THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH

CMA DECEMBER, 2017 EXAMINATION

PROFESSIONAL LEVEL-II
SUBJECT: 202. MANAGEMENT ACCOUNTING.

Solution
Solution to the question No. 1.

(a)
i) Failure to report the obsolete nature of the inventory would violate the Standards of Ethical Conduct as follows:
Competence
 Perform duties in accordance with relevant technical standards.
 Prepare complete reports using reliable information.
 By failing to write down the value of the obsolete inventory, Ms. Jahan would not be preparing a complete
report using reliable information. In addition, generally accepted accounting principles (GAAP) require the
write-down of obsolete inventory.
Integrity
 Avoid conflicts of interest.
 Refrain from activities that prejudice the ability to perform duties ethically.
 Refrain from subverting the legitimate goals of the organization.
 Refrain from discrediting the profession.
Members of the management team, of which Ms. Jahan is a part, are responsible for both operations and
recording the results of operations. Since the team will benefit from a bonus, increasing earnings by ignoring the
obsolete inventory is clearly a conflict of interest. Ms. Jahan would also be concealing unfavorable information and
subverting the goals of
The organization. Furthermore, such behavior is a discredit to the profession.
Objectivity
 Communicate information fairly and objectively.
 Disclose all relevant information.
 Hiding the obsolete inventory impairs the objectivity and relevance of financial statements.

ii)
As discussed above, the ethical course of action would be for Ms. Jahan to insist on writing down the obsolete
inventory. This would not, however, be an easy thing to do. Apart from adversely affecting her own compensation,
the ethical action may anger her colleagues and make her very unpopular. Taking the ethical action would require
considerable courage
and self-assurance.

(b)
Yes, costs such as salaries and depreciation can end up as part of assets on the balance sheet if they are
manufacturing costs. Manufacturing costs are inventoried until the associated finished goods are sold. Thus, if
some units are still in inventory, such costs may be part of either Work in Process inventory or Finished Goods
inventory at the end of the period.

(c)
(i) A cost that is classified as a period cost will be recognized on the income statement as an expense in the
current period. A cost that is classified as a product cost will be recognized on the income statement as an
expense (i.e., cost of goods sold) only when the associated units of product are sold. If some units are unsold at
the end of the period, the costs of those unsold units are treated as assets. Therefore, by reclassifying period costs
as product costs, the company is able to carry some costs forward in inventories that would have been treated as
current expenses.

(ii)
The discussion below is divided into two parts – Nahiyan’s actions to postpone expenditures and the actions to
reclassify period costs as product costs.
The decision to postpone expenditures is questionable. It is one thing to postpone expenditures due to a cash
bind; it is quite another to postpone expenditures in order to hit a profit target. Postponing these expenditures may
1
 have the effect of ultimately increasing future costs and reducing future profits. If orders to the company’s suppliers
are changed, it may disrupt the suppliers’ operations. The additional costs may be passed on to Nahiyan’s
company and may create ill will and a feeling of mistrust. Postponing maintenance on equipment is particularly
questionable. The result may be breakdowns, inefficient and/or unsafe operations, and a shortened life for the
machinery.
Nahiyan’s decision to reclassify period costs is not ethical – assuming that there is no intention of disclosing in the
financial reports this reclassification. Such a reclassification would be a violation of the principle of consistency in
financial reporting and is a clear attempt to mislead readers of the financial reports. Although some may argue that
the overall effect of Nahiyan’s action will be a “wash”—that is, profits gained in this period will simply be taken from
the next period—the trend of earnings will be affected. Hopefully, the auditors would discover any such attempt to
manipulate annual earnings and would refuse to issue an unqualified opinion due to the lack of consistency.
However, recent accounting scandals may lead to some skepticism about how forceful auditors have been in
enforcing tight accounting standards.

