MGT 402 Cost Management Accounting

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Question No: 49 ( Marks: 3 )

The Midnight Corporation budget department gathered the following data for the third
quarter:

July
Projected Sales (units) 1,000
Selling price per unit (Rs.) 30
Direct material purchase requirement (units) 1,500
Purchase cost per unit (Rs.) 15
Production requirements (units) 800

Direct labor hours Rs. 1.5 per unit

Direct Labor rate Rs. 2.5 per direct labor hour
Fixed FOH is Rs. 2600, included depreciation Rs. 300
Selling and Admin expense 4% of sales

Net Income before tax is as follows

 July 8,000
August 10,000
September 8,000

All sales and purchase are for cash and all expenses are paid in the month incurred.
Assuming that the opening cash balance on July 01 is Rs. 40,000 and tax rate is 35%,

Requirement:

Prepare cash budget for the month of July.

CASH BUDGET FOR THE MONTH OF JULY

CASH RECEIPTS

PARTICULARS JULY (Rs.)

OPENING BALANCE 40000
SALES 30000
NET INCOME AFTE TAX 2800
TOTAL RECEIPTS 72800
CASH PAYMENTS
PURCHASES 22500
DIRECT LABOR 3000
FIXED FOH 2300
SELLING AND ADMIN EXP 1200
TOTAL PAYMENTS 29000
TOTAL RECEIPTS – 43800
TOTAL PAYMENTS

Question No: 50 ( Marks: 3 )

Why is the selection of an appropriate cost allocation method in Joint Products

important?

ANSWER

The selection of an appropriate cost allocation method in joint products is

important in order to know approximately exact cost of each product. Following are
the factors which are more contributing to its importance

(1) To know the profitability of each product

(2) To arrive at decision weather to sell or process further
 (3) In order to know the realizable value of each product

Question No: 51 ( Marks: 5 )

The following information is available for the month of June from the Alpha department
of the Greek Corporation:

Units
Work in process June 01 (80% complete as to conversion) 40,000
Started in June 165,000
Work in process June 30 (60% complete as to conversion) 30,000

Materials are added at the beginning of the process in the Alpha department.

Required: Using the average cost method, what are the equivalent units of production for
the month of June?

ANSWER

WIP OPENING 40000

ADD UNIT STARTED 165000

_____________

TOTAL 205000

LESS CLOSING WIP 30000

UNIT COMPLETED 175000

EQUIVALENT UNITS USING AVERAGE COST METHOD

PARTICULARS MATERIAL LABOR FOH

COMPLETED 175000 175000 175000
CLOSING WIP 30000 30000*60% = 30000*60% =
18000 18000
TOTAL 205000 193000 193000

Question No: 52 ( Marks: 5 )

The Carter Manufacturing Company estimates its production requirements to be 30,000

units for October, 38,000 units for November and 41,000 units for December. It takes 3
direct labor hours at a rate of Rs. 3 per hour to complete one unit.

Prepare direct Labor budget cost for the last quarter of the year.

DIRECT LABOR COST BUDGET FOR THE LAST QUARTER

From October to December

Particulars October November December

Units produced 30000 38000 40000
Labor hour per unit 3 3 3
Total labor hours 90000 104000 120000
Labor rate per hour Rs.3 Rs.3 Rs.3
Total labor cost Rs. 270000 Rs.312000 Rs.360000

Question No: 53 ( Marks: 10 )

Consider the following data:

Sales Rs.100 Per unit

Material Rs.10 Per unit
Labor Rs.10 Per unit
FOH Rs.5 Per unit
Fixed FOH Rs. 50,00,000
Units produced & sold 1,00,000 units

Required:

· Income statement under variable costing

 · Break Even point in rupees

· Margin of safety ratio at the given sales level

· MOS

Solution A)

Sales (100000*100) 10,000,000

Less variable cost of goods sold

Material (100000*10) 1,000,000

Labor (100000*10) 1,000,000

Variable FOH(100000*5) 500,000

____________

total variable cost ( 2500000)

CM 7500000

LESS FIXED OVERHEAD (50,00,000)

PROFIT 2,500,000

(B)

BE in Rs = fixed cost /(Contribution margin /Sales)

50,00,000/(75/100) = 6,666,667

C)

MOS RATIO = PRIFIT / CM *100

= 2500000 / 7500000*100
 = 33.34%

D)

MOS = Actual sales – BE sales

=10,000,000 - 6,666,667 = 3,333,333

Question No: 54 ( Marks: 10 )

Ahmed manufacturing company’s projected sales of Rs. 850,000 for the next year. The
budgeted data proposed by Cost Accountants are as follows:

Material: Rs. 115,000

Labor: 95,000

FOH: 65,000

The company’s opening finished goods inventory are Rs. 35,000 and ending finished
goods inventory are Rs. 55,000. The fixed portion of administrative and selling expenses
is estimated as 7% and 12% of sales respectively and variable portion of administrative
and selling expenses is estimated as 6% and 14% of sales respectively.

The financial charges are estimated Rs. 5,500 and the tax rate is 30%.

Required: Prepare the projected income statement for the period?

SALES 850,000
LESS COST OF GOODS SOLD
MATERIAL 115000
LABOR 95000
FOH 65000
__________
TOTLA FACTORY COST 275000
ADD OPENING FINISHED GOODS 35000
__________
COST OF GOODS TO BE SOLD 310000
LESS ENING FINISHED GOODS 55000
__________
COST OF GOODS SOLD 255000
______________
GROSS PROFIT 595000
LESS ADMIN AND SELLING EXP FIXED
ADMIN 59500
SELLING 102000

LESS ADMIN AND SELLING EXP VARIABLE

ADMIN 51000
SELLING 119000
________ 331500
_______________
EBIT 263500
LESS FINANCILA CHARGES 5500
_______________
EBT 258000
LESS TAX 30% 77400
_________________
EAT 180600

Question No: 41 ( Marks: 5 )

Bouch Company has the following data of year 02 given below

Year 02

Sales Rs. 120/unit

Direct Materials Rs. 8/unit
Direct labor Rs. 10/unit
Variable overhead Rs. 7/unit
Selling & Admin expenses Rs. 2/unit
Fixed overhead Rs. 7,500

Normal volume of production 250 units per year

Information regarding units as follows

 Item 1st year 2nd year 3rd year 4th year

units units units units

Opening stock 200 300 300

Production 300 250 200 200

Sales 100 150 200 300

Required: Prepare income statement of year 2 under absorption costing.

SALES 30000

LESS COST OF GOOD SOLD

Direct material (8 *250) 2000

Direct labor (7 *250) 1750

Variable FOH (10*250 2500

FIXED FOH 7500

______________

13750

ADD OP ST 11000

LESS CLOSING ST 16500 8250

__________________

GROSS PROFIT 21750

 LESS ADMIN AND SELLING 500

___________________

PROFIT 21250

Question No: 42 ( Marks: 5 )

A Company manufacturers two products A and B. Forecasts for first 7 months is as

under:

Month Sales in Units

A B
January 1,000 2,800
February 1,200 2,800
March 1,610 2,400
April 2,000 2,000
May 2,400 1,600
June 2,400 1,600
July 2,000 1,800

No work in process inventory has been estimated in any moth however finished goods
inventory shall be on hand equal to half the sales to the next month, in each month. This
is constant practice.
Budgeted production and production costs for the year 1999 will be as follows:

Production units 22,500 24,000

Direct Materials (per unit) 12.5 19
Direct Labor (per unit) 4.5 7
F.O.H. (apportioned) Rs. 66,000 Rs 96,000

Prepare for the six months period ending June 1999, a production budget for ‘’Product
A”

Production budget
For the year ended --------------------
Particular January February March April May June
Unit required to meet sale 1000 1200 1610 2000 2400 2400
budget
Add desired ending inv 600 805 1000 1200 1200 1000
Total unit required 1600 2005 2610 3200 3600 3400
Less opening inventory ---- 600 805 1000 1200 1200
Planned production for the 1600 1405 1805 2200 2400 2200
year

Question No: 43 ( Marks: 10 )

The managing director of Parser Limited, a small business, is considering undertaking a

one-off contract. She has asked her inexperienced accountant to advise on what costs are
likely to be incurred so that she can price at a profit. The following schedule has been
prepared:

Costs for special order Notes Rs.

Direct wages 1 28,500
Supervisor costs 2 11,500
General overheads 3 4,000
Machine depreciation 4 2,300
Machine overheads 5 18,000
Materials 6 34,000
Total 98,300

Notes

v Direct wages comprise the wages of two employees, particularly skilled in the
labor process for this job. They could be transferred from another department to
undertake the work on the special order. They are fully occupied in their usual
department and sub-contracting staff would have to be brought in to undertake the
work left behind.
 v Sub-contracting costs would be Rs. 32,000 for the period of the work. Other
sub-contractors who are skilled in the special order techniques are also available to
work on the special order. The costs associated with this would amount to Rs. 31,300.

v A supervisor would have to work on the special order. The cost of Rs. 11,500
is made up of Rs. 8,000 normal payments plus a Rs. 3,500 additional bonus for
working on the special order. Normal payments refer to the fixed salary of the
supervisor. In addition, the supervisor would lose incentive payments in his normal
work amounting to Rs. 2,500. It is not anticipated that any replacement costs relating
to the supervisors' work on other jobs would arise.

v General overheads comprise an apportionment of Rs. 3,000 plus an estimate

of Rs. 1,000 incremental overheads.

Required

Produce a revised costing schedule for the special project based on relevant costing
principles. Fully explain and justify each of the costs included in the costing schedule.

Question No: 44 ( Marks: 10 )

Due to the declining popularity of digital watches, Swiss Company’s digital watch line
has not reported a profit for several years. An income statement for last year follows:

Segment Income Statement—Digital Watches

Rs. Rs.
Sales..................................................................... 500,000
Less variable expenses:
Variable manufacturing
costs.............................. 120,000
Variable shipping
costs...................................... 5,000
Commissions..................................................... 75,000 200,000
Contribution
margin............................................... 300,000
Less fixed expenses:
General factory 60,000
 overhead(1)..............................
Salary of product line
manager........................... 90,000
Depreciation of equipment
(2)............................ 50,000
Product line
advertising...................................... 100,000
Rent—factory space (3).................................... 70,000
General administrative expense
(1)..................... 30,000 400,000
Net operating loss................................................. (100,000)

1) Allocated common costs that would be redistributed to other product lines

if digital watches were dropped

2) This equipment has no resale value and does not wear out through use

3) The digital watches are manufactured in their own facility

Should the company retain or drop the digital watch line?

Question No: 45 ( Marks: 10 )

Production component Rates Per unit Rate

Direct material 2.5 lbs @ Rs. 4.00 Rs. 10.00

Direct Labor .5 hr @ Rs. 16.00 Rs. 8.00
VOH .5 hr @ Rs. 4.00 Rs. 2.00
Fixed FOH Rs. 40,000 Rs. 2.50
Actual Output 16,000 units
Variable S&A Rs. 6.00 per unit
Fixed S&A Rs. 60,000
 Selling price Rs. 40

Assume sales of 12,000 units.

Required: What is the profit under marginal and absorption

Question No: 49 ( Marks: 3 )

The Superior Company manufactures paint and uses a process costing system.
During February, Superior started 80,000 gallons of paint. During the month the
company completed 92,000 gallons and transferred them to the mixing
department. Superior had 38,000 gallons in beginning inventory and 26,000
gallons in ending inventory. Material is added at the beginning of the process and
conversion costs are added evenly throughout the process. Beginning WIP was
30% complete as to conversion costs and ending WIP was 20% complete as to
conversion costs. The company uses a FIFO costing. The cost data for February
follow:

Beginning inventory:
Direct materials Rs.22, 200
Conversion costs Rs. 44,000
Costs added this period:
Direct materials Rs. 150,000
Conversion costs Rs. 343,200
Required:
How many gallons were started and completed this period?

Answer :

GALLONS STARTED AND COMPLETED THIS PERIOD

MATERIAL LABOR OVERHEAD

OP INVENTORY ------ 26600 26600
ADD STARTED 80000 80000 80000
_________ __________ _____________
started this 80000 106600 106600
period

transferred out 92000 92000 92000

ending inventory 26000 5200 5200
----------- ------------- -------------
completed 118000 97200 97200
this period

Question No: 50 ( Marks: 3 )

Product "A" has a contribution of Rs. 8 per unit; a contribution margin ratio is
50% and requires 4 machine hours to produce. Product "B" has a contribution of
Rs. 12 per unit; a contribution margin ratio is 40% and requires 5 machine hours
to produce. If the constraint is machine hours to produce, then which one of the
both product a company should produce and sell? Support your answer with
suitable workings.

