Tutorial Set 6 – Management Accounting in Public Sector Organizations
Question 1
You are a policy-maker working on a cost-benefit analysis. Your supervisor comes to you with
some projected costs and benefits for project X and project Y and wants to know which project
you think will be better to pursue. You decide to do a cost-benefit analysis. Assume the social
discount rate, r, is 6%.
Benefit for X Cost for X Benefit for Y Cost for Y
GH¢’m GH¢’m GH¢’m GH¢’m
Year 0 0 100 100 500
Year 1 100 50 400 200
Year 2 200 0 800 100
Required:
a. Using the information in the table above, calculate the present value of project X and
project Y. Which project would you recommend to your supervisor?
b. Does your answer change if the benefits for Y in Year 2 are GH¢ 450m rather than
GH¢800m?
c. Why is the cost-benefit ratio analysis preferred to present value analysis and the internal
rate of return analysis in the public sector?
d. Which cost benefit analysis would be most useful for looking at the actual value of a
particular project. Briefly explain the reason for your choice.
e. The term Value for Money (VFM) is synonymous with spending in the public sector,
where it is expected that little resources should be used to generate the best possible
output/outcome for the public good. Explain the ‘three Es' that public sector management
accountants will need to take into consideration when making public spending decisions.
Question 2
GKIA, an Early Childhood Development Centre (ECDC) under Ghana’s Ministry of Health
(MOH) has obtained funding from the Global Fund (GF) to implement targeted programmes in
line with the vision of the GF. In GF’s recent grant releases, GKIA received an amount of GH¢2
million and has the option of spending the amount on any project provided it falls within any of
the thematic areas specified by the GF. Accordingly, GKIA is considering spending the funds on
either of two projects. The first option involves the construction, equipping and full furnishing of
a 30-bed pediatric unit for the Centre. The second option involves the refurbishment of all
existing leisure and recreational facilities that the Centre currently operates. Both options qualify
for funding under the thematic areas of the GF. The information in the table below presents
financial details of both options that GKIA is considering.
Option A: Pediatric Unit Option B: Leisure and
recreational facilities
Initial capital outlay GH¢ 2m GH¢ 2m
Costs Benefits Costs Benefits
GH¢ GH¢ GH¢ GH¢
Year 1 175,000 150,000 150,000 1,000,000
Year 2 218,750 225,000 187,500 1,050,000
Year 3 262,500 562,500 225,000 997,500
Year 4 301,875 1,687,500 258,750 847,875
Year 5 332,062.50 5,906,250 271,687.50 975,056.25
The required rate of return an any investment project undertaken by GKIA is 20%.
Required:
As the Management Accountant of GKIA, you are required to evaluate the acceptability of each
project on the basis of benefit-cost ratio.
Question 3
The Amrahia Specialist Hospital (ASH) is a special government health facility under the Ghana
Health Service (GHS) that provides specialised medical scans for complex health conditions.
Management of ASH are planning to install an ultra-modern imaging machine that will improve
the quality and accuracy of scans. The new installation will require an additional capital
investment of GH¢420,000. The GHS policy on capital projects is that all new projects should
achieve an internal rate of return of at least 30%. Forecast demand for the services of this new
machine over its five-year useful life are as follows:
Year Number of scans
1 1,250
2 2,700
3 3,500
4 1,400
5 675
Projected charge per scan GH¢ 650
Variable costs per scan:
Consumables GH¢ 330
Labour and overheads GH¢ 176
Operating fixed costs per year GH¢ 264,000 (includes depreciation
on a straight-line basis)
Apart from the financial forecasts above, it is also envisaged that the project will produce non-
financial benefits in several forms. Although it is hard to place a precise value on this, expert
opinion suggests that this could approximate GH¢70,000 per annum.
Required:
As the Management Accountant of ASH:
a. Using cost-benefit analysis (CBA) computations, evaluate if the project should be
undertaken.
b. Enumerate two limitations of evaluating projects in the public sector.
