Performance Management · May 2025

a) Product Machine hours required A B C Total Type 1 180 315 180 675 Type 2 120 175 120 415 Machine utilisation rate: Machine type 1 = 675/600 = 112.5% Machine type 2 = 415/500 = 83.0% Machine type 1 has the highest utilisation rate and the rate is above 100. Therefore, machine type 1 is the bottleneck/limiting factor. b) 73

(a) i. The relevant cost is the lower cost option. This is to buy the machine and rent it out when it is not being used. (wka) 250,000

ii. Machinery running cost 10 weeks x ₦7,200 per week The relevant cost is the running cost to be incurred in the future if the project is undertaken. 72,000

iii. Depreciation This is not relevant as it is not a cash cost.

iv. Skilled Labour External project labour: 9,000 hours x ₦120 The existing hourly rate is irrelevant as the company would continue to pay its existing employees regardless of the decision. The relevant cost is the lower cost option External replacement labour 9,000 hours x ₦110 990,000

v. Unskilled labour would have to be recruited for the project. This is the relevant cost because it is only incurred if the project goes ahead: 12,000 hours x ₦80 960,000

vi. Supervision Existing salary would be unchanged so this is irrelevant. Overtime would be worked but this is unpaid so this is also irrelevant. The bonus is only paid if the project goes ahead so it is a relevant cost 5,000

vii. Material A The relevant cost that would have to be purchased 150,000 Material B The current inventory can be used on this project, the relevant cost is its resale value of ₦20 per square metre: 5,000 square metres x ₦20 = 100,000 5,000 square metres x ₦50 The original cost of the inventory is irrelevant as it is a past (sunk) cost. 250,000 350,000 74 Viii. Analysis cost This is not relevant because it is a past (sunk) cost.

ix. Overhead costs These are not relevant unless they are specific to the project. Overheads that are absorbed are non-specific to the project. They are not incremental costs.

x. Profit This is not relevant because it is not a cost. Total relevant cost 2,777,000

Workings The relevant cost of the project is as follows:

(i) Specialised machine Hire cost ₦40,000 x 10 weeks = (₦) 400,000 Net cost if purchased Original cost₦2,500,000 Residual value ₦1,500,000 1,000,000 Less Rental income: ₦25,000 x 30 weeks (750,000) 250,000

(b) Explanation of why the financial profit reports will not show a profit of N1,250,000 for the engineering project at the end of the year The financial profit reports will not show a profit of N1,250,000 for the following reasons:

i. Financial profit calculation will consider depreciation whereas the analysis above did not;

ii. Financial profit will consider the project’s share of general overheads, absorbing them at 40% of prime cost, but the calculation above did not;

iii. Financial profit will not consider the principle of relevant costing when determining the cost of materials for the job, but will charge them using the company’s inventory valuation policy;

iv. The salary cost for unskilled, skilled and supervisor will be considered for the proportion of time they spent on the engineering project. 75

(c) Contribution is the difference between sales and variable costs, both of which are dependent on activity. Fixed costs, which tend to be independent of activity, are ignored. Since most decisions involve changes in the level of activity the relevant costs and revenues are those affected by changes in the level of activity. Thus the net effect of these relevant costs and revenues is contribution.

(d) An opportunity cost is the value which represents the cost of the next best alternative or the benefit forgone by accepting one course of action in preference to others when allocating scarce resources. If there is only one scarce resource, decisions can be made by ranking alternatives according to their contributions per unit of the scarce resource. However, in reality there will be many scarce resources, and different alternatives will use alternative combinations of those scarce resources. In these situations opportunity costs are used to identify the optimum use of those resources.

Examiner’s report This is a compulsory question that dwells on relevant costing and contribution margin theory. The question being a compulsory question was attempted by almost all the candidates. Performance of the candidates was average. The major pitfalls were the inability of most candidates to determine relevant costs of various cost elements including relevant cost of machine as it relates to hiring and outright purchase; relevant cost of skilled labour and unskilled labour and other relevant costs of materials for the purpose of determining minimum cost of a project. It is hereby recommended that candidates use ICAN Study Text and other Performance Management text-books in preparing for future Institute’s examination.

