PATHFINDER EXAMINATION. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL EXAMINATION 1 MAY 2010 MANAGEMENT ACCOUNTING

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1 ICAN/101/Q2 EXAMINATION. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL EXAMINATION 1 MAY 2010 MANAGEMENT ACCOUNTING SECTION A: Attempt All Questions Time allowed 3 hours PART 1 MULTIPLE-CHOICE QUESTIONS (20 Marks) Use the information below to answer questions 1 and 2: Economic Order Quantity - 12,000kg Lead Time - 20 to 28 working days Minimum Usage - 400kg per day Maximum Usage - 800kg per day 1. What is the re-order level? A. 23,800kg B. 22,400kg C. 24,000kg D. 32,000kg E. 40,200kg 2. What is the maximum stock level? A. 32,400kg B. 31,200kg C. 18,500kg D. 33,400kg E. 26,400kg 3. How is production fixed overhead cost classified? A. Variable cost B. Fixed cost C. Prime cost PROFESSIONAL EXAMINATION I - MAY

2 D. Conversion cost E. Mixed cost 4. What does labour cost refer to? A. Manufacturing cost incurred on employee to produce units of output B. All costs associated with manufacturing other than the direct labour cost and raw materials cost C. Cash associated with marketing, shipping, warehousing and billing activities D. The sum of direct labour cost and all factory overheads E. The sum of raw materials cost and direct labour cost. 5. Cost behaviour analysis focuses on how costs A. react to changes in profit B. change over time C. react to changes in activity levels D. react to revenue E. react to turnover. 6. A written request to initiate purchases in a firm is A. Purchase Order B. Purchase Requisition C. Receiving Report D. Materials Requisition Form E. Invoice. 7. Where is workers overtime cost charged to? A. Work-in-progress inventory B. Direct labour C. Administrative expense D. Factory overhead E. Cost of goods sold. PROFESSIONAL EXAMINATION I - MAY

3 8. In the determination of factory overhead application rates, what is the numerator in the fraction? A. Actual factory overhead for the next period B. Estimated factory overhead for the next period C. Actual labour hours for next period D. Actual labour hours for current period E. Estimated labour hours for the next period. 9. What are the units of discarded substances having no value called? A. Spoilage B. Defect C. Scrap D. Waste E. Salvage. Use the information below to answer questions 10 and 11: Given that the following data relate to products X and Y: X Y Budgeted output 3,600 units 8,000 units Standard minutes per unit Actual clocked time (6,250 hours) 22,500 units 15,000 units 10. What is the Efficiency Ratio? A. 80% B. 120% C. 64% D. 70% E. 49% 11. What is the Activity Ratio? A. 120% B. 125% C. 288% D. 375% E. 576% PROFESSIONAL EXAMINATION I - MAY

4 12. Which of the following production operations would be most likely employed in a process costing system? A. Aircraft manufacturing B. Chemical production C. Furniture making D. Home building E. Ship building. 13. What are by products? A. They are secondary products having negligible value B. They are present throughout the production process of joint products C. They are common costs D. They are collections of the direct materials, direct labour, and factory overhead costs that serve as the primary base for establishing a sales value for joint products E. They are costs which are generally and jointly incurred. 14. What is a budget which supports the objective of continuous improvement called? A. Activity based budget B. Master budget C. Programme, planning and budget system D. Zero-based budget E. Flexible budget. 15. What is a standard that is based on perfect operating condition? A. Ideal Standard B. Basic Standard C. Attainable Standard D. Projected Standard E. Budgeted Standard. Use the information below to answer questions 16 and 17: Egbino Limited has a special component for its production process. Demand for the component is 100 units monthly at a cost of N10 each. Cost per order is N400, PROFESSIONAL EXAMINATION I - MAY

5 while handling cost of stock is 10% of the cost of each of the components. Reorder period is 20 to 30 days. 16. What is the Reorder level? A. 1,500 B. 1,800 C. 2,500 D. 3,000 E. 3, What is the Reorder quantity? A. 250 B. 650 C. 980 D. 1,200 E. 1, Which of the Direct Material Usage variances combines materials in standard proportion? A. Yield B. Quantity C. Direct labour efficiency D. Direct labour rate E. Mix. 19. What is the later situation during the year which were not foreseen during the last budget preparation? A. Ex-ante B. Ex-post C. Post-ante D. Planning variances E. Operational variances. PROFESSIONAL EXAMINATION I - MAY

6 20. Which cost arises from direct consequence of a decision? A. Direct Labour Cost B. Opportunity Cost C. Differential Cost D. Relevant Cost E. Incremental Cost. PROFESSIONAL EXAMINATION I - MAY

7 PART II SHORT ANSWER QUESTION (20 MARKS) 1. The systematic varying of budget data input to determine the effects of each change on the budget is called 2. The increase in the value of the objective function which will be achieved if one more unit of resources is available is known as.. 3. The system used in ranking projects when there is insufficient funds to invest in profitable investments is.. Use the information below to answer questions 4 and 5: Kokoro Enterprises wish to buy a new sewing machine which is expected to increase productivity. The initial net cash outlay is N15,600. The cashflows associated with the acquisition of the new sewing machine are as follows: Assuming the required rate of return is 10% 4. What is the Net Present Value for this project? 5. What is the Profitability Index? Year Cash Flow from Operation N 1 6, , , , , The THREE objectives of transfer pricing are autonomy, performance evaluation and.. 7. The mathematical inequality or equality that must be satisfied by the variables in a mathematical model is called.. 8. Sale of technically similar products at prices which are not proportional to their marginal cost is called PROFESSIONAL EXAMINATION I - MAY

