Question 01

The Chemical Free Clean Co (C Co) provides a range of environmentally-friendly

cleaning services to business customers, often providing a specific service to meet a
client’s needs. Its customers range from large offices and factories to specialist care wards
at hospitals, where specialist cleaning equipment must be used and regulations adhered
to. C Co offers both regular cleaning contracts and contracts for one-off jobs. For example,
its latest client was a chain of restaurants which employed them to provide an extensive
clean of all their business premises after an outbreak of food poisoning.
The cleaning market is very competitive, although there are only a small number of
companies providing a chemical free service. C Co has always used cost-plus pricing to
determine the prices which it charges to its customers but recently, the cost of the cleaning
products C Co uses has increased. This has meant that C Co has had to increase its prices,
resulting in the loss of several regular customers to competing service providers.
The finance director at C Co has heard about target costing and is considering whether it
could be useful at C Co.

Required:
(a) Briefly describe the main steps involved in deriving a target cost. (3 marks)
(b) Explain any difficulties which may be encountered and any benefits which may
arise when implementing target costing at C Co. (7 marks)
(10 marks)
Question 02

Cardale Industrial Metal Co (CIM Co) is a large supplier of industrial metals. The
company is split into two divisions:
Division F and Division N. Each division operates separately as an investment centre,
with each one having full control over its non-current assets. In addition, both divisions
are responsible for their own current assets, controlling their own levels of inventory and
cash and having full responsibility for the credit terms granted to customers and the
collection of receivables balances. Similarly, each division has full responsibility for its
current liabilities and deals directly with its own suppliers.
Each divisional manager is paid a salary of $120,000 per annum plus an annual
performance-related bonus, based on the return on investment (ROI) achieved by their
division for the year. Each divisional manager is expected to achieve a minimum ROI for
their division of 10% per annum. If a manager only meets the 10% target, they are not
awarded a bonus. However, for each whole percentage point above 10% which the
division achieves for the year, a bonus equivalent to 2% of annual salary is paid, subject
to a maximum bonus equivalent to 30% of annual salary.
The following figures relate to the year ended 31 August 2015:
Division F Division N
$’000 $’000
Sales 14,500 8,700
Controllable profit 2,645 1,970
Less apportionment of Head Office costs (1,265) (684)
––––––– ––––––
Net profit 1,380 1,286
––––––– ––––––
Non-current assets 9,760 14,980
Inventory, cash and trade receivables 2,480 3,260
Trade payables 2,960 1,400
During the year ending 31 August 2015, Division N invested $6·8m in new equipment
including a technologically advanced cutting machine, which is expected to increase
productivity by 8% per annum. Division F has made no investment during the year,
although its computer system is badly in need of updating. Division F’s manager has said
that he has already had to delay payments to suppliers (i.e. accounts payables) because
of limited cash and the computer system ‘will just have to wait’, although the cash balance
at Division F is still better than that of Division N.

Required:
(a) For each division, for the year ended 31 August 2015, calculate the appropriate
closing return on investment (ROI) on which the payment of management bonuses
will be based. Briefly justify the figures used in your calculations.
Note: There are 3 marks available for calculations and 2 marks available for discussion.
(4 marks)
(b) Based on your calculations in part (a), calculate each manager’s bonus for the year
ended 31 August 2015. (2 marks)
(c) Discuss whether ROI is providing a fair basis for calculating the managers’ bonuses
and the problems arising from its use at CIM Co for the year ended 31 August 2015.
(4 marks)
(10 marks)

Question 03

DH raised cash through an equity share issue to pay for a new factory it planned to
construct. However, the factory contract has been delayed and payments are not expected
to be required for three or four months. DH is going to invest its surplus
funds until they are required.
One of the directors of DH has identified three possible investment opportunities:

(i) Treasury bills issued by the central bank of DH's country. They could be purchased on
1 December 20X6 for a period of 91 days. The likely purchase price is Rs. 990 per Rs. 1,000.
(ii) Equities quoted on DH's local stock exchange. The stock exchange has had a good
record in recent months with the equity index increasing in value for 14 consecutive
months. The director recommends that DH invests in three large multinational entities
each paying an annual dividend that provides an annual yield of 10% on the current share
price.

(iii) DH's bank would pay 3.5% per year on money placed in a deposit account with 30
day's notice.

