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Institute of Certified Management Accountants of Sri Lanka Managerial Level

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Institute of Certified Management Accountants of Sri Lanka Managerial Level
© Copyright Reserved
Serial No………………
Institute of Certified Management Accountants of Sri Lanka
Managerial Level
May 2013 Examination
Examination Date :
Examination Time:
5th May 2013
9.30 a:m. – 12.30 p:m.
Number of Pages
:
Number of Questions:
05
05
Instructions to candidates:
1.
2.
3.
4.
Time allowed is three (3) hours.
Total: 100 Marks.
Answer all questions in Part I and any three (3) questions from Part II.
The answers should be in English Language.
Subject
Subject Code
Integrative Management Accounting
(IMA / ML 1 - 301)
PART I
Question No. 01 (40 Marks)
Chinthana Air Industries (CAI) manufactures aircraft parts for small aircrafts. Over the past decade, CAI’s
management has met its goal of reducing its reliance on government contract work to 50% of total sales.
Thus, CAI’s sales are now roughly evenly split between government and commercial sales. Traditionally,
the costs of the Material-Handling Department have been allocated to direct material as a percentage of
direct material rupee value. This was adequate when the majority of the manufacturing was homogeneous
and related to government contracts. Recently, however, government auditors have rejected some
proposals, stating that “the amount of Material Handling Department costs allocated to these proposals is
disproportionate to the total effort involved”. Saman Darshana, the newly hired cost-accounting manager,
was asked by the manager of the Government Contract Unit, Shan Ganegoda, to find a more equitable
method of allocating Material-Handling Department costs to the user departments. His review has revealed
the following information.
• The majority of the direct-material purchase for government contacts are high-rupee, low volume
purchase, while commercial materials represent low-rupee high volume purchases.
• Administrative departments such as marketing, finance and administration, human resources, and
maintenance also use the services of the material-handling department on a limited basis but have
never been charged in the past for material –handling costs.
• One purchasing manager with a direct phone line is assigned exclusively to purchasing high rupee,
low-volume material for government contracts at an annual salary Rs.1,890,000/-. Employee
benefits are estimated to be 20% of the annual salary. The annual dedicated phone line costs are
Rs.147,000/-.
The components of the Material-Handling Department’s budget for 2013, as proposed by Saman
Darshana’s predecessor, are as follows.
Payroll
Employee benefits
Telephone
Other utilities
Material and supplies
Depreciation
Direct –Material budget
Government contracts
Commercial products
Rs.000’
9,450
1,890
1,995
1,155
315
315
105,315
45,885
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Integrative Management Accounting (IMA / ML 1 - 301) – May 2013 Examination
1
Saman Darshana has estimated the number of purchase orders to be
follows.
Government contracts (Exclusive of high rupee, low
–volume materials
Commercial products
Marketing
Finance and administration
Human resources
Maintenance
Total
processed in 2013 to be as
120,000
234,000
2,700
4,050
750
1,500
363,000
Saman Darshana recommended to Shan Ganegoda that material-handling costs be allocated on a per
purchase order basis. Shan Ganegoda realized that the company has been allocating to government
contracts more material-handling costs that can be justified. However, the implication of Saman
darshan’s analysis could be a decrease in his unit’s earnings and consequently, a cut in his annual
bonus. Shan Ganegooda told Saman Darshana to “adjust” his numbers and modify her
recommendation so that the results will be more favorable to the Government Contracts Unit.
Being new in his position, Saman Darshana is not sure how to proceed. He feels ambivalent about
Shan Ganegoda’s instructions and suspects his motivation. To complicate matters for Saman
Darshana, the company’s new president has asked him to prepare a three-year forecast of the
Government Contracts Unit’s results, and the cost accounting manager believes that the newly
recommended allocation method would provide the most accurate data. However, this would put him
in direct opposition to Shan Ganegoda’s directives.
Saman Darshana has assembled the following data to estimate the material-handling costs.
1.
2.
3.
4.
5.
6.
The number of purchase orders increased by 5% per year.
The ratio of government purchase orders to total purchase orders remains at 33%.
Total direct-material costs increase 2.5% per year.
Material-handling costs remain the same percentage of direct material costs.
Direct government cost (payroll, employee benefits, and direct phone line) remain constant.
In addition, he has assumed that government material in the future will be 70% of total
material.
You are required to:
(a)
Calculate the material-handling rate that would have been used by Saman Darshana’s
predecessor at CAI.
(08 Marks)
(b)
Calculate the revised material-handling costs to be allocated on a per purchase order basis.
(10 Marks)
(c)
Discuss why purchase orders might be a more reliable cost driver than the rupee amount of
direct material.
(05 Marks)
(d)
Calculate the difference due to the change to the new method of allocating material-handling
(05 Marks)
costs to government contracts.
(e)
Prepare a forecast of the cumulative rupee impact over a three-year period from 2014 through
2016 of Saman Darshana’s recommended change for allocating Material-Handling Department
costs to the Government Contract Unit.
(08 Marks)
(f)
Does Saman Darshana have an ethical conflict and discuss the reason for your answer.