8 Use the information below to answer questions 9 and 10: The labour cost per unit of a product over the previous 100 days is as follows: Labour Cost Per Unit Number of Days N What is the probability that the labour cost per unit is N6.00? 10. What is the probability that the labour cost per unit is less than N5.00? 11. An analysis where 20% of total quantity of stocks may account for about 80% of its value is called Costs that may be saved by not adopting a new alternative is called The type of cost that will be changed by a decision is called. 14. The formula Y = a + bx represents 15. The type of variance that discloses excess direct wages rate is.. Use the information below to answer questions 16 and 17: You are given the following report: Period Maintenance Cost Machine Hours N 1 3,000 4, ,000 6, ,600 6, ,400 6,800 PROFESSIONAL EXAMINATION I - MAY

9 16. What is the variable maintenance cost per hour? 17. What is the total cost function? 18. The expression do it right in the first instance stands for. 19. Direct labour cost plus manufacturing overhead cost is known as 20. Cost that varies with Level of Activity is known as.. PROFESSIONAL EXAMINATION I - MAY

10 SECTION B - ANSWER THE QUESTION ON CASE STUDY AND ANY OTHER THREE (60 Marks) QUESTION 1 - CASE STUDY Kokanmi Works Limited fabricates palm-kernel crushing machines. It plans to produce and sell 2,000 units during the coming year with the following projected figures: N million Sales Direct materials Direct labour Direct expenses Indirect expenses Another company, which specializes in the fabrication of one of the components of the crushing machine has forwarded a proposal to Kokanmi Works Limited that it could supply each unit at a price of N12,500. Available records reveal that the component in question consumes 20% of materials input, 10% of labour and 35% of direct expenses presently. If the company decides to accept the proposal and thereby reduce its material purchases, it would lose the 20% discount it enjoys from its suppliers, an option which the Managing Director would not even give a thought. On the other hand, the surplus material can be utilized in producing additional 200 units of the machine, which the Marketing Manager is confident of selling even with a 4% increase in selling price, provided he is allowed to incur N500,000 on advertisement. You are required to: (a) Present two separate operating statements based on: (i) the current projection; and (6 Marks) (ii) the revised projections, assuming the proposal is accepted. (6 Marks) PROFESSIONAL EXAMINATION I - MAY

11 (b) Advise the Managing Director of Kokanmi Works Limited on whether to continue to manufacture the component or purchase it. (3 Marks) (Total 15 Marks) QUESTION 2 The following data relates to Owokotan Limited s actual Profit and Loss Account for the year ended 31 December 2009 as prepared by the Cost Accountant. N Direct material price variance 3,240F Direct material usage variance 4,800A Other materials variances 900A Sales price variance 10,800A Sales volume variance 3,000A Direct labour rate variance 8,400A Direct labour idle time variance 12,000A Direct labour efficiency variance 1,500F Variable production overhead: Expenditure variance Efficiency variance 600A 300F Fixed production overhead: Expenditure variance 3,000A Efficiency variance 2,100F Capacity variance 4,200F Budgeted expenditure variance 1,200A PROFESSIONAL EXAMINATION I - MAY

12 The company s budgeted profit before deducting sales and administration expenses is N42,000 while the budgeted expenses for sales and administration cost is N19,200. You are also informed that the Financial Accountant has presented a statement, based on his financial records, showing a loss of N3,360 for the year. You are required as the Management Accountant, to prepare an operating statement reconciling the budgeted profit with the actual result for the period ended 31 December (15 Marks) QUESTION 3 The following information relates to KOROGBE Industries Limited: (a) Budgeted Profit and Loss Accounts for year Jan Feb Mar Apr May June N 000 N 000 N 000 N 000 N 000 N 000 Sales Less: Purchases Gross Profit Less: Operating Expenses: Selling Expenses Distribution Expenses Administration Expenses Net Profit ==== === === === === === (b) Sales for November and December 2008 were N85,000 and N90,000 respectively. (c) 40% of sales would be in cash, 30% each would be paid in 30 and 60 days. (d) Purchases for November and December 2008 were N48,000 and N50,000 respectively. (e) 75% of purchases would be paid for immediately and the balance after two months. PROFESSIONAL EXAMINATION I - MAY

13 (f) Selling expenses are to be settled in two equal instalments after 30 and 60 days. December 2008 expenses are N15,000. (g) (h) Distribution expenses for December 2008 are payable one month in arrears while the administration expenses are payable immediately. Distribution expenses for December 2008 would be N5,000 while selling expenses would be N8,000 for November 2008 and N9,000 for December (i) Balance in the bank on 31 December 2008 is expected to be N36,000 overdrawn. (j) The company intends to pay for the following: (i) Company tax of N12,000 in February, 2009 (ii) A new generator costing N6,500 in March 2009 (iii) Dividends of N20,000 in April 2009 (k) Some unserviceable parts would be sold in January 2009 for N8,000. You are required to prepare the Cash Budget for the first six months of 2009 for Korogbe Industries Limited. (15 Marks) QUESTION 4 The budget of Sunrem Hospital Limited for the year 2008 is as follows: No of rooms available per day 200 No. of days per month 25 Rate per room per day N625 Rate charged for meals per day N375 Cost composition per month: Variable Fixed N 000 N 000 Direct materials Direct salaries Guest service overhead Administrative overhead PROFESSIONAL EXAMINATION I - MAY

