SUGGESTED ANSWERS – EXTRA ATTEMPT, MAY 2014 EXAMINATIONS 1 of 6

MANAGEMENT ACCOUNTING – SEMESTER-4

Marks
Q. 2 Cash budget:
Rupees
January February March April May June Total
Cash collections
Current month
sales 360,000 540,000 630,000 945,000 1,102,500 1,653,750 5,231,250
Last month sales 846,000 720,000 1,080,000 1,260,000 1,890,000 2,205,000 8,001,000 1
Second last month
sales 43,200 96,000 144,000 168,000 252,000 703,200 1
Loan 600,000 600,000 ½
Total collection 1,806,000 1,303,200 1,806,000 2,349,000 3,160,500 4,110,750 14,535,450 1
Cash payments
Purchases 1,200,000 720,000 1,080,000 1,260,000 1,890,000 2,205,000 8,355,000 ½
Payroll 54,000 81,000 94,500 141,750 165,375 248,063 784,688 ½
Lease payments 90,000 90,000 90,000 90,000 90,000 90,000 540,000 ½
Advertising 420,000 480,000 540,000 617,143 694,286 793,469 3,544,898 ½
Equipment ½
purchases 48,000 – – – – – 48,000
Loan and interest 696,000 696,000 1
1,812,000 1,371,000 1,804,500 2,108,893 2,839,661 4,032,532 13,968,585 2
Cash surplus /
(deficit) (6,000) (67,800) 1,500 240,107 320,839 78,218 566,865 1
Opening balance 156,000 150,000 82,200 83,700 323,807 644,646 156,000 1
Closing balance 150,000 82,200 83,700 323,807 644,646 722,865 722,865 1
OR 2 2 2 2 2 1 1

Q. 3 Operating statement
For the month ended December 31
(i) Calculation of standard cost and selling prices: Rs./ Unit
Direct material
Alpha (20 Kgs. @ Rs. 5) 100 ½
Beta (10 Kgs. @ Rs. 10) 100 ½
Direct wages (6 Hrs. @ Rs. 50) 300 ½
Fixed production overhead (Rs. 300 x 300%) 900 ½
Standard cost 1,400 ½
Profit [1,400.00 X 30 ÷ (100 - 30)] 600 ½
Budgeted selling price 2,000 ½

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advice. The Institute does not take any responsibility about the accuracy, completeness or currency of the information provided in the suggested answers. Therefore, the
Institute is not liable to attend or receive any comments, observations or critics related to the suggested answers.
 SUGGESTED ANSWERS – EXTRA ATTEMPT, MAY 2014 EXAMINATIONS 2 of 6
MANAGEMENT ACCOUNTING – SEMESTER-4
Marks
Calculation of actual profit for the month: Rs. ‘000’
Sales (Rs. 2,000 x 110% = Rs. 2,200 x 19,000 units) 41,800 ½
Direct material:
Alpha (400,000 Kgs. @ Rs. 6) 2,400 ½
Beta (200,000 Kgs. @ Rs. 11) 2,200 ½
Direct wages (110,000 Hrs. @ Rs. 60) 6,600 ½
Fixed production overhead 15,000
Total 26,200
Actual Profit 15,600 ½
(ii) Variances:
Direct Material Variance:
Price:
Alpha [400,000 Kgs. x (Rs. 5 – Rs. 6) (400) A ½
Beta [200,000 Kgs. X (Rs. 10 – Rs.11) (200) A ½
(600) A
Usage:
Alpha [Rs.5.00 x(19,000 units x 20 Kgs. – 400,000)] (100) A ½
Beta [Rs.10.00 x (19,000 units x 10 Kgs. – 200,000)] (100) A ½
(200) A
There is no change in actual and standard mixing ratio; therefore, no mix variance (800) A ½
Direct wage variance:
Rate [110,000 hrs. x (Rs. 50 – Rs. 60) (1,100) A ½
Efficiency [Rs. 50 x (19,000 units x 6 Hrs. – 110,000)] 200 F ½
(900) A
Fixed overhead variance:
Expenditure (20,000 units x Rs. 900.00 - Rs. 15,000,000) 3,000 F ½
Volume:
Efficiency (19,000 units x 6.00 Hrs. - 110,000) x 150.00) 600 F ½
Capacity (20,000 units x 6.00 Hrs. - 110,000) x 150.00) (1,500) A ½
(900) A
Alternate Fixed Overhead Volume Variance
Actual production at standard rate (19,000 units x Rs. 900) 17,100 ½
Budgeted expenditure (20,000 units x Rs. 900) 18,000 ½
(900) A
2,100 F
Sales margin variance:
Price [19,000 units x (Rs. 2200.00 - Rs. 2,000) 3,800 F ½
Volume (19,000 units - 20,000 units) x Rs. 600 (600) A ½
(iii) Reconciliation: 3,200 F
Total variance 3,600 F ½
Budgeted profit (20,000 units x Rs. 600) 12,000 ½
Actual profit 15,600 F 1

