Managerial Accounting

Managerial Accounting — 2024

KNEC Diploma in Supply Chain Management, Module III. Original examination questions with explained answers for revision. Answers are independently prepared for study and are not an official KNEC marking scheme.

November 2024

Paper codes: 2903/305; 2906/305; 2907/305; 2926/305; 3103

Time: 3 hours. Answer any FIVE of the SEVEN questions. All questions carry equal marks. Answer in English.

Question 1(a) — 8 marks

Explain four functions of managerial accounting.

Answer

1. Planning: prepare forecasts, budgets and cost estimates that turn objectives into measurable resource requirements.
2. Decision support: compare relevant future revenues and costs of alternatives such as making or buying, pricing and investing.
3. Control: compare actual results with budgets, investigate significant variances and recommend corrective action.
4. Performance evaluation: report controllable results for responsibility centres so managers can assess efficiency and achievement of targets.

Question 1(b) — 12 marks

Nextime Limited intends to invest Ksh. 8,000,000 in a project. The project has an estimated useful life of 8 years. The expected scrap value at the end of 8 years is Ksh. 500,000. The project is expected to generate an annual net operating income of Ksh. 2,000,000. The company accepts projects with a payback period of less than three years.

(i) determine the payback period of the project;

(ii) advise the management whether to invest in the project or not.

Answer

1. Net operating income is treated as accounting profit after straight-line depreciation. Add back depreciation to obtain annual operating cash inflow.
2. Accept the project under the stated payback rule because 2.72 years is less than three years. Payback alone does not measure total profitability or the time value of money.

The scrap proceeds arrive at the end of year 8, after payback, so they are not added to every annual cash inflow. If “income” were intended to mean cash inflow instead, payback would be 4 years; this answer uses the normal accounting-income interpretation.

Question 2(a) — 8 marks

Highlight four limitations of cost-volume-profit (CVP) analysis.

Answer

1. Constant selling price is assumed, although discounts and market changes may alter revenue per unit.
2. Costs are treated as linear, with constant variable cost per unit and fixed costs within a relevant range; overtime or capacity steps can break this assumption.
3. Costs must be separated reliably into fixed and variable elements, which is difficult for mixed costs.
4. A single product or constant sales mix is assumed; changes in the mix alter the average contribution and break-even point.

Question 2(b) — 12 marks

The following data shows the number of guests and the costs incurred by Townside Hotel during the year 2023.

2023	Number of guests	Cost (Ksh)
March	200	1,500,000
April	325	1,650,000
May	400	2,100,000
June	525	2,400,000
July	600	2,700,000
August	450	2,050,000
September	375	1,950,000

Using the High-Low method, determine the:

(i) variable cost per guest;

(ii) fixed cost per month;

(iii) cost to be incurred for 1,100 guests.

Answer

Select the highest and lowest activity levels, rather than the highest and lowest cost observations.

Question 3(a) — 8 marks

Highlight four conditions that should be met before the application of a transportation technique in solving problems.

Answer

1. Identifiable sources and destinations must exist, with known quantities of supply and demand for the same planning period.
2. The product must be sufficiently homogeneous and quantities divisible or otherwise compatible with the allocation units.
3. Unit transportation costs must be known for each allowed route and the total objective must be additive and approximately linear.
4. The tableau must be balanced: total supply equals total demand, using a clearly identified dummy source or destination when necessary.

Question 3(b) — 12 marks

Matendo Limited intends to invest Ksh. 15,000,000 in a project. The project is expected to generate net cash inflows as follows:

Year	Net cash inflow (Ksh)
1	5,000,000
2	6,000,000
3	4,000,000
4	3,000,000
5	1,500,000

Additional information: (I) The expected scrap value of the project at the end of year 5 is Ksh. 500,000. (II) The company’s cost of capital is 14%.

Required:

(i) Determine the net present value (NPV) of the project.

(ii) Advise the management whether to invest in the project or not.

Answer

1. Add the Ksh. 500,000 scrap value to the year-5 operating cash inflow, giving Ksh. 2,000,000 in year 5.
2. Reject the project on the NPV criterion: its negative NPV of Ksh. 482,365.69 means it fails to earn the required 14% return.

Discounted cash flows: discount rate 14%. PV = cash flow ÷ (1 + r)ⁿ. All amounts are Ksh.

