ALL answers must be written in the answer book

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CMA SEPTEMBER-2022 EXAMINATION ADVANCED LEVEL I

STRATEGIC COST & MANAGEMENT ACCOUNTING

Course Code : CM341 Total Marks : 100

Reading Time : 15 minutes Writing Time : 180 minutes

Instructions to Candidates

 You MUST NOT write anything during the reading time.

 There are 5 (five) questions.

 You should attempt ALL questions.

 Answers should be properly structured and relevant.

 Show all relevant computation.

 Carefully read ALL the requirements and sub-questions before attempting a specific question.

 ALL answers must be written in the answer book.

 AVOID WRITING/MARKING on the question paper at any time which may cause disciplinary action.

 Start answering each question from a fresh sheet.

 Answers should be clearly numbered with the sub-question number.

Allowable Materials

 Writing Stationaries

 Non-programmable Calculator Assessment Structure

RESTRICTED USE

This paper MUST NOT BE REMOVED from the examination venue

Do not turn the page until instructed Sub-

question Marks

Expected Time Required

Question 1 Essay/Computational/Case 4 20 35 minutes

Question 4 Essay/Computational/Case - 20 35 minutes

Revision 5 minutes

Total 100 180 minutes

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QUESTION 1

(a) Is there any difference among Management Accounting (MAC), Management Accounting System (MAS) and Management Control Systems (MCS)? Give Example.

(b) Bangladeshi companies are gradually expanding their business from traditional sector to the consumer goods like rice, flour etc. Consumer Goods market has become a highly competitive marketplace in recent times. Assume, Square Consumer Foods and ACI Foods are two big players in the consumer goods market. You are recently appointed by Square Consumer Foods to conduct a CORE analysis. Draft a report based on your analysis (You do not need to use any data here).

(c) ABC Inc. has only two retail and two wholesale customers. Information relating to each customer for 2020 follows (in thousands)

Wholesale Customers Retail Customers Northern

Wholesaler

Southern Wholesaler

Green Energy

Global Power Revenues at list prices Tk.375,000 Tk.590,000 Tk.175,000 Tk.130,000

Discounts from list prices 25,800 47,200 8,400 590

Cost of goods sold 285,000 510,000 144,000 95,000

Delivery costs 4,550 6,710 2,230 2,145

Order processing costs 3,820 5,980 2,180 1,130

Cost of sales visit 6,300 2,620 2,620 1,575

ABC’s annual distribution-channel costs are Tk.33 million for wholesale customers and Tk.12 million for retail customers. The company’s annual corporate-sustaining costs, such as salary for top management and general-administrative costs are Tk.48 million.

There is no cause-and-effect or benefits-received relationship between any cost- allocation base and corporate-sustaining costs. That is, ABC could save corporate- sustaining costs only if the company shuts down.

(i) Calculate customer level operating income.

(ii) Prepare a customer-cost hierarchy report.

(d) BTI Associates prepares architectural drawings to conform to RAJUK Approved Building Codes. Its income statement for 2021 is as follows:

Revenues Tk.701,250

Salaries of Professional staff (7,500 hours @ Tk.52 per hour) Travel

Administrative and support costs

390,000 15,000 171,600

Total costs 576,600

Operating income 124,650

The percentage of time spent by professional staff on various activities follows:

Making calculations and preparing drawings for clients 77%

Checking calculations and drawings 3

Correcting errors found in drawings (not billed to clients) 8 Making changes in response to client requests (billed to clients) 5 Correcting own errors regarding building codes (not billed to clients) 7

Total 100%

Assume administrative and support costs vary with professional-labor costs. How much of the total costs in 2021 are value-added, non-value-added or in the gray area between? Suppose BTI could eliminate all errors so that it did not need to spend any time making corrections and, as a result, could proportionately reduce professional- labor costs. Calculate BTI’s operating income in 2021.

