Management Accounting

Time allowed – 3 hours

Maximum marks – 100

N.B. – Questions must be answered in English. Figures in the margin indicate full marks. All workings
are to be submitted. Examiner will take account of the quality of language and of the manner in
which the answers are presented. Different parts, if any of the same question must be answered
in one place in order of sequence.]
Marks

1. Mr. Abid, Vice President of ABC Company Limited, comments “Now this does not make any
sense at all. Though our sales have been steadily rising over the last several months, our profits
have been going in the opposite direction. In September we finally hit Tk.2,000,000 in sales,
but the bottom line for that month drops off to a Tk.100,000 loss. Why aren’t profits more
closely correlated with sales?”
The statement to which Mr. Abid was referring is shown as below:
ABC Company
Monthly Income Statements
July August September
Sales @ Tk.25 1,750,000 1,875,000 2,000,000
Less: Cost of goods sold:
Beginning inventory 80,000 320,000 400,000
Cost applied to production:
Variable manufacturing costs @Tk.9 765,000 720,000 540,000
Fixed manufacturing overhead 595,000 560,000 420,000
Cost of goods manufactured 1,360,000 1,280,000 960,000
Goods available for sale 1,440,000 1,600,000 1,360,000
Less: Ending inventory 320,000 400,000 80,000
Cost of goods sold 1,120,000 1,200,000 1,280,000
Under applied or (over applied) fixed overhead cost (35,000) --- 140,000
Adjusted cost of goods sold 1,085,000 1,200,000 1,420,000
Gross Margin 665,000 675,000 580,000
Less: Selling & administrative expenses 620,000 650,000 680,000
Net income (loss) Tk.45,000 25,000 Tk.(100,000)
A Management Accountant named Mr. Jamil who has just been hired by ABC Company, has
stated to Mr. Abid that the contribution approach, with variable costing, is a much better way to
report profit data to management. Sales and production data for the last quarter follow:

July August September

Production in units 85,000 80,000 60,000
Sales in units 70,000 75,000 80,000
Additional information about the company’s operations is given below:
a. Five thousand units were in inventory on July 1.
b. Fixed manufacturing overhead costs total Tk.1,680,000 per quarter and are incurred evenly
throughout the quarter. This fixed manufacturing overhead cost is applied to units of
product on the basis of a budgeted production volume of 80,000 units per month.
c. Variable selling and administrative expenses are Tk.6 per unit sold. The remainder of the
selling and administrative expenses on the statements above are fixed.
d. The company uses a FIFO inventory flow assumption. Work in process inventories are
significant and can be ignored.
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Marks
“I know production is somewhat out of step with sales,” said Karim, the company’s controller.
“But we had to build inventory early in the quarter in anticipation of a strike in September.
Since the union settled without a strike, we then had to cut back production in September in
order to work off the excess inventories. The income statements you have are completely
accurate.”
Required:
(i) Prepare an income statement for each month using the contribution approach with variable
costing. 5
(ii) Compute the monthly break-even point under variable costing. 5
(iii) Explain to Mr. Abid why profits have moved erratically over the three-month period shown
in the absorption costing statement above and why profits have not been more closely
related to changes in sales volume. 5
(iv) Reconcile the variable costing and absorption costing net income (loss) figures for each
month. Show all computations, and show how you derive each figure used in your
reconciliation. 5
2. (a) Discuss about the ethics of Management Accountant Professionals. 4
(b) The Management Team of XYZ is considering the possibility of undertaking a single
production process which jointly produces four products in standard proportions. The
output from 10 kgs batch of raw materials input into the process, together with the net
realizable value per kg of output immediately after the split-off is:
Materials Output per 10 kg input Net realizable value
per kg of output
A 4 8
B 3 4
C 2 10
D 1 2
The cost of processing each 10 kg input batch are Tk.12 and the cost of the raw materials
input is Tk.4 per kg.
For each of the four materials jointly produced there is the possibility of further processing
before sale. The further processing will entail both manual operation and mechanical processing
as well as incurring some costs directly attributable to each product. Details of the resources
used in, and costs incurred by, the further processing as well as the price per kg are:
Material Machine hours Labour hours Other direct costs Sales price Tk.
Tk.
A 2 1 4 17
B 6 1 2 13
C 4 5 3 36
D 2 2 2 9
“Other direct costs” are variable cost but exclude the cost of labour (also a variable cost) at
Tk.3 per labour hour. Apart from “Other direct costs” and labour costs, all other costs or the
further processing are fixed and are expected to amount to Tk.3,40,000 per year.
XYZ has the opportunity to process 1,00,000 kgs of the basic raw Materials per year, and machine
capacity is capable of fully processing this amount. The Managing Director feels that all products,
which are subjected to further processing, must be treated as joint products and all products sold
immediately after the split-off point without further processing are to be treated as By-products of
the original process. The net costs of the process are allocated to the joint products in proportion to
the contribution of each product line, after considering the marginal cost after the split-off point
and the sales revenues.
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Marks