DISCLAIMER: The suggested answers provided on and made available through the Institute’s website may only be referred, relied upon or treated as a guide and substitute for professional
advice. The Institute does not take any responsibility about the accuracy, completeness or currency of the information provided in the suggested answers. Therefore, the
Institute is not liable to attend or receive any comments, observations or critics related to the suggested answers.
 SUGGESTED ANSWERS – EXTRA ATTEMPT, MAY 2014 EXAMINATIONS 3 of 6
MANAGEMENT ACCOUNTING – SEMESTER-4
Marks
Q. 4 (a) Unit cost using activity based costing: Rupees
B1 B3 B5
Paint* 550.00 500.00 450.00 *1
Labour* 64.50 86.00 71.67 *1
Paint stirring and quality control (W-1) 41.67 41.67 41.67
Electricity (W-2) 163.64 109.09 81.82
Filling of machines (W-3) 94.03 67.16 53.73
Unit cost* 913.83 803.92 698.88
½ + ½ + ½ = *1½
Workings:
W-1: Paint stirring and quality control:
A B C
Units 500 400 300
Batches 10 8 6 24
Share of overhead 20,833 16,667 12,500 50,000 0.75
Per unit 41.67 41.67 41.67 0.75

W-2: Electricity:
B1 B3 B5
Coats per Unit 6 4 3
Total coats 3,000 1,600 900 5,500
Share of overhead 81,818 43,636 24,545 150,000 0.75
Per unit 163.64 109.09 81.82 0.75

W-3: Filling:
B1 B3 B5
Liters per Unit 7.00 5.00 4.00
Total Liters 3,500 2,000 1,200 6,700
Share of overhead 47,015 26,866 16,119 90,000 0.75
Per unit 94.03 67.16 53.73 0.75

(b) (i) M/s. Voice Ltd.

Contribution Income Statement Rupees
LL 300 LV 400 Total
Amount % Amount % Amount %
Sales 20,000 100% 80,000 100% 100,000 100% ½
Less: Variable expenses 15,000 75% 40,000 50% 55,000 55% ½
Contribution margin 5,000 25% 40,000 50% 45,000 45% ½
Less: Fixed cost 27,000 ½
Net operating income 18,000 1

Computation of the break-even point:

Fixed expenses 27,000
= = Rs. 60,000 2
CM % (Total 45%

DISCLAIMER: The suggested answers provided on and made available through the Institute’s website may only be referred, relied upon or treated as a guide and substitute for professional
advice. The Institute does not take any responsibility about the accuracy, completeness or currency of the information provided in the suggested answers. Therefore, the
Institute is not liable to attend or receive any comments, observations or critics related to the suggested answers.
 SUGGESTED ANSWERS – EXTRA ATTEMPT, MAY 2014 EXAMINATIONS 4 of 6
MANAGEMENT ACCOUNTING – SEMESTER-4
Marks
(ii) Verification of the break-even point: Rupees
LL 300 LV 400 Total
Current Sales Rs. 20,000 80,000 100,000
Percentage of sales 20% 80% 100%
Sales at break-even 12,000 48,000 60,000 1

LL 300 LV 400 Total

Amount % Amount % Amount %
Sales 12,000 100% 48,000 100% 60,000 100%
Less: Variable expenses 9,000 75% 24,000 50% 33,000 55%
Contribution margin 3,000 25% 24,000 50% 27,000 45% 1.5
Less: Fixed cost 27,000
Net operating income – ½

Q. 5 (a)(i) Payback period:

1,000 – 897
Project-A = 3 years + 1
320

Project-A = 3.32 years 1

Project-B = 3.00 years 1
Project-C = 2.00 years 1

(ii) Accounting rate of return (ARR):

