Subject (SQ): MANAGEMENT ACCOUNTING

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  • 20 Marks

MA – L2 – Q65 – Transfer Pricing

Prepare profit statements for Kumasi Construction Materials Ltd at 80% and 100% capacity with transfer prices of GH₵200 and GH₵180.

Kumasi Construction Materials Ltd is organised into two trading divisions. Division A makes materials that are used to manufacture special bricks. It transfers some of these materials to Division B and sells some of the materials externally to other brick manufacturers. Division B makes special bricks from the materials and sells them to traders in building materials.

The production capacity of Division A is 2,000 tonnes per month. At present, sales are limited to 1,000 tonnes to external customers and 600 tonnes to Division B.

The transfer price was agreed at GH₵200 per tonne in line with the external sales trade price at 1st July which was the beginning of the budget year. From 1st December, however, strong competition in the market has reduced the market price for the materials to GH₵180 per tonne.

The manager of Division B is now saying that the transfer price for the materials from Division A should be the same as for external customers. The manager of Division A rejects this argument on the basis that the original budget established the transfer price for the entire financial year.

From each tonne of materials, Division B produces 1,000 bricks, which it sells at GH₵0.40 per brick. It would sell a further 400,000 bricks if the price were reduced to GH₵0.32 per brick.

Other data relevant are given below:

Division A Division B
GH₵ GH₵
Variable cost per tonne 70
Fixed cost per month 100,000

The variable costs of Division B exclude the transfer price of materials from Division A.

Required:
(a) Prepare estimated profit statements for the month of December for each division and for Kumasi Construction Materials Ltd as a whole, based on transfer prices of GH₵200 per tonne and of GH₵180 per tonne, when producing at
(i) 80% capacity
(ii) 100% capacity, on the assumption that Division B reduces the selling price to GH₵0.32.

(b) Comment on the effect that might result from a change in the transfer price from GH₵200 to GH₵180.

(c) Suggest an alternative transfer price that would provide an incentive for Division B to reduce the selling price and increase sales by 400,000 bricks a month.

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  • 15 Marks

MA – L2 – Q64 – Transfer Pricing

Evaluate transfer pricing objectives and calculate company contribution for Keta Fitness Ltd's divisions.

KETA FITNESS LTD
(a) Objectives of Transfer pricing include the following:
(i) Goal congruence
(ii) Performance evaluation
(iii) Divisional authority
(iv) Tax minimisation
(v) Motivation
(b) The company’s contribution as a whole

 

DIVISION A DIVISION B COMPANY
Selling price GH₵ 20,000 GH₵ 30,000 GH₵ 30,000
Incremental Cost (A) (12,000) (20,000) (12,000)
Incremental Cost (B) – (15,000) (15,000)
Contribution 8,000 (5,000) 3,000

(i) Should Division A transfer to Division B or sell as an intermediate product?
(ii) If there is excess capacity of 200 units, what would be the total contribution and the range of transfer prices for the excess capacity?

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  • 15 Marks

MA – L2 – Q63 – Transfer pricing

Define an optimal transfer price for Keta Shelving Limited.

(A) Keta Shelving Limited, a company operating near Mount Adaklu, has two operating divisions, X and Y, that are treated as profit centres for the purpose of performance reporting.
Division X makes two products, Product A and Product B. Product A is sold to external customers for GH₵62 per unit. Product B is a part-finished item that is sold only to Division Y.
Division Y can obtain the part-finished item from either Division X or from an external supplier. The external supplier charges a price of GH₵55 per unit.
The production capacity of Division X is measured in total units of output, Products A and B. Each unit requires the same direct labour time. The costs of production in Division X are as follows:

 

Product A Product B
GH₵ GH₵
Variable cost 46 48
Fixed cost 19 19
Full cost 65 67

Required:
(a) What is an optimal transfer price?

(b) What would be the optimal transfer price for Product B if there is spare production capacity in Division X?

(c) What would be the optimal transfer price for Product B if Division X is operating at full capacity due to a limited availability of direct labour, and there is unsatisfied external demand for Product A?

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  • 15 Marks

MA – L2 – Q62 – Divisional performance

Calculate ROI for a new investment project at Kumasi Tech Ltd over three years.

