Past Papers All

CERTIFIED PUBLIC ACCOUNTANT
ADVANCED LEVEL 2 EXAMINATIONS
A2.2: STRATEGIC PERFORMANCE MANAGEMENT
DATE: THURSDAY, 26 AUGUST 2021
INSTRUCTIONS:
1. Time Allowed: 3 hours 45 minutes (15 minutes reading

and 3 hours 30 Minutes writing).
2. This examination has two sections: A & B.
3. Section A has one Compulsory Question while section B
has three optional questions to choose any two.
4. In summary attempt three questions.
5. Marks allocated to each question are shown at the end
of the question.
6. Show all your workings where necessary.
Page 1 of 10
A2.2
SECTION A
QUESTION ONE:
Romano Company (RC) owns two branches as a way of diversifying its business in Rwanda:
Romano Laptops (RL) and Romano Health Centre (RHC).
Romano Laptops (RL) makes laptop computers for use in dangerous environments. Their main
customers are organizations in health sector and the military that require laptops that can
survive rough environments whilst being transported to a site and can be made to their unique
requirements.
The company started as a basic laptop manufacturer, but its competitors grew much larger and
RL had to find a niche market where its small size would not hinder its ability to compete. It is
now considered as one of the best quality producers in this sector.
RC as had the same finance director for many years who prefers to develop its business
organically. However, due to a fall in profitability, a new Chief Executive officer (CEO) and a
new Chief Financial Officer (CFO) have been appointed. The CEO wishes to review the
financial control system in order to get information with which to tackle the profit issue.
The CEO wants to begin by thinking about pricing to ensure that selling expensive products
and services at the wrong price is not compromising profit margins. The laptops are
individually specified by the customers for each order and pricing has been on a production
cost plus basis with a markup of 45%. The company uses an absorption costing system based
on labour hours in order to calculate the production cost per unit.
The main control system used within the company is the annual budget. It is set forth before
the start of the financial year and variances are monitored and acted upon by line managers.
The CEO is concerned about the monthly board papers. The board papers contain a high-level
summary of financial information, comparing performance against budget for revenue, costs,
and profit.
The financial and other information for Romano Laptops are given below: Data for the year
ending 31st March 2021
Volume (units) 23,800

Frw“000” Frw “000”
Material 406,500
Labour 38,790
Packaging and transport 21,180
Subtotal 466,470
Overhead costs
Customer service 77,350
Purchasing and receiving 24,510
Inventory management 14,670
Administration of production 25,370
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A2.2
Subtotal 141,900
Total 608,370
Labour time per unit 3 hours
Data collected for the year
Number of minutes on call to customers 899,600

Number of purchase orders raised 21,400
Number of components used in production 618,800
Order 2122
Units ordered 16
Frw
Direct Material 273,280
Labour 26,080
Packaging and transport 14,240
Other activities relating to the order:
Number of minutes on call to customers 1,104
Number of purchase orders raised 64
Number of components used in production 512
Administration of production (absorbed as a general overhead) 3 labour hours per unit.
RL has two divisions (component and assembly), plus the head office that provides design,
administration, and marketing support. The manufacturing process involves:
i) The components division making the housing and electrical components for computers.
This is an intricate process as it depends on the specific design of the laptops and serves
as a significant advantage for the company.
ii) The assembly division assembles the various components into finished laptops ready
for sale.
The finance director is currently overloaded with work due to changes in financial accounting
policies that are considered at board level. As a result, she has not been able to look at certain
management accounting aspects of the business and needs a review of the transfer policy
between the components and assembly divisions.
The current transfer policy at RL is as follows:
a) Market prices for electrical components are used as these are generic components for which
there is a competitive external market.
b) Prices for housing components based on total actual production costs to the component’s
division are used as there is no external market for these components since they are
specially designed for RL’s products.
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A2.2
Currently the components division produces only for the assembly division in order to meet
overall demand without the use of external suppliers for housing and electrical components. If
the components division were to sell its electrical components externally, then additional cost
of Frw 2,690,000 would arise for additional transport, marketing, and bad debts. The finance
director is considering changes to the transfer pricing policy in RL.
The transfer pricing policy for housing components would change to use variable cost to the
components division and no change is proposed to the transfer price for electrical component.
The financial information for the two divisions are provided as below:
Actual data for the two divisions for the year ended 31st March 2021
Component Division Assembly Romano

Division laptops
Frw 000 Frw 000 Frw 000
Sales : Electrical 15,570
Housing 82,040
Subtotal 97,610 157,940 157,940
Cost of sales
Electrical 8,040 15,570
Housing 69,020 82,040
Subtotal 77,060 97,610 77,060
Fixed production costs
Electrical 3,700
Housing 13,020
subtotal 16,720 12,680 29,400
Allocated head office costs 4,610 20,460 25,070
The component division has had problems meeting budgets recently, with an adverse variance
of Frw 5,750,000 in the last year. This variance arises in relation to the cost of sales for housing
components production
On the other side, Romano Health Centre (RHC) specializes in the provision of sports/exercise
and medical/dietary advice for clients. The service is provided on a residential basis based on
the Ministry of Health Covid-19 protocols and the clients stay for whatever number of days
suits their needs.
Budgeted estimates for the year ending 31st March 2022 are as follows:
i) The maximum capacity of the Centre is 50 clients per day for 350 days in the year
ii) Clients will be invoiced at a fee per day. The budgeted occupancy level will vary with
the client fee level per day and is estimated at different percentages of maximum
capacity as follows:
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A2.2
Client fee per day Occupancy level Occupancy as percentage of
maximum capacity
Frw 36,000 High 90%
Frw 40,000 Most likely 75%
Frw 44,000 Low 60%
iii) Variable costs are also estimated at one of three levels per client day. The high, most
likely, and low levels per client per day are Frw 19,000; Frw 17,000; and Frw 14,000
respectively.
The range of cost levels reflects only the possible effect of the purchase prices of goods and
services. The probabilities of variable cost levels occurring at high, most likely, and low levels
are estimated as 0.1, 0.6 and 0.3 respectively.
Due to the pandemic pay cut issues, the finance director is offering accountancy services as a
side hustle to three different small businesses owned by Amina, Bote and Chadia in her
neighborhood. The fee charged is Frw 150,000 per month which is the same for all clients, but
the costs differ from each client and the costs that she incurred last month, and the causes of
the cost have been analyzed as follows:
Amina Bote Chadia Monthly

cost Frw
Hours spent on preparing accounts and 8 5 2 150,000
providing advice
Number of requests for missing information 4 10 6 50,000
Number of payment reminders sent 2 8 10 20,000
Number of client meetings held 5 2 3 80,000
The finance director is concerned on whether she is making any profit from the extra work she
is doing or whether to increase the number of clients.
Required:
a) Evaluate the current system of costing against activity-based costing for Romano
laptops in regard to the order 2122 in the year ending 31st March 2021. Advise
management on what course of action to take. (14 Marks)
b) Assess the profitability of the finance director’s clients and advice on the most
profitable client. (6 Marks)
c) i) Advise Romano Health Centre on the client fee strategy to adopt using minimax
regret criteria. (11 Marks)
ii) If RHC objective is to maximize the expected value of contribution, advise
management on the best client fee strategy. (5 Marks)
d) i) Evaluate the current system of transfer pricing of RL. (8 Marks)
ii) Comment and advise the finance director on the impact of changing the suggested
transfer pricing policy for the housing components . (6 Marks)
(Total: 50 Marks)
Page 5 of 10
A2.2
SECTION B
QUESTION TWO:
Cyiza Company is a clothing manufacturer in Kigali producing a range of dresses which it sells
to Emeza Company which is the only customer. Emeza is a well-known retailer in Kigali.
Emeza has recently been affected by Covid-19 pandemic as consumers have changed their
purchasing preference to buying clothes online and as a result it is keen to reduce the inventory
holding as a way of reducing its costs. Emeza has also discovered an excess of goods which it
has to discount as consumer tastes appears to have changed more quickly than in the past.
Cyiza Company currently obtains its raw materials from four suppliers. Each of the suppliers
operates differently in terms of the processes and procedures which they adopt in trading with
Cyiza. Cyiza has been agreeable to this as the quality of raw materials supplied have been
generally acceptable. More recently though, Cyiza noticed a reason to question the accuracy
and quality of raw materials delivered from one of the suppliers. Another supplier now only
dispatches material in full load quantities to optimize the use of delivery vehicles.
Cyiza’s method of production is to produce individual dresses in long production runs which
has helped in maximizing output. Goods which have not been produced to the required standard
have traditionally been rejected at the end of the production process. The production manager
has indicated that the current production method has been successful, as the company only has
5% of its goods returned from Emeza company due to poor quality.
Emeza company would like to move to a Just in Time (JIT) system of purchasing its goods
from Cyiza company. The board of Cyiza are contemplating changing its purchasing and
production approach as a way of preparing itself adopting the JIT principles. The CEO does
not believe that the company will encounter any problems in adopting Emeza’s requirements
and has said that they have very good quality control practices and procedures in place and are
confident that they are consistently supplying goods which are required at an acceptable price
with high quality.
The CEO of Cyiza company has made available a list of costs which she believes addresses the
relevant costs of quality:
Frw “000”
Estimated costs for handling complaints 1,080
Material costs 16,000
Scrap (cannot be reworked) 464
Quality control supervisor’s salary (employed full time) 280
Rework cost 576
Machine downtime 304
Product recalls and cost of goods returned 1,440
Labour cost of production 6,400
Quality audit 16
Foregone contribution of lost sales (estimated)* 680
Routine maintenance 64
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A2.2
The foregone contribution of lost sales is an estimate made by the CEO of potential sales lost
to Emeza to problems related to production and delivery experiences by Cyiza Company. The
CEO has recommended the cost of quality report to be incorporated as follows:
Cost of quality report headings

Cost of conformance:
Prevention costs
Appraisal costs
Costs of non-conformance:
Internal failure costs
External failure costs
Cyiza operates a responsibility based standard costing system which allocates variances to
specific individuals. The individual managers are paid a bonus only when the net favorable
variances are allocated to them. For the period of March 2021, the new production manager
introduced a new system that uses local organic materials which were more expensive, but with
better output. The company operates a JIT inventory system and holds virtually no inventory.
The variance report for February and March 2021 is shown below: (Fav = Favorable and Adv
= Adverse).
Manager Allocated variance February March Variance

Responsible Variance Frw 000
Frw 000
Production Material price 250 Fav 21,000 Adv
Manager Material mix 0 6,000 Adv
Material yield 200 Fav 4,000 Fav
Sales Manager Sales price 400 Adv 70,000 Fav
Sales contribution volume 350 Adv 30,000 Fav
The production manager is upset that he seems to have lost all hope of a bonus under the new
system. The sales manager thinks its excellent and is pleased with the progress.
Required:
a) Assess and explain the changes which Cyiza will have to make in the areas of
purchasing and production in order to supply goods to Emeza on a JIT basis.
(8 Marks)
b) Evaluate and comment the potential quality cost changes in light of the proposed
move to JIT by preparing Cyiza’s cost of quality report as recommended by the
CEO. (10 Marks)
c) Assess the performance of the production manager and the sales manager and
indicate whether the current bonus scheme is fair to them. (7 Marks)
(Total: 25 Marks)
Page 7 of 10
A2.2
QUESTION THREE:
DUHUZE Group (DG) has been created over the last four years by merging three medium-
sized family businesses. These businesses are involved in making fruit drinks. Fina (F) makes
and bottles healthy, fruit-based sparkling drinks. Stella (S) makes and bottles fruit-flavored
non-sparkling drinks and Heza (H) buys fruits and squeezes them to make basic fruit juices.
The three companies have been divisionalised within the group structure. A fourth division
called Marketing (M) exists to market the products of the other divisions to various large-scale
retail chains. Marketing has only been recently set up in order to help the business expand. All
of the operations and sales of DG occur in Rwanda where there is a strong market for healthy
non-alcoholic drinks.
The group has recruited a new Director of Finance (DF), who was asked by the board to
perform a review of the efficiency and effectiveness of the Finance Department as her first task
on taking office. The DF has identified the main area of improvement as the need to improve
profit margins throughout the business and there is no strong evidence that new products or
markets are required, but that, the promising area of improvement lies in better control
practices. Currently the main method of central control that can be used to drive profit margin
improvement is the budget system in each business. The budgeting method used is to take the
previous year’s figures and simply increment them by estimates of growth in the market that
will occur over the next year. The growth estimates are obtained through a discussion between
the financial managers at group level and the relevant division managers.
H and S divisions are in stable markets where the levels of demand and competition mean that
sales growth is unlikely, unless by acquisition of another brand. The main engine for
prospective profit growth in these divisions is through margin improvements. The managers at
these divisions have been successful in previous years and generally keep the agreed budgets.
As a result, they are usually comfortable with the changing of existing practices. F is growing
faster and is being seen as the Star of the group. However, the group has been receiving
complaints from customers about late deliveries and poor-quality control of F products. The F
managers have explained that they are working hard within the budget and capital constraints
imposed by the board and have expressed a desire to be less controlled. The marketing (M)
department has only been recently set up and the intention is to run each marketing campaign
as an individual project which could be charged to the division whose products are benefiting
from the campaign. The managers of the manufacturing divisions are very doubtful of the value
of division M, as each believes that they have existing strong reputation with their customers
and that it does not require much additional spending on marketing. Similar to other divisions,
the marketing division budgets are set by taking the previous year’s actual spend and adding a
percentage increase. For M, the increase corresponds to the previous year’s growth in group
turnover.
At present, the DF is harassed by the introduction of a new information system within the
Finance Department which is straining the resources of the department. The board in their last
meeting decided that the Finance Department should create and use a marketing budget
effectively at DG. The DF has asked the management accountant at the group level, to do some
preliminary work to help her decide whether and how to change the budget methods. The first
Page 8 of 10
A2.2
task that she believes would be useful is to consider the use of rolling budgets. She thinks that
the fast-growing F division may prove the easiest division to introduce the new ideas to.
F’s incremental budget for the current year and actual results of Quarter 1 which has just been
completed is given below. The cost of sales and distribution are variable and administrative
costs are fixed.
Q1 Q2 Q3 Q4 Q1 Actual
(Frw 000) (Frw 000) (Frw 000) (Frw 000) (Frw 000)
Revenue 87,600 89,790 92,035 94,335 89,660
Cost of sales 48,180 49,385 50,620 51,885 49,315
Gross profit 39,420 40,405 41,415 42,450 40,345
Distribution cost 7,885 8,080 8,285 8,490 8,070
Administration cost 21,070 21,070 21,070 21,070 21,070
Operating profit 10,465 11,255 12,060 12,890 11,205
On the basis of Q1 results, sales volume growth of 3% per quarter is now expected. The
Director of Finance has also heard about bottom-up budgeting and has been wondering how it
could be useful in DG.
Required:
a) Discuss the suitability of incremental budgeting in DG; (8 Marks)
b) Recalculate the budget for division F using rolling budgeting and assess the use of
rolling budgeting in division F; (11 Marks)
c) Describe the factors that DG should have considered when setting up a new
information system to avoid the challenges that the Finance Department is
experiencing with the introduction of a new information system. (6 Marks)
(Total : 25 Marks)
QUESTION FOUR:
Mezeneza Cakes bakes cakes, which are directly sold to the public. The new Production
Manager (a celebrity chef) has argued that the business should use organic ingredients in its
cakes production. Organic ingredients are more expensive but should produce a product with
improved flavor and give health benefits to their consumers. It was hoped that this would
stimulate demand and enable an immediate price increase for cakes.
The new organic cakes production approach was adopted at the start of march 2021, following
the decision by the new Production Manager, though no change was made at that time to the
standard cost card. The company operates a responsibility based standard costing system which
allocates variances to specific individuals. The Production Manager is allocated variances for
material price (total for all ingredients), material mix and material yield.
In March 2021, the following data applied:
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A2.2
Standard cost of a cake (no adjustment for the Actual production details
organic ingredient change)
Ingredients Kg Frw Ingredients Kg Frw 000
Flour 0.10 600 per Kg Flour 5,700 3,705
Eggs 0.10 3,500 per Kg Eggs 6,600 28,050
Butter 0.10 8,500 per Kg Butter 6,600 59,400
Sugar 0.10 2,500 per Kg Sugar 4,578 13,735
Normal Loss 10% of Actual Loss 1,878
total input
The budgeted production and sales in March was 50,000 cakes while the actual production and
sales for the month were 60,000 cakes. All cakes produced must weigh 0.36 Kg as this is what
is advertised. The company operates a Just in Time (JIT) inventory system, and no inventory
is maintained.
With the benefit of hindsight, the management of Mezeneza Cakes realized that a more realistic
standard cost for current conditions would be Frw 2,000 per cake. The planned cost is
unrealistically low.
Mezeneza cakes produces three types of cakes: Sweet, Flavored and Organic. The capacity of
Mezeneza plant is restricted by process alpha. Process alpha is expected to be operational for
eight (8) hours per day and can produce 1,200 units of Sweet per hour, 1,500 units of Flavored
per hour, and 600 units of Organic per hour.
Selling prices and material costs for each product are as follows:
Product Selling price per unit Material cost per unit Throughput contribution per unit
Sweet 1500 800 700
Flavored 1200 400 800
Organic 3000 1000 2000
Conversion costs are Frw 7,200,000 per day.
Required:
a) Critically evaluate the performance of the Production Manager of Mezeneza Cakes
for the month of March 2021 based on the original standard cost.
(9Marks)
b) Assess the performance of the production manager based on planning and operational
variances for the month of March 2021. (5 Marks)
c) i) Determine the profitability per day if daily output achieved is 6,000 units of Sweet,
4,500 units of Flavored and 1,200 units of organic. (3 Marks)
ii) Calculate the Throughput Accounting Ratio for each product and comment on the
results. (8Marks)
(Total :25 Marks)
End of question paper
Page 10 of 10
A2.2
DATE: THURSDAY, 26 AUGUST 2021

MODEL ANSWER AND MARKING GUIDE
SECTION A
MARKING GUIDE
QUESTION ONE: Evaluate the current system of costing
Romano Company (RC) Marks
a) Calculations (0.5 marks per calculation, 9 marks maximum) 9
Difference between current costing vs ABC 1
Advise to management
Significant underpricing 2
Assess the impact the increase could have 1
ABC recommendation 1
Maximum marks 14
b) Assessing profitability (0.5 marks for each, maximum of 5) 5

Most profitable client 1
Maximum marks 6
c) i. Advise on client fee strategy using minimax regret

Calculation of each client fee (0.5 marks, maximum 10) 10
Client fee that maximizes the maximum regret 1
Maximum marks 11
ii. Management advice on best client fee strategy

Expected variable cost 1
Client fee at Frw 36,000 1
Client fee that maximizes contribution 1
Maximum marks 5
d) i. Transfer pricing system

Explanation – aim of transfer pricing system 1
Evaluate – electrical components (1 mark each, max 3) 3
Evaluate – housing components (1 mark each, max 3) 3
Conclusion 1
Maximum marks 8
ii. Impact of changing suggested transfer price

Calculations on both divisions (0.5 marks, maximum 5) 5
Conclusion 1
Maximum marks 6
Total marks 50
Detailed answer
a) Evaluate the current system of costing against Activity-Based Costing (ABC) for
Romano laptops in regard to the order 2122 in the year ending 31st March 2021.
Advise management on what course of action to take.
Evaluation of the current system of Costing
Cost per cost driver unit
Total cost activity in Frw No. of driver Cost per driver unit
“000” units Frw
Customer service 77,350 899,600 86
Purchasing and 24,510 21,400 1,145
receiving
Inventory management 14,670 618,800 24
Administration of 25,370 **71,400 355
production
Cost per unit for

16 units
Order 2122
Driver Costs allocated to order in Cost per unit
units Frw Frw
Customer service 1,104 94,944 5,933
Purchasing and
4,581
receiving 64 73,280
Inventory management 512 12,288 759
Administration of
48 1,066
production 17,040
Comparison
W1 1,104*86=94,944 W2 64*1,145=73,280
W3 512*24=12,288 W4 48*355=17,040
W5 16 *3=48
Current method standard ABC cost per unit
Cost
cost Frw Frw
Direct cost (446470/23) 19,600 19600
Overhead allocated 5,962
[141,900,000/(23800*3)]*3
Customer service 5,933
Purchasing and receiving 4,581
Inventory management 759
Administration of production 1,066
Total cost 25,562 31,939
Markup (45%) 11503 14372
Price 37,065 46,311
Difference = 46,311 – 37,065 = 9,246 Frw - which is an increase of 25%
The difference in current pricing shows that there is currently a significant underpricing of the
order. ABC has identified the major components of overheads rather than applying a blanket
base of labour hours. The management should review the areas of activities and see how they
can be more efficient. The management need to consider whether the order such as this should
be repriced.
However, before increasing the price the company management need to assess the impact that
the increase in price will have on the customers and RL’s competitors, though it appears
unlikely that customers will accept an increase of 25%.
A change to an ABC system may be warranted as an ABC system would provide valuable extra
costing data particularly on product cost and prices that could assist in profitability.
Assess the profitability of the finance director’s clients and advice on the most profitable
client.
cost per
Monthly
Amina Bote Chadia Total cost
cost Frw
driver
Hours spent on preparing
accounts and providing 8 5 2 15 150,000 10,000
advice
Requests for missing
4 10 6 20 50,000 2,500
information
Payment reminder sent 2 8 10 20 20,000 1,000
Client meetings held 5 2 3 10 80,000 8,000
Cost per client

Amina Bote Chadia
Hours spent on preparing accounts and
80,000 50,000 20,000
providing advice
Requests for missing information 10,000 25,000 15,000
Payment reminder sent 2,000 8,000 10,000
Client meetings held 40,000 16,000 80,000
Total cost 132,000 99,000 125,000
Profitability
Amina Bote Chadia
Frw Frw Frw
Sales 150,000 150,000 150,000
Total cost 132,000 99,000 125,000
Profit 18,000 51,000 25,000
The most profitable client is Bote. We are therefore advise to charge fees based on the
activities so as to increase profitability.
b) i) Advise Romano Health Centre on the client fee strategy to adopt using minimax
regret criteria
Determine first the payoff table based on the budget contribution
Contribution = number of client days * contribution per client per day (fee – variable
cost)
Number of client days:
Maximum capacity = 50 * 350 = 17,500
High occupancy level = 90%* 17500 = 15,750
Most likely occupancy level = 75%* 17500 = 13,125
Low occupancy level = 60%* 17500 = 10,500
contribution per day
Variable cost occupancy 36,000 40,000 44,000
19,000 15,750 17,000 21,000 25,000
17,000 13,125 19,000 23,000 27,000
14,000 10,500 22,000 26,000 30,000
Payoff table
Client Fee per day
Frw
Frw 40,000 Frw 44,000
Variable cost per day 36,000
Frw 19,000 267750000 275625000 262500000
Frw 17,000 299250000 301875000 283500000
Frw 14,000 346500000 341250000 315000000
Regret payoff table

Client Fee per day
Variable cost per day Frw 36,000 Frw 40,000 Frw 44,000
Frw 19,000 7,875,000 0 13,125,000
Frw 17,000 2,625,000 0 18,375,000
Frw 14,000 0 5,250,000 31,500,000
Maximum Regret 7,875,000 5,250,000 31,500,000
Choose a client fee of Frw 40,000 because it is the one which minimizes the maximum regret
ii) If RHC objective is to maximize the expected value of contribution, advise
management on the best client fee strategy.
Expected variable cost = (0.1*19000) + (0.6*17000) + (0.3*14000) = 16,300 Frw
Variable cost client fee per day
Frw 36,000 Frw 40,000 Frw 44,000
Frw 16,300 310275000 311062500 290850000
In order to maximise expected value of contribution choose to set price at Frw 40,000
c) i) Evaluate the current system of transfer pricing of RL
The aim of transfer pricing is to ensure goal congruence between the divisions of the company
and the organization as a whole, by ensuring the performance of the division is fairly measured.
A good transfer pricing system should maintain a level of managerial autonomy for the
managers of different divisions.
Electrical components
Market based transfer price seems appropriate as there is already an existing market for
electrical components.
Adjustments to market price – the assembly division could legitimately argue that the transfer
price charged for the electrical components should be lower than the market price since they
do not incur transport costs as it is an internal transfer.
If the adjustment is made, the contribution to head office costs from electrical components
division falls by Frw 2,690,000 – being the transport cost.
Housing components
Actual production costs – the transfer price of housing components is based on the actual
production cost – this seems appropriate because the components are designed specifically for
RL’s products and so there is no external market for them.
However, because the price set for housing components only covers the actual production cost,
the proceeds from the sale of the housing components will not make any contribution towards
the allocated head office costs.
Therefore, rather than keeping the transfer price as the cost of the components, the transfer
price should include a markup on the actual production cost. This would redistribute the
divisional profits between the assembly and components divisions.
Actual vs budget costs – there is no motivation or incentive for component division because it
knows it that it will recover its costs – hence budgeted production costs would be a more
appropriate basis of transfer pricing.
Revised divisional reports.
The divisional reports should be adjusted to reflect these points:
i) Costs relating to transport, marketing and bad debts are no longer included in the transfer
price of components: Frw 15,570,000 - Frw 2,690,000 = Frw 12,880,000
The transfer price for housing department is based on budgeted cost , with a markup of
25% ( 69,020,000 – 57,500,000 + 13,020,000 = 76,290,000 + 25% markup = 95,360,000
Component Division in Assembly Division in
Frw”000” Frw”000”
Housing 95,360
Subtotal 108,240 157,940
Cost of sales
Housing 69,020 95,360
Subtotal 77,060 108,240
Electrical 3,700
Housing 13,020
subtotal 16,720 12,680
Allocated head office costs 4,610 20,460
profit 9,850 16,560
ii) Comment and advise the finance director on the impact of changing the transfer
pricing policy for housing components.
The proposal will reduce the revenue of the component division – hence not fair in terms of
the performance of the division. Though there will be no change in the overall profits of the
company.
The proposed change doesn’t seem to be appropriate since the housing components are
specifically designed for the company products, which is the competitive edge of the company.
Component Division Assembly Division
Frw”000” Frw”000”
Housing 69,020
Subtotal 84,590 157,940
Cost of sales
Housing 69,020 69,020
Subtotal 77,060 84,590
Electrical 3,700
Housing 13,020
subtotal 16,720 12,680
Allocated head office 4,610 20,460
costs
Profit/(loss) (13,800) 40,210
SECTION B
QUESTION TWO: Cyiza company
Marking Guide
Marks
a) Acknowledgment of needed changes for a JIT system 1
Needed changes under purchasing (1 mark each, max 3) 3
Needed changes under production (1 mark each, max 3) 3
Conclusion 1
Maximum marks 8
b) Quality control changes

Report format 0.5
Cost of conformance (0.5 marks each, max 2) 2
Cost of non-conformance (0.5 marks each, max 2) 2
Total cost 0.5
Potential quality cost changes with a move to JIT
(1 mark to be awarded on each well explained point) 5
Maximum marks 10
c) Assess performance
Assessing production manager (1 mark, max of 3) 3
Assessing sales manager ((1 mark, max of 3) 3
Conclusion on whether bonus scheme is fair or not 1
Maximum marks 7
Total marks 25
Detailed Answer
a) Assess the changes which Cyiza will have to make in the areas of purchasing and
production in order to supply goods to Emeza on a JIT basis.
Currently, it is clear that Cyiza is not ready to produce to the JIT principles which Emeza is
requesting and Cyiza needs to make fundamental changes to its operations to be able to do so.
Purchasing
• JIT production involves reduction of suppliers to minimum and establishing strong
relationships with them, based on flexibility, and understanding of each other’s needs.
• In adopting JIT principles, the suppliers will effectively be an extension of Cyiza’s own
business, which currently does not have this level, for example one of the suppliers want to
optimize the delivery cost which does not support JIT production.
• Cyiza must also ensure that the raw materials are defect free, which is not happening as it
is evidenced that one of its suppliers does not supply quality materials and registers delivery
delays too.
• Cyiza will most likely require undertaking official supplier assessment as part of an
ongoing reviews to ensure the quality of raw materials for JIT production.
Production
• The manner at which Cyiza produces its goods need to change. Efficiency will not be
measured by producing volumes but rather by production per order. The culture of
producing as much volume is embedded into the culture of the organization and even the
bonus is based on the quantity.
• Cyiza should rethink about the production runs which are long as JIT production requires
shorter production runs. The production process should match the rate at which Emeza is
demanding the final product.
• The company should also facilitate the operations by eliminating set up and unneeded costs
between operations.
• The company must eliminate any defects on final product as the previous belief of 5%
rejection rate being acceptable, must be replaced with zero defects philosophy.
• Prevention and appraisal costs may be expected to increase as Cyiza may be expected to
establish both goods inwards testing procedures and testing procedures for work in
progress.
• Enhancing workers flexibility and developing their skillset in several areas of operations
may be the best way to react to this new environment where demand is more unpredictable.
The workers should be more flexible in terms of their capabilities and trained much more
in identifying defective products to ensure that they do not progress further.
• Changing the layout of the factory to try to ensure that production is as flexible as possible.
b) Evaluate the potential quality cost changes in the light of the proposed move to JIT
by preparing Cyiza’s cost of quality report as recommended by the CEO.
Cost of quality report
Cost of conformance: Frw “000” Frw “000”
Prevention costs
Routine maintenance 64
Total 64
Appraisal costs
Quality control 280
Quality audit 16
Total 296
Costs of non-conformance:
Internal failure costs
Rework cost 576
Machine downtime 304
Scrap 464
Total 1,344
External failure costs
Cost of complaints from Emeza 1,080
Forgone contribution from lost sales 680
Product recalls and cost of goods returned 1,440
Total 3,200
Overall cost 4,904
The results of the cost of quality report are a representative of a company undertaking quality
control as opposed to quality assurance in that, majority of the costs relate to failure, either of
internal or external nature.
Cost of conformance: the company needs to invest more in quality audits and possibly in
testing equipment to ensure that the product being produced to be at the right standard
through the production process. Final inspection may still be required but not a full-time
occupation and supervisors may be more meaningfully deployed elsewhere. This will reduce
both internal and external failures.
The significant cost of external failure cost is of concern as in operating JIT, it will require to
ensure these costs are as close to zero as possible.
The amount of money attributed to product recalls and cost of goods returned is concerning
as its too high and this suggests that defective products are not detected in the current quality
control system.
Cost of handling customer complaints is of concern and may be arising out of
misunderstandings with the customer and this may be resolved by JIT system which requires
closer working relationship, hence reducing such costs.
The company must ensure it provides more training to staff, more preventive machines
maintenance, more supplier appraisal so as to encourage a culture of zero defects with no
faulty goods moving forward in the production process.
c) Assess the performance of the production manager and the sales manager and
indicate whether the current bonus scheme is fair to them.
Production manager
• The production manager instigated the new production approach which fundamentally
changed the nature of the business. Before the new system, there were favorable material
variances for price and yield and the production manager received a bonus as a result.
• The organic materials are expensive, and this resulted in an adverse material price and
mix variances in March.
• The yield variance is favorable but not enough to compensate for adverse variances. This
means that the production manager does not receive a bonus under the new scheme.
• Sales have improved significantly so customers appreciate the new output. The
production manager does not receive any credit for the favorable sales variances, and this
does not seem to be fair.
Sales manager
• The sales variances have moved from adverse to favorable. The new approach has therefore
been a success with customers.
• The sales manager is partly responsible for more sales of the new output, but the original
idea came from the production manager.
• In conclusion the bonus scheme does not seem to be fair as it does not reward the two
managers fairly for their efforts. They are both responsible for improved sales, but it is
difficult to fairly allocate responsibility in this situation. Some sharing of responsibility and
reward is required.
QUESTION THREE: DUHUZE Group (DG)

Marking Guide Marks
a) Incremental budgeting
Advantages (1 mark each, maximum of 4) 4
Disadvantages (1 mark each, maximum of 4) 4
Maximum marks 8
b) Recalculate budget for division F under rolling budget

Revenue 1
Cost of sales 1
Gross profit 1
Distribution cost 1
Administration cost 1
Operating profit 1
Assess the use of rolling budgets

Reduces budgeting uncertainty 1
Near future plans instead of long-term 1
Helps to know Company direction 1
More effective control mechanism 1
Conclusion 1
Maximum marks 11
c) Factors to consider for a new MIS
Staff qualification 1.5
Provision of information to management 1.5
Position in the market 1.5
Environmental concerns 1.5
Legal considerations or any other 1.5
Maximum marks 6
Total marks 25
Detailed Answer
a) Discuss the suitability of incremental budgeting in DG
Advantages of incremental budgeting are:
• Non time consuming – DG currently uses incremental budgeting which is relatively quick
and easy to prepare. This is advantageous to DG given that they have constraint in the
Finance Department which is experiencing challenges in implementation of the
information system.
• Stable environment – incremental budgets are appropriate for stable environments for
which division H and S are experiencing.
The disadvantages/drawbacks include:
• Accepts inefficiencies – the fact that the director of finance has identified that the most
promising area of performance improvement lies in better internal control practices
suggests that there are inefficiencies in DG’s current processes.
• Can encourage spending -managers may feel that they have to spend the full amount of
the current year’s budget in order to preserve the same level of budget the next year.
• H and S divisions stable markets – the fact that sales growth is unlikely suggest that
incremental budgeting could be inappropriate for them.
• Margin Improvements – H and S have limited opportunities to increase revenues , in
order to increase their profitability, they need to improve their margins which
incremental budget will not help them achieve; this is because they need to reduce costs.
• Rapid growth – F’s growth rate means the incremental approach is unlikely to be suitable
for it.
• Justifying costs - M division doesn’t require to justify costs in the current budgetary
approach which other divisions managers are skeptical of the need of marketing division
which incremental approach may not change their opinion.
b) Recalculate the budget for division F using rolling budgeting and assess the use of
rolling budgeting in division F (
Rolling budget will include actual figures for Q1 of current year and then forecast Q2 - Q4 of
the current year along with Q1 of next year - based on Q1 actual and growth of 3% on
revenue and variable costs.
Q2
Q1 Actual Q3 forecast Q4 forecast Q1 forecast
forecast
Details
(Frw 000) (Frw 000) (Frw 000) (Frw 000) (Frw 000)
Revenue 89,660 92,350 95,120 97,974 100,913
Cost of sales 49,315 50,794 52,318 53,888 55,504
Gross profit 40,345 41,555 42,802 44,086 45,409
Distribution cost 8,070 8,312 8,561 8,818 9,083
Administration
21,070 21,070 21,070 21,070 21,070
cost
Operating profit 11,205 12,173 13,171 14,198 15,256
F is growing rapidly, and the rolling budget gives F’s managers the scope to increase their
variable costs to reflect the growth rather than being constrained by the original budget.
F is able to better sustain its growth and the level of complaints about late deliveries and poor
quality should be reduced.
Rolling budget should provide managers with more realistic targets against which to compare
actual performance.
Rolling budget provides a more effective control mechanism than an annual budget, which
could potentially be disregarded as being out of date
c) Describe the factors that DG should have considered when setting up a new
information system to avoid the challenges that the Finance Department is
experiencing with the introduction of a new information system.
The following factors should be considered when setting up a management accounting
system (which is just one part of an overall MIS).
a) The output required. This is just another way of saying that the management accountant
must identify the information needs of managers. If a particular manager finds pie-charts
most useful, the system should be able to produce them. If another manager needs to know
what time of the day machinery failures occur, this information should be available. Levels
of detail and accuracy of output and methods of processing must be determined in each
case.
b) When the output is required. If information is needed within the hour the system should be
capable of producing it at this speed. If it is only ever needed once a year, at the year end,
the system should be designed to produce it on time, no matter how long it takes to be
produced.
c) The sources of input information. It is too easy to state that the outputs required should
dictate the inputs made. The production manager may require a report detailing the precise
operations of his machines, second by second. However, the management accounting
system could only acquire this information if suitable production technology had been
installed.
d) Staff qualification is also paramount to ascertain on whether DG staff including the Finance
Director are conversant with the new Management Information System.
QUESTION FOUR: Mezeneza cakes

Marking Guide
a) Calculations Marks
Material price variance (Flour; Eggs; Butte; and Sugar) 4
Material mix variance (Flour; Eggs; Butte; and Sugar) 4
Material yield variance 1
Maximum marks 9
b) Assessing Production Manager’s performance

Operating variances 2
Planning variances 2
Interpretation 1
Maximum marks 5
c) i. Profitability
Profit per day on each unit level ( 0.5 mark on each output) 1.5
Total profitability per day 1.5
Maximum marks 3
ii. Throughput Accounting

Conversion cost per factory hour 2
Throughput ratio (Sweet; Flavored; and Organic) 6
Maximum marks 8
Total 25
Detailed Answer
a) Critically evaluate the performance of the Production Manager of Mezaneza Cakes for the
month of March 2021 based on the original standard cost.
Material price variance = (Std price - actual cost) *actual quantity Frw
Flour: 5700*600 = 3,420,000
Actual cost 3,705,000
Material price variance = 285,000 Adv
Eggs: 6600*3,500 = 23,100,000
Material price variance = 4,950,000 Adv
Flour: 6600*8,500 = 56,100,000
Flour: 4578*2,500 = 11,445,000
Total material variances 10,825,000 Adv
Material mix variances
Total quantity used = 5700 + 6600 + 6600 + 4578 = 23,478 kg
Standard mix of actual use of each ingredient is in equal proportions = 23,478/4 = 5,869.5kg
actual
quantity at actual quantity std cost per
actual mix at std mix variance Kg (Frw) Variance (Frw)
Flour 5,700 5,869.50 -169.5 600 101,700 Fav
Eggs 6,600 5,869.50 730.5 3,500 2,556,750 Adv
Butter 6,600 5,869.50 730.5 8,500 6,209,250 Adv
Sugar 4,578 5,869.50 -1,291.5 2,500 3,228,750 fav
Mix
variance 5,435,550 Adv
Material price variance
Standard quantity = 0.4 * 60000 = 24000
Std quantity at Std mix of each ingredient = 24000/4 = 6000
Material price variance

Std quantity at actual quantity variance std cost variance
Std mix at Std mix per Kg
Flour 6,000 5,869.50 130.5 600 78,300
Eggs 6,000 5,869.50 130.5 3,500 456,750
Butter 6,000 5,869.50 130.5 8,500 1,109,250
Sugar 6,000 5,869.50 130.5 2,500 326,250
Yield Variance 24,000 23,478 1,970,550
b) Assess the performance of the production manager based on planning and operational
variances for the month of March 2021.
Operating variances Frw
Revised cost of actual production = 60,000*2000= 120,000,000
Operational variance 15,110,000 Fav
Planning variances Frw
Revised cost of actual production = 60,000*2000= 120,000,000
Original standard cost 90,600,000
Operational variance 15,110,000 Adv
The planning variance reveals the extent to which original standard was at fault. It is an
adverse variance because the original standard was very optimistic, overestimating the
expected profits by understating the cost.
c) i) Determine the profitability per day if daily output achieved is 6,000 units of Sweet,
4,500 units of Flavored and 1,200 units of organic.
Profit per day = throughput contribution – conversion cost

= [(Frw 700* 6,000) + (Frw 800* 4,500) + (Frw 2000*1,200)] – Frw 7,200,000 = Frw
3,000,000
ii) Calculate the Throughput accounting ratio for each product and comment on the
results
TA ratio = throughput contribution per factory hour/conversion cost per factory hour
Conversion cost per factory hour = Frw7,200,000/8 = Frw 900,000
Product Throughput contribution per factory factory Cost hour TA ratio
Sweet Frw 700* 1,200 = Frw 840,000 Frw 90,000 0.93
Flavored Frw 800* 1,500 = Frw1,200,000 Frw 90,000 1.33
Organic Frw 2000* 600 = Frw1,200,000 Frw 90,000 1.33
End of Model Answers and Marking guide

DATE: THURSDAY,02 DECEMBER 2021
INSTRUCTIONS:

5. Marks allocated to each question are shown at the end of
the question.
7. The question paper should not be taken out of the
examination room.
A2.2 Page 1 of 8
SECTION A
QUESTION ONE.
Three Brothers, Habakuki, Matayo and Mariko, during the joyful annual family meeting which
took place on 1st January 2000, decided to put together their wealth and form a transport holding
company which was named “The Brother Service Transport Limited” (TST Ltd).
The mission statement for TST Ltd is: To create and maximize the brother’s value.
In July 2002, they started Kinigi Transport Company (KTC) Ltd with a capital share value of
FRW 900,000,000 for transporting passengers to and from the Northern Province. On 22nd
December 2019, they also formed another company called Butare Transport Company (BTC)
Ltd with a capital injection of FRW 1,900,000,000 and it was accredited by Rwanda Utilities
and Regulatory Authority (RURA) to conduct transport business in all the seven districts of the
Southern Province.
The following are audited financial data approved by the Board of Directors for the
period ended 31st December 2020:
31.12.2020 31.12.2020
Account Name KTC BTC
Assets FRW "000" FRW "000"
Propety, Plant and Equipment (PPE) 1,459,184 1,838,233
Transport software 60,000 40,000
Total Fixed Assets 1,519,184 1,878,233
Current Assets
Inventory 18,274 61,194
Receivables 56,537 264,343
Cash and cash equivalents 260,000 350,000
Total Current Assets 334,811 675,537
Total Assets 1,853,995 2,553,770
Capital and Reserves
Share capital 900,000 1,900,000
Retained earnings 150,059 (4,000)
Total Equity 1,050,059 1,896,000

Non-Current Liabilities
Long term loan 465,600 600,860

Total Non-current Liabilities 465,600 600,860
Current Liabilities
Payables 75,000 56,910