[Marks: (3+4+8+5) = 20]

(3)

QUESTION 2

(a) A retailing firm is considering investing in a new store. The store will only be open for 5 years, after which time the site will be redeveloped by the owner. Lease payments for the store will be $25,000 per year payable in arrears. Equipment will cost $75,000 and can be depreciated over 5 years to a salvage value of $20,000, and furniture and fittings will cost $75,000 and can be depreciated over 5 years to a salvage value of

$15,000. Assume all depreciation is done on a straight line basis. Sales from the new store are expected to be $300,000 in the first year of operations and are expected to grow at 10% p.a. over the second year and at 5% p.a. thereafter. The cost of sales is expected to be 60% (of sales revenue). Up front advertising costs will be $75,000 payable immediately and ongoing advertising and promotion costs are expected to be

$15,000 in the first year, growing at the same rate of growth as sales. The firm's marginal tax rate is 33% and the discount rate appropriate for this project is 14% p.a.

Required:

Should the project be undertaken? How sensitive is the value of the project to changes in the cost of sales and the discount rate?

(b) Bromwich plc, a UK company, is considering undertaking a new project in Portugal.

This will require initial capital expenditure of €1,250 million, with no scrap value envisaged at the end of the five-year lifespan. There will also be an initial working capital requirement of €500 million, which will be recovered at the end of the project.

The initial capital will therefore be €1,750 million, and the company will pay for this investment by purchasing the euros required in exchange for sterling. Pre-tax net cash inflows of €800 million are expected to be generated each year from the project. It is assumed that all after-tax cash flows from the investment will be remitted to the UK in the year that they occur.

Company tax will be charged in Portugal with a rate of 40%, with depreciation on a straight-line basis being an allowable deduction for tax purposes. Portuguese tax is paid at the end of the year following that in which the taxable profits arise.

There is a double taxation agreement between the UK and Portugal, which means that no UK tax will be payable on the project profits.

A project of similar risk recently undertaken by Bromwich plc in the UK had a required post-tax rate of return is 10%.

Required:

Calculate the present value of the project under each of the following conditions- (i) The exchange rate remains constant at €1.60 for the duration of the project.

(ii) Sterling appreciates 5% every year.

[Marks: (10+10) = 20]

QUESTION 3

(a) Consider the following list of scorecard measures:

i) Ratings from customer surveys

ii) Cycle time to resolve customer complaints.

iii) Unit customer cost.

iv) Return on investment.

v) Employee satisfaction ratings.

vi) Percentage of defective units.

vii) Post purchase costs.

viii) Time to market (from start to finish).

ix) Suggestions implemented per employee.

x) Customer profitability.

xi) Percentage of revenues from new products.

xii) MCE.

(4)

Required:

Classify each measure according to the following: perspective; financial or nonfinancial;

subjective or objective; and external or internal. When the perspective is process, identify which type of process: innovation, operations, or post sales service.

(b) Carnover, Inc., manufactures a broad line of industrial and consumer products. One of its plants is located in Madrid, Spain and another in Singapore. The Madrid plant is operating at 85 percent capacity. Its main product, electric motors, has experienced softness in the market, which has led to predictions of further softening of the market and predictions of a decline in production to 65 percent capacity. If that happens, workers will have to be laid off and one wing of the factory closed. The Singapore plant manufactures heavy-duty industrial mixers that use the motors manufactured by the Madrid plant as an integral component. Demand for the mixers is strong. Price and cost information for the mixers are as follows:

Price Tk.2,200

Direct materials 630

Direct labor 125

Variable overhead 250

Fixed overhead 100

Fixed overhead is based on an annual budgeted amount of Tk.3,500,000 and budgeted production of 35,000 mixers. The direct materials cost includes the cost of the motor at Tk.200 (market price).

The Madrid plant capacity is 20,000 motors per year. Cost data are as follows:

Direct materials Tk.75

Direct labor 60

Variable overhead 60

Fixed overhead 100

Required:

(i) What is the maximum transfer price the Singapore plant would accept?

(ii) What is the minimum transfer price the Madrid plant would accept?

(iii) Consider the following environmental factors:

Madrid Plant Singapore Plant

Full employment is very important.

Local government prohibits layoffs without permission (which is rarely granted)

Cheap labor is plentiful.

Accounting is legalistic and conservative, designed to ensure compliance with government objectives.

Accounting is based on British- American model, oriented toward decision-making needs of creditors and investors.

How might these environmental factors affect the transfer pricing decisions?