Kumasi Tech Ltd is organised into several investment centres. The annual performance of each investment centre is measured on the basis of ROI. ROI is measured each year as the profit before interest as a percentage of the average investment/average capital employed in the investment centre.
One of the investment centres has achieved a ROI in excess of 35% in each of the past four years. Its managers are considering a new investment project that will have the following cash flows:

Year Cash flow
Beginning of Year 1 (42,000)
1–3 19,000 each year

The initial investment will be in an item of machinery that will have no residual value at the end of Year 3. Assume that depreciation is charged on a straight-line basis.
Required:
(a) Calculate the ROI for the project, each year and on average for the three-year period.

(b) Suggest whether the managers of the investment Centre are likely to invest in the project.

(c) Residual income

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  • 15 Marks

MA – L1 – Q61 – Performance analysis

Calculate ROI for Keta Textiles Ltd for 5 years and assess division performance using ROI and other measures.

Keta Textiles Ltd is planning to open a new investment centre, which will make and sell a single product. The investment in the new division at the beginning of the year will be GH¢2 million, consisting entirely of non-current assets. These are expected to have a five-year life with no residual value, and they will be depreciated each year at the rate of 20% of cost.
Sales in the first year of operation are expected to be GH¢4 million and the budgeted gross profit is 30%. Overhead costs excluding depreciation of non-current assets will be GH¢600,000 in Year 1.
The estimates for the first five years of operation are as follows:
(1) The company will not make any additional investment in non-current assets for the division in the first five years.
(2) The cost of sales per unit in the five years will remain constant, with no increases.
(3) Sales volume will be the same in Year 2 as in Year 1. Sales volume will then increase in Year 3 by 5% but will fall by 10% in Year 4 and a further 10% in Year 5.
(4) The sales price per unit will be increased by 5% in Year 2. There will be no change in sales prices in Year 3, but prices will be increased by 5% in Year 4 and again by 5% in Year 5.
(5) Overhead costs excluding depreciation will remain at GH¢600,000 for the first three years, but will then be GH¢700,000 in each of Years 4 and 5.

Required:
Calculate the return on investment for the division for each of the first five years, assuming that ROI is calculated using the net book value of assets at the beginning of the year.
Using ROI and any other measures of performance, assess the expected performance of the division over the five-year period.

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  • 10 Marks

MA – L2 – Q60 – Performance Analysis

Calculate the budgeted ROI for North Sector for the year to 31 December Year 7.

PrimeCorp has several separate divisions, each operating as an investment centre within the group. North Sector makes and sells three products, A, B, and C. All three products are sold under the Apex brand label, but Product A and Product B are also sold through a supermarket group as unbranded products. Budgeted data for the year to 31 December Year 7 is as follows:

Product sales

Product A Product B Product C
units units units
Apex brand 160,000 120,000 50,000
Unbranded 450,000 600,000

Selling prices

Product A Product B Product C
GH¢ per unit GH¢ per unit GH¢ per unit
Apex brand 2.50 3.20 5.00
Unbranded 1.50 2.00

Variable costs

Production Packaging
GH¢ per unit GH¢ per unit
Product A:
Apex brand 1.20 0.30
Unbranded 1.20 0.10
Product B:
Apex brand 1.60 0.40
Unbranded 1.60 0.20
Product C:
Apex brand 2.50 0.50

Budgeted marketing expenditure is GH¢180,000 for the year, and other budgeted expenditure for other fixed costs is GH¢375,000. The average capital employed in North Sector in Year 7 is expected to be GH¢400,000 and the division’s cost of capital is 10%.

Required:
(a) Calculate the budgeted ROI for North Sector for the year to 31 December Year 7.

b) Calculate the budgeted residual income for North Sector for the year to 31 December Year 7.

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  • 8 Marks

MA – L2 – Q58 – Performance analysis

Calculate and define financial ratios for Akwasi and Kofi, two manufacturing companies, using their financial statements.

The statements of profit or loss and statements of financial position of two manufacturing companies in the same sector are set out below.

Statement of profit or loss for Akwasi

ZC¢
Revenue 150,000
Cost of sales (60,000)
Gross profit 90,000
Interest payable (500)
Distribution costs (13,000)
Administrative expenses (15,000)
Profit before tax 61,500
Income tax expense (16,605)
Profit for the period 44,895

Statements of financial position for Akwasi and Kofi

Akwasi Kofi
ZC¢ ZC¢
Assets
Non-current assets
Property 280,000
Plant and equipment 190,000 500,000
190,000 780,000
Current assets
Inventories 12,000 26,250
Trade receivables 37,500 105,000
Cash at bank 22,000
49,500 153,250
Total assets 240,000 933,250
Equity and liabilities
Equity
Share capital 156,000 174,750
Retained earnings 51,395 390,830
207,395 565,580
Non-current liabilities
Long-term debt 10,000 250,000
Current liabilities
Trade payables 22,605 117,670
Total equity and liabilities 240,000 933,250

Required:

Define and calculate the following ratios for each company:

(a) Gross profit percentage (2 marks)

(b) Net profit percentage (2 marks)

(c) Return on capital employed (2 marks)

(d) Asset turnover (2 marks)

The statements of profit or loss and statements of financial position of two manufacturing companies in the same sector are set out below.

