NUMBER ONE a) b) Differentiate between a feedback control system and a feed forward control system. (4 marks) In his study of: "the impact of budgets on people" C Argyris reported the following comment by a financial controller on the practice of participation in setting budgets in his company: "We bring in the supervisors of budget areas, we tell them that we want their frank opinion, but most of them just sit there and nod their heads. We know they are not coming out with exactly what they feel. I guess budget scares them". Explain why managers may be reluctant to participate fully in setting budgets, indicating the negative side effects, which may arise from the imposition of budgets senior management. by (10 marks) c) A critic has suggested that budgets should be abolished because they introduce rigidity and hamper creativity. Discuss. (6 marks) (Total: 20 marks) NUMBER TWO Kata Ltd. is a manufacturing company that requires component XLA20 in one of its production lines. The components are bought from outside suppliers. Form past experience, the company has determined that the demand for the component can be approximated by a normal distribution with a mean of 500 and a standard deviation of 10, over the range 470 to 530. The unit is an initial stock of 2000 components and the company has decided to order in batches of 2500 whenever the stock level falls below 1500 components. Again, past experience indicates that the time between the order being placed and delivery varies as follows: Lead time, weeks Probability Lead time distribution 23 4 0.02 0.50 0.25 005 1 The unit cost of holding stock is Sh.5 per week applied to the total stock held at the end of each week. The cost associated with placing an order is Sh.5.00 and the unit cost of being out of stock is Sh.200 per week. The company does all its accounting at the end of the week and all ordering and delivery occur at the beginning of a week. Required: Estimate the average cost per week of the above policy, using simulation analysis and the following random numbers: For Demand: 034 162 743 738 636 964 736 614 698 637 332 616 804 560 111 410 959 774 246 762 For Demand: 034 162 743 738 636 964 736 332 616 804 560 111 614 698 637 410 959 774 246 762 For Leadtime: 95 73 10 76 51 74 (Total: 20 marks) Hint: Use 15 trial runs Round off the demand probabilities to 3 decimal places. (Estimate these probabilities in ranges of 5) NUMBER THREE 1. Highlight how the transportation algorithm can be modified for profit maximization rather than minimization of costs. (3 marks) 2. The Trashin Furnitures Ltd. (TFL) produces a unique type of computer desks. Four of TFL s main outlets are S, S, S, and S, These outlets already have requirements in excess of the combined capacity of its three production plants PP and P, The company needs to know how to allocate its production capacity to maximize profits. Distribution costs (in Sh.) per unit from each production plant to each outlet are given in the following table: S S S S Sh. Sh. Sh. Sh. P1 220 240 220 360 From P2240 200 180 280] P3 260 200 260 240 Since the four outlets are in different parts of the country and as there are differing transportation costs between the production plants and the outlets along with slightly different production costs at different production plants there is a pricing structure which enables different prices to be charged at the four outlets. Currently, the price per unit charged is Sh.2,300 at S,, Sh.2,350 at S, Sh.2,250 at S,, and Sh.2,400 at S, The variable unit production costs are Sh.1,500 at plants P, and P, and Sh.1,550 at plant P The demand at S,S, S, and S, are 850, 640, 380 and 230 desks respectively while the plant capacity at plant P, P, and P,are 625, 825 and 450 desks respectively. Required: Using the transportation algorithm, determine the contribution to profit for the optimal allocation. (17 marks) (Total: 20 marks) NUMBER FOUR 1. Thomas Vila has budgeted that output and sales of his single product will be 100,000 units in the coming year. At this level of activity, his unit variable costs are budgeted at Sh.50 and his unit fixed costs at Sh.25. His sales manager estimates that the demand for the product would increases by 1000 units for every decreased of Sh.1 in unit selling price (and vice versa) and that at a unit selling price of Sh 300 demand would be nil For Demand: 034 162 743 738 636 964 736 332 616 804 560 111 614 698 637 410 959 774 246 762 For Leadtime: 95 73 10 76 51 74 (Total: 20 marks) Hint: Use 15 trial runs Round off the demand probabilities to 3 decimal places. (Estimate these probabilities in ranges of 5) NUMBER THREE 1. Highlight how the transportation algorithm can be modified for profit maximization rather than minimization of costs. (3 marks) 2. The Trashin Furnitures Ltd. (TFL) produces a unique type of computer desks. Four of TFL s main outlets are S, S, S, and S, These outlets already have requirements in excess of the combined capacity of its three production plants PP and P, The company needs to know how to allocate its production capacity to maximize profits. Distribution costs (in Sh.) per unit from each production plant to each outlet are given in the following table: S S S S Sh. Sh. Sh. Sh. P1 220 240 220 360 From P2240 200 180 280] P3 260 200 260 240 Since the four outlets are in different parts of the country and as there are differing transportation costs between the production plants and the outlets along with slightly different production costs at different production plants there is a pricing structure which enables different prices to be charged at the four outlets. Currently, the price per unit charged is Sh.2,300 at S,, Sh.2,350 at S, Sh.2,250 at S,, and Sh.2,400 at S, The variable unit production costs are Sh.1,500 at plants P, and P, and Sh.1,550 at plant P The demand