(d)
Sales (300,000 units × Tk 15 per unit) ..................................... Tk 4,500,000
Less desired profit (12% × Tk 5,000,000) ................................ 600,000
Target cost for 300,000 units ................................................... Tk 3,900,000
Target cost per unit = Tk 3,900,000 ÷ 300,000 units = Tk 13 per unit
(e)
The selling price of the new praline cappuccino product should at least cover its variable cost and its opportunity
cost. The variable cost of the new product is Tk.0.46 and its opportunity cost can be computed by multi-plying the
opportunity cost of Tk. 3.40 per minute of order filling time by the amount of time required to fill an order for the
new product:
Selling price of the new product ≥ Variable cost of the new product + (Opportunity of the constrained resources ×
Amount
of the constrained resources required by a unit of the new product)

Selling price of the new product ≥ Tk 0.46 + {Tk 3.40 per minute × (45 Seconds ÷ 60 seconds per minute)}

Selling price of the new product ≥ Tk 0.46 + (Tk 3.40 per minute × 0.75 minute)

Selling price of the new product ≥ Tk 0.46 + Tk 2.55 = Tk 3.01

Hence, the selling price of the new product should at least cover both its variable cost of Tk 0.46 and its
opportunity cost of Tk 2.55, for a total of Tk 3.01.

Solution to the question No.2

(a)
Continuing to obtain covers from its own Dhaka Cover Plant would allow NHN to maintain its current level of
control over the quality of the covers and the timing of their delivery. Keeping the Dhaka Cover Plant open also
allows NHN more flexibility than purchasing the coverings from outside suppliers. NHN could more easily alter the
coverings’ design and change the quantities produced, especially if long-term contracts are required with outside
suppliers. NHN should also consider the economic impact that closing Dhaka Cover will have on the community
and how this might affect NHN’s other operations in the region.
(b)
(i) The following costs can be avoided by closing the plant, and therefore are relevant to the decision:
Materials .............................................................. Tk 14,000,000
Labor:
Direct ............................................................... Tk 13,100,000
Supervision ...................................................... 900,000
Indirect plant .................................................... 4,000,000 18,000,000
Differential pension cost (Tk 5,000,000 – Tk 3,000,000)................................ 2,000,000
Total annual relevant costs .................................. Tk 34,000,000

2
 (ii) The following costs can’t be avoided by closing the plant, and therefore are not relevant to the decision:
Depreciation—equipment ............................................................................. Tk 3,200,000
Depreciation—building ................................................................................. 7,000,000
Continuing pension cost (Tk 5,000,000 – Tk 2,000,000) ............................. 3,000,000
Plant manager and staff ............................................................................... 800,000
Corporate allocation ..................................................................................... 4,000,000
Total annual continuing costs ....................................................................... Tk 18,000,000
Depreciation is not relevant because it represents expiration of a sunk cost. Three-fifths of the annual pension
expense (Tk 3,000,000) is not relevant because it would continue whether or not the plant is closed. The
amount for plant manager and staff is not relevant because Mr. Hussein and his staff would continue with NHN
and administer the three remaining plants. The corporate allocation is not relevant because this represents
costs incurred outside Dhaka Cover and assigned to the plant.

(iii) The following nonrecurring costs would arise in the year that the plant is closed, but would not be incurred in
any other year:
Termination charges on canceled material orders (Tk 14,000,000 × 20%)... Tk 2,800,000
Employment assistance ................................................................................. 1,500,000
Total recurring costs ...................................................................................... Tk 4,300,000
These two costs are relevant to the decision because they will be incurred only if the plant is closed.
(c)
No, the plant should not be closed. The computations are:
First Year Other Years
Cost of purchasing the covers outside ................................ Tk (35,000,000) Tk (35,000,000)
Costs avoided by closing the plant (Part b(i))...................... 34,000,000 34,000,000
Cost of closing the plant (first year only) ............................. (4,300,000)
Salvage value of equipment and building ............................ 3,200,000
Net advantage (disadvantage) of closing the plant ............. Tk (2,100,000) Tk (1,000,000)
(d)
Factors that should be considered by NHN before making a decision include:
a. Alternative uses of the building and equipment.
b. Any tax implications.
c. The outside supplier’s prices in future years.
d. The cost to manufacture coverings at the Dhaka Cover Plant in future years.
e. The value of the time Mr. Hussein and his staff would have spent managing the Dhaka Cover Plant. This time
may be spent on other important matters.
f. The morale of NHN employees at remaining plants.

