CMA JUNE-2020 EXAMINATION

OPERATIONAL LEVEL
P1. PERFORMANCE OPERATIONS

Model Solution

Solution of the Q. No. 2(a)

Value Analysis is a systematic interdisciplinary examination of the factors which affect the cost of a
product in order to determine the means of achieving the specified purpose in the most economical
manner while meeting the required level of quality and reliability.
Functional Cost Analysis is a method that can be applied to examine the component costs of a product or
service in relation to the value as perceived by the customer. Functional Cost Analysis can be applied to
new products and breaks the product down into its component parts. For example a garden table may
have the function to fold completely flat and therefore require much less storage space. The outcome of
the analysis is to improve the value of the product while maintaining costs and or reduce the costs of the
product without reducing value.
Value Analysis may therefore be viewed as a cost reduction and problem solving technique that analyses
an existing product in order to identify and reduce or eliminate any costs which do not contribute to value
or performance.
In contrast, Functional Cost Analysis focuses on the value to the customer of each function of the product
and consequently allocates resources to those functions from which the customer gains the most value.
It is clear from the scenario that SBC needs to be able to reduce its selling prices in order to compete in
the market. This selling price reduction can only be sustained by a reduction in SBC’s unit costs; however
such a reduction must not be achieved by compromising on quality.
Both value analysis and functional cost analysis have potential to help SBC but value analysis is likely to
be a more useful technique because garden tables and chairs are products that are sold more on the
basis of their use value rather than their esteem value.

(b)
Variable cost = Tk.50 per employee per month
Fixed costs = Tk.10,000 per month
Activity Cost
No employees Tk.
High 1,300 75,000
Low 1,175 68,750
125 6,250
Variable cost per employee = Tk.6,250/125 = Tk.50
For 1,175 employees, total cost = Tk.68,750
Total cost = variable cost + fixed cost
Tk.68,750 = (1,175 × Tk.50) + fixed cost
∴ Fixed cost = Tk.68,750 – Tk.58,750 = Tk.10,000

(c)
(i) Planning variance Tk.
Revised standard cost (780 × 4.5kg × Tk.6.50) 22,815
Original standard cost (780 × 4.5kg × Tk.6.00) 21,060
1,755 (A)

Operational price variance Tk.

Actual cost of actual kg used 14,175
Revised standard cost of actual kg (2,250 × Tk.6.50) 14,625
450 (F)
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Operational usage variance
780 units should have used (× 4.5 kg) 3,510 kg
but did use 2,250 kg
Operational usage variance in kg 1,260 kg (F)
× revised standard price per kg × Tk.6.50
Operational usage variance in Tk. Tk.8,190 (F)

(ii) Three possible courses of a favorable operational usage variance are as follows.
(i) The material was of a higher quality than in the standard therefore wastage was lower than
standard.
(ii) The original standard usage per unit was set too low.
(iii) The direct labour were more highly skilled than standard and therefore they used the
material more efficiently than standard.
(d)
(i) The carrying costs are the average inventory times the cost of carrying an individual unit, so:
Carrying costs = (450/2) (Tk. 37) = Tk. 8,325
(ii) The order costs are the number of orders times the cost of an order, so:
Restocking costs = 52(Tk. 125) = Tk. 6,500
(iii) The economic order quantity is:
EOQ = [(2T × F)/CC]1/2 EOQ = [2(52) (450) (Tk. 125)/Tk. 37]1/2 EOQ = 397.63
The number of orders per year will be the total units sold per year divided by the EOQ, so:
Number of orders per year = 52(450)/397.63
Number of orders per year = 58.85
The firm’s policy is not optimal, since the carrying costs and the order costs are not equal. The
company should decrease the order size and increase the number of orders.
(e)
Mizan
As a risk neutral investor Mizan will base his decision on the expected value of each investment.
These are calculated as follows:
Investment A = (Tk. 6,000x0.1) + (Tk. 5,000x0.4) + (Tk. 4,000x0.5) = Tk. 4,600
Investment B = (Tk. 14,000x0.1) + (Tk. 3,000x0.4) + (Tk. 500x0.5) = Tk. 2,850
Investment C = (Tk. 3,000x0.1) + Tk. 5,000x0.4) + (Tk. 8,000 x 0.5) = Tk. 6,300
Mizan will therefore choose to invest in Investment C as it has the highest overall expected value.
Zahir
As a risk seeker Zahir will ignore the expected value and probabilities, and he will focus solely on the
payouts. He will apply the maximax criteria and consider where the highest payout might arise. The
highest possible return is the Tk. 14,000 that arises in a good market state for investment B. Zahir
will therefore choose to invest in Investment B.
Jaman
To apply the minimax regret criteria Jaman will have to create a regret table as follows:
State of the economy Regret
A B C
Tk. Tk. Tk.
Good 0 0 5,000
Fair 1,000 9,000 3,000
Poor 2,000 13,500 0

