INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF PAKISTAN

Fall 2012 (February 2013) Examinations

Tuesday, the 19th February 2013

STRATEGIC MANAGEMENT ACCOUNTING – (AF-601)

SEMESTER-6
Extra Reading Time: 15 Minutes
Maximum Marks: 90 Roll No.:
Writing Time: 02 Hours 45 Minutes
(i) Attempt all questions.
(ii) Answers must be neat, relevant and brief.
(iii) 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.
(iv) Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper.
(v) Use of non-programmable scientific calculators of any model is allowed.
(vi) DO NOT write your Name, Reg. No. or Roll No. anywhere inside the answer script.
(vii) Question No.1 – “Multiple Choice Question” printed separately, is an integral part of this question paper.
(viii) 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 (9:30 a.m. or 2:30 p.m. [PST] as the case may be).
Marks
Q. 2 (a) (i) What is linear programming? What are the requirements (conditions) to solve a
problem of linear programming? 04

(ii) A poultry feed maker mixes three items in the feed. Item ‘A’ costs Rs.20 per kg,
item ‘B’ costs Rs.40 per kg and item ‘C’ costs Rs.55 per kg. Each item contributes
some essential part of the poultry feed and the producer wishes to produce the
feed as cheaply as possible. Establish the objective function. 03

(b) Brother Engineering Ltd., is an established vendor of special part to major automobiles
manufacturers. It has been offered the choice of making the parts either for Car-A or
Car-B for the next period, but not for the both.
Both parts use the same special alloy, of which only 13,000 kilograms is available, at
Rs. 1,875 per kilogram. The parts are made by passing each one through two fully
automatic computerized machines Auto Tech and Auto Sign whose capacities are
limited. Target prices have been set and the following data is available for the period:
Parts Details for Car-A Part Details for Car-B
Maximum demand 7,000 units 9,000 units
Target price Rs. 21,750 per unit Rs. 17,250 per unit
Alloy usage (per unit) 1.6 kgs 1.6 kgs
Machines Time (per unit):
Auto Tech 0.6 hour 0.25 hour
Auto Sign 0.5 hour 0.55 hour
Machines Details: Auto Tech Auto Sign
Hours available 4,000 4,500
Variable overhead per machine hour Rs. 12,000 Rs. 15,000
Required:
(i) Calculate which vehicle part should be made during the next period to maximize
contribution. 08
(ii) Calculate the contribution which Brothers Engineering Limited will earn and also
state whether the company will be able to meet the maximum demand. 02
(iii) As an alternative to the target prices, the automobile manufacturers have offered
the alternative arrangements i.e., target prices less 10% plus Rs. 9,000 per hour for
each unused machine hour. Calculate the new contribution. Is your
recommendation changed as compared to target prices alternative? 05

SMA-Feb.2013 1 of 4 PTO
 Marks
Q. 3 Gujrat Engineering Ltd., produces and sells washing machines. It also manufactures the
spindles for its machines. It expects to produce and sell 24,000 washing machines during the
year 2013-14. It is considering an offer from an outside vendor to supply any number of
spindles at price of Rs.300 per spindle.
The accounts of the company reports the following costs for producing 24,000 spindles:
Rupees
Cost Cost per Unit Total Cost
Direct material 125.00 3,000,000
Direct labour 100.00 2,400,000
Variable manufacturing overhead 50.00 1,200,000
Quality control, down time etc. 25.00 600,000
Machine leasing cost 25.00 600,000
Allocated fixed overhead 31.25 750,000
356.25 8,550,000
The following additional information is available:
(i) Quality control, down time etc., vary with the number of batches in which the spindles are
produced. Currently spindles are being produced in the batch size of 2,000 units.
(ii) Direct labour cost represents wages to workers who are exclusively engaged in the
manufacturing of spindles. The workers are highly trained and skilled hence cannot be
terminated.
(iii) If company procures all its spindles from outside vendor, it will not require the machine
which it has hired for manufacturing of these spindles.
Required:
(a) Assume that if Gujrat Engineering Ltd., purchases spindles from outside vendor, the
facility (including workers) where the spindles are currently manufactured will remain
idle. Should the company accept the offer from outside vendor at the anticipated
production and sale volume of 24,000 units? 05
(b) Whether your decision in (a) above will change if facilities can be used to upgrade the
washing machine which will result in an incremental revenue of Rs. 550 per machine.
The variable cost of upgrading would be Rs. 450 and tooling cost would be Rs. 400,000. 06
(c) Assume that facilities will be used as stated in (b) above. Further, assume that with
better planning, Gujrat Engineering Ltd., will be able to manufacture these spindle in the
batch size of 4,000 units (instead of 2,000 units), if it decides to produce spindles
in-house. What will you advise? Show all workings. 07

Q. 4 Kemia Industries Ltd., has its home office in Lahore with three factories situated at
Shaikhupora, Sialkot and Faisalabad. The operations at Sialkot have been unprofitable for a
number of years. The leasehold of Sialkot will also expire by the end of current year.
In view of the continued losses the management has decided to close down the said factory
rather than lease again. The factory’s plant and machinery can be sold at a price higher than
the written down value and the surplus funds will be sufficient to cover all termination costs.
The projected profitability of the factories for the year are as under:
Rs. in million
Shaikhupora Sialkot Faisalabad Total
Sales 6,000 1,500 4,500 12,000
Variable costs 3,300 1,125 2,925 7,350
Fixed costs:
Factory 1,200 450 600 2,250
Selling and admin 750 75 225 1,050
Home office expenses apportioned 375 225 375 975
Profit and loss 375 (375) 375 375
The company, however, would like to continue to serve the customers now being served by
Sialkot factory, if it could do so economically. Accordingly following proposals were put
forward for consideration based on a selling price of Rs. 37,500 per unit:
SMA-Feb.2013 2 of 4
 Marks
Proposals:
(a) Close down Sialkot factory and expand the operations of the Faisalabad factory for
which capacity is existed there. This proposal will involve the following changes:
 Sales revenue of Faisalabad factory will increase by 25%.
 The factory fixed cost of Faisalabad factory will increase by 10%.
 Fixed selling and administrative costs of the said factory will increase by 5%.
 Variable distribution costs of the additional output will increase by Rs.600 per unit.
(b) Close down Sialkot factory and expand the operations of the Shaikhupora factory
subject to the following changes in the result of Shaikhupora factory:
 Sales revenue will increase by Rs.1,200 million.
 Factory fixed costs will increase by 20%.
 Fixed selling and administrative costs will increase by 10%.
 Variable distribution costs in respect of the additional units will increase by Rs. 750 per unit.
(c) Close down Sialkot factory and enter into a long-term contract with an independent
manufacturer to serve the customers of Sialkot factory. The manufacturer will pay the
royalty of Rs. 750 per unit to the company. In that event the sales of the area served by
the Sialkot factory will fall by 25%.
(d) Close down Sialkot factory and discontinue serving the present customers of the area.
Required:
Evaluate each of the above proposals and advise the management for the action to be taken
in the interest of improving profitability of the company. 20

Q. 5 Zarq Corporation, a manufacturing company has the following budgeted costs for one month
which are based on a normal capacity level of 40,000 hours. A departmental overhead
absorption rate of Rs. 66 per hour has been calculated on the basis of budgeted overheads.
Actual overheads are given along with budgeted overheads as under:
Budgeted
Actual
(Rs. ‘000’)
Overheads Fixed Variable per
(Rs. ‘000’) Hour (Rs.)
Management and supervision 450 – 450.00
Shift premium – 1.50 60.00
Employees benefits and pension costs 90 3.30 225.00
Inspection 300 3.75 420.00
Consumable supplies 90 2.70 190.50
Power for machinery – 3.00 117.00
Lighting 60 – 63.00
Rent, rates and taxes 135 – 135.00
Repairs and maintenance 120 2.25 226.50
Materials handling 150 4.50 321.00
Depreciation of machinery 225 – 225.00
Auxiliary services 180 – 172.50
Total 1,800 2,605.50
Per hour rate 45 21.00

During the month of January 2013, the company actually worked 36,000 hours.
Required:
(a) Prepare a statement showing the flexible budget for the month of January 2013, the
actual costs and the variance for each overhead items. 10
(b) Calculate the following:
(i) The rate of overhead absorbed. 01
(ii) The total amount under/ over-spent. 01

SMA-Feb.2013 3 of 4 PTO
 Marks
Q. 6 Texchem Corporation has two divisions, both manufacturing textile auxiliaries with same
grade and quality and located at HUB and SITE. Annual output of the division at HUB is 6,000
tonnes (80% capacity) and that of SITE is 7,500 tonnes (60% capacity). The basic raw
material used is available locally at both the places, but limited to 3,000 tonnes per annum
@ Rs. 13,500 per tonne at HUB and 8,000 tonnes per annum @ Rs. 15,000 per tonne at
SITE. Any additional requirement will have to be purchased from other markets at a rate of
Rs. 17,250 per tonne. F.O.R. at either division. Variable cost at each division is constant per
tonne of output. For every 100 tonnes of output, 80 tonnes of basic raw material is required.
The details of other annual variable and fixed costs of the divisions are as under:
Rs. in million
HUB SITE
Other variable cost (excluding raw material ) 117.00 144.00
Fixed cost 75.00 90.00
Required:
(a) Prepare cost of production statement for total output and for determining each tonne of
output, the raw material cost, other variable cost and total cost in respect of each
division, giving detailed presentable working. 08
(b) Determine the quantity of production that could be transferred between the two
divisions, if the company desires to fully utilize the available local supplies of raw
material to reduce cost of production, keeping the total production of both the divisions
put together, the same as at present. 04
(c) Prepare revised cost of production statement {as prepared in (a) above} for both
divisions based on the alternative at (b) above and identify the cost saving. 06

THE END

SMA-Feb.2013 4 of 4