Institute of Certified Management Accountants of Sri Lanka. Managerial Level May 2013 Examination. Integrative Management Accounting (IMA/ ML 1-301)

Transcription

1 Copyright Reserved Serial No Managerial Level May 2013 Examination Examination Date : 5 th May 2013 Number of Pages : 05 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) Chinthana Air Industries (CAI) manufactures aircraft parts for small aircrafts. Over the past decade, CAI s management has met its goal of reducing its reliance on government contract work to 50% of total sales. Thus, CAI s sales are now roughly evenly split between government and commercial sales. Traditionally, the costs of the Material-Handling Department have been allocated to direct material as a percentage of direct material rupee value. This was adequate when the majority of the manufacturing was homogeneous and related to government contracts. Recently, however, government auditors have rejected some proposals, stating that the amount of Material Handling Department costs allocated to these proposals is disproportionate to the total effort involved. Saman Darshana, the newly hired cost-accounting manager, was asked by the manager of the Government Contract Unit, Shan Ganegoda, to find a more equitable method of allocating Material-Handling Department costs to the user departments. His review has revealed the following information. The majority of the direct-material purchase for government contacts are high-rupee, low volume purchase, while commercial materials represent low-rupee high volume purchases. Administrative departments such as marketing, finance and administration, human resources, and maintenance also use the services of the material-handling department on a limited basis but have never been charged in the past for material handling costs. One purchasing manager with a direct phone line is assigned exclusively to purchasing high rupee, low-volume material for government contracts at an annual salary Rs.1,890,000/-. Employee benefits are estimated to be 20% of the annual salary. The annual dedicated phone line costs are Rs.147,000/-. The components of the Material-Handling Department s budget for 2013, as proposed by Saman Darshana s predecessor, are as follows. Rs.000 Payroll 9,450 Employee benefits 1,890 Telephone 1,995 Other utilities 1,155 Material and supplies 315 Depreciation 315 Direct Material budget Government contracts Commercial products 105,315 45,885 1

2 Saman Darshana has estimated the number of purchase orders to be processed in 2013 to be as follows. Government contracts (Exclusive of high rupee, low 120,000 volume materials Commercial products 234,000 Marketing 2,700 Finance and administration 4,050 Human resources 750 Maintenance 1,500 Total 363,000 Saman Darshana recommended to Shan Ganegoda that material-handling costs be allocated on a per purchase order basis. Shan Ganegoda realized that the company has been allocating to government contracts more material-handling costs that can be justified. However, the implication of Saman darshan s analysis could be a decrease in his unit s earnings and consequently, a cut in his annual bonus. Shan Ganegooda told Saman Darshana to adjust his numbers and modify her recommendation so that the results will be more favorable to the Government Contracts Unit. Being new in his position, Saman Darshana is not sure how to proceed. He feels ambivalent about Shan Ganegoda s instructions and suspects his motivation. To complicate matters for Saman Darshana, the company s new president has asked him to prepare a three-year forecast of the Government Contracts Unit s results, and the cost accounting manager believes that the newly recommended allocation method would provide the most accurate data. However, this would put him in direct opposition to Shan Ganegoda s directives. Saman Darshana has assembled the following data to estimate the material-handling costs. 1. The number of purchase orders increased by 5% per year. 2. The ratio of government purchase orders to total purchase orders remains at 33%. 3. Total direct-material costs increase 2.5% per year. 4. Material-handling costs remain the same percentage of direct material costs. 5. Direct government cost (payroll, employee benefits, and direct phone line) remain constant. 6. In addition, he has assumed that government material in the future will be 70% of total material. (a) Calculate the material-handling rate that would have been used by Saman Darshana s predecessor at CAI. (08 Marks) (b) Calculate the revised material-handling costs to be allocated on a per purchase order basis. (10 Marks) (c) Discuss why purchase orders might be a more reliable cost driver than the rupee amount of direct material. (d) Calculate the difference due to the change to the new method of allocating material-handling costs to government contracts. (e) Prepare a forecast of the cumulative rupee impact over a three-year period from 2014 through 2016 of Saman Darshana s recommended change for allocating Material-Handling Department costs to the Government Contract Unit. (08 Marks) (f) Does Saman Darshana have an ethical conflict and discuss the reason for your answer. (Total 40 Marks) End of Part I 2

