Cma August 2013 Solution

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST – 2013 EXAMINATION

FOUNDATION LEVEL SUBJECT: 001. PRINCIPLES OF ACCOUNTING

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Solution to Q. No. 1. (a) CAMP’S MUSIC STORE

Work Sheet For the Year Ended July 31, 2012

Account Titles Trial Balance Adjustments Adjusted Trial Balance

Income Statement Balance Sheet

Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Cash 34,780 34,780 34,780 Accounts Receivable 4,600 4,600 4,600 Merchandise Inventory 31,400 31,400 31,400 26,400 26,400 Prepaid Fire Insurance 720 (1) 240 480 480 Prepaid Rent 4,800 (2) 2,400 2,400 2,400 Office Equipment 12,000 12,000 12,000 Accumulated Depreciation–Office Equipment

4,500 (3) 1,500 6,000 6,000

Accounts Payable 8,000 8,000 8,000 Clay Camp, Capital 22,000 22,000 22,000 Clay Camp, Drawing 20,000 20,000 20,000 Sales 300,000 300,000 300,000 Sales Returns and Allowances 1,000 1,000 1,000 Purchases 194,000 194,000 194,000 Purchase Returns and Allowances 1,400 1,400 1,400 Transportation-In 5,200 5,200 5,200 Advertising Expense 1,000 1,000 1,000 Supplies Expense 1,800 1,800 1,800 Salaries Expense 23,200 23,200 23,200 Utilities Expense 1,400 1,400 1,400 335,900 335,900 Fire Insurance Expense (1) 240 240 240 Rent Expense (2) 2,400 2,400 2,400 Depreciation Expense–Office Equipment

(3) 1,500 _______

_______

1,500 _______

_______

1,500 ______

______

4,140 4,140 337,400 337,400 263,140 327,800 Net income 64,660 ______ _______ 64,660_ 327,800 327,800 100,660 100,660 Adjustments: (1) Expiration of prepaid fire insurance ($720 X 4/12). (2) Expiration of prepaid rent ($4,800 X 6/12). (3) Depreciation expense on office equipment for the fiscal year ended July 31, 2012.



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Solution to Q. No. 1. (b)

CAMP’S MUSIC STORE Income Statement

For the Year Ended July 31, 2012 Operating revenues: Gross Sales ………………………………….. $300,000 Less: Sales returns and allowances …………. 1,000 Net Sales ……………………………………. $299,000 Cost of goods sold: Merchandise inventory, August 1, 2011……. $ 31,400 Purchases …………………………………… $194,000 Less: Purchase returns and allowances …….. 1,400 Net purchases ………………………………. $192,600 Add: Transportation-in …………………….. 5,200 Net cost of purchases ………………………. 197,800 Cost of goods available for sale …………… $229,200 Merchandise inventory, July 31, 2012 …….. 26,400 Cost of goods sold ……………………. 202,800 Gross Margin …………………………………… $ 96,200 Operating expenses: Advertising ………………………………… $ 1,000 Supplies ……………………………………. 1,800 Salaries …………………………………….. 23,200 Utilities …………………………………….. 1,400 Fire insurance ……………………………… 240 Rent ………………………………………... 2,400 Depreciation – office equipment ………….. 1,500 Total operating expenses ……………. 31,540 Net income ………………………………… $ 64,660 ======= Solution to Q. No. 1. (c)

CAMP’S MUSIC STORE Statement of Owner’s Equity

For the Year Ended July 31, 2012 Clay Camp, capital, August 1, 2011 …………………………………….. $ 22,000 Net income for the year ………………………………………………….. 64,660 Total ……………………………………………………………... $ 86,660 Less: Drawings …………………………………………………………… 20,000 Clay Camp, capital, July 31, 2012 ………………………………………… $ 66,660 =======



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Solution to Q. No. 1. (d)

CAMP’S MUSIC STORE Balance Sheet July 31, 2012

Assets

Current assets: Cash …………………………………................ $ 34,780 Accounts receivable ………………………….. 4,600 Merchandise inventory ………………………. 26,400 Prepaid fire insurance ………………………… 480 Prepaid rent …………………………………… 2,400 Total current assets ……………………… $ 68,660 Property, plant, and equipment: Office equipment …………………………….. $ 12,000 Less: Accumulated depreciation …….......... 6,000 Total property, plant, and equipment ….. 6,000 Total assets ……………………………………….. $ 74,660 =======

Liabilities and Owner’s Equity Liabilities: Accounts payable ……………………………. $ 8,000 Owner’s equity: Clay Camp, capital …………………………... 66,660 Total liabilities and owner’s equity ………………. $ 74,660 ======= Solution to Q. No. 1. (e) Closing entries: 1987 July 31 Merchandise Inventory ………………………. …. 26,400 Sales ……………………………………………... 300,000 Purchase Returns and Allowances ………………. 1,400 Income Summary …………………………… 327,800 To close accounts with credit balances in the Income Statement columns and to set up the ending merchandise inventory. 31 Income Summary ………………………………… 263,140 Merchandise Inventory ……………………… 31,400 Sales Returns and Allowances ………………. 1,000 Purchases ……………………………………. 194,000 Transportation-In ……………………………. 5,200



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Advertising Expense ………………………… 1,000 Supplies Expense …………………………… 1,800 Salaries Expense ……………………………. 23,200 Utilities Expense ……………………………. 1,400 Fire Insurance Expense ……………………… 240 Rent Expense ………………………………… 2,400 Depreciation Expense – Office Equipment ….. 1,500 To close accounts with debit balances in the Income Statement columns. 31 Income Summary ………………………………… 64,660 Clay Camp, Capital ………………………….. 64,660 To close the Income Summary account to the owner’s capital account. 31 Clay Camp, Capital ………………………………. 20,000 Clay Camp, Drawing ………………………… 20,000 To close drawing account. Solution to Q. No. 2. (i)

XYZ Company Bank Reconciliation

July 31, 2011 Cash balance according to bank statement Tk. 93,644.80 Add deposit of July 31 not recorded by bank 19,166.20 Deduct outstanding cheques: No. 1244…………………………………………… 9,178.60

1284…………………………………………… 800.00 1223……………………………………………. 820.80 10,799.40

Corrected bank balance…………………………... 102,011.60 Cash balance according to depositor’s records…….. 80,756.60 Add: Proceeds of note collected by bank Tk. 38,000

less collection fee of Tk. 40 37,960.00

Error in recording of a cheque correctly drawn but entered in cash book as Tk. 6981

63.00 38,023.00

118,779.60 Deduct: Check returned because of insufficient funds 1525.00

Discounted note dishonored 15,045.00 Cheque Printing charges 198.00 16,768.00 Corrected cash balance 102,011.60

Q. No. 2. (i) July 31, 2011 Cash …………………………………………………… 37,960 Collection charge ………………………………………… 40.00

Notes Receivable………………………………… 38,000.00 Cash …………………………………………………….. 63.00

Accounts Payable………………………………… 63.00 Accounts Receivable………………………………. 1525.00

Cash ………………………………….. 1525.00



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General expenses………………………….. 198.00

Cash …………………………………….. 198.00 Account Receivable …………………………………… 15,045.00 Notes Receivable Discounted…………………………. 15,000.00

Cash ………………………………………………. 15,045.00 Note Receivable ………………………………… 15,000.00

Solution to Q. No. 3. (a)

1. 2012 Dec. 31 Bad Debts Expense ………………………… 7,500 Allowance for Doubtful Accounts …… 7,500 To record estimated bad debts for the year.

2. 2013

Jan. 15 Allowance for Doubtful Accounts ………… 500 Accounts Receivable – James Ryan … 500 To write off the account of James Ryan as uncollectible.

3. 2013

Feb. 12 Accounts Receivable – James Ryan ………. 500 Allowance for Doubtful Accounts …. 500 To correct the write-off of James Ryan’s account on January 15. 12 Cash ………………………………………… 500 Accounts Receivable – James Ryan ... 500 To record the collection of James Ryan’s account receivable.

Solution to Q. No. 3. (b)

1. 2012 June 15 Notes Receivable – Short Company ………. 15,000.00 Accounts Receivable – Short Company …………………………... 15,000.00 To record receipt of a note from Short Company.

2. July 15 Cash ………………………………………… 15,192.50 Notes Receivable Discounted ………... 15,000.00 Interest Revenue ……………………... 192.50 To record the discounting of the Short Company note. Computation of cash proceeds: Maturity value (Days until maturity = 60) ………..................... $15,450.00 Discount = $15,450 X 10% X 60/360 … 257.50 $15,192.50 =========



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3. Sept. 13 Notes Receivable Discounted ………………. 15,000.00 Notes Receivable – Short Company .. 15,000.00 To remove the note and contingent liability. 4. Sept. 13 Notes Receivable Discounted ……………… 15,000.00

Notes Receivable – Short Company.. 15,000.00 To remove the note and contingent liability. 13 Accounts Receivable – Short Company ….. 15,450.00 Cash ………………………………… 15,450.00 To record the charge made against our account for the Short Company note of $15,000 and interest of $450.

13 Allowance for Doubtful Accounts* ………... 15,450.00 Accounts Receivable – Short Company …………………………… 15,450.00 To write off the Short Company note as uncollectible.

* This debit assumes that notes receivable were taken into consideration when an allowance was established. If not, the debit should be either to Bad Debts Expense or Loss from Dishonored Notes Receivable.

Solution to Q. No. 3. (c) 2010 2011 2012 Total Net income as reported ……………… $68,000 $71,000 $60,000 $199,000 Adjustments: (1) ………………………………….. 2,200 (2) ………………………………….. (2,200) (2,300) (3) ………………………………….. 2,300 . Adjusted net income ………………... $70,200 $66,500 $62,300 $199,000 ====== ====== ====== ======= -------------------------------------------------------------------------------------------------------------------

(1) Ending inventory understated ($14,200 - $12,000 = $2,200). (2) Beginning inventory understated ($14,200 - $12,000 = $2,200).

Ending inventory overstated ($14,000 - $11,700 = $2,300). (3) Beginning inventory overstated ($14,000 - $11,700 = $2,300).

Solution to Q. No. 4. (a) Journal entries (i) Debit (Tk.) Credit(Tk.) 01/01/10: Accumulated Depreciation 72,000 Loss on Disposal of Machinery 12,000 Machinery 84,000



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(To record retirement of the machinery (ii) 01/07/09: Depreciation Expense 9,000 Accumulated Depreciation 9,000 (To record depreciation to the date of disposal for 6 months)

01/07/09 Cash 15,000 Accumulated Depreciation 63,000 Loss on Disposal of Machinery 6,000 Machinery 84,000 (To record the sale of the machinery 01/01/09 Machinery (New) 36,000 Accumulated Depreciation 54,000 Machinery (Old) 84,000 Cash 6,000 (To record exchange of the machinery) Workings: Fair market value of the Machinery Tk. 34,000 Cash paid 6,000 Cost of the New Machinery 40,000 Gain on exchange adjustment (4,000) Value of the new machinery 36,000 Cost value of the Machinery 84,000 Less Accumulated depreciation (54,000) Book value of machinery 30,000 Fair market value of machinery Tk. 34,000 Therefore the gain on exchange: Tk. 34,000-30,000 = Tk. 4,000. Q. No. 4. (b)(i) Depreciation for 2008 on Tk. 30,000 @ 10% 3,000 Depreciation for 2009: (Tk. 30,000-3,000)* 10% 2,700 Depreciation up to 31-12-2009 5,700 Book value of machinery as on 01-07-2010 (Tk. 30,000 – 5,700)* 10% for 6 months

1,215

Total depreciation up to 01-07-2010 Tk. 6,915 Journal entries 01/07/10 Cash 15,000 Accumulated Depreciation 6,915 Loss on Disposal of Machinery 8,085 Machinery 30,000 (To record the sale of the machinery) 4. (b)(ii) Depreciation of the existing machinery: Book value on 01-01-2010: Tk. 1,75,000 – 24,300 1,50,700 Depreciation @ 10% on Tk. 1,50,700 in 2010 15,070 Depreciation of the new machinery (Tk. 35,000+2,500)* 10% for 6 months

1,875

Total depreciation to be charged in 2010 Tk. 16,945



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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST 2013, EXAMINATION

PROFESSIONAL LEVEL-I SUBJECT: 101. INTERMEDIATE FINANCIAL ACCOUNTING.

Model Solution

Answer to the Question No. 1. XYZ Company

Statement of Cash flow For the year ended December 31, 2012

Amount

(Tk.) Amount

(Tk.) Cash flow from Operating Activities:

Net Profit before interest and taxes 47,800

Adjustment for depreciation (W1) 36,500

Loss on sale of equipment 2,500

Loss on debenture redemption 800

Amortization of patent 8,000

Increase in inventory (9,000)

Increase in account receivable (8,000)

Decrease in prepaid expense 2,200

Decrease in accounts payable (W2) (11,700)

Decrease in outstanding expenses (1,200)

Cash generated from operations 67,900

Less: Interest paid 1,800

Income tax paid (W3) 19,960

(21,760)

Net cash generated from operating activities 46,140

Cash flow from Investing Activities:

Purchase of Freehold building (W4) (17,000)

Furniture purchase (W4) (12,700)

sale of equipment 18,000

purchase of equipment (W4) (65,500)

Net cash used in investing activities

(77,200) Cash flow from Financing Activities:

Sale of common stock (W5) 11,250

Sale of right share 51,750

Dividend paid (W6) (17,940)

Redemption of debenture (20,800)

Net cash generated from financing activities 24,260

Net increase in cash and cash equivalents during the year (6,800) Cash and cash equivalents at the beginning of the year 47,300 Cash and cash equivalents at the end of the year 40,500

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Workings: W1: Depreciation – Furniture depreciation Tk. 6,200 plus Equipment depreciation Tk. 30,300 = Tk. 36,500

Acc Dep - Furniture

Acc Dep - Equipment

b/d 22,500

Equipment (Sold) 24,500 b/d 55,500

c/d 28,700 Depreciation 6,200

c/d 61,300 Depreciation 30,300 W2: Decrease in accounts payable – Ending accounts payable Tk. 20,500 Payable for furniture purchase Tk. 15,000 Payable for operating activities Tk. 5,500 Beginning accounts payable Tk. 17,200 Changes in accounts payable Tk. (11,700) W3: Interest and Tax paid –

Interest Payable

Income Tax Payable Cash 1,800 b/d 300

Cash 19,960 b/d 16,000

c/d 700 Int. expense 2,200

c/d 12,000 Income tax* 15,960 *(Profit before interest and taxes – Interest expense) x 35% = (47,800 – 2,200) X 35% = Tk. 15,960

W4: Purchase and sale of property, plant and equipment –

Freehold building

Furniture b/d 175,000

b/d 45,300

Rev. Res 8,000

Accounts payable 15,000 Cash 17,000 c/d 200,000

Cash 12,700 c/d 73,000

Equipment

b/d 125,000 sold 45,000 Cash pur 65,500 c/d 145,500

W5: Sale of common stock – [New issue Tk. 10,000 + premium 1,250 = 11,250]

