CWA/ICWA Final :: Management Accounting—Decision Making : December 2005

F-17(MDM)
Revised Syllabus

Time Allowed : 3 Hours Full Marks : 100
Answer Question No. 1 (carrying 20 marks) and any five (each carrying 16 marks) from the rest.
Marks
1. In each of the following cases given below one out of four answers is correct. Indicate the correct answer and give your working/reasons for your answer.
(a) the total cost of manufacturing a component is as under at a capacity of 50,000 units of production.
Per quarter:

Prime cost
Variable overheads
Fixed overheads
Rs.
10.00
2.40
 4.00
16.40
4
The selling price is Rs.21 per unit. The variable selling and administrative expenses is 60 paise per component extra. During the next quarter only 10,000 units can be produced and sold. Management plans to shut down the plant estimating that the fixed manufacturing cost can be reduced to Rs. 74,000 per quarter. When the plant is operating, the fixed overheads are incurred at a uniform rate throughout the year. Additional costs of plant shut down fir the quarter are estimated at Rs.14,000.
The shut down point for the quarter in units of product will be
(A)
(B)
25,000
14,000
(C)
(D)
11,000
20,000
(b) Division J of NZ Ltd produced the following results in the last financial year:

Net profit
Capital employed in fixed assets
Capital employed : net current assets
Rs. (000)
720
3000
200
4
For performance appraisal purposes, all divisional assets are valued at original cost. The division considering a project which will increase annual net profit by Rs.50,000 but will require average stock levels to increase by Rs.60,000 and fixed assets to increase by Rs.2,00,000.
NZ Ltd imposes a 16% capital charge on its divisions. Given these circumstances, will bt appraisal criteria Return on Investment (ROI) and Residual Income (RI) motivate division J management to accept the project?

(A)
(B)
(C)
(D)
ROI
Yes
Yes
No
No
RI
Yes
No
No
Yes
(c) A company manufacturing two products using common material handling facility. The total budgeted material handling cost is Rs.60,000. the other details are: 4

Number of units produced
Material moves per product line
Direct labour hour per unit
Product X
30
5
200
Product Y
30
15
200
Under activity based costing system the material handling costs to be allocated to product X (per unit) would be:
(A)
(B)
Rs. 1,000
Rs.500
(C)
(D)
Rs.1,500
Rs.2,500
(d) When a manager is concerned with monitoring total cost, total revenue, and net profit conditioned upon the level of productivity, an accountant should normally recommended. 4

(A)
(B)
(C)
(D)
Flexible Budgeting
Yes
Yes
No
No
Standard costing
Yes
No
Yes
No
(e) A company’s approach to a make-or-buy –decision
(A)Depends on whether the company is operating at or below normal volume.
(B)Involves an analysis of avoidable costs.
(C)Should use absorption (full) costing
(D)Should use activity- based-costing.
4
2. X Ltd has been offered a contract to manufacture six special machines for the Government. Manufacture would tale a toal of three years at the rate of two machines per year. Payment would be in two installments, Rs.3,50,000 at the start f manufacture and another Rs.3,50,000 upon completion. 16
The company is now evaluating the contract to see if it is worthwhile undertakeing anf its management accounting department has produced the following estimates about the resources required to produce the special machines:
(a) Materials:
Type of materialQuantity per
M/c     ton
Amount in
stock now
Original cost of
stock per ton
Rs.
Current purchase
price per ton
Rs.
Current realizable
value per ton
Rs.
Copper
Radium
 20
10
60
20
700
500
1000
750
800
See below
Copper is used regularly by the company on many contracts. Radium is used rarely and if the existing stock is not applied to this contract it will have to be disposed immediately at a net cost of Rs.100 per ton. Materials required for the contract must be purchased and paid for annually in advance. Replacement cost of copper and radium and the realizable value of copper are expected to increase at an annual compound rate of 20%.
(b) Labour:
Each of the six machines will require 3,000 hours of skilled electronic engineering and 5,000 hours of unskilled labour. Current wage rate are Rs.4 per hour for skilled electronic staff and Rs.3 per hour for unskilled labour.
X Ltd expects to suffer a shortage of skilled staff during the firs year so that acceptance of the contract would make it necessary for the firm to give up ‘other work’ on which a contribution of Rs. 7 per hour would be earned (the other work would require no unskilled labour.)
In the contract’s first year only, the company expects to have 20,000 surplus unskilled laboue hours. the company has an agreement with the in-house trade union whereby it lays off employees for whom there is work and pays them two-thirds of their normal wages during the lay-off period. All wage rates are expected to increase at an annual compound rate of 15%.
(c) Overheads:
Overhead costs are currently allocated to contracts at a rate of Rs.14 per skilled labour hour calculated as follows:
Fixed overhead (including equipment depreciation of Rs.5)
Variable overhead
11
 3
Special equipment will be required to undertake this contract and will be purchases at Rs.2,00,000 payable immediately. It wil be sold once the contract is completed for Rs.50,000. both fixed and variable overheads are expected to increase in line with the Retail Price Index.
The special equipment will be financed with the first contract installment paid by Government.
The company believes that a return of 20% would be acceptable for the project. The Retail Price Index is expected to increase by 15% per year over the life of the contract.
All current prices will hold for the next 1 months, before increasing in line with inflation.
Therefore material cost for the second year’s production will be 20% higher than the current market prices.
Analyze and comment whether the project can be acceptable. Ignore Tax.
Please turn over

