Code of Name of the Module Date of Exam Time of Set

the Exam
Module
BBA 121 MANAGERIAL ACCOUNTING 26 November 2018 14:00HRS 1

You are advised to read the following before answering the examination question.

1. Read each of the questions carefully before you answer.

2. Number the answers to the questions clearly before answering.

3. Answer all parts of a question at one place in continuous manner.

4. Please write as clearly as possible as illegible handwriting cannot be marked

This paper contains two parts; Section A and Section B. Section A is compulsory and comprises
two questions; Q.1 having four sub questions of five marks each is based on a case study and
Section B contains five questions having two sub questions of ten marks each. Answer any three
questions from section B.

Section A
Answer both questions
Read the following carefully and then answer Q.1

John Hush is in the process of preparing budgets for the period October to December 2013.
The following information has been provided to assist in the budgeting process:

1. Budgeted monthly sales revenue is as follows:

October 40,000

November 70,000

December 50,000

January 2014 45,000

Sales are 20% cash and 80% credit. Credit sales are collected over a three month period, 15%
in the month of sale, 70% in the month following sale and 15% in the second month following
sale. Bad debts of 5% are anticipated on all credit sales.
Total sales revenue in August amounts to K30,000 and September’s total sales revenue
amounts to K36,000.

2. Cost of sales is expected to amount to 60% of sales revenue each month.

3. The business maintains its closing inventory levels at 75% of the following month’s cost of
sales. Inventory at the beginning of October is expected to amount to K18,000.

4. 50% of inventory purchased is paid in the month of purchase. The remaining 50% is paid
for in the month following purchase. At the 30th September amounts owed for purchases are
K11,700.
5. A grant of K20,000 is expected to be received in mid-October.

6. A van which cost K8,000 when purchased second hand three years ago is expected to be
sold in December 2013 for K3,000. At this time the expected net book value of the van is
K1,800.

7. Equipment costing K4,500 will be purchased and paid for in November. The equipment will
be depreciated on a straight line basis over three years.

8. Operating expenses are paid as incurred. These have been estimated as follows:

October 12,800

November 18,900

December 14,600

The above figures include depreciation on existing assets of K2,000 per month.

9. The cash balance on 1st October is expected to amount to K8,000.

Required:

a. Calculate the purchases figure for each month from October 2013 to December 2013.
(5 Marks)
b. Prepare a cash budget on a monthly basis and in total for the period October 2013 to
December 2013. (12 Marks)
c. Outline any three potential benefits from the preparation of a cash budget as prepared in
part (b). (3 Marks)
Q.2

SC Co is evaluating the purchase of a new machine to produce product P, which has a short
product life-cycle due to rapidly changing technology. The machine is expected to cost $1
million. Production and sales of product P are forecast to be as follows:

Year 1 2 3 4

Production and sales (units/year) 35,000 53,000 75,000 36,000

The selling price of product P (in current price terms) will be $20 per unit, while the variable
cost of the product (in current price terms) will be $12 per unit. Selling price inflation is
expected to be 4% per year and variable cost inflation is expected to be 5% per year. No
increase in existing fixed costs is expected since SC Co has spare capacity in both space and
labour terms.

Producing and selling product P will call for increased investment in working capital. Analysis
of historical levels of working capital within SC Co indicates that at the start of each year,
investment in working capital for product P will need to be 7% of sales revenue for that year.

SC Co pays tax of 30% per year in the year in which the taxable profit occurs. Liability to tax
is reduced by capital allowances on machinery (tax-allowable depreciation), which SC Co can
claim on a straight-line basis over the four year life of the proposed investment. The new
machine is expected to have no scrap value at the end of the four year period.

SC Co uses a nominal (money terms) after-tax cost of capital of 12% for investment appraisal
purposes.

