Managerial Accounting

Managerial Accounting — 2023

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.

March/April 2023

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. Show all your workings.

Question 1(a) — 8 marks

Explain each of the following terms as used in Managerial Accounting:

(i) Budget;

(ii) Performance evaluation;

(iii) Marginal costing technique;

(iv) Responsibility accounting.

Answer

1. Budget: a quantified plan for a future period, setting expected revenues, costs, activities and resources.
2. Performance evaluation: assessing actual results against targets, standards or other benchmarks and explaining significant differences.
3. Marginal costing technique: charge variable production costs to units and treat fixed production overhead as a period cost; sales less variable costs gives contribution.
4. Responsibility accounting: organise budgets and reports by centres whose managers are accountable for controllable costs, revenues, profits or investments.

Question 1(b) — 12 marks

A voter registration centre uses a single queue to register potential voters. The arrival and service are random and follow poisson distribution. The inter arrival time of persons is 7.5 minutes while the mean service time at the centre is 6 minutes.

Determine the:

(i) expected number of potential voters waiting in the queue;

(ii) expected number of potential voters in the queuing system;

(iii) expected time a potential voter spends in the queuing system;

(iv) expected time a potential voter waits in the queue;

(v) expected proportion of time that the registration clerk is idle.

Answer

λ = 60 ÷ 7.5 = 8 per hour; μ = 60 ÷ 6 = 10 per hour.

Use the stable M/M/1 model: one server, Poisson arrivals, independent exponential service times and λ < μ. Service completions are counted per time interval; service durations are exponential.

Question 2(a) — 8 marks

During the year 2021, Kolo Manufacturers produced 10,000 units and incurred the following costs:

Cost	Ksh
Rent	1,000,000
Electricity (30% fixed)	720,000
Water (90% variable)	600,000
Repair and maintenance (20% fixed)	1,800,000
Direct materials	10,500,000
Direct labour	3,500,000
Salaries	1,364,000

(i) Using the account analysis method, determine the: (I) variable cost per unit; (II) total fixed costs.

(ii) Formulate a linear cost equation in the form of: y = a + bx.

(iii) Estimate the total cost to be incurred if the company produces 14,000 units.

Answer

Question 2(b) — 12 marks

The management of Mboy Limited intends to manufacture either Product X or Product Y. The following are the expected net profits or losses and associated probabilities under different economic conditions.

Economic condition	Probability	Product X (Ksh)	Product Y (Ksh)
Boom	0.30	1,000,000	1,200,000
Neutral	0.40	800,000	900,000
Recession	0.30	200,000	-100,000

(i) Draw a decision tree to present the information above.

(ii) For each of the products, calculate the Expected Monetary Value (EMV).

(iii) A consultancy firm has offered to provide perfect information to the management at a cost of Ksh. 100,000. Advise the management on whether to hire the consultancy firm or not.

Answer

1. Without additional information, select Product Y because its EMV of Ksh. 690,000 exceeds Product X’s Ksh. 680,000.
2. Perfect information would permit Product Y in boom and neutral conditions, and Product X in recession. Its maximum worth is EVPI = Ksh. 90,000.
3. Do not hire the consultancy at Ksh. 100,000: the fee exceeds even the value of perfect information by Ksh. 10,000.

Question 3(a) — 8 marks

Highlight four objectives of performance evaluation in an organization.

Answer

1. Measure achievement: compare actual outcomes with agreed objectives and budgets.
2. Identify problems: reveal adverse cost, revenue or efficiency variances requiring investigation.
3. Support decisions: provide evidence for resource allocation, training and operational improvements.
4. Motivate and establish accountability: give managers feedback and reward results they can influence while supporting organisational goals.

Question 3(b) — 12 marks

Caleb Limited intends to invest in a project that has the following expected cash flows.

Year	Expected cash flow (Ksh)
0	-6,000,000
1	500,000
2	600,000
3	3,700,000
4	4,000,000
5	1,000,000

The cost of capital is 14%.