14 Assuming that the company is operating at full capacity, you are required to calculate: (a) (i) The contribution per year in sales value. (ii) The contribution sales ratio. (3 Marks) (3 Marks) (b) The break-even point in sales value if: QUESTION 5 (i) Direct materials cost increases by 20% per month. (3 Marks) (ii) Fixed cost increases by 10% per day. (3 Marks) (iii) Rate charged per room increases by N50 per day. (3 Marks) (Total 15 Marks) Using the following probability distribution for the times between arrivals of luxury buses at a parking lot: You are required to: TIME (mins) PROBABILITY (a) Construct the cumulative probability distribution and determine a random number assignment suitable for simulation. (3½Marks) (b) Simulate the arrival of 20 cars and calculate the estimated mean time between arrivals and the standard deviation. (11½Marks) (Total 15 Marks) QUESTION 6 (a) Explain what is meant by Gap Analysis. (3 Marks) (b) Caco, Orange and Kim operate in the same market. At present, the market share of Caco is 50%; Orange 30% and Kim 20%. Past experience shows that Caco has a retention capability of 70% of its customers while it gains 15% PROFESSIONAL EXAMINATION I - MAY

15 and 10% from Orange and Kim respectively. Also, Orange retains 65% of its initial customers, and gains 20% and 22% from Caco and Kim respectively. Kim retains 68% of its customers and gains 10% and 20% from Caco and Orange respectively. You are required to determine: (i) The matrix for the initial market share. (3 Marks) (ii) The matrix for the transitional probability. (3 Marks) (iii) The market share for the companies for the next one year. (6 Marks) (Total 15 Marks) PROFESSIONAL EXAMINATION I - MAY

16 ICAN/102/Q/2 EXAMINATION NO... THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL EXAMINATION I NOVEMBER 2010 MANAGEMENT ACCOUNTING Time allowed 3 hours SECTION A: Attempt All Questions PART I : MULTIPLE-CHOICE QUESTIONS (20 Marks) 1. Which of the following represents a decision that rests upon the judgement of managers because there is no formal mechanism for predicting likely outcomes? A. Symbolic Decision B. Executive Decision C. Managerial Decision D. Non-Programmed Decision E. Programmed Decision 2. Which of the following techniques represents the period usually expressed in years, which makes the cash flows from a capital investments appraisal of project to equal the initial outflow? A. Internal Rate of Return B. Accounting Rate of Return C. Pay Back Period D. Net Present Value E. Profitability Index 3. Which costs and revenue, appropriate to a specific management decision, that are represented by future cash flows whose magnitude will vary depending upon the outcome of management decision? A. Relevant Cost B. Differential Cost C. Marginal Cost D. Incremental Cost E. Opportunity Cost PROFESSIONAL EXAMINATION I NOVEMBER

17 Use the information below to answer Questions 4 and 5 Bijabi Limited has determined its activity level and is now budgeting for its costs for the quarter ended 31 May, It has made the following predictions: Variable Costs Probability Fixed Costs Probability N240, N175, N305, N182, N501, N201, What is the Expected Value of the Total Variable Costs? A. N351,500 B. N358,500 C. N359,600 D. N360,500 E. N360, What is the Expected Value of the Total Fixed Cost? A. N187,500 B. N188,800 C. N201,500 D. N281,500 E. N361, A systematic interdisciplinary examination of factors affecting the cost of a product or service, in order to devise means of achieving the specified purpose most economically at the required standard of quality or reliability is A. value engineering. B. value analysis. C. cost reduction. D. cost objective. E. cost implication. PROFESSIONAL EXAMINATION I NOVEMBER

18 7. Which of the following quick ratios is considered acceptable as a general rule? A. 4 to 1 B. 3 to 1 C. 2 to 1 D. 1 to 1 E. 1 to 3 8. What is capital budgeting? A. A budget for long term expenditure B. A budget for obtaining investments of capital in the firm. C. A budget for investments of short-term funds in the capital markets D. Budget for business capital E. Budget for business formation 9. Which of the following methods uses income instead of cash flow in investment appraisal? A. Payback Period B. Accounting Rate of Return C. Internal Rate of Return D. Net Present Value E. Profitability Index Use the following data to answer Questions 10 and 11. Unit selling price N500 Variable cost per unit N260 Fixed cost N52,000 Tax rate 40% 10. What is the break-even point in units? A. 214 units B. 215 units C. 217 units D. 218 units E. 250 units PROFESSIONAL EXAMINATION I NOVEMBER

19 11. How many units should be produced to achieve a target income of N12,000 after tax? A. 300 units B. 320 units C. 370 units D. 410 units E. 420 units 12. Costs incurred if products or services fail to meet requirements after delivery to customer are called A. appraisal costs. B. internal failure costs. C. running costs. D. prevention costs. E. external failure costs. 13. Adamu Limited sells a product which has N8 per unit as variable cost. Sales demand at N14 current rate, is 6,000 units. It is estimated by marketers that sales volume would fall by 200 units for each addition of 25k to the sales price. What is the optimal price that maximizes contribution? A. N14.25 B. N14.50 C. N14.75 D. N15.25 E. N Using the data in Question13, at what level of sales will contribution be maximized? A. 5,000 units B. 5,200 units C. 5,400 units D. 5,600 units E. 5,800 units PROFESSIONAL EXAMINATION I NOVEMBER

