- 20 Marks
Question
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).
Answer
(a). Option A: Paediatric Unit
| Year | Costs (GH¢) | Benefits (GH¢) | DF @ 20% | PV OF COSTS (GH¢) | PV OF BENEFITS (GH¢) |
|---|---|---|---|---|---|
| 0 | 2,000,000.00 | 0 | 1 | 2,000,000.00 | – |
| 1 | 175,000.00 | 150,000.00 | 0.833 | 145,877.50 | 124,590 |
| 2 | 218,750.00 | 225,000.00 | 0.694 | 151,812.50 | 156,150 |
| 3 | 262,500.00 | 562,500.00 | 0.579 | 151,987.50 | 325,687.50 |
| 4 | 301,875.00 | 1,687,500.00 | 0.482 | 145,503.75 | 813,3750 |
| 5 | 332,062.50 | 5,906,250.00 | 0.402 | 133,489.13 | 2,374,312.50 |
| Total | 2,728,670.38 | 3,794,475 | |||
| NPV | 1,065,804.62 | ||||
| BCR | 1.39 |
Benefit cost ratio (BCR) = PV of benefits / PV of costs = 3,794,475.00 / 2,728,670.38 = 1.39
Option B: Leisure and recreational facilities
| Year | Costs (GH¢) | Benefits (GH¢) | DF @ 20% | PV OF COSTS (GH¢) | PV OF BENEFITS (GH¢) |
|---|---|---|---|---|---|
| 0 | 2,000,000.00 | 0 | 1 | 2,000,000.00 | – |
| 1 | 150,000.00 | 1,000,000.00 | 0.833 | 124,950.00 | 833,333 |
| 2 | 187,500.00 | 1,050,000.00 | 0.694 | 130,125 | 728,700 |
| 3 | 225,000.00 | 997,500.00 | 0.579 | 130,275 | 576,555 |
| 4 | 258,750.00 | 847,875.00 | 0.482 | 124,717.50 | 408,675.75 |
| 5 | 271,687.50 | 975,056.25 | 0.402 | 109,218.38 | 391,942.61 |
| 2,619,285.88 | 2,939,206.36 | ||||
| NPV | 319,956.12 | ||||
| BCR | 1.122 |
Option A BCR of 1.39. Option B on the other hand yields a BCR of 1.122. This shows that Option A yields a higher BCR.
(12 marks)
EXAMINER’S COMMENTS
Q 4 (a) – Cost Benefit Ratio: All the relevant information needed for the appraisal were provided. No adjustments were required neither were there non-cash benefits or cost that could have confused the candidate. Most candidates did quite well in their responses. Others, on the other hand, used the net benefit approach which made them to lose marks.
(b).
- Effectiveness refers to success in achieving end results or success in achieving objectives.
- Efficiency means getting more output from available resources. Applied to employees, efficiency is often called productivity.
- Economy means keeping spending within limits, and avoiding wasteful spending. It can also mean achieving the results but for less cost.
(3 marks)
EXAMINER’S COMMENTS
Q 4 (b) – The three Es in value for money: Candidates responded very well to the question and scored the allocated marks.
(c). The production manager is typically held responsible for labour inefficiency. This is because they oversee the production process and are responsible for ensuring that workers are working efficiently and effectively to meet production goals.
The production manager is the key figure responsible for planning, organizing, and coordinating all aspects of the production process. This includes setting production targets, allocating resources, managing personnel and ensuring that work is completed on time and within budget.
A common metric used to measure labour efficiency is the “labour efficiency variance”. This measures the difference between the actual hours worked and the standard hours allowed for the work completed. If there’s a significant variance, it indicates that workers are not performing as efficiently as expected. Since the production manager is responsible for overseeing the entire production process, including the utilisation of labour, they are typically held accountable for any variances in labour efficiency. This means they would be expected to investigate the reasons for inefficiency, implement corrective actions, and ensure that future production is more efficient.
(5 marks)
EXAMINER’S COMMENTS
Q 4 (c) – Cost Center manager responsible for labour inefficiency: This is an application of the inter dependencies of variances. Most candidates were able to relate the inefficiency to the production and human resources managers. Some even mentioned the procurement which is also right because acquisition of inferior materials can affect the efficiency of labour. A few deviated to talk about different cost centers e.g. cost, profit and investment centers.
- Topic: Other Aspects of Performance Measurement
- Series: MAR 2025
- Uploader: Samuel Duah
