QUESTION ONE

a) Robert Simons proposed the "Four Levers of Control" framework to guide managers in
designing effective control systems. These levers are:

1. Belief Systems: This lever emphasizes the importance of establishing shared values and
beliefs within an organization. It involves defining a clear mission, vision, and set of core
values that guide decision-making and behavior.

2. Boundary Systems: Boundary systems establish the rules, regulations, and limits within
which employees operate. This includes formal policies, procedures, and performance
targets that define acceptable behavior and performance standards.

3. Diagnostic Control Systems: Diagnostic control systems involve the use of performance
measurement and feedback mechanisms to monitor progress toward goals and detect
deviations from expected outcomes. These systems provide managers with information to
assess performance and take corrective actions as necessary.

4. Interactive Control Systems: Interactive control systems focus on ongoing

communication and dialogue between managers and employees. They encourage open
discussion, collaboration, and the exchange of information to ensure alignment with
organizational objectives.

b) To address the challenge of managers behaving unethically and ensure adherence to legal and
ethical accounting policies and procedures, organizations can leverage the Four Levers of
Control in the following ways:

 Belief Systems: Establishing a strong ethical culture starts with fostering a belief system
that values integrity, honesty, and ethical behavior. Top management should
communicate and reinforce these values through their actions and decisions, setting a
clear tone at the top.

 Boundary Systems: Implementing robust policies, procedures, and codes of conduct that
outline expected behavior and explicitly prohibit unethical practices can help create
boundaries for employees. These systems should be regularly reviewed and updated to
ensure relevance and effectiveness.
  Diagnostic Control Systems: Utilize performance metrics and monitoring mechanisms to
detect any deviations from ethical standards or legal requirements. Regular audits,
reviews, and assessments can help identify areas of concern and enable timely
intervention.

 Interactive Control Systems: Foster an environment where employees feel comfortable

raising concerns and reporting unethical behavior without fear of retaliation. Encourage
open communication channels, provide whistleblowing mechanisms, and promote
transparency throughout the organization.

QUESTION TWO

(a) Profit Centers:

 Characteristics: Profit centers are organizational units or departments within a company

that are responsible for both generating revenue and controlling costs. They are typically
given authority over their own resources, such as budget allocation and decision-making,
and are evaluated based on their ability to generate profits.

 Objectives: The main objective of profit centers is to maximize profitability by

optimizing revenue generation and cost management within the designated unit. Profit
centers aim to generate revenues that exceed the costs incurred, thereby contributing
positively to the overall profitability of the organization.

Investment Centers:

 Characteristics: Investment centers are organizational units that have control over their
own resources and are evaluated based on their ability to generate returns on investment
(ROI). They have authority over both operating and capital decisions, including
investments in assets and projects.

 Objectives: The primary objective of investment centers is to maximize the return on

investment by efficiently allocating resources to projects and activities that yield the
highest returns. Investment centers focus on optimizing the utilization of assets and
capital to generate profitable outcomes.

(b) Conditions for Successful Introduction:

  Clear Objectives: The objectives of introducing profit centers and investment centers
should be clearly defined and aligned with the overall strategic goals of the organization.

 Adequate Resources: The centers must be provided with sufficient resources, both
financial and non-financial, to carry out their responsibilities effectively.

 Performance Measurement Systems: Robust performance measurement and reporting

systems should be in place to track the financial and non-financial performance of the
centers accurately.

 Accountability: There should be clear lines of accountability established, with individuals

within the centers held responsible for their performance and outcomes.

 Communication and Coordination: Effective communication and coordination between

the centers and other parts of the organization are essential to ensure alignment with
broader objectives and strategies.

(c) Behavioral and Control Consequences:

 Motivation: Introducing profit centers and investment centers can motivate managers and
employees by providing them with autonomy and accountability over their performance
and outcomes.

 Goal Congruence: However, there may be a risk of goal incongruence if the objectives of
the centers are not properly aligned with the overall goals of the organization, leading to
suboptimal decision-making.

 Competition: Competition between centers may arise, potentially leading to conflicts of

interest or suboptimal resource allocation if not managed effectively.

 Performance Evaluation: There may be a tendency to focus solely on short-term financial

performance at the expense of long-term strategic objectives if performance measures are
not balanced appropriately.

(d) Performance Appraisal Measures for Investment Centers:

 Return on Investment (ROI): ROI is a widely used performance measure that evaluates
the profitability of investment centers by comparing the net income generated with the
 capital invested. It provides a measure of the efficiency of resource utilization and the
effectiveness of investment decisions.

