ADVANCED MANAGEMENT ACCOUNTING

NUMERICAL QUESTION

Q1: Faaris corporation makes a single product, a fire-resistant commercial filing cabinet – that it sells
to office furniture distributors. The company has a simple ABC system that it uses for internal decision
making. The company has two overhead departments whose costs are listed below:

Manufacturing overheads = 500,000.

Selling and administrative overheads = 300,000.

Total overhead costs = 800,000.

The company’s ABC system has the following activity cost pools and activity measures:

Activity cost pool Activity measure

Assembling units Number of units.

Processing orders Number of orders.

Supporting customers Number of customers

Others Not applicable

Cost assigned to the “other activity” cost pool have no activity measure, they consists of the costs of
unused capacity and organization-sustaining costs – neither of which are assigned to order, customers,
or the product.

Following information is relevant:

Activity cost pool Total cost Total activity

Assembly units 280,000 1000

Processing orders 310,000 250

Supporting customers 100,000 100

Office mart is one of the Faaris corporation’s customers. Last year office mart ordering filing cabinets
four different times. Office mart ordered a total of 80 filing cabinets during the year. Compute the
overhead costs attributable to office mart.

Q2: Faaris corporation makes a single product, a fire-resistant commercial filing cabinet – that it sells
to office furniture distributors. The company has a simple ABC system that it uses for internal decision
making. The company has two overhead departments whose costs are listed below:
 Manufacturing overheads = 500,000.

Selling and administrative overheads = 300,000.

Total overhead costs = 800,000.

The company’s ABC system has the following activity cost pools and activity measures:

Activity cost pool Activity measure

Assembling units Number of units.

Processing orders Number of orders.

Supporting customers Number of customers

Others Not applicable

Cost assigned to the “other activity” cost pool have no activity measure, they consists of the costs of
unused capacity and organization-sustaining costs – neither of which are assigned to order, customers,
or the product.

Faaris corporation distributes the costs of manufacturing overhead and of selling and administrative
overhead to the activity cost pool based on employee interviews, the results of which are reported
below:

Distribution of Resource consumption across activity cost pools

Assembling Processing Supporting other total

Units orders customers

Manufacturing overhead 50% 35% 5% 10% 100%

Selling and admin. Overheads 10% 45% 25% 20% 100%

Total Activity 1000 units 250 units 100 customers

Compute activity rates for the following activity cost pools:

a) Assembling units and,

b) Processing orders.

Q3: Khan limited is a diversified manufacturer of industrial goods. The company’s activity based
costing system contains the following six activity pools and activity rates.

Activity cost pool Activity rates

Supporting direct labor........................................ Rs. 6 per direct labor-hour.

 Machine processing............................................. Rs. 4 per machine hour.

Machine setups.................................................... Rs. 50 per setup.

Production orders................................................ Rs. 90 per shipment.

Shipments............................................................ Rs. 14 per product.

Product sustaining............................................... Rs. 840 per product.

Activity data have been supplied for the following two products.

Total Expected Activity

Alpha Beta

Number of units produced per year 200 2000

Direct labor hours 80 500

Machine-hours 100 1500

Machine setups 1 4

Production orders 1 4

Shipments 1 10

Product sustaining 1 1

Required:

The total overhead cost that would be assigned to product Beta in the activity-based costing system is:

Q4: Pak Box makers manufactures a variety of special packaging boxes used in the pharmaceutical
industry. The company’s plant is semi-automated, but the special nature of the boxes requires some
manual labor. The controller has chosen the following activity cost pools, cost drivers, and pool rates
for the plant’s product costing system: 05.

Activity Pool cost Overhead Cost Cost Driver Budgeted level Pool Rate
(Rs.) for Cost Driver
Purchasing storage 200,000 Raw-material costs Rs. 1000,000 20% of material
and material cost
handling
Engineering and 100,000 Hours in design 5000 hours Rs. 20 per hour
product design. department
Machine setup 70,000 Production runs 1000 runs Rs. 70 per run
costs
Machine 300,000 Machine hours 100,000 hours Rs. 3 per hour
 depreciation and
maintenance.
Factory 200,000 Machine hours 100,000 hours Rs. 2 per hour
depreciation,
taxes, insurance
and utilities.
Other 150,000 Machine hours 100,000 hours Rs. 1.50 per
manufacturing hour
overhead costs.
Total 1020,000

Two recent production orders had the following requirements.

20,000 units of 10,000 units of

Box C52 Box W29

Direct-labor hours 42 hours 21 hours

Direct-material cost Rs. 40,000 Rs. 35,000

Hours in design department 10 25

Production runs 2 4

Machine hours 24 20

Suppose the plant were to use a single overhead rate, based on direct labor hours. The direct labor
budget calls for 4000 hours.

a) Compute the pre-determined overhead rate per direct-labor hour.

b) Compute the total overhead cost that would be assigned to the order for box C52.

c) Compute the overhead cost per box for the order.

Q5: Farooq paints company (FPC) uses ABC method for allocating the overheads cost to each of its
three products A, B and C. The following budgeted and activity data is available for its three products.

Product Annual Production size (units) Batch size

A 60,000 300

B 30,000 120

C 25,000 500 .

Activity COST (Rs.) Cost Driver

 Material Handling 9000,000 Number of Batches

Cost driver rate for material handling costs is:

Q6: Foam products limited makes foam seat cushions for the automotive and aerospace industries.
The company’s activity based costing system has four activity cost pools, which are listed below along
with their activity measures and activity rates.