If Jaman where to invest in Investment A, the maximum regret would be Tk. 2,000, in B it would be
Tk. 13,500 and in C it would be Tk. 5,000. Jaman will therefore choose to invest in Investment A as it
has the lowest maximum regret of the three investments.

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Solution of the Q. No. 3

*Budgeted fixed production costs ÷ Budgeted output (normal level of activity) =Tk.1,600 ÷ 800 units
Absorption rate = Tk.2 per unit produced.
During the quarter, the fixed production overhead absorbed was 220 units × Tk.2 = Tk. 440.
* Actual fixed production overhead 400 (¼ of Tk. 1,600)
Absorbed fixed production overhead 440
Over absorption of overhead 40

(a) Profit for the quarter, absorption costing

Tk. Tk.
Sales (160 × Tk.20) 3,200
Production costs
Variable (220 × Tk.8) 1,760
Fixed (absorbed overhead (220 × Tk.2)) 440
Total (220 × Tk.10) 2,200
Less closing inventories (60 × Tk.10) 600
Production cost of sales 1,600
Adjustment for over-absorbed overhead 40
Total production costs 1,560
Gross profit 1,640
Less: sales and distribution costs
variable (160 × Tk.4) 640
fixed (1/4 of Tk.2,400) 600
1,240
Net profit 400

(b) Profit for the quarter, marginal costing

Tk Tk.
Sales 3,200
Variable production costs 1,760
Less closing inventories (60 × Tk.8) 480
Variable production cost of sales 1,280
Variable sales and distribution costs 640
Total variable costs of sales 1,920
Total contribution 1,280
Less: Fixed production costs incurred 400
Fixed sales and distribution costs 600
1,000
Net profit 280

(c) The difference in profit is due to the different valuations of closing inventory. In absorption costing, the
60 units of closing inventory include absorbed fixed overheads of Tk.120 (60 × Tk.2) , which are therefore
costs carried over to the next quarter and not charged against the profit of the current quarter. In marginal
costing, all fixed costs incurred in the period are charged against profit.
Absorption costing profit 400
Fixed production costs carried forward in inventory values 120
Marginal costing profit 280
(d)
(i) Fixed production costs are incurred in order to make output. It therefore seems fair to charge
all output with a share of these costs.
(ii) The requirements of the international accounting standard on inventory valuation (IAS 2) state
that closing inventory values should include a share of fixed production overhead. Absorption
costing fulfils that requirement.
(iii) Absorption costing is consistent with the accruals concept as a proportion of the costs of
production are carried forward to be matched against future sales.
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 (iv) Absorption costing involves charging fixed overheads to a product. This means it is possible
to ascertain whether it is profitable or not. The problem with calculating the contribution of various
products made by an enterprise is that it may not be clear whether the contribution earned by
each product is enough to cover fixed costs.
(v) Absorption costing is particularly useful in pricing decisions in a job or batch costing
environment. It ensures that the profit markup is sufficient to cover fixed costs.
(e) To: managing director
From: management accountant
Date: 17 July 20X1
Subject: Inadequacy of traditional management accounting
Inadequacy 1
Traditional management accounting grew out of cost accounting and hence its roots are in manufacturing.
For much of the twentieth century, manufacturing operated in a business environment in which the
supplier was of utmost importance, competition was largely local and the speed of technical and social
development, although rapid compared with earlier eras, was far slower than at present. This simple
operating environment meant that an organisations' managers were able to anticipate events easily and
plan with more certainty using minimal external information than is possible today. Now however, it is the
customer who is king and the competitive environment constantly threatens a product's life cycle. To
compete effectively organisations must therefore be flexible enough to cope with changes in customer
requirements. Such a focus on customers and competition requires a more forward-looking approach,
which must be substantially outward looking and focus on external information, as opposed to the
backward-looking and inward-looking approach of traditional management accounting.
Inadequacy 2
The 'management' that traditional management accounting was primarily intended to serve was
production management, hence the traditional emphasis on accounting for labour costs, materials costs
and production overheads. Changes in organisations' cost structures and in the nature of costs have
affected the relevance of such an emphasis, however, and have led to the use of possibly misleading
information, especially with regard to overhead absorption.
Inadequacy 3
The internal information used by management accounting tended to be sourced from accounting
systems which were directed towards financial reporting, but the classifications of transactions for
reporting purposes are not necessarily relevant for decision making.
Solution of the Q. No. 4
(a)
Contribution Years 1 – 5

