CMA CAF-8 Possible Questions from Theory

(All these Questios ae t keo faim ICAP Stuy eext oy P st P peas)

Ch ptea 1&2
Ioveotia V lu tio oy M o gemeot
Advantages of FIFO
 Logical (refects tte ost likely ptysical foow
 Acceptable under IAS-2
 Easy to understand and explain to anagers
 Inventory values are near to replace ent cost
 Inventory values at up-to-date price

Disadvantages of FIFO
 It is cu berso e to operate
 Managers ay fnd it difcult to co pare costs and ake decisions oten ttey are ctarged oitt
varying prices for tte sa e aterials
 Cost co parison betoeen jobs are difcult
 In a period of tigt infaaono inventory issue prices oill lag betind current arket value

Advantages of AVCO
 S oottens out price ove ent
 Easier to operate
 Acceptable under IAS-2
 Logical because all units tave sa e values

Disadvantages of AVCO

 Issue price is rarely otat tas been paid

 Prices tend to lag a litle betind current arket values oten ttere is gradual infaaon

Ioveotia M o gemeot
Objectve: To ini ize inventory related cost on annual basis otile aintaining it at
appropriate level

Ioveotia ael tey cists

 1) Purctase Cost. ( paid to supplierw
2) Re-order cost: Ttis include ad inistraave cost of placing an order along oitt
transportaaon inoard cost. For exa ple ad in cost of placing ordero Cost of inspecaono
Inoard delivery cost
3) Holding Cost: Cost of keeping inventory in oaretouse. (Rent of oaretouseo stock
insuranceo da age of cost and Finance cost on funds otict are invested in inventory
4) Stock Out Cost: Ttese costs result fro not taving enougt inventories in stock to eet
custo ers' needs. ( loss of profto loss of custo ero loss of good oillo cost of e ergency
purctasedw

EOQ: It is a reorder size ttat ensure ttat su of annual cost of ordering and tolding is
ini ized

Remembea: At EOQ Aoou l iayeaiog cist will be equ l ti oou l hilyiog cist
ehe pa ctc l limit tios/ ssumptios if EOQ ( Autu n-18 Q-3 part cw

(iw Tte for ula assu es ttat de and/usage is constant ttrougtout tte period. In pracaceo
actual de and/usage ay be uncertain and subject to seasonal variaaons.

(iiw Holding cost per unit are assu ed to be constant. Furttero any tolding costs are fxed
ttrougtout tte period and not relevant to tte odel otereas so e costs (e.g. store keepers'
salariesw are fxed but ctange in steps.

(iiiw Purctasing cost per unit is assu ed to be constant for all purctase quanaaes and is ignored
otile calculaang order size in EOQ. In pracaceo quanaty discounts can be available in case of
bulk purctasing.

(ivw Tte ordering costs are assu ed to be constant per order placed. In pracaceo ost of tte
ordering costs are fxed or subject to stepoise variaaon. It is ttereforeo difcult to esa ate tte
incre ental cost per order.

Ioveotia Ciotail ( Autumo-19 Q.5)

Inventory control can be defned as tte syste used in an organizaaon to control its invest ent
in inventory/stocks. I.e. tte overall objecave of inventory control is to ini izeo in totalo tte
costs associated oitt stock. Ttis includes; tte recording and onitoring of stock levelso
forecasang future de ands and deciding oten and too any to order.

ehe methiy if stick v lu tio which shiuly be usey io tmes if fuctu tog paices:
 Weigtted Average stock valuaaon ettod stould be used in a es of fuctuaang prices
because ttis ettod is raaonalo syste aac and not subject to anipulaaon. It is representaave
of tte prices ttat prevailed during tte enare period ratter ttan tte price at any paracular point
in a e. It is because of ttis s oottening efect ttat ttis ettod stould be used for stock
valuaaon in a es of fuctuaang prices.

Re sios if m iot ioiog s fet stick

 Protect against unforeseen variaaon in supply and/or de and.

 Prevent disrupaon in anufacturing or deliveries.
 Avoid stock-outs to keep custo er service and saasfacaon levels tigt.

Ch ptea 3 Acciuotog Fia Oveahe ys

1) eae tmeot if uoyea- bsiabey oy ivea- bsiabey f ctia iveahe ys. (ICAP Q.B)

Tte under or over applied overtead ay be:

 Treated as period cost by closing it to Cost of Goods Sold Account or directly to Inco e
State ent.
 apporaoned betoeen inventories and cost of goods sold.

