Performance Management · 2023

(a) i. Computation of Cost of goods sold for 2021 and 2022 2021 2022 N N Opening raw Material 108,000 145,800 Materials Purchased 702,000 720,000 Cost of material available 810,000 865,800 Less Closing Material 145,800 180,000 Cost of material used 664,200 685,800 Direct Wages 300,000 250,000 Prime Cost 964,200 935,800 Production expenses 72,600 171,995 1,036,800 1,107,795 Add Opening work in progress 75,600 97,200 Less Closing work in Progress (97,200) (93,360) Production costs 1,015,200 1,111,635 Add opening Finished goods 86,400 129,600 Less Closing finished goods (129,600) (142,875) Cost of goods sold 972,000 1,098,360

i. Length of working capital cycle (Assuming 365 days in a year) for 2021 and 2022 Working capital cycle for 2021 Holding Period for raw material stock = [(Opening +Closing )/2] x 365 Purchases = [(108,000 + 145,800)/2] x 365 702,000 = 66 days Production period for Work in Progress = [(Opening +Closing) /2] x 365 Cost of goods sold = [(75,600 + 97,200)/2] x 365 972,000 = 33 days Holding period for Finished goods = [(Opening +Closing )/2] x 365 Cost of goods sold [(86,400 + 129,600)/2] x 365 972,000 = 41 days Collection period for receivables = [(Opening +Closing )/2] x 365 Sales = [(172,800 + 259,200)/2] x 365 1,080,000 = 73 days Less Payment period for payable = (Opening +Closing)/2] x 365 Purchases = (86,400 + 105,300)/2 x 365 702,000 = (50 days) Working capital cycle 163 days Working capital cycle for 2022 76 Holding Period for raw material stock = [(Opening +Closing)/2] x 365 Purchases = [(145,800 + 180,000)/2] x 365 720,000 = 83 days Production period for Work in Progress = [(97,200 + 93,360)/2 x 365 1,098,360 = 32 days Holding period for Finished goods = [(Opening +Closing)/2] x 365 Cost of goods sold = [(129,600 + 142,875)/2] x 365 1,098,360 = 45 days Collection period for receivables = (Opening +Closing)/2] x 365 Sales = [(259,200 + 297,000)/2] x 365 1,188,000 = 85 days Less Payment period for payable = [(Opening +Closing )/2] x 365 Purchases = [(105,300 + 126,000)/2] x 365 720,000 = (59 days) Working capital cycle 186 days

(iii) Actions that the management of the company might take to reduce the length of the cycle:

• Reduce the period raw materials are held in inventory by adopting a JIT system

• Improve the throughput of the products by adopting efficient manufacturing equipment and process

• Reducing finished goods holding period by producing to order.

• Reducing the length of time customers take to pay by offering early settlement discount.

• Negotiate for longer credit period with suppliers

• Company need to improve on sales strategy to sell more maybe open new markets or they should plan to reduce the sales target to reduce the amount of finished goods left at the end of the year. (b)i. Payoff Table Constructing the Payoff table Course of Action Demand of 10 boxes Demand of 20 boxes Demand of 30 boxes N N N Buy 10 boxes (4000 – 2500)=1500 (4000 - 2500)=1500 (4000 – 2500)=1500 Buy 20 boxes (4000 – 5000)= (1000) (8000 – 5000)=3000 (8000 – 5000)=3000 Buy 30 boxes (4000 – 7500)= (3500) (8000 – 7500)= 500 (12000 – 7500)=4500 77 Payoff table Course of Action Demand of 10 boxes Demand of 20 boxes Demand of 30 boxes N N N Buy 10 boxes 1500 1500 1500 Buy 20 boxes (1000) 3000 3000 Buy 30 boxes (3500) 500 4500

ii. Number of boxes based on maximum decision rule Course of action Maximum of maximum returns Buy 10 boxes 1500 Buy 20 boxes 3000 Buy 30 boxes 4500 Decision: Buy 30 boxes Number of boxes based on maximin decision rule Course of action Maximum of minimum returns Buy 10 boxes 1500 Buy 20 boxes (1000) Buy 30 boxes (3500) Decision: Buy 10 boxes Minimax regret decision rule Constructing the regret Payoff table Course of Action Demand of 10 boxes Demand of 20 boxes Demand of 30 boxes N N N Buy 10 boxes (1500 – 1500)= 0 3000 – 1500=1500 4500 – 1500)=3000 Buy 20 boxes 1500 – (-1000) = 2500 (3000 – 3000)= 0 4500 – 3000)=1500 Buy 30 boxes 1500 – (-3500) =5000 3000 – 500= 2500 4500 – 4500= 0 Regret Payoff table Course of Action Demand of 10 boxes Demand of 20 boxes Demand of 30 boxes N N N Buy 10 boxes 0 1500 3000 Buy 20 boxes 2500 0 1500 Buy 30 boxes 5000 2500 0 Number of boxes based on Minimax regret decision rule Course of action Minimum of Maxi regret returns N Buy 10 boxes 3000 Buy 20 boxes 2500 Buy 30 boxes 5000 Decision: Buy 20 boxes which delivers minimum of the maxi regrets. 78

Examiner’s report This is a compulsory question that is in two parts. The first part tests candidates ability to determine company’s cost of goods sold and working capital cycle period. The second part is on decision making under situation of uncertainty as it affects maxi-max decision rule, mini-max decision rule and maxi-min regret decision rule. The question being a compulsory question was well attempted. Performance of the candidates was average. The major pitfalls are the inability of most candidates to use average stock in determining the working capital cycle and correctly set out the payoff matrix table. It is hereby recommended that candidates should use ICAN study manual and other Performance Management text books in preparing for future Institute’s examination.

Marking guide Mark s Marks

a) i Cost of goods sold 2021 and 2022 (30 ticks @1/10 mark) 3 ii Length of working capital cycle for 2021 and 2022 (28 ticks @1/4 mark) 7 iii Factors that will reduce length of working capital cycle (any 5 points @1 mark) 5 15 b) i Pay off table (21 ticks @1/3 mark) 7 ii • Maximax (5 ticks @½ mark) 2½

• Maximax (5 ticks @½ mark) 2½

• Minimax Regret (6 ticks @½ mark) 3 8 15 30

PAY OFF TABLE (N600) a. Course of Prob. State of Nature (Demand) Action 10,000 20,000 30,000 40,000 10,000 0.1 2,700 2,700 2,700 2,700 20,000 0.4 5,700 5,200 5,200 5,200 30,000 0.3 8,700 8,200 7,700 7,700 40,000 0.2 11,700 11,200 10,700 10,200 79 Cost of copies Cost of Unsold copies N600 a. N200 + (250 x 10) + (300 x 0) = 2,700 b. N200 + (250 x 10) + (300 x 0) = 2,700 c. N200 + (250 x 10) + (300 x 0) = 2,700 d. N200 + (250 x 10) + (300 x 0) = 2,700 e. N200 + (250 x 10) + (300 x 10) = 5,700 f. N200 + (250 x 20) + (300 x 0) = 5,200 g. N200 + (250 x 20) + (300 x 0) = 5,200 h. N200 + (250 x 20) + (300 x 0) = 5,200 i. N200 + (250 x 10) + (300 x 20) = 8,700 j. N200 + (250 x 20) + (300 x 10) = 8,200 k. N200 + (250 x 30) + (300 x 0) = 7,700 l. N200 + (250 x 30) + (300 x 0) = 7,700 m. N200 + (250 x 10) + (300 x 30) = 11,700 n. N200 + (250 x 20) + (300 x 20) = 11,200 o. N200 + (250 x 30) + (300 x 10) = 10,700 p. N200 + (250 x 40) + (300 x 0) = 10,200 State of Nature (N’000) Course of Action Prob. 10,000 20,000 20,000 40,000 10,000 0.1 N270 N270 N270 N270 20,000 0.4 N2,280 N2,080 N2,080 N2,080 30,000 0.3 N2,610 N2,460 N2,310 N2,310 40,000 0.2 N2,340 N2,240 N2,140 N2,040