Bank overdraft 263,336 -
Total current Liabilities 338,336 56,910
Total Equity and Liabilities 1,853,995 2,553,770
A2.2 Page 2 of 8
Additional information related to the financial year ended 31st December 2020:
KTC BTC
Turnover (FRW, “000”) 1,500,000 900,000
Number of Passengers- 1,111 923
Deaths - Persons 5 persons 20 persons
Total KM travelled 600,000 360,000
Fuel cost (FRW) 900,000,000 338,400,000
Lost Courier - 6
Staff Turnover 10 persons 2 persons
Waiting time for trip 1hr 20 min
Total Dividend paid (FRW) 30,000 15,000
The Chief Executive Officer (CEO) of TST Ltd after being presented by both company’s
Annual Financial Statements, called for an urgent shareholders meeting: the three brothers
recommended that BTC Ltd should be closed immediately. The shareholders were not
convinced and wanted a third-party analysis before taking the final decision. The shareholders
recommended to evaluate KTC and BTC performance by using financial and non-financial
performance maesures. The recommended financial ratios were Dividend Payout, Return on
Capital Employed (ROCE), Cash ratio, Net Gearing and Liquidity ratios.
• The Three Brothers are worried about the economic value at TST Ltd following the
unachieved targeted profit of FRW 350,750,000 from KTC and BTC Ltd, both combined.
The TST earnings before interest and taxes for the financial year 2020 amounted to FRW
50,130,000. 60% of the company's assets are financed by debt which has an after-tax cost
of 3%, while 40% is financed by equity with a cost of 7%. TST Ltd average total capital
employed over the period amounted to FRW 41,320,000. Rwanda Tax law states that the
Corporate Income Tax is at 30%.
• KTC Board of Directors (BoD) tasked the Chief Finance Officer (CFO) to determine
whether Backflush costing can help the company to solve its issues at hand. The Board
believes that there is still much to do on cost control regarding the different categories of
expenses incurred by KTC Ltd. The proposal will be presented to the Board by end July
2021. The CFO thinks that this is not applicable in transport service industry.
In the Annual Board Meeting at KTC, the CFO declared that the targeted and budgeted profit
for the year 2021 was at least FRW 50 million following the Covid-19 pandemic. Most of the
passenger vehicles were predicted not to be in use from 1st January up to end March 2021 and
the company was unable to save on fixed costs which include rent, drivers’ salaries, insurance
among others. Total expected fixed cost is FRW 21,500,000 while the variable cost and selling
price per ticket are FRW 500 and FRW 1,500 respectively. The CFO was requested to present
to all staff in the general staff meeting the targeted number of tickets to be sold in order to
achieve the budgeted profit.
A2.2 Page 3 of 8
Required
a) Appraise the CEO’s recommendation to close BTC by evaluating Both Companies
performance using financial ratios recommended by the shareholders and the Non-
financial performance indicators. (20 Marks)
b) Suggest appropriate Business process re-engineering action that the CEO should
implement in BTC in order to revamp the company. (8 Marks)
c) By using EVA analysis, agree or disagree with Three Brothers on the worries of the
economic value of TST Ltd for the FY ended 31st December 2020. (7 Marks)
d) Evaluate the mission statement of TST Ltd and suggest an improvement, if required
(5 Marks)
e) Discuss whether Backflush Costing can solve costing issues at KTC Ltd. (5 Marks)
f) i)Define target costing and calculate the number of tickets to be sold in order to earn
a targeted profit at KTC Ltd. (3 Marks)
g) ii) List four characteristics of a service business such as TST ltd. (2 Marks)
(Total 50 Marks)
A2.2 Page 4 of 8
SECTION B
QUESTION TWO
Bakame Construction Industry (BCI) Ltd is a construction company established in 1984 and it
is based in Bugesera District of Rwanda’s Eastern Province . BCI is one of the oldest
construction companies in Rwanda and has built the strongest brand name among citizens. BCI
uses a variety of building materials. Architects consult with structural engineers on the load-
bearing capabilities of the materials with which they design, and the most common materials
are concrete, steel, wood, masonry, and stone.
In order to remain competitive on the market, BCI has decided to increase its capital from FRW
2 billion to FRW 2.5 billion. The building materials are usually categorized into two sources:
natural and manmade. Materials such as stone and wood are natural, and concrete, masonry,
and steel are manmade.
BCI constructs using cement blocks. The following are the management data for the year ended
2020 on one small project to construct a small bridge at Gasogi main Road.
The standard cost card details of one large cement block are as follows:
Quantity (Kg) Cost/FRW
Cement 2 40
Sand 3 20
Actual data are as follows:

Cement 15,000Kg @41/= FRW 615,000
Sand 9,000Kg @18/= FRW 162,000
Actual number of cement blocks produced for the period are 5,000 units.
BCI also fabricates bricks and sells them to other external parties. The following are the
financial data for the period ended 31st December for only the department of cement block:.
Description Budget Actual

Sales volume (Unity “000”) 300 840
Selling Price/FRW 70 68
Cost per unit/FRW 30 26
BCI itself manufactures iron sheets for use on houses contracted and constructed. The raw
materials are imported from China and take 2 months to arrive in Rwanda. This service appears
more complex and the company is contemplating about buying iron sheets instead of making
them internally.
Karengera Iron Sheet Company (KIC) is a specialized company in manufacturing iron sheets.
A2.2 Page 5 of 8
The following are the financial data for making M2 6,500 of iron sheets on roofs for two
houses contracted:
Description Cost/M2
Flat metal 2,500
Paint 2,000
Labor 300
Electricity 300
Other cost 356
KIC has been approached by BCI which has made a bid to supply the M2 2,000 of iron sheets
at a total contract price of FRW 35,000,000.
Required
a) Calculate the Budgeted Sales Margin, sales margin Price Variance, Direct Material
Mix Variance and Direct Material Yield Variance. (10 Marks)
b) Advise whether BCI can accept the offer from KIC. (5 Marks)
c) Discuss other non-financial factors, that can demotivate BCI to buy and continue to
make iron sheets internally . (10 Marks)
(Total 25 Marks)
QUESTION THREE
Groupe Scolaire Officiel de Huye (GOH) is a private high school operating in Huye district of
Rwanda’s Southern Province.
The school is one of the oldest and famous in the country which was inaugurated in 1965 by
the White Father Missionaries. GOH is also one of the most expensive schools in Rwanda. The
school has the following objective: To develop an awareness of self-confidence, to develop
sensitivity to others, to develop self-discipline, to develop self-esteem, to develop acceptable
behavior and to develop cooperation.
The education sector is one of the areas affected by the decline in economy in 2019 and 2020.
This private school want to prevent any issue that can make it shut down due to poor economic
and living conditions forecasted for the new school calendar scheduled to start in September
2020. In line with that, the school wants to maximize the profits from all moneyto be spent.
The following table shows statistics and projected student registration as provided by an
Economist.
Economic Condition Probability Number of Student
registration
Good 0.40 7,000
Average 0.35 6,000
Bad 0.25 4,500
A2.2 Page 6 of 8
The teaching cost of one student is FRW 40,000 while the school fees is FRW 90,000. If the
students do not enroll in full capacity as predicted, the school loses the fixed cost of FRW 4,500
per student as this is a non-avoidable cost.
During the period, the school will need to tailor the students uniform by using casual tailoring
staff. The head teacher is aware that labor cost may be reduced as the number of uniforms are
being produced, due to learning experience and tailors’ efficiency.
The total predicted uniforms are 7,000 as per the numbers provided by the Economist in good
economic conditions. The predicted labor cost for one uniform is FRW 15,000. An analyst has
indicated that 80% learning curve will apply for the first 6,000 uniforms after which constant
production will take place. The headmaster wants to know how much he can plan to spend and
charge from the parents while enrolling students.
Required:
a) Determine the Minmax, Maximax and Maximin for the school in order to predict its
profitability for the new school calendar year to start in September 2021. (12 Marks)
b) Calculate the Expected Value and comment on the results. (5 Marks)
c) With calculations, comment and advise the headmaster of GOH the minimum total
uniform cost he will charge parents. Learning factor for 80% is equal to -0.3219.
(8 Marks)
(Total 25 Marks)
QUESTION FOUR
WASAC is a product of reforms and institutional development of the former Energy, Water
and Sanitation Corporation (EWSA). The Water and Sanitation Corporation (WASAC) is a
Limited Liability Corporation registered under the company law of Rwanda with the
Government as a sole proprietor/shareholder. WASAC is responsible for the growth and
development of the water and sanitation sector.
WASAC’s Mission is providing quality, reliable and affordable water and sewerage services
through continuous innovations and detailed care to customers’ needs.
The company provides support to citizens who are grouped together as a means of providing
clean water at a cost. The government of Rwanda, with its Vision 2050, provides different
incentives such as tax relief on private business companies and Non-GovernmentOrganizations
(NGOs) which support the citizens in accessing clean water.
In Rwanda, through state partnership, there are several NGO’s that provide water free of
charge.
Healthy Water Company (HWC) limited is an hypothetical project planning to become a
company soon. HWC will be on the market providing a number of water services including
selling water pipes, drilling and flushing boreholes, distribution of clean water through building
water tanks and taps. This shall be done via a bidding process and thereafter award tenders or
contracts to the best bidders. Materials to be used in all of those services/operations are not
made in Rwanda and are specialized, and need enough funding to be acquired. HWC’s main
A2.2 Page 7 of 8
project will be to dig water wells and pump water to water tanks and taps. This is the only
unique service on the market. HWC will be selling water itself at a fixed price.
On the market, there are many companies that have been providing similar services over the
last 20 years. One of them is called Robin Water Company (RWC) Ltd and holds over 50% of
the market share.
Entering the market as a business company requires different legal requirements which include
Taxpayer Identification Number (TIN) and Rwanda Registration Board (RDB) registration
certificate.
Price for water for all public water points is standard and is set by Rwanda Utilities Regulatory
Authority (RURA), however, private water points may fix their own prices.
Due to insufficient funds, the company is planning to hire part-time staff from competitors in
the same business and freelancer water engineers.
In order to collect more market information as a new entrant, the caretaker CEO of HWC has
received a lot of information from water business analysists and has decided to hire a company
lawyer. He is challenged with countless emails. He is confronted on how to manage this issue
going forward, even when the company starts operating across the country.
Required:
A. By use of the Porter’s five forces model, assess whether HWC Ltd can go on with
entering into this new market. (15 Marks)
B. Provide a strategic advice to HWC Ltd on how it can outperform its competitors.
(5 Marks)
C. Discuss the lean information system at HWC Ltd. (5 Marks)
(Total 25 Marks)
A2.2 Page 8 of 8

MODEL ANSWER AND MARKING GUIDE
Page 1 of 26
STRATEGIC PERFORMANCE MANAGEMENT (A2.2)
MARKING GUIDE
QUESTION ONE : Marks
a) Appraising CEO’s recommendation to close BTC
Liquidity ratio
Meaning of liquidity ratio 0.5
Calculation of the ratio at KTC 0.5
Calculation of the ratio at BTC 0.5
Conclusion 0.5
Marks 2
Cash ratio
Meaning of cash ratio 0.5
Conclusion 0.5
Marks 2
Net Gearing ratio

Meaning of Net Gearing ratio 0.5
Conclusion 0.5
Marks 2
Return on capital employed (ROCE)

Meaning of ROCE 0.5
Calculation of ROCE at KTC 0.5
Calculation of ROCE at BTC 0.5
Conclusion 0.5
Marks 2
Dividend payout ratio

Meaning of Dividend Payout 0.5
Conclusion 0.5
Marks 2
Page 2 of 26
Non-financial performance measures
Deaths 1
Lost Courier 1
Staff turnover 1
Trip waiting time 1
Revenue per passenger 1
Fuel efficiency 1
Number of passengers 1
Profitability 1
Any other valid point 1
Maximum marks 7
Recommendation
Unsubstantiated recommendation 1
Ground for BTC’s discontinuation 1
Conclusion 1
Maximum marks 3
Total marks 20
b) Appropriate Business process re-engineering (BPR) action

Define BPR 1
Use of new marketing techniques 1
Adopt computerized ticketing 1
Train administrative staff 1
Train technical staff 1
Reduce luggage cycle time 1
Improve debt recovery process 1
On time maintenance of transport vehicles 1
Adopt ABC 1
Any other valid point (will earn a mark)
Maximum marks 8
c) EVA
Definition of EVA 0.5
EVA Formulae 0.5
WACC 1
Calculated EVA 2
Maximum marks 5
Disagreement with Three Brothers

Not achieving desired profit 1
Page 3 of 26
Increase in EVA over all 1
Maximum marks 2
Total marks 7
d) Evaluate TNT mission statement

Satisfying customer needs 1
Tell who customers are 1
Explain customer needs being satisfied 1
How to serve customers 1
Based on competitive advantage 1
Motivates and inspires employees 1
Nature of organisation’s business 1
Values and culture 1
Any other valid point (to earn a mark)
Maximum marks 5
e) Backflush Costing
Definition 1
Advantage 1
Disadvantage 1
Reference to BTC 1
Conclusion and recommendation 1
Any other valid point (to earn a mark)
Maximum marks 5
f) i) Target costing
Definition 1
Calculation 1
Conclusion 1
Marks 3
ii) Service business characteristics

Intangibility 0.5
Inseparability 0.5
Variability 0.5
Perishability 0.5
Marks 2
Total marks 5
Total marks 50
Page 4 of 26
a) Evaluation of the CEO’s recommendation to close BTC by analyzing BOTH Companies
performance using financial ratios recommended by the shareholders and the Non-
financial performance indicators.
(i) Liquidity Ratio

Liquidity ratios indicate the ability to meet short-term obligations to creditors as they mature or
come due.
31.12.2020 31.12.2020
Description KTC BTC
"000" "000"
Current Assets /Current Liabilities 334,811/ 338,336 = 0.99 675,537/ 56,910 = 11.9
In terms of Liquidity ratio, BTC is performing way better than KTC. BTC is able to honor its
short-term obligations. while KTC’s ratio of less than 1 implies that the company is struggling to
pay its short-term obligations.
(ii) Cash Ratio
The cash ratio is a liquidity measure that shows a company's ability to cover its short-term
obligations using only cash and its cash equivalents.
31.12.2020 31.12.2020
Description KTC BTC
"000" "000"
Cash and Cash Equivalent/Current 260,000 / 338,336 = 350,000 / 56,910 =
Liabilities 0.77 6.15
A Company with a ratio of at least 0.5 to 1 is usually preferred, considering the above calculation,
BTC can sustain in its short term with its available liquid cash. BTC is able to pay its short-term
obligations without going for a bank overdraft. This is a good indicator of inappropriate
recommendation of shutting down BTC and continue with KTC alone.
(iii)Net Gearing Ratio
Net gearing is a measure of a company’s financial leverage. Net gearing ratio is defined as
total borrowings divided by shareholders' funds.
31.12.2020 31.12.2020
Description KTC BTC
"000" "000"
(Non current 465,600/ 600,860 /(600,860+ 1,896,000)/=
liability /equity 465,600+1050,059= 30.71% 24.06%
+Net Current
Liabilities
Page 5 of 26
• A gearing ratio higher than 50% is typically considered highly levered or geared. As a
result, the company would be at greater financial risk, because during times of lower profits
and higher interest rates, the company would be more susceptible to loan default
and bankruptcy.
• A gearing ratio lower than 25% is typically considered lowrisk by both investors
and lenders.
• A gearing ratio between 25% and 50% is typically considered optimal or normal for well-
established companies.
The Net Gearing ratio indicates that BTC is not a company with a high risk, besides, it is better
than KTC. Again, with this, we recommend that BTC may not necessarily be discontinued on
such grounds.
(iv) Return on Capital Employed (ROCE)
The return on capital employed shows how much operating income is generated for each Franc of
capital invested. A higher ROCE is always more favorable, as it indicates that more profits are
generated per Franc of capital employed.
It can be calculated as follows: Earning Before Interest and Tax/Capital Employed (Total Assets
– Current Liabilities)
31.12.2020 31.12.2020
Description KTC BTC
"000" "000"
Earning before interest and 150,059/( 1,853,995 - 338,336) = (4,000)/( 2,553,770 -
Tax/( Total Assets – Current 10% 56,910) = 0%
Liabilities)
On this ratio, BTC made a loss for the year as indicated by the ROCE of 0% while KTC’ ROCE
was 10%. This is basically due to a dividend paid and yet BTC was still a young company, with
only one year in the transport services market, not mentioning the stiff competition within the
sector.. Making a decision to discontinue BTC would therefore appear rushed.
(v) Dividend payout
The dividend payout ratio measures the percentage of net income that is distributed to shareholders
in the form of dividends during the year. It is usually the opposite of the retention ratio which
shows the percentage of net income retained by a company after dividend payments.
31.12.2020 31.12.2020
Description KTC BTC
Page 6 of 26
"000" "000"
Retained Earnings (Profit)/ Dividend paid 150,059/( 30,000) = 5 (4,000)/(15,000) = (0.27)
A small ratio is preferred as it shows that company’s management is taking care and do think much
about the shareholders’ wealth.
For BTC however, in its first year managed to pay a dividend which pushed the company into a
negative payout ratio. For BTC, that is a red flag indicating that it was not worthwhile to pay a
dividend in its first year of operations coupled with unfriendly business environment due to the
Covid-19 pandemic.
Non-financial performance evaluation
(i) Deaths
KTC recorded 5 people to have lost their lives while BTC recorded 20 people. While its not very
clear on what exactly caused the death, since this is a transport business it appears the death can
be attributed to transport vehicle accidents. Management should consider installing speed
governors in both company’s transport given that KTC also registers a wider kilometer coverage
compared to BTC.
(ii) Lost Courier
KTC registered zero on lost courier while BTC lost 6 parcels. Still, this can be a function of the
frequent accidents which normally may not just take away peoples’ lives but also passengers’
parcels getting lost too. This is quite poor customer service. BTC should consider taking enough
time arranging passenger luggages whilst making sure that all the required internal control
processes and procedures such as luggage tagging are in place .
(iii) Staff turn over
Staff turnover is higher in KTC compared to BTC with 10 and 2 staff respectively to have left
the company. While there is no adequate information indicating what could be causing a high
staff turnover mainly at KTC, it could be that staff are not motivated. Probably if the three
brothers are intervening in the day to day running of the companies; then its high time they leave
that to the executive management and concentrate on only strategic matters. Nonetheless, BTC
appears to perform well on this aspect.
(iv) Trip waiting time
KTC clients wait for anhour to start the trip while BTC passengers only wait for 20 minutes., While
it might appear that BTC is responding positively to its clients due to less waiting time, it is also
important to note that starting a long trip requires adequate preparation to ensure that all passengers
have their tickets, their luggage tagged, vehicles thoroughly checked for any mechanical issues
among others . More investigation is required to ascertain whether the lost couriers are not
Page 7 of 26
attributed to less preparation time. Usually, standards can be set to ensure that passengers arrive at
the parking yard an hour before departure to allow sufficient time for control and safety purposes.
(v) Effectiveness on Revenue per passenger
KTC BTC
FRW “000” FRW “000”
Turnover 1,500,000 900,000
Passenger 1,111 923
Revenue per Passenger 1,350 975
Revenue per passenger is higher at KTC than in BTC and this may be attributed to a longer distance
covered at KTC which eventually contributes to a high turnover. The longer distance at KTC is
also supported by a higher fuel cost compared to BTC. (vi) Efficiency on Fuel cost /KM
KTC BTC
Total KM travelled 600,000 360,000
Fuel cost 900,000,000 338,400,000
Fuel cost /KM 1,500 940
KTC vehicles are consuming much more fuel than those at BTC. This may be a sign that vehicles
at KTC need to be replaced with newer versions to help manage the fuel consumption which
appears to be a bigger component in both company’s cost structure. BTC appears to be using fuel
cost effective vehicles which are newer than KTC’s.
(vi) Number of passengers
KTC BTC
Passengers (000) 1,111 923
KTC brand image may have created a big market share compared to BTC which is still new on the
market. BTC may also consider investing more into marketing and publicity of its company to
gain a higher market share and with this it may consider reinvesting the proceeds instead of paying
a dividend until a time when it feels comfortable and when profits have been realized.
(vii) Profitability
KTC BTC
Turn over 1,500,000,000 900,000,000
Fuel cost 900,000,000 338,400,000
Gross Profit 600,000,000 561,600,000
Gross Profit Margin 40% 62.4%
Page 8 of 26
Assuming that fuel cost is one of the biggest expenses in regard to cost of sales in both companies;
KTC would be making a Gross profit of 40% while BTC will be at 62.4%.
Recommendation.
The recommendation to shareholders provided by the CEO to discontinue Butare Transport
Company (BTC) appears not to be well substantiated. This is due to different financial and non-
financial performance measures that have been conducted and in most of the cases, BTC appeared
to be performing better than KTC. Since, BTC is still new on market may contribute to its lesser
market share but surprisingly performing way better than KTC even in terms of profitability With
the available information, also considering fuel as the main expense, BTC has a gross profit of
62.4% where as KTN’s gross profit is 40%. This indicates that a decision to discontinue BTC
should be adjourned.
b) Suggested appropriate Business Process Re-engineering action that the CEO should put
in place in BTC in order to revamp the company.
Business Process Re-engineering (BPR) is the fundamental rethinking and radical redesign of
business processes to achieve dramatic improvements in critical contemporary measures of
performance, such as cost, quality, service and speed.
a) Use new marketing techniques
First and foremost, The Brother Service Transport Limited” (TST Ltd) mission statement that
focusses at creating and maximizing the brother’s value, does not seem to resonate well to their
current and potential customers. Again, this appears to be cascaded down to their branches
including BTC. The company should therefore revisit BTC marketing strategy by incorporating
an element of customer focus thereby appearing to be instilling company values on customer
needs, a major component of business process re-engineering.
b) Adopt computerized ticketing

. Most transport businesses have an arrangement whereby passengers do visit the ticketing office
for booking. This process in most cases is manual and requires ample time and this could be the
reason as to why passengers have to wait for around 20 minutes before setting off. BTC should
therefore use computerized ticketing where by tickets are issued well in advance and the departure
time is not inconvenienced in any way.
c) Train administrative staff - Training staff can help employees understand how their work
fits into their company's structure, mission, and goals. BTC should therefore invest in capacity
building of their staff as this enhances employee motivation and productivity. The two staff
Page 9 of 26
who left BTC could have been demotivated for some of such reasons as it is not clear on
whether staff were being trained or not.
d) Technical staff training
While capacity building is fundamental for staff working directly with BTC in form supporting its
core activities; training drivers is equally paramount on safe driving, road signs among others. This
way, drivers may know better how to control their vehicles thereby contributing to reducing
accidents and dealths.
e) Reduce luggage cycle time
BTC lost 6 passenger parcels, and this might be emanating from a poor internal control system.
BTC should therefore develop a system that allows luggage tagging. This will not only reduce
time spent on trying to identify what luggage belongs to who; but it will also mitigate chances of
having to lose those luggages.
f) Improve debt recovery process.
BTC has FRW 264,343,000 as receivables, though it is for a period of one year, BTC should do
whatever possible to recover this debt. Long outstanding debt may turn into doubtful debts and
later alone bad debts eligible for write off, which is an expense to the company. BTC should
consider allocating one staff to this important function to ensure that a receivables aging report is
developed and shared to management in good time and ensure that action is taken on aged debtors.
g) Ontime maintenance of transport vehicles

While it is not very clear on what could have caused the 20 deaths, but since this is a transport
business; then most likely this was due to road accidents or mechanical break-down related
instances. BTC should therefore work on a timely vehicle maintenance, probably this could reduce
on vehicle breakdowns and later on accidents.
h) Adopt Activity Based (ABC) Costing method
BTC spends over FRW 338 billion per annum on only fuel. This is a very big expense in terms of
determining BTC’s profitability and therefore requires maximum attention. Adopting ABC should
therefore allocate the fuel cost and other costs such that, for each different activity, a different cost
driver is applied which is best suited for that activity.
C) By using EVA analysis, agree or disagree with Three Brothers on the worries of the
economic value of TST Ltd for the Financial Year ended 31st December 2020.
Economic Value Added is a performance metric technique that is used to measure value
creation.
Page 10 of 26
Economic Value Added = NOPAT − WACC × Capital Employed
NOPAT = EBIT × (1 − Tax Rate) = 50,130,00× (1 − 30%) = 35,091,000
WACC = 0.6 × 3% + 0.4 × 7% = 5%
Economic Value Added = 35,091,000 − (5% × 41,320,000) = 33,190,280
Disagreement with Three Brothers
Although the Three Brothers did not achieve the desired profit of FRW 350,750,000 from both
KTC and BTC,, this should not make them get too much worried about the company performance.
Their Economic value, through TST Ltd has increased by FRW 33,190,280. In addition to that,
both companies managed to pay dividends, though BTC should not have, as it ended up with a
negative payout ratio . Coming up with a better strategy will help TST to earn profits and even
increase its EVA much higher.
d) evaluation of the Mission statement of TST Ltd and the required improvement
(i) The Mission Statement Focuses on Satisfying Customer Needs.

A mission statement should have focused on satisfying customer needs rather than being focused
on the product. This is not the same at TST. It talks about only shareholder’s wealth which does
not portray a good picture to customersTNT should consider revising its Mission statement to
include other stakeholders to whom the organization exists.
(ii) The Mission Statement Tells “Who” Our Customers are.
Who is being satisfied? TST Ltd should define the type of customers it wishes to serve. Which
customer groups it is targeting, and the geographical spread of its operations. TNT Mission
statement does not seem to specify that.
(iii)The Mission Statement Explains “What” Customer Needs Our Company is Trying to
Satisfy.
TST Ltd should have defined the particular needs of those customer’s groups it wishes to satisfy.
A product or service becomes a business when it satisfies a need or a want. TNT’s Mission
statement is very silent on what customer needs are they trying to satisfy.
(iv) The Mission Statement Explains “How” Our Company will Serve its customers.
How customers’ needs shall be satisfied? TST Ltd should have defined the means or techniques
by which it will serve the target market and satisfy its customer’s needs. Again, this is not very
clear at TNT.
(v) The Mission Statement is Based on Competitive Advantage.
Page 11 of 26
TST Ltd should have indicated the competitive advantage it has compared to other . Competitors.
As part of TST strategic plan, its competencies and competitive advantage on how it hopes to
prosper should be detailed out. This is also missing in TST’s current mission statement and should
be addressed to indicate how TST intends to compete.
(vi) The Mission Statement Motivates and Inspires Employee Commitment.

TST Ltd Mission statements should be motivating to all employees including drivers. And this
should be able to be converted into everyday performance. With the staff turnover rate at TST, the
motivation and inspiration element appear missing.
(vii) The Mission Statement is Specific (for transport)
TST Ltd mission statements should be specific that it is offering transport services being the nature
of its business services For now, it requires further explanation on what TNT does, yet
strategically it should have appeared in its Mission statement.
(viii) Values and culture – Values are basic unstated beliefs of the people who work in TST.
Since TST’s Mission statement is placing an emphasis on maximizing shareholders wealth,
again nothing shows that the staff are well catered for. Besides, the high staff turnover
complements this judgement.
e) Discussion of whether Backflush Costing can solve costing issues at BTC Ltd.
Backflush costing is a product costing system generally used in a Just-In-Time (JIT) inventory
system. Costs are attached to output only, thereby simplifying the costing system.
Backflush Costing method is most useful to companies with complex products or where the
production process involves several stages. With such companies, each stage of production would
require several journal entries to track the cost accurately resulting into hundreds of entries for one
product, which makes an accountant’s job very cumbersome. Adopting backflush accounting
therefore greatly reduces the number of accounting entries and other supporting vouchers and
documents that should have been produced.
Another important advantage of Backflush costing mainly for organisations that are trying to
keep inventories to the very minimum, is that it simplifies the process to such companies, as
there is no separate accounting for Work in Progress (WIP).
However, Backflush costing is only appropriate for JIT operations where production and sales
volumes are approximately equal.
Page 12 of 26
If BTC Ltd uses backflush costing, the accounts department will not have to post journal entries
throughout the production process. Thus, we can say that this system simplifies the costing
operation and accounting tasks without compromising too much on the information.
However, BTC may not benefit much from Backflush Costing like a complex production industry,
and it does not apply a JIT inventory system as it operates in a service industry We therefore
recommend that BTC adopts a more appropriate costing method such as service costing which is
normally applied where standardized services are rendered such as transport.
f) i Define target costing and calculate the number of tickets to be sold in order to earn a
targeted profit at KTC Ltd.
Target costing is a costing method that determines a product's life-cycle cost which should be
sufficient to develop specified functionality and quality, whilst ensuring its desired profit.
Target costing involves setting a target cost by subtracting a desired profit margin from a
competitive market price.
1,500Q = 500Q + 21,500,000 + 50,000,000

1,500Q - 500Q = 71,500,000
1000Q = 71,500,000
Q = 71,500
Number of tickets to be sold in order to earn a Targeted profit of FRW 50,000,000 is 71,500.
ii) The four characteristics of a service business are:
Intangibility,
Inseparability,
Variability,
and Perishability.
Page 13 of 26
MARKING GUIDE
QUESTION TWO :Bakame Construction Industry (BCI) Ltd Marks
a) Calculation of variances
Budgeted Sales Margin Formulae 1
Calculation 1
Sales Margin Price Variance 1
Calculation 1
Material mix – Cement 1
Material mix – Sand 1
Total Standard Usage 1
Material yield – Cement 1
Material yield – Sand 1
Direct Material Yield Variance 1
Maximum marks 10
b) Advice to BCI
Calculation of total per Unit 1
Calculation of total cost 1
Calculation of saved cost 1
Conclusion 2
Maximum marks 5
c) Non-financial factors that can demotivate BCI
Own equipment 2
Easy integration 2
Control 2
Customer confidence 2
Confidentiality 2
Enhanced efficiency 2
Economies of scale 2
Source of income 2
Any other valid point (earns 2 marks)
Maximum marks 10
Total marks 25
Page 14 of 26
Detailed Answer
a)
i) Budgeted Sales Margin = Budgeted margin per unit x Budgeted sales quantity
= (70 - 30) *300 = 12,000
ii) Sales Margin Price Variance = Actual Sales quantity x (Standard Margin - Actual
Margin) = (40 - 42) *840 = (1,680) F
iii) Direct Material Mix Variance = standard unit cost x (standard mix – actual mix)
Cement Sand
Standard unit cost (FRW) 40 20
Standard mix (Kg) 2 3
Actual mix 15000/5000= 3 9000/5000=1.8
Direct Material Mix Variance for Cement = 40 * (2-3) =-40 A

The variance is FRW -40. This means that the actual amount of cement used exceeded the
budgeted amount in the mix. This led to an adverse cost variance of FRW 25 for cement.
Direct Material Mix Variance for sand =20*(3-1.8)=24F

The variance is FRW 24. This means that the actual amount of sand budgeted in mix exceed the
amount used in the mix. This led to an favorable cost variance of FRW 24 for sand.
Cement = 40(24,000 X 2/5 -24,000 X15000/24000)

= 40(9,600 -15,000)
= 216,000(A)
Sand = 20(24,000 X 3/5 - 24,000 X9,000/24000)
= 20(14,400 - 9,000
= 108,000 (F)
Therefore, Direct Material Mix Variance = 216,000(A)+108,000(F) =108,000(A)
Total Standard Usage = (5,000 x2) + (5,000x3) = 25,000
iv) Direct Material Yield Variance = Standard price (Total Standard Material
usage*Standard Mix - Total Actual Material Usage*Standard Mix)
Page 15 of 26
Cement = 40 (25,000 X 2/5 - 24,000x 2/5)
= 40(10,000 - 9,600)
=16,000(F)
Sand = 20(25,000 X 3/5 - 24,000 x3/5)
= 20(15,000 -14,400)
=12,000(F)
Therefore, Direct Material Yield Variance =16,000(F)+12,000(F) = 28,000(F)
D) Advise whether BCI can accept the offer from KIC.
Description Cost/M/FRW
Flat metal 2,500
Paint 2,000
Labor 300
Electricity 300
Other cost 356
Total per Unit 5,456
Total cost (Unit 6,500) 35,464,000
KIC offer 35,000,000
Saved cost 464,000
Based only on financial analysis, BCI can gain from buying instead of making iron sheet
internally.
• Discuss other non-financial factors that can demotivate BCI to buy and continue to make
iron sheets internally .
• BCI has already bought equipment for making Iron sheets, if BCI decides to buy from KIC
this will make the already bought equipment idle and probably they also get deteriorated.
• Desire to integrate plant operations - BCI is already involved in the construction business
of iron sheets and it appears they will need them anytime for business operations,
considering constructing an iron sheet plant can be a point of integrating those two
businesses to further ease operations
• Need to exert direct control over production and/or quality: This can make BCI being able
to control direct cost related to iron sheets thereby contributing towards the improvement
of the entire business
• Better quality control - BCI will be able to assure the quality of the iron sheets by
manufactuting them internally and this further provides confidence and guaranteed quality
of the iron sheets to their customers
Page 16 of 26
• Design secrecy is required to protect proprietary technology BCI will be able to guide its
business secrecy. Confidentiality in business is a key success factor that may also provide
a competitive advantage to BCI.
• Unreliable suppliers Manufacturing iron sheets internally may enhance efficiency in terms
of just in time delivery better than when such a service is outsourced. Customers may not
deliver on time as agreed, and this may in turn cause delays in delivering the house on the
dates agreed, thereby further hampering business relationships
• Desire to maintain a stable workforce emanating from economies of scale once BCI
becomes a large conglomerate (in periods of declining sales)
• Provision of a second source of income - By manufacturing these iron sheets internally, it
is a form of BCI to diversify its business .At some point when the real estate business is
not performing well, BCI may devote to iron sheet selling to other businesses.
QUESTION THREE: Groupe Scolaire Officiel de Huye (GOH)

a) Payoff table (1 Mark per each state of nature max,3) 3
Regret table (Minmax (1 Mark per each state of nature max,3) 3
Minmax (Decision and interpretation) 2
Maximax (Decision and interpretation) 2
Maximin (Decision and interpretation) 2
Maximum marks 12
b) Expected Value for 7,000 1
Expected Value for 6,000 1
Expected Value for 4,500 1
Conclusion 2
Maximum marks 5
C) Cost of uniform up to 6,000 uniforms 2

Total cost for 6,000 uniforms 2
Cost for the 6000th Uniform 2
Total cost for 7,000 2
Maximum marks 8
Total marks 25
Page 17 of 26
Detailed Answer
c) Minmax, Maximax and Maximin Working
Profit per student 90,000 - 40,000 = FRW 50,000
Loss per student due to fixed cost = FRW 4,500
Workings 2
Good condition (Predicted Students 7,000)
1. (7,000*50,000) = FRW 350,000,000
2. (6,000*50,000) - (1,000*4,500) = FRW 295,500,000
3. (4,500*50,000) - (2,500*4,500) = FRW 213,750,000
Average Condition (Predicted Students 6,000)
4. 7,000*50,000 = FRW 350,000,000
5. 6,000*50,000 = FRW 300,000,000
6. (4500*50,000) - (1500*4,500) = FRW 218,250,000
Bad Condition (Predicted Students 4,500
1. 7,000*50,000= FRW 350,000,000
2. 6,000*50,000= FRW 300,000,000
3. 4,500*50,000= FRW 22,500,000
Payoff table
Economic Probability Number of Students
Condition
7,000 6,000 4,500
Good 0.40 350,000,000 295,500,000 213,750,000
Average 0.35 350,000,000 300,000,000 218,250,000
Bad 0.25 350,000,000 300,000,000 225,000,000
Min MAX (Regret criteria)

Regret Table
Condition
7,000 6,000 4,500
Good 0.40 - 54,500,000 136,250,000
Average 0.35 - 50,000,000 131,750,000
Bad 0.25 - 50,000,000 125,000,000
Page 18 of 26
MINIMAX
Condition
7,000 6,000 4,500
Good 0.40 - 54,500,000 136,250,000
Average 0.35 - 50,000,000 131,750,000
Bad 0.25 - 50,000,000 125,000,000
MAXIMUM - 50,000,000 136,250,000
Comment: GOH to minimize the maximum loss at 7000 students where possible loss is FRW 0
Max Max criteria
Condition
7,000 6,000 4,500
Good 0.40 350,000,000 295,500,000 213,750,000
Average 0.35 350,000,000 300,000,000 218,250,000
Bad 0.25 350,000,000 300,000,000 225,000,000
MAXIMUM 350,000,000 300,000,000 225,000,000
Comment: GOH to maximize the maximum possible profit he can choose 7,000 students with a
profit of FRW 350,000,000.
Maximin
Condition
7,000 6,000 4,500
Good 0.40 350,000,000 295,500,000 213,750,000
Average 0.35 350,000,000 300,000,000 218,250,000
Bad 0.25 350,000,000 300,000,000 225,000,000
Minimum 350,000,000 295,500,000 213,750,000
Comment: Again or GOH will maximize profit at 7000 students with estimated profit of FRW
350,000,000.
Page 19 of 26
d) Expected Value
For 7000 = (0.40*350,000,000) +(0.35*350,000,000) +(0.25*350,000,000) = FRW 350,000,000
For 6000 = (0.40*295,500,000) +(0.35*300,000,000) +(0.25*300,000,000) =FRW 298,200,000
Bad = (0.40*213,750,000) +(0.35*218,250,000) +(0.25*22,500,000) =FRW 218,137,500
Comment: Expected value of enrolling 7,000 students in is better compared to the rest with
FRW 350,000,000
c)
Minimum total cost of uniform to be charged to student’s parents
First 6,000 hundred uniforms
Y =axb
15,000x6,000-0.3219
=911.81
Total cost for 6,000 uniforms is FRW 5,470,860.25
For 5,999 uniforms = 15,000x5,999-.3219= FRW 911.858
Total cost for 5,999 uniforms is = FRW 5,470,241.94
Cost for the 6000th Uniform is 5,470,860.25 - 5,470,241.94= FRW 618.318
Total cost for 7,000 uniforms is = 5,470,860.25+(618.318*1000) = FRW 6,089,178.25
Comments
The minimum total cost for the uniform that the headmaster of GOH must charge to the parents in
relation to the new students enrolled (7,000) are FRW 6,089,178.25
The learning curve is an important modern concept according to which cumulative experience in
the production of a product over time increases efficiency in the use of inputs such as labour and
raw materials and thereby lowering cost per unit of output.
As a tailor produces successive lots of output (uniforms) over various periods of time, he or she
learns to produce more with a given quantity of resources or he or she is capable of producing a
given output by using lesser quantities of inputs or resources than before.
Thus, either with the increase in efficiency of resources or with saving in resources such as labor
and raw materials, the cost per unit of output declines. This learning curve effect mostly occurs in
the reduction of labor requirements per unit of output.
Page 20 of 26
Question 4: HWC ltd
a) Porter five forces model for HWC ltd
Bargaining power of customers
Definition 1
Open market 1
Other services provided by HWC 1
Any other valid point (earns a mark)
Maximum marks 3
Bargaining power of suppliers

Definition 1
Part time staff and water engineers 1
Specialized materials 1
Maximum marks 3
Threat of substitutes
Definition 1
Substitutes for water 1
Water from RWC 1
Maximum marks 3
Rivalry in the market

Definition 1
Free water 1
Unique offering 1
Maximum marks 3
Threat of new entrants

Definition 1
Economies of scale 1
Government policy 1
Capital requirements 1
Cost disadvantages independent of size 1
Maximum marks 3
b) Strategic advice to HWC

Compete on quality service 1
Compete on audience 1
Page 21 of 26
Concentrate on the unique offering 1
Value addition 1
Compete on location 1
Maximum marks 5
c) Lean information system at HWC

Definition 1
Value addition 1
Waste minimization 1
Relevant persons 1
Conclusion 1
Maximum marks 5
Total marks 25
Detailed Answer
A. using Porter’s five force model to assess whether HWC Ltd can go on with its project to
enter into this new market.
Porter's Five Forces model is a framework for analyzing an organization’s competitive
environment The collective strength of these forces determines the ultimate profit potential of an
industry.
(i) Bargaining power of customers
The bargaining power of customers is designated as the market of outputs which includes the
ability of customers to put the firm under pressure, which also affects the customer’s sensitivity to
price changes.
While there is an open market for water and its related accessories, HWC will likely struggle to
get customers selling water at a fixed price. Besides, the presence of several NGOs that provide
water free of charge accelerates this threat. In this case, the bargaining power of customers is very
high due to many available alternatives.
.
HWC does also offer other services including selling water pipes , drilling and flushing bore holes.
Customers for those services are most likely to be the Government, big production companies who
need their own water line and a group of citizens who may come together in collaboration with
other partners to have water access near them.
Page 22 of 26
The bargaining power for such customers is most likely to be high since a contract can only be
awarded after a competitive bidding process.
(ii) Bargaining power of Suppliers

The bargaining power of suppliers is also termed as the market of inputs. Suppliers of raw
materials, components, labor, and services to the firm can be a source of power over the firm when
there are few substitutes.
One of the key suppliers to HWC are the engineers to be used in all HWC services and operations.
These being part-time staff from competitor companies and the water engineers operating as
freelancers can be hard to manage. Without any other staff, they may form a solidarity and refuse
to work for HWC without being paid a particular amount. In this case, the supplier bargaining
power would be perceived as high.
Similarly,. the materials to be used in all those services/operations are not made in Rwanda and
are specialized and need enough fund to acquire them. Since the materials are specialized, it makes
the supplier possess a high bargaining power.
(iii)Threat of substitutes.
The existence of products outside of the normal product boundaries increases the propensity of
customers to switch to alternatives.
In normal life, water does not have substitutes. And water can be used for several purposes
including washing, drinking, cooking, among many others.
However, if water was meant for drinking then close substitutes would avail, such as juice, beers,
and many other soft drinks.
Nonetheless, the substitute in this scenario can come from substituting the HWC water by buying
the same water from Robin Water Company (RWC) which is likely to be cheaper due to economies
of scale and a bigger market share or decide to use free water provided by several NGOs. In this
case, the threat of substitution is very high to HWC.
(iv) Rivalry amongst current industry competitors.
Intensity of rivalry refers to the extent to which firms within an industry put pressure on one
another and limit each other's profit potential.
Competitors are many in this industry and some of them have experience of over 20 years in water
business. Some competitors are Government, private business companies and NGO’s. The rivalry
on supplying water is not a big issue here as the government set a fixed price. The fact that NGOs
provide similar services to the citizenry free of charge intensifies the rivalry.
Page 23 of 26
However, HWC may have a competitive advantage over its unique offering of digging water wells
and pumping water to water tanks and taps. HWC should therefore strategize and concentrate on
that unique offering instead of investing into water service provision which appears unprofitable.
(v) Threats of new entrants.

