August 2013 Solution

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST 2013 EXAMINATION FOUNDATION LEVEL SUBJECT: 001.
. PRINCIPLES OF ACCOUNTING Solution to Q. No. 1. (a) CAMPS MUSIC STORE Work Sheet For the Year Ended July 31, 2012 Trial Balance Adjustments Adjusted Trial Balance Debit Credit Debit Credit Debit Credit 34,780 34,780 4,600 4,600 31,400 31,400 720 (1) 240 480 4,800 (2) 2,400 2,400 12,000 12,000 4,500 (3) 1,500 6,000 8,000 22,000 20,000 300,000 1,000 194,000 1,400 5,200 1,000 1,800 23,200 1,400 335,900 5,200 1,000 1,800 23,200 1,400 335,900 (1) 240 (2) 2,400 (3) 1,500 _______ 4,140 240 2,400 1,500 _______ 337,400 1,000 194,000 1,400 5,200 1,000 1,800 23,200 1,400 20,000 300,000 1,000 194,000 1,400 300,000 8,000 22,000 20,000
Account Titles
Income Statement Debit Credit
Balance Sheet Debit 34,780 4,600 26,400 480 2,400 12,000 Credit
Cash Accounts Receivable Merchandise Inventory Prepaid Fire Insurance Prepaid Rent Office Equipment Accumulated DepreciationOffice Equipment Accounts Payable Clay Camp, Capital Clay Camp, Drawing Sales Sales Returns and Allowances Purchases Purchase Returns and Allowances Transportation-In Advertising Expense Supplies Expense Salaries Expense Utilities Expense Fire Insurance Expense Rent Expense Depreciation ExpenseOffice Equipment
31,400
26,400
6,000 8,000 22,000
240 2,400 1,500 _______ _______ ______ 4,140 337,400 263,140 Net income 64,660 327,800 Adjustments: (1) Expiration of prepaid fire insurance ($720 X 4/12). (2) Expiration of prepaid rent ($4,800 X 6/12). (3) Depreciation expense on office equipment for the fiscal year ended July 31, 2012. Page 1 of 8
______ 327,800 ______ 327,800
_______ 100,660
64,660_ 100,660
THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST 2013 EXAMINATION FOUNDATION LEVEL SUBJECT: 001. PRINCIPLES OF ACCOUNTING
Solution to Q. No. 1. (b) CAMPS MUSIC STORE Income Statement For the Year Ended July 31, 2012
Operating revenues: Gross Sales .. Less: Sales returns and allowances . Net Sales .
$300,000 1,000 $299,000
Cost of goods sold: Merchandise inventory, August 1, 2011. $ 31,400 Purchases $194,000 Less: Purchase returns and allowances .. 1,400 Net purchases . $192,600 Add: Transportation-in .. 5,200 Net cost of purchases . 197,800 Cost of goods available for sale $229,200 Merchandise inventory, July 31, 2012 .. 26,400 Cost of goods sold . 202,800 Gross Margin $ 96,200 Operating expenses: Advertising Supplies . Salaries .. Utilities .. Fire insurance Rent ... Depreciation office equipment .. Total operating expenses . Net income Solution to Q. No. 1. (c) CAMPS MUSIC STORE Statement of Owners Equity For the Year Ended July 31, 2012 Clay Camp, capital, August 1, 2011 .. Net income for the year .. Total ... Less: Drawings Clay Camp, capital, July 31, 2012 $ 22,000 64,660 $ 86,660 20,000 $ 66,660 =======
$ 1,000 1,800 23,200 1,400 240 2,400 1,500 31,540 $ 64,660 =======
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST 2013 EXAMINATION FOUNDATION LEVEL SUBJECT: 001. PRINCIPLES OF ACCOUNTING Solution to Q. No. 1. (d) CAMPS MUSIC STORE Balance Sheet July 31, 2012 Assets Current assets: Cash ................ $ 34,780 Accounts receivable .. 4,600 Merchandise inventory . 26,400 Prepaid fire insurance 480 Prepaid rent 2,400 Total current assets Property, plant, and equipment: Office equipment .. $ 12,000 Less: Accumulated depreciation .......... 6,000 Total property, plant, and equipment .. Total assets ..
$ 68,660
6,000 $ 74,660 =======
Liabilities and Owners Equity Liabilities: Accounts payable . Owners equity: Clay Camp, capital ... Total liabilities and owners equity .
$ 8,000
66,660 $ 74,660 =======
Solution to Q. No. 1. (e) Closing entries: 1987 July 31
Merchandise Inventory . . 26,400 Sales ... 300,000 Purchase Returns and Allowances . Income Summary To close accounts with credit balances in the Income Statement columns and to set up the ending merchandise inventory. Income Summary 263,140 Merchandise Inventory Sales Returns and Allowances . Purchases . Transportation-In . Page 3 of 8
1,400 327,800
31
31,400 1,000 194,000 5,200
THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST 2013 EXAMINATION FOUNDATION LEVEL SUBJECT: 001. PRINCIPLES OF ACCOUNTING Advertising Expense Supplies Expense Salaries Expense . Utilities Expense . Fire Insurance Expense Rent Expense Depreciation Expense Office Equipment .. To close accounts with debit balances in the Income Statement columns. 31 Income Summary 64,660 Clay Camp, Capital .. To close the Income Summary account to the owners capital account. Clay Camp, Capital . 20,000 Clay Camp, Drawing To close drawing account. 1,000 1,800 23,200 1,400 240 2,400 1,500
64,660
31
20,000
Solution to Q. No. 2. (i) XYZ Company Bank Reconciliation July 31, 2011 Cash balance according to bank statement Add deposit of July 31 not recorded by bank Deduct outstanding cheques: No. 1244 1284 1223. Corrected bank balance... Cash balance according to depositors records.. Add: Proceeds of note collected by bank Tk. 38,000 less collection fee of Tk. 40 Error in recording of a cheque correctly drawn but entered in cash book as Tk. 6981 Deduct: Check returned because of insufficient funds Discounted note dishonored Cheque Printing charges Corrected cash balance Q. No. 2. (i) July 31, 2011 Cash Collection charge Notes Receivable Cash .. Accounts Payable Accounts Receivable. Cash .. Page 4 of 8 37,960 40.00 38,000.00 63.00 63.00 1525.00 1525.00
Tk. 93,644.80 19,166.20 9,178.60 800.00 820.80 10,799.40 102,011.60 80,756.60 37,960.00 63.00 38,023.00 118,779.60 1525.00 15,045.00 198.00
16,768.00 102,011.60
General expenses.. Cash .. Account Receivable Notes Receivable Discounted. Cash . Note Receivable Solution to Q. No. 3. (a) 1. 2012 Dec. 31
198.00 198.00 15,045.00 15,000.00 15,045.00 15,000.00
Bad Debts Expense 7,500 Allowance for Doubtful Accounts To record estimated bad debts for the year.
7,500
2. 2013 Jan. 15
Allowance for Doubtful Accounts 500 Accounts Receivable James Ryan To write off the account of James Ryan as uncollectible.
500
3. 2013 Feb. 12
Accounts Receivable James Ryan . 500 Allowance for Doubtful Accounts . To correct the write-off of James Ryans account on January 15. Cash 500 Accounts Receivable James Ryan ... To record the collection of James Ryans account receivable.
500
12
500
Solution to Q. No. 3. (b) 1. 2012 June 15
2. July 15
Notes Receivable Short Company . 15,000.00 Accounts Receivable Short Company ... To record receipt of a note from Short Company. Cash 15,192.50 Notes Receivable Discounted ... Interest Revenue ... To record the discounting of the Short Company note.
15,000.00
15,000.00 192.50
Computation of cash proceeds: Maturity value (Days until maturity = 60) ..................... $15,450.00 Discount = $15,450 X 10% X 60/360 257.50 $15,192.50 ========= Page 5 of 8
3. Sept. 13
Notes Receivable Discounted . Notes Receivable Short Company .. To remove the note and contingent liability.
15,000.00 15,000.00
4. Sept. 13
Notes Receivable Discounted 15,000.00 Notes Receivable Short Company.. To remove the note and contingent liability.
15,000.00
13 Accounts Receivable Short Company .. 15,450.00 Cash To record the charge made against our account for the Short Company note of $15,000 and interest of $450. 13 Allowance for Doubtful Accounts* ... 15,450.00 Accounts Receivable Short Company To write off the Short Company note as uncollectible.
15,450.00
15,450.00
* This debit assumes that notes receivable were taken into consideration when an allowance was established. If not, the debit should be either to Bad Debts Expense or Loss from Dishonored Notes Receivable. Solution to Q. No. 3. (c) 2010 Net income as reported Adjustments: (1) .. (2) .. (3) .. Adjusted net income ... $68,000 2,200 (2,200) (2,300) 2011 $71,000 2012 $60,000 Total $199,000
2,300 . $70,200 $66,500 $62,300 $199,000 ====== ====== ====== ======= ------------------------------------------------------------------------------------------------------------------(1) Ending inventory understated ($14,200 - $12,000 = $2,200). (2) Beginning inventory understated ($14,200 - $12,000 = $2,200). Ending inventory overstated ($14,000 - $11,700 = $2,300). (3) Beginning inventory overstated ($14,000 - $11,700 = $2,300). Solution to Q. No. 4. (a) Journal entries (i) 01/01/10: Accumulated Depreciation Loss on Disposal of Machinery Machinery Page 6 of 8 Debit (Tk.) 72,000 12,000 Credit(Tk.)
84,000
THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST 2013 EXAMINATION FOUNDATION LEVEL SUBJECT: 001. PRINCIPLES OF ACCOUNTING (To record retirement of the machinery (ii) 01/07/09: Depreciation Expense Accumulated Depreciation (To record depreciation to the date of disposal for 6 months) 01/07/09 Cash Accumulated Depreciation Loss on Disposal of Machinery Machinery (To record the sale of the machinery 01/01/09 Machinery (New) Accumulated Depreciation Machinery (Old) Cash (To record exchange of the machinery)
9,000 9,000
15,000 63,000 6,000 84,000 36,000 54,000 84,000 6,000
Workings: Fair market value of the Machinery Cash paid Cost of the New Machinery Gain on exchange adjustment Value of the new machinery Cost value of the Machinery Less Accumulated depreciation Book value of machinery Fair market value of machinery Tk. 34,000 Therefore the gain on exchange: Tk. 34,000-30,000 = Tk. 4,000. Q. No. 4. (b)(i) Depreciation for 2008 on Tk. 30,000 @ 10% Depreciation for 2009: (Tk. 30,000-3,000)* 10% Depreciation up to 31-12-2009 Book value of machinery as on 01-07-2010 (Tk. 30,000 5,700)* 10% for 6 months Total depreciation up to 01-07-2010 Journal entries 01/07/10 Cash Accumulated Depreciation Loss on Disposal of Machinery Machinery (To record the sale of the machinery) 15,000 6,915 8,085
Tk. 34,000 6,000 40,000 (4,000) 36,000 84,000 (54,000) 30,000
3,000 2,700 5,700 1,215 Tk. 6,915
30,000
4. (b)(ii) Depreciation of the existing machinery: Book value on 01-01-2010: Tk. 1,75,000 24,300 Depreciation @ 10% on Tk. 1,50,700 in 2010 Depreciation of the new machinery (Tk. 35,000+2,500)* 10% for 6 months Total depreciation to be charged in 2010
1,50,700 15,070 1,875 Tk. 16,945
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST 2013, EXAMINATION PROFESSIONAL LEVEL-I SUBJECT: 101. INTERMEDIATE FINANCIAL ACCOUNTING. Model Solution Answer to the Question No. 1. XYZ Company Statement of Cash flow For the year ended December 31, 2012 Amount (Tk.) Cash flow from Operating Activities: Net Profit before interest and taxes Adjustment for depreciation (W1) Loss on sale of equipment Loss on debenture redemption Amortization of patent Increase in inventory Increase in account receivable Decrease in prepaid expense Decrease in accounts payable (W2) Decrease in outstanding expenses Cash generated from operations Less: Interest paid Income tax paid (W3) Net cash generated from operating activities Cash flow from Investing Activities: Purchase of Freehold building (W4) Furniture purchase (W4) sale of equipment purchase of equipment (W4) Net cash used in investing activities Cash flow from Financing Activities: Sale of common stock (W5) Sale of right share Dividend paid (W6) Redemption of debenture Net cash generated from financing activities Net increase in cash and cash equivalents during the year Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 11,250 51,750 (17,940) (20,800) 24,260 (6,800) 47,300 40,500 (17,000) (12,700) 18,000 (65,500) (77,200) 1,800 19,960 (21,760) 46,140 47,800 36,500 2,500 800 8,000 (9,000) (8,000) 2,200 (11,700) (1,200) 67,900
Amount (Tk.)
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Workings: W1: Depreciation Furniture depreciation Tk. 6,200 plus Equipment depreciation Tk. 30,300 = Tk. 36,500 Acc Dep - Furniture b/d 22,500 Acc Dep - Equipment Equipment (Sold) 24,500 b/d 55,500 30,300
c/d 28,700 Depreciation 6,200 c/d 61,300 Depreciation W2: Decrease in accounts payable Ending accounts payable Tk. 20,500 Payable for furniture purchase Tk. 15,000 Payable for operating activities Tk. 5,500 Beginning accounts payable Tk. 17,200 Changes in accounts payable Tk. (11,700) W3: Interest and Tax paid Interest Payable Cash 1,800 b/d 300 Cash Income Tax Payable 19,960 b/d
16,000
c/d 700 Int. expense 2,200 c/d 12,000 Income tax* 15,960 *(Profit before interest and taxes Interest expense) x 35% = (47,800 2,200) X 35% = Tk. 15,960 W4: Purchase and sale of property, plant and equipment Freehold building b/d Rev. Res Cash 175,000 8,000 17,000 c/d 200,000 b/d Accounts payable Cash Furniture 45,300 15,000 12,700 c/d 73,000
Equipment b/d Cash pur 125,000 65,500 sold c/d 45,000 145,500
W5: Sale of common stock [New issue Tk. 10,000 + premium 1,250 = 11,250] Common Stock b/d Cash (right share)* 225,000 45,000
c/d 280,000 Cash (new issue) 10,000 *right share @ Tk. 10 will result increase in common stock [(225,000 10) 5 x 1] = 4,500 shares and share premium will increase @ Tk. 1.50 for 4,500 shares. W6: Dividend paid Retained Earnings Divided 17,940 b/d 111,800 c/d 123,500 Profit after tax* 29,640 *profit before interest and tax was Tk. 47,800 less, interest Tk. 2,200 and tax Tk. 15,960
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Answer to the Question No. 2. XYZ Company Statement of comprehensive income For the year ended December 31, 2012 Revenue Less: Cost of goods sold (252,500+650) Gross profit Less: Operating expenses Administrative expenses Admin exp Depreciation [{125,000 (22,800+20,440)}@20%] Selling expenses Distribution expense Bad debt Patent amortization Patent impairment Net operating income Other income and expenses Investment income Losses from assets abandonment EBIT Less: Finance cost EBT Less: Income tax @ 40% Profit from continuing operation Less: Losses from discontinuing division (net of tax) Profit before extraordinary items and cumulative effect of change in accounting principle Extraordinary loss (net of tax) Cumulative effects on prior years of retroactive application of new depreciation method [(22,800+20,440) 24,000](net of tax) Net Income Add: Other comprehensive income Unrealized gain on available for sale securities (net of tax) Comprehensive income 16,700 (3,800) 12,900 341,150 2,000 339,150 135,660 203,490 18,000 185,490 (15,000) (11,544) 158,946 7,680 166,626 36,000 748 2,000 1,000 39,748 112,100 328,250 56,000 16,352 72,352 693,500 253,100 440,350
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XYZ Company Statement of changes in equity For the year ended December 31, 2012 Share Capital Balance b/d Net income Transfer to General reserve Transfer to Sinking fund Comprehensive income Balance c/d 350,000 350,000 Share Premium 72,950 72,950 General Reserve 28,200 20,000 (3,000) 45,200 3,000 24,000 Sinking Fund 21,000 Accu. OCI 7,680 7,680 Retained Earnings 60,300 158,946 (20,000) 199,246
XYZ Company Statement of Financial Position As on December 31, 2012 Assets: Non-current Assets: Property, Plant and Equipment (W2) Patent (W3) Long term investments Current Assets: Account Receivables (W1) Short term investments (45,000 + 12,800) Inventories (12,350 - 650) Total Assets Equity and Liability Shareholder's Equity Share Capital Share Premium General reserve Accumulated OCI Sinking fund Retained earnings Non-current liability 8% Bond payable Current liability Accounts payable Income tax payable (W4) Interest payable Total equity and liability 25,000 117,384 4,300 111,084 2,000 841,460 699,076 350,000 72,950 45,200 7,680 24,000 199,246 Tk. 752,408 690,408 6,000 56,000 89,052 19,552 57,800 11,700 841,460
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W1:
Allowance for bad debt Balance b/d Allowance @ 6% Bad debt charge for the year
: Tk. 500 : Tk. 1,248 : Tk. 748
Account Receivables: Balance b/d Less: Allowance for bad debt Balance c/d
: Tk. 20,800 : Tk. 1,248 : Tk. 19,552
W2: Property, plant and equipment: Land Cost Accumulated depreciation - b/d Retroactive application Depreciation for the year Accumulated depreciation - c/d Carrying value 400,000 225,000 400,000 Building 225,000 Equipment 125,000 24,000 19,240 16,352 59,592 65,408 Total 750,000 24,000 19,240 16,352 59,592 690,408
W3: Patent Amortization and Impairment: Carrying value of patent : Tk. 9,000 Remaining life Amortization for the year : Tk. 2,000 Book Value Net realizable value : Tk. 6,000 Impairment W4: Taxation Provision: Tax on income from continuing operation Tax benefit on losses from discontinued division Tax benefit on losses from earthquake Tax benefit on retroactive application of depreciation Tax on unrealized gain on securities Net tax payable (receivable) 135,660 (12,000) (10,000) (7,696) 5,120 111,084
: 4.5 Years : Tk. 7,000 : Tk. 1,000
Answer to the Question no. 3(a): (i) Tk.1,000 rental revenue (Tk.12,000 6 = Tk.2,000 per month x 1/2 month); the balance (Tk.11,000) should be deferred and recognized as earned during 1985. (ii) Tk.60,000 sales revenue (Tk.10,000 cash plus Tk.50,000 note is equal to FMV of asset); Tk.3,000 earned interest revenue ( 12% x Tk.50,000 x 1/2 year = Tk.3,000); the balance of interest revenue (Tk.3,000) to be earned during 1985. (iii) Tk.104,000 net sales revenue; the Tk.8,000 special discount is a reduction in selling price and should be offset with the Tk.112,000 normal selling price in recognizing the net realizable amount. (iv) Tk.400,000 sales revenue. Tk.16,000 guarantee expense, (4% x Tk.400,000 = Tk.16,000 all of which relates to the Tk.400,000 worth of sales this period). (v) Tk.435,000 sales revenue. (All 5 tractors have been sold; the fact that 3 of the tractors have not yet been delivered, unless there are unusual circumstances, would ordinarily not preclude the recognition of the total sales revenue.)
