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No. of Pages – 12
No. of Questions – 06
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA
CA PROFESSIONAL (STRATEGIC LEVEL I) EXAMINATION
DECEMBER 2014
13304 – STRATEGIC MANAGEMENT ACCOUNTING
Instructions to candidates
(1) Time allowed:
Reading and planning : 15 minutes
Writing : 3 hours
(2) Marks: 100 marks
(3) (i) Section A – Question No. 01 is compulsory.
(ii) Section B – Answer any four (04) questions.
(4) Begin each answer on a separate page. Submit all workings.
(5) All answers should be in English Language, in the answer booklets provided.
DECEMBER 2014: CA PROFESSIONAL (STRATEGIC LEVEL I) EXAMINATION (2) 13304 – STRATEGIC MANAGEMENT ACCOUNTING
SECTION A
Question No. 01
You are the management accountant of Achmo (Pvt) Ltd (APL), a group of companies. The
following are two major business matters discussed in the recently held board meeting.
BUSINESS MATTER – A
At present, APL has given company owned cars to all its management staff members (one car for
each member) and is now planning to renew the fleet. The board has advised APL to carry out a
financial evaluation of paying a vehicle allowance instead of providing company owned cars.
The following information is given to you:
Company owned cars (at present price levels)
Cost of a new car is Rs. 5 million. Company policy is to use cars for four (04) years. APL
can recover 40% of the purchase cost by selling the cars at the end of the fourth year.
APL bears the vehicle maintenance costs including services, repairs, licensing, insurance etc.
aggregating to Rs. 250,000 per year per car.
APL pays fuel reimbursement per month per management staff member at Rs. 25,000.
Payment of vehicle allowance
On this basis, staff members buy their own vehicles for which APL pays a monthly
allowance of Rs. 80,000 per staff member during the forthcoming four (04) year period. APL
is liable to pay Employees’ Provident Fund (EPF) at 12% and Employees’ Trust Fund (ETF)
at 3% on this monthly allowance.
Vehicle maintenance costs stated above will be borne by the staff members.
Staff members will still be eligible for fuel reimbursement.
Tax consultant’s advice
Vehicle maintenance cost is deductible for income tax purposes.
APL is not entitled to depreciation allowance for motor cars. Income from sale of used cars is
not liable to income tax.
Monthly vehicle allowance, ETF and EPF are deductible expenses for income tax purposes.
Other information
APL’s nominal cost of capital is 17.6% per annum (after tax), which includes an allowance
for generally-expected inflation of 5% per annum.
APL is presently making taxable profits which are liable to income tax at 28% per annum.
Taxes are paid during the year in which they arise.
DECEMBER 2014: CA PROFESSIONAL (STRATEGIC LEVEL I) EXAMINATION (3) 13304 – STRATEGIC MANAGEMENT ACCOUNTING
BUSINESS MATTER – B
Techno Products (Pvt) Ltd (TPL) is a subsidiary of APL which manufactures Product X and
currently sells 50,000 units per annum. The market for Product X will exist only for the next
three years. TPL is presently experiencing a decline in demand for Product X due to competition.
If TPL does not take any action to defend competition, the next three years’ sales will come
down by 20% from the present level. Selling price per unit is Rs. 1,500 of which 60% is variable
cost. TPL will not increase the selling price during the next three years.
If TPL changes the design of the product which will cost Rs. 2 million initially, annual sales
are expected to be as follows;
Probability
Sales (units)
0.4
0.6
60,000
70,000
Further, due to this change the variable manufacturing cost is expected to be as follows;
Probability
Variable manufacturing cost (Rs.)
0.5
0.5
950 per unit
1,000 per unit
TPL can carry out an advertising campaign which will cost Rs. 5 million annually during the
three year period. Then the expected annual sales will be as follows;
Probability
Sales (units)
0.3
0.7
65,000
75,000
Due to financial constraint, TPL will select only one option from the above two alternatives
i.e. changing product design or carrying out an advertising campaign.
Assume all cash flows occur at the respective year-end.
You are required to:
BUSINESS MATTER – A
(a) Evaluate the financial desirability for APL, of paying a monthly allowance to its
management staff instead of providing company owned cars, in real terms, using net
present value (NPV) and advise the board on the decision they should make. (8 marks)
(b) Determine the values of the following variables at which the company is indifferent to
choosing either option.
(i) Monthly vehicle allowance
