ICAN PM Past Questions 2014 - Nov 2023-1

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION - NOVEMBER 2014
PERFORMANCE MANAGEMENT
Time Allowed: 3 hours
ATTEMPT FIVE QUESTIONS IN ALL
SECTION A: COMPULSORY QUESTION (30 Marks)
QUESTION 1
NAIJAX Group Limited has been in operation since 1980 playing a leading role in the
automobile industry.
Division “X” which is part of the group manufactures only “265 by 16’’ Rim tyre which
it sells to external customers and also to Division ”Y’’ another member of the group.
Naijax Group’s policy is that:
(i) Divisions have the freedom to set transfer prices and choose their suppliers.
(ii) It uses Residual Income (RI) for performance appraisals.
(iii) The group’s cost of capital is 12% per annum.
The two divisions’ operating data are as follows:
Division X
Budgeted information for the coming year is:
Maximum capacity 150,000 tyres

External sales 110,000 tyres
External selling price N35,000 per tyre
SKILLS EXAMINATION – NOVEMBER 2014

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NOT TO BE SOLD | Compiled by: Babatunde Isaiah | Email: ababatundeisaiah@gmail.com

Variable cost N22,000 per tyre
Fixed costs N1,080,000,000
Capital employed N3,200,000,000
Target residual income N180,000,000
Division Y
Division Y has found two other companies willing to supply tyres:
Adex Limited could supply at N28,000 per tyre, but only for annual orders in
excess of 50,000 tyres. Banaxa Limited could supply at N33,000 per tyre for any
quantity ordered.
Required:
a. If Division Y provisionally requests a quotation for 60,000 tyres from

Division X for the coming year;
i. Determine the transfer price per tyre that Division X should quote in
order to meet its residual income target. (9 Marks)
ii. Calculate the TWO prices that Division X would have to quote to Division
Y if it becomes the group’s policy to quote transfer prices based on
opportunity costs. (2 Marks)
b. Evaluate the impact of the group’s current and proposed policies on the profits
of Divisions X and Y and on group profit. (4 Marks)
c. Assume that Divisions X and Y are based in different countries and consequently
pay taxes at different rates: Division X at 55% and Division Y at 25%. If Division
X has now quoted a transfer price of N30,000 per tyre for 60,000 tyres, you are
required to determine whether it is better for the group if Division Y purchases
60,000 tyres from Division X or from Adex Limited. (15 Marks)
(Total 30 Marks)
SECTION B ATTEMPT ANY TWO OUT OF THREE QUESTIONS (40 Marks)
QUESTION 2

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Ibek Limited manufactures a standard product and operates a system of variance
accounting using a fixed budget.
As a newly appointed Management Accountant, you are responsible for preparing the
monthly operating statements.
Extracts from the budget for the standard product cost and actual data for the month
ended 31 December, 2013 are given below:
Budgeted and Standard Cost Data:
Budgeted sales and production for the month: 20,000 units.

Standard cost for each unit of product:
Budget
Direct materials: A: 10kg at N2 per kg

B: 5kg at N10 per kg
Direct wages 5 hours at N6 per hour
Fixed production overhead is absorbed at 200% of direct wages.

Budgeted sales price has been calculated to give a margin of 20% of sales price.
Actual data for the month ended 31 December, 2013:
Production: 19,000 units sold at a price of 15% higher than that budgeted.
Direct materials consumed:
A: 192,000kg at N2.40 per kg

B: 96,000kg at N9.40 per kg
Direct wages incurred 92,000 hours at N6.40 per hour.

Fixed production overhead incurred - N580,000.
You are required to prepare:
a. The operating statement for the month ended 31 December, 2013. (3 Marks)
b. i. Direct material cost variance (5 Marks)

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ii. Direct labour variances (5 Marks)
iii. Overhead variances (3 Marks)
iv. Sales variances (4 Marks)
(Total 20 Marks)
QUESTION 3
Purity Nigeria Limited is a company that produces table water. The company’s board
plans to restructure its operations with the aim of boosting its market share and
profitability.
The financial results of Purity Nigeria Limited and Bench Mark Co. Limited, which is
the leader in the industry, are as follows:
Operating Statements for the year ended 31 December, 2013

Purity Nigeria Ltd Bench Mark Co. Ltd.
N’000 N’000
Revenue 5,600 9,430
Variable costs 3,500 5,100
Other costs 1,000 1,800
Net Profit 1,100 2,530
Summarised Statements of Financial Position as at 31 December, 2013.
Purity Nig Bench Mark

Ltd. Co. Ltd.
Non-Current Assets: N’000 N’000
Freehold land and buildings 1,800 4,100
Plant and equipment 1,560 1,800
Motor vehicles 1,300 1,600
Fixtures and fittings 500 700
5,160 8,200
Current Assets/Current Liabilities:
Receivables 400 600
Cash 200 500
Inventory 400 300
Payables (600) (500)
400 900

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5,560 9,100
Financed By:
Ordinary share capital 4,000 4,000

Reserves 560 700
Non-current liabilities 1,000 4,400
5,560 9,100
Required:
a. Compute the following performance indices for both companies:

i Profit margin
ii. Asset turnover
iii. Returns On Capital Employed (ROCE)
iv. Current ratio
v. Debt-equity ratio (5 Marks)
b. Compare and analyse the performance of the two companies computed in (a)
above and explain what the board of Purity Nigeria Limited needs to do to
achieve their objectives. (10 Marks)
c. What other non-financial measures can influence the decision of the board of
Purity Nigeria Limited? (5 Marks)
(Total 20 Marks)
QUESTION 4
Paly Limited, a cottage manufacturer of aluminium products, specialises in producing

kettles and cooking pots with annual sales value of N960,000 and N1,440,000
respectively.
Given below are the cost data of each of the products:

Kettle Cooking pots
N’000 N’000
Direct material 200 240
Direct wages N80 per hour:

Department 1 160 240
2 80 160
3 240 -

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4 - 320
Variable overhead 40 120
The fixed overhead per annum is N1,000,000
The company allows for annual 50 weeks of operation at 40 hours per week with the
following employees currently engaged in each department as follows:
Department 1 30
2 16
3 18
You are required to provide your assessment of the company, if only one product was
to be made given the following circumstances:
a. Which product would give the maximum profit and what are the associated
problems that could arise? (10 Marks)
b. Which product should be made and the amount of profit per annum, assuming
that the product uses the same direct materials and that there is a shortage of
the material with supply limited at a current price to a maximum of N3,000,000
per annum? (5 Marks)
c. Determine the product that should be made and the amount of profit per
annum, assuming that there is a shortage of employees possessing the skills
required in Department 2? (5 Marks)
(Total 20 Marks)
SECTION C: ATTEMPT ANY TWO OUT OF THREE QUESTIONS (30 Marks)
QUESTION 5
Colour-Effects Limited retails two products: Common and Executive travelling bags.
The budgeted income statement for year 2015 is as follows:
COMMON BAG EXECUTIVE BAG TOTAL
Units sold 300,000 100,000 400,000

N N N
Revenue at N200 and N300 per unit 60,000,000 30,000,000 90,000,000
Variable costs at N140 and N180 per unit 42,000,000 18,000,000 60,000,000

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Contribution margins at N60 and N120 per unit 12,000,000 30,000,000
18,000,000
Fixed costs: 12,000,000
Operating profit 18,000,000
Required:
a. Calculate the break-even units, assuming that the planned revenue mix is
maintained. (3 Marks)
b. Determine the break-even point in units if only Common bags are sold and if
only the Executive bags are sold. (6 Marks)
c. Calculate the budgeted operating profit and break-even point if 200,000 units
are sold but only 20,000 are Executive bags. (6 Marks)
(Total 15 Marks)
QUESTION 6
GOODLAND Limited produces and sells a single product. The company adopts a
/
standard absorption costing system and absorbs overheads on the basis of direct
labour hours. Presented below are the standard cost details and selling price for a
single unit of the product:
Per Unit
N N
Selling price 6,000
Direct material 30 litres @ N90 2,700
Director labour 10 hours @ N120 per hour 1,200
Variable production overhead 10 hours @ N60 per hour 600
Fixed production overhead 10 hours @ N 30 per hour 300 (4,800)
Gross Profit 1,200
It has been estimated that the production and sales for the month would be 2,000
units. However, the estimated production for the month has been used as a basis for
determining the fixed overhead absorption rate.
The actual results for the month are as follows:

Production (units) 2,800
Sales (units) 2,400
Selling price N6,120

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Direct material 88,000 litres @ N120 per litre
Direct labour 21,000 hours @ N 150 per hour
Variable production overhead N 660,000
Fixed production overhead N 360,000
Required:
Prepare a statement that reconciles the budgeted gross profit with the actual gross
profit for the month with a detailed computation of all the variances involved.
(15 Marks)
QUESTION 7
Omola Industries Limited is introducing a new product. The original information,

available to the company from its archive suggests that the product will sell for N190
per unit. Other information obtained from the initial source are as follows:
Variable cost per unit is N100

Fixed cost is N20,000,000
Annual production and sales information is 700,000 units.
The company’s board, knowing the importance of sourcing for credible information,
inaugurated a market research team to carry out a good research on the product in the
area of marketing variables like volume of sales, sales price and variable cost.
The result of the detailed research work is shown below:
(i) The selling price is not static as originally thought but will be in three regimes
of N180, N190 and N200.
(ii) The following estimates of sales demand for each possible selling price is
provided on the basis of pessimistic forecast, most likely forecast and optimistic
forecast along with their subjective probabilities.
N180 N190 N200

Price Quantity Probability Quantity Probability Quantity Probability
Pessimistic 800,000 0.3 700,000 0.1 500,000 0.4
Most likely 900,000 0.5 800,000 0.7 600,000 0.5

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Optimistic 1,000,000 0.2 900,000 0.2 700,000 0.1
The unit variable cost is projected as follows:
Variable Cost Probability

N100 0.60
N90 0.40
In the light of the market research carried out, the company has committed itself to an
annual contract cost of N5,000,000.
Required:
a. Compute the initial profit achievable by the company. (2 Marks)
b. Calculate the profit achievable by the company in the light of the credible
information for the THREE price scenarios. (7 Marks)
c. What is the value of the new information? (3 Marks)
d. Identify THREE other sources of information available to an organisation.

(3 Marks)
(Total 15 Marks)
SECTION A
SOLUTION 1
NAIJAX GROUP LIMITED
(a) Calculation of transfer price per tyre that Division X should quote in order to
meet its residual income target:
N
Total profit required by Division X
12% of capital employed (N3,200,000,000 x 12%) 384,000,000
Residual Income required 180,000,000
Required profit 564,000,000
Add: Fixed costs 1,080,000,000

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Total contribution required 1,644,000,000
Less: External contribution (90,000 x N13,000) 1,170,000,000
Contribution needed for Internal Sales 474,000,000
Additional contribution per tyre = 474,000,000

60,000 tyres
= N7,900
Transfer price therefore: N

Variable cost = 22,000
+ Additional Contribution = 7,900
29,900
(aii) Selling price to division Y on an opportunity cost basis:
40,000 tyres at N22,000 marginal cost and

20,000 tyres at N35,000 external selling price
(b) Because of the present policy of judging performance on the single measure of
profitability, there is the possibility of sub-optimality.
Y could purchase tyres at 28,000 from Adex Ltd instead of N29,900 from
company X, and if X cannot sell the 40,000 tyres externally, the group’s profit
would fall.
To optimise group profit, goods should be transferred at marginal cost but

divisional performance assessment becomes meaningless and motivation would
fall.
(c)(i) Buying from company X Strategy A

N Y N
External sales 90,000 x N35,000 = 3,150,000,000 60,000 x N35,000 = 2,100,000,000
Transferred sales 60,000 x N30,000 1,800,000,000 -
=
4,950,000,000 2,100,000,000
Less Cost Y Y
N N
Variable cost 150,000 x N22,000 3,300,000,000 60,000 x N30,000 = 1,800,000,000
Fixed Cost 1,800,000,000 -
4,380,000,000 1,800,000,000
Net Profit (4,950,000,000 – 4,380,000,000)= 570,000,000 21,000,000,000 – 1,800,000,000) = 300,000,000

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Tax at 55% Tax at 25%
= N313,500,000 N75,000,000
N
Group Net Profit = 570,000,000 + 300,000,000 = 870,000,000
Less: Group Tax = 313,500,000 + 75,000,000 = (388,500,000)
Group profit after tax 481,500,000
(i) Buying from Adex Ltd. – Strategy B
X Y
N N
110,000 tyres x N 35,000 = 3,850,000,000 60,000 x N35,000 = 2,100,000,000
Less: Cost
Variable cost 110,000 x N22,000 = 2,420,000,000 60,000 x N28,000 = 1,680,000,000
Fixed cost 1,080,000,000 -
1,680,000,000
Net profit (3,850,000,000 – 3,500,000,000 2,100,000,000
3,500,000,000) - 1,680,000,000
= 420,000,000
Tax at 55% 25%

= N192,500,000 = N105,000,000
N
Group Net Profit = 350,000,000 + 420,000,000 = 770,000,000
Group Tax = 192,500,000 + 105,000,000 = (297,500,000)
Group profit after tax 472,500,000
Decision
Division Y should buy from Division X in order to maximise the groups’ profit. N481,500,000 is higher
than N472,500,000 as analysed above.
EXAMINER’S REPORT
The question tests the principles of Transfer Pricing between two divisions: Divisions X
and Division Y. It also tests candidates’ understanding of the implication of Residual
Income (RI) as a performance measure and the effect of taxation on transfer from
divisions operating in different countries.

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Candidates are expected to compute transfer price given a Target Residual Income.
They are also expected to assess the impact of the use of Residual Income as a
measure of profitability and the implication on group profit of transfer to divisions
operating in different tax regimes.
Over 95% of the candidates attempted the question but demonstrated a shallow
knowledge of its requirements due to poor understanding of the basic principles of
Transfer Pricing and application of tax in transfer pricing transactions.
Candidates are advised to pay greater attention both to the theory and application of
Transfer Pricing.
SECTION B
SOLUTION 2
The actual profit for 31 December, 2013
N N
Sales (19,000 units @ 230) 4,370,000
Direct Materials: A 460,800
B 902,400
Direct Wages 588,800
Fixed overhead 580,000 2,532,000
Actual Profit 1,838,000
Direct material cost variance:
Standard Quantity Actual Quantity

X Standard Price - x Actual Price
A = (19,000 x 10kg x N2) - (N192,000 x N2.40)

= N380,000 – 460,800
= N80,800 A
B = (19,000 x 5kg x N10) – (96,000 x N9.40)

= N950,000 – N902,400
= N47,600F
TOTAL = N80,800A + N47,600F
= 33,200 A
ALTERNATIVE APPROACH
(Standard Price – Actual Price) x Actual Qty

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A = (N2 – 2.4) x 192,000 = N76,800A
B = (10 – 9.40) x 96,000 = N57,600F
N19,200A
(Std. Qty. – Act. Qty) x Std. Price
A = (19,000 x 10) – 192,000) x N2 = 4,000A

B = (19,000 x 5) – 96,000) x N10 = 10,000A
14,000A
The Actual Materials used are in standard proportion.

Therefore, there is no MDC variance.
Direct Labour Cost:
Standard Labour Cost - Actual labour cost

Std. Hrs x Std. Rate – AHs x AR
= (19,000 x 5 x N6) – (N92,000 x N6.40)
= 570,000 – 588,800
= N18,800A
Labour Rate Variance

Standard Rate – Actual Rate x Actual Hours
= N6 – 6.40 x 92,000
= N36,800A
Labour Efficiency Variance
Std. Hrs – Actual Hrs x Std. Rate
19,000 x 5 = 95,000 – 92,000 x N6 = 18,000F
Fixed Overhead Cost Variance
Standard fixed overhead Actual fixed production


Charged to production Overhead cost incurred
SH(AO) x SFPORph - Actual Overhead Incurred

= 5 x 19,000 x 12 – 580,000
1,140,000 – 580,000
= N560,000F
Split into:
Fixed Overhead Expenditure Variance

Budgeted fixed overhead - Actual Fixed Overhead
= (20,000 x N60) – 580,000
= 1,200,000 – 580,000
= N620,000F

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Fixed Overhead Volume Variance:
SFORph AO – BO
N60 19,000 – 20,000 = N60,000A
OR
Volume Spit Into
Volume Capacity Variance
= Actual Hrs – Budgeted Hrs x Budg. F. O. rate per hr
= 92,000 – (5 x 20,000) x 12
= N96,000A
Volume Efficiency Variance
Std. Hrs – Actual Hrs x FORph

(19,000 x N5 - 92,000) x N12
=N36,000F
Sales Margin Price Variance:

Actual Margin – Std. Margin x Actual Sales Volume
= N70 – N40 x 19,000 = N570,000F
Sales Margin Volume Variance:

Actual Sales Volume – Budgeted Sales Volume
x sales margin
= 19,000 – 20,000 x N40
= N 40,000A
Workings:
Std. product cost and selling price are calculated as follows:

N
Direct material: A – (10kg @ N2 per kg) 20
B - (5 kg @ N10 per kg) 50
Direct Wages: 30
Fixed Overhead (5 hrs x 200% of N6) 60
Standard Cost 160
Profit: 20% margin i.e. 20 ÷(100 – 20) x N160 40
200
Actual Selling Price = 115% of 200 = N230
EXAMINER’S REPORT
The question tests candidates’ knowledge of standard costing and variance analysis
including preparation of performance report.

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Candidates are expected to determine variances for materials, labour overhead and
sales.
About 85% of the candidates attempted the question and about 50% of them obtained
average marks allocated to the question.
About 30% of the candidates could not correctly compute the sales variances and fixed
overhead variances.
Candidates are advised to ensure they sharpen their skill in the area of the principles
of standard costing and variance analysis to improve performance. They should also
improve on presentation of statements.
SOLUTION 3
Computation of performance measures for Purity Nig. Ltd. and Bench Mark Co. Ltd.
Purity Nig. Ltd. Bench Mark Co. Ltd.

1. Profit Margin
= Profit x 100 = 1100 x 100 = 19.64% 2530 x 160 = 26.83%

Sales 1 5600 1 9430 1
*2. Asset Turnover

= Turnover = 5600 = 1.007 times 9430 = 1.036 times
Net Total Asset 5560 9100
*3. Returns on Capital Employed 2530 = 27.80%

= Profit x 100 = 1100 x 100 9100
Net Total Asset 5560 1
= 19.78%
4. Current Ratio
= Current Asset = 1000 = 1.67:1 = 1400 = 2.8:1
Current Liabilities 600 500
5. Debt-Equity Ratio
= Debt Capital x 100 = 1000 x 100 = 21.91% 4400 x 100 = 93.61%
Equity Capital 1 4560 4700 1
3.(a) Computation of performance measures for Purity Nigeria Limited
i. Profit Margin = Profit x 100

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Sales 1
= 1100 x 100 = 19.64%
5600 1
This measure evaluates the profitability of the company
ii. Asset Turnover = Turnover

Total Asset less current liabilities
= 5600 = 1.007 times

5560
The Asset turnover shows the number of times the asset will be used in building the
sales. It shows how well the company has used its asset. It is a measure of productive
capacity of company’s asset.
iii. Returns on Capital Employed (ROCE).
The Returns on Capital Employed (ROCE) measures the performance of a company as a

whole in using all sources of long term finances. It is seen as a measure of
management efficiency. It is computed thus:
ROCE = Profit x 100 = 1100

Total Asset less current liabilities 1 5560
= 19.78%
iv. Current Ratio
It is a measure of liquidity that represents the relationship between current assets and
current liabilities. The normal ratio is 2:1. It is computed thus:
Current Ratio = Current Asset
Current liabilities
= 1,000 = 1.67:1
600
v. Debt - Equity Ratio

It is gearing ratio that describes the mix of debt finance and equity finance in a
company. It thus considers the relative proportion of long term debts and equity in the
long term financing of the business. It is computed thus:
Debt-Equity Ratio = Debt Capital x 100

Equity Capital 1
= 1000 = 21.91%

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4560
The implication of the level of percentage of gearing is in the level of financial risk.
Low gearing percentage indicates low exposure to financial risk as there will be little
difficulty in meeting loan interest payment and repayment of principal.
High gearing rate is the opposite.
b.(i) Profit Margin

The profit margin of Purity Nig. Ltd. is 19.64% while that of the Bench Mark Co. Ltd. is
26.83%. This measure evaluates the profitability of its operation. It shows that Bench
Mark Co. Ltd. achieves higher profit margin than Purity Nig. Ltd. This can be achieved
by the board through strategies that will enhance sales, improve the market share, sales
promotion, advertising and cost reduction.
(ii) Asset Turnover

This measure shows how well the company uses its asset to increase its sales. The asset
turnover ratio of Purity Nig. Ltd. is slightly lower than the ratio of Bench Mark Co. Ltd.
The present Asset Turnover of Purity which is 1.007 times can be improved upon if the
asset value in stock is reduced and sales improved through advertising and sales
promotion strategies.
(iii) Return on Capital Employed:

This is a measure of company profitability and efficiency. The ratio is higher in the
industry leader – Bench Mark Co. Ltd. with a ratio of 27.80% which is higher than the
ratio of Purity Nigeria Limited whose ROCE ratio is 19.78%. This can be improved
through increasing profitability and sales or reduction in current asset values
receivables, inventories, etc.
(iv) Current Ratio:
This is a measure of liquidity. This shows the ability of the company to meet it short
term debt commitment or obligation. Purity Nig. Ltd. ratio of 1.67:1 is lower than
standard ratio which is 2:1 and lower than the industry leader’s current ratio which is

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2.81:1. Improvement can be achieved through reduction in payables’ value and
increase in receivables.
(v) Debt-Equity Ratio
The Debt-Equity ratio for Purity Nig. Ltd. is lower than that of the industry leader. It has
a low gearing ratio of 21.91% as against the industry leader’s ratio 93.61%.
c. The non-financial measures that will be used in furtherance of the Board’s decision are as
follows:
i. Total quality measures
ii. Measures relating to customer service time and customer satisfaction.
iii. Productivity measures.
iv. Measures that show how individual goals remain consistent with organisation goals.
v. Number of defects and machine down times.
vi. Idle times
vii. Advertisements
viii. Bulk purchase discounts
Note: For the asterisked ratios, alternative formulae can be accepted.
EXAMINER’S REPORT
The question tests candidates’ skill in the computation of basic performance indicators
on ratios.
Candidates are expected to determine the stated ratios, compare the results of the
given companies and advise the boards on measures for improvement.
Candidates performed well in the computations but performed poorly on giving advice
necessary for the needed improvement. About 60% of the candidates that attempted
this question had this pitfall. Many could also not give workable non-financial
measures.
Candidates are advised to study interpretation of ratios as they apply in practice.

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SOLUTION 4
COOKING POTS & KETTLES
(a)
N’000 N’000 N’000 N’000
Sales 960 1440
Direct cost:
Direct Materials 200 240
Direct Wages 1 160 240
2 80 160
3 240 -
4 - 320
Variable Overhead 40 120
720 1080
Pot Contribution 240 360 gives a better profit so it
should be produced.
Associated problems
that could arise are:
i. The department with the lower contribution may be shut down with the attendant
severance cost.
ii. There will be need to employ more workers for Department 4.
iii. Labour hours required for cooking pot is higher and so sensitive to labour rate. Any
increase in labour rate may result in loss.
iv. Direct material and variable overhead costs are sensitive to price change. Any slight
change in the price of the costs may make its production not worthwhile.
v. Loss of goodwill.
vi. Loss of sale which may result to loss of profit.
(b)
Kettle Pot
N N
Raw Materials 200,000 240,000
Total Contribution 240,000 360,000
Contribution per N of materials N1.2 N1.50
Number of units N3,000,000 12,500 units

N240
Annual Contribution 12,500 x 360 N4,500,000
Less Fixed overhead N1,000,000
Profit per annum N3,500,000
Pot should be produced because it has a higher contribution margin per N of materials.
(c)
N N
Sales 960,000 1,440,000

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Dept. 2
Labour hours required N80,000 = 1000 hours N160,000 = 2000 hours

N80 N80
Total Contribution N240,000 N360,000

Contribution per hour N240 N180
Kettle should be produced because it has a higher contribution per hour.
Computation of profit per year

N’000
Total contribution 240 x 16 x 40 x 50 7,680

Less fixed cost 1,000
Profit per year 6,680
EXAMINER’S REPORT
The question tests candidates’ knowledge on the application of Marginal Costing

Techniques for decision making. It also tests the ability of the candidates in
determining contribution per limiting factor to select the better alternative based on
material and labour.
Candidates are expected to rank the products using contribution per limiting factor.
About 40% of the candidates attempted the question but performance was very poor as
less than 10% of them obtained average score. Candidates inability to correctly
determine the number of hours required to manufacture each product was their
greatest pitfall.
Candidates are advised to adequately cover the entire syllabus.
SECTION C
SOLUTION 5

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COLOUR EFFECTS LTD.
a. Let Q = Number of units of executive bags to break even.
3Q = Number of units of common bags to break even.
Revenues – variable costs – fixed costs = zero profit
N200(3Q) + N300Q – N140(3Q) – N180Q – N12,000,000 = 0

N600(3Q) + N300Q – N420Q – N180Q = N12,000,000
N900Q - N600Q = N12,000,000
N300Q = N12,000,000
Q = N40,000 units of executive bags

3Q = N120,000 units of common bags
The breakeven point in units is 120,000 of common bags plus 40,000 units of Executive bags.
Total of 160,000 units.
b. Unit contribution margins are:
Common bag: N200 – N140 = N60

Executive bag: N300 – N180 = N120
If only common bags were sold, the break-even point would be:
N12,000,000
N60
= 200,000 units
If only executive bags were sold, the break-even point would be:
N12,000,000
N120
= 100,000 units
c. Operating profit
= 180,000 (N60) + 20,000 (N120) N12,000,000

= N10,800,000 + N2,400,000 – N12,000,000
= N13,200,000 – N12,000,000
= N1,200,000
Let Q = Number of units of executive bags to break-even.

9Q = Number of units of common bags to break-even

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N200(9Q) + N300(Q) – N140(9Q) – N180Q – N12,000,000 = 0
N1,80Q + N300Q – N1,260Q – N180Q – N12,000,000 = 0

N2,100Q – N1,440Q – N12,000,000 = 0
N660Q = N12,000,000
Q = 18,182 units of Executive Bags
9Q = 163,636 units of Common Bags
Total = 181,648
Alternative Solution
a. Overall Contribution/Sales ratio approach
Total Contribution - N30,000,000

Total Revenue - N90,000,000
Therefore contribution/sales ratio (c/s)

= 30,000,000 = 1
90,000,000 3 or 0.3333
BEP (N) = Fixed Cost = N12, 000,000 = N36, 000,000

c/s 0.3333
For common bags
BEP (Units) = N60,000,000 x N36,000,000

90,000,000 = N24,000,000
Dividing by units sales price

= N24,000,000
200 = 120,000 units
For Executive bags
BEP = N30,000,000 x N36,000,000 = N12,000,000

90,000,000
Dividing by unit sales price

= N12,000,000
N300 = 40,000 units
Total common + executive bags
= 120,000 + 40,000 = 160,000 units
(b) The same approach
(c)i. Budgeted Operating Profit
Common Bags Executive Bags Total

Unit sold 180,000 20,000 200,000
N N N

80

Sales (N200 x 180,000) 36,000,000 6,000,000 42,000,000
N300 x 20,000
Variable Cost (180,000 x 140)
20,000 x 180 3,600,000 28,800,000
Contribution 10.800,000 2,400,000 13,200,000
Less: Fixed Cost 12,000,000
Operating Profit 1,200,000
ii. C/S Ratio = N13,200,000 = 0.3331428

N42,000,000
B.E.F = FC = 12,000,000 = N38,182,512

CS Ratio 0.31428
= N38,182,512 = N38,182,512 = N38,182,512

Sales Ratio 6 7
= N5,454,645
Executive = N5,454,645 x 1 = 5,454,645 = 5,454,645
Common = N5,454,645 x 6 = 5,454,645 = 32,727,867
38,182,512
BEP (units) Executive = N5,454,645 = 18,182 units of Executive bags
N300
Common = N32,727,867 = 163,639 units of common bags

N200 181,648 units
EXAMINER’S REPORT
The question tests candidates’ knowledge of break-even analysis for decision making
involving single and multi-products. It also tests the use of Marginal Costing
Technique in determining budgeted operating profit and break-even in units and
value.
Candidates are expected to calculate the break-even points in units and value for the
given product mix, compute the break-even points from multi products for a given
revenue mix and determine the operating profit for a given sales mix.
About 85% of the candidates attempted this question but performance was poor with
over 70% obtaining less than half of the allocated marks. Their inability to understand
the requirements of the question regarding the stated revenue mix was a major pitfall.
Candidates are advised to ensure adequate understanding of the requirement of

questions before proffering solutions.

81

SOLUTION 6
RECONCILIATION OF ACTUAL AND BUDGETED PROIFTS
RECONCILIATION STATMEENT FOR THE MONTH
N N
Budgeted Gross Profit (2000 x N1200) 2,400,000
Sales Volume Variance

(2,400 – 2,000) x N1,200 480,000F
Sales Price Variance

2,400 (N6,120 – N6,000) 288,000F
Direct Material Price Variance

88,000 (N90 – N120) 2,640,000A
Direct Material Usage Variance

(2,800 x 30) - (88,000) x N90 360,000A
Direct Labour Rate Variance

21,000 x (120 – N150) 630,000A
Direct Labour Efficiency Variance

2,800 x 10) - (21,000) x N120 840,000F
Variable Overhead Expenditure Variance

(21,000 x N60) – N660,000 600,000F
Variable Overhead Efficiency Variance

(2,800 x 10) – 21,000) x N60 420,000F
Fixed Overhead Expenditure Variance

(2,000 x 300) – N360,000 240,000
Fixed Overhead Volume Variance

2,800 – 2,000 x 10) x N30 240,000F
3,630,000 5,508,000
ACTUAL GROSS PROFIT
1,878,000

82

Computation of Actual Gross Profit for the month
N N
Sales (2,400 x N6,120) 14,688,000
Less:
Direct materials (88,000 x N120) 10,560,000
Direct labour (21,000 x N150) 3,150,000 EXAMINER’S
Variable production overhead 660,000
Fixed production overhead 360,000
REPORT
Closing stock (400 x N4800) (1,920,000) (12,810,000)
ACTUAL GROSS PROFIT The question tests
1,878,000
candidates’
understanding of performance reporting using variance analysis and the reconciliation
of actual profit with budgeted profit.
Candidates are expected to compute the variances with breakdowns into their
components and state the effects of the variances on profit.
About 75% of the candidates attempted the question but performance was poor. They
could not accurately compute the variances which could have assisted in adequate
reconciliation of the actual and budgeted profit. This is a confirmation of candidates’
weak foundation in Cost Accounting and inadequate preparation.
SOLUTION 7
OMOLA INDUSTRIES LTD
a. Original Profit Statement

N/Unit
Selling Price 190
Less: Variable cost 100
Contribution 90
Annual Production and Sales 700,000 units
N‘000
Contribution (N90 x 700,000) 63,000
Less: Fixed cost 20,000
Net Profit 43,000
b. Profit achievable by the company under the 3 selling prices scenarios
Selling Price Scenarios
Selling Price N180 N190 N200

83

Quantity expected to be sold (units) (wi) 890,000 810,000 570,000
N N N
SP/Unit 180 190 200
Less: Variable Cost/Per Unit wii) 96 96 96
Contribution/Unit 84 94 104
N N N
Total Contribution (wiii) 74,760 76,140 59,280
Less: Fixed Cost 25,000 25,000 25,000
Net profit from new info 49,760 51,140 34,280
c. Value of information from the market research team:
Price N180 N 190 N 200
N‘000 N‘000 N‘000s

Profit from credible information 49,760 51,140 34,280
Profit from original information source 43,000 43,000 43,000
6,760 8,140 8,720
Alternative solution
Average profit = N‘000 (49,760 + 51,140 + 34,280

3
N45,060,000
N’000
Average profit 45,060
Less: Initial profit 43,000
Value of new information 2,060
d. Other sources of information:
Primary sources – Questionnaire, observation, surveys
Secondary sources - Newspapers, business guides, journals, text books, trade organisations,
professional bodies, library, reports of competitors, circulars, gazettes etc.
Workings
i. Computation of expected demand on each of the 3 price scenarios
Price N180 N190 N200

Quantity Probability Quantity Quantity Proba E
bility

84

Pessimistic 800,000 0.3 240,000 700,000 0.1 70,000 500,000 0.4 200,000
Most likely 900,000 0.5 450,000 800,000 0.7 560,000 600,000 0.5 300,000
Optimistic 1,000,0 0.2 200,000 900,000 0.2 180,000 700,000 0.1 70,000
00
890,000 810,000 570,000
ii. Computation of expected variable cost
VC Pr X.Pr
100 0.60 60
90 0.40 36
96
iii. Computation of the new fixed cost:
N’000
Original fixed cost 20,000
Add: Annual contract cost 5,000
Total Fixed Cost 25,000
EXAMINER’S REPORT
The question tests candidates’ knowledge of planning with emphasis on forecasting

incorporating the use of probabilities to determine demand at different prices. It also
tests candidates’ knowledge of different sources of information available to
organisations.
About 40% of the candidates attempted the question but performance was very poor.
Many of the candidates applied the wrong probabilities thus deriving wrong expected
demand and incorrect. Candidates attempt on the value and sources of information
was also very poor.
Candidates are advised to ensure adequate preparation and coverage of the syllabus.

85

SKILLS LEVEL EXAMINATIONS - MAY 2015

ATTEMPT FIVE QUESTIONS IN ALL
QUESTION 1
TADEFO Limited is a manufacturing company which produces and assembles car

components. The company has two main production departments: Machining and
Assembling. Each of the two departmental managers is responsible for producing
annual budgets based on targets set by the management. From last year’s budget,
TADEFO Limited hoped to turn an expected 10 percent rise in total revenue into a 20
percent increase in the company’s profits.
The following budgeted information relates to TADEFO Limited for the forthcoming
period:
Products
ACQ BEZ CFJ
Sales and production (units) 30,000 50,000 40,000
N N N
Selling price (per unit) 73 45 95
Prime cost (per unit) 65 32 84
Hours Hours Hours
Machine Department (machine hours per unit) 4 2 5
Assembly Department (direct labour hours per unit) 2 7 3
Overheads can be re-analysed into ‘cost pools’ as follows:
Quantity for
Cost pool N‘000 Cost driver the period
Machine services 359 Machine hours 425,000
Assembly services 328 Direct labour hours 532,000
Set-up costs 36 Set-ups 720
SKILLS LEVEL EXAMINATIONS – MAY 2015

69

Order processing 165 Customer orders 34,000
Purchasing 88 Suppliers’ orders 12,400
976
You have also been provided with the following estimates for the period:
ACQ BEZ CFJ
Number of set-ups 220 130 210
Customers orders 18,000 10,000 10,000
Suppliers’ orders 5,200 3,600 4,200
Required:
a. Prepare and present a profit statement using activity-based costing.
(14 Marks)
b. What would you consider to be the weaknesses of an incremental budgeting
system for a company such as TADEFO Limited? (5 Marks)
c. Describe Activity-Based Budgeting (ABB) and comment on the advantages of its
use by TADEFO Limited. (5 marks)
d. Explain how the use of Zero-Based Budgeting (ZBB) can motivate employees.
(3 Marks)
e. “Encouraging employee participation in budget setting is beneficial”
Discuss. (3 Marks)
Total (30 Marks)
SECTION B: ATTEMPT ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION (40 Marks)
QUESTION 2
Ozoigbondu Nigeria Limited is a company that is into buying and selling of plastic
containers. The company is financed by a capital of N15million inclusive of reserves in
a mix of 30% and 70% of debt and equity respectively.
The Company has been in trading business for the past six years and has consistently
adhered to its corporate policy on sales, purchases and inventory management.

70

The company’s policy on sales is to ensure that sales are collected as follows:
(i) Cash sales is 40% of the monthly sales.

(ii) The balance of the month’s sales is to be collected in the month following sales.
The policy on purchases is in agreement with the supplier’s policy which is to pay for
all supplies in the month following. The company’s stock policy is to reserve 30% of
the month’s purchases as closing inventory.
The following information is available for the five years 2010 to 2014:
2010 2011 2012 2013 2014
N N N N N
Monthly Sales 3,400,000 3,600,000 4,200,000 4,800,000 7,200,000
Monthly Purchases 2,000,000 2,400,000 2,800,000 3,200,000 4,800,000
Monthly Salaries 350,000 350,000 430,000 430,000 480,000
Monthly Rent 100,000 100,000 100,000 100,000 100,000
Monthly Cash Expenses 200,000 220,000 240,000 280,000 360,000
Additional information:
(i) The company purchased a motor vehicle in July 2013 which was paid for in
September 2013. The cost of the motor vehicle was N5,000,000.
(ii) Annual depreciation for the motor vehicle is 20%.
(iii) The Cash Balance as at 31st December 2011 was N4,000,000.
(iv) The company’s salaries, rent and expenses were paid in the month they were
due.
Required:
a. Prepare a Profitability Statement for 2012, 2013 and 2014. (10 Marks)
b. Prepare a Cash Flow Statement for 2012, 2013 and 2014. (7 Marks)
c. Determine and comment on the liquidity ratio (current ratio) for 2014.
(2 Marks)
d. Compute the gearing ratio. (1 Mark)
(Total 20 Marks)

71

QUESTION 3
Pakex is a division of an automobile group that has five years remaining on a leased
premises in which it sells self-assembled motorcycles. The management is proposing
an investment of N48million on immediate improvements to the interior of the
premises in order to stimulate sales by creating a more effective selling environment.
The following information is available:
(i) The expected increase in revenue following the improvements is N40million per
annum. The average contribution to sales ratio is expected to be 40%.
(ii) The cost of capital is 16% and the division has a target Return on Capital
Employed of 20% based on the net book value of the investment at the
beginning of the year.
(iii) At the end of the five year period, the premises improvements will have a NIL
residual value.
(iv) The management staff turnover at Pakex division is high. The division’s
investment decisions and management performance measurement are currently
based on the figures for the first year of the proposal.
In addition to the above information, there is an alternative proposal that

suggests a forecast of the increase in revenue per annum from the premises
improvements as follows:
Year 1 2 3 4 5
Nm Nm Nm Nm Nm
Increase in Revenue 56 40 40 24 16
All other factors are expected to remain the same.
Required:
a. Prepare a summary of the statement of the management’s investment proposal

for years 1 to 5 showing Residual Income and Return on Capital Employed for
each year using the straight line depreciation method.
(10 Marks)
b. Comment on the use of the figures from the Statement in (a) above as a
decision-making and management performance measure. (4 Marks)
c. Calculate the Residual Income and Return on Capital Employed for year 1 using
the alternative proposal. (6 Marks)
(Total 20 Marks)

72

QUESTION 4
BADEGY Limited is a medium-sized company. The company is in the process of

deciding its pricing policy for the next period.
The following information is available from its records:

Previous period Current period
Revenue: Revenue:
N’000 N’000
100,000 units at N130 13,000 106,000 units at N130 13,780

Costs 10,000 Costs 10,774
Profit 3,000 Profit 3,006
It was discovered that between the previous and current periods, there was a 4%
general cost inflation and it is forecast that costs will rise further by 6% in the next
period. As a matter of policy, the company did not increase the selling price in the
current period although competitors raised their prices by 4% to allow for the
increased costs. A survey by a team of management consultants was commissioned
and has found that the demand for the product is elastic with an estimated price
elasticity of demand of 1.5. This means that volume falls by 1 times the rate of real
price increase. Various options are to be considered by the Board.
You are required to:
a. Show the budgeted position of the company if it maintains the N130 selling
price for the next period when it is expected that competitors will increase their
prices by 6%. (15 Marks)
b. What would the budgeted position be if the company also raises its price by 6%?
(5 Marks)
(Total 20 Marks)

73

SECTION C: ATTEMPT ANY TWO OUT OF THE THREE QUESTIONS IN THIS SECTION (30 Marks)
QUESTION 5
CAROSSI Limited makes quality wooden products such as tables, chairs, benches and
doors. Historically, the company has used mainly financial performance measures to
assess the performance of the company as a whole. The company’s Chief Executive
Officer has just been informed of the ‘Balanced Scorecard Approach’ and is eager to
learn more.
CAROSSI Limited has two Divisions X and Y, each with its own cost and revenue
streams. Each Division is managed by a divisional manager who has the power to
make all investment decisions within the Division. The cost of capital for both
Divisions is 15 percent. Historically, investment decisions have been made by
calculating the Return on Investment (ROI) of any opportunities and presently, the
return on investment of each Division is 18 percent.
A recently appointed manager for Division X strongly feels that using Residual Income
(RI) to make investment decisions would result in better ‘goal congruence’ throughout
the organisation.
Each Division is currently considering the following separate investments:

Division X Division Y
Capital required for investment N88.2m N46.0m
Revenue generated from investment N46.4m N28.1m
Net profit margin 30 percent 35 percent
The company is seeking to maximise shareholders’ wealth.
Required:
a. Describe the Balanced Scorecard Approach to performance measurement.
(8 Marks)
b. Determine both the return on investment and residual income of the new
investment for each of the two divisions. Comment on these results and take
into consideration the manager’s views about residual income.
(7 Marks)
(Total 15 Marks)

74

QUESTION 6
Markus Limited manufactures three products and operates a marginal costing system.
The following information has been extracted from the company’s records:
Products X Y Z
Units budgeted to be produced and sold 3,600 6,000 3,400
Selling Price (N) 120 110 100
Requirement per Unit:
Direct Material (kg) 5 3 4
Direct Labour (Hours) 4 3 2
Direct Labour Hour rate (N) 4 4 4
Direct Material Cost per Kg (N) 8 8 8
Variable Overheads (N) 14 26 16
Fixed Overheads (N) 20 20 20
Maximum possible sales (units) 8,000 10,000 3,000
All the three products are produced from the same direct material using the same
types of machine and labour. Direct labour, which is the key factor, is limited to
37,200 hours.
a. Determine the most profitable product mix. (6 Marks)

b. Prepare a statement of profitability for the product mix. (9 Marks)
(Total 15 Marks)
QUESTION 7
The use of internet has made the entire universe a global village. Managers can
comfortably sit in their offices connected to the internet and the world wide web to
obtain all necessary information for their business needs.
Required:
a. Discuss the concept of globalisation and how management information system

has enhanced effective management performance. (10 Marks)

75

b. What arguments will you advance against globalisation as it relates to
management performance? (5 Marks)
(Total 15 Marks)

76

Formulae
Learning curve
Y = axb
Where Y = cumulative average time per unit to produce x units
a = the time taken for the first unit of output
x = the cumulative number of units produced
b = the index of learning (log LR/log2)
LR = the learning rate as a decimal
Demand curve
P = a – bQ
b= change in price
change in quantity
a = price when Q = 0
MR = a – 2bq

77

LINEAR REGRESSION AND CORRELATION
The linear regression equation of Y on X is given by:
Y = a + bX or − = −
Where
( ) ∑ ∑ ∑
= =
( ) 2
∑X ∑X
and = -
or solve
∑ = na + ∑
∑ = a∑ + ∑
Coefficient of Correlation
( ) ∑ ∑ ∑
= =
. ( ) 2 2
∑X ∑X ∑ ∑Y
FINANCIAL MATHEMATICS
Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = 1 +
Annuity
Present value of an annuity of N1 per annum receivable or payable for n years,
commencing in one year, discounted at r% per annum
PV = 1 − n
Perpetuity
Present value of N1 per annum, payable or receivable in perpetuity, commencing in
one year, discounted at r% per annum.
PV =

78

Annuity Table
Present value of an annuity of 1 i.e. 1 - (1 + r)-n
r
Where r = discount rate
n = number of periods
Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15

79

Standard normal distribution table
0·00 0·01 0·02 0·03 0·04 0·05 0·06 0·07 0·08 0·09
0·0 0·0000 0·0040 0·0080 0·0120 0·0160 0·0199 0·0239 0·0279 0·0319 0·0359
0·1 0·0398 0·0438 0·0478 0·0517 0·0557 0·0596 0·0636 0·0675 0·0714 0·0753
0·2 0·0793 0·0832 0·0871 0·0910 0·0948 0·0987 0·1026 0·1064 0·1103 0·1141
0·3 0·1179 0·1217 0·1255 0·1293 0·1331 0·1368 0·1406 0·1443 0·1480 0·1517
O.4 0.1554 0·1591 0·1628 0·1664 0·1700 0·1736 0·1772 0·1808 0·1844 0·1879
0·5 0·1915 0·1950 0·1985 0·2019 0·2054 0·2088 0·2123 0·2157 0·2190 0·2224
0·6 0·2257 0·2291 0·2324 0·2357 0·2389 0·2422 0·2454 0·2486 0·2517 0·2549
0·7 0·2580 0·2611 0·2642 0·2673 0·2704 0·2734 0·2764 0·2794 0·2823 0·2852
0·8 0·2881 0·2910 0·2939 0·2967 0·2995 0·3023 0·3051 0·3078 0·3106 0·3133
0·9 0·3159 0·3186 0·3212 0·3238 0·3264 0·3289 0·3315 0·3340 0·3365 0·3389
1·0 0·3413 0·3438 0·3461 0·3485 0·3508 0·3531 0·3554 0·3577 0·3599 0·3621
1·1 0·3643 0·3665 0·3686 0·3708 0·3729 0·3749 0·3770 0·3790 0·3810 0·3830
1·2 0·3849 0·3869 0·3888 0·3907 0·3925 0·3944 0·3962 0·3980 0·3997 0.4015
1·3 0.4032 0.4049 0.4066 0.4082 0.4099 0.4115 0.4131 0.4147 0.4162 0.4177
1.4 0.4192 0.4207 0.4222 0.4236 0.4251 0.4265 0.4279 0.4292 0.4306 0.4319
1·5 0.4332 0.4345 0.4357 0.4370 0.4382 0.4394 0.4406 0.4418 0.4429 0.4441
1·6 0.4452 0.4463 0.4474 0.4484 0·4495 0.4505 0.4515 0.4525 0.4535 0.4545
1·7 0.4554 0.4564 0.4573 0·4582 0·4591 0.4599 0·4608 0·4616 0.4625 0.4633
1·8 0.4641 0.4649 0.4656 0.4664 0.4671 0.4678 0.4686 0.4693 0.4699 0·4706
1·9 0.4713 0.4719 0.4726 0.4732 0.4738 0.4744 0.4750 0.4756 0.4761 0.4767
2·0 0.4772 0.4778 0.4783 0.4788 0.4793 0.4798 0.4803 0.4808 0·4812 0.4817
2.1 0.4821 0.4826 0.4830 0.4834 0.4838 0.4842 0.4846 0·4850 0.4854 0.4857
2·2 0.4861 0.4864 0.4868 0·4871 0.4875 0.4878 0.4881 0·4884 0.4887 0.4890
2·3 0.4893 0·4896 0.4898 0.4901 0.4904 0.4906 0.4909 0.4911 0.4913 0.4916
2·4 0.4918 0.4920 0.4922 0.4925 0.4927 0.4929 0·4931 0.4932 0.4934 0.4936
2·5 0.4938 0.4940 0.4941 0.4943 0.4945 0.4946 0.4948 0.4949 0.4951 0.4952
2·6 0.4953 0.4955 0·4956 0.4957 0.4959 0.4960 0.4961 0·4962 0.4963 0·4964
2·7 0.4965 0.4966 0.4967 0.4968 0.4969 0.4970 0.4971 0.4972 0.4973 0·4974
2·8 0.4974 0.4975 0.4976 0.4977 0.4977 0·4978 0.4979 0.4979 0.4980 0.4981
2·9 0·4981 0.4982 0.4982 0.4983 0.4984 0.4984 0.4985 0.4985 0.4986 0·4986
3·0 0·4987 0.4987 0·4987 0.4988 0.4988 0.4989 0.4989 0·4989 0.4990 0·4990

80

SECTION A
SOLUTION 1
a)
TADEFO LIMITED
ACTIVITY BASED COSTING PROFIT STATEMENTS
ACQ BEZ CFJ TOTAL
Units produced/sold 30,000 50,000 40,000 120,000
N’000 N’000 N’000 N’000
Sales 2,190.00 2,250.00 3,800.00 8,240.00
Less:
Prime cost 1,950.00 1,600.00 3,360.00 6,910,00
Overheads:
Machine services 101.40 84.50 169,00 354,90
Assembly services 37.02 215.95 74.04 327.01
Set-up costs 11.00 6.50 10.50 28.00
Order processing 87,354 48.53 48.53 184.414
Purchasing 36.904 25.549 29.807 92.26
2,223.678 1,981.029 3,691.877 7,896.584
Profit/(loss) (33.678) 268.971 108.123 343.416
Workings
(i) Step 1: Calculate the rate/cost driver for each of the cost pools
Cost pool Cost Quantity for Rate/cost driver

the period
N N
Machine services 359,000 425,000 0.845/machine hr
Assembly services 328,000 532,000 0.617 dir. Lab.hr
Set-up costs 36,000 720 50/set-up
Order processing 165,000 34,000 4.853/customer order
Purchasing 88,000 12,400 7.097/supplier’s order

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(ii)
Allocation of costs to different products
ACQ BEZ CFJ
Units produced/sold 30,000 50,000 40,000
Machine services
Machine hours/unit 4 2 5
Total machine hours 120,000 100,000 200,000
Cost at N0.845/hour N101,400 N84,500 N169,000
Assembly services
Assembly hours/unit 2 7 3
Total assembly hours 60,000 350,000 120,000
Cost at N0.617/hour N37,020 N215,950 N74,040
No of set-ups 220 130 210

Cost at N50/set-up N11,000 N6,500 N10,500
No of customer orders 18,000 10,000 10,000

Cost at N4.853/hour N87,354 N48,530 N48,530
No of suppliers orders 5,200 3,600 4,200

Cost at N7.097/order N36,904 N25,549 N29,807
b)
Incremental budgeting is a form of budgeting in which a budget is based on
the current year’s results plus an extra amount for estimated growth or inflation
in the following year. It is administratively easy to prepare but it is inefficient
because it encourages slack and wasteful spending to creep into budgets, hence
making it to become a normal feature of actual spending.
Car components manufacturing operates in a highly competitive environment.

Continuous improvement is very important and driving down of costs to the
lowest level is essential as much as possible. It is therefore unlikely that
incremental budgeting will provide the necessary tools for such an
environment.
Incremental budgeting approach will be adequate only if current operations are

effective, efficient and economical as much as possible without alternative
options available to TADEFO Limited. Traditional incremental budgeting do not
take into account alternative options neither does it look for ways of improving
performance.

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c) Activity Based Budgeting (ABB) is the use of costs determined by using activity
based costing as a basis for preparing budgets. It involves defining the
activities that underlie the financial figures in each function and using the level
of activity to decide how much resource should be allocated to that function,
how well it is being managed and to explain variances from budget. Its
principle is that activities drive costs and the objective is to control the causes of
costs rather than the costs themselves. The essence is that in the long run, costs
will be better managed and understood.
Activities must be examined and split up according to their ability to add value
because it is not all activities that are value adding. Activity Based Budgeting
(ABB) ensures that an organisation’s overall strategy, any actual or likely
changes in that strategy is taken into account because it attempts to manage
the business as the sum of its inter-related parts.
Activity Based Budgeting (ABB) implementation leads to the realization that the
business as a whole needs to be managed with a great reference to the
behavior of activities and cost drivers identified. The set up costs for TADEFO
Limited’s assembly line are clearly identified and hence can be budgeted for
and controlled.
d) Zero Based Budgeting (ZBB) can motivate employees because they do not set
targets based on historical data but on those consistent with their future
objectives and those of the organization. It ensures that employees benefit by
re-thinking an activity from the scratch, though it calls for extra work.
Zero Based Budgeting (ZBB) aims to eliminate slack, hence, employees raise the
expectations of their own achievement and through increasing job satisfaction,
enhance their motivation. It also encourages goal congruence through
increasing flexibility especially if incentives schemes are based on the budget
setting process.
e) Encouraging employee participation in budget setting has several advantages.

Budgets should be realistic and acceptable to employees. Employees who are
familiar with specific operations will provide the information for the budget and
knowledge spread among several levels of management is pulled together.
Morale and motivation are improved as it is hard for people to be motivated to
achieve targets set by others. Operational managers’ commitment to
organizational objectives is increased and co-ordination between units is
improved.

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EXAMINER’S REPORT
The question tests candidates on Budgeting and Budgetary Control using Activity
Based Costing approach. The principles of Incremental Budgeting System, advantages
of Zero Based Budgeting (ZBB) and the use of budgeting as a factor for employee
motivation are also examined.
Candidates are expected to prepare the company’s profit statement using activity
based costing techniques, state the weaknesses of increment budgeting, describe
Zero-Based Budgeting and how budgeting can be for employee motivation.
All candidates attempted the question but performance was poor. Many candidates
mix-up the computation of absorption rate of cost drivers on the cost pools.
Candidates could not correctly articulate the merits of Activity-Based Costing and
could not explain how Zero-Based budgeting can motivate employee.
Candidates are advised to update their knowledge on the principles of budgeting and
the various types of budgets giving great attention to their merits and demerits.
SECTION B
SOLUTION 2
a) OZOIGBONDU NIGERIA LIMITED
PROFITABILITY STATEMENT OF FOR THE 3 YEARS 2011, 2013 AND 2014
2012 2013 2014
N N N
Sales 50,400,000 57,600,000 86,400,000
Closing stock 840,000 960,000 1,440,000
51,240,000 58,560,000 87,840,000
Less:
Purchases 33,600,000 38,400,000 57,600,000
Opening stock 720,000 840,000 960,000
34,320,000 39,240,000 58,560,000
Gross profit 16,920,000 19,320,000 29,280,000
Expenses 2,880,000 3,360,000 4,320,000
Rent 1,200,000 1,200,000 1,200,000
Wages 5,160,000 5,160,000 5,760,000
Depreciation ____-____ 500,000 1,000,000
9,240,000 10,220,000 12,280,000
Net profit 7,680,000 9,100,000 17,000,000

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b)
OZOIGBONDU NIGERIA LIMITED
CASH FLOW STATEMENT FOR THE 3 YEARS ENDED 2012, 2013, 2014
2012 2013 2014
N’000 N’000 N’000
Cash Inflow:
Cash sales 20,160 23,040 34,560
Receivables 29,880 34,200 50,400
A 50,040 57,240 84,960
Payables 33,200 38,000 56,000
Expenses 2,880 3,360 4,320
Salaries 5,160 5,160 5,760
Rent 1,200 1,200 1,200
Motor vehicles __-___ 5,000 ___-__
B 42,440 52,720 67,280
Net cash flow (A – B) 7,600 4,520 17,680
Opening cash balance 4,000 11,600 16,120
______ ______ ______
Closing cash balance 11,600 16,120 33,800
c) Current ratio
= Current asset
Current liabilities
= N39,560,000 = 8.24:1
N4,800,000
The standard current ratio is 2: 1
Ozoigbondu Nigeria Limited’s current ratio is higher than the approved

standard of 2:1. Meaning that the company is carrying too much cash. A cash
level of N33,800,000 is on the high side. This cash should be put into
productive or investment ventures to generate profit.
d) Gearing ratio = Debt capital

Total capital
= N15,000,000 x 30%
N15,000,000
= N4,500,000 = 30%
N15,000,000

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The ratio concentrates on the longer term stability of the organization in
the area of its finances.
Workings
(i) Computation of closing stock
Purchases Reservation Closing

rate stock
N N
December 2011 (Monthly) 2,400,000 30% 720,000
December 2014 (Monthly) 4,800,000 30% 1,440,00
(ii) Cash from receivables
2011 2012 2013 2014

N N N N
Sales 43,200,000 50,400,000 57,600,000 86,400,000
Cash sales (40%) 17,280,000 20,160,000 23,040,000 34,560,000
Credit sales (60%) 25,920,000 30,240,000 34,560,000 51,840,000
Outstanding receivables 2, 160,000 2,520,000 2,880,000 4,320,000
Cash flow debtors 23,760,000 27,720,000 31,680,000 47,520,000
Add receivables due - 2,160,000 2,520,000 2,880,000

_______________ _______________ _______________
Total receipts 29,880,000 34,200,000 50,400,000
(iii) Cash payables
2011 2012 2013 2014

N N N N
Purchases 28,800,000 33,600,000 38,400,000 57,600,000
Outstanding 2,400,000 2,800,000 3,200,000 4,800,000
Payment to suppliers 26,400,000 30,800,000 35,200,000 52,800,000
Old balance paid 2,400,000 2,800,000 3,200,000

_______________ ________________ ________________
Total payment to 33,200,000 38,000,000 56,000,000
suppliers

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Current asset in 2014
N
Closing inventory 1,440,000
Receivables 4,320,000
Cash Balance 33,800,000
39,560,000
Current liabilities in 2014

N
Payables 4,800,000
EXAMINER’S REPORT
The question tests candidates’ knowledge of the preparation of Income Statement and
Cash Flow Statements.
Candidates are expected to prepare Profitability Statement, Cash Flow Statement and
Compute Current and Gearing ratios.
Candidates are also expected to correctly determine the amount of receivables,
payables and relevant opening and closing stocks.
About 80% of candidates who attempted the question could not clearly distinguish
between the features of profit statement and cash flow and thus affected the
computation of the required ratios.
Candidates’ performance could improve with the effective use of Pathfinders and
Study Texts.
SOLUTION 3
a)
PAKEX DIVISION STATEMENT SUMMARY
Year 1 2 3 4 5
N‘000 N‘000 N‘000 N‘000 N‘000
Opening investment 48,000 38,400 28,800 19,200 9,600
Net cash flow 16,000 16,000 16,000 16,000 16,000
Less depreciation 9,600 9,600 9,600 9,600 9,600
Net profit 6,400 6,400 6,400 6,400 6,400
Less: interest on capital 7,680 6,144 4,608 3,072 1,536
Residual income (1,280) 256 1,792 3,328 4,864
ROCE 13.3% 16.7% 22.2% 33.3% 66.7%

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b)
Management is motivated to focus only on the outcomes of the first year for any
new project because of the criterion used for performance measurement and
investment decisions. Using straight-line depreciation, Residual Income is
negative and the Return on Capital employed (ROCE) of 13.3% is less than the
target return of 20%. Therefore, if the focus is only on the performance
measures for the first year the project will be rejected even though Residual
Income and ROCE rise steadily throughout the five-year period.
c)
Year 1
N‘000
Investment at beginning of year 48,000
Net cash flow (40% x N56million) 22,400
Less: Depreciation 9,600
Profit 12,800
Less: Interest on capital 7,680
Residual Income 5,120
ROCE 26.7%
Workings
Net cash flows per annum = 40% of N40,000,000

= N16million
Depreciation on straight line = N48,000,000

5
= N9,600,000
Interest on capital at 16% p.a.

N
Year 1 = N48,000,000 X 0.16 = 7,680,000
Year 2 = N38,400,000 x 0.16 = 6,144,000
Year 3 = N28,800,000 x 0.16 = 4,608,000
Year 4 = N19,200,000 x 0.16 = 3,072,000
Year 5 = N9,600,000 x 0.16 = 1,536,000
ROCE for each year is based on = profit

88

Investment
EXAMINER’S REPORT
The question tests candidates understanding of Investment decision making using

Residual Income (RI) and Return on Capital Employed (ROCE).
Candidates are expected to prepare Summary Statement in appraising the validity of
the investment proposal based in Residual Income (RI) and Return on Capital
Employed computed. They are also expected to appraise the alternative proposal
based in the same criteria.
Candidates could not correctly interpret the question as many of them were computing
the Net Present Value as a method of appraisal instead of RI and ROCE. Poor
presentation of solution in tabular form was a major shortcoming. Even though, Part
(c) of the question requested for the computation in the alternative proposal for Year 1
only, many candidates wasted valuable time computing for years 1 – 5.
Candidates are advised to clearly understand questions before attempting them.
Proper presentation of results should be mastered by candidates.
SOLUTION 4
a) BADEGY LIMITED
PRICING POLICY
BUDGET POSITION OF THE COMPANY
EFFECT OF COMPETITORS INCREASE IN PRICE WILL RESULT INTO: N‘000

Sales (Workings 3) (115,540 @ N130) 15,020.22
Cost (Workings 4) 12,448.09
Profit 2,572.11
b) Computation of budgeted position if company also raises its price by 6%:
N‘000
Sales (Workings 5) 13,292.188
2,899.742

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Considering options 1, 2 and 3 as per the above computations, the company will be
better off effecting the increase in prices of 6% as profit will be approximately N2.9m
as against N2.4m and N2.6m.
NOTES
i. CURRENT POSITION N‘000

Sales 106,000 units @ N130 13,780.00
Profit 3,006.00
ii. BUDGET FOR NEXT PERIOD N‘000

Sales 106,000 @ N130 13,780.00
Profit 2,360.00
Workings
1. Current price per unit
N 10,774.000
106,000 = N101.64
2. Total Cost = N10,774,000 x 1.06 = N11,420.440
3. Sales Computation in units
106,000 + (6% x 11/2) 9% = 9,540 units
= 106,000 + 9,540 = 115,540units
4. Cost 115,540 x N101,64 x 1.06%
= N12,448,090
5. Sales computation in units as a result of increase in price:

106,000units minus (9% x 106,000) = 9,540units
= (106,000 – 9,540) = 96,460units
Current sales price per unit N130 x (1.06%) = N137.8
New total sales figure = N137.8 x 96,460 = N13,292,188

90

6. Cost of sales = 96,460 x N101.64 x 1.06%
= N10,392,446
ALTERNATIVE SOLUTIONS FOR QUESTION 4
(a) BADEGY LIMITED
Price elasticity of demand = % change in quantity demanded
% change in price
= 1.5
When the company’s price fell by 4% in real terms, demand increased by 4% x 1.5 i.e.
6%.
When the company’s price fell by 6% in real terms, demand will increase by 6% x 1.5
i.e. 9%.
Determination of fixed and variable costs:
Adjust current period’s costs to previous period prices
10,774 = 10,360
1 + 4%
Use high/low method to determine fixed/variable cost split.

Period Unit Cost
‘000 N’000
Current 106 10,360
Previous (100) (10,000)

Difference 6 360
Variable cost per unit = N360,000 = N60

6,000
Fixed cost = N10,000,000 – (100,000 x N60)
Fixed cost = N4,000,000

91

Variable cost per unit next period:
= N60 x (1 + 4%) x (1 + 6%) = N66.144
Fixed cost per unit next period
= 4,000,000 x (1 + 4%) x (1 + 6%) = N4,409,600
Budget position at N130 N

Sales: 106,000 x (1 + 9%) x N130 15,020,200
Variable costs: 106,000 x (1 + 9%) x N66.114 (7,642,278)
Contribution 7,377,922
Fixed costs: 4,409,600
Profit 2,968,322
Budget position at N130 + 6%

Sales 96,460 x 130 x (1 + 6%) 137.80 13,292,188
Variable cost 96,460 x 66,144 6,380,250
Fixed cost 4,409,600
Profit 2,502,338
EXAMINER’S REPORT
The question tests candidates’ knowledge of Budgeting and Pricing Policy decisions.
Candidates are expected to prepare the company’s budgeted position showing the
effect of inflation and change in price, likely effect of competitor’s reaction and
elasticity of demand. About 70% of the candidates avoided the question and the
performance of candidates who attempted it was poor.
Many candidates were unable to factor in elasticity of demand into the budgeting
process and price changes. The effect of inflation factor on changes in quantity in
demand also posed a great challenge.
Candidates are advised to familiarize themselves with budgeting techniques and
pricing strategies and ensure adequate preparations for the examination.

92

SOLUTION 5
a) The Balanced Scorecard Approach to performance measurement emphasises the

need to provide management with a set of information which covers all relevant
areas of performance in an objective and unbiased manner. The information
provided cover both financial and non-financial aspects such as profitability,
customer satisfaction, innovation and internal efficiency. It focuses on four
different perspectives:
(i) Customer perspective – This considers how new and existing customers view
the organisation. It should identify targets that matter to customers such as
cost, quality, delivery etc.
(ii) Internal perspective – This makes an organisation to consider what processes

it must excel at, to achieve financial and customers’ objectives. This
perspective aims to improve internal processes and decision making.
(iii) Innovation and learning perspective – This requires the organisation to

consider how it can continue to improve and create value. The organisation
must acquire new skills and develop new products to maintain a competitive
position in their respective market(s) and provide a basis from which the
other perspectives of the balanced scorecard can be achieved.
(iv) Financial perspective – This considers whether the organisation meets the
expectations of its shareholders and how it creates value for them. It focuses
on traditional measures such as growth, profitability and cost reduction.
b) Division X
(i) Return on Investment (ROI)
Net profit = 46.4m x 30% = 13.92m
ROI = 100%
= N13.92m x 100% = 15.78%

N88.2m
Residual Income (RI)

Imputed interest charge = capital employed x cost of capital
N88.2m x 15% = N13.23m
RI = Net profit - input interest charge
Net profit = N13.92m, Imputed interest charge = N13.23m

93

RI = N13.92m – N13.23m
= N0.69m
(ii) Division Y
Return on Investment (ROI)

Net profit = N28.1m x 35% = N9.835m
ROI = Net profit x 100%
Capital employed
= N9.835m x 100% = 21.38%

N46.0m
Residual Income
Net profit = N9.835m, capital employed = N46.0m
Imputed interest charge = N46.0m x 15%
= N6.9m
R.I = N9.853m – N6.9m = N2.935m
(iii) The current return on investment (ROI) of each division is 18 percent. It is

likely that the manager of Division X will reject any proposal based solely on
ROI as the Division X investment only has a ROI of 15.78%.
The proposed investment would reduce Division X’s ROI by 2.22

percentage points.
Division Y manager will likely accept the proposal as the Division’s

investment has a ROI of 21.38%. The proposed investment would
increase Division Y’s ROI by 3.38 percentage points.
Division Y equally has a more healthy RI unlike Division X. The use of

ROI as a sole decision tool by the organisation would lead to a lack of
goal congruence between Division X and the company as a whole.
The use of RI as an investment measure helps divisions to make

decisions that are in the best interest of the organisation.

94

EXAMINER’S REPORT
The question tests candidate knowledge on divisional performance measurement with

emphasis on Return on Investment (ROI) and Residual Income.
Candidates are expected to focus on the four perspectives of the Balanced Score Card
and compute the Return on Investment and Residual Income stating comments
thereon.
Candidates displayed a good understanding of the question but the presentation of
solution in Part (b) was their greatest undoing. A number of candidates did not
clearly show their workings.
Candidates are advised to ensure adequate coverage of the syllabus in order to excel
in the Institute’s examinations.
SOLUTION 6
a)
MARKUS LIMITED
DETERMINATION OF MOST PROFITABLE PRODUCT MIX
Products X Y Z
N N N
Selling price 120 110 100
Less marginal cost:
Direct material cost 40 24 32
Direct labour cost 16 12 8
Variable overhead 14 26 16
Total marginal cost 70 62 56
Contribution per unit 50 48 44
Contribution per labour hour 12.5 16 22
Ranking of products 3rd 2nd 1st
Products Units Available labour hours

Z 3,000 3,000 X 2 hours = 6,000 hours
Y 10,000 10,000 x 3 hours = 30,000 hours
X 300 -300 x 4 hours = 1,200 hours
37, 200 hours

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b) PROFITABILITY STATEMENT FOR THE PRODUCT MIX
N
Contribution: X: 300 units @ N50 15,000
Y: 10,000 units @ N48 480,000
Z: 3,000 units @ N44 132,000
Total contribution 627,000
Less: Fixed overhead

N
X = 3,600 x N20 = 72,000
Y = 6,000 x N20 = 120,000
Z = 3,400 x N20 = 68,000 260,000
Maximum profit 367,000
EXAMINER’S REPORT
The question tests candidates’ knowledge on Marginal Costing Technique and optimal
product mix using the contribution per limiting factor approach.
Candidates are expected to determine the contribution per unit and per unit of
limiting factor, product profitability using the limiting factor and maximization of
contribution per limiting factor (hours)
Candidates displayed a poor understanding of the question and performance was also
poor.
Candidates demonstrated a shallow knowledge of Marginal Costing Techniques as
many applied absolute profit instead of contribution per limiting factor in taking
decisions.
Candidates are advised to utilize the Institute’s Pathfinders in their preparation for the
examinations.

96

SOLUTION 7
a)
Globalisation refers to the process of denationalization of clusters of political,
economical and social activities. It is an evolution which is systematically
restructuring interactive phase among nations, by breaking down barriers in
the area of culture, commerce, communication and several other fields of
endeavour.
Globalisation is a growing worldwide interdependence of people and
countries made possible as a result of huge advances in technology. Barriers
in trade are broken down and the world major financial markets are
integrating as a result of globalisation. It is a world without frontiers where
business, products, people and their ideas are freely disseminated and
diffused. It makes global exchange of knowledge, commerce and culture to
freely interact.
With the aid of satellite communications, internets, fibre optics cable, digital
information transactions, and high speed computers, management of any
organization can safely monitor the activities and trend of their company’s
performance. It ensures strong economic integration.
Globalisation makes possible the wide spread of materials, wealth,

knowledge and culture. Corporate work places can be effectively managed
online. It has equally made it easier to open up other countries market,
thereby leading to expansion of trade. Internet technology has revolutionized
communication. It enhances easy, cheap and quick access to people and
information worldwide.
Globalisation has given rise to global market value system, global marketing,
access to international financial market and it has effectively removed the
world trade barriers.
Hence, with the attendant benefits that come with globalization, managers of
organizations can increase their entities productivity from any remote area of
the world and receive information as and whenever required.
Management Information System (MIS) is the effective use of information to
aid the activities of managers. The activities of managers include:
· Presentation of materials which is enhanced by the use of word

processing equipment such as word processors. The use of

97

spreadsheets also aid the presentation and preparation of accounting
information.
· Teleconferencing, which involves conferencing of managers in
different locations also aid the effectiveness of managers.
Electronic Commerce (e-Commerce) is another area of MIS where wide

varieties of goods and services are made available to enhance the activities of
the managers.
The production of good information also enables the company to gain more
competitive advantage over rivals of the same line of business and it
encourages specialization by managers.
Globalisation enables companies to gain more competitive advantage over
rivals in the same line of business. Wide varieties of goods and services are
made available. Specialization is enhanced as excess products have markets.
b) The criticisms against globalization

Despite the numerous benefits of globalization, it is not without criticisms. It
has been argued that globalization has widened the gap between the rich
and the poor. Though global wealth has increased, it is held in fewer hands,
organizations and countries.
Globalisation brought about environmental degradation. The quest for

growth and profitability by orgasniations has made many of the companies to
abandon or ignore environmental protection and sustenance. Environmental
pollution is rampant and environmental offenders are daily increasing.
Though globalization has enriched the world scientifically, economically,
politically and socio-culturally, there appears to be no global government to
regulate globalization.
Globalisation has made different countries and cities of the world to be under
one roof, but democracy is literarily eroded and seeds of stability eroded in
most countries. This has negative effect on organizations performance.
Human animal and plant diseases can spread more quickly through
globalization. Economic depression in one country can trigger adverse
reaction across the globe. It can lead to capital flight where funds are moved
from country where interest on return on investment is low to a country
where the interest is high.

98

Companies are faced with greater competition. This can put smaller
organisations at a disadvantage as they do not have resources to compete on
global scale.
Globalizations do not maximize sustainable economic growth. With
globalisation comes the activities of fraudsters, hackers etc.
EXAMINER’S REPORT
The question tests candidates’ knowledge on Globalization and the use of
Management Information System (MIS) to enhance management performance. It also
requests for the criticisms of globalization.
About 60% of the candidates attempted the question and performance was below
average.
Many candidates did not do well as they restricted their explanations only to Internet
services.
Candidates are advised to familiarize themselves with the concept of Globalization and
how Management Information Systems (MIS) support management performance.

99

SKILLS LEVEL EXAMINATION – NOVEMBER 2015
ANSWER FIVE OUT OF SEVEN QUESTIONS IN ALL
QUESTION 1
The Board of Directors of Danda Company Limited is proposing the purchase of either of
two machines that have been proved adequate for the production of an engineering
product “Gee”. The two machines are: ZIGMA 5,000 and DELPHA 7,000. Production in
the first year would be affected by installation challenges and inadequate understanding
of the operating instructions of the machines.
Information available from the production profile of the two machines are as shown
below:
ZIGMA 5000:
Production Production
Capacity: Capacity (%)
Year
1 - 60
2 - 90
3 - 100
4 - 100
5 - 50
6 - 30
Cost of machine is N16,500,000 while the life span is 6 years.

DELPHA 7000:
Production Production
Capacity: capacity (%)
Year
1 - 50
2 - 100
3 - 100
4 - 100
5 - 80
6 - 50
Cost of plant is N18,300,000 while the life span is 6 years.
SKILLS LEVEL EXAMINATION – NOVEMBER 2015 107

Other information relevant to the company‟s operations and administration are:
(i) Selling price per unit is N300.
(ii) Variable cost per unit is N150.
(iii) Annual fixed overhead exclusive of depreciation is N1,200,000.
(iv) Company depreciation policy is straight line basis.
(v) The budgeted production capacity is 100,000 units.
(vi) No opening or closing inventory is envisaged.
(vii) All sales are for cash.
(viii) All costs are for cash.
Required:
a. Prepare the SIX year profitability statement for the two machines. (6 Marks)
b. Prepare the SIX year cash flow statement for the two machines. (6 Marks)
c. What is the payback period for the two machines? (7 Marks)
d. Determine the Net Present Value (NPV) of the two machines if
the acceptable discount rate for the company is 15%. (7 Marks)
e. Which of the two machines should the company acquire? (4 Marks)
(Total 30 Marks)
SECTION B: ANSWER ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION

(40 MARKS)
QUESTION 2
Pestel Limited produces cake and bread which it supplies to a major supermarket in
Abuja. It holds no inventories because it adopts the Just-In-Time (JIT) system.
The standard cost of the wheat used in baking the products is N200 per kg. Each piece
of cake uses 0.5kg of wheat while each loaf of bread uses 2kg of wheat.
The production levels for cake and bread for the month of October were as follows:
Budgeted Actual production
production (units) level (units)
Bread 240,000 240,000
Cake 380,000 360,000
The actual cost of wheat in October was N232 per kg. 496,000kg of wheat was used to
bake the bread and 190,000kg was used to bake the cake.
The global prices of wheat increased by 18% in the month of October.

At the beginning of the month, the supermarket group made an expected request for an
immediate shape change to the cake resulting in 5% more wheat than previously
required. This change also brought about production delays which caused a reduction in
production by 20,000 units of cake in that month. The production director is given the
task of purchasing relevant input materials and any production request which occur,
although he does not take responsibility for setting standard costs.
Required:
(a) Compute the following variances for the month of October for each of the products
and in total:
(i) Material price planning variances, (4 Marks)
(ii) Material price operational variances. (4 Marks)
(iii) Material usage planning variances, (4 Marks)
(iv) Material usage operational variances (4 Marks)
(b) What are the benefits of planning and operational variances to a management
accountant?
(4 Marks)
(Total 20 Marks)
QUESTION 3
Casko Limited manufactures four products from a single chemical process and a single
raw material. The production director is considering proposals to discontinue certain
production process and has provided the following information:
(i) The cost of raw materials for the year just ended was N1,320,000.
(ii) The initial processing costs amounted to N2,564,600.
(iii) All the four products W, X, Y and Z are produced simultaneously at a single split-
off point.
(iv) Product Y is sold immediately without further processing.
(v) The other three products are subjected to further processing before being sold.
(vi) It is the company‟s policy to apportion the cost prior to split-off point on a suitable
sales value basis.
(vii) The output, sales and the additional processing costs for the past year were as
follows:
Products Output Sales Additional
(units) processing
costs
N N
W 400,000 3,840,000 800,000
X 89,230 1,160,000 640,000
Y 5,000 160,000 -
Z 9,000 1,200,000 40,000

The proposal being considered by the management is to sell the products to other
processors immediately after the split-off point without any of the present additional
processing. The additional processing costs of products W,X and Z would either no
longer be incurred or be charged to an alternative profitable use. The prices per unit to
be obtained from the other processors would be: W: N6.40, X: N8, Y: N32, and Z: N100.
You are required to prepare a statement of:
a. i. The profit or loss on each of the four products. (10 Marks)
ii. The change in the profit or loss given in your solution to
(i) above, if the proposals being considered were adopted. (8 Marks)
b. Identify TWO long-run pricing decision approaches that are relevant
to a price setting firm. (2 Marks)
(Total 20 Marks)
QUESTION 4
The existing business of MOOJ Ltd. is very profitable, with forecasts for the next year
showing that this trend of profitability will continue.
MOOJ Limited manufactures all of its own clothes, and then sells these direct to the
public through 105 branches located around Nigeria. The branches are not run as profit
centres; prices are set centrally for the clothes and the costs of each branch are
monitored at the Head Office. Surprisingly, there is no minimum or maximum turnover
requirement for each branch. In the company‟s view, this enables staff to focus on
customer service without the concern of meeting a profit figure. The strategy obviously
works well, given the company‟s results.
The existing Information Technology (IT) infrastructure is based around each shop
maintaining its own inventory records. There is no Wide Area Network (WAN) and Head
Office has few integrated systems.
The Directors recognise that the current IT infrastructure of MOOJ Limited is inadequate
for Internet trading.
The Board of MOOJ Limited is currently discussing whether or not to start selling clothes
on the Internet.
Required:
Identify and discuss the strategic and performance management issues that the Board of
MOOJ Limited will have to address prior to a decision being taken regarding trading on
the Internet. (Total 20 Marks)

SECTION C: ATTEMPT ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION (30 MARKS)
QUESTION 5
KOMERE Limited operates a Standard Costing System. The standard cost information is
presented in the standard costs cards below.
Direct Material:
N
A 20kg at N100 per kg - 2,000
B 30kg at N80 per kg - 2,400
Direct Labour:
Skilled -10hours at N40 per hour 400
Unskilled-10 hours at N25 per hour 400
Variable overhead cost- 10 hours at N20 per hour 200
5,250
The actual results for the month of October 2015 is given below.
(i) Direct Material:
Purchases Amount (N) Consumed
Direct Material A 105,000kg 10,290,000 99,000 kg
Direct Material B 148,000kg 11,988,000 144,000kg
(ii) Direct Labour:
Hours Amount (N)
Skilled labour 56,000 2,352,000
Unskilled labour 56,000 1,344,000
(iii) Variable overhead N1,064,000
(iv) Actual production 4,800 units
Required:
(a) Calculate all the relevant variances. (8 Marks)
(b) What are possible causes of the variances computed. (7 Marks)
(Total 15 Marks)

QUESTION 6
Tee Company makes and sells a product, the Green, which is nearing the end of its life. A
replacement product, Brace, has been designed and test marketed and the company is
trying to decide when to replace Green with Brace. Tee Company only has the capability
to produce one of the two products at a time.
Sales of Green are expected to be 100,000 units in the first quarter of Year 7 and are
forecast to fall after that so that each quarter‟s sales will be 10% less than those of the
previous quarter. Green has a selling price of ₦14 per unit and its Contribution to Sales
ratio (C/S ratio) is 40%. The fixed costs of making Green in Year 7 will be ₦200,000 per
quarter.
Test market results for Brace were very good and demand for similar products is growing
rapidly. Tee Company believes that sales of Brace can be predicted by the following
equation:
Y = 80,000 + 6,000 T
Where:
Y = Sales of Brace in units per quarter
T = Time, measured in quarters. For the first quarter of Year 7 (that is, January to March
Year 7), T = 1; for the second quarter of Year 7, T = 2; etc
The selling price of the Brace will be ₦16 and its contribution per unit will be ₦6.
Fixed costs will increase to ₦240,000 per quarter if Green is replaced by Brace.
To avoid disruption of the production of Tee‟s other products, the changeover between
Green and Brace must take place on either 1 January Year 7 or 1 July Year 7. The costs of
changeover will differ depending upon which date is chosen and the following
information is available.
(i) Some of the machinery used to make the Green will no longer be required for the
Brace. The written down value of this machinery will be ₦250,000 at 1 January
Year 7, and ₦220,000 by 1 July Year 7. Its net realisable value at 1 January Year 7
will be ₦140,000, but by 1 July Year 7 it will be ₦30,000.
(ii) Some redundancies will result from the change of products. Redundancy
payments of ₦40,000 will be made if the changeover occurs on 1 January, but
these will rise to ₦50,000 by 1 July. The five administration workers concerned are
each paid ₦20,000 per annum and will not be replaced.
Their wages are not included in the costs given above.

Required:
a. Determine whether the company should continue to sell Green in Year 7 or
introduce Brace in Year 7. (8 marks)
b. If the company were to replace Green with Brace in Year 7 recommend whether this
should be with effect from 1 January or 1 July. (Include a schedule of relevant costs
and revenues and provide explanations of your figures). (7 marks)
(Total 15 Marks)
QUESTION 7
Stuck Ltd manufactures industrial glues and solvents in a single large factory.
Approximately 400 different inputs are used to produce the 35 specialist outputs, which
range from ultra-strong glues used in aircraft manufacture to high-impact adhesives that
are required on construction sites.
Two years ago, with the company only just breaking even, the directors recognised the
need for more information to control the business. To assist them with their strategic
control of the business, they decided to establish a Management Information System
(MIS). This is now operational but provides only the following limited range of
information to the directors via their networked computer system:
(i) A summary business plan for this and the next two years. The plan includes details
of the expected future incomes and expenditure on existing product lines. It was
produced by a new member of the accounting department without reference to past
production data;
(ii) Inventory balances on individual items of raw materials, finished goods etc. This
report is at a very detailed level and comprises 80% of the output from the MIS
itself; and
(iii) A summary of changes in total demand for glues and solvents in the market place
for the last five years. This information is presented as a numerical summary in six
different sections. Each section takes up one computer screen so only one section
can be viewed at a time.
Required:
(a) Comment on the weaknesses in the information currently being provided to the
directors of the company. (9 Marks)
(b) Suggest how the information may be improved, with particular reference to other
outputs which the MIS might usefully provide to the directors. (6 marks)
(Total 15 Marks)

Formulae
Learning curve
Y = axb
Demand curve
P = a – bQ
b = change in price
change in quantity
quaquantity
a = Fixed Cost when Q = quantity
MR = a – 2bQ
Y= a + bX or Y - Y = b(x – X)
where
Covariance (XY) 𝒏 𝑿𝒀− ( 𝑿)( 𝒀)
b= = 𝟐
Variance (X) 𝒏 𝑿 − 𝑿 𝟐
a = Y – bX
𝒀 = 𝒏𝐚 + 𝒃 𝑿
𝑿𝒀 = 𝐚 𝑿+𝒃 𝑿𝟐

Annuity Formula

r
Annuity Table
Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15

Standard Normal Distribution Table
0·00 0·01 0·02 0·03 0·04 0·05 0·06 0·07 0·08 0·09
0·0 0·0000 0·0040 0·0080 0·0120 0·0160 0·0199 0·0239 0·0279 0·0319 0·0359
0·1 0·0398 0·0438 0·0478 0·0517 0·0557 0·0596 0·0636 0·0675 0·0714 0·0753
0·2 0·0793 0·0832 0·0871 0·0910 0·0948 0·0987 0·1026 0·1064 0·1103 0·1141
0·3 0·1179 0·1217 0·1255 0·1293 0·1331 0·1368 0·1406 0·1443 0·1480 0·1517
O.4 0.1554 0·1591 0·1628 0·1664 0·1700 0·1736 0·1772 0·1808 0·1844 0·1879
0·5 0·1915 0·1950 0·1985 0·2019 0·2054 0·2088 0·2123 0·2157 0·2190 0·2224
0·6 0·2257 0·2291 0·2324 0·2357 0·2389 0·2422 0·2454 0·2486 0·2517 0·2549
0·7 0·2580 0·2611 0·2642 0·2673 0·2704 0·2734 0·2764 0·2794 0·2823 0·2852
0·8 0·2881 0·2910 0·2939 0·2967 0·2995 0·3023 0·3051 0·3078 0·3106 0·3133
0·9 0·3159 0·3186 0·3212 0·3238 0·3264 0·3289 0·3315 0·3340 0·3365 0·3389
1·0 0·3413 0·3438 0·3461 0·3485 0·3508 0·3531 0·3554 0·3577 0·3599 0·3621
1·1 0·3643 0·3665 0·3686 0·3708 0·3729 0·3749 0·3770 0·3790 0·3810 0·3830
1·2 0·3849 0·3869 0·3888 0·3907 0·3925 0·3944 0·3962 0·3980 0·3997 0.4015
1·3 0.4032 0.4049 0.4066 0.4082 0.4099 0.4115 0.4131 0.4147 0.4162 0.4177
1.4 0.4192 0.4207 0.4222 0.4236 0.4251 0.4265 0.4279 0.4292 0.4306 0.4319
1·5 0.4332 0.4345 0.4357 0.4370 0.4382 0.4394 0.4406 0.4418 0.4429 0.4441
1·6 0.4452 0.4463 0.4474 0.4484 0·4495 0.4505 0.4515 0.4525 0.4535 0.4545
1·7 0.4554 0.4564 0.4573 0·4582 0·4591 0.4599 0·4608 0·4616 0.4625 0.4633
1·8 0.4641 0.4649 0.4656 0.4664 0.4671 0.4678 0.4686 0.4693 0.4699 0·4706
1·9 0.4713 0.4719 0.4726 0.4732 0.4738 0.4744 0.4750 0.4756 0.4761 0.4767
2·0 0.4772 0.4778 0.4783 0.4788 0.4793 0.4798 0.4803 0.4808 0·4812 0.4817
2.1 0.4821 0.4826 0.4830 0.4834 0.4838 0.4842 0.4846 0·4850 0.4854 0.4857
2·2 0.4861 0.4864 0.4868 0·4871 0.4875 0.4878 0.4881 0·4884 0.4887 0.4890
2·3 0.4893 0·4896 0.4898 0.4901 0.4904 0.4906 0.4909 0.4911 0.4913 0.4916
2·4 0.4918 0.4920 0.4922 0.4925 0.4927 0.4929 0·4931 0.4932 0.4934 0.4936
2·5 0.4938 0.4940 0.4941 0.4943 0.4945 0.4946 0.4948 0.4949 0.4951 0.4952
2·6 0.4953 0.4955 0·4956 0.4957 0.4959 0.4960 0.4961 0·4962 0.4963 0·4964
2·7 0.4965 0.4966 0.4967 0.4968 0.4969 0.4970 0.4971 0.4972 0.4973 0·4974
2·8 0.4974 0.4975 0.4976 0.4977 0.4977 0·4978 0.4979 0.4979 0.4980 0.4981
2·9 0·4981 0.4982 0.4982 0.4983 0.4984 0.4984 0.4985 0.4985 0.4986 0·4986
3·0 0·4987 0.4987 0·4987 0.4988 0.4988 0.4989 0.4989 0·4989 0.4990 0·4990

SOLUTIONS

SOLUTION 1
(a) DANDA COMPANY LIMITED
Profitability Statement – ZIGMA 5000

Year 1 2 3 4 5 6
Capacity (%) 60 90 100 100 50 30
Units 60,000 90,000 100,000 100,000 50,000 30,000
N‟000 N‟000 N‟000 N‟000 N‟000 N‟000
Sales 18,000 27,000 30,000 30,000 15,000 9,000
Variable cost (9,000) (13,500) (15,000) (15,080) (7,500) (4,500)
Fixed Cost (1,200) (1,200) (1,200) (1,200) (1,200) (1,200)
Depreciation (2,750) (2,750) (2,750) (2,750) (2,750) (2,750)
Net profit 5,050 9,550 11,050 11,050 3,550 550
Profitability Statement - DELPHA 7000

Year 1 2 3 4 5 6
Capacity (%) 50% 100% 100% 100% 80% 50%
Units 50,000 100,000 100,000 100,000 80,000 50,000
Sales 15,000 30,000 30,000 30,000 24,000 15,000
Variable cost (7,500) (15,000) (15,000) (15,000) (12,000) (7,500)
Fixed Cost (1,200) (1,200) (1,200) (1,200) (1,200) (1,200)
Depreciation (3,050) (3,050) (3,050) (3,050) (3,050) (3,050)
Net profit 3,250 10,750 10,750 10,750 7,750 3,250
b. Cash flow Statement – Zigma 5000

Year 1 2 3 4 5 6
N‟000 N‟000 N‟000 N‟000 N‟000 N‟000
Profit 5,050 9,550 11,050 11,050 3,550 550
Add back deprecation 2,750 2,750 2,750 2,750 2,750 2,750
7,800 12,300 13,800 13,800 6,300 3,300
Cash flow Statement – DELPHA 7000

Year 1 2 3 4 5 6
N‟000 N‟000 N‟000 N‟000 N‟000 N‟000
Profit 3,250 10,750 10,750 10,750 7,750 3,250
Add back deprecation 3,050 3,050 3,050 3,050 3,050 3,050
6,300 13,800 13,800 13,800 10,800 6,300

ALTERNATIVE SOLUTION
SECTION A
DANDA COMPANY LIMITED
1(a) The six year profitability statement for the two machines.
ZIGMA 5000
Year 1 2 3 4 5 6
Production units 60,000 90,000 100,000 100,000 50,000 30,000
Contribution margin (N) 150 150 150 150 150 50
N‟000 N‟000 N‟000 N‟000 N‟000 N‟000
Total contribution 9,000 13,500 15,000 15,000 7,500 4,500
Less other fixed (1,200) (1,200) (1,200) (1,200) (1,200) (1,500)
overhead
Less depreciation (2,750) (2,750) (2,750) (2,750) (2,750) (2,750)
Annual profit 5,050 9,550 11,050 11,050 3,550 550
DELPHA 7000
Year 1 2 3 4 5 6
N‟000 N‟000 N‟000 N‟000 N‟000 N‟000
Less other fixed (1,200) (1,200) (1,200) (1,200) (1,200) (1,500)
overhead
Less depreciation (3,050) (3,050) (3,050) (3,050) (3,050) (3,050)
Annual profit 3,250 10,750 10,750 10,750 7,750 3,250
b. The six year cashflow statement for the two machines

ZIGMA 5000
Year 1 2 3 4 5 6
N‟000 N‟000 N‟000 N‟000 N‟000 N‟000
Less other fixed (1,200) (1,200) (1,200) (1,200) (1,200) (1,500)
overhead
Annual net cash flow 7,800 12,300 13,800 13,800 6,300 3,300

DELPHA 7000
Year 1 2 3 4 5 6
N‟000 N‟000 N‟000 N‟000 N‟000 N‟000
Less other fixed overhead (1,200) (1,200) (1,200) (1,200) (1,200) (1,500)
Annual profit 6,300 13,800 13,800 13,800 10,800 6,300
Note: Deprecation is added back because it does not involve movement of cash.
c. Payback period - ZIGMA 5000
Year Cashflow Cashflow

N‟000 N‟000
0 (16,500) (16,500)
1 7,800 (8,700)
2 12,300 3,600
8,700
PBP = 1 X 12
12,300
1 year 8 months
Payback period – DELPHA 7000

Year Cashflow Cashflow
N‟000 N‟000
0 (18,300) (18,300)
1 6,300 (12,000)
2 13,800 1,800
12,000
PBP = 1 X 12
13,800
1 year 10 months

d. (i) Net Present Value of ZIGMA 5000
Net Net Cash flow Discount factor (15%) PV
Year N‟000
0 (16,500,000) 1.000 (16,500,000)
1 7,800,000 0.870 6,786,000
2 12,300,000 0.756 9,298,800
3 13,800,000 0.658 9,080,400
4 13,800,000 0.572 7,893,600
5 6,300,000 0.497 3,131,100
6 3,300,000 0.432 1,425,600
NPV = 21,115,500
(ii) Net Present Value of DELPHA 7000

Net Net Cash flow Discount factor (15%) PV
Year N‟000
0 (18,300,000) 1.000 (18,300,000)
1 6,300,000 0.870 5,481,000
2 13,800,000 0.756 10,432,800
3 13,800,000 0.658 9,080,400
4 13,800,000 0.572 7,893,600
5 10,800,000 0.497 5,367,600
6 6,300,000 0.432 2,721,600
NPV = 22,677,000
e. Using the payback period appraisal approach, Zigma 5000 capital outlay will be
recovered in 1 year and 8 months while Delpha 7000 capital outlay will be
recovered in 1 year and 10 months. This means that the company may prefer
Zigma 5000 which has a shorter payback period.
Using the Net Present Value (NPV) approach, Delpha 7000 returned a positive NPV
of N22.677m as against a positive NPV of N21.116m returned by Zigma 5000.
With the wealth created by Delpha 7000 of N2.677m as against that of Zigma
5000 which is N21.116m, Delpha 7000 should be acquired.

Marking Guide
DANDA COMPANY LIMITED Mark Mark
(a) Zigma 5000: Any 15 ticks @ 1/5 mark/tick 3
Delpha 7000: Any 15 ticks @ 1/5 mark /tick 3
6
(b) Zigma 5000: Any 15 ticks @ 1/5 mark/tick 3
Delpha 7000: Any 15 ticks @ 1/5 mark/tick 3
6
(c) Zigma 5000: Any 7 ticks @ ½ per tick 3 /2
1
Delpha 7000: Any 7 ticks @ ½ per tick 31/2

7
(d) NPV Zigma 5000: Any 14 ticks @ ¼ per tick 3 /2
1
NPV Delpha 7000: Any 14 ticks @ ¼ per tick 31/2

7
(e) Zigma 500 under PBP or
Delpha 700 under NPV 4
Recommendation as regards choice of machine 30
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of the preparation of profitability statement and cash
flow statements and the computation of Net Present Value (NPV) and Payback Period. It also
requires candidates to offer advice based on the results of the computations.
Candidates are expected to demonstrate their ability to distinguish between Cash Flow items and
those of profitability statements, correctly compute NPV and Payback periods of the two
machines and advise management.
Most of the candidates attempted the question and performance was above average.
Candidates understood the preparation of profitability statement and cash flow statement but
were deficient in the preparation of NPV and payback period.
However, many candidates had problem in the treatment of Non-Cash Flow items. A few of them
also applied wrong discounting factors in the determination of NPV.
Candidates are advised to ensure adequate preparation and clearly understand questions before
attempting them. The understanding of the various project appraisal techniques should also be
ensured.

SOLUTION 2
PESTEL LIMITED
Computation of Ex-ante and Ex-post Standards
Ex-ante
Standard cost per cake:
0.5kg @ N200 per kg = N100
Standard cost per loaf of bread
2kg @ N200 per kg = N400
Ex-post
Standard cost per cake:
(1.05 x 0.5) 0.525kg @ (200 x 1.18) N236 per kg = N123.9
Standard cost per loaf of bread:
2kg @ (N200 x 1.18) N236 per kg = N472
a(i) Material Price Planning Variance (Bread)

N
Ex-ante 496,000kg@ standard of N200/kg 99,200,000
Ex-post 496,000kg@ standard of N236/kg 117,056,000
17,856,000 A
Material Price Planning Variance (Cake)

N
6,840,000A
Total Material Price Planning Variance

N
24,696,000A

a(ii) Material Price Operational Variance (Bread)
N
Actual 496,000kg actually cost N232/kg 115,072,000
1984,000 F
Material Price Operational Variance (Cake)

N
760,000F
Total Material Price Operational Variance

N
2,744,000F
a(iii) Material Usage Planning Variance (Bread)

Kg
Ex-ante 240,000units@ standard of 2kg/unit 480,000
Ex-post 240,000units@ standard of 2kg/unit 480,000
Nil variance
Material Usage Planning Variance (Cake)

Kg
Ex-ante 360,000units@ standard of 0.5kg/unit 180,000
Ex-post 360,000units@ standard of 0.525kg/unit 189,000
9,000A
@ standard price N200
1,800,000A

Total Material Usage Planning Variance
Kg
Ex-ante 600,000units@ standard 660,000
(240,000 x 2 + 360,000 x 0.5)
Ex-post 600,000units@ standard 669,000
(240,000 x 2 +360,000 x 0.525)
9,000A
N200
Standard Price N1,800,000A
a(iv) Material Usage Operational Variance (Bread)

Kg
Ex-ante 240,000units@ standard of 2kg/unit 480,000
Actual 240,000units actually consumed 2kg/unit 496,000
16,000A
@ standard price N200
3,200,000A
Material Usage Operational Variance (Cake)

Kg
Ex-post 360,000units@ standard of (0.525/kg) 189,000
Actual 360,000units actually took 190,000
1,000A
Standard price N200
200,000A
Total Material Usage Operational Variance

Kg
Ex-post 600,000units@standard 669,000
(240,000x2 + 360,000 x 0.525)
Actual 600,000units actually took 686,000
(436,000 +190,000)
17,000A
Standard Price N200
3,400,000A

(b) Benefits of Planning and Operational Variances
i. They indentify variances due to poor planning and put a realistic value to
variances resulting from operations.
ii. They are used to update standard costs and revise budgets.
iii. Performance of managers is assessed on realistic variance computations
using ex-post standard costs that are more realistic than ex-ante standard
costs.
iv. Standard costing and variance analysis are more realistic and meaningful
in changing conditions.
v. Operational variances provide an up to date guide to current levels of
operating efficiency as the standards have been recomputed using up to
date information.
vi. Standard costing becomes more acceptable and thus have positive effect on
motivation.
vii. Systematic method of reviewing standards is provided as well as the
assumptions contained within them.
viii. It allows management to assess effectiveness of planning process.
x. Improvements can be made to standard setting process.
ALTERNATIVE SOLUTION TO 2(a)

Alternative Method
The material price planning variance (MPPV) could be calculated using the revised
quantity rather than the actual quantity. Similarly, the material usage operational
variance (MUOV) could be calculated using the revised price rather than the original
standard price. Full credit will be given where this alternative method is used instead.
However, it should be used for both the MPPV and the MUOV, otherwise the figures will
not reconcile.
A step-by-step workings of the alternative method are now provided

Material Planning Variances
Original budget (Ex-ante): ₦ ₦
Bread ₦200×2kg× 240,000 = 96,000,000
Cake ₦200 × 0.5kg × 360,000 = 36,000,000 132,000,000
Revised budget (Ex – post):

Bread ₦236* ×2gk × 240,000 113,280,000
Cake ₦236*×0.525kg** × 360,000 44,604,000 157,884,000
Total material planning variance
25,884,000(A)
* ₦236 = ₦200 × 1.18

** 0.525kg = 0.5kg ×1.05
Note: The question does not ask for the total planning variance. It is included for
educational purposes.
a) i) Material Price Planning Variances (MPPV)

MPPV = (OSP – RSP) ×RSQ × AQP
where
OSP = original standard price per unit of the raw material
RSP = revised standard price per unit of the raw material
RSQ = revised standard quantity of raw material allowed per unit of output
AQP = actual quantity of output produced
Bread (₦200 – ₦236) ×2kg× 240,000 ₦17,280,000(A)
Cake (₦200 – ₦236) × 0.525kg × 360,000 ₦6,804,000(A)
₦24,084,000(A)
iii) Material Usage Planning Variances (MUPV)

MUPV = (OSU – RSU) × OSP, where
OSU = original raw material usage. That is, the total quantity of raw materials
allowed by the original standard, for actual output produced.
RSU = revised standard raw material usage for actual production

₦ ₦
Bread [(240,000 × 2kg) – (240,000 × 2kg)] × ₦200 0
Cake [(360,000 ×0.5kg) – (360,000 × 0.525kg)]× ₦20 1,800,000(A) 1,800,000(A)
Check: ₦
MPPV 24,084,000(A)
MUPV 1,800,000(A)
Total material planning variance 25,884,000(A)
Material Operational Variances

₦
Ex-post budget as above 157,884,000
Actual material cost = ₦232 × (496,000kg + 190,000kg) 159,152,000
Total material operational variance 1,268,000(A)
Note: Once again this total is not required by the question.
ii) Material Price Operational Variances (MPOV)

MPOV = (RSP – AP) × AQ Purchased:
Bread (₦236 – ₦232) × 496,000kg ₦1,984,000(F)
Cake (₦236 – ₦232) × 190,000kg 760,000(F)
2,744,000(F)
iv) Material Usage Operational Variances (MUOV)

MUOV = (RSQ – AQ used) × RSP
Bread: [(240,000 × 2kg) – 496,000kg] × ₦236 ₦3,776,000(A)

Cake: [(360,000 × 0.525kg) – 190,000] × ₦236 236,000(A)
Total MUOV ₦4,012,000(A)
Check: ₦
MPOV 2,744,000(F)
MUOV 4,012,000(A)
Total material operational variance 1,268,000(A)
Note:
In the above solution, deliberate effort has been made to put the planning
variances together and the operational variances together.