Marking guide Q1 a. Relevant costs (20 ticks @ 1 mark = 20 marks) 20

b. Profit maximisation quantity using Marginal and contribution analysis (Any 2 points @ 2 marks = 4 marks) 4

c. Importance of contribution margin theory (2 points @ 1mark per point) = 2 marks) 2

d. Relevance of opportunity costs in decision making (1 point @ 4 marks per point = 4 marks) 4 30 Total 30 76

(a) The sales mix contribution variance: This variance measures the effect on profit of changing the mix of actual sales from the budgeted mix. The sales quantity contribution variance: This variance measures the effect on profit of selling a different total quantity from the budgeted total quantity.

(b) Variances

(i) The sales mix contribution variance Calculated as (actual sales quantity – actual sales quantity in budgeted proportions) x standard contribution per unit. Standard contributions per car wash: Complete = ₦1,000 x 45% = ₦450 per valet Mini = ₦500 x 56% = ₦280 per valet Actual sales quantity in budgeted proportions (ASQBP): Complete: 13,800 x (6,000/10,000) = 8,280 Mini: 13,800 x (4,000/10,000) = 5,520 Car wash Type AQAM AQBM Difference Standard Contribution Variance ₦ ₦ Complete 6,800 8,280 (1,480) 450 666,000 A Mini 7,000 5.520 1,480 280 414,400 F 251,600 A

(ii) The sales quantity contribution variance Calculated as (actual sales quantity in budgeted proportions – budgeted sales quantity) x standard contribution per unit. Car wash Type AQAM BQBM Difference Standard Contribution Variance ₦ ₦ Complete 8,280 6,000 2,280 450 1,026,000 F Mini 5,520 4,000 1,520 280 425,600 F 1,451,600 F 77

(c) Discussion on sales performance of the business i The sales performance of the Adebat Cleaning Services was very good in 2023, as shown by the favourable sales quantity variance of ₦1,451.600. 5y6 ii Overall, total sales revenue is 33% higher than budgeted ((₦8m – ₦10.64)/₦8m). This is because a higher total number of car wash was carried out in the year. iii The difference in sales quantity from the revenue data is substantially from the mini car wash. The Mini car wash is 75% ((7,000 – 4,000)/4,000) higher than budgeted, whereas the number of Complete car wash is only 13% ((6.800 –6,000)/6,000) higher than budget. iv We have an adverse sales mix variance of ₦251,600 because although the number of Mini car wash went up substantially, but they generate a lower contribution per unit than the Complete car wash. v However, the performance is simply a reflection of the economic situation in Nigeria. We are told that disposable incomes in Nigeria have decreased by 50% over the last year. This means that people have less money to spend on non-essential expenditure such as car wash. Consequently, they are opting for the cheaper mini car wash rather than the more expensive Complete car wash. At the same time, we are also told that people now carry out regular maintenance of their cars because of inability to buy a new one, hence a regular car wash Thus, the total quantity of car wash is higher than budgeted, particularly the mini wash.

Examiner’s report The question is on Sales mix contribution variance and sales quantity contribution variance and their importance on the sales performance of Adebat Cleaning services. The question was attempted by most of the candidates. The Performance of the candidate was average. The major pitfall observed was the inability of candidates to understand the computation and use of the proportion of actual sales in budgeted mix from where the variances can be generated for both total sales mix contribution variance and total sales quantity contribution variance. It is hereby recommended that candidates use ICAN Study Text and other approved text-books on Performance Management when preparing for future Institute’s examination. 78

Marking guide

a. Explanation of Sales mix contribution and sales quantity contribution variances. (Two explanations @ 1 marks for each explanation = 2 marks) 2

b. i. Computation of Sales Mix contribution variance (8 ticks @ ½ mark = 4 marks) 4

ii. Computation of Sales quantity contribution variance (8 ticks @ 2 marks = 4 marks) 4 8

c. Using the results in b above, the performance of the company in 2025: Implication of Sales mix variance Implication of Sales quantity variance Sales Price Variance. (4 points at 2½ marks = 10 marks) 10 20 Total 20

a) i) * Contribution per unit Selling price 2,100 1,500 Variable cost per unit (1,488) (1,044) Contribution 612 456 * LP Model Objective function: Maximise contribution (C) = 612A + 456B Subject to constraints:

