Performance Management · 2022

(a) i) Contribution and profit of product/company Product 1 Product 2 Product 3 Company Sales (N) 3,375,000 4,888,000 1,900,000 10,163,000 VC 1,755,000 2,256,000 950,000 4,961,000 Contribution 1,620,000 2,632,000 950,000 5,202,000 Less Fixed Cost: Attributable 275,000 337,000 296,000 908,000 General 553,921 802,242 311,837 1,668,000 Total Fixed Cost 828,921 1,139,242 607,837 2,576,000 Net Profit 791,079 1,492,758 342,163 2,626,000

ii) Budget profit if product 3 is discontinued with no effect on other products sales Product 1 Product 2 Product 3 Company Sales (N) 3,375,000 4,888,000 - 8,263,000 VC 1,755,000 2,256,000 - 4,011,000 Contribution 1,620,000 2,632,000 - 4,252,000 Less Fixed Cost: Attributable 275,000 337,000 - 612,000 General 681,290 986,710 - 1,668,000 Total Fixed Cost 956,290 1,323,710 - 2,280,700 Net Profit 663,710 1,308,290 - 1,972,000

iii) Extra sales to cover advertising cost of N80,000 1 2 3 Company Old contribution 1,620,000 2,632,000 950,000 5,202,000 Additional Contr. 26,567 38,477 14,956 80,000 Total Contribution 1,646,567 2,670,477 964,956 5,282,000 Contribution/unit 7.20 7.00 5.00 New units sold 228,690 381,497 192,991 Old unit sold 225,000 376,000 190,000 Extra units sold 3,690 units 5,497 units 2,991units Selling price (N) 15 13 10 Sale value (N) 55,350 71,461 29,910 156,721 75

(b) i) Computation of minimum selling price using a relevant costing approach Particular Workings Amount Reasons Direct material: Steel Brass Fittings 55 x N40 N2,200 N800 Future cash flow Future cash flow Direct labour: Skilled Semi-skilled 100 x 1,50 x N80 N12,000 - Incremental cash flow No incremental costs Overhead 40 x N7.50 N300 Only power cost is relevant Estimating cost - Sunk cost Administrative overhead - No incremental cost Relevant cost of order N15,300

ii) Factors that need to be considered in making this quotation

- Time period of repeated order, number (frequency of repeat order) and the demand - Cash flow from alternative use of the capacity - Existence of complaints - Price to be quoted by competitors - If there will be need for hiring special equipment - The ability to deliver as at when required to the customer

c. i) Incremental Cost Incremental cost is an additional cost that will occur if a particular decision is taken. Provided this additional cost will result in a cash flow, it is a relevant cost.

ii) Differential Cost It is the amount by which future costs will be different depending on which cause of action is taken. It is thus an amount by which future cost will be higher or lower, if a particular course of action is chosen. It is a relevant cost if it involves additional cash flow.

iii) Committed Cost It is a category of unavoidable costs. It is thus a cost that a company has already committed to or an obligation already made, that it cannot avoid by any means.

iv) Sunk Cost A sunk cost is a cost that has already been committed by an earlier decision. They are not relevant cost in decision making.

v) Opportunity Cost An opportunity cost is a benefit that will be lost by taking one course of action instead of the next most profitable course of action. It is not an actual cost in 76 the real sense of an amount paid out as an expense. It is a comparative cost resulting from making once choice over another.

Examiner’s report The question tests students' understanding of Marginal Cost for Decision Making. Majority of the students attempted the question being a compulsory question. The performance was average. The major pitfall was the inability of students to identify relevant cost and compute extra sales in units to cover additional cost of advertising. Candidates are advised to read ICAN study text when preparing for the future examination of the Institute.

Marking guide Marks Marks a (i) 25 ticks at 1/5 mark 5 (ii) 20 ticks at ¼ mark 5 (iii) 20 ticks at ¼ mark 5 15 b (i) 8 ticks at ½ mark 4 Any 4 correct reasons at ½ mark 2 (ii) Any 4 ticks at 1 mark 4 10 c 5 points at 1 mark 5 Total 20

MEGA LABORATORIES PLC

(a) CASH BUDGET FOR QUARTER ENDING 30TH JUNE 2021 Cash inflow N Collection from customers 2,084,033 Total cash inflow (A) 2,084,033 Cash Outflow Payment to suppliers 398,833 Other expenses 200,000 Labour cost 236,400 Total cash outflow (B) 835,233 Net cashflow (A-B) 1,248,800 Opening Cash balance - Closing cash balance 1,248,800 77

(b) Income statement for Quarter Ending 30 June 2021 N N 2,375,000 Sales Cost of sales: Opening inventory (20,300 x 62) 1,258,600 Production (19,700 x 62) 1,221,400 2,480,000 Closing inventory (15,000 x 62) (930,000) (1,550,000) Gross Profit 825,000 Other expenses 200,000 Depreciation 55,000 (255,000) Net profit 570,000

c. Benefits of Cash Budget

(i) It can help to regulate expenses.

(ii) It will clearly show a business has more cash than expected (surplus) or less cost than expected (deficit).

(iii) it is useful in liquidity management and planning.

d. Principal budget factor is the resource or activity which is limited and which forms the base for the preparation of the budgets. Sales are often regarded as a major budget factor to be considered in preparing company budget since all company operation take bearing from what level of revenue that will be expended in the operation. Thus, this factor is known as the principal budget factor or limiting factor. In the majority of organisations, this factor is sales demand or revenue expectation although it can also be shortage of materials or inadequate plant capacity.

Examiner’s report The question examines candidates on Cash Budget. It was attempted by the majority of the candidates. The performance was average. The main pitfall was the inability to compute correct purchase cost of raw materials used. Candidates are encouraged to read the Institute's text when preparing for the examination of the Institute. 78

