The Professionals’ Academy Of Commerce

Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations

Referral Test Aut-2020 June 17 , 2020
Test: # 1 36 Marks – 1 hour

Cost & Management Accounting

Q.1 Ultimate Private Limited (UPL) manufactures a single product “Z” having daily Demand of 50 units. The product
uses various ingredients out of which component A is the main ingredient. Each unit of Z requires 6 kgs of component
“A”. The following details are also available.
i. Component A is imported having C&F value Rs.2,000 per kg. Custom Duty is paid at the rate of 15% which
is non-refundable.
ii. Company maintains buffer stock equal to 5% of annual requirement (for all types of inventory)
iii. Cost of processing 4 orders is Rs.60,000.
iv. Holding cost of inventory is Rs.0.5 per kg per day.
v. Other carrying cost is estimated at Rs.2 per kg per month.
vi. 1% of input is lost during storage.
Required:
a) Calculate Economic Order Quantity (EOQ) (8)
b) Total cost associated with component A. (5)
c) Calculate (b) if
• No buffer stock is maintained
• Cost per order increased by 10%
• Purchase cost of A including custom duty is Rs.2,500 per kg. (5)
(Assume 30 days in a month and 360 days in a year)

Q.2 Alpha Limited purchases and sells a product X. Delivery of X is received from supplier within one week of placing an
order. Demand of product during that time is not predictable and varies with customer requirement. Company is not sure at
which stock level the new order should be placed. However an estimation can be made regarding maximum and minimum
usage during lead time.

Usage during lead time Probability of Demand

(units)
20 45%
30 25%
40 20%
50 10%
 CMAC |Page 2 of 2

Following information is also available.

(i) Contribution Margin is Rs.200 per unit.
(ii) Annual Demand of product is 1,200 units
(iii) Economic Order Quantity is 80 units.

Required:
Calculate annual stock out cost (if any) if company places and order when stock level falls to
a) 35 units
b) 45 units (8)

Q.3 (i) Briefly explain ABC method of inventory control. (3)

(ii) Efficient Distribution Company (EDC) deals in distribution of two products. Company follows perpetual
inventory system for both of the products. Following information is available for year ended 30th June 2018.

Description Product A Product B

Opening inventory (units) 1,000 1,500
Total cost of opening stock (Rs.) 20,000 27,000
Method used for valuation of FIFO Weighted Average
inventory
Purchases in units:
07-08-2017 300 @ 16 150 @ 15
10-06-2018 500 @ 20 550 @ 17
Sales in units:
15-02-2018 700 500
31-03-2018 400 400
Selling price per unit Rs.30 Rs.20
Variable selling cost per unit Rs.3 Rs.5

Required:
a) Calculate value of inventory using FIFO for Product A and Weighted Average for Product B.
b) Determine the amount of inventories to be reflected in financial statements for year ended 30th June 2018. (7)

(THE END)
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute
CMAC
REFERRAL TEST 1 SUGGESTED ANSWER
Referral Test 1 Solution CMAC
Ans-1

a) Economic Order Quantity (EOQ) for component A

Annual Requirement of A (50*360*6)/99% 109,091 kgs

Cost per order Rs.60,000/4 15,000 Rs.

Annual Holdng Cost per kg (0.5*360)+(1*12) 192 Rs.

EOQ √(2*109,091*15,000)/192 4,129 kgs

Number of orders 109,091/4,129 26

Buffer Stock 109,091*5% 5,455 kgs

Average Stock (4,129/2)+5,455 7,519 kgs

b) Total Cost

Cost of purchasing 2,000*1.15*109,091 250,909,091 Rs.

Ordering Cost 15,000*26 396,347 Rs.

Holding Cost 7,519*192 1,443,620 Rs.

Total Cost 252,749,058 Rs.

c) Revised Total Cost

Cost of purchasing 2,500*109,091 272,727,273 Rs.

Ordering Cost 15,000*1.1*26 435,982 Rs.

Average stock 4,129/2 2,064 kgs

Holding Cost 2,064*192 396,347 Rs.

Revised Total cost 273,561,666 Rs.

 REFERRAL TEST 1 SUGGESTED ANSWER CMAC

Ans2

Demand Stock out

Stock out per Annual Stock out Expected
Re-order level during lead Units per
year cost Probability Annual stock
(units) time order
(units) (Rs.) out cost
(units) (units)
A B C D=C*15 E=D*200 F G=E*F
35 20 - - 45%
30 - - 25%
40 5 75 15,000 20% 3,000
50 15 225 45,000 10% 4,500
7,500
45 20 - - 45%
30 - - 25%
40 - - 20%
50 5 75 15,000 10% 1,500
1,500
No of orders 1,200/80 15
REFERRAL TEST 1 SUGGESTED ANSWER

(i)
In this method inventory can be divided into three broad categories:
a) Category A inventory items, for which inventory holding costs are high.
b) Category B inventory items, for which inventory holding costs are fairly high, but not as high as for category A items.
c) Category B inventory items, for which inventory holding costs are low and insignificnt. Holding excessive amounts of these
inventory items would not affect costs significantly.
ABC approach to inventory control is to control each category of inventory differently and apply the closest control to those items in the most costly
category i.e category A.

(ii)

a) Product A - FIFO

Receipts Issues Balance

Date Qty Rate Rs. Qty Rate Rs. Qty Rate Rs.
01/07/2017 b/f 1,000 20 20,000 1,000 20 20,000
8/7/2017 300 16 4,800 300 16 4,800
Balance 1,300 20/16 24,800
2/15/2018 700 20 14,000 700 20 14,000
300 20 6,000 300 20 6,000
3/31/2018
100 16 1,600 100 16 1,600
- 1,100 20/16 - 21,600
Balance 200 16 3,200
9/10/2017 500 20 10,000 500 20 10,000
Balance 700 16/20 13,200

Product B - Weighted Average

Receipts Issues Balance
Date Qty Rate Rs. Qty Rate Rs. Qty Rate Rs.
01/07/2017 b/f 1,500 18 27,000 1,500 18 27,000
8/7/2017 150 15 2,250 150 15 2,250
Balance 1,650 17.73 29,250
2/15/2018 500 17.73 8,864 500 17.73 8,864
3/31/2018 400 17.73 7,091 400 17.73 7,091
- 900 17.73 - 15,955
Balance 750 17.73 13,295
6/10/2018 550 17 9,350 550 17 9,350
Balance 1,300 17.42 22,645

b) Product A Product B
Selling Price 30 20
Selling cost 3 5
NRV 27 15
Inventory (units) 700 1,300
Total NRV 18,900 19,500

Valuation under
cost method 13,200 22,645
NRV 18,900 19,500
Lower of above 13,200 19,500 Amount to be reflected in financial statements
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations

Referral Test June 24, 2020
Test: 2 32 Marks – 1 hours

Cost & Management Accounting

Q.1 ABC Ltd has two production departments and two service departments in its factory namely Assembly,
Finishing, Maintenance and Quality control respectively.
The following are budgeted costs for the next period.

Cost (Rs.)
Rent 15,000
Electricity 10,000
Plant & machinery depreciation 7,000
Direct labor 80,000
Royalty (It is a direct cost and should be included in direct material cost) 25,000
Insurance (40% employee insurance ; 60% building insurance) 7,200
Plant & machinery insurance 3,990
Administrative & Selling expenses 40,000
Others support overheads (30% for maintenance; 70% for quality control) 4,760
Plant & machinery running and maintenance 18,950

The following department wise information is available.

Items Total Assembly Finishing Maintenance Quality
control
KW hours consumed 9,000 3,000 2,500 1,975 1,525
Number of employees 65 20 30 8 7
Direct labor hours 5,670 3,870 1,800 - -
Value of Machine (Rs.) 150,000 60,000 45,000 27,000 18,000
Indirect labor cost (Rs.) 5,600 3,500 1,500 200 400
Area (Sq. meters) 4,000 1,000 2,000 600 400
Machine Hours per batch 40 25 15 - -
Proportion of Maintenance to 100% 55% 30% - 15%
other departments.
Proportion of Quality control 100% 45% 45% 10% -
to other departments
No. of batches 25 15 10 - -
Required:
(a) Overhead cost allocated to each Department. (Use simultaneous equation method for distributing service
departments costs) (15)
(b) Overhead Absorption Rate (OAR) per machine hour for Assembly and Finishing Department. (03)
(c) Factory wide machine hour rate. (02)
Q.2:
Kamran Limited manufactures a variety of products. It launched a new product “ZXX” in April 2017 and had
produced 10,000 units (10 lots) up to year ended June 30, 2017. The company expects 90% learning curve ratio to
apply on each production lot size of 1,000 units and learning curve effect is expected to prevail up to 54 lots.
Market survey shows two possible demand levels for 2018 production and company is concerned about labor cost at
following mentioned demand levels.

