eee ee ‘SEMESTER-6 Pakistan SPRING 2015 EXAMINATIONS Wednesday, the 26th August 2015 2. IC MA STRATEGIC MANAGEMENT S ACCOUNTING (BAF-601) uD Nee EniraReading Time: 18 Minutes Geen ih Maximum Marks: 100 Roll No, () Altemptal questions (i) Answers must be neat, relevant and bret (ii). Use of nan-programmable sclenttic calculators of any model & allowed. (iv) Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper (Wn marking the question paper, the examiners take into account clarty of expostton, logic of arguments, effective presentation, language and use of clear diagram chart, where appropriate, (v) DO NOT write your Name, Reg, No, or Roll No., or any krelevant information inside the answer sere. (vi) Question Paper must be retumed to invigllator before leaving the examination hall. DURING EXTRA READING TIME, WRITING IS STRICTLY PROHIBITED IN THE ANSWER SCRIPT Marks Q1 Pak Auto Limited is spare parts manufacturing company, established in 1995, intially, the company ‘was highly centralized however, the board of directors has reorganised the company into profit centres to keep up with many important decisions for the betterment of the company, The company’s Management Accountant prepared the following divisional operating statement for tthe year ended June 30, 2015: Pak Auto Limited Operating Statement For the year ended June 30, 2016 Rupees Division-A Division Diision-G Total Sales revenue 72,000,000 12,000,000 16,000,000 40,000,000 Cost of goods sold 8,000,000 _ 5,200,000 _ 12,000,000 _ 25,200,000 Gross proft 4,000,000 6,800,000 ~ 4,000,000 ~14,800,000 Operating expenses: ‘Administration 2,000,000 4,800,000 Selling 2,400,000, 6,800,000 Total operating expenses 4,400,000 17,600,000 Income from operations before taxes 400,000 — 2,400,000 400,000 3,200,000 ‘Average invested capital 8,000,000 12,000,000 16,000,000 60,000,000 Meetings of divisional heads are held monthly and attended by the senior management of the company as well, There had been a special discussion in all divisions meetings regarding profit forecast and it has been decided that each division would calculate ts own return on investment and residual income, so that company can evaluate performance on divisional basis. Adcitional information regarding Pak Auto Limited operations are as follows: # The Division-C sells its spare parts in @ local market as well as its sales revenue also includes Rss. 2,000,000 that represents sales made to Division-B. The transfer price for these sales is at the full cost of manufacturing. All other divisions sell spare parts in a local market only + The three divisions’ costs of goods sold comprise the following costs: jon-A_Division-B Direct material 2,000,000 4,000,000 4,000,000 Direct labour 2,000,000 ‘800,000 4,000,000 \Varable overhead 3,000,000 200,000 4,000,000 Fixed overhead 4,000,000 200,000 - Total cost of goods sold 000,000 5,200,000 42,000,000, + Administrative expenses include the following costs: Rupees ‘Segment expense: Division-A_Division-B __Division-C Variable 340,000, ‘560,000 Fixed 340,000 ‘840,000 Head-Office expenses (all fixed): Directly traceable to segment 400,000 480,000 General (allocated based on sales) 120,000 120,000, Total 200,000 2,000,000 © All selling expenses incurred at the divsional level, 80% of total selling expense is variable for all segments, |SMA-Spring 2015, tof4 PTOMarks Mr. Kamal, the manager of the Division-C hes some reservations on company's presentation of operating performance. He claims, the Division-C makes a greater contribution to the company's profits than is shown. We sell auto parts to Division-B at cost and it gets our share of the profit. We can sell auto parts outside at our regular mark-up, but we are doing this for the well being of the company. The Division-C should get oredit for intemal sales and operating statements should be revised at market price for internal purpose, This matter has been discussed in the meeting of the Management Committee and CEO directed the Management Accountant to prepare a statement at market price and report to the Management Committee within 10 days. Required: {a) As Mr. Kamal believes that the transfers from the Division-C to the Division-B should be at market price rather than at full manufacturing cost for divisional performance measurement, Discuss whether such reservation