(04 Marks)
(Total 40 Marks)
End of Part I
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Integrative Management Accounting (IMA / ML 1 - 301) – May 2013 Examination
2
PART II
Answer any three (3) questions
Question No. 02 (20 Marks)
The summarized profit and loss statement for LBW plc for the last year is as follows:
Rs. Million
1,000
(350)
(200)
(200)
(50)
(180)
(120)
(100)
Sale (50,000,000 units)
Direct material
Direct wages
Fixed production overhead
Variable overhead
Administration overhead
Selling and distribution overhead
Profit
You are required, as management accountant, to evaluate the following alternative proposals and to
comment briefly on each:
(a)
Pay salesman a commission of 10% of sales and thus increase sales to achieve break-even point.
(06 Marks)
(b)
Reduction of the selling price by 10%, which would result in increase in sales by 30%.
(04 Marks)
(c)
Increase direct wage rates from Rs.4/- to 5/- per hour, as part of a productivity/pay deal. It is
hoped that this would increase production and sales by 20%, but advertising costs would
increase by Rs.50 million.
(06 Marks)
(d)
Increases sales by additional advertising of Rs.300 million with an increased selling price of
20%, setting a profit margin of 10%.
(04 Marks)
(Total 20 Marks)
Question No. 03 (20 Marks)
Anoma Plc, a manufacturer of building products, mainly supplies the wholesale. It has recently suffered
falling demand due to economic recession, and thus has spare capacity. It now perceives an opportunity to
produce designer ceramic tiles for the home improvement market. It has already paid Rs.50 million for
development expenditure, market research and a feasibility study. The initial analysis reveals scope for
selling 150,000 boxes per annum over a five-year period at a price of Rs.2,000 per box. Estimated
operating costs are as follows.
Cost per box of tiles at today’s prices.
Material cost
Direct labour
Variable overhead
Fixed overhead ( allocated)
Distribution
Rs.
800
200
150
150
200
Production can take place in existing facilities although initial re-design and set-up costs would be Rs.200
million after following for all relevant tax reliefs. This cost will be capitalized and depreciated over next
five years equally. In estimating fixed overheads, the annual depreciation has already been considered.
Return from the project would be taxed at 33%. Nominal required rate of return for the company is 14%
p.a. (after tax), which includes allowances for generally-expected inflation of 5.5% p.a.
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Integrative Management Accounting (IMA / ML 1 - 301) – May 2013 Examination
3
You are required to:
(a)
Assess the financial desirability of this venture in real terms, finding the Net present Value
(NPV).
(06 Marks)
(b)
Briefly explain the purpose of sensitivity analysis in relation to project appraisal, indicating the
drawbacks with this procedure.
(07 Marks)
(c)
Determine the values of:
(i)
Price.
(ii) Volume, at which the project’s NPV, becomes zero. Discuss your results, suggesting
appropriate management action.
(07 Marks)
(Total 20 Marks)
Question No. 04 (20 Marks)
A company has two divisions. South division manufactures an intermediate product for which there is
no immediate external market. North division incorporates this intermediate product into a final
product, which it sells. One unit of the intermediate product is used in the production of the final
product. The expected units of the final product which North division estimates that the division can
sell at various selling prices are as follows:
Net selling price per unit
(Rs.)
100
90
80
70
60
50
Quantity sold
(units)
1,000
2,000
3,000
4,000
5,000
6,000
The costs, the investment, and Weighted Average Cost of Capital of each division are as follows:
Variable cost per unit
Fixed costs per annum
Total investment
Weighted Average Cost of Capital (WACC)
South
(Rs.)
11
60,000
600,000
15%
North
(Rs.)
7
90,000
700,000
18%
The transfer price is Rs.35 for the intermediate product, and is determined on a full cost-plus basis.
You are required to:
(i)
Prepare profit statements for each division and the company as a whole for the various selling
prices.
(06 Marks)
(ii)
Calculate the Return on Investment (ROI) and Residual Income (RI).
(04 Marks)
(iii) State which selling price maximizes the profit of the North division and the company as whole.
(05 Marks)
(iv)
State what kind of transfer pricing policy would maximize the company’s profit in a divisional
organization.
(05 Marks)
(Total 20 Marks)
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Integrative Management Accounting (IMA / ML 1 - 301) – May 2013 Examination
4
Question No. 05 (20 Marks)
(a)
Briefly explain the concepts of customer profitability analysis, target costing, continuous
improvement, benchmarking, reengineering, and the theory of constraints.
(12 Marks)
(b)
Vegas Company makes three product lines and has two customer types. The table below gives
sales, product cost, and cost-to-serve data for Vegas.
Sales (Rs.)
Product X
2,000,000
Product Y
6,000,000
Product Z
20,000,000
Cost of goods sold (Rs.)
1,000,000
2,000,000
14,000,000
Product X sales (Rs.)
Customer type 1
1,000,000
Customer type 2
1,000,000
Total
2,000,000
Product X sales (Rs.)
5,000,000
1,000,000
6,000,000
0
20,000,000
20,000,000
2,000,000
13,000,000
15,000,000
Product X sales (Rs.)
Cost to serve (Rs.)
You are required to:
(i)
Determine the gross profit margin percentage of sales for each product. Which product is
the most profitable?
(04 Marks)
(ii)
Determine the gross profit margin percentage of sales for each customer type. What
customer is the most profitable?
(04 Marks)
(Total 20 Marks)
End of Part II
End of Question Paper
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Integrative Management Accounting (IMA / ML 1 - 301) – May 2013 Examination
5
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