Professional Documents
Culture Documents
2023 - 6!11!147 - CL3 - Advanced Management Accounting - June 2023 - English
2023 - 6!11!147 - CL3 - Advanced Management Accounting - June 2023 - English
No. of pages: 14
Corporate Level
Advanced Management Accounting
C
Instructions to candidates
L
(3) All questions are compulsory.
(5)
(6)
This is a closed book examination.
(9) Answers written on the answer booklets, graph papers and any
other stationery distributed at the examination hall, only, are
considered in marking of the answer scripts. Any other attached
documents are not taken into account at the time of marking the
answer scripts.
SECTION 1
All questions are compulsory.
Total marks for Section 1 is 20 marks.
Recommended time for the section is 36 minutes.
Question 01
1.1 With the development of technology and requirements in the modern business
environment, many changes have taken place.
1.2 A manufacturing company produces a product that requires two machine hours
per unit. The available machine time is 500 hours per week. The product is sold
at Rs. 2,600 per unit. The total variable production cost which contains direct
materials and direct labour is Rs. 1,500 per unit. The direct labour cost per unit
is Rs. 500 and the production overhead cost per unit is Rs. 400. Weekly
production and sales are 250 units.
A. 3.20
B. 2.00
C. 1.78
D. 1.60
(2 marks)
(2 marks)
If the target profit margin of the company is 50%, which of the following
statements is correct?
(2 marks)
After careful analysis it was noted that the credit department spends around
50% of its time to manually match the advance payments and debit and credit
balances made for entries related to returns and discounts. The credit
department needs to put more effort to coordinate with the sales and finance
departments to ascertain these details.
A. Assess the total man days required to fully reconcile the debtor balances
by the credit department and recruit additional staff to fill the man days.
This will enable the company to complete the outstanding debtor
statements within the expected timeline.
B. Request the credit department to enter the debtor advance payments and
the debit and credit entries for returns and discounts so that the
coordinating time could be reduced.
C. IT units to improve the debtor module to automate the set-off entries.
Further, assess the post automation HR time budget and take action to
design the department’s scope.
D. The credit department to send the unreconciled outstanding balance
statements to debtors, and request the debtors to inform the credit
department in case of any discrepancy for corrections.
(2 marks)
1.6 Creative Manufacturers (CM) makes cement flowerpots and its actual output for
last month was 4,500 pots at a total material cost of Rs. 3,150,000 for 19,000kg
of cement. CM’s budgeted production for the month was 5,000 pots at a material
cost of Rs. 820 per pot. The standard material requirement was set at 4kg per
pot. However, the review of actual results indicated that this material
requirement should have been 4.2kg per pot at a cost of Rs. 945 per pot.
(2 marks)
Which of the above are potential benefits of adopting ZBB over traditional
methods of budgeting?
1.9 Which of the following is true when using the Monte Carlo simulation model to
estimate the net present value (NPV) of a project?
A. It assumes that the main factors affecting the NPV of the project can be
modelled as a probability distribution.
B. A minimum of two uncertain variables affecting the NPV must be available
in order to perform the simulation.
C. The values of variables affecting the NPV will be plotted on a probability
distribution.
D. Only one single uncertain variable can be considered in any simulation
model.
(2 marks)
(i) Deposit the funds in a six-month bank deposit at an interest rate of 16%
per annum.
(ii) Settle 90-day creditors in 30 days to obtain the early settlement discount
of 6%.
(iii) Purchase materials on cash basis at a discount of 9% from the price
offered on a 90-day credit period.
(iv) Invest in shares on the Colombo Stock Exchange (CSE).
Which of the above options could be considered by the company for utilising the
anticipated surplus funds?
(2 marks)
(Total: 20 marks)
Nature Foods (Pvt) Ltd (NFL) is an agricultural products manufacturing company. Its
main product manufactured is coconut oil. NFL has three main customer types:
industrial buyers, distributors and supermarkets. The company at present does not
analyse the revenue, costs and profitability of each type of customer. The head of
marketing is very keen to see the profitability based on customer type to see whether
any improvements are possible. With further analysis of NFL’s records, the following
information was extracted with respect to the year ended 31 March 2023.