Answer :

WORKING

As the limiting factor in above case is the machine hours so we will go with that
option which gives the maximum contribution margin per machine hour.
PRODUCT PRODUCT
A B
Contribution 8 12
Margin/Unit
Machine 4 5
hour
required per
unit
Contribution 2 Rs 2.4 Rs
per machine
hour

Product B should be made by the company and sold instead of A.

Question No: 51 ( Marks: 5 )

Liberty Pizzas delivers to the housing societies near Gulberg. The company’s
annual fixed costs are Rs 400,000. The sales price of a normal size pizza is Rs
100 and it costs the company Rs 60 to make and deliver each pizza.

Required:
1- Calculate the Break even sales in Rs and in Units.
2- How many Pizzas must the company sell to earn a profit of
Rs.650,000
Answer :

1- Calculate the Break even sales in Rs and in Units.

Answer :

Sale price per unit = Rs 100

Variable cost per unit = Rs 60
Fixed Cost = Rs. 400,000

Contribution margin per unit = Sale price per unit– Variable Cost per unit
Contribution margin per unit = 100 - 60
= 40

So contribution margin to sales ration is

C/S = (40/100)X100 = 40%

Break even sales in rupees = Fixed Cost/contribution margin ratio

Break even sales in rupees = 400,000/.40

Break even sales in rupees = 10,00,000 Rs

Break even sales in units = fixed cost / CM per unit

Break even sales in units = 400000/40

Break even sales in units = 10,000 units (10 thousand units)

2- How many Pizzas must the company sell to earn a profit of

Rs.650,000

Answer :

Required profit = Rs 650,000

TARGET contribution margin = Required profit + Fixed cost
TRAGET contribution margin = 650,000 + 400,000
= Rs. 1,050,000

Contribution margin per unit = 100 – 60 = 40 Rs.

numbers of pizzas to produce to earn a profit = TRAGET CM / CM PER UNIT

= Rs 650,000 = 1,050,000/40
Numbers of pizzas to produce to earn a profit of Rs 650,000 = 26,250 pizzas

Question No: 52 ( Marks: 5 )

 Classify the following expenses as Financial or Administrative expense by
filling the appropriate boxes?

Expenses Nature of expense

Salaries of employee Administrative Expense
Interest paid on debts Financial Expense
Utility Bills Administrative Expense
Depreciation of office equipment Administrative Expense
Interest paid on debentures Financial Expense

Question No: 53 ( Marks: 10 )

The following is the Corporation's Income Statement for last month:

Particulars Rs.
Sales 4,000,000
Less: variable expenses 1,800,000
Contribution margin 2,200,000
Less: fixed expenses 720,000
Net income 1480,000

The company has no beginning or ending inventories. A total of 80,000 units

were produced and sold last month.
Required:
3- What is the company's contribution margin ratio?
4- What is the company's break-even in units?
5- How many units would the company have to sell to attain a target
profit of Rs. 820,000?

Answer :

1- What is the company's contribution margin ratio?

Answer :

Contribution margin ratio = (Contribution margin / Sales ) X 100

Contribution margin ratio = (2,200,000/4,000,000)X 100

Contribution margin ratio = 55 %

2- What is the company's break-even in units?

Answer :
Fixed Cost = Rs 720,000
Contribution margin = Rs 2,200,000
Number of units produced and sold = 80,000

Contribution margin per unit = 2,200,000/ 80,000 = Rs 27.5

Break even point in Units = Fixed Cost/ Contribution margin per unit

Break even point in Units = 720,000/ 27,5

Break even point in Units = 26181.82 or approximately 26,182 units

3- How many units would the company have to sell to attain a target
profit of Rs. 820,000?

Answer :
We know that
Contribution margin per unit = Total Contribution margin/ Total units sold
Contribution margin per unit = 2,200,000/80,000 = 27.5 Rs

So target profit = 820,000

Target contribution margin in Rs= 820,000 + 720,000 (fixed cost)
Target contribution margin in Rs = 1,540,000
No. of units = Target contribution margin in rupees/Contribution
margin per unit
No of Units to produce = 1,540,000/27.5 = 56,000 units

So to attain a target profit of Rs 820,000 total units that should be produced are
56,000 units
Question No: 54 ( Marks: 10 )
The manufacturing Company estimates its factory overhead to be as follows:
Variable rate (Rs.)
Fixed expense per month Rs. per direct labor hour
Indirect material 2,000
Indirect Labor 900 0.2
Maintenance 1200 0.3
Heat and Light 300
Power 200 0.55
Insurance 270
Taxes 600
Payroll Taxes 0 0.10
Depreciation 1,350
Assuming that the direct labor hours for January, February and March are 2,640,
4,740 and 2,370 hours respectively.
Required:
Prepare factory overhead budget for the first quarter.

FACTORY OVERHEAD BUDGET FOR THE Fourth QUARTER

PARTICULAR JANUARY FEBRURAY MARCH
Indirect material 2000 2000 2000
Indirect labor
Fixed 372 426
Variable 528 900 474
Maintenance
Fixed 408 489
Variable 792 1200 711
Heat and light 300 300 300
Power
Fixed
Variable 200 200 200
Insurance 270 270 270
Taxes 250 250 250
Payroll
Variable 264 474 237
Fixed
Depreciation 1350 1350 1350
TOTAL 6371 6944 6707
OVERHEAD

Question No: 49 ( Marks: 3 )

Break even chart is the useful technique for showing relationship between costs, volume
and profits. Identify the components of break even chart.

(1) total cost

(2) sales revenue
(3) fixed cost
(4) variable cost

Question No: 50 ( Marks: 3 )

Briefly describes the importance of material budget.

Production planning department plans for quantity and type of material required and
make request to purchase department on receipt of request purchase department arranges
for funds to purchase material as and when required i.e. Jit , just in time inventory so as
to avoid over stocking as well as out of stock hence , material budget is important to
avoid carrying and holding cost and keeping the funds available for making payment to
suppliers

Question No: 51 ( Marks: 5 )

Garrett Company sells hand-crafted furniture. One item it sells is a small table that sells
for Rs. 30 per unit. The variable costs related to the table, including product and shipping
costs, are Rs. 18 per unit. Total fixed costs for the company are Rs. 60,000. Assume the
tables are the only product the company sells this year and draw a CVP graph to
represent the company’s sales and expenses. From this graph, compute the approximate
breakeven point in rupees and units.

CM PER UNIT= SALES PRICE PER UNIT - VARIABLE COST PER UNIT

= 30 - 18

= 12 PER UNIT

BE POINT IN UNITS = FIXED COST / CM PER UNIT

= 60000 /12

= 5000

BE SALES (5000 *30) 150000

PROOF

BE SALES (5000 *30) 150000

VARIALBE COST 90000

_________

CM 60000

CM RATIO = 60000 / 150000 =40%

BE SALES IN Rs. = 60000 /.40

 = 150000

Question No: 52 ( Marks: 5 )

A textile company anticipates the following unit sales during the four months of 2008.

Months April May June July

Sales units 20,000 30,000 25,000 40,000

The company maintains its ending finished goods inventory at 60% of the following
month’s sale. The April1st, finished goods inventory will be 12,000 units.

Required: Prepare a production budget for second quarter of year.

PRODUCTION BUDGET

Months April May June

Sales units 20,000 30,000 25,000
Add 18000 15000 24000
Ending
Inventory
Total 38000 45000 49000

Less op inv 12000 18000 15000

Production 26000 27000 34000

Question No: 53 ( Marks: 10 )

The Midnight Corporation budget department gathered the following data for the third
quarter:

July August September

Projected Sales (units) 1,000 1,500 1,450
Selling price per unit (Rs.) 40 40 40
Direct material purchase requirement (units) 1,300 2,000 1,800
Purchase cost per unit materilal (Rs.) 20 20 20
Production units required to calculate labor cost 800 1,300 1100

Additional information

Direct labor hours 2 per complete unit

Direct Labor rate Rs. 2 per direct labor hour
Fixed factory overhead Rs. 500 per month including Rs. 200 depreciation
Variable factory overhead Rs. 1.50 per direct labor hour
Selling and Admin expense 5% of sales

Net Income before tax is as follows:

Months Rs.
July 6,000
August 10,000
September 8,000

All sales and purchases are for cash and all expenses are paid in the month incurred.
Assuming that the opening cash balance on July 1st is Rs. 25,000 and tax rate is 40%,

Required: Prepare cash budget for third quarter.

CASH RECEIPTS

Particulars July August September

Opening balance 25000 34700 48300
Sales 40000 60000 58000
Ni After Tax 3600 6000 4800
TOTAL 68600 100700 111100
RECEIPTS
CASH PAYMENYTS
Direct material 26000 40000 36000
Direct Labor 3200 5200 4400
Fixed FOH 300 300 300
Variable foh 2400 3900 3300
Sel And Admin 2000 3000 2900
TOTAL PAY 33900 52400 46900
CLOSING 34700 48300 64200
BALANCE

Question No: 54 ( Marks: 10 )

ABC company is currently deciding whether to undertake a new contract of 20 hours of

labor will be required for the contract. The company currently producing product S the
standard cost details of which are given below:

Standard Cost Card

Product S

Rs/unit

Direct Material 200

Direct Labor 300

FIXED FOH 500

Selling Price 700

Contribution margin 200

Requirement:

1. What is the relevant cost of labor if the labor must be hired from outside the
organization? (300*20)=6000
 2. What is the relevant cost of labor if the company expects to have 5 hours
spare capacity? ( 15* 300) =4500

3. What is the relevant cost of labor if the labor is in a short supply

300*5=1500

Question No: 49 ( Marks: 3 )

Define contribution margin?

Contribution margin per unit means selling price per unit less variable cost per unit

Total contribution margin means volume * (selling price per unit less variable cost
per unit

Target contribution margin

Fixed cost + target profit

Question No: 50 ( Marks: 3 )

What is a principle budget factor?

Some factor like labor or material which are short in supply. This
may be due to shortage of material, labor hours, machine capacity
and shortage of funds. That factor which ultimately decides the
planned activity level.

For example a company wants to produce 100,000 pieces of

computer but available skilled labor can produce only 80,000 units.

Hence, labor is principle budget factor in this case.

Question No: 51 ( Marks: 5 )

Ali Company produces and sells Amrat Cola to retailers. The Cola is bottled in 2-litter
plastic bottles. The estimated budgeted sales for the year 2009 would be Rs. 360,000 and
the estimated Profit for the year 2009 would be Rs 10,000.

The Margin of safety Ratio is calculated as 20%.

Required: Breakeven Sales for the year 2009

PROFIT / MOS RATIO = CONTRIBUTION MARGIN

10000 / .2 = 50,000

C/S RATIO = CM /SALES *100

= 50000 / 360000*100

= 13.88%

(IN CASE OF BREAK EVEN SALES = CONTRIBUTION MARGIN EQUAL TO

FIXED COST)

BE SALES = FIXED COST /C/S RATIO

= 40000 / 13.8889

287,999

OR
MOS RATIO = MOS / BUDGETED SALES

MOS = BUDGETED SALES * MOS RATIO

MOS = 360,000 * 20% = 72,000

MOS = budgeted sales – break even sales

Break even sales = Budgeted sales – MOS

= 360,000 – 72,000 = 288,000

Question No: 52 ( Marks: 5 )

The management of Franco Corporation is concerned about department B, which

showed a loss of Rs. 1,300 last quarter. You have been asked to prepare an analysis that
will help management to decide whether to discontinue the department. Below is the
Franco’s Income Statement for last quarter:

Department A Department B Total

Sales (Rs) 260,000 130000 390,000
Variable Cost (Rs) 156,000 117000 273,000
Contribution margin 104,000 13,000 117,000
Less: Fixed Costs:
Separable (Rs) 11,300 5700 17,000
Joint (Rs) 17,400 8600 26,000
Total 28,700 14300 43,000
Profit (Loss) (Rs) 75,300 (1,300) 74,000

Showing all calculations, determine the effect of closing department B on Franco

Corporation and make a recommendation.

