Cost and Management Accounting Page 1 of 3

Certificate in Accounting and Finance Stage Examination

ARTT Business School 04 May 2024

Fellow RAET of the ICAP 2 hours – 60 marks
Prepared by Ahmed Raza Mir, FCA Additional reading time – 15 minutes

Cost and Management Accounting

Instructions to examinees:
(i) Answer all five questions (New Joiners should only attempt Q4 and Q5).
(ii) Answer in black pen only.

Q1 James Limited, a manufacturer and seller of budget-friendly smartwatches, is experiencing increasing

demand. However, the company's outdated manufacturing facilities are operating at only 75% of their
potential capacity. Here is a summary of the financial data from the recently concluded fiscal period:

Fixed Costs (Rs) 125,000

CM Ratio 40%
Margin of safety 30%

Projections for the Next Year:

1. James Limited plans to replace the old machinery with a new one that has a 20% higher total
capacity. To meet market demand next year, the company must operate at 90% capacity of the
new machine.
2. The replacement will result in a 30% increase in total depreciation costs, which currently stand
at Rs 40,000.
3. Although raw material costs, which account for 50% of variable costs, are expected to inflate
by 6%, bulk purchases enabled by increased capacity will provide a 5% discount.
4. Labor costs, comprising 40% of variable costs, will rise by 7%. Variable overheads, the
remaining portion of variable costs, will observe a 10% inflation rate.
5. The new machine will offer several efficiencies:
o Material consumption will decrease by 8%.
o Labor hours per unit will reduce by 7.5%.
o Variable overheads will drop by 2%.
6. Labor efficiency is expected to improve by 9% due to training, which will cost the company Rs
15,000.
7. To stimulate demand, the selling price will be reduced by 2%.
8. Inflation for fixed costs, excluding depreciation and training, is projected to be 9% for the next
year.

Required (13)
You are required to calculate the projected profit and margin of safety for the upcoming year.
Q2. Suleman Limited produces and sells three products for last 6 years. Details are as under:

A B C
Demand (Units) 40,000 25,000 18,000
Selling Price per unit 90.00 140.00 60.00
Variable Cost (%) (Note 1) 60.00 50.00 40.00
Allocated Fixed Cost per unit 20.00 16.00 15.00

1. * Note 1: 5% of variable cost is packing cost

2. The company pays tax @ 30% of its profits.

SL is planning to introduce a King pack which will contain 1 unit each of the three products.
Following are the brought abouts of this strategy:
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1. King pack will be sold at 90% of the price of individual products.
2. King pack will be sold through a distributor who will charge 10% of the selling price as
commission but will bear packing cost.
3. Annual fixed cost will increase to Rs 1.8 million
4. Introduction of the King pack will reduce the demand of all three products in the following
manner:
A 20.00%
B 16.00%
C 12.50%
Required
Calculate the number of units of King Pack which will result in additional after-tax profit of Rs
500,000.
(11)
Q3 For the past 25 years, ABC Limited has predominantly sold a single product, "Beta." Here is a
breakdown of the product's performance from January to April 2023 (First 4 Months of 2023):

Particulars Rupees
Sales Revenue 1,620,000
Material Cost 540,000
Labour Cost 378,000
VOH Cost 327,600

Other information
1. The company was able to sell 3,600 units in the first four months of the year
2. raw material A and B are used in the quantities of 5 kgs and 3 kgs. Prices for raw material
A&B are Rs 21 and Rs 15 respectively.
3. Skilled workers are employed for the production of beta. Each unit requires seven hours.
4. Variable owners per unit was Rs 91
5. annual fixed cost of the company is estimated to be Rs 2.2 million

Plan for the remainder of the year

ABC Limited is considering launching a lower-end version of Beta, named "Alpha," to be sold at 60%
of Beta's current price. The particulars for Alpha for the remainder of the year are as follows:

1. Alpha and Beta will be sold at a ratio of 2:1.

2. Alpha will utilize the same raw materials A and B, with quantities of 2.5 kg and 1.25 kg
respectively.
3. Production will employ semi-skilled labor requiring 40% more time than the skilled labor used
for Beta but costing 30% less per hour.
4. Variable overheads for Alpha will be 30% lower than those for Beta.
5. A marketing campaign costing Rs 600,000 will be launched.
6. A new machine costing Rs 3 million will be purchased and depreciated at 10% per annum.
7. The variable cost for Beta will remain unchanged for the rest of the year, and no increases in
fixed costs are planned other than those mentioned.

Required
Calculate the number of units of Alpha and Beta that must be sold in the remaining eight months of (15)
the year to achieve a total annual profit of Rs 1.65 million.

Q4 Jamal Limited is renowned for sourcing traditional and cultural artifacts for sale in international
markets. Last year, the company discovered a traditional cap in interior Sindh, which showed
promising potential for international sales. The product necessitates skilled labor experienced in local
embroidery techniques, essential for creating delicate products.

The actual cost breakdown for the first unit produced was as follows:
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 Direct Material: Rs 12,500 per unit
 Direct Labour: Rs 8,600 per unit (Rs 20 per hour)
 Variable Overheads: Rs 6,020 per unit (Rs 14 per hour)

In 2022, the company successfully produced 600 units, applying a 50% markup on costs.

Plans for the Next Year (2023)

Looking ahead, Jamal Limited anticipates a demand for 2,400 caps. To maintain competitiveness in
the international market, the company is considering a 10% reduction in the selling price. Given the
labor-intensive nature of the production process, a 90% learning curve is expected to be achieved up to
the production of 1,900 units, after which the labor usage per unit is expected to stabilize.

Required
The management seeks advice on whether it is feasible to implement a 10% discount while
maintaining the desired gross profit markup of 50% constant.
(10)
You may assume no impact of inflation in 2023

Q5 Usman Limited produces and sells a range music equipment. The company is currently considering
producing the following products:

Particulars Product A Product B

Selling Price per unit (Rs) 750 585
Material Cost per unit (Rs) 180 90
Labour Cost per hour (Rs) 16 16
Units in a batch 1,000 800
Demand (Units) 10,000 11,200
VOH per hour (Rs) 6.4 8
Time for first Batch (Hours) 15,000 12,800
Learning Rate (%) 90% 85%

1. Due to shortage of skilled labour the company will be facing difficulty in arranging manpower to
produce these products.
2. Total Labour hours expected to be available to the company will be 100,000.
3. Annual Fixed Cost for A and B will be Rs 1 million
4. Due to legal (licensing) and practical difficult the company can only produce one of the above 2
products

Required
Advice the company as to which product should be produced (11)