ICAN 2024 Performance Management | Mixed

Tani Kamac (TK) makes three products A, B, and C. All the three products must be offered for sale each month in order to be able to provide a complete market service. The products are fragile and their quality deteriorates rapidly once they are manufactured. The products are produced on two types of machine and worked on by a single grade of direct labour. Five direct employees are paid ₦80 per hour for a guaranteed minimum of 160 hours each per month. All the products are first moulded on machine type 1 and then finished and sealed on a machine type 2. The machine hours requirements for each of the products are as follows: Product A: Machine type 1 - 1.5 hours per unit, Machine type 2 - 1.0 hours per unit; Product B: Machine type 1 - 4.5 hours per unit, Machine type 2 - 2.5 hours per unit; Product C: Machine type 1 - 3.0 hours per unit, Machine type 2 - 2.0 hours per unit. The capacity of the available machines type 1 and 2 are 600 hours and 500 hours per month respectively. Details of the selling prices, unit costs and monthly demand for the three products are as follows: Product A: Selling price - 910, Component cost - 220, Other direct material cost - 230, Direct labour cost at ₦80 per hour - 60, Overheads - 240, Profit - 160, Maximum monthly demand (units) - 120; Product B: Selling price - 1,740, Component cost - 190, Other direct material cost - 110, Direct labour cost at ₦80 per hour - 480, Overheads - 620, Profit - 340, Maximum monthly demand (units) - 70; Product C: Selling price - 1,400, Component cost - 160, Other direct material cost - 140, Direct labour cost at ₦80 per hour - 360, Overheads - 520, Profit - 220, Maximum monthly demand (units) - 60. Although TK uses marginal costing and contribution analysis as the basis for its decision making activities, profits are reported in the monthly management accounts using the absorption costing basis. Finished goods inventories are valued in the monthly management accounts at full absorption cost.

Kenny Katuma (KK) manufactures standard engine components. It operates a costing system based on absorption costing and standard costs, and the management control system is based on monthly variance analysis reports. KK has recently appointed a new CEO, who has begun to introduce changes to the manufacturing systems. He believes in lean manufacturing principles, and has begun to establish a just-in-time manufacturing system, with a focus on reducing inventories and production cycle times, and eliminating waste. Discussions are in progress with major suppliers to introduce just-in-time purchasing arrangements. The CEO has informed the management accountant that changes will be needed to the company’s internal accounting systems, he has also indicated that KK will need a lean management accounting system to support its lean manufacturing system. The CEO is dissatisfied with many of the features of the current management accounting system. There are many errors in data capture for the cost accounting system, and monthly variance reports are not produced until two weeks after the end of each month. He also considers that wrong information is being reported.

Ogbunigwe Nigeria Limited is a big and reputable publishing firm established in the early 1970’s. The company has recently been taken over by Wisdom International Publishing Company (WIPC) – a multinational company operating in several countries of the world. Mr. Pampam who is the Managing Director of WIPC has been sent from the company’s headquarters to review, among other things, the budgeting and reporting system used by Ogbunigwe Nigeria Limited. During his visit to all the departments, he discovered that monthly budgets are prepared for each department in the company. Upon request, the newly acquired company submitted the last budget statement for the note book production which covered Quarter 3 of 2022 as shown below: The budget statement presented was as shown below: Budget statement for Quarter 3 Department: Note Book Production: Particulars Actual results: Units produced 75,000 Labour hours: 212,100 ACTUAL BUDGET VARIANCES N’000 N’000 N’000 Direct materials 1,512 1,440 (72) Direct Labour 738 720 (18) Variable production overhead 474 432 (42) Fixed production overhead 354 336 (18) Variable admin. Overhead 246 240 (6) Fixed admin overhead 300 288 (12) Total costs 3,624 3,456 (168) Sales value of production 4,650 4,464 186 Profit 1,026 1,008 18 The Head of Department of Note book Production department - Mr. Josiah Okoli-in his comment on the state of affairs of the department, revealed that the budget statement presented was based on 72,000 units with a standard labour processing time of 2.85 hours per unit. Mr. Pampam observed that Mr. Josaih Okoli was not in any way enthusiastic about the budget system. He saw it as a pressure system imposed by the company to permit some Departmental Managers in bad light. He pointed out that the system was hurriedly introduced by Dynamic Financial Konsult about twelve months ago. The consultant did not take time to provide explanation that could assist users of the budget to understand the budgeting system. The Head of Department of Note book Production department who was very experienced doubt the competence of the consultant. He was of the opinion that the system introduced in Ogbunigwe Nigeria Limited was either a ready-made one developed for another company and not suitable for the company or that the consultant did not understand the system well enough to give him the needed confidence to educate the users. He concluded by stating that he was sure his department made a loss as against the positive figure recorded in the report and there was the possibility of reporting a loss at another period when profit was actually made. The situation reported above cuts across virtually all the departments and so the need to nip the issue in the bud became very imperative and urgent. The task of making budgeting system more useful and acceptable in a biased environment like this, no doubt, seems difficult but your advice to Mr. Pampam will assist tremendously in getting the company out of the quagmire resulting from various contraception of this budget system.

