Cost and Management Accounting

Suggested Answers
Certificate in Accounting and Finance Autumn 2014

Ans.1

Ababeel Foods
Cooking department production and cost for June 2014

Opening WIP
Material
Labour
Overheads (20,000*1.2)

Process account - Cooking department

Rs. in
Kg.
'000'
30,000 (W-2)9,094 Normal loss:
420,000
50,000 weight loss
20,000 rejection
24,000 Abnormal loss:
weight loss
rejection
Transferred out
Closing WIP

W-1: Normal and abnormal losses:

Total loss

Weight loss:
Opening WIP
Input for the month
Transferred to finishing department
Closing WIP
Total loss
Weight loss
(450,000-440,000)
Rejection loss (balancing)

7,700
11,550

693

(W.1)
(W.1)
(W.2)
(W.2)
(W.2)

2,300
1,450
3,750
362,000
65,000
450,000

829
88,328
13,244
103,094

Normal loss (Cooking loss at

2% & rejection loss at 3% of
input)
Kg.

Opening WIP
Cost added
Normal rejection valued @ Rs. 60 per kg
Total cost

Abnormal
loss
(Balancing)

30,000
420,000
450,000
(362,000)
(65,000)
23,000
10,000
13,000
23,000

(450,000-65,000)2%
(450,000-65,000)3%

W-2: Cost and equivalent quantity:

Cost per kg.

(W.1)
(W.1)

103,094

450,000

Rs. in
'000'

Kg.

7,700
11,550
19,250

2,300
1,450
3,750

Material
cost
1,288*2.2
20,000*2.2
11,550*60
(A)

(A1,000)(B)

Conv.
Total
cost
cost
Rs. in '000'
6,260
2,834
9,094
50,000 44,000
94,000
(693)
(693)
55,567 46,834 102,401

129.0

Rupees
115.0

Equivalent kg.
Finished goods
Closing WIP (100% to material and 65% to conv.)
Total abnormal loss (100% to material and 80% to conv.)
Total equivalent quantity and cost

(B)

Material

Conv.

362,000
65,000
3,750
430,750

362,000
42,250
3,000
407,250

244.0
Total cost
(Rs. in
000)
88,328
13,244
829
102,401

Page 1 of 6

Cost and Management Accounting

Suggested Answers
Certificate in Accounting and Finance Autumn 2014

Ans.2

(a)

Auto Industries Limited

Profit statement

Sales
Variable cost of sales
Contribution margin
Fixed cost
Net profit
(b)

(125+25), 150*1.3*0.95
(150*80%), 120*90%*1.3)
(12520%), 25+5+ (40*15%)

Break-even sales
Margin of safety

Ans.3

Current
Proposed
Rs. in million
150.00
185.25
(120.00)
(140.40)
30.00
44.85
(25.00)
(36.00)
5.00
8.85
148.70
36.55

(185.2544.85)36
(185.25-148.7)

Omega Limited
Net present value of the project
Year 0
Land
(40.00)
Factory building
(10.00)
Plant installation
Loan
Working capital
Sales (10% growth)
Cost of goods sold
(8% growth)
Royalty (3% of sales)
Interest on loan
Net cash flows
(50.00)
PV factor at 12%
1.00
Present value
(50.00)
Net present value of the project

W.1

2
3
4
5
Cash inflows/(outflows) Rs. in million
(20.00)
(100.00)
50.00
(15.00)
300.00
330.00
363.00
399.30
W.1
(195.00)
(210.60) (227.45)
(245.64)
(9.00)
(9.90)
(10.89)
(11.98)
(85.00)
96.00
109.50
124.66
141.68
0.89
0.80
0.71
0.64
0.57
(75.65)
76.80
77.75
79.78
80.76

6
70.00
15.00
10.00
(50.00)
15.00
439.23
(265.30)
(13.18)
220.75
0.51
112.58
302.02

Cost of goods sold:

Cost of own production (Including depreciation)
Depreciation factory building
Depreciation Plant