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Answer to the Question no. 3(b): (i) The Allowance for Doubtful Accounts should have a balance of Tk. 50,000 at year-end. The supporting calculations are shown below: Days Account Outstanding Amount Expected Estimated Percentage Uncollectible Uncollectible 0-15 days Tk.300,000 0.02 Tk.6,000 16-30 days 31-45 days 46-60 days 61-75 days Balance for Allowance for Doubtful Accounts 100,000 80,000 40,000 20,000 0.10 0.15 0.25 0.6 10,000 12,000 10,000 12,000 Tk.50,000
(ii)
The accounts which have been outstanding over 75 days (Tk.15,000) and have zero probability of collection would be written off immediately and not be considered when determining the proper amount for the Allowance for Doubtful Accounts. Accounts Receivable Tk.540,000 Less: Allowance for doubtful accounts Accounts Receivable(net) 50,000 Tk.490,000
(iii)
The year-end bad debt adjustment would decrease before-tax income Tk. 30,000 as computed below: Estimated amount required in the Allowance for Doubtful Accounts Tk.50,000 Balance in the account after write-off of uncollectible accounts but before adjustment (Tk.35,000-Tk.15,000) Required charge to expense 20,000 Tk.30,000
Answer of the Question No. 04(a): G & H Pump Co. Partial Balance Sheet December 31, 2007 Liabilities: Current Liabilities: Accounts payable and accrued expenses Income taxes payable Accrued bond interest payable Unearned revenue Current portion of low term debt Total current liabilities: Long term Liabilities: Note payable to Prime Bank Mortgage note payable Bonds payable Add: Premium on bonds payable Total long term liabilities Total liabilities BDT 163,230 63,000 110,000 25,300 70,870 432,400 99,000 169,994 2,200,000 1,406 2,201,406 2,470,400 2,902,800
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Answer of the Question No. 04(b): 1. 2. 3. Although the note payable to Prime Bank is due in 30 days, it is classified as a long term liability as it will be refinanced on a long term basis. The pending lawsuit is a loss contingency requiring disclosure, but it is not listed in the liability section of the balance sheet. The BDT 70,870 of the mortgage note that will be repaid within the next 12 months (BDT 240,864BDT 169,994) is a current liability; the remaining balance, due after December 31, 2008, is a long term debt. Although the bonds payable mature in seven months, they will be repaid from a sinking fund, rather then from current assets therefore, these bonds retain their long term classification.
4.
Answer to the Question No. 5(a). Cost Replacement cost Ceiling Tk. 78,000 Tk. 75,000 Tk. 90,000 = 2013 catalog selling price less sales commissions and estimated other costs of disposal. (2013 catalogue prices are in effect as of 12/01/12.) Tk. 62,400 = Ceiling less (30% X 2013 catalog selling price) Tk. 75,000 [Middle value of Replacement cost, ceiling and floor] Tk. 75,000
Floor Designated Market price LMC
Answer to the Question No. 5(b). Cost Retail Beginning Inventory Tk. 30,000 Tk. 48,000 Purchases 339,500 520,800 Purchase returns (25,800) (36,480) Purchase discounts (7,590) Freight-in 8,920 Markups Tk. 32,500 Markup cancellations (8,320 ) 24,180 Totals 345,030 556,500 Markdowns (12,000) Sales (412,000) Sales returns 28,300 (383,700) Inventory losses due to breakage (2,400) Employee discounts (3,400 ) Ending inventory at retail 155,000 Cost-to-retail ratio = Tk. 345,030/Tk. 556,500 = 62% Ending inventory at cost (62% of Tk. 155,000) = Tk. 96,100
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Answer to the Question No. 5(c). Alvi Corporation Stockholders Equity December 31, 2012 Capital Stock Preferred stock, Tk. 100 par, 12%, 105,000 shares issued and outstanding Common stock, Tk. 20 par, 1,305,000 shares issued, 1,260,000 shares outstanding Total capital stock Additional paid-in capital In excess of parpreferred stock In excess of parcommon stock From treasury stock Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock (45,000 shares common) Total stockholders equity Tk. 10,500,000 26,100,000 36,600,000 2,225,000 23,500,000 70,000 25,795,000 62,395,000 19,175,000* 81,570,000 (4,050,000) 77,520,000
*(12,500,000 + Net income 8,250,000 Preferred dividend 1,260,000 Cash dividend 315,000) = 19,175,000 Cash dividend: [(800,000 shares + 70,000 shares) X split 3/2] 60,000 treasury shares + 15,000 treasury share] X 0.25 per share = 315,000)
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST 2013, EXAMINATION PROFESSIONAL LEVEL-I SUBJECT: 102. COST ACCOUNTING Model Solution Answer to the Question No. 1(b). (i) Sevenhill Manufacturing Company Journal Entries During November SL.No a) b) Particulars Materials Accounts Payable Work In Process Factory Overhead Control Materials Work In Process Materials Factory Overhead Control Cash Accounts Payable Materials Scrap Materials Factory Overhead Control Materials Work In Process Factory Overhead Control Payroll Accrued Payroll Income Tax Payable Hospitalized Other deduction Accrued Payroll Cash Factory Overhead Control Provident Fund Payable Work In Process Factory Overhead Control Payroll Factory Overhead Control Accum. Depr. - Buildings Accum. Depr. Machinery Factory Overhead Control Property Taxes Payable Prepaid Insurance Overhead analysis sheets Job Order Cost Sheets Overhead analysis sheets Overhead analysis sheets Subsidiary Records Inventory cards Accounts Payable Ledger Job Order Cost Sheets Overhead analysis sheets Inventory cards Job Order Cost Sheets Inventory cards Overhead analysis sheets Accounts Payable Ledger Inventory cards Inventory cards Overhead analysis sheets Inventory cards Job Order Cost Sheets Overhead analysis sheets Debit (Tk.) 35,600 35,600 25,250 1,300 26,550 200 200 850 850 225 225 175 175 1,265 1,090 175 52,600 41,503 7,780 950 2,367 41,503 41,503 3,419 3,419 40,200 12,400 52,600 7,800 3,000 4,800 Overhead analysis sheets 1,600 750 850 Credit (Tk.)
c) d) e) f) g)
h)
i) i)
k)
l)
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m) n)
Work In Process Factory Overhead Applied Factory Overhead Applied Cost of Goods Sold Factory Overhead Control Finished Goods Work In Process Cost of Goods Sold Finished Goods Accounts Receivable Sales
Job Order Cost Sheets
26,880 26,880 26,880 139 27,019
o) p)
Inventory cards Job Order Cost Sheets Inventory cards Customers Ledger
81,750 81,750 75,500 75,500 90,000 90,000
(ii) Ledger Accounts Materials Tk. 6,180 (b) 35,600 (c) 1,265 (e) Factory Overhead Control Tk. Tk. 1,300 (f) 175 850 (g) 175 3,419 (m) * 26,880 12,400 (n)** 139 7,800 1,600
Nov:1 (a) (g)
Tk. 26,550 200 225
(b) (d) (i) (j) (k) (l)
Balance 43,045 Work in Process Tk. 9,750 (g) 25,250 (o) 200 40,200 26,880 Balance 1,02,280
16,070 43,045 27,369 Finished Goods Tk. 5,660 (p) 81,750 Balance 19,440 1,02,280 87,410 87,410 27,369
Nov:1 (b) (c) (j) (m)
Tk. 1,090 81,750
Nov:1 (o)
Tk. 75,500
11,910
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Answer to the Question No. 2(b) : (i) Computation of economic order quantity (EOQ) D =Annual requirement = 54,000 castings C = Cost per casting = Tk. 800 Co = Ordering cost = Tk. 9,000 per order Cc = Carrying cost per casting p.a = Tk.300 EOQ = = 1,800 casting (ii) Safety stock (Assuming a 15% risk of being out of stock) Safety stock for one day = 54,000/360 days = 150 castings Re-order point = Minimum stock level + Average lead time Average consumption = 150 + 6 150 = 1,050 castings. Total cost of ordering = (54,000 / 1,800) Tk. 9,000 = Tk.2,70,000 Total cost of carrying = (450 + 1,800) xTk.300 = Tk. 4,05,000 (A) Computation of new EOQ:
(iii)
(iv)
= 300 castings (v) (B) Total number of orders to be placed in a year are 180. Each order is to be placed after 2 days (1 year = 360 days). Under old purchasing policy each order is placed after 12 days.
Answer to the Question No. 3 (a) A volume-based cost driver is a cost driver that reflects some measure of production volume, either production output (i.e. units produced) or production input (i.e. direct labour hours or machine hours). Conventional costing systems assume that manufacturing overhead costs are related to the volume of production, usually measured by input measures such as direct labour hours. Thus, this approach assumes that the more direct labour hours worked on a product, the greater its consumption of overhead resources. Yet, in a modern business environment, many manufacturing overhead costs may not behave in this way. A significant part of the overhead costs are likely to be driven by factors other than production volume. For example, some of the overhead costs, like setup costs, are incurred for each production batch regardless of the number of units in the batch. Others, like factory rent, are incurred each month regardless of the number of units produced. Still others are incurred because of overall production complexity. Products that are difficult to make tend to use more overhead resources than those that are simple to make. Where nonvolume based costs are significant, a conventional costing approach will result in distorted product costs. The regression equations intercept on the vertical axis is $200. It represents the portion of indirect materials cost that does not vary with machine hours, when operating within the relevant range. The slope of the regression line is $4 per machine hour. For every machine hour, $4 of indirect material costs is expected to be incurred.
(b) (i)
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(ii)
Estimated cost of indirect material at 900 machine hours of activity: S = = $200 + ($4 900) $3 800
(iii)
Several questions should be asked: (a) Do the observations contain any outliers, or are they all representative of normal operations? (b) Are there any mismatched time periods in the data? Are all of the indirect material cost observations matched properly with the machine hour observations? (c) Are there any allocated costs included in the indirect material cost data? (d) Are the cost data affected by inflation?
(iv)
The choice of cost driver should reflect the nature of the production process. Other cost drivers could include direct labour hours or direct labour cost if the production process is labour intensive and the consumption of indirect materials is related to labour activities. Alternative the number of units produced could be a suitable cost driver, if each unit uses much the same amount/cost of indirect material.
Answer to the Question No. 4. (i) & (ii) Full cost and manufacturing cost, per unit, for Switch 3901: Activity Prepare purchase order Process payables Prepare payroll Process sales orders Pack and dispatch Program solder robots Solder circuits Assemble circuit boards Wire in switch Insert fuse Test switch Design switch Total annual cost Full cost $2,150 1,350 3,000 16,500 8,500 30,600 144,000 75,000 70,000 50,000 20,000 5,000 $426,100 Manufacturing cost 30,600 144,000 75,000 70,000 50,000 20,000 $389,600
Full cost per switch: $85.22 activity cost + $20 direct material = $105.22 Manufacturing cost per switch: $77.92 activity cost + $20 direct material = $97.92 (iii) The non-manufacturing costs are part of the cost of producing and selling Switch 3901. It is important the management considers these costs, as well as the manufacturing costs, when assessing the profitability of Switch 3901 and, therefore, when making decisions such as product mix, outsourcing and pricing.
Page 4 of 5
Answer to the Question No. 5. (a) Weighted Average Method: Work in process, Feb 1 Cost incurred during Feb Total cost to account for Equivalent units Cost per equivalent unit (i) (ii) Direct material $ 5,500 110,000 $ 115,500 110,000 $1.05 = = = Conversion $ 17,000 171,600 $ 188,600 92,000 $2.05 $275,900 22,050 6,150 $28,200 (b) FIFO Method: Direct material Work in process; February 1 Cost incurred during February Total cost to account for Equivalent units Cost per equivalent unit Cost of opening work in process Cost incurred to complete opening work in process inventory Conversion Cost Cost incurred to produce units started and completed (i) Total cost of goods completed Cost remaining in work in process; February 28 Direct materials Conversion cost (ii) Closing work in process Check: Cost of goods completed and transferred out Cost of closing work in process Total costs accounted for
* **
Total $ 22,500 281,600 $ 304,100 $3.10
Cost of Goods Completed (89,000 3.10) Work-in-Process Material: 21,000 1.05 Conversion Cost: 3,000 2.05
Conversion $ 171,600
Total $ 22,500 281,600 $ 304,100
$ 110,000
100,000 $ 1.10
88,000 $ 1.95 $ 3.05 $22,500
10,000 65% 1.95
12,675 35,175
79,000 3.05
240,950 $276,125 23,100
21,000*1.10 2,500** 1.95
4,875 $27,975
276,125 27,975 $304,100
21,000 = 100,000 + 10,000 89,000 2,500 = 88,000 + (10,000 x 0.35) 89,000
Page 5 of 5
THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST 2013, EXAMINATION PROFESSIONAL LEVEL-II SUBJECT: 201. ADVANCED FINANCIAL ACCOUNTING-I. Model Solution
Solution No. 1(b). Yes, the lease is capital lease as the lease term is 8 years which is 80% of the economic life of the equipment. (ii) Lease Amortization Schedule: Year Description Amount Interest Principal Lease Obligation 01.01.2008 Initial 1,700,360 Balance 01.01.2008 Payment 250,000 250,000 1,450,360 01.01.2009 Payment 250,000 145,036 104,964 1,345,396 01.01.2010 Payment 250,000 134,540 115,460 1,229,936 01.01.2011 Payment 250,000 122,994 127,006 1,102,929 01.01.2012 Payment 250,000 110,293 139,707 963,222 01.01.2013 Payment 250,000 96,322 153,678 809,544 01.01.2014 Payment 250,000 80,954 169,046 640,499 01.01.2015 Payment 250,000 64,050 185,950 454,549 31.12.2015 Payment 500,000 45,455 454,548 0 Minimum Lease Payment: Rentals (250,000 x 5.86842) Guaranteed Residual Value (500,00 x 0.46651) (i)
1,467,105 233,255 1,700,360 1,700,360 1,700,360 250,000 24,000 274,000 145,036 145,036 150,045 150,045
(iii) 01.01.2008 Leased Equipment Obligation Under Capital Lease 01.01.2008 Obligation Under Capital Lease Executory Cost Cash 31.12.2008 Interest Expenses Accrued Interest on Obligation under Capital Lease 31.12.2008 Amortization Expenses Accumulated Amortization on Leased Equipment (17,00,360-500,000)/8=150,045 01.01.2009 Obligation Under Capital Lease Accrued Interest on Obligation under Capital Lease Executory Cost Cash 31.12.2009 Interest Expenses Accrued Interest on Obligation under Capital Lease
Page 1 of 7
104,964 145,036 24,000 274,000 134,540 134,540
31.12.2009 Amortization Expenses Accumulated Amortization on Leased Equipment (iv) Balance Sheet As on December 31, 2008
150,045 150,045
Assets: Leased Equipment 1700360 Less- Accumulated Amortization 150045 1550315 Liabilities: Current LiabilitiesObligation Under Capital Lease(Current Portion) 104964 Accrued Interest on Obligation Under Capital 145036 250000 Lease Non Current LiabilitiesObligation Under Capital Lease(Non Current 1345396 Portion) (v) 01.01.2010 Accrued Interest on Obligation under Capital 134,540 Lease Obligation Under Capital Lease 1,345,396 Accumulated Amortization on Leased 30,090 Equipment Equipment 1,530,334 Leased Equipment 1,700,360 Cash 1,340,000 Solution No. 2(i).
Head Office Journal Entries: Branch Accu. Depre-Store Furniture Cash Merchandise Shipment to Branch Allow. For Overvaluation of Br. Merchandise Store Furniture & Fixture No Entry Accounts Receivable Sales Cash Accounts Receivable Purchase Accounts Payable Accounts Payable Cash Expenses Accrued Expenses Branch Cash Branch Merchandise Shipment to Branch Allow. For Overvaluation of Br. Merchandise Cash Branch Branch Merchandise Shipment to Branch 12,000 10,000 Branch 71,000 5,000 30,000 30,000 6,000 10,000 Cash Merchandise Shipment from Head Office Store Furniture & Fixture Accu. Depre-Store Furniture Head Office Store Furniture & Fixture Cash Accounts Receivable Sales Cash Accounts Receivable Purchase Accounts Payable Accounts Payable Cash Expenses Head Office Cash 30,000 60,000 50,000 10,000 25,000 25,000 Merchandise Shipment from Head Office Head Office 60,000 60,000 30,000 36,000 10,000 5,000 71,000 1,500 1,500 175,000 175,000 140,000 140,000 120,000 120,000 115,000 115,000 11,000 6,000 5,000
250,000 250,000 280,000 280,000 220,000 220,000 240,000 240,000 22,500 1,500 6,000
Head Office Cash Merchandise in Transit Head Office
25,000 25,000 12,000 12,000
Page 2 of 7
Allow. For Overvaluation of Br. Merchandise Depreciation Accu. Depre.- Store Furniture & Fixture 3,800
2,000 Depreciation Accu. Depre.- Store Furniture & Fixture 10,000 x 10%= 1,000 1,500 x 1/5 = 300 1,300 Expenses Accrued Expenses Head Office Income Statement (Loss transferred) 1,300 1,300
3,800
Expenses Accrued Expenses Branch Income Statement Branch (Loss transferred) Allow. For Overvaluation of Br. Merchandise Branch Income Statement (Load on Br goods sold adjusted) Workings: Load on goods sent to Br. (6,000+10,000+2,000)= Less- Load on goods in br. Closing inventory (9,600 x 20/120)= Load on goods sold by branch
1,800 1,800 14,200 14,200 16,400 16,400
900 900 14,200 14,200
18,000 1,600 16,400
Solution No. 2(ii).

