MANAGEMENT ACCOUNTING FOR FINANCIAL SERVICES STAGE-III ISQ EXAMINATION (WINTER) 2008

Q.1 Please write the alphabet of the selected choice in the answer column: (20) (Answer) Internal financial control methods includes 1 A) Internal check. C) External Audit. E) Only A and B. B) D) Internal Audit. All of the above.

Q.2

State True or False in the answer column.

(10) (Answer)

1 Q.3

Management Accounting is the step beyond financial accounts but before cost accounts.

Tasty Products Ltd produces four brands of fruit Juices in their factory located in Sahiwal. The juices are marketed through appointed distributors who collect the juices from the companys depots located in all the major consuming areas. One of the brands, Lemon has been doing rather badly and the budget for the coming year indicates that it will make a loss as shown below: BRAND: LEMON Rs.

Direct costs Material X Material Y Material Z Packaging Materials Labour Overheads: Variable Fixed Total Production costs Selling and Admin. Expense Transportation (80% variable) Advertising (allocated) Others mainly fixed (allocated) Total Costs

300,000 240,000 160,000 200,000 300,000

150,000 400,000 1,750,000

360,000 50,000 180,000 2,340,000

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Sales: (10,000 cartons) Budgeted Loss 1,800,000 (540,000)

At the management meeting held to review and approve the budget, it was unanimously agreed that LEMON should be dropped after the coming year and replaced with MANGO. As for the coming year, opinion was divided with the Marketing Manager arguing that the company would be better off by not producing any LEMON but concentrating on the other three brands. The financial controller argued the dropping LEMON would not necessarily result in higher profits in the budget year as it will depended in actual cost savings on dropping LEMON and the resulting extra demands for the remaining brands. It was finally decided to postpone the decision unit the next meeting when the financial controller would present an analysis of the financial consequence to the company of dropping LEMON. For the above exercise, the Financial controller got the following market information from the marketing department: Additional Sales if LEMON was dropped. Brand Orange Juice Number of Cartons 1200 800 400 2000 1500 1000 1500 1000 500 Probability 0.3 0.5 0.2 0.2 0.6 0.2 0.1 0.4 0.5

Falsa Juice

Apple Juice

The contribution margins per carton for the three brands are as follows: Rs. 18.00 20.00 22.00

Orange Juice Falsa Juice Apple Juice

The production manager supplied the following information for the exercise:

Materials X and Y are common to all the brands. Material Z can only be used for making LEMON Juice. Material Z costing Rs.100,000 would be in stock at the beginning of the budget year and that such material could be resold for only Rs.40,000.

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Packaging material costing Rs.60,000 would also be in stock and could only be resold at Rs.15,000 for conversion to alternative use. Direct labour would be dismissed unless needed for extra production of the other brands. However, termination benefits amounting to Rs.80,000 would have to be paid. Of the fixed costs, only Rs.16,000 would be saved by dropping LEMON Juice excluding the salaries of two clerks who the financial controller reckons would be retired thereby saving Rs.3,500 per month. Required: (A)

A financial analysis as required by the financial Controller for presentation to the next management meeting. Other factors that you think the management of Tasty Products Ltd. Should consider before making final decision.

(10)

(B)

(05)

Q.4

A company which manufactures a uniform product, is operating at 60% level of activity. At this level the sales are Rs.60,000 at selling price of Rs.10/- per product. The following information regarding cost is available. Variable cost Rs.2 per product

Semi variable cost may be considered fixed at Rs.6,000 with a variable cost of Rs.0.5 per product. Fixed cost is Rs.20,000 at the present level of activity but is estimated that achievement of an 80%-90% level would increase cost by Rs.4,000. Proposal has been made to the Directors that the price of product should be reduced by 10% as to reach a wider sales market. The Board is considering it and require statement showing: Required: (A)

The operating profit if the company is operating at level of activity of 60%, 70% and 90% assuming that selling price. (i) (ii) Remains as at present Is reduced to Rs.9 (03) (03)

(B)

The percentage increase in present output which will be required to maintain the present profit if the company reduces the selling price.

(03)

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Q.5

Butt Company manufactures part 1700 for use in its production cycle. The costs per units for 5,000 units of part 1700 are as follows: (05) Direct materials direct labor Variable overhead Variable overhead Fixed overhead Rs. Rs. Rs. Rs. 2 12 5 26

Hamid Company has offered to sell Butt Company 5,000 units of part 1700 for Rs. 27 per unit. If Butt accepts the offer, some of the facilities used for part 1700 will be used for making part 1211 and thus saving the company Rs. 40,000 in relevant costs. Also Rs. 3 per unit of fixed overhead applied to part 1700 would be totally eliminated. By what amount would net relevant costs be increased or decreased if Butt accepts Hamid's offer? A) C) Q.6 Rs. 35,000 decrease Rs. 20,000 decrease B) D) Rs. 15,000 decrease Rs. 5,000 increase

Qureshi Company has 1,000 machine hours available for manufacturing two product mix with the following facts: (06) Product A Rs. 50 Rs. 40 7.5 Product B Rs. 40 Rs. 28 12

Selling price Variable cost Time required to produce one unit (in minutes) 1.

The contribution margin per machine hour for A and B are: A) B) C) D) Rs. 10 for A and Rs. 12 for B Rs. 75 for A and Rs. 144 for B Rs. 80 for A and Rs. 60 for B Rs. 50 for A and Rs. 40 for B

2.

Qureshi Company above can maximize profits by producing: A) C) 48,000 units of A 30,000 units of A B) D) 48,000 units of B 30,000 units of B

3.

The maximum profitability for the Qureshi Company using the facts in The question above is: A) C) Rs. 480,000 Rs. 200,000 B) D) Rs. 360,000 Rs. 210,000

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Q.7

Javeria Roshan, the treasurer of Mallah Corporation is evaluating an investment proposal. Below is the relevant information about the proposal. All cash flows are assumed to take place at the end of the year. There would be no residual value at the end of the investment's life: Initial cost and book value Rs 105,000 70,000 42,000 21,000 7,000 0 Annual net income Rs 15,000 17,000 19,000 21,000 23,000 95,000

Year

Cash flow Rs 50,000 45,000 40,000 35,000 30,000

0 1 2 3 4 5

Ms. Roshan knows that Mallah Corporation's after tax cost of capital is 15%. The discount figures for a 15% after tax rate of return are as follows: Year 1 2 3 4 5 6 7 Present value of Re 1 received 0.81 0.65 0.52 0.42 0.34 0.28 0.22 Present value of annuity of Re 1 0.81 1.46 1.98 2.4 2.74 3.02 3.24

Select the best answer to the following: 1. The payback period for the investment proposal is: A) C) E) 0.875 years 2.3 years some period other than above B) D) 1.993 years over five years (03)

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2.

The accounting rate of return for the investment proposal over its life is: (03) A) 36.2% B) 18.1% C) 28.1% D) 38.1% E) some percentage other than above The net present value for the investment proposal is: A) C) E) Rs. 4,600 B) Rs. (55,280) D) some amount other than above Rs. 10,450 Rs. 115,450 (03)

3.

Q.8

The production manager of Taimur Company is analyzing the cost of water used to cool the plant machinery. He has accumulated the following data for the first 10 month of the year: Month 1 2 3 4 5 6 7 8 9 10 Total Machine Hours 6,000 6,500 5,500 4,500 4,000 5,000 4,500 5,500 4,000 4,500 50,000 Water Cost (Rs) 25,000 27,000 21,000 19,000 18,000 20,000 19,000 20,000 18,000 21,000 208,000

Required: (A)

Determine the fixed and variable component of the cost function associated with water cost using High - Low method

(05)

(B)

If 7,000 machine hours are used next month, what would be the expected water cost for each of the methods used in 1 above? (05)

Q.9

The following information is for Peoples Microfinance Bank:

1,875 millions 1,210 millions 15,765 millions 21 millions 12,612 millions Number of shares Non-interest income Non-interest expenses Provision for loan losses 145,000 501 millions 685 millions 381 millions

Interest income Interest expense Total assets Investments Earning assets

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Total liabilities Taxes

15,440 millions 16 millions

Required: (A)

Calculate: 1. ROE 2. ROA 3. Net interest margin 4. Earnings per share 5. Net non-interest margin 6. Net operating margin

(06)

(B)

Suppose interest income, interest expense, non-interest income, and noninterest expenses each increase by 5 percent while all other revenue and expense items remain unchanged. What will happen to the bank's ROE, ROA, and earnings per share? (04)

Q.10 State Bank of Pakistan treasury bills are available at the following prices (based upon Rs. 100,000 value) and with the indicated maturities: (06) 1. 2. 3. Rs. 97,250 and 182 days Rs. 96,500 and 270 days Rs. 98,750 and 91 days

Required: Calculate the discount rate on each treasury bill if it is held to maturity.

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