Mixed question answers/Gmsisuccess
CASE-BASED QUESTION – “TechNova Electronics Ltd.
*Time: 35 min | 25 marks*
*Scenario:*
TechNova manufactures IoT sensors. FY 2026 data below. You are the CMA. CFO asks for analysis.
*Section A – Inventory & Inflation*
1. Opening inventory: 10,000 units @ $12 _FIFO_. During year: purchased 30,000 units @ $15. Sold 32,000 units. Inflation 8% p.a.
*Q1:* Calculate COGS under FIFO vs LIFO. What is impairment loss if NRV of ending inventory = $11/unit?
*Q2:* Explain inflation effect on COGS, EPS, and taxes under FIFO vs LIFO.
*Section B – Leases & Commitments*
2. Jan 1, 2026: Signed 3-yr lease for warehouse. Annual payment $60,000, 6% IBR. TechNova elects short-term exemption but lease is 3 yrs.
*Q3:* Is this an operating or finance lease under ASC 842? Journal entry Jan 1.
3. Dec 2026: Signed purchase commitment for chips at $500,000, delivery Mar 2027. Market price fell to $420,000 by 31 Dec.
*Q4:* Journal entry for loss contingency? Warranty provision at year-end = $80,000, 70% likely to be paid.
*Section C – Budgeting & Variances*
4. Production data: Budget 50,000 units, Actual 48,000 units.
Budget OH: Fixed $240,000, Variable $6/unit. Actual OH: Fixed $250,000, Variable $300,000.
Actual hours: 95,000; Standard hours for actual output: 2 hrs/unit.
*Q5:* Calculate: a) Under/overapplied OH, b) Variable OH efficiency variance, c) Fixed OH spending variance, d) 3-way variance analysis.
5. Raw material: Budget cost $4/unit, Actual 49,000 units used @ $4.20.
*Q6:* Material efficiency variance? Is this favorable?
*Section D – Performance & Strategy*
6. Division A: Operating income $400,000, Avg assets $2M, Required return 15%. Division B: $300,000 income, $1.5M assets.
*Q7:* Calculate ROI & RI for both. Which division performs better? What is a “responsibility center”?
7. TechNova uses Balanced Scorecard.
*Q8:* Give 1 Critical Success Factor + 1 KPI for each BSC perspective.
*Section E – Cash & Reporting*
8. Q4 Sales $1.2M. 60% collected same quarter, 30% next, 10% uncollectible. AP terms: 50% paid same month, 50% next.
*Q9:* Prepare Q4 cash collection for cash budget.
9. TechNova owns 80% of Subsidiary S. During year sold goods to S for $200,000, cost $140,000. 25% still in S’s ending inventory.
*Q10:* What intercompany profit to eliminate? Journal entry.
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*MODEL ANSWER – KEY POINTS*
*Q1: COGS & Impairment*
FIFO COGS = 10,000×12 + 22,000×15 = $450,000. End Inv = 8,000×15 = $120,000.
LIFO COGS = 30,000×15 + 2,000×12 = $474,000. End Inv = 8,000×12 = $96,000.
NRV = 8,000×11 = $88,000.
FIFO Impairment = 120,000 – 88,000 = *$32,000 loss*. LIFO Impairment = 96,000 – 88,000 = *$8,000 loss*.
*Q2: Inflation Effects*
FIFO: Lower COGS, Higher NI, Higher taxes, Higher EPS, Inventory overvalued. Bad in inflation.
LIFO: Higher COGS, Lower NI, Tax savings, Lower EPS, Better matching. US GAAP allows LIFO, IFRS bans it.
*Q3: Lease ASC 842*
3-yr term > 12 months = *Finance lease*, not short-term.
ROU Asset & Lease Liability = PV = 60,000 × PVAF 3yr,6% = 60,000×2.673 = *$160,380 Dr/Cr*.
*Q4: Purchase Commitment + Warranty*
Loss contingency = 500,000 – 420,000 = *$80,000*
Dr Loss on Purchase Commitment 80,000 ; Cr Estimated Liability 80,000
Warranty: Dr Warranty Expense 80,000 ; Cr Warranty Liability 80,000
*Q5: Overhead Variances*
Applied OH = 48,000×2×$6 + 240,000 = $816,000
Actual OH = 250,000 + 300,000 = $550,000. *Overapplied $266,000*
VOH Efficiency = (95,000 – 96,000)×$6 = *$6,000 F*
FOH Spending = 250,000 – 240,000 = *$10,000 U*
3-way: Spending = $10,000 U + $12,000 U VOH = $22,000 U; Efficiency = $6,000 F; Volume = 240,000 – 230,400 = $9,600 U.
*Q6: Material Efficiency*
AQ = 49,000, SQ = 48,000×1 = 48,000. Variance = (49,000 – 48,000)×$4 = *$4,000 Unfavorable*. Used more.
*Q7: ROI & RI*
A: ROI = 400k/2M = *20%*, RI = 400k – 2M×15% = *$100,000*
B: ROI = 300k/1.5M = *20%*, RI = 300k – 225k = *$75,000*
Same ROI, but A has higher RI = better. Responsibility center = segment where manager controls revenue/cost/investment.
*Q8: BSC Example*
Financial: CSF = Profitability, KPI = RI > 0
Customer: CSF = Quality, KPI = Warranty claims <2%
Internal: CSF = JIT production, KPI = Inventory turns >12
Learning: CSF = Innovation, KPI = # new patents
*Q9: Cash Collection*
Q4 sales 1.2M: 60% = $720k in Q4. Plus 30% of Q3 sales collected in Q4. If Q3 = $1M, then $300k. Total = *$1,020,000*.
*Q10: Intercompany Elimination*
Unrealized profit = 200k – 140k = 60k × 25% = *$15,000*
Dr Sales 200,000 ; Cr COGS 185,000 ; Cr Inventory 15,000
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*Exam Tips from Prof. Mahaley Style*
1. *Relevant Range & Short Run*: Variances assume fixed costs stay fixed within 40k-60k units. Beyond that, step costs hit = diseconomies of scale.
2. *Goal Congruence*: RI > ROI for divisions to avoid rejecting good projects. ROI can mislead.
3. *JIT*: Reduces WIP Control a/c, transfers straight to Finished Goods. No storage variances.
4. *Revenue Recognition*: 5-step ASC 606 – identify contract, PO, performance obligation, price, recognize when control transfers.
5. *Diluted EPS*: Include convertible bonds, stock options. If-converted method for bonds.
6. *Integrated Reporting*: 6 capitals – financial, manufactured, intellectual, human, social, natural.
7. *Cash Flow Ops*: Start NI, + non-cash _impairment, depreciation_, +/- WC changes. Lease payments split: interest = CFO, principal = CFF.
Call Prof. Mahaley 9773464206 for class schedule, or drop your doubt here and I’ll solve it CMA-style.
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