INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF PAKISTAN SPRING (SUMMER) 2007 EXAMINATION Wednesday, the 23rd May, 2007 STRATEGIC MANAGEMENT ACCOUNTING Professional II Time Allowed —2 Hours 45 Minutes a (i) (iii) (iv) (v) (vi) (vii) Q.2 Attempt ALL questions. Answers must be neat, relevant and brief. Maximum Marks —90 in marking the question paper, the examiners take into account clarity of exposi- tion, logic of arguments, effective presentations, language and use of clear dia- gram/chart where appropriate. Read the instructions printed on the top cover of answer script CAREFULLY before attempting the paper. Use of. ‘non-programmable scientific calculators of any model is allowed. DO NOT write your Name, Reg. No. or Roll No. anywhere inside the answer script. Question No. 1—“Multiple Choice Question” printed separately, is an integral part of this question paper. (a) What are the advantages claimed for throughput accounting? (b) Good Luck (Pvt) Limited received an order to produce 5,350 units of ALPHA and 700 units of BETA from Z Limited. Supply has to be made in a week. The factory has a key resource (bottleneck) of Facility A which is available 6,260 minutes per week. Budgeted fac- tory costs data for two products, ALPHA and BETA are given below. ALPHA Selling price per unit (Rs.) 70 Material cost per unit (Rs.) 40 Time in facility A 1 minute Budgeted factory cost per week for Facility Ais as under: Rupees Direct tabour 50,000 Indirect labour 25,000 Power 3,500 Depreciation 45,000 Space costs 16,000 Engineering 7,000 Administration 10,000 1/4 Marks 6 PTOMarks During the week, factory could produce 4,750 units of ALPHA and 650 units of BETA. Good Luck company follows throughput stan- dard costing method. Required : Calculate the following under throughput costing method: (i) Total factory cost (TFC) (ii) Cost per factory minute (iii) Retum per factory minute for both products (iv) Throughput accounting (TA) ratios for both products (v) Standard Throughput cost for the week (vi) Efficiency percentage. SA NONNN (c) Define and discuss costs of quality and briefly describe the cate- gories into which these are classified. o Q. 3. (a) Why should management accountants be concerned with ethical 6 issues involved in the performance of their duties? Support your answer with examples. (o In the last quarter of 2006-07 it is estimated that YNQ will have pro- duced and sold 2,000 units of their main product by the end of the year. At this level of activity it is estimated that the average per unit cost will be. Rs. Direct materials 30 Direct labour 10 Overhead: fixed 10 Variable 10 60 This is in line with the standards set at the start of the year. The management accountant of YNQ is now preparing the budget for 2007-08. He has incorporated into his preliminary calculations the following cost increases. Raw material price increase of 20% Direct labour wage rate increase of 5% Variable overhead increase of 5% Fixed overhead increase of 25% The production manager believes that if a cheaper grade of raw material was to be used, this would enable the direct material cost per unit to be kept at Rs. 31.25 for 2007-08. This cheaper material, would, however, lead to a reject rate estimated at 5% of the com- pleted output and it would be necessary to introduce an inspection 2/4stage at the end of the manufacturing process to identify the faulty items. The cost of this inspection process would be Rs. 40,000 per year (including Rs. 10,000 allocation of existing factory overhead). Established practice has been to reconsider the product's selling price at the time the budget is being prepared. The selling price is. normally determined by adding a mark-up of 50% to unit cost. On this basis the product's selling price for 2006-07 has been Rs. 90 per unit, but the sales manager is worried about the implication of continuing the cost-plus 50% rule for 2007-08. He estimates demand for the product varies with price as follows: Price (Rs). 80 84 88 90 92 96 100 Demand (‘000 units) 25 23 21 20 19 17 15 Required : Q4. (i) Whether YNQ should use the regular or cheaper grade of material? Support your answer with necessary workings. (i) Calculate the best price of the product, the optimal level of produc- tion and the profit that this shall yield (iii) Comment briefly on the senstivity of solution to possible errors in estimation. A toy manufacturing company specializing in musical items for children has just developed a Rs. 50,000 moulding machine for automatically pro- ducing a special toy. The machine has been used to produce only one unit so far. The company will depreciate the Rs. 50,000 original cost even- ly over four years, after which, production of the toy will be stopped. Suddenly a machine salesman appears. He has a new machine that is ideally suited for producing this toy. His automatic machine is distinctly superior. It reduces the cost of materials by 10% and produces twice as many units per hour. It will cost Rs. 44,000 and will have a zero termi- nal disposal price at the end of four years. Production of sales of 25,000 units per year (sales Rs. 100,000) will be the same whether the company uses the moulding machine or the auto- matic machine. The current disposal price of the toy company’s mould- ing machine is Rs. 5,000. Its terminal disposal price in four years will be Rs. 2,600. With its present equipment, the company’s annual cost will be: direct materials Rs. 10,000; direct labour Rs. 20,000; and variable factory overhead Rs, 15,000. Variable factory overhead is applied on the basis of direct labour costs. Fixed factory overhead, exclusive of depreciation is Rs. 7,500 annually, and fixed marketing and administrative costs are Rs, 12,000 annually. Assume that the company pays no taxes. 3/4 Marks PTORequired : (i) ) (iii) Qs. (a) (b) Required : Assume that the required rate of return is 18%. Using the net pres- ent value method, show whether the new equipment should be purchased. What is the role of disposal value of the old equipment in the analysis? What is the payback period for the new equipment? Ag... manager, who developed the Rs. 50,000 moulding machine, you are trying to justify not buying the new Rs. 44,000 machine. You question the accuracy of the expected cash operat- ing savings. By how much must these cash savings fall before the point of indifference—the point where the net present value of the project is zero—is reached? “The successful implementation of budgetary control mechanism suffers from certain obvious weaknesses” Discuss. A company manufactures an electronic accessory for the motor industry. Each accessory requires components costing Rs. 500 and requires 4 hours of labour @ Rs. 100 per hour. Other variable costs, per accessory, include selling and distribution expenses of Rs. 60 and administration expenses of Rs. 30 respec- tively. Monthly fixed overheads are: selling and distribution Rs. 250,000, and administration Rs. 300,000 respectively. The list price charged by the company for the accessory is Rs. 1,200. The company has received following proposals from a specialist in custom built cars: 1. Produce additional 1,000 units per month as a special order for the specialist. The specialist to be allowed a special trade discount of 10% on the fist price. 2. The special order can be increased to 2,000 units per month provided the trade discount is increased to 20%. Prepare a report for the directors of the company explaining why they should accept or reject the offers made by the spe- cialist. Your report should quantify the effect on the profit of the company under each proposal. Discount table : PRESENT VALUE OF RUPEE ONE 2 Year PV factor @ 18% 0 4.0000 1 0.8475 12 [ 0.7182 3 0.6086, 4 0.5158 THE END 4/4 Marks 12 4 6 18