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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA JUNE, 2017 EXAMINATION
PROFESSIONAL LEVEL-II
SUBJECT: 202. MANAGEMENT ACCOUNTING.
Model Solution Solution to the Q. No. 01 (b)
(i)
New Cars Used Cars
Budgeted selling price 3,000,000 2,400,000
Actual selling price 2,960,000 2,380,000
Sale price variances :
New Cars {(2,960,000-3,000,000)×190} 7,600,000 U
Used Cars {(2,380,000-2,400,000) ×320} 6,400,000 U
Total cars 14,000,000 U
(ii)
Budgeted average contribution per used car:
240,000,000÷500 480,000
New Cars Used Cars
Budgeted sales unit 200 300
Actual sales unit 190 320
Sale volume variances:
New Cars {(190-200)×480,000} 4,800,000 U
Used Cars {(320-300) ×480,000} 9,600,000 F
Total cars 4,800,000 F
(iii)
Budgeted contribution margin per new car:
120,000,000÷200 600,000
Budgeted contribution margin per used car:
120,000,000÷300 400,000
Sales mix variances:
New Cars {(190-200)×(600,000-480,000)} 1,200,000 U
Used Cars {(320-300) ×(400,000-480,000)} 1,600,000 U
Total cars 2,800,000 U
(iv)
New Cars Used Cars
Budgeted cost of goods sold 2,400,000 2,000,000
Actual cost of goods sold 2,460,000 2,000,000
Cost of goods sold variance (variable cost variance):
New Cars {(2,460,000-2,400,000)×190} 11,400,000 U
Used Cars {(2,000,000-2,000,000) ×320} _ F
Total cars 11,400,000 U
(v)
Summary of variances: Favourable Unfavourable
Total selling price variance 14,000,000
Total sales volume variance 4,800,000
Total sales mix variance 2,800,000
Total cost of goods sold variance 11,400,000
Total variance 4,800,000 28,200,000
Unfavourable contribution margin variance 23,400,000
2 Solution to the Q. No. 02
(i)
There is not enough kiln capacity to satisfy demand for all four products. The total amount of time available is 2,000 hours, but 2,300 hours would be required to satisfy demand as shown below:
Traditional Brick
Textured Facing
Cinder Block
Roman
Brick Total
Annual demand in pallets (a) 120 80 180 70
Hours required in the drying kiln per pallet (b) 5 7 4 6
Total hours required in the drying kiln (a) × (b) 600 560 720 420 2,300
(ii)
The profitability index should be used to rank the products.
Traditional Brick
Textured Facing
Cinder Block
Roman Brick
Contribution margin per pallet (a) Tk 370 Tk 497 Tk 328 Tk 390
Hours required in drying kiln per pallet (b) 5 7 4 6
Profitability index (PI) (a) ÷ (b) Tk 74 Tk 71 Tk 82 Tk 65
Ranking on PI 2 3 1 4
The most profitable use of the bottleneck operation (the constraint) is the Cinder Block product, followed by the Traditional Brick product and then the Textured Facing and Roman Brick products. Since no fixed costs would be affected by this decision, the optimal plan would be:
Amount of constrained resource available 2,000 hours
Less: Constrained resource required for production of 180 pallets of Cinder Block 720 hours
Remaining constrained resource available 1,280 hours
Less: Constrained resource required for production of 120 pallets of Traditional Brick 600 hours
Remaining constrained resource available 680 hours
Less: Constrained resource required for production of 80 pallets of Textured Facing 560 hours
Remaining constrained resource available 120 hours
Less: Constrained resource required for production of 20 pallets of Roman Brick 120 hours
Remaining constrained resource available 0 hours
(iii)
The total contribution margin under the above plan would be Tk 151,000:
Traditional Brick
Textured Facing
Cinder Block
Roman
Brick Total Contribution margin per pallet (a) Tk 370 Tk 497 Tk 328 Tk 390
Optimal production plan (b) ... 120 80 180 20
Total contribution margin (a) × (b) Tk 44,400 Tk 39,760 Tk 59,040 Tk 7,800 Tk 151,000
(iv)
The company should be willing to pay up to Tk 65 per hour to operate the kiln until demand is satisfied for Roman Bricks.
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(v)The selling price for the new product should at least cover its variable cost and opportunity cost:
Selling price of
the new product ≥ Variable cost of the new product +
(Opportunity cost per unit of the constrained resources
×
Amount of constrained resource required by a unit of new product) Selling price of
the new product ≥ Tk 530 + (Tk 65 per hour × 11 hours)
= Tk 530 + Tk 715
= Tk 1,245
(vi)
Salespersons who are paid a commission of 5% of gross revenues will naturally prefer to sell a customer a pallet of anything other than cinder blocks since they have the lowest gross revenues. However, given the company’s constraint, they are in fact the company’s most profitable product. The rankings of the products in terms of their gross sales and profitability indexes are given below:
Traditional Brick
Textured Facing
Cinder Block
Roman Brick
Gross revenues per pallet Tk 789 Tk 1,264 Tk 569 Tk 836
Ranking based on gross revenues 3 1 4 2
Profitability index Tk 74 Tk 71 Tk 82 Tk 65
Ranking based on profitability index 2 3 1 4
To align the salespersons’ incentives with the interests of the company, the salespersons should be compensated based on the profitability index of the products sold or on the total contribution margin generated by the sales.
Solution to the Q. No. 03 (a)
Target costing is used in new product development. The target cost is the expected selling price of the new product less the desired profit per unit. The product development team is charged with the responsibility of ensuring that actual costs do not exceed this target cost.
This is the reverse of the way most companies have traditionally approached the pricing decision. Most companies start with cost and then add their markup to arrive at the selling price. The traditional cost-plus pricing approach attempts to ignore how much customers are willing to pay for the product.