20 15. Budgeted hours worked in a factory for a month was 220. Actual hours 200 and Standard hour produced 210. What is the efficiency ratio? A. 91% B. 95% C. 97% D. 100% E. 105% 16. Using the data in Question 15, what is the production volume ratio? A. 91% B. 95% C. 97% D. 100% E. 105% 17. Residue from manufacturing operations that has measurable but relatively minor recovery value is A. obsolete. B. scrap. C. defective. D. spoilage. E. expired. 18. A product has a standard direct material cost of N10 (5 kg of material M at N2 per kg). During April 2009, 600kg of M were purchased at N1,140, 100 units of product A were manufactured using 520kg of material M. What is direct material price variance? A. N40 (F) B. N40 (A) C. N50 (F) D. N50 (A) E. N60 (F) 19. Using the details in Question 18, what is direct material usage variance? A. 40 (F) B. 40 (A) C. 50 (F) D. 50 (A) E. 60 (F) PROFESSIONAL EXAMINATION I NOVEMBER

21 20. A budget that perpetually adds a month in the future as the month just ended is dropped is called A. continuous budget. B. static budget. C. current budget. D. fixed budget E. incremental budget. PART II: SHORT ANSWER QUESTIONS (20 MARKS) 1. A budget that adjusts for changes in sales volume and other cost drivers is known as 2. The difference between the standard yield of the actual material input and the actual yield, both valued at standard material cost is known as.. 3. The difference between the fixed overhead recovered on the budgeted hours and the fixed overhead recovered on the actual hours worked is called.. 4. If initial cash outflow is N100,000, yearly constant cash inflow is N20,000 while the working life is 7 years and cost of capital is 15%, determine the Net Present Value. 5. The ratio of the present value of series of future cash benefits at the required rate of return to the present value of the cash outflows is known as. 6. The establishment, through data gathering, of targets and comparators, through which use relative levels of performance, and particularly, areas of underperformance can be identified, is called 7. An emerging discipline that combines elements of law and computer science to collect and analyze data as evidence in a court of law is called 8. The sets of standards dealing with human conduct in relation to what is morally good and bad is.. PROFESSIONAL EXAMINATION I NOVEMBER

22 Use the following information to answer Questions 9 and 10 Carbon-Copy Company Ltd sells a product for N10. Budgeted sales for the first quarter of year 2010 are given below: Budgeted sales N January 400,000 February 600,000 March 700,000 The company collects 70% in the month of sales and 25% in the following month. Five per cent (5%) of all sales are uncollectible and written off. 9. Calculate the budgeted cash receipts for February. 10. Determine the budgeted cash receipts in March. 11. A sub-unit in an organization whose manager is held accountable for specified sub-unit activities is called When preparing a production budget, the quantity to be produced can be determined by the model 13. The result of dividing the total direct labour cost by the total number of units produced is A period when machines and accessory equipment are made ready before the commencement of operation is called. 15. The discount rate that makes the net present value of a project equal to zero is. 16. When an organization has idle capacity, it resorts to low pricing. This method of pricing is called Company X makes and sells 100 units of a product each month. The prime cost per unit is N6.00 and unit selling price is N10. Production overhead cost N200 per week and other overhead N150 per week. Determine the production cost of sales using absorption costing method. 18. Use the data in Question 17 and variable costing method to determine the production cost of sales. PROFESSIONAL EXAMINATION I NOVEMBER

23 19. The measure of the scatter of the actual observation about the regression line is termed. 20. Salaw Limited budgets fixed cost at N40,000. The variable cost of its single product is N4 and capital employed is N100,000. The company wants to earn a return on capital employed of 20% and estimated sale of 10,000 units in the year. What is the selling price per unit? SECTION B: ATTEMPT QUESTION 1 AND ANY OTHER THREE (60 MARKS) QUESTION 1 CASE STUDY Fountain Limited, a car hire firm, is considering its future cash flows. The Directors of the company are interested in the period from the end of January 2010 to the end of In particular, they wish to decide on the optimal replacement cycle for the fleet of thirty hire cars. On 31 January 2010, the company purchased its existing fleet at a cost of N300,000,000. The vehicles are to be depreciated in the accounts over a three-year life, on a straight line basis. The resale value of a one-year old car, of the type used in the fleet, is at present N7,000,000. Inflation is at the rate of 10% per annum, and it is thought that it will continue at this rate in the foreseable future. New car prices will increase in line with inflation but second hand values are expected to remain at the present level for a number of years. The resale value of a two-year old fleet car is at present N4,000,000 and the scrap value of a three-year old car is N500,000. The revenue from operating the fleet is expected to be N250,000,000 in 2010.This annual revenue is expected to increase at a rate of 10% per annum irrespective of the age of vehicles. The operating and maintenance costs for 2010 are estimated to be: N70,000,000 for cars in the first year of their life N100,000,000 for cars in the second year of their life N160, 000,000 for cars in the third year of their life The operating and maintenance costs are expected to increase at the rate of 10% per annum in line with inflation. The cars are not worth keeping for longer than three years. The company s cost of capital is 15% PROFESSIONAL EXAMINATION I NOVEMBER

24 You are required to: Advise the company on the optimal replacement policy for its fleet of cars for the periods 1 February, 2010 to 31 December, Assume that the cash flows relating to revenue and operating costs arise on the last day of the respective years. (15 Marks) QUESTION 2 POLYTECH Aluminum Manufacturing Company has three autonomous divisions: Cutting, Filling and Finishing. Cutting division is responsible for manufacturing aluminum flat sheet which becomes the raw materials for Filling division. The Filling division makes aluminum windows and doors. Finishing division is responsible for marketing the entire company s final products. The company s management feels that the divisions should be evaluated as separate profit centres and that each centre should be credited with an equitable share of contribution. The company s transfer pricing stipulates that proportionate efforts are to be measured by the ratio of the division s variable cost to the total variable cost of the centres. Budgeted sales for 2012 is N25,000,000 with total variable costs of N15,000,000 for the centres. The details of the variable and period costs by divisions are given below: Cutting Filling Finishing N N N Variable costs 4,500,000 3,000,000 7,500,000 Period costs 2,500,000 1,500,000 2,000,000 Total 7,000,000 4,500,000 9,500,000 Required: a) Determine budgeted transfer values using the agreed transfer pricing method (5marks) b) Filling division is considering a cost saving device which will reduce its variable cost by 20%. What effect will this have on other costs or budgeted sales. (5marks) c) Compare the divisional contributions and profits in (a) and (b) above and comment briefly on the possible divisional managerial attitudes to the changes in divisional performances. (5marks) (Total 15 marks) PROFESSIONAL EXAMINATION I NOVEMBER

25 QUESTION 3 The Directors of No Farmer, No Nation Agro-allied Company Limited are considering undertaking the manufacturing of a new product. The company s current cost of capital is 20% in money terms. Construction of the plant required to produce the new product would take one year; that is, production would commence on 1 January The plant would cost N500,000 of which N300,000 is payable immediately and N200,000 on 31 December The construction cost is fixed by contract. 100,000 units of the new product would be produced and sold each year from 1 January 2012 until 31 December Revenues and costs expected, expressed in terms of 1 January 2010 price level, are as follow: Per unit Probability N Selling price Variable cost (excluding labour) Labour Additional overhead costs are N60,000 per annum. Selling price, variable costs (excluding labour) and additional overhead costs are expected to increase in line with the general price index. For a number of years, this index has increased at the annual compound rate of 10% and it is generally expected to continue increasing at the same rate in the future. Labour costs are expected to increase in line with the wage rate index, which has been increasing at an annual compound rate of 20%. The same rate increase is expected in the future. All revenues and costs would be received or paid on the last day of the year in which they arise. Ignore taxation. You are required to: Advise the Directors of No Farmer, No Nation Agro-allied Company Limited whether the manufacture of the new product is worthwhile. (15marks) PROFESSIONAL EXAMINATION I NOVEMBER

26 QUESTION 4 You have just resumed for duty in your office as the Management Accountant after attending a training course for one week at the Elkana Hotel, Kano. The theme of the training was New Contemporary Issues Bothering on Information and Communication Technology and Benchmarking. Write a report to your Managing Director who had been against your attending the course, with focus on: (a) The challenges computers provide to the practice of management accounting (7marks) (b) The steps involved in ensuring a successful implementation of benchmarking in organization. (8 marks) (Total 15 marks) QUESTION 5 ALL WELL LIMITED is experiencing shortage of raw materials as a result of the economic recession in the country. The directors are considering whether or not to close down until the recession is over. A flexible budget has been compiled, as follows: Fixed Costs Production Capacity 40% 60% 80% 100% Close down Normal T o t a l C o s t s N N N N N N Factory Overhead 6,000 8,000 10,000 11,000 12,000 3,000 Admin Overhead 4,000 6,000 6,500 7,000 7,500 8,000 Selling and Distribution 4,000 6,000 7,000 8,000 9,000 10,000 Miscellaneous 1,000 1,000 1,500 2,000 2,500 3,000 Direct Labour - 10,000 15,000 20,000 25,000 Direct Material - 12,000 18,000 24,000 32,000 15,000 21,000 47,000 61,000 75,000 91,000 PROFESSIONAL EXAMINATION I NOVEMBER

27 Additional Information: (a) (b) (c) Present sales at 50% capacity are estimated at N30,000 per annum Estimated costs of closing down are N4,500. In addition, maintenance of plant and machinery is expected to amount to N800 per annum. Cost of re-opening after closing down would be approximately N2,000 for overhauling the machines and N1,400 for training of personnel. (d) Investigation made by a market research unit has indicated that sales should take an upward swing to around 70% capacity at prices which will produce revenue of N100,000 approximately in twelve months time. You are required to present the information in a manner which will show what decision to be taken. (15marks) QUESTION 6 Amina, Yomi & Co, a medium-sized firm of architects, is about to absorb Chika, Tunde & Co, a similar sized firm. They have engaged you as Management Accountant. Part of your duties will be to review the cost and management accounting functions of the combined practice and to recruit an assistant. You have an appointment with the Principal Partner to discuss these issues. Required: Write a memo to the Principal Partner on the following: (a) The functions of cost and management accounting. (6 marks) (b) The personal attributes you would expect the Assistant Management Accountant to possess. (9 marks) (Total 15 Marks) PROFESSIONAL EXAMINATION I NOVEMBER

28 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL EXAMINATION I MAY 2011 MANAGEMENT ACCOUNTING Time allowed 3 hours SECTION A: Attempt All Questions PART I: MULTIPLE-CHOICE QUESTIONS (20 Marks) 1. Management Accounting is concerned with the provision and interpretation of information which assists management in all BUT ONE of the following: A. Planning B. Controlling C. Storekeeping D. Decision making E. Appraising performance 2. Where there are no opening and closing stocks, the net profit obtained under Marginal Costing and net profit under Absorption Costing will be A. marginal. B. duplicated. C. equal. D. doubled. E. halved. Use the data below to answer questions 3 and 4. Jejelaye Ltd sells its product at a unit price of N20 while the unit variable cost is N12. Additional details: Sales Profit Units N N Month 1 600,000 40,000 30,000 Month 2 800, ,000 40,000 Month 3 1,000, ,000 50, The P/V ratio is A. 30%. B. 40%. C. 50%. D. 60%.

29 E. 80%. 4. The profit on sales of N1,400,000 is A. (N360,000) B. (N240,000) C. N240,000 D. N340,000 E. N360, If Average usage = 200 units per day Minimum usage = 120 units per day Maximum usage = 260 units per day Lead time = days EOQ = 8,000 units The maximum stock level is A. 8,260 units B. 10,400 units C. 10,660 units D. 12,360 units E. 14,760 units 6. Corporate Planning consists of the following stages EXCEPT the A. assessment stage. B. objective stage. C. appraisal stage. D. evaluation stage. E. monitoring stage. PROFESSIONAL EXAMINATION I MAY

30 7. If there is no external market for a product component, the best transfer price is A. the open market price. B. a negotiated price. C. full cost. D. full cost plus mark up. E. variable cost. 8. A cost centre in which costs are clearly specified but outcomes are NOT directly related to inputs is a/an A. centralised cost centre. B. discretionary cost centre. C. investment centre. D. standard cost centre. E. profit centre. Use the data below to answer questions 9 and 10. MCD Ltd is planning to install a computer integrated manufacturing process. Information on three acceptable models is presented below. The Company has N400,000 available and the cost of capital is 20%. Cash flow is as given below: Year O 1 3 Projects N N (PV of Cash Inflows) A (400,000) 812,000 B (200,000) 503,800 C (200,000) 484, The best appraisal technique in this situation is the A. Internal Rate of Return (IRR). B. Pay Back Period (PBP. C. Net Present Value (NPV). D. Profitability Index (PI). E. Accounting Rate of Return (ARR). 10. The project(s) to be accepted is/are A. A and B. B. B and C. PROFESSIONAL EXAMINATION I MAY

31 C. A only. D. B only. E. C only. 11. Which of the following serves as cost unit in a computer hardware manufacturing company? A. Bed occupied B. Key board C. Magazine D. Meal E. Courses provided 12. The cost of VDU in a personal computer can be classified as a/an..in a company that bottles soft drinks. A. indirect material B. indirect labour C. indirect expenses D. direct material E. direct expenses 13. Assumptions underlying CVP relationship EXCLUDE A. constant fixed costs over the range of activity. B. single Product Analysis. C. volume is the only independent variable. D significant change in stock level. E linearity of cost and revenue functions. 14. Direct labour efficiency variance is calculated as A B C D E (Actual Hour minus Standard Rate) Standard Rate. (Standard Hour minus Actual Hour) Standard Rate. (Standard Rate minus Actual Rate) Standard Hour. (Standard Rate minus Actual Rate) Actual Hour. (Standard Hour minus Actual Hour) Actual Rate. Use the following information about the costs and activity levels of Alegongo Plastic Limited to answer questions 15 and 16. Activity Total Cost 5,000 N36,500 8,210 N52,000 PROFESSIONAL EXAMINATION I MAY

32 15. By using the high-low method, what is the total cost if 7200 units are to be produced? A. N41,620 B. N45,603 C. N47,126 D. N52,560 E. N59, What is the fixed cost? A. N7,750 B. N8,000 C. N10,000 D. N11,325 E. N12, The coefficient of determination r 2 depicting the extent of variation in the dependant variable Y is This means that A. 54% of the variation is explained by the linear relationship. B. 46% of the variation is explained by the linear relationship. C. 46% of the variation is unexplained by the linear relationship. D. 56% of the variation is explained by the linear relationship. E. 70% of the variation is explained by the linear relationship. 18. Which of the following is NOT a merit of payback period as a technique of project evaluation? A. Very simple to use. B. Emphasizes speedy project returns. C. Considers true value of money. D. Very easy to understand. E. Commonly found in practice. 19. Which of the following enables one to reach the extreme ends of an excel sheet? A. Ctrl + Side arrow B. Alt + Side arrow C. Shift + Side arrow D. Ctrl + Tab E. Tab + Side arrow 20. A company uses an overhead absorption rate of N2.50 per machine hour based on 27,500 budgeted machine hours in the period. During the same period, actual total overhead expenditure amounted to N120,000 and 50,000 machine hours. PROFESSIONAL EXAMINATION I MAY

33 By how much was total overhead under or over-absorbed for the period? A. Under absorbed N3,250 B. Over absorbed N3,250 C. Under absorbed N5,000 D. Over absorbed N5,000 E. Under absorbed N7,000 PART II: SHORT ANSWER QUESTIONS (20 Marks) Use the following data to answer questions 1 and 2 Kores Ltd has N100,000 to invest in two projects A and B, each requiring N100,000. The table below shows the status of each project. Market state I II III Probability of market state Rate of return: Project A 20% 20% 1 2 / 3 % Rate of return: Project B -2% 15% 27% Standard deviation: Project A 22% Standard deviation: project B 15% 1. What is the expected return of Project A?.. 2. Which project is to be preferred? 3. Cost of capital is also referred to as. 4. Linear programming consists of TWO important elements which are: objective function and. 5. The variable missing from this economic order quantity formula is EOQ = 6. A measure of an investment centre performance after deducting a notional interest cost based on the value of the investment in the division is known as.. 7. Throughput time consists of value added time and. 8. A recharge card firm has the following details: selling price per unit N475; variable production cost per unit N375, fixed overhead per unit is N50 while total fixed cost is PROFESSIONAL EXAMINATION I MAY

34 N2.9 million. Determine the number of units that must be produced to realize a profit of N600, The following data relates to ABM Ltd, a computer parts manufacturing company. Budget Budget Under Outside Control Control Probability Cost of investigation N4,800 Benefit of investigating N20,000 The expected value of the decision to investigate is The sensitivity of a project to the life of the project is computed using the formular 11. Accountants, work study engineers and other specialists provide technical advice and information, but do not set the standards. It is the responsibility of..managers and their superiors. 12. The process of compelling events to conform to plan is called. 13. The method of costing, associated with JIT production systems, which applies cost to the output of a process is known as..accounting. 14. A system that uses computer aided manufacturing together with robots and computer controlled machines is called. 15. The accounting and other reports used by management in controlling an organization are called 16. Costs that cannot be identified specifically and exclusively are A situation where two or more independent variables are highly correlated with each other is called 18. The sensitivity of constituent factors of the profit to poor operational conditions is. 19. The sequence of functions that add value to the company s product or service is called 20. A decision model that calculates the optimum quantity of inventory to order, under a restrictive set of assumptions, is known as PROFESSIONAL EXAMINATION I MAY

35 SECTION B: ATTEMPT QUESTION 1 AND ANY OTHER THREE (60 MARKS) QUESTION 1 CASE STUDY Kadeleto Nigeria Limited manufactures and sells three products A, B and C. The company is recently considering the introduction of an activity-based costing approach to facilitate efficient cost allocation, as well as achieve improvement in cost accuracy and reduction. The new approach will use two direct cost methods of direct materials and direct labour as well as five indirect cost pools which represent the five activity areas. The Prior Product Costing System uses the two direct Cost Categories and a single indirect cost pool where overheads are allocated using direct labour hours. The following information is provided for the next period. Product Product Product Total A B C Production and Sales (Units) 40,000 25,000 10,000 Direct Material Cost N25 N20 N18 N1,680,000 Direct Labour Hours ,000 Machine Hours ,000 Number of Production Runs Number of Component receipts PROFESSIONAL EXAMINATION I MAY

36 Number of production orders Direct labour is paid at N8 per hour. Overhead Costs in the period are expected to be as follows: N Cost Driver Set up 140,000 Production Runs Machine 900,000 Machine Hours Goods Inwards 280,000 Company Receipt Packaging 200,000 Production Order Engineering 180,000 Production Order N1,700,000 Required: (a) Calculate the unit costs of each product using: (i) Prior product costing approach (Traditional Cost) (ii) The ABC method (8 Marks) (b) The company considered the pricing of the three products where sales prices have remained uncertain as shown in the table below: Product A Product B Product C Prob. N Prob. N Prob. N Compute the expected sales prices for the three products and the profit or loss that will arise from the implementation of the ABC Costing Approach and the traditional costing method. (5 Marks) (c) State reasons why Activity -based Costing approach may be preferred to traditional absorption costing approach in modern manufacturing environment. (2 Marks) (Total 15 Marks) QUESTION 2 Hadonish Nigeria Ltd is a computer manufacturing company. It manufactures three parts L, M, and N. These are made from silicon materials A, B, C and D in four departments 1,2,3,4. The following information is supplied: Materials Used in Dept. Cost of Materials Units per Product Per Unit L M N A 1 N4-3 2 B 2 N C 3 N PROFESSIONAL EXAMINATION I MAY

37 D 4 N Normal rejection at the time of final inspection 10% 10% 10% Budgeted Details: i) Sales in N000 s 3, ,700 Sales per Unit ii) Finished Goods (Units at Start) Finished Goods (Units at end) iii) Raw materials inventory in units A B C D Opening Closing You are required to prepare for the year: a) The production budget (5 Marks) b) The production cost budget for direct materials (5 Marks) c) The purchase budget (5 Marks) (Total 15 Marks) QUESTION 3 The Production Manager of your organisation has approached you for some expert advice on project X, a one-off order from overseas for which he intends to tender. The costs associated with the project are as follow: N Material A 40,000 Material B 80,000 Direct labour 60,000 Supervision 20,000 Overhead 120, ,000 You ascertained the following: (i) Material A is in stock and the above was the cost. There is now no other use for material A, other than the above project, within the factory and it would cost N17,500 to dispose of. Material B would have to be ordered at the cost shown above. (ii) Direct labour costs of N60, 000 relate to workers that will be transferred to this project from another project. Extra labour will need to be recruited to the other project at a cost of N70,000. (iii) Supervision cost has been charged to the project on the basis of 33 1/3% of labour costs and will be carried out by existing staff with their normal duties. PROFESSIONAL EXAMINATION I MAY

38 (iv) (v) (vi) Overheads have been charged to the project at the rate of 200% on direct labour. The company is currently operating at the point above break-even point. The project will need the utilization of machinery that will have no other use to the company after the project has finished. The machinery will have to be purchased at a cost of N100,000 and then disposed of for N52,500 at the end of the project. The Production Manager tells you that the overseas customer is prepared to pay up to a maximum of N300,000 for the project and a competitor is prepared to accept the order at that price. He also informs you the minimum that he can charge is N400,000 as the above costs shows N320,000, and this does not take into consideration the cost of the machine and profit to be taken on the project. Required: (a) (b) Cost the project for the Production Manager, clearly stating how you have arrived at your figures and giving reasons for the exclusion of other figures. (10 Marks) Write a report to the Production Manager stating whether the organisation should tender for the project, stating the reasons why and the price and bearing in mind that the competitor is prepared to undertake the project for N300,000. (Total 15 Marks) QUESTION 4 You are the Financial Controller of Adelande Limited, a medium-sized engineering company. This company was family-owned and managed for many years but has recently been acquired by a large group, Fortune Plc, to become its Engineering Division. The first meeting of the management board with the newly appointed Divisional Managing Director has not gone well. He commented on the results of the division: Sales and profits were well below budget for the month and cumulatively for the year, and the forecast for the rest of the year suggested no improvement. Working capital was well over budget. Even if budget were achieved the return on capital employed was well below group standards He proposed a Total Quality Management (TQM) programme to change attitudes and improve results. PROFESSIONAL EXAMINATION I MAY

