SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2019 EXAMINATIONS 1 of 8

MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2

Marks
Question No. 2
(a) Allocation of Overhead Costs:
Distribution of Resource Consumption Across Activity Costs Pools
Overhead Costs Cutting Stitching Support Other
Division Division Division Divisions Total
Salaries and wages 30% 35% 25% 10% 100%
Miscellaneous costs 25% 15% 20% 40% 100%
Rupees
Salaries and wages 1,500,000 1,750,000 1,250,000 500,000 5,000,000 1.0
Miscellaneous costs 250,000 150,000 200,000 400,000 1,000,000 1.0
Total cost 1,750,000 1,900,000 1,450,000 900,000 6,000,000 1.0

(b) Computation of Activity Rates:

Total Cost (A) Activity Rates (A ÷ B)
Activity Cost Pools Total Activity (B)
[Rupees] [Rupees]
Cutting Division 1,750,000 15,000 direct labour hours 116.67 per direct labour hour 1.0
Stitching Division 1,900,000 500 Orders 3,800 per order 1.0
Support Division 1,450,000 100 Customers 14,500 per customer 1.0

(c) Computation of Overhead Costs for Ordered Quantity:

Activity Based Cost
Activity Cost Pools Activity Rates (Rupees) Activity
[Rupees]
Cutting Division 116.67 per direct labour hour 75* 8,750 1.0
Stitching Division 3,800 per order 1 3,800 1.0
Support Division 14,500 per customer – –
Total 12,550 1.0
*0.5 direct labour hours per unit x 150 units = 75 direct labour hours

(d) The margin for the order and for the customer as follows:
Rupees
Product Profitability Analysis:
Sales (150 units x Rs.2,500 per unit) 375,000 1.0
Less: Costs:
Direct material (150 units x Rs.1,800 per unit) 270,000 1.0
Direct labour (150 units x 0.5 direct labour hours per unit x 1.0
Rs.250) 18,750
Cutting Division’s overhead costs 8,750 0.5
Stitching Division’s overhead costs 3,800 301,300 0.5
Product margin 73,700 1.0
Customer Profitability Analysis:
Product margin of order 73,700 1.0
Less: Support Division’s overhead costs 14,500 1.0
Customer margin 59,200 1.0
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 SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2019 EXAMINATIONS 2 of 8
MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2
Marks
Question No. 3
(a) Difficulties: 2.0
 It can be difficult to establish a measurable cost unit for some services.
 In some service organizations every cost unit will be different. For example, each hair cut
provided in a salon will be different.
 Most of the services are heterogeneous nature.
 Since the human influence is so great in many services. It can be difficult to predict and
control the quality of the output and the resources used in its production.

(b) Variance Analysis:

Rupees
(i) Material Price and Quantity Variances:
Material Price Variance = AQ (AP- SP)
=900 ( *6,000- 6,500) 450,000 F 1.0
AP= 5,400,000 / 900 = 6,000 0.5
SP= 2,730 / 0.42 = 6,500 0.5
Material Quantity Variance = SP (AQ- SQ)
= 6,500 ( 900 - 840) 390,000 UF 1.0
SQ=2,000 x 0.42 kg per pair 840 1.0

(ii) Labour Rate and Efficiency Variances:

Labour Rate Variance = AH ( AR - SR)
=4,560 (*250 - *** 225) = 114,000 UF 1.0
AR=(1,140,000/4,560) 250 0.25
**4,680 standard hours / 1,950 = 2.40 Standard hour per gloves 0.25
***540 standard cost per pair of gloves / 2.4 standard hours = 225 0.5
Labour Efficiency Variance = SR ( AH - SH)
=225 ( 4,560 - *4,800) 54,000 F 1.0
*2,000 pair of gloves x 2.40 standard hours = 2,000 x 2.4 = 4,800 1.0

(iii) Variable Manufacturing Overhead Spending and Efficiency Variances:

Variable Overhead Spending Variance = AH ( AR - SR)
= 4,560 ( 125 - 75) 228,000 UF 1.0
AR= 570,000 / 4,560 125 0.5
SR = 180 / 2.4 75 0.5
Variable Overhead Efficiency Variance = SR ( AH - SH)
= 75 ( 4,560- 4,800) 18,000 F 1.0
*2,000 pair of gloves x 2.40 standard hours=2,000x2.4 = 4,800 hours 1.0

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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 – SPRING 2019 EXAMINATIONS 3 of 8
MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2
Marks
Question No. 4
(a) Restrictions:
 Project-F cannot be scaled down – this project cannot be varied.
 No project can be scaled up.
 Capital budget is Rs. 2,500 million.

