Sweet Bread Bakery Limited (SBBL) is a large manufacturing plant with three

divisions namely A, B and C and a shared service center (SSC) in Luzira.Division

A is in charge of procuring materials, Division B for baking confectionaries and

Division C for selling and distribution of finished products. All divisions are

treated as investment centres and headed by managers.

Divisional performance is measured on a monthly basis and with effect from

November, 2018senior management decided to start charging SSC costs to A, B

and C in the ratio of 1:1:2 respectively.

SBBL has been measuring divisional managers' performance using return on

investment (ROI) based on controllable profits only, which senior management

has resolved to change with immediate effect. SBBL's target ROI of 20% per

month will remain unchanged.Divisions A, B and C maintained their monthly

ROIs at 22%, 23% and 21.5% respectively for the last quarter and the

managers have been enjoying healthy bonuses.

All divisionalmanagers are unhappy with the changes in performance

measurement and have suggested that senior management adopts 'residual

income' (RI) which may balance the interests of all parties. They propose a

monthly RI target of Shs 12 million. SBBL's cost of capital is 10%.

Due to the comingfestive season, the divisions have prepared their budgeted

operating statement for the month of December 2018 as shown below:

Division A has been buying finished wheat flour (W) and sellingit to division B.

However, management is evaluating the proposal by Division A's

managerofacquiring machinery that can process and package wheat flour for

sale to Division B and also to external customers. The cost of machinery is

estimated at Shs 160 million with a useful life of five years after which it could be

sold for Shs 10 million. SBBL depreciates all its assets on a straight-line basis over the life of the asset. The machinery is expected to increase efficiency of

Division Aresulting into a 20% increase in monthly contribution.

Proposed dealings of Division A with Division B and external customers after

acquiring new machinery:

Division A plans to sell packed wheat flour to division B at an agreed transfer

price that will benefit SBBL as a whole. The machine has a production capacity of

22,000 cartons per month. Division B has ordered 12,000 cartons of wheat flour

for the month of December 2018 while external customers are expected to order

for 10,000 cartons.A carton of wheat flour contains 12 packets of 2 kg each.The

market price of a carton is Shs 50,000 and Division A will transfer wheat flour to

division B at marginal cost plus 25% markup.The production cost per kg of

wheat flour is budgeted at Shs 1,600 75% of which is variable.

Division B and Division C always have damages and customers return what is

commonly known as stalebread (SB) which is highly demanded by

livestockfarmers. Division A has contracts with farmers to supply SB at Shs 1,500

per kg and incurs an additional Shs 1,090,000 per month in selling and

distribution costs.

Both divisions B and C agreed to sell SB to division A at Shs 800 per kg andShs

1,000 per kg respectively. An average of 2,800 kg and 3,000kg of SB are

collected monthly by Divisions B and C respectively.

Required:

(a) (i) Evaluate the effect of the proposed changes by senior management

on divisional managers' performance for the month of December

2018.

(10 marks)

(ii) With reasons, advise SBBL's senior management on whether

toconsider divisional managers' proposal of adopting RI for the

month ofDecember2018

(5 marks)

(b) Assess the impact of acquiring new machinery on Division A's ROI for the

month of December 2018 and advise management on whether to accept

the investment.

(8 marks)

(c) Evaluate the profitability performance of Division A for the month of

December 2018 after acquiring the new machinery. (9 marks)

(d) Describe the relevance of transfer pricing to a company like SBBL.

(8 marks)

(Total 40 marks)

Question 2

Kameke Import and Export Logistics (KIEL) is a family-owned business that was

established in 1997 dealing in tiles and ceramics imported from Europe and Asia.

KIEL's accountant who is also a family memberhas made gradual improvements

in bookkeeping which has contributed to business expansion.

KIEL imported 25,000 square meters of tiles from Spain inOctober 2018 and paid

United States dollars (USD) 95,000. Additional cost information related to the

KIEL plans to import 30,000 square metres of tiles in December 2018 and the

USD exchange rate is anticipated to drop by Shs 5.

You are a cost accounting consultant and KIEL's accountant has come to you for

advice.

Required:

(a) (i) Using the inspection of accounts method, advise KIEL's accountant

on the total cost to be incurred during the month of December 2018.

(12 marks)

(ii) Determine the expected selling price of a square metre of tiles in

December 2018. (2 marks)

(b) Describe the procedure taken in estimating cost functions. (6 marks)

(Total 20 marks)

Question 3

Ssajja Tailoring and Embroidery Services (STES) is a partnership business of two

family members.STES deals in making of school uniforms and fancy clothes. The

partnersare concerned about the declining financial performance of STES despite

the growing demand for its products.