Economies of scale
HWC is new in water business and entering this market is likely to cost them handsomely due to
an apparent economy of scale from the already established companies such as Robin Water
Company (RWC) ltd that has been in the market for over 20 years with over 50% of market share.
Government policy
The government can limit or even foreclose entry to industries with such controls as license
requirements and limits on access to raw materials. For HWC this may not appear as a threat since
all business are required to register with Rwanda Development Board and must possess a Taxpayer
Identification Number (TIN)
Capital requirements
There is a barrier to entry into this market caused by a huge amount of money that must be invested
in purchasing specialized materials that shall be needed for use in services or operations in the
water service business. This appears to be an unrecoverable expenditure that must be incurred up-
front which is not so easy for HWC at the moment.
Cost disadvantages independent of size

Well established companies may have cost advantages not available to potential rivals, no matter
what their size and reasonable economies of scale. While HWC may benefit from a tax relief
provided by the government to all organizations that support the citizenry in form of water
access, this may not appeal HWC to enter the new market since it is available to all
organizations. This indicates that it is not easy to start a new business in this sector with a new
brand name against the already well-established big brands.
Again, due to insufficient funds, the company is planning to hire part-time staff from competitors
in the same business and freelancer water engineers. This is a disadvantage to HWC as it may not
be possible to get staff while they are busy in their main assignments with competitors/primary
employers. Competitors may even refuse to give permission to their staff for giving support to a
rival company.
Page 24 of 26
b) Provide strategic advice to HWC Ltd on how it can outperform its competitors.
Compete on quality service
The water industry’s competition is stiff and therefore not easy for HWC to compete on price as
competitors already have a bigger market share and a renowned brand coupled with economies of
scale. That means their selling price are likely to be lower and to some extent, water is availed free
of charge. This leaves HWC with no choice other than ensuring that its water can be delivered to
point of destination whilst investing more in publicity and advertising.
Compete on audience
HWC may also consider the current market concentration with an aim of determining which
distribution areas are not covered. With this it will require HWC establishing their and start its
water selling business to that new market segment.
Concentrate on the unique offering

Since HWC already possesses a unique product of digging water wells and pumping water to water
tanks and taps; we recommend that HWC concentrates on that as it will provide more revenues to
the company than wasting a lot of resources on water which can even be accessed free of charge.
Value addition
The other way to compete in this industry is by letting HWC add value to the drinking water to
make it more appealing to the customers. In this case, HWC can invest in different types of water
such as mineral water, spring water, sparkling water, distilled water, purified water, and alkaline
water. This product differentiation will provide a competitive advantage to HWC as the rest of the
other competitors are only providing normal water.
Compete on location
HWC should identify competitor’s business location to determine which areas might need huge
amounts of water such as bid industries, hotels, manufacturing plants, construction sites among
others. With its unique service of digging water wells and flushing bore holes, it can easily dig a
borehole or a set up a tap in such a unique location, targeting such big clients.
c) Discuss the lean information system at HWC Ltd
Lean Management Information System:

Management information system is a system of disseminating information that will enable
managers to do their job. It should provide managers with data that they can use for
benchmarking and control purposes.
Lean Management Information System is a concept of designing an information system that
could provide instantly, right information to the right people, at the right time .. Lean information
Page 25 of 26
management in the information system is the efficient use of information, reducing waste time,
and producing the relevant information
In order for the CEO of HWC to collect more information on the market regarding the new market
they wish to enter to, should consider putting up an information system that adds value to the
management system. It appears information being received is non-value adding and quite
disturbing.
The system should focus on waste minimization without having to duplicate it. In that case
receiving so many emails may confuse the CEO and some of those emails could be duplicated.
The system should therefore be able to receive the information needed only and in real time.
Since HWC will still need flexible and customized information going forward, then its high time
the company invests in robust information system that produces reports and information in real-
time.
By receiving a lot of emails, sometimes, it is quite difficult to figure out which one is important,
and which one is not. Therefore, HWC should equally consider developing a system that sends
reports or emails – which they are currently using – to only relevant persons.
In general, when we consider developing the system by Lean Management Information system,
we normally refer to Japanese 5S: Structure, Systemize, Standardize, Self- Discipline, and
Sanitize.
The CEO should put in place an information system that can provide the right information to the
right people, at the right time whilst ensuring that they focus on waste minimization and continuous
improvement is sought as well
Page 26 of 26
DATE: THURSDAY, 31 MARCH 2022
INSTRUCTIONS:
1. Time Allowed: 3hours 45minutes (15minutes reading and 3

hours 30 Minutes writing).
5. Marks allocated to each question are shown at the end of the
question.
7. The question paper should not be taken out of the examination
room
A2.2 Page 1 of 12
SECTION A
QUESTION ONE
Mezeneza Company Limited (MC Ltd) makes high quality, handmade shoes which it sells for an
average of FRW 18,000 per pair. The standard cost for each pair is FRW 4,200 and the standard
labour time of each pair is three hours. In the last quarter MC Ltd had budgeted production of
12,000 pairs, although actual production was 12,600 pairs in order to meet demand. 37,000 hours
were used to complete the work and there was no idle time. The total labour cost for the quarter was
FRW 53,193,000.
At the beginning of last quarter, the design of the shoes was changed slightly. The new design
required workers to sew the company’s logo onto the side of every shoe made and the estimated
time to do this was fifteen minutes for each pair. However, no-one told the accountant responsible
for updating standard cost that the standard time per pair of shoes needed to be changed. Similarly,
although all workers were given 2% pay rise at the beginning of the last quarter, the accountant was
not told about this either. Consequently, the standard was not updated to reflect the changes. The
workers are also paid 25% overtime premium above their usual hourly rate when required to work
overtime.
The sales budget of MC Ltd for last year was based on the following estimates:
Total size of market: 200,000 pairs

Expected market share: 25%
Standard contribution per pair FRW 4,000
At the end of the year, it was estimated that the actual size of the market during the year had been
260,000 pairs.
Actual sales in the last year were 61,000 pairs.
MC Ltd production department also produces chemical Y, which is used to treat leather used in
making shoes. The standard ingredients of 1 kilogram of Y are:
0.65 kilograms of ingredient F @ FRW 400 per Kg
0.30 kilograms of ingredient D @ FRW 600 per Kg.
0.20 kilograms of ingredient N @ FRW 250 per Kg.
The following additional information is provided:
• Production of 4,000 kilograms of chemical Y was budgeted for January 2022.

• The production of chemical Y is entirely automated and production costs attributed to its
production comprise only direct materials and overheads.
• MC Ltd’s production process works on a just-in-time (JIT) inventory system and no ingredients
or inventories of chemical Y are held.
• 4200 kilograms of Y were produced in January 2022 and the cost details of Materials used were
2,840 kilograms of F, 1,210 kilograms of D and 860 kilograms of N at a total cost of FRW
2,038,000.
A2.2 Page 2 of 12
The production manager is assessed based on the performance of the variances on chemical Y.
MC Ltd is about to launch a new sports shoe onto the market as a way of diversification. It needs to
prepare its budget for the coming year and it is trying to decide whether to launch the product at a
price FRW 30,000 or FRW 35,000 per pair. The following information has been obtained from
market research.
Price per pair FRW 30,000 Price per pair FRW 35,000
Probability Sales Volume Probability Sales volume
0.4 120,000 0.3 108,000
0.5 110,000 0.3 100,000
0.1 140,000 0.4 94,000
Notes
1. Variable production cost would be FRW 12,000 per pair for production volumes up to and
including 100,000 pairs each year. However, if production exceeds 100,000 pairs each year,
variable production cost would fall to FRW 11,000 for all pairs produced.
2. Advertising costs would be FRW 900 million per annum at selling price of FRW 30,000 and
FRW 970 million per annum at a selling price of FRW 35,000.
3. Fixed production costs would be FRW 450 million per annum.

MC Ltd in 2020 also started a business in restaurant which is known as Tamu Tamu Foods.
Tamu Tamu Foods is a middle-class restaurant that is only open in the evenings. The restaurant has
eight staff, who are each paid at the wage rate of FRW 960 per hour on the basis of hours actually
worked. The restaurant also has a restaurant manager and a head chef, each of whom is paid a
monthly salary of FRW 516,000.
The following data relates to operations for the month of January 2022:
Budgeted Actual
Number of meals 1,200 1,560
FRW FRW
Revenue: Food 5,760,000 7,300,800
Drinks 1,440,000 1,404,000
Total revenue 7,200,000 8,704,800
Variable costs: Staff wages 1,105,920 1,589,760
Food costs 720,000 861,600
Drink costs 288,000 633,600
Electricity costs 406,440 420,000
Total variable costs 2,520,360 3,504,960
Contribution 4,679,640 5,199,840
Fixed costs: Manager's and chefs salary 1,032,000 1,032,000
Rent and depreciation 540,000 540,000
Total fixed costs 1,572,000 1,572,000
Operating profit 3,107,640 3,627,840
A2.2 Page 3 of 12
The budget above is based on the following assumptions:
1. The restaurant is only open six days a week and there are four weeks in a month. The average
number of orders each day is 50 and demand is evenly spread across all the days in the month.
2. The restaurant offers two meals: Meal A which costs FRW 4,200 per meal and Meal B, which
costs FRW 5,400 per meal. In addition to this, irrespective of which meal the customer orders, the
average customer consumes four drinks each at FRW 300 per drink Therefore, the average spend
per customer is either FRW 5,400 or FRW 6,600 including drinks, depending on the type of meal
selected. The April budget is based on 50% of customers ordering Meal A and 50% of customers
ordering Meal B.
4. Food costs represent 12.5% of revenue from food sales.
5. Drink costs represent 20% of revenue from drink sales.
6. When the number of orders per day does not exceed 50, each member of the hourly paid staff is
required to work exactly six hours per day. For every increase of five orders in the average number
of orders per day, each member of staff has to work 30 minutes of overtime for which they are paid
at the increased rate of FRW 1,440 per hour.
7. Electricity costs are deemed to be related to the total number of hours worked by each of the
hourly paid staff and are absorbed at the rate of FRW 352.8 per hour worked by each of the eight
staff.
8. All costs for hourly paid staff are treated wholly as variable costs.
The board of directors are on the view that the comparison of the actual and the budget which
shows a better performance is not accurate and would wish that for a reliable evaluation they should
use flexible budget. MC Ltd’s CEO has approached you as an expert in strategic performance
management to advice on various issues based on the information provided.
Required:
(a) i) Considering the information on the launch of new sports shoes by MC Ltd, advice the
CEO on the best price option to launch the sports shoes based on expected profit.
(12 Marks)
ii) Identify which price option should be chosen by management for the launch if
maximin decision rule was used. (3 Marks)
(b) Evaluate the performance of the production manager based on production of chemical Y
for last year using the material mix, yield and price variances. (9 Marks)
(c) Assess the performance of MC Ltd sales using the market share and market size
variances (5 Marks)
(d) Analyze the total labour variances for previous quarter into component parts for
planning and operational variances in as much detail as the information allows. (9 Marks)
(e) Basing on the views of the board of directors, recalculate the budget operating profit for
the month of January 2022 for Tamu Tamu Foods and comment. (12 Marks)
(Total: 50 Marks)
A2.2 Page 4 of 12
SECTION B
QUESTION TWO
Kabaye Sports Company (KSC) is a large manufacturing company which specializes in the
manufacture a of wide range of sports clothing and shoes in Rwanda. KSC operates from the
Economic zone in Kigali and its mission statement is to create value for the shareholders through
production of world-class sports items. The company has two divisions that are Clothing division
and Leather division. Each division operates with very little intervention from head office and the
divisional managers have autonomy to make decisions about long term investments.
KSC has been measuring performance of the divisions using return on investment (ROI), which is
calculated using controllable profit and average divisional net assets. The target ROI for each of the
divisions is 18%. If the divisions meet or exceed this target the divisional managers are entitled to a
bonus.
Due to COVID-19 pandemic the company has not been doing very well and last year, an investment
which was expected to yield a return above the company’s cost of capital was rejected by one of the
divisional managers because it would have reduced the division overall ROI. Consequently, KCS is
considering the introduction of new performance measure, residual income (RI), in order to
discourage this dysfunctional behavior in the future. Like ROI, this measure would be calculated
using controllable profit and average divisional net assets.
The draft operating statement for the year 2021, prepared by the company accountant is
shown below:
Clothing Division Leather Division ‘
‘FRW 000’ FRW 000’
Sales revenue 190,000 420,000
Less variable cost (70,000) (151,500)
Contribution 120,000 268,500
Less fixed costs (47,250) (71,000)
Net profit 72,750 197,500
Opening divisional controllable 650,000 1,200,000
net assets
Closing divisional controllable 450,000 1,500,000
net assets
Notes
1. Included in the fixed costs are depreciation costs of FRW 8,250,000 and FRW 23,000,000 for
clothing and leather division respectively. 30% of depreciation costs in each division relate to
the assets controlled but not owned by the head office. Leather division invested FRW 100
million in plant and machinery at the beginning of the year, which is included in the net assets
figures above, and it uses reducing balance method to depreciate assets. Clothing division did
A2.2 Page 5 of 12
not make any significant additions to non-current assets during the year and uses the straight-
line method to depreciate assets. It is the policy of both divisions to charge a full year’s
depreciation in the year of acquisition.
2. Head office allocates and charges all its costs to the two divisions. These have been included in
the fixed costs and amount to FRW 31million for clothing division and FRW 35million for
leather division respectively.
3. KSC cost of capital is 12%
Due to many restrictions by ministry of health for sports the company has seen the sales decline
over the past two years but the leather division has majority share of sales. The management
expected that in this year the company would increase its sales as the restrictions have been
lessened for sports.
In the first quarter of year 2022 the two divisions segmented income statement was as follows:
Details Total ‘FRW 000’ Clothing Division Leather Division
‘FRW 000’ ‘FRW 000’
Sales revenue 35,000 20,000 15,000
Variable cost (17,210) (9,600) (7,610)
Contribution 17,790 10,400 7,390
Less traceable fixed costs:
Advertising 6,120 3,000 3,120
Administration 4,270 2,100 2,170
Depreciation 2,290 1,150 1,140
Divisional profit margin 5,110 4,150 960
Common fixed costs (3,900)
Net profit 1,210
The management has questioned the low margin in the leather division while the leather division
has 25% less sales than clothing division in quarter 1 of year 2022. The management has
recommended that the leather division be further segmented into three product lines namely,
Garment, Shoes and Handbags as follows:
Details Garments Shoes Handbags
‘FRW 000’ ‘FRW 000’ ‘FRW 000’
Sales revenue 5,000 7,000 3,000
Traceable fixed costs:
Advertising 800 1,120 1,200
Administration 300 350 420
Depreciation 25 56 33
Variable costs as a percentage of sales 65% 40% 52%
Analysis of the first quarter of year 2022 show that FRW 1.1 million of administration costs in
Leather division are common to the product lines.
A2.2 Page 6 of 12
Required:
(a) Using segmental profitability analysis, assess how the key segments of the leather division
performed for the first quarter of year 2022 and advice. (9 Marks)
(b) i) Evaluate the performance of each of the two divisions of KSC using return on
investment for year 2021. (6 Marks)
ii) Discuss the performance of the two divisions for the year, including the reasons for
differences in the ROI and impact on the behavior of the division manager with the worst
performance. (6 Marks)
(c) Analyse the performance of each of the two divisions of KSC for the year 2021 using
residual income (4 Marks)
(Total: 25 Marks)
QUESTION THREE
Jean Paul Gafaranga (JP) is a renowned businessman in Rwanda and has some businesses in Kigali
and other places in Rwanda. JP is the owner and CEO of Gafaranga beauty parlor salon which is a
quality hairdresser that experiences high level of competition. The salon has been traditionally
offering a range of hair services to female clients only including cuts, colouring, Rasta,
straightening and weaves.
A year ago, at the beginning of the 2021 financial year, due to COVID-19 pandemic effects on the
business, JP decided to expand his operations to include the hairdressing needs of male clients.
Male hairdressing prices are lower as the work is simpler and the time taken per male client is much
less. The charges of the female clients were not increased during 2020 and 2021 and the mix of
services provided for female clients in the two years was the same.
The latest financial results for the salon are as follows:
2020 2021
‘FRW 000’ ‘FRW 000’ ‘FRW 000’ ‘FRW 000’
Sales Revenue 20,000 23,850
Less cost of sales:
Hairdressing staff costs 6,500 9,100
Hair products- female 2,900 2,700
Hair products- Male - 9,400 800 12,600
Gross profit 10,600 11,250
Less expenses:
Rent 1,000 1,000
Administration salaries 900 950
Electricity 700 800
Advertising 200 500
Total expenses 2,800 3,250
Net profit 7,800 8,000
A2.2 Page 7 of 12
JP is disappointed with his financial results. He thinks that the salon is much busier than a year
before and was expecting more profits than the results provided. He has noted the following extra
information:
1) Some female clients complained about the change in atmosphere following the introduction of
male services, which created tension in the salon.
2) Two new staffs were employed at the start of 2021. The first was a junior hairdresser to support
the specialist hairdressers for the female clients. She was appointed at a salary of FRW 900,000
per annum. The second new staff was a specialist hairdresser for the male clients. There were no
increases in pay for existing staff at the beginning of 2021, as they had a pay increase at start of
2020 which was to cover for two years.
JP introduced some financial measures of success two years ago
2020 2021
Number of complains 12 46
Number of male clients’ visits 0 3,425
Number of female clients’ visits 8,000 6,800
Number of specialist hairdressers for female clients 4 5
Number of specialist hairdressers for male clients 0 1
JP has also been running a small production company that has been producing Telephone in
Rwanda. Recently due to the economic downturn as a result of the pandemic the performance has
not been good and therefore, he launched a new version of the product. Development work
continues to add a related product to the product list. The following details are given for the first
quarter of 2022 financial year.
Details FRW
Development costs 9,500,000
- Existing product 75,000,000
Cost of units produced - New product 14,000,000
- Existing product 110,000,000
Sales Revenue - New product 25,000,000
- Existing product 500,000
Units produced - New product 100,000
- Existing product 100,000
Hours worked - New product 25,000
JP has heard about performance evaluation using financial and non-financial measures. Recently, he
also attended a workshop and heard about balanced scorecard and hence he has approached you as
an expert for advice.
Required:
(a) Suggest and calculate performance indicators that could be used for each of the four
perspectives on the balanced scorecard for JP’s production company for the first quarter
of 2022. (8 Marks)
A2.2 Page 8 of 12
(b) Assess the financial performance of Gafaranga beauty parlor salon from the data
provided. (11 Marks)
(c) Analyse and comment on the non-financial performance of JP’s saloon business under the
headings of quality and resource allocation (6 Marks)
(Total: 25 Marks)
QUESTION FOUR
Brick Building Company (BBC) is a building business that provides a range of building services to
the public. The founder, Mr. Chris, is now semi-retired from active work in the business and was a
construction manager before founding the company. His wife, Sarah, is a semi-retired architect and
continues part-time as an advisor. Chris is suggesting that before he retires from his combined
CEO/Chair role, an independent non-executive Chair should be recruited. Until a new Chair is
appointed, and a successor CEO is recruited, Chris will cover necessary tasks as CEO while
reducing his working hours. Except for the Company Secretary and Finance Director, the current
executive directors are family members (two daughters, nephew, and niece). Each runs a division
or business area as managing director following their own experience and skills.
The new Finance Director, Mugabo, is not part of the family and believes that resource efficiencies
could be made by coordinating the divisions and that the growth potential suggests an initial
stock market listing would be appropriate. The board of BBC rarely meets formally. It
frequently makes high-level decisions at “family only” gatherings with the other shareholders,
who are nephews and grandchildren who previously worked for the business. The family is
considering floating their company on Rwanda Stock Exchange (RSE)
Recently, it has been asked to quote for Kagugu Holdings (KH) for its building conversions and
extension of properties. It has found that it is winning fewer building conversions contracts than
expected. In addition, BBC also produces and sells different types of bricks to the construction
industry. The three types of brick produced are Clay, Concrete and reclaimed bricks.
BBC has a policy to price all jobs at the budgeted total cost plus 50%. Overheads are currently
absorbed on a labour hour basis. BBC thinks that a switch to activity based costing (ABC) to absorb
overheads would reduce the costs associated with building conversions and hence make them more
competitive.
BBC management accountant trainee has provided the following data:
Overhead category Annual overheads Activity driver Total number of

‘FRW 000’ activities per year
Supervisors 90,000 Site visits 500
Planners 70,000 Planning documents 250
Property related 240,000 Labour hours 40,000
Total 400,000
A2.2 Page 9 of 12
A typical building conversion costs FRW 3,500,000 takes 300 labour hours to complete and
requires only one site visit by a supervisor and needs only one planning document to be raised.
An extension of property costs FRW 8,000,000, takes 300 labour hours to complete and requires six
site visits and five planning documents. In all cases the labour is paid FRW 15,000 per hour.
BBC also has a Private polytechnic known as Brick Polytechnic (BP) in Rwanda, which has many
polytechnics which are public. BP obtains the vast majority of its revenue through government
contracts for academic research and payments per head for teaching students which are sponsored
by government. The economy of Rwanda has been not doing well in the last two years and this has
caused the government to cut funding for all the universities in the country.
In order to try to improve efficiency, the chancellor of the university, who leads its executive board,
has asked the head administrator to undertake an exercise to benchmark BP's administration
departments against the other two large Polytechnics in the country, MP and UP. The government
education ministry has supported this initiative and has required all three universities to cooperate
by supplying information.
The following information has been collected regarding administrative costs for the most
recent academic year:
BP MP UP
RWF'000 RWF'000 RWF'000
Research
Contract management 14,430 14,574 14,719
Laboratory management 41,810 42,897 42,646
Teaching facilities management 26,993 27,263 26,723
Student support services 2,002 2,022 2,132
Teachers' support services 4,005 4,100 4,441
Accounting 1,614 1,571 1,611
Human resources 1,236 1,203 1,559
IT management 6,471 6,187 6,013
General services 17,049 16,095 18,644
Total 115,610 115,912 118,488
Drivers:
Student numbers 28,394 22,783 29,061
Staff numbers 7,920 7,709 8,157
Research contract value (FRW m) 185 167 152
The key drivers of costs and revenues have been assumed to be research contract values supported
student numbers and total staff numbers. The head administrator wants you to complete the
benchmarking and make some preliminary comment on your results.
The education ministry in Rwanda is keen to have potential students well informed on available
choices to help them choose which polytechnic to apply to.
To this end, the ministry has proposed that summary league tables are published showing:
• The value of research funding secured by each polytechnic
• The proportion of students gaining first class and upper second (2:1) class degrees
A2.2 Page 10 of 12
• The proportion of students completing their courses
• The proportion of graduates who have secured full time employment within one year of
graduating
However, the Principals of a number of polytechnics in Rwanda have written to the minister for
education expressing their concern at the proposal to introduce the league tables.
Required:
(a) Assess the progress of the benchmarking exercise to date in BP, explaining the actions that
have been undertaken, and those that are still required. (7 Marks)
(b) i) Calculate the cost and advice on the quoted price of building conversion and of an
extension of property using ABC to absorb the overheads. (6 Marks)
ii) Assuming that the cost of a building conversion falls by nearly 7% and the price of an
extension to properties rises by about 2% as a result of the change to ABC, suggest
possible pricing strategies for the two products that BBC sells and suggest two
reasons other than high prices for the current poor sales of the building
conversions. (5 Marks)
(c) Analyse the current board operations at BBC and Chris’s suggestions for an independent
Chair. (7 Marks)
(Total 25 Marks)
A2.2 Page 11 of 12
BLANK PAGE
A2.2 Page 12 of 12
DATE: THURSDAY, 31 MARCH 2022

MARKING GUIDE AND MODEL ANSWERS
A2.2 Page 1 of 18
SECTION A
QUESTION ONE
Marking Guide
Mark(s)
a) i)
Contribution per pair each 0.5 mark 1
EV profit each 1.5 marks 9
Total EV profit each 0.5 mark 1
Choice of price 1
Subtotal 12
a) ii)
Identification of minimum profit for each price 1mark 2
Choice and justification 1
Subtotal 3
b) .
Standard cost of materials per kilogramme of output 1
Material price variance – calculation 1mark and variance 1mark 2
Material yield variance – calculation 2mark and variance 1mark 3
Material price variance – calculation 2mark and variance 1mark 3
Subtotal 9
c) .
Market share variance 2
Market size variance 2
Summary- Volume variance 1
Subtotal 5
d) .
Revised rate 0.5
Revised standard hours 0.5
Labour rate planning variance 2
Labour efficiency planning variance 2
Labour rate operational variance 2
Labour efficiency operational variance 2
Subtotal 9
e) .
Determination of each item !1 mark each 9
Flexible operating profit 2
Comment 1
Subtotal 12
Total 50
A2.2 Page 2 of 18
Model Answer
a) i) Considering the information on the launch of new sports shoes by MCL advice the CEO on
the best price option to launch the sports shoes based on expected profit.
Contribution per pair ‘FRW “000” ‘FRW “000”
Price per pair 30 35
Contribution to 100,000 pairs (30/35 -12) 18 23
Contribution above 100,000 pairs (30/35 -11) 19 24
Expected Values
‘FRW “000” ‘FRW “000” ‘FRW “000” ‘FRW “000” ‘FRW “000” ‘FRW “000”
Price 30 30 30 35 35 35
Sales volume 120000 110000 140000 108000 100000 94000
Unit contribut. 19 19 19 24 23 23
Total contrib. 2,280,000 2,090,000 2,660,000 2,592,000 2,300,000 2,162,000
Fixed cost (450,000) (450,000) (450,000) (450,000) (450,000) (450,000)
Advertising (900,000) (900,000) (900,000) (970,000) (970,000) (970,000)
Profit 930,000 740,000 1,310,000 1,172,000 880,000 742,000
Probability 0.4 0.5 0.1 0.3 0.3 0.4
EV Profit 372,000 370,000 131,000 351,600 264,000 296,800
Total EV 873,000 912,400
Using expected value the choice is based on maximizing the profit and hence choose to launch
with the price of FRW 35,000
A2.2 Page 3 of 18
ii) Identify which price option should be chosen by management for the launch if maximin
decision rule was used.
‘ FRW “000” ‘FRW “000” ‘FRW “000” ‘FRW “000” ‘FRW “000” ‘FRW “000”
Price 30 30 30 35 35 35
Profit 930,000 740,000 1,310,000 1,172,000 880,000 742,000
Minimum Profit
FRW 30,000 FRW 740,000,000
FRW 35,000 FRW 742,000,000
Choose selling price at FRW 35,000 as it maximizes the minimum profit expected.
b) Evaluate the performance of the production manager based on production of chemical Y for
last year using the material mix, yield and price variances
Standard cost of materials per kilogramme of output = (0.65 kilogrammes * 400) +

(0.3kilogrammes * 600) + 0.2 kilogrammes *250) =FRW 490
Variance calculations
Materials price variance = (standard price – actual price) Actual Quantity
= SP * AQ – AC= (400 * 2840) + (600 ×* 1210) + (250 * 860) – 2,038,000= 39,000 F
Material yield variance = Actual yield – Standard yield *Standard material cost per unit of output
= (4200 – 4910/1.15) * 490 = FRW 34,090A
Material mix variance = Actual quantity in actual mix at standard price – actual quantity in
standard mix at standard prices
F (4,910 ×0.65/1.15 – 2,840)400 = FRW 25,910 A
D (4,910 × 0.30/1.15 – 1,210)600 = FRW 42,520 F
N (4,910 × 0.20/1.15 – 860)250 = FRW 1,520 A
FRW 1,509 F
A2.2 Page 4 of 18
c) Assess the performance of MCL sales using the market share and market size variance
Market size variance
Ex ante (budgeted) total market size (units) 200,000
Ex post (actual) total market size (units) 260,000
Total difference (units) 60,000 (F)
Budgeted market share 25%
Market size variance (in units) 15,000 (F)
Standard contribution per unit FRW 4,000
Market size variance in FRW contribution FRW 60,000,000 (F)
Market share variance

Ex post (actual) total market size (units) 260,000
Budgeted market share 25%
Expected sales if budgeted market share achieved 65,000
Actual sales 61,000
Market share variance (units) 4,000 (A)
Standard contribution per unit FRW 4,000
Market share variance in FRW contribution FRW 16,000,000 (A)
Summary FRW
Market size variance 60,000,000 (F)
Market share variance 16,000,000 (A)
Total sales volume variance 44,000,000 (F)
d) Analyse the total labour variances for previous quarter into component parts for planning and
operational variances in as much detail as the information allows
Planning and operational variances
A2.2 Page 5 of 18
Labour Rate Planning variance
FRW per hour
Original standard rate 1,400
Revised standard rate (1400*1.02) 1,428
Labour rate planning variance 28 A
Labor rate planning variance = 37,000 hours * 28 A = FRW 1,036,000 A
Labour rate Planning variance
Hours
Original standard (12,600*3) 37,800
Revised standard (12,600*3.25) 40,950
Labour Efficiency planning variance 3,150 A
Labor efficiency planning variance = Frw 1,400 * 3,150 A = FRW 4,410,000 A
Labour Rate Operational variance

FRW
Revised cost (37,000*1428) 52,836,000
Labour rate operational variance 357,000 A
Labour Efficiecy Operational variance
Hours
Revised standard (12,600*3.25) 40,950
Actual hours taken 37,000
Labour Efficiency operational variance 3,950 F
Labor efficiency planning variance = Frw 1,400 * 3,950 A = FRW 5,530,000 F
A2.2 Page 6 of 18
e) Basing on the views of the board of directors, recalculate the budget operating profit for the
month of January 2022 for Tamu Tamu Foods and comment
Tamu Tamu foods

Flexible budget for the month of January 2022
FRW FRW
Revenue: Food (1,560/1,200 * 5,760,000) 7,488,000
Drinks (1,560/1.200*1,440,000) 1,872,000
9,360,000
Variable costs:
Staff wages (1,105,920 + 8 * 0.5 *144 * 6 * 4 *3) 1,520,640
Food costs ((1,560/1.200 *720,000) 936,000
Drink costs ((1,560/1.200 *288,000) 376,000
Electricity costs (8*6*6*4 + 8*6*4*0.5*3*352.8) 508,030 (3,339,070)
6,020,930
Fixed costs:
Managers' chefs salary 1,032,000
Rent and depreciation 540,000 (1,572,000)
Opening profit 4,448,930
Comment/conclusion
From the flexible budget then the worry of the BOD was confirmed as the flexible budget shows
that the actual performance was not better.
A2.2 Page 7 of 18
SECTION B
QUESTION TWO
Marking Guide Mark(s)

a)
Contribution for each segment 1 mark each 3
profit for each segment 1 mark each 3
Leather Division profit 1
Advice/comment 2
Subtotal 9
b) i).
Add depreciation each 0.5 mark 1
Add head office costs each 0.5 mark 1
Controllable profit 0.5 each 1
Average net assets 0.5 each 1
ROI each 1 mark 2
Subtotal 6
ii)
Any 3 points well explained Each 2 marks 6
c) .
Controllable profit 0.5 mark each 1
Capital charge 0.5 mark each 1
RI each 0.5 mark 1
Comment 1
Subtotal 4
Total 25
Model Answer
a) Using segmental profitability analysis, assess how the key segments of the leather division
performed for the first quarter of year 2022 and advice.
Details Leather division Garments Shoes Handbags

FRW “000” 'FRW “000” 'FRW “000” 'FRW “000”
Sales Revenue 15,000 5,000 7,000 3,000
less variable costs (7,610) (3,250) (2,800) (1,560)
contribution 7,390 1,750 4,200 1,440
less traceable fixed cost
Advertising 3,120 800 1,120 1,200
Administration 1,070 300 350 420
A2.2 Page 8 of 18
Depreciation 114 25 56 33
segmental profit margin 3,086 400 2,170 (510)
less common fixed costs (1,100)
Division profit 1,986
Conclusion/advice
The low margin in leather division could be caused by Handbag product line as it is making losses
and this is because of the high cost of advertising, hence the advertising cost should be reduced so
as to make it profitable or if not possible to drop it.
b) i) Evaluate the performance of each of the two divisions of KSC using the return on investment
for year 2021.
Return on investment (ROI) = (controllable profit /average divisional net assets)*100
Controllable profit
Clothing Division ‘FRW Leather Division

“000” ‘FRW “000”
Net profit 72,750 197,500
Add back depreciation on non-controllable 2,475 6,900

assets (30%)
Add back head office costs 31,000 35,000
Controllable Profit 106,225 239,400
Depn for non-controllable assets = 30%*8250 =2475 30%*23000 = 6900

Average divisional Net Assets
Clothing Division ‘FRW Leather Division

“000” ‘FRW “000”
Opening divisional controllable net assets 650,000 1,200,000
Closing divisional controllable net assets 450,000 1,500,000
Average Net Assets 550,000 1,350,000
ROI = (106255/550000)* 100 = 19.3% (239400/1350000)* 100 = 17.7%

ii) Discuss the performance of the two divisions for the year, including the reasons for
difference in the ROI and impact on the behavior of the division manager with the worst
performance
A2.2 Page 9 of 18
Clothing division has achieved the target ROI of 18% while Leather division has not achieved
target ROI.
If the controllable profit in relation to revenue is considered, clothing division margin is

(106255/190000*100) = 55.9% compared to leather division’s margin of (239400/420000*100) =
57% so actually Leather division is performing better. However, leather division has a larger asset
base than the clothing division, hence the fact that clothing division has a higher ROI.
Leather Division seems to be much larger than clothing division and therefore it could be expected
to have more assets. Leather division assets have increased because it made substantial additions
of noncurrent assets. The additional assets have been depreciated this year hence reducing the
profit, given that leather division depreciate their assts using reducing balance method which has
higher depreciation in the first period hence more impact on profit.
The implication of the difference between the two divisions ROI results is that the manager of
clothing division will get a bonus and the manager of leather division will not receive bonus as he
has not met the target. This has a negative motivation to the manager of leather division which
may discourage from making future investments unless a change in the performance measure used.
c) Analyse the performance of each of the two divisions of KSC for the year 2021 using residual
income
Residual Income = controllable profit – imputed charge on net assets
Clothing Division FRW Leather Division

“000” FRW “000”
Controllable profit 106,225 239,400
Less imputed charge on assets (12%) (66,000) (162,000)
Residual Income (RI) 40,255 77,400
The results of RI shows that both division have performed well with clothing division having FRW
40.255M and leather Division FRW 77.4M. The cost of capital is less than target ROI significantly
making the residual income figure show a more positive position.
A2.2 Page 10 of 18
QUESTION THREE

a)
Financial perspective- gross profit each 1 mark 2
Innovation and learning 2
Customer perspective 2
Internal business 2
Subtotal 8
b)
Sales growth 2
Net profit 1
Gross profit margin 2
Net profit margin 2
Admin salaries 1
Electricity 1
Advertising 2
Subtotal 11
c) .
Quality – Any 2 points each 1.5 mark 3
Resource allocation – Any 2 points each 1.5 mark 3
Subtotal 6
Total 25
Model Answer
a) Suggest and calculate performance indicators that could be used for each of the four
perspectives on the balanced scorecard for JP’s production company for the first quarter of
2022.
Financial perspective
Gross profit - Existing product = (110m-75m)/110m *100 = 32%
- New product = (25m-14m)/25m *100 = 44%
Innovation and learning
A2.2 Page 11 of 18
Development costs as a percentage of sales = 9.5m/135m *100 = 7%
Customer perspective
Percentage of sales represented by new products = (25m/110m+25m)* 100 = 18.5%
Internal business perspective
Productivity - existing product = 500000units/100000hours = 5 units/hour
- New product = 100000units/25000hours = 4 units / hour
Unit cost - existing product = 75m/500,000 units = FRW 150/unit
- New product = 14m/100,000 units = FRW 140/unit
b) Assess the financial performance of Gafaranga beauty parlor salon from the data provided.
Sales growth
Sales have grown by 19.25% [(23.85m-20m)/20m*100] from 2020 to 2021
This is impressive growth given that there is stiff competition in the salon industry
Gross profit margin
The gross profit margin declined from 53% (10.6m/20m *100) in 2020 to 47.17% (11.25/23.85
*100) in 2021 this could be predominantly due to 40% increase (9.1m-6.5m/6.5 *100) in
hairdressing staff costs as a result of the recruitment of two new staff
In 2021, the drop could be attributed by the drop in gross profit margin of female clients
Gross profit margin 2021 - Female clients = 6.9m/17m*100 = 40.59%
- Male clients = 4.35m/6.85m*100 = 63.50%
Net profit
The net profit only increased by 2.6% (8m-7.8m/7.8 *100) which is disappointing compared
to 19.25% increase in sales.
Net profit margin 2020 7.8/20*100 = 39%
2021 8/23.85*100 = 33.54%
There was a decline in Net profit margin from 39% to 33.54%
A2.2 Page 12 of 18
Administration salaries
The administration salaries increased by only 5.6% (9.5m-9m/9m *100), which was impressive
given expansion in the business.
Electricity
The electricity costs increased by 14.3% (8m-7m/7m *100), which could be attributed to more
clients in 2021 as compared to 2020
Advertising
Advertising costs increased by 150% (5m-2m/2m *100) which could be expected as a result
of launching a new service for male clients. May not be of much concern provided it has
generated new clients.
c) Analyse and comment on the non-financial performance of JP’s saloon business under the
headings of quality and resource allocation
Quality
Number of complains has increased significantly by 283% (46-12/12 *100). This is alarming and
it could not just because of increase in client numbers
Complain per customer visit have increased from 0.15% (12/8000*100) to 0.45% (46/10225*100).
This is a cause of concern in service business because usually customers complain, they may not
come back.
Resource Allocation
The resources of the salon are the salon itself and the staff. There is more utilization of the salon
as a result of the increase in the clients from 8,000 in 2020 to 10, 225 (6,800+3,425) in 2021. This
is an increase of 27.8%. However, this increase in utilization has not resulted in proportionate
increase in profits.
The female specialist hairdresser served 2,000 (8,000/4) clients per specialist in 2020 and this fell
to 1,360 (6,800/5) clients in 2021. This contrasts with the higher figure of 3,425 clients per male
hairdresser specialist in 2021. Although this could be expected as the time taken per male client is
much less than female client.
A2.2 Page 13 of 18
QUESTION FOUR

a)
Any 7 points each 1 mark 7
b) i)
Direct cost each 0.5 mark 1
Supervision 0.5 mark each 1
Planners 0.5 mark each 1
Property 0.5 mark each 1
Total cost 0.5 mark each 1
Quoted price 0.5 mark each 6
Subtotal
ii)
c) .
Total 25
Model Answer
a) Assess the progress of the benchmarking exercise to date in BP, explaining the actions that
have been undertaken, and those that are still required.
Benchmarking exercise can be described using seven stages, and we will use these stages to
assess the progress of BP's current benchmarking exercise.
Actions that have been undertaken

(i) Set objectives and determine the area to benchmark.
The underlying objective of the exercise is to improve efficiency, and the area being benchmarked
has been identified as the administrative costs incurred in relation to teaching and research.
(ii) Identify key performance drivers and indicators.
It is important that the benchmarking exercise focuses on performance areas which are crucial to
BP's success.
Three key drivers of costs have revenues have been identified (research contract values supported;
student numbers; and staff numbers). Key performance indicators can be derived from these; for
example, costs per student.
However, although the drivers have already been set, the driver 'staff numbers' could be improved
by distinguishing between teaching staff and administrative staff.
A2.2 Page 14 of 18
(iii) Select organisations to study and benchmark against.
The chancellor has asked the administrator to benchmark BP's performance against the other two
large Polytechnics in Rwanda (MP and UP), and the government has endorsed this proposal.
However, the exercise as it stands will not compare BP's performance against any of the other
smaller polytechnics in Rwanda.
This could be a weakness in the proposed exercise, because the universities which are excluded
could provide examples of best practice which BP could lead from if they had been included.
Measure performance for own organisation and the other organisations involved in the exercise
Information about BP, MP and UP's administrative costs for the most recent academic year has
been collected.
The step has been made easier by the government insisting that all three universities co-operate
and supply information to each other.
Actions still required

(v) Compare performance.
This is the stage that the exercise has currently reached. The information is available to compare
performance but has not yet been done.
(vi) Design and implement improvement programme.
The results of the performance comparison should help identify which areas BP needs to improve.
For those aspects of performance where BP is lagging behind one (or both) of the other
polytechnics
it should send a member of staff to the university which is performing best to identify what that
university is doing differently to BP which is leading to the difference in performance levels.
In turn, that staff member should devise a programme to introduce improvements at BP and
implementing the best practices which have been identified at the other polytechnics.
(vii) Monitor improvement.
Whilst implementing the improvement programme should help BP improve its performance, there
is no guarantee how successful it will be and how much improvement it will actually deliver.
Therefore, management should monitor BP's performance once the programme has been
implemented to see if it achieves its goals or if further improvements will still be necessary.
b) i) Calculate the cost and advice on the quoted price of building conversion and of an extension
of property using ABC to absorb the overheads.
Cost using ABC
Building Conversion Extension of property
FRW”000” FRW”000”
A2.2 Page 15 of 18
Materials 3,500 8,000
Labour (300/500*15000) 4,500 7,500
Direct cost 8,000 15,500
Overheads –supervision 180 1,080
-planners 280 1,400
-property 1,800 3,000
Total cost 10,260 20,980
Quoted price (total cost +50%) 15,390 31,470
Cost per driver
Supervisor (90m/500) = 180,000
Planners (70m/250) = 280,000
Property (240m/40,000) = 6
Supervisor planner propery
Building extension 180*1 =180 280*1 = 280 6*300 =1800
Extension of property 180*6 = 1080 280*5 = 1,400 6*500 = 3,000
ii) Assuming that the cost of a building conversion falls by nearly 7% and the price of
an extension to properties rises by about 2% as a result of the change to ABC, suggest
possible pricing strategies for the two products that BBC sells and suggest two reasons
other than high prices for the current poor sales of the building conversions.
• The pricing policy is a matter for BBC to decide. They could elect to maintain the current
50% mark-up on cost and if they did the price of the building conversion would fall
by around 7% in line with the costs. This should make them more competitive in the
market.
• They could also reduce the prices by a little less than 7% (say 5%) in order to increase
internal margins a little.
• It is possible that the issue lies elsewhere. If the quality of the work or the reputation and
reliability of the builder is questionable then reducing prices is unlikely to improve sales.
A2.2 Page 16 of 18
It is conceivable that BBC has a good reputation for extension of properties but not for
building conversion, but more likely that a poor reputation would affect all products.
Equally poor service levels or lack of flexibility in meeting customer needs may be
causing the poor sales performance.
These too will not be ‘corrected’ by merely reducing prices.
• It is also possible that the way salesmen discuss or sell their products for the building
conversion is not adequate so that in some way customers are being put off placing
the work with BBC.
• BBC is in competition and it perhaps needs to reflect this in its pricing more (by
‘going rate pricing’) and not seek to merely add a mark-up to its costs.
• BBC could try to penetrate the market by pricing some jobs cheaply to gain a foothold.
Once this has been done the completed extension of properties or building conversion
could be used to market the business to new customers.
• The price of the extension of properties would also need consideration. There is no
indication of problems in the selling of the extension of properties and so BBC could
consider pushing up their prices by around 2% in line with the cost increase. This
does not seem that significant and so might not lose a significant number of sales.
• The reliability and reputation of a builder is probably more important than the price
that they charge for a job and so it is possible that the success rate on job quotes may
not be that price sensitive.
c) Analyse the current board operations at BBC and Chris’s suggestions for an independent
Chair.
As Chris is stepping down from the combined Chair/CEO role, this leaves a significant gap
in the responsibilities for the business. There are a few risks and issues here:
• It appears that there has been inadequate succession planning in the past: No nominated
CEO to succeed Chris. It appears no independent directors are to be part of succession
planning to succeed Chris as Chair.
• The Finance Director is relatively new (unlikely to have built support as he is looking
for radical change of behaviour from managing directors) so an unlikely caretaker CEO.
• There are no independent directors to represent the objective view of what is good for
the business and provide a balance to family (collective and individual) interests
A2.2 Page 17 of 18
• Each managing director (family members) has been running an independent division
and so it is unlikely these businesses have been operating together for the whole
organisation.
• The independent Chair suggestion has merit as there is no clear succession. Any appointee
will want to understand their duties, who is CEO and the other independent directors.
They will also wish to understand the role Chris intends to play after retirement (assuming
he is still a majority shareholder) and how this might impact their scope of control.
• Chris has had apparent control of the business for many years and this may have reduced
the possibility of independent (but supportive) challenge from other shareholders and
directors (members of the family).
• A Senior Independent Director would normally be a useful channel of communication

for shareholders (other family members) who are not directors, but this may cause some
difficulties with that person’s independence (because of the family relationships of which
they will not be part). The status of those family shareholders should be established (that
they participate in significant business decisions at family gatherings may indicate a de
facto two-tier board as an unintended consequence).
• Balancing “family business” expectations against need for diversity , independent views
at board level and the risk of nepotism will require a significant transformation of the
management team to bring in other diversity characteristics. A public listing at this stage
would be difficult: there are too many gaps between expected practice and the current
state of the business, not least informal board meetings and lack of independent directors.
END OF MARKING GUIDE AND MODEL ANSWERS
A2.2 Page 18 of 18
DATE: THURSDAY, 28 JULY 2022
INSTRUCTIONS:
1. Time Allowed: 3 hours 45 minutes (15 minutes reading and