Marking guide Marks Marks a 8 ticks at 1 mark 8 b 10 ticks at ½ mark 5 c Any 2 points at ½ mark 3 16 d Definition 2 Explanation 2 4 Total 20

a. i. Average Rate of Return (ARR) Average Profit = (2019 Profit before interest/tax + 2020 Profit before interest Tax)/2 Average Capital Employed = (Beginning Capital employed + Closing capital employed)/2 ARR = Average profit before interest and tax Average capital employed Net Profit 2019 2020 Profit N70 million N80million Net capital employed N500 million N545million ARR = (70 + 80)/2 = 75 x 100 (500 + 545)/2 522.52 1 ARR = 14.354%

ii. Computation of Economic Value Added (EVA) Computing 2020 Net operating Profit after tax (NOPAT) N’million Profit after Tax 48.00 Add (1) Finance change (1- 0.25) x 14 10.50 (2) Non cash items 3.00 (3) Deprecation 28.00 (4) Provision for doubtful debts 1,20 (5) Deferred Tax 2.00 (6) Research/Development - 34.20 92.70 less (1) Economic depreciation 50.50 (2) Research/development 1.00 51.50 Adjusted NOPAT 41.20 79 Computation of opening Capital Employed for 2020: N’million 2019 capital employed (N540million – N40million) 500.00 Add: 1 Non-capitalised lease assets - 18.00 2 Non cash item - 3.00 3 Provision for doubtful debt - 1.30 522.30 Computation of Weighted average cost of capital (WACC) = (0.18 x 0.60) + (0.06 x (1-0.25) x 0.4 = 10.80 + 1.80 = 12.60% Computation of EVA Adjusted NOPAT = 41.20 Less capital charge = (0.126 x 522.30) = (65.81) Negative EVA = (24.61)

b. The business is not creating adequate values for the owners Net Present Value (NPV) of Investment Year Cashflow Dcf@ 12.6% PV 0 (3,000,000) 1.000 (3,000,000) 1 850,000 0.8881 754,885 2 850,000 0.7887 670,395 3 850,000 0.7000 595,000 4 850,000 0.6221 528,785 5 850,000 0.5525 469,625 6 500,000 0.5525 276,250 The project is profitable since the NPV is positive Alternative Solution Year Cashflow Dcf@12.6% PV N N 0 (3,000,000) 1.0000 (3,000,000) 1-5 850,000 3.5518 3,019,030 5 500,000 0.5525 276,250 295,280 The project is profitable since the NPV is positive 80

Examiner’s report The question tests students' understanding of Performance Evaluation and Capital Budgeting. Few students attempted the question and the performance was poor. Majority that attempted the questions could not identify the variables to use to arrive at Net Operating Profit After Tax (NOPAT). Candidates are advised to read the study text for future examination of the Institute.

Marking guide Marks Marks

(a) (i) 8 ticks at ½ mark 4

(ii) 27 ticks at 1/3 mark 9 13 (b) 14 ticks at ½ mark 7 Total 20

a) Large-scale service organisations have a number of features that have been identified as being necessary to derive significant benefits from the introduction of ABC: i) They operate in a highly competitive environment; ii) They incur a large proportion of indirect costs; iii) Products and customers differ significantly in terms of consuming overhead resources; iv) They market many different products and services. v) Their activities are not based on volume such as direct labour hours; vi) Their overhead costs are driven by specific activities

b) The following may create problems for the application of ABC:

i) Facility sustaining costs (such as property rents etc.) represent a significant proportion of total costs and may only be avoidable if the organisation ceases business. It may be impossible to establish appropriate cost drivers; ii) It is often difficult to define products where they are of an intangible nature. Cost objects can therefore be difficult to specify; iii) Many service organisations have not previously had a costing system and much of the information required to set up an ABC system will be non-existent. Therefore introducing ABC is likely to be expensive; iv) The choice of both activities and cost drivers might be inappropriate;

v) The benefits from ABC might not justify the costs. In some cases, it does not provide different information from traditional absorption costing. 81

c) The uses for ABC information for service industries are similar to those for manufacturing organisations: i) It leads to more accurate product costs as a basis for pricing decisions when cost-plus pricing methods are used; ii) It results in more accurate product and customer profitability analysis statements that provide a more appropriate basis for decision-making; iii) ABC attaches costs to activities and identifies the cost drivers that cause the costs. Thus ABC provides a better understanding of what causes costs and highlights ways of performing activities more effectively by reducing cost driver transactions. Costs are managed more effectively in the long term. iv) It enables resources and other related costs to be more accurately attributed to the services which they use. v) It provides understanding into the fastest growing and least visible element of cost-overhead. vi) It encourages continuous improvement and total quality control because control and planning are directed at the process level and it links the corporate strategy to operational decision making. vii) It eliminates waste by providing visibility of non-value added activities.

d) The following aspects would be of most interest to a regulator:

i) The costing method used (e.g. marginal, traditional full cost or ABC). This is of particular importance to verify whether or not reasonable prices are being set and that the organisation is not taking advantage of its monopolistic situation. Costing information is also necessary to ascertain whether joint costs are fairly allocated so that cross-subsidisation from one service to another does not apply; ii) Consistency in costing methods from period to period so that changes in costing methods are not used to distort pricing and profitability analysis; iii) In many situations a regulator may be interested in the ROI of the different services in order to ensure that excessive returns are not being obtained. A regulator will therefore be interested in the methods and depreciation policy used to value assets and how the costs of assets that are common to several services (e.g. corporate headquarters) are allocated. The methods used will influence the ROI of the different services. 82

Examiner’s report The question examines candidates on the application of Activity Based Costing (ABC) in service organisations. Majority of the students attempted the question. The performance was above average. Candidates are encouraged to read ICAN text when preparing for future examinations of the Institute.

Marking guide Marks Marks a Any 5 points at 1mark 5 b Any 5 points at 1mark 5 c Any 5 points at 1mark 5 d Any 5 points at 1mark 5 Total 20

a) When dealing with multi-products, the breakeven point in units is given by: BEP (Units) = FCWC ,where WC = Weighted Contribution per unit and FC = Total fixed costs The WC is calculated using units sold and not sales revenue. The budgeted sales in units are: Units Ratio Product A: ₦8,400,000 ÷ ₦120 = 70,000 1 B: ₦25,200,000 ÷ ₦180 = 140,000 2 210,000 3 This weighted contribution per unit is computed as follows: A B N N Selling price 120 180 Less variable costs 64 76 Contribution per unit 56 104 Weight 1/3 2/3 WC/unit = 563 + 104 × 2 3 = 88 83 Fixed costs: N Production overheads 2,240,000 Selling and adm. overheads 8,320,000 Total fixed costs (FC) 10,560,000 BEP (units) = WC FC= 10,560,000 88 = 120,000 units,made up of: Product A 1/3 × 120,000 = 40,000 units B 2/3 × 120,000 = 80,000 units Alternative Method There are other methods of generating the above results. For example, we can first compute the BEP in naira value as detailed below. 𝐵EP (₦) = WCMR FC The weighted contribution margin ratio (WCMR = weighted contribution margin ratio) (WCMR) must be based on sales revenue as detailed below: Product A 8,400/33,600 = 0.25 B 25,200/33,600 = 0.75 WCMR = ( 120 56 × 0.25) + (104 180 × 0.75) = 0.55 BEP (₦) = ₦10,560,000 0.55 = ₦19,200,000 This made up as follows: Product Weight Sales (₦) Price Qty A 0.25 4,800,000 ₦120 40,000 B 0.75 14,400,000 ₦180 80,000