ANALYSIS

If we discontinue the department “b” than the loss will be as follows

13,000 +1,300 = 14,300

Department “b” must be continued because fixed cost equal to Rs.13, 000 is being
covered and loss is only rs.1300 other wise if we discontinue the loss will be equal to
Rs.14, 300

Question No: 53 ( Marks: 10 )

Classify following organization with respect to cost accumulation procedure generally

used either Job order costing or Process costing by filling the appropriate boxes given
below.
 ANSWER

Industries Costing Procedure to be

applied
Paint Process Costing
Leather Process Costing
Printing press Job Order
Wood furniture Job Order
Steel Process Costing
Jewelry items Job Order
Accounting firms Job Order
Mobile phones Process costing
Tires and tubes Process Costing
Sugar Process Costing

Question No: 54 ( Marks: 10 )

Ali and Co. has sales of Rs. 50,000 in March and Rs. 60,000 in April. Forecasted sales
for May, June and July are Rs. 70,000, Rs. 80,000 and 100,000 respectively. The firm has
a cash balance of Rs. 5,000 on May 01 and wishes to maintain a minimum cash balance
of Rs. 5,000. Given the following data, prepare a cash budget for the month of May, June
and July.

1. The firm makes 20% of sales for cash, 60% are collected in the next month
and the remaining 20% are collected in the second month following the sale.

2. The firm receives other income of Rs. 2,000 per month.

3. The firm’s actual or expected purchases, all made for cash, are Rs. 50,000,
Rs. 70,000 and Rs. 80,000 for the months of May through July, respectively.

4. Rent is Rs. 3,000 per month.

5. Wages and salaries are 10% of the previous month’s sales.

6. Cash dividends of Rs. 3,000 will be paid in June.

7. Payment of principal and interest of Rs. 4,000 is due in June.

8. A cash purchase of equipment costing Rs. 6,000 is scheduled in July.

 9. Taxes of Rs. 6,000 are due in June.

SALES BUDGET FOR THE QUARTER FROM MAY TO JULY

CASH RECEIPTS
PARTICULARS MAY JUNE JULY

(Rs.) (Rs.) (Rs.)

OPENING 5000 5000 -16000
BALANCE of cash
Receipts from sales

March 50,000 10,000 ___ ____

April 60,000 36,000 12,000 ____

May 70,000 14,000 42,000 14,000

June 80,000 ____ 16,000 48,000

July 100,000 ___ ___ 20,000

Other receipts 2000 2000 2000

TOTAL 62,000 77,000 68,000
RECEIPTS
CASH PAYMENTS
CASH 50000 70000 80000
PURCHASES
RENT 3000 3000 3000
WAGES AND 6000 7000 8000
SALERIES
CASH DIVIDEND ---- 3000 -----
PAYMENT OF ---- 4000 -----
INTEREST
EQUIPMENT ----- ----- 6000
TAX ---- 6000 ----
TOTAL 59000 93000 97000
PAYMENTS

TR – TP 3000 -16000 -29000

BANK LOAN 2000

CLOSING 5000 -16000 -29000
BALANCE

Cash budget for the month of May

Opening balance of cash Rs. 5,000

Add: receipts 62000

Total amount of cash 67000

Less: payments (59000)

Closing balance of cash 8000

Receipts = cash sales+ Previous month sales + Previous last 2 months sales + receives
other income

= 14000+ 36000 + 10000 + 2000 = 62000

Rs.70000 *20% = 14000

Previous month sales = 60000*60/100=36000

Previous last 2 months sales = 50000 * 20/100 = 10000

1. Payments = purchases + Rent + Wages and salaries 10% of the previous month’s
sales

=50000 + 3,000 + 10% * 60000 = 59000

Cash budget for the month of June

Cash budget for the month of May

Opening balance of cash Rs. 5,000

Add: receipts 76000

Total amount of cash 81000

Less: payments (90000)

Closing balance of cash (9000)

Receipts = cash sales+ Previous month sales + Previous last 2 months sales + receives
other income

= 14000 + 48000 + 12000 + 2000 = 76000

=70000*20/100 = 14000

Previous month sales =80000* 60/100 = 48000

Previous last 2 months sales = 60000*20/100=12000

2. Payments = purchases + Rent + Wages and salaries 10% of the previous month’s
sales + Payment of principal and interest + Taxes

70000 + 3000 + 7000 + 4000 + 6000 = 90000

Cash budget for the month of July

Opening balance of cash Rs. 5,000

Add: receipts 92000

Total amount of cash 97000

Less: payments (97000)

Closing balance of cash 0

Receipts = cash sales+ Previous month sales + Previous last 2 months sales + receives
other income

= 60000 + 14000 + 16000 +2000 = 92000

100000*60/100 = 60000

70000*20/100=14000

80000*20/100=16000

Payments = purchases + Rent + Wages and salaries 10% of the previous month’s sales +
cash purchase of equipment

= 80000 + 3000 + 8000 + 6000= 97000

Question No: 40 ( Marks: 1 ) - Please choose one

The managers of a firm are in the process of deciding whether to accept or
reject a special offer for one of its products. A cost that is not relevant to
their decision is the:

Variable overheads
Common fixed overhead that will continue if the special offer is not
accepted
Direct materials
Fixed overhead that will be avoided if the special offer is accepted

Question No: 41 ( Marks: 5 )

Basit Ali Company produces and sells Makka Cola to retailers. The Cola is
bottled in 2-litter plastic bottles. The estimated budgeted sales for the year
2008 would be Rs. 80,000 and the estimated Profit for the year 2008 would
be Rs. 4,060. The Margin of safety Ratio is calculated as 25%.
Required:
1- Breakeven Sales for the year 2008
2- Projected Income statement for the year 2008

SOLUTION
CM = 4060 / .25
= 16240
C/S RATIO = CM / SALESS *100
= 16240 / 80000*100
= 20.3
CM – PROFIT = FIXED COST
16240 – 4060 = 12180

BE SALE = FIXED COST / C/S RATIO

= 12180 /.203
=60000

B) PROJECTED INCOME STATEMENT

SALES 80000
-VARIABLE COST 63760
________
CM 16240
FIXED COST 12180
_________
PROFIT 4060
_________-___

Question No: 42 ( Marks: 5 )

A textile company anticipates the following unit sales during the four
months of 2008.
Months April May June July Sales units 20,000 30,000 25,000 40,000
The company maintains its ending finished goods inventory at 60% of the
following month s sale. The April1st, finished goods inventory will be
12,000 units.

Required: Prepare a production budget for second quarter of year.

PARTICULARS APRIL MAY JUNE

SALES 20000 30000 25000
ADD ENDING 18000 15000 24000
INV
TOTAL 38000 45000 49000
AVAIABLE
LESS OP INV 12000 18000 15000
REQUIRED 26000 27000 39000
PRODUCTION

Question No: 43 ( Marks: 10 )

Following data relates to XYZ Company for the month of March:
Cost from preceding department (Rs.)
Labor
(Rs.)
FOH
(Rs.)
Work in process (opening) 14,400 900 550
Cost during month 126,000 33,140 19,430

Information regarding production

Units in process opening (1/4 lab & FOH) 4,000
Units in process ending inventory (1/3 lab &FOH) 3,000
Units transferred to Finished Goods 36,000
Units received from preceding department 36,000
Required:
A Cost of Production Report under Average costing method

Question No: 44 ( Marks: 10 )

80 units of product Milk chocolate are sold for Rs. 110 per unit. Variable
cost is Rs. 80 per unit and fixed cost is Rs.2, 000. Johan is the brand
manager in this company and purposed a new plan to management that
increases their sale price, which lead to increases in net profit.
Management decides to increase its sales price by 10%. With this
effect quantity of sale units were decreased by 5%. Other things remains
same.
Now you are the managerial accountant of the company guide them by
using decision making tool (Contribution Margin Approach).

Required: Calculate the net profit with new and existing plan either
increases the sale price or not state your comments.

Question No: 45 ( Marks: 10 )

Swisher company produces and sells commercial printing press.
According to the records of the past four years reveals the following:
Sales in units:
Press
Model
Year 1 Year 2 Year 3 Year 4
222 100 110 120 130
333 100 120 160 240
444 100 95 85 70
The trends over past four years are expected to extend to year 5. Inventory
estimates for year 5 are:
Press
Model
Beginning
Inventory
Ending
Inventory
222 2 4
333 5 5
444 4 5
Required: Prepare sales and production estimates for year 5 in units and
by
product wise.

Question No: 41 ( Marks: 5 )

The following information is available for the month of June from the Alpha
department of the Greek Corporation:
Units
Work in process June 01 (80% complete as to conversion) 40,000
Started in June 165,000
Work in process June 30 (60% complete as to conversion) 30,000
Materials are added at the beginning of the process in the Alpha department.
Required: Using the average cost method, what are the equivalent units of
production for the month of June?
Question No: 42 ( Marks: 5 )
A Company manufacturers two products A and B. Forecasts for first 7 months is
as under:
Month Sales in Units
AB
January
1,000 2,800
February 1,200 2,800
March
1,610 2,400
April
2,000 2,000
May
2,400 1,600
June
2,400 1,600
July 2,000 1,800
No work in process inventory has been estimated in any moth however finished
goods inventory shall be on hand equal to half the sales to the next month, in
each month. This is constant practice.
Budgeted production and production costs for the year 1999 will be as follows:
Production units 22,500 24,000
Direct Materials (per unit) 12.5 19
Direct Labor (per unit) 4.5 7
F.O.H. (apportioned) Rs. 66,000 Rs 96,000
Prepare for the six months period ending June 1999, a production budget for
Product B
Question No: 43 ( Marks: 10 )
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Production
component
Rates Per unit
Rate
Direct material 2.5 lbs @ Rs. 4.00 Rs. 10.00
Direct Labor .5 hr @ Rs. 16.00 Rs. 8.00
VOH .5 hr @ Rs. 4.00 Rs. 2.00
Fixed FOH Rs. 40,000 Rs. 2.50
Actual Output 16,000 units
Variable S&A Rs. 6.00 per unit
Fixed S&A Rs. 60,000
Selling price Rs. 40
Assume sales of 12,000 units.
Required: What is the profit under marginal and absorption costing method?
Question No: 44 ( Marks: 10 )
The manufacturing Company estimates its factory overhead to be as follows:
Fixed expense per month Rs.
Variable rate (Rs.)
per direct labor
hour
Indirect material 2,000
Indirect Labor 900 0.2
maintenance 1200 0.3
Heat and Light 300
Power 200 0.55
Insurance 270
Taxes 600
Payroll Taxes 0 0.10
Depreciation 1,350
Assuming that the direct labor hours for January, February and March are 2,640,
4,740 and 2,370 hours respectively.
Required:
Prepare factory overhead budget for the first quarter.
Question No: 45 ( Marks: 10 )
Lavender Company produces 2,000 parts per year, which are used in the
assembly of one of its products. The unit product cost of these parts is:
Variable manufacturing cost Rs. 64
Fixed manufacturing cost Rs. 36
Unit product cost Rs. 100
The part can be purchased from an outside supplier at Rs. 80 per unit. If the part
is purchased from the outside supplier, two-thirds of the fixed manufacturing
costs can be eliminated.
What costs are irrelevant to this decision?
What would the annual impact on the company s net operating income be
as a result of buying the part from the outside supplier?

Question No: 1 ( Marks: 5 )

Bouch Company has the following data of year 02 given below

Year 02

Sales Rs. 120/unit

Direct Materials Rs. 8/unit
Direct labor Rs. 10/unit
Variable overhead Rs. 7/unit
Selling & Admin expenses Rs. 2/unit
Fixed overhead Rs. 7,500

Normal volume of production 250 units per year

Information regarding units as follows

 Item 1st year 2nd year 3rd year 4th year

units units units units

Opening stock 200 300 300

Production 300 250 200 200

Sales 100 150 200 300

Required: Prepare income statement of year 2 under absorption costing.

