Institute of Certified Management Accountants of Sri Lanka Operational Level November 2018 Examination. Management Accounting (MA / OL 1-201)

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1 Copyright Reserved Serial No Institute of Certified Management Accountants of Sri Lanka Operational Level November 2018 Examination Examination Date : 17 th November 2018 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. 4. Candidates are allowed to use non-programmable calculators. 5. The answers should be in English Language. Subject Subject Code Management Accounting (MA / OL 1-201) PART I Question No. 01 (40 Marks) For questions 1 to 20, select the most appropriate answer from the given answers under (a), (b), (c) & (d) for each question and write only the letter [i.e. (a) or (b) or (c) or (d)] relating to the most appropriate answer against the question number, in the answer booklet. (1) Which of the following is dedicated to improve the process involved in producing the intended output? (a) Management accounting. (b) Cost accounting. (c) Cost management. (d) Activity management. (e) Investment management. (2) Prime objective of cost accounting is (a) Tax compliance. (b) Financial audit. (c) Costs ascertainment. (d) Profit analysis. (3) In traditional cost systems, selling and administrative costs are treated as (a) Product costs. (b) Inventoriable costs. (c) Unexpired cost. (d) Period cost.. (4) The traditional inventory valuation methods are related to (a) Absorption costing and job order costing. (b) Direct costing and process costing. (c) Absorption costing and process costing. (d) Direct costing and job order costing.. Institute of Certified Management Accountants of Sri Lanka 1

2 (5) According to marginal costing approach (a) Only direct manufacturing costs are assigned to product costs (b) All variable manufacturing costs are assigned to product costs (c) All overheads are assigned to product costs (d) All fixed overheads are assigned to product costs (e) None of these (6) Contribution margin is calculated as (a) Sales revenue less variable cost of goods sold. (b) Sales revenue less gross profit. (c) Sales revenue less variable cost of goods sold and selling & administrative expenses. (d) Sales revenue less manufacturing margin. (7) Full Absorption costing considers (a) Only direct costs. (a) Direct costs and overheads (b) Direct costs and fixed costs (c) Variable fixed costs (d) Only Variable costs (8) Conceptually, control requires (a) Standards. (b) A stable system. (c) Statistically established limits. (d) a. and b. (e) b. and c. (9) Job order costing is (a) A cost flow assumption. (b) An inventory valuation method. (c) An input measurement basis. (d) A cost assignment method. (10) Under-recovery of overheads occurs when: (a) The actual overhead incurred is less than the overhead charged to the production (b) The basis of apportioning overheads has changed during the period (c) Actual overheads have fallen in relation to what they were expected to be (d) The overhead charged to production is less than the Actual overhead incurred (11) Which of the following would cause a favourable overhead spending variance? (a) Actual prices of the indirect resources used are less than estimated or budgeted. (b) Actual quantities of the indirect resources per activity measure are less than estimated. (c) Actual production volume is greater than estimated. (d) a. and b. (e) All of the above. (12) Abnormal loss (a) Amount of waste that is generally expected for the production (b) Amount of waste that is less than generally expected. (c) Amount of waste in excess of generally expected (d) Production volume less than expected Institute of Certified Management Accountants of Sri Lanka 2

3 (13) Under which circumstances might a company be prepared to price a special contract at less than its relevant cost? (a) When there are signs of improved market conditions (b) In the expectation that additional profitable orders will be placed by the same customer (c) When the company is operating at almost full capacity (d) When sales of other products will not increase (14) The logic behind the choice of the joint cost allocation method considers (a) Traceability of costs (b) The cause and effect relationships. (c) Ability to bear the costs. (d) Fairness and equity. (15) It is believed that performance evaluation systems are interactive. This means that (a) The measurement systems must be designed recognizing that performance measurements affect the behaviour of the people being evaluated. (b) Care must be taken when the system is developed to ensure that the measurements are neutral. (c) The people who are evaluated should not be aware of the performance measurement system. (d) The more demanding the measurements, the higher the level of performance obtained. (e) None of these. (16) Assume that a company produces two products. One is a low volume specialty product that is produced on a demand pull basis, while the other is a high volume product that is produced on a push basis for inventory. A production volume based cost allocation system would tend to (a) Accurately reflect the product cost of the two products. (b) Overstate the product cost of the low volume product. (c) Understate the product cost of the low volume product. (d) Overstate the product cost of both products. (e) Understate the product cost of both products. (17) A JIT production system would not have an emphasis on (a) The quantity of individual output. (b) Producing products as needed by the next stage. (c) Decentralization of support services. (d) a and b. (e) a and c. (18) The main difference between ABC and ABM is that (a) ABC emphasizes tracing costs to cost objects, while ABM emphasizes performance evaluation. (b) ABC emphasizes product costs, while ABM emphasizes managing processes and work. (c) ABC emphasizes tracing costs to cost objects, while ABM emphasizes tracing costs and managing processes and work. (d) ABC emphasizes activity based costing, while ABM excludes activity based costing. (e) ABC emphasizes activity management, while ABM excludes activity management (19) A company simultaneously produces three products (X, Y and Z) through a single process. The production of all three products start together. At a point in the process, product Z is removed and only X and Y are continued. Z is a by-product that is sold for Rs. 6 per unit. The sales prices of X and Y after further processing are sold at Rs. 50 per unit and Rs. 60 per unit respectively. Relevant data for the month of October are as follows: Institute of Certified Management Accountants of Sri Lanka 3