Some time ago Robert launched a new product some years ago at first, sales were good but now the figures are causing concern. Robert wants a more accurate sales forecast to produce detailed cash forecasts. Since there is some seasonality present in the raw data, the series for sales shown below represents the underlying trend based on an averaging process: Sales Year Quarter Trend point (cartons) 2016 3rd 1 10,000 2016 4th 2 10,790 2017 1st 3 10,920 2017 2nd 4 11,000 2017 3rd 5 11,050 2017 4th 6 11,080 2018 1st 7 11,085 2018 2nd 8 11,095 2018 3rd 9 11,120 2018 4th 10 11,130 On average, quarters, 1 and 3 are 5% and 6% respectively above trend whilst quarters 2 and 4 are respectively 2% and 9% below trend. Some preliminary calculations on the above ten observations have been carried out and the results are summarised below: Results from ten periods’ observations: Linear regression y = a + bx Slope = 82.67 Intercept = 10,472.33 Coefficient of determination = 0.535 It is required to make forecasts of sales for quarters 3 and 4 in 2019 and for quarters 1 and 2 in 2020 but there is some discussion on whether the ten-period data shown above are suitable for forecasting or whether only the last five periods would provide a better basis for forecasting. Linear analysis of the last five periods only gives the following intermediate results: Results of last five periods’ observations: Σy = 555.10 Σx = 330 Σy = 61,627.40 Σxy = 4,442.15 Note: the y values have been scaled down by 100 times for ease of calculation.

Zona Tango (ZT) plc is a holding company with four divisions, including Alba and Beta Divisions. Alba Division produces a component that it sells externally, and can also transfer to other divisions within the group. Beta Division uses the components from Alba Division as a raw material for its final product. The division can also obtain the components from external suppliers. The components, when obtained from Alba Division undergoes further processing at a cost of N4.50 per unit, before it is sold to the external market. The Board of Directors in order to implement a new Appraisal Review has set up a performance scheme for the divisional managers. A performance target for the next financial year has been set and the following budgeted information relating to the two divisions has been prepared. Alba Division Maximum production/Sales capacity: 900,000 units Sales to external customers: 700,000 units (Selling price) N6.80 Variable Unit Cost N4.90 Divisional fixed cost: N160,000 Capital employed: N4m Residue Income: N700,000 Divisional cost of capital: 12% Beta Division Maximum production/Sales capacity: (no constraints) Sales to external customers: (no constraints) Variable Unit Cost: N4.90 Divisional fixed cost: N140,000 Capital employed: N3m Residue Income: N500,000 Divisional cost of capital: 10%

Many firms still focus on profitability as their main measure of performance, despite increasing evidence that non-financial measures are often more important.

Jumbo Tailors Nigeria Limited manufactures three unique wears for which the maximum revenue for the coming year is estimated as follows: N Trousers 8,250,000 Jackets 9,880,000 Skirts 12,390,000 Summarised unit cost data are as follows: Product Trousers Jackets Skirts N N N Direct material 1,000 900 700 Direct Labour 500 450 350 Variable costs 800 1,600 1,000 Fixed costs 250 500 400 Total costs 2,550 3,450 2,450 The allocation of fixed costs was derived from last year’s production level and this may be reviewed, if current output plans are different. Estimated selling prices are: Product Price N Trousers 3,300 Jackets 3,800 Skirts 2,950 The products are processed on sewing machines housed in a building of three blocks. Block A contains type I machine which has an estimated maximum machine hour capacity of 39,200 hours available in the forthcoming year with fixed overhead cost of N1,960,000 per annum. Block B contains type II machine of which 20,000 machine hours are estimated in the forthcoming year with a fixed overhead cost of N1,500,000 per annum. Block C also contains type II machine which also has an estimate of 16,000 machine hours available in the forthcoming year. The fixed overhead cost of N740,000 is estimated per annum for Block C. The required machine hours for one unit of output for each Jeans on each type of machine are as follows: Product Trousers Jackets Skirts Type I machine 2 hours 4 hours 6 hours Type II machine 3 hours 6 hours 2 hours