SUGGESTED SOLUTIONS/ ANSWERS – SUMMER 2019 EXAMINATIONS 1 of 6

MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2

Marks
Question No. 2
Crescent Company
Flexible Budget
for the year 2019
Per Direct
Level of Activity
Labour Hour
Direct labour hours 12,000 14,000 16,000
Variable Costs: Rupees
Maintenance 20.00 240,000 280,000 320,000 1.50
Supervisor salaries 30.00 360,000 420,000 480,000 1.50
Utilities 4.50 54,000 63,000 72,000 1.50
Supplies 2.50 30,000 35,000 40,000 1.50
Indirect Material 5.00 60,000 70,000 80,000 1.50
Total variable costs 744,000 868,000 992,000 1.50
Fixed Costs:
Maintenance 400,000 400,000 400,000 0.75
Supervisor salaries 750,000 750,000 750,000 0.75
Depreciation 520,000 520,000 520,000 0.75
Indirect Material 120,000 120,000 120,000 0.75
Total Fixed costs 1,790,000 1,790,000 1,790,000 01
Total manufacturing overhead 2,534,000 2,658,000 2,782,000 01

Question No. 3
(a) Actual Sales Units:
Units
Print copy [(Rs.260,000 ÷ Rs.200) + 5,500] 6,800 0.75
Soft copy [4,500 – (Rs.750,000 ÷ Rs.250)] 1,500 0.75
Online copy [(Rs.132,000 ÷ Rs.220) + 2,500] 3,100 0.75
Total units 11,400 0.75

(b) Variance Analysis:

(i) Sales Mix Variance:
Actual
Actual Quantity Standard Contribution Variance
Quantity
Mix [Rs. per copy] [Rupees]
Actual Mix
Print copy 6,800 5,016 [11,400 x 0.44 (W-1)] 200 356,800 F 01
Soft copy 1,500 4,104 [11,400 x 0.36 (W-1)] 250 (651,000) UF 01
Online copy 3,100 2,280 [11,400 x 0.20 (W-1)] 220 180,400 F 01
11,400 11,400
Total sales mix variance (113,800) UF 01

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – SUMMER 2019 EXAMINATIONS 2 of 6
MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2
Marks
(ii) Sales Quantity Variance:
Actual Quantity Sales Quantity Standard Contribution Variance
Standard Mix Mix [Rs. per copy] [Rupees]
Print copy 5,016 5,500 200 (96,800) UF 01
Soft copy 4,104 4,500 250 (99,000) UF 01
Online copy 2,280 2,500 220 (48,400) UF 01
11,400 12,500
Total sales quantity variance (244,200) UF 01

(iii) Fixed Overhead Spending Variance (Product Development):

Budget Actual Variance
150,000 90,000 60,000 F 01

W-1: Allocated Percentage of Budgeted Units::

Budgeted Units Sold Percentage
Print copy 5,500 0.44
Soft copy 4,500 0.36
Online copy 2,500 0.20
12,500 1.00

(c) Underlying Reasons of Unlikely Results of Total Sales Mix and Quantity Variance: 02
The unfavourable sales mix variance represents a loss of profits due to a customer shift away from
the form of the product with the highest per-unit contribution (soft copy) and towards the less
lucrative forms. This may be due to essentially uncontrollable factors, e.g., greater Broadband
coverage which makes it easy for computer users to access the Internet version of the product and
there is less reason for them to buy the Soft Copy (USB or hard disk) version. The other reason is
that people is more likely to buy original books instead of soft versions.
The unfavourable sales quantity variance represents a loss of profits due to decrease in total
demand for the product in all its forms (budget 12,500 units versus actual 11,400 units). The
reason of this decrees possibly that the company’s sales force underperformed during March
2019, a more obvious culprit may be the product development manager’s underspending.