Head Office Income Statement for the year ended December 31, 2012 Sales Less- Cost of Goods sold: Opening Merchandise Add- Purchase Less- Shipment to Branch Less- ending merchandise Gross Profit Less- Other operating expenses: Expenses Depreciation Net Profit Add- Branch Loss Load on goods sold by branch Total Net profit Head Office Balance Sheet As on December 31, 2012 Assets : Cash Accounts Receivable Merchandise Inventory Branch Less- Allowance for overvaluation of Br. Merchandise Store Furniture & Fixture Less- Accu Depreciation Liabilities & Capital Accrued Expenses Accounts Payable Capital Stock Retained Earnings (14,200) 16,400 Branch Income Statement for the year ended December 31, 2012 Sales Less- Cost of Goods sold: Opening Merchandise Add- Purchase Add- Shipment from Head Office 66,000 84,000 Less- ending merchandise Gross Profit Less- Other operating expenses: Expenses Depreciation Net Profit
250,000 96,000 220,000 316,000 90,000 226,000 60,000
175,000 120,000 96,000 216,000 40,000
176,000 (1,000)
24,300 3,800
28,100 55,900 2,200 58,100
11,900 1,300
13,200 (14,200)
Branch Balance Sheet As on December 31, 2012 Assets : Cash Accounts Receivable Merchandise Inventory Merchandise in Transit Store Furniture & Fixture Less- Accu Depreciation Liabilities & Capital Accrued Expenses Accounts Payable Head Office A/C Retained Earnings 11,500 6,300
85,000 130,000 60,000 109,800 1,600 38,000 14,400 08,200 23,600 406,800 1,800 20,000 250,000 135,000 406,800
23,500 35,000 40,000 12,000
5,200 115,700 900 5,000 109,800 115,700
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Solution No. 3(d) National Engineers Ltd Contract Account For the year ended December 31, 2011 Amount Particulars Tk 1,400,000 Material sold 350,000 Sale of Plant 1,050,000 65,000 Work in Process: 125,000 Work Certified ( 24,00,000x100/80) 15,000 Work Uncertified 487,000 Plant in hand Material in hand 3,492,000 300,000 Notional Profit 187,000 487,000 2,990,000 117,000 2,873,000
Particulars Wages Plant Materials Sundry Expenses Head Office Charges Profit & Loss A/C (profit on sale of Materials) Notional Profit
Amount Tk
Amount Tk 115,000 17,000
3,000,000
250,000
3,250,000 80,000 30,000 3,492,000 487,000 487,000
Profit & Loss A/C (profit transferred) Work in Process (Reserve)
Profit to be credited to Profit & Loss Account: Cost to date Less : Plant sold 17,000 Cost of material sold 100,000 Estimated further expenditure: Wages Plant Materials Sundry Expenses Head Office Charges Claims, temporary maintenance & cintingencies Less: Residual Value of Plant Estimated total cost Estimated Profit Contract Price
849,500 150,000 500,000 35,000 62,500 90,000 1,687,000 4,560,000 60,000 4,500,000 500,000 5,000,000
Profit to be transferred: Estimated Profit x Work Certified / Contract Price (5,00,000 x 30,00,000 / 50,00,000)= 300,000
Page 4 of 7
Solution No. 4(a)

Populer Life Assurance Co. Revenue Account For the year ended Dec 31, 2012 Dr. Expenditures Claim paid Add: Oustanding Less: Claims covered under reinsurance Surrenders Bonus to policy holders Add: Bonus utilized in reduction of premium Commission paid Management Expenses Add: Due Dividend paid Life assurance fund at the end of the year Taka 197,000 10,000 207,000 2,300 204,700 7,000 30,500 6,000 32,300 1,200 33,500 16,000 2,976,800 3,283,800 36,500 9,300 Add: Bonus utilized in reduction of premium Interest & dividend received Add: Oustanding Taka Income Taka Life assurance fund at the beginning of the year Premium Received Add: Oustanding 233,500 10,000 243,500 6,000 112,700 21,300 249,500 Cr. Taka 2,900,300
134,000
3,283,800
Solution No. 4(b)

Populer Life Assurance Co. Balance Sheet As at 31 December 2012 Dr. Capital and Liabilities Authorized Capital Issued and subscribed capital 10,000 shares of Tk.15 each Calledup and paidup capital 10,000 shares of Tk.10 each Life assurance fund Claimed admitted but not paid Management Expenses due Taka ? 150,000 100,000 2,976,800 10,000 1,200 Property and Assets Mortgage in Bangladesh Loans on companey's policies Investments Freehold premises Agent's Balance Amount receivable under Reinsurance Outstanding Premium Accrued Interest Cash Deposit Cash in hand 3,088,000 Cr. Taka 492,200 178,600 2,300,000 40,000 9,300 2,300 10,000 21,300 27,000 7,300 3,088,000
Page 5 of 7
Solution No. 5.
Emacol Limited Statement of Affairs As on 31 december 2012 Book Value Assets Assets pledged with fully secured creditors Realized Value
12,000
Notes Receivable Bank Notes Payable Interest payable

Investment in stock
12,000 10,000 300 6,000 250 20,000 50,000 100,000 4,250 10,300
13,250 1,700
13,250
Bank Notes Payable Interest payable

