Certificate in Accounting and Finance Stage Examinations

10 March 2016
3 hours 100 marks
Additional reading time 15 minutes

The Institute of
Chartered Accountants
of Pakistan

Cost and Management Accounting

Q.1

Rainbow Paints Limited (RPL) is in the process of preparing its budget for the year ending
28 February 2017. The following data has been extracted from the profit and loss account
for the year ended 29 February 2016:
Rs. in million
Sales (including cash sales of Rs. 19 million)
109.00
Cost of goods sold:
Materials consumed
(30.00)
Conversion cost - Variable
(18.00)
Conversion cost - Fixed (including depreciation of Rs. 3 million)
(12.00)
Opening finished goods inventory
(5.00)
Closing finished goods inventory
8.00
Gross profit
52.00
Operating expenses:
Variable
(25.00)
Fixed (including depreciation of Rs. 5 million)
(10.00)
Operating profit
17.00
For preparation of the budget, Cost Control Manager has prepared the following
projections/information:
(i)
(ii)

Sales volume and sales price are expected to increase by 10% and 5% respectively. The
ratio of cash and credit sales would be 25:75. Cash sales are made at a discount of 5%.
Average collection and payment time in RPL is as follows:
Collection of trade debtors
Payment to trade creditors
Payment of expenses

(iii)
(iv)
(v)

35 days
40 days
25 days

RPL maintains raw material inventory for average 30 days consumption. Opening
and closing finished goods inventory quantity would be the same.
Trade creditors as at 29 February 2016 amounted to Rs. 3 million.
Effect of price increase is estimated as under:

Raw material - 10%

Variable and fixed expenses (excluding depreciation) - 8%

Depreciation - same as last year

(vi)

RPL plans to introduce a new product during the budget period for which it plans to
launch an advertisement campaign during September 2016 to February 2017. In this
respect payments of Rs. 3 million each would be made on 1 September 2016 and
1 March 2017.
(vii) RPL operates absorption costing system and uses FIFO method for valuation of
inventory.
Required:
(a) Prepare budgeted profit and loss account for the year ending 28 February 2017.
(b) Prepare budgeted cash flow statement for the year ending 28 February 2017.
(Assume that all the transactions occur evenly throughout the year (360 days) unless
otherwise specified)

(08)
(08)

Cost and Management Accounting

Q.2

Page 2 of 5

An investor paid a premium of Rs. 300 for the option to buy 500 shares in ABC Limited for
Rs. 20,000 at any time during the next three months. The investor exercised his right to buy
the shares when the price in the market was Rs. 50 per share.
Required:
(a) Explain the term option.
(01)
(b) In context of the above example, briefly explain:
(i) What is the strike price?
(0.5)
(ii) Whether the above transaction is a call option or a put option.
(1.5)
(c) Explain whether the above option would be termed as in the money or out the
money when the market price is Rs. 35 per share.
(02)

Q.3

Seema Enterprises (SE) produces various leather goods. It operates a standard marginal
costing system. For one of its products Bela, following information was extracted for the
month of December 2015 from SE's budget document for the year 2015.

Sales
Cost of production of 10,000 units:
Direct material
Direct labour
Variable overheads
Fixed overheads

9,800 units

Rs. in million
25.00

5,000 kg
24,000 hrs
2,000 machine hrs

9.00
3.60
4.40
3.80

Actual production for the month of December 2015 was 12,000 units whereas SE earned
revenue of Rs. 30 million by selling 11,000 units of Bela. Following information pertains to
actual cost of production for the month:
(i)

5,700 kg material was issued to production. Raw materials are valued using FIFO
method. Other details relating to the raw material used for Bela are as follows:

1-Dec-2015 Opening balance

10-Dec-2015 Purchases
(ii)

kg
3,000
15,000

Rs. in million
5.70
26.25

To minimise labour turnover, SE increased production wages by 10% above the

standard rate, effective 1 December 2015. This improved labour efficiency by 5% as
compared to budget.

(iii) 2,100 machine hours were worked. Details of overheads are as under:

Depreciation amounted to Rs. 1.6 million (same as budgeted)

Factory building rent amounted to Rs. 1.20 million (same as budgeted)

All other overheads were 4% in excess of the budget
(iv) Variances are treated as period cost and charged to cost of sales.
(v)

There was no opening finished goods inventory of Bela. Actual closing inventory may
be valued at standard marginal production costs.

Required:
(a) Compute budgeted and actual profits of Bela for the month of December 2015 using
marginal costing.
(b) Reconcile the budgeted profit with actual profit using relevant variances under
marginal costing.

(06)
(14)

Cost and Management Accounting

Q.4

Page 3 of 5

Digital Electronics (DE) acquired a plant on 1 January 2016 under a lease arrangement on
the following terms:
Lease period (commencing from 1 January 2016)
Down payment on commencement of lease
Lease installments payable annually in arrears
Amount payable on expiry of the lease term

3 years
Rs. 2.00 million
Rs. 3.90 million
Rs. 0.89 million

On the date of acquisition, fair value of the plant was Rs. 10 million. DE depreciates its
property, plant and equipment over their useful life. The disposal price of the plant at the
end of the useful life of four years is estimated at Rs. 0.50 million.
Net cash inflows from the use of the plant are estimated as under:
Year
Amount (Rs. in million)

2016
5.90

2017
5.20

2018
2.45

2019
1.00

It may be assumed that all cash inflows arise at the end of the year.
Required:
Compute internal rate of return (IRR) and advise whether it is feasible to acquire the plant
assuming that DEs cost of capital is 15%.
Q.5

(08)