Net Present Internal Rate

Initial Investment Profitability
Projects Value (NPV) of Return Ranking
[Rs. in million] Index (PI)
[Rs. in million] (IRR)
A (850) 184 23% 0.2165 5 0.5
B (440) 114 22% 0.2591 2 0.5
C (780) 79 18% 0.1013 6 0.5
D (1,500) 399 27% 0.2660 1 0.5
E (350) 77 23% 0.2200 4 0.5
F (770) 170 27% 0.2208 3 0.5

Cumulative
Initial Net Present Internal Rate
Profitability Investment
Projects Investment Value (NPV) of Return Ranking
Index (PI) [Rs. in
[Rs. in million] [Rs. in million] (IRR)
million]
D (1,500) 399 27% 0.2660 1 (1,500) 0.5
B (440) 114 22% 0.2591 2 (1,940) 0.5
F (770) 170 27% 0.2208 3 (2,710) 0.5
E (350) 77 23% 0.2200 4 (3,060) 0.5
A (850) 184 23% 0.2165 5 (3,910) 0.5
C (780) 79 18% 0.1013 6 (4,690) 0.5

Choice-1: Move Project-F above Project-B, as it can't be scaled down:

Initial Net Present Cumulative NPV from
Proportion
Projects Investment Value (NPV) Investment Investment
of Project
[Rs. in million] [Rs. in million] [Rs. in million] [Rs. in million]
D (1,500) 399 (1,500) 1 399 0.5
F (770) 170 (2,270) 1 170 0.5
B (230) 114 (2,500) 0.52 [W-1] 59 0.5
(2,500) 628 0.25

W-1: Proportion of Project-B that is partially undertaken is calculated as:

Rs. in million
Capital budget available 2,500
Budget utilized in Project-D and Project-F (2,270)
Budget available for Project-B 230 0.25

Proportion of project to be undertaken = Budget available ÷ Investment required for the project
= Rs.230 million ÷ Rs.440 million = 0.52 0.25

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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 – SPRING 2019 EXAMINATIONS 4 of 8
MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2
Marks
Choice-2: Ignore Project-F (that can't be scaled down):
Initial Net Present Cumulative NPV from
Proportion
Projects Investment Value (NPV) Investment Investment
of Project
[Rs. in million] [Rs. in million] [Rs. in million] [Rs. in million]
D (1,500) 399 (1,500) 1.00 399 0.5
B (440) 114 (1,940) 1.00 114 0.5
E (350) 77 (2,290) 1.00 77 0.5
A (210) 184 (2,500) 0.25 [W-2] 45 0.5
634 0.25

W-2: Proportion of Project-A that is partially undertaken is calculated as:

Rs. in million
Capital budget available 2,500
Budget utilized in Projects D, B and E (2,290)
Budget available for Project-A 210 0.25

Proportion of project to be undertaken = Budget available ÷ Investment required for the project
= Rs.210 million ÷ Rs.850 million = 0.25 0.25

(b) Recommendations:
NPV of Choice-1 = Rs.628 million
NPV of Choice-2 = Rs.634 million
Choice-2 is preferable as it earns higher NPV than Choice-1. 0.25
Internal Rate of Return (IRR):
IRR must be calculated on the NPV of the full projects – It cannot be calculated on proportion of
the projects. Therefore we must determine the IRR of the optimum invest plan on the assumption
that we can invest in the whole of Project-F.
Calculate NPV at 13%:
Rs. in million
Projects 2019 2020 2021 2022 2023 2024 2025
D (1,500) 765 670 625 430 – –
B (440) 40 180 190 225 260 (70)
E (350) 125 155 175 120 – –
A (850) 335 440 470 110 – –
(3,140) 1,265 1,445 1,460 885 260 (70)
Discount factor 1.000 0.885 0.783 0.693 0.613 0.543 0.480
PV (3,140) 1,120 1,131 1,012 543 141 (34) 2.0
NPV 773 0.5

