Subject (SQ): MANAGEMENT ACCOUNTING

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  • 20 Marks

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.

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.

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  • 10 Marks

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

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

(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.

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  • 20 Marks

MA – L2 – Q52a – Relevant Cost and Revenue

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

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?

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  • 10 Marks

MA – L2 – Q51 – Decision Making Techniques

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

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.

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  • 15 Marks

MA – L2 – Q50 – Pricing Strategies

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

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.

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  • 10 Marks

MA – L2 – Q49 – Pricing Strategies

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

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)?

(c) Suggest two other pricing strategies that might be applied to decide a selling price for Product

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  • 15 Marks

MA – L2 – Q48 – Decision Making Techniques

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

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.

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  • 15 Marks

MA – L2 – Q47 – Decision Making Techniques

Establish production plan to maximize profit with steel limited to GH₵250,000, prioritizing a major customer's order.

An engineering company has been experiencing problems with restricted availability of resources. The company manufactures a variety of casings. It makes four types of casing. Each casing requires the same bought-in component and some high-grade steel. The standard costs for the four types of casing are as follows:

Casing A B C D
GH₵ GH₵ GH₵ GH₵
Steel 250 500 190 390
Bought-in component 50 50 50 50
Direct labour 60 60 50 100
Variable production costs 40 50 40 50
Fixed production costs 180 240 150 270
Selling and administration costs 145 225 120 215
Profit 35 55 30 55
Selling price 760 1,180 630 1,130

All the selling and administration costs are fixed and the same single component is used for each of the four products. Direct labour is paid GH₵8 per standard hour and each member of the workforce is capable of producing any of the casings.
The company’s main customer has ordered 30 units of Casing A, 20 units of B, 30 units of C, and 20 units of D for production and delivery in the next month. Senior management have agreed that this order should be treated as a priority order and that these casings must be manufactured and delivered to the customer next month. This is necessary to maintain the goodwill of the customer. It is estimated that this order represents 10% of the total demand next month for each type of casing.
The company operates a just-in-time system, and has no inventories of steel, components, or finished goods.
Required:
If the aim is to maximise profit for the month, establish the production and selling plan for the company next month in the following situation:
(a) Situation 1. Supplies of steel are limited to GH₵250,000.

(b) Situation 2. Only 400 bought-in components are available from suppliers.

(c) Situation 3. A labour dispute restricts available productive labour hours in the month to 2,125.

(d) Situation 4. A labour dispute restricts available productive labour hours in the month to 2,125; but the manufacture of any quantities of the four casings could be sub-contracted to an outside supplier. The cost of buying the casings externally would be GH₵475, GH₵705, GH₵380, and GH₵640 for Casing A, Casing B, Casing C, and Casing D respectively. In addition, it should be assumed that the major customer insists that its order is completed by the company itself and the manufacture should not be subcontracted.

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  • 15 Marks

MA – L2 – Q46 – Decision making techniques

Compute Ouluto Limited's net profit for February 20X9 based on the optimum product mix, given resource constraints and cost data.

Ouluto Limited (OUL) is engaged in the manufacture and sale of three products viz. WBA, QPR and SC. The following information is available from OUL’s records for the month of February 20X9:

WBA QPR SC
Sales price per unit (GH₵) 2,300 1,550 2,000
Material cost per Kg. (GH₵) 250 250 250
Labour time per unit (Minutes) 20 30 45
Machine time per unit (Hours) 4 2.5 3
Net weight per unit of finished product (Kg.) 6 4 5
Yield (%) 90 95 92
Estimated demand (Units) 10,000 20,000 9,000

Each worker is paid monthly wages of GH₵15,000 and works a total of 200 hours per month. OUL’s total overheads are estimated at 20% of the material cost.
Fixed overheads are estimated at GH₵5 million per month and are allocated to each product on the basis of machine hours. 100,000 machine hours are estimated to be available in February 20X9.
Required:
Based on optimum product mix, compute OUL’s net profit for the month of February 20X9.

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  • 20 Marks

MA – L2 – Q45 – Decision making techniques

Compute units of each product for Image Solutions to maximize profit and calculate contribution at optimal mix, considering machine hour constraints.

Image Solutions Limited deals in various products. Relevant details of the products are as under:

PW PX PY PZ
Estimated annual demand (units) 5,000 10,000 7,000 8,000
Sales price per unit (GH¢) 150 180 140 175
Material consumption:
R (kg) 2 2.5 1.5 1.75
T (kg) 0.5 0.6 0.4 0.65
Labour hours 2 2.25 1.75 2.5
Variable overheads (based on labour cost) 75% 80% 100% 90%
Fixed overheads per unit (GH¢) (based on 80% capacity utilisation) 10 20 14 16
Machine hours required:
Processing machine hours 5 6 8 10
Packing machine hours 2 3 2 4

Company has a long term contract for purchase of material R and T at a price of GH¢ 15 and GH¢ 20 per kg respectively. Wage rate for 8 hours shift is GH¢ 200.

The estimated overheads given in the above table are exclusive of depreciation expenses. The company provides depreciation on number of hours used basis. The depreciation on each machine based on full capacity utilisation is as follows:

Hours GH¢
Processing machine 150,000 150,000
Packing machine 100,000 50,000

The company has launched an advertising campaign to promote the sale of its products. GH¢ 2 million have been spent on such campaign. This cost is allocated to the products on the basis of sale.

Required:
Compute the number of units of each product that the company should produce in order to maximize the profit and also compute the product wise and total contribution at optimal product mix.

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