b. Maximax Decision Rule course of Action Maximum Profit 10,000 270 20,000 2,080 30,000 2,310 40,000 2,040 *Least Cost yields highest profit Decision: 10,000 copies

c. The production or printing of the programmes involves incurring fixed cost. The larger the volume printed, the lower will be the cost of printing per copy. Therefore, printing 30,000 or 40,000 copies will be an optimistic decision informed by the need to maximise the benefit that is derivable from the fixed cost of printing. 80

d. Profit from perfect forecast: N’000 Result without perfect information (270 + 2080 + 2310 + 2040) (6,700) Result with perfect information (270 + 270 + 270 + 270) (1,080) 5,620

e. Limited of expected value criteria

i. It depends on subjective probability ii. Only useful for repetitive outcome and not for one-off iii. The expected value might not be one of the possible outcome iv. It does not give a view of the risk involved v. it is a weighted average of all possible outcomes.

Examiner’s report The question is on decision making under uncertainty and tests candidates’ ability to answer questions on maxi-max decision rule and decision on perfect information. The question was well attempted. The Performance of the candidate was average. The major pitfall observed was the inability of candidates to set out the Payoff matrix table and decipher the process of computing values when there is perfect information. It is hereby recommended that candidates should use ICAN study manual on Performance Management when preparing for future Institute’s examination.

Marking guide

a. Pay off table

• 15 ticks @1/5 mark) 3

• 15 ticks @1/5 mark) 3 6 b. Number of programmes (8 ticks @½ mark) 4 c. Most profitable quantity (4 points @½ mark) 2 d. Profit from perfect forecast (4 ticks @½ mark) 4 e. Major Limitations (4 points @1 mark) 4 20 81

(a) Relevant costs and relevant revenues from acceptance of contract (₦’000) (₦’000) Sales revenue (20,000 kg at ₦10,000) 200,000 Relevant costs: Labour (20,000 × 6hrs × ₦200) 24,000 Materials A (20,000 × 2 units × ₦1,000 replacement cost) 40,000 B (20,000 × 1 litre × 2,500 NRV) 50,000 Variable overheads b (20,000 × 8hrs × ₦300) 48,000 162,000 Add increase in fixed costs 22,800 Net incremental costs 184,800 Add Loss on product Y Lost contributionc (5,000 × ₦3,800) 19,000 Fixed costs avoidedd (5,800) 13,200 198,000 Excess of relevant revenues over relevant costs 2,000 Advice: In view of the fact that the Contract achieved excess of relevant revenue over relevant cost, the Contract is therefore desirable.

Notes i. Grade 1 labour is not an incremental cost. ii. Variable overheads vary with production labour – 8 labour hours per unit are used, causing variable overheads to increase by ₦300 per hour. Grade 1 labour is not an incremental cost, but it does cause variable overheads to increase.

iii. Lost contribution Selling price 7,000 Less Grade 2 labour (4 hrs × ₦200) 800 Materials 1,200 Variable overheads (4 hrs × ₦300) 1,200 3,200 Contribution 3,800

iv. Assumed fixed costs represent incremental costs or incremental savings. 82

(b) To calculate the product cost for job costing purposes it is necessary to calculate the fixed overhead rate. The calculation is as follows: Fixed overheads Director labour hours Initial budget ₦60,000,000 300,000 Plus contract ₦22,800,000 160,000a Less product Y (₦5,800,000) (20,000) = (4hrs × 5,000) ₦77,000,000 440,000 Fixed overhead absorption rate = ₦175/hour (₦77,000,000/440,000hrs).

Note a The fixed overhead rate is per productive labour hour. Grade 1 labour hours represent additional productive labour hours. If the contract is not accepted then grade 1 labour hours will be non-productive. Total productive hours relating to the contract = 2,000 × (2 hours + 6 hours) = 160,000 hours The job costing contract will be reported as follows: (₦000) (₦000) Direct labour: Grade 1 (20,000×2hrs×₦400) 16,000 Grade 2 (20,000×6hrs×₦200) 24,000 40,000 Direct materials: A (20,000×2units×₦800) 32,000 B (20,000×1litre×₦3,000) 60,000 92,000 Variable overheads 20,000×8hrs×₦300 48,000 Fixed overheads 20,000×8hrs×₦175 28,000 76,000 Total cost (208,000) Sales revenue 200,000 Reported loss (8,000)

c. The difference between the relevant cost profit of ₦2,000,000 and the routine cost loss of ₦8,000,000 arises because of the different ways in which costs are determined in each statement. A reconciliation and summary of the difference is as follows: Difference ₦000 Explanation Grade 1 labour 16,000 Not charged as a relevant cost because it is ’sunk’ and will be incurred anyway. Material A (8,000) Replacement cost is relevant but book value is the routing charge. Material B 10,000 Book value overstate the charge – realisable value is the relevant cost. 83 Fixed overheads 5,200 Routine costing passes on overheads that would be incurred anyway. The relevant cost is simply the incremental cost. Effect on product Y (13,200) Routine costing ignores the loss of contribution from Y – relevant costing takes it into account 10,000

Examiner’s report The question test’s candidate’s ability to answer questions on relevant costing. The question was well attempted. The Performance was above average. The major pitfall observed was candidate inability to decipher relevant costs of material, labour and overhead cost elements in situations involving replacement costs, realisable value of materials and replacement costs. It is hereby recommended that candidates should use ICAN Study Text on Performance Management when preparing for future Institute’s examination.

Marking guide a Desirability of the contract (16 ticks @½ mark) 8 b Routine job casting (12 ticks @½ mark) 6 c Differences between (a) and (b) (Any 4 points @1½ marks) 6 20

TAYO LIMITED

a) Consequences of undertaking the: Abuja Contract Lagos contract ₦’000 ₦’000 ₦’000 ₦’000 Contract revenue 17,000 18,000 Sale of materials held for the Abuja contract (Note 1) 2,400 Saving in material purchases by alternative use of materials for Lagos contract (note 2) 4,800 Hire of plant 200 _______ ₦22,000 ₦20,400 84 Incremental costs: Materials to be ordered (note 3) 4,000 3,400 Project manager’s travel, lodging, etc. 400 400 Local labour 7,000 5,600 Penalty for cancelling the other contract 800 1,600 12,200 11,000 Excess of revenue/savings over incremental costs ₦9,800 ₦9,400

