Certificate in Accounting and Finance Stage Examinations

The Institute of 4 March 2015

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

Cost and Management Accounting

Q.1 KPK Dairies Limited (KDL) is planning to introduce three energy flavored milk from 1 July
2015. In this respect, following projections have been made:

C-Plus I-Plus V-Plus

Planned production (No. of packets) 540,000 275,000 185,000
Sales (No. of packets) 425,000 255,000 170,000
Production cost per packet: ----------- Rupees -----------
Direct material 100 98 97
Direct labour 15 13 12
Variable overheads 23 19 16
Fixed overheads 25 22 20
Selling and distribution cost per packet:
Variable overheads 12 8 10
Fixed overheads 5 5 5
Total cost per packet 180 165 160

KDL will sell its products through a distributor at a commission of 5% of sale price and
expects to earn a contribution margin of 40% of net sales i.e. sales minus distributor's
commission.

Required:
Compute break even sales in packets and rupees, assuming that ratio of quantities sold
would be as per projections. (17)

Q.2 Diamond Investment Limited (DIL) is considering to set-up a plant for the production of a
single product X-49. The details relating to the investment are as under:

(i) The cost of plant amounting to Rs. 160 million would be payable in advance. It
includes installation and commissioning of the plant.
(ii) Working capital of Rs. 20 million would be required at the commencement of the
commercial operations.
(iii) DIL intends to sell X-49 at cost plus 25% (cost does not include depreciation on
plant). Sales for the first year are estimated at Rs. 300 million. The sales quantity
would increase at 6% per annum.
(iv) The plant would be depreciated at the rate of 20% under the reducing balance
method. Tax depreciation is to be calculated on the same basis. Estimated residual
value of the plant at the end of its useful life of four years would be equal to its
carrying value.
(v) Tax rate is 34% and tax is payable in the year the liability arises.
(vi) DIL’s cost of capital is 18%. All costs and prices are expected to increase at the rate
of 5% per annum.

Required:
Compute the following:
(a) Net present value of the project (12)
(b) Internal rate of return of the project (05)
Assume that unless otherwise specified, all cash flows would arise at the end of the year.
 Cost and Management Accounting Page 2 of 4

Q.3 Sigma Limited (SL) is a manufacturer of Product A. SL operates at a normal capacity of

90% against its available annual capacity of 50,000 machine hours and uses absorption
costing. The following summarised profit statements were extracted from SL's budget for
the year ending 31 December 2015.

Actual - 2014 Budget - 2015

Units Rs. in '000 Units Rs. in '000
Sales 4,125 49,500 4,600 56,580
Opening inventory 400 (3,400) 600 (5,400)
Cost of production 4,325 (38,925) 4,500 (44,325)
Closing inventory 600 5,400 500 4,925
Under absorbed production overheads (100) -
Selling and administration cost (30% fixed) (3,000) (5,250)
Net profit 9,475 6,530

Other relevant information is as under:

2014 Budget - 2015

Standard machine hours per unit 10 hours 10 hours
Standard production overhead rate per unit Rs. 2,000 Rs. 2,250
Estimated fixed production overheads at normal capacity Rs. 3,600,000 Rs. 4,050,000
Actual production overheads (Actual machine hours 44,000) Rs. 8,750,000 -

Required:
(a) What do you understand by under/over absorbed production overheads? (02)
(b) Analyse the under absorbed production overheads of SL for the year ended
31 December 2014, into spending and volume variances. Give two probable reasons
for each variance. (06)
(c) Prepare budgeted Profit and Loss Statement for the year ending 31 December 2015,
using marginal costing. (07)
(d) Analyse the difference between budgeted profit determined under absorption and
marginal costing, for the year ending 31 December 2015. (02)

Q.4 KS Limited operates two production departments A and B to produce a product XP-29.
Following information pertains to Department A for the month of December 2014.

