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cpa 3 financial reporting 1 revision 1

By Omosa


QUESTIONS NUMBER ONE A processing company, Jamaa Co. Ltd., is extremely busy. It has increased its output and sales from 12,900 kg in 1st quarter of the year to 17,300 kg in the 2nd quarter. Although demand is still rising, it cannot increase its output more than an additional 5% from its existing labour force, which is now at its maximum. Data for its four products in 2nd quarter were: Product Product Product Product P Q R S Output (Kg) 4560 6960 3480 2300 Selling price (Sh. Per kg) 162 116.40 99.20 136.80 Costs (Sh. Per kg) Direct labour @ Sh.60 per hour) 19.60 13.00 9.90 17.00 Direct materials 65.20 49.00 41.00 54.20 Direct packaging 8.40 7.40 5.60 7.00 Fixed overhead (Absorbed on basis of direct labour cost) 39.20 26.00 19.80 34.00 132.40 95.40 76.30 112.20 The Kimbo Company has offered to supply 2000 kg of product Q at a delivered price of 90% of Jamaa.s Co. Ltd. Selling price.Jamaa Co. Ltd., will then be able to produce extra of product P instead of product Q to the plant.s total capacity. Required: a) State with supporting calculations, whether Jamaa Co. Ltd should accept the Kimbo Company.s offer. (15 marks) b) Which would be the most profitable combination of subcontracting 2000kg of one product at a price of 90% of its selling price and producing extra quantities of another product up to the plant total capacity? Assume that the market can absorb the extra output. (5 marks) (Total: 20 marks) NUMBER TWO ¡°Control theory offers valuable insights into the design and operation of management accounting information systems, but only under circumstances where an organization.s environment is stable and predictable and outcomes are clearly measurable.¡± Required: Comment on the relevance and validity of this statement within the analysis or established control theory systems within a business organization. (Total: 20 marks) NUMBER THREE a) The M division of KLM Ltd., produces a component which it sells externally, and can also be transferred to other divisions within the organization. The division has set a performance target for the coming financial year of residual income of Shs. 5,000,000. The following budgeted information relating to M division has been prepared for the coming financial year. 1. Maximum production/sales capacity 800,000 units. 2. Sales to external customers: 500,000 units at Sh.37. 3. Variable cost per component Sh.25. 4. Fixed costs directly attributable to the division Sh.1,400,000. 5. Capital employed: Sh.20,000,000 with cost of capital of 13% The M division of KLM Ltd has asked M division to quote a transfer price for units of the component. Required: i Calculate the transfer price per component which M division should quote to K division so that its residual income target is achieved. (6 marks) ii Explain why the transfer price calculated in (i) above may lead to sub-optimal decision making from the point of view of KLM Ltd taken as a whole. (4 marks) b) A manufacturer produces and sells two products, X and Y. The unit variable cost is sh.12 and sh.8 for X and Y respectively. A review of selling prices is in progress and it has been estimated that, for each product and increase in the selling price would result in a fall in demand of Sh.500 units per every Sh.1 increase in price and similarly a decrease of Sh.1 in price would result in an increase in demand of 500 units. The current sales prices and sales demand are:- Price (Sh.) Demand (Units) A 30 15,000 B 58 21,000 Required: Calculate the profit-maximizing price for reach product. (10 marks) NUMBER FOUR Kimau Ltd. Operates a conventional stock control system based on re-order levels and Economic Order Quantities (EOQ). The various control levels were set originally based on estimates which did not allow for any uncertainty and this has caused difficulties because, in practice, lead times, demands and other factors to vary. As part of a review of the system, typical stock item, part no. X 206, has been studied in detail as follows: Data for Part No. X 206 Lead times Probability Demand Probability (Days) (units) 15 0.2 5000 0.4 20 0.5 7000 0.6 25 0.3 The company works for 360 days per year and it costs Sh.1,000 to place an order. The holding cost is estimated at Sh.0.025 for storage plus 10% opportunity cost of capital. Each unit is purchased at Sh.2. The re-order level for this part is currently 150,000 units and it can be assumed that the demands would apply for the whole of the appropriate lead-time. Required: a) Calculate the level of buffer stock implicit in a re-order level of 150,000 units. (5 marks) b) Calculate the probability of stock-outs. (2 marks) c) Calculate the expected annual stock-outs in units. (4 marks) d) Compute the stock-out costs per unit at which it would be worthwhile raising the re-order level to 175,000 units. (3 marks) e) Discuss the possible alternatives to a re-order level EOQ inventory system and their advantages and disadvantages. (6 marks) (Total: 20 marks) NUMBER FIVE Ngyma Ltd. (NGL) is trying to decide whether or not to drill for oil on a particular site in North Eastern Kenya. The Chief Engineer has assessed the probabilities that there will be oil as follow, based on past experience. Oil 0.2 No oil 0.8 It is possible for NGL to hire a firm of international consultants to carry out a complete survey of the site. NGL has used the firm many times before and has made the following estimates: 1. If there really is oil, then there is a 95% chance that the report will be favourable. 