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The Institute of Chartered Accountants of Pakistan

Foundation and Modular Examinations Autumn 2001

September 08, 2001

COST ACCOUNTING (MARKS 100)


FE-2 (PAPER-5) & MODULAR (PAPER D12) ‘D’ (3 hours)

Q.1(a) Place each of the following expenses of a manufacturing concern within the classification
of Production, Administration and Selling and Distribution:
(i) Cost of oil used to lubricate fork lifter employed in finished goods warehouse.
(ii) Salary of security guards posted at cash counter located in the Karachi factory.
(iii) Commission paid to sales representatives.
(iv) Commission paid to company’s purchasing agent.
(v) Auditors’ fee
(vi) Cost of damaged raw materials.
(vii) Insurance expenses on finished goods
(viii) Cost of packing cartons.
(ix) Cost of protective clothing for machine operators.
(x) Cost of stationery used in the Lahore factory. (05)

(b) Classify the following cost as fixed, variable and semi-variable:


(i) Depreciation calculated on straight line method.
(ii) Royalty expense
(iii) Factory insurance
(iv) Supervision and inspection
(v) Industrial relations and employees’ welfare expenses
(vi) Property tax
(vii) Overtime costs
(viii) Material handling costs
(ix) Machinery repairs charges
(x) Generator fuel costs. (05)

Q.2 The following information is available for the month of December 2000 of Khalid
Enterprises:

Accounts payable December 01, Rs 6,000


Work in process December 01, Rs 30,000
Finished goods December 01, Rs 50,000
Material December 31, Rs 15,000
Accounts payable December 31, Rs 10,000
Finished goods December 31, Rs 60,000
Actual factory overhead Rs 150,000
Cost of goods sold Rs 300,000
Payment of accounts payable used
only for material purchases Rs 35,000

Factory overhead is applied at 200% of direct labour cost. Jobs still in process on December
31, have been charged Rs 6,000 for material and Rs 12,000 for direct labour hours (1,200
hours). Actual direct labour hours 10,000 @ Rs 8.00 per hour.

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(02)

Required : a) Material purchased


b) Cost of goods manufactured
c) Applied factory overhead
d) Work in process December 31,
e) Material used
f) Material as on December 01
g) Over or under applied factory overhead. (14)

Q.3 Emerson efficiency plan establishes a scale of bonus ratio between low task and high task
starting with zero bonus at a certain efficiency level increasing by small increments to
successively large increments cumulating to a determined bonus at 100% efficiency. Above
100% efficiency, additional bonus is allowed. Khaskhkaily Enterprises adopted the
Emerson efficiency plan for their cigarette packing plant which employs four (4) workers.
Bonus is paid to workers in addition to basic pay which is fixed by the labour authorities.
Brief synopsis of the scheme is as follows:

Efficiency rates Rates of Bonus


Upto 75% efficiency 0 Bonus
76% to 85% efficiency 2.5% bonus
86% to 98% efficiency 7.5% bonus
99% and above efficiency 15% bonus
Standard time 3 minutes per carton
Minimum Basic pay is Rs 3,375
Information specific for the month of August 2001 is as follows:
Actual packing for the month
Worker A 3,750 Cartons
Worker B 4,625 Cartons
Worker C 4,250 Cartons
Worker D 3,350 Cartons
August 2001 consisted of 25 working days of 9 hours each and there were no absentees
during the month. For the purpose of calculating standard per unit labour rate minimum
efficiency is considered as normal packing.

Required: Calculate the employee wise payroll cost for the month of August 2001
separately showing the basic pay and bonus payable to each employee. (15)

Q.4 A controller is interested in an analysis of the fixed and variable cost of electricity as related
to direct labour hours. The following data has been accumulated.
Months Electricity Cost Direct labour hours
Rupees
Jan 2000 15,480 297
Feb 2000 16,670 350
Mar 2000 14,050 241
Apr 2000 15,340 280
May 2000 16,000 274
June 2000 16,000 266
July 2000 16,130 285
Aug 2000 16,350 301

Required : The amount of fixed overhead and the variable cost using.
a) The high and low points method (06)
b) The method of least square. (06)

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(03)
Q.5 SS Construction Co. have under taken the construction of a fly over for Road Development
Authority. The value of the contract is Rs.12,500,000 subject to a retention of 20% until
one year after the certified completion of the contract and final approval of the authorities
surveyor. The Company has given the Contract No SS/RDA/786 for reference. The
following are the details as shown in the books of account of SS Construction Co. as on
June 30, 2001:
Amount in Rupees
Labour wages paid 4,050,000
Material purchased directly 4,200,000
Material issued from stores 812,000
Plant maintenance 121,000
Other expenses 601,000
Material in hand 63,000
Wages payable 78,000
Other expenses payable 16,000
Work not yet certified 165,000
Work certified 11,000,000
Cash received on account 8,800,000
Required: Prepare the Contract Account to show the position at June 30, 2001, retaining
an adequate provision against possible losses before final acceptance of the contract. (10)

Q.6 Shabbir Associates manufactures 3 joint products - Exe, Wye and Zee. A by-product Baye
is also produced. During the month of November 2000 the joint cost for direct materials and
direct labour were Rs 80,000 and 120,000 respectively. Shabbir Associates have an
established practice of absorbing overhead at 50% of direct cost. Production and sales
related data for the month of November 2000 is as follows:

Products Production Sales Sales Value


Kgs Kgs Rupees per Unit
Exe 7,800 7,000 10.00
Wye 11,700 11,000 10.00
Zee 10,000 9,000 6.50
Baye 10,000 10,000 2.60

The sales value of by-product is deducted from the process cost before apportioning cost to
each joint product. Costs of common processing are apportioned between joint product on
the basis of sales value of production. Assume that there is no opening inventories.

Required: Calculate profit for the month of November and analyze the profit
product-wise. (10)

Q.7 New Vision Trading Company Limited is planning to arrange for a six monthly overdraft
facility with a bank. However, before finalization of any arrangement it wants to know the
estimated requirements of cash. For this purpose it has hired you as consultant to make an
estimate of the foreseeable cash requirements.
The following is the basic data regarding various business cycles of the Company
I. Sales forecast for the six months are as under:
Months Rupees
January 800,000
February 950,000
March 600,000
April 900,000
May 1,100,000
June 600,000

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(04)

II. Purchases are made as and when required


III. No closing stock is maintained as the supplier has capability to supply any
quantities at any time.
IV. Gross profit ratio is maintained @ 20% of the sales price
V. Various expenses for the six months are as under:
Rupees
Salaries and 390,000
wages
Repairs and 120,000
maintenance
Insurance 6,000
Stores and 270,000
spares
Duties 360,000
Legal charges 24,000
VI. The recoveries from the debtors are made as follows
50% in the month of sale
30% in the month following the month of sale
20% in the second month after sale
VII. Trade creditors are paid as under
40% in the month of purchase
40% in the month following the month of purchase
20% in the second month after purchase
VIII. All other business expenses are paid in the month of expense. Expenses are evenly
spread throughout the year.
IX The Company commenced its business on January 1, 2000 with a cash balance of
Rs 50,000.

Required: You are required to prepare a cash budget to facilitate the company’s management
in assessing the working capital requirement for the next six months. (15)

Q.8 Sangdil Limited makes two products, SS and TT. The variable cost per unit are as follows:
SS TT
Direct Material Rs. 6.00 Rs. 18.00 .
Direct Labour (Rs 18.00 per hour) Rs. 36.00 Rs. 18.00
Variable overhead Rs. 6.00 Rs. 6.00
_____ _____
Total Variable Cost Rs. 48.00 Rs. 42.00
===== =====
The selling price per unit is Rs 84.00 for SS and Rs 66.00 for TT. During July 2001
the available direct labour is limited to 48,000 hours. Sales demand in July is
expected to be 18,000 units for SS and 30,000 units for TT.
Fixed cost is Rs.200,000 per month.

Required: Determine the profit-maximizing production level for the products


SS & TT. (14)

(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Foundation/Modular Foundation Examinations Spring 2002

March 9, 2002

COST ACCOUNTING (MARKS 100)


FE-2 Paper 5 – Modular D 12 (Module D, SM, 4B) (3 hours)

Q.1 (a) What are the essentials of a good wage system 06


(b) How Cost Control is different from Cost Reduction 02
(c) Define: Direct Material Total Variance and Direct Material Price Variance 04

Q.2 The following balances are appearing in the cost ledger of Marwat Engineering as at
January 1, 2002.

General ledger control account 80,000


Materials control account 35,000
Work-in-process control account 17,500
Finished goods control account 27,500

At the end of the period you are supplied the following information by the factory
supervisor:

Materials purchased 195,000


Materials purchased for “Special Job 420” 10,450
Materials issued for
Repair and maintenance 3,400
Capital Job 101 9,700
Special Job 420 11,200
Production 177,400
Materials returned to suppliers 1,253
Normal material lost in transit and storage ?
Carriage inwards of materials 3,264
Total wages paid to employee for
Repair and maintenance 2,100
Capital Job 101 6,325
Special Job 420 19,475
Production 103,000
Indirect wages 15,325
Normal idle time ?
Production expenses 21,860
Admin expenses 19,462
Selling expenses 11,231
Distribution expenses 5,433
Sales 425,000
Revenue from Special Job 420 70,000
Production overheads recovered as a percentage of prime cost 15.0%

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(2)

Admin overheads recovered on finished production 20,000


Selling overheads recovered on finished production 17,500
Capital Job is completed and needs to be capitalised
Special job 420 was completed and despatched to customer
Inventory valuation as at January 30, 2002
Materials control account 26,500
Work-in-process control account 18,100
Finished goods control account 35,674

Required:

• Prepare necessary control accounts in the cost ledger


• Calculate normal loss on materials in transit and storage
• Calculate normal idle time of labour
• Calculate production overhead allocated to SJ420, CJ101 and normal production
• Calculate profit on SJ420
• Calculate capitalised cost of CJ101 20

Q.3
a) Assuming nil opening stocks, calculate the value of the closing stock from the data
provided below using each of the following methods:

• FIFO
• LIFO
• HIFO

Receipts
Date Units Rate
October 1 100 12.50
October 8 85 15.00
October 16 95 11.95
October 20 115 13.00
Issues
October 2 55
October 9 65
October 12 50
October 18 25
October 20 115
12

b) List the main advantages and disadvantages of FIFO method of costing 03

c) Apollo Industries apportioned its overheads using the following bases:

i) Direct material cost iv) Machine values


ii) Direct labour cost v) Area in square meters
iii) Machine hours vi) Number of employees in the department

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(3)

You have been requested by the Production Manager to reassess the overhead
apportionment basis. You are required to provide an appropriate basis for each of the
following overheads:

1. Rent and property tax


2. Repair and maintenance
3. Electric power
4. Direct material handling
5. Indirect materials
6. Indirect labour wages
7. Workmen canteen expenses
8. Insurance
9. Medical insurance
10. Factory security 05

Q.4 A one-year contract has been offered to Maliaka Industries which will uitilise an existing
machine that is only suitable for such contract works. The machine cost Rs 275,000 four
years ago and has been depreciated by Rs 60,000 per year on a straight-line basis and thus
has a book value of Rs 35,000. The machine could now be sold for Rs 47,500 or in one-
year’s time for Rs 4,000

Four types of materials would be required for the contract as follows:

Material Units Purchase price Current Current resale


of stocks Buying price price
Available Required for Rupees
in stocks contract
071 1,200 450 23.00 17.00 14.50
076 200 1,250 32.00 42.00 40.50
079 3,000 800 47.00 53.50 42.00
085 1,800 1,200 33.00 13.25 12.00

Material 071 and 085 are in regular use within the firm. Material 076 could be sold if not
used for the contract and there are no other uses for 079, which has been deemed to be
obsolete.

The labour requirements for the contract are

First six Subsequent six First six Subsequent six


months months months months
Hours Required Normal wage rate in Rupees
Skilled 1,350 1,276 25.00 28.75
Semi-skilled 1,400 1,225 17.00 19.00
Unskilled 1,225 1,400 15.00 16.00

It is expected that there will be shortage of skilled labour in the first six months only.
Therefore, for the purposes of the contract skilled labour will have to be diverted from other
work from which a contribution of Rs 7.50 per hour is earned, net of wage costs. The firm
currently has a surplus of semi-skilled labour paid at full rate but doing unskilled work. The
labour concerned could be transferred to provide sufficient labour for the contract and
would be replaced by unskilled labour.

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(4)

Overheads are generally allocated in the firm at Rs 18 per skilled labour hour which
represents Rs 13 for fixed overheads and Rs 5 for variable overheads.

Required:

You are required to determine the relevant cost of the contract and sales price of the
contract using the following assumptions:
• 10 % contribution margin is earned on the relevant cost of the contract.
• Contribution margin over relevant cost is equal to 15% of selling price. 18

Q.5 A chemical compound is made by raw material being processed through two processes. The
output of process A is passed to process B where further material is added to the mix. The
details of the process costs for the financial year December 2001 are as below:
Process A
Direct material 2000 kgs @ Rs 5.00 per kg
Direct Labour Rs 7,200
Process Plant Time 140 hrs @ Rs 60.00 per hr
Expected output 80% of input
Actual output 1400 kgs
Normal loss is sold @ Rs 0.50 per kgs

Process B
Direct material 1400 kgs @ Rs 12.00 per kg
Direct Labour Rs 4,200
Process Plant Time 80 hrs @ Rs 72.50 per hr
Expected output 90% of input
Actual output 2620 kgs
Normal loss is sold @ Rs 1.825 per kgs
The department overhead for the year was Rs 6,840 and is absorbed into the costs of each
process on direct labour cost. There was no opening stock at the beginning of the year.

