CMA JANUARY, 2022 EXAMINATION MANAGEMENT LEVEL
SUBJECT: P2. PERFORMANCE MANAGEMENT
Model Solution
Solution of the Q. No. 1 (a)
A proper analysis consists of five key areas, each containing its own set of data points and ratios.
Revenues. Revenues are probably your business's main source of cash. ...
Profits. ...
Operational Efficiency. ...
Capital Efficiency and Solvency. ...
Liquidity.
(b) Kaizen costing is a system of cost reduction via continuous improvement. It tries to maintainpresent cost levels for products currently being manufactured via systematic efforts to achievethe desired cost level. The word kaizen is a Japanese word meaning continuous improvement. Ithas two dimensions. One dimension considers product (narrow perspective) and anotherdimension covers asset and organization (broader perspective).
(c) Two stage process
1) Establish the target cost Market research
Product planning, concept development stages 2) Achieve the target cost
value engineering,continuous improvement Design stage
Continuous improvement in later stage
(d) There are five basic information outputs from ABM.
Cost of activities and business processes Cost of non-value-added activities.
Activity-based performance measures Accurate product/service costs
Cost drivers.
(e) Benefits of Break even analysis smart pricing
Better decision making Figure out missing expenses plan business funding
set revenue and sales target meeting fixed cost.
(f) Basic principles of TQM
1.leadership-committed to quality
2. Customers-focus on customer satisfaction 3. Employees- involvement to all
4. Suppliers-maintaining true relationships 5. Continuous quality improvement
6. Performance measure- management by fact (g)features of relevant revenue.
Incremental/differential Occur in future
(h)
Incremental budgeting is the traditional budgeting method whereby the budget is prepared by taking the current period's budget or actual performance as a base, with incremental amounts then being added for the new budget period.on the other hand
Incremental budgeting is the traditional budgeting method whereby the budget is prepared by taking the current period's budget or actual performance as a base, with incremental amounts then being added for the new budget period.
Solution of the Q. No. 2 (a)
(i)
TYSON CHANDLER COMPANY Production Budget
For the Two Months Ending February 28, 2022 January February Expected unit sales... 10,000 12,000 Add: Desired ending finished goods inventory...3,000* 3,250*
Total required units... 13,000 15,250 Less: Beginning finished goods inventory... 2,500** 3,000 Required production units... 10,500 12,250
*25% X next month’s expected sales
**25% X 10,000 (ii)
TYSON CHANDLER COMPANY Direct Materials Budget
For the Month Ending January 31, 2022
January Units to be produced... 10,500 Direct material pounds per unit... X 2 Total pounds needed for production... 21,000 Add: Desired pounds in ending materials inventory... 9,800*
Total materials required... 30,800 Less: Beginning direct materials (pounds) ... 8,400**
Direct materials purchases... 22,400 Cost per pound... X Tk. 3 Total cost of direct materials purchases... Tk.67,200
*(12,250 X 2) X 40% ** (10,500 X 2) X 40%
(b)
WIDNET MANUFACTURING INC.
Home Appliance Division Responsibility Report
For the Year Ended December 31, 2021
Difference
Budget Actual Favorable F
Unfavorable U
Sales Tk.2,400,000 Tk.2,300,000 Tk.100,000 U
Variable costs
Cost of goods sold 1,200,000 1,260,000 60,000 U
Selling and administrative 240,000 232,000 8,000 F
Total 1,440,000 1,492,000 52,000 U
Contribution margin 960,000 808,000 152,000 U
Controllable fixed costs
Cost of goods sold 200,000 192,000 8,000 F
Selling and administrative 60,000 64,000 4,000 U
Total 260,000 256,000 4,000 F Controllable margin Tk. 700,000 Tk. 552,000 Tk.148,000 U (c)
(i) (Actual) –– (Applied) == Total Overhead Variance (Tk.18,800) - (1,800 X Tk.10) = Tk.800 U
(Actual) –– (Budgeted) == Overhead Controllable Variance (Tk.18,800) - (17,600) = Tk.1,200 U
Fixed OH Rate X (Normal Capacity –– Standard Hours Allowed) = Overhead Volume Variance Tk.3* X (1,667** - 1,800) = Tk.400 F
*(Tk.5,000 X 12)/20,000 **20,000/12
(ii) The cause of an unfavorable controllable variance could be higher than expected use of indirect materials, indirect labor, and factory supplies, or increases in indirect manufacturing costs, such as fuel and maintenance costs. A favorable volume variance would be caused by production of more units than what is considered normal capacity.