Solution to the question No. 3

(a)
(i) Schedule of expected cash collections:
April May June Quarter
Cash sales ............................... Tk 36,000 Tk 43,200 Tk 54,000 Tk 133,200
1 *
Credit sales ............................ 20,000 24,000 28,800 72,800
Total collections ..................... Tk 56,000 Tk 67,200 Tk 82,800 Tk 206,000
1
40% of the preceding month’s sales.
*Given.
(ii) Merchandise purchases budget:
April May June Quarter
1
Budgeted cost of goods sold ......................... Tk 45,000 Tk 54,000 Tk 67,500 Tk 166,500
2
Add desired ending inventory ..................... 43,200 54,000 28,800 28,800
Total needs .................................................... 88,200 108,000 96,300 195,300
Less beginning inventory.............................. 36,000 43,200 54,000 36,000
Required purchases........................................ Tk 52,200 Tk 64,800 Tk 42,300 Tk 159,300
1
For April sales: Tk 60,000 sales × 75% cost ratio = Tk 45,000.
2
At April 30: Tk 54,000 × 80% = Tk 43,200.
At June 30: July sales Tk 48,000 × 75% cost ratio × 80% = Tk 28,800.
*Given.

3
(iii) Schedule of expected cash disbursements – purchases
April May June Quarter
* *
March purchases..................... Tk 21,750 Tk 21,750
April purchases ...................... 26,100 Tk 26,100 52,200
May purchases........................ 32,400 Tk 32,400 64,800
June purchases........................ 21,150 21,150
Total disbursements................ Tk 47,850 Tk 58,500 Tk 53,550 Tk 159,900
*Given.

(iv) Schedule of expected cash disbursements – operating expenses

April May June Quarter
Commissions........................ Tk 7,200 Tk 8,640 Tk 10,800 Tk 26,640
Rent ..................................... 2,500 2,500 2,500 7,500
Other expenses..................... 3,600 4,320 5,400 13,320
Total disbursements............. Tk 13,300 Tk 15,460 Tk 18,700 Tk 47,460

(b) Cash budget for the quarter ended June 30:

April May June Quarter
* *
Cash balance, beginning .................. Tk 8,000 Tk 4,350 Tk 4,590 Tk 8,000
Add cash collections......................... 56,000 67,200 82,800 206,000
Total cash available ......................... 64,000 71,550 87,390 214,000
Less disbursements:
For inventory ............................ 47,850 58,500 53,550 159,900
For expenses ............................. 13,300 15,460 18,700 47,460
For equipment........................... 1,500 — — 1,500
Total disbursements ........................ 62,650 73,960 72,250 208,860
Excess (deficiency) of cash ............. 1,350 (2,410) 15,140 5,140
Financing:
Borrowings ...................................... 3,000 7,000 — 10,000
Repayments...................................... — — (10,000) (10,000)
— —
1
Interest ............................................ (230) (230)
Total financing................................ 3,000 7,000 (10,230) (230)
Cash balance, ending...................... Tk 4,350 Tk 4,590 Tk 4,910 Tk 4,910
1
Tk 3,000 × 12% × 3/12 = Tk 90
7,000 × 12% × 2/12 = 140
Total interest Tk 230
* Given.

(c) Income Statement, For the Quarter Ended June 30

Sales (Tk 60,000 + Tk 72,000 + Tk 90,000) ........................ Tk 222,000

Less cost of goods sold:
Beginning inventory (Given) .......................... Tk 36,000
Add purchases (Part 2) ................................... 159,300
Goods available for sale ................................. 195,300
*
Ending inventory (Part 2) .............................. 28,800 166,500
Gross margin ................................................... 55,500
Less operating expenses:
Commissions (Part 3)............................... 26,640
Rent (Part 3) ............................................ 7,500
Depreciation (Tk 900 × 3)........................ 2,700
Other expenses (Part 3) ........................... 13,320 50,160
Net operating income ..................................... 5,340
Less interest expense (Part 4) ........................ 230
Net income..................................................... Tk 5,110
*A simpler computation would be: Tk 222,000 × 75% = Tk 166,500.

