Copyright Reserved

No of pages: 15

Corporate Level
Advanced Management Accounting

(Pilot Paper)

C
Instructions to candidates

1) Time Allowed: Reading &Planning -15minutes -Writing - 3 Hours

2) Total: 100 marks
3) Answer all the questions

L
4) This paper consists of three sections.
Section 01: 10 questions carrying 2 marks each
Section 02: 4 questions carrying 10 marks each
Section 03: 2 questions carrying 20 marks each

5) Answers should be in the English language, and in the answer

booklet/s given to you.
6) Begin each answer on a separate page in the answer booklet. Submit
all workings.

1
 Section 01

This section has 10 questions carrying 2 marks each.

All questions are compulsory.
Total marks for section 01 is 20 marks.

1) Environmental Management Accounting (EMA) has several implications in the

planning and decision making for the organization. Which of the following
implications are true.
(I) Pricing should include the environmental costs implicit in production or
provision of the service
(II) If incremental budgeting is followed, it should be changed to zero-base
budgeting when implementing EMA.
(III) Environmental implications should be incorporated into investment appraisals.

A. (I),(II)
B. (III) only
C. (I) & (III)only
D. All of these

2) The new CEO of DFK Limited is keen on practicing Environmental Management

Accounting (EMA). Which of the following management accounting techniques do
you recommend for the accounting of environmental costs of DFK limited?
(I) Activity-Based Costing
(II) Life Cycle Costing
(III) Flow Cost Accounting
(IV) Input/Output Analysis

A. (IV)Only
B. (II) & (IV)only
C. (II), (III) & (IV)only
D. All of these

3) Identify which pricing strategy is likely to set a high price.

A. A price skimming strategy to exploit price elasticity
B. A price skimming strategy to exploit price in elasticity
C. A penetration price strategy to exploit price in elasticity
D. A penetration price strategy to exploit price elasticity

2
4) Brief descriptions of the nature of five companies are provided below. Identify
which company/companies mostly benefit from adopting life cycle costing.

Company P The company makes products which typically have a long

life
Company Q The company makes products with short product life
cycles
Company R Company’s investment in plant & machinery is quite low
Company S The company incurs high research & development costs
Company T Company has high advertising costs

A. P only
B. P &S
C. Q &S
D. P, R & S
E. Q only

5) SunX Limited is planning to introduce a smart bulb and the company expects the
product to have a life cycle of 3 years. The following volumes and costs have been
estimated.
Year 1 Year 2 Year 3 Year 4
Units manufactured & sold 30,000 80,000 40,000
R&D costs (Rs mn) 10
Production cost per unit 50 45 40
(Rs.)
Warranty costs (Rs mn.) 1 1.5 1 0.5
Dismantling costs (Rs mn.) 2

Determine the life cycle production cost of a smart bulb to the nearest rupee.
A. Rs.151
B. Rs.148
C. Rs.135
D. Rs. 85

6) A company makes the Product DF20 and 300 units have been manufactured to
date. The company plans to make 50 units during the next month. The direct labor
cost of the very first unit manufactured was Rs. 450. Estimate the total direct labor
cost (to the nearest rupee) for the next month if the company is in 80% of the
learning curve.
A. Rs. 2,370
B. Rs. 21,513
C. Rs.2,789
D. Rs.2,390

3
7) The standard raw material cost of a unit is set at Rs. 1500 (5 kgs at Rs 300 per
kg) at the beginning of the month. Due to the exchange rate depreciation,
average prices per kg has been increased to Rs. 400. Thus the company
considers revising the standard cost.

Within the month the company has manufactured 900 units consuming 4680
kgs at a cost of Rs. 1,825,200. Total material planning variance, operating price
variance and operating usage variance of the company during the month
respectively are
A. 475200 (Adverse), 72000 (Favorable), 46800(Adverse)
B. 450,000 (Adverse), 46800 (Adverse), 72000(Favorable)
C. 450,000 (Adverse) ,46800 (Favorable), 72,000 (Adverse)
D. 468,000 (Adverse), 25200 (Adverse), 46800 (Favorable)

8) A company manufactures two products X & Y and it earns a contribution of Rs

200 & Rs 300 per unit respectively. The following graph shows the different
limitations faced by the company when it attempts to maximize the contribution.
Objective function of the company is derived as 0.2 X + 0.3 y=3000.