3 PART II Answer any three (3) questions Question No. 02 (20 Marks) The summarized profit and loss statement for LBW plc for the last year is as follows: Rs. Million Sale (50,000,000 units) 1,000 Direct material (350) Direct wages (200) Fixed production overhead (200) Variable overhead (50) Administration overhead (180) Selling and distribution overhead (120) Profit (100) You are required, as management accountant, to evaluate the following alternative proposals and to comment briefly on each: (a) Pay salesman a commission of 10% of sales and thus increase sales to achieve break-even point. (b) Reduction of the selling price by 10%, which would result in increase in sales by 30%. (c) Increase direct wage rates from Rs.4/- to 5/- per hour, as part of a productivity/pay deal. It is hoped that this would increase production and sales by 20%, but advertising costs would increase by Rs.50 million. (d) Increases sales by additional advertising of Rs.300 million with an increased selling price of 20%, setting a profit margin of 10%. Question No. 03 (20 Marks) Anoma Plc, a manufacturer of building products, mainly supplies the wholesale. It has recently suffered falling demand due to economic recession, and thus has spare capacity. It now perceives an opportunity to produce designer ceramic tiles for the home improvement market. It has already paid Rs.50 million for development expenditure, market research and a feasibility study. The initial analysis reveals scope for selling 150,000 boxes per annum over a five-year period at a price of Rs.2,000 per box. Estimated operating costs are as follows. Cost per box of tiles at today s prices. Rs. Material cost 800 Direct labour 200 Variable overhead 150 Fixed overhead ( allocated) 150 Distribution 200 Production can take place in existing facilities although initial re-design and set-up costs would be Rs.200 million after following for all relevant tax reliefs. This cost will be capitalized and depreciated over next five years equally. In estimating fixed overheads, the annual depreciation has already been considered. Return from the project would be taxed at 33%. Nominal required rate of return for the company is 14% p.a. (after tax), which includes allowances for generally-expected inflation of 5.5% p.a. 3

4 (a) Assess the financial desirability of this venture in real terms, finding the Net present Value (NPV). (b) Briefly explain the purpose of sensitivity analysis in relation to project appraisal, indicating the drawbacks with this procedure. (07 Marks) (c) Determine the values of: (i) Price. (ii) Volume, at which the project s NPV, becomes zero. Discuss your results, suggesting appropriate management action. (07 Marks) Question No. 04 (20 Marks) A company has two divisions. South division manufactures an intermediate product for which there is no immediate external market. North division incorporates this intermediate product into a final product, which it sells. One unit of the intermediate product is used in the production of the final product. The expected units of the final product which North division estimates that the division can sell at various selling prices are as follows: Net selling price per unit Quantity sold (units) 100 1, , , , , ,000 The costs, the investment, and Weighted Average Cost of Capital of each division are as follows: South North Variable cost per unit 11 7 Fixed costs per annum 60,000 90,000 Total investment 600, ,000 Weighted Average Cost of Capital (WACC) 15% 18% The transfer price is Rs.35 for the intermediate product, and is determined on a full cost-plus basis. (i) Prepare profit statements for each division and the company as a whole for the various selling prices. (ii) Calculate the Return on Investment (ROI) and Residual Income (RI). (iii) State which selling price maximizes the profit of the North division and the company as whole. (iv) State what kind of transfer pricing policy would maximize the company s profit in a divisional organization. 4

5 Question No. 05 (20 Marks) (a) Briefly explain the concepts of customer profitability analysis, target costing, continuous improvement, benchmarking, reengineering, and the theory of constraints. (12 Marks) (b) Vegas Company makes three product lines and has two customer types. The table below gives sales, product cost, and cost-to-serve data for Vegas. Product X Product Y Product Z Sales 2,000,000 6,000,000 20,000,000 Cost of goods sold 1,000,000 2,000,000 14,000,000 Customer type 1 Customer type 2 Total Product X sales 1,000,000 1,000,000 2,000,000 Product X sales 5,000,000 1,000,000 6,000,000 Product X sales 0 20,000,000 20,000,000 Cost to serve 2,000,000 13,000,000 15,000,000 (i) Determine the gross profit margin percentage of sales for each product. Which product is the most profitable? (ii) Determine the gross profit margin percentage of sales for each customer type. What customer is the most profitable? End of Part II End of Question Paper 5