Certificate in Accounting and Finance Stage Examination

The Institute of 9 September 2017

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

Cost and Management Accounting

Q.1 Production at Platinum Chemicals (PC) involves two processes I and II. Following
information pertains to the month of August 2017:

(i) Actual cost:

Process I Process II
--------- Rupees ---------
Direct material (12,000 liters) 5,748,000 -
Conversion 2,610,000 1,542,000

(ii) Production and sales

Process I Process II
Description Remarks
------ Liters ------
Products:
Joint product – J101 5,000 - Sold for Rs. 1,200 per liter after incurring
packing cost of Rs. 120 per liter
Joint product – J202 4,500 - Transferred to process II for conversion
into a new product J-plus
By-product – BP01 1,000 - Sold at the split-off point for Rs. 500 per
liter
J-plus - 3,400 Sold for Rs. 1,400 per liter
Work-in-process:
Opening - -
Closing - 650 70% complete as to conversion

(iii) Materials are introduced at the beginning of process I and PC uses 'weighted average
method' for inventory valuation.
(iv) Proceeds from sale of by-product are treated as reduction in joint costs. Joint costs are
allocated on the basis of net realisable values of the joint products at split-off point.
(v) Normal production losses in both processes are estimated at 10% of the input and are
incurred at beginning of the process. Loss of each liter in process I results in a solid
waste of 0.8 kg which is sold for Rs. 100 per kg. Loss of process II has no sale value.

Required:
(a) Compute the cost of sales of J101 and J-plus for the month of August 2017. (12)
(b) Prepare accounting entries to record production gains/losses and their ultimate
disposal. (03)

Q.2 (a) Describe briefly the concept of ‘integrated reporting’. (02)

(b) In the context of integrated reporting, the term ‘capitals’ refers to the stocks of value
that are increased, decreased or transformed through the activities of an organsiation.

List the different categories of capitals, in the context of integrated reporting. (03)
 Cost and Management Accounting Page 2 of 5

Q.3 Opal Industries Limited (OIL) produces various products which pass through Processing
and Finishing departments. Logistics and Maintenance departments provide necessary
support for the production. Following information is available from OIL’s records for the
month of June 2017:

(i) Overhead costs Direct labour hours

Departments *Budgeted Actual Budgeted Actual
-------- Rupees -------- -------- Hours --------
Processing 560,000 536,000 14,000 14,350
Finishing 320,000 258,000 10,000 9,800
Logistics - 56,700 - -
Maintenance - 45,000 - -
*including apportionment of overhead costs of support departments

(ii) Costs of support departments are apportioned as under:

Processing Finishing Logistics Maintenance

Logistics 50% 40% - 10%
Maintenance 35% 45% 20% -

Required:
(a) Allocate actual overhead costs of support departments to production departments
using repeated distribution method. (05)
(b) Compute under/over applied overheads for the month of June 2017. (03)

Q.4 Cloudy Company Limited (CCL) manufactures and sells specialized machine X85. A newer
version of the machine is gaining popularity in the market and CCL is therefore considering
to introduce a similar version i.e. D44. Detailed research in this respect has been carried out
during the last six months at a cost of Rs. 3.25 million.

The related information is as under:

(i) Initial investment in the new plant for manufacturing D44 would be Rs. 450 million
including installation and commissioning of the plant.
(ii) Projected production and sales of D44 are as follows:

Year 1 Year 2 Year 3 Year 4

------------------ No. of units ------------------
20,000 25,000 27,000 29,000

Sales volume of X85 in the latest year was 30,000 units. It is estimated that
introduction of D44 would reduce the sale of X85 by 2,000 units every year.

(iii) Estimated selling price and variable cost per unit of D44 in year 1 is estimated at
Rs. 40,000 and Rs. 32,000 respectively. The contribution margin on X85 in year 1 is
estimated at Rs. 5,500 per unit.
(iv) Fixed costs in year 1 are estimated at Rs. 45 million. However, if the new plant is
installed these costs would increase to Rs. 75 million.
(v) Impact of inflation on selling price, variable cost and fixed cost would be 10% for
both the machines/plants.
(vi) The new plant would be depreciated at the rate of 25% under the reducing balance
method. Tax depreciation is to be calculated on the same basis. The residual value of
the plant at the end of its useful life of four years is expected to be equal to its carrying
value.
(vii) Applicable tax rate is 30% and tax is paid in the year in which the liability arises.
(viii) CCL’s cost of capital is 12%.
 Cost and Management Accounting Page 3 of 5

Required:
Compute internal rate of return (IRR) of the new plant and advise whether CCL should
introduce D44. (Assume that all cash flows would arise at the end of the year unless stated
otherwise) (15)

Q.5 Falcon (Private) Limited (FPL) is in the process of preparing its annual budget for the next
year. The available information is as follows:

(i) Budgeted and actual production and sales for the current year:

Budgeted Actual
--------- Units ---------
Production 25,000 23,760
Sales 24,000 22,800

(ii) Current year’s actual production cost per unit:

Rupees
Raw material input (49 kg) 980
Direct labour 800
Variable production overheads 500
Fixed production overheads 400
2,680

(iii) Inventory balances:

FPL maintains the following inventory levels:

Raw material Average two months’ consumption based on

budgeted production
Finished goods Average one month’s budgeted sales
Work in process (opening 1,500 units (100% complete as to material and
as well as closing) 60% as to conversion cost)

FPL follows absorption costing and uses FIFO method for valuation of inventory.