Marking Guide
ai) Material Price Planning Variance Mark Mark
Bread Ex- Ante ½
Ex Post ½
Summation ½
Cake Ex-Ante ½
Ex-Post ½
Summation ½
Total Ex Ante ½
Ex post ½
Summation ½
4
Any 8 out of 9 ticks. Maximum of 4 marks
aii) Material Price Operational Variance Mark Mark

Bread Ex- Ante ½
Actual ½
Summation ½
Cake Ex-Ante ½
Actual ½
Summation ½
Total Ex Ante ½
Actual ½
Summation ½ 4
aiii) Material Usage Planning Variance Mark
Bread Ex- Ante ½

Actual ½
Summation ½
Cake Ex-Ante ½
Actual ½
Summation ½
Total Ex Ante ½
Actual ½
Summation ½ 4

aiv) Material Usage Operational Variance Mark
Bread Ex- Post ½
Actual ½
Summation ½
Cake Ex-Post ½
Actual ½
Summation ½
Total Ex Ante ½
Actual ½
Summation ½ 4
Any 8 out of 9 ticks. Maximum of 4 marks. 4
2(b) One full mark for any four points 1 x 4
Total 20
EXAMINER‟S REPORT
The question tests candidates‟ knowledge on planning and operational variances. The benefit of
determining such variances are also tested.
Candidates are expected to compute the material price planning variances, material price
operational variances, material usage planning variances and material usage operational
variance for the two products – bread and cake. They are also expected to discuss the benefits of
planning and operational variances.
Candidates understood the question and performance was above average.
Many candidates were unable to properly distinguish between planning and operational factors.
Figures which should have been used for computing planning variance were used for operational
variance and vice versa.
Candidates are advised to master this core section of the syllabus on variance and its uses as it is
of vital importance to management decision making.

SOLUTION 3
CASKO LIMITED
Total Cost
N N
Material 1,320,000.00 Joint Cost (JC) 3,884,600.00
Processing cost 2,564,600.00 ____________
3,884,600.00 3,884,600.00
a(i) Statement of profit or loss on each of the four products
Products W X Y X Total
Units 400,000 89,230 5,000 9,000 503,230
N N N N N
Sales 3,840,000.00 1,160,000.00 160,000.00 1,200,000.00 6,360.000.00
App. of JC (2,345,418.87) (708,511.95) (97,725.79) (732,943.40) (3,884,600.00)
*APC (800,000.00) (640,000.00) - (40,000.00) (1,480,000.00)
Profit 694,581.13 (188,511.95) 62,274.21 427,056.60 995,400.00
*Additional Processing Cost (APC)
a(ii) Method I: Using change in contribution
Products W X Y X Total
Units 400,000 89,230 5,000 9,000 503,230
N N N N N
SP/Units 6.40 8.00 32.00 100.00
Sales value 2,560,000.00 713,840.00 160,000.00 900,000.00 4,333,840.00
Joint cost 3,884,600.00
Revised Profit 449,240.00
Old profit 995,400.00
Net profit (546,160.00)
METHOD II COST- BENEFIT ANALYSIS APPROACH

N N
New sales value 4,333,840.00
Old sales value 6,360,000.00
(2,026,160.00)
Additional cost:
Old 1,480,000.00
Savings from selling off immediately 0
1,480,000.00
Net Effect (546,160.00)

By adopting the alternative strategy, the total contribution of the firm will reduce
by N546,160.00.
(b) The long-run approaches to pricing decisions are:

i. Pricing customized products
ii. Pricing non-customized products
iii. Target costing for pricing non-customized products.
Marking Guide
A(i) Profit or Loss of Products Mark Mark
Unit 4 ticks ½ each
Sales values 5 ticks ½ each
Apportionment of Joint Cost 5 ticks ½ each
Additional cost 4 ticks ½ each
Profit 5 ticks ½ each 10
Any 20 ticks @ ½
Method I Mark Mark

A(ii) Unit cost 5 ticks ½ each
Selling price 4 ticks ½ each
Application of joint costs 5 ticks ½ each
Joint cost 1 tick ½ each

Profit 1 tick ½ each
Revised profit 1 tick ½ each
Net 1 tick ½ each
Effect 1 tick ½ each 8
16 ticks @ ½ mark
OR
Method II
New sales value
Old sales value
Loss in sales
Saving at split point
Net effect
Any 4 ticks at 2 marks 8 marks
b) Any 2 ticks equals 2 marks 2
Total 20

EXAMINER‟S REPORT
The question tests the ability of candidates in the preparation of product production cost
statements of joint products up to split-off point and product profitability on further
processing thereafter.
The question also requests for approaches to long-run pricing decisions.
Candidates are expected to correctly determine and apportion joint cost and the Profit or
Loss on Products W, X Y and Z. They are also expected to give consideration to additional
processing costs after split-off point and advise on the proposal.
About 70% of the candidates attempted the question and understood its requirements.
However, 40% of them had challenges with the Joint cost apportionment process. Poor
presentation of results also affected them. Many candidates were not well acquainted
with approaches to pricing decisions.
Candidates are advised to ensure adequate practice with related Institute‟s Past Question
Papers and Study Packs.

SOLUTION 4
MOOJ LIMITED
Internet Trading is a form of e-commerce involving buying and selling of goods and
services through electronic retailing for improving overall performance.
The Board of Directors of MOOJ Limited should consider the following factors prior to a
decision being taken regarding trading on the internet:
i. SET-UP COST
It can be fairly expensive for MOOJ Limited to establish a website for selling its
own clothes and taking payments by credit card, debit card, interswitch on
payPal. Irrespective of the level of profitability of MOOJ Limited, there is still need
for a thorough Cost-Benefit-Analysis (CBA) before making such a decision.
ii. TYPE OF BUSINESS
Some products and services are easier to sell than the others on the internet. For
example, Computer firms like HP, Dell, Toshiba, etc, sell products very successfully
over the internet as their products can be perfectly specified in writing. However,
it is much more difficult to sell items of clothing online. No matter how much
detail about clothing items is provided on the website or how many photographs
are provided, there are difficulties in selling goods by catalogue. For MOOJ
Limited that intends to sell clothing by internet, it has to budget for larger amount
of sales returns, but there are no minimum or maximum turnover requirements for
each branch of MOOJ Limited. Hence, there is no concern for profit figure. This
approach needs to be changed if the Board of Directors of MOOJ Limited would
make a decision on internet business.
iii. ON-GOING OPERATING COST
A website has to be updated frequently to keep it interesting and accurate and it

might be necessary to keep making special offers to encourage customers to revisit
the website.
iv. TIME TO ESTABLISH THE SYSTEM
It takes time to establish a website that customers know about and want to visit
coupled with the fact that there is no Wide Area Network (WAN) and the head
office has few integrated system.

v. INADEQUATE IN-HOUSE SKILLS
MOOJ Limited might not employ individuals with the knowledge or skills to
maintain a website. Also, the Directors recognize that the current Information
Technology (IT) infrastructure of MOOJ Limited is inadequate for internet trading.
vi. SECURITY
Internet is not a secure environment and hackers can fiddle with important data.
Therefore, platform must be encrypted and password protected.
vii. DYNAMIC ENVIRONMENT
Internet environment is constantly changing at a rapid pace. If the firm is unable

to cope with latest trend and technology, the business will be left behind.
viii. USER INTERFACE
The design should be user-friendly.
ix. ETHICS & CORPORATE IMAGE
Internet business is built on trust between the customers and the firms. There is a
need for the company to establish good corporate image and ethics of selling
quality products and ready to replace any defective products.
x. EASY SHOPPING
Shopping on internet is more comfortable to customers hence may likely attract

more customers than shops.
Marking Guide Mark Mark
Brief Explanation of Internet Trading:

This is a form of e-commerce involving
Sales of goods and services 1
Through Electronics retailing 1
For improving overall performance 1 2
Any two point of 1 mark each

IDENTIFICATION/STATING
1. Set up cost 1
2. Type of nature of business 1
3. On going operating cost 1
4. Time to establish the system 1
5. No in-house skills 1
6. Security concern/issues 1
7. Dynamic environment 1
8. User interface 1
9. Ethics and corporate image concern 1
10. Easy shopping 1
1 mark for each point stated up to maximum of 6 points (1 x 6) 6
DISCUSSION/EXPLANATION
Discussion of the points listed under identification of the 6 points selected

by the candidates.
Two mark for each item discussed up to maximum of 6 points 2 x 6 12
20
_______________________________________________________________________
EXAMINER‟S REPORT
The question tests candidates‟ knowledge on strategic and performance management

matters relating to trading on the Internet.
Candidates are expected to discuss on set-up cost, types of business, dynamic

environment for internet trading, security issues, staff training, user interface, ethical
issues and corporate image concern and feasibility of easy shopping.
Candidates understood the question and performance was above average.
A few candidates displayed inadequate knowledge of Information Technology and

requirements of Internet trading.
Candidates are advised to update their knowledge on current developments in IT and its
effect on management operations and performance.

SOLUTION 5
a) i) Material Price Variance
= AQP (SP – AP)

A 105,000(100 – 10,290,000/105,000) = ₦210,000 (F)
B 148,000(80 – 11,988,000/148,000) = ₦148,000 (A)
ii) Material Usage Variance:
= SP(SQ – AQ used)
A 100[(4,800 × 20kg) – 99,000] = ₦300,000 (A)
B 80[(4,800 × 30kg) – 144,000] = ₦0
iii) Material Mix Variance
Material Actual Qty Actual Qty Std Price Mix Variance

@ Std mix @ actual mix
(a) (b) (c) (a – b) × (c)
A 97,200* 99,000 ₦100 ₦180,000(A)
B 145,800** 144,000 ₦80 ₦144,000(F)
243,000kg 243,000kg ₦36,000(A)
* = 20 50 × 243,000,** = 30 50 × 243,000
iv) Material Yield Variance
Material Std Qty Actual Qty Std Price Mix Variance

@ Std mix @ Std mix
(a) (b) (c) (a – b) × c
Kg Kg ₦ ₦
A 96,000 97,200 100 120,000(A)
B 144,000 145,800 80 144,000(A)
240,000* 243,000 264,000(A)
* 4,800 × 20 = 96,000
4,800 × 30 = 144,000
240,000

v) Labour Rate Variance
= AH(SR – AR)
Skilled 56,000(₦40 – ₦2,352,000/56,000) = ₦112,000(A)
Unskilled 56,000(₦25 – ₦1,344,000/56,000) = ₦56,000(F)
vi) Labour Efficiency Variance
= SR(SH – AH)
Skilled ₦40[(4,800 × 10hrs) – 56,000] = ₦320,000(A)
Unskilled ₦25[(4,800 × 10hrs) – 56,000] = ₦200,000(A)
vii) Labour Mix Variance
Actual Hrs Actual Hrs Std rate Mix Variance

@ Std mix @ actual mix
(a) (b) (c) (a – b) × c
(Hours) (Hours) ₦ ₦
Skilled 56,000 56,000 40 0
Unskilled 56,000 56,000 25 0
112,000 112,000 0
viii) Labour Yield Variance

Std Hrs Actual Hrs Std rate Yield Variance
@ Std mix @ Std mix
(a) (b) (c) (a – b) × c
Skilled 48,000 56,000 40 320,000(A)
Unskilled 48,000 56,000 25 200,000(A)
96,000 112,000 520,000(A)
xi) Variable Overhead Expenditure Variance

= AH(SR – AR)
= 56,000(₦20 – ₦1,064,000/56,000) = ₦56,000(F)
x) Variable Overhead Efficiency Variance

= SR(SH – AH)
= ₦20[(4,800 × 10hrs) – 56,000] = ₦160,000(A)

b) Possible causes of variances
i) Material Price Variance

Material A: The favourable variance could be due to:
 efficient negotiation;
 lower grade of raw material bought at lower price which possibly resulted in
adverse:
 material usage variance
 material yield variance
 labour efficiency variance
Material B: The variance is adverse and could be due to:

 unexpected increase in market price
 inaccurate standard, etc
ii) Material Usage Variance

Material A: The adverse usage variance could be due to:
 inferior raw material – as noted above
 inexperienced operatives
 poor supervision, etc
iii) Labour rate variance

 Skilled labour – The adverse variance may be due to:
 employment of superior skilled labour paid at higher rate;
 unexpected higher rate in the market, etc
 Unskilled labour – The favourable rate variance may be due to:

 effective negotiation
 lower grade of labour, etc
iv) Labour efficiency variance

 Skilled labour – The adverse variance may be due to:
 poor quality raw materials and the resultant high rate of rework;
 machine malfunctioning
 power failure
 poor supervision, etc
 Unskilled labour – The adverse variance may be due to the same reasons as
enumerated under skilled labour above.

v) Variable overheads variances.
All the variable overheads variances are likely to be due to the same reasons as
listed under labour.
Note: credit will be given for alternative relevant points
b) ANALYSIS OF VARIANCES
Variance Type Amount Reasons for Variance
Direct Material
Price variance for Material A N210,000F Savings of N2 (N100 – N98) in
Material price for 105,000kg
purchased
Direct Material
Price variance for Material B N148,000A Higher cost than budgeted (N81
– N80) = N1 for the quantity
purchased which is 148,000kg
Direct Material
Mix variance for Material A N180,000A Use of 99,000kg of A instead of
97,200kg meaning additional
usage of 1,800kg at N100/kg
Direct Material
Mix variance for Material B N144,000F Used 144,000kg instead of
145,800kg meaning a savings in
use of 1,800kg at N80/kg
Direct Material
Yield variance for Material A N120,000A Company should have used
96,000kg instead of 97,200kg
meaning over used of 1,200kg at
N100
Direct Material
Yield variance for Material B N144,000A The 4,800 units are produced
from 145,800kg instead of
144,000kg meaning over usage
of 1,800kg at N80/kg

Direct Material
Usage variance for A N300,000A The sum of the yield and mix
variance of Material A
Direct Material
Usage variance for B NIL The sum of the yield and mix
variance of Material B
Direct labour
Rate variance for skilled N112,000A The result of rate difference of
labour N2.. (N42 – N40) for 56,000hour
Direct labour
Rate variance for unskilled N56,000F The savings from lower rate of
labour N1 i.e. (N25 – N24) for the
number of hours of 56,000 hours
worked
Direct labour
Mix variance for skilled labour NIL Hours planned was utilized
Direct labour
Mix variance for unskilled NIL Hours planned was actually used
labour
Direct labour
Yield variance for skilled N320,000A Expected mix of hours for the
labour actual production is 48,000
hours but 56,000 hours used
resulting in 8,000 difference at
N40 per hour
Direct labour
Yield variance for unskilled N200,000A Expected mix of hours for actual
labour production is 480,000hours but
56,000 hours was used resulting
in 8,000hours at N25per hour

Direct labour
Efficiency variance for skilled N320,000A Sum of mix and yield variance
labour on skilled labour
Direct labour
Efficiency variance for N200,000F Sum of mix and yield variance
unskilled labour on unskilled labour
Variable overhead N56,000F Actual rate is N19/hour while the

expenditure variance standard rate is N20/hour,
meaning that a savings of N1 for
the hours used which is 56,000
hours
Variable overhead efficiency N160,000A Expected number of hours to be

variance used in producing 4,800 units is
48,000 hours, but used 56,000
hours i.e. 8,000 hours more at
rate of N20

(a) Calculation of relevant variance
Direct Material Variances
Direct Material Price Variance for A ½
Direct Material Price Variance for B ½
Direct Material Mix Variance for A ½
Direct Material Mix Variance for B ½
Direct Material Yield Variance for A ½
Direct Material Yield Variance for B ½

Direct Material Usage Variance for A ½
Direct Material Usage Variance for B ½
Any six 6 of Direct Materials Computed @1/2 3

Direct Variances Mark Mark
Direct Labour Rate Variance for Skilled ½
Direct Labour Rate Variance for Unskilled ½
Direct Labour Mix Variance for Skilled ½
Direct Labour Mix Variance for Unskilled ½
Direct Labour Yield Variance for Skilled ½
Direct Labour Yield Variance for Unskilled ½
Direct Labour Efficiency Variance for Unskilled ½
Direct Labour Efficiency Variance for Unskilled ½
Any 6 of direct Labour Variance computed @ ½ 3
Variable Overhead Variance
Variable Overhead Expenditure Variance 1
Variable Overhead Efficiency Variance 1 2
(A) 8
(b) Reasons/Explanations of Direct labour Variances
Ability to explain the reasons for any six of the variance
computed above for Direct Materials attracts ½ marks
each. 3
Reasons/Explanations of Variable Overhead Variances
Ability to explain the reasons for the variable overhead
Expenditure and variable overhead efficiency variances 1
Attract ½ mark each. (B) 7
Grand total (A) + (B) 15
EXAMINER‟S REPORT
The question tests candidates‟ knowledge on standard costing and variance analysis, its
interpretation and possible reasons for the variances.
Candidates are expected to compute the price usage, mix and yield components of direct
material variances. They are also expected to compute the rate, efficiency, yield and mix
components of direct labour variances.
Candidates are also expected to determine the expenditure and efficiency components of
variable overhead variance. They are also to interprete and offer possible reasons for the
variances.
About 70% of the candidates attempted the question and performance was average.
Many candidates could not clearly give possible reasons for the variances computed.
Some others could not also correctly computer the direct material mix and yield
variances.
Candidates are advised to thoroughly master variance analysis.

SOLUTION 6
TEE COMPANY
(a) Green Product

Sales in unit Contribution per unit Total contribution
N N
Quarter
1 100,000 5.6 560,000
2 90,000 5.6 504,000
3 81,000 5.6 453,600
4 72,900 5.6 408,240
Total contribution 1,925,840
Less Administrative Worker‟s expenses (N20,000 x 5) (100,000)
1,825,840
Note: Fixed cost is not relevant in decision making Brace Product
Sales (Y = 80,000 +6,000T) Contribution Total contribution

units N N
1 86,000 6 516,000
2 92,000 6 552,000
3 98,000 6 588,000
4 104,900 6 624,000
Total contribution 2,280,000
Incremental fixed cost (N40,000 x 4) (160,000)
2,120,000
Based on the above analysis, Brace Product should be introduced in Year 7 to

produce additional contribution of N294,160 i.e. N2,120,000 – N1, 825,840.
(b) Brace Product

(i) Analysis of Revenue and cost if changeover is on the 1st of January
N
Contribution for the quarter 516,000
Realizable value of non count asset 140,000
Redundancy cost (40,000)
Savings in Administrative worker‟s salary 100,000
716,000

Brace Product
(ii) Analysis of cost and revenue if the changeover is on the 1st of July
N
Contribution for the quarter 588,000
Realizable value of asset 30,000
Redundancy cost (50,000)
Savings in Administrator worker‟s salary 50,000
618,000
Note (i) Written down value of asset is a combination of historical cost and
depreciation that are both irrelevant. Therefore, assets that are no
longer required will have only realizable value to the holders.
(ii) Savings in Administrative workers‟ salary will be 100% saved, if
changeover takes place in January 1st. In contrast, if changeover
takes place on 1st July, only 50% will be saved.

(a) Green product
Green – Sales in units 4
/5
Contribution 4
/5
Total contribution 4
/5
Summation 1
/5
Admin worker‟s expenses 1
/5
Grand total 1
/5 3
Brace 3
Conclusion 1
Computation of additional contribution 1
b) Brace product
Schedule of revenue cost changeover
Contribution for the quarter 1
/2
Realizable value of non-current asset 1
/2
Redundancy cost 1
/2
Savings in Adm cost 1
/2
Summation 1
/2 2.5
Schedule of revenue cost 1 July
Contribution 1
/2
Realization value noncurrent 1
/2
Redundancy cost 1
/2
Savings in Admin cost 1
/2
Summation 1
/2 2.5

Correct recommended decision 1
Correct analysis of additional contribution 1
Grand total 15
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of the application of Marginal costing

technique and relevant costing principles for decision making.
Candidates are expected to compute the outcomes of two options on continued sale and
timing of a product and recommend appropriate decisions for profit maximization. The
application of relevant costing principles is also required in making the changeover
decision.
Candidates did not clearly understand the question as only about 10% of the candidates
attempted it. The few candidates who attempted it could not correctly interpret the
result. Poor presentation was also common with many candidates.
Candidates should properly master the application of marginal costing techniques to

management problems and the variations in its applications.

SOLUTION 7
STUCK LIMITED
(a) A Management Information System is an approach a company uses (in this case,
Stuck Limited) when making various business decisions. Business owners and
managers are responsible for operational, technical and strategic decisions.
Using Management Information System (MIS) helps to make the best decisions
possible. Looking at the information currently being provided to the Directors of
Stuck Limited, the following weaknesses are inherent:
(i) CAPTURING OF INCOMPLETE INFORMATION

The information was produced by a new member of the accounting
department without reference to past production data. This means that the
expected income and expenditure is unreliable and unrealistic because
there was no reference to past production data which would ultimately lead
to inconsistency of information;
(ii) INACCURACY OF INVENTORY REPORT

One important quality of information is accuracy and completeness.
However, the inventory report comprises 80% of the output from the MIS
itself; and
(iii) LACK OF INTEGRATED IT INFRASTRUCTURE AND BREVITY OF SUMMARY

Another essential quality of information is brevity. Management may not
have time to react and evaluate appropriately too much information as it
may result in information overload. However, the information should be
brief and concise.
(b) The output or report emanating from the MIS can be improved if the following
reports are embedded in the system and provided to the Directors:
(i) Periodic reports: These are presented in predetermined format at specified

intervals of time. They are normal output of any data processing system;
(ii) Triggered reports: They are reports on specific situation. By their very
nature, the marketing task and the marketing decisions require a host of
triggered reports on various situations and subjects. In fact, the
competence of the MIS gets tested by its capacity to give the right triggered
report;

(iii) Demand reports: These are the answers provided by the system to specific
queries raised by the marketing decision makers; and
(iv) Exception reporting mechanism: In exception reporting, information is

filtered to report only on data that is outside of a normal condition.
Exception reports help managers save time as they help management to
focus on situations that require immediate decisions or actions.

a) Definition of MIS 11/2 11/2
Weaknesses of the Present System
i) Capturing of Incomplete Information 21/2
ii) Inaccuracy of Inventory report 21/2
- Lack of integrated IT infrastructure 21/2 71/2
b) Improvement of MIS
i) Periodic Reporting 2
ii) Giving right Triggered Reports 2
iii) Provision of Reports on demand 2
iv) Exception report mechanism 2 6
Any two points at 3 marks each (2 x 3) 15
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of Management Information Systems (MIS), its
weaknesses and how such weaknesses can be addressed to improve management
information and control.
Candidates are expected to discuss the challenges of MIS in the company and the types
of report needed to enhance management decision making process.
Candidates did not clearly understand the (b) part of the question which requires
suggestions for improving the information process.
Performance was below average.
Candidates are advised to step up their MIS knowledge in order to perform better.
The use of the Institutes Study Pack for their preparations should not be neglected.

SKILLS LEVEL EXAMINATION - MAY 2015
PERFOMANCE MANAGEMENT
Time Allowed – 3 hours
YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN QUESTIONS IN THIS PAPER
SECTION A: COMPULSORY QUESTION (30 MARKS)
QUESTION 1
Orlu Holding Plc prepares its accounts to December 31 each year. It is considering investing in
a new computer controlled production facility on January 1. 2016 at a cost of N50 million. This
will enable Orlu Holding Plc to produce a new product which it expects to be able to sell for
four years. At the end of this time it been agreed to sell the new production facility for N1
million cash.
Sales of the product during the year ended December 31. 2016 and the next three years are
expected to be as follows:
Year ended December 31 2016 2017 2018 2019
Sales in units (000) 100 105 110 108
Selling price, unit variable cost and fixed overhead cost (excluding depreciation) are expected
to be as follows during the year ended December 31. 2016.
N
Selling price per unit 1,200
Variable production cost per unit 750
Variable selling and distribution cost per unit 100
Fixed production cost for the year 4,000.000
Fixed selling and distribution cost for the year 2,000.000
Fixed administration cost for the year 1,000.000
100

The following rates of annual inflation are expected for each of the years during 2017-2019.
%
Selling prices 5
Production costs 8
Selling and distribution costs 6
Administration costs 5
The company pays taxation on its profits at the rate of 30% with half of this being payable in
the year in which the profit is earned and the remainder being payable in the following year.
Investments of this type qualify for tax depreciation at the rate of 25% per annum on a
reducing balance basis.
The Board of Director of Orlu Holding Plc. has agreed to use a 12% post-tax discount rate to
evaluate the investment.
Required:
a. Advise Orlu Holding Plc. Whether the investment is financially worthwhile.

(17 Marks)
b. Calculate the internal rate of return of the investment. (8 Marks)
c. Define the following terms

i. Real rate of returns (1 mark)
ii. Money rate of return (1 mark)
d. Explain briefly how real rate of return and money rate of return would be applied in
calculating the net present value of a project’s cash flows. (3 Marks)
(Total 30 Marks)
SECTION B: ANSWER ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION

(40 MARKS)
QUESTION 2
You have recently been appointed as the management accountant to Abax Limited, a small
company manufacturing two products. Dab and CAB both products use the same type of
material and labour but in different proportions In the past. The company has had poor control
over its working capital. To remedy this, you have recommended to the directors that a
budgetary control system be introduced. This proposal has been approved by the board.
101

Because Abax Limited’s production and sales are spread evenly over the years, it was agreed
that the annual budget should be broken down into four periods, each of 13 weeks,
commencing with the 13 weeks ending April 4. To help you in this task, the sales and
production directors have provided you with the following information:
(i) Marketing and production data:
DAB CAB
Budgeted sales for 13 weeks (units) 845 1,235
Material content per unit (kilograms) 7 8
Labour per unit (standard hour) 8 5
(ii) Production Labour:

Each of the 24 production employees work a 37-hour, five day week at N80 per hour.
Any hours in excess of these will require Abax Limited to pay an overtime premium of
25%. Because of technical problems, which will continue over the next 13 weeks,
employees are only able to work at 95% efficiency compared to standard.
(iii) Purchasing and Opening Inventory:

The production director estimates that raw material will cost N120 per kilogram over
the budget period. He also plans to revise the quantity of raw materials inventory held
in stock. He estimates that the raw materials inventory levels at commencement of the
budget period will be as follows:
Raw material DAB CAB

2,328 kilograms 163 units 361 units
(iv) Closing Inventory: At the end of the 13- week period, closing inventories are planned to
change on the assumption that production and sales volumes for the second budget
period will be similar to those in the first period:
• raw material inventory should be sufficient 13 days production:

• finished inventory of DAB should be equivalent to 6 days sales volume:
• finished inventory of CAB should be equivalent to 14 days sales volume:
Required
a. Prepare in the form of a statement the following information for the 13- week
period ended April 4:
i. the production budget in units for DAB and CAB; (3 Marks)

ii. the purchasing budget for Abax Limited in units: (4 Marks)
102

iii. the production labour budget for Abax Limited in hours: (5 Marks)
iv. the cost of production labour for the period. (2 Marks)
b. Discuss briefly TWO different circumstances where participation in setting budgets

are likely to contribute to poor performance by managers.
(6 Marks)
(Total 20 Marks)
QUESTION 3
a. TK, a telecommunications company, has recently been privatised by the government

after legislation was passed which removed the state monopoly and opened up the
communications market to competition from both Nigeria and foreign companies.
Prior to the deregulation, TK was the sole, protected and monopolistic supplier of
telecommunications services and was required to provide the best telecommunications
services the nation can afford. At that time the government was responsible for setting
TK’s expected levels of performance and the level of resources the company would
require to meet its objectives.
Required
i. State TWO long-term strategic objectives that TK should plan to achieve following
its privatization and deregulation of the telecommunication market and give ONE
example of each. (3 Marks)
ii. Advise the Board of Directors on the stages they should follow in developing
appropriate strategic planning process for TK in the light of its privatisation and
deregulation of the telecommunication market. (12 Marks)
c. Discuss the limitations of the Boston Consulting Group (BCG) portfolio matrix.
(5 Marks)
(Total 20 Marks)
103

QUESTION 4
The management of Gbengus Agro Limited is planning for next season’s cultivation, and has
asked you as a management accountant, to recommend the optimal mix of vegetable
production for the coming year. The current year data is as follows:
Cabbage Spinach Tomatoes Carrots

Area occupied (acres) 30 24 36 30
Yields per acre (tonnes) 17.5 14 15.75 21
Selling price per tonnes (N) 60,000 75,000 90,000 81,000
Variable cost per acre (N)
Fertilizer 24,000 20,000 36,000 32,000
Seeds 12,000 16,000 24,000 20,000
Pesticides 20,000 12,000 16,000 20,000
Direct wages 320,000 360,000 400,000 456,000
Fixed overhead per annum N62 Million
The land area used for the production of carrots and tomatoes can be used for either crops, but
not for cabbage or spinach. The land area used for cabbage and spinach can be used for either
crops, but not for carrots or tomatoes. In order to provide an adequate market service, the
management must produce each year at lease 70 tonnes each of cabbage and spinach and 63
tonnes each of tomatoes and carrots.
Required:
a. i. Present the profit statement for the current year. (6 Marks)
ii. Calculate the profit for the production mix that you would recommend to
Gbengus Agro Limited (4 Marks)
b. i. Advice the management on which of the vegetables they should concentrate

their production on, assuming that the land could be cultivated in such a way
that any of the four vegetable could be produced and that there was no market
constraints. (4 Marks)
ii. Calculate the profit assuming the management accepts your advice in b(i) above.
(2 Marks)
c. Calculate break-even point of sales for the most profitable product. (4 Marks)
(Total 20 Marks)
104

SECTION C: ANSWER ANY TWO OUT OF THREE QUESTION IN THIS SECTION
(30 MARKS)
QUESTION 5
Your manager has asked you to prepare a report entitle ‘How to design an effective
management information system’. The report should incorporate references to specific types of
environments/organisations and give examples of the management accounting tools that
could be useful for each type.
Required:
Prepare a draft report as requested by your manager. (15 marks)
QUESTION 6
Niger Power Electricity Authority has two divisions: Generation and Distribution. The
Generation Division has enough market even at full capacity of 5,000 megawatts of electricity.
The Distribution Division requires 2,500 megawatts to meet the demands of the customers on
its network.
The Power Generation Division has the following selling price and cost data:
N
Market price per megawatt 200,000
Variable cost per megawatt (160,000)
Contribution 40,000
Fixed manufacturing cost is N200,000
Each megawatts distributed sells for N250,000. Variable costs include cost of network
supportN50,000 and selling 2% of sales. Capital investment by the head office in Generation
Division amounted to N100 million.
a. i. Advise the management whether to buy from Generation Division. If transfer

price is based on full cost basis.
ii. Advice whether the company as a whole would benefit if the Distribution
Divisional Manager decides to buy from Generation Division at full cost basis.
(5 Marks)
105

b. Calculate:
i. Return on investment of Generation Division
ii. Residual income of generation division if imputed interest rate is 15% per annum.
(5 Marks)
c. How can divisional performance be measured in a decentralised organisation?

(5 marks)
(Total 15 Marks)
QUESTION 7
Daily Company Limited has developed a new product. Details are as follows:
Selling price and product life cycle

The product will have a life cycle of 10,000 units. It is estimated that the first 9,000 units will
be sold for N3,100 each and then the product will enter the ‘decline’ stage of its life cycle. It is
difficult to forecast the selling price for the 1,000 units that will be sold during this stage.
Costs
Labour will be paid at N300 per hour. Other variable costs will beN950 per unit. Fixed costs
over the life cycle of the product will beN2,000,000. The labour rate and other costs will not
change throughout the product’s life cycle.
Learning curve
The first batch of 100 units will take 1,500 labour hours to produce. There will be an 85%
learning curve that will continue until 6,400 units have been produced. Any batch produced
after this level will each take the same amount of time as the 64th batch. The batch size is
constant at 100 units.
Required:
a. Calculate
i. The cumulative average time per batch for the first 64 batches (2 Marks)
ii. The time taken for the 64th batch (2 Marks)
iii. The average selling price of the final 1,000 units that will allow Daily Company Limited
to earn a total profit of N2,500.000 from the product. (6 Marks)
106

Note: The learning index for an 85% learning curve is – 0.2345.
Ignore time value of money.
b. Discuss briefly FOUR key barriers to e-business. (5 Marks)

(Total 15 Marks)
107

Formulae
Learning curve
Y = axb
Demand curve
P = a – bQ
b = change in price
change in quantity
MR = a – 2bQ
Y= a + bX or Y - 𝑌𝑌� = b(x – 𝑋𝑋�)

Covariance (XY) 𝑛𝑛 ∑ 𝑋𝑋𝑋𝑋−(∑ 𝑋𝑋) ( ∑ 𝑌𝑌)
b= =
Variance (X) 𝑛𝑛 ∑ 𝑋𝑋 2 − (∑ 𝑋𝑋)2
a = 𝑌𝑌� − 𝑏𝑏𝑋𝑋�
∑ 𝑌𝑌 = 𝑛𝑛𝑛𝑛 + 𝑏𝑏 ∑ 𝑋𝑋
∑ 𝑋𝑋𝑋𝑋 = a ∑ 𝑋𝑋 + 𝑏𝑏 ∑ 𝑋𝑋 2
108

Annuity Table
r
Discount rate (r)

Periods
(n
)
1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
1 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
0
1 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
1
1 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
1 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
1 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
1 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
5
(n
11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
)
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
1 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
0
1 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
1
1 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
1 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
1 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
1 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15
109

110

SOLUTION 1
ORLU HOLDINGS PLC
(a) Profitability of the investment using Net Present Value (NPV)

Cash outflow Cash inflow Net 12% Present
Initial Tax Inflow Cash Cash Discount Value
Cost paid Total before Proceed Total flow Factor (PV)
Tax
Year ₦’000 ₦’000 ₦’000 ₦’000 ₦’000 ₦’000 ₦’000 ₦’000
2016 (Jan) 0 (50,000) (50,000) - - - (50,000) 1.000 (50,000)
2016 (Dec) 1 - (2,325) (2,325) 28,000 - 28,000 25,675 0.893 22,928
2017 (Dec) 2 - (5,214) (5,214) 28,630 - 28,630 23,416 0.797 18,663
2018 (Dec) 3 - (6,173) (6,173) 28,926 - 28926 22,753 0.712 16,200
2019 (Dec) 4 - (6,476) (6,476) 26,551 1,000 29,551 21,075 0.636 13,404
2020 (Dec) 5 - (3,284) (3,284) - (3,284) 0.567 (1,862)
Net Present Value (NPV) 19,333
The investment is financially worthwhile in view of the fact that it generated a positive NPV of
₦19, 333,000
(b) Internal Rate of Return on Investment (IRR)

NPVa
Ra +
IRR = NPVa − NPVb (Rb − Rq )
Where Ra = Low discount factor
Rb = High discount factor
NPVa = NPV of low discount factor
NPVb = NPV of high discount factor
By Interpolations of NPV of 30% and 31%
111

Net Cash Discount factor Present
Flow (30%) Value (PV)
Year ₦’000 ₦’000
2016 0 (50,000) 1,000 (50,000)
2016 1 25,675 0.769 19,744
2017 2 23,416 0.592 13,862
2018 3 22,753 0.455 10,353
2019 4 21,075 0.350 7,376
2020 5 (3,284) 0.269 (883)
NPVa = +452
Net Cash Discount factor Present

Flow (31%) Value (PV)
Year ₦’000 ₦’000
2016 0 (50,000) 1,000 (50,000)
2016 1 25,675 0.763 19,590
2017 2 23,416 0.583 13,652
2018 3 22,753 0.445 10,125
2019 4 21,075 0.340 7,166
2020 5 (3,284) 0.259 (851)
NPVb= (318)
NPVa
Ra +
Using IRR =
NPVa − NPVb (Rb − Rq )where R = 30% R = 31%
a b
452,000
30 +
452,000 770,000
30 + 452,000 − (− 318,000 ) (31 − 30) ) =
IRR = 30.59%
112

(c) (i) Real Rate of Return - A real rate of return is the annual percentage
return on an investment which is adjusted for in inflation.
(ii) Money Rate of Return - This is also known as normal rate of return which
is annual percentage return that compensates for depreciation in
purchasing power of the currency due to inflation.
In a situation where the expected rate of inflation is 5% an Investor

seeking a money rate of return of 10% must find an investment that
yields a rate of return of 15%.
(d) How Real Rate Of Return and Money Rate of Return can be applied in calculating NPV
of Project Cash Flow:
There are two ways of calculating NPV under inflationary condition.
The two methods are situations where a real rate of return is used whereby cash flow is
estimated and discounted using the real discount factors as follows:
1 + Money rate
− 1
(1 Inflaation rate)
(1 + m)
− 1
(1 + f)
The second method is where a normal or money rate of return is used whereby Cash
flow is estimated thus:
(1 + m)(1+f) = Normal rate
Where m= Money rate
f = Inflation rate.
WORKINGS
(i)
Profit Statement
2016 2017 2018 2019
N’000 N’000 N’000 N’000
Sales (a) 120,000 132,300 145,000 150,000
Less Costs:
Production costs:
Variable 75,000 85,000 96,228 102,037
Fixed 4,000 4,320 4,666 5,039
Selling and Distribution
113

costs:
Variable 10,000 11,130 12,360 12,863
Fixed cost 2,000 2,120 2,247 2,382
Administration cost:
Fixed 1,000 1,050 1,103 1,158
(b) 92,000 103,670 116,604 123,479
Net Profit (a-b) 28,000 28,630 28,926 26,551
(ii)
Tax Computation
2016 2017 2018 2019 2020
N’000 N’000 N’000 N’000 N’000
Net Profit 28,000 28,630 28,926 26,551 -
Less Depreciation 12,500 9,375 7,030 5,270 -
allowance
Taxable Income 15,500 19,255 21,896 21,281 -
Tax Liability (30%) 4,650 5,777 6,569 6,384
50% Paid in the current 2,325 2,889 3,284 3,192
Year
50% Paid in the next Year - 2,325 3,889 3,284 3,192
2,325 5,214 6,173 6,476 3,192
(iii) Computation of Depreciation Allowance

2016 2017 2018 2019
N’000 N’000 N’000 N’000
Cost Written Down Value b/f 50,000 37,500 28,125 21,094
Depreciation allowance (25%) 12,500 9,375 7,031
5,274
WDV C/F 37,500 28,125 21,094 15,820
(iv) 2016 2017 2018 2019
Computation for items of profit statement

Sales Price factor 1.00 (1.05)1 (1.05)2 (1.05)3
= 1.00 1.05 1.1025 1.1576
Selling Price adjusted N1, 200 N1, 260 N1, 323 N1, 389.15
Total Sales Value (N’000) 120,000 132,300 145,530 150,028.20
Production Costs factor 1.00 (1.08)1 (1.08)2 (1.08)3
= 1.00 1.08 1.1664 1.2597
Variable Production Cost Adjusted
= N750 N810 N874.80 N944.78
Total Variable Production
Cost (N’000) = 75,000 85,050 96,228 102,036.67
114

Fixed Production Cost
Adjusted = N4,000,000 N4,320,000 N4,665,600 N5,038,848
Selling and Distribution Cost factor 1.00 (1.06)1 (1.06)2 (1.06)3

= 1.00 1.06 1.1236 1.191016
Variable Selling/Distribution Cost Adj.
= N100 N106 N112.36 N119.1016
Total Variable Selling/Distr.
Cost (N’000) = 10,000 11,130 12,359.60 12,862.97
Fixed Selling/Distribution
Cost Adjusted = N2,000,000 N2, 120,000 N2,247,200 N2,382,032
Administrative Cost factor 1.00 (1.05)1 (1.05)2 (1.05)3

= 1.00 1.05 1.1025 1.157625
Fixed Administration Cost
Adjusted = N1,000,000 N1,050,000 N1,102,500 1,157,625
Marking Guide
ORLU HOLDING Plc. Mark Mark
a (i) Computation of NPV 40 TICKS = 4 marks
(ii) NPV value = 1 mark
(iii) Advice = 2 marks 7
(iv) Workings - 120 ticks 10 17
b (i) IRR Formula = 1 mark

(ii) IRR Computation 36 ticks = 4 marks
(iii) IRR for the 2 schedules = 1 mark
(iv) IRR formula computation = 1 mark
(v) IRR final rate = 1 mark 8 8
c (i) Definition of Real rate of return = 1 mark

(ii) Definition Money rate of return = 1 mark 2 2
d (i) Application Explanation = 1 mark

(ii) Formula for Money rate of return = 1 mark
(iii) Formula for Real rate of return = 1 mark 3 3
30
115

EXAMINER’S REPORT
The question tests the candidates’ knowledge and ability to evaluate capital
investment project. Candidates were required to use the Net Present Value (NPV)
model to appraise the financial worth of the investment. It also tested the computation
of appropriate breakeven discount factor for an investment using the Internal Rate of
Return (IRR) model under inflationary condition and consideration of tax implication
on the company’s Net Cash Flow.
The candidates’ performance in this question was below average as virtually all
students failed to achieve 50% pass mark in the question.
The commonest pitfalls are:

(i) Poor understanding of the requirements of the question.
(ii) Wrong application of the inflation factor to adjust the cash inflows and outflows.
(iii) Wrong application of depreciation allowance variable.
Candidates are advised to ensure adequate preparation and clear understanding of the
questions before attempting them. The effect of inflation as introduced in the question
and treatment of depreciation allowance i.e. (capital allowance) with tax adjustments
effect in arriving at Net Cash Flows to determine NPV for decision making should be
mastered.
SOLUTION 2
ABAX LIMITED
a (i) Production Budget (units) for DAB and CAB
DAB CAB
Sales 845 1,235
Closing Stock 78 266
923 1,501
Less Opening Stock 163 361
Production (units) 760 1,140
116

(ii) Purchase budget for Abax Limited in units
Purchase Budget (kg) DAB CAB Total
Closing Stock (kg) 1,064 1,824 2,888
Material Usage (kg) ,320 9,120 14,440
6,384 10,944 17,328

Less: Opening Stock 2,328
Purchases (kg) 15,000
(iii) Production Labour Budget for Abax Limited (hours)
DAB CAB Total

Production in units 760 1,140 (hours)
Labour per unit (Standard Hours) 8 5
Production Hours 6,080 5,700 11,780
Grossing production hours as 95% efficiency (W.3) 12,400

Available manpower in hours (W.4) 11,544
Overtime 856
(iv) Cost of production labour for the period
N
Production hours 12,400
Labour rate per hour (N) 80
992,000
Add overtime premium (W.5) 17,120
1,009,120
WORKINGS
(i) Calculation of closing inventory (Units) DAB CAB
6/65 x 845/1 = 78 14/65 x 1,235/1 = 266
(ii) Closing Raw Materials 13/65 x 5,320/1 = 1,064 13/65x 9,120/1= 1,824 =2,888kg
Raw materials consumed DAB 7kg x 760 units of production = 5,320kg
For production CAB 8kg x 1,140Unit of Production =9,120kg
=14,440kg
117

(iii) Grossing production hours at 95% efficiency = 11,780/0.95 = 12,400 Hours
(iv) Available manpower in hour = 24 x 37 x 13

Employee x hours/weeks x weeks per quarter = 11,544 Hours
(v) Overtime premium = 25% x N80 x 856 hours = N17,120
(c) Circumstances where participation in setting budgets are likely to contribute to poor
performance by managers:
i) Strong evidence suggests that some personality types do not perform well in
participatory systems and for these types, being given a budget may produce
higher effort levels. For example “Externals” as defined on the basis of the
“locus of control” variable will actually respond well to imposed budgets.
(ii) Whereas in conditions of uncertainty, participation has been shown to improve
results, under conditions of stability participation may result in few or no
benefits. It may result in more time and cost being expanded for no benefits.
This may be particularly relevant for cost centres within large organisations that
have no direct link to market conditions.
(iv) “Pseudo-participation”- where there is a semblance of participation but no real
participation - has been shown to produce very poor results. Individuals react
strongly against this pretence at participation, and effort levels are significantly
reduced.
(iv) Participation may increase “budget slack” and thus lead to lower targets and
performance. Budget slack is where the budget is deliberately set at a level that
is easier than could be achieved. There may be an increased incentive to build
in budget slack if a bonus will be paid for meeting the budget.
MARKING GUIDE
ABAX LIMITED
a (i) Determination of production budget in units DAB CAB Mark Mark
• Total units available for sale ½ ½ 1

• Closing Stock ½ ½ 1
• Opening Stock ½ ½ 1
• Production 1
Any 6 ticks at ½ mark per tick 3
118

(ii) Production Budget in kilograms
• Closing Stock ½ ½ 1
• Consumed for production ½ ½ 1
• Opening Stock 1
• Total kilograms available for production 1 4
(iii) Production Labour Budget

• Production in units ½ ½ 1
• Standard Labour Hours ½ ½ 1
• Production Hours ½ ½ 1
• Grossing to 95% efficiency ½
• Available manpower in Hours ½
• Working of 95% efficiency ½
• Working of available manpower ½ 5
(iv) Cost of Production - Labour

• Cost of actual hours worked ½
• Its working ½
• Overtime premium ½
• Its working ½
• Total cost of production – Labour ½ 2
Any 4 ticks at ½ mark =2 marks 14
(b) Any 3 points on where participation in budgets setting is likely to

Contribute to poor performance by managers at 2marks each. 6
20
EXAMINER’S REPORT
The question tests the candidates’ knowledge of calculating production budgets from given
data of a multi-product company. About 80% of the candidates attempted the question and the
general performance was below average.
Candidates’ commonest pitfalls are:
(i) Lack of understanding of the question and their inability to determine the opening and
closing inventories and the production purchase budget.
(ii) Inability of most candidates to factor in lower working efficiency of labour due to
technical problems as well as overtime premium payment.
119

(iii) Inadequate preparation for such question where they need to work from known to
unknown variables in arriving at appropriate figures to use in the preparation of the
budget.
Candidates are advised to study in-depth and not to limit their knowledge on simple budget
preparation but also on budgeting application and techniques in deriving important variables
not given but useful in the preparation of overall budget. They should not neglect this aspect
of the syllabus and practice with more worked examples.
SOLUTION 3
i. Long Term Strategic Objectives available to TK:
• Market leadership: obtaining a leadership of the market by market penetration or

market development strategy
• Obtaining large market share through cost leadership. By having lower cost than
competitors thus succeeding by providing services at lower cost, selling at lower
prices and therefore winning a bigger share of the market
• Differentiation: making products or services that are considered by customers to be
better and different from those of competitors. This will make the customers to pay
higher prices.
ii. Stages to follow in developing appropriate strategic planning process

• State mission and objectives
The entity exists for a purpose, formally expressed in a mission statement. The
entity must develop clear objectives, consistent with the mission statement, e.g.
maximisation of shareholders’ wealth.
• Strategic (SWOT) analysis to include;

Position audit: Internal analysis considering strength and weaknesses within the
organisation –its products, customers, management, employees, technical skills etc.
The strategy should make use of any strengths within the organisation and reduce
or remove significant weaknesses.
Corporate appraisal: This involves making use of the mission statement and
objectives of the company, together with environmental analysis and position
audit, to formally appraise what the entity might be capable of doing.
Environmental analysis: This involves an analysis of developments outside the

organisation that are already affecting the organisation or could affect the
organisation in the future. They could affect the achievement of organisational
objectives and strategy selection. An external analysis might consider political
120

situation, changes in law, and changes in economic situations, social factors,
technology changes and competitive environment. External analysis identifies
opportunities and threats that face the organisation. Strategies are developed to
exploit opportunities and deal with threats.
• Strategic choice to include:

Bases of strategy: This is about how to compete. The work of Michael Porter is
influential here. According to Porter, a successful competitive strategy must be
based on either Cost Leadership or Differentiation. Cost leadership means becoming
the lowest- cost producer in the market, leading to ability to sell at lower prices and
therefore winning the biggest share of the market. Differentiation means making
products or services that are considered by customers to be different from those of
competitors and therefore considered better.
Strategic direction: This concerns which products should be sold to the markets. A
useful model here is the Ansoff’s Grid which identifies four possible alternatives:
Market Penetration, Market Development, Product Development and Diversification
Strategies.
Strategic method: This concerns the question of how to grow. Growth can be achieved
through: Internal (Organic) Growth, Acquisitions and Mergers and Joint Ventures or
Strategic Alliance.
• Evaluation of strategic options: Strategies are evaluated to decide whether they
might be appropriate. Johnson and Scholes suggested that strategies be assessed
for suitability, feasibility and acceptability.
• Strategic implementation: The selected strategies should be implemented and
monitored. Changes and adjustments should be made where necessary. Of
particular importance are change management and project management.
• Review and control: A management information system is necessary to monitor the
progress of the business, particularly introduction of a new strategy where timing
and achievement of progress points might be vital to success.
(b) Limitations of BCG portfolio matrix
• It assumes that competitive strength of a product in its market depends on its

market share. This may not necessary be so. A product can have strong competitive
position in its market even with low market share if it has high product quality,
brand name or low cost.
• BCG matrix is better for analysing Strategic Business Units (SBUs) and market
segments and not for the entire market which might consist of many different
market segments.
121

• It might be difficult to define “high rate” and “low rate” of growth in the market
and also be difficult to define what is meant by “high” market share or “low”
market share.
• Market growth is an inadequate description of overall industry attractiveness.
Factors such as entry barriers, capital intensity and strong buyers can make even
high-growth markets oversupplied, price oriented and unprofitable.
• Market share is an inadequate proxy for relative competitive strength. Other factors
such as location, degree of vertical integration and capacity utilization also affect
relative costs. Price and margins are also influenced by product positioning and
shared marketing, distribution and branch franchises.
• The analysis is highly sensitive to how the market is defined. Do market share and
growth refer to the total market or to the segments served?
• The model assumes that business units are independent. If two SBUs share
facilities, divesting in the dog might weaken the star. The additional cash that the
competitor generates may allow it to attack the company's own star in another
market.
• The model incorrectly assumes that capital is rationed and has to be allocated
among the SBUs, but there may not be such rationing - the capital markets are
quite willing to fund all projects that promise to produce returns above the cost of
capital
MARKING GUIDE
Mark Mark
3 (a)
(i) Market Leadership 1.5
Market Share 1.5
Differentiation 1.5 3 3
(Any two points @ 1.5 marks per point)
(ii)
• State mission and objectives 2
• Strategic (SWOT) analysis to include; 2
Position audit 2
Corporate appraisal 2
Environmental analysis 2
• Strategic choice to include 2
Bases of strategy 2
Strategic direction 2
Strategic method 2
122

• Evaluation of strategic options 2
• Strategic implementation 2
• Review and control 2 12 12
(Any six points listed @ 1 mark per point= 6 marks;

The six points explained @ 1 mark per point= 6 marks)
(b) Limitations of BCG Portfolio Matrix
 Assumes competitive strength depends on mkt share 1

 Difficulty of defining market 1
 Better for analyzing SBUs, not entire market 1
 Difficult to define high or low rate of growth 1
 Difficult to define high or low market share 1 5
20
EXAMINER’S REPORT
The question tests candidates’ knowledge and understanding of strategic objectives and plans
of achieving them in a deregulated market. They are also to advise Board of Directors on
stages to take in developing appropriate strategic planning process. The part (b) of the
question also tests their knowledge on Boston Consulting Group (BCG) portfolio matrix. About
90% of the candidates attempted the question and the performance was average.
Most of the candidate were not familiar with the BCG portfolio matrix and thus lose substantial
mark in the (b) part of the question.
Candidates are advised to read more textbook and journals on contemporary issues on
strategic planning process and new developments in Performance Management.
123

SOLUTION 4
Preliminary calculations:
Variable costs are quoted per acre, but selling prices are quoted per tonne: Therefore, it is
necessary to calculate the planned sales revenue per acre. The calculation of the selling price
and contribution per acre is as follows:
Cabbage Spinach. Tomato Carrots

a. Yield per acre(tonne) 17.5 14 15.75 21
b. Selling price per tone N60,000 75,000 90,000 81,000
c. Sales revenue per acre N1,050,000 N1,050,000 N1,417,500 N1,701,000
(a×b)
d. Variable cost per acre N376,000 N408,000 N476,000 N528,000
e. Contribution per acre N674,000 N642,000 N941,500 N1,173,000
a. i. Profit statement for current year
Cabbage Spinach Tomato Carrots Total

a. Acres 30 24 36 30
b. Contribution per N674,000 N642,000 N941,500 N1,173,000
acre
c. Total contribution 20,220,000 15,408,000 33,894,000 35,190,000 104,712,000
(a×b) N
Less fixed costs 62,000,000
Profit 42,712,000
ii. Profit statement for recommended mix
Area A (45 acres) Area B (55 acres)
Cabbage Spinach Tomato Carrots Total

a. Contribution per acre N674,000 N642,000 N941,500 N1,173,000
b. Ranking 1 2 2 1
c. Minimum sales 5 4
requirements in acres
d. Acres allocated 40 51
e. Recommended mix (acres) 40 5 4 51
f. Total contributions (a)× (e) 26,960,0000 3,210,000 3,766,000 59,823,000 93,759,000
(N)
Less: fixed costs 62,000,000
Profit 31,759,000
124

NOTE
The minimum sales requirement for spinach is 70 tonnes, and this will require the allocation
of 5 acres (70) tonnes/14tonnes yield per acre).The minimum sales requirement for tomato is
63 tonnes, requiring the allocation of 4 acres (63tonnes/15.75tonnes yield per acre). Allocation
of available acres to products on basis of ranking and assumes that acre is the key factor.
b.
i. Contribution in sales values for carrots:
= N89,914,860 (52.86 acres at N1,701,000 sales revenue per acre)
Production should be concentrated on carrots, which have the highest
contribution per acre as shown above.
ii. Contribution from 120 acres of carrots:
N
(120× N 1,173) 140,760,000
Fixed overhead 62,000,000
Profit from carrots 78,760,000
c. Break-even point in acres for carrots = Fixed costs = N62,000,000

Contribution per acre N1, 173,000
= 52.8559 = 52.86 acres

OR
b.
ii. Total acre: 54 + 66 = 120 for Carrot
₦
Revenue = 120 x ₦170100 = 204,120,000
VC 120 x 528,000 = 63,36,0000
140,760,000
Less FC 62,000,000
78,760,000
125

c. Break-even point in Naira (N)
𝐹𝐹𝐹𝐹
a. BEP = 𝑃𝑃⁄𝑉𝑉
p� s−v 204,120,000−63,360,000
v = 𝑠𝑠 = 204,120,000
140,760,000
=
204,120,000
𝐹𝐹𝐹𝐹 62,000,000
a. BEP = 𝑃𝑃⁄𝑉𝑉 = PV
b.
62,000,000 x 204,120,000
=
140,760,000
= ₦89,907,928
a (i) Profit Statement for the Current Year
Cabbage Spinach Tomatoes Carrot Total

N’000 N’000 N’000 N’000 N’000
Sales 31,500 25,200 51,030 51,030 158,760
Less Variable Cost 11,280 9,792 17,136 15,840 54,048
20,220 15,408 33,894 35,790 104,712
Less Fixed Cost 62,000
Net Profit 42,712
WORKINGS
Cabbage Spinach Tomatoes Carrot Total

Area in Acres 30 24 36 30 120
Yield/Acre (tones) 17.5 14 15.75 21
Total Yield (tones) 525 336 567 630
Selling Price Per Tonne ₦60,000 ₦75,000 ₦90,000 ₦81,000
Total Sales Revenue (₦’000) 31,500 25,200 51,030 51,030 158,760
126

Variable Cost/Acre
Fertilizer 24,000 20,000 36,000 32,000

Seeds 12,000 16,000 24,000 20,000
Pesticides 20,000 12,000 16,000 20,000
Direct Wages 320,000 360,000 400,000 456,000
Total 376,000 408,000 476,000 528,000
Total variable cost (₦’000) 11,280 9,792 17,136 15,840 54,048

Contribution 104,712
Less fixed cost 62,000
Net Profit 42,712
Contribution (₦’000) 20,220 15,408 33,894 35,190 -

Average Land 30 24 36 30
120Acres
Contribution /acre ₦674,000 ₦642,000 ₦941,500 ₦1,173,000
3rd 4th 2nd 1st
MARKING GUIDE Mark Mark
a(i) Computation of Profit Statement

Any 36 ticks at 1/6 or any 60 ticks at 1/6 alternative solution 6
(ii) Computation of Profit of Production mix 16 ticks at ¼ 4
b(i) Giving correct advice on the production and sales of carrot 4
(ii) Calculation of Profit from advice in b(i) 4 ticks at ½ mark 2
c Computation of break-even point of sales in Naira (N) or acres correctly 4

20
EXAMINER’S REPORT
The question tests candidates’ knowledge and understanding of preparation of profitability

Statement of multiple products where the application of limiting factor is required. They are
also expected to advise the management on the most profitable vegetables and the calculation
of break-even sale. About 60% of the candidates attempted the question and the performance
was poor as they scored below 50% of the pass mark allocated to the question.
127

The commonest pitfalls are:
(i) Inability of the candidates to correctly apply the yield per acre in the determination of
contribution and profit per acre;
(ii) Wrong apportionment of Land (acres) in calculating the required product mix; and
(iv) Those that attempted the question could now calculate the break-even point of
saleshaving forgotten the Break-Even Point (BEP) formula.
Candidates are advised to practice more with worked examples as this is a very important
topic in the syllabus which should not pose problem to good students of performance
management.
SOLUTION 5
18th May, 2016
To: Manager
From: Management Accountant
REPORT ON HOW TO DESIGN AN EFFECTIVE MANAGEMENT INFORMATION

SYSTEM
Management Information System (MIS) provides information to management, of a routine or

non-routine nature, by analysing data and converting it into organised information. MIS
provides management information in regular or routine reports, which management uses for
planning and controlling activities. In short MIS provides management with information for
decision making.
a) Introduction
This brief report summarises how an effective management information system can be
designed.
b) The objectives of management accounting information systems

i) aid to short-term planning and strategic planning
ii) to facilitate control and decision making
iii) to provide the base for the effective use of management accounting techniques.
128

These planning, controlling and decision-making activities are essential if the organisation is
to achieve its objectives. These objectives may encompass a wide range of issues from high-
level strategic plans to the control of detailed operating activities, such as the labour hours
worked during the month. There is therefore a need to identify the information needs for a
broad range of business activities.
c) The range of information

Given a spectrum from long-term strategic to short-term operational information needs,
the data sources will probably exhibit the following characteristics:
• Strategic information needs will tend towards long-term, external and global data,
which is obtainable from customers, suppliers, trade associations and government.
• Detailed operational information needs are likely to come from within the business.
d) Recording and reporting issues

The recording and processing methods adopted need to consider:
• Collecting and recording monetary and non-monetary information
• The influence and needs of management accounting techniques
• The influence of IT systems; and;
• The type of business entity.
In deciding on the format of the reports generated, consideration should be given to:
• Analysis and dissemination to relevant individuals and groups;
• Management culture, structure and style;
• The appropriate accuracy, detail and speed, and any trade-off between them
• Security, access and controllability issues;
• The need for systems compatibility and other organisation’s system; and
• The needs, skills and systems knowledge of the potential users.
e) Other issues
Other general issues that need to be considered are:
• Expected planned life of the system;
• Developments in MIS; and
• Available resources and time constraints in terms of commissioning dates.
The above discussion should include reference to a specific organisation of which the
candidate has experience/knowledge.
The design of the systems should consider the management accounting tools that are likely
to be utilised e.g. budgeting, costing, TQM, benchmarking, etc. Can the system deliver the
information needs of these techniques?
SIGNED
(MANAGEMENT ACCOUNTANT)
129

Address of the report with correct heading of the subject matter 2 2
Introduction, definition and explanation of Management Information System 3 3
Process of Management Information System (MIS):

The range of information - 1½
Recording issues - 1½
Reporting issues - 1½
Development
- 1½
Other issues - 1½ 7½
Conclusion of the report taking into consideration types of organisation and

the Management Accounting tools. 2½
15
EXAMINER’S REPORT
The question tests the candidates’ knowledge of Management Information System (MIS), its
design and examples of Management accounting tools that apply to specific types of
environments/organisations. About 80% of the candidates attempted the question and the
performance was average as most of them scored above 50% of the mark allocated.
Candidates’ major pitfall was their inability to provide relevant Management Accounting tools
to support the Management Information System given in their report.
Candidates are advised not to neglect the Management Information System (MIS) area of the
syllabus as it could be tested in different forms, as it is also an important tool in Performance
Management.
130

SOLUTION 6
Niger Power Electricity Authority

(a) (i) Distribution Division
N N
Selling Price per Unit 250,000
Less: Transfer Cost 200,000
2% of Sales 5,000
Variable Network Support 50,000
255,000
(255,000)
Total Loss = ( 5,000)
• Advice : Do not buy
(a) (ii) Generation Division N

5,000 Units x N40,000 (contribution)
200,000,000
Less: Fixed Manufacturing Cost (200,000)
Total Profit =199,800,000
• Advice: The Company as a whole will benefit if the Distribution Division buys from
the Generation Division.
(b) (i) Return on Investment - ROI
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃
𝑹𝑹𝑹𝑹𝑹𝑹 = 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸
𝑥𝑥 100
𝑁𝑁199,800,000
= 𝑁𝑁100,000,000 𝑥𝑥 100
=199.8% or 200%
(ii) Residual Income

= N199,800,000 - (15% of N100,000,000)
= N199,800,000 - N15,000,000
= N184,800,000
131

(c) Divisional performance in the decentralized organization can be measured using the
following:
(i) Return on Investment (ROI);
(ii) Assets Growth;
(iii) Sales Growth;
(iv) Increased Profitability;
(v) Cost of Reduction;
(vi) Improved Stock Control;
(vii) Bureaucratic efficiency; and
(viii) Residual Income etc.
ALTERNATIVE TO a(i) and a(ii)
a (i) Distribution Division:
Selling Price N N
(250,000 x 2,500) 625,000,000
Less: -Transfer Cost (200,000 x 2,500) 500,000,000
-2% of Sales 15,625,000
-Variable Network Support
(50,000 x 2,500) 125,000,000
640,625,000 (640,625,000)
Loss (15,625,000)
• Advice: Do not buy

(ii) General Division
N
Contribution - (5,000 x 40,000) 200,000,000
Less: fixed Manufacturing Cost (200,000)
Profit: 199,800,000
• Advice: The Company as a whole will benefit if the Distribution Division buys from
the Generation Division.
132

a
(i) Selling Price ½
Costs ½
2% of Sales ½
Network Support ½
Loss Generated (Total) ½
Advised (Decision) ½
(ii) Contribution ½
Fixed Cost Profit ½
Profit (Total) ½
Advise (Decision) ½ 5
b.
ROI – Formula ½
Computation 1
Answer 1
Profit ½
Computation 1
Answer 1
5
c. One mark for each tick or each tick carries one mark to maximum of 5 marks 5
15
EXAMINER’S REPORT
The question tests the candidates’ knowledge of transfer pricing in an organisation from one
division to the other and the computation of Return on Investment (ROI) and Residual Income.
About 90% of the candidates attempted the question and less than 40% of the candidates scored
above 50% of the marks allocated.
The commonest pitfall is the candidates’ inability to calculate the benefit to the whole company if
Distribution Division buys from the Generation Division using contribution (Marginal Costing)
approach. Also, majority of them could not calculate the Return on Investment using the
appropriate formula.
Candidates are advised to pay more attention to this aspect of the syllabus and make use of modern
texts and to patronise the Pathfinder.
133

SOLUTION 7
i. The average time for 64 batches (i.e. 6,400 units)is:
Y = axb = 1,500 x 64 -0.2345 = 565.64 hours.
ii. The total time for 64 batches is 64 x 565.64hours = 36,200.96 hours.

The average time for 63 batches is:
Y = axb = 1,500 x 63 -0.2345 = 567.735 hours = 35,767.31 hours
Thus the time for the 64th and subsequent batches is 36,200.96 – 35,767.36 =
433.65 hours
₦’000 ₦’000
iii. Revenue from 9,000 units (9,000 units @ ₦ 3,100) 27,900
Cost of 10,000 units:
Variable costs:
Non-labour (10,000 units @ ₦950) 9,500
Direct labour (see below) 15,544
25,044
Fixed costs 2,000 27,044
856
Profit Target 2,500
1,644
Revenue required from final 1,000 units:
(₦2,500,000 – ₦856,000) = ₦1,644,000 i.e. ₦ 1,644,000 ÷ 1,000 = ₦1,644 per unit
Direct labour cost:

Total time = 36,200.96 hours + (36, batches x 433.65 hours) = 51,812.36 hours
The direct labour rate is ₦300 per hour so this gives a cost 0f ₦15,543,708.
The 1,000 units being sold in the decline stage need to be sold at an average selling price of
₦1,644 (₦1,644,000/1,000) in order to meet the profit target of ₦2,500,000
7b. The major barriers to e-business include:
(i) Set-up costs. It can be fairly expensive for a small company to establish a website for
selling its products and taking payment by credit card, debit card, Inter-switch or
PayPal. For example, it will be expensive for a small company to set up a website
showing an online catalogue with photograph, keeping records of inventory balances,
and with a facility to debit customer credit cards.
134

(ii) Type of business. Some products and services are easier to sell on the internet than
others. For example, computer firms sell products very successfully over the internet as
their products can be perfectly specified in writing. However, it is much more difficult
to sell items of clothing. No matter how much detail about clothing items that is
provided on the website or how many photographs that are provided, there are
difficulties with selling such goods ‘by catalogue’. Companies that do sell clothing by
internet have to budget for large amount of sales returns.
(iii) On-going operating cost. A website has to be updated frequently to keep it interesting
(and accurate), and it might be necessary to keep making special offers to encourage
customers to keep revisit the site.
(iv) Time to establish the system. It takes time to establish a website that customers know
about and wants to visit.
(v) No in-house skills. A company might not employ individuals with the knowledge or
skills to maintain a website. However, this should not be a serious barrier to e-
business, especially if the employer is prepared to give suitable training to staff.
a) Average time per batch for the first 64 batches:
Stating the formula 1

Interpreting the formula (current figures) 1
Correct answer (no of hours) 1 3
(ii) time taken for 64th batch:
Interpreting formula (for 63rd batch) 1
Correct answer (no. of hours) 1
Subtraction and answers (64th – 63rd batches) 2 4
(iii) Average SP for final 1,000 units @ ₦2,500,000 profit:
Revenue for 9,000 units @ ₦3,100 ½
Variable cost: Non – labour (for 10,000 units) ½
Direct labour ½
Fixed Cost (all 10,000 units) ½
Revenue less total Costs ½
135

Revenue From last 1,000 units (profit target less sale revenue) ½ 3
(b) Key barriers to e business
1 ¼, mark for any correctly discussed barrier x maximum of 4 5

15
EXAMINER’S REPORT
The question tests candidates’ knowledge of Learning Curve and key barriers to e-business.
The Learning Curve portion that accounts for almost 75% of the overall mark demands for
applying learning curve formula to nth batch, determination of incremental analysis to cost
and selling price.
About 40% of the candidates attempted the question and the overall performance was below
average with few candidates showing brilliant performance. Over 60% of the candidates that
attempted the question scored below 45% of the allocated marks. The performance in the e-
business portion was above average of allocated mark.
The major pitfall was the inability of the candidates to understand incremental analysis to
both production hours in the nthbatch and selling price at decline stage.
Students are advised to read beyond applying learning curve formula to nth batch only and be
more conversant with new developments in Performance Management.
136

INSTRUCTION: YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN QUESTIONS IN THIS PAPER
QUESTION 1
1. Hicenta Limited makes three products Soyi, Milco and Yoghurt. All the three
products must be offered for sale each month in order to provide a complete
market service. The products are fragile and their quality deteriorates rapidly
shortly after production.
The products are produced on two types of machine and worked on by a single
grade of direct labour. Fifty direct employees are paid N80 per hour for a
guaranteed minimum of 160 hours per month.
All the products are first pasteurised on a machine type A and then finished
and sealed on a machine type B.
The machine hour requirements for each of the products are as follows:
Soyi Milco Yoghurt
Hours per unit Hours per unit Hours per unit
Machine type A 1.5 4.5 3.0
Machine type B 1.0 2.5 2.0
The capacity of the available machines type A and B are 6,000 hours and 5,000
hours per month respectively. Details of the selling prices, unit costs and
monthly demand for the three products are as follows:
Soyi Milco Yoghurt
N per unit N per unit N per unit
Selling price 910 1,740 1,400
Concentrate cost 220 190 160
Other direct material cost 230 110 140
Direct labour cost @ N80 per hour 60 480 360
Overheads 240- 620 520
Profit 160 340 220
Maximum monthly demand (units) 1200 700 600
SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 65

Although, Hicenta Limited uses marginal costing and contribution analysis as
the basis for its decision making activities, profits are reported in the monthly
management accounts using the absorption costing basis. Finished goods
inventories are valued in the monthly management accounts at full absorption
cost.

a. Calculate the monthly machine utilisation rate for each product and
explain which of the machines is the bottleneck/limiting factor.
(6 Marks)
b. Use current system of marginal costing and contribution analysis to
calculate the profit maximising monthly output of the three products.
(6 Marks)
c. Explain why throughput accounting might provide more relevant
information in Hicenta‟s circumstances. (6 Marks)
d. Use a throughput approach to calculate the throughput-maximising
monthly output of the three products. (6 Marks)
e. Explain the throughput accounting approach to optimizing the level of
inventory and its valuation. Contrast this approach to the current system
employed by Hicenta. (6 Marks)
(Total 30 Marks)
SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
IN THIS SECTION (40 MARKS)
QUESTION 2
Tadesco Limited manufactures Compact Disks. It is planning to introduce a new

model and production will begin very soon. It expects the new product to have a life
cycle of three years and the following costs have been estimated.
Year 0 Year 1 Year 2 Year 3
Units manufactured and sold 50,000 200,000 150,000
Price per unit N900 N800 N700
R&D costs N1,700,000 N180,000 -

Year 0 Year 1 Year 2 Year 3
Production Costs
Variable cost per unit N300 N250 N250
Fixed cost N5,000,000 N5,000,000 N5,000,000
Marketing Costs
Fixed cost N3,000,000 N2,000,000 N2,000,000
Distribution Costs
Fixed cost N1,900,000 N1,900,000 N1,900,000
Customer service costs per unit N30 N20 N20

a. Explain Life Cycle Costing and state what distinguishes it from traditional
costing technique. (10 Marks)
b. Calculate the cost per unit over the whole life cycle and comment on the price
to be charged. (10 Marks)
(Total 20 Marks)
QUESTION 3
Adelab Nigeria Limited is a manufacturer of industrial gear. Over the years, the
company has collected, allocated and absorbed overhead cost based on the
traditional absorption costing technique.
The current economic recession in the country and stiff competition in the market are
seriously affecting the company‟s performance and market share as its competitors
have in recent times, introduced discounts to their customers. The customers of
Adelab have therefore been putting pressure on the company to follow suit and few of
these customers have started patronising the company‟s competitors who offer
discounts on every purchase.
To address these problems and other strategic and operational issues affecting the
company, the Board of Directors of Adelab decided recently to appoint a seasoned
management expert as Business Process Executive (BPE). The BPE recently advised
the Board to organise a management retreat. The focus of the retreat is strategic
management, cost control and performance management. During the course of the
retreat, new costing techniques such as activity based management, life cycle

costing, target costing, Kaizen costing, throughput accounting, backflush accounting,
just in time approach to inventory management, etc., were discussed by the BPE. The
need to also consider both financial and non-financial performance measurements
was also discussed. The BPE further highlighted the need for the company to link its
Key Performance Indicators (KPIs) to its strategic and operational Critical Success
Factors (CSF), to achieve a better focus and improve its financial performance.
In a board meeting after the retreat, the following discussions took place:
Technical Director: “To improve our financial performance I think I will have to agree
with the BPE‟s submission at the retreat that we replace absorption costing approach
with an Activity Based Costing (ABC) system. I believe this will help us to put a tap on
cost and thus improve cost control and increase profit margins. We can then pass
some of these costs reduction to our customers in form of discounts”.
Managing Director: “Yes, I agree with your opinion but I also think we need to
monitor our performance in both financial and non-financial terms. For example, loss
of sales could be due to charging a higher price than our competitors and as well as
producing bad quality product. I therefore think that, while we should consider
introducing activity based costing, we should also consider ways in which the
company could monitor and assess performance on a wider basis”.

a. Describe FIVE key features of Activity Based Costing (ABC) and provide SIX
advantages and FOUR disadvantages of adopting Activity Based Costing (ABC)
approach to cost accumulation. (10 Marks)
b. Explain the need for the measurement of organisational and managerial
performance giving examples of the range of financial and non-financial
performance measures that might be used. (10 Marks)
(Total 20 Marks)
QUESTION 4
Aghobe Air owns a single aircraft which operates between Lagos and Kano. The
normal flight schedule is that flights leave Lagos on Mondays and Thursdays and
depart from Kano on Wednesdays and Saturdays. Aghobe Air cannot offer any more
flights between Lagos and Kano. The only seat available on the aircraft is economy
class.

The following information is available:
Seating capacity of the aircraft is 360 passengers.
Weekly average number of passengers per flight is as follows:
First week 250 Passengers
Second Week 150 “
Third week 200 “
Fourth week 150 “
Flights per week 4
Flights per year 208
Average one-way fare N25,000
Variable fuel costs N700,000 Per flight
(i) Food and beverages service cost N1,000 per passenger but at no charge to the
passengers;
(ii) Commission to travel agents paid by Aghobe Air (All tickets are booked by
travel agents) is 8% of fare;
(iii) Fixed annual leased costs allocated to each flight is N2,650,000 per flight;
(iv) Fixed ground services (maintenance, check in baggage handling, etc.) cost
allocated to each flight N350,000 per flight;
(v) Fixed flight crew salaries allocated to each flight is N200,000 per flight; and
(vi) Fuel cost is unaffected by the actual number of passengers on the flight.
Required:
a. Determine the net operating income made by Aghobe Air on each one way
flight between Lagos and Kano. (5 Marks)
b. The market research unit of Aghobe Air indicates that lowering the average
one way fare to N24,000 will increase the average number of passengers per
flight to 212. Should Aghobe Air lower its fare? (5 Marks)
c. A tourist group known as Sea Bird Tour Operator approaches Aghobe Air on the
possibility of chartering the aircraft twice each month from Lagos to Kano and
back from Kano to Lagos. If Aghobe Air accepts the offer, it will only offer 184
flights in each year. Other terms of the offer include:
- For each one way flight, Sea Bird Tour Operator will pay Aghobe Air
N3,750,000 which covers cost of charter for one way, use of flight crew
and ground service staff. Sea Bird Tour operator will pay for fuel costs,
food and beverages.

Should Aghobe Air accept the offer from Sea Bird Tour Operator?
(5 Marks)
d. What factors should be taken into consideration in taking the decision in (c)
above? (5 Marks)
(Total 20 Marks)
SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE

QUESTIONS IN THIS SECTION (30 MARKS)
QUESTION 5
Okeke and Sons produces a new petroleum additive called „EPBC‟ used in increasing
petrol engine efficiency, while at the same time reducing its fuel consumption. The
actual and budgeted quantities in litres of materials required to produce „EPBC‟ and
the budgeted prices of materials in October 2016 are as follows:
S/N Chemical Actual Quantity (litres) Budgeted Budgeted
and Price (N) Quantity Price (N)
(litres)
1 E-chem 48,160 @ N25 50,400 20
2 Pr-chem 30,960 @ N47 33,600 45
3 Be-chem 72,240 @ N14 67,200 15
4 Chamochem 20,640 @ N30 16,800 30
a. Calculate the individual chemical and total direct materials price and usage
variances for October 2016. (4 Marks)
b. Calculate the individual chemical and total direct materials yield and mix
variances for October 2016. (4 Marks)
c. What conclusions would you draw from the various variances calculated in (a)
and (b) above? (4 Marks)
d. State ONE possible cause of each of the variances computed in (a) and (b)
above. (3 Marks)
(Total 15 Marks)

QUESTION 6
Michael Porter, in his book “Competitive Advantage: Creating and Sustaining Superior
Performance,” suggested that a firm must assess the industry‟s market attractiveness
by considering the following:
 The extent of the rivalry between existing competitors;
 The bargaining power of suppliers;
 The bargaining power of buyers;
 The threat of substitutes; and
 The threat of new entrants.
Required
a. Recommend FIVE factors that should be included in the monitoring system
implemented by the firm, if a firm wishes to monitor the bargaining power of
buyers. (5 Marks)
b. Explain FOUR different methods whereby a firm can reduce the threat of new
entrants to an industry. (7 Marks)
c. Explain the reason why firms often continue to operate in an industry which is
generating below normal returns in the short run. (3 Marks)
(Total 15 Marks)
QUESTION 7
Adak Nigeria Limited sells its products through the internet. Many people around the
world have access to its website to transact various businesses. Recently, the
company has been having problems with the security of its business processes.
The management of the company has been trying to find solutions to the following
problems:
(a) How to protect its data from the activities of hackers;
(b) How to prevent the files from being destroyed by virus.
As a Performance Management Expert, you have been consulted by the management
to provide advice to the company to address the above problems. Advice is required
in the following areas:
(i) How to protect the company‟s data from the activities of hackers;
(ii) Type of viruses that can affect the company‟s files.
Required:
Prepare a paper that will address the above concerns. (15 Marks)

Formulae
Learning curve
Y = axb
b = the index of learning log LR/log2
Demand curve
P = a – bQ
b =
MR = a – 2bQ
 
Y= a + bX or Y - Y = b(x – X )
where
b= Covariance (XY) =
Variance (X)
 
a= Y–bX

Annuity Table
-n
Present value of an annuity of 1 i.e. 1 - (1 + r)
r
Discount rate (r)

Period
s
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15

ON

SOLUTIONS

SOLUTION 1
a. Machine Utilization Rate:

Product
Soyi Milco Yogurt Total
Machine hours required:
Type A (Rate & Maximum Demand) 1,800 3,150 1,800 6,750
Type B (Rate & Maximum Demand) 1,200 1,750 1,200 4,150
Machine utilization rate:

Type A = 6750 / 6000 = 1.125 or 112.5%
Type B = 4150 / 5000 = 0.83 or 83%
Machine type A has the higher utilization rate and the rate is above 1 or 100%.
Therefore, machine type A is the bottleneck / limiting factor.
b. Contribution analysis:
Product
Soyi Milco Yogurt
Contribution per unit N400 N960 N740
Machine type A hour 1.5 4.5 3.0
Contribution per hour N266.67 N213.33 N246.67
Ranking 1 3 2
Allocation of machine type A hours

Soyi 1,200 units x 1.5 = 1,800 hours
Yogurt 600 units x 3 = 1,800 hours
3,600
Milco (6,000 -3,600)/4.5 = 533.333units x 4.5 = 2,400 hours
6,000 hours used
c. A major concept underlying throughput accounting is that the majority of

costs, except material and concentrate costs, are fixed.
In Hicenta‟s case, it is clear that the labour cost which is treated as a variable
cost in traditional marginal costing, is indeed a fixed cost. The employees are
paid for a guaranteed 8,000 hours (160 x 50) each month; whereas the number

of labour hours required to meet the maximum demand can be calculated as
7,800 hours as follows:
Product
Soyi Milco Yogurt Total
Labour hours per unit 0.75 6 4.5
Maximum demand 1,200 700 600
Total hours required 900 4,200 2,700 7,800
Therefore, labour is a fixed cost that will not alter within the relevant range of
activity. Throughput accounting recognizes this in the calculation of
throughput.
d. Given the perishable nature of Hicenta‟s product, throughput accounting

approach to inventory maximization and maximization of throughput would be
more appropriate.
Product
Soyi Milco Yogurt
Sales revenue 910 1,740 1,400
Concentrate cost 220 190 160
Other direct materials 230 110 140
Throughput per unit 460 1,440 1,100
Machine type A hour 1.5 4.5 3.0
Throughput per hour N306.67 N320 N366.67
Ranking 3 2 1
Allocation of machine type A hours according to this ranking:
Yogurt 600 x 3 hours 1,800 hours

Milco 700 x 4.5 hours 3,150 hours
4,950
Soyi (1,050/1.5) 700 x 1.5 hours 1,050 hours
6,000 hours used
e. The conventional cost accounting approach used by Hicenta views inventory as

an asset. In the throughput accounting approach, inventory is not viewed as
an asset, but rather as a result of unsynchronized manufacturing. The
existence of inventory is thus viewed as a breakdown in synchronization and a

barrier to generating profits. In throughput accounting, the ideal inventory
level is zero, with the exception that a buffer inventory should be held prior to
the bottleneck machine.
As regards the valuation of inventory, the throughput philosophy is that no

value is added to inventory items and no profit is earned until the items are
actually sold. The inventory is valued at its material cost until it is sold.
This approach to inventory valuation is the contrast to the full absorption

costing system used by Hicenta. The latter approach encourages managers to
produce output just to add to work in progress or finished goods inventory,
since this helps with the absorption of overheads and boosts reported profits.
This behaviour will be avoided and managers will be more likely to be willing
to minimize inventory if it is valued at material cost only.
Workings
(b) Contribution Computation

Soyi Milco Yogurt
N N N
Selling Price 910 1,740 1,400
Less Unit Variable Cost:
Concentrate Cost 220 190 160
Other Direct Materials 230 110 140
Direct Labour Cost 60 480 360
510 780 660
Contribution per unit 400 960 760

MARKING GUIDE
Marks Marks
a. Machine utilisation rate: machine hours required
For Type A(the three products and total) 2
Type B (the three products and total) 2
Utilisation rate for each machine
Type A ½
Type B ½
Bottleneck/limiting factor 1 6
b. Calculation of profit maximising monthly output

Contribution/unit for the 3 products ¾
Contribution/hour for the 3 products ¾
Ranking of the products ¾
Allocation of machine type A hours for the 3 products 3
Total hours used ¾ 6
c. Description of throughput accounting 2

Throughput relevance and hours required 4 6
d. Calculation of profit maximising output using throughput

approach
Throughput/unit for the 3 products 1
Throughput/hour for the 3 products 1
Ranking 1
Allocation of machine type A hours for the 3 products 3 6
e. Comparison of throughput approach with Hicenta‟s current

approach
Throughput approach (3 points) 3
Hicenta‟s current approach (3 points) 3 6
30
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of Throughput Accounting and Marginal Costing.
The points expected to be raised include computation of machine utilization rate and Profit
maximizing output.
Candidates‟ performance was not encouraging as less than 40% of the Candidates showed
understanding of the requirements of the question.
The major pitfall remains the inability of candidates to understand the requirements of the
question due to lack of technical understanding of the topic.
It is advised that candidates should make use of ICAN Study Text in addition to other relevant
textbooks.

SECTION B
SOLUTION 2
a. Life Cycle Costing
Life cycle costing is a cost accounting system which tracks and accumulates
costs and revenues attributable to each product over the entire product‟s life
cycle. The product‟s life cycle costs are incurred from the design stage,
development to market launch, production, marketing and sales, and finally to
its eventual withdrawal from the market. The product‟s life cycle by summary
involves:
i) Development costs
ii) Introduction costs
iii) Growth costs
iv) Maturity costs
v) Acquisition costs
vi) Product distribution costs
vii) Maintenance costs
viii) Operation costs
ix) Training costs
x) Inventory costs
xi) Decline costs
xii) Disposal costs
The differences between Life Cycle Costing and Traditional Costing Methods are
as follows:
i. Traditional costing does not relate research and development costs to
the products that caused them.
ii. Traditional costs accumulation systems usually total all non-production
costs and record them as period costs.
iii. Traditional costing system does not consider the life span of a product.
iv. Traditional costing system does not consider the decline stage of a
product.
v. Traditional costing system does not consider the end of life costs or
withdrawal costs.
vi. Traditional costing system does not analyse the cost/ benefits of each
option at each stage.

b. Computation of Life Cycle Cost per unit
N
R & D costs 1,880,000
Variable production costs 102,500,000
Variable marketing costs 15,000,000
Variable distribution costs 4,000,000
Fixed production costs 15,000,000
Fixed marketing costs 7,000,000
Fixed distribution costs 5,700,000
Customers service costs 8,500,000
Total life cycle cost 159,580,000
Life cycle cost = N159,580,000

400,000units
= N398.95
Working Notes
1. Variable Production Costs N
Year 1 (N300 x 50,000units) = 15,000,000
Year 2 (N250 x 200,000units) = 50,000,000
Year 3 (N250 x 150,000units) = 37,500,000
102,500,000
2. Variable marketing Costs N
Year 1 (N50 x 50,000units) = 2,500,000
Year 2 (N40 x 200,000units) = 8,000,000
Year 3 (N30 x 150,000units) = 4,500,000
15,000,000
3. Variable distribution Costs N
Year 1 (N10 x 50,000units) = 500,000
Year 2 (N10 x 200,000units) = 2,000,000
Year 3 (N10 x 150,000units) = 1,500,000
4,000,000
4. Customer service cost N
Year 1 (N30 x 50,000units) = 1,500,000
Year 2 (N20 x 200,000units) = 4,000,000
Year 3 (N20 x 150,000units) = 3,000,000
8,500,000

MARKING GUIDE
Marks Marks
a. Explanation of Life Cycle casting 5
Distinction from other costing Technique 5
10
b. Calculation of variable cost (workings)
Production Year 1 -3 ½
Marketing year 1-3 11/2
Distribution year 1-3 11/2
Customer Year 1-3 11/2
06
Total of variable and Fixed
¼ mark x 8 2
Cost per unit 2 04
20
EXAMINER‟S REPORT
The question tests candidates knowledge of Life Cycle Costing technique in comparison with
the Traditional Costing Approach. The points expected from the question bordered on
differentiating Life Cycle Costing from other costing approaches.
Candidates showed a good understanding of the question. About 90% of the candidates who
attempted the question scored above half of the allocated marks.
The commonest pitfall observed was candidates‟ display of poor knowledge of other costing
techniques.
It is advisable that an in-depth study of ICAN Study Text and other relevant textbooks will
widen candidates‟ appreciation of the requirements of the topic in future.

SOLUTION 3
a. Activity Based Costing (ABC) involves the identification of the factors which
cause the costs of an organization‟s major activities. Support overheads are
charged to products on the basis of their usage of the factor causing the
overheads. The major idea behind activity based costing are as follows:
i. Activities cause costs. Activities include ordering, materials handling,
machining, assembly, production scheduling and dispatching.
ii. Producing products creates demand for the activities.
iii. Costs are assigned to a product on the basis of the product‟s
consumption of the activities.
The principal idea of ABC is to focus attention on what causes costs to increase,
ie the cost drivers. Those costs that do vary with production volume, such as
power costs, should be traced to products using production volume –related
cost drivers as appropriate, such as direct labour hours or direct machine
hours. Overheads which do not vary with output but with some other activity
should be traced to products using transaction – based cost drivers, such as
number of production runs and number of orders received. Traditional costing
systems allow overheads to be related to products in rather more arbitrary
ways producing, it is claimed, less accurate product costs.
Advantages of ABC
i. The complexity of manufacturing has increased, with wider product
ranges, shorter product life cycles and more complex production
processes. ABC recognizes the complexity with its multiple cost drivers.
ii. In a more competitive environment, companies must be able to assess
product profitability realistically. ABC facilitates a good understanding
of what drives overhead costs.
iii. In modern manufacturing systems, overhead functions include a lot of
non – factory – floor activities such as product design, quality control,
production planning and customer services. ABC is concerned with all
costs and so goes beyond “traditional” factory floor boundaries.
iv. It is easy to compute.
v. It establishes long run product costs.
vi. It provides the basic data for activity based management and decision
making.
vii. It provides more accurate and more reliable cost information.

viii. It provides the basic data for costs control by adjusting the activities or
cost drivers.
ix. Reduces or eliminates costly and non-value adding activities.
x. Provides better ways of allocating overheads.
Disadvantages of ABC
i. Some measure of (arbitrary) cost apportionment may still be required at
the cost pooling stage for items like rent, rates and building
depreciation.
Unless costs are caused by an activity that is measureable in
quantitative terms and which can be related to production output, cost
drivers will not be usable. What drives the cost of the annual external
audit, for example?
ii. ABC is sometimes introduced because it is fashionable, not because it
will be used by management to provide meaningful product costs or
extra information. If Adelab‟s management is not going to use ABC
information, an absorption costing system may be simpler to operate.
Put another way, the cost of implementing and maintaining an ABC
system can exceed the benefits of improved accuracy.
Implementing ABC is often problematic. Recent journal articles have
highlighted the following issues:
 An incorrect belief that ABC can solve all organization problems.
 Lack of the correct type of data
 Difficulty in determining appropriate cost drivers.
 Time consuming
iii. ABC does not conform to accounting standards and should not be used
for external reporting.
iv. Misinterpretation of data: Interpreting ABC data along with regular
accounting information can be confusing and lead to bad decision
making.
b. Performance measurement is a part of the system of financial control of an

enterprise, as well as being important to investors. The need for managerial
performance and organizational performance are linked, since the decisions
that managers make will influence how well or otherwise the organization
performs. This performance needs to be measured as part of Strategic
Planning are concerned with:

i. Setting targets for the achievement of the entity‟s main strategic
objective;
ii. Setting targets for each strategy that is implemented for achieving the
main strategic object;
iii. Setting targets at all levels of management within the entity; all
planning targets (all levels within the entity) should be consistent with
the strategic targets and objectives;
iv. Measuring actual performance;
v. Comparing actual performance with the targets;
vi. Where appropriate, taking control measures; and
vii. Where appropriate, changing the targets.
The usual assumption in financial management for the private sector is that
the primary financial objective of the company is to maximize shareholders‟
wealth. Financial targets may include target for earning; earning per share;
dividend per share; gearing levels; profit retention and operating profitability.
There are a variety of ways that such performance can be measured. As part of
the system of financial control in an organization, it will be necessary to have
ways of measuring the progress of the enterprise, so that managers know how
well the company is doing. A common means of doing this is through ratio
analysis, which is concerned with comparing and quantifying relationships
between financial variables, such as those variables found in the statement of
financial position and comprehensive profit statement of an organisation.
Ratios can be grouped into the following four categories: profitability and
return; debts and gearing; liquidity: control of cash and other working capital
items; shareholders‟ investment ratio („stock market ratios‟). The ratios can be
seen to be interrelated.
Alternative examples of financial performance measures:

i. Profitability measures such as net profit & gross profit margin return on
capital employed, asset turnover.
ii. Liquidity measures such as current ratios, acid test ratios.
iii. Gearing ratios such as interest cover.
iv. Investors ratios such as EPS, divided cover, dividend yield, earning
yield, shareholders value.

It is therefore important that a range of non – financial indicators be developed
to provide better predictors for the attainment of long – term profitability
goals. Here are some examples:
1. Quantity
2. Number of customer complaints
3. Lead times
4. Delivery to time
5. Non – productive hours
6. System (machine) down time
7. Market share
8. Brand preference
9. Customer/employee satisfaction
10. Product service quality
11. Number of new products/innovation
12. Services performed late versus total service performed
MARKING GUIDE
Marks Marks
a. Description of Key features of ABC 5
Advantages of ABC (any 6 ticks @ ½ ) 3
Disadvantages of ABC (any 4 ticks @ ½) 2
10
b. Explanation of the Need Measurement of management and
organisation performance (any 5 ticks @ 1 mark) 5
Examples of financial performance measures (any 3 ticks @ 1 3
mark)
Examples of non-financial performance measures (any 4 ticks @
½ marks) 2 10
20
EXAMINER‟S REPORT
The question tests candidates‟ understanding of Activity Based Costing (ABC) as well as
financial and non-financial performance measures.
The key points expected to be raised in the question include explanation of ABC, its
advantages and disadvantages and measure of performance (financial and non-financial).
Candidates‟ understanding of the question was however high while those who did not
understand same performed poorly.
Their commonest pitfall was inability to explain the concepts and their features as well as the
differences between financial and non-financial measures.
Candidates are encouraged to devote more time in their preparations for future examinations
using ICAN Study Text and other relevant textbooks.

SOLUTION 4
AGHOBE AIR – DECISION MAKING

a. Net operating income made by Aghobe Air on each one way flight between
Lagos and Kano.
N N
One way flight cost = One way fare x Average Number of Passengers
= N25,000 x 188 4,700,000
Less commission of 8% of N4,700,000 376,000
Net fare 4,324,000

Less Variable Cost of one-way flight:
Fuel Cost 700,000
Food and beverages (N1,000 x 188)= 188,000 888,000
Contribution per flight 3,436,000
Less fixed costs
Lease Costs 2,650,000
Ground cost on Luggage 350,000
Flight Crew 200,000 3,200,000
Net Operating Income 236,000
b. Should Aghobe Air lower its fare to N24,000?

N N
Revenue (N24,000 x 212) 5,088,000
Less Commission of 8% 407,040
Net fare 4,680,960
Less variable costs
Fuel costs 700,000
Food and beverages (212 xN1,000) 212,000 912,000
Fixed Costs:
Lease costs 2,650,000
Ground costs/baggage 350,000
Flight crew 200,000 3,200,000
Net Operating Income 568,960
Yes, based on the computation above, Aghobe Air is advised to lower its fare.

c. 184 flights x 188 passengers = 34,592 passengers N
Revenue from charter (N3,750,000 x 24) 90,000,000
Revenue (34592 x N25,000) 864,800,000
Total revenue 954,800,000
Cost
N
Commission (8% of N954,800,000) 76,384,000
Fuel (184 x N700,000) 128,800,000
Food (184 x 188 x 1000) 34,592,000 239,776,000
Fixed cost
(N350,000 + N2,650,000 + 200,000) = N3,200,000 x 208 665,600,000
Net Income 49,424,000
Contribution per flight = N715,024,000 ÷208

= N3,437,615
Charter fee N3,750,000
 It pays to charter (based on the computation above)
Alternative approach:
N N
Revenue of Agbobe Air: 188 x N25,000 = 4,700,000
Variable costs
Fuel Cost 700,000
Food and beverage 188,000
Commission (8% of N 4,700,000) 376,000 1,264,000
Charter fees 3,750,000
 It pays to charter (based on the computation above)
d. Other factors to be taken into consideration in facilitating this decision are as

follows:
i. The charter will disrupt regular weekly flights
ii. The stability of the relationship of the two companies may not be
guaranteed as it is seen as a short term affair – No adverse regulation
iii. Competitors may take over the business
iv. No increase in the various costs

v. Availability of aviation fuel
vi. Reliability of the estimates
Workings:
Weekly average number of i.e. passengers per flight is as follows:
1st week = 250 passengers
2nd week = 150 passengers
3rd week = 200 passengers
4th week = 150 passengers
Total = 750 passengers
 Average = 750 /4 = 187. 50  188 Passengers
MARKING GUIDE
MARKS MARKS
a. Determining Net operating income by Aghobe Air per flight
Calculation of income per flight 1

Calculation of Variable cost 1
Calculation of contribution 1
Calculation of fixed cost 1
Calculation of Net operating Income 1 5
b Determining whether Aghobe should lower fare
Calculation of income per flight 1
Calculation of Variable cost 1
Calculation of contribution 1
Calculation of fixed cost 1
Calculation of revised Income ½
Decision to accept ½ 5
c. Calculation of Revenue 1
Calculation of Variable Cost 1
Calculation of Contribution 1
Charter fee 1
Decision to charter 1
5
d. Other factors
Risk of uncertainty 1
Disruption of regular flight 1
Stability of relationship 1
Competitors may take over 1
No increase in variation costs 1
Reliability of the estimates 1 5
Any 5 points 20

EXAMINER‟S REPORT
The question tests candidates‟ knowledge of the use of contribution approach in decision
making.
The question requires the determination of the Net Operating Income using a sensitivity
approach and the impact of chartering out a facility.
Candidates‟ performance was poor as less than 35% of those who attempted the question
scored below the allotted marks.
Candidates are advised to do a diligent appraisal of questions in future examinations before
attempting to proffer a solution as that will reduce incidence of failure

SECTION C
SOLUTION 5
a)
i. Material Price Variance

Material Std Act Mat Act Qty Mat Price
Price Price Price Variance
Variance
N N N Ltr N
E-chem 20 25 5A 48,160 240,800A
Prechem 45 47 2A 30,960 61,920A
Be-chem 15 14 1F 72,240 72,240F
Chamochem 30 30 0 20,640 0
Total Material Price variance 230,480A
ii. Material Usage Variance
Material Std Qty Actual Mat Std Mat usage

Price (boao) Qty usage Price Variance
Variance
Ltr Ltr Ltr Ltr Ltr
E-chem 50,400 48,160 2,240F 20 44,800F
Prechem 33,600 30,960 2,640F 45 118,800F
Be chem. 67,200 72,240 5,040A 15 75,600A
Chamochem 16,800 20,640 3,840A 30 115,200A
Total Material Usage Variance 27,200A
Note
It is assumed that the budgeted output is same as actual output.
b) Material Mix Variance

i) Standard Mix of materials
Material budgeted qty standard mix

Ltr %
E-chem 50,400 30
Pr chem 33,600 20
Be chem 67,200 40
Chemochem 16,800 10
168,000 100

(ii) Standard mix of actual quantity
Material Total Std mix of
Actual Qty actual Qty
E-chem 172,000 x 30% = 51,600

Prechem 172,000 x 20% = 34,400
Bechem 172,000 x 40% = 68,800
Chemochem 172,000 x 10% = 17,200
172,000
(iii) Material mix variance
Material Act Qty Actual Qty Mat Mix Std Mat Mix
(Std Variance Price Variance
Mix)
Ltr Ltr N N
E chem 51,600 48,160 3,440F 20 68,800F
Prechem 34,400 30,960 3,440F 45 154,800F
Be chem. 68,800 72,240 3,440A 15 51,600A
Chamochem 17,200 20,640 3,440A 30 103,200A
Total 172,000 172,000 68,800F
(iv) Material Yield Variance
Material Std Qty Actual qty Mat yield Std Material

Std mix Variance Price yield
variance
Ltr Ltr N N
E chem. 50,400 51,600 1,200A 20 24,000A
Prechem 33,600 34,400 800A 45 36,000A
Be chem. 67,200 68,800 1,600A 15 24,000A
Chamochem 16,800 17,200 400A 30 12,000A
Total 168,000 172,000 96,000A

c.
i. The price variance depicted an unfavourable figure of (N230,480) showing that
on average, all actual prices paid were higher than budgeted prices.
ii. The usage variance depicted unfavourable figure of N27,200 showing
inefficiency in material usage (wastages).
iii. On mix variance, a favourable variance was made showing that actual mix
contained more of cheaper input materials.
iv. The yield variance was unfavourable by (N96,000), if the quality of the product
was to be improved on, more of costlier materials could be used.
d. Possible causes of the variances:

S/N Variance Reason for variances
1 Direct Material Price Unrealistic materials price standard
variance (Unrealistic SP).
Change in purchase price (e.g. new
supplier,
change in quantity of materials purchased,
change in purchase discount).
Accounting error (in the actual price of
materials). Inflation factors
Inefficiency in procurement
2 Direct material Usage or Unrealistic materials quantity
efficiency Variance Standard (Unrealistic SQ).
Accounting error (in quantity of materials
used).
Inexperienced machine operator
Poor quality of materials.
Machine malfunctioning
3 Direct material mix Abnormal mix in production process, Non

variance adherence to normal mix.
Inexperienced machine operator
Machine malfunctioning
4 Direct material yield Change in quantity of spoiled materials

variance due to the changes in
quality/equipment/technology, equipment
malfunction, etc.