i) Material X: 2A + B ≤ 2,500 ii) Skilled labour: 5A + 2B ≤ 4,800 iii) Unskilled labour: 2A + 3B ≤ 3,900 iv) Machine hours: 2A + 4B ≤ 5,000 v) Non-negativity: A, B ≥ 0

ii) The equation of the binding constraints are: 5A + 2B = 4,800 …… (1) 2A + 3B = 3,900 …… (2) Eq. (2) x 2.5: 5A + 7.5B = 9,750 …… (3) Eq. (3) - Eq. (1): 0 + 5.5B = 4,950 B= 900 units 79 Substitute for B in Eq. (2): 2A + 3(900) = 3,900 A = 600 units Thus, the optimum production plan is to produce 600 units of A and 900 units of B. Total contribution = 612 (600) + 456 (900) = N777,600 Less fixed costs N600,000 Profit N177,600

b) We need to first compute the shadow prices. Using the dual method: Let x = shadow price per skilled labour y = shadow price per unskilled labour 5x + 2y = 612 ….. (1) 2x + 3y = 456 ….. (2) Eq. (2) x 2.5: 5x + 7.5y = 1,140 Eq. (3) – Eq. (1): 0 + 5.5y = 528 y = 96 Substitute for y in Eq. (2): 2x + 3 (96) = 456 x = 84 Thus, the shadow price (i.e. the overtime premium) per hour of skilled labour is N84 and N96 for unskilled labour. To get the maximum hourly rate we simply add the normal hourly rate: Skilled labour = N144 + N84 = N228 Unskilled labour =N60 + N96 = N156

c) Maximum production of each grade is as follows: A B Material X (2,500/2) 1,250 (2,500/1) 2,500 Skilled labour (4,800/5) 960 (4,800/2) 2,400 Unskilled labour (3,900/2) 1,900 (3,900/3) 1,300 Machine hours (5,000/2) 2,500 (5,000/4) 1,250 To avoid violating the other constraints, the maximum of each grade of the vanish that can be produced is the lowest under each of the two grades. The total maximum contribution is: Grade A 960 units x N612 = N587,520 Grade B 1,250 units x N456 = N570,000 80

Examiner’s report The question tests candidates’ understanding of linear programming. The question was attempted by many candidates. The Performance was average. The major pitfall observed was candidates’ inability to decipher the non-binding constraints and binding constraints as well as the computation and use shadow prices for the determination of maximum production mix for each grade of the skilled and unskilled labour. It is hereby recommended that candidates’ use ICAN Study Text on Performance Management when preparing for future Institute’s examination.

Marking guide a.i. Identify the objective function and the four constraints (10 ticks @ ½ mark = 5 marks) 5

ii. Produce using the simultaneous equations, the optimum production plan (10 ticks @ ½ mark = 5 marks) 5 10

b. Maximum amount of overtime of both skilled and unskilled Labour. (10 ticks @½ mark = 5 marks) 5

c. A choice of Producing either Grade A or B, what grade should be produced to maximise Profit (10 ticks @ ½ mark = 5 marks) 5 20 Total 20

a. i. Unit cost using Traditional approach: Unit Cost of Production (Traditional Cost Approach) X Y Z N N N Material 190 180 160 Labour 48 64 56 Variable overhead 34 44 38 Overhead 60 80 70 Unit Cost 332 368 324 81

Workings: Traditional approach using direct labour hourly rate Total overhead = N15,300,000 Total direct labour hours = 6 x 120,000 = 720,000 = 8 x 75,000 = 600,000 = 7 x 30,000 = 210,000 1,530,000 hours Direct labour hourly rate N15,300,000 = N10 1,530,000 Product X Product Y Product Z Direct Labour hours per unit 6 hours 8 hours 7 hours Direct Labour hourly rate (N) 10 10 10 Unit overhead cost per unit N60 N80 N70 Labour cost at N8 per hour N48 N64 N56 a.ii. Unit cost of Production using ABC approach in overhead absorption Unit Cost of Product (ABC APPROACH) X Y Z N N N Material 190 180 160 Labour 48 64 56 Value OH 34 44 38 Overhead 35.83125 66.57 200.25 Unit Cost 307.83125 354.37 454.25

