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)
 (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.

 (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)
 (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:
 (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
 (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)