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					                                           Summer Exam-2011
                                                           (Final)
                              Management Accounting                           [03-05-2011]

Duration: 3 hrs.                                                                                  Marks-100
                                                        [Instructions]
• Ensure that the question paper delivered to you is the same, in which you intend to appear.
• Read the instructions given on the title page of Answer Copy.

                                           Attempt all Questions

    Q.1. Your company, an electronics retailer, has arranged a conference for its 12 regional
           managers who are responsible for the profitability of its shops. The managers have little
           understanding of management accounting. The conference has been arranged because of
           two recent problems in the business.
            1. The company’s recently introduced budgeting system has not proved popular with
               regional managers, many of whom feel it is a waste of their time.
            2. Due to the large number of products offered by manufacturers and the shortage of
               display space in its shops, the company has recently experienced difficulties in
               deciding which products it should sell.

           Typical of this problem is the choice currently facing the company over which MP3 player to
           sell. Details of three alternative models are given below.

                               Model                           A             B           C
                               Sales price per unit         Rs.130        Rs.180      Rs.210
                               Variable cost per unit       Rs.60         Rs.100      Rs.120
                                                                  3              3           3
                               Display space per unit      140 cm        3120 cm     3160 cm

           Your chief executive has asked you to prepare a brief presentation to the conference to
           improve financial awareness. Your company always attempts to maximize profits.

           Required:
               a) On the basis of contribution per unit of the limiting factor, recommend which of the (06)
                  three MP3 players the company should sell.
               b) Prepare notes, suitable for distribution to conference delegates, which explain the
                  following:
                   (i) Variable cost                                                                       (02)
                   (ii) Fixed cost                                                                         (02)
                   (iii) Contribution                                                                      (03)
                   (iv) Limiting factors                                                                   (03)
                   (v) The importance of making decisions based upon contribution per                      (04)
                       unit of the limiting factor

    Q.2. S limited is listed company and has recently paid dividends on its shares of Rs. 9.8 per share.
           The return on equity of S limited is 8% and required rate of return of shareholders is 11%.
           The company current EPS is Rs. 20 per share.
           Required:
           Calculate the market value of shares of S limited.                                              (05)
                                                    2

Q.3. Adnan Ltd. is planning to produce Saturn which requires Material R, Material S and skilled (07)
       labour.
       6 litres of Material R are required for Saturn. Currently it is also being used in Pluto, per unit
       requirement is 5 litres and was purchased at Rs. 3.5/litre. Current purchase cost of R is Rs.
       3/litre.
       Material S would have to be purchased from market at a cost of Rs 1.85/kg and one unit of
       S requires 2.5 kg.
       Saturn requires 3 hrs/unit of skilled labour and it is available in spare capacity. Currently,
       the labour is being paid Rs. 5/hr and it can be hired from the market at Rs. 4/hr.

       Required:
       Calculate the Relevant Cost per unit of Saturn and briefly define Relevant Cost.
Q.4. A company uses material M in the manufacturing of its products. The order quantity of the
       material is 1000 kg. Average usage is 400 kg per week and a safety stock of 500 kg is kept.
       Lead time between order and receipt is 2 weeks.
       Receipts and issues of material M over a three week period were:
                                                                                Total
                                                                    Kg
                                                                              Cost (Rs.)
                           Week 1:      Day 1      Balance b/f     900         10,800
                                        Day 3         Issue        400
                                        Day 5       Receipt       1,000        12,600
                           Week 2:      Day 2         Issue        260
                                        Day 4         Issue        170
                           Week 3:      Day 3         Issue        370
       Required:
           a) Total cost of the four issues if the weighted average method is applied when each (04)
              issue occurs;
          b) Cost of the stock remaining at the end of the three week period if the last-in first- (04)
              out (LIFO) method is applied.
Q.5.   Sana Limited is a small company, selling computer accessories to local buyers, and it has
       been noticed that the return on average assets have been consistent with the growth of the
       company. The following data relates to Sana Limited.
       The operating cash flows from a project for years 2004 to 2007 is as follows:

                                                                        Rs.
                                            2004                 1,000,000
                                            2005                   800,000
                                            2006                   300,000
                                            2007                   500,000