Workings: Computation of total activity volumes: Product Direct Material Machine Company Production Production Quality Labour Cost Hours Receipt Run Order X 12,000 720,000 22.800,000 480,000 45 15 45 Y 75,000 600,000 13,500,000 600,000 75 30 30 Z 30,000 210,000 4,800,000 270,000 360 75 75 Total 1,530,000 41,100,000 1,350,000 480 120 150 82 Overhead cost per activity (cost driver rate) Activity Overhead Cost Cost Activity per Overhead Allocated Driver Period Absorption Rate Set up 1,260,000 Production run 120 N10,500 per cost Machine 8,100,000 Machine hours 1,350,000 N6 Goods inwards 2,520,000 Component receipts 480 N5,250 Packaging 1,800,000 Production order 150 N12,000 Engineering 1,620,000 Production order 150 N10,800 N15,300,000 Allocation of Overhead to Product Activity (Computation of Overhead cost per unit using ABC Approach) Cost Driver Rate X Y Z Total Cost 120,000 75,000 30,000 N N N N Set up: 15 product runs 10,500 157,500 157,500 30 product runs 10,500 315,000 315,000 75 production run 10,500 _______ _______ 787,500 787,500 Total 157,500 315,000 787,500 1,260,000 Machine: 480,000 machine hours 6 2,880,000 2,880,000 600,000 machine hours 6 3,600,000 3,600,000 270,000 machine hours 6 _________ _________ 1,620,000 1,620,000 Total 2,880,000 3,600,000 1,620,000 8,100,000 Good Include: 45 receipts 5,250 236,250 236,250 75 receipts 5,250 393,750 360 receipts 5,250 _______ _______ 1,890,000 1,890,000 Total 236,250 393,750 1,890,000 2,520,000 Packaging: 45 production order 12,000 540,000 540,000 30 production order 12,000 360,000 360,000 75 production order 12,000 _______ 900,000 900,000 ________ Total 540,000 360,000 900,000 1,800,000 83 Engineering: 45 production order 10,800 486,000 486,000 30 production order 10,800 324,000 324,000 75 production order 10,800 _________ 810,000 810,000 486,000 324,000 810,000 1,620,000 Total 4,299,750 4,992,750 6,007,500 15,300,000 Unit cost of overhead = N35,83125 N66.57 N200.25 b.i. Expected Sales Price Product X Product Y Product Z Price Pr Expected Price Pr Expected Price Pr Expected Selling Price Selling Price Selling Price N N N N N N 350 0.5 150 350 0.6 210 450 0.5 221 300 0.3 108 400 0.3 120 440 0.4 176 390 0.2 78 420 0.1 42 430 0.1 43 336 372 444

b. ii. Profit Computation using Traditional Costing Approach X Y Z N N N Unit Sales Price 336 372 444 Unit Cost 332 368 324 Unit Profit 4 4 120 Quantity 120,000 75,000 30,000 Total Profit 480,000 300,000 3,600,000 Profit Computation Using ABC Approach X Y Z N N N Cost sales price 336 372 444 Unit cost 307.83125 354.57 454.25 Net Profit/(cost) 28.16875 17.43 (10.25) Quantity 120,000 75,000 30,000 Total Profit 3,380,250 1,307,250 (307,500) 84

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

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

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

iii. ABC approach shows a more realistic costing approach.

iv. Cost absorption is based on cost drives not on hourly rate.

Examiner’s report The question tests candidates’ knowledge on comparison of overhead cost per unit based on traditional approach and the Activity based costing approach. The question was attempted by many candidates since it is a popular advanced costing question. The Performance was above average. The major pitfall observed was candidate’s inability to determine the costs per cost driver, expected unit selling prices for the three products X, Y, and Z, using the probabilities given. It is hereby advised that candidates use ICAN Study Text on Performance Management when preparing for future Institute’s examination.

