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The Institute of Chartered Accountants Pakistan SC E-Learning

Foundation and Modular Examinations Autumn 2001

September 08, 2001

COST ACCOUNTING (MARKS 100)

FE-2 (PAPER-5) & MODULAR (PAPER D12) ‘D’ (3 hours)

Q.1(a) Place each of the following expenses of a manufacturing concern within the classification
of Production, Administration and Selling and Distribution:
(i) Cost of oil used to lubricate fork lifter employed in finished goods warehouse.
(ii) Salary of security guards posted at cash counter located in the Karachi factory.
(iii) Commission paid to sales representatives.
(iv) Commission paid to company’s purchasing agent.
(v) Auditors’ fee
(vi) Cost of damaged raw materials.
(vii) Insurance expenses on finished goods
(viii) Cost of packing cartons.
(ix) Cost of protective clothing for machine operators.
(x) Cost of stationery used in the Lahore factory. (05)

(b) Classify the following cost as fixed, variable and semi-variable:

(i) Depreciation calculated on straight line method.
(ii) Royalty expense
(iii) Factory insurance
(iv) Supervision and inspection
(v) Industrial relations and employees’ welfare expenses
(vi) Property tax
(vii) Overtime costs
(viii) Material handling costs
(ix) Machinery repairs charges
(x) Generator fuel costs. (05)

Q.2 The following information is available for the month of December 2000 of Khalid
Enterprises:

Accounts payable December 01, Rs 6,000

Work in process December 01, Rs 30,000
Finished goods December 01, Rs 50,000
Material December 31, Rs 15,000
Accounts payable December 31, Rs 10,000
Finished goods December 31, Rs 60,000
Actual factory overhead Rs 150,000
Cost of goods sold Rs 300,000
Payment of accounts payable used
only for material purchases Rs 35,000

Factory overhead is applied at 200% of direct labour cost. Jobs still in process on December
31, have been charged Rs 6,000 for material and Rs 12,000 for direct labour hours (1,200
hours). Actual direct labour hours 10,000 @ Rs 8.00 per hour.

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Required : a) Material purchased

b) Cost of goods manufactured
c) Applied factory overhead
d) Work in process December 31,
e) Material used
f) Material as on December 01
g) Over or under applied factory overhead. (14)

Q.3 Emerson efficiency plan establishes a scale of bonus ratio between low task and high task
starting with zero bonus at a certain efficiency level increasing by small increments to
successively large increments cumulating to a determined bonus at 100% efficiency. Above
100% efficiency, additional bonus is allowed. Khaskhkaily Enterprises adopted the
Emerson efficiency plan for their cigarette packing plant which employs four (4) workers.
Bonus is paid to workers in addition to basic pay which is fixed by the labour authorities.
Brief synopsis of the scheme is as follows:

Efficiency rates Rates of Bonus

Upto 75% efficiency 0 Bonus
76% to 85% efficiency 2.5% bonus
86% to 98% efficiency 7.5% bonus
99% and above efficiency 15% bonus
Standard time 3 minutes per carton
Minimum Basic pay is Rs 3,375
Information specific for the month of August 2001 is as follows:
Actual packing for the month
Worker A 3,750 Cartons
Worker B 4,625 Cartons
Worker C 4,250 Cartons
Worker D 3,350 Cartons
August 2001 consisted of 25 working days of 9 hours each and there were no absentees
during the month. For the purpose of calculating standard per unit labour rate minimum
efficiency is considered as normal packing.

Required: Calculate the employee wise payroll cost for the month of August 2001
separately showing the basic pay and bonus payable to each employee. (15)

Q.4 A controller is interested in an analysis of the fixed and variable cost of electricity as related
to direct labour hours. The following data has been accumulated.
Months Electricity Cost Direct labour hours
Rupees
Jan 2000 15,480 297
Feb 2000 16,670 350
Mar 2000 14,050 241
Apr 2000 15,340 280
May 2000 16,000 274
June 2000 16,000 266
July 2000 16,130 285
Aug 2000 16,350 301

Required : The amount of fixed overhead and the variable cost using.
a) The high and low points method (06)
b) The method of least square. (06)

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Q.5 SS Construction Co. have under taken the construction of a fly over for Road Development
Authority. The value of the contract is Rs.12,500,000 subject to a retention of 20% until
one year after the certified completion of the contract and final approval of the authorities
surveyor. The Company has given the Contract No SS/RDA/786 for reference. The
following are the details as shown in the books of account of SS Construction Co. as on
June 30, 2001:
Amount in Rupees
Labour wages paid 4,050,000
Material purchased directly 4,200,000
Material issued from stores 812,000
Plant maintenance 121,000
Other expenses 601,000
Material in hand 63,000
Wages payable 78,000
Other expenses payable 16,000
Work not yet certified 165,000
Work certified 11,000,000
Cash received on account 8,800,000
Required: Prepare the Contract Account to show the position at June 30, 2001, retaining
an adequate provision against possible losses before final acceptance of the contract. (10)

Q.6 Shabbir Associates manufactures 3 joint products - Exe, Wye and Zee. A by-product Baye
is also produced. During the month of November 2000 the joint cost for direct materials and
direct labour were Rs 80,000 and 120,000 respectively. Shabbir Associates have an
established practice of absorbing overhead at 50% of direct cost. Production and sales
related data for the month of November 2000 is as follows:

Products Production Sales Sales Value

Kgs Kgs Rupees per Unit
Exe 7,800 7,000 10.00
Wye 11,700 11,000 10.00
Zee 10,000 9,000 6.50
Baye 10,000 10,000 2.60

The sales value of by-product is deducted from the process cost before apportioning cost to
each joint product. Costs of common processing are apportioned between joint product on
the basis of sales value of production. Assume that there is no opening inventories.

Required: Calculate profit for the month of November and analyze the profit
product-wise. (10)

Q.7 New Vision Trading Company Limited is planning to arrange for a six monthly overdraft
facility with a bank. However, before finalization of any arrangement it wants to know the
estimated requirements of cash. For this purpose it has hired you as consultant to make an
estimate of the foreseeable cash requirements.
The following is the basic data regarding various business cycles of the Company
I. Sales forecast for the six months are as under:
Months Rupees
January 800,000
February 950,000
March 600,000
April 900,000
May 1,100,000
June 600,000

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(04)

II. Purchases are made as and when required

III. No closing stock is maintained as the supplier has capability to supply any
quantities at any time.
IV. Gross profit ratio is maintained @ 20% of the sales price
V. Various expenses for the six months are as under:
Rupees
Salaries and 390,000
wages
Repairs and 120,000
maintenance
Insurance 6,000
Stores and 270,000
spares
Duties 360,000
Legal charges 24,000
VI. The recoveries from the debtors are made as follows
50% in the month of sale
30% in the month following the month of sale
20% in the second month after sale
VII. Trade creditors are paid as under
40% in the month of purchase
40% in the month following the month of purchase
20% in the second month after purchase
VIII. All other business expenses are paid in the month of expense. Expenses are evenly
spread throughout the year.
IX The Company commenced its business on January 1, 2000 with a cash balance of
Rs 50,000.

Required: You are required to prepare a cash budget to facilitate the company’s management
in assessing the working capital requirement for the next six months. (15)

Q.8 Sangdil Limited makes two products, SS and TT. The variable cost per unit are as follows:
SS TT
Direct Material Rs. 6.00 Rs. 18.00 .
Direct Labour (Rs 18.00 per hour) Rs. 36.00 Rs. 18.00
Variable overhead Rs. 6.00 Rs. 6.00
_____ _____
Total Variable Cost Rs. 48.00 Rs. 42.00
===== =====
The selling price per unit is Rs 84.00 for SS and Rs 66.00 for TT. During July 2001
the available direct labour is limited to 48,000 hours. Sales demand in July is
expected to be 18,000 units for SS and 30,000 units for TT.
Fixed cost is Rs.200,000 per month.

Required: Determine the profit-maximizing production level for the products

SS & TT. (14)

(THE END)

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Foundation/Modular Foundation Examinations Spring 2002

March 9, 2002

COST ACCOUNTING (MARKS 100)

FE-2 Paper 5 – Modular D 12 (Module D, SM, 4B) (3 hours)

Q.1 (a) What are the essentials of a good wage system 06

(b) How Cost Control is different from Cost Reduction 02
(c) Define: Direct Material Total Variance and Direct Material Price Variance 04

Q.2 The following balances are appearing in the cost ledger of Marwat Engineering as at
January 1, 2002.

General ledger control account 80,000

Materials control account 35,000
Work-in-process control account 17,500
Finished goods control account 27,500

At the end of the period you are supplied the following information by the factory
supervisor:

Materials purchased 195,000

Materials purchased for “Special Job 420” 10,450
Materials issued for
Repair and maintenance 3,400
Capital Job 101 9,700
Special Job 420 11,200
Production 177,400
Materials returned to suppliers 1,253
Normal material lost in transit and storage ?
Carriage inwards of materials 3,264
Total wages paid to employee for
Repair and maintenance 2,100
Capital Job 101 6,325
Special Job 420 19,475
Production 103,000
Indirect wages 15,325
Normal idle time ?
Production expenses 21,860
Admin expenses 19,462
Selling expenses 11,231
Distribution expenses 5,433
Sales 425,000
Revenue from Special Job 420 70,000
Production overheads recovered as a percentage of prime cost 15.0%

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Admin overheads recovered on finished production 20,000

Selling overheads recovered on finished production 17,500
Capital Job is completed and needs to be capitalised
Special job 420 was completed and despatched to customer
Inventory valuation as at January 30, 2002
Materials control account 26,500
Work-in-process control account 18,100
Finished goods control account 35,674

Required:

• Prepare necessary control accounts in the cost ledger

• Calculate normal loss on materials in transit and storage
• Calculate normal idle time of labour
• Calculate production overhead allocated to SJ420, CJ101 and normal production
• Calculate profit on SJ420
• Calculate capitalised cost of CJ101 20

Q.3
a) Assuming nil opening stocks, calculate the value of the closing stock from the data
provided below using each of the following methods:

• FIFO
• LIFO
• HIFO

Receipts
Date Units Rate
October 1 100 12.50
October 8 85 15.00
October 16 95 11.95
October 20 115 13.00
Issues
October 2 55
October 9 65
October 12 50
October 18 25
October 20 115
12

b) List the main advantages and disadvantages of FIFO method of costing 03

c) Apollo Industries apportioned its overheads using the following bases:

i) Direct material cost iv) Machine values

ii) Direct labour cost v) Area in square meters
iii) Machine hours vi) Number of employees in the department

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You have been requested by the Production Manager to reassess the overhead
apportionment basis. You are required to provide an appropriate basis for each of the
following overheads:

1. Rent and property tax

2. Repair and maintenance
3. Electric power
4. Direct material handling
5. Indirect materials
6. Indirect labour wages
7. Workmen canteen expenses
8. Insurance
9. Medical insurance
10. Factory security 05

Q.4 A one-year contract has been offered to Maliaka Industries which will uitilise an existing
machine that is only suitable for such contract works. The machine cost Rs 275,000 four
years ago and has been depreciated by Rs 60,000 per year on a straight-line basis and thus
has a book value of Rs 35,000. The machine could now be sold for Rs 47,500 or in one-
year’s time for Rs 4,000

Four types of materials would be required for the contract as follows:

Material Units Purchase price Current Current resale

of stocks Buying price price
Available Required for Rupees
in stocks contract
071 1,200 450 23.00 17.00 14.50
076 200 1,250 32.00 42.00 40.50
079 3,000 800 47.00 53.50 42.00
085 1,800 1,200 33.00 13.25 12.00

Material 071 and 085 are in regular use within the firm. Material 076 could be sold if not
used for the contract and there are no other uses for 079, which has been deemed to be
obsolete.

The labour requirements for the contract are

First six Subsequent six First six Subsequent six

months months months months
Hours Required Normal wage rate in Rupees
Skilled 1,350 1,276 25.00 28.75
Semi-skilled 1,400 1,225 17.00 19.00
Unskilled 1,225 1,400 15.00 16.00

It is expected that there will be shortage of skilled labour in the first six months only.
Therefore, for the purposes of the contract skilled labour will have to be diverted from other
work from which a contribution of Rs 7.50 per hour is earned, net of wage costs. The firm
currently has a surplus of semi-skilled labour paid at full rate but doing unskilled work. The
labour concerned could be transferred to provide sufficient labour for the contract and
would be replaced by unskilled labour.

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Overheads are generally allocated in the firm at Rs 18 per skilled labour hour which
represents Rs 13 for fixed overheads and Rs 5 for variable overheads.

Required:

You are required to determine the relevant cost of the contract and sales price of the
contract using the following assumptions:
• 10 % contribution margin is earned on the relevant cost of the contract.
• Contribution margin over relevant cost is equal to 15% of selling price. 18

Q.5 A chemical compound is made by raw material being processed through two processes. The
output of process A is passed to process B where further material is added to the mix. The
details of the process costs for the financial year December 2001 are as below:
Process A
Direct material 2000 kgs @ Rs 5.00 per kg
Direct Labour Rs 7,200
Process Plant Time 140 hrs @ Rs 60.00 per hr
Expected output 80% of input
Actual output 1400 kgs
Normal loss is sold @ Rs 0.50 per kgs

Process B
Direct material 1400 kgs @ Rs 12.00 per kg
Direct Labour Rs 4,200
Process Plant Time 80 hrs @ Rs 72.50 per hr
Expected output 90% of input
Actual output 2620 kgs
Normal loss is sold @ Rs 1.825 per kgs
The department overhead for the year was Rs 6,840 and is absorbed into the costs of each
process on direct labour cost. There was no opening stock at the beginning of the year.

Required:
Prepare the following accounts:
a) Process A 05
b) Process B 05
c) Normal loss/gain of both process 05

Q.6 In a manufacturing deptt 1 kg of product K requires two chemicals A and B. The following
are the details of product K for the month of January 2002.
a) Standard mix of Chemical A is 50% and Chemical B is 50%
b) Standard price per kg of chemical A is Rs 60 and chemical B is Rs 75
c) Actual input of chemical B is 350 kgs
d) Actual price of chemical A is Rs 75
e) Standard normal loss is 10% of total input
f) Material Cost Variance Rs 3,250 adverse
g) Material yield variance Rs 675 adverse
h) Actual output 450 kgs.

Required:
i) Material Mix Variance 06
ii) Material Usage Variance 03
iii) Material Price Variance 06
(THE END)

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Foundation Examinations Autumn 2002

September 07, 2002

COST ACCOUNTING (MARKS 100)

FE-2 Paper 5 & Module D Paper D12 (3 hours)

Q.1 (a) Describe the roll of a Cost Accountant in a manufacturing unit. (04)
(b) At the end of the month goods have arrived from the supplier but the relevant
invoice has either not been received or has not yet been processed for
payment by the relevant department. How you would deal with the problem
while preparing monthly management accounts. (03)
(c) Outline briefly a system for ascertaining idle time of a production worker
employed in a manufacturing concern. (05)
(d) A chart of accounts, accompanied by adequate instructions, is a great aid to
better accounting, costing and controlling. Explain. (05)

Q.2 With reference to material control system, you are required to explain the meaning
of:
(i) Perpetual Inventory
(ii) Continuous Stock Taking (05)

Q.3 The Parrot Steel’s factory overhead rate is Rs.5 per hour. Budgeted overhead for
5,000 hours per month is Rs.30,000 and at 7,000 hours is Rs.37,000. Actual
overhead for the month is Rs.29,000 and actual volume is 7,000 hours.

Required:
(i) Variable overhead in overhead rate (02)
(ii) Budgeted fixed overhead rate (02)
(iii) Applied factory overhead rate (02)
(iv) Over or under absorb factory overhead (02)
(v) Spending variance (03)
(vi) Idle capacity variance (03)

Q.4 A manufacturing company makes a product by two processes and the data below
relates to the second process for the month of June 2002.
Work in process as on June 01, 2002 was 1,200 units represented by the following
costs:
Rupees
Direct material (100%) 54,000
Direct wages (60%) 34,200
Overhead (60%) 36,000

During June 4,000 units were transferred from first process @ Rs.37.50 per unit.
This cost is treated as material cost of second process.

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Other costs were as follows:

Rupees
Additional material 24,150
Direct Wages 164,825
Overhead 177,690

Quantitative data shows the following:

Finished Goods transferred to godown 3,200 units

Finished Goods in hand 500 units
Normal loss 520 units
Work in process (100% material and 50% wages and
overhead) 980 units

Average method of pricing is used.

Required (i) Equivalent Production Statement for June 2002 (04)

(ii) Process Account for the month of June 2002 (10)

Q.5 (a) What is margin of safety? (03)

(b) The fixed cost of an enterprise for the year is Rs.400,000. The variable cost per
unit for a single product being made is Rs.20. Each units sells at Rs.100.

Required
(i) Break even point. (04)
(ii) If the turnover for the next year is Rs.800,000, calculate the estimated
contribution and profit, assuming that the cost and selling price remain the
same. (04)
(iii) A profit target of Rs.400,000 has been desired for the next year. Calculate the
turnover required to achieve the desired result. (04)

Q.6 (a) Explain the main functions of a cash budget and discuss briefly its importance
in a system of budgetary control. (05)
(b) Jawed Enterprises has bank balances of Rs.100,000 as on January 01, 2002.
The sales forecast for the next six months are as follows:

Rupees
January 850,000
February 750,000
March 800,000
April 800,000
May 900,000
June 950,000

Trend of recoveries against sales are 55% in the month of sales, 30% in next
month, 10% in the second month and 5% in the third month.

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Cost of sales are 80% of sales, payable immediately to avail 5% cash discount
of cost. Other costs are 10% of sales. Personal drawing are Rs.25,000 per
month. Any shortfall will be financed by bank @ 12% markup p.a. worked out
on the closing balance of the month. Mark up is payable next month.

Required:
(i) Cash budget for the six month ending June 30, 2002 (10)

(ii) Budgeted Income Statement for the six month ending June 30, 2002 (05)

Q.7 Baba Machine Factory manufactures equipment for textile, sugar and cement
industries. The company has three sales departments who are authorized to sell
directly to these industries. The following information is available for the month of
June 2002.

Particulars Textile Sugar Cement

Division Division Division
Capacity utilization 30% 30% 30%
Rupees Rupees Rupees
Gross sales 130,000 170,000 200,000
Net sales 120,000 150,000 200,000
Sales salaries 10,000 15,000 20,000
Storage expenses 6,000 8,000 8,000
Delivery expenses 2,000 4,000 5,000

Cost of goods manufactured as a % of gross sales 50% 60% 65%

Other marketing & selling expenses are Rs.24,000 to be allocated on net sales basis.
General salary are Rs.35,000 to be allocated on manufacturing cost basis and
commission to sales person are 2% of the net sales. The company is using 90% of its
capacity and each of the sales department are confident that they will be able to sell
the equipment if the capacity is increased to 100%. The additional cost for utilizing
100% capacity is estimated to be 5% of net incremental sales.

Required: (i) Income Statement in (columnar form) for the month of June 2002 (10)
for all the three divisions and as a whole.

(ii) Advice the management whether to increase its capacity to 100%

or not. If your answer is in affirmative, the division you would
suggest to increase the capacity. (05)

(THE END)

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Modular Intermediate Examinations Spring 2003

March 08, 2003

COST ACCOUNTING (MARKS 100)

Module D Paper D 12 (3 hours)

Q.1 Following transactions appeared in the books of accounts of the Company

PURCHASES

Month Quantity (Units) Cost per unit (Rs.)

Jan 100 41
Feb 200 50
April 400 51.87

SALES

Month Quantity (Units) Sale price per unit (Rs.)

March 250 64
May 350 70
June 100 74

There was an opening balance of 100 units for Rs.3,900.

From the information given above, for the six month ended June 30, show the store
ledger records including the closing stock balance and stock valuation by using
weighted average, FIFO and LIFO methods of pricing. (09)

Q.2 (a) Following is the labour data of a company for a given week:

Days Units Hours

Monday 270 8
Tuesday 210 8
Wednesday 300 8
Thursday 240 8
Friday 260 8

Required:

You are required to prepare a schedule showing weekly earning, hourly rate, and the
labor cost per unit assuming a 100% bonus plan with a base wage of Rs. 6/- per hour
and a standard production rate of 30 units per hour. (06)

(b) What are the requirements for an incentive plan to be successful. (03)

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Q.3 The following data of a period relates to a manufacturing department:

Budgeted Actual
Direct Material Cost Rs.500,000 Rs.750,000
Direct Labour Cost Rs.500,000 Rs.550,000
Production Overhead Rs.750,000 Rs.800,000

Direct Labour Hours 100,000 130,000

During the period a Job XY 54 was completed. Direct material costing Rs.100,000
direct labour Rs.21,000 and overhead costing Rs.115,000 were incurred.

Required:

(a) Calculate predetermined production overhead absorption rate on the following

basis:
(i) as a percentage to direct material cost (ii) direct labour hours (04)
(b) Calculate the production overhead cost to be charged to XY54 based on rates
calculated in answer (a) above. (04)
(c) Assume that the direct labour hour rate of absorption is used. Calculate the
under or over absorbed production overheads for the period and state an
appropriate treatment in the accounts. (04)
(d) If the factory overhead control account has a credit balance at the end of the
period, was overhead over applied or under applied? (04)

Q.4 ABC Limited produces four joint products Q,R,S and T, all of which result from
processing a single Raw Material Z. The following information is provided to you:

Joint Product Numbers of Units Selling price per unit

Rupees
Q 5000 18
R 9000 8
S 4000 4
T 2000 11

The company budgets for a profit of 14% of sales value. Other costs are as follows:
Carriage Inward 6%
Direct Wages 18%
Manufacturing overhead 12%
Administrative overhead 10%

Required:

(a) Calculate the maximum price that may be paid for the raw material. (04)
(b) Prepare a comprehensive Cost Statement for each of the products allocating the
material cost and other costs based on:
(i) the numbers of units, and
(ii) the sales value. (08)

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Q.5 (a) List the contents of a complete budget document of a manufacturing concern. (08)
(b) Explain Functional Budget. (06)

Q.6 M/s Gama & Sons produces only one product by the name ‘Gama’ and the standard
manufacturing cost of the product is as under:
Rupees
Direct material (4 kg @ Rs.3 per kg) 12
Direct labour (5 hours @ Rs.4 per hour) 20
Variable overhead 5
Fixed overhead 15
__________
Total standard cost 52 per unit
=========

The budgeted quantity to be produced is 10,000 kg and actual production was 9,500
units. The actual consumption and cost during the period was as under:
Rupees
Direct material ( 37,000 kg) 120,000
Direct labour (49,000 hours) 200,000
Variable overhead 47,000
Fixed overhead 145,000
__________
Total standard cost 512,000
=========

There was no stock of work in process or finished goods at the beginning or end of
the period.

Required:

You are required to calculate the relevant cost variances (14)

Q.7 A company manufactures a single product by the name ‘BABA’. Its variable cost is
Rs.40/- and selling price is Rs.100/-. For the current year, Company expects a net
profit of Rs.2,750,000 after charging a fixed cost of Rs.850,000. However the
production capacity is not utilized and the Manager Marketing suggested the
following for maximization of profit:

Suggestion Reduced selling price by Sale volume expected

to increase by
% %
1 5 10
2 7 20
3 10 25

Required:
(a) Evaluate the above proposals and advise the most profitable suggestions
assuming no change in the cost structure.
(b) Suggest other considerations for the decisions. (14)

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Q.8 A company which manufactures a uniform product is operating at 60% level of

activity. At this level the sales are Rs.60,000 at a selling price of Rs.10/- per product.
The following information regarding cost is available.

Variable cost Rs. 2 per product

Semi variable cost may be considered fixed at Rs.6,000 with a variable cost of
Rs.0.50 per product.

Fixed cost is Rs.20,000 at the present level of activity but is estimated that
achievement of an 80% - 90% level would increase cost by Rs.4,000.

A proposal has been made to the Directors that the price of product should be
reduced by 10% so as to reach a wider sales market. The Board is considering it and
require a statement showing:

(a) the operating profit if the company is operating at level of activity of 60%,
70% and 90% assuming that selling price
(i) remains as at present
(ii) is reduced to Rs.9 (08)

(b) The percentage increase in present output which will be required to maintain
the present profit if the Company reduces the selling price. (04)

(THE END)

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Intermediate Examinations Autumn 2003

September 06, 2003

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 Why should semi variable expenses be separated into fixed and variable elements?
What methods are available for separating semi variable expenses? 07

Q.2 How Cash Budget assists management in making more effective use of money?
Name two methods used for the preparation of a cash budget. 09

Q.3 The estimated overheads likely to be incurred relating to a cost center with two major
machines installed are as under:
Rupees

Supervision 8,000
Indirect employees, wages 10,000
Earned leave 5,000
Maintenance cost 15,000
Power 20,000
Depreciation 5,000
Rent of building 2,500
65,000
Details of various allocations of the cost centers are as under
Machine-1 Machine-2 Total

Running hours 5,000 1,000 6,000

1) Supervision cost Rs 4,000 4,000 8,000

2) Capital cost of machine Rs 20,000 5,000 25,000
3) Indirect employees No 8 2 10
4) Total employees No 20 5 25
5) Maintenance hours 600 120 720
6) Kilowatt hours 100,000 20,000 120,000
7) Floor Space Sq. ft 5,000 5,000 10,000

Required: Calculate machine hour rate for each machine. 10

Q.4 Following data pertains to a worker of a manufacturing industry.

Actual production 400 units
Working hours in a week 48 hrs
Guaranteed rate per hour Rs.10
Estimated time to produce one unit 8 minutes

As an incentive the management has agreed to increase the

time allowed per unit by 20%
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Required:

Calculate the gross wages of the worker according to:

a) Piece work with a guaranteed weekly wages
b) Under Rowan premium bonus
c) Under Hasley premium bonus 50% to worker 09

Q.5 Tata Cools manufactures a range of products including Air conditioners which pass
through three processes before transfer to finished goods store. Production department
for the current month has given the following production data.

PROCESS
1 2 3 Total

Basic Raw Material (10,000 units) Rs 6,000 6,000

Direct material – addition Rs 8,500 9,500 5,500 23,500
Direct wages Rs 4,000 6,000 12,000 22,000
Direct expenses Rs 1,200 930 1,340 3,470
Production overheads (to be allocated
on the basis of direct wages) Rs 16,500

Output Units 9,200 8,700 7,900

Normal loss in process of input % 10 5 10
Scrap value of each lost unit Rs 0.20 0.50 1.00

There was no stock at start or at the end in any process.

You are required to prepare the following accounts

a) Process 1 04
b) Process 2 04
c) Process 3 04
d) Abnormal Loss 04
e) Abnormal Gain 04

Q.6 The Parrot Company sold 150,000 units @ Rs. 30 each, Variable cost is Rs. 20
(Manufacturing Rs. 15 & Marketing Rs. 5), Fixed Cost is Rs. 1,200,000 annually
which occurs evenly throughout the year (Manufacturing Rs. 800,000 & Marketing
Rs. 400,000)

Required

i) Breakeven point in units

ii) Breakeven point in Rupees
iii) Number of units to be sold to earn profit before tax of Rs. 200,000
iv) Number of units to be sold to earn after tax profit of Rs. 100,000 if tax rate
is 25%
v) The breakeven point in units if selling price is increased by Rs. 3 and
variable cost by Rs. 2 per unit 10

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Q.7 A manufacturing concern is currently buying a component used in its finished product
from a local supplier @ Rs. 2,000. The company has been informed that plant to
produce this component is available and can be installed at space available with the
company. Two alternative proposals are under consideration:

a) Install a semi-automatic machine in which case fixed cost will be

Rs. 5,000,000 and variable cost Rs. 1,500 per unit.
b) Install an automatic machine in which case fixed cost will be Rs. 10,000,000
and variable cost Rs.1,200 per unit.

Note (Depreciation and interest costs are included in fixed cost).

Required:
(i) At what level of output it is justified to install any of the above two
machines.
(ii) If the annual requirement of the component is 15,000 units, which machine
would you advise to install.
(iii) At what level of output would you advise the company to install automatic
machine instead of semi-automatic machine. 15

Q.8 Following information pertains to Dilber Associates:

Normal capacity of a plant is 20,000 units per month or 240,000 units a year.

Variable costs per unit are:

Direct material Rs. 3.00
Direct labour Rs. 2.25
Variable FOH Rs. 0.75
Total Rs. 6.00

Fixed overheads are Rs. 300,000 per year or Rs.1.25 per unit at normal capacity.
Company is using ‘units of product’ as basis for applying overheads. Fixed marketing
and administrative expenses are Rs. 60,000 per year and variable marketing expenses
are Rs. 3,400, Rs. 3,600, Rs. 4,000 and Rs. 3,000 for the first, second, third and fourth
month respectively.

Actual and applied variable overheads are the same. Likewise no material or labour
variance exists. There is no work in process. Standard costs are assigned to finished
goods only.

The sale price per unit is Rs. 10 and actual production, sale and finished goods
inventories in units are:
MONTHS
First Second Third Fourth

Units in beginning inventory - - 3,000 1,000

Units produced 17,500 21,000 19,000 20,000
Units sold 17,500 18,000 21,000 16,500
Units in ending inventory - 3,000 1,000 4,500

Required: From the above information prepare income statement through Absorption
Costing and Direct Costing methods. 20
(THE END)

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ACCOUNTANTS E-Learning
PAKISTAN

Intermediate Examinations Spring 2004

March 11, 2004

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 Explain the following terms:

Expense (02)
Product cost (02)
Semi-variable cost (02)
Period cost (02)

Q.2 Critically analyse the following statement:

“Labour turnover should be low whereas stock turnover should be high.” (08)

Q. 3 XYZ Company produces 200 articles of X per annum. Each article of X requires
3.8 units of material Y. Some other data is given below:

Cost per unit of Y Rs. 12,500

Warehouse monthly rent Rs. 15,000
Warehouse fumigation during the year Rs. 23,000
Watchman salary per month Rs. 4,500
Per order inspection charges Rs. 10,252
Service departments factory overhead charged to
Store department Rs. 10,000
Ordering department Rs. 7,050
Stock holding per annum Rs. 125 per unit
Working capital cost 16%
Salaries of ordering department Rs. 10,050
Broker commission on supply of Y 0.50%
Per order lump sum out of pocket expenses of
broker of material Y Rs. 22,048

You are required to calculate:

(a) Economic Order Quantity. (08)

(b) Number of orders per annum on the basis of Economic Order Quantity. (02)
(c) Verify your answer in (b) by calculating total ordering plus carrying
costs per annum:
(i) Assuming higher number of orders than in (b) (03)
(ii) Assuming lower number of orders than in (b) (03)

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Q.4 AAB Company is planning its capacity for the year 2004 at 90% of the rated capacity.
For the purpose of estimating ‘other factory overhead expenses’ company uses five years
history and ‘simple regression analysis’ method. Data in hand is as under:

Rated capacity 20,000

Direct labour hours at 100% capacity 25,000

Five year history of ‘Other factory overhead expenses’ is as under:

Year Other factory overhead Direct labour

expenses (Rs.) hours

1999 90,775 23,750

2000 83,125 18,750
2001 84,800 20,000
2002 99,084 21,000
2003 84,860 19,750

In the year 2002 other factory overhead expenses include a penalty of Rs. 12,734 on non
compliance of certain labour laws.

You are required to calculate fixed and variable portions of estimated other factory
overhead expenses at planned capacity. (10)

Q. 5 AAD Company’s Budgeting Department has compiled following data for decision-making:

Product Demand Average Material Labour Opening

in units sale price per unit per unit stock
Rs. Rs. Rs. Units

A 1,500 318 172 76 50

B 2,200 421 172 173 50
C 3,700 280 172 32 -

Minimum order quantity of each product is 100 units. The company has Rs. 800,000
working capital in hand and a running finance line of Rs. 500,000 at 24% per annum cost.

Production lead time and sales recovery period is estimated at one year.

Administrative and marketing expenditure per annum are Rs. 152,700 and Rs. 72,842
respectively.

Opening stock carry same unit cost as given for current year.

You are required to:

(a) Prepare product sales mix that can generate maximum net profit. (08)
(b) Projected Profit and Loss Statement according to your suggested product mix. (04)

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Q.6 Following is the data of Department B of EFG Company for December, 2003:

Work in process (opening) 8,500 units

(Completed as to material 20% and conversion
cost 25%) Rs. 43,860
Work in process (ending) 11,540 units
(Completed as to material 50% and conversion
cost 25%)
Current period transactions are:
Cost transferred from Department A Rs. 45,600
Units transferred from Department A 12,000 units
Units mishandled and lost before start of
any process 460 units
Material consumed Rs. 27,654
Conversion cost incurred Rs. 47,689
Units transferred out 7,500

Normal spoilage is 6% of units transferred out and inspection is done at the end of
process. Company uses FIFO method for inventory valuation.

You are required to prepare production report of Department B showing Quantity

Schedule, Cost Charged to Department and Heads of Account where costs have been
accounted for. (20)

Q.7 ABC Limited intend to commence production from July 1. They have provided
following information for the first four months of operation:

PARTICULARS 1st 2nd 3rd 4th

Sales in units 9,500 9,300 9,900 10,000

Selling price per unit 60 58 59 60

Cost per unit

Material 20 18 19 20
Labour 10 10 10 10
Overhead 5 5 5 5
Depreciation 5 5 5 5
Administrative 3 3 3 3
Marketing 2 2 2 2

Capital expenditure - - - 50,000

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Additional Information

1) Material will be purchased on cash basis. The company intends to keep

stock for one month.

2) Wages to be paid at the end of the month.

3) Other costs will be accrued for one month.

4) Production for 5th month is expected to be 6,500 units.

5) Sales collections are as follows:

50% collection in first month
30% collection in second month
20% collection in third month

6) Loan from sponsors Rs 300,000 to be repaid in 5 equal monthly

installments beginning from second month of operation.

7) Cash in hand to be maintained at Rs 50,000. Deficit, if any, will be

financed from bank. Any surplus funds to be utilized towards payment
of bank liability. Markup, if any, will be paid @ 8% p.a. every six
months.

8) Cash in hand as on July 1, Rs 50,000.

Required:-

(a) Budgeted profit & loss for the four months. (06)
(b) Budgeted Cash flow statement for the four months. (10)

Q.8 From the following information, allocate overheads of service departments to individual
producing departments by adopting algebraic method:

Departmental overheads
before distribution of Service Provided
Departments Service Departments Dept Y Dept Z

Producing Dept – A Rs 6,000 40 % 20 %

Producing Dept – B Rs 8,000 40 % 50 %
Service – Y Rs 3,630 - 30 %
Service – Z Rs 2,000 20 % -
________ ______ ______
Total Departmental Overheads Rs 19,630 100 % 100 %
======= ===== ===== (10 )

(THE END)

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THE INSTITUTE OF CHARTERED Channel SCOF
ACCOUNTANTS E-Learning
PAKISTAN

Intermediate Examinations Autumn 2004

September 11, 2004

COST ACCOUNTING (MARKS 100)

MODULE D (3 hours)

Q.1 (a) Describe briefly THREE major differences between: (i) financial accounting,
and (ii) cost and management accounting. (06)

(b) The incomplete cost accounts for a period of Company A are given below:

Stores ledger control account

Rs. 000
Opening balance 2,640
Financial ledger control A/c 3,363

Production wages control account

Rs. 000
Financial ledger control A/c 2,940

Production overhead control account

Rs. 000
Financial ledger control A/c 1,790

Job ledger control account

Rs.000
Opening balance 1,724

The balances at the end of the period (in ‘000’) were:

Stores ledger Rs.2,543
Job ledger Rs.2,295

During the period 65,000 kilos of direct material were issued from stores at a
weighted average price of Rs.48 per kilo. The balance of materials issued from
stores represented indirect materials.

Two thirds of the production wages are classified as ‘direct’. Average gross
wage of direct workers was Rs.20 per hour. Production overheads are
absorbed at a predetermined rate of Rs.30 per direct labor hour.