 Residual Income: Residual income is another performance measure that assesses the
economic value added by investment centers by comparing their operating income with a
hurdle rate or minimum required return on investment. It focuses on the absolute dollar
amount of profit generated above the cost of capital, encouraging managers to pursue
investments that exceed the cost of capital

QUESTION THREE

(a) To recommend the best option among the three alternatives (small plant, medium-sized plant,
or no plant), we need to consider the expected value of each option given the probabilities of
market conditions and the corresponding net profit or loss figures.

Expected value for Small plant: Expected value = (Probability of good market * Profit in good
market) + (Probability of average market * Profit in average market) + (Probability of bad
market * Profit in bad market)

Expected value = (0.2 * 1,350,000) + (0.5 * 450,000) + (0.3 * -720,000) Expected value =
270,000 + 225,000 - 216,000

Expected value = 279,000

Expected value for Medium-sized plant: Expected value = (0.2 * 1,800,000) + (0.5 * 630,000) +
(0.3 * -1,080,000)

Expected value = 360,000 + 315,000 - 324,000 Expected value = 351,000

Expected value for No plant: Expected value = 0 (as there is no profit or loss associated with this
option)

Comparing the expected values:

Small plant: $279,000

Medium-sized plant: $351,000

No plant: $0
Based on the expected values, the medium-sized plant option would be recommended as it has
the highest expected value, indicating potentially higher profitability compared to the other
options.

(b) Minimax Regret Criterion: To apply the minimax regret criterion, we calculate the regret for
each decision by finding the maximum regret for each market condition and then selecting the
option with the minimum maximum regret.

 Regret for Small plant: Regret = Maximum profit possible - Profit for small plant Regret
= max(1,800,000, 1,350,000) - 1,350,000

 Regret = 450,000

 Regret for Medium-sized plant: Regret = max(1,800,000, 1,350,000) - 1,800,000=0

 Regret = 0

 Regret for No plant: Regret = 0 (as there is no regret associated with this option)

Based on the minimax regret criterion, the medium-sized plant option would be recommended
since it has the minimum maximum regret.

Minimum Expected Opportunity Loss Criterion: This criterion involves calculating the expected
opportunity loss for each decision and selecting the option with the minimum expected
opportunity loss.

Expected Opportunity Loss for Small plant: Expected Opportunity Loss = (0.2 * 450,000) + (0.5
* 900,000) + (0.3 * 1,620,000)

Expected Opportunity Loss = 90,000 + 450,000 + 486,000 Expected Opportunity Loss =

1,026,000

Expected Opportunity Loss for Medium-sized plant: Expected Opportunity Loss = (0.2 * 0) +
(0.5 * 0) + (0.3 * 0)

Expected Opportunity Loss = 0

Expected Opportunity Loss for No plant: Expected Opportunity Loss = 0 (as there is no loss
associated with this option)
Based on the minimum Expected Opportunity Loss criterion, the medium-sized plant option
would be recommended since it has the minimum expected opportunity loss (which is zero).

QUESTION FOUR

1. Yield Ratio: The yield ratio is the ratio of actual output produced to the standard output
expected, given the actual direct labor input.

Yield Ratio = Actual Output / (Standard Output per Hour * Total Actual Direct Labor Hours)

Given:

 Actual Output = 320,000 units

 Standard Output per Hour = 25 units (as per the standard mix)

 Total Actual Direct Labor Hours = 65,000 hours

Yield Ratio = 320,000 / (25 * 65,000) Yield Ratio = 320,000 / 1,625,000 Yield Ratio ≈ 0.197

2. Standard Cost per Unit of Yield: Standard Cost per Unit of Yield is the standard cost per
unit of output, considering the standard mix and prices.

Standard Cost per Unit of Yield = Standard Cost / Standard Output per Hour

Given:

 Standard Cost = K76

 Standard Output per Hour = 25 units (as per the standard mix)

Standard Cost per Unit of Yield = 76 / 25 Standard Cost per Unit of Yield = K3.04

3. Direct Labour Yield Variance: Direct Labour Yield Variance measures the difference
between the actual output achieved and the standard output, multiplied by the standard
cost per unit.

