SUGGESTED ANSWERS – SPRING 2015 EXAMINATIONS 1 of 8

STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6

Marks
Q. 1 (a) Mr. Kamal is correct that the intercompany transfers from the Division-C to the
Division-B should be at market price rather than manufacturing cost, because transfers
at market price promotes goal congruence. 01
Divisional managers seek to maximize divisional profits, and a market based transfer
price will lead to buying and selling decisions at the divisional level that will accomplish
this goal. In addition, transfers at market price facilitate divisional performance
measurement. 01
A market based transfer price dovetails with the profit concept and makes profit based
performance evaluation feasible. 01

(b) Another approach used for setting transfer prices other than manufacturing cost and
market price is full cost plus a mark up. This approach attempts to approximate an
outside market price when market prices are not available because the transferred
product or service differs from that available from outside sources. 01
The firm would use its full manufacturing cost plus a set mark-up. The mark up could be
the gross profit percentage on outside sales. 01

(c) Pak Auto Limited

Segment Income Statement
For the year ended June 30, 2015 Rupees
Division-A Division-B Division-C Total
Sales revenue (W-1 & 2) 12,000,000 12,000,000 16,800,000 40,800,000 02 (0.5 each)
Variable manufacturing cost of
good sold (W-3 & 4) 7,000,000 5,800,000 12,000,000 24,800,000 02 (0.5 each)
Manufacturing contribution
margin 5,000,000 6,200,000 4,800,000 16,000,000
Variable selling and
administrative expenses:
Variable selling expenses (W-5) 1,920,000 1,920,000 1,600,000 5,440,000 01 (0.25 each)
Variable administrative
expenses 340,000 560,000 160,000 1,060,000 01 (0.25 each)
Total variable selling and
administrative expenses 2,260,000 2,480,000 1,760,000 6,500,000
Contribution margin 2,740,000 3,720,000 3,040,000 9,500,000 02 (0.5 each)
Discretionary fixed costs**:
Manufacturing overhead 1,000,000 200,000 0 1,200,000 01 (0.25 each)
Selling expenses (W-6) 480,000 480,000 400,000 1,360,000 01 (0.25 each)
Administrative expenses 340,000 840,000 480,000 1,660,000 01 (0.25 each)
Total discretionary fixed costs 1,820,000 1,520,000 880,000 4,220,000 01 (0.25 each)
Contribution controllable by
division managers 920,000 2,200,000 2,160,000 5,280,000 01 (0.25 each)
Traceable home office
expenses 400,000 480,000 800,000 1,680,000 01 (0.25 each)
Division segment margin 520,000 1,720,000 1,360,000 3,600,000 02 (0.5 each)
General home office expenses 400,000 01
Income from operations before
taxes 3,200,000 01
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 treated 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 ANSWERS – SPRING 2015 EXAMINATIONS 2 of 8
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
W-1:
* Division-C outside sales (16,000,000 – 2,000,000) 14,000,000 0.5
Division-C cost of outside sales (12,000,000 – 2,000,000) 10,000,000 0.5
Division-C profit on outside sales 4,000,000

4,000,000
= 40% mark up on manufacturing cost 01
10,000,000

W-2:
Intra company transfer (2,000,000 x 1.4) 2,800,000
Division-C total sales (14,000,000 + 2,800,000) 16,800,000

W-3:
Division-B variable manufacturing cost of sales:
5,200,000 – 200,000 – 2,000,000 + 2,800,000 = 5,800,000 01
Rs. 200,000 subtracted here is Division-B fixed manufacturing-overhead cost.
**Some portions of these costs might not be discretionary, depending on the
company and circumstances.

W-4: Division-A variable manufacturing cost of sales:

8,000,000 – 1,000,000 = 7,000,000

W-5: Variable selling expense:

Division-A = 2,400,000 x 0.8 = 1,920,000
Division-B = 2,400,000 x 0.8 = 1,920,000
Division-C = 2,000,000 x 0.8 = 1,600,000

W-6: Fixed selling expense:

Division-A = 2,400,000 x 0.2 = 480,000
Division-B = 2,400,000 x 0.2 = 480,000
Division-C = 2,000,000 x 0.2 = 400,000

(d) Rupees
(i) Residual income: Division-A Division-B Division-C
Controllable contribution 920,000 2,200,000 2,160,000 01
Less: Interest on capital (10%) 800,000 1,200,000 1,600,000 1.5
Residual income 120,000 1,000,000 560,000 1.5

(ii) Return on investment (ROI):

Profit or division segment margin/ capital employed Rupees
Division-A Division-B Division-C
Division segment margin 520,000 1,720,000 1,360,000 1.5
Average invested capital 8,000,000 12,000,000 16,000,000 01
ROI 6.5% 14.33% 8.5% 1.5

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 treated 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 ANSWERS – SPRING 2015 EXAMINATIONS 3 of 8
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
(e) Comment:
Using market based transfer pricing “profit margin of Division ‘C’ will be improved but
not more than Division ‘B’. Both Residual income and Return on investment (ROI)
indicates that Division ‘B’ is better than among all three (3) divisions. 02

(f) Role of ROI:

 ROI is the most widely used financial measure of divisional performance. It provides
a useful overall approximation on the success of a firm’s past investment policy by
providing a summary measure of the ex post return on capital invested.
 Measuring returns on invested capital also focuses managers’ attention on the
impact of levels of working capital (particularly stocks and debtors) on the ROI.
 It can be used as a common denominator for comparing the returns of dissimilar
businesses, such as other divisions within the group or outside competitors.
Any two (2) points @ 1 mark each = 02
Limitations of ROI:
Despite the widespread use of ROI, limitations also exist when this measure is used to
evaluate the performance of divisional managers:
 It is possible that divisional ROI can be increased by actions that will make the
company as a whole worse off, and conversely, actions that decrease the divisional
ROI may make the company as a whole better off. In other words, evaluating
divisional managers on the basis of ROI may not encourage goal congruence. 01
 Managers can also be motivated to make incorrect asset disposal decisions. 01

Q. 2 (a) (i) Minimum Price per Toaster: Rs./ Toaster

Direct material 1,200
Direct labour (2 Hrs @ Rs. 220) 440 0.5
Machine Cost 320
Variable selling cost 610
Variable overhead cost (2 Hrs @ Rs. 120) 240 0.5
Allocated incremental administrative cost (W-1) 36 01
Minimum bid price 2,846 01

W-1: Allocated incremental administrative cost = 520,000 ÷ 14,500 = 36

(ii) Bid Price using Total Cost and Allowable Return: Rs./ Toaster
Relevant cost (i) 2,846 0.5
Fixed overhead cost (2 hrs @ Rs. 90) 180 0.5
Total cost 3,026 0.5
Allowable return (0.12 x 3,026) 363 0.5
Bid Price 3,389 01

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 treated 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 ANSWERS – SPRING 2015 EXAMINATIONS 4 of 8
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
(iii) Mark-up Percentage:
Formula:
Mark up percentage using cost plus price = Target profit ÷ (Annual volume × per
toaster cost using cost plus pricing
formula) 0.5
= 2,025,500 ÷ (14,500 x 3,026) 0.5
= 2,025,500 ÷ 43,877,000 0.5
= 4.6 OR 5% 0.5

(iv) Factors to be Considered:

Factors that Electro appliances should consider before deciding whether to submit
a bid at the maximum acceptable price of Rs. 3,200 per toaster include the
following:
 The company should be sure that there is sufficient excess capacity to fill the
order and that no additional investment is necessary in facilities or equipment
that would increase fixed costs. 01
 If the order is accepted at Rs. 3,200 per toaster, there will be a Rs. 354 (3,200 –
2,846) contribution per toaster to fixed costs. However, the company should
consider whether there are other jobs that would make a greater contribution. 01
 Acceptance of the order at a low price could cause problems with current
customers who might demand a similar pricing arrangement. 01

(b) Component/ elements of a product’s cost over its life cycle:

 Research & development costs. Design, testing, production process and
equipment.
 Technical data cost. Cost of purchasing any technical data required.
 Training costs including initial operator training and skills updating.
 Production costs
 Distribution costs. Transportation and handling costs.
 Marketing costs. Customer service, field maintenance, brand promotion.
 Inventory costs. Holding spare parts, warehousing and so on.
 Retirement and disposal costs. Costs occurring at the end of the product’s life.
Any four (4) @ 1 mark each = 04

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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 treated 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 ANSWERS – SPRING 2015 EXAMINATIONS 5 of 8
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
Q. 3 Mercury Plastic Company
Cost of Quality Report
For 2013-2014 and 2014-2015
2013-2014 2014-2015
Cost of % of Cost of % of
Quality Annual Quality Annual
(Rs.) Turnover (Rs.) Turnover
(i) Prevention Costs:
Administration of quality control 90,000 100,000 0.5
Quality Control training 190,000 220,000 0.5
Design of quality control equipment 240,000 250,000 0.5
Maintenance of quality control equipment 140,000 150,000 0.5
Total prevention costs 660,000 4.40% 720,000 4.8% 01
(ii) Appraisal Costs:
Acceptance testing 100,000 130,000 0.5
Inspection goods inwards 200,000 210,000 0.5
Performance testing 160,000 150,000 0.5
Total appraisal costs 460,000 3.06% 490,000 3.30% 0.5
(iii) Internal Failure Costs:
Failure analysis 110,000 80,000 0.5
Re-inspection costs 240,000 210,000 0.5
Losses from failure of purchased items 280,000 250,000 0.5
Total internal failure costs 630,000 4.20% 540,000 3.60% 0.5
(iv) External Failure Costs:
Cost of customer service section 120,000 100,000 0.5
Product liability costs 250,000 220,000 0.5
Cost of repairing of products returned from
customer 290,000 270,000 0.5
Total external failure costs 660,000 4.40% 590,000 3.90% 01
Total quality costs 2,410,000 16.10% 2,340,000 15.60%
Turnover 15,000,000 15,000,000 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 treated 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 ANSWERS – SPRING 2015 EXAMINATIONS 6 of 8
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
Q. 4 (a) Income statements under marginal approach for the three alternatives:
Rs./ Unit
‘Normal’ ‘Super’
Sales price 730 920
Variable costs: 2 x 40 = 80 3 x 40 = 120
3 x 100 = 300 4 x 100 = 400
3 x 50 = 150 530 4 x 50 = 200 720
Contribution margin per unit 200 200
Direct labour hours of production 3 4
Contribution margin per direct labour hours 66.67 50.00 01 (0.5 each)

As the contribution margin per direct labour hour of ‘Normal’ product is higher, so the
company should produce ‘Normal’ product first and remaining hours should be utilised
in the production of ‘Super’ product.
Rs. ‘000’
General Use of
With Additional
Existing Capacity Without
Marketing
Marketing
‘Normal’ ‘Super’ ‘Normal’ ‘Super’ ‘Normal’ ‘Super’
Sold units (W-1 & 2) 6,000 3,000 7,000 3,000 9,000 1,500
Sales revenue 4,380 2,760 5,110 2,760 6,570 1,380 1.5 (0.25each)
Variable costs:
Direct material 480 360 560 360 720 180 1.5 (0.25 each)
Direct labour 1,800 1,200 2,100 1,200 2,700 600 1.5 (0.25 each)
Variable factory
overhead 900 600 1,050 600 1,350 300 1.5 (0.25 each)
Total variable costs (3180) (2160) (3710) (2160) (4770) (1080)
Total contribution
margin 1,200 600 1,400 600 1,800 300 03 (0.5 each)

Total contribution
margin 1,800 2,000 2,100
Fixed costs 1,528 1,528 1,528
Additional marketing – – 150
Total fixed costs 1,528 1,528 1,678 1.5 (0.5 each)
Profit before tax 272 472 422 1.5 (0.5 each)
OR 04 + 04 + 04 = 12

The company should produce 7,000 units of ‘Normal’ and 3,000 units of ‘Super’
because the company can earn highest profit before tax. However, there is no need of
additional marketing as at this level profit of the company will be reduced. 1
W-1:
‘Normal’ = (7,000 units x 3 hrs per unit) = 21,000 hours
33,000 hrs – 21,000 hrs = 12,000 remaining hrs
‘Super’ = 12,000 hrs ÷ 4 hrs per unit = 3,000 units

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 treated 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 ANSWERS – SPRING 2015 EXAMINATIONS 7 of 8
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
W-2:
‘Normal’ = (9,000 x 3) = 27,000 hours
33,000 – 27,000 = 6,000 remaining hrs 0.5
‘Super’ = 6,000 hrs ÷ 4 hrs per unit = 1,500 units 0.5
1,500 units of ‘Super’ can be produced only.

(b) Following are the special decision making areas:

 Selling price decisions.
 Exploring new markets.
 Make or buy decisions.
 Sales mix decisions.
 Selection of a suitable method of production.
 Plants shutdown decisions.
Any five (5) @ 1 mark each = 05

Q. 5 (a) Break-even point for 2015, based on current budget:

15,550,000  8,420,000  3,888,000
Contribution-margin ratio = = 20.85% or 21% 02
15,550,000
Fixed expenses
Break-even point = 0.5
Contribution margin ratio

180,000
= = Rs. 857,143 0.5
0.21

(b) Break-even point full time employment of sales personnel: Rs.‘000’

New fixed expenses:
Previous fixed expenses 180 0.5
Sales personnel salaries (40,000 x 3) 120 0.5
Sales manager’s salary 254 0.5
Total fixed expenses 554
New contribution margin ratio:
Sales 15,550 0.5
Cost of goods sold 8,420 0.5
Gross margin 7,130 0.5
Commissions (at 5%) 778 0.5
Contribution margin 6,352 0.5

63,52,000
Contribution-margin ratio = = 40.85% or 41% 01
15,550,000
Fixed expenses
Estimated break-even point =
Contribution margin ratio
554,000
= = Rs. 1,351,220 01
0.41
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 treated 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 ANSWERS – SPRING 2015 EXAMINATIONS 8 of 8
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
(c) Estimated sales volume: Rs.‘000’
New contribution margin ratio:
Sales 15,550
Cost of goods sold 8,420
Gross margin 7,130 0.5
Commissions (30% of sales) 4,665 0.5
Contribution margin 2,465 01

24,65,000
Contribution-margin ratio = 15.85% OR 16% 01
15,550,000

Fixed expenses  targeted after tax income/1- t

Sales volume in rupees
required to earn = 01
after tax net income Contribution margin ratio

180,000  20,52,000/ 1- .33

= 01
0.16
= 3,242,686 ÷ 0.16 = 20,266,791 01

THE END

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 treated 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.