Notes: i. If the Lagos job is undertaken, sales of materials no longer required for the Abuja job would be: ₦’000 Current market price = ₦2,000 × 1.60 = 3,200 Sales value = ₦3,200 × 90% 2,880 Less transport cost (16.67%) 480 Net sales revenue 2,400

ii. If the Abuja job is undertaken, the materials for the Lagos job might be re-used on a different contract, thereby saving the purchase of additional materials: ₦’000 Materials held 2,400 Contracted for 3,600 Cost of unwanted materials 6,000 Saving in purchases on different contract (80%) ₦4,800

iii. The materials contracted for to carry out the Lagos job must be paid for whatever happens. Although not yet received, they must be paid for whichever (if either) contract is undertaken. It is therefore not an incremental cost chargeable to the Lagos contract. For similar reasons, materials already held are not an incremental cost to their respective contracts. The alternative use of materials not required, is however, significant - and this has been taken into account on the revenue side of the analysis.

iv. It is assumed that the project manager’s salary is a fixed cost, whichever contract (if either) is undertaken. Incremental labour costs are therefore travel, lodgings etc. and local labour.

v. The penalty cost of failing to undertake one contract should be treated as a consequential cost of undertaking the other contract.

vi. The excess of revenue/savings over incremental costs calculated for each contract shows the comparative effect on profits of undertaking each job in preference to the other. The difference between the two figures (₦9,800,000 85 and ₦9,400,000) shows that there is a difference between the two projects of ₦400,000 in favour of the Abuja job.

b. The approach used has assumed that one project or the other will be undertaken. Some costs have already been incurred (some materials, plant); other costs have been committed (project manager’s salary, head office administration) and others are notional (interest on plant). These are not relevant to any decision about the future action. The only relevant considerations should be:

i. future revenues or cash savings as a consequence of the decision; ii. future costs, incurred as an additional expense as a consequence of the decision. In the situation in part (a), incremental revenues are the revenues from the contract undertaken, alternative uses of materials held but not required and hire of plant. Incremental costs are only those additional costs which would be incurred as a result of the decision to undertake one of the contracts. The cost accounting profit or loss recorded for each contract might be: Abuja: ₦17,000,000 – ₦16,000,000 = ₦1,000,000 Lagos: ₦18,000,000 – ₦18,200,000 = (₦200,000) These figures are irrelevant to a decision because the costs include past, committed or notional costs, and other revenues and penalty costs to the company are ignored.

c) Other factors to consider are:

i. the constraints on working which make the contract mutually exclusive. If there is a shortage of labour, funds etc. it might be possible to overcome and carry out both projects; ii. the likelihood of another contract being offered for the same period of time, which is more profitable than either the Abuja or Lagos jobs; iii. loss of goodwill and future contracts by not undertaking either project; iv. reliability of the prospective customer in each contract v. reliability of costs forecasts, labour availability etc. on both contracts. The net difference between the two jobs, ₦400,000, is relatively small and sensitivity/risk analysis will be very important; vi. the preference for the Lagos contract (by ₦400,000) has assumed that the alternative use for the Lagos contract materials will exist. It is only a likelihood, however. Failure to obtain this saving would shift the preference strongly in favour of accepting the Lagos job. 86

Examiner’s report The question test’s candidates ability to answer questions on relevant costing and decision making. The question was well attempted. The Performance was above average. The major pitfall observed was candidates’ inability to decipher relevant costs of material, labour and overhead in situations involving replacement and historical costs. It is hereby advised that candidates should use ICAN study manual on Performance Management when preparing for future institute’s examination.

Marking guide a Date to assist Decision Making (24 ticks @½ mark) 12 b Comment on Appropriations (Any 4 points @ 1mark) 4 c List of factors (Any 4 points @ 1mark) 4 20

a. Calculate the expected net Present value of the two Projects Computation of joint Probability distribution S/N Factor 1 Factor 2 Factor 3 Workings Joint Probability 1 YES YES YES 0.2 x 0.3 x 0.4 0.024 2 YES YES NO 0.2 x 0.3 x 0.6 0.036 3 YES NO NO 0.2 x 0.7 x 0.6 0.084 4 NO NO NO 0.8 x 0.7 x 0.6 0.336 5 NO NO YES 0.8 x 0. 7 x 0.4 0.224 6 NO YES YES 0.8 x 0.3 x 0.4 0.096 7 YES NO YES 0.2 x 0.7 x 0.4 0.056 8 NO YES NO 0.8 x 0.3 x 0.6 0.144 Total 1.000 87 Impact on inflow S/N Joint Probability Inflow impact Result Final expected value 1 0.024 1 - 0.25 -0.10 + 0.05 0.70 0.0168 2 0.036 1 -0.25 – 0.10 0.65 0.0234 3 0.084 1 – 0.25 0.75 0.0630 4 0.336 1-0.0 1.00 0.3360 5 0.224 1 +0.05 1.05 0.2352 6 0.096 1 -0.10+ 0.05 0.95 0.0912 7 0.056 1 – 0.25 + 0.05 0.80 0.0448 8 0.144 1 – 0.10 0.90 0.1296 1.000 0.9400 Thus the EV of considering the 3 factors is 0.94. Therefore the NPV of Project A and B are: Project A Year Cash inflow EV of Cash flow Cash outflow Net Cash flow Discount rate 10% PV of cash flow N’000 N’000 N’000 N’000 N’000 0 - (13000) (13,000) 1.000 (13000) 1 6000 x 0.94 5640 (3000) 2640 0.909 2399.76 2 8000 x 0.94 7520 (4000) 3520 0.826 2907.52 3 10000 x 0.94 9400 (4000) 5400 0.756 4002.40 4 9000 x 0.94 8460 (3000) 5460 0.683 3729.18 5 6000 x 0.94 5640 (3000) 2640 0.621 1639.44 NPV +1678.30 Project B Year Cash inflow EV of Cash flow Cash outflow Net Cash flow Discount rate 10% PV of cash flow N’000 N’000 N’000 N’000 N’000 0 - (14000) (14,000) 1.000 (14000) 1 10000 x 0.94 9400 (5000) 4400 0.909 3999.60 2 9000 x 0.94 8460 (4000) 4460 0.826 3683.96 3 8000 x 0.94 7520 (3000) 4520 0.756 3417.12 4 8000 x 0.94 7520 (3000) 4520 0.683 3087.16 5 4000 x 0.94 3760 (2000) 1760 0.621 1092.96 NPV +1280.80

b. Project A will be more profitable with a higher NPV of N1,678,300 88

Examiner’s report The question test’s candidates’ ability to provide solutions on investment appraisal decision with sensitivity components. The question was well attempted. The Performance was above average. The major pitfall observed was the candidates’ inability to decipher the sensitivity issues that bother on factors that affect the cash inflows for both Projects A and B. It is hereby advised that candidates should use ICAN study manual on Performance Management when preparing for future Institute’s examination.