Required

a. Calculate the net present value of the proposed investment in product P. (10 Marks)
b. Advise on the acceptability of the proposed investment in product P and discuss the
limitations of the evaluations you have carried out. (5 Marks)
c. Discuss how the net present value method of investment appraisal contributes towards
the objective of maximising the wealth of shareholders. (5 Marks)

Section B
Answer any three questions
Q.3
Explain, giving examples, the differences between each of the following:
a. Variable and Fixed cost;
b. Normal and Abnormal loss;
c. Marginal cost plus pricing and full cost plus pricing;
 d. Back-flush accounting and throughput accounting ;
e. Sunk and Incremental costs; (20 Marks)
Q.4
Mikes IT Giants produces and sells computer software. Estimated unit data for next year are
as follows:

Selling price 12,000

Anticipated fixed costs for the year are K1,600,000 for administration and K1,200,000 for
selling and distribution. Estimated sales for the year are 12,800 programmes.

Required:

a.
i. Calculate the breakeven point in terms of number of programmes sold and sales
revenue. (5 Marks)
ii. Determine the margin of safety as a percentage of estimated sales. (3 Marks)
b.
i. i. If the company’s profit target is K1,120,000. Calculate the number of programmes
the company should sell. (3 Marks)
ii. ii. The company is currently negotiating with an overseas client. If the negotiations are
successful, a five –year contract will be signed for purchase by this client of 60,000
programmes per year in each year of the contract. Discuss the possible implications for
the cost/volume/ profit model employed above if the company wins the overseas
contact and expands accordingly. (9 Marks)
Q.5

Perot Manufacturing Company has three salaried clerks to process purchase orders. Each clerk
is paid a salary of $38,000 and is capable of processing 5,000 purchase orders per year (working
efficiently). In addition to the salaries, Perot spends $7,500 per year for forms, postage, and so
forth. Perot assumes 15,000 purchase orders will be processed.
During the year, 12,500 orders were processed.
Required:
a.
i. Calculate the activity rate for the purchase order activity. Break the activity into fixed
and variable components. (3 Marks)
ii. Compute the total activity availability, and break this into activity output and unused
activity. (3 Marks)
iii. Calculate the total cost of the resource supplied, and break this into the cost of activity
output and the cost of unused activity. (4 Marks)
b.

Linda Horton, an accountant for Trent, Inc., has decided to estimate the fixed and variable
components associated with the company’s repair activity. She has collected the following data
for the past six months:
Repair Hours Total Repair Costs
10 $ 800
20 1,100
15 900
12 900
18 1,050
25 1,250
Required:
a. Estimate the fixed and variable components for the repair costs using the high-low
method. Using the cost formula, predict the total cost of repair if 14 hours are used. (5
Marks)
b. Why is knowledge of cost behaviour important for managerial decision making? Give
examples to illustrate your answer. (5 Marks)
.

Q.6
a. Explain the relevance of the product life cycle in considering alternative pricing policies
for a technologically advanced product. (10 Marks)
b. Briefly describe the target costing process and explain 3 benefits to a company of
adopting it at an early stage in the product development process. (10 Marks)
Q.7
Jupiter Silverware Products Limited is a leading manufacturer of silver picture frames. The
company used a traditional costing system to allocate production overheads to products
using machine hours.

The newly appointed financial controller believes that activity based costing would provide
a better allocation of production overheads to products than the current system. You are
provided with the following total production overheads for the last period recorded by the
cost accounting system.

Utility costs related to machine hours 189,000

Production set up costs 120,000

Cost of ordering materials 18,000

Cost of handling materials 33,000

Details of the three models of products and relevant actual information for the last period
are also provided as follows.

Model 1 Model 2 Model 3

Number of production runs 17 25 18

Number of material orders 20 30 40

Number of material requisitions 30 100 70

Units produced 1,000 2,000 2,500

Machine hours per unit 1 1.5 2

Direct labour hours per unit ($60 per hour) 0.5 hour 1 hour 2 hours

Direct material per unit $10 $12 $15

Required:

Calculate the unit production cost of each of the three products using

a. The traditional absorption costing (10 Marks)