2) Re sios fia uoyea- bsiabey / ivea bsiabey f ctia iveahe ys

 Tte actual tours oorked ay be ore or less ttan tte esa ated tours.
 Tte esa ates ay not be accurate.
 Actual overtead costs and actual acavity levels are diferent fro budgeted costs and
acavity levels.
 Ctanges in tte ettods of producaon.
 Abnor al ctanges in tte co ponent prices of factory overteads.
 Extraordinary expenses igtt tave been incurred during tte accounang period.
 Major ctanges igtt tave taken place. For exa pleo replace ent of general purpose
actine oitt auto aac tigt speed actines.

F ctias fectog the paeyeteamioey iveahe y a te:

In addiaon to tte selecaon of baseso tte follooing ore factors are also considered:

a. Acavity level selecaon

b. Inclusion or exclusion of fxed overteads
c. Single rate or several rates

Ch ptea 4 M agio l oy bsiaptio Cistog

Uses if M agio l Cistog

 Used as alternaave proft easure to absorpaon cosang

 Useful in preparing forecast
 Useful tool in anage ent decision aking
 Used in calculaang ini u sales volu e to actieve a break-even

Assumptios io M agio l Cistog

 Sale price and variable cost per unit is constant at all levels
 Total fxed cost is constant at all producaon level

Ayv ot ges if bsiaptio cistog

 Inventory values include an ele ent of fxed producaon overteads. Ttis is consistent
oitt tte require ent in fnancial accounang ttat (for tte purpose of fnancial
reporangw inventory stould include producaon overtead costs.
 Calculaang under/over absorpaon of overteads ay be useful in controlling fxed
overtead expenditure.
 By calculaang tte full cost of sale for a product and co paring it oill tte selling priceo
it stould be possible to idenafy otict products are proftable and otict are being
sold at a loss.

Dis yv ot ges if bsiaptio cistog

 Absorpaon cosang is a ore co plex cosang syste ttan arginal cosang.

 Absorpaon cosang does not provide infor aaon ttat is useful for decision aking
(like arginal cosang doesw.
 Assigning of Producaon overteads aloays include an ele ent of discreaon; and
 It igtt led to sub-opa al decision- aking as a product igtt be disconanued due
to loss otict igtt be caused by fxed producaon over tead.

Ayv ot ges if m agio l cistog

 It is easy to account for fxed overteads using arginal cosang. Instead of being
apporaoned ttey are treated as period costs and oriten of in full as an expense tte
inco e state ent for tte period oten ttey occur.
 Ttere is no under/over-absorpaon of overteads oitt arginal cosango and tterefore
no adjust ent necessary in tte inco e state ent at tte end of an accounang period.
 Marginal cosang provides useful infor aaon for decision aking.

Dis yv ot ges if m agio l cistog

  Marginal cosang does not value inventory in accordance oitt tte require ents of
fnancial reporang. (Hooevero for tte purpose of cost accounang and providing
anage ent infor aaono ttere is no reason oty inventory values stould include
fxed producaon overteado otter ttan consistency oitt tte fnancial accounts.w
 Marginal cosang can be used to easure tte contribuaon per unit of producto or tte
total contribuaon earned by a producto but ttis is not sufcient to decide otetter tte
product is proftable enougt. Total contribuaon tas to be big enougt to cover fxed
costs and ake a proft.

St oy ay Cistog oy V ai oce Ao l sis

St oy ay Cist:

It is an esa ated or predeter ined cost of perfor ing an operaaon or producing a good or
service under nor al condiaons.

St oy ay Cistog

It is a syste of cosang in otict

 All units of product (or servicew are recorded in tte cost accounts at tteir standard
cost
 Tte value of inventory is based on standard producaon cost.

V ai oce: Difeaeoce betweeo ctu l cist oy st oy ay cist.

Beoefits if St oy ay Cistog
 It provides an alternate cosang syste
 Provides a good tool for cost control
 Provides a syste of perfor ance appraisal
 Standard cosang data can be used in budget preparaaon

e pes if St oy ay
Iye l st oy ays.

Ttese assu e perfect operaang condiaons. No allooance is ade for oastageo labour
inefciency or actine breakdoons. Tte ideal standard cost is tte cost ttat oould be
actievable if operaang condiaons and operaang perfor ance oere perfect. In pracaceo tte
ideal standard is not actieved.

Att io ble st oy ays.

Ttese assu e efcient but not perfect operaang condiaons. An allooance is ade for oaste
and inefciency. Hooevero tte atainable standard is set at a tigter level of efciency ttan tte
current perfor ance standardo and so e i prove ents oill tterefore be necessary in order to
actieve tte standard level of perfor ance

Cuaaeot st oy ays.