21,000 99,000
6,250 70,000 104,250
7,000
land Building Mortgage Note Payable Interest Payable- Mortgage Note Fixed Assets: Cash in Hand Cash at Bank Accounts Receivable Inventories-FG Inventories-WIP Inventories-Raw Materials Unpaid Insurance Plant and Machinary Total Net Realizable Value Wages and Salaries due Net free Assets
Eatimated dificiency (balancing Figure)
2,000 2,100 23,500 28,000 12,000 19,500 600 46,500
2,000 2,100 14,000 30,240 9,000 11,900 300 19,000 97,240 6,750 90,490 41,260 131,750 Unsecured
279,450 Book Value 6,750 16,000 550 100,000 4,250
Equities
Liabilities having priority Wages and Salaries due Fully Securied creditors Notes Payable Interest Payable Pertially secured creditors Mortgage Notes Payable Interest Payable- Mortgage Note Total Land and Building Unsecured Creditors
6,750 16,000 550 100,000 4,250 104,250 70,000 34,250
Page 6 of 7
97,500 125,000 (70,600) 279,450
Accounts payable Stock holders' Equity Capital Stock Retained Earnings (deficit)
97500
131,750 Deficiency account As on 31 December 2012 Estimated Losses Estimated Gains Accounts Receivable 9,500 Inventories-FG Inventories-WIP Inventories-Raw Materials Unpaid Insurance Land Buildings Plant and Machinery Total 3,000 7,600 300 1,000 49,000 27,500 97,900 Capital Stock Retained Earnings Estimated deficiency
2,240 125,000 (70,600) 41,260
Total
97,900
Page 7 of 7
THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST 2013, EXAMINATION PROFESSIONAL LEVEL-II SUBJECT: 202. MANAGEMENT ACCOUNTING Model Solution Answer to the Question No. 1(b). (a) In designing management accounting systems, care must be taken that the benefit to management of having certain types or levels of information is greater than the cost of obtaining and using the information. In designing regular management accounting reports or a specific adhoc report, information should be included on a cost-effective basis. While it can be relatively straightforward to measure the costs of producing and using management accounting information, it can be more challenging to estimate the benefits that managers derive from having access to information. Ultimately, the management accountant must use his/her judgment in assessing whether the benefits exceed the costs and, therefore, the information should be produced. (i) Estimates of the cost of lost merchandise due to shoplifting and the cost of employing security personnel would be relevant to this decision.
(b)
(ii) Building-cost estimates for the library extension, as well as estimated benefits to the population from having the addition, would be useful. In estimating the benefits, some value judgements may need to be made about the benefits to the public from having additional library space and more books. (iii) Estimates of the acquisition costs and any operating costs associated with the proposed luxury cars would be relevant. For example, estimates of the cost of petrol, routine maintenance and insurance on the new vehicles would be useful. (iv) Weekly or biweekly data about the cost of maintaining the machine would be relevant. In addition, the production manager should consider historical information of repairs needed and the likely rates of breakdown under each maintenance alternative. (c) The four types of benchmarking and their limitations are as follows: (i) Internal benchmarking involves benchmarking between units of the same company. This is the simplest form of benchmarking to use, as it is relatively easy to gain access to other areas of the one organisation. However, internal benchmarking partners may not provide the best benchmarks as they may not be the best performers in certain areas. Also, they may be operating in dissimilar markets and industries, so processes and measures may not be directly comparable. Competitive benchmarking involves a company identifying the strengths and weaknesses of competitors to assist them to prioritise areas for improvement. While the objective may be to equal or exceed the competitors performance, formal benchmarking processes may be difficult to arrange with direct competitors. Industry benchmarking is broader than competitive benchmarking as it involves comparing a business against all other businesses that have similar interests and technologies, to identify performance and trends within an industry. Where these are relatively common to all firms in the industry, this can be a very valuable form of benchmarking, but as industries become more globalised and directly compete in the same markets, opportunities for benchmarking of this nature are likely to diminish. Best-in-class or process benchmarking. This involves benchmarking against the best practices which may occur in any industry. The difficulty with this approach is that many characteristics of best practice businesses may not be common to other industries.
(ii)
(iii)
(iv)
Page 1 of 6
Answer to the Question No. 2 (a) This comment is occasionally heard from people who are experienced managers who have run their own small business for a long period of time. These individuals may have great knowledge about their business and may be able to manage effectively without the assistance of formal systems, such as budgets. They may feel they do not need to spend a great deal of time on the budgeting process, because they can essentially run the business by gut feeling. This approach can result in several problems. First, if the person who is running the business is absent or leaves the business, there are no formal plans or budgets which may assist new managers to run the business. Second, budgeting can assist in the effective running of an organisation. Budgets facilitate communication and co-ordination, are useful in resource allocation and help in evaluating performance and providing incentives to employees. It is difficult to achieve these benefits without a budgeting process.
(b) Statement of Profit and Loss for Expected Levels of Operations Particulars Sales Less Marginal Costs Contribution Less Fixed Costs Special Costs (Working Note) Profit / Loss Note: Special Cost: Closing down Costs Maintenance of Plant Overhouling, training etc. 7,500 1,000 4,000 12,500 0% (Tk.) Nil Nil Nil 11,000 12,500 (23,500) 50% (Tk.) 49,500 40,500 9,000 19,000 -(10,000) 75% (Tk.) 90,000 60,750 29,250 19,000 -10,250
The amount of loss can be reduced by (23,500 10,000) i.e. 13,500 if the factory continuous to operate. Further in the second year the estimated profit is 10,250. Therefore, closing down is not desirable. Workings: (i) 50% operations: 60% 40% 20% Tk. 67,600 Tk. 51,400 Tk. 16,200
Difference Variable Cost for 40% Fixed Cost Variable Cost for 50% (ii) 75% operations:
Variable Cost only
= Tk. 16,200 2 = Tk. 32,400 (Tk. 51,400 Tk. 32,400) = Tk. 19,000. = VC for 40% + VC for 10% = 32,400 + 8,100 = Tk. 40,500. 80% 60% 20% 15% Tk. 83,800 Tk. 67,600 Tk. 16,200 Tk. 12,150
For VC at 60% Fixed Cost VC for 75%
= 16,200 3 = Tk. 48,600. = (67,600 48,600) = Tk. 19,000. = VC for 60% + VC for 15% = Tk. 48,600 + Tk. 12,150 = Tk. 60,750
Page 2 of 6
Answer to the Question No. 3 (a) The new budget system allows the managers to focus on those areas that need attention. By dividing the annual budget into 12 equal parts, managers can take corrective action before the error is compounded (frequent feedback is provided). Also, the company has segregated costs into fixed and variable components, an essential step for good control. A major weakness of the budget is the failure to properly define responsibility. Because of this, supervisors are being held accountable for areas over which they have no control. The performance report should emphasize those items over which the manager has control. The report should also compare actual costs with budgeted costs for the actual level of activity. Currently, the report is attempting to compare costs at two different levels: the original budget for 3000 units with the actual costs for production of 3185 units. A flexible budgeting system needs to be employed. Berwin, Inc. Machining Department Performance Report For the Month Ended May 31, 2008 Flexible Budget* 3185 $ 25 480 29 461 35 354 $ 90 295 $ 3300 1500 300 240 930 6270 Actual 3185 $ 24 843 29 302 35 035 $ 89 180 $ 3334 1500 300 240 1027 6401 Variance 0 $637 F 159F 319 F $1,115 F 34 U 0 0 0 97 U $131 U $984 F
(b)
(c)
Volume in units Variable manufacturing costs: Direct materials Direct labour Variable overhead Total variable costs Fixed manufacturing costs: Indirect labour Depreciation Taxes Insurance Other Total fixed costs Total costs
$ 96 565
$ 95 581
*For the variable costs: 3185 $24 000/3000; 3185 $27 750/3000; 3185 $33 300/3000 (d) Berwins budgetary system could also be improved by offering monetary and nonmonetary incentives to reach budget goals. The managers and supervisors should be allowed and encouraged to participate in the budgetary process because they will be responsible for controlling the budget. The accountant needs to be certain that the budget objectives are based on realistic conditions and expectations. The managers should be held accountable only for costs over which they have control.
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Answer to the Question No. 4 (a) CM per Unit CM Ratio BEP in Quantity BEP in $ Profit Margin of Safety in Quantity Margin of Safety in % DOL Profit Increase Current CMR = 0.4 CMR = After 15% increase in the cost of Candy, V will be $ 2.7 Therefore, 0.4 = 0.4P = P 2.7 0.6P = 2.7 P = $4.5 Price will be $ 4.5 per unit. (b) Sales Variable Manufacturing Costs Total Contribution Margin Fixed Manufacturing Costs Controllable Profit Fixed Operating expenses Income Snap $4,000 1,600 2,400 1,200 1,200 800 $400 Snap $4,000 1,600 2,400 1,200 1,200 Crackle $2,000 600 1,400 600 800 600 $200 Crackle $2,000 600 1,400 600 800 Pop $1,000 500 500 100 400 800 ($400) $ $ $ $ $ $ $ Total 7,000 2,700 4,300 1,900 2,400.00 2,200.00 200.00 Total 6,000 2,200 3,800 1,800 2,000.00 2,200.00 (200.00) $1.60 0.4 275,000 $1100,000 $ 184,000 115,000 29.49% 3.3913 $93,600 Candy Candy
Sales Variable Manufacturing Costs Total Contribution Margin Fixed Manufacturing Costs Controllable Profit Fixed Operating expenses Income The Pop should not be eliminated.
------
$ $ $ $ $ $ $
Page 4 of 6
Answer to the Question No. 5(a) Variable product costs are particularly useful for short-term decisions, such as whether to make or buy a component, and pricing especially when variable selling and administrative costs are included. The fixed costs will be incurred anyway, and in the short term they should be disregarded. In making these decisions, the variable costs provide a good measure of the differential costs that need to be assessed. We discuss the information needed for short-term decision making in Chapter 19. Under variable costing, profit is a function of sales. The classification of costs, as fixed or variable, makes it simple to project the effects that changes in sales have on profit. Managers find this useful for decision making. Also, cost volume profit analysis (which we discuss in Chapter 18) requires a variable costing format. Planned costs must take account of cost behaviour if they are to provide a reliable basis for control. In addition, the link between sales and profit performance, under variable costing, ensures a performance measure that managers understand easily. Fixed costs are an important part of the costs of a business, especially in the modern manufacturing environment. Variable costing provides a useful perspective of the impact that fixed costs have on profits by bringing them together and highlighting them, instead of having them scattered throughout the statement. Absorption product costs include unitised fixed overhead, which can result in sub-optimal decisions, especially as fixed costs are not differential costs in the short term. However, in the modern business environment, with a high level of fixed overhead, a relatively small percentage of manufacturing costs may be assigned to products under variable costing. Also, in the longer term a business must cover its fixed costs too, and many managers prefer to use absorption cost when they make cost-based pricing decisions. They argue that fixed manufacturing overhead is a necessary cost incurred in the production process. When fixed costs are omitted, the cost of the product is understated. (b) (i) Cost per unit Direct material Direct labour Variable overhead Fixed overhead * * Fixed overhead = = = (ii) (a) Slim and Trim Ltd Absorption Costing Income Statement For the Year Ended 30 June Sales revenue (125,000 units sold at $27 per unit) Less: Cost of goods sold 125,000 units @ $22 per unit Gross margin Less: Selling and administrative expenses: Variable (at $2 per unit) Fixed Net profit $3,375,000 2,750,000 625,000 (250,000) (100,000) $275,000 Variable Absorption $9.00 $9.00 3.60 3.60 5.40 5.40 4.00 $18.00 $22.00 budgeted fixed overhead budgeted level of production $600,000 150,000 $4 per unit
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(b) Slim and Trim Ltd Variable Costing Income Statement For the Year Ended 30 June Sales revenue (125,000 units sold at $27 per unit) Less: Variable expenses: Variable manufacturing costs at $18 per unit Variable selling and administrative costs at $2 per unit Contribution margin Less: Fixed expenses: Fixed manufacturing overhead Fixed selling & administrative expenses Net profit $3,375,000 (2,250,000) (250,000) 875,000 (600,000) (100,000) $175,000
(iii)
Difference in reported profits under absorption costing and variable costing = Changes in inventory in units predetermined fixed overhead rate per unit = 25,000 units $4 per unit = $100,000 As shown in requirement (ii), reported profit under variable costing is $100,000 lower than absorption costing.
Page 6 of 6
THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST 2013 EXAMINATION PROFESSIONAL LEVEL-II SUBJECT: 204. TAXATION Model Solution Solution Question No. 3. Mr. X Computation of Total Income For the year ended on 30/06/2013 (Assessment year: 2013-2014) (a) Income from Salary: (1) Basic Salary (Tk. 20,000 X 12) = 2,40,000/(2) Entertainment Allowance @ 20% = 48,000/(3) Bonus (Tk. 20,000 X 2 months) = 40,000/(4) Free accommodation (25% of Basic salary, or rental value 60,000/Tk. 72,000, lower one) (5) Medical Allowance (Tk. 500 X 12 month) = 6,000/Nil Less: exempted up to actual expenditure = 8,000/(6) Conveyance Allowance (Tk. 3,000 X 12) = 36,000/6,000/Less: Exempted up to -30,000/(7) Employers contribution to Recognised Provident Fund 24,000/10% Total Salary Income Income from Interests on Securities: Interests on Debentures Interests on Govt. Securities Interest Income (As there is no exemption from such interest with effect from the assessment year 2011-2012. so it is fully taxable. Moreover no tax credit will be allowed on TDS Tk. 7,000/- as it was deducted 3 years before which is not to be adjusted with this years assessment) (c) Income from House Property: Annual Value ( Tk. 50,000 X 12 months) (Assuming it as reasonable) Less: allowance deduction: (1) Repairs and maintenance th of A.V (2) Municipal tax (Tk. 20,000 / 2)= (As 50% of the house is self occupied) (3) Insurance Premium (Tk. 12,000 / 2) = (4) Int. on House Building loan ( 1,47,000 / 2)=
4,18,000/-
(b) (1) (2)
Tk. 10,000/Tk. 70,000/80,000/-
Tk. 6,00,000/-
Tk. 1,50,000/Tk. Tk. Tk. 10,000/6,000/73,500/Tk. 2,39,500/Tk. 3,60,500/Tk. 1,50,000/-
House Property Income (d) Income from Partnership Firm: 50% share income from Partnership Firm (before tax)
Page 1 of 5
(e)
Capital Gain (from sale of shares of listed companies): As it is tax free as per SRO No. 269 dated 01/07/2011 so it is not added with income --Income from other sources: (1) (2) (3) (4) Cash dividend ---- (45,000 100/90) = Tk. 50,000/Less: exempted up to = Tk. 10,000/Stock dividend { tax free as per section 2(26)} -Bank Interest (5,600 100/90)= Income From Sub-let (Tk. 3,000 X 12) = Total Income
Nil
f)
Tk. 40,000/Nil Tk. 6,000/Tk. 36,000/=
Tk. 82,000/Tk. 10,90,500/-
Investment Allowance: (1) Contribution to Recognized P.F (both) -- (24,000 X 2) = (2) Life Insurance Premium ( not allowable as it is in the name of old father) (3) Donation to Prime Ministers relief fund is not an item of 6th schedule (Part-B). So it cannot be considered as investment allowance. (4) Investment in secondary share
Tk. 48,000/Nil Nill
Tk. 1,00,000/Tk. 1,48,000/-
Tax Computation:On first On next On next On balance
Tk. 2,20,000/Tk. 3,00,000/Tk. 4,00,000/Tk. 1,70,500/Tk. 10,90,500/Less: Investment tax credit Less: Tax on Taxed Share income of Firm
Tax @ 10% Tax @ 15% Tax @ 20% 1, 48,000 X 15% 1,01,900 X 1,50,000 10,90,500
Nil Tk. 30,000/Tk. 60,000/Tk. 34,100/Tk 1,24,100/Tk. 22,200/Tk.1,01, 900/Tk. 14,017/Tk. 87,883/-
Less: Tax deducted at sources:(1) TDS from cash dividend (2) TDS from Bank Interest
Tk. 5,000/Tk. 600/Net tax payment Tk.5,600/Tk. 82,283/-
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Solution of question No. 4. X Limited Computation of Total Income For the year ended on 30th june-2013 (Assessment Year: 2013-14) (1) Income from trading business: (Sec. 28) Net profit as per P/L :Less: Non business income included in P/L for consideration at appropriate head of income: (a) Dividend Income (considering income from other sources) (b) Share premium (considering income u/s 82C) (c) Sundry Income (considering income from other sources) (d) Capital Gain from sale of machine (considering at under Capital Gain head)
Tk. 2,32,300/-
Tk. 30,000/Tk. 30,000/Tk. 13,000/Tk. 40,000/Tk. 1,13,000/Tk. 1,19,300/-
Add:- Expenditure to be considered as per tax law afterwards:(1) Entertainment (to be considered as per rule-65) (2) Deprecation (to be considered as per 3rd Schedule) Tk. 9,500/Tk. 46,600/Tk. 56,100/Tk. 1,75,400/Add:- Inadmissible Expense:(1) Rent and Taxes Tk. 24,500/As VAT Tk. 4,200 paid for importing machineries is charged at P/L , so disallowed Tk. 4,200 being part of capital expenditure. As the machine is not used during the year, so no tax deprecation is allowable. (2) Repairs and operating expenditure Tk. 27,300/Tk. 6,000 disallowed from here as it is not business expenditure rather personal expenditure of M.D (3) Legal Expenditure Tk. 14,500/Income tax related legal expenditure is allowable up to appeal to the Taxes Appellate Tribunal. So as it is allowable expenditure nothing to add back from here (4) Type Writer Tk. 5,948/Type writer machine is capital nature expenditure. As it is charged at P/L as revenue expenditure, so Disallowed fully. Tk. 5,948/Nil Tk. 6,000/Tk. 4,200/-
Page 3 of 5
(5) Bad debit Provision Tk. 4,400/Disallowed fully being to provision (other than actual bad debit) is allowable as per Sec. 29 (6) Compensation for termination of staff Tk. 10,000/Assuming compensation paid for violation of job agreement by the employer, so disallowed fully Add:- Demand income u/s 19 Bad debit recovered is to be treated as business income as per provision of section 19 (15) of ITO 1984 Tk. 10,000/Tk. 2,05,948/Tk. 4,400/-
Tk. 2,000/Tk. 2,07,948/Less: Tax Depreciation (as per 3rd Schedule) Tk. 58,400/Profit before charging entertainment Tk. 1,49,548/Less: Entertainment (as per Rule.65) Tk. 1,49,548 X 4% = Tk. 5,982/-
