SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2016 EXAMINATIONS 1 of 6

MANAGEMENT ACCOUNTING – SEMESTER-4

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Question No. 2
(a) Zero-Based Budgeting:
An alternative to incremental budgeting is zero-base budgeting (also known as priority-based
budgeting). This approach requires that all activities are justified and prioritized before decisions
are taken relating to the amount of resources to be allocated to each activity. 2
The benefits of this method over traditional methods of budgeting are claimed to be as follows:
 Traditional budgeting tends to extrapolate the past by adding a percentage increase to current
year cost. This becomes very much a preservation of the status quo, since the relationship
between costs and benefits for a particular activity is rarely questioned and consequently costs
are not necessarily allocated to uses where they are most required. Zero-base budgeting
represents a move towards allocation of resources by need and benefit. 1
 Zero-base budgeting creates a questioning attitude rather than one that assumes that current
practice represents value for money. 1
 Zero-base budgeting focuses attention on outputs in relation to value for money. 1
 Zero-base budgeting leads to increased staff involvement, which may lead to improved
motivation and greater interest in the job. 1

(b) (i) Production budget (units):

X Z
Required by sales 20,000 12,000
Closing Stock 800 960
20,800 12,960 0.5+0.5
Opening stock (1,000) (1,200)
19,800 11,760 0.5+0.5

(ii) Raw materials purchase budget:

AA BB
Required by production:
(19800 * (19,800 *
X 396,000 198,000 0.5
20) 10)
Z 58,800 (11760 * 5) 105,840 (11,760 * 9) 0.5
454,800 303,840 0.25+0.25
Closing Stock 640 480
455,440 304,320 0.25+0.25
Opening Stock (800) (600)
Purchase quantity 454,640 303,720 0.25+0.25
Purchases price
3 5
(rupees)
Purchases cost
1,363,920 1,518,600 0.25+0.25
(rupees)

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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
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 SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2016 EXAMINATIONS 2 of 6
MANAGEMENT ACCOUNTING – SEMESTER-4
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(iii) Production cost budget:

Material Rupees
Opening stock of materials (Rs 2240+ Rs3120) 5,360 0.5
Purchase of materials (1,363,920 + 1,518,600 ) 2,882,520 0.5
2,887,880
Closing stock of materials (Rs 1,920 + Rs2,400) (4,320) 0.25
2,883,560 0.25
Direct labour:
X 19,800 * 8 hrs. * Rs 10 = 1,584,000 0.25
Z 11,760 * 15 hrs. * Rs 10 = 1,764,000 0.25
3,348,000
Variable overhead:
X 19,800 * 8 hrs. * Rs 4 = 633,600 0.25
Z 11,760 * 15 hrs. * Rs 4 = 705,600 0.25
1,339,200
Fixed Overhead 950,000 0.25
Total Production cost 8,520,760 0.25

Question No. 3

(a) Operating Statement for the month ended June 30, 2016.

(i) Calculation of Standard Product Cost and Selling Price / Unit:

Rs. / unit
Direct Material:
Beta (15 Kg @ Rs. 2) 30 0.25
Gama (10 Kg @ Rs. 7) 70 0.25
Direct Labour
10 hours @ Rs. 4) 40 0.25
Fixed Production overhead (Rs. 40 x 200 %) 80 0.25
Standard Cost 220 0.5
Profit (220 x 20/80) 55 0.5

Budgeted Selling Price 275 01

(ii) Calculation of Actual Profit for the Period: Rs. ‘000’

Sales (Rs. 275 x 120% = Rs. 330 x 14,500 units) 4,785 01

Direct Material:
Beta (150,000 Kg @ Rs. 3) 450 0.5
Gama (75,000 Kg @ Rs. 6) 450 0.5
Direct Labour
72,000 hours @ Rs. 5) 360 0.25
Fixed Production overhead 1,800 0.25
Total 3,060
Actual Profit 1,725 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,
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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
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 SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2016 EXAMINATIONS 3 of 6
MANAGEMENT ACCOUNTING – SEMESTER-4
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(b) Variances:

(i) Direct material price and usage variances:

Price Variance:
Beta 150,000 Kgs. (Rs. 2 - Rs. 3) (150)A 0.5
Gama (75,000 Kgs. (Rs. 7 - Rs. 6) 75F 0.5
(75)A 0.5
Usage Variance:
Beta Rs. 2 (14,500 units x 15 Kg - 150,000) 135F 0.5
Gama Rs. 7 (14,500 units x 10 Kg - 75,000) 490F 0.5
625F 0.5

(ii) Direct labour rate and efficiency variances:

Rate Variance:
72,000 Hrs (Rs. 4 - Rs. 5) 01
(72)A 0.5
Efficiency Variance:
Rs: 4 (14,500 units x 10 Hrs - 72,000) 01
292F 0.5

(iii) Fixed overhead variances:

Expenditure variance:
(25,000 units x Rs. 80 - Rs. 1,800,000) 200F 01
Volume variances:
Volume efficiency variance (Given) 584F
Volume capacity variance (Given) (1424)A
(640)A 01
(iv) Sales Margin Variance:
Price variance:
14,500 units x (Rs. 330 - Rs. 275) 01
Volume variance: 797.5F 0.5
(14,500 units - 25,000 units) x Rs. 55 01
577.5A 220F 0.5

(c) Reconciliation:
Total variance: 350F 0.25
Budgeted Profit (25,000 units x Rs: 55) 1375 0.25
Actual Profit 1,725 0.5

Question No. 4

(a) Year Revenue Expenses *Depreciation Income before tax 40% Tax Net Income
2011 90,000 60,000 28,000 2,000 800 1,200 0.25+0.25
2012 99,000 64,000 28,000 7,000 2,800 4,200 0.25+0.25
2013 103,000 64,000 28,000 11,000 4,400 6,600 0.25+0.25
2014 109,000 64,000 28,000 17,000 6,800 10,200 0.25+0.25
2015 140,000 64,000 28,000 48,000 19,200 28,800 0.25+0.25
51,000 0.5

*Annual Depreciation: 140,000 / 5 years = 28,000 0.5

Average annual income = Rs.51,000 / 5 years = Rs.10,200 0.5
Average annual investment= 140,000 / 2 = Rs.70,000 0.5
Average annual rate of return = 10,200/ 70,000 = 14.6% 0.5
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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
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 SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2016 EXAMINATIONS 4 of 6
MANAGEMENT ACCOUNTING – SEMESTER-4
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(b) Year Net Income Depreciation Net Cash Flow
2011 1,200 28,000 29,200 0.5
2012 4,200 28,000 32,200 0.5
2013 6,600 28,000 34,600 0.5
2014 10,200 28,000 38,200 0.5
2015 28,800 28,000 56,800 01

(c) Net Present Value (NPV).

Year Net cash flow PVIF @ 15% N.P.V.
2011 (140,000) 1.0000 (140,000) 0.5
2011 29,200 0.8696 25,392 0.5
2012 32,200 0.7561 24,346 0.5
2013 34,600 0.6575 22,750 0.5
2014 38,200 0.5718 21,843 0.5
2015 56,800 0.4972 28,240 0.5
P.V. 122,572 0.5
N.P.V. (17,428) 0.5

Question No. 5
(a) The constraints on producing Rod A are:
Process X= 3,200 units (8000/2.5 hrs.) 0.5
Process Z= 4,286 units (9000/2.1 hrs.) 0.5
Material limitation= 6,000 units (12000/2 kg) 0.5
Therefore the constraint of Process X limits production to 3,200 units 0.5
The constraints on producing Rod B are:
Process X=6,400 units (8000/1.25 hrs.) 0.5
Process Z=4,000 units (9000/2.25 hrs.) 0.5
Material restriction= 6,000 units (12000/2 kg) 0.5
Maximum production of Rod B is 4,000 units 0.5
Maximum contributions for Rod A and B are:
Rod A Rod B
(Rs.) (Rs.)
Process X machine 150
(2.5 hrs. * Rs 75 (1.25 hrs. * Rs
time 60) 60) 0.5+0.5
Process Z machine 105 (2.1 hrs. * Rs 112.50 (2.25 hrs. * Rs
time 50) 50) 0.5+0.5
Materials 200 (2 Kg * Rs 100) 200 (2 kg * Rs. 100) 0.5+0.5
Variable cost 455 387.50 0.5+0.5
Selling price 550 450
Unit contribution 95 62.50 0.5+0.5
Maximum output 3,200 units 4,000 units
Maximum contribution Rs 304,000 Rs 250,000 0.5+0.5

Therefore, Rod A should be produced since it yields the largest contribution. 01

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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 2016 EXAMINATIONS 5 of 6
MANAGEMENT ACCOUNTING – SEMESTER-4
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(b) The company will earn a contribution of Rs.304,000 but it cannot meet the maximum demand
due to the limitations of Process X. 02

(c) Rod A (Rs.) Rod B (Rs.)

