Management Accounting

Suggested Answer
Final Examination (Transitional Scheme) – Winter 2016

A.1 Rupees
Sale price of combo (inclusive of sales tax) 260.00
Variable cost of combo:
Cost of ingredients [(36 × 40%) + (48 × 60%)] +18 + 12 73.20
Commission to riders (260 × 200,000 ÷ 5,000,000) 10.40
Sales tax (260 × 0.73 ÷ 5) 37.96
121.56
Contribution margin of combo 138.44
Less: Contribution forgone due to introduction of combos (W-1) 61.92
Adjusted contribution margin 76.52

Difference of profit to be achieved through sale of combo (W-2) 433,920

Number of combos to be sold (433,920 ÷ 76.52) 5,671

WORKINGS
W-1 : Contribution Foregone
Per unit CM Reduction % in Reduction in
(Rs.) CM CM (Rs.)
A B A×B
Chicken Burger [150–63.90(W-3)] 86.10 16% 13.78
Beef Burger [170–79.62(W-3)] 90.38 24% 21.69
Fries [80–32.88(W-3)] 47.12 28% 13.19
Cold drinks [60–23.16(W-3)] 36.84 36% 13.26
61.92

W-2: Difference of profit to be achieved through sale of combos

Rupees
Total contribution margin (W-3) 3,116,080
Less: Fixed costs
Wages (720,000)
Rent (480,000)
Gas (200,000)
Electricity (300,000)
Repairs and maintenance (250,000)
(1,950,000)
Profit 1,166,080
Target profit 1,600,000
Difference of profit to be achieved through sale of combos (433,920)

W-3 : Total contribution margin

Basis of Chicken Beef Club
Fries Cold drink
allocation Burger Burger Sandwich
No. of units sold (W-4) 8,800 6,600 4,400 13,860 17,820

Sales value in Rs. (W-4) (A) 1,320,000 1,122,000 880,000 1,108,800 1,069,200
----------------------------- Rupees -----------------------------
Cost of ingredients (Units×PU cost) 316,800 316,800 264,000 249,480 213,840
Commission to riders
(200,000÷5,000,000) × A Sales value 52,800 44,880 35,200 44,352 42,768
Sales tax (0.73÷ 5 × sales value) Sales value 192,720 163,812 128,480 161,885 156,103
Total variable costs (B) 562,320 525,492 427,680 455,717 412,711

Variable costs per unit 63.90 79.62 97.20 32.88 23.16

Contribution margin (A– B) 757,680 596,508 452,320 653,083 656,489

Total contribution margin 3,116,080

Page 1 of 8
 Management Accounting
Suggested Answer
Final Examination (Transitional Scheme) – Winter 2016

W-4: Number of units sold at BT

BT
Ratio Weighted ratio Allocation of total
No. of units sold
sales (Rs.)
A B=A×SP C=5.5m×B÷∑ B D=C÷SP
Chicken burger 4 600 1,320,000 8,800
Beef Burger 3 510 1,122,000 6,600
Club sandwich 2 400 880,000 4,400
Fries [(4+3+2)×70%] 6.3 504 1,108,800 13,860
Cold drink [(4+3+2)×90%] 8.1 486 1,069,200 17,820
23.4 2,500 5,500,000

A.2 Determination of cost per unit

Under Activity Based Costing Under single FOH rate
Wye Zee Wye Zee
--------------------------------------- Rupees ---------------------------------------
Direct raw material
(30,000×60, 60,000×35) 1,800,000 2,100,000 1,800,000 2,100,000
Direct wages
(30,000×30, 60,000×8) 900,000 480,000 900,000 480,000
Overheads 688,423 1,421,577 1,406,667 703,333
(W-1) (W-1) (120÷180×2,110,000) (60÷180×2,110,000)
Total costs 3,388,423 4,001,577 4,106,667 3,283,333
Number of units produced 30,000 60,000 30,000 60,000
Cost per unit 112.95 66.69 136.89 54.72

