Subject: MANAGEMENT ACCOUNTING

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  • 4 Marks

MA – Nov 2024 – L2 – Q5b – Profit Maximization and Batch Selection

Determination of the optimal number of printer batches to import and sell to maximize profit.

Awuah deals in online business, importing and selling printers. The cost of each set of printers varies depending on the number purchased, although printers can only be purchased in batches of 1,000 units. Awuah also has to pay import taxes which vary according to the quantity purchased. Awuah has already carried out some market research and identified that sales quantities are expected to vary depending on the price charged.

The following data has been established for the first month:

Number of Batches Imported and Sold Average Cost per Unit (Including Import Taxes) (GH¢) Total Fixed Costs per Month (GH¢) Expected Selling Price per Unit (GH¢)
1 10.00 10,000 20
2 8.80 10,000 18
3 7.80 12,000 16
4 6.40 12,000 13

Required:

Determine the number of batches of printers Awuah should import and sell to maximize profit.

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  • 16 Marks

MA – Nov 2024 – L2 – Q5a – Limiting Factor Decision and Profit Maximization

Determination of the optimum production plan considering scarce resources.

Manche produces two products from different quantities of the same resources using a just-in-time (JIT) production system. The selling price and resource requirements of each of the products are shown below:

Product C L
Unit Selling Price (GH¢) 130 160
Resources per Unit:
Direct Labour (GH¢8 per hour) 3 hours 5 hours
Material A (GH¢3 per kg) 5 kg 4 kg
Material B (GH¢7 per litre) 2 litres 1 litre
Machine Hours (GH¢10 per hour) 3 hours 4 hours
Fixed Overhead (GH¢8 per hour) 1 hour 1 hour

Market research shows that the maximum demand for products C and L during August 2024 is 500 units and 800 units respectively. This does not include an order that Manche has agreed with a commercial customer for the supply of 250 units of C and 350 units of L at selling prices of GH¢100 and GH¢135 per unit, respectively. Failure by Manche to deliver the order in full by the end of August will cause Manche to incur a GH¢5,000 financial penalty.

At a recent meeting between the Purchasing Manager and Production Manager to discuss the production plans of C and L for August, the following resource restrictions for the year were identified:

  • Direct Labour Hours: 90,000 hours
  • Machine Hours: 90,000 hours

The resource restrictions were evenly distributed throughout the year.

Required:

i) Prepare the optimum production plan for August 2024 using relevant computations. 
ii) Determine the contribution from adopting this plan. 
iii) Using relevant computations, show whether Manche should complete the order from the commercial customer assuming any excess labour hours for not making the contract can be used to produce 300 units of product ‘F’ with a contribution of GH¢55 per unit.

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  • 5 Marks

MA – Nov 2024 – L2 – Q4b – Standard Costing and Variance Investigation

Explanation of the use of standard costing in decision-making and key factors to consider before investigating variances.

Standard costing has been employed by organizations as a control technique to analyze the deviation of results from those that are expected.

Required:

i) Explain TWO ways managers have effectively deployed standard costing as a tool in decision-making analysis.

ii) Explain THREE key factors a manager should consider before deciding to institute an investigation into reported variances.

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  • 15 Marks

MA – Nov 2024 – L2 – Q4a – Cost-Benefit Analysis (CBA) for Public Sector Investment

Evaluation of a healthcare capital investment project using cost-benefit analysis.

The Faith Specialist Hospital (FSH) is a special government health facility under the Ghana Health Service (GHS) that provides specialized medical scans for complex health conditions. Management of FSH is planning to install an ultra-modern imaging machine that will improve the quality and accuracy of scans. The new installation will require an additional capital investment of GH¢420,000. The GHS policy on capital projects is that all new projects should achieve an internal rate of return of at least 30%.

Forecast demand for the services of this new machine over its five-year useful life are as follows:

Year Number of Scans
1 1,250
2 2,700
3 3,500
4 1,400
5 675

Projected charge per scan: GH¢650
Variable costs per scan:

  • Consumables: GH¢330
  • Labour and overheads: GH¢176

Operating fixed costs per year: GH¢264,000 (includes depreciation on a straight-line basis)

Apart from the financial forecasts above, it is also envisaged that the project will produce non-financial benefits in several forms. Although it is hard to place a precise value on this, expert opinion suggests that this could approximate GH¢70,000 per annum.