(iv) Impact of inflation:

Inflation %
Raw material and variable overheads 8
Direct labour 10
Fixed overheads (excluding depreciation) 5

(v) Sales volume would increase by 10%.

(vi) Balancing and modernisation of plant would be carried out at a cost of Rs. 20 million
which would:

increase depreciation from Rs. 5,800,000 to Rs. 7,016,800;

reduce raw material wastages from 5% to 2% of input; and

increase labour efficiency by 7%.

Required:
Prepare budgeted statement of cost of sales for the next year. (16)
 Cost and Management Accounting Page 4 of 5

Q.6 DEL Limited manufactures radiators for car manufacturers. In normal operations, about
200,000 units are sold per annum at an average selling price of Rs. 15,000 per unit.
Manufacturing process is carried out by 500 highly skilled labours who work an average of
180 hours per month at Rs. 250 per hour. Raw material cost is Rs. 3,000 per unit. Annual
factory overheads are estimated at Rs. 540 million. Variable overheads are 150% of labour
cost.
DEL had received an offer from TRU Limited to manufacture 4,000 units of radiators of
trucks, at Rs. 50,000 per unit. DEL had expected to earn significantly high margin on this
order and had planned to stop normal production for this purpose. It had already procured
the raw material for Rs. 60 million but before the start of manufacturing it came to know
that TRU has gone into liquidation.
To deal with the situation, DEL’s marketing department has negotiated with another truck
manufacturer, NTR Limited. NTR’s specifications are slightly different and the price offered
by NTR is Rs. 40,000 per unit.
The costs to be incurred on the new order and other relevant details are as follows:
(i) Additional raw material of Rs. 12 million would have to be purchased for NTR’s
order.
(ii) DEL expects that first unit would take 10 hours. The labour time would be subject to
a 95% learning rate upto 1,000 units. Thereafter, the learning rate would stop. The
index of 95% learning curve is -0.074.
(iii) Variable overheads would be 240% of the cost of labour.
(iv) Fixed overheads are to be applied at Rs. 400 per labour hour.
(v) Total cost of preparing the plant for NTR’s order and resetting it to the normal
production would be Rs. 4 million.

If the order from NTR is not accepted, raw materials of Rs. 60 million already procured
would have to be sold at 70% of their cost. However, raw material worth Rs. 10 million can
be utilized in the car’s radiators after slight alteration at a cost of Rs. 1 million. The altered
raw material can produce 30% components of 10,000 car radiators.

Required:
Determine whether DEL may accept the order from NTR. (12)

Q.7 (a) Following information has been extracted from the records of Silver Industries
Limited (SIL) for the month of June 2017:
Production Direct labour Variable & fixed
units hours overheads (Rs.)
Available capacity 10,000 30,000 -
Budget 8,000 24,000 3,600,000
Actual 8,600 25,000 3,900,000

Fixed overheads were budgeted at Rs. 1,200,000. Applied fixed overheads exceeded
actual fixed overheads by Rs. 20,000.

SIL uses standard absorption costing. Over/under applied factory overheads are
charged to profit and loss account.

Required:
(i) Prepare accounting entries to record the factory overheads. (03)
(ii) Analyse under/over applied overheads into expenditure, efficiency and capacity
variances. (11)

(b) Comment on the difference between overhead variances under marginal and
absorption costing. (03)
 Cost and Management Accounting Page 5 of 5

Q.8 Digital Industries Limited (DIL) incurred a loss for the year ended 30 June 2017 as it could
achieve sales amounting to Rs. 89.6 million which was 80% of the break-even sales.
Contribution margin on the sales was 25%. Variable costs comprised of 45% direct material,
35% direct labour and 20% overheads.

During a discussion on the situation, the Marketing Director was of the view that no
increase in sales price was possible due to severe competition. However, sales volume can be
increased by reducing prices. The Production Director was of the view that since the plant is
quiet old, the production capacity cannot be increased beyond the current level of 70%.

Accordingly, the management has developed the following plan:

(i) A new plant would be installed whose capacity would be 20% more than installed
capacity of the existing plant. The cost and useful life of the plant is estimated at
Rs. 30 million and 10 years respectively. The funds for the new plant would be
arranged through a long-term bank loan at a cost of 10% per annum. Capacity
utilization of 85% is planned for the first year of the operation.

The new plant would eliminate existing material wastage which is 5% of the input and
reduce direct labour hours by 8%.
The existing plant was installed fifteen years ago at a cost of Rs. 27 million. It has a
remaining useful life of three years and would be traded in for Rs. 2 million.

DIL depreciates its fixed assets on straight line basis over their estimated useful lives.

(ii) To sell the entire production, selling price would be reduced by 2%.
(iii) Material would be purchased in bulk quantity which would reduce direct material cost
by 10%.
(iv) Direct wages would be increased by 8% which would increase production efficiency
by 10%.
(v) Impact of inflation on overheads would be 4%.

Required:
Compute the projected sales for the next year and the margin of safety percentage after
incorporating the effect of the above measures. (12)

(THE END)