Demand Level-1 50,000 units

Demand Level-2 (If sale price is reduced by 5%) 60,000 units

Direct labor costs for first 1,000 units in 2017 were Rs.200,000.
Required:
Calculate Direct labor cost for 2018 at above mentioned demand Levels. (16)
 REFERRAL TEST 2 SUGGESTED ANSWER CMAC
Ans-1

a) Overhead cost allocated to each department

Production Departments Service Departments

Overheads Bases of Apportionment Total
Assembly Finishing Maintenance Quality control
Rs. Rs. Rs. Rs. Rs.
Rent Area in sq. feet 15,000 3,750 7,500 2,250 1,500
Electricity KW Hours consumed 10,000 3,333 2,778 2,194 1,695
Machine Depreciation Machine value 7,000 2,800 2,100 1,260 840
Employee insurance No of employees 2,880 886 1,329 354 310
Building insurance Area in sq. feet 4,320 1,080 2,160 648 432
Machine insurance Machine value 3,990 1,596 1,197 718 479
Others % given 4,760 - - 1,428 3,332
Machine operating *Machine hours 18,950 13,536 5,414 - -
Indirect labour Given 5,600 3,500 1,500 200 400

Total before apportionment of service depts 72,500 30,481 23,978 9,053 8,988
Apportionment of Maintenance (55:30:15) - 5,557 3,031 (10,103) 1,515
W-1
Apportionment of Quality control (45:45:10) 4,726 4,726 1,050 (10,503)
Total 72,500 40,764 31,736 0 0

*Calculation of total machine hours Assembly Finishing Total

Hours per batch A 25 15
No. of batches B 15 10
Hours C=A x B 375 150 525

W-1
Let the total overheads of Maintenance department be M
Let the total overheads of Quality control department be Q
Then:
M = Original overheads of maintenance department + 10% of Quality control
Q = Original overheads of Quality control department + 15% of Maintenance department
This gives us:
M = 9,053 + 0.1Q ----- (i)
Q= 8,988 + 0.15M ----- (ii)
From (ii) put value of Q in equation (i)
M = 9,053 + 0.1( 8,988 + 0.15M)
M = Rs.10,103
Put this in (ii)
Q = Rs.10,503

b) OAR per unit

Assembly Finishing
Rs.
Total overhead cost 40,764 31,736
No of machine hours 375 150
OAR per hour 108.70 211.57

c) Blanket OAR per hour Rs.

Total overhead cost 72,500
Total machine hours 525
OAR per hour 138.10 per hour
REFERRAL TEST 3 SUGGESTED ANSWER CMAC
Ans-1

Farmula of learning curve is y= ax^b

Where a is the labour cost for first lot of 1,000 units = Rs.200,000
x is the cummulative number of lots
b equals log(0.9)/log(2) = -0.152
Average cost Total cost
(Rs.) (Rs.)
For 10,000 units (10 lots) y = 200,000*10^-0.152 283,812 283,812*10 2,838,115
For 54,000 units (54 lots) y = 200,000*54^-0.152 109,070 109,070*54 5,889,780
For 53,000 units (53 lots) y = 200,000*53^-0.152 109,380 109,380*53 5,797,140
Cost for 54th lot 5,889,780-5,797,140 92,640

Demand Level 50,000 units

Cost for Ist 54 lots 5,889,780

Cost already incurred on first 10 lots (2,838,115)
Cost for 44 further lots (44,000 units) 3,051,665
Cost for further 6 lots to meet demand of 50 lots 92,640*6 555,840
Total labour cost for further 50 lots (50,000 units) 3,607,505

Demand Level 60,000 units

Cost for further 60 lots 92,640*60 5,558,400

 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations

Referral Test July 01 , 2020
Test: # 3 35 Marks – 1 hours

Cost & Management Accounting

Q.1 Nasir Limited, a manufacturing company makes two chemical products that pass through many processes.
Details of Process 2 for the month of November 2017 are as follows.
Opening WIP [60% complete] 4,500 kgs valued at Rs.50,700
Received from Process 1 40,000 kgs valued at 776,800
Closing WIP [50% complete] 4,000 kgs
(i) For every kg received from process 1, 0.2 kg of material XD is added in process 2. Material XD is
available in market in lots of 1,000 kgs. Price of one lot is Rs.11,500. Conversion cost incurred in
process 2 is 70% of the cost of material XD.
(ii) Losses are identified when inspection is performed at 70% completion of unit. Normal loss is 2% of the
kgs inspected in every process. Total 1,200 kgs were scrapped during the month at Rs.2 per kg.
(iii) All materials are added at the start of each process.
(iv) 18,520 kgs of B1 product and 23,150 kgs of B2 were produced from process 2. Remaining output
contain by-product units (P7) produced in the process having sale value of Rs.1.5 per kg.
(v) It is the policy of Company to deduct sale value of by-product from joint production cost of main
products.
Required:
Prepare following for the month of November 2017.
a) Statement of Equivalent units (05)
b) Statement of distribution of cost (06)
c) Apportion joint production cost between B1 & B2 in the ratio of quantity produced (04)
d) Process a/c 2 (05)
Q.2 Super Limited manufactures special types of engineering parts for various products. Company receives bulk orders
from its customers and follows job order costing. JobR200 and JobR300 were started in the month of June 2018 for
which customer ordered 12,000 units and 8,000 units respectively. No other job was in process or started during this
month.
(i) A major component PX is required to build a complete unit, at a cost of Rs.200 per component. Total
components purchased during the month cost Rs.4.5 million.
(ii) JobR200 requires 0.75 skilled labor hours per unit while JobR300 requires 0.5 unskilled labor hours per unit
in addition to skilled labor hours. Rates of skilled and unskilled workers are Rs.300 and Rs.150 per hour
respectively.
(iii) Indirect costs incurred during the month were as follows.
Labor: Rs.920,000
Utilities/Fuel: Rs.700,000
Depreciation: Rs.830,000
(iv) Company operates at an annual normal capacity of 250,000 units. Budgeted overheads for the year were
estimated at Rs.30 million.
(v) Any under/over applied is assigned to Cost of Goods sold.
(vi) Both Jobs were completed and cash was received equal to cost plus 10% markup on JobR200 and cost plus
15% margin on JobR300.
Required:
Record journal entries for all transactions mentioned above. (15)
(THE END)
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute
CMAC
Referral Test 4
Solution

Ans-1

a) Statement of Equivalent units

Equivalent Units
Total units % completion Received from process 1 Material Conversion cost
Transferred to process 2
Opening WIP completed 4,500
Material 0% -
Conversion 40% - 1,800
For the period 42,800 100% 42,800 42,800 42,800
Total transferred 47,300 42,800 42,800 44,600

Closing WIP 4,000

From process 1 100% 4,000
Material 100% 4,000
Conversion 50% 2,000
Total Closing WIP 4,000 4,000 4,000 2,000

Abnormal loss 230

From process 1 100% 230
Material 100% 230
Conversion 70% 161
230 230 230 161
Total 51,530 47,030 47,030 46,761

b) Statement of distribution of cost

Rs.
Opening WIP from previous period Given 50,700
Conversion cost added to complete Open WIP 1,800*1.38 2,479
Cost for the period 42,800*(19.81) 847,837
Total cost of units transferred to next dept. 901,016

Materials & Received from process 1 4,000*(16.48+1.96) 73,728

Conversion cost 2,000*1.38 2,754
Cost of closing WIP 76,483

Materials & Received from process 1 230*(16.48+1.96) 4,239

Conversion cost 161*1.38 222
Cost of abnormal loss 4,461

Statement of cost per Equivalent units

From process 1 Materials Conversion cost Total

Cost for period 776,800 92,000 64,400
Scrap value of Normal loss (1,940)
Net process cost 774,860 92,000 64,400
Equivalent units 47,030 47,030 46,761
Cost per equivalent units 16.48 1.96 1.38 19.81

c) Apportionment of joint cost between B1 and B2

Rs.
Total cost of units produced 901,016
Less: sale value of P7 (47,300-18,520-23,150)*1.5 (8,445)
Cost to be apportioned between joint products 892,571

Total B1 B2
Quantity produced 41,670 18,520 23,150
Ratio of quantity 100% 44.44% 55.56%
Joint cost apportioned on the basis of quantity ratios 396,698 495,873
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute
CMAC
Referral Test 4
Solution
d) Process a/c
Process Account A/C - 2
Description Kgs Rs. Description Kgs Rs.

