Revision & Pilot Paper

Discussion
MBA 61022 - Managerial Accounting

Dr. Chathuri Senarath

Ph.D. (RMIT- AUS), MEcon(UOC-SL), BCom Sp (Hons) (UOC-SL),
ACMA (UK), CGMA
Department of Commerce & Financial Management
Email: [email protected]
1
Question Paper Structure
1. You will be given 2 hours to complete this examination

2. No. of questions: Four (04)

3. Answer All questions.

4. Total marks for the paper: 50 marks

5. Please read all questions carefully and make sure you understand the facts before
you begin answering. Write legibly and be concise as possible.
Topics to be tested in the paper

• Inventory Controls

• Managing cost & quality

• Short term decision making

• Performance measurement & Balance scorecard

Question 1 – Inventory Controls
a)
b)
The main advantage of the JIT system is that inventory is not held in
stock, but is ordered from suppliers so that it arrives just when it is
needed for production. This will reduce storage costs. While the number
of orders placed with suppliers under JIT increases, the costs per order
can be reduced through ordering inventory on-line, requiring suppliers
to deliver at a specified level of quality so that fewer inspections of
deliveries take place, and allowing electronic ordering of inventory and
payments with suppliers.
Question 2 – Short Term Decision Making
a) Distinguish between the absorption costing technique and the marginal
costing technique in making profit statements.

• Absorption Costing is a costing method that includes all manufacturing costs;

DM, DL, and both variable and fixed manufacturing overhead in the cost of a
unit of product Non- manufacturing costs are treated as period costs to product
costs.

• Marginal costing is a principle whereby variable costs are charged to cost units,
and the fixed costs attributable to the relevant period are written off in full against
the contribution for that period.
b) “It is important to clarify relevant cost and irrelevant cost clearly
in making short-term decisions in a business organization.”
Comment with relevant examples.
Relevant Costs
• Definition: These are costs that will be directly affected by the decision at
hand. They are future costs that will differ among alternatives.
• Characteristics:
• Future Costs: They have not yet been incurred and will occur as a result of the
decision.
• Variable with Decision: They change depending on the path taken.
• Directly Attributable: Can be directly associated with a specific decision.
• Example: A company is deciding whether to accept a special order at a
lower price than usual. The relevant costs would include the additional
materials, labor, and overhead required to fill the order. These costs would
not be incurred if the special order is not accepted.
Irrelevant Costs
• Definition: These are costs that will not be affected by the decision or
have already been incurred (sunk costs).
• Characteristics:
• Sunk Costs: Past costs that have already been incurred and cannot be
recovered.
• Fixed Costs: Costs that will not change with the decision, in the short term.
• Not Directly Attributable: Cannot be directly linked to the decision or are
the same among all alternatives.
• Example: The same company considering the special order should not
consider the cost of factory space that is already owned and not used
for other purposes (sunk cost), or the salaries of salaried staff who will
be working regardless of the order (fixed cost).
Importance in Decision-Making
• By clarifying which costs are relevant and which are not, a company
ensures that it bases its decisions on accurate financial information.
Decisions based on irrelevant costs can lead to suboptimal outcomes.
• Short-Term Decisions: These often include whether to accept special
orders, discontinue a product, or make or buy a component.
• Impact: A decision based on relevant costs can lead to increased
profitability and better resource allocation.
Conclusion
• Understanding the difference between relevant and irrelevant costs
helps managers make informed decisions that align with the
company's financial best interests. It is crucial to avoid the common
pitfall of considering sunk costs in decision-making, which can distort
the financial analysis and lead to decisions that are not in the
company's best economic interest.
c) Briefly discuss the applicability of the marginal costing technique in
making different types of short-term business decisions by mentioning
some limitations of applying the marginal costing technique.

• Marginal costing identifies the incremental cost of production, which

arises due to one –unit increase in the production quantity.
• As we understood, variable cost has a direct relationship with the volume
of output and fixed cost remains constant irrespective of volume of
production.
• Hence, marginal costing measures the total variable cost attributable to one
unit. Which includes prime cost and variable overhead
• Short term-decisions are related to temporary gaps between demand and
fixed costs will be irrelevant since they will remain the same, irrespective
of which alternative is selected. Variable costs are the only relevant costs
for decision-making. Since this is usually the case, marginal costing
techniques are applied in most short-term decisions.
• However, in practice marginal costing technique has limited use due to the
following reasons
1) Difficulty in analysing overhead – Separation of costs into fixed and variable is
a difficult problem. In marginal costing, semi-variable or semi-fixed costs are
not considered.
2) Time element ignored – Fixed costs and variable costs are different in the short
run; but in the long run, all costs are variable. In the long run, all costs change
at varying levels of operation. When new plants and equipment are introduced,
fixed costs and variable costs will vary.
3) Difficulty in the fixation of price – Under marginal costing, the selling price is
fixed on the basis of contribution. In the case of cost-plus contract, it is very
difficult to fix price.
4) Significance lost – In capital-intensive industries, fixed costs occupy major
portions in the total cost. But marginal costs cover only variable costs. As such,
it loses its significance in capital industries.
d) State whether the export order should accept or reject with the relevant calculations
• Since the Alpha is having spare capacity to undertake the project only variable cost will impact the
decision. The decision will therefore be based on the contribution made from the new order.