Ttese are based on current oorking condiaons and otat tte enaty is capable of actieving at
tte o ent. Current standards do not provide any incenave to ake signifcant i prove ents
in perfor anceo and igtt be considered unsaasfactory oten current operaang perfor ance
is considered inefcient.

B sic st oy ays.

Ttese are standards otict re ain unctanged over a long period of a e. Variances are
calculated by co paring actual results oitt tte basic standardo and if ttere is a gradual
i prove ent in perfor ance over a eo ttis oill be apparent in an i proving trend in reported
variances.

Pissible C uses if M teai l V ai oce

F via ble Paice v ai oce

 Diferent supplier used ofering looer prices

 Bulk discount availed
 Looer quality aterial oas purctased

Ayvease Paice V ai oce

 Diferent supplier used ofering tigter prices

 Supplier increase prices
 Stortage of aterial in arket
 Purctased beter quality aterial

F via ble us ge v ai oce

 Less oastage of aterial due to beter quality

 I proved producaon ettods

Adverse Usage variance

 More oastage
 Poor aterial tandling

Pissible c uses if l biua v ai oce

F via ble a te v ai oce
  Using inexperienced labour on looer rate
 Incre ents given oere less ttan budgeted

Ayvease R te V ai oce

 Unexpected tigt rate oas given

 Overa e oas paid at tigter rate
 More skilled labour oas tired

F via ble Efcieoc v ai oce

 Efcient ettod oas adopted

 Moavated tea oorked efciently
 More experienced oorkers oere tired
 Incenaves oere ofered for favorable variance

Ayvease efcieoc v ai oce

 Less experienced oorkers oere tired

 Workers oere de oavated

Relev ot Cistog
Oppiatuoit cist: An opportunity cost is a cost ttat easures tte opportunity ttat is lost or
sacrifced oten tte ctoice of one course of acaon requires ttat an alternaave course of acaon
be given up.

Suok cist A sunk cost is a tistorical or past cost ttat tte co pany tas already incurred. Ttese
costs cannot be ctanged/recovered in any case and are ignored otile aking a decision.

Relev ot cist: A relevant cost is a future cast foo ttat oill occur as a direct consequence of
aking a paracular decision

Ao iocaemeot l: cost is tte addiaonal cost ttat oill occur if a paracular decision is taken.
Provided ttat ttis addiaonal cost is a Future cast foo.

Aviiy ble oy uo viiy ble cists An avoidable cost could be saved (avoidedwo depending
otetter or not a paracular decision is taken. An unavoidable cost is a cost ttat oill be incurred
anyoay. ( Avoidable and Diferenaal cost are relevant costw

Buygetog
Buyget: A budget is an organizaaonal plan o relaang to fxed future periodo expressed in
nu ber.
Puapise if buygetog

 Planning
 Control
 Decision aking
 Resource allocaaon
 Coordinaaon of Co unicaaon

e pes if Buygets

 Sales Budget
 Producaon budget
 Direct aterial budget
 Direct labor budget
 Manufacturing overtead budget
 Ending fnisted good inventory budget
 Cost of goods anufactured budget
 Cost of goods sold budget
 Selling and ad inistraave budget
 Capital expenditure budget
 Master Budget
Budgeted Inco e state ent
Budgeted balance steet
Cast budget
Flexible buygets: Flexible budgets areo as tteir na es suggest variable and fexible depending
on tte variability in tte results expected in tte future. Suct budgets are ost useful for
businesses ttat operate in an ever ctanging business environ ent
Fixey buygets: Fixed budgets are used in situaaons otere tte future inco e and expenditure
can be knoono oitt a tigter degree of certaintyo and tave been quite predictable over a e.
Ttese types of budgets are co only used by organizaaons ttat do not expect uct variability
in tte business or econo ic environ ent
Nite: Must Re y ithea t pes if buyget faim Se (zeai b sey buygetogg iocaemeot l buyget
oy ciotouius buyget)
Iocaemeot l Buyget
Under ttis approacto previous period budget is taken as base and adjust ents are ade in
values in tte stape of addiaon or deleaon for tte next period. For exa ple infaaono ctange in
tax rateso or launcting of neo product
Ayv ot ges:
 Si ple process & required infor aaon are readily available
 Suitable for stable business environ ent

Dis yv ot ges:

 Prior period error oill be carry foroard

  Unecono ic acaviaes ay carry foroard. For exa ple co pany ay conanue in-touse
producaon otereas outsourcing ay tave beco e cteaper opaon
 Esa aaon of infaaon ay beco e difcult

Zeai B sey Buygetog

Budget stould be prepared eact a e fro zero base.( no use of past dataw. Ttis approact
nor ally used in service industry or public sector. Generally used by local Govt.

