W1-2-60-1-6

JOMO KENYATTA UNIVERSITY OF AGRICULTURE AND TECHNOLOGY

UNIVERSITY EXAMINATIONS 2018/2019
YEAR 4 SEMESTER 2 EXAMINATIONS FOR THE DEGREE OF BACHELOR OF
COMMERCE
HBA 2405: CONTEMPORARY ISSUES IN MANAGEMENT ACCOUNTING
DATE: AUGUST 2019 TIME: 1.5 HOURS
INSTRUCTIONS: ANSWER QUESTION ONE AND ANY OTHER TWO QUESTIONS

QUESTION ONE (30 MARKS)

a) What are the four control problems decentralization creates in an organization (8 marks)

b) In what two fundamental ways does Activity-Based-Costing (ABC) differ from the traditional
costing method (4 marks)

c) Explain what you understand by Management By Exception (MBE) as used in standard costing
for measuring performance of management (2 marks)

d) What is a balanced scorecard and what is it used for (2 marks)

e) There are standards of ethical behaviour set for Management Accountants and Financial
Management situations may occur where these members encounter problems in identifying
unethical behaviour or resolving such ethical conflict. Briefly discuss three course of action
members are advised to take. (3 marks)

fi) Define a construct as used in determining relevant information for decision-making

(2 marks)

ii) A company that manufactures panners (Saddlebag for bycycles) makes two models of
panniers, namely the touring model and the maintain model. Cost and revenue data for the two
models is shown below:

Model
Mountain Touring
Pannier Pannier
Kshs. Kshs.
Selling price per unit 2500 3000
Variable cost per unit 1000 1800
Contribution margin per unit 1500 1200
Contribution Margin Ratio (CMR) 60% 40%

The bottleneck in the process of manufacturing these panniers occurs in the stitching department.
The mountain pannier require two minutes of stitching and the Touring pannier, one minute of
stitching.

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Required:

1) Carry out an analysis and advice this company, which panniers to concentrate on
(3 marks)

2) Suppose there is an hour of additional stitching and the company has unfulfilled orders for both
products, verify the answer you have in (1) above by calculating additional contribution margin
the company can get by either producing mountain panniers or Touring panniers in this
additional tour. (4 marks)

QUESTION TWO (20 MARKS)

a) Organizational characteristics in contingency theory is mostly measured by the organization

structure. One of these characteristics is decentralization, which creates responsibility centres.

i) Define a responsibility centre (4 marks)

ii) What do you understand by transfer pricing as used in Responsibility Accounting (4

marks)

b) The business staff of the legal firm of Chokwe and Njumwa has constructed a report which
breaks down the firm’s overall results for the previous month in terms of its two main business
segments- family law and commercial law. This report never the less is incorrect. The common
fixed expenses such as the managing partner’s salary, general administrative expenses, general
firm advertising have been allocated to the two segments based on revenues from clients.

Family law Commercial law Total

Kshs ‘000’ Kshs ‘000’ Kshs ‘000’
Revenue from clients 4000 6000 10000
Less variable expenses 1000 1200 2200
Contribution margin 3000 4800 7800
Less traceable fixed expenses 2800 3900 6700
Segment margin 200 900 1100
Less common fixed expenses 240 360 600
Operating income (40) 540 500

Required:

1) Redo the segment report eliminating the allocation of common fixed expenses. Show both
amount and percent columns for the firm as off financially if the family law segment was
dropped? (Note ii, may of the firm’s commercial clients also use the firm for their family law
requirements such as drawing up wills) (8 marks)

2) The firm’s advertising agency has proposed an ad campaign targeted at boosting the revenues
of the family law segment. The ad campaign will cost Kshs200,000 and the advertising agency
claims that it would increase family law revenues by Kshs 1,000,000. The managing partner of
the firm believes this increase in business could be

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accommodated without this ad campaign have on the family law segment margin ad on the
overall operating income of the firm (4 marks)

QUESTION THREE (20 MARKS)

a) Write down the four steps in an ABC system (4 marks)

b) Define an Activity Cost pool (2 marks)

c) Company XYZ makes a five resistant filing cabinet, which it sells to office furniture
distributors. The company uses ABC system for initial decision-making. The company has two
overhead departments for which costs are listed below:

Kshs.
Manufacturing overhead 5,000,000
Selling and administrative overhead 3,000,000
Total overheads 8,000,000

The company’s ABC system has the following activity cert pools and activity measures:

Activity cost pools Activity measure

Assembling units Member of units
Processing order Number of order
Supporting customers Number of customers
Other Not applicable

Note: Costs assigned to other activity cost pool have no activity measure (cost of unused capacity +
organization sustaining costs) are not assigned to products through the activity pools listed above.

Company XYZ distributors the costs of manufacturing overhead and selling and administrative
overheads to the activity cost pools based on the following:

Activity cost pools supporting other Total

Assembly Processing customers
units Order
Manufacturing overhead 50% 35% 5% 10% 100%
Selling and administrative overhead 10% 45% 25% 20% 100%
Total activity 1000 250 100
units orders customers

Required:

i) Allocate overhead costs to the activity cost pools (3 marks)

ii) Compute activity ruter for activity cost pools (3 marks)
iii) Office Mart is ove of XYZ’s customers and in the previous year, the company ordered filing
cabinets four (4) times. The total number of cabinets in the year was 80. Construct a table
showing the overhead costs of the 80 units and the four orders (6 marks)
iv) The selling price of a cabinet is Kshs 5950. The cost of directs materials is Kshs 1,800 per
filing cabinet and direct labour is Kshs 500 per filing cabinet. What is the product margin on
the 80 filing cabinets ordered by office Mart. How profitable is office Mart as a customer?
(2 marks)
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 QUESTION FOUR (20 MARKS)

a) Briefly explain what you understand by the following ethical standards:

i) Confidentiality (3 marks)
ii) Competence (3 marks)

b) One of the methods used to measure an investment’s centre’s performance is return on

investment (ROI). The ROI is said not to be a perfect tool for evaluation. Write down
three limitations of ROI (6 marks)

c) Given below is the basic date relating to a certain division of company QRS Ltd.

Kshs
Average operating assets 2,000,000
Operating income 400,000
Minimum required rate of return 15%

i) Computer the division’s ROI (4 marks)

ii) Compute the division’s RI (4 marks)

QUESTION FIVE (20 MARKS)

Write brief notes on the following:

a) The Agency Theory (4 marks)

b) The mission statement of a company is said to be the overall aims and objectives of the
organization. This statements said to produce effective aims and objectives for employees
which should be SMART. Explain the measuring of the abbreviation SMART (8 marks)
c) The difference between data and information (4 marks)
d) Define through-put accounting (4 marks)

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