(30080%90%)
(3050%)5
(10090%)5

Rs. in million
216.00
(3.00)
(18.00)
195.00

Page 2 of 6

Cost and Management Accounting

Suggested Answers
Certificate in Accounting and Finance Autumn 2014

Ans.4

(a)

(b)

Actual direct material cost

Standard material cost
Un-favorable material usage variance
Un-favorable material price variance

Direct labour variances

1

(c)

(a)

Rupees
17,000,000
820,000
600,000
18,420,000
Favorable/
(Adverse)

Direct labour rate variance

(Standard rate per hour-Actual rate per hour)*Actual hours
[(150/1.25)-(16,250,000/130,000)]*130,000

(650,000)

Direct labour efficiency variance

(Standard hours-Actual hours)*Standard rate per hour
(100,000*1.25)-130,000)*120

(600,000)

Overhead variances
1
Overhead spending variance
Standard variable overheads for actual hours
Standard fixed overheads
Total standard overheads
Total Actual overheads
2

Ans.5

100,000*170

130,000*90 (W-1)

11,700,000
2,560,000
14,260,000
15,500,000
(1,240,000)

Variable overhead efficiency variance

(Standard hours-Actual hours)*Standard rate per hour
(125,000-130,000)*90

(450,000)

Fixed overhead efficiency variance

(Standard hours used-Actual hours used)*Standard rate per hour
(125,000-130,000)*20

(100,000)

Fixed overhead capacity variance

(Normal capacity - Actual capacity used)*Standard fixed rate
(128,000-130,000)*20

40,000

W-1: Fixed and variable overheads rate per direct labour hour
Standard total overheads rate per labour hour
137.5/1.25
Standard fixed overhead rate per labour hour
2,560,000/128,000
Standard variable overhead rate per labour hour
Rs.

110.00
20.00
90.00

Non-financial considerations relevant to make or buy decision:

Risks of outsourcing work:
(i)
Supplier may produce items to a lower standard of quality.
(ii) The supplier may fail to meet delivery dates and the buyer may dependent on the
supplier to commit onward delivery to its buyer. In case of buying of a component,
production process of the end-product may be held up by a lack of component.
Benefits of outsourcing work:
(i)
Outsourcing work will enable the management to focus all of its efforts on those
aspects of operation the entity does best.
(ii) The external supplier may have specialist expertise which enables it to provide
outsourced products more efficiently and at a cheaper price.

Page 3 of 6

Cost and Management Accounting

Suggested Answers
Certificate in Accounting and Finance Autumn 2014

Ans.5

(b)

Alpha Limited
Production/import plan to maximise AL's profit
Capacity utilisation

Machine hours (A)

Sales of units to be produced

Sales of units to be imported
Total sale units

(B)
(C)

Product-A
240,000

Product-B
225,000

Product-C
270,000

30,000
12,000
42,000

25,000
10,000
35,000

22,500
4,000
26,500

Rupees in million
Variable Cost of production:
Direct material
Direct labour
overheads
Total cost

Cost per produced unit

(D)

F (DB)

48.00
45.00
33.00
126.00

31.25
40.00
25.00
96.25

40.50
56.25
29.25
126.00

4,200.00

Rupees
3,850.00

5,600.00

Rupees in million
Cost of imports:
Existing cost of imported finished goods:
Bulk discount offered
Discounted price of imported goods

Cost per imported unit

Loss per unit on imports

(F)

G (FB) Rs.
(F-G)

Production Plan:
Machine hours per unit
H (AB)
Loss per machine hour on imports
Rs.
Production priority to save loss on imports
Production from available hours of 735,000 in
sequence of the above priority:
Product-A
Units demand
Hrs. utilized (42,0008)
Product-B
Units demand
Hrs. utilized (35,0009)
Product-C
Units from remaining hrs.
Remaining hrs, [735-336-315]
Import plan:
Product-C:
Demand exceeding production
Total units

(26,500-7,000)

68.40
15%
58.14

47.00
10%
42.30

26.88
12%
23.65

4,845.00

Rupees
4,230.00

5,912.00

(645.00)

(380.00)

(312.50)

8.00
(80.63)
1st.