W-1: Determination of overheads of each product under ABC

Wye Zee Total
Production
Machine hours (30,000×2, 60,000×5) 60,000 300,000
Allocation of production overheads – Rs. (A) 153,917 769,583 (W-2) 923,500
Material management
Number of requisitions 400 500
Allocation of material management overheads – Rs. (B) 153,556 191,944 (W-2) 345,500
Quality control
Units produced 30,000 60,000
% of units inspected 5% 2%
No. of units inspected 1,500 1,200
Inspection hour per unit 0.40 0.50
No. of hours inspected 600 600
Allocation of quality control overheads – Rs. (C) 222,750 222,750 (W-2) 445,500

Engineering
Units produced 30,000 60,000
Batch size 3,000 4,000
Number of batches 10 15
Allocation of engineering overheads – Rs. (D) 158,200 237,300 (W-2) 395,500
– Rs. (A+B+C+D) 688,423 1,421,577 2,110,000
W-2: Computation of cost driver rate:
Department
Total
Material Quality
Production Engineering (Given)
management control
-------------------------------------------Rupees----------------------------------------
Machine set-up costs - - - 160,000 160,000
IT department’s overheads
(120,000 × 30%, 15%, 15%, 40%) 36,000 18,000 18,000 48,000 120,000
Machine operating expenses 500,000 - - - 500,000
Production control 200,000 - - - 200,000
Material management - 140,000 - - 140,000
Quality control - - 240,000 - 240,000
Other expenses (750,000 ÷ 4) 187,500 187,500 187,500 187,500 750,000
Department wise overheads 923,500 345,500 445,500 395,500 2,110,000
Page 2 of 8
 Management Accounting
Suggested Answer
Final Examination (Transitional Scheme) – Winter 2016

A.3 Budget for the year 2016-17

Premium
1 litre pack 3 litre pack 5 litre pack Total
brand
Volume (in litres) [W-1] 6,375,000 19,125,000 10,000,000 3,500,000
Volume (in packs) 6,375,000 6,375,000 2,000,000 1,750,000
Selling price per pack – Rs. 277.20 648.00 1,100 800
-----------------------------Rs. in million-----------------------------------------
Sales (Volume × pack price) 1,767.15 4,131.00 2,200.00 1,400.00 9,498.15
Cost of goods sold
Opening inventory [W-2] 463.81 309.21 - - 773.02
Variable cost of sales [W-2] 680.54 3,115.12 1,789.20 816.67 6,401.53
Fixed overheads [W-2] 35.87 164.15 94.28 183.75 478.05
Packing cost [W-2] 98.67 268.70 100.00 175.00 642.37
Less: Closing inventory [W-2] (171.54) (514.60) (269.07) (142.92) (1,098.13)
1,107.35 3,342.58 1,714.41 1,032.50 7,196.84
Gross profit 659.80 788.42 485.59 367.50 2,301.31
Selling and admin. expenses[W-2] 108.95 498.68 286.42 126.58 1,020.63
Net profit 550.85 289.74 199.17 240.92 1,280.68
Note: it is assumed that 1:1 ratio will be applicable with reference to no. of packs.
W-1: Determination of number of packs/litres
New quantities
in liters in packs
Total market (30m ÷ 0.08 × 1.04) 390,000,000 -
Sales in liters (390m × 10%) [A] 39,000,000 -
New sales of existing packs (30m × 85%) [B] 25,500,000 -
1 liter pack (25.5m × 1 ÷ 4) 6,375,000 6,375,000
3 liter pack (25.5m × 3 ÷ 4) 19,125,000 6,375,000
2 liter Premium quality brand [C] 3,500,0000 1,750,0000
5 liter pack [A – B – C] 10,000,000 2,000,000 balancing