Activity cost pool Activity-measure Activity rate

Supporting direct labor Number of direct labor hours Rs. 5.55 per direct labor hour

Batch processing Number of batches Rs. 107.00 per batch

Order processing Number of orders Rs. 275 per order

Customer service Number of customers Rs. 2463.00 per customer

The company just completed a single order from inter-province trucking for 1000 custom seat cushions.
The order was produced in two batches. Each seat cushion required 0.25 direct labor hours. The selling
price was Rs. 20 per unit, the direct material costs was Rs. 8.50 per unit and the direct labor cost was Rs.
6.00 per unit. This was interstate trucking only order during the year.

Required:

The customer margin on sales to inter-province trucking for the year is .

Q7: The operations vice-president of Reliable Bank Limited has asked your help in conducting activity
based costing study of bank operations. In particular, he would like to know the cost of opening an
account, the cost of processing deposit, with drawls and the cost of processing other customer
transactions. The West branch of the Bank has submitted the following cost data for last year:

Rs.

Teller wages 160,000

Assistant branch manager salary 75,000

Branch manager salary 80,000

Total 315,000

Virtually all other costs of the branch – rent, depreciation, utilities, and so on – are organization-
sustaining costs that cannot be meaningfully assigned to individual customer transactions such as
depositing checks. In addition, to the cost data above, the employees of the West branch have been
interviewed concerning how their time was distributed last year across the activities included in activity
based costing study. The results of those interviews appear below:

Opening Processing deposits Processing other Other Total

 Accounts and with drawls customer transactions Activities

Teller wages 5% 65% 20% 10% 100%

(Assistant branch 15% 5% 30% 50% 100%

Manager salary)

(Branch manager 5% 0% 10% 85% 100%

Salary)

Required:

Prepare the first stage allocation for the activity based costing study.

Q8: Lamar company is considering a project that would have an eight year life and require a Rs.
2400,000 investment in equipment. At the end of eight years, the project would terminate and the
equipment would have no salvage value. The project would provide net operating income each year
as follows:

Rs.

Sales 3000,000.

Variable expenses 1800,000.

Contribution margin 1200,000.

Fixed expenses:

Advertising, salaries, and other fixed out-of-pocket costs 700,000.

Depreciation 300,000.

Total fixed expenses (1000,000).

Net operating income 200,000.

The company’s discount rate is 12%.

Required:

Find the project’s internal rate of return to the nearest whole percent.

Answer:

Net operating income....................................... 200,000.

Add back: Depreciation..................................... 300,000.

Annual cash inflows........................................... 500,000.

Net present value at 12%:

Items Years cash flows Discount factor (12%) Present value

Cost of new eq. 0 (2400,000) 1 (2400,000)

Annual cash flows 1–8 500,000 4.968 2484,000

Net present value 84000

Net present value at 14%:

Items Years cash flows Discount factor (14%) Present value

Cost of new eq. 0 (2400,000) 1 (2400,000)

Annual cash flows 1–8 500,000 4.639 2319,500

Net present value (80,500)

IRR Calculation:

IRR = a% + NPV at a% x (b% - a%).

NPV at a% - NPV at b%

IRR = 12% + 84000/(84000-80500) x (14% - 12%).

IRR = 0.6 %

Q9: Maryam Textile Limited is considering to purchase a machine for use in the production
department. The machine would cost Rs. 900,000. An additional 650,000 would be required for
installation cost and for software. Management believes that the machine would provide substantial
annual reductions in costs, as shown below:

Annual Reduction

Labor cost Rs. 240,000

Material cost Rs. 96,000

The new machine would require considerable maintenance work to keep it in proper adjustment. The
company’s engineers estimate that maintenance costs would increase by Rs. 4250 per month. If the
machine were purchased in addition, the machine would require a Rs. 90,000 overhaul at the end of
sixth year.

The new etching machine would be useable for 10 years, after which it would be sold for its scrap value
of Rs. 210,000. It would replace an old etching machine that can be sold now for its scrap value of Rs.
70,000. Masters computers requires a rate of return of at least 18% on investment of this type.
What would be the new machine’s net present value using the incremental-cost approach? Would you
recommend that the machine be purchased?

Answer: Rs.

Initial cash flow (year 0) calculation:

Cost of new machine...................................... (900,000).

Add: Installation charges................................ (650,000).

Add: Scrap value of old machine.................... 70,000.

Initial cash flow.......................................... (1480,000).

Cash flows calculation:

Annual reductions in labor.......................................240,000.

Annual reduction in material....................................96,000.

Annual maintenance cost........... 4250 x 12.............(51,000)

Net cash flows 285000

Terminal cash flow calculation:

Net cash flow............................................................ 285,000.

Add: Scrap value....................................................... 210,000.

Terminal cash flow at year 10...................................495,000.

NPV Calculation:

Items Years cash flows Discount factor (18%) Present value

Initial cash flows 0 (1480,000) 1 (1480,000)

Routine cash flows 1 285,000 0.847 241,525

2 285,000 0.718 204,683

3 285,000 0.609 173,460

4 285,000 0.516 146,999

5 285,000 0.437 124,576

Overhaul 6 195,000 0.370 72234

7 285,000 0.314 89469

8 285,000 0.266 75820

 9 285,000 0.225 64255

Terminal cash flows 10 495,000 0.191 94576

NPV (192402)

Recommendation:

The machine should not be purchased since its NPV under incremental cash flow approach is less than
one (negative).

