Mangement Accounting 2 Assignment

Course Code: Acc 425

Level: ND 2 Accountancy
Submission Date & Time: Monday 7th August, 2023 By 12Noon
Activity Based Costing (ABC)
1. Ripples limited makes three classes of computers – HP, APPLE and DELLS. A traditional product
costing system is used at present; although an ABC system is been considered.
Details of the three products for a typical period are
PRODUCT LABOUR HOURS MACHINE HOURS MATERIAL COST PRODUCTION
PER UNIT PER UNIT PER UNIT (N) UNIT
HP ½ 1½ N20 750
APPLE 1½ 1 N12 1,250
DELL 1 3 N25 7,000

Direct labour costs N6 per hour and production overheads are absorbed on a machine hour basis.
Total production overhead are N654,500 and further analysis shows that the production overheads
can be divided as follows.
Production overhead cost breakdown %
Costs relating to set ups 35
Costs relating to machinery 20
Costs relating to materials handling 15
Costs relating to inspection 30
Total production overhead 100

The following total activity volumes are associated with each product line for the period as a whole
PRODUCT Number of set ups Number of movement of Number of
materials inspections
APPLE 115 21 180
HP 75 12 150
DELL 480 87 670

Required
a. Calculate the cost per unit for each product using traditional methods absorbing overheads on the basis
of machine hours
b. Calculate the cost per unit of each product using ABC principles (2 decimal places)
c. Why is Activity Based Costing preferred to Traditional approach

Quality Management & Quality Costs

Question 1

a. Explain the FOUR classifications of cost of quality with examples of each.

b. Benson Dinka is the management accountant of Dynamic PLC. Mr. Dinka realizes that
the present performance reporting system does not highlight quality costs. The
reports contain the information below, but he wants this to be reported in an
appropriate format.
The following information is available in respect of the year ended December 31, 2020.
1. Production data:
Units requiring rework 2,500
Units requiring warranty repair service 1,500

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 Design engineering hours 50,000
Inspection hours (manufacturing) 220,000
2. Cost data:
Design engineering cost per hour 1,000
Inspection cost per hour (manufacturing) 750
Rework cost per heating system unit reworked (Manufacturing) 50,000
Customer support cost per repaired unit (Manufacturing) 4,500
Transportation costs per repaired unit (Distribution) 4,500
Warranty repair costs per repaired unit 55,000
3. Staff training costs amounted to N2,500,000 and product testing costs were N850,000.
4. The marketing director has estimated that sales of 1,100 units were lost as a result of
bad publicity in trade journals. The average contribution per heating system unit is
estimated at N100, 000.
Required:
Prepare a cost of quality report for Dynamic PLC that shows its costs of quality
(using appropriate headings) for the year ended December 31, 2020.

Capital Rationing
1. Dangana Company Limited is considering the Identical Projects as follows:
A B C D E F
Initial Outlay 42,000 25,000 40,000 35,000 38,000 50,000
Annual cash flow 22,000 10,000 18,000 12,000 15,000 20,000
Each project is scheduled to have a life of seven years. The company hopes to be able to rationing
N130,000 out of the N 150,000 budgeted for capital expenditure. The cost of capital is 16%. Which
combination of projects will minimise the value of the firm, assuming the project is
(i.) divisible and (ii.) indivisible

Capital Budgeting
1. (a) The management of Mr. WISE Investment Plc is considering the possibility of selecting one of
the following mutually exclusive projects. From the position of the chairman, any investment with
Accounting Rate of Return of below 20% for total investment and 35% for average investment will be
rejected. The two possible projects have the following cashflow characteristics.
Year A B
0 (100,000) (200,000)
1 15,000 40,000
2 20,000 37,500
3 42,000 40,000
4 17,000 50,000
5 20,000 150,000
Scrap Value 20,000 25,000
The two projects are to be depreciated on a straight line basis over their useful lives.
(b) Identify the Internal Rate of Return (IRR) of a project with the following cashflows
characteristics which are net of depreciation:
Year Profit
0 (200,000)
1 20,000
2 80,000
3 40,000
4 80,000

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 5 140,000
The company depreciate such assets on a straight line method over its useful life. The company tax is
30% and the minimum rate of return expected by the provider of funds is 18%

(c) State the Accept/Reject rule of the following Capital Budgeting Decision criteria:

i. Pay Back Period (PBP)

ii. Accounting Rate of Return (ARR)
iii. Net Present Value (NPV)
iv. Internal Rate of Return (IRR)

2. (a) Given the following information you are required to determine the NPV of two mutually
exclusive projects with a discount rate of 10% and 15% respectively.
Year Project A Project B
N N
Initial Outlay (100,000) (100,000)
Cash flows: 1 5,000 25,000
2 20,000 70,000
3 40,000 55,000
4 65,000 35,000
Advise on which of the two investments should be accepted.

3. A project with a cost of N100,000 will earn a profit before depreciation and tax in its first five years as
follows: N20,000, N30,000, N28,000, N32,000, and N40,000 respectively.
If depreciation is on a straight line basis:
a. Determine the ARR of the project
b. Assuming the tax rate is 30% and the project will have a scrap value of N10,000, determine
the ARR.