Required:

i) Using cost-benefit analysis (CBA) computations, evaluate if the project should be undertaken.

ii) Enumerate TWO limitations of evaluating projects in the public sector.

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  • 5 Marks

MA – Nov 2024 – L2 – Q3b – Activity-Based Costing (ABC) in the Service Sector

Assessment of ABC's applicability in the service sector and identification of four units in healthcare where it can be applied.

In their effort to build equitable, resilient, and sustainable systems for health, both The Global Fund and Gavi have approached you on the implementation of ABC systems to improve their customer profitability analysis.

Required:

Assess the applicability of Activity-Based Costing (ABC) in the services sector. In explaining your answer, identify four units in the healthcare sector where ABC systems are applicable and specify an appropriate cost driver for each.

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  • 10 Marks

MA – Nov 2024 – L2 – Q3a – Flexible Budget and Variance Analysis

Preparation of a flexible budget and calculation of sales, material, and labour variances.

The budget and actual income statement of Shatta Company PLC for the month of April have been presented in the table below:

Budget Actual
Output (production and sales) 10,000 9,000
GH¢ GH¢
Sales Revenue 175,000 162,000
Raw Materials (80,000) (100,000 meters) (64,380) (74,000 meters)
Labour (35,000) (5,000 hours) (30,960) (4,300 hours)
Fixed Overheads (35,000) (36,225)
Operating Profit 25,000 30,435

Required:

i) Prepare a flexible budget for Shatta Company PLC.

ii) Calculate the following variances using the marginal costing system:

  • Sales (price, volume)
  • Material (price and usage)
  • Labour (rate and efficiency)

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  • 5 Marks

MA – Nov 2024 – L2 – Q2b – Ethical Standards in Business

Explanation of the need for ethical standards in business with reference to threats to ethical behavior.

According to the IESBA Handbook of the International Code of Ethics for Professional Accountants, 2024 Edition, a distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest and uphold ethical standards.

Required:

Explain the need for ethical standards in business (make reference to threats to ethical behavior).

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  • 15 Marks

MA – Nov 2024 – L2 – Q2a – Budgetary Control

Preparation of a budgeted profit and loss account for Ankawa LTD for the year ending 31 December 2025.

Ankawa LTD makes and sells a single product ‘Dee’. The following information is available for use in the budgeting process for the year 2025.

i) Sales targets have been proposed for four quarters in 2025 and the first quarter in 2026:

Year Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 1 (2026)
Sales (GH¢) 240,000 160,000 144,000 224,000 192,000

Selling price per unit of Dee is expected to be GH¢20.

ii) Inventory levels

  • At 31 December 2024: Finished units of Dee: 3,000 units

  • Raw materials: 7,000kg

  • Closing inventory of finished product Dee at the end of each quarter is budgeted as a percentage of sales units of the following quarter:

    • Quarters 1 and 2: 25%
    • Quarters 3 and 4: 35%

  • Closing inventory of raw materials is budgeted to fall by 600kg at the end of each quarter.

iii) Product Dee unit data:

  • Material: 8kg at GH¢1.60 per kg
  • Direct labour: 1.2 hours at GH¢3.50 per hour

iv) Other budgeted quarterly expenditure for 2025:

Quarter Fixed Overhead (GH¢) Capital Expenditure (GH¢)
Quarter 1 10,000 10,000
Quarter 2 18,000 –
Quarter 3 27,000 –
Quarter 4 30,000 –

v) Depreciation

  • Property is depreciated on a straight-line basis at 5% per annum based on total cost.
  • Value of property as at 31 December 2024: GH¢100,000.

vi) Inventory of product Dee is valued on a marginal cost basis for internal budget purposes.

Required:

Prepare the budgeted profit and loss account for the year ended 31 December 2025.

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  • 10 Marks

MA – Nov 2024 – L2- Q1b – Return on Investment (ROI)

Computation of ROI for different one-off transactions and advice on whether they should be undertaken.

