Q. No. 1. Required: Required: Required:

(1)

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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA DECEMBER, 2017 EXAMINATION

PROFESSIONAL LEVEL-II

SUBJECT: 202. MANAGEMENT ACCOUNTING.

Time: Three hours Full Marks: 100

 All questions are to be attempted.  Show computations, where necessary.

 Answer must be brief, relevant, neat and clean.  Start answering each question from a fresh sheet.

Q. No. 1.

(a) Ismail, Inc., operates a chain of 44 department stores. Two years ago, the board of directors of Ismail approved a large-scale remodeling of its stores to attract a more upscale clientele.

Before finalizing these plans, two stores were remodeled as a test. Ms. Jahan, Management Accountant, was asked to oversee the financial reporting for these test stores, and she and other management personnel were offered bonuses based on the sales growth and profitability of these stores. While completing the financial reports, Ms. Jahan discovered a sizable inventory of outdated goods that should have been discounted for sale or returned to the manufacturer. She discussed the situation with her management colleagues; the consensus was to ignore reporting this inventory as obsolete because reporting it would diminish the financial results and their bonuses.

Required:

(i) According to the Management Accountants’ Code of Ethical Conduct, would it be ethical for Ms. Jahan not to report the inventory as obsolete?

(ii) Would it be easy for Ms. Jahan to take the ethical action in this situation?

(b) Is it possible for costs such as salaries or depreciation to end up as assets on the balance sheet?

(c) HM Nahiyan is CEO of Patwary Limited, a company whose stock is traded on a stock exchange. In a meeting with investment analysts at the beginning of the year, Mr. Nahiyan had predicted that the company’s earnings would grow by 20% this year. Unfortunately, sales have been less than expected for the year, and Mr. Nahiyan concluded within two weeks of the end of the fiscal year that it would be impossible to ultimately report an increase in earnings as large as predicted unless some drastic action was taken. Accordingly, Mr. Nahiyan has ordered that wherever possible, expenditures should be postponed to the new year – including canceling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-year advertising and travel. Additionally, Mr. Nahiyan ordered the company’s controller to carefully scrutinize all costs that are currently classified as period costs and reclassify as many as possible as product costs. The company is expected to have substantial inventories of work in process and finished goods at the end of the year.

Required:

(i) Why would reclassifying period costs as product costs increase this period’s reported earnings?

(ii) Do you believe Mr. Nahiyan’s actions are ethical? Why or why not?

(d) Jasia Products Corporation of Japan is anxious to enter the electronic calculator market. Management believes that in order to be competitive in world markets, the price of the electronic calculator that the company is developing cannot exceed Tk 15. Jasia’s required rate of return is 12% on all investments. An investment of Tk 5,000,000 would be required to purchase the equipment needed to produce 300,000 calculators that management believes can be sold each year at Tk 15 price.

Required:

(2)

Page 2 of 6 CMA DECEMBER, 2017 EXAMINATION

Q. No. 1.(cont’d……..)

(e) Hussein’s Top Coffee owns and operates a chain of popular coffee stands that serve over 30 different coffee based beverages. The constraint at the coffee stands is the amount of time required to fill an order, which can be considerable for the more complex beverages. Sales are often lost because customers leave after seeing a long waiting line to place an order. Careful analysis of the company’s existing products has revealed that the opportunity cost of order filling time is Tk 3.40 per minute.

The company is considering introducing a new product, praline cappuccino, to be made with pecan extract and molasses. The variable cost of the standard size praline cappuccino would be Tk 0.46 and the time required to fill an order for the beverage would be 45 seconds.

Required:

What is the minimum acceptable selling price for the new praline cappuccino product?

[Marks: {5+2+(2+4)+3+4} = 20]

Q. No. 2.

NHN Corporation manufactures seats for automobiles, vans, trucks, and various recreational vehicles. The company has a number of plants around the world, including the Dhaka Cover Plant, which makes seat covers.

Mr. Hussein is the plant manager of the Dhaka Cover Plant, but also serves as the regional production manager for the company. His budget as the regional manager is charged to the Dhaka Cover Plant.

Mr. Hussein has just heard that NHN has received a bid from an outside vendor to supply the equivalent of the entire annual output of the Dhaka Cover Plant for Tk 35 million. Mr. Hussein was astonished at the low outside bid because the budget for the Dhaka Cover Plant’s operating costs for the upcoming year was set at Tk 52 million. If this bid is accepted, the Dhaka Cover Plant will be closed down.

The budget for Dhaka Cover’s operating costs for the coming year is presented below. DHAKA COVER PLANT, Annual Budget for Operating Costs

Materials . . . Tk 14,000,000 Labor: Direct . . . Tk 13,100,000 Supervision . . . 900,000 Indirect plant . . . 4,000,000 18,000,000 Overhead: Depreciation—equipment . . . 3,200,000 Depreciation—building . . . 7,000,000 Pension expense . . . 5,000,000 Plant manager and staff . . . 800,000

Corporate allocation . . . 4,000,000 20,000,000 Total budgeted costs . . . Tk 52,000,000 Additional facts regarding the plant’s operations are as follows:

(1) Due to Dhaka Cover’s commitment to use high-quality fabrics in all of its products, the Purchasing Department was instructed to place blanket purchase orders with major suppliers to ensure the receipt of sufficient materials for the coming year. If these orders are canceled as a consequence of the plant closing, termination charges would amount to 20% of the cost of direct materials.

