Cost and Management Accounting
Cost and Management Accounting
Cost and Management Accounting
Rupees
Direct material (500 kg) 135,000
Direct labour (1,500 hours) 225,000
Variable overheads (Rs. 120 per direct labour hour) 180,000
Set-up cost per batch 40,000
Fixed costs:
Depreciation of equipment purchased for the project 45,000
Allocation of existing overheads @ Rs. 16 per hour 24,000
Cost of first batch 649,000
Additional information:
(i) The set-up cost per batch would be reduced by 5% for each subsequent batch.
However, there would be no further reduction in the set-up cost from the 5th batch
onward.
(ii) Learning curve effect is estimated at 90% but would remain effective for the first eight
batches only.
(iii) The index of 90% learning curve is -0.152.
Required:
Compute the contract price that would enable SPL to earn an incremental profit of 30% of
the contract price. (10)
Q.2 Aroma Herbs (AH) deals in a herbal tea. The tea is imported on a six monthly basis. The
management is considering to adopt a stock management system based on Economic Order
Quantity (EOQ) model. In this respect, the following information has been gathered:
(i) Annual sale of the tea is estimated at 60,000 kg at Rs. 1,260 per kg. Sales are evenly
distributed throughout the year.
(ii) C&F value of the tea after 10% discount is Rs. 900 per kg. Custom duty and sales tax
are paid at the rates of 20% and 15% respectively. Sales tax paid at import stage is
refundable in the same month.
(iii) Use of EOQ model would reduce the quantity per order. As a result, bulk purchase
discount would be reduced from 10% to 8%.
(iv) Cost of financing the stock is 1% per month.
(v) Annual storage cost is estimated at Rs. 320 per kg.
(vi) Administrative cost of processing an order is Rs. 90,000. Increase in number of
purchase orders would reduce this cost by 10%.
(vii) AH maintains a buffer stock equal to fifteen days' sales.
Required:
(a) Compute EOQ. (04)
(b) Determine the amount of savings (if any) which can be achieved by AH by adopting
the stock management system based on EOQ model. (06)
Cost and Management Accounting Page 2 of 5
Q.3 Ravi Limited (RL) is engaged in production of industrial goods. It receives orders from steel
manufactures and follows job order costing. The following information pertains to an order
received on 1 December 2016 for 6,000 units of a product:
(i) Production details for the month of December 2016:
Units
Produced and transferred to finished goods 3,200
Delivered to the buyer from the finished goods 3,000
Units rejected during inspection 120
Closing work in process (100% material and 80% conversion) 680
(ii) Actual expenses for the month of December 2016:
Rupees
Direct material 1,140,000
Direct labour (6,320 hours) 948,000
Factory overheads 800,000
Additional information:
Factory overheads are applied at Rs. 120 per hour. Under/over applied factory
overheads are charged to profit and loss account.
Units completed are inspected and transferred to finished goods. Normal rejection is
estimated at 10% of the units transferred to finished goods. The rejected units are sold
as scrap at Rs. 150 per unit.
RL uses weighted average method for inventory valuation.
Required:
(a) Prepare work in process account for the month of December 2016. (08)
(b) Prepare accounting entries to record:
over/under applied overheads
production losses and gains (05)
Q.4 Double Crown Limited (DCL) is engaged in manufacturing of a product Zee. Sales
projections according to DCL's business plan for the year ending 31 December 2017, are as
follows:
Required:
(a) Prepare budget for material purchases, direct wages and overheads, for the month of
June 2017. (10)
(b) Prepare cash payment budget for the month of June 2017. (03)
Q.5 Unity Limited (UL) has obtained a loan of Rs. 250 million from Eastern Investment Limited
(EIL) for 5 years. The loan carries a floating (variable) rate of interest which is paid
annually. The existing rate is 10%.
