CMA MAY-2023 EXAMINATION

INTERMEDIATE LEVEL II
SUBJECT: CM 231. MANAGEMENT ACCOUNTING

MODEL SOLUTION
Solution of the Question No. 1
(i) (b)
(ii) (c)
(iii) (d)
(iv) (a)
(iii) (a)
(v) (b)
(vii) (b)
(viii) (c)
(ix) (d)
(x) (e)

Solution of the Question No. 2

(a) True.
(b) True.
(c) True.
(d) True.
(e) True.

Solution of the Question No. 3

1. (c)
2. (e)
3. (g)
4. (i)
5. (h)

Solution of the Question No. 4

(c)

(i) Contribution Net Degree of Operating

Margin / Income = Leverage
Old $600,000 / $200,000 = 3
New $1,400,000 / $200,000 = 7
The degree of operating leverage measures the company’s sensitivity to changes in sales. By
switching to a cost structure dominated by fixed costs, the company would significantly increase its
operating leverage. As a result, with a percentage change in sales, its percentage change in net
income would be 2.33 times as much (7 / 3) under the new structure as it would under the old.
(ii) To compute the break-even point in sales dollars, we need first to compute the contribution
margin ratio under each scenario. Under the old structure, the contribution margin ratio would be
.30 ($600,000 / $2,000,000), and under the new it would be .70 ($1,400,000 / $2,000,000).
Fixed Costs / Contribution = Break-Even
Margin Ratio Point in Dollars
Old $400,000 / .30 = $1,333,333
New $1,200,000 / .70 = $1,714,286

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Because the company’s fixed costs would be substantially higher under the new cost structure, its
break-even point would increase significantly, from $1,333,333 to $1,714,286. A higher break-even
point is riskier because it means that the company must generate higher sales to be profitable.

The margin of safety ratio tells how far sales can fall before the company is operating at a loss.
Actual Break-Even Actual Margin of Safety
Sales - Sales / Sales = Ratio
Old ($2,000,000 - $1,333,333) / $2,000,000 = .33
New ($2,000,000 - $1,714,286) / $2,000,000 = .14
Under the old structure, sales could fall by 33% before the company would be operating at a loss.
Under the new structure, sales could fall by only 14%.

Solution of the Question No. 5

(a) An activity-based flexible budget is based on multiple cost drivers. Cost drivers are selected
on the basis of how well they explain the behavior of the costs in the flexible budget.
Whereas, conventional flexible budgets typically are based on a single cost driver, such as
direct-labor hours or machine hours. Costs are categorized as variable or fixed. The fixed
costs do not vary with respect to the single cost driver on which the flexible budget is based..
Costs that are treated as fixed in a conventional flexible budget may vary with respect to an
appropriate cost driver in an activity-based flexible budget.
(b) i) The flexible budget for MNC Company for the month of September (based on 4,800 units)
showing separate variable cost budgets is as follows.

MNC COMPANY
FLEXIBLE BUDGET
FOR THE MONTH OF SEPTEMBER

Revenue [4,800  (Tk.1,200,000/5,000)] ............................ Tk. 1,152,000

Deduct: Variable costs:
Direct material (4,800  Tk.60) ...................................... Tk.
288,000
Direct labor (4,800  Tk.44) ........................................... 211,200
Variable overhead (4,800  Tk.36) ................................ 172,800
Variable selling (4,800  Tk.12) ..................................... 57,600
Total variable costs ................................................. 729,600
Contribution margin ............................................................ Tk. 422,400
Deduct: Fixed costs:
Fixed overhead ............................................................. Tk.
180,000
Fixed general and administrative................................... 120,000 300,000
Operating income ............................................................... Tk. 122,400

ii) For the month of September, the company's flexible/budget variances are as follows:

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 MNC COMPANY
FLEXIBLE-BUDGET VARIANCES
FOR THE MONTH OF SEPTEMBER
Flexible-
Flexible Budget
Actual Budget Variance
Units .................................................................. 4,800 4,800 0
Revenue ............................................................ Tk.1,152,000 Tk.1,152,000 Tk. 0
Variable costs:
Direct material ............................................. Tk. 320,000 Tk. 288,000 Tk.32,000
U
Direct labor .................................................. 192,000 211,200 19,200 F
Variable overhead........................................ 176,000 172,800 3,200 U
Variable selling ............................................ 92,000 57,600 34,400 U
Deduct: Total variable costs .............................. Tk. 780,000 Tk. 729,600 Tk.50,400
U
Contribution margin ........................................... Tk. 372,000 Tk. 422,400 Tk.50,400
U

Fixed costs:
Fixed overhead ............................................ Tk. 180,000 Tk. 180,000 Tk. 0
Fixed general and administrative ................. 115,000 120,000 5,000 F
Deduct: Total fixed costs ................................... Tk. 295,000 Tk. 300,000 Tk. 5,000
F
Operating income .............................................. Tk. 77,000 Tk. 122,400 Tk.45,400
U

iii) The revised budget and variance data are likely to have the following impact on M A Latif's
behavior:
Latif is likely to be encouraged by the revised data, since the major portion of the variable-cost
variance (direct material and variable selling expense) is the responsibility of others.
The detailed report of variable costs shows that the direct-labor variance is favorable. Latif
should be motivated by this report because it indicates that the cost-cutting measures that he
implemented in the manufacturing area have been effective.
The report shows unfavorable variances for direct material and variable selling expense.
Production Manager Latif may be encouraged to work with those responsible for these areas
to control costs.