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – SUMMER 2019 EXAMINATIONS 3 of 6
MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2
Marks
Question No. 4
(a) Financial Evaluation of weather to Replace Machine-R:
Rupees
Incremental Cash Outflows:
Cost of Machine-S 2,500,000 0.25
Less: Sale proceeds of Machine-R (Rs.1,000,000 –
Rs.300,000 dismantling and removal costs) 700,000 0.50
1,800,000 0.75
Incremental Cash Inflows and Net Present Value (NPV) (Year t = 1 to 5):
Savings in Annual Operating Costs:
Annual cash operating costs (R) 2,100,000 0.50
Annual cash operating costs (S) 1,900,000 200,000 0.50
Present value (PV) factor of annuity (for 5 years at 14%) 3.433
Total PV 686,600 0.50
Less: Incremental cash out flows 1,800,000 0.50
NPV (1,113,400) 0.50
Since, NPV is negative; the company should not replace the Machine-R. 01

(b) Financial Evaluation of Machine-R and Machine-S:

Rupees
Machine-R Machine-S
Sales revenue (160,000 x Rs.60) 9,600,000 9,600,000 01
Less: Operating costs 2,100,000 1,900,000 0.50
Less: Fixed costs 4,800,000 4,800,000 0.50
Annual cash inflows 2,700,000 2,900,000 01
Present value (PV) factor of annuity (for 5 years at 14%) 3.433 3.433 0.50
Total PV 9,269,100 9,955,700 01
Less: cash out flows 2,000,000 2,500,000 0.50
Net present value (NPV) 7,269,100 7,455,700 01
As, NPV of Machine-S is higher, the company should opt for Machine-S. 01

(c) Explanation of Net Present Value (NPV): 05

Net present value is the difference between the present value of cash inflows and the present
value of cash outflows that occur as a result of undertaking an investment project. It may be
positive, zero or negative.
Positive NPV:
If present value of cash inflows is greater than the present value of the cash outflows, the net
present value is said to be positive and the investment proposal is considered to be acceptable.
Zero NPV:
If present value of cash inflows is equal to present value of cash outflows, the net present value is
said to be zero and the investment proposal is considered to be acceptable.
Negative NPV:
If present value of cash inflows is less than present value of cash outflows, the net present value is
said to be negative and the investment proposal is rejected.
DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – SUMMER 2019 EXAMINATIONS 4 of 6
MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2
Marks
Question No. 5
(a) Decision Analysis with 210,000 Units:
Rupees
Make Costs Buy Costs
Total Per Unit Total Per Unit
Raw materials 31,500,000 150.00 – – 0.50
Direct wages 7,875,000 37.50 – – 1.25
Variable overheads 5,250,000 25.00 – – 1.25
Additional Fixed Costs:
Product testing and inspections 1,500,000 7.14 – – 1.50
Purchase costs – – 47,250,000 225.00 0.50
Total costs 46,125,000 219.64 47,250,000 225.00 01

The differential cost of Rs.1,125,000 and Rs.5 per part favours the decision of making new parts
‘in-house’. 01

(b) Decision Analysis with 105,000 Units:

Rupees
Make Costs Buy Costs
Total Per Unit Total Per Unit
Raw materials 15,750,000 150.00 – – 0.50
Direct wages 3,937,500 37.50 – – 1.25
Variable overheads 2,625,000 25.00 – – 1.25
Fixed costs 1,500,000 14.29 – – 1.5
Purchase costs – – 23,625,000 225.00 0.5
Total costs 23,812,500 226.79 23,625,000 225.00 01

If the requirement of new parts is 105,000 units, then the company should buy it from an outside
supplier. 01

Question No. 6
(a) Contribution per Labour Hour:
Products Hard Disk Processor RAM Total
External sales (Units) 2,000 1,400 1,000 –
Labour hours required per unit (Hours) 2.25 3.0 1.20 –
Hours required to meet maximum demand 4,500 4,200 1,200 9,900 1.5
Selling price (Rupees) 5,000 4,500 3,000 –
Less: Variable cost per unit (Rupees) 3,400 2,300 2,100 –
Contribution per unit (Rupees) [A] 1,600 2,200 900 – 1.5
Labour hours required per unit [B] 2.25 3.0 1.20 –
Contribution per labour hour (Rupees) [A ÷ B] 711 733 750 – 1.5
Ranking 3 2 1 – 1.5
DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – SUMMER 2019 EXAMINATIONS 5 of 6
MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2
Marks
(b) (i) Minimum Price of ‘Processor’, if only 8,200 hours are available:
Products Hard Disk Processor RAM Total
Production (Units) 1,244 1,400 1,000 –
Hours required 2,800 4,200 1,200 8,200 01
Unit Cost:
Rupees
Variable cost of ‘Processor’ 2,300 01
Opportunity cost* (3 x 711) *2,133 01
Per unit cost 4,433 01

