Managerial Accounting

Managerial Accounting — Undated papers

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.

The supplied scan has no complete printed examination date. Dates inside a question are accounting periods, not the examination year.

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Question 1(a) — 8 marks

Explain four differences between Management Accounting and Financial Accounting.

Answer

1. Users and purpose: management accounting supports internal planning and decisions; financial accounting reports financial position and performance mainly to external users.
2. Time focus: management accounting can use forecasts and forward-looking estimates as well as history; financial statements primarily summarise past transactions.
3. Rules and format: internal management reports are tailored to decision needs; external financial statements follow applicable reporting standards and prescribed disclosure requirements.
4. Detail and frequency: management reports can analyse individual products or departments whenever needed; financial statements usually summarise the whole entity for regular reporting periods.

Question 1(b) — 12 marks

The following balances were extracted from the books of account of Wotu Limited for the year 2017.

Item (Ksh)	First half of year	Second half of year
Sales	90,000	100,000
Total cost	80,000	86,000

There is no change in prices and variable costs and the fixed costs are incurred equally in the two half year periods. For the year 2017, determine the:

(i) profit / volume (P/V) ratio;

(ii) fixed costs;

(iii) break even sales;

(iv) percentage of margin of safety.

Answer

Question 2(a) — 10 marks

The following information relates to Kowelu Manufacturers for the first six months of the year 2017.

Month	Production volume (units)	Electricity cost (Ksh)
January	12,600	144,000
February	4,500	72,000
March	3,300	48,000
April	8,700	96,000
May	15,300	156,000
June	6,600	96,000

(i) Using the High-Low method, determine: (I) fixed cost; (II) variable cost per unit. (ii) Based on the results in (i), formulate an equation for determining the total cost of electricity. (iii) Using the equation, estimate the total cost of electricity when the production volume is 14,000 units.

Answer

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

Question 2(b) — 10 marks

There is one printing machine in a bank. Requests for printing are sent at the rate of 30 copies per hour, according to a Poisson distribution. Printing service follows an Exponential distribution, with a time interval of 40 seconds between services. Determine the:

(i) percentage of time that the printing machine is used;

(ii) average length of the queue;

(iii) average number of printing requests in the system;

(iv) average time spent in the queue;

(v) average time spent in the system.

Answer

λ = 30 requests per hour; μ = 3,600/40 = 90 per hour. W = 1 minute (60 seconds), and Wq = 1/3 minute (20 seconds).

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 3(a) — 10 marks

Explain five requirements of a transportation problem.

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.
5. A clear objective and route restrictions: normally minimise total delivery cost while satisfying supply and destination requirements; identify prohibited routes or capacity limits before allocation.

Question 3(b) — 10 marks

The following are the production costs of a factory for the year 2017.

2017 production cost	Ksh
Direct wages	160,000
Direct materials	240,000
Fixed production overhead	80,000
Variable production overhead	120,000

In the coming year, it is expected that:

(i) the rate of direct labour remuneration will fall from Ksh. 1.60 per hour to Ksh. 1.50 per hour;

(ii) production will increase by 25%;

(iii) production efficiency will be reduced by 5%;

(iv) price per unit of direct material and other materials and services, which comprise overheads, will remain unchanged.

Prepare a production cost budget for the year 2018.

Answer

1. Treat the efficiency reduction as a reduction in labour output per hour to 95% of the prior rate. Therefore hours needed for the planned output are divided by 0.95.
2. Material and variable overhead quantities are assumed to scale with output because no separate revised usage rates are given; their prices are unchanged. Fixed overhead remains fixed within the relevant capacity range.
3. If an examiner instead uses the approximation of adding 5% to labour hours, labour would be Ksh. 196,875 and total cost Ksh. 726,875. The main calculation uses the exact efficiency-ratio interpretation.

Question 4(a) — 10 marks

Explain five characteristics of a simple queue.

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.
5. The standard simple model assumes an effectively unlimited calling population and waiting space, with no balking or reneging, so customers remain until served.

Question 4(b) — 10 marks

Kalindo Limited intends to invest Ksh. 2,000,000 in either Project A or Project B. The following are the expected cash inflows from the projects.

Year	Project A (Ksh)	Project B (Ksh)
1	500,000	400,000
2	600,000	200,000
3	800,000	500,000
4	400,000	1,200,000
5	—	800,000
6	—	600,000

(i) Calculate the payback period of each project.

(ii) Based on the results in (i) above, advise the management on the project to invest in.

Answer

1. Assume cash is received uniformly within the recovery year for the fractional-year estimate.
2. Choose A under the payback criterion: 3.25 years is shorter than B’s 3.75 years. This criterion ignores post-payback cash flows and the time value of money, so it is not a complete profitability comparison.

Question 5(a) — 12 marks

Wete Enterprises sells clay bricks. The following information is for the year ended 31 December 2017.

