Level 2 – Page 35

MA – L2 – Q56 – Performance analysis

Discuss methods and qualities of good performance measurement in management accounting.

Question

PERFORMANCE MANAGEMENT
Methods used in measuring performance
Financial Performance: analyse profitability, liquidity and risk. Financial Indicators include Profit, Revenue, Costs, Share Price and cash flow.
Non-Financial Performance: This can usefully be applied to employees and product/service quality. Non-Financial Indicators may include Quality of Service, Measures of customer satisfaction, Lateness.
Qualities of Good Performance Measurement

A GOOD MEASURE:	DESCRIPTION:
Is quantitative	The measure can be expressed as an objective value
Is easy to understand	The measure conveys at a glance what it is measuring, and how it is derived
Encourages appropriate behaviour	The measure is balanced to reward productive behaviour and discourage “game playing”
Is visible	The effects of the measure are readily apparent to all involved in the process being measured
Is defined and mutually understood	The measure has been defined by and/or agreed to by all key process participants (internally and externally)
Encompasses both outputs and inputs	The measure integrates factors from all aspects of the process measured
Measures only what is important	The measure focuses on a key performance indicator that is of real value to managing the process
Is multidimensional	The measure is properly balanced between utilisation, productivity, and performance, and shows the trade-offs
Uses economies of effort	The benefits of the measure outweigh the costs of collection and analysis
Facilitates trust	The measure validates the participation among the various parties

Answer

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Tags: Financial Performance, Management Accounting, Non-financial performance, Performance indicators, Performance Measurement
Level: Level 2

MA – L2 – Q55 – Decision making techniques

Provide the optimal production plan for Harmony Company Ltd with limited labour hours for three products.

Question

Harmony Company Ltd is preparing for next season’s operations. The company has provided the following information relating to its three products:

	TA	GB	DC
	GH¢	GH¢	GH¢
Selling price	18.5	16.2	12.6
Material cost	8.75	10.5	3.5
Labour cost	7.7	4.4	7.7

Labour hours per unit:

	TA	GB	DC
Labour hours	3.5	2.0	3.5

Annual Demand:
2,150 units (TA), 3,235 units (GB), 1,556 units (DC)

The company can only make available a total of 18,560 hours in the short run.

Required:
(a) Provide the optimal production plan for Harmony Ltd for the ensuing period.

(b) What is the total incremental benefit of producing DC instead of GB, assuming available resources can only meet demand of DC?

Answer

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Tags: contribution per hour, decision making, Labour Hours, Optimal production, production plan, Resource Allocation
Level: Level 2

Topic: Decision making techniques

MA – L2 – Q54 – Transfer pricing

Calculate profits for Zora Shoes Ltd's departments under different pricing methods, evaluate an outsourcing offer, and explain transfer pricing principles.

Question

Zora Shoes Ltd sells 5,000 pairs of shoes each month through its Production/Sales department. 25% of the shoes (by number) sold require repairs which are carried out by the company’s Repairs department. The Production/Sales department collects an additional GH¢5 for each pair of shoe requiring repairs as an anticipated repair charge when the shoes are sold to customers. The following additional information is available:

	GH¢
Material	2.50
Labour	1.5 per Labour hour
Variable Overheads	0.5 per Labour hour
Fixed Overheads	1.15 per Labour hour

Each repair takes 2 labour hours and the Repairs department processes 1,250 repairs each month (5,000 pairs × 25%). The Production/Sales department sells each pair of shoe for GH¢22.

Required:
(i) Calculate the individual profits of the Production/Sales department, Repairs department and Zora Ventures if repairs are done by the repairs department of Zora Ventures at either full cost plus 20% margin on sales or at marginal cost. (8 marks)
(ii) Lee Shoe Repairs has offered to repair each pair of shoe for Zora Ventures at GH¢10.00, a price which is cheaper than what the repairs department is offering. Should Zora Ventures accept this offer? (5 marks)
(iii) Identify THREE other factors Zora Ventures should consider in finalizing the decision in (ii) above? (3 marks)
(iv) Explain TWO principles of a good transfer pricing method.

Answer

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Tags: Cost-plus pricing, goal congruence, Marginal Costing, outsourcing decision, subunit autonomy, transfer pricing
Level: Level 2

Topic: Transfer pricing

MA – L2 – Q53 – Cost-volume-profit (CVP) analysis

Evaluate four assumptions required for valid cost-volume-profit analysis.

