Certificate in Accounting and Finance Stage Examination

The Institute of 5 September 2024

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.

Section A

Q.1 A factory has three machines and produces two products, A and B. The following information
is available in this respect:
Machine 1 Machine 2 Machine 3
Operators required per machine 2 3 4
Machine hours required to produce each unit of A 0.7 0.6 0.5
Machine hours required to produce each unit of B 0.2 0.3 0.4
Electricity consumed per machine hour (kWh) 12 15 20
The budgeted overheads for the next quarter are Rs. 7.192 million, which include electricity
and power costs amounting to Rs. 2.912 million. All overheads, other than electricity and
power, are allocated on the basis of operator hours.
Required:
Determine the factory overhead rate per machine hour for each machine if the budgeted
production for the next quarter is 1,200 units of A and 800 units of B. (08)

Q.2 Tazeem Limited (TL) is engaged in the manufacturing and sale of a single product. Its budget
for the next year envisages the following:
Rs. in million
Sales (8 million units @ Rs. 64 per unit) 512
Net profit 32
40% of all expenses are fixed, while the remaining 60% are variable

The directors of TL believe that the margin of safety as per the budget is low and should be at
least 20%. They understand that sales cannot be increased due to market competition and,
therefore, have advised the management to identify areas where fixed expenses can be
reduced to achieve a margin of safety of 20%.
Required:
Calculate the margin of safety as per the budget. Also, determine the required amount of
savings in fixed costs to achieve a margin of safety of 20%. (08)

Q.3 A company’s main raw material has an annual consumption of 960,000 units. The company
issues orders using the Economic Order Quantity (EOQ) of 80,000 units. The associated
annual holding costs amount to Rs. 30 per unit, with details as follows:
Rs. per unit
Insurance (2% of cost) 18
Warehousing (based on space occupied) 12
30

Required:
Determine the revised EOQ if the cost of the raw material increases to Rs. 1,160 per unit. (05)
 Cost and Management Accounting Page 2 of 4

Q.4 HG Enterprises (HG) produces three similar products under different brand names. HG is
planning to introduce a new product with several unique features under the brand name Star.
Market research shows that in the first year, HG can sell 190,000 units of Star at
Rs. 620 per unit. However, HG's board believes that the new product should only be
introduced if it can increase the company’s net profit by Rs. 25 million in the first year.

To assess whether the above target is achievable, the finance department has provided the
following information:
(i) A commission of 5% is paid on sales.
(ii) 5% of the units produced are expected to be rejected upon inspection, which is carried
out at the end of the process. The rejected units would be sold as scrap at Rs. 100 per unit.
(iii) Each unit of Star would require 2.5 kg of raw material A and 2 kg of raw material B. The
estimated cost of A and B is Rs. 52 and Rs. 30 per kg, respectively.
(iv) Labour is estimated at 0.4 hours per unit. Similar to the last year, 12.5% of the labour
hours would remain idle if HG continues to produce existing three products only. HG
retains the idle labour because they are highly skilled and such additional labour is not
available in the market. However, the idle labour are paid at 90% of the normal labour
rate and are included in fixed overheads. Overtime, if any, is paid at 75% above the
normal labour rate. In the latest annual financial statements, direct labour cost was
Rs. 140 million at Rs. 500 per hour.
(v) 40% of the total factory overheads are fixed. Factory overheads are allocated on the basis
of labour hours. As per the latest financial statements, total factory overhead were
Rs. 105 million.

Required:
Determine the cost gap if HG wants to achieve a profit of Rs. 25 million from Star, in the first
year. (10)

Q.5 Ahmed Manufacturing Company (AMC) has received an order to supply 200 units of a
machine for Rs. 120,000 each. The estimated cost of producing the first machine is as follows:
Rupees
Material 40,000
Labour (40 hours @ Rs. 500 per hour) 20,000
Overheads (120% of direct labour cost) 24,000
84,000

The labour hours will be subject to a 90% learning curve. However, the impact of learning
curve will stop after the 20th machine.
AMC's HR department has identified a training program that is expected to prolong the
learning curve effect to the 25th machine. Moreover, the training would help reduce material
wastage, thereby reducing the overall material cost by 1%. The training would cost
Rs. 350,000.

Required:
Determine whether the training identified by HR department would be financially beneficial
for this order. (The value of learning curve factor for 90% learning curve effect is –0.152) (08)

Q.6 Omega Limited (OL) uses material L3 in its production process. The annual demand for
L3 is 180,000 units, and it is used evenly throughout the year. The daily demand can vary by
30 units from the average demand. OL orders L3 in batches of 10,000 units. The lead time
and the probabilities of their occurrences are given below:
Lead time (in working days) 5 6 7 8 9 10
Probability of occurrence 32% 53% 5% 5% 3% 2%

Assume that both OL and the supplier work 300 days a year.
 Cost and Management Accounting Page 3 of 4

Required:
Calculate the safety stock, reorder level and maximum inventory level if OL is willing to take:
(i) a 10% risk of being out of stock
(ii) a 5% risk of being out of stock (09)

Section B

Q.7 Waheed Industries Limited (WIL) produces a single product. It is in the process of preparing
its budget for the year ending 31 August 2025. An analysis of WIL's performance during the
current year and plans for the next year is provided below:

(i) The sales volume is expected to increase from 90,000 units to 100,000 units.
(ii) The sale price will be increased to Rs. 1,200 per unit.
(iii) To achieve the increase in sales, advertising expenses will be increased by Rs. 2 million.
Variable selling and administration expenses will increase from Rs. 100 to
Rs. 110 per unit. As a result, total selling and administration expenses will increase
from Rs. 15 million to Rs. 19 million.
(iv) Better quality raw materials will be purchased at Rs. 315 per kg, which is an increase
of 5% over the previous year. This will reduce consumption by 8% to 1.38 kg per unit.
(v) Wages will be increased from Rs. 300 per hour to Rs. 350 per hour. The labour union
has assured that this incentive will help improve labour efficiency and reduce labour
time from 1 hour to 0.9 hour per unit.
(vi) Variable overheads will increase from Rs. 100 to Rs. 105 per labour hour.
(vii) Fixed overheads will increase due to inflation. However, due to an expected increase
in production next year, fixed overhead cost per unit will reduce from Rs. 70 to
Rs. 65.8 per unit.
(viii) It has recently been decided that closing finished goods inventory would be reduced
from 10% to 6% of sales. Inventories are valued under the FIFO method, based on
periodic inventory.
(ix) WIL does not maintain inventory of raw material.

Required:
(a) Prepare a budgeted profit or loss statement for the year ending 31 August 2025 using:
(i) marginal costing (ii) absorption costing (17)
(b) Reconcile net profit under marginal costing and absorption costing. (02)

Q.8 (a) Equinox Industries (EI) manufactures and sells three products A, B and C. EI intends to
introduce a new product, D. The budgeting department has provided the following
estimates for the next year:

Description A B C D
Units to be sold 300,000 240,000 180,000 120,000
------------------- Rs. per unit -------------------
Sale price 600 700 900 1,250
Cost of raw material 300 400 500 600
Labour @ Rs. 400 per hour 80 100 120 240
Manufacturing overheads 150% of labour cost

Additional information:
(i) As per the estimates, the production of A, B and C would utilize 87% of the
maximum available labour hours in the next year.
(ii) 40% of the manufacturing overheads are fixed.
(iii) Each unit of the products can be externally sourced at these prices: A for Rs. 520,
B for Rs. 670, C for Rs. 770 and D for Rs. 1,200.
 Cost and Management Accounting Page 4 of 4

Required:
Determine the quantities of product(s), which EI should purchase from outside, in order
to maximize the profit. (14)

(b) Identify and briefly explain two non-financial factors that support outsourcing and two
that oppose it. (04)

Q.9 Epsilon Ltd (EL) has two production departments, A and B. It manufactures two joint
products, X and Y, in a single process within department A. Incidental to the production of
these products, it produces a by-product known as Z. The output ratio of X, Y and Z in the
department A is 60:35:5. Y and Z are sold without further processing. However, X is further
processed in the department B and sold as a new product, X1.

The following information has been compiled from EL’s records for the latest month:

 Sales related information:

X Y Z X1
Sales price per kg Rs. 120 Rs. 500 Rs. 10 Rs. 150
Selling expenses (as percentage of sales price) 5% 5% 7% 5%

 Production related information:

Department A Department B
Input of material M (Rs. 100 per kg) 100,000 kg -
Input of material N (Rs. 30 per kg) - 15,000 kg
Direct labour (Rs. 180 per hour) 15,000 hours 4,500 hours
Variable overheads per direct labour hour Rs. 150 Rs. 80
Fixed overheads per direct labour hour Rs. 125 Rs. 70
Material wastage (% of input) 10% 5%

 Additional information:
(i) Material is added at the beginning of the process.
(ii) Joint costs are allocated on the basis of net realisable values at the split-off point.
(iii) Proceeds from the sale of by-product Z are treated as a reduction in joint costs.
(iv) There were no opening or closing inventories at the beginning or end of the month.

Required:
(a) Calculate the joint cost and its apportionment to products X and Y. (10)
(b) Determine the additional profit that EL earns from further processing of X. (05)

(THE END)
 Certificate in Accounting and Finance Stage Examination

The Institute of 7 March 2024

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.

Section A

Q.1 Indus Limited produces a product that passes through two processes. The management is
worried about the high rate of wastage attributed to workers and has decided to introduce a
wage incentive plan to address this issue.

The data collected in this respect is as follows:

Process A Process B
Cost of material (Rs. per unit) 1,000 700
Labour hours required per unit 2 3
Labour (Rs. per hour) 200 250
Variable overhead rate (Rs. per hour) 120 120
Wastage percentage in relation to total units produced 10% 5%

The units are inspected at the end of the process.

Each worker works 240 hours every month. Under the incentive plan, the management
intends to allocate the cost savings from wastage, among the workers in the form of bonus.

Required:
Determine the bonus amount to be provided to a worker for every one percent decrease in the
wastage percentage. (08)

Q.2 Noble Industries Limited has two production departments and two service departments.
Information regarding its factory overheads for the latest quarter and related details are as
follows:

Production Service
Departments Departments Total
A B X Y
Direct factory overheads Rs. in ‘000 105,000 85,000 30,000 20,000 240,000
Machine hours 1,890 1,710 - - 3,600
Floor area Square yards 1,200 1,050 250 150 2,650
Basis of allocation – Department X 50% 40% - 10% 100%
Basis of allocation – Department Y 45% 40% 15% - 100%

In addition to direct overheads, there were common overheads of production and service
departments, which amounted to Rs. 53 million.

Required:
Compute the factory overhead rate for the production departments based on machine hours
using the repeated distribution method. (07)
 Cost and Management Accounting Page 2 of 6

Q.3 Toor Industries Limited (TIL) is engaged in the production and sale of product Y, which is
used in hi-tech industries. The following are the extracts from TIL's latest accounts:
Rs. in '000
Sales 450,000
Cost of sales
Raw material SN37 (171,000)
Labour (Rs. 300 per hour) (21,600)
Variable overheads (Rs. 325 per hour) (23,400)
(216,000)
Contribution margin 234,000

TIL's research department has recently developed a product Z which can be produced through
further processing of product Y, with the addition of a new raw material, TS38. Other details
are as under:
(i) Annual demand for Z is estimated at 8,000 kg at a price of Rs. 50,000 per kg.
(ii) 0.6 kg of raw material TS38 would be added per kg of Y at the start of further processing.
Normal wastage, identified at the start of further processing, would be 20% of the input
quantity. Currently, TS38 is available at Rs. 19,200 per kg in the market.
(iii) The price of Y is Rs. 25,000 per kg. The introduction of Z would have no impact on the
demand for Y.
(iv) Further processing would require 2 labour hours per kg of Z produced and can be carried
out on the existing machines.
(v) The total available labour hours for production are 80,000. During the latest year, the
plant worked at 90% of the total production capacity in terms of labour hours.
(vi) There are no opening or closing inventories of both products.

Required:
(a) Assuming that TIL intends to meet the entire demand for the product Z, compute the
production quantities of product Y that will be:
 used in the production of product Z
 sold without further processing (05)
(b) Advice whether TIL should produce product Z. (05)

Q.4 Nauman Engineering Works (NEW) is engaged in the manufacturing and sale of electric
motors of a single specification, Model EMV33. The production process of EMV33 involves
two departments, A and B. Relevant details are as follows:
Available monthly Hours required
hours (30 days) per unit
Machine Labour Machine Labour
Department A 5,400 5,600 6 7
Department B 3,600 7,500 5 10

Department A Department B Total

Profit details of EMV33 -------------- Rs. per unit --------------
Sales price 60,000
Less: Cost of production
Material 14,000 6,000 20,000
Labour 2,100 3,200 5,300
Fixed overheads 600 900 1,500
Variable overheads (based on machine hours) 1,800 2,000 3,800
Total cost per unit 30,600
Profit 29,400
NEW has recently been approached by a customer interested in purchasing 990 units of a
special type of motor, Model LTM78, offering Rs. 105,000 for each unit. However, accepting
this order would require suspending the production of EMV33.
 Cost and Management Accounting Page 3 of 6

The following information has been gathered in relation to the proposed order:

(i) Details relating to each unit of LTM78:

Department A Department B
Cost of raw material (Rs. per unit) 20,000 10,000
Machine hours per unit 10 6
Labour hours per unit 8 12

(ii) The setup time required to prepare for production of LTM78 is 3 days. Another 2 days
would be required to revert back to the production of EMV33.
(iii) Labour is not allowed to work overtime. Further, the labour of each department is
specifically trained for tasks within that department and cannot be used in other
departments.
(iv) Idle labour is paid at 85% of the normal wage rate. Idle labour hours related to EMV33
have already been included in fixed overheads.

Required:
Determine whether NEW should accept the order for supply of LTM78. (10)

Q.5 Shadman Enterprises Limited (SEL) produces two products, namely A and B. The following
figures have been extracted from the draft profit and loss account of SEL for the year ended
31 December 2023:
Product A Product B
Units Rupees Units Rupees
Sales 48,000 5,040,000 59,000 7,670,000
Cost of sales
Raw material – opening 5,000 400,000 6,000 500,000
Purchases 30,000 2,700,000 40,000 3,201,000
Raw material – closing 10,000 (900,000) 7,000 (560,000)
Raw material consumed 2,200,000 3,141,000
Direct labour 1,100,000 1,200,000
Factory overheads 1,320,000 1,440,000
Manufacturing costs 4,620,000 5,781,000
Finished goods – opening 10,000 1,000,000 15,000 1,350,000
Finished goods – closing 12,000 (1,108,800) 16,000 (1,541,600)
Cost of sales (4,511,200) (5,589,400)
Gross profit 528,800 2,080,600

Additional information:
(i) Raw material Y is used for manufacturing product A, and raw material Z is used for
manufacturing product B.
(ii) SEL uses FIFO method for inventory valuation.
(iii) Both the products are produced in the same premises and total factory overheads are
allocated between them on the basis of cost of direct labour.
(iv) Both direct and indirect labour are paid at Rs. 400 per labour hour.

