Solution for QID #46196: Sweet Bread Bakery Limited (SBBL) is a large manufacturing p | StudyHelpMe

Sweet Bread Bakery Limited (SBBL) is a large manufacturing plant with three divisions namely A, B and C and a shared service center (SSC) in Luzira.Division A is in charge of procuring materials, Division B for baking confectionaries and Division C for selling and distribution of finished products. All divisions are treated as investment centres and headed by managers. Divisional performance is measured on a monthly basis and with effect from November, 2018senior management decided to start charging SSC costs to A, B and C in the ratio of 1:1:2 respectively. SBBL has been measuring divisional managers' performance using return on investment (ROI) based on controllable profits only, which senior management has resolved to change with immediate effect. SBBL's target ROI of 20% per month will remain unchanged.Divisions A, B and C maintained their monthly ROIs at 22%, 23% and 21.5% respectively for the last quarter and the managers have been enjoying healthy bonuses. All divisionalmanagers are unhappy with the changes in performance measurement and have suggested that senior management adopts 'residual income' (RI) which may balance the interests of all parties. They propose a monthly RI target of Shs 12 million. SBBL's cost of capital is 10%. Due to the comingfestive season, the divisions have prepared their budgeted operating statement for the month of December 2018 as shown below: Division A has been buying finished wheat flour (W) and sellingit to division B. However, management is evaluating the proposal by Division A's managerofacquiring machinery that can process and package wheat flour for sale to Division B and also to external customers. The cost of machinery is estimated at Shs 160 million with a useful life of five years after which it could be sold for Shs 10 million. SBBL depreciates all its assets on a straight-line basis over the life of the asset. The machinery is expected to increase efficiency of Division Aresulting into a 20% increase in monthly contribution. Proposed dealings of Division A with Division B and external customers after acquiring new machinery: Division A plans to sell packed wheat flour to division B at an agreed transfer price that will benefit SBBL as a whole. The machine has a production capacity of 22,000 cartons per month. Division B has ordered 12,000 cartons of wheat flour for the month of December 2018 while external customers are expected to order for 10,000 cartons.A carton of wheat flour contains 12 packets of 2 kg each.The market price of a carton is Shs 50,000 and Division A will transfer wheat flour to division B at marginal cost plus 25% markup.The production cost per kg of wheat flour is budgeted at Shs 1,600 75% of which is variable. Division B and Division C always have damages and customers return what is commonly known as stalebread (SB) which is highly demanded by livestockfarmers. Division A has contracts with farmers to supply SB at Shs 1,500 per kg and incurs an additional Shs 1,090,000 per month in selling and distribution costs. Both divisions B and C agreed to sell SB to division A at Shs 800 per kg andShs 1,000 per kg respectively. An average of 2,800 kg and 3,000kg of SB are collected monthly by Divisions B and C respectively. Required: (a) (i) Evaluate the effect of the proposed changes by senior management on divisional managers' performance for the month of December 2018. (10 marks) (ii) With reasons, advise SBBL's senior management on whether toconsider divisional managers' proposal of adopting RI for the month ofDecember2018 (5 marks) (b) Assess the impact of acquiring new machinery on Division A's ROI for the month of December 2018 and advise management on whether to accept the investment. (8 marks) (c) Evaluate the profitability performance of Division A for the month of December 2018 after acquiring the new machinery. (9 marks) (d) Describe the relevance of transfer pricing to a company like SBBL. (8 marks) (Total 40 marks) Question 2 Kameke Import and Export Logistics (KIEL) is a family-owned business that was established in 1997 dealing in tiles and ceramics imported from Europe and Asia. KIEL's accountant who is also a family memberhas made gradual improvements in bookkeeping which has contributed to business expansion. KIEL imported 25,000 square meters of tiles from Spain inOctober 2018 and paid United States dollars (USD) 95,000. Additional cost information related to the   KIEL plans to import 30,000 square metres of tiles in December 2018 and the USD exchange rate is anticipated to drop by Shs 5. You are a cost accounting consultant and KIEL's accountant has come to you for advice. Required: (a) (i) Using the inspection of accounts method, advise KIEL's accountant on the total cost to be incurred during the month of December 2018. (12 marks) (ii) Determine the expected selling price of a