Item	Ksh
Sales	200,000
Raw material cost	48,000
Direct labour cost	28,000
Variable manufacturing overheads	18,000
Fixed manufacturing overheads	14,000
Variable distribution and administration expenses	9,000
Fixed distribution and administration expenses	10,000

Using marginal costing approach, prepare an income statement for the year ended 31 December 2017.

Answer

No opening or closing inventory adjustment is supplied; the stated operating costs are treated as costs for the sales period.

Question 5(b) — 8 marks

Outline four types of responsibility centres in performance evaluation.

Answer

1. Cost centre: a manager is accountable primarily for controllable costs and efficient use of resources, such as a maintenance department.
2. Revenue centre: a manager is accountable primarily for generating revenue, such as a sales territory with limited control over production costs.
3. Profit centre: a manager controls both revenue and costs and is evaluated on the resulting profit.
4. Investment centre: a manager is accountable for profit and the assets or capital used to earn it, assessed using measures such as ROI and residual income.

Question 6(a) — 8 marks

A company has three sources of grains, X, Y and Z, which supply to warehouses located at A, B, C, D and E. The supply available from the three sources is 1,800 bags, 1,400 bags and 1,800 bags per month. The monthly demand of the warehouses is 800 bags, 800 bags, 1,000 bags, 800 bags and 1,600 bags, respectively. The following is the unit cost of transportation, in Kenya shillings, from each source to each warehouse.

Source	A	B	C	D	E
X	10	16	12	12	6
Y	8	14	14	12	12
Z	16	8	12	12	9

Determine the:

(i) optimum distribution schedule, using North-West Corner rule in order to minimize the total cost of transportation;

(ii) minimum total cost, according to the schedule determined in (i) above.

Answer

NW allocation steps:

Initial basic feasible schedule:

Initial transportation cost = Σ(quantity × unit cost) = 58,400 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: 200 × 12 + 1,600 × 6 + 800 × 8 + 600 × 12 + 800 × 8 + 800 × 12 + 200 × 12 = 44,000 Ksh.

Question 6(b) — 12 marks

Two divisions, A and B in a company are considering to invest in a new project. The following information relates to the two divisions.

Item	Division A	Division B
Investment outlay (Ksh)	200,000	200,000
Net return on new investment (Ksh)	32,000	22,000
Current ROI	18%	11%

The company’s cost of capital is 13%. Using each of the following approaches, advise each division on whether to accept the new investment or not:

(i) Return on Investment (ROI).

(ii) Residual Income (RI).

Answer

1. Division A’s project ROI is 16%, below its current 18%; a manager evaluated only on maintaining current ROI may reject it. Its RI is positive Ksh. 6,000, so the company should accept it because it exceeds the 13% capital charge.
2. Division B’s project ROI is 11%, equal to its current ROI, so it leaves that ratio unchanged. Its RI is negative Ksh. 4,000, and 11% is below the 13% required return; the company should reject it.
3. Residual income aligns these decisions with earning the required capital return. The divisional ROI comparison alone can discourage a worthwhile project in a high-return division.

Question 7(a) — 8 marks

A company intends to assign four jobs J1, J2, J3 and J4 to four employees, E1, E2, E3 and E4. The following are the wages, in Kenya shillings, payable to each employee for each particular job.

Employee	J1	J2	J3	J4
E1	5,200	6,400	6,800	6,000
E2	4,000	8,400	7,200	5,200
E3	4,000	6,000	11,200	8,000
E4	4,800	5,000	8,400	7,500

Determine the:

(i) employee to be assigned to each job in order to minimize the total wages;

(ii) total minimum wages.

Answer

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 E1 and columns J1, J2. Minimum uncovered entry = 400. 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:

Question 7(b) — 12 marks

Hassan operates a chain of supermarkets in a city. He is considering two options to increase revenues across the chains. The following is the estimated impact of the two options on the sales and their respective probabilities.

Item	Reduce prices	Launch loyalty card
Cost of option (Ksh)	800,000	600,000
Probability of high sales	0.80	0.70
Probability of low sales	0.20	0.30
Result of high sales (Ksh)	1,600,000	2,000,000
Result of low sales (Ksh)	1,000,000	1,500,000

(i) Present the above information in a decision tree.

(ii) Using the Expected Monetary Value (EMV) approach, advise the management on the option to take.

Answer

1. Use each option’s own high/low probabilities; they are not identical. The expected sales values are Ksh. 1,480,000 for reduced prices and Ksh. 1,850,000 for the loyalty card.
2. On the supplied sales-less-option-cost basis, choose the loyalty card: Ksh. 1,250,000 versus Ksh. 680,000, a Ksh. 570,000 expected advantage.
3. The source calls the outcomes sales, rather than contribution or profit. This comparison assumes other relevant operating costs are equal or already accounted for; a full profit decision would also require those costs.