b) We first determine the revised weighted contribution margin ratio (WCMR) A B Direct materials* ₦28.80 ₦28.80 Direct labour 17.60 26.40 Variable overheads 16.00 16.00 Total variable costs per unit 62.40 71.20 Selling price 120.00 160.00 Contribution per unit 57.60 88.80 CMR 0.48 0.555 84 WCMR = (0.2 × 0.48) + (0.8 × 0.555)= 0.54 * The direct material cost per unit is computed as follows: Product A ₦2,240,000 70,000 × 90% = ₦28.80 B ₦5,040,000 140,000 × 80% = ₦28.80 The revised fixed costs = N10,560,000 + 456,000 = ₦11,016,000 Profit after tax, as a percentage of revenue = 12% × (1 – 0.40) = 20% Let ₦x = the required revenue. Profit after tax = 20% of x = N0.20x Using: Sales (₦) = Total fixed cost+ Profit WCMR ,or x = 11,016,000+0.20x 0.54 0.54 x = 11,016,000 + 0.20x 0.34x = 11,016,000 x = N32,400,000 Product A = 20% of ₦32,400,000 = ₦6,480,000 B = 80% of ₦32,400,000 = ₦25,920,000

c) Total sales ₦33,600,000 Ratio of revenue 20% 80% Value N6,720,000 N26,880,000 Selling price N120 N160 Quantity 56,000 168,000 Ratio based on units 0.25 0.75 Contribution per unit N57.60 N88.80 WC/Unit = (₦57.60 × 0.25) + (₦88.80 × 0.75) = ₦81 BEP (units) = FCWC = ₦11,016,000 ₦81 = 136,000 units Product A: 0.25 × 136,000 = 34,000 units B: 0.75 × 136,000 = 102,000 units Total = 136,000 units 85 Alternative Method BEP (₦) = ₦11,016,000 0.54 = ₦20,400,000 Product A Product B Ratio – Value weighted 20% 80% Value ₦4,080,000 ₦16,320,000 Selling price ₦120 ₦160 Quantity 34,000 102,000

Examiner’s report The question tests the candidates’ understanding of Cost-Volume-Profit-Analysis. Majority attempted the questions and the performance was below average. The major pitfall was the inability to compute combined contribution margin. Students are advised to read the Institute's text when preparing for the Institute's examination in future.

Marking guide Marks Marks a 18 ticks at 1/3 mark 6 b 20 ticks at 1/4 mark 5 c 8 ticks at 1/2 mark 4 Total 15

Flexible Budget for 3 months Particulars 80,000 100,000 120,000 140,000 160,000 ’000 ’000 ’000 ’000 ’000 Variable Costs: Direct materials 3,200 4,000 4,800 5,600 6,400 Indirect materials 320 400 480 560 640 Direct labour 2,000 2,500 3,000 3,500 4,000 Power 240 300 360 420 480 Repairs 400 500 600 700 800 Total (A) 6,160 7,700 9,240 10,780 12,320 86 Fixed Costs: Indirect material 160 160 160 160 160 Power 480 480 480 480 480 Repairs 400 400 400 400 400 Supervision 800 800 1,440 1,400 1,440 Rent, rates & Insurance 360 360 360 360 360 Total fixed costs (B) 2,200 2,200 2,840 2,840 2,840 Production Cost (A+B) 8,360 9,900 12,080 13,620 15,160 Working Particulars 80,000 100,000 120,000 140,000 160,000 Cost analysis N’000 N’000 N’000 N’000 N’000 Direct material 3,200 4,000 4,800 5,600 6,400 Variable cost Indirect material 480 800 Semi-variable cost Direct Labour 2,000 2,500 3,000 3,500 4,000 Variable cost Power 720 960 Semi-variable cost Repairs 800 1,200 Semi-variable cost Supervision 800 800 1,440 1,440 1,440 Step cost Rent/insurance/ rates 360 360 360 360 360 Fixed cost Using High – Low method analysis of semi-variable costs: Indirect Material Variable cost Per unit = 800,000 – 480,000 = 320,000 160,000 – 80,000 80,000 = N4 per unit Fixed Cost = (800,000 – 640,000) = N160,000 Power variable cost per unit = N960,000 – N720,000 = 240,000 = N3 80,000 80,000 Fixed cost = 960,000 – (3 x 160,000) = N480,000 Supervision (variable cost) = 1,440,000 – 800,000 = 640,000 = N8 80,000 80,000 Fixed cost = 1,440,000 – 8 (160,000) 1,440,000 – 1.280,000 = N160,000 Repair Variable cost = 1,200,000 – 800,000 = 400,000 = N5 80,000 80,000 Fixed cost = N1,200,000 – 5 x (160,000) = N400,000 87

b. i. Budget report from July to Sept 2021 at 100,000 units showing variances: S/N Particulars Variable Fixed Total Actual Cost Cost Cost Cost Variance N’000 N’000 N’000 N’000 N’000 1. Direct material 4,000 - 4,000 4,150 150 A 2. Indirect material 400 160 560 580 20 A 3. Direct labour 2,500 - 2,500 2,700 200 A 4. Power 300 480 780 760 20 F 5. Repairs 500 400 900 885 15 F 6. Supervision - 800 800 850 50 A 7. Rent, Insurance/Rates - 360 360 320 40 F Where A = Adverse variance and F = favourable variance iii.Further investigations on the variances and measures/actions needed to be taken by director. S/N Variance Variance amount Investigations and measures to be taken on the variances 1 Direct material cost variance N150,000A There exists a N150,000 adverse variance which could be as a result of price and usage of materials. High actual direct material price, wastage, poor quality of materials, and loss in production. Management is expected to conduct price and market survey, ensure high quality low priced materials are procured and used, handling of materials to reduce wastage to be improved. 2 Indirect material cost variance N20,000 A There is N20,000 adverse variance for indirect material which could be as a result of price and usage of such materials, wastage, poor quality of such materials Management is expected to conduct price and market survey, ensure high quality low priced materials are procured and used, handling of such materials to reduce wastage. 3 Direct Labour cost variance N200,000 A An adverse variance of N200,000 was observed. This could arise from direct labour rate and efficiency variances. The variance could be attributable to high labour rates, inefficient operations and excessive overtime. 88 Management can control same through appropriate labour pricing, effective job evaluation and manpower planning. 4 Power overhead cost variance N20,000F There is a favourable variance of N20,000 which could be due to decrease in power rates. There is a need for investigation to ensure appropriate and realistic figure is used for budgeting purposes in future. 5 Repairs expenses cost variance N15,000F A favourable variance of N15,000 was noticed. It may mean that maintenance programme of equipment was not only adhered to but surpassed. A favourable variance of N15,000 means that there is a need for investigation to ensure appropriate figure (realistic figures) are used for budgeting purposes in future. 6 Supervision cost variance N50,000A There is an adverse variance of N50,000 which could be due to increase in cost of supervision. There is need for investigation to ensure appropriate figure is used for budgeting purposes in future. 7 Rent, insurance and Rates cost Variances N40,000F purposes in future. There is a favourable variance of N40,000 which could be due to decrease in rates. There is a need for investigation to ensure appropriate figure is used for budgeting.