Marking guide

a. Calculation of unit costs using traditional costing and ABC approaches. ( 40 ticks @ ¼ mark = 10 marks) 10

b. Computation of expected unit selling prices and the total profit or Loss from implementation of the Traditional costing and ABC approaches. ( 14 ticks @ ½ mark = 7 marks) 7

c. Reasons for using ABC approaches (2 points @ 1½ marks per point = 3 marks) 3 20 Total 20 85

ABC NIGERIA PLC Unit Unit Unit Sales Total Sales Variable Contribution Units Contribution Price Cost N N N N N Product A Alpha brand 5.00 3.00 2.00 160,000 320,000 Beta brand 3.00 2.60 0.40 450,000 180,000 Product B Alpha brand 6.40 4.00 2.40 120,000 288,000 Beta brand 4.00 3.60 0.40 600,000 240,000 Product C Alpha brand 10.00 6.00 4.00 50,000 200,000 Total contribution 1,228,000 Fixed Cost Marketing Cost 300,000 Other fixed costs 700,000 1,000,000 Net profit 228,000

a. ROI - 228,000 x 100 = 22.80% 1,000,000 1

b. Residual Income Net Profit N228,000 Imputed (notional) Cost 12% of N1,000,000 120,000 Residual Income N108,000

c. Advantages of ROI over Residual Income approach.

• ROI relates the Profit to the Capital employed.

• It is a percentage measure.

• It is a tool for comparison.

• It is easily understood.

• It focuses on capital employed. 86

Examiner’s report The question tests candidates’ understanding of divisional performance appraisal. The question was attempted by most of the candidates. The Performance was above average. The major pitfall observed was the candidates’ inability to compute residual income of each division for the products to its generated revenue and net profit. It is hereby advised that candidates use ICAN Study Text on Performance Management when preparing for future Institute’s examination. Working guide

a. Calculation of Returns on Investments (10 ticks @ ½ marks = 5 marks) 5

b. Calculation of residual income (5 ticks @ 1 mark = 5 marks) 5

c. Advantages of ROI over Residual Income in divisional performance appraisal ( Any 2 points @ 2½ marks = 5 marks) 5 15 Total 15

EGOYIBO NIGERIA LTD

a. Flexible Budget for 3 months Particulars 80,000 100,000 120,000 140,000 160,000 N’000 N’000 N’000 N’000 N’000 Variable Costs: Direct materials 6,400 8,000 9,600 11,200 12,800 Indirect materials 640 800 960 1,120 1,280 Direct labour 4,000 5,000 6,000 7,000 8,000 Power 480 600 720 840 960 Repairs 800 1,000 1,200 1,400 1,600 Total variable cost 12,320 15,400 18,480 21,560 24,640 Fixed Costs: Indirect material 320 320 320 320 320 Power 960 960 960 960 960 Repairs 800 800 800 800 800 Supervision 1,600 1,600 2,880 2,880 2,880 Rent, rates and Insurance 720 720 720 720 720 87 Total fixed costs 4,400 4,400 5,680 5,680 5,680 Total cost 6,720 19,800 24,160 27,240 30,320 Working Particulars 80,000 100,000 120,000 140,000 160,000 Cost analysis N’000 N’000 N’000 N’000 N’000 Direct material 6,400 8,000 9,600 11,200 12,800 Variable cost Indirect material 960 1,600 Semi-variable cost Direct Labour 4,000 5,000 6,000 7,000 8,000 Variable cost Power 1,440 1,920 Semi-variable cost Repairs 1,600 2,400 Semi-variable cost Supervision 1,600 1,600 2,880 2,880 2,880 Step cost Rent/insurance/ rates 720 720 720 720 720 Fixed cost Using High –Low method analysis of semi-variable costs: Indirect Material Variable cost Per unit =1600,000 – 960,000 = 640,000 160,000 – 80,000 80,000 = N8 per unit Fixed Cost = using lowest activity it will be FC = Total cost – VC (Activity Level) = (960,000 – 8(80,000) = 960,000 - 640,000) = N320,000 Power variable cost per unit = N1,920,000 – N1,440,000 = 480,000 = N6 80,000 80,000 Fixed cost = 1,920,000 – 6 x 160,000 = N960,000 Supervision (variable cost )= 2,880,000 – 1,600,000 = 1,280,000 = N16 80,000 80,000 Fixed cost = 2,880,000 – 16(160,000) 2,880,000 – 2,560,000 = N320,000 Repair Variable cost = 2,400,000 – 1,600,000 = 800,000 = N10 80,000 80,000 Fixed cost = N2,400,000 – 10 x (160,000) = N800,000 88 Specify each cost type based on activity S/N Particulars Cost analysis (Cost type based on activity) 1. Direct material Variable cost 2. Indirect material Semi-variable cost 3. Direct Labour Variable cost 4. Power Semi-variable cost 5. Repairs Semi-variable cost 6. Supervision Step cost 7. Rent/insurance/ rates Fixed cost