Solution of the Question No. 6

(a) A tactical decision is short-run in nature; it involves choosing among alternatives with an
immediate or limited end in view. A strategic decision involves selecting strategies that
yield a long-term competitive advantage.
(b) (i)
Among the reasons transfer prices based on total actual costs are not appropriate as a
divisional performance measure are the following:
 They provide little incentive for the selling division to control manufacturing costs, because
all costs incurred will be passed on to the buying division.
 They often lead to suboptimal decisions for the company as a whole, because they can
obscure cost behavior. Costs that are fixed for the company as a whole can be made to
appear variable to the division buying the transferred goods.
(ii) Using the market price as the transfer price, the contribution margin for both the Mining
Division and the Metals Division is calculated as follows:

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 Mining Metals
Division Division

Selling price ........................................................................... Tk.90 Tk.150

Less: Variable costs:

Direct material ............................................................ 12 6
Direct labor ................................................................ 16 20
Manufacturing overhead ............................................. 24* 10†
Transfer price .............................................................  90
Unit contribution margin ......................................................... Tk.38 Tk. 24
Volume ................................................................................... x 400,000 x 400,000

Tk.15,200,000
Total contribution margin ........................................................ Tk.9,600,000

*Variable overhead = Tk.32 x 75% = Tk.24

†Variable overhead = Tk.25 x 40% = Tk.10
Note: the Tk.5 variable selling cost that the Mining Division would incur for sales on the open
market should not be included, because this is an internal transfer.
(iii) If GRC instituted the use of a negotiated transfer price that also permitted the divisions to
buy and sell on the open market, the price range for the product that would be acceptable
to both divisions would be determined as follows.
The Mining Division would like to sell to the Metals Division for the same price that can be
obtained on the outside market, Tk.90 per unit. However, Mining would be willing to sell
the product for Tk.85 per unit, because the Tk.5 variable selling cost would be avoided.
The Metals Division would like to continue paying the bargain price of Tk.66 per unit.
However, if Mining does not sell to Metals, Metals would be forced to pay Tk.90 on the
open market. Therefore, Metals would be satisfied to receive a price concession from
Mining equal to the costs that Mining would avoid by selling internally. Therefore, a
negotiated transfer price for the product between Tk.85 and Tk.90 would be acceptable to
both divisions and benefits the company as a whole.
(iv) General transfer-pricing rule:
Transfer price = outlay cost + opportunity cost
= (12 + 16 + 24)* + (38 - 5) **
= 52 + 33 = Tk. 85
*Outlay cost = direct material + direct labor + variable overhead
**Opportunity cost = forgone contribution margin from outside sale on open market
= Tk.38 contribution margin from internal sale calculated in
requirement (ii), less the additional Tk.5 variable selling cost
incurred for an external sale
Therefore, the general rule yields a minimum acceptable transfer price to the Mining
Division of Tk.85, which is consistent with the conclusion in requirement (iii).
(v) A negotiated transfer price is probably the most likely to elicit desirable management
behavior, because it will do the following:
 Encourage the management of the Mining Division to be more conscious of cost
control.
 Benefit the Metals Division by providing the product at a lower cost than that of its
competitors.
 Provide the basis for a more realistic measure of divisional performance.
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Solution of the Question No. 7
Solution to Requirement a
A master budget would include (1) a sales budget and schedule of cash receipts, (2) an inventory
purchases budget and schedule of cash payments for inventory, (3) a general, selling, and
administrative expenses budget and a schedule of cash payments related to these expenses, and
(4) a cash budget.
Solution to Requirement b
Pro forma statements result from the operating budgets listed in the response to Requirement a.
Pro forma statements describe the results of expected future events. In contrast, the financial
statements presented in a company’s annual report reflect the results of events that have actually
occurred in the past.

Solution to Requirement c
General Information
Pro Forma
Sales growth rate 10% Statement Data
Sales Budget January February March
Sales
Cash sales $100,000 $110,000 $121,000
Sales on account 300,000 330,000 363,000 $ 363,000*
Total sales $400,000 $440,000 $484,000 $1,324,000†
Schedule of Cash Receipts
Current cash sales $100,000 $110,000 $121,000
Plus 100% of previous
month’s credit sales 0 300,000 330,000
Total budgeted collections $100,000 $410,000 $451,000

*Ending accounts receivable balance reported on March 31 pro forma balance sheet.
†Sales revenue reported on first quarter pro forma income statement (sum of monthly sales).

Solution to Requirement d
General Information
Cost of goods sold percentage 60% Pro Forma
Desired ending inventory percentage of CGS 25% Statement Data
Inventory Purchases Budget January February March
Budgeted cost of goods sold $240,000 $264,000 $290,400 $794,400*
Plus: Desired ending inventory 66,000 72,600 79,860 79,860†
Inventory needed 306,000 336,600 370,260
Less: Beginning inventory 0 (66,000) (72,600)
Required purchases $306,000 $270,600 $297,660 89,298‡
Schedule of Cash Payments for Inventory Purchases
70% of current purchases $214,200 $189,420 $208,362
30% of prior month’s purchases 0 91,800 81,180
Total budgeted payments
for inventory $214,200 $281,220 $289,542
*Cost of goods sold reported on first quarter pro forma income statement (sum of monthly
amounts).
†Ending inventory balance reported on March 31 pro forma balance sheet.
‡Ending accounts payable balance reported on pro forma balance sheet ($297,660 X 0.3).

= THE END =

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