9.00
(42.22)
2nd.

12.00
(26.04)
3rd.

42,000
336,000
35,000
315,000
7,000
84,000

42,000

35,000

19,500
26,500

Page 4 of 6

Cost and Management Accounting

Suggested Answers
Certificate in Accounting and Finance Autumn 2014

Ans.6

Modern Engineering Works

Journal entries
Date

Particulars

Debit
Credit
Rs. in '000
10,000
31,000
41,000

Work in process Job # 101

Work in process Job # 202
Raw material
(Raw material consumed for jobs)

Work in process Job # 101

Work in process Job # 202
Payroll
(Direct labour cost allocated to jobs)

5,000
8,000

Work in process Job # 101

5,000/100*25
Work in process Job # 202
8,000/100*25
Factory overheads applied
(Overheads applied to the jobs @ Rs. 25 per direct labour hour)

1,250
2,000

Factory overheads applied

Cost of sales overhead under applied
(4,0003,250)
Factory overheads control
(Transfer of applied factory overheads to control a/c and under
applied overheads charged to cost of sales)

3,250
750

Finished goods (Job # 101)

(15,000+10,000+5,000+1,250)*3,840/4,000
Damaged goods (at NRV)
Profit and loss account (damaged goods cost exceeding
NRV)
(31,250160/4,000)-500
Work in process Job # 101
(WIP of Job order # 101 transferred to finished goods)
Cost of sales
Finished goods
(Finished goods of Jobs # 101 transferred to cost of sales)
Finished goods
(31,000+8,000+2,000)/(2,000+3,000*0.7)*2,000
Work in process Job # 202
(Units fully completed for Job # 202 transferred to finished
goods)

13,000

3,250

4,000

30,000
500
750
31,250
30,000
30,000

20,000
20,000

Page 5 of 6

Cost and Management Accounting

Suggested Answers
Certificate in Accounting and Finance Autumn 2014

Ans.7 (a)

(i)

Incremental cost

An incremental cost is the additional cost that will occur if a particular

decision is taken. Provided that this additional cost is a cash flow.
Example:
To produce 1,000 units, a company incurred variable cost of Rs. 1.2 million.
At a normal capacity of 2,000 units, fixed cost incurred was Rs. 0.6 million.
The incremental cost of making one extra unit would be Rs. 1,200 and it
would not affect the fixed cost.

(ii)

Avoidable and unavoidable costs

An avoidable cost could be saved (avoided), depending whether or not a

particular decision is taken. An unavoidable cost is a cost that will be incurred
anyway.
Example:
A company is paying Rs. 0.5 million annually for a warehouse on a short term
lease and incurring an annual cost of Rs. 0.4 million on maintenance and
security of the warehouse. One year of the lease is remaining and the
warehouse is no more required.
The rental cost of the warehouse is unavoidable cost; therefore, it should be
ignored while taking any decision. However, by closing down the warehouse
the company can avoid annual maintenance and security costs of Rs. 0.4
million.

(b)

Salman Limited
Allocation of overheads and overheads absorption rate
Allocation
basis
Direct labour
Direct material
Indirect labour
Indirect materials
Factory rent
Power
Depreciation

Floor area
Kilowatt hrs.
Machine hrs.

Total
1,340
1,515
3,500

Allocation of service departments cost:

SD-1
30:65:5
SD-2
55:35:10
SD-1
30:65:5
SD-2
55:35:10

Allocation basis
Machine/D. labour hours
Overhead absorption rate per hour

Rs.

PD-A
1,900
900
670
758
1,925
6,153

PD-B
Rs. in 000
600
1,100
536
568
1,225
4,029

178
211
12
1
6,555

386
134
25
1
4,576

Machine
hrs.

D. labour
hrs.

19,250
340.52

30,400
150.53

SD-1

SD-2

50
150
67
47
280
594

20
55
67
142
70
354

(594)
39
(39)
0
-

30
(384)
2
(2)
-

80038

(THE END)

Page 6 of 6