SALES 30000

LESS COST OF GOOD SOLD

Direct material (8 *250) 2000

Direct labor (7 *250) 1750

Variable FOH (10*250 2500

FIXED FOH 7500

______________

13750

ADD OP ST 11000

LESS CLOSING ST 16500 8250

__________________

GROSS PROFIT 21750

LESS ADMIN AND SELLING 500

 ___________________

PROFIT 21250

Question No: 2 ( Marks: 5 )

A Company manufacturers two products A and B. Forecasts for first 7 months is as

under:

Month Sales in Units

A B
January 1,000 2,800
February 1,200 2,800
March 1,610 2,400
April 2,000 2,000
May 2,400 1,600
June 2,400 1,600
July 2,000 1,800

No work in process inventory has been estimated in any moth however finished goods
inventory shall be on hand equal to half the sales to the next month, in each month. This
is constant practice.
Budgeted production and production costs for the year 1999 will be as follows:

Production units 22,500 24,000

Direct Materials (per unit) 12.5 19
Direct Labor (per unit) 4.5 7
F.O.H. (apportioned) Rs. 66,000 Rs 96,000

Prepare for the six months period ending June 1999, a production budget for ‘’Product
A”

Production budget
For the year ended --------------------
Particular January February March April May June
Unit required to meet sale 1000 1200 1610 2000 2400 2400
budget
Add desired ending inv 600 805 1000 1200 1200 1000
Total unit required 1600 2005 2610 3200 3600 3400
Less opening inventory ---- 600 805 1000 1200 1200
Planned production for the 1600 1405 1805 2200 2400 2200
year

Question No: 3 ( Marks: 3 )

The Midnight Corporation budget department gathered the following data for the third
quarter:

July
Projected Sales (units) 1,000
Selling price per unit (Rs.) 30
Direct material purchase requirement (units) 1,500
Purchase cost per unit (Rs.) 15
Production requirements (units) 800

Direct labor hours Rs. 1.5 per unit

Direct Labor rate Rs. 2.5 per direct labor hour
Fixed FOH is Rs. 2600, included depreciation Rs. 300
Selling and Admin expense 4% of sales

Net Income before tax is as follows

July 8,000
August 10,000
September 8,000
All sales and purchase are for cash and all expenses are paid in the month incurred.
Assuming that the opening cash balance on July 01 is Rs. 40,000 and tax rate is 35%,

Requirement:

Prepare cash budget for the month of July.

CASH BUDGET FOR THE MONTH OF JULY

CASH RECEIPTS

PARTICULARS JULY (Rs.)

OPENING BALANCE 40000
SALES 30000
NET INCOME AFTE TAX 2800
TOTAL RECEIPTS 72800
CASH PAYMENTS
PURCHASES 22500
DIRECT LABOR 3000
FIXED FOH 2300
SELLING AND ADMIN EXP 1200
TOTAL PAYMENTS 29000
TOTAL RECEIPTS – 43800
TOTAL PAYMENTS

Question No: 4 ( Marks: 3 )

Why is the selection of an appropriate cost allocation method in Joint Products

important?

ANSWER

The selection of an appropriate cost allocation method in joint products is

important in order to know approximately exact cost of each product. Following are
the factors which are more contributing to its importance

(4) To know the profitability of each product

(5) To arrive at decision weather to sell or process further
(6) In order to know the realizable value of each product
Question No: 5 ( Marks: 5 )

The following information is available for the month of June from the Alpha department
of the Greek Corporation:

Units
Work in process June 01 (80% complete as to conversion) 40,000
Started in June 165,000
Work in process June 30 (60% complete as to conversion) 30,000

Materials are added at the beginning of the process in the Alpha department.

Required: Using the average cost method, what are the equivalent units of production for
the month of June?

ANSWER

WIP OPENING 40000

ADD UNIT STARTED 165000

_____________

TOTAL 205000

LESS CLOSING WIP 30000

UNIT COMPLETED 175000

EQUIVALENT UNITS USING AVERAGE COST METHOD

PARTICULARS MATERIAL LABOR FOH

COMPLETED 175000 175000 175000
CLOSING WIP 30000 30000*60% = 30000*60% =
18000 18000
TOTAL 205000 193000 193000

Question No: 6 ( Marks: 5 )

The Carter Manufacturing Company estimates its production requirements to be 30,000
units for October, 38,000 units for November and 41,000 units for December. It takes 3
direct labor hours at a rate of Rs. 3 per hour to complete one unit.

Prepare direct Labor budget cost for the last quarter of the year.

DIRECT LABOR COST BUDGET FOR THE LAST QUARTER

From October to December

Particulars October November December

Units produced 30000 38000 40000
Labor hour per unit 3 3 3
Total labor hours 90000 104000 120000
Labor rate per hour Rs.3 Rs.3 Rs.3
Total labor cost Rs. 270000 Rs.312000 Rs.360000

Question No:7 ( Marks: 10 )

Consider the following data:

Sales Rs.100 Per unit

Material Rs.10 Per unit
Labor Rs.10 Per unit
FOH Rs.5 Per unit
Fixed FOH Rs. 50,00,000
Units produced & sold 1,00,000 units

Required:

· Income statement under variable costing

· Break Even point in rupees

· Margin of safety ratio at the given sales level

· MOS

Solution A)

Sales (100000*100) 10,000,000

Less variable cost of goods sold

Material (100000*10) 1,000,000

Labor (100000*10) 1,000,000

Variable FOH(100000*5) 500,000

____________

total variable cost ( 2500000)

CM 7500000

LESS FIXED OVERHEAD (50,00,000)

PROFIT 2,500,000

(B)

BE in Rs = fixed cost /(Contribution margin /Sales)

50,00,000/(75/100) = 6,666,667

C)

MOS RATIO = PRIFIT / CM *100

= 2500000 / 7500000*100

= 33.34%

D)

MOS = Actual sales – BE sales

=10,000,000 - 6,666,667 = 3,333,333

Question No: 8 ( Marks: 10 )

Ahmed manufacturing company’s projected sales of Rs. 850,000 for the next year. The
budgeted data proposed by Cost Accountants are as follows:

Material: Rs. 115,000

Labor: 95,000

FOH: 65,000

The company’s opening finished goods inventory are Rs. 35,000 and ending finished
goods inventory are Rs. 55,000. The fixed portion of administrative and selling expenses
is estimated as 7% and 12% of sales respectively and variable portion of administrative
and selling expenses is estimated as 6% and 14% of sales respectively.

The financial charges are estimated Rs. 5,500 and the tax rate is 30%.

Required: Prepare the projected income statement for the period?

SALES 850,000
LESS COST OF GOODS SOLD
MATERIAL 115000
LABOR 95000
FOH 65000
__________
TOTLA FACTORY COST 275000
ADD OPENING FINISHED GOODS 35000
__________
COST OF GOODS TO BE SOLD 310000
LESS ENING FINISHED GOODS 55000
__________
COST OF GOODS SOLD 255000
______________
GROSS PROFIT 595000
LESS ADMIN AND SELLING EXP FIXED
ADMIN 59500
SELLING 102000

LESS ADMIN AND SELLING EXP VARIABLE

 ADMIN 51000
SELLING 119000
________ 331500
_______________
EBIT 263500
LESS FINANCILA CHARGES 5500
_______________
EBT 258000
LESS TAX 30% 77400
_________________
EAT 180600

Question No: 9 ( Marks: 3 )

Break even chart is the useful technique for showing relationship between costs, volume
and profits. Identify the components of break even chart.

(5) total cost

(6) sales revenue
(7) fixed cost
(8) variable cost

Question No: 10 ( Marks: 3 )

Briefly describes the importance of material budget.

Production planning department plans for quantity and type of material required and
make request to purchase department on receipt of request purchase department arranges
for funds to purchase material as and when required i.e. Jit , just in time inventory so as
to avoid over stocking as well as out of stock hence , material budget is important to
avoid carrying and holding cost and keeping the funds available for making payment to
suppliers

Question No: 11 ( Marks: 5 )

Garrett Company sells hand-crafted furniture. One item it sells is a small table that sells
for Rs. 30 per unit. The variable costs related to the table, including product and shipping
costs, are Rs. 18 per unit. Total fixed costs for the company are Rs. 60,000. Assume the
tables are the only product the company sells this year and draw a CVP graph to
represent the company’s sales and expenses. From this graph, compute the approximate
breakeven point in rupees and units.

CM PER UNIT= SALES PRICE PER UNIT - VARIABLE COST PER UNIT

= 30 - 18

= 12 PER UNIT

BE POINT IN UNITS = FIXED COST / CM PER UNIT

= 60000 /12

= 5000

BE SALES (5000 *30) 150000

PROOF

BE SALES (5000 *30) 150000

VARIALBE COST 90000

_________

CM 60000

CM RATIO = 60000 / 150000 =40%

BE SALES IN Rs. = 60000 /.40

= 150000

Question No: 12 ( Marks: 5 )

A textile company anticipates the following unit sales during the four months of 2008.

Months April May June July

Sales units 20,000 30,000 25,000 40,000
The company maintains its ending finished goods inventory at 60% of the following
month’s sale. The April1st, finished goods inventory will be 12,000 units.

Required: Prepare a production budget for second quarter of year.

PRODUCTION BUDGET

Months April May June

Sales units 20,000 30,000 25,000
Add 18000 15000 24000
Ending
Inventory
Total 38000 45000 49000

Less op inv 12000 18000 15000

Production 26000 27000 34000

Question No: 13 ( Marks: 10 )

The Midnight Corporation budget department gathered the following data for the third
quarter:

July August September

Projected Sales (units) 1,000 1,500 1,450
Selling price per unit (Rs.) 40 40 40
Direct material purchase requirement (units) 1,300 2,000 1,800
Purchase cost per unit materilal (Rs.) 20 20 20
Production units required to calculate labor cost 800 1,300 1100

Additional information
Direct labor hours 2 per complete unit
Direct Labor rate Rs. 2 per direct labor hour
Fixed factory overhead Rs. 500 per month including Rs. 200 depreciation
Variable factory overhead Rs. 1.50 per direct labor hour
Selling and Admin expense 5% of sales

Net Income before tax is as follows:

Months Rs.
July 6,000
August 10,000
September 8,000

All sales and purchases are for cash and all expenses are paid in the month incurred.
Assuming that the opening cash balance on July 1st is Rs. 25,000 and tax rate is 40%,

Required: Prepare cash budget for third quarter.

CASH RECEIPTS

Particulars July August September

Opening balance 25000 34700 48300
Sales 40000 60000 58000
Ni After Tax 3600 6000 4800
TOTAL 68600 100700 111100
RECEIPTS
CASH PAYMENYTS
Direct material 26000 40000 36000
Direct Labor 3200 5200 4400
Fixed FOH 300 300 300
Variable foh 2400 3900 3300
Sel And Admin 2000 3000 2900
TOTAL PAY 33900 52400 46900
CLOSING 34700 48300 64200
BALANCE
Question No: 14 ( Marks: 10 )

ABC company is currently deciding whether to undertake a new contract of 20 hours of

labor will be required for the contract. The company currently producing product S the
standard cost details of which are given below:

Standard Cost Card

Product S

Rs/unit

Direct Material 200

Direct Labor 300

FIXED FOH 500

Selling Price 700

Contribution margin 200

Requirement:

1. What is the relevant cost of labor if the labor must be hired from outside the
organization? (300*20)=6000

2. What is the relevant cost of labor if the company expects to have 5 hours
spare capacity? ( 15* 300) =4500

3. What is the relevant cost of labor if the labor is in a short supply

300*5=1500

Question No: 15 ( Marks: 3 )

The Superior Company manufactures paint and uses a process costing system.
During February, Superior started 80,000 gallons of paint. During the month the
company completed 92,000 gallons and transferred them to the mixing
department. Superior had 38,000 gallons in beginning inventory and 26,000
gallons in ending inventory. Material is added at the beginning of the process and
conversion costs are added evenly throughout the process. Beginning WIP was
30% complete as to conversion costs and ending WIP was 20% complete as to
conversion costs. The company uses a FIFO costing. The cost data for February
follow:

Beginning inventory:
Direct materials Rs.22, 200
Conversion costs Rs. 44,000
Costs added this period:
Direct materials Rs. 150,000
Conversion costs Rs. 343,200
Required:
How many gallons were started and completed this period?

Answer :

GALLONS STARTED AND COMPLETED THIS PERIOD

MATERIAL LABOR OVERHEAD

OP INVENTORY ------ 26600 26600
ADD STARTED 80000 80000 80000
_________ __________ _____________
started this 80000 106600 106600
period

transferred out 92000 92000 92000

ending inventory 26000 5200 5200
----------- ------------- -------------
completed 118000 97200 97200
this period

Question No: 16 ( Marks: 3 )

Product "A" has a contribution of Rs. 8 per unit; a contribution margin ratio is
50% and requires 4 machine hours to produce. Product "B" has a contribution of
Rs. 12 per unit; a contribution margin ratio is 40% and requires 5 machine hours
to produce. If the constraint is machine hours to produce, then which one of the
both product a company should produce and sell? Support your answer with
suitable workings.
Answer :

WORKING

As the limiting factor in above case is the machine hours so we will go with that
option which gives the maximum contribution margin per machine hour.
PRODUCT PRODUCT
A B
Contribution 8 12
Margin/Unit
Machine 4 5
hour
required per
unit
Contribution 2 Rs 2.4 Rs
per machine
hour

Product B should be made by the company and sold instead of A.

