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of Pages = 05
No. of Questions = 06

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA

FINAL I EXAMINATION - APRIL 2006

Important - This question paper should be answered entirely in the ENGLISH Language only.

MANAGEMENT ACCOUNTING
(Time allowed - 3 hours)

Answer all questions and submit all workings. Begin each answer
on a separate page.

Question No. 01

A construction company has undertaken a job which had the following activities and directions at the
inception.

Activity Duration Proceeding Price quoted

(weeks) activity (Rs. m)

1 6 - 2
2 4 - 4
3 3 1 5
4 2 2 2
5 3 3 12
6 5 3,4 25
7 2 5 4
8 4 6 6
60

Activities 3 & 4 cannot be done together due to constrains in working space.

The job was to be handled by two subcontractors and the price quoted is arrived at by adding 25% for each
activity they have quoted. One subcontractor was to handle activities 1,3, 5 & 7. The other contractor is to
handle activities 2,4, 6 & 8. The additional costs the company has to bear are fixed project site overhead
of Rs. 2 million and a variable site expenses of Rs. 150,000 per week. The agreed maximum completion
time is 20 weeks, and the contractors have agreed to commence work at the earliest possible start time of
each activity.

The project started on schedule commencing site activities 1 & 2 and today is the beginning of the 6th
week. The following information relates to progress to date.

(1) Activity 2 has been completed in time, but activity 4 is not yet commenced. It is expected it will
commence only by middle of this week and would also need 2½ weeks instead of the original 2
weeks estimated.

(2) Activity 5 would need 4 weeks to complete instead of originally estimated 3 weeks. It also cannot
be commenced for another 8 weeks due to late shipment of some materials.
Contd….
You are required to:

(1) Draw a network diagram representing the job as originally planned. (3 marks)
Using the above, establish:
(a) The shortest possible completion time.
(b) The critical path.
(c) The profit expected
(3 marks)

(2) Draw a network diagram representing the position as at today. (10 marks)
Using the above, establish:
(a) (i) The revised completion time.
(ii) The revised critical path.
(iii) The revised profit. (2 marks)
(b) If the activities 3 & 4 can be done together by incurring an additional cost of
Rs. 400,000 would it be profitable for the company to take such step?
(2 marks)
(Total 20 marks)
Question No. 02

A tea factory has kept a record of its green leaf arrivals in the evening and have established that the
following is the usual pattern.

No of lorries each day

Arrival Time
Day (1) Day (2) Day (3) Day (4) Day (5)
between 7.00 p.m. – 7.30 p.m. 4 5 4 4 4
in the next 30 minutes 6 5 4 4 6
in the next 30 minutes 5 5 6 6 6
in the next 30 minuets 4 6 6 5 6
in the next 30 minutes 6 6 6 6 5
in the last thirty minutes from 9.31 to 6 5 5 5 5
10.00 p.m.
31 32 31 30 32
Each lorry carries 50 bags of green leaves carrying 20 kgs (average) each. The data on unloading and
weighing are as follows:

(1) It takes 4 minutes an average to complete the unloading, weighing and recording of the delivery
of a lorry.
(2) Till one lorry is completely cleared the next one has to wait in a queue.
(3) The leaf unloading area cannot hold more than 5000 kgs at a time and when it is reached
5,000 kgs the operation is suspended to clear the leaf to the withering troughs. This activity takes
5 minutes.
You are required to:
assuming that the arrivals and services can be represented by a single queue model,

(1) Calculate the average number of lorries arriving every half an hour at the factory. What is the
simple average?
(4 marks)
(2) Using the simple average above, and using the average service rate of green leaf handling at the
factory arrive at the trafic intensity.
(4 marks)
(3) On average how many leaf lorries will be at the factory and what is the average waiting time?
(2 marks)
Contd…./
(2)
(4) What is the probability that factory staff would be idle without having a lorry to unload. If idle
time costs Rs. 500 per hour what is your estimated idle time cost in a 5 day week?
(3 marks)
(5) What is the advantage in time saved if you are the first lorry to enter the factory premises over a
random entry to the unloading system?
(2 marks)
(Total 15 marks)

Hint: (i) Trafic intensity = ρ = λ

µ

(ii) Expected average number of lorries in the system = λ

µ -λ

(iii) The expected time a lorry will spend waiting in the queue λ
µ (µ - λ)

(iv) Probability that there are exactly n lorries in the system = Pn = ρn (1- ρ)

where; ρ = The traffic intensity

λ = Average number of lorries arrive per unit time.

µ = Average number of lorries a server can service per unit time.

Pn = The probability that there are exactly n lorries in the system in steady
state

Question No. 03

The Business Development Director of H Ltd. is planning to develop three business proposals to be
presented to the Board of Directors of the company. There are three business analysts who are capable of
developing such proposals. The Business Development Director has estimated the time (no. of days)
required by each business analyst to develp each of the business proposals as shown in the following
matrix.