Open WIP [ M-100%, CC-60%] 4,500 50,700 Normal Loss*** 970 1,940

Received from Process 1 40,000 776,800 Abnormal loss 230 4,461

Material added* 8,000 92,000
Conversion cost** 64,400 B1 18,520 396,698
B2 23,150 495,873
P7 5,630 8,445
Joint Output 47,300 901,016

Closing WIP [M-100%, CC-50%] 4,000 76,483

52,500 983,900 52,500 983,900

* Material = (40,000*0.2)/1,000 = 8 lots * Rs.11,500 = Rs.92,000

** Conversion cost = 92,000*70% = Rs.64,400
***Normal Loss = (4,500+40,000+8,000-4,000)*2% = 970 units * Rs.2 = Rs.1,940
 Ans-2

1 PX inventory Given 4,500,000

Accounts payable 4,500,000
(To record purchase of material)

2 WIP - JobR200 12,000*200 2,400,000

WIP - JobR300 8,000*200 1,600,000
PX inventory 4,000,000
(To record issuance of material to jobs)

3 WIP - JobR200 - skilled 0.75*12,000*300 2,700,000

WIP - JobR300 - skilled 0.75*8,000*300 1,800,000
WIP - JobR300 - unskilled 0.5*8,000*150 600,000
Wages payable/payroll 5,100,000
(To record issuance of payroll to jobs)

4 Production overheads 2,450,000

Wages payable Given 920,000
Utilities payable Given 700,000
Accumulated depreciation Given 830,000
(To record indirect overhead cost)

5 WIP - JobR200* 12,000*120 1,440,000

WIP - JobR300* 8,000*120 960,000
Production overheads 2,400,000
(Recording application of overheads to jobs)

6 Finished Goods inventory 11,500,000

WIP - JobR200 6,540,000
WIP - JobR300 4,960,000
(To record completion of goods)

7 Cost of Goods sold 11,500,000

Finished Goods inventory 11,500,000
(To record issuance of goods from store)

8 Cost of Goods sold 50,000

Production overheads 50,000
(To record underapplied overheads)

9 Cash 13,029,294
Sales 13,029,294
(Recording sale to customer)

*Budgeted Overhead rate = Rs.30,000,000/250,000 units = Rs.120 per unit.

Working of cash received
JobR200 JobR300 Total
Material 2,400,000 1,600,000 4,000,000
Labour 2,700,000 2,400,000 5,100,000
Overheads- Applied 1,440,000 960,000 2,400,000
Total cost 6,540,000 4,960,000 11,500,000
Markup 10%/Margin 15% 654,000 875,294 1,529,294
Cash received 7,194,000 5,835,294 13,029,294

Working of under/(over) applied Overheads

Rs.
Total applied 2,400,000
Total actual for the month 2,450,000
Under applied 50,000
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations

Referral Test July 08, 2020
Test: # 4 36 Marks – 1 hours

Cost & Management Accounting

Q.1 Sigma Limited (SL) is a manufacturer of two products X and Y. It is in process of preparing budget for the
year ended 31 December 2018. The following data has been extracted from the budgeted Profit and Loss
Account for the year ended 31 December 2017.
Summarized Profit and Loss Account
Rs. in million
Sales 1,000
Cost of sales (723)
Gross profit 277
Selling and admin expenses (45% variable) (105)
Financial charges (15)
Profit before tax 157

Following further details are available.

(i) SL’s market share is 10% and it sold 20 million units in the year 2017. Product Y contributed 60%
of the sale. Selling price of Y is double the price of X. For year 2018, prices of X and Y are
expected to increase by 5.6% and 4% respectively
(ii) Management intends to launch a new product “Z” at a price lower than the prices of both products
i.e Rs.20 per unit. Volume of existing products is expected to increase by 30% due to increase in
company’s market share and overall size of the market.
(iii) There was no opening or closing inventory of materials and finished products in 2017. Same policy
is expected in 2018.
(iv) Cost of goods sold includes depreciation of Rs. 150 million (which is 80%, remaining 20% is
charged in selling and admin expenses) and other fixed cost of Rs.120 million.
(v) Variable production cost comprises 60% raw material and 40% conversion cost.
(vi) Rate of inflation for raw material is 8%, for other variable costs is 3% and for all fixed costs is 6%.
(vii) Financial charges comprises interest on loan from bank @ 8% p.a. Bank has intimated to increase
the rate from 8% to 10% in 2018. Principal repayment will be made in 2020.
(viii) Machinery is fully depreciated in 2017. New machinery will be purchased in 2019 till then existing
machinery will be used.
(ix) Rs. 11 million will be incurred on marketing and advertisement of product Z.
(x) Company’s market share and overall size of market are expected to increase by 10% and 5%
respectively.
Required:
Prepare budgeted Profit and Loss for year ended 31 December 2018. (18)
 CMAC |Page 2 of 2

Q.2 Qaiser is the managing Director in Hali Limited (HL) who has not maintained detailed records. He has
taken various steps to run the company in professional manner including preparation of cash budget.
Following extracts of P&L for year ended June 2017 and other details have been gathered.
Extracts of P&L
Rs.

Revenue 20,000,000
Cost of revenue (13,200,000)
Operating cost (2,000,000)

(i) Revenue includes cash sales of 3.6 million. Credit period is 30 days and 90% of the sale is collected
within the credit period whereas remaining amount is collected in the next month.
(ii) Sales have been increasing at the rate of Rs.200,000 per quarter for the last few years. This increase
is only on account of price increase as there is no volumetric growth in sales. This trend is expected
to continue in 2017-18.
(iii) Cost of revenue includes cost of raw material 40%, labour 35% and overheads 25%. Raw material
prices increased by 5% on 1 January 2017.
(iv) The prices of material, labour and overheads are expected to increase by 8%, 5% and 3%
respectively with effect from 1 July 2017.
(v) Operating cost is expected to increase by 10% in 2017-18
(vi) 40% of all expenses including purchases are paid in the same month. 60% of the expenses are paid
in the next month. Labour is paid in the same month.
(vii) All expenses and revenues unless stated otherwise, are incurred evenly over the period.
(viii) Cost of revenue of 13.2 million includes depreciation of Rs.400,000
(ix) The balance of cash as on 1 July 2017 was Rs.300,000.
(x) There was no opening or closing stocks.

Required:
Prepare cash budget for the months of July, August and September 2017. (18)

(THE END)
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute
CMAC
Referral Test 1 Solution
REFERRAL TEST 4 SUGGESTED ANSWER CMAC
Ans-1

Rs. In million
Sales 1,677 W-1
Cost of sales (1,135.58) W-2
Gross profit 542
Selling and admin expenes (134) W-3
Financial charges (18.75) W-4
Profit before tax 388

W-1 (Sales)

Calculation of number of units to be sold in 2018

million
Total units sold in 2017 Given 20 units
Market share Given 10%
Market size 20/10% 200 units
Market size in 2018 200*1.05 210 units
Market Share in 2018 210*(10%+10%) 42 units
Units of X in 2017 40%*20 8 units
Units of Y in 2017 60%*20 12 units
Units of X in 2018 8*1.3 10.4 units
Units of Y in 2018 12*1.3 15.6 units
Units of Z in 2018 42-10.4-15.6 16 units

Rs. Per unit

Price of X in 2017* 31.25
Price of Y in 2017 62.5
Price of X in 2018 31.25*1.056 33
Price of Y in 2018 62.5*1.04 65
Price of Z Given 20

Rs. In million
2017 2018
Sale of X 250 343
Sale of Y 750 1,014
Sale of Z - 320
1,000 1,677

*Let X= price of X ; Y= Price of Y

8X + 12Y = 1,000
8X + 12(2X) = 1,000 Y=2X
X = Rs.31.25 per unit Y = Rs.62.5 per unit

W-2 (Cost of sales)

in million
Variable overheads Fixed overheads Depreciation Total
Cost of sales 453 120 150 723
Material Conversion cost
Total Cost in 2017 272 181 120 150 723
Units in 2017 20 million 20 million
Variable. Cost per unit 13.59 9.06
Inflation 8% 3% 6%
15 9 127.20 0
Units in 2018 42 million 42 million
Total costs in 2018 616.44 391.94 127.20 0 1,135.58

W-3 (Selling and admin)

in million
Variable expenes Fixed Marketing campaign Depreciation Total

Selling and admin 2017 47 20 - 38 105

105-47-38 (150/80%)*20%
Variable expenes per unit 2.36
Inflation 3% 6%
2.43 21.20 11
Selling admin in 2018 102.20 21.20 11 0 134
[42*2.43]

W-4 (Financial charges)

Charges rate Principal
2017 15 8% 15/8% = 187.5 million
2018 18.75 10% 15/8% = 187.5 million
 REFERRAL TEST 4 SUGGESTED ANSWER CMAC
Ans-2

July August September

Rs.
Receipts
Cash sales [ 990,000/3] 330,000 330,000 330,000
Credit sales - 90% of previous month 1,303,800 1,353,000 1,353,000
W-1 [(4,346,000/3)*90%] [(4,510,000/3)*90%] [(4,510,000/3)*90%]
- 10% of second last month 144,867 144,867 150,333
[(4,346,000/3)*10%] [(4,346,000/3)*10%] [(4,510,000/3)*10%]

1,778,667 1,827,867 1,833,333

Payments
Material (40% in the same month) 194,716 194,716 194,716
(1,460,371/3)*40% (1,460,371/3)*40% (1,460,371/3)*40%
Material (60% of previous month) 270,439 292,074 292,074
W-2 (1,352,195/3)*60% (1,460,371/3)*60% (1,460,371/3)*60%
Labour 404,250 404,250 404,250
Overheads (40% in the same month) 99,567 99,567 99,567
Overheads (60% of previous month) 145,000 149,350 149,350

Operating cost (40% in the same month) 73,333 73,333 73,333

W-3
Operating cost (60% of previous month) 100,000 110,000 110,000
Total payments (1,287,306) (1,323,290) (1,323,290)

Excess of receipts over payments 491,361 504,576 510,043

Add : opening balance 300,000 791,361 1,295,937
791,361 1,295,937 1,805,980
Workings
Sales (W-1)
Suppose sale of 1st quarter of 2017 = x
Total sales of 2017 = x + (x+200,000) + (x+400,00) + (x+600,000) = Rs. 20,000,000
4x + 1,200,000 = 20,000,000
x = Rs. 4,700,000

Cash sale of last quarter of 2017 = (x+600,000)*18% = Rs.954,000 as 3,600,000/20,000,000 = 18%

Credit sale of last quarter of 2017 = (x+600,000)*82% = Rs.4,346,000 [100%-18%]

Sales of 1st quarter of 2018 = 5,300,000+200,000 = 5,500,000

Cash sales of 1st quarter of 2018 = 5,500,000*18% =Rs. 990,000
Credit sales of 1st quarter of 2018 = 5,500,000*82% =Rs. 4,510,000

Cost of Revenue (W-2)

Material Material cost = 13,200,000*40% = Rs.5,280,000
Suppose material cost of 1st quarter of 2017 = x
Then material cost of 2nd, 3rd and 4th quarter would be x , 1.05x and 1.05x respectively as 5% increased from 3rd quarter i.e 1st jan 2018
Hence x + x + 1.05x + 1.05x = Rs.5,280,000
x = Rs.1,287,805
Forth quarter of 2017 = 1.05*1,287,805 = Rs.1,352,195
First quarter of 2018 = 1,352,195*1.08 = Rs.1,460,371

Labour
2017 - labour cost = Rs.13.2 million*35% = Rs.4,620,000
2018 - Rs.4,620,000*1.05 = Rs.4,851,000 per annum = Rs.404,250 per month.

Overheads
Overheads = 13.2 million*25% = Rs.3,300,000
Excluding depreciation of Rs.400,000 = Rs.2,900,000 p.a = 241,667 per month
2018 - Rs.2.9 million * 1.03 = Rs.2,987,000 per annum = Rs.248,917 per month.

Operating cost (W-3)

2017 operating cost = Rs.2 million /12 = 166,667 per month

2018 Rs.2,000,000*1.1 = 2,200,000 p.a = Rs.183,333 per month.
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations

Referral Test July 15, 2020
Test: # 5 35 Marks – 1 hour

Cost & Management Accounting

Q.1 Rahim Limited manufactures product “Zeta” from two ingredients P and Q. A standard absorption costing system
is in use. Following are shown certain balance in the company’s cost records for the current year.

Dr. Cr.
Variances: Rs. Rs.
Material price – P 92,700
Material price - Q 60,800
Labour efficiency 105,000
Labour rate 93,000
Under-applied overhead 60,000

Following other details are available.

(i) The standard mix of ingredients per standard unit of output is 10 Kg of P and 3 Kg of Q. Actual consumption of
P during the course of the year was 2,000 Kg less than standard while actual consumption of Q exceeded
standard by 2,000 Kg.
(ii) There was no opening stock. Physical closing stocks were as follows.

Quantity Original purchase cost

Material P 25,000 Kg Rs.612,500
Material Q 4,400 Kg Rs.118,800
Finished stock 3,000 standard units

(iii) Labour cost exceeded standard by Rs.3 per hour. Actual overhead expenditure was Rs.5,100,000. Overhead is
applied at 150% of direct labour costs.
(iv) 5,000 standard units were sold during the period.
(v) No overhead efficiency variance has been taken out.

Required:
Prepare standard cost card for “zeta” using absorption costing system. (15)
 CMAC |Page 2 of 2

Q.2 Qaiser Limited has provided you with the following budgeted and actual data for year ended 31 December 2018.

Budgeted (Rs.) Actual (Rs.)

Sales 27,000,000 27,295,000
Material (7,500,000) (8,461,450)
Labour (9,375,000) (9,463,125)
Fixed overheads (3,500,000) (3,200,000)
Profit 6,625,000 6,170,425

The reasons for variance are as follows.

(i) One unit of finished product requires 3 kgs of raw material and actual material price was 6% higher than the
budgeted price
(ii) Actual units sold were 3% (1,500 units) more than the budgeted sales quantity and actual sale price was lower by
Rs.10 per unit.
(iii) Budgeted labour cost per hour was equivalent to 150% of budgeted raw material cost per Kg. Labour utilization per
unit of finished product was 1/8 hour more than the budget.

The company’s policy is to absorb overheads at a predetermined rate per labour hour.

Required:
Prepare a statement reconciling the budgeted profit and actual profit. Calculate all possible and relevant variances for
sales, material, labour and overheads. (20)

(THE END)
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute
CMAC
Referral Test 1 Solution

REFERRAL TEST 5 SUGGESTED ANSWER CMAC

Ans-1

Standard cost card-Zeta

Standard Qty Standard rate (Rs.) Standard cost(Rs.)
Material P 10 23.6 236 W-1
Material Q 3 29 87 W-2
Labour 4 105 420 W-3
Overheads 4 157.5 630 W-4
1,373

W-1
Actual quantity purchased P = [(8,000* x 10) - 2,000 + 25,000] = 103,000 Kg.
Actual price of P = Rs.612,500/25,000 = Rs.24.5 per Kg
Material price variance = Actual quantity purchased (standard price - actual price)
(92,700) = 103,000(standard price- 24.5)
Standard price of material P = Rs.23.6 per Kg

W-2
Actual quantity purchased Q = [(8,000* x 3) + 2,000 + 4,400] = 30,400 Kg.
Actual price of Q = Rs.118,800/4,400 = Rs.27 per Kg
60,800 = 30,400 (standard price - 27)
Standard price of material Q = Rs.29 per Kg

* Output produced = units sold + clsoing stock = 5,000+3,000 = 8,000 units

W-3
Applied FOH = Actual FOH - Underapplied
Applied FOH = 5,100,000 - 60,000 = 5,040,000
FOH are applied at 150% of direct labour cost so 5,040,000/150% = Rs.3,360,000
Standard labour cost of actual output = 3,360,000

Labour rate variance = Actual hours paid (standard rate - actual rate)
(93,000) = Actual hours paid (-3)
Actual hours paid = 31,000 hours

Labour efficiency variance = standrad rate (standard hours for actual output - actual hours worked)
105,000 = (standard rate*standard hours for actual outpu) - (standard rate*31,000)
105,000 = standard labour cost of actual output - standard rate*31,000
105,000 = 3,360,000 - standard rate*31,000
Standard labour rate per hour = 105/hr

Standard labour cost of actual output = 3,360,000

Actual output = 8,000 units
Labour cost per unit = 3,360,000/8,000 = 420/unit
Labour rate per hour = Rs.105/hr
Standard Labour hours required per unit = 420/105 = 4 standard hours

W-4
Standard hours per unit = labour hours per unit = 4 hours
Standard overhead rate per hour = 105*150% = Rs.157.5/hr
 REFERRAL TEST 5 SUGGESTED ANSWER CMAC
Ans-2
Rs.
Budgeted profit 6,625,000
Sales volume variance W-1 198,750
Sales price variance W-2 (515,000)
Material price variance W-3 (478,950)
Material usage variance W-4 (257,500)
Labour rate variance W-5 675,938
Labour efficiency variance W-6 (482,813)
Fixed overheads spending variance W-7 300,000
Fixed overheads volume variance W-8 105,000
Actual profit 6,170,425

W-1
Budgeted sales quantity = 1,500/3% = 50,000 units
Actual sales quantity = 50,000*1.03 = 51,500 units
Budgeted sale price = 27,000,000/50,000 = Rs.540/unit
Actual sale price = 540-10 = 530/unit
Sales volume variance = standard profit per unit(actual quanitity sold - budgeted quantity)
volume variance = 6,625,000/50,000(51,500-50,000) = Rs.198,750 Fav.

W-2
Sales price variance = actual quantity sold(actual price-standard price)
Price variance = 51,500(530-540) = (515,000) Adv.

W-3
Budgeted raw material quantity = 50,000* 3 kgs = 150,000 kgs
Budgeted material price = 7,500,000/150,000 = Rs.50/Kg
Actual material price = 50*1.06 = 53/Kg
Total actual quantity used = 8,461,450/53 = 159,650Kgs

Material price variance = Actual quantity consumed(st.price-actual)

Material price variance = 159,650(50-53) = Rs.478,950

W-4
Material usage variance = Standard price (standard qty for actual output - actual qty consumed)
Usage varaince = 50 (51,500*3 - 159,650) = (257,500)

W-5
Budgeted labour cost per finished goods = 9,370,000/50,000 = Rs.187.5/unit
Budgeted labour time for one finished unit = 187.5/(50*150%) = 2.5 hours/unit
Actual labour time taken for one finished unit = 2.5 + (1/8) = 2.625 hours
Budgeted labour cost per hour = 187.5/2.5 hours = Rs.75/hr
Actual labour cost per hour = 9,463,125/ (2.625 hours x 51,500) = Rs.70/hr

Labour rate variance = Actual hours paid(standard rate-actual rate)

Rate variance = 51,500*2.625 (75-70) = Rs.675,937.5 Fav.

W-6
Labour efficiency variance = Standard rate (standard hours for actual output - actual hours paid)
Efficiency variance = 75 [(51,500*2.5) - (51,500*2.625)] = Rs.(482,812.5) Adv.

W-7
Fixed overhead spending variance = Budgeted FOH - Actual FOH
Fixed overhead spending variance = 3,500,000 - 3,200,000 = Rs.300,000 Fv.

W-8
Budgeted hours for budgeted production = 2.5* 50,000 = 125,000 hours
Budgeted overhead absorption rate = 3,500,000/125,000 = Rs.28/hr
Overheads absorbed/applied = Actual production(hours) x OAR = 51,500*2.5 x 28 = Rs.3,605,000

Fixed overhead volume variance = Absorbed FOH - Budgeted FOH = 3,605,000 - 3,500,000 = Rs.105,000
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations

Referral Test July 18, 2020
Test: # 6 34 Marks – 1 hours

Cost & Management Accounting

Q.1
Farooq Limited received an order to produce 100,000 units of product Y which is expected to be completed in six months.
Three types of raw materials (A, B & C) are required to produce one unit of Y. All the materials are added at the
beginning of the process. Labor and overheads are distributed evenly throughout the process. Inspection is conducted
when the product is 60% complete. Normal loss is equal to 5% of the units produced. Following other information is also
available.
(i) Materials

Material A Material B Material C

Required per unit of Y 1 kg 2 kg 0.75 kg
Market purchase price Rs.250/kg Rs.70/kg Rs.100/kg
Available in stock Not available 300,000 kgs @ Rs.50/kg 40,000 kgs @ Rs.70/kg
Expected selling price of Rs.60/kg Rs.110/kg
available stock

▪ In place of material A, another material D can be used alternatively which is available in market at a cost of
Rs.100/kg. 2.6 kgs of material D are required to produce one unit of Y.
▪ 60% of the available stock of material B is required for use in the current production.
(ii) Labor
Each worker will take 6 hours per unit for initial 50 units. Thereafter the average time would be reduced to 5 hours
per unit. Each worker would be hired on six months contract at the rate of Rs.60/hr. with 200 working hours per
month.
(iii) Variable overheads
Variable overheads are estimated at Rs. 8 per labor hour.
(iv) Fixed overheads
Fixed overheads are estimated at Rs. 22 million and absorbed at the rate of 125% of labor cost per hour.
Overheads of Rs.800,000 which would only be incurred if the contract is accepted.
(v) Others
10 working hours of technical evaluator were spent on this project. The charge out rate of evaluator is Rs.5,000/hr.
Required:
Compute manufacturing cost of product Y using the relevant cost approach. (17)
Q.2
Unique Tools Limited (UTL) manufactures heavy tools for auto industry. UTL is considering an offer for supply of 10,000 units
of tool BX. Following information is available in this regard.

(i) Each unit of tool BX would require 2 kg of material Beta which is available in market at Rs.1,100/kg. Alternatively,
 CMAC |Page 2 of 2

UTL could use 2.5 kg of a substitute material Gamma which can be produced internally. Production of each kg of
material Gamma would require raw materials costing Rs.520 and 1.25 labor hours. Processing of Gamma would require
special equipment which is available at a rent of Rs.188,000 per month. It will be beneficial for UTL to produce
Gamma internally. Any excess quantity of Beta will be purchased from market.
(ii) Due to slack business conditions, approximately 30,000 labor hours remain idle each month. Due to technical nature of
this job additional is not available. Moreover, since company does not want to lose the existing workers, idle house are
paid at 50% of normal wage rate of Rs.100/hr.
(iii) Overheads are estimated at Rs.150 per labor hour which includes variable as well as fixed overheads. Idle hours result
in unabsorbed fixed overheads of Rs.900,000.
(iv) To improve productivity, UTL plans to pay wages of Rs.210 per unit of BX or Rs.100 per hour, whichever is higher.
(v) It is estimated that production of BX at various efficiency levels would be as follows.
▪ 50% units in 2.2 hours per unit
▪ 30% units in 2.0 hours per unit
▪ Remaining units in 1.8 hours per unit

Required:
Compute selling price which UTL may offer for supply of BX, if UTL requires a markup of 25% above the relevant costs.
(17)
(THE END)
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute
CMAC
Referral Test 1 Solution
REFERRAL TEST 6 SUGGESTED ANSWER CMAC
Ans-1
Rs.
Material A 26,250,000 W-1
Material B 13,500,000 W-2
Material C 7,875,000 W-3
Labour 32,256,000 W-4
Variable factory overheads 4,300,800 W-5
Fixed factory overheads 800,000
Note A
Others -
Manufacturing cost of product Y 84,981,800

Materials
Units
Output required Given 100,000
Normal loss for materials 100,000*5% 5,000
Required to be purchased 105,000

W-1
Cost of Material A 105,000units x 1kg x Rs.250 Rs. 26,250,000
OR Lower of
Cost of Material D 105,000 units x 2.6kg x Rs.100 Rs. 27,300,000

W-2
Material B
Kgs required of material B 105,000units x 2kgs Kgs 210,000
Available in stock Given Kgs 300,000
Available for this order 300,000 x 40% x Rs.60 Rs. 7,200,000
Remaining purchase from market (210,000-120,000) x Rs.70 Rs. 6,300,000
Cost of Material B 13,500,000

W-3
Material C
Kgs required of material C 105,000 x 0.75kg Kgs 78,750
Cost for available stock 40,000 Kg x 110 Rs. 4,400,000
Remaining purchase from market (78,750-40,000) x 100 Rs. 3,875,000
Total cost 8,275,000
OR Lower of

All kgs purchase from market 78,750 x 100 Rs. 7,875,000

W-4
Labour
Total working hours per labour 200 x 6 Hours 1,200
Hours required for first 50 units 50 units * 6 hours Hours 300
Remainig hours available Hours 900
Units produced in remaining hours 900/5 units 180
Total number of units produced in 1,200 hours per worker
50 + 180 230

Total output required Given units 100,000

Normal loss 100,000 x 5% x 60% units 3,000
Input units required units 103,000

No of workers 103,000/230 Number 448

Labour cost Rs.60 x 200 hours x 6months x 448 workers

Rs. 32,256,000

W-5
Variable overheads
Cost of variable overheads 200 hours x 6 x 448 workers x Rs.8 Rs. 4,300,800

Note A

Fixed overhead costs are incurred whether the work goes ahead or not so it is not a relevant cost. Additional fixed overheads
due to accepting this order will be relevant.
Technical evaluator's pay is a sunk cost so not relevant for this project.
 REFERRAL TEST 6 SUGGESTED ANSWER CMAC
Ans-2
Rs.
Material cost- External buying of Beta W-1 15,382,400
Material cost - Internal production of Gamma W-1.1 5,696,400
Direct labour cost W-2 1,120,000
Variable overheads W-3 2,472,000
Total relevant cost 24,670,800

BX selling price at 25% above the relevant costs Rs.24,670,800 x 1.25 30,838,500

W-1 Material cost- External buying of Beta

Total hours available Given 30,000 hours

Hours required for production of BX W-2 20,600 hours
Hours available for production of Gamma 9,400
Hours required to produce one kg of Gamma Given 1.25 hours
Kgs of Gamma produced in available capacity 9,400/1.25 7,520 Kg
Kg required to produce one unit of BX Given 2.5 Kg
Units of BX produced 7,520/2.5 3,008 Units
Remaining units produced from Beta 10,000-3,008 6,992 Units
Kgs of Beta required per unit of BX Given 2 Kg
Total Kg of Beta to be purchased 6,992 x 2kg 13,984 Kg
Market cost of Beta per kg Given 1,100 Rs.
Material cost- External buying of Beta 13,984 x 1,100 15,382,400 Rs.

W-1.1 Material cost - Internal production of Gamma

Rs.
Matreial cost - per kg 520
Direct labour cost - per kg 1.25 hours x 100 x 50% 62.5
Variable overheads 1.25 hours x 120 150
Fixed existing (not relevant) -
Fixed additional (188,000/9,400) x 1.25 hours per kg 25
Total production cost of Gamma per kg 757.5

Kgs of Gamma produced in available capacity W-1 7,520

Total production costr of Gamma 7,520 kg x Rs.757.5 5,696,400

W-2 Direct labour cost

Wages at higher of Rs.100 per hour and

Hours Rs.210 per unit
Units hours per unit
10,000 x 50% = 5,000 2.2 11,000 Rs. 100/hr 1,100,000
10,000 x 30% = 3,000 2 6,000 Rs. 210 per unit 630,000
10,000 x 20% = 2,000 1.8 3,600 Rs. 210 per unit 420,000
20,600 2,150,000
Payment of idle hours at 50% (non-relevant cost) 20,600 x Rs.100 x 50% (1,030,000)
Relevant direct labour cost 1,120,000

W-3 Variable overheads

Overhead rate (variable + fixed) Rs. 150 per labour hour
Fixed OAR 900,000/30,000 Rs. 30 per labour hour
Variable overhead rate 150-30 Rs. 120 per labour hour
Direct labour hours W-2 hours 20,600
Variable overheads 20,600 x 120 Rs. 2,472,000 Total
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations

Referral Test July 22, 2020
Test: # 7 33 Marks – 1 hours

Cost & Management Accounting

Q.1 Alpha Limited manufactures a variety of electronic items including a product OY-1. A new model of that
product is produced each year. Production is carried out in batches. Company uses standard absorption
costing. Following costs were recorded for the initial batch of product OY-1.
Rs.
Direct materials (Material A = Rs.80/kg ; Material B = Rs.60/kg) 400,000
Direct labour (800 hours including overtime of 200 hours) 800,000
Special tools (re-useable) 50,000
Variable overheads (per labour hour) 500
Fixed overheads (per week) 25,000

Following further information is available.

(i) All the components are imported and are assembled by a team of highly skilled labour (10
employees) who work 5 days per week and 8 hours per day. Overtime is paid at double the
normal rate.
(ii) Supplier has increased material prices by 10%.
(iii) Ratio of quantities of material A and B is 1:2.
(iv) 25,000 Kgs of Material A and 40,000 Kgs of material B are available in stock which can be sold
at Rs.90/kg and Rs.55/kg respectively.
(v) Total 4,370 direct labour hours are required for this order after taking effect of learning curve.
The company has been asked to bid for an order of 480 units. The order is required to be completed in 10
weeks. If order is not accepted, only 8 of the employees will be employed elsewhere whereas 2
employees will remain idle for the next 6 weeks.
Quotation is unlikely to be accepted if it exceeds Rs.25,000/unit.
Required:
Recommend whether it is worth accepting this order at Rs.25,000 per unit. (15)

Q.2 Super Chemical Limited (SCL) manufactures an industrial chemical PM-1. It has two processing departments
Y and Z. The operating capacity of each department is 42,000 labour hours per annum. The budgeted operating
costs of the departments are as under:
Direct wages Factory OAR Annual Fixed overheads
(per hour) (per labour hour)
Department X Rs.120 Rs.145 Rs.1,356,600
Department Y Rs.90 Rs.105 Rs.1,117,200
 CMAC |Page 2 of 2

Direct wages are paid on a monthly basis irrespective of the production. Factory overhead rates have been
worked out to absorb all budgeted variable and fixed overheads based on 95% operating capacity utilization.
SCL expects a decrease in demand for PM-1 as a result of which operating capacity utilization is estimated to
reduce to 70%.
Option 1
SCL is considering to introduce a new product PM-2 to utilize the spare capacity. According to market
research carried out by the company the annual demand for PM-2 would vary according to its price as shown
below.
Selling price per unit (Rs.) 190190
200200
Demand (units) 18,00015,000
Direct material cost of PM-2 is estimated at Rs.30/unit and direct labour hours are estimated at 0.75 and 0.5 per
unit for Department X and Y respectively.
Option 2
SCL also received an offer from a third party who wants to acquire all the spare capacity facilities on rent at an
hourly rate of Rs.140 and Rs.100 for departments X and Y respectively. Third party would bring its own raw
material but would use SCL’s labour for which no additional amount would be paid.
Required:
Determine which of the two options would be financially beneficial for SCL. (18)

(The End)
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute
CMAC
Referral Test 1 Solution
REFERRAL TEST 7 SUGGESTED ANSWER CMAC
Ans-1
Rs.
Material A cost 2,112,000 W-1
Material B cost Rs.2,200,000+ Rs.528,000 2,728,000 W-1
Labour cost 3,408,000 W-2
Variable overheads 4,370 hours x Rs.500 2,185,000
Total cost 10,433,000

Rs.
Cost per unit Rs.10,433,000/480 21,735
Price per unit Given 25,000
Profit per unit 25,000 - 22,652 3,265

Hence =, quotation can be accepted.

W-1
Material cost
Units required Given 480 Units
Suppose quantity of material A is x then
80x + 60(2x) = Rs.400,000 ; x = 2,000 kg per 40 units
Material A per unit 2,000kg/40 50 Kg
Material A per unit 50kg x 2 100 Kg
Kgs required of material A 50kg x 480 24,000 Kg
Kgs required of material B 100kg x 480 48,000 Kg
Material A available in stock Given 25,000 Kg
Material B available in stock Given 40,000 Kg
Opportunity cost if used available stock-Material A 24,000 kg x Rs.90 2,160,000 Rs.
Lower of
Material A cost if purchased from supplier 24,000Kg x Rs.80 x 1.1 2,112,000 Rs.

Material B cost if purchased from supplier 40,000 kg x Rs.60 x 1.1 2,640,000 Rs.
Opportunity cost if used available stock-Material B 40,000 kg x Rs.55 2,200,000 Rs. Lower of
Remaining purchase from supplier 8,000Kg x Rs.60 x 1.1 528,000

W-2
Labour cost

Rate calculation
600 normal hours + 200 overtime = Rs.800,000
Rate of overtime is double the normal rate then suppose rate of normal hours is "x" then,
600x + 200(2x) = Rs.800,000 ; then x = Rs.800 per hour
Normal rate = Rs.800/hr ; overtime rate = Rs.1,600/hr

Cost calculation
Hours Rs.
8 workers for 10 weeks (per day 8 hours) 3,200 @ Rs.800 per labour hour 2,560,000
2 workers for 10 weeks (per day 8 hours) 800 @ Rs.800 per labour hour 256,000 see Note 1
Overtime (remainig hours) 370 @ Rs.1,600 per labour hour 592,000
Hours required for 480 units 4,370 3,408,000

Note 1
Only 320 hours are relevant for this order.
 REFERRAL TEST 7 SUGGESTED ANSWER CMAC
Ans-2

Option 1 Introduction of new product PM-2

In option one there are further two choices available that which level management should consider for charging price of PM-2 product.
Level 1 Level 2

Selling price per unit (Rs.) 190 200

Deirect material cost per unit (Rs.) (30)
Variable operating cost for both departments (Rs.) W-1 (121.75)
Total variable cost per unit of PM-2 (151.75) (151.75)
Contribution margin per unit 38.25 48.25

Demand in units 18,000 15,000

Production capacity W-2 16,800 16,800

Lower of above is the required output 16,800 15,000

Total contribution margin (Rs.) 642,600 723,750

Option 2 Selling all spare facilities to third party

Department X Department Y
Spare hours W-1 12,600 12,600
Rental income per hour (Rs.) 140 100
Variable operating cost per hour (Rs.) W-1 (111) (77)
Contribution margin per hour (Rs.) 29 23

Department wise contribution margin (Rs.) 365,400 289,800

Total contribution margin 655,200

Decision
SCL should produce 15,000 units of PM-2 having selling price of Rs.200 per unit which gives
the highest contribution margin.

W-1 Department X Department Y

Total overheads per hour (Rs.) A 145 105
Operating capacity at 100% (hours) B 42,000 42,000
Operating capacity at 95% (hours) C = B x 95% 39,900 39,900
Annual fixed overheads (Rs.) D 1,356,600 1,117,200
Fixed OAR per labour hour (Rs.) E = D/C 34 28
Variable overheads per hour (Rs.) F=A-E 111 77
Hours per unit of PM-2 G 0.75 0.5
Variable overheads per unit (Rs.) H=FxG 83.25 38.50

W-2 Calculation of spare capacity

Department X Department Y
Total capacity (hours) 42,000 42,000
30% spare capacity (hours) 12,600 12,600
Hours required per unit 0.75 0.5
Units of PM-2 that can be processed within spare capacity 16,800 25,200
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations

Referral Test 05 August 2020
Test: # 8 34 Marks – 1 hours

Cost & Management Accounting

Q.1 Sigma Limited (SL) manufactures three products P, Q and R. The profitability of SL is declining and it has
incurred a loss during the year ended 31 December 2017. The product wise results are as under:

Product P Product Q Product R

(Rs. in 000) (Rs. in 000) (Rs. in 000)
Sales 140,000 180,000 126,000
Cost of sales (105,000) (135,000) (120,000)
Operating cost (30,000) (49,000) (13,000)
Net profit / (loss) 5,000 (4,000) (7,000)

Other information is also available.

(i) Cost of sales includes fixed costs of Rs. 135 million. Fixed costs have been allocated to the products on the
basis of machine hours. P, Q and R require 1.50, 1.75 and 2.00 machine hours per unit respectively.
(ii) Variable operating cost of P, Q and R is Rs.45, Rs.49 and Rs.26 per unit respectively.
(iii) No of units sold of P, Q and R during 2017 is 400,000, 600,000 and 300,000 respectively.

Proposal to introduce new product ZX:

In order to increase sales and improve operating results, SL is considering a proposal to introduce a new product ZX.
The details of proposal are as follows.
Rs.
Selling price per unit 963
Variable cost per unit (681)
Contribution margin per unit 282

 Sale of existing products would reduce by 20%

 Annual fixed costs would increase by Rs.7 million.

Required:
Calculate the number of units of product ZX that should be sold during the year to achieve a net profit of Rs.4.5
million. (17)
 CMAC |Page 2 of 2

Q.2 Azhar Limited produces and sells two products HX and HY. It started business 5 years ago with a single product HX. 3
years ago it introduced product HY which is a low-end version of product HX but is sold through an entirely different
infrastructure.
Initially product HY started well but due to uncertain market conditions, its sale declined by 85% in 2017. The results of
previous two years are as follows.
-----------------Amount in Rs.--------------------
Product HX Product HY Product HY
Year ended 31 March 2017 31 March 2017 31 March 2016
Sales 20,000,000 1,500,000 10,000,000
Raw material and direct wages 8,750,000 1,000,000 5,000,000
Variable and fixed overheads 3,000,000 1,800,000 2,500,000
Units sold 10,000 units 2,000 units 10,000 units

Management has decided to shut down product HY during 2018. Following estimates pertain to year ending 31 March 2018:

Total variable and fixed overheads cost for product HX Rs.3,400,000

Increase in fixed cost of product HX Rs.250,000
Plant shut down costs for product HY Rs.450,000
Sale of product HX 13,000 units

Required:
a) Determine the minimum number of units of product HY that should be sold in order to satisfy the continuation of
sale of product HY during year ending 31 March 2018. (7)
b) Assuming the sale of product HY is discontinued. Calculate the unit price of product HX that should be charged
to increase the profit by 20% over the total net profit for the year ended 31 March 2017. (10)

(THE END)
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute
CMAC
Referral Test 1 Solution
REFERRAL TEST 8 SUGGESTED ANSWER CMAC
Ans-1

Product P Product Q Product R Total

Units sold (units) A 400,000 600,000 300,000 1,300,000
Machine hours per unit B 1.50 1.75 2.00
Total machine hours C=AxB 600,000 1,050,000 600,000 2,250,000

Rs. in "000"

Present sales D 140,000 180,000 126,000 446,000

Variable cost -
Total cost of sales E 105,000 135,000 120,000 360,000
Fixed cost of sales F 36,000 63,000 36,000 135,000
[600/2,250 x 135,000] [1,050/2,250 x 135,000] [600/2,250 x 135,000]
Variable cost of sales G = E-F 69,000 72,000 84,000 225,000
Variable operating cost H = A x 45, 49, 26 18,000 29,400 7,800 55,200
Total variable cost of existing products I=G+H 87,000 101,400 91,800 280,200
-
Contribution margin of existing product before ZX J=D-I 53,000 78,600 34,200 165,800
Sales reduced due to ZX K = J x 20% (10,600) (15,720) (6,840) (33,160)
Revised contribution margin of existng products L=J-K 42,400 62,880 27,360 132,640
Fixed cost of sales Given (135,000)
Fixed operating cost (30,000 + 49,000 + 13,000) - 55,200 (36,800)
Additional fixed cost Given (7,000)
Required profit for the year Given (4,500)
Costs to be covered through contribution margin of ZX (50,660)

Contribution margin per unit of ZX (Rs.) Given Rs. 282

No of units of ZX to be sold 50,660,000/282 179,645

 REFERRAL TEST 8 SUGGESTED ANSWER CMAC
Ans-2

a)
Contribution margin per unit of product HY Rs.
Sale per unit (based on 2017 results) 1,500,000/2,000 units 750
Raw material and direct wages per unit 1,000,000/2,000 units (500)
Variable overheads per unit W-1 (87.5)
Contribution margin per unit of HY 162.5

Fixed cost calculation in 2018

Fixed cost in 2017 W-1 1,625,000
Avoidable fixed cost of shut down Given (450,000)
Fixed cost to be recovered 1,175,000

Minimum units to continue sale of product HY 1,175,000/162.5 7,231 units

W-1 Variable overheads per unit of HY

Using high low method
2017 2016
Total production overheads 1,800,000 2,500,000 Rs.
Production level 2,000 10,000 units

Decrease in fixed cost 2,500,000-1,800,000 700,000

Decrease in operating level 10,000 - 2,000 8,000
Variable cost per unit 700,000/8,000 units 87.5 Rs. per unit
Fixed cost in 2017 1,800,000 - (2,000 x 87.5) 1,625,000

b)
Contribution margin per unit of product HX Rs.
Sale per unit (based on 2017 results) Rs.20,000,000/10,000 units 2,000
Raw material and direct wages per unit Rs.8,750,000/10,000 units (875)
Variable overheads per unit W-2 (50)
Contribution margin per unit of HX 1,075

Net profit of HX in 2017 20 million - 8.75m - 3m 8,250,000

Net loss of HY in 2017 1.5m - 1m - 1.8m (1,300,000)
Profit for 2017 6,950,000
Increase in profit 6,950,000 x 20% 1,390,000
Fixed cost of HX in 2018 W-2 2,750,000
Fixed cost of HY (shut down cost) 450,000
Variable cost of HX at 13,000 units (875+50) x 13,000 12,025,000
Contribution required 23,565,000

No of units of HX to be produced in 2018 13,000 units

23,565,000/13,000 units 1,813 Rs.per unit

Sale price per unit of HX to be charged to earn required contribution

W-2 Variable overheads per unit of HX

Using high low method
2018 2017
Total production overheads 3,400,000 3,000,000 Rs.
Increase due to fixed cost (250,000)
3,150,000 3,000,000
Production level 13,000 10,000 units

Increase in fixed cost 3,150,000-3,000,000 150,000

Increase in operating level 13,000 - 10,000 3,000
Variable cost per unit 150,000/3,000 units 50.0 Rs. per unit
Fixed cost in 2017 3,000,000 - (10,000 x 50) 2,500,000 Rs.
Fixed cost in 2018 2,500,000 + 250,000 2,750,000 Rs.
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations

Referral Test August 08 , 2020
Test: # 9 32 Marks – 1 hours

Cost & Management Accounting

Q.1 Alpha Limited (AL) plans to introduce a new product DMX which would be used in electric appliances.
Following information is available in this regard:
(i) The demand of DMX for the first year is expected to be 150,000 units which would increase by 15% per
annum in year 2 and onwards. However, in year 5 the demand is expected to decline by 20%.
(ii) Estimated selling price and variable cost per unit of DMX in year 1 is estimated at Rs.5,000 and Rs. 3,200
respectively.
(iii) The new plant would be depreciated at the rate of 20% 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 five years is expected to be equal to its carrying value.
(iv) Incremental fixed overheads will be Rs.35 million per year.
(v) Working capital of Rs.7 million would be required at the commencement of the project. Working capital is
expected to increase by 10% each year.
(vi) Installation charges would be Rs.600,000 which will be paid immediately after the installation.
(vii) Amount spent on research of new product in last 2 months is Rs.1.8 million.
(viii) Initial investment in the new plant for manufacturing DMX would be Rs.1,100 million.
(ix) Impact of inflation on selling price, variable cost and other expenses would be 5%, 8% and 10%
respectively.
(x) Applicable tax rate is 30% and tax is paid in the year following to the year in which the liability arises.
(xi) Company’s cost of capital is 12%.
Required:
On the basis of net present value, advise whether AL should invest in the above project. (Assume that except
stated otherwise, all cash flows would arise at the end of year) (18)

Q.2 Shinning Energy Ltd is a fast growing profitable company. The company is based in Karachi and has
just won a new contract to supply gas to the State Electricity Board. In this regard, the company planned to
commission a 35-kilometre pipeline at a cost of Rs. 260m to enable it execute the contract. The pipeline, when
installed, will carry the gas to an agreed location under the control of the State Electricity Board.
The anticipated revenue from sales to the State Electricity Board is expected to be Rs. 120m per annum.
 CMAC |Page 2 of 2

Apart from this contract, the pipeline could also be used to transport Liquefied Natural Gas (LNG) to other
willing customers in the suburb. The sales from this source are put at Rs. 80m per annum.
The management of Shinning Energy Ltd considers the useful life of the pipeline to be 20 years. The financial
manager estimates a profit to sales ratio of 20% per annum for the first 12 years and 17% per annum for the
remaining life of the project.
The project is not likely to have any salvage value.
Shinning Energy Ltd will enjoy exemption from tax for this project as a result of a recent government
investment incentive.
The company’s cost of capital is 15%.

Required
(a) Why is the investment decision important to organizations and what techniques can be used to ensure that
optimal investments are undertaken by firms? (4)
(b) Compute the project’s IRR. (10)

(THE END)
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute
CMAC
Referral Test 1 Solution

REFERRAL TEST 10 SUGGESTED ANSWER CMAC

Ans-1
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Projected number of sale units of DMX A 150,000 172,500 198,375 228,131 182,505

Rs.
Selling price per unit 5% increase 5,000 5,250 5,513 5,788 6,078
Variable cost per unit 8% increase (3,200) (3,456) (3,732) (4,031) (4,354)
Contribution margin per unit B 1,800 1,794 1,780 1,757 1,724

Total contribution C=AxB 270,000,000 309,465,000 353,111,468 400,837,237 314,632,520

Depreciation of new plant W-1 (220,000,000) (176,000,000) (140,800,000) (112,640,000) (90,112,000)
Incremental fixed overheads 10% increase (38,500,000) (42,350,000) (46,585,000) (51,243,500) (56,367,850)
Net profit before tax 11,500,000 91,115,000 165,726,468 236,953,737 168,152,670
Tax @ 30% (3,450,000) (27,334,500) (49,717,940) (71,086,121) (50,445,801)
Depreciation add back 220,000,000 176,000,000 140,800,000 112,640,000 90,112,000
Working capital W-2 (6,000,000) (600,000) (660,000) (726,000) (798,600) 9,663,060
Technicians payment (600,000)
Residual value receipts W-1 360,448,000
Initial investment (1,100,000,000)
Net cash flows (1,106,600,000) 230,900,000 263,005,000 278,465,968 299,077,197 557,289,609 (50,445,801)
Disc.rate 12% 1 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066
Present value (1,106,600,000) 206,160,714 209,665,976 198,206,575 190,068,965 316,221,091 (25,557,413)
Net present value (11,834,091)

Decision
NPV is negative, hence project is not viable.

W-1 Rs.
Cost of plant 1,100,000,000
Dep in year 1 @ 20% (220,000,000)
NBV 880,000,000
Dep in year 2 (176,000,000)
NBV 704,000,000
Dep in year 3 (140,800,000)
563,200,000
Dep in year 4 (112,640,000)
450,560,000
Dep in year 5 (90,112,000)
Residual value/NBV 360,448,000

W-2
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Working capital required 6,000,000 6,600,000 7,260,000 7,986,000 8,784,600
(Increase)/Decrease (600,000) (660,000) (726,000) (798,600) 9,663,060
REFERRAL TEST 10 SUGGESTED ANSWER CMAC
Ans-2
a) Marks

(i) Investment decision is important to organisations as it involves the identification of

viable projects. It deals with the appraisal of projects using various techniques to
determine those that are viable. 2

(ii) Techniques that can be used to ensure optimal investments include:

1. Net Present Value (NPV)
2. Internal Rate of Return (IRR)
3. Pay Back Period and
4. Accounting Rate of Return (ARR). 2

b) IRR
Try 15% discount factor
Year Cash flow DF(15%) Present Value
Rs.‘000 Rs.‘000
0 (260,000) 1.0000 (260,000)
1 – 12 40,000 5.4206 216,824
13 – 20 34,000 0.8387 28,516
Net Present Value (14,660) 4

Try 12% discount factor

Year Cash flow DF(15%) Present Value
Rs.‘000 Rs.‘000
0 (260,000) 1.0000 (260,000)
1 – 12 40,000 6.1944 247,776
13 – 20 34,000 1.2750 43,350
Net Present Value 31,126 4

IRR = 12% + {31,126/(31,126-14660)*(15-12)

IRR = 12% + 2.039%

IRR = 14.039% 2

14