CMA April - 14 Exam Question Solution

Page 1 of 5
THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH

CMA APRIL 2014 EXAMINATION
FOUNDATION LEVEL
SUBJECT: 001. PRINCIPALES OF ACCOUTING
No.
SOLUTION

Solution to Question # 1(b)
Journal Entries

Particulars Dr. (Tk.) Cr. (Tk.)
i) Office Supplies Expense Account
Office Supplies Account
(To the Office supplies consumed during the year charged to
expense Account)
13,500
13,500
ii) Rent Expense Account
Prepaid Rent Account
(All prepaid rents except Tk. 16,000 (24,000 2,000 4
months) has been adjusted (50,000+60,000-16,000)
94,000
94,000
iii) Insurance expense Account
Prepaid Insurance Account
(Being the Insurance premium expired during the year as
shown below booked)

A 5321 =
96,000
12
11 = 88,000

E 4520 =
24,000
12
9 = 18,000

X 3211 =
18,000
12
2 =
1,09,000
3,000
1,09,000

1,09,000
iv) Goods with customers
Sales Account
Income summary
Accounts Receivables
(Being the Inventory of goods with customers at cost recorded
and the sale is revised accordingly)
12,000
20,000

12,000
20,000
v) Bank account
Accounts Payable
(Being the time expired cheques cancelled, the entry passed
before, is revised)
89,650
89,650
vi) No entry is required since the repair could not Increase the life
of the machine as estimated earlier

vii) Retained Earnings Account
Depreciation Account
Accumulated Depreciation
833
16,000

16,833

Calculation Old Method
Equipment Cost
New Meth
12,00,000 12,00,000
Depr. 2010-11 * 1,00,000

95,833
1,00,000 95,833
Depr. 2011-12 11,00,000
1,10,000
** 1,10,000

1,15,000
9,90,000
2012-13 2,10,000 2,10,833
99,000

1,15,000
3,09,000 3,25,833
Up to previous year =2,10,833 2,10,000 833
*(12,00,000 - 50,000) 10%
10
12

Current year =1,15,000 99,000 =95,833 16,000
16,833 **(12,00,000-50,000) 10% =1,15,000

Page 2 of 5

Solution to Question # 2.
Mr. Arafat
Worksheet
For the Year ended Dec. 31, 2013
Account title
Trial Balance Adjustment Income Statement Balance Sheet
Dr. Cr. Dr. Cr. Dr. Cr. Assets Liabilities
Cash 3,00,000 3,00,000
Capital 10,00,000 10,00,000
Sales 15,00,000 15,00,000
A/C Receivable 6,00,000 10,000 5,90,000
Purchases 7,00,000 10,000 6,90,000
* Interest Income 30,000 30,000
Allowance for Doubtful A/C 20,000 10,000 31,300 41,300
M/Inventory 4,50,000 3,50,000 4,50,000 3,50,000
A/C payable 1,00,000 1,00,000
Gain on sale of Assets 30,000 30,000
Rent Expenses 1,40,000 20,000 1,20,000
Salary Expenses 2,00,000 40,000 2,40,000
Office equipment 1,00,000 1,00,000
Store equipment 1,35,000 15,000 1,20,000
Supplies 30,000 25,000 5,000
Freight in 25,000 25,000
* Income Summary 4,50,000 3,50,000 4,50,000 3,50,000
* Prepaid Rent 20,000 20,000
* Salaries payable 40,000 40,000
* Bad debts Expenses 31,300 31,300
* Depreciation Exp-office equipment 9,000 9,000
Accumulated-Dep-office equipment 9,000 9,000
Repairs 15,000 15,000
Depreciation Exp-Store equipment 12,000 12,000
Accumulated-Dep-store equipment 12,000 12,000
Drawings 10,000 10,000
Supplies Expenses 25,000 25,000
Net Income 2,92,700 2,92,700
26,80,000 26,80,000 9,72,300 9,72,300 19,10,000 19,10,000 14,95,000 14,95,000

No.
Adjusting Entri es
Accounts Name Tk. Tk.
a1) Income Summary 4,50,000
M/Inventory 4,50,000
a2) M/Inventory 3,50,000
Income Summary 3,50,000
b) Prepaid Rent 20,000
Rent Expenses 20,000
c) Salaries Expenses 40,000
Salaries payable 40,000
d) Allowance for Doubtful A/C 10,000
A/C receivable 10,000
e) Bad debts Expenses 31,300
Allowance for Doubtful A/C 31,300
f) Depreciation Expenses Office equipment 90,000
Accumu-Dep-office equipment 90,000
g) i. Repair Expenses 15,000
Store equipment 15,000
ii) Depreciation Exp-Store equipment 12,000
Accumu-Dep-Store 12,000
h) Drawings 10,000
Purchases 10,000
i) Supplies Expenses 25,000
Supplies 25,000
Necessary Calculation as follows:
1. Calculation of Bad debt Exp:
Allowance for Doubtful A/c =20,000 10,000 =Tk. 10,000 (CR)
Additional Allowance =A/c Receivable =6,00,000 - 10,000 =5,90,000 7% =41,300 - 10,000 (CR)
=31,300 (CR)
Calculation of Depreciation:
2. Office equipment = 1,00,000
(-) New = 20,000
80,000
Dep. Exp. 10% on 80,000 - Full year = 8,000
Page 3 of 5

Dep. Exp. 10% on 20,000 -
1
2
year =
(a) 2002 Dec 31
1,000
Total = 9,000
3. Store equipment =1,35,000 15,000 =1,20,000 10% =12,000


Warranty Expense..7,200
Estimated warranty liability..7,200
(To accrue estimated warranty costs)
(300x10% x[Tk.110+Tk.130] =Tk.7,200)
(b) 2002 J an 1 - Dec 31
Estimated warranty liability2,750
Repair parts/ Wages payable...............2,750
(To record honoring of 11 warranty contracts on 2002 sales)


1.
Book Value is the amount of net assets presented by each share of common stock. Book value may be either
higher or lower than the current market value; however it may give an indication of reasonableness of the current
market price.
Market Value is the current price at which share of stock may be bought or sold. When a stock is traded on an
organized stock exchange, the market price is quoted daily in the financial press. Market price is based upon a
combination of factors, including investors expectation of future earning, dividend yield, interest rates and
alternative investment opportunities, etc.
Par value is the amount of legal capital per share that is, the amount below at which the stockholders equity
cannot be reduced except by losses or special legal action.

2.
(a) General Journal
Mar. 31 Memorandum: Stockholders approved a 5-for-4 stock split This action increased the number of shares
of common stock outstanding from 40,000 to 50,000 and reduced the par value from Tk10 to Tk8 per
share. The 10,000 new shares were distributed.

Apr. 1 Treasury Stock 74,000
Cash 74,000
(Acquired 2,000 shares of treasury stock at Tk37 per share)
J uly 1 Cash 45,000
Treasury Stock 37,000
Additional Paid-in Capital: Treasury Stock 8,000
(Sold 1,000 shares of treasury stock at Tk45 per share)
Cash 900,000
Common Stock, Tk8 par 160,000
Additional Paid-in Capital: Common Stock 740,000
(Issued 20,000 shares of previously unissued Tk8 par value stock for cash of Tk45 per share)
Dec. 1 Retained Earnings 69,000
Dividends Payable 69,000
(To record declaration of cash dividend of Tk1 per share on
69,000 shares of common stock outstanding
(1,000 shares in treasury are not entitled to receive dividends))
Note: Entry to record the payment of the cash dividend i s not shown here since the action does not
affect the stockholders equity.
22 Retained Earnings 331,200
Stock Dividends to Be Distributed 55,200
Additional Paid-in Capital: Stock Dividends 276,000
(To record declaration of 10% stock dividend consisting of
6,900 shares of Tk8 par value common stock to be
distributed on J an. 15 of next year)
31 Income Summary 177,000
Retained Earnings 177,000
Page 4 of 5

(To close Income Summary account)

(b) SUTTON CORPORATION
Partial Income Statement
For Year Ended December 31, 1994
Income before extraordinary items Tk212,400
Extraordinary loss (net of income tax benefits)
Income before extraordinary items (Tk. 212,400 59,000) Tk3.60
(35,400)
Net income Tk. 177,000

Earnings per share:
Extraordinary loss (Tk. 35,400 59,000) (0.60)
Net income Tk3.00
* On 59,000 weighted-average number of shares of common stock outstandi ng during 1994, determined
as follows:
J an. 1Mar. 31: (40,000 +10,000 shares issued pursuant to a 5 for 4 split) x 1/4 of year 12,500
Apr. 1J une 30: (50,000 2,000 shares of treasury stock) x 1/4 of year 12,000
J uly 1Dec. 31: (50,000 +20,000 shares of new stock 1,000 shares of treasury stock) x of year 34,500
Weighted-average number of shares outstanding 59,000

(c) SUTTON CORPORATION
Statement of Retained Earnings
For Year Ended December 31, 1994

Retained earnings, December 31, 1993 Tk. 1,500,000
Net income for 1994 177,000
Subtotal Tk. 1,677,000
Less: Cash dividends (Tk1 per share) Tk. 69,000
10% stock dividend 331,200
(a)
400,200
Retained earnings, December 31, 1994 Tk. 1,276,800

Solution to Question # 5(a).

NAFISA COMPANY
Bank Reconcili ation Statement
Jul y 31, 2010

Particulars Amount (Taka)

Cash balance per bank 24,514
Add: Deposit in Transit (81,400-79,000+7,000) 9,400
33,914
Less: Outstanding checks 8,460
(77,150- 90- 74,700- 100+6,200)
Error of understate (255-155) 100 (8,560)
Adjusted cash balance per bank Tk.25,354

Cash balance per books 21,850
Add: Collection of note receivable by bank 3,470
(3400+70)
Error of understate (320-230) 90 3,560
25,410
Less: Bank service charges (56)
Adjusted cash balance per books Tk.25,354

Solution to Question # 5(b).

Date Accounts Title Amount (Taka)
Aug. 31 Cash 3,470
Page 5 of 5

Notes Receivable 3,400
Interest Revenue 70
(To record collection of note with interest revenue.)
Aug. 31 Cash 90
Accounts Payable 90
(To record rectification of overpayment to accounts payable.)
Aug. 31 Miscellaneous Expense 56
Cash 56
(To record miscellaneous expense.)

1
PROFESSIONAL LEVEL-I
SUBJ ECT: 101: INTERMEDIATE FINANCIAL ACCOUNTING
MODEL SOLUTION
Eddie Murphy Company
Statement of Cash Flows
For the Year Ended December 31, 20012
Cash flows from operating activities Taka Taka
Net income Tk.242,000
Adjustments to reconcile net income
Depreciation on building 20,625
Depreciation on equipment 138,875
Amortized of bond discount 2,750
Loss on sale of securities 22,000
Loss on sale of equipment 5,500
Gain on sale of marketable securities (66,000)
Cash from operating activities before working capital changes 365,750
Increase in accounts receivable (net) (247,500)
Decrease in inventory 49,500
Increase in prepaid insurance (2,750
Decrease in accounts payable (27,500)
Increase in misc. expense payable 51,150
Decrease in un-earned revenue (44,000)
Increase in tax payable 1,37,500
Decrease in deferred income tax liability (34,650)
Net cash provided from operating activities 247,500
Cash flows from investing activities:
Sale of equipment 38,500
Purchase of equipment (500,000)
Overhauling of equipment (33,000
Sale of marketable securities (159,000 )
Net cash used by investing activities (335,500)
Cash flows from financing activities
Payment of notes payable (Long-term) (110,000)
Sale of treasury stock 33,000
Sale of common stock 11,55,000
Dividend paid (44,000 )
Net cash flows from financing activities
Net increase in cash
10,34,000
9,46,000
Cash at beginning of year
Cash at end of year
2,75,000
12,21,000

2
i)
Declaration Date Debit (Tk.) Credit
(Tk.)
May 1 Retained Earnings 200,000
Dividend Payable 200,000
May 15 Date of record
No entry

Payment Date
J une 2 Dividend Payable 200,000
Cash 200,000
J une 30 Treasury Stock 80,000
Cash 80,000
Sept. 1 Cash 300,000
Preferred Stock
Paid-in Capital
200,000
100,000
Sept. 30 Equipment 35,000
Retained Earnings 5,000
Treasury Stock 40,000
Oct. 1 Retained Earnings 175,500
Common Stock Dividend Distributable
Paid-in Capital
39,000
1,36,500
Oct. 30 Common Stock Dividend Distributable 39,000
Common Stock 39,000
Dec. 1 Retained Earnings 264,500
Dividend Payable 264,500

ii)
Stockholders Equity Section
For the year ended December 31, 2010

Preferred stock, Tk. 100 par (10,000 shares authorized, 5,000 shares issued) Tk. 500,000
Common stock, Tk. 10 par (100,000 shares authorized, 43,900 shares issued) 439,000
Paid-in Capital: Preferred stock (50,000 +100,000) 150,000
Paid-in Capital: Common stock (75,000 +136,500) 211,500
Retained Earnings ( 550,000 200,000 5,000 175,500 264,500) (95,000)
12,05,500
Less : Treasury stock at cost ( 1000 shares acquired at cost Tk.40) 40,000
Total stockholders equity Tk. 11,65,500