Question No: 17 ( Marks: 5 )

Liberty Pizzas delivers to the housing societies near Gulberg. The company’s
annual fixed costs are Rs 400,000. The sales price of a normal size pizza is Rs
100 and it costs the company Rs 60 to make and deliver each pizza.

Required:
1- Calculate the Break even sales in Rs and in Units.
2- How many Pizzas must the company sell to earn a profit of
Rs.650,000

Answer :

1- Calculate the Break even sales in Rs and in Units.

Answer :

Sale price per unit = Rs 100

Variable cost per unit = Rs 60
Fixed Cost = Rs. 400,000

Contribution margin per unit = Sale price per unit– Variable Cost per unit
Contribution margin per unit = 100 - 60
= 40
So contribution margin to sales ration is
C/S = (40/100)X100 = 40%

Break even sales in rupees = Fixed Cost/contribution margin ratio

Break even sales in rupees = 400,000/.40

Break even sales in rupees = 10,00,000 Rs

Break even sales in units = fixed cost / CM per unit

Break even sales in units = 400000/40

Break even sales in units = 10,000 units (10 thousand units)

2- How many Pizzas must the company sell to earn a profit of

Rs.650,000

Answer :

Required profit = Rs 650,000

TARGET contribution margin = Required profit + Fixed cost
TRAGET contribution margin = 650,000 + 400,000
= Rs. 1,050,000

Contribution margin per unit = 100 – 60 = 40 Rs.

numbers of pizzas to produce to earn a profit = TRAGET CM / CM PER UNIT

= Rs 650,000 = 1,050,000/40
Numbers of pizzas to produce to earn a profit of Rs 650,000 = 26,250 pizzas

Question No: 18 ( Marks: 5 )

Classify the following expenses as Financial or Administrative expense by
filling the appropriate boxes?

Expenses Nature of expense

Salaries of employee Administrative Expense
Interest paid on debts Financial Expense
Utility Bills Administrative Expense
Depreciation of office equipment Administrative Expense
Interest paid on debentures Financial Expense

Question No: 19 ( Marks: 10 )

The following is the Corporation's Income Statement for last month:
 Particulars Rs.
Sales 4,000,000
Less: variable expenses 1,800,000
Contribution margin 2,200,000
Less: fixed expenses 720,000
Net income 1480,000

The company has no beginning or ending inventories. A total of 80,000 units

were produced and sold last month.
Required:
3- What is the company's contribution margin ratio?
4- What is the company's break-even in units?
5- How many units would the company have to sell to attain a target
profit of Rs. 820,000?

Answer :

1- What is the company's contribution margin ratio?

Answer :

Contribution margin ratio = (Contribution margin / Sales ) X 100

Contribution margin ratio = (2,200,000/4,000,000)X 100

Contribution margin ratio = 55 %

2- What is the company's break-even in units?

Answer :

Fixed Cost = Rs 720,000

Contribution margin = Rs 2,200,000
Number of units produced and sold = 80,000

Contribution margin per unit = 2,200,000/ 80,000 = Rs 27.5

Break even point in Units = Fixed Cost/ Contribution margin per unit

Break even point in Units = 720,000/ 27,5

Break even point in Units = 26181.82 or approximately 26,182 units

 3- How many units would the company have to sell to attain a target
profit of Rs. 820,000?

Answer :
We know that
Contribution margin per unit = Total Contribution margin/ Total units sold
Contribution margin per unit = 2,200,000/80,000 = 27.5 Rs

So target profit = 820,000

Target contribution margin in Rs= 820,000 + 720,000 (fixed cost)
Target contribution margin in Rs = 1,540,000
No. of units = Target contribution margin in rupees/Contribution
margin per unit
No of Units to produce = 1,540,000/27.5 = 56,000 units

So to attain a target profit of Rs 820,000 total units that should be produced are
56,000 units

Question No: 20 ( Marks: 10 )

The manufacturing Company estimates its factory overhead to be as follows:
Variable rate (Rs.)
Fixed expense per month Rs. per direct labor hour
Indirect material 2,000
Indirect Labor 900 0.2
Maintenance 1200 0.3
Heat and Light 300
Power 200 0.55
Insurance 270
Taxes 600
Payroll Taxes 0 0.10
Depreciation 1,350

Assuming that the direct labor hours for January, February and March are 2,640,
4,740 and 2,370 hours respectively.
Required:
Prepare factory overhead budget for the first quarter.

FACTORY OVERHEAD BUDGET FOR THE FORST QUARTER

PARTICULAR JANUARY FEBRURAY MARCH
Indirect material 2000 2000 2000
Indirect labor
Fixed 372 426
Variable 528 900 474
Maintenance
Fixed 408 489
Variable 792 1200 711
Heat and light 300 300 300
Power
Fixed
Variable 200 200 200
Insurance 270 270 270
Taxes 250 250 250
Payroll
Variable 264 474 237
Fixed
Depreciation 1350 1350 1350
TOTAL 6371 6944 6707
OVERHEAD

Question 21 : Define contribution margin?

Contribution margin per unit means selling price per unit less variable cost per unit

Total contribution margin means volume * (selling price per unit less variable cost
per unit

Target contribution margin

Fixed cost + target profit

Question No: 22 ( Marks: 3 )

What is a principle budget factor?

Some factor like labor or material which are short in supply. This
may be due to shortage of material, labor hours, machine capacity
and shortage of funds. That factor which ultimately decides the
planned activity level.

For example a company wants to produce 100,000 pieces of

computer but available skilled labor can produce only 80,000 units.

Hence, labor is principle budget factor in this case.

Question No: 23 ( Marks: 5 )

Ali Company produces and sells Amrat Cola to retailers. The Cola is bottled in 2-litter
plastic bottles. The estimated budgeted sales for the year 2009 would be Rs. 360,000 and
the estimated Profit for the year 2009 would be Rs 10,000.

The Margin of safety Ratio is calculated as 20%.

Required: Breakeven Sales for the year 2009

PROFIT / MOS RATIO = CONTRIBUTION MARGIN

10000 / .2 = 50,000

C/S RATIO = CM /SALES *100

= 50000 / 360000*100

= 13.88%

(IN CASE OF BREAK EVEN SALES = CONTRIBUTION MARGIN EQUAL TO

FIXED COST)

BE SALES = FIXED COST /C/S RATIO

= 40000 / 13.8889

287,999
 OR
MOS RATIO = MOS / BUDGETED SALES

MOS = BUDGETED SALES * MOS RATIO

MOS = 360,000 * 20% = 72,000

MOS = budgeted sales – break even sales

Break even sales = Budgeted sales – MOS

= 360,000 – 72,000 = 288,000

Question No: 24 ( Marks: 5 )

The management of Franco Corporation is concerned about department B, which

showed a loss of Rs. 1,300 last quarter. You have been asked to prepare an analysis that
will help management to decide whether to discontinue the department. Below is the
Franco’s Income Statement for last quarter:

Department A Department B Total

Sales (Rs) 260,000 130000 390,000
Variable Cost (Rs) 156,000 117000 273,000
Contribution margin 104,000 13,000 117,000
Less: Fixed Costs:
Separable (Rs) 11,300 5700 17,000
Joint (Rs) 17,400 8600 26,000
Total 28,700 14300 43,000
Profit (Loss) (Rs) 75,300 (1,300) 74,000

Showing all calculations, determine the effect of closing department B on Franco

Corporation and make a recommendation.
ANALYSIS

If we discontinue the department “b” than the loss will be as follows

13,000 +1,300 = 14,300

Department “b” must be continued because fixed cost equal to Rs.13, 000 is being
covered and loss is only rs.1300 other wise if we discontinue the loss will be equal to
Rs.14, 300

Question No: 53 ( Marks: 10 )

Classify following organization with respect to cost accumulation procedure generally

used either Job order costing or Process costing by filling the appropriate boxes given
below.

ANSWER

Industries Costing Procedure to be

applied
Paint Process Costing
Leather Process Costing
Printing press Job Order
Wood furniture Job Order
Steel Process Costing
Jewelry items Job Order
Accounting firms Job Order
Mobile phones Process costing
Tires and tubes Process Costing
Sugar Process Costing

Question No: 25 ( Marks: 10 )

Ali and Co. has sales of Rs. 50,000 in March and Rs. 60,000 in April. Forecasted sales
for May, June and July are Rs. 70,000, Rs. 80,000 and 100,000 respectively. The firm has
a cash balance of Rs. 5,000 on May 01 and wishes to maintain a minimum cash balance
of Rs. 5,000. Given the following data, prepare a cash budget for the month of May, June
and July.

1. The firm makes 20% of sales for cash, 60% are collected in the next month
and the remaining 20% are collected in the second month following the sale.
 2. The firm receives other income of Rs. 2,000 per month.

3. The firm’s actual or expected purchases, all made for cash, are Rs. 50,000,
Rs. 70,000 and Rs. 80,000 for the months of May through July, respectively.

4. Rent is Rs. 3,000 per month.

5. Wages and salaries are 10% of the previous month’s sales.

6. Cash dividends of Rs. 3,000 will be paid in June.

7. Payment of principal and interest of Rs. 4,000 is due in June.

8. A cash purchase of equipment costing Rs. 6,000 is scheduled in July.

9. Taxes of Rs. 6,000 are due in June.

SALES BUDGET FOR THE QUARTER FROM MAY TO JULY

CASH RECEIPTS
PARTICULARS MAY JUNE JULY

(Rs.) (Rs.) (Rs.)

OPENING 5000 5000 -16000
BALANCE of cash
Receipts from sales

March 50,000 10,000 ___ ____

April 60,000 36,000 12,000 ____

May 70,000 14,000 42,000 14,000

June 80,000 ____ 16,000 48,000

July 100,000 ___ ___ 20,000

Other receipts 2000 2000 2000

TOTAL 62,000 77,000 68,000
RECEIPTS
CASH PAYMENTS
CASH 50000 70000 80000
PURCHASES
RENT 3000 3000 3000
WAGES AND 6000 7000 8000
SALERIES
CASH DIVIDEND ---- 3000 -----
PAYMENT OF ---- 4000 -----
INTEREST
EQUIPMENT ----- ----- 6000
TAX ---- 6000 ----
TOTAL 59000 93000 97000
PAYMENTS

TR – TP 3000 -16000 -29000

BANK LOAN 2000

CLOSING 5000 -16000 -29000
BALANCE

Question No: 26 ( Marks: 3 )

Ahmed Trading Company has the following information about Soap, the only product it
sells. The selling price for each unit is Rs 150. the variable cost per unit is Rs 45. and the
total fixed cost for the firm is Rs. 90,000. The Company has budgeted sales of Rs.
370,000 for the next period. Calculate Margin of safety in Rs

CM = 150 – 45
= 105

C/S RATIO = 105 / 150

= 0.7
BREAK EVEN SALES = 90000 / .7
= 128571

MOS = BUDGETED SALES – BREAK EVEN SALES

= 370000 – 128571
=241,429
Question No:27 ( Marks: 3 )

The gross profit for the company amounts to Rs. 150,000. The marketing and office
expenses are Rs. 45,000 and Rs. 20,000 respectively. The financial charges for the period
are Rs. 2,500. Calculate the Operating profit of a company?

Solution:
Gross profit 150,000
LESS OPERATING EXPENSES

Marketing Expenses 45,000

Office Expenses 20,000
-------------- 65,000
__________
OPERATIN PROFIT 85,000

Question No: 28 ( Marks: 5 )

ICI Ltd manufactured three joint products, W, X, Z in a common process. The cost and
production data for March is as follows:
Rs.
Opening stock 40,000
Direct material input 80,000
Conversion cost 100,000
Closing stock 20,000

Out put and sales were as follows:

Production sales sales price per

Products units units unit

W 20,000 15,000 4

X 20,000 15,000 6

Z 40,000 50,000 3

Required:
Costs are apportioned between joint products on market value basis, (Sales value of the
units produced)?
 W X Z Total
Final Price 4 6 3
Direct Meterial 16,000 24,000 40,000 80,000
Coversion Cost 20,000 30,000 50,000 100,000
Total Cost 36,000 54,000 90,000 180,000
-Closing Balance 9,000 13,500 ______
Net Cost 27,000 40,500 90,000
Sales Price 60,000 90,000 150,000
Profit 33,000 49,500 60,000

Question No: 29 ( Marks: 5 )

Briefly describes the main features of relevant cost?

