Institute of Certified Management Accountants of Sri Lanka Managerial Level May 2017 Examination. Integrative Management Accounting (IMA / ML 1-301)

Transcription

1 Copyright Reserved Serial No Institute of Certified Management Accountants of Sri Lanka Managerial Level May 2017 Examination Examination Date : 20 th May 2017 Number of Pages : 06 Examination Time: 9.30 a:m p:m. Number of Questions: 05 Instructions to candidates: 1. Time allowed is three (3) hours. 2. Total: 100 Marks. 3. Answer all questions in Part I and any three (3) questions from Part II. 4. The answers should be in English Language. Subject Subject Code Integrative Management Accounting (IMA / ML 1-301) PART I Question No. 01 (40 Marks) ABC Company s Tooling Business Unit (TBU) manufactures three different products using two production departments. The company currently uses absorption costing to establish product costs and profitability. The CEO has recently attended a conference on Activity Based Costing (ABC) and are examining whether ABC might provide a better system for TBU. The following budgeted information for period ended 31 st December 2016 has been collated for each of the three products: T M P Production and Sales (units) 8,750 4,000 6,000 Unit sales price (Rs.) Direct materials (Kg) Direct labour - Machine Dept. (Hours) Assembly Dept. (Hours) Direct expenses (Rs.) Machine Dept. (machine hours per unit)(hours) Raw material costs Rs. 4/- per Kg and the hourly rate for all labour is Rs 5/-. The direct expenses relate to entirely specialized packaging which is uniquely designed for each of the products and is therefore directly attributable to that product alone. The current costing system absorbs overheads to the Machine and Assembly Departments on the basis of a recovery rate of Rs. 3.50/- per machine hour and Rs.1/- per labour hour respectively. The following is an analysis of the overheads by department: Department Overheads Purchasing Department 22,400 Production Set-up & Design Department 34,500 Customer Service Department 32,600 Machine Department 123,000 Assembly Department 26,500 Institute of Certified Management Accountants of Sri Lanka 1

2 The Departmental Managers have provided the following additional information about operations in their departments: T M P Total Number of set-ups Number of customer orders Number of purchase orders The Machine Dept. is capital intensive and the Assembly Dept. is labour intensive. (a) Explain the meaning of Business Unit. (03 Marks) (b) Differentiate the concept of profit center and investment center. (06 Marks) (c) Calculate the prime cost of each product. (04 Marks) (d) (e) (f) Calculate the profit per unit for each product if overheads are absorbed on the current costing basis. (06 Marks) Calculate the profit per unit for each product if overheads are absorbed using an activity-based costing approach. Clearly identify any cost drivers you assign. (12 Marks) Comment on why there is a difference between the profit/loss shown on an absorption costing basis and that shown using activity-based costing. (06 Marks) (g) Identify factors that might be influences by the use of the ABC. (03 Marks) (Total 40 Marks) End of Part I PART II Answer any three (3) questions Question No. 02 (20 Marks) Neptune Company manufactures toys and gifts. Its research and development department developed a new toy. Neptune s sales personnel estimate that the new toy can be sold for the next three years but not after that. To produce the amount demanded, Neptune needs to buy additional machinery and needs to provide about 25,000 square feet of space to produce this product. Neptune has 12,500 square feet to presently unused space available for the next three years. The company s present lease is with 10 years to run costs Rs. 300/- a square foot, including the 12,500 square feet of unused space that cannot be used for anything else. Neptune can rent another 12,500 square feet adjoining its facility for three years at Rs. 400/- per square foot per year if it decides to make this product. The estimates of profit for the new product have been calculated and are given below. The allocated administrative costs will not be affected by the new toy. Each product is allocated some administrative costs to calculate the profit. The equipment will be purchased for Rs. 90,000,000/- and will have a salvage value of Rs. 1,800,000/- at the end of the third year. Capital allowances can be claimed equally over the three years. Tax is paid in the same year. Institute of Certified Management Accountants of Sri Lanka 2