ARR = Average profit ÷ Average investment 1
Year A B C
0 (1,000) (1,000) (1,000)
1 286 114 571
2 314 286 429
3 297 600 686
4 320 743 114
5 394 457 –
6 457 – –
7 514 – –
Net cash flow 1,583 1,200 800
Project life 7 5 4
Average profit 226.12 240.00 200.00
Average investment 500 500 500
ARR 45.22% 48.00% 40.00%
2 + 2 + 2 = 6

(iii)
Project Payback ARR
A 3 2 ½+½
B 2 1 ½+½
C 1 3 ½+½
OR 1½ + 1½ = 3
DISCLAIMER: The suggested answers provided on and made available through the Institute’s website may only be referred, relied upon or treated as a guide and substitute for professional
advice. The Institute does not take any responsibility about the accuracy, completeness or currency of the information provided in the suggested answers. Therefore, the
Institute is not liable to attend or receive any comments, observations or critics related to the suggested answers.
 SUGGESTED ANSWERS – EXTRA ATTEMPT, MAY 2014 EXAMINATIONS 5 of 6
MANAGEMENT ACCOUNTING – SEMESTER-4
Marks
(b) NPV of manufacturing project:
Cost of capital = 15%
Inflation = 10%

–1 = – 1 = 4.55%
(1+nominal rate) 1.15
Real discount rate = 3
(1+ inflation rate) 1.10
Annual cash flow = (80,000 x 40)
3,200,000 1

PV Factor @
Year Cash Flow PV
4.55 %
0 (1,000,000) 1.0000 (1,000,000) ½
1 3,200,000 0.9565 3,060,870 ½
2 3,200,000 0.9149 2,927,788 ½
3 3,200,000 0.8752 2,800,493 ½
4 3,200,000 0.8371 2,678,733 ½
5 3,200,000 0.8007 2,562,266 ½
13,030,149 1

Q. 6 (a) Relaxation of credit standard: Rs.

Sales increase [50,000,000 x 30%] 15,000,000 1
Variable cost [15,000,000 x 55%] 8,250,000 1
Increase in contribution 6,750,000 ½

Bed debts expense:

Current [50,000,000 x 3%] 1,500,000 1
Proposed [65,000,000 x 8%] 5,200,000 1
(3,700,000) ½
Opportunity (extra financing) cost:
Current [50,000,000 x 0.55 x 30 ÷ 360 x 12%] 275,000 1
Proposed [65,000,000 x 0.55 x 60 ÷ 360 x 12%] 715,000 1
(440,000) ½
2,610,000

Recommendation:
Yes, the company should relax credit standard because this will increase profit by
Rs.2,610,000. ½

DISCLAIMER: The suggested answers provided on and made available through the Institute’s website may only be referred, relied upon or treated as a guide and substitute for professional
advice. The Institute does not take any responsibility about the accuracy, completeness or currency of the information provided in the suggested answers. Therefore, the
Institute is not liable to attend or receive any comments, observations or critics related to the suggested answers.
 SUGGESTED ANSWERS – EXTRA ATTEMPT, MAY 2014 EXAMINATIONS 6 of 6
MANAGEMENT ACCOUNTING – SEMESTER-4
Marks
(b) Working Capital Requirement for 2014: Rs. in million
Projected Sales for 2014 (Rs. 2,400) 2400
Cost break up as follows:
Direct material (2400 x 30%) 720 ½
Direct labour (2400 x 20%) 480 ½
Variable overhead (2400 x 10%) 240 ½
1440
Fixed overhead (2400 x 10%) 240 ½
Selling and distribution (2400 x 10%) 240 ½

Average Value of Current Assets: Rs. in million

Receivables (2400 x 2 /12) 400 ½
Raw material (720 X 2/12 ) 120 ½
Work-in-progress (50%) (1440 X 1/12 ) 60 ½
Finished goods (1440 X 1.25/12 ) 150 ½
730
Less: Average value of current Liabilities
Direct material (720 X 2/12 ) 120 ½
Direct labour (480 X 1/12) 40 ½
Variable overhead (240 X 0.5/12 ) 10 ½
Fixed overhead (240 X 0.5/12) 10 ½
Selling and distribution (240 X 1/12) 20 200 ½
Working capital required 530 1

THE END

DISCLAIMER: The suggested answers provided on and made available through the Institute’s website may only be referred, relied upon or treated as a guide and substitute for professional
advice. The Institute does not take any responsibility about the accuracy, completeness or currency of the information provided in the suggested answers. Therefore, the
Institute is not liable to attend or receive any comments, observations or critics related to the suggested answers.