39 Required: (a) (b) Explain the critical success factors for the implementation of a programme of Total Quality Management. Emphasize the factors that are crucial in changing attitudes from those quoted. (15 Marks) QUESTION 5 Quakupricy Nigeria Limited is a company which produces a single product on an assembly line. The Budget Personnel has been availed with the following information which represents the extremes of high and low volumes of production which the company will achieve over a three month period. Production of Production of 40,000 units 80,000 units N N Direct Materials 800,000 1,600,000 Indirect Materials 120, ,000 Direct Labour 500,000 1,000,000 Power 180, ,000 Repairs 200, ,000 Supervision 200, ,000 Rent, Insurance and Rates 90,000 90,000 Additional Information: (i) Supervision is a step function. To this end, one supervisor is employed for all production levels up to and including 50,000 units. For higher levels of production, an assistant supervisor whose remunerations is N160,000 will be added. (ii) On power, a minimum charge is payable on all production up to and including 60,000 units. For production above this level, there is an additional variable charge based on the power consumed. Required: (a) Prepare a set of flexible budgets for presentation to the Production Director to cover the following levels of production over a period of three months: i) 40,000 Units ii) 50,000 Units PROFESSIONAL EXAMINATION I MAY

40 iii) 60,000 Units iv) 70,000 Units v) 80,000 Units (9 Marks) (b) During the three months July to September 2010, 50,000 units were produced. Actual costs incurred during this period were as follows: N Direct Materials 1,100,000 Indirect Materials 140,000 Direct Labour 700,000 Power 180,000 Repairs 300,000 Supervision 200,000 Rent, insurance and Rates 80,000 Required: (i) Prepare a budget report for presentation to the Production Director displaying all relevant variances. (ii) For each variance, suggest any further investigations which might be required and necessary actions needed to be taken by the Director. (6 Marks) (Total 15 Marks) QUESTION 6 (a) (b) Explain each of the following concepts: i. Back Flush Costing ii. Computer Integrated Manufacturing (CIM) iii. Just- in- time Purchasing iv. Material Requirement Planning v. Time Driver (10 Marks) Adelagun International produces and sells products A and B which require: Material Labour Machine Time Contribution KG HRS HRS N A B Total Available 5000kg 2500Hrs 3200Hrs You are required to: i. Formulate the linear programming problem ii. Formulate the dual problem to (i) above (5 Marks) (Total 15 Marks) PROFESSIONAL EXAMINATION I MAY

41 PROFESSIONAL EXAMINATION I MAY

42 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL EXAMINATION I NOVEMBER 2011 MANAGEMENT ACCOUNTING Time allowed 3 hours SECTION A: Attempt All Questions PART I: MULTIPLE-CHOICE QUESTIONS (20 Marks) Write only the alphabet (A, B, C, D or E) that corresponds to the correct option in each of the following questions. 1. The process of determining the price at which goods are transferred from one profit centre to another within the same company is A. Mark-up pricing B. Market pricing C. Transfer pricing D. Arms length pricing E. Pro-rata pricing 2. A manufacturing company s cost driver excludes A. Number of orders placed B. Number of set ups C. Number of inspections D. Number of hospital beds occupied E. Weight of materials 3. Which of the following costs can be classified as appraisal cost? A. Scrap B. Rework C. Material inspection D. Product warranty E. Quality training PROFESSIONAL EXAMINATION I NOVEMBER

43 4. A radical redesign to achieve dramatic improvements in contemporary measures of performance such as cost, quality service and speed in an organisation is called A. Process re-engineering B. Business re-engineering C. Activity based management D. Business process re-engineering E. Process redesign 5. An examination of every operation required in producing certain products with the existing production facilities to increase productivity is called A. Method study B. Work study C. Work measurement D. Method measurement E. Operation study 6. Costs that may be shifted to the future with little or no effect on the efficiency of current operation is called A. Avoidable cost B. Joint cost C. Out of pocket cost D. Postponable cost E. Sunk cost. 7. The best estimates that represent several possible outcomes for a particular event is A. Perfect result B. Predictive preposition C. Certainty equivalent D. Normal estimation E. Perfect estimation 8. Violation of the assumption of constant variance is A. Hamoscedasticity B. Hateroscedasticity C. Hemoscedasticity D. Homoscedasticity E. Heteroscedasticity PROFESSIONAL EXAMINATION I NOVEMBER

44 9. ONE of the following is NOT a correct method of appraising investment A. Modified internal Rate of Return B. Profitability Index C. Net Present Value D. Internal Rate of Return E. Sensitivity Analysis 10. A company s fixed overhead per annum is N100,000, variable expenses is N10 per unit and the selling price is N15 per unit. What is its Break-Even Point? A. 15,000 units B. 17,500 units C. 20,000 units D. 22,500 units E. 25,000 units 11. An investment centre s operating profit after tax minus the products of investment centre s total assets less investment centre s current liabilities and weighted average cost of capital after tax is A. Net Profit B. Investment Income C. Residual Income D. Economic Value Added E. Value Added 12. From the following information relating to Chika Ltd, you are required to determine the Residual Income Profit before depreciation N600,000 Depreciation N100,000 Minimum rate of 20% return Investment cost N2,000,000 A. N100,000 B. N120,000 C. N125,000 D. N130,000 E. N140,000 PROFESSIONAL EXAMINATION I NOVEMBER