Question

(a) For any cost volume profit analysis to be valid, a number of important assumptions must reasonably be satisfied within the relevant range. As a management accountant for your organization, evaluate any four assumptions that must be satisfied in cost-volume-profit analysis.

(b) Determine the number of units at the break-even point.

Answer

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Tags: assumptions, break-even analysis, cost behavior, CVP analysis
Level: Level 2

Topic: Cost-volume-profit (CVP) analysis

MA – L2 – Q52a – Relevant Cost and Revenue

Advise whether Okonku Enterprises should discontinue Double bed production based on contribution and profit impact.

Question

Okonku Enterprises produces Single, Double, and King size beds for sale to hotels in West Africa. Its manufacturing plant is located in Keta and is currently producing at 100% capacity. Below is the annual output and sales for each product and the associated costs.

Product	Single bed	Double bed	King Size
Units sold	5,000 units	3,500 units	4,000 units
Sales	GH₵ 2,500,000	GH₵ 2,800,000	GH₵ 3,800,000
Cost
Material cost	750,000	1,400,000	1,520,000
Labour costs	600,000	1,050,000	1,200,000
Manufacturing O’head	200,000	650,000	300,000
Administrative cost	200,000	100,000	200,000
Total cost	1,750,000	3,200,000	3,220,000
Profit /Loss	750,000	(400,000)	580,000

The Director of Okonku is of the view that the product Double bed is not doing well and must not be produced any longer. The following additional information has been provided.
(i) 40% of the labour cost for all bed types are fixed costs.
(ii) 50% of the manufacturing overhead is variable costs for all products.
(iii) 80% of the administrative cost is fixed.

Required:
(a) Advise whether the company should shut down the production of Double beds.

(b) Should the company accept the new order assuming Double beds will still be produced?

Answer

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Tags: Contribution Analysis, decision making, fixed costs, Hotel Industry, Manufacturing costs, Product Discontinuation, Profit Impact, Relevant Cost, Short-Term Decisions, variable costs
Level: Level 2

Topic: Relevant cost and revenue

MA – L2 – Q51 – Decision Making Techniques

Determine the optimal plant hire contract for Terra Works Ltd using expected value based on sales probabilities.

Question

Terra Works Limited is a company that is engaged in site clearance and site preparation work. Information about its operations is as follows:
(1) It is Terra Works Limited’s policy to hire all the plant and machinery it needs rather than to purchase its own plant and machinery.
(2) Terra Works Limited will enter into an advance hire agreement contract for the coming year at one of three levels – high, medium, or low – which correspond to the requirements of a high, medium, or low level of orders obtained.
(3) The level of orders obtained will not be known when the advance hire agreement contract is entered into. Probabilities have been estimated by management as to the likelihood of the orders being at a high, medium, or low level.
(4) Where the advance hire agreement entered into is lower than that required for the level of orders actually obtained, a premium rate must be paid to obtain the additional plant and machinery required.
(5) No refund is obtainable where the advance hire agreement for plant and machinery is at a level in excess of that required to satisfy the site clearance and preparation orders actually obtained.
A summary of the information relating to the above points is as follows:

Level of Sales orders	Probability	Revenue GH¢000	Variable costs GH¢000	Plant and machinery hire costs
				Advance GH¢000	Conversion GH¢000
High	0.25	15,000	10,500	2,300	1,500
Medium	0.45	8,500	5,950	1,500	850
Low	0.30	4,000	2,800	1,000	–
Low to medium					850
Medium to high					1,300
Low to high					2,150

Required:
(a) Prepare a table showing the outcomes for each decision and outcome combination.
(b) Prepare a pay-off matrix and determine the advance hire contract that maximizes the expected value.

Answer

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Tags: Contract management, Cost Management, decision making, Expected value, Pay-off matrix, Plant hire, Probability, Resource Allocation
Level: Level 2

Topic: Decision making techniques

MA – L2 – Q50 – Pricing Strategies

Calculate prices for simplified Product Z using full cost-plus and budgeted profit pricing policies for Nexco Industries.