But restricted up to actual expenditure. Here the actual expenditure claimed Tk. 9,500/-. Out of which Tk. 2000/- is unexplained and Tk. 5,276/- is personal expenditure. So after deducting these two, claim renains (Tk. 9,500 - 2,000-5,276/-)= 2,224/- As it is lower than the celling of Rule-65, so it is allowed Income u/s 82C (Share Premium) : Tax @ 3% was collected by SEC and it is final settlement of tax liability. Tax rate is also 3% as per Sec. 16E Capital Gain: Capital Gain from sale of machineries Income From other source: (1) Dividend Income (2) Sundry Income Tk. 30,000/Tk. 13,000/-
Tk. 2,224/Tk. 1,47,324/-
Tk. 30,000/Tk. 40,000/-
Tk. 43,000/Total Income = Tax Computation On Income other than Capital gain, share premium and dividend income @ 37.5 % (being non publicly traded company) (Tk. 2,60,324- 40,000-30,000-30,000)= 1,60,324 X 37.5% On share premium Tk. 30,000 @ 3% On Capital Gain @ 15% (40,000 X 15%) On Dividend @ 20% (30,000 X 20%) Less: Tax credit on TDS on dividend @ 20% Tax Credit on Premium @3% (Assuming TDS was made as per law) Tk. 6,000/Tk. 900/Net Tax Liability Tk. 6,900/Tk. 66,122/Tk. 2,60,324/-
(1)
(2) (3) (4)
Tk. 60,122/Tk. 900/Tk. 6,000/Tk. 6,000/Tk. 73,022/-
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Solution Question No. 5. Asa Electronics Calculation of Assessable Value: (10000x60x78) Insurance Landing Charge Assessable Value for Duty Customs Duty AIT Supplementary Duty (47740680+5728882 = 53469562) VAT (47740680+5728882+5346956 = 58816518) ATV (58816518 x 1.2667 = 74502883) Total Duty & Tax Per Unit Material Cost for Input VAT (47740680+5728882+5346956) Value Addition per unit 40+200+100+80+200 Total Cost Mark Up @ 20% Price for VAT Form-1 before VAT VAT 15% Sales Price per unit Input VAT per unit 8822478+2980115 for Material 200x15% Local Material B Total Input VAT per Unit Total Tk. 1,18,02,593 10000 units
1% 1% 12% 5% 10% 15% 4%
4,68,00,000 4,68,000 4,72,68,000 4,72,680 4,77,40,680 57,28,882 23,87,034 53,46,956 88,22,478 29,80,115 Per unit
Total Tk.
5,88,16,518
10000 units
5,881.65 620.00 6,501.65 1,300.33 7,801.98 1170.30 8,972.28 1,180.26 3.00 1,183.26 1,170.30 1,183.26 (12.96)
VAT per unit Sales Rebate per unit sales Per unit VAT liability after covering input VAT
= THE END =
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST 2013 EXAMINATION PROFESSIONAL LEVEL-III SUBJECT: 301. ADVANCED FINANCIAL ACCOUNTING-II Model Solution
Solution of question: 1 1(a):
MUTTAKEEN LTD Computation of Basic and Diluted EPS Particulars 1 For Basic EPS 2 Adjustment for Dilution 3 Tax Adjusted Interest on Convertible Debentures = Interest (100% Tax Rate) = (10,00,000 10 12%) (100% 37.50%) = 12,00,000 62.50% =Tk. 750,000 (ii) Weighted Average No. of Ordinary Shares (iii) EPS = (i) (ii) Given 50,00,000 Basic EPS = Tk. 2.00 10,00,000 1 = 10,00,000 60,00,000 Diluted EPS =Tk. 1.79 =Tk. 107,50,000 For Diluted EPS 4 = (2+3)
(i) Net Profit for the period attributable for Shareholders
EPS Tk.2 50,00,000 Shares = Tk.100,00,000
1(b):
MONYEM PHARMA AID LTD. Statement of operation in different industry segments as per IFRS-8
Amount (Tk. in millions) Plastic Health Food Inter Segment Particulars and and Other Consolidated Products Elimination Packing Science External Sales .. 5,595 553 324 155 6,627 Inter Segment Sales 55 72 21 7 (155) Total .. 5,650 625 345 162 (155) 6,627 Segment Expenses .. (3,335) (425) (222) (200) 122 (4,060) Operating Profit .. 2,315 200 123 (38) (33) 2,567 (562) General Expenses 132 Income from Investments (65) Interest Income from continuing operations 2,072 Identifiable Assets .. 7,320 1,320 1,050 665 -Corporate Assets Total Assets 10,355 722 11,077
Page 1 of 8
Solution of question: 2. MMH LTD Consolidated Statement of Financial Performance for the financial year ended 30 June 2013 Particulars Revenues from operating activities Sales .. Other .. Expenses from operating activities Cost of sales Other . Profit from operating activities before income tax Income tax expense .. Net profit . Net profit attributable to outside equity interests .. Net profit attributable to members of the parent entity .. Total change in equity other than those resulting from transactions with owners as owners Notes:
(1) Sales revenue
Notes (1) (2) (3) (4) (5) given
Amount (Tk.) 10,40,000 150,800 11,90,800 610,214 443,850 10,54,064 136,736 39,248 97,488 8,625 88,863 Tk. 88,863
Sales revenue Adjustment: Muaz Ltd to Mahran Ltd Mahran Ltd to MMH Ltd
MMH Ltd (Tk.) 400,000
Muaz Ltd (Tk.) 350,000
Mahran Ltd (Tk.) 320,000
Total (Tk.) 10,70,000 (20,000) (10,000) Tk. 10,40,000
(2) Other revenue
Other revenue Adjustment: Dividend paid Muaz Ltd: 80% x Tk.2,500 Dividend provided Muaz Ltd: 80% x Tk.5,000 = Tk.4,000 Mahran Ltd: 60% x Tk. 2,000 = Tk.1,200 Tk.5,200 Sale of machinery: Mahran Ltd to MMH Ltd Proceeds of Sale/Other Revenue
MMH Ltd (Tk.) 80,000
Total (Tk.) 2,00,000
(2,000)
(5,200) (42,000) Tk. 150,800
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(3) Cost of sales
Cost of sales Adjustment: Pre-acquisition At 1 July 2012: Inventory (cr.)Tk. 286 At 30 June 2013: Cost of Sales (cr.) Tk. 286 Unrealized profit in ending inventory: Muaz Ltd to Mahran Ltd Sales.. Dr Tk. 20,000 Cost of Sales... ..Cr 27,000 Inventory... Cr 3,000 Deferred Tax Asset .............. Dr 900 Income Tax Expense (30% x Tk.3,000).Cr.900 Unrealized profit in ending inventory: Mahran Ltd to MMH Ltd Sales.. Dr 10,000 Cost of Sales.. Cr 9,500 Inventory. Cr 500 Deferred Tax Asset .. Dr 150 Income Tax Expense (30% x Tk.500) Cr 150
MMH Ltd (Tk.) 210,000
Total (Tk.) 647,000 (286)
(27,000)
(9,500) Tk. 610,214
(4) Expenses from operating activities: Other
Other operating expenses Adjustment: Pre-acquisition: Muaz Ltd - Mahran Ltd At 30 June 2013: Amortization Expense Depreciation on machinery Depreciation Exp. (10% x Tk.1,500 p.a. ) / 2 Pre-acquisition: At 30 June 2013: Accumulated Depreciation-Plant Pre-acquisition: At 30 June 2013: Accumulated Depreciation-vehicles Sale of machinery: Mahran Ltd to MMH Ltd Proceeds of Sale/Other Revenue.. Dr 42,000 Machinery Dr 1,500 Carrying Amount of Machinery Sold Cr 43,500 Income Tax Expense Dr 450 Deferred Tax Liability Cr 450
MMH Ltd (Tk.) 180,000
Total (Tk.) 486,800 760 75 (171) (114)
(43,500) Tk. 443,850
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(5) Tax Expenses
Tax expense. Adjustment: Pre-acquisition: At 30 June 2013: Income Tax Expense Pre-acquisition: At 30 June 2013: Income Tax Expense Pre-acquisition: At 30 June 2013: Income Tax Expense Sale of machinery: Mahran Ltd to MMH Ltd Income Tax Expense Unrealized profit in ending inventory: Muaz Ltd to Mahran Ltd Sales.. Dr 20,000 Cost of Sales Cr 27,000 Inventory Cr 3 000 Deferred Tax Asset.. Dr 900 Income Tax ExpenseCr 900 (30% xTk.3,000) Unrealized profit in ending inventory: Mahran Ltd to MMH Ltd Sales. Dr 10,000 Cost of Sales.. Cr 9,500 Inventory.. Cr 500 Deferred Tax Asset Dr 150 Income Tax Expense .Cr 150 (30% x Tk.500) Depreciation on machinery Depreciation Expense Dr 75 Accumulated Depreciation Cr 75 (10% x Tk. 500 p.a.) / 2 Deferred Tax Liability.Dr 23 Income Tax Expense.. Cr 23 (30% x Tk.75 = Tk.23 rounded) Solution 3(a). H. Ltd. Consideration Plus non controlling interest (2000 x 30%) Less Net identifiable assets of F. Ltd. Gain on bargain purchase
MMH Ltd (Tk.) 22,000
Total (Tk.) 39,700 86 51 34 450
(900)
(150)
(23) Tk. 39,248
(Tk. 000) 750 600 1350 2000 650
The abridged consolidated statement of financial position at the date of acquisition will appear as follows: (Tk. 000) Assets = (8200 + Fair value of F. Ltd. 2800) Tk. 11,000 Share holders equity (6000+650 gain included in P/L 6650 Non controlling interest 600 Liabilities = (2950 + 800) 3750 Total equities & liabilities Tk. 11,000
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3(b)(ii) The first step in indentifying the reportable segments of in entity is to identify those which represent at least 10% of any of the entitys sales profit or assets. Exceeds of 10% of Quality Nature of business Total Sales Total Profit/ absolute Total assets = $ 1975 loss = $ 232 2303 Beer Yes Yes Yes Yes Beverage No No Yes Yes Hotel Yes Yes Yes Yes Retail Yes No No Yes Packaging Yes Yes Yes Yes Geographical Areas Find land Yes Yes Yes Yes Frame No No Yes Yes United Kingdom Yes Yes Yes Yes Australia Yes Yes Yes Yes * * * The second step would be to check if total external revenue attributable to reportable segments constitutes at least 75% of the total consolidated or entity revenue of $ 13,613,000. As all operating segments qualify as reportable segments, the external revenue requirement of 75% is met. If that had not been the case, IFRS-8 would have required that additional operating segments be identified as reportable even they do not meet the 10% thresholds in step one.
Solution Question No. 4: Required(i): GDP at Market Price Less Indirect taxes Add: Subsidy Add: Capital Grant GDP at factor cost Required(ii): GDP at factor cost Add the followings:Property from abroad Export Less the followings:Property from domestic NNP at factor cost National Income (NI) NNP at factor costs Less Capital Consumption (depreciation) National Income (6,550) 2,500 1,500 Tk. in million 37,250 (2,550) 34,700 34,700 1,730 6,350 6,970 34,580 8,080 (8,200) 34,580 34,580 2,720 31,860
Required(iii):
Solution No. 5(a) Journal entries recorded by R & Co, for investment in S & Co. ordinary shares during 2012: (1) Cash Investment in S & Co. ordinary shares (To record equity method dividend received from Subsidiary Tk. 5,000*0.8) (2) Investment in S & Co. ordinary shares Income from Subsidiary 6,400 6,400 4,000 4,000
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(To record equity method income of subsidiary Tk. 8,000*0.8) (3) Income from Subsidiary Investment in S & Co. ordinary shares (To amortize differential related to building and equipment depreciation) Additional computation: Investment in S & Co. Ordinary Shares Balance, January 1, 2012 Reported income Dividend Declared Depreciation Expense Balance, December 31, 2012 Solution 5(b) Eliminating Journal Entries needed to prepare consolidated financial statements. (a) Income from Subsidiary Dividend declared Investment in S & Co. ordinary shares (To eleminate income from subsidiary) (b) Income to Noncontrolling Interest Dividend declared Noncontrolling Interest (To assign income to noncontrolling interest: Subsidiary net income Less: Ending inventory unrealized profit Add; Beginning inventory realized profit Add: Realized excess depreciation Noncontrolling interest (20%) ('c) Ordinary Shares - S & Co. Share Premium Retained Earnings, January 1 Differentials Investment in S &Co. ordinary shares Noncontrolling Interest (To eleminate beginning investment in S & Co. ordinary shares) (d) Building & Equipment Differential Accumulated Depreciation (To eleminate differential) 8,000 5,600 2,400 8,000 (2,000) 1,600 500 8,100 1,620 20,000 4,000 43,000 5,600 59,200 13,400 1,620 1,000 620 5,600 4,000 1,600 59,200 6,400 (4,000) (800) 60,800 800 800
Page 6 of 8
(e) Depreciation expense Accumulated Depreciation (To amortize differential for depreciation) (f) Retained Earnings, January 1 Noncontrolling Interest Cost of goods sold (To eliminate beginning inventory profit: 1,600 x 80% = 1,280; and 1,600 x 20% = 320.) (g) Sales Cost of goods sold Inventory (To eliminate upstream sale of inventory.) (h) Building & Equipment Retained Earnings, January 1 Accumulated Depreciation (To eliminate unrealized gain on equipment.) (i) Accumulated Depreciation Retained Earnings, January 1 Depreciation & amortization (To eliminate excess depreciation on equipment.) (J) Accounts Payable Accounts Receivable (To eleminate inter company receivable/payable) Solution 5(c) R & Co. with its subsidiary S & Co.
800 800 1,280 320 1,600
9,000 7,000 2,000 5,000 4,000 9,000 1,000 500 500 2,000 2,000
Equity-Method Work Paper for Consolidated Financial Statements For the year ended December 31, 2012 Holding Items Sales Other income Income from Subsidiary Credits Cost of Goods Sold Depreciation & Amortization Other Expenses Debits Income to Noncontrolling interests R &Co. Tk. 100,000 4,080 5,600 109,680 83,200 6,000 4,800 94,000 56,000 40,400 4,000 3,600 48,000 b) 1,620 e) 800 (f) (g) (i) 1,600 7,000 500 115,000 10,300 8,400 133,700 (1,620) Subsidiary S & Co. Tk. 50,000 6,000 a) 5,600 g) Eliminations Debit Tk. 9,000 Credit Tk. Group Consolidated Tk. 141,000 10,080 151,080
Page 7 of 8
Net income c/f Retained Earnings, January 1
15,680 69,180
8,000 43,000 c) f) h)
17,020 43,000 1,280 4,000 17,020 (a) (b) 65,300 (j) (g) (d) h) 8,000 5,000 (a) (c) c) 5,600 1,000 (d) (d) (e) (h) (i)
9,100
15,760
500 9,100 4,000 1,000 14,600 2,000 2,000
64,400 15,760 (10,000) 70,160 28,060 28,000 54,000 213,000
Net income b/f Dividend Declared Retained Earnings, December, 31 c/f Cash Accounts Receivable Inventory Buildings & Equipments Investment in S & Co. Ordinary Shares Differential Debits Accumulated Depreciation
15,680 10,000) 74,860 26,060 16,000 34,000 120,000 60,800
8,000 (5,000) 46,000 2,000 14,000 22,000 80,000
1,600 59,200 5,600 2,400 800 9,000 97,200 21,040 80,000 960 40,000 14,600 70,160 13,700 323,060 323,060
256,860 62,000
118,000 24,000 i)
Accounts Payable Bonds Payable Bond Premium Ordinary Shares Share Premium Retained Earnings Noncontrolling Interests Credits
20,000 60,000 40,000 74,860
3,040 20,000 960 20,000 4,000 46,000
j)
2,000
(c) (c) (f)
20,000 4,000 65,300 320 111,220 (b) (c) 620 13,400 111,220
256,860
118,000
= THE END =
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST 2013 EXAMINATION PROFESSIONAL LEVEL-III SUBJECT: 302. ADVANCED COST ACCOUNTING
Model solution of question no. 01 Requirement 1(a): Costs computed in a cost of production report are useful in determining inventory costs and in computing the cost of goods sold. Unit costs should compare with standard unit costs or previous data to determine whether they represent efficient operations. Also, materials, labor and overhead must be reported by items of materials used, type of labor operations involved and overheads incurred information is to be reported in a cost of production report are necessary but reports must also be designed to assist control of costs. Requirement 1.b (1): Particulars Transferred out Less: Beginning Inventory (all units) Started and finished this period Add: Beginning Inventory (work this period) Add: Ending Inventory Equivalent Production Working in process- Beginning Inventory Cost added by department Materials Direct labour Factory overhead Total cost to be accounted for Miracle Mix: Particulars Beginning Inventory From December 12 purchase Total December usage Bypro- from Beginning Cost of materials added during December Western Corporation Materials Units 19000 3000 16000 1000 6000 23000 Tk. 52,000 Tk. 92,000 Tk. 1,54,000 Tk. 1,98,000 Tk. 4,96,000 Conversion Cost (Units) 19000 3000 16000 1500 4500 22000
Units 62,000 21,200 83,200 50,000
Unit Cost Tk. 1.00 Tk. 1.25
Amount Tk. 62,000 Tk. 26,500 Tk. 88,500 Tk. 3,500 Tk. 92,000
Tk. 0.07
Fabricating Department Factory Overhead Allocation of service department factory overhead: Maintenance Tk. 30,000 Time keeping and personnel Tk. 16,500 Others Tk. 19,500 Cost of factory O/H during December
Tk. 1,32,000
Tk. 66,000 Tk. 1,98,000
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Requirement 1.b (2-ii): Materials (Tk. 92000/23000) Direct labour (Tk. 154000/22000) Factory Overhead (Tk. 198000/22000) Total Unit Cost Requirement 1.b (2-iii): Transferred to Finishing Department: From beginning inventory: Inventory, December 1 Material added (3000 x 1/3 x Tk. 4.00) Direct labour added (3000 x 1/2 x Tk. 7.00) Factory Overhead added (3000 x 1/2 x Tk. 9.00) From current production: Units started and finished (16000 x 20) Total cost of units transferred to Finishing Department Work in process inventory, December 31: Material (6000 x Tk. 4.00) Direct labour added (6000 x 3/4 x Tk. 7.00) Factory Overhead added (6000 x 3/4 x Tk. 9.00) Total Cost of Work in process inventory Requirement 1.b (3): Equivalent Production: Transferred out Ending Inventory Material units 19,000 6,000 25,000 Conversion cost units 19,000 4,500 23,500 Tk. 4.00 per unit Tk. 7.00 per unit Tk. 9.00 per unit Tk. 20.00 per unit
Tk. 52,000 Tk. 4,000 Tk. 10,500 Tk. 13,500
Tk. 80,000 Tk. 3,20,000 Tk. 4,00,000
Tk. Tk. Tk. Tk.
24,000 31,500 40,500 96,000
The total fabricating department cost to be accounted for is the same as shown in answer Unit cost for materials labor and factory overhead: Material :Tk. 13,000 + TK. 92,000 = Tk. 1,05,000; Tk. 1,05,000/25,000 = Tk. 4.20 per unit Labor :Tk. 17,500 + Tk. 1,54,000 = Tk. 1,71,500: Tk. 1,71,500/23,500 = Tk. 7.30 per unit Factory O/H:Tk. 21,500 + Tk. 1,98,000 = Tk. 2,19,500: Tk. 2,19,500/23,500 = Tk. 9.34 per unit Total Unit Cost = Tk. 20.84 per unit Cost of units transferred to Finishing Department: 19000 x Tk. 20.84 per unit = Tk. 395960. To avoid a decimal discrepancy, the cost transferred to the Finishing Department is computed as follows: Tk. 496000- Tk. 100080 (Ending Work in Process inventory cost) = Tk. 395920 Cost of ending work in process inventory in the Fabricating Department: Work in Process Inventory, December 31: Material : (6000 x Tk. 4.20) Tk. 25,200 3 Labor : (6000 x /4 x 7.30) Tk. 32,850
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Factory O/H
: (6000 x 3/4 x 9.34)
Tk. 42,030 Tk. 1,00,080
Solution to Question No. 2(b): Required: (i) Finishing is a bottleneck operation. Therefore, producing 1,000 more units will generate additional throughput contribution and operating income. Increase in throughput contribution (720 320) x 1,000 Tk. 4,00,000 Incremental costs of Jigs and Tools Tk. 3,00,000 Net benefit of investing in Jigs and Tools Tk. 1,00,000 Ottobi should invest in the modern Jigs and tools because the benefit of higher throughput contribution Tk. 4,00,000 exceeds the cost of Tk. 3,00,000. The Machining Department has excess capacity and is not a bottleneck operation. Increasing its capacity further will not increase throughput contribution. Therefore no benefit from spending Tk. 50,000 to increase the Machining Departments capacity by 10,00 units. Ottobi should not implement the change to do setups faster. Finishing is a bottleneck operation. Therefore getting an outside contractor to produce 12,000 units will increase contribution: Increase contribution (720 320) x 12,000 Tk. 48,00,000 Incremental contracting cost 12,00,000 Net benefit Tk. 36,00,000 Ottobi should contract with an outside contractor to do 12,000 units for finishing at Tk. 100 per unit because the benefit of higher throughput contribution of Tk. 48,00,000 exceeds the cost of Tk. 12,00,000. The fact that the cost of Tk. 100 per unit is double Ottobis finishing cost of Tk. 50 per unit is irrelevant. Operating costs in the Machining Department of Tk. 64,00,000 or Tk. 80 per unit, are fixed costs. Ottobi will not save any of these cost by subcontracting machining of 4,000 units to Mumbai Corporation. Total cost will be greater by Tk. 1,60,000 (Tk. 40 x 4,000) under the subcontracting alternative. Machining more filling cabinets will not increase throughput contribution, which is constraints by the finishing capacity. Ottobi should not accept Mumbais offer. The fact that Mumbai Corporations cost of Machining per unit are half of what is costs Ottobi in house is irrelevant.