( 2 )

F-17(MDM)
Revised syllabus
Marks
3. X Ltd a manufacturer of building products, supplies the wholesale trade. It has recently suffered falling demand due to recession and thus has spare capacity. It now decides to produce ceramic tiles for the home improvement market. It has already paid Rs.5,00,000 for development expenditure, market research and a feasibility study.
The initial analysis reveals scope for selling 1,50,000 boxes per annum over a five year period at a price of Rs.20 per box. Estimated operating costs, based on experience are as follows:
Cost per box of tiles (Rs) (at today’s price)
Materials cost
Direct labour
Variable overhead
Fixed overhead (allocated)
Distribution (etc)
8.00
2.00
1.50
1.50
2.00
Production can take place in exiting facilities although initial redesign and set-up costs would be Rs.20,00,000 after allowing for all relevant tax relief. Return from project would be taxed at 33%. X ltd’s shareholders require a nominal return of 14% per annum after tax, which includes allowance of 5.5% per annum for inflation.
Required:
(a) Assess the financial desirability of the venture in real terms, finding both the net present value and the internal rate of return (to the nearest 1%) offered by the project. 4+4
(b) Determine the values of
(i) Price (ii) Volume at which the project’s NPV becomes zero.
Discuss your results, suggesting appropriate management action.
4+4
4. The following data have been collected relating to W division of the MACRO group.

Sales revenue

Variable operating costs


Fixed operating costs

Divisional management cost
Fixed Assets (at cost)

External customers
Internal transfers
Labour
Materials
Overheads
Controllable by division
Controllable centrally
Controllable centrally
Divisional purchases
Central purchases
Rs.
6,00,000
3,50,000
95,000
1,60,000
42,500
78,000
41,000
26,500
4,50,000
2,50,000
Total central administration and management cost
(These are apportioned on the basis of sales revenue which was
Rs.52 lakhs for the the group as a whole)

6,84,210

The group’ s weighted average cost of capital is estimated at 15% and it is the group policy to calculate depreciation on a straight line basis at 25% and to impute interest on a gross investment basis.
Prepare from the above data, a divisional performance statement on
 (i) Profit centre approach
(ii) Investment centre approach.

5. (a)

Z Ltd produces a single product X, which passes through three different processes, A, B, and C. the throughput per hour of the three processes if 12,10 and 15 units of X respectively. The company works an 8-hour day, 6 days a week, 48 weeks a year. The selling price is X is Rs.150 per unit and its material cost is Rs.30 per unit. Conversion costs are planned to be Rs.24,000 per week.
Required:

(i)Determine the throughput accounting (TA) ratio per day.
(ii)Calculate how much the company could spent on equipment to improve the throughput of process B if it wished ti reciver its costs in the following time periods:
(a) 2 years. (b) 12 weeks.
(iii)Calculate the revised TA ration if this money is spent.
4+4+4
(b) X Ltd manufactures a single product. Standard costs for materials and convension costs are Rs.40 and Rs.30 per unit respectively. The company uses a backflash accounting system with two trigger points: raw materials purchased and goods transferred to finished goods store. At the beginning of March there was no opening stock of raw materials or WIP and at the end of the month there was no WIP. 4
Other data for the month
Number of completed production units
Number of products sold
Raw materials purchased
Conversion costs incurred