Steps

1. Paep ae yecisiio p ck ges: Idenafy possible services to be ofered and cost associated
oitt ttese services for exa ple sctoolo roads o tospital
2. R oks: Rank tte decision packages in tte order of i portance
3. Fuoyiog
4. Utliz tio if fuoys

Ayv ot ges

 It e ptasizes on future needs not past

 Past errors are not carry foroard
 It encourages cost reducaons

Dis yv ot ges:

 Ti e consu ing and costly

 Only applicable for services
 It results in increased stress for anage ent

Ciotouius Buyget
Will be prepared in tte follooing anner

 Annual budget is preparedo broken into four quarters

 First quarter is prepared in detail otereas next ttree quarter’s budget is an outline
 After frst quartero second quarter’s budget is prepared in detail otere outline of tte
fftt quarter (frst quarter of next yearw is also added
 Ttus at all a es co pany tas budget for next 4 quarters available

Ayv ot ges:

 More accurate
 Makes budgeang a serious acavity in organizaaon
 It provide beter infor aaon for perfor ance appraisal

Dis yv ot ges

 More costly
  Ti e consu ing
 Increased budgeang oork ay leave less a e for anage ent for actual oork

Peafiam oce Buyget

 It is used by Govt. organizaaons

 It links oney spent to certain standard perfor ance targets for exa ple Cost/paaent
in tospital

Fiaec st
A forecast is a use of tistoric data to deter ine tte direcaon of future trends

e pes
1. Dem oy/s le fiaec st
2. Ecioimic fiaec st
3. eechoiligic l fiaec st
Fiaec stog Methiy
Qu lit tve
 Based on tu an judg ent and betavior
 Non atte aacal approact
 Successful oitt stort ter predicaons

Qu ott tve

 Ti e series odel (read ttis fro ICAP Study Textw

 Causal odel

Decisiio M kiog

Othea f ctias (oio c sh) ti be ciosiyeaey befiae t kiog yecisiio if io-hiuse paiyuctio ia
iutsiuaciog

 Specialist skills and experase

 Quality of oork
 Reliability of oork done by outsourcer
 Capacity

L biua Cistog

W ge Ioceotve Pl os

1. High y -a te s stem: Under ttis syste e ployees get paid at a tigter ttan average
tourly rate provided ttey agree to produce a given a ount of product at a given quality
2. Ioyiviyu l bious scheme
3. Gaiup Bious scheme
4. Paifit sh aiog scheme
5. Sh aes ioceotve scheme
Fio oci l Iostaumeot
(Just 2 Questios faim this tipic fia aevisiio)

Difeaeoce betweeo Iovestmeot oy specul tio (spaiog 18 Q.2 )

Invest ent and speculaaon are si ilar in ttat ttey bott involve an investor to take risk in tte
expectaaon of aking a proft. Hooevero follooing are tte ain diferences betoeen
invest ent and speculaaon:

i. Nor ally invest ents are ade for long-ter period. Speculaaon is often ade on
stort ter basis.
ii. Attitude of investor in invest ent is usually risk neutral. Speculaaon aloays involves
tigt risk.
iii. Invest ent usually involves putting oney into an asset ttat isn’t typically arketable
in tte stort ter . Tte objecave is to yield a series of returns over tte life of tte
invest ent. Speculators often invest in ore arketable assets as ttey do not plan to
oon tte for long a e.
iv. Investors build tteir strategy based on tte expectaaon ttat a certain price ove ent
or inco e strea oill occur. Speculators nor ally expect so e kind of ctange oittout
necessarily knooing otat.
v. Ttere is a loo to oderate risk involved in invest ent. Risk is usually oderate to tigt
in speculaaon.
vi. Invest ent involves oderate returns due to loo to oderate risk. Speculaaon
involves tigt returns in exctange for tigt risks.

Q.4 ( ) Spaiog 19

On 1 January 2019o Marigold Enterprises (MEw purctased an opaon for Rs. 10o000 allooing ME
to buy 5o000 stares of Aro a Li ited (ALw at a price of Rs. 140 per stareo during tte next too
ontts. On 12 February 2019o ME purctased tte stares at tte agreed price oten tte arket
value of AL's stares oas Rs. 180 per stare. Required: Briefy explain eact of tte follooing ter s
and relate eact ter to tte above scenarioo oterever possible:

(iw ‘Call opaon’ and ‘Put opaon’ (2.5w

(iiw ‘In tte oney' and 'Out tte oney' (2.5w

( ) (i)

'C ll iptio' oy 'Put iptio'

An opaon to buy so etting in tte future is called a ‘call opaon’.