(c) Tasty Treat is a large company that owns fast-food restaurants, has a soft-drink division and a snack division. Tasty Treat corporate management gives its division managers considerable operating and investment autonomy in running their divisions.

Tasty Treat is considering how it should compensate J C Roy, the general manager of the snack division.

 Proposal 1 calls for paying Roy a fixed salary.

 Proposal 2 calls for paying Roy some salary and some bonus based on residual income of the division.

Required:

Evaluate the proposals, specifying the advantages and disadvantages of each.

[Marks: 8+ (3x3)+3 = 20]

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QUESTION 4

Maxell Company manufactures webcams, devices which can provide live video and audio streams via personal computers. It has recently been suffering from liquidity problems and hopes that these will be eased by the launch of its new webcam, which has revolutionary audio sound and visual quality. The webcam is expected to have a product life cycle of two years. Market research has already been carried out to establish a target selling price and projected lifetime sales volumes for the product. Cost estimates have also been prepared, based on the current proposed product specification. Maxell Company uses life cycle costing to work out the target costs for its products, believing it to be more accurate to use an average cost across the whole lifetime of a product, rather than potentially different costs for different years. You are provided with the following relevant information for the webcam:

Projected lifetime sales volume 50,000 units

Target selling price per unit Tk.20,000

Target profit margin (35% selling cost price) Tk.7,000

Target cost Tk.13,000

Estimated lifetime cost per unit (see note below for detailed breakdown)

Tk.16,000

Note: Estimated lifetime cost per unit:

Manufacturing costs Taka Taka

Direct material (bought in parts) 4,000

Direct labor 2,600

Machine costs 2,100

Quality control costs 1,000

Rework costs 300

Total Manufacturing costs 10,000

Non-manufacturing costs

Product development costs 2,500

Marketing costs 3,500

Total non-manufacturing costs 6,000

Estimated lifetime cost per unit 16,000

The average market price for a webcam is currently Tk.15,000.

The company needs to close the cost gap of Tk.3,000 between the target cost and the estimated lifetime cost. The following information has been identified as relevant:

1. Direct material cost: all of the parts currently proposed for the webcam are bespoke parts. However, most of these can actually be replaced with standard parts costing 55% less. However, three of the bespoke parts, which currently account for 20% of the estimated direct material cost, cannot be replaced, although an alternative supplier charging 10% less has been sourced for these parts.

2. Direct labor cost: the webcam uses 45 minutes of direct labor, which costs Tk.3,467 per hour. The use of more standard parts, however, will mean that whilst the first unit would still be expected to take 45 minutes, there will now be an expected rate of learning of 90%

(where ‘b’= -0.152). This will end after the first 100 units have been completed.

3. Rework cost: this is the average rework cost per webcam and is based on an estimate of 15%

of webcams requiring rework at a cost of Tk.2,000 per work. With the use of more standard parts, the rate of reworks will fall to 10% and the cost of each rework will fall to Tk.1,800.

Required:

(i) Recalculate the estimated lifetime cost per unit for the webcam after taking into account points 1 to 3 above.

(ii) Explain the ‘market skimming’ (also known as ‘price skimming’) pricing strategy and discuss, as far as the information allows, whether this strategy may be more appropriate for Maxell Company than charging one price throughout the webcam’s entire life.

[Marks: (15+5) = 20]

(6)

QUESTION 5

(a) Discuss the role of management accountants in achieving the UN Sustainable Development Goals (SDGs).

(b) Outline some of the skills that future management accounting professionals should possess to combat the challenges posed by the Fourth Industrial Revolution.

(c) At the end of 2021, Hender Chemicals began to implement an environmental quality management program. As a first step, it identified the following costs in its accounting records as environmentally related for the year just ended:

Settling personal injury claims Tk.1,200,000 Treating and disposing of toxic waste 4,800,000 Cleanup of chemically contaminated soil 1,800,000

Inspecting products and processes 600,000

Operating pollution control equipment 840,000 Licensing facilities for productivity contaminations 360,000

Evaluating and selecting supplies 120,000

Developing performance measures 60,000

Recycling products 75,000

Required:

Prepare an environmental cost report by category. Assume that total operating costs are Tk.60,000,000.

[Marks: (5+5+10) = 20]

END OF QUESTION