SUGGESTED SOLUTIONS/ ANSWERS WINTER 2018 EXAMINATIONS 1 of 7 MANAGEMENT ACCOUNTING [M5] MANAGERIAL LEVEL-2 MARKS

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1 SUGGESTED SOLUTIONS/ ANSWERS WINTER 2018 EXAMINATIONS 1 of 7 Question No. 2 (a) (i) Daily Break-even Volume in Lunches and Dinners: Contribution Margin on Lunches and Dinners: Variable cost percentage = (Rs.18,697,500 + Rs.3,335,700) 31,476, = 70% 0.5 Contribution margin percentage = 1 Variable cost percentage 0.25 = 1 70% = 30% 0.25 Contribution margin Lunch = 0.3 x Rs.300 = Rs Contribution margin Dinner = 0.3 x Rs.600 = Rs Annual fixed cost = Rs.2,564,100 + Rs.6,772,500 = Rs.9,336, Let, X = Number of dinners; and 2X = Number of lunches At Break-even: 180(X) + 90(2X) Rs.9,336,600 = (X) = Rs.9,336, X = 25,935 dinners annually to break-even X = 51,870 lunches annually to break-even 0.25 On Daily Basis: Dinners to break-even = 25, = Lunch to break-even = 51, = (ii) Actual Daily Volume: To determine the actual volume, let Y be a combination of 1 dinner and 2 lunches. The price of Y = Rs (2 x Rs.300) = Rs.1, Total volume in units of Y = Rs.31,476,000 Rs.1,200 = 26,230 serves 0.75 Daily volume of serves = Therefore, 72 dinners and 144 lunches were served on an average day (b) The extra annual contribution margin from 4 dinners and 8 lunches is: Annual contribution margin Dinners (4 x Rs.600 x 0.3 x 365) 262, Annual contribution margin Lunches (8 x Rs. 300 x 0.3 x 365) 262, Total annual contribution margin 525, The added contribution margin is greater than Rs.360,000 advertising expenditure. Therefore, the advertisement expenditure would be warranted. It would increase the operational income by Rs.165,

2 SUGGESTED SOLUTIONS/ ANSWERS WINTER 2018 EXAMINATIONS 2 of 7 (c) Drop-off in the Volume, if the Hotel uses Average Quality Food Ingredients: Let, Y again be a combination of 1 dinner and 2 lunches, priced at Rs.1,200. Variable costs = Rs.1,200 x 0.7 = Rs Food cost = Rs.840 x 0.25 = Rs Cutting food costs by 20% reduces variable costs by Rs.210 x 0.2 = Rs Then the variable cost of Y will be Rs.798 (Rs.840 Rs.42) and the contribution margin will be Rs.402 (Rs.1,200 Rs.798). 0.5 The required annual volume in Y needed to keep operating income at Rs.106,200 is: Rs.402(Y) Rs.9,336,600 = Rs.106, Rs.402(Y) = Rs.9,442, Y = 23, Therefore, daily volume = 23, = 64 (rounded) 0.5 If volume drops no more than 8 dinners (72 64) and 15 lunches ( ), using the less costly food is more profitable. 1.0 Question No. 3 (a) Make or Buy Decision-Making: Per Unit Differential Costs [] Total Cost of 30,000 Units [] Make Buy Make Buy Cost of purchasing 9, , ( ) Cost of Making: Direct materials 2,760 82, ( ) Direct labour 3,150 94, ( ) Special testing cost , ( ) Variable manufacturing overhead 1,440 43, ( ) Fixed manufacturing overhead 1,000 30, ( ) Total cost 8,850 9, , ,250 OR = 06 Rs.8,000,000 rental value of the space being used to produce compressors represents an opportunity cost of continuing to produce the product internally. Thus, the completed analysis would be: 0.25 Make Total cost, as above 265, , ( ) Rental value of the space (opportunity cost) 8, Total cost, including opportunity cost 273, , ( ) Net benefit in favour of buying is Rs.1,250,000 (Rs.273,500,000 Rs.272,250,000) per annum, therefore, management of the company must go for local purchasing instead of in-house production Buy

