ASSOCIATION OF ACCOUNTING TECHNICIANS OF SRI LANKA Examiner's Report Final Examination July 2013 (59) Management Accounting and Business Finance SECTION A Management Accounting (75 marks) Question No. 01 - (Marks Allotted 14) This question tested the allocation of overheads, absorption rates and pricing a product. (A) This part of the question tested on differences between Cost Center and Cost unit for 2 marks. Answering this part of the question is not satisfactory. Because most of the candidates do not have an idea of what is a cost center and a cost unit. Therefore none has scored full marks for this part. It was noted from the answers that most of the candidates have faced difficulties when writing the differences of each, as they have no idea as to how to do it. Therefore, they have just defined each concept separately which was not expected from the question as the answer. (B) (a) This part of the question tested on the application of overhead allocation and primary and secondary apportionment. The performance for this part was very good. Only a very few candidates have lost marks due to lack of practice in allocating overheads. Further, arithmetical negligence in totaling was also noticeable in very few instances. (b) This part of the question tested on computation of absorption rate for each of the 3 production departments which was well answered by most of the candidates. However, candidates have multiplied this rate by 100 and showed as a percentage which was incorrect. (c) The question clearly states A, B and C as production departments. However, many had not clearly read this part of the question properly. Therefore, they have misunderstood and treated A, B and C as 3 different products. Hence 3 selling prices were calculated which was incorrect and lost marks. Further, the question tested on the profit margin on the selling price but candidates have calculated the margin on the cost price. This is a repeated mistake made by the candidates, inspite of the comments made at the past examiner s reports. 1. Calculation of margin on cost instead of selling price. 2. Not showing the overhead cost in calculating the selling price of the product. Practice more past papers and understand the applicability of overheads. Read the question carefully, and understand what is required by the examiner. Improve your arithmetical accuracy.
Question No. 02 - (Marks Allotted 13) This question tested candidates knowledge on Material Control System and related calculations. (A) (B) (C) This part of the question tested the theory part and tested objectives of an organization to have a material control system. Majority of the candidates have scored well for this section, by giving valid answers. This part of the question tested to calculate the Economic Order Quantity (EOQ) and the Optimum Order Quantity (OOQ) that would minimize the total inventory cost. Correct EOQ has been computed by almost all the candidates. However, majority of the candidates have gone wrong in OOQ calculation. Further, some candidates have not even attempted this part of the question. Reason may be due to their lack of knowledge to calculate ordering cost and holding cost when price discounts available. Also, some candidates didn t have knowledge regarding what is the correct order size to be taken at each discounted price range. As a result their total ordering cost, holding cost and purchase cost calculations were incorrect. This part of the question tested the candidates knowledge on calculating Re-order Level (ROL), maximum stock, minimum stock and average stock levels. Majority have scored average marks for this section. Only a very few candidates have not calculated maximum stock level and minimum stock level, thereby average stock level. Writing incorrect formulae. Eg: EOQ, Total cost of Ordering, Total cost of holing, etc. Errors made in applying figures to formulae. Arithmetical errors in calculations. Eg: Finding of square roots in formulae. Practice past examination papers. Read the AAT Self Study Text book on MABF and understand the differences of each concepts and formulae. Question No. 03 - (Marks Allotted 15) This question tested on the theoretical and practical application of the process costing. Part (A) of the question, required the candidates to differentiate Joint Products from By Products. Part (B) of the question tested the knowledge related to preparation of process accounts. Majority of the candidates have attempted this question and generally performances were satisfactory. Majority of the candidates have not performed the theory part well.they could not correctly write the difference between joint product and by product. Some candidates have only showed the evaluation sheet instead of preparing the process account. Some candidates have faced difficulties in calculating abnormal gain. Some candidates have used a different format (statement format) in preparing process I and II, instead of using generally accepted T account format. 2