made by Mr. Kamal regarding Dvision-C is correct or not? 03, {b) Describe another approach that the company could use to set transfer prices other than full manufacturing cost and market price 02 (c) Using market based transfer pricing, prepare a revised operating statement of each division and the company as @ whole, for the year ended June 30, 2015 that will facilitate the evaluation of divisional performance, (Use the contribution margin formal) 24 {d) As decided in divisional meeting, the Controller Finance wants to evaluate each division's performance on the basis of the revised segment statement prepared in requirement (c) above, using the following measures: (i) Residual income 04 (i) Retum on investment (RO!) 04 Assume company's cost of capital is 10%. {e) Comment on residual income and return on investment (RO!) calculated in requirement (d) above. 02 (f) The use of return on investment (RO!) has often been criticised as emphasizing short term profit, but many companies continue to use this measure. Explain the role of ROI in managing business performance. How the limitations of ROI affect decisions? 04 Q.2 (a) Electro Agile Ltd, has been engaged in the business of wide range of small electronic gadgets manufacturing such as electric kettles, toasters, food mixers and irons for 10 years, The company supplies these appliances to various outlets in south region and profitable since its second year of operations, ‘The company has recently received a request by one of the super outlets in south region to bid on the manufacture of 14,500 toasters. In order to prepare the bid for 14,500 toasters Mr. Fahad, the Manager Costing and Budgeting has gathered the following information about cost associated with the production of toasters Rupees, Direct material (per unity 1,200) “Direct labour (per direct labour hour) 220 **Machine costs (per unit) 320 Variable selling cost (per unit) 610 Variable overhead rate (per direct labour hour) 120 Fixed overhead rate (per direct labour hour) EY 2 direct labour hours are used to produce single unit of toaster. ** Machine cost is nat included in normal overhead rates because these machines are used to produce toasters only. Additional Information: ‘= Mr. Fahad indicated that Rs. 520,000 would be allocated as fixed administrative expenses directly traceable to the toaster product fine. ‘= The bid must be stated at full cost per unit plus @ return on full cost of no more than 125 before income taxes, Mr. Bhatti, CFO of super outlet has indicated thet eny bid over 3,200 per toaster will be rejected, |SMA-Spring 2015, 20f4Required: (i) Calculate the minimum price per toaster that Electro Agile Ltd., could bid for the super outlet that would not reduce the Electro income, (li) Calculate the bid price per toaster using total cost and the maximum allowable retum pected by the super outlet before taxes during next year. (iv) Assume that per unit calculated cost using total cost-plus approach exceeds the maximum bid of Rs. 3,200 per toaster allowed by super outlet, What factors the management of Electro Agile Lid., should consider before deciding whether or not to submit a bid at the maximum price of Rs, 3,200 per toaster 7 {b) Enumerate the components! elements of a product's cost that are linked with marketing strategies at various stages of the product Ife cycle Q.3 Mercury Plastic Company manufactures a highly specialized plastic that is used extensively in automobile industry. itis estimated that the annual turnover of Mercury is Rs. 15,000,000. Following (iii) Ignoring the super outlet bid and using total cost-plus pricing formula, determine the mark- up percentage required for the toaster product line to eamn a target profit of Rs. 2,025,500 data has been compiled by Financial Controller of the company for quality assurance expense: Cost of Quality Acceptance testing Cost of customer service Cost of repairing of products returned from customer Design of quality control equipment Failure analysis Inspection goods inwards Losses from failure of purchased items Maintenance of quality control equipment Performance testing Product liability costs Administration of quality control Quality control training Re-inspection costs Required: Prepare @ comparative Cost of Quality Report for 2013-14 and 2014-15 classifying cost of quality