at S,S, S, and S, are 850, 640, 380 and 230 desks respectively while the plant capacity at plant P, P, and P,are 625, 825 and 450 desks respectively. Required: Using the transportation algorithm, determine the contribution to profit for the optimal allocation. (17 marks) (Total: 20 marks) NUMBER FOUR 1. Thomas Vila has budgeted that output and sales of his single product will be 100,000 units in the coming year. At this level of activity, his unit variable costs are budgeted at Sh.50 and his unit fixed costs at Sh.25. His sales manager estimates that the demand for the product would increases by 1000 units for every decreased of Sh.1 in unit selling price (and vice versa) and that at a unit selling price of Sh 300 demand would be nil that the demand for the product would increases by 1000 units for every decreased of Sh.1 in unit selling price (and vice versa) and that at a unit selling price of Sh.200 demand would be nil. Information about two price increases has just been received from suppliers: one is for materials (which are included in Thomas Vila(variable costs) and one is for fuel (which included in his fixed costs). Their effect will be to increase both the variable and fixed costs by 20% each over the budgeted figures. Thomas Vila aims at maximizing profits from his business. Required: a. Calculate before the cost increases the budgeted contribution and profit at the budgeted levels of 100,000 units. (3 marks) (4 marks) b. Calculate the level of sales at which profits would be maximized and the amounts of these maximum profits before the cost increases. c. Show whether and by how much Thomas Vila should adjust his selling price in respect to increases in: Fuel costs. Material costs. (2 marks) (2 marks) 2. Some businesses which supply two or more separate markets from a single source may decide to charge a higher price for sales to home markets than for export sales. The businesses may justify their pricing policy by stating that they need to earn foreign exchange from foreign markets and recover their research and development costs, plus production overheads against home demand. Required: i Critically explain briefly the rationale for such a differential pricingpolicy. (5 marks) ii Should earning of foreign exchange be a factor in a firm" s pricing policy. (4 marks) NUMBER FIVE (Total: 20 marks) a) Explain the advantages of using Value Added Statements (VAS) for interdivision for comparisons in decentralized firm. (8 marks) b) TOB Lt. Is a manufacturing company that makes only three products X, Y, and Z. Data for the period ended last month are as follows: x Units produced and 12,000 Y z 16,000 8,000 sold Sh. Sh. Sh. Sales price per unit 50 70 60 that the demand for the product would increases by 1000 units for every decreased of Sh.1 in unit selling price (and vice versa) and that at a unit selling price of Sh.200 demand would be nil. Information about two price increases has just been received from suppliers: one is for materials (which are included in Thomas Vila(variable costs) and one is for fuel (which included in his fixed costs). Their effect will be to increase both the variable and fixed costs by 20% each over the budgeted figures. Thomas Vila aims at maximizing profits from his business. Required: a. Calculate before the cost increases the budgeted contribution and profit at the budgeted levels of 100,000 units. (3 marks) (4 marks) b. Calculate the level of sales at which profits would be maximized and the amounts of these maximum profits before the cost increases. c. Show whether and by how much Thomas Vila should adjust his selling price in respect to increases in: Fuel costs. Material costs. (2 marks) (2 marks) 2. Some businesses which supply two or more separate markets from a single source may decide to charge a higher price for sales to home markets than for export sales. The businesses may justify their pricing policy by stating that they need to earn foreign exchange from foreign markets and recover their research and development costs, plus production overheads against home demand. Required: i Critically explain briefly the rationale for such a differential pricingpolicy. (5 marks) ii Should earning of foreign exchange be a factor in a firm" s pricing policy. (4 marks) NUMBER FIVE (Total: 20 marks) a) Explain the advantages of using Value Added Statements (VAS) for interdivision for comparisons in decentralized firm. (8 marks) b) TOB Lt. Is a manufacturing company that makes only three products X, Y, and Z. Data for the period ended last month are as follows: x Units produced and 12,000 Y z 16,000 8,000 sold Sh. Sh. Sh. Sales price per unit 50 70 60 Sh. Sh. Sh. 50 70 24 88 20 12 Sales price per unit Direct material cost per 16 unit Direct labour cost per 8 unit Production overheads Total Cost drivers costs Sh. Machine hours Machining costs 102,000 Machine hours Production scheduling 84,000 Number of production runs Set-up costs 54,000 Quality control 49,200 Number of production runs Receiving materials 64,800 Number of components receipts Packing materials 36,000 Number of customer orders 390,000 Information on the cost drier is given as follows: Y Direct labour hours per unit 1 1 Machine hours per unit N 1 1 Number of components per unit 3 Number of component receipts 18 Number of customer orders 6 Number of production runs 6 5881 8 80 64 20 10 16 8 Required: Using activity based costing (TOB) show the cost and gross profit per unit for each product during the period. (12 marks) (Total: 20 marks) 333 (iii) (c) Governmental funds; Proprietary funds; Fiduciary funds. (2 marks) (2 marks) (2 marks) For each of the three categories listed in (b) above, explain how the accounting practice adopted for each is guide by: Accruals basis of accounting: (11) Budgets and budgetary control. (3 marks) (3 marks) (Total: 15 marks)