Q10: Bay City’s Department of public Works (DPW) is considering the replacement of some
machinery. This machinery has zero book value but its current market value is Rs. 960. One possible
alternative is to invest in new machinery, which has a cost of Rs. 46,800. This new machinery would
produce estimated annual operating cash savings of Rs. 15,000. The estimated useful life of new
machinery is four years. The DPW uses straight line depreciation. The new machinery has an
estimated salvage value of Rs. 2400 at the end of four years. The investment in the new machinery
would require an additional investment in working capital of Rs. 3600 which would be recovered after
four years. If the DPW accepts this investment proposal, disposal of the old machinery and investment
in the new equipment will take place in December 31, 20X4. The cash flows from the investment will
occur during the calendar years 20X5 through 20X8. The city has a 10% hurdle rate.

a) Prepare a net-present value analysis of the county DPW’s machinery replacement decision.

b) Should the DPW’s proposed investment in new machinery be accepted?

Answer: “Rs.”

Part a:

Initial Cash flow:

Cost of new machine..............................46,800

Less: Market value of old machine........ (960)

Add: Working capital.............................. 3600

Initial cash flow 49,440.

Annual cash flows:

Cash savings........................................... 15,000.

Terminal cash flow:

Annual cash flows................................... 15,000

Add: Salvage value.................................... 2400

Add: Working capital................................ 3600

Terminal cash flow 21,000

NPV Calculation:

Items Years Cash flows Discount rate Present Value

Initial investment 0 (49,440) 1 (49440)

Annual cash flows 1-3 15,000 3.1699 37,302

Terminal Cash flow 4 21,000 0.683 14,343

Net Present Value 2205

NPV Analysis: From above calculation NPV is found out to be Rs. 2205. (approx..).

Part b:

Since NPV of disposal decision is positive, Hence DPW’s proposed investment in new machinery should
be accepted.

Q11: Dr. Zain Shah is the managing partner of Benard health care clinic. Dr. Zain is trying to determine
the feasibility of moving both the patients and other related files out of the store room situated in the
clinic, replacing it with another OPD room. He has estimated the investment of Rs. 3595,200 required
for equipment and other necessities of the room. Based on receipts being generated from other
rooms in the clinic, Dr. Zain also estimated the annual cash inflow from the new room would be Rs.
750,000 per annum. The equipment purchased from the room would have an estimated life of 10
years.

i. Determine the Internal Rate of Return (IRR).

ii. Assuming that Dr. Zain Shah will not purchase the new equipment unless it promises a return of at
least 15%. Compute the amount of annual cash inflows that would provide this return on Rs. 3595200
investment.

Answer:

Part i:

NPV at 14% “ Rs.”

Items Years Cash flows Discount Rate Present Value

Initial Investment 0 (3595200) 1 (3595200)

Annual Cash flows 1 – 10 750,000 5.216 3912086

Net Present Value 316887

NPV at 17% “ Rs.”

Items Years Cash flows Discount Rate Present Value

Initial Investment 0 (3595200) 1 (3595200)

Annual Cash flows 1 – 10 750,000 4.659 3493952

Net Present Value (101,248)

IRR Calculation:

IRR= 0.14 + 316889 (0.17 – 0.14)

316889 + 101248

IRR= 16.27%.

Part ii:

NPV at 15% “ Rs.”

Items Years Cash flows Discount Rate Present Value

Initial Investment 0 (3595200) 1 (3595200)

Annual Cash flows 1 – 10 716,312 5.019 3595200

Net Present Value 0 .

Since, at 15% discount rate, the NPV becomes zero, making 15% , the internal required rate of return,
for which the annual cash inflows must be approximately Rs. 716,312.

Q12: At the start of the month of January, Mr. Altaf khan paid Rs. 270,000 for 800 shares of the
common stock of Simon Limited (SL). He receives a dividend of Rs. 12 per share on the stock at the
end of the year for 5 years. At the end of 5 years, he sold the stocks for Rs. 337,500. Mr. Altaf has a
target of earning minimum return of 12% on all his stock. Using NPV method determine if Mr. Altaf
earned a return of 15% on stock.

Answer:

Items Years Cash flow Rate (12%) Present value Rate (15%) Present Value

Initial investment 0 (270,000) 1 (270,000) 1 (270,000)

Cash flows 1–5 9600 3.60 34608 3.352 32179

Sale of stock 5 337,500 0.567 191507 0.497 167738

NPV (43885) (70083)

Analysis: Since NPV at both rates (12% , 15%) is negative, hence required rate of return of 15% was not
achieved by Mr. Altaf.

Q13: Tek Enterprises uses a computer to handle its sales invoice. Lately, business has been so good
that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales
invoices. Management is considering updating its computer with faster model that would eliminate all
of the overtime processing.

Current Machine New Machine

Original purchase cost 15,000 25,000

Accumulated depreciation 6000 ----

Estimated Annual operating costs 25,000 20,000

Useful life 6 years 6 years

If sold now, the current machine would have a salvage value of Rs. 5000. If operated for the reminder of
its useful life, the current machine would have zero salvage value. The new machine is expected to have
zero salvage value after 6 years.

a) What impact will be on the net income if the current machine is replaced?

b) Should the current machine be replace? (Ignore time value of money).

