Cma August 2013 Solution

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH
CMA AUGUST 2013 EXAMINATION

FOUNDATION LEVEL
SUBJECT: 001. PRINCIPLES OF ACCOUNTING
Solution to Q. No. 1. (a)
Account Titles
Cash
Accounts Receivable
Merchandise Inventory
Prepaid Fire Insurance
Prepaid Rent
Office Equipment
Accumulated DepreciationOffice
Equipment
Accounts Payable
Clay Camp, Capital
Clay Camp, Drawing
Sales
Sales Returns and Allowances
Purchases
Purchase Returns and Allowances
Transportation-In
Advertising Expense
Supplies Expense
Salaries Expense
Utilities Expense
Fire Insurance Expense
Rent Expense
Depreciation ExpenseOffice
Equipment
CAMPS MUSIC STORE

Work Sheet
For the Year Ended July 31, 2012
Trial Balance
Adjustments
Adjusted Trial
Balance
Debit
Credit
Debit
Credit
Debit
Credit
34,780
34,780
4,600
4,600
31,400
31,400
720
(1) 240
480
4,800
(2) 2,400
2,400
12,000
12,000
4,500
(3) 1,500
6,000
8,000
22,000
Debit
31,400
Credit
26,400
Balance Sheet
Debit
34,780
4,600
26,400
480
2,400
12,000
8,000
22,000
20,000
300,000
20,000
300,000
1,000
194,000
1,000
194,000
1,400
300,000
1,000
194,000
1,400
5,200
1,000
1,800
23,200
1,400
Credit
6,000
8,000
22,000
20,000
5,200
1,000
1,800
23,200
1,400
335,900
Income Statement
1,400
5,200
1,000
1,800
23,200
1,400
335,900
(1) 240
(2) 2,400
(3) 1,500
_______
4,140
240
2,400
1,500
_______
_______
______
4,140
337,400 263,140
Net income
64,660
327,800
Adjustments: (1) Expiration of prepaid fire insurance ($720 X 4/12). (2) Expiration of prepaid rent ($4,800 X 6/12).
(3) Depreciation expense on office equipment for the fiscal year ended July 31, 2012.
Page 1 of 8
240
2,400
1,500
_______
337,400
______
327,800
______
327,800
_______
100,660
64,660_
100,660

FOUNDATION LEVEL
Solution to Q. No. 1. (b)

CAMPS MUSIC STORE
Income Statement
Operating revenues:
Gross Sales ..
Less: Sales returns and allowances .
Net Sales .
$300,000
1,000
$299,000
Cost of goods sold:

Merchandise inventory, August 1, 2011.
$ 31,400
Purchases
$194,000
Less: Purchase returns and allowances ..
1,400
Net purchases .
$192,600
Add: Transportation-in ..
5,200
Net cost of purchases .
197,800
Cost of goods available for sale
$229,200
Merchandise inventory, July 31, 2012 ..
26,400
Cost of goods sold .
202,800
Gross Margin
$ 96,200
Operating expenses:
Advertising
Supplies .
Salaries ..
Utilities ..
Fire insurance
Rent ...
Depreciation office equipment ..
Total operating expenses .
Net income
$ 1,000
1,800
23,200
1,400
240
2,400
1,500
31,540
$ 64,660
=======
Solution to Q. No. 1. (c)

CAMPS MUSIC STORE
Statement of Owners Equity
Clay Camp, capital, August 1, 2011 ..
Net income for the year ..
Total ...
Less: Drawings
Clay Camp, capital, July 31, 2012
Page 2 of 8
$ 22,000
64,660
$ 86,660
20,000
$ 66,660
=======

FOUNDATION LEVEL
Solution to Q. No. 1. (d)
CAMPS MUSIC STORE
Balance Sheet
July 31, 2012
Assets
Current assets:
Cash ................ $ 34,780
Accounts receivable ..
4,600
Merchandise inventory .
26,400
Prepaid fire insurance
480
Prepaid rent
2,400
Total current assets
$ 68,660
Property, plant, and equipment:

Office equipment ..
$ 12,000
Less: Accumulated depreciation ..........
6,000
Total property, plant, and equipment ..
6,000
Total assets ..
$ 74,660
=======
Liabilities and Owners Equity

Liabilities:
Accounts payable .
$ 8,000
Owners equity:
Clay Camp, capital ...
66,660
Total liabilities and owners equity .
$ 74,660
=======
Solution to Q. No. 1. (e)

Closing entries:
1987
July 31
31
Merchandise Inventory . . 26,400

Sales ... 300,000
Purchase Returns and Allowances .
Income Summary
To close accounts with credit balances in the
Income Statement columns and to set up the
ending merchandise inventory.
Income Summary 263,140
Sales Returns and Allowances .
Purchases .
Transportation-In .
Page 3 of 8
1,400
327,800
31,400
1,000
194,000
5,200

FOUNDATION LEVEL
Advertising Expense
Supplies Expense
Salaries Expense .
Utilities Expense .
Fire Insurance Expense
Rent Expense
Depreciation Expense Office Equipment ..
To close accounts with debit balances in the
Income Statement columns.
31
31
Income Summary 64,660

Clay Camp, Capital ..
To close the Income Summary account to the
owners capital account.
Clay Camp, Capital . 20,000
Clay Camp, Drawing
To close drawing account.
1,000
1,800
23,200
1,400
240
2,400
1,500
64,660
20,000
Solution to Q. No. 2. (i)

XYZ Company
Bank Reconciliation
July 31, 2011
Cash balance according to bank statement
Add deposit of July 31 not recorded by bank
Deduct outstanding cheques:
No. 1244
1284
1223.
Corrected bank balance...
Cash balance according to depositors records..
Add: Proceeds of note collected by bank Tk. 38,000
less collection fee of Tk. 40
Error in recording of a cheque correctly drawn
but entered in cash book as Tk. 6981
Tk. 93,644.80
19,166.20
9,178.60
800.00
820.80
10,799.40
102,011.60
80,756.60
37,960.00
63.00
38,023.00
118,779.60
Deduct: Check returned because of insufficient funds

Discounted note dishonored
Cheque Printing charges
Corrected cash balance
1525.00
15,045.00
198.00
16,768.00
102,011.60
Q. No. 2. (i)
July 31, 2011
Cash
Collection charge
Notes Receivable
Cash ..
Accounts Payable
Accounts Receivable.
Cash ..
Page 4 of 8
37,960
40.00
38,000.00
63.00
63.00
1525.00
1525.00

FOUNDATION LEVEL
General expenses..
Cash ..
Account Receivable
Notes Receivable Discounted.
Cash .
Note Receivable
198.00
198.00
15,045.00
15,000.00
15,045.00
15,000.00

1. 2012
Dec. 31
2. 2013
Jan. 15
3. 2013
Feb. 12
12
Bad Debts Expense 7,500

Allowance for Doubtful Accounts
To record estimated bad debts for the
year.
Allowance for Doubtful Accounts

500
Accounts Receivable James Ryan
To write off the account of James Ryan
as uncollectible.
Accounts Receivable James Ryan . 500

Allowance for Doubtful Accounts .
To correct the write-off of James Ryans
account on January 15.
Cash
500
Accounts Receivable James Ryan ...
To record the collection of James Ryans
account receivable.
7,500
500
500
500
Solution to Q. No. 3. (b)

1. 2012
June 15
2. July 15
Notes Receivable Short Company . 15,000.00

Accounts Receivable Short
Company ...
To record receipt of a note from Short
Company.
Cash 15,192.50
Notes Receivable Discounted ...
Interest Revenue ...
To record the discounting of the Short
Company note.
Computation of cash proceeds:

Maturity value (Days until
maturity = 60) ..................... $15,450.00
Discount = $15,450 X 10% X 60/360
257.50
$15,192.50
=========
Page 5 of 8
15,000.00
15,000.00
192.50

FOUNDATION LEVEL
3. Sept. 13
Notes Receivable Discounted .

Notes Receivable Short Company ..
To remove the note and contingent
liability.
15,000.00
15,000.00
4. Sept. 13
Notes Receivable Discounted 15,000.00

Notes Receivable Short Company..
To remove the note and contingent
liability.
13 Accounts Receivable Short Company .. 15,450.00

Cash
To record the charge made against
our account for the Short Company
note of $15,000 and interest of $450.
13 Allowance for Doubtful Accounts* ... 15,450.00
Accounts Receivable Short
Company
To write off the Short Company note
as uncollectible.
15,000.00
15,450.00
15,450.00
* This debit assumes that notes receivable were taken into consideration when
an allowance was established. If not, the debit should be either to Bad Debts
Expense or Loss from Dishonored Notes Receivable.
Solution to Q. No. 3. (c)
2010
Net income as reported
Adjustments:
(1) ..
(2) ..
$68,000
2011
2012
Total
$71,000
$60,000
$199,000
2,200
(2,200)
(2,300)
(3) ..
Adjusted net income ...
2,300
.
$70,200 $66,500 $62,300
$199,000
====== ====== ======
=======
------------------------------------------------------------------------------------------------------------------(1) Ending inventory understated ($14,200 - $12,000 = $2,200).
(2) Beginning inventory understated ($14,200 - $12,000 = $2,200).
Ending inventory overstated ($14,000 - $11,700 = $2,300).
(3) Beginning inventory overstated ($14,000 - $11,700 = $2,300).
Journal entries
(i)
Debit (Tk.)
72,000
12,000
01/01/10: Accumulated Depreciation

Loss on Disposal of Machinery
Machinery
Credit(Tk.)
84,000
Page 6 of 8

FOUNDATION LEVEL
(To record retirement of the machinery
(ii) 01/07/09: Depreciation Expense
Accumulated Depreciation
(To record depreciation to the date of disposal for
6 months)
01/07/09 Cash
Machinery
(To record the sale of the machinery
01/01/09 Machinery (New)
Machinery (Old)
Cash
(To record exchange of the machinery)
9,000
9,000
15,000
63,000
6,000
84,000
36,000
54,000
84,000
6,000
Workings: Fair market value of the Machinery

Cash paid
Cost of the New Machinery
Gain on exchange adjustment
Value of the new machinery
Cost value of the Machinery
Less Accumulated depreciation
Book value of machinery
Tk. 34,000
6,000
40,000
(4,000)
36,000
84,000
(54,000)
30,000
Fair market value of machinery Tk. 34,000

Therefore the gain on exchange: Tk. 34,000-30,000 = Tk. 4,000.
Q. No. 4. (b)(i)
Depreciation for 2008 on Tk. 30,000 @ 10%
Depreciation for 2009: (Tk. 30,000-3,000)* 10%
Depreciation up to 31-12-2009
Book value of machinery as on 01-07-2010 (Tk. 30,000
5,700)* 10% for 6 months
Total depreciation up to 01-07-2010
3,000
2,700
5,700
1,215
Tk. 6,915
Journal entries
01/07/10 Cash
Machinery
(To record the sale of the machinery)
15,000
6,915
8,085
30,000
4. (b)(ii)
Depreciation of the existing machinery:
Book value on 01-01-2010: Tk. 1,75,000 24,300
Depreciation @ 10% on Tk. 1,50,700 in 2010
Depreciation of the new machinery (Tk. 35,000+2,500)* 10% for 6
months
Total depreciation to be charged in 2010
Page 7 of 8
1,50,700
15,070
1,875
Tk. 16,945

FOUNDATION LEVEL
Page 8 of 8

CMA AUGUST 2013, EXAMINATION
PROFESSIONAL LEVEL-I
SUBJECT: 101. INTERMEDIATE FINANCIAL ACCOUNTING.
Model Solution
Answer to the Question No. 1.
XYZ Company
Statement of Cash flow
For the year ended December 31, 2012
Amount
(Tk.)
Cash flow from Operating Activities:
Net Profit before interest and taxes
47,800
Adjustment for depreciation (W1)
36,500
Loss on sale of equipment
Amount
(Tk.)
2,500
Loss on debenture redemption
800
Amortization of patent
8,000
Increase in inventory
(9,000)
Increase in account receivable
(8,000)
Decrease in prepaid expense
2,200
Decrease in accounts payable (W2)
(11,700)
Decrease in outstanding expenses
(1,200)
Cash generated from operations
67,900
Less: Interest paid
1,800
Income tax paid (W3)
19,960
(21,760)
Net cash generated from operating activities

Cash flow from Investing Activities:
46,140
Purchase of Freehold building (W4)
(17,000)
Furniture purchase (W4)
(12,700)
sale of equipment
18,000
purchase of equipment (W4)
(65,500)
Net cash used in investing activities

Cash flow from Financing Activities:
(77,200)
Sale of common stock (W5)
11,250
Sale of right share
51,750
Dividend paid (W6)
(17,940)
Redemption of debenture
(20,800)
Net cash generated from financing activities
24,260
Net increase in cash and cash equivalents during the year
(6,800)
Cash and cash equivalents at the beginning of the year

Cash and cash equivalents at the end of the year
47,300
40,500
Page 1 of 8
Workings:
W1: Depreciation Furniture depreciation Tk. 6,200 plus Equipment depreciation Tk. 30,300 = Tk. 36,500
Acc Dep - Equipment
Acc Dep - Furniture

b/d
22,500
Equipment (Sold)
24,500
b/d
c/d
28,700 Depreciation
6,200
c/d
61,300 Depreciation
W2: Decrease in accounts payable
Ending accounts payable
Tk. 20,500
Payable for furniture purchase Tk. 15,000
Payable for operating activities Tk. 5,500
Beginning accounts payable
Tk. 17,200
Changes in accounts payable Tk. (11,700)
55,500
30,300
W3: Interest and Tax paid

Interest Payable
Cash
1,800
b/d
Income Tax Payable

300
Cash
19,960
b/d
16,000
c/d
700 Int. expense
2,200
c/d
12,000 Income tax*
15,960
*(Profit before interest and taxes Interest expense) x 35% = (47,800 2,200) X 35% = Tk. 15,960
W4: Purchase and sale of property, plant and equipment
Freehold building
b/d
Rev. Res
Cash
Furniture
175,000
8,000
17,000
c/d
200,000
b/d
45,300
Accounts payable
15,000
Cash
12,700
c/d
73,000
Equipment
b/d
Cash pur
125,000
sold
45,000
65,500
c/d
145,500
W5: Sale of common stock [New issue Tk. 10,000 + premium 1,250 = 11,250]
Common Stock
b/d
Cash (right share)*
225,000
45,000
c/d
280,000 Cash (new issue)
10,000
*right share @ Tk. 10 will result increase in common stock [(225,000 10) 5 x 1] = 4,500 shares and
share premium will increase @ Tk. 1.50 for 4,500 shares.
W6: Dividend paid
Retained Earnings
Divided
17,940
b/d
111,800
c/d
123,500 Profit after tax*
29,640
*profit before interest and tax was Tk. 47,800 less, interest Tk. 2,200 and tax Tk. 15,960
Page 2 of 8

XYZ Company
Statement of comprehensive income
Revenue
693,500
Less: Cost of goods sold (252,500+650)
253,100
Gross profit
440,350
Less: Operating expenses

