Cost and Management Accounting

Suggested Answers
Certificate in Accounting and Finance – Spring 2018

Ans.1 Sarwar Limited

K2 K9 A-1
-------------------- Rs. per unit --------------------
Selling price Given 16,500.00 26,000.00 35,000.00
Variable cost 12,375.00 18,625.00 23,270.00
(6,000+4,500+1,875) (8,000+7,500+3,125) (W-1)
Contribution per unit A 4,125.00 7,375.00 11,730.00

Labour hours required per unit B 15 25 35

(4,500/300) (7,500/300) Given

CM per labour hour (Rs.) A/B 275.00 295.00 335.14

Ranking 3 2 1

Allocation of 300,000 hours C - 195,000 105,000

(300,000–105,000) (35×3,000)

Units to be produced C/B - 7,800.00 3,000.00

Contribution margin for the month after accepting special contract Rs. in million
A-1 (3,000×11,730) 35.19
K-9 (7,800×7,375) 57.53
Contribution margin 92.72
Fixed cost (1,500/15)×300,000 30.00
Maximum profit 62.72

W-1: Relevant cost for A-1 Rs. per unit

Material cost - B1 (3×2,500) 7,500.00
Material cost - C3 (2,400,000/3,000) 800.00
Labour cost (35×300) 10,500.00
Variable overheads [{1875÷(4,500÷300)}×35] 4,375.00
Machine hire cost [Lower of (57,000×5) and {900,000– (20,000×25)}]/3,000 95.00
Variable cost per unit of A-1 23,270.00

Ans.2 (a) Investment and speculation are similar in that they both involve an investor to take risk
in the expectation of making a profit. However, following are the main differences
between investment and speculation:
Investment Speculation
(i) Normally investments are made for Speculation is often made on short
long-term period. term basis.
(ii) Attitude of investor in investment is Speculation always involves high risk.
usually risk neutral.
(iii) Investment usually involves putting Speculators often invest in more
money into an asset that isn’t typically marketable assets as they do not plan
marketable in the short term. The to own them for long time.
objective is to yield a series of returns
over the life of the investment.
(iv) Investors build their strategy based on Speculators normally expect some kind
the expectation that a certain price of change without necessarily knowing
movement or income stream will occur. what.
(v) There is a low to moderate risk Risk is usually moderate to high in
involved in investment. speculation.
(vi) Investment involves moderate returns Speculation involves high returns in
due to low to moderate risk. exchange for high risks.

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

(b) Valika Limited

Introduction of new product - AX
Year 0 Year 1 Year 2 Year 3 Year 4
------------------- Rs. in million -------------------
Contribution margin (W-1) - 18.00 20.79 22.05 22.69
Tax/Accounting depreciation (50×0.25, 0.75) - (12.50) (9.38) (7.04) (5.28)
Net profit before tax - 5.50 11.41 15.01 17.41
Tax liability @ 30%. - (1.65) (3.42) (4.50) (5.22)
Net profit after tax - 3.85 7.99 10.51 12.19
Add back depreciation - 12.50 9.38 7.04 5.28
Rent income lost 1.8×1.07 (1.93) (2.07) (2.21) (2.36) -
Tax saved on rent income 1.93×30% 0.58 0.62 0.66 0.71
Residual value receipts (50–34.2 Total dep.) 15.80
Initial investment (50.00) - - - -
Working capital (W-2) (10.00) (1.00) (1.10) (1.21) 13.31
Net cash (outflows)/inflows (61.93) 13.86 14.68 14.64 47.29
Discount rate @ 10% 1.0000 0.9091 0.8264 0.7513 0.6830
Present value (61.93) 12.60 12.13 10.99 32.29
Net present value 6.08

Opinion: VL's should start production of AX.

W-1: Annual contribution margin Year 1 Year 2 Year 3 Year 4

Contribution margin per unit (Rs.) A 100.00 105.00 110.25 115.76
100 100×1.05 105×1.05 110.25×1.05
Annual demand (Units) 180,000 198,000 217,800 196,020
180,000×1.10 198,000×1.10 217,800×90%
Production - Restricted to capacity (Units)
(Up to 200,000 units p.a)B 180,000 198,000 200,000 196,020
Annual CM (Rs. in million) (A×B) 18.00 20.79 22.05 22.69

W-2: Working capital requirement Year 1 Year 2 Year 3

Working capital current year 11.00 12.10 13.31
10×1.1 11×1.1 12.10×1.1
Working capital last year 10.00 11.00 12.10
(Increase)/Decrease (1.00) (1.10) (1.21) 13.31

Ans.3 Washington Limited Rupees

Dividend needs to pay 140,000,000×5% 7,000,000

Profit after tax (required) (7,000,000÷0.8) 8,750,000

Required contribution margin in remaining 10 months

Profit before tax (required) 8,750,000 /70% 12,500,000
Add: Fixed cost (Jan - Dec) (21,200,000+4,500,000) 25,700,000
Add: Promotion campaign Given 5,000,000
Contribution margin required 43,200,000
Contribution margin recovered in 1st two months (W-1) (3,304,464)
Required contribution in remaining 10 months 39,895,536

Forecasted sales revenue to earn in next 10 months 39,895,536/23.19%(W-1) Rs. 172,037,670

Number of units to be sold 172,037,670/9,500 18,109

W-1: Actual results of first two months of 2018 Rupees
Sales 1,500×9,500 14,250,000.00
Variable manufacturing cost (127,000,000–21,200,000)/ *16,800×1.05×1,500 9,918,750.00
Variable operating cost (16,000,000–4,500,000)/16,800×1,500 1,026,785.71
Contribution margin 3,304,464.29