During the review by the internal auditors, the following issues have been identified:
(i) During the year, trade discounts of Rs. 120,000 on the purchase of raw material Y have
been erroneously credited to purchase of raw material Z.
(ii) 250 indirect labour hours were erroneously recorded as direct labour hours of product A.
(iii) Physical stock check by the auditor revealed that 2,000 units of product A and
1,000 units of product B were in damaged condition. These can be sold at 20% below
the normal selling price.

Required:
Compute the correct value of closing inventory of finished goods. (10)
 Cost and Management Accounting Page 4 of 6

Q.6 Shahid Pakistan Limited (SPL) is engaged in the production of three products: J, K and L.
Following is the extract from its latest annual management accounts:

Products
Total
Description J K L
---------- Units ----------
Quantity produced and sold 50,000 40,000 30,000 120,000

---------- Rs. in million ----------

Material 100 200 250 550
Labour 50 40 25 115
Factory overheads 80 64 40 184
Sales overheads 60 48 36 144
Total 290 352 351 993

Traditionally, SPL has allocated its factory and sales overheads on the basis of labour hours
and sales volume, respectively. However, SPL is currently considering the use of activity
based costing for a more accurate allocation of expenses. Following data has been collected
in this regard:
Product J Product K Product L
Sales price per unit Rs. 10,000 12,000 14,000
Machine hours per unit hours 0.18 0.30 0.50
Batch size units 2,500 1,000 1,500
Average amount of sales order Rs. in millions 5 6 7

Break-up of overheads is as follows:

Rs. in million
Factory overheads
Repairs and maintenance – machines 27
Set-up costs 24
Fuel and power 99
Other fixed factory overheads 34
184
Sales overheads
Sales ordering department’s cost 6
Delivery expenses (units are of same size and weight) 54
Commission on sales 70
Other fixed sales overheads 14
144

The other fixed factory overheads and other fixed sales overheads accumulate from various
minor expenses; therefore, the Cost Accountant advised allocating them according to
machine hours.

Required:
Compare the profitability of each product before and after the implementation of activity
based costing. (10)
 Cost and Management Accounting Page 5 of 6

Section B

Q.7 Sultan Industries Limited (SIL) produces three products A, B and C in the same factory.
Recently, there has been a surge in raw material cost of product A, in the international market,
due to closure of large production sites amid the war in Ukraine. Despite efforts, SIL is unable
to pass on the increase in cost to the buyers as close substitutes for product A are available at
similar prices. SIL's research department is hopeful of finding a substitute for the raw material
within the next 12 months. Until then, the management is considering to discontinue the
production and sale of product A.

The following information has been gathered to evaluate whether to discontinue the
production of product A:
Projected profit and loss account for the next year
Product A Product B Product C Total
--------------------- Rs. in ‘000 ---------------------
Sales 24,000 36,000 60,000 120,000
Cost of sales
Material (12,000) (6,480) (12,000) (30,480)
Labour (4,800) (5,400) (11,400) (21,600)
Factory overheads (7,200) (10,800) (18,000) (36,000)
Sales & distribution expenses (2,400) (3,600) (6,000) (12,000)
Administrative expenses (1,200) (1,800) (3,000) (6,000)
Financial charges (2,400) (3,600) (6,000) (12,000)
Net (loss) / profit (6,000) 4,320 3,600 1,920

Sales in units 80,000 140,000 180,000 400,000

Additional information:
(i) 80% of all sales are made on credit. The normal credit period is 30 days.
(ii) All expenses, other than material and labour, have been allocated on the basis of sales
value.
(iii) The material cost included in projected profit and loss account for the next year takes
into account the price increases due to the war in Ukraine.
(iv) SIL employs a direct labour team of 30 employees, each with the ability to engage in
the production process for any of the three products. Each employee works an average
of 200 hours per month and is paid @ Rs. 240 per hour. Overtime is worked at
Rs. 300 per hour. Overtime hours are equally allocated between the three products.
According to the union agreement, labour cannot be terminated before the expiry of the
agreement, which is 18 months from now. However, idle hours, if any, are paid at 80%
of the normal rate.
(v) 40% of the factory overheads are fixed. Variable factory overheads include generator
fuel amounting to Rs. 6 million. When the generator is used, it operates at full capacity,
irrespective of the level of production.
(vi) Sales & distribution expenses include delivery expenses of Rs. 5 per unit sold and a
commission of 5% of sales. 70% of the remaining sales & distribution expenses are fixed.
(vii) Administrative expenses are generally fixed. However, 2% of the costs can be saved for
every 10% reduction in the total sales volume.
(viii) Financial charges include interest on running finance facility obtained for financing the
working capital and on certain leased assets. All leases are non-cancellable. Rate of
financing is 24% per annum.
(ix) SIL follows a policy of maintaining 60 days' inventory for raw material as well as
finished goods.

Required:
Assess whether the management should discontinue the production of product A. (15)
 Cost and Management Accounting Page 6 of 6

Q.8 Cruise Manufacturing Limited (CML) produces a product that passes through two processes.
The details of processing during the month of February 2024 are as follows:
Process A Process B
Cost of Conversion Cost of Conversion
material costs material costs
Costs of production ------------------- Rs. in ‘000 -------------------
Opening work in process 16,000 6,000 30,000 10,000
Cost incurred during the month 110,000 40,000 225,000 70,000
Process Process
Units Units
completion completion
Quantitative analysis
Opening work in process 8,000 60% 5,000 30%
Units started in/transferred from Process A 50,000 - 45,000 -
Units rejected on inspection 2,500 - 3,000 -
Units transferred to Process B/Warehouse 45,000 - 40,000 -
Closing work in process 10,500 80% 7,000 50%
Additional information:
(i) CML uses weightage average method for inventory valuation.
(ii) Material G36 is added at the start of the Process A, and another material, H148, is
added at the start of the Process B.
(iii) Inspection occurs when Process A is 70% complete and again when Process B is
80% complete. Units rejected in Process A are disposed of at a cost of Rs. 500 per unit
whereas, units rejected in Process B can be sold for Rs. 2,000 per unit. 5% of units are
normally rejected at each stage of inspection.
(iv) Units rejected during Process B were sold during the month but units rejected during
Process A were still in the factory at the month’s end.

Required:
(a) Compute equivalent production units. (07)
(b) Compute the cost of finished goods produced, closing inventory and abnormal
gains/losses, if any. (08)

Q.9 Smart Limited (SL) has provided you the following standard and actual data for the year
ended 31 December 2023:
Standard Actual
Production and sales Units 10,000 11,000
Sales Rs. 37,500,000 42,000,000
Material Rs. 22,800,000 25,210,000
Labour Rs. 6,760,000 6,965,000
Overheads
Fixed Rs. 3,100,000 2,900,000
Variable Rs. 3,540,000 3,949,000

As per standard, each unit of finished product requires 10 kg of material and 2 hours of labour.
SL follows the policy to absorb overheads at a predetermined rate per labour hour.
The finance department has conducted an analysis of the variation between the standard and
actual figures, and identified that on the cost side, a positive development was observed in the
procurement of materials, which saw a 10% reduction in prices compared to the standard
estimates. Conversely, labour cost did not follow this trend and instead experienced a
8% increase over the standard rates, indicating higher expense in this area.

Required:
Compute the following:
 Sales price and volume variances  Material price and usage variances
 Labour rate and efficiency variances  Fixed overhead spending and volume variances
 Variable overhead expenditure and efficiency variances (15)
(THE END)
 Certificate in Accounting and Finance Stage Examination

The Institute of 7 September 2023

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.

Section A

Q.1 Royal Enterprises Limited (REL) operates a factory in Karachi where it produces a single
product, Gamma, using 2 kg of raw material X and 3 kg of raw material Y. Both raw materials
are purchased from a supplier in Peshawar, priced at Rs. 400 per kg for X and Rs. 250 per kg
for Y. Typically, the raw materials are received within 10 days of placing an order. However,
there are occasional delays. Last year, REL placed 24 orders and the deliveries were received
as follows:
Number of order(s)
Received within 10 days 20
Received within 11 days 03
Received within 12 days 01
Presently, REL does not maintain any safety stock. In the event of a delay in the receipt of
consignment, raw materials are purchased from a supplier in Karachi at a price 25% higher
than the normal cost to avoid stock-outs and prevent production stoppages. REL is now
considering to maintain a safety stock.
REL produces 1,000 units daily. The cost of holding stock of raw materials X and Y,
equivalent to one day’s usage, is Rs. 1 million per annum.

Required:
Determine whether REL should maintain any safety stock assuming that the current trend of
deliveries would continue. (08)

Q.2 (a) Tulip Limited (TL) is negotiating a deal to manufacture and supply 5,000 units of a
product Jasmine. In this respect, following information is available:
 The available labour hours are 10,000, whereas the required hours for the
production of 5,000 units will be 15,000.
 The normal labour rate per hour is Rs. 250, and overtime is paid at 150% of the
normal labour rate.
 The overhead rate per labour hour is Rs. 240, and it is based on a total fixed cost
of Rs. 1.5 million.
In view of unavailability of the required labour force, the management is considering to
adopt measures for improving labour efficiency. In this respect, the following options
are under consideration:
Option 1: A piece wage system at the rate of Rs. 900 per unit. It is expected to improve
the current labour efficiency by 25%.
Option 2: A bonus of Rs.120 per unit if a unit is completed within 90% of the given
time. It is expected that 80% of units will be completed within 90% of the given time.

Required:
Evaluate the above options and recommend the most beneficial option to TL. (07)
(b) Discuss the difference between labour productivity and labour efficiency. (03)
 Cost and Management Accounting Page 2 of 6

Q.3 Shahab Industries Limited (SIL) is engaged in the production of a product named Alpha2179,
which requires Beta4358 as its primary raw material. SIL presently uses the EOQ model to
place orders for Beta4358. Below is the relevant information about Beta4358:

Quantity per order 50,000 units

Cost per unit Rs. 48
Ordering cost per order Rs. 200,000
Total ordering and holding costs per annum Rs. 4.8 million

SIL’s supplier of Beta4358 is offering a 2% discount if the quantity per order is 75,000 units
and a 4% discount if the quantity per order is 100,000 units.

Required:
Determine whether SIL should accept either of the two discount offers. (08)

Q.4 Sitara Enterprises (SE) is engaged in manufacturing various products that are supplied to
retailers and large beauty parlours. SE’s cost accounting records show the following data for
the quarter ended 31 August 2023:

Purchase price Total

Raw Opening Closing
Purchases per kg/unit purchases
material inventory inventory
---------- Rupees ----------
A kg 10,000 66,000 9,000 100 6,600,000
B kg 30,000 315,000 48,000 80 25,200,000
C kg - 20,000 2,000 70 1,400,000
D kg 12,000 102,000 11,000 50 5,100,000
E unit 4,000 30,000 5,000 40 1,200,000
F unit 10,000 65,000 12,000 30 1,950,000
Others 12,800,000
Total 54,250,000

Additional information:
(i) SE uses perpetual inventory system to record raw materials, which are valued using
FIFO method.
(ii) The values of opening and closing inventories of raw materials, as per general ledger,
are Rs. 10.25 million and Rs. 15.7 million, respectively.
(iii) Any adjustments in the value of inventory due to NRV or excess/shortage are
accounted for directly to the P&L.
(iv) In view of the prevailing inflation, the suppliers of raw materials had increased the
prices by 25%, at the start of the quarter, i.e., 1 June 2023.
(v) A review of the records has revealed the following:
 The issuance of raw material A has erroneously been recorded using the LIFO
method instead of FIFO.
 The issuance of 2,000 kg of raw material B was erroneously recorded as issuance
of 3,000 kg of raw material C.
(vi) A physical stock check at quarter-end has identified the following:
 There is a shortage of 800 kg of raw material D.
 500 units of raw material E were in excess. An investigation showed that 200 units
of E were erroneously delivered by the supplier, whereas the receipt of 300 units
was not recorded as they were delivered just before the close of business on the
last day.
 400 units of raw material F are damaged. These can be repaired at a cost of
Rs. 3,000 or sold on ‘as is where is’ basis for Rs. 8,000.

Required:
Determine the value of the closing inventory of raw materials and the cost of raw material
consumed, after taking into account the above adjustments, for the quarter ended
31 August 2023. (09)
 Cost and Management Accounting Page 3 of 6

Q.5 Khan Corporation Limited (KCL) produces three types of products. Following information
pertains to its next year budget:

Product A Product B Product C

Description
------------ Rs. in million------------
Sales 1,500 900 600
Direct material (660) (360) (216)
Direct labour (120) (100) (80)
Selling and distribution expenses (150) (120) (100)
Administration and other expenses (all fixed) (90) (54) (36)

Additional information:
(i) The estimated total factory overheads amount to Rs. 380 million. All factory overheads
are fixed except the following:
 75% of the total indirect labour of Rs. 40 million varies in proportion to the direct
labour.
 90% of the total power and fuel cost of Rs. 100 million varies in proportion to the
production.
(ii) Selling and distribution expenses include the following:
 Commission on sales @ 3%, 4% and 5% for products A, B and C respectively.
 Distribution expenses which are estimated at 2% of sales for products A and B, and
4% of sales for product C.
 All other expenses are fixed.
(iii) The ratio of product-wise sales is expected to remain the same.

Required:
Compute the break-even sales amount for KCL. Also, determine the product-wise break-even
sales amount. (08)

Q.6 Zahid Enterprises (ZE) produces a single product F-85 using raw materials X and Y. The
beak-up of standard cost per ton (1,000 kg) of F-85 is as follows:

Rupees
Raw material – X (Rs. 50 per kg) 40,000
Raw material – Y (Rs. 80 per kg) 20,000
Direct labour (Rs. 300 per hour) 30,000

Factory overheads (40% are variable) 150% of direct labour

The details of ZE’s operations for the month of August 2023 are as follows:
(i) 30 tons of F-85 were produced, compared to a budgeted production of 33 tons.
(ii) The opening inventory of X was 4,000 kg at Rs. 50 per kg.
(iii) The opening inventory of Y was 1,000 kg at Rs. 80 per kg.
(iv) 23,000 kg of X and 8,000 kg of Y were purchased at Rs. 52 and Rs. 79 per kg,
respectively.
(v) The closing inventory of X and Y was 2,000 kg and 1,800 kg, respectively.
(vi) 3,200 direct labour hours were used, and the total direct labour cost amounted to
Rs. 920,000.
(vii) Due to inflation, the actual factory overheads exceeded the budget by 5%.
 Cost and Management Accounting Page 4 of 6

Required:
Compute the following:
 Material price and yield variances
 Labour rate and efficiency variances
 Variable overhead expenditure and efficiency variances
 Fixed overhead expenditure variance (10)

Section B

Q.7 Gulshan Enterprises Limited (GEL) is engaged in the manufacturing of specialized drilling
equipment for the oil and gas industry. The following data pertains to the jobs undertaken by
GEL during the month of August 2023:

Job A227 Job B391 Job C528

Size of job order (units) 20 40 30
----------- Rs. in million -----------
Selling price per unit 55 72 10
Cost – opening balance 600 400 -
Cost incurred during the month:
– Material issued 280 1,760 1,600
– Labour cost incurred 10 40 20
– Factory overheads See note 1

Note 1: Factory overheads

Factory overheads are allocated to jobs on the basis of labour cost. During the month, factory
overheads amounted to Rs. 245 million.

