Certificate in Accounting and Finance Stage Examination

The Institute of 9 March 2023

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

Cost and Management Accounting

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

Section A

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

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

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

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

Description Rs. in '000 Effect of variance

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

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

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

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

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

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

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

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

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

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

Section B

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

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

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

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

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

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

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

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

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

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

Following data is available for the month of February 2023:

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

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

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

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

(THE END)