STES sought for advice from GM Financial Consultants who recommended the

adoption of a standard costing system and analysis of variances on a monthly

basis. The consultants developed a standard cost card for making a dress as

follows:

Shs

Direct materials (1.5 square metres of cloth each at Shs 9,000) 13,500

Direct wages (1.5 hours each at Shs 2,000) 3,000

Variable overheads (1.5 hours at Shs 3,000 per hour) 4,500

Fixed overheads (1.5 hours at Shs 4,000 per hour) 6,000

Standard cost 27,000

Standard selling price 35,000

Budgeted output for the month of October 2018 was 1,200 dresses but actual

results were as follows:

Units Quantity Shs '000'

Production Dresses 900 28,800

Materials used Square metres 1,125 10,687.5

Labour paid Hours 1,275 3,825

Variable overheads 4,500

Fixed overheads 6,150

STES operated for 1,200 hours during the month and had no inventory balances.

Required:

(a) Using standard absorption costing, prepare statement that reconciles

STES' budgeted profit with actual profit for the month of October 2018.

(14 marks)

(b) Explain the rationale for adopting a standard costing system by STES.

(6 marks)

Question 4

Nile Engineering Company (NEC) located in Jinja has contracts for rehabilitating

tarmac roads, Grade I and Grade II murram roads within Jinja district at the

following price quotations.

Type of road Price per km (Shs)

Tarmac 11,155,000

Grade I murram 22,160,000

Grade II murram 17,115,000

The following resources are required for completing 1km of each road type.

Grade I Grade II

Tarmac murram murram

Materials (tons) 5 15 10

Variable overheads (Shs '000') 1,500 1,500 3,000

Labour (hours) 200 50 50

The average cost of materials per ton is Shs 1,320,000 and the wage rate per

hour is Shs 15,000.

NEC has 5,000 labour hours and Shs 22,500,000 to cater for variable overhead

costs in each quarter.The material suppliers can deliver 1,600 tons every quarter.

NEC's annual fixed costs are Shs 51,275,000.

Required:

(a) Using the simplex method:

(i) identifythe type of road that NEC should drop in order to maximise

contribution.

(12 marks)

(ii) determine NEC's maximum quarterly profit (2 marks)

(b) Discuss the reasons why organizations apply linear programming

indecision making.

(6 marks)

Question 5

LiquidsPlus Limited (LPL) located in Mendesub-county, Wakiso district, deals in

production and distribution of Judo (J), Booster (B) and Hammer (H), energy

drinks. The production of these three products is done using the same machines,

labour and share a centralised store.

LPL has been using traditional absorption costing system in charging overheads

to cost units. In the recent Board meeting, the newly appointed finance director

highlighted the need for adoption of activity-based costing (ABC) system. He

said that this costing technique will reduce on the contemporary challenges

associated with the traditional absorption costing system currently being used by

the company.LPL has been absorbing fixed overheads to products using machine

hours.

He further provided the following budget for the third quarter of the year 2018.

Details Products

J B H

Raw materials (concentrate) per carton (kg) 3.6 8.7 6.3

Direct labour hours per carton 0.96 1.2 1.08

Machine hours per carton 12 16.8 14.4

Production (cartons) 6,000 9,000 12,000

Selling price per carton (Shs) 38,400 60,000 48,000

Number of material movements 750 1,315 2,000

Sales order frequency 78 116 156

Machine maintenance hours 24 9 12

Number of administrative staff 9 6 15

Budgeted net profit (Shs) (9,355,818) 45,476,782 43,462,036

The company has an underground well where water for diluting the concentrates

is extracted and processed before being used in production.

The production of B and H requires more part-time workers than the production

of J. The part-time workers are involved in packing the products.The products

are packed in cartons of 24 bottles each and stacked in batches of 48 cartons. All

products are packed in 400 ml bottles.

The following cost estimates were made for the third quarter:

1. Variable costs

Shs

Concentrate cost per kg 4,500

Direct labour cost per hour 6,000

Other direct materials per carton 5,325

2. Fixed costs

Shs '000'

Quality inspection 15,075

Material handling 10,569

Selling and distribution costs 63,175

Machine maintenance 12,600

Administration costs 56,250

Required:

(a) Assess the impact of ABC system on the product profitability for the

third quarter of the year 2018.

(16 marks)

(b) Justify why ABC system is most preferred to traditional absorption

costing.