MARKING GUIDE
Marks Marks
a. i. Material Price Variance
E-Chem ½
Pre-chem ½
Be-chem ½
Chama Chem ½ 2
ii. Material usage Variable
E-Chem ½
Pre-chem ½
Be-chem ½
Chamo chem. ½ 2
b. Material Mix Variance

i. Standard Mix of Material
E-Chem ½
Pre-chem ½
Be-chem ½
Chamo Chem ½ 1
ii. Standard Mix of actual quantity

E-Chem ½
Pre-chem ½
Be-chem ½
Chamo Chem ½ 1
iii. Material Mix Variance

E-Chem ½
Pre-chem ½
Be-chem ½
Chamo Chem ½ 1
iv. Material Yield Variance

E-Chem ½
Pre-chem ½
Be-chem ½
Chamo Chem ½ 1
c. Price Variance 1
Usage Variance 1
Mix Variance 1
Yield Variance 1 4
d.
Usage Variance 1
Mix Variance 1
Yield Variance 1
3
15

EXAMINER‟S REPORT
The question tests candidates‟ understanding of Material Cost Variance viz: Price Usage, Mix
and Yield.
The question requires the determination of Material Price, Mix, Yield and Usage variances for
a mix of input materials and their causes.
Candidates displayed poor understanding of the requirements of the question as less than
30% showed understanding of the requirements of the question. The poor performance was
sequel to their inability to distinguish between mix and yield variances and their causes.
Candidates are advised to devote more time in preparing for future examinations using the
ICAN Study Text and other relevant textbooks.

SOLUTION 6
a) The bargaining power of buyers also referred to as bargaining power of

customers, is a tool under Porter‟s 5 forces model used in assessing the ability
of buyers to influence an organization in a competitive situation. The
bargaining power of buyers represents a major factor in establishing the
attractiveness of an industry. It is therefore important that the power of buyers
is monitored in order that organisations are aware of the forces which are
important in the development of a strategic plan. Factors which will influence
the relative bargaining strength of the buyers include:
i. The number of different buyers and sellers in the market;
ii. The relative size of both the buying and selling organisations;
iii. The buyer‟s purchases are large in relation to the total sales of each
seller, as a major customer can often dictate terms and conditions,
especially if the cost structure of the seller includes a high level of
fixed costs;
iv. The level of profit earned by the buyers is low;
v. The product is undifferentiated;
vi. The quality of the component purchased is not particularly important
in the final product;
vii. The extent to which buyers can undertake backward integration.
b) There are a number of different barriers to entry that are likely to reduce the
number of potential entrants to the industry. Potential competitive advantage
retained by any of the following:
i. Patents, licences and government/legal constraints. It is possible for a
firm to use any of these as a form of protection and to prevent new
entrants to the industry. Once this type of legal barrier has been
obtained by a firm, it can be of great value in retaining competitive
advantage.
ii. Branding or customer loyalty (differentiation). Often at considerable
expense, an organisation will try to establish customer loyalty which will
ensure that people will buy the product in preference to other brands
and substitutes that are available.
iii. Economies of scales including the learning curve. In some industries,
large- scale operations can produce the products at a lower cost than the
smaller producers. This provides an example of „overall cost leadership‟
which can be very significant in planning for competitive advantage

iv. Access to cheaper factors of production. Some firms are able to produce
products at a lower cost, as they have been able to obtain materials,
labour, finance or other expenses at a lower rate than their competitors.
v. Switching costs. The ability to change to another supplier without many
costs being incurred. Incumbent firms can increase these by offering
volume discounts, special delivery facilities or electronic ordering
systems.
vi. Control of unique distribution channels. If a firm can exclude other
producers from distributing their products through the most effective
distribution channels, then this can represent a significant entry barrier.
vii. The scale of investment needed to establish the operation. If the amount
of investment is so large that most competitors are unable to consider
entering the industry, this represents a way in which potential
competitors can be excluded and the existing firm have competitive
advantage and possibly even a monopoly.
viii. Technological advantages that result in cost leadership. Successful
research and development often results in a firm having a process that
reduces the cost of production so that competitors are unable to compete
on a level playing field. This gives the firm that has invested in the R& D
an important edge over their competitors and this will exclude potential
entrants to the industry.
c. (i) There are exit barriers that result in firms remaining in an industry, even
though the returns are below the normal level. When a firm realises that
the probability of success is low or acknowledges that there is excess
capacity in the industry, a decision to shut down may be appropriate.
However, decisions of this kind are often postponed. This is likely to
occur if the closure will result in substantial costs being incurred by the
firm. These are termed exit costs. In general terms, the costs of closure
are estimated to be higher than continuing the operation.
(ii) Apart from the exit costs, a firm may decide to stay in an industry
because the market has a strategic importance to the firm. For example,
a commercial bank may continue to provide current accounts despite
their low profitability because they are cornerstone of a client
relationship from which more valuable products can be sold.
(iii) Where a particular good or service which is generating below normal
returns in the short run makes customers buy or demand for other
services of the company with high yield.

(iv) Producing equipment whose accessories are in rapid demand and are
profitable.
(v) Overcoming frequent technology change cost
(vi) Where life circle is almost expiring and the product still gives some
marginal profit.
MARKING GUIDE
MARKS MARKS
a. Valid introduction 1
4 correct points at 1 marks 4 5
b. Valid introduction 1
Any 4 correct points at 11/2 marks 6 7
c Any 3 valid points at 1 mark

3 3
15
EXMANER‟S REPORT
The question tests candidates‟ understanding of Michael Porter‟s Analysis of Competitive

Advantage in situations where a firm is upscaling and sustaining its performance.
Candidates showed full grasp of the requirements of the question and that manifested in
their performance. Over 70% of those who attempted the question scored about half of the
marks allocated to the question.
Candidates‟ understanding of Part „C‟ of the question was however discouraging.
Adequate preparation is advised to help candidates in future examinations.

SOULTION 7
INTERNAL MEMORANDUM
To: The Managing Director
From: Performance Management Expert
Date: November 16, 2016
Subject: PREVENTING COMPANY‟S DATA FROM ACTIVITIES OF HACKERS AND

VIRUS
Various measures might help to prevent hacking into a system, or to detect when a
hacker has gained unauthorized access. The following controls can be used to
prevent or detect hacking:
a. Physical security measures to prevent unauthorized access to the computer

terminals of the Company;
b. The use of passwords;
c. The encryption of products that are sent via internet;
d. Uses of audit trails, so that transactions can be traced through the system
when hacking is suspected;
e. Network logs, whereby network servers record attempts to gain access to the
system;
f. Use of firewalls;
g. Data masking; and
h. Data scrambling.
VIRUS
Viruses are computer softwares that are designed to deliberately corrupt computer
systems. Virus can be introduced into a system on a file containing the virus. A virus
may contain:
a. In a file attachment to an e-mail; or

b. On backing storage device such as a CD.

Types of virus
The following are the commonest viruses:

a. Trojan horses: This is a type of virus that disguises itself, often hidden with
other software or files;
b. Worms: This is a corrupt data that replicates itself within the system, moving
from one file or programme to another;
c. Logic bombs: This is a virus that is designed to start working (corrupting the
files or data processing) when a certain event occurs;
d. Time bombs: This is a virus that is designed to start working (corrupting the
files or data processing) on a certain date;
e. Denial of service: This virus renders the system unusable by legitimate users;
and
f. Trap doors.
The following steps can be taken to guide against virus attack:

a. Installation of anti-virus software which must be updated yearly;
b. Restriction on the use of floppy disks, re-writeable CDs and USB storage
medias;
c. Firewall software and hardware should be used to prevent unauthorized access
from the internet;
d. Staff should be encouraged to delete suspicious e-mails without opening any
attachments; and
e. There should be procedures, communicated to all staff, for reporting suspicion
of any virus as soon as they appear.
Thank you.
Signature
NAME

MARKING GUIDE
MARKS MARKS
Report Outline (Header) 1 1
How to prevent Hacking 6 6
Types of Virus 5 5
How to prevent virus attack 3 3
15
EXAMINER‟S REPORT
The question tests candidates‟ understanding of online business challenges as they relate to
hacking.
Candidates‟ performance in this question was high as over 60% of those who attempted the
question did credibly well.
The commonest pitfall was non-provision of the answers in a report format.
It is advised that candidates prepare themselves properly using the Institute‟s Pathfinders,
ICAN Study Text and other relevant textbooks for future examinations.

SKILLS LEVEL EXAMINATION – MAY 2017
INSTRUCTION: YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN
QUESTIONS IN THIS PAPER

QUESTION 1
Kardex Industries Nigeria Limited is a subsidiary of a large manufacturing

company based in China (Kardex International). The company manufactures
washing machines, table gas cookers and refrigerators which are being sold by the
subsidiary in Nigeria. Demand for the company‟s product is growing especially
among the growing middle-class population until recently when the company
started experiencing some hiccups as a result of the economic recession in the
country and stiff competition.
The company is currently selling only two products in Nigeria (both are types of
washing machine). These are:
- A basic product (Wash Up) with functions which are comparable with the
existing local competitors‟ products and;
- A premium product (Perfect Wash) which has functions and features similar to
Kardex‟s products in developed countries.
The competitive environment in Nigeria is changing rapidly. Apart from Kardex,

two other companies are offering similar machines in the market. One of these has
a factory in Nigeria and is producing machines similar to “Wash Up” to compete
directly with Kardex. The government of Nigeria has supported this new entrant
with tax holiday, as its product has been approved as a pioneer product. The other
competitor is now considering building a manufacturing plant in Nigeria to
produce more highly specialised washing machine similar to Kardex‟s Perfect
Wash.
Kardex international‟s stated mission is to be the “leader in its industry”. The

Board of Kardex has set the following critical success factors (CSFs) for Kardex‟s
Nigerian subsidiary:
- To be the market leader;

- To maximise profits and shareholders‟ wealth within acceptable risk; and
- To maintain the brand image of Kardex as top of the range product.
The Board is considering using the following key performance indicators (KPIs) for
each product: total profit, average sales price per unit, contribution per unit,
market share, margin of safety, return on capital employed and total quality costs.
69

You have just been employed by Kardex as its Performance Management Controller
and the Board of Kardex International has requested that you provide calculations
which will show the various indicators suggested above and then assess how the
key performance indicators will address issues in the external environment in
Nigeria. The data given in Appendix 1 below has been collated for your use.
Appendix 1
Nigerian subsidiary‟s information for the most recent financial year:
Wash Up Perfect Wash
Variable costs N per unit N per unit
Materials 9,000 12,000
Labour 6,000 8,000
Overheads 4,000 5,000
Distribution costs 4,500 4,500
Quality costs 2,000 3,000
Total
Fixed costs N‟m N‟m N‟m
Administration costs 1,800 1,800 3,600
Distribution costs 1,600 1,600 3,200
Quality costs 600 600 1,200
Marketing costs 8,000 8,000 16,000
Other data N‟m N‟m N‟m

Revenue 44,800 30,800 75,600
Capital employed 32,600 25,000 57,600
Units Units Units

Total market size (millions) 9.33 1.33 10.66
Kardex‟s sales (millions) 1.12 0.44 1.56
Note:
The allocations of fixed costs are based on a recent activity-based costing exercise
and are considered to be valid.
Required:
a. Provide calculations which show the key performance indicators (KPIs)
suggested by the Board, for the performance assessment of Kardex Industries
Nigeria Limited. (20 Marks)
b. Use PEST analysis to identify issues in the company‟s external environment
and then comment on whether the suggested KPIs address these issues.
(10 Marks)
(Total 30marks)
70

SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THE THREE
QUESTION 2
Sadet Nigeria Limited assembles three types of motorcycle in the same factory; the
50cc Prelude, the 100cc Roadmaster and the 150cc Roadstar. It sells the
motorcycles throughout the West African Coast. In response to market pressure,
Sadet has invested heavily in new manufacturing technology in recent years and,
as a result, has significantly reduced the size of its workforce.
Historically, the company has allocated all overhead costs using total direct labour
hours, but is now considering introducing activity-based costing (ABC). Sadet‟s
Accountant has produced the following analysis.
Types of Annual Output Annual direct Selling price Raw Material
Motorcycles (Units) labour hours (N/ unit) cost (N/ unit)
Prelude 5,000 500,000 25,000 4,000

Roadmaster 4,000 550,000 30,000 6,000
Roadstar 1,400 200,000 40,000 9,000
The three cost drivers that generate overheads are:

Deliveries to retailers - the number of deliveries of motorcycles to retail
showrooms.
Set – ups - the number of times the assembly line process is
re-set to accommodate the production run of a
different type of motorcycle
Purchase orders - the number of purchase orders.
The annual cost driver volumes relating to each activity and each type of motorcycle
are as follows:
Number of deliveries Number of Number of
to retailers set-ups purchase orders
Prelude 200 70 400
Roadmaster 160 80 300
Roadstar 140 50 100
The annual overhead costs relating to these activities are as follows:
N‟000
Deliveries to retailers 24,000
Set –ups costs 60,000
Purchase orders 36,000
Direct labour is paid at N50 per hour. The company holds no inventories.
71

a. Calculate the total profit on each of Sadet‟s three types of product, using the
following methods to absorb overheads:
i. The existing method based upon labour hours.
ii. Activity-based costing. (14 marks)
b. Write a report to the Directors of Sadet, as a Management Accountant,

evaluating the labour hours and the activity- based costing methods in the
circumstances of Sadet.
Refer to your calculations in requirement (a) above, where appropriate.
(6 marks)
(Total 20 marks)
QUESTION 3
Tadex Nigeria Limited is an engineering company that specialises in building
engines for grinding machines. One of the components for building these engines
is sourced from Toka Nigeria Limited, a company in the same group with Tadex
Nigeria Limited. Each component is being transferred to Tadex, taking account of
Toka‟s opportunity cost of the component. The variable cost of Toka is N280 per
component.
A prospective customer has approached Tadex to submit a quotation for a contract

to build a new engine. This is a new customer to Tadex but directors of Tadex are
keen on winning this contract as they believe that this may lead to more contracts
in the future. As a result of this, they intend pricing the contract using relevant
costs.
The following costs data is given in respect of the contract:
(i) The production director of Tadex is on an annual salary equivalent to N15,000
per 8 - hour day;
(ii) The materials needed for the contract are:
- 110 square metres of material A. This material is normally being used by
Tadex and it has 200 square metres in stock. These were bought at a cost
of N120 per square metre. They have resale value of N105 per square
metre and replacement cost is N125 per square metre.
- 30 litres of material B. This material has to be purchased specially for
this contract and the minimum order quantity from the supplier is 40
litres at a cost of N90 per litre. Tadex has no use for this material after
the contract is executed. Sixty (60) components will be purchased from
Toka at a purchase price of N500 per component.
72

(iii) A total of 240 direct labour hours will be required. The current wage rate for
the grade of labour that will work on the contract is N110 per hour. Tadex
currently has 75 direct labour hours of spare capacity for this grade and are
being paid under collective wages agreement. The additional hours required
will be sourced by either
- overtime at a cost of N140 per hour; or
- employment of temporary staff at a cost of N120 per hour.
But this temporary staff, because they are not experienced, will require
10 hour supervision by existing supervisor who would be paid overtime
at a rate of N180 per hour for this contract.
(iv) 25 machine hours will be required. The machine to be used is already leased
at a weekly lease rental of N6,000. It has 40 hours per week capacity. The
machine has sufficient available capacity to complete the contract. The
variable cost of running the machine is N70 per hour.
(v) The company‟s fixed overhead absorption rate is N200 per direct labour hour.

a. Calculate the relevant cost of building the new engine and explain why you
have included or excluded any costs in your calculations. (15 marks)
b. Discuss the factors that would be considered by Tokas to determine the
opportunity cost of the component. (5 marks)
(Total 20marks)
QUESTION 4
Debens Nigeria Limited‟s Job costing system has two direct cost categories: direct
materials and direct manufacturing labour. Manufacturing overhead (both
variable and fixed) is allocated to products on the basis of standard direct
manufacturing labour hours (SDMLH). At the beginning of 2016, Debens adopted
the following standards for its manufacturing costs and sales:
S/N Cost per output
Cost details Input unit
N
1 Direct Materials 3 kg at N500 1,500
2 Direct Manufacturing Labour 5 hours at N200 1,000
3 Manufacturing Overhead:
Variable N120 per SDMLH 600
Fixed N160 per SDMLH 800
4 Unit Manufacturing cost 3,900
5 Standard Profit margin 1,300
6 Standard Selling Price 5,200
73

The denominator level for total manufacturing overhead per month in 2016 is
40,000 direct manufacturing labour hour. Debens flexible budget for January 2016
was based on this denominator level. The records for January indicate the
following:
 Direct materials purchased 25,000kg at N520 per kg

 Direct materials used 23,100kg
 Direct manufacturing labour 40,100 hours at N190 per hour
 Total actual manufacturing overhead N12,000,000
(Fixed and Variable )
 Actual Production/Sales 7,800 output units
 Actual Selling price N5,350
The proportion of the actual variable and fixed overhead costs is the same with in
the standard.
Required:
a. Calculate the budgeted profit of the company for the month of January 2016?
(2 Marks)
b. Calculate the following for the month of January 2016:
i. Direct material variances.
ii. Direct manufacturing labour variances
iii. Variable manufacturing overhead variances.
iv. Fixed manufacturing overhead variances.
v. Sales variances. (10 marks)
c. Prepare a statement reconciling the actual profit with the budgeted profit.
(8 marks)
(Total 20 Marks)
SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THE THREE
QUESTION 5
A systems analyst uses different methods to gather information required for the
system analysis phase of any project.
You are required to discuss these methods showing their advantages and
disadvantages. (Total 15 Marks)
74

QUESTION 6
AL Limited is a manufacturing company based in Aba. One of its most successful

products is Hadtone, a mortar colouring agent. Hadtone is made using a single
processing machine which mixes the raw ingredients and dispenses the completed
product into five-litre cartons.
A five-litre carton of Hadtone sells for ₦300 and estimated maximum annual
demand at this price is 300,000 cartons. At this level of demand, AL can justify the
operation of only one processing machine, which AL currently replaces every three
years, although the processing machine has a productive life of 4 years.
In the first year of its life, the processing machine has a productive capacity in line
with the maximum annual demand for the product, but each year thereafter this
productive capacity falls at a rate of 15,000 units per annum. Annual maintenance
costs in the first year of operating the processing machine are estimated at
₦300,000. Thereafter, the directors expect the annual maintenance costs to increase
by ₦50,000 per annum regardless of the actual number of five-litre cartons
produced. AL incurs variable costs, excluding depreciation and maintenance costs,
of ₦200 in producing each five-litre carton. AL provides for depreciation on all its
non-current assets using the straight-line method.
If AL were to dispose of the processing machine after one year, the directors
estimate sale proceeds of ₦8,000,000, but these could fall by ₦3,000,000 per
annum in each of the following two years. Assume the processing machine has
three years life span.
Following a recent increase in the cost of a processing machine to ₦12,000,000,

AL‟s Directors are reconsidering their current replacement policy with a view to
maximising the present value of the company‟s cash-flows. It can be assumed that
all revenues and costs are received or paid in cash at the end of the year to which
they relate, with the exception of the initial price of the processing machine which
is paid in full at the time of purchase.
Required:
a. Assuming that the processing machine is used to maximum capacity, and
showing all your supporting calculations, advise AL‟s directors how often they
should replace the processing machine. Assume cost of capital of 10%.
(12 marks)
b. Itemise the major assumptions made in your calculations above. (3 marks)
(Total 15 marks)
75

QUESTION 7
Adebel Nigeria Limited manufactures motor cycles. The company is split into two
divisions: the assembling division (division A) and the engine division (division E).
Division E supplies engine to both Division A and to external customers. The two
divisions run as autonomously as possible, subject to the group‟s policy that
Division E must make internal sales first before selling outside the group; and that
Division A must always buy its engine from Division E. However, this company
policy, together with the transfer price which Division E charges Division A, is
currently under review.
Details of the two divisions are given below:
Division A
Division A budget for the coming year shows that 45,000 engines will be needed.
An external supplier could supply these to Division A for N80,000 each.
Division E
Division E has the capacity to produce a total of 70,000 engines per year. Details of
Division E‟s budget, which has just been prepared for the forth coming year, are as
follows:
Budgeted sales volume (units) 70,000
Selling price per engine for external sales of engine N85,000
Variable costs per unit for external sales of engine N77,000
The variable cost per unit for engines sold to Division A is N3,000 per unit less due
to cost saving on distribution and packaging. Maximum external demand for the
engines is 35,000 units per year.
Required:
a. Recommend the transfer price or prices at which these internal sales should
take place. (5 marks)
b. Assuming that the group‟s current policy could be changed, advise, using
suitable calculations, the number of engines which Division E should supply to
Division A in order to maximise group profits. All relevant workings must be
shown. (5 marks)
c. Discuss TWO main performance measurements that are appropriate for

evaluating divisional performance of an autonomous division that operates as
an investment centre. (5 marks)
(Total 15marks)
76

Formulae
Learning curve
Y = axb
where Y = cumulative average time per unit to produce x units
Demand curve
P = a – bQ
𝑐𝑕𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
𝑏=
𝑐𝑕𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦
MR = a – 2bQ
Y= a + bX or Y - Y = b(x – X)
where:
𝐶𝑜𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 (𝑋𝑌) 𝑛 𝑋𝑌 − ( 𝑋)( 𝑌)

𝑏= = 2
𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 (𝑋) 𝑛 𝑋 − 𝑋 2
 
a  Yb X
𝑌 = 𝑛a + 𝑏 𝑋
𝑋𝑌 = a 𝑋+𝑏 𝑋2
77

Annuity Table
1 − (1 + 𝑟)𝑛
𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑛 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 𝑜𝑓 1 =
𝑟

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15
78

79

SOLUTION 1
SECTION A:
QUESTION 1 KARDEX INDUSTRIES NIGERIA LIMITED
a. Calculation of the key performance indicators
(i) Product Wash Perfect Total

Up Wash
N‟M N‟M N‟M
Revenue 44,800 30,800 75,600
Less costs:
Total Variable costs 28,560 14,300 42,860
Total Fixed costs 12,000 12,000 24,000
40,560 26,300 66,860
Total profit 4,240 4,500 8,740
(ii) Product Wash Perfect

Up Wash
N‟M N‟M
Revenue (N‟M) 44,800 30,800
Sale in Units (Millions) 1.12 0.44

Sales price per unit (N) 40,000 70,000
(iii) Product Wash Perfect

Up Wash
N‟M N‟M
Sales per unit 40,000 70,000
Less variable cost per unit 25,500 32,500
Contribution per unit 14,500 37,500
80

𝑠𝑎𝑙𝑒𝑠 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠
(iv) 𝑀𝑎𝑟𝑘𝑒𝑡 𝑠𝑕𝑎𝑟𝑒 = x 100%
𝑚𝑎𝑟𝑘𝑒𝑡 𝑠𝑖𝑧𝑒 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠
Product Wash Up Perfect Wash Total

N‟M N‟M N‟M
Total market size (Millions) 9.33 1.33 10.66

Kardex‟s sales (Millions) 1.12 0.44 1.56
Market shares (%) 12% 33% 15%
(v) Margin of Safety = (Actual sales – Sales at BEP)
Product Wash Up Perfect Wash
Sales in Units (millions) 1.12 0.44

Break-even sales units (millions) 0.83 0.32
Margin of safety (million units) 0.29 0.12
Sales price per unit (N) 40,000 70,000
Margin of safety (N‟M) 11,697 8,400
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
(vi) Return on Capital Employed (ROCE) = 𝑥 100%
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑
Total profit (N‟M) 4,240 4,500 8,740

Capital employed (N‟M) 32,600 25,000 57,600
Return on capital employed (%) 12 18 15
(vii) Total quality costs

N‟M N‟M N‟M
Total variable costs 2.240 1.320 3,560

Total fixed costs 600 600 1,200
Total quality costs 2,840 1,920 4,760
81

b. PEST Analysis of Kardex Industries
The issues on the external environment can be identified using PEST, which
stands for political, economic, socio-cultural and technology.
The political environment is characterized by government actions which
include the giving of tax holidays to a competitor to set up manufacturing
operations in the country. This is not Kardex‟s mode of operation which is to
manufacture outside Nigeria and only to undertake selling operations within
the country. None of the KPIs directly addresses this issue which could lead
to increased shareholders‟ wealth and increased available profit to develop
the competitor‟s products or government action against Kardex by increasing
import tariffs.
The economic environment is characterised by growth as the population of

the middle-class is increasing although economic recession is creating some
problem. There is no measure of this included in the KPIs. There is no
measure of competitors‟ activity, although market share provided some
measures of the relative strength of Kardex and its competitors. It is noticed
that none of the KPIs measures current rates of growth in their area.
Furthermore, the KPIs do not reflect the foreign exchange risk which Kardex
could encounter in repatriating profits from the country.
The socio-cultural factors include demographic trends and changes in

customers‟ taste. The increasing middle-class population mentioned will be
a factor that is likely to drive the consumers‟ taste towards the more
expensive “perfect wash” model. These would justify the large potential
growth indicated in making Plan B. There are several measures which will
bear on this area but all will require knowledge of trends, for example, the
inflation of average price per unit and consequent improvement in profit
and contribution indicators.
Technology can impact on Kardex in two ways: first, the development of new
feature for the products themselves will require continued product
development at Kardex as a whole, although it will be less relevant to the
operation in Nigeria which may not have the market for cutting–edge
technology yet. Therefore, it is appropriate that this area is not covered by
the existing KPIs; and second, new technology in manufacturing could
improve further the contribution per unit as costs are cut from the
manufacturing process by, for example, increased automation in production.
The use of contribution to measure this impact is indirect as it is also
82

influenced by the selling price, so a measure of manufacturing cost per unit
would better capture the change.
EXAMINER‟S REPORT
The question tests candidates‟ understanding of Computation of key performance

indicators (KPI) as well as PEST Analysis. About 80% of the candidates attempted the
question.
However, about 30% of them understood the subject matter and that was responsible for
the poor performance.
The commonest pitfalls were their inability to compute BEP, CSR and explain the meaning
of PEST Analysis.
Candidates are encouraged to use their ICAN Study Text when preparing for future
examinations.
MARKING GUIDE
SOLUTION 1 MARKS MARKS

(a) Key performance Indicators:
i. Total profit 4¼
ii. Average sales price per unit 2
iii. Contribution per unit 2
Iv. Market share 2¾
V. Margin of safety 4
vi. Return on capital employed 2¾
vii. Total quality costs 2
viii. Title ¼ 20
(b) Identification of PEST acronym:

P – Political ½
E – Economical ½
S - Socio-cultural ½
T – Technological ½
Explanations of the points @ 2 marks each 8 10
30
83

SOLUTION 2
a. i. Existing Method
Prelude Roadmaster Roadstar
N‟000 N‟000 N‟000
Direct labour (N350) (W1) 25,000 27,500 10,000
Materials (W2) 20,000 24,000 12,600
Overhead cost (at N96/hr) 48,000 52,800 19,200
93,000 104,300 41,800
Output (units) 5,000 4,000 1,400

Cost per unit (W4) = N18,600 N26,075 N29,857
Selling price per unit N25,000 N30,000 N40,000

Profit per unit N6,400 N3,925 N10,143
Total units produced 5,000 4,000 1,400
Total profit per product N32,000,000 N15,700,000 N14,200,200
Total profit N61,900,200
ii. Activity-Based Costing

Prelude Roadmaster Roadstar
N‟000 N‟000 N‟000
Direct labour (W1) 25,000 27,500 10,000
Materials (W2) 20,000 24,000 12,600
Overhead:
Deliveries (W5a) 9,600 7,680 6,720
Set up costs (W5a) 21,000 24,000 15,000
Purchase (W5a) 18,000 13,500 4,500
93,600 96.680 48,820
Output N93,600,000 N96,680,00 N48.820,00

5,000 4,000 1,400
Cost per unit N18,720 N24,170 N34,871
Selling Price per unit N25,000 N30,000 N40,000
Profit per unit N6,280 N5,830 N5,129
Total profit per product N31,400,000 N23,320,000 N7,180,000
Total profit N61,900,600
84

WORKINGS
1. Labour cost
Prelude = 500,000x50 = N25,000,000
Roadmaster = 550,000x50 = N27,500,000
Roadstar = 200,000x50 = N10,000,000
2. Material cost
Prelude = 5,000x4,000 = N20,000,000
Roadmaster = 4,000x6,000 = N24,000,000
Roadstar = 1,400x9,000 = N12,600,000
3. Overhead per labour hour

Total overhead cost N(24,000,000 + 60,000,000+ 36,000,000) = N120,000,000
Total labour hours (500,000 +550,000 + 200,000) = 1,250,000 hours
Overhead per labour hour = N120,000,000

1,250,000
= N96
4. Cost per unit
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 93,000,000
Prelude = = 𝑁18,600
𝑈𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 5,000
Roadmaster = = 𝑁26,075
Roadstar = = 𝑁29,857
5. Overheads
𝑂𝑣𝑒𝑟 𝑕𝑒𝑎𝑑 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑙𝑖𝑣𝑒𝑟𝑖𝑒𝑠 𝑡𝑜 𝑟𝑒𝑡𝑎𝑖𝑙𝑒𝑟𝑠 𝑁24,000,000
= N48,000
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑒𝑙𝑖𝑣𝑒𝑟𝑖𝑒𝑠 500
𝑂𝑣𝑒𝑟 𝑕𝑒𝑎𝑑 𝑐𝑜𝑠𝑡 𝑠𝑒𝑡 𝑢𝑝𝑠 𝑁60,000,000
= N300,000
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑒𝑡 𝑢𝑝𝑠 200
𝑂𝑣𝑒𝑟 𝑕𝑒𝑎𝑑 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑝𝑢𝑟𝑐 𝑕𝑎𝑠𝑒 𝑜𝑟𝑑𝑒𝑟𝑠 𝑁36,000,000

= N45,000
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑢𝑟𝑐 𝑕𝑎𝑠𝑒 𝑜𝑟𝑑𝑒𝑟𝑠 800
85

i. Deliveries overheads:
Prelude = N48,000 x 200 = N9,600,000
Roadmaster = N48,000 x 160 = N7,680,000
Roadstar = N48,000 x 140 = N6,720,000
ii. Set up overheads:

Prelude = N300,000 x 70 = N21,000,000
Roadmaster = N300,000 x 80 = N24,000,000
Roadstar = N300,000 x 50 = N15,000,000
iii. Purchase order overheads:

Prelude = N45,000 x 400 = N18,000,000
Roadmaster = N45,000 x 300 = N13,500,000
Roadstar = N45,000 x 100 = N4,500,000
b. REPORT
To: Directors - Sadet

From: Management Accountant
Subject: Labour hours and Activity-Based Cost allocation
Date: 15-05-2016
Labour hours
The use of labour hours for allocation of overheads is only appropriate where
there is a direct relationship between overheads and labour hours. This does
not appear to be so for Sadet as painted in the scenario. The traditional
method of cost allocation, such as the one based on labour hours was
developed when manufacturing operations were simple and products went
through similar operations. Also, this method was being widely used when
overhead costs were only a small proportion of total costs while direct labour
and material costs accounted for significant proportion of total costs. It
seems that Sadet has invested so much in new technology and, as a result
the labour size, has been reduced significantly. Direct labour costs now
account for a relatively small proportion of total costs while overheads make
up the highest single item. Allocation of overheads on the basis of labour
costs would tend to allocate a greater proportion of overheads to the higher
volume “Prelude” than lower volume Roadstar, ignoring the fact that lower
86

volume product may require relatively more support services. Allocation of
overheads on the basis of labour hours may therefore lead to inappropriate
decision.
Activity-Based Costing.
Activity-based costing is an attempt to overcome the problem highlighted
earlier by identifying the factors that drive the costs of an organization‟s
major activity.
The idea behind activity-based costing is that activities such as ordering,

materials handling, deliveries, set up etc, drive costs. Costs are therefore,
assigned to a product on the basis of the product‟s consumption of such
activities.
It is also argued by the proponents of activity-based costing that, it is

activities that generate costs and not labour hours. The accuracy of any
activity-based costing system will depend on the appropriateness of the
activities as cost drivers. Each cost driver selected should be appropriate to
the overheads to which it relates. There should be a direct and proportionate
relationship between the relevant overhead costs and the cost driver
selected. The labour hours overhead costs allocation system and activity-
based costing result in different profit figures. The profit per unit of
“Roadstar” significantly reduced from N10,143 to N5,129 while that of
“Prelude” increased from N6,400 to N6,480 per unit.
The reason for this is that, although the “Roadstar” uses about 50% more
labour hours per unit than the “Prelude”, its low output volume of only 1,400
units (compared with 5,000 units of “Prelude”) means that a proportionately
lower amount of overheads is absorbed.
I hope this will assist in your further deliberations on the matters.
Thank you.
Signed
Management Accountant
87

EXAMINER‟S REPORT
This question tests candidates understanding of activity-based costing as a method
of overhead absorption.
About 60% of them attempted the question and the performance was fair as the
commonest pitfall noticed was poor presentation.
Candidates are advised to make better use of ICAN Study Text and other high
quality Study materials.
MARKING GUIDE

(a) Heading for each product 3 x 1/3 = 1
Calculation of sales value 3 x 1/3 = 1
Calculation of material costs 3 x 1/3 = 1
Calculation of labour costs 3 x 1/3 = 1 4
Appointment of overhead under existing method (Labour)

Delivery to retailers 3 x 1/3 = 1
Set-up costs 3 x 1/3 = 1
Purchase orders 3 x 1/3 = 1
Total overheads 3 x 1/3 = 1
Profit 3 x 1/3 = 1 5
Appointment of overhead under activity based costing (ABC)

Deliveries to retailers 3 x 1/3 = 1
Set-up costs 3 x 1/3 = 1
Purchase orders 3 x 1/3 = 1
Total overheads 3 x 1/3 = 1
Profit 3 x 1/3 = 1
5
(b) Heading/layout of the report

4 points at ½ mark 2
Any 4 points in the report at 1 mark each 4

6
20
88

SOLUTION 3
a. Relevant cost
Note N
Production Director‟s salary (i) -
Material A (ii) 13,750
Material B (iii) 3,600
Components (iv) 30,000
Direct labour (v) 21,600
Machine hours (vi) 1,750
Fixed overhead (vii) ___-___
Total relevant cost 70,700
Notes: Explaining why a cost is included or excluded:

i. The Production Director is paid an annual salary and therefore there is no
incremental cost to Tadex.
ii. Material A is in regular use by Tadex and consequently its relevant value is
its replacement cost. The historical cost is irrelevant because it is a past cost
and the resale value is not relevant since Tadex is not going to sell it as the
material is in regular use and therefore must be replaced.
iii. Material B is to be purchased for the contract, therefore, its purchase cost is
relevant. Although 30 liters are required for the work, the minimum order
quantity is 40 liters and since Tadex has no other use for this material and
there is no indication that the unused 10 liters can be sold, the full cost of
purchasing the 40 liters is the relevant cost.
iv. The components are to be purchased from Tokas at a cost of N500 each. This
is a relevant cost because it is future expenditure that will be incurred as a
result of the work being undertaken.
v. Since 75 hours of spare capacity are available which have a zero relevant
cost, the relevant cost relates only to the other 165 hours. Tadex has two
choices:
- Either to use its existing staff and pay them overtime at N140 per hour
which is a total cost of N23,100; or
- To engage temporary staff which attracts a cost of N19,800 plus
supervision cost of N1,800 which is equal to N21,600.
89

The relevant cost is the cheaper of these alternatives which is to use the
temporary staff.
vi. The machine is currently being leased and it has spare capacity so it will
either stand idle or be used for this work. The lease cost will be incurred
regardless, so the only relevant cost is the incremental running cost of N70
per hour.
vii. Fixed overhead costs are incurred whether the contract is accepted or not, so
it is not a relevant cost.
(b) The factors that should be considered by Tokas to determine the opportunity
cost of the components are its available capacity and the extent to which it
has unsatisfied demands for its products.
If Tokas has spare capacity, then the components can be produced for Tadex
using the capacity that is available. There is no opportunity cost so the
relevant cost to the group would be the same as the relevant cost to Tokas
which is the variable cost. If Tokas does not have sufficient spare capacity to
produce all the components demanded by Tadex, then the extent that the
internal sales are utilizing capacity that would have been used to produce
more units for external customers there is an opportunity cost to the group
equal to the contribution forgone by not making those external sales.
Once there is no further unsatisfied external demand, then the opportunity

cost reverts to zero because there is no loss of contribution.
i. When a cost-based transfer pricing policy is used, it is usual for

it to be on a cost-plus basis so that the “plus” provides an incentive to
the supplier to make the internal sale. If it is on a cost basis, then
there is no profit to the supplier, nor is there any incentive for them to
be efficient because the cost (and therefore the inefficiency) is simply
passed on the buyer. When a cost-plus transfer price is used, then the
efficiency issue is made worse as illustrated by the following
examples:
Assume that the transfer price is actual cost + 25%.

If the cost to the supplier is N200 the transfer price would be N250
(i.e. N200 + 25%) and thus the supplier would record a profit of N50
from the internal sale.
90

However, if the supplier were to become inefficient so that the cost of
the item increases to N240, then the new transfer price would be
N300 (i.e. N240 + 25%) with the result that the new supplier‟s profit
would be N60.
This means that the supplier‟s profit increases as a result of the

supplier‟s inefficiency, and therefore, the transfer pricing policy
encourages such inefficiency to occur.
ii. If standard costs are used instead of actual costs, then the problem is
solved provided the standard that is used is fair to both the supplier
and the buyer.
Firstly, it is important that both the supplier and buyer agree on the
standard cost for the item as being a fair standard. This may be
difficult to achieve without the intervention of head office as it may be
affected by the negotiating skills of the managers of the respective
responsibility centres.
Secondly, there is the need to review the standard in the light of

changing conditions that are beyond the control of the supplier. It
would not be fair for the transfer price to be based on an out-of-date
standard if the reason it has become out-of-date is outside the control
of the supplier. This would require a renegotiation of the standard.
The use of the example given and assuming that the standard cost of
the item is N200, means that initially the supplier was achieving the
standard cost and there would be no change in the transfer price.
However, if the supplier was to become inefficient, the transfer price
would remain N250 and so, the supplier‟s profit reduces to N10.
Conversely, if the supplier was to become more efficient and produced
the item for N180, then his profit would increase to N70.
This would seem to solve the problem identified in (i) above as it

encourages the supplier to be efficient.
91

EXAMINER‟S REPORT
The question tests candidates understanding of relevant costing in project quotation.
Candidates‟ understanding of the concept and requirements of the question was average,
as over 50% attempted it. The pass rate was about 40%.
The commonest pitfall was candidates poor understanding of factors that need to be taken
into consideration in determining opportunity costs.
Candidates need to prepare better for future examination using ICAN Study Text and other
relevant text.
MARKING GUIDE
MARKS MARKS
SOLUTION 3
(a) Calculation of relevant costs 3
Explanation why a cost is included or excluded 7 10
(b) Discussion on factors to be considered before determining
opportunity cost
4
(c) Performance measurement problem where there is no external 3
market
Explanation on how standard costs can solve the problem 3 6
20
92

SOLUTION 4
Debens Nig Ltd. - Standard costing and Variance Analysis
a. Budgeted Profit = Budgeted sales - Unit Std Cost x budgeted Quantity.

N5,200 x 40,000
5
= N5,200 x 8,000 - N3,900 x 8,000
= N41,600,000 - N3,900 x 8000 = N10,400,000
b. Schedule of total manufacturing costs

Cost Element Actual Unit Total Cost
Production Standard N
Cost(N)
Direct material 7,800 1,500 11,700,000
Direct manufacturing Labour 7,800 1,000 7,800,000
Variable Manufacturing Overhead 7,800 600 4,680,000
Fixed Manufacturing Overhead 7,800 800 6,240,000
Total manufacturing Overhead 30,420,000
i. Direct material Variances:

Direct Material Price = (Actual Qty Purchased x Actual purchase price) less (Actual
Quantity Purchased x Std Purchased price) = (25,000 x N520) – (25,000 x N500) =
N500,000(U)
Direct Material Usage variance
= (Actual Quantity Used x Standard Price) - (Standard cost of actual production)
= (N500 x 23,100) - (N1,500 x 7,800) = (N11,550,000 – N11,700,000) = N150,000 (F)
ii. Direct Manufacturing Labour Variances:

Direct Labour rate = (Actual rate x Actual Hours) - (Standard rate x actual Hours ) =
(N190 x 40,100) – (40,100 x N200) = N7,619,000 – N8,020,000 = N401,000 (F)
Direct Labour efficiency:
= (Actual hours x Standard labour rate) – (Standard labour rate per unit x actual
production) = (40100 x N200) - (N1,000 x 7,800) = (N8,020,000 - N7,800,000) =
N220,000(U)
iii. Manufacturing Overhead variances:

Manufacturing Overhead rate variance = (Actual overhead rate x Actual labour Hours) –
(Standard overhead rate x Actual Direct Labour Hours) = (N12,000,000 – (N280 x
40100 ) = (N12,000,000 – N11,228,000) = N772,000(U).
Manufacturing overhead efficiency variance = Standard overhead rate x Actual Hours -
Standard overhead rate per unit x actual production = (N280 x 40100) - (N 1400 x 7800)
= N11,228,000 – N10,920,000 = N308,000(U)
93

iv. This is made up of:
Variable manufacturing overhead efficiency variance =
(Standard Cost of Variable Manufacturing Overhead – Standard Cost of variable

manufacturing overhead at Actual Production)
= (40,100 x N120) – (N600 x 7,800)
= (N4,812,000 – N4,680,000)
= N132,000(U)
- Fixed Manufacturing Overhead efficiency Variance =
(Standard cost of Fixed manufacturing overhead - Standard Cost of Fixed

Manufacturing Overhead at actual production)
= (40,100 x N160) – (7,800 x N800) = N6,416,000 – N6,240,000 = N176,000(U)
v. Sales Price variance =

= (Actual selling Price x Actual Sales Quantity) - (Standard selling Price – Actual Quantity
sold) = (N5,350 x 7,800) - (N5,200 x 7,800)
= N41,730,000 - N40,560,000 = N1,170,000(F)
Sales Volume Variance =
(Actual Sales Quantity x Standard selling price) – (Budgeted sales quantity x Standard
selling Price) = (N5,200 x 7800) - (N5,200 x 8000) = (N40,560,000 – N41,600,000)
= N1,040,000 (U)
Actual Volume Margin variance = Standard Profit Margin x Sales Volume variance
Standard Selling Price
= 1300 x N1,040,000 = N260,000 (U)

1 N5,200
Calculation of variances
(i) Material variances

 Price variance
= AQ purchased (SP –AP)
= 25,000 kg (N500-N520) = N500,000 (A)
 Usage Variance
= SP(SQ-AQ used)
= N500 {(7800 x 3 kg) – 23,100 kg} = N150,000 (F)
94

(ii) Labour Variances
 Rate Variance
= AH (SR –AR)
= 40,100 hrs (N200 – N190) = N401,000 (F)
 Efficiency Variance
= SR (SH –AH)
= N200 (7,800 X 5 hrs) – 40,100 = N220,000 (A)
(iii) Variable overhead Variances

Note: The total actual manufacturing overhead is divided into variable and
fixed as follows:
600
- Variable = x N12𝑚 = N5,142,857
600+800
600
- Fixed = x N12𝑚 = N6,857,143
600+800
 Expenditure variance
= AH(SR – AR)
𝑁5,142,857
= 40,100 hrs N120 –( ) = N330,857(A)
40,100
Efficiency Variance
= SR (SH – AH)
= N120 (7,800 x 5 hrs) – 40,100 = N132,000 (A)
(iv) Fixed Overhead Variances

 Expenditure variance
= Budgeted FOH –Actual FOH
= (N800 x 8000) – N6,857,143 = N457,143 (A)
 Volume variance
= SR (SH –BH)
= N160 (7,800 x 5 hrs) - (8,000 x 5 hrs = 160,000 (A)
(v) Sales Variances

 Price Variance
= AQ sold (AP – SP)
= 7,800 (N5,350 – N5,200)
= N1,170,000 (F)
95

 Sales Volume Variance
= STD Profit (AQ –BQ)
= N1,300 (7,800 – 8,000) = N260,000(A)
c.
(i) Schedule of Actual Profit for January 2016
Cost Element Actual Unit Selling Total Total
Quantity/ Price/Unit N N
Hours Actual
Cost(N)
Actual sales Revenue 7800 units 5,350 41,730,000
Less:
Direct material 25000kgs 520 13,000,000
Less: closing stock of raw
materials at Standard cost 1900kg 500 (950,000) 12,050,000
Direct manufacturing Labour 40100hrs 190 N7,619,000
Total Manufacturing Overhead 40100hrs N12,000,000
Total cost N31,669,000
Actual Profit N10.061,000
(ii)
N N N
Reconciliation of Budgeted Profit with Actual
Profit
Budgeted Profit = 10,400,000
Add: Sales Variances:
Sales price variance 1,170,000
Sales Volume Margin Variance (260,000) 910,000
Standard Profit 11,310,000
Add/less Cost Variances Add Less
Material Price variance 500,000
Material usage Variance 150,000 -
Labour Rate variance 401,000 -
Labour Efficiency variance - 220,000
Manufacturing Overhead rate variance - 772,000
Manufacturing Overhead efficiency - 308,000
Variance
Total variances 551,000(F) 1,800,000(U) (1,249.000)
Actual Profit 10,061,000
NOTE:
Variable Manufacturing overhead efficiency variance - N132,000(U)

Fixed Manufacturing overhead efficiency variance - N176,000(U)
N308,000(U)
96

EXAMINER‟S REPORT
The question tests candidate‟s knowledge of Standard Costing, Variance Computation and
reconciliation.
Candidates‟ understanding of the question was average even though over 80% attempted
it, the pass rate was about 40%. Commonest pitfall noticed was their inability to reconcile
budgeted profit with Actual Profit.
Candidates are advised to use ICAN Study Text and other relevant text material.
MARKING GUIDE
SOLUTION 4
MARKS MARKS
(a) Computation of budged profit 2
(b) Calculation of:
i. Direct material variance 2
ii. Director manufacturing labour variance 2
iii. Manufacturing overhead variance 4
iv. Sales variances 2 10
(c) i. Schedule of actual profit for January 2016 2
ii. Reconciliation of Budgeted profit with Actual

profit 6 8
20
97

SOLUTION 5
The following table provides an overview of the basic methods for data collection as well
as their advantages and disadvantages.
SN Method Advantages Disadvantages

1 Observation is a systematic (i) Collect data where and (i) Susceptible to observer
data collection approach. when an event or activity bias - (Hawthorne effect
Researchers use all of their is occurring where people usually
senses to examine people in (ii) Does not rely on people‟s perform better when they
natural settings or naturally willingness to provide know they are being
occurring situations. information observed).
(iii) Directly see what people (ii) Does not increase
do rather than relying on understanding of why
what they say they do people behave the way
they do
2 Interview – Verbal (i) Useful for gaining insight (i) Susceptible to interview
conversation between two and context into a topic bias
people with the objective of
collecting relevant (ii) Allows respondents to (ii) Time consuming and
information. describe what is expensive compared to
important to them other data collection
methods
(iii) Useful for gathering
quotes and stories (iii) May seem intrusive to
the respondent
3 Focus Group is a small, but Quick and relatively easy to (i) Susceptible to facilitator
demographically diverse set up bias
group of people whose (ii) Discussion can be
reactions are studied. Group dynamics can provide dominated or sidetracked
useful information that by a few individuals
individual data collection (iii)Data analysis is time
does not provide consuming and needs to
be well planned in
Is useful in gaining insight advance
into a topic that may be more
difficult to gather information (iv) Does not provide valid
through other data collection information at the
methods individual level
(v) The information is not

representative of other
groups
4 Survey and Questionnaire (i) Administration is (i) Survey respondents may
consisting of a series of comparatively inexpensive not complete the survey
questions and other prompts and easy even when resulting in low response
for the purpose of gathering gathering data from large rates
information from respondents. numbers of people spread
over wide geographic area (ii) Items may not have the
same meaning to all
(ii) Reduces chance of respondents
evaluator bias because the
same questions are asked (iii) Size and diversity of
of all respondents sample will be limited by
people‟s ability to read
98

SN Method Advantages Disadvantages
(iii) Many people are familiar
with surveys (iv) Given lack of contact with
respondent, never know who
(iv) Some people feel more really completed the survey
comfortable responding
to a survey than (v) Unable to probe for
participating in an additional details
interview
(vi) Good survey questions
(v) Tabulation of closed- are difficult to write and they
ended responses is an take considerable time to
easy and straightforward develop and own
process
5 Experimental Method: This (i) Experimentation normally (i) May suffer lower levels
involves the testing of a involves the testing of a of reliable complex and
hypothesis about the hypothesis about the be difficult to carry out.
relationship between an relationship between an
independent variable and independent variable (ii) Sometimes the basis of
dependant variable (cause)and a dependent the experiment may not
variable (effect). reflect realities.
(ii) Experiments are usually (iii) Can only apply under

set up so that the scientist given conditions and such
controls the introduction of conditions may not add up
possible independent
variables.
6 Town Hall Meetings and Other (i) Can gather large amount of (i) Organizing the event
large group events – used to data at one time. takes time and resources
gather large amount of data
at one time, during the (ii)Allows respondents to (ii) Definitely need to have
congregation of relevant describe the issues that are a draw to get people to
respondents important to them. attend in the form of
incentives.
(iii) Provides a venue where
people can build on each (iii) Need to have access to
others‟ knowledge people with good
facilitation skills.
(iv)Need to have “ducks in

a row” to ensure
attendance at event.
7 Case studies are indepth (i)Fully depicts people‟s (i) Usually quite time
investigations of a single experience in program input, consuming to collect
person, group, events or process, and results. information, organize and
community. analyze it.
(ii) Powerful way of portraying
program to outsiders. (ii) Represents depth of
information rather
than breadth.
8 Document Review: Data (i) Relatively inexpensive. (i) Information may be in-
collected from documents, (ii)Good source of information. applicable.
journals and reports. (ii) Could be time biased.
(iii) Provide authenticated data.
99

EXAMINER‟S REPORT
This question demands candidates‟ understanding of the different methods of gathering

information needs of systems analyst as well as their advantages and disadvantages.
Candidates understanding of the question was poor. However, over 60% attempted the
question but the pass rate was about 15%.
The commonest pitfall was candidates‟ lack of adequate use of the ICAN Study Text where
this topic was well dealt with. Candidates are advised to regularly and diligently use ICAN
Study Text to ensure better performance in future examinations.
MARKING GUIDE
Five discussion points at 1 mark each 5

One advantage for each of the five selected methods at
1 mark each 5
One disadvantage for each of the five selected methods at 1 mark
each 5
15
100

SOLUTION 6
(a)
i.
Year 1 2 3 4
Maximum capacity (units) 300,000 285,000 270,000 255,000
₦‟000 ₦‟000 ₦‟000 ₦‟000
Annual contribution at ₦100 30,000 28,500 27,000 25,500
ii. Where AEV = Annual Equivalent Value

Option 1: Replace every year
Year 0 1
₦‟000 ₦‟000
Outlay (12,000)
Contribution - 30,000
Scrap value - 8,000
Maintenance costs - (300)
NCF (12,000) 37,700
PVF at 10%
PV 1 0.909
(12,000) 34,269
NPV = ₦22,269,000
AEV = ₦22,269,000/0.909 = ₦24,498,350
iii. Option 2 – Replace every 2 years

Year 0 1 2
₦‟000 ₦‟000 ₦‟000
Outlay (12,000)
Contribution - 30,000 28,500
Scrap value - - 5,000
Maintenance costs - (300) (350)
NCF (12,000) 29,700 33,150
PVF at 10% 1 0.909 0.826
PV (12,000) 26,997 27,382
NPV = ₦42,379,000
AEV = ₦42,379,000/1.736 = ₦24,411,866
101

(iii) Option 3 – Replace every 3 years
Year 0 1 2 3
₦‟000 ₦‟000 ₦‟000 ₦‟000
Outlay (12,000) - -
Contribution - 30,000 28,500 27,000
Scrap value - - 5,000 2,000
Maintenance costs - (300) (350) (400)
NCF (12,000) 29,700 33,150 28,600
PVF at 10% 1 0.909 0.826 0.751
PV (12,000) 26,997 27,382 21,479
NPV = ₦59,728,000
AEV = ₦59,728,000/2.487 = ₦24,016,084
(v) Conclusion: The Directors should change their existing policy of replacing the
processing machine every 3 years to replacing it every year, as that gives the
greatest annual equivalent value.
(b) The following assumptions are made in the calculations:
 The existing machine will always be replaced with financially

identical machine.
 Replacement will continue to infinity
 There is no inflation
 No taxation
 No competition
 No price change
 No technological change
EXAMINER‟S REPORT
This question tests candidates‟ understanding of Net Present Value (NPV) calculation and
related decision making at various times. Candidates exhibited below average
understanding of the question even though over 20% of them attempted it. Performance
pass rate was below 30%. Commonest pitfall was hinged on poor understanding of the
requirements of the question. This can easily be resolved using the ICAN Study Text and
other relevant text materials.
102

MARKING GUIDE

(a) i. Computation of Contribution
10 ticks = 2 marks 2
ii. Replaceable in Year one (Every year)
iii. Replaceable in Year 2 (Every Two Years)
iv. Replaceable in Year 3 (Every Three Years)
v. Decision 1
12
(b) Any three major assumptions at 1 mark each 3
15
103

SOLUTION 7
(a) In order to work out the Transfer Price which should be set for the internal
sales of 35,000 engines, the perspective of both divisions must be
considered.
i. From the group‟s perspective.

For every engine sold externally, Division E generates a profit of
N8,000 i.e(N85,000 – N77,000) for the Group.
For every engine which Division A buys from outside the group, there
is an incremental cost of N6,000 per unit {N80,000 – (N77,000 –
N3,000}.
Therefore, from the Group‟s perspective, as many external sales
should be made as possible before any internal sales are made.
Consequently, the Group‟s current policy will need to be changed.
This however, assumes that the quality of the engines bought from
outside the Group is the same as the quality of the engine made by
Division E.
Hence, Transfer Prices are N74,000 and N80,000.
ii. From Division E‟s perspective.

Division E‟s only buyer for these 35,000 engines is Division A, so the
lowest price division E would be prepared to charge is the marginal
cost of making these engines, which is N74,000 per engine. However,
Division E would want to make higher profit on these engines too and
would consequently expect a higher price than N74,000.
iii. From Division A‟s perspective

Division A knows that it can buy as many external engines as it needs
from outside the group at a price of N80,000 per engine. Therefore,
this will be the maximum price which it is prepared to pay.
iv. Overall Transfer Price Range

Therefore, the Transfer Price should be set between N74,000 and
N80,000. From the perspective of the Group, the total group profit will
be the same irrespective of where in this range the transfer price is
set. However, it is important that divisional managers and staff
remain motivated. Given the external sales price which Division A
would have to pay N80,000 for each engine bought from outside the
group, the transfer price should probably be at the higher end of the
range.
104

(b)
Division E‟s total capacity is 70,000 units.
Given that it can make external sales of 35,000 units it can only
supply Division A 35,000 units of 45,000 engines demanded. These
35,000 engines should be bought from Division E since, from the
Group‟s perspective, the cost of supplying these internally is N6,000
per engine cheaper than buying externally. The remaining 16,000
engine required by Division A should then be bought in from the
external suppliers at N80,000 per engine.
Profit on sales by Division E = 35,000 units at (N85,000 – N77,000) = 280,000,000

Loss on an external purchase of 10,000 at (N74,000 – N8,000) = (60,000,000)
Group Profit = 220,000,000
(c) The two main performance measurements that are appropriate for
evaluating divisional performance of an autonomous division that operates
as an investment centre are:
i. Return on Investment (ROI) – This is the profit of the division as a

percentage of capital employed. The performance of the manager of
an investment centre may be judged on the basis of ROI – whether the
division has succeeded or not in achieving a target ROI for the
financial year or whether ROI has improved since the previous year.
𝑃𝑟𝑜𝑓𝑖𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
ROI =𝐶𝑎𝑝𝑖𝑡𝑎𝑙 or
𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡
ii. Residual Income (RI) – Residual Income is another way of measuring

the performance of an investment centre. It is an alternative to ROI.
RI is measured in either of the following ways:
Managerial evaluation:
N
Controllable profit XX
Less national interest on average
Controllable investment XX
Controllable Residual income XX
Or
Residual Income: Divisional evaluation:
N
Traceable profit XX
Less national interest on average
105

Traceable investment XX
Divisional Residual income XX
EXAMINER‟S REPORT
This question test candidates‟ understanding of transfer pricing and measures of
evaluating divisional performance. 0ver 82% of the candidates attempted the question,
and performance was poor as less than 20% of them scored above the pass marks.
Candidates‟ poor understanding of the requirement of the question was attributable to the
poor performance. Candidates are therefore advised to use the ICAN Study Text and other
relevant text in order to improve their performance in future examinations.
MARKING GUIDE

(a)
i. Division E‟s external sales generate N8,000 1
ii. Division A‟s external purchases cost N6,000 1
iii. Maximum TP from division E‟s perspective 1
iv. Maximum TP from division A‟s perspective 1
v. Range of TP discussion 1 5
(b)
i. Division A should buy 10,000 units from outside 1
ii. Sale/computation of max. profit 4 5
(c) Two main performance measures in autonomous divisions 5

15
106

Time Allowed: 31/4 hours (including 15 minutes reading time)

QUESTION 1
Top Foods Limited (TFL) manufactures specialty meat pies, which it sells to fast
food shops. The only variable costs are raw materials and labour. The raw materials
consist of 3 grades of raw meat. The standard cost of the raw materials used in the
manufacture of each 100 kilograms of specialty meat pie is as follows:
Raw material kg Std. Price/Kg

N
X 25 200
Y 60 300
Z 40 400
125 900
There is a normal loss of raw materials during production, equivalent to 25% of

output.
It takes 5 labour hours to process the input of 125kg. Labour is normally paid N180
per hour. Idle time is expected to be 10% of hours paid: this is not reflected in the
rate of N180 above. Idle time is normally adjusted in the labour rate when
computing standard cost and the relevant variances.
In preparing its budget for 2016, the company assumed that there would be a
market in the country for 250,000kg of specialty meat pie and that TFL‟s product
would have a 40% share of this market. The budget also assumed a selling price
that gives contribution margin ratio of 36%.
However, during 2016 both TFL and its competitors were adversely affected by
diminishing consumer confidence in meat products. The actual total market size
was only 220,000 kg of specialty meat pie (instead of the anticipated 250,000 kg)
and TFL sold only 66,000 kg of its products.
The managing director of TFL recently explained how his company attempted to
respond to the difficulties which it faced in 2016: “First, we reduced our selling
97

price from N625 to N613; this was a modest price reduction in comparison with
those of our smaller competitors. Second, we took advantage of falling market
prices for some of the types of meat which we use as raw material for our product.
With benefit of hindsight, we should perhaps have done more to increase the
consumers‟ confidence in the safety and quality of meat products in general and
our own product in particular”.
The price of actual raw materials used by TFL in 2016 were as follows:
Raw material Qty (Kg) Price per kg
X 17,600 N170
Y 38,400 N280
Z 24,000 N390
The company had no opening or closing inventory of raw materials or finished

product.
3,000 labour hours were paid for, costing N576,000; 2,600 labour hours were
worked.

a. Prepare a standard cost card per kilogram of the specialty meat pie, showing
clearly the contribution and the selling price per kg. (6 Marks)
b. Compute the company‟s budgeted and actual contribution for 2016. (4 Marks)
c. Compute the following variances for the company:

i. raw materials price; raw materials mix and raw materials yield;
(6 Marks)
ii. sales price and sales volume. (3 Marks)
Note: Already calculated variances are as follows: labour rate - N36,000(A), labour
efficiency - N140,000(F), idle time variance - N20,000(A).
d. Use the above variances to prepare a reconciliation of the budgeted

contribution with the actual contribution. (4 Marks)
e. Evaluate critically the performance of the company in 2016, supporting your

answer with reference to the variances you have calculated and the ones
given in the note (c) above. (7 Marks)
(Total 30 Marks)
98

SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
(40 MARKS)
QUESTION 2
Roda Limited operates two departments to produce its unique products. The „K‟
brand is produced in one department and the „T‟ label is produced in the other. The
two departments are referred to as E and P respectively.
In recent years, demand for the K brand has been falling and the firm has made
the decision to shut down department E. However, the timing of the closure is yet
to be agreed. A budget for department E for the year ending June 30, 2017 has
been prepared as follows:
Budget for Department E for the year ending June 30, 2017
Direct Costs Total Per Case of output

N‟000 N
Material C 5,000 50
Material V 1,000 10
Packaging material 3,000 30
Labour 10,000 100
Overheads
Variable 5,000 50
Fixed 4,000 40
Total Cost 28,000 280
Less: Sales Revenue (100,000 cases) 25,000 250
Budgeted Net Profit (Loss) for Year (3,000) (30)
The Managing Director (MD) of Roda Limited suggests that as the budget indicates
that department E will be in a loss-making position next year, it should be closed
down immediately. The firm‟s Accountant says that he thinks that a flexible budget
should be drawn up, showing the contribution of this department to fixed
overheads and profit, before a decision is finally made. He arranged for a flexible
budget to be prepared based on activities of 80,000, 100,000 and 120,000 cases,
the latter quantity being the maximum that the department can produce. The
following information is available in addition to that contained in the original
budget:
99

(i) Direct Materials
Each case of the final product requires a kilogram of material C and there
are 100,000 kilograms of C in stock. This material originally cost ₦5,000,000
but today has no resale value. Unless it is used to manufacture product K
next year it will have to be disposed of at a cost of ₦100,000 to the firm for
every 10,000 kilograms which have to be dumped. Additional material C can
be obtained by importing it from abroad at a cost of ₦100 per kilogram.
. The stock of material V would be sufficient to produce 120,000 cases

of the product. However, this could also be used in the production of
the standard product, which requires the same amount of material V
to produce one case as the K brand does. The original cost of the
material V in stock was ₦500,000 and this now has a market cost of
₦2,400,000.
. Sufficient packaging material to pack 100,000 cases of K is in stock.
As this has been overprinted with product K information, only half the
value of this could be salvaged for use with the standard product.
There have been no price changes associated with packaging
materials and scrapping costs would be negligible.
(ii) Variable Overheads and Machinery
The machinery used in department E is 10 years old. It originally cost

₦10,000,000 and is currently being depreciated using the straight-line
method over a 20 year-period. No scrap value is expected at the end of the
life of the machinery. Depreciation is recovered by including it in the
variable overheads. The market value of the machinery on 1st July, 2016 was
₦6,000,000. This value would fall during the next year through use only, at a
rate of ₦100 per 10 cases produced.
Variable overheads for department E vary in proportion to output.
(iii) Fixed Overheads
The fixed overhead recovery rate includes occupancy costs and general
expenses which cannot be reduced in the year ahead, even if department E
is closed. It also includes the salary of the departmental manager at
₦500,000 per annum. He is over the retiring age, although he is prepared to
continue if department E remains open.
(iv) Price Elasticity
The Marketing Director estimates that the price which could be obtained for
the quantities suggested for the flexible budget would be as follows:
Qty Price obtainable per case
(Cases)
80,000 ₦300
100,000 ₦250
120,000 ₦200
100

Required:
a. Prepare the flexible budgets required by the MD and state clearly any
assumptions that you make. Show your workings. (18 Marks)
b. Advise the MD at what level of production the department should operate in

the year to 30 June, 2017 and what decision criterion he should use if
immediate closure is to be considered. (2 Marks)
(Total 20 Marks)
QUESTION 3
XYZ Nigeria Limited is considering the use of Activity-Based Costing (ABC) approach
in its overhead recovery. The Company manufactures 2 products known as
Standard and Deluxe.
Details of Production for the two products are given below:
Standard Deluxe
Annual production in units 24,000 24,000
Direct labour time per unit in hours 4 5
Number of Special Parts per unit 2 8
Number of set ups per batch 2 6
Number of sales invoices issued per year 100 480
Number of separate materials issued per batch 2 2
Batch size units 2000 100
The analysis of the overhead costs provided the following information:
S/N Overhead cost analysis Amount (N) Cost driver

1 Set up costs 585,600 Number of set ups
2 Special part handling costs 480,000 Number of special parts
3 Customer invoicing costs 232,000 Number of invoices
4 Material Handling cost 504,000 Number of batches
5 Other overheads 864,000 Labour hours
Total 2,665,600
Required:
a. Use the traditional approach to determine the direct labour hourly rate
for the company. (3 Marks)
b. Use the direct labour hour rate to compute the overhead rate attributable
to a unit of Standard and Deluxe products. (2 Marks)
c. Determine the cost driver rate using the ABC approach. (10 Marks)
d. Compute the overhead rate per unit of each product using the ABC
approach. (5 Marks)
(Total 20 Marks)
101

QUESTION 4
Tees Limited is a small company engaged in the production of plastic tools for the
garden. The sub-total on the spreadsheet of budgeted overheads for a year reveals
the following.
Moulding Finishing General
Department Department Factory
Overhead
Variable overhead N‟000 800 250 525
Fixed overhead N‟000 1,250 425 875
Budgeted activity
Machine hours (000) 400 300
Practical activity
Machine hours (000) 600 400
For the purpose of allocation of general factory overhead, it is agreed that the
variable overheads accrue in line with the machine hours worked in each
department. General factory fixed overhead is to be reallocated on the basis of the
practical machine hour capacity of the two departments.
It has been a long standing company practice to establish selling prices by

applying a mark-up on full manufacturing cost of between 25% and 35%.
A possible price is sought for one new product which is in a final development
stage. The total market for this product is estimated at 100,000 units per annum.
Market research indicates that the company could expect to obtain and hold about
10% of the market. It is hoped the product will offer some improvement over
competitors‟ products, which are currently sold at between N45 and N50 each.
The product development department has ascertained that the direct material
content is N12.50 per unit. Each unit of the product will take one labour hour (two
machine hours) in the moulding department and one and half labour hours (one
and half machine hours) in finishing. Hourly labour rates are N2.50 and N2.75 for
moulding department and finishing department respectively.
Management estimate that the annual fixed costs which would be specifically
incurred in relation to the product are supervision N10,000, depreciation of a
recently acquired machine N60,000 and advertising N13,500. It may be assumed
that these costs are included in the budget given above. Given the state of
development of this new product, management do not consider it necessary to
make revisions to the budgeted activity levels given above for any possible extra
machine hours involved in its manufacture.
Required:
102

a. Prepare full cost and marginal cost information which may help with the
pricing decision. (15 Marks)
b. Comment on the cost information and suggest a price range which should be
considered (5 Marks)
(Total 20 Marks)
SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
(30 MARKS)
QUESTION 5
SKD Holdings Limited makes two products Doughnut and Meat Pie whose
contribution margins are N100 and N115 per unit respectively. The production
process passes through three machines M-1, M-2 and M-3 whose maximum
available hours are 800 hours, 600 hours and 720 hours respectively. Doughnut
requires 8 hours, 10 hours and 4 hours on machines M-1, M-2 and M-3 respectively
per unit while Meat Pie requires for every unit 10 hours, 6 hours and 12 hours on
machines M-1, M-2 and M-3 respectively.
The period charge is N5,000.
Required:
a. Formulate the linear programming model (6 Marks)
b. Discuss briefly the uses of linear programming in Performance Management
and indicate whether there are any limitations in using this kind of model.
(9 Marks)
(Total 15 Marks)
QUESTION 6
Ntams Communications Limited provides the following related services: Computer

upgrading, servicing, and repair facility to a variety of business and personal
computer users. The company has four departments, namely; Finance and Accounts
department and Services and Administration department are under the General
Manager Services, while the Computer Repairs and Maintenance department and
Program Maintenance department are under General Manager Operations. The
management team of the company has managed the business to date using a
standard costing and budgetary control system. However, the team has of recent
been discussing the possible use of alternative performance measurement systems
such as the “Balanced Scorecard”.
Another issue which concerns the management of Ntams Communications Limited

is the quality of the service provided for clients. The company‟s General Manager
Operations has suggested that the company should introduce Total Quality
Management (TQM) but the management team of the company is unsure how to do
this and the likely costs and benefits of its introduction.
Required:
103

a. Explain the concept of the Balanced Scorecard and how it may be used by
Ntams Communication Limited to improve performance measurement.
(7 Marks)
b. i. Explain briefly the concept of Total Quality Management in the context
of Ntams Communications Limited specifying scope of its coverage in
the four departments. (4 Marks)
ii. Discuss the likely costs and benefits that would arise if Ntams
Communications Limited introduced a TQM policy. (4 Marks)
(15 Marks)
QUESTION 7
Ubachuks Ltd. manufactures and sells a single product. The following data has
been extracted from the current year‟s budget:
Item Amount
Contribution per unit N8
Total weekly fixed costs N10,000
Weekly Profit N22,000
Contribution to Sales Ratio 40%
The company‟s production capacity is not fully utilized in the current year and
three possible strategies are under consideration. Each strategy involves reducing
the unit selling price on all units sold with a consequential effect on the volume of
sales.
The detailed effect of each strategy is as follows:
Strategy Reduction in unit Expected increase in

selling Price weekly sales volume
over Budget
% %
A 2 10
B 5 18
C 7 25
The company does not hold inventory of finished goods.
Required:
Calculate:
a. The selling price per unit of the product for the current year. (2 Marks)
b. The weekly sales in units and value for the current year. (3 Marks)
c. The current year‟s break-even point in units and value. (4 Marks)
d. Determine, with a statement, which one of the three strategies should be

adopted by the company in order to maximize its weekly profits. (6 Marks)
(Total 15 Marks)
104

Formulae
Learning curve
Y = axb
b = the index of learning =log LR/log2
Demand curve
P = a – bQ
b = change in price
change in quantity
MR = a – 2bQ
The linear regression equation of Y on X is given by
Y= a + bX or Y - Y = b(x – X)
where
Covariance (XY) 𝑛 𝑋𝑌 − ( 𝑋)( 𝑌)
b= = 2
𝑛 𝑋 − 𝑋 2
Variance (X)
a = Y – bX
𝑋𝑌 = a 𝑋 + 𝑏 𝑋 2
105

Annuity Table
-n
Present value of an annuity of 1 = 1 - (1 + r)
r
(()discount rate 1
Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15
106

107

Solution 1
(a) TOP FOOD LTD.
Standard cost card per unit of speciality Meat Pie
Item Qty Price Cost/Value

N N
Material X 0.25kg 200 50
Material Y 0.60kg 300 180
Material Z 0.40kg 400 160
Total input 1.25kg
Normal loss (20%) (0.25kg) - -
Output 1.00 390
Labour 0.05hr 200* 10
Total variable costs 400
Contribution 225**
Standard selling price 625
* = 180 x 10/9 = N200

** = 36/64 x 400 = N225
Workings
(i) Contribution = SP - VC
Let SP = x
CMR = 0.36 (given)

CM
CMR 
SP / Unit
CM
i.e.  0.36
SP / Unit
CM
i.e.  0..36
x
CM  0.36x
But CM = SP = N400
0.36x = x – 400
i.e. x – 0.36x = 400
i.e. 0.64x = 400
400
i.e. x =  N625
0.64
SP = N625/Unit
(b) Budgeted and Actual contribution for 2016

Budget Actual
Selling price (N) 625.00 613.00
108

Variable Cost (N) (400.00) (358.79)
Contribution/Kg (a) (N) 225.00 254.21
Sales volume (b) 100,000kg 66,000kg
Contribution (a x b) N22,500.00 N16,778.00
Workings
N
Actual variable cost/unit

Material X (17,600 x 170) 2,992,000
Material Y (38,400 x 280) 10,752,000
Material Z (24,000 x 390) 9,360,000
Labour 576,000
TVC 23,680,000
VC/unit = N23,680,000 = N 358.79
66,000
(c) (i) Material Price Variance = AQ used (SP – AP)

Material SP Ap Diff AQ Variance
N N N N N
X 200 170 30 17,600 528,000 (F)
Y 300 280 20 38,400 768,000 (F)
Z 400 390 10 24,000 240,000 (F)
1,536,000 (F)
Material Mix Variance = SSP (RSQ – AQ) where
SSP = Standard Selling Price

RSQ = Required Standard Quantity
AQ = Actual Quantity
Material Actual Mix Standard Mix Diff SP Variance
N N
X 17,600 25
/125 x 80,000 = 16,000 1600 200 320,000 (A)
Y 38,400 60
/125 x 80,000 = 38,400 - 300 -
Z 24,000 40
/125 x 80,000 =25,600 1600 400 640,000 (F)
320,000 (F)
Material Yield Variance = AY – SY

Actual yield 66,000
Standard yield (100/125 x 80,000) (64,000)
Difference (a) 2,000
109

Standard yield price (50 + 180 + 160) (b) N390/kg
Material yield variance (a x b) N780.000 (F)
Alternative Method
Note: The yield variance can also be calculated as follows:
Material Std qty in std Act. Qty in std Variance Total variance
mix mix (a – b) (a – b) x SP
(a) (b)
Kg Kg Kg N00
X 16,500 16,000 500 (F) 100 (F)
Y 39,600 38,400 1,200 (F) 360 (F)
Z 26,400 25,600 800 (F) 320 (F)
82,500 80,000 780 (F)
(ii) Sales Price Variance = Actual sales (Standard Price – Actual Price)
= 66,000kg (N625 – N613)
= 792,000 (A)
Sales Volume Variance = Standard Contribution/unit (BSV – ASV)
= N225 (100,000 – 66,000)
= N7,650,000 (A)
Where
BSV = Budgeted Sales Volume
ASV = Actual Sales Volume
(d) Reconciliation of Budgeted and Actual Contribution
N‟000
Budgeted contribution 22,500
Sales price variance (792)
Sales volume variance (7,650)
14,058
Cost variances Favourable Adverse

N‟000 N‟000
Material price variance 1,536
Material mix variance 320
Material yield variance 780
Labour rate variance 36
Labour efficiency variance 140
Idle time variance ____ 20
2,776 56 2,720
Actual contribution 16,778
110

(e) - There is no doubt that the performance of the company was adversely
affected by the diminishing consumer confidence in meat products,
which caused the company to reduce price from N625 to N613 per kg.
However, the variance calculated showed that only about 10% of the
unfavourable sales volume variance can be blamed on the reduction in
price i.e. sales price variance of N792,000 (A) out of total sales volume
variance of N7,650,000 (A).
- The unfavourable sales volume variance was caused by the company‟s

loss of market share to other meat pie producers.
- The other variances computed suggests that the loss of market share was
caused by wrong strategies used to address the situation i.e. taking
advantage of falling prices of the types of meat used as raw materials by
using more of the cheaper ones and less of the costlier ones (Y & Z).
- Though, the falling market prices for the materials represent a cost
saving with a favourable material price variance of N1.536million, this
might have led to poorer product quality.
- It would have been more appropriate for the company to focus on
reassuring customers about product quality rather than cost savings, to
increase market size.
- The favourable materials yield variance also represents a cost saving
having the same effect on product quality as the use of more of cheaper
materials.
- From the Managing Director‟s comments, it appears that an unfavourable
selling price variance was probably smaller than that of the competitors,
which made the competitors to gain more market share.
- The reduction in selling price and market share caused a total favourable
costs variance of N2.72million, but an adverse total sales variance (sales
price and sales volume) of N8.442million and consequently a drastic
reduction from the budgeted contribution of N22.5million to an actual
contribution of N16.778million i.e. a reduction of N5.722million.
EXAMINER‟S REPORT
This is a compulsory question that tests candidates understanding of standard

costing, variance analysis and reconciliation of budgeted profit with actual profit.
Between 80% and 100% of the candidates attempted the question.
Candidates had very poor understanding of the requirements of the question.

Candidates‟ commonest pitfall was their inability to pick the correct figures in
111

arriving at the standards to compare with actual in order to arrive at the correct
variance. Also, more than 80% of the candidates could not correctly evaluate the
performance of the company.
Candidates are advised to always prepare adequately and familiarise themselves

with the ICAN Study Text and other relevant text.
Marking Guide
Mark Total Marks
a. Standard cost card/unit
Contribution 2½
Variable costs 2½
Selling price 1 6
Budgeted & Actual contribution
b.
Budgeted 1½
Actual 1½
Workings 1 4
ci. Material Price Variance 2

Material Mix variance 2
Material yield variance 2 6
ii. Sales price variance 1½

Sales volume variance 1½ 3
d. Reconciliation 4
e. Performance evaluation 7
30
112

SOLUTION 2
a) Flexible Budget For Department E for the Year ended 30, 2017
Cases Notes 80,000 100,000 120,000

₦‟000 ₦‟000 ₦‟000
Material C 1 (800) (1,000) 1,000

V 2 1,600 2,000 2,400
3 1,200 1,500 2,100
Packing material
4 8,000 10,000 12,000
Labour 5 500 500 500
Manager
6 800 1,000 1,200
Machinery = ₦10
per case
7 3,600 4,500 5,400
Variable cost at ₦45
14,900 18,500 24,600
per unit
Total relevant cost
8 24,000 25,000 24,000
9,100 6,500
Sales revenue
(600)
Total contribution
b) On the basis of opportunity costs, the department makes a positive

contribution at all levels of output except at 120,000 cases. The budget
indicates that production should continue next year at the volume of
80,000 cases. However, other factors should be taken into consideration,
such as whether the facilities in the department could be used in some
other way which would be more profitable. It may be better to plan
alternative uses for department E‟s resources immediately.
Workings
1. Material C: If the firm disposes of all the material, it will cost the firm
₦1,000,000. However, if it uses Material C, it will save ₦800,000 on
disposal costs as far as the production of 80,000 cases is concerned, and
all the disposal costs if either of the other levels is produced. Thus, if
120,000 cases are produced, an additional amount of material C for
20,000 cases at ₦100 per case will have to be purchased at a cost of
₦2,000,000.
Thus for the output level of 120,000 cases, the total relevant cost will be
₦’000
Disposal cost avoided (1,000)
Additional material bought 2,000
Net relevant cost 1,000
113

2. Material V: The relevant cost of material V is the replacement cost and for
the various output levels, the total cost will be
₦
80,000
i) 80,000: × ₦2,400,000 = 1,600,000
120,000
100,000
ii) 100,000: × ₦2,400,000 = 2,000,000
120,000
120,000
iii) 120,000: × ₦2,400,000 = 2,400,000
120,000
3. Packing Material: For the quantity in inventories, the relevant cost is half
of the book value, that is ₦15 (₦30 ÷ 2). Thus for 80,000 cases this is:
80,000 × ₦15 = ₦1,200,000
and for 100,000 cases: 100,000 × ₦15 = ₦1,500,000
But for the 120,000 cases, an additional amount of packaging material
to produce 20,000 cases at full cost of ₦30 would be required, that is
20,000 × ₦30 = ₦600,000.
Thus:
₦
80,000 cases 1,200,000
100,000 cases 1,500,000
120,000 cases ... ₦1,500,000 + 600,000 = 2,100,000
4. Labour: As no information has been given about labour availability, the
necessity to work overtime, etc, it has been assumed that labour costs
vary in proportion to output.
5. Manager and other fixed overheads: At any of the three levels of output,
₦500,000 would have to be spent on the manager‟s salary. If the
department was closed, this expenditure would still be incurred.
6. Machinery: Loss in value is ₦100 per 10 cases or ₦10 per case produced.
7. Variable cost – Depreciation is already included in the given variable

cost. As depreciation does not involve any movement of cash, it must be
identified and removed from the variable cost.
Annual depreciation is ₦10m ÷ 20 years = ₦500,000

Per unit = ₦500,000 ÷ 100,000 = ₦5 (Note that the budget given in the
question is for 100,000 cases).
Therefore, cash unit variable cost = ₦50 – ₦5 = ₦45
8. Sales revenue
No of cases 80,000 100,000 120,000
Selling price (₦) 300 250 200
Total revenue (₦‟000) 24,000 25,000 24,000
114

EXAMINER‟S REPORT
This question tests candidates‟ understanding of flexible budgeting and relevant
costing.
Majority of the candidates did not understand the salient concepts of the question.
Candidates‟ commonest pitfall is their inability to understand the necessary

adjustments of the relevant costs allocated to the various levels of activity.
Candidates are advised to study every aspect of the syllabus.
Marking Guide
Marks Total Marks
(a) Preparation of flexible budget:
Calculation of Material C 1½
Calculation of Material V 1½
Packaging material 1½
Labour 1½
Manager‟s salary 1½
Machinery depreciation 1½
Variable cost 1½
Total relevant cost 1½
Sales revenue 1½
Total contribution 1½
Workings – Any 12 of 18 ticks at ¼ mark per tick 3 18
(b) Point of choosing of 80,000 cases 1

Point on alternative use of facilities e.g. stocks or
machinery 1
2
20
SOLUTION 3
XYZ NIGERIA LTD. – ABC APPROACH TO COSTING/PROFITABILITY

WORKINGS
a) Overhead absorption rate using direct labour hours (using the traditional method)
= Total overhead
Total labour hours for the two products
= N2,665,600
(24,000 x 4) + (24,000 x 5)
115

= N2,665,600 = N12.34
216,000
b) Direct labour hourly overhead rate of each unit of product
Standard Deluxe
Direct labour hours per unit 4 5
Direct labour rate per hour N12.34 N12.34
Overhead per unit N49.36 N61.70
c) Computation of cost driver rate using the ABC approach.
S/N Cost pool Cost driver Standard Deluxe Total Overhead Cost
driver driver driver Costs N Driver
volume volume volume rate
N
1 Set up Set up per 24 1,440 1,464 585,600 400.00
batch
2 Special part No of special 48,000 192,000 240,000 480,000 2.00
handling Parts
3 Customer Number of 100 480 580 232,000 400.00
invoices invoices
4 Material Number of 12 240 252 504,000 2,000.00
handling batches
5 Other Labour hours 96,000 120,000 216,000 864,000 N4.00
overheads
Total 2,665,600
d. Overhead cost per unit using the ABC approach.
S/N Cost pool Cost Driver Driver Total Total Unit Unit cost
driver value value cost for cost for cost for for
rate for for Deluxe standard Deluxe standard deluxe
standard
N N N N N
1 Set up 400.00 24 1,440 9,600 576,000 0.40 24.00
2 Special part 2.00 48,000 192,000 96,000 384,000 4.00 16.00

handling
3 Customer 400.00 100 480 40,000 192,000 1.67 8.00
invoices
4 Material 2,000.00 12 240 24,000 480,000 1.00 20.00
handling
5 Other N4.00 96,000 120,000 384,000 480,000 16.00 20.00
overheads
Total 553,600 2,112,000 23.07 88.00
116

EXAMINER‟S REPORT
This question tests candidates‟ understanding of traditional and ABC approach to

overhead absorption.
Majority of the candidates did not understand the salient concepts of the question,
hence the very poor performance.
Candidates‟ commonest pitfall was their inability to identify the relevant cost
drivers using the ABC approach.
Candidates are advised to learn and understand basic rudiments and principles of
the topic being tested.
Marking Guide
Marks Total Marks
(a) Direct labour hourly rate for the company
Traditional Approach
DLHR for standard 1

DLHR for Deluxe 1
Total O/H ÷Total labour hrs for the 2 products 1 3
(b) D LH per unit standard ¼

D LH per unit deluxe ¼
D LR per hour standard ¼
D LR per hour deluxe ¼
Overhead per unit standard ½
Overhead per unit deluxe ½ 2
(c) Cost pool

Standard drive volume 1
/3
Deluxe drive volume 1
/3
Set up Total drive volume 1
/3
Cost drive rate 1
Standard drive 1
/3
Special part Deluxe drive 1
/3
Total drive 1
/3
Cost drive 1
1
/3
Customer Standard drive
Invoices Deluxe drive 1
/3
Total drive 1
/3
117

Cost drive 1
Standard drive 1
/3
Material Deluxe drive 1
/3
handling Total drive 1
/3
Cost drive 1
Other Standard drive 1
/3
overhead Deluxe drive 1
/3
Total drive 1
/3
Cost drive 1 10
118

(d) Total cost Standard /5
1
Set up Total cost Deluxe /5

1
Unit cost standard ¼

Unit cost deluxe ¼
Total cost Standard /5

1
Special Part Total cost Deluxe /5

1

Unit cost deluxe ¼
Customer Total cost Standard /5

1
invoices Total cost Deluxe /5

1

Unit cost deluxe ¼

1
Material Total cost Deluxe /5

1
handling Unit cost standard ¼

Unit cost deluxe ¼

1
Other Total cost Deluxe /5

1
overhead Unit cost standard ¼

Unit cost deluxe ¼
Total column Unit cost Standard

Material handling Unit cost Deluxe ¼
¼ 5
20
SOLUTION 4
(a) TEES LIMITED
FULL COSTING APPROACH
N
Direct Material 12.50
Direct labour
M = 1 x N2.50 2.50
F = 1.5 x N2.75 4.13
Variable overheads:
M = 2 x N2.75 5.50
F = 1.5 x N1.58 2.37
Total variable cost 27.00
Add fixed overhead
M = 2 x N4.44 8.88
119

F = 1.5 x N2.58 3.87
Full manufacturing cost 39.75
MARGINAL COSTING APPROACH

N N
Variable manufacturing cost 27.00
Add: Incremental fixed costs
Supervision (N10,000/10,000) 1.00
Depreciation (N60,000/10,000) 6.00
Advertising (N13,500/10,000) 1.35 8.35
Total Incremental Cost 35.35
Workings
(i) Computation of Variable Overhead Absorption Rate
Moulding Finishing
N‟000 N‟000
Allocated 800 250
 400 300 
Re-allocated  : 
 700 700  300 225
1,100 475
Budget 400 300
VOAR N2.75 N1.58
(ii) Computation of Fixed Overhead Absorption Rate

Moulding Finishing
N‟000 N‟000
Allocated 1,250 425
 600 400 
Re-allocated  : 
 1000 1000  525 350
1775 775
Budget 400 300
FOAR N4.44 N2.58
(a) Determination of selling price using Full Costing Approach

Mark-up Range
Low Middle Upper
25% 30% 35%
N N N
Full cost/unit 39.75 39.75 39.75
Add Mark-up 9.94 11.93 13.19
Selling price 49.69 51.68 53.66
Marginal Cost Approach
Mark-up Range
Low Middle Upper
120

25% 30% 35%
N N N
Total incremental cost 35.35 35.35 35.35
Add Mark-up 8.84 10.61 12.37

Selling price 44.19 45.96 47.72
Comments:
The cost information above provides a range of bases for a pricing decision.
Variable manufacturing cost:

The variable manufacturing cost is N27 per unit. At a price below this level,
there would be no contribution to fixed overheads. Since the prevailing
market price is between N45 and N50, such a low price might suggest to
customers that the product is of inferior quality.
Incremental total cost:

The incremental total cost per unit is N35.35. Management must select a
price above this level to be sure of covering all costs associated with this
product. This unit rate depends on achieving an annual sales volume of
10,000 units.
Full manufacturing cost:

The full manufacturing cost per unit is N39.75. A price based on this cost
will ensure that all costs are covered on the long run, if the annual sales
volume of 10,000 units is achieved. Since competitors‟ prices range between
N45 and N50, it seems possible that the company can compete with a price
calculated on a full cost – plus basis.
The range of prices suggested, using company‟s usual mark-up of between

25% and 35%, is between N49.69 and N53.66. Given the current price range
of the competitors‟ products and the fact that the product is expected to offer
some improvement over competitors‟ products, a price towards the upper
end of the suggested range would be appropriate.
In general, the price charged for a product should exceed its cost. There are
a number of different cost – based approaches to pricing and each is
appropriate in different circumstances.
Full – cost plus pricing involves adding a profit margin to fully absorbed
total cost of a product. In certain situations, for example if a company has
spare capacity, it may be appropriate to use marginal cost as the basis for
pricing. Alternatively if the lowest possible price is sought, perhaps for
strategic reasons, a minimum price based on relevant costs may be used as
121

the basis for a pricing decision. However, management must not lose sight
of the need to cover fixed costs on the long run.
Whichever cost basis is used, it is important to appreciate that a cost-based

price merely provides a starting point for informed management decisions
and pricing negotiations.
Cost is only one of the factors to bear in mind when making a price-setting
decision. Other factors to consider will include the following:
- The organization‟s objectives;
- The market in which the organization operates; and
- The effect which price has on the volume of demand for its goods.
EXAMINER‟S REPORT
The question tests candidates‟ understanding of overhead absorption, treatment of

fixed and variable costs under full cost and marginal costing approaches and price
determination.
Between 41% and 60% of the candidates attempted the question and performance
was very poor.
Their commonest pitfall was inability to show understanding of the concept being
tested.
Candidates are advised to study hard and familiarise themselves with the ICAN
Study Text and Pathfinder.
Marking Guide Marks Marks

a. Calculation of variable overhead absorption rates 3
Calculation of fixed overhead absorption rates 3
Information for pricing decision 3
Recommended price range 2
Marginal cost information for pricing decision 4 15
b. Comments on the cost information and price recommendation 5

20
SOLUTION 5
SKD HOLDINGS LIMITED
a. Formulation of the Linear Programming Model

Let the number of unit(s) of Doughnut be represented by x
122

Let the number of unit(s) of Meat-Pie be represented by y
The Objective Function is to Maximise Total Contribution: 100x + 115y
Subject to the following Constraints:
M–1 8x + 10y ≤ 800

M–2 10x + 6y ≤ 600
M–3 4x + 12y ≤ 720
Non-negativity constraints x, y ≥ 0
b. Usefulness and Limitation(s) of Linear Programming in Performance

Management
Usefulness of Linear Programming Model

i. It is used to solve limiting factor decision when there are at least two
limiting factors;
ii. It can be used to calculate “shadow price” of a limiting factor;
iii. It can be used to determine additional unit of the limiting factor
which can give extra contribution;
iv. It helps management to identify slack that might be used by
management to identity the amount of constraint that is not used in
the optimal solution; and
v. It is used in solving operational problems.
Limitations of Linear Programming Model

i. It cannot be used to solve limiting factor situation when there is a
single limiting factor;
ii. Uncertainty is not taken care of;
iii. Parameters are assumed to be consistent;
iv. It is only useful when solving allocation problems involving more than
one limiting factor;
v. For non-financial Managers, it could be complex;
vi. It assumes complete linearity.
In practice however, the liner relationship may not hold because of
quantity discount of raw material, the presence of learning curve, etc.
vii. It assumes divisibility of products. In practice, fractions of products
cannot be produced and sold.
viii. It assumes profit maximization. In practice, organizations may have
other objectives
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of the construction of Linear

Programming Model, its uses and limitations.
123

Candidates showed lack of in-depth knowledge of the principles involved in model
formulation as most of them attempted solving the linear programming problem
against the requirement of the examiner.
Candidates commonest pitfall was their wrong application of the mathematical

signs (≤,≥) and wrongful plotting of graphs.
Candidates are advised to pay attention to minute details and technicalities in the
entire syllabus.
MARKING GUIDE MARKS MARKS

a. Formulation of Linear Programming Model
Formulation of L/P table 1
1
Objective Function 1
3
The L/P Model 3
1
Non-Negativity Constrain 6
1
Total
b. Uses of L/P
Any five points at 1 mark each 5
Limitation of L/P
Any four points at 1 mark each 4 9
Total 15
124

SOLUTION 6
NTAMS COMMUNICATION LTD. – BALANCE SCORE CARD AND TOTAL QUALITY

MANAGEMENT (TQM)
a. The Balanced Scorecard is a strategic planning and management system

that is used extensively in business and industry, government, and non-
profit organizations worldwide to align business activities to the vision and
strategy of the organization, improve internal and external communications,
and monitor organization performance against strategic goals. It was
originated by Drs. Robert Kaplan (Harvard Business School) and David
Norton as a performance measurement referred to as Key Performance
Indicators (KPI). It is a framework that added strategic non-financial
performance measures to traditional financial metrics to give managers and
executives a more 'balanced' view of organizational performance. It is
classified into 4 Perspectives.
The Balanced Scorecard suggests that we view the organization from four
perspectives, and to develop metrics, collect data and analyze it relative to
each of these perspectives. The four perspectives are:
i. The Learning & Growth Perspective
This perspective includes employee training and corporate cultural
attitudes related to both individual and corporate self-improvement.
ii. The Business Process Perspective

This perspective refers to internal business processes. Metrics based
on this perspective allows the managers to know how well their
business is running, and whether its products and services conform to
customer requirements (the mission).
iii. The Customer Perspective

Recent management philosophy has shown an increasing realization
of the importance of customer focus and customer satisfaction in any
business. These are leading indicators: if customers are not satisfied,
they will eventually find other suppliers that will meet their needs.
Poor performance from this perspective is thus a leading indicator of
future decline, even though the current financial picture may look
good.
iv. The Financial Perspective

Kaplan and Norton do not disregard the traditional need for financial
data. Timely and accurate funding data will always be a priority, and
managers will do whatever necessary to provide it. In fact, often there
is more than enough handling and processing of financial data.
Financial profits, Ratio analysis and information show if a company is
doing well.
125

LEARNING AND BUSINESS CUSTOMER FINANCIAL
GROWTH PROCESS PERSPECTIVES PERSPECTIVES
PERSPECTIVE PERSPECTIVE
The advantages of Balanced Scorecard
The Balanced Scorecard is a set of financial and non-financial

measures regarding a company‟s success factors. It reflects the
essence of the organisation‟s value-creating activities and helps in
overcoming challenges, brings the interrelationship in measuring the
scorecard of the firm and the persons in an organization and finally
helps in strategic management.
b.i. Total Quality Management (TQM)
Total Quality management is defined as a continuous effort by the

management as well as employees of a particular organization to
ensure long-term customer loyalty and customer satisfaction.
Remember, one happy and satisfied customer brings ten new

customers along with him whereas one disappointed individual will
spread bad word of mouth and spoil several of your existing as well as
potential customers.
Total quality management ensures that every single employee is

working towards the improvement of work culture, processes,
services, systems and so on to ensure long-term success.
Seven basic elements capture the essence of the TQM philosophy:

customer focus, continuous improvement, employee empowerment,
quality tools, product design, process management, and supplier
quality.
ii. Cost and Benefits of TQM
1. Costs - Product disruption – implementing a Total Quality

Management System requires extensive training of employees
which tend to disrupt production processes during training
periods.
2. Employee Resistance - TQM requires change in mindset,

attitudes and methods of performing jobs. If management does
not effectively communicate with team, workers tend to become
agitated for fear of job insecurity which many lend to
resistance.
3. TQM requires research and development which may require
huge in resistant.
126

BENEFITS
 TQM offers opportunity for an organisation is benchmark with
competitors with a view to quality improvement.
 Cost reduction is enhanced when QTM is consistently applied
 Consumer‟s satisfaction is achieved
 Staff morale is achieved
EXAMINER‟S REPORT
This is a theory based question that tests the candidates understanding of the
concept of Balanced Scorecard (BSC) and its uses and Total Quality Management
(TQM).
Between 81% and 100% of the candidates attempted the question. Candidates
exhibited a clear understanding of the Part (a) of the question, but are bereft of
ideas in Part (b).
Candidates‟ commonest pitfall was their inability to explain in-depth, the coverage
of TQM in all the four departments.
Candidates are advised to familiarise themselves with the ICAN Study Text and
Pathfinder.

a. Introduction 1
Perspectives:
Heading ½ x 4 2
Explanation 1 x 4 4
7
b.i Introduction 1
Scope 3 marks each 3
4
ii Costs – (Disadvantages) any points at I
mark each 2
Benefits – any 2 points at 1 mark each 2
4
Total 15
SOLUTION 7
DECISION MAKING AND SYSTEM IMPLEMENTATION
a.i Selling Price per unit = Contribution divided by C/S ratio = N8/0.4 = N20
ii. Weekly sales in Value and units = weekly contribution divided by C/S ratio
Weekly contribution = Weekly profit + weekly Fixed costs.
127

= N22,000 + N10,000 = N32,000
Weekly sales In value = N32,000/0.4 = N80,000
Weekly sales in units = N80,000 / N20 = 4,000 units.
iii. Current year‟s BEP in value = Fixed cost divided by C/S ratio x 52 weeks
= N10,000 /0.4 = N25,000 x 52
= (N25,000 x 52wks = N1,300,000)
BEP in units = N25,000/unit selling price = N25,000 / N20 = 1,250 units
= (1,250 units x 52 wks = 65,000)
iv. Statement showing the contribution under the three options

S/N Particulars Strategy A Strategy B Strategy C
1. Budgeted selling N20 N20 N20
price
2. Budgeted Volume 4,000 4,000 4,000
of sales
N N N
1. New selling Price N20 x .98= N19.6 N20 x .95= N20 x .93=
N 19 N 18.6
2. New Sales Volume 4,000 x 1.1=4400 4,000 x 1.18 4,000 x 1.25
=4,720 = 5,000
N N N
Sales 86,240 89,680 93,000
Less variable costs 52,800 56,640 60,000
Contribution 33,440 33,040 33,000
Fixed costs 10,000 10,000 10,000
Net Profit 23,440 23,040 23,000
Strategy A gives the highest contribution of N33,440 and net profit of

N23,440 and should be adopted.
Workings
Selling price under current situation = N20
Less Unit contribution = N8
Unit Variable costs = N12
EXAMINER‟S REPORT
This question tests candidates‟ knowledge in marginal costing and sensitivity

analysis.
128

Candidates displayed a good grasps of the principles involved in the question.
Their commonest pitfall was their inability to properly apply the BEP formular and
compute accurately weekly sales in units and value.
Candidates are advised to make better use of the ICAN Study Texts and Pathfinder
in order to improve performance in future examinations.

a. Selling Price Per Unit
- Formula (c ratio)
c/s
½
- Contribution Per Unit ½
- c/s Ratio ½
- Solution ½ 2
b. Working Sales in Value and Units

- Weekly Profit 1
/3
- Fixed Cost 1
/3
- Total Contribution 1
/3
- Summation of weekly units 1
- Summation of weekly sales (value) 1 3
c. Current year‟s BEP (Units and Value)

- BEP formula (Value) ½
- Calculation of C/S ratio ½
- Determination of weeks in the year ½
- BEP in value ½
- BEP formula (Units) ½
- Calculation of C/S ratio ½
- Determination of Weeks ½
- BEP in Units ½ 4
d. Statement showing contribution
Under Three (3) strategies. Any 18 ticks
Out of possible, 28 ticks at 1/3 6
Total 15
129


QUESTION 1
DASET DRINKS NIGERIA PLC.
Daset Drinks Nigeria Plc. has been operating in the Nigerian food and beverages
industry as an entity with three distinct factories across the country. One of the
factories bottles soft drink while the other two produce bottles and crown corks for
the soft drink factory.
The company has recently been experiencing problems with its performance
evaluation system across the three factories. Each factory manager is of the
opinion that his factory is the one contributing the most to the overall performance
of the company.
In a recent management retreat, the guest speaker, a performance management

expert, emphasised the need to develop Key Performance Indicators (KPI) for each
of the factories and departments in the company. According to him, this will
enhance performance evaluation of all the managers in the company and will also
make performance management easier. He suggested that the company should
adopt a divisional structure whereby each of the factories will become an
autonomous division with responsibilities for investment, revenues, profits and
costs.
At the last Executive Management meeting, after the retreat, the company‟s top
management decided to adopt the recommendations of the guest speaker. The top
management agreed transfer prices acceptable to each of the divisional managers
and also the needs to decide whether the two factories manufacturing bottles and
corks cocks could sell to external markets.
The top management has mandated you, as the company‟s management

accountant, to supply necessary data that will assist them in taking appropriate
decisions.
54

Financial data collected about the company‟s operations are as follows:
The costs and selling prices of the divisions are:
Soft drink Bottle Crown cork
₦ ₦ ₦
Selling price (price on the external market) 100 5 0.50
Variable cost of production *80 3 0.30
Contribution 20 2 0.20
*This includes costs of bottle and crown cork. To produce one bottle of soft drink
requires one bottle and one crown cork.
The bottling division has the choice to buy its bottle and crown cork requirements
from the external market.
The variable costs of production for external sales and internal transfers are the
same and bottles and crown corks are being transferred to the bottling division at
these costs.
For brand protection, the soft drink factory is not willing to buy bottles and crown
corks from any external supplier.
Required:
a. Differentiate among an investment centre, a profit centre, a revenue centre

and a cost centre, in a divisional organisation giving one example of each.
(8 Marks)
b. Explain a divisional structure, stating the problems associated with this type
of structure in an organisation. (8 Marks)
c. Advise the top management on the transfer prices that will maximise the
company‟s profit and be acceptable to the factory managers.
(10 Marks)
d. Discuss TWO qualitative factors that the top management needs to consider
in taking these decisions. (4 Marks)
(Total 30 Marks)
55

SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE
QUESTIONS (40 MARKS)
QUESTION 2
Nwokocha and Sons Bakery Limited uses absorption costing technique in its
accounting system. The company produces and sells three bakery products, namely
four corner loaf (F), round corner loaf (R) and executive loaf (E) which are
substitutes for each other. The following standard selling prices and cost data
relate to these three products:
Product Selling Direct materials Direct labour Variable

Price per unit per unit expenses
Per unit (N) per unit
F 200.00 25kg at N3 per kg 1.2hrs at N10.00 per hr 1.2hrs at N5 /hr
R 250.00 30kg at N3 per kg 1.5hrs at N10.00 per hr 1.5hrs at N5/ hr
E 300.00 38kg at N3 per kg 1.8hrs at N10.00 per hr 1.8hrs at N5/hr
Annual budgeted fixed production overhead was N3,840,000. The company policy
is that overhead will be absorbed on a machine hour basis. The standard machine
hour for each product and the monthly budgeted level of production and sales for
each product are as follows:
Product F R E
Standard machine hour per unit 0.3 hr 0.6hr 0.8 hr
Monthly budgeted production and sales (units) 10,000 13,000 9,000
Actual volumes and selling prices for the three products in a particular month are
as follows:
Product F R E
Actual selling price per unit (N) 220 260 320
Actual production and sales (unit) 9,500 13, 500 8,500
a. Calculate the following variances for overall sales for the particular month:
i. Sales price variance; (2 Marks)
ii. Sales volume profit variance; (2 Marks)
iii. Sales mix profit variance; and (3 Marks)
iv. Sales quantity profit variance. (3 Marks)
b. Determine the monthly budgeted profit for the company. (6 Marks)
c. Discuss the significance of mix variances in a standard costing system?

