CMA MAY-2022 EXAMINATION BUSINESS LEVEL
SUBJECT: GE 02. FUNDAMENTALS OF MANAGEMENT ACCOUNTING
Time Allocated: Three hours Total Marks: 100
Instructions to Candidates
You are required to answer ALL questions.
Answers should be properly structured, relevant and computations need to be shown.
You are strongly advised to carefully read ALL the question requirements before attempting the question concerned (that is all parts and/or sub-questions).
ALL answers must be written in the answer book. Answers written on the question paper will not be submitted for marking.
Start answering each question from a fresh sheet. Your answers should be clearly numbered with the sub-question number then ruled off, so that the markers know which sub-question you are answering.
No of questions No of sub-questions Marks allocation
8 Maximum 03 Question 1- 6 = 10 marks each
Question 7- 8 = 20 marks each
TURN OVER
You are advised to spend 18 minutes on Question 1- 6 (10 marks per each) and 36 minutes on Question 7- 8 (20 marks per each).
QUESTION 1
(a) How do you generally explain the word “Cost”? What is meant this word in the accounting point of view? Explain.
(b) Discuss Shared Service Center (SSC) and its advantages. What are the advantages and disadvantages of out sourcing?
(c) Square Hospital is a full-service hospital that provides everything from major surgery and emergency room care to outpatient clinics. The hospital’s Radiology Department is considering replacing an old inefficient X-ray machine with a state-of-the-art digital X- ray machine. The new machine would provide higher quality X-rays in less time and at a lower cost per X-ray. It would also require less power and would use a color laser printer to produce easily readable X-ray images. Instead of investing the funds in the new X-ray machine, the Laboratory Department is lobbying the hospital’s management to buy a new DNA analyzer.
Required:
For each of the items below, indicate whether it should be considered a differential cost, an opportunity cost, or a sunk cost in the decision to replace the old X-ray machine with a new machine. If none of the categories apply for a particular item, write
“not applicable”.
(1) Cost of the old X-ray machine
(2) The salary of the head of the Radiology Department (3) The salary of the head of the Pediatrics Department (4) Cost of the new color laser printer
(5) Rent on the space occupied by Radiology (6) The cost of maintaining the old machine (7) Benefits from a new DNA analyzer
(8) Cost of electricity to run the X-ray machines
[Marks: (2+4+4) = 10]
QUESTION 2
(a) State Defense department manufactures radar systems. It has just completed its first newly designed system, RS-32. It took 3000 direct manufacturing labor hours (DMLH) to produce this one unit. Department believes that a 90% cumulative average time learning model for direct manufacturing labor hours applies to RS- 32. (A 90% learning curve means b= -0.1520). The variable costs of producing RS-32 are:
Direct Material costs $ 800000 per unit
Direct manufacturing labor costs $ 150 per DMLH Variable manufacturing overhead costs $ 250 per DMLH Required:
Calculate the total variable costs of producing 2, 4 and 8 units.
(b) Jorgansen Lighting, Inc., manufactures heavy-duty street lighting systems for municipalities. The company uses variable costing for internal management reports and absorption costing for external reports to shareholders, creditors, and the government. The company has provided the following data:
Year 1 Year 2 Year 3 Inventories:
Beginning (units) . . . 200 170 180 Ending (units) . . . 170 180 220 Variable costing net operating income Tk. 1,080,400 Tk. 1,032,400 Tk. 996,400
TURN OVER
The company’s fixed manufacturing overhead per unit was constant at Tk. 560 for all three years.
Required:
Determine each year’s absorption costing net operating income. Present your answer in the form of a reconciliation report.
[Marks: (5+5) = 10]
QUESTION 3
(a) Hielta Oy, a Finnish company, processes wood pulp for various manufacturers of paper products. Data relating to tons of pulp processed during June are provided below:
Percent Completed
Tons of Pulp Materials Labor and Overhead Work in process, June 1 . . . 20,000 90% 80%
Work in process, June 30 . . . 30,000 60% 40%
Started into production during June . . . 190,000 Required:
(1) Compute the number of tons of pulp completed and transferred out during June using weighted average method.
(2) Compute the equivalent units of production for materials and for labor and overhead for June.
(b) Olongapo Sports Corporation distributes two premium golf balls—the Flight Dynamic and the Sure Shot. Monthly sales and the contribution margin ratios for the two products follow:
Product Name Flight Dynamic Sure Shot Total
Sales . . . Tk. 150,000 Tk. 250,000 Tk. 400,000
CM ratio . . . 80% 36% ?
Fixed expenses total Tk. 183,750 per month.
Required:
(1) Prepare a contribution format income statement for the company as a whole.
