UNIVERSITY OF NAIROBI

FACULTY OF BUSINESS AND MANAGEMENT SCIENCES

DEPARTMENT OF FINANCE AND ACCOUNTING
B.COM PROGRAMME
DAC314: COST MANAGEMENT ASSIGNMENT 2
REGULAR DUE DATE 19TH APRIL 2024.

INSTRUCTIONS
1.Attempt all the questions.
2.show all the necessary workings and calculations.
…………………………………………………………………………………………………
QUESTION ONE
TOPIC FOR QUESTION 1 Divisional Structure and Performance Measurement

 Difference between functional and divisional zed organizational structures

 Why it is important to distinguish between managerial and economic performance

 Factors considered in designing financial performance measures for evaluating

divisional managers

 Meaning of return on investment and worked example

 Residual income and economic value added with worked examples

 Compute economic value added

 Divisional performance measures like profit margin, asset turnover,ROI,ROCE,EVA

QUESTION TWO
TOPIC FOR QUESTION 2 Environmental Management Accounting

QUESTION THREE
TOPIC FOR QUESTION 3

Budgetary Control and Advanced Variance Analysis

 Meaning of budget

 Essentials of a budget

 Objectives and importance of budgets and budgetary controls

  Limitations of budgets and budgetary controls

 Process of preparing budgets

 Different types of budgets /classfications of bugets based on time,functions and

capacity

 Meaning of standard,standard cost and standard costing

 Features of standard costing

 Standard costing and budgetary control

 Types of standards

 Analysis of variance with examples(material,labour and overhead variaces)

 Importance and uses of variance analysis

Limitations variance analysis

QUESTION ONE (25MARKS)

a). Discuss any three types of Responsibility Centres (6marks)
b). Explain the following concepts as applied in Divisional Structure and Performance
Measurement (6marks)

i)Return on investment (ROI)

ii)Residual income (RI)

iii)Economic value added (EVA)

iv)Return on capital employed

c) South Plc has two divisions, A and B, whose respective performances are under review.
Division A is currently earning a profit of £35 000 and has net operating assets of £150 000.
Division B currently earns a profit of £70 000 with net assets of £325 000. South Plc has a
current cost of capital of 15% (6marks)

(i) Calculate ROI and RI for divisions A and B and comment on your result

(ii) State which method of performance evaluation would be more useful when comparing
divisional performance and why?

(iii) List three general aspects of performance measures that would be appropriate for a
service sector company.
d)Waka Ltd. reported a pre-tax operating income of Sh.21,000,000 for the year 2019. This
was after charging Sh.4,000,000 for development and launch cost of a new product that is
expected to generate profits for 4 years. Corporation tax is paid at the rate of 30% of the
operating profit. The company has a risk-adjusted Weighted Average Cost of Capital
(WACC) of 12% p.a and is paying interest at 9% p.a on a substantial long term loan (not
charged as an expense in the operating income above).

The company’s non-current assets value is Sh. 50,000,000 and the net current assets have a
value of Sh. 22,000,000. The replacement cost of the non-current assets is estimated to be Sh.
64,000,000

Required:

(i) Calculate the company’s economic value added for the period. (4 marks)

(ii) Calculate the company’s residual income. (3 marks)

QUESTION TWO (15MARKS)

a) What is environmental management accounting? (1marks)

b) In the context of environmental management accounting, explain FOUR types of

environmental costs. (8 marks)

c)State examples of the following environmental costs (6marks)

i). environmental appraisal costs.
ii). environmental prevention costs
iii). environmental internal failure costs.
QUESTION THREE (25MARKS)
a.) Discuss THREE essential features of a budget. (5 marks)

b) Explain the following terms:

(i) Material variances. (3 marks)

(ii) Labour variances. (3 marks)

(iii) Standard costing. (2 marks)

(c) Quota Ltd manufactures and sells a single product branded “TT” with a standard cost of
Sh.1,100 made up as follows: Sh.

Direct materials (15 square metres at Sh.30 per square metre) 450

Direct labour (5 hours at Sh.100 per hour) 500

Variable overheads (5 hours at Sh.20 per hour) 100

Fixed overheads (5 hours at Sh.10 per hour) 50

The standard selling price per unit is Sh.1,300. The monthly budget projects production and
sales of 1,000 units.

