ICMA.

MANAGEMENT ACCOUNTING
9

(BAF-401)

Pakistan
SEMESTER-4
FALL 2014 EXAMINATIONS
Sunday, the 8th March 2015
Extra Reading Time: 15 Minutes Maximum Marks: 80 Roll No.:
Writing Time: 02 Hours 30 Minutes
(i) Attempt all questions.
(ii) Answers must be neat, relevant and brief.
(iii) Use of non-programmable scientific calculator of any model is allowed.
(iv) Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper.
(v) In marking the question paper, the examiners take into account clarity of exposition, logic of arguments,
effective presentation, language and use of clear diagram/ chart, where appropriate.
(vi) DO NOT write your Name, Reg. No. or Roll No., or any irrelevant information inside the answer script.
(vii) Question No. 1 – “Multiple Choice Question” printed separately, is an integral part of this question paper.
(viii) Question Paper must be returned to invigilator before leaving the examination hall.
Answer Script will be provided after lapse of 15 minutes Extra Reading Time (9:45 a.m. or 2:45 p.m. [PST] as the case may be).
Marks
Q. 2 (a) Organisations prepare budgets for various purposes. Discuss any five purposes. 05

(b) Grace Furnitures, a renowned company, makes stylish and modern furniture. The
company not only sells wide range of furniture locally but also makes some units on
special orders for India. The Chief Executive Officer (CEO) of Grace Furnitures,
Mr. Ahmed is concerned about the recent downturn in local industry and its impact on
company’s operating income. The following income statement shows the current year
financial performance of Grace Furnitures:
Grace Furnitures
Income statement
For the year ended December 31, 2014
Rs. ‘000’
Sales Revenue:
Local sales 1,500,000
Special order sales 420,000
Total revenues 1,920,000
Cost of goods sold 1,152,000
Gross margin 768,000
Operating Costs:
Product design cost 50,000
Maintenance cost 230,000
Marketing and advertising cost 100,000
Selling and distributing cost 65,000
Total operating costs 445,000
Operating income 323,000
The Manager of the company, Mr. Hamza, gathered the information about local sales and
pleased to ascertain that downturn is over and sales have been increasing than expected.
Moreover, one of the key competitors in the local market could not survive in recession
period and left the market.
Mr. Hamza predicted that a little more efforts in marketing will grow local as well as
international sales. Further quality improvements and little more marketing will make
following changes in costs and selling price of the next financial year 2015:
 Local sales in units are expected to increase by 8% as the economic recession is
over. Since the economic recovery begins, Grace Furnitures is expecting increase in
special order sales from India by 8% units in the next year.
 It is expected that selling price of furniture locally sold will rise by 12%, while the
selling price of special order sales will remain unchanged.
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 Quality improvements will result 4% increase in cost of each unit sold.
 Selling and distribution costs vary in proportion to the number of units locally sold.
 A group of designer will be hired specially for the purpose of making furniture more
stylish and attractive. Resultantly, product design cost is expected to increase by
Rs. 12,000,000.
 Marketing Manager decided to hire three more marketing personnel that will increase
marketing and advertising cost to Rs. 135,000,000.
 Mr. Hamza suggested that the company should recruit maintenance technicians for
customer service who will assemble furniture at customer place. This will increase
maintenance cost by Rs. 75,000,000.
 Assume no tax is applicable.
Required:
The CEO of Grace Furnitures wants to know whether the predictions of Mr. Hamza would
result in improved financial performance of the company and asked you to prepare
budgeted income statement for the year ended December 31, 2015. Comment and
support your answer with appropriate calculations. 08

Q. 3 BMS Food Caterers supplies meal boxes to canteens of various hospitals and organisations.
BMS has recently installed standard costing system to monitor and control its cost. The
Caterers set the following budgeted and standard data for each box:
Budgeted sales and production activity level (boxes) 36,000
Selling price per box (Rs.) 350
Standard Costs: Rs./ Box
Meal (average standard cost of Rs. 192 per kilogram) 210
Labour cost (2 minutes for packing per meal box) 30
Variable overhead (2 minutes for packing per meal box) 15
35,600 boxes were actually served to generate the revenue of Rs. 12,104,000 during the month
of October 2014. The other actual cost data are as follows:
Cost of Production Rs./ Box
Meal (39,810 Kilograms) 7,404,800
Labour cost (1,500 hours) 996,800
Variable overhead (1,500 hours) 569,600
Required:
(a) Calculate total budgeted and actual contribution for the month of October 2014. 02
(b) Prepare a statement showing reconciliation of the budgeted contribution with actual
contribution. 02
(c) Calculate following variances:
(i) Sales volume contribution and sales price variances. 03
(ii) Material price and usage variances. 03
(iii) Labour rate and efficiency variances. 03
(iv) Variable overhead expenditure and efficiency variances. 03

Q. 4 Bostan and Company is considering investment in two different types of machinery

having cost of Rs. 20 million with zero residual value for both the machines. The estimated
cash inflows of Machine ‘A’ is Rs. 6 million per annum with estimated life of seven (7) years
while the life of Machine ‘B’ is three (3) years with following cash inflows:
Machine ‘B’ (Year) Cash Inflows (Rs. in million)
1 12
2 14
3 14
The company requires a return of 20% before taxation.
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Required:
Calculate the following for both the machines (round off all figures to 3 digits):
(a) Net present value (NPV) at 20% and 30% (use both rates). 08
(b) Internal rate of return (IRR). 05
(c) Payback period. 02
(d) Profitability index. 02

