Final Examinations (Transitional Scheme)

Module F
The Institute of 7 December 2016
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Management Accounting
Q.1 Chips and Chicks (C&C) is a fast food restaurant in DHA. It intends to open a new
restaurant in Bahria Town (BT). The owner has hired you to design a suitable strategy to be
able to achieve a target profit of Rs. 1.6 million per month from the new restaurant.

C&C does not maintain any record other than a cash register on which details of all
payments are noted.

To analyse the situation you have gathered the following information in consultation with
the owner.
(i) Total sale at DHA is around Rs. 5 million per month and total average payments are
Rs. 4 million per month.
(ii) Chicken burgers, beef burgers and club sandwiches are sold in the ratio of 4:3:2.
(iii) In 70% of the cases, the sale of burger or sandwich is accompanied by the sale of fries,
whereas in the case of cold drink, this ratio is 90%.
(iv) Following is the detail of per unit sale price and cost of different items:
Cost of ingredients/
Items Sales price
purchase price
------------------ Rupees ------------------
Chicken burger 150 36
Beef burger 170 48
Club sandwich 200 60
Fries 80 18
Cold drinks 60 12

Analysis of cash register has revealed the following payments during the last month:
Rs. in million Rs. in million
Purchases 1.24 Electricity 0.30
Wages 0.60 Gas 0.20
Rent 0.40 Repair and maintenance 0.25
Commission to riders 0.20 Sales tax 0.73

C&C plans to offer the same products at the BT restaurant and it is projected that the
productwise sale at BT restaurant would also follow the same pattern. However, the total
sale is estimated at Rs. 5.5 million per month. The expenses would remain the same except
wages and rent which are expected to increase by 20%.

Based on your initial review, you have been able to predict that the desired target profit
could not be achieved in the above situation. Consequently, you have suggested that a
combo meal should also be introduced.

The owner envisages that the combo meal would consist of any one burger plus fries and
drinks. The combo meal would be priced at Rs. 260. It is estimated that 60% of the combos
would involve a beef burger whereas 40% combos would include a chicken burger. Further,
it is estimated that for sale of each combo, the sale of burgers would decline by 40%.

Required:
Determine the number of combos that would have to be sold, in order to earn an income of
Rs. 1.6 million at BT restaurant. (20)
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Q.2 Brown Limited (BL) uses a single factory overhead rate for allocating factory overheads to
products, based on direct labour hours. However, for better planning and to bring more
accuracy in costing the products, BL intends to introduce Activity Based Costing.
Information pertaining to the latest quarter is as follows:

(i) Actual expenses:

Rupees
Direct wages 1,380,000
Machine setup costs 160,000
IT department overheads 120,000
Machine operating expenses 500,000
Production control 200,000
Material management 140,000
Quality control 240,000
Other expenses 750,000
Administrative and selling expenses 300,000

(ii) Production department:

Direct Direct Direct Number of
Machine Inspection
Units material labour labour material Number of
Products hours hours
produced per unit per unit hours requisitions units per
(per unit) (per unit)
(Rupees) (Rupees) (per unit) issued batch
Wye 30,000 60 30 4 2 0.4 400 3,000
Zee 60,000 35 8 1 5 0.5 500 4,000

(iii) The quality control department follows a policy of inspecting 5% and 2% of all units
of Wye and Zee respectively.

(iv) Basis of allocation of support services:

Departments IT Department Other expenses

Production 30% 25%
Material management 15% 25%
Quality control 15% 25%
Engineering 40% 25%

Required:
Compute the unit cost of Wye and Zee using both methods. (16)

Q.3 ABC Limited deals in production and marketing of edible oil. Currently, the company sells
the product in packing size of 1 litre and 3 litres. ABC’s market share is 8% and it sold
30 million litres of oil in the year 2015-16. 1-litre packs contributed 60% of the sale.

The profit and loss account of the company for the year 2015-16 is as follows:

Rs. in million
Sales - net 7,632
Cost of goods sold (5,068)
Gross profit 2,564
Less: Selling and administration expenses (750)
Net profit before tax 1,814

Following further details are available:

(i) 1-litre pack 3-litre pack
Retail price Rs. 264 720
Packing cost Rs. 15 40

(ii) Cost of goods sold includes depreciation of Rs. 170 million and other fixed costs of
Rs. 128 million.
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(iii) Variable production cost (excluding packing material) comprises 70% raw material,
20% direct labour and 10% factory overheads.
(iv) The company maintains finished goods inventory equivalent to 2 months’ sales.
(v) 70% of selling and administration expenses are variable. All other expenses are fixed.
(vi) Estimated impact of inflation on fixed and variable costs is 8% and 6% respectively.

