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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
Serial No………………
© Copyright Reserved
Institute of Certified Management Accountants of Sri Lanka
Managerial Level
November 2014 Examination
Examination Date :
Examination Time:
22nd November 2014
9.30 a:m. – 12.30 p:m.
Number of Pages
:
Number of Questions:
06
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)
MEP plc manufactures electric pumps for commercial use. The company produces three models,
designated as regular, advanced, and deluxe. The company uses a job-order cost-accounting system
with manufacturing overhead applied on the basis of direct-labour hours. The predetermined overhead
rate is calculated as budgeted overhead divided by budgeted direct labour hours. The system has been
in place with little change for 25 years. Product costs and annual sales data are as follows:
Annual Sales (units)
Product Costs Per Unit:
Direct Material (Rs.)
Direct Labour (Rs.)
Manufacturing Overhead (Rs.)
Total Product Cost (Per Unit)
REGULAR
20,000
ADVANCED
1,000
DELUXE
10,000
2,000
2,000
(1hr. × Rs.2,000)
17,000
(1hr. × Rs.17,000)
21,000
5,000
4,000
(2hrs. × Rs.2,000)
34,000
(2hrs. × Rs. 17,000)
43,000
8,400
4,000
(2hrs. × Rs.2,000)
34,000
(2hrs. × Rs. 17,000)
46,400
Manufacturing overhead budget:
Depreciation – machinery
Maintenance – machinery
Depreciation and insurance for the factory
Engineering
Purchasing, receiving, and shipping
Inspection, and repair of defects
Material handling
Miscellaneous manufacturing overhead costs
Total
Direct-labour budget:
Regular Model
Advanced model
Deluxe model
Total
Rs.000
296,000
24,000
60,000
70,000
50,000
75,000
80,000
59,000
714,000
20,000 hours
2,000 hours
20,000 hours
42,000 hours
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Integrative Management Accounting (IMA / ML 1 - 301) – November 2014 Examination
1
For the past 10 years the company’s pricing formula has been to set each product’s target price at
percent of its full product cost. Recently, however, the regular model pump has come under increasing
price pressure from offshore competitors. The result was that the price on the regular model has been
lowered to Rs.22,000/-.
The company president recently asked the controller, “Why can’t we compete with the other
companies? They are selling pumps just like our regular model for Rs.21,200/-. That is only two
hundred more than our production cost. Are we really that inefficient? What gives?”
The controller responded by saying, “I think this is due to an outmoded product-costing system. As,
you may remember, I raised a red flag about our system when I came on board last year. But the
decision was to keep our current system in place. In my judgment, our product-costing system is
distorting our product cost. Let me run a few numbers to demonstrate what I mean.”
Getting the president’s go-ahead, the controller compiled the basic data needed to implement an
activity-based costing system. These data are displayed in the following table. The percentages are the
proportion of each cost driver consumed by each product line.
Activity cost pool
Depreciation, machinery
Maintenance, machinery
Engineering
Inspection and repair of defects
Purchasing, receiving, and shipping
Material handling
Depreciation, and insurance for the factory
Miscellaneous manufacturing overhead costs
Cost driver
Regular
39%
Product lines
Advanced
13%
Deluxe
48%
Engineering hours
47%
6%
47%
Number of material
orders
Factory space usage
47%
8%
45%
42%
15%
43%
Machine time
You are required to:
(a)
Compute the target prices for the three models of pumps, based on the traditional, volume-based
product costing-system.
(06 Marks)
(b)
Compute the new product costs for the three products, based on the new data collected by the
controller.
(08 Marks)
(c)
Calculate a new target price for the three products, based on the activity-based costing system,
and compare the new target price with the current actual selling price for the regular model.
(06 Marks)
(d)
Write a memo to the company president explaining what has been happening as a result of the
firm’s traditional volume-based product-costing system.
(12 Marks)
(e)
What strategic options does management have? What do you recommend, and why?