4
 (d) Balance Sheet, at June 30
Assets
Current assets:
Cash (Part 4)..................................................................... Tk 4,910
Accounts receivable (Tk 90,000 × 40%).......................... 36,000
Inventory (Part 2)............................................................. 28,800
Total current assets .......................................................... 69,710
Building and equipment—net
(Tk 120,000 + Tk 1,500 – Tk 2,700)................................ 118,800
Total assets ....................................................................... Tk 188,510

Liabilities and Equity

Accounts payable (Part 2: Tk 42,300 × 50%).. Tk 21,150
Stockholders’ equity:
Capital stock (Given)................................ Tk 150,000
*
Retained earnings .................................. 17,360 167,360
Total liabilities and equity............................ Tk 188,510

* Retained earnings, beginning................... Tk 12,250

Add net income ...................................... 5,110
Retained earnings, ending ....................... Tk 17,360

Solution to the question No. 4

(a) FYR GROUP

% change in quantity demanded
(i) Price elasticity of demand = ---------------------------------------------------------- = 1.5
% change in price
When the group’s price fell by 4% in real terms, demand increased by 4% x 1.5= 6%
When the group’s price falls by 6% in real terms demand will increase by 6% x 1.5 = 9%
Determination of fixed and variable costs
Tk. 4,309.76
Adjust current period’s costs to previous period’s prices: = ------------------ = Tk. 4,144
Tk. (1+0.04)
Using high/low method to determine fixed/variable cost

Period Units Cost (Tk.’000)

Current 212,000 4,144
Previous 200,000 4,000
12,000 144

Variable cost per unit = (Tk. 144,000 ÷ 12,000) = Tk.12

Fixed cost = 200,000 (Tk.20-Tk.12) = Tk.16,00,000
Variable cost per unit next period = Tk.12 x 1.04 x 1.06 = Tk.13.2288
Fixed cost next period = Tk.16,00,000 x 1.04 x 1.06 = Tk.17,63,840
Budgeted Position at sale price Tk. 26
Amount (Tk.)
Sales 212,000 x 1.09 x Tk.26 60,08,080
Variable cost 212,000 x 1.09 x Tk.13.2288 (30,56,911)
Contribution 29,51,169
Fixed cost (17,63,840)
Profit Tk.11,87,329

5
(iii) Budgeted Position at Tk.26 plus 6%

Amount (Tk.)
Sales 212,000 x Tk.26 x 1.06 58,42,720
Variable cost 212,000 x Tk.13.2288 (28,04,523)
Contribution 30,38,197
Fixed cost (17,63,840)
Profit Tk.12,74,357
(iii)

TO : THE BOARD OF DIRECTORS

FROM : MANAGEMENT ACCOUNTANT
DATE : 10 December 2020

SUBJECT : DECISION TO INCREASE SELLING PRICE

The above subject matter refers.

Based on the calculations above, it was reflected that profit of Tk. 12,74,357 derived from the increase in price was
higher than the original profit of Tk.11,87,329.

In view of this, it is hereby recommended that the FYR Group should increase its selling price from Tk. 26.00 to Tk.
27.56 provided that all other things remain constant.

Signed
MANAGEMENT ACCOUNTANT

(b) FYR Inc.

(i)

(ii) Operating Income % of sales & Residual Income

Operating Income % of sales

Residual Income

Amount (Tk.)
Profit 210,000
Less: Imputed charge 12% of Tk.10,50,000 (126,000)
Residual Income Tk.84,000

6
(iii) If sales volume is 15,000 pairs of shoes, the rate of return to be earned on available asset is:

Amount (Tk.)
Sales (15,000 x Tk.35) 525,000
Variable Cost @ Tk.15 (225,000)
Contribution Tk.300,000
Fixed Cost (450,000)
Income/(Loss) (150,000)

Rate of return= [(150,000) ÷ 10,50,000] x 100 = (14.29%)

Solution to the question No. 5.