       The initial investment in Machinery in 2004 was Rs. 500,000, which is to be depreciated
       over 4 years to a residual value of Rs. 55,000 on straight line basis.
       Required:
           a) Compute the accounting rate of return (ARR) of the investment at the end of 2007.             (06)
           b) Give four disadvantages of using ARR method.                                                  (05)
           c) Give four advantages of NPV.                                                                  (04)
                                                   3


Q.6. Zubair Trade Centre is a shopping plaza. Mr. Zubair who currently runs the business is (20)
       planning on retiring on his sixtieth birthday in six years’ time, at which point he hopes to
       sell the business to one or some of the existing staff.
       He is currently considering whether to extend the building in order to create more space so
       that he can meet the demand for more shops. . Mr. Zubair estimates that, with the
       extension, he would be able to sell the business as a going concern for Rs 6,000,000 in six
       years’ time. Without the extension, he would expect to sell it for Rs 5,000,000 in six years’
       time.
       Mr. Zubair needs to decide whether
                   • To carry on in business without the extension (Option 1),
                   •   Have the extension built (Option 2),

       The following information is available;
        1. Mr. Zubair has already obtained preliminary planning permission for the extension
           at a cost of Rs. 12,000.
        2. Mr. Zubair’s building costs are estimated to be Rs. 850,000. Of this amount,
           Rs. 450,000 relates to materials and must be paid immediately. The balance of the
           building costs relates to labour and will be paid on completion of the work. The
           work would take one year to complete. The Plaza would still be open as usual
           during the year so revenue would be unaffected by the building work.
        3. The building currently generates net cash inflows of Rs. 980,000 per annum. With
           the extension, these would rise to Rs. 1,350,000 once the work is complete.
           Mr. Zubair pays himself a salary, but this amount has already been deducted
           before arriving at the Rs. 980,000.
        4. The building’s cost of capital is 10% per annum.
        5. Assume that all cash flows occur at the end of each year, unless otherwise stated.

       Required:
       Calculate the net present value (NPV) of each option at the business’s cost of capital. Based
       on these calculations, conclude as to which option Mr. Zubair should choose.
Q.7.   The following are the cash flows from a project which will require an investment of
       Rs. 2,000,000 now:


                                                       Cash Flows
                                            Year
                                                          (Rs.)
                                             1           500,000
                                             2           600,000
                                             3           600,000
                                             4           500,000
                                             5           800,000
       Required:
          a) Calculate the payback period of the proposed project in months.                           (05)
          b) Calculate the discounted payback period in years, given the required rate of              (05)
             return is 10%.
                                                      4

Q.8.   Jiya Ltd. manufactures and sells a single product. The following data have been extracted
       from the current year’s budget:

                                   Contribution per unit                  Rs.8
                                   Total weekly fixed costs        Rs. 10, 000
                                   Weekly profit                   Rs. 22, 000
                                   Contribution to sales ratio            40%
       The company’s production capacity is not being fully utilized in the current year and three
       possible strategies are under consideration. Each strategy involves reducing the unit selling
       price on all units sold with a consequential effect on the budgeted volume of sales. Details
       of each strategy are as follows:

                                                                  Expected increase
                                         Reduction in unit
                            Strategy                               in weekly sales
                                           selling price
                                                                 volume over budget
                                                 %                       %
                               A                  2                      10
                               B                  5                      18
                               C                  7                      25

       The company does not hold stocks of finished goods.
       Required:
         a) Calculate for the current year:                                                            (03)
                (i) The selling price per unit for the product; and
                (ii) The weekly sales (in units).

         b) Determine, with supporting calculations, which one of the three strategies should be (04)
            adopted by the company in order to maximize weekly profits.
         c) Briefly explain the practical problems that a management accountant might (03)
            encounter in separating costs into their fixed and variable components.
         d) If the finished goods stocks of a product are increasing in the coming year. State with (05)
            reasons whether the profit under absorption costing would be higher than profit
            under marginal costing or not.


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MUHAMMAD SARMAD AKRAM MUHAMMAD SARMAD AKRAM MSA www.docstoc.com/profile/muaz007
About me from Pakistan and i am doing job of Garmints and studing