The optimal combination of X & Y that the company should manufacture are
A. 21000 units of X and 13000 units of Y
B. 24000 units of X and 12000 units of Y
C. 22667 units of X and 13000 units of Y
D. 20500 units of X and 11500 units of Y

4
9) The objective of “reducing staff turnover” is most likely to
appear in the perspective of the balanced scorecard.
A. Customer
B. Financial
C. Learning and growth
D. Internal process

10) Which of the following provides benefits in big data and predictive analytics.
(I) Analytics can benefit any aspect of an organization but some of the most
significant results are in customer acquisition, retention, and development
(II) High precision sales forecasting can be important for suppliers of perishable
items which can be achieved using big data
(III) Using predictive analytics and risk segmentation, organizations can identify
patterns that lead to fraud detection.
(IV) Using big data, a supermarket is able to discover the pregnancy of a person even
before she makes a public announcement

A. I & II only
B. I, II & III only
C. II & IIIonly
D. All of these

5
 Section 02

This section has 4 questions carrying 10 marks each.

All questions are compulsory.
Total marks for section 02 is 40 marks.

Question 01
Wild Leopard is a hotel that provides eco-tourism experience to foreign tourists in Sri
Lanka. The hotel provides two types of luxury tented chalets; Standard and Deluxe. The
monthly operating overhead cost of the company is Rs. 1.8 million. The company
identifies 60% of these costs with the operation cost center and the balance with the
maintenance cost center.
Costs of the operation center are absorbed based on the expected occupancy level of
room nights. Maintenance costs are absorbed as 31% of the direct costs of each chalet.
Under normal circumstances, the company estimates an occupancy level of 80 room
nights for a standard chalet and 50 room nights for a deluxe chalet per month.
The management wishes to change the current absorption costing system to the Activity
Based Costing system for computing the cost per room night. The following information
is available.
✓ The company has allocated the operating overhead cost to the activities as given below.

Activity Cost (Rs.) Cost driver

Luggage delivery 50,000 Number of deliveries
Reception and billing 350,000 No of bills
Restaurant operation 800,000 No of Kitchen Order Tickets
Swimming pool maintenance 460,000 No of guests
Handling pickup and drop off 140,000 No of pickups/drop-offs

✓ Estimated volumes of cost drivers for two types of chalets are given below.

Cost driver Standard Deluxe

Number of deliveries 120 70
No of bills 80 50
No of Kitchen Order Tickets 75 45
No of guests 160 110
No of pickups/drop-offs 120 75

6
✓ Direct cost per room, per night for a standard chalet is Rs.12,500 while a deluxe
chalet is Rs.17,000.

Required:
a) Compute the total operating cost (i.e direct cost plus operating overhead cost) per
room night of each chalet under Absorption Costing and Activity Based Costing.
(07 marks)
b) Discuss the benefits of applying Time Driven ABC method instead of
traditional ABC method by Wild Leopard Company.
(03marks)
(Total 10marks)

7
Question 02
Nepearth (Pvt) Ltd has earned a reputation for the quality tea it produces. The company
has two divisions: the bulk division and packet division. At present all the output of the
bulk division is transferred to the packet division. Packet division makes 100g packets
from each kilo of bulk tea transferred by the bulk division by mixing in different flavors.
The cost details of the two divisions are given below.
Bulk Division Rs. Packet Division Rs.
Variable cost per kg of bulk 650 Variable cost per 100g flavored 25
tea packet (excluding transfer price)
Fixed cost per kg of bulk tea 10 Fixed cost per 100g flavored packet 8
Selling price kg of bulk tea in 750 Selling price per 100g flavored 125
the outside market packet

Bulk Division has produced 9,000 kgs in June 2020.