(4 Marks)
(Total 20 Marks)
56

QUESTION 3
a. Adetoy Nigeria Limited has been in business for more than a decade. The
company distributes and sells children toys. The company has an Accounts
Department that normally prepares monthly and yearly financial statements.
The management of Adetoy has found this report adequate for its need over
the years until recently when the company decided to be producing its own
brand of toys with special orders from some of its customers.
The management of Adetoy has been struggling on how to decide on the
price to charge for special orders and whether to accept some large orders
with a reduction in prices. The company‟s production facility has enough
capacity to meet all the orders. However, because of its full cost-plus pricing
system, it has been rejecting some orders where the customers could not pay
the price the company charges. As a result of this, the company has been
losing some of its customers.
To help the company look at its cost structure and provide management
information for decision making, the company recently employed a
management accountant. During the last management meeting, the
management accountant informed management that the company has been
losing its customers and potential profits because it has not been using
relevant costs for its decisions. The management therefore asked the
management accountant to explain the concept of relevant costs to inform
the management more about this.
Required:
In the context of relevant costs, explain the following:
i. Incremental costs;
ii. Differential costs;
iii. Avoidable and unavoidable costs;
iv. Committed costs;
v. Sunk costs; and
vi. Opportunity costs. (12 Marks)
b. Deban Construction Limited is deciding whether or not to proceed with a

one-off special contract for which it would receive a one-off payment of
N2,000,000.
Details of relevant costs are:
(i) The special contract requires 2,000 hours of labour at N600 per hour.
Employees possessing the necessary skills are already employed by
Deban Construction Limited but are currently idle due to a recent
downturn in business;
(ii) Materials X and Y will be used, 100 tonnes of material X will be
needed and sufficient quantity of material X is in inventory as the
57

material is in common use by the company. Original cost of material X
in inventory was N1,500 per tonne but it would cost N1,800 per tonne
to replace if used on this contract. Material Y is in inventory as a result
of previous over-purchasing. The original cost of material Y was
N500,000 but it has no other use. Material Y is toxic and if not used in
this contract, Deban Construction Limited must pay N240,000 to have
it disposed;
(iii) The contract will require the use of a storage unit for three months.
The company has recently leased the unit for one year at a rental of
N80,000 per month. The unit is not in use at present. However, a
neighbouring business has recently approached Deban construction
Limited offering to rent the unit from them for N110,000 per month;
and
(iv) Overheads are absorbed at N750 per labour hour which consist of
N500 for fixed overhead and N250 for variable overhead. Total fixed
overheads are not expected to increase as a result of the contract.
A trainee accountant has performed the following calculation which
shows that the contract will cost N3,590,000 to deliver and concluded
that the contract should therefore not be accepted for N2,000,000:
Relevant cost
Description N
Labour: 2,000 hours x N600 1,200,000
Material X:100 tonnes x N1,500 150,000
Material Y: Original cost 500,000
Storage: 3 months x N80,000 240,000
Overheads: N750 x 2000 1,500,000
Total 3,590,000
Required:
Calculate the relevant cost of the contract and advise whether the contract
should be accepted or not on financial grounds. (8 Marks)
(Total 20 Marks)
QUESTION 4
ABC Limited is a medium-sized family-owned company, located in Lagos. It

manufactures a range of high-quality electrical household goods as well as buying
completed products for resale from a number of suppliers. It sells its products
through a variety of outlets such as mail order catalogue companies, large stores,
small retail outlets and directly to household customers.
The company has many computer systems which were installed 10 years ago.
However, the systems are not networked in terms of the information they hold
about inventory, customers, sales and purchases information, as each department
58

is responsible for only its part of the system. For example, the accounting
department keeps a regularly updated file on customers and orders placed, but this
data is held separately from the data maintained by the sales department on
customers.
Although, the systems have proved adequate in the past for areas such as payroll,
financial accounting and sales order invoicing, but do not meet the changing
information requirements for management decision-making in a competitive
market. For example, information relating to inventory levels is available to sales
staff online, but is often out of date as the master-files are only updated on a
weekly basis. Technical faults and breakdowns mean that the systems are often
unavailable and customers are requested to try again later. Managers at all levels
of the company are now clamouring for a change in the company‟s information
system and have therefore recommended to the directors to consider changing the
systems.
The directors, who also wish to expand the company within the whole country, have
accepted this recommendation. They now want to appoint a temporary Project
Manager to lead a small team responsible for the new systems development
project. The directors of ABC Limited consider that the appointed Project Manager
will be required only for a secondment period of approximately 12 months, while
the systems development and installation are taking place. After the successful
completion of the project, the appointee will return to his or her original position;
however, the directors consider this to be an opportunity for a member of staff to
gain excellent organisational, management and systems experience.
Required:
a) Identify and describe the responsibilities of the Project Manager within ABC
Limited. (10 Marks)
b) Discuss the skills that a Project Manager would require to successfully

implement a major project involving the design and installation of the new
computer system within ABC Limited. (10 Marks)
(Total 20 Marks)
SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE

QUESTIONS (30 MARKS)
QUESTION 5
Classic Wears Plc. manufactures three unique jeans wears for which the maximum
revenue for the coming year is estimated as follows:
N
Trousers 2,875,000
Jackets 4,800,000
Skirts 6,200,000
59

Summarised unit cost data are as follows:
Products Trousers Jackets Skirts

N N N
Direct material 1,000 900 700
Variable costs 800 1,600 1,000
Fixed costs 250 500 400
Total costs 2,050 3,000 2,100
The allocation of fixed costs was derived from last year‟s production level and this
may be reviewed, if current output plans are different.
Estimated selling prices are:
Products Price
N
Trouser 2,300
Jackets 3,200
Skirts 2,480
The products are processed on sewing machines housed in a building of three blocks.
Block A contains type I machine which has an estimated maximum of 19,600 machine
hours available in the forthcoming year with fixed overhead cost of N980,000 per
annum.
Block B contains type II machine of which 10,000 machine hours are estimated in the
forthcoming year with a fixed overhead cost of N750,000 per annum.
Block C also contains type II machine which also has an estimate of 8,000 machine
hours available in the forthcoming year. The fixed overhead cost of N370,000 is
estimated per annum for Block C.
The required machine hours for one unit of output for each Jeans on each type of
machine are as follows:
PRODUCTS
Trouser Jacket Skirt
Type I Machine 2hours 4hours 6hours
Type II Machine 3hours 6hours 2hours

a. Determine the optimal production plan which Classic Wears Limited should
adopt. (12 Marks)
b. Calculate the total profit that would be made, if the production plan in (a)
above is adopted. (3 Marks)
(Total 15 Marks)
60

QUESTION 6
Ben John (BJ) Limited produces light fittings, and has reputation for constant
design innovation. As a result, its products are seen as highly fashionable, but have
a short product market life cycle. The new product has been launched using market
skimming pricing policy. The industry is highly competitive and only a small
number of companies have survived in the industry and those that remain are
constantly aiming to develop new products.
Required:
Explain, with reasons, the likely changes that will occur in the unit selling price
and in the unit production costs of the product as it moves through each of the four
stages of its product life cycle of:
a. Introduction;
b. Growth;
c. Maturity; and
d. Decline. (Total 15 Marks)
QUESTION 7
Adrak Nigeria Limited produces five different products, and sells each product in a
different market.
The management accountant has obtained the following information about
market size and market share for each product which consists of actual data for
each of the last three years and forecasts for the next two years:
2016 2017 2018 2019 2020
Actual Actual Actual Forecast Forecast
Product 1 (N‟million)
Total market size 50 58 65 75 84
Product 1 sales 2 2 2.5 3 3.5
Product 2 sales 78 77 80 82 82
61

Product 5 sales 4 5 5.5 6 6.5
In the current year, the market share of the market leader or the nearest competitor
to the company has been estimated as follows:
Market share of market leader or the company‟s nearest competitor
Market for: %
Product 1 37
Product 2 26
Product 3 12
Product 4 29
Product 5 20
Required:
a. Using the Boston Consulting Group model, how should each of these
products be classified? (71/2 Marks)
b. How will this analysis help the management of the company to make
strategic decisions about its future products and markets („product-market
strategy‟)? (71/2 Marks)
(Total 15 Marks)
62

Formulae
Learning curve
Y = axb
where Y= cumulative average time per unit to produce x units
Demand curve
P = a – bQ
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
b = 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦
MR = a – 2bQ
Y= a + bX or Y - Y = b(x – X )
𝑪𝒐𝒗𝒂𝒓𝒊𝒂𝒏𝒄𝒆 (𝑿𝒀) n XY   X  Y
where b= =
𝑽𝒂𝒓𝒊𝒂𝒏𝒄𝒆 (𝑿) n X 2   X 
2
a= Y-bX
Y = na + b  X
X Y = a X +b X 2
63

Annuity Table
-n
Present value of an annuity of 1 i.e. 1 - (1 + r)
r
Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15
64

65

SOLUTION 1
(a) DASET DRINKS NIGERIA LIMITED
Investment centre
An investment centre is a division within an organisation where the manager

is responsible not only for the costs of the division and the revenues, but also
for decisions relating to investment in assets for the division. An investment
centre manager usually has authority to purchase new assets, such as items
of plant or equipment, and so should be responsible for the profit or return
that the division makes on the amount that it has invested.
The performance of an investment centre might be measured by calculating

the profit as a percentage of the amount invested (The Return on
Investments (ROI)). It could also be measured by considering the residual
profit after making provision for cost of capital.
An investment centre might include a number of different profit centres. For

example, a company manufacturing cars and buses may have two
investment centres: (1) car-making and (2) bus-making. Within the bus-
making division, there could be several profit centres, each of these being a
separate location or factory at which buses are manufactured and
assembled.
Profit centre
A profit centre is a department or division within the organisation for which

revenues as well as costs are established.
The profit or loss that the centre makes is determined by measuring the costs
of the products or services produced by the centre to the revenues earned
from selling them.
The following is an example of a summarised profit centre report:
N‟000
Revenues of the profit centre ***
Costs of the units sold by the profit centre (***)
Profit/(loss) of the profit centre **
A profit centre may consist of several cost centres. For example, a factory
might be treated as a profit centre, and within the factory, the machining
department, assembly department and finishing department could be three
cost centres.
Revenue centre
A revenue centre is a department or division within the organisation for

which revenues are generated. In a revenue centre, there is no
measurement of cost or profit. Revenue centre managers will only need to
have information relating to revenues and will be accountable for revenues
66

only. For example, the income accountant in a hospital is only responsible
for recording and controlling the different incomes that are received from
funding bodies or other sources (for example, private patients, donors,
fundraising and so on).
Cost centre
A cost centre is a department or work group for which costs are established,
in order to measure the cost of output produced by the centre. For example,
in a factory, a group of machines might be a cost centre. The costs of
operating the machines would be established, and a cost could then be
calculated for each unit of product manufactured by the machines.
In a cost centre, there is no measurement of revenue or profit.
(b) A divisionalised structure refers to the organization of an entity in which

each operating unit has its own management team which reports to a head
office. Divisions are commonly set up to be responsible for specific
geographical areas or product lines within a large organization.
When an organization has a divisionalised structure, some of the divisions

may supply goods or services to the other divisions in the same organization.
The division that sells goods or services to other divisions is referred to as
selling division. While the division(s) that buy(s) the goods or services is
(are) referred to as buying division(s).
The problems likely to be associated with a divisionalised structure include:
i. The problem of acceptable transfer price between the selling and the
buying division. A decision has to be made about what the transfer
price should be for goods and services transferred from one division to
another;
ii. Goal congruence – Each divisional manager may be pursuing goals

that are good for his/her division but not in the best interest of the
organization as a whole. For example, a divisional manager for a
division that is an investment centre, may put off buying a needed
non – current asset so as to improve his/her return on investment
(ROI);
iii. Top management may lose control over the organization if they allow
decentralization without accountability. It will be necessary to
monitor divisional performance closely. The cost of such monitoring
system may be high;
iv. Performance Measurement – How to evaluate the performance of the
Divisional Managers may pose some problems; and
v. There may be duplication of functions and functional managers. Each
division may have to set up its functional units with managers
overseeing the functions.
67

(c) Ideal transfer Price:
First, what is in the best interest of the company as a whole is determined.
For each bottle of soft drink that the company produced and sold, the
company makes additional contribution as follow:
Soft Bottle Crown Company

drink cork
N N N N
Selling price/Transfer price 100.0 3.0 0.30
Less: Variable cost of bottle 3.0 3.0 -
Variable cost of crown cork 0.3 - 0.30
Variable additional processing
costs (80 – (3 + 0.3) 76.7 - -
80.0 3.0 0.30
Contribution per unit 20.0 NIL NIL 20.0
If bottling division buys bottles and crown corks internally, the company, as
a whole, will make N20.0/unit contribution even though it looks like bottle
and crown corks divisions did not contribute anything to the overall
contribution.
However, if the bottling division buys bottles and crown cork at external
market prices, the company, as a whole, also makes N20 contribution with
soft drinks bottle and crown cork divisions making contribution as follows:
Soft Bottle Crown Company

drink cork
N N N N
Selling price/Transfer price 100.0 5.0 0.50
Variable cost (76.7 + 5 + 0.5) 82.2 3.0 0.30
Contribution 17.8 2.0 0.20 20.00
Ideal Transfer Prices:
Since the external market price of bottles and crown corks are ₦5 and ₦0.5
respectively, and variable costs of production are ₦3 and ₦0.3 respectively,
the ideal transfer prices are as follows:
 Bottles; from ₦3 to ₦5.

In view of the current arguments of the divisional managers, ₦5, which is
the external market price, will be the most ideal for evaluation of the
divisional manger‟s performance.
 Crown corks; from ₦0.3 to ₦0.5.
In view of the current arguments of the divisional managers, ₦0.5, which
is the external market price, will be the most ideal for evaluation of the
divisional manger‟s performance.
68

(d) Other qualitative factors the top management needs to consider in taking
these decisions include:
 Will the external supplier be able to meet up with the quality that
meets with the bottling division‟s specifications?
 To protect the company‟s brand, it is also very important to buy from
the internal supplier rather than the external supplier;
 The company may not be able to control the external supplier as it can
do with the internal suppliers;
 The external suppliers may not be able to meet up with the demand of
the bottling division for bottles and crown corks, as the case may be,
because they will have to satisfy their other customers as well;
 Market conditions: Would the bottle and crown cork divisions be able
to produce and sell all their products in the external market?
 The need to encourage initiatives of the divisional managers;
 Loss of market shares if transfers are to be made internally using
variable costs; and
 The level of exposure and experience of the divisional managers.
EXAMINER‟S REPORT
The question tests candidates‟ understanding of the concept of performance

evaluation in a divisionalised organisation and differentiate the various
responsibility centres and the management problems that may be faced by the
organisation.
It also tests the candidates‟ ability to apply the concept of transfer pricing in
advising a company as well as relevant qualitative factors for decision making.
(a) Candidates are expected to explain and give at least, one example each of
Investment Centre, Profit Centre, Revenue Centre and Cost Centres.
(b) A vivid explanation of the concept of divisionalisation as an organisational

structure in identifying its basic features and problems associated with it.
(c) Candidates are expected to present data on the contributions made by the
three divisions respectively, when cost-based (variable costs) and market-
based transfer prices are used. This is to arrive at a conclusion and
recommended prices for the divisions that will maximise the company‟s
profit and at the same time acceptable to divisional managers. They are
also expected to identify and explain two qualitative factors that support the
decision made in part c of the question.
69

About 20% of the candidates showed a good understanding of the various concepts
tested in the question.
The commonest pitfall of the candidates in answering the question was their
inability to identify and explain the decision-making problems, authority and
responsibilities of the respective centres.
Candidates are advised to put in more extensive attention to details while reading
and preparing for future examination.
MARKING GUIDE
Description Marks Marks
(a) Definition and description of investment centre, profit centre,

revenue centre and cost centre 1 mark each 4
Appropriate example for each 1 mark each 4 8
(b) Description of divisional structure 4

List of associated problems, at least 4 4 8
(c) Calculation of optimal result for the company as a whole:

Contribution of each soft drink bottle, if bottle and crown
cork are sourced internally 3
Contribution of each soft drink bottle, if bottle and crown

cork are sourced from the external market 3
Determination of optimal decision (1 mark each) 2
Determination of ideal transfer price for bottles 1
Determination of ideal transfer price for crown corks 1 10
(d) Qualitative factors, at least 2 points at 2 marks each 4

30
70

SOLUTION 2
NWOKOCHA AND SONS BAKERY LIMITED

a. CALCULATION OF SALES VARIANCES
(i) Sales Price Variance
Standard Actual Variance
(Std. price x Act. qty) (Act. price x Act. qty)
Product F N200 x 9,500 = 1,900,000 N220 x 9,500 = 190,000 F
2,090,000
Product R N250 x 13,500 = 3,375,000 N260 x 13,500 = 135,000 F
3,510,000
Product E N300 x 8,500 = 2,550,000 N320 x 8,500 = 170,000 F
2,720,000
7,825,000 8,320,000 495,000 F
(ii) Sales Volume Profit Variance

Budgeted qty Actual Difference Profit Margin Variance
(Actual qty)
Product F 10,000 9,500 500 101.67 50,835 A
Product R 13,000 13,500 -500 126.83 63,415 F
Product E 9,000 8,500 500 144.78 72,390 A
32,000 31,500 500 59,810 A
(iii) Sales Mix Profit Variance

Standard Mix Actual Mix Difference Profit Variance
Margin
(Std. proportion x Actual qty)
Product F 10,000/32,000 x 31,500 = 9,844 9,500 344 101.67 34,974 A
Product R 13,000/32,000 x 31,500 = 12,797 13,500 -703 126.83 89,161.49 F
Product E 9,000/32,000 x 31,500 = 8,859 8,500 359 144.78 51,976 A
31,500 31,500 0 2211.49 F
(iv) Sales quantity Profit Variance

Standard Yield Actual Yield Difference Profit Variance
Margin
(Budgeted qty) (Std. proportion x Actual qty)
Product F 10,000 9,844 156 101.67 15,861 A
Product R 13,000 12,797 203 126.83 25,746.49 A
Product E 9,000 8,859 141 144.78 20,414 A
32,000 31,500 500 62,021.49 A
Calculation of Standard Profit Margin

Product Selling price Direct Direct Variable Fixed Profit
(N) Material (N) Labour expenses overhead Margin
(N) (N) (N) (N)
F 200 (75) (12) (6) (5.33) 101.67
R 250 (90) (15) (7.50) (10.67) 126.83
E 300 (114) (18) (9) (14.22) 144.78
71

𝐹𝑖𝑥𝑒𝑑 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑂𝑣𝑒𝑟 ℎ𝑒𝑎𝑑 (𝐹𝑃𝑂𝐻 ) 𝑁3,840 ,000
 OAR ∗= = = N17.78/machine hr
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑀𝑎𝑐 ℎ𝑖𝑛𝑒 ℎ𝑜𝑢𝑟𝑠 216 ,000
Where OAR = Overhead Absorption Rate
Budgeted Machine hours per annum = (0.3hr x 10,000 x 12mths) + (0.6hr x

13,000 x 12mths) + (0.8hr x 9,000 x 12mths) = 216,000hrs
Therefore, fixed overhead per unit for;
Product F = 0.3hr x N17.78 = N5.33
Product R = 0.6hr x N17.78 = N10.67
Product E = 0.8hr x N17.78 = N14.22
(b) Budgeted Profit

Monthly budgeted Sales N N
F = 200 x N10,000 = 2,000,000
R = 250 x N13,000 = 3,250,000
E = 300 x N9000 = 2,700,000 7,950,000
Less Standard cost
Material: F = 25 x 3 x N10,000 750,000

R = 30 x 3 x N13,000 = 1,170,000
E = 38 x 3 x N9,000 = 1,026.000 (2,946,000)
Labour: F = 1.2 x 10 x N10,000 120,000
R = 1.5 x 10 x N13,000 195,000
E = 1.8 x 10 x N9,000 162,000 (477,000)
Variable Expenses: N N
F = 1.2 x 5 x N10,000 60,000
R = 1.5 x 5 x N13,000 97,500
E = 1.8 x 5 x N9,000 81,000 (238,500)
Monthly Budgeted Fixed overhead
N3,840,000 /12 (320,000)
Budgeted Profit =
3,968,500
(c) Significance of mix variances in standard costing system.

Variance analysis generally, is important for performance evaluation, cost
control and management by exception. A firm operating a standard costing
system calculates variances for each element of cost for which standards
have been set.
Increase in efficiency
Mix variance analysis helps in increasing the efficiency as well as
effectiveness of production;
72

Proper decisions
Mixed variances are also helpful for taking proper decisions for deciding cost
which will help management in reducing cost burden.
EXAMINER‟S REPORT
The question tests candidates‟ understanding and knowledge of calculating sales

price variances, sales volume variance, sales mix profit and the significance of mix
variances in standard costing system.
The points expected to be raised include evaluating individual performances

between attained performance and desired performance, assigning responsibilities
to individuals top management drawing their attention only to exceptional
variances and increase in the efficiency of production, effective utilisation of
resources, using the principle of management by exception.
Candidates‟ understanding of the question was not encouraging as most of them

were using selling price instead of contribution margin. The candidates did not
have good understanding of variance analysis. About 80% of them did not take
into consideration the fixed cost element in determining the profit of each product.
The commonest pitfalls could be traced to lack of knowledge and understanding of

the topic. Candidates‟ inability to calculate mix variance and the fact that they
could not identify correctly whether the variances are favourable or adverse.
Candidates should pay more attention to the nitty gritty of standard costing with
emphasis on variance analysis and make better use of relevant text books on the
topic, while preparing for future examinations.
MARKING GUIDE Marks Marks

2. ai. Computation of sales price variance
4 ticks at ½ mark each 2
ii. Computation of sales volume profit variance
iii. Computation of sales mix profit variance
iv. Computation of sales quality profit variance
6 ticks at ½ mark each 3 10
b. Determination of monthly budgets profit

18 ticks at 1/3 mark each 6
c. Discussion of significance of a mix variances

Any 4 points out of 7 points at 1 mark each 4
20
73

SOLUTION 3
ADETOY NIGERIA LIMITED
(a)
i. INCREMENTAL COST
An incremental cost is an additional cost that will be incurred if a

particular decision is taken. An incremental cost is a relevant cost
provided that this additional cost is a cash flow,
ii. DIFFERENTIAL COST
A differential cost is the amount by which future costs will be

different, depending on which course of action is taken. A differential
cost is therefore an amount by which future costs will be higher or
lower, if a particular course of action is chosen. Provided that this
additional cost is a cash flow, a differential cost is a relevant cost.
Example:
A company needs to hire a bus for the next six months. It has to decide
whether to continue using a particular type of bus, which it currently
rents for ₦25,000 each month, or whether to switch to using a bigger
bus that will cost ₦36,000 each month. If it hires the bigger bus, it
will be able to terminate the rental agreement for the current bus
immediately.
The decision is whether to continue with using the current bus, or to

switch to the bigger bus.
One way of analysing the comparative costs is to say that the bigger
bus will be more expensive to rent, by ₦11,000 each month for six
months.
The differential cost of hiring the bigger bus for six months would
therefore be ₦66,000.
iii. AVOIDABLE AND UNAVOIDABLE COSTS
An avoidable cost is a cost that could be saved (avoided), depending

whether or not a particular decision is taken. An unavoidable cost is a
cost that will be incurred anyway.
 Avoidable costs are relevant costs.
 Unavoidable costs are not relevant to a decision.
74

Example:
A company has one year remaining on a short-term lease agreement

on a warehouse. The rental cost is ₦500,000 per year. The warehouse
facilities are no longer required, because operations have been moved
to another warehouse that has spare capacity.
If a decision is taken to close down the warehouse, the company

would be committed to paying the rental cost up to the end of the
term of the lease. However, it would save local taxes of ₦56,000 for
the year, and it would no longer need to hire the services of a security
company to look after the empty building, which currently costs
₦240,000 each year.
The decision about whether to close down the unwanted warehouse

should be based on relevant costs only.
Local taxes and the costs of the security services (₦296,000 in total for
the next year) could be avoided and so these are relevant costs.
The rental cost of the warehouse cannot be avoided, and so should be

ignored in the economic assessment of the decision whether to close
the warehouse or keep it open for another year.
iv. COMMITTED COST
Committed costs are a category of unavoidable costs. A committed

cost is a cost that a company has already been committed to or an
obligation already made, that it cannot void by any means.
Committed costs are not relevant costs for decision making.
Example:
A company bought a machine one year ago and entered into a

maintenance contract for ₦240,000 per annum for three years.
The machine is being used to make an item for sale. Sales of this item
are disappointing and are only generating ₦150,000 per annum and
will remain at this level for the next two years.
The company believes that it could sell the machine for ₦250,000.
The relevant costs in this decision are the selling price of the machine
and the revenue from sales of the item.
If the company sells the machine it would receive ₦250,000 but lose
₦300,000 revenue over the next two years – an overall loss of ₦50,000
75

The maintenance contract is irrelevant as the company has to pay
₦240,000 per annum whether it keeps the machine or sells it.
Leases normally represent a committed cost for the full term of the
lease, since it is extremely difficult to terminate a lease agreement.
v. SUNK COSTS
Sunk costs are costs that have already been incurred (historical costs)
or costs that have already been committed by an earlier decision.
Sunk costs must be ignored for the purpose of evaluating a decision,
and cannot be relevant costs.
Example:
A company must decide whether to launch a new product into the

market.
It has spent ₦1.9m on developing the new product, and a further

₦750,000 on market research.
A financial evaluation for a decision whether or not to launch the new

product should ignore the development costs and the market research
costs, because the ₦2.65m has already been spent. The costs are sunk
costs.
vi. OPPORTUNITY COSTS
Relevant costs can also be measured as opportunity costs. An

opportunity cost is a benefit that will be lost by taking one course of
action instead of the next-most profitable course of action.
Example:
A company has been asked by a customer to carry out a special job.

The work would require 50 hours of skilled labour time. There is a
limited availability of skilled labour, and if the special job is carried
out for the customer, skilled employees would have to be moved from
doing another work that earns a contribution of ₦6,000 per labour
hour.
A relevant cost of doing the job for the customer is the contribution
that would be lost by switching employees from other work. This
contribution forgone (i.e 50 hours × ₦6,000 = ₦300,000) would be an
opportunity cost.
This cost should be taken into consideration as a cost that would be

incurred as a direct consequence of a decision to do the special job for
the customer. In other words, the opportunity cost is a relevant cost in
deciding how to respond to the customer‟s request.
76

(b) i. The relevant cost of labour is zero as no extra cost will be incurred as
a result of this contract.
ii. The relevant cost of a material that is used regularly is its replacement
cost. Additional inventory of the material must be purchased for use in
this contract. The relevant cost of material X is therefore ₦1,800 per
tonne i.e. ₦1,800 x 100 = ₦180,000
There is a relevant saving from using material Y from not having to

pay the disposal cost of ₦240,000.
iii. As the company has already leased the storage unit for one year, the
monthly rental cost is not relevant to the contract. However, the
opportunity cost is the foregone rental income that the company
would have made from the neighbouring business for the three
months needed for this contract. i.e. 3 x ₦110,000 = ₦330,000.
iv. The fixed overhead is not relevant because there is no increment to

fixed overheads expected as a result of this contract. Therefore the
relevant overhead cost is just the variable part of ₦250 per hour x
2,000 hours = ₦500,000.
So, the total relevant cost is ₦770,000 as follows:
Description Relevant
cost
N
Labour -
Material X 180,000
Material Y (240,000)
Storage 240,000
Storage 90,000
Overheads 500,000
Total 770,000
Conclusion: The contract should be accepted as it would make an
incremental profit to the company, i. e, ₦1,230,000 (revenue of
₦2,000,000 less relevant costs of ₦770,000).
EXAMINERS REPORT
The question tests candidates‟ understanding of Relevant Costing as a tool for

management decision making.
Candidates are expected to demonstrate their knowledge on:
(i) Incremental cost, Additional cost, Relevant cost and extra unit produced;
77

(ii) Differential cost – comparison between two alternative costs; and
(iii) Sunk cost – past cost and irrelevant cost.
(iv) Committed cost – irrelevant, obligatory and committed expenses that must
be paid.
About 80% of the candidates who attempted the question scored 50% or above of
the allocated marks.
Commonest pitfall of the candidates who did not do well was their inability to
identify the relevant cost especially on labour and opportunity cost.
Candidates are advised to make better use of standard texts, such as the Institute‟s
Pathfinder past editions and Study Text.
(a) Discussion of each of the 6 concepts (2 marks each) 12
(b) i. Calculation of Total Relevant Cost 6

ii. Heading ½
iii. Advice/Accept ½
Iv Basis of Acceptance 1 8
20
SOLUTION 4
(a) Project management has nine key elements. The responsibilities of the
project manager will be to manage each of these nine elements.
 Scope
At the outset of the project, the project manager will define the scope
of the project and set objectives. These will then need to be agreed
with the Board of Directors before the project begins and form the
basis for the overall project direction;
 Risk management
The project manager will be responsible for identifying any major risk
associated with the project (e.g. a supplier delivering late), and
managing these risks through transferring risks to other parties,
avoiding risks or accepting them and managing the consequences as
they happen;
78

 Integration
The project manager will need to develop plans for the development
and implementation of the new systems. This will ensure that the
process happens quickly and easily and uses the resources in the best
way.
To integrate the new system into the organisation, these plans will
need to consider change in management issues. People have been
using the old system for a while and will need to adapt to the change
in approach. It may also mean changing job roles and working
practices which could cause conflict and staff dissatisfaction if not
effectively managed;
 Time
Each of the activities will need to be defined and their duration
estimated. They can then be sequenced and time schedules made,
using techniques such as Gantt Charts or Network Analysis. This will
help to ensure that the project is well organised and co-ordinated;
 Cost
A budget for the project must be defined. This might be done through
cost estimates from suppliers or by costing each specific element of
the project individually. Throughout the course of the project, the
project manager will need to monitor costs and take control action if
costs are not in line with budget;
 Quality
It is project manager‟s responsibility to develop the Project Quality
Plan which outlines expected quality of the new information and
systems. They will need to monitor progress against this plan and
ensure that the quality objectives are met. This will mean ensuring
that the systems are developed by experienced suppliers and
adequate testing is undertaken prior to the system going live;
 Resources
This will involve the acquisition and effective management of staff,
materials, buildings and equipment, and ensuring that each of these
resources is adequately co-ordinated and managed;
 Communication
Communication to all stakeholders will need to be undertaken on a
regular basis. This will include reporting to the Board of Directors on
progress, and agreeing with any major changes in the scope.
79

It will also involve good team communication and management to
ensure team members remain motivated and committed to the
project;
 Procurement
The project manager will be responsible for procuring goods and
services from external suppliers. This is likely to include the design
and development of the new information system since ABC Limited
has little in-house expertise; and
 Motivation
Motivation is a key role in managing people for productivity, hence
every team member should be given the opportunity to own the tasks
assigned to him/her. The project manager is expected to provide the
required enabling environment for team members to excel.
(b) The skills required by the project manager are as follows:
 Change management skills

He/She will have to be skilled in understanding the people aspects of
the change and helping to overcome resistance to change. This may
involve knowledge of change management tools;
 IT skills
Since the project is IT-based, some IT knowledge and ability will help
the project manager to understand the key issues and negotiate
effectively with suppliers;
 Leadership
Leadership involves obtaining results through personal direction and
influence. The project manager will need to be able to create a vision
for the team, be assertive, inspire and motivate staff;
 People skills
The project manager will need to understand the concerns and
motivations of team members and to effectively manage them. This
may involve the use of a suitable management style and
understanding of approaches to motivation of staff. The aim will be to
create a motivated and happy team that works well to achieve the
project‟s goals;
 Communication skills
A key role of the project manager is communication with staff,
suppliers or the Board of Directors. He/She will therefore have to be
80

able to use a variety of communication methods (i.e. presentations,
meetings, reports, e-mails) and know when to use these appropriately
and be skilled at using each;
 Problem-solving and decision-making skills

There will inevitably be many decisions to be taken during the course
of the project and problems to be overcome. The project manager
needs to be an analytical thinker who will be able to solve problems
as they arise and who is firm and decisive so that the project is not
delayed;
 Negotiation skills
Negotiation with suppliers and internal departments is an inevitable
part of the process. The project manager will need to understand the
basis of negotiation in order to ensure the best outcomes are achieved
for the organisation. This may involve being able to understand
leverage points over potential suppliers, to see the other parties‟
perspective being firm and willing to walk away when the deal is not
right; and
 Planning skills
The project manager will need project planning skills, and need to be
able to use project management software to make and monitor plans.
Knowledge of techniques such as Gantt Chart and Network Analysis
will facilitate this process.
Some basic financial knowledge or expertise would be an asset to
help with the budgeting and cost monitoring process.
EXAMINER‟S REPORT
The question tests candidates‟ understanding of Project Management with

emphasis on the roles/responsibilities and the skills required of a project manager.
Candidates were expected to list the responsibilities of a project manager, discuss

each of the responsibilities and also list the skills of a project manager describing
each of the skills.
The candidates showed lack of understanding of the requirements of the question.

Performance was poor as about 50% of the candidates who attempted the question
scored below 50% of the allocated mark.
The inability of the candidates to differentiate between the role/responsibility of a

project manager and that of ICT manager and not having clear understanding of
81

responsibilities and skills required by a project manager for successful
implementation of programme/project is their major pitfall.
Candidates are advised to understand the requirement of the question before

attempting it. They need to cover the syllabus and practise questions and answer
provided in the ICAN Pathfinder and Study Text.
MARKING GUIDE Marks
(a) 2 marks per responsibility

identified and explained, maximum of 5 10
(b) 2 marks per relevant skill
identified and explained, maximum of 5 10
20
SOLUTION 5
(a) i. CLASSIC WEARS LIMITED

Computation of Machine Limited Hours
Machine I Machine II
HRS HRS
Sales Requirements:
Trouser:
1,250 x 2 2,500
1,250 x 3 3,750
Jackets:
1,500 x 4 6,000
1,500 x 6 9,000
Skirts:
2,500 x 6 15,000
2,500 x 2 _______ 5,000
Total hours needed 23,500 17,750
Less: Total hours available 19,600 18,000
Deficit/Surplus (3,900) 250
Based on the above, machine 1 hours represent the limiting factor

because the hours available are lower than required.
82

ii. Determination of Ranking
Products Trouser Jacket Skirt
Selling Price ₦2,300 ₦3,200 ₦2,480
Less: variable costs ₦1,800 ₦2,500 ₦1,700
Contribution ₦500 ₦700 ₦780
Machine hour required: Type I 2 4 6
Contribution per hour ₦250 ₦175 ₦130
Ranking 1st 2nd 3rd
iii. Determination of Production Plan

Hrs per Hrs available Hrs Hrs Rem. Production
unit ¾ Production Utilised After plan achieved
T: 1,250 x 2 2 19,600 2,500 17,100 1,250
J: 1,500 x 4 4 17,100 6,000 11,100 1,500
S: (11,100 ÷ 6) = 1.850 6 11,100 11,100 NIL 1,850
Production Plan
Trouser = 1,250 ; Jacket = 1,500 ; Skirt = 1,850
Workings
Estimated production
Estimated sales ÷ Estimated Selling Price
Trouser = N2,875,000 ÷ N2,300 = 1,250 units
Jacket = N4,800,000 ÷ N3,200 = 1,500 units
Skirts = N6,200,000 ÷ N2,480 = 2,500 units
b. Computation of Optimum profit
Trouser Jacket Skirt Total

N N N N
Unit (A) 1,250 1,500 1,850
Unit contribution (B) 500 700 780
Total Contribution (A x B) 625,000 1,050,000 1,443,000 3,118,000
Less Fixed Cost
Block A Machine 980,000
Block B Machine 750,000
Block C Machine 370,000 2,100,000
Total optimum profit 1,018,000
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of Marginal Costing involving the

application of limiting factors in the determination of optimum company‟s profit.
Candidates were expected to address the following points:
83

(a) Determination of machine I, as the limiting factor out of machines I and II
for each product;
(b) Contribution per machine I hours for each product;
(c) Product ranking;
(d) Production hour‟s utilised in producing each of the three products; and
(e) Units turned out for each product and optimum company‟s profit.
About 90% of the candidates attempted the question. About 50% of the candidates
who attempted the question scored 50% or above of the allocated marks.
Candidates‟ commonest pitfall was that some of them took the requirements of
units and Naira of sales as same and not able to calculate beyond the
determination of contribution per hour.
Candidates are advised to put in more effort while preparing for future
examinations and pay more attention on this aspect of the syllabus.

(a) Determination of Optimal Production
i. Computation of sales in units for each product 1
ii. Computation of machine limiting hours
(Deficit/Surplus)
- Machine I 1½
- Machine II 1½
- Machine Limitation 1 4
iii. Determination of contribution
Trouser 1¼
Jacket 1¼
Skirt 1¼
Ranking ¼ 4
iv. Computation of machine time required:
Machine time 1½
Production plan 1½ 3
(b) Computation of total profit from plan

i. Contribution 1¼
ii. Fixed cost 1¼
iii. Profit ½ 3
Total 15
84

SOLUTION 6
The company has just launched an innovative new product using a market
skimming pricing policy. This means that the selling price of the product is high
and thus, the product is only available to a small segment of the market that can
afford to pay the high price for something that is unique and innovative.
The four stages to the product life cycle of each of unit selling price and unit
production cost are Introduction, Growth, Maturity and Decline.
Unit Selling Price

Introduction: The initial selling price will be high as this will quickly recover the
development costs of the product. The High Net Worth customers will not be
deterred from buying the product as it will be sold on the basis of its uniqueness
rather than its price.
Growth Stage: Unit selling price is likely to be reducing for a number of reasons.
● The product will become less unique as competitors use reverse engineering to
introduce their versions of the product.
● The company may wish to discourage competitors from entering the market by
lowering the price.
● The price needs to be lowered so that the product becomes attractive to
customers in different market segments thus increasing demand to achieve
growth in sales volume.
Maturity Stage: As the product enters the maturity stage, the price will need to be
lowered further, possibly by short-term one-off offers or discounts for multiple
purchases so that the product continues to be financially viable for as long as
possible.
Decline Stage: When the product enters the decline stage, the price will be lowered
to marginal cost or even lower in order to sell off inventories of what is now an
obsolete product as it has been replaced by a more technologically advanced
product.
Unit Production Costs:

Introduction: Production costs are also likely to change throughout the product‟s
life cycle. Initially, production costs may be high due to low volume of activity and
the level of fixed costs being incurred to provide the production facility. In addition,
the labour and related costs are likely to be high as the employees have not yet
become experienced in making the product.
85

Growth Stage: Unit production costs are likely to reduce for the following reasons:
● Direct materials are being bought in larger quantities and therefore the
company may be able to negotiate better prices from its suppliers thus causing
unit material costs to reduce;
● Direct labour costs may be reducing if the product is labour intensive due to the
effects of the learning and experience curves; and
● Fixed production costs are being shared by a greater number of units.
The extent of the decrease in unit labour cost in particular, and its speed will
depend on the complexity of the manufacturing process, its similarity to previous
products, the experience and level of retention of the workforce.
Maturity Stage: In the maturity stage, production costs per unit are likely to remain
fairly constant because the learning period will have ended, the workforce will be
experienced in producing and in handling the raw materials and operating the
machinery.
Costs are incurred to maintain manufacturing capacity, marketing and product
enhancement cost to extend maturity
Decline Stage: In the decline stage, production costs per unit may increase due to
both lower volume and high workforce being less interested in a declining product
and trying to learn new skills in relation to other products.
Close attention to cost is needed as withdrawal decision might be expensive.
EXAMINER‟S REPORT
The question tests candidates‟ understanding of product market life cycle,
behavioural pattern with regards to unit selling price and unit production cost
when market skimming pricing policy is used.
Candidates are expected to explain, with reasons, the effect on unit selling price
and unit production cost as the product goes through the four stages of its life
cycle.
About 70% of the candidates did not fully understand the requirements of the
question and they left parts of the question unanswered thus loosing vital marks
allocated. About 30% who attempted the question scored 40% or above of the
marks allocated.
Candidates‟ commonest pitfall is their inability to fully provide solution to the

question thereby leading to loss of marks.
86

Candidates are advised to work harder while preparing for future examinations by
covering all aspects of the syllabus and make better use of the Institute‟s Study
Text, past edition of Pathfinder and relevant text books for future examinations.

Introduction 1
Price – relevant comments
at the various stages 7
Cost – same as price 7 15
SOLUTION 7
ADRAK NIGERIA LIMITED
Boston Consulting Group Model (Matrix)
Relative Market Share
High Low
High
Stars Question Marks

Market Growth
Cash Cows Dogs
Low
(a) A star is a product in a market that is growing quickly, where the company‟s
product has a large market share or where the market share is increasing.
Product 3 appears to be a star. The total market is expected to double in size
between Year 2016 and Year 2020. The expected market share in two years‟
time is 15% compared with 7.5% in Year 2. Its market share in the current
year is over 13%, which makes it the current market leader.
87

A cash cow is a product in a market that has little or no growth. The market
share, however, is normally quite high, and the product is therefore able to
contribute substantially to operational cash flows. Product 2 appears to be a
cash cow. In the current year, its market share was over 53% and it is the
market leader.
A dog is a product in a market with no growth where the product has a low
share of the market. Dogs are likely to be loss-making and its cash flows are
probably negative. Product 4 appears to be a dog. The total market size is
not changing, and the market share for product 4 is only about 3%. This is
much less than the 29% market shares of the market leader.
A question mark is a product with a low market share in a market that is

growing fairly quickly. Product 1 appears to be a question mark. The total
market is growing quite quickly, but the market share of Product 1 is about
4% and this is not expected to change. Product 5 also appears to be a
question mark for the same reason.
(b) This model will help the company to decide on its strategy for the products it
will sell. The company may therefore, decide as follows:
i. It should benefit from the cash flows generated by its only cash cow,
i.e. Product 2;
ii. It should invest in its star, i.e. Product 3, with the objective that this
will eventually become a cash cow;
iii. It should give serious consideration to abandoning its dog, i.e.

Product 4, and withdrawing it from the market;
iv. It has to make a decision about its two question marks, i.e. Product 1
and Product 5. The main question is whether either of these products
can become a star and cash cow. Additional investment and a change
of strategy for these products might be necessary in order to increase
market share; and
v. For all the products (with the exception of Product 4, if this is

abandoned) the company should also consider ways of making the
products more profitable. Techniques, such as value chain analysis,
might help to identify cost savings.
88

ALTERNATIVE SOLUTION TO QUESTION 7
ADRAK NIGERIA LIMITED
a. PRODUCTS CLASSIFICATION USING BOSTON CONSULTING GROUP (BCG)

MODEL
Product 1 appears to be a question mark. A question mark is a product with
a fairly low market share in a market that is growing fairly quickly. The total
market is growing quite quickly, but the market share of Product 1 is about
4% (i.e. 3.5/84 x 100%) and this is not expected to change.
Product 1
High
Question
Mark
17%, 0.11
Market
Growth
Low
10 1.0 0.1
High Relative Market Share Low
Product 2 appears to be a cash cow. A cash cow is a product in a market that

has little or no growth. The market share, however, is normally quite high,
and the product is therefore able to contribute substantially to operational
cash flows. In the current year, its market share was over 53% (i.e. 82/154 x
100%), and it is the market leader.
Product 2
High
Market
Growth
Cash cow
0%, 2.05
Low
10 1.0 0.1
Product 3 appears to be a star. A star is a product in a market that is

growing quickly, where the company‟s product has a large market share or
where the market share is increasing. The total market is expected to double
in size between 2016 and 2020. The expected market share in two years‟
time is 15% (i.e. 12/80 x 100%), compared with 7.5% (i.e. 3/40 x 100%) in
89

2016. Its market share in the current year is over 13% (8/60 x 100%), which
makes it the current market leader.
Product 3
High
Star
20%, 1.25
Market
Growth
Low
10 1.0 0.1
Product 4 appears to be a dog. A dog is a product in a market with no

growth, and where the product has a low share of the market. Dogs are
likely to be loss-making and its cash flows are probably negative. The total
market size is not changing, and the market share for Product 4 is only
about 3% (i.e. 2/60 x 100%). This is much less than the 29% market share of
the market leader.
Product 4
High
Market
Growth
Dog
0%, 0.11
Low
10 1.0 0.1
Product 5 also appears to be a question mark. A question mark is a product

with a fairly low market share in a market that is growing fairly quickly. The
total market is growing quite quickly, but the market share of Product 5 is
about 4% (i.e. 6.5/150 x 100%) and this is not expected to change.
90

Product 5
High
Question
Mark
8%, 0.22
Market
Growth
Low
10 1.0 0.1
% Trend Analysis
2016 2017 2018 2019 2020 Market
Actual Actual Actual Forecast Forecast share of
market
leader
𝑃𝑟𝑜𝑑𝑢𝑐𝑡 𝑠𝑎𝑙𝑒𝑠 % % % % % %
x 100
𝑇𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑠ℎ𝑎𝑟𝑒
Product 1 4.00 3.45 3.85 4.00 4.167 37
Product 2 52.00 50.66 54.00 53.69 53.59 26
Product 3 7.5 10.00 13.33 14.29 15.00 12
Product 4 3.33 3.28 3.28 3.28 3.33 29
Product 5 4.00 4.46 4.46 4.29 4.33 20
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of Boston Consulting Group (BCG) model
as it affects market performance of multi-products organisation and their ability to
use the BCG model to make strategic decisions about future products and markets.
The question expects the candidates to classify the products using all the quadrants
in the BCG model viz STARS, CASH COWS, QUESTION MARKS and DOGS and ability
to explain each. Candidates are also expected to use the classification of products
to make strategic decision on future of the products and the market performance.
About 60% of the candidates attempted the question out of which about 20% scored
50% or above of the marks allocated.
The candidates‟ commonest pitfall was their inability to correctly draw and
interprete the BCG matrix. They were not able to calculate the trend analysis, in
percentage form, which is necessary to determine the relative growth rate and
market share.
Candidates are advised to create time to study and read widely in preparing for
future examinations and also make better use of the ICAN Study Text with other
relevant study materials.
91

(a) Model (Matrix) 1½
% Trend Analysis 1
Star – Product 3 1
Cash cow – (Product 2) 1
Dog – Product 4 1
Question mark – Product 1 1
Question mark – Product 5 1 7½
Model (Matrix) 1½
% Trend Analysis 1
Product 1 1
Product 2 1
Product 3 1
Product 4 1
Product 5 1 7½
(b) Any five points out of six at 1½ marks per point 7½

Total 15
92


QUESTION 1
JJ Company specialises in the manufacture and distribution of accessories for cars and motorcycles
across central Lagos and the suburbs. The board and management of the company have decided to
expand their potential market by capitalising on the recent demand for pedal cycles caused by
congestion and concerns for global warming. They intend to start manufacturing pedal cycles from
2019.
The design team has developed four models A, B, C and D for the initial launch of the pedal cycle.
The manufacturing process involves frame manufacturing and assembly/accessory fitting.
Year 1
At present, there are 40 employees who are available to undertake frame manufacturing and 20 who
are available to undertake assembly and accessory fitting. Each employee works a 37-hour week. At
present, no overtime is permitted, so all of the output has to be completed within the normal working
week. Employees working on the frame manufacturing cost N1,100 per hour. Those working on the
assembly/accessory fitting cost N1,500 per hour. All the employees can be fully utilised elsewhere in
the company if not working on this venture.
The anticipated time in hours that each process will take is as follows:
Model A B C D
Frame manufacturing 2.25 2.20 2.20 2.60
Assembly/accessory fitting 1.25 1.80 1.40 3.00
The direct materials are expected to cost N5,500 for model A, N6,000 for model B, N6,000 for model
C and N10,000 for model D. There is no limit on the availability of materials.
Variable overheads of N2,700 per pedal cycle are incurred for both A and C models and N3,000 per
pedal cycle for both B and D models.
Fixed overheads allocated to the pedal cycle workshop are N666,000 per annum. The organisation
uses labour hours upon which to base its overhead absorption rates.
59

The company has done some initial market research and this indicates that demand and selling prices
are likely to be as follows:
Model Number of Selling price

pedal cycles per unit
N
A 200 14,550
B 75 16,500
C 220 17,000
D 80 24,000
Year 2
In Year 2, all other factors are assumed to be as in Year 1. However, two further options are available
in order to meet demand.
The first is to lift the overtime ban and pay overtime at a rate of time and a half. If this happens
however, it would be necessary to raise the selling price of all units of the specific model being
completed outside normal working hours by N2,500 per pedal cycle. The selling price of the other
models would remain as in Year 1.
The second option is to buy-in the completed pedal cycle necessary to meet the demand from another
supplier. This would cost the company N27,000 per pedal cycle. The selling price of all units of the
model in question would be increased by N5,500, if this option were to be pursued. The board and
management are reluctant to pursue this option as they are concerned it may lower demand.
Required:
a. Determine the production plan that would maximise the profit available to JJ Company in Year
1 assuming that no overtime is worked. State the profit that would be earned as a result of this
plan. (14 Marks)
b. Advise JJ Company of its most profitable course of action in Year 2, assuming that all of the
demand is to be satisfied. (8 Marks)
c. Explain in detail, how the relationship between the company and the chosen supplier should be
controlled on the assumption that the directors of the company are giving consideration to
outsourcing their key inputs. (8 Marks)
(Total 30 Marks)
60

SECTION B: YOU ARE REQUIRED TO ANSWER TWO OUT OF THREE QUESTIONS
QUESTION 2
X and Y Divisions are two arms of the XY group of companies. X Division manufactures one type of
component which it sells to external customers and also to Y Division.
The following information relates to X Division:
Market price per component N200

Variable cost per component N105
Fixed costs N1,375,000 per period
Demand from Y Division 20,000 components per period
Capacity 35,000 components per period
Y Division assembles another type of product which it sells to external customers. Each unit of that
product requires two of the components that are manufactured by X Division.
The following information relates to Y Division:
Selling price per unit N800

Variable cost per unit:
Two components from X 2 @ transfer price
Other variable costs N250
Fixed costs N900,000 per period
Demand 10,000 units per period
Capacity 10,000 units per period
Group Transfer Pricing Policy
 Transfers must be at opportunity cost.

 Y must buy the components from X.
Required:
a. Calculate the profit for each division if the external demand per period for the components
that are made by X Division is:
i. 15,000 components
ii. 19,000 components

iii. 35,000 components (13 Marks)
61

b. Calculate the financial impact on the Group if Y Division ignored the transfer pricing policy
and purchased the 20,000 components that it needs from an external supplier for N170 each.
Your answer must consider the impact at each of the three levels of demand (15,000, 19,000
and 35,000 components) from external customers for the components manufactured by X
Division. (3 Marks)
c. Explain TWO attributes of a good transfer pricing policy. (4 Marks)

(Total 20 Marks)
QUESTION 3
Omegboeji Nigeria Limited is a trading company that specialises in buying and selling of bulk oil.
The company is financed by a capital base of N24 million inclusive of reserves in a mix of 30% and
70% of debt and equity respectively. The company has been in trading business for the past six years
and has consistently adhered to its corporate policy on sales, purchases and inventory management.
The company‟s policy on sales is to ensure that sales proceeds are collected as follows:
(i) Cash Sales is 30% of the monthly sales.
(ii) The balance of the month‟s sales is to be collected in the month following sales.
The policy on monthly purchases which is in agreement with the supplier‟s policy is to pay for all
supplies in the month following the month of purchase. The general policy of the company is that
purchase cost for bulk oil represents 60% of the corresponding annual sales value while its inventory
policy is to reserve 30% of the month‟s purchases as closing inventory.
The following information is available for the five years 2013 to 2017:
Actual Estimates
2013 2014 2015 2016 2017
N‟000 N‟000 N‟000 N‟000 N‟000
Monthly Sales 12,000 15,000 16,800 18,000 24,000
Monthly Salaries 800 800 960 960 1,080
Monthly Rent 400 400 400 400 400
Monthly Expenses 350 370 390 390 380
62

(i) The company will purchase a motor vehicle in July 2016 which will be paid for in two
instalments as follow:
First Payment will be 60% of cost in September 2016 while the balance will be paid in
November 2016. The cost of the motor vehicle is expected to be N7,500,000.
(ii) Annual depreciation for the motor vehicle will be 20% on a straight-line basis. Monthly
expenses include annual depreciation for the motor vehicle.
(iii) The cash balance as at December 31, 2014 was N2,500,000.
(iv) The company‟s salaries, rent and expenses will be paid in the month during which they are
due.
Required:
a. Prepare a cash forecast for 2015, 2016 and 2017, showing closing cash balance at each year
end. (10 Marks)
b. Prepare a forecast profitability statement for 2015, 2016 and 2017. (7 Marks)
d. Determine and comment on the forecast liquidity ratio (current ratio) for 2017.
(3 Marks)
(Total 20 Marks)
QUESTION 4
Julmat Limited, a manufacturing company, has developed a new product. This requires an initial
capital investment of N5m. At the end of the product‟s life, the capital equipment is expected to have
a value of N3m. Julmat Limited requires an Annual Rate of Return (ARR) of 20% on its average
investment on products of this type. The new product has an expected life of one year before it will
be replaced by a more advanced product.
Production
The new product will be manufactured in batches of 1,000 units using a just-in-time production
system.
The first batch is expected to incur a direct labour cost of N100,000 but a 75% learning curve is
expected until the cumulative production equals 30 batches.
Thereafter, each batch is expected to incur the same direct labour cost as that of the 30th batch.
The expected direct materials cost for the first batch is N50,000. However, an experience curve is
expected to apply to the first ten batches produced; thereafter no further savings in material costs per
batch are expected.
Other production costs are expected to be ₦10,000 per batch.
63

Sales
Sales of the new product are expected as follows for each of the four stages of the product life cycle:
Stage Units sold Selling

Price per unit
N
Introduction 10,000 120
Growth 30,000 100
Maturity 60,000 80
Decline 30,000 50
Note: The learning index for a 75% learning curve is - 0.4150.
Required:
a. Prepare calculations to show the total direct labour cost of the product for each of the four
stages of the product life cycle. (6 Marks)
b. Assuming that there is no experience curve in relation to the product‟s direct material cost,
prepare a statement that shows the profitability of the new product for each of the four stages
of the product life cycle individually and in total for the product‟s life.
(5 Marks)
c. Assuming that the direct material experience curve applies, calculate the average direct
material cost per batch that must be incurred in order for the company to meet its ARR target
over the life cycle of the product. (4 Marks)
d. Discuss the concept of life cycle costing and its effect on product pricing strategies at
different stages of the product life cycle. Use the Julmat Limited scenario to illustrate your
answer. (5 Marks)
(Total 20 Marks)
SECTION C: YOU ARE REQUIRED TO ANSWER TWO OUT OF THREE QUESTIONS IN

THIS SECTION (30 MARKS)
QUESTION 5
a. During the system analysis phase, the analyst uses different methods to obtain information.
You are required to discuss these methods, including their advantages and disadvantages.
(7 Marks)
b. Discuss SIX challenges likely to be encountered in the development of an organisation‟s

Management Information System. (8 Marks)
(Total 15 Marks)
64

QUESTION 6
DDD Limited is a relatively small, specialist manufacturer of chemicals that are used in the
pharmaceutical industry. It does not manufacture any pharmaceutical products itself since these are
made by different processes and under different conditions. DDD obtains its raw materials, which are
quite simple, from large chemical companies, and modifies them by a number of patented processes
before selling them to a few pharmaceutical companies. DDD makes significantly higher margins
than its suppliers, which manufacture in bulk. Several patents are due to expire in the next three
years. The large pharmaceutical companies, which are DDD's customers, are suffering reduced
profits as governments reduce the price they are prepared to pay for drugs. As a result, the
pharmaceutical companies are pressuring DDD to reduce its prices. Majority of the shares in the
company are owned by members of the family which started the business some years ago and who
still take active part both as managers of the business and as development chemists. There is a share
option scheme for the employees and this is well supported.
Required:
a. Advise the Board of Directors of the possible threats related to the patent expiring.
(7 Marks)
b. Appraise suitable courses of action that DDD might take to maintain its profits in the face of
the threats identified in (a) above. (8 Marks)
(Total 15 Marks)
QUESTION 7
Information within an organisation can be analysed into the following three levels:
 Strategic information;
 Tactical information; and
 Operational information.
Required:
Give detailed characteristics of each type of the above information.
(Total 15 Marks)
65

Formulae
Learning curve
Y = axb
where Y = cumulative average time per unit to produce x units
Demand curve
P = a – bQ
b= change in price
change in quantity
MR = a – 2bQ
Y= a + bX or Y - Y = b(x – X)
where
b= = 2
𝑛 𝑋 − 𝑋 2
Variance (X)
a = Y – bX
𝑋𝑌 = a 𝑋 + 𝑏 𝑋 2
66

Annuity Table
r
Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15
67

68

SOLUTION 1
a) Available Hours
i) Frame manufacturers: 37 hours × 40 employees = 1,480
ii) Assembly/Fitting: 37 hours × 20 employees = 740
Hours needed to meet production requirements
A B C D Total
Demand (quantity) 200 75 220 80
Frame manufacture time per pedal
cycle (hrs.) 2.25 2.20 2.20 2.6
Frame manufacture time (hrs.) 450 165 484 208 1,307
Assembly/fitting time per pedal
cycle (hrs.) 1.25 1.80 1.40 3.00
Assembly/fitting time (hrs.) 250 135 308 240 933
Therefore, labour for the assembly and accessory fitting is a limiting factor, since the available
time is less than required time.
Contribution per hour of limiting factor
A B C D
Materials 5,500 6,000 6,000 10,000
Labour: Frame 2,475 2,420 2,420 2,860
Assembly/Fitting 1,875 2,700 2,100 4,500
Variable overheads 2,700 3,000 2,700 3,000
Total Variable cost per
pedal cycle 12,550 14,120 13,220 20360
Selling price per pedal cycle
14,550 16,500 17,000 24,000
Contribution per pedal cycle
2,000 2,380 3,780 3,640
No. of assembly hours 1.25 1.80 1.40 3.00
Contribution per hour 1,600 1,322 2,700 1,213
Ranking 2 3 1 4
ALTERNATIVE WORKINGS
Contribution per unit of limiting factor (using total value approach)
A B C D
No of Units of Pedal Cycle 200 75 220 80
N N N N
Total sales 2,910,000 1,237,500 3,740,000 1,920,000
Less variable costs:
Materials 1,100,000 450,000 1,320,000 800,000
Labour frame 495,000 181,500 532,400 228,800
Assembly 375,000 202,500 462,000 360,000
Variable overhead 540,000 225,000 594,000 240,000
Total variable cost 2,510,000 1,059,000 2,908,400 1,628,800
Total contribution N400,000 N178,500 N831,600 N291,200
Contribution/pedal cycle N2,000 N 2,380 N3,780 N3,640
69

No. of assembly hours 1.25 1.80 1.40 3.00
Contribution/hour N1,600 N1,322 N2,700 N1,213

Ranking 2 3 1 4
Production plan
Available assembly hours 740
Model C (full demand) 220 x 1.4 hours 308
Remaining hours 432
Model A (full demand) 200 × 1.25 hours 250
Remaining hours 182
Model B (full demand) 75 x 1.8 hours 135
Remaining hours 47
This means that 47/3 = 15 Model D pedal cycles can be produced within the time available.
This leaves a shortfall of 80 -15 = 65 pedal cycles.
Resulting Profit
A B C D Total
Production 200 75 220 15
Contribution per pedal cycle (N) 2,000 2,380 3,780 3,640
Total contribution (N) 400,000 178,500 831,600 54,600 1,464,700
Less fixed costs (N) 666,000
Maximum possible profit (N) 798,700
b) Option 1: Pay overtime to meet demand for Model D pedal cycles:
65 pedal cycles require 65 x 3 hours = 195 hours of assembly time.

Normal Overtime
Time
Quantity 15 65
N N Total
Current variable cost per unit 20,360 20,360
Overtime premium (3 hours × ₦1,500 × 0.5) - 2,250
20,360 22,610
Selling price (revised) 24,000 26,500
Contribution/unit 3,640 3,890
Total contribution 54,600 252,850 =N307,450
Option 2: Outsourcing
In-house Outsource Total
Quantity 15 65
N N
Selling price (revised) 29,500 29,500
Variable cost/unit (20,360) (27,000)
Revised unit contribution 9,140 2,500
Total contribution 137,100 162,500 =N299,600
70

It would therefore be more profitable for the company to pay overtime.
c) In simple term, the relationship should be controlled through an enforceable contract. This should
include the following terms:
Specification: The precise specification of the service or product should be clearly set out and
agreed. This is essentially to ensure that there is total clarity and to avoid disputes. The
specification should therefore be based on measurable dimensions of performance.
Quality: A key dimension of performance is the level of quality which must be achieved. This
must be specified to ensure that the final product meets customer expectations.
Lead time: Even if the product or service conforms with the required quality standard, it will be
of little value unless it is delivered within the required timescale.
Agreed cost: While a cost will have been agreed before the arrangement is put into operation,
this should be recorded to avoid misunderstanding.
It is also possible that costs will not be constant. For example, there may be a reduction if the
volume is above a specified level. The term of such a reduction should be agreed and set out in
advance.
Basis of cost increase: Equally, it is possible that if the volume of product or service rises above
a certain level, the supplier will incur additional costs. The grounds on which such cost may be
passed on should be clearly set out. The arrangement should also be subjected to regular review,
and part of such a review should include cost.
Cost reduction if standard is not met: While it would be hoped that any relationship would be
mutually beneficial, the contract should set out the basis on which any reduction in cost due to
standards not being met will be calculated.
Penalty clause: It is important to ensure that, in the event that the supplier‟s performance does
not meet the specified standard, there is an agreed mechanism to provide for compensation.
Notice period for termination: It is possible that a situation could arise where either part will
wish to withdraw from the arrangement. If this is done in an arbitrary fashion, it is likely to be
detrimental to the other party. Therefore, any withdrawal or termination should be under an
agreed procedure. This will allow the other party to make alternative arrangements.
Confidentiality: Outsourcing could lead to competitors obtaining information that are

confidential to the company. One way of minimising this risk is a contractual requirement to
maintain confidentiality.
71

EXAMINER‟S REPORT
The question tests candidates‟ understanding of the concept of limiting factors and their
application in determining production plan, associated profit and the impact when such
challenges are resolved by overtime work and outsourcing strategies. This is particularly true
when the limiting factor is labour hours.
Candidates are expected to consider the determination of constraint factor, computation of

contribution per limiting factor, impact of satisfying all the demands, when overtime ban is
lifted and when products are outsourced.
Understanding of the concept was generally poor.
Candidates‟ commonest pitfall was poor understanding of the various concepts in the question
and determination of the limiting factor.
Candidates are encouraged to use ICAN study text when preparing for the Institute‟s future
examinations.

a) Calculation of available hours and
Calculation of hours needed 3
Identification of limiting factor, calculation 4

Of contribution per limiting factor and ranking
of models.
Calculation of optimal production 3

Calculation of profit 4 14
b) * Evaluation of option 1 4
* Evaluation of option 2 4 8
c) 1 mark per well explained point, maximum of 8 8

30
72

SOLUTION 2
a) Working Notes
Analysis of demand
(i) (ii) (iii)
External demand (‟000 units) 15 19 35
Internal demand 20 20 20
Capacity at Division X (35) (35) (35)
Excess demand („000 units) 0 4 20
Since the demand of Y Division must be met according to the group policy, the supply to the
external market must be reduced by the excess demand.
Opportunity cost will be involved in transferring these units to Y. They will be transferred at
market price of N200.
Thus:
i) When external demand is 15,000 units, the entire 20,000 units demanded by Y will be
transferred at variable cost of ₦105 per unit.
ii) When external demand is 19,000 units, internal demand remains 20,000 units of which
16,000 units (35,000 – 19,000) will be transferred internally at N105 per unit, while the
balance of 4,000 units (20,000 – 16,000) would be transferred at full market price of
N200 per unit.
iii) When external demand is 35,000 units, every unit transferred to Y will be
priced at full market price since units produced by X can be sold externally.
Computation of profit of Division X

External demand for components 15,000 19,000 35,000
N‟000 N‟000 N‟000
Internal transfer - @ N105 2,100 1,680
- @ N200 0 800 4,000
Total internal transfer 2,100 2,480 4,000
External sales (15,000 × ₦200) 3,000 3,800 3,000
Total revenue 5,100 5,480 7,000
Total costs (see below) (5,050) (5,050) (5,050)
Profit 50 430 1,950
Total cost computation: N‟000

Variable cost = 35,000 units × N105 3,675
Fixed cost 1,375
5,050
Computation of profit of Division Y
External demand of components 15,000 19,000 35,000

N‟000 N‟000 N‟000
Sales (10,000 units × N800) 8,000 8,000 8,000
73

Own costs - Variable (10,000 × N250) (2,500) (2,500) (2,500)
- Fixed (900) (900) (900)
Profit before cost of components 4,600 4,600 4,600
Cost of components transferred (2,100) (2,480) (4,000)
Profit 2,500 2,120 600
b) Impact Analysis
External demand of components 15,000 19,000 35,000
N‟000 N‟000 N‟000
New cost of components (20,000 × N170)
(3,400) (3,400) (3,400)
Cost of components transferred 2,100 2,480 4,000
Incremental profit/(loss) (1,300) (920) 600
ALTERNATIVE SOLUTION TO 2 (b)
Financial impact on group profit

15,000 units 19,000 units 35,000 units
N N N
Loss of contribution from internal
transfer:
(N95/unit x 20,000units) (1,900,000) - -
(N95/unit x 16,000units) - (1,520,000) -
(N95/unit x 0units) - - 0
Savings from external purchases

(N200 – N170) x 20,000) 600,000 600,000 600,000
Incremental profit/(Loss ) = (1,300,000) (920,000) 600,000
c) Desirable Attributes of a good transfer pricing policy
i) Goal congruence: The prices should be set so that the divisional management‟s desire
to maximise divisional profit is consistent with the objectives of the company as a
whole. The transfer prices should not encourage suboptimality in decision making.
ii) Performance evaluation: The transfer prices should be such that would enable
central management to effectively determine the contribution of each of the divisions
towards corporate profit. The transfer pricing method therefore should not lead to
distortion of the level of efficiency and effectiveness of the divisional managers.
iii) Divisional autonomy: The prices should seek to maintain the maximum divisional
autonomy so that the benefits of decentralisation (motivation, better decision making,
initiative, etc.) are maintained. The profit of one division should not be dependent on
the action of other divisions.
74

iv) Tax minimisation: In multinational companies, the prices should lead to the
minimisation of tariffs and income taxes and observance of legal restrictions.
v) Motivation: The transfer price should be such that will encourage the
divisions to transact business with one another.
vi) Fairness: A good transfer pricing policy must also be fair to the divisions and the
divisions must perceive it to be fair, since it will affect their performance.
vii) Bookkeeping: The transfer pricing policy should ensure proper recording of
movement of goods or services between divisions.
EXAMINER‟S REPORT
The question tests candidates‟ understanding of transfer pricing policy and its application.
Over 60% of the candidates attempted the question but performance was poor.
Candidates‟ commonest pitfall was their inability to discern when to use market price or
variable cost as transfer price.
Candidates are encouraged to ensure that they study ICAN study text and other relevant
materials, when preparing for future examinations.

a) • Analysis of demand
• Analysis of the results 1
• Computation of X profit 8
• Computation of Y profit 4 13
b) Impact analysis 3
c) 2 marks per point 4
Total 20
SOLUTION 3
(a) Cash Flow Statement
S/N Description 2015 2016 2017
N‟000 N‟000 N‟000
Cash inflow:
1. Cash sales 60,480 64,800 86,400
2. Receipts from debtors 139,860 150,360 197,400
Total Cash Inflow 200,340 215,160 283,800
75

Cash outflow:
1. Payments to suppliers 119,880 128,880 169,200
2. Salaries 11,520 11,520 12,960
3. Rent 4,800 4,800 4,800
4. Expenses 4680 3930 3060
5. Motor Vehicle - 7,500 -
Total cash outflow (140,880) (156,630) (190,020)
Net cash flow 59,460 58,530 93,780
Opening cash Balance 2,500 61,960 120,490
Closing cash balance 61,960 120,490 214,270
(b) Profitability Statements for 2015, 2016, and 2017
S/N Description 2015 2016 2017

N‟000 N‟000 N‟000
Revenue:
Sales 201,600 216,000 288,000
Less cost of sales:
Opening inventory 2,700 3,024 3,240
Purchases 120,960 129,600 172,800
Goods available for sales 123,660 132,624 176,040
Less closing inventory 3,024 3,240 4320
Cost of sale 120,636 129,384 171,720
Gross profit 80,964 86,616 116,280
Salaries 11,520 11,520 12,960
Rent 4,800 4,800 4,800
Expenses –cash 4,680 3,930 3060
Expenses – depreciation - 750 1500
Total operating costs 21,000 21,000 22,320
Net profit 59,964 65,616 93,960
(c) Liquidity profile for 2017:

Current asset N
Closing inventory 4,320,000
Trade receivables 16,800,000
Cash balance 214,270,000
Total current asset 235,390,000
Current Liabilities
Trade payables = N14,400,000
The current ratio = N235,390,000/14,400,000 = 16.35 : 1
Comment: The normal ratio for current ratio is 2: 1 meaning that the standard current asset
cover for the current liability should be twice. In the current case, the coverage is more than
16 times.
76

Workings
S/N Items 2013 2014 2015 2016 2017
N‟000 N‟000 N‟000 N‟000 N‟000
1 Monthly sales 12,000 15,000 16,800 18,000 24,000
2 Annual sales 144,000 180,000 201,600 216,000 288,000
3 Purchase value (0.6) 86,400 108,000 120,960 129,600 172,800
4 Closing inventory = .3 of monthly
Purchases 2,160 2,700 3,024 3,240 4,320
5. Payment to suppliers = 11 months
plus opening payables 79,200 106,200 119,880 128,880 169,200
6. Closing payables purchases in
Dec. 7,200 9,000 10,080 10,800 14,400
7 Analysis of sales 144,000 180,000 201,600 216,000 288,000
Cash sales -30% 43,200 56,400 60,480 64,800 86,400
Opening receivables received - 8400 10,500 11,760 12,600
Receipt from receivables 92,400 115,500 129,360 138,600 184,800
Closing receivables - 70% of
Monthly sales 8,400 10,500 11,760 12,600 16,800
Total receipts from receivables 92,400 123,900 139,860 150,360 197,400
Monthly expenses= 350 370 390 390 380
Less monthly depreciation = - - - - 125
Cash motor expenses 350 370 390 390 255
Annual cash expenses 4,200 4,440 4,680 4,680 3,060
Less 6months dep.( N125x6) - - - 750 -
Annual cash expenses 4,200 4,440 4,680 3,930 3,060
Depreciation charge - - - 750 1500
EXAMINER‟S REPORT
The question tests candidates‟ understanding of cash forecast, profitability statement and
determination of current ratio.
Over 90% of the candidates attempted the question and performance was generally poor.
Candidates‟ commonest pitfall was the computation of monthly cash flow items rather than the
annual cash flow items required by the question and their inability to determine the closing
inventory.
Candidates are advised to carry out extensive study of the ICAN study text with other relevant
materials when preparing for future examinations.
Marking Guide
Marks Marks
(a) Cash forecast
Heading – 1 tick at 1/3 1
/3
77

Income – 6 ticks at 1/3 2
Payments – 13 ticks at 1/3 41/3
Cash balances – 10 ticks at 1/3 31/3 10
(b) Profitability statement

Sales – 3 ticks at 1/5 mark 3
/5
Cash of sale – 12 ticks at 1/5 22/5
Gross profit – 3 ticks at 1/5 3
/5
Expenses during
Salaries, Rent, & Depreciation – 11 ticks at 1/5 21/5
Total operating cost – 3 ticks at 1/5 3
/5
Net profit – 3 ticks at 1/5 3
/5 7
(c) Calculation of liquid assets – 4 ticks at ¼ mark 1

Ratio calculation 1
Stating comment on liquidity status 1 3
20
SOLUTION 4
a) Calculation of direct labour cost

 Introduction stage
The learning curve applies throughout this stage
– 0.4150
∴ Y = axb = ₦100,000 × 10 = ₦38,459
Giving total direct labour cost as 10 × ₦38,459 or ₦384,590
 Growth stage
The learning curve continues for another 20 batches, bringing
cumulative output up to 30 batches.
– 0.4150
Y = axb = ₦100,000 × 30 = ₦24,378
Total cost for 30 batches:
TC30 = 30 × 24,378 = ₦731,340
Less TC10 = 384,590
Therefore, total cost for these 20 batches = ₦346,750
The direct labour cost of each of the other 10 batches in

this stage is the same as that of the 30th batch:
Average cost for the first 29 batches

= Y29 = ₦100,000 × 29 – 0.4150 = ₦24,723
TC30, as computed above = ₦731,340
78

TC29 = ₦24,723 × 29 = ₦716,967
th
Direct labour cost for the 30 batch = ₦14,373
Therefore, the total direct labour cost for these 10 batches

= 10 × ₦14,373 = ₦143,730
Thus, the total direct labour cost for this stage of the product
life cycle is (₦346,750 + ₦143,730) = ₦490,480
 Maturity stage
The learning curve effect has now ended so the direct
labour cost of these 60 batches will be:
60 batches × ₦14,373 = ₦862,380
 Decline stage
The learning curve effect has now ended so the direct labour
cost of these 30 batches will be: 30 batches × ₦14,373 = ₦431,190
b)
Introduction Growth Maturity Decline
Sales units 10,000 30,000 60,000 30,000
Selling price N120 N100 N80 N50
N N N N
Sales revenue 1,200,000 3,000,000 4,800,000 1,500,000
Direct labour 384,590 490,480 862,380 431,190
Direct materials 500,000 1,500,000 3,000,000 1,500,000
Others 100,000 300,000 600,000 300,000
Profit 215,410 709,520 337,620 (731,190)
Total profit = ₦531,360
c) Julmat Limited requires a 20% return on its average investment.

Average investment = (N5m + N3m)/2 = N4m
Profit target is therefore 20% of N4m = N800,000
As shown in the answer to (b) above, the profit predicted without the experience curve is
N268,640 less than that required (N800,000 – N531,360).
Total production throughout the products life cycle = 130 batches,
(10+30+60+30).
Currently, the total direct material cost throughout the product life cycle
= N6.5m.
This N6.5m needs to be reduced by N268,640 to N6,231,360 which is an average direct

material cost per batch of N47.934. Therefore, average direct material cost per batch
𝑁6,231,360
= = N47.934
130
d) The concept of life cycle costing is that the costs and revenues of a product are accumulated
over its life cycle and its overall profitability is measured, rather than separating costs and
79

revenues into accounting periods. In this scenario, the length of the product life cycle is 12
months but this may not coincide with the company‟s accounting year.
The statement shown in solution (b) above shows the products profitability over its life cycle.
As illustrated in the scenario to this question there are four recognized stages in the life cycle
of a product. In this scenario, it appears that Julmat Limited is using a market skimming
approach to the initial launch pricing of its product because it is starting with a high price in
the introduction stage. This is then being gradually reduced over the life cycle of the
product.
The company will not only be reducing the price of the product in order to make it harder for
competitors to enter market but also to increase the demand for its product through the growth
stage. At this time, the cost of the product will also be lower than that at the launch stage due
to the effect of learning and experience curves on its labour and material costs.
In the maturity stage, the company will reduce the selling price further to consolidate its sales
and would hope that there may be further cost savings due to economies of scale though,
these are not evident from the data in this scenario.
Finally, in the decline stage, the company will have to reduce its price to sustain sales, while
under more competition from other similar products in the market, prior to launching a new
product of its own.
EXAMINER‟S REPORT
The question tests candidates‟ understanding of learning curve theory and its application in a
life cycle costing situation.
About 40% of the Candidates attempted the question and the performance was poor.
Candidates‟ commonest pitfalls were their inability to interprete and apply the concept in a life
cycle costing situation and their lack of understanding of its concept.
Candidates are advised to study the ICAN study text and other relevant text books, when
preparing for the Institute‟s examination.
80

Marking Guide
Marks
a) Calculation of labour cost:
12 ticks at ½ each 6
b) Calculation of direct material cost when there is no experience
curve
25 ticks at 1/5 each 5
c) Calculation of average direct material cost to meet ARR target
8 ticks at ½ each
4
d) Explain life cycle cost concept
5 ticks at 1 each 5
Total 20
SOLUTION 5
(a) The Methods of data collection
(i) Observation Method: Observation method is a method during which data from the
field are collected through monitoring or systematic viewing. It could be either
participatory or not.
Advantages: Subjectivity and bias are eliminated; method is reliable and dependable;
system analyst gets current data and observation results are independent of
respondent‟s variable.
Disadvantage
 It is an expensive method (more time is required).
 Limited data.
 Unforeseen factors may interfere with observational task.
 Respondents‟ opinion cannot be recorded on certain subjects.
 Consciousness of being monitored may affect respondents and this
performance may be susceptible to observers‟ bias.
(ii) Interview Method
This is a method of collecting data which involves presentation or oral /verbal stimuli
and reply in terms of oral/verbal responses. Most times, it is regarded as a face-to-face
survey process. It could also be personal, group or telephone interviews.
Advantage
o Data are gathered in greater depth.
o Flexibility in restructuring the questionnaire.
o Interviewer, by his skill, can overcome resistance.
o Interviewer can collect supplementary information about
81

respondent‟s personal characteristics and environment which has value in
interpreting results.
o Fast to obtain information.
o Eliminates ambiguity.
Disadvantages
o Little time is given to respondents.
o Survey is restricted to respondents who have telephones.
o Not suitable for intensive survey where comprehensive responses
are required.
o Biased data may be obtained.
o Time consuming.
o Can be costly.
o Very difficult to develop interview questionnaire because it should
be short, simple, less ambiguous, relevant, non-offensive or non-irritating, and
concise.
(iii) Questionnaire Method
This method of data collection is quite popular, particularly in the case of big
enquiries. The questionnaire is mailed to respondents who are expected to read and
understand the questions and write down the reply in the space meant for the purpose
in the questionnaire itself. It could be structured or unstructured questionnaire type.
Advantages
o It can be achieved at lower costs even when the geographical area
covered is large.
o Respondent‟s claims are free from bias.
o Adequate time to think of responses.
o Non-reachable respondents may be conveniently contacted.
o Large samples can be used, so results are more reliable.
o Reduces chance of evaluation bias because same questions are
asked of all respondents.
o Popular method.
o Can be subjected to mathematical or statistical analysis to make
the results scientific.
Disadvantages
o Low rate of return of duly filled questionnaire.
o Can be used only when respondents are educated and cooperative.
o It is inflexible.
o Omission of some questions.
o Difficult to know if the expected respondents have filled the form
or it is filled by someone else.
o Slowest method of data collection and therefore may not be

timely.
o Items may not have same meaning to all respondents.
o Good survey questions are difficult to develop.
82

iv) Case Study Method
It is essentially an intensive investigation of the particular phenomenon/event under
consideration. Important characteristics are as follows:
 The researcher can study one single variable or more of such variables for his
purpose; and
 The selected variable is studied intensively.
Advantages of Case Study Method
o An opportunity for an in-depth and detailed examination of the entity.
o More relevant and reliable data is gathered.
Disadvantages of Case Study Method
o Data gathered is restricted to the situation under study and

at that particular time, and this may not be relevant to future applications.
o Usually, it is time consuming to collect, organise and analyse data.
(v) Panel Method

In this method, data are collected from the same sample respondents at the same
interval either by mail or by personal interview. This is used for studies on:
 Expenditure Pattern;
 Consumer Behaviour;
 Effectiveness of Advertising; and
 Voting Behaviour and so on.
Advantages
o Useful in aerodynamics and highly technical cases.
o Extremely versatile tool for creative modeling.
Disadvantages
o Too technical.
o Costly.
o Limited application.
(vi) Experiment Method

An experiment is a controlled study in which the researcher attempts to understand
cause-and-effect relationships. The study is "controlled" in the sense that the
researcher controls:
 How subjects are assigned to groups; and

 Which treatments each group receives.
83

Advantages
o It is scientific.
o Reliable.
o Eliminates bias.
Disadvantages
o Expensive.
o Time consuming.
(vii) Focus Group: Gathering information through a small demographically diverse group
of people in guided or open discussion about a subject matter with a view to
determining reactions that can be expected from a larger population.
Advantages
Information is obtained from a diverse group of people and therefore could be more
reliable and real to life.
Disadvantages
Result can be influenced by the researcher based on his/her reading of the group
discussions. So, it could be biased.
(viii) Tally/Counting: This involves gathering data by recording actual

performance through physical counting.
Advantages
o Scientific.
o Accurate.
o Reliable.
Disadvantages
o Could be cumbersome.
o Time- Consuming.
o Useful only for small population.
(ix) Literature Review Documentations and Records: This involves searching for
available written data from past records, documents, statistical details and other
records.
Advantages
Involves the use of verifiable empirical documented data sources which can be
referred to subsequently.
84

Disadvantages
o Because it is historical, it therefore may not be suitable for current
or future situation.
o Basis of compilation may be flawed.
b. Challenges in the development of Management Information System

(MIS)
 The MIS development team is faced with various challenges from

the requirement gathering phase to the implementation phase due to
technological and human challenges and the type of data and information
required.
 Lack of internet connectivity is also a challenge. The lack of

understanding about passwords and security policies caused situations where
passwords were even written on sticky notes and pasted on monitors, etc.
 A major problem of introducing an MIS in an organization is the

nature of the company, structure, product, personnel, etc. These will always
pose a challenge.
 When the system is introduced to the staff, some of them may be

reluctant to use the system because of lack of trust in computer systems. In
addition to that, the infrastructure and security policy implementation are
difficult tasks.
 Another challenge is the shortage of human resources within the

MIS team. The problem associated with data gathering, analysis, training, and
documentation activities, are all human resource problems.
 Bad Communication: Lack of understanding/planning for customer,

organization and other stakeholders‟ requirements/needs for the project.
 Unclear Requirements: Unclear requirements will lead to changes

in the course of the project, which will increase delivery time and bring about
customers‟ resentments.
 Increasing Cost: This will lead to added labour and project cost. Thus
making the project less profitable and takes away interest from stakeholders.
 Delayed Project Delivery: The impact of operational challenges and the

introduction of software with less functionality will result in delayed project
delivery.
 Market Pressure: Another important aspect is the rapid

development of software to meet the ever-changing market demands.
 Knowing the Technical needs: This is about understanding

85

programming languages, the frameworks, the systems and the algorithms
needed for a particular information system to be successful.
 Design Patterns: Identifying the right design patterns for your

information system software and establishing an actual design review, quality
evaluation criteria and design management is something highly neglected today
because of the time and effort it takes.
 Quality Control: Building quality and maintaining same to serve

multitude of customers.
 Security: Security of data/information is highly important especially with

today‟s cyber warfare and attacks. Use of Password, Physical security and
limited access to a system is imperative.
 Debugging challenges: Dealing with bugs through debugging as

a process of locating and fixing a software or hardware-related error or
problem is critical to the successful Management of an information system.
EXAMINER‟S REPORT
The question requires candidates to discuss methods of data collection and the challenges that
face the system analysts when developing an organisation‟s management information system.
Candidates‟ understanding of the requirements of the question was high. Over 75% attempted
the question, while performance was adjudged to be over 50%.
Candidates‟ commonest pitfall was their inability to correctly discuss some of the listed
methods.
Candidates are therefore, advised to carry out extensive study of the ICAN Study Text
alongside other relevant texts when preparing for future examination.
Marking guide Marks Marks

a. Explanation/Definition - Any 3 methods = 3 x 11/3 4
Advantage - Advantages for the 3 = 3 x ½ 1½
Disadvantage - Disadvantages for the 3 = 3 x ½ 1½ 7
b. Challenges - 6 points at 11/3 each 8

Total 15
86

SOLUTION 6
a) DDD is exposed to the following threats due to the imminent expiry of patents:
i. Increased competitive rivalry

Without patent protection to stop them, existing rivals will be able to produce
cheaper copies of DDD chemicals. This will reduce the price which DDD can
charge for its products and reduce margins.
Also, since the patents are attached to processes rather than specific chemicals,
there is the threat that competitors will be able to use the processes to develop new
chemicals before DDD produces its own.
ii. Increased threat of entry

Existing patents also act as barriers deterring new entrants into DDD's markets.
Without this barrier, there is a greater threat that new firms will enter the market,
increasing competition and driving down prices and margins.
iii. Increased power of customers

At present, DDD exerts considerable power over customers as they have limited
ability to switch suppliers. This is reflected by DDD's current high margins. Once
patent protection is removed, competitors will be able to make similar chemicals
giving customers more choice.
The pharmaceutical companies will thus be able to exert more influence over
DDD in areas such as price, credit terms, delivery terms and so on.
iv. Increased power of suppliers

Any fall in volume will reduce DDD's power over suppliers and bulk discounts
may be lost.
v. Staffing issues
The expected fall in profits will affect the value of share options, which in turn,
will affect employee‟s motivation. Also, the likely fall in volumes could require
DDD to consider redundancies.
vi. Fall in profit

There may be decrease in profit from operations as a result of fall in the value of
the patent.
vii. Fall in share prices

The expiration of patent may actually affect the prices of DDD‟s shares in the
market.
viii. Employee‟s share option

Employee may not want to exercise the option as the expiration of patent becomes
imminent.
87

ix. Staff turnover
The knowledge of expiry date of the patent may raise staff rate of turnover as this
may affect staff motivation.
x. Rate of debts to turnover

Since the customers are asking for reduction of sales prices, if they are not
obliged, there may be serious increase in receivables.
xi. Litigation threat

The company may start spending huge amount on litigation as a result of flouting
of the patent right, resulting from impatience of some users of the products or
other manufacturers.
xii. Customer loyalty

The loyalty of customers may be threatened, realising that the patent right will be
expiring soon.
b) Possible courses of action include the following:

i. Try to establish new patents for existing processes
By changing various aspects of existing processes, it may be possible to establish new
patents for them, eliminating the threats outlined above. This option should be pursued
first by discussing with patent experts to assess the likelihood of success.
ii. Develop new processes / products as part of product portfolio management.

Presumably, part of DDD's long-term planning process is such that it anticipates
patent expiry as a normal part of its business and has already developed new patent-
protected processes and chemicals to replace the ones concerned. If not, then resources
need to be allocated to such portfolio development.
iii. Cut prices to retain customers
DDD could seek to retain customers by cutting prices and relying on its existing good
relationships with them. Low prices may also act as a deterrent to new entrants.
Volume economies of scale may still enable DDD to produce the chemicals concerned
at a lower cost than competitors, allowing it to make a reasonable margin even with
lower prices. However, if larger manufacturers enter the market, then this advantage
would quickly become eroded.
iv. Long-term contracts
An alternative way of retaining customers could be to offer them lower prices in
exchange for signing long-term contracts. Particularly where patents are not due to
expire immediately, customers could be tempted by lower prices now and the
guarantee of no price rises in the future.
This would also be a way of responding to current pressure from customers to reduce
prices.
v. Buy major threats
If DDD can identify specific threats from competitors, then one option would be to
buy them. This is unfeasible given DDD's small size.
88

vi. Challenge of government policy
The company may need to file an appeal to enable the customer to charge prices that
will stop the agitation of reduction in prices.
vii. Extension of patent right

The company may, if possible, ask for the extension of the patent right on the existing
product.
viii. Cost reduction technique

There may be need for the reduction of prices since there are costs incurred on the
product e.g. suppliers prices may be negotiated lower.
ix. Staff welfare package

In order to reduce staff turnover rate, some welfare packages may be introduced.
x. Incentive to customer
To reduce debtors‟ figures, incentives such as cash and trade discounts may be
introduced.
EXAMINER‟S REPORT
The question tests candidates‟ understanding of the threats that can result from expiring patent
and suitable courses of action to maintain profitability when such threats are identified.
About 40% of the candidates attempted the question and the performance was poor.
Candidates‟ commonest pitfall was their inability to identify threats associated with the
expiring patent.
Candidates are advised to study the ICAN study text when they are preparing for future
examinations.
Marking Guide Marks

a) Possible threats resulting from expiring
Patents
Any 7 points @ 1 mark 7
b) Suitable courses of action to maintain profit
Any 4 points @ 2 marks
8
Total 15
89

SOLUTION 7
Types of Information
Information within an organisation can be divided into three levels, thus:
a. Strategic Information;
b. Tactical Information; and
c. Operational information.
a. Strategic information: This is used by senior managers to plan the objectives of their
organisations, and to assess whether the objectives are being met in practice. Such information
includes overall profitability, the profitability of different segments of the business, capital
equipment needs and so on.
Strategic information therefore has the following features:

i. It is derived from both internal and external sources;
ii. It is summarised at a high level;
iii. It is relevant to the long term objectives of the organisation;
iv. It deals with the whole organisation (although it might go into some details);
v. It is often prepared on an „ad hoc‟ basis;
vi. It is both quantitative and qualitative;
vii. It cannot provide complete certainty, given that the future cannot be predicted;
viii. It is information about the organisation as a whole or a large part of it;
ix. It is peculiar to top management team;
x. It offers tools for helping organisations to apply metrics and analytical tools to their
information repositories;
xi. It is often forward-looking;
xii. There is often a high degree of uncertainty in the information;
xiii. Incoming and outgoing data can be stored and cross referenced according to a wide
range of individually specified controls and parameters; and
xiv. It typically includes built-in controls that filter, sort, categorise and store information
in easy to manage categories.
90

b. Tactical information: This is used by middle level management to decide how the resources
of the business should be employed, and to monitor how they are being and have been
employed.
Such information includes productivity measurements (output per man-hour or per machine
hour), budgetary control or variance analysis reports, and cash flow forecasts and so on.
Tactical information therefore has the following features:

i. It is primarily generated internally;
ii. It is summarised at a lower level;
iii. It is relevant to the short and medium term;
iv. It describes or analyses activities or departments;
v. It is prepared routinely and regularly;
vi. It focuses on divisional investment;
vii. It controls information based on historical performance and may be forward- looking
viii. It is based on quantitative measures;
ix. It is at a greater level of detail than strategic information;
x. It is often concerned with performance measurement;
xi. The level of uncertainty is much less than that of strategic information;
xii. It is usually associated with budgets and budgetary control and similar annual plans; and
xiii. It is about individual departments and operations.
c. Operational information: This is used by „front-line‟ managers such as foremen or head

clerks to ensure that specific tasks are planned and carried out properly within a factory or
office and so on. In the payroll office, for example, information at this level will relate to day-
rate labour and will include the hours worked each week by each employee, his rate of pay per
hour, details of his deductions, and for the purpose of wages analysis, details of the time each
man spent on individual jobs during the week. In this example, the information is required
weekly, but more urgent operational information, such as the amount of raw materials being
input to a production process, may be required daily, hourly, or in the case of automated
production, second by second.
Operational information has the following features:

i. It is derived almost entirely from internal sources;
ii. It is highly detailed, being the processing of raw data;
91

iii. It relates to the immediate term;
iv. It is task-specific;
v. It is prepared constantly or very frequently;
vi. It is largely quantitative;
vii. It is peculiar to junior level management;
viii. It may be summarised at a work group or section level, but is in a more detailed form than
tactical information;
ix. It is often concerned with transactions, procedures and performance measurement on a daily
level; and
x. It includes scheduling of operations and monitoring output, such as daily efficiency levels.
EXAMINER‟S REPORT
The question requires candidates to give detailed characteristics of the three levels of
information within an organisation.
About 80% of the candidates attempted the question and the performance was poor.
Candidates‟ commonest pitfall was their inability to identify the characteristics of the three
levels of information within an organisation.
Candidates are advised to study the ICAN study text when preparing for future examinations.
Marking Guide Marks

Strategic information
1 mark per point, maximum of 5 points 5
Tactical information
Operational information
Total 15
92


QUESTION 1
KK Plc. buys small tablet computers which it customises for the Nigerian market
and then resells to electronics retailers. Although a detailed variance analysis is
carried out each month, the CEO John, T, has become concerned that no one has a
clear responsibility for taking action in response to this analysis or for using it to
carry out an ex-post analysis of the outcome of important decisions.
The following is an extract from last month‟s budget:
Model A Model B Model C

Selling price/unit (N) 1,000 1,250 1,500
Variable cost/unit (N) 400 500 600
Sales (units) 25,000 40,000 15,000
The budgeted fixed costs were N12,500,000 for the month, which were not
dependent on the mix or quantities of products sold. When the budget was being
prepared, it was estimated that the total size of the market (including sales by the
company and the competitors) would be 400,000 units.
Shortly after the beginning of the month, the marketing director, Okon Nelson,
decided that a change of pricing strategy was necessary in response to the
recessionary economic conditions. The price of model A was reduced by 10% and
the prices of models B and C were each reduced by 20%. The company was partly
successful in passing on the impact of these price reductions to its suppliers and as
a consequence, the variable cost per unit for all three models was reduced by 5%.
Actual fixed costs were 5% higher than budgeted because of the marketing costs
associated with publishing the price reductions.
93

As a result of the recessionary conditions, the actual total market size was just
200,000 units. The actual quantities sold by the company were as follows:
Model A Model B Model C

Sales (units) 14,800 29,500 11,700
Required:
a. Present a comprehensive analysis of variances, reconciling the budgeted and
actual profit for last month in as much detail as possible from the information
provided. (25 Marks)
b. Evaluate the financial success (or otherwise) of the decision to change the
pricing strategy and assess whether the difference between the budgeted and
actual performance was attributable mainly to luck or to factors within the
company‟s control. (5 Marks)
(Total 30 Marks)
SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE

QUESTION 2
Peter Drucker opined that “until a business returns a profit that is greater than its
cost of capital, it operates at a loss”. Therefore, experts have challenged
accounting profit as a good measure of increase in the value of a business and have
proposed a measure of real economic profit. In their view, this will lead to better
measurement of the increase in value of a business during a given period of time.
One method that has been suggested to measure economic profit is known as
economic value added (EVA).
Tees Nigeria Limited has presented the following income statement and statement
of financial position for the year ended 31 December, 2018:
Income Statement 2018

₦000
Profit before interest and tax 75,000
Interest cost (9,000)
Profit before tax 66,000
Tax at 30% (19,800)
Profit after tax 46,200
Dividends paid (30,000)
Retained profit 16,200
94

Statement of Financial Position 2018
₦000
Non-current assets 305,000
Net current assets 190,000
Total Assets 495,000
Shareholders‟ funds 395,000
Long-term and medium-term debt 100,000
Capital employed 495,000
Notes
(i) Capital employed at the beginning of the year was ₦420 million.
(ii) The company had non-capitalised leased assets of ₦24 million in the year.
These assets are not subject to depreciation.
(iii) The estimated cost of equity in the year was 10% and the cost of debt was 7%.
(iv) The company‟s target capital structure is 60% equity and 40% debt.
(v) Accounting depreciation was equal to economic depreciation so there is no

need to make an adjustment from accounting depreciation to get economic
depreciation.
(vi) Other non-cash expenses were ₦16 million.
The company has decided to evaluate its performance using economic value added
approach.
Required:
a. Discuss the perceived benefits of using EVA to measure business performance.