Required:

Complete the cost accounts for the period. (08)

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Q.2 ABC Company has been manufacturing 7,280 units per month of a product and
selling the same at a price of Rs.154 per unit. With the increase in competition the
customers are now asking for new contracts at a rate of Rs.140 per unit. The
company has started cost/benefit analysis of various options like extra shift working,
buying new technologies etc. However, as an immediate step they are going to
implement 100% bonus wages plan for improvement in production capacity. Mixed
expectations of the outcome of this plan are:

Owners 7,800 units per month

Production manager 8,190 units per month
Labour contractor 9,100 units per month

Other data is as under:

Fixed overheads Rs. 264,368 per month

Variable overhead Rs. 73 per machine per hour
Daily wages (8 hours shift) Rs. 200 per person
Number of machines 10
Number of labour required 2 per machine
Standard capacity 28 units per machine
Direct material Rs. 75 per unit
Working days in a month 26

Required:
Prepare a table showing per unit cost at present and various expected levels of
production. (16)

Q.3 The AJFA & Co is preparing its production overhead budgets and therefore need to
determine the apportionment of these overheads to products. Cost center expenses
and related information have been budgeted as below:

Total Machine Machine Assembly Canteen Maintenance

Shop A Shop B

Direct Wages (Rs) 518,920 128,480 99,640 290,800

Indirect Wages (Rs) 313,820 34,344 36,760 62,696 118,600 61,420
Consumable
Materials(incl.
Maintenance) (Rs) 67,600 25,600 34,800 4,800 2,400
Rent & Rates (Rs) 66,800
Building Insurance(Rs) 9,600
Heat & Light(Rs) 13,600
Power(Rs) 34,400
Depreciation of
Machine (Rs) 160,800
Area (Sq Ft) 90,000 20,000 24,000 30,000 12,000 4,000
Value of Machines(Rs) 1,608,000 760,000 716,000 88,000 12,000 32,000
Power Usage (%) 100% 54% 40% 3% 1% 2%
Direct Labour (Hours) 72020 16020 12410 43590
Machine Usage (Hours) 54,422 14,730 37,632 2,060

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The proportion of Maintenance cost center time spent for other cost centers is:

Machine Shop A 45%

Machine Shop B 40%
Assembly 13%
Canteen 2%

Required:

Allocate the overhead expense by using the appropriate bases of apportionment. (12)

Q.4 The incomplete process account relating to period 4 for a company which
manufactures paper is shown below:

Process account
Units Rs. Units Rs.
Material 4,000 16,000 Finished goods 2,750
Labour 8,125 Normal loss 400 700
Production overhead 3,498 Work in progress 700

There was no opening work in process (WIP). Closing WIP consisting of 700 units
was complete as shown:
Material 100%
Labour 50%
Production overhead 40%

Losses are recognized at the end of the production process and loss units are sold at
Rs.1.75 per unit.

Required:

Calculate the values of abnormal loss, closing WIP and finished goods. (08)

Q.5 (a) Explain the straight line equation Y = a + bx with reference to cost behaviour. (04)

(b) What are the limitations and problems of the equation? (05)

(c) Using the data provided below, determine the variable cost per unit and fixed
cost of 14,000 units.

Output (Units) Total Cost (Rs)

11,500 204,952
12,000 209,460
12,500 212,526
13,000 216,042
13,500 221,454 (05)
14,000 226,402

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Q.6 PQR Company manufactures product ‘E’ in 1,000 units batches and sells them in
100 unit packs. Cost data of the said product is as under:

Raw material 42 kg per unit

Raw material price Rs.37 per kg for annual buying
upto 3.5 million kgs.
Rs.36.90 per kg for annual
buying over 3.5 million kgs.
Direct labour Rs. 850 per unit
Factory Overhead-Variable Rs.300 per unit
Factory Overhead-Fixed Rs. 500,610 per month
Price Rs. 2,862 per unit.

Current production level is 80,000 units per annum, which is 100% of rated capacity
of the plant. For any increase in production, there will be an increase in fixed
overhead by Rs.25,000 per month.

Cost accountant of the company is of the view that the company can achieve
break-even level at lesser quantity if production is increased to avail purchase
discount of Rs.0.10 per kg.

Required:
(10)
Verify the opinion of the Cost Accountant.

Q.7 GHI Company produces 817 kgs ‘Y’ for which following standard chemical mix is
used:
Material Standard Quantity (Kgs) Standard Rate per kg.(Rs)
A 750 38.00
B 150 53.00
C 50 59.50

Purchase department knowing the standard mix made efforts for reducing the
average price of material mix and achieved the results as under:

Rate (Rs.)
A 37.00
B 56.25
C 62.75

Production department concentrating on yield aspect experienced a different ratio of

raw material mix and got 876 kgs out of following mix:

Quantity (Kgs)
A 750
B 185
C 65

Required:
Find out the effect of deviation from standards by calculating:
(a) Price Variance (05)
(b) Mix Variance (05)
(c) Yield Variance (06)

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Q.8 Khan Company is a small business which has the following budgeted marginal
costing profit and loss account for the month ended June 30, 2004:

Rs. Rs.

SALES 96,000
Cost of Sales:
Opening stock 6,000
Production 72,000
Closing stock (14,000)
(64,000)
32,000
Other Variable Cost - selling expenses (6,400)
Contribution 25,600
Fixed Costs:
Production Overhead (8,000)
Administration (7,200)
Selling (2,400)
Net Profit 8,000

The standard cost per unit is:

Rs.
Direct material (1 Kg) 16
Direct labour (3 hours) 18
Variable cost (3 hours) 6

Budgeted selling price per unit is Rs. 60

The company’s normal level of activity is 4000 units per month. It has budgeted
fixed production costs at Rs.8,000 per month and absorbed them on the normal level
of the activity of units produced.

Required:

Prepare budgeted profit and loss under absorption costing for the month ended June
30, 2004. (10)

(THE END)

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ACCOUNTANTS PAKISTAN

Intermediate Examinations Spring 2005

March 12, 2005

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 (a) It is often stated that ‘actual product cost’ cannot practically be worked out.

(i) Why do you think this statement is made? (05)

(ii) If the statement is correct, is the whole cost accounting process
worthwhile? (04)

(b) (i) Explain with reasons the significance of chart of accounts for the
purpose of cost accounting. (03)
(ii) Give reasons why over- or under-absorptions of overheads may arise. (03)

Q.2 A company manufactures and retails clothing.

You are required to group costs which are listed below and numbered 1 to 20 in the
following classifications (each cost is intended to belong to only one classification):

(i) Direct material

(ii) Direct labour
(iii) Direct expenses
(iv) Indirect production overhead
(v) Research and development costs
(vi) Selling and distribution costs
(vii) Administration costs
(viii) Finance costs
1. Lubricant for sewing machines
2. Floppy disks for general office computer
3. Maintenance contract for general office photocopy machine
4. Telephone rental plus metered calls
5. Interest on bank overdraft
6. Performing Rights Society charge for music broadcast throughout the factory
7. Market research undertaken prior to a new launch
8. Wages of security guards for factory
9. Carriage on purchases of basic raw material
10. Royalty payable on production of XY
11. Road licenses for delivery vehicles
12. Parcels sent to customers
13. Cost of advertising products on television
14. Audit fee
15. Chief accountant’s salary
16. Wages of operatives in the cutting department
17. Cost of painting advertising slogans on delivery vans
18. Wages of storekeepers in a material store
19. Wages of fork lift drivers who handle raw materials
20. Developing a new product in the laboratory (10)

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(2)
Q.3 Omega Limited is a manufacturer producing various items. One of its main
products has a constant monthly demand of 20,000 units. The production of this
product requires two kg of chemical A. The cost of the chemical is Rs.5/- per kg.
The supplier of the chemical takes six days to deliver the same from the date of the
order. The ordering cost is Rs.12/- per order and the holding cost is 10% per
annum.

Required:

(a) Calculate the following :

(i) The economic order quantity
(ii) The number of orders required per year
(iii) The total cost of ordering and holding the chemical A for the year.
(b) Assuming that there is no safety stock and that the present stock level is
4000 kg, when should the next order be placed?
(c) Assuming that a safety stock of 4,000 kg of chemical is maintained, what
will be the holding cost per year?
(d) Discuss the problems which most firms would have in attempting to apply
the EOQ formula. (12)

Q.4 The yield of a certain process is 80% as to the main product and 15% as to the by-
product. Remaining 5% is the process loss. The material put in process (10,000
units) costed Rs.21 per unit and all other charges amounted to Rs.30,000 of which
power cost accounted for 33? %. It is ascertained that power is chargeable to the
main product and by-product in the ratio of 10:9.

Required:

Draw up a statement showing the cost of the by-product. (06)

Q.5 Total Surveys Limited conducts market research surveys for a variety of clients.
Extracts from its records are as follows:

2003 2004
Rupees in million Rupees in million
Total Costs 6.000 6.615

Activity in 2004 was 20% greater than in 2003 and there was an increase of 5% in
general costs.

Activity in 2005 is expected to be 25% greater than 2004 and general costs are
expected to increase by 4%.

Required:

(a) Derive the expected variable and fixed costs for 2005. (07)
(b) Calculate the target sales required for 2005 if Total Surveys Limited wishes to
achieve a contribution to sales ratio of 80%. (03)
(c) Discuss briefly the problems in analyzing costs into fixed and variable
elements. (05)

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Q.6 Gala Promotions Limited is planning a concert in Karachi. The following are the
estimated costs of the proposed concert:

Rs.(000)
Rent of premises 1,300
Advertising 1,000
Printing of tickets 250
Ticket sellers, security 400
Wages of Gala Promotions Limited Personnel employed at the concert 600
Fee of artist 1,000

There are no variable costs of staging the concert. The company is considering a
selling price for tickets at either Rs.4,000/- or Rs.5,000/- each.

Required:

(i) Calculate the number of tickets which must be sold at each price in order to
break-even. (03)
(ii) Recalculate the number of tickets which must be sold at each price in order to
break-even, if the artist agrees to change from fixed fee of Rs. 1 million to a
fee equal to 25% of the gross sales proceeds. (04)
(iii) Calculate the level of ticket sales for each price, at which the company would
be indifferent as between the fixed and percentage fee alternative. (04)
(iv) Comment on the factors, which you think, the company might consider in
choosing between the fixed fee and percentage fee alternative. (04)

Q.7 Ali Limited makes and sells one product, the standard production cost of which is
as follows for one unit:

Rs.
Direct labour 3 hours at Rs.6 per hour 18
Direct materials 4 kilograms at Rs.7 per kg 28
Production overhead Variable 3
Fixed 20
Standard production cost 69

Normal output is 16,000 units per annum and this figure is used for the fixed
production overhead calculation.

Costs relating to selling, distribution and administration are:

Variable 20 percent of sales value

Fixed Rs.180,000 per annum

The only variance is a fixed production overhead volume variance. There are no
units in finished goods stock at 1 October 2003. The fixed overhead expenditure is
spread evenly throughout the year. The selling price per unit is Rs.140.

For each of the six monthly periods, the number of units to be produced and sold
are budgeted as :

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(4)
Six months ending Six months ending
31 March 2004 30 September 2004
Production units 8,500 7,000
Sales units 7,000 8,000

Required:

(a) Prepare statements for the management showing sales, costs and profits for
each of the six monthly periods, using
(i) marginal costing (05)
(ii) absorption costing (08)
(b) Prepare an explanatory statement reconciling for each six monthly period the
profit using marginal costing with the profit using absorption costing. (03)

Q.8 Pink Ltd. is considering proposals for design changes in one of a range of soft toys.
The proposals are as follows:

(a) Eliminate some of the decorative stitching from the toy.

(b) Use plastic eyes instead of glass eyes in the toys.
(c) Change the filling material used. It is proposed that scrap fabric left over from
the body manufacture be used instead of synthetic material which is currently
being used.

On above proposals following information has been gathered by management:

(1) Plastic eyes will cost Rs.30 per hundred whereas the existing glass eyes cost
Rs.40 per hundred. The eyes will be more liable to damage during insertion. It
is estimated that scrap plastic eyes will be 10% of the quantity issued from
stores as compared to 5% in case of glass eyes.
(2) The synthetic filling materials costs Rs.1,600 per ton. One ton of filling is
sufficient for 2,000 soft toys.
(3) Scrap fabric to be used as filling material will need to be cut into smaller
pieces before use and will cost Re.1 per soft toy. Scrap fabric is sufficiently
available for this purpose.
(4) The elimination of decorative stitching is expected to reduce the appeal of the
product, with an estimated fall in sales by 10% from the current level. It is not
felt that the change in eyes or filling material will adversely affect sales
volume. The elimination of the stitching will reduce production costs by Rs.6
per soft toy.
(5) Current sales level of the soft toy is 300,000 units per annum. Apportioned
fixed costs per annum are Rs.4,500,000. The net profit per soft toy at the
current sales level is Rs.30.

Required:

Prepare an analysis which shows the estimated effect on annual profit if all three
proposals are implemented and which enables management to evaluate each
proposal. The proposals for plastic eyes and the use of scrap fabric should be
evaluated after the stitching elimination proposal has been evaluated. (11)

(THE END)

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ACCOUNTANTS PAKISTAN

Intermediate Examinations Autumn 2005

September 10, 2005

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 (a) Without an effective system of cost accounts it is doubtful whether any
business can survive in the intensely competitive conditions prevailing today.
Briefly state how a cost accounting system can be used by a business entity to
gain competitive advantage. (06)

(b) Management is often faced with a situation where a component which is

manufactured by their own organization has a cost, as disclosed by the cost
accounts, in excess of that which would have to be paid if it were bought in the
open market. However a decision whether to manufacture or buy cannot be
made simply by comparing internal costs with open market prices. List the
other factors which management would have to consider, both of a financial
and non-financial nature, while making such a decision. (05)

Q.2 Alpha manufacturing Co. Ltd. maintains stocks on perpetual inventory system. The
bin card for stock item code No. N96 in the company's stores contains the following
information for the month of June 2005:

Opening stock on 01 June: 60 units, value Rs. 3,600.

Receipts Invoice
Date Units issued
Units price per unit
5 June 120 59.00
10 June 80
14 June 40 60.50
17 June 80
20 June 20 62.00
24 June 80
25 June 100 63.00

The market price per unit was Rs. 60.00 on June 1, rising to Rs. 62.00 on June 10,
Rs. 62.50 on June 15 and Rs. 64.00 on June 30. The standard cost may be assumed
as Rs.60.00 per unit.

The following methods of stock pricing are being considered:

(a) LIFO
(b) Weighted average
(c) Standard cost
(d) Replacement cost

Required:

Under each of these methods, determine the cost of issues and the closing stock as at
June 30. (15)

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Q.3 A factory manufactures three components A, B and C.

During a week, the following was recorded:

Labour Number of Rate per hour Individual hours
grade employees (Rs.) worked
I 6 40 40
II 18 32 42
III 4 28 40
IV 1 16 44

Actual output and standard times are given below:

Standard minutes
Component Output
per component
A 444 30
B 900 54
C 480 66

The normal working week is of 38 hours. Overtime is paid at a premium of 50% of

the normal hourly rate.

A group incentive scheme is in operation and a bonus is paid based on the time
saved. The rate of bonus payment is 75% of normal hourly rate. The time saved is
allocated to each labour grade in proportion to the number of hours worked by each
group.

Required:

Calculate the total payroll showing the basic pay, overtime premium and bonus pay
for each grade of labour. (12)

Q.4 The factory overhead budget of a manufacturing company for the year ending June
30, 2006 is as follows:
Rupees
Indirect wages 1,627,920
Insurance – labour 114,240
Supervision 514,080
Machine maintenance wages 485,520
Supplies 257,040
Power 828,240
Tooling cost 285,600
Building insurance 14,280
Insurance of machinery 399,840
Depreciation - machinery 856,800
Rent and rates 371,280
5,754,840

At present, overheads are absorbed into the cost of the company’s products at 70%
of direct wages. The company is considering changing to a separate machine hour
rate of absorption for each of its four different machine groups.

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The following are some further details of costs and machine groups:

Machine groups
A B C D TOTAL
Tooling costs (Rs.) 115,958 88,042 55,832 25,768 285,600
Supervision (Rs.) 159,340 145,471 111,877 97,392 514,080
Supplies (Rs.) 118,634 79,089 19,772 39,545 257,040
Machine maintenance hours 3,000 2,000 4,000 1,000 10,000
Number of indirect workers 6 6 2 2 16
Total number of workers 26 34 15 10 85
Floor space (Sq.ft.) 3,000 2,400 1,600 1,000 8,000
Capital cost of machines
(Rs.’000) 3,200 2,400 1,000 1,800 8,400
Horse-power hours 55,000 27,000 8,000 15,000 105,000
Machine running hours 30,000 60,000 25,000 10,000 125,000

Required:

(a) Calculate a machine hour rate for each group of machines;

(b) Calculate the overhead to be absorbed by product no. 123 involving:

Machine group Hours

A 8
B 3
C 1
D 4

(c) Calculate the overhead to be absorbed by each unit of product 123 if the labour
cost is Rs.1,200 and the present method of absorption is used. (15)

Q.5 The Quetta Cement Company produces a product branded as Falkon. It has
estimated the cost per bag of 100 kgs. as under:
Rs.
Direct material 100
Direct labour 160
Factory overhead 120
380

The selling price of Falkon is Rs. 450 per bag.

During the month of December, the actual costs of production were as follows:

Rs.
Materials 200,000
Direct labour 320,000
Factory overhead 220,000

All materials are added at the beginning of production process.

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Production records show completed production of 2,000 units for the month; sales
records show that 1,600 units were sold during the period. Inventory records exhibit
the following data:

Work in process inventory December 01:

Direct material, 250 units:
Direct labour, 250 units ( 40% completed)
Factory overhead, 250 units ( 40% completed )

Work in process inventory December 31:

200 units estimated to be 60% completed as to labour and factory
overheads.

Required:

(a) Material price variance

(b) Labour rate variance
(c) Overhead budget variance
(d) A statement of actual cost of Falkon per bag for December. (09)

Q.6 Industries Limited produces a single product and has a manufacturing capacity of
7,000 units per week of 48 hours. The output data for three consecutive weeks is
given below:
Total Factory
Units Direct Direct
Overheads
Produced Material Labour
(Variable & Fixed)
Rs. Rs. Rs.
2,400 48,000 60,000 37,200
2,800 56,000 70,000 38,400
3,600 72,000 90,000 40,800
As cost accountant, you are asked by the company management to work out the
selling price assuming an activity level of 4,000 units per week and a profit of 20%
on selling price. (07)

Q.7 The Sindh Engineering Company produces a bicycle which sells at Rs.1,000 per
unit. At 80% capacity utilization which is the normal level of activity, the sales are
Rs.180 million. Costs are as under:

Prime cost per unit Rs.400

Factory indirect cost Rs.30 million (including variable cost Rs.10 million)
Selling costs Rs.25 million (including variable cost Rs.15 million)
Distribution costs Rs.20 million (including variable cost Rs.11 million)
Administration costs Rs.6 million

Commission and discounts are 5% of sales value.

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Required:

(a) Calculate the break-even sales value.

(b) Prepare statements showing sales, costs, profit and contribution margin at
each of the following levels:
i) at the normal level of activity;
ii) if unit selling price is reduced by 5% thereby increasing sales and
production volume by 10% of the normal activity level;
iii) if unit selling price is reduced by 10% thereby increasing sales and
production volume by 20% of the normal activity level. (12)

Q.8 As a cost accountant of Colombia Company, you are required to develop cash and
other budget information. The budget is to be based on the following assumptions:

Sales:
(a) Customers are allowed a 2% discount if payment is made within 10 days after
the billing date. Receivables are recorded at the gross selling price.
(b) Sixty percent of the billings are collected within the discount period; 25% by
the end of the month; 9% by the end of the second month. Bad debts are
estimated at 6% of sales.
(c) Sales are billed on the last day of the month.

Purchases:
(a) Sixty percent of all purchases and other expenses except salaries and wages
are paid in the same month whereas the balance is paid in the following
month.
(b) Raw materials inventory at the end of each month is equal to 130% of next
month’s production requirement.
(c) The cost of each unit of inventory is Rs.20.
(d) Wages and salaries earned each month by employees total Rs.60,000.
(e) Marketing, general, and administrative expenses (of which Rs.2,000 is
depreciation) are estimated at 15% of sales.

Actual and projected sales are as follows:

Rs. Rs.
August ………….………… 354,000 November ………………….... 342,000
September………………… 363,000 December …………………… 360,000
October ………………… 357,000 January ……………………… 366,000

Actual and projected materials needed for production:

Units Units
August ………….………… 11,800 November ………………….... 11,400
September………………… 12,100 December …………………… 12,000
October ………………… 11,900 January ……………………… 12,200

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Wages are paid weekly. The unpaid amount at the end of each month is projected as
follows:
Rs. Rs.
July ……………….………. 14,000 October ……………………… 2,000
August ………….………… 6,000 November ………………….... 6,000
September………………… 10,000 December …………………… 12,000

On August 31, the following balances appeared in the company’s books of account:

Rupees
Cash 44,000
Accounts receivable 349,600
Inventories 247,520
Accounts payable 106,444

The above balances are expected to increase by 25% during the month of
September.

Required:

Cash budget for the months of October, November and December. (19)

(THE END)

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ACCOUNTANTS PAKISTAN

Intermediate Examinations Spring 2006

March 11, 2006

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 (a) An important feature in the installation of any accounting or costing system is
the proper classification of accounts. The Bottlers Limited, bottlers and
distributors of beverages, have recently introduced a new classification which
includes the following accounts:

1. Samples 13. Freight out

2. Sugar 14. Income tax
3. Factory payroll 15. Advertising
4. Foreman’s salary 16. Rent of office building
5. Conveyance and travelling 17. Labels
6. Factory’s clerical salaries 18. Depreciation on machinery
7. Drivers’ wages 19. Insurance
8. Gas, oil and grease 20. Water
9. Depreciation of furniture & fixtures 21. Truck tyres
10. Salesmen’s salary and commissions 22. Bottle breakages
11. Light and power 23. Telephone and communication
12. Legal and audit fee 24. Stationery

Classify each account under one or more of the following headings:

• Manufacturing
• Selling and Distribution
• Administration (06)

(b) Distinguish between joint products and by-products, and briefly explain the
difference in accounting treatment between them. (04)

Q.2 Eastern Limited purchases product Shine for resale. The annual demand is 10,000
units which is spread evenly over the year. The cost per unit is Rs. 160. Ordering
costs are Rs. 800 per order. The suppliers of Shine are now offering quantity
discounts for large orders as follows:

Ordered Quantity Unit price Rs.

Upto 999 units 160.00
1000 to 1999 units 158.40
2000 or more units 156.80

The purchasing manager feels that full advantage should be taken of discounts and
purchases should be made at Rs. 156.80 per unit, using orders for 2000 units or
more. Holding costs for Shine are calculated at Rs. 64 per unit per year, and this
figure will not be altered by any change in the purchase price per unit

Required:

Advise Eastern Limited about the best choice available to them. (10)

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Q.3 Mr. Azad has provided you the following information from his factory ledger for
the quarter ended 31 December 2005:

Control Account Balances as on October 1, 2005: Rupees

Materials 49,500
Work in process 60,100
Finished goods 115,400

Materials purchased 108,000

Direct wages 50,200
Payments for factory overheads 30,900
Depreciation of factory building and machines 42,000

Other related information is as under:

− Closing stock of raw materials and finished goods at December 31, 2005
amounted to Rs. 50,300 and Rs. 125,800 respectively.
− Cost of goods produced is Rs. 222,500.
− Factory overheads are absorbed in production @ 160% of direct wages.
− Diesel costing Rs. 2,000 included in the factory overheads was transferred to
head office for use in generator.
− A bill for repairs amounting to Rs. 12,000 undertaken at the factory remained
unpaid at the end of the quarter.
− Material costing Rs. 2,400 was destroyed by rain.

Required:

Write up the following accounts:

i) Materials
ii) Work in process
iii) Finished goods
iv) Factory overheads
v) Cost of goods sold (10)

Q.4 AG Electronics manufactures transistors which are used for assembling flat screen
TV. During the current year 5,000 transistors were manufactured at the following
costs:
Rupees
Direct material 1,000,000
Direct wages 560,000
Factory overheads:
Lease rentals – equipments 90,000
Equipments Insurance 19,000
Equipments maintenance contract 200,000
Other overheads 600,000

The cost of direct materials include abnormal loss of Rs. 30,000.

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The following estimates have been made for the next year:

1. The production is estimated to increase by 60%.

2. The cost of direct material will increase by 20%.
3. In view of a government regulation which will become effective from July 1,
next year, the rate of wages will increase by 12%.
4. The rate of other overheads is expected to increase by 6% from the start of
next year. 40% of the other overheads are fixed costs allocated by head office.

Moon Limited, a specialist in manufacturing transistors has offered to supply the

full requirement for the next year, at a price of Rs. 400 per unit. If it is decided to
discontinue the production of transistors, the plant currently in use would be
returned to the leasing company but the following additional costs would have to be
incurred:

Inspection Rs. 20,000 per annum

Insurance Rs. 8 per transistor

You are required to advise the company’s management whether it should accept the
offer of Moon Limited or continue to manufacture the transistors in-house. (10)

Q.5 The manufacturing of a chemical is carried out in three continuous processes, P1,
P2 and P3. The following data is available in respect of production during
February 2006.
Particulars P1 P2 P3
Output – litres 8,800 8,400 7,000

Costs in rupees:
Direct Material introduced (10,000 litres) 63,840 - -
Direct wages 5,000 6,000 10,000
Direct Expenses 4,000 6,200 4,080

Work in process – opening (litres) 200

Scrap value (Rs. per unit) 1 3 5

Normal loss 10% 5% 10%

At the end of P3, 420 litres of a by-product ZOLO were produced, which was
treated further at a cost of Rs. 2 per liter. Selling and distribution expenses of Re.1
per unit were incurred and it was sold at a price of Rs. 9 per litre.

Budgeted overheads for the month were Rs. 84,000. Factory overhead absorption is
based on a percentage of direct wages. The work in process at P1 comprised
material of Rs. 500 and labour and factory overheads of Rs. 1,000. There were no
closing work in process in any of the processes.

Required:

Prepare the following:

(a) Work in process account for each process.
(b) By-product account. (12)

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Q.6 Nasib Ltd. has prepared the following budgeted income statement for the year 2006:

Product Caps Crowns Rings Pallets Tubes Total

(Rupees in thousands)
Sales 30,800 34,300 45,500 35,700 63,700 210,000

Manufacturing costs
Materials 1,540 4,620 9,240 7,700 11,550 34,650
Labour 3,500 5,600 10,500 9,800 12,600 42,000
Production overheads:
Variable 1,750 2,450 2,800 3,500 5,040 15,540
Fixed 2,450 4,200 7,700 7,000 6,650 28,000
9,240 16,870 30,240 28,000 35,840 120,190

Transportation 840 2,520 5,040 4,200 4,550 17,150

Packaging 1,400 700 1,400 700 2,100 6,300
2,240 3,220 6,440 4.900 6,650 23,450

Administrative costs 4,620 5,145 6,825 5,355 9,555 31,500

Selling and advertising

expenses 5,040 3,815 3,675 3,885 5,285 21,700
Total cost 21,140 29,050 47,180 42,140 57,330 196,840
Profit 9,660 5,250 (1,680) (6,440) 6,370 13,160

The Management Accountant of the company has provided the following additional
information which describes the basis on which budgeted income statement has been
prepared:

(i) Material costs include purchase cost plus 10% additional charge, which is
added in order to recover the fixed costs of storage and stores administration.

(ii) Labour cost is totally variable.

(iii) Fixed production overhead includes both directly attributable fixed costs and
general fixed production overheads. The general fixed production overheads
amount to Rs. 21 million and have been allocated in proportion to labour
costs. The attributable fixed cost is avoidable if the related product is not
produced.

(iv) Transport charges include fixed costs of Rs. 3,150,000 which have been
allocated to products in proportion to their material costs. Remaining costs
are variable.

(v) Selling and advertising expenses include commission of 5% of sales revenue.

The remaining amount is the advertising cost which is directly attributable to
each product.

(vi) Administrative cost is fixed and is apportioned in the ratio of sales revenue.

(vii) Packaging is a variable cost.

The Managing Director has shown his concern that Rings and Pallets are showing
loss and affecting the financial results of the company. A study which has been
carried out recently has analyzed as under:

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(a) Sales are influenced by advertising and can be increased upto 40% by
extensive advertising. However each 10% increase in sale would require a
75% increase in advertising expenditure.

(b) The sale of Caps or Crowns can be increased by reducing the production/sale
of the product Ring. However a reduction in sale of Ring by Re.1 would
generate a sale of 45 paisas of Caps or 50 paisas of Crowns sales. This
substitution will not entail any extra advertising expenditure.

The management is considering the following three options:

(i) To discontinue the product Ring and Pallets.

(ii) To launch an advertising campaign which will increase the sale of each
product by 40%.
(iii) To substitute the sale of Rings with the sale of Caps or Crowns.

Required:

Calculate the effect of each of the above options on the profitability of the
company. (25)

Q.7 A company produces mineral water. Based on the projected annual sales of 40,000
bottles of mineral water, cost studies have produced the following estimates:

Total annual costs

(in rupees) Variable cost percentage
Material 193,600 100
Labor 90,000 70
Overhead 80,000 64
Administration 30,000 30

The production will be sold through dealers who would receive a commission of
8% of sale price.

Required:

(i) Compute the sale price per bottle which will enable management to realize a
profit of 10 percent of sales.
(ii) Calculate the break-even point in rupees if sale price is fixed at Rs. 11 per
bottle. (10)

Q.8 The standard raw material mix for 2200 kgs of finished product is as follows:

Price per Kg
Materials Weight (Kgs)
(Rs.)
Salt 1,200 1.50
Ash 600 2.00
Coata 200 3.00
Fog 400 4.00

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Materials used during an accounting period were as follows:

Price per Kg
Materials Weight (Kg)
(Rs.)
Salt 6,000 1.6
Ash 4,800 1.8
Coata 1,600 2.6
Fog 2,500 4.1

Actual production was 12,100 kg. Calculate the following materials variances:

(i) Cost variance (ii) Price variance

(iii) Usage variance (iv) Mix variance
(v) Yield variance (13)

(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2006

September 09, 2006

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 Hi-way Engineering Limited uses budgeted overhead rate for applying overhead to
production orders on a direct labour cost basis for department A and on a machine hour
basis in department B.

The company made the following forecasts for August 2006:

Dept A Dept B
Budgeted factory overhead (Rs.) 216,000 225,000
Budgeted direct labour cost (Rs.) 192,000 52,500
Budgeted machine hours 500 10,000

During the month, 50 units were produced in Job no. CNG-011. The job cost sheet for
the month depicts the following information:
Dept A Dept B
Material issued (Rs.) 1,500 2,250
Direct labour cost (Rs.) 1,800 1,250
Machine hours 60 150

Actual data for the month were as follows:

Dept A Dept B
Factory overhead (Rs.) 240,000 207,000
Direct labour cost (Rs.) 222,000 50,000
Machine hours 400 9,000
Required:
(a) Compute predetermined overhead rates for each department. (02)
(b) Work out the total costs and unit cost of Job no. CNG-011. (04)
(c) Compute the over / under applied overhead for each department. (02)

Q.2 (a) Optimum inventory level can only be determined after comparing the holding
costs with the cost of ordering.
Required:
(i) Briefly discuss the impact of holding and ordering costs on optimum
inventory level. (03)
(ii) Give three examples of costs which fall under each category. (03)
(iii) What are the problems which may arise in determining the above costs? (02)
(b) Two-way Engineering Limited has been experiencing stockouts on one of its
important product RD-11. Using the EOQ formula, the company places orders of
1,250 units whenever the stock level reduces to 1500 units. The records of the
company show the following data relating to the usage of Product RD-11 during
lead times:

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Usage (Units) 1,800 1,600 1,400 1,200 1,000

Usage Probability (%) 4 6 10 20 60

The company sells RD-11 at a price of Rs. 500 per unit. The annual carrying cost of one
unit is Rs. 30. The company estimates that the cost of being out of stock is Rs. 125 for
each unit.

Required:
The management of the company asks you to establish an optimal safety stock for this
material and also ascertain the probability of being out of stock on your proposed safety
stock level. (10)

Q.3 Tram-way Hardware Store has been owned by Mr. Petrol. He had himself made all
investment in the business and had not obtained any financing. He appointed a junior
accountant to maintain the manual accounting records. During the month of August, he
asked his accountant to provide certain information including estimates as he was
planning to withdraw some amount for his personal use.

After the failure of his accountant to provide the required information, he has hired your
services for this purpose. You have gathered the following information from the
records:

(i) Sales for August 2006 amounted to Rs. 5,000,000.

(ii) Sales forecast for the next three months was as follows:
Rs.
September 6,000,000
October 5,000,000
November 5,500,000

(iii) Based on past experience, collections are expected to be 56 percent in the month
of sale and 43 percent in the month following the sale. One percent remains
uncollected
(iv) Gross margin on sales is 20% and cost of goods sold comprises of purchase cost
only.
(v) 80 percent of the goods are purchased in the month prior to the month of sale and
20 percent are purchased in the month of sale. Payment for goods is made in the
month following the purchase.
(vi) Other monthly recurring expenses which are paid in cash amount to Rs. 40,700.
(vii) Annual depreciation on fixed assets is Rs. 555,600.
(viii) Annual staff salaries are budgeted at Rs. 600,000.
(viii) Bad debts provision as at August 31, 2006 stands at Rs. 190,400.
(ix) Balances of some other accounts as at August 31, 2006 are as follows:

Rs.
Fixed assets 9,940,000
Acc. depreciation 1,900,500
Owner’s capital 2,800,000
Profit and loss 8,380,000
Cash and bank 1,980,940

Required:
(a) Prepare a balance sheet as at August 31, 2006. (06)
(b) Calculate the projected balance in accounts payable as on September 30, 2006. (02)
(c) Prepare a projected income statement for the month of September 2006. (03)

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Q.4 One-way Limited is engaged in manufacturing and sale of socks. The sales of the
company are mostly to USA and European Countries. At the end of the first quarter, the
results of operations of the company are as follows:
Rs.
Sales (Rs. 40 per unit) 5,300,000
Less: Material 1,987,500
Wages 795,000
Variable overhead 397,500
Fixed overhead 848,000
4,028,000
Gross profit 1,272,000

The factory was working at 40% capacity in the first quarter. Management of the
company has estimated that the quantity sold could be doubled next quarter if the selling
price was reduced by 15%. The variable costs per unit will remain the same, but certain
administrative changes to cope with the additional volume of work would increase the
fixed overhead by Rs. 15,000.

Required:
(a) Evaluate the management’s proposal. (05)
(b) What quantity would need to be sold next quarter in order to yield a profit of Rs.
2,000,000 if the selling price was reduced as proposed, variable cost per unit
remains the same and fixed overheads increased as estimated above? (02)
(c) Calculate the selling price needed to achieve a profit of Rs. 2,000,000 if the
quantity sold last quarter cannot be increased, material prices increase by 12%,
wage rates increased by 15%, variable overheads are higher by 10% and fixed
overheads increase by Rs. 15,000. (04)

Q.5 Mid-way Services Limited received an urgent order for installation of 4 machines in a
textile mill. Immediately after receiving the order, the company deputed four engineers
on the job. Each engineer was responsible for installation of one machine. The standard
time to complete this job was 50 hours.

It is the policy of the company to pay its engineers on job to job basis. The minimum
amount the company pays is based on standard hours. The payment is made at the rate
of Rs. 100 per hour.

In order to speed up the installation work, the company offered the engineers ‘Time
Saving Bonus’ (TSB) under which they would be entitled for the following incentives:

Percentages of time saved

TSB
to time allowed
0% to 10% 10% of time saved x hourly rate
11% to 20% 20% of time saved x hourly rate
20% to 30% 30% of time saved x hourly rate

In addition to the agreed amount, the customer has agreed to pay the company Rs. 150
for every hour saved on installation of each machine.

The jobs were completed successfully and the time spent by each engineer is as follows:

Engineers A B C D
Hours spent 41 36 46 50

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Required:
(i) Calculate the total earning of each engineer and their earning per hour. (08)
(ii) Compute the net additional revenue earned by the company. (03)

Q.6 Broad-way Manufacturing Limited produces two products DL-1 & DL-2. The
production involves two processes, I and II. The following data is available in respect of
production during the month of August 2006.
Process I Process II
Rs. Rs.
Material issued 375,000 100,000
Direct wages paid 150,000 200,000
Direct expenses incurred 100,000 100,000

During the month of August, materials issued to Process I and Process II were 1,250
tons and 230 tons respectively. The cost of output of Process – I is charged to Process –
II. Incidental to production, two by-products i.e. PT-1 and PT-2 are generated in the first
process and treated as a credit to Process-I.

Following additional information is also available:

Sales Packing
Product
Tons Rs. Cost
DL-1 100 600,700 20,070
DL-2 900 1,203,500 100,350
PT-1 200 10,000 -
PT-2 50 2,500 -

A shortfall occurs in Process II due to evaporation which is considered as normal loss.

There were no opening or closing stocks.

Required:
(a) Calculate joint processing costs and apportion them between DL-1 and DL-2 on
the basis of sales value. (08)
(b) Prepare summary trading account for the month showing net profit of each
product. (02)

Q.7 Run-way Pakistan Limited has provided you the following information about its sales,
production, inventory and variable/ fixed costs etc. for the second quarter of the year
2006.
Rupees
Sales 75,000,000
Operating profit 5,171,100
Variable manufacturing costs per unit 10
Fixed factory overhead per unit 11
Marketing & administrative expenses (Fixed Rs. 250,000) 450,000

Units
Sales 3,000,000
Actual production 2,420,100
Budgeted production 3,000,000
Ending inventory 320,200
Normal capacity 3,500,000
Production in quarter – I 3,100,150
Sales in quarter – I 2,200,050

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The Sales Manager claims that the operating profit of the quarter has been wrongly
calculated and is much higher than Rs. 5,171,100.

It is the policy of the company to compute applied factory overhead on the basis of
quarterly budgeted production volume and charge over or under applied factory
overhead to the cost of goods sold account at the end of each quarter.

