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 months budgeted consumption

Finished goods 50% of next months 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
Car registration fee
Mobile phone price per set
Insurance premium
Annual salaries per driver
Annual maintenance cost
2,000,000 Estimated useful life and residual value of
the car is 4 years and Rs. 0.75 million
respectively.
35,000 One-time payment on registration of the car.
15,000 To be charged-off in the year of purchase.
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.
300,000 Would work in 8-hour shifts.
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 BCSs proposal. (16)

Q.8 NK Enterprises produces various components for telecom companies. The demand of these
components is increasing. However, NKs 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 months 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)