Business proposals
I II III
Business Analyst A1 180 160 140
A2 140 150 170
A3 170 200 180

You are required to,

(a) Find how the Business Analysts should be assigned to the business proposals. (use iteration
procedures to find the optimal assignment).
(10 marks)
(b) If the standard costs per day for the three analysts are as follows:

A1 = Rs. 5,000
A2 = Rs. 7,500
A3 = Rs. 6,000

find, the initial matrix of the assignment of Business Analysts that would minimise the total cost
of developing the Business Proposals.
(2 marks)
(Total 12 marks)

(3)
Question No. 04

Pure Water Limited (PWL) is engaged in bottling of mineral water and distribution through retail shops.
The annual capacity of the bottling plant is 50,000 bottles and the estimated annual demand is 25,000
bottles, with a constant demand rate throughout the year. In the production process the fixed cost
associated with a production run is Rs. 1,000. The annual inventory holding cost is estimated at Rs. 100
per bottle.
You are required to find:

(a) Economic Batch Quantity (EBQ) (3 marks)

(b) No. of production runs per year (2 marks)
(c) Length of inventory cycle and production cycle. (3 marks)
(d) Time during which inventory is depleted. (2 marks)
(e) Minimum Inventory Level. (3 marks)

Hint: EBQ = 2KD

h (1 – D/P)

where K = Set-up cost per production run.

D = Demand per annum
P = Production capacity per annum
h = Inventory holding cost per unit.
(13 marks)
Question No. 05

Solex Limited is in the business of making salt. The company has two divisions viz, consumer salt
division which sells salt on wholesale and value added salt division which further processes salt and sell as
an industrial chemical. The value added salt division produces 100 kilograms of industrial chemical from
each tonne of salt.
The production capacity of Solex is 10,000 tonnes of salt per month. Wholesale market is limited to 6,000
tonnes of salt and value added salt market is limited to 200 tonnes of industrial chemical. The transfer
price is Rs. 10,000 per tonne of salt which is equal to the current wholesale market price. The market price
of industrial chemical is Rs. 500 per kilogram. The marketing department is confident that it can sell
further 200,000 kgs of industrial chemical if the price can be reduced to Rs. 300 per kilogram.

The cost of operation at each division is as follows:

Variable cost (per tonne Fixed cost per month
of salt produced/processed )
(Rs.) (Rs.)
Consumer salt division 4,000 10,000,000
Value added salt division 5,000 * 5,000,000
* Excluding cost of salt.
You are required to;
(a) Under what circumstances is market price based transfer pricing approach used? (1 mark)
(b) Under what circumstances a discount to market based transfer pricing can be considered?
(2 marks)
(c) Estimate the profitability for the current month for each division and the company at;
(i) 80% capacity.
(ii) 100% capacity.
Analyse the answer in terms of divisional autonomy and company performance. (13 marks)
(d) Determine suitable transfer price at 100% capacity level which will ensure that each division will
maintain at least their respective profitabilities at 80% capacity level.
(4 marks)
(Total 20 marks)
(4)
Question No. 06

A company manufactures a product X by a chemical engeneering process. The following data are shown
in the standard cost card of X;

Standard cost of making 50 kg bag of X

Direct material P - 25 kg @ Rs. 30 per kg introduced at the beginning.

Direct material Q - 30kg @ Rs. 60 per kg introduced evenly throughout the process.
Direct labour SK1 - 12 hours @ Rs. 50 per hour.
Direct labout SK2 - 20 hours @ Rs. 25 per hour.
Variable OH - 10 hours at Rs. 200 per hour
Fixed OH - equal to VOH.
Total cost - Rs. 7650 per bag of 50 kg.

Note : Material P is subject to wastage during the processing of an even rate which is considered
normal if the final weight loss is 20% of the input of P. Material Q is not wasted.

The company operates a Standard Costing System to value WIP and finished products. The budgeted
fixed overhead per month is Rs. 2,000,000.

The following data relate to month of March 2006.

(a) Opening stock of P = 2000 kg @ Rs. 30 per kg, Q = 7,500 kg @ Rs. 55 per kg. The raw
material stocks are kept at actual costs of FIFO basis, but issues to production are made at
standard costs, price variance of issues calculated using FIFO being charged to Profit and Loss
account. During the month 30,000 kgs of P was purchased at Rs. 31 per kg and 40,000 kgs of Q
was purchased at Rs. 59 per kg.

The consumption of P was 25,000 kg where as 27,000 kgs of Q was consumed.

(b) The WIP at the beginning of the month was 15,000 kgs of X 50% complete. Completed
production transferred to finished goods amounted to 1,050 bags of 50 kgs each. The closing WIP
12,000 kg was at 20% complete stage.

(c) Labour was paid for at the standard rates, the actual labour usage was 12,000 hours of SK1 grade
and 18,000 of SK 2 grade. SK1 refers to skilled labour and SK2 refers to semi skilled labour.

(d) Variable overhead incurred was Rs. 2.4 million.

(e) Fixed overheads were Rs. 425,000 over the budget.

(f) 100 kgs of X at a completion stage of 70% was discarded due to contamination. This is not usual
in the process and does not occur frequently.

(g) Labour and variable OH is absorbed evenly throughout the production. Fixed OH is absorbed
only for completed production.

You are required to ;

(i) Prepare an equivalent unit statement of the month for production and consumption (use) of
materials, labour, variable overheads and fixed overheads.
(9 marks)
(ii) Using the above statement in (i) calculate

(a) Material Price and Usage variances. (4 marks)

(b) Labour usage variance. (2 marks)
(c) Variable overhead total variance and fixed overhead expenditure variance.
(2 marks)
(iii) Comment on results of (ii) from a cost accountants role. (3 marks)
(Total 20 marks)
(5)
(5)

(5)