Required:
Prepare the following accounts:
a) Process A 05
b) Process B 05
c) Normal loss/gain of both process 05

Q.6 In a manufacturing deptt 1 kg of product K requires two chemicals A and B. The following
are the details of product K for the month of January 2002.
a) Standard mix of Chemical A is 50% and Chemical B is 50%
b) Standard price per kg of chemical A is Rs 60 and chemical B is Rs 75
c) Actual input of chemical B is 350 kgs
d) Actual price of chemical A is Rs 75
e) Standard normal loss is 10% of total input
f) Material Cost Variance Rs 3,250 adverse
g) Material yield variance Rs 675 adverse
h) Actual output 450 kgs.

Required:
i) Material Mix Variance 06
ii) Material Usage Variance 03
iii) Material Price Variance 06
(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Foundation Examinations Autumn 2002

September 07, 2002

COST ACCOUNTING (MARKS 100)


FE-2 Paper 5 & Module D Paper D12 (3 hours)

Q.1 (a) Describe the roll of a Cost Accountant in a manufacturing unit. (04)
(b) At the end of the month goods have arrived from the supplier but the relevant
invoice has either not been received or has not yet been processed for
payment by the relevant department. How you would deal with the problem
while preparing monthly management accounts. (03)
(c) Outline briefly a system for ascertaining idle time of a production worker
employed in a manufacturing concern. (05)
(d) A chart of accounts, accompanied by adequate instructions, is a great aid to
better accounting, costing and controlling. Explain. (05)

Q.2 With reference to material control system, you are required to explain the meaning
of:
(i) Perpetual Inventory
(ii) Continuous Stock Taking (05)

Q.3 The Parrot Steel’s factory overhead rate is Rs.5 per hour. Budgeted overhead for
5,000 hours per month is Rs.30,000 and at 7,000 hours is Rs.37,000. Actual
overhead for the month is Rs.29,000 and actual volume is 7,000 hours.

Required:
(i) Variable overhead in overhead rate (02)
(ii) Budgeted fixed overhead rate (02)
(iii) Applied factory overhead rate (02)
(iv) Over or under absorb factory overhead (02)
(v) Spending variance (03)
(vi) Idle capacity variance (03)

Q.4 A manufacturing company makes a product by two processes and the data below
relates to the second process for the month of June 2002.
Work in process as on June 01, 2002 was 1,200 units represented by the following
costs:
Rupees
Direct material (100%) 54,000
Direct wages (60%) 34,200
Overhead (60%) 36,000

During June 4,000 units were transferred from first process @ Rs.37.50 per unit.
This cost is treated as material cost of second process.

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(2)

Other costs were as follows:

Rupees
Additional material 24,150
Direct Wages 164,825
Overhead 177,690

Quantitative data shows the following:

Finished Goods transferred to godown 3,200 units


Finished Goods in hand 500 units
Normal loss 520 units
Work in process (100% material and 50% wages and
overhead) 980 units

Average method of pricing is used.

Required (i) Equivalent Production Statement for June 2002 (04)


(ii) Process Account for the month of June 2002 (10)

Q.5 (a) What is margin of safety? (03)


(b) The fixed cost of an enterprise for the year is Rs.400,000. The variable cost per
unit for a single product being made is Rs.20. Each units sells at Rs.100.

Required
(i) Break even point. (04)
(ii) If the turnover for the next year is Rs.800,000, calculate the estimated
contribution and profit, assuming that the cost and selling price remain the
same. (04)
(iii) A profit target of Rs.400,000 has been desired for the next year. Calculate the
turnover required to achieve the desired result. (04)

Q.6 (a) Explain the main functions of a cash budget and discuss briefly its importance
in a system of budgetary control. (05)
(b) Jawed Enterprises has bank balances of Rs.100,000 as on January 01, 2002.
The sales forecast for the next six months are as follows:

Rupees
January 850,000
February 750,000
March 800,000
April 800,000
May 900,000
June 950,000

Trend of recoveries against sales are 55% in the month of sales, 30% in next
month, 10% in the second month and 5% in the third month.

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(3)

Cost of sales are 80% of sales, payable immediately to avail 5% cash discount
of cost. Other costs are 10% of sales. Personal drawing are Rs.25,000 per
month. Any shortfall will be financed by bank @ 12% markup p.a. worked out
on the closing balance of the month. Mark up is payable next month.

Required:
(i) Cash budget for the six month ending June 30, 2002 (10)

(ii) Budgeted Income Statement for the six month ending June 30, 2002 (05)

Q.7 Baba Machine Factory manufactures equipment for textile, sugar and cement
industries. The company has three sales departments who are authorized to sell
directly to these industries. The following information is available for the month of
June 2002.

Particulars Textile Sugar Cement


Division Division Division
Capacity utilization 30% 30% 30%
Rupees Rupees Rupees
Gross sales 130,000 170,000 200,000
Net sales 120,000 150,000 200,000
Sales salaries 10,000 15,000 20,000
Storage expenses 6,000 8,000 8,000
Delivery expenses 2,000 4,000 5,000

Cost of goods manufactured as a % of gross sales 50% 60% 65%

Other marketing & selling expenses are Rs.24,000 to be allocated on net sales basis.
General salary are Rs.35,000 to be allocated on manufacturing cost basis and
commission to sales person are 2% of the net sales. The company is using 90% of its
capacity and each of the sales department are confident that they will be able to sell
the equipment if the capacity is increased to 100%. The additional cost for utilizing
100% capacity is estimated to be 5% of net incremental sales.

Required: (i) Income Statement in (columnar form) for the month of June 2002 (10)
for all the three divisions and as a whole.

(ii) Advice the management whether to increase its capacity to 100%


or not. If your answer is in affirmative, the division you would
suggest to increase the capacity. (05)

(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Modular Intermediate Examinations Spring 2003

March 08, 2003

COST ACCOUNTING (MARKS 100)


Module D Paper D 12 (3 hours)

Q.1 Following transactions appeared in the books of accounts of the Company

PURCHASES

Month Quantity (Units) Cost per unit (Rs.)


Jan 100 41
Feb 200 50
April 400 51.87

SALES

Month Quantity (Units) Sale price per unit (Rs.)


March 250 64
May 350 70
June 100 74

There was an opening balance of 100 units for Rs.3,900.


From the information given above, for the six month ended June 30, show the store
ledger records including the closing stock balance and stock valuation by using
weighted average, FIFO and LIFO methods of pricing. (09)

Q.2 (a) Following is the labour data of a company for a given week:

Days Units Hours

Monday 270 8
Tuesday 210 8
Wednesday 300 8
Thursday 240 8
Friday 260 8

Required:

You are required to prepare a schedule showing weekly earning, hourly rate, and the
labor cost per unit assuming a 100% bonus plan with a base wage of Rs. 6/- per hour
and a standard production rate of 30 units per hour. (06)

(b) What are the requirements for an incentive plan to be successful. (03)

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(2)

Q.3 The following data of a period relates to a manufacturing department:


Budgeted Actual
Direct Material Cost Rs.500,000 Rs.750,000
Direct Labour Cost Rs.500,000 Rs.550,000
Production Overhead Rs.750,000 Rs.800,000

Direct Labour Hours 100,000 130,000

During the period a Job XY 54 was completed. Direct material costing Rs.100,000
direct labour Rs.21,000 and overhead costing Rs.115,000 were incurred.

Required:

(a) Calculate predetermined production overhead absorption rate on the following


basis:
(i) as a percentage to direct material cost (ii) direct labour hours (04)
(b) Calculate the production overhead cost to be charged to XY54 based on rates
calculated in answer (a) above. (04)
(c) Assume that the direct labour hour rate of absorption is used. Calculate the
under or over absorbed production overheads for the period and state an
appropriate treatment in the accounts. (04)
(d) If the factory overhead control account has a credit balance at the end of the
period, was overhead over applied or under applied? (04)

Q.4 ABC Limited produces four joint products Q,R,S and T, all of which result from
processing a single Raw Material Z. The following information is provided to you:

Joint Product Numbers of Units Selling price per unit


Rupees
Q 5000 18
R 9000 8
S 4000 4
T 2000 11

The company budgets for a profit of 14% of sales value. Other costs are as follows:
Carriage Inward 6%
Direct Wages 18%
Manufacturing overhead 12%
Administrative overhead 10%

Required:

(a) Calculate the maximum price that may be paid for the raw material. (04)
(b) Prepare a comprehensive Cost Statement for each of the products allocating the
material cost and other costs based on:
(i) the numbers of units, and
(ii) the sales value. (08)

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(3)

Q.5 (a) List the contents of a complete budget document of a manufacturing concern. (08)
(b) Explain Functional Budget. (06)

Q.6 M/s Gama & Sons produces only one product by the name ‘Gama’ and the standard
manufacturing cost of the product is as under:
Rupees
Direct material (4 kg @ Rs.3 per kg) 12
Direct labour (5 hours @ Rs.4 per hour) 20
Variable overhead 5
Fixed overhead 15
__________
Total standard cost 52 per unit
=========

The budgeted quantity to be produced is 10,000 kg and actual production was 9,500
units. The actual consumption and cost during the period was as under:
Rupees
Direct material ( 37,000 kg) 120,000
Direct labour (49,000 hours) 200,000
Variable overhead 47,000
Fixed overhead 145,000
__________
Total standard cost 512,000
=========

There was no stock of work in process or finished goods at the beginning or end of
the period.

Required:

You are required to calculate the relevant cost variances (14)

Q.7 A company manufactures a single product by the name ‘BABA’. Its variable cost is
Rs.40/- and selling price is Rs.100/-. For the current year, Company expects a net
profit of Rs.2,750,000 after charging a fixed cost of Rs.850,000. However the
production capacity is not utilized and the Manager Marketing suggested the
following for maximization of profit:

Suggestion Reduced selling price by Sale volume expected


to increase by
% %
1 5 10
2 7 20
3 10 25

Required:
(a) Evaluate the above proposals and advise the most profitable suggestions
assuming no change in the cost structure.
(b) Suggest other considerations for the decisions. (14)

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(4)

Q.8 A company which manufactures a uniform product is operating at 60% level of


activity. At this level the sales are Rs.60,000 at a selling price of Rs.10/- per product.
The following information regarding cost is available.

Variable cost Rs. 2 per product


Semi variable cost may be considered fixed at Rs.6,000 with a variable cost of
Rs.0.50 per product.

Fixed cost is Rs.20,000 at the present level of activity but is estimated that
achievement of an 80% - 90% level would increase cost by Rs.4,000.

A proposal has been made to the Directors that the price of product should be
reduced by 10% so as to reach a wider sales market. The Board is considering it and
require a statement showing:

(a) the operating profit if the company is operating at level of activity of 60%,
70% and 90% assuming that selling price
(i) remains as at present
(ii) is reduced to Rs.9 (08)

(b) The percentage increase in present output which will be required to maintain
the present profit if the Company reduces the selling price. (04)

(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2003

September 06, 2003

COST ACCOUNTING (MARKS 100)


Module D (3 hours)

Q.1 Why should semi variable expenses be separated into fixed and variable elements?
What methods are available for separating semi variable expenses? 07

Q.2 How Cash Budget assists management in making more effective use of money?
Name two methods used for the preparation of a cash budget. 09

Q.3 The estimated overheads likely to be incurred relating to a cost center with two major
machines installed are as under:
Rupees

Supervision 8,000
Indirect employees, wages 10,000
Earned leave 5,000
Maintenance cost 15,000
Power 20,000
Depreciation 5,000
Rent of building 2,500
65,000
Details of various allocations of the cost centers are as under
Machine-1 Machine-2 Total

Running hours 5,000 1,000 6,000

1) Supervision cost Rs 4,000 4,000 8,000


2) Capital cost of machine Rs 20,000 5,000 25,000
3) Indirect employees No 8 2 10
4) Total employees No 20 5 25
5) Maintenance hours 600 120 720
6) Kilowatt hours 100,000 20,000 120,000
7) Floor Space Sq. ft 5,000 5,000 10,000

Required: Calculate machine hour rate for each machine. 10

Q.4 Following data pertains to a worker of a manufacturing industry.


Actual production 400 units
Working hours in a week 48 hrs
Guaranteed rate per hour Rs.10
Estimated time to produce one unit 8 minutes

As an incentive the management has agreed to increase the


time allowed per unit by 20%

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(02)

Required:

Calculate the gross wages of the worker according to:


a) Piece work with a guaranteed weekly wages
b) Under Rowan premium bonus
c) Under Hasley premium bonus 50% to worker 09

Q.5 Tata Cools manufactures a range of products including Air conditioners which pass
through three processes before transfer to finished goods store. Production department
for the current month has given the following production data.

PROCESS
1 2 3 Total

Basic Raw Material (10,000 units) Rs 6,000 6,000


Direct material – addition Rs 8,500 9,500 5,500 23,500
Direct wages Rs 4,000 6,000 12,000 22,000
Direct expenses Rs 1,200 930 1,340 3,470
Production overheads (to be allocated
on the basis of direct wages) Rs 16,500

Output Units 9,200 8,700 7,900


Normal loss in process of input % 10 5 10
Scrap value of each lost unit Rs 0.20 0.50 1.00

There was no stock at start or at the end in any process.

You are required to prepare the following accounts

a) Process 1 04
b) Process 2 04
c) Process 3 04
d) Abnormal Loss 04
e) Abnormal Gain 04

Q.6 The Parrot Company sold 150,000 units @ Rs. 30 each, Variable cost is Rs. 20
(Manufacturing Rs. 15 & Marketing Rs. 5), Fixed Cost is Rs. 1,200,000 annually
which occurs evenly throughout the year (Manufacturing Rs. 800,000 & Marketing
Rs. 400,000)

Required

i) Breakeven point in units


ii) Breakeven point in Rupees
iii) Number of units to be sold to earn profit before tax of Rs. 200,000
iv) Number of units to be sold to earn after tax profit of Rs. 100,000 if tax rate
is 25%
v) The breakeven point in units if selling price is increased by Rs. 3 and
variable cost by Rs. 2 per unit 10

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(03)

Q.7 A manufacturing concern is currently buying a component used in its finished product
from a local supplier @ Rs. 2,000. The company has been informed that plant to
produce this component is available and can be installed at space available with the
company. Two alternative proposals are under consideration:

a) Install a semi-automatic machine in which case fixed cost will be


Rs. 5,000,000 and variable cost Rs. 1,500 per unit.
b) Install an automatic machine in which case fixed cost will be Rs. 10,000,000
and variable cost Rs.1,200 per unit.