(10 Marks)
b. Calculate the real economic profit of Tees Nigeria Limited using EVA.
(10 Marks)
(Total 20 Marks)
QUESTION 3
Peterpan Nigeria Limited is a holding company with two subsidiaries

manufacturing similar products in different regions of the country. These are
Peterpan (Eastern) Nigeria Limited and Peterpan (Western) Nigeria Limited. Return
on capital employed (ROCE) is used as the group‟s performance measure and is also
used to determine divisional managers‟ bonuses. The results of the two companies
and of the holding company for the year ended 31 December, 2018 and the
statement of financial position as at that date are as follows:
95

Western Eastern Peterpan
N‟000 N‟000 N‟000
Revenue 400,000 440,000 800,000
Cost of sales (340,000) (320,000) (620,000)
Gross profit 60,000 120,000 180,000
Administrative costs (20,000) (60,000) (80,000)
Interest payable (20,000) - (20,000)
Pre-tax profit 20,000 60,000 80,000
Non-current assets:
Original cost 2,000,000 3,000,000 5,000,000

Accumulated depreciation (1,180,800) (2,213,568) (3,394,368)
Net book value 819,200 786,432 1,605,632
Net current assets 100,000 120,000 220,000
Total asset 919,200 906,432 1,825,632
Non-current borrowings 300,000 - 300,000

Shareholders‟ fund 619,200 906,432 1,525,632
Capital employed 919,200 906,432 1,825,632
The following additional information was provided:
(i) During the year, Eastern Limited sold goods to Western Limited that had
cost Eastern Limited ₦20,000,000. The transactions relating to this sale
have been eliminated from the holding company‟s results stated above.
(ii) Both companies use the same depreciation policy of 20% per annum on a
reducing balance basis for their non-current assets. Neither company
made any additions or disposals of non-current assets during the year.
(iii) During the last board meeting of the holding company, it was decided
that the holding company should impose a transfer pricing policy for
transfers between the two subsidiaries.
Required:
a. Calculate the return on capital employed (ROCE) ratios for each of the two
subsidiaries for the year and analyse these into their secondary ratio
components of:
i. Pre-Tax Profit %
ii. Asset Turnover (3 Marks)
b.
i. Calculate Eastern Limited‟s gross profit margin on its internal sales and
compare this to the gross profit margin on its external sales. (2 Marks)
96

ii. Discuss the performance of the two subsidiaries excluding the effects of
the intra group transactions. (9 Marks)
c. Explain THREE factors that the management should consider when setting
the transfer pricing policy. (6 Mark)
(Total 20 Marks)
QUESTION 4
BOK is an autonomous division of Large Plc. BOK carries out large engineering jobs
to individual customer specifications. The manager of the division will retire within
next year and Henry Femi, the CEO of Large Plc. has used a recruitment agency to
identify a suitable successor, Mary Tako. Henry believes that Mary has excellent
relevant experience in another company in the country and has offered her a 4-year
contract position at BOK. The terms of the offer include a generous compensation
package linked to the profit earned by BOK during the 4 years. Henry believes that
BOK has been a very successful division and that a high-calibre manager, such as
Mary, has great potential to continue to expand that success. In order to impress on
Mary on the recent success of BOK, Henry provided her with the following
comparative financial data about the recent performance of the division (Table 1):
Table 1:
2018 2017
₦ ₦
Turnover 27,000,000 26,000,000
Net profit 5,600,000 5,200,000
Bad debts 132,000 130,000
It can be assumed that the inflation rate in each of the two years was 3% per
annum.
Mary indicated that she would need some additional information before deciding
on whether to accept the employment offer. The following is an extract from a
balanced scorecard (Table 2) which was prepared at Mary‟s request:
Table 2:
2018 2017
Customer theme:
Number of customers 120 100
Average revenue from each customer, per annum (₦) 225,000 260,000
Market share 9% 8%
Internal process theme:

Percentage of jobs completed which contained errors 3% 4%
Average job completion time 5.5 days 7 days
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Learning & growth themes:
Staff turnover rate 10% 5%
Training expenditure (₦) 1,000,000 1,000,000
(a) Required:
i. Analyse the change in the financial performance of BOK between
2017 and 2018 using the information provided in Table 1. (3 Marks)
ii. Evaluate the change in the performance of BOK between 2017 and
2018, using the information contained in the balanced scorecard
(Table 2).
In addition, discuss the significant reasons why this analysis may be

more relevant than your answer to part (ai) in helping Mary to decide
whether or not to accept the offer. (13 Marks)
(b) Mary has indicated that she would only be willing to accept the employment
offer at BOK if her annual bonuses were to be linked to a defined set of
measures from all sections of the unit's balanced scorecard. Henry is resistant
to this idea, arguing that profit is the ultimate goal of the organisation and
that all bonuses should only be profit-related.
Determine, with reasons, whether Henry should be willing to accede to Mary‟s

request in this regard in order to secure her acceptance of the offer. (4 Marks)
(Total 20 Marks)
SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
QUESTION 5
TK is a company that produces toy television sets targeting children of the elite. The
company has two divisions, Division S and Division B.
Division S manufactures components for the televisions and sells components to

division B and to external customers. Division B uses five of the components in each
of the toy television sets that it manufactures, and sells television sets directly to
external customers.
Division S
Budgeted variable manufacturing cost per component: N
Direct material 140
Direct labour 180
Variable overhead 120
98

The following information relating to next year is also available:
Fixed costs N5,600,000
Production capacity 175,000 components
External demand 150,000 components
Potential demand from Division B 80,000 components
The anticipated external market price for a component is N500.
Division B N
Sales price 4,500
Budgeted variable manufacturing cost per television
Direct material 400
Direct labour 620
Variable overhead 160
In addition to the variable costs above, each toy television set produced needs five
components.
Fixed costs are budgeted to be N14,600,000 for next year. Annual sales of the toy
television sets are expected to be 16,000 units.
Transfer Pricing Policy
Transfer prices are set at opportunity cost.
Division S must satisfy the demand of Division B before selling components

externally.
Division B is allowed to purchase components from Division S or from external

suppliers.
a. Assuming that Division B buys all the components it requires from Division S:
Prepare a profit statement for each division detailing sales and costs, showing
external sales and internal company transfers separately where appropriate.
(6 Marks)
b. A specialist external supplier has approached Division B and offered to supply

80,000 components at a price of N420 each. The components fulfil the same
function as those manufactured by Division S. The manager of Division B has
accepted the offer and has agreed to buy all the components it requires from
this supplier
i. Produce a revised profit statement for each division and for the total TK
company. (5 Marks)
99

Division S has just received an enquiry from a new customer for the
production of 25,000 components. The manager of Division S requires a total
profit for the year for the division of N4,500,000.
ii. Calculate the minimum price per component to sell the 25,000
components to the new customer that would enable the manager of
Division S to meet the profit target. (4 Marks)
Note: This order will have no effect on the divisional fixed costs and no impact
on the 150,000 components Division S sells to its existing external customers
at N500 per component. Division B will continue to purchase the 80,000
components it requires from the specialist external supplier. (Total 15 Marks)
QUESTION 6
“The purpose of management accounting is to provide relevant and reliable
information so that managers can make well – informed decisions. The value of
management accounting therefore depends on the quality of the information
provided and whether this information helps managers to make better decisions.”
Therefore, before management accounting information can be useful to managers,

it must possess some qualities.
Required:
Discuss the essential qualities of a good management accounting information.

(Total 15 Marks)
QUESTION 7
Tetpack Nigerian Limited (TNL) produces various types of packaging products for
the food industry. TNL has just introduced a new type of pack and its marketing
manager is considering how to penetrate the market with the pack. The following
pricing strategies have been suggested.
(i) Market skimming price;
(ii) Market penetration price;
(iii) Full cost plus price;
(iv) Return on investment price; and
(v) Marginal cost plus price
The management accountant has provided the following data about the pack.
 Non-current assets needed for the production of the pack is N2,000,000
 Working capital requirements are estimated at N400,000
 Expected annual sales volume is 40,000 units
100

 Variable production costs are N60 per unit
 Fixed production costs will be N300,000 each year and annual non-
production costs will be N100,000
 The mark up for the pack will be as follows:
- If full cost plus price is used, 25%
- If marginal cost plus price is used, 40%
- At target return on investment of 10% per year
Required:
a. Discuss the above pricing methods and advise when each could be used.
(10 Marks)
b. Calculate what the price of the pack should be if its price is based on:
i. Full cost plus pricing (11/2 Marks)
ii. Marginal cost plus pricing (11/2 Marks)
iii. Return on investment pricing (2 Marks)
(Total 15 Marks)
101

Formulae
Learning curve
Y = axb
Demand curve
P = a – bQ
change in price
b
change in quantity
MR = a – 2bQ
Y= a + bX or Y - Y = b(x – X)
where
b= = 2
𝑛 𝑋 − 𝑋 2
Variance (X)
a = Y – bX
𝑋𝑌 = a 𝑋+𝑏 𝑋2
102

Annuity Table
n
1− 1+𝑟
Present value of an annuity of 1 =
𝑟
Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7

·
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
2
9 8·566 8·162 7·786
3 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
0
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15
103

104

SOLUTION 1
a. Budgeted profit
• Budgeted contribution:
₦000 ₦000
Model A 25,000 × (₦1,000 - 400) = 15,000
B 40,000 × (₦1,250 - 500) = 30,000
C 15,000 × (₦1,500 - 600) = 13,500 58,500
Less fixed costs (12,500)
Budgeted profit 46,000
Actual profit
₦000 ₦000
• Actual contribution
Model A (₦900 - 380) × 14,800 = 7,696.00
B (₦1,000 - 475) × 29,500 = 15,487.50
C (₦1,200 - 570) × 11,700 = 7,371.00 30,554.50
Actual fixed costs (12,500 × 1.05) (13,125.00)
Actual profit 17.429.50
Calculation of variances
i. Sales Prices Variance (SPV)
Model Actual Qty (AP - SP) Variance

(units)
A 14,800 100(A) 1,480(A)
B 29,500 250(A) 7,375(A)
C 11,700 300(A) 3,510(A)
12,365(A)
ii. Variable cost variance
Model Actual Qty Savings in variable Variance

units Cost per unit
₦ ₦000
A 14,800 20(F) 296.00(F)

B 29,500 25(F) 737.50(F)
C 11,700 30(F) 351.00(F)
1,384.50(F)
105

• Budgeted sales mix:
Model A 25/80 x 100 = 31.25%
B 40/80 x 100 = 50%
C 15/80 x 100 = 18.75%
• Weighted average contribution per unit:
(31.25% × ₦600) + (50% ×₦750) + (18.75% × ₦900) = ₦731.25*
(* Needed in market size and market share variances)
iii. Sales mix variance
Model AQ in AM AQ in SM Std Cont. per unit Mix variance

(a) (b) (c) (a-b) x (c)
units Units ₦ N‟000
A 14,800 17,500 600 1,620(A)
B 29,500 28,000 750 1,125(F)
C 11,700 10,500 900 1,080(F)
56,000 56,000 585(F)
Note: AQ = Actual quantity, AM = Actual mix

SM = Standard mix
AP = Actual price
SP = Standard price
iv. Sales quantity variance
Model AQ in SM BQ in SM Std Cont. Sales Qty

variance
(a) (b) (c) (a-b) x (c)
units Units ₦ N‟000
A 17,500 25,000 600 4,500(A)
B 28,000 40,000 750 9,000(A)
C 10,500 15,000 900 4,050(A)
56,000 80,000 17,550(A)
(Note: BQ = Budgeted Quantity)
v. Market size variance

Actual market size = 200,000
Budgeted market size = 400,000
Budgeted market size percentage = 80/400 = 20%
Variance = (200,000 – 400,000) × 20% × ₦731.25 = ₦29,250,000(A)
106

vi. Market share variance
Actual quantity = 56,000
Standard share of actual market = 20% × 200,000 = 40,000
Variance = (56,000 – 40,000) × ₦731.25 = ₦11,700,000(F)
vii. Fixed overhead expenditure variance (FOEV)

5% × ₦12,500,000 = ₦625,000(A)
Profit reconciliation
₦’000 ₦’000 ₦’000
Budgeted profit 46,000.00
Selling price variance 12,365.00(A)
Variable cost variance 1,384.50(F)
Sales mix variance 585(F)
Market size variance 29,250(A)
Market share variance 11,700(F)
Sales quantity variance 17,550(A) 16,965.00(A)
Fixed overhead expenditure variance 625.00(A)
Actual profit 17,429.50
b. CHANGE IN PRICING STRATEGY

The obvious costs of the strategy consist of the ₦625,000 additional
marketing costs (as shown by the unfavourable FOEV) and the ₦12,365,000
cost of the price reductions (unfavourable SPV). The combined cost of the
strategy as indicated by the sum of these two variances, was ₦12,990,000
ANALYSIS OF OTHER VARIANCES

However, these costs were partially offset. One offset resulted from the 5%
reduction in variable costs (₦1,384,500 favourable variance) which arose
because suppliers "agreed" to share in the cost of the price reductions. Also,
because the selling price reduction was only 10% for the lowest-contribution
product (Model A) compared to 20% for the two higher-contribution products
(B and C),the net effect from a customer perspective is that products B and C
became relatively less expensive. This is a probable cause of the favourable
sales mix variance (₦585,000). Taking these two offsets into account, the net
cost of the strategy was ₦12,990,000 – ₦1,398,000 – ₦585,000 =
₦11,007,000
The benefit of the strategy is indicated by the profit from incremental sales
that arose as a result of the strategy. At first glance, the strategy appears to
have failed because (far from increasing) sales actually diminished, giving
rise to the unfavourable sales quantity variance of ₦17,550,000. However,
107

when the SQV is analysed into its market share and market size elements, a
different picture emerges. As a result of market share growth (which quite
likely resulted from the change in pricing strategy) there were additional
sales with a contribution ₦11,700,000. Since this is greater than the cost of
the strategy then it can be judged a financial success.
The only variance which can be attributed to luck or uncontrollable factors is

the market size variance (₦29,250,000 unfavourable).
CONCLUSION
Actual profit (₦17,429,500) was below budgeted profit (₦46,000,000), but
this was due to one unfavourable luck factor (market size) which was partly
offset by the positive effects of the decision to change the strategy, which
was a decision consciously made by the company.
EXAMINER‟S REPORT
The question is a compulsory case study question that tests candidates knowledge
in the following areas- variance computation and analysis, as well as reconciling
budgeted profit with actual profit, It also test candidates ability to evaluate impact
of changes in pricing strategy on performance of the company.
As a compulsory question, over 90% of the candidates attempted the question but
the general average performance of 30% scored above average of the marks
allocated the question, which is considered poor.
The common pitfall was inability of candidates to compute the relevant variances
as well as linking market size and market share variances to sales volume
variances.
Candidates are advised to utilise the ICAN study pack when preparing for future
examination of the Institute.
Marking Guide
1) Marks Marks
(a) Budgeted profit 3
Actual profit 3
Variable cost variance 2
Sales prices variance 2
Sales mix variance 2
Weighted contribution 1½
108

Sales quantity variance 2
Market size variance 2
Market share variance 1½
Fixed overhead variance 1
Profit reconciliation 5 25
(b) Comments on combined cost

of strategy 2
Analysis of other effects 2
Conclusion 1 5
30
SOLUTION 2
a. The following are the benefits of using EVA to measure business

performance:
 It aligns interest of shareholders and managers more closely.
 It is a measure of performance.
 Measures creation of value.
 Helps in improving profitability.
 As a long term matrix, management uses it to measure the wealth and
value of the business.
 Can be used as a reward scheme.
 It is easy to understand and use.
 Recognises the benefits of activities.
 Helps management in focusing value creation.
 Can be used in investment appraisal.
 Can be used in goodwill and share valuation.
b. Tees Nigeria Limited

Calculation of Economic Profit Using EVA
Year 1
₦000
Profit after tax 46,200
Add: Interest cost less tax: (N9,000,00 less 30%) 6,300
Add: Non-cash expenses 16,000
NOPAT 68,500
109

Capital employed Year 1
₦000
Book value of total assets less current liabilities 420,000
Non-capitalised leased assets 24,000
444,000
WACC = (10% x 60%) + [7% (1 – 0.30) x 40%] = 7.96%.
EVA Year 1
₦000
NOPAT 68,500.00
Capital charge: (444,000 x 7.96%) (35,342.4)
Economic value added (estimate) 33,157.6
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of the benefits of economic value added
(EVA) and its computation from a given financial statement of a company.
This question was well attempted as over 80% of the candidates attempted it.
The performance of the candidates was high and encouraging.
The common pitfall observed is candidates‟ failure to compute the weighted

average cost of capital (WACC) and the wrong treatment given to non-cash
expenses that should be added back to the net profit after tax.
It is recommended that candidates should use the ICAN study pack and other
relevant texts when preparing for future examination of the institute.
a. Benefits of EVA, at least 5 points 10 10
b. Calculation of NOPAT 3
Calculation of capital employed 3
Calculation of WACC 2
Calculation of EVA 2 10
20
110

SOLUTION 3
(a)
Company Western Eastern
ROCE 20/919.2 = 2.2% 60/906.432 = 6.6%
Pre-tax profit % 20/400 = 5.0% 60/440 = 13.6%
Asset Turnover 400/919.2 = 0.435 440/906.432 = 0.485
(b) GROSS PROFIT MARGIN OF EASTERN LIMITED

(i) The value of the group transaction can be identified by comparing the
group results with the sum of the two individual company results: the
sales value was ₦40m and the cost of sale value was ₦20m thus
Eastern Limited made a profit of ₦20m on this transaction which is
equal to a gross margin of 50%.
The gross margin on the external sales was ₦100,000 / ₦400,000 =

25%. Thus there is a significant difference in the margins being
achieved.
(ii) If the above transaction had not occurred and assuming that Eastern
Limited had sold these items using its normal mark-up then the ratios
would have been:
Company Western Eastern

ROCE 12.94/919.2 = 1.4% 50/906.432 = 5.5%
Pre-tax profit % 12.94/352.94= 3.7% 50/400 = 12.5%
Asset Turnover 352.94/919.2= 0.384 440/906.432 = 0.485
These calculations show that the relative performance of the two

companies is significantly different. Further analysis identifies two
key reasons for this:
Gearing
Western Limited is financed partly by borrowing and partly by equity
and the interest charge made by the lenders amounts to a 6.7% return
(20/300). This is a significant cost to Western Limited and amounts to
a higher return than is being achieved before interest is paid which is
4.4% (40/919.2).
Non-current asset values

Although there are differences in the original cost of the non-current
asset values (Western Limited is two thirds of Eastern Limited) which
reflects the relative sizes of the companies, there is also a difference
in the age of the assets which can be identified by the proportion of
the non-current assets that has depreciated. Both companies use the
same depreciation policy of 20% per annum on a reducing balance
basis yet, the non-current asset value of Western Limited has been
depreciated by 59.0% of its original cost whereas the non-current
111

asset value of Eastern Limited has been depreciated by 73.8% of its
original cost. Thus the non-current assets of Western Limited are
newer and because they have a higher net book value, this reduces
the apparent Return on Capital Employed (ROCE).
(c) Factors that should be considered when setting the transfer pricing policy are:
 The policy should lead to transfer prices that are fair to both the
internal supplier and the internal customer and should provide them
both with an incentive to carry out the internal transaction where it is
worthwhile from the Group‟s viewpoint to do so.
 The policy should reflect the capacity constraints and market demand
for the item being transferred. Therefore, the transfer price should take
account of the supplier‟s opportunity cost.
 The policy should provide autonomy to both the internal supplier and
the internal customer to make their own decisions concerning internal
transactions.
 There must be divisional structure.
 Each division must be a profit or investment centre.
 One of the divisions must be willing to transact business with the

others.
 The transfer pricing policy must be tax efficient by reducing the overall
tax burden of the company.
WORKINGS
Elimination of Group transaction:
Western Limited: Normal mark - up = 60/400 = 15%
Therefore, cost of sale = (100 – 15)% = 85%
Sales value of goods from Eastern Limited is therefore 40/85 x 100 = N47,058,824
The restated Income Statement will now be as follows:

Western Eastern Peterpan
₦000 ₦000 ₦000
Revenue 352,941 440,000 792,941

Cost of sales (300,000) (330,000) (630,000)
112

Gross profit 52,941 110,000 162,941
Administrative costs (20,000) (60,000) (80,000)

Interest payable (20,000) - (20,000)
Pre-Tax profit 12,941 50,000 62.941
EXAMINER‟S REPORT
The question tests candidates understanding of transfer pricing between two

subsidiaries and the computation and interpretation of financial ratios- return on
capital employed (ROCE), asset turnover and profit margin.
The question was well attempted by over 80% of the candidates
The performance of candidates on this question however was below average.
The common pitfalls were the inability of candidates to decipher the treatment to
be given to inter-subsidiary sales of N20,000,000 which was eliminated from the
holding company and also there were confusion as to the variables that should be
used in computing ratios like ROCE, asset turnover and profit margin.
It is recommended that candidates should in future do enough revision using the

Institutes study pack and other recommended relevant texts and manual.

a. ½ mark each - Calculation of the 3 ratios for each subsidiary 3
b. Calculation of gross profit margin on internal sales 1
Calculation of gross profit margin on external sales 1
Recalculation of the 3 ratios without intra – group transaction 3
1mark each - Identification of the two reasons for difference in
Performance of the two subsidiaries 2
2 marks each - Discussion of the two reasons identified 4 11
c. 1 mark each - Identification of the 3 factors in setting transfer

Price 3
1mark each - Discussion of each of the factors 3 6
20
SOLUTION 4
a. Turnover:
• Increase: ₦27m/₦26m = 1.04 = 4% increase.
• Exceeds the rate of inflation (3%); indicates some modest growth.
113

Net profit:
• Increase in absolute terms = ₦400,000
• Increase in % terms = ₦400,000/₦5,200,000 = 7.7%
 Rising faster than sales revenue (and inflation); suggests “real”
price increases being achieved (or better cost control)
Bad debts:
• This is a minimal expense and the change between the two
years is insignificant. See computation below:
2018 2017
N132,000 N130,000
N27,000,000 N28,000,000
= 0.5% = 0.5%
b. General issue: Why Part (aii) analysis is more relevant than Part (ai)
• The usefulness of these indicators is that many of them provide

a lead indication of future financial success. This is what is of
interest to Mary, since she is considering joining the firm for
the first time.
• "Good results" in the lead indicators are likely to lead (after a
time) to improved financial performance.
• By contrast the indicators in Table 1 measure financial success

in the current period only. They do not (in themselves) provide
any indication of future financial success. Given that Mary is
only now considering joining BOK it is its future success and
potential which are of interest to her, not the past.
Customer knowledge
• "How well BOK dealing with its customers".
 120 
• Number of customers: This has increased by 20%.   A greater
 100 
number of customers is (arguably) a good thing in itself because it
expands the client base who can potentially be satisfied and therefore
become repeat customers in the future.
• Average revenue per customer
- Change = ₦35,000/₦260,000 = 13.4% reduction.
- BOK might be reducing its prices to attract more customers, or
might not be as successful as in the past in leveraging sales from its
client base. This is a potentially negative indicator. The client base
is only as valuable as the profit from the sales which can be made
to it.
114

• Increase in market share
- Total market size:
2018 2017 Change
₦27m/0.09 = ₦300m ₦26m/0.08 = ₦325m 7.7% Decrease
BOK‟s modest growth in turnover seems impressive in the context of the
shrinking market. BOK is expanding despite very difficult circumstances.
Internal business processes

• "The key processes which the business needs to perform well in order to
succeed" are the focus of internal business processes.
• Error rates have decreased from 4% to 3%, while at the same time average
job completion times have improved from 7 days to 5.5days.
• Clients expect their jobs to be done correctly and on time, and these results
indicate that BOK has a strong ability to provide this level of service (which
augurs well for BOK‟s success in attracting new customers and retaining old
ones, as indicated by the growing customer numbers).
Learning and growth

• The increase in staff turnover is unwelcomed. Generally, recruitment and
training of new staff is always expensive and ultimately if not carried-out
reduces the productivity level and increases labour costs in the short term.
• The lack of growth in the training expenditure is of concern. Given the large
number of new clients and the higher staff turnover, it seems likely that
more training is needed. Inadequate expenditure on training is an insidious
threat because in the medium term it threatens BOK‟s ability to maintain its
high client service quality levels.
SIGNIFICANT REASONS THAT WILL SUPPORT MARY‟S DECISION TO ACCEPT

OFFER:
From the above evaluations, the information contained in part 2 of the
balance scorecard is more beneficial to Mary in making her final decision on
whether or not to accept the offer because it gives more clarity on other
performance criteria that the financial performance criteria do not disclose
such as:
- Increase in number of customers
- Increase in market share and size
- Staff turnover issues
- Growth issues in training expenditure
115

c. • Yes, Henry should accept this request, Mary is asking to be allowed to
embrace responsibility for all of the factors which she controls, not just
short term profit, and this attitude is to be welcomed and encouraged.
• Mary‟s contract is for a 4-year term only. Profits in the first year are likely to
be significantly affected by the decisions made by her predecessor, e.g., not
to spend more money on training. In this sense profits are not "controllable"
by Mary in the short term. She might even be tempted to make up for the
shortfall in profits by making dysfunctional decisions which would not
affect profits in the short term but would have detrimental consequences in
future years.
• By accepting responsibility for a wide range of performance measures. Mary

is incentivised not just to pay attention to current profits but to consider
what is beneficial for the firm in the long term (e.g., increasing market
share, even in ways which do not immediately add to profit). The short
duration of her contract might otherwise discourage her from doing this.
EXAMINER‟S REPORT
This is a question that test candidates knowledge and application of balanced

scorecard matrix.
Under 50% of the candidates attempted the question.
Equally, the performance was below average.
The common pitfalls were candidates inability to use the statistics and financial
data availed in the question to analyze the company‟s performance as well as in
the interpretation of the balanced scorecard financial and nonfinancial
information in determining whether Mary will accept or reject the offer given her.
It is therefore recommended that candidates utilize the ICAN study pack and
relevant text books when preparing for the Institute future examinations.
(ai) Growth in turnover 1

Growth in net profit 1
Bad debts 1 3
(aii) General issue 2

Growth customer 2
Internal business process criteria 3
Learning and growth 3
(Staff turnover/training expenditure)
116

Significant reasons for Mary‟s
decision to accept the offer 3 13
(b) Specific relevant reasons Henry 4

20
SOLUTION 5
NOTE S B
Sales N N
Internal (W1) 38,500,000
External (W2) 47,500,000 72,000,000

86,000,000 72,000,000
Variable costs
Components
Internal (W3) - 38,500,000
External (W4) 77,000,000
Other variables (W5) - 18,880,000
Fixed costs 5,600,000 14,600,000
Profit 3,400,000 20,000
Workings
(W1) 55,000 components at N500 opportunity cost = N27,500,000

25,000 components at N440 marginal cost = N11,000,000
N38,500,000
(W2) 95,000 components at N500 = N47,500,000

16,000 units at N4,500 = N72,000,000
(W3) As per division S internal sales revenue
(W4) 175,000 components at N440 = N77,000,000
(W5) 16,000 units at N1,180 = N18,880,000
117

(b)
(i)
Sales Note S B Total

N N N
Internal W1 - - -
External 75,000,000 72,000,000 147,000,000
75,000,000 72,000,000 147,000,000
Variable costs
Components
Internal - - -
External W2 (66,000,000) (33,600,000) (99,600,000)
Other variable W3 - (18,880,000) (18,880,000)

Fixed costs (5,600,000) (14,600,000) (20,200,000)
Profit 3,400,000 4,920,000 8,320,000
Workings
(W1) 150,000 components at N500 market price
16,000 units at N4,500
(W2) 150,000 components at N440

80,000 components at N420
(W3) 16,000 units at N1180
(b) (ii)
Profit requirement N4,500,000
Remaining production capacity N25,000 = N175,000 – N150,000
Additional contribution required N1,100,000 = N4,500,000 – N3,400,000
Contribution per component N44 = N1,100,000/N25,000
Contribution per component N440
Sell externally per component N484 = N440 + N44
EXAMINER‟S REPORT
This question test candidates understanding of transfer pricing and its use in
computing ideal or minimum price of a product.
Over 70% of the candidates attempted this question and performance was high.
However, the common pitfall was candidates inability to compute the minimum
price of selling 25000 components to the new customer to enable the division meet
its profit target.
118

Candidates are advised to use ICAN study manual when preparing for ICAN
examination in future.
Marking Guide
Marks Marks
(a) Sales 2
Variable cost of components 2
Other variable cost ½
Fixed cost ½
Profit 1 6
(b)
i) Sales 1½
Variable cost of components 1
Others 1½
Profit 1 5
ii) Calculation of minimum

selling price 4
Total marks 15
SOLUTION 6
MANAGEMENT ACCOUNTING INFORMATION
Information is only useful to managers if it possesses some essential qualities.

These qualities include:
i) Understandable: Information should be understandable to the individuals

who use it. Therefore, management accounting information must be set out
clearly and properly explained;
ii) Purpose and relevance: Unless information has a purpose, it has no value at
all; therefore, it makes no sense to provide it. Information must be relevant for
this purpose;
iii) Reliable: Users of information must be able to rely on it for its intended
purpose. An unreliable information is not useful. However, information does
not have to be 100% accurate to be reliable. In many cases, information might
be provided in the form of an estimate or forecast;
iv) Sufficiently complete: Information should include all facts necessary for its
purpose. At the same time, information in management reports should not be
excessive, because important information may be hidden in the unimportant
information, and it will take managers too long to read and understand;
119

v) Timely: If information is provided too late for its purpose, it has no value. And
with the widespread computerisation of accounting systems, including cost
accounting systems, it might be appropriate for up-to-date management
accounting information to be available on-line and on demand whenever it is
needed;
vi) Comparable: In accounting it is often useful to make comparisons, such as

current year results with previous years, or comparisons of actual results with
planned results. Therefore, to make comparisons possible, information should
be prepared on the same basis, using the same methods and the same „rules‟;
vii) Communicated to the right recipient: Management accounting information

should be communicated to the proper recipient. The right recipient is the
person with the authority to make a decision on the basis of the facts received
and needs the information to make a decision; and
viii) Cost effective: Its value must exceed its cost. Management accounting
information has a value (if information has no value there is no point in
having it) but obtaining it involves a cost. The value of information comes
from improving the quality of management decisions. Information is worth
having only if it helps to improve management decisions, and the benefits
from those decisions exceed the cost of providing the additional information.
EXAMINER‟S REPORT
This is a question that test candidates knowledge of qualities of good management

accounting information.
Nearly 90% of the candidates attempted this question and performance was
adjudged very high.
The common pitfall was that some candidates mistook the question to mean
advantages of management accounting information rather than qualities of good
management accounting information.
Candidates are advised to take time to decipher the requirements of a question

before attempting it. Also, it is recommended that candidates use ICAN study
manual when preparing for future ICAN examinations.
Marking Guide
Marks
1 mark each - Identification of each of the qualities 5
2 marks each - Explanation of five of the qualities 10
Total marks 15
120

SOLUTION 7
MARKET SKIMMING PRICE: Market skimming price is a pricing strategy that is used
when a new product is introduced to the market with a very high price which is
gradually reduced over time to attract more customers. This pricing strategy is
normally effective for new “high technology” products such as flat screen television
sets, laptops, etc.
However, it is usually a short term pricing strategy that cannot usually be sustained
for a long period of time.
It can also be used with a differentiated product of high quality, e.g. cars.
MARKET PENETRATION PRICE:

It is an alternative pricing strategy to market skimming pricing strategy when a
new product is introduced to the market. Under market penetration pricing
strategy, the aim is to introduce the product into the market with a low selling price
in order to create a high sales demand as quickly as possible. This can help the
company to capture the market before competitors can introduce rival products.
This pricing strategy can be used when a company is using a cost leadership
strategy, because low price will help a company to obtain a large market share
which can further lead to economies of scales and lower costs.
FULL COST PLUS PRICING

This involves calculating the full cost of a product and adding a profit margin to
arrive at a selling price.
Profit is expressed as either:

- a percentage of the full cost (a profit mark-up) or;
- a percentage of the sales price ( a profit margin)
It is useful when operating on historical basis; for planning purposes, appraisal of

divisional performance and stabilising product prices.
MARGINAL COST PLUS PRICING

Under this pricing strategy, the marginal cost of the product is calculated and a
mark up or profit margin is added to the marginal cost to arrive at the selling price.
This is useful in preparing marginal costing statements.
RETURN ON INVESTMENT PRICING

This method of pricing strategy is used in a decentralised environment where an
investment centre within a company is required to meet a target return on capital
employed. Prices are set to achieve a target percentage return on the capital
invested.
This is needed in divisional performance appraisal.
121

(b) FULL COST PLUS PRICE
N
per unit
Variable Cost 60.00
Fixed Cost (N300,000 + N100,000)/40,000 10.00
70.00
Mark-up – 25% of cost 17.50
87.50
MARGINAL COST PLUS

N
per unit
Variable Cost 60.00
Mark-up – 40% of variable cost 24.00
Selling price 84.00
RETURN ON INVESTMENT PRICING:
Target ROI
N
Non-current assets 2,000,000
Working Capital 400,000
Capital employed 2,400,000
Profit required = N2,400,000 x 10%

= N240,000
Profit required per unit = N240,000/40,000

= N6.00
122

N
per unit
Variable cost 60.00
Fixed cost (as in full cost plus) 10.00
70.00
6.00
Selling price 76.00
EXAMINER‟S REPORT
This question test candidates understanding of pricing strategies and methods of

product pricing.
Over 70 % of the candidates attempted this question and performance was above
average.
The common pitfall is candidates poor understanding of procedures for the

computation of product prices as required in the part (b) of the question.
Candidates find it difficult to compute full cost plus price, marginal cost plus price
and return on investment price as required in the second part of the question.
It is recommended that candidates when preparing for future examination of the

Institute, utilize the ICAN study text.
a. 2 Marks for each of the five methods discussed 10
bi. Computation of full cost plus based price 1½
ii. Computation of marginal cost plus based price 1½
iii. Computation of return on investment based price 2 5

15
123

INSTRUCTION: YOU ARE REQUIRED TO ANSWER FOUR OUT OF SIX QUESTIONS

IN THIS PAPER
QUESTION 1
Adeco Nigeria plc. is a large and diversified company with several factories. One of
its factories that produces “Apet” has not been able to meet its sales target for over
two years. The board has mandated the company‟s management to take an urgent
decision on what to do with the factory.
The management has therefore, set up a committee of three, the factory manager,
the marketing manager and the management accountant to analyse the situation
and come up with a report on what they felt the management should do. The
marketing manager has submitted two proposals to the committee. These are:
● a sales volume of 25,000 units can be achieved with a selling price of N13.50
per unit and an advertising campaign of N37,500; or
● a sales volume of 35,000 units can be achieved at a selling price of N11.25 with
an advertising campaign costing N52,500.
The management accountant is to work on these proposals with the information

provided by the factory manager and show with calculations that will help the
committee determine which proposal to be recommended to management. The
management accountant is also to provide a third option, the closure of the factory.
The factory manager has submitted the following information to the management
accountant:
Budgeted sales and production of Apet 50,000 units

N‟000
Sales 750.0
Less production costs:
Material A – 1 kg per unit 75.0
Material B – 1 litre per unit 37.5

Labour – 1 hour per unit 187.5
61

Variable overhead 150.0
Fixed overhead 75.0
Non-production costs 75.0
Total cost 600.0
Budgeted profit 150.0
The following additional information has also been made available:

(i) There are 50,000 kg of material A in inventory. This originally cost N1.5 per
kg. Material A has no other use and unless it is used by the division, it will
have to be disposed of at a cost of N750 for every 5,000 kg.
(ii) There are 30,000 litres of material B in inventory. Any unused material can be
used by another department to substitute for an equivalent amount of a
material, which currently costs N1.875 per litre. The original cost of material B
was N0.75 per litre and it can be replaced at a cost of N2.25 per litre.
(iii) All production labour hours are paid on an hourly basis. Rumours of the
closure of the department have led to a large proportion of the department‟s
employees leaving the organisation. Uncertainty over its closure has also
resulted in management not replacing these employees. The department is
therefore, short of labour hours and has sufficient to produce only 25,000
units. Output in excess of 25,000 units would require the department to hire
contract labour at a cost of N5.625 per hour. If the department is shut down
the present labour force will be redeployed within the organisation.
(iv) Included in the variable overhead is the depreciation of the only machine
used in the department. The original cost of the machine was N300,000 and it
is estimated to have a life of 10 years. Depreciation is calculated on a straight-
line basis. The machine has a current resale value of N37,500. If the
machinery is used for production, it is estimated that the resale value of the
machinery will fall at the rate of N150 per 1,000 units produced. All other
costs included in variable overhead vary with the number of units produced.
(v) Included in the fixed production overhead is the salary of the factory manager
which amounts to N30,000. If the department were to shut down the manager
would be made redundant with a redundancy pay of N37,500. All other costs
included in the fixed production overhead are general factory overheads and
will not be affected by any decision concerning the factory.
(vi) The non-production cost charged to the factory is an apportionment of the

total non-production costs incurred by the factory.
The committee will be meeting in a week‟s time to prepare its report to

management on the line of action management should follow, either one of the
marketing manager‟s proposals or to close down the factory.
62

Required:
As the management accountant of Adeco plc., you are to:
a. Prepare detailed calculations to support the committee‟s recommendation to

the management whether to:
i. reduce production to 25,000 units
ii. reduce production to 35,000 units
iii. shut down the factory. (20 Marks)
b. Discuss the management accounting technique and principle that a
management accountant will apply in preparing calculations to support
management decision in such a circumstance as above. (10 Marks)
c. A customer has just placed a special order for 25,000 units of Apet and the
customer is willing to pay N12.00 per unit. Advise the management whether
to accept or reject the order. Assume that for any shortfall in material A
required to produce the order, it can be bought at a price of N2.00 per kg.
(10 Marks)
(Total 40 Marks)
SECTION B: YOU ARE REQUIRED TO ANSWER ANY THREE OUT OF FIVE

QUESTION 2
Lunda Limited manufactures a range of products, many of which have short
product lifecycles. Research and development staff recently designed three new
products which would be manufactured in a single production cell of the company's
factory. The combined monthly manufacturing overhead costs of the three products
are summarised as follows:
Production set-ups (10 per month) ₦200,000
Material movements (400 per month) ₦1,800,000
Repairs (4,000 per month) ₦3,000,000
Total manufacturing overheads per month ₦5,000,000
The following information is available concerning the three new products:

Product A Product B Product C
Production & sales, per 2,000 units 5,000 units 1,000 units
month
Direct labour hours per unit 6 4 8
63

The company's target costing task group expressed the view that the new products
would not be profitable, given the likely market prices and the cost of
manufacturing the products using the proposed design. In response, the product
designers indicated that no design changes were possible in relation to Product A
or B, but that changes in the design of Product C would bring about the following
reductions in the amount of monthly activity involved in manufacturing that
product without compromising either the quality or quantity of output:
Production set-ups Material movements Repairs
2 per month 100 per month 1,000 per month
Required:
• Calculate the reduction in the cost per unit of each of the three products
which would occur as a result of the design changes to Product C, in each of
the following circumstances:
• If manufacturing overheads are allocated to products using activity-
based costing (ABC);
• If manufacturing overheads are allocated to products on a direct labour
hour basis. (10 Marks)
b. Discuss the view that an ABC system is essential for the implementation of
target costing. Use the case of Lunda Limited to illustrate your answer.
(5 Marks)
c. The following data relates to another product of Lunda:
2016 2017 2018
Internal failures as percentage of units

produced
3% 4% 5%
External failures as percentage of units sold 19% 14% 11%
Comment on the trends in this data set. (5 Marks)

(Total 20 Marks)
QUESTION 3
Rinc Nigeria Limited has two divisions, A and B. Division A specialises in the
manufacture of a special part of a product while Division B is responsible for the
completion of the production and sale of the final product. Division A not only
produces but also sells some of its components to third parties though it remains a
major supplier to Division B. Division B can also buy from other suppliers the same
64

part to augment supply gap from Division A. The two divisions are both profit
centres.
The following information are for the month of November:

Division A Division B
Production in units 20,000 -
Sales to Division B (units) 18,000
Sales to third parties (units) 2,000 23,000
Purchases from outside suppliers (units) 5,000
Transfers from Division A (units) - 18,000
Production cost per unit N200
Transfer from Division A N220
Additional cost of production N30
Market value of sales to third parties N240 N300
Cost of purchase from outside suppliers N225
Investment in the divisions N3,000,000 N3,200,000
The company‟s cost of capital is 10%.
a. Determine the profit made by each division and the company for
the month. (10 Marks)
b. Determine the returns on investment (ROI) and the residual income

(RI) of the divisions and the company. (5 Marks)
c. State the advantages and disadvantages of both ROI and RI as

parameters for appraising divisional performance. (5 Marks)
(Total 20 Marks)
65

QUESTION 4
Akoko plc. has recently developed a new product called “EKO” which has been in
production for the past year. The plant producing „EKO‟ is shut down for routine
inspection and maintenance every three months, and during the first year's
operation the costs of shut- down have been as follows:
Quarter Shut-Down Cost
I 36,000
2 28,800
3 27,000
4 25,200
The management accountant attempts to forecast maintenance costs for the coming
year and on examining the above data, it appears that these costs have been
steadily decreasing. The plant engineers has suggested that this is probably due to
the fact that the maintenance engineers are becoming more used to the procedures
involved and also the fact that the plant itself is gradually settling down after
initial operational problems. If this is the case, an appropriate learning curve could
explain the situation which has been observed.
Required:
a. Explain the concept of learning curve. (4 Marks)
b. Estimate the rate of learning which is inherent in the data. Explain the
meaning of the value you have calculated. (4 Marks)
c. Using the learning rate that you have determined, forecast the total cost of
shut-down for routine maintenance during the coming year. (5 Marks)
d. Assume that learning ceases at the end of the second year, forecast the total
cost of shut-down for routine maintenance during the third year.
(4 Marks)
e. State TWO specific reasons why this forecast may be wrong. (3 Marks)
(Total 20 Marks)
QUESTION 5
Ezeabunafo Nigeria Limited, an aluminium company, has two divisions, A and B.
Division A manufactures a single uniform product, which is partly sold in the
external market and partly transferred to division B where it forms the major sub –
assembly for that division‟s product.
66

The unit cost for each division‟s product is as shown here under:
Division Division
A B
N N
Bought – in component (from Division A) - 58
Direct Material 8 -
Direct Labour 4 46
Direct Expenses 4 6
Variable Production Overhead 4 24
Fixed Manufacturing Overhead 8 24
Selling and packing expenses (variable) 2 2
30 160
Past data shows that average of 10,000 units of its products are sold on the
external market each year by Division A at the standard price of N60.
In addition to the external sales, 5,000 units are transferred annually to Division B
at a transfer price of N58 per unit (as above). The transfer price is derived by
deducting variable selling and packaging expenses from the external price since
these expenses are not incurred for internal transfers.
Division B‟s manager disagrees with the basis used to set the transfer price. He
contends that the transfer price should be made at variable cost plus an agreed
(minimal) mark up. It is his view that under the present set-up, his division is
taking output that Division A would be unable to sell at the price of N60.
A study commissioned by the Marketing Director consequent on this disagreement
shows the following:
Customers‟ demand at various selling prices

Division A
Selling price/unit N40 N60 N80
Demand 15,000 10,000 5,000
Division B
Selling price/unit N160 N180 N200
Demand 7,200 5,000 2,800
Division B‟s manager maintains that the study has buttressed his case and calls for
a transfer price of N24 which he points out, would give Division B a reasonable
contribution to its fixed overheads as well as enable B to earn a reasonable profit
which also leads to an enhanced company-wide output and profit performance.
67

• Calculate the contribution at alternative selling prices shown in the study for
Division A. Which price maximises the Division‟s profit? (6 Marks)
• Calculate the contribution as in (a) above for Division B. Show if B‟s current
selling price of N180 is optimal for the firm as a whole. (5 Marks)
• Assuming a transfer price equal to Division A‟s variable costs, show the
contribution at alternative selling price for Division B. (3 Marks)
• Calculate the contribution per unit and comment briefly on how the whole
firm is affected under this situation. (3 Marks)
• Establish the likely effect on the company‟s profits if the suggestion by
Division B‟s manager, of a transfer price of N24 is adopted. (3 Marks)
(Total 20 Marks)
QUESTION 6
a. Explain the FOUR classifications of cost of quality with examples of each.
(6 Marks)
b. Benson Dinka is the management accountant of Dynamic Plc. Mr. Dinka
realises 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 August 31,
2018.
1. Production data:
Units requiring rework 1,500
Units requiring warranty repair service 1,800
Design engineering hours 66,000
Inspection hours (manufacturing) 216,000
2. Cost data: N
Design engineering cost per hour 1,500
Inspection cost per hour (manufacturing) 800
Rework cost per heating system unit reworked
(manufacturing) 60,000
Customer support cost per repaired unit (marketing) 4,000
Transportation costs per repaired unit (distribution) 4,800
Warranty repair costs per repaired unit 64,000
3. Staff training costs amounted to N3,000,000 and product testing costs
were N980,000.
68

4. The marketing director has estimated that sales of 1,400 units were lost
as a result of bad publicity in trade journals. The average contribution
per heating system unit is estimated at N120,000.
Required:
Prepare a cost of quality report for Dynamic plc. that shows its costs of
quality (using appropriate headings) for the year ended August 31,
2018. (14 Marks)
(Total 20 Marks)
69

Formulae
Learning curve
Y = axb
Demand curve
P = a – bQ
MR = a – 2bQ
Y
where b=
Coefficient of determination (r2)

r2
The Miller-Orr Model
70

Annuity Table

r
Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15
71

72

SOLUTION 1
(a) Relevant savings and revenue
25,000 units 35,000 units Shut

₦ ₦ down
₦
Sales revenue 337,500 393,750 –
Material B 9,375 – 56,250
Sale of machinery 33,750 32,250 37,500
Total revenue/savings 380,625 426,000 93,750
Relevant costs
Material A disposal 3,750 2,250 7,500
Purchase material B – 11,250 –
Labour 93,750 150,000 –
Variable overhead
(excl. depreciation) 60,000 84,000 –
Advertising campaign 37,500 52,500 –
Manager‟s salary 30,000 30,000 –
Redundancy pay – – 37,500
Total relevant costs 225,000 330,000 45,000
Net savings 155,625 96,000 48,750
Workings
25,000 units 35,000 units Shut
down
• Sales revenue
No. of units 25,000 35,000
Selling price ₦13.50 ₦11.25
Sales revenue ₦337,500 ₦393,750
• Savings made on material B
Surplus available 5,000 – 30,000
Saving per litre ₦1.875 ₦1.875 ₦1.875
Total saving ₦9,375 – ₦56,250
• Sale of machinery
Current market price ₦37,500 ₦37,500 ₦37,500
Reduction in value ₦3,750 ₦5,250
–
Sale proceeds ₦33,750 ₦32,250 ₦37,500
• Disposal cost of material A
Quantity to be disposed of 25,000 15,000 50,000
Cost of disposal ₦3,750 ₦2,250 ₦7,500
• Purchase cost of material B
Production requirement 25,000 35,000
No. of litres to be purchased – 5,000
Purchase cost ₦11,250
73

• Labour costs
Normal labour costs ₦93,750 ₦93,750
Contract labour – ₦56,250
₦62,500 ₦150,000
• Variable overhead @ ₦2.40
per unit* ₦60,000 ₦84,000
*Variable overhead/unit N
Total variable overhead 150,000
less depreciation 30,000
120,000
Variable overhead/unit = ₦120,000
50,000
₦2.40 per
unit
• Manager‟s salary – relevant
• Redundancy pay – relevant
• General fixed overheads and
non-production overheads –
not relevant
(b) The cost accounting technique normally used by the management

accountant to assist management in decision making is marginal costing
technique, while the cost accounting principle is the relevant costs and
relevant or incremental revenue principle.
Marginal costing might be used for decision-making. For example, marginal

costing is used for limiting factor analysis and linear programming.
It is appropriate to use marginal costing for decision-making when it can be

assumed that future fixed costs will remain constant, no matter what
decision is taken, and that all variable costs represent future cash flows that
will be incurred as a consequence of any decision that is taken.
These assumptions about fixed and variable costs are not always valid. When
invalid, they are invalid, relevant costs should be used to evaluate the
economic/financial consequences of a decision.
Relevant costs could be used for assessing the economic or financial

consequences of any decision by management. Only relevant costs and
benefits should be taken into consideration when evaluating the financial
consequences of a decision.
A relevant cost is a future cash flow that will occur as a direct consequence
of making a particular decision.
74

The key concepts in this definition of relevant costs are as follows:
• Relevant costs are costs that will occur in the future. They cannot include any
costs that have already occurred in the past.
• Relevant costs of a decision are costs that will occur as a direct consequence
of making the decision. Costs that will occur anyway, no matter what
decision is taken, cannot be relevant to the decision.
• Relevant costs are cash flows. Notional costs, such as depreciation charges,
notional interest costs and absorbed fixed costs, cannot be relevant to a
decision.
(c) Special order

From the calculations in (a), the decision will be to produce 25,000 units at a
price of ₦13.50. This means that the special order of 25,000 units could be
produced, with the following relevant revenues and costs:
₦
Revenue:
Sales (25,000 × ₦12.00) 300,000
Savings made on material A disposal 3,750
303,750
Costs:
Material B (25,000 ₦2.25) 56,250
Labour (25,000 × ₦ 5.625 140,625
Variable overhead (25,000 × ₦2.40) 60,000
256,815
Additional contribution 49,875
Decision: Adeco is advised to accept the special order as it will produce additional
contribution of ₦49,875.
EXAMINER‟S REPORT
The question tests relevant costing techniques, marginal costing principles and
incremental costing approach.
Being a compulsory question, all the candidates attempted the question but
performance was rather poor.
Major pitfall was candidates‟ lack of good grasp of the subject area.
Candidates‟ are advised to read the ICAN Study Text when preparing for future
examination.
75

MARKING GUIDE
Marks Marks
1. Relevant savings and costs:
a(i) Reduce production to 25,000 units
(2ticks = 1 mark) (14 ticks @½mark) 7
(ii) Reduce production to 35,000 units
(2ticks = 1 mark) (14 ticks @½mark) 7
(iii) Shut down the factory
(12ticks @½mark) 6 20
b Management Accounting technique and principles

used
• Relevant costing concept 5
• Marginal costing concept 5 10
c Special order of 25,000 units

Computation (8 ticks @1 mark/tick 8
Correct decision 2 10
Total 40
SOLUTION 2
a) Cost driver rates:
• Production set-ups ₦200,000/10 = ₦20,000 each
• Materials movements ₦1,800,000/400 = ₦4,500 each
• Repairs ₦3,000,000/4,000 = ₦750 each
Cost savings (reduction in cost) as a result of the design changes:

= (2 × ₦20,000) + (100 × ₦4,500) + (1,000 × ₦750) = ₦1,240,000
If ABC is used, all of the cost savings will be traced directly to Product C. Hence,
the cost reductions will be:
• Product A: NIL
• Product B: NIL
• Product C: ₦1,240,000/1,000 = ₦1,240 per unit.
If overheads are allocated on a direct labour hour basis then the cost saving will
be spread among all three products in proportion to their labour content:
• Total DLH = (2,000 × 6) + (5,000 × 4) + (1,000 × 8) = 40,000 DLH
• Cost saving = ₦1,240,000/40,000 DLH = ₦31 per DLH
• Product A: ₦31 × 6 = ₦186 per unit
• Product B: ₦31 × 4 = ₦124 per unit
• Product C: ₦31 × 8 = ₦248 per unit
76

b) When the anticipated cost of manufacturing a product according to a particular
design is unacceptably high, a 'target' for cost reductions is set. These cost
reductions must be brought about by design changes to the product. Otherwise
the product cannot be manufactured.
• In the case of Luanda an ABC system is essential in order to ensure that cost
savings made as a result of changing the design of Product C are fully
reflected in the cost of the product.
• For example, if overheads are allocated on a labour hour basis then it
appears that the cost of Product C has been reduced by only ₦248 per unit.
Management may well decide that this is an inadequate reduction to justify
production of the product. ABC analysis is needed in order to show that the
cost saving is actually a much more substantial ₦124 per unit.
• Similarly, the ABC system rightly shows that there has been no change in the
cost of Products A or B (because there have been no design changes).
However, the non-ABC allocation gives the completely false impression that
the unit costs of these products have been reduced. Management might
decide that these apparent cost savings constitute sufficient grounds to begin
producing these products, even though in reality nothing has changed.
• ABC is used to get a better grasp on costs, allowing companies to form a more
appropriate pricing strategy.
• It is used for product profitability analysis.
• It ensures the cost estimates used are realistic.
• It uses overhead cost estimation
• It helps in assessing the activities that limit the production of products.
c) External failure rates have decreased considerably over time. Admittedly, this
has to some extent been accompanied by an increase in the rate of internal
failure. However, the overall trend is a positive one for two reasons:
1) The combined (internal plus external) failure rate is decreasing

2) An internal failure is less costly than an external failure. For example, an
external failure creates costs (such as loss of customer goodwill and
additional transport costs to and from the customer's premises) which are
avoided if the defective item is detected internally by Luanda Ltd.
It seems likely that Luanda has made some efforts to increase the effectiveness of
its internal quality control procedures. Thus, the proportion of defective items
detected internally is increasing (hence the growing internal failure rate) but the
proportion of defective items reaching the customer is decreasing.
77

It is disturbing that the vast majority of failures are still being detected by
customers rather than by the company's internal quality procedures. As well as
trying to improve the overall level of quality, the company should try to improve
much further the effectiveness of its internal quality control procedures.
EXAMINER‟S REPORT
This question tests candidates understanding of ABC approach in target costing and
its application in cost saving. It also tests the efficacy of the ABC concept in target
costing. Part C of the question tests candidates‟ knowledge in trend analysis using
three series of external failure rates, internal failure rates and combined (total)
failure rates.
About 80% of the candidates attempted the question but performance was just
average.
Major pitfall was candidates‟ lack of good grasp of the subject matter.
Candidates‟ are advised to read the ICAN Study Text when preparing for future
examination.
MARKING GUIDE
Marks Marks
2(a) Reduction in cost per unit
• Using activity-based costing
• Computation of total reduction 3
• Computation of unit saving for each product
2 5
• Using direct labour hour basis:
• Computation of total reduction 3
• Computation of unit savings for each
product 2 5
b Importance of ABC system
(Any 2 points out of 6@2½marks per point) 5
c Correct comment on:

• External failure rates 1
• Internal failure rate 1
• Total failure rate 1
• The trend 2 5
Total 20
78

SOLUTION 3
PERFORMANCE MEASUREMENT AND CONTROL – TRANSFER PRICING AND

DIVISIONAL PERFORMANCE
RINC NIGERIA LIMITED

a. Profit made by each division and the company
Div A Div B Company
N‟000 N‟000 N‟000
Sales To 3rd parties 2,000 x 240 = 480 23,000 x 7,380
300=6,900
Transfer to B 18,000 x 220 = - -
3,960
Total 4,440 6,900 7,380
Cost of sales:
Cost of Production 20,000 x 200 = - 4,000
4,000
Transfer from A 18,000 x 220 -
= 3,960
Purchases from 3rd parties
5,000 x 225 1,125
= 1,125
Additional cost of Production
23,000 x 30 = 690
690
Total Cost (Internal and
External) 4,000 5,775 5,815
Net Profit 440 1,125 1,565
b. RINC NIGERIA LIMITED

Returns on investment and residual income:
Returns 440,000 1,125,000 1,565,000
Investment 3,000,000 3,200,000 6,200,000
ROI 14.67% 35.2% 25.2%
Cost of Capital 300,000 320,000 620,000
Residual Income 140,000 805,000 945,000
• Advantages and disadvantages of ROI and Residual income in Divisional

Performance evaluation.
79

Advantages of ROI
There are several advantages in using ROI as a measure of the performance of

an investment centre. These include:
(i) It relates the profit of the division to the capital employed, and the
divisional manager is responsible for both profit and capital
employed;
(ii) ROI is a percentage measure and can be used to compare the

performance of divisions of different sizes;
(iii) ROI as a measure of financial performance is easy to

understand;
(iv) It focuses attention on capital as well as profit, and encourages

managers to sell off unused assets and avoid excessive working
capital (inventory and receivables);
(v) ROI ensures goal congruence between different divisions and

the firm; and
(vi) It measures profitability better than other measures of

investment.
Disadvantages of ROI
There are also disadvantages in using ROI as a measure of the performance of

an investment centre. These includes:
(i) Investment decisions might be affected by the effect they would have on
the division‟s ROI in the short term, and this is inappropriate for making
investment decisions;
(ii) There are different ways of measuring capital employed. ROI might
be based on the net book value (carrying value) of the division at the
beginning of the year, or at the end of the year, or the average for the
year. Comparison of performance between different organisations is
therefore difficult;
(iii) When assets are depreciated, ROI will increase each year provided that
annual profits are constant. The division‟s manager might not want to
get rid of ageing assets, because ROI will fall if new (replacement)
assets are purchased; and
(iv) ROI is an accounting measure of performance. An alternative system of

performance measurement that includes non-financial performance
indicators, such as a balanced scorecard approach, might be more
appropriate.
80

Advantages of Residual Income
There are several advantages in using residual income as a measure of the

performance of an investment centre. These include:
(i) It relates the profit of the division to the capital employed, by charging an
amount of notional interest on capital employed, and the division manager is
responsible for both profit and capital employed;
(ii) Residual income is a flexible measure of performance, because a different

cost of capital can be applied to investments with different risk
characteristics;
(iii) Residual income concept takes a long term view of divisional performance;
and
(iv) Residual income performance measures are reconcilable to planning

decisions using techniques such as NPV and IRR.
Disadvantages of residual income
There are also disadvantages in using residual income as a measure of the

performance of an investment centre. These are:
(i) Residual income is an accounting-based measure, and suffers
from the same problem as ROI in defining capital employed and
profit;
(ii) Its main weakness is that it is difficult to compare the performance
of different divisions using residual income. Larger divisions should
earn a bigger residual income than smaller divisions; and
(iii) Residual income is not easily understood by management,

especially managers with little accounting knowledge.
EXAMINER‟S REPORT
This is a typical transfer pricing question that also tests candidates‟ knowledge of
parameters used for measuring divisional performances.
Candidates were also required to show that they understand the advantages and
disadvantages of return on investment and residual income parameters.
About 90% of the candidates‟ attempted the question but performance was average.
Major pitfall was candidates‟ lack of good grasp of the subject matter.
81

Candidates‟ are advised study the ICAN Study Text when preparing for future
examination.
MARKING GUIDE
Marks Marks
a Profit made by each division and company
(any 20 ticks @½mark) 10
b Determine ROI and RI of division and company
• ROI (any 6 ticks @½mark = 3) 3
• RI (any 4 ticks @½mark = 2) 2 5
c Advantages/disadvantages of ROI and RI

• Advantages and disadvantages of ROI
(6 ticks @½mark = 3) 3
• Advantages and disadvantages of RI
(4 ticks @½mark = 2) 2 5
Total 20
SOLUTION 4
a) The basic concept of a learning curve is that the more a particular task is
performed the more proficient the individual becomes and, as a
consequence, the time taken decreases.
In the initial stages, the learning effect is substantial leading to marked

decreases in time. In latter stages, however, the individual becomes more
familiar with the task and the rate of learning slows down.
This effect is captured in a relationship between the average time taken per
unit and the cumulative number of units produced (or task repetitions). The
form of this relationship is usually taken to be geometric (or logarithmic) as
given by: Y = axb
where Y = average labour hours for the output level desired
X =
B =
82

b) Estimation of Rate of Learning:
From the data, the cumulative number of shut-downs (x) and the average
cost of shut down (y) are as follows:
Cumulative Cumulative Average
Number Costs Costs
N N
(X) (Y)
I ₦36,000 ₦36,000
2 64,800 32,400
3 91,800 30,600
4 117,000 29,250
When X, doubles from I to 2, then y decreases by a factor 32,400/36,000 =

0.90.
When X again doubles from 2 to 4, Y deceases by 29,250/32,400 = 0.903.
It is therefore clear that the learning rate is about 90%.
c) Forecast of total cost in the coming year:
At the end of the second year, the plant would have been shut-down 8 times
(8 quarters).
Qtr 4 average cost is ₦29,250
:. Qtr 8 average cost = 90% of ₦29,250 = 26,325
Total costs over 8 quarters = N26,325 × 8 = 210,600
Less: Total cost during second year = 117,000
Total costs during second year 93,600
d) Forecast of total cost of shut down after cessation of learning in the 3rd Year:
If learning ceases at the end of quarter 8, the cost applicable for quarter 8
(not the average cost after 8 shut-downs) will apply in all subsequent
quarters.
83

* Determine the total costs after 8 shut-downs - determined in (c) above
as ₦2l0,600
* Determine the total costs after 7 shut-downs:
** Average costs after 7 shut-downs by formula:
Y = 36,000 (1) Log0.9/Log 2
Y = 36,000(7)-0152 = ₦26,782
** Total costs after 7 shut-downs = 7 x 26,782 = ₦187,474
* Cost for quarter 8 is ₦2l0,600-187,474=₦23,126
This is the cost that will apply per quarter subsequently in the absence of
learning.
Thus the cost of shut-down during the third year will be: 4 quarters x
₦23,126 = ₦92,504.
e) Two specific problems are:
i) No allowance seems to have been made for inflation; and
ii) As the plant gets older, maintenance costs would be expected to

rise. This factor has not been taken into account.
EXAMINER‟S REPORT
This question tests candidates‟ ability to determine the learning curve rate and its
application to compute average and total cost of shut down for Year 2 and Year 3
when the shut down costs are accumulated on a quarterly basis. In the end,
candidates were expected to highlight two problems that affect learning curve
concept.
About 60% of the candidates attempted the question but performance was poor.
Major pitfall was candidates‟ lack of good grasp of the principle involved.
Candidates‟ are advised to study the ICAN Study Text when preparing for future
examination.
MARKING GUIDE
Marks Marks
A Correct explanation of learning curve 4
B • Computation/determination of learning rate 3
• Explanation of the value computed 1 4
84

C Forecast cost of shut down in the coming year:
• Computation of average cost in second year 3
• Computation of total cost in second year 2 5
D Forecast cost of shut down in the 3rd year:

• Computation of average cost in third year 2
• Computation of total cost in 3rd year 2 4
E Two specific reasons why the forecast is wrong

(Any 2 points@1½marks each point) 3
Total 20
SOLUTON 5
a. Calculation of contribution to each of the alternative selling prices for

Division A
N N N
Selling price per unit 40 60 80
Bought in materials 8 8 8
Direct labour 4 4 4
Direct expenses 4 4 4
Variable production 4 4 4
overheads
Variable selling & 2 2 2
packing
Contribution margin 18 38 58
Quantity demanded 15,000 10,000 5,000
(units)
Total contribution (N) 270,000 380,000 290,000
From the computation above, the selling price of N60 is the optimal price for
the division because, it is at this price that the division maximises its
contribution. Fixed cost is not considered because the cost does not make a
difference among the alternatives.
85

b. Calculation of the contribution at each of the alternative selling prices for
Division B
N N N
Direct labour 46 46 46
overheads
Variable selling & 2 2 2
packing
(units)
From the calculation above, N180 is the optimal price.

c. At a transfer price to A‟s variable costs, the contribution to Division B
N N N
Direct labour 46 46 46
overheads
Variable selling and 2 2 2
packing
(units)
The contribution to A = N24 – N20 = N4/UNIT. N20 represents the relevant

or variable cost to division A.
86

The company as a whole will be indifferent at this point, since transfer
pricing is an internal policy. Whichever transfer price is adopted between the
sister divisions it should not jeopardise the overall objective or goal
congruence of the company.
d. The company as a whole will be indifferent at this point, since transfer

pricing is an internal policy. Whichever transfer price is adopted between
the sister divisions it should not jeopardise the overall objective or goal
congruence of the company.
EXAMINER‟S REPORT
This question tests candidates‟ ability to use transfer price to compute divisional
contribution under varying selling prices.
About 80% of the candidates attempted the question and performance was good.
Candidates‟ are advised to study the ICAN Study Text when preparing for future
examination.
Marking Guide
Marks Marks
a Calculation of contribution to Division A:
Correct contribution at N40 1½
Decision on price that maximises contribution 1½ 6
b Calculation of contribution to Division B:

Correct contribution at N160 1
Decision on price that maximises contribution 2 5
c Contribution of B where A transfer Price is variable

cost:
Correct contribution at N200 1 3
d Computation of unit contribution when transfer price

is N24 2
Its impact on the firm 1 3
e Effect on the company by adopting transfer price of

N24 3
Total 20
87

SOLUTION 6
a) The costs of quality fall into four categories
1. Prevention costs – costs incurred to preclude the production of products that

do not conform to specifications. Examples include:
· Quality training;
· Testing of new materials;
· Supplier evaluation;
· Preventive equipment maintenance;
· Extra purchase price of higher quality materials;
· Design engineering; and
· Process engineering
2. Appraisal costs – costs incurred to detect which of the individual units

of products do not conform to specifications. Examples include:
· Inspection of goods received;
· Product testing;
· Inspection of part-finished production, i.e. work-in-progress; and
· Inspection of finished output.
3. Internal failure costs – costs incurred on defective products before they

are shipped to customers. Examples include:
· Spoilage;
· Rework;
· Scrap; and
· Staff waiting time and machine downtime due to disruption of
workflows caused by defective materials and part-finished products.
4. External failure costs – costs incurred on defective products after they

are shipped to customers. Examples include:
· Warranty repair costs;

· Liability claims;
· The replacement of failed products;
· The cost of handling complaints; and
· Additional transport costs
Appraisal and prevention costs are sometimes known as the cost of
conformance (for goods) or the costs of compliance (for services). Internal and
external failure costs are the costs of non-conformance or non-compliance.
88

b) Cost of quality report for the year ended 31 August 2015
Quantity Rate (N) Total costs % of Total
(N„000) Costs
Preventive costs (P)
Design engineering 66,000 1,500 99,000 14.89
Training 3,000 00.45
Total prevention costs
102,000 15.34
Appraisal costs (A)

Inspection
(manufacturing) 216,000 800 172,800 26.00
Product testing 980 00.15
173,780 26.15
Total appraisal costs
Internal failure costs (IF)

Rework (manufacturing)
1,500 60,000 90,000 13.53
Total internal failure costs
90,000 13.53
External failure costs (EF)
Customer support
(marketing) 1,800 4,000 7,200 01.08
Transportation costs
(distribution) 1,800 4,800 8,640 01.30
Warranty repair 1,800 64,000 115,200 17.33
Publicity costs 1,400 120,000 168,000 25.27
Total extended Failure cost
299,000 44.98
Grand Total costs
(P + A + IF + EF) 664,820 100.00
EXAMINER‟S REPORT
The question tests candidates‟ ability to classify cost of quality and how to prepare
a cost of quality report under the 4 categories of cost of quality.
About 75% of the candidates attempted the question and performance was good.
Candidates are advised to study the ICAN Study Text when preparing for future
examination.
89

MARKING GUIDE
Marks Marks
A Explanation of 4 classifications of cost of quality @1½
marks per point 6
B Cost of quality report:

• Individual cost of quality (9 ticks @½ mark) 4½
• Total cost of quality (5 ticks @1 mark) 5
• Cost of quality in percentage (9 ticks @½mark) 4½ 14
Total 20
90

SKILLS LEVEL EXAMINATION – MARCH/JULY 2020
INSTRUCTION: YOU ARE REQUIRED TO ANSWER FOUR OUT OF SIX

QUESTION 1
Benco Limited produces two critical components, K and T, both of which are used in
petroleum refinery. The components are made by passing each one through two
fully-automatic computer-controlled machine lines – A and B – with respective
maximum capacity of 13,600 hours and 15,360 hours. The following details are
available:
(i) Due to production constraints, the company has decided to produce only
oneof the two components, K or T for next period, but not both.
(ii) Market demand is limited to 59,200 units of K and 80,000 units of T.
(iii) Products unit data:
K T
Selling price ₦900 ₦800
Machine time (hours) - line A 0.25 0.15
line B 0.20 0.225
Raw material X (kg) 2 2
(iv) The maximum quantity of material X available is 136,000kg. The material is

purchased at ₦50 per kg.
(v) Variable machine overhead for machine line A and line B is estimated
at₦500 and ₦600 per machine hour respectively.
(vi) The company operates a JIT system.
51

Required:
a. Calculate which of the components, K or T, should be produced and sold in

the year in order to maximise profits. You should state the number of units to
be produced and sold and the resulting contribution. (10 Marks)
b. Benco Limited wishes to consider additional sales outlets which could earn
contribution at the rate of ₦400 and ₦600 per machine hour for machine line
A and line B respectively. Such additional sales outlets would be taken up
only to utilise any surplus hours not required for the production of the
components.
Calculate whether Benco Limited should now produce either component K or

T and what quantity to be produced and the resulting contribution.
(9 Marks)
c. Suggest ways in which the company may overcome the capacity constraints
which limit the opportunities available to it in the year, and indicate the
types of costs which may be incurred in overcoming each constraint.
(10 Marks)
d. Illustrate the use of opportunity cost in the charging of each of material,

labour and overhead elements in comparison with historic absorption cost
elements. For each element, you should illustrate your answer with figures of
your choice. (11 Marks)
(Total: 40 Marks)

QUESTION2
Toby Nigeria Limited is a publishing company established in the early 1970‟s. The
company has recently been taken over by Superior Quality Limited – a
multinational company operating in Europe.
Mr. Edet Akpan, a staff of Superior Quality Limited has been sent from the
company‟s headquarters to review, among other things, the budgeting and
reporting system used by Toby Nigeria Limited.
During his visit to all the departments, he discovered that monthly budgets are
prepared for each department in the company. Upon request, the last budget
statement for the School Stationery Production Department (SSP) for period V was
presented to him.
52

The budget statement presented was as follows:
Budget statement for period V
Department: SSP Department
Actual results: Units produced 45,000
Labour hours 130,050
Actual Budget Variances
Results
N‟000 N‟000 N‟000
Direct materials 907.2 800 (107.2)
Direct Labour 442.8 400 (42.8)
Variable production overhead 284.4 240 (44.4)
Fixed production overhead 212.4 187 (25.4)
Variable admin. overhead 147.6 133 (14.6)
Fixed admin overhead 180.0 160 (20.0)
Total costs 2,174.4 1,920 (254.4)
Sales value of production 2,790 2,480 310
Profit 615.6 560 55.6
Mr. Tola Ademola

School Stationery Manager
Interaction with Mr. Tola Ademola the School Stationery Manager, revealed that the
budget statement presented was based on 40,000 units with a standard labour
content of 3 hours per unit.
Mr. Akpan observed that Tola was not in any way enthusiastic about the budget
system. He saw it as a pressure system imposed by the company‟s top
management to indict some of the managers. He pointed out that the system was
hurriedly introduced by High Flyer Consults, about twelve months ago. The
consultant never took time to talk to the managers or provide explanation that
could assist users to understand the system. The experienced School Stationery
Manager was doubtful about the competence of the consultant. He was of the
opinion that the system introduced in Toby Nigeria Limited was either a ready-
made one developed for another company or that the consultant did not
understand the system well enough to give him the needed confidence to educate
the users. He concluded by stating that he was sure his department made a loss as
against the positive figure recorded in the report and there was the possibility of
reporting a loss at another period when profit was actually made. The situation
reported above cuts across virtually all the departments and so the need to nip the
situation in the bud became very urgent.
The task of making budgeting system more useful and acceptable in a biased
environment like this, no doubt, seems difficult therefore, Mr. Akpan has requested
from you an advice that will assist him in getting out of the woods.
53

Required:
a. Redraft the budget statement in a more informative manner. (12 Marks)
b. Discuss the behavioural problems brought out in this situation. (4 Marks)
c. Discuss the steps Mr. Akpan should take to remedy the situation. (4 Marks)
(Total 20 Marks)
QUESTION 3
Sedeco Nigeria Limited manufactures and sells three products Alpha, Beta and
Gamma. For sometime now, the company has been concerned about its cost
allocation system and has been searching for a more efficient way of cost
allocation. The company recently employed a management accountant who
informed the management that activity based costing is a more efficient cost
allocation system which will also lead to improvement in cost accuracy and
reduction.
The management accountant discovered that the company has direct materials,
direct labour and five indirect cost pools which represent the five activity areas.
The prior product costing system uses the two direct cost categories and a single
indirect cost pool where overheads are allocated using direct labour hours.
The following information is provided for the next period.
Alpha Beta Gamma Total
Production and sales (units) 20,000 12,500 5,000
Direct material cost N250 N200 N180 N8,400,000
Direct labour hours 10 8 4 320,000
Machine hours 5 6 5 200,000
Number of production runs 5 10 25 40
Number of component receipts 15 25 120 160
Number of production orders 15 10 25 50
Direct labour is paid at N100 per hour.

Overhead Costs in the period are expected to be as follows:
N Cost driver
Set up 1,400,000 Production runs
Machine 9,000,000 Machine hours
Goods inwards 2,800,000 Component receipts
Packaging 2,000,000 Production orders
Engineering 1,800,000 Production orders
17,000,000
54

Also, the company is considering the pricing of the three products because sales
prices have remained uncertain as shown in the table below:
Alpha Beta Gamma

Prob. N Prob. N Prob. N
0.6 2,000 0.5 2,000 0.7 1,600
0.3 2,200 0.3 2,200 0.2 1,700
0.1 2,300 0.2 2,250 0.1 1,800
Required:
a. Calculate the unit costs of each product using:
(i) Prior product costing approach (traditional cost)
(ii) The Activity Based Costing method (10 Marks)
b. Compute the expected sales prices for the three products and the profit or
loss that will arise from the implementation of the ABC costing approach and
the traditional costing method. (8 Marks)
c. State reasons why activity based costing approach may be preferred to
traditional absorption costing approach in modern manufacturing
environment. (2 Marks)
(Total 20 Marks)
QUESTION 4
Ibok Power Nigeria Limited (IPN) is a power utility company providing power
distribution services to the public and businesses of Southern Nigeria. The company
was formed when the government-owned Power Holding Company of Nigeria was
broken up into regional utility companies (one of which was IPN) and sold into
private ownership over four years ago.
As a vital utility for the economy of Nigeria, power services are a government-
regulated industry. The regulator is principally concerned that IPN does not abuse
its monopoly position in the regional market to unjustifiably increase prices. The
majority of services (80%) are controlled by the regulator who sets an acceptable
return on capital employed (ROCE) level and ensures that the pricing of IPN within
these areas does not breach this level. The remaining services, such as provision of
metres and contract repairs service, are unregulated and IPN can charge a market
rate for these. The regulator calculates its ROCE figure based on its own valuation
of the capital assets being used in regulated services and the operating profit from
those regulated services.
55

The target pre-tax ROCE set by the regulator is 6%. If IPN were to breach this figure,
then the regulator could fine the company. In the past, other such companies have
paid fines amounting to millions of naira.
The board of IPN is trying to drive the performance for the benefit of the
shareholders. This is a new experience for many at IPN, who left the public sector
four years ago. In order to try to better communicate the objective of maximising
shareholders‟ wealth, the board has decided to introduce economic value added
(EVA) as the key performance indicator.
The finance director has provided the following financial information for the year
ending 30 September 2018:
Ibok Power Services
2018
Regulated Non-regulated Total
Nb Nb Nb
Revenue 138·0 34.5 172.5
Operating costs 115·0 23.5 138.5
–––––– ––––– ––––––
Operating profit 23·0 11·0 34·0
Finance charges 11.5
––––––
Profit before tax 22.5
Tax at 25% 4.75
––––––
Profit after tax 17.75
––––––
Capital employed: 2018 2017
Nb Nb
Measured from published accounts 328.5 318.5
Measured by regulator (for regulated services only) 389.5 380.5
Notes:
(i) Total operating costs include:
2018 2017
Nb Nb
Depreciation 29.5 28.5
Provision for doubtful debts 1.0 0·25
Research and development 6.0 –
Other non-cash items 3.5 3.0
56

(ii) Economic depreciation is assessed to be N41.5b in 2018.
Economic depreciation includes any appropriate amortisation adjustments.
In previous years, it can be assumed that economic and accounting
depreciation were the same.
(iii) Tax is the cash paid in the current year (N4.5b) and an adjustment of N0·25b
for deferred tax provisions. There was no deferred tax balance prior to 2018.
(iv) The provision for doubtful debts was N2.25b on the 2018 statement of
financial position.
(v) Research and development is not capitalised in the accounts. It relates to a
new project that will be developed over five years and is expected to be of
long-term benefit to the company. 2018 is the first year of this project.
(vi) Cost of capital of IPN
Equity 16%
Debt (pre-tax) 5%
(vii) Capital structure of IPN 40% Equity
60% Debt
Required:
a. Evaluate the performance of IPN using EVA. (13 Marks)
b. Assess whether IPN meets its regulatory ROCE target and comment on the
impact of such a constraint on performance management at IPN.
(7 Marks)
(Total 20 Marks)
QUESTION 5
Olascom Nigeria Limited has two operating divisions, Western division and Eastern
division that are treated as profit centres for the purpose of performance reporting.
Western division makes two products, Tot and Tal. Tot is sold to external customers
for ₦310 per unit. Tal is a part-finished item that is sold only to Eastern division.
Eastern division can obtain the part-finished item from either Western division or
from an external supplier. The external supplier charges a price of ₦275 per unit.
57

The production capacity of Western division is measured in total units of output of
Tot and Tal. Each unit requires the same direct labour time. The costs of production
in Western division are as follows:
Tot Tal
N N
Variable cost 230 240
Fixed cost 95 95
Full cost 325 335
Required:
a. What is an optimal transfer price? (4 Marks)
b. What would be the optimal transfer price for Tal if there is spare production
capacity in Western division? (4 Marks)
c. What would be the optimal transfer price for Tal if Western division is
operating at full capacity due to a limited availability of direct labour, and
there is unsatisfied external demand for Tot? (7 Marks)
d. Discuss two methods that can be used to evaluate performance of divisions
that operate as investment centres, (5 Marks)
(Total 20 Marks)
Question 6
“Performance management incorporates activities that aim to ensure that goals are
consistently met in an effective and efficient manner. In order to achieve this,
management requires reliable systems to support them in decision making”.
Required:
Explain, with examples, the common types of information that are required by
various levels of management for effective decision making, stating the qualities
needed to classify such information as good. (20 marks)
58

Formulae
Learning curve
Y = axb
Demand curve
P = a – bQ
change in price
b
change in quantity
MR = a – 2bQ
Y= 𝑎 + 𝑏𝑋
𝑛 𝑋𝑌 − ( 𝑋)( 𝑌)
where b= 2
𝑛 𝑋 − 𝑋 2
𝑦 𝑏 𝑥
a= −
𝑛 𝑛

2
𝑛 𝑋𝑌 − 𝑥 𝑌1
r2= 2 2
(𝑛 𝑋 − 𝑋 2 (𝑛 𝑦 − 𝑋 2
1
3 3
x Transaction Cost x Variance of Cash flows
The Miller-Orr Model 𝑆𝑝𝑟𝑒𝑎𝑑 = 3 x 4
Interest rate as a proportion
59

Annuity Table
Present value of an annuity of 1 i.e. 1 - (1 + r) -n
r
Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15
60

SOLUTION 1
61

a) Maximum production of each product is as follows:
K (Units) T (Units)
Machine line A limitation (13,600 ÷ 0.25) (13,600 ÷ 0.15) 90,666
Machine line B limitation (15,360 ÷ 0.20) 76,800 (15,360 ÷ 0.225) 68,266
Material X limitation (136,000 ÷ 2) 68,000 (136,000 ÷ 2) 68,000
Maximum sales 59,200 80,000
Given the various limitations, the maximum that can be produced of each of the
components is the lowest under each component, i.e. 54,400 units of K and
68,000 units of T.
The contribution per unit of output is:
Variable costs:
K T
₦ ₦
Material X (2kg × ₦50) 100 (2kg × ₦50) 100
Machine line A (0.25 × ₦500) 125 (0.15 × ₦500) 75
Machine line B (0.20 × ₦600) 120 (0.225 × ₦600) 135
345 310
Selling price 900 800
Contribution 555 490
The maximum possible contribution from each of the components will be:
K 54,400 × ₦555 ₦30,192,000
T 68,000 × ₦490 ₦33,320,000
The company should therefore produce and sell 68,000 units of component T,
giving total contribution of ₦33,320,000.
b) The spare machine capacity assuming that 54,400 units of K and 68,000 units of
T are produced is as follows:
Machine A Machine B
(Hours) (Hours)
Production of 54,400 of K:
13,600 – (54,400 × 0.25) 0 [15,360 – (54,400 × 0.20)] 4,480
Production of 68,000 of T: 3,400 [15,360 – (68,000 × 0.225)] 60

13,600 – (68,000 × 0.15)
62

The revised contributions are:
T
₦ K ₦
Original contribution
30,192,000 33,320,000
Sales from unused capacity of machine A 0 (3,400 × ₦400) 1,360,000
Sales from unused capacity of machine B x N600) 2,688,000 (60 ×₦600) 36,000
Revised contribution 32,880,000 34,716,000
The above figures indicate that component T should still be sold when an
alternative sales outlet exists.
c) In order to overcome the capacity constraints, the following alternative courses

of action should be considered:
i) Hire additional machinery to meet short-term demand and evaluate

purchase of additional machinery if the shortage of capacity is expected to
continue in the long term. However, cost of financing the additional
machinery needs to be considered.
ii) Increase output per machine hour by more efficient operating or increasing
machine speeds. However, additional costs and lost output might arise
from machine breakdowns.
iii) Increase machine capacity by introducing additional shifts. This will lead to
increased shift and overtime payments and may also result in machine
breakdowns arising from more intensive use of machinery.
iv) Sub-contract production but this will lead to increased costs and possibly
lost sales arising from inferior quality products, late delivery, etc.
v) Seek alternative supplies of Material X since it is a limiting factor. Care

should be taken to ensure that any additional purchase and delivery costs
do not exceed the contribution from increased sales.
vi) Outsource production capacity of excess demands. Quality of the outsourced

products, cost and delivery time should be considered.
63

d) The opportunity cost approach requires the calculation of the net cash flows
which will arise from pursuing a particular course of action.
i) Materials cost: Consider a situation where materials which originally cost

₦1,000 is in store and has a replacement cost of ₦1,500. The material is
not currently used as part of normal production and if not used on a
specific contract now being quoted for, half would be sold as scrap for
₦75 and the remainder disposed of at a cost of ₦50.
The original cost of ₦1,000 is past expenditure and is irrelevant to future

decisions. The replacement cost of ₦1,500 is irrelevant since the material will
not be replaced. The opportunity cost to be charged to the
contract is
₦
Scrap value foregone 75
Less: Disposal cost forgone 50
25
ii) Labour cost: Consider a situation where the company‟s policy is to retain
workers at a basic wage of ₦1,600 per week. If not used on the contract (10
workers for four days), they will be used on general duties which would
otherwise have been undertaken by an outside services agency at a cost of
₦36,000. The contract under review will require overtime which would not
otherwise have been worked at a cost of ₦2,000.
In this case, the basic wage of ₦1,600 × 10 men × 4 days = ₦64,000 will be
paid whether or not the contract is accepted. If the contract goes ahead, the
company will have to spend ₦36,000 on the external service work plus make
overtime payments of ₦2,000 to the workers on the contract.
The opportunity cost to be charged to the contract is therefore ₦36,000 +
₦2,000 = ₦38,000.
iii) Overhead: There are many illustrations which may be used in respect of
overhead cost. Once again the important factor is to determine whether
additional (incremental) expenditure will occur because of the contract.
64

Consider machinery to be used on the contract to which the following
information applies for the period of the contract:
₦
Depreciation provision 1,000
Routine maintenance cost 4,000 (25% due to the contract)
Special tooling cost 3,500
Power cost 5,000
The depreciation provision is simply an allocation of a past (sunk) cost and

will not affect cash flows whatever decision is made. The routine
maintenance which is due to the contract is the relevant cost i.e. 25% ×
₦4,000 = ₦1,000. The special tooling cost is incremental i.e. it is avoidable if
the contract does not proceed. The power cost is also a variable cost.
The opportunity cost to be charged to the contract is therefore ₦1,000 +

₦3,500 + ₦5,000 = ₦9,500
Examiner‟s report
Being a compulsory question, the question tests candidates‟ understanding
of computing maximum contribution in a situation where there are three but
single based limiting factors. The question also tests the utilisation of
surplus hours in production of products.
The question was virtually attempted by all the candidates. The major pitfall
is that most candidates failed to distinguish the requirement of the question
as testing individual limiting factor by proceeding to use linear
programming approach due to the three limiting factors that ordinarily
should have been evaluated individually.
It is advised that candidates should, in future examinations, read the

Institute‟s study text manual so as not to be caught in the web of such self
inflicted confusion.
65

Marking guide
DECISION MAKING Marks Marks
(a) - Computation of maximum production of
each product 2
- Variable cost and contribution of each unit
of product 3
- Maximum contribution 2
- Decision on contribution and quantity 3 10
(b) - Computation of excess machine hours 4

- Computation of revised contribution 4
- Decision on excess machine hours 1 9
(c) - Overcoming the capacity constraint

(any 4 points at 2½ marks per point) 10
(d) - Material expenses (cost):

- Opportunity cost 2
- Historical cost 1
- Illustration ½ 3½
- Labour cost:
- Historical cost 1
- Illustration 1 4
- Overhead cost:
- Historical cost 1
- Illustration ½ 3½ 11
Total: 40
66

SOLUTION 2
TOBY NIGERIA LIMITED
(a) Budget statement for Period V

Department: SSP Department
Particular Flexed Actual Result Variances
Budget N N N
Sales 2,790,000 2,790,000 0
Less Variable costs;
Direct material 900,000 907,200 (7,200)
Direct labour 450,000 442,800 7,200
Variable production overhead 270,000 284,400 (14,400)
Variable Administration 149,625 147,600 2,025
overhead
Total variable costs 1,769,625 1,782,000 (12,375)
Contribution 1,020,375 1,008,000 (12,375)
Fixed costs;
Production overhead 187,000 212,400 (25,400)
Administration overhead 160,000 180,000 (20,000)
Total fixed overhead 347,000 392,400 (45,400)
Net Profit 673,375 615,600 (57,775)
Notes/Workings
Budget Result Basis: Units = 40,000
Labour (Hrs)= 40,000 units × 3.00
= 120,000 hours
Actual result basis:
Units = 45,000
Budgeted Labour (hours)=120,000/40,000 × 45000 = 135,000
Actual Labour (hours) = 130,500 hours
N800,000
Direct materials = 40,000units × 45,000units = N900,000
N400,000
Direct Labour = × 135,000hrs = N450,000
120,000 hrs
Variable Overhead = N240,000 + N133,000 =N373,000
N373,000
x 135,000hrs = N419,625
120,000 hrs
N2,480,000
Sales value =40,000 units x 45,000 =N2,790,000
(b) Behavioural problems in the situation

 The budgetary process here is not participatory.
 The approach applied here discouraged initiative and that was why
users misunderstood the objective of the system.
 They saw the system as a penny-pinching control activity rather than
a positive and beneficial one.
67

 The Budget system was imposed on users. This created resentment
and negative reactions;
 Users did not understand the system and so system was unacceptable
to them;
 The implementation of the budget resulted in the stifling of
motivation;
 Users did not see the system as a neutral and objective one; and
 The goals of users were at variance with those of the organisation
(goal incongruence).
(c) Mr. Akpan is advised to take the following steps:

 Call a meeting of all managers and heads of department where he
will disabuse their minds on the acquired negative and contradictory
attitude;
 Cancel the present system and initiate a new system that involves full
participation of the budget holders;
 Communicate the objectives of the company and the usefulness of a
budget system to all users. All the benefits derivable therefrom
should be clearly and distinctly highlighted; and
 The new process of budget preparation and subsequent performance

evaluation should be carried out in such a manner as to motivate
managers and staff i.e. it should be participatory and should also
encourage initiative and responsibility.
68

Marking guide
BUDGETING Marks Marks
(a) - Budget statement 11
- Workings 1 12
(b) - Behavioural problems in budgeting 4
(c) Advice to remedy the problems 4

Total: 20
Examiner‟s report
The question testes candidates‟ ability to prepare budget statement used in flexible
budgeting approach as well as computation of variances from such statements.
The question was attempted by many candidates.
The common pitfall is the inability of candidates to re-prepare the budget

statement using the flexed quantity of 45,000 units.
It is advised that candidates should, in future examinations of the Institute,

endeavour to study the Institute‟s text manual on the subject as well as other
recommended text books.
69

SOLUTION 3
SEDECO Nigeria Limited
a) (i) SEDECO NIGERIA LIMITED

Unit Cost of Product using prior costing approach
Alpha Beta Gamma

N N N
Direct Materials 250.00 200.00 180.00
Direct labour 1,000.00 800.00 400.00
Overhead Costs 531.25 425.00 212.50
Total Cost per unit 1,781.25 1,425.00 792.50
(ii) SEDECO NIGERIA LIMITED

Unit Cost of Products using the ABC Approach
Alpha Beta Gamma
N N N
Direct Materials 250.00 200.00 180.00
Direct labour 1,000.00 800.00 400.00
Overhead Cost 303.88 393.80 1,200.00
Total Cost per unit 1,553.88 1,393.80 1,780.00
b) (ii) Computation of Expected Sales Prices

Product Alpha Expected
Outcome
Probability N N
0.6 2,000 1,200
0.3 2,200 660
0.1 2,300 230
Expected sales price 2,090
Product Beta Expected

Outcome
Probability N N
0.5 2,000 1,000
0.3 2,200 660
0.2 2,250 450
Expected
Product Gamma Outcome
Probability N N
0.7 1,600 1,120
0.2 1,700 340
0.1 1,800 180
70

(ii) Profit or loss performance using traditional costing approach
Alpha Beta Gamma Total
N N N N
Sales price 2,090.00 2,110.00 1,640.00
Direct material 250.00 200.00 180.00
Direct labour 1,000.00 800.00 400.00
Overhead cost 531.25 425.00 212.50
1,781.25 1,425.00 792.50
Profit / (Loss) 308.75 685.00 847.50
Units produced /sold 20,000 12,500 5,000
Total Profit/(Loss) N6,175,000 N8,562,500 N4,237,500 N18,975,000
(iii) Profit or Loss Performance using ABC Approach

Alpha Beta Gamma TOTAL
N N N N
Selling price 2,090.00 2,110.00 1,640.00
Direct material 250.00 200.00 180.00

Direct labour 1,000.00 800.00 400.00
Overhead 303.88 393.80 1,200.00
1,553.88 1,393.80 1,780.00
Profit /(Loss) 536.12 716.20 (140.00)
Units sold 20,000 12,500 5,000
Total profit/(Loss) N10,722,500 N8,952,500 (N7,000,000) N18,975,000
(c) Reasons why activity -based costing approach is preferred to traditional

absorption costing approach include:
 Unlike in the past, information processing cost is not high, hence a more
sophisticated cost system can be utilised to analyse and allocate current
overhead costs that are now more dominant than direct costs.
 ABC approach relies on a greater number and variety of a second stage

cost drivers unlike the traditional costing system which is simplistic and
possesses a lot of distortions.
 Traditional costing approach uses only volume-based cost drivers on the

assumption that a product‟s consumption of overhead resources is
directly related to the number of units produced. Some overheads are
related to non-volume-based cost drivers and as such, ABC abhors
71

generalisation but encourages the appropriate cost driver relating to the
activity to be used in overhead allocation.
 Costs reflect the complexity and diversity of production as a result of

realistic bases of absorption
 It provides more accurate cost per unit
 It aids cost control
 It focuses attention on real nature of cost behaviour
 It provides a reliable indication of long run variable product cost
 It can be used for both service and product costing
 It can be applied to all overhead cost.
Workings:
Computation of overhead using direct labour hour:
 Total overhead cost N17,000,000
 Total Direct labour hour 320,000 hours
 Overhead rate per hour = N17,000,000
320,000
= N53.125
Computation of overhead cost using ABC Approach

Alpha Beta Gamma
 Set up Cost
Alpha 5× 35,000 = 175,000
Beta 10 × 35,000 = 350,000
Gamma 25 × 35,000 = 875,000
 Machine
Alpha 100,000 x 45 = 4,500,000
Beta 75,000 x 45 = 3,375,000
Gamma 25,000 x 45 = 1,125,000
 Goods Inwards
Alpha 15 × 17,500 = 262,500
Beta 25× 17,500 = 437,500
Gamma 120 × 17,500 = 2,100,000
 Packaging
Alpha 15 × 40,000 = 600,000
Beta 10 × 40,000 = 400,000
Gamma 25 × 40,000 = 1,000,000
 Engineering
A Alpha 15 × 36,000 = 540,000
72

Beta 10 × 36,000 = 360,000
Gamma 25 × 36,000 = __900,000
Total Overhead N6,077,500 N4,922,500 N6,000,000
Alpha Beta Gamma

Total Overhead N6,077,500 N4,922,500 N6,000,000
Total units produced 20,000 12,500 5,000
Overhead Per unit N303.875 ₦393.80 ₦1,200
Cost
Machine Alpha 100,000 × 9,000,000 = N4,500,000
200,000
Beta 75,000 × 9,000,000 = N3,375,000
200,000
Gamma 25,000 × 9,000,000 = N1,125,000
200,000
N1,400,000
Set up Cost = = N35,000 per set up run
40
N2,800,000
Goods inward = = N17,500 per receipt
160
N2,000,000
Packaging = = N40,000 per order
50
N1,800,000
Engineering = = N36,000 per order
50
Computation of Expected Sales Prices

Project Alpha Expected
Outcome
Prob. N N
0.6 2,000 1,200
0.3 2,200 660
0.1 2,300 230
2,090
Project Beta Expected

Outcome
Prob. N N
0.5 2,000 1,000
0.3 2,200 660
0.2 2,250 450
2,110
73

Product Gamma Expected
Outcome
Prob. N N
0.7 1,600 1,120
0.2 1,700 340
0.1 1,800 180
1,640
Examiner‟s report
This question tests candidates understanding of ABC approach to overhead
absorption vis-a-vis traditional absorption costing method.
The question was attempted by most candidates.
Performance was however average.
The common pitfall is the wrong computation of fixed overhead absorption rate
using direct labour hours.
It is suggested that candidates should endeavour to use ICAN Study manuals in

future examinations.
Marking guide
ACTIVITY BASED COSTING Marks Marks
(a)i - Unit cost computation

(Traditional Cost Method) 3
ii - Units Cost Computation (ABC Approach) 3
- Workings 4 10
(b)i - Computation of expected sales prices 1½

ii - Computation of profit (Traditional Costing) 3¼
iii - Computation of Profit (ABC Approach) 3¼ 8
(c) Reasons why ABC approach is preferred to the traditional

approach 2
20
74

SOLUTION 4
(a)
NOPAT N Billion
Profit After Tax 17.75

Add: Interest after tax (11.5 x 0.75) 8.625
Add: Non cash item 3.5
Add: deferred tax 0.25
Add: Research and Development 6.00
Less amortisation (1.2) 4.80
Add provision for doubtful debt 1.00
Add depreciation 29.5
Less economic depreciation (41.5) (12.00)
23.925
Weighted Average Cost of Capital

WACC = [0.16 x 0.4] + [0.05[1-0.25] × 0.6
= 6.4% + 2.25%
= 8.65%
Computation of capital employed: N Billion

Initial capital employed 318.50
Add: Non-Cash item 3.00
Provision for doubtful debt 1.25
322.75
EVA: N Billion
NOPAT 23.925
Less: Capital charges [8.65% × 322.75] (27.918)
(3.993)
The EVA produced negative N3.993 Billion, this shows that the business is not
creating adequate values for the owners.
(b) Regulatory ROCE
Target 6%
Operating profit × 100 = 23.0 × 100 = 5.90%
Ibok Capital employed 1 389.5 1
 The company is within the allowed return on capital employed by the

regulator. There is only a minimal scope for increase in the profitability of
this aspect of the business as the maximum operating profit that the
regulator would allow on N389.5m of capital employed is N23.37m.
75

 The company should seek to increase its non-regulated activities as these are
generating much higher operating profit margins – 32% compared to 17%
(regulated). It could use the regulated activities as a reliable source of cash
profit to reinvest in expansion of the more profitable non-regulated areas.
 The implications for performance management are the need to control costs
within regulated activities so that the regulator cannot argue that the
company is overcharging its customers in order to drive profit growth. This
can be done through tight observance of budgets and seeking cost savings
through efficiency improvements. Targets based on minimising variances
and innovation in cost cutting would be appropriate.
 Within the non-regulated areas, a more entrepreneurial approach can be
taken. Performance management in these areas will focus more on growing
revenues by expanding markets (taking a larger share of the national
market) and improving profit margins. As already noted, growth by
acquisition of suitable unregulated businesses using the cash generated by
the regulated activities would be a possible course of action. Targets based
on revenue growth and innovating in new business areas with high profit
margins would be appropriate.
 Creation of additional value will be discouraged. However, if the additional
value created could outweigh the penalty, the management should drive
more returns.
 The ROCE set by the regulator may not provide adequate values for the
shareholders.
Examiner‟s report
The question tests candidates understanding of Economic Value Added (EVA) as a
measure of divisional and firm performance. Very few candidates attempted the
question.
The performance was however poor. The pitfall was candidates‟ inability to
compute Net Operating Profit after Tax (NOPAT) due to poor understanding of the
adjustments that needed to be made as well as incorrect computation of the initial
capital employed.
Candidates are advised to use the Institute‟s text manual extensively when
preparing for future ICAN examinations.
76

Marking guide
EVA COMPUTATION Marks Marks
(a) - Computation of NOPAT 6

- Computation of WACC 1
- Computation of Capital employed 2
- Computation of EVA 2
- Decision on EVA 2 13
(b) - Computation of regulatory ROCE 3

- Decision on regulated services 2
- Impact on Constraints on
Performance Management 2
7
Total: 20
SOLUTION 5
OLASCOM NIGERIA LIMITED
(a) An optimal transfer price (or range of transfer prices) is a price for an
internally-transferred item at which:
i. the selling division will want to sell units to the other profit centre,
because this will add to its divisional profit;
ii. the buying division will want to buy units from the other profit centre,
because this will add to its divisional profit; and
iii. the internal transfer will be in the best interests of the entity as a whole,
because it will help to maximise its total profit.
(b) When Western division has spare capacity, its only cost in making and
selling extra units of Tal is the variable cost per unit of production, ₦240.
Eastern division can buy the product from an external supplier for ₦275.
77

It follows that a transfer that is higher than ₦240 but lower than ₦275,
for additional units of production, will benefit both profit centres as well
as the company as a whole. (It is in the best interests of the company to
make the units in Western division at a cost of ₦240 than to buy them
externally for ₦275.)
₦
Variable Cost = 240
Opportunity Cost = 0
Optimal Transfer = 240
(b) When Western division is operating at full capacity and has unsatisfied
external demand for Tot, it has an opportunity cost if it makes Tal for
transfer to Eastern division. Tot earns a contribution of ₦80 per unit
(₦310 – ₦230). The minimum transfer price that it would require for Tal
is:
₦
(c) Variable cost of production of Tal 240
Opportunity cost: lost contribution from sale of Tot 80
Minimum transfer price to satisfy Western division 320
Eastern division can buy the product from an external supplier for ₦275,
and will not want to buy from Western division at a price of ₦320. The
maximum price it will want to pay is ₦275.
The company as a whole will benefit if Western division makes and sells
Tot.
It makes a contribution of ₦80 from each unit of Tot.