Actual figures for the month of November 2022 are as follows:

• Sales 1,200 units at Sh.1,320 per unit.

• Actual production 1,400 units.

• Direct materials 22,000 square metres at Sh.40 per square metre.

• Direct wages 6,800 hours at Sh.110.

• Variable overheads was Sh.110,000.

• Fixed overheads was Sh.60,000.

Required:

(i) Material price variance and material usage variance. (4 marks)

(ii) Labour rate variance and labour efficiency variance. (4 marks)

(iii) Fixed overhead capacity variance and fixed overhead efficiency variance. (4 marks)
REVISION QUESTIONS

QUESTION ONE

The Finance Director of ABC Limited is concerned about the performance of its Western
division. He has the following information available for last year.

$000
Revenue 18,000
Operating profit 5,500
Capital employed 80,000
Number of employees at start of year 46
Average number of employees 45
Number of staff leaving during the period 11
Budgeted employee hours 50,000 hours
Actual hours worked 49,500 hours
Standard hours produced 49,700 hours
The division’s imputed charge for the purpose of
calculating performance is 10%.

Required:

i). Calculate the return on investment in % to 2 decimal places. % (3marks)

ii). Calculate the residual income. $ (3marks)

iii). State which method of performance evaluation (return on investment or residual income)
would be more useful when comparing divisional performance and why. (3 marks)

iv). Calculate the labour turnover ratio in % to 2 decimal places. % (3 marks)

v). Calculate the labour efficiency ratio in % to 2 decimal places. % (3marks)

SOLUTION

The Finance Director of ABC Limited is concerned about the performance of its Western
division. He has the following information available for last year.
$000
Revenue 18,000
Operating profit 5,500
Capital employed 80,000
Number of employees at start of year 46
Number of employees at end of year 44
Average number of employees 45
Number of staff leaving during the period 11
Budgeted employee hours 50,000 hours
Actual hours worked 49,500 hours
Standard hours produced 49,700 hours
The division’s imputed charge for the purpose of calculating performance is 10%.
Required:

(a) Calculate the return on investment in % to 2 decimal places. % (3marks)

% ROI = Divisional profit/Divisional investment × 100% = (5,500/80,000) × 100% = 6.88%

(b) Calculate the residual income. $ (3marks)

$ RI = Divisional profit – Notional interest
= $5,500,000 – ($80,000,000 × 10%) = – $2,500,000
State which method of performance evaluation (i.e. return on investment or residual income)
would be more useful when comparing divisional performance and why. (3 marks)

(c) Calculate the labour turnover ratio in % to 2 decimal places. % (3 marks)

% Turnover =
Number of staff leaving in period/Average number of staff employed × 100%
= (11/45) × 100% = 24.44%

(d) Calculate the labour efficiency ratio in % to 2 decimal places. % (3marks)

% Efficiency ratio
= Standard hours produced/Actual hours worked × 100%
= (49,700/49,500) × 100% = 100.40%
QUESTION TWO

a) Describe the following three categories of environmental costs (6marks)

i). environmental appraisal costs.
ii). environmental prevention costs
iii). environmental internal failure costs.
b). A division of a company earns a profit of sh.1,00,000 for an investment of sh.4,00,000.
There is an opportunity to make an additional investment of sh.2,00,000 which earns an
annual income of sh.40,000. You are required to calculate residual income if the company
requires a minimum return of 15 per cent on its investment and comment. (7marks)

b) Describe the following three categories of environmental costs (6marks)

i• environmental appraisal costs.

ii• environmental prevention costs

iii• environmental internal failure costs.

• environmental appraisal costs. These are the costs of activities performed to monitor
environmental effects that a firm is responsible for. Examples include the costs arising from
inspection of products and contamination testing.

• environmental prevention costs. These are the costs of activities performed to prevent the
production of waste that could cause damage to the environment. Examples include the costs
of recycling products, training staff, and carrying out environmental studies.

• environmental internal failure costs. These are the costs of activities that have to be
performed when contaminants and waste have been produced by a company but not
discharged into the environment. Examples include treating toxic waste and maintaining
pollution equipment.