3 hours 30 Minutes writing).
4. In summary attempt THREE questions.
question.
room
A2.2 Page 1 of 10
SECTION A
QUESTION ONE
a) RUSIZI Group is a well-known company operating in Rwanda. It has two divisions; A and
B. Each Division produces only one type of product: A produces product (X) and B produces a
final product (HK). The final product HK usually uses the product X as its input and each HK
needs one unit of X.
RUSIZI Group operates in a highly competitive market for both products (X) and final product
(HK) and its pricing is sensitive. Product X is produced by many other producers in the market,
but it is expected that the external demand for the next year could increase to 2,000 Units more
than the sales quantity presented in the current budget for Division A. The following are the
budgeted data as extracted from RUSIZI Group internal information system, for both divisions
for the next year.
Income Statements of Division A and Division B
Particulars Division A Division B
FRW FRW
Sales 280,000 540,000
Cost of sales
Variable Costs 200,000 228,000
Fixed Costs (Controllable) 50,000 150,000
Profit 30,000 162,000
Other Information Division A Division B

Production/Sales (Units) 10,000 6,000
(6,000 of division A are transferred
to Division B)
Production Capacity (Unit) 10,000 14,000
External Market Price (FRW) 40 90
Capital Employed (FRW) 350,000 600,000
Cost of Capital Charge (%) 10 10
The external demand for divisions is as follows:

Division A: 6,000 units (Only 4,000 units of which can be currently satisfied)
Division B: All produced output is sold to the external market.
It is also in the RUSIZI Group policy that Divisional Managers’ performance should be
evaluated against the Four measures. Based on the data above, the budgeted performance
measures for the two divisions are as follows:
Division A Division B
Residual Income (RI)-FRW (5,000) 102,000
Return on Capital Employed (ROE) 8.57% 27%
Operating Profit Margin 10.71% 30%
Asset Turnover 0.80 0.90
A2.2 Page 2 of 10
Existing (Current) RUSIZI Group Policy:
In RUSIZI Group, there is a policy that product X should be transferred to Division B at the
marginal cost of FRW 20 per item and B must buy all the quantity it needs from A
Proposed RUSIZI Group Policy:

RUSIZI Group is proposing of giving the Divisional Managers the freedom to set their own
transfer price and to buy the products from external suppliers but there are concerns about
problems that could arise by granting such autonomy.
Required
i) If division autonomy is granted to divisional Managers, and the transfer price of the
product is set by the Manager of Division A at the current market price , recalculate the
budgeted performance measures for each division. (13 Marks)
ii) Discuss the changes to the performance measures of the divisions that would arise as a
result of altering the transfer price to FRW 40 per unit of product. (4 Marks)
iii)Discuss the problems that could arise for each of the Divisional Managers and for
RUSIZI Group as a whole as a result of giving full autonomy to the Divisional Managers
and how adopting the dual prices and two-part tariff system approach can fix them
(5Marks)
b) RUSIZI Group has supplied one of its famous products to different customers across the
country. The marketing department has revealed that customers Muhanga Ltd, Ruhango Ltd
and Kamonyi Ltd have been placing more orders than others throughout the year.
The customer related gross margins are FRW 1,194,000, FRW 2,140,000 and FRW 2,112,000
for Muhanga Ltd, Ruhango Ltd and Kamonyi Ltd respectively,
Additional Information regarding the three customers:
Particulars Muhanga Ltd Ruhango Ltd Kamonyi Ltd
Unit sold 9,200 11,600 7,600
Number of orders Placed 600 640 960
Number of sales Visit 160 100 200
Number of invoices Sent 620 780 2100
RUSIZI Group management has designed an activity-based costing system with following
activity cost pools and activity rates:
Activity cost pool Activity Rate
Sales Visit FRW 840 per Visit
Order processing FRW 380 per order placed
Dispatch Cost FRW 700 per order placed
Billing and Collections FRW 194 per Invoice sent
A2.2 Page 3 of 10
Required:
i) Discuss how the Customer Profitability analysis can enhance RUSIZI Group
performance and its competitive advantage (2.5 Marks)
ii) Based on the information given above, Evaluate the three customers’ profitability
(5.5 Marks)
c) D and N are other divisions operating in RUSIZI Group. These divisions have been created
as investment centers and they operate in similar market. Management on a monthly basis should
prepare and submit an operating statement to the central authority of the company. Below are
the operating statements for the month of February of the two divisions (Division D and N)
Division D Division N
FRW (‘000) FRW (‘000)
Sales Revenues 450 277.5
Variable Costs 172.5 156
Contribution 277.5 121.5
Controllable Fixed Costs 47.5 21
Controllable Income 230 100.5
Apportioned Central costs 169 90
Net Income Before tax 61 10.5
Divisional Net Assets 4,880 630
RUSIZI Group has a target return on capital of 10% per annum. Currently, RUSIZI Group
believes its cost of capital is likely to rise and is considering increasing the target return on
capital. The current policy is that the divisional management and performance are primarily
assessed basing on the results of their respective Return on Investment (ROI)
Required:
i) Calculate the annualized Return on Investment (ROI) for divisions D and N, and discuss
their relative performance using the ROI data and other information given above.
(7 Marks)
ii) Calculate the annualized Residual Income (RI) for divisions D and N, and explain the
implications of this information for the evaluation of the divisions’ performance.
(4 Marks)
iii)Explain three further methods of assessment of divisional performance that could be
used in addition to ROI or RI. (3 Marks)
d) Recently, The Board of Directors of RUSIZI Group has decided to extend the company, and
they are considering registering its subsidiary abroad. They have decided to register at least in
one of the East African Community (EAC) member countries. This subsidiary will need some
inputs from the head office in Rwanda.
Required:
For the benefit of the board of Director, write a memo, briefly discussing advantages and
disadvantages of at least three approaches to determine the Arm’s length price for RUSIZI
Group. (6 Marks)
(Total 50 Marks)
A2.2 Page 4 of 10
SECTION B
QUESTION TWO
a) Ambara Uberwe Garment Ltd (AUG Ltd) is a manufacturing company registered in Rwanda
specifically to manufacture Made in Rwanda related clothing. The company has an active and
participative organizational structure. One month ago, AUG Ltd completed the purchase of
Berwa Manufacturing Ltd (BM Ltd) which operates several manufacturing plants. Normally,
BM Ltd managed its owned plants as profit centers, where profit was being measured using
absorption costing method. Since BM Ltd was unable to get the required rate of return from its
investments, its shareholders agreed to sell BM Ltd entirely to AUG Ltd.
The management of BM Ltd has defined the implementation of Just In Time (JIT) manufacturing
as a key strategic and performance improvement tool. However, the AUG Ltd is informed that
this kind of tool was never accepted or embraced by the individual plant managers.
The management of AUG Ltd believes that this kind of behavior was one of the key causes of
poor performance of the plants, and hopes that when this behavior changes, the company will
achieve the profit desired by the new shareholders.
Below is the information of one of BM Ltd factories extracted from its financial records for the
three months period.
Details FRW”000”
Selling price per unit 156,000
Variable Cost per Unit
Raw materials 55,900
Direct labour and other variable overheads 67,600
The factory also incurred the monthly fixed production overheads of FRW 1,170 million and its
normal output level is set at 100,000 Units per month.
The plant manager has provided the following information concerning the expected activities of
the next three months period:
Month Opening inventory Production sales Closing Inventory

Units Units Units Units
June - 96,000 94,000 2,000
July 2,000 100,000 94,000 8,000
August 8,000 90,000 95,000 3,000
Required:
i) Using relevant calculations, evaluate the claim that the performance measurement
system in place creates a disincentive for plant managers to implement the stated JIT
production strategy. (11 Marks)
ii) Use the backflush accounting method to show AUG Ltd an alternative profit-based
performance measurement system which would motivate plant managers to implement
the stated JIT production strategy. (7 Marks)
A2.2 Page 5 of 10
b) Amagara Araramirwa Healthcare (AAH) runs a number of large hospitals which provide
general and pediatric medical care for the people of Rwanda.
Rwanda is a highly developing economy and healthcare is considered to be a high skill, high
technology and high-status industry. It is compulsory for the people of Rwanda to purchase
health insurance where most of its population use Mutuelle de Sante and other insurance scheme
and then the insurance companies reimburse the healthcare providers for services delivered.
The insurance companies verify the healthcare providers and grade them for value for money.
As there are a number of hospital chains (such as AAH), the insurers will encourage their insured
customers to use those which are most efficient. The ultimate sanction for a healthcare provider
is for an insurance company to remove them from the list of acceptable providers.
AAH has large amounts of capital tied up in expensive medical equipment and a drug inventory.
The existing systems for accounting for these items are traditional ones aimed at avoiding theft
and obsolescence. AAH has an inventory system which requires regular (weekly) physical
checks of the drugs in inventory in order to update it. It is important that the right drugs must be
in easily accessible stores (located throughout the hospital) in order to act quickly in case of a
medical emergency. The accounting staff at AAH maintain a non-current asset register which
logs the location of all major assets including medical equipment. The problem with the non-
current asset register is that it is often out-of-date as doctors will take equipment in time of
emergency and not properly log its new location. This often leads to equipment lying unused in
one area of the hospital while being searched for in another area, to the detriment of patient care.
AAH has recently instituted a tagging project where radio-frequency identification devices
(RFID) will be attached to the most valuable pieces of equipment used in treatment and also to
batches of high-value drugs. The hospitals are fitted with WiFi networks which can pick up the
RFID signal so that the RFID tags will be detectable throughout a hospital. The tags will identify
the object which they are attached to by a unique identification number and will give its location.
The identifier number will link to the inventory system which will identify the product, the
quantity initially delivered in that batch and the date of delivery. The RFID information will be
accessible through the computer terminals throughout the hospitals.
The Director of Finance and Administration (DAF) of AAH has asked you to advise him on the
impact of this new system on performance management at AAH. He has suggested that you look
at the costs and benefits which will be associated with producing the information from the RFID
system, the impact of the nature of the information supplied, the changes to performance
management reporting and how the new information could be used for improved control at the
hospital. He is keen to be seen to be at the forefront of accounting and management
developments and has been reading about cost control techniques. Recently, he has heard about
‘lean’ systems, so wants to know how the RFID system and its impact on the hospital fit with
this concept.
Given the importance of the medical staff in running the hospital, he also wants to know how
their behaviour will be affected by the control information from the RFID system. There is a
very strict social order among these staff (in increasing order of skills: nurses, general doctors
and specialist doctors) which regularly causes friction when one group feels it is not given its
A2.2 Page 6 of 10
due status. For example, recently, the general doctors agreed to a new method for nurses to
record drugs administered to patients but this new system has not been fully implemented due
to complaints by the nurses and specialist doctors who were not consulted on the change.
Required:
i) Discuss the impact of the radio-frequency identification devices (RFID) system on the
performance management at AAH as suggested by the DAF (4 Marks)
ii) Discuss how the medical staff’s attitudes will influence the design and implementation
of the RFID system and how it might be used to promote responsibility and accountability
at the hospital (3 Marks)
(Total: 25 Marks)
QUESTION THREE
SANEZA Co. is a highly reputed and well-known hairdressing salon which provides both ‘cuts’
and ‘treatments’ to its clients in Kigali. SANEZA Co. has opened different branches across the
city. All cuts and treatments at the salon are carried out by one of the salon’s three senior stylists.
The salon also has two salon receptionists and two junior stylists.
Every client coming to the salon is first seen by a salon receptionist, who washes their hair; next,
by a senior stylist, who cuts or treats their hair depending on which service the client wants; then
finally, a junior stylist who dries their hair. The average length of time spent with each member
of staff is as follows:
Details Cut hours Treatment hours
Receptionist 0.1 0.3
Senior Stylist 1 1.5
Junior Stylist 0.4 0.5
The salon is open for twenty-four hours each day for seven days per week. It never closes
throughout the year. Staff salaries are FRW 40,000 each year for each senior stylist, FRW 28,000
each year for each junior stylist and FRW12,000 each year for each of the Receptionist. The cost
of cleaning products applied when washing clients’ hair is FRW 2.50 per client. The cost of all
additional products applied during a ‘treatment’ is FRW 8.40 per client. Other salon costs
(excluding labor and raw materials) amount to FRW 106,400 each year. SANEZA Co. charges
FRW 80 for each cut and FRW 150 for each treatment. The senior stylists’ time has been
correctly identified as the bottleneck activity. SANEZA Co. has also calculated the cost per
hour to be FRW 52.56
SANEZA Co. operates different salon branches that provide both ‘cuts’ and ‘treatments’ across
Kigali. Those branches are managed by Salon branch Managers who have little authority over
decisions made at branch level. Branch budgets are usually set at central level by the senior
Accountant and other senior management team, salon branch managers are never consulted
during the budget-setting processes.
During the recent management meeting, the KISIMENTI salon branch manager commented:”
The set budget was totally unrealistic in the current economic situation. Our shop has tried all
A2.2 Page 7 of 10
possible and available means to run several advertisements, improved services and sales
promotions which have even been well received by our customers; our salon failed to achieve
the budgeted revenues. Now check, the budgeted revenues figure for my branch was the same
as last year, but this year the industry as a whole has seen a 12% fall in revenues due to the
lockdown and other COVID-19 Pandemic measures.”
The whole inventory of materials purchasing process is fully controlled by a head office
purchasing team, and brand marketing is controlled by a head office marketing team. The head
office also manages the rent agreements and other property costs for the shops. However, each
branch has a small marketing budget of its own with which it can use to run local promotions.
In addition, salon branch managers have rights to recruit and manage the staff within their
branches. Although, the wage rates they can offer their new hired staff are fixed by head office,
and are not subject to change. SANEZA Co. produces a standard list of selling prices for all
levels based on age across all services. Shop managers have some degree to change the set
prices, but can’t go up more than 5% from the set (standard) prices.
It is the SANEZA Co. policy to remunerate salon branch managers a basic salary with bonuses
of up to 15%. For a manager to qualify for a bonus, their shop's profit has to be above budget.
Many salon branch managers have recently complained about this, because they feel that the
current remuneration scheme doesn't reflect the effort they are putting in.
Below are the results for the manager's branch for the last year. These are the figures used as the
basis for any bonus calculations.
Actual Budget Variance

FRW FRW FRW
Revenues 522,000 592,400 (70,400)
Cost of Sales 208,800 248,000 (39,200)
Gross Profit 313,200 344,400 (31,200)
Operating Costs
Manager's Salaries 55,000 55,000 -
Sales and Promotion Costs 26,000 25,000 (1,000)
Other Staff's Costs 80,000 76,650 (3,350)
Other salon running Costs 62,500 65,000 2,500
Total Operating Costs 221,650 223,500 (1,850)
Shop Profit 91,550 120,900 (29,350)
Note:
Other salon running costs includes rent, heat, water and light.
Required:
i) Using relevant calculations, show the Managing Director of SANEZA Co. the annual
capacity of the bottleneck activity (The senior stylist) (3 Marks)
ii) Calculate the throughput accounting ratio (TPAR) for both services and outline at least
three activities that could be used to improve the TPAR (4 Marks)
A2.2 Page 8 of 10
iii) Discuss what would be the effect on the bottleneck if the salon hired another senior
stylist? (3 Marks)
iv) Using relevant calculations where applicable, critically discuss the problems with using
this salon performance information as the basis for assessing the salon branch manager's
performance? (15 Marks)
(Total: 25 Marks)
QUESTION FOUR
a) Just-in-time is an approach to operations planning and control based on the idea that goods
and services should be produced only when they are needed, and neither too early (so that
inventories build up) nor too late (so that the customer has to wait). Just-in-time is a system
whose objective is to produce or procure products or components as they are required rather
than for inventory.
Required:
As a Management Accountant write a memo to the CEO briefly discussing how the JIT
works, key features of operating in a JIT environment and what to be considered before
implementing the JIT system (7 Marks)
b) Bugesera Manufacturing Ltd is a well-established company that manufactures several high-
quality consumer durables. The company has recently developed sofa (Bugesera Sofa)
manufactured from wood (WX1), which gives it superior strength. The marketing director
believes that the fact the “sofa” is best quality for all currently available sofa in market give the
company a considerable competitive advantage. The following information is available in
respect of the year ending 31 December 2021:
i. Each Bugesera sofa requires 20 kilograms of WX1.

ii. Bugesera Manufacturing Ltd has access to a maximum of 990 tonnes of WX1 during the
year. Each kilogram of WX1 costs FRW 8,400. NB 1 tonne = 1,000 kilogram.
iii. The labour cost of manufacturing a “Bugesera Sofa” is estimated at FRW 56,000 per unit.
iv. Variable overheads are estimated to be FRW 28,000 per unit.
v. Incremental fixed costs relating to the “Bugesera Sofa” are estimated to be FRW 44.1 billion.
vi. The marketing director has estimated that at a selling price of FRW 700,000 per Bugesera
Sofa, an annual sales volume of 500,000 would be achieved. He has further estimated that an
increase/decrease in price of FRW 28,000 will cause quantity demanded to decrease/increase by
25,000 units. He has provided you with then following formulae:
vii. Price function: Pq = P0 – bq , Total revenue (TR) function: Poq – bq2 and Marginal revenue
(MR) function: P0 – 2bq
Where;
P0 = Price at zero units of demand, Pq = Price at q unit of demand
b = price: demand relationship, q = Units of demand
viii. Where the relevant matching of total revenue and total cost functions is expressed as the
quadratic equation ax2 + bx + c = 0, the break-even point(s) in units may be calculated using the
formula:
−𝑏±
√𝑏 2 − 4𝑎𝑐
𝑥=
2𝑎
A2.2 Page 9 of 10
Required:
Calculate the profit maximizing output level for sales of the “Bugesera sofa” and the profit
that would arise from those sales during the period ending 31 December 2021, and the
output level(s) of “Bugesera sofa” and associated selling prices at which Bugesera
Manufacturing Ltd will breakeven. (13 Marks)
c) BSK Ltd. is an electronics company specializing in the manufacture of home television.

Historically, the company has used solely financial measures to assess the performance of the
company as a whole. Kubwimana, the company’s shareholder and Managing Director recently
visited all branches in order to promote corporate identity and inspect performance at each
branch. He returned dismayed at the condition of some branch premises and feels overall that,
although recent financial performance has been consistent with previous years, the company
does not seem to have changed or developed since he last visited branches three years ago.
Kubwimana believes that he needs to change the appraisal methods for branches so that they fit
more closely with what he expects from the company. He wants the business to develop and
grow and become the leading electronics manufacturer in Rwanda. Kubwimana has recently
heard of the “balanced scorecard approach” and is keen to learn more.
Required
Describe the balance scorecard approach to performance measurement and how it might
help rectify these problems. (5 Marks)
(Total: 25 Marks)
A2.2 Page 10 of 10
DATE: THURSDAY,28 JULY 2022
MARKING GUIDE AND MODEL ANSWER
A2.2 Page 1 of 25
SECTION A
Marking Guide
QUESTION ONE: Marks
(a)
i) Recalculation the budgeted performance measures for each division,
Revised sales (1 Mark per each division) 2
Revised Variable costs (1Mark per each division) 2
Finance charges (1 Mark per each division) 2
Revised ROCE (1Mark per each division) 2
Revised Operating profit margin (1 Mark per each division) 2
Revised asset turnover (1 Mark per each division) 2
Presentation of revised income statement 1
Maximum Marks 13
ii) Discussion the changes to the performance measures of the divisions
Residual income 1
ROCE 1
Operating profit margin 1
Asset turnover 1
Maximum Marks 4
iii) Discuss the problems that could arise for each of the Divisional Managers
and how can be resolved
Explaining how there will be goal incongruence and loss for the group 2
Dual prices and its
1.5
relevance
Two tariff prices and its relevance 1.5
Maximum Marks 5
Total marks 22
(b)
i) Award 0.5mark for each point well explained, the maximum is 2.5 Marks 2.5
ii) Customer profitability analysis Award 1.5 marks for each customer's profit 4.5
Customer ranking and conclusion 1
Maximum Marks 8
Total marks 8
(c)
i) ROI
Award 1 mark for ROI of each division 2
Award 1 mark for a well explained ROI relative performance, maximum 5 5
Maximum Marks 7
ii) Residual Income(RI)
Award 1.5 marks for each division's RI 3
Award 0.5 mark for each well expalained implication, maximum 1 marks 1
Maximum Marks 4
A2.2 Page 2 of 25
iii) Other methods to evaluate division's performance
Award 1 mark for each explained method, maximum 3 marks 3
Maximum Marks 3
Total marks 14
(d)
Transfer pricing and arm's length principle methods
Award 0.5 mark for each well explained method, maximum 1.5 marks 1.5
Award 0.5 marks for each advantage and disadvanatge, maximum 4 marks 4
Presentation 0.5
Maximum Marks 6
Total marks 50
Model Answers
(a)
i) Revised Income Statement
FRW FRW
Sales-W1 400,000 540,000
Cost of Sales
Variable costs-W2 (200,000) (348,000)
Fixed costs (50,000) (150,000)
Profit ( 150,000 42,000
Less: Finance cost-W3 (35,000) (60,000)
Residual income 115,000 (18,000)
ROCE-W4 42.86% 7%
Operating profit margin-W5 37.5% 7.78%
Asset turnover-W6 1.14 0.90
Working 1(W1): Sales

If divisions are granted the autonomy, the division A would sell all its outputs (Item X at the
external market price of FRW 40 per unit instead of selling to the division B at the market price
of FRW20 per unit Currently 6,000 units are being transferred to division B and 4,000 units
sold externally.
Therefore, the current sales of (6,000 units x FRW 20) + (4,000 x FRW 40) = FRW 280,000
When the division manager of A sets the unit selling price at FRW 40, the revised sales would
be:
Revised sales 10,000 units are sold at FRW 40 = FRW 400,000
All produced output would be sold at FRW 40 rather than transferring some output at FRW 20
per unit to division B.
A2.2 Page 3 of 25
Division B sales would remain unchanged as they don’t transfer internally
Working 2 (W2): Variable Costs
Division A: They will remain the same at FRW 200,000 (FRW 20 per unit marginal cost)
Division B: 6,000 units transferred from Division A would now cost FRW 40 per unit
Current variable costs FRW 228,000
Less 6,000 x FRW 20 (FRW 120,000)
Add 6,000 x FRW 40 FRW 240,000
Revised variable costs FRW 348,000
Working 3 (W3): Finance charge

Capital employed x cost of capital charge
Division A: FRW 350,000 x 10% = FRW 35,000

Division B: FRW 600,000 x 10% = FRW 60,000
Working 4 (W4): Return on Capital Employed (ROCE)

ROCE = Profit (Earnings before interest and tax / Capital employed x 100%
Division A: FRW 150,000 / FRW 350,000 x 100% = 42.86 %
Division B: FRW 42,000 / FRW 600,000 x 100% = 7%
Working 5 (W5): Operating profit margin
Operating profit margin: Profit / turnover (revenue) x 100%

Division A: FRW 150,000 / FRW 400,000 x 100% = 37.5%
Division B: (FRW 42,000) / FRW 540,000 x 100% = 7.78 %
Working 6: (W6): Asset turnover
Asset turnover: Sales / capital employed or Total Assets

Division A: FRW 400,000 / FRW 350,000 = 1.14
Division B: FRW 540,000 / FRW 600,000 = 0.9
A2.2 Page 4 of 25
(ii)
New and existing performance measures
Performance measures Before After Before After
FRW FRW FRW FRW
Profit 30,000 150,000 162,000 42,000
Finance Charge 35,000 35,000 60,000 60,000
Residual income (5,000) 115,000 102,000 (18,000)
ROCE 8.57% 42.86% 27% 7%
Operating profit margin 10.71% 37.5% 30% 7.78%
Asset turnover 0.8 1.14 0.9 0.90
The proposed change in policy will benefit Division A greatly but at the expense of Division
B
Division A’s revenue and therefore profit increases by FRW 120,000. This is because they are
now selling 6,000 units at current price of FRW 40 rather than at transfer price of FRW 20.
This therefore increases their residual income to a positive FRW 115,000. Their return on
capital has increased hugely from 8.57% to 42.86%. The operating profit margin has also
increased to 37.5% from 10.71% and their asset turnover is much improved from 0.8 to 1.14.
However, the reverse situation has occurred to division B’s performance. With the increased
cost of item X their variable costs have increased to FRW 348,000 from FRW 228,000. This is
52.63% increase which has been passed on from Division A.
The result of these increased costs has resulted in lower residual income FRW (18,000), the
ROCE has dramatically reduced to 7% from the initial of 27%. The profit margin has reduced
from a healthy 30% to a depressing 7.78%. Their asset turnover remains the same. The result
of altering the transfer price to FRW 40 per unit of item X will be great for Division A as their
performance measures will be greatly improved. Therefore, the managers of Division A will
really want to push for this new proposal of granting divisional managers the division
autonomy.
However, for Division B, their performance measures will be dramatically reduced, resulting
in lower moral. Therefore, Division B may choose to source their item X from elsewhere at
cheaper rates. This will lead to goal congruence which is in the best interest of the group
(iii)
With the new proposal, the managers of Division A will want to set the transfer price at the
same rate as the external market price which is FRW 40 per unit. This will improve their
financial performance immensely.
Division B will lose out if the transfer price is set at FRW 40 as their performance measures
deteriorate drastically. Therefore, division B managers will want to negotiate a lower transfer
price. If Division A does not agree to a lower price, Division B may purchase item X externally.
A2.2 Page 5 of 25
The marginal cost to the group of producing item X is FRW 20 and if Division B purchases
externally at a price higher than FRW 20, the group as a whole is losing out. If Division B does
source item X externally, Division A will have spare capacity.
Currently there are only 6,000 units of external demand, which means that there will be 4,000
units of spare capacity. If the fixed costs cannot be avoided, this again means that RUSIZI
group as a whole is losing out and it will impact the profit.
A good transfer price is one where both divisions are happy with and it doesn’t impact the
group as a whole in a negative way. This usually means that divisions buy and sell internally
and do not source goods from outside the group if they can buy them internally.
With the current situation it is unlikely that both divisions can agree on a suitable transfer price.
This may cause hostility between both divisions leading to goal incongruence and low morale.
The group may have to intervene to ensure that profitability of the group as a whole is not
negatively impacted.
A good way of pleasing both divisions where there is a problem of a suitable transfer price
could be methods such as a dual pricing or two-part tariff system. These methods of transfer
pricing ensures both divisions are happy and that they buy and sell to each other.
A dual transfer price is achieved when RUSIZI GROUP sets one transfer price for Division
A and another transfer price for Division B. The transfer price for Division A to sell will be set
at the external market rate and the transfer price for Division B will be set at the marginal cost
of producing item X. The difference between the two transfer prices would need to be
reconciled by head office (RUSIZI Group), which is one of the major drawbacks of this method
as it is very time consuming.
A two-part tariff system is where a fixed charge per period is given to the seller which is
Division A irrespective of the amount of units transferred by the seller plus a fixed rate (at
marginal or variable cost) charged for each unit transferred. Such a system would include an
element of profit to give Division A the necessary motivation. Such a system aims to ensure
the seller covers the fixed cost of production, and receives a selling price for each unit supplied
to cover the variable or marginal cost of production.
Both of these transfer pricing policies would give autonomy to Division A and B. However,
agreeing a transfer price can be very time consuming especially if the divisional managers are
not experienced in this area. Some involvement of RUSIZI GROUP management may be
necessary to ensure that negotiations go ahead and that both divisions do agree.
A2.2 Page 6 of 25
B) (i)
Customer Profitability Analysis (CPA) can enhance RUSIZI Group’s performance and its
competitive advantage on the fact that it mainly focuses on the way in which costs are allocated
to customers instead of basing on products and services sold. Below are the benefits of using
CPA as a performance measure in RUSIZI Group:
a. CPA will show the management of RUSIZI Group whether the customer buying in order
sizes is profitable or unprofitable to supply, hence take the appropriate decision,
b. Whenever CPA is adopted in RUSIZI Group, it will be very easier for management to
evaluate the ratio of the customer’s net contribution to the investment made on behalf of
the customer,
c. As RUSIZI Group is running several divisions, if it is adopted, CPA will help to know the
return on Investment on any division that has been used specifically for any customer,
d. CPA, will help RUSIZI Group to identify whether the company has enough stock held
particularly to any customer and what period of credit do they require,
e. CPA will help RUSIZI Group to identify in advance if there are some other specific costs
to be involved in supplying this particular customer, such as technical and test facilities,
dedicated sales and administrative staff,
f. CPA will help RUSIZI Group management easily illustrate and quantify the loss company
may suffer if company loses any particular client,
g. CPA will help RUSIZI Group to evaluate and assess the profit and contribution the
company is making in respect of any particular customer.
(ii)
Customer Profitability analysis
MUHANGA LTD RUHANGO LTD KAMONYI LTD
FRW FRW FRW
Gross Margin 1,194,000 2,140,000 2,112,000
Less: Customer costs
Sales Visits-W1 (134,400) (84,000) (168,000)
Order Processing-W1 (228,000) (243,200) (364,800)
Dispatch Costs-W1 (420,000) (448,000) (672,000)
Billing and Collections-W1 (120,280) (151,320) (407,400)
Customer’s Profit 291,320 1,213,480 499,800

Ranking 3 1 2
After performing the CPA and ranking the three customers according to their profits, it is very
clear that the customer” RUHANGO Ltd” is the most profitable customer.
Working 1 (W1)
Activity cost Pool MUHANGA LTD RUHANGO LTD KAMONYI LTD
FRW FRW FRW
Sales Visits 160*840=134,400 100*840=84,000 200*840=168,000
A2.2 Page 7 of 25
Order Processing 600*380=228,000 640*380=243,200 960*380=364,800
Dispatch Costs 600*700=420,000 640*700=448,000 960*700=672,000
Billing and Collections 620*194=120,280 780*194=151,320 2100*194=407,400
C (i)
The annualized Return on Investment (ROI) or Return on Capital Employed for divisions
D and N
Divisio RO
n Formula ROI I
(Operating profit before interest and tax)/Capital
employed
D (Net assets) (61*12)/4880 15%
(Operating profit before interest and tax)/Capital
employed (10.5*12)/63
N (Net assets) 0 20%
Note: net assets’ is also equal to shareholders equity + long-term liabilities. It is imperative to
read the question; the operating statements are for a single month (February) therefore profits
before tax must be annualized in order for return on investment to be calculated.
Discussion of relative performance
• Division N has the highest return on investment (20%) in comparison to division D (15%).
• Both divisions exceed the target of 10% per annum set by RUSIZI GROUP. However,
division D will be at greater risk if the target return on investment is increased as its ROI
is approaching the group’s target
• Both are profitable and generate a positive contribution for the group.
• In absolute terms division D is the largest division in terms of net assets and generates a
greater absolute profit than division N (FRW 61,000 compared to FRW 10,500 per month).
This is almost six times the level of absolute profit in comparison to division N.
• Both divisions operate in similar markets however division N has almost the same absolute
level of variable cost as division D, even though its sales revenue is almost half the amount.
Division D has variable cost to sales of 38.3% (FRW 172.5 ÷ FRW 450) and division N
56.2% (FRW 156 ÷ FRW 277.5). This indicates that division D looks more operationally
efficient. Division N has a much lower net assets value than division D which could indicate
that its assets are older and therefore more inefficient.
• Division D has a greater level of apportioned central cost (FRW 169,000 per month), which
is almost twice the amount that division N is charged.
• If the uncontrollability principle is applied and central apportioned cost were to be removed
then the ROI of the two divisions would be as follows
Division D (FRW 230 x 12) ÷ 4880= 56.6%
Division N (FRW 100.5x 12) ÷ 630 = 191.1%
A2.2 Page 8 of 25
C (ii)
The annualized Residual Income (RI) for divisions D and N
Residual income (RI) is calculated by taking the profit a manager earns for a division less a
‘notional interest charge’ for the investment within the division e.g. the profit generated from
the division D or N less a finance charge from the holding company (RUSIZI GROUP) using
a cost of capital. Accounting profit is calculated the same way as for return on investment
(ROI).
Residual Income (RI) calculation

FRW
Profit before interest and tax X
Capital employed x cost of capital (X)
Residual income X
Division D
Calculations FRW (000)
Profit before interest and tax FRW 61*12 months 732
Capital employed x cost of capital FRW 4880*10% (488)
Residual income 244
Division N
Calculations FRW
(FRW)
Profit before interest and tax FRW 10.5*12 months 126
Capital employed x cost of capital FRW 630*10% (63)
Residual income 63
• Even though division D has a lower return on investment (15%) compared to division N
(20%), it does create greater wealth for the group in terms of the absolute size of residual
income it earns.
• This is something that return on investment considered in isolation will not demonstrate
because it is a relative not absolute measure of return.
• The implications of this information are that it demonstrates that division D contributes
greater wealth to the profits of RUSIZI GROUP and therefore its shareholders. It is a
superior measure when contrasted to return on investment. However, one single measure
by itself will never allow a complete understanding of financial performance.
A2.2 Page 9 of 25
C (iii)
✓ Economic value added is an absolute cash-based measure of the economic financial
wealth generated by a division over time. It deducts a finance charge using a cost of
capital, applied to the replacement cost of assets used by a division. This method
concentrates on the maximisation of cash or contribution which is more likely to
maximise shareholder value. EVA cannot be manipulated by a manager’s choice over the
accounting policies they might use.
✓ Controllability principle applied when calculating ROI or RI e.g. ignoring central
costs apportioned
✓ Variance analysis and budgetary control through exception reporting.
✓ Ratio analysis e.g. profitability, liquidity and investor ratios.
✓ Other non-financial ratios e.g. sales per square metre, number of complaints, staff
turnover, market share, sales growth, new customers or repeat business.
D
MEMO
From: Management Accountant
To: Board of Directors, RUSIZI GROUP
Date: Kigali, the 27 January 2022
Subject: Approaches/Methods to determine the Arm’s length price
Rapid advances in business and technology have given rise to a large number of multinational
enterprises (MNEs) which have the flexibility to place their enterprises and activities almost
anywhere in the world. Transfer pricing is an economic term, which refers to the valuation
process for transactions between related entities/persons. Improper transfer pricing methods
lead to unjustified profit transfers. For example, artificially deflated or inflated prices on
transactions would reduce or increase the taxable profits of associated companies.
Arm’s length principle as the internationally accepted guiding principle in establishing an

acceptable transfer price This is for tax purposes whereby, the conditions of dealings between
RUSIZI GROUP and its associated enterprises (controlled transactions) shall not differ from
those that would have been established by independent enterprises (uncontrolled transactions).
These aim to standardize national approaches to transfer pricing and provide guidance on the
application of the ‘arm’s length’ price. This can be determined in three main ways:
Comparable uncontrolled price (CUP) method

The method compares the price charged for property or services transferred in a controlled
transaction i.e RUSIZI GROUP and its subsidiaries to the price charged for property or services
transferred in a comparable uncontrolled transaction in comparable circumstances (internal /
external).
Advantage of CUP method
A2.2 Page 10 of 25
• CUP is most direct and reliable way to apply the arm’s length principle, if possible, to
locate comparable uncontrolled transactions.
• CUP is not a one-sided analysis of only one party as it considers both controlled and
uncontrolled parties
Disadvantages of CUP method

• One of its weaknesses, is that it will require RUSIZI GROUP a strict comparability
standard, particularly with respect to product comparability: a minor difference in the
property transferred could materially affect the price, even though the nature of the business
functions performed and risks assumed may be sufficiently similar to generate the same
overall profit margin.
• Internal comparable often do not exist and external comparable are difficult to find in
practice (due
to the strict comparability standard).
Resale price method (RPM)
This method begins with the price at which a product that has been purchased from an
associated enterprise is resold to an independent enterprise (resale price).
Therefore, the Arm’s length price is given by resale price reduced by an appropriate gross
margin (resale price margin) representing the amount out of which the reseller would seek to
cover its expenses and, in light of the functions performed, assets used and risks assumed, make
an appropriate profit.
Transfer price = resale price x (1 – resale margin).

Advantage of RPM
• This method usually bases on the resale price, a market price, and thus represents a demand
driven method.
• It a good method to be applied in situations where there is no relation between the costs
incurred and the sales price.
Disadvantages of RPM
• The issue of RPM is that it allows one-sided analysis, whereby only appropriate for simple
one way situations (no further processing, intangibles); easiest to determine where the
reseller does not add substantially to the value of the product.
• The data on gross margins may not be comparable due to accounting inconsistencies
(comparing apples and oranges).
Cost Plus Method (C+ or CPM)

This method of computing arm’s length price begins with the actual costs incurred by the
supplier or producer of the goods, services etc.
A2.2 Page 11 of 25
Arm’s length price will be given by costs plus an appropriate mark up, determined by reference
to the mark up earned by suppliers in comparable uncontrolled transactions (internal / external),
to make an appropriate profit in light of the functions performed and the market conditions.
TP = cost of goods sold x (1 + gross profit mark-up).
Advantages of CPM
• CPM is based on internal costs, the information of which would be available to the RUSIZI
GROUP.
• This method allows some third parties indeed to set prices.
Disadvantages of CPM
• Determination of actual costs difficult (fixed costs moreover: business cycle
fluctuations?).
• Important to only apply a comparable mark up to a comparable cost basis (flow through
expenses).
• Accounting consistency as a prerequisite (accounting standards and terms may vary in
allocating costs into: direct/indirect costs of production and operating expenses of the
enterprise as a whole,
Other Methods to determine the arm’s length price are
➢ Comparative profits method

➢ Profit spit method
➢ Negative transfer pricing
➢ Market based method
Conclusion:
RUSIZI GROUP will choose what method to adopt basing on how hard to obtain the method
related information.
Regards.
Management Accountant
RUSIZI GROUP
A2.2 Page 12 of 25
SECTION B
QUESTION 2
MARKING GUIDE
QUESTION TWO Marks

(a)
i) Absorption Costing
Absorption costing definition 1
Just In Time method definition 1
Calculation of sales 3
Calculations of cost of sales 3
Calculations of Fixed Overhead Variance 3
Maximum Marks 11
ii)
Explanation and relevance of backflush accounting method 2
Sales calculations DNA
Calculations of Cost of Sales-Raw materials 2.5
Calculations of Cost of sales-Labour costs 2.5
Maximum Marks 7
Total marks 18
(b)
i) Information System
Award 1 mark for a well explained point, maximum 4 marks 4
ii) Information system
Award 1 mark for a well explained point, maximum 3 marks 3
Maximum Marks 7
Total Marks 25
Model Answer
A) (i)
Absorption costing method
Under the current system (Absorption costing method), all costs incurred are transferred each
month either to the income statement or to the balance Sheet (Closing stock valuation).
A profit center manager (Plant Manager in BM) has an incentive to maximize profits, and
therefore has an incentive to keep costs out of the Income Statement and instead capitalize
them in closing stock as much as possible.
Main characteristic of absorption costing method is, that increasing production (irrespective
whether goods are sold or not) has an effect of reducing the amount of fixed overhead charged
to the Income Statement in current period. This is a dysfunctional incentive given that BM has
stated a strategic commitment to JIT.
Just In Time method
JIT involves not producing goods which cannot be sold immediately at the time of production
i.e: there is no need to store goods not made and they cannot be used in incentive calculations.
Therefore, the suggestion that the performance measurement system in place acts as a
disincentive is probably true.
A2.2 Page 13 of 25
Standard cost card: Absorption costing method:
Quantity FRW (000) FRW(000)

Raw materials 55,900
Direct Labor and Variable Overheads 67,600
Fixed Overheads, based on normal output 100,000 1,170,000 11,700
Total 135,200
Monthly profit: Absorption Costing Method

June July August
FRW (000) FRW (000) FRW (000)
Sales 14,664,000 14,664,000 14,820,000
Cost of Sales (12,708,800) (12,708,800) (12,844,000)
Fixed Overhead Volume Variance (46,800) - (117,000)
Profit 1,908,400 1,955,200 1,859,000
Working 1 (W1)
June July August
Sales FRW (000) FRW (000) FRW
Unit selling Price 156 156 156
Sales Quantity 94 94 95
Total Sales 14,664,000 14,664,000 14,820,000
Working 2(W2)
Cost of Sales June July August
FRW (000) FRW (000) FRW (000)
Unit standard cost 135.2 135.2 135.2
Quantity 94 94 95
Total cost of sales 12,708,800 12,708,800 12,844,000
Working 3(W3)
Fixed Overhead Volume Variance June July August
Normal output 100,000 100,000 100,000

Production 96,000 100,000 90,000
Fixed Overhead Volume Variance (Units) 4,000A - 10,000A
Fixed overhead rate per 11,700 11,700 11,700
normal output unit
Fixed Overhead Volume Variance (Frw) (46,800,000) - (117,000,000)
A2.2 Page 14 of 25
A) (ii)
Back flush accounting as an alternative profit-based performance measurement which

will also implement the stated JIT production strategy.
A profit-based performance measurement which will motivate a JIT approach by plant

managers is one based on backflush accounting. This involves costing units of products on the
basis of raw materials content only, with all costs of labor and overheads (whether variable or
fixed) being treated as period costs.
Particularly, treating variable labor and overhead costs as period costs means that the marginal
effect on reported profits of producing one extra unit is as follows:
• If the extra unit is sold in the current period: Profit increases because of the difference
between selling price and direct labor/overhead costs
• If the extra unit is not sold in the current period: Profit decreases by the amount of direct
labor/overhead costs
This is entirely consistent with the JIT system. Extra production is encouraged (reflected
in higher profit) but only to fulfil the immediate sales opportunity.
Back flush accounting method:

Detail June July August
FRW (000) FRW (000) FRW (000)
Sales 14,664,000 14,664,000 14,820,000
Cost of Sales
Raw Material Cost (5,254,600) (5,254,600) (5,310,500)
Labor and other variable overheads (6,354,400) (6,354,400) (6,422,000)
Profit 3,055,000 3,055,000 3,087,500
As a result, the figures from Back flush accounting creates a direct disincentive for the plant
managers to keep more stocks.
For example, in August, it is very clear that profit is substantially higher than in either of the
previous months. This shows the combined effect of the two actions.
• Achieving higher sales units than in any other month
• Reducing the level of output as compared with the previous months and this is consistent
with JIT, since it resulted in a reduction in the inventory level without any loss of
sales.
A2.2 Page 15 of 25
B) (i)
The new information will not be without cost to AAH. The costs of hardware and software to
set up the system and then ongoing operation of the system in terms of maintenance,
consumables and employee time are often considerable. However, these costs can be offset
against the efficiency savings of lost employee time in searching for tagged items and quality
improvements in patient care which will result from that quicker access.
The information now being collected is non-financial in the location and quantities of
equipment and drugs. However, these are forms of information which exist in the current
systems and so there need not be dramatic change. The significant difference from the old
system will be the real-time nature of the information and also its accuracy as it is collected
and updated automatically. The tags are attached to batches of high-value drugs and if one of
these batches is opened, then the count of inventory will not be entirely accurate if only the
RFID information is used. A physical count will still be required for accuracy but the locations
of these items from RFIDs will speed this.
Performance reporting will change as weekly inventory check reports will no longer be filed
for the high-value drugs and instead there will be real-time, screen-based information. The
relevant staff will need to be trained to access and use the information in this new system. It
would appear that many medical staff will need access and so terminals will need to be
available throughout the hospital – if the speed gains in finding items are to be obtained.
Improved control will result from the knowledge of location of high-value drugs. It will be
easier to ensure that they are all in secure locations which will reduce the opportunity for theft.
Additionally, knowing the date of delivery it will be easier to identify items which may become
obsolete and so they can more easily be used first, thus reducing wastage.
Regarding the items of equipment, identification of location will reduce staff time in searching
and allow the items to be placed in the stores where they are most often accessed, thus further
reducing searching time. This will improve quality of patient care due to a faster response. It
will also be simpler to check and ensure that these items are in secure locations and so reduce
the risk of theft. Management will also be able to check if processes of tidying up and locking
away are being observed by doing daily checks on this through the system.
B) (ii)
The attitude of the medical staff to the system will be important. As they are high-status
individuals, it will be necessary to persuade them to accept the new system rather than imposing
the change. There will be the danger that they see the system as spying on them and take this
as an insult to their professionalism. They will need to see the benefits both in terms of reduced
frustration in their own job and patient care. This will motivate them to change their current
(haphazard) way of storing assets.
The new system will be screen-based but the use of information technology should not be
shocking in AAH as it has the reputation of being advanced in this area. The reports will need
A2.2 Page 16 of 25
to be carefully designed with input from the medical staff in order that they find the system
easy to learn and use, as this is often a major barrier to the uptake of a new system. The design
of the new method of recording drug administration by nurses may have been part of the
problem with its implementation.
Promotion of responsibility and accountability will come through the management use of the
new information. It may be possible to make specific staff (e.g. nursing staff) responsible for
the storage of drugs and specific specialist doctors responsible for the storage of equipment
related to their field of expertise. Regular checks on the position of assets will act as a control
test of this staff activity. It may be necessary to break the hospital into departments or wards in
order to identify the relevant responsible individuals. The managers must think carefully about
how often to do their control reporting but daily exception reporting of any items not properly
stored would appear appropriate, given the need to use the assets at short notice.
It will be important to select the correct individuals and groups to be responsible as there will
be a demotivating effect if a staff member is being criticized for not securing an item when a
higher status member of staff (e.g. medical specialist) has over-ridden their decision.
QUESTION THREE
Marking guide Marks
i) Annual capacity of bottleneck activity 3
Maximum Marks 3
ii) TPAR for both services
Return per hour 1
TPAR 1
Activities to improve TPAR 2
Maximum Marks 4
iii)
Effect on bottleneck after hiring additional employee 3
Maximum Marks 3
iv) Problems with current branch manager's assessment system
Award 2.5 mark to a well explained problem, maximum 15 marks 15
Maximum Marks 15
Total marks 25
Model Answer
3. i
The bottleneck activity is Senior Stylish
Total salon hours = 24 x 7 x 52 = 8,736 hours each year.