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 – SPRING 2019 EXAMINATIONS 5 of 8
MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2
Marks
Calculate NPV at 25%:
Rs. in million
Projects 2019 2020 2021 2022 2023 2024 2025
D (1,500) 765 670 625 430 – –
B (440) 40 180 190 225 260 (70)
E (350) 125 155 175 120 – –
A (850) 335 440 470 110 – –
(3,140) 1,265 1,445 1,460 885 260 (70)
Discount factor 1.000 0.800 0.640 0.512 0.410 0.328 0.262
PV (3,140) 1,012 925 748 363 85 (18) 2.5
NPV (26) 0.5

Applying both NPVs in below formula:

IRR = a + [{(NPVa) ÷ (NPVa – NPVb)} x (b – a)]
= 0.13 + [{773 ÷ (773 + 26)} x (0.25 – 0.13)] = 24.61% 0.25

Question No. 5
MF Enterprises
Product-wise Forecasted Statement of Profit or Loss [Using Marginal Costing Approach]
for the next year
Rupees
Products X Y Total
Sales [W-1] 3,313,440 2,208,960 5,522,400 0.75
Material [W-2] 1,485,000 1,056,000 2,541,000 0.75
Labour [W-3] 496,800 397,440 894,240 0.75
Variable factory overhead [W-4] 445,500 594,000 1,039,500 0.75
Contribution margin 886,140 161,520 1,047,660 0.75
Fixed overhead [W-5] 661,500 0.25
Selling and administrative expenses [W-6] 880,000 0.25
Profit/ (loss) (493,840) 0.25

Workings:
W-1: Sales:
Product ‘X’ = 5,522,400 / 9,000 x 5,400 = Rs.3,313,440 0.25
Product ‘Y’ = 5,522,400 / 9,000 x 3,600 = Rs.2,208,960 0.25

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 – SPRING 2019 EXAMINATIONS 6 of 8
MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2
Marks
W-2: Consumption of Raw Material:
Rupees
Units Price Amount
Consumption of raw material
13,500* = 100** x 1.1 =110 1,485,000 0.75
Consumption of raw material
9,600* = 100* x 1.1 =110 1,056,000 0.75
23,100 2,541,000 0.75
*Product ‘X’: 5,400 x 2.4 / 0.96 = 13,500 and Product ‘Y’: 3,600 x 2.4 / 0.90 = 9,600 0.25
**2,310,000/ 23,100 = 100 0.25

W-3: Direct Labour Hours Calculation:

Rupees
Hours Rate per hour Amount
Labour hours used in Product ‘X’: 5,400 × 5 = 27,000 =16** x 1.15 =18.4 496,800 0.75
Labour hours used in Product ‘Y’: 3,600 × 6 = 21,600 =16** x 1.15 =18.4 397,440 0.75
48,600 0.75 894,240 0.75
** = 777,600 / 48,600 = 16 0.50

W-4: Production Overheads Calculation:

Production overheads Rs. = 630,000 / 40% = Rs.1,575,000 0.25
Variable overheads Rs. = (1,575,000 - 630,000) = Rs.945,000 0.25
Fixed overheads Rs.630,000
Rupees
Products X Y Total
Ratio of variable overheads (a) 1 2 0.25
Total units produced (b) 5,400 3,600 0.25
Product units (c = a x b) 5,400 7,200 12,600 0.25
= 945,000 /12,600 x 5,400 & 945,000 /12,600 x 7,200 405,000 540,000 0.5
Per unit variable overhead (Rs.405,000 / 5,400 &
540,000 / 3,600) 75 150 0.5
Per unit inflated variable overhead @ 10% 82.5 165 0.25
Total inflated variable overhead 445,500 594,000 1,039,500 0.50