(ii)
(iii)
(iv)
Model solution of the question no. 2(c) To record actual conversion costs: Conversion Costs Various Accounts To record finished goods: Finished Goods (7,900 x Tk. 200) Inventory Materials and In Process Control (7,900 x 115) Conversion cost allocated(7,900 x 85) Tk. 1,580,000 Tk. 9,08,500 Tk. 6,71,500 Tk. 435,000 Tk. 435,000
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To record sale of 7,600 units: Cost of Finished Goods Sold (7,600 x 200) Finished Goods Solution to Question No. 3(b):
Tk. 1,520,000 Tk. 15,20,000
Required: (i) A statement showing allocation of Joint Cost applying NRV method). Product Output (In Gallon) 2,80,000 3,40,000 2,00,000 Selling Price (Per Gallon) 2.30 2.00 2.80 Gross Sales Value 6,44,000 6,80,000 5,60,000 Further Cost 1,08,000 62,000 80,000 NRV Share of Joint Cost 1,07,594 1,24,054 96,352 3,28,000
Gasoline Heating Oil Jet Fuel
5,36,000 6,18,000 4,80,000 16,34,000
(ii) Eastern Refinery Co. Product Line Income Statement Particulars Actual Sales Joint cost + Cost incurred + Disposable cost Total costs Profit Gasoline 6,44,000 1,07,594 1,00,000 8,000 2,15,594 4,28,406 Heating Oil 6,80,000 1,24,054 60,000 2,000 1,86,054 4,93,946 Jet Fuel 5,60,000 96,352 70,000 10,000 1,76,352 3,83,648 Total Costs 18,84,000 3,28,000 2,30,000 20,000 5,78,000 13,06,000
Model solution of the question no. 3(c) Cost reduction when produced Tk. 480,000 480,000 332,000 4,080 327,920 152,080 332,000 0 332,000 151,000 Revenue when sold 480,000 3,000 483,000
Sales: Lumber shavings(500 x 0.6) Total Sales: Cost of Good Sold: Total manufacturing costs By-product Total COGS Gross Margin
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Model solution of the question no. 4(b) Requirement b(i): Total Revenue of the life cycle product sales: 1st Year2nd Year3rd Year4th Year5th Year3000X250= 4500X250= 4800X250= 5000X175= 1500X175= Total Tk. 7,50,000 Tk. 11,25,000 Tk. 12,00,000 Tk. 8,75,000 Tk. 2,62,500 Tk. 42,12,500
Less desired profit:1st Year = 3000 (250 X 20%) = Tk. 1,50,000 2nd Year = 4500 (250 X 20%) = Tk. 2,25,000 3rd Year = 4800 (250 X 20%) = Tk. 2,40,000 Tk. 1,75,000 4th Year = 5000 (175 X 20%) = 5th Year = 1500 (175 X 20%) = Tk. 52,500 Tk. 8,42,500 Total Life Cycle Cost of the product Tk.33,70,000 Less variable selling expenses = (18,800 X 30) = 5,64,000 Fixed selling expenses (3,50,000 X 5) = 17,50,000 23,14,000 Cost assigned to manufacture of 18,800 unitsTk. 10,56,000 Manufacturing cost per unit = (10,56,000 18,800) = Tk. 56.17 Requirement b(ii): Cost to manufacturing of productions in 1st year = (3000 X 65) = Tk. 1,95,000. Cost remaining to last 4 years = (10,56,000 1,95,0000 = Tk. 8,61,000. Cost per unit = 8,61,000 15,800 = Tk. 54.49 Requirement b(iii): Expected total manufacturing cost (18,800 X 70) = 13,16,000 Less calculated life cycle manufacturing cost = 10,56,000 Excess cost to be increased Tk. 2,60,000 Expected profit will = (8,42,500 2,60,000) = Tk. 5,82,500 Comment:- The company should reduce the variable cost by (5,64,000 2,60,000) = Tk. 3,04,000 to maintain the target profit margin or to increase the selling price in 4th and 5th year by the same amount Tk. 2,60,000 i.e. per unit sale price would Tk. 215 per unit.
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST 2013 EXAMINATION PROFESSIONAL LEVEL-IV SUBJECT: 401. FINANCIAL MANAGEMENT Solution Solution Question No. 1. MN Ltd. Required-(a): Determination of for each project. [ j Corjm m] Project (j) Correlation with market (Corjm) Beta () SD( ) SD( m) 1 15 0.55 13 0.63 2 20 0.75 13 1.15 3 14 0.84 13 0.90 4 18 0.62 13 0.86 or (20 x .75)/13 = 1.15 Return of the project by applying CAPM [Kef + (Km Krf) ] Project 1. 5% + (14% - 5%) x .63 = 10.67% 2. 5% + (14% - 5%) x 1.15 = 15.35% 3. 5% + (14% - 5%) x .90 = 13.10% 4. 5% + (14% - 5%) x .86 = 12.74% Return of the combined projects representing MN Ltd.s total return Expected return* = (10%x.28)+(18%x.17)+(15%x.31)+(13%x.24) = 13.63% Return as per CAPM = (10.67%x.28)+(15.35 x.17)+(13.10x.31)+(12.74%x.24) = 12.72% * MN Ltd. Share price is currently based on assumption that the last five years experience of returns will continue for the foreseeable future. The Shares are over valued because the return as per CAPM is less than the expected return. Required-(b): For the following reasons the results in (or) above might not correctly identify whether or not the share price of MN Ltd. is under valued or over valued. (i) The above required returns of the four projects are determined by applying Capital Asset Pricing Model. CAPM is based on some unrealistic assumptions which are not always valid in the real world. (ii) Beta is not always able to measure the risk of an investment and that the above there is significant correlation between beta and the expected return. Sometime, the empirical result gives a mixed result. (iii) Most of the time beta is based on historical data due to unavailability of future data. (iv) Investor can use historical beta as the measure of future risk only if it is stable over time. But in practice, the betas of individual securities are not stable over time. This implies that historical betas are poor indicator of the future risk of securities. Solution Question No. 2. Required (i): Swap ratio:(1) Market price per share (Market Capitalization/Nos. of Shares (2) Earning per share = (Market price/P/E Ratio) (3) Book value per share:Share Capital (Tk. in lacs) Reserves and surplus (Tk. in lacs) Earnings for the year. (EPS x Nos. of Shares) (4) Value for acquisition purpose:Earnings = (5 x 40%); (20 x 40%) Page 1 of 8
Efficient Ltd. 50 5 100 300 50 450 = 2
Healthy Ltd. 100 20 75 165 150 390 8
(5) (6)
11 13 18 35 31 56 Total value of the company = (Nos. of shares x value of acquisition per share). Nos. of shares to be given to Healthy Ltd. Shareholders = (750,000 x 56)/31 = 13,54,839 Swap ratio = Efficient Ltd. 13,54,839 = Healthy Ltd. 750,000 shares. Promoters holders% Promoters share
Book value = (45 x 25%); (52 x 25%) Market price = (50 x 35%); (100 x 35%)
= =
500,000 x13,54,839 750,000
Efficient Ltd. 4.75,000 525,000 10,00,000 47.50%
Healthy Ltd. 9,03,226 4,51,613 13,54,839 66.67%
Total 13,78,226 9,76,613 23,54,839 58.53%
Other share holders Promoters holding %
Required (ii): EPS of Efficient Ltd. after acquisition Earning per share before acquisition = (Market price / P/E Ratio) [(500 / 10) 10] Earnings:Efficient Ltd. (before acquisition) Healthy Ltd. Nos. of shares out standing EPS
5 50,00,000 1,50,00,000 2,00,00,000 23,54,839 Tk. 8.49 per share
Required (iii): Expected market price per share = EPS x P/E ratio = (8.49x10) = Tk. 84.9 Expected market capitalization = [23,54,839 x 8,493] = Tk. 200,00,000. Answer to the Question No. 3 (a) Calculation of EpS, DpS and gearing at both book values and market values EpS Share in issue(million) Earnings in year ended 31.03.13(Tkm) EpS DpS Share in issue(million) Dividend paid in year (Tkm) DpS Gearing at book values Debt(Tkm) Less: Surplus cash(Tkm) Net Debt(Tkm) Equity(Tkm0 Gearing at Book Value Gearing at matket values Debt(Tkm) Less: Surplus cash(Tkm) Net Debt(Tkm) Equity(Tkm) Notes/workings 350 280 0.800 =280/350
350 89.6 0.256 550 (110.40) 439.60 1,210.40 26.60%
= 89.6/350
=215-89.6-15 =550-110.4 =350+950-89.6 =439.60/(439.6+1210.40)
550 (110.40) 439.60 1,583.4
=215-89.6-15 =550-110.4 =(350 x 4.78)-89.6 Or 350 x ex-div share price of 4.524
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Gearing at Market Value
21.70%
(Where 4.524 = 4.78-0.256) =439.60/(439.6+1,583.40)
(b) Calculation of likely impact of the three proposed strategies for dealing with surplus cash Assumption All the surplus cash of Tk 110.40 million is used either to repurchase shares or to pay bonuses. (Alternative assumptions were also acceptable) Preliminary workings Based on an ex div share price of 4.524 (=4.78-0.256), the number of share to be repurchased is 24.40 million ( = 110.4m/4.524), leaving 325.60 million shares in issue. 1.Holding onto Cash No Change 0.800 0.800 Nil No Change 0.256 0.256 Nil No Change 2. Repurchase Shares 280.00 325.60(Workings) 0.860 0.800 Up 0.06 long term 89.60 325.60 0.275 0.256 Up 0.02 550.0 (No surplus cash) 1100.00 =350+950-89.6-110.4 33.30% 26.60% Up by 6.70% Pay Bonuses 169.60 (=280-110.4) 350.00 0.485(single year impact) 0.800 Down 0.315 in that year No Change 0.256 0.256 Nil As for share repurchase
EpS Number of Shares(m) New EpS Previous EpS Impact DpS Dividend(Tkm) Number of Shares(m) New DpS Previous DpS Impact Gearing at Book Value Net Debt (Tkm) Equity (Tkm) New gearing Previous gearing Impact Gearing at Market Value Net Debt (Tkm) Equity (Tkm)
26.60% 26.60% Nil
33.30% 26.60% Up by 6.70%
No Change
New gearing Previous gearing Impact
21.70% 21.70% Nil
550.0 1,473.00 =(350 x4.78)-89.6110.4) 27.20% 21.70% Up by 5.5%
As for share repurchase
27.20% 21.70% Up by 5.5%
(C) Evaluate impact on attainment of financial objectives and on shareholder wealth 1. Retain Cash Three reasons or motives have been advanced for individuals and companies to hold cash transaction, speculative and precautionary. Each is commented on briefly below: Page 3 of 8
The transaction reason if SRP has sufficient cash to meet day to day transactions it has no need of additional cash for this reason. The speculative motive would allow the company to take advantage of opportunities such as buying assets at temporarily favourable prices or making an investment. This would be a logical reason for SRP to hold cash even if it has no potential immediate investment opportunities. The precautionary motive would allow SRP to maintain a safety cushion or buffer to meet unexpected cash needs. Given the long term nature of SRPs contracts, its cash flow is fairly predictable so less cash is needed for precautionary needs. However, the surplus cash is approximately equivalent to just one years dividend payment and so may not seem to be an excessive cash buffer.
On the downside, shareholders are missing out on the income that they could obtain by investing the funds elsewhere. With 5.3% of total assets held in the form of surplus cash (where 5.3% = Tk 110.4 million/ Tk. 2,075 million x 100%) and therefore earning little or no return, shareholders will prefer to be given the cash back so that they can invest it elsewhere and enhance their returns. However, if SRP thinks investment opportunities might be available in the not too distant future; shareholders may be willing to forego receiving the cash now in the expectation of even greater returns in the future. 2. Share repurchase The advantage to shareholders is that selling shares back to the company allows them to raise cash with no transaction costs. Not all will want to sell, but SRP is only aiming to purchase around 7% of the shares in issue. The make-up of the shareholders is relevant here in terms of the potential success of any repurchase scheme, as institutional investors are far less likely to participate in a share repurchase than smaller scale investors as they tend to be more concerned with regular income. However, 30% of the shares are held by small investors who might welcome the chance to realise their investment. The advantage to the company in the long term is an opportunity to increase DpS at the same total level of dividend payment or, alternatively, keep DpS at the same level and reduce total dividend payments, retaining cash for future investment. EpS will similarly increase due to the lower number of shares. Shareholder wealth should not be affected, their share holding will be worth less (reflecting fewer shares) but they are now holding additional cash. If this cash can be invested profitably, this should lead to an increase in shareholder wealth in the medium term. However, there is an almost inevitable trade-off between risk and reward here. The riskiness of the equity will increase due to the higher gearing levels. Gearing will increase from 26.7% to 33.3% based on book values. The share repurchase is unlikely to have much effect on the overall cost of capital as the increased use of lower cost debt is likely to be offset by higher returns required on equity. The tax benefit of debt is not relevant as there is no impact on gross debt here. On a practical note, the companys articles of association must be checked to ensure they permit a share repurchase. 3. Bonuses to directors and employees The payment of bonuses reduces shareholder wealth (and reserves) by the amount paid out. It is of little benefit to shareholders unless it leads to the retention of key employees or leads to higher profits as a result of more highly motivated staff in the future. In either Page 4 of 8
case, a long term bonus plan is likely to be of more benefit to the company than large one-off payments at this time. The directors bonuses need to be referred to a remuneration committee before amounts are determined. Indeed, director bonuses need also to be approved by shareholders, something that is not always guaranteed, as has been seen in the UK in the recent past. Gearing would increase to 33.3% (based on book values and using 31 March 2013 figures) due to an increase in net debt and a decrease in reserves the same effect as for under the share repurchase. But for a manufacturing company with substantial assets this is still a modest rate. SRP should consider amending its gearing objective from 30% to, say, 35%. Answer to the Question No. 4 4(a) A break point will occur each time a low cost type of capital is used up. We establish the break points as follows after first noting that LEI has Tk. 24,000 of Retained Earnings: Retained earnings Breaking point = = (Total earnings)(1-payout) = Tk. 34,285.72 x 0.7
Capital Used Up Retained Earnings 10% floatation common 5% floatation preferred 12% Debt 14% Debt
BPRE = BP10%E = BP5%P = BP12%D = BP14%D =
Break Point Calculation = Tk. 40,000 = Tk. 60,000 = Tk. 50,000 = Tk. 20,000 = Tk. 40,000
Breaking Number 2 4 3 1 2
Summary of Break Points (1) There are three common equity costs and hence two changes and, therefore, twoequity-induced breaks in the MCC. There are two preferred costs and hence one preferred break. There are three debt costs and hence two debt breaks. (2) The number in the third column of the table designate the sequential order of the breaks, determined after all the break points were calculated. Note that the second debt break and the break for retained earnings both occur at Tk. 40,000 (3) The first break point occurs at Tk. 20,000, when the 12% debt is used up. The second break point, Tk. 40,000, results from using up both retained earnings and the 14% debt. The MCC curve also rises at Tk. 50,000 and Tk. 60,000 as preferred stock with a 5% flotation cost and a common stock with a 10% floatation cost, respectively are used up. 4(b) Common costs within indicated total capital intervals are as follows: Retained Earnings (used in interval Tk. 0 to Tk. 40,000): ks = +g= = + 0.09 = 0.0654 + 0.09 = 15.54% Common with F = 10%( Tk. 40,0001 to Tk. 60,000) : ke = +g= + 9% Common with F = 20%( Over Tk.60,000) : = 16.27%
Page 5 of 8
ke =
+ 9%
= 17.18% = 11.58% = 12.22% = 7.20% = 8.40%
Preferred with F = 5%( Tk. 0 to Tk. 50,000) : +g= kp = Preferred with F = 10%( Over Tk. 50,000) : kp = Debt at kd = 12%(Tk.0 to Tk. 20,0000) kdt = kd(1-T) = 12%(0.6) Debt at kd = 14%(Tk. 20,001 to Tk. 40,0000) kdt = kd(1-T) = 14%(0.6) Debt at kd = 16%(over Tk. 40,0000) kdt = kd(1-T) = 16%(0.6) 4(c)
= 9.60%
WACC calculations within indicated total capital intervals: (1) Tk 0 to Tk. 20,000 (debt = 7.2%, preferred = 11.58% and retained earnings = 15.54%) WACC1 = W d kdt + W p kp + W s ks
= 0.25(7.2%) + 0.15(11.58%) + 0.60(15.54%) = 12.86%
(2) Tk 20,001 to Tk. 40,000 (debt = 8.4%, preferred = 11.58% and retained earnings = 15.54%) WACC2 = 0.25(8.4%) + 0.15(11.58%) + 0.60(15.54%) = 13.16% (3) Tk 40,001 to Tk. 50,000 (debt = 9.6%, preferred = 11.58% and equity = 16.27%) WACC3 = 0.25(9.6%) + 0.15(11.58%) + 0.60(16.27%) = 13.90% (4) Tk 50,001 to Tk. 60,000 (debt = 9.6%, preferred = 12.22% and equity = 16.27%) WACC4 = 0.25(9.6%) + 0.15(12.22%) + 0.60(16.27%) = 14.000% (5) Over Tk. 60,000 (debt = 9.6%, preferred = 12.22% and equity = 17.18%) WACC5 = 0.25(9.6%) + 0.15(11.58%) + 0.60(17.18%) = 14.54% 4(d) IRR calculation for Project E PVIFAk,6 = = 3.6847 This is the factor for 16 percent , so IRRE=16%
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4(e) LEI should accept Projects B, E and C. It should reject Projects A and D because their IRRs do not exceed the marginal costs of funds needed to finance them. The firms capital budget would be total Tk. 40,000. Answer to the Question No. 5 5(1) = 2.5 = CL = CA Working capital = CA-CL = 1,56,000 Or 2.5 CL-CL = 1,56,000 Or CL = = 1,04,000
CA = 2.5 CL = 1,04,000 x 2.5 = 2,60,000 = 1.5 Or = 1.5
Or Quick Assets = 1.5 x 80,000 = 1,20,000 Closing Stock = CA Quick Assets = 2,60,000 1,20,000 = 1,40,000 Opening stock = x 1,40,000 = 1,12,000
(as closing stock is 25% higher than opening stock) Av stock = = 1,26,000
Cost of sales = Av. Stock x stock velocity = 5 x 1,26,0000 = 6,30,0000 Gross profit = 20% of sales i.e. 25% of cost of sales = 25% of 6,30,0000 = 1,57,500 Sales = cost of sales + gross profit = 6,30,000 + 1,57,500 = 7,87,5000 Net profit = 10% of 7,87,500 = 78,750 Debtors velocity = 1 month = 65,625 Propriety Ratio = = 0.4 Equity = = 3,90,0000 = 0.6 i.e.
Fixed Assets = 3,90,0000 x 0.6 = 2,34,000 Cash at Bank = Quick Assets Debtors = 1,20,000 65,625 = 54,375
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Share Capital Reserve and Surplus (Bal Fig) Retained Earnings Equity Current Liabilities Creditors Bank OD
Balance Sheet as on 31.12.2012 Tk 2,00,000 Fixed Assets Less : Dep 1,11,250 78,750 1,90,0000 Current Assets 3,90,0000 Stock Debtors Cash at Bank 1,04,000 4,94,000
26,000
Tk 2,60,000 2,34,000
1,40,000 65,625 54,375 2,60,000 4,94,000
80,000 24,000
Share Capital Reserve and Surplus General Reserve Retained Earnings Net Profit Current Liabilities Creditors Bank OD
Balance Sheet as on 31.12.2013 Tk 2,00,000 Fixed Assets Add: Additions 1,11,250 Less : Dep 78,750 1,13,695
Tk 2,34,000 40,000 2,74,000 40,000
2,46,600
1,92,445 Current Assets Stock 1,80,000 Debtors(1/12 of sales) 75,797 Cash at Bank 1,06,298 3,62,095 1,05,000 6,08,695 6,08,695
1,00,000 5,000
Income Statement for the year ended 31.12.2013 Tk Tk Sales 7,87,500 Add: Volume increase 10% 78,750 8,66,250 Add: Price Increase 43,312 9,09,562 Cost of goods sold: Opening Stock Add : Purchase (Bal Fig) Cost of goods available for sale Less : Closing Stock Gross Profit (25% of sales) Expenses Depreciation (10% on [ 2,34,000 + 40,000] Expenses (Bal Fig) Net Profit(12.5% on sales
1,40,000 7,22,172 8,62,172 1,80,000 6,82,172 2,27,390 27,4000 86,295 1,13695 1,13,695
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST 2013 EXAMINATION PROFESSIONAL LEVEL IV SUBJECT: 402.STRATEGIC MANAGEMENT ACCOUNTING
Solutions to the questions