Selling Price 36
Direct materials 10
Direct labour 5
Direct expenses 3
Variable production overheads 6
Variable non-production cost 4
Total variable cost (28)
Contribution 8

• The new order creating a contribution to cover the part of the FC. Therefore, the order will be
accepted
 e)
i. If the available maximum capacity of the machines hours of the company is limited to 15 000
hours per month.
P1 P2 P3
Selling price per unit (Rs.) 150 216 182
Direct material cost (Rs.) (Rs.5.00 per 1 kg
Total 45 40 30
of DM)
Total Machine hours Machine
requirements Units Per Unit Hours Direct labour cost (Rs.) (Rs.200 per hour) 60 48 36
Variable overheads per unit (Rs.) 12 24 36
Product-P1 1000 3 3000 contribution 33 104 80
Product-P2 1600 6 9600 Machine hrs 3 6 5
Product-P3 900 5 4500 Contribution per machiner hrs 11 17.33 16
3 1 2
Total Machin Hour total hrs 15000
Requirement 17100
P2 6 X 1600 9600
P3 5 X 900 4500
Remaining hrs 900
P1 900/3 300 U

P1 300
P2 1600
P3 900
 e)
ii. If the available maximum direct material of the company is limited to 19 100 kgs per month.
P1 P2 P3
Selling price per unit (Rs.) 150 216 182
Total material Direct material cost (Rs.) (Rs.5.00 per
45 40 30
requirements Units Per Unit Total Machine Hours 1 kg of DM)
Product-P1 1000 9 9000 Direct labour cost (Rs.) (Rs.200 per
60 48 36
Product-P2 1600 8 12800 hour)
Variable overheads per unit (Rs.) 12 24 36
Product-P3 900 6 5400
contribution 33 104 80
Total Material Material 9 8 6
Requirement 27200 3.6 13 13.3
3 2 1

Total material 19100

P3 900 x 6 5400 900
P2 1600 x 8 12800 1600
900
P1 900/9 100

P1 100
P2 1600
P3 900
 e)
iii. If the available maximum direct labour hours of the company are limited to 600 hours per month.
0 P1 P2 P3
D.L per unit 0.3 0.24 0.18
Total Labour hours
requirements Units Per Unit Total Machine Hours P1 P2 P3
Product-P1 1000 0.30 300 Selling price per unit (Rs.) 150 216 182
Product-P2 1600 0.24 384 Direct material cost (Rs.) (Rs.5.00 per
45 40 30
Product-P3 900 0.18 162 1 kg of DM)
Total Labour Hour Direct labour cost (Rs.) (Rs.200 per
60 48 36
Requirement 846 hour)
Variable overheads per unit (Rs.) 12 24 36
contribution 33 104 80
Contribution per labour hr 110 433.33 444.44
3 2 1

Total hrs available 600

P3 900 X 0.18 162 900
P2 1600 X 0.24 384 1600
54
P1 54/0.3 180

P1 180
P2 1600
P3 900
Question 3- Performance Measurement &
Balance Scorecard
1.
a) In what way can the use of ROI as a performance measure for investment centers
lead to bad decisions? How does the residual income approach overcome this
problem?
• Disadvantages of ROI
- It can encourage managers to focus on short-term financial performance, at the expense
of the long term
- Return on investment may discourage managers from investing in projects that are
acceptable from the total organization's point of view
• The residual income formula incorporates an important piece of data that is excluded
from the ROI formula: the organisation’s required rate of return on invested capital.
• Any investment that, in any year, has a profit that exceeds the minimum required rate of
return will yield a positive residual income.
1)
b) Why do the measures used in a balanced scorecard differ from
company to company
A company's balanced scorecard differs from company to company
because it is based on and supports each company's strategy. Since each
company's strategy is different, their balanced scorecards differ.
1) C
I I II
ROI
NOI Rs.300,000 Rs.700,000
Investment Rs. 1500,000 Rs. 4500,000
300000/1500000 X 700000/4500000 X
ROI 100 100
20% 15.55%
RI I II
NOI Rs.300,000 Rs.700,000
Investment Rs. 1500,000 Rs. 4500,000
ii
Required rate of return 15% 19%
1500000 X 15% 4500000 X 19%
225000 855000
RI 300000 - 225000 700000-855000
75000 -155000