A relevant cost is a cost which is related to the future expected costs that is considerable
for decision making for the management. Due to the difference among alternatives it will
effect the decision of management like opportunity cost. The interest rate provided by the
bank against investment is an opportunity cost which an investor can earn simply without
making any business activity.

Question No: 30 ( Marks: 10 )

Particulars Significant Incidental

Product Product
Opening Stock ----- -----
Production during the year 10,000 units 800 units
Closing Stock 1,000 units 100 units
Cost incurred Rs. 6,40,000 -----
Sales price per unit Rs. 300 Rs. 200
Further Processing cost Rs. 50

With the help of above mentioned information, classify the incidental product treated as
deduction from the cost of goods sold in the income statement of main product.

Cost Of goods Sold

Cost Incurred 640,000.00

Less Closing Stock 64,000.00
Cost Of goods Sold 576,000.00
Add Further Cost on By-Product 35,000.00

Less Sale Of By Product (140,000.00)

Net Cost of Goods Sold 471,000.00
Sales 300*9000 2,700,000.00
COGS 471,000.00
Profit 2,229,000.00

Question No: 31 ( Marks: 10 )

Describe the various stages in a budgeting process?

Preparation of budgets

After finalizing the forecast the preparation process of budget starts. The budget activity
starts with the preparation of the said budget. Then, production budget is prepared on the
basis of sales budget and the production capacity available. Financial budget (i.e. cash or
working capital budget) will be prepared on the basis of sale forecast and production
budget. All these budgets are combined and coordinated into -a master budget- The
budgets may be revised in the course of the financial period if it becomes necessary to do
so in view of the unexpected developments, which have already taken place or are likely
to take place.

Below are the stages of Preparation of Budget.

Functional Budget: Functional Budget is prepared to start the process of budgeting.

Sales budget: Sales budget is the first step in process of budgeting process.
Production Budget: To meet the sales targets production budget if prepared.
Raw material, Labor, FOH Budget: In order to achieve the targets of production Raw
material, Labor and FOH budgets are prepared.
Cost of goods sold: cost of goods sole budget is prepared after having above budgets.
Selling & Distribution Expenses, Administrative Expenses, Financial Expenses
Budget: At last to determine the net income all these said budgets are prepared.

All the above budgets are consolidated to finalize the Master budget.

Question No: 32 ( Marks: 5 )

Basit Ali Company produces and sells Makka Cola to retailers. The Cola is
bottled in 2-litter plastic bottles. The estimated budgeted sales for the year
2008 would be Rs. 80,000 and the estimated Profit for the year 2008 would
be Rs. 4,060. The Margin of safety Ratio is calculated as 25%.
Required:
1- Breakeven Sales for the year 2008
2- Projected Income statement for the year 2008

SOLUTION
CM = 4060 / .25
= 16240
C/S RATIO = CM / SALESS *100
= 16240 / 80000*100
= 20.3
CM – PROFIT = FIXED COST
16240 – 4060 = 12180

BE SALE = FIXED COST / C/S RATIO

= 12180 /.203
=60000

B) PROJECTED INCOME STATEMENT

SALES 80000
-VARIABLE COST 63760
________
CM 16240
FIXED COST 12180
_________
PROFIT 4060
_________-___

Question No: 33 ( Marks: 5 )

A textile company anticipates the following unit sales during the four
months of 2008.
Months April May June July Sales units 20,000 30,000 25,000 40,000
The company maintains its ending finished goods inventory at 60% of the
following month s sale. The April1st, finished goods inventory will be
12,000 units.

Required: Prepare a production budget for second quarter of year.

PARTICULARS APRIL MAY JUNE

SALES 20000 30000 25000
ADD ENDING 18000 15000 24000
INV
TOTAL 38000 45000 49000
AVAIABLE
LESS OP INV 12000 18000 15000
REQUIRED 26000 27000 39000
PRODUCTION

Question No: 34 ( Marks: 10 )

Rashid and company employees 10 production workers, working 8 hours a day
20 days per month at a normal capacity of 2,400 units.
The direct labor wage rate Rs. 6.30 per hour
Direct materials are budgeted Rs. 2.00 per unit produced
Fixed factory overhead Rs. 960
Supplies average Rs. 0.25 per direct labor hour
Indirect labor is 1/6 of direct labor cost and other charges are Rs. 0.45 per direct
labor hour
Required:
Prepare a flexible budget at 60%, 80% and 100% of normal capacity. Showing
total manufacturing costs as well as per unit total manufacturing costs.

CAPACITY LEVELS
DISCRIPTION 60% Suppose 80% 100%
normal capacity
UNITS 2400 3200 4000
HOURS 1600 (20*8*10) 2133 (1600*80/60) 2667 (1600*100/60)
Rs. Rs. Rs.
DL COST 10080 13438 16802
DM COST 4800 6400 8000
FIXED OH 960 960 960
SUPPLIES 400 533 667
IND LABOR 1680 2240 2800
OTHER 720 960 1200
CHARGES
TOTLA MFG 18640 24531 30429
COST
PER UNIT MFG 18640 / 2400 =7.76 7.66 7.60
COST

Question No: 35 ( Marks: 10 )

There are some common types of costs which you will meet when evaluating
different decisions are incremental, non-incremental, spare capacity, opportunity,
sunk costs. Are these likely to be relevant or non-relevant?
Incremental costs
An incremental cost can be defined as a cost which is specifically
incurred by following a course of action and which is avoidable if such
action is not taken. Incremental costs are, by definition, relevant costs
because they are directly affected by the decision

Non incremental cost

These are costs, which will not be affected by the decision at hand. Non-
incremental costs are non-relevant costs because they are not related to
the decision at hand (i.e. non-incremental costs stay the same no matter
what decision is taken).

Spare capacity costs

Because of the recent advancements in manufacturing technology most
enterprises have greatly increased their efficiency and as a result are
often operating at below full capacity. Operating with spare capacity can
have a significant impact on the relevant costs for any short-term
production decision the management of such an enterprise might have
to make.

If spare capacity exists in an enterprise, some costs which are generally

considered incremental may in fact be non-incremental and thus, non-
relevant, in the short-term.

Opportunity costs
An opportunity cost is a level of profit or benefit foregone by the pursuit
of a particular course of action. In other words, it is the value of an
option, which cannot be taken as a result of following a different option.
Opportunity costs are relevant costs for a decision only when they
exceed the costs of the same item in the option to the decision under
consideration

Sunk cost
A sunk cost is a cost that the already been incurred and cannot be altered
by any future decision. If sunk costs are not affected by a decision then
they must be non-relevant costs for decision making purposes.
Sunk costs are the opposite of opportunity costs in that they are not
incorporated in the decision making process even though they have
already been recorded in the books and records of the enterprise

Question No: 49 ( Marks: 3 )

The Superior Company manufactures paint and uses a process costing system. During
February, Superior started 80,000 gallons of paint. During the month the company
completed 92,000 gallons and transferred them to the mixing department. Superior had
38,000 gallons in beginning inventory and 26,000 gallons in ending inventory. Material is
added at the beginning of the process and conversion costs are added evenly throughout
the process. Beginning WIP was 30% complete as to conversion costs and ending WIP
was 20% complete as to conversion costs. The company uses a FIFO costing. The cost
data for February follow:

Beginning inventory:
Direct materials Rs.22, 200
Conversion costs Rs. 44,000
Costs added this period:
Direct materials Rs. 150,000
Conversion costs Rs. 343,200
Required:
How many gallons were started and completed this period?

Answer :

Opening work in process = 38,000 gallons

Add Gallons of paint started = 80,000
Total in the department during the period = 1,18,000

Units Transferred out = 92000

Ending work in process = 26000 gallons

Units of opening work in process 38000

Units put into the process 80,000
118,000
Units of closing work in process 26,000
Units completed and transferred out 92,000
118,000

Question No: 50 ( Marks: 3 )

Product "A" has a contribution of Rs. 8 per unit; a contribution margin ratio is 50% and
requires 4 machine hours to produce. Product "B" has a contribution of Rs. 12 per unit; a
contribution margin ratio is 40% and requires 5 machine hours to produce. If the
constraint is machine hours to produce, then which one of the both product a company
should produce and sell? Support your answer with suitable workings.

http://vustudents.ning.com/

Answer :

WORKING

As the limiting factor in above case is the machine hours so we will go with that option
which gives the maximum contribution margin per machine hour. This means per one
hour usage of machine whichever product maximizes the contribution margin should be
made and sold by the company

PRODUCT PRODUCT
A B
Contribution 8 12
Margin/Unit
Machine 4 5
hour
required per
unit
Contribution 2 Rs 2.4 Rs
per machine
hour

Although one unit of A requires less time in making than one unit of B but because
machine hours is a limiting factor so option B will be taken because it gives more
contribution margin per machine hour than product A. So product B should be made by
the company and sold instead of A.

Question No: 51 ( Marks: 5 )

Liberty Pizzas delivers to the housing societies near Gulberg. The company’s annual
fixed costs are Rs 400,000. The sales price of a normal size pizza is Rs 100 and it costs
the company Rs 60 to make and deliver each pizza.

Required:
1- Calculate the Break even sales in Rs and in Units.
2- How many Pizzas must the company sell to earn a profit of Rs.650,000

Answer :
 1- Calculate the Break even sales in Rs and in Units.

Answer :

Sale price per unit = Rs 100

Variable cost per unit = Rs 60
Fixed Cost = Rs. 400,000

Contribution margin per unit = Sale price per unit– Variable Cost per unit
Contribution margin per unit = 100-60 = 40

So contribution margin to sales ration is

C/S = (40/100)X100 = 40%

So break even point in rupees can be calculated as

Break even point in rupees = Fixed Cost/contribution margin ratio
Break even point in rupees = 400,000/.40
Break even point in rupees = 10,00,000 Rs

Break even point in units = Break even point in Rs/ Sale price per unit
Break even point in units = 10,00,000/100
Break even point in units = 10,000 units (10 thousand units)

2- How many Pizzas must the company sell to earn a profit of Rs.650,000

Answer :

Required profit = Rs 650,000

Required contribution margin = Required profit + Fixed cost
Required contribution margin = 650,000 + 400,000 = Rs. 1,050,000

Contribution margin per unit = 100 – 60 = 40 Rs

So numbers of pizzas to produce to earn a profit of Rs 650,000 = 1,050,000/40

Numbers of pizzas to produce to earn a profit of Rs 650,000 = 26,250 pizzas

Question No: 52 ( Marks: 5 )

Classify the following expenses as Financial or Administrative expense by filling the
appropriate boxes?

Expenses Nature of expense

Salaries of employee Administrative Expense
Interest paid on debts Financial Expense
Utility Bills Administrative Expense
 Depreciation of office equipment Administrative Expense
Interest paid on debentures Financial Expense

Question No: 53 ( Marks: 10 )

The following is the Corporation's Income Statement for last month:

Particulars Rs.
Sales 4,000,000
Less: variable expenses 1,800,000
Contribution margin 2,200,000
Less: fixed expenses 720,000
Net income 1480,000

The company has no beginning or ending inventories. A total of 80,000 units were
produced and sold last month.
Required:
3- What is the company's contribution margin ratio?
4- What is the company's break-even in units?
5- How many units would the company have to sell to attain a target profit of Rs.
820,000?

Answer :

1- What is the company's contribution margin ratio?

Answer :
http://vustudents.ning.com/
Contribution margin ratio = (Contribution margin / Sales ) X 100
Contribution margin ratio = (2,200,000/4,000,000)X 100
Contribution margin ratio = 55 %

2- What is the company's break-even in units?

Answer :

Fixed Cost = Rs 720,000

Contribution margin ratio = Rs 2,200,000
Number of units produced and sold = 80,000
Contribution margin per unit = 2,200,000/ 80,000 = Rs 27.5

Break even point in Units = Fixed Cost/ Contribution margin per unit
Break even point in Units = 720,000/ 27,5
Break even point in Units = 26181.82 or approximately 26,182 units
 3- How many units would the company have to sell to attain a target profit of Rs.
820,000?