Required:
(a) You are required to prepare income statements under the present method being
used by the company and also under marginal costing method for the satisfaction
of Sales Manager. (09)
(b) Reconcile the difference in operating profit under the two methods. (04)

Q.8 Sub-way Furnishers (Pvt.) Limited manufactures three garden furniture products –
Chairs, Benches and Tables. The budgeted data of each of these items is as under:

Chairs Benches Tables

Budgeted sales volume 4,000 2,000 1,500
Selling price per unit (Rs.) 3,000 7,500 7,200
Cost of Timber per unit (Rs.) 750 2,250 1,800
Direct labour per unit (Rs.) 600 1,500 1,600
Variable overhead per unit (Rs.) 450 1,125 1,200
Fixed overhead per unit (Rs.) 675 844 1,350

The budgeted volume was worked out by the sales department and the management of
the company is of the view that the budgeted volume is achievable and equal to the
demand in the market.

The fixed overheads are allocated to the three products on the basis of direct labour
hours. Production department has provided the following information:

Direct labour rate Rs. 40 per hour

Cost of timber Rs. 300 per cubic meter

A memo from Purchase Manager advises that because of the problem with the supplier
only 25,000 cubic meters of timber shall be available.

The Sales Director has already accepted an order for the following quantities which if
not supplies would incur a financial penalty of Rs. 200,000.

Chairs 500
Benches 100
Tables 150

These quantities are included in the overall budgeted volume.

Required:
Work out the optimum production plan and calculate the expected profit that would
arise on achievement of this plan. (14)

Q.9 Smart-ways Manufacturing Limited makes a product called LPG. Most of the
manufacturing expenses incurred during the production of LPG are directly identifiable
as fixed or variable. However, some of the expenses are partly fixed and partly variable.
The management of the company wants to determine the fixed and variable element of
these overheads.

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The total of such overheads which are partly fixed and partly variable, during each of
the last 10 months and the related production is given hereunder:

Month No. of Factory

Units Overhead
(Rs.)
1 3,000 7,200
2 4,000 9,000
3 6,000 12,150
4 5,000 11,250
5 6,000 11,700
6 5,000 10,800
7 7,000 12,600
8 6,000 11,250
9 5,000 10,350
10 3,000 7,200
50,000 103,500

Required:
Determine the fixed and variable element of the above overheads on the basis of high
low method and define the relationship in terms of cost volume formula. (04)

(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2007

March 07, 2007

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 The marketing department of Moon Engineering Limited has prepared the following
projected profit and loss account:
2007 2008
Rupees in million
Sales 750.0 800.0
Less:
Direct materials 187.5 200.0
Direct labour 112.5 120.0
Production overhead 135.0 144.0
435.0 464.0
Contribution margin 315.0 336.0
Less: Fixed costs 297.8 312.7
Net Profit 17.2 23.3
The marketing director is not happy with the sales growth shown in the forecasts.
Similarly, the finance director has shown his concern on the lower profitability. They
have also pointed our certain factors which were ignored while developing the above
projections. Consequently, a comprehensive study was carried out at all levels which has
resulted in the following revisions:
(i) Sales forecast for 2007 has been projected at Rs. 1.0 billion.
(ii) Sales prices are projected to remain the same in 2008. However, the total sales have
been projected to increase by 20% over the year 2007.
(iii) Material prices and costs of production overheads in 2008 will be higher by 10% as
compared to 2007;
(iv) Fixed costs will remain the same except for an expenditure of Rs. 12 million to be
incurred on a special advertising campaign during the year 2008.
Required:
(a) Revise the projected profit and loss account for both years; (05)
(b) Calculate breakeven sales and margin of safety% for 2007 and 2008; (04)
(c) Draw a profit volume chart in respect of each year. (04)

Q.2 (a) The production and cost data of Planet Manufacturing (Pvt.) Limited for the year
2006 and projections for the year 2007 are as follows:
2006 2007
Production (units) 175,000 225,000
Total costs (Rs.) 11,900,000 16,518,600
The rate of inflation in 2007 has been estimated at 15%.
Required:
Calculate the fixed and variable costs for 2007 in ‘real’ terms. (05)
(b) What is a ‘cost unit’ and ‘cost center’? Give two examples of each. (04)
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Q.3 Star Chemicals Limited uses three processes to manufacture a product “ST”. After the
third process the product is transferred to finished goods warehouse.

The following data for the month of January 2007 is available:

PROCESS
I II III
----------Rs. in thousands-------
Raw material – A 1,500 - -
Other direct materials 2,500 3,200 4,000
Direct wages 5,000 6,000 8,000
Direct expenses 1,600 1,885 2,020
Following additional information is also available:

(i) Production overheads are absorbed @ 80% of direct wages;

(ii) 20,000 units of raw material ‘A’ having a cost of Rs. 1,500,000 were initially put in
process-I.
(iii) In each process, an amount of Rs. 500,000 has been wrongly classified as direct
wages, instead of indirect wages.
(iv) The actual output obtained during the month was as under:

Process I 18,500 units

Process II 16,000 units
Process III 16,000 units

(v) Normal loss in each process is 10%, 10% and 5% respectively. Scrap value per unit is
Rs. 100 for process-I, Rs. 200 for process-II and Rs. 300 for process-III.
(vi) There was no stock at the start or at the end of any process.

Required:
Prepare the following in the books of Star Chemicals Limited:
(a) Ledger account for each process; (12)
(b) Abnormal gain/(loss) account. (04)

Q.4 Venus Pharmaceutical Company Limited faced a very high labour turnover during the
last year. The issue has now been settled after the announcement of an attractive payment
plan.

Following data relating to last year has been made available to you:

(i) Sales during the last year was Rs. 726 million and contribution margin was 10% of
sales;
(ii) Total number of actual direct labour hours was 510,000;
(iii) As a result of delays by the Personnel Department in filling vacancies, 10,000
potential productive hours were lost. All these potential lost hours could have been
sold at the prevailing rate;
(iv) The actual direct labour hours included 40,000 hours attributable to training new
recruits, out of which 25% of the hours were unproductive;
(v) The labour turnover resulted in following additional costs:

Rupees
Recruitment costs 284,000
Selection costs 128,500

Required:
Calculate the profit foregone by the company during the last year on account of labour
turnover. (05)
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Q.5 The production engineering staff of Skyline Company Limited, has set the following
standard mix for the production of one unit of Product X:

Weight Rate Per Kg Amount

(Kg) (Rs.) (Rs.)
Material A 0.50 10.00 5.00
Material B 0.30 5.00 1.50
Material C 0.20 2.00 0.40
1.00 6.90
Standard loss (10%) 0.10 -
0.90 6.90

Actual costs incurred on the production of 927,000 units were as follows:

Weight Rate Per Kg

(Kg) (Rs.)
Material A 530,000 10.00
Material B 280,000 5.30
Material C 190,000 2.20

Required:
(a) Calculate the mix and yield variances. (06)
(b) Reconcile actual material costs with the standard costs. (05)

Q.6 The following figures have been extracted from the budget of Uranus Limited for the
year ended June 30, 2007:

Rupees
Direct labour 35,000,000
Electricity 25,000,000
Repairs and maintenance 5,200,000
Depreciation 14,200,000
Other expenses 8,000,000

Budgeted annual production is 40,000 units. It is the policy of the company to charge
factory overhead on the basis of direct labour costs. Following additional information is
available for the first six months:

Direct material consumed (Rs.) 16,250,000

Direct labour cost (Rs.) 17,500,000
Factory overhead applied (Rs.) ?
Good units produced 20,000
Spoiled units (considered abnormal) 750

Spoiled units were sold for Rs. 1,200 per unit. Actual direct labour cost includes the cost
of bringing certain defective units to saleable condition, amounting to Rs. 100,000.

Required:
Prepare journal entries to record the transactions that took place during the first six
months of the year and support your answer with computation. (17)

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Q.7 Sun Fashions (Pvt.) Limited, a chain of retail garments store, has planned to introduce a
new fancy dress for babies at all its seven outlets in the country.

The company is also considering to introduce a matching crown scarf and handbag with
the new dress. Currently they are expecting to sell 15,000 dresses in the first six months
but the management feels that this sale can be increased by 30% if matching crown scarf
and handbag are marketed together.

The data relating to sales and production of dress, crown scarf and handbag are as
follows:

(i) Each dress requires three and half meter of cloth which is easily available in the
market at a price of Rs. 100 per meter. Part of the material left unused can be used to
manufacture a crown scarf and handbag.
(ii) The cost of cutting the dress, crown scarf and handbag is Rs. 35, Rs. 15 and Rs. 20
respectively.
(iii) The leftover pieces can be sold as under:
− if only the dress is manufactured, Rs. 20 per dress;
− if crown scarf and handbag is also manufactured, Rs. 5 per set.
(iv) The company has a contract with a designer firm at a monthly fee of Rs. 1,500,000.
However, in the case of handbag and crown scarf, the company will have to pay a
one time additional amount of Rs. 150,000 to the designer firm.
(v) Each handbag will require a metal hook which is available in the market at Rs. 10
per hook. However, the company has sufficient number of metal hooks in stock
which was purchased at Rs. 6 per hook. If the company does not opt for the
manufacturing of handbags, these hooks can be sold at Rs. 8 per hook.
(vi) The dresses, crown scarves and handbags are expected to be sold according to the
following mix:

Complete set 60%

Dress and crown scarf only 10%
Dress and handbag only 20%
Dress only 10%

(vii) The selling price and variable costs (besides those mentioned above) of each product
are as follows:

Selling Price per Variable Costs

unit (Rs.) (besides those mentioned above)
Dress 2,000 40% of selling price
Crown scarf 400 55% of selling price
Handbag 500 60% of selling price

Required:
Calculate the incremental profit or loss as a result of manufacturing handbags and crown
scarves with the dress. (16)

Q.8 Jupiter Manufacturing Company Limited consists of two manufacturing departments and
one service department. The company applies factory overhead on the following basis:

Manufacturing Department
A-1 70% of direct labour cost
A-2 Rs. 40 per direct labour hour

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Following relevant information is available:

Manufacturing Dept. Service

A-1 A-2 Department
Direct materials (Rs.) 433,000 313,000
Direct labour (Rs.) 388,800 259,200
Direct labour hours 3,500 4,000
Number of employees 140 220 40
Floor space (Sq. ft.) 1500 1500 750

The other expenses are as under:

Rupees
Indirect labour 217,400
Factory office expenses 43,200
Depreciation of computer 45,000
Factory building expenses 54,000
Service department’s expenses 112,800

Indirect labour and service department’s expenses are apportioned on the basis of direct
labour cost. Factory expenses and computer depreciation are allocated in the ratio of
number of employees to all the departments including service department.

Required:
Prepare a factory overhead distribution statement showing over / under applied FOH for
each department. (13)

(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2007

September 07, 2007

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 Binary Limited manufactures three joint products viz. Aay, Bee and Cee in one
common process. Following this process, product Aay and Bee are sold immediately
while product Cee is subjected to further processing. Following information is available
for the period ended June 30, 2007:
(i) Aay Bee Cee
Opening stock in kg Nil Nil Nil
Production in kg 335,000 295,000 134,000
Sales in kg 285,000 212,000 -
Sales price per kg (Rs.) 30.85 40.38 -
(ii) Total costs of production were Rs 17,915,800.
(iii) 128,000 kg of Cee were further processed during the period and converted into
96,000 kg of Zee. The additional cost of further processing were as follows:
Direct labour Rs. 558,500
Production overhead Rs. 244,700
(iv) 94,000 kg of Zee was sold during the period, with total revenue of
Rs. 3,003,300. Opening stock of Zee was 8,000 kg, valued at Rs 172,800. FIFO
method is used for pricing transfers of Zee to cost of sales.
(v) 8,000 kg of a bye-product Vee was also produced during further processing and
sold @ Rs. 10 per kg. Sales proceeds of bye-product are adjusted against
production cost of product Zee.
(vi) The cost of production is apportioned among Aay, Bee and Cee on the basis of
weight of output.
(vii) Selling and administration costs of Rs. 2,500,000 were incurred during the
period. These are allocated to all the main products based on sales value.
Required:
Prepare a profit and loss account for the period, identifying separately the profitability
of each of the three main products. (19)

Q.2 Hexa (Private) Limited is engaged in the supply of a specialized tool used in the
automobile industry. Presently, the company is incurring high cost on ordering and
storage of inventory. The procurement department has tried different order levels but
has not been able to satisfy the management.
The Chief Financial Officer has asked you to evaluate the current situation. He has
provided you the following information:
(i) The annual usage of inventory is approximately 8,000 cartons. The supplier does
not accept orders of less than 800 cartons. The cost of each carton is Rs. 2,186.
(ii) The average cost of placing an order is estimated at Rs 14,000 and presently two
orders are placed in each quarter.
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(iii) The sales are made on a regular basis and on average, half of the quantity ordered
is held in inventory. The cost of storage is considered to be 16% of the value of
inventory.
Required:
(a) Determine the following:
− Economic Order Quantity (EOQ).
− Number of orders to be placed, based on EOQ.
(b) Compute the ordering costs and storage costs in the existing situation. How much
cost can be saved if quantity ordered is equal to EOQ as determined in (a) above. (10)

Q.3 Octa Limited manufactures a single product under the brand name “Pak Pure”. The
latest estimates related to the current year are as follows:
Production and sales (units) 25,000
Cost per unit
Direct material (Rs.) 40
Direct labour (Rs.) 20
Fixed overhead (Rs.) 15
Variable overhead (Rs.) 5
Total cost per unit (Rs.) 80
During the next year, the costs per unit are expected to increase as under:
%
Direct material 20
Direct labour 10
Fixed overhead 5
Variable overhead 20
It is the policy of the company to set the selling price at the time of budget preparation
at cost plus 50%. The Sales Manager is worried about the implications of this policy.
According to his estimate, demand for the product will vary with price as follows:
Price (Rs.) 100 105 110 115
Demand (thousand units) 25 23 21 20
The Production Manager has informed that a different type of raw material is also
available in the market at a cost of Rs. 42.30 per unit. He believes that the new material
will give an acceptable quality of output. However, as a result of using cheaper
material, a process of inspection will have to be introduced which will cost Rs. 30,000
per annum. The chances of rejection are 2% and 3% for raw material and finished
goods respectively.
Required:
(a) Determine the price which will maximize the profit.
(b) Decide whether the company should continue to use the present type of raw
material or switch over to the new one. (10)
(Round off all the figures to two decimal places).

Q.4 Nooruddin Ahmed is planning to start a new business. He will invest his saving
amounting to Rs. 3,500,000 and intends to make borrowing arrangements with a bank
to meet the working capital requirements. His planning is based on the following
estimates:
(i) He has identified a factory cum office premises at a monthly rent of Rs. 80,000
which will be payable in advance at the beginning of each month. However, he
needs to give three months rent as security deposit to the landlord before
occupying the space. Other fixed overheads excluding depreciation are estimated
at Rs. 120,000 per month which will be paid in the same month.
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(ii) He has signed a contract for supply of machinery costing Rs. 1,800,000. The
payment will be made at the time of delivery in January 2008. This machinery
has an estimated life of five years with no residual value.
(iii) Production will start in January 2008 and 60% of the next month’s sales will be
manufactured in January 2008. Thereafter, the production will consist of 40% of
the current month’s sales and 60% of the next month’s sales.
(iv) He estimates the following sales for the first five months:

Month Unit Rupees

January - -
February 2,400 3,120,000
March 3,200 4,160,000
April 4,000 5,200,000
May 4,800 6,240,000

(v) Sales will be made on credit basis. A 5% cash discount will be allowed for
payments in the current month. It is estimated that 35%of each month’s sales
will qualify for this discount. Balance 65% will be recovered in the next month.
(vi) Variable production cost per unit has been estimated as:

Rupees
Direct material 600
Direct labour 200
Variable overhead 100
Total variable cost per unit 900

(vii) Raw materials costing Rs. 1,600,000 will be purchased in January 2008 in cash.
Thereafter, he intends to follow a policy of purchasing 50% of the monthly
requirement in the same month and 50% of the next month’s requirement. All
purchases after January shall be made on 30 days credit.
(viii) Salaries shall be paid in the first week of subsequent month.
(ix) 70% of the variable overheads shall be paid in the same month and 30% in the
next month.
Required:
Prepare a cash budget for the months January 2008 to April 2008 showing the balance
of cash / running finance at the end of each month. (20)

Q.5 Quadra Electronics assembles and sells three products – W, X and Y. The cost per unit
for each product is as follows:
W X Y
Rupees Rupees Rupees
Direct materials 4,880 1,600 1,000
Direct labour 4,000 2,000 700
Variable overheads 1,360 480 348
Fixed production overheads 1,172 1,290 960
Total cost per unit 11,412 5,370 3,008

The fixed overheads are worked out on the basis of normal production levels i.e 15,000;
45,000; and 60,000 units per annum for W, X and Y respectively.
The fixed selling and administrative costs for the next year are expected to be
Rs. 71,270,400.

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Management estimates that the ratio of sales quantities of W, X and Y shall be 1:3:4 and
selling price per unit shall be Rs. 12,800; Rs. 6,000 and Rs. 3,600 respectively.
Required:
(a) Calculate the number of units of W, X and Y to be sold in order to achieve break
even.
(b) Calculate the break even sales in terms of Rupees. (16)

Q.6 Ternary Packages is located at a remote site in an industrial estate which is far away
from the center of the city. Management of the company is now considering to provide
pick and drop facility to its employees. A two member committee has reviewed the
available options and has come up with a proposal to purchase three vans and run them
on three different routes i.e. A, B and C. The information for each van is as follows:
Rupees
Purchase price 1,200,000
Expected trade-in value after 4 years 200,000
Insurance per annum 50,000
Quarterly service including change of lubricants 4,000
Replacement of spare parts per 20,000 km 15,000
Vehicle License fee per annum 8,000
Tyre replacements after 40,000 km 14,000
Cost of diesel per litre 40
Annual running for each van will be as follows:
km
Van on route A 80,000
Van on route B 120,000
Van on route C 160,000

The committee has estimated that average running will be 16 km per litre.
Required:
(a) Prepare a schedule to be presented to the management showing following costs in
respect of each van for the first year of operation:
− Total variable cost − Variable cost per km
− Total fixed cost − Fixed cost per km
− Total cost − Total cost per km
(b) Briefly explain why the cost per km is different in each case. (15)

Q.7 Decimal World (Pvt) Limited is engaged in the manufacturing of standard and scientific
calculators. The company operates a bonus scheme for all its factory workers. A
performance bonus is incorporated into the wages by adding 75% of the efficiency ratio
in excess of 100% to the basic hourly rate. The following information is available for
the month of July 2007:
Basic rate of pay per hour (Rs.) 125
Standard production per hour (units) 4
Production during the period (units) 226,176
Actual hours spent 45,600
Required:
(a) Calculate the hourly wage rate inclusive of performance bonus.
(b) Calculate the total labour cost variance. (10)

(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2008

March 7, 2008

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 Mirza Limited is engaged in the manufacturing of spare parts for automobile industry. The
company records the purchase and issue of materials in a store ledger which is not
integrated with the financial ledger. It is the policy of the company to value inventories on
weighted average basis. The valuation is carried out by the Finance Department using stores
memorandum record. A physical stock count is carried out after every six months. Any
shortage/excess is then adjusted in the financial as well as stores ledger.

On December 31, 2007, physical stock count was conducted by the Internal Auditor of the
company. He submitted the following statement to the Finance Department:

Balance (in units) Cost per unit (Rs.)

Item Code Store Financial
Physical Average Current
Ledger Records
010-09 20,500 20,500 20,000 2.00 2.25
013-25 10,000 10,000 10,000 4.00 1.50
017-10 5,500 5,500 5,000 1.00 1.10
022-05 4,000 4,500 5,500 2.00 2.00
028-35 1,200 1,200 1,000 2.75 2.50
035-15 640 600 600 3.00 3.50

On scrutinizing the details, Finance Department was able to ascertain the following reasons:

Item Code Reasons

010-09 500 units were defective and therefore the Internal Auditor excluded them
while taking the physical count.
013-25 This item is not in use and is considered obsolete. The net realizable value is
Rs. 0.60 per unit.
017-10 Shortage is due to theft.
022-05 A receipt of 1,000 units was not recorded. The remaining difference is due to
errors in recording the quantity issued.
028-35 200 units returned to a supplier were not recorded. The invoiced cost was
Rs. 3 per unit.
035-15 Discrepancy is due to incorrect recording of a Goods Receipt Note.

Required:
(a) Prepare necessary Journal entries to record the adjustments in the financial ledger.
(b) State how would you make the necessary adjustments in the stores ledger? (14)

Q.2 (a) Explain the treatment of under-absorbed and over-absorbed factory overheads. Give
three reasons for under-absorbed / over absorbed factory overheads. (06)

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(b) On December 1, 2007 Zia Textile Mills Limited purchased a new cutting machine for
Rs. 1,300,000 to augment the capacity of five existing machines in the Cutting
Department. The new machine has an estimated life of 10 years after which its scrap
value is estimated at Rs. 100,000. It is the policy of the company to charge
depreciation on straight line basis.

The new machine will be available to Cutting Department with effect from February
1, 2008. It is budgeted that the machine will work for 2,600 hours in 2008. The
budgeted hours include:
− 80 hours for setting up the machine; and
− 120 hours for maintenance.

The related expenses, for the year 2008 have been estimated as under:

(i) Electricity used by the machine during the production will be 10 units per hour
@ Rs. 8.50 per unit.
(ii) Cost of maintenance will be Rs. 25,000 per month.
(iii) The machine requires replacement of a part at the end of every month which will
cost Rs. 10,000 on each replacement.
(iv) A machine operator will be employed at Rs. 9,000 per month.
(v) It is estimated that on installation of the machine, other departmental overheads
will increase by Rs. 5,000 per month.

Cutting Department uses a single rate for the recovery of running costs of the
machines. It has been budgeted that other five machines will work for 12,500 hours
during the year 2008, including 900 hours for maintenance. Presently, the Cutting
Department is charging Rs. 390 per productive hour for recovery of running cost of
the existing machines.

Required:
Compute the revised machine hour rate which the Cutting Department should use
during the year 2008. (08)

Q.3 Ayub Sports Limited produces boxing gloves which are in great demand in the local as well
as international market. Because of better quality and lesser competition in the market, the
company’s profit has approximately doubled in 2007. A summary of company’s expenses
and profit for the year 2006 and 2007 are as under:

2007 2006
Rupees Rupees
Materials consumed 140,000 100,000
Wages 120,000 80,000
Overheads – Fixed 32,000 30,000
Overheads – Variable 34,000 24,000
Net profit 20,500 10,000

In 2007, sales prices were increased by 10% as compared to 2006. The material prices and
rate of wages increased by 10% and 20% respectively in 2007.

In a meeting held to evaluate the performance of various departments, significant

differences arose among the departmental heads. Therefore the Managing Director of the
company asked the CFO to analyse the financial performance objectively.

Required:
Being the CFO of the company carry out an analysis to determine the increase/decrease in
profit in 2007, due to sales price, sales volume, material price, material consumption, labour
efficiency, labour rate, variable overheads and fixed overheads. (17)

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Q.4 Fazal Industries Limited is currently negotiating a contract to supply its products to K-Mart,
a large chain of departmental stores. K-Mart finally offered to sign a one year contract at a
lump sum price of Rs. 19,000,000.

The Cost Accountant of Fazal Industries Limited believes that the offered price is too low.
However, the management has asked you to re-assess the situation. The cost accountant has
provided you the following information:

Statement of Estimated Costs (Project: K-Mart)

Notes Rupees
Material:
X (at historical cost) (i) 1,500,000
Y (at historical cost) (ii) 1,350,000
Z (iii) 2,250,000
Labour:
Skilled (iv) 4,050,000
Unskilled (v) 2,250,000
Supervisory (vi) 810,000
Overheads (vii) 8,500,000
Total cost 20,710,000

You have analysed the situation and gathered the following information:
(i) Material X is available in stock. It has not been used for a long time because a
substitute is currently available at 20% less than the cost of X.
(ii) Material Y was ordered for another contract but is no longer required. Its net realizable
value is Rs. 1,470,000.
(iii) Material Z is not in stock.
(iv) Skilled labour can work on other contracts which are presently operated by semi-
skilled labour who have been hired on temporary basis at a cost of Rs. 325,000 per
month. The company will need to give them a notice of 30 days before terminating
their services.
(v) Unskilled labour will have to be hired for this contract.
(vi) Two new supervisors will be hired for this contract at Rs. 15,000 per month. The
present supervisors will remain employed whether the contract is accepted or not.
(vii) These include fixed overheads absorbed at the rate of 100% of skilled labour. Fixed
production overheads of Rs. 875,000 which would only be incurred if the contract is
accepted, have been included for determining the above fixed overhead absorption
rate.

Required:
Prepare a revised statement of estimated costs using the opportunity cost approach, for the
management of Fazal Industries and state whether the contract should be accepted or not. (14)

Q.5 Ishaq Limited manufactures plastic bottles for pharmaceutical companies. It has recently
introduced a 100% weekly group bonus plan with a guaranteed wage of Rs. 150 per hour.
Standard production per hour is 50 bottles. Each worker is supposed to work 8 hours a day
from Monday to Friday and 5 hours on Saturday. Presently, there are 20 workers who are
entitled for this plan. Production for the first week under the 100% bonus plan was:

Days Mon Tue Wed Thu Fri Sat

No. of bottles 8,700 7,350 9,750 7,500 8,950 4,550

Most of the workers have raised objection on the company’s bonus plan. They are of the
view that bonus calculation should be based on daily production instead of weekly
production. The management of the company has asked you to determine the impact of such
a change.

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Required:
Prepare statements showing labour cost per unit under each of the two options. Give reasons
for the differences, if any. (10)

Q.6 Yahya Limited produces a single product that passes through three departments, A, B and C.
The company uses FIFO method for process costing. A review of department A’s cost
records for the month of January 2008 shows the following details:

Material Labour
Units
Rs. Rs.
Work in process inventory as at January 1, 2008
(75% complete as to conversion costs) 16,000 64,000 28,000
Additional units started in January 2008 110,000 - -
Material costs incurred - 430,500 -
Labour costs incurred - - 230,000
Work in process inventory as at January 31, 2008
(50% complete as to conversion costs) 18,000 - -
Units completed and transferred in January 2008 100,000 - -

Overhead is applied at the rate of 120% of direct labour. Normal spoilage is 5% of output.
The spoiled units are sold in the market at Rs. 6 per unit.
Required:
Compute the following for the month of January:
(a) Equivalent production units.
(b) Costs per unit for material, labour and factory overhead.
(c) Cost of abnormal loss (or gain), closing work in process and the units transferred to
the next process. (16)

Q.7 Zulfiqar Limited makes and sells a single product and has the total production capacity of
30,000 units per month. The company budgeted the following information for the month of
January 2008:

Normal capacity (units) 27,000

Variable costs per unit:
Production (Rs.) 110
Selling and administration (Rs.) 25
Fixed overheads:
Production (Rs.) 756,000
Selling and administration (Rs.) 504,000

The actual operating data for January 2008 is as follows:

Production 24,000 units

Sales @ Rs. 250 per unit 22,000 units
Opening stock of finished goods 2,000 units

During the month of January 2008, the variable factory overheads exceeded the budget by
Rs. 120,000.
Required:
(a) Prepare profit statement for the month of January using:
− marginal costing; and
− absorption costing.
(b) Reconcile the difference in profits under the two methods. (15)

(THE END)
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2008

September 5, 2008

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 Binary Ltd. (BL) manufactures three products, A, B and C. It is the policy of the company to
apportion the joint costs on the basis of estimated sales value at split off point. BL incurred the
following joint costs during the month of August 2008:

Rs. in ‘000
Direct material 16,000
Direct labour 3,200
Overheads (including depreciation) 2,200
Total joint costs 21,400

During the month of August 2008 the production and sales of Product A, B and C were
12,000, 16,000 and 20,000 units respectively. Their average selling prices were Rs. 1,200,
Rs. 1,400 and Rs.1,850 per unit respectively.
In August 2008, processing costs incurred on Product A after the split off point amounted to
Rs. 1,900,000.
Product B and C are sold after being packed on a specialized machine. The packing material
costs Rs. 40 per square foot and each unit requires the following:

Product Square feet

B 4.00
C 7.50

The monthly operating costs associated with the packing machine are as follows:

Rupees
Depreciation 480,000
Labour 720,000
Other costs 660,000

All the above costs are fixed and are apportioned on the basis of packing material
consumption in square feet.
Required:
(a) Calculate the joint costs to be apportioned to each product. (13)
(b) BL has received an offer from another company to purchase the total output of Product B
without packaging, at Rs. 1,200 per unit. Determine the viability of this offer. (03)

Q.2 Alpha Motors (Pvt.) Ltd. uses a special gasket for its automobiles which is purchased from a
local manufacturer. The following information has been made available by the procurement
department:

Annual requirement (no. of gaskets) 162,000

Cost per gasket (Rs.) 1,000
Ordering cost per order (Rs.) 27,000
Carrying cost per gasket (Rs.) 300

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The gaskets are used evenly throughout the year. The lead time for an order is normally 11
days but it can take as much as 15 days. The delivery time and the probability of their
occurrence are given below:

Delivery time (in days) Probability of Occurrence

11 68%
12 12%
13 10%
14 6%
15 4%

Required:
(a) Compute the Economic Order Quantity (EOQ) and the total Ordering Costs based on
EOQ. (04)
(b) What would be the safety stock and re-order point if the company is willing to take:
ƒ a 20% risk of being out of stock?
ƒ a 10% risk of being out of stock? (08)
Note: Assume a 360 day year.

Q.3 (a) Hexa Limited uses a standard costing system. The following profit statement summarizes
the performance of the company for August 2008:

Rupees
Budgeted profit 3,500
Favorable variance:
Material price 16,000
Labour efficiency 11,040 27,040
Adverse variance:
Fixed overheads (16,000)
Material usage (6,000)
Labour rate (7,520) (29,520)
Actual profit 1,020

The following information is also available:

Standard material price per unit (Rs.) 4.0

Actual material price per unit (Rs.) 3.9
Standard wage rate per hour (Rs.) 6.0
Standard wage hours per unit 10
Actual wages (Rs.) 308,480
Actual fixed overheads (Rs.) 316,000
Fixed overheads absorption rate 100% of direct wages

Required:
Calculate the following from the given data:
(a) Budgeted output in units
(b) Actual number of units purchased
(c) Actual units produced
(d) Actual hours worked
(e) Actual wage rate per hour (15)

(b) State any two possible causes of favourable material price variance, unfavourable
material quantity variance, favourable labour efficiency variance and unfavourable labour
rate variance. (04)

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Q.4 Decimal World Limited manufactures and sells modems. It manufactures its own circuit
boards (CB), an important part of the modem. The present cost to manufacture a CB is as
follows:

Rupees
Direct material 440
Direct labour 210
Variable overheads 55
Fixed overheads
Depreciation 60
General overheads 30
Total cost per unit 795

The company manufactures 400,000 units annually. The equipment being used for
manufacturing CB has worn out completely and requires replacement. The company is
presently considering the following options:

(A) Purchase new equipment which would cost Rs. 240 million and have a useful life of six
years with no salvage value. The company uses straight-line method of depreciation. The
new equipment has the capacity to produce 600,000 units per year. It is expected that the
use of new equipment would reduce the direct labour and variable overhead cost by
20%.
(B) Purchase from an external supplier at Rs.730 per unit under a two year contract.

The total general overheads would remain the same in either case. The company has no other
use for the space being used to manufacture the CBs.

Required:
(a) Which course of action would you recommend to the company assuming that 400,000
units are needed each year? (Show all relevant calculations) (07)
(b) What would be your recommendation if the company’s annual requirements were
600,000 units? (06)
(c) What other factors would the company consider, before making a decision? (03)

Q.5 Octa Electronics produces and markets a single product. Presently, the product is
manufactured in a plant that relies heavily on direct labour force. Last year, the company sold
5,000 units with the following results:

Rupees
Sales 22,500,000
Less: Variable expenses 13,500,000
Contribution margin 9,000,000
Less: Fixed expenses 6,300,000
Net income 2,700,000

Required:
(a) Compute the break-even point in rupees and the margin of safety. (04)
(b) What would be the contribution margin ratio and the break-even point in number of units
if variable cost increases by Rs. 600 per unit? Also compute the selling price per unit if
the company wishes to maintain the contribution margin ratio achieved during the
previous year. (05)
(c) The company is also considering the acquisition of a new automated plant. This would
result in the reduction of variable costs by 50% of the amount computed in (b) above
whereas the fixed expenses will increase by 100%. If the new plant is acquired, how many
units will have to be sold next year to earn net income of Rs. 3,150,000. (03)

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Q.6 Ternary Engineering Limited produces front and rear fenders for a motorcycle manufacturer.
It has three production departments and two service departments. Overheads are allocated on
the basis of direct labour hours. The management is considering to change the basis of
overhead allocation from a single overhead absorption rate to departmental overhead rate. The
estimated annual overheads for the five departments are as under:
Production Departments Service Departments
Fabrication Phosphate Painting Inspection Maintenance
-------------------------Rs. in 000--------------------------------
Direct materials 6,750 300 750
Direct labour 1,200 385 480
Indirect material 30 75
Other variable overheads 200 70 100 30 15
Fixed overheads 480 65 115 150 210
Total departmental expenses 8,630 820 1,445 210 300

Maximum production capacity 20,000 25,000 30,000

Direct labour hours 24,000 9,600 12,000
Machine hours 9,000 1,000 1,200
Use of service departments:
Maintenance - Labour hours 630 273 147
Inspection - Inspection hours 1,000 500 1,500

Required:
(a) Compute the single overhead absorption rate for the next year. (06)
(b) Compute the departmental overhead absorption rates in accordance with the following:
ƒ The Maintenance Department costs are allocated to the production department on the
basis of labour hours.
ƒ The Inspection Department costs are allocated on the basis of inspection hours.
ƒ The Fabrication Department overhead absorption rate is based on machine hours
whereas the overhead rates for Phosphate and Painting Departments is based on direct
labour hours. (10)

Q.7 Unity Electronics Limited manufactures and supplies condenser fans used in the production of
Refrigerators to Sigma Corporation. The company earns a contribution margin of Rs. 600 on
each unit sold before charging the labour cost. Following information is available from the
company’s records.

Number of employees 180

Standard working hours (9 hours/day) 54
Standard hours per unit (at 100% efficiency) 3
Standard labour rate per hour (Rupees) 30

Due to the rise in demand for Refrigerators, Sigma Corporation has increased the size of its
order. However, the management is concerned about the productivity of its labour force. An
analysis of the employees performance report has revealed that the company is suffering on
account of the following:
ƒ A tendency to waste time as a result of which approximately 9 working hours are lost per
week per employee.
ƒ A tendency to work inefficiently, as a result of which the production efficiency is only 74%.
In order to meet the increased demand, the management is considering an increase in wages
by Rs. 5 per hour. The increase is likely to motivate the employees and reduce the wastage of
time by 5 hours and will also improve the production efficiency to 88%.
Required:
Advise whether Unity Electronic Limited should revise the wages. Show all necessary
supporting calculations. (09)
(THE END)
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2009

March 6, 2009

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 ABC has recently established a new unit in Multan. Its planning for the first year of
operation depicts the following:

(i) Cash sales 600,000 units

(ii) Credit sales 1,200,000 units
(iii) Ending inventory Equivalent to 15 days sales
(iv) Number of working days in the year 300
(v) Expected purchase price Rs. 450 per unit
(vi) Manufacturer offers 2% discount on purchase of 500 units or more as bulk quantity
discount. The company intends to avail this discount.
(vii) Carrying costs include:
ƒ Financial cost of investment in inventory @ 16% per annum.
ƒ Godown rent of Rs. 10,000 per month.
(viii) Ordering costs are Rs. 300 per order.

Required:
Compute the Economic Order Quantity (EOQ) and the estimated carrying costs and
ordering costs for the first year of operation. (10)

Q.2 The following information pertains to a week’s work for three employees of a company:

Employees L M N
Total hours worked 60 65 70
Hours of indirect work (included in total hours) 20 10 5
Basic hourly wage rate (Rupees) 60 80 50
Output in units 192 175 150
Time allowed per unit (hours) 0.25 0.4 0.60

Bonus is paid @ 60% of basic wage rate for all time saved. The normal working week is 45
hours. The first five hours of overtime are paid at basic rate plus 40% and the rest at basic
rate plus 60%.

Required:
You are required to calculate the following for each employee.
(a) Basic wages including overtime.
(b) Amount of bonus earned and gross wages.
(c) Direct wages per unit, when overtime is worked:
(i) due to labour shortage.
(ii) specifically at the customer’s request, to expedite delivery. (15)

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Q.3 A chemical is manufactured by passing through two processes X and Y using two types of
direct material, A and B. In process Y, a by-product is also produced which is then
transferred to process Z where it is completed. For the first week of a month, the actual data
has been as follows:

Process
X Y Z
Output of main product (kgs) 9,400 8,000
Output of byproduct (kgs) 1,400 1,250
Direct material - A (9,500 units) (Rs.) 123,500
Direct material - B added in process (kgs) 500 300 20
Direct material - B added in process (Rs.) 19,500 48,100 1,651
Direct wages (Rs.) 15,000 10,000 500
Scrap value (Rs. per unit) 5 10 6
Normal loss of units in process (%) 4 5 5

The factory overheads are budgeted @ 240% of direct wages and are absorbed on the basis
of direct wages. Actual factory overheads for the week, amounted to Rs. 65,000. Estimated
sales value of the by-product at the time of transfer to process Z was Rs. 22 per unit.