(d)
1. Target operating income = 30% of $1,000,000 of total assets
= Tk300,000 Let P = Selling price Revenues-Variable cost-Fixed Costs= Operating income 2000,000 p-(200,000×Tk4)- Tk400,000=Tk300,000
200,000p=300,000+800,000+400,000
=1,500,000
p= Tk7.50 per baseball
2. The dupont method describes ROI as the product of two components: return on sales (income revenues) and investment turnover (revenues investment.)
0.2×1.5=0.30, or 30%
3. RI= operating income-Required return on investment
= Tk300,000-(0.12×Tk1,000,000)
=Tk300,000-Tk120,000
=Tk180,000 (e)
Working:
According to question unit variable cost = = Tk. 4.00 Required-i
Present Profit (Loss):
Present sales proceeds (50,000 x 7.50) 3,75,000 Less; Variable costs (50,000 x 4) 2,00,000
Contribution Margin 1,75,000
Less : Fixed costs 1,90,000
Net loss 15,000
We require to earn a net profit of Taka 3,000. So we are to earn Tk. 15,000 (loss) + 3,000 (profit) Tk.18,000
It has been assumed that total production including additional production will full within the range of 20,000 to 65,000 fixed cost range. So the fixed costs will be zero for additional production.
Required units to earn desired profit = Required-ii
Sales = 80,000 × 7.50 = Tk. 6,00,000 Variable cost = 80,000 × 4 = Tk. 3,20,000
Profit Total Sales × 5% = 6,00,000× 5% = Tk. 30,000 Let, Sales Promotion cost = X
Sales = F.C + V.C + Profit + X
6,00,000 = 2,10,000 + 3,20,000 + 30,000 + X -X = 5,60,000 -6,00,000
-X=-40,000 X=Tk.40,000
Sales promotion cost Tk. 40,000 be increased to earn a profit of 5% on sales.
Solution of the Q. No. 3 Notes:
1. Calculation of budget machine hour rate Hours
For product P = 40,000 units x 2 80,000 For product Q = 80,000 units x 1 80,000
1,60,000 (2) Calculate of budgeted fixed expenses per hour:
Recovery rate per hour of fixed expenses (3) Fixed overhead rate per unit:
For product P = hour per unit x rate per hour = 6 × 2 = Tk. 12 For product Q = 6 × 1 = Tk. 6
(4) Variable cost per unit
P Q
Total cost per unit 20 40
Less. Fixed expenses per unit 12 6
8 34
(5) Contribution per unit:
Product P = 25 - 8 = Tk. 17 Product Q = 50- 34 = Tk. 16 (6) Contribution per machine hour:
Product P = (17÷ 2) = Tk. 8.5 per machine hour Product Q (16 ÷ 1) = Tk. 16 per machine hour Required-(a):
Statement for calculation of profit As per draft budget for the next month
Details Product-4
40,000 units
Product-Q 80,000 units Sales
Less: Total variable overhead Total contribution
Less: Total fixed overhead Profit
10,00,000 3.20.000 6,80,000 4.80.000 2.00.000
40,00,000 27.20.00 12,80,000
4,80.000 8.00.000
b)
Out of total budgeted machine hour 1,00,000 hours to be utilizied for producing 1,00,000 units of product Q & the rest of machine hour (1,60,000 - 1,00,000) or 60,000 to be used for product P because contribution
per machine hour product Q is greater than product P.
For profit maximize sales mix will be:
Product Q = 1,00,000 hours ÷ Per machine hour rate = 1,00,000 ÷ 1 = 1,00,000 units
Product P = 60,000 hours + Per machine hour rate = 60,000 ± 2 = 30,000 units Statement for calculation of revised product mix for profit maximize.
Details Product-P
30,000 units
Product-Q 1,00,000 units
Total 1,30,000 units Sales
Less: Total variable cost Total contribution
Less: Total fixed overhead Profit
7,50,000 2,40.000 5,10,000 3.60.000 1,50,000
50,00,000 34.00.000 16,00,000 6.00.000 10,00,000
57,50,000 36.40.000 21,10,000 9.60.000 11,50,000
Required -(c)
Product P should be discontinued as it earns lower profit and product C is to be continued by utilizing themachine hours required by product P. Thus production of C will be (60000 ÷1.5) = 40,000 units.To fix the selling price of product C a statement of profitability is to be prepared as follows:
Statement of profitability
Details Q C Total Tk.
