INSTITUTE OF CERTIFIED

MANAGEMENT ACCOUNTANTS OF SRI LANKA

Incorporated by Parliament Act No.23 of 2009

SUGGESTED SOLUTIONS
Published by CMA Sri Lanka Business School

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The copyright of this Suggested Solutions is reserved by the Institute of Certified Management
Accountants of Sri Lanka (CMA Sri Lanka) and Suggested Solutions neither in whole nor in part
may be reproduced without the prior written approval from the Institute. The purpose of the
suggested solutions is to provide only a guidance and not to be constructed as complete answers

401 - SMA - Strategic Management Accounting

Strategic Level
May 2021
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PART-I

QUESTION NO. 01 [Total 40 Marks]

1.1. As the management accountant of the Great Bank PLC, construct a suitable format to
compare Great Bank performance with the competitor banks and evaluate Great Bank
performance against the performance of competitor banks, ranking the best as 1 and the
least as 4. You need to identify four non-financial indicators including two relative
market shares and six financial indicators including two growths indicators:
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Competitor Analysis - Year 2020

Bank Great Bank Trust National Horizon
Bank Bank Bank
Year ended Year ended Year ended Year ended Rank
31st Dec. 31st Dec. 31st Dec. 31st Dec.
2020 2020 2020 2020
Non-financial
No of branches 200 250 150 175 2
No of employees 3000 3500 2500 2300 2
Deposit Market 22.22 33.33 18.52 25.93 3
Share %
Advances Market 24.40 34.45 20.10 21.05 2
Share %

Financial
Cost to income ratio 62.5 50 71.43 46.67 3
Profit before tax 6 10 4 8 3
Deposit base 300 450 250 350 3
Deposit Growth % (6.25) 2.27 (1.96) 1.45 4
Advance base 255 360 210 220 2
Advances Growth % (1.92) 2.86 2.44 4.76 4

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1.2. Assess external environment which affects the entire banking industry and the
Great Bank using PESTEL model to exploit the opportunities and avoid the threats
in the environment:
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PESTLE analysis
Political factors:
Government is responsible for protecting the public interest; Political stability affects business
decision, Consumer protection and Regulations of business activities.

Economic factors:
Competitor activity, Competition for resources. Savings, Unemployment numbers, Inflation
rates, Interest Rates, Credit availability, monetary policies and Climate changes which affect on
GNP.

Socio Cultural factors:

Work life balance, Trends in consumer behaviours, Leisure & Lifestyle and Attitude on
technological trends.

Technological factors:
Degree of adaptation to emerging technological trends, Technology breakthroughs develops
new products (internet), improved communication infrastructure of the banks, Internet
business and Cyber security threats.

Legal factors:
Government rules and regulations, Laws, Tax system, Traffics, strict guidelines on privacy,
consumer protection, e-commerce and trade structures.

Environmental factors:
Weather and Climate changes, Waste management practices, environmental safeguards,
Attitudes on “Green bank” concept and renewable energy

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1.3. Apply Porter’s five forces model to Sri Lankan banking industry to determine the
level of competition and profit potential:
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Porter’s five forces

1. Competitors rivalry:
Competition is very high in the banking industry. There are nearly 30 Local and Foreign
banks available all around the island. Best Bank is unique. It wins customers heart and
trust by standing nearly with local customers. The competitor rivalry is high and the
profit is average.

2. Threats of new entrants:

Nearly impossible for a new bank to enter into the banking industry and to offer trust
and the full range of services. Because they need huge amount of investment and high
level of rules and regulations imposed by the government. Therefore, it is possible to
earn higher level of revenue in the industry and the threat of new entrance is low.

3. Bargaining power of suppliers:

This includes Customer Deposits, Mortgage and Loans, Loan from other institutions.
Thus, bargaining power of supplier of Best Bank will have a long term negative impact
on this entity. This will lead to an increase in costs and decrease in profits.

4. Bargaining power of buyers:

Customers expect more benefits & security with what they invest and expect more high-
quality services like loans, mortgages, etc. The cost incurred in retaining and
maintaining the needs of the valuable customers in the bank is high. Buyer cost of
switching is high and buyers are price sensitive.

5. Threat from substitutes:

There is no high threat from substitutes for banking industry in Sri Lanka. Based on
Porter’s five forces, we can conclude that Best bank maintains a stable and profitable
business which is a well governed, winning and managed sustainably in the banking
industry of Sri Lanka. Therefore, there is low threat and high profit in the industry.

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1.4. Apply Porter's value chain analysis to Great Bank and discuss how the bank could
make use Porter’s value chain model to gain competitive advantage. You need to explain
how each of the primary activities and secondary activities of Great Bank add to its
value.:
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Porter's value chain analysis:

Primary activities are live functions and are involved in physical creation of product or
service, marketing, transfer to the buyer and after sales support. Primary activities include
Inbound Logistics, operations, outbound logistics, sales & marketing and services.

Inbound Logistics are activities associated with receiving, storing and disseminating inputs. At
Great Bank this includes Cash, Stationeries, Computers, Technology, Customer Database, and
High Skilled Human Resources. In service sector the inbound activities are taken at the
reception or customer service and where the customers are received and introduced to the
services a firm provides.

Operation is associated with transforming input into final product; these activities include
machining, packaging, assembly, testing and facility operations. Operations at Great Bank
includes Payments, Trading, Deposits, Treasury bills and bonds, Loans, Clearing and Settlement,
Branch bank operations, leasing facilities. In banking sector these activities normally take place
in back-office department which comprises of finance, risk, credit, accounts and legal. Therefore,
for a success in a service industry, operation should be carried out in an efficient and effective
manner.

Outbound logistics are activities associated with collecting and physically distributing the
product to buyers as finished goods, material handling, delivery, operations, processing and
scheduling.
In case of a banking industry this may be concerned with the arrangement for bringing
customers to the service, if it is a fixed location through creation of branches for customers to
access. For this purpose, Great bank makes use of Branch networks, ATMs, Website, High quality
customer service, Customized products.

Sales and marketing is associated with providing means by which buyers can purchase the
product and inducing them to do so. These activities include advertising, promotion, sales force
quoting, channel selection, channel relations and pricing.

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Great bank has sales and marketing department which sensitizes the public through sales
promotion and media adverts. The service marketing focus is mainly on the promotion mix i.e.
price, product, place and promotion. Therefore, for good performance in banking sector, the
customers must be well sensitized.

Services are activities associated with proving the after sales checks to enhance or maintain the
value of the product such as installation, repair, maintenance, parts supply and product
adjustment response to buyers’ enquiries and complaints.
The main concern of Great Bank is to bring customers to the service if it is a fixed location, the
services are intangible, and customers will be in more often than be able to make choices
between alternatives. The mode of presentation creates a repeat purchase behaviour by the
target market customers due to customer satisfaction. Accordingly, the Great bank has formed
contact centres where customers can get all day long services and their products.

Support activities help to increase the efficiency or effectiveness of primary activities, these
activities are sometimes referred to as staff or overhead functions. Support activities of Great
Bank include, Procurement, Firm infrastructure, Technology development and Human
resources.

• Procurement is the process of purchasing inputs used in firms value chain, the input
includes raw material, fuel energy assets such as machinery, soft and hard wares and
office equipment. At Great Bank Procurement includes Supplier Management, Funding.
Therefore, improved procurement practices can affect the cost of funds at the bank.

• Technology developments are activities related to product design and improvement

through innovations, research, and development. At Great Bank ICT department which
ensures that technology is a means to leverage their business initiative and manage
critical asset, time, people, and money. ICT must appreciate the need to drive business
by means of controlling overheads, costs, leveraging resources and providing
quantifiable return on investments.

• Human resource management consists of activities involved in recruiting, hiring,

training, development, and compensation of all types of personnel. Therefore, the
benefits a firm realized from human capital investments is directly proportional to the
quality of its human resource, strategy, process, and overall management. Thus,
outcomes of the Great Bank human resource process are directly related to the critical
capabilities like enhanced leadership, managerial competency, employee efficiency and
workforce collaborations.

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• Firm’s infrastructure consists of number of activities including general management,

planning, finance, accounting, legal, government affairs, quality management and
formation of strategic alliances. Further the firm infrastructure supports the entire chain
and is sometimes valued as the only “overhead” but can be powerful source of
competitive advantage. Great Bank infrastructure includes Finance, Legal, Quality
Management, Money monitoring, Information technology system.

QUESTION NO. 02 [Total 20 Marks]

2.1. Define what is cost audit.:

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Cost audit is “the verification of cost accounts and a check on the adherence to the cost
accounting plan”.

2.2. Apply and briefly describe five purposes for which cost audit are used

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Cost audit are used for following purposes:

1. Cost Audit for internal managers
The main object of this type of cost audit is to make available accurate, relevant and
prompt information to management to assist in taking important managerial decisions

2. Cost audit on behalf of a customer

Cost audit may be conducted on behalf of a customer when he agrees to pay price for a
certain product on “cost plus” basis.

3. Cost Audit on behalf of Government

Government may insist on cost audit for satisfying itself that the undertaking which has
approached it for financial assistance is really in need of it and, in fact, deserves it.

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4. Cost Audit by trade association

One of the objects of a trade association is the regulation of price of the product
produced by its members. Should that be so, cost audit may be conducted at the request
of such a trade association.

5. Statutory Cost Audit

In some countries as India, for instance, the law may require a particular class of
undertakings to maintain the requisite cost accounting records and get the same audited
year after year.

2.3. Evaluate the performance report presented by the management accountant and to
identify the possible reason for drop in profit.
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Workings
Performance evaluation report
Lakdiwa Rice Production (Pvt) Ltd
Actual Budgeted
20X1 20X1
Gross profit ratio 40% 60%

Cost per unit Rs. Rs.

Material 2.25 1.25
Direct labour 0.50 0.50
Other variable overhead 0.25 0.25
3.00 2.00

Analysis of the performance report presented by the management reveals that the Actual GP
ratio of the company is 40%, compared to the budgeted GP ratio which is 60%. Thus, it appears
that as GM stated company profits have decreased mainly due to drop in Gross Profit ratio. This
indicates that the actual cost of sales might have been significantly increased over the budgeted
cost of sales.
Further analysis of components of cost of sales reveals that the main reason for increased in
cost of sales is due to increased cost of material consumed.

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2.4. Present four cost audit procedures that could be employed by the cost auditor to
verify the cost of raw materials consumed by the Lakdiwa Rice Production (Pvt) Ltd.
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a. Verify the method of accounting followed for recording the quantities and value of
receipts, issues and balances of all materials used in production.
b. Verify consumption of major raw materials per unit of production compared with the
standard requirement.
c. Verify variation in consumption of major raw materials per unit of production as
compared to the preceding two years.
d. Verify confirmation received from the parties to whom materials are loaned
e. Verify the system for return of scrap and wastage

QUESTION NO. 03 [Total 20 Marks]

3.1. Present the price equation of the new product.:

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Price equation P = a - bx, (where P = price and x = quantity).

Therefore, to find the values for "a" and "b" constructs price equation.
"b" = Ratio of Change in price to Change in quantity = (2/2000)
Therefore "b" =0.001

Find value for "a" by substituting the "b", known price of the similar product and expected
annual demand of the similar product in the demand equation.
b = 0.001
P = 12.00
x = 120,000
As P = a - bx,
12 = a - 0.001 * 120,000
“a “= 132
Therefore, Price equation for the new product is P = 132 - 0.001x

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3.2. Calculate the profit maximising selling price for the new product:
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Calculate MC
MC = 11+5+2
MC = Rs.18.00

MR = a - 2bx (given)
MR = 132 - 2*0.001x

At profit maximisation point MC = MR

18 = 132 - 0.002x
Quantity x = 57,000 Units

Substitute x into demand equation to find P

P = a - bx
P = 132 - (0.001*57,000)
Profit Maximising Selling Price P = Rs. 75.00

3.3. Calculate the resulting profit for the year:

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Resulting profit for the year

Rs.
Sales revenue (57,000*75.00) 4,275,000.00
Less:
Total variable costs (57,000*18.00) 1,026,000.00
Fixed overhead (800,000.00 - (100,000x2.00) 600,000.00
Resulting profit for the year 2,649,000.00

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QUESTION NO. 04 [Total 20 Marks]

4.1. Present three major elements influencing change in business & its competitive
environment and discuss how such elements would influence business decisions.:
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Three major elements that have changed the business and competitive environment are:
a. Technology
b. Globalization
c. Concentration of power

How do changes in major elements influence business decisions?

Technology has become the major driver for change as it alters all the dimensions at number of
times due to new development and breakthroughs of science. This technological development
has taken the form of low- cost, high-speed digital & cable video, data transmission, and
hardware that produce information quickly and easily, and the development of software that
makes data, and communication tools available to individuals who previously did not have
access to needed information. With these technological developments, time, space, and other
temporal constraints to information have been reduced and, in many cases, eliminated. Data
analysis and processing has gone up to a level of big data which interacts and influences
strategic management decision making.

Globalization has made it possible faster methods of transportation, together with

instantaneous information, have allowed the world to become one giant market place in a global
village that operates with no time limit. Due to this, consumers can now buy products from
foreign firms as easily as they can from a local store. Therefore, the organizations have to worry
not only about what famous competitors are doing, but also what other similar companies are
doing. Hence all business organizations now have to compete with all the similar companies
throughout the world. In addition, with the increased availability of inexpensive information,
more is known about these competitors, than ever before. Therefore, if one organization’s
product has deficiencies, the world knows about and can act on those problems instantly.

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Third major change is the Concentration of power in certain market investors, primarily large
mutual and pension funds. In Sri Lanka Perera’s (Dammika & Nimal), Captain family (Sohli and
Rusi), Emagewise, or the government funds such as Sri Lanka Insurance, retirement funds such
as ETF /EPF, for example, now hold major stock positions in many companies. The influence of
these major market players is so significant and that, if they are displeased, corporate
executives will find that their positions within the company are in jeopardy. Armed with easily
available and inexpensive information about investees and their competitors, large institutional
investors raise the competitive bar very high and shorten the periods over which success is
measured.

4.2. Identify four major cost drivers of a value chain and explain how each of them impact
costs.:
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Four major cost drivers of a value chain & how each of them impact costs

1. Economies or diseconomies of scale

Economies of scale arise from the ability to perform activities differently and more
efficiently at larger volume.

2. Learning and spillovers

The mechanisms by which learning can lower cost over time are numerous, and include
such factors as layout changes, improved scheduling, labor efficiency improvement,
product design modifications, procedures that increase the utilization of assets, and
better tailoring of raw materials to the process.

3. Pattern of capacity utilization

Where a value activity has substantial fixed cost associated with it, the cost of an activity
will be affected by capacity utilization.

4. Linkages
Linkages create the opportunity to lower the total cost of the linked activities. Linkages
among value activities pervade the value chain.

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QUESTION NO. 05 [Total 20 Marks]

5.1. Explain four possible challenges faced by the managers in implementing EMA
practices and explain how they would overcome these challenges.:
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Possible challenges faced by the managers in implementing EMA practices:

1. Lack of proper understanding of EMA
2. Difficulties in uncovering environment-related costs “hidden” in overheads
3. Poor communication between accounting and other divisions (these are the divisions
that collect environmental information)
4. Difficulties in tracking materials use, flow and cost information using existing systems
5. Difficulties in accurately estimating environment-related costs and benefits
6. Difficulties in tracking materials use, how and cost information using existing systems.

How these challenges overcome by them:

1. Creating awareness on the prospects and importance of EMA
2. Establishing proper communication throughout the organization, especially between
accountants, engineers and production managers
3. Treating significant environmental costs such as energy, water, waste, etc separately.
4. Establishing tracking mechanisms that capture environmental costs adequately.

5.2. Briefly explain sustainable development and corporate social responsibility as

concepts and discuss how these concepts are interrelated.
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Sustainable development refers primarily to issues of environmental impact and economic

justice, while corporate social responsibility encompasses broader concerns such as the
company's charitable contributions and role in the community.

Therefore, sustainable development is about meeting the needs of society while living within
the planet's ecological limits and without jeopardizing the ability of future generations to meet
their needs. Sustainable development has three dimensions: economic, social and
environmental which are interdependent; for instance, the elimination of poverty requires the

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promotion of social justice, economic development and the protection of the environment.

On the other hand, social responsibility is the focus and concerns of an organization to behave
responsibly in relation to the society and the environment. Social responsibility is closely linked
to sustainable development. Because sustainable development is about the economic, social and
environmental goals common to all people, it can be used as a way of summing up the broader
expectations of society that need to be taken into account by organizations seeking to act
responsibly. Therefore, an overarching objective of an organization's social responsibility
should be to contribute to sustainable development. Accordingly sustainable development can
be a part of a company's social responsibility program.

5.3. i) Briefly discuss how DDMRP can operate as a methodology for planning inventories.

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Demand Driven Material Requirements Planning (DDMRP) is an innovative multi-echelon pull

methodology to plan inventories and materials. It enables a company to build more closely to
actual market requirements and promotes better &quicker decisions & actions at the planning
and execution level. DDMRP has five sequential components.

ii) Briefly explain sequential components of a DDMRP system.

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1.Strategic Inventory Positioning:

The fundamental question is how we place inventory to have the best protection within the
given resources and contexts. Thus Strategic Inventory Positioning will determine where the
buffer points are placed.

2.Buffer profiles and level:

Once the strategically replenished positions are determined, the actual levels of those buffers
have to be initially set. Based on several factors, different materials and parts behave differently.
DDMRP calls for the grouping of parts and materials chosen for strategic replenishment and that
behave similarly into "buffer profiles." Buffer profiles take into account important factors
including lead time. These buffer profiles are made up of "zones" that produce a unique buffer
picture for each part as their respective individual part traits are applied to the group traits.
Thus, Buffer Profiles and Levels will determine the amount of protection at those decoupling

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points

3.Dynamic Adjustments:
Over the course of time, group and individual traits can and will change as new suppliers and
materials are used, new markets are opened and/or old markets deteriorate and manufacturing
capacities & methods change. Dynamic buffer levels allow the company to adapt buffers to
group and individual part trait changes over time through the use of several types of
adjustments. Thus, Dynamic Adjustments define how that level of protection flexes up or down
based on operating parameters, market changes and/or planned or known future events.

4.Demand-Driven Planning:
Takes advantage of the sheer computational power of today's hardware and software. It also
takes advantage of the new demand-driven or pull-based approaches. When these two elements
are combined then there is the best of both worlds; relevant approaches and tools for the way
the world works today and a system of routine that promotes better and quicker decisions and
actions at the planning and execution level. Thus, Demand Driven Planning is the process by
which supply orders (purchase orders, manufacturing orders and stock transfer orders) are
generated

5.Highly Visible and Collaborative Execution:

Simply launching purchase orders (POs), manufacturing orders (MOs) and transfer orders (TOs)
from any planning system does not end the materials and order management challenge. These
POs, MOs and TOs have to be effectively managed to synchronize with the changes that often
occur within the "execution horizon." The execution horizon is the time from which a PO, MO or
TO is opened until the time it is closed in the system of record. DDMRP defines a modern,
integrated and greatly needed system of execution for all part categories in order to speed the
proliferation of relevant information and priorities throughout an organization and supply
chain. Thus, Visible and Collaborative Execution is the process by which a DDMRP system
manages open supply orders.
*End of the Suggested Solutions*

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