Administrative expenses Admin exp
56,000
Depreciation [{125,000 (22,800+20,440)}@20%]
16,352
72,352
Selling expenses Distribution expense
36,000
Bad debt
748
Patent amortization
2,000
Patent impairment
1,000
39,748
112,100
Net operating income
328,250
Other income and expenses Investment income
16,700
Losses from assets abandonment
(3,800)
12,900
EBIT
341,150
Less: Finance cost
2,000
EBT
339,150
Less: Income tax @ 40%
135,660
Profit from continuing operation
203,490
Less: Losses from discontinuing division (net of tax)
18,000
Profit before extraordinary items and cumulative effect of

change in accounting principle
185,490
Extraordinary loss (net of tax)
(15,000)
Cumulative effects on prior years of retroactive application of

new depreciation method [(22,800+20,440) 24,000](net of tax)
(11,544)
Net Income
158,946
Add: Other comprehensive income

Unrealized gain on available for sale securities (net of tax)
Comprehensive income
7,680
166,626
Page 3 of 8
XYZ Company
Statement of changes in equity
Share
Capital
Share
Premium
General
Reserve
Balance b/d
350,000
72,950
Net income
Transfer to General reserve
Transfer to Sinking fund

Comprehensive income
Balance c/d
Sinking
Fund
Accu.
OCI
28,200
21,000
20,000
(3,000)
350,000
72,950
45,200
158,946
(20,000)
3,000
24,000
7,680
7,680
199,246
Tk.
Non-current Assets:
752,408
Property, Plant and Equipment (W2)

Patent (W3)
690,408
6,000
Long term investments

Current Assets:
56,000
89,052
Account Receivables (W1)
19,552
Short term investments (45,000 + 12,800)
57,800
Inventories (12,350 - 650)

Total Assets
11,700
841,460
Equity and Liability

Shareholder's Equity
699,076
Share Capital
350,000
Share Premium
72,950
General reserve
45,200
Accumulated OCI
7,680
Sinking fund
24,000
Retained earnings
199,246
Non-current liability
8% Bond payable
25,000
Current liability
117,384
Accounts payable
4,300
Income tax payable (W4)

Interest payable
Total equity and liability
111,084
2,000
841,460
Page 4 of 8
60,300
XYZ Company
Statement of Financial Position
As on December 31, 2012
Assets:
Retained
Earnings
W1:
Allowance for bad debt

Balance b/d
Allowance @ 6%
Bad debt charge for the year
: Tk. 500
: Tk. 1,248
: Tk. 748
Account Receivables:
Balance b/d
Less: Allowance for bad debt
Balance c/d
: Tk. 20,800
: Tk. 1,248
: Tk. 19,552
W2: Property, plant and equipment:

Land
Cost
Equipment
225,000
Total
125,000
750,000
Accumulated depreciation - b/d
24,000
24,000
Retroactive application
19,240
19,240
Depreciation for the year
16,352
16,352
Accumulated depreciation - c/d
59,592
59,592
65,408
690,408
Carrying value
400,000
Building
400,000
225,000
W3: Patent Amortization and Impairment:

Carrying value of patent : Tk. 9,000
Remaining life
Amortization for the year
: Tk. 2,000
Book Value
Net realizable value
: Tk. 6,000
Impairment
: 4.5 Years
: Tk. 7,000
: Tk. 1,000
W4: Taxation Provision:

Tax on income from continuing operation
135,660
Tax benefit on losses from discontinued division
(12,000)
Tax benefit on losses from earthquake
(10,000)
Tax benefit on retroactive application of depreciation

Tax on unrealized gain on securities
(7,696)
5,120
Net tax payable (receivable)
111,084
Answer to the Question no. 3(a):

(i)
Tk.1,000 rental revenue (Tk.12,000 6 = Tk.2,000 per month x 1/2 month); the balance (Tk.11,000)
should be deferred and recognized as earned during 1985.
(ii)
Tk.60,000 sales revenue (Tk.10,000 cash plus Tk.50,000 note is equal to FMV of asset); Tk.3,000
earned interest revenue ( 12% x Tk.50,000 x 1/2 year = Tk.3,000); the balance of interest revenue
(Tk.3,000) to be earned during 1985.
(iii) Tk.104,000 net sales revenue; the Tk.8,000 special discount is a reduction in selling price and
should be offset with the Tk.112,000 normal selling price in recognizing the net realizable amount.
(iv) Tk.400,000 sales revenue. Tk.16,000 guarantee expense, (4% x Tk.400,000 = Tk.16,000 all of
which relates to the Tk.400,000 worth of sales this period).
(v)
Tk.435,000 sales revenue. (All 5 tractors have been sold; the fact that 3 of the tractors have not yet
been delivered, unless there are unusual circumstances, would ordinarily not preclude the
recognition of the total sales revenue.)
Page 5 of 8
Answer to the Question no. 3(b):

(i)
The Allowance for Doubtful Accounts should have a balance of Tk. 50,000 at year-end. The
supporting calculations are shown below:
Days Account Outstanding
Amount Expected
Estimated
Percentage
Uncollectible
Uncollectible
0-15 days
Tk.300,000
0.02
Tk.6,000
16-30 days
100,000
0.10
10,000
31-45 days
80,000
0.15
12,000
46-60 days
40,000
0.25
10,000
61-75 days
20,000
0.6
12,000
Balance for Allowance for Doubtful Accounts
(ii)
Tk.50,000
The accounts which have been outstanding over 75 days (Tk.15,000) and have zero probability
of collection would be written off immediately and not be considered when determining the proper
amount for the Allowance for Doubtful Accounts.
Accounts Receivable
Tk.540,000
Less: Allowance for doubtful accounts
50,000
Accounts Receivable(net)
(iii)
Tk.490,000
The year-end bad debt adjustment would decrease before-tax income Tk. 30,000 as computed
below:
Estimated amount required in the Allowance for Doubtful Accounts
Tk.50,000
Balance in the account after write-off of uncollectible accounts but before
adjustment (Tk.35,000-Tk.15,000)
Required charge to expense
20,000
Tk.30,000
Answer of the Question No. 04(a):

G & H Pump Co.
Partial Balance Sheet
December 31, 2007
Liabilities:
Current Liabilities:
Accounts payable and accrued expenses
Income taxes payable
Accrued bond interest payable
Unearned revenue
Current portion of low term debt
Total current liabilities:
Long term Liabilities:
Note payable to Prime Bank
Mortgage note payable
Bonds payable
Add: Premium on bonds payable
Total long term liabilities
Total liabilities
BDT
163,230
63,000
110,000
25,300
70,870
432,400
99,000
169,994
2,200,000
1,406
Page 6 of 8
2,201,406
2,470,400
2,902,800
Answer of the Question No. 04(b):

1.
2.
3.
4.
Although the note payable to Prime Bank is due in 30 days, it is classified as a long term liability as
it will be refinanced on a long term basis.
The pending lawsuit is a loss contingency requiring disclosure, but it is not listed in the liability
section of the balance sheet.
The BDT 70,870 of the mortgage note that will be repaid within the next 12 months (BDT 240,864BDT 169,994) is a current liability; the remaining balance, due after December 31, 2008, is a long
term debt.
Although the bonds payable mature in seven months, they will be repaid from a sinking fund, rather
then from current assets therefore, these bonds retain their long term classification.
Answer to the Question No. 5(a).

Cost
Replacement cost
Ceiling
Floor
Designated Market price
LMC
Tk. 78,000
Tk. 75,000
Tk. 90,000
= 2013 catalog selling price less sales commissions and estimated other
costs of disposal. (2013 catalogue prices are in effect as of 12/01/12.)
Tk. 62,400
= Ceiling less (30% X 2013 catalog selling price)
Tk. 75,000 [Middle value of Replacement cost, ceiling and floor]
Tk. 75,000
Answer to the Question No. 5(b).

Cost
Retail
Beginning Inventory
Tk. 30,000
Tk. 48,000
Purchases
339,500
520,800
Purchase returns
(25,800)
(36,480)
Purchase discounts
(7,590)
Freight-in
8,920
Markups
Tk. 32,500
Markup cancellations
(8,320 )
24,180
Totals
345,030
556,500
Markdowns
(12,000)
Sales
(412,000)
Sales returns
28,300
(383,700)
Inventory losses due to breakage
(2,400)
Employee discounts
(3,400 )
Ending inventory at retail
155,000
Cost-to-retail ratio = Tk. 345,030/Tk. 556,500 = 62%
Ending inventory at cost (62% of Tk. 155,000) = Tk. 96,100
Page 7 of 8
Answer to the Question No. 5(c).

Alvi Corporation
Stockholders Equity
December 31, 2012
Capital Stock
Preferred stock, Tk. 100 par, 12%,
105,000 shares issued and outstanding
Common stock, Tk. 20 par,
1,305,000 shares issued, 1,260,000 shares outstanding
Total capital stock
Additional paid-in capital
In excess of parpreferred stock
In excess of parcommon stock
From treasury stock
Total paid-in capital
Retained earnings
Total paid-in capital and retained earnings
Less: Treasury stock (45,000 shares common)
Total stockholders equity
Tk.
10,500,000
26,100,000
36,600,000
2,225,000
23,500,000
70,000
25,795,000
62,395,000
19,175,000*
81,570,000
(4,050,000)
77,520,000
*(12,500,000 + Net income 8,250,000 Preferred dividend 1,260,000 Cash dividend 315,000) =
19,175,000
Cash dividend: [(800,000 shares + 70,000 shares) X split 3/2] 60,000 treasury shares + 15,000 treasury
share] X 0.25 per share = 315,000)
Page 8 of 8

PROFESSIONAL LEVEL-I
SUBJECT: 102. COST ACCOUNTING
Model Solution
(i)
Sevenhill Manufacturing Company
Journal Entries
During November
SL.No
a)
b)
c)
d)
e)
f)
g)
h)
i)
i)
k)
l)
Particulars
Subsidiary Records
Debit
(Tk.)
Materials
Accounts Payable
Inventory cards
Accounts Payable Ledger
35,600
Work In Process
Factory Overhead Control
Materials
Job Order Cost Sheets

Overhead analysis sheets
Inventory cards
25,250
1,300
Work In Process
Materials

Inventory cards
200

Cash
850
Accounts Payable
Materials
Accounts Payable Ledger

Inventory cards
225
Scrap Materials
Inventory cards
175
Materials
Work In Process
Inventory cards
1,265
Credit
(Tk.)
35,600
26,550
200
850
Payroll
Accrued Payroll
Income Tax Payable
Hospitalized
Other deduction
Accrued Payroll
Cash
225
175
1,090
175
52,600
41,503
7,780
950
2,367
41,503
41,503

Provident Fund Payable
Work In Process
Payroll


Accum. Depr. - Buildings
Accum. Depr. Machinery

Property Taxes Payable
Prepaid Insurance
3,419
3,419
40,200
12,400
52,600
7,800
3,000
4,800
1,600
750
850
Page 1 of 5
m)
n)
o)
p)
Work In Process
Factory Overhead Applied
26,880
26,880
Factory Overhead Applied

Cost of Goods Sold
26,880
139
27,019
Finished Goods
Work In Process
Inventory cards
Cost of Goods Sold

Finished Goods
Inventory cards
81,750
81,750
75,500
Accounts Receivable
Sales
75,500
Customers Ledger
90,000
90,000
(ii)
Ledger Accounts
Nov:1
(a)
(g)
Materials
Tk.
6,180
(b)
35,600
(c)
1,265
(e)
Balance
43,045
Nov:1
(b)
(c)
(j)
(m)
Work in Process
Tk.
9,750
(g)
25,250
(o)
200
40,200
26,880
Balance
1,02,280
Tk.
26,550
200
225
(b)
(d)
(i)
(j)
(k)
(l)

Tk.
Tk.
1,300
(f)
175
850
(g)
175
3,419
(m) *
26,880
12,400
(n)**
139
7,800
1,600
16,070
43,045
27,369
Tk.
1,090
81,750
Finished Goods
Tk.
5,660
(p)
81,750
Nov:1
(o)
27,369
Balance
Tk.
75,500
11,910
19,440
1,02,280
87,410
Page 2 of 5
87,410
Answer to the Question No. 2(b) :

(i)
Computation of economic order quantity (EOQ)

D =Annual requirement = 54,000 castings
C = Cost per casting = Tk. 800
Co = Ordering cost = Tk. 9,000 per order
Cc = Carrying cost per casting p.a = Tk.300
EOQ =
= 1,800 casting
(ii)
Safety stock (Assuming a 15% risk of being out of stock)

Safety stock for one day = 54,000/360 days = 150 castings
Re-order point = Minimum stock level + Average lead time Average consumption
= 150 + 6 150
= 1,050 castings.
(iii)
Total cost of ordering = (54,000 / 1,800) Tk. 9,000

= Tk.2,70,000
Total cost of carrying = (450 + 1,800) xTk.300
= Tk. 4,05,000
(iv)
(A)
Computation of new EOQ:
= 300 castings
(v)
(B)
Total number of orders to be placed in a year are 180. Each order is to be placed after 2 days
(1 year = 360 days). Under old purchasing policy each order is placed after 12 days.
Answer to the Question No. 3

(a)
A volume-based cost driver is a cost driver that reflects some measure of production volume, either
production output (i.e. units produced) or production input (i.e. direct labour hours or machine hours).
Conventional costing systems assume that manufacturing overhead costs are related to the volume of
production, usually measured by input measures such as direct labour hours. Thus, this approach assumes
that the more direct labour hours worked on a product, the greater its consumption of overhead resources.
Yet, in a modern business environment, many manufacturing overhead costs may not behave in this way. A
significant part of the overhead costs are likely to be driven by factors other than production volume. For
example, some of the overhead costs, like setup costs, are incurred for each production batch regardless of
the number of units in the batch. Others, like factory rent, are incurred each month regardless of the number
of units produced. Still others are incurred because of overall production complexity. Products that are
difficult to make tend to use more overhead resources than those that are simple to make. Where nonvolume based costs are significant, a conventional costing approach will result in distorted product costs.
(b)
(i)
The regression equations intercept on the vertical axis is $200. It represents the portion of indirect
materials cost that does not vary with machine hours, when operating within the relevant range. The slope
of the regression line is $4 per machine hour. For every machine hour, $4 of indirect material costs is
expected to be incurred.
Page 3 of 5
(ii)
Estimated cost of indirect material at 900 machine hours of activity:

S
(iii)
=
=
$200 + ($4 900)

$3 800
Several questions should be asked:

(a) Do the observations contain any outliers, or are they all representative of normal operations?
(b) Are there any mismatched time periods in the data? Are all of the indirect material cost observations
matched properly with the machine hour observations?
(c) Are there any allocated costs included in the indirect material cost data?
(d) Are the cost data affected by inflation?
(iv)
The choice of cost driver should reflect the nature of the production process. Other cost drivers could
include direct labour hours or direct labour cost if the production process is labour intensive and the
consumption of indirect materials is related to labour activities. Alternative the number of units produced
could be a suitable cost driver, if each unit uses much the same amount/cost of indirect material.