Dondo LTD is a manufacturing company based in Nsawam. The following data represents the budgeted performance of Dondo LTD for the year 2025:

Amount (GH¢’000)
Profit 660
Plant and equipment (net of depreciation) 1,560
Working capital 750

Dondo LTD is considering undertaking the following separate one-off transactions:

  1. A cash discount of GH¢16,000 will be offered to its customers annually. This will, on average, reduce the trade receivables figure by GH¢60,000.
  2. An increase in average inventories by GH¢80,000 throughout the year. The increased inventory level is expected to increase sales, resulting in GH¢30,000 increased contribution per annum.
  3. At the beginning of the year, the company will buy a plant worth GH¢360,000. This is expected to reduce operating costs by GH¢105,000. The plant has a five-year useful life with nil residual value.

Required:

i) Compute the ROI for each of the one-off transactions above. 
ii) Advise Dondo LTD on whether the above one-off transactions should be carried out.

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  • 10 Marks

MA – Nov 2024 – L2 – Q1a – Transfer Pricing

Explanation of three reasons why Kako PLC determines transfer pricing centrally.

Kako PLC is a multinational company with production divisions trading in many countries across the globe. Trade takes place between a number of the divisions in different countries, with intermediate products being transferred between them. Where a transfer takes place between divisions trading in different countries, it is the policy of the board of the company to determine centrally the right transfer price without reference to the managers in the division.

Required:

i) Explain THREE possible reasons for Kako PLC to determine transfer prices of goods from the head office.

ii) Explain TWO criticisms of the central determination of transfer pricing.

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  • 5 Marks

MA – Mar 2024 – L2 – Q2b – Decision making techniques

This question discusses conditions that empower employees and junior managers to make operational decisions under Business Process Re-engineering (BPR).

Business Process Re-engineering (BPR) is the fundamental redesign of workflows and business processes within an organisation. BPR aims to streamline operations, improve outcomes, cut costs, and drive growth in business processes.

Required:
Explain THREE (3) conditions that may empower employees and junior managers to make operational decisions under BPR.

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  • 15 Marks

MA – Mar 2024 – L2 – Q2a – Budgetary Control

This question involves preparing sales budgets for gasoline and diesel and a production budget based on crude oil requirements for the first three months.

Squash Refinery has planned the following monthly sales for the first four months in the year:

Months 1 2 3 4
Gasoline (litres) 140,000 200,000 220,000 250,000
Diesel (litres) 100,000 130,000 180,000 210,000

The proposed ex-refinery prices are GH¢12.5 and GH¢10.8 per litre for gasoline and diesel respectively.

One metric tonne of crude oil when processed can yield 2,000 litres of gasoline and 2,500 litres of diesel. The inventory policy of the company is as follows:

  • Closing inventory at the end of each month: Twice the monthly sales for gasoline and 150% of the monthly sales for diesel.
  • Opening inventory: Gasoline – 200,000 litres, Diesel – 180,000 litres, and Crude – 140 metric tonnes.

Note: The purchase of crude is based on the production requirement for gasoline.

Required:
i) Prepare the sales budget for gasoline and diesel for the first three months. (3 marks)
ii) Calculate the quantity of crude oil to be purchased for the first three months. (12 marks)

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  • 5 Marks

MA – Mar 2024 – L2 – Q1b – Divisional performance | Discounted Cash Flow

This question explains why the divisional manager may reject an option with a higher NPV and discusses board acceptability.

The performance bonus of the fragrance divisional manager is linked to Return on Investment (ROI) and Residual Income (RI) and has an impact on the calculation of retirement benefits. The manager is due to retire at the beginning of Year 3.

Required:
Explain why the fragrance Divisional Manager will not invest in the option showing the higher NPV and comment on whether it will be acceptable to the Board

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  • 10 Marks

MA – Mar 2024 – L2 – Q1a – Divisional performance

This question requires calculating ROI and RI for two investment options and choosing the best based on these performance metrics.

The Board of Otmost Beauty Ltd, a beauty care production company, is planning to introduce a new product. The Board has tasked the Divisional Manager of the fragrance division to evaluate two options to buy a production plant. Both options will have the same capacity and expected life of four years, but they will differ in capital costs and expected net cash flows as shown in the table below:

Option Option 1 (GH¢ million) Option 2 (GH¢ million)
Initial capital investment year 0 640 520
Net cash flows (before tax)
Year 1 240 260
Year 2 240 220
Year 3 240 150
Year 4 240 100
Net present value at 16% p.a 31.6 19.0

All divisions of the company are expected to generate pre-tax returns on divisional investments in excess of 16% per annum, which the fragrance division currently is just managing to achieve. Anything less than 16% would make the divisional managers ineligible for the annual performance bonus.