15000
14,000
Rs. 6,30,000
Rs.  4,70,000
Prepare summary journal entries for March assuming that there were no material cost variances and without writing off under- or over – absorbed convention costs.
Please turn over

( 3 )

F-17(MDM)
Revised syllabus
Marks
6. (a) Division J and A are in M Group. Division J manufactures part N. three units if part N are used in product Z manufactured by Division A. Division J has no external customers for part N. division J transfers part N to Division A at variable costs (Rs.35 per part) plus 50%. The variable cost to division A of manufacturing product Z is Rs.50 per unit. This Rs.50 does not include the cost of part N transferred from Division J.
Division A can sell the following number of units of product Z, warning the associated levels of marginal revenue:
8
Units sold
Marginal revenue (Rs)
1
300
2
270
3
240
4
210
5
180
How many units of product Z should management of Division A sell if they wish to maximize divisional profit?
(b) Fill in the blank spaces (1 to 4) in the table below to show how standard costing and target costing differ. 8
Stage in product life cycle
Product concept stage
Design stage
Production stage

Reminder of life
Standard costing approach
No action
(2)
Costs are controlled
Using variance analysis
(4)
Target costing approach
(1)
Keeps costs to maintain
(3)

Target cost reduced,
Perhaps monthly
Your answer should be supported by reasons.
7. (a) What is simulation? What are the steps in simulation process? 8
(b) A project consists of following activities and the relevant information are provided as under: 8
Estimated duration (days)
ActivityOptimistic Most likelyPessiminstic
(1-2)
(1-3)
(1-4)
(2-5)
(3-5)
(4-6)
(5-6)
(6-7)
1
1
2
1
3
2
3
1
2
4
2
1
6
5
7
2
3
7
8
1
9
8
11
3
You are required to draw the PERT network and find out the expected project completion time ofthe project.
8. A corporate body uses ROCE (return on capital employed) as the performance measure for each of its divisions. The ROCE is calculated by dividing the trading prodit for a year by the book value of net assets at the year end. In the net asset computation, cash is excluded, as the divisions use a common bank account controlled by the corporate head quarter. 16
For the year ended 31-12-2005 division D was given a target ROCE of 18%, with executive being offered salary bonuses if the target is met. On 30th November, 2005 D’s divisional manager receives a forecast that profit for 2005 will be Rs.17,50,000 and the net assets employed at the end of the year will be Rs.1,00,00,000. This means that the performance will fall short of the target ROCE by 0.5 percent. The divisional manager get worried and at once circulates a memorandum to his executives inviting proposals to deal with the situation.
The divisional manager has now before him four proposals made by his four executives.
Proposal 1, made by the accountant, suggests that payment of Rs.6,00,000 trade debt owned to a supplier (due on 22 December,2005) be deferred until 1 January,2006; this will result in a Rs.17,000 default penalty becoming immediately due.
Proposal 2, made by the internal auditor, that a local depot be closed allowing immediate sale for Rs.12,50,000 of premises that carries a book value of Rs.11,25,000; this would result in Rs.3,74,000 immediate closure cost and future reduction in profits.
Rs.1,90,000 per year over the next twelve years.
Proposal 3, from the production manager, that Rs.12,00,000 be invested in new equipment that will result in cost savings of Rs.2,51,000 per year over the next twelve years.
Proposal 4, from the sales manager, that Rs.20,000 additional production expenses be incurred to advance completion of an order top 29 December 2005 from its previous scheduled date of 3 January, 2006. This would allow customer to be involved in December there by boosting 2005 profits by Rs.90,000 (before allowing for additional expenses), but not accelerating payment by the customer which will be made on 1 February,2006 in any event.
Required:
Consider the merits of each of the above proposals from the point of view of division D’s immediate problem and the long-term position of the corporate body.
[An extract from the table of cumulative present value of Re.1, using the formula:
1-1(1+r)-n /r, is given for quick reference:
Year endInterest rates(r)
(n)
12
17%
4.988
18%
4.793
19%
4.611
20%
4.439

__________

 

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