3
(i) Equity Investments (available-for-sale) 37,400
Debt Investments(available-for-sale) 150,000
Interest Revenue(Tk.50,000x .12x4/12) 2,000
Investments 189,400
(ii) Interest Receivable 7,750
Interest Revenue 7,750
(iii) Available-for Sale Portfolio
December31,2014
Securities Cost Fair Value

Unrealized Gain(Loss)
J ordy Company stock Tk.37,400 Tk.33,800 Tk.(3,600)
U.S. government bonds 100,000 124,700 24,700
Driver Company bonds 50,000 58,600 8,600
Total Tk.1,87,400 Tk.217,100 Tk.29,700
Previous fair value adjustment balance 0
Fair value adjustment-Dr. Tk.29,700

Fair Value adjustment (available-for-sale) 29,700
Unrealized Holding Gain or Loss-Equity 29,700
(iv) July 1,2015
Cash (Tk.119,200+Tk.2,750) 121,950
Debt Investments(available-for sale) 100,000
Interest Revenue (Tk.100,000x
.11x3/12)
2,750
Gain on Sale of Investments 19,200
(v) Feb.1,2014
Equity Investments (J ordy Company) 37,400
Cash 37,400
Sep.31,2014
Cash 2,700
(30%xTk.9,000)
Dec.31,2014
Investment Income(30%xTk.30,000) 90,000
(b) Since there is an uncertainty about Tk.5,000 receivables, prudence dictates that irrecoverable
debts of Tk.5,000 should be written off. Sales for 2013 are shown in the income statement at
their full value of Tk.1,50,000, but there is an expense of Tk.5,000, being irrecoverable debt
expense. So, Tk.5,000 should be charged in the income statement to get the true picture of the
financial statement.
4
Solution to Question # 3(c).
(i) J une 30, 2013 Debit (Tk.) Credit
(Tk.)
Bonds Payable ................................................................... 80,000
Loss on Redemption of Bonds ........................................... 4,080
Discount on Bonds Payable.................................... 880
Cash ....................................................................... 83,200
Reacquisition price (Tk.80,000 X 104%) ............................ 83,200
Net carrying amount of bonds redeemed:
Par value ................................................................ 80,000
Unamortized discount ............................................. (880) (79,120

)
(.02 X $80,000 X 11/20)
Loss on redemption ........................................................... 4,080
Cash (1,000,000 X 102%) .................................................. 1,020,000
Premium on Bonds Payable ................................... 20,000
Bonds Payable ....................................................... 1,000,000
(ii) December 31, 2005
Bond Interest Expense ................................................... 49,500
Premium on Bonds Payable ........................................... 500*
Cash ................................................................... 50,000**
*(1/40 X 20,000 =500)
**(.05 X 1,000,000 =50,000)

5
Solution to Question # 4(a)
Revenue: The gross inflow of economic benefits during the period arising in the course of the
ordinary activities of an entity when those flows result in increases in equity, other than increases
relating to contributions from equity participants.
Solution to Question # 4(b)
(i) Costs to complete are CU90,000
As each of the total revenue, the costs incurred and the costs to complete can be estimated
reliably, revenue can be recognized by the percentage of completion method, so 33.3% of
CU210,000 =CU70,000.
(ii) Costs to complete cannot be estimated reliably
As the outcome of the overall contract cannot be estimated reliably, revenue is recognized to the
extent of the costs incurred which are recoverable, i.e. CU40,000. The current period therefore
recognizes the contract loss to date of CU5,000.
Solution to Question # 4(c)
LATENTILE LTD
(a) BAS 2
Accrual basis of accounting
The cost of unsold or unconsumed inventories is incurred in the expectation of future economic
benefits. When such benefits will not arise until a subsequent accounting period, the related costs
should be carried forward and matched with the revenue when it arises. The recognition of year-
end inventories achieves this carry forward.
Going concern basis of accounting
The very act of recognizing closing inventories as assets implies that the business intends to
continue in operational existence for the foreseeable future.
If the business did not intend to continue trading, its inventories would have to be written off as an
item of expenditure during the period, unless there was clear evidence that they could be sold as
part of the breaking up of the business. In this case, the selling price should be determined and
inventories measured at the lower of cost and net realizable value in the usual way.
(b) Suggested methods of valuing inventories
Given the limited information the following methods would be appropriate in the circumstances.
Raw Materials
BAS 2 allows either a first in, first out (FIFO) formula or a weighted average cost (WAC) formula.
Given the fact that clay is presumably continually added to the machinery, WAC would seem the
most appropriate basis.
CU
100,000 kgs @30 p 30,000
200,000 kgs@32p 64,000
20,000 kgs@31p 6,200
320,000 100,200
====== =======
=31.3p per kg

Closing raw material s would therefore be measured at CU 33,804 (108,000 X 31.3p).
Work in Progress
This could be measured using a weighted average cost, given that total cost and total output are
known.

6
Total output (800,000 +(60% X 50,000) 830,000 units
Total costs (excluding distribution costs) CU747,000

Thus average cost per unit
CU747,000
830,00
= 90p
Carrying amount of WIP (50,000 X 60% X 90p) CU27,000
Finished Goods
Again, a weighted cost could be used of 90p per unit. This would be applicable to 50,000 units,
with the remaining 20,000 units being measured at net realizable value of 65p (75p 10p).

CU
50,000 at 90p 45,000
20,000 at 65p 13,000
58,000
Thus inventories would appear as follows.
CU
Raw material 33,804
Work in progress 27,000
Finished goods 58,000
118,804
(c) Alternative valuation method for finished goods
If details regarding total costs were not known, adjusted selling price could be used since the cost
structure is known.
P
Normal selling price (75p discounted price X 3/2) 112.5
Less Gross profit (112.5 X 25/125) (22.5)
Cost re 50,000 90.0
=====
The finished goods inventories would be measured as before.
BAS 2 allows the above practice, used by the retail industry, on the basis that the result can be a
very close approximation to cost.

An impairment review is the procedure required by IAS 36 Impairment of assets to determine if and by
how much an asset may have been impaired. An asset is impaired if its carrying amount is greater
than its recoverable amount. In turn the recoverable amount of an asset is defined as the higher of its
fair value less costs to sell or its value in use, calculated as the present values of the future net cash
flows the asset will generate.
The problem in applying this definition is that assets rarely generate cash flows in isolation; most
assets generate cash flows in combination with other assets. IAS 36 introduces the concept of a cash
generating unit (CGU) which is the smallest identifiable group of assets that generate cash inflows
that are (largely) independent of other assets. Where an asset forms part of a CGU any impairment
review must be made on the group of assets as a whole. If impairment losses are then identified, they
must be allocated and/or apportioned to the assets of the CGU as prescribed by IAS 36.

Solution to Question # 5(b) (i)
The carrying amount of the plant at 31 March 2012, before the impairment review, is $500,000
(800,000 - (150,000 X 2)) where $150,000 is the annual depreciation charge ((800,000 cost - 50,000
residual value)/5 years).
This needs to be compared with the recoverable amount of the plant which must be its value in use as
it has no market value at this date.

7
Value in use:
Cash flow Discount factor Present value
$000 at 10% $000
Year ended: 31 March 2013 220 0.91 200
31 March 2014 180 0.83 149
31 March 2015 170 +50 0.75 165
514
At 31 March 2012, the plants value in use of $514,000 is greater than its carrying amount of
$500,000. This means the plant is not impaired and it should continue to be carried at $500,000.
Solution to Question # 5(b) (ii)
Per question After plant After impairment
write off losses
$000 $000 $000
Goodwill 1,800 1,800 write off in full nil
Patent 1,200 1,200 at realizable value 1,000
Factory 4,000 4,000 pro rata loss of 40% 2,400
Plant 3,500 3,000 pro rata loss of 40% 1,800
Receivables and cash 1,500 1,500 realisable value 1,500
12,000 11,500 value in use 6,700

The plant with a carrying amount of $500,000 that has been damaged to the point of no further use
should be written off (it no longer meets the definition of an asset). The carrying amounts in the
second column above are after writing off this plant.
After this, firstly, goodwill is written off in full.
Secondly, any remaining impairment loss should write off the remaining assets pro rata to their
carrying amounts, except that no asset should be written down to less than its fair value less costs to
sell (net realisable value).
After writing off the damaged plant the remaining impairment loss is $4.8 million (11.5m - 6.7m) of
which $1.8 million is applied to the goodwill, $200,000 to the patent (taking it to its realisable value)
and the remaining $2.8 million is apportioned pro rata at 40% (2.8m/(4m +3m)) to the factory and the
remaining plant.
The carrying amounts of the assets of Tilda, at 31 March 2012 after the accident, are as shown in the
third column above.

Page 1 of 5

PROFESSIONAL LEVEL-I
SUBJ ECT: 102. COST ACCOUNTING
MODEL SOLUTION
Req.-a: EOQ
EOQ = 2 x A x O A= Annual requirement
C O= Ordering cost
C= Carrying cost
2x13000xTk.200 5200000 = 1000 packages
Tk.5.20 5.2
Req.-b: Annual relevent total cost
= Annual relevant
ordering cost
+ Annual relevant carrying
cost

= 13,000XTk.200 + 1,000 x Tk.5.20
1,000 2
= 2,600 + 2,600
= 5,200
Req.-c: Number of deliveries in a year
No. of deliveries = Total Demand 13000 = 13 nos.
EOQ 1000
Req.-d: Time to new order to be placed
Re-order point = Number of units sold x Purchase order Lead time
= 250 x 2
= 500 packages
Req.-e: Safety stock
Safety
stock level
units
Demand
resulting in
stock out
Stock out
units
Probability Relevant
stockout
cost
Number of
orders per
year
Expected
stockout
cost
Relevant
carrying
cost
Relevant
total cost
a b c =(500-b) d e=(4Xc) f g=(dXeXf) h=(aX5.20) i =(g +h)
0 600 100 0.2 400 13 1040 0
700 200 0.09 800 13 936
800 300 0.06 1200 13 936
2912 0 2912
100 700 100 0.09 400 13 468 520
800 200 0.06 800 13 624
1092 520 1612
200 800 100 0.06 400 13 312 1040
312 1040 1352
300 0 0 0.06 0 13 0 1560
0 1560 1560
Therefore, the safety stock level is 200 units where the total stockout and carrying cost is Tk.1352 (minimum)

Page 2 of 5

Req.-f: Cost of prediction error
EOQ = 2 x A x O A= Annual requirement
C O= Ordering cost
C= Carrying cost
2x13000xTk.100 2600000 = 707 pack
Tk.5.20 5.2

Annual relevent
total cost
= Annual ordering
cost
+ Annual relevant
carrying cost

When EOQ is
1000 units
= 13,000XTk.100 + 1,000 x Tk.5.20
1,000 2
= 1,300 + 2,600
= 3,900
When EOQ is 707
units
= 13,000XTk.100 + 707 x Tk.5.20
707 2
= 1,838 + 1,838 = 3,676
Cost of prediction error = 3900-3676 = 224

a) Raw Materials Inventory....................................Dr 346,000
Cash................................................................... Cr 346,000
b) Work in Process Inventory .................................Dr 302,000
Manufacturing Overhead....................................Dr 36,000
Raw Materials Inventory.................................. Cr 338,000
c) Work in Process Inventory .................................Dr 360,000
Manufacturing Overhead....................................Dr 68,000
Administrative Salary Expense ..........................Dr 111,000
Cash....................................................................Cr 539,000
d) Selling Expenses.................................................Dr 153,000
Cash....................................................................Cr 153,000
e) Manufacturing Overhead....................................Dr 29,000
Cash.....................................................................Cr 29,000
f) Manufacturing Overhead....................................Dr 93,000
Depreciation Expense.........................................Dr 9,000
Accumulated Depreciation.................................Cr 102,000
g) Work in Process..................................................Dr 190,000
Manufacturing Overhead ...................................Cr 190,000
[Note: (Estimated OH/Estimated M.H.)*Actual M.H.] [(Tk 210,000/21,000 M.H.)*19,000 M.H.]
h) Finished Goods...................................................Dr 870,000
Work in Process ................................................Cr 870,000
i) Cash....................................................................Dr 1,221,000
Sales ...............................................................Cr 1,221,000
j) Cost of Goods Sold.............................................Dr 855,000
Finished Goods .................................................Cr 855,000
k) Cost of Goods Sold.............................................Dr 36,000
Manufacturing Overhead ....................................Cr 36,000
[Note: (Actual OH Applied OH) =(Tk 226,000-190,000)]

Page 3 of 5

i.
=Estimated Overhead cost / estimated direct labor cost
=Tk 250,000/Tk 200,000
=125% of direct labor cost
Predetermined overhead application rate:
ii.
Direct materials Tk 55,000
Direct labor 80,000
Overhead applied (Tk 80,000*125%)
Ending work in process inventory in J ob #3:
iii.
100,000
Tk 235,000
Direct materials (Tk 145,000+320,000) Tk 465,000
Direct labor (Tk 35,000+65,000) 100,000
Overhead applied (Tk 100,000*125%)
Sales revenue of J obs #1 and J ob #2:
iv.
125,000
Tk 690,000
Revenue is Tk 690,000 x 160% =Tk 1,104,000
Actual manufacturing overhead Tk 233,000
Applied manufacturing overhead (Tk 125,000+100,000)
Under- or overapplied manufacturing overhead:
v.
225,000
Under-applied overhead 8,000
Cost of goods sold ------- Dr Tk 8,000
Manufacturing overhead -----Cr Tk 8,000
J ournal entry to handle under- or overapplied manufacturing overhead at year-end:
vi. No. Companies use a predetermined application rate for several reasons including the fact that
manufacturing overhead is not easily traced to jobs and products. The predetermined rate is based on
estimates of both overhead and an appropriate cost driver, and these estimated rarely equal actual
overhead incurred or the actual cost driver activity. Under- or overapplied overhead typically arises at
year-end.