Answer: Part (a):

Retain Machine Replace Machine Net Income/Loss

Operating Cost Rs. 150,000 Rs. 120,000 Rs. 30,000

New Machine Cost Rs. 25,000 (Rs. 25,000)

Salvage value (Old) (Rs. 5000) Rs. 5000

Total Rs. 150,000 Rs. 140,000 Rs. 10,000 .

Impact on Net income is that, it is increased by Rs. 10,000.

Part (b):

Since Net Income is positive Rs. 10,000, Hence the machine should be REPLACED.

Q14: Lamar company is considering a project that would have an eight year life and require a Rs.
2400,000 investment in equipment. At the end of eight years, the project would terminate and the
equipment would have no salvage value. The project would provide net operating income each year
as follows:
 Rs.

Sales 3000,000.

Variable expenses 1800,000.

Contribution margin 1200,000.

Fixed expenses:

Advertising, salaries, and other fixed out-of-pocket costs 700,000.

Depreciation 300,000.

Total fixed expenses (1000,000).

Net operating income 200,000.

The company’s discount rate is 12%.

Required:

a) Compute the project’s payback period.

b) Compute the project’s simple rate of return.

Answer:

Part (a):

Amount in “Rs.”

Net operating Income.......................................................................... 200,000.

Add Back: Depreciation....................................................................... 300,000.

Annual cash flows 500,000

Project’s payback period = Investment Required/Annual net cash flow

Project’s payback period = 2400,000/500,000

Project’s payback period = 4.8 years.

Part (b):

Simple Rate of Return = Annual incremental net operating income/ Initial investment

Simple Rate of Return = 200,000/ 2400,000.

Simple Rate of Return = 8.3%.

Q15: East Point Limited (EPL) has Rs. 45 Million to invest. The company is trying to decide between
two alternative uses of fund. The alternatives are as follows:

W R

Rs.

Cost of equipment 45000000 -

Working capital investment required - 45000000

Annual cash inflows 12000000 9000000

Salvage value of equipment in 7 years 3000000 -

Life of the project 7 years 7 years

The working capital needed for project R will be released for investment elsewhere at the end of the 8
years. EPL uses cost of capital of 20% per annum.

Recommend which investment alternative (if either) the company may accept. Support your answer
with necessary calculations.

Answer:

We will find NPV of both proposals in order to find the acceptable proposal for investment.

NPV of Proposal W: Amount in “Rs.

Item Years Cash flows Discount Rate Present Value

Initial Investment 0 45,000,000 1 (45,000,000)

Annual cash inflows 1–7 12,000,000 3.605 43,260,000

Salvage value 7 3000,000 0.279 837,245

Net Present Value (902,755)

NPV of Proposal R: Amount in “Rs.

Item Years Cash flows Discount Rate Present Value

Working capital 0 45,000,000 1 (45,000,000)

Annual cash inflows 1–7 9,000,000 3.605 32,445,000

Working cap. released 8 45,000,000 0.233 10,465,562

Net Present Value (2089438)

Since, NPV of both projects is negative, hence no investment proposal shall be accepted.
Q16: A construction company wishes to replace its mixing fleet and worked on the calculations for
determining the appropriate replacement cycle of its fleet. As per the calculations, the company has
remained indifferent regarding replacing its fleet in every 2 years or 4 years. The present value of the
replacement cycle for the first 2 years is Rs. 2604,000 and for 4 years Rs. 4755000. The company is
using .......... as its discount rate.

Answer:
We have to find the rate at which the company is indifferent in investment decision i-e: the rate at
which present value of both the proposal is same. Hence
−n −n
1−( 1+r ) 1−( 1+r )
Ax = Ax
r r
−2 −4
1−( 1+r ) 1−( 1+r )
2604,000 x = 4755,000 x
r r
2604,000 – 2604,000 ( 1+r )−2 = 4755,000 – 4755,000 ( 1+r )−4

2604,000 – 2604,000/( 1+r )2 = 4755,000 – 4755,000/ ( 1+r ) 4

4755,000/ ( 1+r ) 4 – 2604,000/( 1+r )2 = 2151,000

Taking square root on both sides:

2181 / ( 1+r )2– 1614 / 1 + r = 1467

Multiplying by ( 1+r )2 on both sides.

2181 = 1614 (1 + r) + 1467 ( 1+r )2

2181 = 1614 + 1614 r + 1467 ( 1 + r 2 + 2r)

2181 = 1614 + 1614 r + 1467 + 1467 r 2 + 2934 r

1614 + 1614 r + 1467 + 1467 r 2 + 2934 r – 2181 = 0.

1467 r 2 + 4548 r + 900 = 0

Using quadratic formula,

−4548 ± √ ( 4548 x 4548 )−4(1467)(900)

R=
2 x 1467
Rate = r = 2.88 = 3% approximately. At this rate the company will have equal present value, Hence NPV
at 3% is same for both proposals keeping initial investment constant. Hence discount rate is 3%
approximately.
Q17: Tariq limited currently has credit sales of Rs. 360 million per year and an average collection
period of 60 days. Assume that the price of Tariq’s products is Rs. 75 per unit and that the variable
cost are Rs. 55 per unit. The firm is considering an account receivable change that will result in a 20%
increase in sales and a 20% increase in the average collection period. No change in bad debts is
expected. The firm’s equal risk-opportunity cost on its investment in accounts receivable is 14% (Note:
use a 365-day year). What marginal investment in accounts receivable will result?

a) Rs. 11,389,156.

b) Rs. 26,038,000.

c) Rs. 54,276,316.

d) Rs. 78,106,509.