b. Budget report from July to Sept 2021 at 100,000 units showing variances: S/N Particulars Variable Fixed cost Total Actual Variance Cost budgeted Cost N’000 N’000 N’000 N’000 N’000 1. Direct material 8,000 - 8,000 8,300 300 A 2. Indirect material 800 320 1,120 1,160 40 A 3. Direct labour 5,000 - 5,000 5,400 400 A 4. Power 600 960 1,560 1,520 40 F 5. Repairs 1,000 800 1,800 1,770 30 F 6. Supervision - 1,600 1,600 1,700 100 A 7. Rent, Insurance/Rates - 720 720 640 80 F Where A = Adverse variance and F = favourable variance

c. Further investigations on the variances and measures/actions needed to be taken by director. S/n Variance Variance amount Investigations and measures to be taken on the variances 1 Direct material cost variance N300,000 A There exist a N300,000 adverse variance which could be as a result of price and usage of materials. High actual direct material price, wastage, poor quality of materials, and loss in production. Management is expected to conduct price and market survey, ensure high quality low priced materials are procured and used, handling of materials to reduce wastage to be improved. 89 N40,000 2 Indirect A There is a N40,000 adverse variance for indirect material cost material which could be as a result of price and variance usage of such materials, wastage, poor quality of such materials. Management is expected to conduct price and market survey, ensure high quality low priced materials are procured and used, handling of such materials to reduce wastage. 3 Direct Labour cost variance N400,000 A An adverse variance of N400,000 was observed. This could arise from direct labour rate and efficiency variances. The variance could be attributable to high labour rates, inefficient operations and excessive overtime. Management can control same through appropriate labour pricing, effective job evaluation and manpower planning 4 Power overhead cost variance N40,000F There is a favourable variance of N40,000 which could be due to decrease in power rates. There is need for investigation to ensure appropriate and realistic figure is used for budgeting purposes in future. 5 Repairs expenses cost variance N30,000F An favourable variance of N30,000 was noticed. It may mean that maintenance programme of equipment was not only adhered to but surpassed. An favourabler variance of N30,000 means that there is need for investigation to ensure appropriate figure (realistic figures) are used for budgeting purposes in future. 6 Supervision cost variance N100,000A There is aadverse variance of N100,000 which could be due to increase in cost of supervision. There is need for investigation to ensure appropriate figure is used for budgeting purposes in future. 7 Rent, insurance and Rates cost Variances N80,000F There is a favourable variance of N80,000 which could be due to decrease in rates. There is need for investigation to ensure appropriate figure is used for budgeting purposes in future. 90

Examiner’s report The question is a flexible budget question which dwells on candidates’ knowledge of how to separate costs elements into, fixed and variable costs from a given costs and quantity levels. The question also dwells on the budgets and actuals costs for quantity level of 100,000 units expecting candidates to determine the variances between actuals and budgets and reasons for such variances. The question was a popular question and most candidates attempted it. The Performance was above average. The major pitfall observed was the candidates’ inability to use High-low method to separate semi-variable costs and computation of the relevant variances. It is hereby advised that candidates use ICAN Study Text on Performance Management when preparing for future Institute’s examination.

Marking guide

a. Preparation of Flexible (63 ticks @ 7ticks/ mark = 9 marks) 9 b.i. Preparation of budget report showing variances (6 ticks @ ½ marks = 3 marks) 3 ii. Reasons for the variances ( Any 2 points @ 1½ marks = marks) 3 15 Total 15

