Performance Management · May 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

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