3 Rs. million Year 1 Year 2 Year 3 Sales Material, labor, and other unit level batch level, and product level costs Allocated administration costs Rent Depreciation Profit before tax Income tax Profit for the year (a) State the difference between incremental cash flows and estimated profit for the year. (02 Marks) (b) Prepare a schedule to show the differential after-tax net cash flows for this project. (09 Marks) (c) Calculate the Payback period. (02 Marks) (d) Calculate Net Present Value (NPV) assuming the company sets a required discount rate 20% after tax. (04 Marks) (e) State whether to accept the new project by using capital budgeting theory. (03 Marks) Question No. 03 (20 Marks) Financial and management accounting are both important tools for a business, but serve different purposes. A business uses accounting to determine operational plans in the future, to review past performance and to check current business functions. Management and financial accounting have different audiences, as investors are not usually involved in the day-to-day operations of the business but are concerned about their investment, whereas managers need information quickly to make daily business decisions. (a) Explain briefly the Differences between Financial Accounting and Management Accounting. (05 Marks) (b) Discuss why Management Accounting Is Important in Decision-Making. (05 Marks) (c) State four (4) advantages of Management Accounting. (05 Marks) (d) Explain briefly four examples of Management accounting reports. (05 Marks) Institute of Certified Management Accountants of Sri Lanka 3

4 Question No. 04 (20 Marks) Nano Limited manufactures a range of cable products for the electronics industry. The company has been notified of an upcoming scarce availability situation in relation to a raw material called Rhondium, a metal used in the production of three of the company s cable products. The maximum availability of this material will be restricted to 15,000 meters in the upcoming quarter. You have been asked by the production manager to make appropriate changes to the production budget for these three cable products and have received the following resource usage information for each product: Note Cable X Cable Y Cable Z Length of 1 production roll (meters) Resources required to make 1 roll VARIABLE COST ITEMS: Materials Rhondium (meters) Plastic (kilos) Labour time (hours) FIXED COST ITEMS: Machine time (hours) Notes: 1. Each type of cable is produced in standard lengths as indicated in the above table. It is not possible to produce any other roll length due to the need to comply with industry standards. 2. Each production roll of cable requires a length of Rhondium which includes a waste allowance. The amount wasted is sold for scrap and cannot be used to make up other rolls. Rhondium costs Rs.200/- per metre and plastic costs Rs.100/- per kilo. (Scrap proceeds can be ignored for the purposes of this question). 3. Labour is charged at a rate of Rs.130/- per hour. 4. Machine time is charged at a rate of Rs.300/- per hour. Additional information: The sales prices of 1 production roll of the different types of cable are as follows: Cable X Cable Y Cable Z Sales price per production roll 121, , ,380 The company is contractually obliged to supply 1,500 metres of each type of cable to a key customer in the forthcoming quarter. This contract cannot be broken despite the shortage of Rhondium and must be given top priority ahead of other sales orders. The maximum anticipated demand for each type of cable in the forthcoming quarter (including the 1,500 metres of each type of cable detailed in the previous note) is as follows: Cable X Cable Y Cable Z Customer demand (meters) 6,600 3,500 4, (a) (b) Briefly outline the meaning of the term limiting factor and explain how an organization constrained by limiting factors should determine optimal production levels. (04 Marks) Compute the optimal production levels of each type of cable for the upcoming quarter and the closing quantity of Rhondium remaining in stock (if any) at the end of the quarter. (16 Marks) Institute of Certified Management Accountants of Sri Lanka 4

5 Question No. 05 (20 Marks) Sustainability and lean thinking have many similarities: both practices seek to reduce waste. However, lean operations focus on eliminating waste and empowering employees in an effort to increase economic profits. On the other hand, lean and green operations focus on eliminating waste and empowering employees not only to increase economic profits, but also to preserve the planet and improve the lives of all people touched by the company. While lean practices tend to center on international operational waste, green practices also consider the external waste that may occur as a result of the product. To become greener, a lean company should be particularly cognizant of all waste that could harm the planet: packaging waste, water waste, energy waste, and emission waste that would occur from both manufacturing the product and from customers using and eventually disposing of the product. (a) State six (6) types of waste in an organization. (06 Marks) (b) State four (4) benefits of lean management. (04 Marks) (c) (d) List four (4) management accounting techniques that contributed to eliminating waste and empowering employees. (04 Marks) State two (2) very recent environmental disasters which were taking place in Sri Lanka and very briefly explain the role of the following parties in respect of incidents you mentioned. Regulating bodies Academic community including university students Government (06 Marks) End of Part II Institute of Certified Management Accountants of Sri Lanka 5

6 Present value table Present value of 1.00 unit of currency, that is (1 + r) -n where r = interest rate; n = number of periods until payment or receipt. Periods (n) Interest rates (r) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Periods (n) Interest rates (r) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% End of Question Paper Institute of Certified Management Accountants of Sri Lanka 6