W-5: Total inflated fixed overheads = 630,000 x 1.05 = Rs.661,500 0.25

W-6: Selling and administrative expenses = 800,000 x 1.10 = Rs.880,000 0.25

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 – SPRING 2019 EXAMINATIONS 7 of 8
MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2
Marks
Question No. 6

(a) The contribution margin per bag of first 100,000 bags:

Rs. per bag
Sales price 36 0.5
Less: Variable cost 25 0.5
Contribution margin 11 0.5

Total contribution margin = 100,000 bags x Rs.11 per bag = Rs.1,100,000 0.5
The contribution margin per bag over 100,000 bags:
Rs. per bag
Sales price 36 0.5
Less: Variable cost 28 0.5
Contribution margin 8 0.5
Rupees
Fixed cost for first 100,000 bags 1,250,000 0.5
Less: Contribution margin of first 100,000 bags 1,100,000 0.5
Uncovered fixed cost 150,000 0.5
Add: Monthly rental cost of additional space needed
to produce more than 100,000 bags 75,000 0.5
Total fixed cost to be covered by remaining sales 225,000 0.5

Additional units = Total remaining fixed cost ÷ Unit contribution margin over 100,000 bags
= Rs.225,000 ÷ Rs.8 per bag = 28,125 bags 1.0
Total units must be sold for break-even point = 100,000 + 28,125 = 128,125 bags 0.5
Total sales = 128,125 bags x Rs.36 per bag = Rs.4,612,500 0.5
Break-even to achieve target profit = Target profit ÷ Unit contribution margin
= Rs.250,000 ÷ Rs.8 per bag = 31,250 bags 1.0
The company must sell 31,250 bags above break-even to achieve a profit of Rs.250,000
per month.
Total bags must be sold = 100,000 + 31,250 = 131,250 bags 1.0

(b) If bonus paid to the Marketing Manager above break-even point then the revised contribution
margin would be:
Rs. per bag
Existing contribution 8 0.5
Less: Bonus 2 0.5
Revised contribution 6 0.5
The desired monthly profit would be Rs.265,000 [20% x (Rs.1,250,000 + Rs.75,000)]. 1.0
Break-even to achieve target profit = Target profit ÷ Unit contribution margin
= Rs.265,000 ÷ Rs.6 per bag = 44,167 bags 0.5
The company must sell 44,167 bags above break-even to earn a profit of Rs.265,000 per
month. 0.5
These bags added to 128,125 bags required to break-even, would equal to the total sales
of 172, 292 bags (128,125 + 44,167) each month. 0.5
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 – SPRING 2019 EXAMINATIONS 8 of 8
MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2
Marks
Question No. 7
Statement of Working Capital Required:
Rupees
Cash in-hand and bank 300,000 0.5
Stock
Raw material W-1 10,150,000 0.5
Work-in-process W-2 8,700,000 0.5
Finished goods W-3 18,487,500 37,337,500 0.5
Debtors W-4 12,941,250 0.5
50,578,750 0.5
Current liabilities
Creditors W-5 5,075,000 0.5
Wages payable W-6 1,522,500 0.5
Expenses payable W-7 4,205,000 10,802,500 0.5
Net working capital requirement 39,776,250 0.5

Workings:
Rupees
W-1: Raw material = 174,000 x 2 /12 x 350 10,150,000 1.0
W-2: Work-in-process = 174,000 x 1 /12 14,500 Bed sheets 1.0
Raw material =14,500 x 350 5,075,000 0.5
Wages =14,500 x 210 x 50% 1,522,500 0.5
Overhead =14,500 x 290 x 50% 2,102,500 0.5
8,700,000 0.5
W-3: Finished goods = 174,000 x 1.5/12 x 850 18,487,500 1.0
W-4: Debtors =174,000 x 1.5/12 x 850 x 70/100 12,941,250 1.0
W-5: Creditors =174,000 x 1/12 x 350 5,075,000 1.0
W-6: Wages =174,000 x 1/24 x 210 1,522,500 1.0
W-7: Expenses =174,000 x 1/12 x 290 4,205,000 1.0

THE END

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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.