THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH

CMA JUNE, 2018 EXAMINATION

OPERATIONAL LEVEL
SUBJECT: P1. PERFORMANCE OPERATIONS
Time: Three hours Full Marks: 100
 All questions are to be attempted.
 Show computations, where necessary.
 Answer must be brief, relevant, neat and clean.
 Start answering each question from a fresh sheet.

Q. No. 1
What is working capital cycle? Explain what is meant by an aggressive policy in respect of the
level of investment in, and financing of, working capital.
[Marks: 5]
Q. No. 2
Material MNM is a key raw material of ABC Ltd. The store keeper is interested in knowing the
units they have placed on order because the supporting documents have been destroyed by
fire. He is able to provide that immediately before the fire: materials in inventory were 1,250;
materials requested by factory but yet to be supplied issued were 375 whilst inventory balance
was 3,255. What is the amount of material MNM that ABC has ordered from its suppliers?
[Marks: 5]
Q. No. 3
Budgetary control is one of the important tools used by management, yet most organizations
are unable to derive its full benefits.
Identify and explain FOUR reasons that may account for unsuccessful implementation of a
budgetary control system.
[Marks: 5]
Q. No. 4
When management rejects projects with positive net present value because of capital
constraints, they lose opportunities to enhance the value of shareholders. Suggest three
practical ways of dealing with capital rationing so as not to discard projects with positive net
present value.
[Marks: 5]
Q. No. 5
(a) Following information is an inventory problem is available:
Annual demand 2,400 units; unit price Tk. 2.40; ordering cost Tk. 4.00; storage cost 2%
per year; Interest rate 10% p.a.; Lead time ½ month.
Required:
EOQ and total inventory cost.
(b) SUN LIGHT Limited produces and sells two products: an Optical Mouse; and a Trackball
Mouse.
Projected sales for each quarter of 2019 are tabulated below:
2019 Projected Sales
Q1 Q2 Q3 Q4
Units Units Units Units
Optical Mouse 4,500 5,000 7,000 3,500
Trackball Mouse 2,500 4,000 5,500 2,500

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CMA JUNE, 2018 EXAMINATION
OPERATIONAL LEVEL
SUBJECT: P1. PERFORMANCE OPERATIONS

Q. No. 5 (cont’d…)

Notes:
- Each Optical Mouse is sold for Tk.100 and each Trackball Mouse is sold for Tk.200.
- Customers pay in full when purchasing the Optical Mouse.
- Customers pay a 40% deposit when ordering each Trackball Mouse with the balance
payable in the following quarter.

The selling price of each Trackball Mouse will increase by Tk.100 on 1 October 2019.
- SUN LIGHT Limited owes Tk.375,000 to suppliers on 1 January 2019, to be settled on 1
March 2019.
- Both products and raw materials are produced/procured on a Just in Time (JIT) basis.
- The company used to produce the Trackball costs Tk.100 and the company used to
produce the Optical costs Tk.50. SUN LIGHT Limited is given three months after the date
of purchase to settle the account.
- Two staff members will be employed from 1 April 2019 onwards at a monthly cost of
Tk.4,000 each plus employer’s on-costs of 30%.Wages are paid in the month incurred
and on-costs are settled one month in arrears.
- Factory rental is payable (in even instalments) three months in arrears on the quarter
days 1 January, April, July and October. The annual rental for the year ended December
2019 has been fixed at Tk.300,000.
- Dividends of Tk.30,000 will be declared on 31 March 2019. They will be paid three months
after declaration.
- SUN LIGHT Limited is owed Tk.600,000 from customers from sales of slides in the last
quarter of 2018.
- SUN LIGHT Limited expects to have cash of Tk.20,000 on 31 December 2018.

Required:
(i) Prepare a quarterly cash budget for SUN LIGHT Limited for the year ended 31 December 2019.
(ii) Briefly discuss the relevance of the concept “Cash is King” in today’s economic
environment.
[Marks: 5+(10+5) = 20]
Q. No. 6
A Television manufacturer has been experiencing financial difficulties over the past few years.
Sales have reduced significantly as a result of the worldwide economic recession. Costs have
increased due to quality issues that led to a recall of some models of its televisions.
Production volume last year was 50,000 televisions and it is expected that this will increase by
4% per annum each year for the next five years.
The company directors are concerned to improve profitability and are considering two potential
investment projects.
Project 1 – implement a new quality control process
The company has paid an expatriate Tk.50,000 to review the company’s quality processes. The
expatriate recommended that the company implement a new quality control process. The new
process will require a machine costing Tk.20,000,000. The machine is expected to have a
useful life of five years and no residual value.
It is estimated that raw material costs will be reduced by Tk.62 per Television and that both
internal and external failure costs from quality failures will be reduced by 80%.