The performance bonus is linked to Return on Investment (ROI) and Residual Income (RI) and also has an impact on the calculation of retirement benefits, as the retirement benefits take into consideration the performance bonus earned during the two preceding years. The manager of the fragrance division is due to retire at the beginning of Year 3.

In calculating divisional returns, divisional assets are valued at the net book values at the beginning of the year. Depreciation is charged on a straight line basis with nil residual value.

Required:
i) Calculate the ROI and RI for years 1 to 4 and select the best option from the point of view of the fragrance division based on ROI and RI criteria.

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  • 20 Marks

MA – Dec 2023 – L2 – Q5 – Relevant cost and revenue | Decision making techniques

This question focuses on relevant costing for a special order and the distinction between marginal and differential costs.

Semenhyia Ltd is involved in the design and manufacture of custom-built factory equipment. The company has just received an enquiry about the supply of 10 machines from one of their regular clients, Kukua Ltd.

Kukua Ltd has informed the company that the maximum price they are willing to pay is GH¢5,200 per machine. The order would need to be completed within two weeks.

The following details relate to the production of the machines:

i) Materials per machine:

  • 10 units of Material A, which is used regularly by the company. The company has 120 units of Material A in stock, which originally cost GH¢120 per unit. The replacement cost of Material A is 20% higher than the original price.
  • 5 units of Material B. The company has 40 units of Material B in stock, as it was purchased a few years ago for use in the production of other equipment, which the company no longer produces. If this material is not used in the production of this order, it would never be used again. The original purchase price for Material B was GH¢190 per unit. The replacement cost is GH¢150 per unit, and the net realizable value is GH¢130 per unit.
  • 3 units of Material C. This material is used regularly and usually costs GH¢85 per unit. However, the earliest delivery time for new stock from the regular supplier is three weeks. An alternative supplier could deliver immediately but would charge GH¢90 per unit. Semenhyia Ltd has 600 units in stock, but 580 units are required to complete other orders over the next two weeks.

ii) Labour hours per machine:

  • 12 skilled labour hours, paid GH¢20 per hour. Skilled workers are part of the permanent workforce, with 125 surplus skilled hours available per month. Skilled workers are paid time and a half for overtime.
  • 22 unskilled labour hours, paid GH¢15 per hour, employed on a casual basis.

iii) Supervision: A supervisor currently paid GH¢56,500 per annum will oversee the project, but a replacement will be hired for the duration of the contract at a cost of GH¢8,500.

iv) Machine hours: Each machine requires 18 hours of processing time on factory equipment. If the order is not accepted, the equipment would be subcontracted to Fimi Ltd for a contribution of GH¢70 per hour.

v) Depreciation: The depreciation charge for using the equipment for this order would be GH¢4,000.

vi) Overheads: Overheads are absorbed at a rate of GH¢35 per skilled labour hour.

vii) Estimate costs: The planning department has incurred costs to date of GH¢600.

Required:

a) Explain relevant cost and state TWO (2) examples of relevant cost in short-term decision-making. (3 marks)

b) Determine, using relevant costing principles, whether or not Semenhyia Ltd should undertake the contract. Your answer must include an explanation for the inclusion or exclusion of each of the above points. (13 marks)

c) Distinguish between “marginal cost” and “differential cost”. (4 marks)

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  • 5 Marks

MA – Dec 2023 – L2 – Q4b – Budgetary control

This question explains programme-based budgeting and outlines the disadvantages of line-item budgeting.

Slay Mama Plc (SMP) has been using line-item budgeting since its establishment. The Chief Executive Officer (CEO) recently attended a seminar on “Achieving the best out of your budget”. During the seminar, the facilitator highlighted the benefits of programme-based budgeting since it is a performance-based budgeting approach.

Required:

i) Explain Programme-Based Budgeting. (2 marks)

ii) Outline THREE (3) disadvantages of line-item budgeting. (3 marks)

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  • 15 Marks

MA – Dec 2023 – L2 – Q4a – Discounted Cash Flow

This question involves calculating the NPV for three projects being considered by Kanfa Ltd and recommending the best project based on financial grounds.

Kanfa Ltd received GH¢50 million as compensation from Ghana Highways Authority (GHA) when one of its properties was destroyed to pave way for the Accra–Kumasi highway construction. Management of Kanfa Ltd has decided to invest the amount received in one of three capital investment opportunities identified.

