SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2019 EXAMINATIONS 1 of 7

MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2

Marks
Question No. 2
(a) Production Budget

Product
Particulars
X Y

Sales (60 days) 48,000 60,000 0.50

700 1,400 0.50
Add: Desired Closing Stock 16,000 25,000 1.00
64,700 86,400 0.50
Opening Balance (17,200) (33,520) 0.50
Budgeted Production 47,500 52,880 0.50
Wastage rate 10% 52,778 58,756 1.50

Working:
Closing Stock:
Budgeted quarter sales in days
12 weeks x 5 days = 60 days
Closing Stock of Product X (20 days sales)
48,000 units =
x 20 days 16,000 units
60 days
Closing Stock of Product Y (25 days sales)

60,000 units =
x 25 days 25,000 units
60 days

(b) Materials Purchase Budget

Product
Particulars Total
X Y

Budgeted Production (Units) 52,778 58,756 0.25

Budgeted material consumption kg per unit 7 5 0.25
Total Material Consumption 369,444 293,778 663,222 0.50
Add: Closing Stock 165,806 1.50
829,028 0.25
Opening Stock (13,500) 0.25
Material to be purchased 815,528 0.25

Total Value of Material to be purchased = 815,528 x Rs.180 PKR 146,795,080 0.75

Working:
Calculation of closing stock of raw materials (kg)

Total material consumption

= x 15 days
60 days

663,222
= x 15 = 165,806 kg
60

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provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
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 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2019 EXAMINATIONS 2 of 7
MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2
Marks
(c) Direct Labour Hour Budget
Calculation of Budgeted Production

Product
Particulars Total
X Y

Budgeted Production (Units) 52,778 58,756 0.50

Standard hours allowed per unit 5 4 0.50
Standard hours for budgeted production 263,889 235,022 498,911 0.75
Standard hours for budgeted production at targeted 623,639
1.00
efficiency ratio
Add: non-productive down time (623,639x 20/100) 124,728 0.75
Total Labour Hours required 748,367 0.50

Less: Normal Labour hours

(1200 workers x 12 weeks x 5 days x 8 hours) 576,000 0.50
Over time hours 172,367 0.50
Working:
Standard hours for budgeted production at 80% efficiency
= 498,911 hours x 100/80 = 623,639 hours

Question No. 3
(a) Sales price variance = (Rs.304.5 - Rs.300) x81,000kg = Rs.364,500 F 0.5
Sales volume profit variance = (81,000kg – 82,000kg) x (Rs.300 - Rs.230) = Rs.70,000 UF 0.5
(b) Material price variance W= (Rs.273- Rs.274.5) x 27,100kg = Rs.40,650 UF 0.5
Material price variance T = (Rs.90- Rs.87) x 52,900kg = Rs.158,700 F 0.5

Material mix variance

Standard
Actual input Actual input Variance Variance
Price
at standard
at actual mix kg Rs. Rs.
mix
kg kg
Raw Material W 32,000 27,100 4,900 273.00 1,337,700 F 1.00
Raw Material T 48,000 52,900 (4,900) 90.00 (441,000) UF 1.00
Total 80,000 80,000 - - 896,700 F 0.75

(c) Material yield variance

Actual total input 80,000kg 0.25
Standard yield 96% 0.25
Expected output 76,800kg 0.50
Actual output 79,000kg 0.25
Variance 2,200kg F 0.50
Standard price per kg Rs.170 0.25
Variance Rs. 374,000 F 0.50
DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2019 EXAMINATIONS 3 of 7
MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2
Marks
(d) Fixed overhead expenditure variance = ((80,000x60) - Rs.4,770,000) = Rs.30,000 F 0.50
Fixed overhead volume variance = (80,000 kg – 79,000kg) x Rs.60= Rs.60,000 UF 0.50

(e) Budgeted sales(82000x300) Rs.24,600,000 0.50

Budgeted cost of sales (230*80000)+460,000=18,860,000 0.50
Budgeted gross profit Rs.5,740,000 (or 82,000kg x (Rs.300 - Rs.230)) 0.50
Reconciliation Statement
Rupees.
Budgeted gross profit 5,740,000 0.25
Sales price variance 364,500 F 0.25
Sales volume profit variance (70,000) UF 0.25
Material price variance W (40,650) UF 0.25
Material price variance T 158,700 F 0.25
Material mix variance 896,700 F 0.25
Material yield variance 374,000 F 0.25
Fixed overhead expenditure variance 30,000 F 0.25
Fixed overhead volume variance (60,000) UF 0.25
Actual gross profit 7,393,250 0.25

Actual Profit:
Rupees.
Actual sales revenue 24,664,500 0.25
W (7,438,950) 0.25
T (4,602,300) 0.25
Fixed overheads incurred (4,770,000) 0.25
Inventory movement (2,000 units x Rs.230) (460,000) 0.50
Actual gross profit 7,393,250 0.25

Question No. 4

(a) (i) Rupees

Cost of Old Machine A 19,500,000
Less: Salvage value B 1,950,000
Depreciable cost C 17,550,000 0.25
Annual Depreciation D 1,755,000 0.25
Depreciation for 5 years E 8,775,000 0.25

Book Value F=A-E 10,725,000 0.25

Disposal value of old M/c G 12,675,000
Gain on Replacement H=G-F 1,950,000 0.50

Total cost of new machine (29,250,000) 0.25

Disposal value of old M/c H 12,675,000 0.25
29% tax on gain (565,500) 0.5
Initial cash outflow after tax (17,140,500) 0.5

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2019 EXAMINATIONS 4 of 7
MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2
Marks
(ii) Salvage value on new machine Zero
Salvage value on old machine (1,950,000) 1.5
Incremental non-operating cash flow (1,950,000) 1.5

(b) (i) Real cash flows must be discounted at a real discounted rate, therefore,
The nominal discount rate has to be converted into a real discount rate.
Real discount rate = (1 + nominal rate) / (1 + anticipated rate of inflation) - 1 0.25
= (1+0.2025) / (1 + .1137) - 1 0.25
= (1.2025) / (1.1137) - 1 0.25
= 0.0797 or 8% 0.25
Contribution margin per book = Selling price - Variable cost
= Rs. 1,000 - Rs. 675 0.25
= Rs. 325 0.25
Allocated fixed costs do not represent incremental cash flows, therefore, not
relevant to the decision. 0.50
Annual cash flows in Rs.= 580,000 books x Rs. 325 x ( 1- Tax rate) 0.25
= Rs. 133,835,000 0.25
NPV at 8% for 5 years = Rs. (Rs.133,835,000 x 3.993) - Rs.400,000,000 0.25
= Rs. 134,403,155 0.50
Cumulative PV factor for 5 years = Rs. 400,000,000/ Rs.133,835,000 0.25
= 2.989 0.25
Internal rate of return (IRR) based
0.50
on above PV factor= close to 20%
Advise: The project has a positive NPV and IRR also exceeds the real cost of capital of 8%,
therefore, the project should be accepted. 0.75

(ii) Value of Volume (Quantity):

NPV = 0 = V (Rs.1,000 - Rs.675)(1 - 0.29) (Annuity factor at 8% for 5 years) - Rs. 400,000,000 0.5
= 0 = Rs. 325V (0.71 x 3.993) - Rs. 400,000,000 0.5
= 0 = Rs.921.385 V - Rs. 400,000,000 0.5
Volume = Rs. 400,000,000 / 921.385 0.5
Volume = 434,129 0.5
Volume can drop by 145,871 units (580,000 - 434,129) 0.5
Value of Selling Price:
Rupees
For Nil NPV, The Inflow & outflow must be equal 400,000,000
PV factor at 8% for 5years 3.993 0.50
Contribution after tax 100,175,307 0.50
Tax at 29% 40,916,675 0.50
Contribution before tax 141,091,981 0.50
Quantity in Units 580,000
Contribution Margin per unit 243.26 0.50
Contribution Margin per unit, as above in (i) 325.00
Price can drop by Rs. 81.74 per unit 81.74 0.50

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2019 EXAMINATIONS 5 of 7
MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2
Marks
Question No. 5
(a) Contribution Margin per patient day
Rupees
Revenue per patient day 750 0.5
Variable costs per patient day:
(Rs. 18 million / Rs. 750)=24,000 patient days 01
(Rs. 6 million / 24,000 patient days ) 250 01
Contribution margin per patient day 500 01

Schedule of Fixed costs:

Rupees
Foundation Fixed Charges 9,000,000 0.5
Salaries (within 32,000 patient days)
Matron (Rs.50,000 x2 x 12) 1,200,000 0.5
Staff Nurse (Rs. 37,500 x 9x 12) 4,050,000 0.5
Paramedics (Rs. 25,000x 15x 12) 4,500,000 0.5
Total Fixed Costs 18,750,000 0.5

Break-even point: Fixed Cost / CM per unit

(Fixed Cost / CM per patient day ) = Rs. 18,750,000 / 500 01
Break-even in patient days 37,500 01

(b) Increase in revenue:

Rupees
(25 beds x 180days x Rs. 750 charges per day) (1) 3,375,000 01
Increase in expenses:
Variable charges by Foundation:
(25 beds x 180days x Rs. 250 per day) 1,125,000 01
Fixed charges by Foundation:
(25 beds x (Rs. 9 million / 60 beds) 3,750,000 01
Salaries expense:
(24,000 patient days before addition beds, + 25 beds x
180 days = 28,500, which does not exceed 32,000
patient days, therefore, no addition in salaries) 0 01
Total increase in expenses (2) 4,875,000 01
Net decrease in earnings from rental of additional
25 beds. (2)-(1) 1,500,000 01
Question No. 6

(a) To increase demand by one unit, selling price must be decreased by Rs. 195 / 1,000 = Re. 1.0
0.195. Hence the maximum selling price attainable for an output of x units is:
Price = Rs. 78,000 - Rs. 0.195 x 0.5
Price at an output level of 200,000 units,
Price = Rs. 78,000 - Rs. 0.195 x 200,000 units 0.5
Price = Rs. 78,000 - Rs. 39,000
Price = Rs. 39,000 0.5

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2019 EXAMINATIONS 6 of 7
MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2
Marks
Profit at an output level of 200,000 units:
Rupees
Sales (200,000 units x 39,000) 7,800,000,000 0.5
Less: VC (200,000 units x 19,500) 3,900,000,000 0.5
Contribution 3,900,000,000 0.5
Less: FC (200,000 units x 9,750) 1,950,000,000 0.5
Profit 1,950,000,000 0.5

Profit is maximized where MC = MR

MC = Rs. 19,500 per unit VC (given) 0.5
TR = 78,000 - 2 (0.195 x )
TR = 78,000 - 0.390 x
Therefore optimum output is where 19,500 = 78,000 - 0.39 x 0.5
(i.e. where MC = MR), and so 58,500 = 0.39x
x = 150,000 units 01
At an output level of 150,000 units, the selling price is Rs. 78,000 - (Re. 0.195 x 150,000) = 01
Rs.78,000 - Rs.29,250 = Rs.48,750
Therefore Profit at 150,000 units:

Units CM Rupees
Contribution 150,000 29,250 4,387,500,000 0.5
Fixed Costs (1,950,000,000) 0.5
2,437,500,000 01

(b) Adjustment in selling price after cost increase:

Rupees
Revised Fixed Cost= 2,437,500,000 01
The optimal output level will not be affected by 25% increase in fixed costs, therefore, the
selling price should not be changed. However, Profit will decrease by Rs.487,500,000. 01

Revised variable costs : Rupees. 24,375 0.50

The new optimum is where 24,375 = 78,000 – 0.390 x 1.00
0.390 x = 53,625 0.50
Therefore x = 137,500 Units 1.00
At this output level, Price = 78,000 – 0.195 x 137,500 units 0.50
At this output level, Price = 78,000 – 26,400
Price = 51,600 1.50

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2019 EXAMINATIONS 7 of 7
MANAGEMENT ACCOUNTING [M5] – MANAGERIAL LEVEL-2
Marks
Question No. 7

Present Proposed
Credit Period
1 Months 2 Months 3 Months
Sales (Units) 15,000 18,000 20,250 01

Sales (@ 900 per unit) 13,500,000 16,200,000 18,225,000 01

Less: Variable Cost ( @ 600 per unit) 9,000,000 10,800,000 12,150,000 01
marginal Contributions (Rs. 300 per unit) 4,500,000 5,400,000 6,075,000 01
Less: Fixed Cost 2,000,000 2,000,000 2,200,000 01
Operating profit 2,500,000 3,400,000 3,875,000 01

Cost of Funds invested in debtors balances @ 229,167 533,333 896,875 01

25% (W-1)
Bad debts 135,000 648,000 1,093,500 01
364,167 1,181,333 1,990,375 01

Net profit 2,135,833 2,218,667 1,884,625 1.5

The Net profit is highest if 2 months credit period is allowed. Hence, the most effective credit policy is 1.5
of 2 months for the company.
Working -1
Calculation of Investment in Debtor Balances
Cost of Sales x Credit Period / 12
months
Cost of Sales = Fixed Cost + Variable
11,000,000 12,800,000 14,350,000
Cost
=11,000,00x1/12 =12,800,000x2/12 =14,350,000x3/12
916,667 2,133,333 3,587,500 01
Cost of Funds invested in debtors
229,167 533,333 896,875
balances @ 25% 01

THE END

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suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.