On 16 August 2023, a special machine was hired on rent for three months, exclusively for use
on Job C528. A rent of Rs. 4.8 million was paid in advance, while the remaining amounting
to Rs. 2.4 million will be paid at the end of the three-month period. The transportation cost
incurred in bringing the machine to the site amounted to Rs. 0.3 million. The costs incurred
in respect of this machine have not been included in the factory overheads amount.

Additional information:
(i) Job A227 was completed on 25 August 2023. Upon completion, unused materials
costing Rs. 5 million were transferred to Job B391. All 20 units were transferred to the
finished goods store, from which 14 units were transported to the client on
31 August 2023. The remaining 6 units were transported on 2 September 2023.
(ii) On 31 August 2023, 16 units from Job B391 were completed and transferred to the
finished goods store. It is estimated that the further cost required to complete the job
will amount to Rs. 95 million.
(iii) In a fire on 10 August 2023, some of the materials issued on Job C528 having a cost of
Rs. 18 million was destroyed. 80% of the materials were insured, and GEL received a
claim for those materials. The remaining materials were sold as scrap for Rs. 1 million.

Required:
Prepare journal entries to record the transactions for the month of August 2023. (16)
 Cost and Management Accounting Page 5 of 6

Q.8 Habib Industries Limited (HIL) is engaged in the production of two products, A and B, both
of which use the same raw material. However, the manufacturing processes for these products
are completely different. Following are the extracts from HIL’s management accounts for the
latest quarter.

Product A Product B
Description Units/ Rate Total amount Units/ Rate Total amount
hours (Rs.) (Rs. in '000) hours (Rs.) (Rs. in '000)
Sales 500,000 800 400,000 360,000 500 180,000
Raw materials consumed 320,000 300 96,000 108,000 300 32,400
Direct labour utilized* 200,000 400 80,000 120,000 300 36,000
Factory overheads 500,000 218 109,000 360,000 175 63,000
Selling & marketing costs 500,000 60 30,000 360,000 40 14,400
Admin. expenses (fixed) - - 20,000 - - 9,000
* Direct labour hours available for products A and B were 180,000 and 125,000 respectively.

Additional information:
(i) There are no opening and closing inventories for both products.
(ii) Shortfalls in labour hours are covered through overtime, which is paid at 150% of the
normal rate. Idle labour hours, if any, are paid at 80% of the normal rate.
(iii) 60% of the factory overheads are fixed. Variable overheads vary in proportion to direct
labour hours.
(iv) 80% of the selling & marketing costs allocated to each product are fixed.

HIL’s marketing department has recently explored a recurring quarterly export opportunity
where 500,000 units of Product A can be converted into an equivalent number of units of
Product Y. These units could then be exported at USD 3.90 per unit. In order to evaluate this
opportunity, HIL has carried out a study and made the following projections:
(i) The conversion of Product A to Product Y requires further processing, which could be
conducted using the plant that currently produces Product B. This would also
necessitate the addition of a machine costing Rs. 12 million having a useful life of
5 years. However, as a result, the production of Product B would need to be reduced
by 40%.
(ii) Further processing of each unit of Product Y would require the use of an additional raw
material costing Rs. 50, and 0.15 labour hour. The labour currently employed for the
production of Product B would be used for this further processing.
(iii) Exports of Product Y will incur insurance and freight cost of USD 0.50 per unit.
(iv) Variable selling & marketing costs of Product Y would be 70% of the variable selling
and marketing costs of Product A.
(v) Admin. expenses would increase by Rs. 0.6 million per month to accommodate the
necessary changes in systems and procedures under the new production arrangement.
(vi) The average exchange rate is projected at Rs. 300 per USD.

Required:
Determine whether HIL should avail the opportunity of export of Product Y. (15)
 Cost and Management Accounting Page 6 of 6

Q.9 Hercules Chemical Company Limited is engaged in the production of chemicals using two
processes. Chemical T is used in Process 1, which produces chemicals L and M along with
by-product N, in the ratio of 6:5:1. However, there is a wastage of 10% at Process 1 due to
evaporation loss, identified at the end of the process.

Chemical M undergoes further processing in Process 2, where it is combined with the

chemical V to produce chemical P. 15% of the input is produced as waste, identified at the
end of the process, which needs to be disposed of at a cost of Rs. 50 per litre.

The following data pertains to the month of August 2023:

Process 1 Process 2
Description
----------- Litres -----------
Input of Chemical T (Cost per litre – Rs. 240) 20,000 -
Input of Chemical V (Cost per litre – Rs. 180) - 1,750
Production:
– Chemical L 8,700 -
– Chemical M 7,250 -
– Chemical N 1,450 -
– Chemical P - 7,650
– Chemical waste 1,350

Direct labour (Rs. 350 per hour) 12,000 hours -

Direct labour (Rs. 300 per hour) - 2,000 hours

Additional information:
(i) Joint costs are allocated on the basis of net realizable value at the split-off point.
(ii) The net realisable value of the by-product N is credited to Process 1.
(iii) Factory overheads are applied at a rate of 180% of the direct labour cost in both
processes. There were no under/over absorbed factory overheads.
(iv) There was no opening or closing work-in-process inventory.
(v) There was no opening inventory of finished goods. However, 500 litres of L and
400 litres of P remained unsold at the end of the month.
(vi) The sale prices of the chemicals are as follows:

Sale price
Direct selling costs
(Rs. per litre)
Chemical L 5,000 Rs. 500 per litre plus 4% commission
Chemical N 1,000 Rs. 40 per litre
Chemical P 7,000 Rs. 600 per litre plus 5% commission

Required:
Prepare the following ledger accounts:
(a) Work-in-process - Process 1 (11)
(b) Work-in-process - Process 2 (05)

(THE END)
 Certificate in Accounting and Finance Stage Examination

The Institute of 9 March 2023

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.

Section A

Q.1 Ace Contractors Limited (ACL) supplies customized components to various industrial
customers. It is considering to bid for a contract for supply of 100,000 units of LM3, to Sarmad
Industries. Its technical department has provided the following estimates regarding the
production cost of the first batch consisting of 25,000 units of LM3:
Total costs
(Rs. in '000)
Raw material (63,000 kg @ Rs. 600 per kg) 37,800
Labour (4 hours per unit @ Rs. 300 per hour) 30,000
Overheads (Rs. 400 per labour hour) 40,000
Following additional information has also been made available:
(i) LM3’s production will be carried out in four batches of 25,000 units each.
(ii) Raw material consumption includes wastage which is estimated at 5% of the actual
raw material to form part of the product. However, the wastage is expected to reduce
by 10% in each new batch as the production process improves with experience.
(iii) Learning curve effect for labour is estimated at 90%. It is expected to remain effective
for the first three batches only. Index of 90% learning curve is –0.152.
(iv) 20% of the overheads are fixed and mostly represent the maintenance and depreciation
of factory building and machines.
Required:
Calculate the minimum bid price which ACL should quote to earn a profit of 35% on the
quoted price. (10)

Q.2 Masroor Limited (ML) uses EOQ model to order one of its raw materials MCRM. The EOQ
determined using the existing data is 72,000 units. ML maintains a safety stock equivalent to
daily usage of 2,000 units. Presently, 10 orders are placed annually and the lead time is
30 days. The ordering costs are Rs. 86,400 per order.
Recently, ML has faced some shortages due to delays in the procurement time. ML’s cost
accountant, Noman Shaikh has consulted the procurement and the production teams and has
come up with the following analysis:
(i) Probabilities of delay in lead time:
 Delay of 4 days is 0.10
 Delay of 10 days is 0.06
(ii) 3 units of MCRM are required to produce the final product.
(iii) Contribution margin from the final product is Rs. 1,800 per unit.
Based on his analysis, Noman Shaikh has suggested to increase the safety stock.

Required:
Determine whether it would be advisable for ML to increase the safety stock so as to avoid
the possibility of a stock-out. (09)
 Cost and Management Accounting Page 2 of 4

Q.3 Faiza Company Limited (FCL) produces office furniture. FCL recently established a
management accounting department and hired Salman to lead it. Salman has evaluated the
performance of the production department for the last quarter and made his presentation to
the Board. Some of the information extracted from his presentation are given below:

Description Rs. in '000 Effect of variance

Purchase of direct material 22,000
Direct labour cost 5,000
Material price variance 2,600 Favourable
Material yield variance 360 Unfavourable
Material mix variance 80 Favourable
Labour rate variance 350 Favourable
Opening and closing inventory of direct material 14,000

Due to overall favourable variance, Salman has praised the performance of production
department. However, FCL’s CFO is of the view that the matter needs more analysis to
determine the real reasons for the variances, before making a final conclusion with regard to
the performance of the production department.

Required:
Briefly discuss the possible reasons because of which the CFO does not seem to agree with
Salman and has suggested carrying out of further analysis. (08)

Q.4 Discuss the non-financial consequences if safety stock is not maintained by an entity. (05)

Q.5 Karsaz Industries (KI) produces three products A, B and C. KI is facing a shortage of labour
as some of its experienced labour have moved to other industries which are offering better
wages.

Budgeted data of KI which is based on the originally available 200,000 labour hours is as
follows:
A B C
Sales quantity (in units) 40,000 30,000 20,000
--------- Rs. per unit --------
Selling price 2,000 3,000 5,000
Raw material 600 1,160 1,200
Labour 300 240 900
Variable FOH (Based on labour hours) 480 960 1,440
Fixed FOH (Allocated on the basis of unit price) 100 150 240

Wages are paid at Rs. 240 per labour hour. Due to the shortage of labour, the available labour
hours have been reduced to 140,000.

Required:
Determine product wise profit that KI can earn assuming that no other manufacturer of these
products is available in the market. (10)

Q.6 Using the information provided in Question 5, assume that the shortfall would be purchased
from an other manufacturer, at a cost of 80% of the current selling prices of the respective
products.

Required:
Determine the quantities of each product that should be produced internally by KI so as to
maximise the profit. (07)
 Cost and Management Accounting Page 3 of 4

Section B

Q.7 Asghar Ali Associates (AAA) commenced business on 1 January 2023. It manufactures two
products X and Y. Following information pertains to its activities during the month of
January 2023.

(i) During the month, sales of X and Y were 11,600 units and 9,400 units respectively.
Throughout the month, AAA sold these products at 25% above cost.
(ii) Product X requires 6 kg of raw material A and product Y requires 5 kg and 3 kg of
raw materials B and C respectively.
(iii) Data relating to raw materials are as follows:

Description A B C Total
Purchases during the period (kg) 132,000 90,000 50,000
Invoice value (Rs. in '000) 52,800 43,200 30,000 126,000
Freight-in (Rs. in '000) 21,760
Transit insurance (Rs. in '000) 3,780
Closing inventory (kg) 36,000 20,000 8,000

(iv) Product X requires 5 labour hours per unit and product Y requires 3 labour hours
per unit. The cost of labour is Rs. 300 per hour.
(v) Factory overheads during the period were Rs. 13,320,000.
(vi) Sales includes 200 units of X and 400 units of Y which were returned by the customers
because of being damaged. These are with AAA. The defective units need to be
reworked by incurring a per unit cost of Rs. 1,500 and Rs. 800 on products X and Y
respectively, so they can fetch the current selling price.

Required:
Determine the value of closing finished goods as at 31 January 2023. (15)

Q.8 Rafiqi Industry Limited (RIL) produces a product which passes through two departments, A
and B. The details relating to its production during the month of February 2023 is as follows:

Department A Department B
Description Material Conversion Material Conversion
Units Units
------- Rs. in '000 ------- ------- Rs. in '000 -------
Opening WIP 20,000 120,000 32,000 144,000 36,000
(100% complete) (40% complete) 18,000 (100% complete) (60% complete)
Input during the
155,000 - - - - -
month
Received from A - - - 140,000 ? ?
Costs for the month - 920,400 673,650 - 194,900 445,500
Transferred out 140,000 ? ? 120,000 ? ?
Closing WIP 25,000 ? ? 30,000 ? ?
(100% complete) (60% complete) (100% complete) (80% complete)

Other information:
(i) RIL uses FIFO method for valuation of its inventories.
(ii) Rejected units are sold on an “as is, where is” basis. During the month, proceeds from
sale of rejected units in departments A and B were Rs. 4 million and Rs. 6 million
respectively.
(iii) In both departments:
 100% material is added at the start of the process.
 units are inspected when 90% complete as to conversion.
 normal loss is 5% of units transferred out.

Required:
(a) Compute equivalent production units. (10)
(b) Compute the cost of finished goods, closing WIP and abnormal loss/gain. (10)
 Cost and Management Accounting Page 4 of 4

Q.9 Faisal Enterprises Limited (FEL) produces three products A, B and C. Each product is
produced in a separate department. There are two service departments i.e. Repair &
Maintenance (R&M) and Stores.

Following data is available for the month of February 2023:

Service
Production Departments
Departments Total
A B C R&M Stores
-------------------- Rs. in '000 --------------------
Indirect material cost 180 240 120 930 30 1,500
Indirect labour cost 160 210 150 60 20 600
Fuel and electricity 1,520
Air-conditioning and lighting 150
Depreciation & insurance – Machines 665
Depreciation & insurance – Building 50
Other insurance 270

Other information:
Raw material cost (Rs. in ‘000) 60,000 45,000 30,000 - - 135,000
Labour hours (no. of hours) 2,000 3,000 4,000 - - 9,000
Machine hours (no. of hours) 5,000 6,000 8,000 - - 19,000
Area (in square meters) 200 300 400 60 40 1,000
% of apportionment of service
department’s cost:
 R&M 25% 30% 35% - 10%
 Stores 30% 25% 25% 20% -
Equivalent units in process – opening 2,000 2,000 2,500 - -
Equivalent units in process – closing 1,500 3,000 2,000 - -
Units transferred to finished goods 5,500 5,000 4,500 - -

Additional information:
(i) Raw material and labour are consumed evenly during the production process.
(ii) Direct labour is paid @ Rs. 300 per hour.
(iii) FEL uses simultaneous equation method for apportioning service departments’ cost to
production departments.

Required:
Allocate the factory overheads to the departments, clearly displaying the basis of allocation,
and determine the cost of production of each unit. (16)

(THE END)
 Certificate in Accounting and Finance Stage Examination

The Institute of 8 September 2022

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.

Section A

Q.1 Centaurus Limited (CL) is engaged in the business of manufacture and supply of leather
jackets. Presently CL manufactures 30,000 jackets per month. Following information is
available for the month of August 2022:

Number of skilled workers 350

Standard monthly hours per worker 200
Standard hours per unit 3
Normal wage rate per hour Rs. 150
Overtime wage rate per hour Rs. 250
Variable overhead rate per hour Rs. 120

In order to reduce the conversion cost, CL’s management is evaluating the following two
wage incentive plans:

Option 1: Introduce a piece wage system at the rate of Rs. 500 per unit. This is expected to
make workers 15% more efficient.

Option 2: Introduce a bonus of Rs. 50 per unit if a unit is completed within 90% of the
standard time. It is expected that after introduction of bonus, 70% units will be completed
within 90% of the standard time.