Project A:

This is a long-term project, which would run for 20 years and will require an immediate outlay of GH¢50 million and net annual cash profits as follows:

  • 1st to 5th years: GH¢2 million
  • 6th to 10th years: GH¢8 million
  • 11th to 15th years: GH¢15 million
  • 16th to 20th years: GH¢5 million

At the end of the 20th year, the project would be decommissioned at a cost of GH¢2 million.

Project B:

Kanfa Ltd is considering opening a Tourist Attraction Centre in Cape Coast, with an initial capital investment of GH¢50 million. It will operate for five years and be sold at an estimated price of GH¢5 million. The market research survey estimates the following visitor numbers and probabilities:

  • 800,000 visitors (30%)
  • 600,000 visitors (50%)
  • 400,000 visitors (20%)

Entrance fee: GH¢40 per visitor, and each visitor is expected to spend GH¢15 on souvenirs and GH¢5 on refreshments. Variable costs per visitor: GH¢25 (including souvenirs and refreshments). Maintenance costs: GH¢2 million per annum.

Project C:

This project involves a current outlay of GH¢50 million on equipment and GH¢15 million on working capital immediately. The working capital will increase to GH¢21 million in year one. Net annual cash profits: GH¢18 million for six years. The capital equipment can be sold for GH¢5 million at the end of the project.

Other information:

  • The company’s cost of capital is 12% for the three projects.
  • Ignore taxation and inflation.

Required:
Calculate the Net Present Value (NPV) of each project and recommend which project the company should undertake on financial grounds.

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  • 10 Marks

MA – Dec 2023 – L2 – Q3b – Budgetary control

This question requires the preparation of a budget for the supply of rice and beans needed to feed students at Ghanaman SHS for two semesters.

Ghanaman Senior High School (SHS), which has an enrollment of 2,500 students (residential), is one of the schools that depend on the government for the supply of food items. The bursar has proposed that a 50-kilogram bag of rice can feed 200 students per meal, while the same 50-kilogram bag of beans can be used for 350 students. Per the menu plan, rice will be served three times and beans twice a week. The SHS will run two semesters of 16 weeks each for the year 2023.

Other information:

i) Opening inventory:

  • Rice: 40 bags of 50kg
  • Beans: 10 bags of 50kg

ii) Inventory policy (Closing inventory):

  • Rice: 20% of the annual requirement
  • Beans: 15% of the annual requirement

Required:
Prepare the budget for the supply of both rice and beans needed to feed students for the two semesters of the year 2023.

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  • 10 Marks

MA – Dec 2023 – L2 – Q3a – Standard costing and variance analysis

This question involves calculating various cost and sales variances for Odumasi Ltd under a standard marginal costing system.

Odumasi Ltd has just introduced a new standard marginal costing system to assist in the planning and control of the production activities for the single product, which the company manufactures – ‘Tekie’. The system became operational on 1 March 2021.

The Management Accountant has consulted with the Senior Engineer and they have agreed on the following standard specifications to manufacture one unit of the product ‘Tekie’:

  • Direct materials: 4 kg @ GH¢1.75 per kg
  • Direct labour: 2 hours @ GH¢10 per hour
  • Variable overhead: 2 hours @ GH¢8.25 per hour

According to the Marketing Director, Odumasi Ltd operates in an industry where the budgeted selling price is normally calculated to achieve a markup of 30% on cost. The budgeted level of production and sales activity has been agreed with both production managers and sales staff at 24,000 units per month.

The actual results for the month of March 2021 are as follows:

  • Sales: 22,000 units yielding a total revenue of GH¢1,276,000.
  • Production: 23,000 units.
  • Direct Materials: 90,000 kg @ GH¢162,000.
  • Direct labour: 48,000 hours @ GH¢576,000.
  • Variable overhead: GH¢350,000.

Required:
Calculate the relevant variances for March 2021 under the headings of sales, materials, labour, and overheads.

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  • 5 Marks

MA – Dec 2023 – L2 – Q2c – Decision making techniques

This question explains why standard costing may not be appropriate in a Just-In-Time (JIT) and Total Quality Management (TQM) environment.

Explain why a standard costing system may not be considered appropriate for the following modern manufacturing environments listed below:
i) Just-In-Time (JIT).
ii) Total Quality Management (TQM).

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