Note (Depreciation and interest costs are included in fixed cost).

Required:
(i) At what level of output it is justified to install any of the above two
machines.
(ii) If the annual requirement of the component is 15,000 units, which machine
would you advise to install.
(iii) At what level of output would you advise the company to install automatic
machine instead of semi-automatic machine. 15

Q.8 Following information pertains to Dilber Associates:

Normal capacity of a plant is 20,000 units per month or 240,000 units a year.

Variable costs per unit are:


Direct material Rs. 3.00
Direct labour Rs. 2.25
Variable FOH Rs. 0.75
Total Rs. 6.00

Fixed overheads are Rs. 300,000 per year or Rs.1.25 per unit at normal capacity.
Company is using ‘units of product’ as basis for applying overheads. Fixed marketing
and administrative expenses are Rs. 60,000 per year and variable marketing expenses
are Rs. 3,400, Rs. 3,600, Rs. 4,000 and Rs. 3,000 for the first, second, third and fourth
month respectively.

Actual and applied variable overheads are the same. Likewise no material or labour
variance exists. There is no work in process. Standard costs are assigned to finished
goods only.

The sale price per unit is Rs. 10 and actual production, sale and finished goods
inventories in units are:
MONTHS
First Second Third Fourth

Units in beginning inventory - - 3,000 1,000


Units produced 17,500 21,000 19,000 20,000
Units sold 17,500 18,000 21,000 16,500
Units in ending inventory - 3,000 1,000 4,500

Required: From the above information prepare income statement through Absorption
Costing and Direct Costing methods. 20
(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2004

March 11, 2004

COST ACCOUNTING (MARKS 100)


Module D (3 hours)

Q.1 Explain the following terms:

Expense (02)
Product cost (02)
Semi-variable cost (02)
Period cost (02)

Q.2 Critically analyse the following statement:

“Labour turnover should be low whereas stock turnover should be high.” (08)

Q. 3 XYZ Company produces 200 articles of X per annum. Each article of X requires
3.8 units of material Y. Some other data is given below:

Cost per unit of Y Rs. 12,500


Warehouse monthly rent Rs. 15,000
Warehouse fumigation during the year Rs. 23,000
Watchman salary per month Rs. 4,500
Per order inspection charges Rs. 10,252
Service departments factory overhead charged to
Store department Rs. 10,000
Ordering department Rs. 7,050
Stock holding per annum Rs. 125 per unit
Working capital cost 16%
Salaries of ordering department Rs. 10,050
Broker commission on supply of Y 0.50%
Per order lump sum out of pocket expenses of
broker of material Y Rs. 22,048

You are required to calculate:

(a) Economic Order Quantity. (08)


(b) Number of orders per annum on the basis of Economic Order Quantity. (02)
(c) Verify your answer in (b) by calculating total ordering plus carrying
costs per annum:
(i) Assuming higher number of orders than in (b) (03)
(ii) Assuming lower number of orders than in (b) (03)

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(2)

Q.4 AAB Company is planning its capacity for the year 2004 at 90% of the rated capacity.
For the purpose of estimating ‘other factory overhead expenses’ company uses five years
history and ‘simple regression analysis’ method. Data in hand is as under:

Rated capacity 20,000


Direct labour hours at 100% capacity 25,000

Five year history of ‘Other factory overhead expenses’ is as under:

Year Other factory overhead Direct labour


expenses (Rs.) hours

1999 90,775 23,750


2000 83,125 18,750
2001 84,800 20,000
2002 99,084 21,000
2003 84,860 19,750

In the year 2002 other factory overhead expenses include a penalty of Rs. 12,734 on non
compliance of certain labour laws.

You are required to calculate fixed and variable portions of estimated other factory
overhead expenses at planned capacity. (10)

Q. 5 AAD Company’s Budgeting Department has compiled following data for decision-making:

Product Demand Average Material Labour Opening


in units sale price per unit per unit stock
Rs. Rs. Rs. Units

A 1,500 318 172 76 50


B 2,200 421 172 173 50
C 3,700 280 172 32 -

Minimum order quantity of each product is 100 units. The company has Rs. 800,000
working capital in hand and a running finance line of Rs. 500,000 at 24% per annum cost.

Production lead time and sales recovery period is estimated at one year.

Administrative and marketing expenditure per annum are Rs. 152,700 and Rs. 72,842
respectively.

Opening stock carry same unit cost as given for current year.

You are required to:

(a) Prepare product sales mix that can generate maximum net profit. (08)
(b) Projected Profit and Loss Statement according to your suggested product mix. (04)

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(3)

Q.6 Following is the data of Department B of EFG Company for December, 2003:

Work in process (opening) 8,500 units


(Completed as to material 20% and conversion
cost 25%) Rs. 43,860
Work in process (ending) 11,540 units
(Completed as to material 50% and conversion
cost 25%)
Current period transactions are:
Cost transferred from Department A Rs. 45,600
Units transferred from Department A 12,000 units
Units mishandled and lost before start of
any process 460 units
Material consumed Rs. 27,654
Conversion cost incurred Rs. 47,689
Units transferred out 7,500

Normal spoilage is 6% of units transferred out and inspection is done at the end of
process. Company uses FIFO method for inventory valuation.

You are required to prepare production report of Department B showing Quantity


Schedule, Cost Charged to Department and Heads of Account where costs have been
accounted for. (20)

Q.7 ABC Limited intend to commence production from July 1. They have provided
following information for the first four months of operation:

PARTICULARS 1st 2nd 3rd 4th

Sales in units 9,500 9,300 9,900 10,000

Selling price per unit 60 58 59 60

Cost per unit


Material 20 18 19 20
Labour 10 10 10 10
Overhead 5 5 5 5
Depreciation 5 5 5 5
Administrative 3 3 3 3
Marketing 2 2 2 2

Capital expenditure - - - 50,000

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(4)

Additional Information

1) Material will be purchased on cash basis. The company intends to keep


stock for one month.

2) Wages to be paid at the end of the month.

3) Other costs will be accrued for one month.

4) Production for 5th month is expected to be 6,500 units.

5) Sales collections are as follows:


50% collection in first month
30% collection in second month
20% collection in third month

6) Loan from sponsors Rs 300,000 to be repaid in 5 equal monthly


installments beginning from second month of operation.

7) Cash in hand to be maintained at Rs 50,000. Deficit, if any, will be


financed from bank. Any surplus funds to be utilized towards payment
of bank liability. Markup, if any, will be paid @ 8% p.a. every six
months.

8) Cash in hand as on July 1, Rs 50,000.

Required:-

(a) Budgeted profit & loss for the four months. (06)
(b) Budgeted Cash flow statement for the four months. (10)

Q.8 From the following information, allocate overheads of service departments to individual
producing departments by adopting algebraic method:

Departmental overheads
before distribution of Service Provided
Departments Service Departments Dept Y Dept Z

Producing Dept – A Rs 6,000 40 % 20 %


Producing Dept – B Rs 8,000 40 % 50 %
Service – Y Rs 3,630 - 30 %
Service – Z Rs 2,000 20 % -
________ ______ ______
Total Departmental Overheads Rs 19,630 100 % 100 %
======= ===== ===== (10 )

(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2004

September 11, 2004

COST ACCOUNTING (MARKS 100)


MODULE D (3 hours)

Q.1 (a) Describe briefly THREE major differences between: (i) financial accounting,
and (ii) cost and management accounting. (06)

(b) The incomplete cost accounts for a period of Company A are given below:

Stores ledger control account


Rs. 000
Opening balance 2,640
Financial ledger control A/c 3,363

Production wages control account


Rs. 000
Financial ledger control A/c 2,940

Production overhead control account


Rs. 000
Financial ledger control A/c 1,790

Job ledger control account


Rs.000
Opening balance 1,724

The balances at the end of the period (in ‘000’) were:


Stores ledger Rs.2,543
Job ledger Rs.2,295

During the period 65,000 kilos of direct material were issued from stores at a
weighted average price of Rs.48 per kilo. The balance of materials issued from
stores represented indirect materials.

Two thirds of the production wages are classified as ‘direct’. Average gross
wage of direct workers was Rs.20 per hour. Production overheads are
absorbed at a predetermined rate of Rs.30 per direct labor hour.

Required:

Complete the cost accounts for the period. (08)

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2

Q.2 ABC Company has been manufacturing 7,280 units per month of a product and
selling the same at a price of Rs.154 per unit. With the increase in competition the
customers are now asking for new contracts at a rate of Rs.140 per unit. The
company has started cost/benefit analysis of various options like extra shift working,
buying new technologies etc. However, as an immediate step they are going to
implement 100% bonus wages plan for improvement in production capacity. Mixed
expectations of the outcome of this plan are:

Owners 7,800 units per month


Production manager 8,190 units per month
Labour contractor 9,100 units per month

Other data is as under:

Fixed overheads Rs. 264,368 per month


Variable overhead Rs. 73 per machine per hour
Daily wages (8 hours shift) Rs. 200 per person
Number of machines 10
Number of labour required 2 per machine
Standard capacity 28 units per machine
Direct material Rs. 75 per unit
Working days in a month 26

Required:
Prepare a table showing per unit cost at present and various expected levels of
production. (16)

Q.3 The AJFA & Co is preparing its production overhead budgets and therefore need to
determine the apportionment of these overheads to products. Cost center expenses
and related information have been budgeted as below:

Total Machine Machine Assembly Canteen Maintenance


Shop A Shop B

Direct Wages (Rs) 518,920 128,480 99,640 290,800


Indirect Wages (Rs) 313,820 34,344 36,760 62,696 118,600 61,420
Consumable
Materials(incl.
Maintenance) (Rs) 67,600 25,600 34,800 4,800 2,400
Rent & Rates (Rs) 66,800
Building Insurance(Rs) 9,600
Heat & Light(Rs) 13,600
Power(Rs) 34,400
Depreciation of
Machine (Rs) 160,800
Area (Sq Ft) 90,000 20,000 24,000 30,000 12,000 4,000
Value of Machines(Rs) 1,608,000 760,000 716,000 88,000 12,000 32,000
Power Usage (%) 100% 54% 40% 3% 1% 2%
Direct Labour (Hours) 72020 16020 12410 43590
Machine Usage (Hours) 54,422 14,730 37,632 2,060

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3

The proportion of Maintenance cost center time spent for other cost centers is:

Machine Shop A 45%


Machine Shop B 40%
Assembly 13%
Canteen 2%

Required:

Allocate the overhead expense by using the appropriate bases of apportionment. (12)

Q.4 The incomplete process account relating to period 4 for a company which
manufactures paper is shown below:

Process account
Units Rs. Units Rs.
Material 4,000 16,000 Finished goods 2,750
Labour 8,125 Normal loss 400 700
Production overhead 3,498 Work in progress 700

There was no opening work in process (WIP). Closing WIP consisting of 700 units
was complete as shown:
Material 100%
Labour 50%
Production overhead 40%

Losses are recognized at the end of the production process and loss units are sold at
Rs.1.75 per unit.

Required:

Calculate the values of abnormal loss, closing WIP and finished goods. (08)

Q.5 (a) Explain the straight line equation Y = a + bx with reference to cost behaviour. (04)

(b) What are the limitations and problems of the equation? (05)

(c) Using the data provided below, determine the variable cost per unit and fixed
cost of 14,000 units.

Output (Units) Total Cost (Rs)

11,500 204,952
12,000 209,460
12,500 212,526
13,000 216,042
13,500 221,454 (05)
14,000 226,402

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4

Q.6 PQR Company manufactures product ‘E’ in 1,000 units batches and sells them in
100 unit packs. Cost data of the said product is as under:

Raw material 42 kg per unit


Raw material price Rs.37 per kg for annual buying
upto 3.5 million kgs.
Rs.36.90 per kg for annual
buying over 3.5 million kgs.
Direct labour Rs. 850 per unit
Factory Overhead-Variable Rs.300 per unit
Factory Overhead-Fixed Rs. 500,610 per month
Price Rs. 2,862 per unit.

Current production level is 80,000 units per annum, which is 100% of rated capacity
of the plant. For any increase in production, there will be an increase in fixed
overhead by Rs.25,000 per month.

Cost accountant of the company is of the view that the company can achieve
break-even level at lesser quantity if production is increased to avail purchase
discount of Rs.0.10 per kg.

Required:
(10)
Verify the opinion of the Cost Accountant.

Q.7 GHI Company produces 817 kgs ‘Y’ for which following standard chemical mix is
used:
Material Standard Quantity (Kgs) Standard Rate per kg.(Rs)
A 750 38.00
B 150 53.00
C 50 59.50

Purchase department knowing the standard mix made efforts for reducing the
average price of material mix and achieved the results as under:

Rate (Rs.)
A 37.00
B 56.25
C 62.75

Production department concentrating on yield aspect experienced a different ratio of


raw material mix and got 876 kgs out of following mix:

Quantity (Kgs)
A 750
B 185
C 65

Required:
Find out the effect of deviation from standards by calculating:
(a) Price Variance (05)
(b) Mix Variance (05)
(c) Yield Variance (06)

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5

Q.8 Khan Company is a small business which has the following budgeted marginal
costing profit and loss account for the month ended June 30, 2004:

Rs. Rs.

SALES 96,000
Cost of Sales:
Opening stock 6,000
Production 72,000
Closing stock (14,000)
(64,000)
32,000
Other Variable Cost - selling expenses (6,400)
Contribution 25,600
Fixed Costs:
Production Overhead (8,000)
Administration (7,200)
Selling (2,400)
Net Profit 8,000

The standard cost per unit is:


Rs.
Direct material (1 Kg) 16
Direct labour (3 hours) 18
Variable cost (3 hours) 6

Budgeted selling price per unit is Rs. 60

The company’s normal level of activity is 4000 units per month. It has budgeted
fixed production costs at Rs.8,000 per month and absorbed them on the normal level
of the activity of units produced.