Answer :

We know that
Contribution margin per unit = Total Contribution margin/ Total units sold
Contribution margin per unit = 2,200,000/80,000 = 27.5 Rs

So target profit = 820,000

Target contribution margin in Rs= 820,000 + 720,000 (fixed cost)
Target contribution margin in Rs = 1,540,000

No. of units = Target contribution margin in rupees/Contribution margin per

unit
No of Units to produce = 1,540,000/27.5 = 56,000 units

So to attain a target profit of Rs 820,000 total units that should be produced are 56,000
units

Question No: 54 ( Marks: 10 )

The manufacturing Company estimates its factory overhead to be as follows:
Variable rate (Rs.)
Fixed expense per month Rs. per direct labor hour
Indirect material 2,000
Indirect Labor 900 0.2
Maintenance 1200 0.3
Heat and Light 300
Power 200 0.55
Insurance 270
Taxes 600
Payroll Taxes 0 0.10
Depreciation 1,350

Assuming that the direct labor hours for January, February and March are 2,640, 4,740
and 2,370 hours respectively.
Required:
Prepare factory overhead budget for the first quarter.

Question No: 49 ( Marks: 3 )

Ahmed Trading Company has the following information about Soap, the only product it
sells. The selling price for each unit is Rs 150. the variable cost per unit is Rs 45. and the
total fixed cost for the firm is Rs. 90,000. The Company has budgeted sales of Rs.
370,000 for the next period. Calculate Margin of safety in Rs.
Per Unit Amount
Sales 150.00 370,000.00
Variable Cost 45.00 111,000.00
Cont Margin 105.00 259,000.00
Fixed Cost 90,000.00
Profit 169,000.00

Margin Of Safety = Budgeted Sales - Breakeven Sales

Break Even Sales = Fixed Cost/Contibution Margin Per Unit = No. Of units of Breakeven Sales

Units to be sold for Breakeven = 857.14

Selleing price = 150

Breakeven Sales in Rs. =128,571.43

Margin Of Safety in Rs =370,000128,571.43

Margin Of Safety in Rs. =241,428.57

CM = 150 – 45
= 105

C/S RATIO = 105 / 150

= 0.7
BREAK EVEN SALES = 90000 / .7
= 128571

MOS = BUDGETED SALES – BREAK EVEN SALES

= 370000 – 128571
=241,429

Question No: 50 ( Marks: 3 )

The gross profit for the company amounts to Rs. 150,000. The marketing and office
expenses are Rs. 45,000 and Rs. 20,000 respectively. The financial charges for the period
are Rs. 2,500. Calculate the Operating profit of a company?

Solution:
Gross profit 150,000
LESS OPERATING EXPENSES

Marketing Expenses 45,000

Office Expenses 20,000
-------------- 65,000
__________
OPERATIN PROFIT 85,000

Question No: 51 ( Marks: 5 )

ICI Ltd manufactured three joint products, W, X, Z in a common process. The cost and
production data for March is as follows:
Rs.
Opening stock 40,000
Direct material input 80,000
Conversion cost 100,000
Closing stock 20,000

Out put and sales were as follows:

Production sales sales price per

Products units units unit

W 20,000 15,000 4

X 20,000 15,000 6

Z 40,000 50,000 3

Required:
Costs are apportioned between joint products on market value basis, (Sales value of the
units produced)?

W X Z Total
Final Price 4 6 3
Direct Meterial 16,000 24,000 40,000 80,000
Coversion Cost 20,000 30,000 50,000 100,000
Total Cost 36,000 54,000 90,000 180,000
-Closing Balance 9,000 13,500 ______
Net Cost 27,000 40,500 90,000
Sales Price 60,000 90,000 150,000
Profit 33,000 49,500 60,000

Question No: 52 ( Marks: 5 )

Briefly describes the main features of relevant cost?

A relevant cost is a cost which is related to the future expected costs that is considerable
for decision making for the management. Due to the difference among alternatives it will
effect the decision of management like opportunity cost. The interest rate provided by the
bank against investment is an opportunity cost which an investor can earn simply without
making any business activity.

Question No: 53 ( Marks: 10 )

Particulars Significant Incidental

Product Product
Opening Stock ----- -----
Production during the year 10,000 units 800 units
Closing Stock 1,000 units 100 units
Cost incurred Rs. 6,40,000 -----
Sales price per unit Rs. 300 Rs. 200
Further Processing cost Rs. 50

With the help of above mentioned information, classify the incidental product treated as
deduction from the cost of goods sold in the income statement of main product.

Cost Of goods Sold

Cost Incurred 640,000.00

Less Closing Stock 64,000.00
Cost Of goods Sold 576,000.00
Add Further Cost on By-Product 35,000.00

Less Sale Of By Product (140,000.00)

Net Cost of Goods Sold 471,000.00

Sales 300*9000 2,700,000.00

COGS 471,000.00
Profit 2,229,000.00
Question No: 54 ( Marks: 10 )

Describe the various stages in a budgeting process?

Preparation of budgets

After finalizing the forecast the preparation process of budget starts. The budget activity
starts with the preparation of the said budget. Then, production budget is prepared on the
basis of sales budget and the production capacity available. Financial budget (i.e. cash or
working capital budget) will be prepared on the basis of sale forecast and production
budget. All these budgets are combined and coordinated into -a master budget- The
budgets may be revised in the course of the financial period if it becomes necessary to do
so in view of the unexpected developments, which have already taken place or are likely
to take place.

Below are the stages of Preparation of Budget.

Functional Budget: Functional Budget is prepared to start the process of budgeting.

Sales budget: Sales budget is the first step in process of budgeting process.
Production Budget: To meet the sales targets production budget if prepared.
Raw material, Labor, FOH Budget: In order to achieve the targets of production Raw
material, Labor and FOH budgets are prepared.
Cost of goods sold: cost of goods sole budget is prepared after having above budgets.
Selling & Distribution Expenses, Administrative Expenses, Financial Expenses
Budget: At last to determine the net income all these said budgets are prepared.
BUDGETED INCOME STATEMENT
All the above budgets are consolidated to finalize the Master budget.

Question No: 13 ( Marks: 5 )

Golden Company sells its product for Rs. 42 per unit. The company’s unit product cost
based on the full capacity of 400,000 units is as follows:

Direct materials Rs. 8

Direct labor 10
Manufacturing overhead 12
Unit product cost Rs. 30
A special order offering to buy 40,000 units has been received from a foreign distributor.
The only selling costs that would be incurred on this order would be Rs. 6 per unit for
shipping. The company has sufficient idle capacity to manufacture the additional units.
Two-thirds of the manufacturing overhead is fixed and would not be affected by this
order. Assume that direct labor is an avoidable cost in this decision. In negotiating a price
for the special order, calculate the minimum acceptable selling price per unit?

Question No: 14 ( Marks: 5 )

Data concerning P Co’s single product is as follows:
Rs./unit
Selling price 7.00
Variable cost 3.00
Fixed production cost 4.00
Fixed selling cost 1.00

Budgeted production and sales for the year are 12,000 units.
Required: What will be the company’s new Break Even point, to the nearest whole unit if
it is expected that the variable production cost per unit will each increase by 10% and
fixed cost will rise by 25% and other things remains same.
Note: it is necessary to show complete working
Question No: 15 ( Marks: 3 )
A company is considering publishing a limited edition book bound in special leather. It
has in stock the leather bought some years ago for Rs. 1,000. To buy an equivalent
quantity now would cost Rs. 2,000. The company has no plans to use the leather for other
purposes, although it has considered the possibilities:

v Of using it to cover desk furnishings, in replacement for other material which

could cost Rs. 900
v Of selling it if a buyer could be found (the proceeds are unlikely to exceed Rs.
800).

Solution:-
In calculating the likely profit from the proposed book before deciding to go ahead with
the project, the leather would not be costed at Rs. 1000. The cost was incurred in the past
for some reason which is no longer relevant. The leather exists and could be used on the
book without incurring any specific cost in doing so. In using the leather on the book,
however, the company will lose the opportunities of either disposing of it for Rs. 800 or
of using it to save an outlay of Rs. 900 on desk furnishings.

The better of these alternatives, from the point of view of benefiting from the leather, is
the latter. “lost opportunity” cost of Rs 900 will there for be included in the cost of the
books for decision making purposes

Also visit
http://www.scribd.com/doc/30800321/cost-accounting-5
Question No: 16 ( Marks: 3 )
Following information is available for preparing the Direct Labour Cost Budget:

· No. of workers required = 10 workers

· Work performance = 160 hours
· Rate = Rs. 40 per hour

Required:
Calculate the estimated amount of direct labour cost to produce 2,400 units based
on the above information.

Solution:-
worker (160 hrs @ Rs 40)= Rs 6,400 x 10 workers = 64,000

Question No: 17 ( Marks: 5 )

Production component Rates Per unit Rate

Direct material 2.5 lbs @ Rs. 4.00 Rs. 10.00

Direct Labor .5 hr @ Rs. 16.00 Rs. 8.00
VOH .5 hr @ Rs. 4.00 Rs. 2.00
Fixed FOH Rs. 40,000 Rs. 2.50
Actual Output 16,000 units
Variable S&A Rs. 6.00 per unit
Fixed S&A Rs. 60,000
Selling price Rs. 40

Assume sales of 18,000 units.

Required: What is the profit under marginal costing method?

ANSWER:-

INCOME STATEMENT

MARGINAL COSTING

FOR THE PERIOD ENDED….

PARTICULARS AMOUNT IN AMOUNT IN
Rs. Rs.
Sales 18000*40 720,000
CGS:
Opening inventory NOTE 1 2000*20 40,000
Cost of goods manufactured 16000 * 20 320,000
Closing inventory - (360,000 )
GROSS CM 360,000
Less variable period cost: selling n admin exp (108,000)
18000*6
NET CM 252,000
Less fixed period cost
Manufacturing OH 40,000
Selling n admin OH 60,000 (100,000)
NET PROFIT 152,000

NOTE 1 = Since production is 16000 & sales is 18000, so there must be

2000units lying in opening inventory

Per unit product cost= material + labor +variable OH

=10 +8+ 2 = 20

Question No: 18 ( Marks: 5 )

Hussain Corporation annually produces 10,000 units of assembly part number 206. An
outside supplier has offered to manufacture the part at Rs. 9 per unit. If Hussain
Corporation decides to buy the part, they will be able to rent the existing area for Rs.
8,000 per year. Listed below are Hussain’s total costs to produce part 206:

Rs. Total (Rs.)

Direct material 2.50 25,000
Direct Labor 4.00 40,000
Variable overhead 2.25 22,500
Fixed Overhead 0.75 7,500
Total 9.50 95,000

Assuming that no additional costs are incurred in purchasing the part, what should be the
opportunity cost for Hussain Corporation if it will buy? Support your answer with
computations.

VC of making = 8.75 / unit

VC of buying = 9 / unit
Extra cost of buying = 0.5 / unit
Particulars Amount/Qty
Units to be made annually 10000units
Extra cost of buying Rs.5000
Savings from Rent annually Rs.8000
Available benefit Rs.3000

Question No: 19 ( Marks: 5 )

Classify the following expenses as Financial or Administrative expense by filling the
appropriate boxes?

Expenses Nature of expense

Salaries of employee
Interest paid on debts
Utility Bills
Depreciation of office equipment
Interest paid on debentures
Solution:
Expenses Nature of expense
Salaries of employee Admin
Interest paid on debts Financial
Utility Bills Admin
Depreciation of office equipment Admin
Interest paid on debentures Financial

Question No: 20 ( Marks: 3 )

A study has been conducted to determine if one of the departments of Mead Company
should be discontinued. The contribution margin in the department is Rs. 150,000 per
year. Fixed expenses charged to the department are Rs. 195,000 per year. It is estimated
that Rs. 120,000 of these fixed expenses could be eliminated if the department is
discontinued. Will it be favorable to discontinue department operations? Support your
answer with suitable working.

Solution:

Old New

Contribution Margin = 150 000 ------

Fixed Expense = (195 000) -120000 (75000)

Loss / profit: =(45000) (75000)

It will not be favorable to discontinue department operations.

Question No: 21 ( Marks: 3 )

The following information is available for Atlas Corporation to prepare a cash budget for
the month of September:
· Cash on hand beginning of September Rs. 16,000
· Expected receipts in September Rs. 272,000
· Sales salaries paid Rs. 62,000
· Material purchases (all in cash) Rs. 190,000
· Depreciation Rs. 44,000
Required: Calculate ending cash balance in September. Also show complete working.