Answer:

Actually this is a part of a long question which has 4 parts. We will discuss the whole question here:

a) calculate the additional profit contribution from sales that the firm will realize if it makes the
proposed change.

b) what marginal investment in accounts receivable will result?

c) calculate the cost of the marginal investment in accounts receivable.

d) should the firm implement the proposed change?

Part a)

Current Increase New

Credit Sales Rs. 360 million Rs. 72 million Rs. 432 million

Price per unit 75 75

Number of units 4.80 million 5.76 million

Avg. collection period 60 days 12 days 72 days

Additional profit contribution:

Additional units.............................................................. 5.76 million – 4.80 million= 0.96 million.

Contribution................................................................... 75 – 55= Rs. 20.

Additional profit contribution......................................... 0.96 x Rs. 20= Rs. 19.2 million.

Part b)

Marginal investment in accounts receivable:

Current accounts receivable.......................................... 59.178

(360 x 60/365)
New accounts receivable............................................... 85.216

(432 x 72/365)

Marginal investment in accounts receivable Rs. 26.038 million

Part c:

Cost of marginal investment:

Marginal investment x cost of investment percentage

26.038 million x 0.14 = Rs. 3.645 million

Part d:

The firm should implement the proposed change as the additional profit contribution is higher than
marginal cost of investment.

Q18: Al wahid company produces kitchen cabinets for homebuilders across the western Pakistan. The
cost of producing 5000 cabinets is as follows:

Rupees

Materials 50,000,000

Labor 25,000,000

Variable overheads 10,000,000

Fixed overheads 40,000,000

Total 125,000,000

Al Wahid also incurs selling expenses of Rs. 2000 per cabinet. Western company has offered Al Wahid
Rs. 16,500 per cabinet for a special order of 1000 cabinets. This order will not conflict with Al wahid’s
current sales. Selling expenses per cabinet would be only Rs. 500 per cabinet. Al wahid has available
capacity to do the work.

a) How the net income of the company would be effected if the offer is accepted.

b) Should Al Wahid accept the special order?

Answer:

Part a:

Relevant cost per unit as computed by the Wahid's accountant would be as follows:

Materials (Rs.50,000,000/5,000).................................... Rs. 10,000.

Labor (25,000,000/5,000)................................................... Rs. 5000

Variable Overhead (10,000,000/5,000)................................. Rs. 2000

Selling expenses per unit....................................................... Rs. 2000

Total relevant cost per unit.................................................... Rs. 19,000

Relevant cost of offer:

Material cost per unit............................................................... Rs. 10,000.

Labor cost per unit................................................................... Rs. 5000.

Variable cost per unit............................................................... Rs. 2000.

Selling expenses per unit.......................................................... Rs. 500

Total relevant cost per unit.................................................... Rs. 17,500

Reduction in cost per unit (Rs. 19,000 – Rs. 17,500).................. Rs. 1500.

Effect on net income for special order (Rs. 1500 x 1000)........... Rs. 1500,000.

Part b:

This order should be expected since incremental costing method yields net profit of Rs. 1500,000 if the
order is accepted.

Theoretical Question

Q1: What benefits may a properly planned and administrated budgeted system bring? 05

Answer:

 Budgeting forces the management to study about the problems relating to the timely
implementation. It generates a sense of caution and care among the line managers.
 It defines the objectives of an organization in numerical terms for a specific period.
 Budgeting helps in directing both capital and revenue resources in a profitable way.
 It provides an accurate forecast of customer’s demand. It encourages competitiveness among
employees and provides incentive to those who perform efficiently.
 A systematic and disciplined approach is followed to solve the problems in an organization
through budgetary control.
Q2: Exponential smoothing is a frequently used forecasting technique which largely overcomes the
limitations of moving averages. Describe characteristic of exponential smoothing and compare it with
moving averages. (05).

Answer:
1. Exponential smoothing is a rule of thumb technique for smoothing time series data using the
exponential window function. Whereas in the simple moving average the past observations are
weighted equally, exponential functions are used to assign exponentially decreasing weights
over time. It is an easily learned and easily applied procedure for making some determination
based on prior assumptions by the user, such as seasonality. Exponential smoothing is often
used for analysis of time-series data.
2. Exponential Moving Average where the emphasis is the current price rather than a simple
average of price.
3. We can use Exponential Moving Averages when you are Swing Trading, Momentum Trading,
Platform Position Trading, Day Trading, or Velocity Trading and Momentum Sell short trading.

4. As opposed to a simple moving average (SMA), which gives all data points the same weight, an
exponential moving average (EMA) gives more weight to recent data, hence it is more useful
when recent data is more relevant than the historical average.

5. EMA is calculated by:

1. Calculating an EMA% dependent on the number of data points you want to consider, EMA% =
2/(n + 1) where n is the number of points you want to consider,

Q3: How would you define a standard and what are different ways in which it could be developed?

Answer:

Standard in simple words is a measure of what is expected to take place under the current or
anticipated circumstances. Another way of defining standard is that it is something that is
predetermined or planned and management wishes that actual results equate to standards.

Standards are one of important quantitative tools in the hand of management to control and
measure performance of business operations. However it heavily depends on the type of
standards used to decide about the control actions and to measure the performance.

Method of developing a standard is divided into seven steps.

1. Identify

First, identify a need. Once a need is identified, a project proposal to create a new standard, or to
update an existing one, is put forward.
2. Committee

Standards are created or reviewed by experts in the relevant field. They include researchers who
form into a technical committee.

