Performance Management · November 2023

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

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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