2. If there is no oil then there is only a 10% chance that the report will indicate that there is oil. The following additional information is also provided: . The cost of drilling is Sh.10 million. . The value of the benefits if oil is found is Sh.70 million . The cost of obtaining information is Sh.3 million. Required: a) Advise the company on whether to acquire additional information from the consultants (16 marks) b) Compute the value of imperfect information. (4 marks) (Total: 20 marks) ANSWERS NUMBER ONE (a) Existing capacity Kshs P 4560 x 19.6 = 89,376 Q 6960 x 13.0 = 90,480 R 3480 x 9.9 = 34,452 S 2300 x 17.0 = __39,100 Total Existing Capacity 253,408 Add 5% increase to full Capacity 5% x 253,408 12,670.4 Total Direct Labour of Full capacity 266,678.4 Switching of 2000 kg of Q releases Direct Labour cost by-: which is switch to P. 2000 x 13 26,000 Add 5% increase 12,670.4 Available cost to be switched 38,670.4 Labour cost of P = 19.6 Therefore units to be switched = 38,670.4 = 1973 Kg 19.6 Increased contribution therefore is: - Shs Shs. Sales 197 x 162 319,626 Less: Variable Cost Direct labour (1973 x 19.6) 38,670.8 Direct materials (1973 x 65.20) 128,639.6 Direct packaging 91973 x 8.4) 16,573.2 (183,883.6) Contribution of P 135,742.4 Less: Lost contribution from Q = 2000{(0.9 x 116.40) . (13 + 49 + 7.4)} (70,720)_ Incremental Contribution 65,022.4 Decision Jamaa Company Limited should subcontract 2000kg from Kimbo Company due to the incremental contribution of Kshs. 65,022.4 (b) P Q R S Jamaa.s selling prices (A) 162 116.40 99.20 136.80 Subcontracts price = (90% x 4) 145.80 104.76 89.28 123.12 Less: Variable cost of marking Direct labour 19.60 13.00 9.90 17.00 Direct materials 65.20 49.00 41.00 54.20 Direct packing 8.40 7.40 5.60 7.00 Total Variable cost 93.20 69.40 56.50 78.20 Lost Contribution 52.60 35.40 32.90 44.90 Switching of 2000kg to different products. This can be done in a matrix form as follows. Additional Production (Kg) from switching direct labour cost. Source of units P Q R S Shs.39,200 from P (a) 0 3015 (e) 3959 (f) 2305 (g) Shs.26,000 from Q (b) 1326 (h) 0 2626 (i) 1529 (j) Shs.19,800 from R (c) 1010 (k) 1523 (l) 0 1164 (m) Shs.34,000 from S (d) 1734 (n) 2615 (o) 3434 (p) 0 Extra 5 % of capacity Shs.12,670.4 646 (q) 974 (r) 1280 (s) 745 (t) Workings (a) 2000 x 19.60 (e) 39,200 ¡À 13 (i) 26,000 ¡À 9.9 (b) 2000 x 13.00 (f) 39,200 ¡À 9.9 (j) 26,000 ¡À 17 (c) 2000 x 9.90 (g) 39,200 ¡À 17 (k) 19,800 ¡À 19.6 (d) 2000 x 17.00 (h) 26,000 ¡À 19.6 (l) 19,800 ¡À13 (m) 19,800 ¡À17 (q) 12,670.4 ¡À 19.6 (n) 34,000 ¡À 19.60 (r) 12,760.4 ¡À 13 (o) 34,000 ¡À 13 (s) 12,670.4 ¡À 9.9 (p) 34,000 ¡À 9.9 (t) 12,670.4 ¡À 17.00 Extra contribution gained in Shs. P Q R S Contribution per Kg/Sh. 68.80 47 42.70 58.6 2000Kg of P subcontract 0 82,283(i) 118,500(ii) 73,530 2000Kg of Q subcontract 64,954 0 96,070 62,536 2000Kg of R subcontract 48,373 51,788 0 46,307 2000 Kg of S subcontract 73,900 78,843 111,448 0 Workings Incremental contribution - lost contribution i.e. (i) { ( 3015 + 974 ) 47 } . { (2000 x 52.6) } = 82,280 (ii) {(3959 + 1280) 42.7)} . {(2000 x 52.6)} = 118,500 etc Decision The best profitable contribution is to subcontract 2000kg of P and replace it with 5239kg (3959 + 1280) kg of R leading to the highest contribution of Shs. 118,500. NUMBER TWO Two important concepts in control theory are firstly, that a system must have a purpose and must have controls if it.s to remain cohesive and secondly, that is a system can be divided into a number of sub-systems and sub-sub-systems, each with it.s own purpose and controls. Controls provide the binding force, which kept every various elements within the system all working towards a common objective. Control theory can be used to analyse or to establish control systems within a business organization. A model can be constructed and used as follow: i. The system as a whole, and for each sub-system (and sub-sub-systems) one or more objectives are identified. ii. Actual achievements of the system and sub-system are monitored. iii. Actual achievements are compared with the objective. iv. Reasons for any differences between the objectives and achievements are identified v. Where suitable, corrective measures are taken

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