Marking guide

a. Expected Net Present Value

• Joint Probability (9 ticks @1/6 marks) 1½

• Impact on cashflow (9 ticks @1/6 marks) 1½

• (7 ticks @1 mark) 7 10 b. The more profitable project (10 ticks @½ mark) 5 15

a) Current Position Particulars Pre-booked Standard Premium Family Sales Price per ticket ₦580 ₦780 ₦3,700 No of ticket 1,500 8,000 675 Monthly sales in quantity 30 x 1500 =45,000 240,000 20,250 Monthly Fixed Costs N130,000,000 Determination of Optimal price of Premium family: P = a + bx Where a = Maximum Price at which no Premium Ticket will be sold: b = Changes in P = Price Elasticity Changes in X Marginal cost = Variable Cost = N2050 x 0.92 = N1886 =b

- 100 25 -= 4 89 Therefore: bxap = + xaP =

- 4 700,3 =a- 6754 ( ) = a- 2700 a = 3700 + 2700 a= .400,6 Therefore P = 4400,6 - x Converting to Total Revenue TR=P x Q ( 4400,6 - xx ) = 400,6 xx - 24 MR = ∂ ∂TR x= 8400,6- x MC = VC = 1886 Pr isofitmax imized where MR =MC 886,18400,6 -x= - 400,6886,18 x = - - 514,48 x = - x=

- 8/514,4 - x= 564 units Contribution: Pre-booked Ticket Premium Price 580 780 6,400 Variable Cost (1,886) (1,886) (1,886) (1,306) (1,106) 4.514 Tickets sold per month 45,000 240,000 16,920 (58,770,000) (265,440,000) (76,376,880) Total Quantity for the month 1500 x 30=45,000; 8,000 x 30=240,000; 564 x 30=16,920 Total Contribution Prebooked Ticket (58,770,000) Standard Ticket (265,440,000) Premium Ticket 76,376,880 (247,833,120) Decision: No financial benefit unless it is undertaken for corporate social responsibility 90 Standard Ticket

b. Sensitivity Analysis Variable Cost Savings from Standard Ticket [(2,050 – 1,886) x 8,000 x 30] = 39,360,000 Hiring Cost of equipment = (5,000,000) 34,360,000

Examiner’s report The question tests candidates’ ability to provide solutions on optimal pricing, marginal cost and sensitivity implication on hire of ticketing equipment. The question was well attempted. The Performance was above average. The major pitfall observed was the candidates’ inability to decipher the method to be used to compute the marginal revenue as well as determine the sensitivity components of hire of the ticketing equipment. It is hereby advised that candidates should use ICAN study manual on Performance Management when preparing for future Institute’s examination.

Marking guide a Financial benefit and Premium Price Charged (22 ticks @½ mark) 11 b Sensitivity Analysis (4 ticks @1 mark) 4 15

Working Notes

• The contract time for the 400 units is calculated using the learning curve technique. The company has already produced 200 units and now needs to produce another 400, i.e. 600 in total.

• The learning rate is computed as follows: Cumulative Cumulative Cumulative Average Quantity Hours Hours per unit 50 1,800 36 100 3,000 30 The learning rate is therefore 30/36 = 831/3%

• The contract time can now be determined using the learning curve formula: Y = axb 91 Where: Y = Cumulative average time for the cumulative output of 600 units A = the average time for the first batch i.e. 36 hours x = Output level desired Number of units in the 1st bacth = 600 50 = 12 b = Log of .83333 Log of 2 = −0.263 :. Y = 36(12)-0.263 = 18.73 hours Total hours for the 600 units= 600 x 18.73 = 11,238 hours Less: Total hours for the first 200 units already produced 5,000 hours Hours now required 6,238 hours

• Contribution per labour hour. This is necessary because labour is in short supply. Any labour hour used on the special order entails opportunity cost. From the budget statement. N’000 N’000 Sales 18,000 Materials 1,800 Labour 7,560 VOH 2,520 11,880 Contribution 6,120 Budgeted labour hours 42,000 Contribution/hour = 6,120,000 ÷ 42,000 = ₦145.71 Calculation of minimum price ₦ Materials 1,000kg x N1,800,000 = 120,000 15,000 Labour 6,238 x 7,560,000 = 1,122,840 42,000 VOH 6,238 x 2,520,000 = 374,280 42,000 Direct fixed costs = 180,000 Opportunity cost of labour 6,238 x ₦145.71 908,939 Minimum price N2,706,059

Examiner’s report This question tests candidates’ ability to use relevant costing approach to determine the minimum price to quote for special security padlock considering the learning effect on labour hours. The question was fairly attempted. However, the performance was average. The major pitfall observed was candidate inability to take note of the implication of learning effect on labour and variable overhead cost. It is hereby recommended that candidates should use ICAN study manual on Performance Management when preparing for future Institutes’ examination.

Marking guide The Minimum Price (15 ticks @1 mark) 15 ICAN/231/Q/B5 Examination No.................... THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA SKILLS LEVEL EXAMINATION – MAY 2023 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. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

a. Identify the objective function and the constraints of the model (linear programming model) Contribution per unit A B Selling Price N2,100 N1,500 Less Variable costs: Material X 480 240 Labour 1-Skilled 720 288 Labour 2-Unskilled 120 180 Variable overhead 168 336 Total variable cost 1,488 1,044 Unit contribution 612 456 Objective function = C = 612a + 456b Constraints:’ Material will be 2a + b ≤ 25,000 Skilled labour will be 5a + 2b ≤ 48,000 Unskilled labour will be 2a + 3b ≤ 39,000 Machine hours will be 2a + 4b ≤ 50,000 Non negativity a, b ≥ 0 In determining where the constraint equation lines cross a and b axes Material: 2a + b = 25000 Which is a = 12,500 b = 0; a = 0 b = 25,000 Skilled labour: 5a + 2b = 48000 Which is a = 9600 b = o; a = 0 b = 24,000 Unskilled labour: 2a + 3b = 39000 which is a = 19500 b = 0; a = 0 b = 13,000 Machine hours: 2a + 4b = 50000 which is a = 25000 b = 0; a = 0 b = 12,500 Graphically: b Machine hours Material A Unskilled B Skilled C 0 D a The binding constraints are skilled and unskilled labour. 68 From the Graph, the non-limiting factors are material and machine hours while the limiting factors are skilled labour and unskilled labour.

b. Determine the optimum production plan for the month and associated Profit Hence the equations from the linear programme are: Skilled Labour = 5a + 2b = 48,000 …………. …... Equation 1 Unskilled Labour = 2a + 3b = 39,000 ….…….......... Equation 2 Multiply Equation 1 by 3 = 15a + 6b =144,000 …........ Equation 3 Multiply Equation 2 by 2 = 4a + 6b = 78,000 ……….….Equation 4 Subtract Equation 4 from Equation 3 11a = 66,000 a = 6000 Substitute for a in Equation 1 5a + 2b = 48000 5 (6000) + 2b = 48000 30000 + 2b = 48,000 2b = 48000 - 30000 = 18000 b = 9000 Maximum contribution = 612a + 456b = 612 x 6000 + 456 x 9000 = N7,776,000 Less Fixed cost N2,600,000 Net Profit N5,176,000

c. Concept of dual prices and slack variables The concept or model used in this situation of dual or double limiting factor decision tool is linear programming approach and it provides instrument for computing optimum solutions when dual constraints are identified. In this case, some constraints are not limiting while some are limiting. Skilled and unskilled labour hours are the relevant constraints. The dual prices are also known as shadow prices. The shadow or dual price of a constraint is the change in the objective function that is brought about if such constraint is changed by one unit. Slack variables on the other hand refer to the amount of the available resources not used in the optimal solution. Only non limiting resources

