2020

COST ACCOUNTING
C
ICAP past paper with examiner
comments and Marking plan
M A (Aut-2001 to Spr-2020)
By the Grace of Almighty Allah, I am pleased to present the questions and answers
of Cost Accounting (with examiner’s comments & Marking plan) for CAF-08. This
volume contains ICAP papers of last 38 attempts.
C
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ICAP
The Institute of Chartered Accountants of Pakistan

Foundation and Modular Examinations Autumn 2001

September 08, 2001

COST ACCOUNTING (MARKS 100)

FE-2 (PAPER-5) & MODULAR (PAPER D12) ‘D’ (3 hours)

Q.1(a) Place each of the following expenses of a manufacturing concern within the classification
of Production, Administration and Selling and Distribution:
(i) Cost of oil used to lubricate fork lifter employed in finished goods warehouse.
(ii) Salary of security guards posted at cash counter located in the Karachi factory.
(iii) Commission paid to sales representatives.
(iv) Commission paid to company’s purchasing agent.
(v) Auditors’ fee
(vi) Cost of damaged raw materials.
(vii) Insurance expenses on finished goods
(viii) Cost of packing cartons.
(ix) Cost of protective clothing for machine operators.
(x) Cost of stationery used in the Lahore factory. (05)

(b) Classify the following cost as fixed, variable and semi-variable:

(i) Depreciation calculated on straight line method.
(ii) Royalty expense
(iii) Factory insurance
(iv) Supervision and inspection
(v) Industrial relations and employees’ welfare expenses
(vi) Property tax
(vii) Overtime costs
(viii) Material handling costs
(ix) Machinery repairs charges
(x) Generator fuel costs. (05)

Q.2 The following information is available for the month of December 2000 of Khalid
Enterprises:

Accounts payable December 01, Rs 6,000

Work in process December 01, Rs 30,000
Finished goods December 01, Rs 50,000
Material December 31, Rs 15,000
Accounts payable December 31, Rs 10,000
Finished goods December 31, Rs 60,000
Actual factory overhead Rs 150,000
Cost of goods sold Rs 300,000
Payment of accounts payable used
only for material purchases Rs 35,000

Factory overhead is applied at 200% of direct labour cost. Jobs still in process on December
31, have been charged Rs 6,000 for material and Rs 12,000 for direct labour hours (1,200
hours). Actual direct labour hours 10,000 @ Rs 8.00 per hour.
 (02)

Required : a) Material purchased

b) Cost of goods manufactured
c) Applied factory overhead
d) Work in process December 31,
e) Material used
f) Material as on December 01
g) Over or under applied factory overhead. (14)

Q.3 Emerson efficiency plan establishes a scale of bonus ratio between low task and high task
starting with zero bonus at a certain efficiency level increasing by small increments to
successively large increments cumulating to a determined bonus at 100% efficiency. Above
100% efficiency, additional bonus is allowed. Khaskhkaily Enterprises adopted the
Emerson efficiency plan for their cigarette packing plant which employs four (4) workers.
Bonus is paid to workers in addition to basic pay which is fixed by the labour authorities.
Brief synopsis of the scheme is as follows:

Efficiency rates Rates of Bonus

Upto 75% efficiency 0 Bonus
76% to 85% efficiency 2.5% bonus
86% to 98% efficiency 7.5% bonus
99% and above efficiency 15% bonus
Standard time 3 minutes per carton
Minimum Basic pay is Rs 3,375
Information specific for the month of August 2001 is as follows:
Actual packing for the month
Worker A 3,750 Cartons
Worker B 4,625 Cartons
Worker C 4,250 Cartons
Worker D 3,350 Cartons
August 2001 consisted of 25 working days of 9 hours each and there were no absentees
during the month. For the purpose of calculating standard per unit labour rate minimum
efficiency is considered as normal packing.

Required: Calculate the employee wise payroll cost for the month of August 2001
separately showing the basic pay and bonus payable to each employee. (15)

Q.4 A controller is interested in an analysis of the fixed and variable cost of electricity as related
to direct labour hours. The following data has been accumulated.
Months Electricity Cost Direct labour hours
Rupees
Jan 2000 15,480 297
Feb 2000 16,670 350
Mar 2000 14,050 241
Apr 2000 15,340 280
May 2000 16,000 274
June 2000 16,000 266
July 2000 16,130 285
Aug 2000 16,350 301

Required : The amount of fixed overhead and the variable cost using.
a) The high and low points method (06)
b) The method of least square. (06)
 (03)
Q.5 SS Construction Co. have under taken the construction of a fly over for Road Development
Authority. The value of the contract is Rs.12,500,000 subject to a retention of 20% until
one year after the certified completion of the contract and final approval of the authorities
surveyor. The Company has given the Contract No SS/RDA/786 for reference. The
following are the details as shown in the books of account of SS Construction Co. as on
June 30, 2001:
Amount in Rupees
Labour wages paid 4,050,000
Material purchased directly 4,200,000
Material issued from stores 812,000
Plant maintenance 121,000
Other expenses 601,000
Material in hand 63,000
Wages payable 78,000
Other expenses payable 16,000
Work not yet certified 165,000
Work certified 11,000,000
Cash received on account 8,800,000
Required: Prepare the Contract Account to show the position at June 30, 2001, retaining
an adequate provision against possible losses before final acceptance of the contract. (10)

Q.6 Shabbir Associates manufactures 3 joint products - Exe, Wye and Zee. A by-product Baye
is also produced. During the month of November 2000 the joint cost for direct materials and
direct labour were Rs 80,000 and 120,000 respectively. Shabbir Associates have an
established practice of absorbing overhead at 50% of direct cost. Production and sales
related data for the month of November 2000 is as follows:

Products Production Sales Sales Value

Kgs Kgs Rupees per Unit
Exe 7,800 7,000 10.00
Wye 11,700 11,000 10.00
Zee 10,000 9,000 6.50
Baye 10,000 10,000 2.60

The sales value of by-product is deducted from the process cost before apportioning cost to
each joint product. Costs of common processing are apportioned between joint product on
the basis of sales value of production. Assume that there is no opening inventories.

Required: Calculate profit for the month of November and analyze the profit
product-wise. (10)

Q.7 New Vision Trading Company Limited is planning to arrange for a six monthly overdraft
facility with a bank. However, before finalization of any arrangement it wants to know the
estimated requirements of cash. For this purpose it has hired you as consultant to make an
estimate of the foreseeable cash requirements.
The following is the basic data regarding various business cycles of the Company
I. Sales forecast for the six months are as under:
Months Rupees
January 800,000
February 950,000
March 600,000
April 900,000
May 1,100,000
June 600,000
 (04)

II. Purchases are made as and when required

III. No closing stock is maintained as the supplier has capability to supply any
quantities at any time.
IV. Gross profit ratio is maintained @ 20% of the sales price
V. Various expenses for the six months are as under:
Rupees
Salaries and 390,000
wages
Repairs and 120,000
maintenance
Insurance 6,000
Stores and 270,000
spares
Duties 360,000
Legal charges 24,000
VI. The recoveries from the debtors are made as follows
50% in the month of sale
30% in the month following the month of sale
20% in the second month after sale
VII. Trade creditors are paid as under
40% in the month of purchase
40% in the month following the month of purchase
20% in the second month after purchase
VIII. All other business expenses are paid in the month of expense. Expenses are evenly
spread throughout the year.
IX The Company commenced its business on January 1, 2000 with a cash balance of
Rs 50,000.

Required: You are required to prepare a cash budget to facilitate the company’s management
in assessing the working capital requirement for the next six months. (15)

Q.8 Sangdil Limited makes two products, SS and TT. The variable cost per unit are as follows:
SS TT
Direct Material Rs. 6.00 Rs. 18.00 .
Direct Labour (Rs 18.00 per hour) Rs. 36.00 Rs. 18.00
Variable overhead Rs. 6.00 Rs. 6.00
_____ _____
Total Variable Cost Rs. 48.00 Rs. 42.00
===== =====
The selling price per unit is Rs 84.00 for SS and Rs 66.00 for TT. During July 2001
the available direct labour is limited to 48,000 hours. Sales demand in July is
expected to be 18,000 units for SS and 30,000 units for TT.
Fixed cost is Rs.200,000 per month.

Required: Determine the profit-maximizing production level for the products

SS & TT. (14)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Foundation/Modular Foundation Examinations Spring 2002

March 9, 2002

COST ACCOUNTING (MARKS 100)

FE-2 Paper 5 – Modular D 12 (Module D, SM, 4B) (3 hours)

Q.1 (a) What are the essentials of a good wage system 06

(b) How Cost Control is different from Cost Reduction 02
(c) Define: Direct Material Total Variance and Direct Material Price Variance 04

Q.2 The following balances are appearing in the cost ledger of Marwat Engineering as at
January 1, 2002.

General ledger control account 80,000

Materials control account 35,000
Work-in-process control account 17,500
Finished goods control account 27,500

At the end of the period you are supplied the following information by the factory
supervisor:

Materials purchased 195,000

Materials purchased for “Special Job 420” 10,450
Materials issued for
Repair and maintenance 3,400
Capital Job 101 9,700
Special Job 420 11,200
Production 177,400
Materials returned to suppliers 1,253
Normal material lost in transit and storage ?
Carriage inwards of materials 3,264
Total wages paid to employee for
Repair and maintenance 2,100
Capital Job 101 6,325
Special Job 420 19,475
Production 103,000
Indirect wages 15,325
Normal idle time ?
Production expenses 21,860
Admin expenses 19,462
Selling expenses 11,231
Distribution expenses 5,433
Sales 425,000
Revenue from Special Job 420 70,000
Production overheads recovered as a percentage of prime cost 15.0%
 (2)

Admin overheads recovered on finished production 20,000

Selling overheads recovered on finished production 17,500
Capital Job is completed and needs to be capitalised
Special job 420 was completed and despatched to customer
Inventory valuation as at January 30, 2002
Materials control account 26,500
Work-in-process control account 18,100
Finished goods control account 35,674

Required:

• Prepare necessary control accounts in the cost ledger

• Calculate normal loss on materials in transit and storage
• Calculate normal idle time of labour
• Calculate production overhead allocated to SJ420, CJ101 and normal production
• Calculate profit on SJ420
• Calculate capitalised cost of CJ101 20

Q.3
a) Assuming nil opening stocks, calculate the value of the closing stock from the data
provided below using each of the following methods:

• FIFO
• LIFO
• HIFO

Receipts
Date Units Rate
October 1 100 12.50
October 8 85 15.00
October 16 95 11.95
October 20 115 13.00
Issues
October 2 55
October 9 65
October 12 50
October 18 25
October 20 115
12

b) List the main advantages and disadvantages of FIFO method of costing 03

c) Apollo Industries apportioned its overheads using the following bases:

i) Direct material cost iv) Machine values

ii) Direct labour cost v) Area in square meters
iii) Machine hours vi) Number of employees in the department
 (3)

You have been requested by the Production Manager to reassess the overhead
apportionment basis. You are required to provide an appropriate basis for each of the
following overheads:

1. Rent and property tax

2. Repair and maintenance
3. Electric power
4. Direct material handling
5. Indirect materials
6. Indirect labour wages
7. Workmen canteen expenses
8. Insurance
9. Medical insurance
10. Factory security 05

Q.4 A one-year contract has been offered to Maliaka Industries which will uitilise an existing
machine that is only suitable for such contract works. The machine cost Rs 275,000 four
years ago and has been depreciated by Rs 60,000 per year on a straight-line basis and thus
has a book value of Rs 35,000. The machine could now be sold for Rs 47,500 or in one-
year’s time for Rs 4,000

Four types of materials would be required for the contract as follows:

Material Units Purchase price Current Current resale

of stocks Buying price price
Available Required for Rupees
in stocks contract
071 1,200 450 23.00 17.00 14.50
076 200 1,250 32.00 42.00 40.50
079 3,000 800 47.00 53.50 42.00
085 1,800 1,200 33.00 13.25 12.00

Material 071 and 085 are in regular use within the firm. Material 076 could be sold if not
used for the contract and there are no other uses for 079, which has been deemed to be
obsolete.

The labour requirements for the contract are

First six Subsequent six First six Subsequent six

months months months months
Hours Required Normal wage rate in Rupees
Skilled 1,350 1,276 25.00 28.75
Semi-skilled 1,400 1,225 17.00 19.00
Unskilled 1,225 1,400 15.00 16.00

It is expected that there will be shortage of skilled labour in the first six months only.
Therefore, for the purposes of the contract skilled labour will have to be diverted from other
work from which a contribution of Rs 7.50 per hour is earned, net of wage costs. The firm
currently has a surplus of semi-skilled labour paid at full rate but doing unskilled work. The
labour concerned could be transferred to provide sufficient labour for the contract and
would be replaced by unskilled labour.
 (4)

Overheads are generally allocated in the firm at Rs 18 per skilled labour hour which
represents Rs 13 for fixed overheads and Rs 5 for variable overheads.

Required:

You are required to determine the relevant cost of the contract and sales price of the
contract using the following assumptions:
• 10 % contribution margin is earned on the relevant cost of the contract.
• Contribution margin over relevant cost is equal to 15% of selling price. 18

Q.5 A chemical compound is made by raw material being processed through two processes. The
output of process A is passed to process B where further material is added to the mix. The
details of the process costs for the financial year December 2001 are as below:
Process A
Direct material 2000 kgs @ Rs 5.00 per kg
Direct Labour Rs 7,200
Process Plant Time 140 hrs @ Rs 60.00 per hr
Expected output 80% of input
Actual output 1400 kgs
Normal loss is sold @ Rs 0.50 per kgs

Process B
Direct material 1400 kgs @ Rs 12.00 per kg
Direct Labour Rs 4,200
Process Plant Time 80 hrs @ Rs 72.50 per hr
Expected output 90% of input
Actual output 2620 kgs
Normal loss is sold @ Rs 1.825 per kgs
The department overhead for the year was Rs 6,840 and is absorbed into the costs of each
process on direct labour cost. There was no opening stock at the beginning of the year.

Required:
Prepare the following accounts:
a) Process A 05
b) Process B 05
c) Normal loss/gain of both process 05

Q.6 In a manufacturing deptt 1 kg of product K requires two chemicals A and B. The following
are the details of product K for the month of January 2002.
a) Standard mix of Chemical A is 50% and Chemical B is 50%
b) Standard price per kg of chemical A is Rs 60 and chemical B is Rs 75
c) Actual input of chemical B is 350 kgs
d) Actual price of chemical A is Rs 75
e) Standard normal loss is 10% of total input
f) Material Cost Variance Rs 3,250 adverse
g) Material yield variance Rs 675 adverse
h) Actual output 450 kgs.

Required:
i) Material Mix Variance 06
ii) Material Usage Variance 03
iii) Material Price Variance 06
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Foundation Examinations Autumn 2002

September 07, 2002

COST ACCOUNTING (MARKS 100)

FE-2 Paper 5 & Module D Paper D12 (3 hours)

Q.1 (a) Describe the roll of a Cost Accountant in a manufacturing unit. (04)
(b) At the end of the month goods have arrived from the supplier but the relevant
invoice has either not been received or has not yet been processed for
payment by the relevant department. How you would deal with the problem
while preparing monthly management accounts. (03)
(c) Outline briefly a system for ascertaining idle time of a production worker
employed in a manufacturing concern. (05)
(d) A chart of accounts, accompanied by adequate instructions, is a great aid to
better accounting, costing and controlling. Explain. (05)

Q.2 With reference to material control system, you are required to explain the meaning
of:
(i) Perpetual Inventory
(ii) Continuous Stock Taking (05)

Q.3 The Parrot Steel’s factory overhead rate is Rs.5 per hour. Budgeted overhead for
5,000 hours per month is Rs.30,000 and at 7,000 hours is Rs.37,000. Actual
overhead for the month is Rs.29,000 and actual volume is 7,000 hours.

Required:
(i) Variable overhead in overhead rate (02)
(ii) Budgeted fixed overhead rate (02)
(iii) Applied factory overhead rate (02)
(iv) Over or under absorb factory overhead (02)
(v) Spending variance (03)
(vi) Idle capacity variance (03)

Q.4 A manufacturing company makes a product by two processes and the data below
relates to the second process for the month of June 2002.
Work in process as on June 01, 2002 was 1,200 units represented by the following
costs:
Rupees
Direct material (100%) 54,000
Direct wages (60%) 34,200
Overhead (60%) 36,000

During June 4,000 units were transferred from first process @ Rs.37.50 per unit.
This cost is treated as material cost of second process.
 (2)

Other costs were as follows:

Rupees
Additional material 24,150
Direct Wages 164,825
Overhead 177,690

Quantitative data shows the following:

Finished Goods transferred to godown 3,200 units

Finished Goods in hand 500 units
Normal loss 520 units
Work in process (100% material and 50% wages and
overhead) 980 units

Average method of pricing is used.

Required (i) Equivalent Production Statement for June 2002 (04)

(ii) Process Account for the month of June 2002 (10)

Q.5 (a) What is margin of safety? (03)

(b) The fixed cost of an enterprise for the year is Rs.400,000. The variable cost per
unit for a single product being made is Rs.20. Each units sells at Rs.100.

Required
(i) Break even point. (04)
(ii) If the turnover for the next year is Rs.800,000, calculate the estimated
contribution and profit, assuming that the cost and selling price remain the
same. (04)
(iii) A profit target of Rs.400,000 has been desired for the next year. Calculate the
turnover required to achieve the desired result. (04)

Q.6 (a) Explain the main functions of a cash budget and discuss briefly its importance
in a system of budgetary control. (05)
(b) Jawed Enterprises has bank balances of Rs.100,000 as on January 01, 2002.
The sales forecast for the next six months are as follows:

Rupees
January 850,000
February 750,000
March 800,000
April 800,000
May 900,000
June 950,000

Trend of recoveries against sales are 55% in the month of sales, 30% in next
month, 10% in the second month and 5% in the third month.
 (3)

Cost of sales are 80% of sales, payable immediately to avail 5% cash discount
of cost. Other costs are 10% of sales. Personal drawing are Rs.25,000 per
month. Any shortfall will be financed by bank @ 12% markup p.a. worked out
on the closing balance of the month. Mark up is payable next month.

Required:
(i) Cash budget for the six month ending June 30, 2002 (10)

(ii) Budgeted Income Statement for the six month ending June 30, 2002 (05)

Q.7 Baba Machine Factory manufactures equipment for textile, sugar and cement
industries. The company has three sales departments who are authorized to sell
directly to these industries. The following information is available for the month of
June 2002.

Particulars Textile Sugar Cement

Division Division Division
Capacity utilization 30% 30% 30%
Rupees Rupees Rupees
Gross sales 130,000 170,000 200,000
Net sales 120,000 150,000 200,000
Sales salaries 10,000 15,000 20,000
Storage expenses 6,000 8,000 8,000
Delivery expenses 2,000 4,000 5,000

Cost of goods manufactured as a % of gross sales 50% 60% 65%

Other marketing & selling expenses are Rs.24,000 to be allocated on net sales basis.
General salary are Rs.35,000 to be allocated on manufacturing cost basis and
commission to sales person are 2% of the net sales. The company is using 90% of its
capacity and each of the sales department are confident that they will be able to sell
the equipment if the capacity is increased to 100%. The additional cost for utilizing
100% capacity is estimated to be 5% of net incremental sales.

Required: (i) Income Statement in (columnar form) for the month of June 2002 (10)
for all the three divisions and as a whole.

(ii) Advice the management whether to increase its capacity to 100%

or not. If your answer is in affirmative, the division you would
suggest to increase the capacity. (05)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Modular Intermediate Examinations Spring 2003

March 08, 2003

COST ACCOUNTING (MARKS 100)

Module D Paper D 12 (3 hours)

Q.1 Following transactions appeared in the books of accounts of the Company

PURCHASES

Month Quantity (Units) Cost per unit (Rs.)

Jan 100 41
Feb 200 50
April 400 51.87

SALES

Month Quantity (Units) Sale price per unit (Rs.)

March 250 64
May 350 70
June 100 74

There was an opening balance of 100 units for Rs.3,900.

From the information given above, for the six month ended June 30, show the store
ledger records including the closing stock balance and stock valuation by using
weighted average, FIFO and LIFO methods of pricing. (09)

Q.2 (a) Following is the labour data of a company for a given week:

Days Units Hours

Monday 270 8
Tuesday 210 8
Wednesday 300 8
Thursday 240 8
Friday 260 8

Required:

You are required to prepare a schedule showing weekly earning, hourly rate, and the
labor cost per unit assuming a 100% bonus plan with a base wage of Rs. 6/- per hour
and a standard production rate of 30 units per hour. (06)

(b) What are the requirements for an incentive plan to be successful. (03)
 (2)

Q.3 The following data of a period relates to a manufacturing department:

Budgeted Actual
Direct Material Cost Rs.500,000 Rs.750,000
Direct Labour Cost Rs.500,000 Rs.550,000
Production Overhead Rs.750,000 Rs.800,000

Direct Labour Hours 100,000 130,000

During the period a Job XY 54 was completed. Direct material costing Rs.100,000
direct labour Rs.21,000 and overhead costing Rs.115,000 were incurred.

Required:

(a) Calculate predetermined production overhead absorption rate on the following

basis:
(i) as a percentage to direct material cost (ii) direct labour hours (04)
(b) Calculate the production overhead cost to be charged to XY54 based on rates
calculated in answer (a) above. (04)
(c) Assume that the direct labour hour rate of absorption is used. Calculate the
under or over absorbed production overheads for the period and state an
appropriate treatment in the accounts. (04)
(d) If the factory overhead control account has a credit balance at the end of the
period, was overhead over applied or under applied? (04)

Q.4 ABC Limited produces four joint products Q,R,S and T, all of which result from
processing a single Raw Material Z. The following information is provided to you:

Joint Product Numbers of Units Selling price per unit

Rupees
Q 5000 18
R 9000 8
S 4000 4
T 2000 11

The company budgets for a profit of 14% of sales value. Other costs are as follows:
Carriage Inward 6%
Direct Wages 18%
Manufacturing overhead 12%
Administrative overhead 10%

Required:

(a) Calculate the maximum price that may be paid for the raw material. (04)
(b) Prepare a comprehensive Cost Statement for each of the products allocating the
material cost and other costs based on:
(i) the numbers of units, and
(ii) the sales value. (08)
 (3)

Q.5 (a) List the contents of a complete budget document of a manufacturing concern. (08)
(b) Explain Functional Budget. (06)

Q.6 M/s Gama & Sons produces only one product by the name ‘Gama’ and the standard
manufacturing cost of the product is as under:
Rupees
Direct material (4 kg @ Rs.3 per kg) 12
Direct labour (5 hours @ Rs.4 per hour) 20
Variable overhead 5
Fixed overhead 15
__________
Total standard cost 52 per unit
=========

The budgeted quantity to be produced is 10,000 kg and actual production was 9,500
units. The actual consumption and cost during the period was as under:
Rupees
Direct material ( 37,000 kg) 120,000
Direct labour (49,000 hours) 200,000
Variable overhead 47,000
Fixed overhead 145,000
__________
Total standard cost 512,000
=========

There was no stock of work in process or finished goods at the beginning or end of
the period.

Required:

You are required to calculate the relevant cost variances (14)

Q.7 A company manufactures a single product by the name ‘BABA’. Its variable cost is
Rs.40/- and selling price is Rs.100/-. For the current year, Company expects a net
profit of Rs.2,750,000 after charging a fixed cost of Rs.850,000. However the
production capacity is not utilized and the Manager Marketing suggested the
following for maximization of profit:

Suggestion Reduced selling price by Sale volume expected

to increase by
% %
1 5 10
2 7 20
3 10 25

Required:
(a) Evaluate the above proposals and advise the most profitable suggestions
assuming no change in the cost structure.
(b) Suggest other considerations for the decisions. (14)
 (4)

Q.8 A company which manufactures a uniform product is operating at 60% level of

activity. At this level the sales are Rs.60,000 at a selling price of Rs.10/- per product.
The following information regarding cost is available.

Variable cost Rs. 2 per product

Semi variable cost may be considered fixed at Rs.6,000 with a variable cost of
Rs.0.50 per product.

Fixed cost is Rs.20,000 at the present level of activity but is estimated that
achievement of an 80% - 90% level would increase cost by Rs.4,000.

A proposal has been made to the Directors that the price of product should be
reduced by 10% so as to reach a wider sales market. The Board is considering it and
require a statement showing:

(a) the operating profit if the company is operating at level of activity of 60%,
70% and 90% assuming that selling price
(i) remains as at present
(ii) is reduced to Rs.9 (08)

(b) The percentage increase in present output which will be required to maintain
the present profit if the Company reduces the selling price. (04)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2003

September 06, 2003

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 Why should semi variable expenses be separated into fixed and variable elements?
What methods are available for separating semi variable expenses? 07

Q.2 How Cash Budget assists management in making more effective use of money?
Name two methods used for the preparation of a cash budget. 09

Q.3 The estimated overheads likely to be incurred relating to a cost center with two major
machines installed are as under:
Rupees

Supervision 8,000
Indirect employees, wages 10,000
Earned leave 5,000
Maintenance cost 15,000
Power 20,000
Depreciation 5,000
Rent of building 2,500
65,000
Details of various allocations of the cost centers are as under
Machine-1 Machine-2 Total

Running hours 5,000 1,000 6,000

1) Supervision cost Rs 4,000 4,000 8,000

2) Capital cost of machine Rs 20,000 5,000 25,000
3) Indirect employees No 8 2 10
4) Total employees No 20 5 25
5) Maintenance hours 600 120 720
6) Kilowatt hours 100,000 20,000 120,000
7) Floor Space Sq. ft 5,000 5,000 10,000

Required: Calculate machine hour rate for each machine. 10

Q.4 Following data pertains to a worker of a manufacturing industry.

Actual production 400 units
Working hours in a week 48 hrs
Guaranteed rate per hour Rs.10
Estimated time to produce one unit 8 minutes

As an incentive the management has agreed to increase the

time allowed per unit by 20%
 (02)

Required:

Calculate the gross wages of the worker according to:

a) Piece work with a guaranteed weekly wages
b) Under Rowan premium bonus
c) Under Hasley premium bonus 50% to worker 09

Q.5 Tata Cools manufactures a range of products including Air conditioners which pass
through three processes before transfer to finished goods store. Production department
for the current month has given the following production data.

PROCESS
1 2 3 Total

Basic Raw Material (10,000 units) Rs 6,000 6,000

Direct material – addition Rs 8,500 9,500 5,500 23,500
Direct wages Rs 4,000 6,000 12,000 22,000
Direct expenses Rs 1,200 930 1,340 3,470
Production overheads (to be allocated
on the basis of direct wages) Rs 16,500

Output Units 9,200 8,700 7,900

Normal loss in process of input % 10 5 10
Scrap value of each lost unit Rs 0.20 0.50 1.00

There was no stock at start or at the end in any process.

You are required to prepare the following accounts

a) Process 1 04
b) Process 2 04
c) Process 3 04
d) Abnormal Loss 04
e) Abnormal Gain 04

Q.6 The Parrot Company sold 150,000 units @ Rs. 30 each, Variable cost is Rs. 20
(Manufacturing Rs. 15 & Marketing Rs. 5), Fixed Cost is Rs. 1,200,000 annually
which occurs evenly throughout the year (Manufacturing Rs. 800,000 & Marketing
Rs. 400,000)

Required

i) Breakeven point in units

ii) Breakeven point in Rupees
iii) Number of units to be sold to earn profit before tax of Rs. 200,000
iv) Number of units to be sold to earn after tax profit of Rs. 100,000 if tax rate
is 25%
v) The breakeven point in units if selling price is increased by Rs. 3 and
variable cost by Rs. 2 per unit 10
 (03)

Q.7 A manufacturing concern is currently buying a component used in its finished product
from a local supplier @ Rs. 2,000. The company has been informed that plant to
produce this component is available and can be installed at space available with the
company. Two alternative proposals are under consideration:

a) Install a semi-automatic machine in which case fixed cost will be

Rs. 5,000,000 and variable cost Rs. 1,500 per unit.
b) Install an automatic machine in which case fixed cost will be Rs. 10,000,000
and variable cost Rs.1,200 per unit.

Note (Depreciation and interest costs are included in fixed cost).

Required:
(i) At what level of output it is justified to install any of the above two
machines.
(ii) If the annual requirement of the component is 15,000 units, which machine
would you advise to install.
(iii) At what level of output would you advise the company to install automatic
machine instead of semi-automatic machine. 15

Q.8 Following information pertains to Dilber Associates:

Normal capacity of a plant is 20,000 units per month or 240,000 units a year.

Variable costs per unit are:

Direct material Rs. 3.00
Direct labour Rs. 2.25
Variable FOH Rs. 0.75
Total Rs. 6.00

Fixed overheads are Rs. 300,000 per year or Rs.1.25 per unit at normal capacity.
Company is using ‘units of product’ as basis for applying overheads. Fixed marketing
and administrative expenses are Rs. 60,000 per year and variable marketing expenses
are Rs. 3,400, Rs. 3,600, Rs. 4,000 and Rs. 3,000 for the first, second, third and fourth
month respectively.

Actual and applied variable overheads are the same. Likewise no material or labour
variance exists. There is no work in process. Standard costs are assigned to finished
goods only.

The sale price per unit is Rs. 10 and actual production, sale and finished goods
inventories in units are:
MONTHS
First Second Third Fourth

Units in beginning inventory - - 3,000 1,000

Units produced 17,500 21,000 19,000 20,000
Units sold 17,500 18,000 21,000 16,500
Units in ending inventory - 3,000 1,000 4,500

Required: From the above information prepare income statement through Absorption
Costing and Direct Costing methods. 20
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2004

March 11, 2004

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 Explain the following terms:

Expense (02)
Product cost (02)
Semi-variable cost (02)
Period cost (02)

Q.2 Critically analyse the following statement:

“Labour turnover should be low whereas stock turnover should be high.” (08)

Q. 3 XYZ Company produces 200 articles of X per annum. Each article of X requires
3.8 units of material Y. Some other data is given below:

Cost per unit of Y Rs. 12,500

Warehouse monthly rent Rs. 15,000
Warehouse fumigation during the year Rs. 23,000
Watchman salary per month Rs. 4,500
Per order inspection charges Rs. 10,252
Service departments factory overhead charged to
Store department Rs. 10,000
Ordering department Rs. 7,050
Stock holding per annum Rs. 125 per unit
Working capital cost 16%
Salaries of ordering department Rs. 10,050
Broker commission on supply of Y 0.50%
Per order lump sum out of pocket expenses of
broker of material Y Rs. 22,048

You are required to calculate:

(a) Economic Order Quantity. (08)

(b) Number of orders per annum on the basis of Economic Order Quantity. (02)
(c) Verify your answer in (b) by calculating total ordering plus carrying
costs per annum:
(i) Assuming higher number of orders than in (b) (03)
(ii) Assuming lower number of orders than in (b) (03)
 (2)

Q.4 AAB Company is planning its capacity for the year 2004 at 90% of the rated capacity.
For the purpose of estimating ‘other factory overhead expenses’ company uses five years
history and ‘simple regression analysis’ method. Data in hand is as under:

Rated capacity 20,000

Direct labour hours at 100% capacity 25,000

Five year history of ‘Other factory overhead expenses’ is as under:

Year Other factory overhead Direct labour

expenses (Rs.) hours

1999 90,775 23,750

2000 83,125 18,750
2001 84,800 20,000
2002 99,084 21,000
2003 84,860 19,750

In the year 2002 other factory overhead expenses include a penalty of Rs. 12,734 on non
compliance of certain labour laws.

You are required to calculate fixed and variable portions of estimated other factory
overhead expenses at planned capacity. (10)

Q. 5 AAD Company’s Budgeting Department has compiled following data for decision-making:

Product Demand Average Material Labour Opening

in units sale price per unit per unit stock
Rs. Rs. Rs. Units

A 1,500 318 172 76 50

B 2,200 421 172 173 50
C 3,700 280 172 32 -

Minimum order quantity of each product is 100 units. The company has Rs. 800,000
working capital in hand and a running finance line of Rs. 500,000 at 24% per annum cost.

Production lead time and sales recovery period is estimated at one year.

Administrative and marketing expenditure per annum are Rs. 152,700 and Rs. 72,842
respectively.

Opening stock carry same unit cost as given for current year.

You are required to:

(a) Prepare product sales mix that can generate maximum net profit. (08)
(b) Projected Profit and Loss Statement according to your suggested product mix. (04)
 (3)

Q.6 Following is the data of Department B of EFG Company for December, 2003:

Work in process (opening) 8,500 units

(Completed as to material 20% and conversion
cost 25%) Rs. 43,860
Work in process (ending) 11,540 units
(Completed as to material 50% and conversion
cost 25%)
Current period transactions are:
Cost transferred from Department A Rs. 45,600
Units transferred from Department A 12,000 units
Units mishandled and lost before start of
any process 460 units
Material consumed Rs. 27,654
Conversion cost incurred Rs. 47,689
Units transferred out 7,500

Normal spoilage is 6% of units transferred out and inspection is done at the end of
process. Company uses FIFO method for inventory valuation.

You are required to prepare production report of Department B showing Quantity

Schedule, Cost Charged to Department and Heads of Account where costs have been
accounted for. (20)

Q.7 ABC Limited intend to commence production from July 1. They have provided
following information for the first four months of operation:

PARTICULARS 1st 2nd 3rd 4th

Sales in units 9,500 9,300 9,900 10,000

Selling price per unit 60 58 59 60

Cost per unit

Material 20 18 19 20
Labour 10 10 10 10
Overhead 5 5 5 5
Depreciation 5 5 5 5
Administrative 3 3 3 3
Marketing 2 2 2 2

Capital expenditure - - - 50,000

 (4)

Additional Information

1) Material will be purchased on cash basis. The company intends to keep

stock for one month.

2) Wages to be paid at the end of the month.

3) Other costs will be accrued for one month.

4) Production for 5th month is expected to be 6,500 units.

5) Sales collections are as follows:

50% collection in first month
30% collection in second month
20% collection in third month

6) Loan from sponsors Rs 300,000 to be repaid in 5 equal monthly

installments beginning from second month of operation.

7) Cash in hand to be maintained at Rs 50,000. Deficit, if any, will be

financed from bank. Any surplus funds to be utilized towards payment
of bank liability. Markup, if any, will be paid @ 8% p.a. every six
months.

8) Cash in hand as on July 1, Rs 50,000.

Required:-

(a) Budgeted profit & loss for the four months. (06)
(b) Budgeted Cash flow statement for the four months. (10)

Q.8 From the following information, allocate overheads of service departments to individual
producing departments by adopting algebraic method:

Departmental overheads
before distribution of Service Provided
Departments Service Departments Dept Y Dept Z

Producing Dept – A Rs 6,000 40 % 20 %

Producing Dept – B Rs 8,000 40 % 50 %
Service – Y Rs 3,630 - 30 %
Service – Z Rs 2,000 20 % -
________ ______ ______
Total Departmental Overheads Rs 19,630 100 % 100 %
======= ===== ===== (10 )

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2004

September 11, 2004

COST ACCOUNTING (MARKS 100)

MODULE D (3 hours)

Q.1 (a) Describe briefly THREE major differences between: (i) financial accounting,
and (ii) cost and management accounting. (06)

(b) The incomplete cost accounts for a period of Company A are given below:

Stores ledger control account

Rs. 000
Opening balance 2,640
Financial ledger control A/c 3,363

Production wages control account

Rs. 000
Financial ledger control A/c 2,940

Production overhead control account

Rs. 000
Financial ledger control A/c 1,790

Job ledger control account

Rs.000
Opening balance 1,724

The balances at the end of the period (in ‘000’) were:

Stores ledger Rs.2,543
Job ledger Rs.2,295

During the period 65,000 kilos of direct material were issued from stores at a
weighted average price of Rs.48 per kilo. The balance of materials issued from
stores represented indirect materials.

Two thirds of the production wages are classified as ‘direct’. Average gross
wage of direct workers was Rs.20 per hour. Production overheads are
absorbed at a predetermined rate of Rs.30 per direct labor hour.

Required:

Complete the cost accounts for the period. (08)

 2

Q.2 ABC Company has been manufacturing 7,280 units per month of a product and
selling the same at a price of Rs.154 per unit. With the increase in competition the
customers are now asking for new contracts at a rate of Rs.140 per unit. The
company has started cost/benefit analysis of various options like extra shift working,
buying new technologies etc. However, as an immediate step they are going to
implement 100% bonus wages plan for improvement in production capacity. Mixed
expectations of the outcome of this plan are:

Owners 7,800 units per month

Production manager 8,190 units per month
Labour contractor 9,100 units per month

Other data is as under:

Fixed overheads Rs. 264,368 per month

Variable overhead Rs. 73 per machine per hour
Daily wages (8 hours shift) Rs. 200 per person
Number of machines 10
Number of labour required 2 per machine
Standard capacity 28 units per machine
Direct material Rs. 75 per unit
Working days in a month 26

Required:
Prepare a table showing per unit cost at present and various expected levels of
production. (16)

Q.3 The AJFA & Co is preparing its production overhead budgets and therefore need to
determine the apportionment of these overheads to products. Cost center expenses
and related information have been budgeted as below:

Total Machine Machine Assembly Canteen Maintenance

Shop A Shop B

Direct Wages (Rs) 518,920 128,480 99,640 290,800

Indirect Wages (Rs) 313,820 34,344 36,760 62,696 118,600 61,420
Consumable
Materials(incl.
Maintenance) (Rs) 67,600 25,600 34,800 4,800 2,400
Rent & Rates (Rs) 66,800
Building Insurance(Rs) 9,600
Heat & Light(Rs) 13,600
Power(Rs) 34,400
Depreciation of
Machine (Rs) 160,800
Area (Sq Ft) 90,000 20,000 24,000 30,000 12,000 4,000
Value of Machines(Rs) 1,608,000 760,000 716,000 88,000 12,000 32,000
Power Usage (%) 100% 54% 40% 3% 1% 2%
Direct Labour (Hours) 72020 16020 12410 43590
Machine Usage (Hours) 54,422 14,730 37,632 2,060
 3

The proportion of Maintenance cost center time spent for other cost centers is:

Machine Shop A 45%

Machine Shop B 40%
Assembly 13%
Canteen 2%

Required:

Allocate the overhead expense by using the appropriate bases of apportionment. (12)

Q.4 The incomplete process account relating to period 4 for a company which
manufactures paper is shown below:

Process account
Units Rs. Units Rs.
Material 4,000 16,000 Finished goods 2,750
Labour 8,125 Normal loss 400 700
Production overhead 3,498 Work in progress 700

There was no opening work in process (WIP). Closing WIP consisting of 700 units
was complete as shown:
Material 100%
Labour 50%
Production overhead 40%

Losses are recognized at the end of the production process and loss units are sold at
Rs.1.75 per unit.

Required:

Calculate the values of abnormal loss, closing WIP and finished goods. (08)

Q.5 (a) Explain the straight line equation Y = a + bx with reference to cost behaviour. (04)

(b) What are the limitations and problems of the equation? (05)

(c) Using the data provided below, determine the variable cost per unit and fixed
cost of 14,000 units.

Output (Units) Total Cost (Rs)

11,500 204,952
12,000 209,460
12,500 212,526
13,000 216,042
13,500 221,454 (05)
14,000 226,402
 4

Q.6 PQR Company manufactures product ‘E’ in 1,000 units batches and sells them in
100 unit packs. Cost data of the said product is as under:

Raw material 42 kg per unit

Raw material price Rs.37 per kg for annual buying
upto 3.5 million kgs.
Rs.36.90 per kg for annual
buying over 3.5 million kgs.
Direct labour Rs. 850 per unit
Factory Overhead-Variable Rs.300 per unit
Factory Overhead-Fixed Rs. 500,610 per month
Price Rs. 2,862 per unit.

Current production level is 80,000 units per annum, which is 100% of rated capacity
of the plant. For any increase in production, there will be an increase in fixed
overhead by Rs.25,000 per month.

Cost accountant of the company is of the view that the company can achieve
break-even level at lesser quantity if production is increased to avail purchase
discount of Rs.0.10 per kg.

Required:
(10)
Verify the opinion of the Cost Accountant.

Q.7 GHI Company produces 817 kgs ‘Y’ for which following standard chemical mix is
used:
Material Standard Quantity (Kgs) Standard Rate per kg.(Rs)
A 750 38.00
B 150 53.00
C 50 59.50

Purchase department knowing the standard mix made efforts for reducing the
average price of material mix and achieved the results as under:

Rate (Rs.)
A 37.00
B 56.25
C 62.75

Production department concentrating on yield aspect experienced a different ratio of

raw material mix and got 876 kgs out of following mix:

Quantity (Kgs)
A 750
B 185
C 65

Required:
Find out the effect of deviation from standards by calculating:
(a) Price Variance (05)
(b) Mix Variance (05)
(c) Yield Variance (06)
 5

Q.8 Khan Company is a small business which has the following budgeted marginal
costing profit and loss account for the month ended June 30, 2004:

Rs. Rs.

SALES 96,000
Cost of Sales:
Opening stock 6,000
Production 72,000
Closing stock (14,000)
(64,000)
32,000
Other Variable Cost - selling expenses (6,400)
Contribution 25,600
Fixed Costs:
Production Overhead (8,000)
Administration (7,200)
Selling (2,400)
Net Profit 8,000

The standard cost per unit is:

Rs.
Direct material (1 Kg) 16
Direct labour (3 hours) 18
Variable cost (3 hours) 6

Budgeted selling price per unit is Rs. 60

The company’s normal level of activity is 4000 units per month. It has budgeted
fixed production costs at Rs.8,000 per month and absorbed them on the normal level
of the activity of units produced.

Required:

Prepare budgeted profit and loss under absorption costing for the month ended June
30, 2004. (10)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2005

March 12, 2005

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 (a) It is often stated that ‘actual product cost’ cannot practically be worked out.

(i) Why do you think this statement is made? (05)

(ii) If the statement is correct, is the whole cost accounting process
worthwhile? (04)

(b) (i) Explain with reasons the significance of chart of accounts for the
purpose of cost accounting. (03)
(ii) Give reasons why over- or under-absorptions of overheads may arise. (03)

Q.2 A company manufactures and retails clothing.

You are required to group costs which are listed below and numbered 1 to 20 in the
following classifications (each cost is intended to belong to only one classification):

(i) Direct material

(ii) Direct labour
(iii) Direct expenses
(iv) Indirect production overhead
(v) Research and development costs
(vi) Selling and distribution costs
(vii) Administration costs
(viii) Finance costs
1. Lubricant for sewing machines
2. Floppy disks for general office computer
3. Maintenance contract for general office photocopy machine
4. Telephone rental plus metered calls
5. Interest on bank overdraft
6. Performing Rights Society charge for music broadcast throughout the factory
7. Market research undertaken prior to a new launch
8. Wages of security guards for factory
9. Carriage on purchases of basic raw material
10. Royalty payable on production of XY
11. Road licenses for delivery vehicles
12. Parcels sent to customers
13. Cost of advertising products on television
14. Audit fee
15. Chief accountant’s salary
16. Wages of operatives in the cutting department
17. Cost of painting advertising slogans on delivery vans
18. Wages of storekeepers in a material store
19. Wages of fork lift drivers who handle raw materials
20. Developing a new product in the laboratory (10)
 (2)
Q.3 Omega Limited is a manufacturer producing various items. One of its main
products has a constant monthly demand of 20,000 units. The production of this
product requires two kg of chemical A. The cost of the chemical is Rs.5/- per kg.
The supplier of the chemical takes six days to deliver the same from the date of the
order. The ordering cost is Rs.12/- per order and the holding cost is 10% per
annum.

Required:

(a) Calculate the following :

(i) The economic order quantity
(ii) The number of orders required per year
(iii) The total cost of ordering and holding the chemical A for the year.
(b) Assuming that there is no safety stock and that the present stock level is
4000 kg, when should the next order be placed?
(c) Assuming that a safety stock of 4,000 kg of chemical is maintained, what
will be the holding cost per year?
(d) Discuss the problems which most firms would have in attempting to apply
the EOQ formula. (12)

Q.4 The yield of a certain process is 80% as to the main product and 15% as to the by-
product. Remaining 5% is the process loss. The material put in process (10,000
units) costed Rs.21 per unit and all other charges amounted to Rs.30,000 of which
power cost accounted for 33? %. It is ascertained that power is chargeable to the
main product and by-product in the ratio of 10:9.

Required:

Draw up a statement showing the cost of the by-product. (06)

Q.5 Total Surveys Limited conducts market research surveys for a variety of clients.
Extracts from its records are as follows:

2003 2004
Rupees in million Rupees in million
Total Costs 6.000 6.615

Activity in 2004 was 20% greater than in 2003 and there was an increase of 5% in
general costs.

Activity in 2005 is expected to be 25% greater than 2004 and general costs are
expected to increase by 4%.

Required:

(a) Derive the expected variable and fixed costs for 2005. (07)
(b) Calculate the target sales required for 2005 if Total Surveys Limited wishes to
achieve a contribution to sales ratio of 80%. (03)
(c) Discuss briefly the problems in analyzing costs into fixed and variable
elements. (05)
 (3)
Q.6 Gala Promotions Limited is planning a concert in Karachi. The following are the
estimated costs of the proposed concert:

Rs.(000)
Rent of premises 1,300
Advertising 1,000
Printing of tickets 250
Ticket sellers, security 400
Wages of Gala Promotions Limited Personnel employed at the concert 600
Fee of artist 1,000

There are no variable costs of staging the concert. The company is considering a
selling price for tickets at either Rs.4,000/- or Rs.5,000/- each.

Required:

(i) Calculate the number of tickets which must be sold at each price in order to
break-even. (03)
(ii) Recalculate the number of tickets which must be sold at each price in order to
break-even, if the artist agrees to change from fixed fee of Rs. 1 million to a
fee equal to 25% of the gross sales proceeds. (04)
(iii) Calculate the level of ticket sales for each price, at which the company would
be indifferent as between the fixed and percentage fee alternative. (04)
(iv) Comment on the factors, which you think, the company might consider in
choosing between the fixed fee and percentage fee alternative. (04)

Q.7 Ali Limited makes and sells one product, the standard production cost of which is
as follows for one unit:

Rs.
Direct labour 3 hours at Rs.6 per hour 18
Direct materials 4 kilograms at Rs.7 per kg 28
Production overhead Variable 3
Fixed 20
Standard production cost 69

Normal output is 16,000 units per annum and this figure is used for the fixed
production overhead calculation.

Costs relating to selling, distribution and administration are:

Variable 20 percent of sales value

Fixed Rs.180,000 per annum

The only variance is a fixed production overhead volume variance. There are no
units in finished goods stock at 1 October 2003. The fixed overhead expenditure is
spread evenly throughout the year. The selling price per unit is Rs.140.

For each of the six monthly periods, the number of units to be produced and sold
are budgeted as :
 (4)
Six months ending Six months ending
31 March 2004 30 September 2004
Production units 8,500 7,000
Sales units 7,000 8,000

Required:

(a) Prepare statements for the management showing sales, costs and profits for
each of the six monthly periods, using
(i) marginal costing (05)
(ii) absorption costing (08)
(b) Prepare an explanatory statement reconciling for each six monthly period the
profit using marginal costing with the profit using absorption costing. (03)

Q.8 Pink Ltd. is considering proposals for design changes in one of a range of soft toys.
The proposals are as follows:

(a) Eliminate some of the decorative stitching from the toy.

(b) Use plastic eyes instead of glass eyes in the toys.
(c) Change the filling material used. It is proposed that scrap fabric left over from
the body manufacture be used instead of synthetic material which is currently
being used.

On above proposals following information has been gathered by management:

(1) Plastic eyes will cost Rs.30 per hundred whereas the existing glass eyes cost
Rs.40 per hundred. The eyes will be more liable to damage during insertion. It
is estimated that scrap plastic eyes will be 10% of the quantity issued from
stores as compared to 5% in case of glass eyes.
(2) The synthetic filling materials costs Rs.1,600 per ton. One ton of filling is
sufficient for 2,000 soft toys.
(3) Scrap fabric to be used as filling material will need to be cut into smaller
pieces before use and will cost Re.1 per soft toy. Scrap fabric is sufficiently
available for this purpose.
(4) The elimination of decorative stitching is expected to reduce the appeal of the
product, with an estimated fall in sales by 10% from the current level. It is not
felt that the change in eyes or filling material will adversely affect sales
volume. The elimination of the stitching will reduce production costs by Rs.6
per soft toy.
(5) Current sales level of the soft toy is 300,000 units per annum. Apportioned
fixed costs per annum are Rs.4,500,000. The net profit per soft toy at the
current sales level is Rs.30.

Required:

Prepare an analysis which shows the estimated effect on annual profit if all three
proposals are implemented and which enables management to evaluate each
proposal. The proposals for plastic eyes and the use of scrap fabric should be
evaluated after the stitching elimination proposal has been evaluated. (11)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2005

September 10, 2005

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 (a) Without an effective system of cost accounts it is doubtful whether any
business can survive in the intensely competitive conditions prevailing today.
Briefly state how a cost accounting system can be used by a business entity to
gain competitive advantage. (06)

(b) Management is often faced with a situation where a component which is

manufactured by their own organization has a cost, as disclosed by the cost
accounts, in excess of that which would have to be paid if it were bought in the
open market. However a decision whether to manufacture or buy cannot be
made simply by comparing internal costs with open market prices. List the
other factors which management would have to consider, both of a financial
and non-financial nature, while making such a decision. (05)

Q.2 Alpha manufacturing Co. Ltd. maintains stocks on perpetual inventory system. The
bin card for stock item code No. N96 in the company's stores contains the following
information for the month of June 2005:

Opening stock on 01 June: 60 units, value Rs. 3,600.

Receipts Invoice
Date Units issued
Units price per unit
5 June 120 59.00
10 June 80
14 June 40 60.50
17 June 80
20 June 20 62.00
24 June 80
25 June 100 63.00

The market price per unit was Rs. 60.00 on June 1, rising to Rs. 62.00 on June 10,
Rs. 62.50 on June 15 and Rs. 64.00 on June 30. The standard cost may be assumed
as Rs.60.00 per unit.

The following methods of stock pricing are being considered:

(a) LIFO
(b) Weighted average
(c) Standard cost
(d) Replacement cost

Required:

Under each of these methods, determine the cost of issues and the closing stock as at
June 30. (15)
 (2)

Q.3 A factory manufactures three components A, B and C.

During a week, the following was recorded:

Labour Number of Rate per hour Individual hours
grade employees (Rs.) worked
I 6 40 40
II 18 32 42
III 4 28 40
IV 1 16 44

Actual output and standard times are given below:

Standard minutes
Component Output
per component
A 444 30
B 900 54
C 480 66

The normal working week is of 38 hours. Overtime is paid at a premium of 50% of

the normal hourly rate.

A group incentive scheme is in operation and a bonus is paid based on the time
saved. The rate of bonus payment is 75% of normal hourly rate. The time saved is
allocated to each labour grade in proportion to the number of hours worked by each
group.

Required:

Calculate the total payroll showing the basic pay, overtime premium and bonus pay
for each grade of labour. (12)

Q.4 The factory overhead budget of a manufacturing company for the year ending June
30, 2006 is as follows:
Rupees
Indirect wages 1,627,920
Insurance – labour 114,240
Supervision 514,080
Machine maintenance wages 485,520
Supplies 257,040
Power 828,240
Tooling cost 285,600
Building insurance 14,280
Insurance of machinery 399,840
Depreciation - machinery 856,800
Rent and rates 371,280
5,754,840

At present, overheads are absorbed into the cost of the company’s products at 70%
of direct wages. The company is considering changing to a separate machine hour
rate of absorption for each of its four different machine groups.
 (3)

The following are some further details of costs and machine groups:

Machine groups
A B C D TOTAL
Tooling costs (Rs.) 115,958 88,042 55,832 25,768 285,600
Supervision (Rs.) 159,340 145,471 111,877 97,392 514,080
Supplies (Rs.) 118,634 79,089 19,772 39,545 257,040
Machine maintenance hours 3,000 2,000 4,000 1,000 10,000
Number of indirect workers 6 6 2 2 16
Total number of workers 26 34 15 10 85
Floor space (Sq.ft.) 3,000 2,400 1,600 1,000 8,000
Capital cost of machines
(Rs.’000) 3,200 2,400 1,000 1,800 8,400
Horse-power hours 55,000 27,000 8,000 15,000 105,000
Machine running hours 30,000 60,000 25,000 10,000 125,000

Required:

(a) Calculate a machine hour rate for each group of machines;

(b) Calculate the overhead to be absorbed by product no. 123 involving:

Machine group Hours

A 8
B 3
C 1
D 4

(c) Calculate the overhead to be absorbed by each unit of product 123 if the labour
cost is Rs.1,200 and the present method of absorption is used. (15)

Q.5 The Quetta Cement Company produces a product branded as Falkon. It has
estimated the cost per bag of 100 kgs. as under:
Rs.
Direct material 100
Direct labour 160
Factory overhead 120
380

The selling price of Falkon is Rs. 450 per bag.

During the month of December, the actual costs of production were as follows:

Rs.
Materials 200,000
Direct labour 320,000
Factory overhead 220,000

All materials are added at the beginning of production process.

 (4)

Production records show completed production of 2,000 units for the month; sales
records show that 1,600 units were sold during the period. Inventory records exhibit
the following data:

Work in process inventory December 01:

Direct material, 250 units:
Direct labour, 250 units ( 40% completed)
Factory overhead, 250 units ( 40% completed )

Work in process inventory December 31:

200 units estimated to be 60% completed as to labour and factory
overheads.

Required:

(a) Material price variance

(b) Labour rate variance
(c) Overhead budget variance
(d) A statement of actual cost of Falkon per bag for December. (09)

Q.6 Industries Limited produces a single product and has a manufacturing capacity of
7,000 units per week of 48 hours. The output data for three consecutive weeks is
given below:
Total Factory
Units Direct Direct
Overheads
Produced Material Labour
(Variable & Fixed)
Rs. Rs. Rs.
2,400 48,000 60,000 37,200
2,800 56,000 70,000 38,400
3,600 72,000 90,000 40,800
As cost accountant, you are asked by the company management to work out the
selling price assuming an activity level of 4,000 units per week and a profit of 20%
on selling price. (07)

Q.7 The Sindh Engineering Company produces a bicycle which sells at Rs.1,000 per
unit. At 80% capacity utilization which is the normal level of activity, the sales are
Rs.180 million. Costs are as under:

Prime cost per unit Rs.400

Factory indirect cost Rs.30 million (including variable cost Rs.10 million)
Selling costs Rs.25 million (including variable cost Rs.15 million)
Distribution costs Rs.20 million (including variable cost Rs.11 million)
Administration costs Rs.6 million

Commission and discounts are 5% of sales value.

 (5)

Required:

(a) Calculate the break-even sales value.

(b) Prepare statements showing sales, costs, profit and contribution margin at
each of the following levels:
i) at the normal level of activity;
ii) if unit selling price is reduced by 5% thereby increasing sales and
production volume by 10% of the normal activity level;
iii) if unit selling price is reduced by 10% thereby increasing sales and
production volume by 20% of the normal activity level. (12)

Q.8 As a cost accountant of Colombia Company, you are required to develop cash and
other budget information. The budget is to be based on the following assumptions:

Sales:
(a) Customers are allowed a 2% discount if payment is made within 10 days after
the billing date. Receivables are recorded at the gross selling price.
(b) Sixty percent of the billings are collected within the discount period; 25% by
the end of the month; 9% by the end of the second month. Bad debts are
estimated at 6% of sales.
(c) Sales are billed on the last day of the month.

Purchases:
(a) Sixty percent of all purchases and other expenses except salaries and wages
are paid in the same month whereas the balance is paid in the following
month.
(b) Raw materials inventory at the end of each month is equal to 130% of next
month’s production requirement.
(c) The cost of each unit of inventory is Rs.20.
(d) Wages and salaries earned each month by employees total Rs.60,000.
(e) Marketing, general, and administrative expenses (of which Rs.2,000 is
depreciation) are estimated at 15% of sales.

Actual and projected sales are as follows:

Rs. Rs.
August ………….………… 354,000 November ………………….... 342,000
September………………… 363,000 December …………………… 360,000
October ………………… 357,000 January ……………………… 366,000

Actual and projected materials needed for production:

Units Units
August ………….………… 11,800 November ………………….... 11,400
September………………… 12,100 December …………………… 12,000
October ………………… 11,900 January ……………………… 12,200
 (6)

Wages are paid weekly. The unpaid amount at the end of each month is projected as
follows:
Rs. Rs.
July ……………….………. 14,000 October ……………………… 2,000
August ………….………… 6,000 November ………………….... 6,000
September………………… 10,000 December …………………… 12,000

On August 31, the following balances appeared in the company’s books of account:

Rupees
Cash 44,000
Accounts receivable 349,600
Inventories 247,520
Accounts payable 106,444

The above balances are expected to increase by 25% during the month of
September.

Required:

Cash budget for the months of October, November and December. (19)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2006

March 11, 2006

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 (a) An important feature in the installation of any accounting or costing system is
the proper classification of accounts. The Bottlers Limited, bottlers and
distributors of beverages, have recently introduced a new classification which
includes the following accounts:

1. Samples 13. Freight out

2. Sugar 14. Income tax
3. Factory payroll 15. Advertising
4. Foreman’s salary 16. Rent of office building
5. Conveyance and travelling 17. Labels
6. Factory’s clerical salaries 18. Depreciation on machinery
7. Drivers’ wages 19. Insurance
8. Gas, oil and grease 20. Water
9. Depreciation of furniture & fixtures 21. Truck tyres
10. Salesmen’s salary and commissions 22. Bottle breakages
11. Light and power 23. Telephone and communication
12. Legal and audit fee 24. Stationery

Classify each account under one or more of the following headings:

• Manufacturing
• Selling and Distribution
• Administration (06)

(b) Distinguish between joint products and by-products, and briefly explain the
difference in accounting treatment between them. (04)

Q.2 Eastern Limited purchases product Shine for resale. The annual demand is 10,000
units which is spread evenly over the year. The cost per unit is Rs. 160. Ordering
costs are Rs. 800 per order. The suppliers of Shine are now offering quantity
discounts for large orders as follows:

Ordered Quantity Unit price Rs.

Upto 999 units 160.00
1000 to 1999 units 158.40
2000 or more units 156.80

The purchasing manager feels that full advantage should be taken of discounts and
purchases should be made at Rs. 156.80 per unit, using orders for 2000 units or
more. Holding costs for Shine are calculated at Rs. 64 per unit per year, and this
figure will not be altered by any change in the purchase price per unit

Required:

Advise Eastern Limited about the best choice available to them. (10)
 (2)

Q.3 Mr. Azad has provided you the following information from his factory ledger for
the quarter ended 31 December 2005:

Control Account Balances as on October 1, 2005: Rupees

Materials 49,500
Work in process 60,100
Finished goods 115,400

Materials purchased 108,000

Direct wages 50,200
Payments for factory overheads 30,900
Depreciation of factory building and machines 42,000

Other related information is as under:

− Closing stock of raw materials and finished goods at December 31, 2005
amounted to Rs. 50,300 and Rs. 125,800 respectively.
− Cost of goods produced is Rs. 222,500.
− Factory overheads are absorbed in production @ 160% of direct wages.
− Diesel costing Rs. 2,000 included in the factory overheads was transferred to
head office for use in generator.
− A bill for repairs amounting to Rs. 12,000 undertaken at the factory remained
unpaid at the end of the quarter.
− Material costing Rs. 2,400 was destroyed by rain.

Required:

Write up the following accounts:

i) Materials
ii) Work in process
iii) Finished goods
iv) Factory overheads
v) Cost of goods sold (10)

Q.4 AG Electronics manufactures transistors which are used for assembling flat screen
TV. During the current year 5,000 transistors were manufactured at the following
costs:
Rupees
Direct material 1,000,000
Direct wages 560,000
Factory overheads:
Lease rentals – equipments 90,000
Equipments Insurance 19,000
Equipments maintenance contract 200,000
Other overheads 600,000

The cost of direct materials include abnormal loss of Rs. 30,000.

 (3)

The following estimates have been made for the next year:

1. The production is estimated to increase by 60%.

2. The cost of direct material will increase by 20%.
3. In view of a government regulation which will become effective from July 1,
next year, the rate of wages will increase by 12%.
4. The rate of other overheads is expected to increase by 6% from the start of
next year. 40% of the other overheads are fixed costs allocated by head office.

Moon Limited, a specialist in manufacturing transistors has offered to supply the

full requirement for the next year, at a price of Rs. 400 per unit. If it is decided to
discontinue the production of transistors, the plant currently in use would be
returned to the leasing company but the following additional costs would have to be
incurred:

Inspection Rs. 20,000 per annum

Insurance Rs. 8 per transistor

You are required to advise the company’s management whether it should accept the
offer of Moon Limited or continue to manufacture the transistors in-house. (10)

Q.5 The manufacturing of a chemical is carried out in three continuous processes, P1,
P2 and P3. The following data is available in respect of production during
February 2006.
Particulars P1 P2 P3
Output – litres 8,800 8,400 7,000

Costs in rupees:
Direct Material introduced (10,000 litres) 63,840 - -
Direct wages 5,000 6,000 10,000
Direct Expenses 4,000 6,200 4,080

Work in process – opening (litres) 200

Scrap value (Rs. per unit) 1 3 5

Normal loss 10% 5% 10%

At the end of P3, 420 litres of a by-product ZOLO were produced, which was
treated further at a cost of Rs. 2 per liter. Selling and distribution expenses of Re.1
per unit were incurred and it was sold at a price of Rs. 9 per litre.

Budgeted overheads for the month were Rs. 84,000. Factory overhead absorption is
based on a percentage of direct wages. The work in process at P1 comprised
material of Rs. 500 and labour and factory overheads of Rs. 1,000. There were no
closing work in process in any of the processes.

Required:

Prepare the following:

(a) Work in process account for each process.
(b) By-product account. (12)
 (4)

Q.6 Nasib Ltd. has prepared the following budgeted income statement for the year 2006:

Product Caps Crowns Rings Pallets Tubes Total

(Rupees in thousands)
Sales 30,800 34,300 45,500 35,700 63,700 210,000

Manufacturing costs
Materials 1,540 4,620 9,240 7,700 11,550 34,650
Labour 3,500 5,600 10,500 9,800 12,600 42,000
Production overheads:
Variable 1,750 2,450 2,800 3,500 5,040 15,540
Fixed 2,450 4,200 7,700 7,000 6,650 28,000
9,240 16,870 30,240 28,000 35,840 120,190

Transportation 840 2,520 5,040 4,200 4,550 17,150

Packaging 1,400 700 1,400 700 2,100 6,300
2,240 3,220 6,440 4.900 6,650 23,450

Administrative costs 4,620 5,145 6,825 5,355 9,555 31,500

Selling and advertising

expenses 5,040 3,815 3,675 3,885 5,285 21,700
Total cost 21,140 29,050 47,180 42,140 57,330 196,840
Profit 9,660 5,250 (1,680) (6,440) 6,370 13,160

The Management Accountant of the company has provided the following additional
information which describes the basis on which budgeted income statement has been
prepared:

(i) Material costs include purchase cost plus 10% additional charge, which is
added in order to recover the fixed costs of storage and stores administration.

(ii) Labour cost is totally variable.

(iii) Fixed production overhead includes both directly attributable fixed costs and
general fixed production overheads. The general fixed production overheads
amount to Rs. 21 million and have been allocated in proportion to labour
costs. The attributable fixed cost is avoidable if the related product is not
produced.

(iv) Transport charges include fixed costs of Rs. 3,150,000 which have been
allocated to products in proportion to their material costs. Remaining costs
are variable.

(v) Selling and advertising expenses include commission of 5% of sales revenue.

The remaining amount is the advertising cost which is directly attributable to
each product.

(vi) Administrative cost is fixed and is apportioned in the ratio of sales revenue.

(vii) Packaging is a variable cost.

The Managing Director has shown his concern that Rings and Pallets are showing
loss and affecting the financial results of the company. A study which has been
carried out recently has analyzed as under:
 (5)

(a) Sales are influenced by advertising and can be increased upto 40% by
extensive advertising. However each 10% increase in sale would require a
75% increase in advertising expenditure.

(b) The sale of Caps or Crowns can be increased by reducing the production/sale
of the product Ring. However a reduction in sale of Ring by Re.1 would
generate a sale of 45 paisas of Caps or 50 paisas of Crowns sales. This
substitution will not entail any extra advertising expenditure.

The management is considering the following three options:

(i) To discontinue the product Ring and Pallets.

(ii) To launch an advertising campaign which will increase the sale of each
product by 40%.
(iii) To substitute the sale of Rings with the sale of Caps or Crowns.

Required:

Calculate the effect of each of the above options on the profitability of the
company. (25)

Q.7 A company produces mineral water. Based on the projected annual sales of 40,000
bottles of mineral water, cost studies have produced the following estimates:

Total annual costs

(in rupees) Variable cost percentage
Material 193,600 100
Labor 90,000 70
Overhead 80,000 64
Administration 30,000 30

The production will be sold through dealers who would receive a commission of
8% of sale price.

Required:

(i) Compute the sale price per bottle which will enable management to realize a
profit of 10 percent of sales.
(ii) Calculate the break-even point in rupees if sale price is fixed at Rs. 11 per
bottle. (10)

Q.8 The standard raw material mix for 2200 kgs of finished product is as follows:

Price per Kg
Materials Weight (Kgs)
(Rs.)
Salt 1,200 1.50
Ash 600 2.00
Coata 200 3.00
Fog 400 4.00
 (6)

Materials used during an accounting period were as follows:

Price per Kg
Materials Weight (Kg)
(Rs.)
Salt 6,000 1.6
Ash 4,800 1.8
Coata 1,600 2.6
Fog 2,500 4.1

Actual production was 12,100 kg. Calculate the following materials variances:

(i) Cost variance (ii) Price variance

(iii) Usage variance (iv) Mix variance
(v) Yield variance (13)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2006

September 09, 2006

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 Hi-way Engineering Limited uses budgeted overhead rate for applying overhead to
production orders on a direct labour cost basis for department A and on a machine hour
basis in department B.

The company made the following forecasts for August 2006:

Dept A Dept B
Budgeted factory overhead (Rs.) 216,000 225,000
Budgeted direct labour cost (Rs.) 192,000 52,500
Budgeted machine hours 500 10,000

During the month, 50 units were produced in Job no. CNG-011. The job cost sheet for
the month depicts the following information:
Dept A Dept B
Material issued (Rs.) 1,500 2,250
Direct labour cost (Rs.) 1,800 1,250
Machine hours 60 150

Actual data for the month were as follows:

Dept A Dept B
Factory overhead (Rs.) 240,000 207,000
Direct labour cost (Rs.) 222,000 50,000
Machine hours 400 9,000
Required:
(a) Compute predetermined overhead rates for each department. (02)
(b) Work out the total costs and unit cost of Job no. CNG-011. (04)
(c) Compute the over / under applied overhead for each department. (02)

Q.2 (a) Optimum inventory level can only be determined after comparing the holding
costs with the cost of ordering.
Required:
(i) Briefly discuss the impact of holding and ordering costs on optimum
inventory level. (03)
(ii) Give three examples of costs which fall under each category. (03)
(iii) What are the problems which may arise in determining the above costs? (02)
(b) Two-way Engineering Limited has been experiencing stockouts on one of its
important product RD-11. Using the EOQ formula, the company places orders of
1,250 units whenever the stock level reduces to 1500 units. The records of the
company show the following data relating to the usage of Product RD-11 during
lead times:
 (2)

Usage (Units) 1,800 1,600 1,400 1,200 1,000

Usage Probability (%) 4 6 10 20 60

The company sells RD-11 at a price of Rs. 500 per unit. The annual carrying cost of one
unit is Rs. 30. The company estimates that the cost of being out of stock is Rs. 125 for
each unit.

Required:
The management of the company asks you to establish an optimal safety stock for this
material and also ascertain the probability of being out of stock on your proposed safety
stock level. (10)

Q.3 Tram-way Hardware Store has been owned by Mr. Petrol. He had himself made all
investment in the business and had not obtained any financing. He appointed a junior
accountant to maintain the manual accounting records. During the month of August, he
asked his accountant to provide certain information including estimates as he was
planning to withdraw some amount for his personal use.

After the failure of his accountant to provide the required information, he has hired your
services for this purpose. You have gathered the following information from the
records:

(i) Sales for August 2006 amounted to Rs. 5,000,000.

(ii) Sales forecast for the next three months was as follows:
Rs.
September 6,000,000
October 5,000,000
November 5,500,000

(iii) Based on past experience, collections are expected to be 56 percent in the month
of sale and 43 percent in the month following the sale. One percent remains
uncollected
(iv) Gross margin on sales is 20% and cost of goods sold comprises of purchase cost
only.
(v) 80 percent of the goods are purchased in the month prior to the month of sale and
20 percent are purchased in the month of sale. Payment for goods is made in the
month following the purchase.
(vi) Other monthly recurring expenses which are paid in cash amount to Rs. 40,700.
(vii) Annual depreciation on fixed assets is Rs. 555,600.
(viii) Annual staff salaries are budgeted at Rs. 600,000.
(viii) Bad debts provision as at August 31, 2006 stands at Rs. 190,400.
(ix) Balances of some other accounts as at August 31, 2006 are as follows:

Rs.
Fixed assets 9,940,000
Acc. depreciation 1,900,500
Owner’s capital 2,800,000
Profit and loss 8,380,000
Cash and bank 1,980,940

Required:
(a) Prepare a balance sheet as at August 31, 2006. (06)
(b) Calculate the projected balance in accounts payable as on September 30, 2006. (02)
(c) Prepare a projected income statement for the month of September 2006. (03)
 (3)

Q.4 One-way Limited is engaged in manufacturing and sale of socks. The sales of the
company are mostly to USA and European Countries. At the end of the first quarter, the
results of operations of the company are as follows:
Rs.
Sales (Rs. 40 per unit) 5,300,000
Less: Material 1,987,500
Wages 795,000
Variable overhead 397,500
Fixed overhead 848,000
4,028,000
Gross profit 1,272,000

The factory was working at 40% capacity in the first quarter. Management of the
company has estimated that the quantity sold could be doubled next quarter if the selling
price was reduced by 15%. The variable costs per unit will remain the same, but certain
administrative changes to cope with the additional volume of work would increase the
fixed overhead by Rs. 15,000.

Required:
(a) Evaluate the management’s proposal. (05)
(b) What quantity would need to be sold next quarter in order to yield a profit of Rs.
2,000,000 if the selling price was reduced as proposed, variable cost per unit
remains the same and fixed overheads increased as estimated above? (02)
(c) Calculate the selling price needed to achieve a profit of Rs. 2,000,000 if the
quantity sold last quarter cannot be increased, material prices increase by 12%,
wage rates increased by 15%, variable overheads are higher by 10% and fixed
overheads increase by Rs. 15,000. (04)

Q.5 Mid-way Services Limited received an urgent order for installation of 4 machines in a
textile mill. Immediately after receiving the order, the company deputed four engineers
on the job. Each engineer was responsible for installation of one machine. The standard
time to complete this job was 50 hours.

It is the policy of the company to pay its engineers on job to job basis. The minimum
amount the company pays is based on standard hours. The payment is made at the rate
of Rs. 100 per hour.

In order to speed up the installation work, the company offered the engineers ‘Time
Saving Bonus’ (TSB) under which they would be entitled for the following incentives:

Percentages of time saved

TSB
to time allowed
0% to 10% 10% of time saved x hourly rate
11% to 20% 20% of time saved x hourly rate
20% to 30% 30% of time saved x hourly rate

In addition to the agreed amount, the customer has agreed to pay the company Rs. 150
for every hour saved on installation of each machine.

The jobs were completed successfully and the time spent by each engineer is as follows:

Engineers A B C D
Hours spent 41 36 46 50
 (4)

Required:
(i) Calculate the total earning of each engineer and their earning per hour. (08)
(ii) Compute the net additional revenue earned by the company. (03)

Q.6 Broad-way Manufacturing Limited produces two products DL-1 & DL-2. The
production involves two processes, I and II. The following data is available in respect of
production during the month of August 2006.
Process I Process II
Rs. Rs.
Material issued 375,000 100,000
Direct wages paid 150,000 200,000
Direct expenses incurred 100,000 100,000

During the month of August, materials issued to Process I and Process II were 1,250
tons and 230 tons respectively. The cost of output of Process – I is charged to Process –
II. Incidental to production, two by-products i.e. PT-1 and PT-2 are generated in the first
process and treated as a credit to Process-I.

Following additional information is also available:

Sales Packing
Product
Tons Rs. Cost
DL-1 100 600,700 20,070
DL-2 900 1,203,500 100,350
PT-1 200 10,000 -
PT-2 50 2,500 -

A shortfall occurs in Process II due to evaporation which is considered as normal loss.

There were no opening or closing stocks.

Required:
(a) Calculate joint processing costs and apportion them between DL-1 and DL-2 on
the basis of sales value. (08)
(b) Prepare summary trading account for the month showing net profit of each
product. (02)

Q.7 Run-way Pakistan Limited has provided you the following information about its sales,
production, inventory and variable/ fixed costs etc. for the second quarter of the year
2006.
Rupees
Sales 75,000,000
Operating profit 5,171,100
Variable manufacturing costs per unit 10
Fixed factory overhead per unit 11
Marketing & administrative expenses (Fixed Rs. 250,000) 450,000

Units
Sales 3,000,000
Actual production 2,420,100
Budgeted production 3,000,000
Ending inventory 320,200
Normal capacity 3,500,000
Production in quarter – I 3,100,150
Sales in quarter – I 2,200,050
 (5)

The Sales Manager claims that the operating profit of the quarter has been wrongly
calculated and is much higher than Rs. 5,171,100.

It is the policy of the company to compute applied factory overhead on the basis of
quarterly budgeted production volume and charge over or under applied factory
overhead to the cost of goods sold account at the end of each quarter.

Required:
(a) You are required to prepare income statements under the present method being
used by the company and also under marginal costing method for the satisfaction
of Sales Manager. (09)
(b) Reconcile the difference in operating profit under the two methods. (04)

Q.8 Sub-way Furnishers (Pvt.) Limited manufactures three garden furniture products –
Chairs, Benches and Tables. The budgeted data of each of these items is as under:

Chairs Benches Tables

Budgeted sales volume 4,000 2,000 1,500
Selling price per unit (Rs.) 3,000 7,500 7,200
Cost of Timber per unit (Rs.) 750 2,250 1,800
Direct labour per unit (Rs.) 600 1,500 1,600
Variable overhead per unit (Rs.) 450 1,125 1,200
Fixed overhead per unit (Rs.) 675 844 1,350

The budgeted volume was worked out by the sales department and the management of
the company is of the view that the budgeted volume is achievable and equal to the
demand in the market.

The fixed overheads are allocated to the three products on the basis of direct labour
hours. Production department has provided the following information:

Direct labour rate Rs. 40 per hour

Cost of timber Rs. 300 per cubic meter

A memo from Purchase Manager advises that because of the problem with the supplier
only 25,000 cubic meters of timber shall be available.

The Sales Director has already accepted an order for the following quantities which if
not supplies would incur a financial penalty of Rs. 200,000.

Chairs 500
Benches 100
Tables 150

These quantities are included in the overall budgeted volume.

Required:
Work out the optimum production plan and calculate the expected profit that would
arise on achievement of this plan. (14)

Q.9 Smart-ways Manufacturing Limited makes a product called LPG. Most of the
manufacturing expenses incurred during the production of LPG are directly identifiable
as fixed or variable. However, some of the expenses are partly fixed and partly variable.
The management of the company wants to determine the fixed and variable element of
these overheads.
 (6)

The total of such overheads which are partly fixed and partly variable, during each of
the last 10 months and the related production is given hereunder:

Month No. of Factory

Units Overhead
(Rs.)
1 3,000 7,200
2 4,000 9,000
3 6,000 12,150
4 5,000 11,250
5 6,000 11,700
6 5,000 10,800
7 7,000 12,600
8 6,000 11,250
9 5,000 10,350
10 3,000 7,200
50,000 103,500

Required:
Determine the fixed and variable element of the above overheads on the basis of high
low method and define the relationship in terms of cost volume formula. (04)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2007

March 07, 2007

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 The marketing department of Moon Engineering Limited has prepared the following
projected profit and loss account:
2007 2008
Rupees in million
Sales 750.0 800.0
Less:
Direct materials 187.5 200.0
Direct labour 112.5 120.0
Production overhead 135.0 144.0
435.0 464.0
Contribution margin 315.0 336.0
Less: Fixed costs 297.8 312.7
Net Profit 17.2 23.3
The marketing director is not happy with the sales growth shown in the forecasts.
Similarly, the finance director has shown his concern on the lower profitability. They
have also pointed our certain factors which were ignored while developing the above
projections. Consequently, a comprehensive study was carried out at all levels which has
resulted in the following revisions:
(i) Sales forecast for 2007 has been projected at Rs. 1.0 billion.
(ii) Sales prices are projected to remain the same in 2008. However, the total sales have
been projected to increase by 20% over the year 2007.
(iii) Material prices and costs of production overheads in 2008 will be higher by 10% as
compared to 2007;
(iv) Fixed costs will remain the same except for an expenditure of Rs. 12 million to be
incurred on a special advertising campaign during the year 2008.
Required:
(a) Revise the projected profit and loss account for both years; (05)
(b) Calculate breakeven sales and margin of safety% for 2007 and 2008; (04)
(c) Draw a profit volume chart in respect of each year. (04)

Q.2 (a) The production and cost data of Planet Manufacturing (Pvt.) Limited for the year
2006 and projections for the year 2007 are as follows:
2006 2007
Production (units) 175,000 225,000
Total costs (Rs.) 11,900,000 16,518,600
The rate of inflation in 2007 has been estimated at 15%.
Required:
Calculate the fixed and variable costs for 2007 in ‘real’ terms. (05)
(b) What is a ‘cost unit’ and ‘cost center’? Give two examples of each. (04)
 (2)

Q.3 Star Chemicals Limited uses three processes to manufacture a product “ST”. After the
third process the product is transferred to finished goods warehouse.

The following data for the month of January 2007 is available:

PROCESS
I II III
----------Rs. in thousands-------
Raw material – A 1,500 - -
Other direct materials 2,500 3,200 4,000
Direct wages 5,000 6,000 8,000
Direct expenses 1,600 1,885 2,020
Following additional information is also available:

(i) Production overheads are absorbed @ 80% of direct wages;

(ii) 20,000 units of raw material ‘A’ having a cost of Rs. 1,500,000 were initially put in
process-I.
(iii) In each process, an amount of Rs. 500,000 has been wrongly classified as direct
wages, instead of indirect wages.
(iv) The actual output obtained during the month was as under:

Process I 18,500 units

Process II 16,000 units
Process III 16,000 units

(v) Normal loss in each process is 10%, 10% and 5% respectively. Scrap value per unit is
Rs. 100 for process-I, Rs. 200 for process-II and Rs. 300 for process-III.
(vi) There was no stock at the start or at the end of any process.

Required:
Prepare the following in the books of Star Chemicals Limited:
(a) Ledger account for each process; (12)
(b) Abnormal gain/(loss) account. (04)

Q.4 Venus Pharmaceutical Company Limited faced a very high labour turnover during the
last year. The issue has now been settled after the announcement of an attractive payment
plan.

Following data relating to last year has been made available to you:

(i) Sales during the last year was Rs. 726 million and contribution margin was 10% of
sales;
(ii) Total number of actual direct labour hours was 510,000;
(iii) As a result of delays by the Personnel Department in filling vacancies, 10,000
potential productive hours were lost. All these potential lost hours could have been
sold at the prevailing rate;
(iv) The actual direct labour hours included 40,000 hours attributable to training new
recruits, out of which 25% of the hours were unproductive;
(v) The labour turnover resulted in following additional costs:

Rupees
Recruitment costs 284,000
Selection costs 128,500

Required:
Calculate the profit foregone by the company during the last year on account of labour
turnover. (05)
 (3)

Q.5 The production engineering staff of Skyline Company Limited, has set the following
standard mix for the production of one unit of Product X:

Weight Rate Per Kg Amount

(Kg) (Rs.) (Rs.)
Material A 0.50 10.00 5.00
Material B 0.30 5.00 1.50
Material C 0.20 2.00 0.40
1.00 6.90
Standard loss (10%) 0.10 -
0.90 6.90

Actual costs incurred on the production of 927,000 units were as follows:

Weight Rate Per Kg

(Kg) (Rs.)
Material A 530,000 10.00
Material B 280,000 5.30
Material C 190,000 2.20

Required:
(a) Calculate the mix and yield variances. (06)
(b) Reconcile actual material costs with the standard costs. (05)

Q.6 The following figures have been extracted from the budget of Uranus Limited for the
year ended June 30, 2007:

Rupees
Direct labour 35,000,000
Electricity 25,000,000
Repairs and maintenance 5,200,000
Depreciation 14,200,000
Other expenses 8,000,000

Budgeted annual production is 40,000 units. It is the policy of the company to charge
factory overhead on the basis of direct labour costs. Following additional information is
available for the first six months:

Direct material consumed (Rs.) 16,250,000

Direct labour cost (Rs.) 17,500,000
Factory overhead applied (Rs.) ?
Good units produced 20,000
Spoiled units (considered abnormal) 750

Spoiled units were sold for Rs. 1,200 per unit. Actual direct labour cost includes the cost
of bringing certain defective units to saleable condition, amounting to Rs. 100,000.

Required:
Prepare journal entries to record the transactions that took place during the first six
months of the year and support your answer with computation. (17)
 (4)

Q.7 Sun Fashions (Pvt.) Limited, a chain of retail garments store, has planned to introduce a
new fancy dress for babies at all its seven outlets in the country.

The company is also considering to introduce a matching crown scarf and handbag with
the new dress. Currently they are expecting to sell 15,000 dresses in the first six months
but the management feels that this sale can be increased by 30% if matching crown scarf
and handbag are marketed together.

The data relating to sales and production of dress, crown scarf and handbag are as
follows:

(i) Each dress requires three and half meter of cloth which is easily available in the
market at a price of Rs. 100 per meter. Part of the material left unused can be used to
manufacture a crown scarf and handbag.
(ii) The cost of cutting the dress, crown scarf and handbag is Rs. 35, Rs. 15 and Rs. 20
respectively.
(iii) The leftover pieces can be sold as under:
− if only the dress is manufactured, Rs. 20 per dress;
− if crown scarf and handbag is also manufactured, Rs. 5 per set.
(iv) The company has a contract with a designer firm at a monthly fee of Rs. 1,500,000.
However, in the case of handbag and crown scarf, the company will have to pay a
one time additional amount of Rs. 150,000 to the designer firm.
(v) Each handbag will require a metal hook which is available in the market at Rs. 10
per hook. However, the company has sufficient number of metal hooks in stock
which was purchased at Rs. 6 per hook. If the company does not opt for the
manufacturing of handbags, these hooks can be sold at Rs. 8 per hook.
(vi) The dresses, crown scarves and handbags are expected to be sold according to the
following mix:

Complete set 60%

Dress and crown scarf only 10%
Dress and handbag only 20%
Dress only 10%

(vii) The selling price and variable costs (besides those mentioned above) of each product
are as follows:

Selling Price per Variable Costs

unit (Rs.) (besides those mentioned above)
Dress 2,000 40% of selling price
Crown scarf 400 55% of selling price
Handbag 500 60% of selling price

Required:
Calculate the incremental profit or loss as a result of manufacturing handbags and crown
scarves with the dress. (16)

Q.8 Jupiter Manufacturing Company Limited consists of two manufacturing departments and
one service department. The company applies factory overhead on the following basis:

Manufacturing Department
A-1 70% of direct labour cost
A-2 Rs. 40 per direct labour hour
 (5)

Following relevant information is available:

Manufacturing Dept. Service

A-1 A-2 Department
Direct materials (Rs.) 433,000 313,000
Direct labour (Rs.) 388,800 259,200
Direct labour hours 3,500 4,000
Number of employees 140 220 40
Floor space (Sq. ft.) 1500 1500 750

The other expenses are as under:

Rupees
Indirect labour 217,400
Factory office expenses 43,200
Depreciation of computer 45,000
Factory building expenses 54,000
Service department’s expenses 112,800

Indirect labour and service department’s expenses are apportioned on the basis of direct
labour cost. Factory expenses and computer depreciation are allocated in the ratio of
number of employees to all the departments including service department.

Required:
Prepare a factory overhead distribution statement showing over / under applied FOH for
each department. (13)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2007

September 07, 2007

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 Binary Limited manufactures three joint products viz. Aay, Bee and Cee in one
common process. Following this process, product Aay and Bee are sold immediately
while product Cee is subjected to further processing. Following information is available
for the period ended June 30, 2007:
(i) Aay Bee Cee
Opening stock in kg Nil Nil Nil
Production in kg 335,000 295,000 134,000
Sales in kg 285,000 212,000 -
Sales price per kg (Rs.) 30.85 40.38 -
(ii) Total costs of production were Rs 17,915,800.
(iii) 128,000 kg of Cee were further processed during the period and converted into
96,000 kg of Zee. The additional cost of further processing were as follows:
Direct labour Rs. 558,500
Production overhead Rs. 244,700
(iv) 94,000 kg of Zee was sold during the period, with total revenue of
Rs. 3,003,300. Opening stock of Zee was 8,000 kg, valued at Rs 172,800. FIFO
method is used for pricing transfers of Zee to cost of sales.
(v) 8,000 kg of a bye-product Vee was also produced during further processing and
sold @ Rs. 10 per kg. Sales proceeds of bye-product are adjusted against
production cost of product Zee.
(vi) The cost of production is apportioned among Aay, Bee and Cee on the basis of
weight of output.
(vii) Selling and administration costs of Rs. 2,500,000 were incurred during the
period. These are allocated to all the main products based on sales value.
Required:
Prepare a profit and loss account for the period, identifying separately the profitability
of each of the three main products. (19)

Q.2 Hexa (Private) Limited is engaged in the supply of a specialized tool used in the
automobile industry. Presently, the company is incurring high cost on ordering and
storage of inventory. The procurement department has tried different order levels but
has not been able to satisfy the management.
The Chief Financial Officer has asked you to evaluate the current situation. He has
provided you the following information:
(i) The annual usage of inventory is approximately 8,000 cartons. The supplier does
not accept orders of less than 800 cartons. The cost of each carton is Rs. 2,186.
(ii) The average cost of placing an order is estimated at Rs 14,000 and presently two
orders are placed in each quarter.
 (2)

(iii) The sales are made on a regular basis and on average, half of the quantity ordered
is held in inventory. The cost of storage is considered to be 16% of the value of
inventory.
Required:
(a) Determine the following:
− Economic Order Quantity (EOQ).
− Number of orders to be placed, based on EOQ.
(b) Compute the ordering costs and storage costs in the existing situation. How much
cost can be saved if quantity ordered is equal to EOQ as determined in (a) above. (10)

Q.3 Octa Limited manufactures a single product under the brand name “Pak Pure”. The
latest estimates related to the current year are as follows:
Production and sales (units) 25,000
Cost per unit
Direct material (Rs.) 40
Direct labour (Rs.) 20
Fixed overhead (Rs.) 15
Variable overhead (Rs.) 5
Total cost per unit (Rs.) 80
During the next year, the costs per unit are expected to increase as under:
%
Direct material 20
Direct labour 10
Fixed overhead 5
Variable overhead 20
It is the policy of the company to set the selling price at the time of budget preparation
at cost plus 50%. The Sales Manager is worried about the implications of this policy.
According to his estimate, demand for the product will vary with price as follows:
Price (Rs.) 100 105 110 115
Demand (thousand units) 25 23 21 20
The Production Manager has informed that a different type of raw material is also
available in the market at a cost of Rs. 42.30 per unit. He believes that the new material
will give an acceptable quality of output. However, as a result of using cheaper
material, a process of inspection will have to be introduced which will cost Rs. 30,000
per annum. The chances of rejection are 2% and 3% for raw material and finished
goods respectively.
Required:
(a) Determine the price which will maximize the profit.
(b) Decide whether the company should continue to use the present type of raw
material or switch over to the new one. (10)
(Round off all the figures to two decimal places).

Q.4 Nooruddin Ahmed is planning to start a new business. He will invest his saving
amounting to Rs. 3,500,000 and intends to make borrowing arrangements with a bank
to meet the working capital requirements. His planning is based on the following
estimates:
(i) He has identified a factory cum office premises at a monthly rent of Rs. 80,000
which will be payable in advance at the beginning of each month. However, he
needs to give three months rent as security deposit to the landlord before
occupying the space. Other fixed overheads excluding depreciation are estimated
at Rs. 120,000 per month which will be paid in the same month.
 (3)

(ii) He has signed a contract for supply of machinery costing Rs. 1,800,000. The
payment will be made at the time of delivery in January 2008. This machinery
has an estimated life of five years with no residual value.
(iii) Production will start in January 2008 and 60% of the next month’s sales will be
manufactured in January 2008. Thereafter, the production will consist of 40% of
the current month’s sales and 60% of the next month’s sales.
(iv) He estimates the following sales for the first five months:

Month Unit Rupees

January - -
February 2,400 3,120,000
March 3,200 4,160,000
April 4,000 5,200,000
May 4,800 6,240,000

(v) Sales will be made on credit basis. A 5% cash discount will be allowed for
payments in the current month. It is estimated that 35%of each month’s sales
will qualify for this discount. Balance 65% will be recovered in the next month.
(vi) Variable production cost per unit has been estimated as:

Rupees
Direct material 600
Direct labour 200
Variable overhead 100
Total variable cost per unit 900

(vii) Raw materials costing Rs. 1,600,000 will be purchased in January 2008 in cash.
Thereafter, he intends to follow a policy of purchasing 50% of the monthly
requirement in the same month and 50% of the next month’s requirement. All
purchases after January shall be made on 30 days credit.
(viii) Salaries shall be paid in the first week of subsequent month.
(ix) 70% of the variable overheads shall be paid in the same month and 30% in the
next month.
Required:
Prepare a cash budget for the months January 2008 to April 2008 showing the balance
of cash / running finance at the end of each month. (20)

Q.5 Quadra Electronics assembles and sells three products – W, X and Y. The cost per unit
for each product is as follows:
W X Y
Rupees Rupees Rupees
Direct materials 4,880 1,600 1,000
Direct labour 4,000 2,000 700
Variable overheads 1,360 480 348
Fixed production overheads 1,172 1,290 960
Total cost per unit 11,412 5,370 3,008

The fixed overheads are worked out on the basis of normal production levels i.e 15,000;
45,000; and 60,000 units per annum for W, X and Y respectively.
The fixed selling and administrative costs for the next year are expected to be
Rs. 71,270,400.
 (4)

Management estimates that the ratio of sales quantities of W, X and Y shall be 1:3:4 and
selling price per unit shall be Rs. 12,800; Rs. 6,000 and Rs. 3,600 respectively.
Required:
(a) Calculate the number of units of W, X and Y to be sold in order to achieve break
even.
(b) Calculate the break even sales in terms of Rupees. (16)

Q.6 Ternary Packages is located at a remote site in an industrial estate which is far away
from the center of the city. Management of the company is now considering to provide
pick and drop facility to its employees. A two member committee has reviewed the
available options and has come up with a proposal to purchase three vans and run them
on three different routes i.e. A, B and C. The information for each van is as follows:
Rupees
Purchase price 1,200,000
Expected trade-in value after 4 years 200,000
Insurance per annum 50,000
Quarterly service including change of lubricants 4,000
Replacement of spare parts per 20,000 km 15,000
Vehicle License fee per annum 8,000
Tyre replacements after 40,000 km 14,000
Cost of diesel per litre 40
Annual running for each van will be as follows:
km
Van on route A 80,000
Van on route B 120,000
Van on route C 160,000

The committee has estimated that average running will be 16 km per litre.
Required:
(a) Prepare a schedule to be presented to the management showing following costs in
respect of each van for the first year of operation:
− Total variable cost − Variable cost per km
− Total fixed cost − Fixed cost per km
− Total cost − Total cost per km
(b) Briefly explain why the cost per km is different in each case. (15)

Q.7 Decimal World (Pvt) Limited is engaged in the manufacturing of standard and scientific
calculators. The company operates a bonus scheme for all its factory workers. A
performance bonus is incorporated into the wages by adding 75% of the efficiency ratio
in excess of 100% to the basic hourly rate. The following information is available for
the month of July 2007:
Basic rate of pay per hour (Rs.) 125
Standard production per hour (units) 4
Production during the period (units) 226,176
Actual hours spent 45,600
Required:
(a) Calculate the hourly wage rate inclusive of performance bonus.
(b) Calculate the total labour cost variance. (10)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2008

March 7, 2008

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 Mirza Limited is engaged in the manufacturing of spare parts for automobile industry. The
company records the purchase and issue of materials in a store ledger which is not
integrated with the financial ledger. It is the policy of the company to value inventories on
weighted average basis. The valuation is carried out by the Finance Department using stores
memorandum record. A physical stock count is carried out after every six months. Any
shortage/excess is then adjusted in the financial as well as stores ledger.

On December 31, 2007, physical stock count was conducted by the Internal Auditor of the
company. He submitted the following statement to the Finance Department:

Balance (in units) Cost per unit (Rs.)

Item Code Store Financial
Physical Average Current
Ledger Records
010-09 20,500 20,500 20,000 2.00 2.25
013-25 10,000 10,000 10,000 4.00 1.50
017-10 5,500 5,500 5,000 1.00 1.10
022-05 4,000 4,500 5,500 2.00 2.00
028-35 1,200 1,200 1,000 2.75 2.50
035-15 640 600 600 3.00 3.50

On scrutinizing the details, Finance Department was able to ascertain the following reasons:

Item Code Reasons

010-09 500 units were defective and therefore the Internal Auditor excluded them
while taking the physical count.
013-25 This item is not in use and is considered obsolete. The net realizable value is
Rs. 0.60 per unit.
017-10 Shortage is due to theft.
022-05 A receipt of 1,000 units was not recorded. The remaining difference is due to
errors in recording the quantity issued.
028-35 200 units returned to a supplier were not recorded. The invoiced cost was
Rs. 3 per unit.
035-15 Discrepancy is due to incorrect recording of a Goods Receipt Note.

Required:
(a) Prepare necessary Journal entries to record the adjustments in the financial ledger.
(b) State how would you make the necessary adjustments in the stores ledger? (14)

Q.2 (a) Explain the treatment of under-absorbed and over-absorbed factory overheads. Give
three reasons for under-absorbed / over absorbed factory overheads. (06)
 (2)

(b) On December 1, 2007 Zia Textile Mills Limited purchased a new cutting machine for
Rs. 1,300,000 to augment the capacity of five existing machines in the Cutting
Department. The new machine has an estimated life of 10 years after which its scrap
value is estimated at Rs. 100,000. It is the policy of the company to charge
depreciation on straight line basis.

The new machine will be available to Cutting Department with effect from February
1, 2008. It is budgeted that the machine will work for 2,600 hours in 2008. The
budgeted hours include:
− 80 hours for setting up the machine; and
− 120 hours for maintenance.

The related expenses, for the year 2008 have been estimated as under:

(i) Electricity used by the machine during the production will be 10 units per hour
@ Rs. 8.50 per unit.
(ii) Cost of maintenance will be Rs. 25,000 per month.
(iii) The machine requires replacement of a part at the end of every month which will
cost Rs. 10,000 on each replacement.
(iv) A machine operator will be employed at Rs. 9,000 per month.
(v) It is estimated that on installation of the machine, other departmental overheads
will increase by Rs. 5,000 per month.

Cutting Department uses a single rate for the recovery of running costs of the
machines. It has been budgeted that other five machines will work for 12,500 hours
during the year 2008, including 900 hours for maintenance. Presently, the Cutting
Department is charging Rs. 390 per productive hour for recovery of running cost of
the existing machines.

Required:
Compute the revised machine hour rate which the Cutting Department should use
during the year 2008. (08)

Q.3 Ayub Sports Limited produces boxing gloves which are in great demand in the local as well
as international market. Because of better quality and lesser competition in the market, the
company’s profit has approximately doubled in 2007. A summary of company’s expenses
and profit for the year 2006 and 2007 are as under:

2007 2006
Rupees Rupees
Materials consumed 140,000 100,000
Wages 120,000 80,000
Overheads – Fixed 32,000 30,000
Overheads – Variable 34,000 24,000
Net profit 20,500 10,000

In 2007, sales prices were increased by 10% as compared to 2006. The material prices and
rate of wages increased by 10% and 20% respectively in 2007.

In a meeting held to evaluate the performance of various departments, significant

differences arose among the departmental heads. Therefore the Managing Director of the
company asked the CFO to analyse the financial performance objectively.

Required:
Being the CFO of the company carry out an analysis to determine the increase/decrease in
profit in 2007, due to sales price, sales volume, material price, material consumption, labour
efficiency, labour rate, variable overheads and fixed overheads. (17)
 (3)

Q.4 Fazal Industries Limited is currently negotiating a contract to supply its products to K-Mart,
a large chain of departmental stores. K-Mart finally offered to sign a one year contract at a
lump sum price of Rs. 19,000,000.

The Cost Accountant of Fazal Industries Limited believes that the offered price is too low.
However, the management has asked you to re-assess the situation. The cost accountant has
provided you the following information:

Statement of Estimated Costs (Project: K-Mart)

Notes Rupees
Material:
X (at historical cost) (i) 1,500,000
Y (at historical cost) (ii) 1,350,000
Z (iii) 2,250,000
Labour:
Skilled (iv) 4,050,000
Unskilled (v) 2,250,000
Supervisory (vi) 810,000
Overheads (vii) 8,500,000
Total cost 20,710,000

You have analysed the situation and gathered the following information:
(i) Material X is available in stock. It has not been used for a long time because a
substitute is currently available at 20% less than the cost of X.
(ii) Material Y was ordered for another contract but is no longer required. Its net realizable
value is Rs. 1,470,000.
(iii) Material Z is not in stock.
(iv) Skilled labour can work on other contracts which are presently operated by semi-
skilled labour who have been hired on temporary basis at a cost of Rs. 325,000 per
month. The company will need to give them a notice of 30 days before terminating
their services.
(v) Unskilled labour will have to be hired for this contract.
(vi) Two new supervisors will be hired for this contract at Rs. 15,000 per month. The
present supervisors will remain employed whether the contract is accepted or not.
(vii) These include fixed overheads absorbed at the rate of 100% of skilled labour. Fixed
production overheads of Rs. 875,000 which would only be incurred if the contract is
accepted, have been included for determining the above fixed overhead absorption
rate.

Required:
Prepare a revised statement of estimated costs using the opportunity cost approach, for the
management of Fazal Industries and state whether the contract should be accepted or not. (14)

Q.5 Ishaq Limited manufactures plastic bottles for pharmaceutical companies. It has recently
introduced a 100% weekly group bonus plan with a guaranteed wage of Rs. 150 per hour.
Standard production per hour is 50 bottles. Each worker is supposed to work 8 hours a day
from Monday to Friday and 5 hours on Saturday. Presently, there are 20 workers who are
entitled for this plan. Production for the first week under the 100% bonus plan was:

Days Mon Tue Wed Thu Fri Sat

No. of bottles 8,700 7,350 9,750 7,500 8,950 4,550

Most of the workers have raised objection on the company’s bonus plan. They are of the
view that bonus calculation should be based on daily production instead of weekly
production. The management of the company has asked you to determine the impact of such
a change.
 (4)

Required:
Prepare statements showing labour cost per unit under each of the two options. Give reasons
for the differences, if any. (10)

Q.6 Yahya Limited produces a single product that passes through three departments, A, B and C.
The company uses FIFO method for process costing. A review of department A’s cost
records for the month of January 2008 shows the following details:

Material Labour
Units
Rs. Rs.
Work in process inventory as at January 1, 2008
(75% complete as to conversion costs) 16,000 64,000 28,000
Additional units started in January 2008 110,000 - -
Material costs incurred - 430,500 -
Labour costs incurred - - 230,000
Work in process inventory as at January 31, 2008
(50% complete as to conversion costs) 18,000 - -
Units completed and transferred in January 2008 100,000 - -

Overhead is applied at the rate of 120% of direct labour. Normal spoilage is 5% of output.
The spoiled units are sold in the market at Rs. 6 per unit.
Required:
Compute the following for the month of January:
(a) Equivalent production units.
(b) Costs per unit for material, labour and factory overhead.
(c) Cost of abnormal loss (or gain), closing work in process and the units transferred to
the next process. (16)

Q.7 Zulfiqar Limited makes and sells a single product and has the total production capacity of
30,000 units per month. The company budgeted the following information for the month of
January 2008:

Normal capacity (units) 27,000

Variable costs per unit:
Production (Rs.) 110
Selling and administration (Rs.) 25
Fixed overheads:
Production (Rs.) 756,000
Selling and administration (Rs.) 504,000

The actual operating data for January 2008 is as follows:

Production 24,000 units

Sales @ Rs. 250 per unit 22,000 units
Opening stock of finished goods 2,000 units

During the month of January 2008, the variable factory overheads exceeded the budget by
Rs. 120,000.
Required:
(a) Prepare profit statement for the month of January using:
− marginal costing; and
− absorption costing.
(b) Reconcile the difference in profits under the two methods. (15)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2008

September 5, 2008

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 Binary Ltd. (BL) manufactures three products, A, B and C. It is the policy of the company to
apportion the joint costs on the basis of estimated sales value at split off point. BL incurred the
following joint costs during the month of August 2008:

Rs. in ‘000
Direct material 16,000
Direct labour 3,200
Overheads (including depreciation) 2,200
Total joint costs 21,400

During the month of August 2008 the production and sales of Product A, B and C were
12,000, 16,000 and 20,000 units respectively. Their average selling prices were Rs. 1,200,
Rs. 1,400 and Rs.1,850 per unit respectively.
In August 2008, processing costs incurred on Product A after the split off point amounted to
Rs. 1,900,000.
Product B and C are sold after being packed on a specialized machine. The packing material
costs Rs. 40 per square foot and each unit requires the following:

Product Square feet

B 4.00
C 7.50

The monthly operating costs associated with the packing machine are as follows:

Rupees
Depreciation 480,000
Labour 720,000
Other costs 660,000

All the above costs are fixed and are apportioned on the basis of packing material
consumption in square feet.
Required:
(a) Calculate the joint costs to be apportioned to each product. (13)
(b) BL has received an offer from another company to purchase the total output of Product B
without packaging, at Rs. 1,200 per unit. Determine the viability of this offer. (03)

Q.2 Alpha Motors (Pvt.) Ltd. uses a special gasket for its automobiles which is purchased from a
local manufacturer. The following information has been made available by the procurement
department:

Annual requirement (no. of gaskets) 162,000

Cost per gasket (Rs.) 1,000
Ordering cost per order (Rs.) 27,000
Carrying cost per gasket (Rs.) 300
 (2)

The gaskets are used evenly throughout the year. The lead time for an order is normally 11
days but it can take as much as 15 days. The delivery time and the probability of their
occurrence are given below:

Delivery time (in days) Probability of Occurrence

11 68%
12 12%
13 10%
14 6%
15 4%

Required:
(a) Compute the Economic Order Quantity (EOQ) and the total Ordering Costs based on
EOQ. (04)
(b) What would be the safety stock and re-order point if the company is willing to take:
ƒ a 20% risk of being out of stock?
ƒ a 10% risk of being out of stock? (08)
Note: Assume a 360 day year.

Q.3 (a) Hexa Limited uses a standard costing system. The following profit statement summarizes
the performance of the company for August 2008:

Rupees
Budgeted profit 3,500
Favorable variance:
Material price 16,000
Labour efficiency 11,040 27,040
Adverse variance:
Fixed overheads (16,000)
Material usage (6,000)
Labour rate (7,520) (29,520)
Actual profit 1,020

The following information is also available:

Standard material price per unit (Rs.) 4.0

Actual material price per unit (Rs.) 3.9
Standard wage rate per hour (Rs.) 6.0
Standard wage hours per unit 10
Actual wages (Rs.) 308,480
Actual fixed overheads (Rs.) 316,000
Fixed overheads absorption rate 100% of direct wages

Required:
Calculate the following from the given data:
(a) Budgeted output in units
(b) Actual number of units purchased
(c) Actual units produced
(d) Actual hours worked
(e) Actual wage rate per hour (15)

(b) State any two possible causes of favourable material price variance, unfavourable
material quantity variance, favourable labour efficiency variance and unfavourable labour
rate variance. (04)
 (3)

Q.4 Decimal World Limited manufactures and sells modems. It manufactures its own circuit
boards (CB), an important part of the modem. The present cost to manufacture a CB is as
follows:

Rupees
Direct material 440
Direct labour 210
Variable overheads 55
Fixed overheads
Depreciation 60
General overheads 30
Total cost per unit 795

The company manufactures 400,000 units annually. The equipment being used for
manufacturing CB has worn out completely and requires replacement. The company is
presently considering the following options:

(A) Purchase new equipment which would cost Rs. 240 million and have a useful life of six
years with no salvage value. The company uses straight-line method of depreciation. The
new equipment has the capacity to produce 600,000 units per year. It is expected that the
use of new equipment would reduce the direct labour and variable overhead cost by
20%.
(B) Purchase from an external supplier at Rs.730 per unit under a two year contract.

The total general overheads would remain the same in either case. The company has no other
use for the space being used to manufacture the CBs.

Required:
(a) Which course of action would you recommend to the company assuming that 400,000
units are needed each year? (Show all relevant calculations) (07)
(b) What would be your recommendation if the company’s annual requirements were
600,000 units? (06)
(c) What other factors would the company consider, before making a decision? (03)

Q.5 Octa Electronics produces and markets a single product. Presently, the product is
manufactured in a plant that relies heavily on direct labour force. Last year, the company sold
5,000 units with the following results:

Rupees
Sales 22,500,000
Less: Variable expenses 13,500,000
Contribution margin 9,000,000
Less: Fixed expenses 6,300,000
Net income 2,700,000

Required:
(a) Compute the break-even point in rupees and the margin of safety. (04)
(b) What would be the contribution margin ratio and the break-even point in number of units
if variable cost increases by Rs. 600 per unit? Also compute the selling price per unit if
the company wishes to maintain the contribution margin ratio achieved during the
previous year. (05)
(c) The company is also considering the acquisition of a new automated plant. This would
result in the reduction of variable costs by 50% of the amount computed in (b) above
whereas the fixed expenses will increase by 100%. If the new plant is acquired, how many
units will have to be sold next year to earn net income of Rs. 3,150,000. (03)
 (4)

Q.6 Ternary Engineering Limited produces front and rear fenders for a motorcycle manufacturer.
It has three production departments and two service departments. Overheads are allocated on
the basis of direct labour hours. The management is considering to change the basis of
overhead allocation from a single overhead absorption rate to departmental overhead rate. The
estimated annual overheads for the five departments are as under:
Production Departments Service Departments
Fabrication Phosphate Painting Inspection Maintenance
-------------------------Rs. in 000--------------------------------
Direct materials 6,750 300 750
Direct labour 1,200 385 480
Indirect material 30 75
Other variable overheads 200 70 100 30 15
Fixed overheads 480 65 115 150 210
Total departmental expenses 8,630 820 1,445 210 300

Maximum production capacity 20,000 25,000 30,000

Direct labour hours 24,000 9,600 12,000
Machine hours 9,000 1,000 1,200
Use of service departments:
Maintenance - Labour hours 630 273 147
Inspection - Inspection hours 1,000 500 1,500

Required:
(a) Compute the single overhead absorption rate for the next year. (06)
(b) Compute the departmental overhead absorption rates in accordance with the following:
ƒ The Maintenance Department costs are allocated to the production department on the
basis of labour hours.
ƒ The Inspection Department costs are allocated on the basis of inspection hours.
ƒ The Fabrication Department overhead absorption rate is based on machine hours
whereas the overhead rates for Phosphate and Painting Departments is based on direct
labour hours. (10)

Q.7 Unity Electronics Limited manufactures and supplies condenser fans used in the production of
Refrigerators to Sigma Corporation. The company earns a contribution margin of Rs. 600 on
each unit sold before charging the labour cost. Following information is available from the
company’s records.

Number of employees 180

Standard working hours (9 hours/day) 54
Standard hours per unit (at 100% efficiency) 3
Standard labour rate per hour (Rupees) 30

Due to the rise in demand for Refrigerators, Sigma Corporation has increased the size of its
order. However, the management is concerned about the productivity of its labour force. An
analysis of the employees performance report has revealed that the company is suffering on
account of the following:
ƒ A tendency to waste time as a result of which approximately 9 working hours are lost per
week per employee.
ƒ A tendency to work inefficiently, as a result of which the production efficiency is only 74%.
In order to meet the increased demand, the management is considering an increase in wages
by Rs. 5 per hour. The increase is likely to motivate the employees and reduce the wastage of
time by 5 hours and will also improve the production efficiency to 88%.
Required:
Advise whether Unity Electronic Limited should revise the wages. Show all necessary
supporting calculations. (09)
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2009

March 6, 2009

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 ABC has recently established a new unit in Multan. Its planning for the first year of
operation depicts the following:

(i) Cash sales 600,000 units

(ii) Credit sales 1,200,000 units
(iii) Ending inventory Equivalent to 15 days sales
(iv) Number of working days in the year 300
(v) Expected purchase price Rs. 450 per unit
(vi) Manufacturer offers 2% discount on purchase of 500 units or more as bulk quantity
discount. The company intends to avail this discount.
(vii) Carrying costs include:
ƒ Financial cost of investment in inventory @ 16% per annum.
ƒ Godown rent of Rs. 10,000 per month.
(viii) Ordering costs are Rs. 300 per order.

Required:
Compute the Economic Order Quantity (EOQ) and the estimated carrying costs and
ordering costs for the first year of operation. (10)

Q.2 The following information pertains to a week’s work for three employees of a company:

Employees L M N
Total hours worked 60 65 70
Hours of indirect work (included in total hours) 20 10 5
Basic hourly wage rate (Rupees) 60 80 50
Output in units 192 175 150
Time allowed per unit (hours) 0.25 0.4 0.60

Bonus is paid @ 60% of basic wage rate for all time saved. The normal working week is 45
hours. The first five hours of overtime are paid at basic rate plus 40% and the rest at basic
rate plus 60%.

Required:
You are required to calculate the following for each employee.
(a) Basic wages including overtime.
(b) Amount of bonus earned and gross wages.
(c) Direct wages per unit, when overtime is worked:
(i) due to labour shortage.
(ii) specifically at the customer’s request, to expedite delivery. (15)
 (2)

Q.3 A chemical is manufactured by passing through two processes X and Y using two types of
direct material, A and B. In process Y, a by-product is also produced which is then
transferred to process Z where it is completed. For the first week of a month, the actual data
has been as follows:

Process
X Y Z
Output of main product (kgs) 9,400 8,000
Output of byproduct (kgs) 1,400 1,250
Direct material - A (9,500 units) (Rs.) 123,500
Direct material - B added in process (kgs) 500 300 20
Direct material - B added in process (Rs.) 19,500 48,100 1,651
Direct wages (Rs.) 15,000 10,000 500
Scrap value (Rs. per unit) 5 10 6
Normal loss of units in process (%) 4 5 5

The factory overheads are budgeted @ 240% of direct wages and are absorbed on the basis
of direct wages. Actual factory overheads for the week, amounted to Rs. 65,000. Estimated
sales value of the by-product at the time of transfer to process Z was Rs. 22 per unit.

Required:
Prepare the following:
(a) Process accounts for X, Y and Z.
(b) Abnormal loss and abnormal gain accounts.
(c) Factory overhead account. (17)

Q.4 Following information has been extracted from the financial records of ATF Limited:

Production during the year units 35,000

Finished goods at the beginning of the year units 3,000
Finished goods at the end of the year units 1,500
Sale price per unit Rs. 200
Fixed overhead cost for the year Rs. 1,000,000
Administration and selling expenses Rs. 200,000
Annual budgeted capacity of the plant units 40,000

The actual cost per unit, incurred during the year, was as follows:

Rupees
Material 70
Labour 40
Variable overheads 30

Company uses FIFO method for valuation of inventory. The cost of opening finished goods
inventory determined under the absorption costing method system was Rs. 450,000. Fixed
overhead constituted 16% of the total cost last year.

Required:
(a) Prepare profit statements for the year, under absorption and marginal costing
systems.
(b) Prepare reconciliation between the net profits determined under each system. (12)
 (3)

Q.5 The expenses of the production and service departments of a company for a year are as
follows:

Expenses before distribution of Service provided

Department service department costs (%age)
Rs. ‘000’ Deptt. X Deptt. Y
Production department –A 500 50 40
–B 400 30 50

Service department –X 100 - 10

–Y 60 20 -

Required:
Allocate the service departments expenses to production departments by:
ƒ Repeated distribution method
ƒ Simultaneous equation method (13)

Q.6 A soft drink company is planning to produce mineral water. It is contemplating to purchase
a plant with a capacity of 100,000 bottles a month. For the first year of operation the
company expects to sell between 60,000 to 80,000 bottles. The budgeted costs at each of the
two levels, are as under:

Rupees
Particulars 60,000 bottles 80,000 bottles
Material 360,000 480,000
Labour 200,000 260,000
Factory overheads 120,000 150,000
Administration expenses 100,000 110,000

The production would be sold through retailers who will receive a commission of 8% of sale
price.

Required:
(a) Compute the break-even point in rupees and units, if the company decides to fix the
sale price at Rs. 16 per bottle.
(b) Compute the break-even point in units if the company offers a discount of 10% on
purchase of 20 bottles or more, assuming that 20% of the sales will be to buyers who
will avail the discount. (16)

Q.7 A company produces three products using the same raw material. The raw material is in
short supply and only 3,000 kilograms shall be available in April 2009, at a cost of Rs.
1,500 per kilogram.

The budgeted costs and other data related to April 2009 are as follows:

Products X Y Z
Maximum demand (units) 1,000 800 1,200
Selling price per unit (Rs.) 3,750 3,500 4,500
Material used per unit (kg) 1.6 1.2 1.8
Labour hours per unit (Rs. 75 per hour) 12 16 15
 (4)

Required:
(a) Determine the number of units that should be produced by the company to earn
maximum profit
(b) Determine the number of units to be produced if finished products are also available
from an external supplier at the following prices per unit:

Rupees
X 3,450
Y 3,100
Z 3,985 (17)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2009

September 11, 2009

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 Ahmer and Company is engaged in production of engineering parts. It receives bulk orders
from bicycle manufacturers and follows job order costing. On July 1, 2008 two jobs were in
progress whereas two jobs were opened during the year. The details are as follows:

JOBS
A B C D
Work in process – opening (Rs.) 1,400,000 2,500,000 - -
Raw material issued from stores (Rs.) 800,000 1,200,000 1,500,000 600,000
Direct labour hours worked (Hours) 20,000 30,000 15,000 18,000
Rate of direct labour per hour (Rs.) 20 18 16 15

Other related information is as follows:

(i) Factory overhead is applied to the jobs at Rs. 10 per labour hour.
(ii) Actual factory overheads for the year amounted to Rs. 900,000.
(iii) Under/over applied factory overheads are charged to profit and loss account.
(iv) Job A was completed during the year. All the goods were shipped to the customers.
(v) Job B was also completed during the year. However, about 10% of the goods were
rejected during inspection. These were transferred to Job C where they will be used
after necessary adjustments.

Required:
Prepare journal entries to record all the above transactions. (14)

Q.2 Following information has been extracted from the records of RT Limited for August 2009:

Departments
Production Service
P-1 P-2 P-3 S-1 S-2
Budgeted machine hours 60,000 100,000 120,000
Actual machine hours 60,500 110,000 100,000
Budgeted labour hours 50,000 200,000 75,000
Actual labour hours 55,000 190,000 75,000
Budgeted material cost (Rs. ‘000) 50,000 40,000 3,000
Actual material cost (Rs. ‘000) 50,000 42,000 3,200
Budgeted overheads (Rs. ‘000) 1,200 2,000 2,250 600 700
Actual overheads (Rs. ‘000) 1,250 2,000 1,800 500 750
Services provided by S-1 20% 30% 40% - 10%
Services provided by S-2 30% 40% 20% 10% -
Basis of overhead application Machine Labour 75% of
hours hours Material cost

Required:
(a) Allocate costs of service departments using repeated distribution method.
(b) Compute department wise over / under applied overheads. (12)
 (2)

Q.3 Solvent Limited has two divisions each of which makes a different product. The budgeted
data for the next year is as under:

Product A Product B
Rupees
Sales 200,000,000 150,000,000
Direct material 45,000,000 30,000,000
Direct labour 60,000,000 45,000,000
Factory overheads 35,000,000 15,000,000
Price per unit 20 25

Details of factory overheads are as follows:

(i) Product A is stored in a rented warehouse whose rent is Rs. 0.25 million per month.
Product B is required to be stored under special conditions. It is stored in a third party
warehouse and the company has to pay rent on the basis of space utilized. The rent
has been budgeted at Rs. 0.12 million per month.
(ii) Indirect labour has been budgeted at 20% of direct labour. 70% of the indirect labour
is fixed.
(iii) Depreciation for assets pertaining to product A and B is Rs. 6.0 million and Rs. 2.0
million respectively.
(iv) 80% of the cost of electricity and fuel varies in accordance with the production in
units and the total cost has been budgeted at Rs. 4.0 million.
(v) All other overheads are fixed.

Required:
Compute the break-even sales assuming that the ratio of quantities sold would remain the
same, as has been budgeted above. (14)

Q.4 (a) Karachi Limited is a large retailer of sports goods. The company buys footballs from a
supplier in Sialkot. Karachi Limited uses its own truck to pick the footballs from
Sialkot. The truck capacity is 2,000 footballs per trip and the company has been
getting a full load of footballs at each trip, making 12 trips each year.

Recently the supplier revised its prices and offered quantity discount as under:

Quantity Unit price (Rs.)

2,000 400
3,000 390
4,000 380
6,000 370
8,000 360

Other related data is given below:

 All the purchases are required to be made in lots of 1,000 footballs.
 The cost of making one trip is Rs. 15,000. The company has the option to hire a
third party for transportation which would charge Rs. 9 per football.
 The cost of placing an order is Rs. 2,000.
 The carrying cost of one football for one year is Rs. 80.

Required:
(i) Work out the most economical option.
(ii) Compute the annual savings in case the company revises its policy in
accordance with the computation in (i) above. (10)

(b) Briefly describe:

(i) Stock out costs (ii) Lead time
(iii) Reorder point (iv) Safety stock (04)
 (3)

Q.5 Smart Limited has prepared a forecast for the quarter ending December 31, 2009, which is
based on the following projections:

(i) Sales for the period October 2009 to January 2010 has been projected as under:

Rupees
October 2009 7,500,000
November 2009 9,900,000
December 2009 10,890,000
January 2010 10,000,000

Cash sale is 20% of the total sales. The company earns a gross profit at 20% of sales.
It intends to increase sales prices by 10% from November 1, 2009, however since
there would be no corresponding increase in purchase prices the gross profit
percentage is projected to increase. Effect of increase in sales price has been
incorporated in the above figures.

(ii) All debtors are allowed 45 days credit and are expected to settle promptly.
(iii) Smart Limited follows a policy of maintaining stocks equal to projected sale of the
next month.
(iv) All creditors are paid in the month following delivery. 10% of all purchases are cash
purchases.
(v) Marketing expenses for October are estimated at Rs. 300,000. 50% of these expenses
are fixed whereas remaining amount varies in line with the value of sales. All
expenses are paid in the month in which they are incurred.
(vi) Administration expenses paid for September were Rs. 200,000. Due to inflation,
theses are expected to increase by 2% each month.
(vii) Depreciation is provided @ 15% per annum on straight line basis. Depreciation is
charged from date of purchase to the date of disposal.
(viii) On October 31, 2009 office equipment having book value of Rs. 500,000 (40% of
the cost) on October 1, 2009 would be replaced at a cost of Rs. 2,000,000. After
adjustment of trade-in allowance of Rs. 300,000 the balance would have to be paid in
cash.
(ix) The opening balances on October 1, 2009 are projected as under:

Rupees
Cash and bank 2,500,000
Trade debts – related to September 5,600,000
Trade debts – related to August 3,000,000
Fixed assets at cost (20% are fully depreciated) 8,000,000

Required:
(a) Prepare a month-wise cash budget for the quarter ending December 31, 2009.
(b) Prepare a budgeted profit and loss statement for the quarter ending December 31, 2009. (16)

Q.6 Toy Limited is engaged in the production of a single product. On the basis of past history,
the management has estimated the cost of production per unit, as follows:

Rupees
Raw material – 5 kg @ Rs. 40 per kg 200
Labour – 10 hours @ Rs. 25 per hour 250
Variable overheads – 60% of direct labour 150
Total 600

The annual production requirement is 100,000 units.

 (4)

The management has been deeply concerned with the performance of its labour as it has
been witnessing various inefficiencies. The industrial relations department has recently
carried out a study under the guidance of a consultant. It has put forward a plan whereby the
company’s wage policy is to be revised as under:

 Rate of wages would be increased by 12%.

 Workers who perform their tasks in less than the estimated time of 10 hours per unit
would be given a premium of Rs. 18 per hour saved.

The consultant is of the view that the following efficiencies can be brought about by
introducing the above change:

(i) Raw material input per unit includes wastage of 7%. It would reduce to 3% .
(ii) 70% of the workers would work more efficiently and improve their efficiency by 20%.
(iii) Overheads will be reduced to 55% of the revised cost of direct labour (including
premium).
(iv) The quality of production will improve and the rate of rejection will be reduced from
4% to 3%. Rejected units are sold for Rs. 150 each.

Required:
Determine whether it would be beneficial for the company to adopt the wage plan
recommended by the industrial relations department. (14)

Q.7 Excellent Limited makes and sells a single product. The standard cost card for the product,
based on normal capacity of 45,000 units per month is as under:

Rupees
Material 60 kgs at Re. 0.60 per kg 36.00
Labour ½ hour at Rs. 50.00 per hour 25.00
Variable factory overheads, 30% of direct labour cost 7.50
Fixed factory overheads 6.50
Total 75.00

Actual data for the month of August 2009 is as under:

Work in process on August 1, 2009 (60% converted) Units 10,000

Started during the month Units 50,000
Transferred to finished goods Units 48,000
Work in process on August 31, 2009 (50% converted) Units 10,000
Material purchased at Re. 0.50 per kg Rs. 1,750,000
Material issued to production Kgs 3,100,000
Direct labour at Rs. 52 per hour Rs. 1,300,000
Actual factory overheads (including fixed costs of Rs. 290,000) Rs. 600,000

The company uses FIFO method for inventory valuation.

All materials are added at the beginning of the process. Conversion costs are incurred
evenly throughout the process. Inspection takes place when the units are 80% complete.
Under normal conditions, no spoilage should occur.

Required:
(a) Quantity and equivalent production schedules for material and conversion costs.
(b) Material, labour and overhead variances. (Use four variance method for overheads) (16)

(THE END)
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2009
Ans.1 Ahmer and Company
General Journal entries
Date Particulars Ledger folio Debit Credit
1 Work in process A 800,000
Work in process B 1,200,000
Work in process C 1,500,000
Work in process D 600,000
Raw material 4,100,000
(Issuance of raw material to WIP)

2 Work in process A (20,000*20) 400,000

Work in process B (30,000*18) 540,000
Work in process C (15,000*16) 240,000
Work in process D (18,000*15) 270,000
Payroll 1,450,000
(Direct labour cost allocated to WIP)

3 Work in process A (20,000*10) 200,000

Work in process B (30,000*10) 300,000
Work in process C (15,000*10) 150,000
Work in process D (18,000*10) 180,000
Factory overheads applied 830,000
(Factory overheads applied to WIP @ Rs. 10 per
direct labour hours)

4 Factory overheads applied 830,000

Profit and loss account (900,000-830,000) 70,000
Factory overheads Control 900,000
(Factory overheads applied transferred to overheads
control a/c and under applied overheads charged to
P&L account)

5 Finished goods A 2,800,000

(1,400,000+800,000+400,000+200,000)
Work in process A 2,800,000
(Job A completed and transferred to finished goods)

6 Finished goods – B 4,086,000

90% of (2,500,000+1,200,000+540,000+300,000)
Work in process C 454,000
10% of (2,500,000+1,200,000+540,000+300,000)
Work in process B 4,540,000
(Job B completed and transferred to finished goods,
10% rejected items transferred to Job C)

7 Cost of goods sold 6,886,000

Finished goods A 2,800,000
Finished goods B 4,086,000
(Jobs A and B delivered and transferred to cost of
goods sold.)
Rs. 21,506,000 21,506,000

1/4/2010 10:55:09 AM Page 1 of 7

 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2009
Ans.2 RT LIMITED
Allocation of overheads

(a) Allocation of Service dept. cost to production dept. - Repeated distribution method:

Production Dept. Service Dept.

P1 P2 P3 S1 S2
---------------- Rupees in thousand ----------------
Actual overheads as given 1,250 2,000 1,800 500 750
S1 overheads allocation % 20% 30% 40% 10%
S2 overheads allocation % 30% 40% 20% 10%
Allocation of S2 cost 225 300 150 75 (750)
Allocation of S1 cost 115 172 230 (575) 58
Allocation of S2 cost 17 23 11 6 (58)
Allocation of S1 cost 1 2 3 (6)

Allocation from service dept. 358 497 394

TOTAL 1,608 2,497 2,194

(b) Over / under applied overheads:

P1 P2 P3
Actual overheads after allocation from service dept. 1,608 2,497 2,194

Application of overheads to production:

P1 Machine hours basis{(1,200/60,000)*60,500} 1,210
P2 Labour hours basis {(2,000/200,000*190,000} 1,900
P3 75% of material cost (3,200*75%) 2,400
Overheads applied 1,210 1,900 2,400
Overheads under / (over) applied 398 597 (206)

1/4/2010 10:55:09 AM Page 2 of 7

 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2009

Ans.3 Solvent Limited

Product A Product B Total

Sale – units 10,000,000 6,000,000 16,000,000
Sales price per unit 20 25
Sales in Rupees 200,000,000 150,000,000 350,000,000
Less: Variable costs
Direct material 45,000,000 30,000,000 -
Direct labour 60,000,000 45,000,000 -
Variable overheads (Note 1) 5,600,000 5,340,000 -
110,600,000 80,340,000 190,940,000
Contribution margin Rs. 89,400,000 69,660,000 159,060,000
Contribution margin % to sales 45.446%
Break even sales :
Total 39,060,000/0.45446 85,948,699
A (Qty) 85,948,699/350,000,000*10,000,000 2,455,677
B (Qty) 85,948,699/350,000,000*6,000,000 1,473,406

Sales in Rs. 49,113,542 36,835,157

Note 1: Variable & fixed overheads:

Total overheads as given 35,000,000 15,000,000 50,000,000
Variable overheads:
- Rent based on space utilized
120,000 * 12 - 1,440,000 -
- Indirect labour
60,000,000*20%*30% 3,600,000
45,000,000*20%*30% 2,700,000 -
- Electricity & fuel
(4,000,000*80%)/16,000,000*10,000,000 2,000,000 - -
(4,000,000*80%)/16,000,000*6,000,000 - 1,200,000 -
Variable overheads 5,600,000 5,340,000 10,940,000
Fixed costs (Total overheads-Variable overheads) 29,400,000 9,660,000 39,060,000

1/4/2010 10:55:09 AM Page 3 of 7

 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2009
Ans.4 (a.i) Karachi Limited
Price per football A 400 390 380 370 360
Annual purchases (nos.) B 24,000 24,000 24,000 24,000 24,000
Purchase cost A×B 9,600,000 9,360,000 9,120,000 8,880,000 8,640,000
Minimum order size C 2,000 3,000 4,000 6,000 8,000
No. of orders (B÷C) D 12.00 8.00 6.00 4.00 3.00
Ordering cost D × 2,000 24,000 16,000 12,000 8,000 6,000
1.00 + (hired
Trips per order (C÷2,000) E 1.00 2.00 3.00 4.00
transport)
Total no. of trips (D×E) F 12.00 8.00 12.00 12.00 12.00
Transportation cost F×15,000 180,000 120,000 180,000 180,000 180,000
8,000
Hired transportation cost 72,000
units×9
Average inventory (C÷2) G 1,000 1,500 2,000 3,000 4,000
Inventory carrying cost G × 80 80,000 120,000 160,000 240,000 320,000
Total cost Rs. 9,884,000 9,688,000 9,472,000 9,308,000 9146,000

(a.ii) The most economical option is to purchase 3 lots of 8,000 footballs each against the existing
purchases of 12 lots of 2,000 footballs. The saving will be as under:
Cost for 12 lots of 2,000 footballs each. 9,884,000
Cost for 03 lots of 8,000 footballs each. 9,146,000
Cost saving Rs. 738,000

(b) (i) Stock out Costs:

These costs result from not having enough inventories in stock to meet customers' needs.
These costs include lost sales, customers’ ill will, and the costs of expediting orders for
goods not in stock.

(ii) Lead Time:

The time period between placing an order till the receipt of the goods from suppliers is
called lead time.

(iii) Reorder Point:

The point of time when an order is required to be placed or production to be initiated to
replenish depleted stocks is called reorder point. It is determined by multiplying the lead
time and average usage.

(iv) Safety Stock:

To minimize stock outs on account of increased demand or delays in delivery etc., a buffer
stock is often maintained. Such a buffer stocks is called Safety stock.

1/4/2010 10:55:09 AM Page 4 of 7

 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2009

Ans.5 SMART LIMITED

Cash budget for the quarter October - December 2009
October November December
Rupees in '000'
Opening cash and bank balances 2,500 1,476 1,428
Cash receipts:
Cash sales 1,500 1,980 2,178
Collection from debtors Note 1 5,800 5,800 6,960
Total receipts 7,300 7,780 9,138
9,800 9,256 10,566
Cash payments:
Cash purchases Note 2 720 792 727
Creditors Note 2 5,400 6,480 7,128
Marketing expenses – Fixed (300/2) 150 150 150
Marketing expenses - Variable Note 3 150 198 218
Admin. Expenses (2% increase per month) 204 208 212
Purchase of equipment (2,000-300) 1,700
Total payments 8,324 7,828 8,435
Closing cash and bank balances 1,476 1,428 2,131

Profit & Loss Account

for the quarter ending December 31, 2009
Sales (7,500+9,900+10,890) 28,290
Cost of goods sold:
Opening stock (80% of October sale of Rs. 7,500) 6,000
Purchases (7,200+7,920+7,273) 22,393
Goods available for sale 28,393
Closing stock (Purchases of Dec. 2009) (7,273)
21,120
Gross profit 7,170
Admin. & Marketing expenses:
Marketing expenses - Fixed 450
Marketing expenses – variable Note 3 566
Admin. Expenses 624
Depreciation Note 4 259
Loss on replacement of machinery {500-(1,250*15%/12=16)-300} 184
2,083
NET PROFIT 5,087

Note 1 - Cash collection from sales:

Oct.09 Nov.09 Dec. 09 Jan. 10
Total sale 7,500 9,900 10,890 10,000
Cash sale (20% of total) 1,500 1,980 2,178
Credit sale (80% of total) 6,000 7,920 8,712
Cash from debtors:
2nd. fortnight of August 3,000
1st. fortnight of September (5,600/2) 2,800
2nd. fortnight of September (5,600/2) 2,800
1st. fortnight of October (6,000/2) 3,000
2nd. fortnight of October (6,000/2) 3,000
1st. fortnight of November (7,920/2) 3,960
5,800 5,800 6,960

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 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2009

Note 2 - Purchases:
Sale 7,500 9,900 10,890 10,000
Sale price increase 0% 10% 10% 10%
Sales excluding price increase effect 7,500 9,900/1.10 10,890/1.10 10,000/1.10
7,500 9,000 9,900 9,091
Projected purchases 9,000*0.80 9,900*0.80 9,091*0.80
based on next month sales 7,200 7,920 7,273
Cash purchases 10% 720 792 727
Credit purchases 90% 6,480 7,128 6,545
Payment to creditors (Last month’s balance of creditors) (7,500*0.8*0.9)5,400 6,480 7,128

Note 3 - Variable marketing expenses:

Sales 7,500 9,900 10,890 -
Variable marketing expenses 300 / 2 150/7,500*9,900 150/7,500*10,890 -
150 198 218 -

Note 4 – Depreciation
Oct.09 Nov.09 Dec. 09 Jan. 10
Fixed assets at cost 8,000 - - -
Less: Fully depreciated assets 20% (1,600) - - - -
6,400 80 - - -
Disposals on Oct. 31 at cost (500,000/40%) (1,250) - - - -
5,150 - - - -
Additions on October 31 at cost 2,000 - - - -
7,150 - 89 89 -

Ans.6 Toy Limited

Analyses of new wage plan
(a) Raw material consumption and wastage:
Raw material consumption per unit – current 5.000
Present wastage (5*7/100) (0.350)
Raw material forming part of finished product 4.650
Raw material consumption per unit as revised (4.650/0.97) 4.794
Saving in raw material consumption (5.000-4.794)*100,000*40 824,000

(b) Labour cost:

Labour hours – current 10.00
Saving in labour hours due to efficiency (10*70%*20%) (1.40)
Labour hours – revised 8.60
Labour cost: Revised wages (8.60*25*1.12) 240.80
Premium on hours saved (1.40*18) 25.20
Revised labour cost per unit 266.00
Increase in labour cost (Rs. 266-250)*100,000 (1,600,000)

(c) Overheads:
Current overheads per unit 150.00
Revised overheads per unit (266*0.55) 146.30
Saving in overheads (150-146.3)*100,000 370,000

(d) Rejections:
Present rejections {(100,000/0.96)-100,000} 4,167.00
Rejections in the new situation {(100,000/0.97)-100,000} 3,093.00
Present cost of rejections of 4,167 units @ Rs. 450 (600-150) 1,875,150.00
Revised cost of rejection for 3,093 units:
{(4.794*40)+266+146.30-150}*3,093 1,404,408.00

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 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2009

Decrease in rejection (1,875,150.00-1,404,408.00) 470,742

Net Saving (824,000-1,600,000+ 370,000+470,742) 64,742
Ans.7 Excellent Limited
1 Quantity schedule:
Units in process at beginning 10,000
Units started during the month 50,000 60,000

Units transferred to finished goods 48,000

Units in process at the end of the month 10,000
Loss of units (Balance quantity) 2,000 60,000

Conv.
2 Equivalent units, FIFO method: Material
Cost
Transfer to finished goods 48,000 48,000
WIP - beginning (60% converted) (10,000) (6,000)
WIP - closing (50% converted) 10,000 5,000
48,000 47,000
Abnormal loss of units (80% converted) 2,000 1,600
Equivalents units produced during the month 50,000 48,600

3 Variances: Qty. Rate Amount

1) Material price variance
Actual quantity used @ actual rate 3,100,000 0.50 1,550,000
Actual quantity used @ standard rate 3,100,000 0.60 1,860,000
Favourable 310,000
2) Material quantity variance
Actual quantity used at standard rate 3,100,000 0.60 1,860,000
Standard quantity allowed at standard rate 3,000,000 0.60 1,800,000
Adverse (60,000)
3) Labour rate variance
Actual hours worked at actual rate 25,000 52.00 1,300,000
Actual hours worked at standard rate 25,000 50.00 1,250,000
Adverse (50,000)
4) Labour efficiency variance
Actual hours worked at standard rate 25,000 50.00 1,250,000
Standard hours allowed at standard rate 24,300 50.00 1,215,000
Adverse (35,000)
5) Factory overhead spending variance
Actual fixed & variable overheads 600,000
Budgeted overheads:
Fixed overheads 45,000/2 22,500 13.00 292,500
Variable OH based on actual hrs at std. rate 25,000 15.00 375,000
667,500
Favourable 67,500
6) Variable overhead efficiency variance
Actual hrs. worked at standard rate 25,000 15.00 375,000
Standard hrs. allowed at standard rate (48,600/2) 24,300 15.00 364,500
Adverse (10,500)
7) Fixed overhead efficiency variance
Actual hrs. worked at standard rate 25,000 13.00 325,000
Standard hrs. allowed at standard rate (48,600/2) 24,300 13.00 315,900
Adverse (9,100)
8) Idle capacity variance
Actual capacity utilized at standard rate 25,000 13.00 325,000
Available capacity at standard rate (45,000/2) 22,500 13.00 292,500
Favourable 32,500

(THE END)
1/4/2010 10:55:09 AM Page 7 of 7
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2010

March 5, 2010

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 XYZ Limited manufactures four products. The related data for the year ended December 31,
2009 is given below:
A B C D
Opening stock:
- Units 10,000 15,000 20,000 25,000
- Cost (Rs.) 70,000 120,000 180,000 310,000
- NRV (Rs.) 75,000 110,000 180,000 300,000
Production in units 50,000 60,000 75,000 100,000
Costs of goods produced (Rs.) 400,000 600,000 825,000 1,200,000
Variable selling costs (Rs.) 60,000 80,000 90,000 100,000
Closing stock (units) 5,000 10,000 15,000 24,000
Unit cost of purchase from market (Rs.) 10.50 11.00 11.50 13.00
Selling price per unit (Rs.) 10.00 12.00 12.00 12.50
Damaged units included in closing stock 300 600 800 1,500
Unit cost to repair damaged units (Rs.) 3.00 2.00 2.50 3.50
Stock valuation method in use Weighted Weighted
FIFO FIFO
Average Average

The company estimates that in January 2010 selling expenses would increase by 10%.

Required:
Compute the amount of closing stock that should be reported in the balance sheet as on
December 31, 2009. (15)

Q.2 Modern Distributors Limited (MDL) is a distributor of CALTIN which is used in various
industries and its demand is evenly distributed throughout the year.

The related information is as under:

(i) Annual demand in the country is 240,000 tons whereas MDL’s share is 32.5% thereof.
(ii) The average sale price is Rs. 22,125 per ton whereas the profit margin is 25% of cost.
(iii) The annual variable costs associated with purchasing department are expected to be
Rs. 4,224,000 during the current year. It has been estimated that 10% of the variable
costs relate to purchasing of CALTIN.
(iv) Presently, MDL follows the policy of purchasing 6,500 tons at a time.
(v) Carrying cost is estimated at 1% of cost of material.
(vi) MDL maintains a buffer stock of 2,000 tons.

Required:
Compute the amount of savings that can be achieved if MDL adopts the policy of placing
orders based on Economic Order Quantity. (15)
 (2)

Q.3 Smart Processing Limited produces lubricants for industrial machines. Material COX is
introduced at the start of the process in department A and subsequently transferred to
department B. Normal loss in department A is 5% of the units transferred.

In department B, material COY is added just after inspection which takes place when the
production is 60% complete. 10% of the units processed are evaporated before the inspection
stage. However, no evaporation takes place after adding material COY. During the year,
actual evaporation in department B was 10% higher than the estimated normal losses because
of high level of Sulpher contents in natural gas used for processing.

Other details for the year ended December 31, 2009 are as under:

Department A Department B
---------- Rupees ----------
Opening work in process 2,184,000 2,080,000
Material input - 600,000 Litres 17,085,000
- 500,000 Litres 9,693,000
Labour 8,821,000 6,389,000
Overheads 2,940,000 3,727,000

Department A Department B
Completion % Completion %
Litres Conversion Litres Conversion
Material Material
costs costs
Opening WIP 64,500 100 60 40,000 100 60
Closing WIP 24,000 100 70 50,000 100 80

Conversion costs are incurred evenly throughout the process in both departments. The
company uses FIFO method for inventory valuation.

Required:
(a) Equivalent production units
(b) Cost of abnormal loss and closing WIP
(c) Cost of finished goods produced (22)

Q.4 You have recently been appointed as the Financial Controller of Watool Limited. Your
immediate task is to prepare a presentation on the company’s performance for the recently
concluded year. You have noticed that the records related to cost of production have not been
maintained properly. However, while scrutinizing the files you have come across certain
details prepared by your predecessor which are as follows:

(i) Annual production was 50,000 units which is equal to the designed capacity of the
plant.
(ii) The standard cost per unit of finished product is as follows:

Raw material X 6 kg at Rs. 50 per kg

Raw material Y 3 kg at Rs. 30 per kg
Labour- skilled 1.5 hours at Rs. 150 per hour
Labour- unskilled 2 hours at Rs. 100 per hour
Factory overheads Variable overheads per hour are Rs. 100 for skilled labour and
Rs. 80 for unskilled labour. Fixed overheads are Rs. 4,000,000.

(iii) Data related to variation in cost of materials is as under:

Material X price variance Rs. 95,000 (Adverse)

Material Y actual price 6% below the standard price
Material X quantity variance Nil
Material Y quantity variance Rs. 150,000 (Adverse)
 (3)

(iv) Opening raw material inventories comprised of 25 days of standard consumption

whereas closing inventories comprised of 20 days of standard consumption.
(v) Actual labour rate for skilled and unskilled workers was 10% and 5% higher
respectively.
(vi) Actual hours worked by the workers were 168,000 and the ratio of skilled and unskilled
labour hours was 3:4 respectively.
(vii) Actual variable overheads during the year amounted to Rs. 16,680,000. Fixed
overheads were 6% more than the budgeted amount.

Required:
(a) Actual purchases of each type of raw materials.
(b) Labour and overhead variances. (20)

Q.5 Areesh Limited deals in various products. Relevant details of the products are as under:

AW AX AY AZ
Estimated annual demand (units) 5,000 10,000 7,000 8,000
Sales price per unit (Rs.) 150 180 140 175
Material consumption:
Q (kg) 2 2.5 1.5 1.75
S (kg) 0.5 0.6 0.4 0.65
Labour hours 2 2.25 1.75 2.5
Variable overheads (based on labour cost) 75% 80% 100% 90%
Fixed overheads per unit (Rs.)
(based on 80% capacity utilization) 10 20 14 16
Machine hours required:
Processing machine hours 5 6 8 10
Packing machine hours 2 3 2 4

Company has a long term contract for purchase of material Q and S at a price of Rs. 15 and
Rs. 20 per kg respectively. Wage rate for 8 hours shift is Rs. 200.

The estimated overheads given in the above table are exclusive of depreciation expenses.
The company provides depreciation on number of hours used basis. The depreciation on
each machine based on full capacity utilization is as under:

Hours Rs.
Processing machine 150,000 150,000
Packing machine 100,000 50,000

The company has launched an advertising campaign to promote the sale of its products. Rs. 2
millions have been spent on such campaign. This cost is allocated to the products on the basis
of sale.

Required:
Compute the number of units of each product that the company should produce in order to
maximize the profit and also compute the product wise and total contribution at optimal
product mix. (15)

Q.6 Briefly describe the following terms giving an example in each case:

(a) Opportunity cost (b) Sunk cost (c) Relevant cost (06)
 (4)

Q.7 The records of direct labour hours and total factory overheads of IMI Limited over first six
months of its operations are given below:

Total factory
Direct labour
overheads
Hours in 000 Rs. in 000
September 2009 50 14,800
October 2009 80 17,000
November 2009 120 23,800
December 2009 40 11,900
January 2010 100 22,100
February 2010 60 16,150

The management is interested in distinguishing between the fixed and variable portion of the
overheads.

Required:
Using the least square regression method, estimate the variable cost per direct labour hour
and the total fixed cost per month. (07)

(THE END)
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010

Ans.1 A B C D
------------ Units ------------
Opening stock 10,000 15,000 20,000 25,000
Production during the period A 50,000 60,000 75,000 100,000
Goods available for sale B 60,000 75,000 95,000 125,000
Closing Stock C (5,000) (10,000) (15,000) (24,000)
Sale D 55,000 65,000 80,000 101,000
Cost of goods available for sale: ----------------- Rupees -----------------
Opening stock valuation at lower of cost and NRV) 70,000 110,000 180,000 300,000
Cost of production for the period E 400,000 600,000 825,000 1,200,000
Cost of goods available for sale F 470,000 710,000 1,005,000 1,500,000

Closing stock cost

A & B (W/Avg.): F/B×C 39,167 94,667
G{
C & D (FIFO): E/A×C 165,000 288,000
Selling expenses - current year H 60,000 80,000 90,000 100,000
Sales price - per unit I 10.0 12.0 12.0 12.5

Total sales price of closing stock C×I 50,000 120,000 180,000 300,000
Selling costs H / D × C × 1.1 (6,000) (13,538) (18,563) (26,139)
Repair cost of damaged units (900) (1,200) (2,000) (5,250)
NRV of Closing stock 43,100 105,262 159,438 268,611

Value of closing stock (At lower of cost and NRV) 39,167 94,667 159,438 268,611

Ans.2
Purchase department’s variable cost: Rs. 4,224,000

Costs applicable to product CALTIN - 10% of above Rs. 422,400

Ordering costs per purchase order

Annual purchases of CALTIN (tons) [240,000 x 32.5%) Tons 78,000
Existing size of purchase order (tons) Tons 6,500
No. of orders (78,000 / 6,500) Orders 12
Ordering cost per order (422,400/12) Rs. 35,200

Carrying costs per ton (22,125 / 1.25 x 1% ) Rs. Per Ton 177

2 × 78,000 tons x 35,200

Computation of EOQ = 5,570 tons
177

Marks EOQ Existing

Demand of CALTIN Tons 78,000 78,000
Order quantity Tons 5,570 6,500
No. of orders 14 12
Average inventory excluding buffer stock (order quantity / 2) Tons 2,785 3,250
Buffer stock Tons 2,000 2,000
Average inventory Tons 4,785 5,250
Cost of placing orders (Rs 35,200 per order) Rupees 492,800 422,400
Carrying cost ([Avg. Inventory x Rs. 177) Rupees 846,945 929,250
Total costs Rupees 1,339,745 1,351,650

Savings on adoption of EOQ Rupees 11,905

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 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010

Ans.3 (a) EQUIVALENT PRODUCTION UNITS

Quantity Schedule (in litres)

Dept. A Dept. B
WIP opening 64,500 40,000
Started in process / material added 600,000 500,000
Received from preceding department - 610,000
664,500 1,150,000
Transferred out to B (664,500-24,000)x100/105 610,000 -
Transferred to finished goods (1,150,000-50,000-61,000-6,100) - 1,032,900
WIP closing 24,000 50,000
Normal loss – A (664,500-24,000)x5/105) 30,500 -
Normal loss – B (10% x 610,000) - 61,000
Abnormal loss – B (10% x 61,000) - 6,100
664,500 1,150,000

Equivalent production unit (in litres)

Department A Department B
Material Conversion Material Conversion
Units completed and transferred out 610,000 610,000 1,032,900 1,032,900
Opening Inventory (60% completed) (64,500) (38,700) (40,000) (24,000)
Abnormal loss (B: 6,100 x 60%) - - - 3,660
Closing inventory (A: 70%, B: 80%) 24,000 16,800 50,000 40,000
569,500 588,100 1,042,900 1,052,560

(b) COST OF ABNORMAL LOSS AND CLOSING WIP

Department A Department B
Quantity Rate Amount Quantity Rate Amount
Cost of abnormal loss
Units Rs. Rs. Units Rs. Rs.
(Department B)
From department A
(610,000 x 10% x 10%) 6,100 (W-2) 54.60 333,044
Labour (60%) 3,660 6.07 22,216
Overheads (60%) 3,660 3.54 12,956
- 368,216
WIP-closing costs
From department A - - - 50,000 (W-2) 28.42 1,421,000
Material 24,000 30.00 720,000 50,000 9.29 464,500
Labour (70%, 80%) 16,800 15.00 252,000 40,000 6.07 242,800
Overheads (70%, 80%) 16,800 5.00 84,000 40,000 3.54 141,600
1,056,000 2,269,900

(c) COST OF GOODS TRANSFERRED TO FINISHED GOODS

Rupees
Total costs charged to department (W-1) 51,863,000
Less: WIP closing costs (Computed above) (2,269,900)
Less: Cost of abnormal loss (Computed above) (368,216)
Costs transferred to finished goods 49,224,884

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 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010

W-1: Cost charged to department:

Department A Department B
Unit Unit
Equivalent Equivalent
Cost (Rs.) cost Cost (Rs.) cost
Units Units
(Rs.) (Rs.)
WIP - opening inventory 2,184,000 2,080,000
Cost from department A 29,974,000
Material 569,500 17,085,000 30.00 1,042,900 9,693,000 9.29
Labour 588,100 8,821,000 15.00 1,052,560 6,389,000 6.07
Overheads 588,100 2,940,000 5.00 1,052,560 3,727,000 3.54
Total cost to be accounted for 31,030,000 50.00 51,863,000

W-2: Allocation of cost received from department A:

Amount Unit cost

Quantity
(Rs.) (Rs.)
Units received from A 610,000
Normal loss at 10% (61,000)
549,000 *29,974,000 54.60
Abnormal loss at 1% (6,100) (333,044) 54.60
Units after inspection 542,900 29,640,956 54.60
Addition of material COY 500,000
1,042,900 29,640,956 28.42
*Rs. 31,030,000 (Total cost) – Rs. 1,056,000 (Closing WIP) = Rs. 29,974,000

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 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010

Ans.4 Actual quantity purchased: Material X Material Y

Standard consumption quantities 50,000×6 300,000 50,000×3 150,000
Quantity used in excess of standard usage 0 150,000/30 5,000
(adverse quantity variance)
Ending inventory 300,000×20/365 16,438 150,000×20/365 8,219
Opening stock 300,000×25/365 (20,548) 150,000×25/365 (10,274)
Actual purchase quantity kg 295,890 kg 152,945
Actual cost of purchase:
Actual quantity purchased at standard rate 295,890×50 14,794,500 152,945×30 4,588,350
Price paid above / (below) the standard rate
{adverse / (favorable) price variance} 95,000 4,588,350×.06 (275,301)
Actual cost of purchase Rs. 14,889,500 Rs. 4,313,049

Labour and overhead variances:

Skilled labour Unskilled labour

Labour rate variance:
Actual hours at standard rate 168,000×3/7×150 10,800,000 168,000×4/7×100 9,600,000
Rate variance 10% & 5% Adverse (1,080,000) Adverse (480,000)
Labour efficiency variance:
Standard hours for 50,000 units at
standard rate 50,000×1.5×150 11,250,000 50,000x2x100 10,000,000
Actual hours for 50,000 units at
standard rate 168,000×3/7×150 10,800,000 168,000×4/7×100 9,600,000
Favourable 450,000 Favourable 400,000

Overheads spending variance:

Actual hours at standard rate-skilled 168,000x3/7x100 7,200,000
Actual hours at standard rate-unskilled 168,000x4/7x80 7,680,000
Fixed overheads as budgeted 4,000,000
18,880,000
Actual variable overheads 16,680,000
Actual fixed overheads 4,000,000x1.06 4,240,000
20,920,000
Spending variance Adverse (2,040,000)
Overheads efficiency variance:
Standard hours for 50,000 units at
standard rate
Skilled 50,000*1.5*100 7,500,000
Unskilled 50,000*2*80 8,000,000
15,500,000
Actual hours for 50,000 units at
standard rate
Skilled 168,000*3/7*100 7,200,000
Unskilled 168,000*4/7*80 7,680,000
14,880,000
Favourable 620,000

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 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010

Ans.5 AW AX AY AZ Total
Sale price 150.00 180.00 140.00 175.00
Less: Variable cost
Material Q at Rs 15 30.00 37.50 22.50 26.25
Material S at Rs 20 10.00 12.00 8.00 13.00
Labour cost at Rs. 25 per hour 50.00 56.25 43.75 62.50
Overheads 37.50 45.00 43.75 56.25
127.50 150.75 118.00 158.00
Contribution margin per unit Rs 22.50 29.25 22.00 17.00
Annual demand Units 5,000 10,000 7,000 8,000

Possible production under each machine:

Processing machine:
Machine hours required per unit 5.00 6.00 8.00 10.00
Average CM per hour 4.50 4.88 2.75 1.70
Production priority 2 1 3 4
No. of units that can be produced in
available hours in order of CM priority
(Restricted to annual demand) 5,000 10,000 7,000 900
Hours required Hours 25,000 60,000 56,000 9,000 150,000
Contribution margin Rs. 112,500 292,500 154,000 15,300 574,300

Production for product ‘Z’ has to be restricted to 900 units due to limited number of machine hours.

Packing machine:
Machine hours required per unit 2.00 3.00 2.00 4.00
Average CM per hour 11.25 9.75 11.00 4.25
Production priority 1 3 2 4
No. of units that can be produced in
available hours in order of CM priority
(Restricted to annual demand) 5,000 10,000 7,000 8,000
Hours required Hours 10,000 30,000 14,000 32,000 86,000

Conclusion :
The packing machine can meet the full demand but capacity of processing machine is limited.
Therefore, product mix of processing machine will be manufactured.

Assumption:
It has been assumed that the wage rate per eight hours is divisible.

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 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010

Ans.6 (a) Opportunity cost:

An opportunity cost is a cost that measures the opportunity that is lost or sacrificed when the
choice of one course of action requires that an alternative course of action be given up.

Example
A company has an opportunity to obtain a contract for the production of Z which will require
processing on machine X which is already working at full capacity. The contract can only be
fulfilled by reducing the present output of machine X which will result in reduction of profit
contribution by Rs. 200,000.

If the company accepts the contract, it will sacrifice a profit contribution of Rs. 200,000 from
the lost output of product Z. This loss of Rs. 200,000 represents an opportunity cost of
accepting the contract.

(b) Sunk cost

A sunk cost is a historical or past cost that the company has already incurred. These costs
cannot be changed/recovered in any case and are ignored while making a decision.

Example
A company mistakenly purchased a machine that does not completely suit its requirements.
The price of the machine already paid is a sunk cost and will not be considered while deciding
whether to sell the machine or use it.

(c) Relevant cost:

The predicted future costs that would differ depending upon the alternative courses of action,
are called relevant costs.

Example
A company purchased a raw material few years ago for Rs. 100,000. A customer is prepared to
purchase it for Rs. 60,000. The material is not otherwise saleable but can be sold after further
processing at a cost of Rs. 30,000.

In this case, the additional conversion cost of Rs. 30,000 is relevant cost whereas the raw
material cost of Rs. 100,000 is irrelevant.

Ans.7
Direct labour Overheads
(xy) (x2)
Hours (x) (y)
September 2009 50 14,800 740,000 2,500
October 2009 80 17,000 1,360,000 6,400
November 2009 120 23,800 2,856,000 14,400
December 2009 40 11,900 476,000 1,600
January 2010 100 22,100 2,210,000 10,000
February 2010 60 16,150 969,000 3,600
450 105,750 8,611,000 38,500

b (Variable cost per unit) =

∑ xy) - (∑ x)(∑ y) = 6 x 8,611,000 - 450 x 105,750 = 143.1053
n(
n(∑ x ) − (∑ x)
2 2
6 (38,500) - (450)2

Page 6 of 7
Dure nayab 3-May-10 - 12:55:54 PM
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010

a (Fixed costs per month) =

( ∑ y) − b(∑ x) = (105,750 - 143.11 (450)) = 6,892
n 6

(THE END)

Page 7 of 7
Dure nayab 3-May-10 - 12:55:54 PM
 The Institute of Chartered Accountants of Pakistan 
   

Cost Accounting
Intermediate Examinations – Autumn 2010 September 3, 2010
Module D 100 marks - 3 hours

Q.1 Ahsan Enterprises (AE) produces three products Alpha, Beta and Gamma. The management has
some reservations on the method of costing. Consequently, the cost accountant has reviewed the
records and gathered the following information:

(i) The costs incurred during the latest quarter were as follows:

Rupees
Direct material 240,000
Direct labour 1,680,000
Indirect wages – machine maintenance 600,000
– stores 360,000
– quality control 468,000
– cleaning and related services 400,000
Fuel and power 2,800,000
Depreciation on plant, machinery and building 1,560,000
Insurance on plant and machinery 240,000
Insurance on building 60,000
Stores, spares and supplies consumed 1,800,000
Rent, rates and taxes 1,200,000

(ii) The production report for the previous quarter depicted the following information:

Production Direct labour Machine hours Inspection

(units) hours per unit per unit hours per unit
Alpha 12,000 20.00 6.00 2.0
Beta 20,000 5.00 8.00 3.0
Gamma 45,000 4.00 10.00 4.0

(iii) Other relevant details are as follows:

Alpha Beta Gamma

Factory space utilization 40% 35% 25%
Cost of machinery (Rs. in thousands) 6,000 4,000 3,000
Stores consumption (Rs. in thousands) 720 270 810
No. of units inspected 600 400 1,350

The rate of depreciation for plant and machinery is 10% per annum.

Required:
(a) Determine the factory overhead cost per unit for products Alpha, Beta and Gamma by using
single factory overhead rate based on direct labour hours.
(b) Recalculate the factory overhead cost per unit, for each product, by allocating individual
expenses on the basis of specific utilisation of related facilities. (13 marks)
 Cost Accounting Page 2 of 4 

Q.2 Quality Limited (QL) is a manufacturer of washing machines. The company uses perpetual method
for recording and weighted average method for valuation of inventory.

The following information pertains to a raw material (SRM), for the month of June 2010.

(i) Opening inventory of SRM was 100,000 units having a value of Rs. 80 per unit.
(ii) 150,000 units were purchased on June 5, at Rs. 85 per unit
(iii) 150,000 units were issued from stores on June 6.
(iv) 5,000 defective units were returned from the production to the store on June 12.
(v) 150,000 units were purchased on June 15 at Rs. 88.10 per unit.
(vi) On June 17, 50% of the defective units were disposed off as scrap, for Rs. 20 per unit,
because these had been damaged on account of improper handling at QL.
(vii) On June 18, the remaining defective units were returned to the supplier for replacement
under warranty.
(viii) On June 19, 5,000 units were issued to production in replacement of the defective units
which were returned to store.
(ix) On June 20, the supplier delivered 2,500 units in replacement of the defective units which
had been returned by QL.
(x) 150,000 units were issued from stores on June 21.
(xi) During physical stock count carried out on June 30, 2010 it was noted that closing inventory
of SRM included 500 obsolete units having net realizable value of Rs. 30 per unit. 4,000 units
were found short.

Required:
Prepare necessary journal entries to record the above transactions. (15 marks)

Q.3 Naseem (Private) Limited (NPL) is a manufacturer of industrial goods and is launching a new
product. The production will be carried out using existing facilities. However, the capacity of a
machine would have to be increased at a cost of Rs. 3.0 million.

The budgeted costs per unit are as under:

Imported material 1.3 kg at Rs. 750 per kg

Local material 0.5 kg at Rs. 150 per kg
Labour 2.0 hours at Rs. 300 per hour
Variable overheads Rs. 200 per labour hour
Selling & administration cost - variable Rs. 359

Other relevant details are as under:

(i) Net weight of each unit of finished product will be 1.6 kg.
(ii) During production, 5% of material input will evaporate. The remaining waste would be
disposed off at a rate of Rs. 80 per kg.
(iii) The cost of existing plant is Rs. 10 million. The rate of depreciation is 10% per annum.
(iv) Administration and other fixed overheads amount to Rs. 150,000 per month. As a result of
the introduction of the new product, these will increase to Rs. 170,000 per month. The
management estimates that 20% of the facilities would be used for the new product.
(v) The company fixes its sale price at variable cost plus 25%.
(vi) Applicable tax rate for the company is 35%.

Required:
Compute the sales quantity and value, required to achieve a targeted increase of Rs. 4.5 million in
after tax profit. (10 marks)
 Cost Accounting Page 3 of 4 

Q.4 Mazahir (Pakistan) Limited manufactures and sells a consumer product Zee. Relevant information
relating to the year ended June 30, 2010 is as under:

Raw material per unit 5 kg at Rs. 60 per kg

Actual labour time per unit (same as budgeted) 4 hours at Rs. 75 per hour
Actual machine hours per unit (same as budgeted) 3 hours
Variable production overheads Rs. 15 per machine hour
Fixed production overheads Rs. 6 million
Annual sales 19,000 units
Annual production 18,000 units
Selling and administration overheads (70% fixed) Rs. 10 million

Salient features of the business plan for the year ending June 30, 2011 are as under:

(i) Sale is budgeted at 21,000 units at the rate of Rs. 1,100 per unit.
(ii) Cost of raw material is budgeted to increase by 4%.
(iii) A quality control consultant will be hired to check the quality of raw material. It will help
improve the quality of material procured and reduce raw material usage by 5%. Payment will
be made to the consultant at Rs. 2 per kg.
(iv) The management has negotiated a new agreement with labour union whereby wages would
be increased by 10%. The following measures have been planned to improve the efficiency:
ƒ 30% of the savings in labour cost, would be paid as bonus.
ƒ A training consultant will be hired at a cost of Rs. 300,000 per annum to improve the
working capabilities of the workers.
On account of the above measures, it is estimated that labour time will be reduced by 15%.
(v) Variable production overheads will increase by 5%.
(vi) Fixed production overheads are expected to increase at the rate of 8% on account of
inflation. Fixed overheads are allocated on the basis of machine hours.
(vii) The company has a policy of maintaining closing stock at 5% of sales. In order to avoid
stock-outs, closing stock would now be maintained at 10% of sales. The closing stocks are
valued on FIFO basis.

Required:
(a) Prepare a budgeted profit and loss statement for the year ending June 30, 2011 under
marginal and absorption costing.
(b) Reconcile the profit worked out under the two methods. (20 marks)

Q.5 Jaseem Limited manufactures a stationery item in three different sizes. All the sizes are
manufactured at a plant having annual capacity of 1,800,000 machine hours.

Relevant data for each product is given below:

Small Medium Large
Size Size Size
Sales price per unit (Rs.) 75 90 130
Direct material cost per unit (Rs.) 25 32 35
Labour hours per unit 3 4 5
Variable overheads per unit (Rs.) 5 7 8
Machine hours per unit 2 4 5
Demand (Units) 210,000 150,000 180,000
Minimum production required (Units) 100,000 100,000 100,000

Other relevant information is as under:

(i) Cost of the monthly payroll is Rs. 1,500,000.

(ii) Fixed overheads are Rs. 110,000 per month and are allocated on the basis of machine hours.

Required:
Recommend the number of units to be produced for each size. (12 marks)
 Cost Accounting Page 4 of 4 

Q.6 ABC Limited produces and markets a single product. The company operates a standard costing
system. The standard cost card for the product is as under:

Sale price Rs. 600 per unit

Direct material 2.5 kg per unit at Rs. 50 per kg
Direct labour 2.0 hours per unit at Rs. 100 per hour
Variable overheads Rs. 25 per direct labour hour
Fixed overheads Rs. 10 per unit
Budgeted production 500,000 units per month

The company maintains finished goods inventory at 25,000 units throughout the year. Actual
results for the month of August 2010 were as under:

Rupees in ‘000
Sales 480,000 units 295,000
Direct material 950,000 kgs 55,000
Direct labour 990,000 hours 105,000
Variable overheads 26,000
Fixed overheads 5,100

Required:
Reconcile budgeted profit with actual profit using the relevant variances (2 variances each for sale,
raw material and labour and 4 variances for overheads). (18 marks)

Q.7 Pakair Limited manufactures special tools. Information pertaining to payroll costs for the month of
April 2010 is as under:

Gross salaries Income tax

Overtime
Department excluding overtime Deductions
Rupees in thousands
Machining 1,000 75 25
Assembly 400 40 15
Tool room 25 5 -
Warehouse 75 15 -

Details of other benefits are as under:

(i) 35 paid leaves are allowed per year including annual, casual and sick leaves.
(ii) Annual bonus equal to one month salary is paid in June.
(iii) The company maintains a contributory Provident Fund in which 8.33% of the monthly
salary is contributed by the employer as well as the employees.
(iv) During April 2010, the employees availed leaves that cost Rs. 85,000.
(v) Advances paid and recovered during the month amounted to Rs. 17,000 and Rs. 28,000
respectively.
(vi) The company follows a policy of accruing bonus and paid leaves on a monthly basis.

Required:
Prepare journal entries to record payroll and its disbursements. (12 marks)
(THE END)
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2010

A.1 (a) Factory overheads cost per unit based on direct labour hours used:

Alpha Beta Gamma Total

Production (no. of units) A 12,000 20,000 45,000 77,000
Direct labour hours per unit 20 5 4
Total direct labour hours B 240,000 100,000 180,000 520,000
Allocation of overheads
(9,488,000/520,000 ×B) Rs. C 4,379,077 1,824,615 3,284,308 9,488,000
Cost per unit Rs. (C / A) 364.92 91.23 72.98

(b) Factory overheads cost per unit based on utilisation of facilities:

Allocation basis Alpha Beta Gamma Total

Production (no. of units) A 12,000 20,000 45,000 77,000
Machine hours per unit 6 8 10
Total machine hours *1 72,000 160,000 450,000 682,000
Units inspected 600 400 1,350 2,350
Per unit inspection hours 2 3 4
Total no. of hours for units
inspected *2 1,200 1,200 5,400 7,800
Overhead allocation:
Indirect wages:
- Machine maintenance Machine hours 63,343 140,763 395,894 600,000
- Stores Store consumption 144,000 54,000 162,000 360,000
- Quality control Inspected hours 72,000 72,000 324,000 468,000
- Cleaning and related services Factory space
utilisation 160,000 140,000 100,000 400,000
Fuel and power Machine hours 295,601 656,892 1,847,507 2,800,000
Depreciation on plant and machinery Machinery cost 600,000 400,000 300,000 1,300,000
Depreciation on building Factory space
(1,560,000-1,300,000) utilisation 104,000 91,000 65,000 260,000
Insurance on plant and machinery Cost of Machinery 110,769 73,846 55,385 240,000
Insurance on building Factory space
utilisation 24,000 21,000 15,000 60,000
Stores, spares and supplies consumed Actual 720,000 270,000 810,000 1,800,000
Rent, rates and taxes Factory space
utilisation 480,000 420,000 300,000 1,200,000
Total overheads B Rs. 2,773,714 2,339,500 4,374,786 9,488,000
Cost per unit (B/A) Rs. 231.14 116.98 97.22

A.2 Journal entries: Debit Credit

Rupees
5-Jun-2010 Raw material 12,750,000
Account payable (150,000 x 85) 12,750,000
(Cost of material purchased)
6-Jun-2010 Work in process 12,450,000
Raw material 12,450,000
(Issue of raw material to production)
12-Jun-2010 Raw material 415,000
Work in process 415,000
(Defective material returned from the production)
15-Jun-2010 Raw material 13,215,000
Account payable (150,000 x 88.1) 13,215,000
(Cost of material purchased)
17-Jun-2010 Cash (2,500 x 20) 50,000
Factory overheads 165,000
Raw material 215,000

Page 1 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2010

(Defective units sold as scrapped)

18-Jun-2010 Account payable 212,500
Raw material 212,500
(Defective material returned to the supplier)
19-Jun-2010 Work in process 430,050
Raw material 430,050
(Replacement of defective material to production by the store)
20-Jun-2010 Raw material 212,500
Account payable (2,500 x 85) 212,500
(Goods returned were replaced by the supplier)
21-Jun-2010 Work in process 12,900,000
Raw material 12,900,000
(Issue of raw material to production)
30-Jun-2010 Factory overheads - {500 x (86-30)} (obsolete items) 28,000
Factory overheads - (4,000 x 86) (shortages) 344,000
Raw material 372,000
(Cost of obsolete and shortages charged to factory overheads)

Receipts /(Issues)
Date Particulars
Quantity Rate Rupees
01-Jun-2010 Balance 100,000 80.00 8,000,000
05-Jun-2010 purchases 150,000 85.00 12,750,000
Balance 250,000 83.00 20,750,000
06-Jun-2010 Issues (150,000) 83.00 (12,450,000)
12-Jun-2010 Returned from production 5,000 83.00 415,000
15-Jun-2010 Purchases 150,000 88.10 13,215,000
Balance 255,000 86.00 21,930,000
17-Jun-2010 Defective goods sold (2,500) 86.00 (215,000)
18-Jun-2010 Returned to supplier (2,500) 85.00 (212,500)
Balance 250,000 86.01 21,502,500
19-Jun-2010 Replacement to production (5,000) 86.01 (430,050)
20-Jun-2010 Replacement by supplier 2,500 85.00 212,500
Balance 247,500 86.00 21,284,950

A.3 Variable cost per unit:

Qty. Rate Cost per unit

Kg. Rupees
Imported raw material 1.30 750 975.00
Local material 0.50 150 75.00
Total input 1.80 1,050.00
Sale of wastage {1.8-1.6-(0.05*1.8)} 0.11 80 (8.80)
Cost of material per unit 1,041.20
Skilled labour (2 hours @ Rs.300) 600.00
Overheads (2 hours @ Rs. 200) 400.00
Selling and administration cost 359.00
2,400.20
Required contribution margin:
Fixed overheads
- Depreciation on cost of additional capacity (3,000,000*10%) 300,000
- Incremental administration and other fixed overheads (170,000-150,000)*12 240,000
Required profit after tax Rs. 4,500,000
Gross profit required before tax (4,500,000/0.65) 6,923,077
Total contribution margin 7,463,077
Page 2 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2010

Sales price per unit at variable cost plus 25% (2,400.20*1.25) Rs. 3,000.25

Contribution margin per unit sale (3,000.25 – 2400.20) Rs. 600.05

Sales in units (7,463,077 / 600.05) Units 12,437

A.4 Marginal Costing Absorption Costing Marginal Costing Absorption Costing

Units Cost per unit Cost per unit Rupees
Sales 21,000 1,100 23,100,000 23,100,000
Cost of goods sold
Opening stock 950 300+300+45 300+300+45+333.33 612,750 929,414
Production for the year 22,150 648.5 648.5+306.09 14,364,275 21,144,169
Closing inventory 2,100 648.5 648.5+306.09 (1,361,850) (2,004,639)
13,615,175 20,068,944
Variable selling and
administration cost 21,000 157.89 3,315,690
Contribution margin / Gross profit 6,169,135 3,031,056
Selling and administration costs {(21,000x157.89} + 7,000,000 10,315,690
Fixed cost - production W -2 6,780,000
Fixed cost - Selling & administration (70%*10,000,000) 7,000,000
Net loss (7,610,865) (7,284,634)

Profit reconciliation:
In absorption costing fixed costs:
- Brought forward from the last year through opening inventory 950*333.33 (316,664)
- Carried forward to the next year through closing inventory 2,100*306.09 642,789
- Rounding of difference 106
(7,284,634) (7,284,634)
W-1: Variable cost per unit for 2010-11
Raw material (5*0.95*60*1.04) 296.40
Raw material inspection (5*0.95*2) 9.50
Labour (4*0.85*75*1.1) 280.50
Labour incentive cost 30%*(4*0.15*75*1.1) 14.85
Variable production overheads 15*1.05*3 47.25
Variable production costs 648.50
Variable selling and admin. costs (30%*10,000,000)/19,000 157.89
806.39

W-2: Fixed production cost for 2010-11

Annual fixed production overheads (6,000,000*1.08) 6,480,000
Training consultant cost 300,000
6,780,000
W-3:Fixed production cost per unit
Year ended June 30, 2010 6,000,000/18,000 333.33
Year ended June 30, 2011 6,780,000/22,150 306.09

W-4: Production for the year Units

Sales 21,000
Opening inventory 19,000* 5% (950)
Closing inventory 21,000*10% 2,100
Production for the year 22,150

Page 3 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2010

A.5 Small size Medium size Large size

Sales price 75.00 90.00 130.00
Direct material cost (25.00) (32.00) (35.00)
Variable overheads (5.00) (7.00) (8.00)
Contribution margin 45.00 51.00 87.00
Machine hours 2.00 4.00 5.00
Contribution margin per hour 22.50 12.75 17.40
Priority based on contribution per machine hour 1 3 2

Units to be produced: Medium Machine

Small size Large size
size hours
Minimum production - Units 100,000 100,000 100,000
Hours consumed for minimum production 200,000 400,000 500,000 1,100,000

Units in excess of minimum production in

CM priority:
Small size - Units 110,000 220,000
Large size - Units 80,000 400,000
Medium size – Units 20,000 80,000
Total 210,000 120,000 180,000 1,800,000

A.6 Variance
Quantity
Fav./(Adv.)
Description
Qty. Amount
Rate
in ‘000 Rupees in '000
Budgeted gross profit (600-125-200-50-10) 500 215 107,500
Actual gross profit (295,000-55,000-105,000-26,000-5,100) 103,900
Decrease in profit 3,600

Profit variation due to Favourable/(Adverse) variances: +/(-) in profit

1 Sales price variance

Actual sales at actual price 295,000
Actual sales at standard price 480 600 288,000 7,000

2 Sales volume variance

Actual units sold at standard profit 480 215 103,200
Budgeted units sold at standard profit 500 215 107,500 (4,300)

3 Material price variance

Actual quantity used at actual rate 55,000
Actual quantity used at standard rate 950 50 47,500 (7,500)

4 Material usage variance

Actual quantity used at standard rate 950 50 47,500
Standard quantity used at standard rate (480 × 2.5) 1,200 50 60,000 12,500

Page 4 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2010

5 Labour rate variance

Actual hours used at actual rate 105,000
Actual hours used at standard rate 990 100 99,000 (6,000)

6 Labour efficiency variance

Actual hours used at standard rate 990 100 99,000
Standard hours used at standard rate (480 × 2) 960 100 96,000 (3,000)

7 Factory overheads spending variance

Actual fixed and variable overheads 31,100
Budgeted overheads:
Budgeted fixed overheads 500 10 5,000
Variable overheads based on actual hours used at standard rate 990 25 24,750
29,750 (1,350)

8 Variable overheads efficiency variance

Actual hours used at standard rate 990 25 24,750
Standard hours used at standard rate (480×2) 960 25 24,000 (750)

9 Fixed overheads efficiency variance

Actual units produced 480 10 4,800
Standard production in actual hours (990/2) 495 10 4,950 (150)

10 Fixed overheads capacity variance

Capacity used at standard (990/2) 495 10 4,950
Capacity available 500 10 5,000 (50)
Decrease in profit (3,600)

A.7 Journal entries Debit Credit

Rupees in ‘000
Payroll expense 2,030.83
Provision for vacations pay (vacations availed during the month) 85.00
Payroll payable (1,635-193+85) 1,527.00
Contribution to provident fund payable (Co. & employees) 250.00
Provision for bonus 125.00
Provision for vacation pay 145.83
Employees’ income tax payable 40.00
Advance against salary 28.00
(To record payroll cost, liability and provisions)
Work in process (1,338.88+545.56) 1,884.44
Factory overheads (36.60+109.79) 146.39
Payroll expenses 2,030.83
(To allocate payroll cost to WIP and factory overheads)
Advance against salary 17.00
Payroll payable 1,527.00
Contribution to provident fund payable (Co. & employees) 250.00
Employees’ income tax payable 40.00
Bank 1,834.00

Page 5 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2010

(To record disbursement of payroll and payment of liabilities)

Machining Assembly Tool room Stores
Total
WIP Overheads
Rupees in '000
Cost
Payroll cost A 1,000.00 400.00 25.00 75.00 1,500.00
Overtime 75.00 40.00 5.00 15.00 135.00
1,075.00 440.00 30.00 90.00 1,635.00
Employer’s contribution to PF (A*0.833) 83.33 33.34 2.09 6.25 125.00
Provision for year-end bonus (A/12) 83.33 33.34 2.08 6.25 125.00
Provision for paid vacation (A*35/360) 97.22 38.89 2.43 7.29 145.83
1,338.88 545.56 36.60 109.79 2,030.83

Deductions from employees:

Employee income tax 25.00 15.00 - - 40.00
Employees’ contribution to PF (A*0.833) 83.33 33.33 2.08 6.25 125.00
Salary advance recoveries 28.00
108.33 48.33 2.08 6.25 193.00

(THE END)

Page 6 of 6
 The Institute of Chartered Accountants of Pakistan 
   

Cost Accounting
Intermediate Examination – Spring 2011 March 11, 2011
Module D 100 marks - 3 hours

Q.1 (a) The management of Opal Limited (OL) is in the process of preparing next year’s budget and
has gathered the following information:

(i) Sales 180,000 units per month @ Rs. 110 per unit
(ii) Material “A” 75% of finished product @ Rs. 45 per unit
(iii) Material “B” 25% of finished product @ Rs. 30 per unit
(iv) Yield 80%
(v) Labour Rate Rs. 18,000 per month
(vi) Average working hours in a month 200 hours
(vii) Time required for each unit of product 20 minutes
(viii) Variable overhead Rs. 15 per unit of raw material consumed
(ix) Fixed Overhead Rs. 10,000,000 per annum

Required:
Assuming there is no beginning or ending inventory of the product, calculate OL’s budgeted
gross profit for the next year. (06 marks)

(b) The Board of Directors of Opal Limited while reviewing next year’s budgeted margins, as
calculated in (a) above, expressed their serious concerns on the projected profits. After careful
analysis of all activities by a cross-functional team of OL, the directors approved a plan of
action to improve the overall performance of the company.

The salient features of their plan are as under:

(i) Import of Material “A” from abroad at a cost of Rs. 48 per unit, this is expected to
improve the overall yield by 12.5%.
(ii) Based on a detailed study, the installation of a new system of production has been
proposed. The expected cost of the system is Rs. 7.5 million with an expected useful life
of 5 years. An incentive scheme for the workers have also been proposed by allowing
them to share 45% of the time saved for making each unit of product.
The above measures are expected to reduce the average time for making each unit of
product by 30%.
(iii) Introduction of improved management standards which is expected to reduce the
variable overheads by 20%.
(iv) Re-assessment of controllable fixed overhead expenses. This is likely to reduce OL’s
existing fixed overheads by 15%.

Required:
In view of the preceding improvement plan and the data provided in (a) above, calculate OL’s
revised budgeted gross profit for the next year. (13 marks)
 Cost Accounting Page 2 of 4 

Q.2 Amber Limited (AL) manufactures a single product. Following information pertaining to the year
2010 has been extracted from the records of the company’s three production departments.

Material Labour Machine

Department
Rs. in million Hours
A 80 200,000 400,000
Budgeted B 150 500,000 125,000
C 120 250,000 350,000
A 80 220,000 340,000
Actual B 150 530,000 120,000
C 120 240,000 320,000

AL produced 3.57 million units during the period. The budgeted labour rate per hour is Rs. 120.
The overheads for department-A is budgeted at Rs. 5.0 million, for department-B at 15% of labour
cost and for department-C at 5% of prime cost of the respective departments. Actual overheads for
department A, B and C are Rs. 5.35 million, Rs. 8.90 million and Rs. 7.45 million respectively.

Overheads are allocated on the following basis:

Department-A Machine hours

Department-B Labour hours
Department-C % of prime cost

There was no beginning or ending inventory in any of the production departments.

Required:
(a) Budgeted overhead application rate for each department. (05 marks)
(b) The total and departmental actual cost for each unit of product. (08 marks)
(c) The over or under applied overhead for each department. (03 marks)

Q.3 Zircon Limited (ZL) manufactures and supplies footballs for both domestic and international
markets. Following information is available from the company’s records.

Number of skilled workers 250

Standard working hours per month 200
Actual hours per unit of product 1.5
Standard labour rate per hour (Rupees) 42
Variable overhead rate per labour hour (Rupees) 75

The company manufactures 40,000 footballs per month. Overtime is paid to the workers at the rate
of 75% over and above the standard wage rate.

In order to increase the production efficiency and reduce the cost of conversion, the management is
currently evaluating various wage incentive plans. The production manager has suggested the
following options to the management.

Option 1: Introduce a piece wage system at the rate of Rs. 72 per unit. It is expected to improve the
current production efficiency from 65% to 78%.

Option 2: Introduce a monthly group bonus plan with a guaranteed wage of Rs. 48 per hour based
on a standard 1.4 hours per unit of product. This plan is expected to reduce the overtime by 60%.

Required:
Evaluate the above options in contrast with the existing scheme and advise the management about
the most economical option. (15 marks)
 Cost Accounting Page 3 of 4 

Q.4 Topaz Limited (TL) is the manufacturer of consumer durables. Pearl Limited, one of the major
customers, has invited TL to bid for a special order of 150,000 units of product Beta.

Following information is available for the preparation of the bid.

(i) Each unit of Beta requires 0.5 kilograms (kg) of material “C”. This material is produced
internally in batches of 25,000 kg each, at a variable cost of Rs. 200 per kg. The setup cost per
batch is Rs. 80,000. Material “C” could be sold in the market at a price of Rs. 225 per kg. TL
has the capacity to produce 100,000 kg of material “C”; however, the current demand for
material “C” in the market is 75,000 kg.
(ii) Every 100 units of product Beta requires 150 labour hours. Workers are paid at the rate of Rs.
9,000 per month. Idle labour hours are paid at 60% of normal rate and TL currently has
20,000 idle labour hours. The standard working hours per month are fixed at 200 hours.
(iii) The variable overhead application rate is Rs. 25 per labour hour. Fixed overheads are
estimated at Rs. 22 million. It is estimated that the special order would occupy 30% of the
total capacity. The production capacity of Beta can be increased up to 50% by incurring
additional fixed overheads. The fixed overhead rate applicable to enhanced capacity would be
1.5 times the current rate. The utilized capacity at current level of production is 80%.
(iv) The normal loss is estimated to be 4% of the input quantity and is determined at the time of
inspection which is carried out when the unit is 60% complete. Material is added to the
process at the beginning while labour and overheads are evenly distributed over the process.
(v) TL has the policy to earn profit at the rate of 20% of the selling price.

Required:
Calculate the unit price that TL could bid for the special order to Pearl Limited. (14 marks)

Q.5 Emerald Limited (EL) is engaged in the manufacture and sale of a single product. Following
statement summarizes the performance of EL for the first two quarters of the financial year 20X2:

Quarter 1 Quarter 2
Sales volume in units 580,000 540,000
Rs in ‘000
Sales revenue 493,000 464,400
Cost of Goods sold
Material (197,200) (183,600)
Labour (98,600) (91,800)
Factory overheads (84,660) (80,580)
(380,460) (355,980)
Gross Profit 112,540 108,420
Selling and distribution expenses (26,500) (25,500)
Administrative expenses (23,500) (23,500)
(50,000) (49,000)
Net Profit 62,540 59,420

In the second quarter of the year EL increased the sale price, as a result of which the sales volume
and net profit declined. The management wants to recover the shortfall in profit in the third
quarter. In order to achieve this target, the product manager has suggested a reduction in per unit
price by Rs. 15.

The marketing director however, is of the opinion that if the price of the product is reduced further,
the field force can sell 650,000 units in the third quarter. It is estimated that to produce more than
625,000 units the fixed factory overheads will have to be increased by Rs. 2.5 million.

Required:
(a) Compute the minimum number of units to be sold by EL at the reduced price, to recover the
shortfall in the second quarter profits.
(b) Determine the minimum price which could be charged to maintain the profitability calculated
in (a) above, if EL wants to sell 650,000 units. (14 marks)
 Cost Accounting Page 4 of 4 

Q.6 (a) Briefly describe the following terms:

(i) Marginal cost (ii) Stock out cost (iii) Sunk cost (iv) Cost unit
(06 marks)

(b) Sapphire limited (SL) fabricates parts for auto manufacturers and follows job order costing. The
company’s head office is situated in Lahore but the factory is in Karachi. A separate set of
records is kept at the head office and at the factory. Following details were extracted from SL’s
records for the month of February 2011.

Jobs
A B C
Materials issued to production (units)
ƒ Material X 40,000 - 10,000
ƒ Material Y - 75,000 25,000
Direct labour hours worked (hours) 6,000 9,000 15,000
Labour rate per hour (Rs.) 75 60 65

The other related information is as follows:

(i) Materials purchased on account:
ƒ 100,000 units of material X at Rs. 25 per unit
ƒ 150,000 units of material Y at Rs. 35 per unit

(ii) The head office prepared the payroll and deducted 8% for payroll taxes. The payroll
amounted to Rs. 3.0 million out of which Rs. 1.0 million pertained to selling and
administrative staff salaries. After charging direct labour cost to each job the balance
amount of payroll cost was attributed to general factory overhead.
(iii) Factory overhead was applied to the jobs at Rs. 25 per direct labour hour.
(iv) Actual factory overheads amounted to Rs. 700,000 including depreciation on machinery
amounting to Rs. 400,000. All payments were made by head office.
(v) Over or under-applied factory overheads are closed to cost of goods sold account.
(vi) Jobs A and B were completed during the month. Job A was sold for Rs. 2.0 million to
one of the auto manufacturer on credit. The customer however, agreed to settle the
transaction at 2% cash discount.
(vii) Selling and administrative expenses, other than salaries paid during the month were Rs.
500,000.

Required:
Prepare journal entries to record all the above transactions in SL’s factory ledger and general
ledger for the month of February 2011. (16 marks)

(THE END)
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2011

A.1 (a) Computation of budgeted gross profit Rupees

Sales (180,000 units × 12 × Rs. 110) 237,600,000
Less: Cost of sales
Material “A” (2.16 million × 75% × 1/80% x Rs. 45) 91,125,000
Material “B” (2.16 million × 25% × 1/80% × Rs.30) 20,250,000
Labour [20 min. /60 × 2.16 million × (Rs. 18,000/200)] 64,800,000
Variable overhead (2.16 million × 1/80% × Rs. 15) 40,500,000
Fixed Overhead 10,000,000
(226,675,000)
Budgeted Gross Profit 10,925,000

(b) Computation of revised budgeted gross profit Rupees

Sales (180,000 units × 12 × Rs. 110) 237,600,000
Less: Cost of sales
Material “A” [2.16 million /(0.8 × 1.125) × 0.75 × Rs. 48] 86,400,000
Material “B” [2.16 million / (0.8 × 1.125) × 0.25 × Rs. 30] 18,000,000
Labour Cost (W-1) 54,108,000
Variable overhead (Rs. 15 × 80%) × [(2.16 million/90%] 28,800,000
Fixed overhead (Additional depreciation: Rs. 7.5 million /5) 1,500,000
Fixed Overhead (Rs. 10 million) × (1-0.15) 8,500,000
(197,308,000)
Revised Budgeted Gross Profit 40,292,000

W-1 Computation of revised labour cost

Time required for one unit of finished product 20 Minutes
Expected saving of time (20 Minutes × 30%) 6 Minutes
Revised time for one unit of finished product 14 minutes
Workers share of the time saved Rs. 8,748,000
[(6 min./60 × 0.45 × 2.16 million × (Rs. 18000 / 200)]
labour cost (14 min./ 60 × 2.16 million) × (Rs. 18,000/200) Rs. 45,360,000
Rs.54,108,000

A.2 (a) Budgeted overhead rate for department-A Rs. in million

Budgeted Overhead rate per machine hour (OHD/MH Rs.5m/400,000) Rs. 12.5

Budgeted overhead rate for department-B

Budgeted labour cost (Rs. 120 × 500,000) 60
Budgeted overhead (Rs. 60 m × 15%) 9
Budgeted overhead rate per labour hour (Rs. 9 m/0.5 m) 18

Budgeted overhead rate for department-C

Budgeted overhead as a % of Prime Cost (Rs.7.5 m /150 m) 5%

Page 1 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2011

(b) Computation of actual cost of producing one unit of product:

Departments
--------------Rupees in million----------
A B C
Material cost 80.00 150.00 120.0 0
Labour cost
(0.22 m × Rs. 120) 26.40
(0.53 m × Rs. 120) 63.60
(0.24 m × Rs. 120) 28.80
Actual overhead cost 5.35 8.90 7.45
Total Cost 111.75 222.50 156.25

Unit cost (Cost/3.57 m. units) (Rs.) 31.30 62.32 43.77

Total Actual Cost per unit (Rs.) 137.39

(c) Applied Overhead Cost

(0.34 m × 12.5) 4.25
(0.53 m × Rs. 18) 9.54
(Rs. 148.8 m × 5%) 7.44
Actual Overhead Cost 5.35 8.90 7.45
Under applied / (over applied) 1.10 (0.64) 0.01

A.3 Existing Conversion Cost

No. of labour hours required (40,000 × 1.5) 60,000
Labour hours available at standard rate (250 × 200) 50,000
Overtime hours 10,000

Labour cost
Normal hours ( 50,000 × Rs. 42) 2,100,000
Overtime hours ( 10,000 × Rs. 73.50) 735,000
Total labour cost 2,835,000
Variable overhead (60,000 × Rs. 75) 4,500,000
Total conversion cost 7,335,000

Option - 1
No. of hours required per unit (1.5 × 0.65/ 0.78) 1.25
Total no. of hours required (40,000 × 1.25) 50,000
Piece wages (40,000 × 72) 2,880,000
Variable overhead ( 50,000 × 75) 3,750,000
Total conversion cost 6,630,000

Option - 2
Labour hours available (250 × 200) 50,000
Overtime hours (10,000 × 40%) 4,000
Total labour hours 54,000
Standard hours allowed for the bonus plan (40,000 × 1.4) 56,000

Guaranteed wages (56,000 × 48) 2,688,000

Variable overhead (54,000 × 75) 4,050,000
Total conversion cost 6,738,000

Recommendation: By implementing option 1 the conversion cost would be reduced to Rs 165.75 per
unit from the existing Rs. 183.38 per unit. The workers would be paid Rs. 2.880 million which is
better than option 2. The workers would certainly try to earn this amount in the least possible time.
Page 2 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2011

Therefore, option 1 would be the most economical choice for both the workers and the management.
A.4 Calculation of unit price to be quoted to Pearl Limited:
Material (25,000 × 200)+(53,125 × 225) + 80,000 W-1 17,033,125
Labour (20,000 ×45 × 40%) + (210,625 × 45) W-2 9,838,125
Variable overhead (230,625 × Rs. 25) 5,765,625
Incremental fixed cost (22m / 10 ×1.5) 3,300,000
35,936,875
Profit margin (25% of cost) 8,984,219
Sale price 44,921,094
Sale price per unit ( Rs. 44,921,094 / 150,000) 299

W-1: Material
Input units of material C (150,000 / 96%) × 0.5 78,125

W-2: Labour
Labour hours – completed units 150,000 x 1.50 225,000
– lost units {[(150,000 / 0.96) – 150,000] × 1.5 × 60%} 5,625
230,625

A.5 (a) Revised(reduced) Selling price (Rs.464,400 / 540,000 ×1000) - 15 Rs. 845

Rs. in '000
Shortfall in profit of last quarter 3,120
Profit for the 1st quarter 62,540
Target profit for the third quarter 65,660
Add: Fixed cost
Administration cost 23,500
Fixed factory overhead (W–1) 25,500
Fixed selling and distribution expense (W–1) 12,000
61,000
Targeted contribution margin 126,660

Contribution margin per unit (845-637) (W–2) Rs. 208

No. of units to be sold 608,942

W – 1: Computation of fixed factory overhead using high low method

Selling and
Factory
distribution
overheads
expenses
At 580,000 volume 84,660,000 26,500,000
At 540,000 volume A 80,580,000 25,500,000
Difference B 4,080,000 1,000,000
Variable cost per unit C 102 25
Fixed cost [A – (540,000 × C) ] 25,500,000 12,000,000

W – 2: Computation of variable cost per unit

Rupees
Material (183,600 / 540,000) × 1000 340
Labour ( 91,800 / 540,000) × 1000 170
Factory overheads 102
Selling and distribution expenses 25
637

Page 3 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2011

(b) Minimum price that should be charged if EL wants to sell 650,000 units
Rs. ‘000
Required contribution as above 126,660
Additional fixed cost 2,500
129,160
No. of units to be sold 650,000

Required contribution margin per unit 198.71

Variable cost per unit 637.00
Minimum price 835.71

A.6 (a) Briefly describe the following terms:

(i) Marginal cost:

It is the cost of producing one additional unit at a given volume of output.

(ii) Stock out cost:

These costs result from not having enough inventories in stock to meet customers’
needs. These costs include lost sales, customers’ ill will and the costs of expediting
orders for goods not in stock.

(iii) Sunk cost:

A sunk cost is a historical or past cost that the company has already incurred. These
costs cannot be changed / recovered in any case and are ignored while making a
decision.

(iv) Cost unit:

A cost unit is a unit of product or unit of service for which costs are ascertained by
means of allocation, apportionment and absorption. It is a unit of quantity of product,
service or time or a combination of these in relation to which costs are expressed or
ascertained.

(b) General Journal entries

Factory Ledger General Ledger
Date Particulars Particulars
Debit Credit Debit Credit

 Material X 2,500,000 Factory Ledger 7,750,000

Material Y 5,250,000 Trade Creditors 7,750,000
General Ledger 7,750,000
(Purchase of material)

 Payroll 2,000,000 Factory Ledger 2,000,000

General Ledger 2,000,000 Selling and 1,000,000
administrative
expenses
Accrued Payroll 2,760,000
(Payroll accrual) Payroll taxes 240,000

 No Entry Accrued payroll 2,760,000

Payroll Taxes 240,000
Bank 3,000,000
(Payment of payroll &
taxes)

Page 4 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2011

 Work in process A 1,000,000

Work in process B 2,625,000
Work in process C 1,125,000 No Entry
Material X 1,250,000
Material Y 3,500,000
(Issuance of raw
material to WIP)

 Work in process A 450,000

Work in process B 540,000
Work in process C 975,000 No Entry
Factory overheads 35,000
Payroll 2,000,000
(Direct labour cost
allocated to WIP)

 Work in process A 150,000

Work in process B 225,000
Work in process C 375,000 No Entry
Factory overheads 750,000
- applied
(Factory overheads
applied to WIP)

 Factory overheads 700,000 Factory Ledger 700,000

General Ledger 700,000 Bank 300,000
Accumulated 400,000
Depreciation
(Actual factory
overheads transferred)

 Factory overheads - 15,000 Factory Ledger 15,000

applied
General Ledger 15,000 Cost of goods sold 15,000
(Over applied
overheads transferred
to cost of goods sold)

 Finished goods A 1,600,000

Finished goods B 3,390,000 No Entry
Work in process A 1,600,000
Work in process B 3,390,000
(Jobs A and B
completed and
transferred to finished
goods)

 General Ledger 1,600,000 Cost of goods sold 1,600,000

Finished goods A 1,600,000 Factory Ledger 1,600,000
(Job A delivered and
transferred to cost of
goods sold)

 No Entry Trade Debtors 2,000,000

Sales 2,000,000
( Job A sold to
Page 5 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2011

customer)

 No Entry Bank 1,960,000

Cash discount 40,000
Trade debtors 2,000,000
(Amount realized from
customer)

 No Entry Selling and 500,000

administrative
expenses
Bank 500,000
(Payment of Selling
and admin. Expenses)

(THE END)

Page 6 of 6
 The Institute of Chartered Accountants of Pakistan

Cost Accounting
Intermediate Examination 9 September 2011
Autumn 2011 100 marks – 3 hours
Module D Additional reading time – 15 minutes

(All questions are compulsory)

Q.1 Sparrow (Pvt) Limited (SPL) is engaged in the manufacture of two products A and B. These
products are manufactured on two machines M1 and M2 and are passed through two service
departments, Inspection and Packing, before being delivered to the warehouse for final distribution.
SPL’s overhead expenses for the month of August 2011 were as follows:

Rupees
Electricity 2,238,000
Rent 1,492,000
Operational expenses of machine M1 5,500,000
Operational expenses of machine M2 3,200,000

Following information relates to production of the two products during the month:

A B
Units produced 5,600 7,500
Labour time per unit – Inspection department 15 minutes 12 minutes
Labour time per unit – Packing department 12 minutes 10 minutes

The area occupied by the two machines M1 and M2 and the two service departments is as follows:

Square feet
Machine M1 5,500
Machine M2 4,800
Inspection department 12,000
Packing department 15,000

Machine M1 has produced 50% units of product A and 65% units of product B whereas machine
M2 has produced 50% units of product A and 35% units of product B.

Required:
Allocate overhead expenses to both the products A and B. (18 marks)

Q.2 (a) Bulbul Limited (BL) produces a specialized product for industrial customers. Following are
the details of BL’s monthly production and associated cost for the past six months:

Months Units Cost (Rs. ‘000)

March 75 900
April 60 700
May 65 850
June 80 950
July 105 1,200
August 95 1,040

Required:
Using the least square method, calculate the estimated cost to produce 110 units. (09 marks)
 Cost Accounting Page 2 of 4

(b) Mr. Lark works as a machinist on a machine running 54 hours a week. Following information
pertains to his last week’s work on the machine:

Total hours worked 51 hours

Overtime ( included in total hours worked) 4 hours
Idle time due to machine break down 3 hours
Basic hourly wage rate Rs. 25

The overtime is paid at basic rate plus 45%.

Required:
Calculate the total wages paid to Mr. Lark allocating it between direct and indirect labour.
Also give reasons for such allocation. (05 marks)

Q.3 (a) Pelican Limited produces and markets a single product Zeta. The company uses a standard
costing system. Following is the standard material mix for the production of 400 units of Zeta.

Standard rate
Weight (Kg.)
per Kg. (Rs.)
Material A 30 240
Material B 25 320

Actual costs on the production of 192 units of Zeta for the month of August 2011 were as
follows:

Actual rate
Weight (Kg.)
per Kg. (Rs.)
Material A 16 230
Material B 13 308

Required:
Calculate the following material variances from the above data:
(i) Cost variance (ii) Price variance (iii) Mix variance
(iv) Yield variance (v) Usage variance (15 marks)

(b) Following data is available from the production records of Flamingo Limited (FL) for the
quarter ended 30 June 2011.

Rupees
Direct material 120,000
Direct labour @ Rs. 4 per hour 75,000
Variable overhead 70,000
Fixed overhead 45,000

The management’s projection for the quarter ended 30 September 2011 is as follows:

(i) Increase in production by 10%.

(ii) Reduction in labour hour rate by 25%.
(iii) Decrease in production efficiency by 4%.
(iv) No change in the purchase price and consumption per unit of direct material.

Variable overheads are allocated to production on the basis of direct labour hours.

Required:
Prepare a production cost budget for the quarter ended 30 September 2011. (04 marks)
 Cost Accounting Page 3 of 4

Q.4 Hornbill Limited (HL) produces certain chemicals for textile industry. The company has three
production departments. All materials are introduced at the beginning of the process in
Department-A and subsequently transferred to Department-B. Any loss in Department-B is
considered as a normal loss. Following information has been extracted from the records of HL for
Department-B for the month of August 2011:

Department B
Opening work in process (Litres) Nil
Closing work in process (Litres) 10,500
Units transferred from Department-A (Litres) 55,000
Units transferred to Department-C (Litres) 39,500
Labour (Rupees) 27,520
Factory overhead (Rupees) 15,480

Materials from Department-A were transferred at the cost of Rs. 1.80 per litre. The degree of
completion of work in process as to cost originating in Department-B were as follows:

WIP Completion %
50% units 40%
20% units 30%
30% units 24.5%

Required:
Prepare cost of production report for Department-B for the month of August 2011. (15 marks)

Q.5 Seagull Limited (SL) is engaged in the manufacture of Basketballs, Footballs and Rugby balls for
the professional leagues and collegiate play. These balls are produced from different grades of
synthetic leather. Relevant information available from SL’s business plan for the manufacture of
each unit is as under:

Football Basketball Rugby Ball

Cost of leather Rs. 38 Rs. 238 Rs. 255
Time required for each unit of product. 2 hours 1 hour 1.5 hour
Variable overheads (based on labour cost) 65% 50% 60%

The labourers are paid at a uniform rate of Rs. 50 per hour. SL allocates fixed overheads to each of
the above product at the rate of Rs. 4 per direct labour hour.

Following further information is also available:

Football Basketball Rugby Ball

Annual budgeted sales volume (Units) 5000 3500 2000
Selling price per unit of product (Rs.) 295 397 500
Cost of leather per sq. ft (Rs.) 95 340 510

The above sales volumes are based on the market demand for these products. However, due to
financial crises, SL is expected to procure only 3,840 sq. ft. of leather from the tanneries.

The sales department has already accepted an order of 800 footballs, 1,300 basketballs and 400
rugby balls from a renowned professional league in the country. These quantities are already
included in the above budgeted sales volume. The non compliance of this order will result in a
penalty of Rs. 400,000.

Required:
Based on the budgeted volumes, determine the optimum production plan and also calculate the net
profit for the year. (16 marks)
 Cost Accounting Page 4 of 4

Q.6 (a) Penguin Limited (PL) produces and markets a single product. The company’s management
has raised concerns about the declining sales due to frequent stock-outs. In order to resolve the
problem, the finance manager has gathered following information from PL’s records:

Carrying costs of inventory (excluding financing costs) 8% p.a.

Variable costs of inventory 80% of sales
Fixed costs Rs. 40,000 p.a.
Applicable tax rate 30%

Based on stock-out reports, the finance manager has worked out three policies for the
improvement of sales and the projected data is as follows:

Inventory Policy Inventory turnover Sales

(based on cost of goods sold) (Rs. in 000’)
Existing 8 300,000
PI 7 422,500
PII 6 527,500
PIII 5 620,000

Required:
Which of the above policy would maximize the incremental rate of return on investment in
inventories? (13 marks)

(b) Robin Limited (RL) imports a high value component for its manufacturing process. Following
data, relating to the component, has been extracted from RL’s records for the last twelve
months:

Maximum usage in a month 300 units

Minimum usage in a month 200 units
Average usage in a month 225 units
Maximum lead time 6 months
Minimum lead time 2 months
Re-order quantity 750 units

Required:
Calculate the average stock level for the component. (05 marks)

(THE END)
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2011

A.1 Allocation of costs to

Basis Machine M1 Machine M2 Inspection Packing Total
cost centres
Area Occupied 5,500 4,800 12,000 15,000 37,300

Allocation of Electricity Area 330,000 288,000 720,000 900,000 2,238,000

Allocation of rent Area 220,000 192,000 480,000 600,000 1,492,000
Operational cost 5,500,000 3,200,000 - - 8,700,000
6,050,000 3,680,000 1,200,000 1,500,000 12,430,000

ALLOCATION OF COST TO PRODUCTS

Basis of Cost Allocation A B TOTAL
Units produced 5,600 7,500
Inspection time (hrs.) (5,600 x 15 min /60) & (7,500 x 12 min /60) 1,400 1,500 2,900
Packing time (hrs.) (5,600 x 12 min /60) & (7,500 x 10 min /60) 1,120 1,250 2,370
Units produced on Machine M1 (50% A and 65% B) 2,800 4,875 7,675
Units produced on Machine M2 (50% A and 35% B) 2,800 2,625 5,425

Cost Allocated
Machine M1 cost 2,207,166 3,842,834 6,050,000
Machine M2 cost 1,899,355 1,780,645 3,680,000
Inspection department cost 579,310 620,690 1,200,000
Packing department cost 708,861 791,139 1,500,000
5,394,692 7,035,308 12,430,000

A.2 (a) Cost Rs.000’

Units (x) (xy) (x2)
(y)
March 2011 75 900 67,500 5,625
April 2011 60 700 42,000 3,600
May 2011 65 850 55,250 4,225
June 2011 80 950 76,000 6,400
July 2011 105 1,200 126,000 11,025
August 2011 95 1,040 98,800 9,025
480 5,640 465,550 39,900

n(∑ xy) - (∑ x)(∑ y) 6 × 465,550 - 480 × 5,640

b (Variable cost per unit) = = = 9.57
n(∑ x ) − (∑ x)
2 2
6 (39,900) - (480) 2
(∑ y) − b(∑ x) (5,640 - 9.57 (480))
a (Fixed costs per month) = = = 174
n 6

Estimated cost to produce 110 units:

Y= a + b (x)
= 174 + 9.57 x 110 = Rs. 1,227

(b) Allocation of wages between direct and indirect labour

Direct Indirect Total

Rupees
Normal wages (47 × Rs. 25) 1,175 - 1,175
Overtime wages (4 × Rs. 25)(4 x 25 × 0.45) 100 45 145
Idle time wages (3 × Rs. 25) - 75 75
1,275 120 1,395
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2011

Reasons for the allocation:

Normal wages paid for production will be charged to production. The portion of the overtime
wages which is paid in excess of the normal wages should be charged to indirect labour as it
does not give extra production. Idle time wages are unproductive, therefore will be charged to
indirect labour.

A.3 (a) (i) Standard quantity for actual production at standard price:
Materials Quantity (kg) Price Per Kg(Rs.) Amount
A (30/400 × 192) 14.4 240 3,456
B (25/400 × 192) 12 320 3,840
26.4 7,296

(ii) Actual quantity at actual price:

Materials Quantity (kg) Price Per Kg(Rs.) Amount
A 16 230 3,680
B 13 308 4,004
29 7,684

(iii) Actual quantity used at standard price:

Materials Quantity (kg) Price Per Kg(Rs.) Amount
A 16 240 3,840
B 13 320 4,160
29 8,000

(iv) Standard mix of actual total input at standard price:

Materials Quantity (kg) Price Per Kg(Rs.) Amount
A (30/55 × 29) 15.82 240 3,796.80
B (25/55 × 29) 13.18 320 4,217.75
29 8,014.55

Direct Material Cost Variance

SC – AC = (i) – (ii) = 7,296 – 7,684 = Rs. 388 adverse

Direct Material Price Variance

AQ (SP-AP) = (iii) – (ii) = 8,000 – 7,684 = Rs. 316 favourable

Direct Material Usage Variance

SP (AQ-SQ) = (iii) – (i) = 8,000 – 7,296 = Rs. 704 adverse

Direct Material Mix Variance

SP (SQ-AQ) = (iv) – (iii) = 8,014.55 – 8,000 = Rs. 14.55 favourable

Direct Material Yield Variance

SR (SY-AY) = (iv) – (i) = 8,014.55 – 7,296 = Rs. 718.55 adverse
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2011

(b) Production Cost Budget

Actual (30-06-2011) Budget (30-09-2011)

Rupees
Direct material cost 120,000 132,000
Direct labour cost (W-1) 75,000 64,350
Prime Cost 195,000 196,350
Production Overhead:
Variable 70,000 80,080
Fixed 45,000 45,000
Total cost 310,000 321,430

W-1:
The labour hours will increase by 10%. Also there will be increase in labour hours as
production efficiency has decreased by 4%. Therefore, increased total labour hours will
be:

110 104
(75,000 ÷ 4) = 18,750 × × = 21,450
100 100
Rate is decreased to Rs. 3. Therefore, direct labour cost will be 21,450 x 3 = Rs. 64,350.

A.4 Hornbill Limited – Department-B

Cost of Production Report
For the Month of August, 2011

Quantity schedule: (in litres)

Work in process - opening -
Units received from department-A 55,000

Units transferred to department-C 39,500

Work in process - closing 10,500
Units lost in process – Normal loss (balancing figure) 5,000
55,000

Equivalent production statement (in litres)

Labour FOH
Units transferred to department-C 39,500 39,500
Work in process – closing (10,500 × 0.3335) (W-1) 3,500 3,500
Equivalent Units 43,000 43,000

Cost charged to department: Total Cost Unit Cost

Rupees
Cost from preceding department:
Transferred in during the month (55,000 × 1.80) 99,000 1.80

Cost added by the department:

Labour (W-2) 27,520 0.64
Factory overhead (W-2) 15,480 0.36
Total cost added 43,000 1.00
Adjustment for lost units (W-3) 0.18
Total cost to be accounted for 142,000 2.98
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2011

Cost Accounted for as Follows:

Transferred to department-C (39,500 × Rs 2.98) 117,710
Work in process - ending inventory:
Cost from department-1 [10,500 × (Rs. 1.8 + Rs. 0.18)] 20,790
Labour (3,500 × Rs. 0.64) 2,240
Factory overhead (3,500 × Rs. 0.36) 1,260 24,290
Total cost accounted for 142,000

W-1: Units in Process Equivalent

50% were 40% completed 0.20
20% were 30% completed 0.06
30% were 24.5% completed 0.0735
Weighted average 0.3335

W-2 : Unit cost based on equivalent units

Labour FOH
Equivalent units (Litres) 43,000 43,000
Cost (Rs.) 27,520 15,480
Cost per Unit (Rs.) 0.64 0.36

W-3: Adjustment for lost units (Normal loss):

Formula for Calculation:

Unit cost of lost units = (lost units × cost from department 1) / (units from department 1 - lost units)
= (5,000 × 1.80) / (55,000 units – 5,000 units) = Rs 9,000 / 50,000 = Rs 0.18

A.5 (i) Optimal Production Plan

Football Basketball Rugby ball Total
Leather required per unit (Sq. ft.)
38 ÷ 95 0.4
238 ÷ 340 0.7
255 ÷ 510 0.5
Budgeted sales volume 5,000 3,500 2,000
Total Leather required (Sq. ft.) 2,000 2,450 1,000 5,450
Maximum Leather available (Sq. ft.) 3,840

Football Basketball Rugby ball

Selling price 295 397 500
Less: Variable Costs
Leather 38 238 255
Direct labour @ Rs. 50/hr. 100 50 75
Variable Overheads 65 25 45
Total Variable Cost 203 313 375
Contribution per unit 92 84 125

Leather requirement (Sq. ft.) 0.4 0.7 0.5

Contribution per Sq. ft. 230 120 250
Ranking 2 3 1

(Sq. ft.)
Maximum Leather available 3,840
Less: Leather allocated to confirmed order:
Football (800 x 0.4 ) (320)
Basketball (1,300 x 0.7 ) (910)
Rugby ball (400 x 0.5 ) (200)
Unused balance of leather 2,410
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2011

Now, the scarce material will be allocated as per ranking.

Leather Balance
Product Volume Material used
requirements unused
2,410
Rugby ball 1,600 0.5 800 1,610
Football (balance) 4,025 0.4 1,610 -
Basketball Nil 0.7 - -

(ii) Profit arising from above production plan

Contribution
Product Units Contribution per unit
margin
Rugby ball 2,000 125 250,000
Football 4,825 92 443,900
Basketball 1,300 84 109,200
Total Contribution 803,100
Less: Fixed costs (Note 1) (66,000)
Profit 737,100

Note – 1 - Fixed overhead

Fixed costs
Product Units Direct labour Hour Fixed costs
per D.L Hour
Rugby ball 2,000 (2,000×1.5)=3,000 4 12,000
Football 5,000 (5,000×2)=10,000 4 40,000
Basketball 3,500 (3,500×1)=3,500 4 14,000
Total Fixed Costs 66,000

A.6 (a) Evaluation of inventory policies:

Rupees in '000
Particulars Existing PI PII PIII
Sales 300,000 422,500 527,500 620,000

(240,040
Cost of goods sold W-1 ) (338,040) (422,040) (496,040)
Contribution 59,960 84,460 105,460 123,960
Less: inventory carrying cost @
8% (2,400) (3,863) (5,627) (7,937)
Profit before tax 57,560 80,597 99,833 116,023
Tax @ 30% (17,268) (24,179) (29,950) (34,807)
Profit after tax 40,292 56,418 69,883 81,216
Incremental profit - 16,126 29,591 40,925
Incremental investment - 18,286 40,335 69,203
Incremental return - 88% 73% 59%

Recommendation: The incremental rate of return is maximised if inventory Policy PI

is adopted by the company.

W-1: Calculation of cost of goods sold:

Existing 300,000 80% 40 240,040

PI 422,500 80% 40 338,040
PII 527,500 80% 40 422,040
PIII 620,000 80% 40 496,040
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Autumn 2011

W-2: Level of investment in inventory & carrying cost:

Carrying
cost
Existing 240,040 / 8 30,005 @ 8% 2,400
PI 338,040 / 7 48,291 @ 8% 3,863
PII 422,040 / 6 70,340 @ 8% 5,627
PIII 496,040 / 5 99,208 @ 8% 7,937

) (b) Average stock level:

Average stock level = minimum level + ½ (reorder quantity)

As minimum level is not given it will be computed a follows:

Re-order level = maximum usage × maximum lead time
Re-order level = 300 × 6 = 1,800 units.
Minimum level = Re-order level – ( average usage × average lead time)
Minimum level = 1,800 – (225 × (6+2/2) = 900 units.
Therefore, Average stock level = 900 + (½ 750) = 1,275 units.

(THE END)
 The Institute of Chartered Accountants of Pakistan

Cost Accounting
Intermediate Examination 9 March 2012
Spring 2012 100 marks - 3 hours
Module D Additional reading time - 15 minutes

Q.1 Ore Limited (OL) is a manufacturer of sports bicycles. The company buys tyres from a local vendor.
Following data, relating to a pair of tyres, has been extracted from OL’s records:

Rupees
Cost 1,000
Storage cost based on average inventory 80
Insurance cost based on average inventory 60
Store keeper’s salary (included in absorbed overheads) 8
Cost incurred on final quality check at the time of delivery 10

Other relevant details are as under:

(i) The cost of inventory comprises of purchase price and absorbed overhead expenses of Rs. 100
per pair.
(ii) The annual demand for tyres is 200,000 pairs.
(iii) The ordering cost per order is Rs. 8,000.
(iv) The delivery cost per order is Rs. 3,000.
(v) OL’s rate of return on investment in inventory is 15%.
(vi) Recently the vendor has offered a quantity discount of 3% on orders of a minimum of 5,000
pairs.

Required:
Evaluate whether OL should avail the quantity discount from the vendor. (10 marks)

Q.2 Nitrate Limited (NL), producing industrial chemicals, has three production and two service
departments. The annual overheads are as follows:

Rupees in ‘000
Production departments:
A 56,000
B 50,000
C 38,000
Service departments:
X 16,500
Y 10,600

The service departments’ costs are apportioned as follows:

Production departments Service departments

A B C X Y
Service department X 20% 40% 30% - 10%
Service department Y 40% 20% 20% 20% -

Required:
Apportion costs of service departments using simultaneous equation method. (10 marks)
 Cost Accounting Page 2 of 4

Q.3 Magnesium Limited (ML) produces and markets a single product. The management is concerned
about the increasing rate of labour turnover in their factory and wants to assess the losses suffered by
ML due to high labour turnover.

Following information is available from ML’s records for the year ended 31 December 2011:

Sales price per unit Rs. 200

Direct material per unit 0.5 kg at Rs. 96 per kg
Direct labour hours paid 480,000 hours
Labour rate per hour Rs. 55
Actual hours per unit of product 1.5 hours
Variable overhead rate per labour hour Rs. 20
Fixed overheads Rs. 6,000,000

The direct labour hours include 9,000 hours spent on training and replacement, only 50% of which
were productive. Moreover, 12,000 hours of potential work could not be availed because of delayed
replacement. The cost incurred on appointments amounted to Rs. 200,000. ML has no beginning or
ending inventory.

Required:
Prepare a comparative statement showing net profit for the year and profit foregone as a result of
labour turnover; assuming the potential production loss could have been sold in the market at
prevailing prices. (15 marks)

Q.4 Chrome Limited (CL) manufactures two products A and B in small and large packs. Following
information has been extracted from CL’s business plan for the period ending 31 December 2012:

A B
Large pack Large pack
Contribution margin per unit (Rs.) 120 150
Ratio of quantities (small pack : large pack) 3:5 2:3
Annual production and sales (units) 250,000 225,000

Following information is also available:

(i) Product-A:

The variable cost of the large pack of product-A is 75% of its selling price.

The variable cost of the small pack of product-A is 67.5% of the variable cost of large pack.

The ratio of the selling price of both the packs of product-A are same as the ratio of their
quantities.

The annual sales of the small pack of product-A is estimated at 150,000 units.

(ii) Product-B:

The ratio of contribution margin to variable cost for the large pack of product-B is 2:3.

The selling price of the small pack of product-B is 64% of the price of its large pack.

(iii) Fixed overheads are estimated at Rs. 7,600,000 per month.

Required:
Assuming CL is able to sell the budgeted quantities of both packs of product-A and large pack of
product-B:
(a) How many units of the small pack of product-B should be sold to achieve break-even?
(10 marks)
(b) How many units of the small pack of product-B should be sold to earn a net income of
Rs. 10,530,000? Applicable tax rate for the company is 25%. (05 marks)
(c) Based on the results of (b) above, prepare a product wise and consolidated income statement
for the period ending 31 December 2012. (05 marks)
 Cost Accounting Page 3 of 4

Q.5 Bauxite Limited (BL) is engaged in the manufacture and sale of three products viz. Pentagon,
Hexagon and Octagon. Following information is available from BL’s records for the month of
February 2012:

Pentagon Hexagon Octagon

Sales price per unit (Rs.) 2,300 1,550 2,000
Material cost per Kg. (Rs.) 250 250 250
Labour time per unit (Minutes) 20 30 45
Machine time per unit (Hours) 4 2.5 3
Net weight per unit of finished product (Kg.) 6 4 5
Yield (%) 90 95 92
Estimated demand (Units) 10,000 20,000 9,000

Each worker is paid monthly wages of Rs. 15,000 and works a total of 200 hours per month. BL’s
total overheads are estimated at 20% of the material cost.

Fixed overheads are estimated at Rs. 5 million per month and are allocated to each product on the
basis of machine hours. 100,000 machine hours are estimated to be available in February 2012.

Required:
Based on optimum product mix, compute BL’s net profit for the month of February 2012.
(15 marks)

Q.6 Zinc Limited (ZL) is engaged in trading business. Following data has been extracted from ZL’s
business plan for the year ended 30 September 2012:

Sales Rs. ‘000

Actual:
January 2012 85,000
February 2012 95,000
Forecast:
March 2012 55,000
April 2012 60,000
May 2012 65,000
June 2012 75,000

Following information is also available:

(i) Cash sale is 20% of the total sales. ZL earns a gross profit of 25% of sales and uniformly
maintains stocks at 80% of the projected sale of the following month.
(ii) 60% of the debtors are collected in the first month subsequent to sale whereas the remaining
debtors are collected in the second month following sales.
(iii) 80% of the customers deduct income tax @ 3.5% at the time of payment.
(iv) In January 2012, ZL paid Rs. 2 million as 25% advance against purchase of packing machinery.
The machinery was delivered and installed in February 2012 and was to be operated on test run
for two months. 50% of the purchase price was agreed to be paid in the month following
installation and the remaining amount at the end of test run.
(v) Creditors are paid one month after purchases.
(vi) Administrative and selling expenses are estimated at 16% and 24% of the sales respectively and
are paid in the month in which they are incurred. ZL had cash and bank balances of Rs. 100
million as at 29 February 2012.

Required:
Prepare a month-wise cash budget for the quarter ending 31 May 2012. (10 marks)
 Cost Accounting Page 4 of 4

Q.7 (a) Platinum Limited (PL) manufactures two joint products Alpha and Beta and a by-product Zeta
from a single production process. Following information is available from PL’s records for the
month of February 2012:

Direct material 25,000 kg. @ Rs. 25 per kg.

Direct labour @ Rs. 15 per hour Rs. 432,000
Normal process loss 20% of the material consumed

Overheads are allocated to the products at the rate of Rs. 10 per direct labour hour. The normal
loss is sold as scrap at the rate of Rs. 8 per kg.

Following data relates to the output from the process:

Selling price per kg.

Product Output ratio
(Rs.)
Alpha 75% 95.0
Beta 15% 175.0
Zeta 10% 52.5

Alpha is further processed at a cost of Rs. 30 per unit, before being sold in the market. Joint
costs are allocated on the basis of net realisable value.

Required:
Compute the total manufacturing costs for February 2012. Also calculate the profit per kg. for
Alpha and Beta. (10 marks)

(b) Silver Limited (SL) produces and markets a single product. Following budgeted information is
available from SL’s records for the month of March 2012:

Volumes:
Sales 100,000 units
Production 120,000 units
Standard costs:
Direct materials per unit 0.8 kg at Rs. 60 per kg
Labour per unit 27 minutes at Rs. 80 per hour
Variable production overheads Rs. 40 per labour hour
Variable selling expenses Rs. 15 per unit
Fixed selling expenses Rs. 800,000

Fixed production overheads, at a normal output level of 105,000 units per month, are estimated
at Rs. 2,100,000. The estimated selling price is Rs. 180 per unit.

Required:
Assuming there are no opening stocks, prepare SL’s budgeted profit and loss statement for the
month of March 2012 using absorption costing. (05 marks)

Q.8 Explain briefly what is meant by the term inventory control. Describe, giving reasons, the method of
stock valuation which should be used in times of fluctuating prices. (05 marks)

(THE END)
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2012

A.1 PRESENT SCENARIO

Carrying cost per unit: Rupees
Storage costs 80
Insurance cost 60
Store keepers salary -
Cost relating to final quality check -
Opportunity cost of capital (per pair) [ Rs. 1,000 – 100 x 0.15] 135
275
COSTS ASSOCIATED WITH EACH ORDER
Ordering cost per order 8,000
Delivery cost per order 3,000
11,000

2( F )( S )
EOQ =
(C )
2 × 11,000 × 200,000 4,400,000,000
EOQ = =
275 275
16,000,000
EOQ = 4,000
Number of orders = 50

Total relevant costs under present scenario

 Purchase price 180,000,000
 Total ordering cost (50 × 11,000) 550,000
 Total carrying cost (4,000/2 × 275) 550,000
181,100,000

IF DISCOUNT IS AVAILED
Carrying cost per unit
Storage costs 80.00
Insurance cost 60.00
Opportunity cost of capital [ Rs. 900 x (1- 0.03) x 0.15] 130.95
270.95
Number of orders would be (200,000 / 5,000) 40

Total relevant costs:

 Purchase price [Rs. 900 x (1-.03) x 200,000] 174,600,000
 Total ordering cost [ Rs. 11,000 x 40] 440,000
 Total carrying cost [ Rs. 270.95 x 5,000 /2] 677,375
175,717,375

Conclusion:
Yes. Quantity discount should be availed.

A.2 Let X represent total overheads of department X

And Y total overheads of department Y
Since X received 20% of Y’s services
Thus X = 16,500 + 0.2 Y
Likewise Y = 10,600 + 0.1X

Page 1 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2012

Using substitution method of simultaneous equation

X = 16,500 + 0.2 (10,600 + 0.1X)
X = 16,500 + 2,120 + 0.02X
X – 0.02X = 18,620
0.98X = 18620
X = 19,000
Y = 10,600 + (0.1 × 19,000)
Y = 12,500

Overheads charged to production:

A B C
Allocated overheads 56,000 50,000 38,000
Share of X’s service (Rs. 19,000 × % served) 3,800 7,600 5,700
Share of Y’s service (Rs. 12,500 × % served) 5,000 2,500 2,500
64,800 60,100 46,200

A.3 Comparative statement showing actual profit and potential profit in absence of labour turnover:
Actual Potential
Rupees
Sales 63,400,000 65,600,000
Less: Costs
Direct material (15,216,000) (15,744,000)
Direct labour (26,400,000) (27,060,000)
Variable overhead (9,600,000) (9,840,000)
Fixed overheads (6,000,000) (6,000,000)
Cost incurred on Appointments (200,000) -
(57,416,000) (58,644,000)
Net Profit 5,984,000 6,956,000

Loss of profit due to labour turnover is Rs. 972,000

Working Notes:
W-1 Hours lost due to labour turnover:
Hours lost due to delayed replacement 12,000
Unproductive time due to training and replacement (9,000 × 50%) 4,500
Total hours lost 16,500

W-2 Productive labour hours:

Direct labour hours paid 480,000
Less: unproductive time of new workers (9,000 × 50%) (4,500)
Total productive hours 475,500
No. of units sold/produced (475,500/1.5) 317,000
Actual sales: [Total productive hours / hours per unit of product × Rs 200] 63,400,000
Add: sales foregone due to 16,500 unproductive hours [16,500 / 1.5 × 200] 2,200,000
Potential sales 65,600,000
No. of units that could have been sold (65,600,000 / 200) OR (317,000+11,000) 328,000
Direct material:
Actual [(475,500 /1.5) × 0.5 × 96] 15,216,000
Add: Material cost foregone [ 16,500 / 1.5 × 0.5 × 96] 528,000
15,744,000
Direct labour:
Actual [480,000 × 55] 26,400,000
Add: Labour cost foregone [ 12,000 × 55] 660,000
27,060,000
Variable overheads:
Actual [480,000 × 20] 9,600,000
Add: Variable cost foregone [ 12,000 × 20] 240,000
9,840,000
Page 2 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2012

A.4 (a) CALCULATION OF BREAK-EVEN POINT OF SALES IN UNITS:

Small pack of product-B
Required Contribution Margin
Rupees
Annual fixed cost (Rs. 7.6 million x 12) 91,200,000
Less: Estimated contribution margin
Product-A Large pack [250,000 units x Rs. 120] (30,000,000)
Product-A Small pack [150,000 units x Rs. 45] (6,750,000)
Product-B Large pack [225,000 units x Rs. 150] (33,750,000)
(70,500,000)
Required contribution from small pack of Product-B 20,700,000

Units
Break-even sales in units [Rs. 20,700,000 / Rs. 90) 230,000

Working Notes
Product-A
Rs. per unit
Large Pack
Sales price [120 / (1-0.75)] 480
Less: Variable cost [Rs. 480 × 75%] (360)
Contribution Margin 120
Small Pack
Sales price [Rs. 480 × 3/5] 288
Less: Variable cost [Rs. 360 × 67.5%] (243)
Contribution margin 45
Product-B
Large Pack
Sales price [Rs. 150/0.4] OR [225 + 150] 375
Less: Variable cost [ Rs. 375 – Rs. 150] OR [150 x 3/2] (225)
Contribution Margin 150
Small Pack
Sales price [Rs. 375 x 0.64] 240
Less: Variable cost [ Rs. 225 x 2/3] (150)
Contribution margin 90
(b) Sales in units of small pack of product-B to produce net income of Rs. 10,530,000.

Rupees
Desired net income 10,530,000
Applicable tax rate 25%
Income before tax [ Rs. 10,530,000 / (1- 0.25)] 14,040,000
Add: fixed cost [ 7,600,000 x 12] 91,200,000
Required total contribution margin from all packs of A and B 105,240,000
Less: Contribution margin of both packs of Product-A and large pack of B (70,500,000)
Contribution margin from Product-B 34,740,000
Contribution margin per unit of the small pack of product-B 90
Required number of units of small pack of product-B to earn desired income 386,000

Page 3 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2012

(c) Product-wise Income Statement

For the period ended December 31, 2012

Per unit Rupees

Sales
Product Variable Contribution
Price volume Sales Variable cost
cost margin
A-Large 480 360 250,000 120,000,000 90,000,000 30,000,000
A-Small 288 243 150,000 43,200,000 36,450,000 6,750,000
B-Large 375 225 225,000 84,375,000 50,625,000 33,750,000
B- Small 240 150 386,000 92,640,000 57,900,000 34,740,000
340,215,000 234,975,000 105,240,000

Consolidated Income Statement Rupees

Sales 340,215,000
Less: Variable Cost (234,975,000)
Contribution Margin 105,240,000
Less: Fixed Cost (91,200,000)
Budgeted profit before tax 14,040,000
Less: Tax @ 25% (3,510,000)
Budgeted profit after tax 10,530,000

A.5 Computation of net profit on the basis of optimum product mix:

Pentagon Hexagon Octagon

Selling price 2,300 1,550 2,000
Less: Variable Costs
Direct Material
(250 × 6 /0.9) 1,666.67
(250 × 4 /0.95) 1,052.63
(250 × 5 /0.92) 1,358.70
Direct Labour
[15,000 /200 × (20/60)] 25
[15,000 /200 × (30/60)] 37.5
[15,000 /200 × (45/60)] 56.25
Variable Overheads
[1666.66 × 20% - (Rs. 50 × 4 hrs)] 133.33
[1052.63 × 20% - (Rs. 50 × 2.5 hrs)] 85.53
[1358.70 × 20% - (Rs. 50 × 3 hrs)] 121.74
Total Variable Cost 1,825.00 1,175.66 1,536.69
Contribution per unit 475.00 374.34 463.31
Machine Hours required per unit 4.0 2.5 3.0
Contribution per Machine Hour 118.75 149.74 154.44
Ranking 3 2 1

Now, the scarce Hours will be allocated as per ranking.

Product Volume Hours required Hours used Balance unused

100,000
Octagon 9,000 3.0 27,000 73,000
Hexagon 20,000 2.5 50,000 23,000
Pentagon (Bal.) 5,750 4.0 23,000 -

Page 4 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2012

(i) Profit arising from above production plan

Product Units Contribution per unit Contribution margin
Octagon 9,000 463.31 4,169,790
Hexagon 20,000 374.34 7,486,800
Pentagon 5,750 475.00 2,731,250
Total Contribution 14,387,840
Less: Fixed costs (5,000,000)
Net Profit 9,387,840

A.6 Month-wise Cash Budget

Rs. in ‘000
Mar Apr May
Opening balance 100,000 109,204 104,828
Collections 83,800 68,800 59,400
Payments:
Purchases (47,250) (44,250) (48,000)
Selling expenses (13,200 ) (14,400) (15,600)
Administrative expenses (8,800) (9,600 ) (10,400 )
Packing machinery (3,000 ) (3,000) -
Tax withheld by 80% of customers @ 3.5% (2,346) (1,926 ) (1,663 )
(74,596 ) (73,176) (75,663)
Closing balance 109,204 104,828 88,565

Working notes:
W-1: Collections - Jan Sales 85,000
Feb Sales 95,000
Mar Apr May
Sales Gross 55,000 60,000 65,000
Collections:
Cash sales 11,000 12,000 13,000
1st month after sale 45,600 26,400 28,800
2nd month after sale 27,200 30,400 17,600
83,800 68,800 59,400

W-2 Purchases:
Sales Gross (June) 75,000

Feb Mar Apr May

Sales Gross 95,000 55,000 60,000 65,000
Cost of sales [75% of sales] A 71,250 41,250 45,000 48,750
Less: Opening stock [80% of cost of sale] B (57,000) (33,000) (36,000) (39,000)
Add: Closing stock [80% of next cost of
sales] C 33,000 36,000 39,000 45,000
Purchases (A+C–B) 47,250 44,250 48,000 54,750
Payment to creditors 47,250 44,250 48,000

A.7 (a) (i) Total cost of output:

Kg. Rupees
Direct material [25,000 x Rs. 25] 25,000 625,000
Direct Labour 432,000
Overheads [ 432,000 / Rs. 15 x Rs. 10] 288,000
1,345,000
Less: Sale of scrap [ 25,000 x 20% x Rs. 8] (5,000) (40,000)
Total cost of products 20,000 1,305,000
Page 5 of 6
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2012

(ii) Profit per kg of Alpha and Beta:

Rupees
Joint costs of products 1,305,000
Less: Sale of Zeta [20,000 x 10% x Rs. 52.5] (105,000)
1,200,000

NRV at Joint cost Total Profit

Product Kg. Output % Total NRV
split-off allocation profit per Kg.
Alpha 15,000 75% 95-30=65 975,000 780,000 195,000 13
Beta 3,000 15% 175 525,000 420,000 105,000 35
18,000 1,500,000 1,200,000

(b) Absorption costing: Rupees

Sales [100,000 x Rs. 180 ] 18,000,000
Less: Cost of sales:
Opening stock -
Add: Direct materials [ 0.8 x 120,000 x 60] 5,760,000
Direct labour [27/60 x 120,000 x 80] 4,320,000
Variable overheads [ 27/60 x 120,000 x 40] 2,160,000
Fixed overheads [ 2,100,000 / 105,000 x 120,000] 2,400,000
14,640,000
Less: Closing stock [14,640,000 / 120,000 x 20,000] (2,440,000)
Cost of sales (12,200,000)
Less: Over-absorbed overheads [ 2,100,000 / 105,000 x 15,000] (300,000)
Gross profit 6,100,000
Less: Selling expenses:
Variable [ 100,000 x 15] (1,500,000)
Fixed (800,000)
(2,300,000)
Net profit 3,800,000

A.8 Inventory control:

Inventory control can be defined as the system used in an organization to control its investment in
inventory/stocks. i.e. the overall objective of inventory control is to minimize, in total, the costs
associated with stock.

This includes; the recording and monitoring of stock levels, forecasting future demands and deciding
when and how many to order.

The method of stock valuation which should be used in times of fluctuating prices:
Weighted Average stock valuation method should be used in times of fluctuating prices because this
method is rational, systematic and not subject to manipulation. It is representative of the prices that
prevailed during the entire period rather than the price at any particular point in time. It is because of
this smoothening effect that this method should be used for stock valuation in times of fluctuating prices.

(THE END)

Page 6 of 6
 The Institute of Chartered Accountants of Pakistan

Cost Accounting
Intermediate Examination 7 September 2012
Autumn 2012 100 marks - 3 hours
Module D Additional reading time - 15 minutes

Q.1 (a) Following data is available from the records of Cortex Limited (CL) for the year ended 30
June 2012:
Rupees
Profit as per cost accounts 150,000
Under-recovery of production overheads 11,500
Under-recovery of administrative overheads 18,000
Over-recovery of selling and distribution overheads 21,000
Overvaluation of opening stock in cost accounts 9,000
Overvaluation of closing stock in cost accounts 4,500
Loss on sale of fixed assets 1,000
Interest expenses 2,500
Preliminary expenses written off 12,000
Income tax 8,000
Notional rent on own building 5,000
Transfer to reserve fund 10,000
Dividend received 3,000
Interest earned on deposits 1,500
Share transfer fees 2,000
Discount on early payments to suppliers 4,000

Required:
Compute CL’s financial profit after tax for the year ended 30 June 2012. (10 marks)

(b) Bile Limited (BL) produces and markets a single product Plasma. The projected levels of
demand of Plasma at various prices are as under:

Demand Selling price Cost per unit

(Units) per unit (Rs.) (Rs.)
1,000 55 29
1,100 53 28
1,200 52 27
1,300 49 26

Required:
Using tabular approach, calculate the marginal revenues and marginal costs for Plasma at different
levels of demand. Also determine the price at which BL could earn maximum profits. (05 marks)

Q.2 Jadeed Limited (JL) operates a multiple piece rate plan at its factory as follows:

(i) Basic piece rate of Rs. 3 per piece is paid up to 80% efficiency;
(ii) 120% basic piece rate where efficiency is more than 80% but less than or equal to 100%;
(iii) 130% basic piece rate for above 100% efficiency.

The workers are eligible for a “Guaranteed Day Rate “which is equal to 70% efficiency.

Required:
Compute the labour cost per piece at 10% intervals between 60% and 130% efficiency, assuming
that at 100% efficiency 80 pieces are produced per day. (10 marks)
 Cost Accounting Page 2 of 4

Q.3 (a) Stem Limited (SL) is engaged in the manufacture and sale of two products Petal and Leaf.
Following information is available from SL’s records for the year ended 30 June 2012:

Petal Leaf
Direct material 250 kg. @ Rs. 80 per kg. 125 kg. @ Rs. 128 per kg.
Direct labour @ Rs. 25 per hour 720 hours 960 hours
Sales Rs. 65,000 Rs. 80,000
Profit margin 25% on cost 30% on sales price

Factory overheads are allocated to the products as a percentage of direct labour whereas
administrative overheads are allocated as a percentage of direct material cost.

Required:
Compute the amount of factory and administrative overheads using simultaneous equations.
(10 marks)

(b) What is Idle Time? Discuss the treatment of idle time in cost accounting. (05 marks)

Q.4 Mehanti Limited (ML) produces and markets a single product Wee. Two chemicals Bee and Gee
are used in the ratio of 60:40 for producing 1 litre of Wee. ML follows perpetual inventory system
and uses weighted average method for inventory valuation. The purchase and issue of Bee and Gee
for May 2012, are as follows:

Date Bee Gee

Receipt Issue Receipt Issue
Litre Rate Litre Litre Rate Litre
02-05-2012 - - 450 110 -
05-05-2012 - - 560 - - 650
09-05-2012 - - 300 - - 300
12-05-2012 420 52 - 700 115 -
18-05-2012 - - 250 - - 150
24-05-2012 500 55 - 250 124 -
31-05-2012 - - 500 - - 450

Following further information is also available:

(i) Opening inventory of Bee and Gee was 1,000 litres at the rate of Rs. 50 per litre and 500
litres at the rate of Rs. 115 per litre respectively.
(ii) The physical inventories of Bee and Gee were 535 litres and 140 litres respectively. The
stock check was conducted on 01 June and 31 May 2012 for Bee and Gee respectively.
(iii) Due to contamination, 95 litres of Bee and 105 litres of Gee were excluded from the stock
check. Their net realisable values were Rs 20 and Rs. 50 per litre respectively.
(iv) 250 litres of Bee which was received on 01 June 2012 and 95 litres of Gee which was issued
on 31 May 2012 after the physical count were included in the physical inventory.
(v) 150 litres of chemical Bee was held by ML on behalf of a customer, whereas 100 litres of
chemical Gee was held by one of the suppliers on ML’s behalf.
(vi) 100 litres of Bee and 200 litres of Gee were returned from the production process on 31 May
and 01 June 2012 respectively.
(vii) 240 litres of chemical Bee purchased on 12th May and 150 litres of chemical Gee purchased
on 24th May 2012 were inadvertently recorded as 420 litres and 250 litres respectively.

Required:
(a) Reconcile the physical inventory balances with the balances as per book.
(b) Determine the cost of closing inventory of chemical Bee and Gee. Also compute the cost of
contaminated materials as on 31 May 2012. (15 marks)
 Cost Accounting Page 3 of 4

Q.5 Artery Limited (AL) produces and markets three products viz. Alpha, Beta and Gamma. Following
information is available from AL’s records for the manufacture of each unit of these products:

Alpha Beta Gamma

Selling price (Rs.) 66 88 106
Material-A (Rs.4 per kg) (Rs.) 8 0 12
Material-B (Rs.6 per kg) (Rs.) 12 18 24
Direct labour (Rs. 10 per hour) (Rs.) 25 30 25
Variable overhead based on:
− Labour hours (Rs.) 1.5 1.8 1.5
− Machine hours (Rs.) 1.6 1.4 1.2
Total (Rs.) 3.1 3.2 2.7
Other data:
Machine hours 8 7 6
Maximum demand per month (units) 900 3,000 5,000

Additional information:

(i) AL is also engaged in the trading of a fourth product Zeta, which is very popular in the
market and generates a positive contribution. AL currently purchases 600 units per month of
Zeta from a supplier at a cost of Rs. 40 per unit. In-house manufacture of Zeta would
require: 2.5 kg of material-B, 1 hour of direct labour and 2 machine hours.
(ii) Materials A and B are purchased from a single supplier who has restricted the supply of
these materials to 22,000 kg and 34,000 kg per month respectively. This restriction is likely
to continue for the next 8 months.
(iii) AL has recently accepted a Government order for the supply of 200 units of Alpha, 300 units
of Beta and 400 units of Gamma each month for the next 8 months. These quantities are in
addition to the maximum demand stated above.
(iv) There is no beginning or ending inventory.

Required:
Determine whether AL should manufacture Zeta internally or continue to buy it from the supplier
during the next 8 months. (10 marks)

Q.6 Fowl Limited (FL) manufactures two joint products X and Y from a single production process.
Raw material Benz is added at the beginning of the process. Inspection is performed when the units
are 50% complete. Expected loss from rejection is estimated at 10% of the tested units. Following
details are available for the month of May 2012:

Units Material Conversion cost

(Rs.) (Rs.)
Opening work in process 15,000 90,000 25,000
Transferred to finished goods:
− Product- X 50,000
547,125 228,875
− Product- Y 25,000
Loss due to rejection 12,500 - -
Closing work in process 10,000 - -

Additional information:
(i) Opening and closing work in process are 75% complete.
(ii) The normal loss is sold as scrap at the rate of Rs. 1.50 per unit.
(iii) Production costs are allocated to joint products on the basis of weight of output.
(iv) The company uses weighted average method for inventory valuation.

Required:
Cost of production report for the month of May 2012. (15 marks)
 Cost Accounting Page 4 of 4

Q.7 Zodiac Limited (ZL) produces a single product and has a maximum production capacity of
300,000 units per annum. Following information pertains to ZL’s estimated cost of production:

(i) Direct material Rs. 12 per unit.

(ii) Direct labour Rs. 8 per unit. However, based on guaranteed wages, the minimum total cost
of labour is Rs. 150,000 per month.
(iii) Variable overheads Rs. 6 per unit.
(iv) Semi-variable overheads Rs. 450,000 per annum up to 55% capacity. An additional amount
of Rs. 180,000 per annum is estimated for every 20% increase in capacity or a part thereof.
(v) Fixed overheads Rs. 750,000 per annum.

During the first five-months of the year 2012, ZL utilized 70% of its production capacity. However,
it is expected to utilize 92% capacity during the remaining seven-months. The actual selling price
during the first five-months was Rs. 34 per unit.

Required:
Compute selling price per unit which should be charged by ZL for the remaining seven-months to
earn a total profit of Rs. 936,000 for the year 2012. (10 marks)

Q.8 Tychy Limited (TL) is engaged in the manufacture of Specialized motors. The company has been
asked to provide a quotation for building a motor for a large textile industrial unit in Punjab.
Following information has been obtained by TL’s technical manager in a one-hour meeting with
the potential customer. The manager is paid an annual salary equivalent to Rs. 2,500 per eight-hour
day.

(i) The motor would require 120 ft of wire-C which is regularly used by TL in production. TL
has 300 ft of wire-C in inventory at the cost of Rs. 65 per ft. The resale value of wire-C is Rs.
63 and its current replacement cost is Rs. 68 per ft.
(ii) 50 kg of another material viz. Wire-D and 30 other small components would also be
required by TL for the motor. Wire-D would be purchased from a supplier at Rs. 10 per kg.
The supplier sells a minimum quantity of 60 kg per order. However, the remaining quantity
of wire-D will be of no use to TL after the completion of the contract. The other small
components will be purchased from the market at Rs. 80 per component.
(iii) The manufacturing process would require 250 hours of skilled labour and 30 machine hours.
The skilled workers are paid a guaranteed wage of Rs. 20 per hour and the current spare
capacity available with TL for such class of workers is 100 direct labour hours. However,
additional labour hours may be obtained by either:
− Paying overtime at Rs. 23 per hour; or
− Hiring temporary workers at Rs. 21 per hour. These workers would require 5 hours
of supervision by AL’s existing supervisor who would be paid overtime of Rs. 20 per
hour.
The machine on which the motor would be manufactured was leased by TL last year at a
monthly rent of Rs. 5,000 and it has a spare capacity of 110 hours per month. The variable
running cost of the machine is Rs. 15 per hour.
(iv) Fixed overheads are absorbed at the rate of Rs. 25 per direct labour hour.

Required:
Compute the relevant cost of producing textile motor. Give brief reasons for the inclusion or
exclusion of any cost from your computation. (10 marks)

(THE END)
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Autumn 2012

Ans. 1 (a) Cortex Limited (CL)

Reconciliation statement:
Rupees
Profit as per cost accounts 150,000
Add:
Over-recovery of selling and distribution overheads 21,000
Overvaluation of opening stock in cost accounts 9,000
Income excluded from cost accounts:
Dividend received 3,000
Interest earned on deposits 1,500
Share transfer fees 2,000
Discount on early payments to suppliers 4,000
Notional rent on own building 5,000
195,500
Less:
Under-recovery of production overheads (11,500)
Under-recovery of administrative overheads (18,000)
Overvaluation of closing stock in cost accounts (4,500)
Expenses excluded from cost accounts:
Loss on sale of assets (1,000)
Interest expenses (2,500)
Preliminary expenses written off (12,000)
Income tax (8,000)
Transfer to reserve fund -
Profit as per financial accounts 138,000

(b) Selling
Total Marginal Cost per Marginal
Demand price per Total Cost
Revenue Revenue unit Cost
unit
Units --------------------------------------------Rupees--------------------------------------------
1,000 55 55,000 55,000 29 29,000 29,000
1,100 53 58,300 3,300 28 30,800 1,800
1,200 52 62,400 4,100 27 32,400 1,600
1,300 49 63,700 1,300 26 33,800 1,400

Marginal revenue is greater than Marginal cost at 1,200 units but declines at the
level of 1300 units, therefore profits will be maximised at the selling price of Rs. 52
per unit.

Ans.2 Output Piece Wage Guaranteed 20% 30% Total Labour

Efficiency
per day @ Rs. Time Additional Additional Labour cost per
%
(units) 3/piece wages/day piece wage piece wage cost piece

Rs. Rs. Rs. Rs. Rs. Rs.

60 48 144 168 - - 168.00 3.50
70 56 168 168 - - 168.00 3.00
80 64 192 - - - 192.00 3.00
90 72 216 - 43.20 - 259.20 3.60
100 80 240 - 48.00 - 288.00 3.60
110 88 264 - - 79.20 343.20 3.90
120 96 288 - - 86.40 374.40 3.90
130 104 312 - - 93.60 405.60 3.90

Page 1 of 8
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Autumn 2012

Notes:
(i) As guaranteed time wage is equal to 70% efficiency, the time wages of Rs. 168 per
day is payable for efficiency up to 70%.
(ii) Normal piece wages are payable at 80% efficiency level.
(iii) For efficiency levels from 90% to 100%, 20% of the piece wages have been added.
(iv) For efficiency levels above 100%, 30% of the piece wages have been added.

Ans.3 (a) Assuming the percentage of factory overheads on direct labour is ‘x’ and the
percentage of administrative overheads on material cost ‘y’, then the total cost of the
two products Petal and Leaf will be as follows:
Petal Leaf
(Rs.) (Rs.)
Direct Materials 20,000 16,000
Direct labour 18,000 24,000
Prime Cost 38,000 40,000
Factory overhead (Direct labour × x) 18,000 x 24,000 x
Administrative overheads (Material cost × y) 20,000 y 16,000 y
Total Cost 38,000 + 18000x + 20000y 40,000 + 24000x + 16000y

Total cost on the basis of sales is:

Petal Leaf
(Rs.) (Rs.)
Sales 65,000 80,000
Less : Profit
Petal – 25% on cost or 20% on sales (13,000)
Leaf – 30% on sales (24,000)
Total Cost 52,000 56,000

Thus,
Total Cost of Petal is 38,000 + 18000x + 20000y = 52,000
or 18000x + 20000y = 14,000 …………………(i)

Total Cost of Leaf is 40,000 + 24000x +16000y = 56,000

or 24000x + 16000y = 16,000 …………………(ii)

Equation (ii) multiplied by 0.75 and after deducting from equation (i), we get

18000x + 20000y = 14,000

18000x ± 12000y = 12,000
−
8000y = 2,000
or y = 0.25 or 25%

Putting value of y in equation (i), we get

18000x + 20000 × 0.25 = 14,000
or 18000x = 14,000 − 5,000
or 18000x = 9,000
or x =0.5 or 50%
As the percentage of :
Factory overheads on direct labour = 50 % and
The percentage of administrative overheads on manufacturing cost = 25%

Page 2 of 8
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Autumn 2012

Therefore the amount of factory and administrative overheads would be:

Petal Leaf
Rupees
Factory overheads (Rs. 18,000 x 50%) & (Rs. 24,000 x 50%) 9,000 12,000
Administrative overheads (Rs. 20,000 x 25%) & (Rs. 16,000 x 25%) 5,000 4,000

(b) Idle Time:

It is a time during which no production is carried out because the worker remains
idle even though they are paid. Idle time can be normal idle time or abnormal idle
time. Normal idle time is inherent in any work situation and cannot be eliminated
whereas abnormal idle time arises due to abnormal factors like lack of coordination,
power failure, machine breakdowns, non-availability of raw materials, strikes and
lockouts, etc.

Treatment of idle time

Normal idle time is treated as a part of the cost of production. In the case of direct
workers, an allowance for normal idle time is built into the labour cost rate. In the
case of Indirect workers, normal idle time is spread over all the products or jobs
through the process of absorption of factory overheads.
Abnormal idle time cost is not included as a part of production cost and is shown as
a separate item in the costing profit and loss account.

Ans. 4
Chemical Bee: Litres
Stock as per records [ 1,000 + 420 + 500 – 560 – 300 – 250 – 500] 310
Add:
- 150 litres held on behalf of customer 150
- Inventory received after cut-off date taken in count 250
- Return from production process not recorded 100
Less:
- Adjustment for contaminated stock (95)
- Adjustment for incorrect recording (180)
Physical balance 535

Chemical Gee:
Stock as per records [ 500 + 450 + 700 + 250 – 650 – 300 – 150 – 450] 350
Add:
- Inventory issued after stock count 95
- No adjustment for stock returned after month end 0
Less:
- 100 litres were held by supplier on ML's behalf. (100)
- Adjustment for contaminated stock (105)
- Adjustment for incorrect recording (100)
Physical balance 140

Cost of chemical Bee:

Stock as per records 310
- Return from production process not recorded 100
- Adjustment for contaminated / damaged stock (95)
- Adjustment for incorrect recording (180)
Actual quantity present in stock 135

Page 3 of 8
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Autumn 2012

Rate (W-1) 54.23

Cost of closing stock as at 31 May 2012 Rs. 7,321
W-1: Working for rate of closing stock of chemical Bee:
Litres Rate Amount
Balance as of 09-05-2012 [1000 – 560 – 300] 140 50.00 7,000
Add: Actual purchases on 12-05-2012 240 52.00 12,480
380 51.26 19,480
Less: Issuance on 18-05-2012 (250) 51.26 (12,816)
130 51.26 6,664
Add: Actual purchases on 24-05-2012 500 55.00 27,500
630 54.23 34,164

Cost of chemical Gee:

Stock as per records 350
- Adjustment for contaminated / damaged stock (105)
- Adjustment for incorrect recording (100)
- Actual quantity present in stock 145
Rate (W-2) 116.93
16,955

W-2: Working for rate of closing stock of chemical Gee:

Litres Rate Amount
Balance as of 1-5-2012 500 115 57,500
Add: purchases on 2-5-2012 450 110 49,500
950 112.63 107000
Less: Issued on 5-5-12 and 9-5-12 (650+300) 950 112.63 107000
0 0 0
Add: purchases on 12-5-2012 700 115.00 80,500
Less: Issuance on 18-05-2012 (150) 115.00 (17,250)
550 115.00 63,250
Add: Actual purchases on 24-05-2012 150 124.00 18,600
700 116.93 81,850

Contaminated chemical Bee 95 20 1,900

Contaminated chemical Gee 105 50 5,250

Ans.5 The internal manufacturing cost of Zeta would be as follows:

Rs. per unit

Direct material-B (2.5 kg @ Rs. 6/kg) 15.0
Direct labour (1 hours @ Rs. 10/hour) 10.0
Variable overhead W-1
Direct labour (1 hour @ Rs. 0.60/hour) 0.6
Machine hours (2 hours @ Rs. 0.20/hour) 0.4
Total 26.0

The buying price of the component is Rs. 40 per unit so if resources are readily available
the company should manufacture the component. However, due to the scarcity of
resources during the next 8 months the contribution earned from the component needs to
be compared with the contribution that can be earned from the other products.

Page 4 of 8
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Autumn 2012

W-1:
Using Alpha (though any product could be used) the variable overhead rate per hour can
be calculated:

Labour related variable overheads per unit = Rs 1.5

Direct labour hours per unit = Rs 25 / Rs 10 = 2.5 hours
Labour related variable overhead per hours = Rs. 1.5 / 2.5 hour = Rs 0.60 per hour

Machine related variable overhead per hour = Rs. 1.6 / 8 hour = Rs 0.2 per hour

Both material-A and material-B are limited in supply during the next 8 months, but
calculations are required to determine whether this scarcity affects the production plans of
AL. The resources required for the maximum demand must be compared with the
resources available to determine whether either of the materials is a binding constraint.

Total quantity of each product to be manufactured:

Government order Market demand Total
------------------------------Units------------------------------
Alpha 200 900 1,100
Beta 300 3,000 3,300
Gamma 400 5,000 5,400
Zeta 0 600 600

All figures in kg:

Resource Available Requirement Alpha Beta Gamma Zeta

Direct material-A 22,000 18,400 2,200 0 16,200 0
Direct material-B 34,000 35,200 2,200 9,900 21,600 1,500

It can be seen from the above that the scarcity of material-B is a binding constraint and
therefore the contributions of each product and the component per kg of material-B must
be compared.

Alpha Beta Gamma Zeta

Rupees
Contribution 17.9 36.8 42.3 14.0
Contribution /kg of material-B 8.95 12.27 10.58 5.60

Rank 3 1 2 4

AL should manufacture 120 units of Zeta and continue to purchase 480 units from the
market.

Ans.6 Fowl Limited (FL)

Cost of Production Report
For the month ended 31 May 2012

Quantities
Units to be accounted for:
Opening Work in process 15,000
Input units during the month (W-1) 82,500
97,500

Units accounted for:

Completed and transferred to finished goods 75,000
Page 5 of 8
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Autumn 2012

Loss due to rejection 12,500

Closing Work in process 10,000
97,500

W-1: Calculation of input units:

Units produced - X 50,000
Units produced - Y 25,000
Wastage 12,500
Closing W.I.P 10,000
97,500
Less: Opening W.I.P (15,000 )
Input units during the month 82,500

Normal loss units [as the opening units are already tested therefore
normal loss is on input units only] [82,500 × 10%] 8,250
Abnormal loss units [12,500 − 8,250] 4,250

Equivalent Units of Production: (Weighted Average) Material Conversion

Transferred to finished goods:
Product - X 50,000 50,000
Product - Y 25,000 25,000
Abnormal loss 4,250 2,125
Closing inventory 10,000 7,500
A 89,250 84,625

Cost incurred: Rs. Rs.

Opening W.I.P 90,000 25,000
During the month (Product X and Y) 547,125 228,875
Less: Sale of normal loss (8,250 × Rs. 1.5) (12,375) -
B 624,750 253,875
Total cost to be accounted for (624,750 + 253,875) 878,625
Rate per unit of equivalent product B÷A 7.00 3.00
Total per unit cost Rs. (7 + 3) 10

Cost accounted for: Rs.

Transferred out (75,000 × Rs. 10) 750,000
Abnormal loss:
- Material (4,250 × Rs. 7) 29,750
- Conversion cost (2,125 × Rs. 3) 6,375
36,125
Closing work in process
- Material (10,000 × Rs. 7) 70,000
- Conversion cost (10,000 × 75% × Rs. 3) 22,500
92,500
Total cost accounted for 878,625

Page 6 of 8
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Autumn 2012

Ans.7 Zodiac Limited (ZL)

Statement of cost and sales for the year 2012

Maximum production capacity = 300,000 units per annum

Particulars 5 months 7 months

Capacity utilized 70% 92%
300,000 × 5 × 70% 300,000 × 7 × 92%
Production 12 12
=87,500 units =161,000 units

Rs. Rs.
Sales @ Rs. 34 per unit 2,975,000
Direct materials @ Rs. 12 per unit (1,050,000) (1,932,000)
Direct wages @ 8 per unit or Rs. 150,000 per
month whichever is higher (750,000) (1,288,000)

Overheads
Fixed (5:7) (312,500) (437,500)
Variable @ Rs. 6 per unit (525,000) (966,000)
Semi variable (W-1) (262,500) (472,500)
Total Cost (2,900,000) (5,096,000)
Profit during first 5 months 75,000
Desired profit during next 7 months
(Rs. 936,000 – Rs. 75,000) 861,000
Sales required for next 7 months 5,957,000

Total sales required for last 7 months

Required selling price per unit for last 7 months =
Units produced during last 7 months

W-1: Semi-variable overheads

(a) For first 5 months at 70% capacity = Rs. (450,000 + Rs. 180,000) × 5/12
= Rs. 262,500
(b) For remaining 7 months at 92% capacity = Rs. (450,000 + Rs. 360,000) × 7/12
= Rs. 472,500

Ans.8 Tychy Limited (TL)

Note Rs.
Technical manager – meeting 1 NIL
Wire – C 2 8,160
Wire – D 3 600
Components 4 2,400
Direct labour 5 3,250
Machine running cost 6 450
Fixed overhead 7 NIL
Total relevant cost 14,860

Page 7 of 8
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Autumn 2012

Notes:
1. In case of technical manager’s meeting with the potential client, the relevant cost
is NIL because it is not only a past cost but also the manager is paid an annual
salary and therefore TL has incurred no incremental cost on it.
2. Since wire-C is regularly used by TL, its relevant value is its replacement cost. The
historical cost is not relevant because it is a past cost and the resale value is not
relevant since TL is not going to sell it.
3. Since wire-D is to be purchased for the contract therefore its purchase cost is
relevant. TL only requires 50 kg of wire-D but due to the requirement of minimum
order quantity TL will be purchasing 60 kg of the material and since TL has no
other use for this material, the full cost of purchasing the 60 kg is the relevant cost.
4. Since the components are to be purchased from the market at a cost of Rs. 80
each. Therefore, the entire purchase price is a relevant cost.
5. The 100 hours of direct labour are presently idle and hence have zero relevant
cost. The remaining 150 hours are relevant. TL has two choices: either use its
existing employees and pay them overtime at Rs. 23 per hour which is a total cost
of Rs. 3,450: or engage the temporary workers which would cost TL Rs. 3,250
including supervision cost of Rs. 100. The relevant cost is the cheaper of the two
alternatives i.e. Rs. 3250.
6. The lease cost of machine will be incurred regardless of whether it is used for the
manufacture of motors or remains idle. Hence, only the incremental running cost
of Rs. 15 per hour is relevant.
7. Fixed overhead costs are incurred whether the work goes ahead or not so it is not
a relevant cost.

(THE END)

Page 8 of 8
 The Institute of Chartered Accountants of Pakistan

Cost Accounting
Intermediate Examination 8 March 2013
Spring 2013 100 marks - 3 hours
Module D Additional reading time - 15 minutes

Q.1 (a) What do you understand by the terms “Scrap”, “Defectives” and ‘Spoilage”? Briefly
describe the accounting treatment of scrap and defective units. (10)

(b) Replica Limited (RL) produces and markets a single product. The product requires a
specialised component P which RL procures from a supplier using economic order
quantity. Following information is available from RL’s records for component P:

Price of component P Rs. 150 per unit

Cost of placing an order Rs. 50
Carrying cost per unit per annum 10% of purchase price
Total of holding and ordering costs Rs. 3,000 per annum
Normal lead time 12 days
Safety stock Nil

Assume 300 working days in a year.

Required:
(i) Calculate the economic order quantity (EOQ) and re-order level of component P.
(ii) What would be your advice to the company, if the supplier offers a 2% price
discount on purchases in lots of 3,000 components? (10)

Q.2 Hulk Limited (HL) produces and markets a single product. The company uses standard
costing system. Following is the standard cost card per unit of the finished product:

Direct material 2.8 kg at Rs. 6.75 per kg

Direct labour Rs. 150 per hour
Variable production overheads Rs. 12 per direct labour hour
Fixed production overheads Rs. 18 per direct labour hour

The standard labour hours required for producing one unit of finished product is 30 minutes
whereas HL’s standard operating capacity per month is 15,000 hours.

Actual results for the month of February 2013 were as under:

Direct material @ Rs. 6.25 per kg Rs. 504,000

Direct labour Rs. 160 per hour
Variable production overheads Rs. 175,000
Fixed production overheads Rs. 17 per direct labour hour

Actual labour hours consumed by HL for producing 27,000 units was 33 minutes per unit of
finished product.

Required:
(a) Compute material, labour and overhead variances. Use four variance method. (14)
(b) List any four causes of unfavourable material price variance. (02)
 Cost Accounting Page 2 of 4

Q.3 Z Limited (ZL) manufactures various products. Following information relating to product-A
has been extracted from ZL’s business plan for the year ending 30 June 2014:

Direct material per unit 12 kg at Rs. 2 per kg

Average labour rate per worker Rs. 56 per day
Average working hours in a day 8 hours
Average labour efficiency 65%
Standard time required for each unit of product-A 2.6 hours
Variable overheads Rs. 10 per labour hour
Fixed overheads 2% of direct material cost
Annual production 25,000 units

In order to improve the production efficiency and reduce cost of conversion, the
management has sought suggestions from the workers. It has announced a reward equal to
three months savings in labour cost to the worker, whose suggestion would be accepted.

In response to management’s offer, one of the workers has suggested to use electric cutter in
the manufacturing process. The proposal is expected to reduce standard time for making
each unit of product-A by 20%. It would also improve labour efficiency from 65% to 80%.
The cutter can be purchased at a cost of Rs. 15,000 and is estimated to have an effective life
of one year.

Required:
Assuming there is no beginning or ending inventory of product-A:
(a) Calculate the amount of reward payable to the worker as announced by ZL. (06)
(b) Prepare a statement showing annual cost of production and net savings (if any) in total
cost of production of product-A. (05)

Q.4 Neutron Limited (NL) is engaged in the business of manufacture and supply of plastic toys.
The company uses 5 identical injection moulding machines in its machining department
which were acquired at a cost of Rs. 1,000,000. These machines have a useful life of 10 years
and are manned by three dedicated operators. Following information has been extracted
from NL’s records for a period of six months:

Normal time available per month per operator 220 hours

Absenteeism without pay per month per operator 20 hours
Leave with pay per month per operator 25 hours
Average idle time per month per operator 15 hours
Average labour rate per hour per operator Rs. 35
Average estimated rate of production bonus 15% of labour cost
Fuel and power Rs. 118,000
Indirect labour Rs. 115,000
Lighting and electricity Rs. 95,000

Other expenses related to the department are as follows:

Repair and maintenance per annum 6% of machine cost

Insurance Rs. 140,000 per annum
Sundry expenses Rs. 131,800 per annum
Allocated administrative overheads Rs. 120,000 per annum

Required:
Calculate a machine hour rate (inclusive of operators’ wages) for the machining department. (10)
 Cost Accounting Page 3 of 4

Q.5 Colon Limited (CL) manufactures two joint products Pollen and Stigma in the ratio of
65:35. The company has two production departments A and B. Pollen can either be sold at
split off point or can further be processed at department-B and sold as a new product Seeds.
Stigma is sold without further processing. Following information relating to the three
products is available from CL’s records:

Pollen Stigma Seeds

---------------Rupees---------------
Sales price per kg 90 300 125
Total selling expenses 135,000 306,000 180,000

Following further information relating to the two departments is available:

Department A Department B
Material X 75,000 kg at Rs. 60 per kg -
Material Y - 12,000 kg at Rs. 25 per kg
Labour @ Rs. 150 per hour 12,000 hours 3,600 hours
Variable overheads Rs. 125 per labour hour Rs. 65 per labour hour
Fixed overheads Rs. 100 per labour hour Rs. 50 per labour hour
Material input output ratio 100:88 100:96

Material is added at the beginning of the process. Joint costs are allocated on the basis of net
realisable value at split off point.

Required:
(a) Calculate the joint costs and apportion them to the two products. (10)
(b) Advise CL whether it should produce Seeds or sell Pollen without further processing. (06)

Q.6 Altar Limited (AL) produces and markets a single product. Following information is
available from AL’s records for the month of February 2013:

Sales price Rs. 26 per unit

Direct material (2 kg at Rs. 5 per kg) Rs. 10 per unit
Direct labour Rs. 2 per unit
Variable overheads Rs. 4 per unit
Fixed overheads Rs. 3.50 per unit
Selling expenses Rs. 295,000
Administration expenses Rs. 101,400
Production (Good units) 175,000 units
Closing inventory 30,000 units

Additional information:
(i) Inspection is performed at the end of production and defective units are estimated at
20% of the inspected units. The defective units are sold as scrap at Rs. 5 per unit.
(ii) Fixed overheads per unit are calculated on the basis of good units produced.
(iii) As compared to last month, selling expenses in February 2013 have decreased by
Rs. 42,000.
(iv) In January 2013, AL produced and sold 180,000 units.

Required:
Assuming there was no inventory at the beginning of February 2013, calculate break-even
sales in quantity for the month of February 2013. (12)
 Cost Accounting Page 4 of 4

Q.7 Qamber Limited (QL) is engaged in the manufacture and sale of textile products. In
February 2013 QL received an order from JCP, a chain of stores, for the supply of 11,000
packed boxes of its products per month at an agreed price of Rs. 8,000 per box. The boxes
would be supplied every month for a period of one year. It was further agreed that:

Each box would contain a pillow cover, a bed sheet and a quilt cover.

QL would be solely responsible for the quality of supplied products whether they are
being manufactured at its own facility or outsourced to third party, either wholly or
partially.

JCP would provide its logo and printed materials for the packing of these boxes.

Following information is available for the manufacture of each unit of these products:

Products
Pillow Bed Quilt
Cover Sheet Cover
Cloth required (Meters) 1 4 5
Cost of cloth per meter (Rs.) 200 300 400
Direct labour per meter (Minutes) 30 15 18
Machine time (Minutes) 30 75 120
Variable overheads per machine minute (Rs.) 5 4 3.75
Outsourcing cost (Rs.) 750 2,000 3,500

For in-house completion of the above order, a total of 45,000 machine hours and 25,500
labour hours are estimated to be available each month. The labourers are paid at a uniform
rate of Rs. 400 per hour. The cost incurred on quality check, before supply of the boxes to
JCP, is estimated at Rs. 300 per box. Fixed overheads are estimated at Rs. 10,000,000 per
month.

Required:
Calculate net profit for the month, assuming QL wants to produce as many products as
possible within the available resources, and outsource the rest to a third party. (15)

(THE END)
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2013

Ans.1 (a) Scrap:

Scrap is the discarded material in the production process/ Incidential residue that
may be obtained from manufacture. Scrap cannot be put back into production for
the same purpose as before but may be usable for a different purpose or production
process, or sold to outsiders for a nominal amount.

Defectives:
 Units that do not meet production standards and must be processed further in
order to be saleable along with good units, or sold as irregulars.
 Defectives can be classified as normal defective and abnormal defective.

Spoilage:
 Spoiled Units in manufacturing process cannot normally be made into
standard finished units without incurring uneconomical cost. They do not
meet production standards and are either sold for their salvage value or
discarded. Spoiled units are taken out of the production process and no further
work is performed on them.
 Spoilage can either be normal or abnormal.

Accounting treatment for scrap:

 No entry is normally made on the books when scrap is returned to the
materials inventory.

 Allocated (applied) to specific job:

When scrap is relatively significant and is identifiable with the process or job,
the cost of scrap will be transferred to scrap account and any realisation from
sale of such scrap will be credited to the job or process account and any
unrecovered balance in the scrap account will be transferred to profit and loss
account.

 Allocated (applied) to all jobs:

When scrap cannot be linked to a particular product / job / process, the value
of scrap (i.e. net scrap value after deducting any sale related expenses) should
be deducted from the overheads or from the materials cost.

Accounting treatment for defective units:

The accounting treatment of defectives is as follows:

Normal defective:
 Cost of rectification of normal defect is charged to good units.
 If defect can be identified with specific job, rework cost should be charged to
work in process inventory for the specific job.
 If defect cannot be identified with specific job / process, rework cost of
normal defect should be charged to production overheads.

Abnormal defective:
 Cost of rectification of abnormal defective units should be transferred to
income statement as a period cost.

Page 1 of 7
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2013

(b) (i) Computation of EOQ

Where EOQ = Economic Order Quantity

A = Annual demand
OC = Ordering cost per order
CC = Carrying cost per unit per annum

Annual usage of component P is computed as follows:

√
√
√

√ √

Computation of re-order level:

Where,

(ii) Advise as to the acceptance of offer: (Lot size is 3,000 units)

Rupees
Ordering cost [(6,000 ÷ 3,000) × Rs. 50] 100
Carrying cost [3,000 units ÷ 2 × Rs. 14.7] 22,050
Total cost 22,150
Less: Present cost of ordering and holding inventory (3,000)
Extra cost 19,150
Purchase discount [6,000 units × Rs. 150 × 2%] 18,000
Additional cost if purchase discount is accepted 1,150

Advise: Hence, purchase discount offer cannot be accepted

Page 2 of 7
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2013

Ans.2 (a) Material Variances (Actual Production: 27,000 units)

Standard Qty of raw material per unit of finished goods 2.8 kg

Standard price of raw material per kg Rs. 6.75
Actual price of raw material per kg Rs. 6.25
Standard Qty of raw material at actual production [27,000 × 2.8] 75,600kg
Actual Qty of raw material used [ 504,000 ÷ Rs. 6.25] 80,640kg
Direct material usage variance [SP (AQ-SQ)] [6.75 (80,640 – 75,600] Adv. Rs. (34,020)
Direct material price variance [AQ (SP-AP)] [80,640 (6.75-6.25)] Fav. Rs. 40,320

Labour Variances
Standard time allowed per unit of finished goods 30 minutes
Standard direct labour rate per hour Rs. 150
Actual rate per hour Rs. 160
Standard hours allowed for actual production [27,000 × 30/60] 13,500 hours
Actual hours worked for actual production [ 27,000 × 33/60] 14,850 hours
Direct labour efficiency variance [ SR (SH-AH] [150 (13,500 – 14,850)] Adv. Rs. (202,500)
Direct labour rate variance [ AH (AR-SR] [14,850 (160-150)] Adv. Rs. (148,500 )

Variable overhead variances Rupees

Actual variable overheads (i) 175,000
Variable overheads based on actual hours at std. rate [14,850 × Rs. 12] (ii) 178,200
Variable overheads based on std. hours at std. rate [13,500 × Rs. 12] (iii) 162,000
Variable OH efficiency variance [VOH at AH – VOH at SH] [(ii) – (iii)] Adv. (16,200)

Fixed overhead variances

Actual fixed overheads [AH × AR] [14,850 × Rs. 17] (iv) 252,450
Fixed overheads based on actual hours at std. rate [14,850 × Rs. 18] (v) 267,300
Fixed overheads based on std. hours at AP at std. rate [13,500 × Rs. 18] (vi) 243,000
Budgeted fixed overheads [ Std. capacity x std. rate] [15,000 × 18] (vii) 270,000
Fixed overheads efficiency variance [FOH at AH – FOH at SH] [ (v) – (vi)] Adv. (24,300)
Factory overhead spending variance:
Actual fixed and variable overheads [ (i) + (iv)] [ 175,000 + 252,450] 427,450
Less: Budgeted overheads:
Variable overheads based on actual hours at std. rate [14,850 × Rs. 12] (178,200)
Budgeted fixed overheads [ Std. capacity x std. rate] [15,000 × 18] (270,000)
(448,200)
Fav. 20,750
Idle capacity variance / Production volume variance [(vi) – (vii)] Adv. (27,000)

(b) Unfavorable price variance may be caused by:

 inaccurate standard prices

 inflationary cost increases
 scarcity in raw material supplies resulting in higher prices
 Purchasing department inefficiencies.
 Purchase of better quality products

Page 3 of 7
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2013

Ans.3 (a) Computation of Amount of reward Payable to the worker:

Standard time = 2.6 hrs.

Labour efficiency = 65%
Direct labour hours required =2.6 hrs. × 100/65 = 4 hrs.
For 25,000 units time required = 25,000 × 4 hrs. = 100,000 hrs.
Labour cost @ Rs. 7 per hour [56/8] = Rs. 700,000
Standard time after use of cutter = 2.6 hrs. – 0.52 hrs. = 2.08 hrs.
labour hours required per unit at
improved efficiency = 2.08 hrs. × 100/80 = 2.6 hrs.
Total labour hours required = 25,000 × 2.6 hrs. = 65,000 hrs.
Annual saving in time = 100,000 – 65,000 = 35,000 hrs.
Cost of annual saving in time = 35,000 hours × Rs.7 = Rs. 245,000
reward equal to 3 months saving in labour cost [245,000/12 × 3] = Rs. 61,250

(b) Annual Cost of Production and Savings to the ZL:

Before After
Particulars Suggestion Suggestion
(100,000 hrs.) (65,000 hrs.)
Direct materials (25,000 × 12 × 2) 600,000 600,000
Direct labour (@ Rs. 7 per hour) 700,000 455,000
Variable overheads (@ Rs. 10 per hour) 1,000,000 650,000
Fixed overheads (@ 2% of direct material cost) 12,000 12,000
Cost of cutter - 15,000
Total cost 2,312,000 1,732,000

(Rs.)
Gross savings in cost [2,312,000 – 1,732,000] 580,000
Less: reward payable to worker (61,250)
Net savings in cost 518,750

Ans.4 Computation of Machine Hour Rate Rupees

Operator’s wages (W-1) 126,000
Production bonus (15% of labour cost) 18,900
Fuel and power consumed 118,000
Indirect labour 115,000
Lighting and electricity consumed 95,000
Repair and maintenance [ 6% of machine cost of Rs. 1,000,000/2] 30,000
Insurance [Rs. 140,000 / 2] 70,000
Depreciation [Rs. 1,000,000 / 10 / 2] 50,000
Sundry expenses [Rs. 131,800 / 2] 65,900
Allocated administrative overheads [Rs. 120,000 / 2] 60,000
Total overheads of machining department 748,800

Rs. 260 per machine hour

Page 4 of 7
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2013

Working: W-1
Total utilizable hours p.m. [160 hrs. × 3 operators × 6 months] (W 1.1) 2,880hours
Hours per month for which wages are paid to an operator [220 hrs. – 20 hrs.] 200 hours
Total wages paid to operators [200 hrs. × 3 operators × 6 months × Rs. 35] Rs. 126,000
W 1.1 Hours
Normal hours available per month per operator 220
Less: Absenteeism (20)
Leave hours (25)
Idle time (15)
Utilizable hours per operator per month 160

Ans.5 (a) Calculation of Joint costs:

Dept. A
Rupees in
‘000
Material X [75,000 × Rs. 60] 4,500
Labour [12,000 × Rs. 150] 1,800
Variable overheads [12,000 × Rs. 125] 1,500
Fixed overheads [12,000 × Rs. 100] 1,200
Total cost 9,000

Apportionment of joint costs:

Input of material X in dept. A 75,000 kg
Yield (88% of input material X) 66,000 kg
Ratio of output for Pollen and Stigma 65:35
Quantity of Pollen produced at split off point (66,000 × 65/100) 42,900 kg
Quantity of Stigma produced at split off point (66,000 × 35/100) 23,100 kg

Statement showing apportionment of joint costs: Pollen Stigma

Rupees in ‘000
Sales [42,900 × 90] and [23,100 × 300] 3,861 6,930
Less: Selling expenses (135) (306)
Net realisable value 3,726 6,624
Ratio 36% 64%

Allocation of joint costs [9,000 × 36%] and [ 9,000 × 64%] 3,240 5,760

(b) Advise to CL whether it should produce Seeds or sell Pollen without further processing:

Computation of output of Seeds:

Transfer of Pollen to dept. B for further processing 42,900 kg
Input of material Y in dept. B 12,000 kg
Total material in dept. B 54,900 kg
Yield (96% of input material) [54,900 × 96%] 52,704 kg
Statement showing profit earned from Seeds: Seeds
Rs. in ‘000
Sales [52,704 × 125] 6,588
Less: Expenses
 Joint costs (3,240)
 Cost incurred in dept. B (W-1) (1,254)
 Selling expenses (180)
Profit from Seeds 1,914
Page 5 of 7
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2013

If Pollen is sold without further processing, then the profitability would be as under:
Net realisable value at split off point [(42,900 × 90) – 135,000 ] 3,726
Less: Joint costs (3,240)
Profit from Pollen 486
Advise: The company’s profit has increased by Rs. 1,428,000 (i.e. Rs. 1,914,000 – Rs.
486,000) on further processing of Pollen into Seeds. Therefore, it is advisable to CL to
further process Pollen into Seeds.

W-1: Cost incurred in Department B

Dept. B
Rupees in
‘000
Material Y [12,000 × Rs. 25] 300
Labour [3,600 × Rs. 150] 540
Variable overheads [3,600 × Rs. 65] 234
Fixed overheads [3,600 × Rs. 50] 180
Total cost 1,254

Ans.6 Break even sales in quantity for the month of February 2013:
Units produced [175,000 ÷ 0.80] 218,750
Less: Defective units [218,750 – 175,000] OR [ 218,750 × 20%] (43,750)
Good units produced 175,000
Less: closing inventory (30,000)
Number of units sold 145,000

Per Unit* Rupees*

Variable Costs:
Direct material (218,750 × 5 × 2) 10.00 2,187,500
Direct labour (218,750 × 2) 2.00 437,500
Variable overheads (218,750 × 4) 4.00 875,000
Less: Defective units sold (43,750 × 5) 5 × 20% (1.00) (218,750)
Total variable cost of production 15.00 3,281,250

Variable cost per good unit (3,281,250 ÷ 175,000) 15 ÷ 0.8 18.75

Calculation of variable selling expenses per unit [using high-low method]:

= ( ) 1.20
Fixed costs
- Fixed overheads (175,000 × 3.5) 612,500
- Selling expenses 295,000 – (145,000 × 1.2) 121,000
- Administration expenses 101,400
Total fixed costs 834,900

Contribution margin per unit (26 – 18.75 – 1.2) 6.05

Break even quantity (834,900 ÷ 6.05) 138,000

Page 6 of 7
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Spring 2013

Ans.7 Calculation of net profit for the month:

Computation of limiting factor:
Estimated labour hours available each month 25,500
Divided by : labour hours required per box [(30 × 1)+(15 × 4)+(18×5)] ÷ 60 3
No. of boxes that can be produced within available labour hours 8,500

Estimated machine hours available each month 45,000

Divided by : machine hours required per box [(30 + 75 + 120)] ÷ 60 3.75
No. of boxes that can be produced within available machine hours 12,000
Therefore, limiting factor is labour hours.

Products
Pillow Bed Quilt
Cover Sheet Cover
Direct material [1×200],[4×300],[5×400] 200 1,200 2,000
Direct labor
[400×30÷60×1],[400×15÷60×4],[400×18÷60×5] 200 400 600
Variable overhead [5×30],[4×75],[3.75×120] 150 300 450
Variable cost per product 550 1,900 3,050
Less: Outsourcing cost per product (750) (2,000) (3,500)
Cost saving from in-house production 200 100 450
Direct labour hours per unit 0.50 1.00 1.50
Cost saving per labour hour 400 100 300
Ranking 1 3 2

Scarce hours allocated as per ranking:

Labour Available
Quantity
hours used hours
25,500
First Produce – Pillow cover 11,000 5,500 20,000
Then Produce – Quilt cover 11,000 16,500 3,500
Finally produce – Bed sheet 3,500 3,500 -
No. of Bed sheets to be outsourced 7,500

Statement showing net profit for the month:

Products
Pillow Bed Quilt
Cover Sheet Cover Rs. in ‘000
---------------------Rupees--------------------
Sales [11,000 × Rs. 8,000] 88,000
Less: Expenses:
Units produced 11,000 3,500 11,000
Variable manufacturing cost per
product 550 1,900 3,050
6,050,000 6,650,000 33,550,000 (46,250)

Units outsourced 7,500

Outsourcing cost per bed sheet 2,000
15,000,000 (15,000)
Cost on quality check [11,000×Rs.
300] (3,300)
Total variable costs (64,550)
Total contribution 23,450
Less: Fixed cost (10,000)
Net profit for the month 13,450

(THE END)
Page 7 of 7
 Cost Accounting
Intermediate Examination 6 September 2013
Autumn 2013 100 marks - 3 hours
Module D Additional reading time - 15 minutes

Q.1 (a) Rahat Limited (RL) produces and markets a single product Beta. Following are the
details of RL’s monthly production and related costs for the past six months:
March April May June July August
Units 1,115 2,185 1,265 1,610 2,645 1,380
Costs (Rs. ‘000) 1,775 2,300 1,660 1,840 2,875 2,300
Required:
Using least square method, calculate the estimated cost to produce 1,800 units of Beta. (09)
(b) What do you understand by ‘Period cost’? Briefly describe ‘Product cost’ in relation to
both manufacturing and merchandising firms. (06)
(c) Gama Industries (GI) has secured an order for production of a new product Alpha
which would require 600 hours of direct labour. The spare capacity available with GI
is 450 direct labour hours. The additional labour hours may be obtained by either:

paying overtime at time and a half; or

diverting labour from the production of product Zeta which earns a contribution
margin of Rs. 24 in three labour hours.

Required:
Calculate the relevant cost of labour for the production of Alpha, assuming labourers
are paid at a uniform rate of Rs. 20 per hour. (04)

Q.2 Design Limited (DL) produces and markets two products viz. Olive and Mint. Following
information is available from DL’s records for the year ended 30 June 2013:
Olive Mint
Selling price per unit Rs. 760 550
Variable cost of production per unit Rs. 520 430
Selling and distribution expenses per unit Rs. 40 20
Fixed cost Rs. 4,400,000 5,200,000
Number of units produced and sold 120,000 150,000
The above sales volumes are based on the market demand for these products. DL is
currently operating at 75% of the installed capacity. Time required for producing each unit
of Olive and Mint is the same. In order to utilize the spare capacity of the plant, the
marketing department has suggested the following options to the management:
Option 1: Introduce a single pack of both the products Olive and Mint. The price of the
single pack would be 90% of the combined price of separate products. It would increase
overall market demand for these products resulting in utilisation of full capacity. However, it
is estimated that the sale of separate units of each products would reduce by 18%.
Option 2: To launch a new product Salsa at a price of Rs. 380 per unit. Salsa is estimated to
have a demand of 80,000 units per annum and a unit variable cost equal to 40% of the
variable cost of Olive. It would result in additional fixed costs of Rs. 3,200,000 per annum.
Required:
Evaluate the above options and advise the management about the most feasible option. (11)
 Cost Accounting Page 2 of 4

Q.3 Big Limited (BL) manufactures and supplies consumer durables. It uses a fixed time period
inventory model whereby inventory count is carried out every month. In order to employ
inventory optimization and keep costs under control, the management has approved to
implement ABC plan on test basis, for reviewing inventory in one of BL’s departments. This
approach would categorize the inventory on the following basis:

Items that account for upto 25% of the annual consumption in units would be
classified as ‘A’

Items that account for more than 25% but less than or equal to 60% of the annual
consumption in units would be classified as ‘B’

Items that account for more than 60% of the annual consumption in units would be
classified as ‘C’.

The ‘A’ items would be counted once after every 30 days; ‘B’ items once after every 45 days;
and ‘C’ items once after every 90 days.

Following information is available from BL’s records of the concerned department:

Item Code 101 102 103 104 105 106 107 108
Annual consumption (Units ‘000) 550 300 300 600 125 325 500 750
Rate per unit (Rs.) 50 400 40 45 600 120 20 25

Each inventory count is estimated to cost Rs. 2,500 per item. Assume 360 days in a year.

Required:
Classify the above inventory items according to the ABC plan and calculate annual savings,
if any, if the above approach is implemented. (12)

Q.4 Crystal Limited (CL) is engaged in the business of supplying plastic chairs to schools and
hospitals in Karachi. Following data has been extracted from CL’s business plan:

Actual Forecast
Aug. 2013 Sep. 2013 Oct. 2013 Nov. 2013 Dec. 2013
Purchases (Rs. ‘000) 600 520 680 640 560

Additional information:
(i) All the above amounts are exclusive of sales tax. The company uses Just-in-time
inventory system and therefore has a negligible stock at any point of time.
(ii) Sales tax is charged at the rate of 17% and is payable on the 15th day of the next
month along with the sales tax return. Refunds, if any, are received one month after
submission of the sales tax return.
(iii) 70% of the sales are made to hospitals on two months credit whereas the rest of the
sales are made to schools on credit of one month. All debtors are expected to promptly
settle their debts. CL earns a uniform gross profit of 20 percent on sales.
(iv) 10% of the creditors are paid in the month of purchase, 60% are paid in the first month
subsequent to purchase and the remaining 30% are paid in the second month
following the purchase.
(v) Monthly salaries and wages amount to Rs. 95,000 and are paid in the month in which
they are incurred.
(vi) A monthly rent of Rs. 50,000 is paid in advance on quarterly basis.
(vii) Selling expenses for September are estimated at Rs. 40,000. 35% of selling expenses
are fixed whereas remaining amount varies with the variation in sales. Selling
expenses are paid in the month in which they are incurred.
(viii) Other overhead expenses are estimated at 6% of the sales for the previous month.
(ix) Cash and bank balances as at 30 September 2013 are estimated to be Rs. 1,000,000.

Required:
Prepare a month-wise cash budget for the quarter ending 31 December 2013. (16)
 Cost Accounting Page 3 of 4

Q.5 Power Limited (PL) is engaged in the business of overhaul and repair of turbo-generators.
The company uses job order costing system. Following data has been extracted from the cost
cards relating to jobs completed in the month of August 2013:

Rs. ‘000
Materials issued 55,000
Direct labour 41,000
Overheads on material 25%
Overheads on direct labour 80%

The clients are billed at each month-end on the basis of cost cards and PL earns a profit of
20% of the invoice value for each completed job.

Actual expenses for the month of August 2013 were as under:

Rs. ‘000
Factory wages (inclusive of indirect labour) 65,000
Factory expenses 15,000
Store expenses 7,500
Other office expenses 4,500

Following information is also available:

(i) Material requisitions not recorded in the cost cards amounted to Rs. 5,600,000.
(ii) Direct labour shown as indirect in the cost cards amounted to Rs. 2,900,000.
(iii) Details of stock and work in process for the month of August 2013 are as under:

Opening Closing
---------Rs. ‘000---------
Stock of materials 5,000 5,500
WIP - material 10,000 10,500
WIP - labour 2,500 4,500

Required:
Calculate the following for the month of August 2013:
(a) Purchases (b) Direct labour
(c) Under / over absorbed overheads (d) Actual profitability of completed jobs (12)

Q.6 (a) Maroof Engineering (ME) produces and markets a single product. In order to keep
pace with the changing technology, ME’s management has decided to install high-tech
machines in its production department which would result not only in improving the
productivity but would also reduce the number of workers from the present level of
500 to 400 workers. Following information is available from ME’s records for the year
ended 31 August 2013:

Sales per month Rs. 12,000,000

Wages paid to workers per month Rs. 2,000,000
Other benefits 35% of wages
Production per month 80,000 units
Profit/volume (P/V) ratio 30%

After the installation of high-tech machines, the company is expected to produce

89,600 units per month. The management has also decided to pay 1.6% incentive
wages to the workers for every 2% increase in productivity.

Required:
Calculate the annual financial implication of the proposal. (11)
 Cost Accounting Page 4 of 4

(b) Following data is available from the production records of Mian Industries for the
month of August 2013. The company uses process costing to value its output.

Input materials 5,000 units at the rate of Rs. 49 per unit.

Conversion costs Rs. 30,000.

Normal loss, which is 10% of input materials, is sold as scrap at Rs. 19 per unit.

Actual loss 650 units.

There were no opening or closing stocks.

Assume inspection is performed at the end of the process.

Required:
Calculate the amount of abnormal loss and cost of one unit of output. (03)

Q.7 Zaiqa Limited (ZL) is engaged in the business of manufacturing fruit jam. It has three
production and two service departments. Following information is available from ZL’s
records for the month of August 2013:

Rupees
Rent and rates 85,000
Indirect wages 60,000
General lighting 75,000
Power 150,000
Depreciation machinery 50,000

Following further information relating to the departments is also available:

Production departments Service departments

Selection Jam making Bottling Storage Distribution
Direct wages (Rs.) 60,000 80,000 32,000 8,000 20,000
Power consumed (KWH) 1,000 6,000 2,000 1,000 -
Floor area (Sq. ft) 1,500 2,000 1,250 1,000 500
Light points (Nos.) 10 20 15 5 10
Production hours 1,533 3,577 1,815 - -
Labour hours per bottle 0.10 0.25 0.15 - -
Cost of machinery (Rs.) 600,000 1,200,000 900,000 300,000 -

After production, the jam bottles are finally packed in a carton consisting of 12 bottles. The
service departments costs are apportioned as follows:

Production departments Service departments

Selection Jam making Bottling Storage Distribution
Storage 10% 30% 40% - 20%
Distribution 20% 50% 30% - -

Raw and packing material costs of Rs. 36 and labour cost of Rs. 25 is incurred on each
bottle.

Required:
Calculate the cost of each carton. (16)

(THE END)
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Autumn 2013

A.1 (a) Overheads

Units
Rs.000’

March 1,115 1,775 1,979,125 1,243,225

April 2,185 2,300 5,025,500 4,774,225
May 1,265 1,660 2,099,900 1,600,225
June 1,610 1,840 2,962,400 2,592,100
July 2,645 2,875 7,604,375 6,996,025
August 1,380 2,300 3,174,000 1,904,400
10,200 12,750 22,845,300 19,110,200

n( xy) - ( x)( y) 6 22,845,300 - 10,200 12,750

b (Variablecost per unit) 0.6611
2
n( x ) ( x) 2
6 (19,110,200) - (10,200) 2
( y) b( x) (12,750 - 0.6611 (10,200))
a (Fixed costs per month) 1,001.13
n 6
Estimated cost to produce 1,800 units:
Y= a + b (x)
= 1,001.13 + 0.6611 x 1,800 = Rs. 2,191.11

(b) Product cost:

The aggregate of costs that are associated with a unit of product is called product cost.

In case of a manufacturing firm, it includes only the costs necessary to complete the
product. viz. direct material, direct labour and factory overhead. It may or may not
include the element of overhead depending upon the type of costing system in use-
absorption or direct.

Product costs for a merchandising firm include the cost to purchase the product plus
the transportation costs paid by the retailer or wholesaler to get the product to the
location from where it will be sold or distributed.

Period costs:
All non-product expenditures which are incurred for managing the firm and selling the
product are expensed in the period in which they are incurred and are called period
costs.

It is associated with a time period rather than manufacturing or trading activity.

Period costs primarily include the general, selling and administrative costs that are
necessary for the management of the company but are not involved directly or
indirectly in the manufacturing process or in the purchase of the products for resale.

(c) Calculation of relevant cost of labour:

Labour hours required for the production of Alpha 600 hours
Spare capacity available ( Not relevant) 450 hours
Remaining hours required 150 hours
150 hours could either be obtained from:
 over time [ 150 × 1.5 × 20] Rs. 4,500
 curtailing production of Zeta[(150 × 20) + (150÷3 × 24)] Rs. 4,200

The relevant cost of labour would be Rs. 4,200 as it would be cheaper to obtain labour
by diverting it from the production of Zeta.
Page 1 of 7
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Autumn 2013

A.2 Products
Olive Mint
Sale price 760 550
Less: Variable cost (560) (450)
Contribution margin / unit 200 100

No. of units produced and sold 120,000 150,000

Existing contribution margin 24,000,000 15,000,000

Option 1:
Additional profit from the introduction of packaged products:
Quantity of packaged products: Units
Reduction in sale of Olive [120,000 × 18%] 21,600
Reduction in sale of Mint [ 150,000 × 18%] 27,000
Under utilization of existing capacity [(120,000 + 150,000)÷75%] –270,000 90,000
138,600

Units of packaged products [138,600 ÷ 2] 69,300

Rupees
Selling price per package (760 + 550) × 90% 1,179
Variable cost [ 560 + 450] 1,010
Contribution margin of packaged products 169

Contribution margin from sale of packaged products [69,300 × 169] 11,711,700

Less: Reduction in contribution margin [200 × 21,600] + [100 × 27,000] (7,020,000)
4,691,700

Option 2:
Additional profit from Salsa
Contribution margin from Salsa [380 × 80,000] – [560 × 40% × 80,000] 12,480,000
Less: Additional fixed cost 3,200,000
9,280,000

Additional profit [9,280,000 – 4,691,700] 4,588,300

Decision:
The management should produce Salsa as it would result in an additional profit of Rs.
4,588,300 as compared to the introduction of a single pack of both the products.

Page 2 of 7
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Autumn 2013

A.3 Annual Cum. Cum. No. of

Item Rate per Annual
Usage Annual Annual Category Counts in a
Code Unit–Rs. Cost
Unit Usage Usage% year
102 300 400 120,000 300 8.70 A 12
105 125 600 75,000 425 12.32 A 12
106 325 120 39,000 750 21.74 A 12
101 550 50 27,500 1,300 37.68 B 8
104 600 45 27,000 1,900 55.07 B 8
108 750 25 18,750 2,650 76.81 C 4
103 300 40 12,000 2,950 85.51 C 4
107 500 20 10,000 3,450 100.00 C 4
3,450 329,250 64

Inventory count cost – current [ 2,500 × 8 × 12] 240,000

Inventory count cost as per new plan [64 × 2,500] (160,000)
Savings 80,000

A.4 Month-wise Cash Budget

Rs. in ‘000
Oct Nov Dec
Opening balance 1,000 833.10 708.14
Receipts:
Collection from hospitals and schools W-1 842.40 830.70 976.95
Payments:
Purchases W-2 (655.20) (734.76) (753.48)
Sales tax payable W-3 (22.10) (28.90) (27.20)
Salaries and wages (95) (95) (95)
Rent (150) - -
Selling expenses: W-4
 Variable (4% of sales) (34) (32) (28)
 Fixed (14) (14) (14)
Overhead expenses (39) (51) (48)
Total payments (1,009.30) (955.66) (965.68)
Closing balance 833.10 708.14 719.41

WORKING NOTES:
W-1: Calculation of sales and collections

--------------------------Rs. in ‘000--------------------------
Aug Sep Oct Nov Dec
Purchases 600 520 680 640 560
Add: gross profit (25% of cost) 150 130 170 160 140
Sales - Gross 750 650 850 800 700

Sales to hospitals – 70% 525 455 595 560 490

Add: sales tax @17% 89.25 77.35 101.15 95.20 83.30
614.25 532.35 696.15 655.20 573.30
Collection from hospitals- A 614.25 532.35 696.15

Sales to schools – 30% 225 195 255 240 210

Add: sales tax @17% 38.25 33.15 43.35 40.80 35.70
263.25 228.15 298.35 280.80 245.70
Collection from schools - B 228.15 298.35 280.8
Total collection (A+B) 842.40 830.70 976.95

Page 3 of 7
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Autumn 2013

W-2: Purchases
--------------------------Rs. in ‘000--------------------------
Aug Sep Oct Nov Dec
Purchases 600 520 680 640 560
Add: Sales Tax @17% 102 88.40 115.60 108.80 95.20
702 608.40 795.60 748.80 655.20
Payment to creditors:
10% - month of purchase 79.56 74.88 65.52
60%-following month 365.04 477.36 449.28
30%- second month 210.60 182.52 238.68
655.20 734.76 753.48

W-3: Sales tax

--------------------------Rs. in ‘000--------------------------
Aug Sep Oct Nov Dec
Output tax 127.50 110.50 144.50 136.00 119.00
Less: Input tax (102.00) (88.40) (115.60) (108.80) (95.20)
S.tax payable / (refundable) 25.50 22.10 28.90 27.20 23.80
Sales tax payments 22.10 28.90 27.20

W-4: Calculation of variable Selling expenses

Rs. in ‘000
Selling expenses – Sep 2013 40
Less: fixed expenses – 35% (14)
Variable selling expenses 26
Sales for the month of Sep 2013 650
Variable selling expenses as a % of sales [26 ÷ 650 × 100] 4%

Page 4 of 7
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Autumn 2013

A.5 Purchases for the month of August 2013: Rs. in '000

Materials issued as per cost cards 55,000
Add: Materials issued but not booked in cost cards 5,600
Closing stock of: raw material 5,500
Less: Opening stock of: raw material (5,000)
Purchases 61,100
Direct labor for the month of August 2013:
Direct labor as per cost card 41,000
Add: Direct labour booked as indirect in cost cards 2,900
Direct labour 43,900

Unabsorbed overheads
Indirect labour (65,000 – 43,900) 21,100
Factory expenses 15,000
Store expenses 7,500
Actual overheads for the period 43,600

Overhead - on material [ (55,000+5,600) ×25%] 15,150

Overhead - on labour [ (41,000+2,900) ×80%] 35,120
Absorbed overheads as per cost cards 50,270
Over absorbed overhead (6,670)

Actual profitability of completed jobs for the month of August 2013:

Sales (W-1) 190,338
Actual Material consumed [10,000 – 10,500] + [55,000 + 5,600] (60,100)
Actual Direct labour [2,500 – 4,500] + [41,000 + 2,900] (41,900)
Actual overhead (43,600)
(145,600)
Less: Other office expenses (4,500)
Net Profit 40,238

W-1:
Materials consumed 60,100
Direct labour 41,900
Overhead - on material 15,150
Overhead - on labour 35,120
152,270
Profit (152,270 ÷ 80 × 20) 38,068
Sales 190,338

Page 5 of 7
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Autumn 2013

A.6 (a) Improvement in Productivity after Installation of high tech machines:

Proportionate output of 400 workers on the basis of existing

64,000 units
productivity level =
Expected output of 400 workers after mechanisation 89,600 units
Improvement in productivity ( 89,600 – 64,000 units) 25,600 units

40%

Incentive wages payable (@ 1.6% for every 2% improvement) [40%×1.6%÷2%] 32%

Annual wages to 400 workers before incentive Rs. 19,200,000

Selling price per unit = Rs. 150.00

Inst. Of high tech machines

Before After
Wages payable per annum [2,000,000 × 12] 24,000,000 19,200,000
Other benefits [@ 35% of wages] 8,400,000 6,720,000
Incentive wages [@ 32% of wages] - 6,144,000
32,400,000 32,064,000

Rs.
Gross saving per annum (32,400,000 – 32,064,000) 336,000
Add: Increase in contribution [89,600 units – 80,000 units) × 12 × (150 × 0.30)] 5,184,000
Increase in annual contribution due to mechanisation 5,520,000

(b) Cost per unit = –

–
=
Abnormal loss (units) = Total loss – Normal loss = 650 – 500 = 150 units.

Amount of abnormal loss to be charged to Profit and loss Account = (Rs. 59 – Rs. 19) × 150
= Rs. 6,000

A.7 Zaiqa Limited

Primary Distribution of Overheads

Production Depts. Service Depts.

Basis of Total
Items Jam Distri-
Apportionment overheads Selection Bottling Storage
making bution
Direct wages Given 28,000 - - - 8,000 20,000
Rent and rates Floor area 85,000 20,400 27,200 17,000 13,600 6,800
General lighting Light points 75,000 12,500 25,000 18,750 6,250 12,500
Indirect wages Direct wages 60,000 18,000 24,000 9,600 2,400 6,000
Power KWH consumed 150,000 15,000 90,000 30,000 15,000 -
Depreciation Cost of machinery 50,000 10,000 20,000 15,000 5,000 -
Total departmental overheads 448,000 75,900 186,200 90,350 50,250 45,300

Page 6 of 7
 COST ACCOUNTING
Suggested Answers
Intermediate Examination - Autumn 2013

Secondary Distribution of Overheads

Production Depts. Service Depts.
Items
Selection Jam making Bottling Storage Distribution
Total overheads as above 75,900 186,200 90,350 50,250 45,300
(1 : 3 : 4 : 2) 5,025 15,075 20,100 (50,250) 10,050
(2 : 5 : 3 : 0) 11,070 27,675 16,605 - (55,350)
Total 91,995 228,950 127,055
Production hours 1,533 3,577 1,815
Rate per hour (Rs) 60.0 64.0 70.0

Cost of one carton

Rupees
Raw and packing material (36 × 12) 432
Direct labour (25 × 12) 300
Overheads :
Selection (0.1 × 12 × 60) 72
Jam making (0.25 × 12 × 64) 192
Bottling (0.15 × 12 × 70) 126 390
Total 1,122

(THE END)

Page 7 of 7
 Cost Accounting
Intermediate Examination 7 March 2014
Spring 2014 100 marks - 3 hours
Module D Additional reading time - 15 minutes

Q.1 (a) What is ‘opportunity cost’? Give two practical examples of opportunity cost. (04)

(b) A company annually produces 600 units of a product. Each unit requires 6 kg of
material Y. The costs related to material Y are as follows:

Cost per kg. Rs. 16,000

Inspection charges per order Rs. 20,000
Transportation cost per trip (upto 400 units per trip) Rs. 25,000
Annual warehousing cost per unit Rs. 100
Financing cost 15%

Required:
(i) Economic Order Quantity for material Y. (05)
(ii) Total ordering and holding costs, if each order is based on EOQ and the
company maintains a safety stock of 30 units. (04)

Q.2 Alpha Limited is preparing its departmental budgets and product cost estimates for the next
year. The costs and related data for the year ending 31 December 2014 have been estimated
as follows:

Machining Assembly Finishing Maintenance Total

Costs: ------------------------------- Rs. in 000 -------------------------------
Direct wages 274 146 328 - 748
Indirect wages 46 27 36 137 246
Direct materials 365 46 18 - 429
Indirect materials 68 18 36 91 213
Power - - - - 465
Light and heat - - - - 46
Depreciation - - - - 108
Rent and rates - - - - 114
Warehousing cost - - - - 98

Other data:
Direct labour hours 12,000 8,000 16,000 6,000 42,000
Machine hours 40,000 2,000 3,000 - 45,000
No. of employees 6 4 8 3 21
Floor area (m2) 1,000 400 300 300 2,000
Net book value of
fixed assets (Rs. 000) 20,000 8,000 3,000 4,000 35,000

80% of the maintenance department’s time is used in the maintenance of machines whereas
the remaining time is consumed in cleaning and maintenance of factory buildings.

Required:
Calculate appropriate overhead absorption rates for the machining, assembly and finishing
departments. (12)
 Cost Accounting Page 2 of 4

Q.3 (a) The following information relates to a week’s work for three employees:

Employee
A B C
Output (units) 160 276 68
Time allowed (hours per unit) 0.5 0.25 0.75
Basic hourly wage rate (Rupees) 80 100 70
Hours worked as direct labour 48 54 30
Hours worked as indirect labour - - 12

The normal working week is 42 hours. For the first six hours, overtime is paid at 50%
above the normal rate. Any further overtime is paid at double the normal rate. Bonus
is paid at three-fifth of the normal rate for the hours saved.

Required:
Using the information given above, calculate the total wages earned by each
employee. (08)

(b) The following is a summary of payroll of LMN Factory Limited for the month of
February 2014:

Rupees
Basic salary 420,000
Allowances 147,000
Gross salary 567,000
Deductions :
Loans to staff (13,000)
Income tax (15,500)
Employees' provident fund contribution (35,000)
Net salary 503,500
The company is also required to pay the following:

Company’s contribution to the provident fund which is equal to employees’
contribution

5% of the basic salary to a government organisation

Required:
Pass journal entries to record the payroll cost for the month of February 2014. (06)

Q.4 XY Limited manufactures and sells a single product. The selling price and costs for the year
ended 31 December 2013 were as follows:

Rs. per unit

Selling price 1,600
Direct material 630
Direct labour 189
Production overheads (40% fixed) 220
Selling and distribution overheads (60% fixed) 165

Other information is as follows:

(i) During the year, 12,000 units were produced.
(ii) The opening and closing stocks were 4,000 and 3,000 units respectively
(iii) Fixed overhead cost per unit is based on normal capacity which is 15,000 units.
(iv) Overhead costs have increased by 10% over the previous year and raw material and
labour by 5%.
(v) The company uses FIFO method for costing its inventory.
 Cost Accounting Page 3 of 4

Required:
(a) Profit and loss account for the year ended 31 December 2013 under absorption costing
and marginal costing. (14)
(b) Reconciliation of profit worked out under the two methods. (02)

Q.5 ABC Limited deals in manufacturing and marketing of perfumes. The company has three
brands to cater for different classes of customers. The selling prices and contribution margins
for the year 2013 were as follows:

A B C
--------------Rs. per unit--------------
Sale price 10,000 8,000 5,000
Contribution margin 5,000 3,000 2,000

Total sale for the year 2013 was Rs. 15,600 million and sales volume ratio for A, B and C
was 2:3:5 respectively.

The following estimates pertain to the year ending 31 December 2014:

The average sale prices and variable costs for the next year are expected to increase by
14% and 8% respectively.

The normal market growth is estimated at 5% per annum. However, the company plans
to launch an aggressive marketing campaign for which additional advertising budget of
Rs. 250 million has been approved. With increased advertisement, increase in sales
volume for A, B and C has been forecasted at 15%, 12% and 10% respectively.

Required:
Compute the projected contribution margin for the year 2014 and the impact of advertising
on profit of the company. (13)

Q.6 Orient Stores Limited (OSL) operates retail outlets at various petrol pumps across the city.
The average monthly performance of these outlets is as under:

Rs. in ‘000
Sales 1,500
Rent expense 50
Other fixed costs 150

OSL earns contribution margin of 15% on items on which retail prices are printed. These
items constitute 40% of the total sales. All other items are sold at the contribution margin of
25%.

Sohaib Enterprises (SE) has offered OSL to establish an outlet at one of its petrol pumps
located in a posh area of the city. OSL’s planning department estimates that:

At the proposed location, the sales volumes would be 20% lower than average.

Being a posh area, OSL would be able to charge 10% higher prices on items on which
retail prices are not printed.

Other fixed costs would be the same as the average of the existing outlets.

Required:
(a) Determine the break-even sales under the assumptions that SE would monthly charge:
Option I : rent of Rs. 75,000
Option II : rent of Rs. 50,000 plus 5% commission on total sales. (14)

(b) Which of the above options would you recommend and why? (02)
 Cost Accounting Page 4 of 4

Q.7 The following projections are contained in the budget of Scientific Chemicals Limited for
the year ending 31 December 2014:

(i) Annual local and export sales

Product C031 Product D032

Rs. per unit Units Rs. per unit Units
Local sales 1,965 40,000 1,410 50,000
Export sales 2,100 25,000 1,500 24,000

(ii) Raw material and labour per unit

Product Product
C031 D032
Raw material-A at Rs. 25 per kg. (Kg.) 4.0 3.0
Raw material-B at Rs. 60 per kg. (Kg.) 3.5 2.6
Skilled labour hours at Rs. 250 per hour (Hours) 2.4 2.0
Semi-skilled hours at Rs. 120 per hour (Hours) 5.0 2.5

(iii) Variable overheads for each unit of product C031 and D032 are estimated at Rs. 125
and Rs. 60 respectively.

(iv) Fixed overheads including admin & selling overheads would amount to Rs. 3 million
per month.

The company is faced with the under-mentioned constraints:

The supplier of material-B can supply 27,700 kg. per month only.

Only 35 skilled workers will be available for each shift of 8 hours while factory will be
operated for 25 days in a month on 3 shift basis.

Required:
Determine optimal production plan for the next year assuming that the company cannot
afford to terminate the export sales contract because of the heavy damages payable in case of
default. (16)

(THE END)
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2014

Ans.1 (a) An opportunity cost is a cost that measures the opportunity lost or sacrificed when
the choice of one course of action requires that an alternative course of action be
given up.

The following are examples of opportunity costs:

(i) If scarce resources such as machine hours are required for a special contract
then the opportunity cost represents the lost profit that would have been
earned from the alternative use of the machine hours.
(ii) An employee is paid Rs. 100 per hour and is charged out at Rs. 250 per hour
for committed work. If that employee is redirected to other assignment, the
lost contribution of Rs. 150 per hour represents the opportunity cost of the
employee’s time.
(iii) A company owns the building in which it operates, and thus pays no rent for
office space. If the building was rented out, the company would receive rent
of Rs. 4 million per annum. The foregone money from this alternative use of
the property (i.e. rent of Rs. 4 million) is an opportunity cost of using it as
office space.
(iv) A private investor purchased shares of Rs. 100,000 and after one year the
investment has appreciated in value of Rs. 105,000. The investor’s return is 5
percent. If the investor invested in a bank certificate with an annual yield of
7 percent, after a year, the opportunity cost of purchasing shares is Rs. 7,000.

(b) (i) Economic Order quantity

Requirement of material Y per annum (6×600) kg. 3,600
Ordering costs per order:
Inspection 20,000
Transportation cost 25,000
Rs. 45,000
Holding costs per kg per annum:
Financing cost (15% of 16,000) 2,400
Warehousing cost 100
Rs. 2,500

2 � ������ �������� ����� � ����� ��� �����

��� � �
������� ����� ��� �� ��� �����

2 � 3,600 � 45,000
��
2,500

� √129,600 � 360��

(ii) Ordering and holding costs

Number of purchase orders (3,600÷360) kg. 10

Average inventory excluding safety stock (360÷2) 180

Safety stock 30
Average inventory including safety stock kg. 210

Total holding cost (2,500×210) 525,000

Total ordering costs (45,000×10) 450,000

Page 1 of 5
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2014

Ans.2 Overhead analysis sheet for Alpha Limited for the year ending 31 December 2014:

Maintenance
Machining

Assembly

Finishing

Total
Basis of
Expense
apportionment

---------------- Rupees in ‘000 ----------------

Direct wages - - - - -
Indirect wages 46 27 36 137 246 Actual
Direct material - - - - -
Indirect material 68 18 36 91 213 Actual
Power 413 21 31 - 465 Machine hours
Light and heat 23 9 7 7 46 Floor area
Depreciation 62 25 9 12 108 Book value
Rent and rates 57 23 17 17 114 Floor area
Warehousing costs 83 11 4 - 98 Direct materials
752 134 140 264 1,290
80% based on the
Reallocation of 188 9 14 (211) - machine hours.
maintenance costs 20% based on the
31 13 9 (53) - floor area.
971 156 163 - 1,290

40,000 8,000 16,000

Machines Dir. labour Dir. labour
hours hours hours
Overheads
absorption rate Rs. 24.28 19.50 10.19

Ans.3 (a) Employee

A B C
Hours worked 48 54 42
Normal hours per week 42 42 (30+12)=42
Overtime hours 6 12 -

Normal wages (48×80), (54×100), (42×70) 3,840 5,400 2,940

First six overtime hours (6×80×50%), (6×100×50%) 240 300 -
Overtime hours > 6 hours (6×100) - 600 -
Total wages (A) Rs. 4,080 6,300 2,940

Bonus amount
Hours allowed (160×0.5), (276×0.25), (68×0.75) 80 69 51
Direct hours worked 48 54 30
Bonus hours earned/Time saved 32 15 21
Hourly bonus rate - at three fifth of the normal rate (80×3/5)=48 (100×3/5)=60 (70×3/5)=42
(B) Rs. 1,536 900 882

Total wages (A+B) Rs. 5,616 7,200 3,822

Page 2 of 5
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2014

(b) Journal Entries

Dr. Cr.
--------Rupees--------
Salaries 420,000
Allowances 147,000
Loans to staff 13,000
Staff income tax payable 15,500
Trustees- provident fund payable 35,000
Salary payable/bank 503,500
(Payroll for the month of February 2014)

Co’s contribution to provident fund 35,000

Trustees- provident fund payable 35,000
(Being Co. contribution to PF for February 2014)

Contribution to the Government organization 21,000

Account payable - Government organization 21,000
(Amount payable to a government organisation at 5% of basic
salary for February 2014)

Ans.4 (a) XY Limited

Profit and loss account for the year ended 31 December 2013
Absorption Marginal
Costing Costing
--------Rupees--------
Sales (13,000 units at Rs.1,600), (4,000+12,000-3000)×1,600 20,800,000 20,800,000
Cost of sales:
Opening Stock [4,000×980(B)], [4,000×900(A)] (3,920,000) (3,600,000)
Manufacturing cost for the year (12,000×1,039), (12,000×951) (12,468,000) (11,412,000)
(16,388,000) (15,012,000)
Closing stock [3,000×1,039(B)], [3,000×951(A)] 3,117,000 2,853,000
Unabsorbed production overheads [(15,000-12000)×88] (264,000) -
Cost of sales (13,535,000) (12,159,000)
Gross profit / Gross contribution margin 7,265,000 8,641,000
Selling and distribution overheads (13,000×165) (2,145,000)
Variables selling and distribution overhead (13,000×165×40%) (858,000)
Net contribution margin 7,783,000
Fixed production overheads (15,000×88) (1,320,000)
Fixed selling and distribution overheads (13,000×165×0.6) (1,287,000)
Net profit 5,120,000 5,176,000

W–1: Production overhead rate:

2013 2012
--------Rupees--------
Direct material [(630/1.05)=600] 630 600
Direct labour [(189/1.05)=180] 189 180
Production overheads – variable (220×60%=132), (132/1.1=120) 132 120
Production rate for marginal costing (A) 951 900
Production overheads - fixed (220×40%=88), (88/1.1=80) 88 80
Production rate for absorption costing (B) 1,039 980

Page 3 of 5
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2014

(b) Reconciliation of net profit under Marginal and Absorption costing:

Rupees
Net profit under marginal costing 5,176,000
Under absorption costing
 Fixed overheads brought from the last year as included in the
opening inventory (4,000×80) (320,000)
 Fixed overheads carried forward to the next year as included
in the closing inventory (3,000×88) 264,000
Net profit under absorption costing 5,120,000

Ans.5 Projected contribution margin(CM) for 2014 A B C Total

Projected CM on sales for 2014 (after advertising)
Rs. in million C×K 3,120 2,827 3,058 9,005

CM on normal sales growth rate of 5%

Rs. in million C×H 2,850 2,649 2,920 8,419
Additional CM due to advertising 586
Advertising cost (250)
Net increase in profit due to advertising
Rs. in million 336

Working:
Sale price per unit Rs. A 10,000 8,000 5,000
CM per unit Rs. 5,000 3,000 2,000
Variable cost per unit Rs. B 5,000 5,000 3,000

Revised sales price with 14% increase Rs. (A×1.14) 11,400 9,120 5,700
Revised variable cost with 8% increase Rs. (B×1.08) (5,400) (5,400) (3,240)
Projected CM per unit for 2014 Rs. C 6,000 3,720 2,460

Sales quantities for 2013 and 2014:

Sales volume ratio D 2 3 5 10
Sales ratio E (A×D) 20,000 24,000 25,000 69,000
Total sales Rs. in million F(E÷69×15.6) 4,522 5,426 5,652 15,600

Total sales quantities for 2013 Units in million G (F÷A) 0.452 0.678 1.130

Sales quantities for 2014 at estimated normal

growth of 5% Units in million H (G×1.05) 0.475 0.712 1.187
Sales volume increase % for 2014 with advertising J 15% 12% 10%
Sale quantities for 2014 having advertising K
effect Units in million [G×(1+J)] 0.520 0.760 1.243

Page 4 of 5
 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2014

Ans.6 (a) Break-even sales for the new outlet

Option I Option II
Rs. in '000
Sales - Retail price printed (1,500×40%×0.8) 480.00 480.00
Sales - Retail price not printed (1,500×60%×0.8×1.1) 792.00 792.00
5% Commission on sales to the outlet owner - (63.60)
Net sales A 1,272.00 1,208.40
Variable cost of sales – Retail price printed (480×85%) (408.00) (408.00)
Variable cost of sales – Retail price not printed
(1,500×60%×0.8×75%) (540.00) (540.00)
Contribution margin B 324.00 260.40
Fixed costs including Rent (150+75), (150+50) C (225.00) (200.00)
Profit 99.00 60.40
Contribution margin % D (B÷A) 25.47% 21.55%
Break-even sales (C÷D) 883.39 928.07
(b) I would recommend option I as under option I, profit on expected sales is much
higher and the break-even sales is also lower than option II.

Ans.7 Product C031 Product D032

---------Rs. per unit---------
Sales price 1,965.00 1,410.00
Variable costs
Material A 4×25 3×25 (100) (75)
Material B 3.5×60 2.6×60 (210) (156)
Labour skilled 2.4×250 2×250 (600) (500)
Labour semi skilled 5×120 2.5×120 (600) (300)
Overheads (125) (60)
(1,635) (1,091.00)
Contribution margin per unit A 330 319

Contribution margin per limiting factor:

 Material B (A÷3.5), (A÷2.6) 94.29 122.69
 Skilled labour (A÷2.4), (A÷2.0) 137.50 159.50
Priority 2 1

Optimal production using limiting factors: Material B Skilled

(kg) labour (hrs.)
Available resources per annum (27,700×12), (35×3×25×12×8) 332,400 252,000
Total required resources:
C031 (40,000+25,000)×3.5, 2.4 (227,500) (156,000)
D032 (50,000+24,000)×2.6, 2.0 (192,400) (148,000)
Shortage of material B and skilled labour (87,500) (52,000)
Reduction in production of C031 (priority 2)
[(87,500÷3.5), (52,000÷2.4)] (25,000) (21,667)

Production would be as under:

C031 D032
----------Units----------
1st priority for export sales 25,000 24,000
Local sales Product C031: (40,000-25,000) 15,000 50,000
40,000 74,000
(THE END)

Page 5 of 5
 Certificate in Accounting and Finance Stage Examinations
The Institute of 5 September 2014
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Q.1 Ababeel Foods produces and sells chicken nuggets. Boneless chicken is minced, spiced up, cut
to standard size and semi-cooked in the cooking department. Semi-cooked pieces are then
frozen and packed for shipping in the finishing department.
Inspection is carried out when the process in the cooking department is 80% complete. Normal
loss is 5% of input and comprises of:

2% weight loss due to cooking; and

3% rejection of nuggets. The rejected nuggets are sold at Rs. 60 per kg.
Overheads are applied at the rate of 120% of direct labour cost. Inventory is valued using
weighted average cost. Following information pertains to cooking department for the month of
June 2014:
Material Labour
Kg.
----- Rs. in ‘000 -----
Opening work in progress
(100% complete to material and 50%
complete to conversion) 30,000 6,260 1,288
Costs for the month 420,000 50,000 20,000
Weight after cooking 440,000 - -
Transferred to finishing department 362,000 - -
Closing work in progress
(100% complete to material and 65%
complete to conversion) 65,000 - -

Required:
Prepare process account for cooking department for the month of June 2014. (15)

Q.2 Auto Industries Limited (AIL) manufactures auto spare parts. Currently, it is operating at 70%
capacity. At this level, the following information is available:
Break-even sales Rs. 125 million
Margin of safety Rs. 25 million
Contribution margin to sales 20%
AIL is planning to increase capacity utilization through the following measures:
(i) Selling price would be reduced by 5% which is expected to increase sales volume by
30%.
(ii) Increase in sales would require additional investment of Rs. 40 million in distribution
vehicles and working capital. The additional funds would be arranged through a
long-term loan at a cost of 15% per annum. Depreciation on distribution vehicles would
be Rs. 5 million.
(iii) As a result of increased production, economies of scale would reduce variable cost per
unit by 10%.

Required:
(a) Prepare profit statements under current and proposed scenarios. (07)
(b) Compute break-even sales and margin of safety after taking the above measures. (04)
 Cost and Management Accounting Page 2 of 4

Q.3 Omega Limited (OL) is the sole distributor of goods produced by ABC Limited which is a
leading brand in the international market. OL is now planning to establish a factory in
collaboration with ABC Limited. The factory would be established on a land which was
purchased at a cost of Rs. 20 million in 2005. The existing market value of the land is
Rs. 40 million. The cost of factory building and plant is estimated at Rs. 30 million and
Rs. 100 million respectively.
The factory will produce goods which are presently supplied by ABC Limited. The sale for the
first year of production is estimated at Rs. 300 million. The existing profit margin is 20% on
sales. As a result of own production, cost per unit would decrease by 10%. The sale price and
cost of production per unit (excluding depreciation) are expected to increase by 10% and 8%
respectively, each year.
Following further information is available:

ABC Limited would assist in setting up of the factory for which it would be paid an
amount of Rs. 10 million at the time of signing the agreement. In addition, ABC Limited
would be paid a royalty equal to 3% of sales.

The factory building and installation of plant would be completed and commercial
production would start one year after signing the agreement.

50% of the cost of plant would be financed through a five year loan with interest payable
annually at 10% per annum. Principal would be repaid at the end of 5th year.

A working capital injection of Rs. 15 million would be required at the commencement of
commercial production.

OL charges depreciation on factory building and plant under the straight line method.

OL uses a five year project appraisal period. The residual value of the factory building and
plant after five years is estimated at 50% and 10% of cost respectively.

The market value of the land after five years is estimated at Rs. 70 million.

OL’s cost of capital is 12%.

Required:
Calculate the net present value of the project assuming that unless otherwise specified, all cash
inflows/outflows would arise at the end of year. Ignore taxation. (15)

Q.4 Hexa Limited is a manufacturer of various machine parts. Following information has been
extracted from the cost records of one of its products AXE for the month of June 2014:
(i) Standard cost per unit:
Rupees
Raw material 170.00
Direct labour (1.25 hours) 150.00
Overheads 137.50
(ii) Based on normal capacity of 128,000 direct labour hours, fixed overheads are estimated
at Rs. 2,560,000.
(iii) Following information pertains to production of 100,000 units of product AXE:
Actual direct labour hours worked 130,000
Unfavorable material usage variance Rs. 820,000
Unfavorable material price variance Rs. 600,000
Actual direct labour cost Rs. 16,250,000
Actual fixed and variable overheads Rs. 15,500,000

Required:
Compute the following for the month of June 2014:
(a) Actual material cost (02)
(b) Labour variances (04)
(c) Overhead variances, using four variance method (10)
 Cost and Management Accounting Page 3 of 4

Q.5 (a) What are the non-financial considerations relevant to make-or-buy decision? (03)

(b) Alpha Limited (AL) manufactures and sells products A, B and C. In view of limited
production capacity, AL is meeting the demand for its products partly through imports.

The following information has been extracted from the budget for the next year:

A B C
Machine hours used in production 240,000 225,000 270,000
--------------- No. of units ---------------
Sale 42,000 35,000 26,500
Production 30,000 25,000 22,500
Imports 12,000 10,000 4,000
-------------- Rs. in million --------------
Sales 252.00 175.00 185.50
Cost of production:
- Direct material 48.00 31.25 40.50
- Direct labour 45.00 40.00 56.25
- Variable overheads 33.00 25.00 29.25
- Fixed overheads 28.80 27.00 32.40
Cost of import of finished products 68.40 47.00 26.88

Additional information:
(i) AL is working at 100% capacity.
(ii) AL believes that it can obtain substantial quantity discounts from foreign suppliers
if it increases the import volumes. Each product is supplied by a different supplier.
After intense negotiations, the suppliers have offered discounts of 15%, 10% and
12% for products A, B and C respectively.

Required:
Prepare a product-wise plan of production/imports to maximise the company’s
profitability. (15)

Q.6 Modern Engineering Workshop (MEW) is engaged in production of customised spare parts of
textile machinery. The following information pertains to the jobs worked by MEW during the
month of June 2014:

(i) Job 101 Job 202

Size of job order 4,000 units 5,000 units
------------ Rs. in ‘000 ------------
Opening work in process 15,000 -
Raw material consumed 10,000 31,000
Direct labour used (Rs. 100 per hour) 5,000 8,000

(ii) Overheads are applied to jobs at Rs. 25 per direct labour hour. Under/over applied
overheads are transferred to cost of sales.
(iii) Job 101 was completed during the month and the goods were sent to the warehouse for
delivery to the customer. During the transfer to the warehouse, 160 units were damaged.
Net realizable value of the damaged units was Rs. 500,000. Remaining units were
transferred to the customer.
(iv) Job 202 is in process; however, 2,000 units are fully complete and were transferred to the
warehouse during the month while 3,000 units are 70% complete as at 30 June 2014.
(v) Actual overheads for the month of June 2014 amounted to Rs. 4,000,000.

Required:
Prepare journal entries to record the above transactions. (11)
 Cost and Management Accounting Page 4 of 4

Q.7 (a) Briefly describe the following terms giving an example in each case:
(i) Incremental cost (02)
(ii) Avoidable and unavoidable costs (02)

(b) Salman Limited (SL) has two production departments, PD-A and PD-B, and two service
departments, SD-1 and SD-2. A summary of budgeted costs for the year ending
June 2015 is as follows:

PD-A PD-B SD-1 SD-2 Total

------------------------ Rs. in ‘000------------------------
Direct labour 5,400 3,648 - - 9,048
Direct material 13,500 9,120 - - 22,620
Indirect labour 1,900 600 50 20 2,570
Indirect materials 900 1,100 150 55 2,205
Factory rent - - - - 1,340
Power cost - - - - 1,515
Depreciation - - - - 3,500

Other related data is as follows:

PD-A PD-B SD-1 SD-2
Production (units) 2,250 800 - -
Direct labour hours (per unit) 20 38 - -
Machine hours 19,250 12,250 2,800 700
Kilowatt hours (000) 800 600 50 150
Floor area (square feet) 5,000 4,000 500 500
Machine Direct labour
Basis of overhead application
hours hours - -

SL allocates the costs of service departments applying repeated distribution method.

Details of services provided by SD-1 and SD-2 to the other departments are as follows:

Service Departments PD-A PD-B SD-1 SD-2

SD-1 30% 65% - 5%
SD-2 55% 35% 10% -

Required:
Compute the departmental overhead absorption rate. (10)

(THE END)
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014

Ans.1 Ababeel Foods

Cooking department production and cost for June 2014

Process account - Cooking department

Rs. in Rs. in
Kg. Kg.
'000' '000'
Opening WIP 30,000 (W-2)9,094 Normal loss:
Material 420,000 50,000  weight loss (W.1) 7,700 -
Labour 20,000  rejection (W.1) 11,550 693
Overheads (20,000*1.2) 24,000 Abnormal loss:
 weight loss (W.1) 2,300
 rejection (W.1) 1,450
(W.2) 3,750 829
Transferred out (W.2) 362,000 88,328
Closing WIP (W.2) 65,000 13,244
450,000 103,094 450,000 103,094

W-1: Normal and abnormal losses: Normal loss (Cooking loss at Abnormal
Total loss 2% & rejection loss at 3% of loss
input) (Balancing)
Kg.
Weight loss:
Opening WIP 30,000
Input for the month 420,000
450,000

Transferred to finishing department (362,000)

Closing WIP (65,000)
Total loss 23,000
Weight loss (450,000-440,000) 10,000 (450,000-65,000)×2% 7,700 2,300
Rejection loss (balancing) 13,000 (450,000-65,000)×3% 11,550 1,450
23,000 19,250 3,750

W-2: Cost and equivalent quantity: Material Conv. Total

cost cost cost
Rs. in '000'
Opening WIP 1,288*2.2 6,260 2,834 9,094
Cost added 20,000*2.2 50,000 44,000 94,000
Normal rejection valued @ Rs. 60 per kg 11,550*60 (693) - (693)
Total cost (A) 55,567 46,834 102,401

Rupees
Cost per kg. (A×1,000)÷(B) 129.0 115.0 244.0

Equivalent kg. Total cost

(Rs. in
Material Conv.
‘000)
Finished goods 362,000 362,000 88,328
Closing WIP (100% to material and 65% to conv.) 65,000 42,250 13,244
Total abnormal loss (100% to material and 80% to conv.) 3,750 3,000 829
Total equivalent quantity and cost (B) 430,750 407,250 102,401

Page 1 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014

Ans.2 (a) Auto Industries Limited

Profit statement
Current Proposed
Rs. in million
Sales (125+25), 150*1.3*0.95 150.00 185.25
Variable cost of sales (150*80%), 120*90%*1.3) (120.00) (140.40)
Contribution margin 30.00 44.85
Fixed cost (125×20%), 25+5+ (40*15%) (25.00) (36.00)
Net profit 5.00 8.85

(b) Break-even sales (185.25÷44.85)×36 148.70

Margin of safety (185.25-148.7) 36.55

Ans.3 Omega Limited

Net present value of the project
Year 0 1 2 3 4 5 6
Cash inflows/(outflows) – Rs. in million
Land (40.00) - - - - - 70.00
Factory building (10.00) (20.00) 15.00
Plant installation (100.00) 10.00
Loan 50.00 - - - - (50.00)
Working capital (15.00) - - - - 15.00
Sales (10% growth) - - 300.00 330.00 363.00 399.30 439.23
Cost of goods sold W.1
(8% growth) (195.00) (210.60) (227.45) (245.64) (265.30)
Royalty (3% of sales) (9.00) (9.90) (10.89) (11.98) (13.18)
Interest on loan - - - - -
Net cash flows (50.00) (85.00) 96.00 109.50 124.66 141.68 220.75
PV factor at 12% 1.00 0.89 0.80 0.71 0.64 0.57 0.51
Present value (50.00) (75.65) 76.80 77.75 79.78 80.76 112.58
Net present value of the project 302.02

W.1 Cost of goods sold:

Rs. in million
Cost of own production (Including depreciation) (300×80%×90%) 216.00
Depreciation – factory building (30×50%)÷5 (3.00)
Depreciation – Plant (100×90%)÷5 (18.00)
195.00

Page 2 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014

Ans.4 (a) Actual direct material cost Rupees

Standard material cost 100,000*170 17,000,000
Un-favorable material usage variance 820,000
Un-favorable material price variance 600,000
18,420,000

(b) Direct labour variances Favorable/

(Adverse)
1 Direct labour rate variance
(Standard rate per hour-Actual rate per hour)*Actual hours
[(150/1.25)-(16,250,000/130,000)]*130,000 (650,000)

2 Direct labour efficiency variance

(Standard hours-Actual hours)*Standard rate per hour
(100,000*1.25)-130,000)*120 (600,000)

(c) Overhead variances

1 Overhead spending variance
Standard variable overheads for actual hours 130,000*90 (W-1) 11,700,000
Standard fixed overheads 2,560,000
Total standard overheads 14,260,000
Total Actual overheads 15,500,000
(1,240,000)
2 Variable overhead efficiency variance
(Standard hours-Actual hours)*Standard rate per hour
(125,000-130,000)*90 (450,000)

3 Fixed overhead efficiency variance

(Standard hours used-Actual hours used)*Standard rate per hour
(125,000-130,000)*20 (100,000)

4 Fixed overhead capacity variance

(Normal capacity - Actual capacity used)*Standard fixed rate
(128,000-130,000)*20 40,000

W-1: Fixed and variable overheads rate per direct labour hour
Standard total overheads rate per labour hour 137.5/1.25 110.00
Standard fixed overhead rate per labour hour 2,560,000/128,000 20.00
Standard variable overhead rate per labour hour Rs. 90.00

Ans.5 (a) Non-financial considerations relevant to make or buy decision:

Risks of outsourcing work:

(i) Supplier may produce items to a lower standard of quality.
(ii) The supplier may fail to meet delivery dates and the buyer may dependent on the
supplier to commit onward delivery to its buyer. In case of buying of a component,
production process of the end-product may be held up by a lack of component.

Benefits of outsourcing work:

(i) Outsourcing work will enable the management to focus all of its efforts on those
aspects of operation the entity does best.
(ii) The external supplier may have specialist expertise which enables it to provide
outsourced products more efficiently and at a cheaper price.

Page 3 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014

Ans.5 (b) Alpha Limited

Production/import plan to maximise AL's profit
Product-A Product-B Product-C
Capacity utilisation Machine hours (A) 240,000 225,000 270,000

Sales of units to be produced (B) 30,000 25,000 22,500

Sales of units to be imported (C) 12,000 10,000 4,000
Total sale units 42,000 35,000 26,500

Rupees in million
Variable Cost of production:
Direct material 48.00 31.25 40.50
Direct labour 45.00 40.00 56.25
overheads 33.00 25.00 29.25
Total cost (D) 126.00 96.25 126.00

Rupees
Cost per produced unit F (D÷B) 4,200.00 3,850.00 5,600.00

Rupees in million
Cost of imports:
Existing cost of imported finished goods: 68.40 47.00 26.88
Bulk discount offered 15% 10% 12%
Discounted price of imported goods (F) 58.14 42.30 23.65

Rupees
Cost per imported unit G (F÷B) Rs. 4,845.00 4,230.00 5,912.00

Loss per unit on imports (F-G) (645.00) (380.00) (312.50)

Production Plan:
Machine hours per unit H (A÷B) 8.00 9.00 12.00
Loss per machine hour on imports Rs. (80.63) (42.22) (26.04)
Production priority to save loss on imports 1st. 2nd. 3rd.
Production from available hours of 735,000 in
sequence of the above priority:
Product-A Units demand 42,000
Hrs. utilized (42,000×8) 336,000
Product-B Units demand 35,000
Hrs. utilized (35,000×9) 315,000
Product-C Units from remaining hrs. 7,000
Remaining hrs, [735-336-315] 84,000

Import plan:
Product-C:
Demand exceeding production (26,500-7,000) - - 19,500
Total units 42,000 35,000 26,500

Page 4 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014

Ans.6 Modern Engineering Works

Journal entries

Debit Credit
Date Particulars
Rs. in '000
1 Work in process Job # 101 10,000
Work in process Job # 202 31,000
Raw material 41,000
(Raw material consumed for jobs)

2 Work in process Job # 101 5,000

Work in process Job # 202 8,000
Payroll 13,000
(Direct labour cost allocated to jobs)

3 Work in process Job # 101 5,000/100*25 1,250

Work in process Job # 202 8,000/100*25 2,000
Factory overheads applied 3,250
(Overheads applied to the jobs @ Rs. 25 per direct labour hour)

4 Factory overheads applied 3,250

Cost of sales – overhead under applied (4,000–3,250) 750
Factory overheads control 4,000
(Transfer of applied factory overheads to control a/c and under
applied overheads charged to cost of sales)

5 Finished goods (Job # 101)

(15,000+10,000+5,000+1,250)*3,840/4,000 30,000
Damaged goods (at NRV) 500
Profit and loss account (damaged goods cost exceeding
NRV)
(31,250×160/4,000)-500 750
Work in process Job # 101 31,250
(WIP of Job order # 101 transferred to finished goods)

6 Cost of sales 30,000

Finished goods 30,000
(Finished goods of Jobs # 101 transferred to cost of sales)

7 Finished goods
(31,000+8,000+2,000)/(2,000+3,000*0.7)*2,000 20,000
Work in process Job # 202 20,000
(Units fully completed for Job # 202 transferred to finished
goods)

Page 5 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014

Ans.7 (a) (i) Incremental cost

An incremental cost is the additional cost that will occur if a particular
decision is taken. Provided that this additional cost is a cash flow.

Example:
To produce 1,000 units, a company incurred variable cost of Rs. 1.2 million.
At a normal capacity of 2,000 units, fixed cost incurred was Rs. 0.6 million.
The incremental cost of making one extra unit would be Rs. 1,200 and it
would not affect the fixed cost.

(ii) Avoidable and unavoidable costs

An avoidable cost could be saved (avoided), depending whether or not a
particular decision is taken. An unavoidable cost is a cost that will be incurred
anyway.

Example:
A company is paying Rs. 0.5 million annually for a warehouse on a short term
lease and incurring an annual cost of Rs. 0.4 million on maintenance and
security of the warehouse. One year of the lease is remaining and the
warehouse is no more required.

The rental cost of the warehouse is unavoidable cost; therefore, it should be

ignored while taking any decision. However, by closing down the warehouse
the company can avoid annual maintenance and security costs of Rs. 0.4
million.

(b) Salman Limited

Allocation of overheads and overheads absorption rate

Allocation Total PD-A PD-B SD-1 SD-2

basis Rs. in 000
Direct labour - - - - -
Direct material - - - - -
Indirect labour - 1,900 600 50 20
Indirect materials - 900 1,100 150 55
Factory rent Floor area 1,340 670 536 67 67
Power Kilowatt hrs. 1,515 758 568 47 142
Depreciation Machine hrs. 3,500 1,925 1,225 280 70
6,153 4,029 594 354
Allocation of service departments cost:
SD-1 30:65:5 178 386 (594) 30
SD-2 55:35:10 211 134 39 (384)
SD-1 30:65:5 12 25 (39) 2
SD-2 55:35:10 1 1 0 (2)
6,555 4,576 - -

Machine D. labour
Allocation basis
hrs. hrs.
Machine/D. labour hours 19,250 30,400 800×38
Overhead absorption rate per hour Rs. 340.52 150.53

(THE END)

Page 6 of 6
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Cost and Management Accounting Certificate in Accounting and Finance
– Autumn 2014

General:

It was a balanced paper with a good mix of easy, moderate and difficult questions.
However, the overall performance in the paper was about average. This was probably
because of the fact that one of the easiest questions on job order costing was poorly
attempted.

Question-wise comments:

Question 1

This question required preparation of process account of Cooking Department of a food

processing company. As is usual, the key issue was to calculate the process loss and
bifurcation thereof between normal and abnormal loss. In the given situation, the normal
loss required further bifurcation between loss due to cooking and loss due to rejection.

The performance was just about average as majority of the students seemed familiar with
the overall process but made various mistakes in the calculation and treatment of process
losses. Some of the frequent mistakes are enumerated below:

 Total loss was calculated on the material input during the month only. Since opening
work in process was only 50% complete as regards conversion and the inspection
takes place when it is 80% complete, hence, loss should have been calculated on the
opening work in process as well. Further, no loss should have been computed on the
closing stock as it was only 65% complete.
 Normal loss was not bifurcated between weight and rejection losses and in most such
cases, disposal of rejected nuggets was ignored.
 Normal loss was also included in equivalent production.
 In arriving at the equivalent production, the fact that abnormal loss quantity was only
80% complete as regards conversion was ignored and entire quantity of abnormal loss
was included in equivalent production as regards conversion cost also.
 Inventory was valued using FIFO method instead of average cost.
 Some students ignored the applied overheads.

Question 2

This was a straightforward question in which existing break-even sales, margin of safety
and contribution margin percentage were given. The question also provided information
about certain proposed measures and the impact thereof on the financial performance of
the company during the next period. The requirement was to:

Page 1 of 4
 Examiners’ Comments on Cost and Management Accounting - Autumn 2014

(a) Prepare profit statements under current and proposed scenarios and;

(b) Compute break-even sales and margin of safety as a result of taking the proposed
measures.

Overall performance in this question was average. For the existing situation, most of the
students computed the sales correctly by adding the breakeven sales and the margin of
safety. Almost all students correctly calculated the variable costs as 80% of sales and the
fixed costs by multiplying the break-even sales with contribution margin percentage.

However, various errors were noted in calculating the figures for the next period. Some
of these are enumerated below:
 Impact of 5% decline in sales price was determined by dividing the sales under
existing scenario by 1.05 instead of multiplying it by 0.95.
 Only about half the candidates were able to compute the variable costs correctly as
the remaining candidates calculated it by multiplying the sale with 70%. The students
need to understand the difference between 10% decline in variable cost percentage
and 10 % decline in cost per unit.
 A significant number of candidates did not take into account the interest on loan, in
the computation of break-even sales.

Question 3

A poor performance was witnessed in this question which required computation of NPV
of a project. A number of errors were observed. The most common among them are as
follows:

 Majority of the students ignored the fact that installation of plant was to be completed
in one year and hence the cash flows were to be computed for Year 0 to 6. Instead,
they determined cash flows for Year 0 to 5.
 A significant number of candidates did not understand the concept of Year 0 and took
outflows pertaining to Year 0 in Year 1.
 Instead of its market value, cost of land was taken as outflow.
 Market value of land at the end of the period of five years was ignored.

Question 4

This question on variances was straightforward and most of the students attempted it
well. Some of the common errors are as follows:

 Many students could not compute the actual material cost correctly as they deducted
the unfavourable variances from the standard cost instead of adding them. Some
students did not attempt it altogether.
 Many students could not correctly bifurcate the total overhead rate per labour hour
into fixed and variable portions and consequently, made errors in the computation of
variances.

Page 2 of 4
 Examiners’ Comments on Cost and Management Accounting - Autumn 2014

Question 5 (a)

A mixed response was seen in this 3 mark theory question. A large number of students
scored full marks whereas few students did not attempt it altogether. However, it was
noted that those who secured full marks in this part, performed much better in the second
part as well.

Question 5(b)

This was a difficult question and required good understanding of the concept involved in
make or buy decisions as well as in determining the optimum production plan in a
situation where production capacity is limited and each product can be produced as well
as purchased from outside suppliers.

The answer involved the following key steps:

 Determining the variable cost of production of each product.

 Dividing the difference between the discounted cost of imports and the variable cost
of production by number of production hours to determine the order of ranking. (The
same result could have been obtained by dividing the difference between the
contribution margin of own produced and imported units by the number of production
hours but it was a slightly lengthy method)
 Preparing optimum production plan from the available production hours based on the
order of ranking.

Most of the students performed poorly in this question as they started making
calculations without a proper plan. As could be seen from the steps described above, the
key step was to determine the ranking and that is where most students erred as they failed
to use the appropriate basis for the ranking. A large number of students used the
following basis for the purpose of ranking:

 Discount offered.
 Discount offered divided by production hours per unit.
 Import price after discount or import price after discount divided by production hours
per unit.
 Contribution margin on internally produced goods divided by production hours per
unit.

Question 6

It was a simple question requiring journal entries based on job order costing. Probably
because such questions are not tested frequently, the performance was much below the
expected level. The basic entries for charging materials, labour and overhead costs to
WIP of respective jobs were correct in majority of the answers. However, majority of the
students made errors in the entries related to closure of applied FOH, recording of
damaged goods and consequential loss and transfer of WIP to finished goods.

Some students prepared t-accounts which were not required.

Page 3 of 4
 Examiners’ Comments on Cost and Management Accounting - Autumn 2014

Question 7(a)

This part required brief description of some of the very elementary cost accounting
concepts but was not very well-answered. Almost 50% of the students gave incorrect
examples.

Question 7(b)

This was the easiest question of this paper. It required calculation of absorption rate. Cost
was to be allocated to all departments based on relevant drivers and thereafter, service
departments’ cost was to be allocated to the products.

Most of the students performed well in this question. However, some of the common
mistakes are mentioned below:

 Many students did not allocate the service departments’ costs to the products.

 A significant number of students did not understand the repeated distribution method
and allocated the service departments cost in one step i.e. to the products only.

 Many students included the direct material and direct labour costs in the overheads.

THE END

Page 4 of 4
 Certificate in Accounting and Finance Stage Examinations
The Institute of 4 March 2015
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Q.1 KPK Dairies Limited (KDL) is planning to introduce three energy flavored milk from 1 July
2015. In this respect, following projections have been made:

C-Plus I-Plus V-Plus

Planned production (No. of packets) 540,000 275,000 185,000
Sales (No. of packets) 425,000 255,000 170,000
Production cost per packet: ----------- Rupees -----------
Direct material 100 98 97
Direct labour 15 13 12
Variable overheads 23 19 16
Fixed overheads 25 22 20
Selling and distribution cost per packet:
Variable overheads 12 8 10
Fixed overheads 5 5 5
Total cost per packet 180 165 160

KDL will sell its products through a distributor at a commission of 5% of sale price and
expects to earn a contribution margin of 40% of net sales i.e. sales minus distributor's
commission.

Required:
Compute break even sales in packets and rupees, assuming that ratio of quantities sold
would be as per projections. (17)

Q.2 Diamond Investment Limited (DIL) is considering to set-up a plant for the production of a
single product X-49. The details relating to the investment are as under:

(i) The cost of plant amounting to Rs. 160 million would be payable in advance. It
includes installation and commissioning of the plant.
(ii) Working capital of Rs. 20 million would be required at the commencement of the
commercial operations.
(iii) DIL intends to sell X-49 at cost plus 25% (cost does not include depreciation on
plant). Sales for the first year are estimated at Rs. 300 million. The sales quantity
would increase at 6% per annum.
(iv) The plant would be depreciated at the rate of 20% under the reducing balance
method. Tax depreciation is to be calculated on the same basis. Estimated residual
value of the plant at the end of its useful life of four years would be equal to its
carrying value.
(v) Tax rate is 34% and tax is payable in the year the liability arises.
(vi) DIL’s cost of capital is 18%. All costs and prices are expected to increase at the rate
of 5% per annum.

Required:
Compute the following:
(a) Net present value of the project (12)
(b) Internal rate of return of the project (05)
Assume that unless otherwise specified, all cash flows would arise at the end of the year.
 Cost and Management Accounting Page 2 of 4

Q.3 Sigma Limited (SL) is a manufacturer of Product A. SL operates at a normal capacity of

90% against its available annual capacity of 50,000 machine hours and uses absorption
costing. The following summarised profit statements were extracted from SL's budget for
the year ending 31 December 2015.

Actual - 2014 Budget - 2015

Units Rs. in '000 Units Rs. in '000
Sales 4,125 49,500 4,600 56,580
Opening inventory 400 (3,400) 600 (5,400)
Cost of production 4,325 (38,925) 4,500 (44,325)
Closing inventory 600 5,400 500 4,925
Under absorbed production overheads (100) -
Selling and administration cost (30% fixed) (3,000) (5,250)
Net profit 9,475 6,530

Other relevant information is as under:

2014 Budget - 2015

Standard machine hours per unit 10 hours 10 hours
Standard production overhead rate per unit Rs. 2,000 Rs. 2,250
Estimated fixed production overheads at normal capacity Rs. 3,600,000 Rs. 4,050,000
Actual production overheads (Actual machine hours 44,000) Rs. 8,750,000 -

Required:
(a) What do you understand by under/over absorbed production overheads? (02)
(b) Analyse the under absorbed production overheads of SL for the year ended
31 December 2014, into spending and volume variances. Give two probable reasons
for each variance. (06)
(c) Prepare budgeted Profit and Loss Statement for the year ending 31 December 2015,
using marginal costing. (07)
(d) Analyse the difference between budgeted profit determined under absorption and
marginal costing, for the year ending 31 December 2015. (02)

Q.4 KS Limited operates two production departments A and B to produce a product XP-29.
Following information pertains to Department A for the month of December 2014.

Litres Rs. in '000

Opening work in process (Material 100%, conversion 80%) 15,000
 Material - 5,000
 Direct labour and overheads - 2,125
Actual cost for the month:
 Material 120,000 36,240
 Direct labour - 14,224
 Overheads - 11,500
Expected losses 5% -
Closing work in process (Material 100%, conversion 80%) 17,000 -
Units transferred to Department B 110,000 -

KS uses FIFO method for inventory valuation. Direct materials are added at the beginning
of the process. Expected losses are identified at the time of inspection which takes place at
the end of the process. Overheads are applied at the rate of 80% of direct labour cost.

Required:
(a) Equivalent production units (02)
(b) Cost of goods transferred to Department B (09)
(c) Accounting entries in the cost accounting system. (06)
 Cost and Management Accounting Page 3 of 4

Q.5 Zee Chemicals Limited (ZCL) produces two joint products, Alpha and Beta from a single
production process. Both products are processed upto split-off point and sold without any
further processing.

Presently, ZCL is considering the following proposals:

 Expansion of the existing facility by installing a new plant

 Installation of a refining plant to sell either Alpha or Beta after refining

To assess the above proposals, following data has been gathered:

(i) Actual cost incurred in the month of December 2014:

Rs. in '000
Direct material 15,000
Variable conversion costs (Rs. 230 per hour) 4,890
Fixed overheads 2,600

(ii) Actual production and selling price for the month of December 2014:

Selling price per

Litres
litre (Rs.)
Alpha 11,300 1,000
Beta 14,700 1,125

(iii) There is no process loss and joint costs are apportioned between Alpha and Beta
according to the weight of their output.

(iv) Details of the proposed plans are as follows:

Expansion of Installation of
existing facility refining plant
Capacity in machine hours per month 5,000 5,000
------------ Rs. in '000 ------------
Cost of plant and its installation 20,000 25,000
Estimated residual value at the end of life 1,400 2,800
Estimated additional fixed overheads per month 250 500

Estimated useful life of the plant 20 Years 20 Years

(v) Estimated variable cost of refining and sales price of refined products:

Alpha Beta
Rupees per liter
Direct material 90 125
Conversion cost (Rs. 150 per hour) 68 80
Selling price 1,380 1,525

(vi) There would be no loss during the refining process. There is adequate demand for
Alpha and Beta at split-off point and after refining.

Required:
Evaluate each of the above proposals and give your recommendations. (16)
 Cost and Management Accounting Page 4 of 4

Q.6 Hi-tech Limited (HL) assembles and sells various components of heavy construction
equipment. HL is working on a proposal of assembling a new component EXV-99. Based on
study of the product and market survey, the following information has been worked out:

Projected lifetime sale of the component EXV-99 Units 500,000

Selling price per unit Rs. 11,000
Target gross profit percentage 40%

Information about cost of production of the new component is as follows:

(i) One unit of EXV-99 would require:

Parts no. Net quantity Cost per unit/kg (Rs.)

XX 1 unit 2,350
YY 1.5 kg 1,400
ZZ 1 unit 1,200

The above parts would be imported in a lot, for production of 1,000 units of EXV-99.
Custom duty and other import charges would be 15% of cost price. HL is negotiating
with the vendor who has agreed to offer further discount.

(ii) On average, assembling of one unit of EXV-99 would require 1.8 skilled labour hours
at Rs. 200 per hour. The production would be carried out in a single shift of 8 hours.
At the start of each shift, set-up of machines would require 30 minutes. 6% of the
input quantity of YY and ZZ would be lost during assembly process.

(iii) HL works at a normal annual capacity of 4,000,000 skilled hours. Actual production
overheads and skilled labour hours for the last two quarters are as under:

Quarter Total assembly Production

ended hours overheads (Rs.)
30-Sep-2014 950,000 65,600,000
31-Dec-2014 1,050,000 68,000,000

(iv) A special machine that would be used exclusively for the production of EXV-99
would be purchased at a cost of Rs. 1,500,000.

Required:
From the above information, determine the discount that HL should obtain in order to
achieve the target gross profit. (16)

(THE END)
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2015

A.1 KPK Dairies Limited

Break-even sales: C-Plus I-Plus V-Plus Total
- In total – No. of packets(H÷G) A 287,660
- Product wise – No. of packets (A×C) B 143,830 86,298 57,532 287,660
- Product wise – Rupees (B×D) 37,850,303 20,893,609 13,625,879 72,369,791

W.1: Sales quantity ratio

----------------------------Litres----------------------------
Projected sales 425,000 255,000 170,000 850,000
Sales quantity ratio C 0.5 0.3 0.2 1.0

W.2: Contribution margin per combination:

-------------------------- Rupees --------------------------
Gross sales price per unit (E÷0.57*) D 263.16 242.11 236.84
Commission at 5% of sales (13.16) (12.11) (11.84)
Variable cost per unit E (150.00) (138.00) (135.00)
(100+15+23+12) (98+13+19+8) (97+12+16+10)

Contribution margin (CM) per unit F 100.00 92.00 90.00

CM in sales quantity ratio (C×F) G 50.00 27.60 18.00 95.60
VC% to sales: (100-5%)×60% = 57%*

W-3: Fixed overheads

Production fixed overheads 13,500,000 6,050,000 3,700,000 23,250,000
(540,000×25) (275,000×22) (185,000×20)
Selling and distribution fixed overheads 2,125,000 1,275,000 850,000 4,250,000
(425,000×5) (255,000×5) (170,000×5)
H 27,500,000

A.2 Diamond Investment Limited

(a) Net Present Value (NPV) of the project

Year 0 Year 1 Year 2 Year 3 Year 4

Cash inflows/(outflows) - Rupees in million
Sales (yearly increase: volume 6% & price 5%) - 300.00 333.90 371.63 413.62
Cost (Sales ÷ 1.25) - (240.00) (267.12) (297.30) (330.90)
Plant depreciation at 25% of WDV - (32.00) (25.60) (20.48) (16.38)
Net profit - 28.00 41.18 53.85 66.34
Tax @ 34% - (9.52) (14.00) (18.31) (22.56)
Add back depreciation - 32.00 25.60 20.48 16.38
Cost of plant and its installation (160.00) - - - 65.54
Working capital (20.00) - - - 20.00
Projected cash flows (180.00) 50.48 52.78 56.02 145.70
PV factor at 18% 1.00 0.85 0.72 0.61 0.52
Present value (180.00) 42.91 38.00 34.17 75.76

NPV at 18%
10.84

(b) Internal Rate of Return (IRR) of the project:

PV factor at 22% 1.00 0.82 0.67 0.55 0.45
PV at 22% (Projected cash flow × PV factor) (180.00) 41.39 35.36 30.81 65.57

NPV at 22% (6.87)

( ) ( )

Page 1 of 5
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2015

A.3 Sigma Limited

(a) Under /over absorbed production overheads:
Production overhead rate is predetermined at beginning of the year based on budgeted annual
overheads and budgeted annual production. Overhead are applied to actual hours/units using
predetermined overhead rate. However, actual overheads and actual production may differ
from the budgeted overheads and production, therefore, it would result in under/over
absorption of production overheads.

(b) Analyse of under absorbed production overheads into a spending and volume variance:
(i) Spending variance
Hours allowed for actual production of 4,325 units 4,325×10 43,250
Rs. in ‘000
Budgeted variable overheads for hours allowed 43,250×0.12*1 5,190
Standard fixed overheads 3,600
8,790
Actual overheads 8,750
Favourable spending variance A 40

(ii) Volume variance

Estimated fixed overheads at normal capacity 45,000×0.08*2 3,600
Fixed overheads for hours allowed for actual production 43,250×0.08*2 3,460
Adverse volume variance B (140)
Under absorbed production overheads (A+B) (100)
*1
Variable cost per hour [(2,000÷10)–(3,600,000÷(50,000×90%)]=120
*2
Fixed cost per hour [(2,000÷10) –120]=80

Reasons for favourable spending variance:

(i) Lesser spending/decrease in price of overhead items as compared to budget.
(ii) Over-estimating overhead expenditure while preparing the budget.
Reasons for adverse volume variance:
(i) Under-utilisation of available capacity
(ii) In-efficient use of machine hours

(c) Budgeted Profit and Loss Statement – using marginal costing

For the year ending 31 December 2015
Rs. in '000
Sales 56,580
Variable cost of sales:
Opening inventory 5,400-(600×0.8*3) (4,920)
Cost of production (44,325–4,050) (40,275)
Closing inventory 4,925-(500×0.9*4) 4,475
(40,720)
Gross contribution margin 15,860
Variable selling and administration cost 5,250×70% (3,675)
Net contribution margin 12,185
Fixed production overheads (4,050)
Fixed selling and distribution overheads 5,250×30% (1,575)
Net profit 6,560
*3
Fixed cost per unit – 2014 [3,600,000÷(50,000×90%÷10)=800
*4
Fixed cost per unit – 2015 [4,050,000÷(50,000×90%÷10)=900

(d) Analysis of budgeted profit as per Marginal and Absorption costing: Rs. in '000
Net profit under marginal costing 6,560
Under absorption costing:
 fixed overheads brought from the last year as included in
the opening inventory (600×0.8) *3 (480)
 fixed overheads carried forward to the next year as
included in the closing inventory (500×0.9) *4 450
Net profit under absorption costing 6,530
Page 2 of 5
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2015

A.4 (a) KS Limited

Equivalent production: Material Conversion
------------ Litres ------------
Units completed and transferred out 110,000 110,000
Closing WIP (100% material and 80% conversion) 17,000 13,600
Opening WIP (100% material and 80% conversion) (15,000) (12,000)
Abnormal loss
W.1 2,100 2,100
Equivalent production (A) 114,100 113,700

Cost per litre:

---------- Rupees ----------
Cost incurred in December 2014 (B) 36,240,000 25,603,200
(14,224,000×1.8)
Cost per litre (B÷A) 317.62 225.18

(b) Cost of goods transferred to Department B

Rs. in '000
From opening WIP:
- Cost incurred prior to 1 Dec. 2014 5,000+2,125 7,125
- Conversion cost incurred in Dec. 2014 15,000×20%×225.18 676
7,801
From units started and completed in Dec. 2014 [(110,000-15,000)×(317.62+225.18)] 51,566
59,367

W.1: Abnormal loss Litres

Opening WIP 15,000
Units started in December 2014 120,000
Closing WIP (17,000)
Units completed in December 2014 118,000
Transferred to department B (110,000)
Normal loss 118,000 × 5% (5,900)
Abnormal loss 2,100

(c) Accounting entries for the month of December 2014

Debit Credit
Date Description
Rs. in '000
31-Dec-2014 WIP - Department A 61,843
Raw material 36,240
Payroll 14,224
Applied overheads 14,224×80% 11,379
(Cost charged / overheads applied to department A)
31-Dec-2014 Applied overheads 11,379
Cost of sale (under applied overheads) 121
Overhead control account 11,500
(Under-absorbed overheads charged to P&L account)
31-Dec-2014 WIP - Department B 59,367
P&L account (abnormal loss) [2,100×(317.62+225.18)] 1,140
WIP - Department A 60,507
(Units transferred to B and abnormal loss charged to
department B and P&L account respectively)

Page 3 of 5
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2015

A.5 Zee Chemicals Limited

Evaluation of proposals for expansion of the existing facility / installation of refining plant

Expansion Refining plant

(Sale at split-off point) (Sale after refining)
Alpha Beta Alpha Beta
Sales/incremental sales value per litre 1,000 1,125 380 400
(1,380–1,000) (1,525–1,125)

Variable cost at split-off point/cost of (765) (765) (158) (205)

refining per litre (15,000+4,890)÷(11,300+14,700) (90+68) (125+80)

Contribution margin per litre A 235 360 222 195

CM from 5,000 hours:
Total hours worked in December 2014 21,261 Hrs.
(4,890,000÷230)
Hours per litre for refining 0.453 Hrs. 0.533 Hrs.
(68÷150) (80÷150)
Production from 5,000 hours B 2,657 Ltrs. 3,457 Ltrs. 11,038 Ltrs. 9,381 Ltrs.
(5,000/21,261× (5,000/21,261× (5,000÷0.453) (5,000÷0.533)
11,300) 14,700)
Contribution margin (A×B) 1,868,915 2,450,436 1,829,295
(2,657×235)+( 3,457×360) (11,038×222) (9,381×195)
Fixed overheads:
Depreciation per month (20,000-1,400)÷20÷12 (77,500)
(25,000-2,800)÷20÷12 (92,500) (92,500)
Additional fixed overheads per month (250,000) (500,000) (500,000)
Net profit per month 1,541,415 1,857,936 1,236,795

Recommendations:
As refining of Alpha produces the highest profit, ZCL should install refining plant to refine
and sell 11,038 litres of Alpha.

Page 4 of 5
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2015

A.6 Hi-Tech Limited

Discount required from vendors to achieve target gross profit from sale of EXV -99

Rs. in million
Total cost estimated W.1 3,624.27
Target cost [11,000×60%×500,000] 3,300.00
Cost gap 324.27
Discount amount to be obtained from the vendor [324.27÷1.15] 281.97
Required discount % [(281.97÷2,931(W.1)×100 9.62%

W.1: Cost estimate for 500,000 units of EXV-99:

Material XX (2,350×500,000) 1,175.00
Material YY (incl. process loss at 6%)(1.5÷0.94×1,400×500,000) 1,120.00
Material ZZ (incl. process loss at 6%)(1.0÷0.94×1,200×500,000) 636.00
2,931.00
Custom duty and other import charges [2,931×15%] 439.65
Direct labour:
Labour cost (1.8×200×500,000) 180.00
Labour set up cost (1.8÷7.5×0.5×200×500,000) 12.00
Production overheads:
Variable [1.80×24.00(W.2)×500,000] 21.60
Fixed [1.80×42.80(W.3)×500,000] 38.52
Fixed – cost of machine 1.50
Total cost 3,624.27

W.2: Variable overhead rate per hour: Hours Rupees

Quarter ended 31 December 2014 1,050,000 68,000,000
Quarter ended 30 September 2014 (950,000) (65,600,000)
100,000 2,400,000
Variable overhead rate per hour(using high-low method) (2,400,000÷100,000 24.00

W.3: Fixed overhead rate per hour:

Cost for the quarter ended 30 September 2014 65,600,000
Less: Variable cost [950,000×24(W.3)] (22,800,000)
Fixed overheads per quarter 42,800,000
Fixed overheads per annum [42,800,000×4] 171,200,000
Fixed overhead rate per hour at normal capacity of 4,000,000 hrs.
[171,200,000÷4,000,000] 42.80

(THE END)

Page 5 of 5
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Cost and Management Accounting Certificate in Accounting and Finance
– Spring 2015

General:

The overall performance in this attempt was almost the same as in the last attempt. Most
of the students fared badly in questions which required in-depth analysis of data. On the
other hand, the questions requiring straightforward calculations were performed better.
Question-wise comments are given below:

Question 1

According to the question, a company produced three types of products which were sold
in packets. The candidates were required to calculate breakeven sales in rupees as well as
in number of packets of the three products, assuming that ratio between sales quantities
of the three products would be as per the projections.

The important thing to note was that 5 packets of C-Plus, 3 packets of I-Plus and 2
packets of V-Plus (since the sales ratio in terms of quantity was 5:3:2) represented a
combination. Breakeven sales in rupees divided by sales value of this combination could
have given the sales in number of combinations; and multiplying the number of
combinations by 5, 3 and 2 could have given the number of packets of C-Plus, I-Plus and
V-Plus respectively. Similarly, fixed cost divided by contribution margin on this
combination could have given the number of packets to break even, as discussed above
and the number of packets so arrived could have been used to arrive at the break-even
sales in rupees.

Following common mistakes were noted:

 Fixed cost were to be calculated by multiplying fixed production overhead rate with
planned production in packets and fixed selling and distribution overhead rate with
projected sales quantities. But commonly students multiplied planned production
quantity or projected sales quantity with sum of both the rates instead of their
respective rates.
 Many students tried to compute the break even on individual product basis instead of
the overall basis.
 Many students did not understand the treatment of commission. They either
multiplied the net sales by 5% to arrive at the amount of commission or multiplied the
net sales by 1.05. The correct method was to divide the net sale by 0.95 to arrive at
the gross sales before commission. Many students ignored the commission altogether
and computed the break even on the basis of net sales.

Page 1 of 4
 Examiners’ Comments on Cost and Management Accounting - Spring 2015

 Many students tried to solve the question by working out a weighted average. Though
some of them were able to produce a correct answer but the method was too lengthy
and took a lot of their time.

Question 2

It was a simple question requiring computation of net present value of a project. More
than 60% students were able to secure passing marks in this question. Some of the
common mistakes were as follows:
 First year sale was given. Next year’s sale should have been calculated by applying
increase in volume by 6% and increase in price by 5% separately i.e. by multiplying
the previous year’s sales by 1.06 and 1.05. Many students applied a combined
increase of 11% which was incorrect.
 To find out cost of sale, the students used a number of different methods. The correct
method was to divide sales by 1.25 or multiply sale by 0.80. However, many
candidates computed it by multiplying sales by 0.75. Some of the students followed
the correct method for the first year but thereafter they increased it by 5% each year
i.e. took the effect of cost increase but ignored the volume increase.
 Majority of the candidates ignored the changes in working capital altogether. A
number of candidates included the increase in working capital in their calculations but
ignored the recovery thereof, at the end of the project.
 Many candidates could not compute the PV factor correctly.
 A number of candidates were unable to determine the IRR correctly as they had little
idea of interpolation.

Question 3

This question tested the students on variances and marginal v/s absorption costing. It
turned out to be the most poorly attempted question of this paper. There were four parts
and performance in each part is discussed below:

(a) The candidates were required to explain the under/over absorbed production
overheads. Generally the response was poor. Most of the candidates gave
incomplete answers.

(b) It was quite surprising that very few students calculated spending variance and
volume variance correctly. Many of them did not attempt this part altogether.

(c) This part required preparation of budgeted profit and loss statement under marginal
costing. The overall performance was again very poor. Very few students were
able to calculate the opening and closing inventory correctly by excluding the
impact of fixed costs from the value of inventory under absorption costing. Many
students ignored this aspect altogether and took the value of inventory as given in
the question which was based on absorption costing. Other common errors were as
follows:
 The fixed selling and administration expenses were ignored.

Page 2 of 4
 Examiners’ Comments on Cost and Management Accounting - Spring 2015

 Net contribution margin was not calculated. Instead, only net profit was
calculated.

(d) Since very few students were able to work out the profit under marginal costing
correctly, this part requiring analysis of profit under marginal and absorption
costing could not be performed. Some candidates gave general comments on the
two methods and the difference between them, which were not required.

Question 4

This was a straightforward question on process accounting, requiring calculation of

equivalent production units, cost of goods transferred and accounting entries in the cost
accounting system. Majority of the students who attempted the question scored passing
marks. However, working out correct normal loss and hence abnormal loss again proved
difficult for many students. Further, many candidates followed the weighed average
method instead of FIFO method. There were many students who did the first two parts
correctly but were unable to pass journal entries, which is quite alarming. Failure to pass
correct journal entries depict serious conceptual weakness. The students must try to
overcome this weakness otherwise they would face serious problems in the remaining
papers and also in their practical life.

Question 5

This question required evaluation of two proposals, one related to expansion of existing
facility and the other related to installation of plant for further processing of the products
which were being sold without further processing. All such questions are usually solved
using the same approach i.e. by comparing the incremental revenues and incremental
costs. However, majority of the students made a number of mistakes in the process,
mostly because of lack of conceptual understanding and also because of their inability to
grasp the overall situation presented in the question.

Common mistakes are discussed below:

 Majority of the students could not calculate incremental revenues and costs for the
expansion option. Main reason thereof was that the candidates were unable to
compute the existing plant capacity of 21261 hours by dividing the total variable
conversion costs in December 14 by conversion costs per hour. Therefore, they were
also unable to work out the increase in production and consequently the increase in
revenues and costs due to expansion of existing facilities.

 Under the refining option, most candidates were able to determine the incremental
contribution margin due to refining correctly. However, they were unable to calculate
the total increase in contribution margin because of the same reasons, as discussed
above i.e. because they could not determine the quantity that the plant would be able
to refine.

 In case of expansion option, some students computed the enhanced production due to
expansion for both products correctly but they determined the increase in contribution
margin on the basis of one product only.

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 Examiners’ Comments on Cost and Management Accounting - Spring 2015

Question 6

In this question, the costs of producing a new product were given and the candidates were
required to determine the percentage of discount that should be negotiated with the
foreign supplier of raw material in order to earn the target profit. The question was quite
straightforward and majority of the students performed well and many of them scored full
marks as well.

The errors observed were as follows:

 A number of students were unable to determine the fixed and the variable overheads
using the high-low method.

 According to the question, 6% of input quantity i.e. quantity before loss, was
estimated to be lost during the process. Many students treated it as 6% of the quantity
actually used after the incurrence of loss. There is a very fine difference between the
two and the students should understand such issues with clarity.

 According to the question, 30 minutes in each shift were to be used for setting up the
machines. Hence, the actual time available for production in an 8-hour shift was 7.5
hours. The labour cost pertaining to setting up time was ignored by many candidates.

 While determining the required amount of discount, many students ignored the
impact of custom duty.

THE END

Page 4 of 4
 Certificate in Accounting and Finance Stage Examinations
The Institute of 10 September 2015
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Q.1 Oceanic Chemicals manufactures two joint products Sigma and Beta in a single process at its
production department. Incidental to the production of these products, it produces a by-
product known as ZEE. Sigma and ZEE are sold upon completion of processing in
production department whereas Beta goes to refining department where it is converted into
Theta.

Joint costs are allocated to Sigma and Beta on the basis of their net realizable values.
Proceeds from sale of by-product are treated as reduction in joint costs. In both the
departments, losses upto 5% of the input are considered as a normal loss.

Actual data for the month of June 2015:

Department
Production Refining
Cost ------ Rs. in '000 ------
Material input at Rs. 50 per kg 3,000 -
Direct labour at Rs. 100 per hour 2,500 350
Production overheads 1,850 890
Output ---------- Liters----------
Sigma 34,800 -
Beta 16,055 -
ZEE (by-product) 5,845 -
Theta - 15,200
Sigma, Theta and by-product ZEE were sold at Rs. 300, Rs. 500 and Rs. 40 per liter
respectively. There was no work in process at the beginning and the end of the month.

Required:
Compute the cost per liter of Sigma and Theta, for the month of June 2015. (12)

Q.2 Sona Limited (SL) is considering investment in a joint venture. The entire cash outlay of the
project is Rs. 175 million which would require to be invested by SL immediately. The joint
venture partner, Chandi Limited (CL) would provide all the necessary technical support.
The other details of the project are estimated as follows:
(i) The project would extend over a period of four years.
(ii) Sales are estimated at Rs. 155 million per annum for the first two years and
Rs. 65 million per annum during the last two years.
(iii) Cost of sales and operating expenses excluding depreciation would be 50% and 10% of
sales respectively.
(iv) CL would be entitled to share equal to 5% of sales and the remaining profit would
belong to SL.
(v) At the end of the project, SL would be able to recover Rs. 100 million of the invested
amount.

Assume that all cash flows other than the initial cash outlay arise annually in arrears.

Required:
Calculate the project’s internal rate of return. (09)
 Cost and Management Accounting Page 2 of 4

Q.3 The following information pertains to Hope Limited for the latest financial year:
Rupees
Sales price per unit 1,600
Direct labour per unit 240
Variable cost (other than direct labour) per unit 960
Fixed cost (no labour cost included) 850,000
Volume of sales and production was 6,000 units which represent 80% of normal capacity.
The management of the company is planning to increase wages of direct labour by 15% with
effect from next financial year.

Required:
(a) Calculate the number of units to be sold to maintain the current profit if the sales price
remains at Rs. 1,600 and the 15% wage increase goes into effect. (02)
(b) The management believes that an additional investment of Rs. 760,000 in machinery
(to be depreciated at 10% annually) will increase total capacity by 25%. Determine the
selling price in order to earn a profit of Rs. 2 million assuming that all units produced
at increased capacity can be sold and that the wage increase goes into effect. (03)

Q.4 Jack and Jill (JJ) manufactures various products. The following information pertains to one
of its main products:
(i) Standard cost card per unit
Rupees
Direct material (5 kg at Rs. 40 per kg) 200
Direct labour (1.5 hours at Rs. 80 per hour) 120
Factory overheads 130% of direct labour
(ii) Fixed overheads are budgeted at Rs. 3 million based on normal capacity of 75,000
direct labour hours per month.
(iii) Actual data for the month of June 2015
Units
Opening work in process (80% converted) 8,000
Started during the month 50,000
Transferred to finished goods 48,000
Closing work in process (60% converted) 7,000
Rupees
Material issued to production at: Rs. 38 per kg 1,900,000
Rs. 42 per kg 8,400,000
Direct labour at Rs. 84 per hour 6,048,000
Variable factory overheads 6,350,000
Fixed factory overheads 2,850,000
(iv) Materials are added at the beginning of the process. Conversion costs are incurred
evenly throughout the process. Losses up to 3% of the input are considered as normal.
However, losses are determined at the time of inspection which takes place when units
are 90% complete.
(v) JJ uses FIFO method for inventory valuation.

Required:
(a) Compute equivalent production units (05)
(b) Calculate the following variances for the month of June 2015:

Material rate and usage (03)

Labour rate and efficiency (03)

Variable factory overhead expenditure and efficiency (04)

Fixed factory overhead expenditure and volume (04)

Q.5 (a) In the context of ‘Options’, briefly discuss the term “Intrinsic value”. Also state how
the intrinsic value in the case of call option and put option would be computed. (02)
 Cost and Management Accounting Page 3 of 4

(b) An investor paid a premium of Rs. 60 to buy a put option at a strike price of Rs. 300.
The current market price of the share is Rs. 260.
Required:
Calculate the profit/loss of the investor if the market price of the shares on the expiry
date of the option i.e. 30 days from now is:
(i) Rs. 180 (ii) Rs. 260 (iii) Rs. 380 (04)

Q.6 Queen Jewels (QJ) deals in imitated ornaments and operates its business on-line through a
web-portal. Orders are received through the website and dispatched through a courier.
The mode of payments available to customers are as follows:
Mode of payments % of sales
Cash on delivery which is collected by the courier 60%
Advance payments through credit cards 40%
Cash collected by the courier is settled after every 7 days. The courier company’s charges are
Rs. 300 per order which are deducted on a monthly basis from the first payment due in the
subsequent month. Payments through credit cards are credited by the bank in 7 days.
High value items which represent 25% of the sales through credit cards are dispatched after
15 days of receipt of payment. All other dispatches are made immediately and delivered on
the same day.
Following further information is available:
(i) Sales are made at cost plus 30%.
(ii) Sales and sales orders are projected as under:
Sep. 2015 Oct. 2015 Nov. 2015 Dec. 2015 Jan. 2016
Sales (Rs.) 4,600,000 5,000,000 4,200,000 5,800,000 6,000,000
Sales orders (Nos.) 400 450 470 490 520
(iii) High value items are purchased on receipt of the order. Stock level of other goods is
maintained at 25% of projected sales of the next month. 40% of all purchases are paid
in the same month whereas balance is paid in the next month.
(iv) Purchases during the month of September 2015 amounted to Rs. 3.2 million.
(v) Selling and administrative expenses are estimated at Rs. 50 million per annum and
include depreciation of tangible and amortisation of intangible assets amounting to
Rs. 8 million and Rs. 2 million respectively.
(vi) Cash and bank balances as at 30 September 2015 amounted to Rs. 5.5 million.
(vii) Purchases/sales occur evenly throughout the quarter.

Required:
Prepare a cash budget of QJ for the quarter ending 31 December 2015. (Month-wise cash
budget is not required) (14)

Q.7 Chocó-king Limited (CL) produces and markets various brands of chocolates having annual
demand of 80,000 kg. The following information is available in respect of coco powder
which is the main component of the chocolate and represents 90% of the total ingredients.
(i) Cost per kg is Rs. 600.
(ii) Process losses are 4% of the input.
(iii) Purchase and storage costs are as follows:

Annual variable cost of the procurement office is Rs. 6 million. The total number
of orders (of all products) is estimated at 120.

Storage and handling cost is Rs. 20 per kg per month.

Other carrying cost is estimated at Rs. 5 per kg per month.
(iv) CL maintains a buffer stock of 2,000 kg.

Required:
(a) Calculate economic order quantity. (07)
(b) A vendor has offered to CL a quantity discount of 2% on all orders of minimum of
7,500 kg. Advise CL, whether the offer of the vendor may be accepted. (06)
 Cost and Management Accounting Page 4 of 4

Q.8 Reporting Perspective is an important part of the IFAC Sustainability Framework which
comprises of five sections.

Required:
State any three key considerations for professional accountants as mentioned in each of the
following sections of Reporting Perspective:
(a) Determining materiality (03)
(b) External review and assurance of sustainability disclosures (03)

Q.9 In May 2015, the board of directors of Sahil Limited (SL) had decided to close one of SL’s
operating segments at the end of the next year. The sales and production for the next year
were budgeted at 50,000 units and on the basis thereof, the budget of the segment for the
next year was approved as follows:
Rs. in ‘000
Sales 5,000
Direct material (50,000 kg) (950)
Direct labour (1,000)
Variable production overheads (500)
Fixed production overheads (1,750)
Administrative and selling overheads (500)
Budgeted net profit 300
However, rumours of the closure prompted majority of the segment’s skilled labour to leave
the company. Consequently, the management is considering the following alternatives to
cope with the issue:

Close the segment immediately and rent the factory space for one year at a rent of
Rs. 40,000 per month; or

Employ contract labour which would be able to produce a maximum of 40,000 units in
the year. The quality of the product is however expected to suffer due to this change.
The following further information is available:
(i) The sales manager estimates that a sales volume of 30,000 units could be achieved at
the current selling price whereas sales volume of 40,000 units would only be achieved
if the price was reduced to Rs. 90 per unit.
(ii) 25,000 kg of raw material is in stock. Any quantity of the material may be sold in the
market at a price of Rs. 19 per kg after incurring a cost of Rs. 2 per kg. Up to 15,000 kg
can be used in another segment of the company in place of a material which currently
costs Rs. 18 per kg.
(iii) Wages of contract labour would be Rs. 24 per unit. SL would also be required to spend
Rs. 40,000 on the training of the contract labour.
(iv) Due to utilization of contract labour, variable production overheads per unit are
expected to increase by 20%.
(v) Fixed production overheads include:

Depreciation of three machines used in the segment amounting to Rs. 170,000.
These machines originally costed Rs. 1.7 million and could currently be sold for
Rs. 830,000. If the machines are used for production in the next year, their sales
value would reduce by Rs. 5 per unit of production.

All other costs included in ‘fixed production overheads’ represent apportionments
of general overheads.
(vi) 40% of administrative and selling overheads are variable whereas the remaining
amounts represent apportionment of general overheads.

Required:
Advise the best course of action for Sahil Limited. (16)

(THE END)
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A.1 Oceanic Chemicals

Product-wise cost of Sigma and Theta
Sigma Theta
----------- Rs. in '000’ -----------
Joint costs of production W.2 4,303.49 2770.98
Cost of refining (350+890) - 1,240.00
(A) 4,303.49 4,010.98
No. of units produced Ltr. (B) 34,800 15,252
Cost per Litre Rs. (A÷B) 123.66 262.98
W.1: Joint cost of production
Rs. in '000’
Joint cost of production (3,000+2,500+1,850) 7,350.00
Sale proceeds from by-product ZEE (5,84540) (233.80)
7116.20
Cost of abnormal loss of production [7,116.20÷(34,800+16,055+300)300] (41.73)
7,074.47

W.2: Allocation of joint costs

NRV at Units Joint cost
Total NRV
split-off produced allocation
Rs. Ltrs -------- Rs. in '000 --------
Sigma 300.00 34,800 10,440.00 4,303.49
Beta 500-[(350+890)÷15,252)] 418.70 16,055 6,722.23 2,770.98
17,162.23 7,074.47

W.3: Abnormal loss quantity

Production Refining
---------- Litres ----------
Input quantity 3,000,000÷50 60,000 16,055
Output quantity (34,800+16,055+5,845) (56,700) (15,200)
Production losses 3,300 855
Normal losses up to 5% of input (60,000×5%), (16,055×5%) 3,000 803
Abnormal loss 300 52

A.2 Project’s Internal rate of return Year 0 1 2 3 4

---------------------- Rs. in million ----------------------
Sales - 155.00 155.00 65.00 65.00
Cost of sales (50%) - (77.50) (77.50) (32.50) (32.50)
Operating expense (10%) - (15.50) (15.50) (6.50) (6.50)
5% of sales for technical support by CL - (7.75) (7.75) (3.25) (3.25)
Investment (175.00) - - - 100.00
Net cash flows (175.00) 54.25 54.25 22.75 122.75

Discount factor (15%) 1.00 0.87 0.76 0.66 0.57

Present value (175.00) 47.20 41.23 15.02 69.97
Net present value at 15% NPVA (1.58)
Discount factor (12%) 1.00 0.89 0.79 0.71 0.63
Present value (175.00) 48.28 42.86 16.15 77.33
Net present value at 12% NPVB 9.62
Using the interpolation formula A%+ [NPVA÷ (NPVA-NPVB)] × (B%-A %)
Internal rate of return (IRR) 15%+ [-1.58 ÷ (-1.58-9.62)] (12%-15%)
14.58%

Page 1 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A.3 (a) Units to be sold to maintain the current profit:

Rs.
Sales (6,000 units × 1,600) 9,600,000
Variable cost [6,000 × (960+240)] (7,200,000)
Contribution margin A 2,400,000
Revised contribution margin per unit [1,600–960–(240×1.15)] B 364
Units to be sold A÷B 6,593 Units

(b) Selling price per unit to earn a profit of Rs. 2 million:

Revised capacity (6,000 ÷ 0.8 × 1.25) Units 9,375
Revised fixed cost 850,000 + (760,000 × 10%) Rs. 926,000
(  ) Rs. 1,548

A.4 Jack and Jill

(a) Equivalent units using FIFO: Quantity Equivalent production units

schedule Material Conversion
(Units) (Units) (Units)
Opening WIP (80% conversion) 8,000 (8,000) (6,400)
Units started during the month 50,000
58,000
Units transferred to finished goods 48,000 48,000 48,000
Closing WIP (60% conversion) 7,000 7,000 4,200
Normal loss 3% of input (58,000-7,000)  3% 1,530 - -
Abnormal loss (90% conversion) Bal. 1,470 1,470 1,323
58,000 48,470 47,123

Page 2 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A B (A×B)
(b) Variances: kg/Hrs. Fav./(adv.)
(Standard-Actual)
/ Rs. Rupees
Material price variance:
Actual material usage W.2 50,000 40 - 38 = Rs. 2.00 100,000
Actual material usage W.2 200,000 40 - 42 = (Rs. 2.00) (400,000)
(300,000)
Material usage variance:
Standard material rate per kg 40.00 242,350 - 250,000 = (7,650 kgs) (306,000)

Labour rate variance:

Actual labour hours W.2 72,000 80 - 84 = (Rs. 4.00) (288,000)

Labour efficiency variance:

Standard labour rate per hour 80.00 70,685 - 72,000 = (1,315 Hrs.) (105,200)

Variable overhead expenditure variance:

Actual labour hours at standard rate 72,000 (W.1) 64.00 4,608,000
Actual variable overheads (6,350,000)
(1,742,000)

Variable overhead efficiency variance:

Standard variable overhead rate per hour W.1 64.00 70,685 - 72,000 = (1,315 Hrs.) (84,160)

Fixed overhead expenditure variance:

Budgeted fixed production overhead 3,000,000
Actual fixed production overhead (2,850,000)
150,000
Fixed overhead volume variance:
Standard fixed overhead rate per hour W.1 40.00 70,685 - 75,000 = (4,315 Hrs.) (172,600)

W.1: Statement of standard factory overhead rate per hour: Rs.

Standard factory overhead rate per hour (120130%)÷1.5 104.00
Standard fixed factory overhead rate per hour 3,000,000÷75,000 40.00
Standard variable factory overhead rate per hour 104-40 64.00

W.2: Standard usage of material/labour Actual usage of material/labour/overheads

Per kg/hrs.
Eq. units Per unit Kg/hrs. Amount kg/hrs.
(Rs.)
Material 48,470 5.0 kg 242,350 1,900,000 38.00 50,000
8,400,000 42.00 200,000
10,300,000 250,000
D. labour 47,123 1.5 hrs. 70,685 6,048,000 84.00 72,000
V. overheads 6,350,000 88.1944 72,000

A.5 (a) In the case of ‘in the money’ option, intrinsic value is the difference between the underlying
price and the strike price. An “out-the-money” option has no intrinsic value.

Intrinsic value in the case of call option is computed by deducting the strike price from the
underlying price.

Intrinsic value in the case of put option is computed by deducting the underlying price from
the strike price.

Page 3 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

(b) Profit/(loss) of the investor on exercising put option at various market prices of shares:
(i) (ii) (iii)
----------- Rupees -----------
Shares’ strike price under the option 300 300 -
Premium paid (60) (60) (60)
Shares’ market price on expiry date of the option (180) (260) -
Net profit/(loss) of the investor 60 (20) (60)

In case of (iii) investor will not exercise the option and only book loss of premium.
A.6 Queen Jewels
Cash budget for the Quarter ending 31 December 2015

Rs. in '000’
RECEIPTS:
Collection from sales excluding 10% sales of high valued items:
- 7 days sale in September received in October (4,600÷30790%) 966
- Sales for the quarter ending 31 December 2015 (5,000+4,200+5,800)90% 13,500
- 7 days sale in December collected in January 2015 (5,800/30790%) (1,218)
13,248
Collection in advance from 10% sales of high valued items:
- 8 days(15-7) sales in October received in September (5,000/30810%) (133)
- Sales for the quarter ending 31 December 2015 (5,000+4,200+5,800)10% 1,500
- 8 days sale of Jan. 2016 collected in Dec. 2015 (6,000÷30810%) 160
1,527
Deduction of courier charges from collection
- No. of orders recorded in the previous month (400+450+470) 1,320
- No. of high value orders of Aug. delivered in Sep. 2015 -
- No. of high value orders of Nov. delivered in Dec. 2015 (47010%÷2) (24)
No. of orders delivered previous month 1,296
Courier charges at Rs. 300 per order 1,296300 (389)
Total collection for the quarter 14,386

PAYMENTS:
Cost of sales for the quarter (cost plus 30%) (5,000+4,200+5,800)÷1.3 11,538
Opening stock 1 October 2015 5,00090%25%÷1.3 (865)
Closing stock 31 December 2015 6,00090%25%÷1.3 1,038
Purchases 11,712
60% of Sept. purchases paid in Oct. (3,20060%) 1,920
60% of Dec. purchases to be paid in Jan. 2016 (W.1) 4,49660% (2,698)
Payments for purchases 10,934

Expenses paid excluding depreciation and amortisation (50,000-8,000-2,000)÷4 10,000

Net outflow for the quarter ended 31 December 2015 (6,548)

Cash and bank balances as at 1 October 2015 5,500

Cash and bank balances as at 31 December 2015 - Overdraft (1,048)

W.1: Purchases for December 2015

Cost of sales for Dec. 2015 (cost plus 30%) 5,800÷1.3 4,462
Opening stock 1 December 2015 4,46290%25% (1,004)
Closing stock 31 December 2015 6,00090%25%÷1.3 1,038
Purchases 4,496

Page 4 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A.7 Chocó-king Limited

(a) Economic order quantity (EOQ)

Annual requirement of the coco powder 80,000÷0.9690% kg 75,000

Ordering cost per order (6,000,000÷120) Rs. 50,000

Storage and handling 2012 240

Other carrying cost 512 60
Carrying cost per kg Rs. 300

Economic order quantity (EOQ)

SQRT[(2 × Annual demand × Ordering cost per order) ÷ Carrying cost per kg]
SQRT[(275,00050,000)÷300] = √ = 5,000

(b) Analysis of purchases using EOQ / minimum quantity as offered by the vendor:
EOQ Vendor's offer
No. of orders (75,000÷5,000), (75,000÷7,500) A 15.00 10.00
Average inventory including buffer stock
(Order quantity÷2)+2,000 B 4,500 5,750
Rs. Rs.
Annual cost of placing orders (A×50,000) 750,000 500,000
Carrying cost (B×300) 1,350,000 1,725,000
Discount on placing order of 7,500 kg each
(75,0006002%) - (900,000)
Net cost 2,100,000 1,325,000
Annual saving on acceptance of vendor's offer 775,000

A.8 Key considerations for professional accountants as per IFAC sustainability framework for the
following sections of reporting perspective:
(a) Determining materiality
(i) In defining report content, materiality should be considered along with the need for
other important information characteristics
(ii) Accountability for materiality thresholds and judgments
(iii) Linking the determination of materiality to strategy, risk management, and sector
benchmarks
(iv) Determining a process for resolving different expectations regarding materiality
(v) Where information is reported can help (a) to reinforce materiality criteria, and (b) to
keep the length of disclosures manageable (particularly where the application of
materiality might vary between reporting for wider stakeholders from investors)

(b) External review and assurance of sustainability disclosures

(i) The quality of external assurance is directly linked to stakeholder inclusiveness
(ii) Clarifying the purpose and scope of the assurance
(iii) The choice of service provider
(iv) Establishing the type of engagement
(v) Enhancing the assurance statement

Page 5 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A.9 Sahil Limited

Analysis of options of renting the factory and utilization of contract labour
Available options
Immediate Operation using contract
closure and labour
renting of To produce To produce
factory bldg. 30,000 units 40,000 units
-------------- Rupees --------------
Incremental savings
Sales (30,000100), 40,00090) 3,000,000 3,600,000
Rental income (40,00012) 480,000
Proceeds from sale of machine
(830,000-30,0005), (830,000-40,0005) 830,000 680,000 630,000
Direct material - Use for other segment (15,00018) 270,000 - -
Direct material - sale externally [10,000(19-2)] 170,000 - -
Fixed production overheads; apportionment of
general overheads (1,750-170= 1580) - - -
Fixed admin and selling overheads; apportionment of
general overheads (50060%=300) - - -
Incremental costs
Purchase of direct material (5,00019), (15,00019) - (95,000) (285,000)
Training of contract labour - (40,000) (40,000)
Contract labour cost (30,00024), (40,00024) - (720,000) (960,000)
Variable production overhead
(500÷50 1.2  30,000),(500÷501.240,000) - (360,000) (480,000)
Variable admin. & selling overheads:
[(50040%)÷5030], [(50040%)÷5040] - (120,000) (160,000)
Net savings 1,750,000 2,345,000 2,305,000

Conclusion:
Since the highest savings occur with a production level of 30,000 units, SL should operate the segment
at this level of activity.

(THE END)

Page 6 of 6
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Cost and Management Accounting Certificate in Accounting and Finance
– Autumn 2015

General:

The overall performance in this attempt was better than the previous attempt mainly due
to very good performances in Questions 2, 3 and 7. Question-wise comments are as
follows:

Question 1

An average response was observed in this question pertaining to by-products and joint
products. The commonly observed errors were as follows:

 Majority of the students did not compute the abnormal loss and those who did
compute the quantity did not deduct the cost thereof in arriving at the cost of good
production.

 Joint cost of production should have been allocated between Sigma and Beta on the
basis of NRV at split point. In arriving at the NRV of Beta many students did not
deduct the cost of refining. Further, many students allocated the joint cost on the basis
of sale price or on the basis of units produced.

Question 2

This was an easy question and the requirement was to compute the IRR of a project. A
good performance was witnessed as more than 50% students scored full marks. However,
some students lost this scoring opportunity by making the following mistakes:

 Cost of technical support was ignored while determining the net cash flows.

 Cash flows were taken from year 2 to year 5 instead of year 1 to year 4.

 Cost of sales and operating expenses were calculated on sales net of CLs share
instead of gross sales.

 Those students who obtained either both negative or both positive present values
could not apply them correctly in the formula for interpolation.

Question 3(a)

This part of the question was quite easy and almost all the students performed well
mostly securing full marks.

Page 1 of 4
 Examiners’ Comments on Cost and Management Accounting - Autumn 2015

Question 3(b)

This part of the question was also quite easy and majority of the students secured high
marks. The mistakes observed were as follows:

 Many students considered the investment in machinery as addition to fixed cost

whereas only the 10% depreciation represented the additional fixed cost.

 Most of the students computed total capacity as 125% of the capacity utilization of
6,000 units whereas the revised capacity should have been worked using the Normal
 100 
Capacity of 7500  6000x  units.
 80 

Question 4(a)

This part requiring computation of Equivalent units of production was quite easy and
many students secured full marks. However, many students were confused as regards
treatment of the Normal and Abnormal losses. In many cases, either both types of losses
were included in the equivalent production or both were excluded.

Further, most of the students did not understand the significance of the fact that
inspection takes place when the units are 90% complete. Consequently, they applied the
normal loss percentage on the closing WIP also which was only 60% complete. Some of
them applied the percentage on units started during the month and ignored the opening
units. Further, many students computed the Abnormal Loss related to conversion as if the
units were fully converted, instead of restricting the conversion loss to 90% of the units
lost.

Question 4(b)

This part of the question required computation of variances. One of the most common
mistakes observed in the students’ response was that units produced and transferred to
finished goods were used in calculating the variances instead of Equivalent units.
Another common mistake pertained to calculation of Standard Variable Overhead Rate. It
should have been computed either as Rs. 104 per unit {(Rs. 120x130%) - (40x1.5)} or
Rs. 64 per hour (Rs. 80x130% - 40). Instead, many students computed it as Rs. 116 per
unit (Rs. 120x130% - Rs. 40).

Further, many students did not specify whether the variance calculated by them was
Favourable or Unfavourable.

Question 5(a)

In this part of the question, the students were required to discuss the term ‘Intrinsic
Value’ and explain how it is computed in the case of call option and put option. Since this
topic was included in the syllabus for the first time, majority of the students seemed
unprepared and the overall performance was poor. Most of the students either ignored it
altogether or used pure guesswork without any success.

Page 2 of 4
 Examiners’ Comments on Cost and Management Accounting - Autumn 2015

Question 5(b)

The performance in this part was equally bad. However, some of the seemingly
intelligent students were able to grasp the requirement as the data was quite simple. They
were able to produce correct answers in this part despite their poor performance in part
(a). Many students treated the given option as if it was a call option instead of a put
option.

Question 6

The overall response to this question was poor. Only few students were able to properly
handle the timing of cash flows correctly. The commonly observed errors were as
follows:

 Period for collection of sales was 7 days, both in case of sales through courier as well
as sales through credit card except sale of high value items. However, collection from
sales of high value items was made 8 days in advance i.e. 15 days in advance less 7
days taken by bank to credit the amount. Most of the students failed to analyze this
situation correctly and a number of different incorrect alternatives were tried.
 Sales of the high valued items was 25% of sale through credit card i.e. 10% (25 of
40%) of total sales. Instead, many students took it as 25% of total sales.
 While computing payment on account of purchases, most of the students correctly
worked out the cost of sales for the quarter. However, the cost of sales needed to be
adjusted with opening and closing stocks to arrive at the purchases, which were not
correctly dealt with by a large number of students.
 Though it was specifically mentioned in the question that month-wise cash budget is
not required, many candidates prepared it on month by month basis and wasted
precious time.
 According to the question, stock of high value items was not maintained as these
were purchased on receipt of order. Many students failed to understand this and as a
result, calculated incorrect values of opening and closing stocks.
 Cost of sales was computed correctly by a number of students; however, the concept
of 40% payment in current month and 60% in subsequent month was not applied
correctly by most of the candidates.

Question 7(a)

Above average performance was witnessed in this question requiring calculation of

Economic Order Quantity. The common mistakes were as follows:

 In such questions, it is important to convert all values to the same time frame i.e.
either on an annual or monthly basis. Many students took the carrying cost on per
month basis and all other values on annualized basis.
 Many students failed to understand that the final product was chocolate but the item
to be purchased was coco powder. Consequently, they took the annual demand as
80,000 kg. Further, many students ignored the process losses while determining the
purchase quantity. Further, the process losses were 4% of input whereas many
candidates calculated it as 4% of output.

Page 3 of 4
 Examiners’ Comments on Cost and Management Accounting - Autumn 2015

 Some students took the Ordering cost as Rs. 120 or as Rs. 6 million instead of Rs.
50,000 i.e. Rs. 6 million divided by number of orders i.e. 120.

Question 7(b)

The performance in this part was good. However, the following errors were noted:

 Buffer stock was ignored in the calculation of holding cost.

 Holding cost was calculated on the basis of EOQ instead of average stock.

Question 8

This was a theoretical question based on IFAC sustainability frame-work. The

performance was very poor. Being a newly introduced topic very few students had the
required knowledge and attempted part (a) through guesswork whereas part (b) was
mostly left un-attempted.

Question 9

This question required the candidates to make a decision on the basis of the given
situation. The options available were as follows:

1. Close the factory immediately and rent it.

2. Produce and sell 30,000 units at the current price.
3. Produce and sell 40,000 units at the lower price.

The overall performance was below average. Common mistakes were as follows:

 Majority of the students compared only option 1 with option 3 and ignored option 2.
 Most of the students assumed that in case of renting, fixed costs would not be
incurred. This was not correct because fixed costs represented apportionment of
expenses and since only one factory/segment was being closed, these costs would
have continued to be incurred in any case.
 Most of the students got confused in determining the impact on realizable value of
machine under options 2 and 3. Only the decline in value at Rs. 5 per unit should
have been taken into consideration. Instead, most of the students determined the
impact by adding the entire realizable value of Rs. 830,000 with the amount
computed @ Rs. 5 per unit.
 Many students failed to identify the income generated from use of material in other
department, if the factory was rented out.
 Many students performed calculations without clearly identifying the option to which
they pertained.

THE END

Page 4 of 4
 Cost and Management Accounting
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2015

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers were also advised to award marks for
alternative approaches to a question and relevant/well-reasoned comments/explanations.

A.1 Mark(s)
 Calculation of joint costs 2.5
 Allocation of joint costs 4.0
 Determination of abnormal loss quantity 3.0
 Calculation of production-wise cost per litre 2.5

A.2 Mark(s)
 Preparation of cash flows 4.5
 Discounting of the cash flows 3.0
 Determination of IRR 1.5

A.3 (a) Mark(s)

 Determination of contribution margin 1.0
 Calculation of units to be sold 1.0

Mark(s)
(b)  Determination of revised capacity and revised fixed cost 2.0
 Determination of new selling price 1.0

A.4 (a) Mark(s)

 Preparation of quantity schedule 2.0
 Calculation of equivalent production units 3.0

(b) Marking plan:

 1.5 marks each for material and labour variance
 2.0 marks each for variable and fixed overheads

A.5 (a) Mark(s)

 Briefly explanation of ‘Intrinsic value’ 1.0
 Computation of intrinsic value in the case of call and put option 1.0

(b) Mark(s)
 Determination of premium paid 1.5
 Determination of shares market price on expiry date 1.5
 Net profit / (loss) of the investor 1.0

A.6 Mark(s)
 Collection from sales 5.0
 Courier charges 1.5
 Payment for purchases 6.5
 Expenses paid 1.0

A.7 (a) Mark(s)

 Determination of annual requirement 1.0
 Calculation of ordering cost per order 1.0
 Determination of carrying cost 2.0
 Determination of EOQ 3.0

  Page 1 of 2
 Cost and Management Accounting
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2015

(b) Mark(s)
 Determination of annual cost of placing orders 2.0
 Determination of carrying cost 3.0
 Calculation of discount on placing order 0.5
 Advise on the offer 0.5

Mark(s)
A.8 (a)  Up to 01 mark for each consideration 3.0

Mark(s)
(b)  Up to 01 mark for each consideration 3.0

A.9 Mark(s)
 Incremental sales / rental income under each option 1.5
 Proceeds from sale of machine 2.0
 Incremental savings from direct material 2.0
 Purchase of direct material 2.0
 Contract labour and related costs 3.0
 Variable overheads 4.0
 Ignoring the fixed overheads 1.0
 Advise the best course of action 0.5

(THE END)

  Page 2 of 2
 Certificate in Accounting and Finance Stage Examinations
The Institute of 10 March 2016
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Q.1 Rainbow Paints Limited (RPL) is in the process of preparing its budget for the year ending
28 February 2017. The following data has been extracted from the profit and loss account
for the year ended 29 February 2016:
Rs. in million
Sales (including cash sales of Rs. 19 million) 109.00
Cost of goods sold:
Materials consumed (30.00)
Conversion cost - Variable (18.00)
Conversion cost - Fixed (including depreciation of Rs. 3 million) (12.00)
Opening finished goods inventory (5.00)
Closing finished goods inventory 8.00
Gross profit 52.00
Operating expenses:
Variable (25.00)
Fixed (including depreciation of Rs. 5 million) (10.00)
Operating profit 17.00

For preparation of the budget, Cost Control Manager has prepared the following
projections/information:

(i) Sales volume and sales price are expected to increase by 10% and 5% respectively. The
ratio of cash and credit sales would be 25:75. Cash sales are made at a discount of 5%.
(ii) Average collection and payment time in RPL is as follows:

Collection of trade debtors 35 days

Payment to trade creditors 40 days
Payment of expenses 25 days

(iii) RPL maintains raw material inventory for average 30 days’ consumption. Opening
and closing finished goods inventory quantity would be the same.
(iv) Trade creditors as at 29 February 2016 amounted to Rs. 3 million.
(v) Effect of price increase is estimated as under:

Raw material - 10%

Variable and fixed expenses (excluding depreciation) - 8%

Depreciation - same as last year

(vi) RPL plans to introduce a new product during the budget period for which it plans to
launch an advertisement campaign during September 2016 to February 2017. In this
respect payments of Rs. 3 million each would be made on 1 September 2016 and
1 March 2017.
(vii) RPL operates absorption costing system and uses FIFO method for valuation of
inventory.

Required:
(a) Prepare budgeted profit and loss account for the year ending 28 February 2017. (08)
(b) Prepare budgeted cash flow statement for the year ending 28 February 2017. (08)
(Assume that all the transactions occur evenly throughout the year (360 days) unless
otherwise specified)
 Cost and Management Accounting Page 2 of 5

Q.2 An investor paid a premium of Rs. 300 for the option to buy 500 shares in ABC Limited for
Rs. 20,000 at any time during the next three months. The investor exercised his right to buy
the shares when the price in the market was Rs. 50 per share.

Required:
(a) Explain the term ‘option’. (01)
(b) In context of the above example, briefly explain:
(i) What is the strike price? (0.5)
(ii) Whether the above transaction is a ‘call option’ or a ‘put option’. (1.5)
(c) Explain whether the above option would be termed as ‘in the money’ or ‘out the
money’ when the market price is Rs. 35 per share. (02)

Q.3 Seema Enterprises (SE) produces various leather goods. It operates a standard marginal
costing system. For one of its products Bela, following information was extracted for the
month of December 2015 from SE's budget document for the year 2015.

Rs. in million
Sales 9,800 units 25.00
Cost of production of 10,000 units:
Direct material 5,000 kg 9.00
Direct labour 24,000 hrs 3.60
Variable overheads 2,000 machine hrs 4.40
Fixed overheads 3.80

Actual production for the month of December 2015 was 12,000 units whereas SE earned
revenue of Rs. 30 million by selling 11,000 units of Bela. Following information pertains to
actual cost of production for the month:

(i) 5,700 kg material was issued to production. Raw materials are valued using FIFO
method. Other details relating to the raw material used for Bela are as follows:

kg Rs. in million
1-Dec-2015 Opening balance 3,000 5.70
10-Dec-2015 Purchases 15,000 26.25

(ii) To minimise labour turnover, SE increased production wages by 10% above the
standard rate, effective 1 December 2015. This improved labour efficiency by 5% as
compared to budget.

(iii) 2,100 machine hours were worked. Details of overheads are as under:

Depreciation amounted to Rs. 1.6 million (same as budgeted)

Factory building rent amounted to Rs. 1.20 million (same as budgeted)

All other overheads were 4% in excess of the budget

(iv) Variances are treated as period cost and charged to cost of sales.

(v) There was no opening finished goods inventory of Bela. Actual closing inventory may
be valued at standard marginal production costs.

Required:
(a) Compute budgeted and actual profits of Bela for the month of December 2015 using
marginal costing. (06)
(b) Reconcile the budgeted profit with actual profit using relevant variances under
marginal costing. (14)
 Cost and Management Accounting Page 3 of 5

Q.4 Digital Electronics (DE) acquired a plant on 1 January 2016 under a lease arrangement on
the following terms:

Lease period (commencing from 1 January 2016) 3 years

Down payment on commencement of lease Rs. 2.00 million
Lease installments payable annually in arrears Rs. 3.90 million
Amount payable on expiry of the lease term Rs. 0.89 million

On the date of acquisition, fair value of the plant was Rs. 10 million. DE depreciates its
property, plant and equipment over their useful life. The disposal price of the plant at the
end of the useful life of four years is estimated at Rs. 0.50 million.

Net cash inflows from the use of the plant are estimated as under:

Year 2016 2017 2018 2019

Amount (Rs. in million) 5.90 5.20 2.45 1.00

It may be assumed that all cash inflows arise at the end of the year.

Required:
Compute internal rate of return (IRR) and advise whether it is feasible to acquire the plant
assuming that DE’s cost of capital is 15%. (08)

Q.5 Omega Industries Limited (OIL) produces two products Alpha and Beta. These products are
processed through Fabrication and Finishing departments. Quality control and Logistics
departments provide all the necessary support for the production.

OIL allocates production overheads to Alpha and Beta at a pre-determined rate of Rs. 1,300
and Rs. 500 per unit respectively. Any under/over absorbed overheads are adjusted to cost
of sales.

Following actual data has been extracted from the cost records of OIL for the month of
December 2015:

Quality
Fabrication Finishing Logistics Total
control
Indirect labour Rs. in '000 1,500 1,200 500 400 3,600
Factory rent Rs. in '000 2,000
Power Rs. in '000 1,200
Depreciation – Plant Rs. in '000 9,000
Other information:
Cost of plant Rs. in '000 32,000 20,000 2,000 6,000 60,000
Floor area Square feet 10,000 5,000 3,000 2,000 20,000
Power KWH 50,000 40,000 4,000 6,000 100,000
Hours worked for Alpha 70% 60% - -
Hours worked for Beta 30% 40% - -
Services provided by:
- Quality control 40% 60% - - 100%
- Logistics 60% 35% 5% - 100%

8,000 units of Alpha and 10,000 units of Beta were produced during the month of
December 2015.

Required:
(a) Compute product wise actual overheads for Alpha and Beta. (10)
(b) Prepare journal entries to record:
(i) Applied production overheads; and
(ii) Under/over absorbed production overheads (02)
 Cost and Management Accounting Page 4 of 5

Q.6 Quality Chemicals (QC) produces one of its products through two processes A and B.
Following information has been extracted from the records of process A for the month of
January 2016.
Quantity Material Conversion
Units ----- Rs. in ‘000 -----
Opening work in process 5,000 2,713 1,499
Input during the month 20,000 10,000 5,760
Transferred to process B 18,000 - -
Closing work in process 6,000 - -
Additional information:
(i) Materials are introduced at the beginning of the process. In respect of conversion,
opening and closing work in process inventories were 40% and 60% complete,
respectively.
(ii) Inspection is performed when the units are 50% complete. Expected rejection is
estimated at 5% of the inspected units. The rejected units are not processed further and
sold at Rs. 100 per unit.
(iii) QC uses 'weighted average method' for inventory valuation.

Required:
(a) Compute equivalent production units and cost per unit. (05)
(b) Prepare journal entries to record the above transactions. (06)

Q.7 Global (Pvt.) Limited (GPL) is in the process of preparing bid documents for a special order
of 5,000 units of a new product Zeta. In this respect, GPL’s technical department has
worked-out the following projections/information:
(i) The order would be completed in 15 days.
(ii) GPL has sufficient stock of the required materials to produce Zeta. Some of the
relevant information is as follows:
Material A Material B Material C
Quantity required 5,000 kg 3,000 kg 2,000 kg
Original purchase price Rs. 180 per kg Rs. 150 per kg Rs. 50 per kg
Current purchase price Rs. 200 per kg Rs. 175 per kg Rs. 60 per kg
Current disposal price Rs. 100 per kg Rs. 135 per kg Nil

Material A is used by GPL in many products and therefore sufficient stock is
maintained.

Material B has no use other than in the production of Zeta.

The stock of material C was purchased several years ago for another project. It
can only be used in the production of Zeta. Otherwise, it will have to be
disposed of at a cost of Rs. 10 per kg to meet environmental legislation.
(iii) The production of Zeta would require:

800 skilled labour hours at Rs. 200 per hour. Presently, 1,440 labour hours
remain idle during each month.

250 unskilled labour hours which can be hired at Rs. 120 per hour.

150 machine hours. If the machine is not used for Zeta, it may be leased out at
Rs. 4,000 per day.
(iv) GPL absorbs overheads at Rs. 400 per skilled and unskilled labour hours. Based on
normal capacity of 50,000 hours, fixed overheads are estimated at Rs. 6,000,000. If
GPL decides to produce Zeta, fixed overheads would increase by Rs. 150,000.
(v) As a result of production of Zeta, general administration cost would increase by
Rs. 100,000.
(vi) The planning department of GPL has incurred a cost of Rs. 20,000 on preparing
feasibility for production of Zeta.
 Cost and Management Accounting Page 5 of 5

Required:
Compute the bid price that GPL should quote, if it wants to earn profit (based on relevant
costs only) of 20% of selling price. (12)

Q.8 Himalayan Rivers (HR) is planning to install a new plant. Planned production from the
plant for the next year is 150,000 units. Cost of production is estimated as under:

Rs. in million
Direct material 6.00
Direct labour 5.00
Production overheads 10.29

Production overheads include the following:

(i) Factory premises would be acquired on rent at a cost of Rs. 1.8 million per annum.
(ii) Indirect labour has been budgeted at 30% of direct labour cost, 50% of which would
be fixed.
(iii) Depreciation of the plant would be Rs. 0.5 million.
(iv) Total power and fuel cost has been budgeted at Rs. 3 million. 80% of power and fuel
cost would vary in accordance with the production.
(v) All remaining production overheads are variable.

The sales and marketing budget includes the following:

(i) Employment of two sales representatives at a monthly salary of Rs. 25,000 each and a
sales commission of 2% on sales achieved.
(ii) Hiring of a delivery van at Rs. 70,000 per month.
(iii) Launching an advertisement campaign at a cost of Rs. 1.5 million.

Required:
Calculate the breakeven sales revenue and quantity for the next year if HR expects to earn a
contribution margin of 40% on sales, net of 2% sales commission. (10)

Q.9 According to Global Reporting Initiative, an effective sustainability reporting cycle should
benefit all reporting organizations. List internal and external benefits (three each) of
sustainability reporting. (06)

(THE END)
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2016

A.1 (a) Rainbow Paints Limited

Budgeted profit and loss account for the year ending 28 February 2017
Rs. in million
Sales (W-1) 125.46
Cost of sales
Raw material consumption 301.11.1 (36.30)
Conversion cost - Variable 181.11.08 (21.38)
Conversion cost - Fixed [(12-3)1.08]+3 (12.72)
Cost of goods manufacture (70.40)
Opening finished goods inventory (8.00)
Closing finished goods inventory (W-2) 8.69
(69.71)
Gross profit 55.75
Operating expenses
Variable 251.081.1 (29.70)
Fixed [(10-5)1.08+5]+6 (16.40)
(46.10)
Operating profit 9.65

W-1: Budgeted sales

Cash Credit Total
--------- Rs. in million ---------
Existing sales - gross-up of 5% cash disc. 20.00 90.00 110.00
(19÷0.95) (109-19)
Gross sales after volume & price increase of 10% &
5% in the ratio of 25:75 for cash and credit sales 31.76 95.29 127.05
respectively (127.05×25%) (127.05×75%) (110×1.05×1.1)
Budgeted sales – net of 5% cash sales discount 30.17 95.29 125.46
(31.76×95%)

W-2: Closing finished goods inventory (same quantity as opening inventory)

Opening Price Closing
inventory increase inventory
Raw material [30÷(30+18+12)]8 4.0 10% 4.40
Conversion cost – variable [18÷(30+18+12)]8 2.4 8% 2.59
Conversion cost – fixed (excl. dep.) [9÷(30+18+12)]8 1.2 8% 1.30
Depreciation [3÷(30+18+12)]8 0.4 - 0.40
8.0 8.69

Page 1 of 9
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2016

(b) Rainbow Paints Limited

Budgeted cash flow statement for the year ending 29 February 2017
Rs. in million
Inflows:
Sale proceeds:
Total sale P&L 125.46
Trade debtors - opening balance (109-19)÷36035 8.75
Trade debtors - closing balance 95.29÷36035 (9.26)
124.95
Outflows:
Payments for purchases:
Purchases for the year (W-3) (36.83)
Trade creditors - opening balance (3.00)
Trade creditors - closing balance 36.83÷36040 4.09
(35.74)
Payments for expenses:
Exp. for the year (excluding depreciation) (PL) [21.38+12.72+29.7+16.4]-3-5 (72.20)
Accrued expenses - opening balance (18+12-3+25+10-5)25÷360 (3.96)
Accrued expenses - closing balance (72.2-6)(25÷360)+3 7.60
(68.56)
Net cash inflows 20.65

W-3: Purchases
Raw material consumed P&L 36.30
Opening raw material inventory (30×30÷360) (2.50)
Closing raw material inventory (36.3×30÷360) 3.03
36.83

A.2 (a) Option

An option gives the holder the right, but not the obligation to trade an item. The item might be
shares, securities, foreign currencies, commodities etc.

(b) In the context of the given example the terms are briefly explained as under:
(i) Strike price
The investor has a right to buy 500 shares for Rs. 20,000 i.e. at Rs. 40 per share.
Therefore, Rs. 40 is the strike price.

(ii) Call option or Put option

In the given example, the investor has an option is to buy shares, therefore, it is a call
option.

(c) ‘In the money’ or ‘Out the money’

There would be a loss of Rs. 5 (40-35) per share, if the investor exercises the option to buy
shares at a strike price of Rs. 40 per share as against the prevailing market price of Rs. 35 per
share. Therefore, the option would be termed as ‘out the money’.

Page 2 of 9
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2016

A.3 (a) Seema Enterprises

Budgeted and actual profits for the month of December 2015
Using marginal costing
Rs. in million
Budgeted profit:
Sales (9,800 units) 25.00
Variable costs (9+3.6+4.4) (17.00)
Closing finished goods inventory at standard cost 17÷10,000×200 0.34
Contribution margin 8.34
Fixed cost (3.80)
4.54
Actual profit:
Sales (11,000 units) 30.00
Variable costs (W-1) (19.74)
Closing finished goods inventory at standard cost 17×1,000÷10,000 1.70
Contribution margin 11.96
Fixed cost 1.6+1.2+(3.8-1.6-1.2)1.04 (3.84)
8.12

W-1: Actual variable cost

Material cost using FIFO 3,000 5.70
2,700 (2,70026.25÷15,000) 4.73
Kg 5,700 10.43
Labour cost; Actual labour hours (24,000÷10,00012,0000.95) 27,360
Actual hrs. at actual rate 27,360(3.6÷24,0001.1) 4.51
Variable overheads:
Actual machine hrs. at actual rate 2,100(4.4÷2,0001.04) 4.80
19.74

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2016

(b) Reconciliation of budgeted profit with actual profit

Rs. in million
Budgeted profit (As computed in (a) above) 4.54
Favourable/(adverse) variances:
Sales volume (contribution margin) variance:
Actual sale quantity at standard contribution margin 8.34÷9,80011,000 9.36
BU sale quantity at standard contribution margin 8.34
1.02
Sales price variance
Actual sale quantity at actual price 30.00
Actual sale quantity at standard price 25÷9,80011,000 28.06
1.94
Material price variance:
Actual usage at actual price (W-1) 10.43
Actual usage at standard price 5,700(9÷5,000) 10.26
(0.17)
Material usage variance
Actual usage at standard rate 10.26
Allowable usage at standard rate (5,000÷10,00012,000)(9÷5,000) 10.80
0.54
Labour rate variance
Actual hours at actual rate (W-1) 4.51
Actual hours at standard rate 27,360(W-1)(3.6÷24,000) 4.10
(0.41)
Labour efficiency variance
Actual hours at standard rate 4.10
Allowable hours at standard rate 24,000÷10,00012,000(3.6÷24,000) 4.32
0.22
Variable overhead expenditure variance
Actual machine hours at actual rate (W-1) 4.80
Actual machine hours at standard rate 2,100(W-1)(4.4÷2,000) 4.62
(0.18)
Variable overhead efficiency variance
Actual machine hours at standard rate 4.62
Allowable machine hours at standard rate 2,000÷10,00012,000(4.4÷2,000) 5.28
0.66
Fixed overhead expenditure variance
Actual fixed overheads (As computed in (a) above) 3.84
Standard fixed overheads 3.80
(0.04)
Fixed overhead volume variance
Under marginal costing, there is no fixed overhead volume variance as fixed
costs are treated as period cost and not allocated to products. -
Actual profit 8.12

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2016

A.4 Digital Electronics

Evaluating acquisition of a plant on lease

Receipts and payments:

1-Jan-16 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19
-------------------- Rs. in million --------------------
Net cash inflows - 5.90 5.20 2.45 1.00
Disposal price - - - - 0.5
Payments (2.00) (3.90) (3.90) (3.90) -
Amount payable
- - - -
on expiry of lease (0.89)
Net receipts (2.00) 2.00 1.30 (2.34) 1.50

NPV at 10% (A%) NPVA

PV factor 1.00 0.91 0.83 0.75 0.68
PV (Rs. in million) (2.00) 1.82 1.08 (1.76) 1.02 0.16

NPV at 20% (B%) NPVB

PV factor 1.00 0.83 0.69 0.58 0.48
PV (Rs. in million) (2.00) 1.66 0.90 (1.36) 0.72 (0.08)

Internal rate of return (IRR): A%+ [NPVA÷ (NPVA–NPVB) × (B%–A %)]

10%+ [0.16 ÷ (0.16-(-0.08) × (20%-10%)] = 16.67%

Conclusion: As internal rate of return (IRR) is higher than the company's cost of capital, it is
advisable to acquire the plant on lease.

Page 5 of 9
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2016

A.5 (a) Omega Industries

Actual overheads for production of Alpha and Beta

Cost allocation to production department:

Production depts. Service depts.
Total Fabricat- Quality
Items Allocation basis Finishing Logistics
ion control
-------------------- Rs. in '000 --------------------
Indirect labour Given 3,600 1,500 1,200 500 400
Factory rent Floor area 2,000 1,000 500 300 200
Power KWH consumed 1,200 600 480 48 72
Depreciation Plant cost 9,000 4,800 3,000 300 900
1,148 1,572
Service departments:
Logistics 60:35:5 1,572 943 550 79 (1,572)
1,227
Quality control 40:60 1,227 491 736 (1,227)
9,334 6,466 - -

Cost allocation to Alpha and Beta:

Alpha Beta
Total
Actual no. of units produced 8,000 10,000
---------- Rs. in '000 ----------
Overheads allocation on the basis of hours worked:
- Fabrication department in the ratio of 70:30 6,534 2,800 9,334
- Finishing department in the ratio of 60:40 3,880 2,586 6,466
10,414 5,386 15,800

(b) Accounting entries for absorption of overheads:

Debit Credit
--- Rs. in '000---
1 Work in process (8,0001,300)+(10,000500) 15,400
Factory overheads control account 15,400
(Overheads charged to production at pre-determined rate)

2 Cost of sales 15,800-15,400 400

Factory overheads control account 400
(Overheads under applied charged to cost of sales)

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2016

A.6 (a) Quality Chemicals

Process A - production and cost for the month of January 2016

Equivalent units under weighted average method:

Quantity Equivalent units
schedule Material Conv.
-------------- No. of units --------------
Opening WIP (40% to conversion) 5,000
Input for the month 20,000
A 25,000
Transferred to process B 18,000 18,000 18,000
Closing WIP (60% to conversion) 6,000 6,000 3,600
Normal loss-5% of the inspected units (A5%) 1,250 - -
Abnormal gain (50% to conv.) (Bal.) (250) (250) (125)
Normal equivalent units B 25,000 23,750 21,475

Cost per unit: ------ Rs. in '000 ------

Opening WIP 2,713 1,499
Cost for the month 10,000 5,760
Scrapped units at sale price 1,250100 (125) -
C 12,588 7,259

------- Rupees --------

Cost per unit C÷B 530 338

(b) Accounting entries

Debit Credit
Date Description
-------- Rs. in '000 --------
1 WIP - Process A 15,760
Raw material 10,000
Labour and overheads 5,760
(Material, labour and overheads charged to Process A)
2 WIP - Process A
(250530)+(125338) OR (250530)+(250169) 175
Abnormal gain 175
(To record abnormal gain)
3 Scrapped units 1,250100 125
WIP - Process A 125
(Sales value of rejected units credited to WIP)
4 WIP - Process B 18,000×(530+338) 15,624
WIP - Process A 15,624
(Goods completed transferred to Process B)
5 Abnormal gain (250×530)+(125×338) 175
Scrapped units 250100 25
Profit or loss account 150
(Abnormal gain adjusted to profit or loss account)

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2016

A.7 Global (Pvt.) Limited

Computation of bid price for Zeta
Rupees
Material A - at current purchase price 5,000200 1,000,000
Material B - at current selling price 3,000135 405,000
Material C - disposal cost saving 2,00010 (20,000)
Skilled labour hours - after using idle hours [800-(1440÷2)]200 16,000
Unskilled labour hours 250120 30,000
Machine hours 15 days4000 60,000
Variable overheads
(800+250)[(40050,000-6,000,000)÷50,000)]OR(800+250)[400 - (6,000,000÷50,000)] 294,000
Incremental fixed overheads 150,000
Increase in general administration costs 100,000
Feasibility cost incurred by planning department - sunk cost -
Total production cost 2,035,000

Bid price - to earn 20% profit on selling price 2,035,000÷0.8 2,543,750

A.8 Himalayan Rivers

Break-even sales revenue and quantity
Rs. in million
Break even sales revenue 6.59(W-2)÷[(100–2)×40%] 16.81
Break even sales quantity [16,810,000÷200(W.1)] Units 84,050

W-1: Sales price per unit Rs. in million

Variable overheads (excluding 2% sales commission):
Direct material 6.00
Direct labour 5.00
Variable overheads 10.29-3.65 (W-2) 6.64
17.64
Variable overheads % to sales [100-(100-2)40%]–2% 58.80%

Sales price per unit (17.64÷58.8%)÷150,000 Rs. 200.00

W-2: Fixed cost Rs. in million

Production overheads:
Rent - factory premises 1.80
Indirect labour 530%50% 0.75
Depreciation of plant 0.50
Power and fuel 320% 0.60
3.65
Sales and marketing expenses:
Employees’ salaries 25,000212 0.60
Delivery van 70,00012 0.84
Advertisement campaign 1.50
Total fixed overheads 6.59

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2016

A.9 Internal benefits of sustainability reporting can include:

(i) It increases understanding of risks and opportunities
(ii) It emphasize the link between financial and non-financial performance
(iii) It provides supports in the development of long term management strategy and policy, and
business plans
(iv) It helps in streamlining processes, reducing costs and improving efficiency
(v) It helps in benchmarking and assessing sustainability of performance with respect to laws,
norms, codes, performance standards, and voluntary initiatives
(vi) It helps in avoiding being implicated in publicized environmental, social and governance
failures
(vii) It helps in comparing performance internally, and between organizations and sectors

External benefits of sustainability reporting can include:

(i) Mitigating – or reversing – negative environmental, social and governance impacts
(ii) It improves reputation and brand loyalty
(iii) It enables external stakeholders to understand the organization’s true value, and tangible and
intangible assets
(iv) It demonstrates how the organization influences, and is influenced by, expectations about
sustainable development

(THE END)

Page 9 of 9
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Cost and Management Accounting Certificate in Accounting and Finance
– Spring 2016

General:

The overall performance in this paper was good as the result was nearly 50%. Above
average performances were witnessed in all the questions except questions 1 and 3.

Question wise comments are as under:

Question 1

This question required preparation of profit and loss account and cash flow statement.
The overall response was poor as a number of mistakes were observed. Some of the
common mistakes are discussed below:
 Majority of the students were unable to calculate sales revenue correctly. Most such
students did not gross up the existing cash sales by adding back the discount and
consequently ignored the discount in the calculation of budgeted sale also. Probably,
they thought that both discounts would cancel each other, which was not the case.
 Many students applied 15% increase on existing sale instead of applying increase in
sales volume and price separately. Similar errors were made in the calculation of
other items as well.
 Impact of increase in prices was to be applied to budgeted fixed cost also. Many
students ignored it altogether. Some of them applied the increase on all the expenses
i.e. they did not exclude depreciation. Some of them separated the depreciation for the
purpose of applying the price increase but forgot to add it back for calculating the
final figure.
 Many students ignored the impact of price increase on raw material consumption,
variable conversion cost and variable operating expenses.
 Most of the students failed to correctly compute the closing finished goods inventory
which required breaking up the opening inventory into components i.e. raw material,
fixed & variable conversion costs and depreciation and then applying the price
increase on value of each component. Many students did not calculate it altogether
whereas many of them took it as equal to opening finished goods stock.
 Though calculation of cash flow was quite straight forward, many students didn’t
attempt it altogether. Those who did attempt seemed to lack practice and made simple
errors in the calculation of opening and closing balances of debtors, creditors and
accrued expenses. Further, while adjusting the figures, they added the balances which
should have been deducted and vice versa.
 Raw material consumed was used in the calculation of payments against purchases.
 Depreciation was not ignored while calculating payments for expenses.

Page 1 of 4
 Examiners’ Comments on Cost and Management Accounting - Spring 2016

Question 2

This was a theoretical question on the topic of option and tested the concepts of call
option, put option and strike price. Most of the students seemed well prepared, especially
in parts (a) and (b) and scored very high marks. The most common mistake was that they
restricted the concept of option to share trading only. There was also some lack of clarity
in many answers as to whether an option is just a right or carries an obligation also.

In part (c) the performance was average as many students did not seem to understand the
concepts of “in the money” and “out the money”. Many candidates left it un-attempted
also.

Question 3

This question required computation of budgeted and actual profits using marginal costing
and reconciling them by using relevant variances. The overall performance was quite
poor especially with regard to calculation of variances. The common mistakes were as
follows:

 Many students computed the actual profit and budgeted profit to the extent of
contribution margin only.
 Many students considered the closing inventory in computing the actual profit but
ignored it in the calculation of budgeted profit.
 Many students used weighted average instead of FIFO method to compute material
consumption.
 Most of the students made various types of errors while computing actual cost of
labour and variable overheads.
 Sales volume variance could have been computed by multiplying the standard
contribution margin with the difference between actual and standard sale quantity.
However, most of the students multiplied the difference in quantity with the sale
price.
 While computing material usage variance, most of the students compared the actual
usage of material with the budgeted quantity without adjusting the budgeted quantity
on the basis of actual units produced. Similar types of errors were observed in the
computation of labour and overhead variances.
 Some of the students only stated the total variances e.g. total material variance was
calculated which was not bifurcated into material rate variance and material usage
variance.
 Some of the students stated the formulas for variances and did not provide any
calculations.

Question 4

This question required calculation of IRR of a project and to assess whether it should be
undertaken or not. It was one of the best attempted questions as 79% of the students were
able to obtain passing marks.

However, some commonly observed errors are discussed below:

 Fair value of the plant was considered as an outflow.

Page 2 of 4
 Examiners’ Comments on Cost and Management Accounting - Spring 2016

 Amount payable on expiry of lease term was taken as an outflow at the end of year
2019 instead of 2018.
 Disposal price of Rs. 0.5 million was ignored.
 Some of the candidates could not compute the PV factor correctly.
 Some of the candidates were unable to determine the IRR correctly due to application
of incorrect formula.
 Some students started inflows from December 2017 rather than December 2016.

Question 5

This question required allocation of departmental (production as well as service)

overheads to the products and passing of necessary journal entries to record applied
production overheads and under/over absorbed production overheads.

On an overall basis it was the best attempted question as more than 90% of the students
secured passing marks. However, the response with regard to journal entries was very
poor. Most of the students confused the recording of applied overheads with recording of
actual overheads. Many students omitted it altogether whereas some of them prepared
entries without amount.

Question 6

This question required calculation of equivalent production units under weighted average
method and passing of journal entries to record the transactions through the entire process
accounting system.

This question was also attempted well. However, the common mistakes were as follows:

 Most of the students failed to correctly compute the normal loss correctly. Most of
them failed to realise that the opening work in process units were 40% complete and
closing work in process units were 60% complete whereas inspection takes place
when the units are 50% complete and hence normal loss of 5% had to be computed on
opening units as well as units input during the period without deducting the closing
units.
 Most of the students computed abnormal gain units at 100% whereas they should
have been taken at 50% considering that inspection is conducted when the units are
50% complete.
 Some of the candidates included normal loss in the calculation of EPU whereas many
candidates excluded abnormal gain from the calculation as well.
 Many students attempted to record journal entry for the opening WIP by crediting
various types of accounts.
 Students who recorded abnormal gain failed to close the same in profit and loss
account correctly. However, the same should have been closed by crediting the
scrapped units at value of Rs.100 per unit being the notional sale value of abnormal
gain units and the remaining balance should have been credited to profit and loss
account.
 Many students did not recognise (journalise) the sale value of normal loss. Some of
them credited it to P&L account instead of WIP account.
 Some of the students debited finished goods instead of debiting WIP – Process B.

Page 3 of 4
 Examiners’ Comments on Cost and Management Accounting - Spring 2016

Question 7

This question required calculation of bid price for a special order and tested the concept
of relevant and irrelevant costs in decision making. Good performance was witnessed in
this question also. Some of the common mistakes are described below:

 Original purchase price of Material B was used instead of the disposal price.
 Most of the students failed to recognise the saving of disposal cost that would be
possible if Material C is used for this order. Some of them added the amount of
savings instead of deducting it.
 Most of the students did not allocate any cost of skilled labour hours. They failed to
recognise the fact that 1440 idle labour hours per month meant that only 720 idle
hours can be utilised during the duration of the order which was 15 days.
 While computing variable overhead cost most of the students simply multiplied the
labour hours with Rs.400 being the absorption overhead rate. However, the
absorption rate should have been reduced by the fixed overhead portion thereof.
 A number of students included the feasibility costs in calculating the bid price for
Zeta whereas it was a sunk cost.
 Majority of the students was unable to understand that 20% of selling price may be
computed by taking 25% of the relevant costs.

Question 8

This question required calculation of breakeven sales in terms of amount of revenue as

well as the quantity in a single product situation. Overall performance was good as most
of the students were able to compute the fixed and the variable costs correctly. However,
most of them were unable to correctly comprehend the treatment of sales commission.
Some of them added it to variable cost to arrive at variable expenses of 62% of gross
sales and thus arrived at a contribution margin of 38% of total sales. The contribution
margin if computed on gross sales was 39.2% [(100-2)*40%] resulting in a contribution
margin of 40% of net sales (39.2/98*100) as was required in the question. Hence, the
proper method to arrive at breakeven gross sales was to divide fixed expenses by 39.2%
or to arrive at net sales (after commission) by dividing fixed expenses by 40% and then
arriving at breakeven gross sales by dividing net sales by 98%.

Question 9

This question required the candidates to list down the internal and external benefits of
sustainability reporting. The performance was at either extreme, i.e. those students (about
25% of the total) who had studied it secured full marks whereas the rest of them mostly
scored zero or very low marks. Some of the students could not distinguish clearly
between internal and external benefits.

THE END

Page 4 of 4
 Cost and Management Accounting
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2016

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations.

Mark(s)
A.1 (a)  Budgeted sales 2.0
 Budgeted cost of sales 4.5
 Budgeted operating expenses 1.5

(b)  Cash inflows 2.0

 Cash outflows
 Payments for purchases 3.0
 Payments for expenses 3.0

A.2 (a) Explanation of the term ‘option’ 1.0

(b) Brief explanation of:

(i) Strike price 0.5
(ii) Whether the given transaction is ‘call option’ or ‘put option’ 1.5

(c) Explanation whether the given option would be ‘in the money’ or ‘out the
money’ when the market price is Rs. 35 per share 2.0

A.3 (a)  Computation of budgeted profit 1.5

 Computation of actual profit 4.5

(b)  1.5 marks each for computing sales, material, labour and overhead 13.5
variances
 0.5 mark for explaining that there would be no fixed overhead volume
variance 0.5

A.4  Year-wise preparation of cash flows 3.0

 Discounting of the cash flows 3.0
 Computation of IRR and to suggest whether it is feasible to acquire the plant 2.0

A.5 (a)  Allocation of overheads to production and service departments 6.5

 Allocation of service departments’ costs to production departments 2.5
 Allocation of production departments’ cost to products 1.0

(b)  Preparation of journal entries to record:

 applied production overheads 1.0
 under/over absorbed production overheads 1.0

A.6 (a)  Preparation of quantity schedule and computation of equivalent units 3.0
 Calculation of cost per unit 2.0

  Page 1 of 2
 Cost and Management Accounting
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2016

Mark(s)
(b)  Accounting entries to:
 charge material, labour and overheads to process A 1.5
 record abnormal gain 1.0
 record sales value of rejected units 1.0
 record transfer of completed goods to process B 1.0
 adjust abnormal gain to profit and loss account 1.5

A.7  1.0 mark each for calculating relevant cost of materials A, B and C 3.0
 1.0 mark each for calculating skilled and unskilled labour cost 2.0
 Relevant cost of machine 1.0
 Relevant cost of variable overheads 2.0
 Relevant cost of fixed overheads 2.0
 Ignoring irrelevant/sunk cost 1.0
 Calculation of bid price 1.0

A.8  Computation of variable and fixed costs 5.0

 Computation of sales price per unit 3.0
 Determination of break-even sales revenue and quantity 2.0

A.9  1.0 mark each for listing any three internal benefits of Sustainability Reporting 3.0
 1.0 mark each for listing any three external benefits of Sustainability
Reporting 3.0

(THE END)

  Page 2 of 2
 Certificate in Accounting and Finance Stage Examinations
The Institute of 8 September 2016
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Q.1 The following information has been extracted from the projected financial statements of
Lotus Enterprises (LE) for the year ending 30 September 2016:

Rs. in million
Sales (100% credit sales) 3,000
Raw material consumption 900
Raw material inventory (including imports of Rs. 98 million) 158
Conversion cost: Variable 570
Fixed (including depreciation of Rs. 16 million) 40
Operating cost: Variable 730
Fixed (including depreciation of Rs. 27 million) 120
Trade creditors (local purchases) 95
Advance to suppliers for import of raw material 30

LE is in the process of preparing its budget for the next year. The relevant information is as
under:

(i) Sale volume is projected to increase by 30%. In order to finance the additional
working capital, the management has decided to adopt the following measures:

Introduce cash sales at a discount of 2%. It is estimated that 20% of the customers
would avail the discount.

The present average collection period is 45 days. LE has decided to improve
follow-ups which would ensure collection within 40 days.

40% of the raw material consumed is imported which is paid in advance on
placement of purchase order. The delivery is made within 30 days after the
placement of order. LE has negotiated with the foreign suppliers and agreed that
from the next year, payments would be made on receipt of the goods.

Local purchases would be paid in 50 days.

(ii) As a result of increased production, economies of scale would reduce variable

conversion cost per unit by 5%.
(iii) Due to price increases, cost of raw material and all other costs (excluding
depreciation) would increase by 10% and 8% respectively.
(iv) Average days for payment of other costs would remain the same i.e. 25 days.
(v) There is no opening and closing finished goods inventory.
(vi) Quantity of closing local and imported raw material as a percentage of raw material
consumption would remain the same.
(vii) LE uses FIFO method of valuation of inventory.

Required:
Prepare cash budget for the next year. (Assume that all transactions occur evenly throughout
the year (360 days) unless otherwise specified) (15)
 Cost and Management Accounting Page 2 of 4

Q.2 Tropical Juices (TJ) is planning to expand its production capacity by installing a plant in a
building which is owned by TJ but has been rented out at Rs. 6 million per annum. The
relevant details are as under:
(i) The cost of the building is Rs. 40 million and it is depreciated at 5% per annum.
(ii) The rent is expected to increase by 5% per annum.
(iii) Cost of the plant and its installation is estimated at Rs. 60 million. TJ depreciates
plant and machinery at 25% per annum on a straight line basis. Residual value of the
plant after four years is estimated at 10% of cost.
(iv) Additional working capital of Rs. 25 million would be required on commencement of
production.
(v) Selling price of the juices would be Rs. 350 per litre. Sales quantity is projected as
under:
Year 1 Year 2 Year 3 Year 4
Litres 250,000 300,000 320,000 290,000
(vi) Variable cost would be Rs. 180 per litre. Fixed cost is estimated at Rs. 100 per litre
based on normal capacity of 280,000 litres. Fixed cost includes yearly depreciation
amounting to Rs. 16 million.
(vii) Rate of inflation is estimated at 5% per annum and would affect the revenues as well
as expenses.
(viii) TJ's cost of capital is 15%.

Required:
Compute net present value (NPV) of the project and advise whether it would be feasible to
expand the production capacity. (Assume that all cash flows other than acquisition of plant and
additional working capital would arise at the end of the year) (11)

Q.3 Bela Enterprises (BE) produces a chemical that requires two separate processes for its
completion. Following information pertains to process II for the month of August 2016:
kg Rs. in '000
Opening work in process (85% to conversion) 5,000 2,000
Costs for the month:
Received from process I 30,000 18,000
Material added in process II 15,000 10,000
Conversion cost incurred in process II - 11,000
Finished goods transferred to warehouse 40,000 -
Closing work in process (60% to conversion) 4,000 -
In process II, material is added at start of the process and conversion costs are incurred
evenly throughout the process. Process losses are determined on inspection which is carried
out on 80% completion of the process. Process loss is estimated at 10% of the inspected
quantity and is sold for Rs. 100 per kg.
BE uses FIFO method for inventory valuation.

Required:
(a) Prepare a statement of equivalent production units. (04)
(b) Compute cost of:
(i) finished goods (ii) closing WIP (iii) abnormal loss/gain (09)
(c) Prepare accounting entries to record production gain/loss for the month. (03)

Q.4 (a) What do you understand by ‘safety stock’? Briefly discuss the reasons of maintaining
the safety stock. (03)

(b) List any four costs that are associated with holding of inventory. (02)
 Cost and Management Accounting Page 3 of 4

Q.5 Ideal Chemicals (IC) blends and markets various cleaning chemicals. Presently, IC’s plant is
working at 70% capacity. To utilize its idle capacity, IC is planning to acquire rights to
produce and market a new brand of chemical namely Z-13 on payment of fee of Rs. 160,000
per month.
In this respect, the relevant information is summarised as under:
(i) Z-13 would be produced using the existing plant whose cost is Rs. 81 million.
Processing would be carried out in batches of 2,000 litres of raw-materials.
Production costs per batch are estimated as under:
Raw material: Imported 1,200 litres @ Rs. 1,500 per litre
Local 800 litres @ Rs. 900 per litre
Direct labour 4,000 hours @ Rs. 165 per hour
Variable production overheads @ Rs. 120 per direct labour hour

1,700 litres of Z-13 is produced from each batch. 100 litres are lost by way of
evaporation whereas 200 litres of input is converted into solid waste. The
approximate weight of the solid waste is 225 kg per batch.
(ii) Net volume of each bottle of Z-13 would be 1.25 litres.
(iii) The solid waste would be refined to produce a by-product, polishing wax. Refining
would cause an estimated loss of 2% of by-product output.
(iv) Cost of refining and sales price of wax would be Rs. 250 and Rs. 400 per kg
respectively. Net sales revenue (sales less refining cost) from sale of wax is to be
deducted from the cost of the main product.
(v) Variable selling overheads are estimated at Rs. 175 per unit.
(vi) The plant is depreciated at 10% per annum. It is estimated that production of Z-13
would utilise 20% capacity of the plant.
(vii) To introduce Z-13, IC plans to launch a sales campaign at an estimated cost of
Rs. 3.5 million.
(viii) IC wishes to sell Z-13 at a contribution margin of 40% on sales.

Required:
Determine Z-13’s sale price per unit and annual units to be sold, if IC intends to earn an
incremental profit before tax of Rs. 10 million from its sale. (11)

Q.6 Galaxy Engineers (GE) manufactures and sells a wide range of products. One of the raw
materials XPI is in short supply and only 80,000 kg are available in GE's stores. Following
information pertains to the products in which XPI is used:
Product A Product B Product C
Budgeted local sales/requirement Units 4,500 1,000 2,500
Committed export sales as per agreement Units - 800 -
------------------ Per unit ------------------
Sales price Rs. 20,000 14,100 For internal use
Material XPI (Rs. 500 per kg) kg 14 12 2
Other material (Rs. 300 per kg) kg 5 3 1
Direct labour hours (Rs. 100 per hour) hours 20 15 5
Variable overheads based on labour cost % 80% 80% 80%
Fixed overheads per direct labour hour Rs. 95 75 60

Product C is used in other products made by GE. If it could not be produced internally, it
has to be purchased from market at Rs. 3,000 per unit.

Required:
Determine the number of units of each product that should be manufactured, to earn
maximum profit. (12)
 Cost and Management Accounting Page 4 of 4

Q.7 Zamil Industries (ZI) produces and markets an industrial product Zeta. ZI uses standard
absorption costing system. The break-up of Zeta’s standard cost per unit is as under:
Rupees
Materials: Axe – 1 kg 160
Zee – 2 kg 210
Direct labour – 0.8 hours 200
Overheads – 0.8 hours 180
Production of Zeta for the month of August 2016 was budgeted at 15,000 units. Information
pertaining to production of Zeta for August 2016 is as under:
(i) Raw material inventory is valued at lower of cost and net realizable value. Cost is
determined under FIFO method. Stock cards of materials Axe and Zee are reproduced
below:
Axe Zee
Date Description Cost per Cost per
kg kg
kg (Rs.) kg (Rs.)
1-Aug Opening balance 9,000 150 4,000 120
8,000 122
3-Aug Purchase returns - - (2,000) 122
4-Aug Purchases 17,000 148 35,000 125
6-Aug Issues to production (16,000) - (29,000) -

(ii) Actual direct wages for the month were Rs. 3,298,400 consisting of 11,780 direct
labour hours.
(iii) Fixed overheads were estimated at Rs. 540,000 based on budgeted direct labour hours.
(iv) The actual fixed overheads for the month were 583,000.
Actual sales of Zeta for the month of August 2016 was 12,000 units. Opening and closing
finished goods inventory of Zeta was 5,000 and 8,500 units respectively.

Required:
(a) Compute following variances:
(i) Material price, mix and yield variances (07)
(ii) Labour rate and efficiency variances (04)
(b) Compute applied fixed overheads and analyse ‘under/over applied fixed factory
overheads’ into expenditure, efficiency and capacity variances. (08)

Q.8 Explain ‘sustainability reporting’ and state any four internal benefits of sustainability
reporting. (05)

Q.9 Abid Foods Limited (AFL) has issued 8,000 convertible bonds of Rs. 100 each at par value.
The bonds carry mark-up at the rate of 8% which is payable annually. Each bond may be
converted into 10 ordinary shares of AFL in three years. Any bonds not converted will be
redeemed at Rs. 115 per bond.

Required:
Calculate the current market price of the bonds, if the bondholders require a return of 10%
and the expected value of AFL’s ordinary shares on the conversion day is:
(a) Rs. 12 per share (03)
(b) Rs. 10 per share (03)

(THE END)
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

A.1 Lotus Enterprises

Cash budget for the next year
Rs. in million
Inflows:
Sale proceeds from:
– Cash sales (net of cash discount) (3,000×1.3)×20%×98% 764.40
– Credit sales:
Credit sales for the year (3,000×1.3)×80% 3,120.00
Trade debtors – closing balance 3,120×40÷360 (346.67)
2,773.33
Trade debtors – opening balance 3,000×45÷360 375.00
Collection from credit sales 3,148.33
(A) 3,912.73
Outflows:
Payments for raw material imports and local purchases:
Imports Local purchases
Imports and local purchases for the year W.1 544.14 792.00 1,336.14
Trade creditors - closing balance 792×50÷360 - (110.00) (110.00)
544.14 682.00 1,226.14
Adjustment of advance for imports (30.00) - (30.00)
Trade creditors - opening balance - 95.00 95.00
514.14 777.00
(B) 1,291.14
Payments for expenses:
Conversion cost Operating cost
Variable Fixed Variable Fixed
Cost for the year 760.27 25.92 1,024.92 100.44 1,911.55
570×1.3×95%×1.08 (4016)×1.08 730×1.3×1.08 (12027)×1.08
Closing–payables (52.80) (1.80) (71.18) (6.97) (132.75)
(760.27÷360×25) (25.92÷360×25) (1,024.92÷360×25) (100.44)÷360×25
707.47 24.12 953.74 93.47 1,778.80
Opening–payables 39.58 1.67 50.69 6.46 98.40
570÷360×25 (40-16)÷360×25 730÷360×25 (120-27)÷360×25
Payments 747.05 25.79 1,004.43 99.93
(C) 1,877.20
Net cash inflows (A-B-C) 744.39

W-1: Imports/purchases for the next year: Local

Imports
purchases
--------- Rs. in million ---------
Raw material consumption using FIFO:
- From current year’s import : at old price 30.00 -
at revised price [(900×1.3×40%)(98+30)]×1.1 374.00 -
- Current year’s purchases: at revised price [(900×1.3×60%)60]×1.1 - 706.20
404.00 706.20
Closing raw material inventory (98×1.3×1.1), (60×1.3×1.1) 140.14 85.80
Total imports/local purchases for the next year 544.14 792.00

Page 1 of 7
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

A.2 Tropical Juices

Investment appraisal - Expansion of production facility
Year 0 Year 1 Year 2 Year 3 Year 4
Cash inflows/(outflows)
------------------------ Rs. in million ------------------------
Loss of opportunity (Bldg. rent) - (6.30) (6.62) (6.95) (7.29)
Cost of plant and its installation (60.00) 6.00
Working capital (25.00) - - - 25.00
Sales 87.50 110.25 123.48 117.50
2 3
(0.25×350) (0.3×350×1.05) (0.32×350×1.05 ) (0.29×350×1.05 )
Variable cost (45.00) (56.70) (63.50) (60.43)
2 3
(0.25×180) (0.3×180×1.05) (0.32×180×1.05 ) (0.29×180×1.05 )
Fixed cost (12.00) (12.60) (13.23) (13.89)
2 3
(0.28×100)-16 (12×1.05) (12×1.05 ) (12×1.05 )
Net cash flows (85.00) 24.20 34.33 39.80 66.89

Present value factor at 15% 1.000 0.870 0.756 0.658 0.572

Present value at 15% (85.00) 21.05 25.95 26.19 38.26
Net present value (NPV) at 15% 26.45

Conclusion: The expansion of production facility is generating positive NPV at TJ's cost of capital of 15%.
Therefore, it is feasible for TJ to expand the production facility.

Page 2 of 7
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

A.3 Bela Enterprises

(a) Statement of equivalent units: Equivalent units Quantity
Material Conversion schedule
------------------- kg -------------------
Opening WIP (85% to conversion) (5,000) (4,250) 5,000
Received from process I 30,000
Material added in process II 15,000
50,000
Transferred to finished goods 40,000 40,000 40,000
Goods started and completed during the month A 35,000 35,750
Closing WIP (60% to conversion) B 4,000 2,400 4,000
Normal loss at 10% (50,0005,0004,000)×10% 4,100
Abnormal loss (80% conversion) (Balancing) C 1,900 1,520 1,900
D 40,900 39,670 50,000

(b) Computation of costs:

Cost per unit Material Conversion Total
---------- Rs. in ‘000 ----------
Opening WIP - - 2,000
Cost for the month: Process I 18,000 - 18,000
Process II 10,000 11,000 21,000
Normal loss quantity at sale price (4,100×100) (410) - (410)
Total cost E 27,590 11,000 40,590

----------------- Rupees -----------------

Cost per unit F=(E÷D) 674.57 277.29

(i) Cost of finished goods: ----------------- Rs. in ‘000 -----------------

Opening WIP 2,000
Cost for the month A×F 23,610 9,913 33,523
35,523
(ii) Cost of closing WIP B×F 2,698 666 3,364
(iii) Cost of abnormal loss C×F 1,282 421 1,703

(c) Accounting entries to account for production losses:

Debit Credit
Date Description
--------- Rs. in '000 ---------
1 Scrap inventory (normal loss quantity) 4,100×100 410
WIP – II 410
(Normal loss quantity credited to WIP at sales value)
2 Scrap inventory (abnormal loss quantity) 1,900×100 190
Profit and loss account (Balancing) 1,513
WIP – II As (iii) above 1,703
(Loss on abnormal loss quantity debited to profit and loss account)

Page 3 of 7
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

A.4 (a) Safety stock:

To minimize stock-outs on account of increased demand or delays in delivery etc., a buffer stock in
excess of average requirements is often maintained. Such a buffer stock is called a safety stock.

Reasons of maintaining the safety stock:

(i) Protect against unforeseen variation in supply and/or demand.
(ii) Prevent disruption in manufacturing or deliveries.
(iii) Avoid stock-outs to keep customer service and satisfaction levels high.

(b) Costs associated with holding of inventory:

(i) Cost of capital tied up
(ii) Insurance costs
(iii) Cost of warehousing
(iv) Obsolescence, deterioration and theft

A.5 Ideal Chemicals

Units
Finished units per batch 1,700÷1.25 (A) 1,360
By-product units per batch 225÷1.02 221

Variable production cost per unit: Rupees

Material: Imports 1,200×1,500 1,800,000
Local 800×900 720,000
Direct labour 4,000×165 660,000
Variable production overheads 4,000×120 480,000
Net sales revenue from sale of by-product 221×(400–250) (33,150)
(B) 3,626,850

Variable production cost per unit (B÷A) 2,666.80

Variable selling overheads per unit 175.00
Variable cost per unit (C) 2,841.80

Sales price per unit to earn 40% contribution on sale D=(C÷0.6) 4,736.33

No. of sale units to earn annual profit before tax of Rs. 10,000,000
Incremental fixed overheads and profit:
- Fee for blending and marketing of Z-13 160,000×12 1,920,000
- Sales promotion expenses 3,500,000
- Required incremental profit before tax 10,000,000
(E) 15,420,000

Required annual sales units No. of units E÷ (D-C) 8,139

Page 4 of 7
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

A.6 Galaxy Engineers

Units to be manufactured to earn maximum profit
Product A Product B Product C Material XPI
---------- Units---------- kg
Budgeted sales/requirements 4,500 1,800 3,000
---------- Rupees ----------
For internal
Sales price per unit 20,000 14,100 use only
Opportunity cost per unit (Purchase price) - - 3,000
Cost of production per unit:
Material XPI usage at Rs. 500 per kg (7,000) (6,000) (1,000)
Other material usage at Rs. 300 per kg (1,500) (900) (300)
Direct labour at Rs. 100 per hour (2,000) (1,500) (500)
Variable overheads at 80% of labour cost (1,600) (1,200) (400)
(12,100) (9,600) (2,200)
CM/savings from own manufacturing (A) 7,900 4,500 800

Per unit usage of material XPI (B) kg 14 12 2

CM per one kg of material XPI (A)÷(B) Rs. 564 375 400
Ranking based on CM per XPI kg 1st 3rd 2nd

Production from available material XPI:

Production of committed export sales - 800 - 9,600
Production in ranking order 4,500 200 2,500 70,400
Optimal production Units 4,500 1,000 2,500 80,000

A.7 Zamil Industries

(a) (i) Material variances

Material price variance:

Actual material usage at actual price using FIFO
Axe Zee Net adverse
Issues (kg) Actual rate Rs. Issues (kg) Actual rate Rs. variance Rs.
9,000 150 1,350,000 4,000 120 480,000
7,000 148 1,036,000 6,000 122 732,000
- - - 19,000 125 2,375,000
16,000 2,386,000 29,000 3,587,000

Actual material usage at

standard price:
16,000 160 2,560,000 29,000 (210÷2) 105 3,045,000
Fav./(Adverse) variance 174,000 (542,000) (368,000)

Material mix variance

Actual usage at Mix quantity
Actual mix
(kg)
std. mix ratio variance Std. cost per (kg) Rs.
(kg) (Adv.)/Fav.
Axe 16,000 15,000 (1,000) 160 (160,000)
Zee 29,000 30,000 1,000 105 105,000
45,000 45,000
Material mix variance – adverse (55,000)

Material yield variance

Per unit Std. raw
Yield (no. of units) material usage at Rs.
Std. price
Standard yield (45,000÷3) 15,000 (160+210) 370 5,550,000
Actual yield (12,000+8,5005,000) 15,500 370 5,735,000
Yield variance – favourable 185,000

Page 5 of 7
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

(ii) Labour variance Rs.

Labour rate variance
Actual hours at standard rate 11,780×(200÷0.8) 2,945,000
Actual hours at actual (3,298,400)
Labour rate variance – adverse (353,400)

Labour efficiency variance

Allowable hours at standard rate (15,500×0.8)×(200÷0.8) 3,100,000
Actual hours at standard rate 11,780×(200÷0.8) (2,945,000)
Labour efficiency variance – favourable 155,000

(b) Analyses of under/over applied fixed overheads

Standard fixed overhead rate per hour (540,000÷15,000×0.8) 45

Applied fixed overheads (15,500×0.8×45) 558,000

Actual fixed overheads (583,000)
Under applied overheads (25,000)

Fixed overhead expenditure variance

Budgeted fixed overheads 540,000
Actual fixed overheads (583,000)
Fixed overhead expenditure variance – adverse (A) (43,000)

Fixed overhead efficiency variance

Allowable hrs. for actual production at standard cost 15,500×0.8×45 558,000
Actual hours worked at standard rate 11,780×45 (530,100)
Fixed overhead efficiency variance – favourable (B) 27,900

Fixed overhead capacity variance

Actual hours worked at standard rate 11,780×45 530,100
BU hours at standard rate 12,000×45 (540,000)
Fixed overhead capacity variance – adverse (C) (9,900)

Under applied fixed overheads (A)+(B)+(C) (25,000)

A.8 Sustainability Reporting

According to the Global Reporting Initiative (GRI), sustainability report is published by a company
or organisation about the economic, environmental and social impacts caused by its everyday
activities. The report also presents the organisation's values and governance model. It demonstrates
the link between its strategy and its commitment to a sustainable global economy.

Internal benefits of sustainability reporting can include:

(i) It increases understanding of risk and opportunities.
(ii) It emphasises the link between financial and non-financial performance.
(iii) It provides supports in the development of long term management strategy and policy, and
business plans.
(iv) It helps in streamlining processes, reducing costs and improving efficiency.
(v) It helps in benchmarking and assessing sustainability of performance with respect to laws,
norms, codes, performance standards, and voluntary initiatives.
(vi) It helps in avoiding being implicated in publicized environmental, social and governance
failures.
(vii) It helps in comparing performance internally, and between organisations and sectors.

Page 6 of 7
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

A.9 Abid Foods Limited

Current market value for 8,000 convertible bonds
Current market value for
Cash
Discount 8,000 bonds, when price per
flows/value
Year Description factor at share is
for 8,000
10% (a) (b)
bonds
Rs. 12 Rs. 10
Rupees --------- Rupees ---------
1 Annual interest (8,000×100×8%) 64,000 0.909 58,176 58,176
2 Annual interest (8,000×100×8%) 64,000 0.826 52,864 52,864
3 Annual interest (8,000×100×8%) 64,000 0.751 48,064 48,064
159,104 159,104
Bonds’ value at higher of shares' expected value
and bonds' redemption value:
Expected value of Redemption value
10 shares of one bond
3 (a) 120.00 115.00 960,000*1 0.751 720,960
3 (b) 100.00 115.00 920,000*2 0.751 690,920
Current market value for 8,000 convertible bonds 880,064 850,024
*1
(8,000 × 120)
*2
(8,000 × 115)

(THE END)

Page 7 of 7
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Cost and Management Accounting Certificate in Accounting and Finance
Autumn 2016

General:

The overall performance in this paper was good. The result was almost the same as in the
last attempt i.e. 49.44% as compared to 49.01% for the last attempt. However, it was noted
that areas where students performed poorly were same as last attempt i.e. cash budget (Q.1),
cost variances (Q.7) and sustainability reporting (Q.8).

Major reason for failure of many students was lack of presentation skill as they framed their
answered without any thoughtful process and workings were prepared in a haphazard
manner. In some cases workings were given on the last page of the answer script without
mentioning any question number.

Question-wise comments

Question 1

This question required preparation of cash budget. Overall performance in this question was
below average. Marks were mostly scored in the easy part of the question i.e. sales. Most of
the students were unable to compute budgeted import/local purchases correctly. Some of
the common mistakes were as under:

 Instead of calculating cash and credit sales separately, many students calculated cash
sales net of discount and total sales and took the difference between the two as the
credit sales.
 Majority of the students did not know how to deal with the amount of advance against
imports and made numerous types of errors.
 30% growth in sales was ignored while computing closing inventory.
 Many students computed purchases and treated it as payment without adjusting opening
and closing balances of trade creditors. Similarly, some students computed raw-material
consumption and treated it as purchase without considering the opening and closing
inventory balances.
 Sales growth of 30% was not considered for calculation of variable and operating costs
whereas some students applied to the fixed cost also.
 Many students did not exclude deprecation while computing cash outflows on account
of fixed costs.

Page 1 of 4
 Examiners’ Comments on Cost and Management Accounting - Autumn 2016

Question 2

The requirement of this question was to assess feasibility for expansion of the production
capacity by computing net present value (NPV) based on the given scenario. This was a
very well attempted question as 78% students were able to secure passing marks. The errors
observed were as under:

 Inflation rate of 5% was applied from year 1, instead of applying it form year 2.
 For calculation of NPV, given 15% cost of capital was adjusted to incorporate 5%
inflation. As this adjusted rate of cost of capital was applied to all the costs, it ended up
in incorrect NPV.
 Loss of the building rent is an opportunity cost, but most of the students ignored it
altogether.
 Many students incorrectly treated cost of building as outflow in year 0 and written down
value of the building at the end of year 4 as inflow.
 Many students computed increased fixed cost in proportion to the increase in
production.
 Most of the students failed to consider the recoupment of working capital at the end of
year 4.

Question 3

This question was on process costing, requiring the students to compute equivalent
production units, cost of finished goods, closing WIP and abnormal loss/gain and
accounting entries to record production gains/losses. The question was well attempted and
75% students were able to secure passing marks. However, the common mistakes were as
under:

 Most of the students failed to correctly compute normal/abnormal loss units. It was not
realized by most of the students that losses are determined on 80% completion of the
process and hence both opening and closing WIP units would be excluded from the total
input units as opening units were already subject to normal loss being 85% complete
and closing units were not subject to inspection being 60% complete.
 While computing equivalent units of conversion, abnormal loss units were not reduced
to 80%.
 Significant number of students included normal loss units in equivalent production.
 While computing cost per unit, realisable value of normal loss unis was not deducted
from the material cost.
 Cost of opening WIP was incorrectly added to the material cost. Since the company’s
policy was to use FIFO method, WIP should have been kept separately and added to
cost of finished goods.
 While recording production losses, most of the students did not prepare any accounting
entry for sale value of normal losses or prepared incorrect entry by crediting profit and
loss account instead of WIP account.

Question 4

The question was well answered by most of the students and about 11% students secured full marks.

Page 2 of 4
 Examiners’ Comments on Cost and Management Accounting - Autumn 2016

Question 5

In this question, the candidates were required to determine the sale price per unit and
number of units to be sold for a new chemical which the company planned to produce, in
order to earn incremental profit before tax of Rs. 10 million.

An average performance was witnessed in this question. Some of the common mistakes
were as under:

 Many students were unable to understand the question correctly. Instead of computing
cost per batch they misunderstood the given costs as cost per batch without taking into
consideration the other relevant information.
 Depreciation on existing plant was not relevant for incremental analyses but it was
taken as fixed cost by most of the students.
 Fee for acquiring the right to produce and market the new product was either not
considered at all or only one month charges were taken as charge for the full year.
Further, some students treated these as variable cost.

Question 6

This was a very well attempted question and 91% students were able to secure passing
marks. The question required optimal production plan in a situation where availability of
raw material was a limiting factor. The errors observed were as under:

 Since product C was to be used internally, some students did not take it into
consideration altogether.
 Instead of ranking the products on the basis of contribution margin per unit of raw
material, contribution margin per unit of production or profit per unit of raw material
was used for ranking.
 Committed export sales quantity of Product B was required to be produced first
irrespective of its ranking. Most of the students ignored this point.

Question 7

This question required computation of material and labour variances and computation of
applied fixed overheads and analyses of under/over applied fixed overheads into
expenditure, efficiency and capacity variances.

Average performance was witnessed in this question. Some of the common mistakes were
as under:
 Many students were unable to correctly compute actual yield and ended up in wrong
material yield variance, labour efficiency variance and fixed overhead efficiency
variance.
 Many students computed the variance but did not mention whether it was a favourable
or an adverse variance or mentioned it incorrectly.
 To compute cost of material issued, instead of using the required FIFO method, many
students used weighted average or simple average method.
 While computing material price variance, many students used cost of material
purchased instead of cost of material issued to production.

Page 3 of 4
 Examiners’ Comments on Cost and Management Accounting - Autumn 2016

 While computing material price and mix variances, many students mistakenly used per
unit standard material cost of Zee instead of standard cost per kg. Whereas, while
working material yield variance cost per kg was taken instead of cost per unit. Similar
mistakes were also observed in the case of labour rate and efficiency variances.
 To compute fixed overhead efficiency variance, budgeted hours were taken as allowable
hours instead of computing it by multiplying actual production units with standard
direct labour hours per unit.

Question 8

In this question the candidates were required to explain ‘sustainability reporting’ and state
its four internal benefits. The performance was below average. Only few students were able
to fully explain sustainability reporting whereas most of the students mixed up internal and
external benefits.

Question 9

This question required calculation of market value of 8% redeemable bonds when required
rate of return of the bondholders was 10% and expected value of ordinary shares on the
conversion date was (a) Rs. 12 per share (b) Rs. 10 per share.

The performance was very poor. 44% of the students left this question un-attempted, while
most of those who attempted it had very little idea of the procedure to be followed. They
are advised to refer to the suggested answer given on the Institute’s website.

THE END

Page 4 of 4
 Cost and Management Accounting
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2016

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations.

Mark(s)
A.1  Collection from cash and credit sales 4.0
 Budgeted imports and purchases of raw material 4.0
 Payments of raw material imports and purchases 2.0
 Payments for budgeted conversion and operating costs 5.0

A.2  Up to 01 mark for each item reported in the year-wise cash flows 9.5
 Computation of net present value and advice on feasibility of expansion of
the production facility 1.5

A.3 (a)  Computation of normal/abnormal loss units 1.0

 Computation of equivalent units of material 1.0
 Computation of equivalent units of conversion cost 2.0

(b) Computation of:

 cost per unit of material 2.0
 cost per unit of conversion cost 2.0
(i) Computation of cost of finished goods 2.0
(ii) Computation of cost of closing WIP 1.5
(iii) Computation of cost of abnormal gain / loss 1.5

(c) Preparing accounting entries to record:

 normal process loss 1.0
 abnormal process loss 2.0

A.4 (a)  Explanation of safety stock 1.0

 Discussing the reasons for maintaining the safety stock 2.0

(b) 0.5 mark each for listing any four costs associated with holding of inventory 2.0

A.5  Calculation of finished and by-product units per batch 2.0

 Computation of variable cost per unit 3.5
 Computation of fixed overhead for the year 3.0
 Determination of number of units to be sold to earn the required
incremental profit 2.5

A.6  Product-wise contribution margin 7.0

 Product-wise contribution margin per kg usage of material XPI 3.0
 Computation of number of units of each product to earn maximum profit 2.0

  Page 1 of 2
 Cost and Management Accounting
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2016

Mark(s)
A.7 (a) (i)  0.75 marks for determination of each material actually issued to
production using FIFO 1.5
 Calculation of actual yield 1.0
 1.5 marks each for computing material price, mix and yield
variances 4.5

(ii) 02 marks each for computing labour rate and efficiency variances 4.0

(b)  Computation of under applied overheads 2.0

 02 marks each for computing fixed overhead expenditure, efficiency
and capacity variances 6.0

A.8  Explanation of sustainability reporting 3.0

 0.5 mark for stating each internal benefit of sustainability reporting 2.0

A.9  Discounting of cash flows 4.0

 Determination of bonds value at higher of shares’ expected value and
bonds’ redemption value 2.0

(THE END)

  Page 2 of 2
 Certificate in Accounting and Finance Stage Examinations
The Institute of 9 March 2017
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Q.1 Smart Processing Limited (SPL) is considering to sign a contract for manufacturing 10,000
auto parts for a large automobile assembler. The parts would be produced in batches of
500 units each. The estimated cost of the first batch is as under:

Rupees
Direct material (500 kg) 135,000
Direct labour (1,500 hours) 225,000
Variable overheads (Rs. 120 per direct labour hour) 180,000
Set-up cost per batch 40,000
Fixed costs:
− Depreciation of equipment purchased for the project 45,000
− Allocation of existing overheads @ Rs. 16 per hour 24,000
Cost of first batch 649,000

Additional information:
(i) The set-up cost per batch would be reduced by 5% for each subsequent batch.
However, there would be no further reduction in the set-up cost from the 5th batch
onward.
(ii) Learning curve effect is estimated at 90% but would remain effective for the first eight
batches only.
(iii) The index of 90% learning curve is -0.152.

Required:
Compute the contract price that would enable SPL to earn an incremental profit of 30% of
the contract price. (10)

Q.2 Aroma Herbs (AH) deals in a herbal tea. The tea is imported on a six monthly basis. The
management is considering to adopt a stock management system based on Economic Order
Quantity (EOQ) model. In this respect, the following information has been gathered:

(i) Annual sale of the tea is estimated at 60,000 kg at Rs. 1,260 per kg. Sales are evenly
distributed throughout the year.
(ii) C&F value of the tea after 10% discount is Rs. 900 per kg. Custom duty and sales tax
are paid at the rates of 20% and 15% respectively. Sales tax paid at import stage is
refundable in the same month.
(iii) Use of EOQ model would reduce the quantity per order. As a result, bulk purchase
discount would be reduced from 10% to 8%.
(iv) Cost of financing the stock is 1% per month.
(v) Annual storage cost is estimated at Rs. 320 per kg.
(vi) Administrative cost of processing an order is Rs. 90,000. Increase in number of
purchase orders would reduce this cost by 10%.
(vii) AH maintains a buffer stock equal to fifteen days' sales.

Required:
(a) Compute EOQ. (04)
(b) Determine the amount of savings (if any) which can be achieved by AH by adopting
the stock management system based on EOQ model. (06)
 Cost and Management Accounting Page 2 of 5

Q.3 Ravi Limited (RL) is engaged in production of industrial goods. It receives orders from steel
manufactures and follows job order costing. The following information pertains to an order
received on 1 December 2016 for 6,000 units of a product:
(i) Production details for the month of December 2016:
Units
Produced and transferred to finished goods 3,200
Delivered to the buyer from the finished goods 3,000
Units rejected during inspection 120
Closing work in process (100% material and 80% conversion) 680
(ii) Actual expenses for the month of December 2016:
Rupees
Direct material 1,140,000
Direct labour (6,320 hours) 948,000
Factory overheads 800,000
Additional information:

Factory overheads are applied at Rs. 120 per hour. Under/over applied factory
overheads are charged to profit and loss account.

Units completed are inspected and transferred to finished goods. Normal rejection is
estimated at 10% of the units transferred to finished goods. The rejected units are sold
as scrap at Rs. 150 per unit.

RL uses weighted average method for inventory valuation.

Required:
(a) Prepare work in process account for the month of December 2016. (08)
(b) Prepare accounting entries to record:

over/under applied overheads

production losses and gains (05)

Q.4 Double Crown Limited (DCL) is engaged in manufacturing of a product Zee. Sales
projections according to DCL's business plan for the year ending 31 December 2017, are as
follows:

May June July August

------------------------- Rs. in million -------------------------
Sales 60 55 70 68
Additional information:
(i) Goods are sold at a gross margin of 40% on sales.
(ii) Ratio of direct material, direct wages and overheads is 6:3:1 respectively.
(iii) Normal loss is 5% of the units completed.
(iv) Inventory levels maintained by DCL are as under:

Direct materials Next month’s budgeted consumption

Finished goods 50% of next month’s budgeted sales
(v) 10% of all purchases are in cash. Remaining purchases are paid in the following
month.
(vi) Direct wages include DCL's contribution at 5% of the direct wages, towards canteen
expenses. An equal amount is deducted from the employees’ wages. Direct wages are
paid on the last day of each month. Both contributions are paid to the canteen
contractor in the following month.
(vii) Overheads for each month include depreciation on plant and machinery and factory
building rent, amounting to Rs. 0.2 million and Rs. 0.1 million respectively. The rent
is paid on half yearly basis in advance on 30 June and 31 December each year.
 Cost and Management Accounting Page 3 of 5

Required:
(a) Prepare budget for material purchases, direct wages and overheads, for the month of
June 2017. (10)
(b) Prepare cash payment budget for the month of June 2017. (03)

Q.5 Unity Limited (UL) has obtained a loan of Rs. 250 million from Eastern Investment Limited
(EIL) for 5 years. The loan carries a floating (variable) rate of interest which is paid
annually. The existing rate is 10%.

To avoid losses on account of any extra-ordinary increase in interest rate, UL bought an

interest rate cap at 12% from Sawera Bank Limited (SBL). In addition, they also agreed to a
floor at 8%.

Required:
Compute the interest which UL would pay to EIL and the amounts which UL and SBL
would pay to settle their obligations towards each other, if the interest rate on the due date
is:
(a) 13% per annum (02)
(b) 6% per annum (02)

Q.6 Hexa Limited is using a standard absorption costing system to monitor its costs. The
management is considering to adopt a marginal costing system. In this respect, following
information has been extracted from the records for the month of December 2016:

(i) Actual as well as budgeted sale was 10,500 units at Rs. 2,000 per unit.
(ii) Standard cost per unit is as follows:

Rupees
Direct material 5 kg @ Rs. 158 790
Direct labour 3 hours @ Rs. 150 450
Production overheads (fixed & variable) Rs. 120 per labour hour 360
1,600

(iii) Budgeted fixed overheads were Rs. 1,650,000.

(iv) Production and actual costs were as under:

Units
Production: Budgeted 11,000
Actual 12,000

Actual variable costs: Rupees

Direct material (58,000 kg @ Rs. 160) 9,280,000
Direct labour (35,000 hours @ Rs. 155) 5,425,000
Variable overheads 2,975,000
(v) Applied fixed overheads exceeded actual overheads by Rs. 200,000.
(vi) There was no opening finished goods inventory. Closing finished goods inventory was
1,500 units.

Required:
(a) Compute the profit for the month of December 2016, using standard marginal
costing. (03)
(b) Reconcile the profit computed above with actual profit under marginal costing, by
incorporating the related variances. (08)
(c) Reconcile the actual profit under marginal and absorption costing. (02)
 Cost and Management Accounting Page 4 of 5

Q.7 Modern Transport Limited (MTL) is considering an investment proposal from Burraq Cab
Services (BCS). As per the proposal, MTL would provide branded cars to BCS under the
following terms and conditions:

(i) BCS would pay rent of Rs. 1.8 million per annum per car to MTL. The cars would
operate on a 24-hour basis. The payment would be made at the end of year.
(ii) Cost of the drivers and maintenance cost of the car would initially be paid by BCS but
would be adjusted against car rentals payable to MTL at the end of each year.
(iii) MTL would provide a smart mobile to each driver.

MTL has estimated the following costs for deployment of a car with BCS:

Description Rupees Remarks

Car purchase price 2,000,000 Estimated useful life and residual value of
the car is 4 years and Rs. 0.75 million
respectively.
Car registration fee 35,000 One-time payment on registration of the car.
Mobile phone price per set 15,000 To be charged-off in the year of purchase.
Insurance premium 50,000 To be paid at the beginning of each year. It
would reduce by Rs. 5,000 each year due to
decrease in WDV of the car.
Annual salaries per driver 300,000 Would work in 8-hour shifts.
Annual maintenance cost 60,000 Due to ageing of cars, cost would increase
by 10% each year.

Additional information:

The car would be depreciated at the rate of 25% under the reducing balance method.
Tax depreciation is to be calculated on the same basis.

Applicable tax rate is 30% and tax is payable in the year in which the liability arises.

Inflation is estimated at 5% per annum.

MTL's cost of capital is 12% per annum.

Required:
Advise whether MTL should accept BCS’s proposal. (16)

Q.8 NK Enterprises produces various components for telecom companies. The demand of these
components is increasing. However, NK’s production facility is restricted to 50,000 machine
hours only. Therefore, NK is considering to buy certain components externally. In this
respect, the following information has been gathered:

Components
Description
X-1 X-2 X-3 X-4
Estimated demand in units 6,500 2,000 7,100 4,500
Machine hours required per unit 8 4 5 2
In-house cost per unit: ------------- Rupees -------------
Direct material 20.0 28.0 23.0 22.0
Direct labour 9.0 5.0 9.0 8.0
Factory overheads 16.0 8.0 8.5 5.0
Allocated administrative overheads 5.0 4.0 3.0 2.0
50.0 45.0 43.5 37.0
External price of the component per unit 35.0 40 34.0 33.0

Factory overheads include fixed overheads estimated at Rs. 1.50 per machine hour.

Required:
Determine the number of units to be produced in-house and bought externally. (13)
 Cost and Management Accounting Page 5 of 5

Q.9 Sword Leather Limited (SLL) produces and sells shoes. The following information pertains
to its latest financial year:

Rs. in million
Sales (62,500 pairs) 187.5
Fixed production overheads 35.0
Fixed selling and distribution overheads 10.0

Variable production cost (in proportion of 40:35:25

for material, labour and overheads respectively) 60% of sale
Variable selling and distribution cost 15% of sale

To increase profitability, SLL has decided to introduce new design shoes and discontinue
the existing deigns. In this regard it has carried out a study whose recommendations are as
follows:

(i) Replace the existing fully depreciated plant with a new plant at an estimated cost of
Rs. 50 million. The new plant would:

reduce material wastage from 10% to 5%;

decrease direct wages by 5%; and

increase variable overheads by 6% and fixed overheads by Rs. 15 million
(including depreciation on the new plant).

(ii) Improve efficiency of the staff by paying 1% commission to marketing staff and
annual bonus amounting to Rs. 1.5 million to other staff.
(iii) Introduction of new designs would require an increase in variable selling and
distribution cost by 2%.
(iv) Sell the newly designed shoes at 10% higher price.
(v) Maintain finished goods inventory equal to one month’s sale.

Required:
Compute the budgeted production for the first year if the budgeted sale has been determined
with the objective of maintaining 25% margin of safety on sale. (08)

(THE END)
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2017

Ans.1 Smart processing Limited

Computation of contract price
Rupees
Cost of material 135,000×20 2,700,000
Direct labour cost:
- For the first 8 batches (W-1) 8,748
- For the last 12 batches (W-1)
937×12 11,244
19,992 ×150 2,998,800
Variable overheads 19,992 ×120 2,399,040
Batch set-up cost:
- For the first 4 40,000+[40,000×(0.95)1]+[40,000×(0.95)2]+[40,0
batches 00×(0.95)3] 148,395
- For the last 16 batches [(40,000×(0.95)3)]×16 548,720
Fixed costs:
- Depreciation on equipment purchased for the
project 45,000×20 900,000
- Allocation of existing fixed overheads Irrelevant cost -
Total incremental cost of the contract A 9,694,955

Contract price (A÷70%) 13,849,936

W-1: Direct labour hrs. per batch for batch 9 onward: Hours
Direct labour hours for the first 8 batches 8×1,500×(8)–0.152 8,748
Direct labour hours for the first 7 batches 7×1,500×(7)–0.152 (7,811)
Hours per batch for 8th and onward batches 937

Ans.2 Aroma Herbs

(a) Economic order quantity (EOQ):

Annual demand of herbal tea (A) kg 60,000.00

Rupees
Purchase cost per kg (C&F+Import duty) [(900÷0.9)*0.92 ×1.2]
(B) 1,104.00
Ordering cost per purchase order 90,000×90%
(C) 81,000.00
Annual holding cost per kg
- Finance cost B×1%×12 132.48
- Storage cost 320.00
(D) 452.48
EOQ =
SQRT [(2×annual demand × ordering cost) ÷ Holding
cost per kg)]
SQRT [(2×60,000×81,000)÷452.48)] (E) kg 4,635.00

  Page 1 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2017

(b) Savings on adopting EOQ:

EOQ Existing
No. of purchase orders (A÷E) (F) 13 2
Holding of inventory:
- Average inventory (E÷2); (A÷F ÷2) 2,318 15,000
- Buffer stock 2,500 2,500
(G) 4,818 17,500
-------- Rupees --------
Ordering costs (C×F); (90,000×F) 1,053,000 180,000
Holding costs of
inventory (G×D); (G×*449.6) 2,180,049 7,868,000
Purchasing cost of 66,240,00
tea (A×B); (60,000×900×1.2) 0 64,800,000
Cost of 60,000 kg of tea 69,473,04
9 72,848,000

Savings on using EOQ (72,848,000 –

model 69,473,049) 3,374,951
*Existing holding cost per unit (900×1.2×0.12)+320=449.6

Ans.3 Ravi Limited

(a) Work in process for the month of December 2016
Description Units Rupees Description Units Rupees
Finished goods

Raw W.1 [3,200×778.23

material (A) 4,000 1,140,000 (W-2)] 3,200 2,490,336
Norm
al
Direct labour 948,000 loss (320×150) 320 48,000
Applied overheads Closin
(6,320×120) 758,400 g WIP *(Bal.) 680 463,710
Abnormal gain
[200×(778.23)] 200 155,646
4,200 3,002,046 4,200 3,002,046
*(680×296.74)+(544×481.49)

Equivalent units
W-1: Equivalent units and costs applied to Quantity
Conversi
the job schedule Material
on
Transferred to finished goods
3,200 3,200 3,200
Closing WIP
680×80% 680 680 544
Normal loss at 10% of the
320 - -
units completed 3,200×10%
4,200
Abnormal gain 120–320 (200) (200) (200)
Normal production 4,000
A 3,680 3,544

  Page 2 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2017

----------- Rupees -------

W-2: Cost per unit
----
Raw material 1,140,000
Direct labour -
948,000
Applied overheads -
6,320×120 758,400
Normal loss - sales price -
320×150 (48,000)

1,092,000 1,706,40
B 0
296.74
(B÷A) 481.49

778.23

Accounting entries to record over/under applied overheads and production

(b) loss/gains
Debit Credit
Date Description
--------- Rupee ---------
31-Dec-
Factory overhead applied
2016 (6,320×120) 758,400
P& L account–overheads under applied 41,600
Factory overheads
control 800,000
(Transfer of applied factory overheads to
control a/c and under applied overheads
charged to P&L account)

31-Dec- 155,64
WIP
2016 (200×778.23) 6
Abnormal gain 155,646
(To record abnormal
gain)

31-Dec-
Scrap inventory
2016 (320×150) 48,000
WIP 48,000
(Sales value of rejected units credited to
WIP)

31-Dec- Abnormal gain

2016 (200×778.23) 155,646
(320-
Scrap inventory
120)×150 30,000
P&L account 125,646
(Abnormal gain adjusted to P&L account)

  Page 3 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2017

Ans.4 Double Crown Limited

Budget for material purchases, direct wages and overheads for the month
(a) June 2017
May Jun Jul Aug
----------- Rs. in million -----------

Sales (A) 60.00 55.00 70.00 68.00

A×60%
Cost of sales (B) 36.00 33.00 42.00 40.80
Finished
goods: Opening stock B÷2 (18.00) (16.50) (21.00)

Closing stock 16.50 21.00 20.40

Cost of goods manufactured 34.50 37.50 41.40

5% Normal loss - no effect, as being
normal loss it is already included in cost of
goods produced - - -

Cost of goods produced (C) 34.50 37.50 41.40

Budgeted direct material purchases - (as

opening inventory is equal to current
month consumption, purchases would be
equal to the next month consumption)

(37.5×60%),(41.4×60%) (D) 22.50 24.84

Budgeted direct wages C×3÷10

(E) 11.25

C×1÷10
Budgeted overheads (F) *3.75
* (Including fixed overheads – Depreciation and Rent amounted to Rs. 0.2
million and Rs. 0.1 million respectively)

(b) Cash payment budget for the month of June 2017

Rs. in
Material purchases:
million
10% Cash purchases for current month (D) 24.84×10% 2.48
Last month's balance of 90% (D) 22.5×90% 20.25
(G) 22.73
Direct wages:
Payment to employees after deduction of their 11.25÷1.05×0.9
contribution towards canteen expenses at 5% 5 10.18
Payments to canteen contractor for the month of (34.5×30%)÷1.05
May 2017 ×0.10 0.99
(H) 11.17
Overheads:
As computed above in (a) (F) 3.75
Depreciation (0.20)
  Page 4 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2017

Factory rent for the month of June 2017 paid in

advance (0.10)
Variable overheads 3.45
Payment of half yearly rent in advance for Jul-
Dec 2017 0.1×6 0.60
(I) 4.05

G+H+I 37.95

Ans.5 Unity Limited

Amounts payable by UL to EIL: Rs. in million

Interest rate is 13% 250×13% 32.50
Interest rate is 6% 250×6% 15.00

Settlement between UL and SBL:

Interest rate is 13% Payable by SBL to UL (13%-12%)×250 2.50
Interest rate is 6% Payable by UL to SBL (8%-6%)×250 5.00

Ans.6 Hexa Limited

(a) Profit for the month of December 2016 - Standard marginal costing
Rupees
Sales 10,500×2,000 21,000,000
12,000×(790+450+(W.1)
Production cost 210) (17,400,000)
Closing stock 1,500×(790+450+(W.1) 210) 2,175,000
Variable cost of sales at standard
rate (15,225,000)
Contribution margin 5,775,000

Budgeted fixed overheads (1,650,000)

Profit at standard rate 4,125,000

W-1: Production overhead rate: Per unit Per hour

------------ Rupees ------------
(360÷3)
Standard overhead rate (fixed & variable) 360 120
Less: Standard fixed overhead rate (150÷3)
(1,650,000÷11,000) 150 50
Standard variable overhead rate per hour 210 70

Reconciliation of standard and actual profit under marginal

(b) costing:
Rupees
Standard profit as above
(A) 4,125,000
(Adverse)/favourable cost variances:
Direct material price (SR–AR)×AQ=(158–160)×58,000 (116,000)
Direct material (Allowable Qty.–AQ)×SR=[(5×12,000)–
usage 58,000]×158 316,000
(SR–AR)×AH= (150–
Direct labor rate 155)×35,000 (175,000)

  Page 5 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2017

Rupees
Direct labour (Allowable Hrs. –AH)×SR= [(3×12,000)–
efficiency 35,000]×150 150,000
Variable overheads Actual cost – (SR×AH)=2,975,000-
expenditure (70×35,000) (525,000)
Variable overheads (Allowable Hrs.–AH)×SR=(36,000–
efficiency 35,000)×70 70,000
Fixed overheads expenditure variance
(BU overheads – Actual overheads) [1,650,000 –
(12,000 ×150 – 200,000)] 50,000
Net adverse variance (B) (230,000)
Closing stock (Difference of standard and actual variable costs)
[(9,280,000+5,425,000+2,975,000)÷12,000×1,500]-[(1,600-
150)×1,500] (C) 35,000
Actual profit under marginal costing
A+B+C 3,930,000

(c) Actual profit under absorption costing: Rupees

Actual profit under marginal costing – as above 3,930,000
Fixed cost carried forward to the next year with closing inventory
under absorption costing whereas under marginal costing fixed costs
are charged in the year of incurrence (1,800,000-
200,000)÷12,000)×1,500 200,000
Actual profit under absorption costing 4,130,000

Ans.7 Modern Transport Limited

Evaluation of BRC’s proposal
Year 0 Year 1 Year 2 Year 3 Year 4
----------------------- [Cash inflows/(outflows)] ----------------------
-------------------------------- Rupees --------------------------------
Car's cost (2,000,000) - - - -
Registration charges (35,000) - - - -
Initial investment (A) (2,035,000) - - - -
Cost of three mobile phones
(15,000×3) (45,000) - - - -
Revenue
(1,800,000×1.05) - 1,800,000 1,890,000 1,984,500 2,083,725
Salaries/meals of drivers
(3×300,000×1.05) - (900,000) (945,000) (992,250) (1,041,863)
Maintenance cost
(60,000×1.05×1.10) - (60,000) (69,300) (80,042) (92,448)
Insurance premium
(50,000-5,000) (50,000) (45,000) (40,000) (35,000) -
(B) 795,000 835,700 877,208 949,414
(B-
Taxation 30% W.1)× 30% - (70,875) (134,741) (175,811) (241,769)
Residual value of
car 750,000
Net cash flows (2,130,000) 724,125 700,959 701,397 1,457,644
Discount factor @
12% 1.0000 0.8929 0.7972 0.7118 0.6355
Present value (2,130,000) 646,571 558,805 499,254 926,333
Net present value 500,963

  Page 6 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2017

Conclusion: The net present value is positive; therefore, the proposal should be
accepted.

Year 0 Year 1 Year 2 Year 3 Year 4

----------------------- [Cash inflows/(outflows)] ----------------------
-------------------------------- Rupees --------------------------------
W.1: Adjustment for tax liability
Accounting/tax depreciation
(A×25%) (C) - (508,750) (381,563) (286,172) (214,629)*
Profit on disposal of 750 – (A–
car C) - - - - 106,114*
Mobiles' cost charged off - (45,000) - - -
Insurance premium allowable for
tax-next year - 45,000 40,000 35,000 -
Insurance premium allowable for
tax this year - (50,000) (45,000) (40,000) (35,000)
- (558,750) (386,563) (291,172) (143,515)

Ans.8 NK Enterprises
Number of units to be produced in-house and bought
externally

X-1 X-2 X-3 X-4

Demand in units (A) 6,500 2,000 7,100 4,500

Machine hours per unit (B) 8 4 5 2

---------------------- Rupees ---------------------

-
In-house cost
50.00 45.00 43.50 37.00
Irrelevant cost for decision
making
- Fixed overheads
1.5×B (12.00) (6.00) (7.50) (3.00)
- Allocated administrative overheads (5.00) (4.00) (3.00) (2.00)
Relevant production cost (C) 33.00 35.00 33.00 32.00

Per unit cost of buying (D)

externally 35.00 40.00 34.00 33.00

Incremental cost in case of external

buying:
- Per unit (C-D) (E) 2.00 5.00 1.00 1.00
- Per machine hour (E÷B) 0.25 1.25 0.20 0.50
Ranking for in-house
production 3rd. 1st. 4th. 2nd.
No. of units for in-house production:
*[50,000–(2,000×4) – (4,500×2)]/8 (F) *4,125 2,000 - 4,500
Machine hours consumed 33,000 8,000 9,000
No. of units to be bought A-F
externally 2,375 - 7,100 -

  Page 7 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2017

Ans.9 Sword Leather Limited

Budgeted production of the new design shoes for the first year
Rs. per unit
Sales 187,500,000÷62,500×1.1 (A) 3,300.00
Variable costs:
Direct material (3,000×0.6×0.4)÷1.1×1.05 (687.27)
Direct wages 3,000×0.6×0.35×0.95 (598.50)
Production overheads 3,000×0.6×0.25×1.06 (477.00)
Selling and distribution 3,000×0.15×1.02 (459.00)
Sales commission to marketing staff 3,300×1% (33.00)
(B) (2,254.77)
Contribution margin (C) 1,045.23
Total fixed cost (Rs.) (35+10+15+1.5) (D) 61,500,000

Budgeted production: No. of pairs

Break-even sales D÷C (E) 58,839
Margin of safety on sales at 25% E÷0.75×0.25 19,613
Budgeted sales (F) 78,452
Inventory - average one month's sales F ÷12 6,538
Budgeted production 84,990

(THE END)

  Page 8 of 8
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Cost and Management Accounting Certificate in Accounting and Finance
– Spring 2017

General:

Overall result of this attempt was much below as compared to the performances in the
last two attempts. Majority of the students seemed unable to complete the questions and
solved the easier parts of the questions only. This type of situation is usually attributed to
lack of practice i.e. where the candidates try to understand the concepts without actually
practicing them. As a result, they are unable to understand the finer points. The
candidates are advised to note that good practice is essential if one is to perform well in
subjects involving mathematical problems.

Besides the above, it was noted that about 26% of the candidates were totally unprepared
for the examination as they scored less than 30 marks. The performances were
particularly poor in question # 1, 4, 5 and 9 as in each case between 27% to 64% of the
students could not secure any mark as they were unaware of even the very basic concepts.

Question-wise comments.

Question 1

The overall performance was average as 33% students secured passing marks. However,
very few of them could score high marks. On the other hand, about 37% of the students
had no idea whatsoever and could not secure any mark. The common mistakes were as
follows:

 Instead of applying the learning curve effect on direct labour hours, some candidates
applied it on direct labour cost.
 Fixed cost was not ignored in calculating the contract price.
 Instead of computing the labour hours required by the eighth batch and then applying
them on the remaining 12 batches, many candidates used average labour hours for the
first eight batches. Similar type of errors were observed in the calculation of set-up
costs also.
 Cost of direct material and variable overheads were ignored.
 Contract price was calculated as 130% of cost instead of by computing profit at 30%
of the contract price.

Page 1 of 5
 Examiners’ Comments on Cost and Management Accounting - Spring 2017

Question 2

This question was based on a simple situation according to which a company wanted to
adopt stock management system based on Economic Order Quantity (EOQ) model in
place of its existing practice. The requirement was to compute the Economic Order
Quantity (EOQ) and the saving which could be achieved by adopting the EOQ model.

The performance was average and around 40% of the students secured passing marks.
Many students restricted their answer to requirement (a) of the question. Other common
mistakes were as follows:

 Cost of financing the inventory was ignored in the calculation of holding costs. Some
students applied the total holding costs in the formula, instead of applying the holding
cost per kg.
 Many candidates did not know how the new purchase price was to be calculated i.e.
by dividing the existing cost by 0.9 (90%) and multiplying it by 0.92 i.e. 92%.
 Sales tax was included in the cost of purchase although it was refundable.
 Financing cost was computed on the existing price instead of the revised price. Many
students computed the financing cost on monthly basis i.e. at 1% instead of 12% on
an annualised basis.
 A number of students couldn’t understand that the number of purchase orders under
the existing situation was 2 per annum.

Question 3

In this question, the candidates were required to prepare work in progress account in a job
order system and to pass accounting entries related to over/under applied overheads and
production losses/gains.

The overall performance was average as 42% students scored passing marks. However,
most of the students did well in preparing the work in progress account but displayed
poor understanding of the accounting entries.

The common mistakes were as follows:

 Equivalent units were computed incorrectly as abnormal gain was added rather than
being deducted. Some students included normal loss in the calculation.
 While calculating per unit cost of raw material, proceeds from sale of normal loss
units was ignored.
 Actual factory overheads were debited to the work in process account instead of
applied overheads.
 Accounting entry for closing the under/over applied factory overheads was ignored
by many students.
 A number of students who had posted the abnormal gain correctly into the WIP
account could not pass the complete accounting entry which showed lack of
conceptual understanding.

Page 2 of 5
 Examiners’ Comments on Cost and Management Accounting - Spring 2017

Question 4

The performance in this question on budgeting was poor as only 13% candidates could
secure passing marks. The requirement was to prepare budget for material purchases,
direct wages and overheads and cash payment budget for a month (June) which required
some calculations involving previous as well as future months.

Majority of the students made some apparent errors. On the other hand, many
knowledgeable candidates seemed to suffer from lack of practice and presentation skills,
as a result of which they indulged in long and repetitious computations instead of
developing a proper format which would have made the calculations much easier.

Other common mistakes were as follows:

 Normal loss was added to cost of sales although it is already included in cost of goods
produced.
 Cost of sales was taken as the cost of goods manufactured i.e. opening and closing
stock of finished goods were ignored. Consequently, raw material purchases were
computed incorrectly.
 Majority of the candidates were unable to calculate payment to canteen contractor
correctly as they failed to realise that since 5% contribution to canteen contractor was
included in wages, amount excluding the contribution could be calculated by dividing
the gross amount by 1.05 i.e. multiplying by 100 and dividing by 105.
 While computing payment of overheads, depreciation was not excluded.

Question 5

This 4 mark question pertained to interest rate hedging and was quite simple. However,
the overall performance was quite poor. Though 27% candidates secured passing marks,
about 40% students did not attempt it altogether and 26% could not secure any mark. It
seemed that majority of the students had not covered this part of the syllabus in their
studies which has been included in the syllabus recently. However, even if they had tried
using common sense, they could have scored marks. The candidates are advised to avoid
selective studies.

Question 6

The overall performance in this question pertaining to standard marginal costing was
average and about 40% of the candidates secured passing marks. The common errors
were as follows:

 Majority of the candidate were unable to segregate the Standard Overhead Rate
between fixed and variable rates. Most of them didn’t try and are advised to seek
guidance from the suggested answer in this regard.
 In part (a) many students prepared incomplete P&L i.e. discontinued after
computation of contribution margin.
 Many candidates presented the net variances i.e. did not bifurcate the variances
between price & usage variances, rate & efficiency variances, etc.
 In part (b), many candidates ignored the difference between closing stock under
standard and actual costs.
 Production cost was calculated on the basis of 10500 units instead of 12000 units.

Page 3 of 5
 Examiners’ Comments on Cost and Management Accounting - Spring 2017

Question 7

In this 16 mark question, the candidates were required to evaluate an investment

proposal. Average response was observed in this question as compared to previous
attempts in which students were scoring high marks in NPV based questions, as only
36% candidates secured passing marks. In many cases, simple mistakes were witnessed
merely because of not reading the question carefully. The common errors were as
follows:

 Many students ignored the fact that the cars would operate on a 24 hour basis and
hence the number of drivers and number of mobiles, etc. would be three per car.
 Many students ignored inflation altogether whereas many students applied it even on
the first year.
 Residual value of car was taxed instead of profit on disposal of car. Many students
ignored it altogether.
 Some students wasted precious time in computing the IRR which was not required.
 Majority of the students did not understand that insurance premium would be paid
from Year 0 to 3 but for tax purposes, it would be charged in Year 1 to 4.
 Many candidates increased the car maintenance cost by 15% instead of 15.5%
(1.05*1.1-1).

Question 8

According to the scenario in this question a company’s production capacity was limited
to 50,000 machine hours. The candidates were required to identify the type of
components and their quantity, which the company should acquire externally, based on
the given information.

This was the best attempted question and 77% candidates secured passing marks and
39% students secured full marks. However, some candidates made simple mistakes as are
discussed below:

 For the purpose of ranking, the difference between cost of buying and variable cost of
production should have been divided by the number of machine hours. Instead, the
production cost was divided by the machine hours.
 Many candidates ranked the components on the basis of machine hours only.
 Total factory overheads were included in the cost of production instead of variable
overheads. Some students included allocated administrative overheads in the cost as
well.

Question 9

In this 08 mark question, the candidates were required to compute the budgeted sale
which would give a company 25% margin of safety on sale and to compute the budgeted
production based on the budgeted sale as computed above. The overall performance was
below average as only 25% candidates secured passing marks.

In this question also, the candidates seemed to suffer from lack of practice as they carried
out unnecessary calculations where simple alternatives were available. For example,
contribution margin per unit could have been computed by taking the sale price per unit

Page 4 of 5
 Examiners’ Comments on Cost and Management Accounting - Spring 2017

and the cost per unit. Instead, many candidates calculated it by first calculating the total
contribution margin. Another major issue was that the candidates’ lack of understanding
about margin of safety and how it had to be calculated. Other common errors were as
follows:

 Sales commission to marketing agents was ignored.

 In computing the fixed costs, annual bonus was ignored.
 Revised variable costs were computed on the basis of revised selling price of Rs.
3,300 instead of existing sales price of Rs. 3,000 whereas sales commission to
marketing staff was computed on existing sales price of Rs. 3,000 instead of revised
sales price.

THE END

Page 5 of 5
 Cost and Management Accounting
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2017

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in a question may exceed the total marks.

Mark(s)
A.1
Determination of direct labor hours with learning curve effect 4.0

Computation of:
− cost of material 0.5
− direct labor cost 1.0
− variable overheads 0.5
− batch set-up cost 2.0
− relevant fixed cost 1.5

Determination of contract price 0.5

A.2 (a) Computation of:

purchase cost per kg with revised discount and custom duty 1.0

ordering cost per purchase order 0.5

annual holding cost per kg 1.0

Economic Order Quantity (EOQ) 1.5

(b)
Computation of cost of importing tea using EOQ 2.75

Computation of existing cost of importing tea 2.75

Determination of net savings using EOQ 0.5

A.3 (a)
Preparation of ‘quantity schedule’ and ‘equivalent production units’ 3.0

Computation of cost per unit 1.5

Preparation of WIP account 3.5

(b) Preparing accounting entries to record:

over/under applied overheads 1.5

abnormal gain and normal loss 3.5

A.4 (a)
Preparation of budget for material:

− determination of cost of sales 2.0
− determination of cost of goods manufactured 4.0
− determination of direct material purchases 2.0

Preparation of budget for direct wages 1.0

Preparation of budget for overheads 1.0

(b) Cash payment budget for:

material purchases 1.0

direct wages 1.0

overheads 1.0

A.5 (a) Calculation of interest payable and settlement amount if interest rate cap is 13% 2.0

(b) Calculation of interest payable and settlement amount if interest rate cap is 6% 2.0

Page 1 of 2
 Cost and Management Accounting
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2017

Mark(s)
A.6 (a)
Determination of standard fixed overhead rate per unit 1.0

Computation of profit using standard marginal costing 2.0

(b)
01 mark for computation of each cost variance 7.0

Computation of difference of standard and actual variable cost in closing
stock 1.0

(c) Reconciliation of actual profit under marginal and absorption costing 2.0

A.7
Determination of cash flows relating to:

− initial investment including cost of cars, their residual values, registration
charges and mobile phones 2.0
− rental revenues 1.0
− salaries/meals of drivers 1.0
− maintenance cost 1.0
− insurance premium 1.0
− tax liability including tax depreciation, gain on disposal and adjustment of
insurance premium in current year and next year 7.5

Determination of present values of cash flows 2.0

Recommendation 0.5

A.8
Computation of product wise relevant cost of in-house manufacturing 4.0

Computation of product wise incremental cost per unit / machine hour in case
of external buying 5.0

Ranking for in-house production / external buying 2.0

Determination of number of units to be manufactured and bought externally
according to ranking 2.0

A.9
Computation of:

− revised selling price per unit 0.5
− revised variable costs per unit 4.5
− total fixed cost 1.0

Determination of:
− break-even number of units to be sold 0.75
− budgeted annual sales by incorporating 25% margin of safety 0.75
− budgeted production 0.5

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination
The Institute of 9 September 2017
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Q.1 Production at Platinum Chemicals (PC) involves two processes I and II. Following
information pertains to the month of August 2017:

(i) Actual cost:

Process I Process II
--------- Rupees ---------
Direct material (12,000 liters) 5,748,000 -
Conversion 2,610,000 1,542,000

(ii) Production and sales

Process I Process II
Description Remarks
------ Liters ------
Products:
Joint product – J101 5,000 - Sold for Rs. 1,200 per liter after incurring
packing cost of Rs. 120 per liter
Joint product – J202 4,500 - Transferred to process II for conversion
into a new product J-plus
By-product – BP01 1,000 - Sold at the split-off point for Rs. 500 per
liter
J-plus - 3,400 Sold for Rs. 1,400 per liter
Work-in-process:
Opening - -
Closing - 650 70% complete as to conversion

(iii) Materials are introduced at the beginning of process I and PC uses 'weighted average
method' for inventory valuation.
(iv) Proceeds from sale of by-product are treated as reduction in joint costs. Joint costs are
allocated on the basis of net realisable values of the joint products at split-off point.
(v) Normal production losses in both processes are estimated at 10% of the input and are
incurred at beginning of the process. Loss of each liter in process I results in a solid
waste of 0.8 kg which is sold for Rs. 100 per kg. Loss of process II has no sale value.

Required:
(a) Compute the cost of sales of J101 and J-plus for the month of August 2017. (12)
(b) Prepare accounting entries to record production gains/losses and their ultimate
disposal. (03)

Q.2 (a) Describe briefly the concept of ‘integrated reporting’. (02)

(b) In the context of integrated reporting, the term ‘capitals’ refers to the stocks of value
that are increased, decreased or transformed through the activities of an organsiation.

List the different categories of capitals, in the context of integrated reporting. (03)
 Cost and Management Accounting Page 2 of 5

Q.3 Opal Industries Limited (OIL) produces various products which pass through Processing
and Finishing departments. Logistics and Maintenance departments provide necessary
support for the production. Following information is available from OIL’s records for the
month of June 2017:

(i) Overhead costs Direct labour hours

Departments *Budgeted Actual Budgeted Actual
-------- Rupees -------- -------- Hours --------
Processing 560,000 536,000 14,000 14,350
Finishing 320,000 258,000 10,000 9,800
Logistics - 56,700 - -
Maintenance - 45,000 - -
*including apportionment of overhead costs of support departments

(ii) Costs of support departments are apportioned as under:

Processing Finishing Logistics Maintenance

Logistics 50% 40% - 10%
Maintenance 35% 45% 20% -

Required:
(a) Allocate actual overhead costs of support departments to production departments
using repeated distribution method. (05)
(b) Compute under/over applied overheads for the month of June 2017. (03)

Q.4 Cloudy Company Limited (CCL) manufactures and sells specialized machine X85. A newer
version of the machine is gaining popularity in the market and CCL is therefore considering
to introduce a similar version i.e. D44. Detailed research in this respect has been carried out
during the last six months at a cost of Rs. 3.25 million.

The related information is as under:

(i) Initial investment in the new plant for manufacturing D44 would be Rs. 450 million
including installation and commissioning of the plant.
(ii) Projected production and sales of D44 are as follows:

Year 1 Year 2 Year 3 Year 4

------------------ No. of units ------------------
20,000 25,000 27,000 29,000

Sales volume of X85 in the latest year was 30,000 units. It is estimated that
introduction of D44 would reduce the sale of X85 by 2,000 units every year.

(iii) Estimated selling price and variable cost per unit of D44 in year 1 is estimated at
Rs. 40,000 and Rs. 32,000 respectively. The contribution margin on X85 in year 1 is
estimated at Rs. 5,500 per unit.
(iv) Fixed costs in year 1 are estimated at Rs. 45 million. However, if the new plant is
installed these costs would increase to Rs. 75 million.
(v) Impact of inflation on selling price, variable cost and fixed cost would be 10% for
both the machines/plants.
(vi) The new plant would be depreciated at the rate of 25% under the reducing balance
method. Tax depreciation is to be calculated on the same basis. The residual value of
the plant at the end of its useful life of four years is expected to be equal to its carrying
value.
(vii) Applicable tax rate is 30% and tax is paid in the year in which the liability arises.
(viii) CCL’s cost of capital is 12%.
 Cost and Management Accounting Page 3 of 5

Required:
Compute internal rate of return (IRR) of the new plant and advise whether CCL should
introduce D44. (Assume that all cash flows would arise at the end of the year unless stated
otherwise) (15)

Q.5 Falcon (Private) Limited (FPL) is in the process of preparing its annual budget for the next
year. The available information is as follows:

(i) Budgeted and actual production and sales for the current year:

Budgeted Actual
--------- Units ---------
Production 25,000 23,760
Sales 24,000 22,800

(ii) Current year’s actual production cost per unit:

Rupees
Raw material input (49 kg) 980
Direct labour 800
Variable production overheads 500
Fixed production overheads 400
2,680

(iii) Inventory balances:

FPL maintains the following inventory levels:

Raw material Average two months’ consumption based on

budgeted production
Finished goods Average one month’s budgeted sales
Work in process (opening 1,500 units (100% complete as to material and
as well as closing) 60% as to conversion cost)

FPL follows absorption costing and uses FIFO method for valuation of inventory.

(iv) Impact of inflation:

Inflation %
Raw material and variable overheads 8
Direct labour 10
Fixed overheads (excluding depreciation) 5

(v) Sales volume would increase by 10%.

(vi) Balancing and modernisation of plant would be carried out at a cost of Rs. 20 million
which would:

increase depreciation from Rs. 5,800,000 to Rs. 7,016,800;

reduce raw material wastages from 5% to 2% of input; and

increase labour efficiency by 7%.

Required:
Prepare budgeted statement of cost of sales for the next year. (16)
 Cost and Management Accounting Page 4 of 5

Q.6 DEL Limited manufactures radiators for car manufacturers. In normal operations, about
200,000 units are sold per annum at an average selling price of Rs. 15,000 per unit.
Manufacturing process is carried out by 500 highly skilled labours who work an average of
180 hours per month at Rs. 250 per hour. Raw material cost is Rs. 3,000 per unit. Annual
factory overheads are estimated at Rs. 540 million. Variable overheads are 150% of labour
cost.
DEL had received an offer from TRU Limited to manufacture 4,000 units of radiators of
trucks, at Rs. 50,000 per unit. DEL had expected to earn significantly high margin on this
order and had planned to stop normal production for this purpose. It had already procured
the raw material for Rs. 60 million but before the start of manufacturing it came to know
that TRU has gone into liquidation.
To deal with the situation, DEL’s marketing department has negotiated with another truck
manufacturer, NTR Limited. NTR’s specifications are slightly different and the price offered
by NTR is Rs. 40,000 per unit.
The costs to be incurred on the new order and other relevant details are as follows:
(i) Additional raw material of Rs. 12 million would have to be purchased for NTR’s
order.
(ii) DEL expects that first unit would take 10 hours. The labour time would be subject to
a 95% learning rate upto 1,000 units. Thereafter, the learning rate would stop. The
index of 95% learning curve is -0.074.
(iii) Variable overheads would be 240% of the cost of labour.
(iv) Fixed overheads are to be applied at Rs. 400 per labour hour.
(v) Total cost of preparing the plant for NTR’s order and resetting it to the normal
production would be Rs. 4 million.

If the order from NTR is not accepted, raw materials of Rs. 60 million already procured
would have to be sold at 70% of their cost. However, raw material worth Rs. 10 million can
be utilized in the car’s radiators after slight alteration at a cost of Rs. 1 million. The altered
raw material can produce 30% components of 10,000 car radiators.

Required:
Determine whether DEL may accept the order from NTR. (12)

Q.7 (a) Following information has been extracted from the records of Silver Industries
Limited (SIL) for the month of June 2017:
Production Direct labour Variable & fixed
units hours overheads (Rs.)
Available capacity 10,000 30,000 -
Budget 8,000 24,000 3,600,000
Actual 8,600 25,000 3,900,000

Fixed overheads were budgeted at Rs. 1,200,000. Applied fixed overheads exceeded
actual fixed overheads by Rs. 20,000.

SIL uses standard absorption costing. Over/under applied factory overheads are
charged to profit and loss account.

Required:
(i) Prepare accounting entries to record the factory overheads. (03)
(ii) Analyse under/over applied overheads into expenditure, efficiency and capacity
variances. (11)

(b) Comment on the difference between overhead variances under marginal and
absorption costing. (03)
 Cost and Management Accounting Page 5 of 5

Q.8 Digital Industries Limited (DIL) incurred a loss for the year ended 30 June 2017 as it could
achieve sales amounting to Rs. 89.6 million which was 80% of the break-even sales.
Contribution margin on the sales was 25%. Variable costs comprised of 45% direct material,
35% direct labour and 20% overheads.

During a discussion on the situation, the Marketing Director was of the view that no
increase in sales price was possible due to severe competition. However, sales volume can be
increased by reducing prices. The Production Director was of the view that since the plant is
quiet old, the production capacity cannot be increased beyond the current level of 70%.

Accordingly, the management has developed the following plan:

(i) A new plant would be installed whose capacity would be 20% more than installed
capacity of the existing plant. The cost and useful life of the plant is estimated at
Rs. 30 million and 10 years respectively. The funds for the new plant would be
arranged through a long-term bank loan at a cost of 10% per annum. Capacity
utilization of 85% is planned for the first year of the operation.

The new plant would eliminate existing material wastage which is 5% of the input and
reduce direct labour hours by 8%.
The existing plant was installed fifteen years ago at a cost of Rs. 27 million. It has a
remaining useful life of three years and would be traded in for Rs. 2 million.

DIL depreciates its fixed assets on straight line basis over their estimated useful lives.

(ii) To sell the entire production, selling price would be reduced by 2%.
(iii) Material would be purchased in bulk quantity which would reduce direct material cost
by 10%.
(iv) Direct wages would be increased by 8% which would increase production efficiency
by 10%.
(v) Impact of inflation on overheads would be 4%.

Required:
Compute the projected sales for the next year and the margin of safety percentage after
incorporating the effect of the above measures. (12)

(THE END)
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

Ans.1 Platinum Chemicals

(a) Cost of sales for the month of August 2017 - Product J101 and J-plus
J101 J-plus
Quantity sold Ltrs. 5,000 3,400
-------------- Rupees --------------
Allocated joint costs from process I (W-1) 4,147,792 -
3,456,494(W-1)÷(3,400+650)×3,400 - 2,901,748
Process II – Conversion cost (3,400×400) - 1,360,000
Packing cost (5,000×120) 600,000 -
4,747,792 4,261,748

W-1: Allocation of joint cost - Process I (on the basis of NRV)

Joint cost
Joint NRV per unit at split-off Units produced Total NRV
allocation
product
------------ Rs. ------------ Liters --------------- Rupees ---------------
J101 (1,200-120) 1,080 5,000 5,400,000 4,147,792
J202 [1,400-400(W-3)] 1,000 4,500 4,500,000 3,456,494
9,900,000 (W-2) 7,604,286

W-2: Joint costs - Process I Rupees

Direct material 5,748,000
Proceeds from sale of solid waste - normal loss 1,200(W-4)×80%×100 (96,000)
Proceeds from sale of by-product BP01 1,000(W-4)×500 (500,000)
5,152,000
Cost of abnormal loss 5,152,000×300÷9,800 (157,714)
Conversion cost 2,610,000
Cost allocation between joint products J101 and J202 7,604,286

W-3: Conversion cost per unit - Process II Rupees

Conversion cost of process II A 1,542,000
Equivalent units 3,400(W-4)+(650×0.7) B 3,855
Cost per unit (A÷B) C 400

W-4: Normal and abnormal losses quantity Process I Process II

--------- Liters ---------
Input quantity 12,000 4,500
Less: J101 (5,000) -
J202 – Transfer to process II (4,500)
By-product BP01 (1,000) -
J-plus - (3,400)
Closing work in process (70% conversion) - (650)
Normal loss - 10% of input (12,000×10%); (4,500×10%) (1,200) (450)
Abnormal loss 300 -

(b) Journal entries to record production and disposal of solid waste

Debit Credit
Date Description
-------- Rupees --------
30-Jun-2017 Solid waste inventory (normal loss at sale price) (W-2) 96,000
Solid waste inventory (abnormal loss at cost) (W-2) 157,714
WIP - Process I 253,714
(Normal losses at sale price and abnormal losses at cost credited
to WIP)
30-Jun-2017 Bank (1,200+300)×0.8×100 120,000
Profit and loss account Balancing 133,714
Solid waste inventory 253,714
(Sale of normal and abnormal solid waste)

Page 1 of 7
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

Ans.2 (a) Integrated reporting is a method of presentation about how the organization interacts
with the external environment and how an organization’s strategy, governance,
performance and prospects, in the context of its external environment, lead to the
creation of value over the short, medium and long term.

(b) Different categories of ‘capitals’ in the context of integrated reporting:

(i) Financial (ii) Human

(iii) Manufactured (iv) Social and relationship
(v) Intellectual (vi) Natural

Ans.3 Opal Industries Limited

(a) Allocation of support departments' actual overheads:
Production departments Support departments
Processing Finishing Logistics Maintenance
------------------------- Rupees -------------------------
Cost incurred 536,000 258,000 56,700 45,000
Allocation of support departments' costs:
Logistics 50%:40%:0%:10% 28,350 22,680 (56,700) 5,670
Maintenance 35%:45%:20%:0% 17,734 22,802 10,134 (50,670)
Logistics 5,067 4,054 (10,134) 1,013
Maintenance 354 456 203 (1,013)
Logistics (Being immaterial amount,
allocated to production dept. only) 50:40 113 90 (203) -
Total - Actual overhead costs A 587,618 308,082 - -

(b) Under/over applied overheads:

Predetermined overhead rate:
Budgeted direct labour hours B 14,000 10,000
Budgeted overhead costs C 560,000 320,000
Budgeted overhead rate (C÷B) D 40.00 32.00
Overheads applied:
Actual direct labour hours E 14,350 9,800
Overheads applied (D×E) F 574,000 313,600

Overheads under/(over) applied (A-F) 13,618 (5,518)

Page 2 of 7
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

Ans.4 Cloudy Company Limited

Introduction of new version D44
Year 0 Year 1 Year 2 Year 3 Year 4
Projected production and sales of D44 Units (A) - 20,000 25,000 27,000 29,000

------------------- Rs. in million -------------------

Contribution margin of D44 (40,000-32,000)×1.1×A - 160.00 220.00 261.36 308.79
Research cost To be ignored - - - - -
Loss of CM of X85 (5,500×2,000×1.1) - (11.00) (24.20) (39.93) (58.56)
Existing fixed cost To be ignored - - - - -
Incremental fixed cost (75-45)×1.1 - (30.00) (33.00) (36.30) (39.93)
Tax/Accounting depreciation 450×0.25 - (112.50) (84.38) (63.29) (47.47)
Net profit before tax - 6.50 78.42 121.84 162.83
Tax liability @ 30% - (1.95) (23.53) (36.55) (48.85)
Net (loss)/profit after tax - 4.55 54.89 85.29 113.98
Add back non-cash item of depreciation - 112.50 84.38 63.29 47.47
Plant cost/residual value at the end of useful life (450.00) - - - 142.36
Total cash (outflows) / inflows (450.00) 117.05 139.27 148.58 303.81

Net cash inflows 258.71

Discount factor at 15% 1.0000 0.8696 0.7561 0.6575 0.5718

Present value (450.00) 101.79 105.30 97.69 173.72

Net present value at 15% NPVa 28.50

Discount factor at 20% 1.0000 0.8333 0.6944 0.5787 0.4823

Present value (450.00) 97.54 96.71 85.98 146.53

Net present value at 20% NPVb (23.24)

IRR = A% + [NPVa ÷ ( NPVa - NPVb) × (B% - A%)] 15%+[28.50÷{28.50-(-23.24)} × (20%-15%)] 17.75%

Conclusion:
IRR 17.75% is higher than CCL's cost of capital (12%), therefore, CCL should introduce D44.

Page 3 of 7
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

Ans.5 Falcon (Private) Limited

Budgeted statement of cost of sales for the next year
Rupees
Opening work in process:
Raw material cost 1,500×980 1,470,000
Conversion cost 1,500×60%×(800+500+400) 1,530,000
A 3,000,000
Manufacturing expenses:
Raw material cost (W-4) 25,497,753
Conversion cost 25,170(W-1)×1,791(W-2) 45,079,470
B 70,577,223
Closing work in process:
Raw material cost 1,500×1,026(W-2) (1,539,000)
Conversion cost 1,500×60%×1,791(W-2) (1,611,900)
C (3,150,900)
Finished goods:
Opening stock 2,000(W-1)×2,680
D 5,360,000
Closing stock 2,090(W-1) ×2,817(W-2)
E (5,887,530)
Cost of sales (A+B+C+D+E) 69,898,793

W-1: Budgeted production for the next year Units

Sales for the next year 22,800×1.1 25,080
Finished goods inventory: Closing 25,080÷12 2,090
Opening 24,000÷12 (2,000)
Work in progress: Closing (100% to material and 60% to conversion) 1,500
Opening (100% to material and 60% to conversion) (1,500)
25,170

W-2: Budgeted cost per unit for the next year Rupees
Raw material 980×0.95÷0.98×1.08 1,026
Direct labour 800×93%×1.1 818
Variable overheads 500×1.08 540
Fixed overheads 10,906,000(W-3)÷25,170(W-1) 433
1,791
2,817

W-3: Budgeted fixed overheads for the next year Rupees

Current year's fixed overheads (excluding depreciation) (400×23,760)-5,800,000 3,704,000
5% increase for next year's fixed overheads (excluding depreciation) 3,704,000×1.05 3,889,200
Depreciation for the next year 7,016,800
10,906,000

W-4: Budgeted raw material consumption for the next year Kg

Required raw material including 2% wastage 25,170(W-1)×(49×0.95÷0.98) 1,195,575

Opening raw material inventory (25,000×49×2÷12) 204,167

Raw material issues on FIFO basis from: Rupees

- Opening raw material inventory 204,167×(980÷49) 4,083,340
- Current purchases at revised price (1,195,575-204,167)×(980÷49)×1.08 21,414,413
25,497,753

Page 4 of 7
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

Ans.6 DEL Limited

Acceptance of order from NTR Limited for truck radiators
Rs. in million
Revenue from NTR Limited 40,000×4,000 160.00
Additional raw material (12.00)
Raw material already procured – sales value (60-10)×70% (35.00)
– use value for truck radiators (10,000×3,000×30%)-1 (8.00)
Labour cost [22,647.91 (W-1)×250] (5.66)
Variable overheads (5.66×240%) (13.58)
Preparation and resetting cost of the plant (4.00)
Fixed overheads applied To be ignored -
81.76
Loss of CM for not producing car radiators 4,194 (W-2) ×8,625 (W-3) (36.17)
Profit on acceptance of the order from NTR 45.59

Conclusion:
DEL should accept the order from NTR Limited

W-1: Direct labour hours for production of truck radiators Hours

Direct labour hours for 1,000 units [1,000×10×(1,000)-0.074] 5,997.91
Direct labour hours for 999 units [999×10×(999)-0.074] (5,992.36)
Hours per unit for 1,001 and onward 5.55
Direct labour hours for first 1,000 units 5,997.91
Direct labour hours for next 3,000 units (5.55×3,000) 16,650.00
22,647.91

W-2: No. of Car radiators to be produced if NTR's order is not accepted

Labour hours per unit of car radiator (500×180×12)÷200,000 Hrs. 5.40
No. of car radiators to be produced 22,647.91 (W-1) ÷ 5.40 Nos. 4,194

W-3: Contribution margin per unit/hour for car radiators Rupees

Selling price 15,000
Raw material cost (3,000)
Labour cost (500×180×250×12)÷200,000 (1,350)
Variable overheads 150%×1,350 (2,025)
Contribution margin per unit 8,625

Ans.7 Silver Industries Limited

(a) (i) Accounting entries to record cost of production:

Debit Credit
Date Description
-------- Rupees --------
30-Jun-17 Work in process/Finished goods
[8,600×(24,000÷8,000)×150(W-1) 3,870,000
PL account (Under absorbed overheads) (Bal.) 30,000
Overhead control account 3,900,000
(Under-absorbed overheads charged to profit & loss account)

Page 5 of 7
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

(ii) Analysis of under absorbed overheads amounted to Rs. 30,000 Rupees

Variable overhead expenditure variance
Actual hours at standard variable rate 25,000×100 2,500,000
Actual variable overheads (W-2) 2,630,000
Adverse variance A (130,000)
Variable overhead efficiency variance
Allowable hours at standard rate 8,600×3×100 2,580,000
Actual hours at standard variable rate 25,000×100 2,500,000
Favourable variance B 80,000
Fixed overhead expenditure variance
Budgeted fixed overheads 1,200,000
Actual fixed overheads (W.2) 1,270,000
Adverse variance C (70,000)
Fixed overhead efficiency variance
Allowable hours at standard rate 8,600×3×50 1,290,000
Actual hours at standard rate 25,000×50 1,250,000
Favourable variance D 40,000
Fixed overhead capacity variance
Budgeted hours at standard rate 24,000×50 1,200,000
Actual hours at standard rate 25,000×50 1,250,000
Favourable variance E 50,000
(A+B+C+D+E) (30,000)

W-1: Standard fixed and variable overhead rate per hour

Standard fixed and variable overhead rate per hour 3,600,000÷24,000 150
Less: Standard fixed overhead rate per hour 1,200,000÷24,000 50
Standard variable overhead rate per hour 100

W-2: Actual fixed overheads

Applied fixed overheads 8,600×(24,000÷8,000)×50 1,290,000
Applied overheads exceeded actual overheads (20,000)
Actual fixed overheads 1,270,000
Actual variable overheads (Balancing) 2,630,000
Total variable overheads 3,900,000

(b) Comments on the difference between overhead variances under marginal and
absorption costing:
All variable and fixed overhead variances under marginal and absorption costing are
same, except for the fixed overhead volume (efficiency and capacity) variances which
can be calculated only under absorption costing.

In absorption costing, fixed overheads are allocated to the products and these are
included in the inventory valuations. Therefore, fixed overhead volume variances can
be computed under absorption costing only.

In marginal costing, only variable overheads are assigned to the product; fixed
overheads are regarded as period costs and written off as a lump sum to the profit and
loss account. Therefore, fixed overhead volume variances cannot be computed under
marginal costing.

Page 6 of 7
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

Ans.8 Digital Industries Limited

Projected sales and margin of safety % for the next year
Rs. in million
Projected sales for the next year (89.6÷0.7)×1.2×0.85×0.98 (A) 127.95

Margin of safety % to projected sales (A-B)÷A×100 15%

Break-even sales [A÷ (A-C) × D] (B) 108.72

Variable cost:
Variable cost – 2017 level of 75% [127.95(A)÷0.98]×0.75 97.92
Variable cost on incorporating impact of changes:
Direct material (97.92×0.45)×0.95×0.9 37.67
Direct labour (97.92×0.35)×0.92×0.9×1.08 30.65
Overheads (97.92×0.20)×1.04 20.37
Variable cost – projected (C) 88.69

Fixed cost - projected:

Fixed cost – 2017 (equal to CM for break-even sales) (89.6÷0.8) ×0.25 28.00
Depreciation - old plant 27÷(15+3) (1.50)
26.50
Impact of 4% inflation 26.5×4% 1.06
Depreciation - new plant 30÷10 3.00
Long-term loan interest at 10% (30-2) ×10% 2.80
(D) 33.36

(THE END)

Page 7 of 7
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Examiners’ comments
Cost and Management Accounting
Certificate in Accounting and Finance
Autumn 2017 Examinations

General:

22.73% candidates passed as compared to 29.27% in the previous attempt. The overall
performance was below par although most of the questions were quite simple. Only questions
3 and 4 were well responded. The response in questions 1, 6 and 8 was average while
remaining questions were responded quite poorly.

Many students made simple mistakes which could have been avoided easily. For example, in
question 1, joint cost was allocated on the basis of number of units produced whereas it was
specifically mentioned in the question that it has to be allocated on the basis of NRV.

Question-wise Comments:

Question 1

37.15% candidates secured passing marks in this question. Common errors are discussed
below:

Question 1(a)

 Cost of abnormal loss was computed on the basis of cost of direct material only i.e.
without deducting sale proceeds of solid waste and by product.
 Cost of abnormal loss was not deducted while computing the joint costs.
 Joint cost was allocated on the basis of number of units instead of their NRV.
 Sale price of J-plus was considered as the NRV of J202 i.e. cost of converting J202 into
J-plus was ignored.
 While computing cost of sale of J101, packing cost was ignored.
 The entire joint cost of J202 was included in the cost of sale of J-plus instead of allocating
the joint cost between work-in-process and cost of sales.

Question 1(b)

 Cost was allocated to normal loss also.

 Inventory account was credited without showing how the balance arose i.e. the entry to
debit the normal and abnormal losses to solid waste inventory account and credit to WIP
account was not passed.

Page 1 of 3
 Examiners’ comments on Cost and Management Accounting,
CAF Examination Autumn 2017

Question 2

07.86% candidates secured passing marks in this question. 42% candidates did not attempt this
question. This area i.e. integrated reporting was tested for the first time and as is usually the
case, the performance was very poor. Mostly, the candidates used guesswork and remained
totally out of context.

Question 3

90.28% candidates secured passing marks in this question. Common errors are discussed
below:

 Over/under applied overheads were computed by comparing actual overheads with

budgeted overheads instead of applied overheads.
 Underapplied overheads were termed as overapplied and vice versa.

Question 4

80.51% candidates secured passing marks in this question. Common errors are discussed
below:

 The figures for year 1 were given in the question. Hence, impact of inflation was to be
applied from year 2 but was incorrectly applied from year 1.
 The increase in fixed costs was ignored.
 Loss of contribution margin due to decrease in the sale of X85 was ignored.

Question 5

05.99% candidates secured passing marks in this question. Common errors are discussed
below:

 Opening and closing balances of raw material, WIP and finished goods were ignored.
 Change in material and labour due to the change in wastage and efficiency respectively, was
not understood correctly and various types of erroneous calculations were produced.
 100% conversion cost was included in cost of WIP units instead of 60% conversion costs.
 Budgeted production was computed as 10% above the current year’s production instead of
increasing current year’s sale by 10% and computing production by considering the opening
and closing inventory of finished goods as equivalent to one months projected sale.
 Fixed overheads were increased by 5% (inflation) without excluding depreciation and
adding the increase in depreciation.

Question 6

47.40% candidates secured passing marks in this question. Common errors are discussed
below:

 Loss of contribution margin because of not producing car radiators was ignored. The fact
that number of car radiators that could have been produced would depend upon the labour
hours involved in production of truck radiators was generally misunderstood.
Page 2 of 3
 Examiners’ comments on Cost and Management Accounting,
CAF Examination Autumn 2017

 Raw material which had already been acquired should have been considered at its
opportunity cost which was 70% of the cost. This aspect was ignored.
 Cost of preparing the plant for truck production and resetting it for car production was
ignored.

Question 7

11.01% candidates secured passing marks in this question. Common errors are discussed
below:

Question 7(a)

 Fixed overhead variances were analysed but variable overheads were ignored.
 Budgeted overheads were considered as applied overheads.
 Applied overheads were used in the calculation of expenditure variance instead of actual
overheads.
 Instead of debiting work-in-process or finished goods, applied overheads were debited.
 The difference between actual and applied overheads was closed into over applied or under
applied account rather than the P&L account.

Question 7 (b)

This part was not attempted in most of the cases. Those who did attempt mostly produced
totally irrelevant material.

Question 8

26.19% candidates secured passing marks in this question. Common errors are discussed
below:

 Various types of errors were made in computing the projected sale as the students ignored
the impact of one or more of the following:
o Capacity of the new plant would be 20% more than the existing plant
o Existing plant was running at 70% capacity
o Price reduction of 2%.
 Variable costs (Direct Material, Labour and variable overheads) were computed by taking
the costs for 2017 and applying the impact of changes in the costs, wastage, efficiency etc.
but ignoring the increase in sales.
 Only the interest on loan and depreciation on the new plant were considered in determining
the projected fixed costs whereas existing fixed costs were ignored.
 Impact of inflation was applied on depreciation also. / Depreciation of existing plant was
not separated from existing fixed overheads, for arriving at the projected fixed overheads.
 Margin of safety was not computed.

(THE END)

Page 3 of 3
 Cost and Management Accounting
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2017

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in answer may exceed the total marks of a question.

Mark(s)
A.1 (a)
01 mark for preparation of quantity schedule for each process 2.0

Computation of joint cost of process I 4.0

Computation of conversion cost per unit of process II 1.0

Allocation of joint cost of process I based on NRV of the joint products 3.0

Cost of sales for the month of August 2017 for product J101 and J-plus 2.0

(b) Preparation of accounting entries to record:

production normal/abnormal loss credited to WIP – Process I 1.5

proceeds from sale of solid waste and loss thereon 1.5

A.2 (a) Brief description of the concept of ‘Integrated reporting’ 2.0

(b) 0.5 mark for listing each category of capitals, in the context of integrated
reporting 3.0

A.3 (a) 01 mark for allocation of each support departments’ costs to production
departments 5.0

(b) Computation of production departments’:

budgeted overhead rate per hour 1.0

applied overheads 1.0

under/over applied overheads 1.0

A.4
Determination of:

− contribution margin of new product D44 2.0
− reduction in contribution margin of existing product X85 2.0
− incremental fixed cost 1.0
− cash flows relating to tax liability including accounting/tax depreciation 3.0
− cash flows relating to initial investment and carrying value of the plant at
the end of its useful life 2.0

Ignoring irrelevant costs 1.0

Computation of Internal Rate of Return (IRR) 3.5

Conclusion 0.5

A.5
Determination of:

− production units 1.5
− budgeted cost per unit 3.5
− budgeted fixed overheads 2.0
− budgeted raw material consumption 3.5

Computation of opening work in process, manufacturing expenses and closing
work in process 4.0

Computation of opening and closing finished goods stock 1.5
Page 1 of 2
 Cost and Management Accounting
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2017

Mark(s)
A.6
Determination of revenue from NTR Limited 0.5

Determination of incremental cost of:
− raw material 2.5
− labour 3.5
− variable overheads 1.0

Consideration of preparation and resetting cost of the plant 0.5

Loss of contribution for not producing car radiators 3.0

Ignoring applied fixed overheads 0.5

Conclusion 0.5

A.7 (a) (i) Accounting entry to record:

overheads charged to production 1.5

under absorbed overheads charged to profit & loss account 1.5

(ii)
Computation of standard and variable overhead rate per hour 1.0

Computation of actual fixed overheads 1.25

1.75 marks for calculation of each cost variance 8.75

(b) Comments on the differences of overhead variances computed under marginal

and absorption costings 3.0

A.8 Computation of:

Variable cost 5.0

Fixed cost 3.0

Projected production and sales 2.0

Break-even sales 1.0

Margin of safety % to projected sales 1.0

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination
The Institute of 8 March 2018
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Q.1 Sarwar Limited (SL) manufactures two industrial products i.e. K2 and K9. It also
manufactures other products in accordance with the specification of customers. SL’s
products require specialised skilled labour. Maximum labour hours available with the
company are 300,000 per month.

Following information has been extracted from SL’s budget:

K2 K9
---- Rs. per unit ----
Selling price 16,500 26,000
Direct material 6,000 8,000
Direct labour (Rs. 300 per hour) 4,500 7,500
Variable production overheads (based on labour hours) 1,875 3,125
Applied fixed production overheads (based on labour hours) 1,500 2,500

Monthly demand (Units) 5,000 8,000

An overseas customer has offered to purchase 3,000 units of a customized industrial

product ‘A-1’ at a price of Rs. 35,000 each. The duration of contract would be one month.
The cost department has ascertained the following facts in respect of the contract:
(i) Each unit of A-1 would require 3 units of raw material B-1 and 2 units of raw
material C-3. B-1 is available in the local market at Rs. 2,500 per unit. However, the
required quantity of C-3 is not available in the local market and would be imported
from Srilanka at a landed cost of Rs. 2.4 million.
(ii) Each unit of A-1 would require 35 labour hours.
(iii) A specialised machinery would be hired for five days. However, due to certain
production scheduling issues, it is difficult for SL to exactly predict when the
machine would be required. As a result of negotiations, SL has received the
following offers:

Falah Modarba has quoted a rent of Rs. 0.9 million for the entire month. If
accepted, SL would be able to sublet the machine at Rs. 20,000 per day.

Tech Rentals has quoted a rent of Rs. 57,000 per day and guaranteed availability
of machinery when required.

The management believes that it can increase/decrease the production of K2 and K9, if
required.

Required:
Determine the maximum profit that can be earned by SL, in the above situation. (10)
 Cost and Management Accounting Page 2 of 4

Q.2 (a) Briefly describe any three differences between investment and speculation. (03)
(b) Valika Limited (VL) plans to introduce a new product AX which would be used in
hybrid cars. Following information is available in this regard:
(i) Initial investment in the new plant including installation and commissioning is
estimated at Rs. 50 million. The plant is expected to have a useful life of four
years and would have annual capacity of 200,000 units.
(ii) The demand of AX for the first year is expected to be 180,000 units which
would increase by 10% per annum in year 2 and 3. However, in year 4 the
demand is expected to decline by 10%.
(iii) The contribution margin for the first year is estimated at Rs. 100 per unit which
is expected to increase by 5% each year.
(iv) The new plant would be installed at VL’s premises which are presently rented
out at Rs. 1.8 million per annum. As per the terms of rent agreement, the rent is
received in advance and is subject to 7% increase per annum.
(v) Working capital of Rs. 10 million would be required at the commencement of
the project. Working capital is expected to increase by 10% each year.
(vi) The new plant would be depreciated at the rate of 25% under the reducing
balance method. Tax depreciation is to be calculated on the same basis. The
residual value of the plant at the end of useful life is expected to be equal to its
carrying value.
(vii) VL’s cost of capital is 10%.
(viii) Tax rate is 30% and is paid in the year in which the tax liability arises.

Required:
On the basis of net present value, advise whether VL should invest in the above
project. (Assume that except stated otherwise, all cash flows would arise at the end of year) (17)

Q.3 Washington Limited (WL) is a listed company having paid-up capital of Rs. 140 million.
WL deals in the manufacturing of washing machines. Following are the extracts from the
budgeted statement of profit or loss for the year ending 31 December 2018:
Rs. in ‘000
Sales revenue (Rs. 10,000 per unit) 168,000
Cost of goods sold (including fixed cost of Rs. 21.2 million) (127,000)
Gross profit 41,000
Operating expenses (including fixed cost of Rs. 4.5 million) (16,000)
Profit before taxation 25,000
Taxation @ 30% (7,500)
Profit after taxation 17,500
Additional information:
(i) An analysis of actual results for the first two months of the year 2018 shows that:

Due to change in import duty structure, imported products have become available
in the market at much cheaper prices. Consequently, it was decided to reduce the
selling price to Rs. 9,500 per unit with effect from 1 January 2018.

1,500 washing machines were sold during the period.

Due to increase in raw material prices with effect from 1 January 2018, variable
cost of sales has increased by 5%.
(ii) To boost the sales, WL has decided to launch a promotion campaign at an estimated
cost of Rs. 5 million.
(iii) The directors of WL wish to pay 5% dividend to its ordinary shareholders. However,
according to the agreement with the bank, WL cannot pay dividend exceeding 80% of
its profit after taxation.

Required:
Calculate the minimum number of units to be sold in remaining 10 months to enable WL
to pay the desired dividend. (10)
 Cost and Management Accounting Page 3 of 4

Q.4 RI Limited (RIL) is engaged in the manufacturing of spare parts for industrial machines.
RIL receives bulk orders from its customers and follows job order costing. Following data
pertains to two of the jobs which were started in the month of February 2018:
(i) Job F01 Job F02
Size of job order (Units) 5,400 3,600
Labour hours used 27,500 21,600
Labour rate per hour Rs. 360 Rs. 400
(ii) Each unit of both jobs require 24 kg of raw material S40. Purchase price of S40 was
Rs. 30 per kg.
(iii) The inventory of S40 at beginning and end of the month was Rs. 2,940,000 and
Rs. 1,740,000 respectively.
(iv) Wages were paid on 28 February 2018. Income tax withheld from the wages
amounted to Rs. 500,000 which would be deposited in government treasury in the
following month.
(v) Job F01 was in process at month-end. However, Job F02 was completed during the
month of February and finished goods were sent to warehouse. During the delivery
to the customer, 500 units were damaged badly and their realisable value is 50% of
the cost.
Total labour hours utilized during the month were 100,000. Factory overheads are applied
at Rs. 120 per direct labour hour. Under/over applied factory overheads are charged to
cost of sales at month-end. Total actual factory overheads amounted to Rs. 11,000,000, out
of which 40% were fixed.

Required:
Prepare journal entries to record the transactions for the month of February 2018. (13)

Q.5 MZ Limited (MZL) manufactures a single product X and uses standard marginal costing
system. The standard cost card of product X is as follows:
Rupees
Raw material (13 kg @ Rs. 135 per kg) 1,755
Labour (14 hours @ Rs. 100 per hour) 1,400
Variable production overheads (Rs. 75 per labour hour) 1,050
Following data is available in respect of operations for the month of February 2018:
(i) 55,000 units were put into process. 1,500 units were lost in process which were
considered to be normal loss. Process losses occur at the end of the process.
(ii) 698,000 kg of material was purchased at Rs. 145 per kg. Material is added at the start
of the process and conversion costs are incurred evenly throughout the process.
(iii) 755,000 labour hours were worked during the month. However, due to certain labour
related issues, wages were paid at Rs. 115 per hour.
(iv) Fixed production overheads are budgeted at Rs. 40 million for the month of
February 2018. Total actual production overheads amounted to Rs. 95 million.
Actual fixed production overheads exceeded budgeted fixed overheads by
Rs. 1.1 million.
(v) Inventory balances were as under:

01 February 2018 28 February 2018

Raw material (kg) 15,000 17,000
Work in process (units) 5,000 (60% converted) 6,000 (80% converted)
Finished goods (units) 10,000 12,000
(vi) MZL uses FIFO method for valuing the inventories.

Required:
Compute material, labour and overhead variances. (14)
 Cost and Management Accounting Page 4 of 4

Q.6 Khan Limited (KL) imports and sells a product ‘AA’. KL is faced with a situation where
lead time is mostly predictable i.e. 1 month but lead time usage varies quite significantly.
Data collected for past three years shows that probability for lead time usage is as follows:
No. of units demanded Probability of demand
during lead time during lead time (%)
1,000 30
660 50
450 20
Other relevant information is as follows:
(i) Annual demand is 8,640 units.
(ii) Contribution margin is Rs. 40 per unit.
(iii) Purchase orders are raised on the basis of economic order quantity model. Annual
holding cost is Rs. 100 per unit whereas average cost of placing an order is Rs. 6,750.

Required:
Determine at which of the following re-order levels, KL’s profit would be maximised:

1,000 units

450 units

Expected demand during lead time (17)

Q.7 Sadiq Limited (SL) is in the process of preparation of budget for the year ending
31 December 2018. Following are the extracts from the statement of profit or loss for the
year ended 31 December 2017:
Rs. in million
Sales (30% cash sales) 7,500
Cost of goods sold (4,000)
Gross profit 3,500
Operating expenses (1,250)
Net profit before tax 2,250

Raw material inventory as on 1 January 2017 amounted to Rs. 152 million. There were no
opening and closing inventories of work in process and finished goods. SL follows FIFO
method for valuation of inventories.
Following are the projections to be used in the preparation of the budget:
(i) Selling price would be reduced by 5%. Further, credit period offered to customers
would be reduced from 45 days to 30 days. As a result, volumes of cash and credit
sales are expected to increase by 10% and 5% respectively.
(ii) Ratio of manufacturing cost was 5:3:2 for raw material, direct labour and factory
overheads respectively.
(iii) All operating expenses and 20% of factory overheads are fixed. Total depreciation for
the year 2017 amounted to Rs. 100 million and was apportioned between
manufacturing cost and operating expenses in the ratio of 7:3. Depreciation for the
next year would remain the same.
(iv) Raw material inventory would be maintained at 30 days of consumption. Up to
31 December 2017, it was maintained at 45 days of consumption.
(v) Raw material prices and direct labour rate would increase by 10% and 6%
respectively.
(vi) Impact of inflation on all other costs would be 5%.
(vii) The existing policy of payment to raw material suppliers in 30 days is to be changed
to 15 days. Other costs are to be paid in the month of incurrence.

Required:
Compute the budgeted net cash inflows/(outflows) for the year ending
31 December 2018. (Assume there are 360 days in a year) (16)
(THE END)
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

Ans.1 Sarwar Limited

K2 K9 A-1
-------------------- Rs. per unit --------------------
Selling price Given 16,500.00 26,000.00 35,000.00
Variable cost 12,375.00 18,625.00 23,270.00
(6,000+4,500+1,875) (8,000+7,500+3,125) (W-1)
Contribution per unit A 4,125.00 7,375.00 11,730.00

Labour hours required per unit B 15 25 35

(4,500/300) (7,500/300) Given

CM per labour hour (Rs.) A/B 275.00 295.00 335.14

Ranking 3 2 1

Allocation of 300,000 hours C - 195,000 105,000

(300,000–105,000) (35×3,000)

Units to be produced C/B - 7,800.00 3,000.00

Contribution margin for the month after accepting special contract Rs. in million
A-1 (3,000×11,730) 35.19
K-9 (7,800×7,375) 57.53
Contribution margin 92.72
Fixed cost (1,500/15)×300,000 30.00
Maximum profit 62.72

W-1: Relevant cost for A-1 Rs. per unit

Material cost - B1 (3×2,500) 7,500.00
Material cost - C3 (2,400,000/3,000) 800.00
Labour cost (35×300) 10,500.00
Variable overheads [{1875÷(4,500÷300)}×35] 4,375.00
Machine hire cost [Lower of (57,000×5) and {900,000– (20,000×25)}]/3,000 95.00
Variable cost per unit of A-1 23,270.00

Ans.2 (a) Investment and speculation are similar in that they both involve an investor to take risk
in the expectation of making a profit. However, following are the main differences
between investment and speculation:
Investment Speculation
(i) Normally investments are made for Speculation is often made on short
long-term period. term basis.
(ii) Attitude of investor in investment is Speculation always involves high risk.
usually risk neutral.
(iii) Investment usually involves putting Speculators often invest in more
money into an asset that isn’t typically marketable assets as they do not plan
marketable in the short term. The to own them for long time.
objective is to yield a series of returns
over the life of the investment.
(iv) Investors build their strategy based on Speculators normally expect some kind
the expectation that a certain price of change without necessarily knowing
movement or income stream will occur. what.
(v) There is a low to moderate risk Risk is usually moderate to high in
involved in investment. speculation.
(vi) Investment involves moderate returns Speculation involves high returns in
due to low to moderate risk. exchange for high risks.

Page 1 of 5
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

(b) Valika Limited

Introduction of new product - AX
Year 0 Year 1 Year 2 Year 3 Year 4
------------------- Rs. in million -------------------
Contribution margin (W-1) - 18.00 20.79 22.05 22.69
Tax/Accounting depreciation (50×0.25, 0.75) - (12.50) (9.38) (7.04) (5.28)
Net profit before tax - 5.50 11.41 15.01 17.41
Tax liability @ 30%. - (1.65) (3.42) (4.50) (5.22)
Net profit after tax - 3.85 7.99 10.51 12.19
Add back depreciation - 12.50 9.38 7.04 5.28
Rent income lost 1.8×1.07 (1.93) (2.07) (2.21) (2.36) -
Tax saved on rent income 1.93×30% 0.58 0.62 0.66 0.71
Residual value receipts (50–34.2 Total dep.) 15.80
Initial investment (50.00) - - - -
Working capital (W-2) (10.00) (1.00) (1.10) (1.21) 13.31
Net cash (outflows)/inflows (61.93) 13.86 14.68 14.64 47.29
Discount rate @ 10% 1.0000 0.9091 0.8264 0.7513 0.6830
Present value (61.93) 12.60 12.13 10.99 32.29
Net present value 6.08

Opinion: VL's should start production of AX.

W-1: Annual contribution margin Year 1 Year 2 Year 3 Year 4

Contribution margin per unit (Rs.) A 100.00 105.00 110.25 115.76
100 100×1.05 105×1.05 110.25×1.05
Annual demand (Units) 180,000 198,000 217,800 196,020
180,000×1.10 198,000×1.10 217,800×90%
Production - Restricted to capacity (Units)
(Up to 200,000 units p.a)B 180,000 198,000 200,000 196,020
Annual CM (Rs. in million) (A×B) 18.00 20.79 22.05 22.69

W-2: Working capital requirement Year 1 Year 2 Year 3

Working capital current year 11.00 12.10 13.31
10×1.1 11×1.1 12.10×1.1
Working capital last year 10.00 11.00 12.10
(Increase)/Decrease (1.00) (1.10) (1.21) 13.31

Ans.3 Washington Limited Rupees

Dividend needs to pay 140,000,000×5% 7,000,000

Profit after tax (required) (7,000,000÷0.8) 8,750,000

Required contribution margin in remaining 10 months

Profit before tax (required) 8,750,000 /70% 12,500,000
Add: Fixed cost (Jan - Dec) (21,200,000+4,500,000) 25,700,000
Add: Promotion campaign Given 5,000,000
Contribution margin required 43,200,000
Contribution margin recovered in 1st two months (W-1) (3,304,464)
Required contribution in remaining 10 months 39,895,536

Forecasted sales revenue to earn in next 10 months 39,895,536/23.19%(W-1) Rs. 172,037,670

Number of units to be sold 172,037,670/9,500 18,109

W-1: Actual results of first two months of 2018 Rupees
Sales 1,500×9,500 14,250,000.00
Variable manufacturing cost (127,000,000–21,200,000)/ *16,800×1.05×1,500 9,918,750.00
Variable operating cost (16,000,000–4,500,000)/16,800×1,500 1,026,785.71
Contribution margin 3,304,464.29

Contribution margin % 23.19%

*Budgeted number of units to be sold 168,000,000/10,000 16,800

Page 2 of 5
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

Ans.4 RI Limited
Journal entries
Debit Credit
Date Particulars
----------- Rs. in '000 -----------
Purchases - Raw material (W-1) 5,280
1 Supplier/cash 5,280
(Purchased raw material)
Work in process (F01) (W-1) 3,888
Work in process (F02) (W-1) 2,592
2
Raw material 6,480
(Allocated raw material consumed to the jobs)
Work in process (F01) (27,500×360) 9,900
Work in process (F02) (21,600×400) 8,640
3
Payroll 18,540
(Allocated direct labour to the jobs)
Payroll 18,540
Accrued payroll tax 500
4
Bank/Cash 18,040
(Paid of payroll)
Work in process (F01) (27,500×120) 3,300
Work in process (F02) (21,600×120) 2,592
5 Factory overheads applied 5,892
(Applied factory overheads to the jobs @ Rs. 120 per direct
labour hour)
Finished goods (2,592+8,640+2,592) 13,824
6 Work in process (F02) 13,824
(Transferred WIP of job F02 to finished goods)
Damaged goods (at NRV) (13,824/3,600×500×50%) 960
Abnormal loss - P&L (13,824/3,600×500×50%) 960
7
Finished goods 1,920
(Recorded 500 damaged units)
Cost of sales (13,824–1,920) 11,904
8 Finished goods 11,904
(Transferred total finished goods to cost of sales)
Factory overheads applied (100,000×120) 12,000
Cost of sales (overhead over applied) 1,000
9 Factory overheads control 11,000
(Transferred applied factory overheads to control a/c and
charged under applied overheads to cost of sales)
Factory overheads control 11,000
10 Cash/suppliers 11,000
(Recorded actual factory overheads incurred)

W-1: Rs. in '000

Material consumption - F01 (5,400×24×30) 3,888.00
Material consumption - F02 (3,600×24×30) 2,592.00
Add: Closing stock of raw material Given 1,740.00
Less: Opening stock of raw material Given (2,940.00)
Purchases - Raw material 5,280.00

Ans.5 MZ Limited
Material, labour, overhead variances Rs. in '000
Cost variances under marginal costing
Material price variance [(135–145)×698,000] Adv. (6,980.00)
Material usage variance {(53,500(W.3)×13)– 696,000(W.1)}×135 Adv. (67.50)
Labour rate variance (100–115)×755,000 Adv. (11,325.00)
Labour efficiency variance {(14×54,300)(W.3)–755,000}×100 Fav. 520.00
Variable overheads expenditure variance (755,000×75)–Rs. 53,900,000(W.4) Fav. 2,725.00
Variable overheads efficiency variance {(54,300(W.3)×14)–755,000}×75 Fav. 390.00
Fixed overhead expenditure variance (40,000–41,100) (W.4)) Adv. (1,100.00)
Page 3 of 5
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

W-1:
Actual material usage (kg) (698,000+15,000–17,000) 696,000.00

W-2: Quantity schedule Units

WIP (opening) 5,000.00
Units started 55,000.00
Total units in production 60,000.00
Normal loss (1,500.00)
WIP (End) (6,000.00)
Finished goods/Transferred out 52,500.00

W-3: Equivalent production units Material Conversion cost

---------- Units ----------
Finished goods/Transferred out (W-2) 52,500.00 52,500.00
Less: WIP (Opening) (5,000.00) (5,000.00)
Started and finished in this period 47,500.00 47,500.00
Add: WIP (Opening) (5,000×40%) - 2,000.00
Add: WIP (Closing) (6,000×80%) 6,000.00 4,800.00
Equivalent production units 53,500.00 54,300.00

W-4: Actual variable and fixed overheads Rs. in '000

Budgeted fixed overheads Given 40,000.00
Actual fixed overheads exceeded applied overheads Given 1,100.00
Actual fixed overheads 41,100.00
Less: Total actual variable and fixed overheads Given 95,000.00
Actual variable overheads 53,900.00

Ans.6 Reorder Demand Stock out Stock out Stock out Average Holding Expected
level level per order per year cost inventory cost Probability total cost
(Units) (Units) (Units) (Units) (Rs.) (Units) (Rs.) (Rs.)
d= c× g=[a–b+
a b c e=d×40 h=g×100 i j=(h+e)×i
8(W-2) EOQ(W-1)]/2
1,000 - - - 540 54,000 30% 16,200
1,000 660 - - - 880 88,000 50% 44,000
450 - - - 1,090 109,000 20% 21,800
82,000
1,000 550 4,400 176,000 540 54,000 30% 69,000
450 660 210 1,680 67,200 540 54,000 50% 60,600
450 - - - 540 54,000 20% 10,800
140,400
1,000 280 2,240 89,600 540 54,000 30% 43,080
720 660 - - - 600 60,000 50% 30,000
(W-3) 450 - - - 810 81,000 20% 16,200
89,280

Conclusion: Profit would be maximised at re-order level of 1,000 units.

Rupees
W-1: EOQ (Units) = SQRT[ 2×8,640×6,750)/100] 1,080.00

W-2: No. of orders (8,640/1,080) 8.00

W-3: Expected value (1,000×30%)+(660×50%)+(450×20%) 720.00

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

Ans.7 SL
Budgeted cash inflows / (outflows) for the next year

Inflows Rs. in million

Cash sales (7,500×30%)×1.1×95% – A 2,351.25
Budgeted credit sales 2018 (7,500×70%)×95%×1.05 5,236.88
Trade debtor (Opening) (7,500×70%)×(45/360) 656.25
Trade debtor (Closing) 5,236.88×30/360 (436.41)
Collections from debtors B 5,456.72
Total inflows A+B 7,807.97

Outflows
Payment to suppliers (W-1) 2,343.78
Direct labour 4,000×{(70%×1.05)+(30%×1.1)} ×30%×1.06 1,354.68
Variable factory overheads 4,000×{(70%×1.05)+(30%×1.1)}×{(20%–(20%×20%)}×1.05 715.68
Fixed factory overheads [{4,000×(20%×20%)}–{(100×70%)}]×1.05 94.50
Operating expenses {1,250–(100×30%)}×1.05 1,281.00
Total outflows 5,789.64

Net cash inflows 2,018.33

W-1: Payments to material suppliers

Consumption of raw material 2018 at 2017 price (4,000×50%)×{(70%×1.05)+(30%×1.1)} 2,130.00
Opening raw material at 2017 price (4,000×50%)×(45/360) (250.00)
Closing raw material at 2017 price 2,130×30/360 177.50
Purchases of 2018 at 2017 price 2,057.50

Purchases of 2018 – at increased price 2,057.50×1.1 2,263.25

Trade creditor (Opening) 2,098(W-2)×30/360 174.83
Trade creditor (Closing) 2,263.25×15/360 (94.30)
Payment to suppliers 2,343.78

W-2: Purchases 2017

Consumption of raw material 2017 4,000×50% 2,000.00
Opening raw material Given (152.00)
Closing raw material (W-1) 250.00
Purchases 2017 2,098.00

(THE END)

Page 5 of 5
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Cost and Management Accounting Certificate in Accounting and Finance
– Spring 2018

General:

The overall performance was good as 54% of the candidates secured passing marks.
However, performance in the question on inventory management was very poor. An area
of concern was the students’ presentation as in many cases the calculations were
performed without any description and it was left to the examiner to understand what is
being done. In many cases, this results in loss of marks. Moreover, probably due to lack
of practice, many students used lengthy steps to perform simple calculations where
shorter alternate methods were available.

Question-wise comments:

Question 1

Very good performance was witnessed in this question as 76% candidates secured
passing marks and about 40% of the candidates secured full marks. However, some
students didn’t calculate correct contribution margin as they took fixed cost into
consideration. Moreover, many students were confused in calculation of machine hire
cost. Further, some students lost easy marks by leaving the question after calculating the
units to be produced and did not compute the amount of maximum profit

Question 2(a)

Below average response was observed on this part of the question as students were not
generally aware of the difference between speculation and investment and applied
guesswork. They are advised to seek guidance from ICAP’s suggested answer.

Question 2(b)

This part was very well attempted and nearly all students secured passing marks and a
large number of candidates obtained full marks. Only few mistakes were observed which
are listed below:
 In year 3, production should have been restricted to 200,000. This instruction was
ignored.
 Impact of rent was taken from year 1 instead of Year 0.
 Tax on rent was ignored.
 Total working capital was included in outflows in year1 to 4 instead of increase in
working capital.

Page 1 of 3
 Examiners’ Comments on Cost and Management Accounting - Spring 2018

Question 3

Performance in this question remained below average as only 32% of the candidates
secured passing marks. The common mistakes were as under:
 The required profit was calculated as 20% above the required dividend of Rs. 7
million instead of Rs. 7 million / 80%. Many students didn’t compute profit after tax
by grossing up the dividend and instead, simply added dividend to the required
contribution margin.
 The required profit before tax was calculated as 30% above the required profit after
tax instead of dividing profit after tax by 0.7 or 70%.
 Only the fixed cost relating to cost of goods sold was considered in the computation
of required contribution margin. Fixed costs included in operating expenses and cost
of promotion campaign was ignored.
 Contribution margin percentage was computed on the basis of budgeted statement of
profit or loss i.e. the impact of revision in sale price and/or 5% increase in variable
cost was ignored.
 About 26% of the candidates did not have any clue and scored one or less marks.

Question 4

Below average response was observed in this question as well, as students were not very
well prepared for this type of questions which required passing of journal entries under
job order costing. As a result, about 18% of the candidates secured one or less mark. The
common mistakes were as under:
 Raw material purchased was considered equal to raw material consumed.
 Raw material consumed account was debited instead of work-in-process / job
accounts.
 Entry to record payroll was ignored.
 Factory overheads were debited to the jobs on the basis of actual factory overheads
instead of applied factory overheads, using labour hours for the purpose of allocation
thereof. Majority of the candidates were unaware of the Factory Overhead Control
account.
 Entry to record transfer of finished goods to cost of sales was missed.
 Entry to record damaged goods / abnormal loss was either ignored or passed
incorrectly.
 Realisable value of damaged goods was ignored or credited to other income.

Question 5

The performance in this question was good as 63% of the candidates secured passing
marks. However, about 16% of the candidates obtained 2 or less marks. These students
were even unable to determine the equivalent production units and actual fixed and
variable overheads. The other most common mistakes were as follows:
 Finished goods produced were taken in the calculation of variances instead of
equivalent units produced.
 Material purchase was used for calculating material usage variance.
 One combined overhead variance was calculated and further bifurcation was not
done.
 It was not stated whether the calculated variance was favourable or unfavourable.

Page 2 of 3
 Examiners’ Comments on Cost and Management Accounting - Spring 2018

Question 6

The requirement in this question was to calculate the expected total cost of holding the
inventory and stock out costs at different levels to determine the best re-ordering level.
The performance in this question was very pathetic as only 3% of the candidates secured
passing marks. About 21% of the candidates were totally clueless and obtained on or less
mark. A further 69% of the candidates remained restricted to the calculation of EOQ,
number of orders, holding costs and and expected demand during lead time and did not
have any understanding of the concept of re-order level and stock out cost.

Question 7

The overall performance in this question on cash flows was average as 42% of the
candidates obtained passing marks. but due to length of the question, many students
couldn’t attempt completely, but those who did achieved passing marks. Following
mistakes were observed in this question were:

 Majority of the candidates failed to understand how to compute the impact of increase
in sales volume on cost of raw material, labour and variable factory overheads or
followed very lengthy methods which resulted in loss of time resulting in time
pressure on questions attempted afterwards.
 Factory overheads were 20% of cost of sales and fixed overheads were 20% of the
total overheads. Hence, variable overheads were 16% of cost of sales. Most of the
candidates did not seem to understand this point.
 Fixed cost was deducted from variable cost before bifurcating into Material Labour
and Variable overhead which was not required.
 Depreciation was not excluded for computing payment of fixed overheads and
consequently failed to complete failure. Few of the students were unable to calculate
Raw material purchase of 2017.

THE END

Page 3 of 3
 Cost and Management Accounting
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2018

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1
Computation of:
− contribution margin of each product 3.5
− ranking on the basis of limiting factor i.e. labour hours 3.5
− labour hours to be utilised and units to be produced 2.0

Determination of maximum profit 1.0

A.2 (a) 01 mark for discussing each difference between investment and speculation 3.0

(b)
Computation of:

− contribution margin 4.0
− depreciation and its impact 2.5
− taxation 2.0
− initial investment and residual value receipts 1.0
− incremental working capital and its recovery 2.5
− rent income lost 2.0
− net present value of cash flows 2.5

Conclusion 0.5

A.3 Computation of:

required dividend 0.5

required profit after tax and before tax 2.5

contribution margin required 1.0

actual contribution margin earned in first two months and required
contribution margin in remaining 10 months 4.5

required sales revenue to be earned in next 10 months and number of units
required to be sold 1.5

A.4 Prepare accounting entries to record:

purchase of raw material and issuance to production 3.5

charging of payroll to production and payment of payroll 2.5

charging of overheads to production and payment of actual overheads 1.5

under/over applied overheads 1.5

transferring of goods from work in process to finished goods 1.5

damaged goods 1.5

transferring of goods from finished goods to cost of sales 1.0

A.5
Preparation of quantity schedule and equivalent production units 2.5

Computation of actual material usage 1.0

Computation of actual fixed and variable overheads 1.5

Up to 1.5 marks for each relevant material, labour and overheads variance 9.0

Page 1 of 2
 Cost and Management Accounting
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2018

Mark(s)
A.6
Computation of economic order quantity, number of orders and expected value
of demand 3.5

Comparison of each re-order level with demand levels during lead time 1.5

Computation of:
− stock out and its cost 3.5
− average inventory 4.0
− holding cost 2.0
− expected total cost 2.0

Conclusion 0.5

A.7 Computation of:

cash sales 1.0

credit sales and collection from debtors 3.0

purchases 4.5

payment to suppliers 2.0

payment to labour, factory overheads and operating expenses 5.5

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination
The Institute of 6 September 2018
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Q.1 Cricket Chemicals Limited (CCL) is a manufacturing concern and has two production
processes. Process I produces two joint products i.e. X-1 and X-2. Incidental to the
production of joint products, it produces a by-product known as Zee. X-1 is further
processed in process II and converted into ‘X1-Plus’.

Following information has been extracted from the budget for the year ending
31 August 2019:

(i) Process wise budgeted cost:

Process I Process II
-------------- Rupees ------------
Direct material (500,000 liters) 98,750,000 -
Conversion cost 72,610,000 19,100,000

(ii) Expected output ratio from process I and budgeted selling prices:

Output ratio Selling price

Products
in process I (Rs. per liter)
Joint product – X-1 55% -
Joint product – X-2 40% 532
By-product – Zee 5% 120
X1-Plus - 768

Additional information:
(i) Material is added at the beginning of the process and CCL uses 'weighted average
method' for inventory valuation.
(ii) Joint costs are allocated on the basis of net realizable value of the joint products at the
split-off point. Proceeds from the sale of by-product are treated as reduction in joint
costs.
(iii) Joint product X-2 is sold after incurring packing cost of Rs. 75 per liter.
(iv) Normal production loss in process I is estimated at 5% of the input which occurs at
beginning of the process. Loss of each liter results in a solid waste of 0.7 kg which is
sold for Rs. 10 per kg. No loss occurs during process II.
(v) Budgeted conversion cost of process I and process II include fixed factory overheads
amounting to Rs. 7,261,000 and Rs. 3,820,000 respectively.

Required:
(a) Prepare product wise budgeted income statement for the year ending 31 August 2019,
under marginal costing. (14)
(b) CCL has recently received an offer from Football Industries Limited (FIL) to purchase
the entire expected output of X-1 during the year ending 31 August 2019 at
Rs. 670 per liter. It is estimated that if process II is not carried out, fixed costs
associated with it would reduce by Rs. 2,500,000. Advise whether FIL’s offer may be
accepted. (02)
 Cost and Management Accounting Page 2 of 4

Q.2 Basketball (Private) Limited (BPL) is in the process of planning for the next year. BPL is
currently operating at 70% of the production capacity. The management wants to achieve an
increase of Rs. 36 million in profit after tax of the latest year.

The summarized statement of profit or loss for the latest year is as follows:

Rs. in million
Sales 567
Cost of sales (60% variable) (400)
Gross profit 167
Operating expenses (40% variable) (47)
Profit before tax 120
Tax (25%) (30)
Profit after tax 90

Following are the major assumptions/projections for the next year’s budget:

(i) Selling price of all products would be increased by 8%. However, to avoid any adverse
impact of price increase, 10% discount would be offered to the large customers who
purchase about 30% of the total sales. Additionally, distributor commission would be
increased from 2% to 3% of net selling price.
(ii) Average variable costs other than distributor commission are projected to increase by
4% while fixed costs other than depreciation are projected to increase by 5%.
(iii) Depreciation for the latest year was Rs. 90 million and would remain constant.

Required:
(a) Compute the amount of sales required to achieve the target profit. (09)
(b) Determine the production capacity that would be utilized to achieve the sales as
computed in (a) above. (02)

Q.3 Snooker (Private) Limited (SNPL) manufactures a component ‘Beta’ which is used as input
for many products. The current requirement of Beta is 18,000 units per annum. Current
production cost of Beta is as follows:

Rs. per unit

Direct material 3,670
Direct labour 1,040
Variable manufacturing overheads 770
Fixed manufacturing overheads 870
Total cost 6,350

A supplier has recently offered SNPL to supply Beta at Rs. 7,000 per unit. The management
has nominated a team to evaluate the offer which has gathered the following information:

(i) There is a shortage of labour. However, some of the labour would become available
due to outsourcing of Beta, which would be utilized for production of a product ‘Zee’.
The estimated selling price of Zee is Rs. 5,800 per unit whereas production cost would
be as follows:

Direct material would cost Rs. 2,600 per unit.

Each unit of Zee would require 20% more labour as compared to each unit of Beta.

Estimated variable manufacturing overheads would be Rs. 480 per unit.

(ii) Outsourcing of Beta and production of Zee would result in net reduction in fixed
manufacturing overheads by Rs. 1,900,000 per annum.

Required:
Advise SNPL whether it should outsource component Beta or not. (09)
 Cost and Management Accounting Page 3 of 4

Q.4 Hockey Pakistan Limited (HPL) is engaged in the manufacturing of a single product ‘H-2’
which requires a chemical ‘AT’. Presently, HPL follows a policy of placing bulk order of
60,000 kg of AT. However, HPL’s management is presently considering to adopt economic
order quantity model (EOQ) for determining the size of purchase order of AT.

Following information is available in this regard:

(i) Average annual production of H-2 is 45,600 units. Production is evenly distributed
throughout the year.
(ii) Each unit of H-2 requires 10 kg of AT. Cost of AT is Rs. 200 per kg. 5% of the
quantity purchased is lost during storage.
(iii) Annual cost of procurement department is Rs. 2,688,000. 65% of the cost is variable.
(iv) AT is stored in a third party warehouse at a cost of Rs. 6.25 per kg per month.
(v) HPL’s cost of financing is 8% per annum.

Required:
(a) Calculate economic order quantity. (06)
(b) Supplier of AT has offered a discount of 5% quantity per order is increased to
120,000 kg. Advise whether HPL should accept the offer. (06)
(c) Discuss any three practical limitations of using the EOQ model. (03)

Q.5 (a) Discuss any three advantages and three disadvantages if a project is financed through
debt as against when it is financed through equity. (03)

(b) Golf Limited (GL) is engaged in the manufacturing and sale of a single product
‘Smart-X’. The existing manufacturing plant is being operated at full capacity but the
production is not sufficient to meet the growing demand of Smart-X. GL is
considering to replace it with a new Japanese plant. The production capacity of new
plant would be 50% more than the existing capacity.

To assess the viability of this decision, the following information has been gathered:
(i) The purchase and installation cost of new plant would be Rs. 500 million and
Rs. 25 million respectively. The supplier would send a team of engineers to
Pakistan for final inspection of the plant before it is commissioned. 50% of the
total cost of Rs. 12 million to be incurred on the visit, would be borne by GL.
(ii) As a result of installation of the new plant, fixed costs other than depreciation
would increase by Rs. 30 million.
(iii) The existing plant has an estimated life of 10 years and is in use for the last
6 years. Plant’s tax carrying value is Rs. 50 million. A machine supplier has
offered to purchase the existing plant immediately at Rs. 45 million.
(iv) During the latest year, 6 million units were sold at an average selling price of
Rs. 550 per unit. Variable manufacturing cost was Rs. 450 per unit. GL expects
that it can increase the sales volume by 25% in the first year after the plant’s
installation. Thereafter, the sales volume would increase by 4% per annum.
(v) The new plant would be depreciated under the straight line method. Tax
depreciation is calculated on the same basis. The residual value of the plant at
the end of its useful life of 4 years is estimated at Rs. 60 million.
(vi) Applicable tax rate is 30% and tax is paid in the year in which the liability arises.
(vii) Rate of inflation is estimated at 5% per annum and would affect the revenues as
well as expenses.
(viii) GL’s cost of capital is 12%.
(ix) All receipts and payments would arise at the end of the year except cost of
setting up the plant which would arise at the beginning of the year. It may be
assumed that the new plant would commence operations at the start of year 1.

Required:
On the basis of internal rate of return (IRR), advise whether GL should acquire the
new plant. (17)
 Cost and Management Accounting Page 4 of 4

Q.6 Rugby Limited (RL) is engaged in manufacturing of a product ‘B1’. Presently, RL is

considering to launch a new product B1–Extra which has a demand of 10,000 units per
month. The estimated selling price of B1–Extra is Rs. 2,000 per unit. Other relevant
information is as follows:
(i) Each unit of B1-Extra would require 2 kg of material X and 1.5 labour hours. Material
X is available in the market at Rs. 520 per kg. Alternatively, instead of material X, RL
can use 2.5 kg of a substitute material Y which can be produced internally. Production
of each kg of Y would require raw material costing Rs. 300 and 0.5 labour hour.
(ii) Presently, about 14,000 labour hours remain idle each month and are paid at the rate
of 50% of the normal wage rate of Rs. 250 per hour and such payments are charged to
administration expenses.
(iii) Any shortfall in required labour hours can be met through overtime at the rate of 40%
above the normal wage rate.
(iv) Records of last 4 months show the following factory overheads (variable and fixed) at
different levels of direct labour hours:

Month 1 Month 2 Month 3 Month 4

Direct labour (Hours) 174,000 172,000 170,000 168,000
Factory overheads (Rs. in ‘000) 58,280 57,840 57,400 56,960

Required:
Calculate the expected relevant cost per unit of B1-Extra and determine the cost gap (if any)
if RL requires a margin of 30%. (11)

Q.7 Tennis Trading Limited (TTL) was incorporated on 1 September 2018 and would start
trading from the month of October 2018. As part of planning and budgeting process, the
management has developed the following estimates:
(i) During the month of September 2018, TTL would pay Rs. 5 million, Rs. 2 million and
Rs. 1.2 million for purchase of a property, equipment and a motor vehicle respectively.
(ii) Projected sales for October is Rs. 12 million. The sales would increase by
Rs. 2.5 million per month till January 2019. From February 2019 and onwards, sales
would be Rs. 25 million per month.
(iii) Cash sales is estimated at 30% of the total sales.
(iv) Credit customers are expected to pay within one month of the sales.
(v) 80% of the credit sales would be generated by salesmen who would receive 5%
commission on sales. The commission is payable in the following month after sales.
(vi) Gross profit margin would be 30%.
(vii) TTL would maintain inventory at 80% of the projected sale of the following month, up
to December 2018 and thereafter, 85% of the projected sale of the following month.
All purchases of inventories would be on two months’ credit.
(viii) Salaries would be Rs. 1.5 million in September and Rs. 2 million per month,
thereafter. Other administrative expenses would be Rs. 1 million per month from
September till January 2019 and Rs. 1.3 million per month thereafter. Both types of
expenses would be paid in the same month in which they are incurred.
(ix) An aggressive marketing scheme would be launched in September 2018. The related
expenses are estimated at Rs. 7 million. 50% of the amount would be payable in
September and 50% in October 2018.
(x) Marketing expenses from October 2018 would consist of 65% variable and 35% fixed
expenses. Total expenses in October 2018 would be Rs. 2 million. All expenses would
be paid in the month in which they occur.
(xi) Bank balance as of 1 September 2018 is Rs. 12 million. TTL has arranged a running
finance facility from a local bank at a mark-up of 10% per annum. The mark-up is
payable at the end of each month on the closing balance.

Required:
Prepare a cash forecast (month-wise) from September 2018 to February 2019. (18)
(THE END)
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

Note:
The suggested answers are provided for the guidance of the students. However, there are
alternative solution(s) to the questions which are also considered by the Examination
Department while marking the answer scripts.

A.1 Cricket Chemicals Limited

(a) Product wise budgeted income statement - (Marginal costing)
X1 - Plus X2
---- Rs. in million ----
Sales [768×261,250 (W-4)], [532×190,000(W-4)] 200.64 101.08
Variable production cost:
Joint cost (W-1) (108.96) (52.11)
Process II Conversion cost (19.10m–3.82m) (15.28) -
Packing cost (75×190,000) - (14.25)
Budgeted contribution margin 76.40 34.72
Fixed cost:
Joint cost (W-1) (4.91) (2.35)
Process II conversion cost (3.82) -
Budgeted profit 67.67 32.37
Total budgeted profit 100.04

W-1: Allocation of joint cost on the basis of NRV

Joint cost
NRV at Variable joint
Production Total NRV allocation on Fixed cost
Joint split-off point cost
(Units) (A×B) NRV basis (D)
products (Rs. per unit) (C–D)
(B) (C)
(A)
---------------------- Rs. in million ----------------------
X1 694.89 261,250 181.54 113.87 4.91 108.96
768–73.11 (W-3) (W-4) (168.33×181.54 (7.26×181.54
/268.37) /268.37)

X2 457.00 190,000 86.83 54.46 2.35 52.11

(532–75) (W-4) (168.3×86.83/ (7.26×86.83/
268.37) 268.37) (W-1)

268.37 (W-2)168.33 7.26 161.07

W-2: Joint cost - Process I Rs. in million

Direct material 98.75
Conversion cost 72.61
Proceeds from By product - Zee (23,750 (W-4)×120) (2.85)
Proceeds from sale of normal loss (25,000(W-4)×0.7kg×10) (0.18)
Total joint cost 168.33

W-3: Conversion cost - Process II (Rs. per unit) [19,100,000 / 261,250 (W-4)] 73.11

W-4: Quantity schedule Process I

--- Liters ---
Input quantity 500,000
Joint product - X-1 (500,000–25,000)×55% (261,250)
Joint product - X-2 (500,000–25,000)×40% (190,000)
By product – Zee (500,000–25,000)×5% (23,750)
Normal loss (500,000×5%) (25,000)

(b) Evaluation of offer from FIL Rs. in million

Loss of revenue if offer is accepted {261,250 (W-4) ×(768–670)} (25.60)
Variable cost saved in process-II (19.10m – 3.82m) 15.28
Fixed cost saved 2.50
(Decrease)/Increase in budgeted profits (7.82)

Conclusion: Offer should not be accepted

Page 1 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

A.2 Basketball Private Limited

Rs. in million
(a) Budgeted sales to achieve target profit [361.11m (W-1)/53.7%(W-2)] 672.46

W-1: Contribution margin required in next year

Total existing fixed cost including depreciation (400m×40%)+(47m×60%) 188.20
Add: Increase in fixed costs in next year (188.2m–90m)×5% 4.91
Add: Target profit for the next year (90m+36m)÷75% 168.00
Total contribution margin required in next year 361.11

W-2: Budgeted Contribution margin (next year) Rs. in million

Budgeted sales [567m×1.08] 612.36
Less: Discount @ 10% on 30% of sales [612.36m×10%×30%] (18.37)
Net average sales 593.99
Less: Distributor commission on net average sales [593.99m×3%] (17.82)
Less: Variable cost [247.46m (W-3)×1.04] (257.36)
Budgeted contribution margin 318.81

Budgeted contribution margin ratio (318.81m/593.99m) 53.7%

W-3: Variable cost (existing) Rs. in million

Distributor commission (567m×2%) 11.34
Variable cost [{(400m×60%)+(47m×40%)}–11.34m] 247.46

(b) Average increase in selling price

(1.08×30%×90%)+(1.08×70%) OR [1.08–(1.08×10%×30%)] A 1.0476

Capacity to be utilized during next year

[(672.46m (part a)÷A) ÷ (567m÷70%)] 79.25%

A.3 Snooker Private Limited

Rupees
Additional cost of outsourcing of component Beta W-1 (27,360,000)
Additional contribution from utilizing spare capacity by producing
Zee W-2 22,080,000
Net savings of fixed factory overheads 1,900,000
Loss due to outsourcing (3,380,000)

Opinion: SNPL should not outsource the production of component X.

W-1: Difference between cost of production and cost of outsourcing of

component Beta Rupees
Purchase cost (18,000×7,000) 126,000,000
Variable production costs saved [18,000×(3,670+1,040+770)] 98,640,000
Allocation of shared cost (irrelevant) Ignore -
Additional cost of outsourcing component Beta 27,360,000

W-2: Profit from spare capacity - Production of Zee Rupees

Sales revenue of Zee [5,800×15,000 (W-3)] 87,000,000
Material [(2,600×15,000 (W-3)] (39,000,000)
Labour (1,040×15,000 (W-3)×1.2) (18,720,000)
Variable manufacturing overheads (480×15,000) (7,200,000)
Profit from Zee 22,080,000

W-3: Production of Zee (18,000÷1.2) 15,000

Page 2 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

A.4 Hockey Limited - Economic Order Quantity

(a) Economic Order Quantity (Units to order)

SQRT [(2×annual demand × ordering cost) ÷ Holding cost per kg)]
SQRT [(2×480,000 (W-4) × 218,400 (W-1) ÷ 91(W.5)] 48,000.00

W-1: Ordering cost per order (Rs.) (1,747,200( W-2)÷8 (W-3) 218,400

W-2: Purchase department cost -Variable cost (Rs.) 2,688,000×65% 1,747,200

W-3: Number of orders 480,000 (W-4)÷60,000 8

W-4: Annual Requirement of AT (kg) 45,600×10/95% 480,000

W-5: Holding cost (Rs. per unit) Rs. per unit

Storage cost (6.25 per kg per month×12) 75
Finance cost 200×8% 16
Total holding cost (Rs. per unit) 91

(b) Evaluation of discount offer from supplier of AT

Comparison of cost EOQ As per offer
Annual Requirement of AT (kg) A (W-4) 480,000 480,000
Order quantity (kg) B (EOQ, Given) 48,000 120,000
Number of orders C=A/B 10 4
Average inventory (kg) D=B/2 24,000 60,000

--------- Rupees ---------

Ordering cost C×218,400 (W-1) 2,184,000 873,600
Holding cost D×91(W-5);[D×{75(W-5)+(16(W-5)×95%)}] 2,184,000 5,412,000
Purchase cost (200×480,000); (200×480,000×95%) 96,000,000 91,200,000
Total cost 100,368,000 97,485,600

Opinion:
Offer from AT's supplier should be accepted as it would reduce the purchase cost.

(c) The practical limitations/assumptions of EOQ are:

(i) The formula assumes that demand/usage is constant throughout the period. In
practice, actual demand/usage may be uncertain and subject to seasonal
variations.
(ii) Holding cost per unit are assumed to be constant. Further, many holding costs
are fixed throughout the period and not relevant to the model whereas some costs
(e.g. store keepers' salaries) are fixed but change in steps.
(iii) Purchasing cost per unit is assumed to be constant for all purchase quantities and
is ignored while calculating order size in EOQ. In practice, quantity discounts can
be available in case of bulk purchasing.
(iv) The ordering costs are assumed to be constant per order placed. In practice, most
of the ordering costs are fixed or subject to stepwise variation. It is therefore,
difficult to estimate the incremental cost per order.

Page 3 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

A.5 Golf Pakistan Limited

(a) Advantages of debt finance:
(i) Debt is a cheaper source of finance than equity because, unlike dividends, cost of debt
attracts tax savings.
(ii) Debt holders do not have any voting rights and therefore are not able to participate in the
decision making process.
(iii) Despite high profits, company only has to pay a fixed interest.
(v) Low issuance cost as compared to equity.

Disadvantages of debt finance:

(i) Company has to provide security against the debt.
(ii) Even when there are losses or very low profits, fixed interest still has to be paid.
(iii) In the case of non-payment of interest, the company may be placed on the defaulters list
which may seriously affect the reputation of the company.
(iv) The future borrowing capacity of the company would be reduced as there would be fewer
assets to provide security for future loans.
(v) Issuance of debt affects the risk profile of the company. Hence, as debt increases,
incremental cost of borrowing also increases.

(b) Golf Limited

Year 0 Year 1 Year 2 Year 3 Year 4
Descriptions
--------------------- Rs. in million ------------------------
Incremental contribution margin (W-1) - 157.50 198.45 244.25 295.37
Incremental fixed cost (30×1.05) - (30.00) (31.50) (33.08) (34.73)
Tax depreciation
[{500+25+(12×50%)-60)×25%}] - (117.75) (117.75) (117.75) (117.75)
Net profit / (loss) before tax - 9.75 49.20 93.42 142.89
Tax @ 30% - (2.93) (14.76) (28.03) (42.87)
Tax savings on loss of disposal of old plant
(50m–45m)×30% - 1.50 - - -
Net profit / (loss) after tax - 8.32 34.44 65.39 100.02
Adding back depreciation (Non-cash item) - 117.75 117.75 117.75 117.75
Initial investment [500m+25m+(12m×50%)–45m] (486.00) - - - -
Receipts from residual value - - - - 60.00
Total cash (outflows) / inflows (A) (486.00) 126.07 152.19 183.14 277.77

Discount factor at 12% (B) 1.0000 0.8929 0.7972 0.7118 0.6355

Present value (A×B) (486.00) 112.57 121.33 130.36 176.52
Net present value at 12% NPVb 54.78

Discount factor @ 18% (C) 1.0000 0.8475 0.7182 0.6086 0.5158

Present value (A×C) (486.00) 106.84 109.30 111.46 143.27
Net present value at 18% NPVc (15.13)

IRR = B%+[NPVb/(NPVb–NPVc)×C%–B%)] = 12%+[54.78/(54.78+15.13)×{18%–12%}] 17%

Conclusion: Since IRR is higher than the GL's cost of capital existing plant should be replaced.

W-1: Year 1 Year 2 Year 3 Year 4

--------- Units in million -------------
Production with new plant (6×1.25), (LY×1.04) 7.50 7.80 8.11 8.43
Production with old plant 6.00 6.00 6.00 6.00
Incremental production (A) 1.50 1.80 2.11 2.43

Contribution margin per unit (550–450)×1.05(B) 105.00 110.25 115.76 121.55

Incremental contribution margin (A×B) 157.50 198.45 244.25 295.37

Page 4 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

A.6 Rugby Limited

Cost gap per unit Rs. per unit

Expected relevant cost per unit (15,800,000/10,000) 1,580.00
Less: Target cost per unit (2,000×70%) 1,400.00
Cost gap (1,580–1,400) 180.00

Relevant costs of producing B1-Extra

Rupees
Material cost 10,000×1,040(W-1) 10,400,000
Direct labour cost (W-2) 2,100,000
Variable overheads 10,000×1.5×220(W-4) 3,300,000
Total relevant cost 15,800,000

Rs. per unit of

W-1: Decision to use X or Y
B1-Extra
Cost of Y for each unit of B1-Extra
Material cost (300×2.5) 750.00
Labour cost (Without overtime) (250×50%)×(0.5×2.5) 156.25
Variable factory overheads [(220(W-4)×0.5)×2.5] 275.00
Fixed (existing) (Not relevant) -
Cost of Y for each unit of B1-Extra 1,181.25
Cost of material X for each unit of B1-Extra (520×2.0)(Given) 1,040.00
Extra cost on producing Y internally (Not feasible) 141.25

W-2: Direct labour cost for B1-Extra Rupees

Labour cost – hours (14,000×250×50%) 1,750,000
Labour cost – overtime (1,000(W-3)×1.4×250) 350,000
Total direct labour cost 2,100,000

W-3: Overtime hours required Labour hours

Available labour hours 14,000
Labour hours required (10,000×1.5) 15,000
Excess hours required - Overtime hours (1,000)

W-4: Variable factory overhead rate by high-low method High Low Variable
(a) (b) (a–b)
Factory overheads (Rs.) A 58,280,000 56,960,000 1,320,000
Labour hours B 174,000 168,000 6,000
Variable factory overheads rate per hour (Rs.) (A÷B) 220

Page 5 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

A.7 Tennis Trading Limited

Cash budget for the period from September 2018 to February, 2019
Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19
------------------------ Rs. in million --------------------
Collections
- From cash sales
(Sales of current month(W-1)×30%) - 3.60 4.35 5.10 5.85 7.50
- From credit customers
(Sales of previous month (W-1)×70%) - - 8.40 10.15 11.90 13.65
Total cash inflows A - 3.60 12.75 15.25 17.75 21.15

Payments
Cash paid to suppliers W-2 - - 6.72 9.80 11.55 13.30
Wages and salaries 1.50 2.00 2.00 2.00 2.00 2.00
Other administrative expenses 1.00 1.00 1.00 1.00 1.00 1.30
Commission (Last month sale × 70% ×80%×5%) - - 0.34 0.41 0.48 0.55
Marketing expenses – Fixed - 0.70 0.70 0.70 0.70 0.70
Marketing expenses - Variable
{(2×65%/12(W-1))×Sales} - 1.30 1.57 1.84 2.11 2.71
Initial promotion and advertisement expenses (7×50%) 3.50 3.50 - - - -
Property 5.00 - - - - -
Equipment 2.00 - - - - -
Motor vehicle 1.20 - - - - -
Total cash outflows B 14.20 8.5 12.33 15.75 17.84 20.56

Net cash inflows / (outflows) (A-B) (14.20) (4.90) 0.42 (0.50) (0.09) 0.59
Opening balance 12.00 (2.22) (7.18) (6.82) (7.38) (7.53)
Closing balance for mark-up calculation (2.20) (7.12) (6.76) (7.32) (7.47) (6.94)
Mark-up @ 10% p.a (Closing balance×10%/12) (0.02) (0.06) (0.06) (0.06) (0.06) (0.06)
Closing balance (2.22) (7.18) (6.82) (7.38) (7.53) (7.00)

W-1: Monthly sales

Sales 12.00 14.50 17.00 19.50 25.00
(12+2.5) (14.50+2.5) (17+2.5)

W-2: Purchases
Cost of sale (70% of sales) - 8.40 10.15 11.90 13.65
Less: Opening stock - (6.72) (8.12) (9.52)
Add: Closing stock
(80% of cost of sales of next month till Dec.) 6.72 8.12 9.52 10.92
Total purchases 6.72 9.80 11.55 13.30

(THE END)

Page 6 of 6
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Cost and Management Accounting Certificate in Accounting and Finance
– Autumn 2018

General:

The overall performance in this attempt showed decline as passing ratio dropped to
38.8% as compared to 54.08% in the previous attempt. However, considering the
previous history of this subject, the performance was satisfactory.

The performance suffered mainly on account of Questions 3 and 5. In question 3, 4% of

the candidates secured full marks which showed that it was not difficult. The students
seemed to suffer from lack of practice as in many cases they used lengthy methods where
easier alternatives were available and also made errors because of lack of concentration
rather than lack of understanding.

Question-wise comments:

Question 1

This question carrying 16 marks consisted of two parts. The main requirement of the
question was to prepare budgeted income statement under marginal costing, for a
manufacturer which produced two joint products along with a bye product; and one of the
joint products was processed further and converted into a superior product.

The overall performance remained average as 37.7% of the candidates secured passing
marks. The common errors were as follows:

 While computing joint cost of process I, proceeds from sale of by product ZEE were
correctly deducted but proceeds from sale of normal loss were ignored.
 Normal production loss of 5% was ignored probably because the students failed to
realise that output ratio as given in the question was based on quantities produced
rather than input quantities.
 Joint costs were allocated on the basis of production quantities instead of their NRVs.
Some students allocated joint cost on the basis of NRV per unit instead of total NRV
of the produced units.
 Consolidated budgeted income statement was prepared instead of product wise
income statement.
 Fixed portion of conversion cost was not excluded while calculating contribution
margin for product XI-Plus.

Most of the students did not take part (b) seriously as it only consisted of two marks.
Consequently, either they ignored it altogether or made simple calculation errors.
Page 1 of 4
 Examiners’ Comments on Cost and Management Accounting - Autumn 2018

Question 2

This question required computation of sales required for achieving the target profit and
the production capacity utilisation required to achieve the targeted sales. 44.2%
candidates secured passing marks in this question. However, only few could achieve high
marks as the candidates made several mistakes.

The common mistakes are described below:

 Contribution margin required in next year was computed by considering the existing
fixed cost only. Those who considered the increase in fixed cost applied such increase
on the entire fixed cost whereas it was mentioned in the question that fixed costs
other than depreciation would increase whereas depreciation would remain constant.
 While computing budgeted contribution margin of next year, target profit after tax
was added to fixed costs instead of adding target profit before tax. Further, many
students multiplied target profit after tax by 1.25 to arrive at the target profit before
tax instead of dividing target profit after tax by 0.75 or 75%.
 Instead of computing the contribution margin ratio for the next year based on the
given data, many candidates computed it on the basis of figures related to the latest
year.
 Very few students were able to correctly calculate the amount of discount and made
different types of mistakes.
 Distributor commission was computed on gross sales basis instead of net sales after
discount.
 Capacity utilisation was computed by comparing the sales values instead of sales
volume. In fact, very few students knew how the increase in sales volume was to be
computed i.e. by excluding the impact of price increase from the sales value.

Question 3

According to the scenario given in the question, a component (Beta) was being produced
internally for use in various other products of the company, where labour was a limiting
factor. The requirement was to decide whether to outsource the production of Beta and
utilise the labour to produce product Zee.

Poor performance was noted in this question as majority of the students could not
understand the requirement of the question and only 20% students were able to score
passing marks. However, about 4% candidates secured full marks which showed that the
question was not difficult.

The most common mistakes were as follows:

 Majority of the students tried to solve the question by computing and comparing the
cost per unit of the two products, which was totally incorrect / illogical.
 Most of the students were unable to understand that 15,000 units of product Zee
would be produced by utilising the labour hours which would become available as a
result of outsourcing of Beta.
 Savings in fixed costs were taken as Rs. 17.56 million (18,000 x 870 + 1,900,000)
instead of Rs. 1,900,000.

Page 2 of 4
 Examiners’ Comments on Cost and Management Accounting - Autumn 2018

Question 4

This question on the concept of Economic Order Quantity was well answered and 53%
candidates secured passing marks whereas about 5% candidates secured full marks.
Performance in each part is discussed below:

Question 4(a)

The requirement in this part was to compute the economic order quantity in the given
scenario. The common mistakes were as follows:
 Annual requirement was worked out without considering the quantity which is lost
during storage. Many students computed the quantity lost as 5% of quantity used
instead of 5% of quantity purchased.
 Ordering cost per order was computed on the basis of total cost of the purchase
department instead of its variable cost only.
 Finance cost was ignored in the calculation of holding cost.

Question 4(b)

In this part, the requirement was to compare the costs if order size is equal to 48,000 units
i.e. EOQ and when the order size is increased to 120,000 units to avail the discount. The
common mistakes were as follows:
 In the above comparison, cost to be incurred when order size was 60,000 units was
compared instead of EOQ.
 When the order size was 120,000 units, the cost of financing should have been
reduced by 5% i.e. in line with the reduction in price. This was ignored.

Question 4(c)

This part required practical limitations of the EOQ model. The performance in this part
was below average. Most of the students resorted to guesswork, whereas many students
did not attempt this part.

Question 5

This question consisted of two parts. The overall performance was not satisfactory as
only 26% candidates secured passing marks. However, performance in part (a) carrying 3
marks was good as most of the students were able to mention the advantages and
disadvantages of financing a project through debt as compared to equity. Performance in
part (b) was however quite poor as a number of mistakes were observed in most of the
answers. The most common mistake was that the students did not realise that it was not
mandatory for the company to purchase the new plant as the old plant was also working
satisfactorily. Hence, they needed to compare the option to continue with the existing
plant with the option to purchase the new plant by using incremental revenues and costs.
Instead, they only tried to evaluate the purchase of new plant by taking the revenues and
expenses associated with the new plant without considering the existing situation. Other
common mistakes were as follows:

 IRR was not worked out and conclusion was drawn on the basis of net present value
instead of IRR.
 Tax saving on loss of disposal of old plant was ignored.
Page 3 of 4
 Examiners’ Comments on Cost and Management Accounting - Autumn 2018

Question 6

This question required computation of relevant cost of production of a newly developed

product and determination of the cost gap where required margin was 30%. The
performance in this question remained satisfactory as 46% candidates secured passing
marks. Some of the common errors were as follows:

 While determining whether the company should purchase and use raw material X or
use material Y which was to be developed internally, only the material cost of
producing material Y was considered, whereas labour and factory overheads
associated with the production of Y were ignored.
 Since idle direct labour (14,000 hours) was already being paid at 50%, the relevant
cost of their utilisation was only the additional amount that was to be paid. However,
the additional 1,000 hours (15,000 – 14000) should have been calculated at 40%
above the normal rate. These aspects were not clearly understood and most of the
students made various types of mistakes.
 Overheads were recorded for 1,000 hours only instead of 15,000 hours.
 Required margin was computed as 30% of cost instead of 30% of sale price.

Question 7

This question on cash budgeting was well attempted and 51% candidates secured passing
marks. However, many candidates made simple calculation errors which were not
expected at this stage. Some of the common mistakes are described below:

 Collection from credit sales were taken from October instead of November.
 Payments for purchase of inventory were computed using cost of sales instead of
purchases.
 Mark-up was computed as 10% per month instead of 10% per annum.

THE END

Page 4 of 4
 Cost and Management Accounting
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2018

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1 (a)
Preparation of quantity schedule 2.5

Determination of joint cost of Process I 2.5

Determination of conversion cost of Process II 1.0

Determination of total net realizable values and allocation of joint cost 5.0

Preparation of product wise budgeted income statement under marginal
costing method 3.0

(b)
Calculation of budgeted profit, if offer is accepted 1.5

Conclusion 0.5

A.2 (a) Determination of:

existing variable cost and distributor commission 2.0

revised fixed cost and target profit 3.0

revised net average sales and budgeted contribution margin ratio 3.0

budgeted sales to achieve the target profit 1.0

(b)
Calculation of average increase in selling price 1.0

Determination of capacity to be utilised during next year 1.0

A.3 Determination of:

production of product Zee 2.0

profit from spare capacity – Production of Zee 2.5

difference between cost of internal production and cost of outsourcing of
component Beta 2.5

profit/loss due to outsourcing with conclusion 2.0

A.4 (a)
Computation of:

− holding cost 1.0
− annual requirement of AT 1.5
− cost per order 1.5

Determination of economic order quantity 2.0

(b)
Computation of
− number of orders and average inventory levels 2.0
− revised ordering cost 1.0
− revised holding cost 1.5
− purchase cost 1.0

Conclusion 0.5

(c) 01 mark for each assumption/limitation of economic order quantity 3.0

Page 1 of 2
 Cost and Management Accounting
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2018

Mark(s)
A.5 (a) 0.5 mark for each advantage/disadvantage, if project is financed through debt
finance as against when it is financed through equity 3.0

(b)
Calculation of:

− incremental production 3.0
− incremental contribution margin 3.0
− incremental fixed cost 1.0
− depreciation and adding back to profit after tax 1.5
− tax expense and savings 1.5
− initial investment and receipts from residual value 2.5

Computation of net present values of cash flows 3.0

Computation of IRR 1.0

Conclusion 0.5

A.6
Calculation of:

− variable factory overhead rate 2.5
− overtime hours required 1.0
− cost of substitute material Y for each unit of B1-Extra 3.5

Decision whether to use material X or Y 0.5

Calculation of direct material and direct labour cost for B1-Extra 2.5

Determination of cost gap 1.0

A.7 Computation of:

cash sales and credit sales 2.5

purchases and payment to suppliers 4.0

wages & salaries and other administrative expenses 1.0

commission on sales 2.0

marketing expenses (Fixed and variable) 3.0

initial promotion and advertisement expenses 1.0

initial capital expenditures 1.5

net cash inflows/(outflows) and mark-up on closing balances 3.0

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination
The Institute of 7 March 2019
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Q.1 Tulip Enterprises (TE) manufactures a product Alpha that requires two separate processes,
A and B. Following information has been extracted from the cost records of Process B for
the month of February 2019:
Process A Process B cost
Quantity
cost Material Conversion
Liters ------------- Rs. in '000 -------------
Opening work-in-process – Process B 10,000 1,500 600 400
(80% complete as to conversion)
Cost for the month:
- Received from process A 90,000 14,000 - -
- Added during process B 12,000 - 7,000 5,600
Closing work-in-process – Process B 9,500 - - -
(70% complete as to conversion)

Additional information:
(i) Materials are added at start of the process.
(ii) Normal loss is estimated at 5% of the input. Loss is determined at completion of the
process. Loss of each liter results in a solid waste of 0.75 kg. During the month of
February 2019, solid waste produced was 6,000 kg.
(iii) Solid waste is sold for Rs. 170 per kg after incurring further cost of Rs. 20 per kg.
(iv) TE uses weighted average method for valuation of inventory.

Required:
Prepare accounting entries to record the transactions of process B. (Narrations to accounting
entries are not required) (12)

Q.2 Lily (Private) Limited (LPL) has two factories. LPL manufactures a product Delta in its
Quetta factory. One unit of Delta is assembled from three components P, Q and R which are
produced in the Hub factory. Monthly demand of Delta is estimated at 5,000 units.

Following information is available in respect of each component:

P Q R
Quantity required for one unit of Delta 2 2 3
Machine hours required for producing each component 4 3 5
Cost of production: --------- Rupees ---------

Direct material 900 800 300

Direct labour 270 250 240

Factory overheads 500 700 280

Allocated administrative overheads 40 30 50

Fixed factory overheads are charged at Rs. 20 per machine hour.

Production capacity at Hub factory is restricted to 100,000 machine hours per month. In
order to meet the demand, LPL is considering to purchase P, Q and R from a vendor at
Rs. 1,700, Rs. 1,800 and Rs. 870 per unit respectively.
 Cost and Management Accounting Page 2 of 5

Required:
Determine how LPL can optimise its profit in the above situation. (11)

Q.3 Lotus Enterprises (LE) is engaged in trading of various locally manufactured products.
Hope Limited (HL), a company incorporated outside Pakistan has offered to assist LE in
establishing a manufacturing facility in Pakistan for producing its products. LE has gathered
the following information in respect of HL’s offer:

(i) The manufacturing facility will be set up on a land which was acquired by LE three
years ago for Rs. 40 million. Market value of the land at the commencement of the
project is estimated at Rs. 60 million. Cost of the manufacturing facility is estimated as
under:
Rs. in million
Factory building 30
Plant including its installation 100
Other fixed assets 10

(ii) Sales for the first year of production is estimated at Rs. 500 million. It is expected that
sales demand would increase by 5% in each subsequent year.
(iii) Under the product licensing agreement, HL would be paid a royalty equal to 15% of
sales.
(iv) It is expected that cost of production in the first year of production would be 75% of
sales including fixed costs of Rs. 50 million.
(v) Additional working capital of Rs. 35 million would be required in the first year of
production. Working capital requirement would increase by Rs. 5 million each year.
(vi) Rate of inflation is estimated at 8% per annum with effect from 2nd year onward. It
would affect revenues as well as all the costs (excluding depreciation).
(vii) Factory building would be depreciated at 5% whereas plant and other fixed assets
would be depreciated at 25% using reducing balance method. It is estimated that at the
end of plant’s useful life of four years:

market value of the land would be Rs. 75 million; and

residual value of all the assets would be equal to their carrying value.

(viii) Applicable tax rate is 30% and tax is payable in the year in which the liability arises.
(ix) There would be no temporary or permanent timing difference between accounting
profit and taxable income.
(x) LE’s cost of capital is 15%.

Required:
Compute the net present value (NPV) of the project and advise whether it would be feasible
to accept HL’s offer. (Assume that except where stated otherwise, all cash flows would arise at the
end of the year) (15)

Q.4 (a) On 1 January 2019, Marigold Enterprises (ME) purchased an option for Rs. 10,000
allowing ME to buy 5,000 shares of Aroma Limited (AL) at a price of Rs. 140 per
share, during the next two months. On 12 February 2019, ME purchased the shares at
the agreed price when the market value of AL's shares was Rs. 180 per share.

Required:
Briefly explain each of the following terms and relate each term to the above scenario,
wherever possible:
(i) ‘Call option’ and ‘Put option’ (2.5)
(ii) ‘In the money' and 'Out the money' (2.5)
 Cost and Management Accounting Page 3 of 5

(b) Orchid Limited (OL) is a trading concern. It is planning to implement Economic

Order Quantity model (EOQ) from 1 April 2019. OL deals in four products each of
which is purchased from a different supplier. To compute EOQ for one of its products
Beta, the following data has been gathered:

(i) Actual data for the last year relating to Beta:

Annual sales Units 72,000

Safety stock Units 2,000

Transit losses as % of purchases 10%

Average holding cost per month Rs. 500,000

Average holding cost per month per unit Rs. 80

Number of purchase orders issued for Beta 40

(ii) Total cost of purchase department for the last year amounted to Rs. 4,500,000
which included fixed cost of Rs. 1,350,000. A total of 100 purchase orders were
issued during the last year.

(iii) Projections for the next year:

Increase in sales volume 25%

Safety stock Units 2,500

Transit losses as % of purchases 6%

Impact of inflation on all costs 10%

(iv) Closing inventory (excluding safety stock) varies in line with the sales volume.

Required:
Calculate EOQ for Beta. (07)

Q.5 Daisy Limited (DL) manufactures and markets product Zee. DL uses standard absorption
costing. Following information pertains to product Zee for the month of February 2019.

(i) Data extracted from the budget for the month of February 2019:

Production Units 27,000

Cost of production: Rs. in '000

Direct material X: 16,000 kg @ Rs. 400 per kg 6,400
Y: 14,000 kg @ Rs. 300 per kg 4,200
Direct labour 10,000 hours @ Rs. 220 per hour 2,200
Factory overheads
(including fixed overheads of Rs. 900,000) Rs. 250 per labour hour 2,500

(ii) Actual input ratio of X and Y was 55:45 respectively.

(iii) Direct materials are added at the beginning of the process. Actual process losses were
6% of the output. There is no change in the direct material prices during the month.
(iv) DL increased wages by 12% as against the budgeted increase of 8% which improved
labour efficiency by 5%.
(v) Due to higher than expected inflation, actual factory overhead rate was 6% higher
than the budgeted rate.
(vi) Conversion costs were incurred evenly throughout the process.
(vii) 27,400 units of Zee were transferred to finished goods. There was no opening or
closing work in process. Finished goods inventory at the beginning and closing of the
month was 1,000 units and 1,500 units respectively.
 Cost and Management Accounting Page 4 of 5

Required:
Compute the following:
(a) Material price, mix and yield variances (06)
(b) Labour rate and efficiency variances (04)
(c) Over/under applied overheads and analyse it into:
(i) variable overhead expenditure and efficiency variances
(ii) fixed overhead expenditure and volume variances (06)

Q.6 Rose Industries Limited (RIL) is in process of preparation of its budget for the year ending
31 March 2020. In this respect, following information has been extracted from RIL's
projected financial statements for the year ending 31 March 2019:

Rs. in million
Sales (100% credit sales) 360,000 units 2,800
Cost of sales

Raw material 1,120

Variable conversion cost 280

Fixed conversion cost (including depreciation of Rs. 24 million) 160
Operating cost

Variable (varies with sales volume) 190

Fixed (including depreciation of Rs. 16 million) 45
Closing inventory

Raw material 70

Finished goods 40,000 units 110

Information and projections for the budget year ending 31 March 2020:
(i) The management estimates that profitability can be increased by employing the
following measures:

Introduction of cash sales at 5% less than the credit sales price. This would
increase the total sales volume by 30% whereas credit sales volume would reduce
by 20% as some of the existing customers would shift to cash sales.

Installation of a software that would automatically generate follow-up emails to
the customers and relevant reports for the management. The software having
useful life of 10 years would be operational from 1 April 2019. The software
would cost Rs. 2.5 million and its maintenance cost is estimated at
Rs. 0.15 million per quarter. It is expected that as a result of the use of this
software, RIL would be able to reduce its fixed operating costs by 15%.

As the purchases increase, RIL would negotiate with the suppliers and receive
2% trade discount.

Cost reduction measures would be taken which would save 5% of the variable
conversion and variable operating costs.

(ii) The increase in working capital requirements would be met by arranging a running
finance facility of Rs. 100 million at a mark-up of 10% per annum. It is estimated that
on an average, 90% of the facility would remain utilised during the budget year.
(iii) Effect of inflation on price of raw material and all other costs (excluding depreciation)
would be 10%.
(iv) Closing raw material and finished goods inventories would increase by 8%.

RIL uses marginal costing and follows FIFO method for valuation of inventory.

Required:
Prepare budgeted profit or loss statement for the year ending 31 March 2020. Assume that
except stated otherwise, all transactions are evenly distributed over the year (360 days). (16)
 Cost and Management Accounting Page 5 of 5

Q.7 Following information has been extracted from the projected results of Saffron Limited (SL)
for the year ending 31 March 2019:

Sales Rs. 160 million

Contribution margin 30%
Margin of safety 25%

Information for the next year ending 31 March 2020:

(i) SL is planning to increase its sales by reducing sales prices by 5% and launching a
sales campaign at a cost of Rs. 5 million.
(ii) Cost efficiency measures planned for the next year are expected to reduce variable cost
per unit by 10%.
(iii) Inflation impact on all costs would be 8%, except depreciation. At present,
depreciation is 40% of the total fixed cost.
(iv) Margin of safety would be maintained at 25%.

Required:
(a) Prepare budgeted statement of profit or loss for the year ending 31 March 2020 based
on the above projections. (06)
(b) Compute the percentage increase in sales volume. (02)

Q.8 Jasmine Limited (JL) manufactures various products according to customers' specifications.
In March 2019, JL is required to submit a tender for supply of 5,000 plastic bodies of a
washing machine. In this respect, following information has been gathered:

(i) The production would be carried out on JL’s plant at its Sialkot factory. Cost of the
plant is Rs. 3,600,000. Its estimated useful life is 96,000 hours. Each plastic body
(unit) would require 2 machine hours.
(ii) Production would be carried out in ten batches of 500 units each. Cost per unit for the
first batch has been estimated as under:

Rupees
Direct material 2 kg 150
Direct labour 3 labour hours 300
*Overheads (based on direct labour hours):

Variable overheads 240

Fixed overheads 360
*Overheads do not include depreciation of the plant

(iii) Direct material consumption would reduce by 5% in each subsequent batch up to the
third batch and would become constant thereafter.
(iv) Applicable learning curve effect is 95% but it will remain effective for the first six
batches only. The index of 95% learning curve is –0.074.

Required:
Compute the bid amount that JL should quote to earn 30% contribution margin. (10)

(THE END)
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Ans.1 Tulip Enterprises

Accounting entries for Process B
Debit Credit
Date Description
--------- Rs. in '000 ---------
1 WIP - Process B 26,600
WIP - Process A 14,000
Raw material 7,000
Labour and overheads 5,600
2 Scrapped inventory (Normal loss) [C×0.75×170] 653
Bank [C×0.75×20] 77
WIP - Process B (Normal loss) (W-1) 576
3 Scrapped inventory (Abnormal loss) [D×0.75×170] 367
Profit or loss account Balancing 448
Bank [D×0.75×20] 43
WIP - Process B (Abnormal loss) (D×H) 772
4 Finished goods (E×H) 25,366
WIP - Process B 25,366

W-1: Equivalent production and cost per liter - Weighted average method
Quantity Equivalent units
Schedule Material Conversion
------------------ Liters ------------------
Opening WIP (80% complete as to conversion) 10,000
Input for the month - Process A 90,000
Process B 12,000
Total input A 112,000
Closing WIP (70% complete as to conversion) B 9,500 9,500 6,650
Normal loss (A–B)×5% C 5,125 - -
Abnormal loss [(6,000÷0.75)–C] D 2,875 2,875 2,875
Transferred to finished goods Balancing E 94,500 94,500 94,500
F 112,000 106,875 104,025

Process A & Process B

material conversion
costs costs
------ Rs. in '000 ------
Opening WIP Process A 1,500
Process B 600 400
Cost for the month Process A 14,000
Process B 7,000 5,600
Scrapped inventory (Recovery from normal scrapped units) (C×0.75)×(170–20) (576)
Total cost G 22,524 6,000

Rupees
G÷F×1,000 210.74 57.68
Total - Cost per liter H 268.42

Page 1 of 8
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Ans.2 Lily (Private) Limited

In-house production / External purchase
P Q R
Quantity required to produce one unit of Delta A 2 2 3

Machine hours to produce the components B 4 3 5

Components required to produce 5,000 units of Delta (5,000×A) C 10,000 10,000 15,000

Relevant production cost per component: ----------- Rupees -----------

Direct material 900 800 300
Direct labour 270 250 240
Variable overheads 500–(B×20); 700–(B×20); 280–(B×20) 420 640 180
Fixed overheads (Not relevant) - - -
Allocated administrative overheads (Not relevant) - - -
Total relevant cost D 1,590 1,690 720

External purchase price per component E 1,700 1,800 870

Savings per component in case of in-house production E–D = F 110 110 150
Savings per machine hour for in-house production F÷B 27.50 36.67 30.00
Priority for in-house production 3rd. 1st. 2nd.
In-house production in sequence of priority Units G - 10,000 14,000
Use of available hours G×B - 30,000 70,000
External purchase Units C–G 10,000 - 1,000

Page 2 of 8
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Ans.3 Lotus Enterprises

Feasibility to accept HL’s offer for establishment of manufacturing facility in Pakistan

Year 0 Year 1 Year 2 Year 3 Year 4

-------------------- Rs. in million --------------------
Sales - (Increase of 5% in volume & 8% in price) 500.00 567.00 642.98 729.14
Royalty (15% of sales) (75.00) (85.05) (96.45) (109.37)

Variable cost (500×0.75)–50 (325.00)

(325×1.05×1.08) (368.55) (417.94) (473.94)

Accounting/tax depreciation:
- Factory building at 5% A (1.50) (1.43) (1.36) (1.29)
- Plant & other fixed assets at 25% B (27.50) (20.63) (15.47) (11.60)
Fixed cost excluding depreciation (50–A–B) (21.00)
21×1.08 (22.68) (24.49) (26.45)
Taxable profit C 50.00 68.66 87.27 106.49
Tax at 30% C×30% (15.00) (20.60) (26.18) (31.95)
Net profit 35.00 48.06 61.09 74.54
Non-cash expenses – Depreciation (A+B) 29.00 22.06 16.83 12.89
Market value of the land (60.00) 75.00
Factory building (30.00) 24.42

Plant and its installation & other assets (110.00) 34.80

Working capital (35.00) (5.00) (5.00) 45.00

D (200.00) 29.00 65.12 72.92 266.65

Present value factor 15% E 1.00 0.87 0.76 0.66 0.57

Present value at 15% D×E (200.00) 25.23 49.49 48.13 151.99

Net present value 74.84

Conclusion:
Since the net present value is positive, it is feasible for LE to accept HL’s offer.

Page 3 of 8
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Ans.4 (a) (i) 'Call option' and 'Put option'

An option to buy something in the future is called a ‘call option’.

An option to sell something in the future is called a ‘put option’.

In the given situation, option is for purchase of shares, therefore, it is a ‘call

option’.

(ii) 'In the money' and 'Out the money'

When the market price of the share is such that by exercising the option, the
option holder makes a profit, the option is said to be ‘in the money’.

When the market price of the share is such that by exercising the option, the
option holder suffers a loss, the option is said to be ‘out the money’.

By exercising the option, ME made a profit of Rs. 38 (180–140–2) per share,

therefore, the option is said to be ‘in the money’.

(b) Orchid Limited

Economic order Quantity (EOQ) for Beta

Annual demand (Purchases): Units

Projected sales 72,000×1.25 90,000
Opening stock - including safety stock (500,000÷80) (6,250)
Closing stock - including safety stock [(6,250–2,000)×1.25]+2,500 7,813
Purchases - net of transit losses 91,563

Purchases including transit losses of 6% 91,563÷0.94 97,407

Ordering cost per order: Rupees

Variable cost (4,500,000–1,350,000)×(1.1÷100) 34,650

Holding cost per unit per annum 80×1.1×12 1,056

Economic Order Quantity (EOQ): Units

SQRT[(2×Annual demand × Ordering cost per order)÷Carrying cost per unit]
SQRT[(2×97,407×34,650)÷1,056] 2,528

Page 4 of 8
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Ans.5 Daisy Limited

Variances for the month of February 2019
Units
Budgeted production A 27,000
Actual production B 27,400
Allowable production from actual input A÷D×E C 26,140
kg
Total budget input quantity X 16,000+Y 14,000 D 30,000
Total actual input quantity B×1.06 E 29,044
Rs.
Standard material cost per finished unit (6,400,000+4,200,000)÷A F 392.59
Hours
Allowable hours for actual production 10,000÷A×B G 10,148
Actual hours G×0.95 H 9,641
Rs.
Standard Fixed overhead rate per hour 900,000÷10,000 J 90
Standard variable overhead rate per hour 250–90 K 160

(a) Material mix variance

Fav/(Adverse)
Actual input in standard mix Actual input in Rate per kg
Description variance
ratio (kg) 55:45 ratio (kg) (Rs.)
(Rs. in '000)
X 16,000÷D×E 15,490.13 E×0.55 15,974.20 400.00 (193.63)
Y 14,000÷D×E 13,553.87 E×0.45 13,069.80 300.00 145.22
Total E 29,044.00 E 29,044.00 (A) (48.41)

Material yield variance:

(Actual yield - Allowable yield from actual input)×Standard material cost per unit
[(B–C)×F] (F) 494.66
Material price variance:
No variance as there is no change in prices of material. -

(b) Labour rate variance:

(Standard rate - Actual rate) × Actual hours [220–(220÷1.08×1.12)]×H (A) (78.56)

Labour efficiency variance:

(Allowable hours - Actual hours) × Standard rate [G–H×220] (F) 111.54

(c) Overheads over/(under) applied

Applied overheads G×250 2,537.00
Actual overheads:
- Variable overheads H×K×1.06 1,635.11
- Fixed overheads 900×1.06 954.00
2,589.11
Overheads under applied (A) (52.11)

Analysis of under applied overheads:

(i) Variable overhead expenditure variance:
(Standard variable overheads rate – Actual variable overhead rate) × Actual
hours
[K–(K×1.06)×H] (A) (92.55)
Variable overhead efficiency variance
(Allowable hours – Actual hours) × Standard variable overhead rate per hour
(G–H)×K (F) 81.12

Page 5 of 8
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

(ii) Fixed overhead expenditure variance 900,000×6% (A) (54.00)

Fixed overhead volume variance:

(Allowable hours – Budgeted hours)×Standard fixed overhead rate per hour
(G–10,000)×J (F) 13.32

Ans.6 Rose Industries Limited

Budgeted profit or loss statement for the year ending 31 March 2020
Rs. in million
Sales – credit 2,800×0.8 2,240.00
Sales – cash [(2,800×1.3)–2,240]×0.95 1,330.00
3,570.00
Variable cost of goods sold:
Raw material consumption (W-1) (1,574.84)
Variable conversion cost [280÷360,000×471,200(W-2)]×0.95×1.1 (382.98)
Manufacturing cost (1,957.82)
Opening finished goods (110.00)
Closing finished goods (W-3) 179.99
Variable cost of goods sold (1,887.83)
Gross contribution margin 1,682.17
Variable operating cost (190×1.30)×0.95×1.1 (258.12)
Net contribution margin 1,424.05
Fixed conversion cost (160–24)×1.1+24 (173.60)
Fixed operating cost [(45–16)×0.85×1.1+16] +(2.5×10%)+(0.15×4) (43.97)
10% mark-up on running finance facility 100×90%×10% (9.00)
Net profit 1,197.48

W-1: Budgeted raw material consumption Rs. in million

Consumption at last year's price 1,120÷360,000×471,200(W-2) 1,465.96
Use of opening raw material 70.00
Use of current purchases [(1,465.96–70)×1.10]×0.98 1,504.84
1,574.84

W-2: Budgeted production quantity Units

Sales 360,000×1.3 468,000
Finished goods inventory - closing 40,000×1.08 43,200
- opening (40,000)
471,200

W-3: Finished goods inventory valuation using marginal costing and FIFO Rs. in million
Raw material cost 43,200×(1,120÷360,000)×1.1×0.98 144.88
Variable conversion cost 43,200×(280÷360,000)×1.1×0.95 35.11
179.99

Page 6 of 8
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Ans.7 (a) Saffron Limited

Budgeted statement of profit or loss for the year ending 31 March 2020

Rs. in million
Sales 152(W-2)÷43.14×56.97 200.73
Variable cost Balancing (143.76)
Contribution margin (CM) 56.97
(at a safety margin of 25% and fixed cost of Rs. 42.73 million) [42.73(W-1)÷0.75]
Fixed cost (W-1) (42.73)
Net profit 14.24

W-1: Fixed Cost

- For 2019 (160×0.3×0.75) 36.00
- For 2020:
Depreciation (36×0.4) 14.40
Other fixed cost (36-14.40)×1.08+5 28.33
42.73

W-2: CM on revision of sales price and variable cost Rs. in million

Sales (160×0.95) 152.00
Variable cost (160×0.7)×1.08×0.9 (108.86)
Contribution margin 43.14

(b) Increase in sales volume %:

Budgeted sales of 2019-20 at 2018-19 prices (200.73÷0.95) 211.29
Increase in sales volume (%) (211.29–160)÷160 32.06%

Ans.8 Jasmine Limited

Computation of bid amount to earn 30% contribution margin
Rs. in '000
Direct material cost:
For first 3 batches 75,000+ (75,000×0.95)
+[75,000×(0.95)2] 214
For last 7 batches 75,000×(0.95)2×7 474
A 688
Direct labour cost:
For first 6 batches (W-1) 7,882×100 788
For last 4 batches (W-1) 1,224×4×100 490
B 1,278
Overheads
Variable overheads based on direct labour hours 240÷3×1,278 1,022
Variable overheads based on machine hours (molding plant depreciation)
3,600÷96,000×(5,000×2) 375
1,397
Fixed overheads -
C 1,397

Bid amount to earn 30% contribution margin (A+B+C)÷0.7 4,804

W-1: Direct labour hours at 95% learning curve Hours

For the first 6 batches 6×(500 units × 3 hours)×(6)–0.074 7,882
For the first 5 batches 5×(500 units × 3 hours)×(5)–0.074 (6,658)
For the 7th. batch and onwards 1,224
Page 7 of 8
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2019
(THE END)

Page 8 of 8
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

CERTIFICATE IN ACCOUNTING AND FINANCE (CAF) EXAMINATIONS

EXAMINERS’ COMMENTS

SUBJECT SESSION
Cost & Management Accounting (CMA) Spring 2019

Passing %

Question-wise
Overall
1 2 3 4 5 6 7 8
49% 77% 88% 39% 03% 27% 09% 44% 41%

General comments

Overall performance in this attempt was slightly improved as passing ratio increased from
39% to 41%. However, performance in Q. 5 – Variance analysis and Q. 7 – Cost profit
volume (CPV) analysis was disappointing as evident from the above question-wise pass %.

Question-wise common mistakes observed

Question 1

 Normal loss was not correctly computed as students did not deduct closing WIP
quantity from the total input.
 While computing equivalent units, weighted average method of valuation of inventory
was not applied correctly as opening WIP quantity was considered to arrive at
equivalent units.
 While computing total cost of process B, students neither deducted recovery from
normal scrapped units nor accounted for the opening WIP cost of processes A and B.
 While preparing accounting entries for process B:
– transfer cost of WIP (process A) to WIP (process B) was ignored; and
– abnormal loss was accounted for incorrectly by not recording the difference of cost
of abnormal loss units and recovery on sale thereof in profit or loss account.

Question 2

 Fixed overheads/allocated administrative overheads were taken into consideration. In

fact, these were irrelevant for decision making.
 Production priority was determined on the basis of savings per component instead of
limiting factor of machine hours.

Question 3

 Variable costs were incorrectly computed by deducting the fixed costs of Rs. 50 million
from each year’s total costs.
 Fixed cost was computed without deducting the depreciation.

Page 1 of 3
 Examiners’ comments on Cost and Management Accounting – Spring 2019

 Amount of tax payments was computed after taking into account the working capital
requirement, market value of the land and residual value of the assets at the end of
project life. In fact, these items were not subjected to tax shield.
 Recovery of working capital at the end of the tenure was not shown.

Question 4(a)

Good performance was observed in this question.

Question 4(b)

 The annual demand (purchase) of Beta was not computed correctly. In fact, the
computation of purchases required adjustment of opening and closing stock in projected
sales and the resultant thereof was required to be adjusted for transit losses.
 While computing holding cost per unit, holding cost was not multiplied with 12 months
to arrive at annual holding cost.

Question 5

 Finished goods inventory at the beginning and closing of the month were incorrectly
adjusted to the goods transferred to finished goods to arrive at actual production.
 Allowable raw material quantities and allowable hours required for actual units
produced were not computed correctly.
 Students wasted time in calculating at material price variance. They disregarded the
fact, clearly mentioned in the question, that there is no change in the direct material
prices but still many students made calculation for material price variance.
 While computing labour variances, budgeted labour hours of 10,000 for the month of
February 2019 were used instead of using the allowable labour hours computed on the
basis of actual production by incorporating the labour efficiency of 5%.
 Over/under applied overheads were not computed. Students restricted their answers to
computation of overhead variances.
 While computing overhead variances, per unit and hourly overhead rates were
interchangeably used.

Question 6

 Students were not able to compute the sales amount correctly. In fact, credit sales could
be computed by reducing the existing sales by 20%. Secondly, cash sale could be
computed by increasing the existing sales by 30% and then deducted the revised credit
sale to arrive at cash sale. Thirdly, cash sales could then be reduced by 5% being the
adjustment of sale price.
 Instead of computing the raw material consumption and variable conversion costs on
the basis of budgeted production quantity, the costs were computed in line with
percentage increase in sales. Other common errors in computation of costs were
ignoring the adjustments of opening and closing finished goods inventories in the
budgeted production quantity and not following the FIFO method of valuation.
 Opening raw material was not taken into consideration in the raw material costs.
Consequently, price increase and trade discount would only be applicable on additional
material to be purchased.

Page 2 of 3
 Examiners’ comments on Cost and Management Accounting – Spring 2019

 Mark-up on running finance facility was computed on 100% of the running finance
facility available, instead of utilized facility of 90%.

Question 7(a)

The revised contribution margin was not computed correctly by applying given margin of
safety of 25% to revised fixed cost. Consequently, revised sales and variable costs were not
worked out correctly.

Question 7(b)

While computing the volume increase percentage, the reduction in sales price was ignored.
Resultantly, increase in sales revenue was computed instead of increase in sales volume.

Question 8

 Direct material costs were taken at Rs. 150,000 per batch instead of Rs. 75,000 per
batch i.e. Rs.150 per unit multiply by 500 units being the batch size.
 Learning curve method was not correctly applied for computation of labour hours.
Further, per hour cost was taken at Rs. 300 instead of Rs.100.
 While computing bid amount at 30% contribution margin, 30% profit on variable cost
was added instead of grossing up the variable cost i.e. by dividing the variable cost by
70%, to arrive at the bid amount.

The End

Page 3 of 3
 Cost and Management Accounting
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2019

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1
Preparation of accounting entries to record Process B transactions 5.0

Preparation of quantity schedule and equivalent production liters 3.5

Computation of cost per liter 3.5

A.2
Computation of component-wise relevant cost per unit 4.0

Computation of savings per machine hour for in-house production and
determination of priority for in-house production 4.5

Determination of units to be produced in-house and purchased externally 2.5

A.3
Determination of project investment value at commencement and end of the

project 3.0

Year-wise computation of sales, variable costs and fixed costs (other than
depreciation) incorporating effect of inflation and volume 7.0

Calculation of depreciation and adding it back to profit after tax 3.0

Computation of net present value 1.5

Conclusion 0.5

A.4 (a) (i)
01 mark for explanation of each term 2.0

Relating the term to the given scenario 0.5

(ii)
01 mark for explanation of each term 2.0

Relating the term to the given scenario 0.5

(b)
Computation of:

– annual demand 3.5
– ordering cost per order 1.5
– holding cost per unit per annum 1.0

Determination of EOQ 1.0

A.5 (a) 02 marks each for material price, mix and yield variance 6.0

(b) 02 marks each for labour rate and efficiency variance 4.0

(c)
01 mark each for applied and actual overheads 2.0

01 mark each for variable overhead expenditure and efficiency variance 2.0

01 mark each for fixed overhead expenditure and volume variance 2.0

Page 1 of 2
 Cost and Management Accounting
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2019

Mark(s)
A.6 Computation of budgeted:

sale amount 1.5

production quantity 1.5

raw material consumption 3.0

variable conversion and operating costs 4.0

fixed conversion and operating costs 3.0

closing finished goods using marginal costing and FIFO 3.0

A.7 (a) Computation of:

sales 1.5

variable and fixed costs 3.0

contribution margin after revision in sales price and variable cost 1.5

(b) Computation of percentage increase in sales volume 2.0

A.8 Computation of:

direct material cost 2.0

direct labour cost using learning curve effect of 95% 4.0

overheads 3.0

bid amount to earn 30% contribution margin 1.0

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination
The Institute of 5 September 2019
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Q.1 Macchiato (Private) Limited (MPL) is planning to launch a new business of manufacturing
carpets and rugs. The extracts from the projected statement of profit or loss of the new
business are given below:

Rs. in '000
Sales 500,000
Cost of goods sold (360,000)
Gross profit 140,000
Operating expenses (90,000)
Profit before taxation 50,000
Taxation @ 35% (17,500)
Profit after taxation 32,500

Selling prices of carpets and rugs would be Rs. 24,000 and Rs. 4,000 per unit with
contribution margin of 25% and 20% respectively. Carpets and rugs would be sold in the
ratio of 1:4.

Required:
(a) Compute the sales revenue at break-even and the margin of safety in units. (07)
(b) Determine the number of carpets and rugs that must be sold if MPL wishes to
maintain profit after taxation equivalent to 10% of sales. (05)

Q.2 Latte Limited (LL) is considering to accept a five-year proposal from Mocha Limited (ML)
for supply of a product namely K44. ML would use K44 as a raw material for its main
product. Details of the proposal and related matters are summarized as follows:

(i) Initial investment in the specialized machinery is estimated at Rs. 60 million. At the
beginning of year 4, LL would require a major overhauling on this machinery
amounting to Rs. 10 million. The machinery can be disposed of at 80% of written
down value at the end of project.
(ii) In year 1, LL would supply 18,000 units of K44 to ML at Rs. 5,000 per unit. The
supply would increase by 5% per annum from year 2 onward.
(iii) Variable cost is estimated at Rs. 4,000 per unit for year 1. Fixed cost associated with
the proposal (other than depreciation) is expected to be Rs. 250,000 per month, out of
which Rs. 50,000 would be allocated overheads.
(iv) Impact of inflation on revenues as well as all costs would be 7%.
(v) Tax rate would be applicable at 30% and tax would be payable in the year in which
liability would arise. Tax depreciation on machinery would be allowed at the rate of
25% under reducing balance method.
(vi) The cost of capital of LL is 15%.

Assume that except stated otherwise, all cash flows would arise at the end of year.

Required:
(a) Using net present value method, advise whether LL should accept the proposal. (11)
(b) Determine the minimum discount rate at which the proposal would be acceptable to
LL. (03)
 Cost and Management Accounting Page 2 of 4

Q.3 Frappe Limited (FL) manufactures and sells a single product Sigma. Following information
is available:

During the year ended 31 December 2018, FL sold 5,500 units at Rs. 25,000 per unit.

Details of opening and closing work in process and finished goods are as follows:

Percentage of completion
Number of units
Direct material Conversion costs
Work in process:
Opening 400 100% 60%
Closing 800 100% 40%
Finished goods:
Opening 600 - -
Closing 900 - -

The work in process account had been debited during the year with the following
costs:
Rs. in '000
Direct material 82,350
Conversion costs (including fixed overheads of Rs. 16.762 million) 44,217

Variable operating costs amounted to Rs. 500 per unit whereas fixed operating costs
for the year were Rs. 7,500,000.

Effective from 1 January 2018, direct material price and conversion costs were
increased by 5% and 10% respectively.

FL uses FIFO method for valuation of its inventories.

Required:
(a) Prepare statements of equivalent units and cost per equivalent unit. (04)
(b) Prepare profit statements on the basis of:
(i) marginal costing (08)
(ii) absorption costing (07)
(Round off all figures to the nearest rupee amount)

Q.4 Following information pertains to Espresso Limited (EL), engaged in manufacturing of a

product ‘Rita’:
(i) Extracted from last year’s records:

EL budgeted to produce 16,000 units of Rita by utilizing 32,000 budgeted machine
hours.

The absorption rate for fixed overheads was determined at Rs. 1,250 per machine
hour.

Actual fixed overheads incurred were Rs. 41.20 million that included depreciation
of Rs. 12.50 million.

The actual production was 17,000 units by utilizing 32,400 machine hours.
(ii) EL absorbs fixed overheads by using pre-determined machine hour rate.
(iii) For the next year, the management of EL has made the following projections:

Production and demand for Rita is expected to increase by 15%. EL is intending
to buy a new automated machinery costing Rs. 7.3 million to increase the actual
efficiency by 25%. The new machinery would have a useful life of 8 years with
residual value of Rs. 1 million.

Existing fixed overheads other than depreciation are expected to increase by 10%.
Additional supervision cost would need to be incurred at Rs. 70,000 per month.

Required:
(a) Compute under/over absorption of fixed overheads for the last year and analyse it into
fixed overhead expenditure, efficiency and capacity variances. (06)
(b) Determine fixed overheads absorption rate for the next year. (04)
 Cost and Management Accounting Page 3 of 4

Q.5 Americano Limited (AL) is engaged in the assembling and marketing of three products,
Alpha, Beta and Gamma. AL is in the process of preparation of product-wise projected
statement of contribution margin for the next financial year commencing from
1 January 2020. Following information in this regard is available:

(i) Total sales of AL for the year ending 31 December 2019 are estimated to be
Rs. 28 million. The current sales price and ratio of sales for each of three products are
given below:

Alpha Beta Gamma

Sale price per unit (Rs.) 8,000 12,000 10,000
Ratio of quantities sold 4 1 2

With effect from 1 January 2020, AL is intending to increase the selling prices by 10%.
The demand would decline by 2% due to increase in sale prices.

(ii) The details of components that are used in each product are as follows:

Components
Description
A B C
----------- Units -----------
Alpha 4 2 5
Beta 5 4 6
Gamma 4 3 4
------------ Rs. ------------
Purchase price per component 45 60 30

The suppliers have informed AL that prices of components would increase by 15%
with effect from 1 April 2020.

(iii) All products pass through assembling and finishing departments. Details of labour
costs at each department are as follows:
Assembling Finishing
Description
Direct labour (Hours)
Alpha 10 15
Beta 12 20
Gamma 10 18
------------ Rs. ------------
Rate per hour 50 40

(iv) Factory overheads are estimated at 60% of direct labour cost. 40% of factory
overheads are fixed.

Required:
Prepare a product-wise statement showing projected contribution margin for the year ending
31 December 2020. (16)

Q.6 Reporting perspective is an integral part of IFAC Sustainability Framework. It includes key
considerations on how professional accountants can help improving the usefulness and
relevance of their organization’s external communications.

Required:
State any two key considerations for professional accountants as mentioned in each of the
following sections of reporting perspective:
(a) Developing an organizational reporting strategy (02)
(b) Determining materiality (02)
(c) External review and assurance of sustainability disclosures (02)
 Cost and Management Accounting Page 4 of 4

Q.7 (a) Explain briefly what is meant by the term ‘inventory control’. Suggest and explain the
method of stock valuation which should be used in times of fluctuating prices. (05)

(b) Cappuccino Limited (CL), incorporated in January 2018, is engaged in manufacturing

and marketing of two types of products, S1 and S2. Due to strict quality standards at
CL, the ratio of damaged goods is high. Damaged units of S1 can only be identified at
100% completion whereas damaged units of S2 can be identified at 60% completion.
Damaged units of S1 and S2 can be sold at 80% and 50% of market prices respectively.

CL’s production department believes that damaged units can be sold at full market
price after incurring per unit rectification costs of Rs. 150 and Rs. 450 on S1 and S2
respectively.

Additional information:

Following information has been extracted from CL’s latest records:

S1 S2
--------- Units ---------
No. of units sold 347,000 218,000
Closing inventory 47,000 34,000
------- Rs. in '000 -------
Sales 492,800 463,760
Cost of goods manufactured 431,430 349,370
Closing inventory (51,465) (48,287)
Cost of goods sold 379,965 301,083
Gross profit 112,835 162,677

Closing inventory includes units of S1 and S2 damaged during the year i.e.
15,000 and 22,500 units respectively.

Fixed costs are incurred at the beginning of period and variable costs are incurred
throughout the manufacturing process.

Cost of goods manufactured includes fixed cost of Rs. 80 million which is
allocated on the basis of total units produced.

Selling expenses during the period was 1% of sales.

Required:
(i) Advise CL whether it should sell damaged units of each product with or without
further processing. (12)
(ii) Determine value of damaged units of S1 and S2 included in the closing
inventories, under each of the following situations:
– If CL opts for further processing
– If CL does not opt for further processing (06)

(THE END)
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019

A.1 (a) Rs. in '000

Sales [given] 500,000
Less: Variable costs (W-1) (385,000)
Contribution 115,000

Combined CM [Contribution/Sales] 23.0%

Fixed costs (W-3) 65,000

Break-even sales [Fixed costs/Combined CM] 282,609

Sales at BE Existing sales Safety units

Carpets Break-even sales/D×B (W-2) 7,065 12,500 5,435
Rugs Break-even sales/D×B (W-2) 28,261 50,000 21,739

(b) Sales revenue to yield desired net margin [65,000 (W-3)/0.0762 (W-4)] 853,018,373
Carpets Sales/D×B 21,325
Rugs 21,325×4 OR Sales/D×B 85,300

WORKINGS:
W-1: Variable costs Carpets Rugs Total
Selling price per unit [given] 24,000 4,000
Contribution [Selling price × CM%] (6,000) (800)
Variable cost per unit 18,000 3,200

Number of units sold (W-2) 12,500 50,000

Total variable costs (Rs. in '000) 225,000 160,000 385,000

W-2: Number of units sold Carpets Rugs Total

Sales (Rs.) A 500,000,000
Ratio B 1 4
Sale price (Rs.) C 24,000 4,000
Weighted average ratio D=B×C 24,000 16,000 40,000
No. of units sold A/D×B 12,500 50,000

W-3: Fixed costs Rs. in '000

Cost of goods sold [given] 360,000
Operating expenses [given] 90,000
Total costs 450,000
Less: Variable costs (W-1) (385,000)
Fixed costs 65,000

W-4: Net margin Rs. in '000

Contribution margin [From (a)] 23%
Desired retained profit [0.1/(1–0.35)] 15.38%
Net margin [CM– desired retained profit] 7.62%

Page 1 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019

A.2 (a) Net present value method:

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
------------------------------- Rs. in '000 -------------------------------
Sales revenue
[18,000×5,000×1.05×1.07] - 90,000 101,115 113,603 127,633 143,396
Variable cost (114,716
[18,000×4,000×1.05×1.07] - (72,000) (80,892) (90,882) (102,106) )
Fixed cost
[(250,000–50,000)×12×1.07] - (2,400) (2,568) (2,748) (2,940) (3,146)
Depreciation [WDV×0.25]
- (15,000) (11,250) (8,438) (8,828) (6,621)
Loss on disposal [WDV×0.2] - - - - - (3,973)
Profit before tax - 600 6,405 11,535 13,759 14,940
Income tax @30% - (180) (1,922) (3,461) (4,128) (4,482)
Profit after tax - 420 4,483 8,074 9,631 10,458
Cost of machine (60,000) - - - - -
Overhauling cost - - - (10,000) - -
Residual value [WDV×0.8] - - - - - 15,890
Addback depreciation - 15,000 11,250 8,438 8,828 6,621
Addback loss on disposal - - - - - 3,973
Net cash flows (60,000) 15,420 15,733 6,512 18,459 36,942

Discount factor @ 15% 1.00 0.87 0.76 0.66 0.57 0.50

Present value (60,000) 13,415 11,957 4,298 10,522 18,471

Net present value (1,337)

Conclusion:
Since expected NPV is negative, LL should not accept the proposal.

(b) Determination of minimum discount rate:

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
------------------------------- Rs. in '000 -------------------------------
Net cash flows [from part (a)] (60,000) 15,420 15,733 6,512 18,459 36,942

Discount factor @ 10% 1.00 0.91 0.83 0.75 0.68 0.62

Present value (60,000) 14,032 13,058 4,884 12,552 22,904
Net present value (NPV) 7,430

IRR = A% + [NPVa/NPVa–NPVb)×(B%–A%)]
IRR = 10% + [7,430 /7,430–(1,337)×(15%–10%)]
IRR = 14.24% (Minimum discount rate)

A.3 (a) Statement of equivalent units Direct Variable Fixed

Material CC overheads
Completed units [5500+900–600] 5,800 5,800 5,800
Closing WIP [800×Completion%] 800 320 320
Less: Opening WIP [400×Completion%] (400) (240) (240)
Equivalent units A 6,200 5,880 5,880

Statement of cost per equivalent unit Direct Material Variable CC Fixed overheads
Total cost
[Conversion cost–Fixed overheads] [B] 82,350 (Bal.) 27,455 16,762
Cost per equivalent unit C= B/A 13,282 4,669 2,851

Page 2 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019

(b) Marginal costing profit statement Rs. in '000

Sales [5500×25000] 137,500
Less: Variable cost of sales
Opening WIP (W-1) 6,079
Opening finished goods (W-2) 10,137
Variable cost of production (82,350+27,455) 109,805
Closing WIP (W-1) (12,120)
Closing finished goods (W-2) (16,156)
(97,745)
Less: Variable operating costs [5,500×500] (2,750)
Contribution 37,005
Less: Fixed costs [16,762+7,500] (24,262)
Net profit 12,743

Absorption costing profit statement Rs. in '000

Sales [5,500×25,000] 137,500
Less: Cost of goods sold
Opening WIP (W-1) 6,701
Opening finished goods (W-2) 11,692
Production cost (82,350+27,455+16,762) 126,567
Closing WIP (W-1) (13,032)
Closing finished goods (W-2) (18,722)
(113,206)
Gross profit 24,294
Less: Selling and administrative costs
Variable operating costs [5,500×500] 2,750
Fixed operating costs [given] 7,500
(10,250)
Net profit 14,044

W-1: Cost of opening and closing WIP Direct Variable Total Fixed Total
Material CC VC OHs costs
Closing WIP
Cost per EPU [From (a)] (Rs.) 13,282 4,669 17,951 2,851 20,802
Equivalent units [From (a)] 800 320 320
Total cost (Rs. in '000) 10,626 1,494 12,120 912 13,032
Opening WIP
Cost per EPU [Current cost/1.05,1.1] (Rs.) 12,650 4,245 16,895 2,592 19,487
Equivalent units [From (a)] 400 240 240
Total cost (Rs. in '000) 5,060 1,019 6,079 622 6,701

W-2: Finished goods Direct Variable Total Fixed Total

Material CC VC OHs costs
Opening (Qty.) (given) 600 600 600
Opening (Rs. in '000)(12650, 4245, 2592 × 600) 7,590 2,547 10,137 1,555 11,692
Closing (Qty.) (given) 900 900 900
Closing (Rs. in '000) (13282, 4669, 2851× 900) 11,954 4,202 16,156 2,566 18,722

A.4 (a) Under/(Over) Absorption of Fixed Production Overheads

Rs. in '000
Actual overheads [given] 41,200
Absorbed overheads [17,000×2×1,250] 42,500
Over absorbed overheads 1,300

Fixed Overhead Expenditure Variance Rs. in '000

Page 3 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019

Budgeted overheads [32,000×1,250] 40,000

Actual overheads [given] 41,200
Adverse variance A (1,200)

Fixed Overhead Efficiency Variance

Actual hours 32,400
Allowable hours [17,000 × 2(i.e.32,000/16,000)] 34,000
Variance 1,600
Absorption rate 1,250
Favorable variance (Rs. in '000) B 2,000

Capacity Variance
Budgeted hours 32,000
Actual hours 32,400
Variance 400
Absorption rate 1,250
Favorable variance (Rs. in '000) C 500

Total fixed production overhead variance (Rs. in '000) A+B+C 1,300

(b) Hours
Projected hours required [32,400×1.15×0.75] A 27,945

Rs. in '000
[(41,200–
Expected fixed overheads excluding depreciation 12,500)×1.1] 31,570
Depreciation [12.5+(7.3–1)/8] 13,288
Additional supervision cost [70,000×12] 840
Revised fixed cost B 45,698

Absorption rate B/A 1,635

A.5 For the first three months (per unit) Alpha Beta Gamma
Sales (8000, 12000, 10000 × 1.1) 8,800 13,200 11,000
Cost of components used
- A (4, 5, 4 × 45) 180 225 180
- B (2, 4, 3 × 60) 120 240 180
- C (5, 6, 4 × 30) 150 180 120
A 450 645 480
Direct labour
- Assembling (10, 12, 10 × 50) 500 600 500
- Finishing (15, 20, 18 × 40) 600 800 720
B 1,100 1,400 1,220

Variable overheads (DL×0.6×0.6) 396 504 439

Total variable costs 1,946 2,549 2,139

Contribution per unit 6,854 10,651 8,861

Qty (1750, 438, 875 ×0.98×3/12) (W-1) 429 107 215
Total contribution 2,940,366 1,139,657 1,905,115

For next nine months (per unit) Alpha Beta Gamma

Sales (8000, 12000, 10000 ×1.1) 8,800 13,200 11,000

Page 4 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019

Cost of components used (A×1.15) 518 742 552

Direct labour 1,100 1,400 1,220
Variable overheads 396 504 439
Total variable costs 2,014 2,646 2,211
Contribution 6,786 10,554 8,789
Qty (1750, 438, 875 × 0.98×9/12)(W-1) 1,286 322 643
Total contribution 8,726,796 3,398,388 5,651,327

Net contribution 11,667,162 4,538,045 7,556,442

W-1: Sales Alpha Beta Gamma Total

Selling price (given) A 8,000 12,000 10,000
Sales ratio (given) 4 1 2
Weighted average sales ratio 32,000 12,000 20,000 64,000
Sales for the year (given) 28,000,000
Sales (on the basis of sales ratio)
B 14,000,000 5,250,000 8,750,000
Number of units to be sold B/A 1,750 438 875

A.6 Key considerations for professional accountants are stated below:

(a) Developing an organizational reporting strategy:

 Determine the range of users and their needs for various types of reports and
disclosures.
 Project planning and management, and structured processes.

(b) Determining materiality:

 In defining report content, materiality should be considered along with the need for
other important information characteristics.
 Accountability for materiality thresholds and judgments.
(c) External review and assurance of sustainability disclosures:
 The quality of external assurance is directly linked to stakeholder inclusiveness.
 Clarifying the purpose and scope of the assurance.

A.7 (a) Inventory control can be defined as the system used in an organization to control its investment
in inventory/stocks i.e. to minimize, in total, the costs associated with stock.

This includes; the recording and monitoring of stock levels, forecasting future demands and
deciding when and how many to order.

Weighted Average stock valuation method should be used in times of fluctuating prices because
this method is rational, systematic and not subject to manipulation. It is representative of the
prices that prevailed during the entire period rather than the price at any particular point in
time. It is because of this smoothening effect that this method should be used for stock valuation
in times of fluctuating prices.

(b) (i) Without further processing With further processing

S1 S2 S1 S2
Sales price [Sales/Quantity] 1,136 1,064 1,420 2,127
(1,420×80%) (2,127×50%) (492,800÷347) (463,760÷218)
Costs
Fixed cost (Irrelevant) - - - -
Variable cost (W-1) 971 786 971 1,309
Further processing costs (given) - - 150 450

Page 5 of 6
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019

Selling Expense (1% of sales price) 11 11 14 21

(982) (797) (1,135) (1,780)
Profit 154 267 285 347

Conclusion
Sell S1 after further processing
Sell S2 after further processing

(ii) Lower of costs and NRV Without further processing With further processing
S1 S2 S1 S2
Without further processing
NRV [Sales price less selling costs] A 1,125 1,053 1,256 1,656
Costs [Variable +Fixed costs] B 1,095 910 1,095 1,433
Lower of costs or NRV 1,095 910 1,095 1,433
Value of damaged units 16,425,000 20,475,000 16,425,000 32,242,500

Adjustments requirement in the books No No No No

WORKINGS:
W-1: Variable cost per unit S1 S2
---------- Rs. in '000 ----------
Total costs (given) 431,430 349,370
Fixed cost (W-2) 48,793 31,207
Variable cost (Total cost – Fixed cost) 382,637 318,163
No. of units manufactured (W-3) 394 243
Variable cost per unit (382,637÷394, 318,163÷243) 971 1,309

W-2: Fixed cost per unit S1 S2 Total

------------------ Rs. in '000 ------------------
Fixed costs (given) 80,000
No. of units produced (W-3) 394 252 646
Fixed cost per unit (80,000÷646) 124
Allocated fixed cost (394÷646×80,000,
252÷646×80,000) 48,793 31,207

W-3: No. of completed units manufactured S1 S2

No. of units sold [given] 347,000 218,000
Closing stock [given] 47,000 34,000
No. of completed units manufactured [including damaged units] 394,000 252,000
Damaged stock [Damaged × 1 – Completion] - (9,000)
No. of completed units manufactured [excluding damaged goods] 394,000 243,000

(THE END)

Page 6 of 6
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

CERTIFICATE IN ACCOUNTING AND FINANCE (CAF) EXAMINATIONS

EXAMINERS’ COMMENTS

SUBJECT SESSION
Cost & Management Accounting (CMA) Autumn 2019

Passing %

Question wise
Overall
1 2 3 4 5 6 7
29% 82% 39% 39% 62% 5% 08% 31%

General comments

Overall performance in this attempt was lower than previous attempt as passing ratio
declined from 41% to 31%. Disappointing performance in Question 6 and Question 7
reflected selected study and poor time management in the overall attempt of question paper.

Question-wise common mistakes observed

Question 1(a)

 Examinees could not apply the concept of weighted average ratio to compute number of
units sold.
 Examinees attempted to compute break even using contribution margin of both products
individually instead of using combined contribution margin.

Question 1(b)

Examinees could not compute the net margin (contribution margin less desired retained
profit percentage) correctly. Examinees applied profit retention percentage to existing sales
without considering the other factors i.e. taxation and contribution margin. Please refer
ICAP’s suggested answer for further guidance.

Question 2(a)

 Examinees either missed to apply the impact of increase in quantity of production and
sales or the impact of inflation while computing sales revenue and variable cost over a
life of project.
 Examinees did not exclude allocated overheads while accounting for fixed cost.
 Examinees accounted for overhauling cost on machinery at the end of year 4 instead of
beginning of year 4.
 Examinees did not account for depreciation on overhauling cost.

Page 1 of 3
 Examiners’ comments on Cost and Management Accounting – Autumn 2019

Question 2(b)

Examinees could not apply correct formula of IRR while computing the required discount
rate.

Question 3(a)

Examinees could not account for opening and closing WIP units correctly while computing
statement of equivalent units.

Question 3(b)

 Examinees could not differentiate between marginal and absorption costing while
preparing the profit statements and used the components (contribution and gross profit)
interchangeably under each statement.
 Examinees did not account for opening and closing WIPs while preparing marginal and
absorption profit statements.
 Examinees did not account for change in material and conversion costs while
computing opening WIP and finished goods.
 Examinees wasted time in computing production cost per unit wherein production cost
was given in the question.

Question 4(a)

Examinees mixed up fixed overhead efficiency variance with fixed overhead capacity
variance.

Question 4(b)

 Examinees either missed increase in production or increase in efficiency while

determining the projected hours.
 Examinees did not account for increase in fixed overheads while computing the fixed
costs.

Question 5

 Examinees could not apply the concept of weighted average sales ratio while
determining the projected sales of each product.
 Examinees did not consider the impact of increase in the price of components from
April and instead either accounted for whole year or ignored it altogether.
 Examinees could not account for decrease in demand while computing the variable cost
components.
 Examinees did not apply the correct rates (60% and 60%) while computing the variable
overheads and instead applied (60% and 40%).

Page 2 of 3
 Examiners’ comments on Cost and Management Accounting – Autumn 2019

Question 6

Examinees opted for guess work and performed poorly on this otherwise straight forward
question from study text and question bank.

Question 7(a)

Examinees wrongly suggested FIFO method instead of Weighted Average method to be

used in the times of fluctuating prices.

Question 7(b)

 Examinees could not bifurcate between variable cost and fixed cost while determining
total costs under with or without further processing options.
 Examinees did not account for damaged units correctly while determining number of
completed units manufactured.
 Examinees ignored the concept of valuing the inventory at lower of cost and NRV and
simply reproduced the numbers from requirement (i) of this part.

(THE END)

Page 3 of 3
 Cost and Management Accounting
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2019

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1 (a) Computation of:

number of units sold, variable cost and contribution 4.0

fixed cost and combined contribution 1.0

break-even sales 1.0

margin of safety units 1.0

(b)
Determination of net margin 2.5

Sales revenue to yield net margin 1.0

Number of carpets and rugs to be sold 1.5

A.2 (a)
Year-wise computation of sales, variable costs and fixed costs (other than
depreciation) incorporating effect of inflation and volume 4.0

Calculation of depreciation, loss on disposal and added back to profit after
tax 3.0

Cost of machine, overhauling cost and residual value 2.0

Computation of net present value 1.5

Conclusion 0.5

(b) Determination of minimum discount rate 3.0

A.3 (a)
Equivalent units 3.0

Cost per equivalent unit 1.0

(b) (i) Marginal costing

Variable cost of production 4.0

Variable operating costs 3.0

Profit 1.0

(ii) Absorption costing

Production cost 4.0

Gross profit 2.0

Profit 1.0

A.4 (a)
Over absorption of fixed overheads 1.5

Expenditure variance 1.5

Efficiency variance 1.5

Capacity variance 1.5

(b)
Projected required hours 1.0

Expected fixed overheads, depreciation and supervision cost 2.5

Absorption rate 0.5

Page 1 of 2
 Cost and Management Accounting
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2019

Mark(s)
A.5
Sales 4.0

Cost of components used 6.0

Direct labor cost 4.0

Variable overheads 1.0

Contribution margin 0.5

Fixed cost 0.5

A.6 (a) 01 mark for each consideration 2.0

(b) 01 mark for each consideration 2.0

(c) 01 mark for each consideration 2.0

A.7 (a)
Explanation of inventory control 2.0

Suggestion of stock valuation method 1.0

Explanation of suggested stock valuation method 2.0

(b) (i)
Sales price 2.0

Fixed costs 2.0

Variable costs 5.0

Further processing costs 0.5

Selling expense 1.0

Profit 0.5

Conclusion 1.0

(ii)
Net realizable value 2.0

Total costs 2.0

Value of damaged units 2.0

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination

The Institute of 5 March 2020

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Instructions to examinees:
(i) Answer all SEVEN questions.
(ii) Answer in black pen only.

Q.1 Venus Limited (VL) is engaged in the business of processing and selling cashew nuts. It
purchases raw cashew nuts which are then processed and packaged before selling to
consumers.

VL uses standard costing system. The standard cost card for the month of February 2020 is
given below:

Standard cost card per tonne of processed cashew nuts

Direct material 1.75 tonnes of raw cashew nuts at Rs. 50,000 per tonne.
Direct labour 8 hours at Rs. 300 per hour (idle time is estimated at 5% of total time).
Fixed production Rs. 275 per direct labour hour for budgeted production of
overhead 17,500 tonnes of processed and packaged cashew nuts.

Actual results for the month of February 2020:

(i) 17,050 tonnes were produced.
(ii) 31,500 tonnes of direct material at Rs. 46,500 per tonne were purchased and consumed
during the month.
(iii) Each tonne of processed cashew nuts took 7 hours to produce and direct labour was
paid at Rs. 375 per hour.
(iv) Scheduled maintenance of machine was not carried out which reduced the idle time
to 4%.
(v) Fixed production overhead amounting to Rs. 32 million was incurred during the
month.

VL’s actual profit for the month of February 2020 was higher than the budgeted profit.
Views of three department heads on high profitability are as follows:
 Head of purchase department
Despite stable prices of raw cashew nuts in the market for last three years, his
department has saved significant cost by purchasing material from a new supplier at a
relatively cheaper rate by good negotiations. This contributes significantly to the
increase in VL’s profitability.

 Head of production department

His team’s decision to increase labour rate has resulted in an increased motivation and
overall efficiency of workers which led to the increase in VL’s profitability.
 Head of maintenance department
Delaying the scheduled maintenance of machines has contributed to VL’s profitability.
The machines are running well, therefore, scheduled maintenance can be delayed for
another month.
 Cost and Management Accounting Page 2 of 6

Required:
(a) Calculate the following variances for the month of February 2020:
 All material variances
 All labour variances
 Fixed production overhead expenditure variance (08)

(b) Critically evaluate the views of departmental heads. Your evaluation should include
the discussion of claims made and likely impact of their decisions on the long-term
profitability of VL. (07)

Q.2 Neo Hardware (Private) Limited (NHPL) is engaged in the manufacturing and marketing
of a single product 'locks'. NHPL is in the process of preparing its budgeted profit or loss
statement for the year ending 28 February 2021. Following information pertains to the year
ended 29 February 2020:

(i) Extracts from profit or loss statement:

Rs. in million
Sales 6,930
Cost of goods sold:
Material (3,140)
Labour (645)
Manufacturing overheads (960)
Gross profit 2,185
Selling expenses (55% variable) (468)
Administration expenses (276)
Net profit before tax 1,441

(ii) The production plant at NHPL factory has an annual production capacity of 6 million
locks. During the year, it operated at 77% of capacity and all locks produced during
the year were sold out.
(iii) During the year, NHPL had received a quotation from a Chinese company at
Rs. 1,400 per lock, similar to NHPL’s locks. Since the production target for the year
had already been met, the management decided to keep this option open for any
future shortfall in production.
(iv) NHPL has divided the sales team in three regions i.e. East, West and Central with
20, 24 and 46 sales personnel in each region respectively. During the year, the ratio
of each region’s sales to total sales was 20%, 30% and 50% respectively.
(v) Manufacturing overheads include fixed overheads of Rs. 625 million which include
depreciation of Rs. 415 million.
(vi) Administration expenses comprised of fixed costs including depreciation of
Rs. 23 million.

Information and projections for the budget year ending 28 February 2021
(i) Selling price would be increased by Rs. 150 per lock.
(ii) It is anticipated that sales volume will increase by 25% and in order to achieve this
target, sales commission would be introduced to motivate the sales personnel.
However, the commission would be paid on regional teams’ performances and the
rate of commission would be determined on the basis of average number of units sold
by each team member as follows:
Average number of locks Commission % on regional
sold by a sales person sale revenue
0 – 50,000 1.00%
50,001 – 70,000 1.25%
70,001 – 90,000 1.50%
> 90,000 1.75%
 Cost and Management Accounting Page 3 of 6

(iii) It is expected that East, West and Central will contribute to the increase in sales
volume by 10%, 30% and 60% respectively.
(iv) The price of locks from the Chinese company is expected to increase to
Rs. 1,500 per lock.
(v) Labour is short in supply and already working overtime. The increase in production
can only be achieved by increasing efficiency of the existing labour. The management
has approved 20% bonus for labour which would increase the efficiency by 15%.
(vi) At the beginning of the year, a major overhaul amounting to Rs. 55 million will be
carried out on one of the machines in a manufacturing department which was
originally purchased in 2018 for Rs. 100 million. The overhauling would increase the
original useful life of machine from 4 years to 8 years and salvage value would
increase from Rs. 12 million to Rs. 15 million. The company uses straight line method
for depreciating its machines.
(vii) All variable costs would increase by 8% and all fixed costs other than depreciation
would increase by 5%.

Required:
Prepare budgeted profit and loss statement for the year ending 28 February 2021. (18)

Q.3 Ayyan Group (AG) opened a pizza outlet under the brand name ‘Say Cheese’ (SC) two
years ago. The initial assessment of the investment in SC had high financial prospects. AG
entered into a five year rent agreement for pizza outlet. The rent for the first year was agreed
at Rs. 600,000 subject to an annual increment of 10%. For pizza preparation, AG imported
equipment amounting Rs. 5,000,000 having useful life of five years with a residual value of
Rs. 1,000,000.

After two years of operations, SC has failed to achieve desirable results and the management
of AG is skeptical whether to continue to operate SC for further three years or not. You
have been provided the following information in this regard:
(i) Sales for the first two years were amounted to Rs. 7,500,000 and Rs. 9,000,000
respectively.
(ii) Variable costs for the first two years were amounted to Rs. 6,000,000 and
Rs. 7,080,000 respectively.
(iii) The fixed costs other than rent and depreciation for the first two years were amounted
to Rs. 500,000 and Rs. 525,000 respectively.
(iv) The trend in sales, variable costs and fixed costs other than rent and depreciation from
year 1 to year 2 is expected to continue in future.
(v) If management of AG decides to discontinue the investment in SC now, equipment
could be sold for Rs. 4,000,000. Further, termination of rent agreement would require
three months’ notice period.
(vi) Applicable tax rate is 30% and tax is payable in the year in which liability arises. Tax
depreciation on equipment is allowed at the rate of 25% under reducing balance
method.
(vii) The cost of capital of AG is 16%.

Assume that except stated otherwise, all cash flows arise at the end of the year.

Required:
By using net present value method, recommend whether management of AG should
continue to operate SC for a further period of three years or discontinue it now. (16)
 Cost and Management Accounting Page 4 of 6

Q.4 Ring Limited (RL) is engaged in the manufacture and sale of customized products. In
January 2020, RL entered into an agreement with Gamma Limited (GL) for manufacture
and supply of 3,500 units of a customized product ‘Zing’ at Rs. 4,000 per unit.

RL placed the order for raw material AA-2 and the supplier agreed to supply the material
in second week of March 2020. RL had also hired skilled labour for the production of Zing.
However, in February 2020, GL went bankrupt.

RL has recently been approached by Sigma Limited (SL) for supply of 3,500 units of
D-Zing which is a modified version of Zing. RL can use the ordered raw material and the
hired skilled labour for this product. The production of D-Zing will take three months.
Following information has been provided in this regard:

Machinery
Specialized machinery will be needed to produce D-Zing. Following proposals are under
consideration:
(i) Lease machinery for three months at monthly lease rentals of Rs. 250,000 and an
upfront payment of refundable security deposit of Rs. 5,000,000. The upfront
payment will be financed through running finance @ 20% per annum. As per the
lease terms, monthly maintenance cost of Rs. 15,000 will be borne by the lessor.
(ii) Lease machinery at monthly lease rentals of Rs. 160,000 for a minimum period of
six months. In this case, monthly maintenance of Rs. 20,000 will be borne by RL
which will be incurred only in the months in which machinery is operative.

Direct material
Following raw materials will be required for manufacturing of each unit of D-Zing:
(i) 15 units of AA-2: RL had already ordered 50,000 units of AA-2 at Rs. 75 per unit
under the original contract of Zing. The current market price for AA-2 is
Rs. 80 per unit. If the contract is not fulfilled, a penalty at 20% of the contract value
will be payable by RL.
(ii) 10 units of A-78: A-78 is available in market at Rs. 110 per unit. However, it can also
be produced internally at a variable cost of Rs. 80 per unit. Fixed cost would be
absorbed at Rs. 25 per unit. Internally produced A-78 would be subject to 20% normal
loss.
(iii) 5 units of C-11: Market price of C-11 is Rs. 20 per unit. However, a substitute material
D-50 can also be used after processing it at a cost of Rs. 15 per unit. Presently
5,000 units of D-50 is available in stock as a result of over purchasing for a previous
order. D-50 was purchased at Rs. 5 per unit and can be sold back to the supplier at
Rs. 3 per unit.

Direct labour
(i) RL had hired skilled labour from a third party at Rs. 1,000 per hour under the original
contract of Zing. If order from SL is not accepted, 200 labour hours would become
idle and RL will have to pay 50% of the contract rate.
(ii) If SL’s offer is accepted, then D-Zing would be produced in batches of 350 units and
the first batch would require 400 skilled labour hours. Learning curve effect is
estimated at 80% but would remain effective for the first four batches only. The index
of learning curve is – 0.322.
(iii) 1.5 hours of semi-skilled labour is required for every unit of D-Zing. Since there is a
shortage of semi-skilled labour in the market, only 4,000 labour hours are available at
Rs. 600 per hour. However, labour is willing to do overtime at a 50% higher rate
up to maximum of 1,500 hours. Alternatively, unskilled labour can be hired at
Rs. 200 per hour, however, unskilled labour would require 300% of the time taken by
semi-skilled labour. This can be reduced to 250% if training is given to them at a cost
of Rs. 300,000.

Variable overheads
Variable overheads would be charged at Rs. 125 per skilled labour hour.
 Cost and Management Accounting Page 5 of 6

Required:
By using the relevant costs approach, compute the minimum price per unit that RL may
quote. (20)

Q.5 Scents Limited produces three joint products P, Q and R. Raw material is added at the
beginning of process I. On completion of process I, these three products are split in the ratio
of 50:30:20 respectively. Joint costs incurred in process I are apportioned on the basis of net
realizable value of the three products at split-off point. Products P and Q are sold in the
same state whereas product R is further processed in process II before being sold in the
market. A by-product TS is also produced in process II.

Following information relating to the two processes is available for the month of
February 2020:

Process I Process II
Raw material at Rs. 411 per kg 744,000 kg -
Direct labour at Rs. 200 per hour 611,568 hours 55,450 hours
Production overheads Rs. 91,456,000 Rs. 7,230,000

Additional information:
(i) Loss of 7% is considered normal in process I.
(ii) Details of opening and closing stocks, estimated cost to sell and selling price are given
as under:

Selling price Cost to sell Opening Closing

per kg (Rs.) per kg (Rs.) stock (kg) stock (kg)
Product P 1,045 15 - 20,200
Product Q 960 10 - 15,140
Product R 1,021 12 7,800 48,134

(iii) Values of opening and closing stocks of product R comprised of cost of both
processes. Value of opening stock of product R is Rs. 5,850,000.
(iv) In process II, 7450 kg of TS was produced and sold at Rs. 175 per kg. Proceeds from
sale of TS are adjusted against cost of process II.
(v) Selling and administration costs are charged to P, Q and R at 12% of sales.

FIFO method is used for inventory valuation.

Required:
Prepare product-wise income statement for the month of February 2020. (15)

Q.6 For the purpose of this question, assume that today is 01 March 2020.

On 01 March 2018, Shahab Pakistan Limited (SPL) purchased 10,000 convertible bonds of
Delphi Limited (DL) at par value of Rs. 100 each. The bonds carry annual mark-up of 12%
which is payable semi-annually that is at the end of February and August each year. Each
bond is convertible into 5 ordinary shares of DL which are currently trading at Rs. 24 each.
Any bonds not converted by 28 February 2022 will be redeemed at Rs. 120 per bond. SPL’s
cost of capital is 15%.

Required:
Advise whether SPL should hold the bonds till redemption or convert them into ordinary
shares today. Also determine at what market price per share SPL would be indifferent to
hold bonds till redemption or convert into shares today. (Ignore tax) (04)
 Cost and Management Accounting Page 6 of 6

Q.7 (a) List any four situations in which EOQ model for determining optimum level of stocks
becomes invalid. (04)

(b) Jamal Limited (JL) purchases raw material T3 for its product DBO on a quarterly
basis as per the requirement of the production department. The management is
considering to revise the existing policy of placing orders for T3. Following
information is available in this regard:

(i) Annual production of DBO is 19,000 units.

(ii) Each unit of DBO requires 1 kg of T3 which is the resultant quantity after
normal loss of 5%.
(iii) Minimum order quantity set by the supplier for purchase of T3 is 3,500 kg.
However, the supplier offers following prices at different order quantities:
Order quantity (kg) Price per kg (Rs.)
3,500 305
4,000 299
5,000 296

(iv) JL maintains T3’s safety stock of 320 kg.

(v) The cost of placing each order is Rs. 4,200 out of which Rs. 1,780 pertains to
salaries of staff of purchase department.
(vi) Holding cost per kg of average stock is Rs. 260 which includes rent of Rs. 180
for the floor space occupied by each kg. Variation in the stock held has no effect
on the remaining holding cost.

Required:
Determine the purchase order quantity of T3 offered by the supplier at which JL’s
cost would be minimized. (08)

(THE END)