Tusuka Corporation
a) calculation of factory overhead rate:
Particulars Cutting Finishing Buildings
ground
Factory
administration
Budgeted f/O 100,000 150,000 60,000 42,000
Distribution of Building ground 37,500 22,500 (60,000)
Distribution of factory adm 28,000 14,000 (42,0010)
Total 165,000 185,000
Machine hr 106,000
Pre determined rate Tk.1.56
Labour hr 25,000
Pre determined rate Tk.7.46

b) the total cost of J ob No.302

cutting : D. Mat Tk.45.00
D. Lab (3hrxTk.6) 18.00
F/O (7hr x 1.56) 10.92
Finishing: D. Mat 10.00
D. Lab (5hr x 8) 40.00
FO (5hr x 7.46) 37.30
__________________________________
Total Cost Tk.161.22
Page 4 of 5

i. Calculation of cost of products shipped to Auckland Zoo Gift Shop

ii. Cost of special order

iii. ..Theory

Particulars Taka
Standard Kiwi:
Material (Tk 5.3 * 0.2 kg*100) 106
Materials receiving and handling (Tk 1.2*0.2kg*100)
24
Production set-up (60/600*100) 10
Cutting, sewing and assembly (40*100) 4,000
Packing and shipping 10
Total cost of Standard Kiwi (A) 4,150
Giant Kiwi:
Material (Tk 8.2 * 0.4kg*50) 164
Materials receiving and handling (Tk 1.2*0.4kg*50) 24
Production set-up (Tk 60/240*50) 13
Cutting, sewing and assembly (40*50) 2,000
Packing and shipping 10
Total cost of Giant Kiwi (B) 2,211
Cost of products shipped to Auckland Zoo Gift Shop (A+B) 6,361
Particulars Taka
Cost of Standard Kiwi (per req i) 4,150
Less: Cost of normal production set-up (10)
Add: Cost of special production set-up 60
4,200
Cost of Giant Kiwi (per req i) 2,211
Less: Cost of normal production set-up (13)
Add: Cost of special production set-up 60
2,258
Total cost of special order 6,458
Page 5 of 5

Req.-a Cleaning Deaprtment
Calculaion of Physical Units Qty Material Labour Overhead
Beginning WIP 200,000
Units Started 1,000,000
Total Input 1,200,000
Units Completed & transferred 900,000 900,000 900,000 900,000
WIP, Ending (50%) 300,000 300,000 150,000 150,000
Total Output 1,200,000 1,200,000 1,050,000 1,050,000
Total Cost to account for
Beginning Inventory cost 704,000 200,000 315,000 189,000
Cost Added during May 4,492,000 1,300,000 1,995,000 1,197,000
To be accounted for 5,196,000 1,500,000 2,310,000 1,386,000
Cost Per Unit 4.77 1.25 2.20 1.32

Req.-b: Assignment of costs
Cost of finished Goods ending 954,000 250,000 440,000 264,000
WIP, May 31 903,000 375,000 330,000 198,000
Cost aacounted for/assigned 1,857,000 625,000 770,000 462,000
Req.-c: Necessary Adjustment to be made
Work in
process
Finished
Goods
Total
Cost to be assigned for as above 903,000 954,000 1,857,000
Year end balance 660,960 1,009,800 1,670,760
242,040 -55,800 186,240

Work in process inventory 242,040
Finished goods inventory 55,800
Cost of goods sold 186,240
Req.-d: Cost of goods sold

Beginning finshed goods inventory -
Units completed during the year 900,000
Units available for sale 900,000
Less: Units in hand 200,000
700,000
Cost per equivalent unit 4.77
Cost of goods sold 3,339,000

Page 1 of 6

CMA APRIL, 2014 EXAMINATION
PROFESSIONAL LEVEL-II
SUBJ ECT : 201. ADVANCED FINANCIAL ACCOUNTING-I.

1. The lease agreement has a bargain purchase option and meets the criteria to be classified as a capital type lease to Square Textiles
Limited. The present value of the minimum lease payment also exceeds 90%of the fair value of the leased equipment.
SOLUTION
Solution of Q. No. 1.

Along with the option of bargain purchase option in the lease agreement, the collectability of the lease payments is reasonably
predictable and there are no important uncertainties surrounding the costs yet to be incurred by the United Leasing Company. As
such, the lease qualifies as a capital type lease to United Leasing Company.
2. Computation of the Lease Liability:
Tk.84,910.60 [Annual Lease Payment]
X 4.16986 [PV of annuity due of Tk. 1 for n=5, i=10%]
Tk. 3,54,065.30 [Present Value of Lease Payments]
Tk. 16,000.00 [Bargain Purchase Option Price]
X 0.62092 [PV of Tk. 1 for n=5, i=10%]
Tk.9,934.70 [Present Value of Bargain Purchase Option]
Tk. 3,54,065.30 [Present Value of Lease Payments]
Tk.9,934.70 [Present Value of Bargain Purchase Option
Tk. 3,64,000.00
Date
[Present Value of Lease Liability]
Square Textiles Limited [Lessee]
Lease Amortization Schedule
Annual Lease Payment Interest (10%) on
Liability
Reduction of Lease
Liability
Lease Liability
01/05/2008 TK.3,64,000.00
01/05/2008 Tk.84,910.60 Tk.84,910.60 Tk.2,79,089.40
01/05/2009 Tk.84,910.60 Tk. 27,908.94 Tk.57,001.66 Tk.2,22,087.74
01/05/2010 Tk.84,910.60 Tk.22,208.77 Tk.62,701.83 Tk.1,59,385.91
01/05/2011 Tk.84,910.60 Tk.15,938.59 Tk.68,972.01 Tk. 90,413.90
01/05/2012 Tk.84,910.60 Tk.9,041.39 Tk.75,869.21 Tk.14,544.69
30/04/2013 Tk.16,000.00 Tk.1,454.47 Tk.14,545.53 -0.84* (rounding error)

3) On 01/05/2008
Leased Equipment under Capital Lease Dr. 3,64,000.00
Lease Liability Cr. 3,64,000.00
Lease Liability Dr. 84,910.60
Cash Cr. 84,910.60
On 31/12/2008

Interest Expense Dr. 18,605.96
Interest Payable Cr. 18,605.96
[Tk. 27,908.94X8/12=18,605.96]
Depreciation Expense Dr. 24,266.68
Accumulated Depreciation-Capital Lease Cr. 24,266.68
[Tk. 3,64,000.00/10=36,400.00; 36,400.00X8/12=24,266.68]

On 01/05/2009

Lease Liability Dr. 57,001.66
Interest Payable Dr. 18,605.96
Cash Cr. 84,910.60

Page 2 of 6

On 31/12/2009

Interest Payable Cr. 14,805.85
[Tk. 22,208.77X8/12=14,805.85]
Depreciation Expense Dr. 36,400.00
Accumulated Depreciation-Capital Lease Cr. 36,400.00
[Tk. 3,64,000.00/10=36,400.00]

Solution of Q. No. 2. (b)

Mr. Khan

Trading and Profit & Loss Account

For the year ended 31-3-2014

Dr.

Cr.

Taka Taka

To Opening Stock 5,000 By Sales 62,550

To Purchase 50,250 By Closing Stock 5,500

To Gross Profit c/d 12,800

68,050 68,050

To business expenses 3,500 By gross Profit b/d 12,800

To Net Profit transferred to Capital 9,750 By Interest on Fixed Deposits
(for 3 months)

100

By Interest on National
Defence Certificate (for 1 year)

350

13,250 13,250

Balance Sheet as at 31-3-2014

Liabilities Taka Assets Taka

Capital:

Freehold Cottage 10,000

as on 31-3-2013 25,100
3.50% National Defence Certificate 10,000

Add: Net Profit 9,750 Stock in Trade 5,500

Less: Drawings 4,000 Sundry Debtors 5,750

30,850 Bank 1,600

Sundry Creditors 2,000

32,850 32,850

Workings:-

(1) Balance at Bank on 1-4-13:

Balance as on 31-3-14

1,600

Add: Withdrawals during the year

59,250

60,850

Less: Lodgements during the year

60,100

750

Page 3 of 6

(2) Receipts from Customers during the year:

Lodgement into Bank

60,100

Add: Expenses met out of receipts

Business 3,500

Personal 4,000

7,500

67,600

Less: Lodgements of

Encashment Fixed Deposit 5,000

Interest on it (for 6 months) 200

Interest on N.D.C. (for 1 year) 350

5,550

62,050
(3) Sales during the year:

Receipt from customers as in (2)

62,050

Add: Sundry Debtors at the end

5,750

67,800

Less: Sundry Debtors at the beginning 5,250

62,550
(4) Purchases during the year:

Payment to suppliers (59,250 - 10,000) 49,250

Add: Creditors at the end

2,000

51,250

Less: Creditors at the beginning

1,000

50,250

(5) Capital on 31-03-13:

Balance Sheet as at 31-3-2013

Liabilities Taka Assets Taka

Sundry Creditors 1,000 Freehold Cottage (assumed 10,000

to be same as on 31-3-13)

Capital (balancing figure)
25,100
8% Fixed Deposit 5,000

Interest accrued thereon (for
3 months)
100

Stock in Trade 5,000

Sundry Debtors 5,250

Bank 750

26,100 26,100

Page 4 of 6

Solution of Q. No.3(b)

Calculation of Deferred Tax

Million Tk.
Profit for the year 2013 90.00

Add: Accounting Depreciation 60.00

Add: Non admissible item 2.50

152.50

Less: Capital allowances 100.00

Adjusted Taxable profit 52.50

Tax at current rate of 35% 18.375

Current Taxation

Tax on current year Profit @35% 18.375

Under provision in 2012 0.50

18.875

Deferred Taxation account

Opining Balance 20.00

Transfer for current year timing difference 14.00

Balance carried forward 34.00

Current year timing difference

Accounting Depreciation 60.00

Capital allowances 100.00

Difference 40.00

Deferred tax @ 35% 14.00

Total tax charge for the year is Tk.32.875 million, out of which Tk.14
million has been deferred and Tk.18.875 million has been currently
charged.

Solution of Q. No. 4 (c).

Overseas Branch Converted Trial Balance as at 30.06.2012

Sl
no
Heads of Account L.F
Florins Rate of
Exchan
ge (per
Re)
Taka
Dr. (Rs) Cr. (Rs) Dr. (Rs) Cr. (Rs)
Freehold buildings

63,000 7 9,000
Debtors (Note 1) 35,680 8 4,460
Creditors 1,560 8 195
Sales 4,32,000 9 48,000
Head Office Account (Note 1) 5,03,940 Actual 60,100
Cost of sales (Note 2) 3,47,400 9 38,600
Depreciation on machinery 12,600 7 1,800
Provision for depreciation on
machinery 56,700 7 8,100
Administration cost 18,000 9 2,000
Stock on 30.06.2012 11,520 8 1,440
Machinery at cost 1,26,000 7 18,000
Remittances 2,72,000 Actual 29,990
Cash at bank 79,200 8 9,900
Selling and distribution cost 28,800 9 3,200
Difference on exchange 1,995
9,94,200 9,94,200 1,18,390 1,18,390
Page 5 of 6

Moohit Limited
Trading and Profit and Loss Account for the year ended on 30
th
Particulars
June, 2012
Dr. Cr.
Head
Office
Branch Total Particulars
Head
Office
Branch Total
To Cost for Sales
(Other than depreciation)
58,400 38,600 97,000 By Sales 1,04,000 48,000 1,52,000
To Gross Profit c/d 80,600 9,400 90,000 By Component
Sent to Branch A/c
35,000
-
35,000
1,39,000 48,000 1,87,000 1,39,000 48,000 1,87,000
To Depreciation on Machinery 600 1,800 2,400 By Gross Profit b/d 80,600 9,400 90,000
To Administrative cost 15,200 2,000 17,200 By Difference on
Exchange(Note)
- 1,995 1,995
To Selling and Distribution Exp. 23,300 3,200 26,500
To Comm. to manager (Note 3) - 150 150
To Stock reserve 300 - 300
To Net Profit c/d 41,200 4,245 45,445
80,600 11,395 91,995 80,600 11,395 91,995
Total Balance b/d 47445 By Balance b/d 2,000

By Net Profit for
the year : H.O 41,200
Branch 4,245
47,445 47,445

Balance Sheet of Moohit Limited as at 30
th
Liabilities
June, 2012

Rs Assets Rs
Share capital Reserve & Surplus
Profit & Loss
Current Liabilities:

Sundry Creditors(Tk.9500+Tk. 195)
Branch Manager Commission
40000
47,445

9,695
150
Fixed Assets :
Freehold building at cost (Tk. 14,000+Tk. 9,000)
Machinery at cost (Tk.6,000+Tk.18,000) 24,000
Less Prov. For dep (Tk 1500+8100

23,000

14,400

30,040
13,360
14,500
1,990
) 9,600

Current Assets :

Stock (at cost) (Tk.28,900+1440-Tk.300)
Sundry Debtors (Tk. 8,900+Tk.4,460)
Cash at bank (Tk. 4,600+Tk. 9,900)
Cash in Transit
97,290 97,290

Working Notes:
(1) Debtors balance as per branch Trial Balance is Tk.36000. A customer paid FL. 320 direct to H.O.
Therefore, net debtors at branch will be FL. 36000 FL.320 =Fl.35680 and Head Office Account
will be FL.504260-320=FL503940. No adjustment is required in the books of H.O for Tk.36,
because it has been treated properly in the books.
(2) Cost of sales =Fl.360000-FL.12600 =FL.347400.
(3) Branch Managers commission will be calculated on the basis of the foreign currency.

Sales:
Less: Cost of Sales 347400
Depreciation 12600
Adm.Cost 18000
Selling Cost 28800
-----------------
Profit before charging commission
FL.
432000

406800
25200
Commission is payable @5% after charging
branch commission. So total commission will
be 5/105xFL.1200. It should be converted
into Taka at closing rate 8 FL. To 1 Tk. The
amount of commission becomes Tk.150

Page 6 of 6

Solution of Q. No.5(b).

Contract A/c
for the year 2013

House
A
House
B House A House B
Tk. Tk. Tk. Tk.
Work in progress including estimated profit
148,000

-
Work in progress A/C:
Materials

230,000

166,000 Work certified 360,000
Wages 200,000

140,000 Work uncertified 25,000
Electric Services and fittings

14,000 3,000 Contractee A/C 600,000
Road making charges

80,000

- Materials return to stores 4,000
Plant value used 120,000 60,000 Materials in hand 5,400
Establishment charges (Tk.1,22,400

72,000

50,400 Plant return to stores 1,20000
to be appropriated in the ratio of 10:7) Less: Dep @10% for 10 M 110,000 10,000
Plant in hand (house B): Cost 60,000
Notional profit C/d

27,000 Less: Dep @10% for 8 M 4 ,000 56,000
P & L A/C (Loss) 150,000
864,000 446,400 864,000 446,400
P & L A/C (27,000*2/3*2/3) or
27,000 x 66.67%x8/12

12,000 Notional profit b/d 27,000
Work in progress
15,000

27,000
27,000

=THE END =
SUBJ ECT: 202. MANAGEMENT ACCOUNTING

SOLUTION
(1) Operating income =Revenue Variable cost Fixed costs
=(20,000 * 2,500) (20,000 * 1,375) 1,68,75,000
=5,00,00,000 2,75,00,000 1,68,75,000
=5,00,00,000 4,43,75,000
=56,25,000
Income tax =.40 * 56,25,000
=22,50,000
Net income =56,25,000 22,50,000
= 33,75,000

(2) BES in uints =Fixed cost/Unit contribution margin
Unit contribution margin =2,500 1,375
= 1,125
Fixed cost =1,68,75,000
BES in units =1,68,75,000/1,125
=15,000 units
(3) Revenues =22,000 * 2,500
=5,50,00,000
Operating income =5,50,00,000 (22,000 * 1,375 +1,68,75,000 +11,25,000)
=5,50,00,000 (3,02,50,000 +1,80,00,000)
= 5,50,00,000 4,82,50,000
=67,50,000
Income tax =67,50,000 * .40
=27,00,000
Net income =67,50,000 27,00,000
=40,50,000
(4) Let Q =Number of units to break-even with new fixed cost - 1,80,00,000
2,500 Q 1,375 Q 1,80,00,000 =0
Q (2,500 1,375) =1,80,00,000
1,125 Q =1,80,00,000
Q =1,80,00,000/1,125 =16,000 units
(5) Let S =Required sales units to equal 2014 net income
2,500 S 1,375 S 1,80,00,000 =33,75,000/0.60
S (2,500 1,375) =1,80,00,000 +56,25,000
1,125 S =2,36,25,000
S =2,36,25,000/1,125
=21,000

Manufacturing cost for 30,000 units.
Cost elements :
Direct Material cost (30,000 * 6.5) =Tk. 1,95,000
Direct Manufacturing labour costs (30,000 * 4) =Tk. 1,20,000
Plant space rent =Tk. 84,000
Equipment leasing cost =Tk. 36,000
Variable manufacturing overhead (a) =Tk. 90,000
Fixed manufacturing overhead =Tk. 1,35,000
Total cost = Tk. 6,60,000

(a) Working note of other variable manufacturing overhead.
Cost for 30,000 =2,25,000.00
40% of 2,25,000 =90,000.00
Other variable manufacturing overhead as percentage of direct manufacturing labour cost :
90,000 * 100%/1,20,000 =75%
=75% of 1,20,000 =90,000
Fixed manufacturing overhead =60% of 2,25,000
=1,35,000
Purchase cost of 30,000 units.
Cost of purchase (30,000 * 20.50) =6,15,000
Terminate cost of space rent = 10,000
Terminate cost of leasing = 5,000
Fixed manufacturing overhead cost =1,35,000
Total purchasing costs = 7,65,000
The cost to purchase is higher than estimated cost of manufacturing. The company should
manufacture in house.

2. Manufacturing cost for 30,000 units.
Cost elements Amount
Direct materials cost (1,95,000 * 1.08) =2,10,600.00
Direct labour cost (1,20,000 * 1.05) =1,26,000.00
Space rent cost =84,000.00
Equipment lease costs =36,000.00
Variable manufacturing cost (a) =94,500.00
Fixed manufacturing cost =1,35,000.00
Total manufacturing costs = 6,86,100.00

(a) Working note for variable manufacturing costs.
75% of direct labour cost =75% of 1,26,000 =94,500
Purchase costs for 30,000 units.
Purchase cost =30,000 * 20.50 =6,15,000
Plant space rental termination costs =10,000
Equipment termination costs =3,000
Fixed manufacturing costs =1,35,000
Total cost of purchase = 7,63,000
The company should not accept the offer as the cost of buying is higher than manufacturing.

Requirement 1 (a & b)
Cost elements Absorption costing Variable costing
Direct materials 1860 1860
Variable manufacturing overhead 40 40
Fixed manufacturing overhead
24,00,000/4,000 600 -
Total product costs 2,500 1,900

2. Income statement under Absorption costing
Revenue / Sales (3,200 * 4,500) =1,44,00,000
Less : Costs of goods sold
Opening inventory 0
Add : Costs of good manufactured
(4,000 * 2,500) =1,00,00,000
Goods available for sales 1,00,00,000
Less: ending inventory
800 * 2,500 =20,00,000 80,00,000
Gross margin = 64,00,000
Less: Selling and administrative expenses.
Variable (15% of 1,44,00,000) =21,60,000
Fixed =16,00,000
Total = 37,60,000
Operating income = 26,40,000

3. Income statement under variable costing.
Sales / Revenue (3,200 * 4,500) =1,44,00,000
Less: Variable cost of goods sold.
Beginning inventory 0
Add: Variable manufacturing cost
4,000 * 1,900 =76,00,000
Goods available for sale =76,00,000
Less: ending inventory
800 * 1,900 =15,20,000
Variable cost of goods sold =60,80,000
Cross contribution margin = 83,20,000
Less: Variable selling & administrative cost =21,60,000
Contribution margin = 61,60,000
Less: Fixed costs :
Fixed manufacturing overhead =24,00,000
Fixed selling & administrative costs =16,00,000
Total fixed costs = 40,00,000
Operating income = 21,60,000

4. Reconciliation statement :
Operating income as per variable costing =21,60,000
Add : Fixed manufacturing cost deferred in
inventory under absorption costing (800 * 600) = 4,80,000
Absorption costing net income = 26,40,000


1. Cost of direct material cost per tablet.
Raw Material cost (Taka) =15,60,000
Production of tablets (Units) =39,00,000
Cost of materials per tablet =15,60,000/39,00,000
=0.4
Selling price per tablet =1.00
Unit throughput contribution =1.00 .4 =0.6
Tablet making is a bottleneck operation therefore producing 1,95,000 more will generate
addition operating income as :
Additional operating income =Unit throughput contribution Additional operating cost
0.6 .12 =0.48 * 1,95,000
=93,600
The Arbee should accept the offer.

2. Cost per gram of mixture =15,60,000/20,00,000
=0.78
Cost of 1,00,000 grms of mixture =1,00,000 * 0.78
=78,000
Benefit from better mixture =78,000
Cost of improving the mixture operating =90,000
Since cost exceeds the benefit by (90,000 78,000) Tk. 12,000 per month, the company should not
adopt the quality
improvement plan.

3. The benefit of improving quality at the mixing operation is the saving in material costs. The
benefit of improving quality of the tablet making department is the saving material cost plus the
additional throughput contribution from higher sales equal to the total revenues as result from
releasing the bottleneck.

Page 1 of 4

SUBJ ECT: 204-TAXATION
1.
SOLUTION

Mr. Ameen
Income Year 2012-13
Calculation of Taxable Income
Tk. Tk. Tk.
Income from Salary (Sec 24) Basic Salary (12,000 x 12) 1,44,000
Conveyance Allowances (14,400 x 10%) 14,400
Less: Exempted upto Nil 30,000
House Rent Allowances (14,400 x 60%) 86,400
Less: Exempted 50% of Basic Salary 72,000
Or Tk. 20,000 / Month whichever is lower 2,40,000 14,400 72,000

Entertainment Allowances (3,000 x 12) 36,000
Medical Allowances (12,000 x 12) 14,400
Less: Exempted Actual (Assumed Full) Nil 14,400
Festival Bonus (12,000 2x2) 12,000 12,000
Employers Contribution to R.P.F. (1,44,000 x 10%) 14,400
Interest from R.P.F. 3,000
Less: Lower of interest @ 14.50% 3,625
1

or 1/3 of Basic 48,000 3,625 Nil
Income from Salary 2,20,800

2. Income from Securities (See 22d)
Interest from less tax Govt. Securities 20,000
Gross 18,000/10%
Less: Admissible expenses Bank charge (18,000 x 5%) 900
19,100
Interest from Approved commercial securities
(3,00,000x10%)
30,000
Less: Admissible expenses Bank charges (30,000x5%) 1,500 47,600 28,500
3. Income from other sources (Sec. 33 & 34):
Dividend Income [(3,600 90) x 100] 4,000
Less: Exempted upto Nil 10,000

Interest from Savings Account (
2,250
90
x 100)
2,500
Sale of Forest Timber 4,000 6,500
Total Income excluding income on which final payment of _______
Tax is applicable u/s 82c (1 to 3) 2,74,900
Prize Money of Lottery u/s 82c (Note-1) 4,81,700
Total Income 7,56,600

Calculation of Allowable Investments
Tk.
Investment in savings certificates 16,200
Contribution to R.P.F. (14,400 x 2) 28,800
Actual investment 45,000
Maximum Limit:
30% of total income excluding employers
Contribution to P.F. (7,56,600 14,400 4,81,700) 30% 78,150
Or 1,50,00,000
Whichever is lower i.e. 45,000

1
3000/12% x 14.50% =3,625
Page 2 of 4

Calculation of tax liability
Rates Tk.
On 1
st
220,000 @ 0%
On next 3,00,000 @ 10% 30,000
On next 2,36,600 @ 15% 35,490
7,56,600 65,490
Less: Investment tax credit @ 15% 6,750
Net tax liability 58,740

Less: Tax deducted at source on lottery 60,000
On less tax Govt. Security 2,000
On security dividend income 400
On Interest from savings 250 62,650
Refund claim 3,910
Notes: As TDS against lottery is a final tax liability, so the total income excluding lottery income
were calculated firstly. Then both calculations is used to determine income from lottery by the
following ways:
Total income excluding lottery income Tk. 2,74,900
Tax on above would be
On 1
st
@ Nil 2,20,000
Then rest 54,900 10% 5,490
Tax on lottery is 60,000
2
nd
Tk. 245,100 slub tax (3,00,000 54,900) x 10% 24,510
3
rd
slub tax will be used to adjust Balance current tax 35,490
i.c. 35,490 / 15 x 100 2,36,600 65,490
Lottery income should be shown as (2,45,100+2,36,600) =4,81,700/-

Page 3 of 4

Solution to the Question # 5.
ABC Ltd.
Computation of Total Income
For the year ended on December-2012
Net profit as per accounts
(Assessment year -2013-14)
Tk. 1,97,00,000
Less: Income for consideration at separate head:-
(a) Interest Tk.10,00,000/-
(b) Capital gain on sale of shares Tk.25,00,000/-
of listed companies Tk. 35,00,000/-
Tk. 1,62,00,000/-
Add: Inadmissible Exp.
(1) Salary and wages Tk. 2,60,00,000/-
(a) Salary of finance Manager Tk.6,00,000/- disallowed
as per provision of section 30(i) being paid in each
not by crossed cheque of bank transfer Tk. 6,00,000/-
(b) Gratuity provision T^k. 15,00,000 disallowed being
no such provision is allowable u/s 29 of ITO 1984 Tk. 15,00,000/-
(c) Gratuity payment Tk. 10,00,000disallowed being not
Approved by the NBR Tk. 10,00,000/-
Tk. 31,00,000/-
(2) Security service Tk 3,00,000
Disallowed fully under section 30(aa) being VAT was not deducted at source Tk. 3,00,000/-
(3) Donation....... Tk.18,00,000
Disallowed fully as it is not allowable business expenditure u/s 29. Moreover,
donation was made to ICMB which is not approved Institution of NBR. So it
will not be considered for CSR also.
Tk. 1,80,000/-
(4) Board Meeting Attendance fee Tk. 3,00,000
TDS not applicable but VDS is applicable or Board meetings Attendance fee.
AS VAT was not deducted at source from Board meeting attendance fee, so
disallowed such expense u/s 30(aa)
Tk. 3,00,000/-
(5) Other Exp. Tk. 30,00,000/-
(a) Entertainment exp. of Tk. 5,00,000
Spent on MDs birthday party which is personal expenditure
and no such personal expenditure is allowable u/s 29

Tk. 5,00,000/-
(b) Foreign travel for business purpose Tk. 8,00,000/-
It is allowable u/s 30(k) up to 1% of the disclosed turnover which is
Tk. 12,65,00,000 x 1% =Tk. 12,65,000/-.