Question has not been properly read by majority of the candidates. Instead of differentiating joint product from by product, candidates have just defined the 2 concepts. Errors in computing abnormal gain. Improve arithmetical accuracy. Subject matters to be carefully understood. Eg: Abnormal gain, Abnormal loss, etc. Question No. 04 - (Marks Allotted 17) Part (A) of the question tested the theoretical knowledge on flexible budgets. Part (B) of the question tested the candidates knowledge in preparing a cash budget and part (C) tested on calculation of variances. Most of the candidates have showed their weakness in answering part (A) of the question. i.e. What is a flexible budget. However, calculation of the cash budget was at a fairly satisfactory level except the calculations relating to purchases and payments to suppliers. Though, some candidates have correctly done the calculation, they have recorded them under incorrect month. Few candidates have considered the discount as a cash outflow instead of showing it under inflow of cash net of discounts. However, majority of the candidates have identified cash inflows correctly. Part (C) has been fairly well answered except for material price variance by majority of the candidates. Here candidates have used the actual usage of 20,750 Kg instead of actual purchases of 25,000Kg. Not showing the month end closing stock as opening stock for the following month in their workings. 5% discount has been shown as a cash outflow. Considering non-cash items also as cash outflows. Eg: Depreciation Not showing the closing cash balance at the end of December 2013. Examiner suggestions Variances should be named as to Adverse or Favorable. Apply formulae correctly. 3
Question No. 05 - (Marks Allotted 16) Part (A) of this question tested on the principles of marginal costing, whereas part (B) tested the knowledge of candidates on short term decision making with a limiting factor. Part (A) of the question, have not been performed well by majority of the candidates. Some candidates have mixed-up the numerator and denominator when calculating contribution per unit. Some other candidates have considered fixed cost (FC) in arriving at the contribution, which shows that they were lack in understanding of basic concepts like contribution, etc. For the last part of (A), examiner required candidates to recommend whether the order of the new customer should be accepted or not. Though, the candidates have tried to compute the financial impact of the new order, majority of them have not recommended as to whether to go ahead or not. This shows their poor decision making ability. Candidates have answered fairly well, part (B) of this question. However, considerable number of candidates have not correctly ranked the products and thereby the product mix. Ranking based on limiting factor has not been done correctly. Some candidates have not taken variable cost into consideration in arriving at the contribution. Always show your workings. Use legible handwriting and write neatly. SECTION B Business Finance (25 marks) Question No. 06 - (Marks Allotted 11) Part (A) of this question tested on differentiating Weighted Average Cost of Capital (WACC) & Marginal Cost of Capital (MCC). Part (B) of this question tested on the ability to calculate various costs of capital including cost of ordinary shares, preference shares, debentures and WACC. For the part (A), performance was not satisfactory, but for part (B), candidates have performed satisfactorily. Most of the candidates have computed cost of ordinary shares and cost of preference shares correctly. To compute the cost of debentures, IRR has to be calculated. Hence most of the candidates were unable to answer this question. A large number of candidates have wrongly taken interest on Rs.1,000/- debenture as Rs.7/- whereas the correct amount should be Rs.70/-. Based on the answers given for parts (a),(b) and (c), candidates have successfully attempted part (d) on computing WACC. 4
In computing cost of debt, wrongly taken interest as Rs.7/- instead of Rs.70/-. Some candidates used the book values instead of market values in calculating WACC. When writing formulae, numerators and denominators have changed. Formula for WACC has not been properly substituted. Thorough with each formula related with cost of capital. Question No. 07 - (Marks Allotted 14) Part (A) of this question tested on usefulness of the payback period which was well answered and part (B) tested on computing, 1. Net Present Value and the decision, 2. Payback Period, and 3. Internal Rate of Return (IRR). For part (A) - Most of the candidates have answered satisfactorily and correctly given the advantages of the payback period. Only a very few has given incomplete answers. For part (B) - Most of the candidates have answered well, but only a very few candidates has wrongly identified Rs.500/- sunk cost as an outflow in year zero and working capital requirement in year 1 instead of year zero. Some other candidates have considered revenue to match with cost of investments when calculating the pay back period. We have observed that few candidates have done arithmetical mistakes. Incorrect signs (+) and (-) were used for cash flows in the project evaluation. Workings have not been shown. Depreciation has been taken as a cash outflow. Recovery of working capital (WC) has not been shown as inflow in year 5. Consider market research cost under year 0, though it was a sunk cost. Careful in showing plus (+) and minus (-) signs in project evaluations (Cost to be shown within brackets and inflows without brackets). Always show your workings. - - - 5
SOME TIPS TO SCORE MARKS IN THIS PAPER Read the question and the requirement carefully. Eg: Q4 cash budget - time periods of payments. Start each question on a new page. Answer the theory part well. You can easily score 2 marks from each theory part. Always show your workings / notes to show how you arrived the number. Write neatly. Eg: Q7 project evaluation - * * * - 6