(i) Determine the Internal Rate of Return (IRR) using discount rates of 14% and 16%, respectively.

(ii) Based on the results obtained in (i) above, advise the management on whether to invest in the project or not.

Answer

1. Invest in the project: the estimated IRR is about 15.618%, above the 14% cost of capital. Its NPV at 14% is positive.

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

At 16%: discount rate 16%. PV = cash flow ÷ (1 + r)ⁿ. All amounts are Ksh.

IRR is a linear interpolation estimate; full-precision discount factors are used, so answers using the printed four-decimal tables can differ slightly.

Question 4(a) — 8 marks

The following information relates to Delly Limited for the first six months of the year 2021.

Month	Output (units)	Total cost of production (Ksh ‘000)
January	64	13,210
February	60	13,620
March	72	14,150
April	90	14,600
May	100	15,020
June	96	14,980

(i) Using the high-low method, determine the: (I) variable cost per unit; (II) fixed cost of production; (IV) linear cost function in the form of: y = a + bx.

(ii) The company’s fixed cost will increase by 40% when the output exceeds 100 units. Calculate the estimated total cost of producing 120 units.

Answer

The question’s costs are in Ksh ‘000. Multiply by 1,000 before presenting the answer in shillings; the printed subpart sequence skips (III).

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

Question 4(b) — 12 marks

Pakn Limited manufactures and sells a single product, PK30. The following are the costs of the firm for the year 2021:

Cost	Ksh
Direct labour cost per unit	22
Direct material cost per unit	12
Variable overheads per unit	16
Annual fixed costs	400,000

Additional information: The selling price per unit is Ksh. 70. The company has a capacity of producing a maximum of 40,000 units in a year.

(i) On the provided graph paper, construct a break-even chart.

(ii) Using the chart in (i) above, determine the: (I) break-even point in units and in shillings; (II) margin of safety in units and in shillings.

(iii) Determine the profit that will be made when 30,000 units are produced and sold.

Answer

1. The question gives maximum capacity of 40,000 units but no separate expected sales volume. The reported margin of safety assumes the company sells at that capacity.
2. If margin of safety is instead required for the later 30,000-unit scenario, it is 10,000 units, or Ksh. 700,000. A margin of safety always needs a stated sales basis.

Question 5(a) — 10 marks

Kase Limited manufactures and sells detergents. The company hires four salespersons; Ann, Joy, John and Peter to sell in each of the towns; Kitui, Garissa, Eldoret and Narok. Each salesperson is assigned to each town. The following table shows the daily sales, in thousands of shillings, made by each salesperson.

Town	Ann	Joy	John	Peter
Kitui	20	18	14	22
Garissa	16	22	20	10
Eldoret	15	19	16	20
Narok	10	12	8	14

Determine the:

(i) optimal assignment schedule that will maximize daily sales;

(ii) maximum daily sales.

Answer

Maximise by converting each entry to an opportunity loss: 22 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:

Cover zeros with rows Garissa and columns Ann, Peter. Minimum uncovered entry = 1. Subtract it from uncovered cells and add it at line intersections.

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

Maximum daily sales in shillings = 73 × 1,000 = Ksh. 73,000.

Question 5(b) — 10 marks

Lax Limited manufactures and sells electric kettles. Currently the company produces and sells 7,000 electric kettles which is 70% of the company’s production capacity. The selling price per electric kettle is Ksh. 4,200. The following are the variable production costs per electric kettle.

Cost per kettle	Ksh
Direct materials	600
Direct labour	800
Variable production overheads	200

The fixed administration and selling costs are Ksh. 4,500,000 per annum. The firm has received a special order of 3,000 electric kettles at a price of Ksh. 3,500 each. If the order is accepted, it will utilize the idle capacity.

(i) Using marginal costing approach, prepare: (I) current income statement; (II) income statement if the order is accepted.

(ii) Advise the management on whether to accept the order or not.