Solution:-
Atlas Corporation
Cash Budget
For the month of Sep…
Particulars Amount in Rs.
Opening Balance 16000
Add: Receipts 272000
Total 1 288000
Less: Payments
Sales Salaries 62000
Material Purchases 190000
Total 2 252000
C/S
Total 1- Total 2 36000
Bank O/D NIL

Question No: 22 ( Marks: 5 )

The Carter Manufacturing Company estimates its production requirements to be 30,000
units for October, 38,000 units for November and 41,000 units for December. It takes 3
direct labor hours at a rate of Rs. 3 per hour to complete one unit.
Prepare direct Labor budget cost for the last quarter of the year.

Solution:-
Particulars OCT NOV DEC
Hrs/Unit 3 3 3
Units to be manufactured 30000 38000 41000
Hrs to manufacture req. units 90000 114000 123000
Cost per Hr. in Rs. 3 3 3
Cost of manufacturing req. units 270000 342000 369000
(Rs)
Total labor cost of the quarter Rs.981000
Question No: 23 ( Marks: 5 )
Data concerning P Co’s single product is as follows:
Rs./unit
Selling price 7.00
Variable cost 3.00
Fixed production cost 4.00
Fixed selling cost 1.00

Budgeted production and sales for the year are 12,000 units.
Required: What will be the company’s new Break Even point, to the nearest whole unit
if it is expected that the variable production cost per unit will each increase by 10% and
fixed cost will rise by 25% and other things remains same.
Note: it is necessary to show complete working

B.E.Sales in units = FC/ CM per unit

Old B.E.Sales in units
= 48000 / 4 = 12000

New B.E.Sales in units

VC is increased by 10% so now per unit VC is Rs.3.3/Unit

FC is increased by 25% so now new FC is Rs.60000
New CM/ Unit = S/unit – VC/Unit
= 7-3.3
= 3.7
B.E.Sales in units = FC/CM per unit
= 60000/ 3.7
= 16216 units ( rounded to the nearest whole unit)
B.E.Sales in Rs.= 16216 x 7 = 113512 Rs.
VC = Rs.53512

Particulars Amount in Rupees

Sales 113512
Less VC 53512
Contribution margin 60000
Less FC 60000
Profit NIL

Question No: 24 ( Marks: 5 )

G incorporation a manufacturer of skin care products is considering dropping from its
line Moisturizing Cream, which is currently losing money. Following information of G
incorporation’s three products are given below.
Cleansers Moisturizing Eye Care
& Toners Cream Creams
 (Rs) (Rs) (Rs)
Sales revenue 500,000 300,000 400,000
Less: Variable Cost 230,000 200,000 230,000
Contribution margin 270,000 100,000 170,000
Less: Fixed Cost:
Separable cost 50,000 59,000 40,000
Common cost 106,000 60,000 85,000
Profit (loss) 114,000 (19,000) 45,000

Required: What do you think that G incorporation should discontinue the product line
Moisturizing Cream? Support your answer with complete working.

By dropping the moisturizing line results will be as follows

Differential cost statement

Current Shut down Difference

Business
(Rs) ( Rs.)
Sales revenue 300,000 ----- ------
Less: Variable Cost 200,000 ----- ------
Contribution margin 100,000 ------ (100,000)
Less: Fixed Cost:
Separable cost 59,000 ------ 59000
Common cost 60,000 60,000 ------
Profit (loss) (19,000) (60,000) (41,000)

Loss of contribution Margin = (100,000)

Gain from FC = 59,000
Differential Loss = (41,000)
Earlier we were bearing a loss of Rs. 19,000 now its Rs. 60,000 so we should not
suffer from this additional loss of Rs. 41,000 and continue with moisturizing
range.

Question No: 25 ( Marks: 3 )

A study has been conducted to determine if one of the departments of Mead Company
should be discontinued. The contribution margin in the department is Rs. 150,000 per
year. Fixed expenses charged to the department are Rs. 195,000 per year. It is estimated
that Rs. 120,000 of these fixed expenses could be eliminated if the department is
discontinued. Will it be favorable to discontinue department operations? Support your
answer with suitable working.

Question No:26 ( Marks: 3 )

 The following information is available for Atlas Corporation to prepare a cash budget for
the month of September:
· Cash on hand beginning of September Rs. 16,000
· Expected receipts in September Rs. 272,000
· Sales salaries paid Rs. 62,000
· Material purchases (all in cash) Rs. 190,000
· Depreciation Rs. 44,000
Required: Calculate ending cash balance in September. Also show complete working.

Question No: 27 ( Marks: 5 )

The Carter Manufacturing Company estimates its production requirements to be 30,000
units for October, 38,000 units for November and 41,000 units for December. It takes 3
direct labor hours at a rate of Rs. 3 per hour to complete one unit.
Prepare direct Labor budget cost for the last quarter of the year.

Question No: 28 ( Marks: 5 )

Data concerning P Co’s single product is as follows:
Rs./unit
Selling price 7.00
Variable cost 3.00
Fixed production cost 4.00
Fixed selling cost 1.00

Budgeted production and sales for the year are 12,000 units.
Required: What will be the company’s new Break Even point, to the nearest whole unit
if it is expected that the variable production cost per unit will each increase by 10% and
fixed cost will rise by 25% and other things remains same.
Note: it is necessary to show complete working

Question No: 29 ( Marks: 5 )

G incorporation a manufacturer of skin care products is considering dropping from its
line Moisturizing Cream, which is currently losing money. Following information of G
incorporation’s three products are given below.
Cleansers Moisturizing Eye Care
& Toners Cream Creams
(Rs) (Rs) (Rs)
Sales revenue 500,000 300,000 400,000
Less: Variable Cost 230,000 200,000 230,000
Contribution margin 270,000 100,000 170,000
Less: Fixed Cost:
Separable cost 50,000 59,000 40,000
Common cost 106,000 60,000 85,000
Profit (loss) 114,000 (19,000) 45,000

Required: What do you think that G incorporation should discontinue the product line
Moisturizing Cream? Support your answer with complete working.
Question No: 49 ( Marks: 3 )

XYZ manufacturing company expects the following sales in units for the 1st quarter of
next year:

Month December January February March April

Sales in units 500 560 620 820 600

The company desires an ending inventory of finished units of 30% of the next month's
sales.

Required:
Prepare budgeted production for the month January

Question No: 30 ( Marks: 3 )

Your Company regularly uses material X and currently has in stock 500 Kg for which it
paid Rs. 1,500 two weeks ago. If this ever to be sold as raw material, it could be sold
today for Rs. 2.00 per Kg. You are aware that the material can be bought in open market
for Rs. 3.25 per Kg but it must be purchased in quantities of 1,000 Kg. What would be
the relevant cost for material X?
Cost of purchase = 1500
Cost as of toady 2*500= 1000
Cost in open market 3.25*500=1625
Relevant Cost 1625-1000=625
Question No:31 ( Marks: 5 )
A study has been conducted to determine if one of the departments of Sparrow Company
should be discontinued. The contribution margin in the department is Rs. 150,000 per
year. Fixed expenses charged to the department are Rs. 130,000 per year. It is estimated
that Rs. 120,000 of these fixed expenses could be eliminated if the department is
discontinued.

v If the department is discontinued, what will be the impact on the company’s overall
net operating income?
v Which costs are irrelevant to this decision?
Ans. If the departments is discontinued then the impact would be;
a. 150000 – (130000- 120000)=40000 net operating income would increase

Question No: 32 ( Marks: 5 )

Production component Rates Per unit Rate

Direct material 2.5 lbs @ Rs. 4.00 Rs. 10.00

Direct Labor .5 hr @ Rs. 16.00 Rs. 8.00
 VOH .5 hr @ Rs. 4.00 Rs. 2.00
Fixed FOH Rs. 40,000 Rs. 2.50
Actual Output 16,000 units
Variable S&A Rs. 6.00 per unit
Fixed S&A Rs. 60,000
Selling price Rs. 40

Required: What do the income statements look like under Absorption costing
approaches if actual sales equal 16,000 units?

Question No: 33 ( Marks: 5 )

A Company manufacturers two products A and B. Forecasts for first 7 months is as
under:

Month Sales in Units

A B
January 1,000 2,800
February 1,200 2,800
March 1,610 2,400
April 2,000 2,000
May 2,400 1,600
June 2,400 1,600
July 2,000 1,800

No work in process inventory has been estimated in any moth however finished goods
inventory shall be on hand equal to half the sales to the next month, in each month. This
is constant practice.
Budgeted production and production costs for the year 1999 will be as follows:

Production units 22,500 24,000

Direct Materials (per unit) 12.5 19
Direct Labor (per unit) 4.5 7
F.O.H. (apportioned) Rs. 66,000 Rs 96,000

Prepare for the six months period ending June 1999, a production budget for ‘’Product
B”

Question No: 34 ( Marks: 3 )

 Nomi Limited budgets to make 4,000 units of product X an estimates that the standard
material cost per unit will be Rs. 6. In fact 3,800 units are produced at a material cost of
Rs. 24,700. For the purpose of budgetary control, what will be the actual and budgeted
figure of material cost?

Solution:-
Price of the material according to budgeted cost/ unit
= 3800 units x Rs.6 / unit
= 22,800 Rs

Price of the material according to the actual cost/ unit

= 3800 units x Rs.6.5/ unit
= 24700 Rs
Variance = budgeted – actual
= 22,800 – 24,700
= (1900 ) unfavorable balance

Question No: 35 ( Marks: 3 )

What is a principle budget factor?

Solution:-

Some factor like labor or material which are short in supply.

This could be because of shortage of material, staff hours, machine capacity even money.

It is the factor which ultimately decides the activity level planned. Like a company
wanted to produce 100,000 pieces of computer but skilled labor available is able to
produce only.

So labor is principle budget factor in this case.

Question No: 36 ( Marks: 5 )

Hussain Corporation annually produces 10,000 units of assembly part number 206. An
outside supplier has offered to manufacture the part at Rs. 9 per unit. If Hussain
Corporation decides to buy the part, they will be able to rent the existing area for Rs.
8,000 per year. Listed below are Hussain’s total costs to produce part 206:

Rs. Total (Rs.)

Direct material 2.50 25,000
Direct Labor 4.00 40,000
Variable overhead 2.25 22,500
 Fixed Overhead 0.75 7,500
Total 9.50 95,000

Assuming that no additional costs are incurred in purchasing the part, what should be the
opportunity cost for Hussain Corporation if it will buy? Support your answer with
computations.

Solution
VC of making = 8.75 / unit
VC of buying = 9 / unit

Extra cost of buying = 0.5 / unit

Particulars Amount/Qty
Units to be made annually 10000units
Extra cost of buying Rs.5000
Savings from Rent annually Rs.8000
Available benefit Rs.3000

Question No: 37 ( Marks: 5 )

Classify the following expenses as Financial or Administrative expense by filling the
appropriate boxes?

Expenses Nature of expense

Salaries of employee ?
Interest paid on debts ?
Utility Bills ?
Depreciation of office equipment ?
Interest paid on debentures ?
Solution:-
Expenses Nature of expense
Salaries of employee Admin
Interest paid on debts Financial
Utility Bills Admin
Depreciation of office equipment Admin
Interest paid on debentures Financial

Question No: 38 ( Marks: 5 )

Data concerning P Co’s single product is as follows:
Rs./unit
Selling price 7.00
Variable cost 3.00
 Fixed production cost 4.00
Fixed selling cost 1.00

Budgeted production and sales for the year are 12,000 units.
Required: What will be the company’s new Break Even point, to the nearest whole unit
if it is expected that the variable production cost per unit will each increase by 10% and
fixed cost will rise by 25% and other things remains same.
Note: it is necessary to show complete working

Solution

B.E.Sales in units = FC/ CM per unit

Old B.E.Sales in units
= 48000 / 4 = 12000

New B.E.Sales in units

VC is increased by 10% so now per unit VC is Rs.3.3/Unit

FC is increased by 25% so now new FC is Rs.60000
New CM/ Unit = S/unit – VC/Unit
= 7-3.3
= 3.7
B.E.Sales in units = FC/CM per unit
= 60000/ 3.7
= 16216 units ( rounded to the nearest whole unit)
B.E.Sales in Rs.= 16216 x 7 = 113512 Rs.
VC = Rs.53512

Particulars Amount in Rupees

Sales 113512
Less VC 53512
Contribution margin 60000
Less FC 60000
Profit NIL