(ii) Minimum Price of ‘Processor’, if only 12,000 hours are available:

Hours available 12,000 0.5
Hours required to meet maximum demand 9,900 0.5
Balance hours available 2,100 0.5
‘Processor’ can be produced from available hours (2,100 ÷ 3) (Units) 700 01

Total variable cost (Rs.2,300 x 1,000 units) (Rupees) 2,300,000 01

Opportunity Cost*:
Additional demand (Units) 1,000
‘Processor’ can be produced from available hours (Units) (700)
Balance to be produced (Units) 300 0.5
Opportunity cost per unit of 'Processor' (Rs.*2,133 x 300
units) (Rupees) 639,900 01
Total cost (Rupees) 2,939,900 01
Average minimum price (Rs.2,939,900 ÷ 1,000) (Rs. per unit) 2,939.9 OR 2,940 01
*Contribution relating to ‘Hard Disk’ forgone for producing additional units of ‘Processor’

Question No. 7
(a) Improvement in First Year Profit before Tax attributable to the Just-in-Time (JIT) Agreement:
Rs. ‘000’
Equipment interest cost (Rs.5,000 x 0.13) (650.00) 0.5
Depreciation cost (Rs.5,000 ÷ 5) (1,000.00) 0.5
Main Customer:
Original value of annual sales (Rs.200,000 x 0.2) 40,000.00 0.5
Increased value of annual sales (Rs.40,000 x 1.05) 42,000.00 0.5
Increase in sales (Rs.40,000 – Rs.42,000) 2,000.00 0.5
Original receivables (Rs.40,000 x 90 ÷ 365) 9,863.01
Revised receivables (Rs.42,000 x 60 ÷ 365) 6,904.11
Reduction in receivables 2,958.90 01
Annual interest saving from reduction in receivables
(Rs.2,958.9 x 0.13) 384.66 01
Penalty payment for default (Rs.42,000 x 0.1) 4,200.00
Expected value of penalty (Rs.4,200 x 0.05) (210.00) 01
Net benefit for the Year-1 524.66 0.5
The JIT arrangement appears to be worthwhile in profit terms.
DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – SUMMER 2019 EXAMINATIONS 6 of 6
MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2
Marks
Other Considerations: 02
However, the expected value figure conceals the risk of adverse results if the company fails to
meet delivery guarantees: the 'worst case' scenario in one year is that a penalty of Rs.4,200,000 is
payable (more than 2.1% of turnover). The directors should make sure that the company is insured
against all the normal risks outside its direct control (e.g. fire, theft, and flood) and also invest in a
total quality programme to underpin the JIT arrangement by eliminating any defective output.

(b) Other Benefits from Just-in-Time (JIT) Agreement: 06

 Closer Relationship between Organizations:
The JIT arrangement with its major customer will promote a closer relationship between the
two organizations. This will lower Royal Motors Company Limited’s (RMCL) medium-term
operating risk and enable it to plan its own materials requirements, although in the short-term
the company must be prepared to be very flexible in its delivery procedures. It may also result
in RMCL entering into JIT arrangements with its own suppliers. The strengthened link
between the companies may result in further co-operation in other fields (e.g. design of new
products).
 Just-in-Time (JIT) and Total Quality:
A JIT arrangement with a customer works best when the company uses a ‘total quality’
approach to eliminate defective products from its output. The growing reputation for ‘zero’
defects is an advantage of implementing the system effectively. This growing reputation will
boost RMCL’s sales and enable it to negotiate JIT arrangements with other customers.

THE END

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.