Required:
Prepare the following:
(a) Process accounts for X, Y and Z.
(b) Abnormal loss and abnormal gain accounts.
(c) Factory overhead account. (17)

Q.4 Following information has been extracted from the financial records of ATF Limited:

Production during the year units 35,000

Finished goods at the beginning of the year units 3,000
Finished goods at the end of the year units 1,500
Sale price per unit Rs. 200
Fixed overhead cost for the year Rs. 1,000,000
Administration and selling expenses Rs. 200,000
Annual budgeted capacity of the plant units 40,000

The actual cost per unit, incurred during the year, was as follows:

Rupees
Material 70
Labour 40
Variable overheads 30

Company uses FIFO method for valuation of inventory. The cost of opening finished goods
inventory determined under the absorption costing method system was Rs. 450,000. Fixed
overhead constituted 16% of the total cost last year.

Required:
(a) Prepare profit statements for the year, under absorption and marginal costing
systems.
(b) Prepare reconciliation between the net profits determined under each system. (12)

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Q.5 The expenses of the production and service departments of a company for a year are as
follows:

Expenses before distribution of Service provided

Department service department costs (%age)
Rs. ‘000’ Deptt. X Deptt. Y
Production department –A 500 50 40
–B 400 30 50

Service department –X 100 - 10

–Y 60 20 -

Required:
Allocate the service departments expenses to production departments by:
ƒ Repeated distribution method
ƒ Simultaneous equation method (13)

Q.6 A soft drink company is planning to produce mineral water. It is contemplating to purchase
a plant with a capacity of 100,000 bottles a month. For the first year of operation the
company expects to sell between 60,000 to 80,000 bottles. The budgeted costs at each of the
two levels, are as under:

Rupees
Particulars 60,000 bottles 80,000 bottles
Material 360,000 480,000
Labour 200,000 260,000
Factory overheads 120,000 150,000
Administration expenses 100,000 110,000

The production would be sold through retailers who will receive a commission of 8% of sale
price.

Required:
(a) Compute the break-even point in rupees and units, if the company decides to fix the
sale price at Rs. 16 per bottle.
(b) Compute the break-even point in units if the company offers a discount of 10% on
purchase of 20 bottles or more, assuming that 20% of the sales will be to buyers who
will avail the discount. (16)

Q.7 A company produces three products using the same raw material. The raw material is in
short supply and only 3,000 kilograms shall be available in April 2009, at a cost of Rs.
1,500 per kilogram.

The budgeted costs and other data related to April 2009 are as follows:

Products X Y Z
Maximum demand (units) 1,000 800 1,200
Selling price per unit (Rs.) 3,750 3,500 4,500
Material used per unit (kg) 1.6 1.2 1.8
Labour hours per unit (Rs. 75 per hour) 12 16 15

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Required:
(a) Determine the number of units that should be produced by the company to earn
maximum profit
(b) Determine the number of units to be produced if finished products are also available
from an external supplier at the following prices per unit:

Rupees
X 3,450
Y 3,100
Z 3,985 (17)

(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2009

September 11, 2009

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 Ahmer and Company is engaged in production of engineering parts. It receives bulk orders
from bicycle manufacturers and follows job order costing. On July 1, 2008 two jobs were in
progress whereas two jobs were opened during the year. The details are as follows:

JOBS
A B C D
Work in process – opening (Rs.) 1,400,000 2,500,000 - -
Raw material issued from stores (Rs.) 800,000 1,200,000 1,500,000 600,000
Direct labour hours worked (Hours) 20,000 30,000 15,000 18,000
Rate of direct labour per hour (Rs.) 20 18 16 15

Other related information is as follows:

(i) Factory overhead is applied to the jobs at Rs. 10 per labour hour.
(ii) Actual factory overheads for the year amounted to Rs. 900,000.
(iii) Under/over applied factory overheads are charged to profit and loss account.
(iv) Job A was completed during the year. All the goods were shipped to the customers.
(v) Job B was also completed during the year. However, about 10% of the goods were
rejected during inspection. These were transferred to Job C where they will be used
after necessary adjustments.

Required:
Prepare journal entries to record all the above transactions. (14)

Q.2 Following information has been extracted from the records of RT Limited for August 2009:

Departments
Production Service
P-1 P-2 P-3 S-1 S-2
Budgeted machine hours 60,000 100,000 120,000
Actual machine hours 60,500 110,000 100,000
Budgeted labour hours 50,000 200,000 75,000
Actual labour hours 55,000 190,000 75,000
Budgeted material cost (Rs. ‘000) 50,000 40,000 3,000
Actual material cost (Rs. ‘000) 50,000 42,000 3,200
Budgeted overheads (Rs. ‘000) 1,200 2,000 2,250 600 700
Actual overheads (Rs. ‘000) 1,250 2,000 1,800 500 750
Services provided by S-1 20% 30% 40% - 10%
Services provided by S-2 30% 40% 20% 10% -
Basis of overhead application Machine Labour 75% of
hours hours Material cost

Required:
(a) Allocate costs of service departments using repeated distribution method.
(b) Compute department wise over / under applied overheads. (12)

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Q.3 Solvent Limited has two divisions each of which makes a different product. The budgeted
data for the next year is as under:

Product A Product B
Rupees
Sales 200,000,000 150,000,000
Direct material 45,000,000 30,000,000
Direct labour 60,000,000 45,000,000
Factory overheads 35,000,000 15,000,000
Price per unit 20 25

Details of factory overheads are as follows:

(i) Product A is stored in a rented warehouse whose rent is Rs. 0.25 million per month.
Product B is required to be stored under special conditions. It is stored in a third party
warehouse and the company has to pay rent on the basis of space utilized. The rent
has been budgeted at Rs. 0.12 million per month.
(ii) Indirect labour has been budgeted at 20% of direct labour. 70% of the indirect labour
is fixed.
(iii) Depreciation for assets pertaining to product A and B is Rs. 6.0 million and Rs. 2.0
million respectively.
(iv) 80% of the cost of electricity and fuel varies in accordance with the production in
units and the total cost has been budgeted at Rs. 4.0 million.
(v) All other overheads are fixed.

Required:
Compute the break-even sales assuming that the ratio of quantities sold would remain the
same, as has been budgeted above. (14)

Q.4 (a) Karachi Limited is a large retailer of sports goods. The company buys footballs from a
supplier in Sialkot. Karachi Limited uses its own truck to pick the footballs from
Sialkot. The truck capacity is 2,000 footballs per trip and the company has been
getting a full load of footballs at each trip, making 12 trips each year.

Recently the supplier revised its prices and offered quantity discount as under:

Quantity Unit price (Rs.)

2,000 400
3,000 390
4,000 380
6,000 370
8,000 360

Other related data is given below:

 All the purchases are required to be made in lots of 1,000 footballs.
 The cost of making one trip is Rs. 15,000. The company has the option to hire a
third party for transportation which would charge Rs. 9 per football.
 The cost of placing an order is Rs. 2,000.
 The carrying cost of one football for one year is Rs. 80.

Required:
(i) Work out the most economical option.
(ii) Compute the annual savings in case the company revises its policy in
accordance with the computation in (i) above. (10)

(b) Briefly describe:

(i) Stock out costs (ii) Lead time
(iii) Reorder point (iv) Safety stock (04)
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(3)

Q.5 Smart Limited has prepared a forecast for the quarter ending December 31, 2009, which is
based on the following projections:

(i) Sales for the period October 2009 to January 2010 has been projected as under:

Rupees
October 2009 7,500,000
November 2009 9,900,000
December 2009 10,890,000
January 2010 10,000,000

Cash sale is 20% of the total sales. The company earns a gross profit at 20% of sales.
It intends to increase sales prices by 10% from November 1, 2009, however since
there would be no corresponding increase in purchase prices the gross profit
percentage is projected to increase. Effect of increase in sales price has been
incorporated in the above figures.

(ii) All debtors are allowed 45 days credit and are expected to settle promptly.
(iii) Smart Limited follows a policy of maintaining stocks equal to projected sale of the
next month.
(iv) All creditors are paid in the month following delivery. 10% of all purchases are cash
purchases.
(v) Marketing expenses for October are estimated at Rs. 300,000. 50% of these expenses
are fixed whereas remaining amount varies in line with the value of sales. All
expenses are paid in the month in which they are incurred.
(vi) Administration expenses paid for September were Rs. 200,000. Due to inflation,
theses are expected to increase by 2% each month.
(vii) Depreciation is provided @ 15% per annum on straight line basis. Depreciation is
charged from date of purchase to the date of disposal.
(viii) On October 31, 2009 office equipment having book value of Rs. 500,000 (40% of
the cost) on October 1, 2009 would be replaced at a cost of Rs. 2,000,000. After
adjustment of trade-in allowance of Rs. 300,000 the balance would have to be paid in
cash.
(ix) The opening balances on October 1, 2009 are projected as under:

Rupees
Cash and bank 2,500,000
Trade debts – related to September 5,600,000
Trade debts – related to August 3,000,000
Fixed assets at cost (20% are fully depreciated) 8,000,000

Required:
(a) Prepare a month-wise cash budget for the quarter ending December 31, 2009.
(b) Prepare a budgeted profit and loss statement for the quarter ending December 31, 2009. (16)

Q.6 Toy Limited is engaged in the production of a single product. On the basis of past history,
the management has estimated the cost of production per unit, as follows:

Rupees
Raw material – 5 kg @ Rs. 40 per kg 200
Labour – 10 hours @ Rs. 25 per hour 250
Variable overheads – 60% of direct labour 150
Total 600

The annual production requirement is 100,000 units.

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(4)

The management has been deeply concerned with the performance of its labour as it has
been witnessing various inefficiencies. The industrial relations department has recently
carried out a study under the guidance of a consultant. It has put forward a plan whereby the
company’s wage policy is to be revised as under:

 Rate of wages would be increased by 12%.

 Workers who perform their tasks in less than the estimated time of 10 hours per unit
would be given a premium of Rs. 18 per hour saved.

The consultant is of the view that the following efficiencies can be brought about by
introducing the above change:

(i) Raw material input per unit includes wastage of 7%. It would reduce to 3% .
(ii) 70% of the workers would work more efficiently and improve their efficiency by 20%.
(iii) Overheads will be reduced to 55% of the revised cost of direct labour (including
premium).
(iv) The quality of production will improve and the rate of rejection will be reduced from
4% to 3%. Rejected units are sold for Rs. 150 each.

Required:
Determine whether it would be beneficial for the company to adopt the wage plan
recommended by the industrial relations department. (14)

Q.7 Excellent Limited makes and sells a single product. The standard cost card for the product,
based on normal capacity of 45,000 units per month is as under:

Rupees
Material 60 kgs at Re. 0.60 per kg 36.00
Labour ½ hour at Rs. 50.00 per hour 25.00
Variable factory overheads, 30% of direct labour cost 7.50
Fixed factory overheads 6.50
Total 75.00

Actual data for the month of August 2009 is as under:

Work in process on August 1, 2009 (60% converted) Units 10,000

Started during the month Units 50,000
Transferred to finished goods Units 48,000
Work in process on August 31, 2009 (50% converted) Units 10,000
Material purchased at Re. 0.50 per kg Rs. 1,750,000
Material issued to production Kgs 3,100,000
Direct labour at Rs. 52 per hour Rs. 1,300,000
Actual factory overheads (including fixed costs of Rs. 290,000) Rs. 600,000

The company uses FIFO method for inventory valuation.

All materials are added at the beginning of the process. Conversion costs are incurred
evenly throughout the process. Inspection takes place when the units are 80% complete.
Under normal conditions, no spoilage should occur.

Required:
(a) Quantity and equivalent production schedules for material and conversion costs.
(b) Material, labour and overhead variances. (Use four variance method for overheads) (16)

(THE END)

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Ans.1 Ahmer and Company

General Journal entries
Date Particulars Ledger folio Debit Credit
1 Work in process A 800,000
Work in process B 1,200,000
Work in process C 1,500,000
Work in process D 600,000
Raw material 4,100,000
(Issuance of raw material to WIP)

2 Work in process A (20,000*20) 400,000

Work in process B (30,000*18) 540,000
Work in process C (15,000*16) 240,000
Work in process D (18,000*15) 270,000
Payroll 1,450,000
(Direct labour cost allocated to WIP)

3 Work in process A (20,000*10) 200,000

Work in process B (30,000*10) 300,000
Work in process C (15,000*10) 150,000
Work in process D (18,000*10) 180,000
Factory overheads applied 830,000
(Factory overheads applied to WIP @ Rs. 10 per
direct labour hours)

4 Factory overheads applied 830,000

Profit and loss account (900,000-830,000) 70,000
Factory overheads Control 900,000
(Factory overheads applied transferred to overheads
control a/c and under applied overheads charged to
P&L account)

5 Finished goods A 2,800,000

(1,400,000+800,000+400,000+200,000)
Work in process A 2,800,000
(Job A completed and transferred to finished goods)

6 Finished goods – B 4,086,000

90% of (2,500,000+1,200,000+540,000+300,000)
Work in process C 454,000
10% of (2,500,000+1,200,000+540,000+300,000)
Work in process B 4,540,000
(Job B completed and transferred to finished goods,
10% rejected items transferred to Job C)

7 Cost of goods sold 6,886,000

Finished goods A 2,800,000
Finished goods B 4,086,000
(Jobs A and B delivered and transferred to cost of
goods sold.)
Rs. 21,506,000 21,506,000

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Ans.2 RT LIMITED
Allocation of overheads

(a) Allocation of Service dept. cost to production dept. - Repeated distribution method:

Production Dept. Service Dept.

P1 P2 P3 S1 S2
---------------- Rupees in thousand ----------------
Actual overheads as given 1,250 2,000 1,800 500 750
S1 overheads allocation % 20% 30% 40% 10%
S2 overheads allocation % 30% 40% 20% 10%
Allocation of S2 cost 225 300 150 75 (750)
Allocation of S1 cost 115 172 230 (575) 58
Allocation of S2 cost 17 23 11 6 (58)
Allocation of S1 cost 1 2 3 (6)

Allocation from service dept. 358 497 394

TOTAL 1,608 2,497 2,194

(b) Over / under applied overheads:

P1 P2 P3
Actual overheads after allocation from service dept. 1,608 2,497 2,194

Application of overheads to production:

P1 Machine hours basis{(1,200/60,000)*60,500} 1,210
P2 Labour hours basis {(2,000/200,000*190,000} 1,900
P3 75% of material cost (3,200*75%) 2,400
Overheads applied 1,210 1,900 2,400
Overheads under / (over) applied 398 597 (206)

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Ans.3 Solvent Limited

Product A Product B Total

Sale – units 10,000,000 6,000,000 16,000,000
Sales price per unit 20 25
Sales in Rupees 200,000,000 150,000,000 350,000,000
Less: Variable costs
Direct material 45,000,000 30,000,000 -
Direct labour 60,000,000 45,000,000 -
Variable overheads (Note 1) 5,600,000 5,340,000 -
110,600,000 80,340,000 190,940,000
Contribution margin Rs. 89,400,000 69,660,000 159,060,000
Contribution margin % to sales 45.446%
Break even sales :
Total 39,060,000/0.45446 85,948,699
A (Qty) 85,948,699/350,000,000*10,000,000 2,455,677
B (Qty) 85,948,699/350,000,000*6,000,000 1,473,406

Sales in Rs. 49,113,542 36,835,157

Note 1: Variable & fixed overheads:

Total overheads as given 35,000,000 15,000,000 50,000,000
Variable overheads:
- Rent based on space utilized
120,000 * 12 - 1,440,000 -
- Indirect labour
60,000,000*20%*30% 3,600,000
45,000,000*20%*30% 2,700,000 -
- Electricity & fuel
(4,000,000*80%)/16,000,000*10,000,000 2,000,000 - -
(4,000,000*80%)/16,000,000*6,000,000 - 1,200,000 -
Variable overheads 5,600,000 5,340,000 10,940,000
Fixed costs (Total overheads-Variable overheads) 29,400,000 9,660,000 39,060,000

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Ans.4 (a.i) Karachi Limited

Price per football A 400 390 380 370 360
Annual purchases (nos.) B 24,000 24,000 24,000 24,000 24,000
Purchase cost A×B 9,600,000 9,360,000 9,120,000 8,880,000 8,640,000
Minimum order size C 2,000 3,000 4,000 6,000 8,000
No. of orders (B÷C) D 12.00 8.00 6.00 4.00 3.00
Ordering cost D × 2,000 24,000 16,000 12,000 8,000 6,000
1.00 + (hired
Trips per order (C÷2,000) E 1.00 2.00 3.00 4.00
transport)
Total no. of trips (D×E) F 12.00 8.00 12.00 12.00 12.00
Transportation cost F×15,000 180,000 120,000 180,000 180,000 180,000
8,000
Hired transportation cost 72,000
units×9
Average inventory (C÷2) G 1,000 1,500 2,000 3,000 4,000
Inventory carrying cost G × 80 80,000 120,000 160,000 240,000 320,000
Total cost Rs. 9,884,000 9,688,000 9,472,000 9,308,000 9146,000

(a.ii) The most economical option is to purchase 3 lots of 8,000 footballs each against the existing
purchases of 12 lots of 2,000 footballs. The saving will be as under:
Cost for 12 lots of 2,000 footballs each. 9,884,000
Cost for 03 lots of 8,000 footballs each. 9,146,000
Cost saving Rs. 738,000

(b) (i) Stock out Costs:

These costs result from not having enough inventories in stock to meet customers' needs.
These costs include lost sales, customers’ ill will, and the costs of expediting orders for
goods not in stock.

(ii) Lead Time:

The time period between placing an order till the receipt of the goods from suppliers is
called lead time.

(iii) Reorder Point:

The point of time when an order is required to be placed or production to be initiated to
replenish depleted stocks is called reorder point. It is determined by multiplying the lead
time and average usage.

(iv) Safety Stock:

To minimize stock outs on account of increased demand or delays in delivery etc., a buffer
stock is often maintained. Such a buffer stocks is called Safety stock.

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Ans.5 SMART LIMITED

Cash budget for the quarter October - December 2009
October November December
Rupees in '000'
Opening cash and bank balances 2,500 1,476 1,428
Cash receipts:
Cash sales 1,500 1,980 2,178
Collection from debtors Note 1 5,800 5,800 6,960
Total receipts 7,300 7,780 9,138
9,800 9,256 10,566
Cash payments:
Cash purchases Note 2 720 792 727
Creditors Note 2 5,400 6,480 7,128
Marketing expenses – Fixed (300/2) 150 150 150
Marketing expenses - Variable Note 3 150 198 218
Admin. Expenses (2% increase per month) 204 208 212
Purchase of equipment (2,000-300) 1,700
Total payments 8,324 7,828 8,435
Closing cash and bank balances 1,476 1,428 2,131

Profit & Loss Account

for the quarter ending December 31, 2009
Sales (7,500+9,900+10,890) 28,290
Cost of goods sold:
Opening stock (80% of October sale of Rs. 7,500) 6,000
Purchases (7,200+7,920+7,273) 22,393
Goods available for sale 28,393
Closing stock (Purchases of Dec. 2009) (7,273)
21,120
Gross profit 7,170
Admin. & Marketing expenses:
Marketing expenses - Fixed 450
Marketing expenses – variable Note 3 566
Admin. Expenses 624
Depreciation Note 4 259
Loss on replacement of machinery {500-(1,250*15%/12=16)-300} 184
2,083
NET PROFIT 5,087

Note 1 - Cash collection from sales:

Oct.09 Nov.09 Dec. 09 Jan. 10
Total sale 7,500 9,900 10,890 10,000
Cash sale (20% of total) 1,500 1,980 2,178
Credit sale (80% of total) 6,000 7,920 8,712
Cash from debtors:
2nd. fortnight of August 3,000
1st. fortnight of September (5,600/2) 2,800
2nd. fortnight of September (5,600/2) 2,800
1st. fortnight of October (6,000/2) 3,000
2nd. fortnight of October (6,000/2) 3,000
1st. fortnight of November (7,920/2) 3,960
5,800 5,800 6,960

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Note 2 - Purchases:
Sale 7,500 9,900 10,890 10,000
Sale price increase 0% 10% 10% 10%
Sales excluding price increase effect 7,500 9,900/1.10 10,890/1.10 10,000/1.10
7,500 9,000 9,900 9,091
Projected purchases 9,000*0.80 9,900*0.80 9,091*0.80
based on next month sales 7,200 7,920 7,273
Cash purchases 10% 720 792 727
Credit purchases 90% 6,480 7,128 6,545
Payment to creditors (Last month’s balance of creditors) (7,500*0.8*0.9)5,400 6,480 7,128

Note 3 - Variable marketing expenses:

Sales 7,500 9,900 10,890 -
Variable marketing expenses 300 / 2 150/7,500*9,900 150/7,500*10,890 -
150 198 218 -

Note 4 – Depreciation
Oct.09 Nov.09 Dec. 09 Jan. 10
Fixed assets at cost 8,000 - - -
Less: Fully depreciated assets 20% (1,600) - - - -
6,400 80 - - -
Disposals on Oct. 31 at cost (500,000/40%) (1,250) - - - -
5,150 - - - -
Additions on October 31 at cost 2,000 - - - -
7,150 - 89 89 -

Ans.6 Toy Limited

Analyses of new wage plan
(a) Raw material consumption and wastage:
Raw material consumption per unit – current 5.000
Present wastage (5*7/100) (0.350)
Raw material forming part of finished product 4.650
Raw material consumption per unit as revised (4.650/0.97) 4.794
Saving in raw material consumption (5.000-4.794)*100,000*40 824,000

(b) Labour cost:

Labour hours – current 10.00
Saving in labour hours due to efficiency (10*70%*20%) (1.40)
Labour hours – revised 8.60
Labour cost: Revised wages (8.60*25*1.12) 240.80
Premium on hours saved (1.40*18) 25.20
Revised labour cost per unit 266.00
Increase in labour cost (Rs. 266-250)*100,000 (1,600,000)

(c) Overheads:
Current overheads per unit 150.00
Revised overheads per unit (266*0.55) 146.30
Saving in overheads (150-146.3)*100,000 370,000

(d) Rejections:
Present rejections {(100,000/0.96)-100,000} 4,167.00
Rejections in the new situation {(100,000/0.97)-100,000} 3,093.00
Present cost of rejections of 4,167 units @ Rs. 450 (600-150) 1,875,150.00
Revised cost of rejection for 3,093 units:
{(4.794*40)+266+146.30-150}*3,093 1,404,408.00
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Decrease in rejection (1,875,150.00-1,404,408.00) 470,742

Net Saving (824,000-1,600,000+ 370,000+470,742) 64,742
Ans.7 Excellent Limited
1 Quantity schedule:
Units in process at beginning 10,000
Units started during the month 50,000 60,000

Units transferred to finished goods 48,000

Units in process at the end of the month 10,000
Loss of units (Balance quantity) 2,000 60,000

Conv.
2 Equivalent units, FIFO method: Material
Cost
Transfer to finished goods 48,000 48,000
WIP - beginning (60% converted) (10,000) (6,000)
WIP - closing (50% converted) 10,000 5,000
48,000 47,000
Abnormal loss of units (80% converted) 2,000 1,600
Equivalents units produced during the month 50,000 48,600

3 Variances: Qty. Rate Amount

1) Material price variance
Actual quantity used @ actual rate 3,100,000 0.50 1,550,000
Actual quantity used @ standard rate 3,100,000 0.60 1,860,000
Favourable 310,000
2) Material quantity variance
Actual quantity used at standard rate 3,100,000 0.60 1,860,000
Standard quantity allowed at standard rate 3,000,000 0.60 1,800,000
Adverse (60,000)
3) Labour rate variance
Actual hours worked at actual rate 25,000 52.00 1,300,000
Actual hours worked at standard rate 25,000 50.00 1,250,000
Adverse (50,000)
4) Labour efficiency variance
Actual hours worked at standard rate 25,000 50.00 1,250,000
Standard hours allowed at standard rate 24,300 50.00 1,215,000
Adverse (35,000)
5) Factory overhead spending variance
Actual fixed & variable overheads 600,000
Budgeted overheads:
Fixed overheads 45,000/2 22,500 13.00 292,500
Variable OH based on actual hrs at std. rate 25,000 15.00 375,000
667,500
Favourable 67,500
6) Variable overhead efficiency variance
Actual hrs. worked at standard rate 25,000 15.00 375,000
Standard hrs. allowed at standard rate (48,600/2) 24,300 15.00 364,500
Adverse (10,500)
7) Fixed overhead efficiency variance
Actual hrs. worked at standard rate 25,000 13.00 325,000
Standard hrs. allowed at standard rate (48,600/2) 24,300 13.00 315,900
Adverse (9,100)
8) Idle capacity variance
Actual capacity utilized at standard rate 25,000 13.00 325,000
Available capacity at standard rate (45,000/2) 22,500 13.00 292,500
Favourable 32,500

(THE END)
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2010

March 5, 2010

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 XYZ Limited manufactures four products. The related data for the year ended December 31,
2009 is given below:
A B C D
Opening stock:
- Units 10,000 15,000 20,000 25,000
- Cost (Rs.) 70,000 120,000 180,000 310,000
- NRV (Rs.) 75,000 110,000 180,000 300,000
Production in units 50,000 60,000 75,000 100,000
Costs of goods produced (Rs.) 400,000 600,000 825,000 1,200,000
Variable selling costs (Rs.) 60,000 80,000 90,000 100,000
Closing stock (units) 5,000 10,000 15,000 24,000
Unit cost of purchase from market (Rs.) 10.50 11.00 11.50 13.00
Selling price per unit (Rs.) 10.00 12.00 12.00 12.50
Damaged units included in closing stock 300 600 800 1,500
Unit cost to repair damaged units (Rs.) 3.00 2.00 2.50 3.50
Stock valuation method in use Weighted Weighted
FIFO FIFO
Average Average

The company estimates that in January 2010 selling expenses would increase by 10%.

Required:
Compute the amount of closing stock that should be reported in the balance sheet as on
December 31, 2009. (15)

Q.2 Modern Distributors Limited (MDL) is a distributor of CALTIN which is used in various
industries and its demand is evenly distributed throughout the year.

The related information is as under:

(i) Annual demand in the country is 240,000 tons whereas MDL’s share is 32.5% thereof.
(ii) The average sale price is Rs. 22,125 per ton whereas the profit margin is 25% of cost.
(iii) The annual variable costs associated with purchasing department are expected to be
Rs. 4,224,000 during the current year. It has been estimated that 10% of the variable
costs relate to purchasing of CALTIN.
(iv) Presently, MDL follows the policy of purchasing 6,500 tons at a time.
(v) Carrying cost is estimated at 1% of cost of material.
(vi) MDL maintains a buffer stock of 2,000 tons.

Required:
Compute the amount of savings that can be achieved if MDL adopts the policy of placing
orders based on Economic Order Quantity. (15)

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(2)

Q.3 Smart Processing Limited produces lubricants for industrial machines. Material COX is
introduced at the start of the process in department A and subsequently transferred to
department B. Normal loss in department A is 5% of the units transferred.

In department B, material COY is added just after inspection which takes place when the
production is 60% complete. 10% of the units processed are evaporated before the inspection
stage. However, no evaporation takes place after adding material COY. During the year,
actual evaporation in department B was 10% higher than the estimated normal losses because
of high level of Sulpher contents in natural gas used for processing.

Other details for the year ended December 31, 2009 are as under:

Department A Department B
---------- Rupees ----------
Opening work in process 2,184,000 2,080,000
Material input - 600,000 Litres 17,085,000
- 500,000 Litres 9,693,000
Labour 8,821,000 6,389,000
Overheads 2,940,000 3,727,000

Department A Department B
Completion % Completion %
Litres Conversion Litres Conversion
Material Material
costs costs
Opening WIP 64,500 100 60 40,000 100 60
Closing WIP 24,000 100 70 50,000 100 80

Conversion costs are incurred evenly throughout the process in both departments. The
company uses FIFO method for inventory valuation.

Required:
(a) Equivalent production units
(b) Cost of abnormal loss and closing WIP
(c) Cost of finished goods produced (22)

Q.4 You have recently been appointed as the Financial Controller of Watool Limited. Your
immediate task is to prepare a presentation on the company’s performance for the recently
concluded year. You have noticed that the records related to cost of production have not been
maintained properly. However, while scrutinizing the files you have come across certain
details prepared by your predecessor which are as follows:

(i) Annual production was 50,000 units which is equal to the designed capacity of the
plant.
(ii) The standard cost per unit of finished product is as follows:

Raw material X 6 kg at Rs. 50 per kg

Raw material Y 3 kg at Rs. 30 per kg
Labour- skilled 1.5 hours at Rs. 150 per hour
Labour- unskilled 2 hours at Rs. 100 per hour
Factory overheads Variable overheads per hour are Rs. 100 for skilled labour and
Rs. 80 for unskilled labour. Fixed overheads are Rs. 4,000,000.

(iii) Data related to variation in cost of materials is as under:

Material X price variance Rs. 95,000 (Adverse)

Material Y actual price 6% below the standard price
Material X quantity variance Nil
Material Y quantity variance Rs. 150,000 (Adverse)
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(3)

(iv) Opening raw material inventories comprised of 25 days of standard consumption

whereas closing inventories comprised of 20 days of standard consumption.
(v) Actual labour rate for skilled and unskilled workers was 10% and 5% higher
respectively.
(vi) Actual hours worked by the workers were 168,000 and the ratio of skilled and unskilled
labour hours was 3:4 respectively.
(vii) Actual variable overheads during the year amounted to Rs. 16,680,000. Fixed
overheads were 6% more than the budgeted amount.

Required:
(a) Actual purchases of each type of raw materials.
(b) Labour and overhead variances. (20)

Q.5 Areesh Limited deals in various products. Relevant details of the products are as under:

AW AX AY AZ
Estimated annual demand (units) 5,000 10,000 7,000 8,000
Sales price per unit (Rs.) 150 180 140 175
Material consumption:
Q (kg) 2 2.5 1.5 1.75
S (kg) 0.5 0.6 0.4 0.65
Labour hours 2 2.25 1.75 2.5
Variable overheads (based on labour cost) 75% 80% 100% 90%
Fixed overheads per unit (Rs.)
(based on 80% capacity utilization) 10 20 14 16
Machine hours required:
Processing machine hours 5 6 8 10
Packing machine hours 2 3 2 4

Company has a long term contract for purchase of material Q and S at a price of Rs. 15 and
Rs. 20 per kg respectively. Wage rate for 8 hours shift is Rs. 200.

The estimated overheads given in the above table are exclusive of depreciation expenses.
The company provides depreciation on number of hours used basis. The depreciation on
each machine based on full capacity utilization is as under:

Hours Rs.
Processing machine 150,000 150,000
Packing machine 100,000 50,000

The company has launched an advertising campaign to promote the sale of its products. Rs. 2
millions have been spent on such campaign. This cost is allocated to the products on the basis
of sale.

Required:
Compute the number of units of each product that the company should produce in order to
maximize the profit and also compute the product wise and total contribution at optimal
product mix. (15)

Q.6 Briefly describe the following terms giving an example in each case:

(a) Opportunity cost (b) Sunk cost (c) Relevant cost (06)

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(4)

Q.7 The records of direct labour hours and total factory overheads of IMI Limited over first six
months of its operations are given below:

Total factory
Direct labour
overheads
Hours in 000 Rs. in 000
September 2009 50 14,800
October 2009 80 17,000
November 2009 120 23,800
December 2009 40 11,900
January 2010 100 22,100
February 2010 60 16,150

The management is interested in distinguishing between the fixed and variable portion of the
overheads.

Required:
Using the least square regression method, estimate the variable cost per direct labour hour
and the total fixed cost per month. (07)

(THE END)

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Ans.1 A B C D
------------ Units ------------
Opening stock 10,000 15,000 20,000 25,000
Production during the period A 50,000 60,000 75,000 100,000
Goods available for sale B 60,000 75,000 95,000 125,000
Closing Stock C (5,000) (10,000) (15,000) (24,000)
Sale D 55,000 65,000 80,000 101,000
Cost of goods available for sale: ----------------- Rupees -----------------
Opening stock valuation at lower of cost and NRV) 70,000 110,000 180,000 300,000
Cost of production for the period E 400,000 600,000 825,000 1,200,000
Cost of goods available for sale F 470,000 710,000 1,005,000 1,500,000

Closing stock cost

A & B (W/Avg.): F/B×C 39,167 94,667
G{
C & D (FIFO): E/A×C 165,000 288,000
Selling expenses - current year H 60,000 80,000 90,000 100,000
Sales price - per unit I 10.0 12.0 12.0 12.5

Total sales price of closing stock C×I 50,000 120,000 180,000 300,000
Selling costs H / D × C × 1.1 (6,000) (13,538) (18,563) (26,139)
Repair cost of damaged units (900) (1,200) (2,000) (5,250)
NRV of Closing stock 43,100 105,262 159,438 268,611

Value of closing stock (At lower of cost and NRV) 39,167 94,667 159,438 268,611

Ans.2
Purchase department’s variable cost: Rs. 4,224,000

Costs applicable to product CALTIN - 10% of above Rs. 422,400

Ordering costs per purchase order

Annual purchases of CALTIN (tons) [240,000 x 32.5%) Tons 78,000
Existing size of purchase order (tons) Tons 6,500
No. of orders (78,000 / 6,500) Orders 12
Ordering cost per order (422,400/12) Rs. 35,200

Carrying costs per ton (22,125 / 1.25 x 1% ) Rs. Per Ton 177

2 × 78,000 tons x 35,200

Computation of EOQ = 5,570 tons
177

Marks EOQ Existing

Demand of CALTIN Tons 78,000 78,000
Order quantity Tons 5,570 6,500
No. of orders 14 12
Average inventory excluding buffer stock (order quantity / 2) Tons 2,785 3,250
Buffer stock Tons 2,000 2,000
Average inventory Tons 4,785 5,250
Cost of placing orders (Rs 35,200 per order) Rupees 492,800 422,400
Carrying cost ([Avg. Inventory x Rs. 177) Rupees 846,945 929,250
Total costs Rupees 1,339,745 1,351,650

Savings on adoption of EOQ Rupees 11,905

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Ans.3 (a) EQUIVALENT PRODUCTION UNITS

Quantity Schedule (in litres)

Dept. A Dept. B
WIP opening 64,500 40,000
Started in process / material added 600,000 500,000
Received from preceding department - 610,000
664,500 1,150,000
Transferred out to B (664,500-24,000)x100/105 610,000 -
Transferred to finished goods (1,150,000-50,000-61,000-6,100) - 1,032,900
WIP closing 24,000 50,000
Normal loss – A (664,500-24,000)x5/105) 30,500 -
Normal loss – B (10% x 610,000) - 61,000
Abnormal loss – B (10% x 61,000) - 6,100
664,500 1,150,000

Equivalent production unit (in litres)

Department A Department B
Material Conversion Material Conversion
Units completed and transferred out 610,000 610,000 1,032,900 1,032,900
Opening Inventory (60% completed) (64,500) (38,700) (40,000) (24,000)
Abnormal loss (B: 6,100 x 60%) - - - 3,660
Closing inventory (A: 70%, B: 80%) 24,000 16,800 50,000 40,000
569,500 588,100 1,042,900 1,052,560

(b) COST OF ABNORMAL LOSS AND CLOSING WIP

Department A Department B
Quantity Rate Amount Quantity Rate Amount
Cost of abnormal loss
Units Rs. Rs. Units Rs. Rs.
(Department B)
From department A
(610,000 x 10% x 10%) 6,100 (W-2) 54.60 333,044
Labour (60%) 3,660 6.07 22,216
Overheads (60%) 3,660 3.54 12,956
- 368,216
WIP-closing costs
From department A - - - 50,000 (W-2) 28.42 1,421,000
Material 24,000 30.00 720,000 50,000 9.29 464,500
Labour (70%, 80%) 16,800 15.00 252,000 40,000 6.07 242,800
Overheads (70%, 80%) 16,800 5.00 84,000 40,000 3.54 141,600
1,056,000 2,269,900

(c) COST OF GOODS TRANSFERRED TO FINISHED GOODS

Rupees
Total costs charged to department (W-1) 51,863,000
Less: WIP closing costs (Computed above) (2,269,900)
Less: Cost of abnormal loss (Computed above) (368,216)
Costs transferred to finished goods 49,224,884

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W-1: Cost charged to department:

Department A Department B
Unit Unit
Equivalent Equivalent
Cost (Rs.) cost Cost (Rs.) cost
Units Units
(Rs.) (Rs.)
WIP - opening inventory 2,184,000 2,080,000
Cost from department A 29,974,000
Material 569,500 17,085,000 30.00 1,042,900 9,693,000 9.29
Labour 588,100 8,821,000 15.00 1,052,560 6,389,000 6.07
Overheads 588,100 2,940,000 5.00 1,052,560 3,727,000 3.54
Total cost to be accounted for 31,030,000 50.00 51,863,000

W-2: Allocation of cost received from department A:

Amount Unit cost

Quantity
(Rs.) (Rs.)
Units received from A 610,000
Normal loss at 10% (61,000)
549,000 *29,974,000 54.60
Abnormal loss at 1% (6,100) (333,044) 54.60
Units after inspection 542,900 29,640,956 54.60
Addition of material COY 500,000
1,042,900 29,640,956 28.42
*Rs. 31,030,000 (Total cost) – Rs. 1,056,000 (Closing WIP) = Rs. 29,974,000

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Ans.4 Actual quantity purchased: Material X Material Y

Standard consumption quantities 50,000×6 300,000 50,000×3 150,000
Quantity used in excess of standard usage 0 150,000/30 5,000
(adverse quantity variance)
Ending inventory 300,000×20/365 16,438 150,000×20/365 8,219
Opening stock 300,000×25/365 (20,548) 150,000×25/365 (10,274)
Actual purchase quantity kg 295,890 kg 152,945
Actual cost of purchase:
Actual quantity purchased at standard rate 295,890×50 14,794,500 152,945×30 4,588,350
Price paid above / (below) the standard rate
{adverse / (favorable) price variance} 95,000 4,588,350×.06 (275,301)
Actual cost of purchase Rs. 14,889,500 Rs. 4,313,049

Labour and overhead variances:

Skilled labour Unskilled labour

Labour rate variance:
Actual hours at standard rate 168,000×3/7×150 10,800,000 168,000×4/7×100 9,600,000
Rate variance 10% & 5% Adverse (1,080,000) Adverse (480,000)
Labour efficiency variance:
Standard hours for 50,000 units at
standard rate 50,000×1.5×150 11,250,000 50,000x2x100 10,000,000
Actual hours for 50,000 units at
standard rate 168,000×3/7×150 10,800,000 168,000×4/7×100 9,600,000
Favourable 450,000 Favourable 400,000

Overheads spending variance:

Actual hours at standard rate-skilled 168,000x3/7x100 7,200,000
Actual hours at standard rate-unskilled 168,000x4/7x80 7,680,000
Fixed overheads as budgeted 4,000,000
18,880,000
Actual variable overheads 16,680,000
Actual fixed overheads 4,000,000x1.06 4,240,000
20,920,000
Spending variance Adverse (2,040,000)
Overheads efficiency variance:
Standard hours for 50,000 units at
standard rate
Skilled 50,000*1.5*100 7,500,000
Unskilled 50,000*2*80 8,000,000
15,500,000
Actual hours for 50,000 units at
standard rate
Skilled 168,000*3/7*100 7,200,000
Unskilled 168,000*4/7*80 7,680,000
14,880,000
Favourable 620,000

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Ans.5 AW AX AY AZ Total
Sale price 150.00 180.00 140.00 175.00
Less: Variable cost
Material Q at Rs 15 30.00 37.50 22.50 26.25
Material S at Rs 20 10.00 12.00 8.00 13.00
Labour cost at Rs. 25 per hour 50.00 56.25 43.75 62.50
Overheads 37.50 45.00 43.75 56.25
127.50 150.75 118.00 158.00
Contribution margin per unit Rs 22.50 29.25 22.00 17.00
Annual demand Units 5,000 10,000 7,000 8,000

Possible production under each machine:

Processing machine:
Machine hours required per unit 5.00 6.00 8.00 10.00
Average CM per hour 4.50 4.88 2.75 1.70
Production priority 2 1 3 4
No. of units that can be produced in
available hours in order of CM priority
(Restricted to annual demand) 5,000 10,000 7,000 900
Hours required Hours 25,000 60,000 56,000 9,000 150,000
Contribution margin Rs. 112,500 292,500 154,000 15,300 574,300

Production for product ‘Z’ has to be restricted to 900 units due to limited number of machine hours.