d. Calculate the dual prices for constraints identified in this scenario Dual price for Skilled Labour Skilled Labour = 5a + 2b = 48,001 ….…….……..... Equation 1 Unskilled Labour = 2a + 3b = 39,000 ……….……...…Equation 2 Multiply Equation 1 by 3 = 15a + 6b =144,003 …….. Equation 3 Multiply Equation 2 by 2 = 4a + 6b = 78,000 …..…....Equation 4 Subtract Equation 4 from Equation 3 11a = 66,003 a = 6000.2727 Substitute for a in equation 1 2a + 3b = 39,000 2(6,000.2727) + 3b = 39,000 12,000.545 + 3b = 39,000 3b = 39,000 – 12,000.545 = 26,999.4545 b = 8,999.82 New Max. contribution = 612a + 456b = 612 x 6,000.2727 + 456 x 8,999.82 = N7,775,918.14 Old contribution = N7,776,000.00 Dual price for skilled labour = N81.86 Dual price for unskilled labour Skilled Labour = 5a + 2b = 48,000 ……………...Equation 1 Unskilled Labour = 2a + 3b = 39,001 …..……….….Equation 2 Multiply Equation 1 by 3 = 15a + 6b = 144,000 …….... Equation 3 Multiply Equation 2 by 2 = 4a + 6b = 78,002 …….…... Equation 4 Subtract Equation 4 from Equation 3 11a = 65,998 a = 5,999.82 Substitute for a in equation 1 5a + 2b = 48,000 5(5,999.82) + 2b = 48,000 29,999.10 + 2b = 48,000 2b = 48,000 – 29,999.10 = 18,000.90 b = 9,000.45 New maximum contribution = 612a + 456b = 612 x 5,999.82 + 456 x 9,000.45= N7,776,095.04 Old contribution = N7,776,000.00 Dual price for unskilled labour = N95.04 70

e. Ways linear programming model can be used to overcome capacity constraints:

• Investigate alternative sources of materials, skilled labour and unskilled labour. Such sources may necessitate overtime hours and bonuses;

• Increase operating hours of machinery. Including maintenance cost or purchase cost;

• Increase output per machine hours which could lead to additional labour cost;

• Acquisition of machines requiring purchase and capital costs (Investment or capital outlay); and

• Subcontract some of the production to outsiders at higher purchase price which could be higher than the incremental costs.

Examiner’s report Question one is a compulsory question. This question tested candidates understanding of Linear Programming in capacity decision making and dual pricing in situation where there are limiting and non-limiting equations. Being a compulsory question, most candidates attempted this question. However performance was average. Major Pitfall was candidates’ inability to decipher limiting and non-limiting equations as well as computation of dual prices. Candidates are encouraged to intensively use the ICAN study guide when preparing for future ICAN Examinations.

Marking guide Marks Marks

a. Identification of objective function and constraints of the model (30 ticks = 5 marks) 5

b. Determine optimum plan and associated profit. (20 ticks = 5 marks) 5

c. Explain the concept and significance of dual prices and slack variables. Dual price: (Any 4 Points = 2 marks) Slack variables: (Any 4 points = 2 marks) 2 2 4

d. Calculate the dual prices for the constraints. (30 ticks = 10marks) 10

e. Suggest the ways in which the model will be used to overcome capacity constraints. (3 points @ 2 marks each) 6 Total 30 71

(a) Set out below are the conditions that are necessary for the successful implementation of a JIT manufacturing system. Suppliers

• Quality raw materials/components Stocks of raw materials/components, work in progress and finished goods are kept at near zero levels under a JIT system. Raw materials/components must therefore be of 100% quality, as defects stop the production line and, with no buffer stocks available, they could possibly result in failure to meet delivery dates to customers.

• Delivery on time As well as being responsible for the quality of raw materials/components, suppliers must also guarantee to deliver on time so that there are no production delays.

• Small deliveries Order sizes should be small to avoid the build up of stocks and the costs associated with this.

• Close relationships You must therefore establish long-term commitments with a limited number of suppliers with whom you should deal exclusively in their component areas. They guarantee to deliver material of 100% quality on time in return they are guaranteed demand for their products. Production

• Smooth production flow The rate of production should be kept as smooth as possible as fluctuations can cause delays and lead to high levels of work in progress.

• Pull system Production in one process is only carried out when output of that process is needed by the next. Ultimately this means production is entirely based on customer demand for final output.

• Set-ups Because production runs are short, there are more of them, and set-ups need to be quick and inexpensive.

• Machine maintenance Routine preventative maintenance will avoid machine downtime. 72 Employees

• Flexible and multi-skilled workers Workers must be multi-skilled and flexible in order to be able to move between different production lines to maintain output.

• Teamwork Teamwork will ensure high levels of efficiency and the elimination of non- value added costs.

(b) Annual demand = 400,000 + 440,000 + 760,000 + 560,000 = 2,160,000 units Annual capacity = 540,000 x 4 = 2,160,000 units Thus, there is no need to work overtime under the existing policy of constant quarterly production. Calculation of cost of holding inventory Quarter 1 2 3 4 (N’000) Total Opening stock (units) 0 140,000 240,000 20,000 Production (units) 540,000 540,000 540,000 540,000 Sales (units) (400,000) (440,000) (760,000) (560,000) Closing stock (units) 140,000 240,000 20,000 0 Average stock (Q) 70,000 190,000 130,000 10,000 Holding cost = Q x N25 N1,750,000 N4,750,000 N3,250,000 N250,000 10,000

(c) JIT Production system Sales demand for quarter 3 is above maximum capacity – including overtime capacity. Units Demand 760,000 Maximum possible production: 540,000 x 1.40 756,000 Production shortfall 4,000 Contribution (4,000 units x N175 = N700,000) associated with the 4,000 units will be lost.

• Quantity produced during overtime Quarter 3 – maximum overtime capacity = 540,000 x 40% = 216,000 units Quarter 4: 560,000 – 540,000 = 20,000 units

• Extra cost per unit during overtime working N N Overtime premium: 175 x 50% = 87.50 Variable production overhead: 50 x 25% = 12.50 100.00 73

• Financial impact of JIT N000 Extra cost of overtime production:

- 3rd quarter: 216,000 x N100 21,600 - 4th quarter: 20,000 x N100 2,000 23,600 Lost contribution 700 24,300 Existing cost (per (b) above) (10,000) Incremental cost 14,300

Examiner’s report This question tests candidates understanding of implementation of JIT, inventory management and control and financial impact of JIT manufacturing system. The attempt on this question by candidates was very low. The candidates recorded below average performance. The Pitfall noticed was candidates’ lack of understanding of the salient issues in inventory control and JIT implementation. Candidates are encouraged to intensively use the ICAN study guide when preparing for future ICAN examinations.