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CMA JUNE, 2018 EXAMINATION
OPERATIONAL LEVEL
SUBJECT: P1. PERFORMANCE OPERATIONS

Q. No. 6 (cont’d…)

Estimated internal and external failure costs per year without the new process, based on last
year’s production volume of 50,000 televisions, and their associated probabilities are shown
below:

Tk. Probability Tk. Probability

300,000 50% 1,300,000 60%
500,000 30% 1,900,000 30%
700,000 20% 3,000,000 10%

Internal and external failure costs are expected to increase each year in line with the number of
televisions produced.
The company’s accountant has calculated that this investment will result in a net present value
(NPV) of Tk.1,338,000 and an internal rate of return of 10.5%.
Project 2 – in-house component manufacturing
The company could invest in new machinery to enable in-house manufacturing of a component
that is currently made by outside suppliers. The new machinery is expected to cost
Tk.15,000,000 and have a useful life of five years and no residual value. Additional working
capital of Tk.1,000,000 will also be required as a result of producing the component in-house.
The price paid to the current supplier is Tk.370 per component. It is estimated that the in-house
variable cost of production will be Tk.260 per component. Each television requires one
component. Fixed production costs, including machinery depreciation, are estimated to
increase by Tk.5,000,000 per annum as a result of manufacturing the component in-house.
Depreciation is calculated on a straight line basis.
Additional Information
The company is unable to raise enough capital to carry out both projects. The company will
therefore have to choose between the two alternatives.
Taxation and inflation should be ignored.
The company uses a cost of capital of 8% per annum.
Required:
(a) Calculate for Project 1 the relevant cash flows that the accountant should have used for
year 1 when appraising the project.
All workings should be shown in Tk.000.
(b) Calculate for Project 2:
(i) the net present value (NPV);
(ii) the internal rate of return (IRR).
All workings should be shown in Tk.000.
(c) Advise the company directors which of the two investment projects should be
undertaken.
[Marks: (6+10+4) = 20]

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CMA JUNE, 2018 EXAMINATION
OPERATIONAL LEVEL
SUBJECT: P1. PERFORMANCE OPERATIONS

Q. No. 7

JAMUNA limited produces Superior, Deluxe and Super Deluxe Fan for sale during summer. Its
manufacturing plant is located in Gazipur and currently producing at 100% capacity. Below is
the annual output and sales for each product and the associated costs.

Product Superior Deluxe Super Deluxe

Units sold 5000 units 3,500 units 4000 units
Taka Taka Taka
Sales
2,500,000 2,800,000 3,800,000
Costs:
Material cost 750,000 1,400,000 1,520,000
Labour costs 600,000 1,050,000 1,200,000
Manufacturing O’head 200,000 650,000 300,000
Administrative cost 200,000 100,000 200,000
Total cost 1,750,000 3,200,000 3,220,000
Profit /Loss 750,000 (400,000) 580,000

The Plant Director of JAMUNA is of the view that the product, Deluxe Fan is not doing well and
must not be produced any longer. The following additional information has been provided.
(i) 40% of the labour cost for all Fan type are fixed costs.
(ii) 50% of the manufacturing overhead is variable costs for all products.
(iii) 80% of the administrative cost is fixed.

KARNAFULI limited situated at Chittagong has requested for 80 units of each Fan and they are
ready to procure them at the current prices. JAMUNA Ltd can only produce more if they
increase production capacity in the short term at an additional cost of Taka 80, 000. Assuming
that costs and prices remain the same.
You are required to:
(a) Advice whether the company should shut down the production of Deluxe Fan.
(b) Should the company accept the new order assuming Deluxe Fan will still be produced?
[Marks: (10+10) = 20]
Q. No. 8

MEGHNA provides a range of project management services to clients, ranging from one-off
design of buildings to overall development, and ongoing supervision in completion of structures.
As it is a service company it incurs only labour and overhead costs. MEGHNA have two
categories of labour cost, technical and secretarial support. To allocate labour costs to jobs,
separate technical labour and secretarial support labour rates are calculated and applied to
jobs based on hours worked.
Currently the company uses traditional overhead absorption, allocating overheads to jobs
based total labour hours worked (both technical and secretarial support)
In an attempt to improve accuracy in tendering for new jobs and to better assess profitability of
existing contracts,
MEGHNA is considering adopting an activity based costing (ABC) approach to overhead
allocation. Last year, to facilitate the adoption of ABC, the firm employed accountants to
research and compile the detailed information required. Four main cost types or pools were
identified: design costs, planning costs, supervision costs and sundry completion costs. The
following budgeted information is available for the year ahead:

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CMA JUNE, 2018 EXAMINATION
OPERATIONAL LEVEL
SUBJECT: P1. PERFORMANCE OPERATIONS

Q. No. 8 (cont’d…)

Cost pool Cost driver Tk.

Design costs Number of drafts of project 18,333

Planning costs Number of planning meetings 32,170
Supervision costs Number of site visits 42,084
Sundry completion costs Secretarial support labour hours 25,202

Technical labour cost Tk. 245,000

Secretarial support labour cost Tk. 162,015
Technical labour hours 1,960
Secretarial support labour hours 9,258
Number of drafts of projects 378
Total site visits 560
Number of planning meetings 250

Details relating to two jobs undertaken by MEGHNA are as follows:

PQS XYZ

Contract price agreed Tk.10,000 Tk.10,000

Technical labour hours 50 45
Secretarial support labour hours 67 49
Number of drafts of project 5 7
Site visits 15 30
Planning meetings 6 10

Required:
(a) Calculate the total cost of each of the two jobs noted above using:
(i) The costing approach currently used by MEGHNA
(ii) Activity based costing.
(b) Compare and comment on your answers in (a) (i) and (ii) above.
[Marks: (6+11) +3 = 20]

= THE END =

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