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No. of Pages – 10
No. of Questions – 06
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA
CA PROFESSIONAL (STRATEGIC LEVEL I) EXAMINATION
JUNE 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.
JUNE 2014: CA PROFESSIONAL (STRATEGIC LEVEL I) EXAMINATION 13304 – STRATEGIC MANAGEMENT ACCOUNTING
(2)
SECTION A
Question No. 01
Green Orbit Limited (GOL) is a diversified company with separate operating divisions. Air
Comfort Division (ACD) manufactures air conditioners for the local market. Gol Compressor
Unit (GCU) manufactures compressors for both ACD and the external market. GCU was formed
recently as a backward integration strategy. Further, GolTech India Ltd, a subsidiary of GOL
operating in India, manufactures specialty steel products for the Indian market.
GOL held its board meeting recently and the board has advised the management to circulate a
report among board members on the following, together with management’s suggestions:
Transfer pricing policy of GCU
The board advised the management to have another look at the transfer pricing policy for
transfers from GCU to ACD.
Performance based bonus scheme
It was decided to implement a performance based bonus scheme for all divisions meeting a
target Return on Investment (ROI) of 20% and a minimum Residual Income (RI) of
Rs. 50 million (at a cost of capital of 12% on the capital employed as of the reporting date).
The summary of forecasted financial information for the forthcoming year, forwarded to the
board was as follows:
ACD
GCU
Capacity (units)
20,000
50,000
Sales (units)
16,000
50,000
ACD
GCU
Rs. million
Rs. million
Extracts of the income statement for the forthcoming year
Sales (Note 1)
480.00
475.02
Cost of sales (Note 2)
(272.00)
(390.00)
Other overheads (Note 3)
(40.00)
(13.40)
Operating profit before financial costs
168.00
71.62
Extracts of the statement of financial position as at forthcoming year-end
Cost of property, plant & equipment (PPE)
800.00
660.00
Accumulated depreciation
(530.00)
(165.00)
Carrying value of PPE
270.00
495.00
Current assets
300.00
150.00
Current liabilities
210.00
140.00
Depreciation charged for the year
25.00
66.00
Note 1
Sales of GCU include external sales worth Rs. 331.5 million.
Note 2
20% of the cost of sales of ACD is fixed production overheads and that of GCU is 35%.
ACD utilises one compressor for each air conditioner and buys the entire requirement from
GCU. Cost of sales of ACD includes the cost of such compressors from GCU at their
purchased cost.
Note 3
Variable selling and distribution costs relating to external sales (ACD – Rs. 500 per unit and
GCU – Rs. 100 per unit) are included in other overheads.
Special order inquiry from a local company
The board advised the management to evaluate the following order received from a local
company:
A local company has made an offer to buy 5,000 units of air conditioners from ACD, during
