GREAT ZIMBABWE UNIVERSITY

FACULTY OF COMMERCE

DEPARTMENT OF ACCOUNTING AND INFORMATION SYSTEMS

EXAMINATION
_____________________________________________________________________________________

BACHELOR OF COMMERCE DEGREE PART 1 SEMESTER 1

APPLIED MANAGEMENT ACCOUNTING MAAC504

DATE JUNE 2015

DURATION 4 HOURS

INSTRUCTIONS TO CANDIDATES

1. ANSWER ALL QUESTIONS

2. START EACH ANSWER ON A FRESH PAGE

3. SHOW ALL WORKINGS, WHERE APPLICABLE

Page 1 of 9
QUESTION 1

The MAMBO Group (TMG) manufactures and sells a number of rubber-based products.
Its strategic focus is channeled through profit centres which sell products transferred
from production divisions that are operated as cost centres. The profit centres are the
primary value-adding part of the business, where commercial profit centre managers
are responsible for the generation of a contribution margin sufficient to earn the target
return of TMG. The target return is calculated after allowing for the sum of the agreed
budgeted cost of production at production divisions, plus the cost of marketing, selling
and distribution costs and central services costs.

The MUPAWOSE Division is part of TMG and manufactures moulded products that it
transfers to profit centres at an agreed cost per tonne. The agreed cost per tonne is set
following discussion between management of the MUPAWOSEDivision and senior
management of TMG.

The following information relates to the agreed budget for the MUPAWOSE Division for
the year ending 30 June 2009:

(1) The budgeted output of moulded products to be transferred to profit centresis

100,000 tonnes. The budgeted transfer cost has been agreed on a two-part basis as
follows:
(i) A standard variable cost of $200 per tonne of moulded products;
(ii) A lump sum annual charge of $50,000,000 in respect of fixed costs, which is
charged to profit centres, at$500 per tonne of moulded products.

(2) Budgeted standard variable costs (as quoted in 1 above) have been set after
incorporating each of the following:

(i) A provision in respect of processing losses amounting to 15% of material

inputs. Materials are sourced ona JIT basis from chosen suppliers who have
been used for some years. It is felt that the 15% level of losses is necessary
because the ageing of the machinery will lead to a reduction in the efficiency of
output levels.

(ii) A provision in respect of machine idle time amounting to 5%. This is

incorporated into variable machinecosts. The idle time allowance is held at the
5% level partly through elements of ‘real-time’ maintenance undertaken by the
machine operating teams as part of their job specification.

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(3) Quality checks are carried out on a daily basis on 25% of throughput tonnes of
moulded products.

(4) All employees and management have contracts based on fixed annual salary
agreements. In addition, a bonusof 5% of salary is payable as long as the budgeted
output of 100,000 tonnes has been achieved;

(5) Additional information relating to the points in (2) above (but NOT included in the
budget for the year ending 30 June 2009) is as follows:

(i) There is evidence that materials of an equivalent specification could be

sourced for 40% of the annual requirement at the MUPAWOSE Division, from
another division within TMG which has spare capacity.

(ii) There is evidence that a move to machine maintenance being outsourced

from a specialist company could help reduce machine idle time and hence allow
the possibility of annual output in excess of 100,000 tonnesof moulded products.

(iii) It is thought that the current level of quality checks (25% of throughput on a
daily basis) is vital, although current evidence shows that some competitor
companies are able to achieve consistent acceptable quality with a quality check
level of only 10% of throughput on a daily basis.

The directors of TMG have decided to investigate claims relating to the use of budgeting
within organisations which have featured in recent literature. A summary of relevant
points from the literature is contained in the following statement:

‘The use of budgets as part of a ‘performance contract’ between an organisation and its
managers may be seen as a practice that causes management action which might lead
to the following problems:

(a) Meeting only the lowest targets

(b) Using more resources than necessary
(c) Making the bonus – whatever it takes
(d) Competing against other divisions, business units and departments
(e) Ensuring that what is in the budget is spent
(f) Providing inaccurate forecasts
(g) Meeting the target, but not beating it
(h) Avoiding risks.’

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Required:

(a) Explain the nature of any SIX of the eight problems listed above relating to the
use of budgeting; (13 marks)
(b) Illustrate EACH of the six problems chosen in (a) using the data from the
MUPAWOSE division/TMG scenario; and (6 marks)
(c) Suggest ways in which each of the six problems chosen in (a) above may be
overcome. (6 marks)
(TOTAL MARKS: 25)

QUESTION 2

The table below shows data on two variables for the Zimbabwe from the Central
Statistical Office for the period 2003 to 2014.

Table 1 NEW REGISTRATION OF CARS AND PER CAPITA

INCOME, ZIMBABWE

YEAR CARS PCI

2003 92 4000
2004 120 4200
2005 140 4500
2006 110 4100
2007 88 3100
2008 210 2000
2009 340 2880
2010 180 5000
2011 160 4600
2012 148 4600
2013 240 5600
2014 300 4800

Cars - New registrations of second cars imported from Japan shown in thousands.
PCI - Personal disposable income shown per capita in $ at 2014 prices.

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REQUIRED:

(a) Draw a scatter diagram for this data and comment on any relationship
observed? (4 marks)
(b) Using the scatter diagram drawn above for the period 2003-2014 estimate a
regression equation or model for this data. (3 marks)
(c) Estimate the regression model or equation mathematical using the least-
squares method. (4marks)
(d) Evaluate the regression equation in terms of its likely reliability for
forecasting by calculating:
i. The Coefficient of Determination, (8 marks)
ii. The Standard Error of the Estimate, and (3 marks)
iii. The Standard Error of the Coefficient. (3 marks)
(TOTAL MARKS: 25)

QUESTION 3

A local government housing department (LGHD) has funds which it is proposing to

spend on the upgrading of air conditioning systems in its housing inventory.

It is intended that the upgrading should enhance the quality of living for the occupants of
the houses.

Preferred contractors will be identified to carry out the work involved in the upgrading of
the air conditioning systems, with each contractor being responsible for upgrading of the
systems in a proportion of the houses. Contractors will also be required to provide a
maintenance and operational advice service during the first two years of operation of
the upgraded systems.

Prior to a decision to implement the proposal, LGHD has decided that it should carry out
a value for money (VFM) audit.

You have been given the task of preparing a report for LGHD, to help ensure that it can
make an informed decision concerning the proposal.

Required:
Prepare a detailed analysis which will form the basis for the preparation of the
final report. The analysis should include a clear explanation of the meaning and
relevance of each of (i) to (iii) below:
(i) Value for Money (VFM) audit (including references to the roles of principal and
agent). (6 marks)
(ii) Economy, efficiency and effectiveness as part of the VFM audit. (6 marks)

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(iii) The extent (if any) to which each of intangibility, heterogeneity, simultaneity
and perishability may be seen torelate to the decision concerning the proposal,
and any problems that may occur. (8 marks)
Note: Your analysis should incorporate specific references to examples relating to the
upgrading proposal. (TOTAL MARKS: 20)

QUESTION 4

KWAEDZA Co assembles and sells two types of washing machines – the Spin (S) and
the Rise (R). The company has two divisions: the assembly division, and the retail
division.

The company’s policy is to transfer the machines from the assembly division to the retail
division at full cost plus 10%. This has resulted in internal transfer prices, when S and R
are being transferred to the retail division, of $220·17 and $241·69 respectively. The
retail division currently sells S to the general public for $320 per machine and R for
$260 per machine. Assume it incurs no other costs except for the transfer price.

The retail division’s manager is convinced that, if he could obtain R at a lower cost and
therefore reduce the external selling price from $260 to $230 per unit, he could
significantly increase sales of R, which would be beneficial to both divisions. He has
questioned the fact that the overhead costs are allocated to the products on the basis of
labour hours; he thinks it should be done using machine hours or even activity based
costing.

You have obtained the following information for the last month from the assembly
division:

Product S Product R
Production and sales (units) 3,200 5,450
Materials cost $117 $95
Labour cost (at $12 per hour) $6 $9
Machine hours (per unit) 2 1
Total no. of production runs 30 12
Total no. of purchase orders 82 64
Total no. of deliveries to retail division 64 80

Overhead costs: $
Machine set-up costs 306,435
Machine maintenance costs 415,105
Ordering costs 11,680
Delivery costs 144,400
––––––––
Total 877,620

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Required:

(a) Using traditional absorption costing, calculate new transfer prices for S and R
if machine hours are used as a basis for absorption rather than labour hours.
(3 marks)
(b) Using activity based costing to allocate the overheads, recalculate the transfer
prices for S and R. (8 marks)

(i) Calculate last month’s profit for each division, showing it both for each
product and in total, if activity based costing is used. (3 marks)

(ii) You have calculated the profits that both divisions made last month using traditional
absorption costing and found them to be as follows:

Using labour hours to allocate overhead Product S Product R Total *

$ $ $
Assembly’s division profit 64,064 119,737 183,801
Retail division’s profit 319,456 99,790 419,246
––––––––
603,047*
––––––––
Using machine hours to allocate overheads
Assembly division’s profit 86,720 97,065 183,785
Retail division’s profit 69,760 349,563 419,323
––––––––
603,108*
––––––––
* Note: small differences arise in figures because of rounding.Round all workings to 2
decimal places.

Required:

Given these two sets of figures and your calculations in (c) (i), discuss whether
activity based costing should be implemented. Consider the decision from the
view of each of the divisional managers. (6 marks)
(TOTAL MARKS: 20)

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QUESTION 5

Solar Systems Co (S Co) makes two types of solar panels at its manufacturing plant:
large panels for commercial customers and small panels for domestic customers. All
panels are produced using the same materials, machinery and a skilled labour force.
Production takes place for five days per week, from 7 am until 8 pm (13 hours), 50
weeks of the year. Each panel has to be cut, moulded and then assembled using a
cutting machine (Machine C), a moulding machine (Machine M) and an assembly
machine (Machine A).

As part of a government scheme to increase renewable energy sources, S Co has

guaranteed not to increase the price of small or large panels for the next three years. It
has also agreed to supply a minimum of 1,000 small panels each year to domestic
customers for this three-year period.

Due to poor productivity levels, late orders and declining profits over recent years, the
finance director has suggested the introduction of throughput accounting within the
organisation, together with a ‘Just in Time’ system of production. Material costs and
selling prices for each type of panel are shown below.

Large panels Small panels

$ $
Selling price per unit 12,600 3,800
Material costs per unit 4,300 1,160

Total factory costs, which include the cost of labour and all factory overheads, are $12
million each year at the plant.

Out of the 13 hours available for production each day, workers take a one hour lunch
break. For the remaining 12 hours, Machine C is utilised 85% of the time and Machines
M and A are utilised 90% of the time. The unproductive time arises either as a result of
routine maintenance or because of staff absenteeism, as each machine needs to be
manned by skilled workers in order for the machine to run. The skilled workers are
currently only trained to work on one type of machine each. Maintenance work is carried
out by external contractors who provide a round the clock service (that is, they are
available 24 hours a day, seven days a week), should it be required.

The following information is available for Machine M, which has been identified as the
bottleneck resource:

Large panels Small panels

Hours per unit Hours per unit
Machine M 1·4 0·6

There is currently plenty of spare capacity on Machines C and A. Maximum annual

demand for large panels and small panels is 1,800 units and 1,700 units respectively.
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Required:
(a) Calculate the throughput accounting ratio for large panels and for small
panels and explain what they indicate to S Co about production of large
and small panels.
(11 marks)
(b) Assume that your calculations in part (a) have shown that large panels have a
higher throughput accounting ratio than small panels.

Required:
Using throughput accounting, prepare calculations to determine the
optimum production mix and maximum profit of S Co for the next year.
(5 marks)
(c) Suggest and discuss THREE ways in which S Co could try to increase its
production capacity and hence increase throughput in the next year
without making any additional investment in machinery. (4 marks)
(TOTAL MARKS: 20)

END OF EXAM

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