However, the Managing Director is uncertain whether Tk.340,000 fixed production cost of
the further processing should be allocated to products in accordance with machine or labour
hours.

Required:
(i) Specify which of the jointly produced materials should be subject to further processing,
if the joint process is carried out. Explain. 6
(ii) Produce a product profitability report for the joint products utilizing the Managing
Director’s approach to the determination of joint products and by-product for each of
the methods of allocating fixed production overhead he has mentioned. You may
assume all production will be sold. 10

3. Ron Dennis, a promoter, is considering the possibility of booking the World Wrestling
Federation (WWF) in Indiana Futuredome. Currently, due to intense TV exposure, the WWF is
enjoying great popularity. Ron figures that the possibility of earning money, which would be
donated to the building drive to replace the roof on the local curling arena, is pretty good.
The Indiana Futuredome is a domed arena that will seat 80,000 fans as a wrestling or boxing
venue. Ron figures that there would be three types of seating: ringside, reserved and rush. The
distribution and the ticket prices for these seats are expected to be as follows:
Seat Type % Total Capacity % Total ticket sales Price Tk.
Ringside 10 10 40
Reserved 70 70 20
Rush 20 20 10
At these prices, total ticket sales are expected to be 60,000.
The costs associated with such a promotion are high. The rent for the Futuredome is
Tk.100,000. The cost of hiring the private security personnel will be Tk.30,000. In addition, a
city ordinance requires that police be attendance. The number of police required depends on the
number of customers, and the police cost will be Tk.1 (one) per customer. The cost of hiring
ushers for the event will be Tk.20,000. Clean-up and the repair of property damage caused by
the fans is expected to cost Tk.80,000 plus about Tk.2 per fan. Insurance and other incidental
costs will be Tk.10,000.
The promotional fee for the event will be Tk.10,000. The basic fee for the wrestlers who will
appear on the card is Tk.400,000. In addition, the wrestlers demand, and get, 10% of the gross
receipts. The restaurants, snack bars and vendors are controlled by the owners of the
Futuredome. Futuredome management requires a flat fee of Tk.1,10,000 to provide food
services for the evening plus 30% (20% for the owners, 10% for the vendors) of the total foods
sales. Ron must also pay the variable cost of the food provided, which averages Tk.3 per fan.
The average sales are Tk.8 per fan. Finally, total sales taxes are 8% on any sales, food, or
tickets. (All the prices provided above include taxes).
Required:
Consider each case below separately:
(i) What is the expected profit from this promotion? 3
(ii) Given the anticipated prices and distribution of sales, how many tickets, in total, must be
sold for the promotion to break even? 3
(iii) An alternative and more expensive seating plan will increase the rent for the event to
Tk.150,000. Under this seating plan, the distribution of seats, and sales would be ringside 15%,
reserved 70% and rush 15%. Is the upgrade to the more expensive seating plan worthwhile? 3