Carry computations to one decimal place.
(2) Compute the break-even point for the company based on the current sales mix.
(3) If sales increase by Tk. 100,000 a month, by how much would you expect net operating income to increase? What are your assumptions?
[Marks: (5+5) = 10]
QUESTION 4
(a) Via Gelato is a popular neighborhood gelato shop. The company has provided the following data concerning its operations:
Fixed Element per Month
Variable Element per Liter
Actual Total for June
Revenue Tk. 12.00 Tk. 71,540
Raw materials Tk. 4.65 Tk. 29,230
Wages Tk. 5,600 Tk. 1.40 Tk. 13,860
Utilities Tk. 1,630 Tk. 0.20 Tk. 3,270
Rent Tk. 2,600 - Tk. 2,600
Insurance Tk. 1,350 - Tk. 1,350
Miscellaneous Tk. 650 Tk. 0.35 Tk. 2,590
TURN OVER
While gelato is sold by the cone or cup, the shop measures its activity in terms of the total number of liters of gelato sold. For example, wages should be Tk. 5,600 plus Tk.
1.40 per liter of gelato sold and the actual wages for June were Tk. 13,860. Via Gelato expected to sell 6,000 liters in June, but actually sold 6,200 liters.
Required:
Prepare a report showing Via Gelato revenue and spending variances for June.
(b) Fogerty Company makes two products, titanium Hubs and Sprockets. Data regarding the two products follow:
Direct Labor-Hours per Unit Annual Production Hubs . . . 0.80 10,000 units Sprockets . . . 0.40 40,000 units Additional information about the company follows:
(1) Hubs require Tk. 32 in direct materials per unit, and Sprockets require Tk. 18.
(2) The direct labor wage rate is Tk. 15 per hour.
(3) Hubs are more complex to manufacture than Sprockets and they require special equipment.
(4) The ABC system has the following activity cost pools:
Estimated Activity level Activity Cost Pool (Activity Measure) Overhead Cost Hubs Sprockets Total Machine setups (number of setups) Tk. 72,000 100 300 400 Special processing (machine-hours) Tk. 200,000 5,000 0 5,000 General factory (organization-sustaining) Tk. 816,000 N/A N/A N/A Required:
(1) Compute the activity rate for each activity cost pool. Did you compute an activity rate for all of the activity cost pools? Why?
(2) Determine the unit product cost of each product according to the ABC system.
[Marks: (5+5) = 10]
QUESTION 5
The Delta corporation manufactures and sells two products, Royal Bucket and Royal Drum.
In July 2020 Delta’s Budget Department gathered the following data to prepare budgets for 2021:
Projected sales for 2021
Product Units Price
Royal Bucket 60000 $ 165
Royal Drum 40000 $250
Inventories (in units), 2021 Expected target
Product April 1, 2020 March 31, 2021
Royal Bucket 20000 25000
Royal Drum 8000 9000
The following direct materials are used in the two products:
Direct Materials Unit Royal Bucket Royal Drum
A kg 4 5
B kg 2 3
C kg 0 1
TURN OVER
Projected data with respect to direct materials are as follows:
Direct Materials Anticipated Expected inventories Target Inventories Purchase price April 1, 2020 March 31, 2021
A $ 12 32000 kg 36000 kg
B $ 5 29000 kg 32000 kg
C $ 3 6000 kg 7000 kg
Projected direct manufacturing labor requirements and rates for 2021 are as follows:
Product Hours per unit Rate per hour
Royal Bucket 2 $ 12
Royal Drum 3 $ 16
Manufacturing overhead is allocated at the rate of $ 20 per direct manufacturing labor hour.
Based on the above data prepare the following budgets for 2021, for Royal Bucket and Royal Drum:
1. Revenue budget (in Dollar) 2. Production budget (in units)
3. Direct materials purchase budget (in quantities) 4. Direct materials purchase budget (in Dollar) 5. Direct manufacturing labor budget (in Dollar)
[Marks: 10]
QUESTION 6
(a) Idee GmbH is a company that develops bespoke educational computer software. The company is based in Germany. It has recently acquired two companies: Welt and Zero.
Welt is a well-established company that is also based in Germany. It develops educational computer software and was a direct competitor of Idee GmbH (i.e., prior to the acquisition). Zero, which is based in Southeast Asia, is a new but rapidly growing company that develops off-the-shelf educational software and also produces DVDs.
Zero was acquired so that it could produce DVDs for Idee GmbH and Welt.