Packing machine:
Machine hours required per unit 2.00 3.00 2.00 4.00
Average CM per hour 11.25 9.75 11.00 4.25
Production priority 1 3 2 4
No. of units that can be produced in
available hours in order of CM priority
(Restricted to annual demand) 5,000 10,000 7,000 8,000
Hours required Hours 10,000 30,000 14,000 32,000 86,000

Conclusion :
The packing machine can meet the full demand but capacity of processing machine is limited.
Therefore, product mix of processing machine will be manufactured.

Assumption:
It has been assumed that the wage rate per eight hours is divisible.

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Ans.6 (a) Opportunity cost:

An opportunity cost is a cost that measures the opportunity that is lost or sacrificed when the
choice of one course of action requires that an alternative course of action be given up.

Example
A company has an opportunity to obtain a contract for the production of Z which will require
processing on machine X which is already working at full capacity. The contract can only be
fulfilled by reducing the present output of machine X which will result in reduction of profit
contribution by Rs. 200,000.

If the company accepts the contract, it will sacrifice a profit contribution of Rs. 200,000 from
the lost output of product Z. This loss of Rs. 200,000 represents an opportunity cost of
accepting the contract.

(b) Sunk cost

A sunk cost is a historical or past cost that the company has already incurred. These costs
cannot be changed/recovered in any case and are ignored while making a decision.

Example
A company mistakenly purchased a machine that does not completely suit its requirements.
The price of the machine already paid is a sunk cost and will not be considered while deciding
whether to sell the machine or use it.

(c) Relevant cost:

The predicted future costs that would differ depending upon the alternative courses of action,
are called relevant costs.

Example
A company purchased a raw material few years ago for Rs. 100,000. A customer is prepared to
purchase it for Rs. 60,000. The material is not otherwise saleable but can be sold after further
processing at a cost of Rs. 30,000.

In this case, the additional conversion cost of Rs. 30,000 is relevant cost whereas the raw
material cost of Rs. 100,000 is irrelevant.

Ans.7
Direct labour Overheads
(xy) (x2)
Hours (x) (y)
September 2009 50 14,800 740,000 2,500
October 2009 80 17,000 1,360,000 6,400
November 2009 120 23,800 2,856,000 14,400
December 2009 40 11,900 476,000 1,600
January 2010 100 22,100 2,210,000 10,000
February 2010 60 16,150 969,000 3,600
450 105,750 8,611,000 38,500

b (Variable cost per unit) =

∑ xy) - (∑ x)(∑ y) = 6 x 8,611,000 - 450 x 105,750 = 143.1053
n(
n(∑ x ) − (∑ x)
2 2 2
6 (38,500) - (450)

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a (Fixed costs per month) =

( ∑ y) − b(∑ x) = (105,750 - 143.11 (450)) = 6,892
n 6

(THE END)

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The Institute of Chartered Accountants of Pakistan

Cost Accounting
Intermediate Examinations – Autumn 2010 September 3, 2010
Module D 100 marks - 3 hours

Q.1 Ahsan Enterprises (AE) produces three products Alpha, Beta and Gamma. The management has
some reservations on the method of costing. Consequently, the cost accountant has reviewed the
records and gathered the following information:

(i) The costs incurred during the latest quarter were as follows:

Rupees
Direct material 240,000
Direct labour 1,680,000
Indirect wages – machine maintenance 600,000
– stores 360,000
– quality control 468,000
– cleaning and related services 400,000
Fuel and power 2,800,000
Depreciation on plant, machinery and building 1,560,000
Insurance on plant and machinery 240,000
Insurance on building 60,000
Stores, spares and supplies consumed 1,800,000
Rent, rates and taxes 1,200,000

(ii) The production report for the previous quarter depicted the following information:

Production Direct labour Machine hours Inspection

(units) hours per unit per unit hours per unit
Alpha 12,000 20.00 6.00 2.0
Beta 20,000 5.00 8.00 3.0
Gamma 45,000 4.00 10.00 4.0

(iii) Other relevant details are as follows:

Alpha Beta Gamma

Factory space utilization 40% 35% 25%
Cost of machinery (Rs. in thousands) 6,000 4,000 3,000
Stores consumption (Rs. in thousands) 720 270 810
No. of units inspected 600 400 1,350

The rate of depreciation for plant and machinery is 10% per annum.

Required:
(a) Determine the factory overhead cost per unit for products Alpha, Beta and Gamma by using
single factory overhead rate based on direct labour hours.
(b) Recalculate the factory overhead cost per unit, for each product, by allocating individual
expenses on the basis of specific utilisation of related facilities. (13 marks)

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Cost Accounting Page 2 of 4

Q.2 Quality Limited (QL) is a manufacturer of washing machines. The company uses perpetual method
for recording and weighted average method for valuation of inventory.

The following information pertains to a raw material (SRM), for the month of June 2010.

(i) Opening inventory of SRM was 100,000 units having a value of Rs. 80 per unit.
(ii) 150,000 units were purchased on June 5, at Rs. 85 per unit
(iii) 150,000 units were issued from stores on June 6.
(iv) 5,000 defective units were returned from the production to the store on June 12.
(v) 150,000 units were purchased on June 15 at Rs. 88.10 per unit.
(vi) On June 17, 50% of the defective units were disposed off as scrap, for Rs. 20 per unit,
because these had been damaged on account of improper handling at QL.
(vii) On June 18, the remaining defective units were returned to the supplier for replacement
under warranty.
(viii) On June 19, 5,000 units were issued to production in replacement of the defective units
which were returned to store.
(ix) On June 20, the supplier delivered 2,500 units in replacement of the defective units which
had been returned by QL.
(x) 150,000 units were issued from stores on June 21.
(xi) During physical stock count carried out on June 30, 2010 it was noted that closing inventory
of SRM included 500 obsolete units having net realizable value of Rs. 30 per unit. 4,000 units
were found short.

Required:
Prepare necessary journal entries to record the above transactions. (15 marks)

Q.3 Naseem (Private) Limited (NPL) is a manufacturer of industrial goods and is launching a new
product. The production will be carried out using existing facilities. However, the capacity of a
machine would have to be increased at a cost of Rs. 3.0 million.

The budgeted costs per unit are as under:

Imported material 1.3 kg at Rs. 750 per kg

Local material 0.5 kg at Rs. 150 per kg
Labour 2.0 hours at Rs. 300 per hour
Variable overheads Rs. 200 per labour hour
Selling & administration cost - variable Rs. 359

Other relevant details are as under:

(i) Net weight of each unit of finished product will be 1.6 kg.
(ii) During production, 5% of material input will evaporate. The remaining waste would be
disposed off at a rate of Rs. 80 per kg.
(iii) The cost of existing plant is Rs. 10 million. The rate of depreciation is 10% per annum.
(iv) Administration and other fixed overheads amount to Rs. 150,000 per month. As a result of
the introduction of the new product, these will increase to Rs. 170,000 per month. The
management estimates that 20% of the facilities would be used for the new product.
(v) The company fixes its sale price at variable cost plus 25%.
(vi) Applicable tax rate for the company is 35%.

Required:
Compute the sales quantity and value, required to achieve a targeted increase of Rs. 4.5 million in
after tax profit. (10 marks)

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Cost Accounting Page 3 of 4

Q.4 Mazahir (Pakistan) Limited manufactures and sells a consumer product Zee. Relevant information
relating to the year ended June 30, 2010 is as under:

Raw material per unit 5 kg at Rs. 60 per kg

Actual labour time per unit (same as budgeted) 4 hours at Rs. 75 per hour
Actual machine hours per unit (same as budgeted) 3 hours
Variable production overheads Rs. 15 per machine hour
Fixed production overheads Rs. 6 million
Annual sales 19,000 units
Annual production 18,000 units
Selling and administration overheads (70% fixed) Rs. 10 million

Salient features of the business plan for the year ending June 30, 2011 are as under:

(i) Sale is budgeted at 21,000 units at the rate of Rs. 1,100 per unit.
(ii) Cost of raw material is budgeted to increase by 4%.
(iii) A quality control consultant will be hired to check the quality of raw material. It will help
improve the quality of material procured and reduce raw material usage by 5%. Payment will
be made to the consultant at Rs. 2 per kg.
(iv) The management has negotiated a new agreement with labour union whereby wages would
be increased by 10%. The following measures have been planned to improve the efficiency:
ƒ 30% of the savings in labour cost, would be paid as bonus.
ƒ A training consultant will be hired at a cost of Rs. 300,000 per annum to improve the
working capabilities of the workers.
On account of the above measures, it is estimated that labour time will be reduced by 15%.
(v) Variable production overheads will increase by 5%.
(vi) Fixed production overheads are expected to increase at the rate of 8% on account of
inflation. Fixed overheads are allocated on the basis of machine hours.
(vii) The company has a policy of maintaining closing stock at 5% of sales. In order to avoid
stock-outs, closing stock would now be maintained at 10% of sales. The closing stocks are
valued on FIFO basis.

Required:
(a) Prepare a budgeted profit and loss statement for the year ending June 30, 2011 under
marginal and absorption costing.
(b) Reconcile the profit worked out under the two methods. (20 marks)

Q.5 Jaseem Limited manufactures a stationery item in three different sizes. All the sizes are
manufactured at a plant having annual capacity of 1,800,000 machine hours.

Relevant data for each product is given below:

Small Medium Large
Size Size Size
Sales price per unit (Rs.) 75 90 130
Direct material cost per unit (Rs.) 25 32 35
Labour hours per unit 3 4 5
Variable overheads per unit (Rs.) 5 7 8
Machine hours per unit 2 4 5
Demand (Units) 210,000 150,000 180,000
Minimum production required (Units) 100,000 100,000 100,000

Other relevant information is as under:

(i) Cost of the monthly payroll is Rs. 1,500,000.

(ii) Fixed overheads are Rs. 110,000 per month and are allocated on the basis of machine hours.

Required:
Recommend the number of units to be produced for each size. (12 marks)
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Cost Accounting Page 4 of 4

Q.6 ABC Limited produces and markets a single product. The company operates a standard costing
system. The standard cost card for the product is as under:

Sale price Rs. 600 per unit

Direct material 2.5 kg per unit at Rs. 50 per kg
Direct labour 2.0 hours per unit at Rs. 100 per hour
Variable overheads Rs. 25 per direct labour hour
Fixed overheads Rs. 10 per unit
Budgeted production 500,000 units per month

The company maintains finished goods inventory at 25,000 units throughout the year. Actual
results for the month of August 2010 were as under:

Rupees in ‘000
Sales 480,000 units 295,000
Direct material 950,000 kgs 55,000
Direct labour 990,000 hours 105,000
Variable overheads 26,000
Fixed overheads 5,100

Required:
Reconcile budgeted profit with actual profit using the relevant variances (2 variances each for sale,
raw material and labour and 4 variances for overheads). (18 marks)

Q.7 Pakair Limited manufactures special tools. Information pertaining to payroll costs for the month of
April 2010 is as under:

Gross salaries Income tax

Overtime
Department excluding overtime Deductions
Rupees in thousands
Machining 1,000 75 25
Assembly 400 40 15
Tool room 25 5 -
Warehouse 75 15 -

Details of other benefits are as under:

(i) 35 paid leaves are allowed per year including annual, casual and sick leaves.
(ii) Annual bonus equal to one month salary is paid in June.
(iii) The company maintains a contributory Provident Fund in which 8.33% of the monthly
salary is contributed by the employer as well as the employees.
(iv) During April 2010, the employees availed leaves that cost Rs. 85,000.
(v) Advances paid and recovered during the month amounted to Rs. 17,000 and Rs. 28,000
respectively.
(vi) The company follows a policy of accruing bonus and paid leaves on a monthly basis.

Required:
Prepare journal entries to record payroll and its disbursements. (12 marks)
(THE END)

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A.1 (a) Factory overheads cost per unit based on direct labour hours used:

Alpha Beta Gamma Total

Production (no. of units) A 12,000 20,000 45,000 77,000
Direct labour hours per unit 20 5 4
Total direct labour hours B 240,000 100,000 180,000 520,000
Allocation of overheads
(9,488,000/520,000 ×B) Rs. C 4,379,077 1,824,615 3,284,308 9,488,000
Cost per unit Rs. (C / A) 364.92 91.23 72.98

(b) Factory overheads cost per unit based on utilisation of facilities:

Allocation basis Alpha Beta Gamma Total

Production (no. of units) A 12,000 20,000 45,000 77,000
Machine hours per unit 6 8 10
Total machine hours *1 72,000 160,000 450,000 682,000
Units inspected 600 400 1,350 2,350
Per unit inspection hours 2 3 4
Total no. of hours for units
inspected *2 1,200 1,200 5,400 7,800
Overhead allocation:
Indirect wages:
- Machine maintenance Machine hours 63,343 140,763 395,894 600,000
- Stores Store consumption 144,000 54,000 162,000 360,000
- Quality control Inspected hours 72,000 72,000 324,000 468,000
- Cleaning and related services Factory space
utilisation 160,000 140,000 100,000 400,000
Fuel and power Machine hours 295,601 656,892 1,847,507 2,800,000
Depreciation on plant and machinery Machinery cost 600,000 400,000 300,000 1,300,000
Depreciation on building Factory space
(1,560,000-1,300,000) utilisation 104,000 91,000 65,000 260,000
Insurance on plant and machinery Cost of Machinery 110,769 73,846 55,385 240,000
Insurance on building Factory space
utilisation 24,000 21,000 15,000 60,000
Stores, spares and supplies consumed Actual 720,000 270,000 810,000 1,800,000
Rent, rates and taxes Factory space
utilisation 480,000 420,000 300,000 1,200,000
Total overheads B Rs. 2,773,714 2,339,500 4,374,786 9,488,000
Cost per unit (B/A) Rs. 231.14 116.98 97.22

A.2 Journal entries: Debit Credit

Rupees
5-Jun-2010 Raw material 12,750,000
Account payable (150,000 x 85) 12,750,000
(Cost of material purchased)
6-Jun-2010 Work in process 12,450,000
Raw material 12,450,000
(Issue of raw material to production)
12-Jun-2010 Raw material 415,000
Work in process 415,000
(Defective material returned from the production)
15-Jun-2010 Raw material 13,215,000
Account payable (150,000 x 88.1) 13,215,000
(Cost of material purchased)
17-Jun-2010 Cash (2,500 x 20) 50,000
Factory overheads 165,000
Raw material 215,000
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(Defective units sold as scrapped)

18-Jun-2010 Account payable 212,500
Raw material 212,500
(Defective material returned to the supplier)
19-Jun-2010 Work in process 430,050
Raw material 430,050
(Replacement of defective material to production by the store)
20-Jun-2010 Raw material 212,500
Account payable (2,500 x 85) 212,500
(Goods returned were replaced by the supplier)
21-Jun-2010 Work in process 12,900,000
Raw material 12,900,000
(Issue of raw material to production)
30-Jun-2010 Factory overheads - {500 x (86-30)} (obsolete items) 28,000
Factory overheads - (4,000 x 86) (shortages) 344,000
Raw material 372,000
(Cost of obsolete and shortages charged to factory overheads)

Receipts /(Issues)
Date Particulars
Quantity Rate Rupees
01-Jun-2010 Balance 100,000 80.00 8,000,000
05-Jun-2010 purchases 150,000 85.00 12,750,000
Balance 250,000 83.00 20,750,000
06-Jun-2010 Issues (150,000) 83.00 (12,450,000)
12-Jun-2010 Returned from production 5,000 83.00 415,000
15-Jun-2010 Purchases 150,000 88.10 13,215,000
Balance 255,000 86.00 21,930,000
17-Jun-2010 Defective goods sold (2,500) 86.00 (215,000)
18-Jun-2010 Returned to supplier (2,500) 85.00 (212,500)
Balance 250,000 86.01 21,502,500
19-Jun-2010 Replacement to production (5,000) 86.01 (430,050)
20-Jun-2010 Replacement by supplier 2,500 85.00 212,500
Balance 247,500 86.00 21,284,950

A.3 Variable cost per unit:

Qty. Rate Cost per unit

Kg. Rupees
Imported raw material 1.30 750 975.00
Local material 0.50 150 75.00
Total input 1.80 1,050.00
Sale of wastage {1.8-1.6-(0.05*1.8)} 0.11 80 (8.80)
Cost of material per unit 1,041.20
Skilled labour (2 hours @ Rs.300) 600.00
Overheads (2 hours @ Rs. 200) 400.00
Selling and administration cost 359.00
2,400.20
Required contribution margin:
Fixed overheads
- Depreciation on cost of additional capacity (3,000,000*10%) 300,000
- Incremental administration and other fixed overheads (170,000-150,000)*12 240,000
Required profit after tax Rs. 4,500,000
Gross profit required before tax (4,500,000/0.65) 6,923,077
Total contribution margin 7,463,077
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Sales price per unit at variable cost plus 25% (2,400.20*1.25) Rs. 3,000.25

Contribution margin per unit sale (3,000.25 – 2400.20) Rs. 600.05

Sales in units (7,463,077 / 600.05) Units 12,437

A.4 Marginal Costing Absorption Costing Marginal Costing Absorption Costing

Units Cost per unit Cost per unit Rupees
Sales 21,000 1,100 23,100,000 23,100,000
Cost of goods sold
Opening stock 950 300+300+45 300+300+45+333.33 612,750 929,414
Production for the year 22,150 648.5 648.5+306.09 14,364,275 21,144,169
Closing inventory 2,100 648.5 648.5+306.09 (1,361,850) (2,004,639)
13,615,175 20,068,944
Variable selling and
administration cost 21,000 157.89 3,315,690
Contribution margin / Gross profit 6,169,135 3,031,056
Selling and administration costs {(21,000x157.89} + 7,000,000 10,315,690
Fixed cost - production W -2 6,780,000
Fixed cost - Selling & administration (70%*10,000,000) 7,000,000
Net loss (7,610,865) (7,284,634)

Profit reconciliation:
In absorption costing fixed costs:
- Brought forward from the last year through opening inventory 950*333.33 (316,664)
- Carried forward to the next year through closing inventory 2,100*306.09 642,789
- Rounding of difference 106
(7,284,634) (7,284,634)
W-1: Variable cost per unit for 2010-11
Raw material (5*0.95*60*1.04) 296.40
Raw material inspection (5*0.95*2) 9.50
Labour (4*0.85*75*1.1) 280.50
Labour incentive cost 30%*(4*0.15*75*1.1) 14.85
Variable production overheads 15*1.05*3 47.25
Variable production costs 648.50
Variable selling and admin. costs (30%*10,000,000)/19,000 157.89
806.39

W-2: Fixed production cost for 2010-11

Annual fixed production overheads (6,000,000*1.08) 6,480,000
Training consultant cost 300,000
6,780,000
W-3:Fixed production cost per unit
Year ended June 30, 2010 6,000,000/18,000 333.33
Year ended June 30, 2011 6,780,000/22,150 306.09

W-4: Production for the year Units

Sales 21,000
Opening inventory 19,000* 5% (950)
Closing inventory 21,000*10% 2,100
Production for the year 22,150

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A.5 Small size Medium size Large size

Sales price 75.00 90.00 130.00
Direct material cost (25.00) (32.00) (35.00)
Variable overheads (5.00) (7.00) (8.00)
Contribution margin 45.00 51.00 87.00
Machine hours 2.00 4.00 5.00
Contribution margin per hour 22.50 12.75 17.40
Priority based on contribution per machine hour 1 3 2

Units to be produced: Medium Machine

Small size Large size
size hours
Minimum production - Units 100,000 100,000 100,000
Hours consumed for minimum production 200,000 400,000 500,000 1,100,000

Units in excess of minimum production in

CM priority:
Small size - Units 110,000 220,000
Large size - Units 80,000 400,000
Medium size – Units 20,000 80,000
Total 210,000 120,000 180,000 1,800,000

A.6 Variance
Quantity
Fav./(Adv.)
Description
Qty. Amount
Rate
in ‘000 Rupees in '000
Budgeted gross profit (600-125-200-50-10) 500 215 107,500
Actual gross profit (295,000-55,000-105,000-26,000-5,100) 103,900
Decrease in profit 3,600

Profit variation due to Favourable/(Adverse) variances: +/(-) in profit

1 Sales price variance

Actual sales at actual price 295,000
Actual sales at standard price 480 600 288,000 7,000

2 Sales volume variance

Actual units sold at standard profit 480 215 103,200
Budgeted units sold at standard profit 500 215 107,500 (4,300)

3 Material price variance

Actual quantity used at actual rate 55,000
Actual quantity used at standard rate 950 50 47,500 (7,500)

4 Material usage variance

Actual quantity used at standard rate 950 50 47,500
Standard quantity used at standard rate (480 × 2.5) 1,200 50 60,000 12,500

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5 Labour rate variance

Actual hours used at actual rate 105,000
Actual hours used at standard rate 990 100 99,000 (6,000)

6 Labour efficiency variance

Actual hours used at standard rate 990 100 99,000
Standard hours used at standard rate (480 × 2) 960 100 96,000 (3,000)

7 Factory overheads spending variance

Actual fixed and variable overheads 31,100
Budgeted overheads:
Budgeted fixed overheads 500 10 5,000
Variable overheads based on actual hours used at standard rate 990 25 24,750
29,750 (1,350)

8 Variable overheads efficiency variance

Actual hours used at standard rate 990 25 24,750
Standard hours used at standard rate (480×2) 960 25 24,000 (750)

9 Fixed overheads efficiency variance

Actual units produced 480 10 4,800
Standard production in actual hours (990/2) 495 10 4,950 (150)

10 Fixed overheads capacity variance

Capacity used at standard (990/2) 495 10 4,950
Capacity available 500 10 5,000 (50)
Decrease in profit (3,600)

A.7 Journal entries Debit Credit

Rupees in ‘000
Payroll expense 2,030.83
Provision for vacations pay (vacations availed during the month) 85.00
Payroll payable (1,635-193+85) 1,527.00
Contribution to provident fund payable (Co. & employees) 250.00
Provision for bonus 125.00
Provision for vacation pay 145.83
Employees’ income tax payable 40.00
Advance against salary 28.00
(To record payroll cost, liability and provisions)
Work in process (1,338.88+545.56) 1,884.44
Factory overheads (36.60+109.79) 146.39
Payroll expenses 2,030.83
(To allocate payroll cost to WIP and factory overheads)
Advance against salary 17.00
Payroll payable 1,527.00
Contribution to provident fund payable (Co. & employees) 250.00
Employees’ income tax payable 40.00
Bank 1,834.00
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(To record disbursement of payroll and payment of liabilities)

Machining Assembly Tool room Stores
Total
WIP Overheads
Rupees in '000
Cost
Payroll cost A 1,000.00 400.00 25.00 75.00 1,500.00
Overtime 75.00 40.00 5.00 15.00 135.00
1,075.00 440.00 30.00 90.00 1,635.00
Employer’s contribution to PF (A*0.833) 83.33 33.34 2.09 6.25 125.00
Provision for year-end bonus (A/12) 83.33 33.34 2.08 6.25 125.00
Provision for paid vacation (A*35/360) 97.22 38.89 2.43 7.29 145.83
1,338.88 545.56 36.60 109.79 2,030.83

Deductions from employees:

Employee income tax 25.00 15.00 - - 40.00
Employees’ contribution to PF (A*0.833) 83.33 33.33 2.08 6.25 125.00
Salary advance recoveries 28.00
108.33 48.33 2.08 6.25 193.00

(THE END)

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The Institute of Chartered Accountants of Pakistan

Cost Accounting
Intermediate Examination – Spring 2011 March 11, 2011
Module D 100 marks - 3 hours

Q.1 (a) The management of Opal Limited (OL) is in the process of preparing next year’s budget and
has gathered the following information:

(i) Sales 180,000 units per month @ Rs. 110 per unit
(ii) Material “A” 75% of finished product @ Rs. 45 per unit
(iii) Material “B” 25% of finished product @ Rs. 30 per unit
(iv) Yield 80%
(v) Labour Rate Rs. 18,000 per month
(vi) Average working hours in a month 200 hours
(vii) Time required for each unit of product 20 minutes
(viii) Variable overhead Rs. 15 per unit of raw material consumed
(ix) Fixed Overhead Rs. 10,000,000 per annum

Required:
Assuming there is no beginning or ending inventory of the product, calculate OL’s budgeted
gross profit for the next year. (06 marks)

(b) The Board of Directors of Opal Limited while reviewing next year’s budgeted margins, as
calculated in (a) above, expressed their serious concerns on the projected profits. After careful
analysis of all activities by a cross-functional team of OL, the directors approved a plan of
action to improve the overall performance of the company.

The salient features of their plan are as under:

(i) Import of Material “A” from abroad at a cost of Rs. 48 per unit, this is expected to
improve the overall yield by 12.5%.
(ii) Based on a detailed study, the installation of a new system of production has been
proposed. The expected cost of the system is Rs. 7.5 million with an expected useful life
of 5 years. An incentive scheme for the workers have also been proposed by allowing
them to share 45% of the time saved for making each unit of product.
The above measures are expected to reduce the average time for making each unit of
product by 30%.
(iii) Introduction of improved management standards which is expected to reduce the
variable overheads by 20%.
(iv) Re-assessment of controllable fixed overhead expenses. This is likely to reduce OL’s
existing fixed overheads by 15%.

Required:
In view of the preceding improvement plan and the data provided in (a) above, calculate OL’s
revised budgeted gross profit for the next year. (13 marks)

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Cost Accounting Page 2 of 4

Q.2 Amber Limited (AL) manufactures a single product. Following information pertaining to the year
2010 has been extracted from the records of the company’s three production departments.

Material Labour Machine

Department
Rs. in million Hours
A 80 200,000 400,000
Budgeted B 150 500,000 125,000
C 120 250,000 350,000
A 80 220,000 340,000
Actual B 150 530,000 120,000
C 120 240,000 320,000

AL produced 3.57 million units during the period. The budgeted labour rate per hour is Rs. 120.
The overheads for department-A is budgeted at Rs. 5.0 million, for department-B at 15% of labour
cost and for department-C at 5% of prime cost of the respective departments. Actual overheads for
department A, B and C are Rs. 5.35 million, Rs. 8.90 million and Rs. 7.45 million respectively.

Overheads are allocated on the following basis:

Department-A Machine hours

Department-B Labour hours
Department-C % of prime cost

There was no beginning or ending inventory in any of the production departments.

Required:
(a) Budgeted overhead application rate for each department. (05 marks)
(b) The total and departmental actual cost for each unit of product. (08 marks)
(c) The over or under applied overhead for each department. (03 marks)

Q.3 Zircon Limited (ZL) manufactures and supplies footballs for both domestic and international
markets. Following information is available from the company’s records.

Number of skilled workers 250

Standard working hours per month 200
Actual hours per unit of product 1.5
Standard labour rate per hour (Rupees) 42
Variable overhead rate per labour hour (Rupees) 75

The company manufactures 40,000 footballs per month. Overtime is paid to the workers at the rate
of 75% over and above the standard wage rate.

In order to increase the production efficiency and reduce the cost of conversion, the management is
currently evaluating various wage incentive plans. The production manager has suggested the
following options to the management.

Option 1: Introduce a piece wage system at the rate of Rs. 72 per unit. It is expected to improve the
current production efficiency from 65% to 78%.

Option 2: Introduce a monthly group bonus plan with a guaranteed wage of Rs. 48 per hour based
on a standard 1.4 hours per unit of product. This plan is expected to reduce the overtime by 60%.

Required:
Evaluate the above options in contrast with the existing scheme and advise the management about
the most economical option. (15 marks)

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Cost Accounting Page 3 of 4

Q.4 Topaz Limited (TL) is the manufacturer of consumer durables. Pearl Limited, one of the major
customers, has invited TL to bid for a special order of 150,000 units of product Beta.

Following information is available for the preparation of the bid.

(i) Each unit of Beta requires 0.5 kilograms (kg) of material “C”. This material is produced
internally in batches of 25,000 kg each, at a variable cost of Rs. 200 per kg. The setup cost per
batch is Rs. 80,000. Material “C” could be sold in the market at a price of Rs. 225 per kg. TL
has the capacity to produce 100,000 kg of material “C”; however, the current demand for
material “C” in the market is 75,000 kg.
(ii) Every 100 units of product Beta requires 150 labour hours. Workers are paid at the rate of Rs.
9,000 per month. Idle labour hours are paid at 60% of normal rate and TL currently has
20,000 idle labour hours. The standard working hours per month are fixed at 200 hours.
(iii) The variable overhead application rate is Rs. 25 per labour hour. Fixed overheads are
estimated at Rs. 22 million. It is estimated that the special order would occupy 30% of the
total capacity. The production capacity of Beta can be increased up to 50% by incurring
additional fixed overheads. The fixed overhead rate applicable to enhanced capacity would be
1.5 times the current rate. The utilized capacity at current level of production is 80%.
(iv) The normal loss is estimated to be 4% of the input quantity and is determined at the time of
inspection which is carried out when the unit is 60% complete. Material is added to the
process at the beginning while labour and overheads are evenly distributed over the process.
(v) TL has the policy to earn profit at the rate of 20% of the selling price.

Required:
Calculate the unit price that TL could bid for the special order to Pearl Limited. (14 marks)

Q.5 Emerald Limited (EL) is engaged in the manufacture and sale of a single product. Following
statement summarizes the performance of EL for the first two quarters of the financial year 20X2:

Quarter 1 Quarter 2
Sales volume in units 580,000 540,000
Rs in ‘000
Sales revenue 493,000 464,400
Cost of Goods sold
Material (197,200) (183,600)
Labour (98,600) (91,800)
Factory overheads (84,660) (80,580)
(380,460) (355,980)
Gross Profit 112,540 108,420
Selling and distribution expenses (26,500) (25,500)
Administrative expenses (23,500) (23,500)
(50,000) (49,000)
Net Profit 62,540 59,420

In the second quarter of the year EL increased the sale price, as a result of which the sales volume
and net profit declined. The management wants to recover the shortfall in profit in the third
quarter. In order to achieve this target, the product manager has suggested a reduction in per unit
price by Rs. 15.

The marketing director however, is of the opinion that if the price of the product is reduced further,
the field force can sell 650,000 units in the third quarter. It is estimated that to produce more than
625,000 units the fixed factory overheads will have to be increased by Rs. 2.5 million.

Required:
(a) Compute the minimum number of units to be sold by EL at the reduced price, to recover the
shortfall in the second quarter profits.
(b) Determine the minimum price which could be charged to maintain the profitability calculated
in (a) above, if EL wants to sell 650,000 units. (14 marks)
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Cost Accounting Page 4 of 4

Q.6 (a) Briefly describe the following terms:

(i) Marginal cost (ii) Stock out cost (iii) Sunk cost (iv) Cost unit
(06 marks)

(b) Sapphire limited (SL) fabricates parts for auto manufacturers and follows job order costing. The
company’s head office is situated in Lahore but the factory is in Karachi. A separate set of
records is kept at the head office and at the factory. Following details were extracted from SL’s
records for the month of February 2011.

Jobs
A B C
Materials issued to production (units)
ƒ Material X 40,000 - 10,000
ƒ Material Y - 75,000 25,000
Direct labour hours worked (hours) 6,000 9,000 15,000
Labour rate per hour (Rs.) 75 60 65

The other related information is as follows:

(i) Materials purchased on account:
ƒ 100,000 units of material X at Rs. 25 per unit
ƒ 150,000 units of material Y at Rs. 35 per unit

(ii) The head office prepared the payroll and deducted 8% for payroll taxes. The payroll
amounted to Rs. 3.0 million out of which Rs. 1.0 million pertained to selling and
administrative staff salaries. After charging direct labour cost to each job the balance
amount of payroll cost was attributed to general factory overhead.
(iii) Factory overhead was applied to the jobs at Rs. 25 per direct labour hour.
(iv) Actual factory overheads amounted to Rs. 700,000 including depreciation on machinery
amounting to Rs. 400,000. All payments were made by head office.
(v) Over or under-applied factory overheads are closed to cost of goods sold account.
(vi) Jobs A and B were completed during the month. Job A was sold for Rs. 2.0 million to
one of the auto manufacturer on credit. The customer however, agreed to settle the
transaction at 2% cash discount.
(vii) Selling and administrative expenses, other than salaries paid during the month were Rs.
500,000.