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Marks
(iv) If the food prices were cut so that the average revenue from each customer was Tk.6, the
total ticket sales would rise to 65,000. Is this price cut worthwhile? 3
(v) Cutting all ticket prices by 10% is expected to increase total ticket sales by 10%. Is this
change worthwhile? 2
(vi) One of the main attractions of the event would be a feature match between the Mightly
Hercules, the current WWF heavy weight champion, and his arch rival, Warren, the
Weasel. Hercules and Warren could be brought in a few days before the event in order to
appear on local TV and in some shopping centers. The total cost of the promotion would
the Tk.60,000 and would increase ticket sales by 10%. Is this promotion worthwhile? 3
(vii) One possibility is to organize a lottery for the available tickets. Under this scheme, all
tickets to the event would sell for Tk.20, and the names of the customers to be assigned
the seats would be drawn randomly by a computer. The additional cost of this alternative
would Tk.60,000, which includes the cost of promoting the lottery, as well as the fee to
be paid to the accounting firm that would supervise the lottery. If the lottery were used,
all 80,000 seats to the event would probably be sold. Is this lottery worthwhile? 3

4. (i) Discuss the following statement: “Full cost can be viewed as a floor of protection. If a
firm always sets its prices above full cost, it will never have to worry about operation at a
loss.” 4
(ii) L Ltd. And M Ltd. are subsidiaries of the same group of companies. L Ltd. produces a
branded product sold in drums (10,000 in number) at a price of Tk.20 per drum.

Its direct product costs per drum are:

• Raw materials from M Ltd. at a transfer price of Tk.9 for 25 litres
• Other product and services from outside the group at a cost of Tk.3

L Ltd. fixed costs are Tk.40,000 per month. These costs include process labour whose costs
will not alter until L Ltd’s output reaches twice its current level.

A market research study has indicated that L Ltd’s market could increase by 80% in volume if
it were to reduce its price by 20%.

M Ltd. produces a fairly basic product which can be converted into a wide range of end products. It
sells one third of its output to L Ltd. and the remainder to customers outside the group.

M Ltd. production capacity is 1,000 kilolitres per month, but competition is keen and it budgets
to sell no more than 750 kilolitres per month for the year.

Its variable costs are Tk.200 per kilolitre and its fixed costs are Tk.60,000 per month.

The current policy of the group is to use market prices, where known, as the transfer price
between its subsidiaries. This is the basis of the transfer price between M Ltd., and L Ltd.

Required:
(a) Calculate the monthly profit position for each of L Ltd., and M Ltd. if sales of L Ltd. are: 8
1. at their present level, and
2. at the higher potential level indicated by the market research, subject to a cut in price of
20%;
(b) Explain why the use of market price as the transfer price produces difficulties under the
current conditions outlined in (ii) above; 4
(c) Recommend, with supporting calculations, a range of transfer prices which are appropriate
under the circumstances. 4

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Marks

5. (a) Name three types of constraints generally found in a product mix linear program. 3

(b) A furniture manufacturer makes standard chairs and tables. Profit from selling chairs and
tables are as follows:

Chair Table
Selling price per unit 3000 12000
Variable cost per unit 1000 6000
Fixed cost per unit 1000 4000
Profit 1000 2000

Chairs and tables are passed through the machining and finishing department. Each chair
requires 90 minutes machining time and each table requires 120 minutes of machining
time. A total of 90 machining hours are available per week. Skilled labour in the finishing
department is in short supply. Each table requires twice as much time as required by a chair
for finishing. During the time available in the week, a total of 70 chairs can be
manufactured or an equivalent mix of the two.

Marketing limitation restricts the sale of tables to a maximum of 30 per week. On the other
hand, a minimum of 20 chairs must be manufactured per week to meet the requirements of
regular customers.

The manufacturer wishes to maximize his profits subject of course to all the manufacturing
and marketing restrictions.

Required:
What should be the production of tables and chairs per week to maximize his profits? 12

(c) What do you understand by TQM? Distinguish between the Production View of Quality
and the Customer View of Quality. 5

The End