CMA Inter Suggested Answers | Jun 25 Paper 12 Management Accounting (MA)

Section B

Question 2 (A):

The business world has radically changed from what it used to be a few decades ago and accordingly the role of the management accountant has also changed significantly. In this context, illustrate the functions of management accountant in a dynamic business world.

Solution:

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Question 2 (B):

Hot n Cold, a FMCG company manufactures and sells three flavours of ice cream: Dark chocolate, Chocolate, and Butterscotch. The batch size for the ice cream is limited to 1,000 ice cream based on the size of the fridge and ice cream moulds owned by the company. Based on budgetary projections, the information listed below is available:

Total overhead costs and activity levels for the year are estimated as follows:

Required:

(i) With the help of traditional system (with direct labour hours as the overhead allocation base), for the Chocolate ice cream, compute the estimated operating profit per thousand ice cream.

(ii) With the help of Activity Based Costing (ABC) system, for the Chocolate ice cream:

A. Compute the activity cost-driver rate.

B. Compute the estimated overhead costs per thousand ice cream.

C. Compute the estimated operating profit per thousand ice cream

Solution:

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Question 3 (A):

Colour Paints is a manufacturer of industrial dyes. It can produce and sell at its maximum capacity of 20,000 litres. The sale price is ₹ 100 per litre. The present sales are 15,000 litres.

The current cost structure is as follows:

To produce over 20,000 litres and up to another 10,000 litres, some balancing equipment are to be installed at a cost of ₹ 10 lakhs and the same will have a life span of 10 years.

The present cost structure is estimated to go up due to price escalation as under:

• 10% in direct materials from its present level of 30%.

• 25% in direct labour from present level of 20%.

• ₹ 50,000 in fixed overheads per year.

There is a proposal from a customer to take 10,000 litres additionally over the present level of output on a long-term basis at a price of ₹ 90 per litre. Apart from the investment of ₹ 10 lakhs, fixed overheads will go up by ₹ 50,000 due to additional administrative expenses.

The company is in dilemma as to whether to accept the order for 10,000 litres or to use the present capacity of 5,000 litres for which there will be additional selling expenses of ₹ 50,000.

As a management accountant of the company give your recommendation. Ignore financing charges.

Solution:

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Question 4 (A):

 AON Ltd has furnished the following data for the Financial Year 2024-25:

A decrease in selling price and decrease in the fixed cost could change the ‘contribution to sales ratio’ to 30% and ‘margin of safety’ to 40% of the revised sales.

You are required to calculate:

(i) Revised Fixed Cost

(ii) Revised Sales

(iii) New Break-Even Point

Solution:

Contribution to sales ratio (P/V ratio) = 37%

Variable cost ratio = 100% - 37% = 63%

Variable cost = ₹ 10,00,000 × 63% = ₹ 6,30,000

After decrease in selling price and fixed cost, sales quantity has not changed. Thus, variable cost is ₹ 6,30,000.

Revised Contribution to sales = 30%

Thus, Variable cost ratio = 100% - 30% = 70%

Thus, Revised sales = ₹ 6,30,000 / 70% = ₹ 9,00,000

Revised, Break-even sales ratio = 100% - 40% (revised Margin of safety) = 60%

(i) Revised fixed cost = revised breakeven sales × revised contribution to sales ratio

= ₹ 5,40,000 (₹ 9,00,000 × 60%) × 30%

= ₹ 1,62,000

(ii) Revised sales = ₹ 9,00,000 (as calculated above)

(iii) Revised Break-even point = Revised sales × Revised break-even sales ratio

= ₹ 9,00,000 × 60%

= ₹ 5,40,000.

Question 4 (B):

PIECO Ltd. having an installed capacity of 1,00,000 units of product is currently operating at 70% utilization. At current levels of input prices, the unit costs (after taking credit for applicable export incentives) work out as follows:

The company has received three foreign offers from different sources as under:

Source A: 5,000 units at ₹ 55 per unit.

Source B: 10,000 units at ₹ 52 per unit.

Source C: 10,000 units at ₹ 51 per unit.

Advise the company as to whether any or all the export orders should be accepted or not.

Solution:

Step 1: Calculate Current Production and Utilization

Current capacity utilization is 70%.

Current production = 1,00,000 units * 70% = 70,000 units.

Step 2: Calculate Remaining Capacity

Remaining capacity = Total capacity - Current production = 1,00,000 - 70,000 = 30,000 units.

Step 3: Analyze Export Orders

We need to check if accepting the export orders would still leave us within the available capacity:

Source A: 5,000 units

Source B: 10,000 units

Source C: 10,000 units

Total units for export = 5,000 + 10,000 + 10,000 = 25,000 units.

Step 4: Determine Impact on Cost Per Unit

Accepting the orders will increase the production utilization:

New utilization = 70% + (25,000/1,00,000) * 100% = 95%.

Cost per unit at 90% and 100% utilization is ₹ 87 and ₹ 82, respectively. At 95%, assume it approximates to ₹ 85 (between ₹ 87 and ₹ 82).

Step 5: Calculate Revenue from Export Orders

Revenue from Source A = 5,000 * ₹ 55 = ₹ 2,75,000

Revenue from Source B = 10,000 * ₹ 52 = ₹ 5,20,000

Revenue from Source C = 10,000 * ₹ 51 = ₹ 5,10,000

Total revenue = ₹ 2,75,000 + ₹ 5,20,000 + ₹ 5,10,000 = ₹ 13,05,000.

Step 6: Calculate Costs for the New Production

Cost for producing 25,000 units at ₹ 85 = 25,000 * ₹ 85 = ₹ 21,25,000.

Step 7: Calculate Profit from Accepting Export Orders

Total profit = Total Revenue - Total Costs

Total profit = ₹ 13,05,000 - ₹ 21,25,000 = -₹ 8,20,000 (a loss).

Final Answer

The company should not accept any of the export orders as it leads to a net loss of ₹ 8,20,000.

Summary

The key concept here involves understanding production capacity, cost structures, and profitability assessments. In this case, despite potential revenue from export orders, the increased cost from higher utilization results in significant losses, indicating the importance of evaluating the overall financial impact before accepting additional orders.

Question 5 (A):

The operating results of PKS Ltd. for the year ending 31st March, 2025 are summarised below:

The following changes are to be incorporated in the budget for the year 2025-26:

1. Sales (units) to be increased by 25%;

2. Material price to increase by 15%;

3. Direct wages to go up by 12%;

4. Overheads —

Factory Overheads will increase by 15%. In addition, a new facility will be added to the factory laboratory at a recurring cost of ₹ 12,500 per year;

Administrative and Selling & Distribution Overheads are estimated to increase by 10% and 14% respectively;

5. Inventory - No change;

6.Profit target for the year has been fixed at ₹ 6 lakhs; and

7.No change in the rate of Trade Discount.

Calculate the unit selling price and present the budget for 2025–26 in a meaningful format.

Solution:

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Question 6 (A):

Budgeted and actual sales for the month of April, 2025 of two products JOY & TOY of M/s Chandan Ltd. were as follows:

Budgeted costs for products JOY and TOY were ₹ 4 and ₹ 1.50 per unit respectively.

Work out from the above data the following variances of the individual products as well as for the company as a whole:

1. Sales Value Variance

2. Sales Value Price Variance

3. Sales Value Volume Variance

4. Sales Value Mix Variance

5. Sales Value Sub-Volume Variance

Solution:

Revised Standard Quantity:

For JOY: (6,000 / 16,000) × 15,750 = 5,906.25 units

For TOY: (10,000 / 16,000) × 15,750 = 9,843.75 units

AQAP = Actual Sales = ₹50,450

AQSP = Actual Quantity of Sales at Standard Price = ₹51,000

RSQSP = Revised Budgeted or Standard Sales = ₹49,219

SQSP = Standard or Budgeted Sales  = ₹50,000

Sales Sub Volume or Quantity Variance = 3 − 4 = ₹781 (A)

Sales Mix Variance = 2 − 3 = ₹1,781 (F)

Sales Volume Variance = 2 − 4 = ₹1,000 (F)

Sales Price Variance = 1 − 2 = ₹550 (A)

Sales Value Variance = 1 − 4 = ₹450 (F)

Important Notes

Budgeted Sales = (Budgeted Quantity of Sales × Standard Selling Price per unit)/ Budgeted Selling Price per unit.

Actual Sales = Actual Quantity of Sales × Actual Selling Price per unit

tandard Sales = Actual Quantity of Sales × Standard Selling Price per unit

Revised Standard Sales:

(i) Based on Quantity

Total Quantity of Actual Mix ÷ Total Quantity of Standard Mix × Standard Quantity × Standard Price per unit.

(ii) Based on value:

Budgeted Ratio on Sales × Standard Sales

Budgeted Ratio on Sales = Budgeted Sales of a Product ÷ Total Budgeted Sales

Question 6 (B):

The following details apply to an annual budget for Raj & Sons, a manufacturing company:

Additional Information:

• Quantity of raw material per unit of production: 2 kg.
• Budgeted opening stock of raw material: 4,000 kg (cost ₹ 4,000).
• Budgeted closing stock of raw material: 2,000 kg.
• Issues are priced on FIFO basis.

Calculate the following budgeted figures:

1. Quarterly and annual purchases of raw material, by weight and value.
2. Closing quarterly stocks by weight and value.

Solution:

Material Purchase Budget

Computation of Purchases by Value

Budget Showing Closing Quarterly Stocks by Weight and Value

Question 7 (A):

Sandip Corporation has three divisions whose income statements and balance sheets are summarised below:

Division	X	Y	Z
Sales	₹ 10,00,000	(iv)	(vii)
Operating Income	₹ 50,000	₹ 60,000	₹ 10,000
Operating Assets	₹ 2,00,000	(v)	₹ 5,00,000
Asset Turnover	(i)	(vi)	0.5
Margin	(ii)	0.5%	4%
ROI	(iii)	2.5%	2%

Supply the missing values through (i) to (vii) in the table above.

Solution:

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Question 7 (B):

Briefly describe the four perspectives of the Balanced Scorecard of an entity

Solution:

Question 8 (A):

Linku can choose from five mutually exclusive projects. Each project will last for one year only and their net cash inflows will be determined by the prevailing market conditions. The forecast net cash inflows and their associated probabilities are shown below.

(i) Based on the expected value of the net cash inflows, which project should be undertaken by Linku?

(ii) Calculate the value of perfect information about the state of the market.

Solution:

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Question 8 (B):

What is the significance of identifying responsibility centres in responsibility accounting? 

Solution:

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