3 SUGGESTED SOLUTIONS/ ANSWERS WINTER 2018 EXAMINATIONS 3 of 7 (b) Important Factors while Making Make or Buy Decision: 3.0 The most important factors to remember is that the decision should not be based solely on cost considerations. Management should weigh up the non-financial benefits of internal production against those of outsourcing. The make option should give management more direct control over the work, but the buy option often has the benefit that the external organization has a specialist skill and expertise in the work. Other issues to consider are: How can spare capacity freed up by subcontracting be used most profitably? Could the decision to use an outside supplier cause an industrial dispute? Would the sub-contractor be reliable with delivery times and product quality? Does the company wish to be flexible and maintain better control over operations by making everything itself? Question No. 4 (a) Computation of Present Value (PV), using Discounted Cash Flow (DCF) Technique: Years Kanon Machines: Initial cash out flow (6,550,000) Operating cash flows (304,980) (304,980) (304,980) (304,980) (304,980) 0.5 Total (6,550,000) (304,980) (304,980) (304,980) (304,980) (304,980) 2.5 Present value (PV) factor 10%) PV (6,550,000) (277,227) (251,913) (229,040) (208,301) (189,393) 3.0 Net present value (NPV) (7,705,874) Yotta Machines: Operating cash flows (1,320,600) (1,320,600) (1,320,600) (1,320,600) (1,320,600) 2.5 Present value (PV) factor 10%) PV (1,200,425) (1,090,816) (991,771) (901,970) (820,093) 1.25 Net present value (NPV) (5,005,075) 0.25 Retaining Yotta benefit (2,700,799) (b) The Yotta machines should not be replaced with Kanon machines as it will cost an additional amount of Rs.2,700,799 (Rs.7,705,874 Rs.5,005,075). 2.0

4 SUGGESTED SOLUTIONS/ ANSWERS WINTER 2018 EXAMINATIONS 4 of 7 Question No. 5 (a) Annual ordering cost = 100,800 4,200 = 24 orders x Rs.1,000 = Rs.24, Annual holding cost = 4,200 2 = Rs.2,100 x Rs. 60 = Rs.126, (b) Economic order quantity (EOQ) = 2 x Rs.1,000 x 100,800 Rs.60 = Rs.201,600,000 Rs This is the order quantity that minimises ordering and holding costs. = 1,833 units 1.0 (c) Financial Viability of Discount Offer: Existing Cost: Revised Cost: Material cost (100,800 x Rs.600) 60,480, Order cost (100,800 1,833 x Rs.1,000) 54, Holding cost of EOQ (1,833 2 x Rs.60) 54, Total cost 60,589, Material cost (Rs.60,480,000 x 0.9) 54,432, Order cost (100,800 8,000 x Rs.1,000) 12, Holding cost of EOQ (8,000 2 x Rs.54) 216, Total cost 54,660, Availing the discount offer is financially worthwhile. Because, there is a saving of Rs.5,929,382 (Rs.60,589,982 Rs.54,660,600). 1.0 Question No. 6 (a) Budgets and standards are very similar and interrelated, however, there are important differences between both which are as under: 3.0 Budgets Gives planned total aggregate costs for a functions or cost centre. Can be prepared for all functions, even where output cannot be measured. Expressed in money terms. Standards Shows the unit resource usage for a single task, for example the standard labour hours for a single unit of production. Limited to situations where repetitive actions are performed and output can be measured. Need not be expressed in money terms. For example a standard rate of output does not need a financial value put on it.

5 SUGGESTED SOLUTIONS/ ANSWERS WINTER 2018 EXAMINATIONS 5 of 7 (b) Computations for Product A : Sales price variance = (Standard selling price Actual selling price) x Actual quantity = (Rs.60 Rs.75) x 500 = Rs.7,500 Favourable 2.0 Standard Sales Quantity: Sales volume variance = (Actual quantity Standard quantity) x Standard selling price Rs. 6,000 = (500 X) x Rs. 60 = 60X = 30,000 6, X = 400 (Standard sales quantity) 1.0 Sales value variance = Rs.7,500 Favourable + Rs.6,000 Favourable = Rs.13,500 Favourable 1.0 Computations for Product B : Sales price variance = (Standard selling price Actual selling price) x Actual quantity = (Rs.75 Rs.100) x 800 = Rs.20,000 Favourable 2.0 Sales volume variance = (Actual quantity Standard quantity) x Standard selling price = ( ) x Rs.75 = Rs.30,000 Favourable 2.0 Sales value variance = Rs.20,000 Favourable + Rs.30,000 Favourable = Rs.50,000 Favourable 1.0 Question No. 7 (a) Z-Tech Limited Budgeted Statements of Profit or Loss for the first four months of Financial Year 2019 January February March April Sales 18, , , , Opening stock 6, , , , Direct materials 5, , , , Direct labour 9, , , , Variable production overheads 2, , , , Closing stock [W-1] (9,375.0) (11,250.0) (11,250.0) (14,062.5) 0.5 Cost of goods sold 13, , , , Gross profit 4, , , , Sales and marketing expenditure 1, , , , Administrative expenses 1, , , , Premises expenditure 2, , , , Depreciation [W-2] Total costs 5, , , , Net profit/ (loss) (1,550.0) (250.0) (262.5)