Required:
a) Compute the profit of Nepearth (Pvt) Ltd for the month of June 2020.
(02 marks)
b) Recommend the minimum transfer price that should be charged by the bulk division
if it operates under a full capacity.
(01 marks)
c) Company pays a bonus for its divisional staff based on divisional profit calculated as
5% from the monthly profit. If the company has the following policies for transfer
price calculate the bonus received by each division.
i. Full Cost plus20%
ii. Marketprice
(04 marks)
d) Discuss how transfer pricing may lead to suboptimal decisions in an organization
specially when negotiating a transfer price by two investment centres.
(03marks)
(Total 10marks)

8
Question 03
Nas (Pvt) Ltd has recently faced considerable variability in demand. The company is
evaluating two short term capacity modification strategies; i.e changing inventory
levels and varying workforce.
The following information is available for the first quarter of 2020.

January February March April

Demand forecast 2,000 2,500 2,500 2,000
No of working days 22 19 21 20

Other information is as follows.

Opening stock -January 200 units

Labor hours required 2 hrs/unit
Working hours per day 8 hours
No of employees at the beginning 26
Labor cost/hour (Rs) 100
Cost of hiring & training/person (Rs) 5,000
Cost of layoff/person (Rs.) 10,000
Stock holding cost/per unit-per month10
(Rs)
Stock out cost/unit (Rs) 15

Required:
Evaluate the following options for the quarter ending March 2x20 and recommend the
best course of action.
Option A) : Company changes the workforce in the short term capacity planning.
(Assume closing stock requirement is 20% of next month demand)
Option B) : Company changes the stock level while keeping a stable workforce.
(Total 10 marks)

9
Question 04
PiX Ltd is considering changing its credit policy for receivables. At present, the company
provides a credit period of 30 days and the management is considering to extend this
period up to 45 days. This is expected to increase sales by 10%. However, it is also
estimated that the new policy would increase the current level of bad debt from 1% to
2%.
The current level of sales and profit are as follows.

Rs mn
Sales 500
Cost of sales -300
200
Less: Bad debt -5
Profit 195

The cost of sales is 80% variable and20% fixed. The company settles its creditors
within 45days and sells goods within 20 days. These are not expected to change with
the new decision of extending the credit period. The company finances its working
capital at a rate of 15%.

Required:
a) Identify the new cash conversion cycle of the company and discuss why it is
important tomanage.
(04 marks)
b) Recommend whether to change the credit policy for receivables ornot.
(06 marks)
(Total 10 marks)

10
 Section 03

This section has 2 questions carrying 20 marks each.

All questions are compulsory.
Total marks for section 03 is 40 marks.

Question 05
The government has decided at a policy level to purchase locally manufactured tablet
computers to distribute to Advanced Level students. A local computer manufacturer
Tech- Wis (Pvt) Ltd has identified this as desktop and laptop computers. The company is
in the process of evaluating the project for supplying tablet computers.

National education statistics show that 300,000 students qualify annually for advanced
level studies. The Marketing Director has already had discussions with top government
officials and he is confident that 25% of the market can be captured in year1. Sales are
expected to increase at the rate of 10 percent per annum for the remainder of the life of
the project.

The company’s research and development division has already spent Rs. 15 million in
developing the product. A further investment of Rs. 1500 million in a new
manufacturing facility will be required at the beginning of year1. It is expected that the
new manufacturing facility could be sold for Rs 200 million, cash at year 5 prices, at the
end of the life of the project. The manufacturing facility will be depreciated over 5 years
using the straight-line method.

The project will also require an investment of Rs.50 million in working capital at the
beginning of the project. The amount of investment in working capital is expected to
increase by the rate of inflation each year.

The selling price of a new tablet computer in year1 will be Rs.20,000 and the variable
cost will be Rs. 12,000 per unit. The selling price and the variable cost per unit are
expected to increase by the rate of inflation each year.

The tablet computers will be exclusively produced in the new manufacturing facility.
The total fixed costs in year1 will be Rs. 450 million including depreciation. Moreover,
this fixed cost includes Rs. 3 million, the annual salary of the current operations
director. The current operations director is expected to manage the new manufacturing
facility as well. The fixed costs are expected to increase by the rate of inflation each year.

According to tax rules, capital allowances for a new manufacturing facility is provided
for over 5 years on a straight-line basis. Assessable charge (on disposal gains) and
balancing allowances (on disposal loss) are also subject to tax and payable in the
succeeding year of terminating the project.