(i) & (ii) Full cost and manufacturing cost, per unit, for Switch 3901:
Activity
Prepare purchase order
Process payables
Prepare payroll
Process sales orders
Pack and dispatch
Program solder robots
Solder circuits
Assemble circuit boards
Wire in switch
Insert fuse
Test switch
Design switch
Total annual cost
Full cost
$2,150
1,350
3,000
16,500
8,500
30,600
144,000
75,000
70,000
50,000
20,000
5,000
$426,100
Manufacturing cost
30,600
144,000
75,000
70,000
50,000
20,000
$389,600
Full cost per switch:

$85.22 activity cost + $20 direct material = $105.22
Manufacturing cost per switch: $77.92 activity cost + $20 direct material = $97.92
(iii)
The non-manufacturing costs are part of the cost of producing and selling Switch 3901. It is important the
management considers these costs, as well as the manufacturing costs, when assessing the profitability of
Switch 3901 and, therefore, when making decisions such as product mix, outsourcing and pricing.
Page 4 of 5

(a)
Weighted Average Method:

Work in process, Feb 1
Cost incurred during Feb
Total cost to account for
Equivalent units
Cost per equivalent unit
Direct material
$ 5,500
110,000
$ 115,500
110,000
$1.05
(i)
Cost of Goods Completed (89,000 3.10)
(ii)
Work-in-Process
Conversion
$ 17,000
171,600
$ 188,600
92,000
$2.05
=
$275,900
Material: 21,000 1.05
22,050
Conversion Cost: 3,000 2.05
6,150
Total
$ 22,500
281,600
$ 304,100
$3.10
$28,200
(b)
FIFO Method:
Direct material
Conversion
$ 110,000
$ 171,600
Work in process; February 1
Total
$ 22,500
Cost incurred during February

Total cost to account for
281,600
$ 304,100
Equivalent units
Cost per equivalent unit
100,000
88,000
$ 1.10
$ 1.95
Cost of opening work in process
$ 3.05
$22,500
Cost incurred to complete opening work in

process inventory
Conversion Cost
10,000 65% 1.95
12,675
35,175
Cost incurred to produce units started and

completed
(i) Total cost of goods completed
79,000 3.05
240,950
$276,125
Cost remaining in work in process; February 28

Direct materials
23,100
21,000*1.10
2,500** 1.95
Conversion cost
(ii) Closing work in process
4,875
$27,975
Check:
Cost of goods completed and transferred out
Cost of closing work in process
27,975
Total costs accounted for

*
**
276,125
$304,100
21,000 = 100,000 + 10,000 89,000

2,500 = 88,000 + (10,000 x 0.35) 89,000
Page 5 of 5

PROFESSIONAL LEVEL-II
SUBJECT: 201. ADVANCED FINANCIAL ACCOUNTING-I.
Model Solution
Solution No. 1(b).

(i)
Yes, the lease is capital lease as the lease term is 8 years which is 80% of the economic life of
the equipment.
(ii) Lease Amortization Schedule:
Year
Description
Amount
Interest Principal Lease
Obligation
01.01.2008 Initial
1,700,360
Balance
01.01.2008 Payment
250,000
250,000
1,450,360
01.01.2009 Payment
250,000 145,036
104,964
1,345,396
01.01.2010 Payment
250,000 134,540
115,460
1,229,936
01.01.2011 Payment
250,000 122,994
127,006
1,102,929
01.01.2012 Payment
250,000 110,293
139,707
963,222
01.01.2013 Payment
250,000
96,322
153,678
809,544
01.01.2014 Payment
250,000
80,954
169,046
640,499
01.01.2015 Payment
250,000
64,050
185,950
454,549
31.12.2015 Payment
500,000
45,455
454,548
0
Minimum Lease Payment:
Rentals (250,000 x 5.86842)
Guaranteed Residual Value (500,00 x 0.46651)
1,467,105
233,255
1,700,360
(iii)
01.01.2008 Leased Equipment
Obligation Under Capital Lease
01.01.2008 Obligation Under Capital Lease
Executory Cost
Cash
31.12.2008 Interest Expenses
Accrued Interest on Obligation under Capital
Lease
31.12.2008 Amortization Expenses
Accumulated Amortization on Leased
Equipment
(17,00,360-500,000)/8=150,045
01.01.2009 Obligation Under Capital Lease
Accrued Interest on Obligation under Capital Lease
Executory Cost
Cash
31.12.2009 Interest Expenses
Accrued Interest on Obligation under Capital
Lease
Page 1 of 7
1,700,360
1,700,360
250,000
24,000
274,000
145,036
145,036
150,045
150,045
104,964
145,036
24,000
274,000
134,540
134,540
31.12.2009 Amortization Expenses

Equipment
(iv)
150,045
150,045
Balance Sheet
Assets:
Leased Equipment
1700360
Less- Accumulated Amortization
150045 1550315
Liabilities:
Current LiabilitiesObligation Under Capital Lease(Current Portion)
104964
Accrued Interest on Obligation Under Capital
145036
250000
Lease
Non Current LiabilitiesObligation Under Capital Lease(Non Current
1345396
Portion)
(v)
01.01.2010 Accrued Interest on Obligation under Capital
134,540
Lease
Obligation Under Capital Lease
1,345,396
30,090
Equipment
Equipment
1,530,334
Leased Equipment
1,700,360
Cash
1,340,000
Solution No. 2(i).
Head Office
Journal Entries:
Branch
Accu. Depre-Store Furniture
Cash
Merchandise Shipment to Branch
Allow. For Overvaluation of Br. Merchandise
Store Furniture & Fixture
No Entry
Branch
71,000
5,000
30,000
30,000
6,000
10,000
Accounts Receivable
Sales
Cash
Accounts Receivable
250,000
Purchase
Accounts Payable
220,000
Accounts Payable
Cash
240,000
Expenses
Accrued Expenses
Branch
Cash
22,500
1,500
6,000
Branch
60,000
Cash
25,000
30,000
36,000
10,000
5,000
71,000
280,000

Cash
Accounts Receivable
Sales
Cash
Accounts Receivable
Purchase
Accounts Payable
120,000
220,000
Accounts Payable
Cash
115,000
240,000
Expenses
Head Office
Cash
11,000
Merchandise Shipment from Head Office

Head Office
60,000
Head Office
Cash
25,000
25,000
Merchandise in Transit
Head Office
12,000
10,000
250,000
280,000
1,500
1,500
175,000
175,000
140,000
140,000
120,000
115,000
6,000
5,000
30,000
50,000
10,000
Branch
Branch
Cash
Merchandise Shipment from Head Office
Accu. Depre-Store Furniture
Head Office
12,000
Page 2 of 7
60,000
25,000
12,000
2,000
Depreciation
Accu. Depre.- Store Furniture & Fixture
3,800
Expenses
Accrued Expenses
Branch Income Statement
Branch
(Loss transferred)
Branch Income Statement
(Load on Br goods sold adjusted)
Workings:
Load on goods sent to Br. (6,000+10,000+2,000)=
Less- Load on goods in br. Closing inventory
(9,600 x 20/120)=
Load on goods sold by branch
1,800
3,800
1,800
14,200
14,200
Depreciation
Accu. Depre.- Store Furniture & Fixture
10,000 x 10%= 1,000
1,500 x 1/5 =
300
1,300
Expenses
Accrued Expenses
Head Office
Income Statement
(Loss transferred)
1,300
1,300
900
900
14,200
14,200
16,400
16,400
18,000
1,600
16,400
Solution No. 2(ii).

Head Office
Income Statement
for the year ended December 31, 2012
Sales
Less- Cost of Goods sold:
Opening Merchandise
Add- Purchase
Less- Shipment to Branch
Less- ending merchandise
Branch
250,000
96,000
220,000
316,000
90,000
226,000
60,000
Gross Profit
Less- Other operating expenses:
Expenses
Depreciation
24,300
3,800
Net Profit
Add- Branch Loss
Load on goods sold by branch
Total Net profit
(14,200)
16,400
Income Statement
for the year ended December 31, 2012
Sales
Less- Cost of Goods sold:
Opening Merchandise
Add- Purchase
Add- Shipment from Head Office
66,000
Less- ending merchandise
84,000
Gross Profit
28,100
Less- Other operating expenses:

Expenses
Depreciation
55,900
Net Profit
Liabilities & Capital

Accrued Expenses
Accounts Payable
Capital Stock
Retained Earnings
120,000
96,000
216,000
40,000
176,000
(1,000)
11,900
1,300
13,200
(14,200)
2,200
58,100
Head Office
Balance Sheet
Assets :
Cash
Accounts Receivable
Branch
Less- Allowance for overvaluation of Br. Merchandise
Less- Accu Depreciation
175,000
Branch
85,000
130,000
60,000
109,800
1,600
38,000
14,400
Balance Sheet
Assets :
Cash
Accounts Receivable
Merchandise in Transit
23,500
35,000
40,000
12,000
08,200
23,600
406,800
1,800
20,000
250,000
135,000

Less- Accu Depreciation
Liabilities & Capital
Accrued Expenses
Accounts Payable
Head Office A/C
Retained Earnings
406,800
Page 3 of 7
11,500
6,300
5,200
115,700
900
5,000
109,800
115,700
Solution No. 3(d)
Particulars
Wages
Plant
Materials
Sundry Expenses
Head Office Charges
Profit & Loss A/C (profit on sale of
Materials)
Notional Profit
Profit & Loss A/C (profit transferred)

Work in Process (Reserve)
National Engineers Ltd

Contract Account
Amount
Particulars
Tk
1,400,000 Material sold
350,000 Sale of Plant
1,050,000
65,000 Work in Process:
125,000 Work Certified
( 24,00,000x100/80)
15,000
Work Uncertified
487,000 Plant in hand
Material in hand
3,492,000
300,000 Notional Profit
187,000
487,000
Profit to be credited to Profit & Loss Account:

Cost to date
Less : Plant sold
17,000
Cost of material sold
100,000
Estimated further expenditure:
Wages
Plant
Materials
Sundry Expenses
Head Office Charges
Claims, temporary maintenance &
cintingencies
2,990,000
117,000
2,873,000
849,500
150,000
500,000
35,000
62,500
90,000
Less: Residual Value of Plant

Estimated total cost
Estimated Profit
Contract Price
1,687,000
4,560,000
60,000
4,500,000
500,000
5,000,000
Profit to be transferred: Estimated Profit x Work Certified / Contract Price

(5,00,000 x 30,00,000 / 50,00,000)=
300,000
Page 4 of 7
Amount
Tk
Amount
Tk
115,000
17,000
3,000,000
250,000
3,250,000
80,000
30,000
3,492,000
487,000
487,000
Solution No. 4(a)

Populer Life Assurance Co.
Revenue Account
For the year ended Dec 31, 2012
Dr.
Expenditures
Claim paid
Add: Oustanding
Taka
197,000
Taka
10,000
Premium Received
207,000
Less: Claims covered under
reinsurance
Surrenders
Bonus to policy holders
Add: Bonus utilized in reduction
of premium
Commission paid
Management Expenses
Add: Due
2,300
204,700
30,500
36,500
9,300
2,900,300
233,500
Add: Oustanding
7,000
6,000
Cr.
Taka
Income
Taka
Life assurance fund at the beginning of the
year
10,000
243,500
Add: Bonus utilized in reduction
of premium
Interest & dividend received
6,000
112,700
249,500
21,300
134,000
Add: Oustanding
32,300
1,200
Dividend paid
Life assurance fund at the end of
the year
33,500
16,000
2,976,800
3,283,800
3,283,800
Solution No. 4(b)

Populer Life Assurance Co.
Balance Sheet
As at 31 December 2012
Dr.
Capital and Liabilities
Authorized Capital
Issued and subscribed capital 10,000 shares of
Tk.15 each
Calledup and paidup capital 10,000 shares of
Tk.10 each
Life assurance fund
Claimed admitted but not paid
Management Expenses due
Property and Assets

Mortgage in Bangladesh
Cr.
Taka
492,200
150,000
Loans on companey's policies
178,600
100,000
2,976,800
10,000
Investments
Freehold premises
Agent's Balance
Amount receivable under Reinsurance
2,300,000
40,000
9,300
Taka
?
1,200
Outstanding Premium
Accrued Interest
Cash Deposit
Cash in hand
3,088,000
Page 5 of 7
2,300
10,000
21,300
27,000
7,300
3,088,000
Solution No. 5.
Emacol Limited
Statement of Affairs
As on 31 december 2012
Book
Value
12,000
13,250
Notes Receivable
Bank Notes Payable
Interest payable
99,000
land
Building
Mortgage Note Payable
Interest Payable- Mortgage Note
2,000
2,100
23,500
28,000
12,000
19,500
600
46,500
12,000
10,000
300
Investment in stock
Bank Notes Payable

Interest payable
21,000
Realized
Value
Assets
Assets pledged with fully secured
creditors
10,300
6,000
250
6,250
20,000
50,000
70,000
100,000
4,250
104,250
Fixed Assets:
Cash in Hand
Cash at Bank
Accounts Receivable
Inventories-FG
Inventories-WIP
Inventories-Raw Materials
Unpaid Insurance
Plant and Machinary
Total Net Realizable Value
Wages and Salaries due
Net free Assets
2,100
14,000
30,240
9,000
11,900
300
19,000
97,240
6,750
90,490
41,260
131,750
Equities
Unsecured
6,750
Liabilities having priority

Wages and Salaries due
6,750
16,000
550
Fully Securied creditors

Notes Payable
Interest Payable
16,000
550
100,000
4,250
7,000
2,000
Eatimated dificiency (balancing Figure)

279,450
Book
Value
1,700
13,250
Pertially secured creditors

Mortgage Notes Payable
100,000
Interest Payable- Mortgage Note

Total
4,250
104,250
Land and Building

Unsecured Creditors
70,000
Page 6 of 7
34,250
97,500
125,000
(70,600)
279,450
Accounts payable
Stock holders' Equity
Capital Stock
97500
Retained Earnings (deficit)

131,750
Deficiency account
As on 31 December 2012
Estimated Losses
Estimated Gains
Accounts Receivable
9,500 Inventories-FG
Inventories-WIP
Inventories-Raw Materials
Unpaid Insurance
Land
Buildings
Plant and Machinery
Total
3,000
7,600
300
1,000
49,000
27,500
97,900
Capital Stock
Retained Earnings
Estimated deficiency
Page 7 of 7
Total
2,240
125,000
(70,600)
41,260
97,900

SUBJECT: 202. MANAGEMENT ACCOUNTING
Model Solution
(a)
In designing management accounting systems, care must be taken that the benefit to management of
having certain types or levels of information is greater than the cost of obtaining and using the information.
In designing regular management accounting reports or a specific adhoc report, information should be
included on a cost-effective basis. While it can be relatively straightforward to measure the costs of
producing and using management accounting information, it can be more challenging to estimate the
benefits that managers derive from having access to information. Ultimately, the management accountant
must use his/her judgment in assessing whether the benefits exceed the costs and, therefore, the
information should be produced.
(b)
(i)
Estimates of the cost of lost merchandise due to shoplifting and the cost of employing security
personnel would be relevant to this decision.
(ii) Building-cost estimates for the library extension, as well as estimated benefits to the population from
having the addition, would be useful. In estimating the benefits, some value judgements may need to be
made about the benefits to the public from having additional library space and more books.
(iii) Estimates of the acquisition costs and any operating costs associated with the proposed luxury cars
would be relevant. For example, estimates of the cost of petrol, routine maintenance and insurance on
the new vehicles would be useful.
(iv) Weekly or biweekly data about the cost of maintaining the machine would be relevant. In addition, the
production manager should consider historical information of repairs needed and the likely rates of
breakdown under each maintenance alternative.
(c)
The four types of benchmarking and their limitations are as follows:

(i)
Internal benchmarking involves benchmarking between units of the same company. This is the
simplest form of benchmarking to use, as it is relatively easy to gain access to other areas of the one
organisation. However, internal benchmarking partners may not provide the best benchmarks as they
may not be the best performers in certain areas. Also, they may be operating in dissimilar markets
and industries, so processes and measures may not be directly comparable.
(ii)
Competitive benchmarking involves a company identifying the strengths and weaknesses of

competitors to assist them to prioritise areas for improvement. While the objective may be to equal or
exceed the competitors performance, formal benchmarking processes may be difficult to arrange
with direct competitors.
(iii)
Industry benchmarking is broader than competitive benchmarking as it involves comparing a business

against all other businesses that have similar interests and technologies, to identify performance and
trends within an industry. Where these are relatively common to all firms in the industry, this can be a
very valuable form of benchmarking, but as industries become more globalised and directly compete
in the same markets, opportunities for benchmarking of this nature are likely to diminish.
(iv)
Best-in-class or process benchmarking. This involves benchmarking against the best practices which
may occur in any industry. The difficulty with this approach is that many characteristics of best
practice businesses may not be common to other industries.
Page 1 of 6

(a)
This comment is occasionally heard from people who are experienced managers who have run their
own small business for a long period of time. These individuals may have great knowledge about their
business and may be able to manage effectively without the assistance of formal systems, such as
budgets. They may feel they do not need to spend a great deal of time on the budgeting process,
because they can essentially run the business by gut feeling. This approach can result in several
problems. First, if the person who is running the business is absent or leaves the business, there are no
formal plans or budgets which may assist new managers to run the business. Second, budgeting can
assist in the effective running of an organisation. Budgets facilitate communication and co-ordination,
are useful in resource allocation and help in evaluating performance and providing incentives to
employees. It is difficult to achieve these benefits without a budgeting process.
(b)
Statement of Profit and Loss
for Expected Levels of Operations
Particulars
Sales
Less Marginal Costs
Contribution
Less Fixed Costs
Special Costs (Working Note)
Profit / Loss
0% (Tk.)
Nil
Nil
Nil
11,000
12,500
(23,500)
50% (Tk.)
49,500
40,500
9,000
19,000
-(10,000)
75% (Tk.)
90,000
60,750
29,250
19,000
-10,250
Note: Special Cost:

Closing down Costs
Maintenance of Plant
Overhouling, training etc.
7,500
1,000
4,000
12,500
The amount of loss can be reduced by (23,500 10,000) i.e. 13,500 if the factory continuous to operate. Further
in the second year the estimated profit is 10,250. Therefore, closing down is not desirable.
Workings:
(i)
50% operations:
60%
40%
20%
Difference
Variable Cost for 40%
Fixed Cost
Variable Cost for 50%
(ii)
Tk. 67,600
Tk. 51,400
Tk. 16,200
= Tk. 16,200 2 = Tk. 32,400

(Tk. 51,400 Tk. 32,400) = Tk. 19,000.
= VC for 40% + VC for 10%
= 32,400 + 8,100 = Tk. 40,500.
75% operations:
For
VC at 60%
Fixed Cost
VC for 75%
80%
60%
20%
15%
Tk. 83,800
Tk. 67,600
Tk. 16,200
Tk. 12,150
= 16,200 3 = Tk. 48,600.

= (67,600 48,600) = Tk. 19,000.
= VC for 60% + VC for 15%
= Tk. 48,600 + Tk. 12,150
= Tk. 60,750
Page 2 of 6
Variable Cost only

(a)
The new budget system allows the managers to focus on those areas that need attention. By dividing the
annual budget into 12 equal parts, managers can take corrective action before the error is compounded
(frequent feedback is provided). Also, the company has segregated costs into fixed and variable
components, an essential step for good control. A major weakness of the budget is the failure to properly
define responsibility. Because of this, supervisors are being held accountable for areas over which they have
no control.
(b)
The performance report should emphasize those items over which the manager has control. The report
should also compare actual costs with budgeted costs for the actual level of activity. Currently, the report is
attempting to compare costs at two different levels: the original budget for 3000 units with the actual costs for
production of 3185 units. A flexible budgeting system needs to be employed.
(c)
Berwin, Inc.
Machining Department Performance Report
For the Month Ended May 31, 2008
Volume in units
Variable manufacturing costs:
Direct materials
Direct labour
Variable overhead
Total variable costs
Fixed manufacturing costs:
Indirect labour
Depreciation
Taxes
Insurance
Other
Total fixed costs
Total costs
Flexible
Budget*
3185
Actual
3185
Variance
0
$ 25 480
29 461
35 354
$ 90 295
$ 24 843
29 302
35 035
$ 89 180
$637 F
159F
319 F
$1,115 F
3300
1500
300
240
930
6270
$ 96 565
3334
1500
300
240
1027
6401
34 U
0
0
0
97 U
$131 U
$ 95 581
$984 F
*For the variable costs: 3185 $24 000/3000; 3185 $27 750/3000; 3185 $33 300/3000
(d)
Berwins budgetary system could also be improved by offering monetary and nonmonetary incentives to
reach budget goals. The managers and supervisors should be allowed and encouraged to participate in the
budgetary process because they will be responsible for controlling the budget. The accountant needs to be
certain that the budget objectives are based on realistic conditions and expectations. The managers should
be held accountable only for costs over which they have control.
Page 3 of 6

(a)
CM per Unit
$1.60
CM Ratio
0.4
BEP in Quantity
275,000
BEP in $
$1100,000
Profit
$ 184,000
Margin of Safety in Quantity
115,000
Margin of Safety in %
29.49%
DOL
Candy
Candy
3.3913
Profit Increase
$93,600
Current CMR = 0.4

CMR =
After 15% increase in the cost of Candy, V will be $ 2.7
Therefore,
0.4 =
0.4P = P 2.7
0.6P = 2.7
P = $4.5
Price will be $ 4.5 per unit.
(b)
Sales
Variable Manufacturing Costs
Total Contribution Margin
Fixed Manufacturing Costs
Controllable Profit
Fixed Operating expenses
Income
Sales
Variable Manufacturing Costs
Total Contribution Margin
Fixed Manufacturing Costs
Controllable Profit
Fixed Operating expenses
Income
Snap
$4,000
1,600
2,400
1,200
1,200
800
$400
Crackle
$2,000
600
1,400
600
800
600
$200
Pop
$1,000
500
500
100
400
800
($400)
Snap
$4,000
1,600
2,400
1,200
1,200
Crackle
$2,000
600
1,400
600
800
------
The Pop should not be eliminated.
Page 4 of 6
$
$
$
$
$
$
$
Total
7,000
2,700
4,300
1,900
2,400.00
2,200.00
200.00
$
$
$
$
$
$
$
Total
6,000
2,200
3,800
1,800
2,000.00
2,200.00
(200.00)
Answer to the Question No. 5(a)

Variable product costs are particularly useful for short-term decisions, such as whether to make or buy a
component, and pricing especially when variable selling and administrative costs are included. The fixed costs
will be incurred anyway, and in the short term they should be disregarded. In making these decisions, the variable
costs provide a good measure of the differential costs that need to be assessed. We discuss the information
needed for short-term decision making in Chapter 19.
Under variable costing, profit is a function of sales. The classification of costs, as fixed or variable, makes it
simple to project the effects that changes in sales have on profit. Managers find this useful for decision making.
Also, cost volume profit analysis (which we discuss in Chapter 18) requires a variable costing format.
Planned costs must take account of cost behaviour if they are to provide a reliable basis for control. In addition,
the link between sales and profit performance, under variable costing, ensures a performance measure that
managers understand easily.
Fixed costs are an important part of the costs of a business, especially in the modern manufacturing environment.
Variable costing provides a useful perspective of the impact that fixed costs have on profits by bringing them
together and highlighting them, instead of having them scattered throughout the statement.
Absorption product costs include unitised fixed overhead, which can result in sub-optimal decisions, especially as
fixed costs are not differential costs in the short term. However, in the modern business environment, with a high
level of fixed overhead, a relatively small percentage of manufacturing costs may be assigned to products under
variable costing. Also, in the longer term a business must cover its fixed costs too, and many managers prefer to
use absorption cost when they make cost-based pricing decisions. They argue that fixed manufacturing overhead
is a necessary cost incurred in the production process. When fixed costs are omitted, the cost of the product is
understated.
(b)
(i)
Cost per unit
Direct material
Direct labour
Variable overhead
Fixed overhead *
* Fixed overhead
=
=
=
(ii)
Variable
Absorption
$9.00
$9.00
3.60
3.60
5.40
5.40
4.00
$18.00
$22.00
budgeted fixed overhead
budgeted level of production
$600,000
150,000
$4 per unit
(a)
Slim and Trim Ltd
Absorption Costing Income Statement
For the Year Ended 30 June
Sales revenue (125,000 units sold at $27 per unit)
Less: Cost of goods sold
125,000 units @ $22 per unit
Gross margin
Less: Selling and administrative expenses:
Variable (at $2 per unit)
Fixed
Net profit
Page 5 of 6
$3,375,000
2,750,000
625,000
(250,000)
(100,000)
$275,000
(b)
Slim and Trim Ltd
Variable Costing Income Statement
For the Year Ended 30 June
Sales revenue (125,000 units sold at $27 per unit)
Less: Variable expenses:
Variable manufacturing costs at $18 per unit
Variable selling and administrative costs at $2 per unit
Contribution margin
Less: Fixed expenses:
Fixed manufacturing overhead
Fixed selling & administrative expenses
Net profit
(iii)
$3,375,000
(2,250,000)
(250,000)
875,000
(600,000)
(100,000)
$175,000
Difference in reported profits under absorption costing and variable costing

= Changes in inventory in units predetermined fixed overhead rate per unit
= 25,000 units $4 per unit
= $100,000
As shown in requirement (ii), reported profit under variable costing is $100,000 lower than absorption
costing.
Page 6 of 6

SUBJECT: 204. TAXATION
Model Solution
Solution Question No. 3.
Mr. X
Computation of Total Income
For the year ended on 30/06/2013 (Assessment year: 2013-2014)
(a)
(b)
(1)
(2)
Income from Salary:

(1) Basic Salary (Tk. 20,000 X 12) =
2,40,000/(2) Entertainment Allowance @ 20% =
48,000/(3) Bonus (Tk. 20,000 X 2 months) =
40,000/(4) Free accommodation (25% of Basic salary, or rental value
60,000/Tk. 72,000, lower one)
(5) Medical Allowance (Tk. 500 X 12 month)
= 6,000/Nil
Less: exempted up to actual expenditure
= 8,000/(6) Conveyance Allowance (Tk. 3,000 X 12) =
36,000/6,000/Less: Exempted up to -30,000/(7) Employers contribution to Recognised Provident Fund
24,000/10%
Total Salary Income
Income from Interests on Securities:
Interests on Debentures
Interests on Govt. Securities
4,18,000/-
Tk. 10,000/Tk. 70,000/Interest Income
80,000/-
(As there is no exemption from such interest with effect from the assessment
year 2011-2012. so it is fully taxable. Moreover no tax credit will be allowed
on TDS Tk. 7,000/- as it was deducted 3 years before which is not to be adjusted
with this years assessment)
(c)
Income from House Property:

Annual Value ( Tk. 50,000 X 12 months)
(Assuming it as reasonable)
Less: allowance deduction:
(1) Repairs and maintenance th of A.V
(2) Municipal tax (Tk. 20,000 / 2)=
(As 50% of the house is self occupied)
(3) Insurance Premium (Tk. 12,000 / 2) =
(4) Int. on House Building loan ( 1,47,000 / 2)=
Tk. 6,00,000/-
Tk. 1,50,000/Tk.
10,000/-
Tk.
Tk.
6,000/73,500/Tk. 2,39,500/-
House Property Income

(d)
Income from Partnership Firm:

50% share income from Partnership Firm (before tax)
Page 1 of 5
Tk. 3,60,500/Tk. 1,50,000/-
(e)
f)
Capital Gain (from sale of shares of listed companies):

As it is tax free as per SRO No. 269 dated 01/07/2011
so it is not added with income ---
Nil
Income from other sources:

(1)
(2)
(3)
(4)
Cash dividend ---- (45,000 100/90) = Tk. 50,000/Less: exempted up to

= Tk. 10,000/Stock dividend { tax free as per section 2(26)} -Bank Interest (5,600 100/90)=
Income From Sub-let (Tk. 3,000 X 12) =
Total Income
Investment Allowance:
(1) Contribution to Recognized P.F (both) -- (24,000 X 2) =
(2) Life Insurance Premium ( not allowable as it is in the
name of old father)
(3) Donation to Prime Ministers relief fund is not an item of
6th schedule (Part-B). So it cannot be considered as
investment allowance.
(4) Investment in secondary share
Tk. 40,000/Nil
Tk. 6,000/Tk. 36,000/=
Tk. 82,000/Tk. 10,90,500/-
Tk. 48,000/Nil
Nill
Tk. 1,00,000/Tk. 1,48,000/-
Tax Computation:On first

On next
On next
On balance
Tk. 2,20,000/Tk. 3,00,000/Tk. 4,00,000/Tk. 1,70,500/Tk. 10,90,500/Less: Investment tax credit
Tax @ 10%
Tax @ 15%
Tax @ 20%
1, 48,000 X 15%
Less: Tax on Taxed Share income of Firm
Less: Tax deducted at sources:(1) TDS from cash dividend

(2) TDS from Bank Interest
1,01,900 X 1,50,000
10,90,500
Nil
Tk. 30,000/Tk. 60,000/Tk. 34,100/Tk 1,24,100/Tk. 22,200/Tk.1,01, 900/Tk. 14,017/Tk. 87,883/-
Tk. 5,000/Tk. 600/Net tax payment
Page 2 of 5
Tk.5,600/Tk. 82,283/-
Solution of question No. 4.