Marking guide Marks Marks

a. Key conditions necessary for JIT Implementation. (Any 7 points @ 1 mark each) 7

b. Cost of holding inventory for each quarter and the year. (30 ticks = 6 marks) 6

c. Financial impact of changing to JIT system (21 ticks = 7 marks) 7 Total 20

a. The key stages in the planning process that links long-term objectives and budgetary control can be divided between long-term planning and the budgeting process. Long- term planning involves identifying objectives, and identifying, evaluating and selecting alternative courses of action. The budgeting process involves implementing the long-term plan in the annual budget, monitoring actual results and responding to divergences from plan. This can be stated thus: 74 Stage one: Identifying objectives The planning process cannot take place unless organisational objectives are identified, since these determine what the organisation is seeking to accomplish through its operations and activities. These objectives will be long-term or strategic in nature and will give direction to the organisation's operational activities. Stage two: Identifying alternative courses of action Once organisational objectives have been identified, alternative courses of action that may lead to achieving those objectives can be identified. Strategic analysis of the organisation and its environment can indicate potential courses of action. For example, a company may look at its existing products and markets, its potential markets, the threat posed by its competitors, the impact of changes in technology on its products and production processes, and so on, and decide that a key objective is the development of new products to replace existing products in existing markets that are reaching the end of their product life cycle. Stage three: Evaluating alternative courses of action At this stage the various alternative courses of action are considered from the point of view of suitability, feasibility and acceptability. In order for this to be done, detailed information about each alternative course of action needs to be gathered and analysed. Stage Four: Selecting alternative courses of action Once the most appropriate alternative courses of action have been selected, long-term plans to implement them are formulated. Because these plans are long-term in nature, they will of necessity be less detailed than short-term plans, and will need to allow a degree of flexibility in responding to the changing organisational environment. Stage Five: Preparing and implementing of long-term budget Preparing and implementing the budget: A budget is a short-term plan formulated in financial terms and will show in detail the short-term actions the organisation will take in working towards its long-term objectives. Once the budget has been formulated, finalised and agreed it can be implemented. Stage Six: Monitoring actual results In order to achieve the long-term objectives that are reflected in the budget, the organisation must ensure that actual performance is proceeding according to plan. It will therefore need to monitor actual performance and results. Stage Seven: Responding to divergences from plan Divergences from planned activity, as measured by variances from budget, can lead to action if they are deemed to be significant. This action may be corrective in nature, in order to bring actual activity back into line with planned activity, 75 or may entail revision of the budget if one of its underlying assumptions is seen as being in error.

b. A fixed budget is one prepared in advance of the relevant budget period which is not changed or amended as the budget period progresses. This budget represents a periodic approach to budgeting, since a new budget is prepared towards the end of the budget period for the subsequent budget period. In this way, an organisation may set a new budget on an annual basis. A rolling budget, sometimes called a continuous budget, represents an Alternative approach to periodic budgeting. Here, a portion of the budget period is replaced on a regular basis so that the overall budget period remains unchanged. For example, with a budget period of one year, at the end of each quarter a new quarter could be added to the end of the budget period and the elapsed quarter could be deleted, so that the budget was always looking one year ahead. Continuous budgeting continues to increase in popularity. A zero-based budget is a periodic budget which seeks to dispose of the incremental approach to budgeting. In the incremental approach, an increment is added to the relevant figure from last year's budget, for example to take account of inflation. In this way, inefficiency can become embedded in the annual budget and profitability may suffer as a result. With the zero-based approach, each element of planned activity is required to be justified in terms of its contribution towards achieving organisational objectives. This involves the formulation of decision packages, which describe particular activities in such a way that managers can compare them in terms of their competing claims on organisational resources, and then rank them from a cost-benefit point of view. In this way, zero-based budgeting looks at each budget period with a new perspective. A fixed budget is likely to be useful in circumstances where the organisational environment is relatively stable and can be predicted with a reasonable degree of certainty. A rolling budget is likely to be useful in circumstances where the future is less certain and more flexibility is needed in the organisational response to its changing environment. For this reason, rolling budgets are popular with new organisations. A cash budget is often a rolling budget because of the need to keep tight control over this aspect of financial management. A rolling budget is also supported by the availability of cheap and powerful information processing via personal computers and computer networks. A zero-based budgeting approach tends to be most beneficial when used with services and with discretionary activities, and so is most widely used in the public sector.

c. Linear regression is a powerful way of analysing past information in order to derive linear relationships and so is ideally suited to deriving cost equations from past accounts. Sales volume, however, is unlikely to follow a linear 76 relationship alone. Linear regression could be used to determine the overall trend being followed by sales volume on, for example, an annual basis, but inspection of historic sales volumes is likely to show variations about the trend. These could be due to seasonal variations, or longer-term cyclical variations. Time-series analysis can extract these seasonal and cyclical variations and therefore produce forecasts of sales volumes that are likely to be more accurate in a given period than forecasts based on the underlying trend alone. In forecasting future sales volumes, therefore, both quantitative methods have their place in increasing forecasting accuracy.

Examiner’s report This question tests candidates’ knowledge of the planning process and budget types and when to use them. It also tests candidates’ understanding of time series analysis and linear regression models for sales forecasting. The attempt on the questions which were in three parts (a) to (c) by candidates was very low. The candidates recorded below average performance. The Pitfall noticed was the inability of the candidates to comprehend the theoretical requirements of the questions. Candidates are encouraged to intensively use the ICAN study guide when preparing for future ICAN Examinations.

Marking guide Marks Marks

a. Key Stages in Planning process linking Long term Objectives and Budgetary Control. ( 8 stages @ 1 mark/stage) 8

b. • Meaning of Fixed Budget and when to use it (Explanation = 1%; When to use it = ½%)

• Meaning of Rolling Budget and when to use it. (Explanation = 1%; When to use it = ½%)

• Meaning of Zero-based Budget and when to use it. (Explanation = 2%; When to use it = 3%) 1½ 1½ 5 8

c. Discuss whether time series analysis are preferred to linear regression analysis in sales forecasting. (2 points @ 1 point = 2 marks) 4 Total 20 77

a. The machine hours are insufficient to produce all the budgeted quantity: Hours needed: Model A 300,000/12.5 = 24,000 hours Model B 140,000/10 = 14,000 hours Total needed 38,000 hours Total available 30,000 hours Shortfall 8,000 hours

• Calculation of contribution and ranking Model A Model B Selling price per unit (N) 1,000 1,400 Total variable cost per unit (N) 500 800 Contribution per unit (N) 500 600 Machine hour per unit (1/12.5) 0.08 (1/10) 0.10 Contribution per machine hour (N500/0.08) N6,250 (N600/0.10) N6,000 Ranking 1st 2nd

• Calculation of optimal production plan Model A to be produced 300,000 units Model B that can be produced: 140,000 – (8,000 ÷ 0.10) 60,000 units The company should therefore produce 300,000 units of Model A and 60,000 units of Model B.

