Question
Franc Bank Holding (FBH) is a commercial bank with headquarters in Kampala and was licensed by the central bank in 2007. The banking industry is
Franc Bank Holding (FBH) is a commercial bank with headquarters in Kampala and was licensed by the central bank in 2007. The banking industry is very competitive and characterised by development of new products, use of recent technology and increasing complexity in customers' expectations which has made players' survival difficult.
In line with the ever evolving technology, FBH is considering introducing mobile banking and agency banking onto the market to target new customer base involving low, middle and high income earners. The estimated fixed costs of introducing the two products are Shs 49.267 million and Shs 68.45 million respectively.
FBH made a profit of Shs 85 million for the year ended 31 December 2018 and the operations director expects an annual profitability growth of 10% without introduction of new products.
The marketing director anticipates that introduction of new products will grow FBH's customer base by either 8,390 platinum customers or 9,460 gold customers. There is a 60% chance of getting a platinum customer. Revenue of Shs 50,000 is expected to be collected from each new customer.
The following information relates to direct costs to be incurred on each new customer from different income levels with their respective probabilities of occurrence (Pf):
Income level
Direct cost per new customer
Mobile banking
Agency banking
Pc(Pf)
Gc(Pf)
Pc(Pf)
Gc(Pf)
Low
25,000
0.25
0.5
0.1
0.2
Middle
28,000
0.3
0.3
0.4
0.7
High
35,000
0.45
0.2
0.5
0.1
Where: Pc = Platinum customers Gc = Gold customers
FBH has been printing Automated Teller Machine (ATM) cards at Shs 4,500 each, but with the new trend of technology, management is not certain of the costs to
be incurred on printing Visa cards. However, there is a proposal to outsource the printing services.
The following information relates to costs of printing Visa cards:
SECTION B
Attempt three of the four questions in this section
Question 2
Bato Group of Hotels (BGH) was established in the 1950s by twin sisters after completion of a diploma course in Catering and Hotel Management from France. BGH owns 20 medium and high class hotels located in different districts of Uganda. Member hotels are headed by general managers (GM) who report directly to BGH's chief executive officer (CEO). All hotels charge a full board fee
Management Decision & Control - Paper 11
Cost (Shs)
Probability
3,500
0.18
3,000
0.17
4,000
0.14
4,500
0.16
5,500
0.21
6,000
0.14
FBH has identified you as a consultant to provide advisory services to keep the business competitive.
Required:
- (a)Using the decision tree analysis, determine the expected profit per new product.
- (26 marks)
- (b)Considering the information in (a) above, advise management of FBH on which product:
- (i)satisfies the maximin criterion. (2 marks)
- (ii)maximises the expected profit. (2 marks)
- (iii) has the maximum chance of yielding profit of at least Shs
- 100million.
- (2 marks)
- (c)Basing on the three risk attitudes, advise management of FBH on whether
- to continue printing cards or outsource the printing services.
(8 marks) (Total 40 marks)
to clients, which is inclusive of accommodation and restaurant services except conference services. BGH uses variance analysis for financial control of all activities and evaluating GMs' performance for rewards.
The newly recruited CEO found the current management control to be ineffective in evaluating GMs' performance and proposed the use of flexible budgets. He wants GMs to know that they head responsibility centres and this controllability principle must apply. He has decided to test his proposal by using the performance of BHM for the year ended 31 December 2018.
The budgeted and actual performance of BHM for the year ended 31 December, 2018 was as below:
evaluating GMs' performance in financial control. (b) With reference to BGH:
(3 marks)
(i) (ii)
(iii)
distinguish between responsibility centre and controllability principle.
(2 marks)
discuss appropriate methods that can be applied to address the effects of uncontrollable factors before assigning performance rewards.
(4 marks)
describe the different forms of responsibility centres.
Particulars
Budget
Actual
Variance
Number of guests
7,500
8,000
500F
Shs '000'
Shs '000'
Shs '000'
Revenue
900,000
982,000
82,000F
Direct labour costs
243,000
260,000
17,000A
Other variable costs
417,000
460,000
43,000A
Fixed costs
210,000
200,000
10,000F
Headquarter allocated expenses
25,000
25,000
-
The CEO of BGH has tasked you, as the company senior management accountant, to elaborate on various budget concerns.
Required:
(a) Using variance analysis and flexible budgets:
- (i)determine profit variances. (7 marks)
- (ii)advise the CEO, with reasons, on the best method to use in
Question 3
Natural Food Restaurant (NFR) is an African based restaurant located in Semuto town. NFR specialises in the preparation of three main traditional dishes using the same production methods and machine equipment. The dishes prepared include Luwombo (L), Boil (B) and Pillao (P). Each dish is sold at a standard price of Shs 10,000 per plate.
NFR has grown rapidly and has won several contracts to supply lunch to staff of five districts. However, NFR is facing cash flow problems due to traditional budgeting systems based mostly on incremental approach. Management has resolved to introduce activity-based budgeting (ABB) technique to solve the problem.
The following are their budget extracts for the year ending 30 June, 2020:
Luwombo
Boil
Pillao
Cooking hours per plate
0.2
0.2
0.2
Material cost per plate (Shs)
2,200
2,250
2,150
Labour cost per plate (Shs)
2,500
2,400
2,500
Number of plates produced
10,700
10,000
10,250
Number of gas refills
33
32
37
Number of material movements
75
100
80
Number of inspections
450
450
400
Budgeted manufacturing profit (Shs '000')
19,650
22,325
26,062.50
Annual kitchen overheads are analysed into the following cost pools:
Required:
As a senior management accountant at NFR:
- (a)Evaluate the effect of ABB technique on NFR's budgeted manufacturing profit for year ending 30 June, 2020.
- (16 marks)
- (b)Describe any four stages involved in the budgeting process. (4 marks) (Total 20 marks)
Shs '000'
Gas
25,500
Material handling
24,990
Inspection and supervision
27,950
Other cooking overheads
18,570
Question 4
Real Deal Supermarket (RDS) is a family owned business located in Bukunda sub-county, Masaka district and is known for selling cheap and quality consumer products. The supermarket has been suffering from stock outs, obsolescence of products, increasing sugar prices, pilferage and increased operating costs.
In an attempt to avert the above challenges, the proprietors of RDS sought advice from KS Business Consultants who made the following recommendations for consideration:
- Stocking sugar in bulk to hedge against increasing sugar prices.
- Set economic order quantity (EOQ) for sugar.
- Use ABC inventory analysis to manage stock.
The proprietors of RDS made the following action plan to implement the consultants' recommendations:
- Purchase ten 50 kg bags of sugar whenever an order is placed with the supplier.
- Incur Shs 5,000 on communication with supplier to place an order.
- Pay Shs 100 to print an Order Form and Shs 20,000 for transporting
- ordered bags of sugar.
- Keep sugar in a separate store which incurs the following costs per bag in
- a year:
The supermarket would earn interest of 6% per annum if the funds committed in storing sugar were deposited on its fixed deposit account. The proprietors anticipate having an annual demand of 4.8 metric tons of sugar for the year ending 30 June, 2020.
The current market price of sugar is Shs 140,000 per 50 kg bag.
The proprietors have identified cheaper sugar from Divine wholesalers who offer discounts for customers that buy in bulk.
In case sugar is purchased in bulk from Divine wholesalers, inventory costs will vary as follows:
Shs
Rent
10,000
Power
1,000
Fumigation
1,000
Security guard's wages
10,000
Insurance
3,000
RDS is considering buying either 20 bags or 25 bags of sugar to take advantage of the quantity discounts. They have approached you as a senior consultant for advice.
Required:
(a) Determine the EOQ of sugar for the supermarket.
- (b)Advise on the quantity of sugar that minimises the total inventory costs.
- (13 marks)
- (c)Explain to the management of RDS the process of applying ABC inventory management technique.
- (4 marks) (Total 20 marks)
Question 5
Link Medical University (LMU) evolved from a humble nursing institute in 1998 and now boasts of high quality services with its rallying slogan, 'Quality Costs but Benefits are Exclusive and Unquantifiable'.
LMU operates the academic year on a semester system with vigour for continuous improvement in service delivery, promoting efficiency and becoming a centre of excellence. A lot of funds have been invested in maintenance of quality but management feels they have not yet reached the level at which they desire to be.
LMU generated turnover of Shs 1,246 million during the second semester ending 30 April, 2019.
The Vice Chancellor (VC) attended a global workshop on sustainability of universities in March 2019, where cost of quality report and benchmarking concepts were extensively emphasised as key engines for the growth of universities.
The Quality Assurance Controller (QAC) presented, in the management meeting, the following costs which were incurred on quality maintenance during the second semester that ends 30 April 2019.
Quantity (bags)
19 - 24
25 or more
Discount (%)
9
12
Increase in storage costs (%)
9
10
Decrease in ordering costs (%)
7
9
(3 marks)
Item
Shs '000'
Annual accreditation fees
9,610
Annual competence assessment
25,000
Correction of processing errors
24,800
Correction of wrong tests issued to patients
58,800
Cost of violation of procedures
14,312
Expired chemicals
2,110
Inspection expenses
18,010
Parents' complaints
25,987
Preventive maintenance contracts
25,580
Process improvement costs
65,424
Quality assurance tests
8,410
Training
95,000
373,043
During the management meeting, the VC demanded that in the next meeting the QAC should report the costs of quality maintenance in a report format.
You are the QAC at LMU.
Required:
- (a)Prepare Cost of Quality report for the second semester and explain to the VC the effect of compliance costs on non-compliance costs.
- (10 marks)
- (b)Advise the VC on the challenges of direct benchmarking from competitors.
- (10 marks)
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