(3)

Q. No. 2.(cont’d…….)

(2) Approximately 400 plant employees will lose their jobs, if the plant is closed. This includes all of the direct laborers and supervisors as well as the plumbers, electricians, and other skilled workers classified as indirect plant workers. Some would be able to find new jobs while many others would have difficulty. All employees would have difficulty matching Dhaka Cover’s base pay of Tk 18.80 per hour, which is the highest in the area. A clause in Dhaka Cover’s contract with the union may help some employees; the company must provide employment assistance to its former employees for 12 months after a plant closing. The estimated cost to administer this service would be Tk 1.5 million for the year. (3) Some employees would probably choose early retirement because NHN has an excellent

pension plan. In fact, Tk 3 million of the annual pension expense would continue whether Dhaka Cover is open or not.

(4) Mr. Hussein and his staff would not be affected by the closing of Dhaka Cover. They would still be responsible for administering three other area plants.

(5) If the Dhaka Cover Plant were closed, the company would realize about Tk 3.2 million salvage value for the equipment and building. If the plant remains open, there are no plans to make any significant investments in new equipment or buildings. The old equipment is adequate and should last indefinitely.

Required:

(a) Without regard to costs, identify the advantages to NHN Corporation of continuing to obtain covers from its own Dhaka Cover Plant.

(b) NHN Corporation plans to prepare a financial analysis that will be used in deciding whether or not to close the Dhaka Cover Plant. Management has asked you to identify: (i) The annual budgeted costs that are relevant to the decision regarding closing the

plant (show the taka amounts).

(ii) The annual budgeted costs that are not relevant to the decision regarding closing the plant and explain why they are not relevant (again show the taka amounts). (iii) Any nonrecurring costs that would arise due to the closing of the plant, and explain

how they would affect the decision (again show any taka amounts).

(c) Looking at the data you have prepared in (b) above, should the plant be closed? Show computations and explain your answer.

(d) Identify any revenues or costs not specifically mentioned in the problem that NHN should consider before making a decision.

[Marks: {4+(4+4+2)+4+2} = 20] Q. No. 3.

The following data relate to the operations of Shaad & Wasi Inc., a wholesale distributor of consumer goods:

Current assets as of March 31:

Cash . . . Tk 8,000 Accounts receivable . . . Tk 20,000 Inventory . . . Tk 36,000 Building and equipment, net . . . Tk 120,000 Accounts payable . . . Tk 21,750 Capital stock . . . Tk 150,000 Retained earnings . . . Tk 12,250 (1) The gross margin is 25% of sales.

(2) Actual and budgeted sales data:

March (actual) . . . Tk 50,000 April . . . Tk 60,000 May . . . Tk 72,000 June . . . Tk 90,000 July . . . Tk 48,000

(4)

Q. No. 3.(cont’d…….)

(3) Sales are 60% for cash and 40% on credit. Credit sales are collected in the month following sale. The accounts receivable at March 31 are a result of March credit sales. (4) Each month’s ending inventory should equal 80% of the following month’s budgeted cost

of goods sold.

(5) One-half of a month’s inventory purchases is paid for in the month of purchase; the other half is paid for in the following month. The accounts payable at March 31 are the result of March purchases of inventory.

(6) Monthly expenses are as follows: commissions, 12% of sales; rent, Tk 2,500 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is Tk 900 per month (includes depreciation on new assets). (7) Equipment costing Tk 1,500 will be purchased for cash in April.

(8) The company must maintain a minimum cash balance of Tk 4,000. An open line of credit is available at a local bank. All borrowing is done at the beginning of a month, and all repayments are made at the end of a month; borrowing must be in multiples of Tk 1,000. The annual interest rate is 12%. Interest is paid only at the time of repayment of principal; figure interest on whole months (1⁄12, 2⁄12, and so forth).

Required:

(a) Using the preceding data, complete the following schedule for the quarter ended June 30:

(i) Schedule of expected cash collections (ii) Merchandise purchases budget

(iii) Schedule of expected cash disbursements – merchandise purchases (iv) Schedule of expected cash disbursements – operating expenses (b) Prepare a cash budget for the quarter ended June 30

(c) Prepare an absorption costing income statement for the quarter ended June 30. (d) Prepare a balance sheet as of June 30.

[Marks: {(4x2)+6+3+3} = 20] Q. No. 4.