Direct Labour Yield Variance = (Actual Output - Standard Output) * Standard Cost per Unit of
Yield

Given:
  Actual Output = 320,000 units

 Standard Output = (Total Actual Direct Labor Hours * Standard Output per Hour) =
(65,000 * 25) = 1,625,000 units (as per the standard mix)

 Standard Cost per Unit of Yield = K3.04

Direct Labour Yield Variance = (320,000 - 1,625,000) * 3.04 Direct Labour Yield Variance = -
1,305,000 * 3.04 Direct Labour Yield Variance ≈ -K3,968,200 (Unfavorable)

4. Direct Labour Mix Variance: Direct Labour Mix Variance measures the difference
between the actual mix of direct labor used and the standard mix, multiplied by the
standard cost per hour of each type of labor.

Direct Labour Mix Variance = (Actual Mix - Standard Mix) * Standard Price per Hour

Given:

 Actual Mix:

 Painting: 20,000 hours

 Designing: 45,000 hours

 Standard Mix:

 Painting: 2 hours

 Designing: 3 hours

 Standard Price per Hour:

 Painting: K20

 Designing: K12

Direct Labour Mix Variance = [(20,000 - (2 * 65,000/5)) * 20] + [(45,000 - (3 * 65,000/5)) * 12]

Direct Labour Mix Variance = [(20,000 - 13,000) * 20] + [(45,000 - 39,000) * 12]

Direct Labour Mix Variance = (7,000 * 20) + (6,000 * 12)

Direct Labour Mix Variance = 140,000 + 72,000

Direct Labour Mix Variance = K212,000 (Unfavorable)

QUESTION FIVE

(a) (i) Total Profit per Year Made by the Company Overall: Total Profit = Total Revenue - Total
Costs

Total Revenue = Unit Sales Price in Mozambique * Sales Volume Total Revenue = K140 *
800,000 Total Revenue = K112,000,000

Total Variable Manufacturing Costs = Variable Manufacturing Cost per Unit * Production
Volume in Malawi Total Variable Manufacturing Costs = K32 * 800,000 Total Variable
Manufacturing Costs = K25,600,000

Total Fixed Manufacturing Costs in Malawi = K3,600,000 Total Fixed Assembly Costs in
Mozambique = K1,400,000

Total Costs = Total Variable Manufacturing Costs in Malawi + Total Fixed Manufacturing Costs
in Malawi + Total Variable Assembly Costs in Mozambique + Total Fixed Assembly Costs in
Mozambique Total Costs = K25,600,000 + K3,600,000 + K14,400,000 + K1,400,000 Total
Costs = K45,000,000

Total Profit = Total Revenue - Total Costs Total Profit = K112,000,000 - K45,000,000 Total
Profit = K67,000,000

(ii) Profit per Year Made by Each Division:

 Malawi Division: Total Revenue in Malawi = Transfer Price * Production Volume in

Malawi Total Revenue in Malawi = K100 * 800,000 Total Revenue in Malawi =
K80,000,000

Total Variable Manufacturing Costs in Malawi = K25,600,000 Total Fixed Manufacturing Costs
in Malawi = K3,600,000

Total Costs in Malawi = Total Variable Manufacturing Costs in Malawi + Total Fixed
Manufacturing Costs in Malawi Total Costs in Malawi = K25,600,000 + K3,600,000 Total Costs
in Malawi = K29,200,000
Profit in Malawi = Total Revenue in Malawi - Total Costs in Malawi Profit in Malawi =
K80,000,000 - K29,200,000 Profit in Malawi = K50,800,000

 Mozambique Division: Total Revenue in Mozambique = Sales Price * Sales Volume

Total Revenue in Mozambique = K140 * 800,000 Total Revenue in Mozambique =
K112,000,000

Total Variable Assembly Costs in Mozambique = K18 * 800,000 Total Variable Assembly Costs
in Mozambique = K14,400,000 Total Fixed Assembly Costs in Mozambique = K1,400,000

Total Costs in Mozambique = Total Variable Assembly Costs in Mozambique + Total Fixed
Assembly Costs in Mozambique Total Costs in Mozambique = K14,400,000 + K1,400,000 Total
Costs in Mozambique = K15,800,000

Profit in Mozambique = Total Revenue in Mozambique - Total Costs in Mozambique Profit in

Mozambique = K112,000,000 - K15,800,000 Profit in Mozambique = K96,200,000

(b) Decentralization involves delegating decision-making authority and responsibility from

higher levels of management to lower levels or subsidiaries within an organization.

Merits:

 Faster Decision Making: Decentralization allows decisions to be made closer to the point
of action, leading to quicker responses to changes in the environment.

 Improved Motivation and Morale: Employees at lower levels feel more empowered and
motivated when given decision-making authority, leading to increased job satisfaction
and morale.