• Calculation of projected profit N’000 N’000 Contribution: Model A 300,000 x N500 150,000 B 60,000 x N600 36,000 186,000 Fixed costs (40,500) Optimal profit 145,500

b. Throughput accounting ratio = return per factory hour/cost per factory hour Return per factory hour = Sales – material costs/usage of bottleneck resource Model A Model B Selling price (N) 1,000 1,400 Less material cost (N) 400 500 Return per unit (throughput contribution) 600 900 Bottleneck resource (machine hours) 0.08 0.10 Return/machine hour (N600 ÷ 0.08) N7,500 (N900 ÷ 0.10) N9,000 78 Cost per machine hour = Total factory cost/Total available machine hours N000 N000

• Total factory cost Variable overheads costs (fixed in short-term) - Model A: 300,000 x N100 = 30,000 - Model B: 60,000 x N300 = 18,000 48,000 Conversion of variable cost to fixed cost 24,000 Unconverted Variable costs 24,000 Short term Fixed costs 24,000 Other Fixed overheads 40,500 Total factory costs 88,500 Available machine hours 30,000 Factory Cost per machine hour = N88,500,000/30,000 = N2,950

• Throughput accounting ratio (TAR) TAR =Return Cost per per machine machine hour hour Model A N7,500/N2,950 = 2.54 B N9,000/N2,950 = 3.05 In situations where throughput accounting principles are in application, a product will be worth producing provided that the throughput return per hour of bottleneck resource is greater than the cost per factory hour. This may be measured by the throughput accounting ratio. If throughput return outweighs the cost per factory hour, the ratio will be greater than 1.00. Management should focus attention upon increasing the throughput ratio. If they can do this, then higher levels of profit will be achieved.

c. Since Model B has a higher return per machine hour than Model A, PK Ltd should produce Model B until it has satisfied the total demand for 140,000 units. The production mix will therefore be as follows: Model Qty. Machine hour per unit Total machine Hours B 140,000 1/10 = 0.10 14,000 A 200,000 1/12.5 = 0.08 16,000 30,000

• Calculation of projected profit N000 N000 Throughput contribution: Model A 200,000 x N600 = 120,000 B 140,000 x N900 = 126,000 /246,000 Less: Variable over-head costs (assumed fixed) 48,000 Fixed overheads 40,500 88,500 Projected net profit 157,500 79

d. Throughput accounting and marginal costing both determine a contribution by calculating the difference between sales revenue and variable costs. However this contribution will be higher under throughput accounting since only material costs are recognised as being variable costs. Under marginal costing, direct labour costs and certain overhead expenses will also be deducted from sales revenue in order to calculate contribution. This is because such costs are variable in nature. Throughput accounting regards such costs as fixed and this is true insofar as they cannot be avoided in the ’immediate’ sense. In marginal costing and throughput accounting the rate of contribution generated per unit of scarce resource can be used to determine the optimum production mix. However, different rankings can occur under each method of which the decision maker must be aware. Throughput accounting is only concerned about output that will affect sales revenues. Very much in sympathy with Just-in-time philosophy stocks are only considered desirables when they can enhance and increase throughput. In throughput accounting the cost of all materials purchased during a period is deducted from the sales revenue generated in that period irrespective of whether they have been consumed or remains in stock at the end of the period. This contrasts with marginal costing where only the costs of materials actually consumed during the period is deducted from sales revenue generated in period.

Examiner’s report This question tests candidates’ knowledge of marginal costing technique as a tool for capacity decision vis a viz throughput accounting. It also tests computation of Throughout Accounting Ratio (TAR). The attempt on the questions which were in four parts (a) to (d) by candidates was very low. The candidates recorded below average performance. The Pitfall noticed was the inability of the candidates to comprehend the concept of throughput accounting. Candidates are encouraged to intensively use the ICAN study guide when preparing for future ICAN examinations.

Marking guide Marks Marks

a. Using marginal costing to compute optimal mix and net Profit. (25 ticks = 5 marks) 5

b. Calculate Throughput Accounting Ratio (TAR) (20 ticks = 5 marks) Discussion of TAR 5 2 7

c. Using throughput accounting optimal mix and net Profit to compute (10 ticks = 5 marks) 5 80

d. Differences between throughput contribution and marginal costing contribution. (Any 2 points @ 1½ marks per point) 3 Total 20

a. From: Finance Manager To: Credit Control Manager, V Plc. Date: 15 May 2019 Subject: Order from new customer As required, I have looked into the above. There are three possible outcomes:

i) all goes well and we receive the balance due from the customer (probability 60%); ii) we have to pay a ₦500,000 collection fee, as a result of which the balance is received (probability 20%); iii) we pay the ₦500,000, but the balance is not forthcoming (probability 20%). These can be evaluated, and a statistically “expected” figure calculated, as follows: Possible Outcome (i) (ii) (iii) ₦000 ₦000 ₦000 Now Receive 10% of ₦25m 2,500 2,500 2,500 (Pay) 70% of ₦18m (12,600) (12,600) (12,600) Net (k) (10,100) (10,100) (10,100) Year 1 (Pay) 30% of ₦18m (5,400) (5,400) (5,400) (Pay) collection fee - (500) (500) Receive balance 22,500 22,500 - Net receipt/(payment) 17,100 16,600 (5,900) Present value at 16% p.a (T) 14,740 14,310 (5,086) Net present value (K+T) 4,640 4,210 (15,186) Probability 60% 20% 20% Expected value 2,784 + 842 - 3,037 = ₦589 The expected value being positive, the order is financially viable. 81

b. Other factors worthy of consideration include the following:

• Although the expected value is positive, there are only three possible outcomes: ₦4,640,000 positive, ₦4,210,000 positive and ₦15,186,000 negative; Depending on your aversion to risk, the size of the negative outcome may dissuade you from accepting the order;

• The possibility of insuring against default;

• The possibility of using other forms of payment, e.g. bills of exchange or different terms (discount for early payment);

• The likelihood of getting further orders as a consequence of accepting this (e.g. repeat or recommendation).

• The possibility of recovering some of the balance at a later date (e.g., on the insolvency of the buyer).

• Opportunity cost, e.g. penalties/layoffs if order is not accepted; and

• The question of whether the 16% already includes a component to reflect uncertainty/risk aversion - if so, what Please let me know if you wish to elaborate on any of the above or take any aspect further. Signed: Credit control Accountant

Examiner’s report The question tests candidates’ understanding of credit control analysis and investment analysis. The question was poorly attempted by candidates. The candidates recorded below average performance. The Pitfalls noticed were the inability of the candidates to compute the customers outstanding based on credit terms and associated bad debts, incremental costs and the investment appraisal on cash receipts and payments. Candidates are encouraged to intensively use the ICAN study guide when preparing for future ICAN examinations.

Marking guide Marks Marks

a. Evaluate the financial implication of whether to accept or reject the order. (36 ticks = 12 marks) 12

b. Factors for Credit control decisions. (Any 3 points @ 1mark each) 3 Total 15 82

a. Relative performance of the two profit centres S/N Ratios Owerri event centre Isiekenesi Event Centre N’000 N’000 2020 2019 2020 2019 Capital employed: Total non – current asset Current asset less cash/bank Cash and bank Total asset Less: current liabilities Capital employed 6400 1300 1000 8700 1100 7600 6100 1100 900 8100 900 7200 5900 1500 1000 8400 1200 7200 5700 1690 1200 8590 1150 7440 Sales (Revenue) 10,400 9,600 10,000 7,000 Less: Operating expenses: Rental and hiring expenses 2100 1800 2000 1000 Salaries and wages 2580 2300 2230 2120 Consumables 970 880 850 540 Other operating expenses 1450 1150 950 700 Total expenses 7100 6130 6030 4360 Operating profit before interest and tax 3300 3470 3970 2640

i. Returned on capital employed = Profit/capital employed 0.434 0.482 0.551 0.355 ii. Operating profit 3300 3470 3970 2640 Imputed cost = 15% of capital employed 1140 1080 1080 1116 Residual income = Profit – imputed cost 2160 2390 2890 1524

iii. Operating profit before interest and tax 3300 3470 3970 2640 Sales (Revenue) 10400 9600 10000 7000 Profit margin = Profit /sales 0.317 0.362 0.397 0.377