6 SUGGESTED SOLUTIONS/ ANSWERS WINTER 2018 EXAMINATIONS 6 of 7 W-1: Stock and Production Calculation: Units January February March April Next month s sales quantity 10,000 12,000 12,000 15, Add: Closing stock (a) 5,000 6,000 6,000 7, Sales quantity 8,000 10,000 12,000 12, Total required units 13,000 16,000 18,000 19, Less: Opening stock (4,000) (5,000) (6,000) (6,000) 0.5 Production requirements (b) 9,000 11,000 12,000 13, Direct materials [625 x (b)] 5,625 6,875 7,500 8, Direct labour 9,000 11,000 12,000 13, Variable production overhead 2,250 2,750 3,000 3, Closing stock [1,875* x (a)] 9,375 11,250 11,250 14, *Manufacturing cost Production requirement (b) W-2: Depreciation: Rs.26,250,000 x 0.20 = Rs.5,250, = Rs.437,500 per month 1.0 (b) Z Tech Limited Projected Summarized Statement of Financial Position as at April 30, 2019 Fixed assets Equipment 24, Stock 14, Debtors (30,000 x 0.2) 6, , Bank overdraft [W-4] (15,450.0) 0.5 Trade creditors (3,125.0) 0.5 Net current assets 1, Net assets 25, Total equity [W-3] 25, W-3: Total Equity: Opening stock; Rs.27,250,000 + ( Rs.1,550,000 Rs.250, , ,000) = Rs.25,987,500 as at April 30, W-4: Bank overdraft: Balancing figure in statement of financial position (c) Continuous or Rolling Budget: 2.0 Continuous or rolling budget is constantly updated to reflect the current operating circumstances and revised projected position, as new information becomes available. As each month or quarter end, a new period is added and projections are updated to reflect the most recent trading position. This approach ensures that budgeting and planning are very focused on the current position and maintained up to date.

7 Question No. 8 SUGGESTED SOLUTIONS/ ANSWERS WINTER 2018 EXAMINATIONS 7 of 7 (a) Advantages of Backflush Costing: 5.0 It is much simpler, as there is no separate accounting for work-in-process (WIP). The finished goods account is unnecessary. The number of accounting entries should be greatly reduced, as are the supporting vouchers, documents and so on. The system should discourage managers from producing simply for inventory since working on material does not add value until the final product is completed or sold. (b) Throughput and Backflush: Products A B C Selling price (Rs. per unit) 15,000 13,750 16, Direct material cost (Rs. per unit) 7,500 8,750 10, Throughput contribution (Rs. per unit) 7,500 5,000 5, Time required on the bottleneck resource (Hours per unit) Return per factory hour () 1,500 1,250 1, Ranking OR = 3.0 Product No. of Units Hours per Unit Throughput Hours Throughput Contribution [Rs. per hour] Total Throughput Contribution [] C 25, ,000 1, ,625, A 15, ,000 1, ,500, B 6, ,000 1,250 32,500, Total monthly contribution () 176, ,625, THE END

Rupees Product RAX (552,000 x Rs.360) 198,720,

Rupees Product RAX (552,000 x Rs.360) 198,720, Question No. 2 (a) Break-even Sales Revenue: SUGGESTED SOLUTIONS/ ANSWERS SPRING 2017 EXAMINATIONS 1 of 8 Calculation of total contribution: Product RAX (552,000 x Rs.216) 119,232,000 0.5 Product MAX (1,200,000