into the following (i) Prevention costs (i) Appraisal costs: (il) Internal failure costs (iv) External failure costs 4 The Management Accountant of Moon Manufacturers has collected the following data regarding its two products namely ‘Normal’ and ‘Super’ Sales price (Rs. per unit) Direct material required per unit (kg) Direct material cost per kg (Rs.) Drect labour hours required for manufacturing (per unt) Per hour direct labour rate (Rs.) Variable factory overheads (per direct labour hour) |SMA-Spring 2015, 30f4 2013-14 400,000 420,000 290,000 240,000 410,000, 200,000 280,000 440,000 160,000 250,000 ‘90,000 490,000 240,000 Normal Super 730920, 2 3 40 40 3 4 100 100 50. 50, Rupees, 2014-15 130,000 100,000, 270,000 250,000 80,000 210,000, 260,000 180,000, 160,000, 220,000 100,000, 220,000 210,000 Marks 03, 03, 02 03 03, 02 02 03, PTOMarks The combined cost inolude the following Rupees Depreciation of the factory building (per year) 100,000 Depreciation of the machineries (per year) 108,000, Salary of the Praduction Manager (per month) Salary of the Foreman (per month) The organization can sell 7,000 units of ‘Normal product and 3,000 units of Super’ product, keeping its existing marketing force, but at present, 6,000 units of ‘Normal’ product and 3,000 units of ‘Super’ product are being produced and sold per year A marketing firm has contacted the management of Moon Manufacturers and has given a firm commitment that they can increase the avalable market of ‘Normal’ and ‘Super’ products to 9,000 Units and 7,000 units respectively, provided the marketing firm paid Rs 10,000 per year for their semvices. The present capacity of the company is 33,000 direct labour hours. Required: (@) You are required to present income statements under marginal approach for the three alternatives and advice the management of Moon Manufacturers as to how many units of ‘Normal" and ‘Super’ products can be produced and sold to maximize profit? 15 {b) Marginal costing is an invaluable aid to management decision making. Specify areas where marginal costing proves its worth in decision making, 05 .5 Maanjees is a wholesaler of formal stitched dresses and other accessories like hand bags and Jewelleries. Eid celebrations and Christmas are peak seasons in which demand for the company’s products increases. Maanjees engages independent sales agents to market the company's products in advance to meet the peak seasons as well as regular demand, Currently, Maanjees pays commission of 25% of sales to these independent agents, but they are demanding an increase in commission to 30% of sales made during the year ended June 30, 2015, The Assistant Finance Manager prepared the budget for 2015, but this budget does not include the agents’ demand for an increase in commissions. Assume that all cost of goods sold is 100% variable cost Following budgeted income statement for 2015 is provided by the Assistant Finance Manager: Rs. 000" Sales 15,550 Cost of goods sold 8,420 Gross margin 7,130 Selling and administrative expenses: Cammissions @ 25% of sales 3,888 Other fixed expenses. 180 _4,068 Income before taxes 3,062 Incame tax (33%) 4,010 Net income 2,052 Maanjee's Marketing Manager i evaluating the independent sales agents demand and suggested that company should employ fulltime sales personnel The company should hire three individuals at an estimated annual salary of Rs. 40,000 each, plus commissions of 5% of sales. In addition, a Sales Manager would be employed at a fixed annual salary of Rs. 254,000. itis estimated that all other fixed costs, as well as the variable cost percentages would remain the same 36 estimated in 2018 budgeted income statement Required: Compute the following (a) the estimated break-even point in rupees for the year ended June 30, 2016, based on the budgeted income statement prepared by the Assistant Finance Manager. 03, {b) the estimated break-even point in rupees for the year ended June 30, 2016, if the company employs its own full time sales personnel 06 (c) the estimated sales volume in rupees that would be required for the year ended June 30, 2015, to yield the same net income as projected in the budgeted income statement, if management continues to use the independent sales agents and agrees to their demand for @ 30% sales, commission 06 THE END ‘SMA Spring 2015, 4of4