Required:

Prepare budgeted profit and loss under absorption costing for the month ended June
30, 2004. (10)

(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2005

March 12, 2005

COST ACCOUNTING (MARKS 100)


Module D (3 hours)

Q.1 (a) It is often stated that ‘actual product cost’ cannot practically be worked out.

(i) Why do you think this statement is made? (05)


(ii) If the statement is correct, is the whole cost accounting process
worthwhile? (04)

(b) (i) Explain with reasons the significance of chart of accounts for the
purpose of cost accounting. (03)
(ii) Give reasons why over- or under-absorptions of overheads may arise. (03)

Q.2 A company manufactures and retails clothing.


You are required to group costs which are listed below and numbered 1 to 20 in the
following classifications (each cost is intended to belong to only one classification):

(i) Direct material


(ii) Direct labour
(iii) Direct expenses
(iv) Indirect production overhead
(v) Research and development costs
(vi) Selling and distribution costs
(vii) Administration costs
(viii) Finance costs
1. Lubricant for sewing machines
2. Floppy disks for general office computer
3. Maintenance contract for general office photocopy machine
4. Telephone rental plus metered calls
5. Interest on bank overdraft
6. Performing Rights Society charge for music broadcast throughout the factory
7. Market research undertaken prior to a new launch
8. Wages of security guards for factory
9. Carriage on purchases of basic raw material
10. Royalty payable on production of XY
11. Road licenses for delivery vehicles
12. Parcels sent to customers
13. Cost of advertising products on television
14. Audit fee
15. Chief accountant’s salary
16. Wages of operatives in the cutting department
17. Cost of painting advertising slogans on delivery vans
18. Wages of storekeepers in a material store
19. Wages of fork lift drivers who handle raw materials
20. Developing a new product in the laboratory (10)

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(2)
Q.3 Omega Limited is a manufacturer producing various items. One of its main
products has a constant monthly demand of 20,000 units. The production of this
product requires two kg of chemical A. The cost of the chemical is Rs.5/- per kg.
The supplier of the chemical takes six days to deliver the same from the date of the
order. The ordering cost is Rs.12/- per order and the holding cost is 10% per
annum.

Required:

(a) Calculate the following :


(i) The economic order quantity
(ii) The number of orders required per year
(iii) The total cost of ordering and holding the chemical A for the year.
(b) Assuming that there is no safety stock and that the present stock level is
4000 kg, when should the next order be placed?
(c) Assuming that a safety stock of 4,000 kg of chemical is maintained, what
will be the holding cost per year?
(d) Discuss the problems which most firms would have in attempting to apply
the EOQ formula. (12)

Q.4 The yield of a certain process is 80% as to the main product and 15% as to the by-
product. Remaining 5% is the process loss. The material put in process (10,000
units) costed Rs.21 per unit and all other charges amounted to Rs.30,000 of which
power cost accounted for 33? %. It is ascertained that power is chargeable to the
main product and by-product in the ratio of 10:9.

Required:

Draw up a statement showing the cost of the by-product. (06)

Q.5 Total Surveys Limited conducts market research surveys for a variety of clients.
Extracts from its records are as follows:

2003 2004
Rupees in million Rupees in million
Total Costs 6.000 6.615

Activity in 2004 was 20% greater than in 2003 and there was an increase of 5% in
general costs.

Activity in 2005 is expected to be 25% greater than 2004 and general costs are
expected to increase by 4%.

Required:

(a) Derive the expected variable and fixed costs for 2005. (07)
(b) Calculate the target sales required for 2005 if Total Surveys Limited wishes to
achieve a contribution to sales ratio of 80%. (03)
(c) Discuss briefly the problems in analyzing costs into fixed and variable
elements. (05)

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(3)
Q.6 Gala Promotions Limited is planning a concert in Karachi. The following are the
estimated costs of the proposed concert:

Rs.(000)
Rent of premises 1,300
Advertising 1,000
Printing of tickets 250
Ticket sellers, security 400
Wages of Gala Promotions Limited Personnel employed at the concert 600
Fee of artist 1,000

There are no variable costs of staging the concert. The company is considering a
selling price for tickets at either Rs.4,000/- or Rs.5,000/- each.

Required:

(i) Calculate the number of tickets which must be sold at each price in order to
break-even. (03)
(ii) Recalculate the number of tickets which must be sold at each price in order to
break-even, if the artist agrees to change from fixed fee of Rs. 1 million to a
fee equal to 25% of the gross sales proceeds. (04)
(iii) Calculate the level of ticket sales for each price, at which the company would
be indifferent as between the fixed and percentage fee alternative. (04)
(iv) Comment on the factors, which you think, the company might consider in
choosing between the fixed fee and percentage fee alternative. (04)

Q.7 Ali Limited makes and sells one product, the standard production cost of which is
as follows for one unit:

Rs.
Direct labour 3 hours at Rs.6 per hour 18
Direct materials 4 kilograms at Rs.7 per kg 28
Production overhead Variable 3
Fixed 20
Standard production cost 69

Normal output is 16,000 units per annum and this figure is used for the fixed
production overhead calculation.

Costs relating to selling, distribution and administration are:

Variable 20 percent of sales value


Fixed Rs.180,000 per annum

The only variance is a fixed production overhead volume variance. There are no
units in finished goods stock at 1 October 2003. The fixed overhead expenditure is
spread evenly throughout the year. The selling price per unit is Rs.140.

For each of the six monthly periods, the number of units to be produced and sold
are budgeted as :

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(4)
Six months ending Six months ending
31 March 2004 30 September 2004
Production units 8,500 7,000
Sales units 7,000 8,000

Required:

(a) Prepare statements for the management showing sales, costs and profits for
each of the six monthly periods, using
(i) marginal costing (05)
(ii) absorption costing (08)
(b) Prepare an explanatory statement reconciling for each six monthly period the
profit using marginal costing with the profit using absorption costing. (03)

Q.8 Pink Ltd. is considering proposals for design changes in one of a range of soft toys.
The proposals are as follows:

(a) Eliminate some of the decorative stitching from the toy.


(b) Use plastic eyes instead of glass eyes in the toys.
(c) Change the filling material used. It is proposed that scrap fabric left over from
the body manufacture be used instead of synthetic material which is currently
being used.

On above proposals following information has been gathered by management:

(1) Plastic eyes will cost Rs.30 per hundred whereas the existing glass eyes cost
Rs.40 per hundred. The eyes will be more liable to damage during insertion. It
is estimated that scrap plastic eyes will be 10% of the quantity issued from
stores as compared to 5% in case of glass eyes.
(2) The synthetic filling materials costs Rs.1,600 per ton. One ton of filling is
sufficient for 2,000 soft toys.
(3) Scrap fabric to be used as filling material will need to be cut into smaller
pieces before use and will cost Re.1 per soft toy. Scrap fabric is sufficiently
available for this purpose.
(4) The elimination of decorative stitching is expected to reduce the appeal of the
product, with an estimated fall in sales by 10% from the current level. It is not
felt that the change in eyes or filling material will adversely affect sales
volume. The elimination of the stitching will reduce production costs by Rs.6
per soft toy.
(5) Current sales level of the soft toy is 300,000 units per annum. Apportioned
fixed costs per annum are Rs.4,500,000. The net profit per soft toy at the
current sales level is Rs.30.

Required:

Prepare an analysis which shows the estimated effect on annual profit if all three
proposals are implemented and which enables management to evaluate each
proposal. The proposals for plastic eyes and the use of scrap fabric should be
evaluated after the stitching elimination proposal has been evaluated. (11)

(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2005

September 10, 2005

COST ACCOUNTING (MARKS 100)


Module D (3 hours)

Q.1 (a) Without an effective system of cost accounts it is doubtful whether any
business can survive in the intensely competitive conditions prevailing today.
Briefly state how a cost accounting system can be used by a business entity to
gain competitive advantage. (06)

(b) Management is often faced with a situation where a component which is


manufactured by their own organization has a cost, as disclosed by the cost
accounts, in excess of that which would have to be paid if it were bought in the
open market. However a decision whether to manufacture or buy cannot be
made simply by comparing internal costs with open market prices. List the
other factors which management would have to consider, both of a financial
and non-financial nature, while making such a decision. (05)

Q.2 Alpha manufacturing Co. Ltd. maintains stocks on perpetual inventory system. The
bin card for stock item code No. N96 in the company's stores contains the following
information for the month of June 2005:

Opening stock on 01 June: 60 units, value Rs. 3,600.

Receipts Invoice
Date Units issued
Units price per unit
5 June 120 59.00
10 June 80
14 June 40 60.50
17 June 80
20 June 20 62.00
24 June 80
25 June 100 63.00

The market price per unit was Rs. 60.00 on June 1, rising to Rs. 62.00 on June 10,
Rs. 62.50 on June 15 and Rs. 64.00 on June 30. The standard cost may be assumed
as Rs.60.00 per unit.

The following methods of stock pricing are being considered:

(a) LIFO
(b) Weighted average
(c) Standard cost
(d) Replacement cost

Required:

Under each of these methods, determine the cost of issues and the closing stock as at
June 30. (15)

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(2)

Q.3 A factory manufactures three components A, B and C.

During a week, the following was recorded:


Labour Number of Rate per hour Individual hours
grade employees (Rs.) worked
I 6 40 40
II 18 32 42
III 4 28 40
IV 1 16 44

Actual output and standard times are given below:


Standard minutes
Component Output
per component
A 444 30
B 900 54
C 480 66

The normal working week is of 38 hours. Overtime is paid at a premium of 50% of


the normal hourly rate.

A group incentive scheme is in operation and a bonus is paid based on the time
saved. The rate of bonus payment is 75% of normal hourly rate. The time saved is
allocated to each labour grade in proportion to the number of hours worked by each
group.

Required:

Calculate the total payroll showing the basic pay, overtime premium and bonus pay
for each grade of labour. (12)

Q.4 The factory overhead budget of a manufacturing company for the year ending June
30, 2006 is as follows:
Rupees
Indirect wages 1,627,920
Insurance – labour 114,240
Supervision 514,080
Machine maintenance wages 485,520
Supplies 257,040
Power 828,240
Tooling cost 285,600
Building insurance 14,280
Insurance of machinery 399,840
Depreciation - machinery 856,800
Rent and rates 371,280
5,754,840

At present, overheads are absorbed into the cost of the company’s products at 70%
of direct wages. The company is considering changing to a separate machine hour
rate of absorption for each of its four different machine groups.

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The following are some further details of costs and machine groups:

Machine groups
A B C D TOTAL
Tooling costs (Rs.) 115,958 88,042 55,832 25,768 285,600
Supervision (Rs.) 159,340 145,471 111,877 97,392 514,080
Supplies (Rs.) 118,634 79,089 19,772 39,545 257,040
Machine maintenance hours 3,000 2,000 4,000 1,000 10,000
Number of indirect workers 6 6 2 2 16
Total number of workers 26 34 15 10 85
Floor space (Sq.ft.) 3,000 2,400 1,600 1,000 8,000
Capital cost of machines
(Rs.’000) 3,200 2,400 1,000 1,800 8,400
Horse-power hours 55,000 27,000 8,000 15,000 105,000
Machine running hours 30,000 60,000 25,000 10,000 125,000

Required:

(a) Calculate a machine hour rate for each group of machines;


(b) Calculate the overhead to be absorbed by product no. 123 involving:

Machine group Hours


A 8
B 3
C 1
D 4

(c) Calculate the overhead to be absorbed by each unit of product 123 if the labour
cost is Rs.1,200 and the present method of absorption is used. (15)

Q.5 The Quetta Cement Company produces a product branded as Falkon. It has
estimated the cost per bag of 100 kgs. as under:
Rs.
Direct material 100
Direct labour 160
Factory overhead 120
380

The selling price of Falkon is Rs. 450 per bag.

During the month of December, the actual costs of production were as follows:

Rs.
Materials 200,000
Direct labour 320,000
Factory overhead 220,000

All materials are added at the beginning of production process.

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(4)

Production records show completed production of 2,000 units for the month; sales
records show that 1,600 units were sold during the period. Inventory records exhibit
the following data:

Work in process inventory December 01:


Direct material, 250 units:
Direct labour, 250 units ( 40% completed)
Factory overhead, 250 units ( 40% completed )

Work in process inventory December 31:


200 units estimated to be 60% completed as to labour and factory
overheads.

Required:

(a) Material price variance


(b) Labour rate variance
(c) Overhead budget variance
(d) A statement of actual cost of Falkon per bag for December. (09)

Q.6 Industries Limited produces a single product and has a manufacturing capacity of
7,000 units per week of 48 hours. The output data for three consecutive weeks is
given below:
Total Factory
Units Direct Direct
Overheads
Produced Material Labour
(Variable & Fixed)
Rs. Rs. Rs.
2,400 48,000 60,000 37,200
2,800 56,000 70,000 38,400
3,600 72,000 90,000 40,800
As cost accountant, you are asked by the company management to work out the
selling price assuming an activity level of 4,000 units per week and a profit of 20%
on selling price. (07)

Q.7 The Sindh Engineering Company produces a bicycle which sells at Rs.1,000 per
unit. At 80% capacity utilization which is the normal level of activity, the sales are
Rs.180 million. Costs are as under:

Prime cost per unit Rs.400


Factory indirect cost Rs.30 million (including variable cost Rs.10 million)
Selling costs Rs.25 million (including variable cost Rs.15 million)
Distribution costs Rs.20 million (including variable cost Rs.11 million)
Administration costs Rs.6 million

Commission and discounts are 5% of sales value.

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(5)

Required:

(a) Calculate the break-even sales value.