Solution to Question No. 1. (a) (b) No, not all fixed costs are sunk- only those for which the cost has already been irrevocably incurred. A variable cost can be a sunk cost, if it has already been incurred. No, a variable cost is a cost that varies in total amount in direct proportion to changes in the level of activity. A differential cost measures the difference in cost between two alternatives. If the level of activity is the same for the two alternatives, a variable cost will be unaffected and will be irrelevant. Test for optimality: number of allocation = m+n-1 where there are m rows and n columns. The allocations are independent i.e. if no loop can be formed by them. Here, No. of factories + No. of destination + dummy-1 = m+n+1 - 1 = 3+4+1 -1 = 7. Hence, there should be exactly 7 allocations. Solution to Question No. 2(a). (i) The transfer price of Tk.750 proposed by the IT division is based on cost plus 150% from which it can be deducted that the total cost of a consulting day is (100/250) x Tk.750 = Tk. 300. This comprises Tk.240 (80%) variable cost and Tk.60 (20%) fixed cost. In this instance the transfer price should be set at marginal costs plus opportunity cist. It is assumed in this situation that transferring internally would result in the IT division having a lost contribution of Tk.750 Tk.240 = Tk.510 per consulting day. The marginal cost of the transfer of services to the HR division is Tk.190 (Tk.240 external variable cost less Tk50 saving due to use of internal video-conferencing equipment). Adding the opportunity cost of Tk.510 gives a transfer price of Tk.700 per consulting day. This is equivalent to using market price as a basis for transfer pricing where the transfer price is set at the external market price (Tk.750) less any costs avoided (Tk50) by transferring internally. There is in effect on external market available for one of the required pairs of consultants within the IT division and therefore opportunity cost will not apply and transfers should be made at the variable cost per consulting day of Tk.190. The other pair of consultants, who would be 100% utilized in providing consulting services to external clients, should be charged at a rate of Tk.700 per day which represents marginal cost plus opportunity cost. The lost contribution from the major client amounts to Tk.2,64,000/(2x240) =Tk.550 less variable costs of Tk.240 = Tk.310 per consulting day. Thus, in this instance the transfer price should be the contribution foregone of Tk310 plus internal variable costs of Tk.190 making total of Tk.500 per consulting day.
(c)
(ii)
(iii)
Solution to Question No. 2(b). Negotiated transfer prices suffer from the following limitations: The transfer price which is the final outcome of negotiations may not be close to the transfer price that would be optimal for the organization as a whole since it can be dependent on the negotiating skills and bargaining power of individual managers. They can lead to conflict between divisions which may necessitate the intervention of top management to mediate. The measure of divisional profitability can be dependent on the negotiating skills of managers who may have unequal bargaining power. They can be time-consuming for the managers involved, particularly where large numbers of transactions are involved.
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Solution to Question No. 3(a) In traditional cost systems, product-level costs are indiscriminately spread across all products using direct labor-hours or some other allocation base that is tied to volume. As a consequence, high-volume product are designed the bulk of such costs. If a product is responsible for 40% of the direct labor in a factory, it will be assigned 40% of the manufacturing overhead cost in the factory- including 40% of the product level costs of low-volume products. In an activity based costing, batch level and product level costs assigned are more appropriate. This results in shifting product-level costs back to the products that cause them and away from the high-volume products. (A similar effect will be observed with batch-level costs if high-volume products are produced in larger batches than low volume products). Solution to Question No. 3(b) Working Notes: (i) Overhead costs Tk. Set-up 20,500 Inspection 146,000 Machines 284,000 Selling 324,000 Total 774,500 As per conventional system, total O/H of Tk.774,500 is to be allocated on the basis of no. of units sold i.e. in the ratio of 50 : 112 : 54 or 50/216, 111/216 and 54/216. (ii) P Q R Overheads (Tk.) 179,282.41 401,592.59 193,625.00 Gross units / production run 5040 5620 6020 Defective units / production run 40 20 20 Good units / production run 5,000 5,600 6,000 Sale of good units 50,000 112,000 54,000 No. of production runs 10 20 9 Gross production required (units) 50,400 112,400 54,180 Prime cost (Tk.) 50,400 12 112,400 9 54,180 8 = 604,800 = 1,011,600 = 433,440 (i) Statement of profitability as per conventional system Products P Q R (Tk.) (Tk.) (Tk.) Sales value 50,000 18 = 112,000 14 = 54,000 12 = 1,568,000.00 648,000.00 900,000 Prime cost 604,800.00 1,011,600.00 433,440.00 401,592.59 193,625.00 Overheads 179,282.41 1,413,192.59 627,065.00 Total cost 784,082.41 154,807.41 20,935.00 Profit 115,917.59 Working notes for ABC System: (i) Set up cost / production run Total set up cost (20,500) Set up O/H of Tk.20,500 & cost driver is set up cost (ii) Inspection hours / prod. Run Total inspection hours (total 292) Inspection cost 1,46,000 & cost driver is inspection hours (Tk.) P 400 400 10 = 4,000 4,000 6 6 10 = 60 30,000 Q 600 600 12 = 12,000 12,000 8 8 20 = 160 80,000 R 500 500 9 = 4,500 4,500 8 8 9 = 72 36,000
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(iii)
Machine hours / prod. run
40 4010 = 400 80,000
24 2420 = 480 96,000
60 609 = 540 1,08,000
Total machine hours (Total 1420) Machining cost 2,84, 000 & cost driver machine hours (iv) Total selling O/H Tk.3,24,000 Advertisement cost 1,66,000 to be allocated to Q & R in ratio of sales units 112 : 54 =166 Special packing only for Q Balance (324,000 166,000 108,000) = 50,000 to be allocated in sales units 50 : 112 : 54 = 216 (ii) Products Sales value Prime cost Set-up cost Inspection cost Machining cost Selling cost Total cost Profit Solution to Question No. 4(a).
---
1,12,000 1,08,000
54,000 --
11,574 11,574
25,926 2,45,926
12,500 66,500 R (Tk.) 648,000 433,440 4,500 36,000 108,000 66,500 648,440 (440)
Statement of profitability as per ABC system P (Tk.) Q (Tk.) 1,568,000 900,000 604,800 1,011,600 4,000 12,000 30,000 80,000 80,000 96,000 245,926 11,574 1,445,526 730,374 122,474 169,626
Evaluation of managerial performance should include all elements in the division that management can control. The degree of autonomy enjoyed by a division will determine the control that managers maintain over pricing investment and other factors that affect profit. (i) Contribution: The division has contributed BDT 119,000 to the central costs and profit of the Group, but this is below the budget. The responsibility of management for this deficit depends on the influence that divisional managers can exercise over Sales, marketing and costs and whether the budget used as a yardstick was attainable in realistic terms. Contribution does not take into account the assets under the control of divisional management and cannot comment on the return on investment needed to earn that return. Management of Chocolaty division could increase the contribution by the wasteful investment of group funds at returns below the cost of capital without suffering any penalty if this method were used to evaluate their performance. (ii) Net Income This measure of performance shows only a small net profit for the division. As a performance evaluator it fails to set return against investment and also includes, head office charges, which are outside the control of divisional management.
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(iii) Return on investment Net Income 12x BDT 19000
= - = 80% Investment Rs. 2850000
Compared to the cost of capital 15% this return is not good. However for evaluation of managerial performance centrally administered assets and allocated head office costs should not be included in the analysis. Therefore the figures could be. Rs. 119000 x 12 = 51% Rs. 2780000 The measurement of profit and investment may be made in ways that lead to unreliable conclusions from ROI. e.g. historic costs of assets against current cost revenue. Decisions that maximize ROI may not necessarily be best for the group as a whole. (iv) Residual Income Residual Income is the income remaining after deducting a charge for the use of funds invested in the decisions based on the cost of capital. Net Profit Investment charge Residual Income BDT. 19,000 BDT. 35,625 BDT. (16625) BDT. 2850000 x 0.15 12
Management are not making sufficient return to service group funds allocated to the division at the group cost of capital. However, if head office expenses and centrally administered assets are excluded, a divisional residual income can be calculated relating to factors that divisional managers can influence. Residual Income Net profit Investment charge Residual Income 119000 34750 BDT. 84250 2780000 x 0.15 12
Solution to Question No. 4(b) Managerial performance can be evaluated by using absolute measures of contribution or net income or by using relative measures of ROI (return on investment or return on equity (ROE) or return on capital employed (ROCA). However, economic performance is evaluated by using RI (residual income). Managerial performance is worse than budget using contribution and net income. ROI is even worse in comparison to cost of capital. But economic performance is to some extent good on the basis of divisional traceable assets.
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Solution to Question No. 5(a) No, of the profitability index is less than 1.00, then the net present value of the project is negative, indicating that it does not provide the required minimum rate of return. So, profitability index less than 1.00 be an unacceptable investment. Solution to Question No. 5(b) (i) Calculate of expected net present value: Sales volume = 3,200 units. Tk. Sales revenue per unit 2,500 Variable costs per unit 1,640 Contribution per unit 860 Total contribution = (3,200 x 860) = Tk. 27,52,000 fixed overheads Tk.9,00,000 = Tk.18,52,000 less taxation (at 30%) Tk. 5,55,600 = Tk.12,96,400 Net present value at a discount rate of 11% per annum = (Tk.12,86,400 x 4.231) (Tk.50,00,000 x 50%) = Tk.29,85,068. The project should be undertaken by the directors of ITL. Note: Variable cost per unit = Tk.1,490 + Royalty Tk.150 = Tk.1,640 Tk.2,00,000 already spent on market research is a sunk cost and therefore not included in the calculation of the expected net present value of the Snowballer proposal. A real discount rate of 11% has been used. It has been calculated as follows: ((1 + nominal cost of capital)/(1 + rate of inflation)) 1 = 1.1544/(1+0.04) = 1.11 1 = 0.11 or 11%. (ii) The level of annual contribution at which NPV will be equal to zero can be calculated using the formula (1 t) 4.231 x initial investment fixed overheads (1 t) 4.231 = 0, where t is the rate of corporate tax and x = annual contribution. This gives: (1 0.30) 4.231x Tk.25,00,000 (9,00,000 (t 0.30)4.231) = 2.9617x = Tk.25,00,000 + 26,65,530 x = Tk.17,44,110 This shows the annual contribution can decline from the existing level of Tk.27,52,000 to Tk.17,44,110. This represents a percentage decrease of 36.62% (10,07,890/27,52,000) x 100%. The 4.231 in the above formula represents the cumulative discount factor for six years at a rate of 11% per annum. Tk.25,00,000 represents the investment outlay net of the government grant. (iii) The life cycle of the Snowballer: Tk. NPV of year 1 net cash flow = Tk. 12,96,400 x 0.901 = 11,68,056 NPV of year 2 net cash flow = Tk. 12,96,400 x 0.812 = 10,52,677 Total for year 1 and 2 22,20,733 Investment outlay (net) 25,00,000 NPV required in year 3 in order to achieve a zero NPV 2,79,267 However, if fixed overheads are incurred in year 3 irrespective of the sales life of the Snowballer then discounted fixed costs amounting to Tk.4,60,530 (Tk.9,00,000 x 0.7 x 0.731) would be incurred. Hence discounted contribution required in order to achieve a zero NPV would amount to Tk.2,79,267 + Tk.4,60,530 = Tk.7,39,797. The total discounted contribution for the whole of year 3 amounts to Tk.27,52,000 x 70% x 0.731 = Tk.14,08,198. Hence the reduction in year 3 life allowable in year 3 = (14,08,198 7,39,797) / 14,08,198 = 47.46% (say 47% approximately). So the life cycle required during year 3 = 53% or (0.53 of the year). This means that 2 + 0.53 = 2.53 years are required to produce an overall NPV = 0. Hence the fall in the life cycle of the project (for an overall NPV = 0) = 6 2.53 = 3.47 years or 3.47/6 = 57.8 (which is the sensitivity measure). Page 5 of 6
(iv)
Factors that should be considered by the directors of ITL include: The cash flows are estimated. How accurate they are requires detailed consideration. The cost of capital used by the finance director might be inappropriate. For example if the Snowballer proposal is less risky than other projects undertaken by ITL than a lower cost of capital be used. The rate of inflation may vary from the anticipated rate of 4% per annum. How strong is the Olympic brand name: The directors are proposing to pay royalties equivalent to 6% of sales revenue during the six years of the anticipated life of the project. Should they market the Snowballer themselves? Would competitors enter the market and what would be the likely effect on sales volumes and selling prices? == THE END ==
Page 6 of 6

