CMA JANUARY-2023 EXAMINATION

ADVANCED LEVEL I
SUBJECT: CM341.SMA- STRATEGIC COST & MANAGEMENT ACCOUNTING

MODEL SOLUTION

Solution of the Question No. 1

(b) Req.1. Design I: Tk.20 x 3,000= Tk.60,000+ Tk.150,000= Tk.210,000.
Design II: Tk.20 x 2,000= Tk.40,000+ Tk.150,000= Tk.190,000.
The unit based analysis would lead to the selection of Design II.
Req.2. Design I
Assembling components (Tk.10x 3,000) Tk.30,000
Setting up equipment [(10xTk.100)+ Tk.31,000
(1xTk.30,000)
Receiving goods (1x Tk.40,000) Tk. 40,000
Total Tk.101,000
Design II:
Assembling components (Tk.10 x 2,000) Tk.20,000
Setting up equipment [(20x Tk.100)+ (2 Tk.62,000
xTk.30,000)]
Receiving goods (2x Tk.40,000) Tk.80,000
Total Tk.162,000

Design I has the lower total cost. Notice also the difference in expected total manufacturing costs.
The direct labor driver approach produces a much higher cost for both designs. This difference in
cost could produce significant differences in pricing strategies.
Req.3. Exploiting internal linkages mean taking advantage of the relationships among the activities
that exist within a firm’s segment of the value chain. To do this, we must know what the activities
are and how they are related. Activity costs and drivers are an essential part of this analysis. Using
only unit-based drivers for design decisions, as in Requirement 1, ignores the effect that different
designs have on non-unit based activities. The results of Requirement 2 illustrate a significant
difference between tow designs- relative to the unit-based analysis. The traditional costing system
simply is not rich enough to supply the information needed for a thorough analysis of linkages.
Solution of the Question No. 2
(a) Open Ended
(b) The details are-
i. NPV = $240,000 * 3.9932 - $661,500 = $958,320 - $661,500 = $296,820
ii. There are several approaches to computing IRR. One is to use a calculator with an
IRR function. This approach gives an IRR of 23.8%. Another approach is to use
present value Table:
$661,500 = $240,000F; F = $661,500/$240,000 = 2.756
On the five-period line of PVIFA Table, the column closest to 2.756 is 24%. To
obtain a more accurate number, we use straight-line interpolation:
Present Value Factors
22% 2.864 2.864
IRR — 2.756
24% 2.745 —
Difference 0.119 0.108
IRR = 22% +0.108/0.119*(24-22)% = 23.8% per year
iii. Payback period =Net initial investment/Uniform increase in annual future cash flows
= $661,500/$240,000 = 2.76 years

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(c) Foreign Currency Approach:
(Amount in Million)
Year 1 2 3 4 5
Cash inflows CI 2,000 2,200 2,420 2,662 2,928
Less: variable cash outflows VC 600 660 726 799 878
Less:: fixed cash outflows FC 200 200 200 200 200
Less: depreciation D 1000 1000 1000 1000 1000
Cash flows before corporate tax 200 340 494 663 850
Less: corporate tax Tc 66 112 163 219 280
Add: depreciation D 1,000 1,000 1,000 1,000 1,000
After-tax corporate tax flows 1,134 1,228 1,331 1,444 1,569
Less: dividend tax Td 113 123 133 144 157
Net repatriable cash flows 1,021 1,105 1,198 1,300 1,412

(Amount in Million)
Year 0 1 2 3 4 5
Net repatriable cash flows in BDT 1,021 1,105 1,198 1,300 1,412
Add: terminal cash flows 9,000
Initial investment (6,000)
Total cash flows (6,000) 1,021 1,105 1,198 1,300 10,412

Discount factor at 17% 1.0000 0.8525 0.7268 0.6196 0.5282 0.4503

Present value of cash flows (6,000) 870 803 742 687 4,689
Net present value (BDT) 1,790.86
Spot exchange rate 0.0086
Net present value (USD) 15.40