(a)

Year 1 Year 2 Year 3

Sales...................................................................... Tk 800,000 Tk 640,000 Tk 800,000
Less variable expenses:
Variable cost of goods sold @ Tk 2 per unit ......... 100,000 80,000 100,000
Variable selling and admin exp @ Tk 1 per unit ..... 50,000 40,000 50,000
Total variable expenses ................. 150,000 120,000 150,000
Contribution margin ...................... 650,000 520,000 650,000
Less fixed expenses:
Fixed manufacturing overhead..... 480,000 480,000 480,000
Fixed selling and administrative exp........................... 140,000 140,000 140,000
Total fixed expenses...................... 620,000 620,000 620,000
Net operating income (loss) ........... Tk 30,000 Tk (100,000) Tk 30,000

(b)
(i)

Year 1 Year 2 Year 3

Variable manufacturing cost........................................ Tk 2.00 Tk 2.00 Tk 2.00
Fixed manufacturing cost:
Tk 480,000 ÷ 50,000 units..................................... 9.60 - -
Tk 480,000 ÷ 60,000 units..................................... - 8.00 -
Tk 480,000 ÷ 40,000 units.................................... - - 12.00
Unit product cost ..................................................... .. Tk 11.60 Tk 10.00 Tk 14.00

(ii)
Variable costing net operating income (loss).............. Tk 30,000 Tk (100,000) Tk 30,000
Add (Deduct): Fixed manufacturing overhead cost deferred in
inventory from Year 2 to Year 3 under absorption costing
(20,000 units × Tk 8.00 per unit) ... ..................................... 160,000 (160,000)
Add: Fixed manufacturing overhead cost deferred in inventory
from Year 3 to the future under absorption costing (10,000 units
× Tk 12.00 per unit)................................... 120,000
Absorption costing net operating income (loss) .......... Tk 30,000 Tk 60,000 Tk (10,000)

(c)
Production went up sharply in Year 2 thereby reducing the unit product cost, as shown in (b (i)) above. This
reduction in cost per unit, combined with the large amount of fixed manufacturing overhead cost deferred in
inventory for the year, more than offset the loss of revenue. The net result is that the company’s net operating
income increased.

(d)
The fixed manufacturing overhead cost deferred in inventory from Year 2 was charged against Year 3 operations,
as shown in the reconciliation in (b(ii)). This added charge against Year 3 operations was offset somewhat by the
7
 fact that part of Year 3’s fixed manufacturing overhead costs were deferred in inventory to future years [again see
(b(ii))]. Overall, the added costs charged against Year 3 were greater than the costs deferred to future years, so
the company reported less income for the year even though the same number of units was sold as in Year 1.

(e)
If JIT had been in use, the net operating income under absorption costing would have been the same as under
variable costing in all three years. With production geared to sales, there would have been no ending inventory,
and therefore there would have been no fixed manufacturing overhead costs deferred in inventory to other years.
Assuming that the company expected to sell 50,000 units in each year and that unit product costs were set on the
basis of that level of expected activity, the income statements under absorption costing would have appeared as
follows:
Year 1 Year 2 Year 3
Sales..................................... Tk 800,000 Tk 640,000 Tk 800,000
Less cost of goods sold:
Cost of goods manufactured @ Tk 11.60 per unit .. 580,000 464,000 * 580,000
Add underapplied overhead.. 96,000 **
Cost of goods sold ................. 580,000 560,000 580,000
Gross margin ......................... 220,000 80,000 220,000
Less selling and administrative exp ...................... 190,000 180,000 190,000
Net operating income (loss) .... Tk 30,000 Tk (100,000) Tk 30,000
* 40,000 units × Tk 11.60 per unit = Tk 464,000.
** 10,000 units not produced × Tk 9.60 per unit fixed manufacturing overhead cost per unit = Tk 96,000 fixed
manufacturing overhead cost not applied to products

= THE END =