Question 4(a) — 10 marks

Mazuri Limited has a team of four salesmen to be assigned in four counties. The profit in Kenya shillings to be made by each salesman is as shown in the table below.

Salesman	Nairobi	Nakuru	Kisumu	Mombasa
Ali	320	200	280	220
Babu	280	220	300	300
Charo	300	300	260	240
Dado	260	240	280	300

Assign the salesmen to counties in order to maximize profit.

Answer

Maximise by converting each entry to an opportunity loss: 320 minus the original entry. Apply the Hungarian method. Reduce each row by its smallest entry, then reduce each column by its smallest entry.

After row reduction:

After column reduction:

Choose four independent zeros, with one assignment in every row and column. Read the values from the original table:

Question 4(b) — 10 marks

Malaku Limited makes and sells product M27. The variable cost per unit is Ksh. 300. The selling price is Ksh. 400. The budgeted fixed costs are Ksh. 700,000. Budgeted sales are 10,000 units.

(i) Determine the: (I) Break-even point in units; (II) Break-even point in shillings; (III) Margin of safety in units; (IV) Percentage margin of safety.

(ii) Interpret the results obtained in (i)(III) above.

Answer

1. Contribution per unit is Ksh. 100. The margin of safety means budgeted sales may fall by 3,000 units, or 30%, before the company reaches break-even.

Question 5(a) — 9 marks

Makutano Limited has four quarries 1, 2, 3 and 4 and four construction sites M, N, P and Q to deliver building stones. The following table shows the cost in Kenya shillings of transporting 1 stone from the quarry to the construction site.

Quarry	M	N	P	Q	R	Supply
1	14	12	8	10	18	40
2	16	10	12	14	16	30
3	12	16	18	12	10	20
4	10	14	14	16	12	10
Requirements	30	30	15	20	5

Using the North-West rule, determine the optimum transportation schedule that will minimize the total cost.

Answer

The introduction says four sites, but the printed table includes five, M, N, P, Q and R. Use all five columns; their demand totals 100, equal to supply.

NW allocation steps:

Initial basic feasible schedule:

Initial transportation cost = Σ(quantity × unit cost) = 1,270 Ksh.

The initial allocation method produces a feasible schedule, but does not by itself prove minimum cost. Apply MODI: uᵢ + vⱼ = cᵢⱼ on basic cells and Δᵢⱼ = cᵢⱼ − uᵢ − vⱼ on nonbasic cells. A negative Δ permits a cost reduction; adjust alternating +/− cells by θ. Zero basic allocations may be used for degeneracy.

Optimal schedule:

Final reduced costs (all are nonnegative, proving optimality):

Cost working: 5 × 14 + 15 × 8 + 20 × 10 + 30 × 10 + 15 × 12 + 5 × 10 + 10 × 10 = 1,020 Ksh.

Question 5(b) — 11 marks

Tuanze Limited has been performing poorly over the last three years. The management of the company is considering two alternatives to improve the performance. I expand the product line; II outsource the products.

The chances of selling the products in the international market and local market are 70% and 30% respectively. The following tables show the expected profits and their associated probabilities under different markets.

International demand	Probability	Expand (Ksh)	Outsource (Ksh)
High	0.80	1,000,000	900,000
Low	0.20	800,000	600,000

Local demand	Probability	Expand (Ksh)	Outsource (Ksh)
High	0.60	750,000	550,000
Low	0.40	600,000	400,000

The product expansion policy will cost Ksh. 100,000 while the outsourcing policy will cost Ksh. 10,000.

(i) prepare a decision tree to present the information above;

(ii) determine the expected monetary value (EMV) for each alternative;

(iii) advise the management whether to expand the product line or outsource the product.

Answer

1. Multiply the market probability by the conditional demand probability to obtain each joint probability. Deduct each policy cost once, after calculating its expected gross profit.
2. Expand the product line: net EMV is Ksh. 779,000, compared with Ksh. 725,000 for outsourcing, an expected advantage of Ksh. 54,000.

Question 6(a) — 8 marks

Highlight four features of a single queue model.

Answer

1. One service channel handles customers from a single waiting line.
2. Arrivals are independent and random, normally represented by a Poisson process with a constant mean rate.
3. Service times are independent and exponentially distributed with a constant mean service rate.
4. For the usual steady-state M/M/1 results, the service rate exceeds the arrival rate; customers normally follow first-come, first-served discipline.

Question 6(b) — 12 marks

Kalulu Limited manufactures two types of tables; round and rectangular. The following is the operating statement of the company for the year 2023.

Operating statement (Ksh)	Round	Rectangular	Total
Sales	2,800,000	10,000,000	12,800,000
Variable production costs	1,200,000	4,000,000	5,200,000
Adverting	820,000	2,200,000	3,020,000
Depreciation	400,000	800,000	1,200,000
Line supervisors salaries	120,000	140,000	260,000
Factory expenses	560,000	2,000,000	2,560,000
Printed total costs	1,900,000	9,140,000	12,240,000
Net operating income	-300,000	860,000	560,000

Additional information: (I) The management is concerned about the losses made in round tables and intends to discontinue its manufacture. (II) If the manufacture of round tables is discontinued, the line supervisors assigned to the model will be discharged. (III) Advertising costs are specific to the products.

(i) Using marginal costing technique, prepare: (I) current operating statement; (II) operating statement if production of round tables is discontinued.

(ii) Advise the management whether to discontinue production of round tables or not.

Answer

1. The round-table cost components add to Ksh. 3,100,000, although the printed total is Ksh. 1,900,000. The component figures reconcile with the printed round-table loss of Ksh. 300,000 and total profit of Ksh. 560,000; use those components.
2. Round-table advertising and its supervisor salary are avoidable. Depreciation and factory expenses are assumed to continue because no disposal proceeds or avoidability is stated.
3. Retain round tables. Discontinuing them removes Ksh. 660,000 of contribution after avoidable costs, turning a Ksh. 560,000 profit into a Ksh. 100,000 loss. Review the decision if additional fixed costs can actually be saved.

Question 7(a) — 8 marks

Explain four objectives of responsibility accounting.

Answer

1. Assign accountability: identify managers responsible for each cost, revenue, profit or investment centre.
2. Set measurable targets: communicate budgets and standards for the factors each manager can influence.
3. Control operations: compare actual results with targets and investigate exceptions at the appropriate responsibility level.
4. Improve performance and goal alignment: provide feedback and incentives that link divisional decisions to overall organisational objectives.

Question 7(b) — 12 marks

The following is the statement of financial position of Freezo Limited as at 31 December 2023.

Statement of financial position at 31 December 2023 (Ksh)	Amount
Plant and equipment — cost	700,000
Less accumulated depreciation	-290,000
Net plant	410,000
Motor vehicles — cost	1,200,000
Less accumulated depreciation	-150,000
Net vehicles	1,050,000
Total noncurrent assets	1,460,000
Finished goods	52,000
Raw materials	100,000
Accounts receivable	182,000
Bank	50,000
Current assets	384,000
Total assets	1,844,000
Ordinary share capital	1,200,000
Retained profit	470,000
Total equity	1,670,000
Accounts payable	174,000
Capital and liabilities	1,844,000

Additional information relating to the projections for the year 2024:

(i) The expected cash at bank as at 31 December 2024 will be Ksh. 90,000.

(ii) The accounts receivable will increase by Ksh. 20,000.

(iii) The inventory of finished goods will decrease by 20% while raw materials will increase by 10%.

(iv) A motor vehicle costing Ksh. 200,000 will be acquired during the year. Depreciation on motor vehicles for the year will be Ksh. 239,600.

(v) Depreciation on plant is Ksh. 40,000 per annum.

(vi) Accounts receivable will increase by Ksh. 18,000 while the accounts payable will decrease by Ksh. 62,000.

(vii) The expected retained profit for the year will be Ksh. 40,000.

Prepare a budgeted statement of financial position as at 31 December 2024.

Answer

1. Notes (ii) and (vi) give conflicting increases in the same accounts-receivable balance. A unique budget cannot be confirmed until the setter clarifies the discrepancy.
2. For the provisional statement below, treat the later Ksh. 18,000 increase in note (vi) as superseding note (ii), and treat the Ksh. 40,000 retained profit as the addition for 2024. This interpretation balances without an invented adjustment.
3. Keep the alternative outcomes visible rather than forcing the Ksh. 20,000 instruction to balance with an unsupported cash, borrowing or equity figure.