ICMA.

MANAGEMENT ACCOUNTING
9

(AF-401)

Pakistan
SEMESTER-4
SPRING (AUGUST) 2014 EXAMINATIONS
Monday, the 25th August 2014
Extra Reading Time: 15 Minutes Maximum Marks: 80 Roll No.:
Writing Time: 02 Hours 30 Minutes
(i) Attempt all questions.
(ii) Answers must be neat, relevant and brief.
(iii) Use of non-programmable scientific calculators of any model is allowed.
(iv) Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper.
(v) In marking the question paper, the examiners take into account clarity of exposition, logic of arguments,
effective presentation, language and use of clear diagram/ chart, where appropriate.
(vi) DO NOT write your Name, Reg. No. or Roll No., or any irrelevant information inside the answer script.
(vii) Question No.1 – “Multiple Choice Question” printed separately, is an integral part of this question paper.
(viii) Question Paper must be returned to invigilator before leaving the examination hall.
Answer Script will be provided after lapse of 15 minutes Extra Reading Time (9:45 a.m. or 2:45 p.m. [PST] as the case may be).
Marks
Q. 2 (a) Following information is extracted from the records of Mega Limited for the year ended
June 30, 2014:
Direct Labour Electricity Cost
(Hours ‘000’) (Rs. ‘000’)
Month

July, 2013 34 640

August, 2013 30 620
September, 2013 34 620
October, 2013 39 590
November, 2013 42 500
December, 2013 32 530
January, 2014 26 500
February, 2014 26 500
March, 2014 31 530
April, 2014 35 550
May, 2014 43 580
June, 2014 48 680

Required:
Compute variable electricity rate and fixed cost per month under the least square
(simple regression) method carrying formulae: 08
 (x  x)(y  y)
b y  a  bx ; a  y  bx
 (x  x)2
;

Where:
x = independent variable = the level of activity; y = dependent variable = total cost;
x = average values of ‘x’; y = average values of ‘y’;
a = intercept of the line on the Y axis = the fixed cost;
b = gradient of the line = the variable cost per unit of activity;

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 Marks
(b) Falcon Ltd., has recently introduced flexible budgeting as an integral part of its corporate
planning process. Staff members of company are inexperienced and are reluctant to
prepare the flexible budget. Suppose you have recently been appointed as Senior
Management Accountant and asked to prepare the flexible budget at different capacity
levels.
Following data is available at 50% capacity for the month of July 2014:
Fixed Costs Rs. ‘000’
Salaries, wages and benefits 168
Rent, rate and taxes 112
Depreciation 140
Other administrative expenses 160
580
Variable Costs
Materials 480
Labour 512
Other expenses 76
1,068
Sales at various capacity levels:
Capacity Level (%) Rs. ‘000’
60 1,900
75 2,300
90 2,750
100 3,050
Required:
Prepare a flexible budget showing budgeted profit at 60%, 75%, 90% and 100%
capacity. 08

Q. 3 (a) Benchmarking allows attainable standards to be established, elaborate its advantages. 04

(b) The Delta Ltd., is a cement manufacturing company and sells a single product, ‘LLM’.
The company operates standard costing system and furnished the following data:
Normal Capacity (in machine hours) 13,040
Standard machine-hours allowed for units produced ?
Actual machine-hours worked 13,000
Rupees
Budgeted variable overhead per machine-hour 2
Budgeted fixed overhead (total) ?
Actual variable overhead cost 28,000
Actual Fixed overhead cost 66,000
Variable overhead cost applied to production* 25,400
Fixed overhead cost applied to production* ?
Variable overhead spending variance ?
Variable overhead efficiency variance 600 U
Fixed overhead budget variance 800 U
Fixed overhead volume variance ?
Variable portion of the predetermined overhead rate ?
Fixed portion of the predetermined overhead rate ?
Under applied (or over applied) overhead ?
*Based on standard machine-hours allowed for units produced.
Required:
Compute the missing figures by calculating necessary variances. 08
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Q. 4 (a) What are the similarities between net present value (NPV) and internal rate of return
(IRR) methods of discounted cash flow analysis? 03