3. Study

The technical committee conducts preliminary research and creates a draft outline of the new or
revised standard.

4. Consensus

Once a draft is written, technical committee members formally meet in person to approve a draft
for public review.

5. Public Review

The next step is to present the new or revised standard for public review. Anyone is welcome to
provide feedback to improve its quality and ensure standards cover all relevant areas and
perspectives.

6. Approve

After public review, the standard goes back to the technical committee to make amendments it
deems necessary based on the feedback received. The committee then votes on the final version.

7. Publish

After the new or revised standard receives final approval from the technical committee, it is
officially released.

Q4: Answer the following:

a) Describe steps involved in the management’s decision making process.

b) What is incremental analysis

Answer:

a) The decision‐making process involves the following steps:

1. Define the problem.

2. Identify limiting factors.

3. Develop potential alternatives.

4. Analyze the alternatives.
5. Select the best alternative.

6. Implement the decision.

7. Establish a control and evaluation system.

b) Incremental analysis is a decision-making technique used in business to determine the true cost
difference between alternatives. Also called the relevant cost approach, marginal analysis, or differential
analysis, incremental analysis disregards any sunk cost or past cost.

Incremental analysis is a problem-solving approach that applies accounting information to decision

making. Incremental analysis can identify the potential outcomes of one alternative compared to
another.

Q5: Despite of being useful forecasting technique there are some limitations of moving averages.
Briefly mention these limitations. (05)?

Answer:

While moving averages are widely used by investors and traders alike, the indicators are far from
perfect:

1. Moving averages draw trends from past price information only. Like any type of technical
analysis tool, chart indicators don't take into account changes in fundamental factors in the
managerial structure of the company.

2. Ideally, a moving average will show a consistent change in the price of a security over time.
However, since every asset has unique price histories and levels of volatility, there are no
uniform rules that can be applied across all markets.

3. Moving averages can be spread out over any time period and this can be problematic because
the general trend can be different depending on the time period used

4. Most recent data better reflect the direction but giving some days more weight than others
incorrectly biases the trend.

5. Some investors argue that moving averages (and other forms of technical analysis) are
meaningless and do not predict market behavior. They say that the market has no memory and
that the past is not an indicator of the future.

6. Securities often show a cyclical pattern of behavior that is not captured by moving averages.
That is, if a market is bouncing up and down a lot, moving averages are not likely to capture any
meaningful trends.

7. The purpose of any trend is to predict where the price of a security will be in the future.
However, if a security is not trending in either direction, it doesn't provide an opportunity to
profit from either buying or short selling.
Q6: Discuss briefly the type of factors which could effect the bases on organization can use to
apportion service department costs. (04).

Answer:

The basis used for apportionment of costs is the number of cost centers when the expenses are \to be
shared equitably between them. This happens when an overhead cannot be assigned directly to one
specific cost center

Methods of Apportionment of Service Department Overheads!

(a) Step-Ladder Method:

Under this method, expenses of one service department (generally the one which received the least
service and gives the maximum service from and to other service departments) are apportioned to all
other departments in the proportion of benefit derived by them.

(b) Inter-Service Departmental Mutual Allocation System (Simultaneous Equation Method):

The method assumes that service is rendered by one department to the other but not by the latter to
the former. This assumption is not valid since service departments not only render service to production
departments but also mutually.

(c) “Cycles” Methods or Repeated Distribution Method:

Instead of having an algebraic equation, the expenses of one service department may be apportioned to
all other departments (production as well as service) and then the expenses of other service
departments may be similarly treated.

(d) Trial and Error Method:

In this method the overheads of each service department is allocated only to other service department
in the given basis or ratio. Thus true overhead cost of each service department is ascertained. Thereafter
these are distributed to production department.

Q7: Service costing is an essential concept since every service organization needs to ascertain its
business overheads. Illustrate the characteristics of service organizations?

Answer:

Five high-effectiveness characteristics of service organizations

1. A well-defined service strategy

Highly effective service organizations are guided by a coherent strategy that aligns service initiatives to
overall corporate goals and objectives. The service strategy describes how service operations contribute
to the attainment of specific corporate objectives. And it’s responsive and resilient in the face of
changing customer profiles, trends, and demands.
2. Appropriate success metrics

Highly effective service organizations have the means to measure the contribution of service initiatives
to specific corporate goals and objectives. Success metrics provide not only visibility into progress
against goals, but also insights into areas to strengthen within the service organization. (And when the
service organization exceeds its goals, success metrics give service leadership leverage come budget
time.)

3. Performance insights and analytics

Highly effective service organizations have the means to monitor the current level of performance for
established success metrics with data and analytical insights. These insights can both stretch
organization-wide and provide pinpoint focus at the associate level to inform performance
management.

4. Ability to execute

Highly effective service organizations have the tools and resources required to execute service
strategies. Leadership readily leverages performance data and analytics to justifying necessary funding
levels that will address system and resource limitations.

5. Means to assess customer impact

Highly effective service organizations employ active customer feedback mechanisms to continually
assess the effect of service initiatives on CX. This direct customer knowledge empowers the service
organization to take an active “seat at the table” when corporate strategy and direction are defined,
assessed, and refined.

Q8: When selecting cost drivers for an activity based costing method, explain the factors that must be
considered?

Answer:

We allocate cost based on suitable cost drivers under activity-based costing. We select these cost drivers
based on three important factors.