4 Joint production costs for producing, 2500 units of X, 3500 units of Y and 3000 units of Z Rs. 140,000 Further processing costs for 2500 units of X 24, units of Y 46, 000 Joint costs are apportioned using the final sales value method. The total cost of the production of X for the month of October would be: (a) Rs.69,522 (b) Rs.69,000 (c) Rs.59,000 (d) Rs.59,622 (20) E Ltd recently started to produce the product DG. The variable cost is Rs. 4 per unit and the total weekly fixed costs are Rs The company has set the initial selling price of the product by adding a markup of 40 per cent to its total unit cost. It has assumed that production and sales will be 3000 units per week. PART II The company holds no stocks of product DG. The initial selling price per unit of product DG would be: (a) Rs. 14 (b) Rs. 15 (c) Rs. 13 (d) Rs (20 2 Marks = Total 40 Marks) End of Part I Question No. 02 (15 Marks) ABC Company manufactures quality furniture to customer orders. It has three production departments and two service departments. Budgeted overheads for the forthcoming year are as follows: Rs. Rent and rates Machine insurance Telephone charges Depreciation Production supervisor s salaries Lighting Total The three production departments A, B and C, and the two service departments X and Y, are housed in the new premises, the details of which, together with some operational data are given below. Institute of Certified Management Accountants of Sri Lanka 4

5 A B C X Y Floor area occupied (sq. meters) Machine value (Rs. 000) Direct labor hrs. budgeted Labor rates per hour (Rs.) Allocated overheads: specific to each department (Rs. 000) Service Department X s costs apportioned 50% 25% 25% Service Department Y s costs apportioned 20% 30% 50% You are required to: (a) Prepare a statement, showing the budgeted overhead for each department, with the basis of apportionment used. Also calculate suitable overhead absorption rates (09 Marks) (b) Two jobs need to be produced namely Job 123 and Job 124 and their production details are as follows: Job 123 Job 124 Direct material Rs. 154 Rs. 108 Processing time (in labour hours) - At Dept. A Processing time (in labour hours) - At Dept. B Processing time (in labour hours) - At Dept. C Calculate the total costs of each job. (06 Marks) Question No. 03 (15 Marks) It has been stated that companies do not have profitable products, only profitable customers. Many companies have placed emphasis on the concept of customer profitability analysis (CPA) analysis in order to increase their earnings and returns to shareholders. Much of the theory of CPA draws from the view that the main strategic thrust operated by many companies is to encourage the development and sale of new products to existing customers. You are required to: (a) Briefly explain the concept of CPA analysis. (05 Marks) (b) Critically appraise the value of CPA analysis as a means of increasing earnings per share and returns to shareholders. (10 Marks) Question No. 04 (15 Marks) a) The preparation of budgets is a lengthy process, which requires great care if the ultimate master budget is to be useful for the purposes of management control within an organization. You are required to: (i) To identify and to explain briefly the stages involved in the preparation of budgets identifying separately the roles of managers and the budget committee; (04 Marks) (ii) To explain how the use of spreadsheets may improve the efficiency of the budget preparation process. (04 Marks) Institute of Certified Management Accountants of Sri Lanka 5

6 b) Explain the deficiencies of the traditional budgeting, which led to the development of beyond budgeting practice. (07 Marks) Question No. 05 (15 Marks) (a) X & Y is a firm of qualified Accountants, providing accountancy services. It has three different categories of clients, namely Limited companies, self-employed individuals, and employed individuals. X & Y currently charges its clients a fee by adding a 20% mark-up to total costs. Currently, the costs are attributed to each client based on the hours spent on preparing accounts and providing advice. X & Y is considering changing to an activity-based costing system. The annual costs and the causes of these costs have been analysed as follows: Rs. Accounts preparation and advice Requesting missing information Issuing fee payment reminders Holding client meetings Travelling to clients The following details relate to three of X & Y s clients and to X & Y as a whole: Client A B C X & Y Hours spent on preparing accounts and providing advice No. of requests for missing information No. of payment reminders sent No. of client meetings held Miles travelled to meet clients You are required to (a) Calculate cost driver rates for each activity identified. (04 Marks) (b) Calculate fees charged to each of these three clients under the traditional method and ABC method separately. (11 Marks) End of Part II End of Question Paper Institute of Certified Management Accountants of Sri Lanka 6