Examiner’s report The question examines candidates on Flexible Budget. Majority of the students attempted the question. The performance is above average. Candidates are advised to study the Institute's text for future Institute's examination.

Marking guide Marks Marks a 63 ticks at 1/7 mark 9 b (i) Any 6 ticks at 1/2 mark 3

(ii) Any 6 ticks at ½ mark 3 6 Total 15

a. i) Production Budget Kay Lay Unit needed for sales 23,000 10,000 Units needed to increase closing stock 275 185 Total good units needed 23,275 10,185 Normal loss: 2/98 x 23,275 475 3/97 x 10,185 315 23,750 10,500

ii) Raw Material Purchase Budget 23,750 10,500 Usage of Material Tee 2kg 3kg Material Tee needed for production, net of wastage 47,500 31,500 Normal wastage: 5/95 x 47,500 = 2,500 10/90 x31,500 3,500 Material purchase (gross) 50,000 35,000 Total raw material to be purchased is 85,000 kgs of material Tee at a price of N30 per kg gives a total purchasing budget of N2,550,000 for the period.

b. Economic Order Quantity (EOQ) EOQ = 2 DK H,𝐰here D = annual demand in units = 85,000 units K = cost per order = N30 H= holding cost per unit per unit = N30 x 17% = N5.10 EOQ = √ 2 x 85,000 N5.10 x N30 = 1,000 units

Examiner’s report The question tests candidates' understanding on preparation of Operational Budget. The major pitfall was the inability to adjust for wastages. The performance was below average. Candidates are encouraged to read the study text of the Institute for future examination.

Marking guide Marks Marks a (i) 10 ticks at ½ mark 5 (ii) 10 ticks at ½ mark 5 10 b 5 ticks at 1 mark 5 Total 15 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

a. ₦ Note Food and drink at meeting - 1 Material Z 7,800,000 2 Construction workers - 3 Engineers 448,500 4 Specialist machine 1,525,000 5 Windows 150,000 6 Other materials 600,000 7 Fixed overhead - 8 Profit margin - 9 Total relevant cost 10,523,500

Notes 1) The food and drink costs are sunk. The meeting with the client has already occurred and therefore the costs are not relevant.

2) Material Z is regularly used by KL. The 550kg currently in inventory will need to be replaced and therefore should be valued at replacement cost. ₦6,500 × 550kg = ₦3,575,000. The remaining 650kg required for the contract is not owned by KL and therefore will need to be purchased at the replacement cost. ₦6,500 × 650 = ₦4,225,000. The total relevant cost is ₦7,800,000.

3) The construction workers have spare capacity to complete the work and are employed under a guaranteed wage agreement. Construction workers will be paid whether or not they work on the contract. Therefore, the cost is not relevant.

4) Engineers are salaried and this is not an incremental cost. However, they are currently at full capacity and do not have time within their normal hours to complete the 90 hours of work required. The engineer’s additional time should be valued at opportunity cost. If overtime is paid, the cost would be 90 hours× ₦5,200 = ₦468,000. Alternatively, switching engineers from their existing job. 90 hours/30 hours to produce a unit = 3 units valued at contribution per unit ₦149,500 = ₦448,500. The lower cost of the two options is ₦448,500 and this is the relevant cost.

5) The first rental period is part-way through and the payment of ₦1,500,000 has already been made. Therefore, this is a sunk cost and not relevant. In order to obtain the machine for the required seven week period another 15 week standard rental agreement would have to be entered into, therefore the relevant cost is ₦1,525,000. 69 If the machine was to be purchased, the relevant cost would be ₦2,000,000 (sales price less resale value). The lower relevant cost of the two options is to rent the machine for another rental period at ₦1,525,000.

6) The cost to produce the windows has already been incurred and is therefore sunk and not relevant. If KL uses the windows for the building and misses the conference, the sales will not be lost. The chief executive will visit the clients at a later date to secure the sales. Therefore, there is no incremental loss in contribution. The chief executive’s time is not relevant as he is paid an annual salary and would receive this irrespective of the visit to the clients. However, should the windows be used for the building, KL would not be able to attend the conference and be liable to pay the non-attendance fee of ₦150,000.

7) 400kg of other materials are required for the building. The incremental cost is ₦600,000.

8) Fixed costs are not relevant as they will be incurred irrespective of whether the contract is taken or not.

9) Profit mark-up is not relevant as KL is producing a minimum price quotation to exactly cover the relevant cost.

b. When quoting a minimum price for the contract, relevant costing principles are being used. Only relevant costs i.e. those that change as a direct result of the contract decision are included in the quoted cost. The minimum price will result in KL making neither a profit nor a loss. This is not a sustainable pricing policy in the longer term as it does not include a contribution to the fixed costs of the organisation. Relevant costing does not include a profit margin. This is not suitable for KL in the longer term as the company is planning to expand into different countries and investors will also require a return on their investment.

c. Market skimming would be a suitable pricing strategy to launch the houses in the new country. Market skimming charges a high price for the product initially where the product is unique and there are significant barriers to entry for competitors. The price is reduced as new competitors enter the market with a similar product. The strategy aims to maximise the profit from the product. 70 The high quality materials and unique energy saving technology used in the houses should command high prices from customers keen to have a house with this technology. The house that consumers are willing to pay a high price for, together with the barrier to competitors of the new energy saving technology, make KL’s product suited to the market skimming pricing strategy. This market skimming approach will allow KL to recover the research and development costs incurred to develop the energy saving technology.

Marking guide Marks Marks Marks 1 a. Minimum Price Schedule (12 ticks at 1 mark 12 Justification statements (9 ticks at 1 mark) 9 21 b. Reasons for relevant costing (2 points at 2 marks each) 4 c. - Correct Recommendation 2

- Any 2 Justifications at 1½ marks 3 5 30

Examiner’s report This question tests candidates’ knowledge of price setting using Marginal Costing, Absorption Costing and Relevant Costing criteria and pricing method for new innovative products and projects The question was well attempted by the candidates because it is a compulsory question. The pitfall noticed in their performance includes candidates’ inability to decipher the costs that are relevant and non-relevant costs. Also candidates’ inability to know that skimming pricing strategy will best be adopted in the type of situation Koliwi Limited finds itself in the production of special, innovative and environmental friendly project. It is recommended that candidates preparing for ICAN future examination read the ICAN Study Text. 71

a) i. Unit cost using Traditional approach: A B C N N N Material 190 180 160 Labour 48 64 56 Variable overhead 34 44 38 Overhead 60 80 70 Unit Cost 332 368 324

Workings: Total overhead = N15,300,000 = 6 x 120,000 = 720,000 = 8 x 75,000 = 600,000 = 7 x 30,000 = 210,000 1,530,000 hours Direct labour hourly rate = N15,300,000 = N10/hour 1,530,000 Product A Product B Product C Direct Labour hours per unit 6 hours 8 hours 7 hours Direct Labour hourly rate (N) 10 10 10 Unit overhead cost N60 N80 N70 Labour cost at ₦8 per hour N48 N64 N56

ii. Unit cost of Production using ABC approach in overhead absorption Unit Cost of Product (ABC Approach) A B C N N N Material 190.000 180 160 Labour 48 64 56 Value OH 34 44 38 Overhead 35.83125 66.57 200.25 Unit Cost 307.83125 354.57 454.25 72

Workings: Computation of total activity volumes: Product Direct Material Machine Company Production Production Quantity Labour Cost Hours Receipt run Order a 120,000 720,000 22.800,000 480,000 45 15 45 b 75,000 600,000 13,500,000 600,000 75 30 30 c 30,000 210,000 4,800,000 270,000 360 75 75 Total 1,530,000 41,100,000 1,350,000 480 120 150 Overhead cost per activity (cost driver rate) Activity Overhead Cost Overhead Allocated Cost Driver Activity per period Allocation of Overhead to Product Activity (Computation of Overhead cost per unit using ABC Approach) Activity Cost Driver Rate Absorption N Rate (N) Set up 1,260,000 Production run 120 10,500 per cost Machine 8,100,000 Machine hours 1,350,000 6 Goods inwards 2,520,000 Company receipts 480 5,250 Packaging 1,800,000 Production order 150 12,000 Engineering 1,620,000 Production order 150 10,800 N15,300,000 A B C Total Cost 120,000 75,000 30,000 N N N N Sep up: 15 product runs 10,500 157,500 157,500 30 product runs 10,500 315,000 315,000 75 production run 10,500 787,500 787,500 Total 157,500 315,000 787,500 1,260,000 Machine: 480,000 machine hours 6 2,880,000 2,880,000 600,000 machine hours 6 3,600,000 3,600,000 270,000 machine hours 6 1,620,000 1,620,000 Total 2,880,000 3,600,000 1,620,000 8,100,000 Good Include: 45 receipts 5,250 236,250 236,250 75 receipts 5,250 393,750 393,750 360 receipts 5,250 1,890,000 1,890,000 Total 236,250 393,750 1,890,000 2,520,000 73 Packaging: 45 production order 12,000 540,000 540,000 30 production order 12,000 360,000 360,000 75 production order 12,000 900,000 900,000 Total 540,000 360,000 900,000 1,800,000 Engineering: 45 production order 10,800 486,000 486,000 30 production order 10,800 324,000 324,000 75 production order 10,800 810,000 810,000 486,000 324,000 810,000 1,620,000 Total 4,299,750 4,992,750 6,007,500 15,300,000 Unit cost of overhead N35.83125 N66.57 N200.25

i. Expected Sales Price Product A Product B Product C Price Pr Expected Selling Price Price Pr Expected Selling Price Price Pr Expected Selling Price N N N N N N 300 0.5 150 350 0.6 210 450 0.5 225 360 0.3 108 400 0.3 120 440 0.4 176 390 0.2 78 420 0.1 42 430 0.1 43 336 372 444

ii. Profit Computation using Traditional Costing Approach A B C N N N Unit Sales Price 336 372 444 Unit Cost 332 368 324 Unit Profit 4 4 120 Quantity 120,000 75,000 30,000 N480,000 N300,000 N3,600,000 Profit Computation Using ABC Approach A B C N N N Unit Sales Price 336 372 444 Unit Cost 307.83125 354.57 454.25 Unit Profit/(cost) 28.16875 17.43 (10.25) Quantity 120,000 75,000 30,000 Total Profit 3,380,250 1,307,250 (307,500) 74

c. Why ABC is preferred to traditional approach ABC is preferred traditional costing due to the following reasons:

i. The traditional absorption costing method uses a single basis to absorb fixed overhead costs even if the overhead costs are not related to the basis used.

ii. ABC groups overhead costs into cost pools and assigns a suitable cost driver to each cost pool. By so doing, overheads are absorbed on basis that best reflect the manner in which they were incurred.

iii. ABC uses multiple absorption basis unlike traditional absorption costing method that uses a single basis of absorption.

iv. ABC provides useful information about the activities that drive overhead costs.

v. ABC provides information that could be relevant to long-term cost control and long-term product pricing.

vi. ABC approach shows a more realistic costing approach.

Examiner’s report This question tests candidates’ understanding of ABC approach in overhead absorption and cost based pricing in situation of uncertainty. The question was well attempted due to its familiarity. Performance by candidate is above average. The pitfall noticed was wrongful computation of unit sales price of products due to wrong adoption of the probabilities needed in the computation of sales price. Candidates are hereby encouraged to carry out their revision using the ICAN study text when preparing for Examination.