Omega Industries Limited (OIL) produces two products Alpha and Beta. These products are
processed through Fabrication and Finishing departments. Quality control and Logistics
departments provide all the necessary support for the production.
OIL allocates production overheads to Alpha and Beta at a pre-determined rate of Rs. 1,300
and Rs. 500 per unit respectively. Any under/over absorbed overheads are adjusted to cost
of sales.
Following actual data has been extracted from the cost records of OIL for the month of
December 2015:

1,500

1,200

Quality
control
500

32,000
10,000
50,000
70%
30%

20,000
5,000
40,000
60%
40%

2,000
3,000
4,000
-

40%
60%

60%
35%

Fabrication Finishing
Indirect labour
Rs. in '000
Factory rent
Rs. in '000
Power
Rs. in '000
Depreciation Plant
Rs. in '000
Other information:
Cost of plant
Rs. in '000
Floor area
Square feet
Power
KWH
Hours worked for Alpha
Hours worked for Beta
Services provided by:
- Quality control
- Logistics

5%

Logistics

Total

400

3,600
2,000
1,200
9,000

6,000
2,000
6,000
-

60,000
20,000
100,000

100%
100%

8,000 units of Alpha and 10,000 units of Beta were produced during the month of
December 2015.
Required:
(a) Compute product wise actual overheads for Alpha and Beta.
(b) Prepare journal entries to record:
(i)
Applied production overheads; and
(ii) Under/over absorbed production overheads

(10)

(02)

Cost and Management Accounting

Q.6

Page 4 of 5

Quality Chemicals (QC) produces one of its products through two processes A and B.
Following information has been extracted from the records of process A for the month of
January 2016.

Opening work in process

Input during the month
Transferred to process B
Closing work in process

Quantity
Units
5,000
20,000
18,000
6,000

Material
Conversion
----- Rs. in 000 ----2,713
1,499
10,000
5,760
-

Additional information:
(i)
Materials are introduced at the beginning of the process. In respect of conversion,
opening and closing work in process inventories were 40% and 60% complete,
respectively.
(ii) Inspection is performed when the units are 50% complete. Expected rejection is
estimated at 5% of the inspected units. The rejected units are not processed further and
sold at Rs. 100 per unit.
(iii) QC uses 'weighted average method' for inventory valuation.
Required:
(a) Compute equivalent production units and cost per unit.
(b) Prepare journal entries to record the above transactions.
Q.7

(05)
(06)

Global (Pvt.) Limited (GPL) is in the process of preparing bid documents for a special order
of 5,000 units of a new product Zeta. In this respect, GPLs technical department has
worked-out the following projections/information:
(i)
(ii)

The order would be completed in 15 days.

GPL has sufficient stock of the required materials to produce Zeta. Some of the
relevant information is as follows:
Quantity required
Original purchase price
Current purchase price
Current disposal price

Material A
5,000 kg
Rs. 180 per kg
Rs. 200 per kg
Rs. 100 per kg

Material B
3,000 kg
Rs. 150 per kg
Rs. 175 per kg
Rs. 135 per kg

Material C
2,000 kg
Rs. 50 per kg
Rs. 60 per kg
Nil

Material A is used by GPL in many products and therefore sufficient stock is

maintained.
Material B has no use other than in the production of Zeta.
The stock of material C was purchased several years ago for another project. It
can only be used in the production of Zeta. Otherwise, it will have to be
disposed of at a cost of Rs. 10 per kg to meet environmental legislation.

(iii)

The production of Zeta would require:

800 skilled labour hours at Rs. 200 per hour. Presently, 1,440 labour hours
remain idle during each month.


250 unskilled labour hours which can be hired at Rs. 120 per hour.


150 machine hours. If the machine is not used for Zeta, it may be leased out at
Rs. 4,000 per day.

(iv)

GPL absorbs overheads at Rs. 400 per skilled and unskilled labour hours. Based on
normal capacity of 50,000 hours, fixed overheads are estimated at Rs. 6,000,000. If
GPL decides to produce Zeta, fixed overheads would increase by Rs. 150,000.
As a result of production of Zeta, general administration cost would increase by
Rs. 100,000.
The planning department of GPL has incurred a cost of Rs. 20,000 on preparing
feasibility for production of Zeta.

(v)
(vi)

Cost and Management Accounting

Page 5 of 5

Required:
Compute the bid price that GPL should quote, if it wants to earn profit (based on relevant
costs only) of 20% of selling price.

Q.8

(12)

Himalayan Rivers (HR) is planning to install a new plant. Planned production from the
plant for the next year is 150,000 units. Cost of production is estimated as under:
Direct material
Direct labour
Production overheads

Rs. in million
6.00
5.00
10.29

Production overheads include the following:

(i)
Factory premises would be acquired on rent at a cost of Rs. 1.8 million per annum.
(ii)
Indirect labour has been budgeted at 30% of direct labour cost, 50% of which would
be fixed.
(iii)
Depreciation of the plant would be Rs. 0.5 million.
(iv)
Total power and fuel cost has been budgeted at Rs. 3 million. 80% of power and fuel
cost would vary in accordance with the production.
(v)
All remaining production overheads are variable.
The sales and marketing budget includes the following:
Employment of two sales representatives at a monthly salary of Rs. 25,000 each and a
(i)
sales commission of 2% on sales achieved.
Hiring of a delivery van at Rs. 70,000 per month.
(ii)
Launching an advertisement campaign at a cost of Rs. 1.5 million.
(iii)

Q.9

Required:
Calculate the breakeven sales revenue and quantity for the next year if HR expects to earn a
contribution margin of 40% on sales, net of 2% sales commission.

(10)

According to Global Reporting Initiative, an effective sustainability reporting cycle should

benefit all reporting organizations. List internal and external benefits (three each) of
sustainability reporting.

(06)

(THE END)