Answer

1. Capacity is 7,000 ÷ 70% = 10,000 units; the 3,000-unit order exactly uses idle capacity.
2. Accept the order if fixed costs remain unchanged and it does not displace regular sales or reduce their price. Incremental contribution and profit are Ksh. 5,700,000.

Question 6(a) — 8 marks

Explain each of the following types of transfer pricing:

(i) Full cost transfer pricing;

(ii) Marginal cost plus transfer pricing;

(iii) Market based transfer pricing;

(iv) Negotiated transfer pricing.

Answer

1. Full cost: charge the receiving division the production cost including allocated fixed overhead; a profit mark-up may be added if specified.
2. Marginal cost plus: charge the variable or incremental cost of the transfer plus an agreed margin; identify any capacity opportunity cost separately.
3. Market based: use a comparable external market price, adjusted for selling or distribution costs avoided on internal transfers.
4. Negotiated: divisional managers agree a price within a range acceptable to both, subject to group objectives and capacity constraints.

Question 6(b) — 12 marks

Mbogo Limited has three warehouses in which it stores maize. The maize is sold to three different maize milling firms; M1, M2 and M3. On 1 January 2021, the company had the following quantities of maize available from the warehouses.

Warehouse	Bags available
W1	800
W2	1,200
W3	700

Milling firm	Bags required
M1	900
M2	1,100
M3	700

The cost of transporting one bag of maize from each warehouse to the milling firm is as follows (Ksh).

	M1	M2	M3
W1	40	30	20
W2	45	28	40
W3	25	32	35

Using the Vogel’s Approximation Method (VAM), determine the:

(i) optimal schedule that will minimize the total transportation cost;

(ii) optimal schedule that will minimize the total transportation cost;

Answer

The printed requirements (i) and (ii) are identical. The answer gives the VAM schedule, checks optimality and states the minimum total cost.

VAM allocation steps:

Initial basic feasible schedule:

Initial transportation cost = Σ(quantity × unit cost) = 70,800 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.

No improving negative reduced cost exists in the initial schedule.

Optimal schedule:

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

Cost working: 100 × 40 + 700 × 20 + 100 × 45 + 1,100 × 28 + 700 × 25 = 70,800 Ksh.

Question 7(a) — 10 marks

Manuh Limited is in the process of preparing its budgets. The following estimates relate to the year 2023.

2023	February	March	April	May	June
Purchases (Ksh)	300,000	200,000	500,000	400,000	250,000
Sales (Ksh)	400,000	300,000	200,000	250,000	300,000
Wages (Ksh)	150,000	150,000	150,000	200,000	200,000
Overheads (Ksh)	60,000	60,000	60,000	70,000	70,000

Additional information: (I) The expected cash balance on 1 April, 2023 is Ksh. 150,000. (II) All purchases and sales are on credit terms. (III) Creditors are paid 50% in the month of purchase, 40% in the month following, and 10% in the third month. (IV) Debtors settle 60% in the month of sale and 40% in the following month. (V) Overheads are paid one month after they are incurred. (VI) Wages are paid in the month they are incurred.

(i) Prepare a cash budget for each of the months of April, May and June 2023.

(ii) Based on the results in (i) above, advise the management on the action to take.

Answer

1. Treat the “third month” as two months after purchase. No discounts, bad debts or other receipts are stated.
2. Arrange a cash facility before April, reaching at least Ksh. 955,000 by June if the plan is unchanged. Also accelerate collections, negotiate payment dates and review discretionary spending. Negative balances show financing needs; they are not assumed approved overdrafts.

Question 7(b) — 10 marks

Reagan Limited produces and sells a single product, P24. The standard cost of producing one unit is as shown below.

Unit cost	Ksh
Direct materials	24
Direct labour	15
Variable production overheads	6

Actual results for the year 2021: (i) Selling, distribution and administration expenses: fixed Ksh. 40,000; variable 10% of sales value. (ii) Fixed production costs amounted to Ksh. 50,000. (iii) Selling price per unit was Ksh. 105. (iv) Units produced and sold were 3,000 and 2,500 respectively. Prepare income statement using the marginal costing technique.

Answer