 Casual Relationship - This means when there exist and obvious relationship between the cost
driver and the overhead costs then we select cost driver based on that relationship.

 Proportional Benefits - In absence of any obvious relationship, we allocate costs in proportion of

the benefits received. The department that was benefitted the most , will bear the highest cost.

 Reasonableness - If it is not possible to select cost drivers based on the above two factors, we
may select the most reasonable cost driver.
Q9: Present arguments in support of the following method of treatment of standard cost variance for
the purpose of financial reporting: Variance appearing as charges or credits on the statement of profit
or loss account are regarded as appropriate charges or credits in the period in which they occurred?

Answer:

Management is responsible for evaluation of variances. This task is an important part of effective control
of an organization. When total actual costs differ from total standard costs, management must perform
a more penetrating analysis to determine the root cause of the variances. The total variance for direct
materials is found by comparing actual direct material cost to standard direct material cost

In a standard cost system, both standard costs and actual costs are recorded in accounting records. This
dual record keeping affords an element of cost control by providing norms against which actual costs
operations can be compared.

Unfavorable variances are recorded as debits and favorable variances are recorded as credits.
Variance accounts are temporary accounts that are closed out at the end of the financial reporting
period.

Q10: In a paper mill, materials specification standards are set up for various grades of pulp and
secondary furnish (waste paper) for each grade and kind of paper produced. Yet at regular intervals
the cost accountant is able to determine a materials mic variance. Why does a mix variance occur?

Answer:

Materials mix variance

In any process, much time and money will have been spent ascertaining the exact optimum mix of
materials. The optimum mix of materials will be the one that balances the cost of each of the materials
with the yield that they generate.

Therefore, the optimum mix that minimizes the cost of the inputs compared to the value of the outputs
is mix

Reasons for occurrence of mix variance;

The variance can also be due to the change in the quantity from the optimum combination. We can say
that the variance arises because of a change in the ratio in which a company uses the materials, in
comparison to the set standard. This variance could either be favorable or unfavorable (or adverse).

Q11: Describe the steps involved in the management’s decision-making process and incremental
process.

Answer:

a) The decision‐making process involves the following steps:

1. Define the problem.

2. Identify limiting factors.

3. Develop potential alternatives.

4. Analyze the alternatives.

5. Select the best alternative.

6. Implement the decision.

7. Establish a control and evaluation system.

b) Steps involved in incremental analysis:

1. Determine the relevant costs.

2. Identify any opportunity costs.

3. Add costs together.

4. Compare the options.

5. Make a decision.

Q12: CD copy makers provides CD duplicating services to software companies. The customer provides
master CD from which CD copy makers copies. An order from a customer can be for a single copy or
for thousands of copies. Most jobs are broken down into batches to allow smaller jobs with higher
priorities to have access to the machines. A number of activities carried out at CD copy Makers are
listed below:

a) sales representatives’ periodic visits to customers to keep them informed about the services provided
by CD copy makers.

b) ordering labels from the printer for a particular CD.

c) setting up the CD duplicating machine to make copies from a particular master CD.

d) Loading the automatic labeling machine with labels for a particular CD.

e) Visually inspecting CDs are placing them by hand into protective plastic cases prior to shipping.

f) preparation of the shipping documents for the order.

g) periodic maintenance of equipment.

h) lighting and heating the company’s production facility.

Required:

Classify each of the activities above as either a unit-level, batch-level, product-level, customer level, or
organization-sustaining activity. An order to duplicate a particular CD is a product-level activity. Assume
the order is large enough that it must be broken down into batches.

Answer:
a) Customer level.

b) Product level.

c) Batch level.

d) Batch level.

e) Unit level.

f) Product level.

g) Organization sustaining level.

h) Organization sustaining level.

Q13: If an organization is a part of manufacturing sector and uses forecasting technique like Linear
regression analysis for determining the total operating costs and quantity produced. What concerns
the company might have while using the regression analysis model for budgetary planning purposes?

Answer:

Managerial concerns in using regression analysis:

Despite the above utilities and usefulness, the technique of regression analysis suffers form the
following serious limitations:

 It is assumed that the cause and effect relationship between the variables remains unchanged.
This assumption may not always hold good and hence estimation of the values of a variable
made on the basis of the regression equation may lead to erroneous and misleading results.

 The functional relationship that is established between any two or more variables on the basis
of some limited data may not hold good if more and more data are taken into consideration. For
example, in case of the Law of Return, the law of diminishing return may come to play, if too
much of inputs are used with ca view to increasing the volume of output.

 It involves very lengthy and complicated procedure of calculations and analysis.

 It cannot be used in case of qualitative phenomenon viz. honesty, crime etc.

Q14: Mention any four factors that should be considered before the cause of a variance is
investigated?

Answer:

Factors to Consider
When deciding which variances to investigate, the following factors should be considered

1. Reliability and accuracy of the figures.

Mistakes in calculating budget figures, or in recording actual costs and revenues, could lead to a
variance being reported where no problem actually exists (the process is actually ‘in control’).

2. Materiality.

The size of the variance may indicate the scale of the problem and the potential benefits arising
from its correction.

3. Possible interdependencies of variances.

Sometimes a variance in one area is related to a variance in another.These two variances would
need to be considered jointly before making an investigation decision.

4. The inherent variability of the cost or revenue.

Some costs, by nature, are quite volatile (oil prices, for example) and variances would therefore
not be surprising. Other costs, such as labor rates, are far more stable and even a small variance
may indicate a problem.