Question

Nexco Industries Limited makes Product Z in department C. For the year commencing 1 January Year 7, the following budget has been formulated for department C:

	GH¢000
Direct costs
Materials	60
Labour	40
	100
Production overheads	100
Full production cost	200
Administrative and marketing overheads	50
Full cost of sale	250
Profit	50
Revenue (see note)	300

Note: This revenue is from budgeted sales of 20,000 units.
Production overheads are absorbed on the basis of 100% of direct costs. However, half of these costs are fixed, and the other half are variable. It is assumed that they vary with the cost of materials.
The administrative and marketing overheads are based on 25% of factory costs and do not vary within wide ranges of activity. A profit margin of 20% is applied to the full cost of sale. This also results in a price that appears to be fair to customers.
Halfway through the year to 31 December Year 7, it became clear that actual sales of Product Z would be 25% below budget. At about the same time that this shortfall in sales became evident, a customer asked about buying 5,000 units of a simplified version of Product Z. If Nexco Industries Limited were to produce this simplified model for the customer, the direct material and labour costs would be lower. It is estimated that materials costing GH¢12,000 and direct labour of GH¢8,000 would be required to produce the 5,000 units. As the production could take place within the firm’s existing capacity, fixed costs would not be affected.

Required:
(a) Calculate the prices that Nexco Industries Limited should quote to the customer for each unit of the simplified product, assuming that the following pricing policies are applied:
(i) Full cost plus pricing, on the current basis.
(ii) A price that would enable the company to achieve its original budgeted profit.

(b) Give your advice on the price that should be quoted to the customer.

Answer

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Tags: Budgeted profit, Cost-plus pricing, Overhead absorption, Pricing, Profit Margin, Selling price, variable costs
Level: Level 2

Topic: Decision making techniques

MA – L2 – Q49 – Pricing Strategies

Calculate selling price for Product X using Nexco Limited’s normal pricing policy with a 16.67% profit margin.

Question

Nexco Limited has developed a new product, Product X, that it wishes to introduce to the market. The cost per unit is expected to be as follows, assuming annual sales of 40,000 units.

Cost per unit

Cost Item	GH¢
Direct materials:
Material M1 (2 litres at GH¢15)	30
Material M2 (0.5 litres at GH¢8)	4
Direct labour (3 hours at GH¢10)	30
Fixed overheads (3 hours at GH¢12)	36
Full cost	100

It has been company policy to price products to achieve a profit of 16.67% (one-sixth) on the sales price.

Required:
(a) Calculate the selling price that would be charged if Nexco Limited applies its normal pricing policy.

(b) If Nexco Limited decided to price products at marginal cost plus, what mark-up on the marginal cost would be required to obtain the same selling price as in (a)?

Answer

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Tags: Cost-plus pricing, decision making, Pricing, Profit Margin, Selling price
Level: Level 2

Topic: Decision making techniques

MA – L2 – Q48 – Decision Making Techniques

Determine if BHIL should manufacture Zeta internally or buy it, given material constraints and government orders.

Question

Blue Horizon Industries Limited (BHIL) produces and markets three products viz. Alpha, Beta, and Gamma. Following information is available from BHIL’s records for the manufacture of each unit of these products:

	Alpha	Beta	Gamma
Selling price	GH₵ 66	GH₵ 106	GH₵ 124
Material-A (GH₵ 4 per kg)	GH₵ 8	GH₵ 12	GH₵ 12
Material-B (GH₵ 6 per kg)	GH₵ 12	GH₵ 24	GH₵ 24
Direct labour (GH₵ 10 per hour)	GH₵ 25	GH₵ 25	GH₵ 30
Variable overhead based on:
– Labour hours	GH₵ 1.8	GH₵ 1.5	GH₵ 1.8
– Machine hours	GH₵ 1.4	GH₵ 1.2	GH₵ 1.2
Total	GH₵ 3.2	GH₵ 2.7	GH₵ 3.0
Other data:
Machine hours	7	6	6
Maximum demand per month (units)	3,000	3,000	5,000

Additional information:
(i) BHIL is also engaged in the trading of a fourth product Zeta, which is very popular in the market and generates a positive contribution. BHIL currently purchases 600 units per month of Zeta from a supplier at a cost of GH₵ 40 per unit. In-house manufacture of Zeta would require: 2.5 kg of material-B, 1 hour of direct labour, and 2 machine hours.
(ii) Materials A and B are purchased from a single supplier who has restricted the supply of these materials to 22,000 kg and 34,000 kg per month respectively. This restriction is likely to continue for the next 8 months.
(iii) BHIL has recently accepted a Government order for the supply of 200 units of Alpha, 300 units of Beta, and 400 units of Gamma each month for the next 8 months. These quantities are in addition to the maximum demand stated above.
(iv) There is no beginning or ending inventory.

Required:
Determine whether BHIL should manufacture Zeta internally or continue to buy from the supplier during the next 8 months.