square metre of tiles in December 2018. (2 marks) (b) Describe the procedure taken in estimating cost functions. (6 marks) (Total 20 marks) Question 3 Ssajja Tailoring and Embroidery Services (STES) is a partnership business of two family members.STES deals in making of school uniforms and fancy clothes. The partnersare concerned about the declining financial performance of STES despite the growing demand for its products. STES sought for advice from GM Financial Consultants who recommended the adoption of a standard costing system and analysis of variances on a monthly basis. The consultants developed a standard cost card for making a dress as follows: Shs Direct materials (1.5 square metres of cloth each at Shs 9,000) 13,500 Direct wages (1.5 hours each at Shs 2,000) 3,000 Variable overheads (1.5 hours at Shs 3,000 per hour) 4,500 Fixed overheads (1.5 hours at Shs 4,000 per hour) 6,000 Standard cost 27,000 Standard selling price 35,000 Budgeted output for the month of October 2018 was 1,200 dresses but actual results were as follows: Units Quantity Shs '000' Production Dresses 900 28,800 Materials used Square metres 1,125 10,687.5 Labour paid Hours 1,275 3,825 Variable overheads 4,500 Fixed overheads 6,150 STES operated for 1,200 hours during the month and had no inventory balances. Required: (a) Using standard absorption costing, prepare statement that reconciles STES' budgeted profit with actual profit for the month of October 2018. (14 marks) (b) Explain the rationale for adopting a standard costing system by STES. (6 marks) Question 4 Nile Engineering Company (NEC) located in Jinja has contracts for rehabilitating tarmac roads, Grade I and Grade II murram roads within Jinja district at the following price quotations. Type of road Price per km (Shs) Tarmac 11,155,000 Grade I murram 22,160,000 Grade II murram 17,115,000 The following resources are required for completing 1km of each road type. Grade I Grade II Tarmac murram murram Materials (tons) 5 15 10 Variable overheads (Shs '000') 1,500 1,500 3,000 Labour (hours) 200 50 50 The average cost of materials per ton is Shs 1,320,000 and the wage rate per hour is Shs 15,000. NEC has 5,000 labour hours and Shs 22,500,000 to cater for variable overhead costs in each quarter.The material suppliers can deliver 1,600 tons every quarter. NEC's annual fixed costs are Shs 51,275,000. Required: (a) Using the simplex method: (i) identifythe type of road that NEC should drop in order to maximise contribution. (12 marks) (ii) determine NEC's maximum quarterly profit (2 marks) (b) Discuss the reasons why organizations apply linear programming indecision making. (6 marks)   Question 5 LiquidsPlus Limited (LPL) located in Mendesub-county, Wakiso district, deals in  production and distribution of Judo (J), Booster (B) and Hammer (H), energy  drinks. The production of these three products is done using the same machines,  labour and share a centralised store. LPL has been using traditional absorption costing system in charging overheads  to cost units. In the recent Board meeting, the newly appointed finance director  highlighted the need for adoption of activity-based costing (ABC) system. He  said that this costing technique will reduce on the contemporary challenges  associated with the traditional absorption costing system currently being used by  the company.LPL has been absorbing fixed overheads to products using machine  hours. He further provided the following budget for the third quarter of the year 2018. Details Products J B H Raw materials (concentrate) per carton (kg) 3.6 8.7 6.3 Direct labour hours per carton 0.96 1.2 1.08 Machine hours per carton 12 16.8 14.4 Production (cartons) 6,000 9,000 12,000 Selling price per carton (Shs) 38,400 60,000 48,000 Number of material movements 750 1,315 2,000 Sales order frequency 78 116 156 Machine maintenance hours 24 9 12 Number of administrative staff 9 6 15 Budgeted net profit (Shs) (9,355,818) 45,476,782 43,462,036 The company has an underground well where water for diluting the concentrates  is extracted and processed before being used in production. The production of B and H requires more part-time workers than the production  of J. The part-time workers are involved in packing the products.The products  are packed in cartons of 24 bottles each and stacked in batches of 48 cartons. All  products are packed in 400 ml bottles. The following cost estimates were made for the third quarter: 1. Variable costs Shs Concentrate cost per kg 4,500 Direct labour cost per hour 6,000 Other direct materials per carton 5,325   2. Fixed costs Shs '000' Quality inspection 15,075 Material handling 10,569 Selling and distribution costs 63,175 Machine maintenance 12,600 Administration costs 56,250 Required: (a) Assess the impact of ABC system on the product profitability for the third quarter of the year 2018. (16 marks) (b) Justify why ABC system is most preferred to traditional absorption costing.