To increase the market share and profitability of the company, the management intends to:

(i) launch economy pack of 5 litres at retail price of Rs. 1,100. As a result, the total
quantity of oil sold under the existing packs would reduce by 15%. This pack would
be produced using existing facilities. The packing cost would be Rs. 50 per pack.
(ii) increase selling price of 1-litre pack by 5% and reduce selling price of 3-litre pack by
10%. As a result, ratio of sale of 1 and 3 litre packs would change to 1:1.
(iii) launch premium quality brand in 2 litre pack at Rs. 800 per pack. Annual demand is
expected to be 1.75 million packs. The variable and fixed production costs per litre are
estimated at Rs. 200 and Rs. 45 respectively. The packing cost would be Rs. 100 per
pack. Fixed production cost comprises of amount pertaining to the new production
facility established for the production of premium brand as well as amount allocated
from existing fixed costs of the company on the basis of production quantities. The
variable selling and administration cost is estimated at Rs. 50 per pack.

As a result of the above measures, the company’s market share is expected to increase from
8% to 10%. It is also estimated that the overall size of the market would expand by 4%.

Required:
Prepare budgeted profit and loss account for the year 2017. (23)

Q.4 Alpha Limited (AL) is a manufacturing concern. The management believes that it can
improve the profitability significantly if more working capital is available. However, in the
existing situation, the banks are not inclined to provide further financing. Consequently, AL
has approached few high net worth individuals who have offered to provide financing at
fixed rate of interest.

In order to evaluate the offer, you have gathered the following information:
(i) Credit sales amounted to Rs. 600 million representing 80% of total sales. Credit
period is 30 days.
(ii) Annual consumption of raw materials is 3 million units @ Rs. 160 per unit.
(iii) Raw material is purchased at the start of each month. The credit period is 60 days.
(iv) Monthly storage cost is Rs. 1.50 per unit of raw material.
(v) Labour and variable factory overheads are approximately 30% of the cost of material.
(vi) AL has a running finance facility of Rs. 120 million which mostly remains fully
utilized. It carries interest @ 12% per annum.
(vii) The management has prepared the following plans for utilization of funds:

Avail bulk purchase discount of 3% on raw material which would be available if
the quantity purchased is one million units and payment is made within 10 days.

50 days credit term would be offered to customers. The extended credit period
would increase credit sales by 10%. However, the provision for bad debts will also
increase from 2% of average debtors to 3%.
(viii) Surplus funds can be invested @ 5% per annum.

Required:
Determine the financing rate at which it would be feasible for AL to acquire the loan,
assuming that the investors want to invest a minimum of Rs. 300 million and AL wants to
earn a minimum of Rs. 10 million from this arrangement. Assume a 360 day year. (15)
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Q.5 Ali Industries Limited (AIL) deals in a specialty chemical. Production is carried out on two
different plants which are installed in the same premises. The related data is as follows:

PM-1 PM-2
Production capacity per annum (tons) 230 270
Labour hours required per ton 30 50
Remaining useful life 10 years 8 years
Written down value (Rupees) 35,000,000 30,000,000
Variable overheads (% of direct labour) 60% 50%
Normal loss (% of input) 5% 8%

Due to rising demand, AIL plans to increase its production capacity. It is therefore
considering to:
(i) spend Rs. 25 million on balancing and modernization of PM-2. This expenditure is
expected to bring about the following benefits:

Production capacity would increase by 40 tons per annum.

The remaining useful life of the plant would increase by 4 years.

Normal loss would reduce from 8% to 6%.

Labour hours would reduce by 10%.

(ii) purchase a new plant to replace anyone of the two plants, at a cost of Rs. 80 million
having useful life of 20 years with annual capacity to produce 400 tons. The new plant
would reduce the normal loss to 4%. The labour required by the new plant would be
to 20 hours per ton. Variable overheads would be 40% of direct labour.

Other related information is as under:

(i) Annual demand is 600,000 litres. Selling price is Rs. 50,000 per ton.
(ii) Cost of raw material is Rs. 17,480 per ton. Labour is paid at the rate of Rs. 120 per
hour.
(iii) The current disposal value of the existing machines is estimated at 30% of their WDV.
The new machine is expected to have a salvage value of 10% of cost at the end of its
useful life. The machines are depreciated on straight line basis.
(iv) Cost of financing is 10% per annum.
(v) Fixed overheads other than depreciation would remain the same.

Required:
Suggest the most feasible strategy for Ali Industries Limited. (12)

Q.6 Target Manufactures Limited (TML) produces two products BM-1 and BM-2. The total
time required to manufacture each product and time available during a month are as
follows:

Machine hours Labour hours

BM-1 15 8
BM-2 12 10
Available hours 41,400 30,000

The per unit contribution margin of BM-1 and BM-2 is estimated at Rs. 9,000 and Rs. 5,500
respectively.

In order to maintain the market for BM-2, a minimum of 2,000 units of BM-2 have to be
produced.

Required:
Calculate the shadow price per machine hour if 5,000 machine hours can be added to the
capacity, at a cost of Rs. 0.2 million per month. (14)

(THE END)