Original selling price 550 450
Less: 10% reduction in selling price 55 45 0.25+0.25
Revised unit contribution 40 (95-55) 17.50 (62.5-45) 0.5+0.5
Output 3,200 units 4,000 units
Total contribution Rs. 128,000 Rs. 70,000 0.5+0.5
Payment for unused machine hours N-1 136,800 180,000 0.25+0.25
Revised contribution Rs. 264,800 Rs. 250,000 0.5+0.5

With the alternative pricing arrangement the company should produce Rod A and the
contribution will be Rs.264,800. 01

N-1 The payment for unused machine hours is calculated as follows:

Rod A Rs.
Process X at Rs 60 per hour - Fully used
Process Z at Rs 60 per hour 136,800 {9,000 – (3,200 x 2.1 hour)} x 60 01
136,800

Rod B Rs.
Process X at Rs 60 per hour 180,000 {8,000 – (4,000 x 1.25 hour)} x 60
Process Z at Rs 60 per hour - Fully used 01
180,000

Question No. 6
(a) Statements as per Schedule III:
(i) Statement Showing The Total Expenses And Income of The Company (Group) And
The Share Applicable To Textile Activity And Other Activities.
(ii) Statement of Raw Materials Cost And Recovery
(iii) Statement of Yarn Cost Per Lb.
(iv) Cloth Production Cost Statement Manufactured
(v) Statement Showing Hard Waste Collected In Weaving Preparatory
And Weaving Departments
(vi) Statement of Apportionment of Cloth Weaving Cost
(vii) Summary Statement of Weaving Operations Results
(viii) Statement Showing The Cost of Processed And Finished Cloth Made

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,
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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
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 SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2016 EXAMINATIONS 6 of 6
MANAGEMENT ACCOUNTING – SEMESTER-4
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(b) (i) Throughput accounting ratio (TAR)
Working:
Procedures
A B C Total
Annual Demand 600 800 1,200
Time Require / Annum:
Nurse 162 224 360 746 0.25+0.25+0.25
Anesthetist 150 224 396 770 0.25+0.25+0.25
Doctor 450 800 1,500 2,750 0.25+0.25+0.25
Assistant Doctor 360 560 888 1,808 0.25+0.25+0.25

Doctor is a bottle neck resource (BNR) as time available is shorter than required.

Total fixed cost Rupees

Salary 4,800,000
Overhead 1,200,000
6,000,000 0.5
Total Hours 2,000
Therefore, cost per hospital hour (rupees) 3,000 0.5

Procedures
A B C
Selling price per unit 46,500 55,500 62,000
Materials cost (44,250) (49,500) (59,750)
Throughput per unit 2,250 6,000 2,250 0.25+0.25+0.25
Time on BNR in hours 0.75 1.00 1.25
Return per hour (Rs.) 3,000 6,000 1,800 0.25+0.25+0.25
TAR 1.00 2.00 0.60 0.5+0.5+0.5

(ii) Optimum production plan

Rupees
A B C
TAR 1.00 2.00 0.60
Ranking 2 1 3 0.75

Hrs Total Return Total

Name Number
each hours per hour Return/Profit
A 600 0.75 450 3,000 1,350,000 0.25+0.25
B 800 1.00 800 6,000 4,800,000 0.25+0.25
C 600 1.25 750 1,800 1,350,000 0.25+0.25
2,000 7,500,000 0.25

The optimum production plan is therefore to perform the maximum number of procedure
A and B (600 and 800 respectively) and perform only 600 of procedure C.

Total profit will be: Rupees

Throughput 7,500,000
Less total costs (6,000,000)
Profit 1,500,000 0.5
THE END

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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.