X Limited
Computation of Total Income
For the year ended on 30th june-2013
(Assessment Year: 2013-14)
(1) Income from trading business: (Sec. 28)
Net profit as per P/L :Less: Non business income included in P/L for consideration at
appropriate head of income:
(a) Dividend Income (considering income from other sources)
(b) Share premium (considering income u/s 82C)
(c) Sundry Income (considering income from other sources)
(d) Capital Gain from sale of machine (considering at
under Capital Gain head)
Tk. 2,32,300/-
Tk. 30,000/Tk. 30,000/Tk. 13,000/Tk. 40,000/Tk. 1,13,000/Tk. 1,19,300/-
Add:- Expenditure to be considered as per tax law afterwards:(1) Entertainment (to be considered as per rule-65)
(2) Deprecation (to be considered as per 3rd Schedule)
Tk. 9,500/Tk. 46,600/Tk. 56,100/Tk. 1,75,400/-
Add:- Inadmissible Expense:(1) Rent and Taxes Tk. 24,500/As VAT Tk. 4,200 paid for importing machineries is
charged at P/L , so disallowed Tk. 4,200 being part
of capital expenditure. As the machine is not used
during the year, so no tax deprecation is allowable.
Tk. 4,200/-
(2) Repairs and operating expenditure Tk. 27,300/Tk. 6,000 disallowed from here as it is not business
expenditure rather personal expenditure of M.D
Tk. 6,000/-
(3) Legal Expenditure Tk. 14,500/Income tax related legal expenditure is allowable
up to appeal to the Taxes Appellate Tribunal. So as it is
allowable expenditure nothing to add back from here
Nil
(4) Type Writer Tk. 5,948/Type writer machine is capital nature expenditure.
As it is charged at P/L as revenue expenditure, so
Disallowed fully.
Tk. 5,948/-
Page 3 of 5
(5) Bad debit Provision Tk. 4,400/Disallowed fully being to provision (other than actual
bad debit) is allowable as per Sec. 29
Tk. 4,400/-
(6) Compensation for termination of staff Tk. 10,000/Assuming compensation paid for violation of job
agreement by the employer, so disallowed fully
Tk. 10,000/Tk. 2,05,948/-
Add:- Demand income u/s 19

Bad debit recovered is to be treated as business income as
per provision of section 19 (15) of ITO 1984
Tk. 2,000/Tk. 2,07,948/Less: Tax Depreciation (as per 3rd Schedule)

Tk. 58,400/Profit before charging entertainment Tk. 1,49,548/Less: Entertainment (as per Rule.65)
Tk. 1,49,548 X 4% = Tk. 5,982/-
But restricted up to actual expenditure. Here the actual expenditure

claimed Tk. 9,500/-. Out of which Tk. 2000/- is unexplained and Tk.
5,276/- is personal expenditure. So after deducting these two, claim
renains (Tk. 9,500 - 2,000-5,276/-)= 2,224/- As it is lower than the
celling of Rule-65, so it is allowed
Income u/s 82C (Share Premium) :
Tax @ 3% was collected by SEC and it is final settlement of tax liability.
Tax rate is also 3% as per Sec. 16E
Capital Gain:
Capital Gain from sale of machineries
Income From other source:
Tk. 2,224/Tk. 1,47,324/-
Tk. 30,000/Tk. 40,000/-
(1) Dividend Income

(2) Sundry Income
Tk. 30,000/Tk. 13,000/Tk. 43,000/Total Income =
(1)
(2)
(3)
(4)
Tax Computation
On Income other than Capital gain, share premium and
dividend income @ 37.5 % (being non publicly traded company)
(Tk. 2,60,324- 40,000-30,000-30,000)= 1,60,324 X 37.5%
On share premium Tk. 30,000 @ 3%
On Capital Gain @ 15% (40,000 X 15%)
On Dividend @ 20% (30,000 X 20%)
Tk. 2,60,324/-
Tk. 60,122/Tk.
900/Tk. 6,000/Tk. 6,000/Tk. 73,022/-
Less: Tax credit on TDS on dividend @ 20%

Tax Credit on Premium @3%
(Assuming TDS was made as per law)
Tk. 6,000/Tk. 900/Net Tax Liability
Page 4 of 5
Tk. 6,900/Tk. 66,122/-

Asa Electronics
Calculation of Assessable Value:
(10000x60x78)
Insurance
1%
Landing Charge
Assessable Value for Duty
1%
Customs Duty
AIT
Supplementary Duty
(47740680+5728882 = 53469562)
VAT
(47740680+5728882+5346956 = 58816518)
ATV
(58816518 x 1.2667 = 74502883)
Total Duty & Tax
Per Unit Material Cost for Input VAT
(47740680+5728882+5346956)
4,68,00,000
4,68,000
4,72,68,000
4,72,680
4,77,40,680
12%
5%
10%
57,28,882
23,87,034
53,46,956
15%
88,22,478
4%
29,80,115
Per unit
Total Tk.
5,88,16,518
10000 units
Value Addition per unit

40+200+100+80+200
Total Cost
Mark Up @ 20%
Price for VAT Form-1 before VAT
VAT 15%
Sales Price per unit
Input VAT per unit
8822478+2980115 for Material
200x15% Local Material B
Total Input VAT per Unit
5,881.65
620.00
6,501.65
1,300.33
7,801.98
1170.30
8,972.28
Total Tk.
VAT per unit Sales

Rebate per unit sales
Per unit VAT liability after covering input VAT
= THE END =
Page 5 of 5
1,18,02,593
10000 units
1,180.26
3.00
1,183.26
1,170.30
1,183.26
(12.96)

PROFESSIONAL LEVEL-III
SUBJECT: 301. ADVANCED FINANCIAL ACCOUNTING-II
Solution of question: 1
1(a):
Model Solution
MUTTAKEEN LTD
Computation of Basic and Diluted EPS
Particulars
1
(i) Net Profit for the

period attributable for
Shareholders
For Basic EPS

2
EPS Tk.2 50,00,000

Shares
= Tk.100,00,000
Adjustment for Dilution

3
Tax Adjusted Interest on
Convertible Debentures
For Diluted EPS

4 = (2+3)
= Interest (100% Tax

Rate)
=Tk. 107,50,000
= (10,00,000 10 12%)
(100% 37.50%)
= 12,00,000 62.50%
=Tk. 750,000
(ii) Weighted Average

No. of Ordinary Shares
(iii) EPS = (i) (ii)
1(b):
Given 50,00,000
10,00,000 1
60,00,000
= 10,00,000
Basic EPS = Tk. 2.00
Diluted EPS =Tk. 1.79
MONYEM PHARMA AID LTD.

Statement of operation in different industry segments as per IFRS-8
Amount (Tk. in millions)

Plastic
Health
Food
Inter Segment
Particulars
and
and
Other
Consolidated
Products
Elimination
Packing Science
External Sales ..
5,595
553
324
155
6,627
Inter Segment Sales
55
72
21
7
(155)
Total ..
5,650
625
345
162
(155)
6,627
Segment Expenses ..
(3,335)
(425)
(222)
(200)
122
(4,060)
Operating Profit ..
2,315
200
123
(38)
(33)
2,567
(562)
General Expenses
132
Income from Investments
(65)
Interest
Income from continuing operations
2,072
Identifiable Assets ..
7,320
1,320
1,050
665
-Corporate Assets
Total Assets
Page 1 of 8
10,355
722
11,077
Solution of question: 2.
MMH LTD
Consolidated Statement of Financial Performance
for the financial year ended 30 June 2013
Particulars
Notes
Amount
(Tk.)
Revenues from operating activities

Sales ..
Other ..
(1)
(2)
10,40,000
150,800
11,90,800
Expenses from operating activities

Cost of sales
Other .
(3)
(4)
610,214
443,850
10,54,064
136,736
39,248
97,488
8,625
88,863
Profit from operating activities before income tax

Income tax expense ..
Net profit .
Net profit attributable to outside equity interests ..
Net profit attributable to members of the parent entity ..
Total change in equity other than those resulting from
transactions with owners as owners
(5)
given
Tk. 88,863
Notes:
(1) Sales revenue
MMH Ltd
(Tk.)
400,000
Sales revenue
Muaz Ltd
(Tk.)
350,000
Mahran
Ltd (Tk.)
320,000
Adjustment:
Muaz Ltd to Mahran Ltd
Mahran Ltd to MMH Ltd
Total (Tk.)
10,70,000
(20,000)
(10,000)
Tk.
10,40,000
(2) Other revenue
MMH Ltd
(Tk.)
80,000
Other revenue
Adjustment:
Dividend paid
Muaz Ltd: 80% x Tk.2,500
Dividend provided
Muaz Ltd: 80% x Tk.5,000 = Tk.4,000
Mahran Ltd: 60% x Tk. 2,000 = Tk.1,200
Tk.5,200
Sale of machinery: Mahran Ltd to MMH Ltd
Proceeds of Sale/Other Revenue
Page 2 of 8
Muaz Ltd
(Tk.)
70,000
Mahran
Ltd (Tk.)
50,000
Total (Tk.)
2,00,000
(2,000)
(5,200)
(42,000)
Tk.
150,800
(3) Cost of sales
Cost of sales
Adjustment:
Pre-acquisition
At 1 July 2012: Inventory (cr.)Tk. 286
At 30 June 2013: Cost of Sales (cr.) Tk. 286
Unrealized profit in ending inventory:
MMH Ltd
(Tk.)
210,000
Muaz Ltd
(Tk.)
252,000
Mahran
Ltd (Tk.)
185,000
Total (Tk.)
647,000
(286)
Sales.. Dr Tk. 20,000

Cost of Sales... ..Cr 27,000
Inventory... Cr 3,000
Deferred Tax Asset .............. Dr 900
Income Tax Expense (30% x Tk.3,000).Cr.900
(27,000)
Sales.. Dr 10,000
Cost of Sales.. Cr 9,500
Inventory. Cr 500
Deferred Tax Asset .. Dr 150
Income Tax Expense (30% x Tk.500) Cr 150
(9,500)
Tk.
610,214
(4) Expenses from operating activities: Other
MMH Ltd
(Tk.)
180,000
Other operating expenses

Adjustment:
Pre-acquisition: Muaz Ltd - Mahran Ltd
At 30 June 2013: Amortization Expense
Depreciation on machinery
Muaz Ltd
(Tk.)
141,800
Mahran
Ltd (Tk.)
165,000
Total (Tk.)
486,800
760
Depreciation Exp. (10% x Tk.1,500 p.a. ) / 2

Pre-acquisition: At 30 June 2013:
Accumulated Depreciation-Plant
Pre-acquisition: At 30 June 2013:
Accumulated Depreciation-vehicles
Proceeds of Sale/Other Revenue.. Dr 42,000
Machinery Dr 1,500
Carrying Amount of Machinery Sold Cr 43,500
Income Tax Expense Dr
450
Deferred Tax Liability Cr 450
Page 3 of 8
75
(171)
(114)
(43,500)
Tk.
443,850
(5) Tax Expenses
Tax expense.
Adjustment:
Pre-acquisition:
At 30 June 2013: Income Tax Expense
Pre-acquisition:
Pre-acquisition:
Income Tax Expense
MMH Ltd
(Tk.)
22,000
Muaz Ltd
(Tk.)
8,700
Mahran
Ltd (Tk.)
9,000
Total (Tk.)
39,700
86
51
34
450
Sales.. Dr 20,000
Cost of Sales Cr 27,000
Inventory Cr 3 000
Deferred Tax Asset.. Dr
900
Income Tax ExpenseCr 900
(30% xTk.3,000)
(900)
Sales. Dr 10,000
Cost of Sales.. Cr 9,500
Inventory.. Cr
500
Deferred Tax Asset Dr
150
Income Tax Expense .Cr
150
(30% x Tk.500)
Depreciation on machinery
(150)
Depreciation Expense Dr
75
Accumulated Depreciation Cr
75
(10% x Tk. 500 p.a.) / 2
Deferred Tax Liability.Dr
23
Income Tax Expense.. Cr
23
(30% x Tk.75 = Tk.23 rounded)
(23)
Tk. 39,248
Solution 3(a).
H. Ltd.
Consideration
Plus non controlling interest (2000 x 30%)
(Tk. 000)
750
600
1350
2000
650
Less Net identifiable assets of F. Ltd.

Gain on bargain purchase
The abridged consolidated statement of financial position at the date of acquisition will appear as follows:
(Tk. 000)
Assets = (8200 + Fair value of F. Ltd. 2800)
Tk. 11,000
Share holders equity (6000+650 gain included in P/L
6650
Non controlling interest
600
Liabilities = (2950 + 800)
3750
Total equities & liabilities
Tk. 11,000
Page 4 of 8
3(b)(ii) The first step in indentifying the reportable segments of in entity is to identify those which represent
at least 10% of any of the entitys sales profit or assets.
Exceeds of 10% of
Quality
Nature of business
Total Sales
Total Profit/ absolute
Total assets =
$ 1975
loss = $ 232
2303
Beer
Yes
Yes
Yes
Yes
Beverage
No
No
Yes
Yes
Hotel
Yes
Yes
Yes
Yes
Retail
Yes
No
No
Yes
Packaging
Yes
Yes
Yes
Yes
Geographical Areas
Find land
Yes
Yes
Yes
Yes
Frame
No
No
Yes
Yes
United Kingdom
Yes
Yes
Yes
Yes
Australia
Yes
Yes
Yes
Yes
*
*
*
The second step would be to check if total external revenue attributable to reportable segments
constitutes at least 75% of the total consolidated or entity revenue of $ 13,613,000.
As all operating segments qualify as reportable segments, the external revenue requirement of 75% is
met.
If that had not been the case, IFRS-8 would have required that additional operating segments be
identified as reportable even they do not meet the 10% thresholds in step one.
Solution Question No. 4:

Required(i):
Tk. in million
GDP at Market Price
Less Indirect taxes
Add: Subsidy
Add: Capital Grant
GDP at factor cost
Required(ii):
Required(iii):
37,250
(6,550)
2,500
1,500
GDP at factor cost

Add the followings:Property from abroad
Export
Less the followings:Property from domestic
NNP at factor cost
(2,550)
34,700
34,700
1,730
6,350
8,080
6,970
34,580
(8,200)
34,580
National Income (NI)

NNP at factor costs
Less Capital Consumption (depreciation)
National Income
34,580
2,720
31,860
Solution No. 5(a)

Journal entries recorded by R & Co, for investment in S & Co. ordinary shares during 2012:
4,000
(1) Cash
Investment in S & Co. ordinary shares
4,000
(To record equity method dividend received from Subsidiary

Tk. 5,000*0.8)
(2) Investment in S & Co. ordinary shares
6,400
Income from Subsidiary
6,400
Page 5 of 8
(To record equity method income of subsidiary

Tk. 8,000*0.8)
(3) Income from Subsidiary
800
800
(To amortize differential related to building

and equipment depreciation)
Additional computation:
Investment in S & Co. Ordinary Shares
Balance, January 1, 2012
59,200
Reported income
6,400
Dividend Declared
(4,000)
Depreciation Expense
Balance, December 31, 2012
(800)
60,800
Solution 5(b)
Eliminating Journal Entries needed to prepare consolidated financial statements.
(a) Income from Subsidiary
5,600
Dividend declared
4,000
1,600
(To eleminate income from subsidiary)

(b) Income to Noncontrolling Interest
1,620
Dividend declared
1,000
Noncontrolling Interest
620
(To assign income to noncontrolling interest:

Subsidiary net income
8,000
Less: Ending inventory unrealized profit
(2,000)
Add; Beginning inventory realized profit
1,600
Add: Realized excess depreciation
500
8,100
Noncontrolling interest (20%)
1,620
('c) Ordinary Shares - S & Co.
20,000
Share Premium
Retained Earnings, January 1
Differentials
4,000
43,000
5,600
Investment in S &Co. ordinary shares
59,200
13,400
(To eleminate beginning investment

in S & Co. ordinary shares)
(d) Building & Equipment
8,000
Differential
5,600
2,400
(To eleminate differential)
Page 6 of 8
(e) Depreciation expense
800
800
(To amortize differential for depreciation)

(f) Retained Earnings, January 1
1,280
320
Cost of goods sold
1,600
(To eliminate beginning inventory profit:

1,600 x 80% = 1,280; and
1,600 x 20% = 320.)
(g) Sales
9,000
Cost of goods sold
7,000
Inventory
2,000
(To eliminate upstream sale of inventory.)

(h) Building & Equipment
5,000
4,000
9,000
(To eliminate unrealized gain on equipment.)

(i) Accumulated Depreciation
1,000
500
Depreciation & amortization
500
(To eliminate excess depreciation on equipment.)

(J) Accounts Payable
2,000
Accounts Receivable
2,000
(To eleminate inter company receivable/payable)

Solution 5(c)
R & Co. with its subsidiary S & Co.
Equity-Method Work Paper for Consolidated Financial Statements
Holding
Subsidiary
R &Co.
Tk.
S & Co.
Tk.
100,000
50,000
Other income
4,080
6,000
Income from Subsidiary
5,600
Items
Sales
Credits
Cost of Goods Sold
Eliminations
Debit
Tk.
g)
56,000
83,200
40,400
Credit
Tk.
9,000
Consolidated
Tk.
141,000
10,080
a)
109,680
Group
5,600
151,080
(g)
7,000
115,000
(i)
500
10,300
6,000
4,000
Other Expenses
4,800
3,600
8,400
94,000
48,000
133,700
Income to Noncontrolling interests
b)
Page 7 of 8
800
1,600
Depreciation & Amortization

Debits
e)
(f)
1,620
(1,620)
Net income c/f
15,680
8,000
69,180
43,000
Net income b/f
15,680
(5,000)
Retained Earnings, December, 31 c/f

Cash
74,860
26,060
46,000
2,000
Accounts Receivable
Inventory
16,000
34,000
14,000
22,000
120,000
80,000
Buildings & Equipments

Investment in S & Co. Ordinary Shares
Accounts Payable
Bonds Payable
256,860
118,000
62,000
24,000
20,000
60,000
3,040
20,000
40,000
h)
4,000
(i)
17,020
8,000
h)
5,000
5,600
500
64,400
9,100
15,760
(a)
(b)
4,000
1,000
14,600
(j)
(g)
2,000
2,000
65,300
(d)
15,760
74,860
28,000
54,000
213,000
(a)
1,600
(c)
59,200
(d)
5,600
323,060
i)
j)
1,000
(d)
2,400
(e)
800
(h)
9,000
2,000
97,200
21,040
80,000
960
(c)
20,000
40,000
4,000
(c)
4,000
46,000
65,300
(f)
256,860
(10,000)
70,160
28,060
20,000
Noncontrolling Interests
Credits
1,280
9,100
960
Share Premium
Retained Earnings
f)
c)
Bond Premium
Ordinary Shares
43,000
60,800
Differential
Debits
c)
8,000
10,000)
Dividend Declared
17,020
118,000
= THE END =
Page 8 of 8
320
111,220
14,600
70,160
(b)
620
(c)
13,400
13,700
111,220
323,060

SUBJECT: 302. ADVANCED COST ACCOUNTING
Model solution of question no. 01

Requirement 1(a):
Costs computed in a cost of production report are useful in determining inventory costs
and in computing the cost of goods sold. Unit costs should compare with standard unit costs or
previous data to determine whether they represent efficient operations. Also, materials, labor
and overhead must be reported by items of materials used, type of labor operations involved
and overheads incurred information is to be reported in a cost of production report are
necessary but reports must also be designed to assist control of costs.
Requirement 1.b (1):
Particulars
Western Corporation
Materials Units
Transferred out
Less: Beginning Inventory (all units)
Started and finished this period
Add: Beginning Inventory (work this
period)
Add: Ending Inventory
Equivalent Production
Working in process- Beginning Inventory
Cost added by department
Materials
Direct labour
Factory overhead
Total cost to be accounted for
Miracle Mix:
Particulars
Beginning Inventory
From December 12 purchase
Total December usage
Bypro- from Beginning
Cost of materials added during
December
19000
3000
16000
1000
Conversion Cost
(Units)
19000
3000
16000
1500
6000
23000
4500
22000
Tk. 52,000
Tk. 92,000
Tk. 1,54,000
Tk. 1,98,000
Tk. 4,96,000
Units
62,000
21,200
Unit Cost
Tk. 1.00
Tk. 1.25
Amount
Tk. 62,000
Tk. 26,500
83,200
50,000
Tk. 0.07
Tk. 88,500
Tk. 3,500
Tk. 92,000
Fabricating Department Factory Overhead

Allocation of service department factory overhead:
Maintenance
Tk. 30,000
Time keeping and personnel
Tk. 16,500
Others
Tk. 19,500
Cost of factory O/H during December
Tk. 1,32,000
Tk. 66,000
Tk. 1,98,000
Page | 1

Requirement 1.b (2-ii):

Materials (Tk. 92000/23000)
Direct labour (Tk. 154000/22000)
Factory Overhead (Tk. 198000/22000)
Total Unit Cost
Tk. 4.00 per unit

Tk. 7.00 per unit
Tk. 9.00 per unit
Tk. 20.00 per unit
Requirement 1.b (2-iii):

Transferred to Finishing Department:
From beginning inventory:
Inventory, December 1
Material added (3000 x 1/3 x Tk. 4.00)
Direct labour added (3000 x 1/2 x Tk. 7.00)
Factory Overhead added (3000 x 1/2 x Tk. 9.00)
From current production:
Units started and finished (16000 x 20)
Total cost of units transferred to Finishing Department
Work in process inventory, December 31:
Material (6000 x Tk. 4.00)
Direct labour added (6000 x 3/4 x Tk. 7.00)
Factory Overhead added (6000 x 3/4 x Tk. 9.00)
Total Cost of Work in process inventory
Tk. 52,000
Tk. 4,000
Tk. 10,500
Tk. 13,500
Tk. 80,000
Tk. 3,20,000
Tk. 4,00,000
Tk.
Tk.
Tk.
Tk.
24,000
31,500
40,500
96,000
Requirement 1.b (3):

Equivalent Production:
Transferred out
Ending Inventory
Material units
19,000
6,000
25,000
Conversion cost units

19,000
4,500
23,500
The total fabricating department cost to be accounted for is the same as shown in answer
Unit cost for materials labor and factory overhead:
Material :Tk. 13,000 + TK. 92,000 = Tk. 1,05,000; Tk. 1,05,000/25,000 = Tk. 4.20 per unit
Labor :Tk. 17,500 + Tk. 1,54,000 = Tk. 1,71,500: Tk. 1,71,500/23,500 = Tk. 7.30 per unit
Factory O/H:Tk. 21,500 + Tk. 1,98,000 = Tk. 2,19,500: Tk. 2,19,500/23,500 = Tk. 9.34 per unit
Total Unit Cost
= Tk. 20.84 per unit
Cost of units transferred to Finishing Department:
19000 x Tk. 20.84 per unit = Tk. 395960. To avoid a decimal discrepancy, the cost
transferred to the Finishing Department is computed as follows:
Tk. 496000- Tk. 100080 (Ending Work in Process inventory cost)
= Tk. 395920
Cost of ending work in process inventory in the Fabricating Department:
Work in Process Inventory, December 31:
Material
: (6000 x Tk. 4.20)
Tk. 25,200
3
Labor
: (6000 x /4 x 7.30)
Tk. 32,850
Page | 2

Factory O/H
: (6000 x 3/4 x 9.34)
Tk. 42,030
Tk. 1,00,080
Solution to Question No. 2(b):

Required:
(i)
Finishing is a bottleneck operation. Therefore, producing 1,000 more units will generate
additional throughput contribution and operating income.
Increase in throughput contribution (720 320) x 1,000
Tk. 4,00,000
Incremental costs of Jigs and Tools
Tk. 3,00,000
Net benefit of investing in Jigs and Tools
Tk. 1,00,000
Ottobi should invest in the modern Jigs and tools because the benefit of higher throughput
contribution Tk. 4,00,000 exceeds the cost of Tk. 3,00,000.
(ii)
The Machining Department has excess capacity and is not a bottleneck operation.
Increasing its capacity further will not increase throughput contribution. Therefore no
benefit from spending Tk. 50,000 to increase the Machining Departments capacity by
10,00 units. Ottobi should not implement the change to do setups faster.
(iii)
Finishing is a bottleneck operation. Therefore getting an outside contractor to produce

12,000 units will increase contribution:
Increase contribution (720 320) x 12,000
Tk. 48,00,000
Incremental contracting cost
12,00,000
Net benefit
Tk. 36,00,000
Ottobi should contract with an outside contractor to do 12,000 units for finishing at Tk. 100
per unit because the benefit of higher throughput contribution of Tk. 48,00,000 exceeds
the cost of Tk. 12,00,000. The fact that the cost of Tk. 100 per unit is double Ottobis
finishing cost of Tk. 50 per unit is irrelevant.
(iv)
Operating costs in the Machining Department of Tk. 64,00,000 or Tk. 80 per unit, are fixed
costs. Ottobi will not save any of these cost by subcontracting machining of 4,000 units to
Mumbai Corporation. Total cost will be greater by Tk. 1,60,000 (Tk. 40 x 4,000) under the
subcontracting alternative. Machining more filling cabinets will not increase throughput
contribution, which is constraints by the finishing capacity. Ottobi should not accept
Mumbais offer. The fact that Mumbai Corporations cost of Machining per unit are half of
what is costs Ottobi in house is irrelevant.
Model solution of the question no. 2(c)

To record actual conversion costs:
Conversion Costs
Various Accounts
Tk. 435,000
Tk. 435,000
To record finished goods:

Finished Goods (7,900 x Tk. 200)
Inventory Materials and In Process Control
(7,900 x 115)
Conversion cost allocated(7,900 x 85)
Tk. 1,580,000
Tk. 9,08,500
Tk. 6,71,500
Page | 3

To record sale of 7,600 units:

Cost of Finished Goods Sold (7,600 x 200)
Finished Goods
Tk. 1,520,000
Tk. 15,20,000
Solution to Question No. 3(b):

Required:
(i)
A statement showing allocation of Joint Cost applying NRV method).
Product
Output (In
Gallon)
Gasoline
Heating Oil
Jet Fuel
2,80,000
3,40,000
2,00,000
Selling
Price (Per
Gallon)
2.30
2.00
2.80
Gross
Sales
Value
6,44,000
6,80,000
5,60,000
Further
Cost
NRV
Share of
Joint Cost
1,08,000
62,000
80,000
5,36,000
6,18,000
4,80,000
16,34,000
1,07,594
1,24,054
96,352
3,28,000
(ii)
Eastern Refinery Co.
Product Line Income Statement
Particulars
Gasoline
Heating Oil
Jet Fuel
Total Costs
Actual Sales
6,44,000
6,80,000
5,60,000
18,84,000
Joint cost
+ Cost incurred
+ Disposable cost
Total costs
Profit
1,07,594
1,00,000
8,000
2,15,594
4,28,406
1,24,054
60,000
2,000
1,86,054
4,93,946
96,352
70,000
10,000
1,76,352
3,83,648
3,28,000
2,30,000
20,000
5,78,000
13,06,000
Model solution of the question no. 3(c)
Sales: Lumber
shavings(500 x 0.6)
Total Sales:
Cost of Good Sold:
Total manufacturing costs
By-product
Total COGS
Gross Margin
Cost reduction when

produced
Tk.
480,000
Revenue when sold

480,000
3,000
480,000
332,000
483,000
332,000
4,080
0
327,920
152,080
332,000
151,000
Page | 4

Model solution of the question no. 4(b)

Requirement b(i):
Total Revenue of the life cycle product sales:
1st Year2nd Year3rd Year4th Year5th Year-
3000X250=
4500X250=
4800X250=
5000X175=
1500X175=
Total
Tk. 7,50,000
Tk. 11,25,000
Tk. 12,00,000
Tk. 8,75,000
Tk. 2,62,500
Tk. 42,12,500
Less desired profit:1st Year = 3000 (250 X 20%) =

Tk. 1,50,000
2nd Year = 4500 (250 X 20%) =
Tk. 2,25,000
3rd Year = 4800 (250 X 20%) =
Tk. 2,40,000
Tk. 1,75,000
4th Year = 5000 (175 X 20%) =
5th Year = 1500 (175 X 20%) =
Tk. 52,500 Tk. 8,42,500
Total Life Cycle Cost of the product Tk.33,70,000
Less variable selling expenses = (18,800 X 30) = 5,64,000
Fixed selling expenses (3,50,000 X 5) = 17,50,000
23,14,000
Cost assigned to manufacture of 18,800 unitsTk. 10,56,000
Manufacturing cost per unit = (10,56,000 18,800) =
Tk. 56.17
Requirement b(ii):
Cost to manufacturing of productions in 1st year = (3000 X 65) = Tk. 1,95,000.
Cost remaining to last 4 years = (10,56,000 1,95,0000 = Tk. 8,61,000.
Cost per unit = 8,61,000 15,800 = Tk. 54.49
Requirement b(iii):
Expected total manufacturing cost (18,800 X 70) = 13,16,000
Less calculated life cycle manufacturing cost
= 10,56,000
Excess cost to be increased
Tk. 2,60,000
Expected profit will = (8,42,500 2,60,000) = Tk. 5,82,500
Comment:- The company should reduce the variable cost by (5,64,000 2,60,000) = Tk.
3,04,000 to maintain the target profit margin or to increase the selling price in 4th and 5th year by
the same amount Tk. 2,60,000 i.e. per unit sale price would Tk. 215 per unit.
Page | 5

PROFESSIONAL LEVEL-IV
SUBJECT: 401. FINANCIAL MANAGEMENT
Solution
MN Ltd.
Required-(a):
Determination of for each project. [ j Corjm m]
Project (j)
Correlation with market (Corjm)
Beta ()
SD( )
SD( m)
1
15
0.55
13
0.63
2
20
0.75
13
1.15
3
14
0.84
13
0.90
4
18
0.62
13
0.86
or (20 x .75)/13 = 1.15
Return of the project by applying CAPM [Kef + (Km Krf) ]
Project 1. 5% + (14% - 5%) x .63
= 10.67%
2. 5% + (14% - 5%) x 1.15
= 15.35%
3. 5% + (14% - 5%) x .90
= 13.10%
4. 5% + (14% - 5%) x .86
= 12.74%
Return of the combined projects representing MN Ltd.s total return
Expected return* = (10%x.28)+(18%x.17)+(15%x.31)+(13%x.24) = 13.63%
Return as per CAPM = (10.67%x.28)+(15.35 x.17)+(13.10x.31)+(12.74%x.24) = 12.72%
*
MN Ltd. Share price is currently based on assumption that the last five years experience
of returns will continue for the foreseeable future.
The Shares are over valued because the return as per CAPM is less than the expected return.
Required-(b):
For the following reasons the results in (or) above might not correctly identify whether or not the
share price of MN Ltd. is under valued or over valued.
(i)
The above required returns of the four projects are determined by applying Capital Asset
Pricing Model. CAPM is based on some unrealistic assumptions which are not always
valid in the real world.
(ii) Beta is not always able to measure the risk of an investment and that the above there is
significant correlation between beta and the expected return. Sometime, the empirical
result gives a mixed result.
(iii) Most of the time beta is based on historical data due to unavailability of future data.
(iv) Investor can use historical beta as the measure of future risk only if it is stable over time.
But in practice, the betas of individual securities are not stable over time. This implies that
historical betas are poor indicator of the future risk of securities.
Required (i):
Swap ratio:(1) Market price per share
(Market Capitalization/Nos. of Shares
(2) Earning per share = (Market price/P/E Ratio)
(3) Book value per share:Share Capital (Tk. in lacs)
Reserves and surplus (Tk. in lacs)
Earnings for the year. (EPS x Nos. of Shares)
(4)
Value for acquisition purpose:Earnings