There are three senior stylists, therefore total hours available = (8,736 hours *3) =26,208 hours
Based on the time taken for each activity, they can perform 26,208 cuts (26,208 hours/1 hour
per cut) or 17,472 treatments (26,208 hours/1·5 hours per treatment).
A2.2 Page 17 of 25
ii
TPAR for Cutting service
Return per hour = (Selling price – materials)/time taken on the bottleneck = (80 – 2.50)/1 =
77.50
Throughput accounting ratio (TPAR)= Return per hour/cost per hour = 77.50/52·56 = 1.47
Throughput accounting ratio (TPAR) for treatments

Return per hour = (Selling price – materials)/time taken on the bottleneck = (150 – 10.9)/1.5
= 92.73
Throughput accounting ratio (TPAR) = Return per hour/cost per hour = 92.73/52·56 = 1.76
(to two decimal places)
Activities that could be used to improve the Throughput accounting ratio
• SANEZA Co should identify ways to reduce the material costs for the services by
tracing low price suppliers and ensure efficiency and effectiveness in the use of
available materials
• SANEZA Co should improve the control of the salon’s total operating expenses, this
will be carried out by monitoring and controlling the total time its employees spent on
customers
• SANEZA Co should also apply an increase to the selling price of the services, this is
usually, very tricky as the price is very sensitive factor, SANEZA should try this as a
last alternative and be done wisely, because it may end up losing customers as an effect
of increasing prices.
iii
The existing capacity for each activity is:
Detail Cut Treatment
Receptionist (24*7*52)/0.1 87,360 (24*7*52)/0.3 29,120
Senior stylist (24*7*52)/1 8,736 (24*7*52)/1.5 5,824
Junior stylists (24*7*52)/0.4 21,840 (24*7*52)/0.6 17,472
If another senior stylist is employed, this will mean that their available hours will be (4 x 8,736)
= 34,944
This will give them capacity to now do 34,944 cuts (34,944 hours/1 hour per cut) and 23,296
treatments (34,944 hours/1·5 hours per treatment).
As a result, the senior stylists will still be the bottleneck activity for both treatments and cutting
services.
iv)
Accountability:
The branch managers should only be held responsible for those aspects of performance they
can control. However, the branch information used does not appear to distinguish between the
factors that the branch managers can control and those they can't.
A2.2 Page 18 of 25
Controllable and non-controllable costs:
A number of non-controllable costs are currently included in the manager's performance
assessment. In particular, the branch manager will have very little scope to control property
costs because the rental contract and other contracted costs (such as heat and light) are managed
by the head office. The branch managers may have some control over the amount of heat and
light that are used in their branches, but not over the unit prices paid for these utilities.
Misclassification of controllable and non-controllable costs

The branch managers can't control their own wages. However, it is reasonable to classify the
part-time staff costs as controllable. The managers manage the staffing for their shops, and
so they could save on part-time staff costs by working longer hours themselves. Consequently,
a fairer way of assessing the shop managers' performance would be to distinguish costs into
two groups: controllable (marketing; part-time staff) and non-controllable (managers' wages;
property costs
Budgets:
Another problem with SANEZA Co current performance management process is its budgeting
process. If the manager's performance is assessed by comparing actual performance to budget,
then it is important that the budgets are realistic and achievable. However, the original sales
budgeted (which showed the same figure as the previous year) seems unrealistic given that
there has been a 12 % fall in sales across the industry as a whole.
Consequently, it would be useful to break down the overall profit variance (FRW 31,200) into
a planning variance (which adjusts for the 12 % drop in industry sales) and an operational
variance (showing the variance in the shop's own performance after adjusting for the 12 %).
Planning variance
Frw
Original sales 592,400
Revenue variance due to the economic condition-12% 71,088 A
Planning variance (Gross margin 44.3%) 31,492 A
Operational variance
FRW
Actual sales 522,000
Revised budgeted sales 521,312
688F
The operational variance will be given will be 688*44.3% 304.8A
The operational variance more accurately reflects the branch manager's work in promoting
sales, and here we can see that the manager's efforts have actually reduced the fall in gross
profit by FRW 304.8. The overall gross profit variance (of FRW 31,200 adverse) reflects an
adverse planning variance of FRW 31,492 partially offset by a favorable operational variance
of FRW 304.8
A2.2 Page 19 of 25
Controllable profit
Following on from this, we could suggest that SANEZA Co should show a controllable profit
for each branch, as well as the overall shop profit. The branch manager's performance (and
therefore their eligibility for any bonus payments) should then be assessed on the controllable
profit performance of their branch only.
If we apply this logic to the manager's branch, then instead of the manager facing an adverse
variance of FRW 29,350 they would have achieved a positive variance of FRW 6,492 and
would therefore have been entitled to a bonus. This helps explain why the manager is so
unhappy about the current way performance is being measured.
FRW
Original variance - 29,350
Add back: Gross profit planning variance 31,492
Manager's wages -
Sales and promotion 1,000
Other staff costs 3,350
6,492
Discounting
One area where the managers do have a degree of autonomy is in setting prices, because they
can vary prices by up to 5% from the standard price list; for example, to reduce prices of a
particular product to boost sales of it. Therefore, this is an area of the manager's performance
which SANEZA Co could justifiably measure; for example, by looking at the sales price and
volume for individual product lines, and then looking at the impact of any promotions on gross
profit.
However, in this case, it appears that the manager has not made any significant use of this
authority because the actual gross margin percentage achieved for the year (44.3%) has
remained constant with the budgeted margin of 44.3 %. If the manager had applied any price
discounts this would have led to a reduction in the margin percentage.
A2.2 Page 20 of 25
QUESTION FOUR
Mark
Marking guide:
s
a)
JIT
What is JIT 0.5
How JIT works 1
JIT key features, award 0.5 mark for a well explained feature, maximum 2 2
What to be considered to implement JIT, 1 Mark for a well explained point,
3
max 3 marks
Presentation 0.5
Maximum Marks 7
b) Calculation of Material cost per unit 1
Calculation of Labour cost per unit 1
Calculation of variable overhead cost per unit 1
Calculating Price at zero units of demand (P0) 1
Showing price function 0.5
Showing Total Revenue function 0.5
Showing Marginal Revenue function 0.5
Calculation of Profit maximization Quantity Where MC=MR 1
Calculation of Profit maximization price Where MC=MR 1
Sales revenue (450,000 units x FRW 756,000) 0.5

Variables costs (450,000 units x FRW 252,000) 0.5
Contribution from sales of Bugesera sofa 0.5
Fixed costs 0.5
Profit from sale 0.5
Indicating that Breakeven point occurs where Total Revenue = Total Costs 0.5
Indicating formula for Total Costs ( Fixed cost + Total Variable cost 0.5
Use quadratic equation to find quantity one and two (Q1,Q2) 1
Use Q1 and Q2 to find Selling price one and 2 (P1,P2) 1
Maximum Marks 13
c Explaining Balance Scorecard approach 1
Well explaination of 4 perspective of Balance score card ( Customer
perspective ,Internal business process,Innovation, and learning ,and 4
Financial perspective) 1 Mark each
Maximum Marks 5
Total Marks 25
A2.2 Page 21 of 25
Model Answer
A)
MEMO
From: Management Accountant

To: The Chief Executive Officer (CEO)
Date: Kigali, the 27 January 2022
Subject: Just In Time (JIT) system
The just-in-time (JIT) inventory system is a management strategy that aligns raw-material
orders from suppliers directly with production schedules. Companies employ this inventory
strategy to increase efficiency and decrease waste by receiving goods only as they need them
for the production process, which reduces inventory costs. But again, this method will require
company to forecast demand accurately.
The just-in-time (JIT) inventory system minimizes inventory and increases efficiency. JIT
production systems cut inventory costs because company will be receiving materials and parts
as needed for production and does not have to pay storage costs.
Company will also not be remaining with unwanted inventory if an order is cancelled or not
fulfilled.
Key features of operating in a JIT

The following are key features of companies operating in a JIT environment:
• High level of automation
• High levels of overheads and low levels of direct labor costs
• Customized products produced in small batches
• Low stocks
• Emphasis on quality
Key considerations before implementation of the JIT system

• Employee involvement should be actively encouraged. The successful operation of
just-in-time requires that workers possess flexibility of both attitude and aptitude.
• The fundamental requirement to ensure that the level of quality satisfies the customer.
• A constant focus on the simplification of products and processes in order to maximize
the utilization of available resources.
• The creation of a uniform factory load which will enable the speed of manufacture to
mirror the demand of customers.
• The minimization of set-up time as no value is added at this point in the manufacturing
process.
• The factory layout to be adopted. The majority of factories operating just-in-time
manufacturing operations have adopted a U-shaped layout of machinery. This layout
A2.2 Page 22 of 25
facilitates the flow of components, thereby minimizing transportation activities while
maximizing efficiency.
• The operation of a 'pull' system which produces products for the time when they are
required by customers.
• The fundamental need for excellent relationships with suppliers, putting emphasis on
flexibility and good communication channels.
Regards
b)
Total fixed cost = FRW44, 100,000,000
Variable costs of producing Bugesera sofa
FRW
Materials (20 kilograms at FRW8,400 per kilogram) 168,000
Labour 56,000
Variable overheads 28,000
Variable cost per unit 252,000
Using the formula 𝑃𝑞 = 𝑃0 − 𝑏𝑞

28000
700,000 =𝑃0 − 25,000 (500,000)
𝑃0 = 1,260,000
Therefore, the price function is 𝑃𝑞 = 1,260,000 − 1.12𝑄
Total Revenue = 1,260,000Q-1.12Q2

Marginal Revenue =1,260,000-2.24Q
Profit is maximized at the point where Marginal Revenue (MR) = Marginal Cost (MC),
therefore 1,260,000 -2.24Q= 252,000 from which the value of q is 450,000.
To find the selling price per unit (Pq) at which a quantity of 450,000 will be demanded we use
the price function as previously calculated.
Pq = 1,260,000 – 1.12Q where q = 450,000

Pq = FRW756,000
The profit can be calculated as follows:

FRW’000”
Sales revenue (450,000 units x FRW 756,000) 340,200,000
Less:
Variables costs (450,000 units x FRW 252,000) 113,400,000
Contribution from sales of Bugesera sofa 226,800,000
Less:
Fixed costs 44, 100,000
Profit from sale of Bugesera sofa 182,700,000
A2.2 Page 23 of 25
Breakeven point
Breakeven point occurs where Total Revenue = Total Costs
Fixed costs = FRW 44,100,000,000; variable costs are FRW 252,000 per unit.
Total cost =44,100,000,000+252,000Q
From (a) Total Revenue = 1,260,000Q-1.12Q2
Therefore 1,260,000q – 1.12𝑞 2 − 252,000𝑞 − 44,100,000,000 = 0
−𝑏±√𝑏 2 −4𝑎𝑐
The formula 𝑥 = 2𝑎
can be used to solve the quadratic equation once it is rearranged into the form:
𝑎𝑥 2 + 𝑏𝑥 + 𝑐 = 0
we have -1.12𝑞 2 + 1,008,000𝑞 − 44,100,000,000 = 0
Solving the equation 𝑥 = 853,887.36 or 46,112.639
If 𝑥 = 853,887.36 then substitution into the demand function gives a value for Pq =
FRW303646.154
If 𝑥 = 46.112.639 then substitution into the demand function gives a value for Pq =
FRW1,208,353.846.
C)
The Balance Scorecard approach to measurement emphasises the need to provide management
with a set of information which covers all relevant areas of performing in an objective and
unbiased fashion.The information provided may be both financial and non-financial and cover
areas such as profitability, customer satisfaction, internal efficiency and innovation.The
balance scorecard focuses on four different perspectives, as follows.
Customer perspective
The customer perspective considers how new and existing customers view the organisation.
This perspective should identify targets that matter to customers such as cost,
quality/performance and delivery of electronics and so on. The customer perspective is linked
to revenue /profit objectives in the financial perspective. If customer objectives are achieved,
it is likely that revenue /profit objectives will also be achieved.
Internal business process perspective.

The internal perspective makes an organisation consider what processes it must excel at in
order to achieve financial and customer objectives. The perspective aims to improve internal
processes and decision making. In terms of BSK, this should entail approving designs of
different electronics, throughput efficiency and quality inspection.
Innovation, and learning perspective.
This innovation and learning perspective require the organisation to consider how it can
continue to improve and create value for both the customers and shareholders. Organisations
seek to acquire new skills and develop new products in order 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 accomplished. In terms of BSK, this should entail developing new
versions of certain types of television and other electronics such as blenders, micro waves etc.
Financial perspective
The financial perspective considers whether the organisation meets the expectations of its
shareholders such as Kubwimana and how it creates value. The company must perform well in
order to fund future growth. The company must compete favourably in order to maintain its
A2.2 Page 24 of 25
current market position. This perspective focuses on traditional measures such as growth,
profitability and cost reduction.
END OF MARKING GUIDE AND MODEL ANSWER
A2.2 Page 25 of 25
INSTRUCTIONS:

5. Marks allocated to each question are shown at the end of
the question.
7. The question paper should not be taken out of the
examination room
A2.2 Page 1 of 11
SECTION A
Rwamagana Multipurpose Group (RMG)
Rwamagana Multipurpose Group (RMG) is a group of companies registered and operating in
Rwanda for many years. Due to the fluctuations of market and demands, the board of directors
decided to diversify the operations of RMG Ltd in different sectors. As a results, RMG has
registered three companies operating in manufacturing sector but in different orientations where
Rwamagana Garment Company (RGC) Ltd is operating in garment and apparel manufacturing
while Rwamagana Best Chalk Company (RBCC) Ltd has been established to manufacture
chalks and Rwamagana 5K Furniture Ltd specializing in making a well-known and high-quality
furniture and woods ‘related materials in the country. Apart from the board of directors of RMG
Ltd as the group, each of the three companies has its own and independent board of directors.
Rwamagana Garment Company (RGC) Ltd
RGC Ltd operates in Rwamagana special economic zone, in recent years, it has developed a high
market base due to the improved quality of its products. RGC Ltd introduced the Made in Rwanda
quality clothes which have the popularity all over the country. Amongst the RGC Ltd current
models, it is well-designed trouser and skirts which are considered to be the most profitable product
of the company. Both products are made using different materials mainly including fabrics, sewing
threads. Sewing threads are available on the local market in plenty, while the fabrics should be
imported from abroad as RGC Ltd use high quality fabrics. Apart from fabrics both products
require specialized labor.
The following is unit cost related information as extracted from the management accounts
of RGC Ltd.
Description Trouser Skirt Total
FRW FRW FRW
Selling Price 10,000 7,000 17,000
Costs
Material Costs (Fabrics FRW 2,000 per meter) 4,000 3,000 7,000
Labor Costs-FRW 800 per labor hour 1,200 1,600 4,200
Other variable costs 1,600 1,200 2,800
Total Variable Costs 6,800 5,800 14,000
Contribution 3,200 1,200 3,000
Fixed Costs
Manufacturing 800
Marketing and distribution 400
Total fixed costs 1,200
Profit 1,800
Quarter one:
A2.2 Page 2 of 11
In coming quarter one, RGC Ltd expects demand for each of the two products, as follows
Type Expected demand (Units)
Trousers 18,000
Skirts 24,000
Due to the famous and popularity of the fabrics being used by RGC Ltd, it has been noticed that
the supply of fabrics in coming quarter one is going to be limited to only 90,000 meters. Recently,
prior to this market fluctuation, RGC Ltd had been offered a contract with a local secondary school
(Future Leaders Academy), to supply it with 20,000 skirts in the next quarter, at a discounted price
of FRW 6,000 per skirt. Future Leaders Academy has schools in almost all district of Rwanda.
The order from Future Leaders Academy of 20,000 skirts is not included in the expected demand
levels highlighted above.
Quarter Two:
In quarter two, it is expected that the international market shortage in fabrics supply issue will
persist, RGC Ltd will use specialized tailors who are few in local labour market. As a result, P&S
G Co will be having only the ability to employ the maximum of 7,500 labour hours and 9,000
meters for labour and fabrics respectively. Due to the difference in market share of both products
and high demand of skirts, the expected production of skirts in the quarter two should not be less
than twice as more as the production of trousers. The normal loss for each unit of skirt and trouser
produced is 0.02 meter.
RGC Ltd is expecting more orders from schools as the start of the academic year is approaching,
in these periods as the garment manufacturers experience high demand of clothes. RGC Ltd is
expecting the shortage of labour to respond to the potential demand, expected offers and customer
deadlines in quarter two. The issue of labour shortage has been raised by the Chief Executive
Officer (CEO) in senior management meeting and the CEO is considering adopting the overtime
pay policies of FRW 4,500 per labor hour or hiring external part time tailors who will be paid at a
rate of FRW 4,400 per labour hour.
Required:
i. Considering the contract from Future Leaders Academy, calculate the shortage of
material (Fabrics), the resulting optimum production plan and the total profit of RGC
Ltd for quarter one (7 Marks)
ii. For the RGC Ltd, advise on which optimum level of production to be produced in quarter
two and which related maximum contribution and profit (11Marks)
iii. Briefly discuss the proposals of the RGC Ltd’ s CEO regarding the overtime and part
time hourly rate payments. (2 Marks)
A2.2 Page 3 of 11
Rwamagana Best Chalk Company (RBCC) Ltd
RBCC Ltd is a company under the RMG specializing in the production and trade of high-quality
chalks used in many schools of the country and the region. The business of RBCC Ltd is normally
split into two parts, wholesaling to sales agent in different regions and retailing to any customer
who may wish to buy in bulk from the factory premises. RBCC Ltd operates under the Just in time
system and it produces based on different customers specifications. A box is, therefore, considered
the basic sales unit.
Although management had made detailed estimates of costs and volumes prior to the start of every
financial year, new projections based on actual cost experience are now required. Income
statements for the last two months of July and August are each thought to be basis of the costs and
productive efficiency we can expect in the next few months.
The following is the income statements of the months of July and August as extracted from RBCC
Ltd management reports.
Months
July August
Level of Activity 10,000 48,000
FRW (000) FRW (000)
Sales revenues 225,000 315,000
Cost of Sales 131,250 165,000
Gross Profit Margin 93,750 150,000
Other Expenses
Selling and Distribution 121,875 129,375
Other Administrative 8,650 9,210
Total other expenses 130,525 138,585
Net Income before taxes (36,775) 11,415
Taxes - 3,424.5
Net Income After taxes (36,775) 7,990.5
The following additional information is to be considered:

1. Cost of sales, Selling and distribution costs and Other administrative costs all include both
variable and fixed production costs of chalk.
2. RBCC Ltd.’s income tax rate is 30% and this rate has been used to estimate the tax liability
arising from the chalk resulted profits.
3. The board of directors of RBCC is considering the investment in a highly specialized chalk
manufacturing machine costing FRW 60 million in next few months. The expected after-
tax return on this investment (ROI) is 15%.
4. Recently, RBCC’s Ltd marketing director proposed that if the selling price is reduced by
10% per box of chalk and a FRW 8,500,0000 injection in advertising campaign among
different schools is considered, sales would increase by 15% over the month of August.
A2.2 Page 4 of 11
Required:
i. Advise the management of RBCC Ltd on the monthly number of chalk boxes to be
produced and sales revenues to break even. (9 Marks)
ii. Advise the board of directors on the number of boxes of chalk to be produced and total
revenues if the proposed investment is undertaken for RBCC Ltd to earn the expected
ROI. (4 Marks)
iii. Evaluate the proposal of the marketing director and advise the management of RBCC
whether the plan should be implemented. (6 Marks)
Rwamagana 5K Furniture (R5KF) Ltd

Rwamagana Multipurpose Group (RMG) also owns a best furniture manufacturing plant in its
investment portfolio, which is R5KF Ltd. This company is very known for its best quality and
durable home furniture. R5KF Ltd has won the heart of almost 40% of the current total market.
Recently, due to the good relation with the RMG companies, Future Leaders Academy is
considering to offer R5KF Ltd a contract to supply 20,000 adjustable students’ desks & chairs and
52 office staff chairs. Student desk and chair are considered as one unit as they are attached and
cannot be separated. Future Leaders Academy is offering R5KF Ltd a price of FRW 10,000 and
FRW 48,000 per one student chair & desk and staff chair respectively.
This offer is a bit specific as it is different from the specifications of chairs that R5KF Ltd is used
to produce. These chairs will require specialized materials including woods, chair bases, armrests
and pads, polyurethane parts and chair adjustable steel sheet (6*48 crem). Even though this
contract is not large, R5KF Ltd is highly concerned with it as it is considering and expecting the
future business and demand as this school is growing too fast and accumulating a large market
share in Rwanda and the region. R5KF Ltd is therefore keen to quote a competitive price for the
job. R5KF Ltd management accountant has tasked the finance internee to prepare a quote for
review. Below is the quote of one unit of student and staff chair along with the basis for
calculations as prepared by a finance internee before review:
Student desk
Details Staff Chair
and Chair
FRW FRW
Selling Price 10,000 48,000
Costs
Material Costs 6,500 28,900
Labor Cost 4,500 12,400
Other Overhead costs 6,900 16,200
Total Costs 17,900 57,500
Profit (7,900) (9,500)
A2.2 Page 5 of 11
Material costs:
1. R5KF Ltd would need 52 chairbases and 20,000 chair foots for staff and student chairs
respectively. The company purchasing department conducted the market survey and it revealed
that the current market price of one good quality chair-base is FRW 28,900.
In its inventory, R5KF Ltd possesses 32 chairbases with no expected future use, these bases
have been bought at a price of FRW 31,800 each but currently they can be sold at FRW 23,200
each. Chair foot will also be required to produce student chairs, the current unit market price
of a chair foot is FRW 5,400 each, although R5KF Ltd has already 20,800 chair foots in its
inventory. These were bought at a price of FRW 6,500 each last month. The chair foots used
in this type of chairs are very popular and frequently preferred by many R5KF customers.
2. R5KF Ltd would also need armrests for staff chairs. Each staff chair would need two armrests.
The company has 70 armrests in its inventory since last month with no expected further use,
but the issue is that they are different in the current needed size. Armrests need to be revised
to meet the needed quality standard. The 70 armrests were purchased at FRW 7,400. R5KF
Ltd to modify the current armrest could cost the company FRW 1,200. The current market
price of the armrest is FRW 4,875, although its price is FRW 2,100 when R5KF Ltd tries to
sell them.
3. There will be a need of chair adjustable steel sheet (6*48 crem) equivalent to a number of
students desks &chairs that will be made (i.e., 20,000 students chairs & desks). Its current
market price is FRW 5,000 but due to its shortage on the local market it is being speculated
that this price will grow by 5% of its current price in three months’ time.
Labor Costs
4. The company will take two weeks to complete both products in the order. Twelve carpenters
will be allocated for each product. Each carpenter is paid a fixed monthly gross salary of FRW
100,000. A half of allocated twelve carpenters have spare capacity to complete the job, for
other half would need to be moved from another ongoing contract (Contract to supply AH Co)
which has been suspended due to the material stockouts, they will wait for three weeks to
receive those materials from abroad. Agreement with AH Co stipulates that for any delay in
supply, R5KF Ltd will pay AH Co FRW 50,000 as penalty.
5. The designer expert will spend the whole two weeks’ time checking and providing all design
related advices. R5KF Ltd as the company has only one designer expert, he is always busy
with plenty of assignments and works of designs. As a result, he will need to work for the
overtime hours. He is expected to spend 15 hours to this particular job as overtime. He is paid
an hourly rate of FRW 8,000 and is paid for all overtime at a premium of 50% above his normal
hourly rate.
Other Overhead Costs
6. There would be a need to progressively and physically inspect the types of desks and chairs to
be made. As a results two carpenters have to visit the school. The company would spend total
daily subsistence allowance of FRW 50,000 on each carpenter on each visit. All employees of
A2.2 Page 6 of 11
R5KF Ltd are entitled to this allowance when visiting client’s site. It is expected that each
carpenter will make 5 visits at the school.
Note: You should assume that there are four weeks in each month and that the standard working
week is 40 hours long.
Required:
i. By discussing the basis of the valuation provided for each item using relevant cost
principle, review and where necessary revise the costs statement elaborated by the
finance internee and advise whether the offer should be accepted considering both
financial and non-financial factors (9 Marks)
ii. Explain the implications of the minimum price that has been calculated in relation to
the minimum price agreed with Future Leaders Academy (2 Marks)
(Total: 50 Marks)
A2.2 Page 7 of 11
SECTION B
QUESTION TWO
Kandagira Ltd is a company that specializes in production and selling of movable washing taps.
These washing taps were mainly found to be very useful measures to reduce the spread of Covid-
19 were put in place. In 2020 alone, Kandagira Ltd was able to earn close to FRW 500M in sales
revenues. In their recent management meeting, the management accountant challenged the Chief
Financial Officer (CFO) that she no longer sees any need of sticking to the traditional budgeting
methods; as according to her, she finds them rigid and do stifle innovations. The CFO intervened
by arguing that even though it appears traditional, an incremental budget is very useful especially
when an organization is budgeting for costs which can easily be estimated. Nonetheless,
considering the drawbacks of traditional budgets, implementing ‘a beyond budgeting approach’
would be the most appropriate for Kandagira Ltd. The CFO was happy that the management
accountant raised the budgeting issue and also proposed to the CEO that the company should adopt
a beyond budgeting approach that uses adaptive management processes instead of relying on more
rigid annual budget processes such as incremental budgets, currently in use. She went ahead to
explain that with beyond budgeting, the focus will now be on cash forecasting rather than purely
cost control. The CEO was happy to hear the proposal from the management accountant, and later
the CFO but was curious on the implementation approach. He strictly asked the CFO to explain
whether there will not able any bottlenecks as the company embarks on the new approach of
changing its budgetary system.
Required:
a) i) Critically evaluate the difference between incremental budgeting and rolling budgets.
(4 Marks)
ii) Discuss five limitations that could be encountered by Kandagira Ltd while using the
traditional budgeting approach. (10 Marks)
iii) Assuming that Kandagira Ltd decides to immediately implement CFO’s proposal of
beyond budgeting approach, discuss some of the difficulties they might encounter as they
change the budgetary system. (5 Marks)
b) Kandagira Ltd is considering extending into a new market by setting up its first subsidiary to
sell washing taps into the neighboring country of Uganda as a new profit center. It intends to
sell its products at a transfer price but unsure which factors will be put into consideration while
setting up an effective international transfer price.
Required:
Advise the management of Kandagira Ltd the factors they should put into consideration
when setting a multinational transfer price. (6 Marks)
(Total: 25 Marks)
A2.2 Page 8 of 11
QUESTION THREE
ISIMBI Super market possesses a bakery that manufactures bread, cakes, cookies and pancakes.
The market for bread has been growing tremendously and ISIMBI owns over 60% of its market
share; for cakes, ISIMBI also owns a substantial market share though operating in a low growth
market; for cookies, they are operating in a high growth market but ISIMBI has a lower share; and
the pancakes, both the growth and market share are too low.
Required:
a) i) Using the BCG portfolio matrix, advise ISIMBI Supermarket on the strategies that can
be deployed in order to balance ISIMBI’s product range. (8 Marks)
ii) Discuss at least four limitations of using a BCG portfolio matrix. (2 Marks)
iii) It is believed that forecasting is not somewhat easy: with examples, discuss five factors
that might make it difficult to forecast future sales at ISIMBI super market. (5 Marks)
b) ISIMBI Super market also owns a coffee shop opposite the main entrance of the super market.
The newly recruited accountant supports both the super market and the coffee shop but he does
not seem to understand the difference between service costing against other manufacturing
costing methods.
Required:
Referring to the coffee shop business, explain the specific characteristics of service costing
(10 Marks)
(Total: 25 Marks)
QUESTION 4:
Neptune & Venus Consult Ltd is the firm legally registered in Rwanda to operate different
research related activities. The following is the summarized statement of profit or loss for the year
ended 2020 and 2021 and its respective statement of financial position as at 2020 and 2021.
Neptune & Venus Consult Ltd
Statement of Profit or Loss for the year ended 2021
Accounts details 2021 2020
FRW (000) FRW (000)
Revenues 489,750,000 352,181,000
Cost of Sales 65,750,000 58,971,000
Gross Profit 424,000,000 293,210,000
Expenses
Operating Expenses 21,300,000 17,650,000
Administrative Expenses 32,149,800 19,300,000
Other Expenses 7,550,200 15,260,000
Total 61,000,000 52,210,000
PBIDAT 363,000,000 241,000,000
A2.2 Page 9 of 11
Accounts details 2021 2020
FRW (000) FRW (000)
Finance Costs 2,000,000 1,800,000
Net Profit before taxation 361,000,000 239,200,000
Taxes (30%) 108,300,000 71,760,000
Net Profit After taxation 252,700,000 167,440,000
PBIT: Profit before interest and taxes

You have been also provided with the following summary of balances as at 01 January.
Details 01.01.2021 01.01.2020
FRW (000) FRW (000)
The allowance for doubtful debts 4,500,000 5,000,000
Total Equity 337,000,000 313,811,000
Total Debts 121,500,000 113,139,000
Total equity plus debts 458,500,000 426,950,000
31.12.2021 31.12.2020
The allowance for doubtful debts 6,000,000 4,500,000
Additional information:
1. The following is the breakdown of other expenses for the periods ended 31st December 2020
and 2021:
Details 2021 2020
FRW (000) FRW (000)
Provision for court fees 120,000 98,000
Allowance for inventories 180,000 202,000
Other miscellaneous cash expenses 7,250,200 14,960,000
Total 7,550,200 15,260,000
2. Neptune & Venus Consult Ltd has an ongoing research project (Project GK) whose cost
amounting to FRW 1,000,000 has been incurred in both 2020 and 2021 and expensed in their
respective statement of profit or loss for the period as the external auditors advised the
company that these research projects costs do not meet criteria for them to be capitalized.
3. Neptune & Venus Consult Ltd had been engaged in the research and development of a project
of new product development of a local company. The developed product was ready for sale
on 01st January 2020. The market research revealed that the product has been received well
and it has high demand on the market. Due to current innovation and technology, the product
is expected to last for two years on the market and the company did not expect any sale
thereafter. The total costs incurred to this project by Neptune & Venus Consult Ltd before the
product is ready for the market were FRW 30,000,000.
4. Neptune & Venus Consult Ltd had not made any provision for deferred tax.
A2.2 Page 10 of 11
5. Consider the following tax rates, cost of debt and capital for 2020 and 2021
Details 2021 (%) 2020 (%)

Pre-tax costs of debt 8 8
Cost of equity 15 13
Tax rate 30 30
Required
Calculate the Economic Value Added (EVA) of Neptune &Venus Consult Ltd for the year
2020 and 2021 (18 Marks)
Recently in the senior management the CEO suggested the use of short-term performance
measures like Return on Investment, Residual income, use of financial ratios as a base of rewarding
and measuring the divisional managers. He was arguing that this policy could improve the
profitability and motivation among divisions. The CFO reacted on this and he said that he objects
on the CEO’ s idea. This idea has been brought at the end of the meeting and they did not find
enough time to discuss this deeply.
Required:
Write an email to the CEO convincing him the following matters:
i. Briefly discuss on the problems that may be involved in comparing divisional
performance using RI and ROI (3 Marks)
ii. Analyze the objection of the CFO in both short- and long-term view and authenticity
of the financial results when the idea of the CEO is bought. (4 Marks)
(Total Marks:25 Marks)
End of Question Paper
A2.2 Page 11 of 11
DATE: THURSDAY, 01 DECEMBER 2022
MARKING GUIDE AND MODEL ANSWER
A2.2 Page 1 of 20
SECTION A
QUESTION ONE
S MARKING GUIDE Mar

Q ks
Part A
i Per unit requirement Award 0.5 Marks to each product 1
Total demand Award 0.5 Marks to each product 1
Total material requirement Award 0.5 Marks to each product 1
Material shortage 1
Optimum production plan Award 0.5 Marks to each product 1
Profit 2
Maximum 7
ii Defining Variables 0.5
Define and formulate the objective function 0.5
Formulate the constraints 3
Draw a graph identifying the feasible region 2
Optimum production plan Award 1 Mark to each point at the feasible area 4
Conclusion 1
Maximum 11
iii Shadow price explanations 2
Part B
i Determination of variable cost per unit Award 1 Mark to each variable cost 3
Determination of fixed cost Award 1 Mark to each fixed cost 3
Contribution to sales ratio 1
Break-even point 2
Maximum 9
ii Expected monthly profit after tax Award 1 Mark to each elemet of BEP 1
Expected monthly profit before tax 1
Expected contribution each month 1
Break-even point 1
Maximum 4
iii Sales as per revised plan 1
Variable costs 1
Fixed costs 2
Profit/Loss 2
Maximum 6
Part C
A2.2 Page 2 of 20
S MARKING GUIDE Mar
Q ks
i Material Costs-Chair bases Award 1 mark for calculation and 0.5 Marks for 1.5
explanations
Material Costs-Chair foots Award 1 mark for calculation and 0.5 Marks for 1.5
explanations
Material Costs-Armrests Award 1 mark for calculation and 0.5 Marks for 1.5
explanations
Material Costs-chair adjustable steel sheet Award 0.5 marks for calculation and 1
0.5 Marks for explanations
Labor Cost 0.5 for carpent and 0.5 for designer costs 0.5 Marks for explanations 1.5
Overheads Award 0.5 marks for calculation and 0.5 Marks for explanations 1
Cost per unit 1
Maximum 9
ii Implications of the minimum price 2
Total Marks 50
Model Answer
Rwamagana Garment Company (RGC) Ltd
i) Step1: The shortage of material (Fabrics) in quarter one will be 12,000 meters as
calculated below
Details Trouser Skirt Total Available Surplus
requirement materials /(Deficit
)
Materials
Per unit requirement 2 meters 1.5 meters
Total demand of 18,000 (20,000+24,000
products ) =44,000
Total material 36,000 66,000 102,000 90,000 (12,000)
requirements
As it is clear the company has direct material as a limiting factor.