Q. 5 (a) AFC Bakers makes and supplies special delightful dark and white chocolate cookies to
famous five star hotels. As the business is growing rapidly, AFC Bakers wants to evaluate
its performance and provided following data for analysis:
The AFC Bakers sells two products each of which has the same selling price of Rs. 100 in
the given proportions along with cost data of producing cookies as under:
Dark Cookies White Cookies
Sales (%) 60 40
Variable cost (Rs./ Unit) 40 30
Fixed cost (Rs./ annum) 1,450,000

The management is satisfied with the prevailing performance of the company, because
they believe that total revenue of two products will reach to Rs. 5 million by the end of this
financial year.
Required:
You are appointed as a Management Accountant of AFC Bakers and management is
sought your advice in respect of the following:
(i) Calculate the breakeven sales revenue, based on given sales mix. 03
(ii) Assume there is a change in the sales mix to dark cookies and white cookies as
80% and 20% respectively. Evaluate the impact of these changes on break-even
point of two products. 03
(iii) Assume fixed cost of Rs. 550,000 is attributable to dark cookies. What sales revenue
would be required to recover fixed cost and earn contribution of Rs. 860,000 of dark
cookies. 03
(iv) Calculate the margin of safety in terms of sales revenue and percentage at expected
level of sales of Rs. 5 million using current as well as revised sales mix. 04

(b) The management of a company is planning to implement backflush costing from next
financial year and is willing to evaluate its advantages and disadvantages before its
implementation.
Required:
Being a Management Accountant of a company enumerate advantages and
disadvantages of backflush costing for its better implementation. 06

Q. 6 (a) QZ Ltd., deals in domestic appliances and supplies special toasters to various outlets in
south zone of the country. Special toaster is a popular product of QZ Ltd., which is
distributed in large quantities throughout the year. The company’s Chief Executive Officer,
Mr. Kamal came to know the fact that company is holding excessive stocks which causes
increase in monthly cost.
Mr. Kamal is of the opinion that application of Economic Order Quantity (EOQ) model will
help in reducing cost. Being a Management Accountant, you are asked to guide Mr.
Kamal regarding EOQ application.

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Information regarding stocks for the month of January 2015 is given below:

Toasters demand from outlets (Units) 40,000

Carrying cost per lot (Re. 0.20 per toaster) (Rs.) 200
Ordering cost (Rs.) 60

Special toasters are ordered from outlets in lot sizes of 1,000 units.
Required:
(i) Calculate optimum order quantity in lots and the number of orders that should be
placed by the company during the month. 03
(ii) Assume the carrying cost is reduced to Re. 0.10 a toaster per month, what would be
the economic order quantity in this case? Also discuss the impact on optimal order
size due to reduction in carrying cost. 03
(iii) If ordering cost is reduced to Rs. 20 then what would be the optimum order quantity?
Also discuss the impact of change in ordering cost. 03
(iv) Specify two major limitations inherent to practical application of EOQ model. 02

(b) Versatile Automobile Company manufactures wide range of spare parts. The company’s
production department is planning to reduce production start-up cost and for this purpose
the production engineers of the company have improvised the running time of machinery
that will result in annual savings of Rs. 350,000 and decrease in inventory turnover from 6
to 4 times a year. As per the company books of accounts annual cost of goods sold is
Rs. 52 million.
Required:
Should the company opt for the new production plan provided the required rate of return
before tax is 12% on investment in inventories? Support your answer with all necessary
calculations. 04

THE END
PRESENT VAL UE F A CT O RS
Year 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%
1 0.833 0.826 0.820 0.813 0.806 0.800 0.794 0.787 0.781 0.775 0.769
2 0.694 0.683 0.672 0.661 0.650 0.640 0.630 0.620 0.610 0.601 0.592
3 0.579 0.564 0.551 0.537 0.524 0.512 0.500 0.488 0.477 0.466 0.455
4 0.482 0.467 0.451 0.437 0.423 0.410 0.397 0.384 0.373 0.361 0.350
5 0.402 0.386 0.370 0.355 0.341 0.328 0.315 0.303 0.291 0.280 0.269
6 0.335 0.319 0.303 0.289 0.275 0.262 0.250 0.238 0.227 0.217 0.207
7 0.279 0.263 0.249 0.235 0.222 0.210 0.198 0.188 0.178 0.168 0.159
8 0.233 0.218 0.204 0.191 0.179 0.168 0.157 0.148 0.139 0.130 0.123
9 0.194 0.180 0.167 0.155 0.144 0.134 0.125 0.116 0.108 0.101 0.094
10 0.162 0.149 0.137 0.126 0.116 0.107 0.099 0.092 0.085 0.078 0.073

CUM UL AT IV E P RESE NT VAL U E F ACTO R S

Year 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%
1 0.833 0.826 0.820 0.813 0.806 0.800 0.794 0.787 0.781 0.775 0.769
2 1.528 1.509 1.492 1.474 1.457 1.440 1.424 1.407 1.392 1.376 1.361
3 2.106 2.074 2.042 2.011 1.981 1.952 1.923 1.896 1.868 1.842 1.816
4 2.589 2.540 2.494 2.448 2.404 2.362 2.320 2.280 2.241 2.203 2.166
5 2.991 2.926 2.864 2.803 2.745 2.689 2.635 2.583 2.532 2.483 2.436
6 3.326 3.245 3.167 3.092 3.020 2.951 2.885 2.821 2.759 2.700 2.643
7 3.605 3.508 3.416 3.327 3.242 3.161 3.083 3.009 2.937 2.868 2.802
8 3.837 3.726 3.619 3.518 3.421 3.329 3.241 3.156 3.076 2.999 2.925
9 4.031 3.905 3.786 3.673 3.566 3.463 3.366 3.273 3.184 3.100 3.019
10 4.192 4.054 3.923 3.799 3.682 3.571 3.465 3.364 3.269 3.178 3.092
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