Year 1: 100,000 x Tk.20 = Tk.2,000k

Year 2: 100,000 x 1.2 = 120,000 x Tk.20 = Tk.2,400k x 1.04 = Tk.2,496k
Year 3: 120,000 x 1.2 = 144,000 x Tk.20 = Tk.2,880k x 1.042 = Tk.3,115k
Year 4: 144,000 x 1.2 = 172,800 x Tk.20 = Tk.3,456k x 1.043 = Tk.3,888k
Year 5: 172,800 x 1.2 = 207,360 x Tk.20 = Tk.4,147k x 1.044 = Tk.4,852k
Fixed Costs
Depreciation per annum = (Tk.10m – Tk.1.5m) / 5 = Tk.1.7m

Fixed costs (excluding depreciation) per annum

= Tk.2.5m – Tk.1.7m = Tk.0.8m
Taxation
Year 1 Year 2 Year 3 Year 4 Year 5
Tk. 000 Tk.000 Tk.000 Tk.000 Tk.000

Contribution 2,000 2496 3115 3888 4852

Fixed Costs (800) (832) (865) (900) (936)
Net Cash flows 1200 1664 2250 2988 3916
Tax depreciation (2500) (1875) (1406) (1055) (1664)
Taxable profit (1300) (211) 844 1933 2252
Taxation @30% 390 63 (253) (580) (676)

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Net Present Value

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Tk.000 Tk.000 Tk. 000 Tk.000 Tk.000 Tk.000 Tk.000

Investment/ (10,000) 1500

Residual value
Working Capital (3000) (120) (125) (130) (135) 3510
Net Cash Flow 1200 1664 2250 2988 3916
Tax Cash Flow 195 32 (127) (290) (338)
Net cash flow after tax(13000 1275 1766 2024 2437 8209 (338)
Discount factor 1.000 0.893 0.797 0.712 0.636 0.567 0.507
Present Value (13000) 1139 1408 1441 1550 4705 (171)

Net present value = - Tk.2,928k

The net present value is negative therefore the project should not go ahead.

(b)
The project is concerned with the education of children in computer science and with encouraging them to be
involved in computer science at an early age. This is a new market for the company and may have long term
benefits if children start to use full scale computers at an earlier age than normally would be expected.

Whilst the project makes a negative net present value the company may be able to improve its brand image if it
is seen to be supplying relatively low cost computers to the education market. The company could benefit from
being involved in this project as they are being seen to be concerned with the education needs of children.

(c)
(i)

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Tk.000 Tk.000 Tk. 000 Tk.000 Tk.000 Tk.000 Tk.000

Net Cash flow (13000) 1275 1766 2024 2437 8298 (338)
After tax
Discount factor 1.000 0.962 0.925 0.889 0.855 0.822 0.790
@4%
Present Value (13000) 1227 1634 1799 2084 6821 (267)

Net present value at 4% discount rate = Tk. 298k

By interpolation:

IRR = 4% + ((Tk.298k / (Tk.298k + Tk.2,928)) x 8) = 4.74%

(ii)

The cost of capital is 12%.

(12 – 4.74) / 12 = 61%
For the project to be accepted the cost of capital would need to reduce by 61%.

= THE END =