Step2: To get the optimum production plan, we should first calculate the contribution per
unit of limiting factor
Details Trouser Skirt
Contribution per unit 3,200 1,200
Per unit limiting factor-Meters 2 1.5
Contribution per unit of limiting factor (FRW/M) 1,600 800
Ranking 1st 2nd
As it is clear in the above table, the trouser should be given priority as it has the high contribution
per unit of limiting factor
A2.2 Page 3 of 20
Step3: Optimum Production plan will be producing 36,000 units of both trousers and skirts
considering the limiting factor.
Item Units to be Direct material Total units Available Balance

produced per unit Required materials
(Meters) (Meters)
Trouser 18,000 2 36,000 90,000 54,000
Skirt (54,000/1.5) 1.5 54,000 54,000 0
36,000
Profit resulting from the optimum production

Description Trouser Skirt Total
FRW FRW FRW
Level of Activity 18,000 20,000+16,000 54,000
Selling Price 180,000,000 232,000,000 412,000,000
Costs
Material Costs (Fabrics FRW 2,000 per
72,000,000 108,000,000 180,000,000
meter)
Labor Costs-FRW 800 per labor hour 21,600,000 57,600,000 79,200,000
Other variable costs 28,800,000 43,200,000 72,000,000
Total Variable Costs 122,400,000 208,800,000 331,200,000
Contribution 57,600,000 23,200,000 80,800,000
Fixed Costs
Manufacturing 43,200,000
Marketing and distribution 21,600,000
Total fixed costs 64,800,000
Profit 16,000,000
ii) For the RGC Ltd, advise on which optimum level of production to be produced in quarter
two and which related maximum contribution and profit ( to solve this problem linear
programming should be used)
Step1: Defining the variables
Let x be the number of trousers to be produced
Let y be the number of skirts to be produced
Step2: Define and formulate the objective function

The objective of RGC Ltd is to maximize contribution and profit, the objective function will be
given by: Max, C=3200x+1200y
Step3: Formulate the constraints
Material requirement per unit:

Trouser: FRW 4,000/FRW 2,000=2 meter per trouser
A2.2 Page 4 of 20
Skirt: FRW3,000/FRW2,000=1.5 meter per skirt
Labor hour requirement per unit:
Trouser: FRW1,200/FRW 800=1.5 Labor hours

Skirt: FRW 1,600/FRW 800=2 Labor hours
Material constraint: 2x+1.5y<=9,000
Labor hour constraints: 1.5x+2y<=7,500
Production constraint: 2x<=y
Non negativity constraint: x,y>=0
Step4: Draw a graph identifying the feasible region:

Constraints related equations:
Material constraints: 2x+1.5y=9,000
Labor constraint: 1.5x+2y=7,500
Production constraint: 2x=y
Non negativity constraint: x, y=0
To draw the graph at least two points are needed at each constraint equation:
2x+1.5y=9,000
x 0 4,500
y 6,000 0
1.5x+2y=7,500
x 0 5,000
y 3,750 0
7000
6000
5000
4000
Y Axix
3000
2000
1000
y
0
Labor constraint
0 1000 2000 3000 4000 5000 6000 7000
X Axis Production Constraint
A2.2 Page 5 of 20
The feasible region will be given by the shaded area, the optimum point will be from the point
(0,0) or (4500, 0) or the intersection of lines 2x=y and 1.5x+2y=7,500, or the intersection of lines
2x+1.5y=9,000 and 1.5x+2y=7,500
At the point (0,0) RGC Ltd will produce zero units of both trousers and skirts hence making 0
contribution and a loss of FRW 1,200.
At the point (4,500 and 0) RGC Ltd will produce 4,500 units of trousers hence making FRW
14,400,000 of contribution (C= (3,200*4,500) + (1,200*0) and a profit of FRW
9,000,000(14,400,000-(1200*4500)).
The intersection of lines 2x=y and 1.5x+2y=7,500 will give the following points
X= 1,364 Units Y=2,728 Units
At this point (1,364 and 2,728) RGC Ltd will produce 1,364 units of trousers and 2,728 units of
skirts hence making FRW 7,637,200 of contribution (C= (3200*1364) +(1200*2728) and a profit
of FRW 2,728,000 (7,637,200-(1,200*4,092)).
The intersection of lines 2x+1.5y=9,000 and 1.5x+2y=7,500 will give the following points
X= 3,857 Units Y=857 Units
At this point (3,857 and 857) RGC Ltd will produce 3,857 units of trousers and 857 units of skirts
hence making FRW 13,370,800 of contribution (C= (3,200*3,857) +(1,200*857) and a profit of
FRW 7,714,000(13,370,800-(1,200*4,714)).
Conclusion: Therefore, RGC Ltd should produce 4,500 Units of trousers as they will maximize
both contribution and profit of FRW 14,400,000 and FRW 9,000,000 respectively.
iii)Discuss the proposals of the RGC Ltd’ s CEO regarding the overtime and part time hourly
rate payments
The overtime rate should normally be determined by the rate at which RGC Ltd should pay for the
extra additional one unit of limiting factor which is in this case labor hours. To set the right rate at
which additional extra workers will be paid hourly, RGC Ltd should determine the shadow price
which will be found by adding one extra unit of labor hour on total available hours. The new
optimum production, contribution and profit will be calculated which will then be compared with
the original optimum production, contribution and profit. The difference between two
contributions will then set as the maximum additional hourly rate at which RGC should not go
beyond for extra workers.
Rwamagana Best Chalk Company (RBCC) Ltd

i. Advise the management of RBCC Ltd on the monthly number of chalk boxes to be
produced and sales revenues to break even
For determining the Break-Even Point, it is necessary to separate variable and fixed costs element
A2.2 Page 6 of 20
from the given costs:
Cost of sales:
Variable cost per unit: Change in Cost of sales/Change in the level of activity
=(FRW165,000,000- FRW131,250,000)/(35,000-25,000) =FRW 3,375/ Box of chalk
Details Calculations July August
Total FRW Total FRW
Total cost of sales 131,250,000 165,000,000
3,375*25,000 84,375,000 118,125,000
Total Variable costs 3,375*35000
Total fixed costs (Cost of sales) 46,875,000 46,875,000
Selling and distribution costs:

Variable cost per unit: Change in selling and distribution costs/Change in the level of activity
=(FRW129,375,000- FRW121,857,000)/(35,000-25,000) =FRW 750/ Box of chalk
Total FRW Total FRW
Total selling and distribution 121,875,000 129,375,000
750*25,000 18,750,000 26,250,000
Total Variable costs 750*35000
Total fixed costs (Selling and Distribution) 103,125,000 103,125,000
Other administrative costs

Variable cost per unit: Change in other administration costs /Change in the level of activity
=(FRW9,210,000- FRW8,650,000)/(FRW35,000-FRW25,000) =FRW 56/ Box of chalk

Total FRW Total FRW
Total selling and distribution 8,650,000 9,210,000
56*25,000 1,400,000 1,960,000
Total Variable costs 56*35,000
Total fixed costs(Cost of sales) 7,250,000 7,250,000
Therefore, the total variable costs per unit will be given by:
Details FRW
Variable costs of sales 3,375
Variable selling and distribution costs 750
Variable Other administrative costs 56
Total Variable cost per unit 4,181
Selling price per unit = FRW 225,000,000/25,000 or FRW 315,000,000/35,000 = FRW 9,000
per box
C/S ratio (Contribution to sales ratio): (FRW 9,000- FRW 4,181)/ FRW 9,000=4,819/9,000
The total Fixed costs per unit will be given by:
A2.2 Page 7 of 20
Details FRW
Fixed costs of sales 46,875,000
Fixed selling and distribution costs 103,125,000
Fixed Other administrative costs 7,250,000
Total 157,250,000
It is known that break even sales *C/S ratio gives Total fixed costs or
(BES*4,819/9,000) =FRW 157,250,000,
Break Even point in terms of FRW will be FRW 293,681,262
Break Even point in terms of units will be 32,631 boxes of chalks (FRW 293,681,262/9,000)
ii. Advise the board of directors on the number of boxes of chalk to be produced and total
revenues if the proposed investment is undertaken for RBCC Ltd to earn the expected ROI
Management wants 15% of ROI per annum on the investment of FRW 60,000,000
Expected monthly profit after tax: (FRW 60,000,000 *0.15/12): FRW 750,000
Expected monthly profit before tax: (FRW 750,000*100/70): FRW 1,071,429
Expected contribution each month: Profit +FC: FRW 1,071,429+157,250,000
: FRW 158,321,429
Therefore, Sales*C/S ratio=FRW 158,321,429
Required sales: FRW 158,321,429*9,000/4,819
Required sales: FRW 295,682,270
Therefore, required monthly sales in units to make ROI of 15% will be FRW 295,682,270/9,000
Sales will be: 32, 854 Boxes of chalks.
iii. Evaluate the proposal of the marketing director and advise the management of RBCC
whether the plan should be implemented
If the proposal is accepted the new selling price per box will be FRW 9,000*90%= FRW 8,100
and the variable cost per unit will remain unchanged at FRW 4,181
Details Calculations FRW

Sales as per revised plan (35,000*115%*FRW 8,100): 326,025,000
Less: Variable costs (FRW 4,181*35,000*115%) 168,285,250
Monthly contribution as per revised plan 157,739,750
Less Monthly Fixed costs 157,250,000
Additional advertising costs 8,500,000
Total fixed costs 165,750,000
Profit/Loss before tax (8,010,250)
Taxation -
Profit/Loss after tax (8,010,250)
Advise/Conclusion: The existing profit after tax during the month of august is FRW 7,990,500.
Considering the proposal of the marketing director, the company would suffer a loss of FRW
A2.2 Page 8 of 20
8,010,250. Therefore, basing on financial considerations, the plan should not be implemented.
Rwamagana 5K Furniture (R5KF) Ltd
i. Revised cost statement
Details Note Student desk and Chair Staff Chair

FRW FRW
Selling Price per unit 10,000 48,000
Costs
Material Costs
Chair bases 1 - 1,320,400
Chair foots 1 108,000,000
Armrests 2 - 396,750
chair adjustable steel sheet 3 100,000,000 -
Total material costs 208,000,000 1,717,150
Labor Cost 4,5 390,000 390,000
Other Overhead costs 6 500,000 500,000
Total Costs 208,680,000 2,397,150
Number of units 20,000 52
Cost per unit 10,434 46,099
Conclusion:
Considering financial factors, this offer should not be accepted as for the student desk and chairs,
the offer price is not covering total relevant costs and for the staff chair there is a difference of
only FRW 1,901 which may not cover every cost, remember in relevant costs principle we only
consider relevant cost, but it does not necessarily mean that there are no other fixed costs to be pai
d by the company. Considering all those factors it is hard for the company to accept this offer in
financial perspectives.
Considering non-financial factors, It is clearly stated that Future Leaders academy is a growing
school in the country as well as in the region, therefore as it is the potential royal and good customer
and company is expecting much orders and demand in the future, R5KF Ltd can consider this and
accept this offer for it to create a good relationship with this big customer by expecting much
demand in the future from Future Leaders Academy.
Notes:
Material costs
1. Chairbases
52 chair bases are needed for staff chairs, as in the inventory there is 32 chairbases with no future
use, they should be used for the current offer at the residual value which is FRW 23,200 each. The
remaining 20 chairbases will be purchased at the normal and current market price which is FRW
28,900 each. Giving the total costs of chairbases of (FRW 23,200*32)+(20*28,900) which gives
a total of FRW 1,320,400. In this regard, FRW 182,400 is a sunk cost and it should not be used.
A2.2 Page 9 of 20
Chairfoots:
The current market price of a chairfoot is FRW 5,400 each, even though in the inventory of the
company there is enough chairfoots equivalent to 20,800 units, these items are regulary used by
the company. R5KF Ltd may use this existing inventory but they will neeed to be replaced, as a
result we should consider the replacement value. Therefore, the costs of chairfoot will be given
by: FRW108,000,000 (FRW 5,400*20,000). The initial cost of chairfoot of FRW 6,500 per unit is
a sunk cost as it should not be used because it is a non-relevant cost.
2. Armrest:
Each staff chair needs two armrest, as a result the company will need 104 armrests (52 chairs*2)
to complete this offer.
In its inventory there is 70 armrests which need to be revised, in this regard, we should check the
costs of 70 existing armrest and the cost of additional 34 armrests to be purchased and compare
this with the full purchase cost of 104 armrests.
Details Calculations Amount FRW
Residual value of 70 armrests 70*2100 147,000
Revisiting costs of 70 Armrests 70*1200 84,000
Cost of additional 34 armrests 34*4875 165,750
Total costs 396,750
If they are all purchase at the current market price, they would cost the company FRW 507,000
(FRW 104 armrests*FRW4,875). The company should therefore choose to use the ones which are
cheap.
The unit costs of FRW 7,400 is a non-relevant costs as it is a sunk costs, therefore, it should not
be considered in this matter.
3. Chair adjustable steel sheet (6*48 crem)

These chair adjustable steel should be purchased at FRW 5,000 each giving a total cost of FRW
100,000,000 (FRW 5,000*20,000 students chairs).
4. Carpenters costs
Labour cost is calculated by taking 12 staff * 100,000*2 weeks/ 4 weeks = FRW 600,000. This
cost is non-relevant as workers were at spare capacity and penalty is a non-relevant cost as this
contract is not the cause of the delay of AH Co contract. Cost will be shared equally
5. Designer expert costs
In this regard, the overtime of 15 hours at the normal rate plus 50% will be considered as the
designer expert is being employed at full capacity. Therefore, the cost will be FRW 180,000 for
each product (15hrs*8,000*1.5). Cost will be shared equally
Overheads
6. Carpenter costs
The carpenter cost will be relevant to this decision, the cost will therefore be FRW 500,000 for
each product which is (2 carpenters*FRW 50,000*5 visits).
A2.2 Page 10 of 20
ii. Explain the implications of the minimum price that has been calculated in relation to the
minimum price agreed with Future Leaders Academy
• The relevant cost is the future incremental cash flow associated with the decision. Hence any
past or sunk costs should be ignored. Any non-cash flows such as depreciation or other such
accounting adjustments should be excluded from the relevant cost statement.
• Incremental implies that the future cash flow should be as a direct result of the decision taken
so any items such as a salary, which is a committed cost rather than an incremental one, should be
ignored.
• The minimum price calculated in the above relevant cost statement would not be practical to
charge Future Leaders Academy.
• In reality, R5KF Ltd would want to cover all costs, not only just relevant ones. Hence, any sunk,
committed or fixed costs incurred would also need to be covered.
• Also, R5KF Ltd would look to make a profit on the contract. In adding a profit margin to arrive
at a final price, R5KF Ltd should be mindful of remaining competitive and attracting future work.
• The minimum price calculated in part a should serve only as (i) starting point when calculating
the final price
SECTION B
QUESTION TWO
Marking Guide
a) i) Critically evaluate the difference between incremental budgeting and rolling budgets
Incremental budgeting (2 Marks awarded to a well evaluated budget type) 2
A rolling budget 2
Maximum Marks 4
ii) Discuss Five limitations that could be encountered by Kandagira Ltd while using the
traditional budgeting approach ( 1Mark for listing and 1 Mark for discussing)
Allows past inefficiencies to be carried forward 2
Unethical behaviour 2
Time consuming 2
Value to users 2
Shareholder value 2
Rigidity 2
Protection 2
Stifle innovation 2
Sales focus 2
Forgotten strategy 2
Reinforces dependence culture 2
Any other valid implication 2
Maximum Marks 10
A2.2 Page 11 of 20
iii)Discussing some of the difficulties they might encounter as they change the budgetary
system
Resistance to change 1
Loss of control 1
Training 1
Implementation costs 1
Lack of accounting information 1
Maximum Marks 5
b) Advise the management of Kandagira Ltd the factors they should put into consideration
when setting a multinational transfer price.
Exchange rate fluctuation 1
Taxation in different countries 1
Import tariffs 1
Exchange control 1
Anti-dumping legislation 1
Competitive pressures 1
Repatriation of funds 1
Maximum Marks 6
Total: 25 Marks
Model Answer
Kandagira Ltd
a) Incremental budgeting
i) Critically evaluate the difference between incremental budgeting and rolling budgets
Incremental budgeting is a process of budgeting which considers current year’s results as a base
and adjusts it with an extra amount for estimated growth or inflation in the next year. This
budgeting approach may be appropriate when an entity is budgeting for costs such as staff salaries
which can easily be estimated based on the current salaries as opposed to, for example advertising
costs which cannot be easily quantified. The issues with incremental budgeting is that it
progressively builds on previously budgeted inefficiencies.
While, a rolling budget is one which gets updated continuously by adding a further period whilst
dropping the earliest one, bidding at preparing targets and plans which are more realistic and
certain. The rationale for rolling budgets is that, anticipated conditions could have changed from
the time the budget was prepared due to several reasons such as new technologies in place, changed
environmental conditions, among many other factors.
A2.2 Page 12 of 20
ii) Discuss five limitations that could be encountered by Kandagira Ltd while using the
traditional budgeting approach
The main drawback with incremental budgeting similar to other traditional budgeting methods is
that it allows past inefficiencies to be carried forward since cost levels are rarely subjected to close
scrutiny.
Unethical behaviour: Incremental budgeting is also an inefficient form of budgeting as it allows
or encourages budget slack and wasteful spending which is totally unethical. For example, staff in
the marketing department at Kandagira Ltd may set a lower sales target if a bonus is capped at the
number of washing taps sold.
Time consuming: Budgets are considered to be time consuming and expensive to prepare as it is
estimated that even with the current support of computer models, organisations still spend on
budget close to 20 or 30 hours of management precious time. With the production and selling
department, among other departments, the budget setting process appear to take a couple of hours
as consolidation will also be of a paramount.
Value to users: It is believed that some surveys have showed that a great deal of financial directors
wish to reform the budgetary process as they feel that finance staff are spending too much time on
low value adding activities during budget preparations. With Kandagira Ltd specialising in the
production and selling of washing taps, it appears that staff in those departments would be expected
to spend more time on the budget as opposed to the finance team.
Shareholder value: It is argued that budgets do not focus on shareholder value as most of them
are set on an incremental basis acceptable between a manager and his or her supervisor. When it
is achieved a manager may get a reward, an act that is myopic in its own nature. The budget process
does not appear to add value to Kandagira Ltd shareholders but to its managers.
Rigidity: The process of reviewing and updating traditional budgets is rather too slow compared
to the pace at which the external environment is changing. With advancements in technology,
Kandagira Ltd would be better devising a means of relying on the strategic objectives that would
be indicating the future of the company as opposed to much reliance over traditional budgets.
Kandagira Ltd would adopt the budgetary system which allows flexibility and the adoption of its
strategic objectives as need be other than relying on the rigid traditional budgetary system.
Protection: Budgets protect rather than reduce costs in a sense that once approved a manager will
have the audacity of spending the approved amounts without further authorisation and sometimes
leading them to spend costs unnecessarily especially at the end of the budget period.
Stifle innovation: Due to the need to respond to what was approved, managers end up not being
innovate as they do fear to take risks, most especially when an adverse outcome impacts on their
short-term performance. Eventually the staff at Kandagira Ltd would be less innovative.
Sales focus: Budgets have been accused of focusing much on sales targets as opposed to customer
satisfaction. And when the short-term forecasts are also realised, you also find that still, Kandagira
Ltd’s customers are not satisfied.
Forgotten strategy: Most Kandagira Ltd’s concern would be around monitoring the monthly
results against the short-term monthly budget as opposed to establishing a system that monitors
A2.2 Page 13 of 20
the long-term process against the organisation’s strategy.
Reinforces dependence culture: The process of planning and budgeting within a framework
devolved from senior management accelerates a culture of dependence. Such traditional budgeting
system discourage a personal responsibility culture which is detrimental Kandagira Ltd.
iii)Some of the difficulties that Kandagira Ltd may face during the process of changing its
budgetary systems:
Resistance to change: Due to some slack that could have been built by Kandagira Ltd’s staff
owing to the traditional budgeting system, introducing a new system may threaten to change the
existing power relationships and hence the resistance.
Loss of control: It might take some time for senior management to adapt to the new system
including comprehending its results.
Training: Like any new introduced system, training of all staff would be paramount in order for
the new system to operate effectively which could be time consuming and expensive.
Implementation costs: The implementation of a new system such as a beyond budgeting approach
would require careful attention which also increases the cost of implementation.
Lack of accounting information: Kandagira Ltd may not have the systems in place to
accommodate and analyse the necessary information.
b) Factors to be considered when setting a multinational transfer price
Exchange rate fluctuation – The value of a transfer of goods between Kandagira Ltd and its other
profit centres in different countries may equally depend on fluctuations in the Rwandan Franc
exchange rate.
Taxation in different countries – Companies will tend to manipulate their profits especially when
the tax regimes between profit centres are different by reducing profits in a country with a low tax
rate. For example, if Kandagira Ltd has a subsidiary in Uganda where the tax rate is 20% and in
Rwanda it is at 30%, profits in Uganda will tend to be manipulated due to a lower tax rate.
Import tariffs – Multinational companies will intend to import goods at a minimised cost in order
to keep the transfer price at a minimum value especially in situations where import tariffs are
imposed.
Exchange control – This situation may occur when Kandagira’s foreign subsidiary, where transfer
of profits is restricted, sells to Kandagira Ltd at an exorbitantly higher prices disguising profits as
sales revenues.
Anti-dumping legislation – This occurs when governments take action to protect home industries
by restricting Kandagira’s subsidiary from transferring goods into Rwanda cheaply. For example,
by insisting on the use of a fair market value as the transfer price.
Competitive pressures – Transfer pricing can be used to enable profit centres to match or undercut
local competitors.
Repatriation of funds – Kandagira’s subsidiary may repatriate profits to Rwanda by inflating
transfer prices for goods sold to it by Kandagira where inflation is high, thereby reducing the
subsidiaries’ profits and consequently saving their value.
A2.2 Page 14 of 20
QUESTION THREE
Marking Guide
a) i) Using the BCG portfolio matrix, advise ISIMBI Supermarket on the strategies that can
be deployed in order to balance ISIMBI’s product range.
Stars – Harvest 2
Cash cows – Hold 2
Question marks – Build 2
Dogs – Divest 2
Maximum Marks 8
ii) Discuss at least four limitations of using a BCG portfolio matrix
Too simplistic model 0.5
Undefined market 0.5
Does not consider relationships 0.5
Requires collection of large amounts of data 0.5
Any other valid limitation 0.5
Maximum Marks 2
iii) Discussing five factors that might make it difficult to forecast future sales at ISIMBI super
market.
Political and economic changes 1
Environmental changes 1
Technological changes 1
Technological advancements 1
Social changes 1
Any other valid limitation 1
Maximum Marks 5
b) Referring to the coffee shop business, explain the specific characteristics of service costing.
Simultaneous 2
Heterogenous 2
Intangible 2
Perishable 2
No transfer of ownership 2
Maximum Marks 10
(Total: 25 Marks)
A2.2 Page 15 of 20
Model Answer
a) i) Advise ISIMBI Supermarket on the strategies that can be deployed in order to balance
ISIMBI’s product range:
The BCG portfolio matrix provides a method of positioning products through their life cycles in
terms of market growth and market share.
Stars – These are products with a high share of a high growth market, though they require some
investments to maintain their market position. The bread product appears to belong here and
ISIMBI may spend some money to further support this product or make a decision to instead spend
it on cookies to increase on their market share.
Cash cows – These are products with a high share of a low growth market. These might require
less investment though generating high levels of cash income. ISIMBI should preserve the market
for cakes so that they remain cash cows, though this may require some additional investment for
customer retention and loyalty.
Question marks – These are products that possess a low share of a high growth market, with
potential to become stars though with some investment reluctance as sufficient market retention
may not be guaranteed at this level. ISIMBI should therefore build – by increasing the cookies
market share such that it gets to the level of bread – which is the current star.
Dogs – These are products with a low share of a low growth market, and these are allowed to be
killed off. ISIMBI should consider divesting pancakes and if cookies cannot be turned into stars,
then, ISIMBI should consider divesting them as well.
i) Discussing at least four limitations in using the BCG matrix
✓ The model is too simplistic in the four classifications used in that some products are falling in
more than one category
✓ The market is not always easy to define mainly for organisations operating in specialised
markets
✓ The model does not consider the relationship between divisions or any links between products
for example there may be a relationship between bread and cakes which is apparently ignored.
✓ The model requires the collection of large amounts of data which is time consuming and
expensive.
ii) Discuss five factors that may make it difficult to forecast future sales at ISIMBI
supermarket
Political and economic changes: When there are highly political and economic changes in an
economy, uncertainty is created, which make it difficult to forecast future sales and the related
costs.
Environmental changes: When the environment changes, it is believed that it will have a
considerable impact on some of ISIMBI’s markets and products.
Technological changes: Technology is changing by the day and therefore the past cannot be relied
upon to tell the future.
A2.2 Page 16 of 20
Technological advancements: The advent of advanced manufacturing technology is changing the
cost structure of so many organisations. Besides, faster machinery may arise which change the
way output levels are currently being produced.
Social changes: Alterations in taste and preferences including changes in social acceptability of
different products may cause difficulties in forecasting future sales levels.
Climate changes: Isimbi supermarket products depend on agricultural produces which are highly
sensitive to climate changes
b) Discuss the specific characteristics of service costing:
Simultaneity: The production and consumption of a service are simultaneous which makes it
difficult to be inspected for quality, nor can be it returned if it is not what was required. Poor
quality service can only be determined after a customer has already received it.
Heterogeneity: The service received will be changing each time it is received. It appears
impossible to consistently deliver the same quality of service. The service served on Monday’s
will different from that served the next day.
Intangibility: The performance of a service entails many other intangible factors. Personality of
the person serving you, quality of the service itself etc. At ISIMBI coffee shop customers may also
enjoy other intangibles such as listening to soft music while having coffee, quick service, smiling
waiters and waitresses etc.
Perishability: A service cannot be stored neither can it be bought in bulk. There is no work in
progress for services as it is usually seen with products. Coffee can be served one cup at a time in
the coffee shop and therefore service cannot be stored or served in bulk similar to other products.
No transfer of ownership: Service costing does not result in the transfer of property. The purchase
of a service only allows the customer access to or a right to use a facility.
A2.2 Page 17 of 20
QUESTION FOUR
Marking Guide Marks

i) NOPAT Calculation
Operating profit Award 0.5 for each year, max 1 mark 1
Research costs expensed (Project GK) Award 0.5 for each year, max 1 mark 1
Amortization of prior year expenses Award 0.5 for each year, max 1 mark 1
Expense relating to increase in allowance for doubtful debts Award 0.5 for each year,
1
max 1 mark
Add non-cash expenses Award 0.5 for each year, max 1 mark 1
Cash taxes Award 1 for each year, max 2 marks 2
Calculation of adjusted capital employed at 01 Jan
Capital employed as at 01 January Award 0.5 for each year, max 1 mark 1
Expense relating to increase in allowance for doubtful debts Award 0.5 for each year,
1
max 1 mark
Project GK research costs Award 0.5 for each year, max 1 mark 1
New product development project Award 0.5 for each year, max 1 mark 1
Non-cash expenses during 2020 Award 0.5 for each year, max 1 mark 1
Adjusted capital employed at 01 January Award 0.5 for each year, max 1 mark 1
Calculation of WACC Award 1 for each year, max 2 marks 2
Calculation of EVA Award 1.5 for each year, max 3 marks 3
Maximum Marks 18
ii) Problems of using ROI and RI Award 0.5 for each well explained point, max 3
3
marks
iii) Problems of Short-termism and reward-based performance Award 0.5 for each well
4
explained point, max 3 marks and award 1 mark for a well-presented email
Total Marks 25
Model Answer
i. Calculation of EVA
1. Calculation of NOPAT for 2020 and 2021
Details 2021 2020

FRW (000,000) FRW (000,000)
Operating profit 363,000 241,000
Add: research costs expensed (Project GK) 1,000 1,000
Less: Amortization of prior year expenses
(Product development project) (15,000) (15,000)
Add: Expense relating to increase in allowance for
doubtful debts 1,500 (500)
Add non-cash expenses 300 300
Less: Cash taxes (Working) (108,900) (72,300)
NOPAT 241,900 154,500
A2.2 Page 18 of 20
Working of cash tax
2021 2020
FRW (000) FRW (000)
Tax charge as per the SOPL 108,300 71,760
Add tax relief on interest (Interest charge*30%) 600 540
Cash Taxes 108,900 72,300
2. Calculation of adjusted capital employed at 01 January 2020 and 2021
Details 2021 2020

FRW (000,000) FRW (000,000)
Capital employed as at 01 January 458,500 426,950

Add: Expense relating to increase in allowance for
doubtful debts 4,500 5,000
Add Capitalization of research and development
Project GK 1,000 1,000
New product development project 15,000 15,000
Add non-cash expenses 300 300
Adjusted capital employed at 01 January 479,300 448,250
3. Weighted average cost of capital
Details 2021 2020

Debt weight =121,500,000/458,500,000*100 26% 113,139,000/426,950,000*100 26%
Equity weight=337,000,000/458,500,000*100 74% 313,811,000/426,950,000*10 74%
After tax cost of debt 5.6% 5.6%

Weight of debt 26% 26%
Cost of Equity 15% 13%
Weight of Equity 74% 74%
WACC 13% 11%
4. Economic Value Added-EVA
2021 2020
FRW (000,000) FRW (000,000)
EVA=NOPAT-(K*Capital) 179,591 105,192.5
(241,900-(479,300*13%) 2021
(154,500-(11%*448,250) 2020
ii)
A2.2 Page 19 of 20
Email to CEO
From:managementaccountant@gmail.com
To: ceo@gmail.com
Date:01/01/2022
Subject: Discussing the divisional performance measures and their related problems
Dear CEO,
I hope this email finds you well, as per your request kindly accept my view concerning the inquired
matters:
The problems that may be involved in comparing divisional performance using RI and ROI
The following are some of the problems that may arise as a results of using RI and ROI as a
divisional performance measure:
• Divisions may operate in different environments. A division earning a ROI of 10% when the
industry average is 7% may be considered to be performing better than a division earning a ROI
of 12% when the industry average is 15%.
• The transfer pricing policy may distort divisional performance.
• Divisions may have assets of different ages. A division earning a high ROI may do so because
assets are old and fully depreciated. This may give a poor indication of future potential
performance.
• There may be difficulties comparing divisions with different accounting policies (e.g.
depreciation).
• Evaluating performance on the basis of a few indicators may lead to manipulation of data. A
wider range of indicators may be preferable which include non-financial measures. It may be
difficult to find nonfinancial indicators which can easily be compared if divisions operate in
different environments.
ii. Analyze the objection of the CFO in both short- and long-term view and authenticity of
the financial results when the idea of the CEO is bought.
Short-termism: Linking rewards to financial performance may tempt managers to make decisions
that will improve short-term financial performance but may have a negative impact on long-term
profitability. e.g. they may decide to cut investment or to purchase cheaper but poorer quality
materials.
Manipulation of results: In order to achieve the target financial performance and hence their
reward, managers may be tempted to manipulate results for example: accelerating revenue,
delaying costs, understating a provision or accrual, manipulation of accounting policies
Not conveying the full picture: The use of these short-term financial performance indicators has
limited benefit to the company as it does not convey the full picture regarding the factors that will
drive long-term profitability, e.g. customer satisfaction, quality. Therefore, when monitoring
performance, a broader range of measures should be used.
Best Regards
END OF MODEL ANSWER AND MARKING GUIDE
A2.2 Page 20 of 20
DATE: THURSDAY, 27 APRIL 2023
INSTRUCTIONS:
1. Time Allowed: 3hours 45minutes (15minutes reading and

4. In summary attempt Three questions.
question.
room
A2.2 Page 1 of 14
SECTION A
QUESTION ONE
You have been recently hired as a management accounting consultant in the Ministry of
Information, Communication and Technology. The ministry wants to assess both financial and
non-financial performance of the selected two key companies (Rebero Investment Company
(RIC) Ltd and Five Generation Computer Corner (5GCC) Ltd in the industry of information
technology, which will help the ministry during its policy formulation.
Financial performance measures
RIC Ltd and 5GCC Ltd are very known computer and accessories manufacturing companies in
Rwanda and in the region for their tight competition and they both have almost 70% of the
computer industry market share. Recently the information technology industry faced a downturn
due to the reduction of inputs and abnormal increase in input prices. In addition to that, due to
COVID-19, the demand of information technology related items including computers and other
accessories shrank significantly due to the reduction of purchasing power of their clients. This has
resulted in the reduction of set prices by 5%.
The two companies use financial performance analysis including ratios to measure their
profitability and position themselves against their competitors and also making benchmarks based
on the industry averages.
Industry average ratios
SN Ratio type Ratio

1 Current ratio 2:1
2 Return on Capital Employed 45%
3 Accounts receivable days 35 days
4 Accounts payable days 30 days
5 Debt ratio 20%
The following are some of the financial statements components as extracted from the company’s
unaudited financial report for the year ended 31st December 2022.
Statement of Profit or Loss for RIC Ltd and 5GCC Ltd for the year ended 31st December
2022.
Accounts description RIC Ltd 5GCC Ltd

FRW (000) FRW (000)
Revenues 22,154,640 33,987,520
Cost of sales 7,249,691 11,456,810
Gross Profit 14,904,949 22,530,710
A2.2 Page 2 of 14
FRW (000) FRW (000)
Operating expenses
Operating Costs 9,424,000 11,564,892
Administrative costs 145,825 214,780
Selling and distribution costs 213,654 380,000
Finance Costs 89,700 15,120
Total Expenses 9,873,179 12,174,792
Profit before tax 5,031,770 10,355,918
Taxation 1,509,531 3,106,775
Profit after tax 3,522,239 7,249,143
Statement of Financial Position of RIC Ltd and 5GCC Ltd as at 31st December 2022.

FRW (000) FRW (000)
Non-Current Assets
Property Plant & Equipment 7,500,000 18,900,000
Intangible Assets 794,000 -
Total Non-Current Assets 8,294,000 18,900,000
Current Assets
Inventory 486,000 736,800
Accounts Receivable 189,650 105,800
Prepayments 36,121 77,980
Cash and Cash equivalent 254,000 89,400
Total current Assets 965,771 1,009,980
Total Assets 9,259,771 19,909,980
Borrowings 1,801,900 2,582,400
Current Liabilities
Trade and other payables 126,400 103,910
Overdraft 11,200 558,500
Total Current Liabilities 137,600 662,410
Total Liabilities 1,939,500 3,244,810
Net Assets 7,320,271 16,665,170
Financed by:
Share Capital 5,000,000 11,000,000
Reserves 975,400 1,798,800
Retained Earnings 1,344,871 3,866,370
Owners' Equity 7,320,271 16,665,170
A2.2 Page 3 of 14
Additional Information
1. The inventory valuation method by RIC Ltd and 5GCC Ltd is FIFO and LIFO respectively.
The industry averages have been calculated using the FIFO method. All inventories should be
valued under the FIFO method. The following are the inventory costs under different valuation
methods:
Table4: Inventory valuation method
RIC Ltd 5GCC Ltd

FIFO FIFO LIFO
FRW (000) FRW (000) FRW (000)
Opening Inventory-FRW 193,300 245,200 284,300
Closing Inventory-FRW 486,000 811,100 736,800
2. Included in the RIC Ltd borrowings is a loan facility amounting to FRW 950 million which
was acquired before the year end specifically for construction of a branch in Musanze. This
branch is expected to start its operations in mid-2023. Its related finance costs amounting to 85
million has been accurately calculated and included in the finance costs and its related liability
has been included in the trade and other payables.
3. It is 5GCC Ltd’s policy to treat the overdraft facility above 15% of the total long-term liabilities
as a 100% non-current liability.
4. Included in the operating costs is the depreciation expenses of RIC Ltd and 5GCC Ltd which
has been calculated using the straight-line method of depreciation. To compare their results
with that of the industry, a reducing balance method should be used for this particular year
instead of a straight-line method of depreciation. The following is the depreciation as included
in the above presented statement of profit or loss:
Table 5: Depreciation
RIC Ltd 5GCC Ltd

FRW (000) FRW (000)
Depreciation for the year under straight line method 3,750,000 4,050,000
Depreciation for the year under reducing balance method 2,250,000 4,590,000
5. 10% of sales have been made on credit for both companies

6. Credit purchases were FRW 500 million and 920 million for RIC Ltd and 5GCC Ltd
respectively
7. Assume the year has 360 days.
A2.2 Page 4 of 14
Required:
a) After making all necessary adjustments write a report which contains an appraisal of the
performance and financial position of RIC Ltd and 5GCC Ltd against each other and also
against the industry average (25 Marks)
b) Discuss key areas, with recommendations, that the management of RIC Ltd and 5GCC
Ltd need to address to improve performance (5 Marks)
c) 5GCC Ltd business processes and corporate governance

Five Generation Computer Corner (5GCC) Ltd has 400 employees including 300 machine
operators and 100 office staff. Some operators are for organizing inputs before they are put in the
machines for production, others are for counting the computers and accessories produced. while
the rest are for operating machines which are used in the production process. 5GCC Ltd has 30
technicians who are responsible for the maintenance of the machines in the factory. The company
has around 10 machines which need repairs, maintenance and checkup, regularly.
The office staff includes 20 marketing staff who are responsible for conducting a door-to-door
marketing campaign within the city and 20 accounting staff who should ensure that all accounting
transactions and budgets are prepared and checked regularly. The remaining 60 staff are split in
other different departments like human resource where there are around 20 staff who are
responsible for making employees attendance list in the morning and evening at the close of each
business day.
5GCC Ltd usually purchases inventory from different suppliers and stores them in the big stores
which the company rents in the neighboring companies. The company is responsible for its stock
security, cleaning and electricity. As a result, 5GCSS Ltd has allocated some of its employees to
ensure the hygiene of the stock is maintained and continually remove defects and obsolete
inventory parts.
5GCC Ltd has several information systems such as the accounting information system, inventory
monitoring system, human resource management system, where each system works
independently, they are not linked. The company has no system in place to handle customer
complaints as anyone who has a complaint has to come in person to the office and express his/her
issue.
All company decisions are taken during the senior management meeting which occurs once in a
trimester as the company has no operational board of directors. The company has no audit
department but they are audited by an external auditor as part of tax compliance to file audited
financial statements on annual basis.
Recently, Mr. Robert Cyamatare, the company CEO attended a CEOs dinner event organized by
ICPAR, and they discussed about Business Process Re-engineering as a current trending business
model that can be deployed for an efficient and effective resources allocation in a business
including a discussion around the role of the board of directors to a company.
A2.2 Page 5 of 14
5GCC Ltd Organizational structure
Shareholders
CEO
Chief Operating Officer Chief Finance Officer Chief Investment Officer
Operational departments Operational departments

Operational departments
Required:
i) Critically analyze the current 5GCC Ltd business processes and discuss how the
introduction of BPR can help them to improve performance (6 Marks)
ii) Briefly discuss how BPR would affect the existing systems at 5GCC Ltd (4 Marks)
iii) Critically evaluate the current organizational structure of 5GCC Ltd and
discuss the impact of having such a structure (10 Marks)
(Total: 50 Marks)
A2.2 Page 6 of 14
SECTION B
QUESTION TWO
Kigali Foods Ltd is a manufacturing company operating in the Kigali Special Economic Zone for
ten years. It is very known by its high-quality and delicious maize floor called Kaunga Njema. It
produces and supplies countrywide and, in the region, especially in secondary schools and
universities. Kigali Foods Ltd’s operations department has two operating divisions: Planting and
Grinding divisions which also have their respective divisional managers. Planting division’s main
task is to plant and harvest maize until they are ready for the market, while the grinding division
is for processing the harvested maize into eatable and sellable maize floor. Planting division buys
inputs for plantation from an external market but for the grinding division, they may buy inputs
from planting division or buy them from an external market.
Divisions usually use market-based or full cost-plus transfer pricing methods to determine at which
price different divisions should transfer inputs and outputs. Currently the transfer price is set by
the individual division using market prices. The grinding division has full autonomy to choose
where to outsource the inputs. Recently the grinding division received an offer from a newly
established plant which is ready to offer the maize on a discounted price.
The following are the different input prices from the planting divisions and the external market in
the last 4 months
Months Planting Division External Market

Price per 1 Kg FRW Price per 1 Kg FRW
March 1,000 1,000
April 1,200 1,100
May 1,100 1,100
June 900 850
The above prices have been a topic of debate in the senior management meeting, wondering why
the planting division charges higher prices to its sister division which is sometimes above the
market prices. The chief finance officer advised that if the two divisional managers sit and agree
on the fair transfer price between their divisions, it would be beneficial not only to their divisional
performance but also to the whole organization.
Kigali Foods Ltd has the head of business unit, functional manager and a manufacturing manager.
In addition to this, the company has the chief executive officer and a well operationalized board
of directors. The company has different departments including finance, production, human
resource and marketing departments. The company has many divisions and each divisional
manager is rewarded based on their performance.
The company uses a traditional performance measure such as earnings or earnings growth where
the actual performance is being compared against that of previous years to measure the growth.
A2.2 Page 7 of 14
The manufacturing manager is given an annual target and performance measures are tailored to
particular circumstances though driven by the functional strategy.
Recently in the senior management meeting, the head of operations introduced the concept of
Value-Based Management and emphasized its role in improving corporate performance towards
value creation and improvement in shareholders’ wealth. The senior management team borrowed
her idea and decided to discuss it in detail in the following senior management meeting.
Required:
a) Based on the idea of the Chief Finance Officer, discuss the transfer pricing method to be
adopted at Kigali Foods Ltd to resolve the existing transfer prices issues among the two
divisions (11 Marks)
b) As the head of operations, write a report to CEO, briefly discussing the implementation
and the pitfalls of adopting a Value Based Management approach in Kigali Foods Ltd.
(8 Marks)
c) Discuss the potential effects which may arise when the grinding division opts to sources
its inputs from an external market including a foreign market (4 Marks)
d) Briefly discuss the distinction between economic and managerial performance evaluation
in the context of Kigali Foods Ltd. (2 Marks)
(Total: 25 Marks)
QUESTION THREE
Sabyinyo International Tourism University (SITU)
Sabyinyo International Tourism University (SITU) is a well-known tourism university
headquartered in Musanze but with three other campuses in Kigali, Rubavu and Nyanza District.
SITU was established 10 years ago.
SITU has around 200 academic staff and 8,000 students across all campuses. The headquarter is
responsible for all central activities including budgeting exercises. Its budgetary process is done
on a quarterly basis, and the university set a team that is always involved in the budget preparation
process. The team is composed of senior management members only. The budget execution report
is submitted to the senior management on 15th of the month of each next quarter, while the final
budget for the next quarter is submitted not later than 10th of the last month of the previous quarter.
The budget team is responsible for investigating the current inflation rates, which usually provides
a basis to adjust the current quarter’s budget and update the next quarter’s budget. This has been
practiced since university establishment and the management is fine with that approach. In the last
two years, the former university director of finance wished to implement time series concept as a
forecasting technique which would have to replace the current budgetary system, unfortunately he
failed to convince management the rationale for this change.
A2.2 Page 8 of 14
The university has hired you as a financial analyst, one of your key responsibilities include budget
preparation and analysis and you have been presented with the following two quarters of the year
ended December 2022 budget for your analysis as extracted from SITU’s management reports.
During your induction, you were explained the budgetary process at SITU.
Budget items Quarter 1 Quarter 2

Varianc
Budget Actual e Budget Actual Variance
FRW'00 FRW'00 FRW'00 FRW'00 FRW'00 FRW'00
0 0' 0 0' 0' 0'
Revenues
Tuition fees 520,000 291,720 228,280 551,200 309,223 241,977
Training fees 15,000 4,065 10,935 15,900 4,309 11,591
Grants 820,000 402,620 417,380 869,200 426,777 442,423
1,355,00
Total 0 698,405 656,595 1,436,300 740,309 695,991
Expenditures
Publication fees 9,805 10,393 (588) 10,393 11,017 (624)
Data Collection costs 21,100 24,476 (3,376) 22,366 25,945 (3,579)

Data Analysis costs 56,790 3,407 53,383 60,197 3,611 56,586
1,124,32 1,293,081
Salaries 1 1,219,888 (95,567) 1,191,780 (101,301)
Repairs and
maintenance 80,500 79,695 805 85,330 84,477 853
Travel expenses 61,500 66,728 (5,228) 65,190 70,731 (5,541)
1,354,01
Total expenditures 6 1,404,587 (50,571) 1,435,256 1,488,862 (53,606)
Net Revenues/(Costs) 984 (706,182) 606,024 1,044 (748,553) 749,597
Required:
a) Critically evaluate the current SITU’s budgetary system and advise on how the
implementation of Zero- Based Budgeting system would improve the university’s budget
performance (12 Marks)
b) Briefly discuss the advantages and disadvantages of using time series as a forecasting
technique (5 Marks)
A2.2 Page 9 of 14
c) Just More Than Beauty Co
Just More Than Beauty Co makes better quality lotion using three ingredients. The standard cost
card of the month of July 2022 shows that one batch of lotion consists mainly of three ingredients:
0.2 Kg of mango butter, 0.4 Kg of hazelnut oil and 0.35 Kg of seed oil. Below is the price per
kilogram of each ingredient:
Ingredients Price per Kilogram

Mango butter 20
Hazelnut oil 8
Seed Oil 6
The following production and sales data are made available:
Batches
Budgeted production 140,000
Budgeted sales 140,000
Actual Production 152,000
Actual sales 152,000
The actual ingredients used were 35,010 Kg, 60,180 Kg and 43,100 Kg for mango butter, hazelnut
oil and seed oil respectively.
Required:
Calculate and comment on the material mix and material yield variance of Just More Than
Beauty Co for the month of July 2022 (8 Marks)
(Total: 25 Marks)
A2.2 Page 10 of 14
QUESTION FOUR
Pismelo Company has been established by the government to manufactures two types of products:
Product X and Product Y. It is wholly owned by the government. Pismelo Company forecasted
the total manufacturing overheads to be FRW 261,780 during the current period. The current
company policy is to allocate overheads to products on the basis of direct labor hours. Below is
the data regarding the current period’s operations:
1. Pismelo Company budgeted volume of production is 800 Units and 2,400 Units for product
X and product Y respectively,
2. Direct labor hours per unit of product X and Product Y is 1.40 Hours and 2.40 hours
respectively,
3. Direct material cost per unit of product X and product Y is FRW 21.40 and FRW 33.40
respectively,
4. Direct labor cost per unit of product X and product Y is FRW 22.40 and FRW 38.40
respectively
During last month, Pismelo Company hired a new Finance Manager, and he is considering using
Activity-Based Costing (ABC) to apply manufacturing overhead costs to products for all their
external financial reports. He suggested that the ABC system would have the following cost pools:
Overhead
Activity Cost Pool Activity Measure Product X Product Y Cost
Number of purchase
Purchase Orders orders 1,620 orders 2,540 orders 183,040
Machine setups Number of setups 200 set ups 260 set ups 27,140
560 labor 2,880 labor
General Factory Direct labor hours hours hours 51,600
Total Overheads
costs 261,780
Required:
a) Compute a predetermined overhead rate under the current method and determine the
unit product cost of each product. (5 Marks)
b) Compute the unit product cost of Product X and Product Y using the Activity Based
Costing System. (9 Marks)
c) Briefly discuss how ABC system could help an organization like Pismelo Company to
identify, allocate and control costs and the potential challenges it may face. (3 Marks)
A2.2 Page 11 of 14
d) Pismelo Company recently encountered challenges from foreign competitors’ companies that
pay lower wages yet they have more modern and more efficient production equipment. This
contributed to competitors’ products becoming more competitive in terms of lower prices on the
market place. As a result, the company’s management is seeking ways to cut costs without
reducing quality. Pismelo Company is considering to introduce a profit-sharing payment scheme
whereby its workers would receive a share of profits in profitable years. The workers gave up a
wage increase to obtain this profit-sharing scheme.
Required:
Discuss the advantages and disadvantages of giving the workers a profit-sharing bonus
instead of a wage increase (8 Marks)
(Total: 25 Marks)
End of question paper.
A2.2 Page 12 of 14
BLANK PAGE
A2.2 Page 13 of 14
BLANK PAGE
A2.2 Page 14 of 14
DATE: THURSDAY,27 APRIL 2023
A2.2 Page 1 of 23
SECTION A
QUESTION ONE
Marking guide Allocated