a) Throughput accounting ratio = throughput return per factory hour/cost per factory hour. Cost per factory hour Total factory costs/total available hours on bottleneck resource = ₦12,000,000/2,700 hours (12 × 5 × 50 × 90% hours) =₦4,444.44 91 Throughput return Red panels Black panels ₦ ₦ Selling price 12,600 3,800 Materials (4,300) (1,160) Throughput per unit 8,300 2,640 Hours per unit required on Machine M 1.4 0.6 Throughput return per hour ₦5,928.57 ₦4,400 Throughput accounting ratio Throughput return per factory hour/cost per factory hour: 5,928.57/4,444.44 4,400/4,444.44 = 1.33 = 0.99 In any organisation, one would expect the throughput accounting ratio to be greater than 1.This means that the rate at which the organisation is generating cash from sales of this product is greater than the rate at which it is incurring costs. It follows on, then, that if the ratio is less than 1, changes need to be made quickly. Whilst the ratio for Red panels is more than 1, it is just under 1 for Black panels. However, if changes are made as suggested in (c) below, this could soon be rectified.

b. Optimum Production Plan using the Through put Analysis: Product No. of Units Hour per unit on Machine Total Hours Throughput per hours (N) Total through put return (N) Black Panel (Limited to contract 1000 0.6 600 4,400 2,640,000 Red Panel (Balance) 1500 1.4 2100 5,928.57 12,449,997 Less total costs Profit 2,700 hours 15,089,997 12,000,000 3,089,997 92

c. Increasing throughput without additional investment in Machinery Generally speaking, throughput can be increased by increasing sales volumes or prices on the one hand, or by cutting costs on the other hand. In the case of Yaro Ltd, it is not possible to increase sales prices as the company has guaranteed not to increase them for three years. From our answer to (b) above, we can see that Yaro Ltd has unsatisfied demand for both Black panels and Red panels. There are customers out there who the company is unable to supply because of its restricted machine capacity. Therefore, it would be worthwhile for Yaro Ltd to focus on increasing production volumes and thus sales volumes. In order to increase production volumes without making any additional capital expenditure, the company needs to focus on how it could increase the productivity of Machine M. We are told that there is plenty of spare capacity on Machine C and A. Some suggestions to increase Machine M’s capacity are as follows:

• Machine M is currently only fully functional 90% of the time. This means that 300 hours of time are lost whilst the machine is being maintained or workers are not available to man it. If the maintenance work could be carried out outside the usual working day (i.e either before 7 am or after 8 pm), some additional time could be freed up. This should be possible given that we are told that the maintenance contractors work around the clock.

• Workers could be trained to use more than one of the machines. This would then mean that, if some workers were absent, one of the other workers could step in and work on another machine in order to keep it running. Again, this would help to keep the lost 300 hours productive.

• The most obvious machine time which is being lost is the one hour per day at lunchtime. This amounts to 250 lost production hours per year. These additional 250 hours could be used to produce an extra 178 Red panels (250/1.4 hours). Red panels should be made first in preference to Black panels since they generate a higher throughput per machine hour. If workers were trained to use all three machines then, if their lunch times were staggerred, it may be possible to keep machine M running for the whole working day. However, even after doing this, there would still be 590 additional hours of time required on Machine M if the full market demand is going to be satisfied. Therefore, more time needs to be made available.

• Finally then, in order to increase productive hours on M, the working hours of the factory would need to be increased. Either the working day could be 93 made longer, given that workers must already be working shifts, or maybe the factory could open for one extra day per week.

Examiner’s report This question is a popular question that tests candidates’ knowledge of throughput accounting, the determination of the machine that is the bottleneck and limiting factor, and the computation of throughput accounting ratio. The question was attempted by most of the candidates. The performance was average. The major pitfall observed was candidates’ inability to compute the throughput ratio and using the same to determine the optimum production. It is hereby recommended that candidates use ICAN Study Text on Performance Management when preparing for future Institutes’ examination.

Marking guide Marks a. Computation of throughput accounting ratio (10 ticks @ ½ mark = 5 marks) 5

b. Optimal Production plan using The throughput accounting approach (10 ticks @ ½ mark = 5 marks) 5

c. Ways of increasing through put (3 points = 5 marks) 5 15 Total 15 94 ICAN/251/Q/B5 Examination No.................... THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA SKILLS LEVEL EXAMINATION – MAY 2025 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.

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8. You are required to attempt Question ONE (Compulsory), TWO Questions in Section B and TWO Questions in Section C.

9. Check that you have collected the correct question paper for the examination you are writing. THURSDAY, MAY 22, 2025 INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA