Question Tag: Controllability Principle

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  • 20 Marks

MA – Mar 2025 – L2 – Q4 – Capital Budgeting

Evaluate two projects using benefit-cost ratio for GKIA with given financial data and 20% required rate of return.

a). GKIA, an Early Childhood Development Centre (ECDC) under Ghana’s Ministry of Health (MOH) has obtained funding from the Global Fund (GF) to implement targeted programmes in line with the vision of the GF. In GF’s recent grant releases, GKIA received an amount of GH¢2 million and has the option of spending the amount on any project provided it falls within any of the thematic areas specified by the GF.
Accordingly, GKIA is considering spending the funds on either of two projects. The first option involves the construction, equipping and full furnishing of a 30-bed paediatric unit for the Centre. The second option involves the refurbishment of all existing leisure and recreational facilities that the Centre currently operates. Both options qualify for funding under the thematic areas of the GF.
The information in the table below presents financial details of both options that GKIA is considering.

Option A: Paediatric Unit Option B: Leisure and recreational facilities
Initial capital outlay GH¢2 million GH¢2 million
Year Costs (GH¢) Benefits (GH¢) Costs (GH¢) Benefits (GH¢)
1 175,000 150,000 150,000 1,000,000
2 218,750 225,000 187,500 1,050,000
3 262,500 562,500 225,000 997,500
4 301,875 1,687,500 258,750 847,875
5 332,062.50 5,906,250 271,687.50 975,056.25

The required rate of return on any investment project undertaken by GKIA is 20%.

Required:
As the Management Accountant of GKIA, you are required to evaluate the acceptability of each project on the basis of benefit-cost ratio.

b). The term Value for Money (VFM) is synonymous with spending in the public sector, where it is expected that little resources should be used to generate the best possible output/outcome for the public good.

Required:
Explain the ‘three Es’ that public sector management accountants will need to take into consideration when making public spending decisions.

c). In the application of the controllability principle, identify the cost centre manager who is responsible for any adverse impact of labour on production. (provide three reasons to justify your answer).

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  • 20 Marks

MA – July 2023 – L2 – Q1 – Performance analysis

This question involves explaining the controllability principle, calculating controllable profit, ROI, and RI, and analyzing the performance of two divisions.

Kenkah Ltd provides buffer storage for many companies throughout the country. The company has two divisions, namely Abura and Keta. Each division is autonomous and makes its own long-term investment decisions.

Kenkah Ltd measures the performance of its divisions using Return on Investment (ROI), calculated using controllable profit and average divisional net assets. The company has a cost of capital of 12% but a targeted ROI of 18%. The divisional managers’ annual bonus is determined by the extent to which the ROI earned by the division exceeds the target.

At the beginning of the year, the two divisions, Abura and Keta, bought assets worth GH¢12.5 million and GH¢18.2 million respectively. The assets have a five-year life span with no residual value. The company uses the straight-line depreciation method. The other assets are being controlled by the head office.

Over the years, Kenkah Ltd has used ROI in evaluating the performance of managers. However, to discourage dysfunctional behavior, Kenkah Ltd is considering introducing Residual Income (RI) as a performance measure. Like ROI, RI is calculated using controllable profit and average divisional assets.

The current year’s draft operating statement is shown below:

Abura (GH¢000) Keta (GH¢000)
Sales 15,350 17,020
Less controllable Variable Cost 7,505 8,950
Contribution 7,845 8,070
Less Fixed Cost [i) & ii)] 6,335 6,910
Profit 1,510 1,160

Additional Information:
i) Included in fixed costs are the current year depreciation charges of GH¢3,125,000 and GH¢4,550,000 for division Abura and Keta, respectively. Twenty percent (20%) of the depreciation cost in each division is from assets owned and controlled by the head office.
ii) Head office allocates some of its overhead costs to the two divisions using activity-based costing. These costs have been included in the fixed costs and amounted to GH¢210,000 and GH¢230,000 for Abura and Keta, respectively.
iii) The Management Accountant stated at a recent board meeting that “Responsibility accounting is based on the application of the controllability principle.” Hence, he would resist any attempt by management to deviate from this basic principle.

Required:
a) Explain the “controllability principle” and why its application is difficult in practice.
(4 marks)

b) Calculate the current year controllable profit for both divisions of Kenkah Ltd.
(4 marks)

c) Calculate the current year ROI for each of the two divisions of Kenkah Ltd.
(3 marks)

d) Calculate the current year RI for each of the two divisions of Kenkah Ltd.
(4 marks)

e) Discuss the performance of the two divisions for the year.

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  • 5 Marks

MA – Nov 2016 – L2 – Q3c – Budgetary control, Performance analysis

Explain the controllability principle and budgetary slack in the context of responsibility accounting.

Explain the following concepts and describe their application in responsibility accounting:

i) The controllability principle (2.5 marks)

ii) Budgetary slacks (2.5 marks)

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  • 20 Marks

MA – Mar 2025 – L2 – Q4 – Capital Budgeting

Evaluate two projects using benefit-cost ratio for GKIA with given financial data and 20% required rate of return.

a). GKIA, an Early Childhood Development Centre (ECDC) under Ghana’s Ministry of Health (MOH) has obtained funding from the Global Fund (GF) to implement targeted programmes in line with the vision of the GF. In GF’s recent grant releases, GKIA received an amount of GH¢2 million and has the option of spending the amount on any project provided it falls within any of the thematic areas specified by the GF.
Accordingly, GKIA is considering spending the funds on either of two projects. The first option involves the construction, equipping and full furnishing of a 30-bed paediatric unit for the Centre. The second option involves the refurbishment of all existing leisure and recreational facilities that the Centre currently operates. Both options qualify for funding under the thematic areas of the GF.
The information in the table below presents financial details of both options that GKIA is considering.

Option A: Paediatric Unit Option B: Leisure and recreational facilities
Initial capital outlay GH¢2 million GH¢2 million
Year Costs (GH¢) Benefits (GH¢) Costs (GH¢) Benefits (GH¢)
1 175,000 150,000 150,000 1,000,000
2 218,750 225,000 187,500 1,050,000
3 262,500 562,500 225,000 997,500
4 301,875 1,687,500 258,750 847,875
5 332,062.50 5,906,250 271,687.50 975,056.25

The required rate of return on any investment project undertaken by GKIA is 20%.

Required:
As the Management Accountant of GKIA, you are required to evaluate the acceptability of each project on the basis of benefit-cost ratio.

b). The term Value for Money (VFM) is synonymous with spending in the public sector, where it is expected that little resources should be used to generate the best possible output/outcome for the public good.

Required:
Explain the ‘three Es’ that public sector management accountants will need to take into consideration when making public spending decisions.

c). In the application of the controllability principle, identify the cost centre manager who is responsible for any adverse impact of labour on production. (provide three reasons to justify your answer).

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  • 20 Marks

MA – July 2023 – L2 – Q1 – Performance analysis

This question involves explaining the controllability principle, calculating controllable profit, ROI, and RI, and analyzing the performance of two divisions.

Kenkah Ltd provides buffer storage for many companies throughout the country. The company has two divisions, namely Abura and Keta. Each division is autonomous and makes its own long-term investment decisions.

Kenkah Ltd measures the performance of its divisions using Return on Investment (ROI), calculated using controllable profit and average divisional net assets. The company has a cost of capital of 12% but a targeted ROI of 18%. The divisional managers’ annual bonus is determined by the extent to which the ROI earned by the division exceeds the target.

At the beginning of the year, the two divisions, Abura and Keta, bought assets worth GH¢12.5 million and GH¢18.2 million respectively. The assets have a five-year life span with no residual value. The company uses the straight-line depreciation method. The other assets are being controlled by the head office.

Over the years, Kenkah Ltd has used ROI in evaluating the performance of managers. However, to discourage dysfunctional behavior, Kenkah Ltd is considering introducing Residual Income (RI) as a performance measure. Like ROI, RI is calculated using controllable profit and average divisional assets.

The current year’s draft operating statement is shown below:

Abura (GH¢000) Keta (GH¢000)
Sales 15,350 17,020
Less controllable Variable Cost 7,505 8,950
Contribution 7,845 8,070
Less Fixed Cost [i) & ii)] 6,335 6,910
Profit 1,510 1,160

Additional Information:
i) Included in fixed costs are the current year depreciation charges of GH¢3,125,000 and GH¢4,550,000 for division Abura and Keta, respectively. Twenty percent (20%) of the depreciation cost in each division is from assets owned and controlled by the head office.
ii) Head office allocates some of its overhead costs to the two divisions using activity-based costing. These costs have been included in the fixed costs and amounted to GH¢210,000 and GH¢230,000 for Abura and Keta, respectively.
iii) The Management Accountant stated at a recent board meeting that “Responsibility accounting is based on the application of the controllability principle.” Hence, he would resist any attempt by management to deviate from this basic principle.

Required:
a) Explain the “controllability principle” and why its application is difficult in practice.
(4 marks)

b) Calculate the current year controllable profit for both divisions of Kenkah Ltd.
(4 marks)

c) Calculate the current year ROI for each of the two divisions of Kenkah Ltd.
(3 marks)

d) Calculate the current year RI for each of the two divisions of Kenkah Ltd.
(4 marks)

e) Discuss the performance of the two divisions for the year.

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  • 5 Marks

MA – Nov 2016 – L2 – Q3c – Budgetary control, Performance analysis

Explain the controllability principle and budgetary slack in the context of responsibility accounting.

Explain the following concepts and describe their application in responsibility accounting:

i) The controllability principle (2.5 marks)

ii) Budgetary slacks (2.5 marks)

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