Required
Prepare notes on the risk and yield of each of the above investment opportunities
for use by the Management Accountant at the next board meeting. (10 marks)

Question 04

The Organic Bread Company (OBC) makes a range of breads for sale direct to the public.
The production process begins with workers weighing out ingredients on electronic
scales and then placing them in a machine for mixing. A worker then manually removes
the mix from the machine and shapes it into loaves by hand, after which the bread is then
placed into the oven for baking.
All baked loaves are then inspected by OBC’s quality inspector before they are packaged
up and made ready for sale.
Any loaves which fail the inspection are donated to a local food bank.
The standard cost card for OBC’s ‘Mixed Bloomer’, one of its most popular loaves, is as
follows:
 $
White flour 450 grams at $1·80 per kg 0·81
Wholegrain flour 150 grams at $2·20 per kg 0·33
Yeast 10 grams at $20 per kg 0·20
–––– ––––
Total 610 grams 1·34
–––– ––––
Budgeted production of Mixed Bloomers was 1,000 units for the quarter, although actual
production was only 950 units. The total actual quantities used and their actual costs
were:
Kg $ per kg
White flour 408·5 1·90
Wholegrain flour 152·0 2·10
Yeast 10·0 20·00
––––––
Total 570·5
––––––
Required:
(a) Calculate the total material mix variance and the total material yield variance for
OBC for the last quarter. (7 marks)
(b) Using the information in the question, suggest THREE possible reasons why an
ADVERSE MATERIAL YIELD variance could arise at OBC. (3 marks)
(10 marks)

Question 05

The Alka Hotel is situated in a major city close to many theatres and restaurants.
The Alka Hotel has 25 double bedrooms and it charges guests $180 per room per night,
regardless of single or double occupancy. The hotel’s variable cost is $60 per occupied
room per night. The Alka Hotel is open for 365 days a year and has a 70% budgeted
occupancy rate. Fixed costs are budgeted at $600,000 a year and accrue evenly throughout
the year. During the first quarter (Q1) of the year the room occupancy rates are
significantly below the levels expected at other times of the year with the Alka Hotel
expecting to sell 900 occupied room nights during Q1. Options to improve profitability
are being considered, including closing the hotel for the duration of Q1 or adopting one
of two possible projects as follows:

Project 1 – Theatre package

For Q1 only the Alka Hotel management would offer guests a ‘theatre package’. Couples
who pay for two consecutive nights at a special rate of $67·50 per room night will also
receive a pair of theatre tickets for a payment of $100. The theatre tickets are very good
value and are the result of long negotiation between the Alka Hotel management and the
local theatre. The theatre tickets cost the Alka Hotel $95 a pair. The Alka Hotel’s fixed
costs specific to this project (marketing and administration) are budgeted at $20,000.
The hotel’s management believes that the ‘theatre package’ will have no effect on their
usual Q1 customers, who are all business travellers and who have no interest in theatre
tickets, but will still require their usual rooms.

Project 2 – Restaurant
There is scope to extend the Alka Hotel and create enough space to operate a restaurant
for the benefit of its guests. The annual costs, revenues and volumes for the combined
restaurant and hotel are illustrated in the following graph:
Required:
(a) Using the current annual budgeted figures, and ignoring the two proposed projects,
calculate the breakeven number of occupied room nights and the margin of safety as a
percentage. (3 marks)
(b) Ignoring the two proposed projects, calculate the budgeted profit or loss for Q1 and
explain whether the hotel should close for the duration of Q1. (3 marks)
(c) Calculate the breakeven point in sales value of Project 1 and explain whether the
hotel should adopt the project. (4 marks)
(10 marks)
Question 06

Lesting Regional Authority (LRA) is responsible for the provision of a wide range of
services in the Lesting region, which is based in the south of the country ‘Alaia’. These
services include, amongst other things, responsibility for residents’ welfare, schools,
housing, hospitals, roads and waste management. Over recent months the Lesting region
experienced the hottest temperatures on record, resulting in several forest fires, which
caused damage to several schools and some local roads.
Unfortunately, these hot temperatures were then followed by flooding, which left a
number of residents without homes and saw higher than usual numbers of admissions
to hospitals due to the outbreak of disease. These hospitals were full and some patients
were treated in tents. Residents have been complaining for some years that a new hospital
is needed in the area.
Prior to these events, the LRA was proudly leading the way in a new approach to waste
management, with the introduction of its new ‘Waste Recycling Scheme.’ Two years ago,
it began phase 1 of the scheme and half of its residents were issued with different
coloured waste bins for different types of waste. The final phase was due to begin in one
month’s time. The cost of providing the new waste bins is significant but LRA’s focus has
always been on the long-term savings both to the environment and in terms of reduced
waste disposal costs.
The LRA is about to begin preparing its budget for the coming financial year, which starts
in one month’s time. Over recent years, zero-based budgeting (ZBB) has been introduced
at a number of regional authorities in Alaia and, given the demand on resources which
LRA faces this year, it is considering whether now would be a good time to introduce it.

