FALL 2013 (FEBRUARY 2014) EXAMINATIONS

Tuesday, the 18th February 2014

STRATEGIC MANAGEMENT
ACCOUNTING (AF-601)

ICMA.
Pakistan
Extra Reading Time:
Writing Time:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)

15 Minutes
03 Hours

SEMESTER-6
Maximum Marks: 100

Roll No.:

Attempt all questions.

Answers must be neat, relevant and brief.
In marking the question paper, the examiners take into account clarity of exposition, logic of arguments,
effective presentation, language and use of clear diagram/ chart, where appropriate.
Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper.
Use of non-programmable scientific calculators of any model is allowed.
DO NOT write your Name, Reg. No. or Roll No., or any irrelevant information inside the answer script.
Question Paper must be returned to invigilator before leaving the examination hall.

Answer Script will be provided after lapse of 15 minutes Extra Reading Time (9:15 a.m. or 2:15 p.m. [PST] as the case may be).

Marks
Q. 1

Stylish Furniture Ltd., is enjoying a good reputation for its quality products. The company has
its own manufacturing plant but it also outsources a good number of furniture products and
also runs a sales outlet in the posh area of Islamabad. The company is run by its Managing
Director Mr. Adeel Hashmi, who is also having 60% stake in the company.
You have been recently employed by Business Solutions Ltd., an Islamabad based
Consultancy Company of management accountants. The company provides a variety of
services like, preparation of accounts, conducting the audit, providing the IT solution, dealing
with income tax and sales tax matters and carrying out the feasibility studies.
Managing Director, Mr. Adeel Hashmi, has sought the professional advice of your company,
Business Solutions Ltd., and asks for a meeting to deliberate upon the following plans/
proposals:

Production and sales plan.

Expansion of its Bed Departments sales outlet.

Negotiation of purchasing a running furniture outlet in New City, 60 kilo-meters from

Islamabad.
In this connection, you have been detailed to take care of all the queries of your client.
Production and Sales Plans
The Managing Director has shown his concern about the firms inability to meet the
forecasted product demand during the meeting with you. The sales of Stylish Furniture Ltd.,
have been increasing rapidly during past 3 years, and the company only has one plant with a
production capacity of 159,400 machine hours per year.
The sales and production data for the next year is as under:
Product-A
Product-B
Product-C
Product-D
(i)

Rupees/ unit

Estimated Sales (Units) Selling Price Direct Materials Direct Labour

70,000
160
24
64
60,000
264
40
112
110,000
126
18
48
92,000
287
29
120

The direct labour rate is Rs. 160 per hour and variable manufacturing overhead costs are
25% of direct labour costs.

(ii) Annual fixed manufacturing overhead costs are Rs. 1,360,000 and all selling and
administrative expenses are fixed amounting to Rs. 620,000 for the year.
(iii) The same equipment and workers are used for all four products. The 159,400 machine
hours available annually are operated during a single shift from 7:00 am to 4:00 pm each
day with one hour lunch break. One hour of direct labour is required for each machine
hour.
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Later on Sales Manager of Stylish Furniture Ltd., joined the meeting and stated that at least
50,000 units of Product-B must be produced for customers who want to buy the full-range
from the company.
Acquiring the Dream Beds Company
During the meeting, with Mr. Adeel Hashmi, the following latest income statement of Dream
Beds Company has been provided to you:
Dream Beds Company
Statement of Profit or Loss
as at June 30, 2013
Model - Sales
Model-L
Model-M
Model-N
Turnover
Expenses:
Cost of beds
Sales commission
Delivery expenses
Rates and insurance
Light heat and power
Assistants salaries
Managers salary
Net (loss)

Units
1,620
2,160
1,620
Rs.
3,240,000
421,200
432,000
16,900
20,000
80,000
80,000

Rupees
673,920
1,516,320
2,021,760
4,212,000

4,290,100
(78,100)

The following additional information has also been provided:

(i)

Dream Beds Company sells three types of bed, Model-L, Model-M and Model-N and the
sale price of each model of beds is determined by adding 30% to the cost of beds.

(ii) Sales assistants receive a commission of 10% of the selling price for each bed sold and
the beds are delivered in consignments of 10 beds at a cost of Rs. 800 per delivery.
(iii) All other expenses are annual amounts and the mix of models sold is likely to remain
constant irrespective of overall sales volume.
(iv) The purchase price of the business is Rs. 1,750,000. Stylish Furniture Ltd., has enough
funds to acquire the Dreams Beds Company. However these funds of Rs. 1,750,000 are
currently invested with a commercial bank at 8% mark-up per annum.
(v) The Manager at present of Dreams Beds Company is going to retire in a couple of days.
To reduce cost, the Managing Director of Stylish Furniture Ltd., intends to hire the
services of Mr. Sajid Hassan to take charge of the Dream Beds Company. Mr. Sajid
Hassan belongs to the New City. He is agreed to take the new assignment. However, he
is not willing to accept reduction in his salary at any cost. He is currently drawing a salary
of Rs. 73,100 from his present employer.
(vi) In this connection, your market research shows that the number of households in New
City is currently 18,250 and Dream Beds Company is the only outlet selling beds in New
City.
A recent survey indicates that 10% of households change their beds every 6 years, 50%
every 7 years and 40% every 8 years and there is an average of 5 beds per household.
Expansion of Bed Department:
Mr. Adeel Hashmi has also discussed with you a plan to expand companys sales outlet and
sought your advice to formulate the appropriate marketing plan which will maximize the
profitability of Bed Department while the expansion work completes. A statement of unit
profitability has been prepared by the Managing Director which assumed that there would be
3,000 square meters of storage space available to the bed department after expansion.

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Storage space is critical factor as customers ask immediate delivery of the products and
would not wait until the new stock arrives. The statement of profitability is as under:
Model
Monthly demand (beds in units)
Selling price
Cost per bed
Transportation-in
Staff salaries
Department fixed overheads
General fixed overheads
Total cost/ expenses
Profit/ (loss)
Storage required per bed (square meters)

P
350
4,800
2,600
400
432
400
500
4,332
468
3

Q
R
450
200
Rupees/ unit
8,960
13,440
6,200
11,000
400
400
806
1,210
400
400
500
500
8,306
13,510
654
(70)
4
5

The Managing Director has also provided you with the following additional information:
(i)

The salaries of sales staff is Rs. 756,000 per month for the bed department and has been
apportioned to unit on the basis of planned turnover.

(ii) Departmental fixed overhead of Rs. 400,000 per month is directly attributable to the
department and is apportioned on the number of beds planned to be sold.
(iii) General fixed overheads of Rs. 500,000 are also apportioned on the number of beds
planned to be sold. The Managing Director of Stylish Furniture Ltd., believes this to be a
fair apportionment of the stores general fixed overheads.
(iv) The cost of transportation-in and the cost of beds vary directly with the number of beds
purchased.
Required:
The Managing Director of Stylish Furniture Ltd., has asked you to:
(a)
(b)
(c)
(d)

(e)
(f)
(g)
(h)

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Prepare a next years production schedule for the four products (A, B, C & D) that will
result in the maximum amount of total contribution margin.

12

Explain how the production of 50,000 units of Product-B would affect the total
contribution margin.

05

What possible actions Stylish Furniture Ltd., could take to meet the total demand for its
products?

02

Identify the minimum profit required to compensate for the employment of new manager
and loss of interest in acquiring the Dream Beds Company and show the number of
beds to be sold to achieve that profit.

06

Calculate the likely maximum number of beds that Dream Beds Company would sell in a
year.

03

Justify whether or not Stylish Furniture Ltd., should purchase the Dream Beds
Company.

02

State two possible reasons why your estimate of the maximum annual sales volume of
Dream Beds Company may prove inaccurate.

02

Prepare a recommended monthly sales schedule which will maximize the profitability of
Stylish Furniture bed department.

08

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Q. 2

The details of the cost, volume and cost drivers for a particular period in respect of Daata
Textile Limited are as under:
Product
Alpha
Beta
Zeta
Total
Production and sales (units)
45,000 35,000 10,000
Sale price (Rs.)
100
110
100
Raw material usage (units)
5
5
11
Direct material cost (Rs./ unit & total)
30
25
15 2,375,000
Direct labour hours
2
4
2
250,000
Machine hours
2
3
2
215,000
Direct labour cost (Rs./ unit)
12
15
10
Number of production runs
3
7
20
30
Number of deliveries
9
3
20
32
Number of receipts of inventory components
15
35
220
270
Number of production orders
15
10
25
50
Overhead cost:
Rupees
Set-up
50,000
Machines
800,000
Receiving
500,000
Packing
300,000
Engineering
400,000
2,050,000
In the past the company has allocated overheads to products on the basis of direct labour
hours, though the majority of overheads are more closely related to machine hours than direct
labour hours.
The company has recently redesigned its costing system for recovering overhead of receiving
department using two volume-related bases: machine hours and a material handling
overhead rate.

Required:
(a)

Q. 3

Compute the product-wise profitability using a traditional volume-related costing system

based on:
(i) past practice.
(ii) current practice.

04
04

(b)

Compute product-wise profitability using an activity-based costing system.

06

(c)

Briefly explain the differences between the product-wise profitability calculated in

(a) and (b) above.

03

An international airline, planning to outsource its local operations due to heavy load of
international flights. The local flight division currently operates 20 flights per annum. The
costs currently assigned to the local operation are as follows:
Rupees
Total Cost of Operations
Direct cost Non-contractual
Direct cost Contractual
Variable overheads
Fixed overheads
Allocated other overheads

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1,400,000
1,100,000
120,000
700,000
600,000
3,920,000
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Per Flight Cost

70,000
55,000
6,000
35,000
30,000
196,000

Marks
The numbers of flights and above costs are expected to remain unchanged in the foreseeable
future, if the airline continues to operate locally. Contractual direct cost will be made
redundant. No redundancy cost will be incurred. Non-contractual direct cost and variable
overhead are avoidable and fixed overhead would be reduced by Rs. 100,000 per annum and
allocated other overheads will remain unchanged, if local operations got outsourced. Vacant
facilities after outsourcing will generate a cash flow of Rs. 800,000 per annum.
Blue Shine Limited, a local airline, has offered to operate required number of flights per
annum at a price of Rs. 170,000 per flight.
Required:
Would you recommend the outsourcing to local operations of Blue Shine Limited?
Substantiate your answer with analyses.

Q. 4

(a)

08

Asma Building, a supplies company, has two stores one in old city area and other in
new city area. Both stores have their own managers who have a great deal of decision
authority over their store. Store performance related decisions regarding salaries,
wages, supplies and depreciation etc., are made by managers and strategic decisions
are taken by their head office. Asma Building allocates all costs to the stores.
The results for 2013 are as under:
Rupees
ITEM
Total
Old Area New Area
Sales revenue
820,000
410,000
410,000
490,000
245,000
245,000
Cost of merchandise sold
330,000

165,000

165,000

75,000
55,000
80,000
17,000
90,000

35,000
27,500
50,000
5,000
45,000

40,000
27,500
30,000
12,000
45,000

Total operating expenses 317,000

Operating income (Loss)
13,000

162,500

154,500

2,500

10,500

Gross margin
Operating Expenses:
Salaries and wages
Supplies
Rent and utilities
Depreciation
Allocated staff cost

Supplies are variable costs. Variable salaries and wages are equal to 10% of the cost of
merchandise sold; the remainder of salaries and wages is a fixed cost. Rent, utilities and
depreciation are also fixed costs. Allocated staff costs are unaffected by any event at
the stores, but they are allocated as a proportion of sales revenue.
Required:
(i)

(b)

Using the contribution approach, prepare a performance report that distinguishes

the performance of each store from that of the store manager.

08

(ii) Evaluate the financial performance of each store.

03

(iii) Evaluate the financial performance of each manager.

03

Although financial measures are important for evaluation purposes, many organizations
use a mix of financial and non-financial measures to evaluate performance. Usually,
airlines track on-time arrival percentages carefully, and delivery companies monitor
percentages of on-time deliveries.

Required:
What is a balanced scorecard and how does it help companies to evaluate
performance?

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Q. 5

Parkline Co., has trading stores worldwide. The company has a cosmetic production facility in
Pakistan. The total production capacity of division P to produce cosmetic products is 400,000
units per annum. The variable cost of production is Rs. 30 per unit and the division can sell
75% units within home country per annum at Rs. 50 per unit.
Parkline Co., UK branch has two options to purchase cosmetic products either from UK local
market supplier at a price equivalent to Rs. 40 per unit or import from Pakistan at Rs. 45 per
unit. Total demand for UK market is 50,000 units.
Parkline Co., first priority goes to inter-company sales and so a few orders from external
customers would remain unfulfilled.

Required:
Determine from which branch, UK branch should purchase cosmetics product in each of the
following circumstances, if the aim is to maximize group profit:
(a)

The tax rate in Pakistan is 35% and the tax rate in UK is 50%.

08

(b)

The tax rate in Pakistan is 50% and the tax rate in UK is 35%.

08

Hint:

You may assume that changes in contribution can be used as a basis of

calculating changes in tax charges and the UK branch is able to absorb any tax
benefit from the profit it generates on other activities.
THE END

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