Statement of profit or loss for Akwasi

ZC¢
Revenue 150,000
Cost of sales (60,000)
Gross profit 90,000
Interest payable (500)
Distribution costs (13,000)
Administrative expenses (15,000)
Profit before tax 61,500
Income tax expense (16,605)
Profit for the period 44,895

Statements of financial position for Akwasi and Kofi

Akwasi Kofi
ZC¢ ZC¢
Assets
Non-current assets
Property 280,000
Plant and equipment 190,000 500,000
190,000 780,000
Current assets
Inventories 12,000 26,250
Trade receivables 37,500 105,000
Cash at bank 22,000
49,500 153,250
Total assets 240,000 933,250
Equity and liabilities
Equity
Share capital 156,000 174,750
Retained earnings 51,395 390,830
207,395 565,580
Non-current liabilities
Long-term debt 10,000 250,000
Current liabilities
Trade payables 22,605 117,670
Total equity and liabilities 240,000 933,250

Required:

Define and calculate the following ratios for each company:

(a) Gross profit percentage (2 marks)

(b) Net profit percentage (2 marks)

(c) Return on capital employed (2 marks)

(d) Asset turnover (2 marks)

The statements of profit or loss and statements of financial position of two manufacturing companies in the same sector are set out below.

Statement of profit or loss for Akwasi

ZC¢
Revenue 150,000
Cost of sales (60,000)
Gross profit 90,000
Interest payable (500)
Distribution costs (13,000)
Administrative expenses (15,000)
Profit before tax 61,500
Income tax expense (16,605)
Profit for the period 44,895

Statements of financial position for Akwasi and Kofi

Akwasi Kofi
ZC¢ ZC¢
Assets
Non-current assets
Property 280,000
Plant and equipment 190,000 500,000
190,000 780,000
Current assets
Inventories 12,000 26,250
Trade receivables 37,500 105,000
Cash at bank 22,000
49,500 153,250
Total assets 240,000 933,250
Equity and liabilities
Equity
Share capital 156,000 174,750
Retained earnings 51,395 390,830
207,395 565,580
Non-current liabilities
Long-term debt 10,000 250,000
Current liabilities
Trade payables 22,605 117,670
Total equity and liabilities 240,000 933,250

Required:

Define and calculate the following ratios for each company:

(a) Gross profit percentage

(b) Net profit percentage

(c) Return on capital employed

(d) Asset turnover

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  • 18 Marks

MA – L2 – Q57 – Performance analysis

Evaluate KINTAMPO LTD's performance using financial ratios for two divisions, Amir and Mo.

Zestco is an importer and retailer of vegetable oils. Extracts from the financial statements for this year and last are set out below.

Statements of profit or loss for the years ended 30 September

Year 7 Year 6
ZC¢’000 ZC¢’000
Revenue 2,160 1,806
Cost of sales (1,755) (1,444)
Gross profit 405 362
Distribution costs (130) (108)
Administrative expenses (260) (198)
Profit before tax 15 56
Income tax expense (6) (3)
Profit for the period 9 53

Statements of financial position as of 30 September

Year 7 Year 6
ZC¢’000 ZC¢’000
Assets
Non-current assets
Property, plant and equipment 78 72
Current assets
Inventories 106 61
Trade receivables 316 198
Cash 6
428 259
Total assets 506 331
Equity and liabilities
Equity
Ordinary shares 110 85
Preference shares 23 11
Share premium 15
Revaluation reserve 20
Retained earnings 78
Current liabilities
Bank overdraft 49
Trade payables 198
Current tax payable 7
Total equity and liabilities

Required:

Define and calculate the following ratios for each year:

(a) Gross profit percentage

(b) Net profit percentage

(c) Return on capital employed

(d) Asset turnover

(e) Current ratio

(f) Quick ratio

(g) Average receivables collection period

(h) Average payables period

(i) Inventory turnover.

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  • 15 Marks

MA – L2 – Q56 – Performance analysis

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

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

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  • 8 Marks

MA – L2 – Q55 – Decision making techniques

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

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?

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