Required:
(a) Describe the main steps involved in preparing a zero-based budget. (3 marks)
(b) Discuss the problems which the Lesting Regional Authority (LRA) may encounter
if it decides to introduce and use ZBB to prepare its budget for the coming financial
year. (9 marks)
(c) Outline THREE potential benefits of introducing zero-based budgeting at the LRA.
(3 marks)

Techno (Pvt) Ltd (TPL) is a computer assembling company that is part of DPP group.
Many of the required computer parts are bought from outside suppliers. However, the
computer motherboard is supplied by Qtech (Pvt) Ltd, a sister company of the group.
The current transfer price of motherboards that Qtech charges from TPL are set by the
group head office, by adding a 30% profit mark-up to the total variable cost relating to
production and delivery. The managing director of Qtech argues that the fixed cost
should also be taken into consideration when setting the transfer price. He further stated
that he is willing to reduce the mark-up to 10% in this case. TPL is also unhappy with the
current pricing policy since the price of motherboards of the same quality in the external
market is Rs. 11,500 each. The present requirement of TPL is 20,000 motherboards per
month.
Cost per Unit Rs
Raw Material 7000
Labour 1500
Production Variable Cost 500

Fixed overheads are charged at 20% of total variable production cost per unit.
Qtech presently serves both external market and demand of TPL. Deliveries to both
markets are made by an outsourced distributor who charges Qtech Rs. 200 per
motherboard. Qtech expects that the external market demand for motherboards could
not be increased in the short-run.

You are a management accountant working at the head office of DPP group.

Required:
(a) Calculate the prices at which Qtech sells motherboards to TPL under the existing
pricing policy and when it applies the full cost plus 10% profit mark-up as proposed
by the managing director of Qtech. (3 marks)
(b) Assess the possible change in TPL’s profit and the maximum loss to DPP group if
TPL is independent in making purchasing decisions. (4 marks)
(c) Explain the dual rate transfer pricing policy and whether it is applicable in the
above scenario. (3 marks)
(Total: 25 marks)

Question 07

CSC Co is a health food company producing and selling three types of high-energy
products: cakes, shakes and cookies, to gyms and health food shops. Shakes are the
newest of the three products and were first launched three months ago. Each of the three
products has two special ingredients, sourced from a remote part the world. The first of
these, Singa, is a super-energising rare type of caffeine. The second, Betta, is derived from
an unusual plant believed to have miraculous health benefits.
CSC Co’s projected manufacture costs and selling prices for the three products are as
follows:

Cakes Cookies Shakes

Per unit $ $ $
Selling price 5·40 4·90 6·00
Costs:
Ingredients: Singa ($1·20 per gram) 0·30 0·60 1·20
Ingredients: Betta ($1·50 per gram)
0·75 0·30 1·50
Other ingredients 0·25 0·45 0·90
Labour ($10 per hour) 1·00 1·20 0·80
Variable overheads 0·50 0·60 0·40
––––– ––––– –––––
Contribution 2·60 1·75 1·20
––––– ––––– –––––
For each of the three products, the expected demand for the next month is 11,200 cakes,
9,800 cookies and 2,500 shakes.
The total fixed costs for the next month are $3,000.
CSC Co has just found out that the supply of Betta is going to be limited to 12,000 grams
next month. Prior to this, CSC Co had signed a contract with a leading chain of gyms,
Encompass Health, to supply it with 5,000 shakes each month, at a discounted price of
$5·80 per shake, starting immediately. The order for the 5,000 shakes is not included in
the expected demand levels above.

Required:
(a) Assuming that CSC Co keeps to its agreement with Encompass Health, calculate
the shortage of Betta, the resulting optimum production plan and the total profit for
next month. (6 marks)

One month later, the supply of Betta is still limited and CSC Co is considering whether
it should breach its contract with Encompass Health so that it can optimise its profits.

Required:
(b) Discuss whether CSC Co should breach the agreement with Encompass Health.
Note: No further calculations are required. (4 marks)

Several months later, the demand for both cakes and cookies has increased significantly
to 20,000 and 15,000 units per month respectively. However, CSC Co has lost the contract
with Encompass Health and, after suffering from further shortages of supply of Betta,
Singa and of its labour force, CSC Co has decided to stop making shakes at all. CSC Co
now needs to use linear programming to work out the optimum production plan for
cakes and cookies for the coming month. The variable ‘x’ is being used to represent cakes
and the variable ‘y’ to represent cookies.

Required:
(c) (i) Explain what the line labelled ‘C = 2·6x + 1·75y’ on the graph is and what the area
represented by the points 0ABCD means. (6 marks)

(ii) Explain how the optimum production plan will be found using the line labelled ‘C
= 2·6x + 1·75y’ and identify the optimum point from the graph. (3 marks)

(iii) Explain what a slack value is and identify, from the graph, where slack will occur
as a result of the optimum production plan. (6 marks)

Note: No calculations are needed for part (c). (25 marks)