(b) Prepare statements showing sales, costs, profit and contribution margin at
each of the following levels:
i) at the normal level of activity;
ii) if unit selling price is reduced by 5% thereby increasing sales and
production volume by 10% of the normal activity level;
iii) if unit selling price is reduced by 10% thereby increasing sales and
production volume by 20% of the normal activity level. (12)

Q.8 As a cost accountant of Colombia Company, you are required to develop cash and
other budget information. The budget is to be based on the following assumptions:

Sales:
(a) Customers are allowed a 2% discount if payment is made within 10 days after
the billing date. Receivables are recorded at the gross selling price.
(b) Sixty percent of the billings are collected within the discount period; 25% by
the end of the month; 9% by the end of the second month. Bad debts are
estimated at 6% of sales.
(c) Sales are billed on the last day of the month.

Purchases:
(a) Sixty percent of all purchases and other expenses except salaries and wages
are paid in the same month whereas the balance is paid in the following
month.
(b) Raw materials inventory at the end of each month is equal to 130% of next
month’s production requirement.
(c) The cost of each unit of inventory is Rs.20.
(d) Wages and salaries earned each month by employees total Rs.60,000.
(e) Marketing, general, and administrative expenses (of which Rs.2,000 is
depreciation) are estimated at 15% of sales.

Actual and projected sales are as follows:

Rs. Rs.
August ………….………… 354,000 November ………………….... 342,000
September………………… 363,000 December …………………… 360,000
October ………………… 357,000 January ……………………… 366,000

Actual and projected materials needed for production:


Units Units
August ………….………… 11,800 November ………………….... 11,400
September………………… 12,100 December …………………… 12,000
October ………………… 11,900 January ……………………… 12,200

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(6)

Wages are paid weekly. The unpaid amount at the end of each month is projected as
follows:
Rs. Rs.
July ……………….………. 14,000 October ……………………… 2,000
August ………….………… 6,000 November ………………….... 6,000
September………………… 10,000 December …………………… 12,000

On August 31, the following balances appeared in the company’s books of account:

Rupees
Cash 44,000
Accounts receivable 349,600
Inventories 247,520
Accounts payable 106,444

The above balances are expected to increase by 25% during the month of
September.

Required:

Cash budget for the months of October, November and December. (19)

(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2006

March 11, 2006

COST ACCOUNTING (MARKS 100)


Module D (3 hours)

Q.1 (a) An important feature in the installation of any accounting or costing system is
the proper classification of accounts. The Bottlers Limited, bottlers and
distributors of beverages, have recently introduced a new classification which
includes the following accounts:

1. Samples 13. Freight out


2. Sugar 14. Income tax
3. Factory payroll 15. Advertising
4. Foreman’s salary 16. Rent of office building
5. Conveyance and travelling 17. Labels
6. Factory’s clerical salaries 18. Depreciation on machinery
7. Drivers’ wages 19. Insurance
8. Gas, oil and grease 20. Water
9. Depreciation of furniture & fixtures 21. Truck tyres
10. Salesmen’s salary and commissions 22. Bottle breakages
11. Light and power 23. Telephone and communication
12. Legal and audit fee 24. Stationery

Classify each account under one or more of the following headings:

• Manufacturing
• Selling and Distribution
• Administration (06)

(b) Distinguish between joint products and by-products, and briefly explain the
difference in accounting treatment between them. (04)

Q.2 Eastern Limited purchases product Shine for resale. The annual demand is 10,000
units which is spread evenly over the year. The cost per unit is Rs. 160. Ordering
costs are Rs. 800 per order. The suppliers of Shine are now offering quantity
discounts for large orders as follows:

Ordered Quantity Unit price Rs.


Upto 999 units 160.00
1000 to 1999 units 158.40
2000 or more units 156.80

The purchasing manager feels that full advantage should be taken of discounts and
purchases should be made at Rs. 156.80 per unit, using orders for 2000 units or
more. Holding costs for Shine are calculated at Rs. 64 per unit per year, and this
figure will not be altered by any change in the purchase price per unit

Required:

Advise Eastern Limited about the best choice available to them. (10)

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(2)

Q.3 Mr. Azad has provided you the following information from his factory ledger for
the quarter ended 31 December 2005:

Control Account Balances as on October 1, 2005: Rupees


Materials 49,500
Work in process 60,100
Finished goods 115,400

Materials purchased 108,000


Direct wages 50,200
Payments for factory overheads 30,900
Depreciation of factory building and machines 42,000

Other related information is as under:

− Closing stock of raw materials and finished goods at December 31, 2005
amounted to Rs. 50,300 and Rs. 125,800 respectively.
− Cost of goods produced is Rs. 222,500.
− Factory overheads are absorbed in production @ 160% of direct wages.
− Diesel costing Rs. 2,000 included in the factory overheads was transferred to
head office for use in generator.
− A bill for repairs amounting to Rs. 12,000 undertaken at the factory remained
unpaid at the end of the quarter.
− Material costing Rs. 2,400 was destroyed by rain.

Required:

Write up the following accounts:

i) Materials
ii) Work in process
iii) Finished goods
iv) Factory overheads
v) Cost of goods sold (10)

Q.4 AG Electronics manufactures transistors which are used for assembling flat screen
TV. During the current year 5,000 transistors were manufactured at the following
costs:
Rupees
Direct material 1,000,000
Direct wages 560,000
Factory overheads:
Lease rentals – equipments 90,000
Equipments Insurance 19,000
Equipments maintenance contract 200,000
Other overheads 600,000

The cost of direct materials include abnormal loss of Rs. 30,000.

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(3)

The following estimates have been made for the next year:

1. The production is estimated to increase by 60%.


2. The cost of direct material will increase by 20%.
3. In view of a government regulation which will become effective from July 1,
next year, the rate of wages will increase by 12%.
4. The rate of other overheads is expected to increase by 6% from the start of
next year. 40% of the other overheads are fixed costs allocated by head office.

Moon Limited, a specialist in manufacturing transistors has offered to supply the


full requirement for the next year, at a price of Rs. 400 per unit. If it is decided to
discontinue the production of transistors, the plant currently in use would be
returned to the leasing company but the following additional costs would have to be
incurred:

Inspection Rs. 20,000 per annum


Insurance Rs. 8 per transistor

You are required to advise the company’s management whether it should accept the
offer of Moon Limited or continue to manufacture the transistors in-house. (10)

Q.5 The manufacturing of a chemical is carried out in three continuous processes, P1,
P2 and P3. The following data is available in respect of production during
February 2006.
Particulars P1 P2 P3
Output – litres 8,800 8,400 7,000

Costs in rupees:
Direct Material introduced (10,000 litres) 63,840 - -
Direct wages 5,000 6,000 10,000
Direct Expenses 4,000 6,200 4,080

Work in process – opening (litres) 200

Scrap value (Rs. per unit) 1 3 5

Normal loss 10% 5% 10%

At the end of P3, 420 litres of a by-product ZOLO were produced, which was
treated further at a cost of Rs. 2 per liter. Selling and distribution expenses of Re.1
per unit were incurred and it was sold at a price of Rs. 9 per litre.

Budgeted overheads for the month were Rs. 84,000. Factory overhead absorption is
based on a percentage of direct wages. The work in process at P1 comprised
material of Rs. 500 and labour and factory overheads of Rs. 1,000. There were no
closing work in process in any of the processes.

Required:

Prepare the following:


(a) Work in process account for each process.
(b) By-product account. (12)

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(4)

Q.6 Nasib Ltd. has prepared the following budgeted income statement for the year 2006:

Product Caps Crowns Rings Pallets Tubes Total


(Rupees in thousands)
Sales 30,800 34,300 45,500 35,700 63,700 210,000

Manufacturing costs
Materials 1,540 4,620 9,240 7,700 11,550 34,650
Labour 3,500 5,600 10,500 9,800 12,600 42,000
Production overheads:
Variable 1,750 2,450 2,800 3,500 5,040 15,540
Fixed 2,450 4,200 7,700 7,000 6,650 28,000
9,240 16,870 30,240 28,000 35,840 120,190

Transportation 840 2,520 5,040 4,200 4,550 17,150


Packaging 1,400 700 1,400 700 2,100 6,300
2,240 3,220 6,440 4.900 6,650 23,450

Administrative costs 4,620 5,145 6,825 5,355 9,555 31,500

Selling and advertising


expenses 5,040 3,815 3,675 3,885 5,285 21,700
Total cost 21,140 29,050 47,180 42,140 57,330 196,840
Profit 9,660 5,250 (1,680) (6,440) 6,370 13,160

The Management Accountant of the company has provided the following additional
information which describes the basis on which budgeted income statement has been
prepared:

(i) Material costs include purchase cost plus 10% additional charge, which is
added in order to recover the fixed costs of storage and stores administration.

(ii) Labour cost is totally variable.

(iii) Fixed production overhead includes both directly attributable fixed costs and
general fixed production overheads. The general fixed production overheads
amount to Rs. 21 million and have been allocated in proportion to labour
costs. The attributable fixed cost is avoidable if the related product is not
produced.

(iv) Transport charges include fixed costs of Rs. 3,150,000 which have been
allocated to products in proportion to their material costs. Remaining costs
are variable.

(v) Selling and advertising expenses include commission of 5% of sales revenue.


The remaining amount is the advertising cost which is directly attributable to
each product.

(vi) Administrative cost is fixed and is apportioned in the ratio of sales revenue.

(vii) Packaging is a variable cost.

The Managing Director has shown his concern that Rings and Pallets are showing
loss and affecting the financial results of the company. A study which has been
carried out recently has analyzed as under:

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(5)

(a) Sales are influenced by advertising and can be increased upto 40% by
extensive advertising. However each 10% increase in sale would require a
75% increase in advertising expenditure.

(b) The sale of Caps or Crowns can be increased by reducing the production/sale
of the product Ring. However a reduction in sale of Ring by Re.1 would
generate a sale of 45 paisas of Caps or 50 paisas of Crowns sales. This
substitution will not entail any extra advertising expenditure.

The management is considering the following three options:

(i) To discontinue the product Ring and Pallets.


(ii) To launch an advertising campaign which will increase the sale of each
product by 40%.
(iii) To substitute the sale of Rings with the sale of Caps or Crowns.

Required:

Calculate the effect of each of the above options on the profitability of the
company. (25)

Q.7 A company produces mineral water. Based on the projected annual sales of 40,000
bottles of mineral water, cost studies have produced the following estimates:

Total annual costs


(in rupees) Variable cost percentage
Material 193,600 100
Labor 90,000 70
Overhead 80,000 64
Administration 30,000 30

The production will be sold through dealers who would receive a commission of
8% of sale price.

Required:

(i) Compute the sale price per bottle which will enable management to realize a
profit of 10 percent of sales.
(ii) Calculate the break-even point in rupees if sale price is fixed at Rs. 11 per
bottle. (10)

Q.8 The standard raw material mix for 2200 kgs of finished product is as follows:

Price per Kg
Materials Weight (Kgs)
(Rs.)
Salt 1,200 1.50
Ash 600 2.00
Coata 200 3.00
Fog 400 4.00

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(6)

Materials used during an accounting period were as follows:

Price per Kg
Materials Weight (Kg)
(Rs.)
Salt 6,000 1.6
Ash 4,800 1.8
Coata 1,600 2.6
Fog 2,500 4.1

Actual production was 12,100 kg. Calculate the following materials variances:

(i) Cost variance (ii) Price variance


(iii) Usage variance (iv) Mix variance
(v) Yield variance (13)

(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2006

September 09, 2006

COST ACCOUNTING (MARKS 100)


Module D (3 hours)

Q.1 Hi-way Engineering Limited uses budgeted overhead rate for applying overhead to
production orders on a direct labour cost basis for department A and on a machine hour
basis in department B.

The company made the following forecasts for August 2006:

Dept A Dept B
Budgeted factory overhead (Rs.) 216,000 225,000
Budgeted direct labour cost (Rs.) 192,000 52,500
Budgeted machine hours 500 10,000

During the month, 50 units were produced in Job no. CNG-011. The job cost sheet for
the month depicts the following information:
Dept A Dept B
Material issued (Rs.) 1,500 2,250
Direct labour cost (Rs.) 1,800 1,250
Machine hours 60 150

Actual data for the month were as follows:


Dept A Dept B
Factory overhead (Rs.) 240,000 207,000
Direct labour cost (Rs.) 222,000 50,000
Machine hours 400 9,000
Required:
(a) Compute predetermined overhead rates for each department. (02)
(b) Work out the total costs and unit cost of Job no. CNG-011. (04)
(c) Compute the over / under applied overhead for each department. (02)

Q.2 (a) Optimum inventory level can only be determined after comparing the holding
costs with the cost of ordering.
Required:
(i) Briefly discuss the impact of holding and ordering costs on optimum
inventory level. (03)
(ii) Give three examples of costs which fall under each category. (03)
(iii) What are the problems which may arise in determining the above costs? (02)
(b) Two-way Engineering Limited has been experiencing stockouts on one of its
important product RD-11. Using the EOQ formula, the company places orders of
1,250 units whenever the stock level reduces to 1500 units. The records of the
company show the following data relating to the usage of Product RD-11 during
lead times:

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Usage (Units) 1,800 1,600 1,400 1,200 1,000


Usage Probability (%) 4 6 10 20 60

The company sells RD-11 at a price of Rs. 500 per unit. The annual carrying cost of one
unit is Rs. 30. The company estimates that the cost of being out of stock is Rs. 125 for
each unit.

Required:
The management of the company asks you to establish an optimal safety stock for this
material and also ascertain the probability of being out of stock on your proposed safety
stock level. (10)

Q.3 Tram-way Hardware Store has been owned by Mr. Petrol. He had himself made all
investment in the business and had not obtained any financing. He appointed a junior
accountant to maintain the manual accounting records. During the month of August, he
asked his accountant to provide certain information including estimates as he was
planning to withdraw some amount for his personal use.