Production (in units) Machine hour req.
Variable costs Fixed Costs:
General
Additional Fixed O.H
Return on capital employed (2,00,000x 15%) Total cost
Profit Sales
1,00,000 40,000 1,40,000 1,00,000 60,000 1,60,000 34,00,000
6,00,000
8,40,000 3,60,000 60,0000 30,000
42,40,000 9,60,000 60,000 30,000 40,00,000
10,00,000
12,90,000 1,50,000
52,90,000 11,50,000 50,00,000 14,40,000 64,40,000 Selling price of product C per unit = 14,40,000 ÷ 40,000= Tk. 36
Solution of the Q. No. 4 (a)
(i) The primary causes of the loss in net income were the decrease in the number of boarding days and the decrease in the boarding fee. The number of boarding days decreased by 2,920 or
approximately 13% (2,920 days ÷ 21,900 days), and the boarding fee decreased from Tk.25(a) per day to Tk.20(b) per day, a decrease of 20% (Tk.5 ÷ Tk.25). Together these resulted in a Tk.167,900 decrease in sales revenue, a decrease of approximately 31% (Tk.167,900 ÷ Tk.547,500).
(a)Tk.547,500 ÷ 21,900 days = Tk.25 per day (b)Tk.379,600 ÷ 18,980 days = Tk.20 per day
(ii) Management did a poor job in controlling variable expenses. Given that boarding days declined by about 13%, variable expenses should decline by about 13%, or more precisely, variable expenses should decline by Tk.25,842. However, variable expenses only declined by Tk.14,335 or about 7% (Tk.14,335 ÷ Tk.193,815). Thus, management did a poor job in controlling variable expenses. Management did a better job in controlling fixed expenses. Fixed expenses were under budget by Tk.5,000 and this includes the additional expenses incurred in advertising and entertainment.
(iii) Management’s decisions to stay competitive probably were sound. Given the decline in boarding days, the decision not to replace the worker was sound. The decision to reduce rates was probably forced by the competition. Without the additional advertising and entertainment expenses, the loss in net income might have been even greater.
(b)
G-BAR PASTURES Income Statement Flexible Budget Report
For the Year Ended December 31, 2020
Difference Budget at Actual at Favorable F Boarding days (BD) 18,980 BD 18,980 BD Unfavorable U Sales (Tk.25) Tk.474,500 Tk.379,600 Tk. 94,900 U Less variable expenses
Feed (Tk.5) 94,900 104,390 9,490 U
Veterinary fees (Tk.3) 56,940 58,838 1,898 U
Blacksmith fees (Tk..30) 5,694 6,074 380 U
Supplies (Tk..55) 10,439 10,178 261 F
Total variable expenses 167,973 179,480 11,507 U
Contribution margin 306,527 200,120 106,407 U
Less fixed expenses
Depreciation 40,000 40,000 0 U
Insurance 11,000 11,000 0
Utilities 14,000 12,000 2,000 F
Repairs and maintenance 11,000 10,000 1,000 F
Labor 96,000 88,000 8,000 F
Advertising 8,000 12,000 4,000 U
Entertainment 5,000 7,000 2,000 U
Total fixed expenses 185,000 180,000 5,000 F
Net income Tk.121,527 Tk. 20,120 Tk.101,407 U
(c)
(i) The primary causes of the decrease in net income are the decreases in boarding rates and volume. The average daily rate charged was Tk.20 = (Tk.379,600 ÷ 18,980). This rate resulted in a decrease in sales revenue of Tk.94,900 or 20% = (Tk.94,900 ÷ Tk.474,500). Given that it is “an extremely competitive business,” if G-Bar Pastures had not reduced rates, boarding days almost certainly would have declined even more.
(ii) Management did a poor job of controlling variable expenses. These expenses in total were Tk.11,507 over budget or 7%, or (Tk.11,507 ÷ Tk.167,973).
Moreover, each individual variable expense was over budget, except for supplies. Management did a good job of controlling fixed expenses as noted in part (a).
(iii) As noted in part (a), management’s decisions to stay competitive probably were sound.
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