= (5 x 40%); (20 x 40%)
Page 1 of 8
Efficient Ltd.
Healthy Ltd.
50
5
100
20
100
300
50
450
75
165
150
390
Book value = (45 x 25%); (52 x 25%)

Market price = (50 x 35%); (100 x 35%)
(5)
(6)
11
13
18
35
31
56
Total value of the company = (Nos. of shares x value of acquisition per share).
Nos. of shares to be given to Healthy Ltd. Shareholders = (750,000 x 56)/31 = 13,54,839
Swap ratio = Efficient Ltd. 13,54,839 = Healthy Ltd. 750,000 shares.
Promoters holders%
500,000 x13,54,839
750,000
Promoters share
=
=
Efficient Ltd.
4.75,000
Healthy Ltd.
9,03,226
Total
13,78,226
525,000
10,00,000
47.50%
4,51,613
13,54,839
66.67%
9,76,613
23,54,839
58.53%
Other share holders

Promoters holding %
Required (ii): EPS of Efficient Ltd. after acquisition

Earning per share before acquisition = (Market price / P/E Ratio)
[(500 / 10) 10]
Earnings:Efficient Ltd. (before acquisition)
Healthy Ltd.
Nos. of shares out standing
EPS
5
50,00,000
1,50,00,000
2,00,00,000
23,54,839
Tk. 8.49 per share
Required (iii): Expected market price per share = EPS x P/E ratio = (8.49x10) = Tk. 84.9
Expected market capitalization = [23,54,839 x 8,493] = Tk. 200,00,000.
(a)
Calculation of EpS, DpS and gearing at both book values and market values
EpS
Share in issue(million)
Earnings in year ended
31.03.13(Tkm)
EpS
Notes/workings
350
280
0.800
=280/350
350
89.6
0.256
= 89.6/350
DpS
Share in issue(million)
Dividend paid in year (Tkm)
DpS
Gearing at book values
Debt(Tkm)
Less: Surplus cash(Tkm)
Net Debt(Tkm)
Equity(Tkm0
Gearing at Book Value
550
(110.40)
439.60
1,210.40
26.60%
Gearing at matket values

Debt(Tkm)
Less: Surplus cash(Tkm)
Net Debt(Tkm)
Equity(Tkm)
550
(110.40)
439.60
1,583.4
Page 2 of 8
=215-89.6-15
=550-110.4
=350+950-89.6
=439.60/(439.6+1210.40)
=215-89.6-15
=550-110.4
=(350 x 4.78)-89.6
Or 350 x ex-div share price of 4.524
Gearing at Market Value
21.70%
(Where 4.524 = 4.78-0.256)

=439.60/(439.6+1,583.40)
(b)
Calculation of likely impact of the three proposed strategies for dealing with surplus
cash
Assumption
All the surplus cash of Tk 110.40 million is used either to repurchase shares or to pay bonuses.
(Alternative assumptions were also acceptable)
Preliminary workings
Based on an ex div share price of 4.524 (=4.78-0.256), the number of share to be repurchased
is 24.40 million ( = 110.4m/4.524), leaving 325.60 million shares in issue.
EpS
Number of Shares(m)
New EpS
Previous EpS
Impact
DpS
Dividend(Tkm)
Number of Shares(m)
New DpS
Previous DpS
Impact
Gearing at Book Value
Net Debt (Tkm)
1.Holding onto
Cash
No Change
0.800
2. Repurchase
Shares
280.00
325.60(Workings)
0.860
0.800
Nil
0.800
Up 0.06 long term
No Change
89.60
325.60
0.275
0.256
Up 0.02
No Change
550.0
(No surplus cash)
1100.00
=350+950-89.6-110.4
33.30%
26.60%
Up by 6.70%
As for share repurchase
550.0
1,473.00
=(350
x4.78)-89.6110.4)
27.20%
21.70%
Up by 5.5%
As for share repurchase
0.256
0.256
Nil
No Change
Equity (Tkm)
New gearing
Previous gearing
Impact
Gearing at Market
Value
Net Debt (Tkm)
Equity (Tkm)
26.60%
26.60%
Nil
New gearing
Previous gearing
Impact
21.70%
21.70%
Nil
No Change
Pay Bonuses
169.60 (=280-110.4)
350.00
0.485(single
year
impact)
0.800
Down 0.315 in that year
0.256
0.256
Nil
33.30%
26.60%
Up by 6.70%
27.20%
21.70%
Up by 5.5%
(C)
Evaluate impact on attainment of financial objectives and on shareholder wealth
1. Retain Cash
Three reasons or motives have been advanced for individuals and companies to hold
cash transaction, speculative and precautionary. Each is commented on briefly below:
Page 3 of 8
The transaction reason if SRP has sufficient cash to meet day to day
transactions it has no need of additional cash for this reason.
The speculative motive would allow the company to take advantage of
opportunities such as buying assets at temporarily favourable prices or making
an investment. This would be a logical reason for SRP to hold cash even if it has
no potential immediate investment opportunities.
The precautionary motive would allow SRP to maintain a safety cushion or buffer
to meet unexpected cash needs. Given the long term nature of SRPs contracts,
its cash flow is fairly predictable so less cash is needed for precautionary needs.
However, the surplus cash is approximately equivalent to just one years dividend
payment and so may not seem to be an excessive cash buffer.
On the downside, shareholders are missing out on the income that they could obtain by
investing the funds elsewhere. With 5.3% of total assets held in the form of surplus cash
(where 5.3% = Tk 110.4 million/ Tk. 2,075 million x 100%) and therefore earning little or
no return, shareholders will prefer to be given the cash back so that they can invest it
elsewhere and enhance their returns.
However, if SRP thinks investment opportunities might be available in the not too distant
future; shareholders may be willing to forego receiving the cash now in the expectation
of even greater returns in the future.
2. Share repurchase
The advantage to shareholders is that selling shares back to the company allows them
to raise cash with no transaction costs. Not all will want to sell, but SRP is only aiming to
purchase around 7% of the shares in issue.
The make-up of the shareholders is relevant here in terms of the potential success of
any repurchase scheme, as institutional investors are far less likely to participate in a
share repurchase than smaller scale investors as they tend to be more concerned with
regular income. However, 30% of the shares are held by small investors who might
welcome the chance to realise their investment.
The advantage to the company in the long term is an opportunity to increase DpS at the
same total level of dividend payment or, alternatively, keep DpS at the same level and
reduce total dividend payments, retaining cash for future investment. EpS will similarly
increase due to the lower number of shares. Shareholder wealth should not be affected,
their share holding will be worth less (reflecting fewer shares) but they are now holding
additional cash. If this cash can be invested profitably, this should lead to an increase in
shareholder wealth in the medium term. However, there is an almost inevitable trade-off
between risk and reward here. The riskiness of the equity will increase due to the higher
gearing levels. Gearing will increase from 26.7% to 33.3% based on book values.
The share repurchase is unlikely to have much effect on the overall cost of capital as the
increased use of lower cost debt is likely to be offset by higher returns required on
equity. The tax benefit of debt is not relevant as there is no impact on gross debt here.
On a practical note, the companys articles of association must be checked to ensure
they permit a share repurchase.
3. Bonuses to directors and employees
The payment of bonuses reduces shareholder wealth (and reserves) by the amount paid
out. It is of little benefit to shareholders unless it leads to the retention of key employees
or leads to higher profits as a result of more highly motivated staff in the future. In either
Page 4 of 8
case, a long term bonus plan is likely to be of more benefit to the company than large
one-off payments at this time.
The directors bonuses need to be referred to a remuneration committee before amounts
are determined. Indeed, director bonuses need also to be approved by shareholders,
something that is not always guaranteed, as has been seen in the UK in the recent past.
Gearing would increase to 33.3% (based on book values and using 31 March 2013
figures) due to an increase in net debt and a decrease in reserves the same effect as
for under the share repurchase. But for a manufacturing company with substantial assets
this is still a modest rate. SRP should consider amending its gearing objective from 30%
to, say, 35%.
4(a)
A break point will occur each time a low cost type of capital is used up. We establish the break
points as follows after first noting that LEI has Tk. 24,000 of Retained Earnings:
Retained earnings
= (Total earnings)(1-payout)
= Tk. 34,285.72 x 0.7
Breaking point =
Capital Used Up
Retained Earnings
BPRE =
10% floatation common
BP10%E =
5% floatation preferred
BP5%P =
12% Debt
BP12%D =
14% Debt
BP14%D =
Break Point Calculation

= Tk. 40,000
= Tk. 60,000
= Tk. 50,000
= Tk. 20,000
= Tk. 40,000
Breaking Number
2
4
3
1
2
Summary of Break Points

(1) There are three common equity costs and hence two changes and, therefore, twoequity-induced breaks in the MCC. There are two preferred costs and hence one
preferred break. There are three debt costs and hence two debt breaks.
(2) The number in the third column of the table designate the sequential order of the breaks,
determined after all the break points were calculated. Note that the second debt break
and the break for retained earnings both occur at Tk. 40,000
(3) The first break point occurs at Tk. 20,000, when the 12% debt is used up. The second
break point, Tk. 40,000, results from using up both retained earnings and the 14% debt.
The MCC curve also rises at Tk. 50,000 and Tk. 60,000 as preferred stock with a 5%
flotation cost and a common stock with a 10% floatation cost, respectively are used up.
4(b)
Common costs within indicated total capital intervals are as follows: Retained Earnings (used in
interval Tk. 0 to Tk. 40,000):
ks =
+g=
=
+ 0.09 = 0.0654 + 0.09 = 15.54%
Common with F = 10%( Tk. 40,0001 to Tk. 60,000) :
ke =
+g=
+ 9%
Common with F = 20%( Over Tk.60,000) :
Page 5 of 8
= 16.27%
ke =
+ 9%
= 17.18%
Preferred with F = 5%( Tk. 0 to Tk. 50,000) :

+g=
kp =
= 11.58%
Preferred with F = 10%( Over Tk. 50,000) :

kp =
= 12.22%
Debt at kd = 12%(Tk.0 to Tk. 20,0000)

kdt = kd(1-T) = 12%(0.6)
Debt at kd = 14%(Tk. 20,001 to Tk. 40,0000)
kdt = kd(1-T) = 14%(0.6)
Debt at kd = 16%(over Tk. 40,0000)
kdt = kd(1-T) = 16%(0.6)
= 7.20%
= 8.40%
= 9.60%
4(c)
WACC calculations within indicated total capital intervals:
(1) Tk 0 to Tk. 20,000 (debt = 7.2%, preferred = 11.58% and retained
earnings = 15.54%)
WACC1 = W d kdt + W p kp + W s ks
= 0.25(7.2%) + 0.15(11.58%) + 0.60(15.54%) = 12.86%
(2) Tk 20,001 to Tk. 40,000 (debt = 8.4%, preferred = 11.58% and

retained earnings = 15.54%)
WACC2 = 0.25(8.4%) + 0.15(11.58%) + 0.60(15.54%) = 13.16%
equity = 16.27%)
WACC3 = 0.25(9.6%) + 0.15(11.58%) + 0.60(16.27%) = 13.90%
equity = 16.27%)
WACC4 = 0.25(9.6%) + 0.15(12.22%) + 0.60(16.27%) = 14.000%
(5) Over Tk. 60,000 (debt = 9.6%, preferred = 12.22% and equity =
17.18%)
WACC5 = 0.25(9.6%) + 0.15(11.58%) + 0.60(17.18%) = 14.54%
4(d)
IRR calculation for Project E
PVIFAk,6 =
= 3.6847
This is the factor for 16 percent , so IRRE=16%
Page 6 of 8
4(e)
LEI should accept Projects B, E and C. It should reject Projects A and D because their IRRs do
not exceed the marginal costs of funds needed to finance them. The firms capital budget would
be total Tk. 40,000.
5(1)
=
2.5 = CL = CA
Working capital = CA-CL = 1,56,000
Or 2.5 CL-CL = 1,56,000
Or CL =
= 1,04,000
CA = 2.5 CL = 1,04,000 x 2.5 = 2,60,000

= 1.5
Or
= 1.5
Or Quick Assets = 1.5 x 80,000 = 1,20,000

Closing Stock = CA Quick Assets
= 2,60,000 1,20,000 = 1,40,000
x 1,40,000 = 1,12,000
Opening stock =
(as closing stock is 25% higher than opening stock)

Av stock
= 1,26,000
Cost of sales = Av. Stock x stock velocity

= 5 x 1,26,0000 = 6,30,0000
Gross profit = 20% of sales i.e. 25% of cost of sales
= 25% of 6,30,0000 = 1,57,500
Sales = cost of sales + gross profit
= 6,30,000 + 1,57,500 = 7,87,5000
Net profit = 10% of 7,87,500 = 78,750
Debtors velocity = 1 month
= 65,625
= 0.6 i.e.
Propriety Ratio =
= 0.4
Equity =
= 3,90,0000
Fixed Assets = 3,90,0000 x 0.6 = 2,34,000

Cash at Bank = Quick Assets Debtors
= 1,20,000 65,625 = 54,375
Page 7 of 8
Share Capital
Reserve and Surplus
(Bal Fig)
Retained Earnings
Equity
Current Liabilities
Creditors
Bank OD
Balance Sheet as on 31.12.2012

Tk
2,00,000 Fixed Assets
Less : Dep
1,11,250
78,750
80,000
24,000
1,90,0000 Current Assets

3,90,0000 Stock
Debtors
Cash at Bank
1,04,000
4,94,000
Balance Sheet as on 31.12.2013

Tk
2,00,000 Fixed Assets
Add: Additions
Share Capital
Reserve and Surplus
General Reserve
Retained Earnings
Net Profit
78,750
1,13,695
Current Liabilities
Creditors
Bank OD
1,00,000
5,000
1,11,250 Less : Dep
Gross Profit (25% of sales)

Expenses
Depreciation
(10% on [ 2,34,000 + 40,000]
Expenses (Bal Fig)
Net Profit(12.5% on sales
1,40,000
65,625
54,375
2,60,000
4,94,000
Tk
2,34,000
40,000
2,74,000
40,000
2,46,600
1,92,445 Current Assets

Stock
1,80,000
Debtors(1/12 of sales)
75,797
Cash at Bank
1,06,298
3,62,095
1,05,000
6,08,695
6,08,695
Income Statement for the year ended 31.12.2013

Tk
Tk
Sales
7,87,500
Add: Volume increase 10%
78,750
8,66,250
Add: Price Increase
43,312
9,09,562
Cost of goods sold:
Opening Stock
Add : Purchase (Bal Fig)
Cost of goods available for sale
Less : Closing Stock
26,000
Tk
2,60,000
2,34,000
1,40,000
7,22,172
8,62,172
1,80,000
6,82,172
2,27,390
27,4000
86,295
Page 8 of 8
1,13695
1,13,695

PROFESSIONAL LEVEL IV
SUBJECT: 402.STRATEGIC MANAGEMENT ACCOUNTING
Solutions to the questions

Solution to Question No. 1.
(a)
(b)
(c)
No, not all fixed costs are sunk- only those for which the cost has already been irrevocably incurred.
A variable cost can be a sunk cost, if it has already been incurred.
No, a variable cost is a cost that varies in total amount in direct proportion to changes in the level of
activity. A differential cost measures the difference in cost between two alternatives. If the level of
activity is the same for the two alternatives, a variable cost will be unaffected and will be irrelevant.
Test for optimality: number of allocation = m+n-1 where there are m rows and n columns. The
allocations are independent i.e. if no loop can be formed by them.
Here, No. of factories + No. of destination + dummy-1 = m+n+1 - 1 = 3+4+1 -1 = 7.
Hence, there should be exactly 7 allocations.
Solution to Question No. 2(a).

(i)
(ii)
(iii)
The transfer price of Tk.750 proposed by the IT division is based on cost plus 150% from which it
can be deducted that the total cost of a consulting day is (100/250) x Tk.750 = Tk. 300. This
comprises Tk.240 (80%) variable cost and Tk.60 (20%) fixed cost. In this instance the transfer price
should be set at marginal costs plus opportunity cist. It is assumed in this situation that transferring
internally would result in the IT division having a lost contribution of Tk.750 Tk.240 = Tk.510 per
consulting day. The marginal cost of the transfer of services to the HR division is Tk.190 (Tk.240
external variable cost less Tk50 saving due to use of internal video-conferencing equipment).
Adding the opportunity cost of Tk.510 gives a transfer price of Tk.700 per consulting day. This is
equivalent to using market price as a basis for transfer pricing where the transfer price is set at the
external market price (Tk.750) less any costs avoided (Tk50) by transferring internally.
There is in effect on external market available for one of the required pairs of consultants within the
IT division and therefore opportunity cost will not apply and transfers should be made at the
variable cost per consulting day of Tk.190. The other pair of consultants, who would be 100%
utilized in providing consulting services to external clients, should be charged at a rate of Tk.700
per day which represents marginal cost plus opportunity cost.
The lost contribution from the major client amounts to Tk.2,64,000/(2x240) =Tk.550 less variable
costs of Tk.240 = Tk.310 per consulting day. Thus, in this instance the transfer price should be the
contribution foregone of Tk310 plus internal variable costs of Tk.190 making total of Tk.500 per
consulting day.
Solution to Question No. 2(b).

Negotiated transfer prices suffer from the following limitations:
The transfer price which is the final outcome of negotiations may not be close to the transfer price
that would be optimal for the organization as a whole since it can be dependent on the negotiating
skills and bargaining power of individual managers.
They can lead to conflict between divisions which may necessitate the intervention of top
management to mediate.
The measure of divisional profitability can be dependent on the negotiating skills of managers who
may have unequal bargaining power.
They can be time-consuming for the managers involved, particularly where large numbers of
transactions are involved.
Page 1 of 6
Solution to Question No. 3(a)

In traditional cost systems, product-level costs are indiscriminately spread across all products using direct
labor-hours or some other allocation base that is tied to volume. As a consequence, high-volume product
are designed the bulk of such costs. If a product is responsible for 40% of the direct labor in a factory, it
will be assigned 40% of the manufacturing overhead cost in the factory- including 40% of the product
level costs of low-volume products. In an activity based costing, batch level and product level costs
assigned are more appropriate. This results in shifting product-level costs back to the products that cause
them and away from the high-volume products. (A similar effect will be observed with batch-level costs if
high-volume products are produced in larger batches than low volume products).
Solution to Question No. 3(b)
Working Notes:
(i)
Overhead costs
Tk.
Set-up
20,500
Inspection
146,000
Machines
284,000
Selling
324,000
Total
774,500
As per conventional system, total O/H of Tk.774,500 is to be allocated on the basis of no. of units
sold i.e. in the ratio of 50 : 112 : 54 or 50/216, 111/216 and 54/216.
(ii)
P
Q
R
Overheads (Tk.)
179,282.41
401,592.59
193,625.00
Gross units / production run
5040
5620
6020
Defective units / production run
40
20
20
Good units / production run
5,000
5,600
6,000
Sale of good units
50,000
112,000
54,000
No. of production runs
10
20
9
Gross production required (units)
50,400
112,400
54,180
Prime cost (Tk.)
50,400 12
112,400 9
54,180 8
= 604,800
= 1,011,600
= 433,440
(i)
Statement of profitability as per conventional system
Products
P
Q
R
(Tk.)
(Tk.)
(Tk.)
Sales value
50,000 18 =
112,000 14 =
54,000 12 =
1,568,000.00
648,000.00
900,000
Prime cost
604,800.00
1,011,600.00
433,440.00
401,592.59
193,625.00
Overheads
179,282.41
1,413,192.59
627,065.00
Total cost
784,082.41
154,807.41
20,935.00
Profit
115,917.59
Working notes for ABC System:
(i) Set up cost / production run
Total set up cost (20,500)
P
400
400 10 =
4,000
Q
600
600 12 =
12,000
R
500
500 9 =
4,500
4,000
12,000
4,500
6
6 10 = 60
8
8 20 = 160
8
8 9 = 72
30,000
80,000
36,000
Set up O/H of Tk.20,500

& cost driver is set up cost
(ii) Inspection hours / prod. Run
Total inspection hours (total 292)
Inspection cost 1,46,000 &
cost driver is inspection hours (Tk.)
Page 2 of 6
(iii)
Machine hours / prod. run
40
24
Total machine hours (Total 1420)

Machining cost 2,84, 000 &
cost driver machine hours
4010 = 400
2420 = 480
609 = 540
80,000
96,000
1,08,000
(iv) Total selling O/H

Tk.3,24,000 Advertisement
cost 1,66,000 to be
allocated to Q & R in ratio
of sales units 112 : 54 =166
--
1,12,000
54,000
Special packing only for Q
--
1,08,000
--
11,574
11,574
25,926
2,45,926
12,500
66,500
Balance (324,000 166,000 108,000) =

50,000 to be allocated in
sales units 50 : 112 : 54 = 216
(ii)
Products
Sales value
Prime cost
Set-up cost
Inspection cost
Machining cost
Selling cost
Total cost
Profit
Statement of profitability as per ABC system

P (Tk.)
Q (Tk.)
1,568,000
900,000
604,800
1,011,600
4,000
12,000
30,000
80,000
80,000
96,000
245,926
11,574
1,445,526
730,374
122,474
169,626
60
R (Tk.)
648,000
433,440
4,500
36,000
108,000
66,500
648,440
(440)
Solution to Question No. 4(a).

Evaluation of managerial performance should include all elements in the division that management can
control. The degree of autonomy enjoyed by a division will determine the control that managers maintain
over pricing investment and other factors that affect profit.
(i) Contribution:
The division has contributed BDT 119,000 to the central costs and profit of the Group, but this is below
the budget. The responsibility of management for this deficit depends on the influence that divisional
managers can exercise over Sales, marketing and costs and whether the budget used as a yardstick was
attainable in realistic terms. Contribution does not take into account the assets under the control of
divisional management and cannot comment on the return on investment needed to earn that return.
Management of Chocolaty division could increase the contribution by the wasteful investment of group
funds at returns below the cost of capital without suffering any penalty if this method were used to
evaluate their performance.
(ii) Net Income
This measure of performance shows only a small net profit for the division. As a performance evaluator it
fails to set return against investment and also includes, head office charges, which are outside the control
of divisional management.
Page 3 of 6
(iii) Return on investment

Net Income
12x BDT 19000
= - = 80%
Investment
Rs. 2850000
Compared to the cost of capital 15% this return is not good. However for evaluation of managerial
performance centrally administered assets and allocated head office costs should not be included in the
analysis. Therefore the figures could be.
Rs. 119000 x 12
= 51%
Rs. 2780000
The measurement of profit and investment may be made in ways that lead to unreliable conclusions from
ROI. e.g. historic costs of assets against current cost revenue. Decisions that maximize ROI may not
necessarily be best for the group as a whole.
(iv) Residual Income
Residual Income is the income remaining after deducting a charge for the use of funds invested in the
decisions based on the cost of capital.
Net Profit
BDT. 19,000
Investment charge
BDT. 35,625
BDT. 2850000 x 0.15
Residual Income
BDT. (16625)
12
Management are not making sufficient return to service group funds allocated to the division at the group
cost of capital. However, if head office expenses and centrally administered assets are excluded, a
divisional residual income can be calculated relating to factors that divisional managers can influence.
Residual Income
Net profit
119000
Investment charge
Residual Income
34750
2780000 x 0.15
12
BDT. 84250

Managerial performance can be evaluated by using absolute measures of contribution or net income
or by using relative measures of ROI (return on investment or return on equity (ROE) or return on
capital employed (ROCA). However, economic performance is evaluated by using RI (residual income).
Managerial performance is worse than budget using contribution and net income. ROI is even worse in
comparison to cost of capital. But economic performance is to some extent good on the basis of divisional
traceable assets.
Page 4 of 6
Solution to Question No. 5(a)

No, of the profitability index is less than 1.00, then the net present value of the project is negative,
indicating that it does not provide the required minimum rate of return. So, profitability index less than
1.00 be an unacceptable investment.
(i)
Calculate of expected net present value:

Sales volume = 3,200 units.
Tk.
Sales revenue per unit
2,500
Variable costs per unit
1,640
Contribution per unit
860
Total contribution = (3,200 x 860) = Tk. 27,52,000 fixed overheads Tk.9,00,000 = Tk.18,52,000
less taxation (at 30%) Tk. 5,55,600 = Tk.12,96,400
Net present value at a discount rate of 11% per annum = (Tk.12,86,400 x 4.231) (Tk.50,00,000 x
50%) = Tk.29,85,068. The project should be undertaken by the directors of ITL.
Note:
Variable cost per unit = Tk.1,490 + Royalty Tk.150 = Tk.1,640
Tk.2,00,000 already spent on market research is a sunk cost and therefore not included in
the calculation of the expected net present value of the Snowballer proposal.
A real discount rate of 11% has been used. It has been calculated as follows: ((1 + nominal
cost of capital)/(1 + rate of inflation)) 1 = 1.1544/(1+0.04) = 1.11 1 = 0.11 or 11%.
(ii)
The level of annual contribution at which NPV will be equal to zero can be calculated using the
formula (1 t) 4.231 x initial investment fixed overheads (1 t) 4.231 = 0, where t is the rate of
corporate tax and x = annual contribution. This gives:
(1 0.30) 4.231x Tk.25,00,000 (9,00,000 (t 0.30)4.231) =
2.9617x = Tk.25,00,000 + 26,65,530
x = Tk.17,44,110
This shows the annual contribution can decline from the existing level of Tk.27,52,000 to
Tk.17,44,110. This represents a percentage decrease of 36.62% (10,07,890/27,52,000) x 100%.
The 4.231 in the above formula represents the cumulative discount factor for six years at a rate of
11% per annum. Tk.25,00,000 represents the investment outlay net of the government grant.
(iii)
The life cycle of the Snowballer:

Tk.
NPV of year 1 net cash flow = Tk. 12,96,400 x 0.901 =
11,68,056
NPV of year 2 net cash flow = Tk. 12,96,400 x 0.812 =
10,52,677
Total for year 1 and 2
22,20,733
Investment outlay (net)
25,00,000
NPV required in year 3 in order to achieve a zero NPV
2,79,267
However, if fixed overheads are incurred in year 3 irrespective of the sales life of the Snowballer
then discounted fixed costs amounting to Tk.4,60,530 (Tk.9,00,000 x 0.7 x 0.731) would be
incurred.
Hence discounted contribution required in order to achieve a zero NPV would amount to
Tk.2,79,267 + Tk.4,60,530 = Tk.7,39,797. The total discounted contribution for the whole of year 3
amounts to Tk.27,52,000 x 70% x 0.731 = Tk.14,08,198. Hence the reduction in year 3 life
allowable in year 3 = (14,08,198 7,39,797) / 14,08,198 = 47.46% (say 47% approximately). So
the life cycle required during year 3 = 53% or (0.53 of the year). This means that 2 + 0.53 = 2.53
years are required to produce an overall NPV = 0.
Hence the fall in the life cycle of the project (for an overall NPV = 0) = 6 2.53 = 3.47 years or
3.47/6 = 57.8 (which is the sensitivity measure).
Page 5 of 6
(iv)
Factors that should be considered by the directors of ITL include:

The cash flows are estimated. How accurate they are requires detailed consideration.
The cost of capital used by the finance director might be inappropriate. For example if the
Snowballer proposal is less risky than other projects undertaken by ITL than a lower cost of
capital be used.
The rate of inflation may vary from the anticipated rate of 4% per annum.
How strong is the Olympic brand name: The directors are proposing to pay royalties
equivalent to 6% of sales revenue during the six years of the anticipated life of the project.
Should they market the Snowballer themselves?
Would competitors enter the market and what would be the likely effect on sales volumes and
selling prices?
== THE END ==
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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH

CMA AUGUST 2013 EXAMINATION

CAMPS MUSIC STORE

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH

Solution to Q. No. 1. (b)

Cost of goods sold:

Solution to Q. No. 1. (c)

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH

Property, plant, and equipment:

Liabilities and Owners Equity

Total liabilities and owners equity .

Solution to Q. No. 1. (e)

Merchandise Inventory . . 26,400

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH

Income Summary 64,660

Solution to Q. No. 2. (i)

Deduct: Check returned because of insufficient funds

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH

Solution to Q. No. 3. (a)

Bad Debts Expense 7,500

Allowance for Doubtful Accounts

Accounts Receivable James Ryan . 500

Solution to Q. No. 3. (b)

Notes Receivable Short Company . 15,000.00

Computation of cash proceeds:

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH

Notes Receivable Discounted .

Notes Receivable Discounted 15,000.00

13 Accounts Receivable Short Company .. 15,450.00

01/01/10: Accumulated Depreciation

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH

Workings: Fair market value of the Machinery

Fair market value of machinery Tk. 34,000

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH

THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH

Adjustment for depreciation (W1)

Loss on sale of equipment

Loss on debenture redemption

Increase in account receivable

Decrease in prepaid expense

Decrease in accounts payable (W2)

Decrease in outstanding expenses

Cash generated from operations

Less: Interest paid

Income tax paid (W3)

Net cash generated from operating activities

Purchase of Freehold building (W4)

Furniture purchase (W4)

purchase of equipment (W4)

Net cash used in investing activities

Sale of common stock (W5)

Sale of right share

Dividend paid (W6)

Net cash generated from financing activities

Net increase in cash and cash equivalents during the year

Cash and cash equivalents at the beginning of the year

Acc Dep - Furniture

W3: Interest and Tax paid

Income Tax Payable