(b) M/s. Mexican Ltd., is a manufacturer of sports goods and is proposing to manufacture
new product line. The product line is expected to have 4 years life. You have recently
been appointed as a Management Accountant for this project and have been delegated
the responsibility of preparing the financial evaluation of the proposed investment.
You have been provided with the following information related to the new product line:
Rupees
Sales 9,000 units @ Rs. 32 288,000
Cost of Goods sold:
Labour 40,000 hours @ Rs. 3.50 per hour 140,000
(including fixed costs)
Materials and other variable costs 65,000
Depreciation 45,000
250,000
Less: Closing stock 25,000 225,000
Net profit 63,000
Other data relating to new product line:
 Annual sales volume at 9,000 units is expected to be constant over the period of
four years.
 Production which was estimated at 10,000 units in the first year would be 9,000
units each in year two and three, and 8,000 units in year four.
 Debtors at the end of each year would be 20% of sales during the year and
creditors would be 10% of materials and other variable costs. (The policy of the
company is to collect its 80% of debtors in the current year and remaining in the
next year following the sale and creditors are paid 90% in the year of purchase and
10% in the next year).
 Special machinery would be purchased for manufacturing of the new product and
its depreciation will be calculated on the straight line basis. Assume that the
machinery would last for four years and have no terminal scrap value.
 Cost of capital of M/s. Mexican Ltd., is 20% per annum.
Required:
Calculate the net present value (NPV) of the product line and state whether the
manufacturing of the new product is worthwhile. Ignore taxation. 15

Q. 5 (a) Global Manufacturing Company produces and sells two products ‘A’ and ‘B’ having
following data for a particular period: Rs. Per Unit
Product
Particulars
A B
Sales revenue 5,000 10,000
Material cost (Rs. 100 per Kg.) 1,000 2,500
Labour cost (Rs. 60 per hour) 1,500 3,000
Variable overhead 500 1,000
Required:
(i) Calculate the following for both the products:
(1) Contribution margin per unit. 1
(2) Material consumption in kgs per unit. 1
(3) Labour hours required to produce one unit. 1
(ii) Which product is more profitable when total sales value is limited? 2
(iii) Comment on the profitability when production capacity is the limiting factor. 2
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(b) M/s. Hi Sky Ltd., produces three products, ‘A’, ‘B’ and ‘C’. The capacity of Hi Sky’s plant
is restricted and all products pass through a single process. This process is expected to
be operational for 7 hours per day and can produce 1,600 units of ‘A’ per hour, 1,800
units of ‘B’ per hour, and 800 units of ‘C’ per hour. Conversion costs are Rs. 600, 000
per day.
Selling prices and material costs for each product are as follows: Rupees
Selling Price Material Cost Throughput Contribution
Product
per Unit per Unit per Unit
A 160 80 80
B 140 50 90
C 280 110 170
Required:
(i) Calculate the profit per day if daily output achieved is 4,000 units of ‘A’, 3,500 units
of ‘B’ and 1,000 units of ‘C’. 02
(ii) Determine the efficiency of the bottleneck process given the output in (i) above. 04
(iii) Calculate the Throughput Accounting ratio for each product. 04
(iv) How the concept of ‘Throughput Accounting’ is a direct contrast to the fundamental
principles of conventional costing? 03

Q. 6 Armaghan Ltd., is a medium sized company producing wide range of engineering products.
The company sells its products to wholesale distributors at an average of Rs. 850,000 per
month at invoice value and allowed its customers 40 days to pay from the date of invoice. The
company has been facing cash flow difficulties for few years and has already utilized its
maximum overdraft facility.
The Director Finance Mr. Khan suggested two possible solutions to overcome the company’s
cash flow problems :
Option 1: The company could improve its cash flows through factoring. A factor would
advance 70% of the value of invoices raised to the customers by Armaghan Ltd.,
at an interest rate of 12% per annum. The factor would also charge a service fee
amounting to 4% of the total invoices. As a result of factoring, the company would
save administration costs estimated to Rs. 12,000 per month.
Option 2: The company could offer a cash discount to its customers for prompt payment. It
has been suggested that customers could be offered a 4% discount for payments
made within ten days of invoicing.
Required:
(a) Identify the services that may be provided by factoring organisations. 04
(b) Calculate the annual cost of the factoring agreement. 05
(c) Calculate the annual cost (in percentage) of offering a cash discount to customers. 05
(Assume all customers will avail cash discount)

THE END
P R E S E N T V A L U E F A C T O R S
Year 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335

C U M U L A T I V E P R E S E N T VA L U E F A C T O R S
Year 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.859 1.833 1.808 1.783 1.759 1.736 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.723 2.673 2.624 2.577 2.531 2.487 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 4.329 4.212 4.100 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 5.076 4.917 4.767 4.623 4.486 4.355 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326

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