Company’s activity information
Required:
(a) Calculate the profit for the year earned by each customer type based on
activity-based costing (ABC) principles.
(8 marks)
(b) Explain two (02) suggestions to improve the current profitability of the
company.
(2 marks)
(Total: 10 marks)
Louis Manufacturers (Pvt) Ltd (LML) makes yarn for apparel manufacturers. Its
products are one of the best local solutions and the quality is also equal to the quality
level of world class yarn manufacturers. The company serves the local market which is
dominated by international brands. Despite many efforts, LML has still not got the
opportunity to prove the quality of its products and break the customer loyalty for
international brands. The company knows that it is difficult to attract new customers.
However, once a customer is won over, LML can build a long-term business
relationship via its quality products. The company follows the policy of full cost plus
pricing adding a 30% mark-up.
• Monthly budgeted sales were 5,000 yarn packs. However, due to the economic
crisis, sales dropped to 2,500 yarn packs a month and this condition will be the
same throughout the current year.
• Yarn is made out of cotton bales. The opening cotton bales in stock was
Rs. 96 million and the cost of cotton bales issued during the month was
Rs. 12 million (to produce 2,500 yarn packs).
• There was no work-in-progress in the process and no restrictions in sourcing
materials.
• Other direct costs of manufacturing were Rs. 5 million.
• Monthly budgeted fixed production overhead costs were Rs. 6 million.
Due to the economic crisis, the apparel manufacturers who rely on imported yarn are
facing difficulties in sourcing yarn. Recently, one of the apparel manufacturers had
called for quotations from local yarn suppliers to supply 1,500 yarn packs a month.
This order will last at least for the next six months and many yarn suppliers that have
quality products have quoted for this. The business intelligence unit of LML has found
that the maximum possible quote to be successful in this order is Rs. 7,800 per yarn
pack. However, this price is much lower than LML’s current selling price per pack.
Hence the sales manager is not in favour of this price.
Required:
(a) Compute LML’s current selling price per pack of yarn. (3 marks)
(b) Discuss whether LML should accept or reject the new customer order.
(Your answer should describe both financial and non-financial reasons for
arriving at the decision.)
(7 marks)
(Total: 10 marks)
You are working as the management accountant of RPL and are asked to perform a risk
evaluation of this investment.
Required:
(a) Advise the management on the sensitivity of the NPV of the investment to
RPL’s cost of capital and sales volume (contribution of sales).
(8 marks)
(b) Explain how the adjusted discount rate could also be used to eliminate the
risks associated with the investment project.
(2 marks)
(Total: 10 marks)
Star Electronics (Pvt) Ltd (SEL) sells various electronic items. It imports items directly
from foreign manufacturers and sells them locally. One of its suppliers recently
launched a new product and SEL is interested in marketing it locally. The survey
performed indicated that it could sell an average of 600 units a month consistently.
• The selling price of the new product of the supplier is Rs. 5,000 per unit.
• SEL’s imports are handled by an outsourced service provider for which it charges a
handling fee of Rs. 49,000 per shipment. This service provider has informed that it
will take a minimum of 10 days and a maximum of 20 days from the order time
until the shipment is delivered to SEL’s warehouse.
• SEL arranges the supplier’s payments from a bank loan obtained at an annual
interest rate of 12% and the central warehouse has confirmed that it will incur
Rs. 400 annually to hold one unit in its inventory.
After a successful negotiation, the procurement manager was able to secure a price
discount of 10% on the price of this new product for which SEL is supposed to place at
least 850 units per order. SEL’s management is happy with this discount. In addition,
SEL would like to manage its inventory and procurement functions in a
cost-efficient manner.
Required:
(a) Advise whether SEL should accept the discount offered by the supplier in
order to achieve the most economical inventory management cost.
(6 marks)
(c) Explain the role of economic order quantity (EOQ) in working capital
management.
(2 marks)
(Total: 10 marks)
Question 06
Fantasy (Pvt) Ltd (FPL) is a company that has three related business divisions:
Plantation, Beverages and Bottles. The company allows its divisional managers to
maintain autonomy in making operational decisions. The following additional
information is available for its operations.