Required:
Evaluate the above options and advise the most beneficial option. (08)

Q.2 Saturn Limited (SL) imports raw material M-1 for manufacturing of its products. Following
data relating to M-1 has been extracted from SL’s latest records:

Maximum usage in a month units 5000

Minimum usage in a month units 3000
Average consumption in a month units 3750
Maximum lead time months 4
Minimum lead time months 2

Required:
(a) Briefly explain the meaning of ‘Lead time’ and ‘Stock out costs’. (03)
(b) Compute the following with brief explanation of why it is necessary for SL to maintain
these levels of inventories:
(i) Reorder level
(ii) Maximum inventory level
(iii) Safety stock level (05)
 Cost and Management Accounting Page 2 of 5

Q.3 Pluto Limited (PL) manufactures a single product ZAA and operates at a normal capacity of
45,000 machine hours per annum which is 90% of its full capacity. PL uses absorption costing
method to manage its costs. Following information has been extracted from PL’s prior year’s
records:
Actual production 44,000 units
Under absorbed overheads Rs. 420,000
Fixed overhead absorption rate Rs. 200 per machine hour

PL has a policy of revising its fixed overhead absorption rate for each year on the basis of
prior year’s actual fixed overheads. During the current year, following events took place:
(i) There was an unexpected increase in demand of ZAA due to which PL utilized its
excess production capacity to manufacture maximum units of ZAA. Further, factory
workers were paid overtime of Rs. 1.2 million for additional hours worked during the
year.
(ii) The government announced an increase in taxes on electricity which increased PL’s
cost by Rs. 300,000.
(iii) Due to a mechanical fault there was a machine breakdown which had to be repaired at
a cost of Rs. 3 million. PL received insurance claim of Rs. 2.8 million against the
machine breakdown.

Required:
(a) For each of the above events, briefly explain whether they would independently result
in over/under absorbed overheads. (03)
(b) Compute the budgeted and actual fixed overheads of prior year and current year.
Assume that there was no other increase/decrease in fixed overheads other than those
mentioned above. (07)

Q.4 (a) List any two examples of bases for absorption of factory overheads. Also briefly discuss
how a base should be selected. (02)

(b) Venus Limited (VL) is a manufacturer of consumer goods. Below are the details related
to overheads of its production department for the year:

Total machine hours available (2500 hours per machine) 7,500

Machine maintenance hours (150 hours per machine) 450
Departmental overhead absorption rate per productive machine hour Rs. 850

The management of VL has decided to replace one of its existing machines having zero
book value with a new machine which will cost Rs. 1,200,000 and has a useful life of
10 years. The machine will be available for use from the beginning of next year and is
expected to run for 2,500 hours during the next year including:
(i) 80 hours for setting up the machine; and
(ii) 110 hours for machine maintenance.

The estimated overheads for the year related to the new machine are given below:

Electricity consumption per hour Rs. 180

Annual maintenance cost Rs. 200,000
Indirect labour cost Rs. 50,000

It has also been decided that from the beginning of next year, one of the managers from
another department will be moved to the production department for monitoring the line
efficiency. The manager’s salary is Rs. 30,000 per month.
 Cost and Management Accounting Page 3 of 5

Required:
Compute the revised overhead absorption rate for the production department for the
next year. (06)

Q.5 Galaxy Limited (GL) is engaged in trading various consumer goods including Star-1 for
which demand is evenly distributed throughout the year. The present supplier of Star-1 offers
a bulk purchase discount of 5% on all orders of 20,000 units and above, which GL has been
availing. Due to availing the bulk discount, the normal transit loss has been increased from
3% to 4%.

GL is currently evaluating to adopt economic order quantity (EOQ) model which would
reduce the transit loss to 3%.

Following information has been gathered for the purpose of evaluation:

Average annual demand Units 120,000

Safety stock Units 1,200
Per unit purchase cost Rs. 250
Ordering cost per order Rs. 50,000
Average annual holding cost per unit Rs. 100

Required:
Advise GL whether it will be beneficial to adopt EOQ model. (10)

Q.6 Uranus Limited (UL) manufactures and sells two products, X1 and Y1. Following is the latest
information pertaining to X1 and Y1:

X1 Y1
---------- Units ----------
Sales volume 5000 2500
--------- Rupees ---------
Selling price per unit 4,400 2,200
Variable cost per unit 3,000 1,500
Fixed factory overheads 5,400,000
Fixed selling and distribution overheads 4,500,000

UL’s finance director has suggested that sales of X1 can be increased by spending
Rs. 300,000 on advertisement and reducing selling price by 5%. Sales volume of X1 is
expected to increase by 20% as a result of adopting his suggestions.

Required:
(a) Compute the existing overall break-even sales revenue and margin of safety units. (05)
(b) Advise UL whether it should go ahead with his suggestions or not. (02)
 Cost and Management Accounting Page 4 of 5

Section B

Q.7 Mars Limited (ML) blends and markets a specialised chemical and has two production
processes, A and B. In process A, two joint products, Comet and G-1 are produced and
incidental to their production, a by-product String is also manufactured. G-1 is further
processed in process B and converted into a new product Gravity. Following information has
been extracted for the month of August 2022:
Process A Process B
Remarks
------ Rs. in '000 ------
Costs
Direct material 9,600 - 9000 litres were added at the beginning
of the process.
Conversion costs 4,500 2,000 Conversion costs are incurred evenly
throughout the process.
Output --------- Litres ---------
Comet 3500 - Sold for Rs. 1,500 per litre after incurring
packing cost of Rs. 120 per litre.
G-1 4000 - Transferred to process B for conversion
into Gravity.
String 1000 - Sold at split-off point for Rs. 600 per litre.
Gravity 4000 Sold for Rs. 2,200 per litre after incurring
packing cost of Rs. 140 per litre.
Opening work in process 800 - 60% complete as to conversion.
Closing work in process 950 - 80% complete as to conversion.

Additional information:
(i) Cost of opening work in process is Rs. 1,500,000 which comprises of 60% material cost
and 40% conversion cost.
(ii) Normal loss in process A is estimated at 10% of the input and is incurred at the end of
the process. The rejected quantity from process A is sold for Rs. 200 per litre. No loss
is incurred in process B.
(iii) Proceeds from sale of by-product String are treated as reduction in joint costs. Joint
costs are allocated on the basis of net realizable values of the joint products at the
split-off point.
(iv) ML uses weighted average method for inventory valuation.
Required:
(a) Prepare quantity schedule and equivalent production schedule of process A. (05)
(b) Compute cost per litre of Comet and Gravity. (08)
(c) Prepare accounting entries to record production gain/loss of process A for the month. (03)

Q.8 Neptune Limited (NL) is engaged in the production of a single product Lunar-1 and uses
standard absorption costing system. NL has total production capacity of 6,250 units
per month whereas it operates at a normal capacity of 80%. Following information pertains
to the month of August 2022:
Standard cost card per unit:
Rupees
Direct material (8 kg at Rs. 30 per kg) 240
Direct labour (6 hours at Rs. 25 per hour) 150
Overheads* (Rs. 20 per labour hour) 120
*include budgeted fixed overheads of Rs. 200,000.
Sales and production data:
Budgeted selling price per unit Rs. 700
Budgeted sales Units 4,000
Actual sales Units 5,200
Actual production Units 5,400
 Cost and Management Accounting Page 5 of 5

Additional information:
(i) There was no inventory at the beginning of the month.
(ii) 50,000 kg direct material was purchased in bulk in order to avail discount of
Rs. 150,000.
(iii) Actual material loss was 10% as against the budgeted loss of 6%.
(iv) Workers’ wages were increased by 10% effective from 1 August 2022 due to prevailing
high inflation. This increased workers’ efficiency by 5% as compared to the budget.
(v) Actual overheads (both fixed and variable) amounted to Rs. 720,000. Fixed overheads
were over absorbed by Rs. 30,000.

Required:
(a) Compute the budgeted profit for the month of August 2022 using standard marginal
costing. (05)
(b) Compute the following variances for the month of August 2022:
(i) Sales volume variance (ii) Material price and usage variances
(iii) Labour rate and efficiency variances (iv) Fixed overhead expenditure variance
(v) Variable overhead expenditure and efficiency variances (14)

Q.9 (a) Jupiter Limited (JL) is engaged in the production of three products L1, L2 and L3 which
it sells in the local market. Presently, JL’s manufacturing plant is operating at 80% of
its capacity. Following information has been extracted from JL’s records for the year
ended 31 August 2022:
L1 L2 L3
Production/sales (units) 3,500 6,000 7,000
Machine hours per unit (hours) 8 5 6
------------- Rupees -------------
Selling price per unit 6,200 5,000 7,000
Variable cost per unit
Direct material 900 600 1,000
Direct labour 800 750 1400
Variable overheads 600 700 600
Fixed overheads 8,250,000

In order to enter into the international market, on 1 August, 2022, JL hires the services
of an export house to market its products, at a monthly payment of Rs. 100,000. JL
resultantly receives first export order from a USA based company, Asteroid Limited.
Details of the export order are as follows:

Selling price per unit

Product Units
PKR equivalent
L1 1,200 6,500
L2 1,500 5,200
L3 1,800 7,400

It is estimated that due to additional packaging, the direct material cost will increase by
10% and due to quality control, other variable overheads will increase by 15%.

A toll manufacturer offers JL to produce L1, L2 and L3 at Rs. 1,800, Rs. 1,600 and
Rs. 2,500 respectively subject to provision of material by JL.

The management has decided to produce local orders on priority.

Required:
Prepare a product wise plan for in-house production and outsourcing to maximize JL's
profitability for the upcoming year. (10)
(b) Briefly discuss any four non-financial considerations that are often relevant to an
outsourcing decision. (04)
(THE END)
 Certificate in Accounting and Finance Stage Examination

The Institute of 10 March 2022

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.

Section A

Q.1 Nigeria Limited (NL) is involved in trading of various consumer goods. It purchases one of
its products 'Silver' from a local supplier in batches of 3,000 kg using the EOQ model. NL
receives the delivery in two weeks of placing the order. Below are the details related to Silver's
demand:
Demand during
Probability
lead time (kg)
1,000 35%
1,500 45%
2,000 20%

Annual holding cost of Silver is Rs. 25 per kg and contribution margin is Rs. 10 per kg.

NL operates for 48 weeks each year.

Required:
Suggest which of the following reorder levels would be financially beneficial for NL:
(i) Average demand during lead time
(ii) 1,600 kg (08)

Q.2 Denmark Ice Cream (DIC) runs various ice cream parlors across the city. Below is the average
weekly information extracted from DIC's records:
Rs. in '000
Sales 500
Variable cost (350)
Fixed cost (100)
Profit 50

DIC is now planning to introduce frozen yogurt in addition to its existing ice cream range to
attract more customers. In this regard, following information has been gathered:
(i) Sale of 800 frozen yogurt cups every week is expected to be achieved at selling price of
Rs. 190 per cup. It is expected that introduction of frozen yogurt would also increase
the sales volume of ice cream by 10%.
(ii) Variable cost of frozen yogurt will be Rs. 150 per cup.
(iii) Fixed cost will increase by 12% due to launching of marketing campaign for frozen
yogurt.
(iv) DIC's target is to achieve a profit margin of 14% after introducing frozen yogurt.

Required:
(a) Compute the cost gap. (03)
(b) Discuss the methods that DIC can use to close the cost gap identified in (a) above. (04)
 Cost and Management Accounting Page 2 of 6

Q.3 Argentina Limited (AL) is involved in the production of a single product 'Zinc' which requires
highly skilled labour. AL’s budgeted production for the year is 120,000 units. The break-up of
existing variable cost per unit of Zinc is as follows:

Rupees
Raw material (4 kg @ Rs. 100 per kg) 400
Skilled labour (1.5 hours @ Rs. 200 per hour) 300
Variable overheads 125
825

Presently, there is a shortage of skilled labour in the market and consequently the management
of AL foresees a high labour turnover. In case of high labour turnover, AL would be required
to hire substitute labour at the existing wage rate which would cause the following
inefficiencies:
(i) Increase of raw material wastage from 4% to 5%.
(ii) Increase of finished goods rejection rate from 3% to 4%. Rejected units are sold as scrap
for Rs. 300 per unit.

In order to avoid the situation, the management is considering to revise the wage plan as
follows:
(i) Increase wages by 7%.
(ii) Pay a premium of Rs. 70 per hour saved to skilled labour who manufactures the product
in less than 1.5 hours.

The management believes that introduction of above wage plan would increase the efficiency
of its existing skilled labour by 6%.

Required:
Determine whether AL should implement the proposed wage plan or hire substitute labour. (08)

Q.4 Rio Limited (RL) operates donut shops in different parts of Karachi and has average monthly
sales of Rs. 4.5 million per shop. RL earns contribution margin of 20%.

RL is now planning to open a shop in Lahore. In this respect, following two rental options
are under consideration:
(i) Annual rent of Rs. 2.52 million payable in advance.
(ii) Monthly rent of Rs. 0.1 million plus 2% commission on total sales, payable at the end
of each month.

Additional information:
(i) RL would introduce customized donuts, in addition to the regular range. The price of
customized donuts will be 15% higher than the regular ones.
(ii) Average monthly sales volume of this shop is expected to be 30% higher than existing
sales. 20% of the sales volume will consist of customized donuts.
(iii) Variable costs consist of 75% cost of making regular donuts which would increase by
5% in case of customized donuts. The remaining variable costs represent packaging cost
of all donuts which is expected to increase by 4%.
(iv) Fixed costs (other than rent) is estimated at Rs. 0.8 million per month.
(v) RL can borrow the required funds at 14% per annum.

Required:
Compute net profit per month and margin of safety percentage under both options and
recommend the most suitable option to RL. (10)
 Cost and Management Accounting Page 3 of 6

Q.5 California Limited (CL) runs a factory which has two production departments AB and AC,
and two service departments SA and SB. CL allocates the cost of service departments using
simultaneous equation method. A summary of budgeted overheads for the year ending
31 December 2022 is as follows:
Rs. in '000
Factory rent 2,500
Fuel cost 1,800
Depreciation 2,000
Electricity and other utilities 1,100

Other related information is given below:

Production department Service department
Total
AB AC SA SB
Machine hours 22,000 12,000 - - 34,000
Labour hours 8,000 10,000 - - 18,000
Floor area (square feet) 6,000 4,500 900 600 12,000
SA - % of services 40% 40% - 20%
SB - % of services 45% 40% 15% -
Machine Labour
Basis of overhead absorption
hours hours

The per hour fuel consumption of machines in department AC is 50% more than that of
machines in department AB.

Required:
Compute the departmental overhead absorption rate. (08)

Q.6 Spain Limited uses standard costing system. Below is a summary of variances occurred during
the month of February 2022:
Rupees
Favourable variances:
Material price 15,000
Labour efficiency 12,000
Adverse variances:
Fixed overheads expenditure 9,500
Material usage 14,000

Following information is also available:

(i) Standard cost card per unit:
Rupees
Direct material (Rs. 120 per kg) 360
Direct labour (Rs. 100 per hour) 200
Variable factory overheads 175
Fixed factory overheads 150

(ii) 2,520 units were produced during the month.

(iii) Direct material was purchased from a new supplier at a discount of 2% of standard
material cost.
(iv) Actual wages and actual fixed overheads were Rs. 510,000 and Rs. 380,000
respectively.