An opaon to sell so etting in tte future is called a ‘put opaon’.

In tte given situaaono opaon is for purctase of stareso ttereforeo it is a ‘call opaon’.

(ii) 'Io the mioe ' oy 'Out the mioe '

Wten tte arket price of tte stare is suct ttat by exercising tte opaono tte opaon tolder
akes a profto tte opaon is said to be ‘in tte oney’.

Wten tte arket price of tte stare is suct ttat by exercising tte opaono tte opaon tolder
sufers a losso tte opaon is said to be ‘out tte oney’.

By exercising tte opaono ME ade a proft of Rs. 38 (180–140–2w per stareo ttereforeo tte
opaon is said to be ‘in tte oney

Sust io bilit Repiatog:

Sustainability report is a report publisted by a co pany or organizaaon about tte econo ico
environ ental and social i pacts caused by its everyday acaviaes. Tte report also presents tte
organizaaon's values and governance odelo and de onstrates tte link betoeen its strategy
and its co it ent to a sustainable global econo y………. {As per Global Reporang Iniaaave
(GRIw}.

(Just li ited topics for revision. Must read/ e orize co plete topic fro Study textw

Autumo-19 Q-6

Reporang perspecave is an integral part of IFAC Sustainability Fra eoork. It includes key
consideraaons on too professional accountants can telp i proving tte usefulness and
relevance of tteir organizaaon’s external co unicaaons.

Requiaey:

State any too key consideraaons for professional accountants as enaoned in eact of tte
follooing secaons of reporang perspecave:

(aw Developing an organizaaonal reporang strategy (02w

(bw Deter ining ateriality (02w

(cw External revieo and assurance of sustainability disclosures (02w

Aoswea

Key consideraaons for professional accountants are stated beloo:

( ) Develipiog o iag oiz tio l aepiatog sta teg :

  Deter ine tte range of users and tteir needs for various types of reports and
disclosures.
 Project planning and anage ento and structured processes.

(b) Deteamioiog m teai lit :

 In defning report contento ateriality stould be considered along oitt tte need for
otter i portant infor aaon ctaracterisacs.
 Accountability for ateriality ttrestolds and judg ents.
(c) Exteao l aeview oy ssua oce if sust io bilit yisclisuaes:
 Tte quality of external assurance is directly linked to staketolder inclusiveness.
 Clarifying tte purpose and scope of tte assurance.
Beoefits if Sust io bilit Repiatog

 A focus on sustainability telps organizaaons anage tteir social and environ ental
i pacts and i prove operaang efciency and natural resource steoardstipo
 Fir s conanuously seek neo oays to i prove perfor anceo protect reputaaonal
assetso and oin staretolder and staketolder trust.
 Sustainability disclosure can serve as a diferenaator in co peaave industries and
foster investor confdenceo trust and e ployee loyalty.
 It ay provide fr s beter access to capital due to disclosures of anage ent quality
& efciency.
 Sustainability reporang requires co panies to gatter infor aaon about processes and
i pacts ttat ttey ay not tave easured before.
 Ttis neo datao in addiaon to creaang greater transparency about fr perfor anceo
can provide fr s oitt knooledge necessary to reduce tteir use of natural resourceso
increase efciency and i prove tteir operaaonal perfor ance.

Sime Exteao l Beoefits

 Miagaang – or reversing – negaave environ entalo social and governance i pacts

 I proving reputaaon and brand loyalty
 Enabling external staketolders to understand tte organizaaon’s true valueo and
tangible and intangible assets
 De onstraang too tte organizaaon infuenceso and is infuenced byo expectaaons
about sustainable develop ent

Sime Ioteao l Beoefits

 Increased understanding of risks and opportuniaes

 E ptasizing tte link betoeen fnancial and non-fnancial perfor ance
  Infuencing long ter anage ent strategy and policyo and business plans
 Strea lining processeso reducing costs and i proving efciency
 Benct arking and assessing sustainability perfor ance oitt respect to laoso nor so
codeso perfor ance standardso and voluntary iniaaaves
 Co paring perfor ance internallyo and betoeen organizaaons and sectors

ehe thaee yimeosiios if sust io bilit

1. Econo ic viability
2. social responsibility
3. environ ental responsibility

Pa ctce Questio faim P st P peas

A-19gA-17gA-16gA-15gS-16

Nite: ehese ae just impiat ot theia questios. Re yiog faim Stuy text ia o ithea
helpiog biik is cimpulsia ti civea ll tipics. All hum o eaaias ae ccept ble. Fia
feeyb ck/quea ia if iu fioy o eaaia ple se em il me (q iseakh oc 650@gm il.cim).

Paep aey b
.