Required:
Compute the interest which UL would pay to EIL and the amounts which UL and SBL
would pay to settle their obligations towards each other, if the interest rate on the due date
is:
(a) 13% per annum (02)
(b) 6% per annum (02)
Q.6 Hexa Limited is using a standard absorption costing system to monitor its costs. The
management is considering to adopt a marginal costing system. In this respect, following
information has been extracted from the records for the month of December 2016:
(i) Actual as well as budgeted sale was 10,500 units at Rs. 2,000 per unit.
(ii) Standard cost per unit is as follows:
Rupees
Direct material 5 kg @ Rs. 158 790
Direct labour 3 hours @ Rs. 150 450
Production overheads (fixed & variable) Rs. 120 per labour hour 360
1,600
Units
Production: Budgeted 11,000
Actual 12,000
Required:
(a) Compute the profit for the month of December 2016, using standard marginal
costing. (03)
(b) Reconcile the profit computed above with actual profit under marginal costing, by
incorporating the related variances. (08)
(c) Reconcile the actual profit under marginal and absorption costing. (02)
Cost and Management Accounting Page 4 of 5
Q.7 Modern Transport Limited (MTL) is considering an investment proposal from Burraq Cab
Services (BCS). As per the proposal, MTL would provide branded cars to BCS under the
following terms and conditions:
(i) BCS would pay rent of Rs. 1.8 million per annum per car to MTL. The cars would
operate on a 24-hour basis. The payment would be made at the end of year.
(ii) Cost of the drivers and maintenance cost of the car would initially be paid by BCS but
would be adjusted against car rentals payable to MTL at the end of each year.
(iii) MTL would provide a smart mobile to each driver.
MTL has estimated the following costs for deployment of a car with BCS:
Additional information:
The car would be depreciated at the rate of 25% under the reducing balance method.
Tax depreciation is to be calculated on the same basis.
Applicable tax rate is 30% and tax is payable in the year in which the liability arises.
Inflation is estimated at 5% per annum.
MTL's cost of capital is 12% per annum.
Required:
Advise whether MTL should accept BCSs proposal. (16)
Q.8 NK Enterprises produces various components for telecom companies. The demand of these
components is increasing. However, NKs production facility is restricted to 50,000 machine
hours only. Therefore, NK is considering to buy certain components externally. In this
respect, the following information has been gathered:
Components
Description
X-1 X-2 X-3 X-4
Estimated demand in units 6,500 2,000 7,100 4,500
Machine hours required per unit 8 4 5 2
In-house cost per unit: ------------- Rupees -------------
Direct material 20.0 28.0 23.0 22.0
Direct labour 9.0 5.0 9.0 8.0
Factory overheads 16.0 8.0 8.5 5.0
Allocated administrative overheads 5.0 4.0 3.0 2.0
50.0 45.0 43.5 37.0
External price of the component per unit 35.0 40 34.0 33.0
Factory overheads include fixed overheads estimated at Rs. 1.50 per machine hour.
Required:
Determine the number of units to be produced in-house and bought externally. (13)
Cost and Management Accounting Page 5 of 5
Q.9 Sword Leather Limited (SLL) produces and sells shoes. The following information pertains
to its latest financial year:
Rs. in million
Sales (62,500 pairs) 187.5
Fixed production overheads 35.0
Fixed selling and distribution overheads 10.0
To increase profitability, SLL has decided to introduce new design shoes and discontinue
the existing deigns. In this regard it has carried out a study whose recommendations are as
follows:
(i) Replace the existing fully depreciated plant with a new plant at an estimated cost of
Rs. 50 million. The new plant would:
(ii) Improve efficiency of the staff by paying 1% commission to marketing staff and
annual bonus amounting to Rs. 1.5 million to other staff.
(iii) Introduction of new designs would require an increase in variable selling and
distribution cost by 2%.
(iv) Sell the newly designed shoes at 10% higher price.
(v) Maintain finished goods inventory equal to one months sale.
Required:
Compute the budgeted production for the first year if the budgeted sale has been determined
with the objective of maintaining 25% margin of safety on sale. (08)
(THE END)