(a) You are the Management Accountant of FYR Group. You have been asked to provide budgetary information and advice to the BoD at a meeting where they will decide the pricing of an important product for the next period. You confirmed that between the previous and current periods there was a four percent general cost inflation and it is forecast that costs will rise a further six percent in the next period. As a matter of policy, the group did not increase the selling price in the current period, although competitors raised their prices by four percent to allow for the increased costs. A survey undertaken by economic consultants has found that the demand for the product is elastic with an estimated price elasticity of demand of 1.5. This means that volume would fall by 1½ times the rate of real price increase.

The following information is available from the records:

Current period

(Tk ‘000)

Previous Period

(Tk ‘000)

Sales: 212,000 & 200,000 units at Tk 26 each 5,512.00 5,200.00

Costs (4,309.76) (4,000.00)

Profit 1,202.24 1,200.00

Various options are to be considered by the BoD of FYR Group.

Required:

(i) As a management accountant show the budgeted position if the firm maintains the Tk 26 selling price for the next period (when it is expected that competitors will increase their prices by six percent).

(5)

Q. No. 4.(cont’d……)

(ii) Show the budgeted position if the group also raises its price by six percent.

(iii) Write a short report to the Board, with appropriate figures, recommending whether the group should maintain the Tk 26 selling price or raise it by six percent.

(b) FYR Inc., a shoe manufacturer, prepared the following budget data for the period ended June 2017:

Fixed overhead Tk 450,000

Variable cost per pair Tk 15

Desired rate of return on average assets 20%

Selling price per pair Tk 35

Average available assets:

Bills receivable Inventories

Plant & Equipment (NBV)

Amount (Tk) 250,000 300,000 500,000 Tk 10,50,000 Required:

(i) How many pairs of shoes must be sold to obtain the desired rate of return on average assets? What would be the expected capital turnover?

(ii) What would be the operating income percentage of sales? If FYR Inc. has 12% cost of capital, what will be the Residual Income for the Company?

(iii) What rate of return will be earned on available assets if sales volume is 15,000 pairs of shoes?

[Marks: (3+3+4)+(3+3+4) = 20] Q. No. 5.

Hassan, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Operating results for the first three years of activity were as follows (absorption costing basis):

Year 1 Year 2 Year 3 Sales . . . Tk 800,000 Tk 640,000 Tk 800,000 Cost of goods sold:

Beginning inventory . . . 0 0 200,000 Add cost of goods manufactured . . . 580,000 600,000 560,000 Goods available for sale . . . 580,000 600,000 760,000 Less ending inventory . . . 0 200,000 140,000 Cost of goods sold . . . 580,000 400,000 620,000 Gross margin . . . 220,000 240,000 180,000 Less selling and administrative expenses . . . 190,000 180,000 190,000 Net operating income (loss) . . . Tk 30,000 Tk 60,000 Tk (10,000) In the latter part of Year 2, a competitor went out of business and in the process dumped a large number of units on the market. As a result, Hassan’s sales dropped by 20% during Year 2 even though production increased during the year. Management had expected sales to remain constant at 50,000 units; the increased production was designed to provide the company with a buffer of protection against unexpected spurts in demand. By the start of Year 3, management could see that inventory was excessive and that spurts in demand were unlikely. To reduce the excessive inventories, Hassan cut back production during Year 3, as shown below:

Year 1 Year 2 Year 3

Production in units . . . 50,000 60,000 40,000

(6)

Q. No. 5.(cont’d……)

Additional information about the company follows:

(1) The company’s plant is highly automated. Variable manufacturing costs (direct materials, direct labor, and variable manufacturing overhead) total only Tk 2 per unit, and fixed manufacturing overhead costs total Tk 480,000 per year.

(2) Fixed manufacturing overhead costs are applied to units of product on the basis of each year’s production.

(3) Variable selling and administrative expenses were Tk 1 per unit sold in each year. Fixed selling and administrative expenses totaled Tk 140,000 per year.

(4) The company uses a FIFO inventory flow assumption.

(5) Hassan’s management can’t understand why profits doubled during Year 2 when sales dropped by 20% and why a loss was incurred during Year 3 when sales recovered to previous levels.

Required:

(a) Prepare variable costing income statements for each year using the contribution approach.

(b) Refer to the absorption costing income statements above.

(i) Compute the unit product cost in each year under absorption costing. (Show how much of this cost is variable and how much is fixed.)

(ii) Reconcile the variable costing and absorption costing net operating income figures for each year.

(c) Refer again to the absorption costing income statements. Explain why net operating income was higher in Year 2 than it was in Year 1 under the absorption approach, in light of the fact that fewer units were sold in Year 2 than in Year 1.

(d) Refer again to the absorption costing income statements. Explain why the company suffered a loss in Year 3 but reported a profit in Year 1 although the same number of units was sold in each year.

(e) If JIT had been used during Year 2 and Year 3, what would the company’s net operating income (or loss) have been in each year under absorption costing? Explain the reason for any differences between these income figures and the figures reported by the company in the statements above.

[Marks: {5+(3+4)+2+2+4} = 20]