 Enhanced Flexibility: Decentralization enables subsidiaries or divisions to adapt more

quickly to local market conditions and customer needs.

 Development of Managerial Talent: Decentralization provides opportunities for managers

at lower levels to gain experience in decision-making and leadership, fostering their
professional growth.
  Better Customer Service: Local managers are better equipped to understand and respond
to the needs of customers in their respective markets, leading to improved customer
satisfaction.

Demerits:

 Coordination Challenges: Decentralization may lead to coordination problems between

different divisions or subsidiaries, resulting in inefficiencies or conflicts.

 Potential Duplication of Effort: Decentralized units may duplicate functions or resources,

leading to increased costs and inefficiencies.

 Risk of Inconsistent Policies: Different divisions or subsidiaries may adopt divergent

policies or strategies, resulting in inconsistency across the organization.

 Loss of Control: Higher levels of management may experience a loss of control over
decision-making and operations, which can be detrimental if not properly managed.

 Difficulty in Standardization: Decentralization may make it challenging to implement

standardized processes or procedures across the organization, affecting consistency and
quality.

(c) Possible Objectives of Transfer Pricing

1. Performance Evaluation: Transfer pricing can be used to evaluate the performance of

different divisions or subsidiaries within the organization by assessing their profitability.

2. Goal Congruence: Transfer pricing aims to align the goals of individual divisions or
subsidiaries with the overall objectives of the organization, promoting harmony and
cooperation.

3. Resource Allocation: Transfer pricing helps in determining the most efficient allocation
of resources across different divisions or subsidiaries to maximize overall profitability.

4. Tax Management: Transfer pricing strategies may be used to manage tax liabilities by
shifting profits between different jurisdictions, taking advantage of tax rate differentials.
 5. Avoidance of Conflict: Transfer pricing policies can help prevent conflicts between
divisions or subsidiaries by ensuring fairness and transparency in the allocation of costs
and revenues.

QUESTION SIX

(a) Monthly Cash Budget for January to April 2024:

Month January February March April

Sales Revenue 10 * K180,000 15 * K180,000 25 * K180,000 30 * K180,000

= K1,800,000 = K2,700,000 = K4,500,000 = K5,400,000

10 * K180,000 * 15 * K180,000 * 25 * K180,000 * 30 * K180,000 *

Sales Commission (1%) 1% 1% 1% 1%

= K18,000 = K27,000 = K45,000 = K54,000

Remaining Sales 10 * K180,000 * 15 * K180,000 * 25 * K180,000 *

Commission (2%) 0 2% 2% 2%

= K36,000 = K54,000 = K108,000

Total Sales Commission K18,000 K63,000 K99,000 K162,000

Salary Expenses 9 * K35,000 9 * K35,000 9 * K35,000 9 * K35,000

= K315,000 = K315,000 = K315,000 = K315,000

Bonus Payments 0 0 0 (25 - 20) * K140

= K700

10 * K180,000 * 15 * K180,000 * 25 * K180,000 * 30 * K180,000 *

Variable Expenses (0.5%) 0.5% 0.5% 0.5% 0.5%
Month January February March April

= K9,000 = K13,500 = K22,500 = K27,000

Fixed Overheads K4,300 K4,300 K4,300 K4,300

Interest Payment 0 0 0 K200,000 * 6% / 4

= K3,000

Tax Payment 0 0 0 K95,800

Surplus Vehicle Sale 0 0 0 K20,000 - K15,000

= K5,000

Total Expenditure K346,300 K395,800 K495,800 K737,000

Opening Cash Balance -K40,000 K1,413,700 K1,212,900 K1,216,100

Closing Cash Balance K1,413,700 K1,212,900 K1,216,100 K979,100

(b) The Four Purposes of Budgets are:

1. Planning: Budgets help organizations set objectives and plan for the allocation of
resources to achieve those objectives. They provide a roadmap for decision-making by
outlining expected revenues, expenses, and investments over a specific period.

2. Coordination: Budgets facilitate coordination among different departments or divisions

within an organization by aligning their activities with overall organizational goals. They
ensure that resources are allocated efficiently and effectively across various functions.

3. Control: Budgets serve as a tool for monitoring and controlling performance by

comparing actual results against planned targets. Discrepancies between actual and
budgeted figures can highlight areas of concern and enable management to take
corrective actions as needed.
4. Evaluation: Budgets provide a basis for evaluating the performance of individuals,
departments, or the organization as a whole. By comparing actual results to budgeted
expectations, management can assess the effectiveness of strategies and identify areas for
improvement.