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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
November 2013 Examination
Examination Date :
Examination Time:
7th December 2013
9.30 a:m. – 12.30 p:m.
Number of Pages
:
Number of Questions:
04
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)
Vmart is a retailer that sells readymade garments in Western Province. The firm lease space for stores
in upscale shopping centers and organizational structure consists of regions, districts, and stores. Each
store, district, and region has been established as a profit center. At all levels, the company uses a
responsibility accounting system focusing on information and knowledge rather than blame and
control. Each year, managers, in consultation with their supervisors, establish financial and nonfinancial goals, and these goals are integrated into the budget. Actual performance is measured each
month.
The North Central Region consists of Anurdapura and Polonnaruwa district. Anuradapura district
inludes three stores namely Mehin, Dambul and Anura. The performance of Anuuradapura District
has not been up to expectations in the past. For the month of July 2013, the district manager has set
performance goals with the managers of Mehin and Dambul stores, who will receive bonuses if
certain performance measures are expected. The manager in Anura decided not to participate in the
bonus scheme. Since district manager is unsure what bonus will encourage better performance, the
Mehin manager will receive a bonus based on sales in excess of budgeted sales of Rs.1,140,000/-,
while manager at Dambul will receive a bonus based on net income in excess of budgeted net
income. The company’s net income goal for each store is 12% of sales. The budgeted sales revenue
for the Dambul store is Rs.1,060,000/-. Other pertinent data for July 2013 are as follows:
• Anuradapura district sales revenue was Rs 3,000,000, and its cost of goods sold amounted
Rs.1,267,500/-.
• Anuradapura district spent Rs.150,000/- on advertising.
• General and administrative expenses for Anuradapura district amounted to Rs.360,000/-.
• At the Mehin store, sales were 40% of the district sales, while sales at Dambul store were 35%
of the district sales. The cost of goods sold in both stores was 42% of sales.
• Sales commissions were 6% of sales for all stores, district, and regions.
• Variable administrative expenses were 2.5% of sales for all stores, district and regions.
• Maintenance cost includes janitorial and repair services, and is a direct cost for each store. The
store manager has completed control over this outlay. The maintenance costs were incurred as
follows: Mehin Rs.15,000/-, Dambul Rs.1,200/- and Anura Rs.9,000/-.
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Integrative Management Accounting (IMA / ML 1 - 301) – November 2013 Examination
1
•
•
•
•
•
Advertising cost is considered a direct cost for each store and is completely under the control of
the store manager. The Mehin store spent ⅔ of the district’s total outlay for advertising, which
was 10 times the amount spent in Dambul on advertising.
Anuradhapura district rental expense amounted to Rs.300,000/-.
The rental expenses at the Mehin store were 40% of the district’s total, while the Dambul store
incurred 30% of the district total.
District expenses were allocated to the stores based on sales
North Central Region general and administrative expenses of Rs.330,000/- were allocated to
Anuradhapura district. The expenses were, in turn, allocated equally to the three stores of the
district.
You are required to:
(a)
List out controllable and uncontrollable expenses for the stores.
(08 Marks)
(b)
Explain briefly the concept of responsibility accounting.
(04 Marks)
(c)
Differentiate profit centers from investment centers.
(04 Marks)
(d)
Prepare the July 2013 Segmented income statement for the Anuradhapura district and for the
Mehin and Dambul stores.
(12 Marks)
(e)
Compute the Anura store’s net income for July 2013.
(f)
Discuss the impact of the responsibility accounting system and bonus structure on the
managers’ behavior and the effect of their behavior on the financial results for the Mehin and
Bambul stores.
(08 Marks)
(Total 40 Marks)
End of Part I
(04 Marks)
PART II
Answer any three (3) questions
Question No. 02 (20 Marks)
For many years, Lehigh Plc has used a straightforward cost-plus pricing system, marking its goods up
approximately 25 percent of total cost. The Company has been profitable: however, it has recently lost
considerable business to foreign competitors that have become very aggressive in the marketplace.
These firms appear to be using target costing. An example of Lehigh’s problem is typified by item
DD 77, which has the following unit cost characteristics.
Cost
Direct Material
Direct Labour
Manufacturing Overhead
Selling and Administrative expenses
Rs.
90
225
150
75
The going market price for an identical product of comparable quality is Rs.585/-, which is
significantly below what Lehigh is charging.
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Integrative Management Accounting (IMA / ML 1 - 301) – November 2013 Examination
2
You are required to:
(a)
Contrast cost-plus pricing and target costing, which of the two approaches could be aptly
labeled price –led costing? Why?