(08 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) – November 2014 Examination
2
PART II
Answer any three (3) questions
Question No. 02 (20 Marks)
Development PLC is a large business organized on divisional lines. Two typical divisions are
Division Y and Division X. They are engaged in broadly similar activities and, therefore, central
management compares their results in order to make judgments on managerial performance. Both
divisions are regarded as investment centers. A summary of last year’s financial results of the two
divisions is as follows:
Capital Employed
Sales
Manufacturing cost:
Direct
Indirect
Selling and Distribution
Divisional profit
Apportionment of uncontrollable central overhead cost
Net profit
Division Y
(Rs. Million)
2,500
1,000
Division X
(Rs. Million)
500
400
(300)
(220)
(180)
300
(50)
250
(212)
(48)
(40)
100
(20)
80
At the beginning of last year, Division Y incurred substantial expenditure on automated production
lines and new equipment. Division X has a quite old plant. Approximately 50% of the sales of the
Division X are internal transfers to other divisions within the business. These transfers are based on
unadjusted prevailing market price. The inter-divisional transfers of division Y are minimal.
Management of the business focuses on return on investment as a major performance indicator. The
required minimum Rate of Return is the business’ Cost of Capital of 10%.
You are required to:
(a)
Differentiate between managerial performance and divisional performance.
(06 Marks)
(b)
List characteristics of an investment center.
(03 Marks)
(c)
Compute Residual Income, and Return on Investment for Managerial Performance by stating
any assumptions that you made.
(07 Marks)
(d)
Comment on the managerial performance of the two divisions.
(04 Marks)
(Total 20 Marks)
Question No. 03 (20 Marks)
Visit Company operates a visitor center in a major tourist area. The normal price is Rs.2,000/- per
person, but a reduced rate of Rs.1,200/- applies to senior citizens (who make up 25% of the center’s
visitors). The total number of visitors per month is 24,000. The fixed cost of operating the center is
Rs. 36 million per month. This does not include the fixed costs of the center’s shop and cafe, which
are Rs. 5 million and 7 million, respectively. The average spending per visitor in the shop and cafe
are as follows:
Normal price visitor
Senior citizen
Shop (Rs.)
1,000
800
Cafe (Rs.)
1,000
300
Contribution margins in the shop and cafe are 25% and 30% respectively.
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Integrative Management Accounting (IMA / ML 1 - 301) – November 2014 Examination
3
You are required to:
(a)
Calculate the monthly break-even point (in terms of number of visitors to the center) for each of
the following:
(i) The shop
(ii) The Cafe
(iii) The visitor center as a whole
(06 Marks)
(b)
A nationwide catering chain has offered to take over the running of the cafe. The chain pays all
fixed, variable costs of the cafe and would also pay the center a monthly fee of Rs.500,000/- for
use of the cafe space in the visit center.
Identify and present the financial analysis, which the visitor center should carry out in relation
to this offer.
(04 Marks)
(c)
The Marketing Manager of the center has suggested that the admission price of senior citizens
should be increased by Rs.500/-. The price increase would be accompanied by an advertising
campaign (in some selected magazines read by senior citizens) costing Rs.350,000/- but would
nevertheless result in a 25% reduction in the number of senior citizens visiting the center.
Calculate the effect on monthly profit of implementing this proposal. (In answering this part,
assume that the proposal in part (b) above is also under consideration).
(06 Marks)
(d)
Identify two factors (other than the results of the financial analysis, which you have conducted)
that should be considered by the visitor center in making decisions about the proposals in parts
(b) and (c) above.
(04 Marks)
(Total 20 Marks)
Question No. 04 (20 Marks)
Captain Press Company (CPC) is analyzing the potential profitability of three mutually exclusive
printing jobs put up for bid by the State Department of Revenue.
Project winning bid per unit (Rs.)
Direct cost per unit (Rs.)
Annual sales volume (units)
Annual distribution costs (Rs.)
Investment required to produce annual volume (Rs.)
Job A
500
Job B
800
Job C
750
200
430
300
800,000
9 million
650,000
7.5 million
450,000
5.5 million
500 million
520 million
400 million
Additional information:
1.
2.
3.
4.
5.
6.
The company’s income tax rate is 50%.
Each job is expected to have a six-year life span.