Litres Rs. in '000

Opening work in process (Material 100%, conversion 80%) 15,000
 Material - 5,000
 Direct labour and overheads - 2,125
Actual cost for the month:
 Material 120,000 36,240
 Direct labour - 14,224
 Overheads - 11,500
Expected losses 5% -
Closing work in process (Material 100%, conversion 80%) 17,000 -
Units transferred to Department B 110,000 -

KS uses FIFO method for inventory valuation. Direct materials are added at the beginning
of the process. Expected losses are identified at the time of inspection which takes place at
the end of the process. Overheads are applied at the rate of 80% of direct labour cost.

Required:
(a) Equivalent production units (02)
(b) Cost of goods transferred to Department B (09)
(c) Accounting entries in the cost accounting system. (06)
 Cost and Management Accounting Page 3 of 4

Q.5 Zee Chemicals Limited (ZCL) produces two joint products, Alpha and Beta from a single
production process. Both products are processed upto split-off point and sold without any
further processing.

Presently, ZCL is considering the following proposals:

 Expansion of the existing facility by installing a new plant

 Installation of a refining plant to sell either Alpha or Beta after refining

To assess the above proposals, following data has been gathered:

(i) Actual cost incurred in the month of December 2014:

Rs. in '000
Direct material 15,000
Variable conversion costs (Rs. 230 per hour) 4,890
Fixed overheads 2,600

(ii) Actual production and selling price for the month of December 2014:

Selling price per

Litres
litre (Rs.)
Alpha 11,300 1,000
Beta 14,700 1,125

(iii) There is no process loss and joint costs are apportioned between Alpha and Beta
according to the weight of their output.

(iv) Details of the proposed plans are as follows:

Expansion of Installation of
existing facility refining plant
Capacity in machine hours per month 5,000 5,000
------------ Rs. in '000 ------------
Cost of plant and its installation 20,000 25,000
Estimated residual value at the end of life 1,400 2,800
Estimated additional fixed overheads per month 250 500

Estimated useful life of the plant 20 Years 20 Years

(v) Estimated variable cost of refining and sales price of refined products:

Alpha Beta
Rupees per liter
Direct material 90 125
Conversion cost (Rs. 150 per hour) 68 80
Selling price 1,380 1,525

(vi) There would be no loss during the refining process. There is adequate demand for
Alpha and Beta at split-off point and after refining.

Required:
Evaluate each of the above proposals and give your recommendations. (16)
 Cost and Management Accounting Page 4 of 4

Q.6 Hi-tech Limited (HL) assembles and sells various components of heavy construction
equipment. HL is working on a proposal of assembling a new component EXV-99. Based on
study of the product and market survey, the following information has been worked out:

Projected lifetime sale of the component EXV-99 Units 500,000

Selling price per unit Rs. 11,000
Target gross profit percentage 40%

Information about cost of production of the new component is as follows:

(i) One unit of EXV-99 would require:

Parts no. Net quantity Cost per unit/kg (Rs.)

XX 1 unit 2,350
YY 1.5 kg 1,400
ZZ 1 unit 1,200

The above parts would be imported in a lot, for production of 1,000 units of EXV-99.
Custom duty and other import charges would be 15% of cost price. HL is negotiating
with the vendor who has agreed to offer further discount.

(ii) On average, assembling of one unit of EXV-99 would require 1.8 skilled labour hours
at Rs. 200 per hour. The production would be carried out in a single shift of 8 hours.
At the start of each shift, set-up of machines would require 30 minutes. 6% of the
input quantity of YY and ZZ would be lost during assembly process.

(iii) HL works at a normal annual capacity of 4,000,000 skilled hours. Actual production
overheads and skilled labour hours for the last two quarters are as under:

Quarter Total assembly Production

ended hours overheads (Rs.)
30-Sep-2014 950,000 65,600,000
31-Dec-2014 1,050,000 68,000,000

(iv) A special machine that would be used exclusively for the production of EXV-99
would be purchased at a cost of Rs. 1,500,000.

Required:
From the above information, determine the discount that HL should obtain in order to
achieve the target gross profit. (16)

(THE END)