After the failure of his accountant to provide the required information, he has hired your
services for this purpose. You have gathered the following information from the
records:

(i) Sales for August 2006 amounted to Rs. 5,000,000.


(ii) Sales forecast for the next three months was as follows:
Rs.
September 6,000,000
October 5,000,000
November 5,500,000

(iii) Based on past experience, collections are expected to be 56 percent in the month
of sale and 43 percent in the month following the sale. One percent remains
uncollected
(iv) Gross margin on sales is 20% and cost of goods sold comprises of purchase cost
only.
(v) 80 percent of the goods are purchased in the month prior to the month of sale and
20 percent are purchased in the month of sale. Payment for goods is made in the
month following the purchase.
(vi) Other monthly recurring expenses which are paid in cash amount to Rs. 40,700.
(vii) Annual depreciation on fixed assets is Rs. 555,600.
(viii) Annual staff salaries are budgeted at Rs. 600,000.
(viii) Bad debts provision as at August 31, 2006 stands at Rs. 190,400.
(ix) Balances of some other accounts as at August 31, 2006 are as follows:

Rs.
Fixed assets 9,940,000
Acc. depreciation 1,900,500
Owner’s capital 2,800,000
Profit and loss 8,380,000
Cash and bank 1,980,940

Required:
(a) Prepare a balance sheet as at August 31, 2006. (06)
(b) Calculate the projected balance in accounts payable as on September 30, 2006. (02)
(c) Prepare a projected income statement for the month of September 2006. (03)

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(3)

Q.4 One-way Limited is engaged in manufacturing and sale of socks. The sales of the
company are mostly to USA and European Countries. At the end of the first quarter, the
results of operations of the company are as follows:
Rs.
Sales (Rs. 40 per unit) 5,300,000
Less: Material 1,987,500
Wages 795,000
Variable overhead 397,500
Fixed overhead 848,000
4,028,000
Gross profit 1,272,000

The factory was working at 40% capacity in the first quarter. Management of the
company has estimated that the quantity sold could be doubled next quarter if the selling
price was reduced by 15%. The variable costs per unit will remain the same, but certain
administrative changes to cope with the additional volume of work would increase the
fixed overhead by Rs. 15,000.

Required:
(a) Evaluate the management’s proposal. (05)
(b) What quantity would need to be sold next quarter in order to yield a profit of Rs.
2,000,000 if the selling price was reduced as proposed, variable cost per unit
remains the same and fixed overheads increased as estimated above? (02)
(c) Calculate the selling price needed to achieve a profit of Rs. 2,000,000 if the
quantity sold last quarter cannot be increased, material prices increase by 12%,
wage rates increased by 15%, variable overheads are higher by 10% and fixed
overheads increase by Rs. 15,000. (04)

Q.5 Mid-way Services Limited received an urgent order for installation of 4 machines in a
textile mill. Immediately after receiving the order, the company deputed four engineers
on the job. Each engineer was responsible for installation of one machine. The standard
time to complete this job was 50 hours.

It is the policy of the company to pay its engineers on job to job basis. The minimum
amount the company pays is based on standard hours. The payment is made at the rate
of Rs. 100 per hour.

In order to speed up the installation work, the company offered the engineers ‘Time
Saving Bonus’ (TSB) under which they would be entitled for the following incentives:

Percentages of time saved


TSB
to time allowed
0% to 10% 10% of time saved x hourly rate
11% to 20% 20% of time saved x hourly rate
20% to 30% 30% of time saved x hourly rate

In addition to the agreed amount, the customer has agreed to pay the company Rs. 150
for every hour saved on installation of each machine.

The jobs were completed successfully and the time spent by each engineer is as follows:

Engineers A B C D
Hours spent 41 36 46 50

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(4)

Required:
(i) Calculate the total earning of each engineer and their earning per hour. (08)
(ii) Compute the net additional revenue earned by the company. (03)

Q.6 Broad-way Manufacturing Limited produces two products DL-1 & DL-2. The
production involves two processes, I and II. The following data is available in respect of
production during the month of August 2006.
Process I Process II
Rs. Rs.
Material issued 375,000 100,000
Direct wages paid 150,000 200,000
Direct expenses incurred 100,000 100,000

During the month of August, materials issued to Process I and Process II were 1,250
tons and 230 tons respectively. The cost of output of Process – I is charged to Process –
II. Incidental to production, two by-products i.e. PT-1 and PT-2 are generated in the first
process and treated as a credit to Process-I.

Following additional information is also available:

Sales Packing
Product
Tons Rs. Cost
DL-1 100 600,700 20,070
DL-2 900 1,203,500 100,350
PT-1 200 10,000 -
PT-2 50 2,500 -

A shortfall occurs in Process II due to evaporation which is considered as normal loss.


There were no opening or closing stocks.

Required:
(a) Calculate joint processing costs and apportion them between DL-1 and DL-2 on
the basis of sales value. (08)
(b) Prepare summary trading account for the month showing net profit of each
product. (02)

Q.7 Run-way Pakistan Limited has provided you the following information about its sales,
production, inventory and variable/ fixed costs etc. for the second quarter of the year
2006.
Rupees
Sales 75,000,000
Operating profit 5,171,100
Variable manufacturing costs per unit 10
Fixed factory overhead per unit 11
Marketing & administrative expenses (Fixed Rs. 250,000) 450,000

Units
Sales 3,000,000
Actual production 2,420,100
Budgeted production 3,000,000
Ending inventory 320,200
Normal capacity 3,500,000
Production in quarter – I 3,100,150
Sales in quarter – I 2,200,050

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(5)

The Sales Manager claims that the operating profit of the quarter has been wrongly
calculated and is much higher than Rs. 5,171,100.

It is the policy of the company to compute applied factory overhead on the basis of
quarterly budgeted production volume and charge over or under applied factory
overhead to the cost of goods sold account at the end of each quarter.

Required:
(a) You are required to prepare income statements under the present method being
used by the company and also under marginal costing method for the satisfaction
of Sales Manager. (09)
(b) Reconcile the difference in operating profit under the two methods. (04)

Q.8 Sub-way Furnishers (Pvt.) Limited manufactures three garden furniture products –
Chairs, Benches and Tables. The budgeted data of each of these items is as under:

Chairs Benches Tables


Budgeted sales volume 4,000 2,000 1,500
Selling price per unit (Rs.) 3,000 7,500 7,200
Cost of Timber per unit (Rs.) 750 2,250 1,800
Direct labour per unit (Rs.) 600 1,500 1,600
Variable overhead per unit (Rs.) 450 1,125 1,200
Fixed overhead per unit (Rs.) 675 844 1,350

The budgeted volume was worked out by the sales department and the management of
the company is of the view that the budgeted volume is achievable and equal to the
demand in the market.

The fixed overheads are allocated to the three products on the basis of direct labour
hours. Production department has provided the following information:

Direct labour rate Rs. 40 per hour


Cost of timber Rs. 300 per cubic meter

A memo from Purchase Manager advises that because of the problem with the supplier
only 25,000 cubic meters of timber shall be available.

The Sales Director has already accepted an order for the following quantities which if
not supplies would incur a financial penalty of Rs. 200,000.

Chairs 500
Benches 100
Tables 150

These quantities are included in the overall budgeted volume.

Required:
Work out the optimum production plan and calculate the expected profit that would
arise on achievement of this plan. (14)

Q.9 Smart-ways Manufacturing Limited makes a product called LPG. Most of the
manufacturing expenses incurred during the production of LPG are directly identifiable
as fixed or variable. However, some of the expenses are partly fixed and partly variable.
The management of the company wants to determine the fixed and variable element of
these overheads.

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(6)

The total of such overheads which are partly fixed and partly variable, during each of
the last 10 months and the related production is given hereunder:

Month No. of Factory


Units Overhead
(Rs.)
1 3,000 7,200
2 4,000 9,000
3 6,000 12,150
4 5,000 11,250
5 6,000 11,700
6 5,000 10,800
7 7,000 12,600
8 6,000 11,250
9 5,000 10,350
10 3,000 7,200
50,000 103,500

Required:
Determine the fixed and variable element of the above overheads on the basis of high
low method and define the relationship in terms of cost volume formula. (04)

(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2007

March 07, 2007

COST ACCOUNTING (MARKS 100)


Module D (3 hours)

Q.1 The marketing department of Moon Engineering Limited has prepared the following
projected profit and loss account:
2007 2008
Rupees in million
Sales 750.0 800.0
Less:
Direct materials 187.5 200.0
Direct labour 112.5 120.0
Production overhead 135.0 144.0
435.0 464.0
Contribution margin 315.0 336.0
Less: Fixed costs 297.8 312.7
Net Profit 17.2 23.3
The marketing director is not happy with the sales growth shown in the forecasts.
Similarly, the finance director has shown his concern on the lower profitability. They
have also pointed our certain factors which were ignored while developing the above
projections. Consequently, a comprehensive study was carried out at all levels which has
resulted in the following revisions:
(i) Sales forecast for 2007 has been projected at Rs. 1.0 billion.
(ii) Sales prices are projected to remain the same in 2008. However, the total sales have
been projected to increase by 20% over the year 2007.
(iii) Material prices and costs of production overheads in 2008 will be higher by 10% as
compared to 2007;
(iv) Fixed costs will remain the same except for an expenditure of Rs. 12 million to be
incurred on a special advertising campaign during the year 2008.
Required:
(a) Revise the projected profit and loss account for both years; (05)
(b) Calculate breakeven sales and margin of safety% for 2007 and 2008; (04)
(c) Draw a profit volume chart in respect of each year. (04)

Q.2 (a) The production and cost data of Planet Manufacturing (Pvt.) Limited for the year
2006 and projections for the year 2007 are as follows:
2006 2007
Production (units) 175,000 225,000
Total costs (Rs.) 11,900,000 16,518,600
The rate of inflation in 2007 has been estimated at 15%.
Required:
Calculate the fixed and variable costs for 2007 in ‘real’ terms. (05)
(b) What is a ‘cost unit’ and ‘cost center’? Give two examples of each. (04)

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(2)

Q.3 Star Chemicals Limited uses three processes to manufacture a product “ST”. After the
third process the product is transferred to finished goods warehouse.

The following data for the month of January 2007 is available:

PROCESS
I II III
----------Rs. in thousands-------
Raw material – A 1,500 - -
Other direct materials 2,500 3,200 4,000
Direct wages 5,000 6,000 8,000
Direct expenses 1,600 1,885 2,020
Following additional information is also available:

(i) Production overheads are absorbed @ 80% of direct wages;


(ii) 20,000 units of raw material ‘A’ having a cost of Rs. 1,500,000 were initially put in
process-I.
(iii) In each process, an amount of Rs. 500,000 has been wrongly classified as direct
wages, instead of indirect wages.
(iv) The actual output obtained during the month was as under:

Process I 18,500 units


Process II 16,000 units
Process III 16,000 units

(v) Normal loss in each process is 10%, 10% and 5% respectively. Scrap value per unit is
Rs. 100 for process-I, Rs. 200 for process-II and Rs. 300 for process-III.
(vi) There was no stock at the start or at the end of any process.

Required:
Prepare the following in the books of Star Chemicals Limited:
(a) Ledger account for each process; (12)
(b) Abnormal gain/(loss) account. (04)

Q.4 Venus Pharmaceutical Company Limited faced a very high labour turnover during the
last year. The issue has now been settled after the announcement of an attractive payment
plan.

Following data relating to last year has been made available to you:

(i) Sales during the last year was Rs. 726 million and contribution margin was 10% of
sales;
(ii) Total number of actual direct labour hours was 510,000;
(iii) As a result of delays by the Personnel Department in filling vacancies, 10,000
potential productive hours were lost. All these potential lost hours could have been
sold at the prevailing rate;
(iv) The actual direct labour hours included 40,000 hours attributable to training new
recruits, out of which 25% of the hours were unproductive;
(v) The labour turnover resulted in following additional costs:

Rupees
Recruitment costs 284,000
Selection costs 128,500

Required:
Calculate the profit foregone by the company during the last year on account of labour
turnover. (05)

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(3)

Q.5 The production engineering staff of Skyline Company Limited, has set the following
standard mix for the production of one unit of Product X:

Weight Rate Per Kg Amount


(Kg) (Rs.) (Rs.)
Material A 0.50 10.00 5.00
Material B 0.30 5.00 1.50
Material C 0.20 2.00 0.40
1.00 6.90
Standard loss (10%) 0.10 -
0.90 6.90

Actual costs incurred on the production of 927,000 units were as follows:

Weight Rate Per Kg


(Kg) (Rs.)
Material A 530,000 10.00
Material B 280,000 5.30
Material C 190,000 2.20

Required:
(a) Calculate the mix and yield variances. (06)
(b) Reconcile actual material costs with the standard costs. (05)

Q.6 The following figures have been extracted from the budget of Uranus Limited for the
year ended June 30, 2007:

Rupees
Direct labour 35,000,000
Electricity 25,000,000
Repairs and maintenance 5,200,000
Depreciation 14,200,000
Other expenses 8,000,000

Budgeted annual production is 40,000 units. It is the policy of the company to charge
factory overhead on the basis of direct labour costs. Following additional information is
available for the first six months:

Direct material consumed (Rs.) 16,250,000


Direct labour cost (Rs.) 17,500,000
Factory overhead applied (Rs.) ?
Good units produced 20,000
Spoiled units (considered abnormal) 750

Spoiled units were sold for Rs. 1,200 per unit. Actual direct labour cost includes the cost
of bringing certain defective units to saleable condition, amounting to Rs. 100,000.

Required:
Prepare journal entries to record the transactions that took place during the first six
months of the year and support your answer with computation. (17)

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(4)

Q.7 Sun Fashions (Pvt.) Limited, a chain of retail garments store, has planned to introduce a
new fancy dress for babies at all its seven outlets in the country.

The company is also considering to introduce a matching crown scarf and handbag with
the new dress. Currently they are expecting to sell 15,000 dresses in the first six months
but the management feels that this sale can be increased by 30% if matching crown scarf
and handbag are marketed together.

