CMA JANUARY 2022 EXAMINATION

INTERMEDIATE LEVEL II
CM 231. MANAGEMENT ACCOUNTING

MODEL SOLUTION

Solution of the Q. No. 1

i. (c)
ii. (b)
iii. (d)
iv. (b)
v. (b)
vi. (a)
vii. (d)
viii (c)
ix. (c )
x. (a)

Solution of the Q. No. 2

(a) True
(b) False. In this case the cost of goods manufactured is greater than the cost of goods sold.
(c) False. Depreciation on equipment a company uses in its selling and administrative activities
would be classified as a period cost.
(d) True
(e) false. Only those future costs that differ between the alternatives under consideration are
relevant.

Solution of the Q. No. 3

(1) (b)
(2) (a)
(3) (d)
(4) (h)
(5) (j)

Solution of the Q. No. 4

a.

Details Machine A machine B

Capacity 10,000 units 10,000 units
Selling price Tk. 10 per unit Tk. 10 per unit
annual fixed cost Tk. 30,000 Tk. 16,000
profit at 100% capacity Tk. 30,000 Tk. 24,000
contribution (fixed cost+ profit) Tk. 60,000 Tk. 40,000
contribution per unit Tk. 6.00 Tk. 4.00
C/M ratio 60% 40%
required (a) Machine A machine B
break even sales in tk.=
=Tk. 50,000 Tk. 40,000
Break even ales in units= 50,000 10= 5,000 40,000 10= 4,000 units
units

Required(b):
Sales level where both machines are equally profitable is shown below:
Sales level of equal profits =
= Tk. 70,000
= 70,000 10= 7,000 units

b.
Mithun supplier company
Statement for Target Selling Price (For 50,000 units)
Particulars Total Taka Per unit Taka
Target cost:
Variable cost:
Direct Material (50,000 x 40) 20,00,000 40.00
Direct labor (50,000 x 20) 10,00,000 20.00
Variable manufactured overhead (50,000 x 12) 6,00,000 12.00
Variable selling & administrative cost (50,000 x 7) 3,50,000 7.00
Total variable cost (A) 39,50,000 79.00
Fixed cost:
Manufacturing overhead 50,000 1.00
Selling & Administrative 40,000 .80
Total fixed cost (B) 90,000 1.80
Total target cost (A + B) 4,040,000 80.80
Add : Target profit (Tk. 1,20,000 x 12%) 14,400 .288
Target selling price (mark up value) 4054,400
Mark up value Tk. 4054,400
And target selling price per unit Tk. 81.088
c.
1. Throughput time = Process time + Inspection time + Move time + Queue time = 28 days + 15
days + 07 days + 04 days =54days.
2. Only process time is value added time, therefore the manufacturing cycle efficiency (MCE) is;
MCE=
3. If the MCE is 51% then the complement of this figure or 49% of the time was spent in non value
added activities.
4. If all queue time in production is eliminated, then the throughput time drops to only 50 days (15+
28 + 7)
The MCE becomes:
MCE=
Thus, the MCE increare to 56%. This exercise shows quite dramatically how the JIT approach can
improve operations and reduce throughput time.

Solution of the Q. No. 5

a) Skimming pricing: Setting a high initial price for a new product in order to reap short-run
profits. Over time, the price is reduced gradually.
Penetration pricing: Setting a low initial price for a new product in order to penetrate a
market deeply and gain a large and broad market share.
Target costing: Conducting market research to determine the price at which a new product
will sell and then, given the likely sales price, computing the cost for which the product must
 be manufactured in order to provide the firm with an acceptable profit margin. Then
engineers and cost analysts work together to design a product that can be manufactured for
the allowable cost. This process is used widely in the development stages of new products.
b) i) The order will boost SPAA’s net income by Tk.27,900, as the following calculations
show.
Sales revenue ................................................... Tk.165,000
Less: Sales commissions (10%) ........................ 16,500 Tk.148,500
Less manufacturing costs:
Direct material.............................................. Tk. 29,200
Direct labor .................................................. 56,000
Variable manufacturing overhead* .......................... 16,800
Total manufacturing costs 102,000
Income before taxes .......................................... Tk. 46,500
Income taxes (40%) .......................................... 18,600
Net income ................................................... Tk. 27,900

*Based on an analysis of the year just ended, variable overhead is 30 percent of direct
labor (Tk.2,250  Tk.7,500). For Apex’s Foods’ order:
Direct-labor cost x .30 = Tk.56,000 x .30 = Tk.16,800.
ii) Although this amount is below the Tk.165,000 full-cost price, the order is still profitable.
SPAA can afford to pick up some additional business, because the company is operating at
75 percent of practical capacity.
Sales revenue .........................................................Tk.127,000
Less: Sales commissions (10%) .............................. 12,700 Tk.114,300
Less manufacturing costs:
Direct material....................................................Tk. 29,200
Direct labor ........................................................ 56,000
Variable manufacturing overhead ...................... 16,800
Total manufacturing costs 102,000
Income before taxes ................................................ Tk. 12,300
Income taxes (40%) ................................................ 4,920
Net income ......................................................... Tk. 7,380

 Note that the fixed manufacturing overhead and fixed corporate administration costs
are not relevant in this decision, because these amounts will remain the same
regardless of what SPAA’s management decides about the order.
iii) The break-even price is Tk.113,333, computed as follows:
Let P = break-even bid price
P – 0.1P – Tk.102,000 = 0
0.9P = Tk.102,000
P = Tk.113,333
Income taxes can be ignored, because there is no tax at the break-even point.
iv) Profits will probably decline. SPAA originally used a full-cost pricing formula to derive a
Tk.165,000 bid price. A drop in the selling price to Tk.127,000 signifies that the firm is now
pricing its orders at less than full cost, which would decrease profitability.
Reduces prices could lead to an increase in income if the company is able to generate
additional volume. This situation will occur because the problem states that SPAA has
operated and will continue to operate at 75% of capacity.
Solution of the Q. No. 6
a) If a firm has excess production capacity, there is no opportunity cost to the acceptance of a
special order. On the other hand, if the firm is already at capacity and there is no excess
production capacity, the opportunity cost associated with accepting a special order involves
the contribution margin from the products that would have been manufactured with the
resources devoted to the special order.
b) People often exhibit a behavioral tendency to ignore or downplay the importance of
opportunity costs in making a decision. Since an opportunity cost often is not a cash flow,
people tend to think it is less important than costs that are represented by cash flows. This
behavioral tendency can result in faulty decision making.
c) i) System A System B Headset Total
Tk. Tk. Tk. Tk.
Sales 45,000 32,500 8,000 85,500
Less: Variable expenses 20,000 25,500 3,200 48,700
Contribution margin 25,000 7,000 4,800 36,800
Less: Direct fixed costs* 526 11,158 1,016 12,700
Segment margin (loss) 24,474 (4,158) 3,784 24,100
Less: Common fixed costs 18,000
Operating income 6,100
*45,000/85,500  18,000 = 9,474; 10,000 – 9,474 = 526
32,500/85,500  18,000 = 6,842; 18,000 – 6,842 = 11,158
8,000/85,500  18,000 = 1,684; 2,700 – 1,684 = 1,016
ii) System A Headset Total
Tk. Tk. Tk.
Sales 58,500 6,000 64,500
Less: Variable expenses 26,000 2,400 28,400
Contribution margin 32,500 3,600 36,100
Less: Direct fixed costs 526 1,016 1,542
Segment margin 31,974 2,584 34,558
Less: Common fixed costs 18,000
Operating income 16,558
System B should be dropped.
iii) System A System C Headset Total
Tk. Tk. Tk. Tk.
Sales 45,000 26,000 7,200 78,200
Less: Variable expenses 20,000 13,000 2,880 35,880
Contribution margin 25,000 13,000 4,320 42,320
Less: Direct fixed costs 526 11,158 1,016 12,700
Segment margin 24,474 1,842 3,304 29,620
Less: Common fixed costs 18,000
Operating income 11,620
Replacing B with C is better than keeping B, but not as good as dropping B without
replacement with C.
Solution of the Q. No. 7
a) Quality is concerned with ensuring that products are produced according to specifications, and
productivity is concerned with producing the output efficiently. Quality can improve productivity,
since improving quality generally means using less inputs and becoming more efficient.
Productivity, however, can be improved without quality improvements.

b) i) Quality Cost Report

MN Company
For the Year Ended December 31, 2018
Percentage of
Quality Costs Sales
Prevention costs: Tk. Tk.
Design review 150,000
Quality training 40,000 190,000 3.17%
Appraisal costs:
Materials inspection 60,000
Process acceptance 0
Product inspection 50,000 110,000 1.83
Internal failure costs:
Reinspection 100,000
Scrap 145,000 245,000 4.08
External failure costs:
Recalls 200,000
Lost sales 300,000
Complaint adjustment 155,000 655,000 10.92
Total quality costs 1,200,000 20.00%

Quality Cost Report

MN Company
For the Year Ended December 31, 2019
Percentage of
Quality Costs Sales
Prevention costs: Tk. Tk.
Design review 300,000
Quality training 100,000 400,000 6.67%
Appraisal costs:
Materials inspection 40,000
Process acceptance 50,000
Product inspection 30,000 120,000 2.00
Internal failure costs:
Reinspection 50,000
Scrap 35,000 85,000 1.42
External failure costs:
Recalls 100,000
Lost sales 200,000
Complaint adjustment 95,000 395,000 6.58
Total quality costs 1,000,000 16.67%
ii) Additional investment = Increase in control costs
Control costs increase = Tk.520,000 – Tk.300,000 = Tk.220,000
Failure costs reduction = Tk.900,000 – Tk.480,000 = Tk.420,000
A Tk.420,000 benefit for a Tk.220,000 investment is certainly sound.

iii) Tk.1000,000 – (2.5% × 6,000,000)

= Tk.10,00,000 – TK.150,000 = Tk.850,000
If the quality costs drop to 2.5% of sales, another Tk.850,000 of profit improvement is
possible.

= THE END =