THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Management Accounting Final Examination - Winter 2017

General:

The overall performance in the paper remained quite poor as the candidates could not
respond well to Question 1, 3 and 4. None of the above questions were particularly
difficult and the calculations were not at all complex, such a performance was surprising.
Even the performances in question 5 and 6 were much below expectation as these were
simple and straight forward questions. It seemed as if the majority of the students had
appeared in the paper without proper preparation.

It was noted that most of the students computed figures without clearly depicting as to
what they were doing. In many cases, final figures were stated without showing
calculations. When a student follows this approach he/she either gets full marks if the
figure is correct but gets no mark if it is incorrect as the examiner has no way to ascertain
whether the error was a conceptual one or otherwise.

Question-wise comments

Question 1

This was the worst performed question as only 6% of the candidates secured passing
marks. Part-wise comments are given below:

Question 1(a)

The requirement was to compute the budgeted profit and loss account based on marginal
costing. The most important step in this part was to compute the budgeted sale quantity.
This was to be done in three steps i.e. computation of actual sales based on given data,
computation of sales volume variance and computation of budgeted sale as the difference
between actual sale and the volume variance. Majority of the students did not understand
how the budgeted sale quantity was to be determined and adopted various types of
incorrect methods.

Many students seemed confused as regards marginal costing and presumed that in
marginal costing fixed overheads are totally ignored and computed the budgeted
contribution margin only.

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 Examiners’ Comments on Management Accounting – Final Examination Winter 2017

Question 1(b)

The requirement was to compute all possible variances on the basis of given data. The
major errors were as follows:

 Majority of the students couldn’t compute sales volume variance. Sales volume
variance was based on standard contribution margin and budgeted sales as computed
in part (a). As majority could not understand part (a), they could not compute these
variances either.
 Material usage variance was to be computed on the basis of units put into process as
the material was input at the beginning of the process. In many cases it was computed
on the basis of units produced.
 Majority of students left difference of actual and standard variable costs in closing
inventory.
 Majority of the students did not understand the calculation of actual fixed and
variable overheads. Actual fixed overhead was based on applied fixed overheads and
over applied variance as given. Actual variable overheads were to be computed by
taking the difference between total and fixed overheads.
 Some of the students instead of calculating the variances only stated the formulas
thereof which did not carry any marks.

Question 2

The performance in this question was good and more than 50% of the students secured
passing marks. However, about 15% of the students had no idea about even this question
and scored zero or one mark.

The common errors were as follows:

 Many candidates did not evaluate all the three corner points and concluded only on
the basis of production as per point of intersection.
 Most of the students did not account for the sale of surplus material. The options
where only one of the two products was produced, surplus raw material would have
been available. Since the raw materials had a limited life of one month, these needed
to be sold at market price. This aspect was mostly ignored.
 For determining the contribution margin, actual cost of purchase of raw material A
and B was used instead of the opportunity cost i.e. the price at which these raw
materials could have been sold in the market.
 Labour cost was given in terms of per kg of input. A large number of students
ignored this and arrived at incorrect contribution margin.

Question 3

The requirement in this question was to determine the optimum output and the
corresponding selling price of a product with elastic demand, so as to maximize the
profit. The overall performance in this question was very poor as only 11% of the
candidates secured passing marks. This was quite surprising as similar questions have
been performed well in the past. The common errors were as follows:

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 Examiners’ Comments on Management Accounting – Final Examination Winter 2017

 Majority of the students were unable to determine the correct equations for total
revenue, marginal revenue and marginal cost although these involved basic concepts
and most of the students have studied them in their earlier examinations also.
 Many students made the correct equations except that they ignored commission on
sales while determining the equation for revenue per unit and the total revenue.
 For computing the cost per unit, various fixed and sunk costs were also considered.

Question 4

This question required evaluation of two main options i.e. whether to opt for increase in
production capacity of the chemical plant or to install a refining plant. In the case of
refining option, the candidates were also required to evaluate as to which of the two
products should be refined.

The performance in this question also remained very poor as only 12% candidates
secured passing marks. Majority of the students were unsure as to what approach should
be followed. Some of them calculated the additional contribution margin from additional
capacity but had little idea about calculating additional profit in case of refining option.
Those who adopted the right approach made the following types of errors:

 Fixed costs of the new plant in both cases (additional capacity as well as refining
plant) were ignored though these were incremental costs and were therefore relevant.
 While computing contribution margin from refinery, most of the students included
cost of production at the split off point rather than loss of revenue.
 While determining the additional production from expansion of existing facility, the
fact that the production per hour from new plant would be 6% higher was ignored.
 Many candidates computed the input losses for the additional plant incorrectly. The
correct method was to take the existing material cost per kg of production and
multiply it by 0.9 and divide it by 0.95 to arrive at the material cost per kg of
production for the new plant. This could have accounted for the change in input
losses without calculating the lost quantity. Only few could do it correctly in this
manner. Most candidates were unaware of the above easy method and tried other
lengthy and in many cases incorrect methods. Many candidates multiplied the
existing cost per unit by 1.05 and divided it by 1.1.

Question 5

The overall performance in this question on cash budget was average as 32% of the
candidates were able to secure passing marks. Proceeds from sale were mostly calculated
correctly but various errors were witnessed in the payment side. These are discussed
below:

 According to the question, ratio of raw material, labour and variable overheads in the
cost of manufacturing was given. Many candidates applied this ration on cost of
goods sold. Some students added the finished goods opening stock and deducted
finished goods closing stock for converting cost of goods sold into cost of goods
manufactured whereas they were supposed to deduct the finished goods opening
stock and add the closing stock.

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 Examiners’ Comments on Management Accounting – Final Examination Winter 2017

 Either raw material consumed or raw material purchases were treated as outflows
instead of converting raw material consumed into raw material purchases by
adjusting opening and closing raw material and computing outflows by adjusting
purchases with opening and closing balances of creditors.
 While computing raw material, labour and overheads, the increase in volume of
production, prices, wage rates, etc. were ignored.
 In fixed overheads cost, depreciation was not separated before applying inflation.
 Interest was computed on incorrect amount as current maturity of long-term loan was
ignored.

Question 6

According to the given scenario, a company was faced with liquidity issues and had two
options i.e. to obtain bank overdraft at 13% per annum or introduce policies to reduce
working capital. The overall performance was below average as only 25% of the
candidates secured passing marks. However, the question was quite simple and most of
the students lost marks because of not understanding some of the very basic principles or
because of not reading the question carefully and ignoring some of the given information.
Some such errors are mentioned below:

 Bad debts were computed on total sales rather than credit sales. Many students did
not consider the reduction in sale under the proposed option, for the purpose of
calculating bad debts.
 In determining average inventory under the proposed option, safety stock was
ignored. Many students took EOQ as the average inventory. Many students ignored
the decline in sales under the proposed option, for determining EOQ.
 Reduction in average inventory of finished goods and creditors, due to reduction in
sale was ignored.
 Many students did not state the non-financial factors.

(THE END)

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