11
The tax rate applicable to the company is14%. Half of the tax will be paid in the year it
arises and the balance is paid in the following year. The company has sufficient taxable
profits from other parts of its business to absorb any tax losses from the new project.

The cost of capital (nominal) of the company is 15% per annum. However, the finance
director is of the view that a 5% risk premium should be added on top due to the extra
risk in government projects. Based on the forecast of macroeconomic data, inflation is
expected to be 5% over the next five years.

Required:
a) Evaluate whether Tech-Wis (Pvt) Ltd should undertake this new project on the basis
of Net Present Value (NPV).
(12 marks)
b) The Managing Director is interested to know the return of the project as a percentage.
However he dislikes IRR due to inherent weaknesses. Suggest, with justification, a
better measurement of return for the project and Compute the same.
(04 marks)

c) The Managing Director asks the Finance Manager how the government would
evaluate costs and benefits of the project of providing laptops to A/Lstudents. The
Finance Manager replied that the government could use Economic Net Present Value
(ENPV) and Economic Internal Return (EIRR). Differentiate ENPV & EIRR from
NPV & IRR.
(04 marks)

(Total 20 marks)

12
Question 06

Opex Ltd is planning to launch new kitchen equipment with multiple tasks and low
energy consumption. This is totally a new product line where the company has no
previous experience. However, the company has been selling agricultural processing
equipment for 10 years. Marketing Manager has obtained the services of a market
research firm to decide a selling price and estimate the potential sales volume.
Accordingly, the market research firm has provided three prices along with probable
sales volumes. Different probabilities have been identified based on market conditions
for each price category.

Price per unit-Rs. 6,500 Price per unit-Rs. 7,250 Price per unit-Rs. 8,000
Probability Sales Volume Probability Sales Volume Probability Sales Volume
(Per annum) (per annum) (Per annum)
0.4 10,000 0.3 9,000 0.25 7000
0.5 10,500 0.5 8,000 0.45 7500
0.1 11,000 0.2 8,500 0.3 7250

Advertising costs are estimated to be Rs. 4 million per annum at the selling price of Rs.
6,500 and Rs. 5 million at the selling price of Rs. 7,250. The estimated variable
production cost is Rs. 3,500 below 10,000 units per year and it would be Rs..3,000 for
10,000 units and above. The current fixed costs of the company are Rs110 mn per
annum and this is expected to rise by 10% with the new product for volumes below
8,000. The expected rise in fixed cost is 11% for volumes 8,000 and above but less than
10,000 units. Fixed costs will rise by 12% for volumes of 10000 and above.

The company also finds similar products in the international market and is looking at
the feasibility of importing and selling the product in the local market under the
company brand name as an alternative to inhouse manufacturing.
A foreign supplier has quoted prices based on different volumes which are given below.
Further, the direct costs including irrecoverable taxes of importing the product are
provided.

13
 10000 units 8000 units and Below 8000 units
above
and above
but less than 10000
units
Price quoted –Rs. 3100 3900 4000
Direct costs & irrecoverable 10% 15% 20%
taxes-as a % of quoted price

Importing the product would result in a decrease in the incremental fixed cost estimated
under the manufacturing option by 50%.

The Operations Manager has come up with the following risks at the operational level
when the new product is launched.
• As the new product requires a high voltage of electricity, it is expected to have
power interruptions that would cause damage to existing machinery.
• Employees may be injured when handling new machinery required for the new
product.
• As the current warehouse space is not sufficient, it needs to stock the finished
goods at a third party location obtained on a rent basis which may create room
for theft.
• According to the layout of the factory, some of the processes of the new product
will be set up in proximity to the main boiler of the factory.

14
Required:
a) Estimate the profit the company could earn under different prices and
recommend whether it is best to import or manufacture the product at each of these
prices.
(09 marks)
b) Recommend a price that the company should set for the new product on the basis of
expected value of profit.
(02 marks)
c) If the company chooses a maximum decision rule, explain whether you would
change the recommendation in part b)
(03 marks)
d) Recommend strategies to manage the operational risks by applying TARA
framework.
(06 marks)
(Total 20 marks)

-End of the Question Paper-

15