Advanced Management Techniques

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(a) Define Life Cycle Costing
(b) Highlight FIVE stages of Life Cycle Costing
(c) Differentiate between Traditional Management Accounting System and Life Cycle Costing
(d) Distinguish between risk and uncertainty
(e) Write short note on any FOUR of the following:
(a) Activity Based Management (ABM)
(b) Total Quality Management (TQM)
(c) Target Costing (TC)
(d) Back-flush costing (BC)
(e) Just-In-Time (JIT) System

Portfolio Theory
1. Ogbeni Lana Ire Komi who has just won a lottery worth N800,000 has decided to invest half in a second
hand car and the remaining half in buying securities. A stockbroker has offered him a two-security
portfolio for consideration. Assuming the following expected returns have been given on the two
securities.
Probability Security X Security Y
Return (%) Return (%)
0.1 15 10
0.8 25 30
0.1 35 50
Required:
(i) Calculate the expected return and standard deviation for each security.

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 (ii) Determine what would be the standard deviation and the expected return of his portfolio in
each of the following cases.
a. The correlation between the two securities has perfect positive correlation (i.e +1)
b. The correlation between the two securities has perfect negative correlation (i.e - 1)
c. The correlation between the two securities has neutral correlation (i.e 0)
In all cases, assume 50% of the amount is invested in each security.

2. Given that the following information of X and Y

Security X Security Y
Return Probability Return Probability
18 % 0.25 26% 0.30
38% 0.35 25% 0.35
35% 0.40 28% 0.35
i. Calculate the expected returns and standard deviation of the following portfolio;
ii. 55% in X and 45% in Y
iii. Assuming the correlation coefficient are 1, 0, -1 respectively

3. Oju Tunrari is considering investment in the following securities with random returns as
follows

Security A Security B Security C

Rate of Probability of Rate of Probability of Rate of Probability of
Returns (%) Occurrence Returns (%) Occurrence Returns (%) Occurrence
26 0.3 16 0.4 30 0.1
32 0.3 20 0.1 45 0.2
35 0.2 36 0.3 50 0.5
40 0.2 45 0.2 60 0.2

The treasury bill rate is currently 12%

Required:
(a) Calculate the means and standard deviation of the following portfolio:
(i) P = 1 A + 1 B with a correlation coefficient of 0.1
2 2
(ii) M = 1 B + 1 C with a correlation coefficient of 0.6
3 3
(iii) Q = 0.6 A + 0.4 C with a correlation coefficient of 0.8

(iv) R = 7 A + 1 B with a correlation coefficient of -0.4

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(b) Assuming securities A and B have zero correlation, how will it affect the result?

Division Performance Evaluation

1. The following financial statements were extracted from the books of Ayoade Trading Company Plc for
relevant years.
Statement of Profit or Loss and Other Comprehensive Income for the year ended March 31:
2018 2017
N’000 N’000
Revenue 250,000 400,000
Cost of sales (137,500) (225,000)
Gross profit 112,500 175,000
Administration expenses (36,050) (44,500)

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Distribution expenses (20,200) (24,250)
Finance cost (3,125) (3.125)
Profit before tax 53,125 103,125
Taxation expense (20,000) (40,000)
Profit for the year 33,125 63,125

Statement of Financial Position as at March 31:

2018 2017
N’000 N’000
Assets
Non-current assets at cost 136,500 196,000
Accumulated depreciation (36,500) (52,250)
100,000 143,750

Current Assets
Inventory 79,250 20,750
Trade receivables 50,000 12,500
Bank balance 12,000 91,750
141,250 125,000
Total Assets 241,250 268,750

Equity and Liabilities

Equity
Ordinary Shares of 50kobo each 57,500 57,500
Accumulated depreciation 43,000 25,000
100,500 82,500

Non-current Liabilities
10% Loan notes 31,250 31,250
12% Redeemable preference shares - 5,000
31,250 36,250
Current Liabilities:
Trade payables 18,750 26,875
Trade receivables 60,000 40,000
Bank balance 30,750 83,125
109,500 150,000
Total Equity and Liabilities 241,250 268,750
Additional Information:
(i) Dividend paid to Equity holders are N15,125,000 for the year ended, March 31, 2018 and
N21,375,000 in 2017.
(ii) There was a drop in the market price per share of the company’s equity shares from 36 kobo in the
year ended March 31, 2017 to 24 kobo in 2018.
(iii) The finance cost relates to the interest paid on the 10% loan notes.
Required: a. Calculate in columnar form, for the two relevant years the following financial ratios:
(i) Return on capital employed
(ii) Net profit margin (use profit after tax)
(iii) Current ratio
(iv) Quick ratio
(v) Debt ratio
(vi) Fixed interest cover
(vii) Dividend cover
(viii) Dividend yield

b. Comment on the profitability and short term liquidity of the company based on the
ratios calculated.

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2. The Statements of Financial Position extract of Alowonle Limited is given as follows:
2016 2015
N’000 N’000
Inventories 11,850 9,750
Receivables 7,545 8,025
Investments (Marketable Securities) 1,290 1,125
Cash 1,695 -
22,380 18,900
Payables amounts due within one year (11,595) (11,265)
10,785 7,635
Payables are analysed as follows:
Trade payables 7,800 2,215
Company income Tax 2,085 2,460
Dividend Payable 1,710 1,620
Bank overdraft - 540
11,595 11,265

Its profit or loss account extract is as follows:

Sales 53,385 50,145
Cost of sales (36,300) (33,600)
Gross profit 17,085 16,545

Cost of sales is analysed as follows:

Opening inventory 9,750 9,450
Add: Purchase 38,400 33,900
Less: Closing inventory (11,850) (9,750)
36,300 33,600

In 2014 and 2015, credit sales were 87% of sales.

Required:
a. Calculate the working capital cycle for 2016 and 2015.
b. Compute the ratio listed below and comment on the company’s Liquidity over two years.
i. Cash ratio
ii. Current ratio
iii. Quick ratio