The data relating to sales and production of dress, crown scarf and handbag are as
follows:

(i) Each dress requires three and half meter of cloth which is easily available in the
market at a price of Rs. 100 per meter. Part of the material left unused can be used to
manufacture a crown scarf and handbag.
(ii) The cost of cutting the dress, crown scarf and handbag is Rs. 35, Rs. 15 and Rs. 20
respectively.
(iii) The leftover pieces can be sold as under:
− if only the dress is manufactured, Rs. 20 per dress;
− if crown scarf and handbag is also manufactured, Rs. 5 per set.
(iv) The company has a contract with a designer firm at a monthly fee of Rs. 1,500,000.
However, in the case of handbag and crown scarf, the company will have to pay a
one time additional amount of Rs. 150,000 to the designer firm.
(v) Each handbag will require a metal hook which is available in the market at Rs. 10
per hook. However, the company has sufficient number of metal hooks in stock
which was purchased at Rs. 6 per hook. If the company does not opt for the
manufacturing of handbags, these hooks can be sold at Rs. 8 per hook.
(vi) The dresses, crown scarves and handbags are expected to be sold according to the
following mix:

Complete set 60%


Dress and crown scarf only 10%
Dress and handbag only 20%
Dress only 10%

(vii) The selling price and variable costs (besides those mentioned above) of each product
are as follows:

Selling Price per Variable Costs


unit (Rs.) (besides those mentioned above)
Dress 2,000 40% of selling price
Crown scarf 400 55% of selling price
Handbag 500 60% of selling price

Required:
Calculate the incremental profit or loss as a result of manufacturing handbags and crown
scarves with the dress. (16)

Q.8 Jupiter Manufacturing Company Limited consists of two manufacturing departments and
one service department. The company applies factory overhead on the following basis:

Manufacturing Department
A-1 70% of direct labour cost
A-2 Rs. 40 per direct labour hour

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(5)

Following relevant information is available:

Manufacturing Dept. Service


A-1 A-2 Department
Direct materials (Rs.) 433,000 313,000
Direct labour (Rs.) 388,800 259,200
Direct labour hours 3,500 4,000
Number of employees 140 220 40
Floor space (Sq. ft.) 1500 1500 750

The other expenses are as under:


Rupees
Indirect labour 217,400
Factory office expenses 43,200
Depreciation of computer 45,000
Factory building expenses 54,000
Service department’s expenses 112,800

Indirect labour and service department’s expenses are apportioned on the basis of direct
labour cost. Factory expenses and computer depreciation are allocated in the ratio of
number of employees to all the departments including service department.

Required:
Prepare a factory overhead distribution statement showing over / under applied FOH for
each department. (13)

(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2007

September 07, 2007

COST ACCOUNTING (MARKS 100)


Module D (3 hours)

Q.1 Binary Limited manufactures three joint products viz. Aay, Bee and Cee in one
common process. Following this process, product Aay and Bee are sold immediately
while product Cee is subjected to further processing. Following information is available
for the period ended June 30, 2007:
(i) Aay Bee Cee
Opening stock in kg Nil Nil Nil
Production in kg 335,000 295,000 134,000
Sales in kg 285,000 212,000 -
Sales price per kg (Rs.) 30.85 40.38 -
(ii) Total costs of production were Rs 17,915,800.
(iii) 128,000 kg of Cee were further processed during the period and converted into
96,000 kg of Zee. The additional cost of further processing were as follows:
Direct labour Rs. 558,500
Production overhead Rs. 244,700
(iv) 94,000 kg of Zee was sold during the period, with total revenue of
Rs. 3,003,300. Opening stock of Zee was 8,000 kg, valued at Rs 172,800. FIFO
method is used for pricing transfers of Zee to cost of sales.
(v) 8,000 kg of a bye-product Vee was also produced during further processing and
sold @ Rs. 10 per kg. Sales proceeds of bye-product are adjusted against
production cost of product Zee.
(vi) The cost of production is apportioned among Aay, Bee and Cee on the basis of
weight of output.
(vii) Selling and administration costs of Rs. 2,500,000 were incurred during the
period. These are allocated to all the main products based on sales value.
Required:
Prepare a profit and loss account for the period, identifying separately the profitability
of each of the three main products. (19)

Q.2 Hexa (Private) Limited is engaged in the supply of a specialized tool used in the
automobile industry. Presently, the company is incurring high cost on ordering and
storage of inventory. The procurement department has tried different order levels but
has not been able to satisfy the management.
The Chief Financial Officer has asked you to evaluate the current situation. He has
provided you the following information:
(i) The annual usage of inventory is approximately 8,000 cartons. The supplier does
not accept orders of less than 800 cartons. The cost of each carton is Rs. 2,186.
(ii) The average cost of placing an order is estimated at Rs 14,000 and presently two
orders are placed in each quarter.

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(2)

(iii) The sales are made on a regular basis and on average, half of the quantity ordered
is held in inventory. The cost of storage is considered to be 16% of the value of
inventory.
Required:
(a) Determine the following:
− Economic Order Quantity (EOQ).
− Number of orders to be placed, based on EOQ.
(b) Compute the ordering costs and storage costs in the existing situation. How much
cost can be saved if quantity ordered is equal to EOQ as determined in (a) above. (10)

Q.3 Octa Limited manufactures a single product under the brand name “Pak Pure”. The
latest estimates related to the current year are as follows:
Production and sales (units) 25,000
Cost per unit
Direct material (Rs.) 40
Direct labour (Rs.) 20
Fixed overhead (Rs.) 15
Variable overhead (Rs.) 5
Total cost per unit (Rs.) 80
During the next year, the costs per unit are expected to increase as under:
%
Direct material 20
Direct labour 10
Fixed overhead 5
Variable overhead 20
It is the policy of the company to set the selling price at the time of budget preparation
at cost plus 50%. The Sales Manager is worried about the implications of this policy.
According to his estimate, demand for the product will vary with price as follows:
Price (Rs.) 100 105 110 115
Demand (thousand units) 25 23 21 20
The Production Manager has informed that a different type of raw material is also
available in the market at a cost of Rs. 42.30 per unit. He believes that the new material
will give an acceptable quality of output. However, as a result of using cheaper
material, a process of inspection will have to be introduced which will cost Rs. 30,000
per annum. The chances of rejection are 2% and 3% for raw material and finished
goods respectively.
Required:
(a) Determine the price which will maximize the profit.
(b) Decide whether the company should continue to use the present type of raw
material or switch over to the new one. (10)
(Round off all the figures to two decimal places).

Q.4 Nooruddin Ahmed is planning to start a new business. He will invest his saving
amounting to Rs. 3,500,000 and intends to make borrowing arrangements with a bank
to meet the working capital requirements. His planning is based on the following
estimates:
(i) He has identified a factory cum office premises at a monthly rent of Rs. 80,000
which will be payable in advance at the beginning of each month. However, he
needs to give three months rent as security deposit to the landlord before
occupying the space. Other fixed overheads excluding depreciation are estimated
at Rs. 120,000 per month which will be paid in the same month.

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(3)

(ii) He has signed a contract for supply of machinery costing Rs. 1,800,000. The
payment will be made at the time of delivery in January 2008. This machinery
has an estimated life of five years with no residual value.
(iii) Production will start in January 2008 and 60% of the next month’s sales will be
manufactured in January 2008. Thereafter, the production will consist of 40% of
the current month’s sales and 60% of the next month’s sales.
(iv) He estimates the following sales for the first five months:

Month Unit Rupees


January - -
February 2,400 3,120,000
March 3,200 4,160,000
April 4,000 5,200,000
May 4,800 6,240,000

(v) Sales will be made on credit basis. A 5% cash discount will be allowed for
payments in the current month. It is estimated that 35%of each month’s sales
will qualify for this discount. Balance 65% will be recovered in the next month.
(vi) Variable production cost per unit has been estimated as:

Rupees
Direct material 600
Direct labour 200
Variable overhead 100
Total variable cost per unit 900

(vii) Raw materials costing Rs. 1,600,000 will be purchased in January 2008 in cash.
Thereafter, he intends to follow a policy of purchasing 50% of the monthly
requirement in the same month and 50% of the next month’s requirement. All
purchases after January shall be made on 30 days credit.
(viii) Salaries shall be paid in the first week of subsequent month.
(ix) 70% of the variable overheads shall be paid in the same month and 30% in the
next month.
Required:
Prepare a cash budget for the months January 2008 to April 2008 showing the balance
of cash / running finance at the end of each month. (20)

Q.5 Quadra Electronics assembles and sells three products – W, X and Y. The cost per unit
for each product is as follows:
W X Y
Rupees Rupees Rupees
Direct materials 4,880 1,600 1,000
Direct labour 4,000 2,000 700
Variable overheads 1,360 480 348
Fixed production overheads 1,172 1,290 960
Total cost per unit 11,412 5,370 3,008

The fixed overheads are worked out on the basis of normal production levels i.e 15,000;
45,000; and 60,000 units per annum for W, X and Y respectively.
The fixed selling and administrative costs for the next year are expected to be
Rs. 71,270,400.

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(4)

Management estimates that the ratio of sales quantities of W, X and Y shall be 1:3:4 and
selling price per unit shall be Rs. 12,800; Rs. 6,000 and Rs. 3,600 respectively.
Required:
(a) Calculate the number of units of W, X and Y to be sold in order to achieve break
even.
(b) Calculate the break even sales in terms of Rupees. (16)

Q.6 Ternary Packages is located at a remote site in an industrial estate which is far away
from the center of the city. Management of the company is now considering to provide
pick and drop facility to its employees. A two member committee has reviewed the
available options and has come up with a proposal to purchase three vans and run them
on three different routes i.e. A, B and C. The information for each van is as follows:
Rupees
Purchase price 1,200,000
Expected trade-in value after 4 years 200,000
Insurance per annum 50,000
Quarterly service including change of lubricants 4,000
Replacement of spare parts per 20,000 km 15,000
Vehicle License fee per annum 8,000
Tyre replacements after 40,000 km 14,000
Cost of diesel per litre 40
Annual running for each van will be as follows:
km
Van on route A 80,000
Van on route B 120,000
Van on route C 160,000

The committee has estimated that average running will be 16 km per litre.
Required:
(a) Prepare a schedule to be presented to the management showing following costs in
respect of each van for the first year of operation:
− Total variable cost − Variable cost per km
− Total fixed cost − Fixed cost per km
− Total cost − Total cost per km
(b) Briefly explain why the cost per km is different in each case. (15)

Q.7 Decimal World (Pvt) Limited is engaged in the manufacturing of standard and scientific
calculators. The company operates a bonus scheme for all its factory workers. A
performance bonus is incorporated into the wages by adding 75% of the efficiency ratio
in excess of 100% to the basic hourly rate. The following information is available for
the month of July 2007:
Basic rate of pay per hour (Rs.) 125
Standard production per hour (units) 4
Production during the period (units) 226,176
Actual hours spent 45,600
Required:
(a) Calculate the hourly wage rate inclusive of performance bonus.
(b) Calculate the total labour cost variance. (10)

(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2008

March 7, 2008

COST ACCOUNTING (MARKS 100)


Module D (3 hours)

Q.1 Mirza Limited is engaged in the manufacturing of spare parts for automobile industry. The
company records the purchase and issue of materials in a store ledger which is not
integrated with the financial ledger. It is the policy of the company to value inventories on
weighted average basis. The valuation is carried out by the Finance Department using stores
memorandum record. A physical stock count is carried out after every six months. Any
shortage/excess is then adjusted in the financial as well as stores ledger.

On December 31, 2007, physical stock count was conducted by the Internal Auditor of the
company. He submitted the following statement to the Finance Department:

Balance (in units) Cost per unit (Rs.)


Item Code Store Financial
Physical Average Current
Ledger Records
010-09 20,500 20,500 20,000 2.00 2.25
013-25 10,000 10,000 10,000 4.00 1.50
017-10 5,500 5,500 5,000 1.00 1.10
022-05 4,000 4,500 5,500 2.00 2.00
028-35 1,200 1,200 1,000 2.75 2.50
035-15 640 600 600 3.00 3.50

On scrutinizing the details, Finance Department was able to ascertain the following reasons:

Item Code Reasons


010-09 500 units were defective and therefore the Internal Auditor excluded them
while taking the physical count.
013-25 This item is not in use and is considered obsolete. The net realizable value is
Rs. 0.60 per unit.
017-10 Shortage is due to theft.
022-05 A receipt of 1,000 units was not recorded. The remaining difference is due to
errors in recording the quantity issued.
028-35 200 units returned to a supplier were not recorded. The invoiced cost was
Rs. 3 per unit.
035-15 Discrepancy is due to incorrect recording of a Goods Receipt Note.

Required:
(a) Prepare necessary Journal entries to record the adjustments in the financial ledger.
(b) State how would you make the necessary adjustments in the stores ledger? (14)

Q.2 (a) Explain the treatment of under-absorbed and over-absorbed factory overheads. Give
three reasons for under-absorbed / over absorbed factory overheads. (06)

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(2)

(b) On December 1, 2007 Zia Textile Mills Limited purchased a new cutting machine for
Rs. 1,300,000 to augment the capacity of five existing machines in the Cutting
Department. The new machine has an estimated life of 10 years after which its scrap
value is estimated at Rs. 100,000. It is the policy of the company to charge
depreciation on straight line basis.

The new machine will be available to Cutting Department with effect from February
1, 2008. It is budgeted that the machine will work for 2,600 hours in 2008. The
budgeted hours include:
− 80 hours for setting up the machine; and
− 120 hours for maintenance.

The related expenses, for the year 2008 have been estimated as under:

(i) Electricity used by the machine during the production will be 10 units per hour
@ Rs. 8.50 per unit.
(ii) Cost of maintenance will be Rs. 25,000 per month.
(iii) The machine requires replacement of a part at the end of every month which will
cost Rs. 10,000 on each replacement.
(iv) A machine operator will be employed at Rs. 9,000 per month.
(v) It is estimated that on installation of the machine, other departmental overheads
will increase by Rs. 5,000 per month.