iv. Current asset 2300 2000 2500 2890 Current liabilities 1100 900 1200 1150 Current ratio= current Asset/current liability 2.091 2.222 2.083 2.513

v. Current asset less inventory 2300 2000 2500 2890 Current liability 1100 900 1200 1150 Quick ratio = Current asset less Inventory/Current liability 2.091 2.222 2.083 2.513 83

vi. Long term debts 1400 1500 1300 1100 Capital employed 7600 7200 7200 7440 Gearing ratio = Long term debt /Capital employed 0.184 0.208 0.181 0.148

vii. Interest charge 250 250 250 220 Profit before interest/tax 3300 3470 3970 2640 Interest cover = (PBIT/Interest charge) 13.2 times 13.88 times 15.88 times 12.00 times Explanations of the computed ratios: Returns on capital employed (ROCE) The ROCE sometimes called Return on Investment (ROI) is the profit of the division as a percentage of the capital employed. Isiekenesi event centre has a better ROCE than Owerri in 2020 while Owerri had a better ROCE than Isiekenesi event centre in 2019. Residual income Residual income is another way of appraising a company or division which shows the absolute profit after deducting imputed cost or notional cost of capital from operating profit. The Isiekenesi event centre shows better residual income than Owerri event centre in 2020 but Owerri event centre shows better residual income than Isiekenesi in 2019. Profit margin This is the profit as a percentage of sales/revenue (Profit achieved per N1 of sales. Isiekenesi event centre makes higher profit margin than Owerri event centre. Current ratio The current ratio is the liquidity ratio that specifies the relationship between current asset and current liabilities. The ideal current ratio is 2:1 or 2.0. that means the company has enough liquid asset to meet the demand of short term of current liabilities. Owerri event centre have better liquidity in 2020 while Isiekenesi event centre have a better liquidity in 2019. Quick ratio The quick ratio is a more effective liquidity ratio that shows the relationship between Current asset less inventory and current liability. In some cases it is current asset less only inventory. But in this very situation the inventory are not specified. Owerri event centre have better liquidity in 2020 while Isiekenesi event centre have a better liquidity in 2019. Gearing ratio The gearing ratio otherwise referred to as leverage ratio shows the relationship between Long term debt and capital employed. A company is said to be highly geared or leveraged when its debt capital exceeds its equity interest. It is low geared if the debt capital is lower than equity. All the two centres are low geared even though in 2019 and 2020 the Owerri centre was slightly higher. 84 Interest cover This measures the ability of the company to meet its obligations to pay interest. An interest cover of 3 is considered low and shows that the company may be at risk from too much debt in relation with the amount of profit the centre makes. All the centres are comfortable even though Owerri centre is better than Isikenesi event centre.

b. Computation of Performance bonus Particulars Owerri event centre Isiekenesi event centre 2019 2020 2019 2020 Actual ROCE 0.434 0.482 0.551 0.355 Standard ROCE 0.50 0.50 0.50 0.50 Qualifies for bonus Not qualified Not Qualified Qualified Not Qualified Performance Bonus = 10% of Sales - N1,000 -

c. Role of Management Accountant in Project Management

• Understanding the economics of different options and decisions

• Ability to forecast cost and profits

• Generate accurate networks analysis and Gantt chart

• Use spread sheets effectively

• Considers external factors and internal factors.

Examiner’s report The question tests candidates’ ability to determine performance measure of company using ROCE, residual income, profit margin, current ratio, gearing ratio and interest cover. The question tests candidates’ understanding of role of management accountant in project management. The attempt on this question by candidates was very high. The candidates recorded average performance. The Pitfall noticed was candidates’ inability to discuss the theoretical aspect that dwell on project management. Candidates are encouraged to intensively use the study guide when preparing for future ICAN examinations. 85

Marking guide Marks Marks

a. Compute performance ratios:

i. ROCE ii. Residual income iii. Profit Margin iv. Current Ratio v. Quick ratio vi. Gearing ratio vii. Interest cover 1 1 1 1 1 1 1 7

b. Computation of performance bonus (16 ticks = 4 marks) 4

c. Role of management accountant in project management. (Any 4 points @ 1 mark each) 4 Total 15

i) Definition of Terms Responsibility Accounting This is the structuring of performance report for individual manager in a way that identifies the factors that are controllable by them and for which they are responsible. Responsibility accounting reports may be prepared for cost centres, revenue centres, profit centres, or investment centres.

ii) An Investment Centre It is an operating division within an organisation whose manager has the responsibility for both the profit and investments of the division.

iii) Return on Investment (ROI) for a division It is the divisional profit divided by the capital employed in that division.

iv) Residual Income (RI) for a division Divisional income less a notional or imputed interest charge on the investment in capital employed. 86

b. (i) Evaluate the performance of the divisions using ROI and residual income method. Returns on capital employed (ROI) Particular Lagos Kano Gombe Enugu Total N’000 N’000 N’000 N’000 N’000 Sales 53,000 23,000 24,600 29,400 130,000 Variable Cost 50,000 22,000 23,400 27,400 122,800 Contribution 3,000 1,000 1,200 2,000 7,200 Fixed Cost Specific 1,500 750 600 800 3,650 General 530 230 246 294 1,300 2,030 980 846 1,094 4,950 Net Profit 970 20 354 906 2,250 ROI = 970,000 20,000 354,000 906,000 2,250,000 10,000,000 4,000,000 3,000,000 7,000,000 24,000,000 = 0.097 0.005 0.118 0.1294 0.09375 Using ROI, Enugu division is more profitable than the other three Divisions Residual Income: At cost of capital of 7½% Particular Lagos Kano Gombe Enugu Total Profit 970,000 20,000 354,000 906,000 2,250,000 Less: Imputed cost: 7.5% of investment 750,000 300,000 225,000 525,000 1,800,000 Residual income 220,000 (280,000) 129,000 381,000 450,000 Appraising the divisions using residual income method with an imputed interest of 7.50%, Enugu is more profitable. Residual income at cost of capital of 10% Particular Lagos Kano Gombe Enugu Total Profit 970,000 20,000 354,000 906,000 2,250,000 Less: Imputed cost 1,000,000 400,000 300,000 700,000 2,400,000 Residual income/ (Negative income) (30,000) (380,000) 54,000 206,000 (150,000) In appraising the divisions with a imputed interest of 10%, Enugu is still profitable. 87

Examiner’s report The question tests candidates understanding of certain definitions like responsibility accounting, investment centres, ROI and residual income. Many candidates attempted the question. The candidates recorded above average performance. The Pitfall noticed was candidates’ inability to compute the new performance ratio arising from 10% cost of capital. Candidates are encouraged to intensively use the study guide when preparing for future ICAN examinations.

Marking guide Marks Marks

a. Definition of Terms:

i. Responsibility accounting ii. An investment centre iii. Return on investment (ROI) iv. Residual income 1½ 1½ 1½ 1½ 6

b. i. Evaluation of performance of Divisions

• ROI method (30 ticks = 3 marks)

• Residual income method (15 ticks = 3 marks)

ii. Re-evaluate the residual income situation of company if cost of capital is 10% (15 ticks = 3 marks) 3 3 3 9 Total 15 88 ICAN/232/Q/B5 Examination No.................... THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA SKILLS LEVEL EXAMINATION – NOVEMBER 2023 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 16, 2023 89 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA