Question

a) Outline the objectives of management accounting (3 Marks)

b) Assume that a certain process has an 95% learning curve effect and the first unit took 4000hrs to produce.
Required:
i) Compute the number of hours required to produce the first 34 units                                                   (3 Marks)
ii) Compute the number of hours required to produce 34th unit.                                                (2 Marks)
iii) Assume that the wage rate is Kshs.100 per hour, compute the Labor cost of producing the last 16 units (2 Marks)

QUESTION TWO
Sanders Ltd is a manufacturing company producing two joint products P1 and P2 in the ratio of 3:1 at the split-off point. The two products are taken to the mixing plant for blending and refining after the split off point. The following information is also provided:

Product P1 Product P2
Sales volume (litres)
Selling price per litre
Joint process costs*
Blending and refining costs
Other separable costs (all variable)
*Joint costs are apportioned on the basis of volume 300,000
Sh.3,500
Sh.300,000,000
Sh.250,000,000
Sh.50,000,000 100,000
Sh.7,000
Sh.100,000,000
Sh.250,000,000
Sh.20,000,000

The joint process costs are 70% fixed and 30% variable whereas the mixing plant costs are 30% fixed and 70% variable. There are only 5000 hours available in the mixing plant. Usually 4000 hours are taken in processing of Product P1 and P2, 2000 hours for each product while the remaining 1000 hours are used for other work that generates a contribution of Sh.100,000 per hour.

The company is now planning to change the production mix of the joint process to 3:2 for product P1 and P2 respectively. This change will result in an increase in the joint cost by Sh.500 for each additional litre of P2 produced.

Required:
(a)   Advise the company on whether to change the production mix.    (7 Marks)

(b) Explain other qualitative factors that are important to consider before changing the production mix.    (3 Marks)


QUESTION THREE  
A sports good manufacturer in conjunction with a software house, is considering the launch of a new sporting simulator based on video tapes linked to a personal computer enabling much greater realism to be achieved.
Two proposals are being considered. Both use the same production facilities and as these are limited, only one product can be launched.
The following date are the best estimates the firm has been able to obtain:
                                                      
Foot ball simulator                   Cricket simulator
                Annual volume(units)                  40,000                                      30,000
                Selling price                               £130 per unit                             £200 per unit
               Variable production costs           £80 per unit                               £100 per unit
                Fixed production costs               £600,000                                    £600,000
                Fixed selling and
                Administrative costs                  £450,000                                     £1,350,000
        
The higher selling and administrative costs for the cricket simulator reflect the additional advertising and promotion costs expected to be necessary to sell the more expensive cricket system.
The firm has a minimum target of £200,000 profit per year for the new products. The management recognises the uncertainty in the above estimates and wishes to explore the sensitivity of the profit on each product to changes in the value of the variables (volume, price, variable cost per unit, fixed costs).

Required
a) To calculate the expected profit from each product. (4 Marks)

b) To calculate the critical value for each variable (i.e the value at which the firm will earn £200,000), assuming that all other variables are expected (express this as an absolute value and as a percentage change from the expected value.); (3 Marks)

c) To discuss the factors which should be considered in making a choice between the two

Answer 1

a.

Objectives of Management Accounting:

1. Assistance in Planning and Formulation of Future Policies
2. Helps in the Interpretation of Financial Information
3. Helps in the Solution of Strategic Business Problems
4. Helps in Evaluating the Efficiency and Effectiveness of Policies