Higher National Diploma in Accountancy

4th Year, Second Semester Examination – 2017

HNDA 4201 – Strategic Management Accounting

Instructions for candidates; No. of questions: 05

Answer any five questions. No. of pages : 07
Time : 03 hours

Question 01
i. Distinguish strategic Management Accounting and Financial Accounting. ( 02 marks )
ii. Define target costing and target costing procedures. ( 03 marks )
iii. The following is the summery of the information that has been presented to the management by the
“Silva” manufacturing company.
Sales units 300 000
Target selling price is Rs. 800
Target profit margin 30%
Actual cost per unit is Rs. 600
You are required to calculate the target cost per unit and state the variance of profitability compared
to the target cost. ( 03 marks )
iv. Briefly explain the following tools used in strategic management accounting
a) ABC costing
b) Cost of quality
c) Perspective of balance Score card
d) Life cycle costing ( 12 marks )
[ Total 20 marks ]

Question 02
i. Silva limited manufactures two products P and Q . The relevant data for the products are as follows.

Per unit
Project P Project Q
Selling price Rs. 150 Rs. 210
Raw material used 2 kg 3 kg
Raw material cost Rs. 25 Rs. 30
Direct labour cost Rs. 30 Rs. 45
Direct expenses Rs. 18 Rs. 20
Fixed overheads Rs. 15 Rs. 30
Machine hours used 3 hours 4 hours
Direct labour per hour Rs.15

You are required to comment on the profitability of each product when.

a. Total sales potential in units is limited ( according to contribution ) ( 02 marks )
b. Total sales potential in value is limited ( according to C/S ratio ) ( 02 marks )
c. Raw material is limited ( 02 marks )
d. Direct labour is limited ( 02 marks )

ii. Assume raw material is the key factor. The availability of which is 15,000 kg and the maximum
sales potential of each product is 6,000 units. Find out product mix which will maximum the profit.
( 04 marks )
iii. XYZ company produces a product. Information related to the product is as follows.
Selling price per unit is Rs. 100
Company produced 20,000 units but sold 18,000 units only.

Rs.
Direct material cost 500,000
Direct labour cost 200,000
Direct expenses 150,000
Variable production overhead – variable 100,000
Fixed 120,000
Administration overhead cost – variable 80,000
Fixed 80,000
Selling overhead cost Variable 100,000
Fixed 170,000

You are required to prepare the profit statement using Marginal costing and Absorption costing
methods. ( 08 marks )
[ Total 20 marks ]
 Question 03

i. Explain the importance of variance analysis for decision making. ( 02 marks )

ii. The following data related to budget and actual results of AB enterprise Ltd which produce and
sells single product.

Budgeted data

Sales 10 000 units at Rs. 105 each. 1050 000

(-) costs

Direct material X 15000 Kg at Rs.10 each 150 000

Y 5000 Kg at Rs.10 each 50 000
Direct labour 40 000 hours at Rs.3 per hour. 120 000
Variable production overheads 40 000 hours at Rs.2 80 000
Fixed production overheads 150 000
Administration and selling expenses 150 000 (700 000)
Budgeted / standard profit 350 000

Overhead are absorbed based on labour hours

Actual information for the same period are as follows.

Sales 10 200 units at Rs. 110 each 1122 000

(-) cost
Direct materials X 14 000 kg 147 000
Y 4 500 kg 49 500
Direct labour 43 700 hours 122 360
Variable production overheads 76 125
Fixed production overheads 140 000
Administration and selling expenses 87 015 ( 622 000)
Actual net profit 500 000

Additional information

Overheads are absorbed based on labour hours

Labour includes idle time of 200 hours

You are required to,

a) Prepare the standard cost card per unit. ( 03 marks )
b) Calculate all possible variances and reconcile the budgeted and actual profits.
( 05 marks )
[ Total 20 marks ]
Question 04

i. State project appraisal techniques ( capital budgeting ) with examples. ( 02 marks )

ii. AB company is considering to buy a machine to produce the new product “X” , The initial
investment of the machine would be Rs. 43 750 000 and the scrap value after 10 years would be nil
(0) at which the machine has to be replaced. The company is expected to produce and sell 10 000
units of the product annually at a price of Rs.5000 per unit. Variable cost of production is expected
to Rs. 3750 per unit and annual fixed cost are estimated to Rs. 7500 000 inclusive of depreciation
on straight line basis over the ten years. The cost of capital is 15%
Compute NPV and IRR of this project and recommend whether the machine could be purchased or
not. ( 10 marks )
iii. What is meant by sensitivity analysis? ( 02 marks )
iv. Raj company is considering a project with the following information. All values are in Rs.000

Year Initial outlay operating cost Annual savings

0 20 000 - -
1 - 10 000 24 000
2 - 9 000 20 000

Cost of capital of the project is 10%

You are required to measure the sensitivity of the project to the following variables.
a) Initial outlay
b) Operating cost
c) Annual savings ( 06 marks )
[ Total 20 marks ]

Question 05
i. Define, what is Transfer Pricing? ( 02 marks )
ii. Distinguished Return on ( ROI) and Residual Income( RI) ( 03 marks )
iii. Distinguished Market based Transfer pricing from Adjusted market Transfer pricing.
( 03 marks )
iv. A company has two profit centers, P and Q. P sells half of its output on the open market and transfer
the other half to Q. costs and external selling price are as follows.

P Q
Quantity produced 4000 -
Cost per unit
Variable (Rs) 18 30
 Fixed (Rs) 12 20
Selling price per unit- external (Rs) 40 120

You required to,

a) Compute divisional profit and company profit as a whole when the TP is Rs. 40 and state
the consequences by setting a transfer price at market price. ( 06 marks )
b) If the variable cost of Rs 18/- of division P includes selling expenses of Rs 4/- which can
be avoided if division P transfers the quantity to division Q.
Compute the divisional profits and company profits under the following options
separately.
Option 01 – division P transfers the entire benefits to division Q adjusting the transfer
Price .
Option 02 – division P keeps the entire benefits without adjusting the transfer price
( 06 marks )
[ Total 20 marks ]
Question 06

i. Define budgeting and list out the objectives of budgeting. ( 03 marks )

ii. Distinguish fixed budget and flexible budget. ( 03 marks )
iii. ABC Ltd advertises and sells houses on behalf of its customers. the company is preparing a cash
budget for the first four months of 2018. Expected sales of Houses are as follows.

2017 2018 2018 2018 2018

Month December January February March April

Units sold 20 20 30 50 60

The price of a house is Rs. 90 000 and company charged a fee of 10% of the value of each house sold
at which it receives 40% in the month of sale and balance 60% in the next month. The company has 10
employees who are paid a salary on a monthly basis. The average salary of an employee is Rs. 48 000
per annum. If more than 40 houses are sold in that month.
Variable expenses are incurred at the rate of 2% of the value of each houses sold and these expenses
are paid in the month of sale. Fixed overheads of Rs. 5000 per month are paid in the month in which
they arise ABC Ltd pays interest quarterly on a loan of Rs. 400 000 at a rate of 5% per year. The loan
interest for the 1st quarter of 2018 will be payable in March.
ABC Ltd intends to scrap in vehicle in April, with a net book value of Rs. 500 000 for Rs. 400 000.
The cash balance at 1st of January 2018 is expected to be Rs.10 000.
Prepare a monthly cash budget for the period from January to April 2018. ( 14 marks )
[ Total 20 marks ]