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:
30% of the savings in labour cost, would be paid as bonus.
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)