Marks
a Working inventory 2
Working Depreciation 1
Working Finance cost 1
Working borrowings and overdraft 1
Ratio calculation 10
Interpretation of ratios, including 1 Professional mark of report format 10
Maximum 25
b Discuss areas of improvement 5
c (i) Business Process Re-engineering 6
(ii) Impact of BPR, 1 Mark for a well explained impact, max 4 Marks 4
(iii) Evaluation of current structure 2
Role of the Board of Directors, 1 Mark for a well explained role, max
8 Marks 8
Total Marks 50
Model Answers
a) The question required the candidate to analyse the financial performance of two companies
against themselves and then against the industry average. Some of the accounting policies of
both companies are a bit different and different from those of an industry. The candidate in this
particular question was required to first adjust the given financial statements to have them
comparable. As comparing companies with differing accounting policies and basis of financial
statements preparation may be misleading. Inventory costs should be adjusted through the cost
of sales, the depreciation expenses should also be adjusted, finance costs and borrowings need
also to be adjusted.
1. Inventory adjustments through cost of sales

RIC Ltd 5GCC Ltd
FRW’(000) FRW’(000)
Cost of sales 7,249,691 11,456,810
Less opening stock-LIFO 0 (284,300)
Add Opening Stock-FIFO 0 245,200
Add back Closing Stock-LIFO 0 736,800
Less closing stock-FIFO 0 (811,100)
Adjusted Cost of sales 7,249,691 11,343,410
A2.2 Page 2 of 23
2. Adjustments of finance costs
Included in the RIC Ltd borrowings is the loan facility amounting to FRW 950 million which
was acquired before the year end specifically for construction of a branch in Musanze. This
branch is expected to start its operations in mid-2023. Its related finance costs amounting to
85million has been accurately calculated and included in the finance costs. The finance costs
related to 2023 but incurred during the year ended 2022 should be removed from the finance
costs figure and from trade and other payables as the branch will start operating in mid-2023.
To compare both companies we should ensure we match expenses, revenues in their related
period.
Balance as 31.12.2022 Adjustments Adjusted Balance

FRW (000) FRW (000) FRW (000)
Finance costs 89,700 (85,000) 4,700
Trade and other payables 126,400 (85,000) 41,400
3. It is 5GCC Ltd policy to treat the overdraft facility above 15% of the total long-term
liabilities as a 100% non-current liability. The 15% of borrowings of 5GCC Ltd is
FRW387,360 (FRW2,582,400*15%) which is below of the existing overdraft facility of
FRW558,500. The overdraft should be reclassified and be added to long-term borrowing as the
existing company policy.
5GCC Ltd
FRW (000)
Borrowings-FRW 2,582,400
Overdraft-FRW 558,500
Adjusted Borrowings-FRW 3,140,900
4. The differing depreciation methods should be adjusted to same depreciation method to allow
the users of the financial information to compare the two companies and compare them with
the industry average. This will be adjusted from the operating expenses and non-current assets
as well.
RIC Ltd 5GCC Ltd
FRW (000) FRW (000)
Operating expenses 9,424,000 11,564,892
Less Depreciation SLM (3,750,000) (4,050,000)
Add: Depreciation RBM 2,250,000 4,590,000
Adjusted Operating expenses 7,924,000 12,104,892
A2.2 Page 3 of 23
Revised financial statements
Revised Statement of Profit or Loss for RIC Ltd and 5GCC Ltd for the year ended 31 st
December 2022.
Accounts description Note RIC Ltd 5GCC Ltd

FRW (000) FRW (000)
Revenues 22,154,640 33,987,520
Cost of sales 1 7,249,691 11,343,410
Gross Profit 14,904,949 22,644,110
Operating expenses
Operating Expenses 4 7,924,000 12,104,892
Administrative Expenses 145,825 214,780
Selling and distribution Expenses 213,654 380,000
Finance Costs 2 4,700 15,120
Total Expenses 8,288,179 12,714,792
Profit before tax 6,616,770 9,929,318
Taxation (30%) 1,985,031 2,978,795
Profit after tax 4,631,739 6,950,523
Revised Statement of financial position as at 31.12.2022
FRW (000) FRW (000)
Non-Current Assets
Property Plant & Equipment 9,000,000 18,360,000
Intangible Assets 794,000 -
Total Non-Current Assets 9,794,000 18,360,000
Current Assets
Inventory 486,000 811,100
Accounts Receivable 189,650 105,800
Prepayments 36,121 77,980
Cash and Cash equivalent 254,000 89,400
Total current Assets 965,771 1,084,280
Total Assets 10,759,771 19,444,280
Borrowings 1,801,900 3,140,900
Current Liabilities
Trade and other payables 41,400 103,910
Overdraft 11,200 -
Total Current Liabilities 52,600 103,910
Total Liabilities 1,854,500 3,244,810
Net Assets 8,905,271 16,199,470
Financed by:
Share Capital 5,000,000 11,000,000
Reserves 975,400 1,798,800
Retained Earnings 2,929,871 3,400,670
Owners' Equity 8,905,271 16,199,470
A2.2 Page 4 of 23
Report
To: Department head
From: Management consultant
Date: 22 November 20X5
Subject: Financial performance analysis of RIC Ltd and 5GCC Ltd
Current ratio: The current ratio is one of the measures of company’s liquidity management.
It appears that RIC Ltd has 18:1 and 5GCC Ltd 10:1. Even though both companies have high
current ratios, it is clear that at least 5GCC Ltd manages its liquidity well compared to RIC
Ltd. The industry averages’ current ratio is 2:1 which is also the standard current ratio. It
appears that both RIC Ltd and 5GCC Ltd are not efficient in using available current assets.
This has been caused by high level of inventories, accounts receivables and cash kept by both
company against low level of trade payables. The excessive current ratio shows idleness of
current assets.
Return on Capital employed: This ratio measures how well the company is using its capital
employed to generate profits. When you look at both companies’ ROCE, it appears that RIC
Ltd used its capital employed to generate profit more efficiently than 5GCC Ltd with 56% and
51% respectively. When it comes to the industry comparison, it is very clear that still RIC Ltd
used its assets more efficiently to generate profits beyond the industry average of 45% while
5GCC Ltd performed above the industry average However, it is below RIC Ltd.’s performance.
Accounts receivable days: This ratio shows how long it takes a company to collect debts from
credit sellers, the shorter the better. It appears that 5GCC Ltd is doing very well to shortly
collect debts within 11 days than RIC Ltd with 31 days. On the other hand, when it is monitored
and managed efficiently the shorter accounts receivable days may lead to the reduction of
customers due to much pressure put upon them in debts collection. The industry average is 35
days, it appears that both companies are efficiently collecting debts in a shorter time than the
industry average, and they have to keep that momentum. Both companies should be careful
and review their credit policy as it may wipe their customer base.
Accounts payable days: This ratio shows how long it takes a company to pay debts due to its
suppliers, the longer the better. It appears that 5GCC Ltd has a longer period to pay off its dues
to suppliers in 41 days compared to RIC Ltd with 30 days. This shows that 5GCC Ltd is
performing well in this perspective, but the company should be careful as when it continues to
delay payments to suppliers it may end up losing its loyal suppliers after they have lost their
trust. When you compare this to the industry average, it appears that RIC Ltd has the same
payable days as the industry but for 5GCC Ltd, it delays payment more than the industry
average. Maximum attention should be taken to ensure that the company does not lose trust
from its loyal suppliers.
A2.2 Page 5 of 23
Debt ratio: This ratio shows the composition of debts in a company’s capital structure. RIC
Ltd has debt ratio of 17% and 5GCC Ltd has debt ratio of 16% which are slightly below the
industry average of 20%. The adequacy of the debt ratio depends on several factors including
company’s shareholders and their attitude to risks, tax laws, cost of capital, size of the company
and its reputation among many others.
Appendices:
S Ratio
N type Calculation
RIC Ltd 5GCC Ltd
Current
1
ratio 965,771/52,600 1,084,280/103,910
2 ROCE 6,621,470/(10,759,771-52,600) 9,944,438/(19,444,280-103,910)
Accounts
3 receivabl
e days (189,650/0.1*22,154,640) *360 (105,800/0.1*33,987,520) *360
Accounts
4 payable
days (41,400/500,000) *360 (103,910/920,000) *360
((1,801,900/(1,801,900+8,905,271 ((3,140,900/(3,140,900+16,199,470
5 Debt ratio
)) ))
SN Ratio type Formula Ratio

RIC Ltd 5GCC Ltd
1 Current ratio Current Assets/Current Liabilities 18 10
2 ROCE PBIT/Capital Employed 62% 51%
Accounts receivable (Accounts receivable/Credit Sales)
3 31 11
days *360
Accounts payable (Accounts payable/Credit
4 30
days purchases) *360 41
5 Debt ratio Debts/(Debts + Equity)*100 17% 16%
A2.2 Page 6 of 23
b) Discuss key areas, with recommendations, that the management of RIC Ltd and 5GCC
Ltd need to address to improve performance
SN Key area of concern Recommendation

1 Liquidity management It appears that both companies have issues in liquidity
management when you look at their current ratios, as
they both have idle resources. Management should
assess potential short-term investments and ensure they
remain within acceptable levels of cash in their
respective companies.
2 Credit policy The companies’ current credit policy should be
reviewed, like for accounts receivable days, it is clear
that both companies are below the industry average.
The review should therefore be undertaken for them to
avoid putting much pressure and other strong measures
in debt collection as it may jeopardize their relationship
with customers. Accounts payable days should also be
reviewed to avoid any excessive delay in paying
suppliers.
3 Revenues and pricing Due to continuous reduction in demand, it pushed both
policy companies to reduce products’ prices up to 5%. This
reduced the overall total revenues as well as profits. As
a result, both companies should look for cheaper but
quality suppliers for them to be compensated on the
reduced prices.
4 Cost management It appears operating costs are higher than the cost of
sales. Operating costs is about 95% of total expenses for
both companies. Management should investigate and
check whether it would be possible to cut off some
operating expenses and ensure efficiency.
5 Inventory management It appears that both companies have large inventories.
They should assess if they can use the JIT system to
avoid inventory related costs.
c) 5GCC Ltd business processes and corporate governance

i. Critically analyse the current 5GCC Ltd business processes and discuss how the
introduction of BPR can help them to improve performance
Business process re-engineering involves focusing attention inwards to consider how business
processes can be redesigned or re-engineered to improve efficiency. It can lead to fundamental
changes in the way an organization function. Business Process Re-engineering (BPR) is the
fundamental rethinking and radical redesign of business processes to achieve dramatic
improvements in critical contemporary measures of performance, such as cost, quality, service
and speed. BPR would help 5GCC Ltd to improve the company’s performance in the following
ways:
A2.2 Page 7 of 23
1. Staff responsibilities redesign: 5GCC Ltd has around 400 employees among them 300
employees are machine operators while the remaining 100 employees are office staff. This is a
huge number of employees given the size of the company. 30 technicians operating
maintenance of 10 machines is too excessive, it means each machine is operated by 3
technicians which is not efficient. By adopting the BPR it will minimize cost of labour and
efficient allocation of available resources.
2. Inventory management system: The current inventory system of keeping more stock is
costly in terms of electricity, water, security, hygiene, rental costs, and material obsolescence.
When the company adopts BPR, it will help them to set costless or low costs of inventory
management system like Just In Time (JIT). This will help them to minimize the costs of
maintaining inventory.
3. Setting information system: Currently 5GCC Ltd has different information systems like
accounting information system, inventory monitoring system, human resource management
system, with each system working independently. The company has no system in place to
handle customer complaints as anyone who has a complaint has to come in person to the office
and express his/her issue. By adopting BPR, this would help 5GCC to set up an effective
integrated system which will help them to manage different data like accounting data, inventory
data, employee’s data efficiently. This would also reduce staff costs such as those related to
employees’ attendances records, accounting staff etc.
4. Decentralized decision making: The current practice in 5GCC Ltd requires any decision
to be taken in the management meeting which occurs once in a trimester. Once the BPR is
introduced, it will help the company to set up a decentralized management system whereby
decisions will be in hands of the operational staff. This reduces the delays and bureaucratic
decision-making processes which also hinder production efficiency.
5. Customer relationship management: The current practice requires 5GCC staff to conduct
door to door marketing activities and also customers’ complaints are managed at 5GCC
premises. Introducing BPR will help the company to set a Customer Relationship Management
(CRM) system). This will help to timely handle customer orders and complaints.
ii. Briefly discuss how BPR would affect the existing systems at 5GCC Ltd
Introducing Business Process Re-engineering will help 5GCC Ltd to redesign its processes and
systems. The BPR will affect the following current systems:
1. Performance measurement: By adopting BPR management model, it requires that all
performance measures must be built around processes not departments: this may affect the
current design of responsibility centres in place.
2. Reporting: By adopting the Business Process Re-engineering, almost all reporting systems
will change. By introducing computerized systems in all functions will ease the reporting
process and management of data. There should be a need to identify where value addition may
be attained.
A2.2 Page 8 of 23
3. Activity: By adopting the Business Process Re-engineering, 5GCC Ltd would change from
traditional costing and budgeting systems to an Activity Based Costing (ABC) system which
could be used to model business processes.
4. Structure: The complexity of the reporting system will depend on 5GCC structure.
Arguably, the reports will be designed around the process teams, in case there are independent
process teams after the introduction of the Business Process Re-engineering.
5. Variance: By redesigning the production processes and requirements, new variances can
be developed.
iii. Critically evaluate the current organizational structure of 5GCC Ltd and advise on
how it can be improved
Normally, the organizational structure of any company as per the best practice of corporate
governance should be constructed as follows:
The current 5GCC Ltd organizational structure has some weaknesses such as not having an
operational board of directors (BoD).
Board structures and procedures vary both within and among countries. Some countries have
two-tier boards that separate the supervisory function and the management function into
different bodies. Such systems typically have a “supervisory board” composed of non-
executive board members and a “management board” composed entirely of executives. Other
countries have “unitary” boards, which bring together executives and non-executive board
members. In some countries there is also an additional statutory body for audit purposes. The
principles are intended to apply to whatever board structure is charged with the functions of
governing the enterprise and monitoring management. Absence of this organ would lead 5GCC
Ltd to miss out on many roles that would be performed by the BoD including:
1. Board members should act on a fully informed basis, in good faith, with due diligence and
care, and in the best interest of 5GCC and its shareholders.
2. Reviewing and guiding corporate strategy, major plans of action, risk management policies
and procedures, annual budgets and business plans; setting performance objectives; monitoring
implementation and corporate performance; and overseeing major capital expenditures,
acquisitions and divestitures, etc.
3. Monitoring the effectiveness of the company’s governance practices and making changes
as needed
4. Selecting, compensating, monitoring and, when necessary, replacing key executives and
overseeing succession planning: In most two-tier board systems the supervisory board is also
responsible for appointing the management board which will normally comprise of key
executives
5. Aligning key executive and board remuneration with the longer-term interests of the
company and its shareholders
A2.2 Page 9 of 23
6. Ensuring a formal and transparent board nomination and election process
7. Monitoring and managing potential conflicts of interest of management, board members and
shareholders, including misuse of corporate assets and abuse in related party transactions.
8. Ensuring the integrity of the corporation’s accounting and financial reporting systems,
including the independent audit, and that appropriate systems of control are in place, in
particular, systems for risk management, financial and operational control, and compliance
with the law and relevant standards. Companies are also well advised to establish and ensure
the effectiveness of internal controls, ethics, and compliance programmes or measures to
comply with applicable laws, regulations, and standards, including statutes criminalizing the
bribery of foreign public officials.
9. Overseeing the process of disclosure and communications: The functions and

responsibilities of the board and management with respect to disclosure and communication
need to be clearly established by the board. In some jurisdictions, the appointment of an
investment relations officer who reports directly to the board is considered good practice for
large listed companies.
The following is the possible ideal organizational structure with the role of BoD being
considered.
Shareholders
Chairperson of
Board of Directors BoD
CEO
Chief Operating Officer Chief Finance Officer Chief Investment Officer
Operational departments Operational departments

Operational departments
Therefore, the absence of the organ of board of directors would hinder the performance of
many activities in corporate governance perspectives. 5GCC Ltd should ensure the organ is set
and made operational.
A2.2 Page 10 of 23
SECTION B
QUESTION TWO
Marking Guide
QN Description Allocated Marks Total Marks

a Identification of current Transfer pricing method 2
Discussion of negotiated transfer pricing method 9
b Implementation of VBM 3.5
b Pitfall of VBM 3.5
25
Format, professional mark 1
c Effect of external purchase 4
Distinction of economic and managerial
d performance measure 2
Model Answers
a) Based on the idea of the Chief Finance Officer, discuss the transfer pricing method to
be adopted at Kigali Foods Ltd to resolve the existing transfer prices issues among the
two divisions
Currently, Kigali Foods Ltd is adopting the market based or full costs-plus pricing methods in
its divisions. Market based transfer pricing method involves using the external market prices
of similar products to charge the sister division in Kigali Foods Ltd, while a full cost plus
transfer pricing method involves charging the Grinding division after considerring all
production costs of the Planting division and then adding a given predetermined percentage of
a mark up.
Considerring both transfer pricing methods and the provided transfer prices data, it is very clear
that inter divisional prices are very high, sometimes higher than that of the external market.
Since divisional managers have autonomy to outsource inputs from any market, this would lead
to goal incongruence if the divisional transfer prices are not monitored with caution. These
divisional issues would be resolved by shifting from setting divisional transfer prices based on
a full cost plus method to a negotiated transfer pricing method.
In this case it is likely that transfer prices will be set by means of negotiation. The agreed price
may be finalised from a mixture of accounting arithmetic, politics and compromise. The
process of negotiation will be improved if adequate information about each division’s costs
and revenues are made available to the other division involved in the negotiation. By having a
free flow of cost and revenue information, it will be easier for divisional managers to identify
opportunities for improving profits, to the benefit of both divisions involved in the transfer. A
negotiating system that might enable goal congruent plans to be agreed between profit centres
is as follows.
A2.2 Page 11 of 23
1. Both divisions will submit plans for output and sales to head office, as a preliminary step in
preparing the annual budget,
2. Head office reviews these plans, together with any other information it may obtain.
Amendments to divisional plans might be discussed with the divisional managers,
3. Once divisional plans are acceptable to head office and consistent with each other, head
office might let the divisional managers arrange budgeted transfers and transfer prices.
4. Where divisional plans are inconsistent with each other, head office might try to establish a
plan that would maximize the profits of the company as a whole. Divisional managers would
then be asked to negotiate budgeted transfers and transfer prices on this basis.
5. If divisional managers fail to agree a transfer price between themselves, a head office
‘arbitration’ manager or team would be referred to for an opinion or a decision.
6. Divisions finalize their budgets within the framework of agreed transfer prices and resource
constraints.
7. Head office monitors the profit performance of each division.
By adopting a negotiated transfer pricing method, this will eliminate the potential risk of intra
divisioanal high prices and hence leading towards goal congruence.
b) As the head of operations, write a report to CEO, briefly discussing the
implementation and pitfalls of adopting a Value Based Management approach in Kigali
Foods Ltd.
From: XXXXX
To: CEO
Date: 01/01/2022
Re: Implementation and pitfalls of adopting a Value Based Management Approach in
Kigali Foods Ltd
Value-based management (VBM) starts with the philosophy that the value of a company is
measured by its discounted future cash flows. Value is created only when companies invest
capital at returns that exceed the cost of that capital. VBM extends this philosophy by focusing
on how companies use the idea of value creation to make both major strategic and everyday
operating decisions.To implement VBM business model, Kigali Foods Ltd will need to pay
much attention on the following aspects:
Performance measures: Kigali Foods Ltd usually uses traditional financial performance
measures, such as earnings or earnings growth which do not focus enough on value creation.
The adoption of VBM will then require Kigali Foods Ltd to move from that traditional financial
performance measures hence improving value creation. This will also help them to set goals in
terms of discounted cash flow value, the most direct measure of value creation. These targets
can then be cascaded down the organisation as shorter-term, more objective financial
performance targets. However, non-financial goals such as customer satisfaction, product
A2.2 Page 12 of 23
innovation, and employee satisfaction are also important as these inspire and guide the entire
organisation.
Linking performance measurements to the company’s value creation: Kigali Foods Ltd’s
planning, target setting, performance measurement, and incentive systems need to be linked to
value creation at the different levels of the organisation. Management processes and systems
encourage managers and employees to behave in a way that maximises the value of the
organisation.
Employees’ responsibilities’ redesigning: Management processes and systems
encourage managers and employees to behave in a way that maximises the value of the
organisation. For the head of a business unit, the objective may be stated as value creation
measured in financial terms. Functional manager’s goals could be expressed in terms of
customer service. The manufacturing manager might focus on operational measures such as
cost per unit, cycle time, or defect rate.
There are four essential management processes that collectively govern the adoption of VBM.
These four processes are linked across the company at the corporate, business unit, and
functional levels. The four processes which run in order are expressed as below:
1. A company or business unit develops a strategy to maximise value
2. This strategy translates into short- and long-term performance targets defined in terms of
the key value drivers
3. Action plans and budgets are drawn up to define the steps that will be taken over the next
year or so to achieve these targets
4. Finally, performance measurement and incentive systems are set up to monitor performance
against targets and to encourage employees to meet their goals
The pitfalls of adopting a Value Based Management approach in Kigali Foods Ltd.
VBM approach is based on an evaluation of different options and selecting some, which can
contribute to the wealth of shareholders. However, there is no such a thing as a perfect valuation
model. Every valuation will have its advantages and disadvantages.
If a Kigali Foods Ltd has not adopted a VBM approach, it may find it difficult to adopt the
approach later. This is mainly because a VBM approach requires a cultural change within the
company. Similarly, implementing VBM at a large scale can be time-consuming for
companies. Furthermore, while value creation may sound straightforward, it requires
companies to synchronize their strategic and operational activities to obtain the best results.
While VBM may be a useful approach for the benefits it provides to companies, it may often
come at a cost for these companies. Kigali Foods Ltd has to measure the value created by
different processes using different tools such as a balanced scorecard. The more the company
goes into details with these tools, the more accurate results it will get. However, to achieve
more accurate results, companies may have to do a significant amount of research.
Similarly, Kigali Foods Ltd must understand how the process of value creation works and what
goes into the process. If the company takes any irrelevant information, it may end up
A2.2 Page 13 of 23
destructing value rather than creating it. This may also require the company to have
knowledgeable and skillful top-level management.
Finally, as Kigali Foods Ltd does not have any prior experience with a VBM approach, it will
need to train its management and employees. This may further add to the costs of the company
related to adopting a VBM approach.
Kigali Foods Ltd should perform a situational and organizational analysis to ensure the
implementation of VBM is achieving intended objectives when implemented, considerring the
above pitfalls.
c) Discuss the potential effects which may arise when the Grinding division opts to
sources its inputs from an external market including a foreign market
The manager of the Grinding division may opt to transact with external stakeholders including
foreign suppliers instead of buying the raw materials from its sister division. This can lead to
the following impact:
1. Political and Geographical risks: Purchasing inputs from abroad may not be reliable as
international supplies are subject to several uncertainties including geographical and political
risks. If this happens, it may hinder the production process due to stockouts, which in the end
can lead to delayed customers’ orders.
2. Potentially poor-quality materials: Kigali foods Ltd might not have quality assurance
from external suppliers like that it would have achieved from in-house purchasing whereby
quality control would be assured from the first production process to the end.
3. Exchange rate risks: International trade involves using different currencies. Therefore,
involving in international trade may lead to adverse exchange rate risks, which in turn can
affect the Grinding division cost of production and that of Kigali Foods Ltd as well.
4. Inflexibility in credit terms: Local suppliers can be flexible compared to the international
supplier.
5. Goal incongruence: Divisions of Kigali Foods Ltd could enjoy the company’s economies
of scale and minimize production costs and hence increase the company’s competitiveness on
the market. When this is not applied, divisions may end up acting like competitors which in
turn may benefit their individual divisions but to the expense of the whole Kigali Foods Ltd,
as a company.
A2.2 Page 14 of 23
d) Briefly discuss the distinction between economic and managerial performance
evaluation in the context of Kigali Foods Ltd.
Economic performance evaluation refers to the use of economic measures such as Return on
Investment, Residual Income, Economic Value Added as a basis to measure the performance
of a given division or organization while,
Managerial Performance Evaluation refers to the use of other factors that determine the
performnace of divisional managers such as days absent, professional qualifications obtained,
personability, divisional improvement from loss making to profit making division etc. to
measure the manager’s performance.
QUESTION THREE
Marking guide
Questi Description Allocated Total
on Marks Marks
Numbe
r
a Identification of current budgetary system 2 25
Disadvantages of Incremental budgeting 5
Definition (1 Mark) and Advantages of Zero- 5
Based Budgeting
b Advantages of Time series forecasting 2.5
Disadvantages of Time series forecasting 2.5
c Material mix calculation, correct comment 1 mark 4
Material yield calculation, correct comment 1 4
mark
Model Answers
a) Critically evaluate the current SITU’s budgetary system and advise how the
implementation of Zero-Based Budgeting system would improve the university’s budget
performance
Budget Budget
FRW'000 FRW'000 % Increment
Revenues
Tuition fees 520,000 551,200 1.06
Training fees 15,000 15,900 1.06
Grants 820,000 869,200 1.06
Total 1,355,000 1,436,300 1.06
Expenditures
Publication fees 9,805 10,393 1.06
Data Collection costs 21,100 22,366 1.06
A2.2 Page 15 of 23
Budget Budget
FRW'000 FRW'000 % Increment
Data Analysis costs 56,790 60,197 1.06
Salaries 1,124,321 1,191,780 1.06
Repairs and maintenance 80,500 85,330 1.06
Travel expenses 61,500 65,190 1.06
Total expenditures 1,354,016 1,435,257 1.06
Net Revenues/(Costs) 984 1,043 1.06
Critically evaluate the current SITU’s budgetary system

Referring to the two quarters’ budget, it is clear that quarter two is more than the quarter one’s
budget by 6% which may be a result of the inflation rate. This implies that the current budgetary
system is an incremental budgetary system. This budgetary system has some disadvantages as
described below:
1. Incremental budgeting is a reasonable procedure if current operations are as effective,

efficient and economical as they can be. It is also appropriate for budgeting for costs such as
staff salaries, which may be estimated on the basis of current salaries plus an increment for
inflation and are hence administratively fairly easy to prepare. For other items, using
incremental budgeting may cause some budgetary performance problems.
2. Promotes unnecessary spending: Because it bases on the previous budget; it does not care
whether the previous budget was over budgeted. For SITU, it is clear that all revenues were
budgeted for modestly but in the next quarter, nothing changed except adding a 6% instead of
reducing it.
3. Discourages innovation and creativity in SITU: Basing on the previous budget

discourages innovation as this budgetary system does not offer room to the budget committee
to think beyond the previous period budget. It does not consider that SITU lives in a highly
changing environment.
4. Fails to account for changes and external factors: The key assumption behind
incremental budgets is the constant stability of the company’s operations. Therefore, budgets
are typically not responsive to potential changes that can result from unforeseen circumstances
or some un anticipated factors.
5. It does not consider variance analysis: Incremental budgetary system does not consider
the variance analysis to be a basis of preparing the next period budget, rather it tends to inflate
the amounts without taking into consideration slacks or surplus that were previously budgeted
for.
A2.2 Page 16 of 23
All these problems should be addressed by the adoption of Zero-based budgeting (ZBB)
system. ZBB, in theory, rejects the assumption inherent in incremental budgeting; that this
year’s activities will continue at the same level or volume next year, and that next year’s budget
can be based on this year’s costs plus an extra amount, perhaps for expansion and inflation.
Zero based budgeting involves preparing a budget for each cost centre from a zero base. Every
item of expenditure has then to be justified in its entirety in order to be included in the next
year’s budget.
Implementing zero based budgeting, there is a three-step approach:
1. Define decision units: Define decision packages, comprehensive descriptions of specific

SITU’s activities which management can use to evaluate the activities and rank them in order
of priority against other activities.
2. Evaluate and rank packages: Evaluate and rank each activity (decision package) on the
basis of its benefit to SITU.
3. Allocate resources: Allocate resources in the budget according to the funds available and
the evaluation and ranking of the competing packages.
Implementation of ZBB has the following benefits to SITU:
1. It is possible to identify and remove inefficient or obsolete operations: As ZBB starts it

budget process from zero, it helps to budget for only efficient operations, hence leaving out the
inefficient operations from the previous periods’ budgets.
2. It forces employees to avoid wasteful expenditure: Wasteful expenditures that were may
be previously budgeted for are automatically removed from the current budget, hence
improving company’s performance.
3. It can increase innovation: When employees know what they can think can be
incorporated in the budget, this increases their motivation and morale of thinking beyond the
previous budget.
4. It responds to changes in the business environment: The current world is highly

changeing in all corners, including technological advancements, environmental changes, etc.,
adopting a ZBB would help SITU to adopt to any changes that may occur and their respective
budget can be easily incorporated in the company’s budget, hence flexibility.
A2.2 Page 17 of 23
b) Advantages and disadvantages of using time series as a forecasting technique
A time series forecasting is the forecasting process, whereby a series of figures or values
recorded over time are used to predict future variables.
Time series has the following components:
1. Trend
2. Seasonal variations or fluctuations
3. Cycles, or cyclical variations
4. Non-recurring, random variations
The following are the advantages of forecasting using time series

1. Time Series Analysis helps you identify patterns, which helps in planning and other models
development like, sales-advertisement models, etc
2. Time series involves predicting future pattern using previous periods’ data which can be
reliable
3. Time Series Forecasting can predict the future: Time series usually help the company to
predict future patterns
The following are the disadvantages of forecasting using time series
• All forecasts are subject to error, but the likely errors vary from case to case,
• The further into the future the forecast is for, the more unreliable it is likely to be,
• The less data available on which to base the forecast, the less reliable the forecast,
• The historic pattern of trend and seasonal variations may not continue into the future, hence
the unreliablity of future forecasts,
• Random variations may upset the pattern of trend and seasonal variation,
• Extrapolation of the trend line is done by judgment and can introduce errors,
• There are a number of changes that also may make it difficult to forecast future events.
• Forecasting using time series does not consider the environmental changes, technological
advances, legal changes, social changes which may occur between the periods.
c) Variance calculations
Material mix variance calculation
Total kilograms of materials per standard batch of lotion:
Ingredients Kilograms
Mango butter 0.2
hazelnut oil 0.4
Seed Oil 0.35
Total material per standard batch 0.95
A2.2 Page 18 of 23
Therefore, standard quantity to produce the actual quantity produced will be given by: 152, 000
batched* 0.95 kg = 144,400 Kg
Actually, 152,000 batches of lotion have been processed using:
Ingredients Kg
Mango butter 35,010
Hazelnut oil 60,180
Seed Oil 43,100
Total 138,290
Varianc
Material/ Standar e
AQAM Variance d cost
Ingredients AQSM (kg) (kg) per Kg in FRW
Mango 138,290*0.2/0.95=29,11 117,920
butter 4 35,010 (5,896) 20 A
138,290*0.4/0.95=58,22
hazelnut oil 7 60,180 (1,953) 8 15,624A
138,290*0.35/0.95=50,9
Seed Oil 49 43,100 7,849 6 47,094F
Total 138,290 138,290 - 86,450A
Note:
AQSM: Actual Quantity at Standard Mix
Material yield variance
Standa
Material/Ingred AQSM Variance rd cost Variance in
ients SQSM (kg) (kg) per Kg FRW
152,000*0.2=30,
Mango butter 400 29,114 1,286 20 25,720F
152,000*0.4=60,
hazelnut oil 800 58,227 2,573 8 20,584F
152,000*0.35=53
Seed Oil ,200 50,949 2,251 6 13,506F
Total 144,400 138,290 6,110 59,810F
SQSM: Standard Quantity at Standard Mix

A2.2 Page 19 of 23
Comments:
A materials mix variance will occur when the actual mix of materials used in production is
different from the standard mix. So, it is inputs which are being considered. Since the total mix
variance is adverse for the Just More Than Beauty Co, this means that the actual mix used July
2022 was more expensive than the standard mix.
A material yield variance arises because the output which was achieved is different from the
output which would have been expected from the inputs. So, whereas the mix variance focuses
on inputs, the yield variance focuses on outputs. In July 2022, the yield variance was
favourable, meaning that the inputs produced a higher level of output than one would have
expected.
QUESTION FOUR
Marking guide
Question
Number Description Allocated Marks Total Marks
a Predetermined Overhead rate 2
Unit cost price-Traditional method 3
b Overheads rates 3
Overheads cost per unit 4
25
Unit cost price-ABC method 2
c ABC in government entities 3
d Advantages of profit sharing 4
Disadvantages of profit sharing 4
Model Answers
a) Predetermined overhead rate under the current method
Product X Product Y Total-Direct labour hours
Quantity 800 units 2,400 units
Direct labour hours per unit 1.4hrs 2.4 hrs
Total direct labour hours 1,120 5,760 6,880
Overhead absorption rate: Total overhead costs/total direct labor hours

Overhead absorption rate: FRW 261,780/6,880 Direct labor hours=FRW 38.05/direct labor
hour
Determine the unit product cost of each product
Product X-FRW Product Y-FRW

Direct material 21.4 33.4
Direct labour 22.4 38.4
Overheads* 53.3 91.3
Total unit price 97.1 163.1
A2.2 Page 20 of 23
Overhead*
Product x: 1.4 dlh*38.05=FRW 53.3
Product y: 2.4 dlh*38.05=FRW 91.3
b) Compute the unit product cost of Product X and Product Y using Activity Based
Costing System
Computation of activity rates:
Activity Cost Pool O/H Costs Activity Activity rates

Purchase Orders 183,040 4,160 orders 44 per order
Machine setups 27,140 460 set ups 59 per set up
General Factory 51,600 3,440 labour hours 15 per labour hour
The total amount of manufacturing overhead cost that would be applied to each product
using the activity-based costing system
Activity
Activities rates Product X Product Y
Estimate Estimate
d d
Amount- Amount-
activity FRW activity FRW
Purchase orders 44 1,620 71,280 2,540 111,760
Machine set ups 59 200 11,800 260 15,340
General factory 15 560 8,400 2,880 43,200
91,480 170,300
Number of units 800 2,400
Overhead cost per
unit 114.35 70.96
Unit product cost using ABC system
Product X (FRW) Product Y (FRW)

Direct material 21.4 33.4
Direct labour 22.4 38.4
Overheads 114.35 70.96
Total unit price 158.15 142.76
A2.2 Page 21 of 23
c) How the ABC system could help organizations like Pismelo Company to identify,
allocate and control costs and potential challenges it may face
As can be seen in the scenario, it is clear that Pismelo Company is a wholly government owned
company. Many governments have put the public sector under increasing pressure to deliver
more services, for less money, and with greater transparency. Public sector organizations thus
need to identify, allocate and control costs more than ever before. ABC is seen as one possible
tool to help with this:
Reasons to introduce ABC system in government company like Pismelo Company:
1. Public responsibility: responsible public organizations must have tight control of running
costs at a time when resources provided by central government are strictly limited.
2. Public accountability: many organizations are being challenged as to whether or not they
spend taxpayer’s money wisely and feel a need to demonstrate this when the questions are
asked.
3. Resource allocation within organizations: there have been concerns in many

organizations as to whether the services provided had an equitable distribution of scarce
resource or whether those who shouted the loudest got the most resources.
4. Helping managers to manage: managers need a better awareness of what activities actually
cost, before they can think of which ones to cut.
Challenges that introduction of ABC in government set up may face
Resistance: Many public sector organizations have resisted the introduction of ABC. To
measure the cost of a service and take into account resource costs, the resource used must be
measured which often means recording time spent. Timesheets allow accountability for what
people are actually doing, and for this cost then to be allocated to services. This is a challenge
for the public sector, and for those that wish to use ABC or take a similar approach, a culture
change is definitely required.
d) Advantages and disadvantages of giving the workers a profit-sharing bonus instead of

a wage increase
Advantages of giving workers a profit-sharing bonus instead of a wage increase

Increase employee loyalty: Employees with profit-share options connect with their employers
in a different way than those who earn regular salaries. If you offer this incentive, you directly
link employees to the success of your company on a financial level if they help you make a
profit, they earn a reward. Acknowledging the importance of the work they do by giving a
tangible benefit may increase their loyalty to your company and their levels of job satisfaction.
A2.2 Page 22 of 23
Lower recruitment and salary costs: Adding profit sharing to your benefits package could
help you improve employee retention rates, saving money on recruitment and training. Apart
from keeping people happier in their roles, the extra money may dissuade them from looking
for other jobs. You can also use profit sharing to your advantage if you want to retain key
people but cannot or do not want to increase their base salaries. Provided your company does
well, you can offer the incentive of additional earnings without committing to increasing their
salaries.
Improve efficiency and productivity: Sharing a proportion of profits among all your
employees may have a positive effect on their efficiency, their motivation and their
productivity. Employees without a stake in results may be contented to do their jobs at a
minimum level of efficiency. Adding a profit share to the mix and employees have a vested
interest in the success of the company. They have a financial stake in business performance
and may be more motivated to work towards your business goals, thereby boosting profits.
Disadvantages of giving workers a profit-sharing bonus instead of a wage increase
Negative focus on profits: If employees focus solely on profits, your business may suffer.
This may be a problem if they work towards making the greatest profit at the expense of other
key business drivers such as quality. For example, if your sales teams solely push products with
the highest profit margins, rather than focusing on what is best for the customer, you could lose
repeat business and your market reputation might suffer
Issues with entitlement and inequality: Once employees receive profit shares, they may feel
entitled to earning the extra money. If you don't make profits in a period, they may become
unmotivated. Over time, you may also lose productivity gains, as employees may not maintain
initial motivation once the novelty of the system wears off. You may also have problems with
perceptions of inequality. For example, a hard-working employee may be resentful of others if
he feels that they work less hard but receive the same share of profits. If you use scaled profit
sharing, some employees may feel undervalued or may perceive the system as being unfairly
weighted.
Additional profit-sharing costs: Setting up a profit-sharing program may not bring significant
upfront costs, but you must still factor in long-term time, labour and administrative costs.
Committing to giving away a share of your profits also reduces your disposable investment
income. This may be an issue if you want to reinvest profits into your business, as you'll have
less money with which to do so. Also, if your company has a lean period, you can't hide this
fact from your employees. You've made them focus on profits, so they are more likely to notice
if things aren't going well. This could unsettle and demotivate them and, in extreme cases,
encourage them to look for other jobs
A2.2 Page 23 of 23
DATE: THURSDAY 24, AUGUST 2023
INSTRUCTIONS:
1. Time Allowed: 3hours 45minutes (15minutes reading and

4. In summary attempt Three questions.
question.
room
A2.2 Page 1 of 11
SECTION A
QUESTION ONE
Karekezi Holdings Ltd (KHL) is a company that was established in 2020 in the city of Kigali,
dealing in super market business and the manufacturing of wheel barrows to which it sells to its
southern province customers. The wheelbarrow’s life expectancy is about five years and the
Management Accountant, Deo Musoni is of the view that the company should use life cycle
costing to determine its selling price which is estimated at FRW 600 per unit; nonetheless, the
Chief Finance Officer (CFO) argues that this price may not cover all the costs throughout the
wheelbarrow’s lifecycle instead they would rather use Activity Based Costing (ABC) as it
provides a better basis for cost apportionment. Besides ABC, will help KHL to trace its overhead
incurred on each wheel barrow by identifying each cost driver thereby providing a more accurate
pricing decision.
To further support the Management Accountant’s suggestion of Lifecyle costing, he reiterated
on the bottlenecks with the usage of ABC by expounding on the difficulties which KHL may
encounter upon implementation of ABC to include complexity and costly, technology required,
time and KHL size to mention but a few. Deo also shared some data that had been collected in
a recent survey regarding the wheelbarrows business. The report indicated that in the first year
of the product launch, KHL will be incurring losses, and only profits shall start to emerge in the
subsequent year, though KHL will need to do a lot of marketing as more players will have entered
into the market towards the third year requiring the company to devise strategies mitigating the
impact of declining sales in the fourth year. If nothing is done, then the product will require
withdrawal from the market.
When the Chief Executive Officer heard this, he became so much concerned as he expected that,
at last the issues that they were encountering are finally getting to an end, as he was the only one
running all KHL operations, yet the company has an operations Manager. The CFO explained
that the issues confronting them have nothing to do with the costing method being used. He gave
an example that the two ISIMBI supermarkets owned by KHL where one is located in
Nyamirambo and another in Remera; are just characterised by poor customer service and several
clients have already expressed their dissatisfaction. Recent internal research indicated poor
quality products especially groceries and vegetables, most inventories never get recorded and
some get missing, both supermarkets are opened late as a result of prolonged cleaning hours,
long queues at the counters, among many other challenges. ‘I think KHL should consider re-
engineering its business processes along with implementation of ABC.’ the CFO emphasised.
In the next board meeting, some of the issues were discussed and the CEO vowed to get
everything in order including some rumours of an ethical behaviour in KHL. The board chair
was so much concerned with the level of integrity and ethical behaviour within KHL and he
requested the CEO to explain to the board the circumstances around such an allegation. He
explained that recently, the Director of Marketing, James Habineza was given three million
Rwandan francs (FRW 3 million) by one of the company’s main customers to thank him for the
support he rendered to them while purchasing the 300 wheelbarrows; to which he gladly
accepted. Upon receipt of the news, the CEO called him in his office and accused him of
accepting to take a bribe. ‘At your level, you should not be receiving money or any other benefit
from the people you are meant to serve owing it to a thank you gesture; if we do not have strong
A2.2 Page 2 of 11
ethics how can people trust us, he stressed. James still insisted that he believes this does not
tantamount to a conflict of interest as he did not request for this money. ‘It was offered to me at
will’ he emphasised. Trying to check what KHL talks about conflict of interest and corruption,
there was nothing as KHL does not own any code of conduct which would serve as a basis to
punish James.
The Board Chair strictly requested management to develop and share a code of conduct for all
the company staff since it offers several benefits. He reiterated that imposing of social and ethical
responsibilities on management should come from within the organisation itself and thus
requested that an integrity-based approach is adopted.
The expected cost of the wheelbarrow is as follows:
Particulars Year 1 Year 2 Year 3 Year 4 Year 5