As it is within limit, so nothing to add back from here. Tk. Nil
(6) Corporate Income Tax Tk. 45,00,000
Tax is not an expense and hence it is not allowable expenditure u/s 29,
So disallowed corporate income tax fully Tk. 45,00,000/-
Tk. 88,80,000/-
Income for Business or Profession Tk. 2,50,80,000/-
Tk. 10,00,000/- Income from Interest on securities (Sec. 22)
Capital Gain (Sec. 31)
Capital Gain from sales of Shares of Listed Co. Tk. 25,00,000/-
Less: Capital loss of Tk. 10,00,000 for the A/Y 2010-2011
Carried forward for set off u/s-40 (Tk. 10,00,000 Tk. 5,000) Tk. 9,95,000/-
Tk. 15,05,000/-
Total Income Tk. 2,75,85,000/-
Tax Calculation:
(1) Tax on income other than Capital Gain @ 24.75%
(as dividend paid more than 20%)
Tk. 2,75,85,000 15,05,000 =2,60,80,000 x 24.75% = Tk. 64,54,800/-
(2) Tax on Capital Gain @ 10% as per SRO No. 269 of 2101
Tk.15,05,000 x 10% Tk. 1,50,500/-
Tk. 66,05,300/-

Page 4 of 4

Add: Simple Interest for non-payment of adequate advance tax u/s 73
Tk. 66,05,300 x 75% = Tk. 49,53,975/-
Less: advance tax paid = Tk. 27,00,000/-
(45,00,000 x 60%)
Tk. 22,53,975 x 10% for 2 years = Tk. 4,50,795
(Assuming it was not paid as per provision of section 64) for 2 years =
(From 1
st
April 2012 to 31
st
Tk. 70,56,095/- March 2014) (Assuming date of assessment is 31.03.14)
Less: Advanced Tax paid (60% of Tk. 45,00,000) Tk. 27,00,000/-
Net Tax Payable Tk. 43,56,095/-

Test of minimum tax:
0.50% of Gross receipt of Tk. 13,00,00,000 = Tk. 6,50,000/-
Which is lower than tax at normal tax rate. So net tax playable will be Tk. 43,56,095/-

Ans: 1. Total Income Tk. 2,75,85,000/-
2. Net Tax Payble Tk. 43,56,095/-

Page 1 of 9

PROFESSIONAL LEVEL-III
SUBJ ECT : 301. ADVANCED FINANCIAL ACCOUNTING-II.

Solution to Question 1

PRIME LTD EASTERN LTD

75%
Prime Ltd Eastern Ltd
Prime Ltd 75%
Minority Interest (MI)25%
Acquisition analysis

At 1 J uly 2008:

Net fair value of identifiable assets,
liabilities and contingent liabilities
of Eastern Ltd =Tk.300,000(Sh. Capital) +Tk.60,000(Ret. Earnings)
=Tk.360,000
Net fair value acquired =75% x Tk.360,000
=Tk.270,000
Cost of acquisition =Tk.276,000
Goodwill =Tk.6,000

1. Entry to Eliminate Investment in Shares of Eastern Ltd.

At 30 J une 2013:

Retained Earnings Dr 45,000
Share Capital Dr 225,000
Goodwill Dr 6,000
Shares in Eastern Ltd Cr 276,000

2 . MI share of equity at 1/7/08

Share Capital Dr 75,000
MI Cr 90,000

3. MI share of equity: 1/7/08 - 30/6/12

General Reserve Dr 12,500
MI Cr 33,750
[RE: (25% x (Tk.145,000 - Tk.60,000)]
[GR: (25% x Tk.50,000)]

4. MI share of current year's profit

MI Share of Profit [Note 1] Dr 16,250
MI Cr 16,250
(25% x Tk.65,000)
Page 2 of 9

5. Reduction in Minority Interest for Dividend paid

MI Dr 6,000
Dividend Paid Cr 6,000
(25% x Tk.24,000)

6. Profit in opening inventory: Eastern Ltd - Prime Ltd

Retained Earnings (1/7/12) Dr 5,600
Income Tax Expense Dr 2,400
Cost of Sales Cr 8,000

7. MI adjustment

MI Share of Profit Dr 1,400
MI Cr 1,400
(25% x Tk.5,600)

MI Dr 1,400
Retained Earnings Cr 1,400
(25% x Tk.5,600)

8. Profit in ending inventory: Eastern Ltd - Prime Ltd

Sales Dr 190,000
Cost of Sales Cr 178,000
Inventory Cr 12,000

Deferred Tax Asset Dr 3,600
Income Tax Expense Cr 3,600

9. MI adjustment

MI Dr 2,100
MI Share of Profit Cr 2,100
(25% x Tk.8,400)

10. Debentures

10% Debentures Dr 30,000
10% Debentures in Eastern Ltd Cr 30,000

11. Debenture interest

Interest Revenue from Debentures Dr 3,000
Financial Expenses Cr 3,000

12. Dividend paid

Dividend Revenue Dr 18,000
Dividend Paid Cr 18,000
(75% x Tk.24,000)

Page 3 of 9

PRIME LTD
Consolidated Income Statement
for the financial year ended 30 June 2013

Revenue
Sales revenue (Tk.500,000+Tk.800,000 - Tk.190,000) Tk.1,110,000
Expenses:
Cost of sales [Tk.340,000 +Tk.585,000 - (Tk.178,000 +Tk.8,000)] 739,000
Financial [Tk. 15,000 +Tk. 5,000 - Tk. 3,000] 17,000
Selling 115,000
Other 30,000
901,000
Profit before tax 209,000
Income tax expense [Tk.50,000 +Tk.55,000 +Tk.2,400 - Tk. 3,600] 103,800
Profit for the period Tk.105,200
Attributable to:
Parent shareholders Tk. 89,650
Minority interest (From Note 2) Tk. 15,550

PRIME LTD
Consolidated Statement of Changes in Equity
for the financial year ended 30 June 2013

Group Parent
Profit for the period Tk.105,200 Tk.89,650
Net income recognised directly in equity _____- _____-
Total recognised income and expense for the period Tk.105,200 Tk.89,650

Retained earnings:
Balance at 1 J uly 2012 Tk.284,400 Tk.249,550
Profit for the period 105,200 89,650
Dividend paid (30,000) (24,000)
Balance at 30 J une 2013 Tk.359,600 Tk.315,200

General reserve:

Share capital

Page 4 of 9

PRIME LTD
Consolidated Balance Sheet
as at 30 June 2013

ASSETS
Current Assets
Inventories [Tk.120,000 +Tk. 155,000 - Tk. 12,000] Tk.263,000
Other 150,500
Total Current Assets 413,500
Non- current Assets
Property, plant and equipment
Plant Tk.1,000,000
Accumulated depreciation (475,000) 525,000
Deferred tax asset (Tk.20,000 +Tk. 50,000 +Tk.3,600) 73,600
Intangible assets:
Goodwill __6,000
Total Non-current Assets 604,600
Total Assets Tk.1,018,100

Equity and Liabilities
Equity attributable to equity holders of the parent
Share capital Tk.400,000
Reserves: General reserve 37,500
Retained earnings 315,200
Parent Entity Interest 752,700
Minority Interest (Note 2) 131,900
Total Equity Tk.884,600
Current Liabilities: Tax liabilities 113,500
Non-current Liabilities:
Interest-bearing liabilities: Debentures 20,000
Total Liabilities Tk.134,000
Total Liabilities and Equity Tk.1,018,100
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
_Note 1
Profit after tax of Eastern Ltd.

Sales - Cost of Sales- Financial Expense - Selling Expense - Other Expense - Income Tax
=Tk.(800,000 - 585,000 - 5,000 - 75,000 - 15,000 - 55,000)
=Tk. 65,000

Note 2
Minority Interest:

Total 25% Minority
Interest
Tk. Tk.
Profit after tax for the year of Eastern Ltd (Note 1) 65,000 16,250
Adjustments:
Unrealised profit in opening inventory 5,600 1,400
Unrealised profit in Closing inventory (8,400)
Profit attributable to Minority Interest
(2,100)
15,550
Opening retained earnings:
Opening retained earnings of Eastern Ltd 145,000
Unrealised profit in opening inventory 34,850 (5,600)
Dividend paid by Eastern Ltd (24,000) (6,000)
General reserve 50,000 12,500
Share Capital 300,000
Total Minority Interest
75,000

131,900
Page 5 of 9

Solution to Question No. 2
a.
Acquisition Analysis: Alpha Ltd - Beta Ltd
Fair value of identifiable assets and acquired :
Tk.
Accounts receivable 21,300
Inventory 26 000
Land and buildings 80 000
Plant and equipment 105 000
Tk. 232 300
Cost of the combination
Purchase consideration
Shareholders:
Shares: Shares of Beta Ltd 15,000
Shares in Alpha Ltd [(1/3)15,000]
Mortgage loan 30,000
x Tk.25 Tk.125,000
Shares in Listed Companies 15,000
Creditors:
Cash
Accounts payable Tk.49,100
Liquidation costs 15,000
Annual leave
Total cash required 123,800
29,700
Less cash already held (5 200) 118,600
258,600
Directly attributable costs (Transfer and Installation costs) 7,600
Total cost of combination Tk.266,200
Goodwill = Tk.266,200 Tk.232,300 =Tk.33,900

Acquisition Analysis: Alpha Ltd - Pie Ltd
Cost of combination:
Shareholders
Shares Shares of Pie Ltd 6,000
Shares in Alpha Ltd [(1/2)6,000]x Tk.25 Tk.75,000
Cash (6,000/2) x Tk.15 45,000
Total cost of combination Tk.120,000

Page 6 of 9

ALPHA LTD
General Journal

Accounts Receivable 21,300
Inventory 26,000
Land and Buildings 80,000
Plant and Equipment 105,000
Goodwill 33,900
Payable to Beta Ltd 258,600
Incidental Costs Payable 7,600
(Acquisition of Beta Ltds assets)

Payable to Beta Ltd 258,600
Loss on Shares in Listed Companies 1,000
Cash 118,600
Shares in Listed Companies 16,000
(Payment of purchase consideration)

Incidental Costs Payable 7,600
Cash 7,600
(Payment of incidental costs)

Share Capital 1,200
Cash 1,200
(Payment of share issue costs)

Shares in Pie Ltd 120,000
Cash 45,000
(Acquisition of shares in Pie Ltd)
b.
Goodwill is measured differently for two reasons:

1. IFRS 3 prohibits the recognition of internally generated goodwill so the figure recorded in
the books of Beta Ltd does not represent the total goodwill of the company at acquisition
date.
2. Goodwill cannot be separated from the company and cannot sold separately so no fair
value is available. The only way goodwill can be measured is to compare the total value
of the company against the fair values of its identifiable net assets, any surplus is
deemed to represent the value of the net unidentifiable assets or goodwill.

c.
The journal entry to record the dividend cheque is:

Cash 1 500
Shares in Pie Ltd 1 500
(Dividend received from Pie Ltd)
This accounting treatment is required as the distribution from pre-acquisition profits is deemed
to be a refund of the investment cost rather than revenue earned on the investment. This is
Page 7 of 9

based on the rationale that the price paid for the shares includes a premium to acquire
undistributed profits in existence at acquisition date.
d.
Alpha Ltd should post the following journal entry:

Goodwill 25,000
Cash 25,000
(Payment to Beta Ltd)

If the liability had been identified at acquisition date then Alpha Ltd would have paid an extra
Tk.25 000 cash to acquire the assets of Beta Ltd. As the cost of the combination has increased
but there has been no change in the fair values of identifiable assets and liabilities, then the
value of goodwill acquired must increase.

Solution to Question No. 3.

(a)

The directors should be persuaded that professional ethics are an inherent part of accounting
profession as well as other major professions such as law and engineering. Professional ethics
are a set of moral standards applicable to all professionals

The main aim of professional ethics is to serve as a moral guideline for professional
accountants. By referring back to the set of ethical guidelines, the accountant is able to decide
on the most appropriate course of action, which will be in line with the professional bodys
stance on ethics. The presence of a code of ethics is a form of declaration by the professional
body to the public that it is committed to ensuring the highest level of professionalism amongst
its members.

Often there may be ethical principles, which conflict with the profit motive and it may be difficult
to decide on a course of action. Ethical guidelines can help by developing ethical reasoning in
accountants by providing insight into how to deal with conflicting principles and why a certain
course of action is desirable. Individuals may hold inadequate beliefs or hold on to inadequate
ethical values. An accountant has an ethical obligation to encourage the directors to operate
within certain boundaries when determining the profit figure. Users are becoming reactive to
unethical behaviour by directors. This is leading to greater investment in ethical companies with
the result that unethical practices can have a greater impact on the value of an entity than the
reporting of a smaller profit figure. Ethical guidelines enable individuals to understand the nature
of ones own opinion and ethical values. Ethical guidelines help identify the basic ethical
principles which should be applied. This will involve not only code-based decisions but also the
application of principles which should enable the determination of what should be done in a
given situation. This should not conflict with the profit motive unless directors are acting
unscrupulously.

Ethical guidance gives a checklist to be applied so that outcomes can be determined. Ethical
issues are becoming more and more complex and it is critical to have an underlying structure of
ethical reasoning, and not purely be driven by the profit motive.

Page 8 of 9

(b)
Haycarb Ltd
Income statement
for the year ended on 30 June 2012

() (Rate) (NZ$)
Sales 2,500 2.10 5,250.0
Cost of sales
- Inventory 01 J uly 2011 (500) 2.00 (1,000.0)
- Purchases (2,000) 2.10 (4,200.0)
- Inventory 30 J une 2012 450 2.20 990.0
Administration expense (75) 2.10 (157.5)
Depreciation expense 2.10 (100)
Profit
(210.0)
275 672.5
Income tax expense 2.10 (125)
Profit after tax
(262.5)
150 410.0
Retained earnings 01 J uly 2011 2.00 150
Retained earnings 30 J une 2012
300.0
300 710.0

Haycarb Ltd
Balance sheet
as at 30 June 2012

01 J uly
2011()
30 J une
2012()
(Rate) (NZ$)
Assets
Plant and equipment 1,050 950 2.30 2,185
Cash and debtors 100 800 2.30 1,840
Inventory 500 2.30 450
Total assets
1,035
1,650 2,200

5,060

Liabilities

Bank loan 1,000 1,000 2.30 2,300
Trade creditors 0 400 2.30
Total liabilities
920
1,000 1,400
Net assets
3,220
650 800
Represented by:
1,840

Share capital 500 500 2.00 1,000
Foreign currency translation reserve(note 1) 130
Retained earnings 150 300

710
650 800

1,840
Net assets at 30 J une 2012 at current rate (800 x NZ$2.30)
Note 1:
The transfer to the foreign currency translation reserve is determined as follows:

NZ$1840
Less Components of net assets at their historical rates:
Share capital (500 x NZ$2.00) (NZ$1000)
Retained earnings from the income statement
Translation gain to foreign currency translation reserve
(NZ$710)

NZ$130

Page 9 of 9

(a)
Earnings calculation
Profit after tax Tk. 1,000,000
Less: Preference share dividend 120,000
Profit after tax available to ordinary shareholders
Period
Tk. 880,000

Theoretical ex right price: [ {(Tk.20 x 4) +(Tk.15)}/ (4+1)}] =Tk.19.00

Adjustment factor =Tk.19 /Tk. 20 =0.95 or Tk.20/Tk.15 =1.0526

Calculation of the Weighted-average number of ordinary shares and ordinary share equivalents:

Proportion of
year
No. of shares
outstanding
Adjustment factor Weighted
average
Fully paid ordinary shares
1/7/2011 - 31/8/2011 62/365 800,000 Divide by 0.95 or
multiply by 1.052632
143,043
1/9/2011 - 30/6/2012 303/365 1,000,000 830,137
No. of weighted average shares 973,180

Basic earnings per share for 2012 would be:

Tk.880,000/973,180 =Tk. 0.9043

The earnings per share for 2011 would be adjusted for the right issue. The adjusted figure
would be:

Tk. 1.95 x 0.95 =Tk.1.853 OR Tk.1.95 /1.052632 =Tk.1.853
(b)
There are four operating segments for the purpose of allocating recourses and assessing
performance. However, whether we report information about each individual operating segment
will depend on whether the operating segments are considered to be reportable. To determine if
they are reportable we apply the quantitative tests provided in IFRS 8.
Mining and agriculture qualify as reportable segments as their revenue is more than 10 per cent
of total segment revenue, thus satisfying test (a).
Mining, manufacturing and agriculture qualify as material using test (b), as the absolute-amount
total of the profits/losses of the segments that earned a profit is Tk. 105,000, whereas the
combined reported loss of those that generated a loss total Tk. 80,000. Hence for test (b) we
need to compare the absolute amount of the profit/loss with Tk. 105,000. Using these criteria,
mining, manufacturing and agriculture are reportable operating segments.
Using test (c), mining and agriculture are reportable operating segments, as their assets are 10
per cent or more of the total segment assets of all segments.
Therefore, mining, manufacturing and agriculture are all reportable segments. Chemicals is not
a reportable segment as it did not pass any of the three tests.
Even though each segment is considered under all three tests, the passing of only one of the
tests would be enough to establish a segment as being reportable.

=THE END =

Page 1 of 5

The Institute of Cost and Management Accountants of Bangladesh
CMA April, 2014 Examination
Professional Level III
Subject: 302, Advanced Cost Accounting
Model Solution

(a)
Total standard variable cost of May (5,000 units Tk.84) Tk.420,000
Less standard labor and variable manufacturing overhead costs of May

Tk.192,000

Total standard cost of the materials used during May

Tk.228,000

(b)
Standard price of materials per unit (Tk.228,000 /5,000 units) Tk.45.6
Standard price per kg. of materials (given) Tk.12.0
Standard quantity required to produce one unit (Tk.45.6 / Tk12) 3.8 kilograms
(c)
We need actual quantity of materials used to compute materials price variance. It is computed by working backward
from materials quantity variance:
Standard materials cost allowed for actual production (in (a) above) Tk.228,000
Add unfavorable materials quantity variance
Actual quantity used at standard cost
Tk.12,000
Actual quantity of direct materials used =Tk.240,000 / Tk.12 =20,000 kilograms
Tk.240,000
Now we can compute direct materials price variance as follows:
(d)
Total standard variable manufacturing overhead cost
Materials price variance:
(Actual quantity purchased x Actual price) (Actual quantity purchased x Standard price)
= Tk.200,000 (20,000 kgs Tk.12)
= Tk.200,000 Tk.240,000
= Tk.40,000 Favorable

Note: It is assumed that the Fine Electronics purchased and used the same quantity (20,000 kgs) of materials and
there were no opening and closing inventories of materials.

Tk.32,000
Per unit standard variable manufacturing overhead cost : (Tk.32,000/5,000 units) Tk.6.40
Standard direct labor hours per unit: (Tk.6.40 / Tk.4 standard cost per hour) 1.60 hours
Standard hours for 5,000 units: (5,000 units 1.60 hours per unit) 8,000 hours
Standard direct labor rate per hour: (Tk.160,000 / 8,000 hours) Tk.20
(e)
Direct labor rate variance:
(Actual direct labor hours worked x Actual rate) (Actual direct labor hours worked x Standard rate)

=Tk.189,000* (9,000 hours Tk.20)
=Tk.189,000 Tk.180,000
=Tk.9,000 Unfavorable
* Total actual cost (Actual materials cost +Actual variable manuf. o/h cost)
=5,000 units Tk.84.28 (Tk.200,000 +32,400)
=Tk.421,400 Tk.232,400
=Tk.189,000
Page 2 of 5

=Tk.180,000 (8,000 hours Tk.20)
=Tk.180,000 Tk.160,000
(f)

=Tk.32,400 (9,000 hours Tk.4)
=Tk.32,400 Tk.36,000
=Tk.3,600 Favorable

=Tk.36,000 (8,000 hours Tk.4)
=Tk.36,000 Tk.32,000


Requirement (i):
Particulars
Quantity Schedule for three departments

Blending Testing Terminal
Units started in process 8,000
Units received in preceding dept. 5,400 3,200
Units transferred to next dept. 5,400 3,200
Units transferred to finished goods room 2,100
Units still in process 2,400 1,800 900
Units lost in process 200 400 200
Total 8,000 5,400 3200

Particulars
Requirement (ii): Equivalent production schedule for three departments

Blending Department Testing Department Terminal Testing
Materials Labour &
FOH
Prior Deptt.
& Materials
Labour &
FOH
Prior
Deptt. &
Materials
Labour &
FOH
Transferred out 5,400 5,400 3,200 3,200 2,100 2,100
Units still in process 2,400 800 1,800 600 900 600
Total 7,800 6,200 5,000 3,800 3,000 2,700

Requirement (iii):

Units Cost of FOH in the Blending Department: Tk. 5,580/6,200
= Tk. 0.90 per unit
Page 3 of 5

Requirement (iv):

Lost unit cost adjustment in Testing Department:
Tk. 5.35X5,400=Tk. 28,890 cost transferred in from Blending Department
Tk. {28,890/(5,400-400 lost units)}Tk. 5.778 new unit cost
Tk. 5.778 new unit cost
Tk. 5.350 old unit cost
Tk. 0.428 lost unit cost adjustment


KNM PUBLIC SCHOOL

R 1. Statement showing the operating cost of a bus and fleet of 5 buses.

Particulars Rate Per
Bus
No.
Per Annum
Tk.
Fleet of 5
Buses No.
Per Annum
Tk.
Directors Salary 4,500 p.m. 1 54,000 5 2,70,000
Cleaners Salary 3,500 p.m. 1/5 8,400 1 42,000
Licensc fees Taxes etc. 8,600 p.a. 8,600 43,000
Insurance 10,000 p.a. 10,000 50,000
Repair & maintenance 35,000 p.a. 35,000 1,75,000
Depreciation 100,000 p.a. 1,00,000 5,00,000
Diesel (Note -1) -- 72,000 3,60,000
Total cost per annum 2,88,000 14,40,000
Cost per month Tk. 24,000 Tk. 1,20,000
Distance travelled by a bus a day 64 km 320 km
Distance travelled by a bus in a
month (64x25)
1600 km (1600 x 9) 14,400 km
Cost per km Tk. 15 Tk. 15

R 2. (i) Students coming from 4 km Tk. 24,000/150 =Tk. 160
(ii) Students coming from beyond 4 km Tk. 24,000/75 =Tk. 320

Working Notes:

1. Calculation of diesel cost per bus:-
Nos. of trips of eight km each day =8
Distance travelled by each bus per day =8 x 8 km =64 km.
Distance travelled during a month =64 x 25 =1600 km.
Distance travelled per annum =(1600 x 9) =14,400 km.
Mileage 4km/liter; Diesel required =14,400 / 4 =3,600 liters.
Cost of diesel @ Tk. 20 per liter =3600 x 20 =Tk. 72,000 p.a. per bus.
2. Calculation of number of student per bus.
Basic capacity 50 students
Half fare 50% 25
Full fare 50% 25
Full fare students as equivalent to half fare 50
Total number of half fare students =(25+50) 75
Total number of half fare students in two trips (75 x 2) 150
On full fare basis number of students in two trips (150/2) 75 students

Page 4 of 5


R (a) Detailed schedule showing marketing cost per order size and as percentage of total sales for each order size.
Type of Total Cost O R D E R S I Z E
Cost Marketing Formula Small Medium Large
Cost (1 to 20) (21 to 100) 100 above
Cost % Cost % Cost %
Marketing personnel Salary Tk. 27,000 27,000/9 15,000 56 2,000 33 3,000 11
Marketing Managers Salary 20,000 20,000/100 12,000 60 2,000 10 6,000 30
Sales people commission 3,000 3,000/75 1,000 33 1,200 40 800 27
Advertising & Direct Selling 37,500 37,500/75 12,500 33 15,000 40 10,000 27
Packing and shipping 26,250 26,250/1041 15,130 58 7,414 28 3,706 14
Delivery 19,000 19,000/1041 11,020 58 5,320 28 2,660 14
Credit and collections 15,000 15,000/850 10,800 72 3,000 20 1,200 08
Total Tk. 1,47,750 Tk. 77,450 Tk. 42,934 Tk. 27,366
Total cost as a percentage of
sales
19.66% 31% 14.31% 13.68%

Note: Marketing costs are allocated to order size based on the selected cost drivers given in the question.

R (b) From the above analysis it reveals that small size orders are more costly than that of the medium and large size
orders. In respect of packing, delivery, managers salary and credit collections small size incurr higher cost to meet
higher cost, profit margin will lower even loss may incurr. So, management should accept medium and large order size
to earn maximum profit.


(a)
Life-cycle costing is the profiling of costs over the life of a product, including the pre-production stage. Unlike traditional
management accounting systems, which are based on financial years, life-cycle costing tracks and accumulates the
costs and revenues attributable to the product over the full life cycle, which may last for many years.
Target costing is an activity which is aimed at reducing the life-cycle costs of new products, by examining all possibilities
for cost reduction at the research, development and production stage.
It is not a costing system, but a profit-planning system the selling price and profit requirement are set during the
research stage, thus creating a target cost.
The product is then developed and produced in such a way as to achieve this cost.

(b)
Cost reduction when produced Revenue when sold
Sales: Lumber
Shavings
$480,000
0
$480,000
4,080

Total Sales: $480,000 484,080
Cost of Good Sold:
Total manufacturing costs
Byproduct
$332,000
(4,080)

$332,000
000000

Total COGS 327,920 332,000
Gross Margin $152,080 $152,080

Page 5 of 5

(c)
Four categories of quality costs are: Prevention Costs, Appraisal Costs, Internal Failure Costs and External Failure
Costs

Items related to each categories:

Prevention: Hiring employees with good references
Training of owners and employees
Good security
Good reservation system
Purchasing quality furniture

Appraisal: Verifying accuracy of reservation and registration procedures
Inspecting rooms, facilities, building and grounds regularly
Observing activities of employees
Testing furniture and fixtures
Taste testing food

Internal failure: Re-cleaning rooms and facilities
Restocking rooms with linens, glasses, etc.
Out-of-stock supplies
Re-inspection
Failure to bill on a timely basis

External failure: Responding to complaints about rooms and food
Responding to complaints about reservations
Emergency cleaning of rooms when not ready on time
Customer refunds because of unsatisfactory conditions
Opportunity cost of lost revenue resulting from unhappy customers
Page 1 of 6

THE INSTITUE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH
PROFESSIONAL LEVEL - IV
SUBJ ECT: 401 - FINANCIAL MANAGEMENT

Model Solution

(a)
Net Profit Margin =(Tk.1,277,500/Tk.8,500,000) =0.150294 =15.03%
Total Asset Turnover =(Tk.8,500,000/ Tk.7,250,000) =1.17
Financial Leverage Multiplier =(Tk.7,250,000/ Tk.3,250,000) = 2.23
Return on Total Assets (ROA) =Net Profit Margin x Total Asset Turnover
= 0.150294 x 1.17 =0.175844 =17.58%
Return on Equity (ROE) =Return on Total Assets x Financial Leverage Multiplier
=0.175844 x 2.23 = 39.21%
(b)
Beta Developments Ltd.
Income Statement
Tk.
Sales 10,500,000
Less: Costs and Expenses 7,875,000
Earnings before interest and tax 2,625,000
Interest 600,000
Earnings before tax 2,025,000
Tax 607,500
Earnings after tax 1,417,500

Beta Developments Ltd.
Balance Sheet
Assets Tk. Equity and Liabilities Tk.
Non Current assets 9,250,000 Equity 3,250,000
Current assets 1,000,000 Long-term debt @10% 6,000,000
________ Current liabilities 1,000,000
Total assets 10,250,000 Total Equity and Liabilities 10,250,000

Net Profit Margin =(Tk.1,417,500/Tk.10,500,000) =0.135 =13.5%
Total Asset Turnover =(Tk.10,500,000/ Tk.10,250,000) =1.02
Financial Leverage Multiplier =(Tk.10,250,000/ Tk.3,250,000) = 3.15

Return on Total Assets (ROA) =Net Profit Margin x Total Asset Turnover
= 0.135 x 1.02 =0.1377 =13.77%
Return on Equity (ROE) =Return on Total Assets x Financial Leverage Multiplier
=0.1377 x 3.15 = 43.38%
As measured by ROE, which increases from 39.21% to 43.38% the purchase of the assets is a
success.
(c) Sensitivity analysis looks at how changes in a single variable affect a projects profitability or NPV. For
example, in Betas case between case (b), we allowed sales to change but kept all other factors
constant, (or at least no change in their proportions).
Scenario analysis looks at how several changes occurring simultaneously affect a projects profitability
or NPV. In Betas case, we could have allowed both sales and interest rates to change as the proportion
of debt in the capital structure increased for example.
Scenario analysis is probably more realistic because certain key variables in a projects profitability or
NPV calculation are correlated. For example, in Betas case as sales increased we did not change costs
and expenses as a percentage of sales. This limitation of sensitivity analysis that you can only change
one variable at a time is its biggest drawback. Scenario analysis, while it can be more involved and may
require more computing power, allows for changes in multiple variables simultaneously.
Page 2 of 6

ALPHA LTD.

R (a) P/E Ratio of Canada Agroproduct =8 : 1
Canada Agroproducts profit after tax (PAT) =Tk. 150 Crore (after) deducting exceptional item).
Hence market value =8 x Tk. 150 Crore =Tk. 1200 Crore.
The price per share is Tk. 1200 / (Tk. 1000 100) =Tk. 120.
Since the last dividend was paid a year ago, this appears to be cum dividend share price.
Last year dividend was:-
(Tk. 50 Crore / (Tk. 1000 100) =Tk. 5.
Given 12% growth rate this year dividend would be Tk. 5 x (1+.12) =Tk. 5.60.
Therefore ex-dividend price would be (Tk. 120 Tk. 5.60) =Tk. 114.40 say 114.
R (b) Book value is based on historical cost. Market value depends on earning power.
Value stated in the accounts may be suspected e.g. fixed assets is undervalued while stock is
overvalued.
R (c) Book value of net assets =Tk. 1300 Crore.
Shareholders earning after tax =Tk. 150 Crore.
Return on book value =Tk. 150 / Tk. 1300 =11.50%
R (d) Canada Agroproducts normal cash flow:-
PAT exceptional item +depreciation
=Tk. 200 Crore Tk. 50 Crore +Tk. 200 Crore =Tk. 350 Crore.
Assumptions:-
1. Infinite life use perpetuity formula.
2. No growth.
3. Cost of equity for Alpha Ltd. given as 17%.
4. Annual replacement investment =Depreciation charge of Tk. 200 Crore.
5. Allowing for operating savings of Tk. 50 Crore.
6. Free cash flow =Tk. 350 Crore Tk. 200 Crore +50 Crore =Tk. 200 Crore.
7. With no growth value of Canada Agroproduct:-
Tk. 200 Crore / .17 =Tk. 1176 Crore


(a)(i)
Cost of Leasing:

Year Lease
Payment Tk.
Tax savings
Tk.
Net Cash Flow
Tk.
PV Factor
@13%
Present Value
Tk.
0 500,000 (500,000) 1.000 (500,000)
1 500,000 175,000 (325,000) 0.885 (287,625)
2 500,000 175,000 (325,000) 0.783 (254,475)
3 500,000 175,000 (325,000) 0.693 (225,225)
4 175,000 175,000 0.613 107275
Present value of Cost of Leasing (1,160,050)
Cost of Buying:
Year Purchase
Price Tk.
Maintenance
Cost
Tk.
Allowable
Depreciation
Tax Savings
on
Maintenance
cost and
Depreciation
Tk.
Cash Flow PV
Factor
@ 13%
Present
Value
Tk.
0 (2,000,000) (2,000,000) 1.000 (2,000,000)
1 40,000 600,000 224,000 184,000 0.885 162,840
2 40,000 420,000 161,000 121,000 0.783 94,743
3 40,000 294,000 116,900 76,900 0.693 53,292
4 40,000 286,000 114,100 74,100 0.613 45,423
4 400,000 0.613 245,200
Page 3 of 6

Present value of Owning (1,398,502)

(ii) Decision:
Since the present value of the cost of leasing is less than the present value of the cost of buying, the equipment
should be leased as it would save the cost to company amounting to Tk.1,398,502 - Tk.1,160,050=Tk.238,452.

(b) (i) For portfolio consisting of this two stocks to have a standard deviation of zero, the returns on the stocks
must be perfectly negatively correlated.

(ii) The weights that derive the standard deviation of the portfolio to zero, when the return are in perfect
negative correlation, are as under:

W
A
={Standard Deviation of B / (Standard Deviation of A +Standard Deviation of B)
={13/ (12+13) =0.52
W
B
= 1 - W
A
=1- 0.52 =0.48

The expected return of the portfolio =(W
A
x R
A
) +(W
B
x R
B

)
= (0.52 x 0.18) +(0.48 x 0.20)
= 18.96 %

(c) Although companies acquire and merge with others for a variety of reasons, the main reason such
mergers and acquisitions take place is that the purchasing company seeks improved financial
performance. Some of the following attributes could, in theory, help improve the acquirers financial
performance:
Increased revenue and/or market share:

This would typically occur when the buyer takes over a major
competitor, reducing its competition and thus building up its market power by capturing increased
market share. If it has a dominant enough position, it could then exercise greater power in setting prices
as well.
Economy of scale:

A combined company can usually cut its fixed costs by removing duplicate
departments, teams and operations, thus lowering the companys costs relative to the same revenue
stream, which would result in increasing profit margins.
Cross-selling:

This refers to the complementary products an acquiring company can sell to the
customers of its acquired company. As an example, a bank buying a stock broker could sell its banking
products to the stock broker's customers. At the same time, the broker could poach the bank's
customers for brokerage accounts.
Geographical, product, or other diversification:

Diversification of any kind can usually smooth the
earnings results of a company. This, in turn, smooths the stock price of a company, giving conservative
investors more confidence in investing in the company.
Synergy:

Often, managerial economies such as the increased chances of managerial specialization.
Another example would be the purchasing economies due to larger order size and bulk-buying
discounts.
Absorption of similar businesses under single management:

So if complementary companies can come
together, they can often save considerable money by spreading management over a wider scope of
employees and operations.
Tax Consequences:
While some mergers and acquisitions end up bringing value to all stakeholders involved, it is not uncommon
for some shareholders in a deal to be shortchanged, and as a result suffer a financial loss due to the merger
or acquisition.
A money-making company can buy a money- losing and use the target's loss as
their advantage by reducing their tax liability. Some governments have cottoned onto this tactic and
seek to minimize it. In the United States and many other countries, laws have been enacted to limit the
ability of profitable companies to buy loss making companies, limiting the tax motive of an acquiring
company.
Page 4 of 6

(a)
A. R. Traders

If A. R. Traders earn 25 percent on its equity and payout 50% of its earnings indefinitely then the
growth rate is
G =r(1 - d)
=.25(1 - .50)
=.25 x .50
=.1250 or 12.50%
In the case of constant growth:-
V =[(1 - d) x Eo x (1+g)] / (k-g)
=[(1-.5) x Tk. 3 (1+.1250)] / (.15 -.1250)
=(.50 x Tk. 3.375) / .0250
=Tk. 1.6875 / .0250
=Tk. 67.50.

(b)
NOVEX INDUSTRIES

R (a) Constant growth (Single stage) dividend discount model:-
Vo =D
1

(k g)
Vo =Value at the beginning.
D
1

=Next year dividend
K =Required rate of rfeturn.
G =Constant growth rate.
D
1

=[EPS] (1+g) D / P ratio
=(Tk. 4.00) (1+.06) (.50)
=Tk. 2.12
K =given 12% or .12
G =(ROE) (1-.50)
=(.15)(.50) =.075
Vo =Tk. 2.12 / (.12-.015)
=Tk. 47.11.
R (b) Multistage dividend discount model (where g
1
=20% and g
2
=V

1

V
1
=D
1
/ (1+k) +D
2
/ (1+k)
2
+D
3
/ (k-g
2
) / (1+k)

2

D
1

=[EPS] (1+g) D / P ratio
=Tk. 4.00 (1.20) (.50)
=Tk. 2.40
D
2
=D
1
(1+g
1

)
=Tk. 2.40 (1.20)
=Tk. 2.88
K =given 12% or .12
G
2

=0.075
D
3
=D
2
(1+g
2

)
=Tk. 2.88 (1.075)
=Tk. 3.096
Vo Tk. 2.40 / 1.12 +(Tk. 2.88) / (1.12)
2
+[Tk. 3.096 / .12 0.075) / (1+k)

2

=Tk. 2.143 +Tk. 2.296 +Tk. 54.847
=Tk. 59.29

Solution of Q. No. 5.
(a)

The primary financial management objective of a company is usually taken to be the maximisation of
shareholder wealth. In practice, the managers of a company acting as agents for the principals (the
shareholders) may act in ways which do not lead to shareholder wealth maximisation. The failure of managers
to maximise shareholder wealth is referred to as the agency problem.

Page 5 of 6

Shareholder wealth increases through payment of dividends and through appreciation of share prices. Since
share prices reflect the value placed by buyers on the right to receive future dividends, analysis of changes in
shareholder wealth focuses on changes in share prices. The objective of maximising share prices is commonly
used as a substitute objective for that of maximising shareholder wealth.

The agency problem arises because the objectives of managers differ from those of shareholders: because
there is a divorce or separation of ownership from control in modern companies; and because there is an
asymmetry of information between shareholders and managers which prevents shareholders being aware of
most managerial decisions.

One way to encourage managers to act in ways that increase shareholder wealth is to offer them share options.
These are rights to buy shares on a future date at a price which is fixed when the share options are issued.
Share options will encourage managers to make decisions that are likely to lead to share price increases (such
as investing in projects with positive net present values), since this will increase the rewards they receive from
share options. The higher the share price in the market when the share options are exercised, the greater will be
the capital gain that could be made by managers owning the options.

Share options therefore go some way towards reducing the differences between the objectives of shareholders
and managers. However, it is possible that managers may be rewarded for poor performance if share prices in
general are increasing. It is also possible that managers may not be rewarded for good performance if share
prices in general are falling. It is difficult to decide on a share option exercise price and a share option exercise
date that will encourage managers to focus on increasing shareholder wealth while still remaining challenging,
rather than being easily achievable.

(b)

Conflict between the objectives of shareholders and directors in a listed company is associated with the agency
problem, which has three main causes. First, the objectives of shareholders and directors may be different.
Second, there is asymmetry of information, so that shareholders have access to less information about the
company than directors, making it hard for shareholders to monitor the actions and decisions of directors. Third,
there is a separation between ownership and control, as shareholders and directors are different people.

One reason why small and medium-sized entities (SMEs) might experience less conflict between shareholders
and directors than larger listed companies is that in many cases shareholders are not different from directors, for
example in a family-owned company. Where that is the case, there is no separation between ownership and
control, there is no difference between the objectives of shareholders and directors, and there is no asymmetry
of information. Conflict between the objectives of shareholders and directors will therefore not arise.

Another reason why there may be less conflict between the objectives of shareholders and directors in SMEs
than in larger listed companies is that the shares of SMEs are often owned by a small number of shareholders,
who may be in regular contact with the company and its directors. In these circumstances, the possibility of
conflict is very much reduced.
(c)

Nature and assessment of business risk

Business risk arises due to the nature of a companys business operations, which determines the business
sector into which it is classified, and to the way in which a company conducts its business operations. Business
risk is the variability in shareholder returns that arises as a result of business operations. It can therefore be
related to the way in which profit before interest and tax (PBIT or operating profit) changes as revenue or
turnover changes. This can be assessed from a shareholder perspective by calculating operational gearing,
which essentially looks at the relative proportions of fixed operating costs to variable operating costs. One
measure of operational gearing that can be used is (100 x contribution/PBIT), although other measures are also
used.

Financial risk arises due to the use of debt as a source of finance, and hence is related to the capital structure of
a company. Financial risk is the variability in shareholder returns that arises due to the need to pay interest on
debt. Financial risk can be assessed from a shareholder perspective in two ways. Firstly, balance sheet gearing
Nature and assessment of financial risk

Page 6 of 6

can be calculated. There are a number of gearing measures that can be used, such as the debt/equity ratio, the
debt ratio and financial gearing, and the calculation can be based on either market values or book values.
Secondly, the interest coverage ratio can be calculated.

Nature and assessment of systematic risk

From a shareholder perspective, systematic risk is the sum of business risk and financial risk. Systematic risk is
the risk that remains after a shareholder has diversified investments in a portfolio, so that the risk specific to
individual companies has been diversified away and the shareholder is faced with risk relating to the market as
a whole. Market risk and undiversifiable risk are therefore other names for systematic risk.

From a shareholder perspective, the systematic risk of a company can be assessed by the equity beta of the
company. If the company has debt in its capital structure, the systematic risk reflected by the equity beta will
include both business risk and financial risk. If a company is financed entirely by equity, the systematic risk
reflected by the equity beta will be business risk alone, in which case the equity beta will be the same as the
asset beta.

=THE END =

Page 1 of 5

CMA APRIL - 2014, EXAMINATION
PROFESSIONAL LEVEL-IV
SUBJECT: 402- STRATEGIC MANAGEMENT ACCOUNTING

MODEL SOLUTION

(a)

There are wide differences in legal, political, social, and cultural environments among countries. Many
governments impose price and import/export controls on various products. Availability of materials and skilled
labor as well as power, transportation, and communication grids are likely to create significant issues.

Divisions operating in different countries account for their performance in different currencies. The exchange
rates will fluctuate and there will be differences and effects as a result of levels of inflation, which will need to be
reconciled with adjustments to the measurement criteria established.

(b)
i. ROS = Operating Income / Total Sales = Tk.3,000,000/Tk.25,000,000 = 12%
ROI = Operating Income / Total Assets = Tk.3,000,000/Tk.16,650,000 = 18.02%

ii(a) ROI = 20% = Operating Income / Tk.16,650,000
Hence, operating income = 20% 16,650,000 = Tk.3,330,000
Operating income = Revenue Costs
Therefore, Costs = Tk. 25,000,000 Tk.3,330,000 = Tk.21,670,000
Currently,
Costs = Revenues Operating income = Tk.25,000,000 Tk.3,000,000 = Tk.22,000,000
Costs need to be reduced by (Tk.22,000,000 Tk. 21,670,000) = Tk.330,000.
ii(b) ROI = 20% =
assets Total
income Operating
=
X
3,000,000 Tk.

Hence, X = Tk.3,000,000 20% = Tk.15,000,000 (Required total assets)
Therefore SD would need to decrease total assets in 2014 by Tk.1,650,000.
iii. RI = Income (Required rate of return Investment)
= Tk.3,000,000 (0.15 Tk.16,650,000)
= Tk.502,500
iv. SD wants RI to increase by 50% Tk.502,500 = Tk.251,250
That is, SD wants RI in 2014 to be Tk. 753,750
If SD cuts costs by Tk.75,000 its operating income will increase to Tk.3,000,000 + Tk.75,000 =
Tk.3,075,000
RI
2014
= Tk.3,075,000 (0.15 x Assets)
Tk.753,750 = Tk. 3,075,000 0.15 Assets
Assets = Tk.2,321,250 0.15 = Tk. 15,475,000
SD would need to decrease total assets by Tk. 1,175,000.
Page 2 of 5


Year Unit
sales
price $
Unit
variable
cost $
Unit
Contribution $
Quantity of
units
Total Fixed
Costs excluding
Depreciation $
Depreciation
$
1 24.00 12.00 12.00 140,000 640,000 800,000
2 24.96 12.84 12.12 140,000 672,000 480,000
3 25.96 13.74 12.22 140,000 705,600 288,000
4 27.00 14.70 12.30 140,000 740,880 432,000

Year Total
Contribution
Margin $
Total Fixed
Costs $
Earnings
before Tax $
Earnings after
Tax $
Cash Flow
from
operation $
1 1,680,000 1,440,000 240,000 168,000 968,000
2 1,696,800 1,152,000 544,800 381,360 861,360
3 1,710,800 993,600 717,200 502,040 790,040
4 1,722,000 1,172,880 549,120 384,384 816,384

Year Cash Flows $ Discount
Factor at
14%
Present Value
$
0 Cost of Fixed Assets (1,500,000) 1.000 (1,500,000)
0 Working Capital (500,000) 1.000 (500,000)
1 Cost of Fixed Assets (500,000) 0.877 (438,500)
1 Cash flow from operation 968,000 0.877 848,936
2 Working Capital (100,000) 0.769 (76,900)
4 Recovery of Working Capital 480,000 0.592 284,160
Net Present Value 296,658

The NPV is positive. Therefore the project is viable.


(a)

When market prices are unavailable or too costly to obtain, it is often appropriate to use cost-based transfer
prices. In some cases, the supplying division will charge full cost (or full cost plus a markup) to the receiving
division. This is not optimal, because it causes the receiving division to treat the transferred in full cost per unit
as if it were a variable cost. Since the full cost includes an allocation for overhead, it is not all variable cost. As a
result, the organization as a whole will make suboptimal decisions using this as a basis.

A more appropriate method would be to use a variable cost or incremental cost for the units being transferred
between subunits within an organization.

In the event that the supplying organization is a profit center and has other external customers for its products,
then there may be some accommodation made for prorating the difference between variable cost and full cost.
This method would be superior to allowing a full cost (or full cost plus markup) method to be used. The objective
is to have the organization as a whole act in a manner that will approximate competitive marketplace conditions
as much as possible to promote cost efficiency in the long run.

Page 3 of 5

(b)(a) Profit statement
Division A Division B Company
Taka000 Taka000 Taka000
Sales revenue:
External (1) 36,000 9,600 45,600
Inter-divisional transfers (3) 0 6,000 _____0
Total 36,000 15,600 45,600
Variable costs:
External material costs (2) 16,000 1,000 17,000
Inter-divisional transfers (3) 6,000 0
Labour costs (4) 3,600 3,000 6,600
Total variable costs 25,600 4,000 23,600
Fixed costs 7,440 4,400 11,840
Total costs 33,040 8,400 35,440
Profit 2,960 7,200 10,160

Workings (Taka000)
(1) External sales
Div A: 80,000 x Taka 450 = Taka 36,000
Div B: 120,000 x Taka 80 = Taka 9,600
(2) External material costs
Div A: 80,000 x Taka 200 = Taka16,000
Div B: 200,000 x Taka 5 = Taka 1,000
(3) Inter-divisional transfers
Div A: 80,000 x Taka 75 = Taka 6,000
(4) Labour costs
Div A: 80,000 x Taka 45 = Taka 3,600
Div B: 200,000 x Taka 15 = Taka 3,000

(b)(b) Aromatic Cos profit if transfer pricing is optimized:

Division A Division B Company
Taka000 Taka000 Taka000
Sales revenue:
External (1) 36,000 14,400 50,400
Internal sales (2) ____ 0 1,300 0
Total 36,000 15,700
Labour costs
50,400

Variable costs:
External material costs (3) 19,900 1,000 20,900
Inter-divisional transfers (2) 1,300 0 0
3,600 3,000 6,600
Total variable costs 24,800 4,000 27,500
Fixed costs 7,440 4,400 11,840
Total costs 32,240 8,400 39,340
Profit 3,760 7,300 11,060

Note: A transfer price of Taka 65 has been used on the assumption that the company will introduce the policy
discussed in the problem.

Workings (Taka000)

(1) External sales
Div A: 80,000 x Taka 450 = Taka 36,000
Div B: 180,000 x Taka 80 = Taka 14,400
(2) Internal sales/inter-divisional transfers
20,000 x Taka 65 = Taka 1,300

(3) Material costs
Div A: 60,000 x Taka.265 + (20,000 x Taka 200) = Taka 19,900
Div B: 200,000 x Taka 5 = Taka 1,000

Page 4 of 5

(a) The net cash savings realised by Farm Fresh Ltd Service Division as a result of the just-in-time inventory
program is $80,000, computed as follows:
Cash savings
(loss)
Funds released from inventory investment $800,000
Interest $120, 000 0.15
Insurance savings ($160,000 0.60) 96, 000
Warehouse rental revenue [(8,000 sq. mtr 0.75) $5.00 per sq. mtr.] 30, 000
Warehouse rental cost: no effect
Transferred employees: no effect
Contribution of lost sales (3,800 units at $20.00) [Note 1] (76, 000)
Overtime premium (7,500 units at $12) [Note 2]

(90, 000)
Net cash savings $80, 000

Note 1: Calculation of unit contribution margin:
Revenue ($12 320,000 280,000 units) $44.00
Less variable costs:
Cost of goods sold ($5,320,000 280,000 units) $19.00
Selling and administrative expenses ($1,400,000 280,000 units) 5.00

24.00
Contribution margin $20.00

Note 2 :

(b) Factors (other than financial) that should be considered before a company implements a JIT inventory
program include:
The incremental cost of $12 per unit for overtime is less than the additional $20.00 per
unit contribution for the 7,500 units that would have been lost sales. Therefore, the
overtime hours should be used.
Customer dissatisfaction: Stock outs of finished goods or spare parts could result in downtime,
which may led to increased production costs, delayed deliveries to customers and to the loss of
customers, and future sales and profits.
Distributor relations: Stock outs of spare parts or finished goods can impair the manufacturers
image with its distributors, who represent the direct contacts with the final customers.
Supplier dissatisfaction: Placement of smaller and more frequent orders can result in higher material
and delivery costs for suppliers. Additionally, with changes in their production and procurement
processes, suppliers may choose to discontinue supplying to a just-in-time customer.
Competition: Brand loyalty can deteriorate when service standards are lowered. Therefore, it is
crucial that before adopting JIT, management think through all the implications. It is important to
maintain the companys prior service standards and if possible to improve on them.

Solution to Question No .5
(a)
Four perspectives are:

Financial Perspective
Customer Perspective
Internal Business Perspective
Learning and Growth Perspective
Limitations :
(i) Many question the cause and effect relationship on the grounds that they are too ambiguous
and lack a theoretical underpinning or empirical support
(ii) The omission of an environmental perspective
(iii) The omission of an employee perspective
(iv) The danger of over cluttering were the above two be included
(v) It might argued that it lacks predictability upon which decisions can be made

Page 5 of 5

(b)(i) In order to maximise contribution margin, the objective function and constraint functions would be
formulated as follows:
Notation:
S = number of batches of Star bars
M = number of batches of Moon bars
TCM = total contribution margin

The contribution margin is the selling price less variable cost for each product. Thus, for the Moon bar,
the contribution margin is $125 ($350 less $225), and for the Star bar, it is $200 ($300 less $100).
Therefore, the objective function is as follows:

Maximise TCM = 125M + 200S

Subject to the following constraints:

Mixing Department: 1.5S + 1.5M 525
Coating Department: 2.0S + 1.0M 500
Materials: M 250
Non-negativity: S 0 and M 0

(ii) The number of batches of each bar that should be produced to maximise contribution can be determined
by graphing the linear program given below. The optimal solution is to produce 200 batches of Moon bars
and 150 batches of Star bars.

(iii) The total contribution margin, then, is [(200 $125) + (150 $200)] = $55 000.

= THE END =

CMA April - 14 Exam Question Solution

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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH

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