Answer

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Tags: Contribution Analysis, fixed costs, Government Order, Make or Buy, Manufacturing, Material Scarcity, Production Planning, Profit Maximization, Resource Constraints, variable costs
Level: Level 2

Topic: Decision making techniques

FA – L1 – Q81 – Preparation of Partnership accounts

Prepare capital accounts and statement of financial position for Alvin, Boris, and Gina partnership after Gina's admission, including adjustments for goodwill and revaluation.

Question

Alvin and Boris are partners in a firm sharing profits and losses in the ratio of 3:2. The Statement of financial position of the firm as on 31 March 20X9 was as under:

Assets	GH¢
Furniture and fixture	600,000
Office equipment	300,000
Motor car	375,000
Inventory	250,000
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Due to expansion in the business, Gina was admitted as a partner with effect from 1 April 20X9. Gina brought furniture worth GH¢120,000 and inventory costing GH¢80,000. She also contributed cash of GH¢150,000 plus her proportionate share of goodwill valued at two years’ purchase of the average profits of the last three years.
Following adjustments were considered necessary, at the time of admission:
(i) On 1 April 20X7, new furniture costing GH¢8,000 was purchased but wrongly debited to revenue account. The firm charges depreciation on furniture @ 10% on straight line basis.
(ii) An invoice dated 1 October 20X8 for purchase of goods amounting to GH¢24,000 has not been recorded.
(iii) Value of the sundry receivables on 31 March 20X9 is to be reduced by 6%.
The profits of the last three years, before the above adjustments were:

Year	GH¢
20X8-11	352,100
20X7-10	232,000
20X9-09	128,000

It was decided that the future profits of the firm would be shared among Alvin, Boris, and Gina in the ratio of 5:3:2 respectively.

Required:
Prepare the capital accounts of the partners and the statement of financial position of the firm on Gina’s admission as a partner.

Answer

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Tags: Adjustments, Capital accounts, Depreciation, Financial Statements, Goodwill, Partner admission, Partnership accounts, Profit-sharing ratio, Revaluation, Statement of Financial Position
Level: Level 2

Topic: Preparation of Partnership accounts, Preparing financial statements

Level (SQ): Level 2

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MA – L2 – Q56 – Performance analysis

Discuss methods and qualities of good performance measurement in management accounting.

MA – L2 – Q55 – Decision making techniques

Provide the optimal production plan for Harmony Company Ltd with limited labour hours for three products.

MA – L2 – Q54 – Transfer pricing

Calculate profits for Zora Shoes Ltd's departments under different pricing methods, evaluate an outsourcing offer, and explain transfer pricing principles.

MA – L2 – Q53 – Cost-volume-profit (CVP) analysis

Evaluate four assumptions required for valid cost-volume-profit analysis.

MA – L2 – Q52a – Relevant Cost and Revenue

Advise whether Okonku Enterprises should discontinue Double bed production based on contribution and profit impact.

MA – L2 – Q51 – Decision Making Techniques

Determine the optimal plant hire contract for Terra Works Ltd using expected value based on sales probabilities.

MA – L2 – Q50 – Pricing Strategies

Calculate prices for simplified Product Z using full cost-plus and budgeted profit pricing policies for Nexco Industries.

MA – L2 – Q49 – Pricing Strategies

Calculate selling price for Product X using Nexco Limited’s normal pricing policy with a 16.67% profit margin.

MA – L2 – Q48 – Decision Making Techniques

Determine if BHIL should manufacture Zeta internally or buy it, given material constraints and government orders.

FA – L1 – Q81 – Preparation of Partnership accounts

Prepare capital accounts and statement of financial position for Alvin, Boris, and Gina partnership after Gina's admission, including adjustments for goodwill and revaluation.

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Discuss methods and qualities of good performance measurement in management accounting.

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Provide the optimal production plan for Harmony Company Ltd with limited labour hours for three products.

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Calculate profits for Zora Shoes Ltd's departments under different pricing methods, evaluate an outsourcing offer, and explain transfer pricing principles.

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Evaluate four assumptions required for valid cost-volume-profit analysis.

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Determine the optimal plant hire contract for Terra Works Ltd using expected value based on sales probabilities.

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Calculate prices for simplified Product Z using full cost-plus and budgeted profit pricing policies for Nexco Industries.

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Calculate selling price for Product X using Nexco Limited’s normal pricing policy with a 16.67% profit margin.

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Determine if BHIL should manufacture Zeta internally or buy it, given material constraints and government orders.

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Prepare capital accounts and statement of financial position for Alvin, Boris, and Gina partnership after Gina's admission, including adjustments for goodwill and revaluation.

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