The Managing Director of Idee GmbH has now realised that the acquisition of these two companies will cause problems for him in terms of planning, control, and decision- making. He is thinking of implementing a decentralised structure but is unsure of the advantages and disadvantages of such a structure, of how much autonomy to grant to the new companies, and also which performance measure to use to appraise their performance. Consequently he has contacted you, the Finance Director of Idee GmbH, for help.
Required:
Write a report to the Managing Director which Explains the advantage and disadvantages that would be experienced by Idee GmbH in operating a decentralised structure;
(b) MB Ltd operates in Bangladesh and investment made in plant and machinery. The corporation tax rate is 30%. The company is considering whether to purchase some machinery which will cost 2 million and is expected to result in additional net cash flows after tax is 500,000 per annum for six years. Assume a discount factor of 8%.
Required:
(1) Calculate the Net Present Value (NPV) (2) Internal Rate of Return (IRR)
[Marks: (5+5) = 10]
TURN OVER
QUESTION 7
Miller Toy Company manufactures a plastic swimming pool at its Westwood Plant. The plant has been experiencing problems as shown by its June contribution format income statement below:
Budgeted Actual
Sales (15,000 pools) . . . Tk. 450,000 Tk. 450,000 Variable expenses:
Variable cost of goods sold * . . . 180,000 196,290 Variable selling expenses . . . 20,000 20,000 Total variable expenses . . . 200,000 216,290 Contribution margin . . . 250,000 233,710 Fixed expenses:
Manufacturing overhead . . . 130,000 130,000 Selling and administrative . . . 84,000 84,000 Total fixed expenses . . . 214,000 214,000 Net operating income . . . Tk. 36,000 Tk. 19,710
*Contains direct materials, direct labor, and variable manufacturing overhead.
Janet Dunn, who has just been appointed general manager of the Westwood Plant, has been given instructions to “get things under control.” Upon reviewing the plant’s income statement, Ms. Dunn has concluded that the major problem lies in the variable cost of goods sold. She has been provided with the following standard cost per swimming pool:
Standard Quantity Standard Price Standard
or Hours. or Rate Cost
Direct materials . . . 3.0 pounds Tk. 2.00 per pound Tk. 6.00 Direct labor . . . 0.8 hours Tk. 6.00 per hour 4.80 Variable manufacturing overhead 0.4 hours * Tk. 3.00 per hour 1.20 Total standard cost . . . Tk. 12.00
*Based on machine-hours.
During June the plant produced 15,000 pools and incurred the following costs:
(a) Purchased 60,000 pounds of materials at a cost of Tk. 1.95 per pound.
(b) Used 49,200 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
(c) Worked 11,800 direct labor-hours at a cost of Tk. 7.00 per hour.
(d) Incurred variable manufacturing overhead cost totaling Tk. 18,290 for the month. A total of 5,900 machine-hours was recorded. It is the company’s policy to close all variances to cost of goods sold on a monthly basis.
Required:
(1) Compute the following variances for June:
(a) Materials price and quantity variances.
(b) Labor rate and efficiency variances.
(c) Variable overhead rate and efficiency variances.
(2) Pick out the two most significant variances that you computed in (1) above. Explain to Ms. Dunn the possible causes of these variances.
[Marks: (10+10) = 20]
QUESTION 8
Morton Company’s contribution format income statement for last month is given below:
Sales (15,000 units X Tk. 30 per unit) . . . Tk. 450,000 Variable expenses . . . 315,000 Contribution margin . . . 135,000 Fixed expenses . . . 90,000 Net operating income . . . Tk. 45,000
The industry in which Morton Company operates is quite sensitive to cyclical movements in the economy. Thus, profits vary considerably from year to year according to general economic conditions. The company has a large amount of unused capacity and is studying ways of improving profits.
Required:
(1) New equipment has come onto the market that would allow Morton Company to automate a portion of its operations. Variable expenses would be reduced by Tk. 9 per unit. However, fixed expenses would increase to a total of Tk. 225,000 each month.
Prepare two contribution format income statements, one showing present operations and one showing how operations would appear if the new equipment is purchased.
Show an Amount column, a Per Unit column, and a Percent column on each statement. Do not show percentages for the fixed expenses.
(2) Refer to the original data. Rather than purchase new equipment, the marketing manager argues that the company’s marketing strategy should be changed. Rather than pay sales commissions, which are currently included in variable expenses, the company would pay salespersons fixed salaries and would invest heavily in advertising. The marketing manager claims this new approach would increase unit sales by 30% without any change in selling price; the company’s new monthly fixed expenses would be Tk. 180,000; and its net operating income would increase by 20%.
Compute the break-even point in dollar sales for the company under the new marketing strategy. Do you agree with the marketing manager’s proposal?
[Marks: (10+10) = 20]
*END OF QUESTION PAPER*