The company uses straight-line depreciation method.
The average Cost of Capital is 14%.
The jobs have the same risk as the firm’s other business.
The company has already spent Rs. 6 million on developing the preceding data. This
amount has been capitalized and will be amortized over the life of the project.
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Integrative Management Accounting (IMA / ML 1 - 301) – November 2014 Examination
4
You are required to:
(a)
Differentiate between mutually exclusive projects and independent projects.
(04 Marks)
(b)
The expected net cash flow for each year.
(08 Marks)
(c)
Net Present Value of each project, on which project, if any, should the company bid?
(04 Marks)
(d)
Suppose that CPC’s primary business is quite cyclical, improving and declining depending on
the overall performance of the economy, but that job A is expected to be counter-cyclical.
Might this have any bearing on your decision?
(04 Marks)
(Total 20 Marks)
Question No. 05 (20 Marks)
Industrial Technologies Company (ITC) produces two compression machines that are popular with
manufacturers of plastics; No.165 and No.172. Machine no.165 has an average selling price of
Rs.3,000,000/-, whereas no.172 typically sells for approximately Rs.2,750,000/-. The company is very
concerned about quality and has provided the following information:
No. 165
Number of machines produced and sold
Warranty cost:
Average repair cost per unit (Rs.)
Percentage of units needing repair
Reliability engineering at Rs.15,000 per hour
Rework at ITC; manufacturing plant:
Average rework cost per unit (Rs.)
Percentage of units needing rework
Manufacturing inspection at Rs.5,000 per hour
Transportation costs to customer sites and to fix machines (Rs.)
Quality training for employees (Rs.)
No. 172
160
200
90,000
70%
1,600 hours
35,000
10%
2,000 hours
190,000
35%
300 hours
2,950,000
3,500,000
160,000
25%
500 hours
1,500,000
5,000,000
You are required to:
(a)
Classify the preceding costs as prevention, appraisal, internal failure, or external failure.
(04 Marks)
(b)
Using the classifications in (a) above, compute ITC’s quality cost for machine no.165 in Rupees
and as a percentage of sales revenues. Further, calculate prevention, appraisal, internal failure,
and external failure cost as a percentage of total quality costs.
(06 Marks)
(c)
Repeat the steps in part (b) for machine no. 172.
(d)
Quality costs can be classified as observable or hidden. What are hidden quality costs, and how
do these costs differ from observable costs?
(04 Marks)
(Total 20 Marks)
End of Part II
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Integrative Management Accounting (IMA / ML 1 - 301) – November 2014 Examination
(06 Marks)
5
Present value table
-n
Present value of 1.00 unit of currency, that is (1 + r) where r = interest rate; n = number of periods until payment
or receipt.
Periods (n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Interest rates (r)
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554
0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.534
0.513
0.494
0.475
0.456
0.952
0.907
0.864
0.823
0.784
0.746
0.711
0.677
0.645
0.614
0.585
0.557
0.530
0.505
0.481
0.458
0.436
0.416
0.396
0.377
0.943
0.890
0.840
0.792
0.747
0705
0.665
0.627
0.592
0.558
0.527
0.497
0.469
0.442
0.417
0.394
0.371
0.350
0.331
0.312
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149
17%
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043
18%
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037
19%
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.079
0.062
0.052
0.044
0.037
0.031
20%
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026
Periods (n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Interest rates (r)
11%
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124
12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104
13%
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087
14%
0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140
0.123
0.108
0.095
0.083
0.073
15%
0.870
0.756
0.658
0.572
0.497
0.432
0.376
0.327
0.284
0.247
0.215
0.187
0.163
0.141
0.123
0.107
0.093
0.081
0.070
0.061
16%
0.862
0.743
0.641
0.552
0.476
0.410
0.354
0.305
0.263
0.227
0.195
0.168
0.145
0.125
0.108
0.093
0.080
0.069
0.060
0.051
End of Question Paper
Institute of Certified Management Accountants of Sri Lanka
Managerial Level – Integrative Management Accounting (IMA / ML 1 - 301) – November 2014 Examination
6
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