Certificate in Accounting and Finance Stage Examinations

The Institute of 10 March 2016

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

Cost and Management Accounting

Q.1 Rainbow Paints Limited (RPL) is in the process of preparing its budget for the year ending
28 February 2017. The following data has been extracted from the profit and loss account
for the year ended 29 February 2016:
Rs. in million
Sales (including cash sales of Rs. 19 million) 109.00
Cost of goods sold:
Materials consumed (30.00)
Conversion cost - Variable (18.00)
Conversion cost - Fixed (including depreciation of Rs. 3 million) (12.00)
Opening finished goods inventory (5.00)
Closing finished goods inventory 8.00
Gross profit 52.00
Operating expenses:
Variable (25.00)
Fixed (including depreciation of Rs. 5 million) (10.00)
Operating profit 17.00

For preparation of the budget, Cost Control Manager has prepared the following
projections/information:

(i) Sales volume and sales price are expected to increase by 10% and 5% respectively. The
ratio of cash and credit sales would be 25:75. Cash sales are made at a discount of 5%.
(ii) Average collection and payment time in RPL is as follows:

Collection of trade debtors 35 days

Payment to trade creditors 40 days
Payment of expenses 25 days

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

Raw material - 10%

Variable and fixed expenses (excluding depreciation) - 8%

Depreciation - same as last year

(vi) RPL plans to introduce a new product during the budget period for which it plans to
launch an advertisement campaign during September 2016 to February 2017. In this
respect payments of Rs. 3 million each would be made on 1 September 2016 and
1 March 2017.
(vii) RPL operates absorption costing system and uses FIFO method for valuation of
inventory.

Required:
(a) Prepare budgeted profit and loss account for the year ending 28 February 2017. (08)
(b) Prepare budgeted cash flow statement for the year ending 28 February 2017. (08)
(Assume that all the transactions occur evenly throughout the year (360 days) unless
otherwise specified)
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Q.2 An investor paid a premium of Rs. 300 for the option to buy 500 shares in ABC Limited for
Rs. 20,000 at any time during the next three months. The investor exercised his right to buy
the shares when the price in the market was Rs. 50 per share.

Required:
(a) Explain the term ‘option’. (01)
(b) In context of the above example, briefly explain:
(i) What is the strike price? (0.5)
(ii) Whether the above transaction is a ‘call option’ or a ‘put option’. (1.5)
(c) Explain whether the above option would be termed as ‘in the money’ or ‘out the
money’ when the market price is Rs. 35 per share. (02)

Q.3 Seema Enterprises (SE) produces various leather goods. It operates a standard marginal
costing system. For one of its products Bela, following information was extracted for the
month of December 2015 from SE's budget document for the year 2015.

Rs. in million
Sales 9,800 units 25.00
Cost of production of 10,000 units:
Direct material 5,000 kg 9.00
Direct labour 24,000 hrs 3.60
Variable overheads 2,000 machine hrs 4.40
Fixed overheads 3.80

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

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

kg Rs. in million
1-Dec-2015 Opening balance 3,000 5.70
10-Dec-2015 Purchases 15,000 26.25

(ii) To minimise labour turnover, SE increased production wages by 10% above the
standard rate, effective 1 December 2015. This improved labour efficiency by 5% as
compared to budget.

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

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

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

All other overheads were 4% in excess of the budget

(iv) Variances are treated as period cost and charged to cost of sales.

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

Required:
(a) Compute budgeted and actual profits of Bela for the month of December 2015 using
marginal costing. (06)
(b) Reconcile the budgeted profit with actual profit using relevant variances under
marginal costing. (14)
 Cost and Management Accounting Page 3 of 5

Q.4 Digital Electronics (DE) acquired a plant on 1 January 2016 under a lease arrangement on
the following terms:

Lease period (commencing from 1 January 2016) 3 years

Down payment on commencement of lease Rs. 2.00 million
Lease installments payable annually in arrears Rs. 3.90 million
Amount payable on expiry of the lease term Rs. 0.89 million

On the date of acquisition, fair value of the plant was Rs. 10 million. DE depreciates its
property, plant and equipment over their useful life. The disposal price of the plant at the
end of the useful life of four years is estimated at Rs. 0.50 million.

Net cash inflows from the use of the plant are estimated as under:

Year 2016 2017 2018 2019

Amount (Rs. in million) 5.90 5.20 2.45 1.00

It may be assumed that all cash inflows arise at the end of the year.

Required:
Compute internal rate of return (IRR) and advise whether it is feasible to acquire the plant
assuming that DE’s cost of capital is 15%. (08)

Q.5 Omega Industries Limited (OIL) produces two products Alpha and Beta. These products are
processed through Fabrication and Finishing departments. Quality control and Logistics
departments provide all the necessary support for the production.

OIL allocates production overheads to Alpha and Beta at a pre-determined rate of Rs. 1,300
and Rs. 500 per unit respectively. Any under/over absorbed overheads are adjusted to cost
of sales.