W-2: Production requirements

Premium
1 litre pack 3 litre pack 5 litre pack Total
brand
Sales quantities (as worked out above) - in litres 6,375,000 19,125,000 10,000,000 3,500,000 39,000,000
-----------------------in packs----------------------------
Number of packs sold A 6,375,000 6,375,000 2,000,000 1,750,000 16,500,000
Closing quantities required
(no. of pack sold ÷ 12 × 2) B 1,062,500 1,062,500 333,333 291,667 2,750,000
Less: Op. quantities available
[(30m ÷12 × 2 60%, 40%) ÷ pack liters] C 3,000,000 666,667 - - 3,666,666
Number of packs to be produced D 4,437,500 6,770,833 2,333,333 2,041,667 15,583,333

Number of liters to be produced E 4,437,500 20,312,499 11,666,665 4,083,334 40,499,998

Total liters produced F 40,499,998

Value of opening stock

Opening stock in litre
(30,000,000 × 2 ÷ 12 × 60%, 40%) G 3,000,000 2,000,000 - - 5,000,000

Variable cost [G × 144.67(W-3)] Rs. in million 434.01 289.34 - - 723.35

Fixed cost [(128 + 170) ÷ 30m × G] Rs. in million 29.80 19.87 - - 49.67
Rs. in million 463.81 309.21 - - 773.02

----------------------- Rs. in million -----------------------

Variable cost of sales [E×153.36(W-3)], [E×200] 680.54 3,115.12 1,789.20 816.67 6,401.53

Fixed cost of sales

Depreciation [170 × E ÷ (F – 4,083,334)] 20.72 94.82 54.46 - 170.00
Other fixed costs (128 × 1.08 × E ÷ F) H 15.15 69.33 39.82 13.94 138.24
Additional fixed costs [(45 × E) – H] - - - 169.81 169.81
I 35.87 164.15 94.28 183.75 478.05

Page 3 of 8
 Management Accounting
Suggested Answer
Final Examination (Transitional Scheme) – Winter 2016

Packing cost
Per unit packing cost J 15.00 40.00 50.00 100.00

Opening packing inventory (J×C) 45.00 26.67 - - 71.67

Packing cost of produced units (J×D×1.06) 70.56 287.08 116.67 204.17 678.48
Closing packing inventory (J×B×1.06) (16.89) (45.05) (16.67) (29.17) (107.78)
Packing cost for the year 98.67 268.70 100.00 175.00 642.37

Value of closing stock

Closing stock in liters (B × number of liters) K 1,062,500 3,187,500 1,666,665 583,334 6,499,999

Variable cost [K × 153.36(W-3)], (K×200) 162.95 488.84 255.60 116.67 1,024.06

Fixed cost (K × I ÷ E) 8.59 25.76 13.47 26.25 74.07
171.54 514.60 269.07 142.92 1,098.13
Selling and administration expenses
Fixed : [(750 × 0.3 × E ÷ F) × 1.08] 26.63 121.88 70.00 24.50 243.01
Variable : [(750 × 0.7 ÷ 30) × 1.06) × E], D×50 82.32 376.80 216.42 102.08 777.62
108.95 498.68 286.42 126.58 1,020.63

W-3: Determination of variable costs

Rs. in million
Cost of goods sold 5,068.00
Less: Fixed cost (170 + 128) 298.00
Variable cost of sales 4,770.00
Less: Packing cost (30 × 60% × 15) + (30 × 40% ÷ 3 × 40) 430.00
Variable cost excluding packing cost 4,340.00
Variable cost per liter (4,340 ÷ 30m) 144.67
Existing Revised (Existing + 6%)
Raw material costs per litre (70%) 101.27 107.35
Direct labour costs per litre (20%) 28.93 30.67
Factory overheads per litre (10%) 14.47 15.34
144.67 153.36

A.4 Additional CM exluding target profit (𝐖 − 𝟏)

Financing rate = = 7.08%
Loan from investors (i. e. Rs. 300m)