(b)
No. Planning and control are different, although related, concepts.
Planning involves developing objectives and formulating steps to achieve those objectives.
Control, by contrast, involves the means by which management ensures that the objectives set down at the planning stage are attained.
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(c) (i)Only the incremental costs and benefits are relevant. In particular, only the variable manufacturing overhead and the cost of the special tool are relevant overhead costs in this situation. The other manufacturing overhead costs are fixed and are not affected by the decision.
Per unit
Total 10 bracelets
Taka Taka
Incremental revenue 349.95 3,499.5
Incremental costs:
Variable costs:
Direct material 143 1,430
Direct labor 86 860
Variable manufacturing overhead 7 70
Special filigree 6 60
Total variable costs 242 2,420
Fixed costs:
Purchase of special tool 465
Total incremental cost 2,885
Incremental net operating income 614.5
(ii)
Even though the price for the special order is below the company’s regular price for such an item, the special order would add to the company’s net operating income and should be accepted. This conclusion would not necessarily follow if the special order affected the regular selling price of bracelets or if it required the use of a constrained resource.
(d) (i)
Each “bag” contains one unit of liquid and two units of spray. Thus, each bag generates contribution margin of: (1 × Tk 10) + (2 × Tk 5) = Tk 20.
The break-even point would be: Tk 100,000 ÷ Tk 20 = 5,000 bags. Since each bag contains two units of spray, at the break-even point 5,000 × 2 or 10,000 units of spray must be sold.
(ii)
At the break-even point, Total CM = Total FC; and the CM per unit would be Tk 1,600 ÷ 4,000 = Tk 0.40.
If one unit is sold beyond the break-even point, net income would rise by Tk 0.40.
(iii)
Tk 10X 0.40(Tk 10X) Tk 216,000 = 0.25(Tk 10X) Tk 3.50X = Tk 216,000
X = 61,715 units (rounded) (iv)
In units: 3,200 – 2,800 = 400 units
In dollars: 400 units × Tk 65 per unit = Tk 26,000 Solution to the Q. No. 4.
(b) (i)
Income Statement for the Nahiyan & Co., Variable Costing For the Year Ended December 31, 2016
Taka Taka
Revenues (Tk 22 × 345,400 units) 7,598,800
Variable costs:
Beginning inventory (Tk 5.10 × 85,000) 433,500
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Add: Variable manufacturing costs (Tk 5.10 × 294,900)1 1,503,990
Cost of goods available for sale 1,937,490
Less: ending inventory (Tk 5.10 × 34,500) 175,950
Variable cost of goods sold 1,761,540
Variable operating costs (Tk 1.10 × 345,400) 379,940 Total variable costs (at standard costs) 2,141,480
Adjustment for variances 0
Total variable costs 2,141,480
Contribution margin 5,457,320
Fixed costs:
Fixed manufacturing overhead costs 1,440,000
Fixed operating costs 1,080,000
Adjustment for fixed cost variances 0
Total fixed costs 2,520,000
Operating income Tk 2,937,320
Note -1: No. of units manufactured = (no. of units sold + ending inventory) – beginning inventory
= (345,400 + 34,500) – 85,000 = 294,900 units
(ii)
Absorption Costing Data
Fixed MOH allocation rate = FMOH ÷ Denominator level MHs
= Tk 1,440,000 ÷ 6,000
= Tk 240 per machine-hour
Fixed MOH allocation rate per unit = FMOH allocation rate ÷ standard production rate
= Tk 240 ÷ 50
= Tk 4.80 per unit
Income Statement for the Nahiyan & Co., Absorption Costing For the Year Ended December 31, 2016
Taka Taka
Revenues (Tk 22 × 345,400 units) 7,598,800
Cost of goods sold:
Beginning inventory (Tk 5.10 + Tk 4.80) × 85,000 841,500 Add: Variable manuf. costs (Tk 5.10 × 294,900) 1,503,990 Add: Fixed manuf. costs (Tk 4.80 × 294,900) 1,415,520 Cost of goods available for sale 3,761,010 Less: ending inventory (Tk 5.10 + Tk 4.80) × 34,500 (341,550) Adjust for manuf. variances (Tk 4.80 × 5,100)2 24,480
Cost of goods sold 3,443,940
Gross margin 4,154,860
Operating costs:
Variable operating costs (Tk 1.10 × 345,400) 379,940
Fixed operating costs 1,080,000
Adjust for operating cost variances 0
Total operating costs 1,459,940
Operating income Tk 2,694,920
Note 2: Production volume variance
= [(6,000 hours × 50) – 294,900] × Tk 4.80
= (300,000 – 294,900) × Tk 4.80 = Tk 24,480
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(iii)NHN’s pre-tax profit margins –
Under variable costing Under absorption costing
Revenues Tk 7,598,800 Revenues Tk 7,598,800
Operating income Tk 2,937,320 Operating income Tk 2,694,920 Pre-tax profit margin 38.66% Pre-tax profit margin 35.46%
(iv)
Operating income using variable costing is about 9% higher than operating income calculated using absorption costing.
Variable costing operating income – Absorption costing operating income
= Tk 2,937,320 – Tk 2,694,920
= Tk 242,400
Fixed manuf. costs in beg. inventory under absorption costing – Fixed manuf. costs in ending inventory under absorption costing = (Tk 4.80 × 85,000) – (Tk 4.80 × 34,500) = Tk 242,400
(v)
The factors the CFO should consider include:
(a) Effect on managerial behavior, and
(b) Effect on external users of financial statements.
Absorption costing has many critics. However, the dysfunctional aspects associated with absorption costing can be reduced by:
Careful budgeting and inventory planning,
Adding a capital charge to reduce the incentives to build up inventory, and
Monitoring nonfinancial performance measures.