Plantation
The Plantation division grows organic fruits. There is an export demand for 80% of its
harvest at Rs. 350 per kg and the rest is purchased by the Beverages division at the
transfer price of full cost plus 25% mark-up. There is no attractive local demand for
these organic fruits. Therefore, any unsold harvest could only be sold at the variable
cost plus 30% mark-up to local fruit sellers. The following additional details are also
available.
There is a variable cost saving of Rs. 20 per kg due to reduced packing and
transportation cost for intercompany sales.
Beverages
The Beverages division has budgeted to process and sell 5,000 juice bottles a week at
Rs. 1,000 each using the intercompany fruit purchase. The division has the capacity to
process 10,000 juice bottles a week. However, due to limited demand, production is
maintained at the current level.
In addition to the fresh fruit input, the division buys glass bottles from the Bottles
division at Rs. 60 each and incurs an additional variable cost of Rs. 40 per finished juice
bottle as a processing cost. The weekly fixed cost is Rs. 400,000 and any increase in the
current weekly output level will result in an additional fixed cost of Rs. 20,000 a week.
The Beverages division has been purchasing intercompany fruits since there were no
other organic fruit suppliers in the market. Recently, a new planter approached the
Beverages division and offered fresh fruit of the same quality at Rs. 220 per kg. This
proposal is under consideration.
FPL received a proposal from a new bottled juice seller to subcontract its fruit juice
processing work. FPL’s management referred this proposal to the head of the
Beverages division for consideration. This subcontracting arrangement includes the
following terms.
Required:
(a) Compute the impact on the Plantation and Beverages divisions’ profitability
and the net profitability of FPL arising from the proposal of the new organic
fruit supplier to provide organic fruits at Rs. 220 per kg. (5 marks)
(b) Considering the proposal from the new organic fruit supplier:
(i) Evaluate whether the transfer price offered by the Plantation division
meets the characteristics of a good transfer price. (3 marks)
(c) Considering the proposal from the new customer to subcontract the processing
of 4,000 fruit juice bottles a week:
(i) Explain whether the present transfer price offered by the Bottles
division would motivate the Beverages division to accept this new
business opportunity.
(Support your answer with relevant computations) (5 marks)
(ii) Discuss how the dual pricing concept is applied for this scenario in light
of corporate profit maximisation.
(Support your answer with relevant computations)
(4 marks)
(Total: 20 marks)
CL3 – June 2023 Page 12 of 14
Question 07
Knowledge Hub (Pvt) Ltd (KHL) is engaged in the business of printing cheque leaves,
plastic security cards and various security documents. KHL is in the process of
evaluating two capital investment proposals. You are working as the management
accountant of the company and have been asked to evaluate the two proposals with
your boss, the head of finance. You are provided with the following information with
regard to the two proposals.
Proposal A
Inflationary factors stated in the above table are effective from the first year of
operations.
Revenue from advertisements is stated using the future cash flows basis.
KHL’s real cost of capital is 12% per annum. The general inflation is 4.47% per annum.
The profit of this operation is liable for tax at 24% payable in the year in which the
liability arises.
The management of KHL needs to know the recommendation for this proposal from
the finance division before going forward.
The security card printing machine is due for replacement at present. The machine
currently costs Rs. 15 million. The annual maintenance costs and expected residual
values at the end of each year for a three-year period are provided in the following
table.
The management of KHL is expecting to evaluate the optimal replacement cycle of the
printing machine. The head of finance has advised you to consider a discount rate of
17% and ignore the impact from taxation and inflation for the evaluation of this
proposal.
Required:
(a) Advise the management of KHL on the financial viability of Proposal A based
on the net present value (NPV).
(You are required to provide necessary computations for this purpose)
(10 marks)
(b) Compute the optimal replacement cycle for the security card printing
machine under Proposal B.
(6 marks)
(c) Demonstrate with an example the usefulness of the profitability index for
companies when selecting an investment project from several mutually
exclusive investment projects.
(4 marks)
(Total: 20 marks)