Solution of the Question No. 3

a. EVA is economic value added. It is the difference between after-tax income and the cost of the
capital employed. EVA is an absolute dollar amount not a percentage rate of return like ROI.
EVA differs from residual income in EVA’s use of after-tax income and the true cost of capital
(rather than a hurdle rate).
b.
1. MCE= Process time/(Process time+ Move time + Wait time)
=30 minutes/60 minutes= 0.50
2. Cycle time= 1/Velocity= 1/60 hr. = 1 minute.
3. The time required to produce 60 units is 45 minutes (30 minutes process time+ move and
wait time of 15 minutes). Thus, velocity= 60/3/4 hour)= 80 units per hour, cycle time= 1/80
hr., or 0.75 minute. Finally, MCE= 30/(30+15)= 0.67.
c.
a. Since the Transistor Division can sell all its transistors to the outside competitive market, the
minimum transfer price is Tk.3.40. The Systems Division can buy its transistors from the
outside market at Tk.3.40, so the maximum transfer price is Tk.3.40.

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 b. Yes, since the minimum transfer price for the idle capacity is Tk.1.90 (Tk.2.65 less the
Tk.0.75 of allocated fixed overhead). The Division is better off if the transfer price is greater
than Tk.1.90 for the excess capacity.
c. The negotiated price of Tk.11 provides profit for both the Board Division and the Systems
Division. The Board Division realizes a profit of Tk.1.85 per board (Tk.11-9.15). The
Systems Division realizes a reduction in cost of Tk.1.25 per board (Tk.12.25-Tk.11.00).
It should be noted that the Tk.12.25 is not a true market price because this particular board
is not sold externally. Thus, the Board Division is not necessarily foregoing profit by not
selling externally at its regular markup.

Solution of the Question No. 4

(a) Open Ended.
(b)
i.

ii.

Therefore,

iii.

Therefore, the

Yes, the decision to increase the selling price is a good idea. Because it will increase the return on
investment of the company.
(c) The Commercial division’s current level of profit is as follows:
Sales to external customers: 100,000 × Tk.12 = 1,200,000
Sales to Specialty division: 200,000 × Tk.12 = 2,400,000
Sales Revenues: 3,600,000
Variable manufacturing costs: 300,000 × Tk.8 = (2,400,000)
Fixed manufacturing costs: (900,000)
Operating Income: Tk.300,000
i. With the new order, the Commercial division generates additional contribution margin from
the 20,000 units it sells to Homebound (note that fixed costs are irrelevant because of the
presence of excess capacity). At a price of Tk.9, the incremental contribution from the order
is: 20,000 units × (Tk.9 – Tk.8) = Tk.20,000.
However, the weighted average external price is no longer $12, but rather [(100,000
×Tk.12) + (20,000 × Tk.9)]/[100,000 + 20,000] = Tk.11.5. As a result, the transfer price
realized by Commercial for internal sales is lowered from Tk.12 to Tk.11.5, reducing
Commercial’s sales revenues by (200,000 units) × Tk.0.5 = Tk.100,000. The net effect
therefore is that Commercial’s operating income would decrease by Tk.80,000 (Tk.100,000
– Tk.20,000) overall. As manager of the Commercial division, Elius Mir would therefore
choose to reject the offer from Homebound.
ii. Yes, because the new order from Homebound results in an additional contribution margin to
Nasir Glass of Tk.20,000, and the same amount in higher firm-wide profit. The additional
effect identified in requirement ii, namely the effect on the internal transfer price, has no
relevance in evaluating the value of the order to the firm as a whole.

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Solution of the Question No. 5
(b) Open Ended

(c)
Brown Company
Quality Cost Report
For the Year Ended December 31, 2010
Items Quality Costs Total Percentage
of sales
Prevention costs:
Design review Tk.405,000
Quality training Tk.135,000 Tk.540,000 6.67%
Appraisal Costs:
Material inspection Tk.54,000
Process acceptance Tk.67,500
Product inspection Tk.40,500 Tk.162,000 2.00%
Internal failure costs:
Reinspection Tk.67,500
Scrap Tk.47,250 Tk.114,750 1.42%
External failure costs:
Recalls Tk.135,000
Lost sales Tk.270,000
Returned goods Tk.128,250 Tk.533,250 6.58%
Total quality costs 1,350,000 16.67%

= THE END =

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