Following actual data has been extracted from the cost records of OIL for the month of
December 2015:

Quality
Fabrication Finishing Logistics Total
control
Indirect labour Rs. in '000 1,500 1,200 500 400 3,600
Factory rent Rs. in '000 2,000
Power Rs. in '000 1,200
Depreciation – Plant Rs. in '000 9,000
Other information:
Cost of plant Rs. in '000 32,000 20,000 2,000 6,000 60,000
Floor area Square feet 10,000 5,000 3,000 2,000 20,000
Power KWH 50,000 40,000 4,000 6,000 100,000
Hours worked for Alpha 70% 60% - -
Hours worked for Beta 30% 40% - -
Services provided by:
- Quality control 40% 60% - - 100%
- Logistics 60% 35% 5% - 100%

8,000 units of Alpha and 10,000 units of Beta were produced during the month of
December 2015.

Required:
(a) Compute product wise actual overheads for Alpha and Beta. (10)
(b) Prepare journal entries to record:
(i) Applied production overheads; and
(ii) Under/over absorbed production overheads (02)
 Cost and Management Accounting Page 4 of 5

Q.6 Quality Chemicals (QC) produces one of its products through two processes A and B.
Following information has been extracted from the records of process A for the month of
January 2016.
Quantity Material Conversion
Units ----- Rs. in ‘000 -----
Opening work in process 5,000 2,713 1,499
Input during the month 20,000 10,000 5,760
Transferred to process B 18,000 - -
Closing work in process 6,000 - -
Additional information:
(i) Materials are introduced at the beginning of the process. In respect of conversion,
opening and closing work in process inventories were 40% and 60% complete,
respectively.
(ii) Inspection is performed when the units are 50% complete. Expected rejection is
estimated at 5% of the inspected units. The rejected units are not processed further and
sold at Rs. 100 per unit.
(iii) QC uses 'weighted average method' for inventory valuation.

Required:
(a) Compute equivalent production units and cost per unit. (05)
(b) Prepare journal entries to record the above transactions. (06)

Q.7 Global (Pvt.) Limited (GPL) is in the process of preparing bid documents for a special order
of 5,000 units of a new product Zeta. In this respect, GPL’s technical department has
worked-out the following projections/information:
(i) The order would be completed in 15 days.
(ii) GPL has sufficient stock of the required materials to produce Zeta. Some of the
relevant information is as follows:
Material A Material B Material C
Quantity required 5,000 kg 3,000 kg 2,000 kg
Original purchase price Rs. 180 per kg Rs. 150 per kg Rs. 50 per kg
Current purchase price Rs. 200 per kg Rs. 175 per kg Rs. 60 per kg
Current disposal price Rs. 100 per kg Rs. 135 per kg Nil

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

Material B has no use other than in the production of Zeta.

The stock of material C was purchased several years ago for another project. It
can only be used in the production of Zeta. Otherwise, it will have to be
disposed of at a cost of Rs. 10 per kg to meet environmental legislation.
(iii) The production of Zeta would require:

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

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

150 machine hours. If the machine is not used for Zeta, it may be leased out at
Rs. 4,000 per day.
(iv) GPL absorbs overheads at Rs. 400 per skilled and unskilled labour hours. Based on
normal capacity of 50,000 hours, fixed overheads are estimated at Rs. 6,000,000. If
GPL decides to produce Zeta, fixed overheads would increase by Rs. 150,000.
(v) As a result of production of Zeta, general administration cost would increase by
Rs. 100,000.
(vi) The planning department of GPL has incurred a cost of Rs. 20,000 on preparing
feasibility for production of Zeta.
 Cost and Management Accounting Page 5 of 5

Required:
Compute the bid price that GPL should quote, if it wants to earn profit (based on relevant
costs only) of 20% of selling price. (12)

Q.8 Himalayan Rivers (HR) is planning to install a new plant. Planned production from the
plant for the next year is 150,000 units. Cost of production is estimated as under:

Rs. in million
Direct material 6.00
Direct labour 5.00
Production overheads 10.29

Production overheads include the following:

(i) Factory premises would be acquired on rent at a cost of Rs. 1.8 million per annum.
(ii) Indirect labour has been budgeted at 30% of direct labour cost, 50% of which would
be fixed.
(iii) Depreciation of the plant would be Rs. 0.5 million.
(iv) Total power and fuel cost has been budgeted at Rs. 3 million. 80% of power and fuel
cost would vary in accordance with the production.
(v) All remaining production overheads are variable.

The sales and marketing budget includes the following:

(i) Employment of two sales representatives at a monthly salary of Rs. 25,000 each and a
sales commission of 2% on sales achieved.
(ii) Hiring of a delivery van at Rs. 70,000 per month.
(iii) Launching an advertisement campaign at a cost of Rs. 1.5 million.

Required:
Calculate the breakeven sales revenue and quantity for the next year if HR expects to earn a
contribution margin of 40% on sales, net of 2% sales commission. (10)

Q.9 According to Global Reporting Initiative, an effective sustainability reporting cycle should
benefit all reporting organizations. List internal and external benefits (three each) of
sustainability reporting. (06)

(THE END)