Required:
Prepare journal entries to record all the above transactions in SL’s factory ledger and general
ledger for the month of February 2011. (16 marks)

(THE END)

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A.1 (a) Computation of budgeted gross profit Rupees

Sales (180,000 units × 12 × Rs. 110) 237,600,000
Less: Cost of sales
Material “A” (2.16 million × 75% × 1/80% x Rs. 45) 91,125,000
Material “B” (2.16 million × 25% × 1/80% × Rs.30) 20,250,000
Labour [20 min. /60 × 2.16 million × (Rs. 18,000/200)] 64,800,000
Variable overhead (2.16 million × 1/80% × Rs. 15) 40,500,000
Fixed Overhead 10,000,000
(226,675,000)
Budgeted Gross Profit 10,925,000

(b) Computation of revised budgeted gross profit Rupees

Sales (180,000 units × 12 × Rs. 110) 237,600,000
Less: Cost of sales
Material “A” [2.16 million /(0.8 × 1.125) × 0.75 × Rs. 48] 86,400,000
Material “B” [2.16 million / (0.8 × 1.125) × 0.25 × Rs. 30] 18,000,000
Labour Cost (W-1) 54,108,000
Variable overhead (Rs. 15 × 80%) × [(2.16 million/90%] 28,800,000
Fixed overhead (Additional depreciation: Rs. 7.5 million /5) 1,500,000
Fixed Overhead (Rs. 10 million) × (1-0.15) 8,500,000
(197,308,000)
Revised Budgeted Gross Profit 40,292,000

W-1 Computation of revised labour cost

Time required for one unit of finished product 20 Minutes
Expected saving of time (20 Minutes × 30%) 6 Minutes
Revised time for one unit of finished product 14 minutes
Workers share of the time saved Rs. 8,748,000
[(6 min./60 × 0.45 × 2.16 million × (Rs. 18000 / 200)]
labour cost (14 min./ 60 × 2.16 million) × (Rs. 18,000/200) Rs. 45,360,000
Rs.54,108,000

A.2 (a) Budgeted overhead rate for department-A Rs. in million

Budgeted Overhead rate per machine hour (OHD/MH Rs.5m/400,000) Rs. 12.5

Budgeted overhead rate for department-B

Budgeted labour cost (Rs. 120 × 500,000) 60
Budgeted overhead (Rs. 60 m × 15%) 9
Budgeted overhead rate per labour hour (Rs. 9 m/0.5 m) 18

Budgeted overhead rate for department-C

Budgeted overhead as a % of Prime Cost (Rs.7.5 m /150 m) 5%

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(b) Computation of actual cost of producing one unit of product:

Departments
--------------Rupees in million----------
A B C
Material cost 80.00 150.00 120.0 0
Labour cost
(0.22 m × Rs. 120) 26.40
(0.53 m × Rs. 120) 63.60
(0.24 m × Rs. 120) 28.80
Actual overhead cost 5.35 8.90 7.45
Total Cost 111.75 222.50 156.25

Unit cost (Cost/3.57 m. units) (Rs.) 31.30 62.32 43.77

Total Actual Cost per unit (Rs.) 137.39

(c) Applied Overhead Cost

(0.34 m × 12.5) 4.25
(0.53 m × Rs. 18) 9.54
(Rs. 148.8 m × 5%) 7.44
Actual Overhead Cost 5.35 8.90 7.45
Under applied / (over applied) 1.10 (0.64) 0.01

A.3 Existing Conversion Cost

No. of labour hours required (40,000 × 1.5) 60,000
Labour hours available at standard rate (250 × 200) 50,000
Overtime hours 10,000

Labour cost
Normal hours ( 50,000 × Rs. 42) 2,100,000
Overtime hours ( 10,000 × Rs. 73.50) 735,000
Total labour cost 2,835,000
Variable overhead (60,000 × Rs. 75) 4,500,000
Total conversion cost 7,335,000

Option - 1
No. of hours required per unit (1.5 × 0.65/ 0.78) 1.25
Total no. of hours required (40,000 × 1.25) 50,000
Piece wages (40,000 × 72) 2,880,000
Variable overhead ( 50,000 × 75) 3,750,000
Total conversion cost 6,630,000

Option - 2
Labour hours available (250 × 200) 50,000
Overtime hours (10,000 × 40%) 4,000
Total labour hours 54,000
Standard hours allowed for the bonus plan (40,000 × 1.4) 56,000

Guaranteed wages (56,000 × 48) 2,688,000

Variable overhead (54,000 × 75) 4,050,000
Total conversion cost 6,738,000

Recommendation: By implementing option 1 the conversion cost would be reduced to Rs 165.75 per
unit from the existing Rs. 183.38 per unit. The workers would be paid Rs. 2.880 million which is
better than option 2. The workers would certainly try to earn this amount in the least possible time.
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Therefore, option 1 would be the most economical choice for both the workers and the management.
A.4 Calculation of unit price to be quoted to Pearl Limited:
Material (25,000 × 200)+(53,125 × 225) + 80,000 W-1 17,033,125
Labour (20,000 ×45 × 40%) + (210,625 × 45) W-2 9,838,125
Variable overhead (230,625 × Rs. 25) 5,765,625
Incremental fixed cost (22m / 10 ×1.5) 3,300,000
35,936,875
Profit margin (25% of cost) 8,984,219
Sale price 44,921,094
Sale price per unit ( Rs. 44,921,094 / 150,000) 299

W-1: Material
Input units of material C (150,000 / 96%) × 0.5 78,125

W-2: Labour
Labour hours – completed units 150,000 x 1.50 225,000
– lost units {[(150,000 / 0.96) – 150,000] × 1.5 × 60%} 5,625
230,625

A.5 (a) Revised(reduced) Selling price (Rs.464,400 / 540,000 ×1000) - 15 Rs. 845

Rs. in '000
Shortfall in profit of last quarter 3,120
Profit for the 1st quarter 62,540
Target profit for the third quarter 65,660
Add: Fixed cost
Administration cost 23,500
Fixed factory overhead (W–1) 25,500
Fixed selling and distribution expense (W–1) 12,000
61,000
Targeted contribution margin 126,660

Contribution margin per unit (845-637) (W–2) Rs. 208

No. of units to be sold 608,942

W – 1: Computation of fixed factory overhead using high low method

Selling and
Factory
distribution
overheads
expenses
At 580,000 volume 84,660,000 26,500,000
At 540,000 volume A 80,580,000 25,500,000
Difference B 4,080,000 1,000,000
Variable cost per unit C 102 25
Fixed cost [A – (540,000 × C) ] 25,500,000 12,000,000

W – 2: Computation of variable cost per unit

Rupees
Material (183,600 / 540,000) × 1000 340
Labour ( 91,800 / 540,000) × 1000 170
Factory overheads 102
Selling and distribution expenses 25
637

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(b) Minimum price that should be charged if EL wants to sell 650,000 units
Rs. ‘000
Required contribution as above 126,660
Additional fixed cost 2,500
129,160
No. of units to be sold 650,000

Required contribution margin per unit 198.71

Variable cost per unit 637.00
Minimum price 835.71

A.6 (a) Briefly describe the following terms:

(i) Marginal cost:

It is the cost of producing one additional unit at a given volume of output.

(ii) Stock out cost:

These costs result from not having enough inventories in stock to meet customers’
needs. These costs include lost sales, customers’ ill will and the costs of expediting
orders for goods not in stock.

(iii) Sunk cost:

A sunk cost is a historical or past cost that the company has already incurred. These
costs cannot be changed / recovered in any case and are ignored while making a
decision.

(iv) Cost unit:

A cost unit is a unit of product or unit of service for which costs are ascertained by
means of allocation, apportionment and absorption. It is a unit of quantity of product,
service or time or a combination of these in relation to which costs are expressed or
ascertained.

(b) General Journal entries

Factory Ledger General Ledger
Date Particulars Particulars
Debit Credit Debit Credit

 Material X 2,500,000 Factory Ledger 7,750,000

Material Y 5,250,000 Trade Creditors 7,750,000
General Ledger 7,750,000
(Purchase of material)

 Payroll 2,000,000 Factory Ledger 2,000,000

General Ledger 2,000,000 Selling and 1,000,000
administrative
expenses
Accrued Payroll 2,760,000
(Payroll accrual) Payroll taxes 240,000

 No Entry Accrued payroll 2,760,000

Payroll Taxes 240,000
Bank 3,000,000
(Payment of payroll &
taxes)

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 Work in process A 1,000,000

Work in process B 2,625,000
Work in process C 1,125,000 No Entry
Material X 1,250,000
Material Y 3,500,000
(Issuance of raw
material to WIP)

 Work in process A 450,000

Work in process B 540,000
Work in process C 975,000 No Entry
Factory overheads 35,000
Payroll 2,000,000
(Direct labour cost
allocated to WIP)

 Work in process A 150,000

Work in process B 225,000
Work in process C 375,000 No Entry
Factory overheads 750,000
- applied
(Factory overheads
applied to WIP)

 Factory overheads 700,000 Factory Ledger 700,000

General Ledger 700,000 Bank 300,000
Accumulated 400,000
Depreciation
(Actual factory
overheads transferred)

 Factory overheads - 15,000 Factory Ledger 15,000

applied
General Ledger 15,000 Cost of goods sold 15,000
(Over applied
overheads transferred
to cost of goods sold)

 Finished goods A 1,600,000

Finished goods B 3,390,000 No Entry
Work in process A 1,600,000
Work in process B 3,390,000
(Jobs A and B
completed and
transferred to finished
goods)

 General Ledger 1,600,000 Cost of goods sold 1,600,000

Finished goods A 1,600,000 Factory Ledger 1,600,000
(Job A delivered and
transferred to cost of
goods sold)

 No Entry Trade Debtors 2,000,000

Sales 2,000,000
( Job A sold to
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customer)

 No Entry Bank 1,960,000

Cash discount 40,000
Trade debtors 2,000,000
(Amount realized from
customer)

 No Entry Selling and 500,000

administrative
expenses
Bank 500,000
(Payment of Selling
and admin. Expenses)

(THE END)

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The Institute of Chartered Accountants of Pakistan

Cost Accounting
Intermediate Examination 9 September 2011
Autumn 2011 100 marks – 3 hours
Module D Additional reading time – 15 minutes

(All questions are compulsory)

Q.1 Sparrow (Pvt) Limited (SPL) is engaged in the manufacture of two products A and B. These
products are manufactured on two machines M1 and M2 and are passed through two service
departments, Inspection and Packing, before being delivered to the warehouse for final distribution.
SPL’s overhead expenses for the month of August 2011 were as follows:

Rupees
Electricity 2,238,000
Rent 1,492,000
Operational expenses of machine M1 5,500,000
Operational expenses of machine M2 3,200,000

Following information relates to production of the two products during the month:

A B
Units produced 5,600 7,500
Labour time per unit – Inspection department 15 minutes 12 minutes
Labour time per unit – Packing department 12 minutes 10 minutes

The area occupied by the two machines M1 and M2 and the two service departments is as follows:

Square feet
Machine M1 5,500
Machine M2 4,800
Inspection department 12,000
Packing department 15,000

Machine M1 has produced 50% units of product A and 65% units of product B whereas machine
M2 has produced 50% units of product A and 35% units of product B.

Required:
Allocate overhead expenses to both the products A and B. (18 marks)

Q.2 (a) Bulbul Limited (BL) produces a specialized product for industrial customers. Following are
the details of BL’s monthly production and associated cost for the past six months:

Months Units Cost (Rs. ‘000)

March 75 900
April 60 700
May 65 850
June 80 950
July 105 1,200
August 95 1,040

Required:
Using the least square method, calculate the estimated cost to produce 110 units. (09 marks)
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Cost Accounting Page 2 of 4

(b) Mr. Lark works as a machinist on a machine running 54 hours a week. Following information
pertains to his last week’s work on the machine:

Total hours worked 51 hours

Overtime ( included in total hours worked) 4 hours
Idle time due to machine break down 3 hours
Basic hourly wage rate Rs. 25

The overtime is paid at basic rate plus 45%.

Required:
Calculate the total wages paid to Mr. Lark allocating it between direct and indirect labour.
Also give reasons for such allocation. (05 marks)

Q.3 (a) Pelican Limited produces and markets a single product Zeta. The company uses a standard
costing system. Following is the standard material mix for the production of 400 units of Zeta.

Standard rate
Weight (Kg.)
per Kg. (Rs.)
Material A 30 240
Material B 25 320

Actual costs on the production of 192 units of Zeta for the month of August 2011 were as
follows:

Actual rate
Weight (Kg.)
per Kg. (Rs.)
Material A 16 230
Material B 13 308

Required:
Calculate the following material variances from the above data:
(i) Cost variance (ii) Price variance (iii) Mix variance
(iv) Yield variance (v) Usage variance (15 marks)

(b) Following data is available from the production records of Flamingo Limited (FL) for the
quarter ended 30 June 2011.

Rupees
Direct material 120,000
Direct labour @ Rs. 4 per hour 75,000
Variable overhead 70,000
Fixed overhead 45,000

The management’s projection for the quarter ended 30 September 2011 is as follows:

(i) Increase in production by 10%.

(ii) Reduction in labour hour rate by 25%.
(iii) Decrease in production efficiency by 4%.
(iv) No change in the purchase price and consumption per unit of direct material.

Variable overheads are allocated to production on the basis of direct labour hours.

Required:
Prepare a production cost budget for the quarter ended 30 September 2011. (04 marks)

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Cost Accounting Page 3 of 4

Q.4 Hornbill Limited (HL) produces certain chemicals for textile industry. The company has three
production departments. All materials are introduced at the beginning of the process in
Department-A and subsequently transferred to Department-B. Any loss in Department-B is
considered as a normal loss. Following information has been extracted from the records of HL for
Department-B for the month of August 2011:

Department B
Opening work in process (Litres) Nil
Closing work in process (Litres) 10,500
Units transferred from Department-A (Litres) 55,000
Units transferred to Department-C (Litres) 39,500
Labour (Rupees) 27,520
Factory overhead (Rupees) 15,480

Materials from Department-A were transferred at the cost of Rs. 1.80 per litre. The degree of
completion of work in process as to cost originating in Department-B were as follows:

WIP Completion %
50% units 40%
20% units 30%
30% units 24.5%

Required:
Prepare cost of production report for Department-B for the month of August 2011. (15 marks)

Q.5 Seagull Limited (SL) is engaged in the manufacture of Basketballs, Footballs and Rugby balls for
the professional leagues and collegiate play. These balls are produced from different grades of
synthetic leather. Relevant information available from SL’s business plan for the manufacture of
each unit is as under:

Football Basketball Rugby Ball

Cost of leather Rs. 38 Rs. 238 Rs. 255
Time required for each unit of product. 2 hours 1 hour 1.5 hour
Variable overheads (based on labour cost) 65% 50% 60%

The labourers are paid at a uniform rate of Rs. 50 per hour. SL allocates fixed overheads to each of
the above product at the rate of Rs. 4 per direct labour hour.

Following further information is also available:

Football Basketball Rugby Ball

Annual budgeted sales volume (Units) 5000 3500 2000
Selling price per unit of product (Rs.) 295 397 500
Cost of leather per sq. ft (Rs.) 95 340 510

The above sales volumes are based on the market demand for these products. However, due to
financial crises, SL is expected to procure only 3,840 sq. ft. of leather from the tanneries.

The sales department has already accepted an order of 800 footballs, 1,300 basketballs and 400
rugby balls from a renowned professional league in the country. These quantities are already
included in the above budgeted sales volume. The non compliance of this order will result in a
penalty of Rs. 400,000.

Required:
Based on the budgeted volumes, determine the optimum production plan and also calculate the net
profit for the year. (16 marks)

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Cost Accounting Page 4 of 4

Q.6 (a) Penguin Limited (PL) produces and markets a single product. The company’s management
has raised concerns about the declining sales due to frequent stock-outs. In order to resolve the
problem, the finance manager has gathered following information from PL’s records:

Carrying costs of inventory (excluding financing costs) 8% p.a.

Variable costs of inventory 80% of sales
Fixed costs Rs. 40,000 p.a.
Applicable tax rate 30%

Based on stock-out reports, the finance manager has worked out three policies for the
improvement of sales and the projected data is as follows:

Inventory Policy Inventory turnover Sales

(based on cost of goods sold) (Rs. in 000’)
Existing 8 300,000
PI 7 422,500
PII 6 527,500
PIII 5 620,000

Required:
Which of the above policy would maximize the incremental rate of return on investment in
inventories? (13 marks)

(b) Robin Limited (RL) imports a high value component for its manufacturing process. Following
data, relating to the component, has been extracted from RL’s records for the last twelve
months:

Maximum usage in a month 300 units

Minimum usage in a month 200 units
Average usage in a month 225 units
Maximum lead time 6 months
Minimum lead time 2 months
Re-order quantity 750 units

Required:
Calculate the average stock level for the component. (05 marks)

(THE END)

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A.1 Allocation of costs to

Basis Machine M1 Machine M2 Inspection Packing Total
cost centres
Area Occupied 5,500 4,800 12,000 15,000 37,300

Allocation of Electricity Area 330,000 288,000 720,000 900,000 2,238,000

Allocation of rent Area 220,000 192,000 480,000 600,000 1,492,000
Operational cost 5,500,000 3,200,000 - - 8,700,000
6,050,000 3,680,000 1,200,000 1,500,000 12,430,000

ALLOCATION OF COST TO PRODUCTS

Basis of Cost Allocation A B TOTAL
Units produced 5,600 7,500
Inspection time (hrs.) (5,600 x 15 min /60) & (7,500 x 12 min /60) 1,400 1,500 2,900
Packing time (hrs.) (5,600 x 12 min /60) & (7,500 x 10 min /60) 1,120 1,250 2,370
Units produced on Machine M1 (50% A and 65% B) 2,800 4,875 7,675
Units produced on Machine M2 (50% A and 35% B) 2,800 2,625 5,425

Cost Allocated
Machine M1 cost 2,207,166 3,842,834 6,050,000
Machine M2 cost 1,899,355 1,780,645 3,680,000
Inspection department cost 579,310 620,690 1,200,000
Packing department cost 708,861 791,139 1,500,000
5,394,692 7,035,308 12,430,000

A.2 (a) Cost Rs.000’

Units (x) (xy) (x2)
(y)
March 2011 75 900 67,500 5,625
April 2011 60 700 42,000 3,600
May 2011 65 850 55,250 4,225
June 2011 80 950 76,000 6,400
July 2011 105 1,200 126,000 11,025
August 2011 95 1,040 98,800 9,025
480 5,640 465,550 39,900

n(∑ xy) - (∑ x)(∑ y) 6 × 465,550 - 480 × 5,640

b (Variable cost per unit) = = = 9.57
n(∑ x ) − (∑ x)
2 2
6 (39,900) - (480) 2
(∑ y) − b(∑ x) (5,640 - 9.57 (480))
a (Fixed costs per month) = = = 174
n 6

Estimated cost to produce 110 units:

Y= a + b (x)
= 174 + 9.57 x 110 = Rs. 1,227

(b) Allocation of wages between direct and indirect labour

Direct Indirect Total

Rupees
Normal wages (47 × Rs. 25) 1,175 - 1,175
Overtime wages (4 × Rs. 25)(4 x 25 × 0.45) 100 45 145
Idle time wages (3 × Rs. 25) - 75 75
1,275 120 1,395

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Reasons for the allocation:

Normal wages paid for production will be charged to production. The portion of the overtime
wages which is paid in excess of the normal wages should be charged to indirect labour as it
does not give extra production. Idle time wages are unproductive, therefore will be charged to
indirect labour.

A.3 (a) (i) Standard quantity for actual production at standard price:
Materials Quantity (kg) Price Per Kg(Rs.) Amount
A (30/400 × 192) 14.4 240 3,456
B (25/400 × 192) 12 320 3,840
26.4 7,296

(ii) Actual quantity at actual price:

Materials Quantity (kg) Price Per Kg(Rs.) Amount
A 16 230 3,680
B 13 308 4,004
29 7,684

(iii) Actual quantity used at standard price:

Materials Quantity (kg) Price Per Kg(Rs.) Amount
A 16 240 3,840
B 13 320 4,160
29 8,000

(iv) Standard mix of actual total input at standard price:

Materials Quantity (kg) Price Per Kg(Rs.) Amount
A (30/55 × 29) 15.82 240 3,796.80
B (25/55 × 29) 13.18 320 4,217.75
29 8,014.55

Direct Material Cost Variance

SC – AC = (i) – (ii) = 7,296 – 7,684 = Rs. 388 adverse

Direct Material Price Variance

AQ (SP-AP) = (iii) – (ii) = 8,000 – 7,684 = Rs. 316 favourable

Direct Material Usage Variance

SP (AQ-SQ) = (iii) – (i) = 8,000 – 7,296 = Rs. 704 adverse

Direct Material Mix Variance

SP (SQ-AQ) = (iv) – (iii) = 8,014.55 – 8,000 = Rs. 14.55 favourable

Direct Material Yield Variance

SR (SY-AY) = (iv) – (i) = 8,014.55 – 7,296 = Rs. 718.55 adverse

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(b) Production Cost Budget

Actual (30-06-2011) Budget (30-09-2011)

Rupees
Direct material cost 120,000 132,000
Direct labour cost (W-1) 75,000 64,350
Prime Cost 195,000 196,350
Production Overhead:
Variable 70,000 80,080
Fixed 45,000 45,000
Total cost 310,000 321,430

W-1:
The labour hours will increase by 10%. Also there will be increase in labour hours as
production efficiency has decreased by 4%. Therefore, increased total labour hours will
be:

110 104
(75,000 ÷ 4) = 18,750 × × = 21,450
100 100
Rate is decreased to Rs. 3. Therefore, direct labour cost will be 21,450 x 3 = Rs. 64,350.

A.4 Hornbill Limited – Department-B

Cost of Production Report
For the Month of August, 2011

Quantity schedule: (in litres)

Work in process - opening -
Units received from department-A 55,000

Units transferred to department-C 39,500

Work in process - closing 10,500
Units lost in process – Normal loss (balancing figure) 5,000
55,000

Equivalent production statement (in litres)

Labour FOH
Units transferred to department-C 39,500 39,500
Work in process – closing (10,500 × 0.3335) (W-1) 3,500 3,500
Equivalent Units 43,000 43,000

Cost charged to department: Total Cost Unit Cost

Rupees
Cost from preceding department:
Transferred in during the month (55,000 × 1.80) 99,000 1.80

Cost added by the department:

Labour (W-2) 27,520 0.64
Factory overhead (W-2) 15,480 0.36
Total cost added 43,000 1.00
Adjustment for lost units (W-3) 0.18
Total cost to be accounted for 142,000 2.98

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Cost Accounted for as Follows:

Transferred to department-C (39,500 × Rs 2.98) 117,710
Work in process - ending inventory:
Cost from department-1 [10,500 × (Rs. 1.8 + Rs. 0.18)] 20,790
Labour (3,500 × Rs. 0.64) 2,240
Factory overhead (3,500 × Rs. 0.36) 1,260 24,290
Total cost accounted for 142,000

W-1: Units in Process Equivalent

50% were 40% completed 0.20
20% were 30% completed 0.06
30% were 24.5% completed 0.0735
Weighted average 0.3335

W-2 : Unit cost based on equivalent units

Labour FOH
Equivalent units (Litres) 43,000 43,000
Cost (Rs.) 27,520 15,480
Cost per Unit (Rs.) 0.64 0.36

W-3: Adjustment for lost units (Normal loss):

Formula for Calculation:

Unit cost of lost units = (lost units × cost from department 1) / (units from department 1 - lost units)
= (5,000 × 1.80) / (55,000 units – 5,000 units) = Rs 9,000 / 50,000 = Rs 0.18

A.5 (i) Optimal Production Plan

Football Basketball Rugby ball Total
Leather required per unit (Sq. ft.)
38 ÷ 95 0.4
238 ÷ 340 0.7
255 ÷ 510 0.5
Budgeted sales volume 5,000 3,500 2,000
Total Leather required (Sq. ft.) 2,000 2,450 1,000 5,450
Maximum Leather available (Sq. ft.) 3,840

Football Basketball Rugby ball

Selling price 295 397 500
Less: Variable Costs
Leather 38 238 255
Direct labour @ Rs. 50/hr. 100 50 75
Variable Overheads 65 25 45
Total Variable Cost 203 313 375
Contribution per unit 92 84 125

Leather requirement (Sq. ft.) 0.4 0.7 0.5

Contribution per Sq. ft. 230 120 250
Ranking 2 3 1

(Sq. ft.)
Maximum Leather available 3,840
Less: Leather allocated to confirmed order:
Football (800 x 0.4 ) (320)
Basketball (1,300 x 0.7 ) (910)
Rugby ball (400 x 0.5 ) (200)
Unused balance of leather 2,410
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Now, the scarce material will be allocated as per ranking.

Leather Balance
Product Volume Material used
requirements unused
2,410
Rugby ball 1,600 0.5 800 1,610
Football (balance) 4,025 0.4 1,610 -
Basketball Nil 0.7 - -

(ii) Profit arising from above production plan

Contribution
Product Units Contribution per unit
margin
Rugby ball 2,000 125 250,000
Football 4,825 92 443,900
Basketball 1,300 84 109,200
Total Contribution 803,100
Less: Fixed costs (Note 1) (66,000)
Profit 737,100

Note – 1 - Fixed overhead

Fixed costs
Product Units Direct labour Hour Fixed costs
per D.L Hour
Rugby ball 2,000 (2,000×1.5)=3,000 4 12,000
Football 5,000 (5,000×2)=10,000 4 40,000
Basketball 3,500 (3,500×1)=3,500 4 14,000
Total Fixed Costs 66,000

A.6 (a) Evaluation of inventory policies:

Rupees in '000
Particulars Existing PI PII PIII
Sales 300,000 422,500 527,500 620,000

(240,040
Cost of goods sold W-1 ) (338,040) (422,040) (496,040)
Contribution 59,960 84,460 105,460 123,960
Less: inventory carrying cost @
8% (2,400) (3,863) (5,627) (7,937)
Profit before tax 57,560 80,597 99,833 116,023
Tax @ 30% (17,268) (24,179) (29,950) (34,807)
Profit after tax 40,292 56,418 69,883 81,216
Incremental profit - 16,126 29,591 40,925
Incremental investment - 18,286 40,335 69,203
Incremental return - 88% 73% 59%

Recommendation: The incremental rate of return is maximised if inventory Policy PI

is adopted by the company.

W-1: Calculation of cost of goods sold:

Existing 300,000 80% 40 240,040

PI 422,500 80% 40 338,040
PII 527,500 80% 40 422,040
PIII 620,000 80% 40 496,040
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W-2: Level of investment in inventory & carrying cost:

Carrying
cost
Existing 240,040 / 8 30,005 @ 8% 2,400
PI 338,040 / 7 48,291 @ 8% 3,863
PII 422,040 / 6 70,340 @ 8% 5,627
PIII 496,040 / 5 99,208 @ 8% 7,937

) (b) Average stock level:

Average stock level = minimum level + ½ (reorder quantity)

As minimum level is not given it will be computed a follows:

Re-order level = maximum usage × maximum lead time
Re-order level = 300 × 6 = 1,800 units.
Minimum level = Re-order level – ( average usage × average lead time)
Minimum level = 1,800 – (225 × (6+2/2) = 900 units.
Therefore, Average stock level = 900 + (½ 750) = 1,275 units.

(THE END)

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The Institute of Chartered Accountants of Pakistan

Cost Accounting
Intermediate Examination 9 March 2012
Spring 2012 100 marks - 3 hours
Module D Additional reading time - 15 minutes

Q.1 Ore Limited (OL) is a manufacturer of sports bicycles. The company buys tyres from a local vendor.
Following data, relating to a pair of tyres, has been extracted from OL’s records:

Rupees
Cost 1,000
Storage cost based on average inventory 80
Insurance cost based on average inventory 60
Store keeper’s salary (included in absorbed overheads) 8
Cost incurred on final quality check at the time of delivery 10

Other relevant details are as under:

(i) The cost of inventory comprises of purchase price and absorbed overhead expenses of Rs. 100
per pair.
(ii) The annual demand for tyres is 200,000 pairs.
(iii) The ordering cost per order is Rs. 8,000.
(iv) The delivery cost per order is Rs. 3,000.
(v) OL’s rate of return on investment in inventory is 15%.
(vi) Recently the vendor has offered a quantity discount of 3% on orders of a minimum of 5,000
pairs.

Required:
Evaluate whether OL should avail the quantity discount from the vendor. (10 marks)

Q.2 Nitrate Limited (NL), producing industrial chemicals, has three production and two service
departments. The annual overheads are as follows:

Rupees in ‘000
Production departments:
A 56,000
B 50,000
C 38,000
Service departments:
X 16,500
Y 10,600

The service departments’ costs are apportioned as follows:

Production departments Service departments

A B C X Y
Service department X 20% 40% 30% - 10%
Service department Y 40% 20% 20% 20% -

Required:
Apportion costs of service departments using simultaneous equation method. (10 marks)

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Cost Accounting Page 2 of 4

Q.3 Magnesium Limited (ML) produces and markets a single product. The management is concerned
about the increasing rate of labour turnover in their factory and wants to assess the losses suffered by
ML due to high labour turnover.

Following information is available from ML’s records for the year ended 31 December 2011:

Sales price per unit Rs. 200

Direct material per unit 0.5 kg at Rs. 96 per kg
Direct labour hours paid 480,000 hours
Labour rate per hour Rs. 55
Actual hours per unit of product 1.5 hours
Variable overhead rate per labour hour Rs. 20
Fixed overheads Rs. 6,000,000

The direct labour hours include 9,000 hours spent on training and replacement, only 50% of which
were productive. Moreover, 12,000 hours of potential work could not be availed because of delayed
replacement. The cost incurred on appointments amounted to Rs. 200,000. ML has no beginning or
ending inventory.

Required:
Prepare a comparative statement showing net profit for the year and profit foregone as a result of
labour turnover; assuming the potential production loss could have been sold in the market at
prevailing prices. (15 marks)

Q.4 Chrome Limited (CL) manufactures two products A and B in small and large packs. Following
information has been extracted from CL’s business plan for the period ending 31 December 2012:

A B
Large pack Large pack
Contribution margin per unit (Rs.) 120 150
Ratio of quantities (small pack : large pack) 3:5 2:3
Annual production and sales (units) 250,000 225,000

Following information is also available:

(i) Product-A:

The variable cost of the large pack of product-A is 75% of its selling price.

The variable cost of the small pack of product-A is 67.5% of the variable cost of large pack.

The ratio of the selling price of both the packs of product-A are same as the ratio of their
quantities.

The annual sales of the small pack of product-A is estimated at 150,000 units.

(ii) Product-B:

The ratio of contribution margin to variable cost for the large pack of product-B is 2:3.

The selling price of the small pack of product-B is 64% of the price of its large pack.

(iii) Fixed overheads are estimated at Rs. 7,600,000 per month.

Required:
Assuming CL is able to sell the budgeted quantities of both packs of product-A and large pack of
product-B:
(a) How many units of the small pack of product-B should be sold to achieve break-even?
(10 marks)
(b) How many units of the small pack of product-B should be sold to earn a net income of
Rs. 10,530,000? Applicable tax rate for the company is 25%. (05 marks)
(c) Based on the results of (b) above, prepare a product wise and consolidated income statement
for the period ending 31 December 2012. (05 marks)

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Cost Accounting Page 3 of 4

Q.5 Bauxite Limited (BL) is engaged in the manufacture and sale of three products viz. Pentagon,
Hexagon and Octagon. Following information is available from BL’s records for the month of
February 2012:

Pentagon Hexagon Octagon

Sales price per unit (Rs.) 2,300 1,550 2,000
Material cost per Kg. (Rs.) 250 250 250
Labour time per unit (Minutes) 20 30 45
Machine time per unit (Hours) 4 2.5 3
Net weight per unit of finished product (Kg.) 6 4 5
Yield (%) 90 95 92
Estimated demand (Units) 10,000 20,000 9,000

Each worker is paid monthly wages of Rs. 15,000 and works a total of 200 hours per month. BL’s
total overheads are estimated at 20% of the material cost.

Fixed overheads are estimated at Rs. 5 million per month and are allocated to each product on the
basis of machine hours. 100,000 machine hours are estimated to be available in February 2012.

Required:
Based on optimum product mix, compute BL’s net profit for the month of February 2012.
(15 marks)

Q.6 Zinc Limited (ZL) is engaged in trading business. Following data has been extracted from ZL’s
business plan for the year ended 30 September 2012:

Sales Rs. ‘000

Actual:
January 2012 85,000
February 2012 95,000
Forecast:
March 2012 55,000
April 2012 60,000
May 2012 65,000
June 2012 75,000

Following information is also available:

(i) Cash sale is 20% of the total sales. ZL earns a gross profit of 25% of sales and uniformly
maintains stocks at 80% of the projected sale of the following month.
(ii) 60% of the debtors are collected in the first month subsequent to sale whereas the remaining
debtors are collected in the second month following sales.
(iii) 80% of the customers deduct income tax @ 3.5% at the time of payment.
(iv) In January 2012, ZL paid Rs. 2 million as 25% advance against purchase of packing machinery.
The machinery was delivered and installed in February 2012 and was to be operated on test run
for two months. 50% of the purchase price was agreed to be paid in the month following
installation and the remaining amount at the end of test run.
(v) Creditors are paid one month after purchases.
(vi) Administrative and selling expenses are estimated at 16% and 24% of the sales respectively and
are paid in the month in which they are incurred. ZL had cash and bank balances of Rs. 100
million as at 29 February 2012.

Required:
Prepare a month-wise cash budget for the quarter ending 31 May 2012. (10 marks)

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Cost Accounting Page 4 of 4

Q.7 (a) Platinum Limited (PL) manufactures two joint products Alpha and Beta and a by-product Zeta
from a single production process. Following information is available from PL’s records for the
month of February 2012:

Direct material 25,000 kg. @ Rs. 25 per kg.

Direct labour @ Rs. 15 per hour Rs. 432,000
Normal process loss 20% of the material consumed

Overheads are allocated to the products at the rate of Rs. 10 per direct labour hour. The normal
loss is sold as scrap at the rate of Rs. 8 per kg.

Following data relates to the output from the process:

Selling price per kg.

Product Output ratio
(Rs.)
Alpha 75% 95.0
Beta 15% 175.0
Zeta 10% 52.5

Alpha is further processed at a cost of Rs. 30 per unit, before being sold in the market. Joint
costs are allocated on the basis of net realisable value.

Required:
Compute the total manufacturing costs for February 2012. Also calculate the profit per kg. for
Alpha and Beta. (10 marks)

(b) Silver Limited (SL) produces and markets a single product. Following budgeted information is
available from SL’s records for the month of March 2012:

Volumes:
Sales 100,000 units
Production 120,000 units
Standard costs:
Direct materials per unit 0.8 kg at Rs. 60 per kg
Labour per unit 27 minutes at Rs. 80 per hour
Variable production overheads Rs. 40 per labour hour
Variable selling expenses Rs. 15 per unit
Fixed selling expenses Rs. 800,000

Fixed production overheads, at a normal output level of 105,000 units per month, are estimated
at Rs. 2,100,000. The estimated selling price is Rs. 180 per unit.

Required:
Assuming there are no opening stocks, prepare SL’s budgeted profit and loss statement for the
month of March 2012 using absorption costing. (05 marks)

Q.8 Explain briefly what is meant by the term inventory control. Describe, giving reasons, the method of
stock valuation which should be used in times of fluctuating prices. (05 marks)

(THE END)

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A.1 PRESENT SCENARIO

Carrying cost per unit: Rupees
Storage costs 80
Insurance cost 60
Store keepers salary -
Cost relating to final quality check -
Opportunity cost of capital (per pair) [ Rs. 1,000 – 100 x 0.15] 135
275
COSTS ASSOCIATED WITH EACH ORDER
Ordering cost per order 8,000
Delivery cost per order 3,000
11,000

2( F )( S )
EOQ =
(C )
2 × 11,000 × 200,000 4,400,000,000
EOQ = =
275 275
16,000,000
EOQ = 4,000
Number of orders = 50

Total relevant costs under present scenario

 Purchase price 180,000,000
 Total ordering cost (50 × 11,000) 550,000
 Total carrying cost (4,000/2 × 275) 550,000
181,100,000

IF DISCOUNT IS AVAILED
Carrying cost per unit
Storage costs 80.00
Insurance cost 60.00
Opportunity cost of capital [ Rs. 900 x (1- 0.03) x 0.15] 130.95
270.95
Number of orders would be (200,000 / 5,000) 40

Total relevant costs:

 Purchase price [Rs. 900 x (1-.03) x 200,000] 174,600,000
 Total ordering cost [ Rs. 11,000 x 40] 440,000
 Total carrying cost [ Rs. 270.95 x 5,000 /2] 677,375
175,717,375

Conclusion:
Yes. Quantity discount should be availed.

A.2 Let X represent total overheads of department X

And Y total overheads of department Y
Since X received 20% of Y’s services
Thus X = 16,500 + 0.2 Y
Likewise Y = 10,600 + 0.1X

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Using substitution method of simultaneous equation

X = 16,500 + 0.2 (10,600 + 0.1X)
X = 16,500 + 2,120 + 0.02X
X – 0.02X = 18,620
0.98X = 18620
X = 19,000
Y = 10,600 + (0.1 × 19,000)
Y = 12,500

Overheads charged to production:

A B C
Allocated overheads 56,000 50,000 38,000
Share of X’s service (Rs. 19,000 × % served) 3,800 7,600 5,700
Share of Y’s service (Rs. 12,500 × % served) 5,000 2,500 2,500
64,800 60,100 46,200

A.3 Comparative statement showing actual profit and potential profit in absence of labour turnover:
Actual Potential
Rupees
Sales 63,400,000 65,600,000
Less: Costs
Direct material (15,216,000) (15,744,000)
Direct labour (26,400,000) (27,060,000)
Variable overhead (9,600,000) (9,840,000)
Fixed overheads (6,000,000) (6,000,000)
Cost incurred on Appointments (200,000) -
(57,416,000) (58,644,000)
Net Profit 5,984,000 6,956,000

Loss of profit due to labour turnover is Rs. 972,000

Working Notes:
W-1 Hours lost due to labour turnover:
Hours lost due to delayed replacement 12,000
Unproductive time due to training and replacement (9,000 × 50%) 4,500
Total hours lost 16,500

W-2 Productive labour hours:

Direct labour hours paid 480,000
Less: unproductive time of new workers (9,000 × 50%) (4,500)
Total productive hours 475,500
No. of units sold/produced (475,500/1.5) 317,000
Actual sales: [Total productive hours / hours per unit of product × Rs 200] 63,400,000
Add: sales foregone due to 16,500 unproductive hours [16,500 / 1.5 × 200] 2,200,000
Potential sales 65,600,000
No. of units that could have been sold (65,600,000 / 200) OR (317,000+11,000) 328,000
Direct material:
Actual [(475,500 /1.5) × 0.5 × 96] 15,216,000
Add: Material cost foregone [ 16,500 / 1.5 × 0.5 × 96] 528,000
15,744,000
Direct labour:
Actual [480,000 × 55] 26,400,000
Add: Labour cost foregone [ 12,000 × 55] 660,000
27,060,000
Variable overheads:
Actual [480,000 × 20] 9,600,000
Add: Variable cost foregone [ 12,000 × 20] 240,000
9,840,000
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A.4 (a) CALCULATION OF BREAK-EVEN POINT OF SALES IN UNITS:

Small pack of product-B
Required Contribution Margin
Rupees
Annual fixed cost (Rs. 7.6 million x 12) 91,200,000
Less: Estimated contribution margin
Product-A Large pack [250,000 units x Rs. 120] (30,000,000)
Product-A Small pack [150,000 units x Rs. 45] (6,750,000)
Product-B Large pack [225,000 units x Rs. 150] (33,750,000)
(70,500,000)
Required contribution from small pack of Product-B 20,700,000

Units
Break-even sales in units [Rs. 20,700,000 / Rs. 90) 230,000

Working Notes
Product-A
Rs. per unit
Large Pack
Sales price [120 / (1-0.75)] 480
Less: Variable cost [Rs. 480 × 75%] (360)
Contribution Margin 120
Small Pack
Sales price [Rs. 480 × 3/5] 288
Less: Variable cost [Rs. 360 × 67.5%] (243)
Contribution margin 45
Product-B
Large Pack
Sales price [Rs. 150/0.4] OR [225 + 150] 375
Less: Variable cost [ Rs. 375 – Rs. 150] OR [150 x 3/2] (225)
Contribution Margin 150
Small Pack
Sales price [Rs. 375 x 0.64] 240
Less: Variable cost [ Rs. 225 x 2/3] (150)
Contribution margin 90
(b) Sales in units of small pack of product-B to produce net income of Rs. 10,530,000.