If Western division were to make and sell Tal, the company would
benefit by only ₦35. This is the difference in the cost of making the
product in Western division (₦240) and the cost of buying it
externally (₦275).
The same quantity of limited resources (direct labour in Western

division) is needed for each product, therefore the company
benefits by ₦45 (₦80 – ₦35) from making units of Tot instead of
units of Tal.
On the basis of this information, the transfer price for Tal should be
₦320 as long as there is unsatisfied demand for Tot. At this price,
there will be no transfers of Tal.
78

(d) Two methods of evaluating the performance of divisions that operate as
investment centres are:
i. Residual income: This is described as the difference between the

absolute profit on investment and the imputed cost of capital of the
organization. Residual income is calculated by deducting an
amount for imputed interest (also called notional interest) from the
accounting profit for the division.
The interest charge is calculated by applying a cost of capital to the

division‟s net investment (net assets).
One reason for using residual income instead of ROI to measure a

division‟s financial performance is that residual income has a
money value, whereas ROI is a percentage value. A company may
prefer to measure performance in money terms. In most other
respects, however, residual income is similar to ROI as a measure of
divisional performance.
ii. Return on investment: Return on investment (ROI) is a measure of

the return on capital employed for an investment centre. It is also
called the accounting rate of return (ARR).
It is often used as a measure of divisional performance for

investment centres because:
 the manager of an investment centre is responsible for the

profits of the centre and also the capital invested in the centre,
and
 ROI is a performance measure that relates profit to the size of
the investment.
iii. Absolute Profit: Absolute profit can be used as a measure of performance

and investment centre. This is calculated as selling price less cost.
iv. Economic Value added (EVA): EVA can be used as a performance

evaluation tool for divisional managers. Using EVA encourages
divisional managers to maximize the wealth of the division.
EVA can be computed thus:
EVA = Net Operating Profit after Tax (NOPAT) minus [weighted average
cost of capital (WACC) X Initial capital employed].
79

Examiner‟s report
The question tests candidates understanding of transfer pricing, the computation of
ideal transfer price in situation of unlimited spare capacity and limited spare
capacity as well as parameters for measuring the performance of investment
centres.
Many candidates attempted the question due to its outlook which appears simple.
The performance of candidates is above average.
It is hereby recommended that candidates, in future examinations should continue
to revise ICAN text manual.
Marking guide
OPTIMAL TRANSFER PRICE Marks
(a) - Explanation of an optimal transfer price
(selling division/buying division/company) 4
(b) - Computation of optimal transfer price
in situation of spare capacity 4
(c) - Computation of optimal transfer price
in situation of limited spare capacity 7
(d) - Two methods of divisional performance evaluation
(any 2 methods at 2½ marks for a method) 5
Total: 20
SOLUTION 6
Levels of Management
Management may be classified into three levels:
Strategic management;
Tactical management; and
Operational management.
These three classifications are based on the types of decision that are taken by
management at each level. For decisions at each level of management, a different
type of information is required.
80

Strategic information is required at strategic management level. The characteristics
of strategic information may be summarised as follows:
It is information about the organisation as a whole, or a large part of it.

It is in a summary form, without too much detail.
It is generally relevant to the longer term.
It is often forward-looking.
The data that are analysed, to provide the strategic information come from both
internal and external sources.
It is often prepared on an „ad hoc‟ basis, rather than in the form of regular and
routine reports.
It may contain information of qualitative and quantitative nature.
There is often a high degree of uncertainty in the information. This is particularly

true when the information is forward-looking (for example, a forecast) over a
number of years in the future.
Tactical information is used to decide how the resources of the organisation should
be used, and to monitor how well they are being used. It is useful to relate tactical
information to the sort of information that is contained in an annual budget. A
budget is planning at a tactical management level, where the plan is expressed in
financial terms.
The general features of tactical information are as follows:
It is information about individual departments and operations.

It is in summary form, but at a greater level of detail than strategic information.
It is generally relevant to the short-term and medium term.
It may be forward-looking (for example, medium-term plans) but it is often

concerned with performance measurement. Control information at a tactical level is
often based on historical performance.
The data that are analysed to provide the information come from both internal and
external sources, but most of the information come from internal sources.
It is often prepared on a routine and regular basis (for example, monthly or weekly
performance reports).
It consists mainly of quantified information.
81

There may be some degree of uncertainty in the information. However, as tactical
plans are short-term or medium-term, the level of uncertainty is much less than for
strategic information.
Operational information is the day to day (routine) information needed for control
purposes. It may also be needed by employees, to process transactions in the
course of their regular work.
The general features of operational information are as follows:
It is normally information about specific transactions, or specific jobs, tasks, daily

workloads, individuals or work groups. (It is „task-specific‟.)
It may be summarised at a work group or section level, but is in a more detailed

form than tactical information.
It is generally relevant to the very short-term.
It may be forward-looking (for example, daily plans) but it is often concerned with
transactions, procedures and performance measurement at a daily level.
The data that are analysed to provide the information comes almost exclusively
from internal sources.
It is often prepared frequently, as required for daily operational needs (routine in
nature).
It consists mainly of quantified information. Most of this information is „factual‟ and
is not concerned with uncertainty.
Qualities of Good Information

The qualities of good information include:
Relevance- It must have purpose and use.
Reliability - It must be accurate and complete for its intended purpose
Timely – It must be available as and when required.
It must attract user confidence and realistic.
It must be valuable and cost efficient – Cost and benefit.
It must be accurate.
It must be readily accessible.
It must be addressed to right recipient.
Examiner‟s report
The question tests candidates‟ understanding of performance and management
systems as it relates to Management levels, information expectation at those levels
and the qualities of good information.
82

Most of the candidates attempted the question. Performance in this question was
high.
Certain pitfalls were however noticed in candidates inability to show the qualities
expected of good information.
It is however advised that candidates should, in preparing for future examinations
of the Institute, study and understand the Institute‟s text manuals extensively to
achieve greater success.
Marking guide
Marks Marks
- Types of management level
(3 levels at 1 mark per level listed) 3
- Management Information types
(listing of 3 information types 3
Correct explanation of 3 information types
at 2 marks each) 6 9
- Quality of information
(4 points at 2 marks per point) 8
Total: 20
83

INSTRUCTION: YOU ARE REQUIRED TO ANSWER FOUR OUT OF SIX

QUESTION 1
Adeco Nigeria plc is a large and diversified company with several factories. One of
its factories that produces “Apex” has not been able to meet its sales target for over
two years. The board has mandated the company‟s management to take a decisive
step on what to do with the factory.
The management therefore set up a committee of three, the factory manager,

marketing manager and the management accountant to analyse the situation and
come up with a report on what they feel the management should do. The marketing
manager submitted two proposals to the committee, these are:
● a sales volume of 25,000 units can be achieved with a selling price of ₦13.50
per unit and an advertising campaign of ₦37,500; or
● a sales volume of 35,000 units can be achieved at a selling price of ₦11.25 with
an advertising campaign costing ₦52,500.
The management accountant is to work on these proposals with the information

provided by the factory manager and come up with calculations that will help the
committee to know which of the proposals to be recommended to management. The
management accountant is also required to prepare a third scenario that would
reflect the factory closure.
54

The factory manager submitted the following information to the management
accountant:
Budgeted sales and production of Apex (units) 50,000

N000
Sales 750.0
Less production costs:
Material A – 1 kg per unit 75.0
Material B – 1 litre per unit 37.5
Labour – 1 hour per unit 187.5
Fixed overhead 75.0
Non-production costs 75.0
Total cost 600.0
Budgeted profit 150.0
The following additional information has also been made available:
(i) There are 50,000 kg of material A in inventory. This originally cost ₦1.5 per
kg.
Material A has no other use and unless it is used by the division, it would have
to be disposed off at a cost of ₦750 for every 5,000 kg.
(ii) There are 30,000 litres of material B in inventory. Any unused material can be
used by another department to substitute for an equivalent amount of a
material, which currently costs ₦1.875 per litre. The original cost of material B
was ₦0.75 per litre and it can be replaced at a cost of ₦2.25 per litre.
(iii) All production labour hours are paid on an hourly basis. Rumours of the
closure of the department have led to a large proportion of the department‟s
employees leaving the organisation. Uncertainty over its closure has also
resulted in management not replacing these employees. The department is
therefore short of labour hours but has sufficient man hour to produce 25,000
units. Output in excess of 25,000 units would require the department to hire
contract labour at a cost of ₦5.625 per hour. If the department is shut down,
the present labour force will be deployed within the organisation.
(iv) Included in the variable overhead is the depreciation of the only machine
used in the department. The original cost of the machine was ₦300,000 and it
is estimated to have a life span of 10 years. Depreciation is calculated on a
straight-line basis. The machine has a current resale value of ₦37,500. If the
machinery is used for production, it is estimated that the resale value of the
machinery will fall at the rate of ₦150 per 1,000 units produced. All other
costs included in variable overhead vary with the number of units produced.
55

(v) Included in the fixed production overhead is the salary of the factory manager
which amounts to ₦30,000. If the department were to shut down, the
manager would be made redundant with a redundancy pay of ₦37,500. All
other costs included in the fixed production overhead are general factory
overheads and will not be affected by any decision concerning the factory.
(vi) The non-production cost charged to the factory is an apportionment of the

total on-production costs incurred by the factory.
The committee will be meeting in a week‟s time to prepare its report to the
management on what course of action the management should take, either one of
the marketing manager‟s proposals or to close down the factory.
Required:
As the management accountant of Adeco Plc, you are to:
a. Prepare detail calculations to support the committee‟s recommendation to
the management whether to:
i. reduce production to 25,000 units
ii. reduce production to 35,000 units
iii. shut down the factory. (20 Marks)
b. A customer has just placed a special order for 25,000 of Apex and the
customer is willing to pay ₦12.00 per unit. Advise management whether to
accept or reject the order. Assume that for any shortfall in material “A”
required to produce the order, it can be bought at a price of ₦2.00 per kg.
(10 Marks)
c. Discuss the management accounting techniques and principles that a
management accountant will apply in preparing calculations to support
management decision in such a circumstance as above. (10 Marks)
(Total 40 Marks)

QUESTION 2
Ideal Nigeria Limited manufactures two products, Light and Medium, on the same
machines. Sales demand for the products exceeds the machine capacity of the
company‟s production department. The potential sales demand in each period is for
10,000 units of Light and 15,000 units of Medium. Sales prices cannot be increased
due to competition from other producers in the market. The maximum machine
capacity in the production department is 40,000 hours in each period.
56

The following cost and profitability estimates have been prepared:
Light Medium
N N
Sales price 110 135
Direct materials (50) (45)
Direct labour and variable overhead (30) (55)
Contribution per unit 30 35
Machine hours per unit 1.5 hours 2 hours
Fixed costs in each period are N450,000.
Required:
a. Using marginal costing principles, calculate the profit-maximising output in
each period, and the amount of profit. (4 Marks)
b. Explain how throughput accounting differs from marginal costing in its
approach to maximising profit. (4 Marks)
c. Using throughput accounting, calculate the throughput accounting ratio for
Light and Medium. (8 Marks)
d. Using throughput accounting principles, calculate the profit maximising
output in each period, and the amount of profit. (4 Marks)
(Total 20 Marks)
QUESTION 3
Toma Paste Nigeria Limited produces tomatoe paste which serves as an alternative
for an immediate stew for working mothers instead of looking for fresh tomatoes.
For the forthcoming period, the company‟s budgeted fixed costs were ₦600,000 and
budgeted production and sales were 13,000 units.
The product has the following standard cost:
N
Selling price 500
Materials 5kg  N40/kg 200
Labour 3hrs  N40/hr 120
Variable overheads 3hrs  N30/hr 90
Actual results for the period were as follows:
11,000 units were made and sold, earning revenue of ₦5,720,000.
66,000kg of materials were bought at a cost of ₦2,970,000 but only 63,000 kg were
used. 36,000 hours of labour were paid for at a cost of ₦1,422,000. The total cost
for variable overheads was ₦1,170,700 and fixed costs were ₦400,000.
57

The company uses marginal costing and values all inventory at standard cost.
Required:
a. Prepare a statement reconciling actual and budgeted profit using
appropriate variances. (12 Marks)
b. Recalculate the fixed production overhead variances, assuming the
company uses absorption costing. (4 Marks)
c. Discuss possible causes for the labour variances you have calculated.
(4 Marks)
(Total 20 Marks)
QUESTION 4
Adeb Nigeria Limited has two divisions, Eastern and Northern divisions. Eastern
division makes materials that are used to manufacture special blocks. It transfers
some of these materials to the Northern division and sells some of the materials
externally to other block manufacturers. Northern division makes special blocks
from the materials and sells them to traders in building materials.
The production capacity of Eastern division is 10,000 tonnes per month. At present,
sales are limited to 5,000 tonnes to external customers and 3,000 tonnes to
Northern division.
The transfer price was agreed at ₦200 per tonne in line with the external sales
trade price at 1st July which was the beginning of the budget year. From 1st
December, however, strong competition in the market has reduced the market price
for the materials to ₦180 per tonne.
The manager of the Northern division has suggested that the transfer price for the
materials from Eastern division should be the same as for external customers. The
manager of Eastern division rejected this suggestion on the basis that the original
budget established the transfer price for the entire financial year.
From each tonne of materials, Northern division produces 10 blocks, which it sells
at ₦40 per blocks. It would sell a further 20,000 blocks if the price were reduced to
₦32 per block.
Other relevant data are given below:
Eastern Northern
division division
N N
Variable cost per tonne 70 60
Fixed cost per month 150,000 60,000
The variable costs of Northern division exclude the transfer price of materials from
Eastern division.
58

Required:
a. Prepare estimated profit statements for the month of December for each
division and for Adeb Nigeria Limited as a whole, based on transfer prices of
₦200 per tonne and of ₦180 per tonne, when producing at
i. 80% capacity
ii. 100% capacity, on the assumption that Northern division reduces the
selling price to ₦32. (10 Marks)
b. Comment on the effect that might result from a change in the transfer price
from ₦200 to ₦180. (5 Marks)
c. Suggest an alternative transfer price that would provide an incentive for
Northern division to reduce the selling price and increase sales by 20,000
blocks a month. (5 Marks)
(Total 20 Marks)
QUESTION 5
Dat Air was founded in January 2010 by Dr. Daniel Taiwo and the airline has been
branded as a low-cost airline in Nigeria. Dat Air‟s strategy is to operate as a low-
cost and highly efficient airline, and it does this by:
(i) Operating mostly in cities where other airlines do not fly to reduce landing
cost;
(ii) Using only one aircraft model in order to reduce maintenance and operational
costs. These planes are leased rather than bought outright;
(iii) Having only one category of seat class; there is no pre-allocated seats or in-
flight entertainment; and to
(iv) Focus on e-commerce with customers both booking tickets and checking in
for flights online. Customers who booked well in advance before the flight
date enjoy substantial discount.
The airline was given an „on time arrival‟ ranking of second best by the
Nigerian aviation authority, who rank all 20 airlines operating locally in the
country based on the number of flights which arrive on time at their
destinations. 48 Dat Air flights were cancelled in 2018 compared to 35 in
2017. This increase was due to an increase in the staff absentee rate at Dat
Air from 5 days per staff member per year to 7 days.
The average „ground turnaround time‟ for airlines in Nigeria is 2 hours,

meaning that, on average, planes are on the ground for cleaning, refuelling,
etc for 2 hours before departing again. Customer satisfaction surveys have
59

shown that 90% of customers are happy with the standard of cleanliness on
Dat Air‟s planes.
The number of passengers carried by the airline has grown from 200,000
passengers on a total of 2,107 flights in 2010 to 650,000 passengers on
5,320 flights in 2018. The overall growth of the airline has been helped by
the limited route licensing policy of the Nigerian government, which has
given DAT Air almost monopoly status on some of its routes. However, the
government is now set to change this policy with almost immediate effect,
and it has become more important than ever to monitor performance
effectively.
This has necessitated the management of Dat Air to examine the airline‟s
performance using the balanced scorecard model. This will enable the
management to discover areas where improvement is needed in its
operations.
Required:
a. Describe each of the FOUR perspectives of the balanced scorecard.
(6 Marks)
b. For each perspective of the balanced scorecard, identify ONE goal
together with a corresponding performance measure which could be
used by DAT Air to measure the company‟s performance. The goals
and performance measures should be specifically relevant to Dat Air.
For each pair of goals and performance measures, explain why you
have chosen them. (9 Marks)
c. Appraise the usefulness of the balanced scorecard as a performance
evaluation technique. (5 Marks)
(Total 20 Marks)
QUESTION 6
Lapez operates a chain of health and fitness clubs, located in state capitals in
Nigeria. For easy administration, the clubs are structured into two divisions, the
Northern and the Southern divisions. Each division has a General manager who is
responsible for revenue, cost and investment decisions at their clubs. A bonus is
awarded each year to the General manager that generates the higher return on
capital employed (ROCE).
60

The following summary information shows the results of the divisions for the past
two years:
Year ending 31st December 2018 2017

Northern Southern Northern Southern
N000 N000 N000 N000
Revenue 2,700 3,720 2,850 3,375
Staff costs 1,725 2,145 1,770 1,965
Others operating cost 690 1,012 750 930
Operating profit 285 563 330 480
Capital employed 750 1,350 1,125 1,800
Average number of members 6,880 9,425 7,050 8,320
Notes:
(i) Revenue is comprised largely of income from membership fees.
(ii) Lapez uses net book value of non-current assets as the capital employed. The
capital employed figures in the above table are the net book value of the
non-current assets of each division at the end of the year.
(iii) Non-current assets are depreciated on a straight-line basis over a period of
five years and are assumed to have no residual value. There were no
additions nor disposals of non-current assets during the years 2017 and
2018.
(iv) Both divisions have a cost of capital of 15%.
(v) Ignore taxation and inflation.
However, investigations by Lapez‟s management revealed that at the end of 2017

the General manager of the Southern division rejected the opportunity to acquire a
new building and equipment to set up a new fitness club at a total cost of
₦1,200,000. The building could have been purchased for ₦525,000 and for the
purpose of this evaluation, it is assumed that it would have held that value for five
years and that no depreciation would have been charged on the building. The new
equipment would have cost ₦675,000 and would have been depreciated in
accordance with Lapez‟s policy over five years. The investment would have taken
place on 1 January 2018.
The forecast annual profit and number of members for the proposed new club
were as follows:
N000
Revenue 1,012.5
Staff costs (556.5)
Other operating costs (including depreciation of the equipment) (240.0)
Operating profit 216.0
Average number of members 2,100
It is Lapez‟s policy that investments of this type should be appraised over five years
using net present value.
61

Required:
a. Discuss the relative performance of the two divisions using Return on Capital
Employed and TWO other performance measures that you think are
appropriate. (15 Marks)
b. Calculate the net present value of the investment. Ignore taxation and
inflation. (5 Marks)
(Total 20 Marks)
62

Formulae
Learning curve
Y = axb
Demand curve
P = a – bQ
change in price
b
change in quantity
MR = a – 2bQ
Y= 𝑎 + 𝑏𝑋
𝑛 𝑋𝑌 − ( 𝑋)( 𝑌)
where b= 2
𝑛 𝑋 − 𝑋 2
𝑦 𝑏 𝑥
a= −
𝑛 𝑛

2
𝑛 𝑋𝑌 − 𝑥 𝑌
r2 = 2 2
(𝑛 𝑋 − 𝑋 2 (𝑛 𝑦 − 𝑋 2

1
3 3
4
𝑆𝑝𝑟𝑒𝑎𝑑 = 3 x
63

Annuity Table
r
Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15
64

65

SOLUTION 1
ADECO NIGERIA PLC.

(a)
Relevant savings and revenue
25,000 units 35,000 units Shut down
₦ ₦ ₦
Sales revenue 337,500 393,750 –
Material B 9,375 – 56,250
Sale of machinery 33,750 32,250 37,500
Total revenue/savings 380,625 426,000 93,750
Relevant costs
Material A disposal 3,750 2,250 7,500
Purchase material B – 11,250 –
Labour 93,750 150,000 –
Variable overhead
(excl. depreciation) 60,000 84,000 –
37,500 52,500 –
Advertising campaign
Manager‟s salary 30,000 30,000 –
Redundancy pay – – 37,500
Total relevant costs 225,000 330,000 45,000
Net savings 155,625 96,000 48,750
Workings
25,000 units 35,000 units Shut down
1. Sales revenue
No. of units 25,000 35,000
Selling price ₦13.50 ₦11.25
Sales revenue ₦337,500 ₦393,750
2. Savings made on material B
Surplus available 5,000 _ 30,000
Saving per litre ₦1.875 ₦1.875 ₦1.875
Total saving ₦9,375 – ₦56,250

3. Sale of machinery
Current market price ₦37,500 ₦37,500 ₦37,500
Reduction in value ₦3,750 ₦5,250 _
Sale proceeds ₦33,750 ₦32,250 ₦37,500
4. Disposal cost of material A
Quantity to be disposed of 25,000 15,000 50,000
Cost of disposal ₦3,750 ₦2,250 ₦7,500
5. Purchase cost of material B
Production requirement 25,000 35,000
No. of litres to be _ 5,000
Purchased
66

Purchase cost ₦11,250
6. Labour costs
Normal labour costs ₦93,750 ₦93,750
Contract labour – ₦56,250
₦93,750 ₦150,000
7. Variable overhead
@ ₦2.40 per unit* ₦60,000 ₦84,000
*Variable overhead/unit
₦
Total variable overhead 150,000
less depreciation 30,000
120,000
Variable overhead/unit = ₦120,000
50,000
= ₦2.40 per unit
8. Manager‟s salary – relevant
9. Redundancy pay – relevant
10. General fixed overheads and non-production overheads – not relevant
(b) Special order

From the calculations in (a), the decision will be to produce 25,000 units at a
price of ₦13.50. This means that the special order of 25,000 units could be
produced, with the following relevant revenues and costs:
₦
Revenue:
Sales (25,000 × ₦12.0) 300,000
250,000 𝑋 ₦750 3,750
Savings made on material A disposal { }
5000
303,750
Costs:
Material B (20,000 x ₦1.875) 37,500
Labour (25,000 × ₦ 5.625) 140,625
Variable overhead (25,000 × ₦2.40) 60,000
238,125
Additional contribution 65,625
Decision: Adeco is advised to accept the special order as it will produce additional
contribution of ₦65,625.
67

(c) The cost accounting technique normally used by the management accountant
to Assist management in decision making is the marginal costing technique,
while the cost accounting principle is the relevant costs and relevant revenue
principle.
Marginal costing might be used for decision-making. For example, marginal

costing is used for limiting factor analysis, linear programming and
contribution techniques.
It is appropriate to use marginal costing for decision-making when it can be

assumed that future fixed costs will be the same, no matter what decision is
taken, and that all variable costs represent future cash flows that will be
incurred as a consequence of any decision that is taken.
These assumptions about fixed and variable costs are not always valid. When
they are not valid, relevant costs should be used to evaluate the
economic/financial consequences of a decision.
Relevant costs should be used for assessing the economic or financial

consequences of any decision by management. Only relevant costs and
benefits should be taken into consideration when evaluating the financial
consequences of a decision.
A relevant cost is a future cash flow that will occur as a direct consequence of
making a particular decision.
The key concepts in this definition of relevant costs are as follows:
 Relevant costs are costs that will occur in the future. They cannot include
any costs that have already occurred in the past.
 Relevant costs of a decision are costs that will occur as a direct
consequence of making the decision. Costs that will occur anyway, no
matter what decision is taken, cannot be relevant to the decision.
 Relevant costs are cash flows. Notional costs, such as depreciation
charges, notional interest costs and absorbed fixed costs, cannot be
relevant to a decision.
Marking Guide
Marks Marks Marks
a. (i) Production of 25000 units (½ x 13) 6.5

(ii) Production of 35000 units (½ mark x 13 ticks) 6.5
(iii) Shutdown of factory (½ mark x 13ticks) 6.5
Headline 0.5 20.0
b. Management Accounting Technique (Any 4 points @ 2½marks) 10.0
c. Accept or reject decision on special order (10ticks @ 1 mark) 10.0 40.0
68

Examiner’s Report
The question tests candidates‟ understanding of marginal costing as well as

relevant costing techniques.
Being a compulsory question, all candidates attempted the question.
The performance of student was just above average.
The major pitfall was candidate lack of understanding of the subject area especially
in situation that has to do with savings, replacement costs and cost incurred in
situation of shutdowns.
Candidates are advised to read the ICAN study text when preparing for future
SOLUTION 2
IDEAL NIGERIA LIMITED

(a) Marginal costing approach
Profit will be maximised by producing output to maximise the contribution
per machine hour (contribution per unit of limiting factor).
Light Medium
Contribution per unit ₦30 ₦35

Contribution per machine hour ₦20 ₦17.50
Ranking for manufacture 1st 2nd
Profit will be maximised by making and selling 10,000 units of Light in each period
(maximum sales demand). This will require 15,000 machine hours. The remaining
25,000 machine hours should be used to make and sell 12,500 units of Medium.
₦
Contribution from Light: 10,000 ₦30 300,000
Contribution from Medium: 12,500 ₦35 437,500
Total contribution 737,500
Fixed costs 450,000
Profit 287,500
(b) Throughput Accounting recognises material costs and its components as the
only variable costs while the variable costs under marginal costing consist of
direct materials costs, direct labour costs and variable overhead costs.
69

Under throughput accounting, direct labour costs are treated as fixed costs under
other operational costs while marginal costing treats direct labour costs as relevant
or variable costs relevant for decision making.
The Net profit of throughput accounting differs from that of the marginal costing
because the components of their costs of sales vary.
The main difference between throughput accounting and marginal costing is

in the treatment of direct labour and variable overhead costs as a „fixed cost‟ in
the short-term. In throughput accounting, fixed costs are referred to as „factory
cost‟.
(c) Throughput accounting ratio =

Return per bottleneck unit / Factory cost per bottleneck unit
Here, the bottleneck resource is machine time.
Light Medium
₦ ₦
Sales price 110 135
Materials cost 50 45
Throughput 60 90

Throughput/return per machine hour ₦40 ₦45
To calculate the cost per factory hour, we need to make an assumption

about direct labour cost and variable overhead costs. It is assumed that the
direct labour cost and variable overhead cost in the answer to part (a) is
fixed in the short-term.
₦
Direct labour and variable overhead
costs:
Light: 10,000 ₦30 300,000
Medium: 15,000 ₦55 825,000
Total Direct labour/Variable Overhead 1,125,000
Fixed costs 450,000
Factory cost in each period 1,575,000
70

Factory cost per machine hour = ₦1,575,000/40,000 hours = ₦39.375.
Light Medium
Return per machine hour ₦40 ₦45
Factory cost per machine hour ₦39.375 ₦39.375
Throughput accounting ratio 1.02 (102%) 1.14 (114%)

Ranking for manufacture 2nd 1st
Note: The aim should be to maximise the throughput accounting ratio, and
to ensure that the ratio is higher than 1.0.
(d) Profit will be maximised by making and selling 15,000 units of Medium
(maximum sales demand). This will use up 30,000 machine hours. The
remaining 10,000 machine hours should be used to make 6,666.67 units of
Light.
₦
Return from Medium: 15,000 ₦90 1,350,000
Return from Light: 6,666.67₦60 400,000
Total return/throughput 1,750,000
Fixed costs 1,575,000
Profit ₦175,500
Marking Guide Marks Marks Marks
a. - Profit maximizing output using Marginal Costing principles

(8 ticks @ 1 tick = ¼ mark) 2.0
- Maximising output (2 ticks @ ½mark) 1.0
- Maximum profit ( 4ticks @ ¼mark) 1.0 4.0
b. Throughput accounting Vs Marginal Costing
(2 points @ 2 marks per tick) 4.0
c. Calculation of Throughput Accounting ratio
- Throughput returns/per Machine hour (8 ticks @ ¼ mark) 2.0
- Computation of Factory Cost/Machine hour (8 ticks @ ¼ mark) 2.0
- Computation of Throughput Accounting ratio (4ticks @ 1 mark) 4.0 8.0
d. Profit Maximisation/output using Throughput Accounting:
- Computation of output (2 ticks @ 1 tick) 2.0
- Computation of Profit (4 ticks @ ½ mark) 2.0 4.0 20.0
71

Examiner’s Report
The question tests candidates‟ understanding of application of marginal costing

and throughput accounting principles.
The performance of candidates was just average.
The major pitfall was candidates‟ poor understanding of marginal costing and
throughput accounting techniques.
Candidates are encouraged to read the Institute‟s study text when preparing for
future examinations of the Institute.
SOLUTION 3
(a) Reconciliation Statement between Budgeted and Actual Profit
N‟000
Budgeted contribution 1170.0
Sales volume variance 180.0 (A)
Sales price variance 220.0 (F)
Standard Contribution 1,210.0
Cost variances
F A
N. N.
Materials price 330.0
Materials usage 320.0
Labour rate 18.0
Labour efficiency 120.0
Variable overhead rate 90.7
efficiency
Total 18.0 950.7
Total cost variances 932.7 (A)
Actual contribution 277.3
Less Fixed cost 400.0
Actual loss (122.7)
72

Workings
TOMA PASTE NIGERIA LIMITED
Materials price variance: based on quantities purchased since inventories are
valued at standard cost.
N‟000
66,000 kg of materials should cost (N40) 2,640
They did cost 2,970
Material price variance 330 (A)
kg
11,000 units produced should use ( 5kg) 55,000
They did use 63,000
Usage variance in kg 8,000 (A)
Standard price per kg N40

Usage variance in ₦ N320,000 (A)
Labour rate variance

N‟000
36,000 hours of labour should cost (N40) 1,440
They did cost 1,422
Labour rate variance 18 (F)
Labour efficiency variance

hours
11,000 units produced should take ( 3 hours) 33,000
They did take 36,000
Efficiency variance in hours 3,000 (A)
Standard rate per hour N40

Efficiency variance (in ₦) N120,000(A)
Variable Overhead Variances:

N‟000
36,000 hours should cost (N30) 1,080.0
They did cost 1,170.7
Variable overhead expenditure variance 90.7 (A)
Variable overhead efficiency variance
(36,000hrs – 33,000hrs) =3,000 hours (A) N30 per hour = N90,000 (A)
73

Sales price variance
N‟000
11,000 units should sell for (x N500) 5,500
They did sell for 5,720
Sales price variance 220 (F)
Sales volume (contribution margin) variance
Budgeted sales volume in units 13,000
Actual sales volume in units 11,000
Sales volume variance in units 2,000 (A)
 Standard contribution per unit N90
Sales volume variance in N.contribution N180,000 (A)
N/B = Standard Contribution = (N500 – N410)
ALTERNATIVE TO COMPUTING VARIANCES
- Material price Variance = Actual Cost less Standard Cost
= Actual Quantity Purchased x Actual Cost Per kg
less
= Actual Quantity Purchased x Standard Cost per kg
= (AQ x AC) – (AQ x SC)

2,970,000
= 66,000 x 66,000
– (66,000 x N40)
= N2,970,000 – N2,640,000
= N330,000 Adverse
- Material Usage Variance = Standard Cost less Standard Cost of Actual Production
= Actual Quantity Used x Standard Cost Per kg
less
= Standard Cost of material per unit x Actual Production
= (AQ x SC) – (SC x AP)
= (63,000 x 40) – (N200 x 11,000)
74

= N2,520,000 – N2,200,000
= N320,000 Adverse
- Labour Rate Variance = Actual Cost less Standard Cost
= (Actual hours used x Actual hour rate
less
= (Actual hours used x Standard labour rate per hour)

N1,422,000
= (36,000 x ) – (36,000 x N40)
36,000
= N1,422,000 – N1,440,000
= N18,000 Favourable
- Labour Efficiency Variance= Standard Cost - Standard Cost of Actual Production
= (Actual hours x Standard labour rate per hour) - (Standard labour rate per unit x Actual
Production)
= (36,000 x N40) – (N120 x 11,000)
= N1,440,000 – N1,320,000
= N120,000 Adverse
- Variable Overhead Efficiency Variance = Standard Cost – Standard Cost of Actual

Production
= (Actual Hours x Standard variable overhead per hour)-(Standard variable

overhead per unit x Actual Production)
= (36,000 x N30) – (N90 x 11,000)
= N1,080,000 – N990,000
= N90,000 Adverse
75

- Variable Overhead Expenditure Variance = (Actual Cost – Standard Cost)
= (Actual Hours x Actual Variable Overhead per hour) – (Actual Hours x Standard Variable
overhead per hour)
= (AH x AVOH) – (AH – SVOH)

N1,170,700
= (36,000 x ( ) – (36,000 x N30)
36,000
= N1,170,700 – N1,080,000
= N90,700 Adverse
= (SSP – ASP) AQS

N5,720,000
= N500 – ( ) x 11,000
11,000
- Sales Volume Variance = (Standard Sales – Budgeted Sales)
= (Actual Sales Volume x Standard Sales Price) - (Budgeted Quantity x Standard Sales Price )
= (AQS x SSP) – (BQS – SSP)
= (11,000 x N500) – (13,000 x N500)
= N5,500,000 – N6,500,000
= N1,000,000 Adverse
- Standard Margin = (Standard Sales Price – Standard Cost per unit)
= N500 – N410 = N90

N90 N1,000,000
- Sales Volume Variance = x = N180,000 Adverse
N500 1
Working Notes
N‟000
Budgeted contribution N90.00  13,000 units 1,170.0
Budgeted fixed costs (600.0)
Budgeted profit
570.0
76

Actual profit
N‟000 N‟000
Sales 5,720.0
Materials 2,970.0
Less closing inventory (3,000kg N40.00) (120.0)
2,850.0
Labour 1,422.0
Variable overheads 1,170.7
Fixed costs 400.0
Total (5,842.7)
Actual loss in the period (122.7)
b) If the company uses absorption costing with a direct labour hour absorption
rate, we can calculate an expenditure, capacity and efficiency variance for
fixed production overheads.
Budgeted absorption rate per hour:
Budgeted labour hours: 13,000  3 = 39,000 hrs
Budgeted fixed cost N600,000
Budgeted absorption rate: N600,000 /39,000 = N15.38
Fixed overhead expenditure variance

N‟000
Budgeted fixed overhead costs 600
Actual fixed overhead costs 400
Fixed overhead expenditure variance 200 (F)
Fixed overhead capacity variance

hours
Budgeted hours of work 39,000
Actual hours worked 36,000
Capacity variance in hours 3,000 (A)
Standard fixed overhead rate per hour N15.38
Fixed overhead capacity variance in N. N46,140 (A)
Fixed overhead efficiency variance
Efficiency variance in hours = 3,000 hours (A) – see answer to (a).
Fixed overhead efficiency variance = 3,000 hours (A) N15.38 =
N46,140(A).
77

 Fixed Overhead Expenditure Variance = Actual Cost – Budgeted Cost
= N400,000 – N600,000
= N200,000 Favourable
 Fixed Overhead Capacity Variance = (Budgeted Cost – Standard Cost)

= (Budgeted Hours x Standard Cost per hour) – (Actual Hours x Standard Cost per
hour)
= (BH x SC) – (AH x SC)

N600,000 N600,000
=(13,000 x3 - (36,000 x ( )
13,000 𝑥 3 39,000
= N600,000 – N553,846
= N46,154 Adverse
- Fixed Overhead Efficiency Variance =
= (Standard Cost - Standard Cost of Actual Production)
= (AH x SC) – (SCAP)

N600,000 N600,000 𝑥 3
= (36,000 x ( ) – (11,000 x ( )
39,000 39,000
= N553,846 - N507,692
= N46,154 Adverse
N/B: Due to round-off or, any answer between N46,140 (A) to N46,154 (A)
will be accepted.
(c) Labour rate

The labour rate variance is favourable indicating a lower rate per hour was
paid than expected. This is perhaps because lower grade of labour were
used during production. Though less likely, it is possible that staff had a
pay cut imposed upon them/decrease in buy rate. Finally, an incorrect or
outdated standard could have been used.
Labour efficiency
This is significantly adverse, indicating staff took much longer than
expected to complete the output. This may relate to the favourable labour
rate variance, reflecting employment of less skilled or experienced staff.
Staff demotivated by a pay cut are also less likely to work efficiently.
78

It may also relate to the reliability of machinery as staff may have been
prevented from reaching full efficiency by unreliable equipment. Others
include:
 Decrease in machine set up time
 Idle time
 Lack of motivation
 Faulty equipment/Machine breakdown

a. Reconciliation Statement (16 ticks @ ½ mark) 8.0
- Workings (8 ticks @ ½ mark) 4.0 12.0
b. Recalculation of Fixed overhead variances
- 3 fixed overhead variances (1 mark each) 3.0
- Working ( 2 ticks @ ½ mark each) 1.0 4.0
c. Labour rate variance
(Any 2 points at 1 point = 1 mark) 2.0
Labour efficiency Variance
(Any 2 points @ 1 point = 1 mark) 2.0 4.0 20.0
Examiner’s Report
The question tests candidates‟ understanding of application of standard costing

and variance analysis.
Majority of the candidates attempted the question.
The performance of candidates was above average.
The major pitfall was candidates inability to understand the application of

standard costing using marginal costing as well as treatment of fixed overhead
under absorption costing approach. Another pitfall was candidates‟ failure to
understand the treatment of inventory under standard costing principle.
future examination of the Institute.
79

SOLUTION 4
ADEB NIGERIA LIMITED

(a) Profit statements in December
(i) Operating at 80% capacity
Transfer price ₦200 Transfer price ₦180
Eastern Northern Eastern Northern
division division Total division division Total
₦‟000 ₦‟000 ₦‟000 ₦‟000 ₦‟000 ₦‟000

Sales:
External 900 1,200 2,100 900 1,200 2,100
(₦180x5000)
Transfers 600 - 0 540 - 0
(₦200x3000)
Total 1,500 1,200 2,100 1,440 1,200 2,100
Costs
Transfers - (600) 0 - (540) 0
Variable (560) (180) (740) (560) (180) (740)
(₦70x8000)
Fixed (150) (60) (210) (150) (60) (210)
Total (710) (840) (950) (710) (780) (950)
Profit 790 360 1,150 730 420 1,150
80

(ii) Operating at 100% capacity
Transfer price ₦200 Transfer price ₦180
Eastern Northern Eastern Northern
division division Total division division Total
₦‟000 ₦‟000 ₦‟000 ₦‟000 ₦‟000 ₦‟000
Sales:
External 900 1,600 2,500 900 1,600 2,500
(₦180x5000)
Transfers 1,000 - 0 900 - 0
(₦200x5000)
Total 1,900 1,600 2,500 1,800 1,600 2,500
Costs
Transfers - (1,000) 0 - (900) 0
Variable (700) (300) (1,000) (700) (300) (1,000)
Fixed (150) (60) (210) (150) (60) (210)
Total (850) (1,360) (1,210) (850) (1,260) (1,210)
Profit 1,050 240 1,290 950 340 1,290
N/B: Under the Northern Div. External Sales = ((₦32x5000x10 blocks) = ₦1,600,000
Under the Northern Div. Variable Costs = ((₦60x5000) = ₦300,000
(b) The effect of a change in the transfer price from ₦200 to ₦180 will result in
lower profit for Eastern division and higher profit for Northern division, but
the total profit for the company as a whole will be unaffected.
A reduction in the transfer price to ₦180 (or possibly lower) is recommended,

because this is the price at which Northern division can buy the materials
externally. At any price above ₦180, Northern division will want to buy
externally, and this would not be in the interests of the company as a whole.
Significantly, at a transfer price of both ₦200 and ₦180, Northern division
would suffer a fall in its divisional profit if it reduced the selling price of
blocks to ₦32 and increased capacity by 20,000 blocks each month. A
reduction in price would be in the best interests of the company as a whole,
because total profit would rise from ₦1,150,000 per month to ₦1,290,000.
(c) Ignoring the transfer price, the effect on Northern division of reducing the sale
price of blocks to ₦32 would be to increase external sales by ₦640,000 and
variable costs in Northern division by ₦120,000 (2,000 tonnes  ₦60). Cash
flows would therefore improve by ₦520,000 per month (₦640,000 less
₦120,000). To persuade Northern division to take the extra 2,000 tonnes, the
transfer price should not exceed ₦260 (₦520,000/2,000). This is above the
current external market price which is ₦180 although there is strong price
competition in the market.
81

The transfer price for Eastern division should not be less than the variable cost
of production in Eastern division, which is ₦70 per tonne.
In the final analysis, an optimal transfer price suggested should be between

₦70 to ₦180.

a. (i) Profit Statement @ 80% capacity
(50 ticks @ 1 mark for 10 ticks) 5.0
(ii) Profit Statement @ 100% capacity
(50 ticks @ 1 mark for 10 ticks) 5.0 10.0
b. Comments on effect on transfer price change

(2 points @ 2½ marks per point) 5.0
c. Other transfer price to provide incentive
(2 points @ 2½ marks per point) 5.0 20.0
Examiner‟s Report
The question tests candidates‟ understanding of transfer pricing technique.
The attempt on this question by candidates was moderate.
The major pitfall was candidates poor understanding of the requirements of the
question especially in areas of varying capacity for production and sales as well as
determination of optimum transfer price.
Candidates are advised to read the Institute‟s study text when preparing for the
Institute‟s examination in future.
SOLUTION 5
DAT AIR
(a) The four perspectives
Financial perspective – this perspective is concerned with how a company

looks to its shareholders. How can it create value for them? Kaplan and
Norton identified three core financial themes which will drive the business
strategy: revenue growth and mix, cost reduction and asset utilisation
Customer perspective – this considers how the organisation appears to

customers. The organisation should ask itself: „to achieve our vision, how
should we appear to our customers?‟ The customer perspective should
identify the customer and market segments in which the business will
82

compete. There is a strong link between the customer perspective and the
revenue objectives in the financial perspective. If customer objectives are
achieved, revenue objectives should be too.
Internal perspective – this requires the organisation to ask itself: „what must
we excel at to achieve our financial and customer objectives?‟ It must
identify the internal business processes which are critical to the
implementation of the organisation‟s strategy. These will include the
innovation process, the operations process and the post-sales process.
Learning and growth perspective – this requires the organisation to ask itself
whether it can continue to improve and create value. The organisation must
continue to invest in its infrastructure – i.e. people, systems and
organisational procedures – in order to improve the capabilities which will
help the other three perspectives to be achieved.
(b) Goals and Measures:
Perspective Goal Performance Measure Comments/Remarks

Customer To improve on the Rating of the This constitute a major
existing level of cleaning by the factor adding value to
cleaningness of customers. customers.
Airplanes
Customer To ensure that flights “On time arrival” DAT Air is currently No. 2
are on time. ranking from the in the ranking and
To reduce the number aviation authority. customers are more likely
of flight cancelled The number of flights to use it.
cancelled. If flights are frequently
cancelled, customers will
not use it as it will be
received as unreliable.
Internal Extending operations The number of This represents area where
to other cities where customer base and the airline has been
no airline fly to fights in a year excelling
currently
Internal To improve On the ground time % Less time spent on ground
turnaround time on of customers happy means fewer planes are
the ground. with the standards of needed, reduce leasing
To improve the the planes (customer costs.
cleaningness of DAT‟s satisfaction) About 85% of customers
Planes. percentage are happy meaning 15%
To develop the online downtime can result in loss of
booking system. revenue.
Since the company relies
on booking system. It is
critical in situation of
growing number of
customers.
83

Financial (a) To continue to use The extent reduction This will help to make
one model of aircraft in maintenance and superior returns to the
operational costs shareholders of the
when compared with company.
increase in
customers‟ base and
revenue.
Financial (b) To use fewer Cost of lease of plane Operating efficiency will
planes to transport per customer be driven by getting more
customers. customers on fewer
Revenue per planes.
(c) To increase set available passenger This measures the cost
revenue per plane side. This covers the first
part of achieving
operating efficiency by
having fewer empty seats
on planes
Innovation & To reduce the The number of days It is critical to the
Learning employee absentee absent per employee. company that its
rate. Number of days‟ workforce are reliable as
To increase ground training per ground absentee staff will lead to
crew training on crew members flight cancellation.
cleaning and If ground crew are better
refuelling procedures trained, they reduce the
time the place stays on the
ground, resulting in fewer
planes being required and
thus lowers costs.
Cleaning results in
customer satisfactory and
retention will increase
Innovation & Taking advantage of The increase in This area will help the
Learning new developments in number of customers airline to maintain its
the e-commerce to who book online in competitive position in the
improve business advance industry
operations
84

c. APPRAISAL OF THE USEFULNESS OF THE BALANCED SCORECARD AS A
PERFORMANCE EVALUATION TECHNIQUE
 Better Strategic Planning
The Balanced Scorecard provides a powerful framework for building and
communicating strategy. The business model is visualised in a Strategy
Map which helps managers to think about cause-and-effect relationships
between the different strategic objectives. The process of creating a
Strategy Map ensures that consensus is reached over a set of interrelated
strategic objectives. It means that performance outcomes as well as key
enablers or drivers of future performance are identified to create a
complete picture of the strategy.
 Improved Strategy Communication & Execution
Having a one-page picture of the strategy allows companies to easily
communicate strategy internally and externally. We have known for a
long time that a picture is worth a thousand words. This 'plan on a page'
facilitates the understanding of the strategy and helps to engage staff
and external stakeholders in the delivery and review of the strategy. The
thing to remember is that it is difficult for people to help execute a
strategy which they don‟t fully understand.
 Better Alignment of Projects and Initiatives

The Balanced Scorecard helps organisations map their projects and
initiatives to the different strategic objectives, which in turn ensures that
the projects and initiatives are tightly focused on delivering the most
strategic objectives.
 Better Management Information

The Balanced Scorecard approach helps organisations design key
performance indicators for their various strategic objectives. This ensures
that companies are measuring what actually matters. Research shows
that companies with a BSC approach tend to report higher quality
management information and better decision-making.
 Better Process Alignment

Well implemented Balanced Scorecards also help to align organisational
processes such as budgeting, risk management and analytics with the
strategic priorities. This will help to create a truly strategy focused
organisation.
85

a. (i) Listing of each perspective ( 1 mark each) 4.0
(ii) Discussing each perspective (½ mark each) 2.0 6.0
b. Goods/Performance measures of the perspectives
- Any 3 of the perspective goals 3.0
- Any 3 corresponding measures 3.0
- Any 3 corresponding explanations 3.0 9.0
c. Usefulness of Balance Scorecard
(2 points @ 2½ marks per point) 5.0 20.0
Examiner’s Report
The question tests candidate knowledge of the concept of balance scorecard as an
instrument of identifying corporate goals and associated performance measures.
The performance of students is below average.
The major pitfall was candidates‟ inability to identify the corporate goals and the
associated measures.
examinations of the Institute.
SOLUTION 6
LAPEZ
(a)
2018 2017
Northern Southern Northern Southern
ROCE % 38.0 41.7 29.3 26.7
Staff costs/revenue % 63.9 57.7 62.1 58.2
Other operating 25.6 27.2 26.3 27.6
costs/revenue %
Asset turnover 3.6 2.8 2.5 1.9
Operating profit/revenue % 10.6 15.1 11.6 14.2
Depreciation N‟000 375.0 450.0 375.0 450.0
Op costs-depreciation N‟000 315.0 562.0 375.0 480.0
Op costs- 11.7 15.1 13.2 14.2
depreciation/revenue %
Revenue per member N 392 395 404 406
Staff costs per member N 251 228 251 236
Residual Income 172.50 360.50 161.25 210.00
Absolute Profit N 285 N 563 N 330 N 480
In 2017 the Northern division generated the higher ROCE and the General manager
of that division would have received the bonus. The revenue for the Northern
division was lower than that of the southern division but so was its capital
86

employed. This is because it had a lower investment in non-current assets and its
assets are older (assuming that all assets in each particular division were acquired
at the same date).
Revenue at the Northern division has fallen by 5.3% between 2017 and 2018. Also.
revenue per member slightly fell from N404 in 2017 to ₦392 in 2018. Therefore, it
can be concluded that the decline in revenue is due to the fall in number of
members. The opposite is true for the Southern division, as revenue has increased
by 10.2% over the period. Revenues per member are in line with the Northern
division at N395 and have been maintained over the period.
The operating profit has fallen over the period at the Northern division due to a fall
in revenue and also less effective cost management with operating profit margins
decreasing from 11.6% to 10.6%.
Conversely, in the Southern division, the operating profit margin has increased
from 14.2% to 15.1%. However further information can be obtained from a deeper
analysis of the figures:
• Staff expenses as a percentage of revenue have increased for the Northern
division but decreased for the Southern division. Given that revenue is almost
directly linked to the number of members, it could be argued that this is to be
expected given that it is highly likely that many of the staff costs are fixed.
• Operating costs as a percentage of revenue have fallen for both divisions but
if depreciation is excluded it can be seen that they have increased for the
Southern division.
The General manager of the southern division would earn the bonus in 2018.
b.
Year N‟000 Disc factor PV N

Investment 0 -1,200 1.000 -1,200
Cash inflow 1-5 351 3.352 1,177
Sales of assets 5 525 0.497 261
NPV 238
The NPV of the project is N238,000. This NPV is positive.
Workings
N675,000
Calculation of Depreciation for each year = 5 𝑦𝑒𝑎𝑟 = N135,000
Calculation of Adjusted Annual Cashflows =
Operating Profit = N 216,000
Add: Depreciation = N 135,000
= N 351,000
87

The NPV of the investment is positive and therefore this investment should
have been made.

a. Computation/discussion of ROCE and two other performance
measures for 2017/2018:
- Computation of ROCE @ 1 mark 4.0
- Discussion of relative performance for ROCE 1.0
- Computation of any other two measures @ 1 mark 8.0
- Discussion of relative performance 2.0 15.0
b. Computation/Appraisal of Investment
(5 ticks @ 1 mark) 5.0 20.0
Examiner’s Report
The question tests candidates knowledge of company divisional performance and

the use of appropriate parameters when financial data are provided on divisional
basis. The question also test‟s candidates‟ ability in investment appraisal
technique.
Majority of the candidates attempted the question.
The major pitfall was inability of candidates to carry out thorough and relevant
appraisal of the ratios computed. Also, candidates inability to apply the annuity
table since the cash flow is regular for the duration of the investment is a major
pitfall.
Candidates are advised to read the Institute‟s study text when preparing for the
Institute‟s examination in future.
88

INSTRUCTION: YOU ARE REQUIRED TO ANSWER FOUR OUT OF SIX QUESTIONS IN

THIS PAPER
QUESTION 1
The Managing Director of NTAMS Manufacturing Company Limited located in Lagos

attended a seminar titled “optimising scarce resource utility in a manufacturing setting
with particular reference to linear programming”. On his return after three days of the
programme, he called for a management meeting to discuss his experiences at the
seminar in view of the board decision to produce two major products in the coming
years.
The following information are made from the work of a research team earlier conducted
by a group of external research experts.
The expected products are “Biggi” and “smalli”. The expected costs statistics are as
follows:
Biggis N Smallis N
Material costs (5kg @ N50/kg) 250 (3kg @ N50/kg) 150
Labour costs:
Machining time (4 hours@ N15/Hr) 60 (2hours @ N15/Hr) 30
Other Processing Time (4hours @ N10/Hr) 40 (5 hours @ N10/Hr) 50
The company expects to maintain a pricing policy that is hinged on total cost of
production plus 20% mark up on cost. The Company further expects to incur annual
period overhead of N10,000,000 with normal production expectation of 200,000 units
of Biggis and 100,000 units of Smallis absorbing the overhead on 3 to 2 basis
respectively.
It is expected that in the forth coming year, the company will have the following
resources available
56

Materials 1,800,000kgs
Machine time 800,000 hours
Other Process time 1,400,000 hours
You are required:

As the management accountant
a. Explain briefly the concept of linear programming and usefulness of the model
(5 Marks)
b. Compute the Prices that will be adopted by the company for the two products using
the company pricing policy (5 Marks)
c. Advise the company on the output that needs to be produced to maximise its total
profit, supporting your answer with full financial analysis (10 Marks)
d. i. Explain the meaning of „shadow prices‟ and comment on the
usefulness of it and its limitation (5 Marks)
ii. Calculate the shadow prices of the constraints (7 Marks)
e. Assuming the company‟s position in (c) is maintained for three years with an
investment cost of N45,000,000 on the day of the commencement of
manufacturing business, using a cost of capital of 15%:
i. Can this venture be justified for the period? (4 Marks)
ii. What is the breakeven discount factor for this project? (4 Marks)
(Total 40 Marks)
SECTION B: OPEN-ENDED QUESTIONS (60 MARKS)
INSTRUCTION: YOU ARE REQUIRED TO ANSWER ANY THREE OUT OF FIVE

QUESTIONS IN THIS SECTION
QUESTION 2
PQR Plc is preparing its budgets for next year. It has already prepared forecasts of
demand levels for its product range. These are as follows:
Forecast 1 Forecast 2
Price Quantity Price Quantity
₦ ₦
Product A 10.00 500 15.00 350
Product B 20.00 800 25.00 700
Product C 30.00 2,200 40.00 1,000
57

You are to assume that only one of either forecast 1 or forecast 2 would be accepted.
The expected variable unit costs of each product are as follows:

₦ ₦ ₦
Direct materials (50k per kg) 2.00 3.50 7.00
Direct labour 3.00 5.00 7.40
Variable overhead 1.50 2.50 3.70
6.50 11.00 18.10
General fixed costs are budgeted as ₦20,000 for the year and no specific fixed costs are
expected for any product.
All three products use the same direct material which is expected to be limited in supply
to a maximum of 22,020 kgs in the budget year.
Required:
a. Recommend, with supporting calculations, whether forecast 1 or forecast 2 should be
adopted for the budget period. (11 Marks)
b. Prepare a report, addressed to the managing director, to explain the budget
preparation process, with particular reference to:
i. The principal budget factor (3 Marks)
ii. The budget manual (3 Marks)
iii. The role of the budget committee (3 Marks)
(Total 20 Marks)
QUESTION 3
Some time ago, Robert launched a new product. At first, sales were good but now the
figures are causing concern. Robert wants a more accurate sales forecast to produce
detailed cash forecasts.
Since there are some seasonality present in the raw data, the series for sales shown
below represents the underlying trend based on an averaging process:
58

Year Quarter Trend Sales
point (Cartons)
x y
2016 3rd 1 10,000
2016 4th 2 10,760
2017 1st 3 10,920
2017 2nd 4 11,000
2017 3rd 5 11,050
2017 4th 6 11,080
2018 1st 7 11,085
2018 2nd 8 11,095
2018 3rd 9 11,120
2018 4th 10 11,130
On average, quarters 1 and 3 are 5% and 6% respectively above trend whilst quarters 2
and 4 are respectively 2% and 9% below trend. Some preliminary calculations on the
above ten observations have been carried out and the results are summarised below:
Results from ten periods‟ observations:
Linear regression y = a + bx
Slope = 82.67
Intercept = 10,472.33
Coefficient of determination = 0.535
It is required to make forecasts of sales for quarters 3 and 4 in 2019 and for quarters 1
and 2 in 2020 but there is some discussion on whether the ten-period data shown above
are suitable for forecasting or whether only the last five periods would provide a better
basis for forecasting. Linear analysis of the last five periods only gives the following
intermediate results:
Results of last five periods‟ observations:

y = 555.10
x2 = 330
y2 = 61,627.40
xy = 4,442.15
Note: the y values have been scaled down by 100 times for ease of calculation.
Required:
a.
59

Probability No of pupils joining late
0.2 80 Forecast the sales of the four
0.3 30 quarters required using the
ten- 0.5 52 period observations results.
(8 Marks)
b. Prepare similar forecasts based on the last five periods‟ observations
(8 Marks)
c. Explain which forecasting bases produce the better forecast (4 Marks)
(Total 20 Marks)
QUESTION 4
Adrac Community School was founded by Adrac Community Resident Association of
Garki, Abuja, Nigeria. The school is being supervised by a board of governors made up
of selected experienced members of the community. The school is not allowed to charge
the pupils any fee as it is a community project donated to assist members of the
community.
Adrac Community Residents Association pays the school ₦21,000 for each child
registered at the beginning of the school year, which is September 1, and ₦18,000 for
any child joining the school part-way through the year. The school does not have to
refund the money to the association if a child leaves the school part-way through the
year. The number of pupils registered at the school on September 1, 2019 is 720, which
is 10% lower than the previous year. Based on past experience, the probabilities for the
number of pupils starting the school part-way through the year is as follows:
The school‟s headmistress normally prepares annual budget for consideration of the
board of governors. Since she is not too comfortable with figures, she does not
understand how to use the probability distribution provided for her annual budget.
Therefore, she just used simple average for her calculation of number of pupils expected
to join late. The revenue budget for 2019/2020 submitted by the headmistress is as
follows:
60

Pupils Rate per Total
pupil income
N’000
Pupils registered at beginning of school year 720 ₦21,000 15,120
Average expected number of new joiners 54 N18,000 972
16,092
The headmistress uses incremental budgeting to budget for her expenditure, taking
actual expenditure for the previous year as a starting point and simply adjusting it for
inflation, as shown below.
Note Actual cost for Inflationary Budgeted cost

y/e 30 June 2019 adjustment y/e 30 June 2020
N‘000 N‘000
Repairs and maintenance 1 880 +3% 906.4
Salaries 2 12,400 +2% 12,648
Capital expenditure 3 1,300 +6% 1,378
Total budgeted expenditure 14,932.4
Budget surplus 1,159.6
Notes
i. N600,000 of the costs for the year ended 30 June 2019 related to standard
maintenance checks and repairs that have to be carried out by the school every
year in order to comply with the local government health and safety standards.
These are expected to increase by 3% in the coming year. In the year ended 30
June 2019, N280,000 was also spent on redecorating some of the classrooms. There
will be no redecoration in the coming year.
ii. One teacher earning a salary of N520,000 left the school on 30 June 2019 and
there are no plans to replace her. However, a 2% pay rise will be given to all staff
with effect from 1 December 2019.
iii. The full N1,300,000 actual costs for the year ended 30 June 2019 related to
improvements made to the school building. This year, the canteen is going to be
substantially improved, although the extent of the improvements and level of
service to be offered to pupils is still under discussion. There is a 0·7 probability
that the cost will be N1,450,000 and a 0·3 probability that it will be N800,000.
These costs must be paid in full before the end of the year ending 30 June 2020.
The school‟s board of governors, who review the budget, are concerned that the budget
surplus has been calculated incorrectly. They believe that it should have been calculated
using expected income, based on the probabilities provided, and using expected
61

expenditure, based on the information provided in notes i to iii. They believe that
incremental budgeting is not a reliable tool for budget setting in the school since, for
the last three years, there have been shortfalls of cash despite a budget surplus being
predicted. Since the school has no other source of funding available to it, these
shortfalls have had serious consequences, such as the closure of the school kitchen for a
considerable period in the last school year, meaning that no meals were available to
pupils. This is thought to have been the cause of the 10% fall in the number of pupils
registered at the school on 1 September 2019.
Required:
a. Redraft the school‟s budget for the year ending 30 June 2020 based on the views
of the board of governors. (6 Marks)
b. Discuss the advantages and disadvantages of using incremental budgeting
(4 Marks)
c. Discuss the THREE main steps involved in preparing a zero-based budget
(6 Marks)
d. Discuss the extent to which zero-based budgeting could be used by Adrac
Community School to improve the budgeting process (4 Marks)
(Total 20 Marks)
QUESTION 5
A national boutique chain sells a wide range of high quality customised fashion goods.
One particular outfit is bought at ₦8,000 and sold at ₦13,000. Mean holding costs per
season per outfit work out at ₦500 and it costs ₦80,000 to order and receive goods in
stock. The manufacturers require orders in advance and once a batch has been made it
is not possible to place a repeat order. Further, it is not possible for delivery to be
staggered over the fashion season.
When a customer buys an outfit that requires adjustments, any alterations or

adjustments are made and she collects the outfit a day or so later. Generally, if an outfit
is out of stock at one boutique it can be readily obtained from another branch, usually
in a matter of hours. However, if the chain as a whole runs out of an item, then not only
is the profit not earned, but the ₦2,000 or so profit that comes from the extras that
customers buy is also lost. If the chain has excess purchase for a season then it is
expected that the chain will be able to dispose of the surplus outfits at ₦5,000 each.
62

The pattern of past sales of a comparable outfit show the following probability
distribution for the chain as a whole:
Outfits Probability
sold
1,100 0.30
1,200 0.40
1,300 0.20
1,400 0.10
The problem facing the management accountant of the chain is to decide how many
outfits to order for the season ahead, in order to maximise expected profit, bearing in
mind the penalties for over and under ordering.

a) Determine the number of outfits to order to maximise expected profits.
(17 Marks)
b) Compare and contrast the model that you have developed with the
classical economic order model. (3 Marks)
(Total 20 Marks)
QUESTION 6
Chukwukah Nigeria Limited manufactures three products, JEL, JET and JAL. Demand for
products JEL and JET is relatively elastic whilst demand for product JAL is relatively
inelastic. Each product uses the same materials and the same type of direct labour but
in different quantities. For many years, the company has been using full absorption
costing and absorbing overheads on the basis of direct labour hours. Selling prices are
then determined using cost plus pricing. This is common in the company‟s industry with
most competitors applying a standard mark-up.
Budgeted production and sales volumes for JEL, JET and JAL for the next year are
25,000, 20,000 and 27,600 units respectively.
The budgeted direct costs of the three products are shown below:
Product JEL JET JAL

Direct materials 250 280 220
Direct labour (N120 per hour) 300 360 240
63

In the coming year, Chukwukah also expects to incur indirect production costs of
N6,887,000, which are analysed as follows:
Cost pools N‘000 Cost drivers

Machine set up costs 1,400 Number of batches
Material ordering costs 1,580 Number of purchase orders
Machine running costs 2,100 Number of machine hours
General facility costs 1,807 Number of machine hours
6,887
The following additional data relates to each product:
Product JEL JET JAL

Batch size (units) 500 800 400
No of purchase orders per batch 4 5 4
Machine hours per unit 1.5 1.25 1.4
The management of Chukwukah Nigeria Limited wants to boost sales revenue in order to
increase profits but its capacity to do this is limited because of its use of cost plus
pricing and the application of standard mark-up. The management accountant has
suggested using activity based costing (ABC) instead of full absorption costing, since
this will alter the cost of the products and may therefore enable a different price to be
charged.
Required:
a. Calculate the budgeted full production cost per unit of each product using
absorption costing. All workings should be to two decimal places. (6 Marks)
b. Calculate the budgeted full production cost per unit of each product using activity
based costing. All workings should be to two decimal places. (8 Marks)
c. Discuss the impact on the selling prices and the sales volumes of each product
which a change to activity based costing would be expected to bring about.
(6 Marks)
(Total 20 Marks)
64

Formulae
Learning curve
Y = axb
Demand curve
P = a – bQ
change in price
b
change in quantity
MR = a – 2bQ
Y= 𝑎 + 𝑏𝑋
𝑛 𝑋𝑌 − ( 𝑋)( 𝑌)
where b= 2
𝑛 𝑋 − 𝑋 2
𝑦 𝑏 𝑥
a= −
𝑛 𝑛

2
r2 = 2 2
(𝑛 𝑋 − 𝑋 2 (𝑛 𝑦 − 𝑋 2
65

1
3 3
4
Annuity Table
r
Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15
66

67

SECTION A
SOLUTION 1
a. Concept of linear programming and usefulness

Linear programming is a mathematical method for determining a way to achieve
the best outcome (such as maximum profit or lowest cost) subject to a number of
limiting factors (constraints).
A linear programming problem involves maximising or minimising a linear

function (the objective function) subject to linear constraints.
Both the constraints and the “best outcome” are represented as linear
relationships.
What constitutes the best outcome depends on the objective. The equation
constructed to represent the best outcome is known as the objective function.
Uses of linear programming (LP)
 Budgeting: In preparing budget, one of the first steps is the identification of the
key (limiting) factor. When there is more than one limiting factor, LP can be used
to identify the most profitable use of resources.
 Capital budgeting: When we have multi-period capital rationing, LP can be used

to optimally allocate the available funds among the competing projects.
 Transfer pricing: In a divisionalised organisation, LP can be used to compute

optimal transfer price between divisions when the supplying division does not
have sufficient capacity to met all the demands placed upon it.
 Calculating relevant costs: The relevant cost of a scarce resource is calculated as

acquisition cost of the resource plus opportunity cost. When more than one scarce
resource exist, LP can be used to establish the opportunity cost (Shadow price).
 Maximum payment for the supply of additional scarce resources: If labour is

an effective limiting factor, for example, the maximum overtime premium to pay
per additional hour is the shadow price which can be determined using LP.
 Control: LP is also useful in the analysis of variances. For example, adverse

material usage variances can be indication of material wastage. Such variances
68

should be valued at the standard cost of the material plus the opportunity cost of
the loss of one scarce unit of material. LP can be used to determine the
opportunity cost.
b. Computation of unit selling price and associated unit profit of the two products.
Biggis Smallis
N N
Material 250 150
Labour costs:
Machine time 60 30
Processing 40 50
Overhead cost 30 40
Total costs 380 270
Profit per unit 76 54
Selling price per unit 456 324
c. ADVICE ON THE OUTPUT TO BE PRODUCED TO MAXIMISE TOTAL PROFIT
STEP 1 –DETERMINATION OF LIMITING FACTOR
Materials needed to produce 200,000 units of Biggis & 100,000 units of Smallis
BIGGIS 5kg x 200,000 1,000,000

SMALLIS 3kg x 100,000 300,000
Total Required 1,300,000
Available Material 1,800,000
Conclusion:
Materials are not limiting factor since available resources exceed
resources needed to meet production levels.
Machine time needed to produce 200,000 units of Biggis and 100,000 units of
Smallis.
69

BIGGIS 4hrs x 200,000 800,000
SMALLIS 2hrs x 100,000 200,000
Available Hours 800,000
Conclusion:
Machine time is a limiting factor since hours available are less than
the hours needed to meet production levels.
Other processing time needed to produce 200,00 units of Biggs and

100,000 units of smallis:
BIGGIS 4hrs x 200,000 800,000

SMALLIS 5hrs x 100,000 500,000
Available Hours 0
1,400,000
Conclusion:
Other processing time is not a limiting factor since hours available
exceeds hours needed to meet production levels.
STEP 2 – DETERMINATION OF PRIORITY OF PRODUCTION PLAN
Biggis Smallis
N N
Total variable costs (350) (230)
Machine time per unit 4 2
Contribution per machine time 26.5 47
Ranking 2nd 1st
PRODUCT UNITS HOURS USED HOURS LEFT

SMALLIS 100,000 200,000 600,000
BIGGIS 150,000 600,000 -
70

Comment
Hence, the optimal production plan for NTAMS Manufacturing Company Ltd
is to produce 100,000 units of Smallis and 150,000 units of Biggis.
(d) SHADOW PRICE

MEANING
The shadow cost of a binding constraint is the amount by which the objective
function decreases (or increases) as a result of availability of one unit less or
more of the scarce resource. The solutions to the dual problem of the
primal problem give the shadow costs (prices), hence the alternative term
dual costs (prices).
USEFULNESS OF SHADOW PRICES

 Can be used to determine the relevant cost of a scarce resource
 Useful in setting transfer price
 Useful in setting transfer price
 It assists in determining opportunity cost
 Can be used in allocating funds to projects when there is multi-period capital
rationing.
The major limitation of shadow price is that it is valid for a limited range of output.
For example, if labour hour is the limiting factor, the shadow price will tend to zero
as more labour hours are supplied.
71

CALCULATION OF SHADOW PRICE OF THE CONSTRAINTS
Shadow price only exists for binding resources – hence shadow price
will only exist for machine time. If one (1) additional machine time is
available, total machine time will be 800,001
Total units of Biggis to be produced wil l be 150,000.25 units (600,001/4)

New Total contribution will be (100,000 x 94) + (150,000.25 x 106) =
25,300,026.50
Previous total contribution was (100,000 x 94) + (150,000 x 106) =
25,300,000
Increase in contribution = 25,300,026.50 – 25,300,000 = 26.50
Alternative solution
Candidates may reduce the available machine time by 1 hour.
If one machine hour is reduced Total units of Biggis =149,999.75 units
N
New contribution (100,000 x 94 + 149,999.75 x 106) = 25, 299,973.5
Old contribution 25,300,000
Shadow price (reduction in contribution)

(26.50)
Shadow price = N26.50k
ei) NPV (Discount Factor 15%) = 2.283

Total contribution = 25,300,000 (2.283) = 57,759,900
Total Outflow = 45,000,000 = 45,000.000
NPV = N12,759,000
Yes, the project‟s NPV is positive and therefore worthwhile.
ii) If a discount factor = 35%

Total contribution = 25.300,000 x 1.696 = N42,908,800
Total Outflow = N
45,000,000
NPV at 35% = (N2,091,200)
A
IRR = a + ( ) (b – a)
A B
72

a = Positive NPV discount rate
A = Positive NPV
b = Negative NPV discount rate
B = Negative NPV
12,759,000
= 15% + ( ) (35% – 15%)
12,759,000  2,091,200
12,759,000 (20%)
= 15% + ( )
14,851,100
= 15% + 17.18%
= 32.18%
Examiner’s report
The question tests students‟ understanding of resource allocation using
contribution per limiting factor. It was attempted by the majority of the
candidates being a compulsory question.
The performance was below average.
The major pitfall was the lack of understanding in the subject area and the
conditions that must be satisfied before the linear programming is applied.
Marking guide
Mark Total
a. Definition of linear programming 1
Explanation of linear programming 1
Usefulness (3 points at 1 mark per point) 3 5
b. Selling Price (20 ticks at ¼ mark per tick) 5
c. Advice on the optimal output 10
d. Shadow Price/usefulness/limitation 5
Shadow price computations 7 12
e. Investment analysis - NPV 4
Calculation of IRR 4 8 40
73

SECTION B
SOLUTION 2
(a) Materials supply is a limiting factor for forecast 1, but not for forecast 2.
Forecast 1

₦ ₦ ₦
Sales price per unit 10.00 20.00 30.00
Variable cost per unit 6.50 11.00 18.10
Contribution 3.50 9.00 11.90
Contribution per kg of material 0.88 1.29 0.85
Ranking 2nd 1st 3rd
Optimal production plan for forecast 1
Units Contribution ₦
kg of material
Product B 800 5,600 7,200
Product A 500 2,000 1,750
Product C 1,030 14,420 12,257
Total contribution 22,020 21,207
Optimal Production Plan for forecast 2

Total
₦per unit ₦ per unit ₦ per unit
Sales price 15.00 25.00 40.00
Variable-cost 6.50 11.00 18.10
Contribution 8.50 14.00 21.90
Sales volume (units) 350 700 1,000
Total contribution ₦2,975 ₦9,800 ₦21,900 ₦34,675
74

Recommendation:
Forecast 2 should be adopted for the budget period. It produces a
contribution of ₦34,675 which is ₦13,468 higher than the contribution for
forecast 1.
(b) REPORT
To: The Managing Director
From: The Finance Manager
Subject: Budget Preparation Process
Date: 5 May 2021
1. INTRODUCTION
In line with the request of the management of our company, PQR Plc
(“PQR” or “the Company”) kindly see below the detailed discussion o n
some of the key issues in the budget preparation process.
2. PRINCIPAL BUDGET FACTOR

The principal budget factor or limiting factor or key budget factor is a
factor, which at any time is an overriding planning limitation on the
activities of the organisation. Examples of principal budget factors
include: staffing limitations, scarcity of materials and other logistics,
limited financial resources, low sales demand, limited storage facilities,
etc.
3. BUDGET MANUAL
The budget manual sets out the budget guidelines which are budgeting
instructions, that the Budget Committee gives to guide departmental
heads involved in the preparation of the budget so that they follow a
particular goal, objective, technique, trend or method of estimating the
income and expenditure variables.
4. ROLE OF THE BUDGET COMMITTEE

The Budget Committee is made up of members of senior management
that oversees all budgetary matters. A typical budget committee
includes the chief executive officer, heads of strategic business units
and the chief finance officer. The committee sets or approves the
overall budget goals for the organisation, and its major business units,
75

directs and coordinates budget preparation, approves the final budget,
monitors operations as the year unfolds, and reviews the operating
results at the end of the period.
The budget committee also approves major revisions of the budget

during the period. This committee usually consists of sectional or
departmental managers and is usually serviced by the Budget Officer
who normally is the finance officer.
Apart from the above, the functions of the committee may include the
following:
 Determine budget policy guidelines and selecting
budget policies compatible with organisational goals
and objectives;
 Establishing the budget timetable;
 Review budget estimates submitted by sectional heads;
 Facilitate the co-ordination of the budgets;
 Suggest amendments to budgets and revising budget
estimates when necessary;
 Approve budgets after amendments;
 Facilitate the generation of budgetary control reports;
 Analysing budget reports and recommending changes;
 Examine variances, recommend investigation of variances
and recommend solutions to remedy off-standard
performance; and
 Advise top management on all matters concerning the
budget.
Examiner‟s report
The question examines candidates on optimal mix of production and some
concepts associated with the budgeting process. Majority of the candidates
attempted the question, the performance was average. The main pitfall is
inability of the students to identify the quantity of the limiting factor.
the examination of the Institute.
Marking guide
Mark Total
a. Forecast to be Adopted/Computation 11
b. i) Principal budget factor 3
ii) Budget manual 3
iii) Role of budget committee 3 9 20
76

SOLUTION 3
a) Year Quarter Trend point Sales trend (cartons)
x y = a + bx
2019 3 13 10,472.33 + (82.67 × 13) = 11,547
2019 4 14 10,472.33 + (82.67 × 14) = 11,630
2020 1 15 10,472.33 + (82.67 × 15) = 11,712
2020 2 16 10,472.33 + (82.67 × 16) = 11,795
The seasonally adjusted forecasts are therefore as follows:

Year Quarter Seasonally adjusted forecast sales (cartons)
2019 3 11,547 × 1.06 = 12,240
2019 4 11,630 × 0.91 = 10,583
2020 1 11,712 × 1.05 = 12,298
2020 2 11,795 × 0.98 = 11,559
b) We need to calculate the regression line of the last five periods'

observations. This line is
y = a + bx
n xy − x y
where b =
n x2− x 2
y 𝑏 x
and a = −
n n
5 × 4,442.15 − (40 × 555.1) 6.75

So b= = = 0.135
5 × 330 − 40 × 40 50
555.1 0.135 × 40
a= − = 111.02 − 1.08 = 109.94
5 5
We need to multiply the a and b values back up by 100 to compensate for

the fact that the y values were scaled down by 100 before the sigma
calculations were carried out.
So the regression line is y = 10,994 + 13.5x
77

Year Quarter Trend point Sales trend (cartons)
x y = a + bx
2019 3 13 10,994 + (13.5 × 13) = 11,169.5
2019 4 14 10,994 + (13.5 × 14) = 11,183.0
2020 1 15 10,994 +(13.5 × 15) = 11,196.5
2020 2 16 10,994 + (13.5 × 16) = 11,210.0
The seasonally adjusted forecasts are therefore as follows:
Year Quarter Seasonally adjusted forecast sales (cartons)

2019 3 11,169.5 × 1.06 = 11,840
2019 4 11,183.0 × 0.91 = 10,177
2020 1 11,196.5 × 1.05 = 11,756
2020 2 11,210.0 × 0.98 = 10,986
c) One common method of deciding on which forecasting basis produces the

better result is to compare the coefficients of determination. With ten
periods' observations we are told that r2 = 0.535.
With five periods' observations we have to calculate the coefficient of

determination from the equation given in the tables provided.
n xy − x y 2
r2 = 2
n x − x 2 n 𝑦 2 − ( 𝑦)2
5 × 4,442.15 − 40 × 555.1 2 6.752

= =
5 × 330 − 40 × 40 5 × 61,627.4 − (555.1 × 555.1) 50 × 0.99
= 0.92
Prima facie the forecasting method, using five periods' observations is

much better than the other using ten periods, since the coefficient of
determination of the former is 0.92 compared with 0.535 for the latter.
We can explain 92% of the variations in sales by the passage of time using
the former method, but can explain only 53.5% of the variations in sales
using the latter method.
78

Examiner’s report
The question tests candidates‟ knowledge of regression analysis in forecasting.

Few candidates attempted the question, the performance was average. The
major pitfall of the candidates was inability to apply seasonal variation of the
trend to the forecast.
future examination of the Institute.
Marking guide
Mark Total
a. Forecast of 4 Quarters using 10-period
observation 8
b. Forecast of 4 Quarters using 5-period
observation 8
c. Commenting of better of forecast:
- Coefficient of determination formulae 1
- Substituting of figures into the formulae 1
- Comparation of two forecast figures 1
- Decision 1 4 20
SOLUTION 4
ADRAC COMMUNITY SCHOOL
a. REDRAFTING THE BUDGET FOR THE YEAR ENDED 30 JUNE 2020

BUDGETED INCOME
N‟000
Pupils Rate/Pupil
N
Pupils registered at the beginning of school year 720 21,000 15, 120
Average Expected Number of New Joiners 51 18,000 918
16,038
79

BUDGETED EXPENDITURE
Actual cost for Inflationary Budget Cost for

the year Ended Adjustment the year Ended
30-June-2019 30-June-2020
N‟000 N‟000
Repairs and Maintenance Note 1 600 3% 618
Salary Note 2 11,880 2% 12,019
Improvement of canteen Note 3 1,300 1,255
13,892
Budgeted Surplus/(Deficit) 2,146
Note 1:
Repairs & maintenance 600,000 (1.03) = 618,000
Note 2:
Salaries (12,400,000 – 520,000) (1 + 0.02 x 7/12) = 12,019,000
Note 3:
Improvement of canteen
Estimated cost Pro Expected cost

1,450,000 0.7 1,015,000
800,000 0.3 240,000
1,255,000
(b) Advantages of Incremental Budgeting
– Incremental budgeting is very easy to prepare. This makes it possible for a

person without any accounting training to build a budget.
– Incremental budgeting is also very quick to comprehend compared to other
budgeting methods.
– The information required to complete it is also usually readily available
Disadvantages of Incremental Budgeting
– There is no incentive to eliminate wasteful or unnecessary

spending from the budget;
– It encourages more waste (or budget slack) because managers will
try to spend up to their budget limit so that budget for next financial
year will not reduce.
– It increases allocated cost irrespective of performance.
80

(c) STEPS IN PREPARING ZERO-BASED BUDGET
Zero-based Budget is prepared as follows:

(i) A decision must be taken to provide for a minimum level of operation.
This means deciding for each basic operation whether or not to
perform the operation.
(ii) Having decided on a basic level of operations, a basic expenditure
budget can be prepared.
(iii) The next step is to consider each incremental decision package and
decide whether additional operation is justified. An incremental
decision package is justified if the expected benefits exceed the
estimated costs.
(d) EXTENT TO WHICH ZERO-BASED BUDGET CAN BE USED BY

ADRAC TO IMPROVE BUDGETING PROCESS
i. It can be used to help lower costs by avoiding blanket increases or

decreases to a prior period's budget.
ii. It can be used to help in efficient allocation of resources
(department-wise) as it does not look at the historical numbers but
looks at the actual numbers
iii. It leads to the identification of opportunities and more cost-
effective ways of doing things by removing all the unproductive or
redundant activities.
iv. Since every line item is to be justified, zero-based budget
overcomes the weakness of incremental budgeting of budget inflation.
v. It also improves coordination and communication within the
department and motivates employees by involving them in decision-
making.
Examiner’s report
The question tests candidates‟ understanding of Incremental Budget and Zero

Based Budget. Majority of the candidates attempted the question.
Candidates performance was above average.
The candidates are advised to read the Institute‟s study text when preparing for
the Institute‟s examination in future.
81

Marking guide
Mark Total
a. Redrafted budget 6
b. i) Advantages (Any 2 at 1 mark) 2
ii) Disadvantages (Any 2 at 1 mark) 2 4
c. 3 steps at 2 marks 6
d. Extent of use of ZBB by Adrac (Any 2 points
at 2 marks each) 4 20
SOLUTION 5
a) Unit contribution
₦13,000 – (8,000 + 500) = ₦4,500
Unit loss when surplus sold
₦8,500 – 5,000 = ₦3,500
Unit penalty when demand not satisfied
₦2,000 per outfit not sold
Probability of sales levels
Sales Probability
1,100 0.3
1,200 0.4
1,300 0.2
1,400 0.1
Contribution calculations
(1,100 units purchased)
Demand contribution ₦
1,100 1,100 × ₦4,500 = 4,950,000
1,200 1,100 × ₦4,500 – 100 × ₦2,000 = 4,750,000
1,300 1,100 × ₦4,500 – 200 × ₦2,000 = 4,550,000
1,400 1,100 × ₦4,500 – 300 × ₦2,000 = 4,350,000

Demand Contribution ₦
1,100 1,100 × ₦4,500 – 100 × ₦3,500 = 4,600,000
1,200 1,200 × ₦4,500 = 5,400,000
1,300 1,200 × ₦4,500 – 100 × ₦2,000 = 5,200,000
1,400 1,200 × ₦4,500 – 200 × ₦2,000 = 5,000,000
82

1,100 1,100 × ₦4,500 – 200 × ₦3,500 = 4,250,000
1,200 1,200 × ₦4,500 – 100 × ₦3,500 = 5,050,000
1,300 1,300 × ₦4,500 = 5,850,000
1,400 1,300 × ₦4,500 – 100 × ₦2,000 = 5,650,000

1,100 1,100 × ₦4,500 – 300 × ₦3,500 = 3,900,000
1,200 1,200 × ₦4,500 – 200 × ₦3,500 = 4,700,000
1,300 1,300 × ₦4,500 – 100 × ₦3,500 = 5,500,000
1,400 1,400 × ₦4,500 = 6,300,000
Summary of outcomes
Probability Order quantity
Demand Expected
1,100 1,200 1,300 1,400 contribution
0.3 0.4 0.2 0.1 ₦000
1,100 4,950,000 4,750,000 4,550,000 4,350,000 4,730
1,200 4,600,000 5,400,000 5,200,000 5,000,000 5,080
1,300 4,250,000 5,050,000 5,850,000 5,650,000 5,030
1,400 3,900,000 4,700,000 5,500,000 6,300,000 4,780
Application of probability on the Pay off Matrix
State of Nature (Sales)

Decision 0.3 0.4 0.2 0.1
Alternatives 1,100 1,200 1,300 1,400 Max
1100 1,485,000 1,900,000 910,000 435,000 1,900,000
1200 1,380,000 2,160,000 1,040,000 500,000 2,160,000
1300 1,275,000 2,020,000 1,170,000 565,000 2,020,000
1400 1,170,000 1,880,000 1,100,000 630,000 1,880,000
:. On the basis of the expected contribution the number of outfits to order is

1,200 units.
Note: The order/receipt costs of ₦80,000 are constant throughout and

therefore have been ignored.
83

b) The basic EOQ model assumes a known demand per period e.g., per year
and the aim is then to find how often, and therefore how much, to order at
a time so as to minimise total costs, each order arriving when the stock
level is zero so that there are no „lost sales‟ and no surplus stock. (It has to
be said that the basic EOQ model is rarely, if ever applicable in this simple
form in a real-life case, although refinements such as variable demand can
be built into the model).
By contrast, in the model calculated, demand is not known with certainty

but is assumed to conform to the probability distribution given. Since the
whole of the season‟s stock has to be ordered in a single batch at the start
of the season, both overstocking and under stocking are possible, with
resultant loss of profit contribution.
Examiner’s report
The question tests the candidates‟ understanding of decision making under

uncertainty. Few students attempted the question and performance was below
average. The major pitfall was lack of understanding in identifying possible
scenarios for decision making.
Candidates are advised to study the Institute‟s text for future Institute‟s study
examination.
Marking guide
Mark Total
a. i) Number of outfits to maximise profits
(32 ticks at ½ mark) 16
ii) Decision 1 17
b. Compare models 1½
Contrast models 1½ 3 20
SOLUTION 6
CHUKWUKAH NIGERIA LIMITED
(a) Full budgeted production cost per unit using absorption costing
Product Jel Jet Jal Total
Budgeted annual production (units) 25,000 20,000 27,600
Labour hours per unit 2·5 3 2
Total labour hours 62,500 60,000 55,200 177,700
Overhead absorption rate = N6,887,000/177,700 = N38·76 per hour.
84

Product Jel Jet Jal
Direct materials 250.00 280.00 220.00
Direct labour 300.00 360.00 240.00
Overhead (N38·76 x 2·5/3/2) 96.90 116.28 77.52
Full cost per unit 646.90 756.28 537.52
(b) Full budgeted production cost per unit using activity based costing

Budgeted annual production (units) 25,000 20,000 27,600
Batch size 500 800 400
Number of batches (i.e. set ups) 50 25 69 144
Number of purchase orders per batch 4 5 4
Total number of orders 200 125 276 601
Machine hours per unit 1·5 1·25 1·4
Total machine hours 37,500 25,000 38,640 101,140
Cost driver rates:

Cost per machine set up N1,400,000/144 = N9,722.22
Cost per order N1,580,000/601 = N2,628.95
Machine running cost = ₦21,000,000/101140 = ₦20.76
General facility cost = 1,807,000/101140 = ₦17.87
Allocation of overheads to each product:

N N N N
Machine set up costs 486,111 243,055 670,833 1,400,000
Material ordering costs 525,790 328,619 725,591 1,580,000
Machine running cost 778,624 519,082 802,294 2,100,000
General facility cost 669,987 446,658 690,355 1,807,000
Total 2,460,512 1,537,414 2,889,073 6,887,000
85

Quantity Produced 25,000 20,000 27,600
Overhead cost per unit N98.42 N76.87 N104.68
Allocation of overheads to each product
Total cost per unit: N per unit N per unit N per unit
Direct materials 250.00 280.00 220.00
Direct labour 300.00 360.00 240.00
Overhead 98.42 76.87 104.68
ABC cost per unit 648.42 716.87 564.68
c. The company prices product on the basis of cost plus pricing model. The
application of ABC model will impact the selling price and sales volume of
the products as follows:
Jel: The demand is elastic.
As a result of ABC model, cost will increase from N646.90 to N648.42

meaning increase in selling price and reduction in sales volume
Jet: The demand is elastic.
As a result pf ABC method, cost will decrease from N756.28 to N716.87

meaning that there will be a decrease in selling price and increase in sales
volume.
JAL: The demand is inelastic meaning change in price will not affect the
quantity demanded. Hence, even though the cost increased from N537.52
to N564.68, selling price will increase but will not affect the sales volume.
Examiner’s report
The question tests the candidates‟ understanding of overhead apportionment

using Traditional and Activity Based Costing Method. Majority attempted the
question and the performance was average. The major pitfall was the
determination of the number of batches involved.
Candidates are encouraged to make use of the Institute‟s text for future
Institute‟s examination.
86

Marking guide
Mark Total
a. Budgeted full cost per unit (12 ticks at ½ mark
each tick) 6
b. Budgeted ABC full production cost per unit
Cost driver rate (4 ticks at ½ mark each) 2
Production cost per unit (12 ticks at ½ mark each) 6 8
c. Impact of ABC on selling price/sales volume 6 20
87


QUESTION 1
Kikelomo Limited manufactures three products K, T and F, using different
quantities of the same resources. Budget information per unit is as follows:
K T F
₦ ₦ ₦
Market selling price 1,800 2,520 3,000
Direct labour (₦140/hour) 280 560 700
Material A (₦60/kg) 300 240 420
Material B (₦120/kg) 480 720 600
Variable overhead (₦80/hour) 160 320 400
Fixed overhead 240 140 240
Total cost 1,460 1,980 2,360
Profit 340 540 640
Total budgeted sales units 500 800 1,600
The budgeted sales are for the month of June but do not include an order from a
major customer to supply 400 units per month of each of the three products, at a
discount of ₦200 per unit from the market selling price.
During June, the management of Kikelomo Ltd anticipated that there will be a
shortage of material B, and that only 17,500 kgs will be available. It is not
possible for Kikelomo Ltd to hold inventory of any raw materials, work-in-
progress or finished products.
Required:
a. State THREE factors which may cause input materials to be a budget

constraint and identify steps which may be taken to overcome this
constraint. (6 Marks)
b. Prepare calculations to show production that will maximise Kikelomo
Ltd‟s profit for June. (9 Marks)
c. Kikelomo Ltd has now realised that the contract with the major customer
does not have to be met in full for any of the three products. The customer
will accept whatever Kikelomo is prepared to supply at the contracted
58

prices but they will charge a financial penalty if Kikelomo does not
supply them in full in June. Based on this additional information:
Calculate: The lowest value of the financial penalty that the major
customer would need to insert in the contract to ensure that Kikelomo Ltd
meets the order in full in June. (6 Marks)
d. Now assume that the shortage of material B is expected to continue far

beyond June and management of Kikelomo Ltd has decided to outsource
the production of some of the products, advise the management of
Kikelomo Ltd on the advantages and disadvantages of outsourcing.
(9 Marks)
(Total 30 Marks)
INSTRUCTION: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THE

THREE QUESTIONS IN THIS SECTION
QUESTION 2
Divine Grace (DG) Limited currently makes as many units of “Part-2011” as it
needs. The company has recently received a bid from another company, KK Plc,
for making “Part 2011”. The company will supply 1,000 units of “Part 2011” per
year at N100 a unit. The company can begin the supply and continue for five
years, after which time DG Limited will not need the part. KK Plc can
accommodate any change in DG Limited‟s demand for the part and will supply it
for N100 regardless of quantity.
Ayo Ayuba, the cost accountant, reports the following costs for manufacturing
1,000 units of “Part 2011”.
N
Direct materials 44,000
Direct production labour 22,000
Variable production overhead 14,000
Depreciation on machine 20,000
Product and process engineering 8,000
Rent 4,000
General overheads 10,000
122,000
59

The following additional information is available:
(i) “Part 2011” is made on a machine used exclusively for the production of
“Part 2011”. The machine was acquired on January 1, last year at a cost
of N120,000. The machine has a useful life of six years and zero terminal
disposal price. Depreciation is calculated on the straight-line method.
(ii) The machine could be sold today for N30,000.
(iii) Product and process engineering costs are incurred to ensure that the
production process for “Part 2011” works smoothly. Although these costs
are fixed in the short run, with respect to units of “Part 2011” produced,
they can be saved in the long run if “Part 2011” is no longer produced. If
“Part 2011” is outsourced, product and process engineering costs of
N8,000 will be incurred for next year only.
(iv) Rent costs of N8,000 are apportioned to products on the basis of the floor
space used for manufacturing the product. If “Part 2011” is discontinued,
the space currently used to manufacture it would become available. The
company could then use the space for storage purposes and save N2,000
currently paid for outside storage.
(v) General overheads are apportioned to each department on the basis of

direct production labour costs. These costs will not change in total, but no
general overhead will be apportioned to “Part 2011” if the part is
outsourced.
Assume the required rate of return is 12%.
Required:
a. Should DG Limited outsource “Part 2011”? (10 Marks)

b. What maximum price should KK Limited quote on the 1,000 units to make
Divine Grace indifferent between outsourcing and internal production?
(5 Marks)
c. What non-financial factors would favour internal production rather than
outsourcing? (5 Marks)
(Total 20 Marks)
60

QUESTION 3
Kahkiri Limited manufactures two products, product X and product Y, on the

same machines. Sales demand for the products exceed the machine capacity of
the company‟s production department. The potential sales demand in each
period is for 16,000 units of Product X and 24,000 units of Product Y. Sales
prices cannot be increased due to competition from other firms in the market.
The maximum machine capacity in the production department is 64,000 hours
in each period.
The following cost and profitability estimates have been prepared:
Product Product
X Y
₦ ₦
Sales price 44 54
Direct materials 20 18
Direct Labour 6 11
Attributable fixed cost N10,000 N10,000
Fixed costs in each period are N100,000
Required:
a. Using marginal costing approach, calculate the profit-maximising
output for the period, and the associated profit for each product and
company. (4 Marks)
b. What are the advantages of throughput accounting over marginal
costing method in profit maximising decisions?. (4 Marks)
c. Calculate the throughput accounting ratio for Product X and for Product
Y. (8 Marks)
d. Using throughput accounting principles, calculate the profit-maximising
output in each period, and calculate the amount of the profit.
(4 Marks)
(Total 20 Marks)
61

QUESTION 4
You work as the assistant to the management accountant for Henry Limited, a
medium-sized manufacturing company. One of its products, Product P, has been
very successful in recent years, showing a steadily increasing trend in sales
volumes. Sales volumes for the four quarters of last year were as follows:
Quarter Quarter Quarter Quarter

1 2 3 4
Actual sales volume (units) 420,000 450,000 475,000 475,000
A new assistant has recently joined the marketing department and she has
asked you for help in understanding the terminology which is used in preparing
sales forecasts and analysing sales trends. She said: “My main problem is that I
do not see why my boss is so enthusiastic about the growth in Product P‟s sales
volume. It looks to me as though the rate of growth is really slowing down and
has actually stopped in quarter 4. I am told that I should be looking at the
deseasonalised or seasonally adjusted sales data, but I do not understand what
is meant by this‟‟.
You have found that Product P‟s sales are subject to the following seasonal
variations:
Quarter Quarter Quarter Quarter

1 2 3 4
Seasonal variation (units) +25,000 +15,000 0 -40,000
Required:
a.
i. Adjust for the seasonal variations to calculate deseasonalised or seasonally
adjusted sales volume (i.e., the trend figures) for each quarter of last year.
(5 Marks)
ii. Assuming that the trend and seasonal variations will continue, forecast the
sales volumes for each of the four quarters of next year. (4 Marks)
b. Explain what is meant by seasonal variations and deseasonalised or
seasonally adjusted data. Indicate how they can be useful in analysing a
time series and preparing forecasts. (5 Marks)
c. State the arguments for and challenges arising from managers
participating in setting their budget targets. (6 Marks)
(Total 20 Marks)
62

SECTION C: OPEN-ENDED QUESTIONS (30 MARKS)
INSTRUCTION: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THE

QUESTION 5
Gaskiya Nigeria Limited is considering whether or not to invest in any of the two
projects where the initial cash investment would be ₦13,000,000 for A and
N14,000,000 for B. The project would have a five-year life and the estimated
annual cash flows are as follows:
Project A
Year Cash inflows Cash outflows
N N
1 6,000,000 3,000,000
2 8,000,000 4,000,000
3 10,000,000 4,000,000
4 9,000,000 3,000,000
5 6,000,000 3,000,000
Total 39,000,000 17,000,000
Project B
N N
1 10,000,000 5,000,000
2 9,000,000 4,000,000
3 8,000,000 3,000,000
4 8,000,000 3,000,000
5 4,000,000 2,000,000
Total 39,000,000 17,000,000
The company‟s cost of capital is 10%.
The estimates of cash outflows are considered fairly reliable. However, the
estimates of cash inflows are much more uncertain. Several factors could make
the annual cash flows higher or lower than expected.
Factor 1: There is a 20% probability that government measures to control the

Industry will reduce annual cash inflows by 25%.
Factor 2: There is a 30% probability that another competitor will also enter the
market: this would reduce the estimated cash inflows by 10%.
Factor 3: There is a 40% probability that demand will be stronger than expected.
The company would not be able to supply more products to the market, but it
63

would be able to sell at higher prices and cash inflows would be 5% higher than
estimated.
Required:
a. Calculate the expected net present value of the two projects. (13 Marks)
b. Which of the Projects will be more profitable? (2 Marks)
(Total 15 Marks)
QUESTION 6
Mr. Alade, the owner of a business, has been attending a course on scenario
planning and decision making. As a result of that advice, the owner has
produced, by using cost, volume and profit analysis, 12 scenarios for a new
product that the business will launch in the near future. There are four possible
marketing packages that could be used (A, B, C, or D) and there are three
possible market conditions (poor, average or good) that could be encountered.
The Net Present Value of the cash flows resulting from each of the scenarios is
shown in the table below.
Market package
Market A B C D
conditions N‟000 N‟000 N‟000 N‟000
Poor 180 230 220 190
Average 190 200 210 275
Good 550 260 210 500
Unfortunately, Mr. Alade missed the session on how to deal with risk and
uncertainty. He has sent the above table to the tutor for the course and has
asked for help. The tutor replied “I will send you some notes. Based on your
table, you will need the methods in the section on „Uncertainty‟. If you can
estimate the probability of each type of market condition occurring you need
„Risk based methods‟. However, whichever method you use, your decision will
be influenced by your attitude.”
Required:
Note: Calculations are NOT required.
Explain FOUR methods that could help Mr. Alade to decide which marketing
package to choose. Your answer should include THREE methods to deal with
uncertainty, ONE method to deal with risk, and an explanation of the attitude
that would be associated with the decision maker using each of the four
methods. (15 Marks)
64

QUESTION 7
Garki plc. is a holding company with four divisions, including Alba and Beta
Divisions. Alba Division produces a component that it sells externally, and can
also transfer to other divisions within the group.
Beta Division uses the components from Alba Division as a raw material for its
final product. The division can also obtain the components from external
suppliers. The components, when obtained from Alba Division undergoes
further processing at a cost of N4.50 per unit, before it is sold to the external
market.
The Board of Directors, in order to implement a new Appraisal Review, has set
up a performance scheme for the divisional managers. A performance target for
the next financial year has been set and the following budgeted information
relating to the two divisions has been prepared.
Alba Division Beta Division
Maximum production/
Sales capacity 900,000 units
Sales to external customers 700,000 units (no constraints)
(Selling price) N6.80
Variable Unit Cost N4.90
Divisional fixed cost ` N160,000 N140,000
Capital employed N4m N3m
Residue Income N700,000 N500,000
Divisional cost of capital 12% 10%.
Beta Division has asked Alba Division to quote a transfer price for units of the
components.
Required:
a. Calculate the transfer price per unit which Alba Division should quote to
Beta division in order that its budgeted residual income target will be
achieved. (3 Marks)
b. Calculate the selling price per unit which Beta Division should quote to
external market in order that its budgeted residual income target will be
achieved, based on the transfer price quotation, (state clearly your
assumptions). (3 Marks)
c. Explain why the transfer price calculated in (a) may lead to sub-optimal
decision making from the point of view of Garki plc. taken as a whole.
(5 Marks)
d. In what circumstances would a negotiated transfer price be used instead
of a market based price? (4 Marks)
(Total 15 Marks)
65

Formulae
Learning curve
Y = axb
Demand curve
P = a – bQ
change in price
b
change in quantity
MR = a – 2bQ
Y= 𝑎 + 𝑏𝑋
𝑛 𝑋𝑌 − ( 𝑋)( 𝑌)
where b = 2
𝑛 𝑋 − 𝑋 2
𝑦 𝑏 𝑥
a= −
𝑛 𝑛
n xy − x y1 2
r2 =
n x2− x 2 n 𝑦 2 −( 𝑦 )2
66

1
3 3
4
Annuity Table
r
Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15
67

68

SOLUTION 1
a) The availability of materials may be a constraint when formulating the

budget.
i) There may be a shortage of supply of materials e.g. where they are
Imported and it is known that a bad harvest or political unrest will limit
the total quantity available.
ii) The company may have a limited quantity of specialist storage space
available.
For example raw material may require specially humidified storage or
special storage container space where it is toxic or dangerous in nature.
Such constraints may limit the overall amount of material which can be
made available during the budget period.
iii) The level of material losses in stores and in the production process may
be unacceptably high. This will increase the total input materials
required and could lead to a shortfall arising.
iv) Seasonal material input
v) Surge in demand
vi) Storage facility and capacity
vii) Transport system to move material
viii) Price of related input material for substitute and complementary goods
The steps:
The company may attempt to minimise the effect of potential shortages
by placing forward orders for materials. It may also consider possible
substitute materials which are more readily available. Where storage
space is a problem, the company may consider the renting of extra
storage facilities. It may also wish to negotiate a „just-in-time‟ agreement
whereby deliveries of material are guaranteed by suppliers to coincide
with the forward production plan. In order to reduce the level of material
losses, stores layout and control procedures should be reviewed. In the
production process additional focus on the efficiency of machinery and
the level of training of the work force should help reduce the level of
material losses and hence the total material input required.
69

b) Computation of Production that maximises profit
Product K T F
N N N
Selling Price 1,800 2,520 3,000
Less Variable cost:
Direct labour (280) (560) (700)
Material A (300) (240) (420)
Material B (480) (720) (600)
Variable overhead (160) (320) (400)
Contribution/Unit 580 680 880
Ranking the products using contribution/kg of material B

Kg of material B 4 6 5
Contribution/kg N145 N113.33 N176
Ranking 2 nd
3 rd
1st
Use of material B 3,600kg 3,900kg 10,000kg
Optimal Production 900 650 2,000
c) Producing with no special emphasis on special order

K T F
Contr./Unit N580 N680 N880
Normal Production 500 800 1,600
Unit of material B 4 6 5
2,000 4,800 8,000 = 14,800
Ranking 2nd 3rd 1st
Bal. to be used for
special Order 700kg 0 2,000kg = 2,700
Units to be produced
under special order 175 units 400 units
Normal contribution 580 x 500 800 x 680 1,600 x 880 =
=290,000 544,000 1,408,000 = N2,242,000
Special Order 175 x 380 400 x 680 =
= 66,500 - 272,000 N338,500
N356,500 N544,000 N1,680,000 = N2,580,500
70

Producing with Emphasis on Special order
Optimal Production N
(units) 900 650 2,000
Contribution/unit N580 N680 N880
Total Contribution N522,000 N442,000 N1,760,000
2,724,000
Less Discount N80,000 N80,000 N80,000 (240,000)
N442,000 N362,000 N1,680,000 = 2,484,000
Financial Penalty N2,580,500 – N2,484,000 = N 96,500
d) Advantages of outsourcing:
i. It allows each party to focus on core competences. This should lead to
improved quality of the final products produced by Alice. In addition, this
should lead to improved efficiency in that part of the overall operations.
ii. It should lead to improved services provided to customers, leading to an
increase in customer satisfaction. This will assist in retaining existing
customers and achieving repeat sales.
iii. Outsourcing will mean that the amount of capital expenditure is reduced,
as the company will no longer be required to invest in the plant and
equipment needed to carry out the outsourced activity.
iv. It should lead to less incidence of under-utilisation of assets. This will
lead togreater efficiency, and will impact positively on a number of
important performance measures (e.g. ROA, asset turnover, ROE, etc).
v. It is possible, but by no means certain, that an activity can be provided
by an outsourcer at lower cost than is possible in-house, as a result of the
outsourcer‟s ability to specialise.
Disadvantages of outsourcing:
i. Staff resistance: Members of staff, particularly those currently working in
the activity to be outsourced, may be resistant, as they will fear that their
jobs will be lost.
ii. Loss of critical skill: In the medium to long term, the skills associated with
the outsourced activity will be lost to the company. It is probable that
replacing such skills could prove to be costly. If an inappropriate activity
is outsourced, or the outsourcing initiative is unsuccessful, this could
prove to be very costly.
Once such skills have been lost, the supplier may seek to increase prices.
In such circumstances there would be little option to accept the increased
cost, unless an alternative supplier can be identified.
71

iii. Quality of the supplier: The success of an outsourcing initiative will be
heavily influenced by the quality of the supplier. It may be difficult to
identify a supplier who can provide the correct skills and meet the
required specification.
iv. Loss of confidential data: When an activity is outsourced, there is a
danger that it allows competitors to obtain access to data which
otherwise would remain in-house. This may lead to a commercial
disadvantage. This is most likely to occur in the case of a product, and
competitors may now be able to carry out a tear-down analysis more
easily.
v. Reputational problems: The most significant potential problem is the
damage to reputation which may result if the supplier does not meet the
required specification.
vi. Outsourcing firm may turn to a competitor
vii. Loss of managerial control
viii. Failure to meet delivery targets
ix. Selection of vendors may take time and effort
Examiner’s report
This is a compulsory question that tests candidates‟ knowledge on how to
handle limiting factor. Being a compulsory question, it was attempted by
almost all the candidates.
The candidates recorded an average performance.
The pitfall is that most candidates failed to compute the financial penalty
that will be expected when Kikelomo Ltd fails to supply the special order in
full as well as failure to treat the discount as an attributable variable costs
that only applies to the special order.
Candidates are encouraged to study the Institute‟s study manual when

preparing for ICAN examinations.
72

Marking guide
Marks
a 3 factors that cause material input constraint 3
3 Steps to overcome them 3 6
b  Contribution per unit 1½
 Contribution per kg of material B 1½
 Ranking 1½
 Optimal Production 4½ 9
c Computation of lowest value of financial penalty
1
(36 ticks at 6 mark) 6
d Advantages of outsourcing (2 points at 21/2
marks) 5
Disadvantage of outsourcing (2 points at
2 marks) 4 9 30
SOLUTION 2
a) Outsourcing Cost
Year Particular CF DCF@12% PV
N N
1-5 Outsourcing Cost (100,000) 3.605 (360,500)
0 Sales of machine 30,000 1.000 30,000
1 Engineering cost (8,000) 0.893 (7143)
1-5 Rent 2,000 3.605 7,210
330,433
Internal Production Cost

Year Particular CF DCF@12% PV
N N
1-5 Direct material (44,000) 3.605 (158,620)
1-5 Direct Labour (22,000) 3.605 (79,310)
1-5 Variable O/H (14,000) 3.605 (50,470)
1-5 Engineering cost (8,000) 3.605 (28,840)
317,240
Decision: Produce internally

The company should continue to produce “Part 2011”.
73

Alternative Approach
a) There are two options to evaluate

- Outsource......................A
- Produce .......................B
In the solution that follows, we use incremental approach
Cash flows (N)
Items Yr A B A-B PVF@12% PV
Sales of machine 0 30,000 0 30,000 1 30,000
Outsourcing costs 1-5 (100,000) 0 (100,000) 3.605 (360,500)
Direct materials 1-5 0 (44,000) 44,000 3.605 158,200
Direct labour 1-5 0 (22,000 22,000 3.605 79,310
Variable overhead 1-5 0 (14,000) 14,000 3.605 50,470
Product, etc
engineering 1 (8,000) (8,000) 0 0.893 0
2-5 0 (8,000) 8,000 2.712 21,696
Rent 1-5 0 (2,000) 2,000 3.606 7,210
NPV if outsourcing N(13,614)
The company should continue to produce part 2011.
b) NPV =N330,433 – N317,240= N13,193

Sensitivity of the quoted price
NPV
= x 100
PV of outsourcing cost
N13,139
= x 100 = 3.66%
N360,500
This means that the unit price should not reduce more than
N100 - (N100 x 3.66%)
= N100 - N3.66
= N96.34
Alternative Solution:
3.605 x 1000 units x Price =N360,500 – NPV
= 3,605 P = N360,500 – N13,193

3,605P = N347,307
P = N347,307
3,605
P = N96.34
74

c) The following are the non-financial factors that would favour internal
production:
i) Labour Union: If outsourcing leads to laying off operatives who are
currently producing the components, labour union may react adversely, if
not properly handled.
ii) Quality: To maintain high level of quality of the component, it might be

better to produce rather than to outsource.
iii) Ability to meet delivery scheduling: Internal production should ensure

that the components are delivered as and when needed.
iv) Continuity of supply: This component will be needed for the next five
years. Strategic reasons will demand that the company should keep the
supply under its control.
Thus, for harmonious labour relationship, desired level of quality, ability to meet
delivery scheduling and continuity of supply, it better to produce rather than
outsourcing.
Examiner’s report
This is one of the open-ended questions that tests candidates‟ understanding of
relevant cost.
The attempt on this question by candidates was very low.
The candidates recorded below average performance.
The pitfall noticed is candidates‟ failure to apply the discounting aspect of the
question.
Candidates are encouraged to study the Institute‟s study manual when

preparing for ICAN future examinations.
Marking guide
Marks
A DG to outsource or not (20 ticks at ½ mark) 10
B Maximum price to be quoted by KK Ltd 5
C Non-financial factors that affect internal
production (Any 2 points at 2½ marks) 5
20
75

SOLUTION 3
a. Using marginal costing principles to calculate the profit maximising

output and profit:
Products X Y
Sales volume 16,000 units 24,000 units
N N
Sales Price 44 54
Direct material 20 18
Direct labour 6 11
Variable overheads 6 11
Total variable costs 32 40
Machine hours per product 1.50 hours 2 hours
Contribution per machine hours N8 N7

Ranking 1st 2nd
Hours Required:
Product X = 16,000 x 1.50 = 24,000hours
Product Y = 24,000 x 2 = 48,000 hours
Total hours machine required = 72,000 hours
Available hours: 64,000 hours
Production Mix =
Product X = 16,000 units x 1.50 hours = 24,000 hours
Product Y = 40,000 /2 = 20,000 units = 40,000 Hours
Therefore, profit maximising output = Product X = 16,000 units

Product Y = 20,000 units
Associated Profit
Product X Y Total
N
Unit contribution 12 14
Total contribution N192,000 N280,000 472,000
Less Attributable fixed cost N(10,000) N(10,000) (20,000)
Less General Fixed costs (100,000)
Net Profit N182,000 N270,000 352,000
76

b. The advantages of throughput accounting over marginal costing method
in profit maximising decisions include:
(i) It helps to identify the factors that limit the organisation from
realising its goal.
(ii) It helps management to solve organisational crisis and improve
business processes to ensure a competitive edge.
(iii) It identifies method which the organisation can use to improve its
financial management.
c. Calculation of the throughput accounting ratio for Products X and Y

Computing throughput return per
bottleneck
X Y
Sales volume 16,000 24,000 units
units
Sales Price N44 N54

Less: Throughput costs:
Direct material N20 N18
Throughput return N24 N36
Throughput returns per machione hours N16 N18
Ranking 2nd 1st
Factory operating cost per bottleneck

Particulars X Y Total
N
Units of production 16,000 24,000
Direct labour N96,000 N264,000 360,000
Variable overhead N96,000 N264,000 360,000
Attributable fixed costs N10,000 N10,000 20,000
Other fixed costs 100,000
Total operating costs 840,000
Factory operating cost per machine hour (Bottleneck)= N840,000/64,000

= N13.125
77

Throughput accounting ratio = Throughput return per bottleneck
Factory cost per bottle neck
Product X Y
Throughput returns per machione hours N16 N18
Factory operating cost per machine hour N13.125 13.125
Throughput Accounting ratio = 16 18
= 13.125 13.125
= 1.22 1.37
Ranking to manufacture 2nd 1st
d.
Product X Y Total
N
Total machine hours 16000 hours 48,000 hours
Machine hours/Unit 1.5 hours 2 hours
Profit maximising output 10,667 units 24,000 units
Throughput return/hour N16 N18
Total Return N256,000 N864,000 1,120,000
Total operating cost 840,000
Total operating costs 280,000
Examiner’s report
The question tests candidates‟ understanding of throughput accounting and
marginal costing analysis.
The attempt on this question by candidates was very high.
The candidates recorded above average performance.
The pitfall noticed is inability of the candidates to compute throughput

accounting ratio.
Candidates are advised to use ICAN study manual intensively when preparing
for ICAN future examinations.
78

Marking guide
Marks
a Computation of profit maximising output and
profit (20 ticks at 1/5 mark) 4
b Advantages of throughput accounting over
marginal costing. (2 points at 2 marks) 4
c Computation of Throughput accounting ratio.
(40 ticks at 1/5 mark) 8
Computation of profit maximising output and
d profit using throughput Accounting. (16 ticks ¼
mark) 4
20
SOLUTION 4
a) HENRY LIMITED
Quarter 1 Quarter 2 Quarter 3 Quarter 4
(i) units units units units
Actual sales volumes 420,000 450,000 475,000 475,000
Seasonal variation + 25,000 + 15,000 0 40,000
Deasonalised sales volumes 395,000 435,000 475,000 515,000
Quarter 1 Quarter 2 Quarter 3 Quarter 4

(ii) units units units units
Trend projection 555,000 595,000 635,000 675,000
Seasonal variation +25,000 +15,000 - 40,000
Forecast sales volume 580,000 610,000 635,000 635,000
b) Seasonal variations
Seasonal variations are short term variations in data that occur due to the
time or season of the year. These variations could be due to hourly, daily,
weekly, monthly or yearly changes in sales patterns. Due to these
variations, forecast data do not always follow the historical trend and
hence, the figures have to be adjusted to account for these variations.
Deseasonalised or seasonally adjusted data: Actual data recorded
already include seasonal variations. In order to get a clear picture of the
trend (i.e. the underlying pattern), the effect of seasonal variations have
to be adjusted - a process referred to as deaseasonalising the data.
79

Observation of the actual data suggests that the rate of increase in sales
is declining.
Uses
Provided that the observed trend in deseasonalised data continues, the
deseasonalised data can be used to project the trend in future sales. The
trend values are adjusted by seasonal variations in each quarter to
predict actual sales.
c) Argument for manager‟s participation

i) Managers have experience of the day-to-day running of the
business. Their knowledge can help ensure that budget targets are
on the one hand: realistic, and on the other hand, a reflection of
the full capabilities of the business.
ii) Through manager participation the budgeting process can also
become an opportunity for senior management to communicate
organisational strategy, policies and expectations. This should
encourage subordinate managers to concentrate on corporate
goals rather than their own personal goals and will therefore help
to achieve goal congruence.
iii) Participation tends to increase motivation since managers feel they
are valued. In addition, input to target setting encourages greater
commitment to budgets as the budgets are then perceived to be
fair. This again leads to improved goal congruence.
iv) Grooming of managers for top posts: The consultation processes
involved can be used to access manager potential and help
provide training in the skills needed for higher-level management.
Challenges arising from manager participation

i) Since managers are required to implement budgets, they may
attempt to set easily achievable targets, over-estimating resource
requirements for instance. This can be a particular problem if
bonuses depend on achieving such targets. Occasionally, the
reverse problem can arise: managers might be over optimistic,
thinking an ambitious target will improve their status.
ii) Managers may have different degress of skill in determining an
appropriate level of difficulty for budget targets, particularly in a
changing business environment. Lack of confidence may also
make a manager reluctant to participate.
iii) Although participation is usually perceived to improve motivation,
if managers‟ ideas are rejected, they may feel slighted and have
less motivation and commitment to the budget than if it had been
imposed from above.
80

Examiner’s report
This is an unpopular question which dwells on trend analysis, seasonal variation
and de-seasonalised adjusted data as tools for forecasting and budgeting. The
(a) aspect tests candidates ability to compute trend figures using trend and
seasonal variation information while the (b) and (c) parts dwelt on theories of
seasonal variation, deseasonalised variations and participative budgetary
process.
Marking guide
Marks Marks Marks
a Adjusting for personal variation
(i) (20 ticks at ¼ mark) 5
Forecasts for sales volumes (16 ticks at ¼ 4 9
(ii) mark)
b  Explanation of seasonal valuation 1½

 Explanation of deseasonalised
adjusted data 1½
 Uses of time series/Forecast 2 5

c Advantages of participative budgeting
(2 points at 1 ½ marks) 3
Disadvantages of participative budgeting
(2 points at 1½ marks) 3 6 20
SOLUTION 5
GASKIYA NIG LTD

a. Calculation of the expected net present value of the two Projects
Computation of joint Probability distribution

S/N Factor Factor 2 Factor 3 Workings Joint
1 Probability
1 YES YES YES 0.2 X 0.3 X 0.4 0.024
2 YES YES NO 0.2 X 0.3 X. 0.6 0.036
3 YES NO NO 0.2 X 0.7 X 0.6 0.084
4 NO NO NO 0.8 X 0.7 X 0.6 0.336
5 NO NO YES 0.8 X 0. 7 X 0.4 0.224
6 NO YES YES 0.8 X 0.3 X0.4 0.096
7 YES NO YES 0.2 X 0.7 X 0.4 0.056
8 NO YES NO 0.8 X 0.3 X. 0.6 0.144
Total 1.000
81

Impact on inflow
S/N Joint Inflow impact Result Final expected
Probability value
1 0.024 1 - 0.25 -0.10 + 0.05 0.70 0.0168
2 0.036 1 -0.25 – 0.10 0.65 0.0234
3 0.084 1 – 0.25 0.75 0.0630
4 0.336 1-0.0 1.00 0.3360
5 0.224 1 +0.05 1.05 0.2352
6 0.096 1 -0.10+ 0.05 0.95 0.0912
7 0.056 1 – 0.25 + 0.05 0.80 0.0448
8 0.144 1 – 0.10 0.90 0.1296
1.000 0.9400
Thus the EV of considering the 3 factors is 0.94. Therefore the NPV of Project
A and B are:
Project A
Year Cash inflow EV of Cash Net Cash Discount PV of cash
Cash outflow flow rate 10% flow
flow
N‟000 N‟000 N‟000 N‟000 N‟000 N‟000
0 - (13,000) (13,000) 1.000 (13,000)
1 6,000 x 5,640 (3,000) 2,640 0.909 2,399.76
0.94
2 8,000 x 7,520 (4,000) 3,520 0.826 2,907.52
0.94
3 10,000 x 9,400 (4,000) 5,400 0.751 4,055.40
0.94
4 9,000 x 8,460 (3,000) 5,460 0.683 3,729.18
0.94
5 6,000 x 5,640 (3,000) 2,640 0.621 1,639.44
0.94
NPV +1,731.30
82

Project B
Cash flow outflow flow rate 10% flow
N‟000 N‟000 N‟000 N‟000 N‟000
0 - (14,000) (14,000) 1.000 (14,000)
1 10,000 x 9,400 (5,000) 4,400 0.909 3,999.60
0.94
2 9,000 x 8,460 (4,000) 4,460 0.826 3,683.96
0.94
3 8,000 x 7,520 (3,000) 4,520 0.751 3,394.52
0.94
4 8,000 x 7,520 (3,000) 4,520 0.683 3,087.16
0.94
5 4,000 x 3,760 (2,000) 1,760 0.621 1,092.96
0.94
NPV +1,258.20
b. Project A will be more profitable with a higher NPV of N1,731.30
Examiner’s report
The question tests candidates‟ understanding of investment appraisal under
situations of uncertainty with sensitivity of variables that affected the
investment .
The question was highly attempted by candidates as it was a popular capital

investment appraisal question.
The candidates recorded average performance.

The pitfall noticed is the inability of the candidates to decipher the several
other factors that affect the annual cash inflows and reflect their effect on the
present values of net cash flow.
Candidates are encouraged to study the Institute‟s study pack when preparing
for ICAN future examinations.
Marking guide
 Marks Marks Marks
 Company Name ½
 Computation of joint probability
 (9 ticks at ¼ mark) 2¼
 Computation of expected value ( 9 ticks at
¼ mark) 2¼
 Expected Net Present value of project A
(24 ticks at 1/6 mark) 4
 Expected Net Present value of Project B
(24 ticks at 1/6 mark) 4 13
 Most profitable project 2 15
83

SOLUTION 6
Mr. Alade could use any of the following three approaches to deal with
uncertainty:
(i) Maximin Decision Rule: The decision maker will look at the options and
choose the one that has the highest minimum return. This type of decision
maker is a pessimist and will look at the worst outcome for each of the
options and seeks to get the best of the worst.
(ii) Maximax Decision Rule: The decision maker will look at the options and
choose the one that has the highest return. This type of decision maker is
an optimist.
(iii) Minimax Decision Rule (Regret): The decision maker will analyse the
options and choose an option so that if it is the wrong choice, the regret
will not be as much as if the others had been chosen and they were
wrong. This type of decision maker seeks to minimise the post-event
regret of having made a wrong decision.
(iv) If probabilities can be assigned to the outcomes then “uncertainty” will

become “risk”. It will then be possible to calculate “expected values”. The
decision will choose the outcome that has the highest expected value.
This assumes that the decision maker is risk neutral.
METHOD OF DEALING WITH RISK

The expected value of an option does not give any indication of the risk
associated with the option. The risk, or spread, of the possible outcomes
of each option can be measured by calculating the standard deviation. A
risk minimiser would choose the option with the lowest standard
deviation.
The trade off between risk and return can be evaluated by calculating the
coefficient of variation (standard deviation over the expected value).
(v) Decision tree is a flowchart to represent possible solution based on

certain conditions
(vi) Simulation method forecasts the outcome of an event using probabilities

associated with the events.
(vii) Sensitivity analysis is a method that determines the effect of risk on the
expected outcome of a key variable or factor.
84

Attitude of Decision Makers:
(i) Risk averse: This avoids risk without adequate compensation for
the risk
(ii) Risk neutral: This is indifferent about risk taking and hence,
ignores it
(iii) Risk seeking: This takes risk without compensation for the risk.
Examiner’s report
This question tests candidates theoretical appreciation of decision making under

situations of uncertainty and risk.
Many candidates attempted the question.
The major pitfall noticed is the inability of candidates to work in accordance

with the examiners‟ requirements that no computations are required.
Candidates are advised to pay special attention to the requirements of questions

as well as use the Institute‟s study manual when preparing for ICAN future
examinations.
Marking guide
Marks Marks
 3 Methods of uncertainty in decisions
making. (Any 3 points and explanations) 9
 1 Method of risk appraisal in decision
making. (Any 1 point and explanation) 3
 3 Attitudes associated with decision
making under risk/uncertainty. (Any 3
points and explanations) 3 15
85

SOLUTION 7
a) Garki Plc
Transfer price per unit for Alba Division: N

Residual income 700,000
Notional interest (12% x 4,000,000) 480,000
Net profit 1,180,000
Divisional fixed cost 160,000
Variable cost (900,000 x 4.90) 4,410,000
Total revenue 5,750,000
Less: External revenue (700,000 x 6.80) (4,760,000)
Internal revenue (A) 990,000

Excess/idle capacity (900,000 – 700,000) (B) 200,000 units
Transfer price (A/B)/unit N4.95
b)
Selling price of Beta Division N
Residual income 500,000
Notional interest (10% x 3,000,000) 300,000
Net profit 800,000
Divisional fixed cost 140,000
Contribution 940,000
Plus Variable cost further of processing cost (200,000 x 4.50) 900,000
Plus Transfer price (200,000 x 4.95) - input cost 990,000
Total revenue (c) 2,830,000
Quantity to sell (D) 200,000

External selling price (C/D) N14.15
Assumption: External offer price from intermediate market from Beta Division is
equal to or greater than N4.95 transfer price.
c) The transfer price to Beta Division will be sub-optimal to the company as

a whole since N6.80 is the price to external customers while N4.95 is
price to the division necessitating a loss of N1.85 per unit. The sub-
optimal decision making also can be due to the buying division
recognising the fixed costs of N160,000 and mark-up (Profit – residual
income and imputed capital cost) of selling divisions as variable costs of
N4.95 when it should have been N4.90 in setting the transfer price.
86

d) Negotiated transfer Price Versus Market based Price
A negotiated transfer price is a price that is a product of agreements
between the managers of the profit centres. Here, managers are given
the autonomy to agree on transfer price. Negotiated transfer prices are
appropriate when there is an imperfect market for the goods and services
that are bought and sold between divisions.
Market-based transfer pricing is based on the existence of external

market. Market-based transfer pricing is perhaps the easiest form of
transfer pricing when it comes to determining the price that will be paid
between divisions of the same company. It uses the normal market rate
that would be paid if the goods were bought on the open market.
Examiner’s report
The question is a transfer pricing question that is computed using expected
divisional profit and residual income information.
Many candidates attempted the question.
The pitfall noticed is candidates computation of transfer price based on variable

costs and opportunity cost without taking into consideration divisional returns
expectation in the areas of divisional profit and residual income which are the
basis of sub-optimality.
Candidates are advised to pay special attention to the requirements of questions

as well as use the Institute‟s study manual when preparing for ICAN future
examinations.
Marking guide
Marks Marks
a Transfer price from Alba divison (12 ticks at
¼ mark) 3
b Selling price by Beta division (12 ticks at ¼
mark) 3
c Transfer price as sub-optimal decision
(2 reasons at 2 ½ marks) 5
d  Explanation of Negotiated Transfer price 2
 Explanation of market based Transfer
Price‟ 2 4
Total 15
87

INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT FIVE OUT OF THE SEVEN

QUESTION 1
a. You are the Management Accountant of Dankoli Nigeria Limited which

specialises in the production of 3 products: Product 1, Product 2 and Product
3.
The following information is available for the first quarter of 2021:

Particulars Product 1 Product 2 Product 3
Sales units (‘000) 225 376 190
N N N
Selling Price per unit 15.0 13.00 10.00
Variable costs per unit 7.80 6.00 5.00
Attributable fixed costs 275,000.00 337,000.00 296,000.00
General fixed overhead is apportioned on the basis of sales value. The

budgeted general fixed overhead is N1,668,000.
Required:
i. Calculate the budgeted contribution and profit of the Products and
Company. (5 Marks)
ii. Calculate the budgeted profits on the assumption that Product 3 is

discontinued with no effect on sales of the other products. (5 Marks)
iii. Calculate the extra sales in units and value required to cover the
additional cost of advertising of N80,000 if such cost is treated as general
fixed overhead. (5 Marks)
62
b. The company is considering the viability of investing in a one-off order
outside its normal budgeted routine operation. The Management Accountant
is requested to appraise the procurement and sale of some useful medical
equipment. The following cost estimate has been prepared by a junior
accountant:
Particulars Quantity used Notes N

Direct material:
Steel 40 sq. meters at N50 per sq/MM 1 2,000
Brass fittings 2 800
Direct labour:
Skilled 100 hours at N80 per hour 3 8,000
Semi-skilled 40 hours at N50 per hour 4 2,000
Overhead 140 hours at N100 per hour 5 14,000
Estimating time 6 4,000
30,800
Administrative overhead This is 20% of production cost 7 6,160
36,960
Profit at 25% of total cost 8 9,240
Selling Price 46,200
Explanation on the notes are:

(1) The steel is regularly used and has a current stock value of N50 per square
meter. There are currently 400sq. meters in stock. The steel is readily
available at a price of N55 per square meter.
(2) The brass fittings would have to be bought specifically for the job. A supplier
has quoted N800 for the fittings required.
(3) The skilled labour is currently employed by the company and paid at the
rate N80 per hour. If this job were undertaken, it will be necessary to
either work 100 hours overtime which would be paid at time plus one half
or reduce production of another product which earns a contribution of
N130 per hour.
(4) The semi-skilled labour to complete the job currently has sufficiently been
paid idle time to be able to complete this work.
(5) The overhead absorption rate includes power cost which is directly related
to machine usage. If this job were undertaken, it is estimated that the
machine time required would be 40 hours. The machine incurs power costs
of N7.50 per hour. There are no other overhead costs which can be
specifically identified with this job.
(6) The cost of the estimation time is that attributable to the 4 hours taken by
the engineers to analyse the drawings and determine the cost estimate
given above.
63
(7) It is the company’s policy to add 20% to the production cost as an allowance
against administrative costs associated with the jobs accepted.
(8) This is the standard profit added by the company as part of its pricing
strategy.
Required:
i. Prepare on a relevant cost basis, the lowest cost estimate that could be
used as the basis for a quotation. Explain briefly, your reasons for using
each of the values in your estimates. (6 Marks)
ii. There may be a possibility of repeat orders from your company which
would occupy part of normal production capacity. What factors need to
be considered before quoting for this order? (4 Marks)
c. Explain the following concepts:

i. Incremental cost;
ii. Differential cost;
iii. Committed cost;
iv. Sunk cost; and
v. Opportunity cost.
(5 Marks)
(Total 30 Marks)
INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THE

QUESTION 2
Mega Laboratories plc is a successful manufacturing company in the pharmaceutical

industry. The company manufactures a number of household drugs. Since the
advent of the Covid-2019 pandemic, its products have been in high demand. One
of its newest products is known as vacineDcovid. In order to manufacture the
product, a single raw material, Zithromax is used.
Budgets are to be prepared for the quarter ending 30 June 2021 and the following
information is available for this purpose:
(i) At 31 March 2021 various balances were as follows:
Receivables N500,700
Creditors (suppliers of Zithromix) N153,000
Inventory of vacineDcovid 20,300 units
Inventory of Zithromix 200,000 kg
64
(ii) Extracts from the ‘standard cost card’ – vacineDcovid are as follows:
N/unit
Direct material Zithromax, 10kg at N5.00 per kg N50.00
Direct labour, 2 hours at N6.00 per hour N12.00
(iii) Suppliers of Zithromax give two months credit to the company, whereas
customers take one month’s credit.
(iv) Sales expectations for the quarter ending 30th June 2021 are as follows:
25,000 units of vacineDcovid at a selling price of N95.00 per unit.
(v) Assume that sales of vacineDcovid and purchases of Zithromix will be evenly
spread over the three months to 30 June 2021.
(vi) Depreciation relating to plant and machinery is N55,000 for the quarter
ending 30th June 2021.
(vii) ‘Other expenses’ are paid immediately in cash, and are estimated to be
N200,000 for the quarter ending 30th June 2021.
(viii) The anticipated inventory levels at 30 June 2021 are as follows:

Inventory of vacineDcovid 15,000 units
Inventory of Zithromix 150,500 kgs
(ix) Assume there is no work-in-progress and that stocks of vacineDcovid and

Zithromix are valued at standard direct cost – see (ii) above.
Required:
For the quarter ending 30th June 2021 prepare:
a. A cash budget (amounts for each separate month are not required).
(8 Marks)
b. Income Statement budget. (clearly state any assumptions you have made)
(5 Marks)
c. Briefly state the benefits of a Cash Budget to Mega Laboratories plc.
(3 Marks)
d. Sales are often considered to be a principal budget factor of an organisation.
Required:
Explain the meaning of a ‘principal budget factor’ and assuming that is sales,
explain how sales may be forecast, making appropriate reference to the use
of statistical techniques and the use of computers. (4 Marks)
(Total 20 Marks)
65
QUESTION 3
Uzochuks Nigeria Limited is a company established four years ago to produce

medical
equipment. The income statement and statement of financial position for 2019 and
2020 are as follows:
Income Statement
Particulars 2019 2020
NM NM
Sales 250 280
Operating costs (180) (200)
Operating Profit 70 80
Finance charges (10) (14)
Profit before tax 60 66
Tax at 25% (15) (18)
Profit after tax 45 48
Statement of Financial Position

NM NM
Non- Current Asset 350 440
Current Asset 190 260
Total 540 700
Shareholders’ fund 400 445

Long-term and medium
term debts 100 100
Current Liabilities 40 155
Total 540 700
Other information are given as follows:

(3) Operating costs include the following:
N’M N’M
Depreciation 25.0 28.0
Provision for doubtful debts 2.8 1.2
Research and development 5.0 -
Other non-cash items 4.0 3.0
66
(ii) Economic depreciation is assessed to be N50.5million in 2020. Economic
depreciation includes any appropriate amortisation adjustments. In
previous
years, it can be assumed that economic and accounting depreciation were
the same.
(iii) Tax is the cash paid in the current year (N16 million) and an adjustment of
N2 million for deferred tax provisions. There was no deferred tax balance
prior to 2020.
(iv) The provision for doubtful debts was N2.5million on the 2020 statement of
financial position.
(v) Research and development is not capitalised in the accounts. It relates to a
new project that will be developed over five years and is expected to be of
long-term benefit to the company. 2020 is the first year of this project.
(vi) The company had a non-capitalised leased assets of N18million in January
2020. These assets are not subjected to depreciation.
(vii) Cost of capital of Uzochuks:

Equity 18%
Debt (pre-tax) 6%
(viii) Capital structure of Uzochuks:

Equity 60%
Debt 40%
(ix) The company had the opportunity to invest in a solar project that will require
the procurement of an equipment worth N3million in January 2020 and run
for a period of 5 years with a salvage value of N0.50million, generating a
stable net cash flow of N0.85 million. The applicable cost of capital is the
associated weighted average cost of capital of the company.
Required:
a. i. Compute and evaluate the company’s performance using average
rate of return (ARR). (4 Marks)
ii. Compute and evaluate the Company’s performance using economic value
added (EVA) parameter. (9 Marks)
b. Calculate the net present value of the solar project for the life of the
investment. (7 Marks)
(Total 20 Marks)
QUESTION 4
Large service organisations, such as banks and hospitals, used to be noted for their
lack of management accounting techniques and their relatively unsophisticated
budgeting and control systems compared with large manufacturing organisations.
But this is changing and many large service organisations are now revising their
67
use of management accounting techniques, especially as it relates to activity-based
approach.
Required:
a. Explain which features of large-scale service organisations encourage the
application of activity-based approaches to the analysis of cost information.
(5 Marks)
b. Explain which features of service organisations may create problems for the
application of activity-based costing. (5 Marks)
c. Explain the uses for activity-based cost information in service industries.
(5 Marks)
d. Many large service organisations were at one time state-owned, but have been
privatised. Examples in some countries include electricity supply and
telecommunications. They are often regulated. Similar systems of regulation
of prices by an independent authority exist in many countries, and are
designed to act as a surrogate for market competition in industries where it is
difficult to ensure a genuinely competitive market. Explain which aspects of
cost information and systems in service organisations would particularly
interest a regulator, and why these features would be of interest.
(5 Marks)
(Total 20 Marks)

QUESTION 5
Abayomi Plc produces and sells two major products, A and B. The budgeted income
statement for the year to December 31, 2022 is given below:
Products A B Total
₦’000 ₦’000 ₦’000
Sales 8,400 25,200 33,600
Production costs:
Materials 2,240 5,040 7,280
Direct labour 1,120 3,360 4,480
Variable overheads 1,120 2,240 3,360
Fixed overheads 560 1,680 2,240
Total 5,040 12,320 17,360
Gross Profit 3,360 12,880 16,240
Fixed selling and Adm. (8,320)

Net profit before tax 7,920
68
The budgeted selling prices of the products are:
A ₦120
B ₦180
Required:
a. Determine the breakeven sales in units for each of the products, using the
budgeted data. (6 Marks)
Now assume that the following changes are made to the budget:
(i) Unit selling price of product B is reduced to ₦160
(ii) Direct material cost is expected to drop by 10% for product A and 20%
product B.
(iii) Direct labour costs for each product will increase by 10%.
(iv) Additional ₦456,000 will be spent on advertising.
(v) 80% of total revenue will be derived from product B.
b. Calculate how much sales revenue must be made to earn an after tax rate of
return of 12% of the revenue? Assume tax rate of 40%. (5 Marks)
c. Assuming all the facts in (b) (i) – (v) above but with the original budgeted
revenue of ₦33,600,000. Compute the revised breakeven sales in units for each
of the products. (4 Marks)
(Total 15 Marks)
QUESTION 6
Ezenwa Nigeria Limited is a company which produces a single product on an

assembly line. The budget personnel has been availed with the following
information which represents the extremes of high and low volumes of production
which the company will achieve over a three month period.
Production of Production of
80,000 units 160,000 units
N N
Direct materials 3,200,000 6,400,000
Indirect materials 480,000 800,000
Direct labour 2,000,000 4,000,000
Power 720,000 960,000
Repairs 800,000 1,200,000
Supervision 800,000 1,440,000
Rent, insurance and rates 360,000 360,000
Additional Information:
Supervision is a “step function”. To this end, one supervisor is employed for all
production levels up to and including 100,000 units. For higher levels of production,
an assistant supervisor whose remuneration is N640,000 will be added.
69
Required:
a. Prepare a set of flexible budgets for presentation to the Production Director to
cover the following levels of production over a period of three months:
i. 80,000 Units
ii. 100,000 Units
iii. 120,000 Units
iv. 140,000 Units
v. 160,000 Units (9 Marks)
b. During the three months July to September 2021, 100,000 units were
produced. Actual costs incurred during this period were as follows:
N
Direct materials 4,150,000
Indirect materials 580,000
Direct labour 2,700,000
Power 760,000
Repairs 885,000
Supervision 850,000
Rent, insurance and rates 320,000
Required:
i. Prepare a budget report for presentation to the Production Director
displaying all relevant variances. (3 Marks)
ii. For each variance, suggest any further investigations which might be
required and the necessary actions required to be taken by the Director.
(3 Marks)
(Total 15 Marks)
QUESTION 7
Eko Limited is a small manufacturing company producing two high quality products
called ‘Kay’ and ‘Lay’. Both products use a raw material Tee (costing ₦30 per kg) in
their manufacture. The Directors are reviewing the company’s stock management
policies for the forthcoming year as part of the annual budget preparation cycle.
Due to the product specification, quality is an important factor and a quality control
inspection takes place immediately after the production cycle has ended. At this
point, any inferior products are rejected and only good production becomes
available for sale. In addition to these losses, a certain quantity of waste is
unavoidable from material Tee due to the cutting process for both products.
70
The following forecast information has been extracted from departmental estimates
for the year ending 31st December 2020 (the budget period).
Product Kay Product Lay

Sales (quality approved units) 23,000 10,000
Finished goods stock increase by year-end 275 185
Post-production rejection rate (%) 2 3
Material Tee usage (per completed unit, net
of wastage) 2kg 3kg
Material Tee wastage (%) 5 10
• Usage of raw material Tee is expected to be at a constant rate over the period.
• Annual cost of holding one unit of raw material in stock is 17% of the material
cost.
• The cost of placing orders is ₦30 per order.
• Eko Limited maintains a constant 1,000 kg of safety/buffer stock of material Tee
regardless of the quantity ordered each time.
Required:
a. Prepare operational budgets for the year ending 31st December 2020 under
the following headings: (Show your workings clearly)
i. Production budget for Products Kay and Lay (in units). (5 Marks)
ii. Purchases budget for Material Tee (in kgs and value). (5 Marks)
b, Calculate the Economic Order Quantity for Material Tee (in kgs). (5 Marks)
(Total 15 Marks)
71
Formulae
Learning curve
Y = axb
Demand curve
P = a – bQ
change in price
b=
change in quantity
MR = a – 2bQ
Y = 𝑎 + 𝑏𝑋
𝑛 ∑ 𝑋𝑌− (∑ 𝑋)(∑ 𝑌)
where b = 2
𝑛 ∑ 𝑋 −(∑ 𝑋)2
∑𝑦 𝑏 ∑𝑥
a = −
𝑛 𝑛

2
(𝑛 ∑ 𝑋𝑌 − ∑ 𝑥 ∑ 𝑌1)
r2 = 2 2
(𝑛 ∑ 𝑋 −(∑ 𝑋)2 (𝑛 ∑ 𝑦 −(∑ 𝑋)2
72
The Miller-Orr Model 𝑆𝑝𝑟𝑒𝑎𝑑 =
1
3
x Transaction Cost x Variance of Cash flows 3
4
3x( )
Interest rate (as a proportion)
Annuity Table
r
Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15
73
74
SOLUTION 1
(a) i) Contribution and profit of product/company
Product 1 Product 2 Product 3 Company

Sales (N) 3,375,000 4,888,000 1,900,000 10,163,000
VC 1,755,000 2,256,000 950,000 4,961,000
Contribution 1,620,000 2,632,000 950,000 5,202,000
Less Fixed Cost:
Attributable 275,000 337,000 296,000 908,000
General 553,921 802,242 311,837 1,668,000
Total Fixed Cost 828,921 1,139,242 607,837 2,576,000
Net Profit 791,079 1,492,758 342,163 2,626,000
ii) Budget profit if product 3 is discontinued with no effect on other products sales
Product 1 Product 2 Product 3 Company

Sales (N) 3,375,000 4,888,000 - 8,263,000
VC 1,755,000 2,256,000 - 4,011,000
Contribution 1,620,000 2,632,000 - 4,252,000
Less Fixed Cost:
Attributable 275,000 337,000 - 612,000
General 681,290 986,710 - 1,668,000
Total Fixed Cost 956,290 1,323,710 - 2,280,700
Net Profit 663,710 1,308,290 - 1,972,000
iii) Extra sales to cover advertising cost of N80,000

1 2 3 Company
Old contribution 1,620,000 2,632,000 950,000 5,202,000
Additional Contr. 26,567 38,477 14,956 80,000
Total Contribution 1,646,567 2,670,477 964,956 5,282,000
Contribution/unit 7.20 7.00 5.00

New units sold 228,690 381,497 192,991
Old unit sold 225,000 376,000 190,000
Extra units sold 3,690 units 5,497 units 2,991units
Selling price (N) 15 13 10
Sale value (N) 55,350 71,461 29,910 156,721
75
(b) i) Computation of minimum selling price using a relevant costing approach
Particular Workings Amount Reasons

Direct material:
Steel 55 x N40 N2,200 Future cash flow
Brass Fittings N800 Future cash flow
Direct labour:
Skilled 100 x 1,50 x N80 N12,000 Incremental cash flow
Semi-skilled - No incremental costs
Overhead 40 x N7.50 N300 Only power cost is relevant
Estimating cost - Sunk cost
Administrative overhead - No incremental cost
Relevant cost of order N15,300
ii) Factors that need to be considered in making this quotation

- Time period of repeated order, number (frequency of repeat order) and
the demand
- Cash flow from alternative use of the capacity
- Existence of complaints
- Price to be quoted by competitors
- If there will be need for hiring special equipment
- The ability to deliver as at when required to the customer
c. i) Incremental Cost
Incremental cost is an additional cost that will occur if a particular decision
is taken. Provided this additional cost will result in a cash flow, it is a relevant
cost.
ii) Differential Cost

It is the amount by which future costs will be different depending on which
cause of action is taken. It is thus an amount by which future cost will be
higher or lower, if a particular course of action is chosen. It is a relevant cost
if it involves additional cash flow.
iii) Committed Cost

It is a category of unavoidable costs. It is thus a cost that a company has
already committed to or an obligation already made, that it cannot avoid by
any means.
iv) Sunk Cost

A sunk cost is a cost that has already been committed by an earlier decision.
They are not relevant cost in decision making.
v) Opportunity Cost
An opportunity cost is a benefit that will be lost by taking one course of action
instead of the next most profitable course of action. It is not an actual cost in
76
the real sense of an amount paid out as an expense. It is a comparative cost
resulting from making once choice over another.
Examiner’s report
The question tests students' understanding of Marginal Cost for Decision Making.
Majority of the students attempted the question being a compulsory question. The
performance was average. The major pitfall was the inability of students to identify
relevant cost and compute extra sales in units to cover additional cost of advertising.
Candidates are advised to read ICAN study text when preparing for the future
Marking guide
Marks Marks
a (i) 25 ticks at 1/5 mark 5
(ii) 20 ticks at ¼ mark 5
(iii) 20 ticks at ¼ mark 5 15
b (i) 8 ticks at ½ mark 4

Any 4 correct reasons at ½ mark 2
(ii) Any 4 ticks at 1 mark 4 10
c 5 points at 1 mark 5
Total 20
SOLUTION 2
MEGA LABORATORIES PLC
(a) CASH BUDGET FOR QUARTER ENDING 30TH JUNE 2021
Cash inflow N
Collection from customers 2,084,033
Total cash inflow (A) 2,084,033
Cash Outflow
Payment to suppliers 398,833
Other expenses 200,000
Labour cost 236,400
Total cash outflow (B) 835,233
Net cashflow (A-B) 1,248,800
Opening Cash balance -
Closing cash balance 1,248,800
77
(b) Income statement for Quarter Ending 30 June 2021
N N
2,375,000
Sales
Cost of sales:
Opening inventory (20,300 x 62) 1,258,600
Production (19,700 x 62) 1,221,400
2,480,000
Closing inventory (15,000 x 62) (930,000) (1,550,000)
Gross Profit 825,000
Other expenses 200,000
Depreciation 55,000 (255,000)
Net profit 570,000
c. Benefits of Cash Budget
(i) It can help to regulate expenses.
(ii) It will clearly show a business has more cash than expected (surplus)
or less cost than expected (deficit).
(iii) it is useful in liquidity management and planning.
d. Principal budget factor is the resource or activity which is limited and which
forms the base for the preparation of the budgets.
Sales are often regarded as a major budget factor to be considered in

preparing company budget since all company operation take bearing from
what level of revenue that will be expended in the operation. Thus, this factor
is known as the principal budget factor or limiting factor. In the majority of
organisations, this factor is sales demand or revenue expectation although it
can also be shortage of materials or inadequate plant capacity.
Examiner’s report
The question examines candidates on Cash Budget. It was attempted by the majority
of the candidates. The performance was average. The main pitfall was the inability
to compute correct purchase cost of raw materials used.
Candidates are encouraged to read the Institute's text when preparing for the
78
Marking guide
Marks Marks
a 8 ticks at 1 mark 8
b 10 ticks at ½ mark 5
c Any 2 points at ½ mark 3
16
d Definition 2
Explanation 2 4
Total 20
SOLUTION 3
a. i. Average Rate of Return (ARR)

Average Profit = (2019 Profit before interest/tax + 2020 Profit before interest
Tax)/2
Average Capital Employed = (Beginning Capital employed + Closing capital
employed)/2
ARR = Average profit before interest and tax

Average capital employed
Net Profit 2019 2020

Profit N70 million N80million
Net capital employed N500 million N545million
ARR = (70 + 80)/2 = 75 x 100

(500 + 545)/2 522.52 1
ARR = 14.354%
ii. Computation of Economic Value Added (EVA)

Computing 2020 Net operating Profit after tax (NOPAT)
N’million
Profit after Tax 48.00
Add (1) Finance change (1- 0.25) x 14 10.50
(2) Non cash items 3.00
(3) Deprecation 28.00
(4) Provision for doubtful debts 1,20
(5) Deferred Tax 2.00
(6) Research/Development - 34.20
92.70
less (1) Economic depreciation 50.50
(2) Research/development 1.00 51.50
Adjusted NOPAT 41.20
79
Computation of opening Capital Employed for 2020: N’million
2019 capital employed
(N540million – N40million) 500.00
Add:
1 Non-capitalised lease assets - 18.00
2 Non cash item - 3.00
3 Provision for doubtful debt - 1.30
522.30
Computation of Weighted average cost of capital (WACC)

= (0.18 x 0.60) + (0.06 x (1-0.25) x 0.4
= 10.80 + 1.80
= 12.60%
Computation of EVA
Adjusted NOPAT = 41.20
Less capital charge = (0.126 x 522.30) = (65.81)
Negative EVA = (24.61)
b. The business is not creating adequate values for the owners

Net Present Value (NPV) of Investment
Year Cashflow Dcf@ 12.6% PV
0 (3,000,000) 1.000 (3,000,000)
1 850,000 0.8881 754,885
2 850,000 0.7887 670,395
3 850,000 0.7000 595,000
4 850,000 0.6221 528,785
5 850,000 0.5525 469,625
6 500,000 0.5525 276,250
The project is profitable since the NPV is positive
Year Cashflow Dcf@12.6% PV

N N
0 (3,000,000) 1.0000 (3,000,000)
1-5 850,000 3.5518 3,019,030
5 500,000 0.5525 276,250
295,280
The project is profitable since the NPV is positive
80
Examiner’s report
The question tests students' understanding of Performance Evaluation and Capital
Budgeting. Few students attempted the question and the performance was poor.
Majority that attempted the questions could not identify the variables to use to
arrive at Net Operating Profit After Tax (NOPAT).
Candidates are advised to read the study text for future examination of the Institute.
Marking guide
Marks Marks
(a) (i) 8 ticks at ½ mark 4
(ii) 27 ticks at 1/3 mark 9 13
(b) 14 ticks at ½ mark 7
Total 20
SOLUTION 4
a) Large-scale service organisations have a number of features that have been

identified as being necessary to derive significant benefits from the
introduction of
ABC:
i) They operate in a highly competitive environment;
ii) They incur a large proportion of indirect costs;
iii) Products and customers differ significantly in terms of consuming overhead
resources;
iv) They market many different products and services.
v) Their activities are not based on volume such as direct labour hours;
vi) Their overhead costs are driven by specific activities
b) The following may create problems for the application of ABC:

i) Facility sustaining costs (such as property rents etc.) represent a significant
proportion of total costs and may only be avoidable if the organisation ceases
business. It may be impossible to establish appropriate cost drivers;
ii) It is often difficult to define products where they are of an intangible
nature. Cost objects can therefore be difficult to specify;
iii) Many service organisations have not previously had a costing system and
much of the information required to set up an ABC system will be
non-existent.
Therefore introducing ABC is likely to be expensive;
iv) The choice of both activities and cost drivers might be inappropriate;
v) The benefits from ABC might not justify the costs. In some cases, it does
not provide different information from traditional absorption costing.
81
c) The uses for ABC information for service industries are similar to those for
manufacturing organisations:
i) It leads to more accurate product costs as a basis for pricing decisions when
cost-plus pricing methods are used;
ii) It results in more accurate product and customer profitability analysis
statements that provide a more appropriate basis for decision-making;
iii) ABC attaches costs to activities and identifies the cost drivers that cause the
costs. Thus ABC provides a better understanding of what causes costs and
highlights ways of performing activities more effectively by reducing cost
driver transactions. Costs are managed more effectively in the long term.
iv) It enables resources and other related costs to be more accurately attributed
to the services which they use.
v) It provides understanding into the fastest growing and least visible element
of cost-overhead.
vi) It encourages continuous improvement and total quality control because
control and planning are directed at the process level and it links the
corporate strategy to operational decision making.
vii) It eliminates waste by providing visibility of non-value added activities.
d) The following aspects would be of most interest to a regulator:

i) The costing method used (e.g. marginal, traditional full cost or ABC). This is
of particular importance to verify whether or not reasonable prices are being
set and that the organisation is not taking advantage of its monopolistic
situation. Costing information is also necessary to ascertain whether joint
costs are fairly allocated so that cross-subsidisation from one service to
another does not apply;
ii) Consistency in costing methods from period to period so that changes in
costing methods are not used to distort pricing and profitability analysis;
iii) In many situations a regulator may be interested in the ROI of the different
services in order to ensure that excessive returns are not being obtained. A
regulator will therefore be interested in the methods and depreciation policy
used to value assets and how the costs of assets that are common to several
services (e.g. corporate headquarters) are allocated. The methods used will
influence the ROI of the different services.
82
Examiner’s report
The question examines candidates on the application of Activity Based Costing (ABC)
in service organisations. Majority of the students attempted the question. The
performance was above average.
Candidates are encouraged to read ICAN text when preparing for future
examinations of the Institute.
Marking guide
Marks Marks
a Any 5 points at 1mark 5
b Any 5 points at 1mark 5
c Any 5 points at 1mark 5
d Any 5 points at 1mark 5
Total 20
SOLUTION 5
a) When dealing with multi-products, the breakeven point in units is given by:
FC
BEP (Units) = , where
WC
WC = Weighted Contribution per unit and FC = Total fixed costs

The WC is calculated using units sold and not sales revenue. The budgeted
sales in units are:
Units Ratio
Product A: ₦8,400,000 ÷ ₦120 = 70,000 1
B: ₦25,200,000 ÷ ₦180 = 140,000 2
210,000 3
This weighted contribution per unit is computed as follows:

A B
N N
Less variable costs 64 76
Weight 1/3 2/3
56 104 × 2
WC/unit = + = 88
3 3
83
Fixed costs: N
Production overheads 2,240,000
Selling and adm. overheads 8,320,000
Total fixed costs (FC) 10,560,000
FC 10,560,000
BEP (units) = = = 120,000 units, made up of:
WC 88
Product A 1/3 × 120,000 = 40,000 units
B 2/3 × 120,000 = 80,000 units
Alternative Method
There are other methods of generating the above results.
For example, we can first compute the BEP in naira value as detailed
below.
FC
𝐵EP (₦) = WCMR
The weighted contribution margin ratio (WCMR = weighted contribution

margin ratio) (WCMR) must be based on sales revenue as detailed below:
Product A 8,400/33,600 = 0.25
B 25,200/33,600 = 0.75
56 104
WCMR = ( × 0.25) + ( × 0.75) = 0.55
120 180
₦10,560,000
BEP (₦) = = ₦19,200,000
0.55
This made up as follows:
Product Weight Sales (₦) Price Qty
A 0.25 4,800,000 ₦120 40,000
B 0.75 14,400,000 ₦180 80,000
b) We first determine the revised weighted contribution margin ratio (WCMR)

A B
Direct materials* ₦28.80 ₦28.80
Direct labour 17.60 26.40
Variable overheads 16.00 16.00
Total variable costs per unit 62.40 71.20
Selling price 120.00 160.00
Contribution per unit 57.60 88.80
CMR 0.48 0.555
84
WCMR = (0.2 × 0.48) + (0.8 × 0.555)= 0.54
* The direct material cost per unit is computed as follows:
₦2,240,000
Product A × 90% = ₦28.80
70,000
₦5,040,000
B × 80% = ₦28.80
140,000
The revised fixed costs = N10,560,000 + 456,000 = ₦11,016,000

Profit after tax, as a percentage of revenue = 12% × (1 – 0.40) = 20%
Let ₦x = the required revenue.
Profit after tax = 20% of x = N0.20x
Using:
Total fixed cost+ Profit 11,016,000+0.20x

Sales (₦) = , or x =
WCMR 0.54
0.54 x = 11,016,000 + 0.20x

0.34x = 11,016,000
x = N32,400,000
Product A = 20% of ₦32,400,000 = ₦6,480,000
B = 80% of ₦32,400,000 = ₦25,920,000
c) Total sales
₦33,600,000
Ratio of revenue 20% 80%

Value N6,720,000 N26,880,000
Selling price N120 N160
Quantity 56,000 168,000
Ratio based on units 0.25 0.75
Contribution per unit N57.60 N88.80
WC/Unit = (₦57.60 × 0.25) + (₦88.80 × 0.75) = ₦81
FC ₦11,016,000
BEP (units) = = = 136,000 units
WC ₦81
Product A: 0.25 × 136,000 = 34,000 units

B: 0.75 × 136,000 = 102,000 units
Total = 136,000 units
85
Alternative Method
₦11,016,000
BEP (₦) = = ₦20,400,000
0.54
Product A Product B
Ratio – Value weighted 20% 80%
Value ₦4,080,000 ₦16,320,000
Selling price ₦120 ₦160
Quantity 34,000 102,000
Examiner’s report
The question tests the candidates’ understanding of Cost-Volume-Profit-Analysis.
Majority attempted the questions and the performance was below average.
The major pitfall was the inability to compute combined contribution margin.
Students are advised to read the Institute's text when preparing for the Institute's
examination in future.
Marking guide
Marks Marks
a 18 ticks at 1/3 mark 6
b 20 ticks at 1/4 mark 5
c 8 ticks at 1/2 mark 4
Total 15
SOLUTION 6
Flexible Budget for 3 months
Particulars 80,000 100,000 120,000 140,000 160,000

‘000 ‘000 ‘000 ‘000 ‘000
Variable Costs:
Direct materials 3,200 4,000 4,800 5,600 6,400
Indirect materials 320 400 480 560 640
Direct labour 2,000 2,500 3,000 3,500 4,000
Power 240 300 360 420 480
Repairs 400 500 600 700 800
Total (A) 6,160 7,700 9,240 10,780 12,320
86
Fixed Costs:
Indirect material 160 160 160 160 160
Power 480 480 480 480 480
Repairs 400 400 400 400 400
Supervision 800 800 1,440 1,400 1,440
Rent, rates & Insurance 360 360 360 360 360
Total fixed costs (B) 2,200 2,200 2,840 2,840 2,840
Production Cost (A+B) 8,360 9,900 12,080 13,620 15,160
Working
Particulars 80,000 100,000 120,000 140,000 160,000 Cost analysis
N’000 N’000 N’000 N’000 N’000
Direct material 3,200 4,000 4,800 5,600 6,400 Variable cost
Indirect material 480 800 Semi-variable cost
Direct Labour 2,000 2,500 3,000 3,500 4,000 Variable cost
Power 720 960 Semi-variable cost
Repairs 800 1,200 Semi-variable cost
Supervision 800 800 1,440 1,440 1,440 Step cost
Rent/insurance/ rates 360 360 360 360 360 Fixed cost
Using High – Low method analysis of semi-variable costs:
Indirect Material Variable cost

Per unit = 800,000 – 480,000 = 320,000
160,000 – 80,000 80,000
= N4 per unit
Fixed Cost = (800,000 – 640,000) = N160,000

Power variable cost per unit = N960,000 – N720,000 = 240,000 = N3
80,000 80,000
Fixed cost = 960,000 – (3 x 160,000) = N480,000
Supervision (variable cost) = 1,440,000 – 800,000 = 640,000 = N8

80,000 80,000
Fixed cost = 1,440,000 – 8 (160,000)
1,440,000 – 1.280,000 = N160,000
Repair Variable cost = 1,200,000 – 800,000 = 400,000 = N5

80,000 80,000
Fixed cost = N1,200,000 – 5 x (160,000) = N400,000
87
b. i. Budget report from July to Sept 2021 at 100,000 units showing variances:
S/N Particulars Variable Fixed Total Actual
Cost Cost Cost Cost Variance
N’000 N’000 N’000 N’000 N’000
1. Direct material 4,000 - 4,000 4,150 150 A
2. Indirect material 400 160 560 580 20 A
3. Direct labour 2,500 - 2,500 2,700 200 A
4. Power 300 480 780 760 20 F
5. Repairs 500 400 900 885 15 F
6. Supervision - 800 800 850 50 A
7. Rent, Insurance/Rates - 360 360 320 40 F
Where A = Adverse variance and F = favourable variance
iii.Further investigations on the variances and measures/actions needed to be

taken
by director.
S/N Variance Variance Investigations and measures to be taken on the

amount variances
1 Direct N150,000A There exists a N150,000 adverse variance which
material cost could be as a result of price and usage of materials.
variance High actual direct material price, wastage, poor
quality of materials, and loss in production.
Management is expected to conduct price and market

survey, ensure high quality low priced materials are
procured and used, handling of materials to reduce
wastage to be improved.
2 Indirect N20,000 A There is N20,000 adverse variance for indirect
material cost material which could be as a result of price and usage
variance of such materials, wastage, poor quality of such
materials Management is expected to conduct price
and market survey, ensure high quality low priced
materials are procured and used, handling of such
materials to reduce wastage.
3 Direct N200,000 A An adverse variance of N200,000 was observed. This
Labour cost could arise from direct labour rate and efficiency
variance variances. The variance could be attributable to high
labour rates, inefficient operations and excessive
overtime.
88
Management can control same through appropriate
labour pricing, effective job evaluation and
manpower planning.
4 Power N20,000F There is a favourable variance of N20,000 which

overhead could be due to decrease in power rates.
cost
variance There is a need for investigation to ensure
appropriate and realistic figure is used for budgeting
purposes in future.
5 Repairs N15,000F A favourable variance of N15,000 was noticed. It
expenses may mean that maintenance programme of
cost variance equipment was not only adhered to but surpassed.
A favourable variance of N15,000 means that there is
a need for investigation to ensure appropriate figure
(realistic figures) are used for budgeting purposes in
future.
6 Supervision N50,000A There is an adverse variance of N50,000 which could
cost be due to increase in cost of supervision.
variance There is need for investigation to ensure appropriate
figure is used for budgeting purposes in future.
7 Rent, N40,000F purposes in future. There is a favourable variance of
insurance N40,000 which could be due to decrease in rates.
and Rates There is a need for investigation to ensure
cost appropriate figure is used for budgeting.
Variances
Examiner’s report
The question examines candidates on Flexible Budget. Majority of the students
attempted the question. The performance is above average.
Candidates are advised to study the Institute's text for future Institute's examination.
Marking guide
Marks Marks
a 63 ticks at 1/7 mark 9
b (i) Any 6 ticks at 1/2 mark 3
(ii) Any 6 ticks at ½ mark 3 6
Total 15
89
SOLUTION 7
a. i) Production Budget
Kay Lay
Unit needed for sales 23,000 10,000
Units needed to increase closing stock 275 185
Total good units needed 23,275 10,185
Normal loss: 2/98 x 23,275 475

3/97 x 10,185 315
23,750 10,500
ii) Raw Material Purchase Budget

23,750 10,500
Usage of Material Tee 2kg 3kg
Material Tee needed for production, net of wastage 47,500 31,500
Normal wastage: 5/95 x 47,500 = 2,500
10/90 x31,500 3,500
Material purchase (gross) 50,000 35,000
Total raw material to be purchased is 85,000 kgs of material Tee at a price of N30
per kg gives a total purchasing budget of N2,550,000 for the period.
b. Economic Order Quantity (EOQ)
2 DK
EOQ = , 𝐰here
H
D = annual demand in units = 85,000 units

K = cost per order = N30
H= holding cost per unit per unit = N30 x 17% = N5.10
2 x 85,000 x N30
EOQ = √ = 1,000 units
N5.10
90
Examiner’s report
The question tests candidates' understanding on preparation of Operational Budget.
The major pitfall was the inability to adjust for wastages.
The performance was below average. Candidates are encouraged to read the study
text of the Institute for future examination.
Marking guide
Marks Marks
a (i) 10 ticks at ½ mark 5
(ii) 10 ticks at ½ mark 5
10
b 5 ticks at 1 mark 5
Total 15
91
ICAN/222/Q/B4 Examination No....................
EXAMINATION INSTRUCTIONS
PLEASE READ THESE INSTRUCTIONS BEFORE THE COMMENCEMENT OF THE PAPER
1. Check your pockets, purse, mathematical set, etc. to ensure that you do not
have prohibited items such as telephone handset, electronic storage device,
programmable devices, wristwatches or any form of written material on you
in the examination hall. You will be stopped from continuing with the
examination and liable to further disciplinary actions including cancellation
of examination result if caught.
2. Write your EXAMINATION NUMBER in the space provided above.
3. Do NOT write anything on your question paper EXCEPT your examination
number.
4. Do NOT write anything on your docket.
5. Read all instructions in each section of the question paper carefully before
answering the questions.
6. Do NOT answer more than the number of questions required in each section,
otherwise, you will be penalised.
7. All solutions should be written in BLUE or BLACK INK. Any solution written
in PENCIL or RED INK will not be marked.
8. A formula sheet and discount tables are provided with this examination
paper.
WEDNESDAY, NOVEMBER 16, 2022
DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO
55

QUESTION 1
Koliwi Limited is a company that builds innovative and environmentally friendly

housing. Their houses use high quality materials and the unique patented
energy saving technology used in the houses has been the result of the
company‟s own extensive research in the area.
Koliwi Limited is planning to expand into another country and has been asked
by a prominent person in that country for a price quotation to build them a
house. The Board of Directors believes that securing the contract will help to
launch their houses in the country and have agreed to quote a price for the
house that will exactly cover its relevant cost.
The following information has been obtained in relation to the contract:
(1) The Chief Executive and Marketing Director recently met with the potential
client to discuss the house. The meeting was held at a restaurant and
Koliwi Limited provided food and drinks at a cost of ₦37,500.
(2) 1,200 kg of Material Z will be required for the house. Koliwi Limited
currently has 550 kg of Material Z in its inventory purchased at a price of
₦5,800 per kg. Material Z is regularly used in its houses and has a current
replacement cost of ₦6,500 per kg. The resale value of the Material Z in
inventory is ₦3,500 per kg.
(3) 400 hours of construction workers‟ time are required to build the house.
Koliwi Limited construction workers are paid an hourly rate of ₦2,200
under a guaranteed wage agreement and currently have spare capacity to
build the house.
(4) The house will require 90 hours of the engineers‟ time. Koliwi Limited
engineers are paid a monthly salary of ₦475,000 each and do not have any
56
spare capacity. In order to meet the engineering requirement for the house.
Koliwi Limited can choose one of two options:
(i) Pay the engineers an overtime rate of ₦5,200 per hour to perform
the additional work.
(ii) Reduce the number of engineers‟ hours available for their existing
job, for the building of Product Y. This would result in lost sales of
Product Y.
Summary details of the existing job the engineers are working on:
Information for one unit of Product Y
Sales revenue ₦486,000
Variable costs ₦336,500
Engineers‟ time required per unit 30 hours
(5) A specialist machine would be required for 7 weeks for the house to be
built. Koliwi Limited has 4 weeks remaining on the 15 week specialist
machine rental contract that cost ₦1,500,000. The machine is currently not
in use. The machine can be rented for an additional 15 weeks at a cost of
₦1,525,000. The specialist machine can only be rented in blocks of 15
weeks.
Alternatively, a machine can be purchased for ₦16,000,000 and sold after

the work on the house has been completed for ₦14,000,000.
(6) The windows required for the house have recently been developed by
Koliwi Limited and use the latest environmentally friendly insulating
material. They produced the windows at a cost of ₦3,495,000 and are
currently the only ones of their type. They were planning to exhibit the
windows at a house building
conference. The windows would only be used for display purposes at the
conference and would not be for sale to prospective clients.
Koliwi Limited has had assurances from three separate clients that they
would place an order for 25 windows each if they saw the technology
demonstrated at the conference. The contribution from each window is
₦1,045,000. If the windows are used for the contract, Koliwi Limited would
not be able to attend the conference. The conference organisers will charge
a penalty fee of ₦150,000 for non-attendance by the Company. The Chief
Executive of Koliwi Limited can meet the clients directly and still secure the
orders for the windows. The meetings would require two days of the Chief
Executive‟s time. The Chief Executive is paid an annual salary of
₦41,400,000 and contracted to work 260 days per year.
(7) The house to be built requires 400kg of other materials. Koliwi Limited
currently has none of these materials in its inventory. The total current
purchase price for these other materials is ₦600,000.
57
(8) Koliwi Limited fixed overhead absorption rate is ₦3,700 per construction
worker hour.
(9) Koliwi Limted normal policy is to add 12% mark-up to the cost of each
house.
Required:
a. Produce a schedule that shows the minimum price that could be quoted for
the contract to build the house. Your schedule should show the relevant
cost of each of the NINE items identified above. You should also explain
each relevant cost value you have included in your schedule and why any
values you have excluded are not relevant. (21 Marks)
b. Explain TWO reasons why relevant costing may not be a suitable approach
to pricing houses in the longer term for Koliwi Limited. (4 Marks)
c. Recommend, with justifications, a pricing strategy for Koliwi Limited to use

to price the innovative, environmentally friendly houses when they are
launched in the new country. (5 Marks)
(Total 30 Marks)

QUESTION 2
Ibezi Nigeria Limited manufactures and sells three products A, B and C.
The company is recently considering the introduction of an activity-based
costing approach to facilitate efficient cost allocation, as well as achieve
improvement in cost accuracy and reduction.
Under Activity based wrong approach, direct materials and direct labour are
allocated to products and indirect costs are apportioned using cost pools which
represent the time activity areas. The Traditional costing approach uses the two
direct cost categories and a single indirect cost pool where overheads are
allocated using direct labour hours.
58
The following information is provided for the next period.
Product Product Product
A B C
Production and sales (units) 120,000 75,000 30,000
Direct material cost N190 N180 N160
Direct labour hours 6 8 7
Machine hours 4 8 9
Number of production runs 15 30 75
Number of component receipts 45 75 360
Number of production orders 45 30 75
Direct labour is paid at N8 per hour. Variable overhead is paid at N34 per unit
for Product A, N44 per unit for Product B and N38 per unit for Product C.
Fixed overhead costs in the period are expected to be as follows:
N Cost Driver
Set up 1,260,000 Production Runs
Machine 8,100,000 Machine Hours
Goods inwards 2,520,000 Company Receipt
Packaging 1,800,000 Production Order
Engineering 1,620,000 Production Order
15,300,000
Required:
a. Calculate the unit costs of each product using:
i. Traditional Cost approach, based on direct labour hourly rate.
(5 Marks)
ii. The ABC method. (5 Marks)
b. The company considered the pricing of the three products where sales
prices have remained uncertain as shown in the table below:
Prob. N Prob. N Prob. N
0.5 300 0.6 350 0.5 450
0.3 360 0.3 400 0.4 440
0.2 390 0.1 420 0.1 430
Compute the expected unit sales prices for the three products and the
total profit or loss for each product that will arise from the
implementation of the ABC approach and the traditional costing method.
(7 Marks)
59
c. State reasons why activity based costing approach may be preferred to
traditional absorption costing approach in a modern manufacturing
environment. (3 Marks)
(Total 20 Marks)
QUESTION 3
High Tech plc is a manufacturer of computer applications (apps) and has
contracts to supply the components to contractors operating throughout the
West African region.
Set out below is a part of the Master Budget for the component for the month of
April 2021.
Budget for April 2021

N N
Sales 3,000 batches of apps at N80.00 240,000
Direct materials 225,000kg at N0.40 per kg 90,000
Direct labour 5,000 hours at N12.00 per hour 60,000
Variable Overhead (absorbed on direct Labour hours) 15,000
Fixed overhead (absorbed on output) 30,000 195,000
Profit 45,000
High Tech plc uses absorption costing to arrive at product cost. Annual fixed
overhead budget for the year ending April 2021 is N360,000 and the normal
annual output is expected to be 36,000 batches.
Early in May 2021, these results were available to operating managers:
INCOME STATEMENT ACCOUNT FOR APRIL 2021

N N
Sales of 2,800 batches 225,000
Direct materials 210,000 kg at a cost of 88,000
Direct labour 4,400 hours at a cost of 52,000
Overhead: Variable 12,000
Overhead: Fixed 36,000
188.000
Profit 37,000
Required:
a. Prepare a full standard cost card per batch showing contribution margin.
(4 Marks)
b. Calculate all relevant variances and prepare a report reconciling
budgeted and actual contribution for April 2021. (12 Marks)
Outline FOUR factors to be taken into consideration by the management
of the company before deciding whether or not to investigate any
60
particular variance shown on the April Report prepared in (b) above.
(4 Marks)
(Total 20 Marks)
QUESTION 4
Ukachi and Sons limited has two operating divisions, X and Y, which are
treated as profit centres for the purpose of performance reporting.
Division X makes two products, Product A and Product B. Product A is sold to

external customers for ₦248 per unit. Product B is a part-finished item that is
sold only to Division Y.
Division Y can obtain the part-finished item from either Division X or from an
external supplier. The external supplier charges a price of ₦220 per unit.
Department Y produces Product C which is sold at a mark up of 25% of cost
which is the company sales policy.
The production capacity of Division X is measured in total units of output,

Products A and B. Each unit requires the same direct labour time. The costs of
production in Division X are as follows:
Cost Element Product A Product B
N N
Variable cost 184 192
Fixed cost 76 76
Total unit cost 260 268
Required:
a. i. What is an optimal transfer price or price range for Product B?
(3 Marks)
ii. What would be the optimal transfer price for Product B if there is
spare production capacity in Division X? (3 Marks)
iii. What would be the optimal transfer price for Product B if Division X is
operating at full capacity due to a limited availability of direct
labour and there is unsatisfied external demand for Product A?
(5 Marks)
b. The following additional information relate to business activities in the two

divisions.
Particular Dept. X Dept. Y
Product A: Production / Sales units 150,000
Product B: Production of part finished items 100,000
Product B: Procurement from external suppliers 80,000
Product C: Sales 180,000
Investment Capital N40 million N50 million
Cost of Capital 15% 15%
61
Required:
i. Prepare an operating statement showing the optimal profit the
Divisions can generate in the period when operating at full
capacity with no spare capacity. (4 Marks)
ii. Using the return on investment and residual income approaches
Provide a comparative analysis of the performance of the divisions
provided for the period. (5 Marks)
(Total 20 Marks)

QUESTION 5
Zinko Limited is launching a new, innovative product onto the market and is
trying to decide on the right launch price for the product. The product‟s
expected life is three years. Given the high level of costs which have been
incurred in developing the product, Zinko Limited wants to ensure that it sets its
price at the right level and has therefore consulted a market research company
to help it do this. The research, which relates to similar but not identical
products launched by other companies, has revealed that at a price of ₦60,
annual demand would be expected to be 250,000 units. However, for every ₦2
increase in selling price, demand would be expected to fall by 2,000 units and
for every ₦2 decrease in selling price, demand would be expected to increase by
2,000 units.
A forecast of the annual production costs which would be incurred by Zinko

Limited in relation to the new product are as follows:
Annual production (units) 200,000 250,000 300,000 350,000

₦ ₦ ₦ ₦
Direct material 2,400,000 3,000,000 3,600,000 4,200,000
Direct labour 1,200,000 1,500,000 1,800,000 2,100,000
Overheads 1,400,000 1,550,000 1,700,000 1,850,000
Required:
a. Calculate the total variable cost per unit and total fixed overheads.
(3 Marks)
b. Calculate the optimum (profit maximising) selling price for the new product
and calculate the resulting profit for the period.
Note: If P = a + bx; then, MR = a - 2bx. (7 Marks)
62
c. The sales director is unconvinced that the sales price calculated in (b) above
is the right one to charge on the initial launch of the product. He believes
that a high price should be charged at launch so that those customers
prepared to pay a higher price for the product can be „skimmed off‟ first.
Required:
Discuss the conditions which would make skimming a more suitable pricing
strategy for Zinko Limited and recommend whether Zinko Limited should
adopt this approach instead. (5 Marks)
(Total 15 Marks)
QUESTION 6
Kolawole Limited (KL) manufactures equipment for metal testing. It also

manufactures the electronic testing equipment.
The company has a well-established cost and management accounting system.
The cost accounting system records the actual manufacturing costs for the
electronic chips and the testing equipment, and also produces standard unit
costs for the purposes of budgeting and variance analysis. The management
accountant of KL is pleased with the management information system that is in
place within the company, and is particularly proud of the budgetary control
reporting system that provides monthly control reports to the board within one
week of the end of each month.
The market for metal testing equipment is growing at a reasonable rate, but
there are three other competitors in the market. Competition between them is
strong and consequently profit margins are fairly low at the moment, KL is
operating at a profit. KL‟s senior management are not sure what any competitor
might do next, although they suspect that at least one of them may be in
financial difficulty. KL‟s sales director is certain that although low prices are one
factor in the buying decisions of customers, customers are much more concerned
about the quality, reliability and functional features of the equipment that KL
produces.
At a recent board meeting, the board made two important decisions. The first
was a decision not to invest in new equipment for manufacturing electronic
chips that would significantly reduce the water and energy consumption in the
production process. This decision was taken because the discounted cash flow
return on investment was considered insufficient.
The second decision was an agreement that costs would need to be reduced to
improve profitability. In relation to this, the board decided that employees in the
manufacturing units should be empowered more, and should be given some
authority to take decisions affecting production operations.
63
The board also discussed the current lack of sufficient strategic information
within KL. They were aware that the decision not to invest in the new equipment
had not taken into consideration the probability of rising water and energy costs
in the future, and they felt they needed more information to help them predict
the long-term prospects for their industry.
Required:
a) Explain the difference between strategic, tactical and operational
information, and give examples of each that should be used by a company
such as Kolawole Limited. (10 Marks)
b) Discuss why it will be important for Kolawole Limited to monitor non-

financial aspects of performance as well as financial performance. (5 Marks)
(Total 15 Marks)
QUESTION 7
A producer of high quality executive motor cars has developed a new model
which it knows to be very advanced both technically and in style, compared to
the competition in its market segment.
The company's reputation for high quality is well-established and its servicing
network in its major markets is excellent. However, its record in timely delivery
has not been so good in previous years, though this has been improving
considerably.
In the past few years, it has introduced annual variations/improvement in its

major models. When it launched a major new vehicle some six years ago, the
recommended retail price was so low in relation to the excellent specification of
the car that a tremendous demand built up quickly and a two-year waiting list
for the car developed within 6 months. Within three months a second-hand
model has been sold at an auction for nearly 50% more than the list price and
even after a year of production a sizeable premium above list price was being
obtained.
The company considers that, in relation to the competition, the proposed new
model will be attractive as was its predecessor six years ago. Control of costs is
very good so that accurate cost data for the new model are on hand. For the
previous model, the company assessed the long-term targeted annual
production level and calculated its prices on that basis. In the first year
production was 30% of that total.
For the present model, the company expects that the relationship between first-
year production and longer-term annual production will also be about 30%,
though the absolute levels in both cases are expected to be higher than
previously.
64
The senior management committee, of which you are a member, has been asked
to recommend the pricing approach that the company should adopt for the new
model.
Required:
a. List the major pricing approaches available in this situation and discuss
in some detail relative merits and demerits to the company of each
approach in the context of the new model. (10 Marks)
b. Recommend which approach you would propose, giving your reasons.

(5 Marks)
(Total 15 Marks)
65
Formulae
Learning curve
Y = axb
Demand curve
P = a – bQ
change in price
b
change in quantity
MR = a – 2bQ
Y = 𝑎 + 𝑏𝑋
𝑛 𝑋𝑌 − ( 𝑋)( 𝑌)
where b = 2
𝑛 𝑋 − 𝑋 2
𝑦 𝑏 𝑥
a = −
𝑛 𝑛

2
r2 = 2 2
(𝑛 𝑋 − 𝑋 2 (𝑛 𝑦 − 𝑋 2
66
1
3 3
4
Annuity Table
r
Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15
67
68
SOLUTION 1
a.
₦ Note
Food and drink at meeting - 1
Material Z 7,800,000 2
Construction workers - 3
Engineers 448,500 4
Specialist machine 1,525,000 5
Windows 150,000 6
Other materials 600,000 7
Fixed overhead - 8
Profit margin - 9
Total relevant cost 10,523,500
Notes
1) The food and drink costs are sunk. The meeting with the client has already
occurred and therefore the costs are not relevant.
2) Material Z is regularly used by KL. The 550kg currently in inventory will

need to be replaced and therefore should be valued at replacement cost.
₦6,500 × 550kg = ₦3,575,000. The remaining 650kg required for the
contract is not owned by KL and therefore will need to be purchased at the
replacement cost.
₦6,500 × 650 = ₦4,225,000. The total relevant cost is ₦7,800,000.
3) The construction workers have spare capacity to complete the work and are
employed under a guaranteed wage agreement. Construction workers will
be paid whether or not they work on the contract. Therefore, the cost is not
relevant.
4) Engineers are salaried and this is not an incremental cost. However, they
are currently at full capacity and do not have time within their normal
hours to complete the 90 hours of work required. The engineer‟s additional
time should be valued at opportunity cost. If overtime is paid, the cost
would be 90 hours× ₦5,200 = ₦468,000.
Alternatively, switching engineers from their existing job.

90 hours/30 hours to produce a unit = 3 units valued at contribution per
unit ₦149,500 = ₦448,500.
The lower cost of the two options is ₦448,500 and this is the relevant cost.
5) The first rental period is part-way through and the payment of ₦1,500,000
has already been made. Therefore, this is a sunk cost and not relevant. In
order to obtain the machine for the required seven week period another 15
week standard rental agreement would have to be entered into, therefore
the relevant cost is ₦1,525,000.
69
If the machine was to be purchased, the relevant cost would be
₦2,000,000 (sales price less resale value). The lower relevant cost of the
two options is to rent the machine for another rental period at
₦1,525,000.
6) The cost to produce the windows has already been incurred and is
therefore sunk and not relevant.
If KL uses the windows for the building and misses the conference, the
sales will not be lost. The chief executive will visit the clients at a later
date to secure the sales. Therefore, there is no incremental loss in
contribution. The chief executive‟s time is not relevant as he is paid an
annual salary and would receive this irrespective of the visit to the
clients.
However, should the windows be used for the building, KL would not be
able to attend the conference and be liable to pay the non-attendance fee
of ₦150,000.
7) 400kg of other materials are required for the building. The incremental
cost is ₦600,000.
8) Fixed costs are not relevant as they will be incurred irrespective of

whether the contract is taken or not.
9) Profit mark-up is not relevant as KL is producing a minimum price

quotation to exactly cover the relevant cost.
b. When quoting a minimum price for the contract, relevant costing

principles are being used. Only relevant costs i.e. those that change as a
direct result of the contract decision are included in the quoted cost.
The minimum price will result in KL making neither a profit nor a loss.
This is not a sustainable pricing policy in the longer term as it does not
include a contribution to the fixed costs of the organisation.
Relevant costing does not include a profit margin. This is not suitable for
KL in the longer term as the company is planning to expand into different
countries and investors will also require a return on their investment.
c. Market skimming would be a suitable pricing strategy to launch the

houses in the new country. Market skimming charges a high price for the
product initially where the product is unique and there are significant
barriers to entry for competitors. The price is reduced as new competitors
enter the market with a similar product. The strategy aims to maximise
the profit from the product.
70
The high quality materials and unique energy saving technology used in
the houses should command high prices from customers keen to have a
house with this technology. The house that consumers are willing to pay a
high price for, together with the barrier to competitors of the new energy
saving technology, make KL‟s product suited to the market skimming
pricing strategy. This market skimming approach will allow KL to recover
the research and development costs incurred to develop the energy
saving technology.
Marking guide
Marks Marks Marks
1 a. Minimum Price Schedule (12 ticks at 1 mark 12
Justification statements (9 ticks at
1 mark) 9 21
b. Reasons for relevant costing (2 points at 2
marks each) 4
c. - Correct Recommendation 2
- Any 2 Justifications at 1½ marks 3 5 30
Examiner’s report
This question tests candidates‟ knowledge of price setting using Marginal
Costing, Absorption Costing and Relevant Costing criteria and pricing method for
new innovative products and projects
The question was well attempted by the candidates because it is a compulsory

question.
The pitfall noticed in their performance includes candidates‟ inability to

decipher the costs that are relevant and non-relevant costs. Also candidates‟
inability to know that skimming pricing strategy will best be adopted in the type
of situation Koliwi Limited finds itself in the production of special, innovative
and environmental friendly project. It is recommended that candidates
preparing for ICAN future examination read the ICAN Study Text.
71
SOLUTION 2
a) i. Unit cost using Traditional approach:
A B C
N N N
Material 190 180 160
Labour 48 64 56
Variable overhead 34 44 38
Overhead 60 80 70
Unit Cost 332 368 324
Workings:
Total overhead = N15,300,000

= 6 x 120,000 = 720,000
= 8 x 75,000 = 600,000
= 7 x 30,000 = 210,000
1,530,000 hours
Direct labour hourly rate = N15,300,000 = N10/hour
1,530,000

Direct Labour hours per unit 6 hours 8 hours 7 hours
Direct Labour hourly rate (N) 10 10 10
Unit overhead cost N60 N80 N70
Labour cost at ₦8 per hour N48 N64 N56
ii. Unit cost of Production using ABC approach in overhead absorption

Unit Cost of Product (ABC Approach)
A B C
N N N
Material 190.000 180 160
Labour 48 64 56
Value OH 34 44 38
Overhead 35.83125 66.57 200.25
Unit Cost 307.83125 354.57 454.25
72
Workings:
Computation of total activity volumes:
Product Direct Material Machine Company Production Production
Quantity Labour Cost Hours Receipt run Order
a 120,000 720,000 22.800,000 480,000 45 15 45
b 75,000 600,000 13,500,000 600,000 75 30 30
c 30,000 210,000 4,800,000 270,000 360 75 75
Total 1,530,000 41,100,000 1,350,000 480 120 150
Overhead cost per activity (cost driver rate)
Activity Overhead Cost Overhead

Allocated Cost Driver Activity Absorption
per period
N Rate (N)
Set up 1,260,000 Production run 120 10,500 per cost
Machine 8,100,000 Machine hours 1,350,000 6
Goods inwards 2,520,000 Company receipts 480 5,250
Packaging 1,800,000 Production order 150 12,000
Engineering 1,620,000 Production order 150 10,800
N15,300,000
Allocation of Overhead to Product Activity (Computation of Overhead cost per

unit using ABC Approach)
Activity Cost A B C Total
Driver Cost
Rate
120,000 75,000 30,000
N N N N
Sep up:
15 product runs 10,500 157,500 157,500
30 product runs 10,500 315,000 315,000
75 production run 10,500 787,500 787,500
Total 157,500 315,000 787,500 1,260,000
Machine:
480,000 machine hours 6 2,880,000 2,880,000
600,000 machine hours 6 3,600,000 3,600,000
270,000 machine hours 6 1,620,000 1,620,000
Total 2,880,000 3,600,000 1,620,000 8,100,000
Good Include:
45 receipts 5,250 236,250 236,250
75 receipts 5,250 393,750 393,750
360 receipts 5,250 1,890,000 1,890,000
Total 236,250 393,750 1,890,000 2,520,000
73
Packaging:
45 production order 12,000 540,000 540,000
Total 540,000 360,000 900,000 1,800,000
Engineering:
486,000 324,000 810,000 1,620,000
Total 4,299,750 4,992,750 6,007,500 15,300,000
Unit cost of overhead N35.83125 N66.57 N200.25
i. Expected Sales Price

Price Pr Expected Price Pr Expected Price Pr Expected
Selling Price Selling Price Selling Price
N N N N N N
300 0.5 150 350 0.6 210 450 0.5 225
360 0.3 108 400 0.3 120 440 0.4 176
390 0.2 78 420 0.1 42 430 0.1 43
336 372 444
ii. Profit Computation using Traditional Costing Approach

A B C
N N N
Unit Sales Price 336 372 444
Unit Cost 332 368 324
Unit Profit 4 4 120
Quantity 120,000 75,000 30,000
N480,000 N300,000 N3,600,000
Profit Computation Using ABC Approach

A B C
N N N
Unit Sales Price 336 372 444
Unit Cost 307.83125 354.57 454.25
Unit Profit/(cost) 28.16875 17.43 (10.25)
Quantity 120,000 75,000 30,000
Total Profit 3,380,250 1,307,250 (307,500)
74
c. Why ABC is preferred to traditional approach
ABC is preferred traditional costing due to the following reasons:
i. The traditional absorption costing method uses a single basis to absorb fixed
overhead costs even if the overhead costs are not related to the basis used.
ii. ABC groups overhead costs into cost pools and assigns a suitable cost driver to each
cost pool. By so doing, overheads are absorbed on basis that best reflect the manner in
which they were incurred.
iii. ABC uses multiple absorption basis unlike traditional absorption costing method that
uses a single basis of absorption.
iv. ABC provides useful information about the activities that drive
overhead costs.
v. ABC provides information that could be relevant to long-term cost

control and long-term product pricing.
vi. ABC approach shows a more realistic costing approach.
Examiner’s report
This question tests candidates‟ understanding of ABC approach in overhead
absorption and cost based pricing in situation of uncertainty. The question was
well attempted due to its familiarity. Performance by candidate is above
average.
The pitfall noticed was wrongful computation of unit sales price of products due
to wrong adoption of the probabilities needed in the computation of sales price.
Candidates are hereby encouraged to carry out their revision using the ICAN
study text when preparing for Examination.
Marking guide
Marks Marks
(a) i. Unit Cost using Traditional Method (25

ticks at 5 ticks for one mark) 5
ii. Unit Cost using ABC method (40 ticks at 8
ticks for 1 mark) 5 10
(b) - Computation of Selling Price and total

profit per product for ABC and traditional
method (21 ticks at 3 ticks per mark) 7
Importance of ABC over Traditional
(c)
approach. (Any 2 points at 1½ marks)
3 10
Total 20
75
SOLUTION 3
a) Workings
Budgeted material usage 225,000/3,000 = 75 kg per unit
Budgeted labour hours 5,000/3,000 = 1.666hrs per unit
Budgeted variable overhead rate: 15,000/5,000 = N3.00 per direct
labour hr.
Budgeted fixed overhead absorption 30,000/3,000 = N10.0 per unit
Standard specification per unit:

₦ ₦
Selling price 80
Variable costs
Direct materials (75 x N0.4) 30
Direct labour (1.666 x N12) 20
Variable overheads (1.666 x N3) 5 55
Contribution 25
Less fixed overheads 10
Profit 15
b) Workings
Actual production = 2,800 batches
Actual material cost: 88,000/210,000 =N0.42 per kg
Actual labour cost 52,000/4,400 = N11.82 per hour.
Summary of Variances (excluding Volume variances)

Comparison of Budget v Actual (both for 2,800 units)
Detailed Variances:
Material Price
(SP – AP) x AQ
(0.4 – 0.42) x 210,000 (4,000)A
Material usage
(SQ – AQ) x SP
(210,000 – 210,000) x £0.40 -
check (4,000)A
76
Labour Rate
(SR – AR) x AH
(12 – 11.82) x 4,400 800F
Labour Efficiency
(SH – AH) x SR
(4,667 – 4,400) x £12 = 3,200F
check 4,000F
Variable Overhead Efficiency
(SH – AH) x SR
(4,667 – 4,400) x £3.0 800F
Variable overhead expenditure

(AH x SR) – Actual cost
(4,400 x 3) – 12,000 1,200F

2,000F
Fixed overhead expenditure

(budgeted cost – actual cost)
30,000 – 36,000 (6,000)A
Sales Margin Price Variance
Actual Revenue – Budgeted revenue for actual level of output
225,000 - 224,000 1,000F
Sales Margin volume variance

(Actual units – Budgeted units) x standard contribution per unit
(2,800 – 3,000) x N25.00 (5,000)A
Fixed Overhead Capacity Variance = SC (BH – AH)

N6 (5,000 – 4,400)
= N3,600A
77
Fixed Overhead Efficiency Variance = SC (AH – SHAP)
 2,800 5,000 
N6 4,400  X
 3,000 1 
= N1,600F
Fixed Overhead Volume Variance = N3,600A + N1,600F

= N2,000A
ii. Reconciliation of Budgeted contribution and Actual Contribution for April 2021
Budgeted Contribution (N25 x 3000 batches) 75,000

Sales variance: Sales Price variance 1000F
Sales quantity margin 5000A (4000)
variance
Standard profit 71,000
Standard cost variance
Favourable Adverse
Direct material price variance N4000
Direct Material usage variance
Direct labour rate variance 800
Direct labour efficiency variance 3200
Variable overhead expenditure variance 800
Variance overhead efficiency variance 1200
Total 6000 4000 2000F
Actual Contribution 73,000
c) FACTORS TO CONSIDER BY MANAGEMENT BEFORE INVESTIGATING VARIANCE

i. Size of the variance: generally, the cause of the variance is more likely to be
significant if the variance is large. This is a matter of materiality and management
may need to determine what is material.
ii. Favourable or adverse variance: significant favourable or adverse variance may

need to be investigated. However, adverse variance tends to require more
investigation than favourable variances because of the impact of adverse
variances on profit.
iii. Probability that the cause of the variance will be controllable: whether or not to
investigate a variance will depend on management‟s expectation that the cause of
the variance will be controllable.
iv. Cost and benefit of the control action: investigating a variance has a cost in
terms of management‟s time actual cost incurred. A variance should not be
investigated unless the expected benefits outweigh the cost.
78
v. Reliability and accuracy of the figures.
vi. Possible interdependencies of variances
vii. The inherent variability of the cost or revenue trends in variances.
Examiner’s report
This question tests candidates‟ understanding of standard costing, variance
computation and reconciliation of Budgeted Contribution with Actual
Contribution. Many candidates attempted the question. Being a familiar
question, performance was high and encouraging.
The pitfall was in candidates failing to compute capacity and efficiency variance
preferring to determine the volume variance only.
It is advised that candidates read the questions thoroughly in order to provide
solution that fulfil the requirement of the question and familiarise themselves
with the ICAN study text.
Marking guide
3. Marks Marks
a. Standard Cost Card (8 ticks at ½ mark) 4

B i. Computation of variances and
preparation of reconciliation statements
(24 ticks at ½ mark) 12
ii. Any four considerations at 1 mark for
each consideration 4
Total 20
SOLUTION 4
(a) i. OPTIMAL TRANSFER PRICE OR PRICE RANGE FOR PRODUCT B

Since the only consumer of product B is Division Y, the minimum transfer
price should be set at marginal cost less any cost savings due to internal
sales.
The variable cost per unit of product B is N192, hence the minimum
transfer price should be set at N192 per unit of B.
The maximum transfer price per unit for B would be the price that the
external supplier charges Division Y, which is N220.
Hence, the optimal transfer price per unit would lie between a minimum of
N192, and a maximum of N220.
79
ii. OPTIMAL TRANSFER PRICE FOR PRODUCT B IF THERE IS SPARE CAPACITY
If Division X has spare production capacity, then the units of product B
have no opportunity cost and should be transferred to Division Y at
variable cost less any cost savings due to internal sales. The transfer price
would therefore be N192 per unit.
iii. OPTIMAL TRANSFER PRICE FOR PRODUCT B IF DIVISION X OPERATES AT

FULL CAPACITY
If Division X is at full capacity and would forego sales of product A to
suppy product B to Division Y, then the units of product B would have to be
transferred at marginal cost less any cost savings plus the contribution
forgone on sales of product A.
The contribution per unit of A is N64 (i.e. N248 – N184). Thus, the optimal
transfer price would be N192 + N64 = N256.
(b)ii. OPERATING STATEMENT
N N
Sales Sales
Product A to external parties Product C (N256 x 1.25 x 57,600,000
(150,000 x N248) 37,200,000 180,000)
Product B to Division Y 25,600,000
(100,000 x N256)
62,800,000 57,600,000
Variable costs Costs
Product A (150,000 x N184) 27,600,000 80,000 @ N220 17,600,000
Product B (100,000 x N192) 19,200,000 100,000 @ N256 25,600,000
46,800,000 43,200,000
Fixed costs
Product A (150,000 x N76) 11,400,000
Product B (100,000 x N76) 7,600,000
19,000,000
Profit /(Loss) (3,000,000) Profit/(Loss) 14,400,000
80
ii. COMPARATIVE ANALYSIS OF PERFORMANCE
N N
Profit /(loss) (3,000,000) 14,400,000
Investment 40,000,000 50,000,000
% %
ROI -7.5% 28.80%
Cost of capital 15% 15%

N N
Profit/(loss) -3,000,000 14,400,000
Charge on capital employed 6,000,000 7,500,000
Residual Income (RI) (9,000,000) 6,900,000
Due to the transfer price policy of operating at full capacity, Division X is not
able to charge a share of its fixed costs to division Y, hence Division X is
operating at a loss of N3million while Division Y with no fixed overhead cost
implication is operating at a Profit of N14.4 million.
The ROI for division X is therefore negative of N3million for its investors while
Division Y generates a 28.80% returns per Naira invested.
Division X generates a residual loss of N9million while Division Y

generates a residual income of N14.40 million. The cost of capital for
both Divisions is the same at 15% but Division Y has a higher investment
base.
Examiner’s report
The question tests candidates‟ understanding of transfer pricing and divisional
performance appraisal. This is a familiar question that should have attracted
high performance from the candidates.
However, candidates‟ performance was average due to lack of understanding of

Transfer pricing in situations of spare capacity and where there is limited
resources.
Candidates are hereby encouraged to study the ICAN Performance Management

Manual and indeed other Management Accounting text books to widen their
scope of understanding and knowledge of transfer pricing and divisional
performance evaluation when preparing for future ICAN examination.
81
Marking guide
4. Marks Marks
(a)i. Optimal transfer price 3

ii. Optimal transfer price
when there is space capacity 3
iii. Optimal transfer price under limited

resources 5 11
Operating Statement
(b)i.
(12 ticks for 4 marks) 4
ii. Computation of ROI and residual income
(10 ticks at ½ mark) 5 9
Total 20
SOLUTION 5
a) Variable cost per unit

Material cost =₦2,400,000/200,000 = ₦12 per unit
Labour cost = ₦1,200,000/200,000 = ₦6 per unit
Variable overhead cost using high-low method:
(₦1,850,000 - ₦1,400,000)/(350,000 - 200,000) = ₦3 per unit
₦
Direct material 12
Direct labour 6
Variable overhead 3
21
Fixed cost = ₦1,400,000 - (200,000 x ₦3) = ₦800,000
b) Optimum price
Find the demand function
Demand function is P = a + bx, where:
P = Price per unit
x = quantity
b = ∆P/∆x = -2/2000 = -0.001
Therefore P = a - 0.001x
Find value for „a‟ by substituting the known values for P and x:
60 = a - (0.001 x 250,000)
a = 310
(Note: This is the maximum selling price, that is, the price at which no
quantity will be demanded.)
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Therefore P = 310 - 0.001x
Identify marginal cost (MC)
MC = unit variable = ₦21
Identify total revenue (TR)
TR = (P)(x) = (310 - 0.001x)(x)
= 310x - 0.001x2
Identify marginal revenue (MR)
MR = dTR/dx = 310 - 0.002x
Equate MC and MR to find x

21= 310 - 0.002x
x = 144,500
Substitute x into demand function to find P
P = 310 - (0.001 x 144,500) = ₦165.50
Calculate profit
Total contribution = 144,500 x (₦165.50 - 21) = ₦20,880,250
Fixed cost (800,000)
Profit ₦20,080,250
c) Market skimming
As the sales director suggests, market skimming is a strategy which
initially charges high prices for the product in order to take advantage of
those buyers who want to buy it as soon as possible, and are prepared to
pay high prices in order to do so.
If certain conditions exist, the strategy could be a suitable one for Zinko
Ltd. The conditions are as follows:
- Where a product is new and different, so that customers are prepared

to pay high prices in order to gain the perceived status of owing the
product early. All we know about Zinko Ltd‟s product is that it is
„innovative‟, so it may well meet this condition.
- Where products have a short life cycle this strategy is more likely to be
used, because of the need to recover development costs and make a
profit quickly. Zinko Ltd‟s product does only have a three-year life
cycle, which does make it fairly short.
- Where high prices in the early stages of a product‟s life cycle are
expected to generate high initial cash inflows. If this is the case here,
then skimming would be useful to help Zinko Ltd cover the high initial
development costs which it has incurred.
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- Where barriers to entry exist, which deter other competitors from
entering the market, as otherwise, they will be enticed by the high
prices being charged. These might include prohibitively high
investment costs, patent protection or unusually strong brand loyalty.
According to the information we have been given, high development
costs were involved in this case, which would be a barrier to entry.
- Where demand and sensitivity of demand to price are unknown. In

Zinko Ltd‟s case, market research has been carried out to establish a
price. However, this information is based on the launch of similar but
not identical products, so it is not really known just how accurate it
will be.
Examiner’s report
This question tests candidates‟ understanding of using high-low method in
analysing costs as well as using derived cost data in computing optimum selling
price under situation of imperfect competition. It also tests candidates‟
knowledge of condition that will make skimming price policy more suitable for
the company in the prevailing situation.
Candidates attempt on this question was high. However, performance was

average. The pitfall was candidates‟ inability to compute the profit maximising
selling price to determine the profit for the period.
Candidates are encouraged to use effectively ICAN Study Text when preparing
for future examinations of the Institute.
Marking guide
5. Marks Marks
(a) Total unit variable costs and total fixed

cost (6 ticks at ½ mark) 3
(b) Optimum Selling Price and resulting

profit (14 ticks at ½ mark) 7
(c) Skimming Price conditions
(Any 2 points at 2½ marks) 5
Total 15
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SOLUTION 6
a) Strategic, tactical and management information are classifications of

information that distinguish the purposes for which that information is
used. The classifications can also be used to distinguish the type of
information that is used at different levels in an organisation with a
hierarchical management structure.
Managers at all levels need information to make business decisions. The

nature of information required varies according to the level of
management and the type of decision. Kolawole Limited (KL) has a
management information system that should generate information for
decision making at the strategic, tactical, and operational levels of
management.
Strategic information
Strategic management needs strategic information. This is information
that helps strategic managers to make long-term plans, assess whether
these plans will be met, review existing strategies, and make changes or
improvements. Strategic information has the following characteristics:
i. If is often information about the organization as a whole or a large

part of it
ii. It is usually in summary form, without much detail
iii. It is generally relevant to the longer-term
iv. It is often prepared on ah-hoc basis
v. It may be qualitative or quantitative in nature
For KL, relevant strategic information example would include information

about competitors in the market. It appears that a competitor may be in
financial difficulty; it may be useful for KL to know more about this
and the reasons why the competitor may be in difficulty. It would also be
useful to have information about how rival organisations may respond to
any competitive initiative by KL.
The management of KL would also benefit from strategic information

about technological developments in the industry, the possibility of rising
water and energy prices, or even the possibility of government action to
discourage excessive energy use by business organisations.
Tactical information
This is information reported to middle managers for the purpose of
planning and budgetary control. Tactical information is used to decide
85
how the resources of the organisation should be used, and to monitor how
well they are being used. The features of tactical information are:
i. It is usually information about individual departments or operations

ii. It is usually in summary form, but in greater detail than strategic
information
iii. It is generally relevant to the short term and medium term
iv. It is often produced on a routine and regular basis
v. It consists mainly of quantitative information
Tactical information examples include both non-financial and financial

information. Examples of tactical information include budgets, variance
reports for control purposes, efficiency and capacity ratios and summary
information about quality failures (re-working of faulty items and items
returned under warranty) and on-time deliveries.
Operational Information
Operational information is needed to enable supervisors and front line
managers to organize and monitor operations and to make on-the-spot
decisions whenever operational problems arise. Operational information
may be needed by employees to process transactions in the course of their
regular work.
The features of operational information are:

i. It is usually information about specific transactions, jobs, or tasks
ii. It may be summarized at a work group level but is more detailed than
tactical information
iii. It is generally relevant to the short term
iv. It is usually about transactions, jobs, and tasks on a daily basis
v. It consists mainly of quantitative information
Examples of operational information include detailed information about

throughput times, machine failures and downtime, bottlenecks,
complaints, quantities of rejected items and so on.
b) Importance of non-financial measures - The quality and reliability of the

equipment that KL produces could both potentially be critical success
factors for KL because they are likely to be important in customers'
buying decisions.
By performing well in these areas, KL should be better placed to sustain

its financial performance than if it performs badly in them. For example,
if it provides its customers with high quality, reliable equipment, this
should ensure a high level of customer retention, which should in turn
help it maintain its revenues.
86
In this way, there would seem to be a strong link between non-financial
performance and financial performance.
Importance of financial measures: However, it is also important that KL

continues to monitor its financial performance, because there is no
guarantee that favourable non-financial performance will necessarily
translate into favourable financial performance. For example, although
KL‟s equipment may be very reliable, if it is significantly more expensive
than competitors‟, customers may choose to buy the competitors‟
equipment instead.
Also, the directors have already highlighted the importance of reducing

costs in order to improve profitability. This identifies the importance of
monitoring financial performance, in order to assess how successfully KL
is reducing its costs and improving profitability.
Combination of measures – KL‟s profit margins are known to be low, as a

result of the intense competition in the market. This reinforces the need to
monitor aspects of its financial performance (such as costs and margins).
However, it is equally important to monitor whether sale and market
share are increasing or decreasing in this competitive market, and how
KL is performing in relation to the other critical success factors which will
affect customers buying decisions.
Examiner’s report
The question tests candidates‟ knowledge of strategic, tactical and operational
management, and features of information needed in each level. It also tests
candidates‟ understanding of the importance of financial and non-financial
information in evaluating organisations performance.
The question was well attempted by candidates. Performance of candidates was

adjudged high. The only pitfall observed was candidates‟ concentration on
definitions of the 3 levels of information without highlighting the differences.
Candidates are advised to read the questions thoroughly before attempting

them. They are also advised to use at all time ICAN Study Text in their revisions.
87
Marking guide
6. Marks Marks
a. -Differences between strategic, tactical

and operational information
(3 points each at 1 mark per point at
each level 9
- Examples
(1 example for each level of information
at 1/3 mark per example)
1 10
- Importance of both financial and non-
b.
financial indicators
(1 point for each type of information at
2½ marks)
5
Total 15
SOLUTION 7
(a) The following are the major pricing approaches which may be used in
this situation:
(i) - Price skimming
- Penetration pricing
(ii) Price skimming

This involves charging a high price relative to competitors. The
advantage is that the contribution earned per unit is high. The
potential disadvantage is that market share will be restricted. In
this situation this restriction in market share would be beneficial
in the early stages since it is expected that production in the first
year is to be restricted. This would also avoid charging too Iow a
price as happened previously. It would be necessary to advertise to
promote the technological and style advantages to potential
customers which would help to justify the higher price.
(iii) Penetration pricing

Here the aim is to charge a lower price than competitors in order to
obtain a high market share at an early stage in the product life
cycle. The advantage is that a lower price will encourage people to
'try out' a new product rather than keeping with a familiar 'existing'
product. This incentive would appear unnecessary in this case on
two counts. Firstly, the reputation of the company is well
established and the car's predecessor was well received six years
ago.
88
Secondly, the car is very advanced both technically and in style
compared with the competition. This 'non-price' advantage may be
sufficient to encourage people to choose this vehicle.
The main advantage of penetration pricing - a high market share -

would be a disadvantage for this particular car since it could result
in excess demand in the first year, a waiting list and further
damage to reputation regarding delivery.
Another disadvantage of charging a low price is the small

contribution generated on sales. It may be necessary to charge a
lower price at a later stage if a superior quality competitor comes
on to the market.
In this case there is a further pricing option which is to charge a

price at a similar level to that of competitors. The better technology
and style of the car would act as selling features which could result
in increased market share which would be a disadvantage in the
early stages when production capacity is restricted.
Advantages are that market share may be obtained without

offering a discount against competitors' prices and that a price
similar to competitors' will not 'rock the boat'. A low price could
start a 'price war' which could be very damaging.
(b) In this situation the approach proposed is to charge a high price relative
to competitors in the first year and a price similar to that of competitors in
later years because:
(i) It enables a high contribution to be earned per car in the first year
to compensate for the higher average cost caused by volume being
lower and to aid recovery of development costs.
(ii) It is likely to match demand with production, i.e. low in first year
and increasing thereafter.
iii) High prices in the first year should prevent excess demand and
waiting.
(iv) A high initial price may make it easier to boost market share in the
second year when prices are reduced.
89
Examiner’s report
This question tests candidates‟ knowledge of pricing new products and in this
situation, pricing of technically advanced products. Candidates attempt on the
question was very high.
Performance was above average. The pitfall was candidates‟ inability to list the
two pricing methods and stating the merits and demerits of the two pricing
strategies. Candidates are encouraged to always read the questions before
attempting same in order not to stray away from the requirements of the
question.
Marking guide
7. Marks Marks
a. - List of pricing approach

(2 price strategy at 2 marks each) 4
- Merit (Any one merit for each strategy

at 1½ marks) 3
- Demerit (Any one demerit for each Y

strategy at 1½ marks) 3 10
2
- Recommendation
b.
- Justification (Any two points at 1½ marks)
3 5
Total 15
90

QUESTION 1
Vestapricy and Company Limited is a manufacturing outfit located in Port Harcourt.