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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST 2013 EXAMINATION FOUNDATION LEVEL SUBJECT: 001.

Income Statement Debit Credit

6,000 8,000 22,000

______ 327,800 ______ 327,800

$300,000 1,000 $299,000

6,000 $ 74,660 =======

66,660 $ 74,660 =======

Solution to Q. No. 1. (e) Closing entries: 1987 July 31

31,400 1,000 194,000 5,200

198.00 198.00 15,045.00 15,000.00 15,045.00 15,000.00

Solution to Q. No. 3. (b) 1. 2012 June 15

15,000 63,000 6,000 84,000 36,000 54,000 84,000 6,000

Tk. 34,000 6,000 40,000 (4,000) 36,000 84,000 (54,000) 30,000

3,000 2,700 5,700 1,215 Tk. 6,915

1,50,700 15,070 1,875 Tk. 16,945

: Tk. 500 : Tk. 1,248 : Tk. 748

: Tk. 20,800 : Tk. 1,248 : Tk. 19,552

: 4.5 Years : Tk. 7,000 : Tk. 1,000

Floor Designated Market price LMC

Job Order Cost Sheets

26,880 26,880 26,880 139 27,019

81,750 81,750 75,500 75,500 90,000 90,000

Nov:1 (a) (g)

Tk. 26,550 200 225

(b) (d) (i) (j) (k) (l)

Nov:1 (b) (c) (j) (m)

Tk. 1,090 81,750

Total $ 22,500 281,600 $ 304,100 $3.10

Total $ 22,500 281,600 $ 304,100

88,000 $ 1.95 $ 3.05 $22,500

10,000 65% 1.95

240,950 $276,125 23,100

21,000*1.10 2,500** 1.95

276,125 27,975 $304,100

21,000 = 100,000 + 10,000 89,000 2,500 = 88,000 + (10,000 x 0.35) 89,000

104,964 145,036 24,000 274,000 134,540 134,540

Head Office Cash Merchandise in Transit Head Office

25,000 25,000 12,000 12,000

1,800 1,800 14,200 14,200 16,400 16,400

900 900 14,200 14,200

18,000 1,600 16,400

Solution No. 2(ii).

250,000 96,000 220,000 316,000 90,000 226,000 60,000

175,000 120,000 96,000 216,000 40,000

28,100 55,900 2,200 58,100

23,500 35,000 40,000 12,000

5,200 115,700 900 5,000 109,800 115,700

Amount Tk 115,000 17,000

3,250,000 80,000 30,000 3,492,000 487,000 487,000

Profit & Loss A/C (profit transferred) Work in Process (Reserve)

Solution No. 4(a)

Solution No. 4(b)

Notes Receivable Bank Notes Payable Interest payable

Bank Notes Payable Interest payable

6,250 70,000 104,250

2,000 2,100 23,500 28,000 12,000 19,500 600 46,500

279,450 Book Value 6,750 16,000 550 100,000 4,250

6,750 16,000 550 100,000 4,250 104,250 70,000 34,250

97,500 125,000 (70,600) 279,450

2,240 125,000 (70,600) 41,260

Variable Cost only

For VC at 60% Fixed Cost VC for 75%

(b) (1) (2)

327,800 327,800