Common Stock

b/d 225,000

Cash (right share)* 45,000

c/d 280,000 Cash (new issue) 10,000 *right share @ Tk. 10 will result increase in common stock [(225,000 ÷ 10) ÷ 5 x 1] = 4,500 shares and share premium will increase @ Tk. 1.50 for 4,500 shares. W6: Dividend paid –

Retained Earnings Divided 17,940 b/d 111,800 c/d 123,500 Profit after tax* 29,640

*profit before interest and tax was Tk. 47,800 less, interest Tk. 2,200 and tax Tk. 15,960

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Answer to the Question No. 2. XYZ Company

Statement of comprehensive income For the year ended December 31, 2012

Revenue

693,500

Less: Cost of goods sold (252,500+650)

253,100 Gross profit

440,350

Less: Operating expenses Administrative expenses - Admin exp 56,000

Depreciation [{125,000 – (22,800+20,440)}@20%] 16,352 72,352 Selling expenses -

Distribution expense 36,000 Bad debt 748 Patent amortization 2,000 Patent impairment 1,000 39,748

112,100 Net operating income

328,250

Other income and expenses - Investment income

16,700 Losses from assets abandonment

(3,800)

12,900 EBIT

341,150

Less: Finance cost

2,000 EBT

339,150

Less: Income tax @ 40%

135,660 Profit from continuing operation

203,490

Less: Losses from discontinuing division (net of tax)

18,000

Profit before extraordinary items and cumulative effect of change in accounting principle

185,490

Extraordinary loss (net of tax)

(15,000)

Cumulative effects on prior years of retroactive application of new depreciation method [(22,800+20,440) – 24,000](net of tax)

(11,544)

Net Income

158,946 Add: Other comprehensive income

Unrealized gain on available for sale securities (net of tax)

7,680 Comprehensive income 166,626

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XYZ Company Statement of changes in equity

For the year ended December 31, 2012

Share Capital

Share Premium

General Reserve

Sinking Fund

Accu. OCI

Retained Earnings

Balance b/d 350,000 72,950 28,200 21,000 - 60,300 Net income - - - - - 158,946 Transfer to General reserve - - 20,000

- - (20,000)

Transfer to Sinking fund - - (3,000) 3,000 - - Comprehensive income - - - - 7,680 - Balance c/d 350,000 72,950 45,200 24,000 7,680 199,246

XYZ Company

Statement of Financial Position As on December 31, 2012

Assets: Tk.

Non-current Assets: 752,408 Property, Plant and Equipment (W2) 690,408 Patent (W3) 6,000 Long term investments 56,000

Current Assets: 89,052 Account Receivables (W1) 19,552 Short term investments (45,000 + 12,800) 57,800 Inventories (12,350 - 650) 11,700

Total Assets 841,460 Equity and Liability

Shareholder's Equity 699,076 Share Capital 350,000 Share Premium 72,950 General reserve 45,200 Accumulated OCI 7,680 Sinking fund 24,000 Retained earnings 199,246

Non-current liability 8% Bond payable 25,000

Current liability 117,384 Accounts payable 4,300 Income tax payable (W4) 111,084 Interest payable 2,000

Total equity and liability 841,460

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W1: Allowance for bad debt Account Receivables: Balance b/d : Tk. 500 Balance b/d : Tk. 20,800 Allowance @ 6% : Tk. 1,248 Less: Allowance for bad debt : Tk. 1,248 Bad debt charge for the year : Tk. 748 Balance c/d : Tk. 19,552

W2: Property, plant and equipment:

Land Building Equipment Total Cost 400,000 225,000 125,000 750,000 Accumulated depreciation - b/d 24,000 24,000 Retroactive application 19,240 19,240 Depreciation for the year 16,352 16,352 Accumulated depreciation - c/d 59,592 59,592 Carrying value 400,000 225,000 65,408 690,408

W3: Patent Amortization and Impairment: Carrying value of patent : Tk. 9,000 Remaining life : 4.5 Years Amortization for the year : Tk. 2,000 Book Value : Tk. 7,000 Net realizable value : Tk. 6,000 Impairment : Tk. 1,000 W4: Taxation Provision: Tax on income from continuing operation 135,660 Tax benefit on losses from discontinued division (12,000) Tax benefit on losses from earthquake (10,000) Tax benefit on retroactive application of depreciation (7,696) Tax on unrealized gain on securities 5,120 Net tax payable (receivable) 111,084 Answer to the Question no. 3(a): (i) Tk.1,000 rental revenue (Tk.12,000 ÷ 6 = Tk.2,000 per month x 1/2 month); the balance (Tk.11,000)

should be deferred and recognized as earned during 1985. (ii) Tk.60,000 sales revenue (Tk.10,000 cash plus Tk.50,000 note is equal to FMV of asset); Tk.3,000

earned interest revenue ( 12% x Tk.50,000 x 1/2 year = Tk.3,000); the balance of interest revenue (Tk.3,000) to be earned during 1985.

(iii) Tk.104,000 net sales revenue; the Tk.8,000 special discount is a reduction in selling price and should be offset with the Tk.112,000 normal selling price in recognizing the net realizable amount.

(iv) Tk.400,000 sales revenue. Tk.16,000 guarantee expense, (4% x Tk.400,000 = Tk.16,000 all of which relates to the Tk.400,000 worth of sales this period).

(v) Tk.435,000 sales revenue. (All 5 tractors have been sold; the fact that 3 of the tractors have not yet been delivered, unless there are unusual circumstances, would ordinarily not preclude the recognition of the total sales revenue.)

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Answer to the Question no. 3(b): (i) The Allowance for Doubtful Accounts should have a balance of Tk. 50,000 at year-end. The

supporting calculations are shown below: Days Account Outstanding Amount Expected

Percentage Uncollectible

Estimated Uncollectible

0-15 days Tk.300,000 0.02 Tk.6,000 16-30 days 100,000 0.10 10,000 31-45 days 80,000 0.15 12,000 46-60 days 40,000 0.25 10,000 61-75 days 20,000 0.6 12,000 Balance for Allowance for Doubtful Accounts Tk.50,000

The accounts which have been outstanding over 75 days (Tk.15,000) and have zero probability of collection would be written off immediately and not be considered when determining the proper amount for the Allowance for Doubtful Accounts.

(ii) Accounts Receivable Tk.540,000 Less: Allowance for doubtful accounts 50,000 Accounts Receivable(net) Tk.490,000 (iii) The year-end bad debt adjustment would decrease before-tax income Tk. 30,000 as computed

below: Estimated amount required in the Allowance for Doubtful Accounts Tk.50,000

Balance in the account after write-off of uncollectible accounts but before adjustment (Tk.35,000-Tk.15,000)

20,000

Required charge to expense Tk.30,000

Answer of the Question No. 04(a):

G & H Pump Co. Partial Balance Sheet

December 31, 2007 Liabilities: BDT Current Liabilities: Accounts payable and accrued expenses 163,230 Income taxes payable 63,000 Accrued bond interest payable 110,000 Unearned revenue 25,300 Current portion of low term debt 70,870 Total current liabilities: 432,400 Long term Liabilities: Note payable to Prime Bank 99,000 Mortgage note payable 169,994 Bonds payable 2,200,000 Add: Premium on bonds payable 1,406 2,201,406 Total long term liabilities 2,470,400 Total liabilities 2,902,800

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Answer of the Question No. 04(b):

1. Although the note payable to Prime Bank is due in 30 days, it is classified as a long term liability as it will be refinanced on a long term basis.

2. The pending lawsuit is a loss contingency requiring disclosure, but it is not listed in the liability section of the balance sheet.

3. The BDT 70,870 of the mortgage note that will be repaid within the next 12 months (BDT 240,864-BDT 169,994) is a current liability; the remaining balance, due after December 31, 2008, is a long term debt.

4. Although the bonds payable mature in seven months, they will be repaid from a sinking fund, rather then from current assets therefore, these bonds retain their long term classification.

Answer to the Question No. 5(a).

Cost Tk. 78,000 Replacement cost Tk. 75,000 Ceiling Tk. 90,000

= 2013 catalog selling price less sales commissions and estimated other costs of disposal. (2013 catalogue prices are in effect as of 12/01/12.)

Floor Tk. 62,400 = Ceiling less (30% X 2013 catalog selling price) Designated Market price Tk. 75,000 [Middle value of Replacement cost, ceiling and floor] LMC Tk. 75,000 Answer to the Question No. 5(b).

Cost Retail Beginning Inventory Tk. 30,000 Tk. 48,000 Purchases 339,500 520,800 Purchase returns (25,800) (36,480) Purchase discounts (7,590) Freight-in 8,920 Markups Tk. 32,500 Markup cancellations (8,320 ) 24,180 Totals 345,030 556,500 Markdowns (12,000) Sales (412,000) Sales returns 28,300 (383,700) Inventory losses due to breakage (2,400) Employee discounts (3,400 ) Ending inventory at retail 155,000

Cost-to-retail ratio = Tk. 345,030/Tk. 556,500 = 62% Ending inventory at cost (62% of Tk. 155,000) = Tk. 96,100

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Answer to the Question No. 5(c).

Alvi Corporation Stockholders’ Equity December 31, 2012

Capital Stock Tk.

Preferred stock, Tk. 100 par, 12%, 105,000 shares issued and outstanding

10,500,000

Common stock, Tk. 20 par, 1,305,000 shares issued, 1,260,000 shares outstanding

26,100,000

Total capital stock 36,600,000 Additional paid-in capital

In excess of par—preferred stock 2,225,000 In excess of par—common stock 23,500,000 From treasury stock 70,000

25,795,000 Total paid-in capital 62,395,000 Retained earnings 19,175,000* Total paid-in capital and retained earnings 81,570,000 Less: Treasury stock (45,000 shares common) (4,050,000) Total stockholders’ equity 77,520,000

*(12,500,000 + Net income 8,250,000 – Preferred dividend 1,260,000 – Cash dividend 315,000) = 19,175,000 Cash dividend: [(800,000 shares + 70,000 shares) X split 3/2] – 60,000 treasury shares + 15,000 treasury share] X 0.25 per share = 315,000)

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PROFESSIONAL LEVEL-I SUBJECT: 102. COST ACCOUNTING

Model Solution

Answer to the Question No. 1(b).

(i)

Sevenhill Manufacturing Company Journal Entries

During November

SL.No Particulars Subsidiary Records Debit (Tk.)

Credit (Tk.)

a) Materials Inventory cards 35,600 Accounts Payable Accounts Payable Ledger 35,600

b) Work In Process Job Order Cost Sheets 25,250 Factory Overhead Control Overhead analysis sheets 1,300 Materials Inventory cards 26,550

c) Work In Process Job Order Cost Sheets 200 Materials Inventory cards 200

d) Factory Overhead Control Overhead analysis sheets 850 Cash 850

e) Accounts Payable Accounts Payable Ledger 225 Materials Inventory cards 225

f) Scrap Materials Inventory cards 175 Factory Overhead Control Overhead analysis sheets 175

g) Materials Inventory cards 1,265 Work In Process Job Order Cost Sheets 1,090 Factory Overhead Control Overhead analysis sheets 175

h) Payroll 52,600 Accrued Payroll 41,503 Income Tax Payable 7,780 Hospitalized 950 Other deduction 2,367 Accrued Payroll 41,503 Cash 41,503

i) Factory Overhead Control Overhead analysis sheets 3,419 Provident Fund Payable 3,419

i) Work In Process Job Order Cost Sheets 40,200 Factory Overhead Control Overhead analysis sheets 12,400 Payroll 52,600

k) Factory Overhead Control Overhead analysis sheets 7,800 Accum. Depr. - Buildings 3,000 Accum. Depr. – Machinery 4,800

l) Factory Overhead Control Overhead analysis sheets 1,600 Property Taxes Payable 750 Prepaid Insurance 850

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m) Work In Process Job Order Cost Sheets 26,880 Factory Overhead Applied 26,880

n) Factory Overhead Applied 26,880 Cost of Goods Sold 139 Factory Overhead Control 27,019

o) Finished Goods Inventory cards 81,750 Work In Process Job Order Cost Sheets 81,750

p) Cost of Goods Sold 75,500 Finished Goods Inventory cards 75,500

Accounts Receivable Customers Ledger 90,000 Sales 90,000

(ii)

Ledger Accounts

Materials Factory Overhead Control Tk. Tk. Tk. Tk. Nov:1 6,180 (b) 26,550 (b) 1,300 (f) 175 (a) 35,600 (c) 200 (d) 850 (g) 175 (g) 1,265 (e) 225 (i) 3,419 (m) * 26,880 (j) 12,400 (n)** 139 (k) 7,800 (l) 1,600 Balance 16,070 43,045 43,045 27,369 27,369

Work in Process Finished Goods Tk. Tk. Tk. Tk. Nov:1 9,750 (g) 1,090 Nov:1 5,660 (p) 75,500 (b) 25,250 (o) 81,750 (o) 81,750 (c) 200 (j) 40,200 Balance 11,910 (m) 26,880 Balance 19,440 1,02,280 1,02,280 87,410 87,410

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Answer to the Question No. 2(b) : (i) Computation of economic order quantity (EOQ)

D =Annual requirement = 54,000 castings C = Cost per casting = Tk. 800 Co = Ordering cost = Tk. 9,000 per order Cc = Carrying cost per casting p.a = Tk.300

EOQ =

= 1,800 casting (ii) Safety stock (Assuming a 15% risk of being out of stock) Safety stock for one day = 54,000/360 days = 150 castings Re-order point = Minimum stock level + Average lead time × Average consumption = 150 + 6 × 150 = 1,050 castings. (iii) Total cost of ordering = (54,000 / 1,800) × Tk. 9,000 = Tk.2,70,000 Total cost of carrying = (450 + ½ × 1,800) xTk.300

= Tk. 4,05,000 (iv) (A) Computation of new EOQ:

= 300 castings (v) (B) Total number of orders to be placed in a year are 180. Each order is to be placed after 2 days

(1 year = 360 days). Under old purchasing policy each order is placed after 12 days. Answer to the Question No. 3

(a) A volume-based cost driver is a cost driver that reflects some measure of production volume, either production output (i.e. units produced) or production input (i.e. direct labour hours or machine hours). Conventional costing systems assume that manufacturing overhead costs are related to the volume of production, usually measured by input measures such as direct labour hours. Thus, this approach assumes that the more direct labour hours worked on a product, the greater its consumption of overhead resources. Yet, in a modern business environment, many manufacturing overhead costs may not behave in this way. A significant part of the overhead costs are likely to be driven by factors other than production volume. For example, some of the overhead costs, like setup costs, are incurred for each production batch regardless of the number of units in the batch. Others, like factory rent, are incurred each month regardless of the number of units produced. Still others are incurred because of overall production complexity. Products that are difficult to make tend to use more overhead resources than those that are simple to make. Where non-volume based costs are significant, a conventional costing approach will result in distorted product costs.

(b) (i) The regression equation’s intercept on the vertical axis is $200. It represents the portion of indirect

materials cost that does not vary with machine hours, when operating within the relevant range. The slope of the regression line is $4 per machine hour. For every machine hour, $4 of indirect material costs is expected to be incurred.

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(ii) Estimated cost of indirect material at 900 machine hours of activity:

S = $200 + ($4 × 900) = $3 800

(iii) Several questions should be asked: (a) Do the observations contain any outliers, or are they all representative of normal operations? (b) Are there any mismatched time periods in the data? Are all of the indirect material cost observations

matched properly with the machine hour observations? (c) Are there any allocated costs included in the indirect material cost data? (d) Are the cost data affected by inflation?

(iv) The choice of cost driver should reflect the nature of the production process. Other cost drivers could include direct labour hours or direct labour cost if the production process is labour intensive and the consumption of indirect materials is related to labour activities. Alternative the number of units produced could be a suitable cost driver, if each unit uses much the same amount/cost of indirect material.

Answer to the Question No. 4.

(i) & (ii) Full cost and manufacturing cost, per unit, for Switch 3901:

Activity Full cost Manufacturing cost Prepare purchase order $2,150 - Process payables 1,350 - Prepare payroll 3,000 - Process sales orders 16,500 - Pack and dispatch 8,500 - Program solder robots 30,600 30,600 Solder circuits 144,000 144,000 Assemble circuit boards 75,000 75,000 Wire in switch 70,000 70,000 Insert fuse 50,000 50,000 Test switch 20,000 20,000 Design switch 5,000 - Total annual cost $426,100 $389,600

Full cost per switch: $85.22 activity cost + $20 direct material = $105.22 Manufacturing cost per switch: $77.92 activity cost + $20 direct material = $97.92

(iii) The non-manufacturing costs are part of the cost of producing and selling Switch 3901. It is important the management considers these costs, as well as the manufacturing costs, when assessing the profitability of Switch 3901 and, therefore, when making decisions such as product mix, outsourcing and pricing.

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Answer to the Question No. 5.

(a) Weighted Average Method: Direct material Conversion Total Work in process, Feb 1 $ 5,500 $ 17,000 $ 22,500 Cost incurred during Feb 110,000 171,600 Total cost to account for

281,600 $ 115,500 $ 188,600

Equivalent units $ 304,100

110,000 92,000 Cost per equivalent unit $1.05 $2.05 $3.10

(i) Cost of Goods Completed (89,000 × 3.10) = $275,900 (ii) Work-in-Process Material: 21,000 × 1.05 = 22,050 Conversion Cost: 3,000 × 2.05 =

6,150 $28,200

(b) FIFO Method: Direct material Conversion Total

Work in process; February 1 $ 22,500 Cost incurred during February $ 110,000 $ 171,600 Total cost to account for

281,600 $ 304,100

Equivalent units 100,000 88,000 Cost per equivalent unit $ 1.10 $ 1.95 $ 3.05 Cost of opening work in process $22,500

Cost incurred to complete opening work in process inventory

Conversion Cost 10,000 × 65% × 1.95

12,675

Cost incurred to produce units started and completed

35,175

79,000 × 3.05 (i) Total cost of goods completed

240,950

Cost remaining in work in process; February 28 $276,125

Direct materials 21,000*×1.10 23,100 Conversion cost 2,500** × 1.95 (ii) Closing work in process

4,875 $27,975

Check: Cost of goods completed and transferred out 276,125 Cost of closing work in process Total costs accounted for

27,975 $304,100

* 21,000 = 100,000 + 10,000 – 89,000 **

2,500 = 88,000 + (10,000 x 0.35) – 89,000

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PROFESSIONAL LEVEL-II SUBJECT: 201. ADVANCED FINANCIAL ACCOUNTING-I.

Model Solution Solution No. 1(b).

(i) Yes, the lease is capital lease as the lease term is 8 years which is 80% of the economic life of the equipment.

(ii) Lease Amortization Schedule: Year Description Amount Interest Principal Lease

Obligation 01.01.2008 Initial

Balance 1,700,360

01.01.2008 Payment 250,000 - 250,000 1,450,360 01.01.2009 Payment 250,000 145,036 104,964 1,345,396 01.01.2010 Payment 250,000 134,540 115,460 1,229,936 01.01.2011 Payment 250,000 122,994 127,006 1,102,929 01.01.2012 Payment 250,000 110,293 139,707 963,222 01.01.2013 Payment 250,000 96,322 153,678 809,544 01.01.2014 Payment 250,000 80,954 169,046 640,499 01.01.2015 Payment 250,000 64,050 185,950 454,549 31.12.2015 Payment 500,000 45,455 454,548 0

Minimum Lease Payment: Rentals (250,000 x 5.86842) 1,467,105 Guaranteed Residual Value (500,00 x 0.46651) 233,255 1,700,360

(iii) 01.01.2008 Leased Equipment 1,700,360 Obligation Under Capital Lease 1,700,360 01.01.2008 Obligation Under Capital Lease 250,000 Executory Cost 24,000 Cash 274,000 31.12.2008 Interest Expenses 145,036 Accrued Interest on Obligation under Capital

Lease 145,036

31.12.2008 Amortization Expenses 150,045 Accumulated Amortization on Leased

Equipment 150,045

(17,00,360-500,000)/8=150,045 01.01.2009 Obligation Under Capital Lease 104,964 Accrued Interest on Obligation under Capital Lease 145,036 Executory Cost 24,000 Cash 274,000 31.12.2009 Interest Expenses 134,540 Accrued Interest on Obligation under Capital

Lease 134,540

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31.12.2009 Amortization Expenses 150,045 Accumulated Amortization on Leased

Equipment 150,045

(iv) Balance Sheet

As on December 31, 2008 Assets: Leased Equipment 1700360 Less- Accumulated Amortization 150045 1550315 Liabilities: Current Liabilities- Obligation Under Capital Lease(Current Portion) 104964 Accrued Interest on Obligation Under Capital Lease

145036 250000

Non Current Liabilities- Obligation Under Capital Lease(Non Current Portion)

1345396

(v) 01.01.2010 Accrued Interest on Obligation under Capital

Lease 134,540

Obligation Under Capital Lease 1,345,396 Accumulated Amortization on Leased

Equipment 30,090

Equipment 1,530,334 Leased Equipment 1,700,360 Cash 1,340,000

Solution No. 2(i).

Head Office Branch Journal Entries: Branch 71,000 Cash 30,000 Accu. Depre-Store Furniture 5,000 Merchandise Shipment from Head Office 36,000 Cash 30,000 Store Furniture & Fixture 10,000 Merchandise Shipment to Branch 30,000 Accu. Depre-Store Furniture 5,000 Allow. For Overvaluation of Br. Merchandise 6,000 Head Office 71,000 Store Furniture & Fixture 10,000 No Entry Store Furniture & Fixture 1,500 Cash 1,500 Accounts Receivable 250,000 Accounts Receivable 175,000 Sales 250,000 Sales 175,000 Cash 280,000 Cash 140,000 Accounts Receivable 280,000 Accounts Receivable 140,000 Purchase 220,000 Purchase 120,000 Accounts Payable 220,000 Accounts Payable 120,000 Accounts Payable 240,000 Accounts Payable 115,000 Cash 240,000 Cash 115,000 Expenses 22,500 Expenses 11,000 Accrued Expenses 1,500 Head Office 6,000 Branch 6,000 Cash 5,000 Cash 30,000 Branch 60,000 Merchandise Shipment from Head Office 60,000 Merchandise Shipment to Branch 50,000 Head Office 60,000 Allow. For Overvaluation of Br. Merchandise 10,000 Cash 25,000 Head Office 25,000 Branch 25,000 Cash 25,000 Branch 12,000 Merchandise in Transit 12,000 Merchandise Shipment to Branch 10,000 Head Office 12,000

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Allow. For Overvaluation of Br. Merchandise 2,000 Depreciation 3,800 Depreciation 1,300 Accu. Depre.- Store Furniture & Fixture 3,800 Accu. Depre.- Store Furniture & Fixture 1,300 10,000 x 10%= 1,000 1,500 x 1/5 = 300 1,300 Expenses 1,800 Expenses 900 Accrued Expenses 1,800 Accrued Expenses 900 Branch Income Statement 14,200 Head Office 14,200 Branch 14,200 Income Statement 14,200 (Loss transferred) (Loss transferred) Allow. For Overvaluation of Br. Merchandise 16,400 Branch Income Statement 16,400 (Load on Br goods sold adjusted) Workings: Load on goods sent to Br. (6,000+10,000+2,000)= 18,000 Less- Load on goods in br. Closing inventory (9,600 x 20/120)= 1,600 Load on goods sold by branch 16,400

Solution No. 2(ii). Head Office Branch

Income Statement Income Statement for the year ended December 31, 2012 for the year ended December 31, 2012 Sales 250,000 Sales 175,000 Less- Cost of Goods sold: Less- Cost of Goods sold: Opening Merchandise 96,000 Opening Merchandise - Add- Purchase 220,000 Add- Purchase 120,000 316,000 Less- Shipment to Branch 90,000 Add- Shipment from Head Office 96,000 226,000 216,000 Less- ending merchandise 60,000 66,000 Less- ending merchandise 40,000 176,000 Gross Profit 84,000 Gross Profit (1,000) Less- Other operating expenses: Less- Other operating expenses: Expenses 24,300 Expenses 11,900 Depreciation 3,800 28,100 Depreciation 1,300 13,200 Net Profit 55,900 Net Profit (14,200) Add- Branch Loss (14,200) Load on goods sold by branch 16,400 2,200 Total Net profit 58,100

Head Office Branch

Balance Sheet Balance Sheet As on December 31, 2012 As on December 31, 2012 Assets : Assets : Cash 85,000 Cash 23,500 Accounts Receivable 130,000 Accounts Receivable 35,000 Merchandise Inventory 60,000 Merchandise Inventory 40,000 Branch 109,800 Merchandise in Transit 12,000 Less- Allowance for overvaluation of Br. Merchandise 1,600 08,200 Store Furniture & Fixture 38,000 Store Furniture & Fixture 11,500 Less- Accu Depreciation 14,400 23,600 Less- Accu Depreciation 6,300 5,200 406,800 115,700 Liabilities & Capital Liabilities & Capital Accrued Expenses 1,800 Accrued Expenses 900 Accounts Payable 20,000 Accounts Payable 5,000 Capital Stock 250,000 Head Office A/C 109,800 Retained Earnings 135,000 Retained Earnings 115,700 406,800

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Solution No. 3(d) National Engineers Ltd

Contract Account For the year ended December 31, 2011

Particulars Amount Particulars Amount Amount Tk Tk Tk Wages

1,400,000 Material sold

115,000

Plant

350,000 Sale of Plant

17,000 Materials

1,050,000

Sundry Expenses

65,000 Work in Process: Head Office Charges

125,000 Work Certified 3,000,000

( 24,00,000x100/80) Profit & Loss A/C (profit on sale of

Materials) 15,000 Work Uncertified 250,000

3,250,000 Notional Profit

487,000 Plant in hand

80,000

Material in hand

30,000

3,492,000

3,492,000

Profit & Loss A/C (profit transferred) 300,000 Notional Profit

487,000 Work in Process (Reserve)

187,000

487,000

487,000

Profit to be credited to Profit & Loss Account: Cost to date

2,990,000

Less : Plant sold

17,000 Cost of material sold

100,000 117,000

2,873,000 Estimated further expenditure:

Wages

849,500 Plant

150,000

Materials

500,000 Sundry Expenses

35,000

Head Office Charges

62,500 Claims, temporary maintenance &

cintingencies

90,000 1,687,000

4,560,000

Less: Residual Value of Plant

60,000 Estimated total cost

4,500,000

Estimated Profit

500,000 Contract Price

5,000,000

Profit to be transferred: Estimated Profit x Work Certified / Contract Price (5,00,000 x 30,00,000 / 50,00,000)=

300,000

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Solution No. 4(a)

Populer Life Assurance Co. Revenue Account

For the year ended Dec 31, 2012 Dr.

Cr.

Expenditures Taka Taka Income Taka Taka Claim paid 197,000 Life assurance fund at the beginning of the

year

2,900,300 Add: Oustanding 10,000 Premium Received 233,500 207,000 Add: Oustanding 10,000 Less: Claims covered under reinsurance 2,300

204,700 243,500

Surrenders 7,000 Add: Bonus utilized in reduction of premium 6,000

249,500

Bonus to policy holders 30,500 Interest & dividend received 112,700 Add: Bonus utilized in reduction of premium 6,000

36,500 Add: Oustanding 21,300

134,000

Commission paid 9,300 Management Expenses 32,300 Add: Due 1,200 33,500 Dividend paid 16,000 Life assurance fund at the end of the year

2,976,800

3,283,800 3,283,800

Solution No. 4(b)

Populer Life Assurance Co. Balance Sheet

As at 31 December 2012 Dr.

Cr.

Capital and Liabilities Taka Property and Assets Taka Authorized Capital ? Mortgage in Bangladesh 492,200 Issued and subscribed capital 10,000 shares of Tk.15 each 150,000 Loans on companey's policies 178,600 Calledup and paidup capital 10,000 shares of Tk.10 each 100,000 Investments 2,300,000 Life assurance fund 2,976,800 Freehold premises 40,000 Claimed admitted but not paid 10,000 Agent's Balance 9,300

Management Expenses due 1,200 Amount receivable under Re-insurance 2,300

Outstanding Premium 10,000 Accrued Interest 21,300 Cash Deposit 27,000 Cash in hand 7,300 3,088,000 3,088,000

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Solution No. 5.

Emacol Limited

Statement of Affairs

As on 31 december 2012

Book Value Assets

Realized Value

Assets pledged with fully secured creditors

12,000 Notes Receivable 12,000

Bank Notes Payable 10,000

Interest payable 300 10,300 1,700 13,250 Investment in stock 13,250 Bank Notes Payable 6,000 Interest payable 250 6,250 7,000 21,000 land 20,000 99,000 Building 50,000 70,000 Mortgage Note Payable 100,000

Interest Payable- Mortgage Note 4,250 104,250

Fixed Assets: 2,000 Cash in Hand 2,000 2,100 Cash at Bank 2,100 23,500 Accounts Receivable 14,000 28,000 Inventories-FG 30,240 12,000 Inventories-WIP 9,000 19,500 Inventories-Raw Materials 11,900 600 Unpaid Insurance 300 46,500 Plant and Machinary 19,000 Total Net Realizable Value 97,240 Wages and Salaries due 6,750 Net free Assets 90,490 Eatimated dificiency (balancing Figure) 41,260 279,450 131,750 Book

Value Equities

Unsecured Liabilities having priority 6,750 Wages and Salaries due 6,750 Fully Securied creditors 16,000 Notes Payable 16,000 550 Interest Payable 550 Pertially secured creditors 100,000 Mortgage Notes Payable 100,000 4,250 Interest Payable- Mortgage Note 4,250 Total 104,250 Land and Building 70,000 34,250 Unsecured Creditors

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97,500 Accounts payable 97500 Stock holders' Equity 125,000 Capital Stock

(70,600) Retained Earnings (deficit) 279,450 131,750

Deficiency account

As on 31 December 2012

Estimated Losses Estimated Gains

Accounts Receivable 9,500 Inventories-FG 2,240

Inventories-WIP

3,000 Capital Stock 125,000

Inventories-Raw Materials 7,600 Retained Earnings (70,600)

Unpaid Insurance 300 Estimated deficiency 41,260

Land 1,000

Buildings 49,000

Plant and Machinery 27,500

Total 97,900 Total 97,900

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PROFESSIONAL LEVEL-II SUBJECT: 202. MANAGEMENT ACCOUNTING

Model Solution

Answer to the Question No. 1(b).

(a) In designing management accounting systems, care must be taken that the benefit to management of having certain types or levels of information is greater than the cost of obtaining and using the information. In designing regular management accounting reports or a specific adhoc report, information should be included on a cost-effective basis. While it can be relatively straightforward to measure the costs of producing and using management accounting information, it can be more challenging to estimate the benefits that managers derive from having access to information. Ultimately, the management accountant must use his/her judgment in assessing whether the benefits exceed the costs and, therefore, the information should be produced.

(b) (i) Estimates of the cost of lost merchandise due to shoplifting and the cost of employing security personnel would be relevant to this decision.

(ii) Building-cost estimates for the library extension, as well as estimated benefits to the population from having the addition, would be useful. In estimating the benefits, some value judgements may need to be made about the benefits to the public from having additional library space and more books.

(iii) Estimates of the acquisition costs and any operating costs associated with the proposed luxury cars would be relevant. For example, estimates of the cost of petrol, routine maintenance and insurance on the new vehicles would be useful.

(iv) Weekly or biweekly data about the cost of maintaining the machine would be relevant. In addition, the production manager should consider historical information of repairs needed and the likely rates of breakdown under each maintenance alternative.

(c) The four types of benchmarking and their limitations are as follows:

(i) Internal benchmarking involves benchmarking between units of the same company. This is the simplest form of benchmarking to use, as it is relatively easy to gain access to other areas of the one organisation. However, internal benchmarking partners may not provide the best benchmarks as they may not be the best performers in certain areas. Also, they may be operating in dissimilar markets and industries, so processes and measures may not be directly comparable.

(ii) Competitive benchmarking involves a company identifying the strengths and weaknesses of competitors to assist them to prioritise areas for improvement. While the objective may be to equal or exceed the competitors’ performance, formal benchmarking processes may be difficult to arrange with direct competitors.

(iii) Industry benchmarking is broader than competitive benchmarking as it involves comparing a business against all other businesses that have similar interests and technologies, to identify performance and trends within an industry. Where these are relatively common to all firms in the industry, this can be a very valuable form of benchmarking, but as industries become more globalised and directly compete in the same markets, opportunities for benchmarking of this nature are likely to diminish.

(iv) Best-in-class or process benchmarking. This involves benchmarking against the best practices which may occur in any industry. The difficulty with this approach is that many characteristics of best practice businesses may not be common to other industries.

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Answer to the Question No. 2

(a) This comment is occasionally heard from people who are experienced managers who have run their own small business for a long period of time. These individuals may have great knowledge about their business and may be able to manage effectively without the assistance of formal systems, such as budgets. They may feel they do not need to spend a great deal of time on the budgeting process, because they can essentially run the business by gut feeling. This approach can result in several problems. First, if the person who is running the business is absent or leaves the business, there are no formal plans or budgets which may assist new managers to run the business. Second, budgeting can assist in the effective running of an organisation. Budgets facilitate communication and co-ordination, are useful in resource allocation and help in evaluating performance and providing incentives to employees. It is difficult to achieve these benefits without a budgeting process.

(b)

Statement of Profit and Loss for Expected Levels of Operations

Particulars 0% (Tk.) 50% (Tk.) 75% (Tk.) Sales Nil 49,500 90,000 Less Marginal Costs Nil 40,500 60,750 Contribution Nil 9,000 29,250 Less Fixed Costs 11,000 19,000 19,000 Special Costs (Working Note) 12,500 -- -- Profit / Loss (23,500) (10,000) 10,250

Note: Special Cost:

Closing down Costs 7,500 Maintenance of Plant 1,000 Overhouling, training etc. 4,000 12,500

The amount of loss can be reduced by (23,500 – 10,000) i.e. 13,500 if the factory continuous to operate. Further in the second year the estimated profit is 10,250. Therefore, closing down is not desirable.

Workings:

(i) 50% operations: 60% Tk. 67,600 40% Tk. 51,400 Difference 20% Tk. 16,200 Variable Cost only

Variable Cost for 40% = Tk. 16,200 × 2 = Tk. 32,400 Fixed Cost (Tk. 51,400 – Tk. 32,400) = Tk. 19,000. Variable Cost for 50% = VC for 40% + VC for 10% = 32,400 + 8,100 = Tk. 40,500.

(ii) 75% operations: 80% Tk. 83,800 60% Tk. 67,600 20% Tk. 16,200 For 15% Tk. 12,150

VC at 60% = 16,200 × 3 = Tk. 48,600. Fixed Cost = (67,600 – 48,600) = Tk. 19,000. VC for 75% = VC for 60% + VC for 15% = Tk. 48,600 + Tk. 12,150 = Tk. 60,750

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(a) The new budget system allows the managers to focus on those areas that need attention. By dividing the annual budget into 12 equal parts, managers can take corrective action before the error is compounded (frequent feedback is provided). Also, the company has segregated costs into fixed and variable components, an essential step for good control. A major weakness of the budget is the failure to properly define responsibility. Because of this, supervisors are being held accountable for areas over which they have no control.

(b) The performance report should emphasize those items over which the manager has control. The report should also compare actual costs with budgeted costs for the actual level of activity. Currently, the report is attempting to compare costs at two different levels: the original budget for 3000 units with the actual costs for production of 3185 units. A flexible budgeting system needs to be employed.

(c) Berwin, Inc. Machining Department Performance Report

For the Month Ended May 31, 2008 Flexible Budget* Actual Variance Volume in units 3185 3185 0 Variable manufacturing costs: Direct materials $ 25 480 $ 24 843 $637 F Direct labour 29 461 29 302 159F Variable overhead 35 354 35 035 319 F Total variable costs $ 90 295 $ 89 180 $1,115 F Fixed manufacturing costs: Indirect labour $ 3300 $ 3334 34 U Depreciation 1500 1500 0 Taxes 300 300 0 Insurance 240 240 0 Other 930 1027 97 U Total fixed costs $ 6270 $ 6401 $131 U Total costs $ 96 565 $ 95 581 $984 F

*For the variable costs: 3185 × $24 000/3000; 3185 × $27 750/3000; 3185 × $33 300/3000

(d) Berwin’s budgetary system could also be improved by offering monetary and nonmonetary incentives to reach budget goals. The managers and supervisors should be allowed and encouraged to participate in the budgetary process because they will be responsible for controlling the budget. The accountant needs to be certain that the budget objectives are based on realistic conditions and expectations. The managers should be held accountable only for costs over which they have control.

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(a)

CM per Unit $1.60 CM Ratio 0.4

BEP in Quantity 275,000 Candy BEP in $ $1100,000

Profit $ 184,000

Margin of Safety in Quantity 115,000 Candy Margin of Safety in % 29.49%

DOL 3.3913 Profit Increase $93,600

Current CMR = 0.4

CMR =

After 15% increase in the cost of Candy, V will be $ 2.7

Therefore,

0.4 =

0.4P = P – 2.7

0.6P = 2.7

P = $4.5

Price will be $ 4.5 per unit.

(b) Snap Crackle Pop Total Sales $4,000 $2,000 $1,000 $ 7,000 Variable Manufacturing Costs 1,600 600 500 $ 2,700 Total Contribution Margin 2,400 1,400 500 $ 4,300 Fixed Manufacturing Costs 1,200 600 100 $ 1,900 Controllable Profit 1,200 800 400 $ 2,400.00 Fixed Operating expenses 800 600 800 $ 2,200.00 Income $400 $200 ($400) $ 200.00 Snap Crackle Total Sales $4,000 $2,000 -- $ 6,000 Variable Manufacturing Costs 1,600 600 -- $ 2,200 Total Contribution Margin 2,400 1,400 -- $ 3,800 Fixed Manufacturing Costs 1,200 600 -- $ 1,800 Controllable Profit 1,200 800 -- $ 2,000.00 Fixed Operating expenses $ 2,200.00 Income $ (200.00) The Pop should not be eliminated.

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Answer to the Question No. 5(a)

Variable product costs are particularly useful for short-term decisions, such as whether to make or buy a component, and pricing – especially when variable selling and administrative costs are included. The fixed costs will be incurred anyway, and in the short term they should be disregarded. In making these decisions, the variable costs provide a good measure of the differential costs that need to be assessed. We discuss the information needed for short-term decision making in Chapter 19.

Under variable costing, profit is a function of sales. The classification of costs, as fixed or variable, makes it simple to project the effects that changes in sales have on profit. Managers find this useful for decision making. Also, cost volume profit analysis (which we discuss in Chapter 18) requires a variable costing format. Planned costs must take account of cost behaviour if they are to provide a reliable basis for control. In addition, the link between sales and profit performance, under variable costing, ensures a performance measure that managers understand easily. Fixed costs are an important part of the costs of a business, especially in the modern manufacturing environment. Variable costing provides a useful perspective of the impact that fixed costs have on profits by bringing them together and highlighting them, instead of having them scattered throughout the statement. Absorption product costs include unitised fixed overhead, which can result in sub-optimal decisions, especially as fixed costs are not differential costs in the short term. However, in the modern business environment, with a high level of fixed overhead, a relatively small percentage of manufacturing costs may be assigned to products under variable costing. Also, in the longer term a business must cover its fixed costs too, and many managers prefer to use absorption cost when they make cost-based pricing decisions. They argue that fixed manufacturing overhead is a necessary cost incurred in the production process. When fixed costs are omitted, the cost of the product is understated. (b) (i)

Cost per unit Variable Absorption Direct material $9.00 $9.00 Direct labour 3.60 3.60 Variable overhead 5.40 5.40 Fixed overhead * - 4.00 $18.00 $22.00

* Fixed overhead = budgeted fixed overhead budgeted level of production

= $600,000 150,000 = $4 per unit

(ii) (a) Slim and Trim Ltd

Absorption Costing Income Statement For the Year Ended 30 June

Sales revenue (125,000 units sold at $27 per unit) $3,375,000 Less: Cost of goods sold 125,000 units @ $22 per unit 2,750,000 Gross margin 625,000 Less: Selling and administrative expenses: Variable (at $2 per unit) (250,000) Fixed (100,000) Net profit $275,000

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(b) Slim and Trim Ltd

Variable Costing Income Statement For the Year Ended 30 June

Sales revenue (125,000 units sold at $27 per unit) $3,375,000 Less: Variable expenses: Variable manufacturing costs at $18 per unit (2,250,000) Variable selling and administrative costs at $2 per unit (250,000) Contribution margin 875,000 Less: Fixed expenses: Fixed manufacturing overhead (600,000) Fixed selling & administrative expenses (100,000) Net profit $175,000

(iii) Difference in reported profits under absorption costing and variable costing = Changes in inventory in units × predetermined fixed overhead rate per unit

= 25,000 units × $4 per unit = $100,000 As shown in requirement (ii), reported profit under variable costing is $100,000 lower than absorption costing.

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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST– 2013 EXAMINATION

PROFESSIONAL LEVEL-II SUBJECT: 204. TAXATION

Model Solution

Solution Question No. 3.

Mr. X Computation of Total Income

For the year ended on 30/06/2013 (Assessment year: 2013-2014)

(a) Income from Salary: (1) Basic Salary (Tk. 20,000 X 12) = 2,40,000/- (2) Entertainment Allowance @ 20% = 48,000/- (3) Bonus (Tk. 20,000 X 2 months) = 40,000/- (4) Free accommodation (25% of Basic salary, or rental value

Tk. 72,000, lower one) 60,000/-

(5) Medical Allowance (Tk. 500 X 12 month) = 6,000/- Less: exempted up to actual expenditure = 8,000/-

Nil

(6) Conveyance Allowance (Tk. 3,000 X 12) = 36,000/- Less: Exempted up to -- 30,000/-

6,000/-

(7) Employer’s contribution to Recognised Provident Fund – 10%

24,000/-

Total Salary Income 4,18,000/- (b) Income from Interests on Securities: (1) Interests on Debentures Tk. 10,000/- (2) Interests on Govt. Securities Tk. 70,000/- Interest Income 80,000/- (As there is no exemption from such interest with effect from the assessment year 2011-2012. so it is fully taxable. Moreover no tax credit will be allowed on TDS Tk. 7,000/- as it was deducted 3 years before which is not to be adjusted with this year’s assessment) (c) Income from House Property: Annual Value ( Tk. 50,000 X 12 months)

(Assuming it as reasonable) Tk. 6,00,000/-

Less: allowance deduction: (1) Repairs and maintenance ¼ th of A.V

(2) Municipal tax (Tk. 20,000 / 2)= (As 50% of the house is self occupied)

(3) Insurance Premium (Tk. 12,000 / 2) = (4) Int. on House Building loan ( 1,47,000 / 2)=

Tk. 1,50,000/- Tk. 10,000/- Tk. 6,000/- Tk. 73,500/-

Tk. 2,39,500/- House Property Income Tk. 3,60,500/-

(d) Income from Partnership Firm: 50% share income from Partnership Firm (before tax) Tk. 1,50,000/-

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(e) Capital Gain (from sale of shares of listed companies): As it is tax free as per SRO No. 269 dated 01/07/2011

so it is not added with income --- Nil

f) Income from other sources:

(1) Cash dividend ---- (45,000 100/90) = Tk. 50,000/- Less: exempted up to = Tk. 10,000/-

Tk. 40,000/-

(2) Stock dividend { tax free as per section 2(26)} -- Nil (3) Bank Interest – (5,600 100/90)= Tk. 6,000/- (4) Income From Sub-let (Tk. 3,000 X 12) = Tk. 36,000/- Tk. 82,000/- Total Income = Tk. 10,90,500/-

Investment Allowance: (1) Contribution to Recognized P.F (both) -- (24,000 X 2) =

(2) Life Insurance Premium ( not allowable as it is in the name of old father)

(3) Donation to Prime Minister’s relief fund is not an item of 6th schedule (Part-B). So it cannot be considered as investment allowance.

(4) Investment in secondary share

Tk. 48,000/-

Nil

Nill

Tk. 1,00,000/-

Tk. 1,48,000/- Tax Computation:- On first Tk. 2,20,000/- Nil On next Tk. 3,00,000/- Tax @ 10% Tk. 30,000/- On next Tk. 4,00,000/- Tax @ 15% Tk. 60,000/- On balance Tk. 1,70,500/- Tax @ 20% Tk. 34,100/- Tk. 10,90,500/- Tk 1,24,100/- Less: Investment tax credit 1, 48,000 X 15% Tk. 22,200/- Tk.1,01, 900/- Less: Tax on Taxed Share income of Firm 1,01,900 X 1,50,000

10,90,500

Tk. 14,017/- Tk. 87,883/- Less: Tax deducted at sources:-

(1) TDS from cash dividend (2) TDS from Bank Interest

Tk. 5,000/- Tk. 600/-

Tk.5,600/- Net tax payment Tk. 82,283/-

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Solution of question No. 4. X Limited

Computation of Total Income For the year ended on 30th june-2013

(Assessment Year: 2013-14)

(1) Income from trading business: (Sec. 28) Net profit as per P/L :- Tk. 2,32,300/- Less: Non business income included in P/L for consideration at appropriate head of income: (a) Dividend Income (considering income from other sources) Tk. 30,000/- (b) Share premium (considering income u/s 82C) Tk. 30,000/- (c) Sundry Income (considering income from other sources) Tk. 13,000/- (d) Capital Gain from sale of machine (considering at

under Capital Gain head) Tk. 40,000/-

Tk. 1,13,000/- Tk. 1,19,300/- Add:- Expenditure to be considered as per tax law afterwards:-

(1) Entertainment (to be considered as per rule-65) Tk. 9,500/- (2) Deprecation (to be considered as per 3rd Schedule) Tk. 46,600/-

Tk. 56,100/- Tk. 1,75,400/-

Add:- Inadmissible Expense:-

(1) Rent and Taxes Tk. 24,500/-

As VAT Tk. 4,200 paid for importing machineries is

charged at P/L , so disallowed Tk. 4,200 being part

of capital expenditure. As the machine is not used

during the year, so no tax deprecation is allowable. Tk. 4,200/-

(2) Repairs and operating expenditure Tk. 27,300/-

Tk. 6,000 disallowed from here as it is not business

expenditure rather personal expenditure of M.D Tk. 6,000/-

(3) Legal Expenditure Tk. 14,500/-

Income tax related legal expenditure is allowable

up to appeal to the Taxes Appellate Tribunal. So as it is

allowable expenditure nothing to add back from here Nil

(4) Type Writer Tk. 5,948/-

Type writer machine is capital nature expenditure.

As it is charged at P/L as revenue expenditure, so

Disallowed fully. Tk. 5,948/-

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(5) Bad debit Provision Tk. 4,400/-

Disallowed fully being to provision (other than actual

bad debit) is allowable as per Sec. 29 Tk. 4,400/-

(6) Compensation for termination of staff Tk. 10,000/-

Assuming compensation paid for violation of job

agreement by the employer, so disallowed fully Tk. 10,000/-

Tk. 2,05,948/-

Add:- Demand income u/s 19 Bad debit recovered is to be treated as business income as per provision of section 19 (15) of ITO 1984 Tk. 2,000/- Tk. 2,07,948/- Less: Tax Depreciation (as per 3rd Schedule) Tk. 58,400/-

Profit before charging entertainment Tk. 1,49,548/- Less: Entertainment (as per Rule.65) Tk. 1,49,548 X 4% = Tk. 5,982/- But restricted up to actual expenditure. Here the actual expenditure claimed Tk. 9,500/-. Out of which Tk. 2000/- is unexplained and Tk. 5,276/- is personal expenditure. So after deducting these two, claim renains (Tk. 9,500 - 2,000-5,276/-)= 2,224/- As it is lower than the celling of Rule-65, so it is allowed Tk. 2,224/- Tk. 1,47,324/- Income u/s 82C (Share Premium) :

Tax @ 3% was collected by SEC and it is final settlement of tax liability. Tax rate is also 3% as per Sec. 16E Tk. 30,000/-

Capital Gain: Capital Gain from sale of machineries Tk. 40,000/-

Income From other source:

(1) Dividend Income Tk. 30,000/- (2) Sundry Income Tk. 13,000/-

Tk. 43,000/-

Total Income = Tk. 2,60,324/-

Tax Computation (1) On Income other than Capital gain, share premium and

dividend income @ 37.5 % (being non publicly traded company) (Tk. 2,60,324- 40,000-30,000-30,000)= 1,60,324 X 37.5% Tk. 60,122/-

(2) On share premium Tk. 30,000 @ 3% Tk. 900/- (3) On Capital Gain @ 15% (40,000 X 15%) Tk. 6,000/- (4) On Dividend @ 20% (30,000 X 20%) Tk. 6,000/-

Tk. 73,022/- Less: Tax credit on TDS on dividend @ 20% Tk. 6,000/- Tax Credit on Premium @3% Tk. 900/- (Assuming TDS was made as per law) Tk. 6,900/- Net Tax Liability Tk. 66,122/-

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Solution Question No. 5. Asa Electronics Calculation of Assessable Value: (10000x60x78) 4,68,00,000 Insurance 1% 4,68,000 4,72,68,000 Landing Charge 1% 4,72,680 Assessable Value for Duty 4,77,40,680

Customs Duty 12% 57,28,882 AIT 5% 23,87,034 Supplementary Duty 10% 53,46,956 (47740680+5728882 = 53469562) VAT 15% 88,22,478 (47740680+5728882+5346956 = 58816518) ATV 4% 29,80,115 (58816518 x 1.2667 = 74502883)

Total Duty & Tax Per unit Per Unit Material Cost for Input VAT (47740680+5728882+5346956) Total Tk. 5,88,16,518 10000 units 5,881.65

Value Addition per unit 40+200+100+80+200 620.00 Total Cost 6,501.65 Mark Up @ 20% 1,300.33 Price for VAT Form-1 before VAT 7,801.98 VAT 15% 1170.30 Sales Price per unit 8,972.28

Input VAT per unit 8822478+2980115 for Material Total Tk. 1,18,02,593 10000 units 1,180.26 200x15% Local Material B 3.00 Total Input VAT per Unit 1,183.26

VAT per unit Sales 1,170.30 Rebate per unit sales 1,183.26 Per unit VAT liability after covering input VAT (12.96)

= THE END =

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PROFESSIONAL LEVEL-III SUBJECT: 301. ADVANCED FINANCIAL ACCOUNTING-II

Model Solution Solution of question: 1 1(a):

MUTTAKEEN LTD Computation of Basic and Diluted EPS

Particulars For Basic EPS Adjustment for Dilution For Diluted EPS

1 2 3 4 = (2+3)

(i) Net Profit for the period attributable for Shareholders

EPS Tk.2 × 50,00,000 Shares

= Tk.100,00,000

Tax Adjusted Interest on Convertible Debentures

= Interest × (100% – Tax Rate)

= (10,00,000 × 10 × 12%) × (100% – 37.50%)

= 12,00,000 × 62.50%

=Tk. 750,000

=Tk. 107,50,000

(ii) Weighted Average No. of Ordinary Shares Given 50,00,000

10,00,000 × 1

= 10,00,000

60,00,000

(iii) EPS = (i) ÷ (ii) Basic EPS = Tk. 2.00 Diluted EPS =Tk. 1.79

1(b):

MONYEM PHARMA AID LTD. Statement of operation in different industry segments as per IFRS-8

Amount (Tk. in millions)

Particulars Food Products

Plastic and

Packing

Health and

Science Other Inter Segment

Elimination Consolidated

External Sales ………………………….. Inter Segment Sales ……………………

Total ……………………….. Segment Expenses ……………………..

Operating Profit ………………..

5,595 55

553 72

324 21

155 7

- (155)

6,627 -

5,650 (3,335)

625 (425)

345 (222)

162 (200)

(155) 122

6,627 (4,060)

2,315 200 123 (38) (33) 2,567 (562)

132 (65)

General Expenses ……………………………………………………………………………………………… Income from Investments ……………………………………………………………………………………… Interest …………………………………………………………………………………………………………… Income from continuing operations ……………………………………………………………… 2,072

Identifiable Assets …………………….. 7,320 1,320 1,050 665 -- 10,355 Corporate Assets ………………………………………………………………………………………………… 722 Total Assets ……………………………………………………………………………………………………………………………… 11,077

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Solution of question: 2.

MMH LTD Consolidated Statement of Financial Performance

for the financial year ended 30 June 2013

Particulars Notes Amount (Tk.)

Revenues from operating activities Sales ………………………………………………………….. (1) 10,40,000 Other ………………………………………………………….. (2) 150,800 11,90,800 Expenses from operating activities Cost of sales ………………………………………………… (3) 610,214 Other …………………………………………………………. (4) 443,850 10,54,064 Profit from operating activities before income tax …………………… 136,736 Income tax expense …………………………………………………….. (5) 39,248 Net profit ………………………………………………………………. 97,488 Net profit attributable to outside equity interests …………………….. given 8,625 Net profit attributable to members of the parent entity …….. 88,863 Total change in equity other than those resulting from transactions with owners as owners …………………………… Tk. 88,863

Notes:

(1) Sales revenue MMH Ltd

(Tk.) Muaz Ltd

(Tk.) Mahran

Ltd (Tk.) Total (Tk.)

Sales revenue Adjustment: Muaz Ltd to Mahran Ltd Mahran Ltd to MMH Ltd

400,000 350,000 320,000 10,70,000

(20,000) (10,000)

Tk. 10,40,000

(2) Other revenue

MMH Ltd

(Tk.) Muaz Ltd

(Tk.) Mahran

Ltd (Tk.) Total (Tk.)

Other revenue Adjustment: Dividend paid Muaz Ltd: 80% x Tk.2,500

80,000 70,000 50,000 2,00,000

(2,000) Dividend provided Muaz Ltd: 80% x Tk.5,000 = Tk.4,000 Mahran Ltd: 60% x Tk. 2,000 = Tk.1,200 Tk.5,200

(5,200) Sale of machinery: Mahran Ltd to MMH Ltd Proceeds of Sale/Other Revenue

(42,000)

Tk. 150,800

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(3) Cost of sales

MMH Ltd (Tk.)

Muaz Ltd (Tk.)

Mahran Ltd (Tk.) Total (Tk.)

Cost of sales ………………………………………… 210,000 252,000 185,000 647,000 Adjustment: Pre-acquisition At 1 July 2012: Inventory (cr.)Tk. 286 At 30 June 2013: Cost of Sales (cr.) Tk. 286

(286)

Unrealized profit in ending inventory: Muaz Ltd to Mahran Ltd Sales…………………………….. Dr Tk. 20,000 Cost of Sales…………………..…. ..Cr 27,000 Inventory……………………………... Cr 3,000 Deferred Tax Asset ………….............. Dr 900 Income Tax Expense (30% x Tk.3,000).Cr.900

(27,000)

Unrealized profit in ending inventory: Mahran Ltd to MMH Ltd Sales……………………………….. Dr 10,000 Cost of Sales……………………….. Cr 9,500 Inventory………………………………. Cr 500 Deferred Tax Asset ………………….. Dr 150 Income Tax Expense (30% x Tk.500) Cr 150

(9,500)

Tk. 610,214

(4) Expenses from operating activities: Other

MMH Ltd (Tk.)

Muaz Ltd (Tk.)


Other operating expenses …………………… 180,000 141,800 165,000 486,800 Adjustment: Pre-acquisition: Muaz Ltd - Mahran Ltd At 30 June 2013: Amortization Expense

760 Depreciation on machinery Depreciation Exp. (10% x Tk.1,500 p.a. ) / 2

75 Pre-acquisition: At 30 June 2013: Accumulated Depreciation-Plant

(171)

Pre-acquisition: At 30 June 2013: Accumulated Depreciation-vehicles

(114)

Sale of machinery: Mahran Ltd to MMH Ltd Proceeds of Sale/Other Revenue.. Dr 42,000 Machinery………………………… Dr 1,500 Carrying Amount of Machinery Sold Cr 43,500 Income Tax Expense……………… Dr 450 Deferred Tax Liability……………… Cr 450

(43,500)

Tk. 443,850

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(5) Tax Expenses

MMH Ltd (Tk.)

Muaz Ltd (Tk.)


Tax expense…………………………………………. 22,000 8,700 9,000 39,700 Adjustment: Pre-acquisition: At 30 June 2013: Income Tax Expense

86 Pre-acquisition: At 30 June 2013: Income Tax Expense

51

Pre-acquisition: At 30 June 2013: Income Tax Expense

34

Sale of machinery: Mahran Ltd to MMH Ltd Income Tax Expense

450

Unrealized profit in ending inventory: Muaz Ltd to Mahran Ltd Sales……………………………….. Dr 20,000 Cost of Sales……………………… Cr 27,000 Inventory Cr 3 000 Deferred Tax Asset……………….. Dr 900 Income Tax Expense………………Cr 900 (30% xTk.3,000)

(900) Unrealized profit in ending inventory: Mahran Ltd to MMH Ltd Sales…………………………………. Dr 10,000 Cost of Sales……………………….. Cr 9,500 Inventory…………………………….. Cr 500 Deferred Tax Asset …………………Dr 150 Income Tax Expense …………….Cr 150 (30% x Tk.500)

(150) Depreciation on machinery Depreciation Expense …………… Dr 75 Accumulated Depreciation …………Cr 75 (10% x Tk. 500 p.a.) / 2 Deferred Tax Liability……………….Dr 23 Income Tax Expense………..…… Cr 23 (30% x Tk.75 = Tk.23 rounded)

(23)

Tk. 39,248 Solution 3(a).

H. Ltd. (Tk. 000) Consideration 750 Plus non controlling interest (2000 x 30%) 600 1350 Less Net identifiable assets of F. Ltd. 2000 Gain on bargain purchase 650 The abridged consolidated statement of financial position at the date of acquisition will appear as follows: (Tk. 000) Assets = (8200 + Fair value of F. Ltd. 2800) Tk. 11,000 Share holders equity – (6000+650 gain included in P/L 6650 Non controlling interest 600 Liabilities = (2950 + 800) 3750 Total equities & liabilities Tk. 11,000

of 8

3(b)(ii) The first step in indentifying the reportable segments of in entity is to identify those which represent

at least 10% of any of the entity’s sales profit or assets. Exceeds of 10% of Quality Nature of business Total Sales

$ 1975 Total Profit/ absolute loss = $ 232

Total assets = 2303

Beer Yes Yes Yes Yes Beverage No No Yes Yes Hotel Yes Yes Yes Yes Retail Yes No No Yes Packaging Yes Yes Yes Yes Geographical Areas Find land Yes Yes Yes Yes Frame No No Yes Yes United Kingdom Yes Yes Yes Yes Australia Yes Yes Yes Yes

* The second step would be to check if total external revenue attributable to reportable segments constitutes at least 75% of the total consolidated or entity revenue of $ 13,613,000.

* As all operating segments qualify as reportable segments, the external revenue requirement of 75% is met.

* If that had not been the case, IFRS-8 would have required that additional operating segments be identified as reportable even they do not meet the 10% thresholds in step one.

Solution Question No. 4:

Required(i): Tk. in million

GDP at Market Price 37,250 Less Indirect taxes (6,550) Add: Subsidy 2,500 Add: Capital Grant 1,500 (2,550) GDP at factor cost 34,700 Required(ii): GDP at factor cost 34,700 Add the followings:- Property from abroad 1,730 Export 6,350 8,080 Less the followings:- Property from domestic 6,970 (8,200) NNP at factor cost 34,580 34,580 Required(iii): National Income (NI) NNP at factor costs 34,580 Less Capital Consumption (depreciation) 2,720 National Income 31,860

Solution No. 5(a)

Journal entries recorded by R & Co, for investment in S & Co. ordinary shares during 2012:

(1) Cash

4,000 Investment in S & Co. ordinary shares

4,000

(To record equity method dividend received from Subsidiary Tk. 5,000*0.8)

(2) Investment in S & Co. ordinary shares

6,400 Income from Subsidiary

6,400

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(To record equity method income of subsidiary Tk. 8,000*0.8)

(3) Income from Subsidiary

800 Investment in S & Co. ordinary shares

800

(To amortize differential related to building and equipment depreciation)

Additional computation: Investment in S & Co. Ordinary Shares

Balance, January 1, 2012

59,200 Reported income

6,400

Dividend Declared

(4,000) Depreciation Expense

(800)

Balance, December 31, 2012

60,800

Solution 5(b)

Eliminating Journal Entries needed to prepare consolidated financial statements. (a) Income from Subsidiary

5,600

Dividend declared

4,000 Investment in S & Co. ordinary shares

1,600

(To eleminate income from subsidiary) (b) Income to Noncontrolling Interest 1,620

Dividend declared

1,000 Noncontrolling Interest

620

(To assign income to noncontrolling interest: Subsidiary net income

8,000

Less: Ending inventory unrealized profit (2,000) Add; Beginning inventory realized profit 1,600 Add: Realized excess depreciation

500

8,100

Noncontrolling interest (20%)

1,620

('c) Ordinary Shares - S & Co.

20,000

Share Premium

4,000 Retained Earnings, January 1

43,000

Differentials

5,600 Investment in S &Co. ordinary shares

59,200

Noncontrolling Interest

13,400 (To eleminate beginning investment

in S & Co. ordinary shares) (d) Building & Equipment

8,000 Differential

5,600

Accumulated Depreciation

2,400 (To eleminate differential)

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(e) Depreciation expense

800 Accumulated Depreciation

800

(To amortize differential for depreciation) (f) Retained Earnings, January 1

1,280

Noncontrolling Interest

320 Cost of goods sold

1,600

(To eliminate beginning inventory profit: 1,600 x 80% = 1,280; and

1,600 x 20% = 320.) (g) Sales

9,000 Cost of goods sold

7,000

Inventory

2,000 (To eliminate upstream sale of inventory.)

(h) Building & Equipment


4,000


9,000 (To eliminate unrealized gain on equipment.)

(i) Accumulated Depreciation


500

Depreciation & amortization

500 (To eliminate excess depreciation on equipment.)

(J) Accounts Payable

2,000 Accounts Receivable

2,000

(To eleminate inter company receivable/payable)

Solution 5(c)

R & Co. with its subsidiary S & Co. Equity-Method Work Paper for Consolidated Financial Statements

For the year ended December 31, 2012 Holding Subsidiary Eliminations Group

Items R &Co. S & Co. Debit Credit Consolidated

Tk. Tk.

Tk.

Tk. Tk.

Sales

100,000 50,000 g) 9,000

141,000

Other income

4,080 6,000

10,080

Income from Subsidiary

5,600

a) 5,600

-

Credits

109,680 56,000

151,080

Cost of Goods Sold

83,200 40,400

(f) 1,600

(g) 7,000 115,000

Depreciation & Amortization

6,000 4,000 e) 800 (i) 500 10,300

Other Expenses

4,800 3,600

8,400

Debits

94,000 48,000

133,700

Income to Noncontrolling interests

b) 1,620

(1,620)

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Net income c/f

15,680 8,000 17,020 9,100 15,760

Retained Earnings, January 1

69,180 43,000 c) 43,000

f) 1,280

h) 4,000 (i) 500 64,400

Net income b/f

15,680 8,000

17,020

9,100 15,760

Dividend Declared

10,000) (5,000)

(a) 4,000

(b) 1,000 (10,000)

Retained Earnings, December, 31 c/f 74,860 46,000 65,300 14,600 70,160 Cash

26,060 2,000

28,060

Accounts Receivable

16,000 14,000

(j) 2,000 28,000 Inventory

34,000 22,000

(g) 2,000 54,000

Buildings & Equipments

120,000 80,000 (d) 8,000

h) 5,000

213,000

Investment in S & Co. Ordinary Shares 60,800

(a) 1,600

(c) 59,200 -

Differential

c) 5,600 (d) 5,600 -

Debits

256,860 118,000

323,060


62,000 24,000 i) 1,000 (d) 2,400

(e) 800

(h) 9,000 97,200

Accounts Payable

20,000 3,040 j) 2,000

21,040 Bonds Payable

60,000 20,000

80,000

Bond Premium

960

960

Ordinary Shares

40,000 20,000 (c) 20,000

40,000

Share Premium

4,000 (c) 4,000

-

Retained Earnings

74,860 46,000

65,300

14,600 70,160

Noncontrolling Interests

(f) 320 (b) 620

(c) 13,400 13,700

Credits

256,860 118,000

111,220

111,220 323,060

= THE END =

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA AUGUST 2013 EXAMINATION

PROFESSIONAL LEVEL-III SUBJECT: 302. ADVANCED COST ACCOUNTING

Page | 1

Model solution of question no. 01

Requirement 1(a):

Costs computed in a cost of production report are useful in determining inventory costs and in computing the cost of goods sold. Unit costs should compare with standard unit costs or previous data to determine whether they represent efficient operations. Also, materials, labor and overhead must be reported by items of materials used, type of labor operations involved and overheads incurred information is to be reported in a cost of production report are necessary but reports must also be designed to assist control of costs. Requirement 1.b (1):

Western Corporation Particulars Materials Units Conversion Cost

(Units) Transferred out 19000 19000 Less: Beginning Inventory (all units) 3000 3000 Started and finished this period 16000 16000 Add: Beginning Inventory (work this period)

1000 1500

Add: Ending Inventory 6000 4500 Equivalent Production 23000 22000 Working in process- Beginning Inventory Tk. 52,000 Cost added by department Materials Tk. 92,000 Direct labour Tk. 1,54,000 Factory overhead Tk. 1,98,000 Total cost to be accounted for Tk. 4,96,000 Miracle Mix: Particulars Units Unit Cost Amount Beginning Inventory 62,000 Tk. 1.00 Tk. 62,000 From December 12 purchase 21,200 Tk. 1.25 Tk. 26,500 Total December usage 83,200 Tk. 88,500 Bypro- from Beginning 50,000 Tk. 0.07 Tk. 3,500 Cost of materials added during December

Tk. 92,000

Fabricating Department Factory Overhead Tk. 1,32,000 Allocation of service department factory overhead: Maintenance Tk. 30,000 Time keeping and personnel Tk. 16,500 Others Tk. 19,500 Tk. 66,000 Cost of factory O/H during December Tk. 1,98,000



Page | 2

Requirement 1.b (2-ii): Materials (Tk. 92000/23000) Tk. 4.00 per unit Direct labour (Tk. 154000/22000) Tk. 7.00 per unit Factory Overhead (Tk. 198000/22000) Tk. 9.00 per unit Total Unit Cost Tk. 20.00 per unit Requirement 1.b (2-iii): Transferred to Finishing Department: From beginning inventory: Inventory, December 1 Tk. 52,000 Material added (3000 x 1/3 x Tk. 4.00) Tk. 4,000 Direct labour added (3000 x 1/2 x Tk. 7.00) Tk. 10,500 Factory Overhead added (3000 x 1/2 x Tk. 9.00) Tk. 13,500 Tk. 80,000 From current production: Units started and finished (16000 x 20) Tk. 3,20,000 Total cost of units transferred to Finishing Department Tk. 4,00,000 Work in process inventory, December 31: Material (6000 x Tk. 4.00) Tk. 24,000 Direct labour added (6000 x 3/4 x Tk. 7.00) Tk. 31,500 Factory Overhead added (6000 x 3/4 x Tk. 9.00) Tk. 40,500 Total Cost of Work in process inventory Tk. 96,000 Requirement 1.b (3): Equivalent Production: Material units Conversion cost units Transferred out 19,000 19,000 Ending Inventory 6,000 4,500 25,000 23,500 The total fabricating department cost to be accounted for is the same as shown in answer Unit cost for materials labor and factory overhead: Material :Tk. 13,000 + TK. 92,000 = Tk. 1,05,000; Tk. 1,05,000/25,000 = Tk. 4.20 per unit Labor :Tk. 17,500 + Tk. 1,54,000 = Tk. 1,71,500: Tk. 1,71,500/23,500 = Tk. 7.30 per unit Factory O/H:Tk. 21,500 + Tk. 1,98,000 = Tk. 2,19,500: Tk. 2,19,500/23,500 = Tk. 9.34 per unit Total Unit Cost = Tk. 20.84 per unit Cost of units transferred to Finishing Department:

19000 x Tk. 20.84 per unit = Tk. 395960. To avoid a decimal discrepancy, the cost transferred to the Finishing Department is computed as follows:

Tk. 496000- Tk. 100080 (Ending Work in Process inventory cost) = Tk. 395920 Cost of ending work in process inventory in the Fabricating Department: Work in Process Inventory, December 31: Material : (6000 x Tk. 4.20) Tk. 25,200 Labor : (6000 x 3/4 x 7.30) Tk. 32,850



Page | 3

Factory O/H : (6000 x 3/4 x 9.34) Tk. 42,030 Tk. 1,00,080 Solution to Question No. 2(b): Required: (i) Finishing is a bottleneck operation. Therefore, producing 1,000 more units will generate

additional throughput contribution and operating income. Increase in throughput contribution (720 – 320) x 1,000 Tk. 4,00,000 Incremental costs of Jigs and Tools Tk. 3,00,000 Net benefit of investing in Jigs and Tools Tk. 1,00,000

Ottobi should invest in the modern Jigs and tools because the benefit of higher throughput contribution Tk. 4,00,000 exceeds the cost of Tk. 3,00,000.

(ii) The Machining Department has excess capacity and is not a bottleneck operation.

Increasing its capacity further will not increase throughput contribution. Therefore no benefit from spending Tk. 50,000 to increase the Machining Department’s capacity by 10,00 units. Ottobi should not implement the change to do setups faster.

(iii) Finishing is a bottleneck operation. Therefore getting an outside contractor to produce

12,000 units will increase contribution: Increase contribution (720 – 320) x 12,000 Tk. 48,00,000 Incremental contracting cost 12,00,000 Net benefit Tk. 36,00,000

Ottobi should contract with an outside contractor to do 12,000 units for finishing at Tk. 100 per unit because the benefit of higher throughput contribution of Tk. 48,00,000 exceeds the cost of Tk. 12,00,000. The fact that the cost of Tk. 100 per unit is double Ottobi’s finishing cost of Tk. 50 per unit is irrelevant.

(iv) Operating costs in the Machining Department of Tk. 64,00,000 or Tk. 80 per unit, are fixed

costs. Ottobi will not save any of these cost by subcontracting machining of 4,000 units to Mumbai Corporation. Total cost will be greater by Tk. 1,60,000 (Tk. 40 x 4,000) under the subcontracting alternative. Machining more filling cabinets will not increase throughput contribution, which is constraints by the finishing capacity. Ottobi should not accept Mumbai’s offer. The fact that Mumbai Corporation’s cost of Machining per unit are half of what is costs Ottobi in house is irrelevant.

Model solution of the question no. 2(c) To record actual conversion costs: Conversion Costs Tk. 435,000 Various Accounts Tk. 435,000 To record finished goods: Finished Goods (7,900 x Tk. 200) Tk. 1,580,000 Inventory – Materials and In Process Control (7,900 x 115)

Tk. 9,08,500

Conversion cost allocated(7,900 x 85) Tk. 6,71,500



Page | 4

To record sale of 7,600 units: Cost of Finished Goods Sold (7,600 x 200) Tk. 1,520,000 Finished Goods Tk. 15,20,000 Solution to Question No. 3(b): Required: (i) A statement showing allocation of Joint Cost applying NRV method).

Product Output (In Gallon)

Selling Price (Per Gallon)

Gross Sales Value

Further Cost

NRV Share of Joint Cost

Gasoline 2,80,000 2.30 6,44,000 1,08,000 5,36,000 1,07,594 Heating Oil 3,40,000 2.00 6,80,000 62,000 6,18,000 1,24,054 Jet Fuel 2,00,000 2.80 5,60,000 80,000 4,80,000 96,352 16,34,000 3,28,000 (ii)

Eastern Refinery Co. Product Line Income Statement

Particulars Gasoline Heating Oil Jet Fuel Total Costs

Actual Sales 6,44,000 6,80,000 5,60,000 18,84,000

Joint cost 1,07,594 1,24,054 96,352 3,28,000 + Cost incurred 1,00,000 60,000 70,000 2,30,000 + Disposable cost 8,000 2,000 10,000 20,000 Total costs 2,15,594 1,86,054 1,76,352 5,78,000 Profit 4,28,406 4,93,946 3,83,648 13,06,000

Model solution of the question no. 3(c)

Cost reduction when

produced Revenue when sold

Sales: Lumber

Tk. 480,000

480,000

shavings(500 x 0.6) 3,000 Total Sales: 480,000 483,000 Cost of Good Sold: Total manufacturing costs By-product

332,000

4,080

332,000

0

Total COGS 327,920 332,000 Gross Margin 152,080 151,000



Page | 5

Model solution of the question no. 4(b) Requirement b(i): Total Revenue of the life cycle product sales:

1st Year- 2nd Year- 3rd Year- 4th Year- 5th Year-

3000X250= 4500X250= 4800X250= 5000X175= 1500X175=

Tk. 7,50,000 Tk. 11,25,000 Tk. 12,00,000 Tk. 8,75,000 Tk. 2,62,500

Total Tk. 42,12,500 Less desired profit:-

1st Year = 2nd Year = 3rd Year = 4th Year = 5th Year =

3000 (250 X 20%) = 4500 (250 X 20%) = 4800 (250 X 20%) = 5000 (175 X 20%) = 1500 (175 X 20%) =

Tk. 1,50,000 Tk. 2,25,000 Tk. 2,40,000 Tk. 1,75,000 Tk. 52,500

Tk. 8,42,500 Total Life Cycle Cost of the product - Tk.33,70,000 Less variable selling expenses = (18,800 X 30) = 5,64,000 Fixed selling expenses (3,50,000 X 5) = 17,50,000 23,14,000 Cost assigned to manufacture of 18,800 units- Tk. 10,56,000 Manufacturing cost per unit = (10,56,000 ÷ 18,800) = Tk. 56.17 Requirement b(ii): Cost to manufacturing of productions in 1st year = (3000 X 65) = Tk. 1,95,000. Cost remaining to last 4 years = (10,56,000 – 1,95,0000 = Tk. 8,61,000. Cost per unit = 8,61,000 ÷ 15,800 = Tk. 54.49 Requirement b(iii): Expected total manufacturing cost (18,800 X 70) = 13,16,000 Less calculated life cycle manufacturing cost = 10,56,000 Excess cost to be increased Tk. 2,60,000 Expected profit will = (8,42,500 – 2,60,000) = Tk. 5,82,500 Comment:- The company should reduce the variable cost by (5,64,000 – 2,60,000) = Tk. 3,04,000 to maintain the target profit margin or to increase the selling price in 4th and 5th year by the same amount Tk. 2,60,000 i.e. per unit sale price would Tk. 215 per unit.

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PROFESSIONAL LEVEL-IV SUBJECT: 401. FINANCIAL MANAGEMENT

Solution

Solution Question No. 1.

MN Ltd. Required-(a): Determination of β for each project. [ j Corjm ÷ m] Project (j) SD( ) Correlation with market (Corjm) SD( m) Beta (β)

1 15 0.55 13 0.63 2 20 0.75 13 1.15 3 14 0.84 13 0.90 4 18 0.62 13 0.86

or (20 x .75)/13 = 1.15 Return of the project by applying CAPM [Kef + (Km – Krf) β]

Project – 1. 5% + (14% - 5%) x .63 = 10.67% 2. 5% + (14% - 5%) x 1.15 = 15.35% 3. 5% + (14% - 5%) x .90 = 13.10% 4. 5% + (14% - 5%) x .86 = 12.74%

Return of the combined projects representing MN Ltd.’s total return Expected return* = (10%x.28)+(18%x.17)+(15%x.31)+(13%x.24) = 13.63% Return as per CAPM = (10.67%x.28)+(15.35 x.17)+(13.10x.31)+(12.74%x.24) = 12.72% * MN Ltd. Share price is currently based on assumption that the last five year’s experience

of returns will continue for the foreseeable future. The Shares are over valued because the return as per CAPM is less than the expected return. Required-(b): For the following reasons the results in (or) above might not correctly identify whether or not the share price of MN Ltd. is under valued or over valued. (i) The above required returns of the four projects are determined by applying Capital Asset

Pricing Model. CAPM is based on some unrealistic assumptions which are not always valid in the real world.

(ii) Beta is not always able to measure the risk of an investment and that the above there is significant correlation between beta and the expected return. Sometime, the empirical result gives a mixed result.

(iii) Most of the time beta is based on historical data due to unavailability of future data. (iv) Investor can use historical beta as the measure of future risk only if it is stable over time.

But in practice, the betas of individual securities are not stable over time. This implies that historical betas are poor indicator of the future risk of securities.

Solution Question No. 2. Required (i): Swap ratio:- Efficient Ltd. Healthy Ltd. (1) Market price per share (Market Capitalization/Nos. of Shares 50 100 (2) Earning per share = (Market price/P/E Ratio) 5 20 (3) Book value per share:- Share Capital (Tk. in lacs) 100 75 Reserves and surplus (Tk. in lacs) 300 165 Earnings for the year. (EPS x Nos. of Shares) 50 150 450 390 (4) Value for acquisition purpose:- Earnings = (5 x 40%); (20 x 40%) = 2 8

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Book value = (45 x 25%); (52 x 25%) = 11 13 Market price = (50 x 35%); (100 x 35%) = 18 35 31 56 (5) Total value of the company = (Nos. of shares x value of acquisition per share). (6) Nos. of shares to be given to Healthy Ltd. Shareholders’ = (750,000 x 56)/31 = 13,54,839 Swap ratio = Efficient Ltd. 13,54,839 = Healthy Ltd. 750,000 shares. Promoters holders% Efficient Ltd. Healthy Ltd. Total

Promoters share

000,750

839,54,13000,500 x

4.75,000 9,03,226 13,78,226

Other share holders 525,000 4,51,613 9,76,613 10,00,000 13,54,839 23,54,839 Promoters holding % 47.50% 66.67% 58.53% Required (ii): EPS of Efficient Ltd. after acquisition Earning per share before acquisition = (Market price / P/E Ratio) [(500 / 10) ÷ 10] 5 Earnings:- Efficient Ltd. (before acquisition) 50,00,000 Healthy Ltd. 1,50,00,000 2,00,00,000 Nos. of shares out standing 23,54,839 EPS Tk. 8.49 per share Required (iii): Expected market price per share = EPS x P/E ratio = (8.49x10) = Tk. 84.9 Expected market capitalization = [23,54,839 x 8,493] = Tk. 200,00,000. Answer to the Question No. 3 (a) Calculation of EpS, DpS and gearing at both book values and market values EpS Notes/workings Share in issue(million) 350 Earnings in year ended 31.03.13(Tkm)

280

EpS 0.800 =280/350 DpS Share in issue(million) 350 Dividend paid in year (Tkm) 89.6 DpS 0.256 = 89.6/350 Gearing at book values Debt(Tkm) 550 Less: Surplus cash(Tkm) (110.40) =215-89.6-15 Net Debt(Tkm) 439.60 =550-110.4 Equity(Tkm0 1,210.40 =350+950-89.6 Gearing at Book Value 26.60% =439.60/(439.6+1210.40) Gearing at matket values Debt(Tkm) 550 Less: Surplus cash(Tkm) (110.40) =215-89.6-15 Net Debt(Tkm) 439.60 =550-110.4 Equity(Tkm) 1,583.4 =(350 x 4.78)-89.6

Or 350 x ex-div share price of 4.524

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(Where 4.524 = 4.78-0.256) Gearing at Market Value 21.70% =439.60/(439.6+1,583.40) (b) Calculation of likely impact of the three proposed strategies for dealing with surplus cash Assumption All the surplus cash of Tk 110.40 million is used either to repurchase shares or to pay bonuses. (Alternative assumptions were also acceptable) Preliminary workings Based on an ex div share price of 4.524 (=4.78-0.256), the number of share to be repurchased is 24.40 million ( = 110.4m/4.524), leaving 325.60 million shares in issue. 1.Holding onto

Cash 2. Repurchase Shares

Pay Bonuses

EpS No Change 280.00 169.60 (=280-110.4) Number of Shares(m) 325.60(Workings) 350.00 New EpS 0.800 0.860 0.485(single year

impact) Previous EpS 0.800 0.800 0.800 Impact Nil Up 0.06 long term Down 0.315 in that year DpS Dividend(Tkm) No Change 89.60 No Change Number of Shares(m) 325.60 New DpS 0.256 0.275 0.256 Previous DpS 0.256 0.256 0.256 Impact Nil Up 0.02 Nil Gearing at Book Value Net Debt (Tkm) No Change 550.0

(No surplus cash) As for share repurchase

Equity (Tkm) 1100.00 =350+950-89.6-110.4

New gearing 26.60% 33.30% 33.30% Previous gearing 26.60% 26.60% 26.60% Impact Nil Up by 6.70% Up by 6.70% Gearing at Market Value

Net Debt (Tkm) No Change 550.0 As for share repurchase Equity (Tkm) 1,473.00

=(350 x4.78)-89.6-110.4)

New gearing 21.70% 27.20% 27.20% Previous gearing 21.70% 21.70% 21.70% Impact Nil Up by 5.5% Up by 5.5% (C) Evaluate impact on attainment of financial objectives and on shareholder wealth

1. Retain Cash Three reasons or motives have been advanced for individuals and companies to hold cash –transaction, speculative and precautionary. Each is commented on briefly below:

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• The transaction reason –if SRP has sufficient cash to meet day to day transactions it has no need of additional cash for this reason.

• The speculative motive would allow the company to take advantage of opportunities such as buying assets at temporarily favourable prices or making an investment. This would be a logical reason for SRP to hold cash even if it has no potential immediate investment opportunities.

• The precautionary motive would allow SRP to maintain a safety cushion or buffer to meet unexpected cash needs. Given the long term nature of SRP’s contracts, its cash flow is fairly predictable so less cash is needed for precautionary needs. However, the surplus cash is approximately equivalent to just one year’s dividend payment and so may not seem to be an excessive cash buffer.

On the downside, shareholders are missing out on the income that they could obtain by investing the funds elsewhere. With 5.3% of total assets held in the form of surplus cash (where 5.3% = Tk 110.4 million/ Tk. 2,075 million x 100%) and therefore earning little or no return, shareholders will prefer to be given the cash back so that they can invest it elsewhere and enhance their returns. However, if SRP thinks investment opportunities might be available in the not too distant future; shareholders may be willing to forego receiving the cash now in the expectation of even greater returns in the future.

2. Share repurchase The advantage to shareholders is that selling shares back to the company allows them to raise cash with no transaction costs. Not all will want to sell, but SRP is only aiming to purchase around 7% of the shares in issue. The make-up of the shareholders is relevant here in terms of the potential success of any repurchase scheme, as institutional investors are far less likely to participate in a share repurchase than smaller scale investors as they tend to be more concerned with regular income. However, 30% of the shares are held by small investors who might welcome the chance to realise their investment. The advantage to the company in the long term is an opportunity to increase DpS at the same total level of dividend payment or, alternatively, keep DpS at the same level and reduce total dividend payments, retaining cash for future investment. EpS will similarly increase due to the lower number of shares. Shareholder wealth should not be affected, their share holding will be worth less (reflecting fewer shares) but they are now holding additional cash. If this cash can be invested profitably, this should lead to an increase in shareholder wealth in the medium term. However, there is an almost inevitable trade-off between risk and reward here. The riskiness of the equity will increase due to the higher gearing levels. Gearing will increase from 26.7% to 33.3% based on book values. The share repurchase is unlikely to have much effect on the overall cost of capital as the increased use of lower cost debt is likely to be offset by higher returns required on equity. The tax benefit of debt is not relevant as there is no impact on gross debt here. On a practical note, the company’s articles of association must be checked to ensure they permit a share repurchase.

3. Bonuses to directors and employees The payment of bonuses reduces shareholder wealth (and reserves) by the amount paid out. It is of little benefit to shareholders unless it leads to the retention of key employees or leads to higher profits as a result of more highly motivated staff in the future. In either

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case, a long term bonus plan is likely to be of more benefit to the company than large one-off payments at this time. The directors’ bonuses need to be referred to a remuneration committee before amounts are determined. Indeed, director bonuses need also to be approved by shareholders, something that is not always guaranteed, as has been seen in the UK in the recent past. Gearing would increase to 33.3% (based on book values and using 31 March 2013 figures) due to an increase in net debt and a decrease in reserves –the same effect as for under the share repurchase. But for a manufacturing company with substantial assets this is still a modest rate. SRP should consider amending its gearing objective from 30% to, say, 35%.

Answer to the Question No. 4 4(a) A break point will occur each time a low –cost type of capital is used up. We establish the break points as follows after first noting that LEI has Tk. 24,000 of Retained Earnings:

Retained earnings = (Total earnings)(1-payout) = Tk. 34,285.72 x 0.7 Breaking point =

Capital Used Up Break Point Calculation Breaking Number Retained Earnings BPRE = = Tk. 40,000 2

10% floatation common BP10%E = = Tk. 60,000 4

5% floatation preferred BP5%P = = Tk. 50,000 3

12% Debt BP12%D = = Tk. 20,000 1

14% Debt BP14%D = = Tk. 40,000 2

Summary of Break Points

(1) There are three common equity costs and hence two changes and, therefore, two-equity-induced breaks in the MCC. There are two preferred costs and hence one preferred break. There are three debt costs and hence two debt breaks.

(2) The number in the third column of the table designate the sequential order of the breaks, determined after all the break points were calculated. Note that the second debt break and the break for retained earnings both occur at Tk. 40,000

(3) The first break point occurs at Tk. 20,000, when the 12% debt is used up. The second break point, Tk. 40,000, results from using up both retained earnings and the 14% debt. The MCC curve also rises at Tk. 50,000 and Tk. 60,000 as preferred stock with a 5% flotation cost and a common stock with a 10% floatation cost, respectively are used up.

4(b) Common costs within indicated total capital intervals are as follows: Retained Earnings (used in interval Tk. 0 to Tk. 40,000):

ks = + g = = + 0.09 = 0.0654 + 0.09 = 15.54% Common with F = 10%( Tk. 40,0001 to Tk. 60,000) : ke = + g = + 9% = 16.27%

Common with F = 20%( Over Tk.60,000) :

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ke = + 9% = 17.18%

Preferred with F = 5%( Tk. 0 to Tk. 50,000) : kp = + g = = 11.58%

Preferred with F = 10%( Over Tk. 50,000) : kp = = 12.22%

Debt at kd = 12%(Tk.0 to Tk. 20,0000) kdt = kd(1-T) = 12%(0.6) = 7.20% Debt at kd = 14%(Tk. 20,001 to Tk. 40,0000) kdt = kd(1-T) = 14%(0.6) = 8.40% Debt at kd = 16%(over Tk. 40,0000) kdt = kd(1-T) = 16%(0.6) = 9.60%

4(c) WACC calculations within indicated total capital intervals: (1) Tk 0 to Tk. 20,000 (debt = 7.2%, preferred = 11.58% and retained

earnings = 15.54%) WACC1 = Wd kdt + Wp kp + Ws ks

= 0.25(7.2%) + 0.15(11.58%) + 0.60(15.54%) = 12.86%

(2) Tk 20,001 to Tk. 40,000 (debt = 8.4%, preferred = 11.58% and

retained earnings = 15.54%) WACC2 = 0.25(8.4%) + 0.15(11.58%) + 0.60(15.54%) = 13.16%

(3) Tk 40,001 to Tk. 50,000 (debt = 9.6%, preferred = 11.58% and equity = 16.27%) WACC3 = 0.25(9.6%) + 0.15(11.58%) + 0.60(16.27%) = 13.90%

(4) Tk 50,001 to Tk. 60,000 (debt = 9.6%, preferred = 12.22% and equity = 16.27%) WACC4 = 0.25(9.6%) + 0.15(12.22%) + 0.60(16.27%) = 14.000%

(5) Over Tk. 60,000 (debt = 9.6%, preferred = 12.22% and equity = 17.18%) WACC5 = 0.25(9.6%) + 0.15(11.58%) + 0.60(17.18%) = 14.54%

4(d) IRR calculation for Project E

PVIFAk,6 = = 3.6847 This is the factor for 16 percent , so IRRE=16%

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4(e) LEI should accept Projects B, E and C. It should reject Projects A and D because their IRRs do not exceed the marginal costs of funds needed to finance them. The firm’s capital budget would be total Tk. 40,000. Answer to the Question No. 5 5(1)

=

2.5 = CL = CA Working capital = CA-CL = 1,56,000

Or 2.5 CL-CL = 1,56,000

Or CL = = 1,04,000

CA = 2.5 CL = 1,04,000 x 2.5 = 2,60,000

= 1.5

Or = 1.5

Or Quick Assets = 1.5 x 80,000 = 1,20,000

Closing Stock = CA – Quick Assets = 2,60,000 – 1,20,000 = 1,40,000

Opening stock = x 1,40,000 = 1,12,000

(as closing stock is 25% higher than opening stock)

Av stock = = 1,26,000

Cost of sales = Av. Stock x stock velocity = 5 x 1,26,0000 = 6,30,0000

Gross profit = 20% of sales i.e. 25% of cost of sales = 25% of 6,30,0000 = 1,57,500

Sales = cost of sales + gross profit = 6,30,000 + 1,57,500 = 7,87,5000

Net profit = 10% of 7,87,500 = 78,750 Debtors velocity = 1 month

= 65,625

Propriety Ratio = = 0.6 i.e.

= 0.4

Equity = = 3,90,0000

Fixed Assets = 3,90,0000 x 0.6 = 2,34,000 Cash at Bank = Quick Assets – Debtors

= 1,20,000 – 65,625 = 54,375

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Balance Sheet as on 31.12.2012 Tk Tk

Share Capital 2,00,000 Fixed Assets 2,60,000 Less : Dep 26,000 2,34,000 Reserve and Surplus 1,11,250 (Bal Fig) Retained Earnings 78,750 1,90,0000 Current Assets Equity 3,90,0000 Stock 1,40,000 Current Liabilities Debtors 65,625 Creditors 80,000 Cash at Bank 54,375 2,60,000 Bank OD 24,000 1,04,000 4,94,000 4,94,000

Balance Sheet as on 31.12.2013

Tk Tk Share Capital 2,00,000 Fixed Assets 2,34,000 Add: Additions 40,000 Reserve and Surplus 2,74,000 General Reserve 1,11,250 Less : Dep 40,000 2,46,600 Retained Earnings 78,750 Net Profit 1,13,695 1,92,445 Current Assets Stock 1,80,000 Debtors(1/12 of sales) 75,797 Current Liabilities Cash at Bank 1,06,298 Creditors 1,00,000 3,62,095 Bank OD 5,000 1,05,000 6,08,695 6,08,695

Income Statement for the year ended 31.12.2013 Tk Tk

Sales 7,87,500 Add: Volume increase 10% 78,750 8,66,250 Add: Price Increase 43,312 9,09,562 Cost of goods sold: Opening Stock 1,40,000 Add : Purchase (Bal Fig) 7,22,172 Cost of goods available for sale 8,62,172 Less : Closing Stock 1,80,000 6,82,172 Gross Profit (25% of sales) 2,27,390 Expenses Depreciation 27,4000 (10% on [ 2,34,000 + 40,000] Expenses (Bal Fig) 86,295 1,13695 Net Profit(12.5% on sales 1,13,695

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PROFESSIONAL LEVEL – IV SUBJECT: 402.STRATEGIC MANAGEMENT ACCOUNTING

Solutions to the questions

Solution to Question No. 1. (a) No, not all fixed costs are sunk- only those for which the cost has already been irrevocably incurred.

A variable cost can be a sunk cost, if it has already been incurred. (b) No, a variable cost is a cost that varies in total amount in direct proportion to changes in the level of

activity. A differential cost measures the difference in cost between two alternatives. If the level of activity is the same for the two alternatives, a variable cost will be unaffected and will be irrelevant.

(c) Test for optimality: number of allocation = m+n-1 where there are m rows and n columns. The allocations are independent i.e. if no loop can be formed by them. Here, No. of factories + No. of destination + dummy-1 = m+n+1 - 1 = 3+4+1 -1 = 7. Hence, there should be exactly 7 allocations.

Solution to Question No. 2(a).

(i) The transfer price of Tk.750 proposed by the IT division is based on cost plus 150% from which it

can be deducted that the total cost of a consulting day is (100/250) x Tk.750 = Tk. 300. This comprises Tk.240 (80%) variable cost and Tk.60 (20%) fixed cost. In this instance the transfer price should be set at marginal costs plus opportunity cist. It is assumed in this situation that transferring internally would result in the IT division having a lost contribution of Tk.750 – Tk.240 = Tk.510 per consulting day. The marginal cost of the transfer of services to the HR division is Tk.190 (Tk.240 external variable cost less Tk50 saving due to use of internal video-conferencing equipment). Adding the opportunity cost of Tk.510 gives a transfer price of Tk.700 per consulting day. This is equivalent to using market price as a basis for transfer pricing where the transfer price is set at the external market price (Tk.750) less any costs avoided (Tk50) by transferring internally.

(ii) There is in effect on external market available for one of the required pairs of consultants within the IT division and therefore opportunity cost will not apply and transfers should be made at the variable cost per consulting day of Tk.190. The other pair of consultants, who would be 100% utilized in providing consulting services to external clients, should be charged at a rate of Tk.700 per day which represents marginal cost plus opportunity cost.

(iii) The lost contribution from the major client amounts to Tk.2,64,000/(2x240) =Tk.550 less variable costs of Tk.240 = Tk.310 per consulting day. Thus, in this instance the transfer price should be the contribution foregone of Tk310 plus internal variable costs of Tk.190 making total of Tk.500 per consulting day.

Solution to Question No. 2(b). Negotiated transfer prices suffer from the following limitations: - The transfer price which is the final outcome of negotiations may not be close to the transfer price

that would be optimal for the organization as a whole since it can be dependent on the negotiating skills and bargaining power of individual managers.

- They can lead to conflict between divisions which may necessitate the intervention of top management to mediate.

- The measure of divisional profitability can be dependent on the negotiating skills of managers who may have unequal bargaining power.

- They can be time-consuming for the managers involved, particularly where large numbers of transactions are involved.

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Solution to Question No. 3(a) In traditional cost systems, product-level costs are indiscriminately spread across all products using direct labor-hours or some other allocation base that is tied to volume. As a consequence, high-volume product are designed the bulk of such costs. If a product is responsible for 40% of the direct labor in a factory, it will be assigned 40% of the manufacturing overhead cost in the factory- including 40% of the product level costs of low-volume products. In an activity based costing, batch level and product level costs assigned are more appropriate. This results in shifting product-level costs back to the products that cause them and away from the high-volume products. (A similar effect will be observed with batch-level costs if high-volume products are produced in larger batches than low volume products). Solution to Question No. 3(b) Working Notes: (i) Overhead costs Tk.

Set-up 20,500 Inspection 146,000 Machines 284,000 Selling 324,000 Total 774,500 As per conventional system, total O/H of Tk.774,500 is to be allocated on the basis of no. of units sold i.e. in the ratio of 50 : 112 : 54 or 50/216, 111/216 and 54/216.

(ii) P Q R Overheads (Tk.) 179,282.41 401,592.59 193,625.00 Gross units / production run 5040 5620 6020 Defective units / production run 40 20 20 Good units / production run 5,000 5,600 6,000 Sale of good units 50,000 112,000 54,000 No. of production runs 10 20 9 Gross production required (units) 50,400 112,400 54,180 Prime cost (Tk.) 50,400 × 12 112,400 × 9 54,180 × 8 = 604,800 = 1,011,600 = 433,440

(i) Statement of profitability as per conventional system Products P Q R (Tk.) (Tk.) (Tk.) Sales value 50,000 × 18 = 112,000 × 14 = 54,000 × 12 = 900,000 1,568,000.00 648,000.00 Prime cost 604,800.00 1,011,600.00 433,440.00 Overheads 179,282.41 401,592.59 193,625.00 Total cost 784,082.41 1,413,192.59 627,065.00 Profit 115,917.59 154,807.41 20,935.00 Working notes for ABC System:

(i) Set up cost / production run P Q R 400 600 500 Total set up cost (20,500) 400 × 10 = 600 × 12 = 500 × 9 = 4,000 12,000 4,500 Set up O/H of Tk.20,500 & cost driver is set up cost 4,000 12,000 4,500

(ii) Inspection hours / prod. Run 6 8 8 Total inspection hours (total 292) 6 × 10 = 60 8 × 20 = 160 8 × 9 = 72 Inspection cost 1,46,000 & cost driver is inspection hours (Tk.) 30,000 80,000 36,000

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(iii) Machine hours / prod. run 40 24 60

Total machine hours (Total 1420) 40×10 = 400 24×20 = 480 60×9 = 540 Machining cost 2,84, 000 & cost driver machine hours 80,000 96,000 1,08,000

(iv) Total selling O/H Tk.3,24,000 Advertisement cost 1,66,000 to be allocated to Q & R in ratio of sales units 112 : 54 =166 -- 1,12,000 54,000 Special packing only for Q -- 1,08,000 --

Balance (324,000 – 166,000 – 108,000) = 50,000 to be allocated in sales units 50 : 112 : 54 = 216 11,574 25,926 12,500 11,574 2,45,926 66,500

(ii) Statement of profitability as per ABC system Products P (Tk.) Q (Tk.) R (Tk.) Sales value 900,000 1,568,000 648,000 Prime cost 604,800 1,011,600 433,440 Set-up cost 4,000 12,000 4,500 Inspection cost 30,000 80,000 36,000 Machining cost 80,000 96,000 108,000 Selling cost 11,574 245,926 66,500 Total cost 730,374 1,445,526 648,440 Profit 169,626 122,474 (440)

Solution to Question No. 4(a). Evaluation of managerial performance should include all elements in the division that management can control. The degree of autonomy enjoyed by a division will determine the control that managers maintain over pricing investment and other factors that affect profit.

(i) Contribution:

The division has contributed BDT 119,000 to the central costs and profit of the Group, but this is below the budget. The responsibility of management for this deficit depends on the influence that divisional managers can exercise over Sales, marketing and costs and whether the budget used as a yardstick was attainable in realistic terms. Contribution does not take into account the assets under the control of divisional management and cannot comment on the return on investment needed to earn that return. Management of Chocolaty division could increase the contribution by the wasteful investment of group funds at returns below the cost of capital without suffering any penalty if this method were used to evaluate their performance.

(ii) Net Income

This measure of performance shows only a small net profit for the division. As a performance evaluator it fails to set return against investment and also includes, head office charges, which are outside the control of divisional management.

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(iii) Return on investment

Net Income 12x BDT 19000

—————— = ———————- = 80%

Investment Rs. 2850000

Compared to the cost of capital 15% this return is not good. However for evaluation of managerial performance centrally administered assets and allocated head office costs should not be included in the analysis. Therefore the figures could be.

Rs. 119000 x 12

———————— = 51%

Rs. 2780000

The measurement of profit and investment may be made in ways that lead to unreliable conclusions from ROI. e.g. historic costs of assets against current cost revenue. Decisions that maximize ROI may not necessarily be best for the group as a whole.

(iv) Residual Income

Residual Income is the income remaining after deducting a charge for the use of funds invested in the decisions based on the cost of capital.

Net Profit BDT. 19,000

Investment charge BDT. 35,625 BDT. 2850000 x 0.15

Residual Income BDT. (16625) 12

Management are not making sufficient return to service group funds allocated to the division at the group cost of capital. However, if head office expenses and centrally administered assets are excluded, a divisional residual income can be calculated relating to factors that divisional managers can influence.

Residual Income

Net profit 119000

2780000 x 0.15 Investment charge 34750 ————————— 12 Residual Income BDT. 84250

Solution to Question No. 4(b)

Managerial performance can be evaluated by using absolute measures of “contribution” or “net income” or by using relative measures of “ROI (return on investment” or “return on equity (ROE)” or “return on capital employed (ROCA)”. However, economic performance is evaluated by using “RI (residual income)”. Managerial performance is worse than budget using “contribution” and “net income”. ROI is even worse in comparison to cost of capital. But economic performance is to some extent good on the basis of divisional traceable assets.

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Solution to Question No. 5(a) No, of the profitability index is less than 1.00, then the net present value of the project is negative, indicating that it does not provide the required minimum rate of return. So, profitability index less than 1.00 be an unacceptable investment. Solution to Question No. 5(b) (i) Calculate of expected net present value:

Sales volume = 3,200 units. Tk. Sales revenue per unit 2,500 Variable costs per unit 1,640 Contribution per unit 860 Total contribution = (3,200 x 860) = Tk. 27,52,000 – fixed overheads Tk.9,00,000 = Tk.18,52,000 less taxation (at 30%) Tk. 5,55,600 = Tk.12,96,400 Net present value at a discount rate of 11% per annum = (Tk.12,86,400 x 4.231) – (Tk.50,00,000 x 50%) = Tk.29,85,068. The project should be undertaken by the directors of ITL. Note: - Variable cost per unit = Tk.1,490 + Royalty Tk.150 = Tk.1,640 - Tk.2,00,000 already spent on market research is a sunk cost and therefore not included in

the calculation of the expected net present value of the Snowballer proposal. - A real discount rate of 11% has been used. It has been calculated as follows: ((1 + nominal

cost of capital)/(1 + rate of inflation)) – 1 = 1.1544/(1+0.04) = 1.11 – 1 = 0.11 or 11%. (ii) The level of annual contribution at which NPV will be equal to zero can be calculated using the

formula (1 – t) 4.231 x – initial investment – fixed overheads (1 – t) 4.231 = 0, where t is the rate of corporate tax and x = annual contribution. This gives: (1 – 0.30) 4.231x – Tk.25,00,000 – (9,00,000 (t – 0.30)4.231) = 2.9617x = Tk.25,00,000 + 26,65,530 x = Tk.17,44,110

This shows the annual contribution can decline from the existing level of Tk.27,52,000 to Tk.17,44,110. This represents a percentage decrease of 36.62% (10,07,890/27,52,000) x 100%. The 4.231 in the above formula represents the cumulative discount factor for six years at a rate of 11% per annum. Tk.25,00,000 represents the investment outlay net of the government grant.

(iii) The life cycle of the Snowballer: Tk.

NPV of year 1 net cash flow = Tk. 12,96,400 x 0.901 = 11,68,056 NPV of year 2 net cash flow = Tk. 12,96,400 x 0.812 = 10,52,677 Total for year 1 and 2 22,20,733 Investment outlay (net) 25,00,000 NPV required in year 3 in order to achieve a zero NPV 2,79,267 However, if fixed overheads are incurred in year 3 irrespective of the sales life of the Snowballer then discounted fixed costs amounting to Tk.4,60,530 (Tk.9,00,000 x 0.7 x 0.731) would be incurred. Hence discounted contribution required in order to achieve a zero NPV would amount to Tk.2,79,267 + Tk.4,60,530 = Tk.7,39,797. The total discounted contribution for the whole of year 3 amounts to Tk.27,52,000 x 70% x 0.731 = Tk.14,08,198. Hence the reduction in year 3 life allowable in year 3 = (14,08,198 – 7,39,797) / 14,08,198 = 47.46% (say 47% approximately). So the life cycle required during year 3 = 53% or (0.53 of the year). This means that 2 + 0.53 = 2.53 years are required to produce an overall NPV = 0. Hence the fall in the life cycle of the project (for an overall NPV = 0) = 6 – 2.53 = 3.47 years or 3.47/6 = 57.8 (which is the sensitivity measure).

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(iv) Factors that should be considered by the directors of ITL include:

- The cash flows are estimated. How accurate they are requires detailed consideration. - The cost of capital used by the finance director might be inappropriate. For example if the

Snowballer proposal is less risky than other projects undertaken by ITL than a lower cost of capital be used.

- The rate of inflation may vary from the anticipated rate of 4% per annum. - How strong is the Olympic brand name: The directors are proposing to pay royalties

equivalent to 6% of sales revenue during the six years of the anticipated life of the project. Should they market the Snowballer themselves?

- Would competitors enter the market and what would be the likely effect on sales volumes and selling prices?

== THE END ==

Cma August 2013 Solution

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