Rupees
Desired net income 10,530,000
Applicable tax rate 25%
Income before tax [ Rs. 10,530,000 / (1- 0.25)] 14,040,000
Add: fixed cost [ 7,600,000 x 12] 91,200,000
Required total contribution margin from all packs of A and B 105,240,000
Less: Contribution margin of both packs of Product-A and large pack of B (70,500,000)
Contribution margin from Product-B 34,740,000
Contribution margin per unit of the small pack of product-B 90
Required number of units of small pack of product-B to earn desired income 386,000

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(c) Product-wise Income Statement

For the period ended December 31, 2012

Per unit Rupees

Sales
Product Variable Contribution
Price volume Sales Variable cost
cost margin
A-Large 480 360 250,000 120,000,000 90,000,000 30,000,000
A-Small 288 243 150,000 43,200,000 36,450,000 6,750,000
B-Large 375 225 225,000 84,375,000 50,625,000 33,750,000
B- Small 240 150 386,000 92,640,000 57,900,000 34,740,000
340,215,000 234,975,000 105,240,000

Consolidated Income Statement Rupees

Sales 340,215,000
Less: Variable Cost (234,975,000)
Contribution Margin 105,240,000
Less: Fixed Cost (91,200,000)
Budgeted profit before tax 14,040,000
Less: Tax @ 25% (3,510,000)
Budgeted profit after tax 10,530,000

A.5 Computation of net profit on the basis of optimum product mix:

Pentagon Hexagon Octagon

Selling price 2,300 1,550 2,000
Less: Variable Costs
Direct Material
(250 × 6 /0.9) 1,666.67
(250 × 4 /0.95) 1,052.63
(250 × 5 /0.92) 1,358.70
Direct Labour
[15,000 /200 × (20/60)] 25
[15,000 /200 × (30/60)] 37.5
[15,000 /200 × (45/60)] 56.25
Variable Overheads
[1666.66 × 20% - (Rs. 50 × 4 hrs)] 133.33
[1052.63 × 20% - (Rs. 50 × 2.5 hrs)] 85.53
[1358.70 × 20% - (Rs. 50 × 3 hrs)] 121.74
Total Variable Cost 1,825.00 1,175.66 1,536.69
Contribution per unit 475.00 374.34 463.31
Machine Hours required per unit 4.0 2.5 3.0
Contribution per Machine Hour 118.75 149.74 154.44
Ranking 3 2 1

Now, the scarce Hours will be allocated as per ranking.

Product Volume Hours required Hours used Balance unused

100,000
Octagon 9,000 3.0 27,000 73,000
Hexagon 20,000 2.5 50,000 23,000
Pentagon (Bal.) 5,750 4.0 23,000 -

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(i) Profit arising from above production plan

Product Units Contribution per unit Contribution margin
Octagon 9,000 463.31 4,169,790
Hexagon 20,000 374.34 7,486,800
Pentagon 5,750 475.00 2,731,250
Total Contribution 14,387,840
Less: Fixed costs (5,000,000)
Net Profit 9,387,840

A.6 Month-wise Cash Budget

Rs. in ‘000
Mar Apr May
Opening balance 100,000 109,204 104,828
Collections 83,800 68,800 59,400
Payments:
Purchases (47,250) (44,250) (48,000)
Selling expenses (13,200 ) (14,400) (15,600)
Administrative expenses (8,800) (9,600 ) (10,400 )
Packing machinery (3,000 ) (3,000) -
Tax withheld by 80% of customers @ 3.5% (2,346) (1,926 ) (1,663 )
(74,596 ) (73,176) (75,663)
Closing balance 109,204 104,828 88,565

Working notes:
W-1: Collections - Jan Sales 85,000
Feb Sales 95,000
Mar Apr May
Sales Gross 55,000 60,000 65,000
Collections:
Cash sales 11,000 12,000 13,000
1st month after sale 45,600 26,400 28,800
2nd month after sale 27,200 30,400 17,600
83,800 68,800 59,400

W-2 Purchases:
Sales Gross (June) 75,000

Feb Mar Apr May

Sales Gross 95,000 55,000 60,000 65,000
Cost of sales [75% of sales] A 71,250 41,250 45,000 48,750
Less: Opening stock [80% of cost of sale] B (57,000) (33,000) (36,000) (39,000)
Add: Closing stock [80% of next cost of
sales] C 33,000 36,000 39,000 45,000
Purchases (A+C–B) 47,250 44,250 48,000 54,750
Payment to creditors 47,250 44,250 48,000

A.7 (a) (i) Total cost of output:

Kg. Rupees
Direct material [25,000 x Rs. 25] 25,000 625,000
Direct Labour 432,000
Overheads [ 432,000 / Rs. 15 x Rs. 10] 288,000
1,345,000
Less: Sale of scrap [ 25,000 x 20% x Rs. 8] (5,000) (40,000)
Total cost of products 20,000 1,305,000
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(ii) Profit per kg of Alpha and Beta:

Rupees
Joint costs of products 1,305,000
Less: Sale of Zeta [20,000 x 10% x Rs. 52.5] (105,000)
1,200,000

NRV at Joint cost Total Profit

Product Kg. Output % Total NRV
split-off allocation profit per Kg.
Alpha 15,000 75% 95-30=65 975,000 780,000 195,000 13
Beta 3,000 15% 175 525,000 420,000 105,000 35
18,000 1,500,000 1,200,000

(b) Absorption costing: Rupees

Sales [100,000 x Rs. 180 ] 18,000,000
Less: Cost of sales:
Opening stock -
Add: Direct materials [ 0.8 x 120,000 x 60] 5,760,000
Direct labour [27/60 x 120,000 x 80] 4,320,000
Variable overheads [ 27/60 x 120,000 x 40] 2,160,000
Fixed overheads [ 2,100,000 / 105,000 x 120,000] 2,400,000
14,640,000
Less: Closing stock [14,640,000 / 120,000 x 20,000] (2,440,000)
Cost of sales (12,200,000)
Less: Over-absorbed overheads [ 2,100,000 / 105,000 x 15,000] (300,000)
Gross profit 6,100,000
Less: Selling expenses:
Variable [ 100,000 x 15] (1,500,000)
Fixed (800,000)
(2,300,000)
Net profit 3,800,000

A.8 Inventory control:

Inventory control can be defined as the system used in an organization to control its investment in
inventory/stocks. i.e. the overall objective of inventory control is to minimize, in total, the costs
associated with stock.

This includes; the recording and monitoring of stock levels, forecasting future demands and deciding
when and how many to order.

The method of stock valuation which should be used in times of fluctuating prices:
Weighted Average stock valuation method should be used in times of fluctuating prices because this
method is rational, systematic and not subject to manipulation. It is representative of the prices that
prevailed during the entire period rather than the price at any particular point in time. It is because of
this smoothening effect that this method should be used for stock valuation in times of fluctuating prices.

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The Institute of Chartered Accountants of Pakistan

Cost Accounting
Intermediate Examination 7 September 2012
Autumn 2012 100 marks - 3 hours
Module D Additional reading time - 15 minutes

Q.1 (a) Following data is available from the records of Cortex Limited (CL) for the year ended 30
June 2012:
Rupees
Profit as per cost accounts 150,000
Under-recovery of production overheads 11,500
Under-recovery of administrative overheads 18,000
Over-recovery of selling and distribution overheads 21,000
Overvaluation of opening stock in cost accounts 9,000
Overvaluation of closing stock in cost accounts 4,500
Loss on sale of fixed assets 1,000
Interest expenses 2,500
Preliminary expenses written off 12,000
Income tax 8,000
Notional rent on own building 5,000
Transfer to reserve fund 10,000
Dividend received 3,000
Interest earned on deposits 1,500
Share transfer fees 2,000
Discount on early payments to suppliers 4,000

Required:
Compute CL’s financial profit after tax for the year ended 30 June 2012. (10 marks)

(b) Bile Limited (BL) produces and markets a single product Plasma. The projected levels of
demand of Plasma at various prices are as under:

Demand Selling price Cost per unit

(Units) per unit (Rs.) (Rs.)
1,000 55 29
1,100 53 28
1,200 52 27
1,300 49 26

Required:
Using tabular approach, calculate the marginal revenues and marginal costs for Plasma at different
levels of demand. Also determine the price at which BL could earn maximum profits. (05 marks)

Q.2 Jadeed Limited (JL) operates a multiple piece rate plan at its factory as follows:

(i) Basic piece rate of Rs. 3 per piece is paid up to 80% efficiency;
(ii) 120% basic piece rate where efficiency is more than 80% but less than or equal to 100%;
(iii) 130% basic piece rate for above 100% efficiency.

The workers are eligible for a “Guaranteed Day Rate “which is equal to 70% efficiency.

Required:
Compute the labour cost per piece at 10% intervals between 60% and 130% efficiency, assuming
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Cost Accounting Page 2 of 4

Q.3 (a) Stem Limited (SL) is engaged in the manufacture and sale of two products Petal and Leaf.
Following information is available from SL’s records for the year ended 30 June 2012:

Petal Leaf
Direct material 250 kg. @ Rs. 80 per kg. 125 kg. @ Rs. 128 per kg.
Direct labour @ Rs. 25 per hour 720 hours 960 hours
Sales Rs. 65,000 Rs. 80,000
Profit margin 25% on cost 30% on sales price

Factory overheads are allocated to the products as a percentage of direct labour whereas
administrative overheads are allocated as a percentage of direct material cost.

Required:
Compute the amount of factory and administrative overheads using simultaneous equations.
(10 marks)

(b) What is Idle Time? Discuss the treatment of idle time in cost accounting. (05 marks)

Q.4 Mehanti Limited (ML) produces and markets a single product Wee. Two chemicals Bee and Gee
are used in the ratio of 60:40 for producing 1 litre of Wee. ML follows perpetual inventory system
and uses weighted average method for inventory valuation. The purchase and issue of Bee and Gee
for May 2012, are as follows:

Date Bee Gee

Receipt Issue Receipt Issue
Litre Rate Litre Litre Rate Litre
02-05-2012 - - 450 110 -
05-05-2012 - - 560 - - 650
09-05-2012 - - 300 - - 300
12-05-2012 420 52 - 700 115 -
18-05-2012 - - 250 - - 150
24-05-2012 500 55 - 250 124 -
31-05-2012 - - 500 - - 450

Following further information is also available:

(i) Opening inventory of Bee and Gee was 1,000 litres at the rate of Rs. 50 per litre and 500
litres at the rate of Rs. 115 per litre respectively.
(ii) The physical inventories of Bee and Gee were 535 litres and 140 litres respectively. The
stock check was conducted on 01 June and 31 May 2012 for Bee and Gee respectively.
(iii) Due to contamination, 95 litres of Bee and 105 litres of Gee were excluded from the stock
check. Their net realisable values were Rs 20 and Rs. 50 per litre respectively.
(iv) 250 litres of Bee which was received on 01 June 2012 and 95 litres of Gee which was issued
on 31 May 2012 after the physical count were included in the physical inventory.
(v) 150 litres of chemical Bee was held by ML on behalf of a customer, whereas 100 litres of
chemical Gee was held by one of the suppliers on ML’s behalf.
(vi) 100 litres of Bee and 200 litres of Gee were returned from the production process on 31 May
and 01 June 2012 respectively.
(vii) 240 litres of chemical Bee purchased on 12th May and 150 litres of chemical Gee purchased
on 24th May 2012 were inadvertently recorded as 420 litres and 250 litres respectively.

Required:
(a) Reconcile the physical inventory balances with the balances as per book.
(b) Determine the cost of closing inventory of chemical Bee and Gee. Also compute the cost of
contaminated materials as on 31 May 2012. (15 marks)

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Cost Accounting Page 3 of 4

Q.5 Artery Limited (AL) produces and markets three products viz. Alpha, Beta and Gamma. Following
information is available from AL’s records for the manufacture of each unit of these products:

Alpha Beta Gamma

Selling price (Rs.) 66 88 106
Material-A (Rs.4 per kg) (Rs.) 8 0 12
Material-B (Rs.6 per kg) (Rs.) 12 18 24
Direct labour (Rs. 10 per hour) (Rs.) 25 30 25
Variable overhead based on:
− Labour hours (Rs.) 1.5 1.8 1.5
− Machine hours (Rs.) 1.6 1.4 1.2
Total (Rs.) 3.1 3.2 2.7
Other data:
Machine hours 8 7 6
Maximum demand per month (units) 900 3,000 5,000

Additional information:

(i) AL is also engaged in the trading of a fourth product Zeta, which is very popular in the
market and generates a positive contribution. AL currently purchases 600 units per month of
Zeta from a supplier at a cost of Rs. 40 per unit. In-house manufacture of Zeta would
require: 2.5 kg of material-B, 1 hour of direct labour and 2 machine hours.
(ii) Materials A and B are purchased from a single supplier who has restricted the supply of
these materials to 22,000 kg and 34,000 kg per month respectively. This restriction is likely
to continue for the next 8 months.
(iii) AL has recently accepted a Government order for the supply of 200 units of Alpha, 300 units
of Beta and 400 units of Gamma each month for the next 8 months. These quantities are in
addition to the maximum demand stated above.
(iv) There is no beginning or ending inventory.

Required:
Determine whether AL should manufacture Zeta internally or continue to buy it from the supplier
during the next 8 months. (10 marks)

Q.6 Fowl Limited (FL) manufactures two joint products X and Y from a single production process.
Raw material Benz is added at the beginning of the process. Inspection is performed when the units
are 50% complete. Expected loss from rejection is estimated at 10% of the tested units. Following
details are available for the month of May 2012:

Units Material Conversion cost

(Rs.) (Rs.)
Opening work in process 15,000 90,000 25,000
Transferred to finished goods:
− Product- X 50,000
547,125 228,875
− Product- Y 25,000
Loss due to rejection 12,500 - -
Closing work in process 10,000 - -

Additional information:
(i) Opening and closing work in process are 75% complete.
(ii) The normal loss is sold as scrap at the rate of Rs. 1.50 per unit.
(iii) Production costs are allocated to joint products on the basis of weight of output.
(iv) The company uses weighted average method for inventory valuation.

Required:
Cost of production report for the month of May 2012. (15 marks)

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Cost Accounting Page 4 of 4

Q.7 Zodiac Limited (ZL) produces a single product and has a maximum production capacity of
300,000 units per annum. Following information pertains to ZL’s estimated cost of production:

(i) Direct material Rs. 12 per unit.

(ii) Direct labour Rs. 8 per unit. However, based on guaranteed wages, the minimum total cost
of labour is Rs. 150,000 per month.
(iii) Variable overheads Rs. 6 per unit.
(iv) Semi-variable overheads Rs. 450,000 per annum up to 55% capacity. An additional amount
of Rs. 180,000 per annum is estimated for every 20% increase in capacity or a part thereof.
(v) Fixed overheads Rs. 750,000 per annum.

During the first five-months of the year 2012, ZL utilized 70% of its production capacity. However,
it is expected to utilize 92% capacity during the remaining seven-months. The actual selling price
during the first five-months was Rs. 34 per unit.

Required:
Compute selling price per unit which should be charged by ZL for the remaining seven-months to
earn a total profit of Rs. 936,000 for the year 2012. (10 marks)

Q.8 Tychy Limited (TL) is engaged in the manufacture of Specialized motors. The company has been
asked to provide a quotation for building a motor for a large textile industrial unit in Punjab.
Following information has been obtained by TL’s technical manager in a one-hour meeting with
the potential customer. The manager is paid an annual salary equivalent to Rs. 2,500 per eight-hour
day.

(i) The motor would require 120 ft of wire-C which is regularly used by TL in production. TL
has 300 ft of wire-C in inventory at the cost of Rs. 65 per ft. The resale value of wire-C is Rs.
63 and its current replacement cost is Rs. 68 per ft.
(ii) 50 kg of another material viz. Wire-D and 30 other small components would also be
required by TL for the motor. Wire-D would be purchased from a supplier at Rs. 10 per kg.
The supplier sells a minimum quantity of 60 kg per order. However, the remaining quantity
of wire-D will be of no use to TL after the completion of the contract. The other small
components will be purchased from the market at Rs. 80 per component.
(iii) The manufacturing process would require 250 hours of skilled labour and 30 machine hours.
The skilled workers are paid a guaranteed wage of Rs. 20 per hour and the current spare
capacity available with TL for such class of workers is 100 direct labour hours. However,
additional labour hours may be obtained by either:
− Paying overtime at Rs. 23 per hour; or
− Hiring temporary workers at Rs. 21 per hour. These workers would require 5 hours
of supervision by AL’s existing supervisor who would be paid overtime of Rs. 20 per
hour.
The machine on which the motor would be manufactured was leased by TL last year at a
monthly rent of Rs. 5,000 and it has a spare capacity of 110 hours per month. The variable
running cost of the machine is Rs. 15 per hour.
(iv) Fixed overheads are absorbed at the rate of Rs. 25 per direct labour hour.

Required:
Compute the relevant cost of producing textile motor. Give brief reasons for the inclusion or
exclusion of any cost from your computation. (10 marks)

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Ans. 1 (a) Cortex Limited (CL)

Reconciliation statement:
Rupees
Profit as per cost accounts 150,000
Add:
Over-recovery of selling and distribution overheads 21,000
Overvaluation of opening stock in cost accounts 9,000
Income excluded from cost accounts:
Dividend received 3,000
Interest earned on deposits 1,500
Share transfer fees 2,000
Discount on early payments to suppliers 4,000
Notional rent on own building 5,000
195,500
Less:
Under-recovery of production overheads (11,500)
Under-recovery of administrative overheads (18,000)
Overvaluation of closing stock in cost accounts (4,500)
Expenses excluded from cost accounts:
Loss on sale of assets (1,000)
Interest expenses (2,500)
Preliminary expenses written off (12,000)
Income tax (8,000)
Transfer to reserve fund -
Profit as per financial accounts 138,000

(b) Selling
Total Marginal Cost per Marginal
Demand price per Total Cost
Revenue Revenue unit Cost
unit
Units --------------------------------------------Rupees--------------------------------------------
1,000 55 55,000 55,000 29 29,000 29,000
1,100 53 58,300 3,300 28 30,800 1,800
1,200 52 62,400 4,100 27 32,400 1,600
1,300 49 63,700 1,300 26 33,800 1,400

Marginal revenue is greater than Marginal cost at 1,200 units but declines at the
level of 1300 units, therefore profits will be maximised at the selling price of Rs. 52
per unit.

Ans.2 Output Piece Wage Guaranteed 20% 30% Total Labour

Efficiency
per day @ Rs. Time Additional Additional Labour cost per
%
(units) 3/piece wages/day piece wage piece wage cost piece

Rs. Rs. Rs. Rs. Rs. Rs.

60 48 144 168 - - 168.00 3.50
70 56 168 168 - - 168.00 3.00
80 64 192 - - - 192.00 3.00
90 72 216 - 43.20 - 259.20 3.60
100 80 240 - 48.00 - 288.00 3.60
110 88 264 - - 79.20 343.20 3.90
120 96 288 - - 86.40 374.40 3.90
130 104 312 - - 93.60 405.60 3.90

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Notes:
(i) As guaranteed time wage is equal to 70% efficiency, the time wages of Rs. 168 per
day is payable for efficiency up to 70%.
(ii) Normal piece wages are payable at 80% efficiency level.
(iii) For efficiency levels from 90% to 100%, 20% of the piece wages have been added.
(iv) For efficiency levels above 100%, 30% of the piece wages have been added.

Ans.3 (a) Assuming the percentage of factory overheads on direct labour is ‘x’ and the
percentage of administrative overheads on material cost ‘y’, then the total cost of the
two products Petal and Leaf will be as follows:
Petal Leaf
(Rs.) (Rs.)
Direct Materials 20,000 16,000
Direct labour 18,000 24,000
Prime Cost 38,000 40,000
Factory overhead (Direct labour × x) 18,000 x 24,000 x
Administrative overheads (Material cost × y) 20,000 y 16,000 y
Total Cost 38,000 + 18000x + 20000y 40,000 + 24000x + 16000y

Total cost on the basis of sales is:

Petal Leaf
(Rs.) (Rs.)
Sales 65,000 80,000
Less : Profit
Petal – 25% on cost or 20% on sales (13,000)
Leaf – 30% on sales (24,000)
Total Cost 52,000 56,000

Thus,
Total Cost of Petal is 38,000 + 18000x + 20000y = 52,000
or 18000x + 20000y = 14,000 …………………(i)

Total Cost of Leaf is 40,000 + 24000x +16000y = 56,000

or 24000x + 16000y = 16,000 …………………(ii)

Equation (ii) multiplied by 0.75 and after deducting from equation (i), we get

18000x + 20000y = 14,000

18000x ± 12000y = 12,000
−
8000y = 2,000
or y = 0.25 or 25%

Putting value of y in equation (i), we get

18000x + 20000 × 0.25 = 14,000
or 18000x = 14,000 − 5,000
or 18000x = 9,000
or x =0.5 or 50%
As the percentage of :
Factory overheads on direct labour = 50 % and
The percentage of administrative overheads on manufacturing cost = 25%

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Therefore the amount of factory and administrative overheads would be:

Petal Leaf
Rupees
Factory overheads (Rs. 18,000 x 50%) & (Rs. 24,000 x 50%) 9,000 12,000
Administrative overheads (Rs. 20,000 x 25%) & (Rs. 16,000 x 25%) 5,000 4,000

(b) Idle Time:

It is a time during which no production is carried out because the worker remains
idle even though they are paid. Idle time can be normal idle time or abnormal idle
time. Normal idle time is inherent in any work situation and cannot be eliminated
whereas abnormal idle time arises due to abnormal factors like lack of coordination,
power failure, machine breakdowns, non-availability of raw materials, strikes and
lockouts, etc.

Treatment of idle time

Normal idle time is treated as a part of the cost of production. In the case of direct
workers, an allowance for normal idle time is built into the labour cost rate. In the
case of Indirect workers, normal idle time is spread over all the products or jobs
through the process of absorption of factory overheads.
Abnormal idle time cost is not included as a part of production cost and is shown as
a separate item in the costing profit and loss account.

Ans. 4
Chemical Bee: Litres
Stock as per records [ 1,000 + 420 + 500 – 560 – 300 – 250 – 500] 310
Add:
- 150 litres held on behalf of customer 150
- Inventory received after cut-off date taken in count 250
- Return from production process not recorded 100
Less:
- Adjustment for contaminated stock (95)
- Adjustment for incorrect recording (180)
Physical balance 535

Chemical Gee:
Stock as per records [ 500 + 450 + 700 + 250 – 650 – 300 – 150 – 450] 350
Add:
- Inventory issued after stock count 95
- No adjustment for stock returned after month end 0
Less:
- 100 litres were held by supplier on ML's behalf. (100)
- Adjustment for contaminated stock (105)
- Adjustment for incorrect recording (100)
Physical balance 140

Cost of chemical Bee:

Stock as per records 310
- Return from production process not recorded 100
- Adjustment for contaminated / damaged stock (95)
- Adjustment for incorrect recording (180)
Actual quantity present in stock 135
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Rate (W-1) 54.23

Cost of closing stock as at 31 May 2012 Rs. 7,321
W-1: Working for rate of closing stock of chemical Bee:
Litres Rate Amount
Balance as of 09-05-2012 [1000 – 560 – 300] 140 50.00 7,000
Add: Actual purchases on 12-05-2012 240 52.00 12,480
380 51.26 19,480
Less: Issuance on 18-05-2012 (250) 51.26 (12,816)
130 51.26 6,664
Add: Actual purchases on 24-05-2012 500 55.00 27,500
630 54.23 34,164

Cost of chemical Gee:

Stock as per records 350
- Adjustment for contaminated / damaged stock (105)
- Adjustment for incorrect recording (100)
- Actual quantity present in stock 145
Rate (W-2) 116.93
16,955

W-2: Working for rate of closing stock of chemical Gee:

Litres Rate Amount
Balance as of 1-5-2012 500 115 57,500
Add: purchases on 2-5-2012 450 110 49,500
950 112.63 107000
Less: Issued on 5-5-12 and 9-5-12 (650+300) 950 112.63 107000
0 0 0
Add: purchases on 12-5-2012 700 115.00 80,500
Less: Issuance on 18-05-2012 (150) 115.00 (17,250)
550 115.00 63,250
Add: Actual purchases on 24-05-2012 150 124.00 18,600
700 116.93 81,850

Contaminated chemical Bee 95 20 1,900

Contaminated chemical Gee 105 50 5,250

Ans.5 The internal manufacturing cost of Zeta would be as follows:

Rs. per unit

Direct material-B (2.5 kg @ Rs. 6/kg) 15.0
Direct labour (1 hours @ Rs. 10/hour) 10.0
Variable overhead W-1
Direct labour (1 hour @ Rs. 0.60/hour) 0.6
Machine hours (2 hours @ Rs. 0.20/hour) 0.4
Total 26.0

The buying price of the component is Rs. 40 per unit so if resources are readily available
the company should manufacture the component. However, due to the scarcity of
resources during the next 8 months the contribution earned from the component needs to
be compared with the contribution that can be earned from the other products.

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W-1:
Using Alpha (though any product could be used) the variable overhead rate per hour can
be calculated:

Labour related variable overheads per unit = Rs 1.5

Direct labour hours per unit = Rs 25 / Rs 10 = 2.5 hours
Labour related variable overhead per hours = Rs. 1.5 / 2.5 hour = Rs 0.60 per hour

Machine related variable overhead per hour = Rs. 1.6 / 8 hour = Rs 0.2 per hour

Both material-A and material-B are limited in supply during the next 8 months, but
calculations are required to determine whether this scarcity affects the production plans of
AL. The resources required for the maximum demand must be compared with the
resources available to determine whether either of the materials is a binding constraint.

Total quantity of each product to be manufactured:

Government order Market demand Total
------------------------------Units------------------------------
Alpha 200 900 1,100
Beta 300 3,000 3,300
Gamma 400 5,000 5,400
Zeta 0 600 600

All figures in kg:

Resource Available Requirement Alpha Beta Gamma Zeta

Direct material-A 22,000 18,400 2,200 0 16,200 0
Direct material-B 34,000 35,200 2,200 9,900 21,600 1,500

It can be seen from the above that the scarcity of material-B is a binding constraint and
therefore the contributions of each product and the component per kg of material-B must
be compared.

Alpha Beta Gamma Zeta

Rupees
Contribution 17.9 36.8 42.3 14.0
Contribution /kg of material-B 8.95 12.27 10.58 5.60

Rank 3 1 2 4

AL should manufacture 120 units of Zeta and continue to purchase 480 units from the
market.

Ans.6 Fowl Limited (FL)

Cost of Production Report
For the month ended 31 May 2012

Quantities
Units to be accounted for:
Opening Work in process 15,000
Input units during the month (W-1) 82,500
97,500

Units accounted for:

Completed and transferred to finished goods 75,000
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Loss due to rejection 12,500

Closing Work in process 10,000
97,500

W-1: Calculation of input units:

Units produced - X 50,000
Units produced - Y 25,000
Wastage 12,500
Closing W.I.P 10,000
97,500
Less: Opening W.I.P (15,000 )
Input units during the month 82,500

Normal loss units [as the opening units are already tested therefore
normal loss is on input units only] [82,500 × 10%] 8,250
Abnormal loss units [12,500 − 8,250] 4,250

Equivalent Units of Production: (Weighted Average) Material Conversion

Transferred to finished goods:
Product - X 50,000 50,000
Product - Y 25,000 25,000
Abnormal loss 4,250 2,125
Closing inventory 10,000 7,500
A 89,250 84,625

Cost incurred: Rs. Rs.

Opening W.I.P 90,000 25,000
During the month (Product X and Y) 547,125 228,875
Less: Sale of normal loss (8,250 × Rs. 1.5) (12,375) -
B 624,750 253,875
Total cost to be accounted for (624,750 + 253,875) 878,625
Rate per unit of equivalent product B÷A 7.00 3.00
Total per unit cost Rs. (7 + 3) 10

Cost accounted for: Rs.

Transferred out (75,000 × Rs. 10) 750,000
Abnormal loss:
- Material (4,250 × Rs. 7) 29,750
- Conversion cost (2,125 × Rs. 3) 6,375
36,125
Closing work in process
- Material (10,000 × Rs. 7) 70,000
- Conversion cost (10,000 × 75% × Rs. 3) 22,500
92,500
Total cost accounted for 878,625

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Ans.7 Zodiac Limited (ZL)

Statement of cost and sales for the year 2012

Maximum production capacity = 300,000 units per annum

Particulars 5 months 7 months

Capacity utilized 70% 92%
300,000 × 5 × 70% 300,000 × 7 × 92%
Production 12 12
=87,500 units =161,000 units

Rs. Rs.
Sales @ Rs. 34 per unit 2,975,000
Direct materials @ Rs. 12 per unit (1,050,000) (1,932,000)
Direct wages @ 8 per unit or Rs. 150,000 per
month whichever is higher (750,000) (1,288,000)

Overheads
Fixed (5:7) (312,500) (437,500)
Variable @ Rs. 6 per unit (525,000) (966,000)
Semi variable (W-1) (262,500) (472,500)
Total Cost (2,900,000) (5,096,000)
Profit during first 5 months 75,000
Desired profit during next 7 months
(Rs. 936,000 – Rs. 75,000) 861,000
Sales required for next 7 months 5,957,000

Total sales required for last 7 months

Required selling price per unit for last 7 months =
Units produced during last 7 months

W-1: Semi-variable overheads

(a) For first 5 months at 70% capacity = Rs. (450,000 + Rs. 180,000) × 5/12
= Rs. 262,500
(b) For remaining 7 months at 92% capacity = Rs. (450,000 + Rs. 360,000) × 7/12
= Rs. 472,500

Ans.8 Tychy Limited (TL)

Note Rs.
Technical manager – meeting 1 NIL
Wire – C 2 8,160
Wire – D 3 600
Components 4 2,400
Direct labour 5 3,250
Machine running cost 6 450
Fixed overhead 7 NIL
Total relevant cost 14,860

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Notes:
1. In case of technical manager’s meeting with the potential client, the relevant cost
is NIL because it is not only a past cost but also the manager is paid an annual
salary and therefore TL has incurred no incremental cost on it.
2. Since wire-C is regularly used by TL, its relevant value is its replacement cost. The
historical cost is not relevant because it is a past cost and the resale value is not
relevant since TL is not going to sell it.
3. Since wire-D is to be purchased for the contract therefore its purchase cost is
relevant. TL only requires 50 kg of wire-D but due to the requirement of minimum
order quantity TL will be purchasing 60 kg of the material and since TL has no
other use for this material, the full cost of purchasing the 60 kg is the relevant cost.
4. Since the components are to be purchased from the market at a cost of Rs. 80
each. Therefore, the entire purchase price is a relevant cost.
5. The 100 hours of direct labour are presently idle and hence have zero relevant
cost. The remaining 150 hours are relevant. TL has two choices: either use its
existing employees and pay them overtime at Rs. 23 per hour which is a total cost
of Rs. 3,450: or engage the temporary workers which would cost TL Rs. 3,250
including supervision cost of Rs. 100. The relevant cost is the cheaper of the two
alternatives i.e. Rs. 3250.
6. The lease cost of machine will be incurred regardless of whether it is used for the
manufacture of motors or remains idle. Hence, only the incremental running cost
of Rs. 15 per hour is relevant.
7. Fixed overhead costs are incurred whether the work goes ahead or not so it is not
a relevant cost.

(THE END)

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The Institute of Chartered Accountants of Pakistan

Cost Accounting
Intermediate Examination 8 March 2013
Spring 2013 100 marks - 3 hours
Module D Additional reading time - 15 minutes

Q.1 (a) What do you understand by the terms “Scrap”, “Defectives” and ‘Spoilage”? Briefly
describe the accounting treatment of scrap and defective units. (10)

(b) Replica Limited (RL) produces and markets a single product. The product requires a
specialised component P which RL procures from a supplier using economic order
quantity. Following information is available from RL’s records for component P:

Price of component P Rs. 150 per unit

Cost of placing an order Rs. 50
Carrying cost per unit per annum 10% of purchase price
Total of holding and ordering costs Rs. 3,000 per annum
Normal lead time 12 days
Safety stock Nil

Assume 300 working days in a year.

Required:
(i) Calculate the economic order quantity (EOQ) and re-order level of component P.
(ii) What would be your advice to the company, if the supplier offers a 2% price
discount on purchases in lots of 3,000 components? (10)

Q.2 Hulk Limited (HL) produces and markets a single product. The company uses standard
costing system. Following is the standard cost card per unit of the finished product:

Direct material 2.8 kg at Rs. 6.75 per kg

Direct labour Rs. 150 per hour
Variable production overheads Rs. 12 per direct labour hour
Fixed production overheads Rs. 18 per direct labour hour

The standard labour hours required for producing one unit of finished product is 30 minutes
whereas HL’s standard operating capacity per month is 15,000 hours.

Actual results for the month of February 2013 were as under:

Direct material @ Rs. 6.25 per kg Rs. 504,000

Direct labour Rs. 160 per hour
Variable production overheads Rs. 175,000
Fixed production overheads Rs. 17 per direct labour hour

Actual labour hours consumed by HL for producing 27,000 units was 33 minutes per unit of
finished product.

Required:
(a) Compute material, labour and overhead variances. Use four variance method. (14)
(b) List any four causes of unfavourable material price variance. (02)

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Q.3 Z Limited (ZL) manufactures various products. Following information relating to product-A
has been extracted from ZL’s business plan for the year ending 30 June 2014:

Direct material per unit 12 kg at Rs. 2 per kg

Average labour rate per worker Rs. 56 per day
Average working hours in a day 8 hours
Average labour efficiency 65%
Standard time required for each unit of product-A 2.6 hours
Variable overheads Rs. 10 per labour hour
Fixed overheads 2% of direct material cost
Annual production 25,000 units

In order to improve the production efficiency and reduce cost of conversion, the
management has sought suggestions from the workers. It has announced a reward equal to
three months savings in labour cost to the worker, whose suggestion would be accepted.

In response to management’s offer, one of the workers has suggested to use electric cutter in
the manufacturing process. The proposal is expected to reduce standard time for making
each unit of product-A by 20%. It would also improve labour efficiency from 65% to 80%.
The cutter can be purchased at a cost of Rs. 15,000 and is estimated to have an effective life
of one year.

Required:
Assuming there is no beginning or ending inventory of product-A:
(a) Calculate the amount of reward payable to the worker as announced by ZL. (06)
(b) Prepare a statement showing annual cost of production and net savings (if any) in total
cost of production of product-A. (05)

Q.4 Neutron Limited (NL) is engaged in the business of manufacture and supply of plastic toys.
The company uses 5 identical injection moulding machines in its machining department
which were acquired at a cost of Rs. 1,000,000. These machines have a useful life of 10 years
and are manned by three dedicated operators. Following information has been extracted
from NL’s records for a period of six months:

Normal time available per month per operator 220 hours

Absenteeism without pay per month per operator 20 hours
Leave with pay per month per operator 25 hours
Average idle time per month per operator 15 hours
Average labour rate per hour per operator Rs. 35
Average estimated rate of production bonus 15% of labour cost
Fuel and power Rs. 118,000
Indirect labour Rs. 115,000
Lighting and electricity Rs. 95,000

Other expenses related to the department are as follows:

Repair and maintenance per annum 6% of machine cost

Insurance Rs. 140,000 per annum
Sundry expenses Rs. 131,800 per annum
Allocated administrative overheads Rs. 120,000 per annum

Required:
Calculate a machine hour rate (inclusive of operators’ wages) for the machining department. (10)

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Q.5 Colon Limited (CL) manufactures two joint products Pollen and Stigma in the ratio of
65:35. The company has two production departments A and B. Pollen can either be sold at
split off point or can further be processed at department-B and sold as a new product Seeds.
Stigma is sold without further processing. Following information relating to the three
products is available from CL’s records:

Pollen Stigma Seeds

---------------Rupees---------------
Sales price per kg 90 300 125
Total selling expenses 135,000 306,000 180,000

Following further information relating to the two departments is available:

Department A Department B
Material X 75,000 kg at Rs. 60 per kg -
Material Y - 12,000 kg at Rs. 25 per kg
Labour @ Rs. 150 per hour 12,000 hours 3,600 hours
Variable overheads Rs. 125 per labour hour Rs. 65 per labour hour
Fixed overheads Rs. 100 per labour hour Rs. 50 per labour hour
Material input output ratio 100:88 100:96

Material is added at the beginning of the process. Joint costs are allocated on the basis of net
realisable value at split off point.

Required:
(a) Calculate the joint costs and apportion them to the two products. (10)
(b) Advise CL whether it should produce Seeds or sell Pollen without further processing. (06)

Q.6 Altar Limited (AL) produces and markets a single product. Following information is
available from AL’s records for the month of February 2013:

Sales price Rs. 26 per unit

Direct material (2 kg at Rs. 5 per kg) Rs. 10 per unit
Direct labour Rs. 2 per unit
Variable overheads Rs. 4 per unit
Fixed overheads Rs. 3.50 per unit
Selling expenses Rs. 295,000
Administration expenses Rs. 101,400
Production (Good units) 175,000 units
Closing inventory 30,000 units

Additional information:
(i) Inspection is performed at the end of production and defective units are estimated at
20% of the inspected units. The defective units are sold as scrap at Rs. 5 per unit.
(ii) Fixed overheads per unit are calculated on the basis of good units produced.
(iii) As compared to last month, selling expenses in February 2013 have decreased by
Rs. 42,000.
(iv) In January 2013, AL produced and sold 180,000 units.

Required:
Assuming there was no inventory at the beginning of February 2013, calculate break-even
sales in quantity for the month of February 2013. (12)

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Q.7 Qamber Limited (QL) is engaged in the manufacture and sale of textile products. In
February 2013 QL received an order from JCP, a chain of stores, for the supply of 11,000
packed boxes of its products per month at an agreed price of Rs. 8,000 per box. The boxes
would be supplied every month for a period of one year. It was further agreed that:

Each box would contain a pillow cover, a bed sheet and a quilt cover.

QL would be solely responsible for the quality of supplied products whether they are
being manufactured at its own facility or outsourced to third party, either wholly or
partially.

JCP would provide its logo and printed materials for the packing of these boxes.

Following information is available for the manufacture of each unit of these products:

Products
Pillow Bed Quilt
Cover Sheet Cover
Cloth required (Meters) 1 4 5
Cost of cloth per meter (Rs.) 200 300 400
Direct labour per meter (Minutes) 30 15 18
Machine time (Minutes) 30 75 120
Variable overheads per machine minute (Rs.) 5 4 3.75
Outsourcing cost (Rs.) 750 2,000 3,500

For in-house completion of the above order, a total of 45,000 machine hours and 25,500
labour hours are estimated to be available each month. The labourers are paid at a uniform
rate of Rs. 400 per hour. The cost incurred on quality check, before supply of the boxes to
JCP, is estimated at Rs. 300 per box. Fixed overheads are estimated at Rs. 10,000,000 per
month.

Required:
Calculate net profit for the month, assuming QL wants to produce as many products as
possible within the available resources, and outsource the rest to a third party. (15)

(THE END)

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Ans.1 (a) Scrap:

Scrap is the discarded material in the production process/ Incidential residue that
may be obtained from manufacture. Scrap cannot be put back into production for
the same purpose as before but may be usable for a different purpose or production
process, or sold to outsiders for a nominal amount.

Defectives:
 Units that do not meet production standards and must be processed further in
order to be saleable along with good units, or sold as irregulars.
 Defectives can be classified as normal defective and abnormal defective.

Spoilage:
 Spoiled Units in manufacturing process cannot normally be made into
standard finished units without incurring uneconomical cost. They do not
meet production standards and are either sold for their salvage value or
discarded. Spoiled units are taken out of the production process and no further
work is performed on them.
 Spoilage can either be normal or abnormal.

Accounting treatment for scrap:

 No entry is normally made on the books when scrap is returned to the
materials inventory.

 Allocated (applied) to specific job:

When scrap is relatively significant and is identifiable with the process or job,
the cost of scrap will be transferred to scrap account and any realisation from
sale of such scrap will be credited to the job or process account and any
unrecovered balance in the scrap account will be transferred to profit and loss
account.

 Allocated (applied) to all jobs:

When scrap cannot be linked to a particular product / job / process, the value
of scrap (i.e. net scrap value after deducting any sale related expenses) should
be deducted from the overheads or from the materials cost.

Accounting treatment for defective units:

The accounting treatment of defectives is as follows:

Normal defective:
 Cost of rectification of normal defect is charged to good units.
 If defect can be identified with specific job, rework cost should be charged to
work in process inventory for the specific job.
 If defect cannot be identified with specific job / process, rework cost of
normal defect should be charged to production overheads.

Abnormal defective:
 Cost of rectification of abnormal defective units should be transferred to
income statement as a period cost.

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(b) (i) Computation of EOQ

Where EOQ = Economic Order Quantity

A = Annual demand
OC = Ordering cost per order
CC = Carrying cost per unit per annum

Annual usage of component P is computed as follows:

√
√
√

√ √

Computation of re-order level:

Where,

(ii) Advise as to the acceptance of offer: (Lot size is 3,000 units)

Rupees
Ordering cost [(6,000 ÷ 3,000) × Rs. 50] 100
Carrying cost [3,000 units ÷ 2 × Rs. 14.7] 22,050
Total cost 22,150
Less: Present cost of ordering and holding inventory (3,000)
Extra cost 19,150
Purchase discount [6,000 units × Rs. 150 × 2%] 18,000
Additional cost if purchase discount is accepted 1,150

Advise: Hence, purchase discount offer cannot be accepted

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Ans.2 (a) Material Variances (Actual Production: 27,000 units)

Standard Qty of raw material per unit of finished goods 2.8 kg

Standard price of raw material per kg Rs. 6.75
Actual price of raw material per kg Rs. 6.25
Standard Qty of raw material at actual production [27,000 × 2.8] 75,600kg
Actual Qty of raw material used [ 504,000 ÷ Rs. 6.25] 80,640kg
Direct material usage variance [SP (AQ-SQ)] [6.75 (80,640 – 75,600] Adv. Rs. (34,020)
Direct material price variance [AQ (SP-AP)] [80,640 (6.75-6.25)] Fav. Rs. 40,320

Labour Variances
Standard time allowed per unit of finished goods 30 minutes
Standard direct labour rate per hour Rs. 150
Actual rate per hour Rs. 160
Standard hours allowed for actual production [27,000 × 30/60] 13,500 hours
Actual hours worked for actual production [ 27,000 × 33/60] 14,850 hours
Direct labour efficiency variance [ SR (SH-AH] [150 (13,500 – 14,850)] Adv. Rs. (202,500)
Direct labour rate variance [ AH (AR-SR] [14,850 (160-150)] Adv. Rs. (148,500 )

Variable overhead variances Rupees

Actual variable overheads (i) 175,000
Variable overheads based on actual hours at std. rate [14,850 × Rs. 12] (ii) 178,200
Variable overheads based on std. hours at std. rate [13,500 × Rs. 12] (iii) 162,000
Variable OH efficiency variance [VOH at AH – VOH at SH] [(ii) – (iii)] Adv. (16,200)

Fixed overhead variances

Actual fixed overheads [AH × AR] [14,850 × Rs. 17] (iv) 252,450
Fixed overheads based on actual hours at std. rate [14,850 × Rs. 18] (v) 267,300
Fixed overheads based on std. hours at AP at std. rate [13,500 × Rs. 18] (vi) 243,000
Budgeted fixed overheads [ Std. capacity x std. rate] [15,000 × 18] (vii) 270,000
Fixed overheads efficiency variance [FOH at AH – FOH at SH] [ (v) – (vi)] Adv. (24,300)
Factory overhead spending variance:
Actual fixed and variable overheads [ (i) + (iv)] [ 175,000 + 252,450] 427,450
Less: Budgeted overheads:
Variable overheads based on actual hours at std. rate [14,850 × Rs. 12] (178,200)
Budgeted fixed overheads [ Std. capacity x std. rate] [15,000 × 18] (270,000)
(448,200)
Fav. 20,750
Idle capacity variance / Production volume variance [(vi) – (vii)] Adv. (27,000)

(b) Unfavorable price variance may be caused by:

 inaccurate standard prices

 inflationary cost increases
 scarcity in raw material supplies resulting in higher prices
 Purchasing department inefficiencies.
 Purchase of better quality products

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Ans.3 (a) Computation of Amount of reward Payable to the worker:

Standard time = 2.6 hrs.

Labour efficiency = 65%
Direct labour hours required =2.6 hrs. × 100/65 = 4 hrs.
For 25,000 units time required = 25,000 × 4 hrs. = 100,000 hrs.
Labour cost @ Rs. 7 per hour [56/8] = Rs. 700,000
Standard time after use of cutter = 2.6 hrs. – 0.52 hrs. = 2.08 hrs.
labour hours required per unit at
improved efficiency = 2.08 hrs. × 100/80 = 2.6 hrs.
Total labour hours required = 25,000 × 2.6 hrs. = 65,000 hrs.
Annual saving in time = 100,000 – 65,000 = 35,000 hrs.
Cost of annual saving in time = 35,000 hours × Rs.7 = Rs. 245,000
reward equal to 3 months saving in labour cost [245,000/12 × 3] = Rs. 61,250

(b) Annual Cost of Production and Savings to the ZL:

Before After
Particulars Suggestion Suggestion
(100,000 hrs.) (65,000 hrs.)
Direct materials (25,000 × 12 × 2) 600,000 600,000
Direct labour (@ Rs. 7 per hour) 700,000 455,000
Variable overheads (@ Rs. 10 per hour) 1,000,000 650,000
Fixed overheads (@ 2% of direct material cost) 12,000 12,000
Cost of cutter - 15,000
Total cost 2,312,000 1,732,000

(Rs.)
Gross savings in cost [2,312,000 – 1,732,000] 580,000
Less: reward payable to worker (61,250)
Net savings in cost 518,750

Ans.4 Computation of Machine Hour Rate Rupees

Operator’s wages (W-1) 126,000
Production bonus (15% of labour cost) 18,900
Fuel and power consumed 118,000
Indirect labour 115,000
Lighting and electricity consumed 95,000
Repair and maintenance [ 6% of machine cost of Rs. 1,000,000/2] 30,000
Insurance [Rs. 140,000 / 2] 70,000
Depreciation [Rs. 1,000,000 / 10 / 2] 50,000
Sundry expenses [Rs. 131,800 / 2] 65,900
Allocated administrative overheads [Rs. 120,000 / 2] 60,000
Total overheads of machining department 748,800

Rs. 260 per machine hour

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Working: W-1
Total utilizable hours p.m. [160 hrs. × 3 operators × 6 months] (W 1.1) 2,880hours
Hours per month for which wages are paid to an operator [220 hrs. – 20 hrs.] 200 hours
Total wages paid to operators [200 hrs. × 3 operators × 6 months × Rs. 35] Rs. 126,000
W 1.1 Hours
Normal hours available per month per operator 220
Less: Absenteeism (20)
Leave hours (25)
Idle time (15)
Utilizable hours per operator per month 160

Ans.5 (a) Calculation of Joint costs:

Dept. A
Rupees in
‘000
Material X [75,000 × Rs. 60] 4,500
Labour [12,000 × Rs. 150] 1,800
Variable overheads [12,000 × Rs. 125] 1,500
Fixed overheads [12,000 × Rs. 100] 1,200
Total cost 9,000

Apportionment of joint costs:

Input of material X in dept. A 75,000 kg
Yield (88% of input material X) 66,000 kg
Ratio of output for Pollen and Stigma 65:35
Quantity of Pollen produced at split off point (66,000 × 65/100) 42,900 kg
Quantity of Stigma produced at split off point (66,000 × 35/100) 23,100 kg

Statement showing apportionment of joint costs: Pollen Stigma

Rupees in ‘000
Sales [42,900 × 90] and [23,100 × 300] 3,861 6,930
Less: Selling expenses (135) (306)
Net realisable value 3,726 6,624
Ratio 36% 64%

Allocation of joint costs [9,000 × 36%] and [ 9,000 × 64%] 3,240 5,760

(b) Advise to CL whether it should produce Seeds or sell Pollen without further processing:

Computation of output of Seeds:

Transfer of Pollen to dept. B for further processing 42,900 kg
Input of material Y in dept. B 12,000 kg
Total material in dept. B 54,900 kg
Yield (96% of input material) [54,900 × 96%] 52,704 kg
Statement showing profit earned from Seeds: Seeds
Rs. in ‘000
Sales [52,704 × 125] 6,588
Less: Expenses
 Joint costs (3,240)
 Cost incurred in dept. B (W-1) (1,254)
 Selling expenses (180)
Profit from Seeds 1,914
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If Pollen is sold without further processing, then the profitability would be as under:
Net realisable value at split off point [(42,900 × 90) – 135,000 ] 3,726
Less: Joint costs (3,240)
Profit from Pollen 486
Advise: The company’s profit has increased by Rs. 1,428,000 (i.e. Rs. 1,914,000 – Rs.
486,000) on further processing of Pollen into Seeds. Therefore, it is advisable to CL to
further process Pollen into Seeds.

W-1: Cost incurred in Department B

Dept. B
Rupees in
‘000
Material Y [12,000 × Rs. 25] 300
Labour [3,600 × Rs. 150] 540
Variable overheads [3,600 × Rs. 65] 234
Fixed overheads [3,600 × Rs. 50] 180
Total cost 1,254

Ans.6 Break even sales in quantity for the month of February 2013:
Units produced [175,000 ÷ 0.80] 218,750
Less: Defective units [218,750 – 175,000] OR [ 218,750 × 20%] (43,750)
Good units produced 175,000
Less: closing inventory (30,000)
Number of units sold 145,000

Per Unit* Rupees*

Variable Costs:
Direct material (218,750 × 5 × 2) 10.00 2,187,500
Direct labour (218,750 × 2) 2.00 437,500
Variable overheads (218,750 × 4) 4.00 875,000
Less: Defective units sold (43,750 × 5) 5 × 20% (1.00) (218,750)
Total variable cost of production 15.00 3,281,250

Variable cost per good unit (3,281,250 ÷ 175,000) 15 ÷ 0.8 18.75

Calculation of variable selling expenses per unit [using high-low method]:

= ( ) 1.20
Fixed costs
- Fixed overheads (175,000 × 3.5) 612,500
- Selling expenses 295,000 – (145,000 × 1.2) 121,000
- Administration expenses 101,400
Total fixed costs 834,900

Contribution margin per unit (26 – 18.75 – 1.2) 6.05

Break even quantity (834,900 ÷ 6.05) 138,000

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Ans.7 Calculation of net profit for the month:

Computation of limiting factor:
Estimated labour hours available each month 25,500
Divided by : labour hours required per box [(30 × 1)+(15 × 4)+(18×5)] ÷ 60 3
No. of boxes that can be produced within available labour hours 8,500

Estimated machine hours available each month 45,000

Divided by : machine hours required per box [(30 + 75 + 120)] ÷ 60 3.75
No. of boxes that can be produced within available machine hours 12,000
Therefore, limiting factor is labour hours.

Products
Pillow Bed Quilt
Cover Sheet Cover
Direct material [1×200],[4×300],[5×400] 200 1,200 2,000
Direct labor
[400×30÷60×1],[400×15÷60×4],[400×18÷60×5] 200 400 600
Variable overhead [5×30],[4×75],[3.75×120] 150 300 450
Variable cost per product 550 1,900 3,050
Less: Outsourcing cost per product (750) (2,000) (3,500)
Cost saving from in-house production 200 100 450
Direct labour hours per unit 0.50 1.00 1.50
Cost saving per labour hour 400 100 300
Ranking 1 3 2

Scarce hours allocated as per ranking:

Labour Available
Quantity
hours used hours
25,500
First Produce – Pillow cover 11,000 5,500 20,000
Then Produce – Quilt cover 11,000 16,500 3,500
Finally produce – Bed sheet 3,500 3,500 -
No. of Bed sheets to be outsourced 7,500

Statement showing net profit for the month:

Products
Pillow Bed Quilt
Cover Sheet Cover Rs. in ‘000
---------------------Rupees--------------------
Sales [11,000 × Rs. 8,000] 88,000
Less: Expenses:
Units produced 11,000 3,500 11,000
Variable manufacturing cost per
product 550 1,900 3,050
6,050,000 6,650,000 33,550,000 (46,250)

Units outsourced 7,500

Outsourcing cost per bed sheet 2,000
15,000,000 (15,000)
Cost on quality check [11,000×Rs.
300] (3,300)
Total variable costs (64,550)
Total contribution 23,450
Less: Fixed cost (10,000)
Net profit for the month 13,450

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Cost Accounting
Intermediate Examination 6 September 2013
Autumn 2013 100 marks - 3 hours
Module D Additional reading time - 15 minutes

Q.1 (a) Rahat Limited (RL) produces and markets a single product Beta. Following are the
details of RL’s monthly production and related costs for the past six months:
March April May June July August
Units 1,115 2,185 1,265 1,610 2,645 1,380
Costs (Rs. ‘000) 1,775 2,300 1,660 1,840 2,875 2,300
Required:
Using least square method, calculate the estimated cost to produce 1,800 units of Beta. (09)
(b) What do you understand by ‘Period cost’? Briefly describe ‘Product cost’ in relation to
both manufacturing and merchandising firms. (06)
(c) Gama Industries (GI) has secured an order for production of a new product Alpha
which would require 600 hours of direct labour. The spare capacity available with GI
is 450 direct labour hours. The additional labour hours may be obtained by either:

paying overtime at time and a half; or

diverting labour from the production of product Zeta which earns a contribution
margin of Rs. 24 in three labour hours.

Required:
Calculate the relevant cost of labour for the production of Alpha, assuming labourers
are paid at a uniform rate of Rs. 20 per hour. (04)

Q.2 Design Limited (DL) produces and markets two products viz. Olive and Mint. Following
information is available from DL’s records for the year ended 30 June 2013:
Olive Mint
Selling price per unit Rs. 760 550
Variable cost of production per unit Rs. 520 430
Selling and distribution expenses per unit Rs. 40 20
Fixed cost Rs. 4,400,000 5,200,000
Number of units produced and sold 120,000 150,000
The above sales volumes are based on the market demand for these products. DL is
currently operating at 75% of the installed capacity. Time required for producing each unit
of Olive and Mint is the same. In order to utilize the spare capacity of the plant, the
marketing department has suggested the following options to the management:
Option 1: Introduce a single pack of both the products Olive and Mint. The price of the
single pack would be 90% of the combined price of separate products. It would increase
overall market demand for these products resulting in utilisation of full capacity. However, it
is estimated that the sale of separate units of each products would reduce by 18%.
Option 2: To launch a new product Salsa at a price of Rs. 380 per unit. Salsa is estimated to
have a demand of 80,000 units per annum and a unit variable cost equal to 40% of the
variable cost of Olive. It would result in additional fixed costs of Rs. 3,200,000 per annum.
Required:
Evaluate the above options and advise the management about the most feasible option. (11)
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Q.3 Big Limited (BL) manufactures and supplies consumer durables. It uses a fixed time period
inventory model whereby inventory count is carried out every month. In order to employ
inventory optimization and keep costs under control, the management has approved to
implement ABC plan on test basis, for reviewing inventory in one of BL’s departments. This
approach would categorize the inventory on the following basis:

Items that account for upto 25% of the annual consumption in units would be
classified as ‘A’

Items that account for more than 25% but less than or equal to 60% of the annual
consumption in units would be classified as ‘B’

Items that account for more than 60% of the annual consumption in units would be
classified as ‘C’.

The ‘A’ items would be counted once after every 30 days; ‘B’ items once after every 45 days;
and ‘C’ items once after every 90 days.

Following information is available from BL’s records of the concerned department:

Item Code 101 102 103 104 105 106 107 108
Annual consumption (Units ‘000) 550 300 300 600 125 325 500 750
Rate per unit (Rs.) 50 400 40 45 600 120 20 25

Each inventory count is estimated to cost Rs. 2,500 per item. Assume 360 days in a year.

Required:
Classify the above inventory items according to the ABC plan and calculate annual savings,
if any, if the above approach is implemented. (12)

Q.4 Crystal Limited (CL) is engaged in the business of supplying plastic chairs to schools and
hospitals in Karachi. Following data has been extracted from CL’s business plan:

Actual Forecast
Aug. 2013 Sep. 2013 Oct. 2013 Nov. 2013 Dec. 2013
Purchases (Rs. ‘000) 600 520 680 640 560

Additional information:
(i) All the above amounts are exclusive of sales tax. The company uses Just-in-time
inventory system and therefore has a negligible stock at any point of time.
(ii) Sales tax is charged at the rate of 17% and is payable on the 15th day of the next
month along with the sales tax return. Refunds, if any, are received one month after
submission of the sales tax return.
(iii) 70% of the sales are made to hospitals on two months credit whereas the rest of the
sales are made to schools on credit of one month. All debtors are expected to promptly
settle their debts. CL earns a uniform gross profit of 20 percent on sales.
(iv) 10% of the creditors are paid in the month of purchase, 60% are paid in the first month
subsequent to purchase and the remaining 30% are paid in the second month
following the purchase.
(v) Monthly salaries and wages amount to Rs. 95,000 and are paid in the month in which
they are incurred.
(vi) A monthly rent of Rs. 50,000 is paid in advance on quarterly basis.
(vii) Selling expenses for September are estimated at Rs. 40,000. 35% of selling expenses
are fixed whereas remaining amount varies with the variation in sales. Selling
expenses are paid in the month in which they are incurred.
(viii) Other overhead expenses are estimated at 6% of the sales for the previous month.
(ix) Cash and bank balances as at 30 September 2013 are estimated to be Rs. 1,000,000.

Required:
Prepare a month-wise cash budget for the quarter ending 31 December 2013. (16)
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Q.5 Power Limited (PL) is engaged in the business of overhaul and repair of turbo-generators.
The company uses job order costing system. Following data has been extracted from the cost
cards relating to jobs completed in the month of August 2013:

Rs. ‘000
Materials issued 55,000
Direct labour 41,000
Overheads on material 25%
Overheads on direct labour 80%

The clients are billed at each month-end on the basis of cost cards and PL earns a profit of
20% of the invoice value for each completed job.

Actual expenses for the month of August 2013 were as under:

Rs. ‘000
Factory wages (inclusive of indirect labour) 65,000
Factory expenses 15,000
Store expenses 7,500
Other office expenses 4,500

Following information is also available:

(i) Material requisitions not recorded in the cost cards amounted to Rs. 5,600,000.
(ii) Direct labour shown as indirect in the cost cards amounted to Rs. 2,900,000.
(iii) Details of stock and work in process for the month of August 2013 are as under:

Opening Closing
---------Rs. ‘000---------
Stock of materials 5,000 5,500
WIP - material 10,000 10,500
WIP - labour 2,500 4,500

Required:
Calculate the following for the month of August 2013:
(a) Purchases (b) Direct labour
(c) Under / over absorbed overheads (d) Actual profitability of completed jobs (12)

Q.6 (a) Maroof Engineering (ME) produces and markets a single product. In order to keep
pace with the changing technology, ME’s management has decided to install high-tech
machines in its production department which would result not only in improving the
productivity but would also reduce the number of workers from the present level of
500 to 400 workers. Following information is available from ME’s records for the year
ended 31 August 2013:

Sales per month Rs. 12,000,000

Wages paid to workers per month Rs. 2,000,000
Other benefits 35% of wages
Production per month 80,000 units
Profit/volume (P/V) ratio 30%

After the installation of high-tech machines, the company is expected to produce

89,600 units per month. The management has also decided to pay 1.6% incentive
wages to the workers for every 2% increase in productivity.

Required:
Calculate the annual financial implication of the proposal. (11)

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(b) Following data is available from the production records of Mian Industries for the
month of August 2013. The company uses process costing to value its output.

Input materials 5,000 units at the rate of Rs. 49 per unit.

Conversion costs Rs. 30,000.

Normal loss, which is 10% of input materials, is sold as scrap at Rs. 19 per unit.

Actual loss 650 units.

There were no opening or closing stocks.

Assume inspection is performed at the end of the process.

Required:
Calculate the amount of abnormal loss and cost of one unit of output. (03)

Q.7 Zaiqa Limited (ZL) is engaged in the business of manufacturing fruit jam. It has three
production and two service departments. Following information is available from ZL’s
records for the month of August 2013:

Rupees
Rent and rates 85,000
Indirect wages 60,000
General lighting 75,000
Power 150,000
Depreciation machinery 50,000

Following further information relating to the departments is also available:

Production departments Service departments

Selection Jam making Bottling Storage Distribution
Direct wages (Rs.) 60,000 80,000 32,000 8,000 20,000
Power consumed (KWH) 1,000 6,000 2,000 1,000 -
Floor area (Sq. ft) 1,500 2,000 1,250 1,000 500
Light points (Nos.) 10 20 15 5 10
Production hours 1,533 3,577 1,815 - -
Labour hours per bottle 0.10 0.25 0.15 - -
Cost of machinery (Rs.) 600,000 1,200,000 900,000 300,000 -

After production, the jam bottles are finally packed in a carton consisting of 12 bottles. The
service departments costs are apportioned as follows:

Production departments Service departments

Selection Jam making Bottling Storage Distribution
Storage 10% 30% 40% - 20%
Distribution 20% 50% 30% - -

Raw and packing material costs of Rs. 36 and labour cost of Rs. 25 is incurred on each
bottle.

Required:
Calculate the cost of each carton. (16)

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Intermediate Examination - Autumn 2013

A.1 (a) Overheads

Units
Rs.000’

March 1,115 1,775 1,979,125 1,243,225

April 2,185 2,300 5,025,500 4,774,225
May 1,265 1,660 2,099,900 1,600,225
June 1,610 1,840 2,962,400 2,592,100
July 2,645 2,875 7,604,375 6,996,025
August 1,380 2,300 3,174,000 1,904,400
10,200 12,750 22,845,300 19,110,200

n( xy) - ( x)( y) 6 22,845,300 - 10,200 12,750

b (Variablecost per unit) 0.6611
2
n( x ) ( x) 2
6 (19,110,200) - (10,200) 2
( y) b( x) (12,750 - 0.6611 (10,200))
a (Fixed costs per month) 1,001.13
n 6
Estimated cost to produce 1,800 units:
Y= a + b (x)
= 1,001.13 + 0.6611 x 1,800 = Rs. 2,191.11

(b) Product cost:

The aggregate of costs that are associated with a unit of product is called product cost.

In case of a manufacturing firm, it includes only the costs necessary to complete the
product. viz. direct material, direct labour and factory overhead. It may or may not
include the element of overhead depending upon the type of costing system in use-
absorption or direct.

Product costs for a merchandising firm include the cost to purchase the product plus
the transportation costs paid by the retailer or wholesaler to get the product to the
location from where it will be sold or distributed.

Period costs:
All non-product expenditures which are incurred for managing the firm and selling the
product are expensed in the period in which they are incurred and are called period
costs.

It is associated with a time period rather than manufacturing or trading activity.

Period costs primarily include the general, selling and administrative costs that are
necessary for the management of the company but are not involved directly or
indirectly in the manufacturing process or in the purchase of the products for resale.

(c) Calculation of relevant cost of labour:

Labour hours required for the production of Alpha 600 hours
Spare capacity available ( Not relevant) 450 hours
Remaining hours required 150 hours
150 hours could either be obtained from:
 over time [ 150 × 1.5 × 20] Rs. 4,500
 curtailing production of Zeta[(150 × 20) + (150÷3 × 24)] Rs. 4,200

The relevant cost of labour would be Rs. 4,200 as it would be cheaper to obtain labour
by diverting it from the production of Zeta.
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A.2 Products
Olive Mint
Sale price 760 550
Less: Variable cost (560) (450)
Contribution margin / unit 200 100

No. of units produced and sold 120,000 150,000

Existing contribution margin 24,000,000 15,000,000

Option 1:
Additional profit from the introduction of packaged products:
Quantity of packaged products: Units
Reduction in sale of Olive [120,000 × 18%] 21,600
Reduction in sale of Mint [ 150,000 × 18%] 27,000
Under utilization of existing capacity [(120,000 + 150,000)÷75%] –270,000 90,000
138,600

Units of packaged products [138,600 ÷ 2] 69,300

Rupees
Selling price per package (760 + 550) × 90% 1,179
Variable cost [ 560 + 450] 1,010
Contribution margin of packaged products 169

Contribution margin from sale of packaged products [69,300 × 169] 11,711,700

Less: Reduction in contribution margin [200 × 21,600] + [100 × 27,000] (7,020,000)
4,691,700

Option 2:
Additional profit from Salsa
Contribution margin from Salsa [380 × 80,000] – [560 × 40% × 80,000] 12,480,000
Less: Additional fixed cost 3,200,000
9,280,000

Additional profit [9,280,000 – 4,691,700] 4,588,300

Decision:
The management should produce Salsa as it would result in an additional profit of Rs.
4,588,300 as compared to the introduction of a single pack of both the products.

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A.3 Annual Cum. Cum. No. of

Item Rate per Annual
Usage Annual Annual Category Counts in a
Code Unit–Rs. Cost
Unit Usage Usage% year
102 300 400 120,000 300 8.70 A 12
105 125 600 75,000 425 12.32 A 12
106 325 120 39,000 750 21.74 A 12
101 550 50 27,500 1,300 37.68 B 8
104 600 45 27,000 1,900 55.07 B 8
108 750 25 18,750 2,650 76.81 C 4
103 300 40 12,000 2,950 85.51 C 4
107 500 20 10,000 3,450 100.00 C 4
3,450 329,250 64

Inventory count cost – current [ 2,500 × 8 × 12] 240,000

Inventory count cost as per new plan [64 × 2,500] (160,000)
Savings 80,000

A.4 Month-wise Cash Budget

Rs. in ‘000
Oct Nov Dec
Opening balance 1,000 833.10 708.14
Receipts:
Collection from hospitals and schools W-1 842.40 830.70 976.95
Payments:
Purchases W-2 (655.20) (734.76) (753.48)
Sales tax payable W-3 (22.10) (28.90) (27.20)
Salaries and wages (95) (95) (95)
Rent (150) - -
Selling expenses: W-4
 Variable (4% of sales) (34) (32) (28)
 Fixed (14) (14) (14)
Overhead expenses (39) (51) (48)
Total payments (1,009.30) (955.66) (965.68)
Closing balance 833.10 708.14 719.41

WORKING NOTES:
W-1: Calculation of sales and collections

--------------------------Rs. in ‘000--------------------------
Aug Sep Oct Nov Dec
Purchases 600 520 680 640 560
Add: gross profit (25% of cost) 150 130 170 160 140
Sales - Gross 750 650 850 800 700

Sales to hospitals – 70% 525 455 595 560 490

Add: sales tax @17% 89.25 77.35 101.15 95.20 83.30
614.25 532.35 696.15 655.20 573.30
Collection from hospitals- A 614.25 532.35 696.15

Sales to schools – 30% 225 195 255 240 210

Add: sales tax @17% 38.25 33.15 43.35 40.80 35.70
263.25 228.15 298.35 280.80 245.70
Collection from schools - B 228.15 298.35 280.8
Total collection (A+B) 842.40 830.70 976.95

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W-2: Purchases
--------------------------Rs. in ‘000--------------------------
Aug Sep Oct Nov Dec
Purchases 600 520 680 640 560
Add: Sales Tax @17% 102 88.40 115.60 108.80 95.20
702 608.40 795.60 748.80 655.20
Payment to creditors:
10% - month of purchase 79.56 74.88 65.52
60%-following month 365.04 477.36 449.28
30%- second month 210.60 182.52 238.68
655.20 734.76 753.48

W-3: Sales tax

--------------------------Rs. in ‘000--------------------------
Aug Sep Oct Nov Dec
Output tax 127.50 110.50 144.50 136.00 119.00
Less: Input tax (102.00) (88.40) (115.60) (108.80) (95.20)
S.tax payable / (refundable) 25.50 22.10 28.90 27.20 23.80
Sales tax payments 22.10 28.90 27.20

W-4: Calculation of variable Selling expenses

Rs. in ‘000
Selling expenses – Sep 2013 40
Less: fixed expenses – 35% (14)
Variable selling expenses 26
Sales for the month of Sep 2013 650
Variable selling expenses as a % of sales [26 ÷ 650 × 100] 4%

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A.5 Purchases for the month of August 2013: Rs. in '000

Materials issued as per cost cards 55,000
Add: Materials issued but not booked in cost cards 5,600
Closing stock of: raw material 5,500
Less: Opening stock of: raw material (5,000)
Purchases 61,100
Direct labor for the month of August 2013:
Direct labor as per cost card 41,000
Add: Direct labour booked as indirect in cost cards 2,900
Direct labour 43,900

Unabsorbed overheads
Indirect labour (65,000 – 43,900) 21,100
Factory expenses 15,000
Store expenses 7,500
Actual overheads for the period 43,600

Overhead - on material [ (55,000+5,600) ×25%] 15,150

Overhead - on labour [ (41,000+2,900) ×80%] 35,120
Absorbed overheads as per cost cards 50,270
Over absorbed overhead (6,670)

Actual profitability of completed jobs for the month of August 2013:

Sales (W-1) 190,338
Actual Material consumed [10,000 – 10,500] + [55,000 + 5,600] (60,100)
Actual Direct labour [2,500 – 4,500] + [41,000 + 2,900] (41,900)
Actual overhead (43,600)
(145,600)
Less: Other office expenses (4,500)
Net Profit 40,238

W-1:
Materials consumed 60,100
Direct labour 41,900
Overhead - on material 15,150
Overhead - on labour 35,120
152,270
Profit (152,270 ÷ 80 × 20) 38,068
Sales 190,338

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Intermediate Examination - Autumn 2013

A.6 (a) Improvement in Productivity after Installation of high tech machines:

Proportionate output of 400 workers on the basis of existing

64,000 units
productivity level =
Expected output of 400 workers after mechanisation 89,600 units
Improvement in productivity ( 89,600 – 64,000 units) 25,600 units

40%

Incentive wages payable (@ 1.6% for every 2% improvement) [40%×1.6%÷2%] 32%

Annual wages to 400 workers before incentive Rs. 19,200,000

Selling price per unit = Rs. 150.00

Inst. Of high tech machines

Before After
Wages payable per annum [2,000,000 × 12] 24,000,000 19,200,000
Other benefits [@ 35% of wages] 8,400,000 6,720,000
Incentive wages [@ 32% of wages] - 6,144,000
32,400,000 32,064,000

Rs.
Gross saving per annum (32,400,000 – 32,064,000) 336,000
Add: Increase in contribution [89,600 units – 80,000 units) × 12 × (150 × 0.30)] 5,184,000
Increase in annual contribution due to mechanisation 5,520,000

(b) Cost per unit = –

–
=
Abnormal loss (units) = Total loss – Normal loss = 650 – 500 = 150 units.

Amount of abnormal loss to be charged to Profit and loss Account = (Rs. 59 – Rs. 19) × 150
= Rs. 6,000

A.7 Zaiqa Limited

Primary Distribution of Overheads

Production Depts. Service Depts.

Basis of Total
Items Jam Distri-
Apportionment overheads Selection Bottling Storage
making bution
Direct wages Given 28,000 - - - 8,000 20,000
Rent and rates Floor area 85,000 20,400 27,200 17,000 13,600 6,800
General lighting Light points 75,000 12,500 25,000 18,750 6,250 12,500
Indirect wages Direct wages 60,000 18,000 24,000 9,600 2,400 6,000
Power KWH consumed 150,000 15,000 90,000 30,000 15,000 -
Depreciation Cost of machinery 50,000 10,000 20,000 15,000 5,000 -
Total departmental overheads 448,000 75,900 186,200 90,350 50,250 45,300

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Secondary Distribution of Overheads

Production Depts. Service Depts.
Items
Selection Jam making Bottling Storage Distribution
Total overheads as above 75,900 186,200 90,350 50,250 45,300
(1 : 3 : 4 : 2) 5,025 15,075 20,100 (50,250) 10,050
(2 : 5 : 3 : 0) 11,070 27,675 16,605 - (55,350)
Total 91,995 228,950 127,055
Production hours 1,533 3,577 1,815
Rate per hour (Rs) 60.0 64.0 70.0

Cost of one carton

Rupees
Raw and packing material (36 × 12) 432
Direct labour (25 × 12) 300
Overheads :
Selection (0.1 × 12 × 60) 72
Jam making (0.25 × 12 × 64) 192
Bottling (0.15 × 12 × 70) 126 390
Total 1,122

(THE END)

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