Marking guide Marks Marks

(a) i. Unit Cost using Traditional Method (25 ticks at 5 ticks for one mark) 5 ii. Unit Cost using ABC method (40 ticks at 8 ticks for 1 mark) 5 10

(b) - Computation of Selling Price and total profit per product for ABC and traditional method (21 ticks at 3 ticks per mark) 7

(c) Importance of ABC over Traditional approach. (Any

a) Workings Budgeted material usage 225,000/3,000 = 75 kg per unit Budgeted labour hours 5,000/3,000 = 1.666hrs per unit Budgeted variable overhead rate: 15,000/5,000 = N3.00 per direct labour hr. Budgeted fixed overhead absorption 30,000/3,000 = N10.0 per unit Standard specification per unit: ₦ ₦ Selling price 80 Variable costs Direct materials (75 x N0.4) 30 Direct labour (1.666 x N12) 20 Variable overheads (1.666 x N3) 5 55 Contribution 25 Less fixed overheads 10 Profit 15

b) Workings Actual production = 2,800 batches Actual material cost: 88,000/210,000 =N0.42 per kg Actual labour cost 52,000/4,400 = N11.82 per hour. Summary of Variances (excluding Volume variances) Comparison of Budget v Actual (both for 2,800 units) Detailed Variances: Material Price (SP – AP) x AQ (0.4 – 0.42) x 210,000 (4,000)A Material usage (SQ – AQ) x SP (210,000 – 210,000) x £0.40 - check (4,000)A 76 Labour Rate (SR – AR) x AH (12 – 11.82) x 4,400 800F Labour Efficiency (SH – AH) x SR (4,667 – 4,400) x £12 = 3,200F check 4,000F Variable Overhead Efficiency (SH – AH) x SR (4,667 – 4,400) x £3.0 800F Variable overhead expenditure (AH x SR) – Actual cost (4,400 x 3) – 12,000 1,200F 2,000F Fixed overhead expenditure (budgeted cost – actual cost) 30,000 – 36,000 (6,000)A Sales Margin Price Variance Actual Revenue – Budgeted revenue for actual level of output 225,000 - 224,000 1,000F Sales Margin volume variance (Actual units – Budgeted units) x standard contribution per unit (2,800 – 3,000) x N25.00 (5,000)A Fixed Overhead Capacity Variance = SC (BH – AH) N6 (5,000 – 4,400) = N3,600A 77 Fixed Overhead Efficiency Variance = SC (AH – SHAP) N6 ⌈ │⌊400,4 - 800,2 000,3 X 000,5 1⌉ │⌋= N1,600F Fixed Overhead Volume Variance = N3,600A + N1,600F = N2,000A

ii. Reconciliation of Budgeted contribution and Actual Contribution for April 2021 Budgeted Contribution (N25 x 3000 batches) 75,000 Sales variance: Sales Price variance 1000F Sales quantity margin variance 5000A (4000) Standard profit 71,000 Standard cost variance Favourable Adverse Direct material price variance N4000 Direct Material usage variance Direct labour rate variance 800 Direct labour efficiency variance 3200 Variable overhead expenditure variance 800 Variance overhead efficiency variance 1200 Total 6000 4000 2000F Actual Contribution 73,000

c) FACTORS TO CONSIDER BY MANAGEMENT BEFORE INVESTIGATING VARIANCE

i. Size of the variance: generally, the cause of the variance is more likely to be significant if the variance is large. This is a matter of materiality and management may need to determine what is material.

ii. Favourable or adverse variance: significant favourable or adverse variance may need to be investigated. However, adverse variance tends to require more investigation than favourable variances because of the impact of adverse variances on profit.

iii. Probability that the cause of the variance will be controllable: whether or not to investigate a variance will depend on management’s expectation that the cause of the variance will be controllable.

iv. Cost and benefit of the control action: investigating a variance has a cost in terms of management’s time actual cost incurred. A variance should not be investigated unless the expected benefits outweigh the cost. 78

v. Reliability and accuracy of the figures.

vi. Possible interdependencies of variances

vii. The inherent variability of the cost or revenue trends in variances.

Examiner’s report This question tests candidates’ understanding of standard costing, variance computation and reconciliation of Budgeted Contribution with Actual Contribution. Many candidates attempted the question. Being a familiar question, performance was high and encouraging. The pitfall was in candidates failing to compute capacity and efficiency variance preferring to determine the volume variance only. It is advised that candidates read the questions thoroughly in order to provide solution that fulfil the requirement of the question and familiarise themselves with the ICAN study text.

Marking guide 3. Marks Marks

a. Standard Cost Card (8 ticks at ½ mark) 4 B i. Computation of variances and preparation of reconciliation statements (24 ticks at ½ mark) 12 ii. Any four considerations at 1 mark for each consideration 4 Total 20

(a) i. OPTIMAL TRANSFER PRICE OR PRICE RANGE FOR PRODUCT B Since the only consumer of product B is Division Y, the minimum transfer price should be set at marginal cost less any cost savings due to internal sales. The variable cost per unit of product B is N192, hence the minimum transfer price should be set at N192 per unit of B. The maximum transfer price per unit for B would be the price that the external supplier charges Division Y, which is N220. Hence, the optimal transfer price per unit would lie between a minimum of N192, and a maximum of N220. 79

ii. OPTIMAL TRANSFER PRICE FOR PRODUCT B IF THERE IS SPARE CAPACITY If Division X has spare production capacity, then the units of product B have no opportunity cost and should be transferred to Division Y at variable cost less any cost savings due to internal sales. The transfer price would therefore be N192 per unit.

iii. OPTIMAL TRANSFER PRICE FOR PRODUCT B IF DIVISION X OPERATES AT FULL CAPACITY If Division X is at full capacity and would forego sales of product A to suppy product B to Division Y, then the units of product B would have to be transferred at marginal cost less any cost savings plus the contribution forgone on sales of product A. The contribution per unit of A is N64 (i.e. N248 – N184). Thus, the optimal transfer price would be N192 + N64 = N256. (b)ii. OPERATING STATEMENT Division X Division Y N N Sales Product A to external parties (150,000 x N248) Product B to Division Y (100,000 x N256) Sales Product C (N256 x 1.25 x 180,000) 57,600,000 62,800,000 57,600,000 Variable costs Product A (150,000 x N184) Product B (100,000 x N192) 37,200,000 25,600,000 Costs 27,600,000 80,000 @ N220 19,200,000 100,000 @ N256 46,800,000 17,600,000 25,600,000 43,200,000 Contribution 16,000,000 Fixed costs Product A (150,000 x N76) Product B (100,000 x N76) 11,400,000 7,600,000 19,000,000 Profit /(Loss) (3,000,000) Profit/(Loss) 14,400,000 80

ii. COMPARATIVE ANALYSIS OF PERFORMANCE Division X Division Y N N Profit /(loss) (3,000,000) 14,400,000 Investment 40,000,000 50,000,000 % % ROI -7.5% 28.80% Cost of capital 15% 15% N N Profit/(loss) -3,000,000 14,400,000 Charge on capital employed 6,000,000 7,500,000 Residual Income (RI) (9,000,000) 6,900,000 Due to the transfer price policy of operating at full capacity, Division X is not able to charge a share of its fixed costs to division Y, hence Division X is operating at a loss of N3million while Division Y with no fixed overhead cost implication is operating at a Profit of N14.4 million. The ROI for division X is therefore negative of N3million for its investors while Division Y generates a 28.80% returns per Naira invested. Division X generates a residual loss of N9million while Division Y generates a residual income of N14.40 million. The cost of capital for both Divisions is the same at 15% but Division Y has a higher investment base.