• environmental external failure costs. These are the costs incurred by a company if it
discharges waste into the environment. Examples include the costs of cleaning up oil spills or
cleaning a polluted river. A company may also incur fines or other penalties or lose sales if it
acquires a poor environmental reputation

QUESTION THREE

c). A division of a company earns a profit of sh.1,00,000 for an investment of sh.4,00,000.

There is an opportunity to make an additional investment of sh.2,00,000 which earns an
annual income of sh.40,000. You are required to calculate residual income if the company
requires a minimum return of 15 per cent on its investment and comment.

Solution

Before the additional Investment:

RI = Rs.1,00,000 – (15% of Rs.4,00,000)

= Rs.1,00,000 – Rs.60,000

= Rs.40,000

RI from additional Investment

RI = Rs.40,000 – (15% of 2,00,000)

= Rs.40,000 – Rs.30,000
= Rs. 10,000

QUESTION

Return on investment and residual income.

South Plc has two divisions, A and B, whose respective performances are under
review.Division A is currently earning a profit of £35 000 and has net assets of £150
000.Division B currently earns a profit of £70 000 with net assets of £325 000.South Plc has
a current cost of capital of 15 per cent. Required:(a) Using the information above, calculate
the return on investment and residual income figures for the two divisions under review and
comment on your results.(b) State which method of performance evaluation (i.e., return on
investment or residual income) would be more useful when comparing divisional
performance and why

a)

Division A Division B

Profit £35 000 £70 000

Net Assets £150 000 £325 000

Cost Of Capital 15% 15%

ROI =£35 000/£150 000=23.33% =£70 000/£325 000=21.53%

Interms of ROI Division A is performing well than Division B.

RI =£35 000-(£150 000*15%) =£12500 =£70 000-(£325 000*15%) =£21250

Interms of RI Division B is performing well than Division B.

b) For divisional performance evaluation Residual income is more useful than Return on
Investment because RI leads to decision likely to benefit whole company whereas ROI may
lead to sub-optimal decisions. The RI measure enables to calculate the different risk-adjusted
in capital cost while ROI cannot incorporate these differences. ROI yields lower returns on
the initial investment whereas the residual income will maximize the income and not the
return on investment. For example, we can see in the above question interms of ROI Division
A was performing well than Division B whereas interms of RI Division B is performing well.
In the above solution if we had to take decision for project interms of ROI then Division A
would be selected and Division B would be rejected and the extra profit which would be yield
by Division B would be lost.
What is environmental management accounting?

Environmental management accounting is simply a specialised part of the

management accounts that focuses on things such as the cost of energy and water
and the disposal of waste and effluent.

It is a subset of environmental accounting.

It focuses on information required for decision making within the organisation

(internally focused), although much of the information it generates could also be
used for external reporting.

The focus of environmental management accounting is not all on purely financial

costs.

It includes consideration of other non-financial matters such as the costs vs. benefits
of buying from suppliers who are more environmentally aware, or the effect on the
public image of the company from failure to comply with environmental regulations.

a) Moran Ltd. has established the following standard mix of producing 9 litres of product
“MRN”:

Sh.

5 litres of material M at Sh.7 per litre 35

3 litres of material R at Sh.5 per litre 15

2 litres of material N at Sh.2 per litre 4

Actual input was as follows:

Sh.

53,000 litres of material M at Sh.7 per litre 371,000

28,000 litres of material R at Sh.5.30 per litre 148,400

19,000 litres of material N at Sh.2.20 per litre 41,800

Additional information:

1. A standard loss of 10% of the input is expected to occur.

2. Actual output for the period was 92,700 litres of product MRN.

Required:

Compute and interpret the following variances:

(i) Material price variance. (3 marks)

(ii) Material mix variance. (3 marks)

(iii) Material yield variance. (3 marks)

(iv) Material usage variance. (3 marks)

To produce a litre of a product, 24 units of materials are required at a standard price of Sh.75
per litre. The actual production for the period is 75,000 units. Records proved that 80,000
units of materials were used at a price of Sh.73 per unit.

Required:

Calculate:

(i) Material cost variance. (4 marks)

(ii) Material price variance. (4 marks)

(iii) Material usage variance. (4 marks)