Manager of Div I will not be motivated to

accep the offer.
2) i Discuss to what extent U Care (Pvt) Ltd. was successful in implementing its
strategy in 2022

Evaluating the success of U Care (Pvt) Ltd. in implementing its strategy in 2022
involves examining various aspects of their operations against their set targets.
Here's a breakdown:

1.Profitability: The target profit after tax for 2022 was Rs. 253 million, but the
actual figure achieved was Rs. 175 million. This indicates a significant shortfall of
Rs. 78 million from their financial goal, suggesting a partial success in terms of
profitability.
2.Patient Increase: The goal to increase the number of patients by 1 million was
partially met, with an actual increase of 640,000 patients. While this is a
substantial growth, it falls short of the ambitious target set by the company,
indicating a need for more effective or extensive promotional campaigns.
3.Patient Satisfaction: The target for patient satisfaction was a 75% good or better
rating, but the actual rating achieved was 68%. This shows that while a majority of
patients were satisfied, the company did not fully meet its own benchmark for
patient satisfaction.
4. Employee Training and Grievance Resolution: In these areas, U Care (Pvt)
Ltd. excelled. They surpassed their target of training 90% of employees in process
and quality management by achieving 92%. Additionally, the number of grievances
received and resolved prior to arbitration was better than the target, indicating strong
internal processes and employee satisfaction.
5. Patient Safety Metrics: The company was successful in meeting its patient
safety targets. The inpatient fall rate was kept below the 5% target, and the
medication reconciliation on admission rate was very close to the target of 95%,
indicating strong performance in these critical areas.
In summary, U Care (Pvt) Ltd. had a mixed success in implementing its strategy in
2022. While they performed exceptionally well in employee training, grievance
resolution, and patient safety, they fell short in achieving their financial goals,
patient increase targets, and desired levels of patient satisfaction. Their performance
suggests strengths in internal processes and patient safety but highlights the need for
improved strategies in marketing, financial management, and customer satisfaction
to fully realize their vision and mission.
2) ii Analyze the practices and performance of U Care (Pvt) Ltd. using
“Balanced scorecard” and give your suggestions to direct the company towards
its strategy, mission and vision.
Based on the detailed information provided about U Care (Pvt) Ltd., a leading private hospital in Sri
Lanka, we can analyze its practices and performance using the Balanced Scorecard framework. This
framework will consider the Financial, Customer, Internal Business Processes, and Learning & Growth
perspectives to provide a comprehensive view of the organization's performance and suggest ways to align
with its strategy, mission, and vision.
1. Financial Perspective:
• Target vs. Actual Performance: The target profit after tax for 2022 was Rs. 253,000,000, but the
actual was Rs. 175,000,000. This shortfall indicates a need for improved financial strategies.
• Suggestions: Enhance revenue generation strategies, possibly by introducing new services or
optimizing existing ones. Cost management and efficiency improvements in operations could also help
bridge the gap between targeted and actual profits.
2. Customer Perspective:
• Target vs. Actual Performance: The target increase in patient numbers was 1,000,000, but the actual
increase was 640,000. The goal for overall patient satisfaction was 75%, but the actual satisfaction rate
was 68%.
• Suggestions: Intensify marketing efforts and improve patient engagement strategies. Focus on areas of
patient care that directly impact satisfaction, such as wait times, staff responsiveness, and facility
cleanliness.
3. Internal Business Processes Perspective:
• Target vs. Actual Performance: The company is focused on patient-centered
care with targets like less than 5% inpatient falls and 95% medication
reconciliation on admission, achieving close to these goals with 4% and 94.6%
respectively.
• Suggestions: Continue to emphasize quality and safety in patient care.
Implementing continuous improvement processes and leveraging technology
could further enhance efficiency and accuracy in patient care.
4. Learning & Growth Perspective:
• Target vs. Actual Performance: The target for employee training in process and
quality management was 90%, with the actual being 92%. The target for grievance
resolution was 4 to 5, with an actual of 3.
• Suggestions: Maintain and further develop employee training programs, focusing
on areas critical to healthcare excellence. Foster a positive work environment and
continue effective grievance handling to ensure employee satisfaction and
retention.
Aligning with Strategy, Mission, and Vision:
• Strategy: Focus on enhancing service quality and patient care while
maintaining cost-effectiveness to meet financial goals.
• Mission: Continue adhering to international standards in healthcare,
improving patient satisfaction rates, and maintaining high-quality,
timely, and professional healthcare services.
• Vision: Uphold the vision of providing quality and safe healthcare by
continuously improving patient care standards and maintaining
leadership in the healthcare sector.
By addressing these areas, U Care (Pvt) Ltd. can better align its
operations with its strategic objectives, ultimately leading to improved
performance and fulfillment of its mission and vision in a competitive
healthcare market.