5. Adverse or favorable?

Adverse variances tend to attract most attention as they indicate problems. However, there is
an argument for the investigation of favorable variances so that a business can learn from its
successes.

Q15: Zahid limited manufactures and market a slimming drink. Current output is 400,000 cans per
month which represents 80% of capacity. They have the opportunity to utilize their surplus capacity
by selling their product to a supermarket chain who will sell it as an own label product. If Zahid limited
accept this order, it will produce a positive contribution. However, there are several other factors
which would need to be considered before a final decision is taken. What are these factors.

Answer:

Other factors to consider include:

i. Will the acceptance of one order at a lower than market price make other customers to ask for price
reductions?

ii. Is the so called special price the most profitable way of utilizing the excess capacity?

iii. If accepted, will the special order not block the acceptance of offers which may be at true market
price? and
iv. Will fixed cost remain constant?

Q16: There are different types of standards, which include:

a) Basic standards.

b) Ideal standards.

c) Attainable standards.

Explain these briefly.

Answer:
Basic Standards:

Basic Standards are the unaltered standards which are used over for a longer period of time and do
not reflect current conditions. These standards are not useful from the cost of control point of view as
they consider only fixed costs. It is only a technique which is used with the intention of controlling cost.

Ideal Standards:

Ideal standards are the standards which are set by assuming best-case working conditions. Ideal
standards do not consider any wastage that may occur in the production process due to machinery
breakdowns, employee strikes, employee unproductivity, material shortages etc.

Attainable Standards:

Attainable standards represent what could be achieved with a reasonable level of effort under normal
operating conditions. They include an allowance for normal losses, machine breakdowns, maintenance
and idle time.

Q17: Comment on the following statement “ Budgeting is an iterative process”.

Answer:

Iterative process:

Iterative means “to repeat or do again.” The iterative process is a combination of top-down and
bottom-up budget building. There is a higher project level (top-down) and a lower level (bottom-up)
estimation of costs.

Budgeting as iterative process:

We can not obtain the perfect budget on the first try because not how business budgeting works. The
entire effort is an iterative process, which demands the requisite time and attention to evolve.

At first it typically begins with a “wish list” based on the information gathered and the projection
analysis completed by the entity. People tend to be overly optimistic on revenue (which is why so many
companies miss their plan). Therefore, it must undergo a process of refinement by updating these
projections accurately, eliminating where necessary and reallocating where appropriate. This could take
countless rounds of review and revision.

After that the budget is presented to a board, but it is not expected that the budget will go through on
the first attempt. It requires multiple reviews and the corresponding work associated with implementing
changes.

Q18: A company currently operating at full capacity, manufactures and sells sauce pans at Rs. 2 each.
Current volume is 100,000 pans per annum with the following cost structure.

Operating statement for the year

Rs.

Sales (100,000 at Rs. 2) 200,000

Marginal cost:

Labor 80,000

Material 50,000

(130,000)

Contribution 70,000

Fixed costs (30,000)

Net profit 40,000

An opportunity has arisen to supply an additional 30,000 pans per annum at Rs. 1.8 each. Acceptance of
this order would incur extra fixed cost of Rs. 8000 per annum for the hire of additional machinery and
the payment of an overtime premium of 20% for the extra direct labor required.

i) If the order is accepted, what impact would it have on net profit?

ii) In addition to net profit, what other factors need to be considered for accepting or rejecting the
order?

Answer:

Additional units to be sold = 30,000 units.

Sales price per unit = Rs. 1.8.

Total sales value = 30,000 x 1.8 = Rs. 54,000.

Less: extra fixed cost = (Rs. 8000)

Less: extra labor cost = 80,000 x 20% = (Rs. 16,000)

Extra profit = impact on net profit = Rs. 30,000.

Q19: What is a cash budget and what purpose does it serve for an organization?

Answer:

A cash budget is an estimation of the cash flows of a business over a specific period of time. This could
be for a weekly, monthly, quarterly, or annual budget. This budget is used to assess whether the entity
has sufficient cash to continue operating over the given time frame. The cash budget provides a
company insight into its cash needs (and any surplus) and helps to determine an efficient allocation of
cash.

Purpose of cash flows:

 A cash budget is a company's estimation of cash inflows and outflows over a specific period of
time, which can be weekly, monthly, quarterly, or annually.

 A company will use a cash budget to determine whether it has sufficient cash to continue
operating over the given time frame.

 A cash budget will also provide a company with insight into its cash needs and any surpluses,
which help it determine an efficient use of cash.

 Cash budgets can be viewed as short-term cash budgets, usually, a time frame of weeks to
months, or long-term cash budgets, which are viewed as years.

 A company must manage its sales and expenses to reach an optimal level of cash flows.

Q20: Bazil limited uses back flush accounting in conjunction with JIT. The system does not include a
raw material stock control account. During the control period 8400 units were produced and sold and
conversion costs of Rs. 8000 incurred. The standard unit cost is Rs. 60 inclusive materials cost of Rs.
30. What is the debit balance on the cost of goods sold account at the end of control period 8?

Answer:

Unit cost = Rs. 60.

Total units = 8400.

Total cost = 8400 x 60 = 504,000.

Less: Material cost = 8400 x 30 = (252,000)

Conversion cost = Total cost – material cost = 252,000.

Less: conversion cost given in question (8000).

= Debit cost to be added = Rs. 244,000.