W-1: Additional CM excluding target profit

Rs. in million
CM on increase in credit sales (600 × 10% × 16.8%(W-2)) 10.08
Increase in bad debts (W-3) (1.75)
Avail bulk discount [3.24 (W-4) × 160 × 3%] 15.55
Storage costs (W-4) (7.47)
Savings in RF interest (120 × 12%) 14.40
Income from surplus funds [8.49 (W-5) × 5%] 0.42
31.23
Less: Target profit (10.00)
Maximum interest to be paid on the amount 21.23

W-2: Determination of Contribution Margin

Rs. in million
Sales 750
Less: Raw material (3 × 160) (480)
Less: Labour and FOH (30% × 480) (144)
Contribution margin 126

Contribution margin % (126 ÷ 750) 16.8%

Page 4 of 8
 Management Accounting
Suggested Answer
Final Examination (Transitional Scheme) – Winter 2016

W-3: Increase in bad debts

Existing Projected Increase
------------- Rs. in million -------------
Debtors 50.00 91.67 41.67
Bad debts 1.00 2.75 1.75

W-4: Average RM Inventory/Storage costs/Creditors

Existing Projected Increase
---------- Units in million ----------
RM inventory requirement 3.00 3.00
Increase in RM due to 10% increase (3 × 80%× 10%) 0.24
3.00 3.24

Average RM inventory (3÷12÷2, 3.24÷12×4÷2) 0.125 0.54

Number of months inventory to be kept 1.00 4.00
Storage cost per unit per month 1.50 1.50
Storage cost 2.25 9.72 7.47
(0.125×1×1.5×12) (0.54×4×1.5×3)

Average RM Inventory – Rs. in million (@ Rs. 160 PU) 20.00 83.81 63.81
(After discount of 3%)

Creditors payment period – in days 60 10

Creditors – Rs. in million 80.00 13.97 66.03
(60÷360×3×160) (10÷360×3.24×160×0.97)

W-5: Availability of surplus funds

Further
Existing Projected funding
requirement
------------- Rs. in million ------------
Debtors (W-3) 50.00 91.67 41.67
Average RM Inventory (W-3) 20.00 83.81 63.81
Creditors (W-3) 80.00 13.97 66.03
Settlement of running finance facility 120 - 120.00
291.51
Less: Loan from investors 300.00
Surplus funds 8.49

Page 5 of 8
 Management Accounting
Suggested Answer
Final Examination (Transitional Scheme) – Winter 2016

A.5 PM-2
PM-1 PM-2 PM 3
(After BMR)
Data
Prod capacity per annum – in tons A 230 270 310 400
Normal loss % B 5% 8% 6% 4%
Labour hours required per ton C 30 50 45 20
Variable OH - in % of DL D 60% 50% 50% 40%
Machine WDV – Rs. E 35,000,000 30,000,000 55,000,000 80,000,000
Machine useful life (years) F 10 8 12 20
Determination of CM per ton --------------------- Rupees ---------------------
Sale price 50,000 50,000 50,000 50,000
Less: Variable cost per ton
Raw material [17,480 ÷ (1 – B)] (18,400) (19,000) (18,596) (18,208)
Labour (120 × C) (3,600) (6,000) (5,400) (2,400)
Variable overheads (Labour × D) (2,160) (3,000) (2,700) (960)
Contribution margin per ton 25,840 22,000 23,304 28,432