It produces a tracking device that is attached to motor vehicles. The device is
designed to help locate the whereabouts of stolen motor vehicles within the country.
The company‟s capital (or cash operating cycle) is the length of time between the
payment for purchased materials and the receipt of payment from selling the goods
made with the materials.
The table below gives information extracted from the annual accounts of Vestapricy
and Company limited for the past three years.
Extracts from Vestapricy and Company Limited annual accounts for 31 st

December 2020 to December 2022:
2020 2021 2022
N N N
Inventory:
Raw materials 108,000 145,800 180,000
Work in progress 75,600 97,200 93,360
Finished goods 86,400 129,600 142,875
Purchases 518,400 702,000 720,000
Sales 864,000 1,080,000 1,188,000
Trade receivables 172,800 259,200 297,000
Trade payables 86,400 105,300 126,000
63
Other information is as follow:
(1) All purchases and sales are on credit.
(2) Direct wages:
- 2021: N300,000
- 2022: N250,000
(3) Production expenses:

- 2021: N72,600
- 2022: N171,995
(4) The company‟s policy is that any data that will be used from the statement of
financial position in determining the working capital cycle period will be
average based.
Required:
a. i. Compute the cost of goods sold for 2021 and 2022. (3 Marks)
ii. Calculate the length of the working capital cycle (assuming 365 days
in the year) for 2021 and 2022. (7 Marks)
iii. List the actions that the management of the company might take to reduce
the length of the cycle. (5 Marks)
b. In 2023, the company (Vestapricy) decided to open a new small apple
shop in Owerri to be managed by a shopkeeper. The shopkeeper is
deciding on the number of boxes of special apples it hopes to buy each
day. A box of apples earns a contribution of N400 and costs N250.
Demand of apple is uncertain and could vary from 30 boxes to 10 boxes.
Any apple that is purchased but not sold will be thrown away at the end of
the day.
The shop keeper has decided that he will buy 10 boxes, 20 boxes or 30
boxes each day, and these are the only three options he wants to consider.
Required:
i. Construct the Pay-off table for this business in Owerri. (7 Marks)
ii. How many boxes should the storekeeper purchase if the decision is
based on:
The Maximax decision rule; The Maximum decision rule and The Minimax regret
decision rule? Give reasons for your decisions. (8 Marks)
(Total 30 Marks)
64
INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THE THREE
QUESTION 2
The local football club has asked for your advice on the number of programmes that
should be printed for each game. The cost of printing and production of programmes
for each game, as quoted by the local printer, is ₦1,000,000 plus ₦400 per copy.
Advertising revenue which has been agreed for the season represents ₦800,000 for
each game.
Programmes are sold for N150 each. A review of sales during the previous seasons
indicates that the following pattern is expected to be repeated during the coming
season of 50 games:
Number of programmes sold Number of games

10,000 5
20,000 20
30,000 15
40,000 10
Programmes not sold at the game are sold as waste paper to a paper manufacturer at
N100 per copy.
Assuming that the four quantities listed are the only possibilities, you are
required to:
a. Prepare a payoff table; (6 Marks)
b. Determine the number of programmes that would provide the highest profit if a
constant number of programmes were to be printed for each game; (4 Marks)
c. Explain why you should buy 30,000 or 40,000 copies, assuming one of these is
the most profitable quantity, despite the fact that the most probable sales are
20,000 copies per game; (2 Marks)
d. Calculate the profit which would arise from a perfect forecast of the numbers of
programmes which would be sold at each game. (4 Marks)
e. Discuss the major limitations at expected value criterion in decision making.

(4 Marks)
(Total 20 Marks)
65
QUESTION 3
Kenny Limited (KL) has been offered a contract that, if accepted, would significantly
increase next year‟s activity levels. The contract requires the production of 20,000 kg
of product X and specifies a contract price of N10,000 per kg. The resources used in
the production of each kg of X include the following:
Resources per kg of X
Labour:
Grade 1 2 hours
Grade 2 6 hours
Materials:
A 2 units
B 1 litre
Grade 1 labour is highly skilled and although it is currently under-utilised in the firm,
it is KL‟s policy to continue to pay grade 1 labour in full. Acceptance of the contract
would reduce the idle time of grade 1 labour. Idle time payments are treated as non-
production overheads.
Grade 2 is unskilled labour with a high turnover, and may be considered a variable
cost.
The costs to KL of each type of labour are
Grade 1 N400 per hour
Grade 2 N200 per hour
The materials required to fulfil the contract would be drawn from those materials
already in stock. Material A is widely used within the firm, and any usage for this
contract will necessitate replacement. Material B was purchased to fulfil an expected
order that was not received, if material B is not used for the contract, it will be sold.
For accounting purposes, FIFO is used. The various values and costs for A and B are:
A B
per unit per litre
(N) (N)
Book value 800 3,000
Replacement cost 1,000 3,200
Net realisable value 900 2,500
A single recovery rate for fixed factory overheads is used throughout the firm, even
though some fixed production overheads could be attributed to single products or
departments. The overhead is recovered per productive labour hour, and initial
estimates of next year‟s activity, which excludes the current contract, show fixed
production overheads of N60,000,000 and productive labour hours of 300,000.
Acceptance of the contract would increase fixed production overheads by
N22,800,000.
66
Variable production overheads are accurately estimated at N300 per productive
labour hour.
Acceptance of the contract would be expected to encroach on the sales and
production of another product. Y, which is also made by KL Limited. It is estimated
that sales of Y would then decrease by 5,000 units in the next year only. However,
this forecast reduction in sales of Y would enable attributable fixed factory overheads
of N5,800,000 to be avoided. Information on Y is as follows:
(per unit)
Sales price N7,000
Labour grade 2 4 hours
Materials: relevant variable costs N1,200
All activity undertaken by KL is job costed using full or absorption costing in order to
derive a profit figure for each contract. If the contract for X is accepted, it will be
treated as a separate job for routine costing purposes. The decision to accept or reject
the contract will be taken in sufficient time to enable its estimated effects to be
incorporated in the next year‟s budget and also in the calculations carried out to
derive the overhead recovery rate to be used in the forthcoming year.
Required:
a. Advise KL on the desirability of the contract (8 Marks)
b. Show how the contract, if accepted, will be reported on the routine job costing
system used by KL (6 Marks)
c. Briefly explain the reasons for any differences between the figures used in (a)
and (b) above. (6 Marks)
(Total 20 Marks)
QUESTION 4
Tayo Limited is a civil engineering company based in Benin. Contracts are carried out
under the supervision of project managers who are sent out from Head Office and
remain on site for the duration of the contract. The project manager recruits local
labour, and arranges for plant and materials to be provided by Head Office.
Some time ago, the company successfully tendered for two contracts which have now
become mutually exclusive. It is currently considering which of these to accept. Both
jobs would last for 12 months.
67
The following information about each contract is available:
Abuja Lagos
₦‟000 ₦‟000
Contract price 17,000 18,000
Penalty payment (i.e. a condition of the tender if
offered the job and it is not accepted) 1,600 800
Materials required:
In store (at cost) 2,000 2,400
Contracted for - 3,600
To be ordered (at current cost) 4,000 3,400
Labour required:
Project manager‟s salary 1,000 1,000
Travel, lodgings etc. 400 400
Local recruitment 7,000 5,600
Head office:
Plant depreciation 600 600
Interest on plant 200 200
General administration 800 800
Notes:
(i) The materials which would be used on the Abuja job have increased in money
value by 60% over their purchase cost. Tayo Limited has no other use for these
materials on any other contract apart from the Abuja one, but they could be re-
sold to other companies in the industry at 90% of their value. Transportation
and other selling costs would further decrease the cash inflow from the sale by
16.67% of the sales price.
(ii) The materials for the Lagos job have no other obvious use, but could be sold for
scrap if the contract were cancelled. The scrap value would be 10% of cost, and
costs of transport, etc. would be paid by the scrap merchant. It is likely,
however, that the materials could be used next year on another contract in
substitution for a different material normally costing 20% less than the cost of
the materials to be used on the Lagos contract.
(iii) Local labour can be hired as and when required.
(iv) Plant is depreciated on a straight line basis, and the interest on plant charge is
a nominal cost added for accounting purposes.
(v) The two contracts would require similar plant, although more plant would be
required for the Lagos than for the Abuja job. The plant not required on the
Abuja job would be sub-contracted out by Head Office for ₦200,000 per annum.
68
(vi) Head office administration costs are fixed at ₦2,500,000 for the coming year.
This excludes project managers‟ salaries.
Required:
a. Present the data to management in a form which will assist in making the
decision as to which job to undertake. Provide notes to explain the
principles which have been used in selecting the data and to support any
calculations made. (12 Marks)
b. Comment on the appropriateness of the approach used in your analysis.

(4 Marks)
c. List briefly any other factors which ought to be considered before finally
making the decision in this case. (4 Marks)
(Total 20 Marks)
QUESTION 5
A company is considering whether or not to invest in any of the two projects where
the initial cash investment would be N13,000,000 for A and N14,000,000 for B. The
project would have a five-year life, and the estimated annual cash flows are as
follows:
Project A
N N
1 6,000,000 3,000,000
2 8,000,000 4,000,000
3 10,000,000 4,000,000
4 9,000,000 3,000,000
5 6,000,000 3,000,000
Total 39,000,000 17,000,000
Project B
N N
1 10,000,000 5,000,000
2 9,000,000 4,000,000
3 8,000,000 3,000,000
4 8,000,000 3,000,000
5 4,000,000 2,000,000
Total 39,000,000 17,000,000
69
The company cost of capital is 10%.
The estimates of cash outflows are considered fairly reliable. However, the estimates
of cash inflows are much more uncertain. Several factors could make the annual cash
flows higher or lower than expected.
Factor 1: There is a 20% probability that government measures to control the Industry
will reduce annual cash inflows by 25%.
Factor 2: There is a 30% probability that another competitor will also enter the
market: this would reduce the estimated cash inflows by 10%.
Factor 3: There is a 40% probability that demand will be stronger than expected. The
company would not be able to supply more products to the market, but it would be
able to sell at higher prices and cash inflows would be 5% higher than estimated.
Required:
a. Calculated the expected net present value of the two projects. (10 Marks)
b. Which of the Projects will be more profitable? (5 Marks)

(Total 15 Marks)
QUESTION 6
TK is a theme park. The following information is available for the forthcoming month:
Forecast daily ticket sales and prices

Ticket Price per
sales ticket
Pre-booked discounted ticket 1,500 N580
Standard ticket 8,000 N780
Premium family ticket (admits 4 people) 675 N3,700
The theme park will be open for 30 days in the month.
Costs
Variable costs per person per day are forecast to be N2050
Fixed costs for the month are forecast to be N130,000,000
Pricing information
The sales of pre-booked discounted tickets and standard tickets will be restricted to
1,500 and 8,000 per day respectively for the forthcoming month. It is forecast that all
of these tickets will be sold.
70
A premium family ticket admits four people to the theme park and allows them to go
to the front of the queues in the theme park. The price of a premium family ticket has
been set at N3,700 in order to maximise the profit from the sale of these tickets for
the month.
Market information shows that for every N100 increase in the selling price of a
premium family ticket, the demand would reduce by 25 tickets. For every N100
decrease in the selling price, the demand would increase by 25 tickets.
The theme park has adequate capacity to accommodate any level of demand for the
premium family tickets. It is to be assumed that four people would always be
admitted on every premium family ticket sold.
Sales of the different ticket types are independent of each other.
Equipment hire
TK is considering hiring some automated ticket reading equipment for the
forthcoming month. The hire of this equipment would increase fixed costs by
N5,000,000 for the month. However, variable costs per person would be reduced by
8% during the period of the hire.
Required:
a) Calculate the financial benefit of hiring the equipment for the forthcoming
month given its impact on variable cost and the price charged for premium
family tickets. (11 Marks)
b) It has now been realised that a competing theme park is planning to offer
discounted ticket prices during the forthcoming months. It is thought that this
will reduce the demand for TK‟s standard tickets. TK will not be able to reduce
the price of the Standard Tickets for the forthcoming month.
Discuss the sensitivity of the decision to hire the equipment to a change in the
number of standard tickets sold per day. (Note: your answer should include
the calculation of the sensitivity). (4 Marks)
(Total 15 Marks)
71
QUESTION 7
Kola Plc produces and sells a brand of security padlock keys. Its budget for next year
is as follows:
N‟000 N‟000
Sales 18,000
Materials (15,000 kg) 1,800
Labour (42,000 hours) 7,560
Variable production overheads (absorbed
on labour hours) 2,520
Fixed production overheads (absorbed on
labour hours) 1,260
Administration overheads (absorbed on
labour hours) 2,520 15,660
Profit 2,340
When reviewing the budget, the company is approached by a customer asking for a
quote for a special security padlock keys - superior lock. Kola Plc is a bit
apprehensive about the order since they tried a similar venture at the end of last year
and made heavy losses as shown below:
N N
Sales (200 units) 960,000
Materials (500kg) 54,000
Labour (5,000 hours) 840,000
Variable production overheads (N42/hour) 210,000
Fixed production overheads (N24/hour) 120,000
Administration overheads - (N36/hour) 180,000 1,404,000
Loss (444,000)
Further research showed that the time taken for the first 50 units of these was 1,800
hours and the first 100 units took 3,000 hours.
The customer is insistent that Kola Plc at least quotes a price for his requirement of
400 units though part of Kola plc‟s reluctance to do so arises from the fact that the
order would divert labour away from the planned production of the regular padlock
keys and the company has found it impossible to recruit more staff. If the contract is
taken on, the same type of material would be used as for the regular padlock keys,
fixed production overheads of N150,000 and N30,000 of administration costs would
be incurred.
Required:
Calculate the minimum price Kola plc should quote for the 400 units of the special
padlock keys. (Total 15 Marks)
72
Formulae
Learning curve
Y = axb
Demand curve
P = a – bQ
change in price
b
change in quantity
MR = a – 2bQ

Y = 𝑎 + 𝑏𝑋
𝑛 𝑋𝑌 − ( 𝑋)( 𝑌)
where b = 2
𝑛 𝑋 − 𝑋 2
𝑦 𝑏 𝑥
a = −
𝑛 𝑛
2
r2 = 2 2
(𝑛 𝑋 − 𝑋 2 (𝑛 𝑦 − 𝑋 2
73
1
3 3
4
Annuity Table
r
Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15
.
74
75
SOLUTION 1
(a) i. Computation of Cost of goods sold for 2021 and 2022
2021 2022
N N
Opening raw Material 108,000 145,800
Materials Purchased 702,000 720,000
Cost of material available 810,000 865,800
Less Closing Material 145,800 180,000
Cost of material used 664,200 685,800
Direct Wages 300,000 250,000
Prime Cost 964,200 935,800
Production expenses 72,600 171,995
1,036,800 1,107,795
Add Opening work in progress 75,600 97,200
Less Closing work in Progress (97,200) (93,360)
Production costs 1,015,200 1,111,635
Add opening Finished goods 86,400 129,600
Less Closing finished goods (129,600) (142,875)
Cost of goods sold 972,000 1,098,360
i. Length of working capital cycle (Assuming 365 days in a year) for 2021 and
2022
Working capital cycle for 2021

Holding Period for raw material stock = [(Opening +Closing )/2] x 365
Purchases
= [(108,000 + 145,800)/2] x 365 = 66 days
702,000
Production period for Work in Progress = [(Opening +Closing) /2] x 365
Cost of goods sold
= [(75,600 + 97,200)/2] x 365 = 33 days
972,000
Holding period for Finished goods = [(Opening +Closing )/2] x 365
Cost of goods sold
[(86,400 + 129,600)/2] x 365 = 41 days
972,000
Collection period for receivables = [(Opening +Closing )/2] x 365
Sales
= [(172,800 + 259,200)/2] x 365 = 73 days
1,080,000
Less Payment period for payable = (Opening +Closing)/2] x 365
Purchases
= (86,400 + 105,300)/2 x 365 = (50 days)
702,000
Working capital cycle 163 days
Working capital cycle for 2022
76
Holding Period for raw material stock = [(Opening +Closing)/2] x 365
Purchases
= [(145,800 + 180,000)/2] x 365 = 83 days
720,000
Production period for Work in Progress = [(97,200 + 93,360)/2 x 365 = 32 days
1,098,360
Holding period for Finished goods = [(Opening +Closing)/2] x 365
Cost of goods sold
= [(129,600 + 142,875)/2] x 365 = 45 days
1,098,360
Collection period for receivables = (Opening +Closing)/2] x 365
Sales
= [(259,200 + 297,000)/2] x 365 = 85 days
1,188,000
Less Payment period for payable = [(Opening +Closing )/2] x 365
Purchases
= [(105,300 + 126,000)/2] x 365 = (59 days)
720,000
Working capital cycle 186 days
(iii) Actions that the management of the company might take to reduce the
length of the cycle:
 Reduce the period raw materials are held in inventory by adopting a JIT
system
 Improve the throughput of the products by adopting efficient
manufacturing equipment and process
 Reducing finished goods holding period by producing to order.
 Reducing the length of time customers take to pay by offering early
settlement discount.
 Negotiate for longer credit period with suppliers
 Company need to improve on sales strategy to sell more maybe open new
markets or they should plan to reduce the sales target to reduce the
amount of finished goods left at the end of the year.
(b)i. Payoff Table

Constructing the Payoff table
Course of Action Demand of 10 boxes Demand of 20 boxes Demand of 30 boxes
N N N
Buy 10 boxes (4000 – 2500)=1500 (4000 - 2500)=1500 (4000 – 2500)=1500
Buy 20 boxes (4000 – 5000)= (1000) (8000 – 5000)=3000 (8000 – 5000)=3000
Buy 30 boxes (4000 – 7500)= (3500) (8000 – 7500)= 500 (12000 – 7500)=4500
77
Payoff table
N N N
Buy 10 boxes 1500 1500 1500
Buy 20 boxes (1000) 3000 3000
Buy 30 boxes (3500) 500 4500
ii. Number of boxes based on maximum decision rule

Course of action Maximum of maximum returns
Buy 10 boxes 1500
Buy 20 boxes 3000
Buy 30 boxes 4500
Decision: Buy 30 boxes

Number of boxes based on maximin decision rule
Course of action Maximum of minimum returns
Buy 10 boxes 1500

Buy 20 boxes (1000)
Buy 30 boxes (3500)
Decision: Buy 10 boxes

Minimax regret decision rule
Constructing the regret Payoff table

N N N
Buy 10 boxes (1500 – 1500)= 0 3000 – 1500=1500 4500 – 1500)=3000
Buy 20 boxes 1500 – (-1000) = 2500 (3000 – 3000)= 0 4500 – 3000)=1500
Buy 30 boxes 1500 – (-3500) =5000 3000 – 500= 2500 4500 – 4500= 0
Regret Payoff table

N N N
Buy 10 boxes 0 1500 3000
Buy 20 boxes 2500 0 1500
Buy 30 boxes 5000 2500 0
Number of boxes based on Minimax regret decision rule

Course of action Minimum of Maxi regret returns
N
Buy 10 boxes 3000
Buy 20 boxes 2500
Buy 30 boxes 5000
Decision: Buy 20 boxes which delivers minimum of the maxi regrets.
78
Examiner‟s report
This is a compulsory question that is in two parts. The first part tests candidates
ability to determine company‟s cost of goods sold and working capital cycle period.
The second part is on decision making under situation of uncertainty as it affects
maxi-max decision rule, mini-max decision rule and maxi-min regret decision rule.
The question being a compulsory question was well attempted.
Performance of the candidates was average.
The major pitfalls are the inability of most candidates to use average stock in
determining the working capital cycle and correctly set out the payoff matrix table.
It is hereby recommended that candidates should use ICAN study manual and other
Performance Management text books in preparing for future Institute‟s examination.
Marking guide
Mark Marks
s
a) i Cost of goods sold 2021 and 2022
(30 ticks @1/10 mark) 3
ii Length of working capital cycle for 2021 and 2022
(28 ticks @1/4 mark) 7
iii Factors that will reduce length of working capital
cycle
(any 5 points @1 mark) 5 15
b) i Pay off table
(21 ticks @1/3 mark) 7
ii  Maximax (5 ticks @½ mark) 2½
 Maximax (5 ticks @½ mark) 2½
 Minimax Regret (6 ticks @½ mark) 3 8 15 30
SOLUTION 2
PAY OFF TABLE (N600)

a. Course of Prob. State of Nature (Demand)
Action 10,000 20,000 30,000 40,000
10,000 0.1 2,700 2,700 2,700 2,700
20,000 0.4 5,700 5,200 5,200 5,200
30,000 0.3 8,700 8,200 7,700 7,700
40,000 0.2 11,700 11,200 10,700 10,200
79
Cost of copies Cost of Unsold copies N600
a. N200 + (250 x 10) + (300 x 0) = 2,700
b. N200 + (250 x 10) + (300 x 0) = 2,700
c. N200 + (250 x 10) + (300 x 0) = 2,700
d. N200 + (250 x 10) + (300 x 0) = 2,700
e. N200 + (250 x 10) + (300 x 10) = 5,700
f. N200 + (250 x 20) + (300 x 0) = 5,200
g. N200 + (250 x 20) + (300 x 0) = 5,200
h. N200 + (250 x 20) + (300 x 0) = 5,200
i. N200 + (250 x 10) + (300 x 20) = 8,700
j. N200 + (250 x 20) + (300 x 10) = 8,200
k. N200 + (250 x 30) + (300 x 0) = 7,700
l. N200 + (250 x 30) + (300 x 0) = 7,700
m. N200 + (250 x 10) + (300 x 30) = 11,700
n. N200 + (250 x 20) + (300 x 20) = 11,200
o. N200 + (250 x 30) + (300 x 10) = 10,700
p. N200 + (250 x 40) + (300 x 0) = 10,200
State of Nature (N‟000)

Course of Action Prob. 10,000 20,000 20,000 40,000
10,000 0.1 N270 N270 N270 N270
20,000 0.4 N2,280 N2,080 N2,080 N2,080
30,000 0.3 N2,610 N2,460 N2,310 N2,310
40,000 0.2 N2,340 N2,240 N2,140 N2,040
b. Maximax Decision Rule

course of Action Maximum Profit
10,000 270
20,000 2,080
30,000 2,310
40,000 2,040
*Least Cost yields highest profit

Decision: 10,000 copies
c. The production or printing of the programmes involves incurring fixed cost. The
larger the volume printed, the lower will be the cost of printing per copy.
Therefore, printing 30,000 or 40,000 copies will be an optimistic decision
informed by the need to maximise the benefit that is derivable from the fixed
cost of printing.
80
d. Profit from perfect forecast: N‟000
Result without perfect information (270 + 2080 + 2310 + 2040) (6,700)
Result with perfect information (270 + 270 + 270 + 270) (1,080)
5,620
e. Limited of expected value criteria

i. It depends on subjective probability
ii. Only useful for repetitive outcome and not for one-off
iii. The expected value might not be one of the possible outcome
iv. It does not give a view of the risk involved
v. it is a weighted average of all possible outcomes.
Examiner‟s report
The question is on decision making under uncertainty and tests candidates‟ ability to
answer questions on maxi-max decision rule and decision on perfect information.
The question was well attempted.
The Performance of the candidate was average.
The major pitfall observed was the inability of candidates to set out the Payoff matrix
table and decipher the process of computing values when there is perfect
information.
It is hereby recommended that candidates should use ICAN study manual on

Performance Management when preparing for future Institute‟s examination.
Marking guide
a. Pay off table
 15 ticks @1/5 mark) 3
 15 ticks @1/5 mark) 3 6
b. Number of programmes
(8 ticks @½ mark) 4
c. Most profitable quantity
(4 points @½ mark) 2
d. Profit from perfect forecast
e. Major Limitations
(4 points @1 mark) 4 20
81
SOLUTION 3
(a) Relevant costs and relevant revenues from acceptance of contract

(₦‟000) (₦‟000)
Sales revenue (20,000 kg at ₦10,000) 200,000
Relevant costs:
Labour (20,000 × 6hrs × ₦200) 24,000
Materials
A (20,000 × 2 units × ₦1,000 replacement cost) 40,000
B (20,000 × 1 litre × 2,500 NRV) 50,000
Variable overheads b (20,000 × 8hrs × ₦300) 48,000
162,000
Add increase in fixed costs 22,800
Net incremental costs 184,800
Add
Loss on product Y
Lost contributionc (5,000 × ₦3,800) 19,000
Fixed costs avoidedd (5,800) 13,200 198,000
Excess of relevant revenues over relevant costs 2,000
Advice: In view of the fact that the Contract achieved excess of relevant revenue over
relevant cost, the Contract is therefore desirable.
Notes
i. Grade 1 labour is not an incremental cost.
ii. Variable overheads vary with production labour – 8 labour hours per unit are
used, causing variable overheads to increase by ₦300 per hour. Grade 1 labour
is not an incremental cost, but it does cause variable overheads to increase.
iii. Lost contribution
Selling price 7,000
Less
Grade 2 labour (4 hrs × ₦200) 800
Materials 1,200
Variable overheads (4 hrs × ₦300) 1,200 3,200
Contribution 3,800
iv. Assumed fixed costs represent incremental costs or incremental savings.
82
(b) To calculate the product cost for job costing purposes it is necessary to
calculate the fixed overhead rate. The calculation is as follows:
Fixed overheads Director labour hours
Initial budget ₦60,000,000 300,000
Plus contract ₦22,800,000 160,000a
Less product Y (₦5,800,000) (20,000) = (4hrs × 5,000)
₦77,000,000 440,000
Fixed overhead absorption rate = ₦175/hour (₦77,000,000/440,000hrs).

Note
a
The fixed overhead rate is per productive labour hour. Grade 1 labour hours
represent additional productive labour hours. If the contract is not accepted
then grade 1 labour hours will be non-productive. Total productive hours
relating to the contract = 2,000 × (2 hours + 6 hours) = 160,000 hours
The job costing contract will be reported as follows:

(₦000) (₦000)
Direct labour:
Grade 1 (20,000×2hrs×₦400) 16,000
Grade 2 (20,000×6hrs×₦200) 24,000 40,000
Direct materials:
A (20,000×2units×₦800) 32,000
B (20,000×1litre×₦3,000) 60,000 92,000
Variable overheads
20,000×8hrs×₦300 48,000
Fixed overheads
20,000×8hrs×₦175 28,000 76,000
Total cost (208,000)
Sales revenue 200,000
Reported loss (8,000)
c. The difference between the relevant cost profit of ₦2,000,000 and the routine
cost loss of ₦8,000,000 arises because of the different ways in which costs are
determined in each statement. A reconciliation and summary of the difference is
as follows:
Difference
₦000 Explanation
Grade 1 labour 16,000 Not charged as a relevant cost because it is
„sunk‟ and will be incurred anyway.
Material A (8,000) Replacement cost is relevant but book value
is the routing charge.
Material B 10,000 Book value overstate the charge – realisable
value is the relevant cost.
83
Fixed overheads 5,200 Routine costing passes on overheads that
would be incurred anyway. The relevant cost
is simply the incremental cost.
Effect on product Y (13,200) Routine costing ignores the loss of
contribution from Y – relevant costing takes it
into account
10,000
Examiner‟s report
The question test‟s candidate‟s ability to answer questions on relevant costing.
The Performance was above average.
The major pitfall observed was candidate inability to decipher relevant costs of
material, labour and overhead cost elements in situations involving replacement
costs, realisable value of materials and replacement costs.
It is hereby recommended that candidates should use ICAN Study Text on

Performance Management when preparing for future Institute‟s examination.
Marking guide
a Desirability of the contract
b Routine job casting
c Differences between (a) and (b)
(Any 4 points @1½ marks) 6 20
SOLUTION 4
TAYO LIMITED
a) Consequences of undertaking the:
Abuja Lagos
Contract contract
₦‟000 ₦‟000 ₦‟000 ₦‟000
Contract revenue 17,000 18,000
Sale of materials held for the Abuja contract
(Note 1) 2,400
Saving in material purchases by alternative use
of materials for Lagos contract (note 2) 4,800
Hire of plant 200 _______
₦22,000 ₦20,400
84
Incremental costs:
Materials to be ordered (note 3) 4,000 3,400
Project manager‟s travel, lodging, etc. 400 400
Local labour 7,000 5,600
Penalty for cancelling the other contract 800 1,600
12,200 11,000
Excess of revenue/savings over
incremental costs ₦9,800 ₦9,400
Notes:
i. If the Lagos job is undertaken, sales of materials no longer required for the
Abuja job would be:
₦‟000
Current market price = ₦2,000 × 1.60 = 3,200
Sales value = ₦3,200 × 90% 2,880
Less transport cost (16.67%) 480
Net sales revenue 2,400
ii. If the Abuja job is undertaken, the materials for the Lagos job might be re-used
on a different contract, thereby saving the purchase of additional materials:
₦‟000
Materials held 2,400
Contracted for 3,600
Cost of unwanted materials 6,000
Saving in purchases on different contract (80%) ₦4,800
iii. The materials contracted for to carry out the Lagos job must be paid for
whatever happens. Although not yet received, they must be paid for whichever
(if either) contract is undertaken. It is therefore not an incremental cost
chargeable to the Lagos contract.
For similar reasons, materials already held are not an incremental cost to their
respective contracts. The alternative use of materials not required, is however,
significant - and this has been taken into account on the revenue side of the
analysis.
iv. It is assumed that the project manager‟s salary is a fixed cost, whichever
contract (if either) is undertaken. Incremental labour costs are therefore travel,
lodgings etc. and local labour.
v. The penalty cost of failing to undertake one contract should be treated as a

consequential cost of undertaking the other contract.
vi. The excess of revenue/savings over incremental costs calculated for each
contract shows the comparative effect on profits of undertaking each job in
preference to the other. The difference between the two figures (₦9,800,000
85
and ₦9,400,000) shows that there is a difference between the two projects of
₦400,000 in favour of the Abuja job.
b. The approach used has assumed that one project or the other will be
undertaken. Some costs have already been incurred (some materials, plant);
other costs have been committed (project manager‟s salary, head office
administration) and others are notional (interest on plant).
These are not relevant to any decision about the future action. The only relevant
considerations should be:
i. future revenues or cash savings as a consequence of the decision;

ii. future costs, incurred as an additional expense as a consequence of the
decision.
In the situation in part (a), incremental revenues are the revenues from the
contract undertaken, alternative uses of materials held but not required and hire
of plant. Incremental costs are only those additional costs which would be
incurred as a result of the decision to undertake one of the contracts.
The cost accounting profit or loss recorded for each contract might be:
Abuja: ₦17,000,000 – ₦16,000,000 = ₦1,000,000
Lagos: ₦18,000,000 – ₦18,200,000 = (₦200,000)
These figures are irrelevant to a decision because the costs include past,
committed or notional costs, and other revenues and penalty costs to the company
are ignored.
c) Other factors to consider are:

i. the constraints on working which make the contract mutually exclusive. If
there is a shortage of labour, funds etc. it might be possible to overcome
and carry out both projects;
ii. the likelihood of another contract being offered for the same period of
time, which is more profitable than either the Abuja or Lagos jobs;
iii. loss of goodwill and future contracts by not undertaking either project;
iv. reliability of the prospective customer in each contract
v. reliability of costs forecasts, labour availability etc. on both contracts. The
net difference between the two jobs, ₦400,000, is relatively small and
sensitivity/risk analysis will be very important;
vi. the preference for the Lagos contract (by ₦400,000) has assumed that the
alternative use for the Lagos contract materials will exist. It is only a
likelihood, however. Failure to obtain this saving would shift the
preference strongly in favour of accepting the Lagos job.
86
Examiner‟s report
The question test‟s candidates ability to answer questions on relevant costing
and decision making.
The major pitfall observed was candidates‟ inability to decipher relevant costs of
material, labour and overhead in situations involving replacement and historical
costs.
It is hereby advised that candidates should use ICAN study manual on Performance
Management when preparing for future institute‟s examination.
Marking guide
a Date to assist Decision Making
b Comment on Appropriations
(Any 4 points @ 1mark) 4
c List of factors
(Any 4 points @ 1mark) 4 20
SOLUTION 5
a. Calculate the expected net Present value of the two Projects

Computation of joint Probability distribution
S/N Factor 1 Factor 2 Factor 3 Workings Joint
Probability
1 YES YES YES 0.2 x 0.3 x 0.4 0.024
2 YES YES NO 0.2 x 0.3 x 0.6 0.036
3 YES NO NO 0.2 x 0.7 x 0.6 0.084
4 NO NO NO 0.8 x 0.7 x 0.6 0.336
5 NO NO YES 0.8 x 0. 7 x 0.4 0.224
6 NO YES YES 0.8 x 0.3 x 0.4 0.096
7 YES NO YES 0.2 x 0.7 x 0.4 0.056
8 NO YES NO 0.8 x 0.3 x 0.6 0.144
Total 1.000
87
Impact on inflow
S/N Joint Inflow impact Result Final
Probability expected
value
1 0.024 1 - 0.25 -0.10 + 0.05 0.70 0.0168
2 0.036 1 -0.25 – 0.10 0.65 0.0234
3 0.084 1 – 0.25 0.75 0.0630
4 0.336 1-0.0 1.00 0.3360
5 0.224 1 +0.05 1.05 0.2352
6 0.096 1 -0.10+ 0.05 0.95 0.0912
7 0.056 1 – 0.25 + 0.05 0.80 0.0448
8 0.144 1 – 0.10 0.90 0.1296
1.000 0.9400
Thus the EV of considering the 3 factors is 0.94. Therefore the NPV of Project A
and B are:
Project A
Year Cash inflow EV of Cash Net Discount PV of cash
Cash outflow Cash flow rate 10% flow
flow
N‟000 N‟000 N‟000 N‟000 N‟000
0 - (13000) (13,000) 1.000 (13000)
1 6000 x 0.94 5640 (3000) 2640 0.909 2399.76
2 8000 x 0.94 7520 (4000) 3520 0.826 2907.52
3 10000 x 0.94 9400 (4000) 5400 0.756 4002.40
4 9000 x 0.94 8460 (3000) 5460 0.683 3729.18
5 6000 x 0.94 5640 (3000) 2640 0.621 1639.44
NPV +1678.30
Project B
Cash flow outflow flow rate 10% flow
N‟000 N‟000 N‟000 N‟000 N‟000
0 - (14000) (14,000) 1.000 (14000)
1 10000 x 0.94 9400 (5000) 4400 0.909 3999.60
29000 x 0.94 8460 (4000) 4460 0.826 3683.96
38000 x 0.94 7520 (3000) 4520 0.756 3417.12
48000 x 0.94 7520 (3000) 4520 0.683 3087.16
54000 x 0.94 3760 (2000) 1760 0.621 1092.96
NPV +1280.80
b. Project A will be more profitable with a higher NPV of N1,678,300
88
Examiner‟s report
The question test‟s candidates‟ ability to provide solutions on investment appraisal
decision with sensitivity components.
The major pitfall observed was the candidates‟ inability to decipher the sensitivity
issues that bother on factors that affect the cash inflows for both Projects A and B.
Management when preparing for future Institute‟s examination.
Marking guide
a. Expected Net Present Value

 Joint Probability
(9 ticks @1/6 marks) 1½
 Impact on cashflow
(9 ticks @1/6 marks) 1½
 (7 ticks @1 mark) 7 10
b. The more profitable project
(10 ticks @½ mark) 5 15
SOLUTION 6
a) Current Position
Particulars Pre-booked Standard Premium Family
Sales Price per ticket ₦580 ₦780 ₦3,700
No of ticket 1,500 8,000 675
Monthly sales in quantity 30 x 1500 =45,000 240,000 20,250
Monthly Fixed Costs N130,000,000

Determination of Optimal price of Premium family:
P = a + bx
Where a = Maximum Price at which no Premium Ticket will be sold:
b = Changes in P = Price Elasticity
Changes in X
Marginal cost = Variable Cost = N2050 x 0.92 = N1886

100
b  4
 25
89
Therefore:
p  a  bx
P  a  4x
3,700  a  4675 
 a  2700
a  3700  2700
a  6,400. Therefore P  6,400  4 x
Converting to Total Revenue

TR=P x Q
6,400  4 x x
 6,400 x  4 x 2
TR
MR   6,400  8 x
x
MC  VC  1886
Pr ofit is max imized where
MR  MC
6,400  8 x  1,886
 8 x  1,886  6,400
 8 x  4,514
x  4,514 /  8
x  564units
Contribution: Pre-booked Standard Premium
Ticket Ticket
Price 580 780 6,400
Variable Cost (1,886) (1,886) (1,886)
(1,306) (1,106) 4.514
Tickets sold per month 45,000 240,000 16,920
(58,770,000) (265,440,000) (76,376,880)
Total Quantity for the month 1500 x 30=45,000; 8,000 x 30=240,000; 564 x
30=16,920
Total Contribution
Prebooked Ticket (58,770,000)

Standard Ticket (265,440,000)
Premium Ticket 76,376,880
(247,833,120)
Decision: No financial benefit unless it is undertaken for corporate
social responsibility
90
b. Sensitivity Analysis
Variable Cost Savings from Standard Ticket [(2,050 – 1,886) x 8,000 x 30]
= 39,360,000
Hiring Cost of equipment = (5,000,000)
34,360,000
Examiner‟s report
The question tests candidates‟ ability to provide solutions on optimal pricing,
marginal cost and sensitivity implication on hire of ticketing equipment.
The major pitfall observed was the candidates‟ inability to decipher the method
to be used to compute the marginal revenue as well as determine the sensitivity
components of hire of the ticketing equipment.
Management when preparing for future Institute‟s examination.
Marking guide
a Financial benefit and Premium Price Charged

b Sensitivity Analysis
(4 ticks @1 mark) 4 15
SOLUTION 7
Working Notes
 The contract time for the 400 units is calculated using the learning curve
technique. The company has already produced 200 units and now needs to
produce another 400, i.e. 600 in total.
 The learning rate is computed as follows:

Cumulative Cumulative Cumulative Average
Quantity Hours Hours per unit
50 1,800 36
100 3,000 30
1
The learning rate is therefore 30/36 = 83 /3%
 The contract time can now be determined using the learning curve formula:
Y = axb
91
Where:
Y = Cumulative average time for the cumulative output of 600 units
A = the average time for the first batch i.e. 36 hours
Output level desired 600

x= = = 12
Number of units in the 1st bacth 50
Log of .83333
b= = −0.263
Log of 2
:. Y = 36(12)-0.263 = 18.73 hours
Total hours for the 600 units= 600 x 18.73 = 11,238 hours
Less: Total hours for the first 200 units

already produced 5,000 hours
Hours now required 6,238 hours
 Contribution per labour hour. This is necessary because labour is in short supply.
Any labour hour used on the special order entails opportunity cost. From the
budget statement.
N‟000 N‟000
Sales 18,000
Materials 1,800
Labour 7,560
VOH 2,520 11,880
Contribution 6,120
Budgeted labour hours 42,000
Contribution/hour = 6,120,000 ÷ 42,000 = ₦145.71
Calculation of minimum price

₦
Materials 1,000kg x N1,800,000 = 120,000
15,000
Labour 6,238 x 7,560,000 = 1,122,840

42,000
VOH 6,238 x 2,520,000 = 374,280

42,000
Direct fixed costs = 180,000
Opportunity cost of
labour 6,238 x ₦145.71 908,939
Minimum price N2,706,059
92
Examiner‟s report
This question tests candidates‟ ability to use relevant costing approach to determine
the minimum price to quote for special security padlock considering the learning
effect on labour hours.
The question was fairly attempted.
However, the performance was average.
The major pitfall observed was candidate inability to take note of the implication of
learning effect on labour and variable overhead cost.
It is hereby recommended that candidates should use ICAN study manual on

Performance Management when preparing for future Institutes‟ examination.
Marking guide
The Minimum Price
(15 ticks @1 mark) 15
93
ICAN/232/Q/B4 Examination No....................
EXAMINATION INSTRUCTIONS
PLEASE READ THESE INSTRUCTIONS BEFORE THE COMMENCEMENT OF THE PAPER
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the examination hall. You will be stopped from continuing with the examination
and liable to further disciplinary actions including cancellation of examination
result if caught.
2. Write your EXAMINATION NUMBER in the space provided above.
3. Do NOT write anything on your question paper EXCEPT your examination
number.
4. Do NOT write anything on your docket.
5. Read all instructions in each section of the question paper carefully before
answering the questions.
6. Do NOT answer more than the number of questions required in each section,
otherwise, you will be penalised.
7. All solutions should be written in BLUE or BLACK INK. Any solution written in
PENCIL or RED INK will not be marked.
8. A formula sheet and discount tables are provided with this examination paper.
WEDNESDAY, NOVEMBER 15, 2023
DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO
57


QUESTION 1
Oshimiri Nigeria Limited, a company based in Aba, produces two grades of industrial
vanish. The selling price and associated unit variable costs for vanish Grade A and
Grade B are shown below:
Particulars Grade A Grade B

N N
Selling Price 2,100 1,500
Material x - N240 per kg 480 240
Skilled Labour - N144 per Hour 720 288
Unskilled Labour - N60 per hour 120 180
Variable overhead - N84 per machine hour 168 336
The fixed overhead costs are N2,600,000 per month. The company plans to maximise
profits.
The availability of resources for the following month is as follows:
Material X 25,000Kg
Skilled labour 48,000 hours
Unskilled labour 39,000 hours
Machine hours 50,000 hours
Required:
a. Identify the objective function and the constraints of the model to be used in
determining the optimum production plan for the following month.
(5 Marks)
b. Determine the optimum production plan for the month and the associated
Profit. (5 Marks)
c. Explain the concept and significance of dual prices and slack variables in the
context of the model used by the company in this scenario. (4 Marks)
d. Calculate the dual prices for constraints identified in this scenario.

(10 Marks)
58
e. Suggest ways in which the management can overcome the capacity
constraints identified above during the month and the cost implications.
(6 Marks)
(Total 30 Marks)
QUESTION 2
Ope-Olu Limited produces and sells household items. For a particular product, the
marketing department has prepared the following quarterly expected demand for
next year:
Quarter Expected Demand

(Units)
1 400,000
2 440,000
3 760,000
4 560,000
The existing production facility can only produce 540,000 units per quarter under
regular time. However, it is possible to increase output by 40% if working overtime is
introduced.
It is the policy of the company to manufacture units using a constant level of

production system. This means that although the opening and closing levels of
inventory for the year are zero units, there are increases and decreases in the
quarterly inventory levels. Based on this policy, the unit selling price, variable
production costs and contribution for next year are expected to be as follows:
N per unit N per unit

Selling price 450
Direct materials 150
Direct labour 175
Variable production overhead 50 (375)
Contribution 75
The following additional information is available:

 Overtime is paid at 150% of normal rate and the unit variable production
overhead cost will increase by 25% for those units produced during overtime
working.
 The company incurs a holding cost (based on average inventory) of N25 per unit
per quarter for each item that is held in inventory.
59
 The company is considering whether it should change to a just-in-time (JIT)
production system, but it is concerned that due to the fluctuating levels of its
sales demand, this may not be financially beneficial.
Required:
a. Discuss generally, the key conditions that are necessary for the successful
implementation of JIT manufacturing system. (7 Marks)
b. Calculate the cost of holding inventory for each of the quarters and the year in
total under the current production system. (6 Marks)
c. Calculate the financial impact of changing to a JIT production system.

(7 Marks)
(Total 20 Marks)
QUESTION 3
You are the management accountant of a large manufacturing company in Kaduna.
A management retreat has been planned for next week to set agenda for the
preparation for next year‟s budget.
Required:
a. Outline the key stages in the planning process that link long-term objectives
and budgetary control. (8 Marks)
b. Explain the meaning of the terms 'fixed budget', 'rolling budget' and 'zero-
based budget', and discuss the circumstances under which each budget might
be used. (8 Marks)
c. Discuss whether time series analysis may be preferred to linear regression as a
way of forecasting sales volume. (4 Marks)
(Total 20 Marks)
QUESTION 4
PK Limited manufactures two models of heavy-duty cooking rack suitable for use in
restaurant kitchens and similar commercial environments. Both models use the same
types of raw material and machine hour. No inventories are held. The sales budget
for next year is as follows:
Model A Model B
Sales units 300,000 140,000
Selling prices N1,000 N1,400
The following additional information is provided:
60
 Cost data:
Model A Model B
Material cost N400 N500
Variable production
N100 N300
conversion costs
 Fixed production overheads attributable to the manufacture of the two models

amount to N40,500,000
 Each model is completed in the machining department. The production rate per
hour in the department is:
Model A 12.5 units

Model B 10 units
 Availability of machine hours is limited to 30,000 hours.
Required:
a. Using marginal costing principles, calculate the mix (units) of each model
which will maximise net profit and indicate the value of the net profit.
(5 Marks)
b. Calculate the throughput accounting ratio for each of the two models and briefly
discuss when it is worth producing a product where throughput accounting
principles are in operation. Your answer should assume that the variable
overhead cost amounting to N24 million incurred as a result of the chosen
product mix in part (a) is fixed in the short-term. (7 Marks)
c. Using throughput accounting principles, advise management of the quantities

of each model that should be manufactured which will maximise profit and
prepare a projection of the net profit that would be earned by PK Limited next
year. (5 Marks)
d. Explain two aspects in which the concepts of „contribution‟ in throughput
accounting differs from its use in marginal costing. (3 Marks)
(Total 20 Marks)

QUESTION 5
Vena Plc. manufactures engineering equipment. The company has received an order
from a new customer for 5 machines at N5,000,000 each. Vena Plc.‟s terms of sale are
10 percent of the sales value payable with order. The deposit has been received from
the new customer. The balance is payable 12 months after acceptance of the order by
Vena Plc.
61
Vena Plc.'s past experience has been that only 60 percent of similar customers pay
within 12 months.
Customers who do not pay within 12 months are referred to a debt collection agency
to pursue the debt. The agency has in the past had a 50 percent success rate of
obtaining immediate payment once they became involved. When they are
unsuccessful, the debt is written off by Vena Plc. The agency‟s fee is N500,000 per
order, payable by Vena Plc. with the request for service. This fee is not refundable if
the debt is not recovered.
You are an accountant in Vena Plc.‟s credit control department, and based on the
company's past experience and on discussions with the sales and credit managers,
you do not expect the pattern of payment and collection to change.
Incremental costs associated with the new customer's order are expected to be
N3,600,000 per machine; 70 percent of these costs are for materials and are incurred
shortly after the order has been accepted. The remaining 30 percent is for all other
costs which you can assume are paid shortly before delivery that is, in 12 months‟
time. The company is not presently operating at full production capacity.
A credit bureau has offered to provide an error-free credit information about the new
customer if the price is right.
Vena Plc.‟s opportunity cost of capital is 16 percent. Ignore taxation.
Required:
Write a report to the Credit Control Manager which;
a. Evaluates, from a purely financial point of view, whether Vena Plc. should
accept the order from the new customer on the basis of the above
information. (12 Marks)
b. Comment on what other factors should be considered before a decision to
grant credit is taken. (3 Marks)
(Total 15 Marks)
QUESTION 6
Omegboje and company is a medium scale outfit that specialises in rental business in
Owerri and Isiekenesi towns. The company has a gigantic event center in each of the
two cities. The rental business is tailored to supplying of chairs, tables and canopies
to outdoor event centres and in some cases to indoor event centre owned by the
company.
Each event centre is managed by a manager who is given some level of
independence in the management of the affairs of the centre. Event centre managers
and their staff are rewarded with performance bonus of 10% of sales if they earn
more than the approved standard returns on capital employed which is 50%.
62
The following information is extracted from the accounts of the company as it relates
to the centres for two years ended December 31, 2020 and 2019.
Particulars Owerri Event Centre Isiekenesi Event Centre
2020 2019 2020 2019
N’000 N’000 N’000 N’000
Revenue 10,400 9,600 10,000 6,000
Rental and hiring 2,100 1,800 2,000 1,000
expenses
Salaries and wages 2,580 2,300 2,230 2,120
Consumables 970 880 850 540
Other operating costs 1,450 1,150 950 700
Total non-current asset
less depreciation 6,400 6,100 5,900 5,700
Total current asset less
cash and bank 1,300 1,100 1,500 1,690
Cash and bank 1,000 900 1,000 1,200
Long term debts 1,400 1,500 1,300 1,100
Current liabilities 1,100 1,000 1,200 1,150
Interest expenses 250 250 250 220
Further information:
(1) Revenue is derived from rentals and other ancillary services to customers.
(2) Both centres have a cost of capital of 15%.
(3) Ignore taxation and inflation.
Required:
a. Discuss the relative performance of the two centres using the following basis:
i. Return on capital employed
ii. Residual income model
iii. Profit margin
iv. Current ratio
v. Quick ratio
vi. Gearing ratio
vii. Interest cover (7 Marks)
b. Compute the performance bonus of the centres (if any) and state your
workings. (4 Marks)
c. Briefly state the role of a Management Accountant in Project management.
(4 Marks)
(Total 15 Marks)
QUESTION 7
a. Define the following concepts:
i. Responsibility accounting
ii. An investment centre
63
iii. Return on Investment (ROI)
iv. Residual income (6 Marks)
b. Ngerige and Sons limited has four operating divisions which are spread in four
cities in Nigeria: Lagos, Kano, Gombe and Enugu. These divisions are treated
as investment centres for the purpose of performance reporting. The following
information is available:
S/N Particulars Lagos Kano Gombe Enugu

1. Divisional investment N10,000,000 N4,000,000 N3,000,000 N7,000,000
2. Divisional sales N53,000,000 N23,000,000 N24,600,000 N29,400,000
3. Divisional variable costs N50,000,000 N22,000,000 N23,400,000 N27,400,000
4. Divisional fixed costs N1,500,000 N750,000 N600,000 N800,000
The company‟s annual fixed cost is N1,300,000 which is apportioned to the divisions
on the basis of sales.
The cost of capital for Ngerige and Sons limited is 7.5%

Ignore taxation.
Required:
i. Evaluate the performance of the divisions using:
ROI method. (3 Marks)
Residual Income Method. (3 Marks)
ii. Re-evaluate the residual income situation of the company given that the cost of
capital is 10%. (3 Marks)
(Total 15 Marks)
64
Formulae
Learning curve
Y = axb
Demand curve
P = a – bQ
change in price
b
change in quantity
MR = a – 2bQ
Y = 𝑎 + 𝑏𝑋
𝑛 𝑋𝑌 − ( 𝑋)( 𝑌)
where b = 2
𝑛 𝑋 − 𝑋 2
𝑦 𝑏 𝑥
a = −
𝑛 𝑛

2
r2 = 2 2
(𝑛 𝑋 − 𝑋 2 (𝑛 𝑦 − 𝑋 2
65
1
3 3
4
Annuity Table
r
Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15
66
67
SOLUTION 1
a. Identify the objective function and the constraints of the model (linear
programming model)
Contribution per unit

A B
Selling Price N2,100 N1,500
Less Variable costs:
Material X 480 240
Labour 1-Skilled 720 288
Labour 2-Unskilled 120 180
Total variable cost 1,488 1,044
Unit contribution 612 456
Objective function = C = 612a + 456b

Constraints:‟
Material will be 2a + b ≤ 25,000
Skilled labour will be 5a + 2b ≤ 48,000
Unskilled labour will be 2a + 3b ≤ 39,000
Machine hours will be 2a + 4b ≤ 50,000
Non negativity a, b ≥ 0
In determining where the constraint equation lines cross a and b axes
Material: 2a + b = 25000 Which is a = 12,500 b = 0; a = 0 b =

25,000
Skilled labour: 5a + 2b = 48000 Which is a = 9600 b = o; a = 0 b = 24,000
Unskilled labour: 2a + 3b = 39000 which is a = 19500 b = 0; a = 0 b =
13,000
Machine hours: 2a + 4b = 50000 which is a = 25000 b = 0; a = 0 b =
12,500
Graphically:
b
Machine hours
Material
A Unskilled
B Skilled
C
0 D a
The binding constraints are skilled and unskilled labour.
68
From the Graph, the non-limiting factors are material and machine hours while
the limiting factors are skilled labour and unskilled labour.
b. Determine the optimum production plan for the month and associated Profit
Hence the equations from the linear programme are:
Skilled Labour = 5a + 2b = 48,000 …………. …... Equation 1

Unskilled Labour = 2a + 3b = 39,000 ….…….......... Equation 2
Multiply Equation 1 by 3 = 15a + 6b =144,000 …........ Equation 3
Multiply Equation 2 by 2 = 4a + 6b = 78,000 ……….….Equation 4
Subtract Equation 4 from Equation 3
11a = 66,000
a = 6000
Substitute for a in Equation 1

5a + 2b = 48000
5 (6000) + 2b = 48000
30000 + 2b = 48,000
2b = 48000 - 30000
= 18000
b = 9000
Maximum contribution = 612a + 456b

= 612 x 6000 + 456 x 9000
= N7,776,000
Less Fixed cost N2,600,000
Net Profit N5,176,000
c. Concept of dual prices and slack variables

The concept or model used in this situation of dual or double limiting factor
decision tool is linear programming approach and it provides instrument for
computing optimum solutions when dual constraints are identified. In this case,
some constraints are not limiting while some are limiting. Skilled and unskilled
labour hours are the relevant constraints. The dual prices are also known as
shadow prices. The shadow or dual price of a constraint is the change in the
objective function that is brought about if such constraint is changed by one
unit.
Slack variables on the other hand refer to the amount of the available resources
not used in the optimal solution. Only non limiting resources have slack
variables. Limiting resources are fully utilised and therefore do not have slack
values. In this case, the slack variables can be determined from material and
machine hour resources.
69
d. Calculate the dual prices for constraints identified in this scenario
Dual price for Skilled Labour
Skilled Labour = 5a + 2b = 48,001 ….…….……..... Equation 1
Unskilled Labour = 2a + 3b = 39,000 ……….……...…Equation 2
Multiply Equation 1 by 3 = 15a + 6b =144,003 …….. Equation 3
Multiply Equation 2 by 2 = 4a + 6b = 78,000 …..…....Equation 4
11a = 66,003
a = 6000.2727
Substitute for a in equation 1

2a + 3b = 39,000
2(6,000.2727) + 3b = 39,000
12,000.545 + 3b = 39,000
3b = 39,000 – 12,000.545 = 26,999.4545
b = 8,999.82
New Max. contribution

= 612a + 456b = 612 x 6,000.2727 + 456 x 8,999.82 = N7,775,918.14
Old contribution = N7,776,000.00

Dual price for skilled labour = N81.86
Dual price for unskilled labour
Skilled Labour = 5a + 2b = 48,000 ……………...Equation 1
Unskilled Labour = 2a + 3b = 39,001 …..……….….Equation 2
Multiply Equation 1 by 3 = 15a + 6b = 144,000 …….... Equation 3
Multiply Equation 2 by 2 = 4a + 6b = 78,002 …….…... Equation 4
11a = 65,998
a = 5,999.82
Substitute for a in equation 1

5a + 2b = 48,000
5(5,999.82) + 2b = 48,000
29,999.10 + 2b = 48,000
2b = 48,000 – 29,999.10 = 18,000.90
b = 9,000.45
New maximum contribution

= 612a + 456b = 612 x 5,999.82 + 456 x 9,000.45= N7,776,095.04
Old contribution = N7,776,000.00
Dual price for unskilled labour = N95.04
70
e. Ways linear programming model can be used to overcome capacity constraints:
 Investigate alternative sources of materials, skilled labour and unskilled

labour. Such sources may necessitate overtime hours and bonuses;
 Increase operating hours of machinery. Including maintenance cost or
purchase cost;
 Increase output per machine hours which could lead to additional labour
cost;
 Acquisition of machines requiring purchase and capital costs (Investment or
capital outlay); and
 Subcontract some of the production to outsiders at higher purchase price
which could be higher than the incremental costs.
Examiner’s report
Question one is a compulsory question. This question tested candidates
understanding of Linear Programming in capacity decision making and dual pricing
in situation where there are limiting and non-limiting equations. Being a compulsory
question, most candidates attempted this question. However performance was
average.
Major Pitfall was candidates‟ inability to decipher limiting and non-limiting
equations as well as computation of dual prices.
Candidates are encouraged to intensively use the ICAN study guide when preparing
for future ICAN Examinations.
Marking guide
Marks Marks
a. Identification of objective function and
constraints of the model
(30 ticks = 5 marks) 5
b. Determine optimum plan and associated
profit. 5
(20 ticks = 5 marks)
c. Explain the concept and significance of dual
prices and slack variables.
Dual price: (Any 4 Points = 2 marks) 2
Slack variables: (Any 4 points = 2 marks) 2 4
d. Calculate the dual prices for the constraints.
(30 ticks = 10marks) 10
e. Suggest the ways in which the model will be
used to overcome capacity constraints.
(3 points @ 2 marks each) 6
Total 30
71
SOLUTION 2
(a) Set out below are the conditions that are necessary for the successful
implementation of a JIT manufacturing system.
Suppliers
 Quality raw materials/components

Stocks of raw materials/components, work in progress and finished goods are
kept at near zero levels under a JIT system. Raw materials/components must
therefore be of 100% quality, as defects stop the production line and, with no
buffer stocks available, they could possibly result in failure to meet delivery
dates to customers.
 Delivery on time
As well as being responsible for the quality of raw materials/components,
suppliers must also guarantee to deliver on time so that there are no
production delays.
 Small deliveries
Order sizes should be small to avoid the build up of stocks and the costs
associated with this.
 Close relationships
You must therefore establish long-term commitments with a limited number
of suppliers with whom you should deal exclusively in their component areas.
They guarantee to deliver material of 100% quality on time in return they are
guaranteed demand for their products.
Production
 Smooth production flow
The rate of production should be kept as smooth as possible as fluctuations
can cause delays and lead to high levels of work in progress.
 Pull system
Production in one process is only carried out when output of that process is
needed by the next.
Ultimately this means production is entirely based on customer demand for
final output.
 Set-ups
Because production runs are short, there are more of them, and set-ups need
to be quick and inexpensive.
 Machine maintenance
Routine preventative maintenance will avoid machine downtime.
72
Employees
 Flexible and multi-skilled workers
Workers must be multi-skilled and flexible in order to be able to move

between different production lines to maintain output.
 Teamwork
Teamwork will ensure high levels of efficiency and the elimination of non-
value added costs.
(b) Annual demand = 400,000 + 440,000 + 760,000 + 560,000 = 2,160,000 units

Annual capacity = 540,000 x 4 = 2,160,000 units
Thus, there is no need to work overtime under the existing policy of constant
quarterly production.
Calculation of cost of holding inventory

(N‟000)
Quarter 1 2 3 4 Total
Opening stock (units) 0 140,000 240,000 20,000
Production (units) 540,000 540,000 540,000 540,000
Sales (units) (400,000) (440,000) (760,000) (560,000)
Closing stock (units) 140,000 240,000 20,000 0
Average stock (Q) 70,000 190,000 130,000 10,000
Holding cost = Q x N25 N1,750,000 N4,750,000 N3,250,000 N250,000 10,000
(c) JIT Production system

Sales demand for quarter 3 is above maximum capacity – including overtime
capacity.
Units
Demand 760,000
Maximum possible production: 540,000 x 1.40 756,000
Production shortfall 4,000
Contribution (4,000 units x N175 = N700,000) associated with the 4,000 units
will be lost.
 Quantity produced during overtime

Quarter 3 – maximum overtime capacity = 540,000 x 40% = 216,000 units
Quarter 4: 560,000 – 540,000 = 20,000 units
 Extra cost per unit during overtime working
N N
Overtime premium: 175 x 50% = 87.50
Variable production overhead: 50 x 25% = 12.50
100.00
73
 Financial impact of JIT
N000
Extra cost of overtime production:
- 3rd quarter: 216,000 x N100 21,600
- 4th quarter: 20,000 x N100 2,000
23,600
Lost contribution 700
24,300
Existing cost (per (b) above) (10,000)
Incremental cost 14,300
Examiner’s report
This question tests candidates understanding of implementation of JIT, inventory
management and control and financial impact of JIT manufacturing system.
The attempt on this question by candidates was very low.
The Pitfall noticed was candidates‟ lack of understanding of the salient issues in
inventory control and JIT implementation.
for future ICAN examinations.
Marking guide
Marks Marks
a. Key conditions necessary for JIT
Implementation.
(Any 7 points @ 1 mark each) 7
b. Cost of holding inventory for each quarter and
the year.
c. Financial impact of changing to JIT system
Total 20
SOLUTION 3
a. The key stages in the planning process that links long-term objectives and
budgetary control can be divided between long-term planning and the
budgeting process. Long- term planning involves identifying objectives, and
identifying, evaluating and selecting alternative courses of action. The
budgeting process involves implementing the long-term plan in the annual
budget, monitoring actual results and responding to divergences from plan.
This can be stated thus:
74
Stage one: Identifying objectives
The planning process cannot take place unless organisational objectives are
identified, since these determine what the organisation is seeking to accomplish
through its operations and activities. These objectives will be long-term or
strategic in nature and will give direction to the organisation's operational
activities.
Stage two: Identifying alternative courses of action

Once organisational objectives have been identified, alternative courses of
action that may lead to achieving those objectives can be identified. Strategic
analysis of the organisation and its environment can indicate potential courses
of action. For example, a company may look at its existing products and
markets, its potential markets, the threat posed by its competitors, the impact of
changes in technology on its products and production processes, and so on, and
decide that a key objective is the development of new products to replace
existing products in existing markets that are reaching the end of their product
life cycle.
Stage three: Evaluating alternative courses of action

At this stage the various alternative courses of action are considered from the
point of view of suitability, feasibility and acceptability. In order for this to be
done, detailed information about each alternative course of action needs to be
gathered and analysed.
Stage Four: Selecting alternative courses of action

Once the most appropriate alternative courses of action have been selected,
long-term plans to implement them are formulated. Because these plans are
long-term in nature, they will of necessity be less detailed than short-term
plans, and will need to allow a degree of flexibility in responding to the
changing organisational environment.
Stage Five: Preparing and implementing of long-term budget

Preparing and implementing the budget: A budget is a short-term plan
formulated in financial terms and will show in detail the short-term actions the
organisation will take in working towards its long-term objectives. Once the
budget has been formulated, finalised and agreed it can be implemented.
Stage Six: Monitoring actual results

In order to achieve the long-term objectives that are reflected in the budget, the
organisation must ensure that actual performance is proceeding according to
plan. It will therefore need to monitor actual performance and results.
Stage Seven: Responding to divergences from plan

Divergences from planned activity, as measured by variances from budget, can
lead to action if they are deemed to be significant. This action may be corrective
in nature, in order to bring actual activity back into line with planned activity,
75
or may entail revision of the budget if one of its underlying assumptions is seen
as being in error.
b. A fixed budget is one prepared in advance of the relevant budget period which
is not changed or amended as the budget period progresses. This budget
represents a periodic approach to budgeting, since a new budget is prepared
towards the end of the budget period for the subsequent budget period. In this
way, an organisation may set a new budget on an annual basis.
A rolling budget, sometimes called a continuous budget, represents an

Alternative approach to periodic budgeting. Here, a portion of the budget
period is replaced on a regular basis so that the overall budget period remains
unchanged. For example, with a budget period of one year, at the end of each
quarter a new quarter could be added to the end of the budget period and the
elapsed quarter could be deleted, so that the budget was always looking one
year ahead. Continuous budgeting continues to increase in popularity.
A zero-based budget is a periodic budget which seeks to dispose of the

incremental approach to budgeting. In the incremental approach, an increment
is added to the relevant figure from last year's budget, for example to take
account of inflation. In this way, inefficiency can become embedded in the
annual budget and profitability may suffer as a result. With the zero-based
approach, each element of planned activity is required to be justified in terms
of its contribution towards achieving organisational objectives. This involves the
formulation of decision packages, which describe particular activities in such a
way that managers can compare them in terms of their competing claims on
organisational resources, and then rank them from a cost-benefit point of view.
In this way, zero-based budgeting looks at each budget period with a new
perspective.
A fixed budget is likely to be useful in circumstances where the organisational

environment is relatively stable and can be predicted with a reasonable degree
of certainty.
A rolling budget is likely to be useful in circumstances where the future is less

certain and more flexibility is needed in the organisational response to its
changing environment. For this reason, rolling budgets are popular with new
organisations. A cash budget is often a rolling budget because of the need to
keep tight control over this aspect of financial management. A rolling budget is
also supported by the availability of cheap and powerful information processing
via personal computers and computer networks.
A zero-based budgeting approach tends to be most beneficial when used with

services and with discretionary activities, and so is most widely used in the
public sector.
c. Linear regression is a powerful way of analysing past information in order to

derive linear relationships and so is ideally suited to deriving cost equations
from past accounts. Sales volume, however, is unlikely to follow a linear
76
relationship alone. Linear regression could be used to determine the overall
trend being followed by sales volume on, for example, an annual basis, but
inspection of historic sales volumes is likely to show variations about the trend.
These could be due to seasonal variations, or longer-term cyclical variations.
Time-series analysis can extract these seasonal and cyclical variations and
therefore produce forecasts of sales volumes that are likely to be more accurate
in a given period than forecasts based on the underlying trend alone.
In forecasting future sales volumes, therefore, both quantitative methods have

their place in increasing forecasting accuracy.
Examiner’s report
This question tests candidates‟ knowledge of the planning process and budget types
and when to use them. It also tests candidates‟ understanding of time series analysis
and linear regression models for sales forecasting.
The attempt on the questions which were in three parts (a) to (c) by candidates was
very low. The candidates recorded below average performance.
The Pitfall noticed was the inability of the candidates to comprehend the theoretical
requirements of the questions.
for future ICAN Examinations.
Marking guide
Marks Marks
a. Key Stages in Planning process linking Long
term Objectives and Budgetary Control.
( 8 stages @ 1 mark/stage) 8
b.  Meaning of Fixed Budget and when to use it
(Explanation = 1%; When to use it = ½%) 1½
 Meaning of Rolling Budget and when to use

it.
(Explanation = 1%; When to use it = ½%) 1½
 Meaning of Zero-based Budget and when to
use it.
(Explanation = 2%; When to use it = 3%) 5 8
c. Discuss whether time series analysis are
preferred to linear regression analysis in sales
forecasting.
(2 points @ 1 point = 2 marks) 4
Total 20
77
SOLUTION 4
a. The machine hours are insufficient to produce all the budgeted quantity:
Hours needed:
Model A 300,000/12.5 = 24,000 hours
Model B 140,000/10 = 14,000 hours
Total needed 38,000 hours
Total available 30,000 hours
Shortfall 8,000 hours
 Calculation of contribution and ranking

Model A Model B
Selling price per unit (N) 1,000 1,400
Total variable cost per unit (N) 500 800
Contribution per unit (N) 500 600
Machine hour per unit (1/12.5) 0.08 (1/10) 0.10
Contribution per machine hour (N500/0.08) N6,250 (N600/0.10) N6,000
Ranking 1st 2nd
 Calculation of optimal production plan

Model A to be produced 300,000 units
Model B that can be produced: 140,000 – (8,000 ÷ 0.10) 60,000 units
The company should therefore produce 300,000 units of Model A and 60,000
units of Model B.
 Calculation of projected profit

N’000 N’000
Contribution:
Model A 300,000 x N500 150,000
B 60,000 x N600 36,000 186,000
Fixed costs (40,500)
Optimal profit 145,500
b. Throughput accounting ratio = return per factory hour/cost per factory hour
Return per factory hour = Sales – material costs/usage of bottleneck resource
Model A Model B
Selling price (N) 1,000 1,400
Less material cost (N) 400 500
Return per unit (throughput contribution) 600 900
Bottleneck resource (machine hours) 0.08 0.10
Return/machine hour (N600 ÷ 0.08) N7,500 (N900 ÷ 0.10) N9,000
78
Cost per machine hour = Total factory cost/Total available machine hours
N000 N000
 Total factory cost
Variable overheads costs (fixed in short-term)
- Model A: 300,000 x N100 = 30,000
- Model B: 60,000 x N300 = 18,000 48,000
Conversion of variable cost to fixed cost 24,000
Unconverted Variable costs 24,000
Short term Fixed costs 24,000
Other Fixed overheads 40,500
Total factory costs 88,500
Available machine hours 30,000
Factory Cost per machine hour = N88,500,000/30,000 = N2,950
 Throughput accounting ratio (TAR)

Return per machine hour
TAR = Cost per machine hour
Model A N7,500/N2,950 = 2.54

B N9,000/N2,950 = 3.05
In situations where throughput accounting principles are in application, a

product will be worth producing provided that the throughput return per hour
of bottleneck resource is greater than the cost per factory hour. This may be
measured by the throughput accounting ratio. If throughput return outweighs
the cost per factory hour, the ratio will be greater than 1.00. Management
should focus attention upon increasing the throughput ratio. If they can do this,
then higher levels of profit will be achieved.
c. Since Model B has a higher return per machine hour than Model A, PK Ltd
should produce Model B until it has satisfied the total demand for 140,000
units. The production mix will therefore be as follows:
Model Qty. Machine hour Total machine
per unit Hours
B 140,000 1/10 = 0.10 14,000
A 200,000 1/12.5 = 0.08 16,000
30,000
 Calculation of projected profit

N000 N000
Throughput contribution:
Model A 200,000 x N600 = 120,000
B 140,000 x N900 = 126,000 /246,000
Less: Variable over-head costs

(assumed fixed) 48,000
Fixed overheads 40,500 88,500
Projected net profit 157,500
79
d. Throughput accounting and marginal costing both determine a contribution by
calculating the difference between sales revenue and variable costs. However
this contribution will be higher under throughput accounting since only
material costs are recognised as being variable costs. Under marginal costing,
direct labour costs and certain overhead expenses will also be deducted from
sales revenue in order to calculate contribution. This is because such costs are
variable in nature.
Throughput accounting regards such costs as fixed and this is true insofar as
they cannot be avoided in the „immediate‟ sense. In marginal costing and
throughput accounting the rate of contribution generated per unit of scarce
resource can be used to determine the optimum production mix. However,
different rankings can occur under each method of which the decision maker
must be aware. Throughput accounting is only concerned about output that will
affect sales revenues. Very much in sympathy with Just-in-time philosophy
stocks are only considered desirables when they can enhance and increase
throughput. In throughput accounting the cost of all materials purchased during
a period is deducted from the sales revenue generated in that period
irrespective of whether they have been consumed or remains in stock at the end
of the period. This contrasts with marginal costing where only the costs of
materials actually consumed during the period is deducted from sales revenue
generated in period.
Examiner’s report
This question tests candidates‟ knowledge of marginal costing technique as a tool for
capacity decision vis a viz throughput accounting. It also tests computation of
Throughout Accounting Ratio (TAR).
The attempt on the questions which were in four parts (a) to (d) by candidates was
very low. The candidates recorded below average performance.
The Pitfall noticed was the inability of the candidates to comprehend the concept of
throughput accounting.
Marking guide
Marks Marks
a. Using marginal costing to compute optimal mix
and net Profit.
b. Calculate Throughput Accounting Ratio (TAR) 5
2 7
Discussion of TAR
Using throughput accounting to compute
c.
optimal mix and net Profit
5
80
d. Differences between throughput contribution
and marginal costing contribution.
(Any 2 points @ 1½ marks per point) 3
Total 20
SOLUTION 5
a. From: Finance Manager

To: Credit Control Manager, V Plc.
Date: 15 May 2019
Subject: Order from new customer
As required, I have looked into the above. There are three possible outcomes:
i) all goes well and we receive the balance due from the customer
(probability
60%);
ii) we have to pay a ₦500,000 collection fee, as a result of which the balance
is received (probability 20%);
iii) we pay the ₦500,000, but the balance is not forthcoming (probability
20%).
These can be evaluated, and a statistically “expected” figure calculated, as
follows:
Possible Outcome
(i) (ii) (iii)
₦000 ₦000 ₦000
Now Receive 10% of ₦25m 2,500 2,500 2,500
(Pay) 70% of ₦18m (12,600) (12,600) (12,600)
Net (k) (10,100) (10,100) (10,100)
Year 1 (Pay) 30% of ₦18m (5,400) (5,400) (5,400)

(Pay) collection fee - (500) (500)
Receive balance 22,500 22,500 -

Net receipt/(payment) 17,100 16,600 (5,900)
Present value at 16% p.a 14,740 14,310 (5,086)
(T)
Net present value (K+T) 4,640 4,210 (15,186)

Probability 60% 20% 20%
Expected value 2,784 + 842 - = ₦589
3,037
The expected value being positive, the order is financially viable.
81
b. Other factors worthy of consideration include the following:
• Although the expected value is positive, there are only three possible
outcomes:
₦4,640,000 positive, ₦4,210,000 positive and ₦15,186,000 negative;
Depending on your aversion to risk, the size of the negative outcome may
dissuade you from accepting the order;
• The possibility of insuring against default;
• The possibility of using other forms of payment, e.g. bills of exchange or
different terms (discount for early payment);
• The likelihood of getting further orders as a consequence of accepting this
(e.g. repeat or recommendation).
• The possibility of recovering some of the balance at a later date (e.g., on the
insolvency of the buyer).
• Opportunity cost, e.g. penalties/layoffs if order is not accepted; and
• The question of whether the 16% already includes a component to reflect
uncertainty/risk aversion - if so, what
Please let me know if you wish to elaborate on any of the above or take any
aspect further.
Signed: Credit control Accountant
Examiner’s report
The question tests candidates‟ understanding of credit control analysis and
investment analysis. The question was poorly attempted by candidates.
The Pitfalls noticed were the inability of the candidates to compute the customers
outstanding based on credit terms and associated bad debts, incremental costs and
the investment appraisal on cash receipts and payments.
Marking guide
Marks Marks
a. Evaluate the financial implication of whether
to accept or reject the order.
b. Factors for Credit control decisions.
(Any 3 points @ 1mark each) 3
Total 15
82
SOLUTION 6
a. Relative performance of the two profit centres
S/N Ratios Owerri event centre Isiekenesi Event Centre

N’000 N’000
2020 2019 2020 2019
Capital employed:
Total non – current asset 6400 6100 5900 5700
Current asset less cash/bank 1300 1100 1500 1690
Cash and bank 1000 900 1000 1200
Total asset 8700 8100 8400 8590
Less: current liabilities 1100 900 1200 1150
Capital employed 7600 7200 7200 7440
Sales (Revenue) 10,400 9,600 10,000 7,000

Less: Operating expenses:
Rental and hiring expenses 2100 1800 2000 1000
Salaries and wages 2580 2300 2230 2120
Consumables 970 880 850 540
Other operating expenses 1450 1150 950 700
Total expenses 7100 6130 6030 4360
Operating profit before
interest and tax 3300 3470 3970 2640
i. Returned on capital
employed
= Profit/capital employed 0.434 0.482 0.551 0.355
ii. Operating profit 3300 3470 3970 2640
Imputed cost = 15% of
capital employed 1140 1080 1080 1116
Residual income
= Profit – imputed cost 2160 2390 2890 1524
iii. Operating profit before

interest and tax 3300 3470 3970 2640
Sales (Revenue) 10400 9600 10000 7000
Profit margin = Profit /sales 0.317 0.362 0.397 0.377
iv. Current asset 2300 2000 2500 2890

Current liabilities 1100 900 1200 1150
Current ratio= current
Asset/current liability 2.091 2.222 2.083 2.513
v. Current asset less inventory 2300 2000 2500 2890

Current liability 1100 900 1200 1150
Quick ratio = Current asset
less Inventory/Current
liability 2.091 2.222 2.083 2.513
83
vi. Long term debts 1400 1500 1300 1100
Capital employed 7600 7200 7200 7440
Gearing ratio = Long term
debt /Capital employed 0.184 0.208 0.181 0.148
vii. Interest charge 250 250 250 220

Profit before interest/tax 3300 3470 3970 2640
Interest cover = 13.2 13.88 15.88 12.00
(PBIT/Interest charge) times times times times
Explanations of the computed ratios:

Returns on capital employed (ROCE)
The ROCE sometimes called Return on Investment (ROI) is the profit of the division as
a percentage of the capital employed. Isiekenesi event centre has a better ROCE than
Owerri in 2020 while Owerri had a better ROCE than Isiekenesi event centre in 2019.
Residual income
Residual income is another way of appraising a company or division which shows the
absolute profit after deducting imputed cost or notional cost of capital from
operating profit. The Isiekenesi event centre shows better residual income than
Owerri event centre in 2020 but Owerri event centre shows better residual income
than Isiekenesi in 2019.
Profit margin
This is the profit as a percentage of sales/revenue (Profit achieved per N1 of sales.
Isiekenesi event centre makes higher profit margin than Owerri event centre.
Current ratio
The current ratio is the liquidity ratio that specifies the relationship between current
asset and current liabilities. The ideal current ratio is 2:1 or 2.0. that means the
company has enough liquid asset to meet the demand of short term of current
liabilities. Owerri event centre have better liquidity in 2020 while Isiekenesi event
centre have a better liquidity in 2019.
Quick ratio
The quick ratio is a more effective liquidity ratio that shows the relationship between
Current asset less inventory and current liability. In some cases it is current asset less
only inventory. But in this very situation the inventory are not specified. Owerri event
centre have better liquidity in 2020 while Isiekenesi event centre have a better
liquidity in 2019.
Gearing ratio
The gearing ratio otherwise referred to as leverage ratio shows the relationship
between Long term debt and capital employed. A company is said to be highly
geared or leveraged when its debt capital exceeds its equity interest. It is low geared
if the debt capital is lower than equity. All the two centres are low geared even
though in 2019 and 2020 the Owerri centre was slightly higher.
84
Interest cover
This measures the ability of the company to meet its obligations to pay interest. An
interest cover of 3 is considered low and shows that the company may be at risk from
too much debt in relation with the amount of profit the centre makes. All the centres
are comfortable even though Owerri centre is better than Isikenesi event centre.
b. Computation of Performance bonus
Particulars Owerri event centre Isiekenesi event centre

2019 2020 2019 2020
Actual ROCE 0.434 0.482 0.551 0.355
Standard ROCE 0.50 0.50 0.50 0.50
Qualifies for bonus Not qualified Not Qualified Qualified Not Qualified
Performance Bonus
= 10% of Sales - N1,000 -
c. Role of Management Accountant in Project Management

 Understanding the economics of different options and decisions
 Ability to forecast cost and profits
 Generate accurate networks analysis and Gantt chart
 Use spread sheets effectively
 Considers external factors and internal factors.
Examiner’s report
The question tests candidates‟ ability to determine performance measure of company
using ROCE, residual income, profit margin, current ratio, gearing ratio and interest
cover. The question tests candidates‟ understanding of role of management
accountant in project management. The attempt on this question by candidates was
very high.

The Pitfall noticed was candidates‟ inability to discuss the theoretical aspect that
dwell on project management.
Candidates are encouraged to intensively use the study guide when preparing for
future ICAN examinations.
85
Marking guide
Marks Marks
a. Compute performance ratios:
i. ROCE 1
ii. Residual income 1
iii. Profit Margin 1
iv. Current Ratio 1
v. Quick ratio 1
vi. Gearing ratio 1
vii. Interest cover 1 7
b. Computation of performance bonus
c. Role of management accountant in project
management.
(Any 4 points @ 1 mark each) 4
Total 15
SOLUTION 7
i) Definition of Terms
Responsibility Accounting
This is the structuring of performance report for individual manager in a way
that identifies the factors that are controllable by them and for which they are
responsible. Responsibility accounting reports may be prepared for cost centres,
revenue centres, profit centres, or investment centres.
ii) An Investment Centre

It is an operating division within an organisation whose manager has the
responsibility for both the profit and investments of the division.
iii) Return on Investment (ROI) for a division

It is the divisional profit divided by the capital employed in that division.
iv) Residual Income (RI) for a division

Divisional income less a notional or imputed interest charge on the investment
in capital employed.
86
b. (i) Evaluate the performance of the divisions using ROI and residual
income method.
Returns on capital employed (ROI)
Particular Lagos Kano Gombe Enugu Total
N‟000 N‟000 N‟000 N‟000 N‟000
Sales 53,000 23,000 24,600 29,400 130,000
Variable Cost 50,000 22,000 23,400 27,400 122,800
Contribution 3,000 1,000 1,200 2,000 7,200
Fixed Cost
Specific 1,500 750 600 800 3,650
General 530 230 246 294 1,300
2,030 980 846 1,094 4,950
Net Profit 970 20 354 906 2,250
ROI = 970,000 20,000 354,000 906,000 2,250,000

10,000,000 4,000,000 3,000,000 7,000,000 24,000,000
= 0.097 0.005 0.118 0.1294 0.09375
Using ROI, Enugu division is more profitable than the other three Divisions
Residual Income: At cost of capital of 7½%

Profit 970,000 20,000 354,000 906,000 2,250,000
Less: Imputed cost:
7.5% of investment 750,000 300,000 225,000 525,000 1,800,000
Residual income 220,000 (280,000) 129,000 381,000 450,000
Appraising the divisions using residual income method with an imputed interest
of 7.50%, Enugu is more profitable.
Residual income at cost of capital of 10%

Profit 970,000 20,000 354,000 906,000 2,250,000
Less: Imputed cost 1,000,000 400,000 300,000 700,000 2,400,000
Residual income/
(Negative income) (30,000) (380,000) 54,000 206,000 (150,000)
In appraising the divisions with a imputed interest of 10%, Enugu is still
profitable.
87
Examiner’s report
The question tests candidates understanding of certain definitions like responsibility
accounting, investment centres, ROI and residual income. Many candidates
attempted the question.
The candidates recorded above average performance.
The Pitfall noticed was candidates‟ inability to compute the new performance ratio
arising from 10% cost of capital.
Candidates are encouraged to intensively use the study guide when preparing for
future ICAN examinations.
Marking guide
Marks Marks
a. Definition of Terms:
i. Responsibility accounting 1½
ii. An investment centre 1½
iii. Return on investment (ROI) 1½
iv. Residual income 1½ 6
b. i. Evaluation of performance of Divisions
 ROI method
 Residual income method
ii. Re-evaluate the residual income
situation of company if cost of capital is 10%
(15 ticks = 3 marks) 3 9
Total 15
88

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL EXAMINATION - NOVEMBER 2014

Time Allowed: 3 hours

ATTEMPT FIVE QUESTIONS IN ALL

SECTION A: COMPULSORY QUESTION (30 Marks)

(ii) It uses Residual Income (RI) for performance appraisals.

(iii) The group’s cost of capital is 12% per annum.

The two divisions’ operating data are as follows:

Budgeted information for the coming year is:

Maximum capacity 150,000 tyres

SKILLS EXAMINATION – NOVEMBER 2014

NOT TO BE SOLD | Compiled by: Babatunde Isaiah | Email: ababatundeisaiah@gmail.com

Division Y has found two other companies willing to supply tyres:

a. If Division Y provisionally requests a quotation for 60,000 tyres from

SECTION B ATTEMPT ANY TWO OUT OF THREE QUESTIONS (40 Marks)

SKILLS EXAMINATION – NOVEMBER 2014

NOT TO BE SOLD | Compiled by: Babatunde Isaiah | Email: ababatundeisaiah@gmail.com

Budgeted and Standard Cost Data:

Budgeted sales and production for the month: 20,000 units.

Direct materials: A: 10kg at N2 per kg

Fixed production overhead is absorbed at 200% of direct wages.

A: 192,000kg at N2.40 per kg

Direct wages incurred 92,000 hours at N6.40 per hour.

You are required to prepare:

b. i. Direct material cost variance (5 Marks)

SKILLS EXAMINATION – NOVEMBER 2014

NOT TO BE SOLD | Compiled by: Babatunde Isaiah | Email: ababatundeisaiah@gmail.com

Operating Statements for the year ended 31 December, 2013

Summarised Statements of Financial Position as at 31 December, 2013.

Purity Nig Bench Mark

SKILLS EXAMINATION – NOVEMBER 2014

NOT TO BE SOLD | Compiled by: Babatunde Isaiah | Email: ababatundeisaiah@gmail.com

Ordinary share capital 4,000 4,000

a. Compute the following performance indices for both companies:

Paly Limited, a cottage manufacturer of aluminium products, specialises in producing

Given below are the cost data of each of the products:

Direct wages N80 per hour:

SKILLS EXAMINATION – NOVEMBER 2014

NOT TO BE SOLD | Compiled by: Babatunde Isaiah | Email: ababatundeisaiah@gmail.com

SECTION C: ATTEMPT ANY TWO OUT OF THREE QUESTIONS (30 Marks)

COMMON BAG EXECUTIVE BAG TOTAL

Units sold 300,000 100,000 400,000

SKILLS EXAMINATION – NOVEMBER 2014

NOT TO BE SOLD | Compiled by: Babatunde Isaiah | Email: ababatundeisaiah@gmail.com

The actual results for the month are as follows:

SKILLS EXAMINATION – NOVEMBER 2014

NOT TO BE SOLD | Compiled by: Babatunde Isaiah | Email: ababatundeisaiah@gmail.com

Omola Industries Limited is introducing a new product. The original information,

Variable cost per unit is N100

The result of the detailed research work is shown below:

N180 N190 N200

SKILLS EXAMINATION – NOVEMBER 2014

NOT TO BE SOLD | Compiled by: Babatunde Isaiah | Email: ababatundeisaiah@gmail.com

The unit variable cost is projected as follows:

Variable Cost Probability

a. Compute the initial profit achievable by the company. (2 Marks)

c. What is the value of the new information? (3 Marks)

d. Identify THREE other sources of information available to an organisation.

NAIJAX GROUP LIMITED