Cutting Department uses a single rate for the recovery of running costs of the
machines. It has been budgeted that other five machines will work for 12,500 hours
during the year 2008, including 900 hours for maintenance. Presently, the Cutting
Department is charging Rs. 390 per productive hour for recovery of running cost of
the existing machines.

Required:
Compute the revised machine hour rate which the Cutting Department should use
during the year 2008. (08)

Q.3 Ayub Sports Limited produces boxing gloves which are in great demand in the local as well
as international market. Because of better quality and lesser competition in the market, the
company’s profit has approximately doubled in 2007. A summary of company’s expenses
and profit for the year 2006 and 2007 are as under:

2007 2006
Rupees Rupees
Materials consumed 140,000 100,000
Wages 120,000 80,000
Overheads – Fixed 32,000 30,000
Overheads – Variable 34,000 24,000
Net profit 20,500 10,000

In 2007, sales prices were increased by 10% as compared to 2006. The material prices and
rate of wages increased by 10% and 20% respectively in 2007.

In a meeting held to evaluate the performance of various departments, significant


differences arose among the departmental heads. Therefore the Managing Director of the
company asked the CFO to analyse the financial performance objectively.

Required:
Being the CFO of the company carry out an analysis to determine the increase/decrease in
profit in 2007, due to sales price, sales volume, material price, material consumption, labour
efficiency, labour rate, variable overheads and fixed overheads. (17)

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(3)

Q.4 Fazal Industries Limited is currently negotiating a contract to supply its products to K-Mart,
a large chain of departmental stores. K-Mart finally offered to sign a one year contract at a
lump sum price of Rs. 19,000,000.

The Cost Accountant of Fazal Industries Limited believes that the offered price is too low.
However, the management has asked you to re-assess the situation. The cost accountant has
provided you the following information:

Statement of Estimated Costs (Project: K-Mart)

Notes Rupees
Material:
X (at historical cost) (i) 1,500,000
Y (at historical cost) (ii) 1,350,000
Z (iii) 2,250,000
Labour:
Skilled (iv) 4,050,000
Unskilled (v) 2,250,000
Supervisory (vi) 810,000
Overheads (vii) 8,500,000
Total cost 20,710,000

You have analysed the situation and gathered the following information:
(i) Material X is available in stock. It has not been used for a long time because a
substitute is currently available at 20% less than the cost of X.
(ii) Material Y was ordered for another contract but is no longer required. Its net realizable
value is Rs. 1,470,000.
(iii) Material Z is not in stock.
(iv) Skilled labour can work on other contracts which are presently operated by semi-
skilled labour who have been hired on temporary basis at a cost of Rs. 325,000 per
month. The company will need to give them a notice of 30 days before terminating
their services.
(v) Unskilled labour will have to be hired for this contract.
(vi) Two new supervisors will be hired for this contract at Rs. 15,000 per month. The
present supervisors will remain employed whether the contract is accepted or not.
(vii) These include fixed overheads absorbed at the rate of 100% of skilled labour. Fixed
production overheads of Rs. 875,000 which would only be incurred if the contract is
accepted, have been included for determining the above fixed overhead absorption
rate.

Required:
Prepare a revised statement of estimated costs using the opportunity cost approach, for the
management of Fazal Industries and state whether the contract should be accepted or not. (14)

Q.5 Ishaq Limited manufactures plastic bottles for pharmaceutical companies. It has recently
introduced a 100% weekly group bonus plan with a guaranteed wage of Rs. 150 per hour.
Standard production per hour is 50 bottles. Each worker is supposed to work 8 hours a day
from Monday to Friday and 5 hours on Saturday. Presently, there are 20 workers who are
entitled for this plan. Production for the first week under the 100% bonus plan was:

Days Mon Tue Wed Thu Fri Sat


No. of bottles 8,700 7,350 9,750 7,500 8,950 4,550

Most of the workers have raised objection on the company’s bonus plan. They are of the
view that bonus calculation should be based on daily production instead of weekly
production. The management of the company has asked you to determine the impact of such
a change.

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(4)

Required:
Prepare statements showing labour cost per unit under each of the two options. Give reasons
for the differences, if any. (10)

Q.6 Yahya Limited produces a single product that passes through three departments, A, B and C.
The company uses FIFO method for process costing. A review of department A’s cost
records for the month of January 2008 shows the following details:

Material Labour
Units
Rs. Rs.
Work in process inventory as at January 1, 2008
(75% complete as to conversion costs) 16,000 64,000 28,000
Additional units started in January 2008 110,000 - -
Material costs incurred - 430,500 -
Labour costs incurred - - 230,000
Work in process inventory as at January 31, 2008
(50% complete as to conversion costs) 18,000 - -
Units completed and transferred in January 2008 100,000 - -

Overhead is applied at the rate of 120% of direct labour. Normal spoilage is 5% of output.
The spoiled units are sold in the market at Rs. 6 per unit.
Required:
Compute the following for the month of January:
(a) Equivalent production units.
(b) Costs per unit for material, labour and factory overhead.
(c) Cost of abnormal loss (or gain), closing work in process and the units transferred to
the next process. (16)

Q.7 Zulfiqar Limited makes and sells a single product and has the total production capacity of
30,000 units per month. The company budgeted the following information for the month of
January 2008:

Normal capacity (units) 27,000


Variable costs per unit:
Production (Rs.) 110
Selling and administration (Rs.) 25
Fixed overheads:
Production (Rs.) 756,000
Selling and administration (Rs.) 504,000

The actual operating data for January 2008 is as follows:

Production 24,000 units


Sales @ Rs. 250 per unit 22,000 units
Opening stock of finished goods 2,000 units

During the month of January 2008, the variable factory overheads exceeded the budget by
Rs. 120,000.
Required:
(a) Prepare profit statement for the month of January using:
− marginal costing; and
− absorption costing.
(b) Reconcile the difference in profits under the two methods. (15)

(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2008

September 5, 2008

COST ACCOUNTING (MARKS 100)


Module D (3 hours)

Q.1 Binary Ltd. (BL) manufactures three products, A, B and C. It is the policy of the company to
apportion the joint costs on the basis of estimated sales value at split off point. BL incurred the
following joint costs during the month of August 2008:

Rs. in ‘000
Direct material 16,000
Direct labour 3,200
Overheads (including depreciation) 2,200
Total joint costs 21,400

During the month of August 2008 the production and sales of Product A, B and C were
12,000, 16,000 and 20,000 units respectively. Their average selling prices were Rs. 1,200,
Rs. 1,400 and Rs.1,850 per unit respectively.
In August 2008, processing costs incurred on Product A after the split off point amounted to
Rs. 1,900,000.
Product B and C are sold after being packed on a specialized machine. The packing material
costs Rs. 40 per square foot and each unit requires the following:

Product Square feet


B 4.00
C 7.50

The monthly operating costs associated with the packing machine are as follows:

Rupees
Depreciation 480,000
Labour 720,000
Other costs 660,000

All the above costs are fixed and are apportioned on the basis of packing material
consumption in square feet.
Required:
(a) Calculate the joint costs to be apportioned to each product. (13)
(b) BL has received an offer from another company to purchase the total output of Product B
without packaging, at Rs. 1,200 per unit. Determine the viability of this offer. (03)

Q.2 Alpha Motors (Pvt.) Ltd. uses a special gasket for its automobiles which is purchased from a
local manufacturer. The following information has been made available by the procurement
department:

Annual requirement (no. of gaskets) 162,000


Cost per gasket (Rs.) 1,000
Ordering cost per order (Rs.) 27,000
Carrying cost per gasket (Rs.) 300

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(2)

The gaskets are used evenly throughout the year. The lead time for an order is normally 11
days but it can take as much as 15 days. The delivery time and the probability of their
occurrence are given below:

Delivery time (in days) Probability of Occurrence


11 68%
12 12%
13 10%
14 6%
15 4%

Required:
(a) Compute the Economic Order Quantity (EOQ) and the total Ordering Costs based on
EOQ. (04)
(b) What would be the safety stock and re-order point if the company is willing to take:
ƒ a 20% risk of being out of stock?
ƒ a 10% risk of being out of stock? (08)
Note: Assume a 360 day year.

Q.3 (a) Hexa Limited uses a standard costing system. The following profit statement summarizes
the performance of the company for August 2008:

Rupees
Budgeted profit 3,500
Favorable variance:
Material price 16,000
Labour efficiency 11,040 27,040
Adverse variance:
Fixed overheads (16,000)
Material usage (6,000)
Labour rate (7,520) (29,520)
Actual profit 1,020

The following information is also available:

Standard material price per unit (Rs.) 4.0


Actual material price per unit (Rs.) 3.9
Standard wage rate per hour (Rs.) 6.0
Standard wage hours per unit 10
Actual wages (Rs.) 308,480
Actual fixed overheads (Rs.) 316,000
Fixed overheads absorption rate 100% of direct wages

Required:
Calculate the following from the given data:
(a) Budgeted output in units
(b) Actual number of units purchased
(c) Actual units produced
(d) Actual hours worked
(e) Actual wage rate per hour (15)

(b) State any two possible causes of favourable material price variance, unfavourable
material quantity variance, favourable labour efficiency variance and unfavourable labour
rate variance. (04)

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(3)

Q.4 Decimal World Limited manufactures and sells modems. It manufactures its own circuit
boards (CB), an important part of the modem. The present cost to manufacture a CB is as
follows:

Rupees
Direct material 440
Direct labour 210
Variable overheads 55
Fixed overheads
Depreciation 60
General overheads 30
Total cost per unit 795

The company manufactures 400,000 units annually. The equipment being used for
manufacturing CB has worn out completely and requires replacement. The company is
presently considering the following options:

(A) Purchase new equipment which would cost Rs. 240 million and have a useful life of six
years with no salvage value. The company uses straight-line method of depreciation. The
new equipment has the capacity to produce 600,000 units per year. It is expected that the
use of new equipment would reduce the direct labour and variable overhead cost by
20%.
(B) Purchase from an external supplier at Rs.730 per unit under a two year contract.

The total general overheads would remain the same in either case. The company has no other
use for the space being used to manufacture the CBs.

Required:
(a) Which course of action would you recommend to the company assuming that 400,000
units are needed each year? (Show all relevant calculations) (07)
(b) What would be your recommendation if the company’s annual requirements were
600,000 units? (06)
(c) What other factors would the company consider, before making a decision? (03)

Q.5 Octa Electronics produces and markets a single product. Presently, the product is
manufactured in a plant that relies heavily on direct labour force. Last year, the company sold
5,000 units with the following results:

Rupees
Sales 22,500,000
Less: Variable expenses 13,500,000
Contribution margin 9,000,000
Less: Fixed expenses 6,300,000
Net income 2,700,000

Required:
(a) Compute the break-even point in rupees and the margin of safety. (04)
(b) What would be the contribution margin ratio and the break-even point in number of units
if variable cost increases by Rs. 600 per unit? Also compute the selling price per unit if
the company wishes to maintain the contribution margin ratio achieved during the
previous year. (05)
(c) The company is also considering the acquisition of a new automated plant. This would
result in the reduction of variable costs by 50% of the amount computed in (b) above
whereas the fixed expenses will increase by 100%. If the new plant is acquired, how many
units will have to be sold next year to earn net income of Rs. 3,150,000. (03)

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(4)

Q.6 Ternary Engineering Limited produces front and rear fenders for a motorcycle manufacturer.
It has three production departments and two service departments. Overheads are allocated on
the basis of direct labour hours. The management is considering to change the basis of
overhead allocation from a single overhead absorption rate to departmental overhead rate. The
estimated annual overheads for the five departments are as under:
Production Departments Service Departments
Fabrication Phosphate Painting Inspection Maintenance
-------------------------Rs. in 000--------------------------------
Direct materials 6,750 300 750
Direct labour 1,200 385 480
Indirect material 30 75
Other variable overheads 200 70 100 30 15
Fixed overheads 480 65 115 150 210
Total departmental expenses 8,630 820 1,445 210 300

Maximum production capacity 20,000 25,000 30,000


Direct labour hours 24,000 9,600 12,000
Machine hours 9,000 1,000 1,200
Use of service departments:
Maintenance - Labour hours 630 273 147
Inspection - Inspection hours 1,000 500 1,500

Required:
(a) Compute the single overhead absorption rate for the next year. (06)
(b) Compute the departmental overhead absorption rates in accordance with the following:
ƒ The Maintenance Department costs are allocated to the production department on the
basis of labour hours.
ƒ The Inspection Department costs are allocated on the basis of inspection hours.
ƒ The Fabrication Department overhead absorption rate is based on machine hours
whereas the overhead rates for Phosphate and Painting Departments is based on direct
labour hours. (10)

Q.7 Unity Electronics Limited manufactures and supplies condenser fans used in the production of
Refrigerators to Sigma Corporation. The company earns a contribution margin of Rs. 600 on
each unit sold before charging the labour cost. Following information is available from the
company’s records.

Number of employees 180


Standard working hours (9 hours/day) 54
Standard hours per unit (at 100% efficiency) 3
Standard labour rate per hour (Rupees) 30

Due to the rise in demand for Refrigerators, Sigma Corporation has increased the size of its
order. However, the management is concerned about the productivity of its labour force. An
analysis of the employees performance report has revealed that the company is suffering on
account of the following:
ƒ A tendency to waste time as a result of which approximately 9 working hours are lost per
week per employee.
ƒ A tendency to work inefficiently, as a result of which the production efficiency is only 74%.
In order to meet the increased demand, the management is considering an increase in wages
by Rs. 5 per hour. The increase is likely to motivate the employees and reduce the wastage of
time by 5 hours and will also improve the production efficiency to 88%.
Required:
Advise whether Unity Electronic Limited should revise the wages. Show all necessary
supporting calculations. (09)
(THE END)

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