Examiner’s report The question tests candidates’ understanding of transfer pricing and divisional performance appraisal. This is a familiar question that should have attracted high performance from the candidates. However, candidates’ performance was average due to lack of understanding of Transfer pricing in situations of spare capacity and where there is limited resources. Candidates are hereby encouraged to study the ICAN Performance Management Manual and indeed other Management Accounting text books to widen their scope of understanding and knowledge of transfer pricing and divisional performance evaluation when preparing for future ICAN examination. 81

Marking guide 4. Marks Marks (a)i. Optimal transfer price 3

ii. Optimal transfer price when there is space capacity 3

iii. Optimal transfer price under limited resources 5 11 (b)i. Operating Statement (12 ticks for 4 marks) 4 ii. Computation of ROI and residual income (10 ticks at ½ mark) 5 9 Total 20

a) Variable cost per unit Material cost =₦2,400,000/200,000 = ₦12 per unit Labour cost = ₦1,200,000/200,000 = ₦6 per unit Variable overhead cost using high-low method: (₦1,850,000 - ₦1,400,000)/(350,000 - 200,000) = ₦3 per unit ₦ Direct material 12 Direct labour 6 Variable overhead 3 21 Fixed cost = ₦1,400,000 - (200,000 x ₦3) = ₦800,000

b) Optimum price Find the demand function Demand function is P = a + bx, where: P = Price per unit x = quantity b = ∆P/∆x = -2/2000 = -0.001 Therefore P = a - 0.001x Find value for ’a’ by substituting the known values for P and x: 60 = a - (0.001 x 250,000) a = 310 (Note: This is the maximum selling price, that is, the price at which no quantity will be demanded.) 82 Therefore P = 310 - 0.001x Identify marginal cost (MC) MC = unit variable = ₦21 Identify total revenue (TR) TR = (P)(x) = (310 - 0.001x)(x) = 310x - 0.001x2 Identify marginal revenue (MR) MR = dTR/dx = 310 - 0.002x Equate MC and MR to find x 21= 310 - 0.002x x = 144,500 Substitute x into demand function to find P P = 310 - (0.001 x 144,500) = ₦165.50 Calculate profit Total contribution = 144,500 x (₦165.50 - 21) = ₦20,880,250 Fixed cost (800,000) Profit ₦20,080,250

c) Market skimming As the sales director suggests, market skimming is a strategy which initially charges high prices for the product in order to take advantage of those buyers who want to buy it as soon as possible, and are prepared to pay high prices in order to do so. If certain conditions exist, the strategy could be a suitable one for Zinko Ltd. The conditions are as follows:

- Where a product is new and different, so that customers are prepared to pay high prices in order to gain the perceived status of owing the product early. All we know about Zinko Ltd’s product is that it is ’innovative’, so it may well meet this condition.

- Where products have a short life cycle this strategy is more likely to be used, because of the need to recover development costs and make a profit quickly. Zinko Ltd’s product does only have a three-year life cycle, which does make it fairly short.

- Where high prices in the early stages of a product’s life cycle are expected to generate high initial cash inflows. If this is the case here, then skimming would be useful to help Zinko Ltd cover the high initial development costs which it has incurred. 83

- Where barriers to entry exist, which deter other competitors from entering the market, as otherwise, they will be enticed by the high prices being charged. These might include prohibitively high investment costs, patent protection or unusually strong brand loyalty. According to the information we have been given, high development costs were involved in this case, which would be a barrier to entry.

- Where demand and sensitivity of demand to price are unknown. In Zinko Ltd’s case, market research has been carried out to establish a price. However, this information is based on the launch of similar but not identical products, so it is not really known just how accurate it will be.

Examiner’s report This question tests candidates’ understanding of using high-low method in analysing costs as well as using derived cost data in computing optimum selling price under situation of imperfect competition. It also tests candidates’ knowledge of condition that will make skimming price policy more suitable for the company in the prevailing situation. Candidates attempt on this question was high. However, performance was average. The pitfall was candidates’ inability to compute the profit maximising selling price to determine the profit for the period. Candidates are encouraged to use effectively ICAN Study Text when preparing for future examinations of the Institute.

Marking guide 5. Marks Marks

(a) Total unit variable costs and total fixed cost (6 ticks at ½ mark) 3

(b) Optimum Selling Price and resulting profit (14 ticks at ½ mark) 7 (c) Skimming Price conditions (Any 2 points at 2½ marks) 5 Total 15 84

a) Strategic, tactical and management information are classifications of information that distinguish the purposes for which that information is used. The classifications can also be used to distinguish the type of information that is used at different levels in an organisation with a hierarchical management structure. Managers at all levels need information to make business decisions. The nature of information required varies according to the level of management and the type of decision. Kolawole Limited (KL) has a management information system that should generate information for decision making at the strategic, tactical, and operational levels of management. Strategic information Strategic management needs strategic information. This is information that helps strategic managers to make long-term plans, assess whether these plans will be met, review existing strategies, and make changes or improvements. Strategic information has the following characteristics:

i. If is often information about the organization as a whole or a large part of it ii. It is usually in summary form, without much detail iii. It is generally relevant to the longer-term iv. It is often prepared on ah-hoc basis v. It may be qualitative or quantitative in nature For KL, relevant strategic information example would include information about competitors in the market. It appears that a competitor may be in financial difficulty; it may be useful for KL to know more about this and the reasons why the competitor may be in difficulty. It would also be useful to have information about how rival organisations may respond to any competitive initiative by KL. The management of KL would also benefit from strategic information about technological developments in the industry, the possibility of rising water and energy prices, or even the possibility of government action to discourage excessive energy use by business organisations. Tactical information This is information reported to middle managers for the purpose of planning and budgetary control. Tactical information is used to decide 85 how the resources of the organisation should be used, and to monitor how well they are being used. The features of tactical information are:

i. It is usually information about individual departments or operations ii. It is usually in summary form, but in greater detail than strategic information iii. It is generally relevant to the short term and medium term iv. It is often produced on a routine and regular basis v. It consists mainly of quantitative information Tactical information examples include both non-financial and financial information. Examples of tactical information include budgets, variance reports for control purposes, efficiency and capacity ratios and summary information about quality failures (re-working of faulty items and items returned under warranty) and on-time deliveries. Operational Information Operational information is needed to enable supervisors and front line managers to organize and monitor operations and to make on-the-spot decisions whenever operational problems arise. Operational information may be needed by employees to process transactions in the course of their regular work. The features of operational information are: i. It is usually information about specific transactions, jobs, or tasks ii. It may be summarized at a work group level but is more detailed than tactical information iii. It is generally relevant to the short term iv. It is usually about transactions, jobs, and tasks on a daily basis v. It consists mainly of quantitative information Examples of operational information include detailed information about throughput times, machine failures and downtime, bottlenecks, complaints, quantities of rejected items and so on.