Required:
Calculate the following:
(a) Actual material purchased (02)
(b) Budgeted units (02)
(c) Actual material used (02)
(d) Actual labour hours (02)
 Cost and Management Accounting Page 4 of 6

Section B

Q.7 Assume that date today is 1 April 2022.

Zimbabwe Limited (ZL) has planned to shut down its factory in Karachi on
31 December 2022. On receiving the news of shut down, all skilled labour employed in the
Karachi factory resigned in protest effective from 31 March 2022. This has raised concerns
about the factory’s ability to continue operations for the rest of the year.

Using the original budget document for the year 2022, following information has been
extracted relating to the period from April 2022 to December 2022:

Production and sales (units) 50,000

Rs. in '000
Sales 83,750
Direct material (36,000)
Direct labour (14,000)
Variable production overheads (11,000)
Fixed production overheads (12,000)
Selling expenses (8,200)
Profit 2,550

Other related information:

(i) Contractual sales represent 75% of the total budgeted sales volume, which have to be
fulfilled on priority to avoid penalties. Selling price for contractual sales is 20% lower
than the normal price. However, 5% trade discount to other customers has also been
budgeted.
(ii) Closing stock comprises of the following as on 31 March 2022:
 Raw material stock of 10,000 kg costing Rs. 3.4 million
 Defective 2,500 units costing Rs. 3.05 million which can be sold as scrap at
Rs. 100 per unit
(iii) Budgeted fixed production overheads include depreciation of Rs. 2.5 million,
technical fee of Rs. 1.2 million (paid in advance) and salary of factory supervisor of
Rs. 3.6 million. The remaining amount pertains to allocated general overheads.
(iv) Selling expenses represent salaries of five sales officers hired from a third party on
contract which will expire on 31 December 2022.
(v) Plant and machinery costed Rs. 15 million and has an estimated resale value of
Rs. 2.8 million as on 31 March 2022.

Keeping in view the resignation of skilled labour, the board of directors of ZL is considering
the following two options for implementation with effect from 1 April 2022.

Option I: Close the factory now and rent out the factory space
(i) Rental income of Rs. 20 million would be received for nine months.
(ii) Penalties estimated at Rs. 3.8 million would have to be paid by ZL for its failure to
fulfill contractual commitments.
(iii) Closing raw material can be used by another factory of ZL by converting it into
9,000 kg of Rita at a processing cost of Rs. 140 per kg of input. Rita is available in the
market at Rs. 350 per kg. Alternatively, the raw material can be sold in the market at
Rs. 160 per kg.
(iv) An amount equal to twelve months’ salary would have to be paid to the factory
supervisor.
(v) On early termination of contract with third party for sales officers, a penalty of 30% of
the remaining amount would have to be paid by ZL. Alternatively, this staff can be
utilized at ZL's factory in Lahore. For this purpose, ZL would have to pay the staff
relocation allowance of Rs. 2 million.
 Cost and Management Accounting Page 5 of 6

Option II: Continue operating the factory for the remaining nine months by employing
skilled labour on contract
(i) The contract for provision of skilled labour would not fulfill the entire requirement of
ZL. Considering this constraint, it is estimated that ZL would be able to produce
45,000 units only in remaining nine months.
(ii) Skilled labour would be hired at Rs. 500 per hour, however, due to lack of training,
variable production overheads would be increased by 5%. In order to avoid this
increase, ZL can provide training to the skilled labour at a cost of Rs. 0.45 million.
(iii) Goods are produced in batches of 3,000 units each. The first batch would require
2,750 skilled labour hours. Learning curve effect is estimated at 90% that would remain
effective for the first five batches only. At 90%, the index of learning curve is –0.152.
(iv) If the factory continues to operate, the resale value of plant and machinery at
31 December 2022 would be 80% of the current resale value.

Required:
Advise which of the two options would be financially beneficial for ZL. (20)

Q.8 (a) Discuss the assumptions used in marginal costing. (04)

(b) Kenya Limited (KL) is involved in the manufacture of a single product and has a total
production capacity of 60,000 units per month. It is currently operating at its normal
capacity of 80% and uses absorption costing. Below is the extract from KL's budget
for the month of February 2022:
Rupees
Selling price per unit 210

Variable costs per unit:

Prime cost 75
Factory overheads 45
Selling and admin expenses 15

Fixed costs:
Factory overheads 2,016,000
Selling and admin expenses 800,000

Actual operating data for the month of February 2022:

 Due to an unexpected fault in KL's manufacturing plant, it was able to operate
at 75% of its production capacity only.
 Sales of 47,000 units were made at the selling price budgeted by KL.
 Opening stock of 10,000 units costing Rs. 1,600,000 was held by KL. Fixed
factory overheads were absorbed in prior month at the rate of Rs. 40 per unit.
 Fixed factory overheads exceeded the budget by Rs. 500,000 due to increase in
electricity cost.

Required:
(i) Prepare profit or loss statement for the month of February 2022 using marginal
costing and absorption costing. (11)
(ii) Reconcile the difference in profits under the two methods. (02)
 Cost and Management Accounting Page 6 of 6

Q.9 Beijing Limited (BL) is engaged in manufacturing of a single product which passes through
two processes. Following information relating to process II is extracted from BL’s records for
the month of February 2022:
Rs. in '000
Opening work in process 3,000
Transferred from process I - 295,000 litres 21,000
Material - 200,000 litres 8,000
Labour 8,500
Overheads 3,200

Material is added at 60% completion of process II after inspection is carried out. Normal loss
is estimated at 10% of the input. Conversion costs are incurred evenly throughout the process.
Information related to opening and closing work in process and goods completed and
transferred to finished goods are as follows:

Opening work in process Closing work in process Finished goods

Litres Completion % Litres Completion % Litres
40,000 40% 50,000 70% 450,500

The company uses FIFO method for inventory valuation.

Required:
Calculate the following for process II:
(a) Quantity schedule and statement of equivalent production units. (06)
(b) Cost of finished goods, closing work in process and abnormal gain/loss. (08)

(THE END)
 Certificate in Accounting and Finance Stage Examination

The Institute of 9 September 2021

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Instructions to examinees:
(i) Answer all SIX questions.
(ii) Answer in black pen only.

Q.1 White Limited (WL) had prepared five years’ projection for its then newly developed
product ‘Delta’. Based on the original estimates, the management was highly optimistic
regarding the performance of Delta. However, during the first two years, Delta could not
meet the expectations and had incurred heavy losses. Now, at the beginning of third year,
the management is considering two options; either to discontinue production of Delta or
continue to produce and sell Delta for three more years.
Following information is available in this respect:
Original estimates:
(i) Machinery would be purchased for Rs. 2,000,000 which would be depreciated at
25% reducing balance method. Tax depreciation would be calculated on the same
basis. The estimated residual value of machinery would be equal to its written down
value at the end of project life i.e. 5 years.
(ii) Quantity to be produced and sold would be 3000, 3500, 4800, 5500 and 6000 units
from year 1 to year 5 respectively.
(iii) Sales price for the first year would be Rs. 1,000 per unit subject to increase of
10% per annum.
(iv) Each Delta would require one unit of material A-4. The supplier of A-4 has offered a
discount of 20% for all annual orders of 3000 units or more.
(v) Variable cost for the first year would be Rs. 600 per unit after accounting for
20% discount from supplier. Variable cost would comprise of direct material, direct
labour and variable overhead in the proportion of 50:30:20.
(vi) The storage facility would be acquired on rent for 5 years. The rent for first year would
be Rs. 500,000 which would be subject to an annual increase of 10%. However, if the
agreement is terminated before 5 years, penalty equivalent to 6 months’ rent payable
in the year the termination takes place, would need to be paid.
(vii) Other fixed cost would amount to Rs. 500,000 per annum.
(viii) Tax rate applicable to WL is 30%. Tax is payable in the same year in which it arises.
(ix) WL’s weighted average cost of capital is 15%.
(x) All costs unless otherwise specified are subject to 5% inflation rate.
Option 1: Discontinue production of Delta
(i) The existing stock of 1500 units of Delta would be sold to an existing customer at
75% of price based on the original estimates.
(ii) Machinery would be sold for Rs. 1,500,000.
(iii) All other information would remain the same as per original estimates.
Option 2: Continue to produce and sell Delta for 3 more years
(i) WL would continue to sell Delta (including opening stock of 1500 units) at the
budgeted price based on original estimates. However, at that price, WL would only
be able to sell 80% of budgeted quantity including 5% units to be given away as free
under the promotional scheme.
(ii) Marketing campaign would be carried out at Rs. 500,000 per annum.
(iii) More stringent controls would be introduced to reduce variable overheads and other
fixed cost by 20%.
(iv) All other information would remain the same as per original estimates.
 Cost and Management Accounting Page 2 of 5

Required:
Evaluate both options by using net present value method. Recommend the best course of
action that WL should follow. (20)
Notes:
 Net present value based on original estimates is not required.
 Assume that except where stated otherwise, all cash flows would arise at the end of the year.

Q.2 (a) Yellow Limited (YL) is engaged in manufacturing and selling of three products that
are Alpha, Beta and Gamma. YL has recently received an order from an overseas
customer for 3000, 4000 and 1000 kg of Alpha, Beta and Gamma respectively. This
order represents 25% of total demand for each of the three products. The management
has decided to consider this order as ‘high priority’ as it is expected that repeated
orders would be received if the customer is fully satisfied; therefore, this order would
be fulfilled before any other order.

The per unit details of sales price, costs and direct labour hours required for each
product are given below:
Alpha Beta Gamma
----------- Rupees ----------
Selling price 10,000 9,000 12,500

Specialized chemical 2,500 1,800 3,500

Direct labour 1,250 2,000 1,500
Variable production cost 250 200 500
*Fixed production cost 750 400 600
*Selling and administration
costs (30% variable) 250 200 300
----------- Hours ----------
Direct labour hours required 6 5 8
*Fixed costs are allocated on the basis of expected demand

Each product requires specialized imported chemical. YL has been allowed to import
that chemical maximum to Rs. 70 million per annum.

The management of YL is concerned over restrictions on import of specialised

chemical in the existing country of operation as any shortfall to meet demand cannot
be fulfilled. One of the proposals is to shut-down the existing plant and start
manufacturing in Country X.

Following information is relevant if YL considers to start manufacturing in

Country X:
(i) There is no import restriction on required chemical.
(ii) Direct labour hours required for manufacturing YL’s products are in short
supply and available up to 100,000 hours only.
(iii) Any shortfall in the units can be met by sub-contracting to an outside supplier.
The cost of buying each finished product of Alpha, Beta and Gamma would
be equivalent to Rs. 5000, Rs. 4500 and Rs. 7500 respectively. However, the
order considered as ‘high priority’ would be manufactured by YL itself.
(iv) All other information unless otherwise specified would remain the same for
Country X.

YL operates a just-in-time system and has no inventories of chemical or finished

goods.

Required
Recommend whether YL should continue manufacturing in the existing country or
start manufacturing from Country X. Your recommendation should be based on
profit maximizing production schedules. (15)
 Cost and Management Accounting Page 3 of 5

(b) Discuss the non-financial factors that management would need to consider before
deciding to sub-contract the manufacturing of its products. (04)

Q.3 Following information pertains to one of the products ‘Violet’ of Blue Limited (BL), for the
month of August 2021:

(i) Production for the month was budgeted at 12,000 units. The standard cost per unit of
Violet is as follows:
Rupees
Direct materials:
Alpha – 4 kg 800
Beta – 6 kg 900
Direct labour – 2 hours 300
*Production overheads – 2 direct labour hours 260
*Fixed production overheads were estimated at Rs. 1.2 million based
on budgeted direct labour hours

(ii) Direct materials are added at the beginning of the production process. BL accounts for
material price variance at the time of issuance of material to production and uses FIFO
method for inventory valuation. Following information has been extracted from the
stock cards of Alpha and Beta:
Alpha Beta
Date Description Cost per kg Cost per kg
kg kg
(Rs.) (Rs.)
2,000 220 4,000 140
1-Aug Opening balance
4,000 190 4,000 150
2-Aug Purchase returns (1,000) 190 - -
3-Aug Purchases 75,000 195 86,000 155
5-Aug Purchase returns - - (500) 140
7-Aug Issues to production (60,000) - (70,000) -

(iii) Conversion costs are incurred evenly throughout the process. Conversion costs
incurred for August 2021 are as under:
Rupees
Direct labour paid for 26,730 hours
(including 10% idle hours due to machine break-down) 4,000,000
Variable production overheads 2,000,000
Fixed production overheads 1,400,000

(iv) Actual sales for the month of August 2021 were 12,500 units. Details of opening and
closing inventories are hereunder:
Opening Closing
Finished goods 1,200 units 1,500 units
Work in process 1,000 units (60% complete) 500 units (80% complete)

(v) BL uses standard absorption costing system.

Required:
(a) Prepare a statement of equivalent production units. (02)
(b) Compute the following variances:
(i) Material price, mix and yield variances (09)
(ii) Variable production overhead rate and efficiency variances (04)
(iii) Fixed production overhead expenditure, efficiency and capacity variances (05)
 Cost and Management Accounting Page 4 of 5

Q.4 Green Limited (GL) produces a chemical that passes through two processes before being
transferred to warehouse. Following information pertains to Process II for the month of
August 2021:

Production Cost
(kg) (Rs. in '000)
Opening work in process 7,500 3,000
Transferred from Process I 45,000 27,000
Material added in Process II 22,500 11,250
Conversion costs incurred in Process II - 1,500
Finished goods transferred to warehouse 60,000 -
Closing work in process 9,000 -

In Process II, material is added at start of the process and conversion costs are incurred
evenly throughout the process. Process loss is determined on inspection which is carried out
on 60% completion of the process. Process loss is estimated at 10% of the inspected quantity
and is sold for Rs. 200 per kg.

The details of opening and closing work in processes are as follows:

Opening work in process Closing work in process

kg Completion % kg Completion %
5,250 80% 5,400 70%
2,250 40% 3,600 30%

GL uses FIFO method for inventory valuation.

Required:
Prepare Process II account for the month of August 2021. (10)

Q.5 Red Limited (RL) manufactures and sells plastic chairs. The relevant details at different
demand levels are as follows:

Demand in units 16,000 14,000 11,800 9,300

--------------------- Rupees --------------------
Sale price (net of 3% distributor
commission) per unit 2,850 2,945 3,040 3,135
Material 20,520,000 18,900,000 15,930,000 12,555,000
Conversion cost 11,403,600 10,750,000 9,374,000 8,299,000
Operating expenses 3,500,000 3,500,000 3,500,000 3,500,000

The management is considering manufacturing either 14,000 chairs or 16,000 chairs. In the
above table, fixed conversion cost increases by 10% if number of chairs manufactured
exceeds 13,000. Further, material cost and variable conversion costs reduce by 5% and 3%
respectively, if number of chairs manufactured exceeds 15,000.

In order to achieve the desired level of sales, RL is also considering to offer 5% sale discount
on bulk order of 25 chairs and 10% sale discount on bulk order of 50 chairs. The sales mix
after introduction of discount is estimated to be in the ratio of 60:30:10 for normal sale,
5% sale discount and 10% sale discount respectively. It is estimated that introduction of
discount would result in increase in distributor commission by 1% on bulk sale of 25 chairs
and 2% on bulk sale of 50 chairs.

Required:
(a) Determine the breakeven revenue and margin of safety units at the demand level of
14,000 and 16,000 chairs. (14)
(b) Briefly discuss any conclusion which may be drawn from your calculation in (a)
above. (02)
 Cost and Management Accounting Page 5 of 5

Q.6 (a) Identify any four situations under which the cost of inventories may exceed its
net realisable value. (02)

(b) Orange Limited (OL) manufactures four products. The information related to its
inventory of each product for the year ended 30 June 2021 is as follows:

A B C D
Closing inventory (units) 15,000 25,000 5,000 8,000
Cost per unit using weighted average method (Rs.) 800 700 900 1,275
Retail price per unit inclusive of 10% sales tax (Rs.) 1,144 990 1,320 1,980
Variable selling cost per unit (Rs.) 80 75 100 110
Defective units (included in closing inventory) 2,400 4,000 - -
Rework cost per defective unit (Rs.) 260 320 - -

Additional information:
 During physical inventory count of Product C, a discrepancy of 900 completed
units was observed. On investigation, it was found that 5,600 units supplied to a
customer were erroneously recorded as 6,500 units.
 The defective units can be sold in the market at 60% of the current retail price
without incurring any rework and selling costs.
 Due to decrease in raw material prices, the products similar to B and D, offered
by the competitors, are available in the market at a discount of 15% and 20%
respectively, of OL’s current retail price. OL would have to adjust its sales prices
accordingly.

Required:
(i) Prepare entries to record the adjustments that need to be incorporated for correct
valuation of inventory. (10)
(ii) Determine the adjusted value of inventory as at 30 June 2021. (03)

(THE END)
 Certificate in Accounting and Finance Stage Examination

The Institute of 4 March 2021

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Instructions to examinees:
(i) Answer all SEVEN questions.
(ii) Answer in black pen only.

Q.1 Mehnat Limited (ML) manufactures a product KLM which goes through two processes,
Process A and Process B. Following information pertains to process A for the month of
February 2021:
kg Rs. in '000
Opening work in process (80% complete) 2,000 5,000
Materials added during the month 18,000 36,000
Conversion costs 12,000
Transferred to Process B 16,000 -
Closing work in process (60% complete) 3,000 -

Additional information relating to Process A:

(i) Costs of opening work in process consisted of Rs. 3,600,000 as to material and
Rs. 1,400,000 as to conversion costs.
(ii) Materials are added at the start of the process and conversion costs are incurred
evenly throughout the process.
(iii) Process loss is determined on inspection which is carried out at 75% of completion.
(iv) Process loss is estimated at 12% of the input which is sold as scrap at Rs. 400 per kg.
(v) Inventory is valued using weighted average method.

Required:
(a) Prepare a statement of equivalent production units. (04)
(b) Compute the costs of finished goods, closing work in process and production
gain/loss. (07)
(c) Prepare journal entries to record production gain/loss of process A for the month. (02)

Q.2 (a) What do you understand by the term ‘Sustainability Reporting’? List any three
external benefits of sustainability reporting. (05)

(b) Platinum (Private) Limited (PPL) has recently obtained a loan of Rs. 500 million
from Gold Enterprises (GE) for 2 years. The loan carries a floating rate of interest
payable annually. The existing rate of interest is 10%.

PPL’s treasury department expects increase in interest rate in the coming monetary
policy. In order to avoid any losses in this respect, PPL has entered into an
agreement with Metallic Investments (MI) to buy an interest rate cap at 14% and
they also agreed to a floor at 8%.

Required:
(i) Briefly explain the terms cap, floor and collar. (02)
(ii) Compute the interest which PPL would pay to GE and the amounts which
PPL and MI would pay to settle their obligations towards each other, if the
interest rate on the due date is:
 15% per annum
 9% per annum (04)
 Cost and Management Accounting Page 2 of 5

Q.3 Elements Limited (EL) is in the process of launching a newly developed product ‘Lotus’.
Manufacturing facility has been commissioned and production would commence from
1 July 2021. In this respect, a cash budget for the six months ending 31 December 2021 is
under preparation and following information has been gathered:
(i) At 100% capacity utilisation of the facility, Lotus’s annual production is
800,000 units. Considering market demand, EL plans to operate the plant at 60%
capacity in the first quarter ending 30 September 2021 and at 75% capacity in the
subsequent quarters.
(ii) Lotus’s cost per unit is estimated as under:
Direct material 1.5 kg at Rs. 360 per kg (inclusive of normal loss)
Direct labour 1.2 hours at Rs. 240 per hour
Factory overheads – variable Rs. 180 per direct labour hour
Operating expenses – variable Rs. 94 per unit produced

(iii) Direct material would be added at start of the manufacturing process. Normal loss
is estimated at 10% of the input. 60% of the loss would result in solid waste which
would be sold for cash at Rs. 500 per kg. Sale proceeds from the waste would be
credited to cost of production.
Direct material inventory would be maintained for average 15 days’ consumption of
current quarter based on budgeted production, whereas finished goods inventory
would be maintained for average 30 days’ budgeted production of the next quarter.
(iv) Fixed factory overheads of Rs. 1,000,000 (including depreciation of Rs. 450,000)
would be incurred every month.
(v) In addition to the above, following expenses would be incurred:
 Lotus is an outcome of a research carried out by Humble Research Institute
(HRI). As per the agreement, a fixed amount of Rs. 2,800,000 is payable to
HRI on the date of commencement of production of Lotus. In addition, a
royalty of Rs. 40 per unit sold would also be payable.
 Administrative expenses would amount to Rs. 1,200,000 per month. This
amount would be inclusive of allocated head office salaries of Rs. 250,000.
 A sales promotion campaign has been planned from 1 July 2021 at a cost of
Rs. 6,000,000. In this respect, 20% of the cost would be paid in June 2021 and
the remaining amount would be payable in two equal instalments on
1 October 2021 and 15 January 2022.
(vi) Unless otherwise specified, payments would be made as detailed under:
 Direct material purchases within 50 days;
 Direct labour on 25th of each month; and
 All other expenses within 30 days.
(vii) Lotus would be sold at a contribution margin of 20% and 25% for cash and credit
sales respectively. Cash sales is estimated to be 25% of the credit sales. Credit
customers are expected to pay within 40 days of the sales.

Other information:
 EL uses marginal costing and follows FIFO method for valuation of inventory.
 All the transactions would occur evenly throughout the period unless otherwise
specified.
 Consider 30 days in a month.

Required:
Prepare cash budget for the six months ending 31 December 2021. (Month-wise/quarter-
wise cash budget is not required) (20)
 Cost and Management Accounting Page 3 of 5

Q.4 Standard Limited (SL) is in the business of buying and selling electric ovens. It follows
perpetual inventory system and uses weighted average method for valuation of inventory.
Following information is extracted from SL’s records for the month of February 2021:
(i) Opening inventory consisted of 220,000 units having average cost of
Rs. 7,000 per unit.
(ii) 280,000 units were purchased on 5 February 2021, at Rs. 7,200 per unit.
(iii) 180,000 units were sold to Khurram Limited (KL) on 10 February 2021.
(iv) 5,000 defective units were returned by KL on 12 February 2021.
(v) 30% of the defective units returned to SL, had a manufacturing fault and were
returned to the supplier on 15 February 2021. Remaining defective units were
damaged due to mishandling at the warehouse. These units were disposed of as
scrap on 20 February 2021 for Rs. 2,000 per unit.
(vi) 5,000 units were sent to KL on 22 February 2021 in replacement of the defective
units returned.
(vii) 150,000 units were sold on 25 February 2021.

On 28 February 2021, a physical stock count was carried out and the following was
discovered:
 4,500 units were identified as obsolete having net realizable value of
Rs. 6,000 per unit.
 500 units were found missing.

Required:
Prepare necessary journal entries to record the above transactions relating to inventory. (09)

Q.5 Bright Limited (BL) is engaged in the manufacturing of two products, Shine and Glow.
Both these products are processed through two production departments, A and B, while
department X and Y provide services to both the production departments. Below is a
summary of the indirect costs incurred by BL for manufacture of 100,000 units of Shine
and 60,000 units of Glow during the year ended 31 December 2020:
Rs. in '000
Salaries and wages 115,000
Depreciation of machinery 80,000
Building insurance 25,000
Electricity 60,000
280,000

Other information related to the four departments is given below:

Department Department Department Department

Total
A B X Y
Cost of machinery
(Rs. in '000) 250,000 150,000 400,000
Floor Area (square feet) 15,000 6,000 6,000 3,000 30,000
No. of employees 150 50 25 25 250
Services provided by
 Department X 80% 20%
 Department Y 75% 15% 10%

The overhead absorption rates used by BL for allocation to Shine and Glow are Rs. 1,800
and Rs. 1,700 per unit respectively. Any under/over absorbed overheads are adjusted to
cost of sales.

Required:
(a) Compute product-wise actual overheads for Shine and Glow. (08)
(b) Compute the product-wise under/over absorbed production overheads. (02)
 Cost and Management Accounting Page 4 of 5

Q.6 Bounce Enterprises (BE) manufactures and sells customized products. To utilise its idle
facilities, BE is working on a three-year proposal received from Joy Limited to
manufacture and supply a product ‘Crystal’ at Rs. 3,600 per unit. Details of the proposal
and relevant information are summarised as under:

(i) In the first year, BE would supply 10,000 units of Crystal that would increase
annually by 1,000 units.
(ii) A specialised machine for refining and finishing of Crystal would be purchased at a
cost of Rs. 8 million. The machine can be disposed of at 30% of its cost at the end of
third year.
(iii) BE depreciates its plant and machinery at 25% using reducing balance method.
(iv) One unit of Crystal would require 2 kg of a raw material Z-plus which is available in
the market at Rs. 1,000 per kg.

Presently, 12,000 kg of a raw material Z1 is available with BE which was purchased

at Rs. 400 per kg for manufacture of a product which is now discontinued.
Currently Z1 has no use. Available quantity of Z1 can be converted into 8,000 kg of
Z-plus at a processing cost of Rs. 550 per kg of input. Alternatively, Z1 can be sold
back to the supplier at 40% of its cost.

(v) Crystal would be produced in batches of 1,000 units each and the first batch would
require 2,500 skilled labour hours. Learning curve effect is estimated at 90% but that
would remain effective for the first nine batches only. At 90%, the index of learning
curve is –0.152.

BE hires skilled labour at a rate of Rs. 260 per hour. It is expected that if the project
is not accepted then there would be 2,200 idle labour hours available for each year.
(vi) BE would also require 1,200 semi-skilled labour hours per batch which is available
at a cost of Rs. 150 per hour. Alternatively, this work can be outsourced at a cost of
Rs. 195 per unit.
(vii) Variable overheads would be charged at Rs. 140 per skilled labour hour. Fixed costs
associated with the proposal (other than depreciation) is expected to be
Rs. 3.2 million per annum, 25% of which would be allocated overheads.
(viii) Inflation is estimated at 5% per annum on sales revenue and all costs, with effect
from year one.

Required:
(a) Determine year-wise relevant cost of:
 raw material
 direct labour
 overheads (15)

(b) BE evaluates its projects using a cost of capital of 15%. Tax rate applicable on BE is
30% and tax is payable/refundable in the year in which liability arises. Tax
depreciation is assumed to be the same as accounting depreciation.

Using the cost worked out in part (a) above, compute feasibility of this proposal for
BE. (Assume that except where stated otherwise, all cash flows would arise at the end of
the year) (10)
 Cost and Management Accounting Page 5 of 5

Q.7 Fine Limited (FL) is involved in manufacturing and distribution of various consumer
products. Following information pertains to one of its products, FGH for the year ended
31 December 2020:
Rs. in '000
Sales (500,000 units) 56,000
Material (Rs. 30 per kg) (22,500)
Skilled labour ( Rs. 125 per hour) (10,000)
Semi-skilled labour (Rs. 100 per hour) (5,000)
Production overheads (50% variable) (4,500)
Gross profit 14,000

The management of FL has decided to take following measures with respect to

production of FGH for the next year:
(i) Increase production volume by 10% to take advantage of increase in demand.
Currently the plant for FGH is operating at 80% of its capacity.
(ii) Purchase 60% of the material from FL’s associated company that has offered a bulk
discount of 5%. Additional wastage from this material is expected to be 1%.
(iii) Replace 40% of the skilled labour with semi-skilled labour. It is estimated that
semi-skilled labour will take 30% more time to do the work of skilled labour.

Impact of inflation on all costs would be 10%.

FL’s management also wants to maintain the same gross profit margin in 2021 as the
previous year.

Required:
Compute the selling price per unit of FGH for the next year. (12)

(THE END)
 Certificate in Accounting and Finance Stage Examination

The Institute of 24 September 2020

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Instructions to examinees:
(i) Answer all SIX questions.
(ii) Answer in black pen only.

Q.1 Smart Fit (SF) is engaged in manufacturing and selling of product X75. It offers two
variants of X75 that are ‘Standard’ and ‘Premium’.

The management is in the process of preparing its budgeted profit or loss statement for the
year ending 31 August 2021. Following information are available in this respect:

Information for the year ended 31 August 2020

(i) Extracts from profit or loss statement:

Rs. in million
Sales 5,250
Cost of goods sold:
Material (1,584)
Labour (540)
Manufacturing overheads (440)
Gross profit 2,686
Selling and administration expenses (426)
Profit before tax 2,260

(ii) During the year, SF operated at 75% of capacity. It manufactured and sold 900,000
and 600,000 standard and premium units respectively.
(iii) The retail price of premium unit is set at two times of retail price of standard unit.
(iv) 1.6 kg of material is required for each standard unit whereas 2 kg of material is
required for each premium unit.
(v) Labour manufactures three standard units per hour. Each premium unit takes 50%
more labour time than standard unit.
(vi) 25% of total manufacturing overheads are fixed. Variable manufacturing overheads
per premium unit are 1.25 times of a standard unit.
(vii) All selling and administration expenses are fixed.
(viii) There are no closing stocks of raw material and finished goods.

Information and projections for the budget year ending 31 August 2021
(i) Retail price of standard and premium units would be increased by 10% and 15%
respectively. It is expected that existing demand for standard and premium units
would not be affected by price increase. In addition, SF has entered into a contract
with a new foreign customer for supply of 450,000 premium units at a discount of
20% of new retail price.
(ii) Any constraint due to production capacity would be met by reducing the existing
production of standard units. However, any shortfall in production of standard
units would be met by purchasing it from the market at a price of
Rs. 2,400 per unit.
(iii) Material price would increase by 5% with effect from 1 January 2021. The material
would be purchased evenly during the year.
(iv) Labour, manufacturing overheads and selling and administration expenses would
be subject to inflation of 10% per annum.
 Cost and Management Accounting Page 2 of 5

Required:
Prepare a budgeted profit or loss statement for the year ending 31 August 2021. (19)

Q.2 Pizza Inc. has pizza outlets in all major shopping malls in the city. It prepares and sells
approximately 4,850 standard pizzas per week. A premium quality imported cheese
(cheese), the key ingredient for pizza preparation is purchased from a supplier at
Rs. 1,200 per kg. Other costs related to cheese are as follows:
Rupees
Administration cost per order 150,000
Transportation cost per order 22,500
Quality inspection cost per order 20,000
Refrigeration cost per kg 250
Warehouse cost per annum 4,420,000

Cost of financing the stock per month 1.5%

Other information:
(i) The company places orders on the basis of Economic Order Quantity (EOQ).
(ii) Each standard size pizza requires 0.25 kg of cheese. However, 3% of cheese is lost
in refrigeration.
(iii) 80% of administration cost and 50% of warehouse cost are variable. All other costs
are fixed.
(iv) The company operates throughout the year which is 52 weeks.
The supplier has offered to reduce 5% price if the company agrees to double the size of
order for the coming year. However, it would have following implications:
(i) 4% of cheese would be lost in refrigeration.
(ii) Variable cost of warehouse, transportation cost and inspection cost would increase
by 50%.
(iii) Refrigeration cost would increase by 75%.
Required:
Advise whether Pizza Inc. should accept offer of the supplier. (13)

Q.3 Francisco Limited (FL) is a manufacturer of product Z and has annual operational
capacity of 82,500 machine hours. FL uses absorption costing.
Below is a summary of FL’s profit or loss statement for the years ended 31 August 2019
and 2020:
31 August 2020 31 August 2019
Units Rs. in '000 Units Rs. in '000
Sales 9,950 149,250 10,500 155,500
Opening inventory – finished goods 3,500 31,000 2,500 20,000
Cost of production 10,450 94,050 11,500 97,750
Closing inventory – finished goods 4,000 (36,000) 3,500 (31,000)
Cost of goods sold (89,050) (86,750)
Gross profit 60,200 68,750
(Under)/over absorbed production overheads (400) 650
Selling and administration cost (20,900) (22,475)
Net profit 38,900 46,925

In both years, the actual and standard machine usage per unit are 6 hours. However, the
standard machine usage was 80% and 82% of the operational capacity in 2019 and 2020
respectively.
Fixed overhead absorption rate of Rs. 700 per machine hour was applied in 2019. FL
revises its fixed overhead absorption rate for each year on the basis of prior year’s actual
fixed overhead expenditure.
 Cost and Management Accounting Page 3 of 5

Required:
(a) Calculate budgeted and actual fixed overheads for 2019 and 2020. (04)
(b) Prepare profit or loss statement for the year ended 31 August 2020, using marginal
costing. (05)
(c) Reconcile the actual profits under marginal and absorption costing for the year
ended 31 August 2020. (02)

Q.4 Siyab Limited (SL) is involved in manufacturing and exporting of products BA, CA and
DA. Keeping in view the continuous operating losses in product BA, the management is
considering to discontinue the production of BA.

Summarised operating results of BA for the year 2019 are as follows:

Units sold (2018: 156,250 units) 150,000

Rs. in '000
Sales revenue 30,000
Raw material consumption (12,000)
Labour (6,000)
Variable manufacturing overheads (3,000)
Fixed manufacturing overheads:
Directly attributable (2,800)
Allocated (30% of total) (750)
Selling expenses (2018: Rs. 8,050,000) (7,800)
Operating loss (2,350)

Chief Financial Officer (CFO) is of the view that discontinuance of BA would save all
manufacturing and selling expenses except allocated fixed manufacturing overheads. It is
estimated that total allocated fixed manufacturing overheads will be reduced by 10%.

In a recent management meeting, SL’s sales director does not agree with the suggestion to
discontinue this product. She is of the view that BA is in high demand in the local market
and the management should consider to launch this product in the local market through
an online marketplace, Jamal Express (JE). She argues that this will not only minimize
the selling expenses but also allow SL to reach maximum customers.

Following information have been available in respect of launching an online store of BA

at JE:
(i) Existing production capacity of BA is 172,000 units.
(ii) Existing demand of BA in the online market is sufficient to boost sales by 10% from
the previous year. However, for achieving this target level of sales, a digital
marketing service provider would be hired at an annual cost of Rs. 800,000.
(iii) BA would be sold at Rs. 180 per unit.
(iv) SL would have to pay an annual subscription fee of Rs. 110,000 to JE to operate as
a seller. In addition, JE would charge 2% sales commission.
(v) JE also provides an additional facility of handling delivery and sales return to its
clients. This service can be availed by paying either an annual lump sum fee of
Rs. 1,500,000 or an additional commission of 5% of the selling price. If this service
is availed, entire fixed selling expenses will be saved.
(vi) Fixed and variable selling expenses pertaining to BA would be reduced by 10% and
80% respectively.
(vii) Additional support staff would be hired at a cost of Rs 200,000 per month. This
additional hiring cost can be reduced to 80% if existing staff is given additional
responsibilities with overtime payment which would increase variable selling
expense by 10%.
 Cost and Management Accounting Page 4 of 5

Required:
Evaluate the suggestions of CFO and sales director and recommend the best course of
action to the management. (17)

Q.5 Siyara Pakistan Limited (SPL) manufactures and sells a single product Zeta. The product
passes through two processes before transferring to warehouse for sale. Following data
pertains to Process I for the month of August 2020:

Standard cost information:

(i) Direct material per unit – 1 kg at Rs. 75.
(ii) Direct labour per unit – 1.2 hours at Rs. 40 per hour.
(iii) Factory overheads per unit – 150% of direct labour. Factory overheads are budgeted
on the basis of 250,000 direct labour hours. 40% of factory overheads are variable.

Actual data for the month of August 2020:

Rs. in '000
Direct material issued: Rs. 75 per kg 6,750
Rs. 85 per kg 11,475
Direct labour paid for 235,000 hours 9,870
Variable factory overheads 6,345
Fixed factory overheads 11,250
45,690

(i) Direct material is added at the beginning of the process. Conversion costs are
incurred evenly throughout the process. Losses up to 7% of the input are considered as
normal. However, losses are determined at the time of inspection which takes place
when product is 75% complete.
(ii) During the month, 225,000 kg of direct material was issued to Process I and
200,000 units were transferred to Process II.
(iii) Opening and closing work in processes were 25,000 units (80% completed) and
35,000 units (60% completed) respectively.
(iv) 10% of direct labour hours were idle due to machine break-down but fully paid.
(v) SL uses FIFO method for inventory valuation.

Required:
(a) Calculate the following variances for the month of August 2020:
 Material price and usage
 Labour rate, efficiency and idle
 Variable factory overhead expenditure and efficiency
 Fixed factory overhead expenditure and volume (17)

(b) Reconcile the budgeted expenditure with actual expenditure for the month of
August 2020 by using relevant variances calculated in part (a). (03)
 Cost and Management Accounting Page 5 of 5

Q.6 Aluminium Limited (AL) is engaged in the manufacture of product GH which requires
one unit of a single raw material PQR. The manufacturing of PQR is currently outsourced
under a contract which is expiring shortly.

The management of AL has decided to setup an in-house manufacturing facility for

production of PQR instead of renewing the existing contract of supply on its expiry. In
this respect, following two proposals at current prices have been forwarded for
evaluation:

Proposal 1 Proposal 2
Purchase cost (including setup cost) Rs. 3,500,000 Rs. 5,000,000
Useful life (Note) 3 years 5 years
Residual value (Note) Nil Rs. 1,000,000
Annual production capacity 10,000 units 9,000 units
Plant operation cost Rs. 90,000 per month Rs. 70,000 per month
Annual maintenance cost Rs. 1,380,000 Rs. 1,200,000

Note: Under proposal 1, on carrying out a major overhaul at a cost of Rs. 1,300,000
(at current price) at the end of year 2, useful life and residual value of the plant would
increase to 5 years and Rs. 500,000 (at current price) respectively.

Other information:
(i) Existing demand of GH is 7,500 units which is expected to increase by 5% every
year.
(ii) In case of any shortage of PQR, it would be purchased from the market at a price of
Rs. 550 per unit at current price.
(iii) Variable cost of production at current price under proposal 1 and proposal 2 are
Rs. 400 per unit and Rs. 380 per unit respectively.
(iv) Depreciation would be charged on a straight line basis. Accounting depreciation is
assumed to be the same as tax depreciation.
(v) Inflation rate is estimated to be 6% per annum which is applicable from year 1.
(vi) Applicable tax rate is 30% and is payable in the year in which liability arises.
(vii) AL’s cost of capital is 14%.

Assume that except stated otherwise, all cash flows arise at year-end.

Required:
By using net present value (NPV) method, recommend the best course of action to the
management of AL. (20)

(THE END)
 Certificate in Accounting and Finance Stage Examination

The Institute of 5 March 2020

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Instructions to examinees:
(i) Answer all SEVEN questions.
(ii) Answer in black pen only.

Q.1 Venus Limited (VL) is engaged in the business of processing and selling cashew nuts. It
purchases raw cashew nuts which are then processed and packaged before selling to
consumers.

VL uses standard costing system. The standard cost card for the month of February 2020 is
given below:

Standard cost card per tonne of processed cashew nuts

Direct material 1.75 tonnes of raw cashew nuts at Rs. 50,000 per tonne.
Direct labour 8 hours at Rs. 300 per hour (idle time is estimated at 5% of total time).
Fixed production Rs. 275 per direct labour hour for budgeted production of
overhead 17,500 tonnes of processed and packaged cashew nuts.

Actual results for the month of February 2020:

(i) 17,050 tonnes were produced.
(ii) 31,500 tonnes of direct material at Rs. 46,500 per tonne were purchased and consumed
during the month.
(iii) Each tonne of processed cashew nuts took 7 hours to produce and direct labour was
paid at Rs. 375 per hour.
(iv) Scheduled maintenance of machine was not carried out which reduced the idle time
to 4%.
(v) Fixed production overhead amounting to Rs. 32 million was incurred during the
month.

VL’s actual profit for the month of February 2020 was higher than the budgeted profit.
Views of three department heads on high profitability are as follows:
 Head of purchase department
Despite stable prices of raw cashew nuts in the market for last three years, his
department has saved significant cost by purchasing material from a new supplier at a
relatively cheaper rate by good negotiations. This contributes significantly to the
increase in VL’s profitability.

 Head of production department

His team’s decision to increase labour rate has resulted in an increased motivation and
overall efficiency of workers which led to the increase in VL’s profitability.
 Head of maintenance department
Delaying the scheduled maintenance of machines has contributed to VL’s profitability.
The machines are running well, therefore, scheduled maintenance can be delayed for
another month.
 Cost and Management Accounting Page 2 of 6

Required:
(a) Calculate the following variances for the month of February 2020:
 All material variances
 All labour variances
 Fixed production overhead expenditure variance (08)

(b) Critically evaluate the views of departmental heads. Your evaluation should include
the discussion of claims made and likely impact of their decisions on the long-term
profitability of VL. (07)

Q.2 Neo Hardware (Private) Limited (NHPL) is engaged in the manufacturing and marketing
of a single product 'locks'. NHPL is in the process of preparing its budgeted profit or loss
statement for the year ending 28 February 2021. Following information pertains to the year
ended 29 February 2020:

(i) Extracts from profit or loss statement:

Rs. in million
Sales 6,930
Cost of goods sold:
Material (3,140)
Labour (645)
Manufacturing overheads (960)
Gross profit 2,185
Selling expenses (55% variable) (468)
Administration expenses (276)
Net profit before tax 1,441

(ii) The production plant at NHPL factory has an annual production capacity of 6 million
locks. During the year, it operated at 77% of capacity and all locks produced during
the year were sold out.
(iii) During the year, NHPL had received a quotation from a Chinese company at
Rs. 1,400 per lock, similar to NHPL’s locks. Since the production target for the year
had already been met, the management decided to keep this option open for any
future shortfall in production.
(iv) NHPL has divided the sales team in three regions i.e. East, West and Central with
20, 24 and 46 sales personnel in each region respectively. During the year, the ratio
of each region’s sales to total sales was 20%, 30% and 50% respectively.
(v) Manufacturing overheads include fixed overheads of Rs. 625 million which include
depreciation of Rs. 415 million.
(vi) Administration expenses comprised of fixed costs including depreciation of
Rs. 23 million.

Information and projections for the budget year ending 28 February 2021
(i) Selling price would be increased by Rs. 150 per lock.
(ii) It is anticipated that sales volume will increase by 25% and in order to achieve this
target, sales commission would be introduced to motivate the sales personnel.
However, the commission would be paid on regional teams’ performances and the
rate of commission would be determined on the basis of average number of units sold
by each team member as follows:
Average number of locks Commission % on regional
sold by a sales person sale revenue
0 – 50,000 1.00%
50,001 – 70,000 1.25%
70,001 – 90,000 1.50%
> 90,000 1.75%
 Cost and Management Accounting Page 3 of 6

(iii) It is expected that East, West and Central will contribute to the increase in sales
volume by 10%, 30% and 60% respectively.
(iv) The price of locks from the Chinese company is expected to increase to
Rs. 1,500 per lock.
(v) Labour is short in supply and already working overtime. The increase in production
can only be achieved by increasing efficiency of the existing labour. The management
has approved 20% bonus for labour which would increase the efficiency by 15%.
(vi) At the beginning of the year, a major overhaul amounting to Rs. 55 million will be
carried out on one of the machines in a manufacturing department which was
originally purchased in 2018 for Rs. 100 million. The overhauling would increase the
original useful life of machine from 4 years to 8 years and salvage value would
increase from Rs. 12 million to Rs. 15 million. The company uses straight line method
for depreciating its machines.
(vii) All variable costs would increase by 8% and all fixed costs other than depreciation
would increase by 5%.

Required:
Prepare budgeted profit and loss statement for the year ending 28 February 2021. (18)

Q.3 Ayyan Group (AG) opened a pizza outlet under the brand name ‘Say Cheese’ (SC) two
years ago. The initial assessment of the investment in SC had high financial prospects. AG
entered into a five year rent agreement for pizza outlet. The rent for the first year was agreed
at Rs. 600,000 subject to an annual increment of 10%. For pizza preparation, AG imported
equipment amounting Rs. 5,000,000 having useful life of five years with a residual value of
Rs. 1,000,000.

After two years of operations, SC has failed to achieve desirable results and the management
of AG is skeptical whether to continue to operate SC for further three years or not. You
have been provided the following information in this regard:
(i) Sales for the first two years were amounted to Rs. 7,500,000 and Rs. 9,000,000
respectively.
(ii) Variable costs for the first two years were amounted to Rs. 6,000,000 and
Rs. 7,080,000 respectively.
(iii) The fixed costs other than rent and depreciation for the first two years were amounted
to Rs. 500,000 and Rs. 525,000 respectively.
(iv) The trend in sales, variable costs and fixed costs other than rent and depreciation from
year 1 to year 2 is expected to continue in future.
(v) If management of AG decides to discontinue the investment in SC now, equipment
could be sold for Rs. 4,000,000. Further, termination of rent agreement would require
three months’ notice period.
(vi) Applicable tax rate is 30% and tax is payable in the year in which liability arises. Tax
depreciation on equipment is allowed at the rate of 25% under reducing balance
method.
(vii) The cost of capital of AG is 16%.

Assume that except stated otherwise, all cash flows arise at the end of the year.

Required:
By using net present value method, recommend whether management of AG should
continue to operate SC for a further period of three years or discontinue it now. (16)
 Cost and Management Accounting Page 4 of 6

Q.4 Ring Limited (RL) is engaged in the manufacture and sale of customized products. In
January 2020, RL entered into an agreement with Gamma Limited (GL) for manufacture
and supply of 3,500 units of a customized product ‘Zing’ at Rs. 4,000 per unit.

RL placed the order for raw material AA-2 and the supplier agreed to supply the material
in second week of March 2020. RL had also hired skilled labour for the production of Zing.
However, in February 2020, GL went bankrupt.

RL has recently been approached by Sigma Limited (SL) for supply of 3,500 units of
D-Zing which is a modified version of Zing. RL can use the ordered raw material and the
hired skilled labour for this product. The production of D-Zing will take three months.
Following information has been provided in this regard:

Machinery
Specialized machinery will be needed to produce D-Zing. Following proposals are under
consideration:
(i) Lease machinery for three months at monthly lease rentals of Rs. 250,000 and an
upfront payment of refundable security deposit of Rs. 5,000,000. The upfront
payment will be financed through running finance @ 20% per annum. As per the
lease terms, monthly maintenance cost of Rs. 15,000 will be borne by the lessor.
(ii) Lease machinery at monthly lease rentals of Rs. 160,000 for a minimum period of
six months. In this case, monthly maintenance of Rs. 20,000 will be borne by RL
which will be incurred only in the months in which machinery is operative.

Direct material
Following raw materials will be required for manufacturing of each unit of D-Zing:
(i) 15 units of AA-2: RL had already ordered 50,000 units of AA-2 at Rs. 75 per unit
under the original contract of Zing. The current market price for AA-2 is
Rs. 80 per unit. If the contract is not fulfilled, a penalty at 20% of the contract value
will be payable by RL.
(ii) 10 units of A-78: A-78 is available in market at Rs. 110 per unit. However, it can also
be produced internally at a variable cost of Rs. 80 per unit. Fixed cost would be
absorbed at Rs. 25 per unit. Internally produced A-78 would be subject to 20% normal
loss.
(iii) 5 units of C-11: Market price of C-11 is Rs. 20 per unit. However, a substitute material
D-50 can also be used after processing it at a cost of Rs. 15 per unit. Presently
5,000 units of D-50 is available in stock as a result of over purchasing for a previous
order. D-50 was purchased at Rs. 5 per unit and can be sold back to the supplier at
Rs. 3 per unit.

Direct labour
(i) RL had hired skilled labour from a third party at Rs. 1,000 per hour under the original
contract of Zing. If order from SL is not accepted, 200 labour hours would become
idle and RL will have to pay 50% of the contract rate.
(ii) If SL’s offer is accepted, then D-Zing would be produced in batches of 350 units and
the first batch would require 400 skilled labour hours. Learning curve effect is
estimated at 80% but would remain effective for the first four batches only. The index
of learning curve is – 0.322.
(iii) 1.5 hours of semi-skilled labour is required for every unit of D-Zing. Since there is a
shortage of semi-skilled labour in the market, only 4,000 labour hours are available at
Rs. 600 per hour. However, labour is willing to do overtime at a 50% higher rate
up to maximum of 1,500 hours. Alternatively, unskilled labour can be hired at
Rs. 200 per hour, however, unskilled labour would require 300% of the time taken by
semi-skilled labour. This can be reduced to 250% if training is given to them at a cost
of Rs. 300,000.

Variable overheads
Variable overheads would be charged at Rs. 125 per skilled labour hour.
 Cost and Management Accounting Page 5 of 6

Required:
By using the relevant costs approach, compute the minimum price per unit that RL may
quote. (20)

Q.5 Scents Limited produces three joint products P, Q and R. Raw material is added at the
beginning of process I. On completion of process I, these three products are split in the ratio
of 50:30:20 respectively. Joint costs incurred in process I are apportioned on the basis of net
realizable value of the three products at split-off point. Products P and Q are sold in the
same state whereas product R is further processed in process II before being sold in the
market. A by-product TS is also produced in process II.

Following information relating to the two processes is available for the month of
February 2020:

Process I Process II
Raw material at Rs. 411 per kg 744,000 kg -
Direct labour at Rs. 200 per hour 611,568 hours 55,450 hours
Production overheads Rs. 91,456,000 Rs. 7,230,000

Additional information:
(i) Loss of 7% is considered normal in process I.
(ii) Details of opening and closing stocks, estimated cost to sell and selling price are given
as under:

Selling price Cost to sell Opening Closing

per kg (Rs.) per kg (Rs.) stock (kg) stock (kg)
Product P 1,045 15 - 20,200
Product Q 960 10 - 15,140
Product R 1,021 12 7,800 48,134

(iii) Values of opening and closing stocks of product R comprised of cost of both
processes. Value of opening stock of product R is Rs. 5,850,000.
(iv) In process II, 7450 kg of TS was produced and sold at Rs. 175 per kg. Proceeds from
sale of TS are adjusted against cost of process II.
(v) Selling and administration costs are charged to P, Q and R at 12% of sales.

FIFO method is used for inventory valuation.

Required:
Prepare product-wise income statement for the month of February 2020. (15)

Q.6 For the purpose of this question, assume that today is 01 March 2020.

On 01 March 2018, Shahab Pakistan Limited (SPL) purchased 10,000 convertible bonds of
Delphi Limited (DL) at par value of Rs. 100 each. The bonds carry annual mark-up of 12%
which is payable semi-annually that is at the end of February and August each year. Each
bond is convertible into 5 ordinary shares of DL which are currently trading at Rs. 24 each.
Any bonds not converted by 28 February 2022 will be redeemed at Rs. 120 per bond. SPL’s
cost of capital is 15%.

Required:
Advise whether SPL should hold the bonds till redemption or convert them into ordinary
shares today. Also determine at what market price per share SPL would be indifferent to
hold bonds till redemption or convert into shares today. (Ignore tax) (04)
 Cost and Management Accounting Page 6 of 6

Q.7 (a) List any four situations in which EOQ model for determining optimum level of stocks
becomes invalid. (04)

(b) Jamal Limited (JL) purchases raw material T3 for its product DBO on a quarterly
basis as per the requirement of the production department. The management is
considering to revise the existing policy of placing orders for T3. Following
information is available in this regard:

(i) Annual production of DBO is 19,000 units.

(ii) Each unit of DBO requires 1 kg of T3 which is the resultant quantity after
normal loss of 5%.
(iii) Minimum order quantity set by the supplier for purchase of T3 is 3,500 kg.
However, the supplier offers following prices at different order quantities:
Order quantity (kg) Price per kg (Rs.)
3,500 305
4,000 299
5,000 296

(iv) JL maintains T3’s safety stock of 320 kg.

(v) The cost of placing each order is Rs. 4,200 out of which Rs. 1,780 pertains to
salaries of staff of purchase department.
(vi) Holding cost per kg of average stock is Rs. 260 which includes rent of Rs. 180
for the floor space occupied by each kg. Variation in the stock held has no effect
on the remaining holding cost.

Required:
Determine the purchase order quantity of T3 offered by the supplier at which JL’s
cost would be minimized. (08)

(THE END)
 Certificate in Accounting and Finance Stage Examination
The Institute of 5 September 2019
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Q.1 Macchiato (Private) Limited (MPL) is planning to launch a new business of manufacturing
carpets and rugs. The extracts from the projected statement of profit or loss of the new
business are given below:

Rs. in '000
Sales 500,000
Cost of goods sold (360,000)
Gross profit 140,000
Operating expenses (90,000)
Profit before taxation 50,000
Taxation @ 35% (17,500)
Profit after taxation 32,500

Selling prices of carpets and rugs would be Rs. 24,000 and Rs. 4,000 per unit with
contribution margin of 25% and 20% respectively. Carpets and rugs would be sold in the
ratio of 1:4.

Required:
(a) Compute the sales revenue at break-even and the margin of safety in units. (07)
(b) Determine the number of carpets and rugs that must be sold if MPL wishes to
maintain profit after taxation equivalent to 10% of sales. (05)

Q.2 Latte Limited (LL) is considering to accept a five-year proposal from Mocha Limited (ML)
for supply of a product namely K44. ML would use K44 as a raw material for its main
product. Details of the proposal and related matters are summarized as follows:

(i) Initial investment in the specialized machinery is estimated at Rs. 60 million. At the
beginning of year 4, LL would require a major overhauling on this machinery
amounting to Rs. 10 million. The machinery can be disposed of at 80% of written
down value at the end of project.
(ii) In year 1, LL would supply 18,000 units of K44 to ML at Rs. 5,000 per unit. The
supply would increase by 5% per annum from year 2 onward.
(iii) Variable cost is estimated at Rs. 4,000 per unit for year 1. Fixed cost associated with
the proposal (other than depreciation) is expected to be Rs. 250,000 per month, out of
which Rs. 50,000 would be allocated overheads.
(iv) Impact of inflation on revenues as well as all costs would be 7%.
(v) Tax rate would be applicable at 30% and tax would be payable in the year in which
liability would arise. Tax depreciation on machinery would be allowed at the rate of
25% under reducing balance method.
(vi) The cost of capital of LL is 15%.

Assume that except stated otherwise, all cash flows would arise at the end of year.

Required:
(a) Using net present value method, advise whether LL should accept the proposal. (11)
(b) Determine the minimum discount rate at which the proposal would be acceptable to
LL. (03)
 Cost and Management Accounting Page 2 of 4

Q.3 Frappe Limited (FL) manufactures and sells a single product Sigma. Following information
is available:

During the year ended 31 December 2018, FL sold 5,500 units at Rs. 25,000 per unit.

Details of opening and closing work in process and finished goods are as follows:

Percentage of completion
Number of units
Direct material Conversion costs
Work in process:
Opening 400 100% 60%
Closing 800 100% 40%
Finished goods:
Opening 600 - -
Closing 900 - -

The work in process account had been debited during the year with the following
costs:
Rs. in '000
Direct material 82,350
Conversion costs (including fixed overheads of Rs. 16.762 million) 44,217

Variable operating costs amounted to Rs. 500 per unit whereas fixed operating costs
for the year were Rs. 7,500,000.

Effective from 1 January 2018, direct material price and conversion costs were
increased by 5% and 10% respectively.

FL uses FIFO method for valuation of its inventories.

Required:
(a) Prepare statements of equivalent units and cost per equivalent unit. (04)
(b) Prepare profit statements on the basis of:
(i) marginal costing (08)
(ii) absorption costing (07)
(Round off all figures to the nearest rupee amount)

Q.4 Following information pertains to Espresso Limited (EL), engaged in manufacturing of a

product ‘Rita’:
(i) Extracted from last year’s records:

EL budgeted to produce 16,000 units of Rita by utilizing 32,000 budgeted machine
hours.

The absorption rate for fixed overheads was determined at Rs. 1,250 per machine
hour.

Actual fixed overheads incurred were Rs. 41.20 million that included depreciation
of Rs. 12.50 million.

The actual production was 17,000 units by utilizing 32,400 machine hours.
(ii) EL absorbs fixed overheads by using pre-determined machine hour rate.
(iii) For the next year, the management of EL has made the following projections:

Production and demand for Rita is expected to increase by 15%. EL is intending
to buy a new automated machinery costing Rs. 7.3 million to increase the actual
efficiency by 25%. The new machinery would have a useful life of 8 years with
residual value of Rs. 1 million.

Existing fixed overheads other than depreciation are expected to increase by 10%.
Additional supervision cost would need to be incurred at Rs. 70,000 per month.

Required:
(a) Compute under/over absorption of fixed overheads for the last year and analyse it into
fixed overhead expenditure, efficiency and capacity variances. (06)
(b) Determine fixed overheads absorption rate for the next year. (04)
 Cost and Management Accounting Page 3 of 4

Q.5 Americano Limited (AL) is engaged in the assembling and marketing of three products,
Alpha, Beta and Gamma. AL is in the process of preparation of product-wise projected
statement of contribution margin for the next financial year commencing from
1 January 2020. Following information in this regard is available:

(i) Total sales of AL for the year ending 31 December 2019 are estimated to be
Rs. 28 million. The current sales price and ratio of sales for each of three products are
given below:

Alpha Beta Gamma

Sale price per unit (Rs.) 8,000 12,000 10,000
Ratio of quantities sold 4 1 2

With effect from 1 January 2020, AL is intending to increase the selling prices by 10%.
The demand would decline by 2% due to increase in sale prices.

(ii) The details of components that are used in each product are as follows:

Components
Description
A B C
----------- Units -----------
Alpha 4 2 5
Beta 5 4 6
Gamma 4 3 4
------------ Rs. ------------
Purchase price per component 45 60 30

The suppliers have informed AL that prices of components would increase by 15%
with effect from 1 April 2020.

(iii) All products pass through assembling and finishing departments. Details of labour
costs at each department are as follows:
Assembling Finishing
Description
Direct labour (Hours)
Alpha 10 15
Beta 12 20
Gamma 10 18
------------ Rs. ------------
Rate per hour 50 40

(iv) Factory overheads are estimated at 60% of direct labour cost. 40% of factory
overheads are fixed.

Required:
Prepare a product-wise statement showing projected contribution margin for the year ending
31 December 2020. (16)

Q.6 Reporting perspective is an integral part of IFAC Sustainability Framework. It includes key
considerations on how professional accountants can help improving the usefulness and
relevance of their organization’s external communications.

Required:
State any two key considerations for professional accountants as mentioned in each of the
following sections of reporting perspective:
(a) Developing an organizational reporting strategy (02)
(b) Determining materiality (02)
(c) External review and assurance of sustainability disclosures (02)
 Cost and Management Accounting Page 4 of 4

Q.7 (a) Explain briefly what is meant by the term ‘inventory control’. Suggest and explain the
method of stock valuation which should be used in times of fluctuating prices. (05)

(b) Cappuccino Limited (CL), incorporated in January 2018, is engaged in manufacturing

and marketing of two types of products, S1 and S2. Due to strict quality standards at
CL, the ratio of damaged goods is high. Damaged units of S1 can only be identified at
100% completion whereas damaged units of S2 can be identified at 60% completion.
Damaged units of S1 and S2 can be sold at 80% and 50% of market prices respectively.

CL’s production department believes that damaged units can be sold at full market
price after incurring per unit rectification costs of Rs. 150 and Rs. 450 on S1 and S2
respectively.

Additional information:

Following information has been extracted from CL’s latest records:

S1 S2
--------- Units ---------
No. of units sold 347,000 218,000
Closing inventory 47,000 34,000
------- Rs. in '000 -------
Sales 492,800 463,760
Cost of goods manufactured 431,430 349,370
Closing inventory (51,465) (48,287)
Cost of goods sold 379,965 301,083
Gross profit 112,835 162,677

Closing inventory includes units of S1 and S2 damaged during the year i.e.
15,000 and 22,500 units respectively.

Fixed costs are incurred at the beginning of period and variable costs are incurred
throughout the manufacturing process.

Cost of goods manufactured includes fixed cost of Rs. 80 million which is
allocated on the basis of total units produced.

Selling expenses during the period was 1% of sales.

Required:
(i) Advise CL whether it should sell damaged units of each product with or without
further processing. (12)
(ii) Determine value of damaged units of S1 and S2 included in the closing
inventories, under each of the following situations:
– If CL opts for further processing
– If CL does not opt for further processing (06)

(THE END)