(04 Marks)
(b)
What is Lehigh’s current selling price of item DD 77?
(c)
If Lehigh used target costing for item DD 77, by how much must costs change if the company
desires to meet the market price and maintain its current rate of profit on sales?
(05 Marks)
(d)
Would the identification of value-added and non-value added costs assist Lehigh in this
situation? Briefly explain.
(06 Marks)
(Total 20 Marks)
(05 Marks)
Question No. 03 (20 Marks)
Royal City plc manufactures chemicals used in radiological imaging systems. The controller has
established the following activity cost pools and cost drivers.
Activity cost pool
Machine setups
Material handling
Hazardous waste
control
Quality control
Other overhead costs
Total
Budgeted
overhead (Rs.)
1,000,000
300,000
100,000
300,000
800,000
2,500,000
Cost driver
Number of setups
Weight of raw
material
Weight of hazardous
chemicals used
Number of
inspections
Machine hours
Budgeted level
of cost driver
250
75,000 Kg
10,000 Kg
2,000
40,000
Pool rate
Rs.4,000 per setup
Rs.4 per kg
Rs.10 per kg
Rs.150 per inspection
Rs.20 per machine hour
An order for 1,000 boxes of radiological development chemicals has the following production
requirements.
Machine setups
7 setups
Raw material
10,000 kg
Hazardous materials
3,100 kg
Inspections
9 inspections
Machine hours
600 machine hours
You are required to:
(a)
Compute the total overhead that should be assigned to the development-chemical order.
(06 Marks)
(b)
What is the overhead cost per box of chemical?
(c)
Suppose Royal City plc was to use a single predetermined overhead rate based on machine
hours. Compute the rate per hour.
(02 Marks)
(d)
Under the approach in requirement (iii), how much overhead would be assigned to the
development-chemical order?
(02 Marks)
(e)
Explain why these two product-costing systems result in such widely differing costs. Which
system do you recommend? Why?
(08 Marks)
(Total 20 Marks)
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Integrative Management Accounting (IMA / ML 1 - 301) – November 2013 Examination
(02 Marks)
3
Question No. 04 (20 Marks)
Araliya Plc is considering investing in the production of an electronic security device, with an
expected market life of five years.
Proposed electronic security device project (Rs.’000)
Year 0 Year 1 Year 2 Year 3
Investment
4,500
Cumulative investment in working capital
300
400
500
600
Sales
3,500
4,900
5,320
Material
535
750
900
Labour
1,070
1,500
1,800
overhead
50
100
100
Interest
576
576
576
Depreciation
900
900
900
3,131
3,826
4,276
Taxable profit
369
1,074
1,044
Taxation
129
376
365
Profit after tax
240
689
679
Year 4
Year 5
700
5,740
1,050
2,100
100
576
900
4,726
1,014
355
659
700
5,320
900
1,800
100
576
900
4,276
1,044
365
679
Total initial investment is Rs.4,800,000/-.
Average annual after tax profit is Rs.591,000/-.
All the above cash flow and profit estimates have been prepared in nominal value.
(1) Capital allowances are allowable for taxation purposes against profits at 25% per year on a
reducing balance basis.
(2) Taxation on profit and tax on capital gain is at rate of 35%.
(3) The fixed assets have no expected value at the end of five years.
(4) The company’s real after-tax weighted average cost of capital is estimated to be 8% per year,
and nominal after-tax weighted average cost of capital is 15% per year.
You are required to:
(a)
Estimate the net present value of the proposed project. State clearly any assumptions that you
make.
(10 Marks)
(b)
Calculate by how much the discount rate would have to change to result in a net present value
of approximately zero.
(06 Marks)
(c)
Describe how sensitivity analysis might be used to assist in assessing this project. What are the
weaknesses of sensitivity analysis in capital investment appraisal?
(04 Marks)
(Total 20 Marks)
Question No. 05 (20 Marks)
(a)
Why is goal congruence important to an organization’s success?
(b)
“Performance reports based on controllability are impossible. Nobody really controls anything
in an organization”. Explain.
(07 Marks)
(c)
Explain how the concepts of continuous improvement and theory of constraints are related.
(05 Marks)
(d)
State three (3) objectives of a transfer pricing system.
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Integrative Management Accounting (IMA / ML 1 - 301) – November 2013 Examination
(05 Marks)
(03 Marks)
(Total 20 Marks)
End of Part II
End of Question Paper
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