b) Importance of non-financial measures - The quality and reliability of the equipment that KL produces could both potentially be critical success factors for KL because they are likely to be important in customers' buying decisions. By performing well in these areas, KL should be better placed to sustain its financial performance than if it performs badly in them. For example, if it provides its customers with high quality, reliable equipment, this should ensure a high level of customer retention, which should in turn help it maintain its revenues. 86 In this way, there would seem to be a strong link between non-financial performance and financial performance. Importance of financial measures: However, it is also important that KL continues to monitor its financial performance, because there is no guarantee that favourable non-financial performance will necessarily translate into favourable financial performance. For example, although KL’s equipment may be very reliable, if it is significantly more expensive than competitors’, customers may choose to buy the competitors’ equipment instead. Also, the directors have already highlighted the importance of reducing costs in order to improve profitability. This identifies the importance of monitoring financial performance, in order to assess how successfully KL is reducing its costs and improving profitability. Combination of measures – KL’s profit margins are known to be low, as a result of the intense competition in the market. This reinforces the need to monitor aspects of its financial performance (such as costs and margins). However, it is equally important to monitor whether sale and market share are increasing or decreasing in this competitive market, and how KL is performing in relation to the other critical success factors which will affect customers buying decisions.

Examiner’s report The question tests candidates’ knowledge of strategic, tactical and operational management, and features of information needed in each level. It also tests candidates’ understanding of the importance of financial and non-financial information in evaluating organisations performance. The question was well attempted by candidates. Performance of candidates was adjudged high. The only pitfall observed was candidates’ concentration on definitions of the 3 levels of information without highlighting the differences. Candidates are advised to read the questions thoroughly before attempting them. They are also advised to use at all time ICAN Study Text in their revisions. 87

Marking guide 6. Marks Marks

a. -Differences between strategic, tactical and operational information (3 points each at 1 mark per point at each level

- Examples (1 example for each level of information at 1/3 mark per example) 9 1 10

b. - Importance of both financial and non- financial indicators (1 point for each type of information at 2½ marks) 5 Total 15

(a) The following are the major pricing approaches which may be used in this situation:

(i) - Price skimming

- Penetration pricing

(ii) Price skimming This involves charging a high price relative to competitors. The advantage is that the contribution earned per unit is high. The potential disadvantage is that market share will be restricted. In this situation this restriction in market share would be beneficial in the early stages since it is expected that production in the first year is to be restricted. This would also avoid charging too Iow a price as happened previously. It would be necessary to advertise to promote the technological and style advantages to potential customers which would help to justify the higher price.

(iii) Penetration pricing Here the aim is to charge a lower price than competitors in order to obtain a high market share at an early stage in the product life cycle. The advantage is that a lower price will encourage people to 'try out' a new product rather than keeping with a familiar 'existing' product. This incentive would appear unnecessary in this case on two counts. Firstly, the reputation of the company is well established and the car's predecessor was well received six years ago. 88 Secondly, the car is very advanced both technically and in style compared with the competition. This 'non-price' advantage may be sufficient to encourage people to choose this vehicle. The main advantage of penetration pricing - a high market share - would be a disadvantage for this particular car since it could result in excess demand in the first year, a waiting list and further damage to reputation regarding delivery. Another disadvantage of charging a low price is the small contribution generated on sales. It may be necessary to charge a lower price at a later stage if a superior quality competitor comes on to the market. In this case there is a further pricing option which is to charge a price at a similar level to that of competitors. The better technology and style of the car would act as selling features which could result in increased market share which would be a disadvantage in the early stages when production capacity is restricted. Advantages are that market share may be obtained without offering a discount against competitors' prices and that a price similar to competitors' will not 'rock the boat'. A low price could start a 'price war' which could be very damaging.

(b) In this situation the approach proposed is to charge a high price relative to competitors in the first year and a price similar to that of competitors in later years because:

(i) It enables a high contribution to be earned per car in the first year to compensate for the higher average cost caused by volume being lower and to aid recovery of development costs. (ii) It is likely to match demand with production, i.e. low in first year and increasing thereafter. iii) High prices in the first year should prevent excess demand and waiting. (iv) A high initial price may make it easier to boost market share in the second year when prices are reduced. 89

Examiner’s report This question tests candidates’ knowledge of pricing new products and in this situation, pricing of technically advanced products. Candidates attempt on the question was very high. Performance was above average. The pitfall was candidates’ inability to list the two pricing methods and stating the merits and demerits of the two pricing strategies. Candidates are encouraged to always read the questions before attempting same in order not to stray away from the requirements of the question.

Marking guide 7. Marks Marks

a. - List of pricing approach (2 price strategy at 2 marks each)

- Merit (Any one merit for each strategy at 1½ marks)

- Demerit (Any one demerit for each Y strategy at 1½ marks) 4 3 3 10

b. - Recommendation

- Justification (Any two points at 1½ marks) 2 3 5 Total 15 90 ICAN/222/Q/B5 Examination No.................... THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA SKILLS LEVEL EXAMINATION – NOVEMBER 2022 PUBLIC SECTOR ACCOUNTING & FINANCE EXAMINATION INSTRUCTIONS PLEASE READ THESE INSTRUCTIONS BEFORE THE COMMENCEMENT OF THE PAPER

1. Check your pockets, purse, mathematical set, etc. to ensure that you do not have prohibited items such as telephone handset, electronic storage device, programmable devices, wristwatches or any form of written material on you in the examination hall. You will be stopped from continuing with the examination and liable to further disciplinary actions including cancellation of examination result if caught.

2. Write your EXAMINATION NUMBER in the space provided above.

3. Do NOT write anything on your question paper EXCEPT your examination number.

4. Do NOT write anything on your docket.

5. Read all instructions in each section of the question paper carefully before answering the questions.

6. Do NOT answer more than the number of questions required in each section, otherwise, you will be penalised.

7. All solutions should be written in BLUE or BLACK INK. Any solution written in PENCIL or RED INK will not be marked. THURSDAY, NOVEMBER 17, 2022 91 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA