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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)