Total contribution margin (CM per ton × A) 5,943,200 5,940,000 7,224,240 11,372,800
Less: Depreciation (E × F) (3,500,000) (3,750,000) (4,583,333) (3,600,000)
Profit from each plant 2,443,200 2,190,000 2,640,907 7,772,800
* Depreciation is worked out after deducting 10% salvage value from cost.
Profit from
Profit before Financing
PM-2 Net profit
Options available to AIL PM-1 PM-2 PM-3 fin. cost cost (W-1)
(after BMR)
------------------------------------------- Rs. in million -------------------------------------------
I Continue with existing
plant without
replacement and BMR 2,443,200 2,190,000 - - 4,633,200 - 4,633,200
II Replace PM-1 with new
machine and no BMR
(400 ton from PM-3 and 650,000 7,772,800
200 ton from PM-2) - - 8,422,800 6,950,000 1,472,800
III Replace PM-2 with new
machine (400 machine
from PM-3 and 200 ton
from PM-1) 1,668,000 - - 7,772,800 9,440,800 7,100,000 2,340,800
IV Replace PM-1 with new
machine and spend on
BMR (400 ton from PM-
3 and 200 ton from PM-
2(after BMR)) - - 77,467 7,772,800 7,850,267 9,450,000 (1,599,733)
V Only go for BMR 2,443,200 - 2,640,907 - 5,084,107 2,500,000 2,584,107
Conclusion
Continue with existing option is feasible as it results in highest net profit.

W-1: Determination of financing costs

Cost of new Disposal value Financing Cost of
Cost of BMR
Options machine of old machine required financing 10%
------------------------------------ Rupees ------------------------------
I - - - - -
II 80,000,000 - (10,500,000) 69,500,000 6,950,000
III 80,000,000 - (9,000,000) 71,000,000 7,100,000
IV 80,000,000 25,000,000 (10,500,000) 94,500,000 9,450,000
V - 25,000,000 - 25,000,000 2,500,000

Page 6 of 8
 Management Accounting
Suggested Answer
Final Examination (Transitional Scheme) – Winter 2016

A.6 Let BM-1 = x and BM-2 = y

Objective Function
Maximize Z: 9000x +5500y

15x + 12y = 41,400 ------------------------ Equation 1

8x + 10y = 30,000 -------------------------- Equation 2

From equation 1
At x = 0 then (0 , 3,450)
At y = 2,000 then (1,160 , 2,000)

From equation 2
At x = 0 then (0 , 3,000)
At y = 2,000 then (1,250 , 2,000)

Multiply equation 1 by 8 and equation 2 by 15

120x + 96y = 331,200 ------------------------ Equation 3

120x + 150y = 450,000 ----------------------- Equation 4

Subtracting equation 3 from equation 4

Determination of maximum quantities of x and y under original constraints:-

54y = 118,800 y = 2,200

Put the value of y in equation 3

120x + 96×2,200 = 331,200 120x = 120,000 x= 1,000

Present options Contribution Total contribution

x y x y
1160 2000 10,440,000 11,000,000 21,440,000
1000 2200 9,000,000 12,100,000 21,100,000
0 3000 - 16,500,000 16,500,000

Revised constraints
15x + 12y = 46,400 ------------------------ Equation 5
8x + 10y = 30,000 -------------------------- Equation 2

From equation 5
At x = 0 then (0 , 3,867)
At y = 2,000 then (1,493 , 2,000)

From equation 2 (Above)

At x = 0 then (0 , 3,000)
At y = 2,000 then (1,250 , 2,000)

Determination of maximum quantities under revised constraints:-

Solving equation 5 and 2

x = 1925.926 y = 1459.259

Page 7 of 8
 Management Accounting
Suggested Answer
Final Examination (Transitional Scheme) – Winter 2016

As the quantity of y is 1,459 which is less than 2,000 ∴ the production plan is not possible and
the company has to revert to the production plan of producing minimum 2,000 quantities of
product y i.e.

At y = 2,000 then (1,250 , 2,000)

Revised options Contribution Total contribution

x y x y
1250 2000 11,250,000 11,000,000 22,250,000
1250 2000 11,250,000 11,000,000 22,250,000
0 3000 0 16,500,000 16,500,000

Additional contribution (22,250,000 – 21,440,000) – 200,000 610,000

Additional number of hours 5,000
Shadow price 122.00

(The End)

Page 8 of 8