FRW FRW FRW FRW FRW
Marketing costs 85,000 40,000 120,000 130,000 150,000
Research and Development Costs 2,500,000 300,000 240,000 200,000 -
Production cost per unit 300 520 380 410 450
Customer service costs per unit 30 35 40 45 50
Disposal of the equipment cost 1,000,000
Units manufactured and sold 35,000 20,000 18,000 15,000 9,000
Required:
a) i) Under Life cycle costing, calculate the cost attributable to each wheelbarrow
(3 Marks)
ii) How much profit will Karekezi Holdings Ltd earn per wheelbarrow (1 Mark)
iii) Advise the Chief Finance Officer the best course of action for Karekezi Holding
Ltd in regard to the management accountant’s view (1 Mark)
b) Describe two approaches to the management of ethics within KHL as suggested by
board chair (4 Marks)
c) KHL is considering re-engineering its processes; examine the features that would indicate
a re-engineered process in reference to ISIMBI Supermarkets (6 Marks)
d) Merely developing a code is never considered sufficient: demonstrate the impact of
developing and implementing a code of conduct at Karekezi Holdings Ltd. (10 Marks)
e) The management accountant of KHL opined on the need to deploy life cycle costing in
determining the selling price of the wheelbarrows: with vivid examples on each stage,
explain to him the five stages of a product life cycle. (10 Marks)
f) What are some of the implications of life cycle costing on pricing, performance
managemnet and decision making. (4 Marks)
g) The Chief Finance Officer insists that KHL should implement Activity Based Costing (ABC)
methodology as it is perceived to be superior to other traditional costing methods: discuss
five advantages and five disadvantges of diploying an ABC methodology at KHL.
(10 Marks)
(Total: 50 Marks)
A2.2 Page 3 of 11
SECTION B
QUESTION TWO
Pablo & Sons Co Ltd is a management consulting company legally registered and operating in
Rwanda. Its services include, corporate governance advisory, financial management, business
management, human resources management and IT consulting. It is equipped with state of art
tools and techniques along with dedicated professionals to evaluate potential opportunities and
risks delivering effective business consulting services to its different clients across the country.
Recently, Pablo & Sons Co Ltd has been competitively awarded two contracts, the first one is
from High-Definition Technology company (HDT Co) Ltd a company known in the region
for manufacturing best quality telephones and Computers. Currently the company operates in the
city of Kigali and it is considering to open up another branch in Musanze district which is in
Northern part of the country.
Many businesses in Musanze have been closed due to economic slowdown to the extent many
have closed their doors, buildings in Musanze have empty stores which are relatively cheap to
rent. Furthermore, landlords who once required high rents and long leases are increasingly
willing to offer these stores a relatively short fixed term lease. This sector in Musanze advertises
extensively using different means including social media, newspapers, radio and televisions and
continually stress their future expansion plans.
By entering to Musanze market, HDT Co Ltd will be specializing in receiving customers’ order
online and deliver the orders through their homes and offices. HDT Co Ltd will be renting the
shops along the high street nearby the chain of different businesses where customers will easily
access its products. HDT Co Ltd will be offering its customers after sales services including free
delivery, one year warranty, etc...
There are many conventional chains of telephone and computer retailers operating in Musanze,
recently they also have adopted the same business model of delivering goods to customers’
premises. In general, the large chains retailers largely compete with each other.
Many retailers also have internet-based home ordering systems, offering deliveries to their
customers who are unable or unwilling to visit the shops. Revenues and costs in Musanze branch
are expected to be identical to that of Kigali branch including an additional cost of FRW100
million to acquire equipment which is expected to last a one year with zero residual value.
Opening the new division will have no effect on corporate office costs.
As a financial management consultant at Pablo & Sons Co Ltd, you have been provided with the
following forecasted financial information from company’s activity-based costing system
regarding the year of 2021 of existing Kigali branch.
Details Telephone Computer

Unit Selling Price FRW 125,000 200,000
Expected quantity to be sold 4,000 5,000
Unit Variable cost FRW 75,000 105,000
A2.2 Page 4 of 11
The following are the other costs to be considered:
Details Telephone Computer

FRW (000) FRW (000)
Depreciation 42,000 58,000
Marketing and distribution costs 70,000 135,000
Fixed general administrative cost 110,000 220,000
Corporate office costs 50,000 100,000
Total 272,000 513,000
Additional Information:
1. The book value of the equipment on 01 January 2021 was FRW100,000,000 a one-year useful
life, and zero disposal value. Any equipment not used will remain idle.
2. Marketing and distribution costs are semi variable costs consisting a fixed cost component of
FRW 40 million and 60 million for telephone and computer respectively. Variable cost
component consists of FRW 750,000 for each telephone and computers shipment. The
company made 40 and 100 shipments in the year 2021 for telephone and computers
respectively.
3. Fixed marketing and distribution costs of any product line can be avoided if the line is
discontinued.
4. Fixed general administration costs of the division and corporate-office costs will not change
if sales of individual product lines are increased or decreased or if product lines are added or
dropped.
5. Fixed general administration and corporate office costs of the division are allocated to
product lines on the basis of revenue
Recently, Mr Karibwami the production manager at HDT Co Ltd attended the seminar where
different performance measurement topics were discussed, among other balanced score card and
scenario planning concepts were deeply presented and discussed. The production manager is
keen to adopt and implement the balanced scorecard as a performance measure in HDT Co Ltd
staring from next year of 2022.
Required:
a) Briefly discuss stages through which HDT Co Ltd would go through while performing
the scenario planning. (2.5 Marks)
b) By basing on financial considerations, should the HDT Co discontinue the telephone
product line for the year, assuming the released facilities remain idle? (8 Marks)
c) What would be the effect on the Kigali branch operating income if it were to sell 4,000
more telephones? Assuming that the branch would have to acquire additional equipment
costing FRW 42 million with a one year useful life and zero residual value. (8 Marks)
d) Advise whether or not the HDT Co Ltd should open up Musanze branch. (6.5 Marks)
(Total :25 Marks)
A2.2 Page 5 of 11
QUESTION THREE
Royal Mountain Bags (RMB) Ltd is a company legally registered and operates in Rwanda for
over fifteen years. It is highly specialized in making a well-designed good quality bag. RMB Ltd
has estimated annual sales budget of 800,000 bags for the year of 2023. This budget has been
estimated based on the research and market survey conducted ten years ago which showed that
RMB Ltd only possess 25% of the total market. On each unit sold, it is expected that RMB Ltd
will make a profit of FRW 6,000. Actual sales for the year were 900,000 bags, however, recent
manufacturing industry reports showed that the total market volume had been 3.5 million.
In the month of January 2023, RMB Ltd has been awarded a contract to supply 1,200 students’
bags to the local not for profit organization (UMWANA NKUNDI). In this particular contract,
UMWANA NKUNDI requested RMB Ltd to specialized materials while producing these bags,
this means that this particular order bags should be slightly different from other bags that RMB
Ltd is used to produce.
The following items should be put into consideration while producing these 1,200 bags.
Specialized material to be used to this order has been chosen by UMWANA NKUNDI and it is
clearly stipulated in the contract. The following are some elements of standard costs card of the
normal bag as produced by RMB ltd and the revised standard costs of the new bag as requested
by UMWANA NKUNDI contract.
Details New bag Normal bag

Standard price per meter 3,150 3,281
standard quantity per bag (meters) 4.4 4
Labor hours per bag-Minutes 15 10
1. As the design of these particular bags is a bit complicated and special, the complicated new
sewing techniques will be needed, as a result all sewing technicians should be trained before
starting to work on this order.
2. RMB Ltd currently has 48 staff, being paid an hourly wage rate of FRW 12,000 and each of
whom works 8 hours a day. All staff works five days a week. Assume a month has 4 weeks.
3. All staff worked all of their contracted hours in January on production of UMWANA
NKUNDI bags and there was no idle time. No labor rate variance arose in January.
4. Activity levels for January were as follows:
Activity level (Units)

Budgeted production and sales 60,000
Actual production and sales 48,000
5. For the month of January, actual material used and purchased is 109,120 meters. The
production manager at RMB Ltd is the one who is responsible for all purchasing and
production issues which occur. RMB Ltd uses standard costing and whenever there is a
change in design of bags, the standard cost card is changed accordingly to address any change
made. However, for this month January this was not the case as the production manager has
forgotten to update the standard cost card.
A2.2 Page 6 of 11
Required:
i. Calculate for the RMB Ltd the market size and market share variances of the year 2023
and Comment on your results. (5 Marks)
ii. Calculate material planning and operational variances (7 Marks)
iii. Calculate labor efficiency planning and operational variances (7 Marks)
iv. Extract from the article of time.com regarding Royal Mountain Bags (RMB) Ltd.
RMB Ltd is a famous manufacturing company specializing in production of bags. It has been in
manufacturing of bags for over fifteen years ago. Its production process has no fixed standard
product design and specifications as it produces bags depending on the customer need and
specifications which therefore leads to the price difference across different customers depending
on the cost of customers’ specifications. As RMB Ltd operates in a highly technological
environment, all its production processes are automated from production stage one to the last and
it has a technology and innovation department which ensure daily adoption of new technology
and creates new production designs and innovations of the company, this implies that any
technology or innovation which is in place and on top today may be outdated tomorrow as a
result of an emerged new technologies and innovations, therefore standard costs it may set is
always subject to changes as the production technology changes.
In addition, RMB Ltd applies the Just in Time approach of inventory and production management
since 2015, this approach has been facilitated by the easy access to suppliers’ raw materials when
orders arrive, it also reduces continuous losses that previously led by the obsolescence of stocks.
RMB Ltd also adopted improved management approach whereby the following aspects have
been emphasized across the organization: customer focus and priority, total employee
commitment, process and integrated approaches of production and fact-based decision making
among others.
Its employees are very supportive and adaptive, duties and responsibilities are clearly stated to
all employees hence the promotion of accountability in the organization. Carrot and stick
approach have been adopted in RMB Ltd, even if it is very hard for the management to allocate
the adverse variance to any employee. The performance measurement in RMB ltd has been
standard costing and variance analysis since its establishment. These performance measurements
are being very hard to be accommodated in the new computerized and highly changing
environment of RMB Ltd and in the manufacturing sector in general.
Required.
Considering the production environment of RMB Ltd, write a memo to the CEO, critically
assessing the use of standard costing and variance analysis in RMB Ltd. (6 Marks)
(Total: 25 Marks)
A2.2 Page 7 of 11
QUESTION FOUR
SIMEX Ltd is a company located in Kigali with a subsidiary in the southern province, SIMAKO
Ltd. SIMAKO uses some of the raw materials from SIMEX. SIMEX produces three products
Uni, Una, and Uno and all of them have an external market. The CEO was concerned that the
company should not be selling externally when its subsidiary which uses its products as raw
materials has not been considered. The CFO explained that to sell to a subsidiary company an
ideal transfer price must be established which enables the transferring division to earn a return
for its efforts, and the receiving division to incur a cost for benefits received, at a fair commercial
price. Most importantly, the organization’s aim as a whole is mainly about maximizing company
profits and has to always be maintained and where need be, divisional managers may have to
negotiate and agree on the amount of goods and services to be transferred.
Other additional information about the three products is as follows:
Particulars FRW FRW FRW

Uni Una Uno
External market price, per unit 35,000 32,000 30,000
Variable cost of production in SIMEX 22,000 14,000 16,000
Labour hours required per unit in SIMEX 4 5 3
Maximum external sales in units 800 500 300
SIMAKO requires SIMEX to transfer 400 units of Una. Besides, SIMEX could buy similar units
of Una from an external market at FRW 31,000.
Required:
a) Determine what should be the transfer price for each product unit if the total labour
hours are limited to 6,000 hours at SIMEX. (10 Marks)
b) Assuming SIMEX Ltd had two subsidiaries, and considering CFO’s explanation
regarding goal congruence through negotiations; examine the ideal approach that
would be able to provide goal congruence opportunities to all the profit centers.
(12 Marks)
c) Value Based Management is considered to be a philosophy about corporate value
interpret the difference between value-based management and value mindset.
(3 Marks)
(Total: 25 Marks)
End of question Paper
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DATE: THURSDAY 24, AUGUST 2023
A2.2 Page 1 of 19
SECTION A
QUESTION ONE
Marking Guide
a) i) Under Life cycle costing, calculate the cost attributable to each wheelbarrow
Marketing costs 0.5
Research and Development Costs 0.5
Production cost per unit 0.5
Customer service costs per unit 0.5
Total cost 0.5
Cost per unit 0.5
Maximum marks 3
ii) How much profit will Karekezi Holdings Ltd earn per wheelbarrow
Profit per wheelbarrow (1 Mark only) 1
iii) Advise the Chief Finance Officer the best course of action for Karekezi Holding Ltd in regard
to the management accountant’s view
Lifecycle costing worthwhile (1 Mark only) 1
b) Describe two approaches to the management of ethics within KHL as suggested by lynne
Paine.
A compliance-based approach 2
An integrity-based approach 2
(2 Marks on each well explained approach with corresponding features)
Maximum marks 4
c) ISIMBI Supermarket is considering re-engineering its processes; examine the features that
would indicate a re-engineered process in reference to ISIMBI Supermarket
Define BPR 1
Combine several jobs 1
Logical framework 1
Cleaning time 1
Quality control system 1
Operations Manager takes the lead 1
Centralisation of the supermarket management 1
Any other valid point to score 1 Mark 1
Maximum Marks 6
d) Merely developing a code is never considered sufficient: discuss the impact of developing
and implementing a code of conduct at KHL Ltd
Senior management commitment 2
A2.2 Page 2 of 19
Behavioural change 2
Behaviour discouragement 2
Detailed statement 2
Buy-in 2
Any other valid impact to score 2 Marks 2
Maximum Marks 10
e) Five stages of a product life cycle
Introduction stage (Each 2 Marks is awarded to a well explained point with an eg.) 2
Growth stage 2
Maturity stage 2
Saturation stage 2
Decline stage 2
Maximum Marks 10
management and decision making.
Reporting 1
Enhanced visibility 1
Profitability understood 1
Accurate information 1
Maximum Marks 4
g) Discuss five advantages and five disadvantages of deploying an ABC methodology at KHL
Advantges
Identification of change cost factors 1
Better basis for cost apportionment 1
Overheads are traced to the product 1
More realistic and accurate product costs 1
Improves decision making 1
Attention to cost behaviour 1
Any other valid advantage 1
Maximum Marks 5
Disadvantages 1
Difficulties that emerge 1
Disadvantage to smaller organisations 1
Several cost pools and cost drivers 1
Technology level 1
Time 1
Fashion based 1
Any other valid advantage 1
Maximum Marks 5
(Total: 50 Marks)
A2.2 Page 3 of 19
Model Answers
Karekezi Holdings Ltd
Particulars Amounts in FRW

Year 1 Year 2 Year 3 Year 4 Year 5 Totals
Marketing costs 85,000 40,000 120,000 130,000 150,000 525,000
Research and development 2,500,00 300,000 240,000 200,000 - 3,240,000
costs 0
Production costs 10,500,0 10,400,0 6,840,0 6,150,0 4,050,0 37,940,00
00 00 00 00 00 0
Customer service costs 1,050,00 700,000 720,000 675,000 450,000 3,595,000
0
Disposal of the equipment 1,000,0
costs 00 1,000,000
Total cost
46,300,00
0
No of units 97,000
Cost per unit = (46,300,000/ 97,000) 477
Profit per wheel barrow
Estimated selling price 600
Cost per unit 477
Profit = (600 – 477) 123
iii) Given that each wheelbarrow makes a profit of FRW 123 then it is worthwhile to consider
life cycle costing while determining the selling price of the wheelbarrows though the profit
appears really marginal.
b) The two approaches to the management of ethics within an organisation as suggested by

lynne Paine.
A compliance-based approach: This is an approach purely designed to ensure that all KHL staff
act within the letter of the law. The drawback to this approach is that by just complying with the
law, cannot be an adequate means to which a full range of day-to-day organisational ethical issues
could be addressed. KHL will need to abide by the law though this might not stop officers from
being unethical.
An integrity-based approach: This approach combines the letter of the law along with an
emphasis on managerial responsibility to behave ethically. The benefit with this approach is that
once it is integrated into KHL’s day to day operations, it helps in mitigating ethical lapses. KHL
will need to develop a code of conduct but complement it with managerial buy-in and
responsibility.
c) ISIMBI Supermarket is considering re-engineering its processes; examine the features
that would indicate a re-engineered process in reference to ISIMBI Supermarket.
BPR may be defined as the fundamental rethinking and radical redesign of business processes to
achieve dramatic improvements in critical contemporary measures of performance such as
quality, cost, service and speed.
A2.2 Page 4 of 19
ISIMBI supermarket would have to combine several jobs into one at each super market branch
especially staff in charge of quality control and those in charge of recording deliveries should be
the same person.
ISIMBI should come up with a logical framework through which each process has to be
performed i.e., from requisition to order placing, then to inspection upon arrival and receiving
and registering deliveries into inventory etc
ISIMBI should not waste a lot of time cleaning the supermarket. In as much as cleaning is
important, it should be noted that under BPR work is performed where it makes most sense.
Besides, cleaning can either be done early morning or at night before concerned staff depart.
ISIMBI may also have to consider establishing a system of quality control such that poor quality
products do not have to go beyond the quality control check point to avoid humiliation by
customers.
It will be important that going forward, the Operations Manager takes the lead in managing the
supermarkets and reports back to the CEO as opposed to both of them running the supermarkets
without a clear chain of command.
Centralisation of the supermarket management may also offer other benefits such as economies
of scale that would be very important while dealing with suppliers including negotiation of
supplier contracts.
Processes at ISIMBI should be designed to achieve a desired outcome rather than focusing on
existing tasks. For example, Point of Sale at the counters should be increased to reduce on longer
queues or implement other payment modes such that customers may be able to enjoy flexibility
of choice.
d) Merely developing a code is never considered sufficient: discuss the impact of developing
and implementing a code of conduct at KHL Ltd.
A code of conduct contains a series of statements setting out company’s values including
explaining how it responds and addresses various stakeholder issues.
Senior management commitment – with a code at KHL, the commitment of the senior
management team shall be enhanced and with this, the code shall help management to persuade
the staff that expectations have since changed.
Behavioural change – Better still, staff will also be facilitated to understand that it is in the KHL’s
interest to change behaviour, by also committing to the same ideals.
Behaviour discouragement – Measures that conflict with the previous behaviour at KHL just
before the code was introduced, shall henceforth be discouraged.
Detailed statement – Apart from the general code of conduct, a more detailed statements (codes
of practice) will need to be developed setting out formal procedures that must be followed.
Buy-in – Like any other organisation’s new policy, the code of conduct may not be perceived the
same way by all the staff as it may be perceived to have a limitation either to their earnings or
job freedom.
A2.2 Page 5 of 19
e) Five stages of a product life cycle
The product life cycle – This refers to a process through which a product undergoes from the
time it is launched until it dies out. The process is made up of five stages:
Introduction stage – This is a stage where a product is characterized with no profit as a result of
being launched. At this level, competition is either non-existent or limited though with high
growth levels. In KHL Ltd the introduction would be the first year were it is equally indicated
that KHL would be incurring losses as in that stage, sales are very limited yet some costs would
have been already incurred in form of research and development costs among others.
Growth stage – At this level, profits start to emerge to cover a bit of expenses incurred at the
introductory level, attributed to the products being accepted at the market in bigger numbers.
Year two would be the growth stage at KHL Ltd as profits will have emerged with possibilities
of increasing the market share.
Maturity stage - At this level, there is stiff market competition with various players coming up
with diverse marketing strategies including advertising, promotional campaigns that attract the
use and rewarding of loyalties. As the third year is characterised with more players entering into
the market, it is an indication of product maturity and therefore KHL Ltd will need to devise
means of fighting the competition.
Saturation stage – At this level, sales growth appears to be in decline which leads to a lower profit
per unit as more competitors join the market. With sales declining rapidly in the fourth year, the
wheel barrows shall have reached the saturation stage, a sign that competitors will be
owning a bigger portion of the market.
Decline stage – This is the last level of the product life cycle characterized with a slow but
accelerated decline in sales and profits. For some players this is the time that they may have to
start thinking about product withdrawal. If KHL Ltd is considering withdrawing out of the
market, it’s a sign that wheel barrows will have reached the decline stage. After all, if the wheel
barrows had been estimated to have a life cycle of five years; it would be high time KHL Ltd
considered discontinuing the wheel barrow product and concentrate on the super market business.
management and decision making.
Since non production costs are attributed to individual products over the wheel barrows life cycle
this may result into:
Reporting - the total of these costs for each wheel barrow are able to be reported and revenues to
be generated for the future and equally compared instantly.
Enhanced visibility – The visibility of wheel barrow costs that have been accustomed to life cycle
costing increases at KHL Ltd to facilitate decision making. For example, the FRW 150,000 in
year 5 as a marketing cost may be ignored since the product shall be at a decline stage, almost at
a point of withdrawal and therefore management may decide to save that expense.
A2.2 Page 6 of 19
Profitability understood – Each wheel barrow profitability can be better understood by attributing
all costs to wheel barrows and a decision made in case of unfavourable circumstances.
Accurate information – KHL Ltd will be able to access accurate information fundamental for its
future growth as the information and the decision is made early enough.
Reduced product cost – being able to plan, design and develop a product at such an early stage
improves an organisation’s cost management process, a move that contributes to cost reduction
thereby providing an opportunity for the organisation to effectively compete in the market.
Additionally;
Under pricing, As Life Cycle Costing (LCC) considers all costs of a products from its
introductory to its decline stage, there would be much probability of considering all costs over
its life. As a result, this would help to know the accurate total costs of a products, hence helps in
setting up its related selling price. This will therefore avoid under/over pricing of this product.
Under performance management, after knowing or ascertaining product’s total costs and price,
KHL will identify profitable and loss-making product, this will help to measure the performance
of its product over its life.
Under Decision making, As LCC helps to know total costs, price and product performance, this
will help KHL to decide on the products to be dropped, continued as per its performance and
contribution as well.
g) Discuss five advantages and five disadvantages of deploying an ABC methodology at
KHL Ltd
Advantages of ABC at KHL Ltd
ABC is a costing technique that involves the identification of the factors which cause the costs
of an organisation’s main activities to change based on the usage levels.
Better basis for cost apportionment by identifying the real nature of cost behaviour which will
help KHL Ltd in reducing costs and identifying activities which do not add value to the product
as emphasised by the Chief Finance Officer.
Overheads will be better traced at KHL Ltd to the wheelbarrows which increases a better
understanding of the overhead costs and cost drivers.
A more realistic and accurate product costs shall be realised at KHL Ltd thereby leading to a
more accurate pricing decision. This is supported by accuracy and reliability in the wheelbarrow
cost determination by focusing on cause-and-effect relationship in the cost incurrence.
ABC will influence KHL Ltd’s managers to consider the drivers of cost within their businesses
which greatly improves the manager’s decision making as they can use more reliable product
cost data.
ABC will provide a useful means of getting financial and non-financial data by tracing costs to
areas of managerial responsibility, processes, customers, departments besides the product costs.
A2.2 Page 7 of 19
ABC will bring attention to cost behaviour and also help in the reduction of costs by comparing
the resources required under ABC with the resources that are currently provided with life cycle
costing and other costing methods.
ii) Disadvantages of ABC at KHL Ltd
There are difficulties that emerge during the implementation of the ABC system such as picking
cost drivers and varying cost driver rates. In order to implement ABC at KHL Ltd, will require
identification of all cost drivers and this appears challenging.
Disadvantage to KHL Ltd: ABC has different levels of utility for different organisations such as
large manufacturing firms which can use it more usefully than the size of KHL Ltd. For example,
KHL Ltd may be better off using life cycle costing as opposed to ABC.
A full ABC system having several cost pools and cost drivers is more complex and more
expensive to operate than traditional product costing systems. KHL Ltd might not find it
worthwhile therefore.
Technology level: The level of technology and manufacturing environment prevailing in

different firms also affect the application of ABC. It appears the technology at KHL Ltd might
not be favoured by ABC.
Time: The ABC system is very time consuming as it requires management to estimate costs of
activity pools and to identify and measure cost drivers to serve as cost allocation bases which
involves so many calculations to determine costs of wheelbarrows which KHL Ltd appears not
to have and ready for.
Fashion based: Some organisations may just decide to deploy ABC because it is fashionable not
because KHL Ltd really needs it to make informed product costing decisions. In such cases
therefore, it may be better to use absorption costing or life cycle costing which is cheaper and
more cost effective as opposed to sticking to ABC.
A2.2 Page 8 of 19
SECTION B
QUESTION TWO
Details Marks
Stages of scenario planning Award 0.5 Marks to each well explained point, max
a 2.5
2.5 marks
b Revenues 1
Variable costs 1
Depreciation on equipment 1
Marketing and distribution costs 1
General administration costs 1
Corporate office costs 1
Operating income (loss) 1
Conclusion 1
Maximum 8
c Revenues 1
Variable costs 1
Depreciation on equipment written off as depreciation 1
Operating income (loss) 1
Conclusion 1
Maximum 8
d Revenues 1
Variable costs 1
Equipment cost written off as depreciation 1
Division general administration costs 1
Effect on operating income (loss) 0.5
Maximum 6.5
Total 25
A2.2 Page 9 of 19
Model Answers
(a) Stages through which HDT Co Ltd would go through while performing the scenario
planning
Nowadays, the complexity of the external environment makes it difficult for organizations to
predict the future. However, to help them plan and assess potential opportunities and threats,
firms can develop scenarios based on the key influences and change drivers in the environment.
Constructing plausible views of how the business environment of an organization might develop
in the future, based on sets of key drivers for change.
Scenarios are not forecasts and predictions, but are plausible views of possible future conditions.
The aim of scenario planning is to learn rather than predict the future, so organizations are often
advised to produce multiple scenarios, to maximize the learning and contingency planning if
necessary. Scenarios can be developed at a macro-environmental level (i.e relating to changes in
PESTEL factors) or an industry level (ie relating to Porter's five forces).
The following are the stages through which HDT Co Ltd would go while performing the
scenario planning:
1. HDT Co Ltd would identify the scope including the timeframe to be involved, product line
to be considered either telephone or computer, and who are the major stakeholders to be
involved,
2. HDT Co Ltd would identify the key trends and areas of uncertainty based for example on
Political, Economic, Social, Technological and Legal factors,
3. HDT Co Ltd would then construct the initial scenarios based on the key areas of uncertainty
identified in stage two above,
4. HDT Co Ltd would then check the scenario for consistency and plausibility,
5. HTD Co Ltd would expand the initial scenarios into full descriptions as if the scenario was
actually occurring in order for management to assess the implications each scenario could
have on the organization,
6. Develop quantitative models of the effect of different scenarios on the organization’s
activities and profitability or cash flow
7. Develop strategies or courses of action which could be adopted in different scenarios if they
actually happen
(b) The incremental revenue or losses by discontinuing the Tables product line follows:
Details Amount
(FRW'000)
Revenues (FRW 125,000*4,000 Telephones) (500,000)
Variable costs (FRW 75,000*4,000 telephones) 300,000
Depreciation on equipment 0
Marketing and distribution costs 70,000
Total costs 370,000
Operating income (loss) (130,000)
A2.2 Page 10 of 19
By discontinuing the telephone product line, it will result in revenue losses of FRW 500,000,000
and cost savings of FRW 370,000,000. Hence, High-Definition Technology company (HDT Co)
Ltd.’s operating income will be FRW 130,000,000 lower if it discontinues the telephone line.
Note that, by discontinuing the telephone product line, HDT Co Ltd will save none of the
depreciation on equipment, general administration costs, and corporate office costs, but it will
save variable costs and all marketing and distribution costs on the telephone product line.
(c) HDT Co Ltd will generate incremental operating income of FRW128,000,000 from selling
4,000 additional telephones and, as a results, it should try to increase telephone sales. The
calculations are as follow:
Details Amount
(FRW'000)
Revenues (FRW 125,000*4,000 Telephones) 500,000
Variable costs (FRW 75,000*4,000 telephones) (300,000)
Depreciation on equipment written off as
(42,000)
depreciation
Marketing and distribution costs (FRW750,000*40
(30,000)
shipments)
Total costs (372,000)
Operating income (loss) 128,000
The additional costs of equipment are relevant future costs for the “selling more telephones
decision” because they represent incremental future costs that differ between the alternatives of
selling and not selling additional telephones.
Current marketing and distribution costs which varies with number of shipments FRW
750,000*40 telephone shipments = FRW 30,000,000. As the sales of telephones double, the
number of shipments will double, resulting in incremental marketing and distribution costs of
FRW 30,000,000.
General administration and corporate office costs will be unaffected if HDT Co Ltd decides to
sell more telephones. Hence, these costs are irrelevant for this particular decision.
(d)
Details Telephones Computers Total
(FRW'000) (FRW'000) (FRW'000)
Revenues 500,000 1,000,000 1,500,000
Variable costs 300,000 525,000 825,000
Equipment cost written off as 100,000
depreciation
Marketing and distribution costs 70,000 135,000 205,000
Division general administration 110,000 220,000 330,000
costs
Corporate office costs - - -
Total costs 480,000 880,000 1,460,000
Effect on operating income (loss) 20,000 120,000 40,000
A2.2 Page 11 of 19
HDT Co Ltd should open the Musanze Branch because it would increase operating income by
FRW 40,000 (increase in relevant revenues of FRW 1,500,000 and increase in relevant costs of
FRW1,460,000). The relevant costs include direct materials, direct manufacturing labor,
marketing and distribution, equipment, and division general administration costs but not
corporate office costs. Note, in particular, that the cost of equipment written off as depreciation
is relevant because it is an expected future cost that HDT Co Ltd will incur only if it opens the
Kigali branch. Corporate office costs are irrelevant because actual corporate office costs will not
change if HDT Co Ltd opens the Musanze branch. The current corporate staff will be able to
oversee the Southern Division’s operations. Grossman will allocate some corporate office costs
to the Southern Division but this allocation represents corporate office costs that are already
currently being allocated to some other division. Because actual total corporate office costs do
not change, they are irrelevant to the division.
QUESTION THREE
Details Marks
Market share Every component of a variance should be given 0.5 marks,

i 2
max 2 marks
Market size Every component of a variance should be given 0.5 marks, max
2
2 marks
Comment 1
Maximum 5
Planning material variance Every component of a variance should be given
ii 3.5
0.5 marks, max 3.5 marks
Operational material variance Every component of a variance should be
3.5
given 0.5 marks, max 3.5 marks
Maximum 7
Planning labour efficiency variance Every component of a variance should
iii 3.5
be given 0.5 marks, max 3.5 marks
Operational labour efficiency variance Every component of a variance
3.5
should be given 0.5 marks, max 3.5 marks
Maximum 7
Assessing the use of standard costing and variance analysis in RMB Ltd
iv Award 1 mark to each well explained point max 5 marks and 1 mark for 6
memo presentation
Total 25
A2.2 Page 12 of 19
Model Answers
i. Using the traditional sales volume variance method, the variance will be given by: (Actual
units sold - Budgeted sales) * Standard profit per unit: (900,000 – 800,000) *FRW6,000 =
FRW600million F
Planning and operational variances
The revised budget would show that RMB Ltd should expect to sell 25% of 3.5 million units =
875,000 units.
Details Formula FRW (000)

Original sales* standard margin 800,000 * FRW6,000 4,800,000
Revised sales * standard margin 875,000 × FRW6,000 5,250,000
Market size 450,000F
Details Formula FRW (000)

Revised sales * standard margin 875,000 × FRW6,000 5,250,000
Actual sales * standard margin 900,000 × FRW6,000 5,400,000
Market Share 150,000F
Then, the total sales volume variance will be given by adding up market size and share which
will be FRW 450 million and FRW 150 million and totalling 600 million favourable as calculated
in the traditional sales volume variance calculations above.
Comment:
Most of the favorable variance can be attributed to the increase in overall market size. However,
some can be put down to effort by the sales force which has increased its share from 25% to
25.7% (900,000/ 3,500,000).
Managers of RMB Ltd should therefore only be appraised based on the operational variance, i.e.
the market share variance as they market size is out of their controls.
ii. Calculation of material planning and operational variances
From the scenario, we have been given the following information:
Units
Budgeted production and sales 60,000
Actual production and sales 48,000
Actual material used and purchased 109,120
New bag Old bag
Standard price per meter 3,150 3,281
Standard quantity per bag (meters) 4.4 4
Labor hours per bag-Minutes 15 10
SQAP (standard quantity for actual production) 4 meters*48,000 192,000 meters

RQAP (revised quantity for actual production) 4.4 meters*48,000 211,200 meters
A2.2 Page 13 of 19
From the scenario the actual production level (AP) is 48,000 bags and actual quantity of material
bought and used (AQ) is 109,120 meters.
Material price
variances FRW
(SP -RP) * (FRW3,281-FRW3,150) *
Planning variance AQ 109,120 14,294,720F
(RP -AP) * (FRW3,150 - FRW3,150) *
Operational variance AQ 109,120 -
Total price variance 14,294,720F
Material usage
variances FRW
(SQAP - RQAP) * (192,000 - 211,200) *
Planning variance SP FRW3,281 62,995,200A
(211,200 -109,120) * 334,924,480
Operational variance (RQAP -AQ) * SP FRW3,281 F
271,929,280
Total usage variance F
Total material 286,224,000
variance F
iii. Calculation of labor efficiency planning and operational variances

48staff * 8 hours a
AH (actual hours worked and paid) day*5days*4weeks 7680 hours
SHAP (standard hours for actual
production) (48,000 * 10minutes)/60minutes 8000 hours
RHAP (revised hours for actual 12000
production) (48,000 * 15minutes)/60mimnutes hours
From the scenario the standard rate per hour (SR) is FRW12,000, the standard time per dress is
10 minutes and the revised time per dress is 15 minutes.
Labor efficiency variances FRW

(SHAP - RHAP) * (8000- 12000) * 48,000,000
Planning variance SR FRW12,000 A
(12000 -7680) * 51,840,000
Operational variance (RHAP - AH) * SR FRW12,000 F
Total labor efficiency
variance 3,840,000F
A2.2 Page 14 of 19
iv. By Considering the production environment of RMB Ltd, the following is the critical
assessment on the use of standard costing and variance analysis in RMB Ltd
MEMO
From: Management accountant

To: Chief Executive Officer,
Date:01/01/2020
Re: critical assessment on the use of standard costing and variance analysis in RMB Ltd
The standard costing and variance analysis have been very popular performance measurement in
manufacturing industry. Nowadays, as the technology evolves, the use of traditional budgetary
systems and variance analysis as a measure of performance are not appropriate due to the
continuing improvement in technology and other factors including but not limited to the
following:
1. Non-standard product: Nowadays, many modern manufacturing industries like RMB have
no standard products, the company design and produce a product depending on the clients’
specific specifications. Therefore, the products differ and are customized depending on the
preference of a particular client. This makes the use of traditional standard costing system and
variance analysis very hard to be used in the manufacturing environment like this.
2. Standard costs card can be outdated quickly: In RMB Ltd, there is an innovation and
research department which should ensure the new method of producing bags. This make standard
costing system very hard to be used because the company keeps changing the design, inputs
requirements et. Therefore, the continual update of standard cost card as designs and costs change
can be cost full in both terms of finance and time
3. RMB Ltd production processes are very automated: It is doubtful whether standard
costing system is of much value for performance setting and controlling an automated
manufacturing environment like that of RMB Ltd. There is an underlying assumption in standard
costing that control can be exercised by concentrating on the efficiency of the workforce. Direct
labor efficiency standards are seen as the key to management control. However, in RMB Ltd,
there is a technological manufacturing processes where the rates of production output and
material consumption are controlled by the machinery rather than the workforce.
4. Ideal standard used: Variance are the difference between actual and standard performance,
measured in cost terms. The significance of variances for management control purposes depends
on the type of standard cost used. RMB Ltd adopts JIT ns TQM systems, businesses often
implement an ideal standard due to the emphasis on continuous improvement and high quality.
Therefore, adverse variances with an ideal standard have a different meaning from adverse
variances calculated with a current standard.
5. Emphasis on continuous improvement: As it is emphasized in the scenario, RMB Ltd
adopted the JIT and TQM system. Standard costing and adherence to a preset standard is
inconsistent with those system as applied in RMB Ltd.
6. Monitoring performance is important: Variance analysis control reports tend to be made
available to managers at the end of a reporting period like a week, month, quarter or a year. In
the modern manufacturing environment like that of RMB Ltd, managers need more real time
information about events as they occur.
A2.2 Page 15 of 19
7. Detailed information is required: Variance analysis is often carried out on an aggregate
basis (total material usage variance, total labor efficiency variance etc..) but in a complex and
constantly changing business environment like that of RMB Ltd, more detailed information is
required for effective management control which variance analysis does not provide.
Standard costing system and variance analysis is a key management and performance tool across
many sectors mostly in the manufacturing sector. These factors do not mean that modern
manufacturing industries are not using this system anymore or are out of use completely. The
idea is for the efficiency and effective performance the modern and highly changing environment
are changing and the use of standard costing system and variance are being gradually being little
used.
Management Accountant.
QUESTION FOUR
Marking Guide
a) Determine what should be the transfer price for each product unit if the total labour
hours are limited to 6000 hours at SIMEX
Hours required to meet maximum demand
Uni 0.5
Una 0.5
Uno 0.5
Total hours 0.5
Contribution per unit 1
Contribution per labour hour 1
Priority for selling 1
Uni hours (balancing figure: 650) 1
Benefit foregone 2
Transfer price for Una 1
Decision 1
Maximum Marks 10
A2.2 Page 16 of 19
b) Examine the ideal approach that would be able to provide goal congruent opportunities to
all the profit centres.
Define negotiated transfer pricing and provide an example 2
Submission of plans 2
Arrange budget transfers between subsidiaries 2
Seek for opinion in case of non-agreement 2
Finalise the budget 2
SIMEX monitoring profit performance 2
Any other valid approach 2
Maximum Marks 12
c) Value Based Management is considered to be a philosophy about corporate value:
interpret the difference between value-based management and value mindset.
VBM interpreted 1
Value mindset interpreted 1
Linkage 1
Maximum Marks 3
Model Answers
a) Determine what should be the transfer price for each product unit if the total labour hours
are limited to 6000 hours at SIMEX.
Solution: Hours * Demand Total
Uni 4 800 3200
Una 5 500 2500
Uno 3 300 900
Total Hours 6600
Contribution from external sales Uni Una Uno
Contribution per unit 13,000 18,000 14,000 (35,000 – 22,000)
Labour hours per unit 4 5 3
Contribution per labour hour 3250 3600 4,667 (13,000/2)
Priority for selling 3 2 1
Total hours needed 3200 2500 900 = 6,600
A2.2 Page 17 of 19
If labour hours are limited to 6000
Uno 300 3 900
Una 500 5 2500
Uni 650 4 2600
6000
In order to transfer the 400 units of Una to SIMAKO means foregoing the sale of 650 Units of
Uni as 2600 hours would be need to make the transferred units.
Therefore, the opportunity cost of transferring a unit of Uni and the appropriate transfer price is
as follows:
FRW per unit
Variable cost of making Una 14,000
Opportunity cost: benefit foregone (3250*5) 16,250
Transfer price for Uni 30,250
The transfer price for the Uni should be FRW 30,250 which is less than the external market price
of FRW 32,000.
b) Examining the ideal approach that would be able to provide goal congruence
opportunities to all the profit centres.
Negotiated transfer pricing
This is a transfer pricing method adopted as a result of failure to identify an opportunity cost
mainly attributable to lack of information about costs and revenues in the concerned individual
divisions. This therefore calls for both divisional managers to negotiate the most appropriate
price whilst identifying opportunities for improving profits beneficial for both divisions.
The ideal approach that would be able to provide goal congruent opportunities to SIMEX and its
subsidiaries is as follows:
Both subsidiaries would need to submit plans for output and sales to SIMEX Ltd as a starting
point to facilitate annual budget preparation.
SIMEX will review them along with any other information available at its disposal with any
amendment requiring consent with the subsidiary managers.
Once SIMEX is happy with the plans, assuming they will have been found consistent with each
subsidiary, SIMEX will then let subsidiary managers arrange budgeted transfers and transfer
prices. If they are not there, SIMEX would need to establish a plan that would maximise profits
as a whole with emphasise that both subsidiaries negotiate their prices based on SIMEX’s plan.
If the subsidiary managers fail to agree a transfer price between themselves, they would then seek
for an opinion or decision from SIMEX.
A2.2 Page 18 of 19
With SIMEX intervention, subsidiaries will be able to finalise their budgets within the agreed
transfer price and resource constraint framework, while SIMEX will be doing the monitoring
role regarding each subsidiary’s profit performance.
c) Interpret the difference between value-based management and value mindset
VBM is a management approach that aligns an organisation’s overall aspirations, analytical
techniques, and management processes with the key drivers of value. For example, the
performance measure adopted by an organisation is used in creating value throughout the
organisation and equally embedded into its organisational culture.
Value mindset requires companies to focus enough on value creation by combining both financial
and non-financial goals in order to have a balanced approach to performance review and
measurement including senior managers possessing a solid analytical understanding of which
performance variables drive the value of an organisation.
Linkage at the different levels of the organisation has to be seen in order to maximise
organisational value: For the CEO, the objective may be stated as value creation measured in
financial terms; Operations Director may want to focus on operational measures such as cycle
time, cost per unit, defect rate etc; while the Marketing Director, may want to focus on customer
service issues.
A2.2 Page 19 of 19

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CERTIFIED PUBLIC ACCOUNTANT

ADVANCED LEVEL 2 EXAMINATIONS

A2.2: STRATEGIC PERFORMANCE MANAGEMENT

DATE: THURSDAY, 26 AUGUST 2021

1. Time Allowed: 3 hours 45 minutes (15 minutes reading

Volume (units) 23,800

Data collected for the year

Number of minutes on call to customers 899,600

Component Division Assembly Romano

Amina Bote Chadia Monthly

Cost of quality report headings

Manager Allocated variance February March Variance

ADVANCED LEVEL 2 EXAMINATIONS

A2.2: STRATEGIC PERFORMANCE MANAGEMENT

DATE: THURSDAY, 26 AUGUST 2021

b) Assessing profitability (0.5 marks for each, maximum of 5) 5

c) i. Advise on client fee strategy using minimax regret

ii. Management advice on best client fee strategy

d) i. Transfer pricing system

ii. Impact of changing suggested transfer price

Cost per unit for

Cost per client

Regret payoff table

b) Quality control changes

QUESTION THREE: DUHUZE Group (DG)

b) Recalculate budget for division F under rolling budget

Assess the use of rolling budgets

QUESTION FOUR: Mezeneza cakes

b) Assessing Production Manager’s performance

ii. Throughput Accounting

Material price variance

Profit per day = throughput contribution – conversion cost

End of Model Answers and Marking guide

ADVANCED LEVEL 2 EXAMINATIONS

A2.2: STRATEGIC PERFORMANCE MANAGEMENT

DATE: THURSDAY,02 DECEMBER 2021

1. Time Allowed: 3 hours 45 minutes (15 minutes reading

Total Equity 1,050,059 1,896,000

Long term loan 465,600 600,860

Payables 75,000 56,910

Actual data are as follows:

Description Budget Actual

End of question paper

ADVANCED LEVEL 2 EXAMINATIONS

A2.2: STRATEGIC PERFORMANCE MANAGEMENT

DATE: THURSDAY,02 DECEMBER 2021

Net Gearing ratio

Return on capital employed (ROCE)

Dividend payout ratio

b) Appropriate Business process re-engineering (BPR) action

Disagreement with Three Brothers

d) Evaluate TNT mission statement

ii) Service business characteristics

(i) Liquidity Ratio

Description KTC BTC

(ii) Lost Courier

(iii) Staff turn over

(iv) Trip waiting time

(v) Effectiveness on Revenue per passenger

(vi) Number of passengers

b) Adopt computerized ticketing

e) Reduce luggage cycle time

f) Improve debt recovery process.

g) Ontime maintenance of transport vehicles