Contribution margin % 23.19%

*Budgeted number of units to be sold 168,000,000/10,000 16,800

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

Ans.4 RI Limited
Journal entries
Debit Credit
Date Particulars
----------- Rs. in '000 -----------
Purchases - Raw material (W-1) 5,280
1 Supplier/cash 5,280
(Purchased raw material)
Work in process (F01) (W-1) 3,888
Work in process (F02) (W-1) 2,592
2
Raw material 6,480
(Allocated raw material consumed to the jobs)
Work in process (F01) (27,500×360) 9,900
Work in process (F02) (21,600×400) 8,640
3
Payroll 18,540
(Allocated direct labour to the jobs)
Payroll 18,540
Accrued payroll tax 500
4
Bank/Cash 18,040
(Paid of payroll)
Work in process (F01) (27,500×120) 3,300
Work in process (F02) (21,600×120) 2,592
5 Factory overheads applied 5,892
(Applied factory overheads to the jobs @ Rs. 120 per direct
labour hour)
Finished goods (2,592+8,640+2,592) 13,824
6 Work in process (F02) 13,824
(Transferred WIP of job F02 to finished goods)
Damaged goods (at NRV) (13,824/3,600×500×50%) 960
Abnormal loss - P&L (13,824/3,600×500×50%) 960
7
Finished goods 1,920
(Recorded 500 damaged units)
Cost of sales (13,824–1,920) 11,904
8 Finished goods 11,904
(Transferred total finished goods to cost of sales)
Factory overheads applied (100,000×120) 12,000
Cost of sales (overhead over applied) 1,000
9 Factory overheads control 11,000
(Transferred applied factory overheads to control a/c and
charged under applied overheads to cost of sales)
Factory overheads control 11,000
10 Cash/suppliers 11,000
(Recorded actual factory overheads incurred)

W-1: Rs. in '000

Material consumption - F01 (5,400×24×30) 3,888.00
Material consumption - F02 (3,600×24×30) 2,592.00
Add: Closing stock of raw material Given 1,740.00
Less: Opening stock of raw material Given (2,940.00)
Purchases - Raw material 5,280.00

Ans.5 MZ Limited
Material, labour, overhead variances Rs. in '000
Cost variances under marginal costing
Material price variance [(135–145)×698,000] Adv. (6,980.00)
Material usage variance {(53,500(W.3)×13)– 696,000(W.1)}×135 Adv. (67.50)
Labour rate variance (100–115)×755,000 Adv. (11,325.00)
Labour efficiency variance {(14×54,300)(W.3)–755,000}×100 Fav. 520.00
Variable overheads expenditure variance (755,000×75)–Rs. 53,900,000(W.4) Fav. 2,725.00
Variable overheads efficiency variance {(54,300(W.3)×14)–755,000}×75 Fav. 390.00
Fixed overhead expenditure variance (40,000–41,100) (W.4)) Adv. (1,100.00)
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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

W-1:
Actual material usage (kg) (698,000+15,000–17,000) 696,000.00

W-2: Quantity schedule Units

WIP (opening) 5,000.00
Units started 55,000.00
Total units in production 60,000.00
Normal loss (1,500.00)
WIP (End) (6,000.00)
Finished goods/Transferred out 52,500.00

W-3: Equivalent production units Material Conversion cost

---------- Units ----------
Finished goods/Transferred out (W-2) 52,500.00 52,500.00
Less: WIP (Opening) (5,000.00) (5,000.00)
Started and finished in this period 47,500.00 47,500.00
Add: WIP (Opening) (5,000×40%) - 2,000.00
Add: WIP (Closing) (6,000×80%) 6,000.00 4,800.00
Equivalent production units 53,500.00 54,300.00

W-4: Actual variable and fixed overheads Rs. in '000

Budgeted fixed overheads Given 40,000.00
Actual fixed overheads exceeded applied overheads Given 1,100.00
Actual fixed overheads 41,100.00
Less: Total actual variable and fixed overheads Given 95,000.00
Actual variable overheads 53,900.00

Ans.6 Reorder Demand Stock out Stock out Stock out Average Holding Expected
level level per order per year cost inventory cost Probability total cost
(Units) (Units) (Units) (Units) (Rs.) (Units) (Rs.) (Rs.)
d= c× g=[a–b+
a b c e=d×40 h=g×100 i j=(h+e)×i
8(W-2) EOQ(W-1)]/2
1,000 - - - 540 54,000 30% 16,200
1,000 660 - - - 880 88,000 50% 44,000
450 - - - 1,090 109,000 20% 21,800
82,000
1,000 550 4,400 176,000 540 54,000 30% 69,000
450 660 210 1,680 67,200 540 54,000 50% 60,600
450 - - - 540 54,000 20% 10,800
140,400
1,000 280 2,240 89,600 540 54,000 30% 43,080
720 660 - - - 600 60,000 50% 30,000
(W-3) 450 - - - 810 81,000 20% 16,200
89,280

Conclusion: Profit would be maximised at re-order level of 1,000 units.

Rupees
W-1: EOQ (Units) = SQRT[ 2×8,640×6,750)/100] 1,080.00

W-2: No. of orders (8,640/1,080) 8.00

W-3: Expected value (1,000×30%)+(660×50%)+(450×20%) 720.00

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

Ans.7 SL
Budgeted cash inflows / (outflows) for the next year

Inflows Rs. in million

Cash sales (7,500×30%)×1.1×95% – A 2,351.25
Budgeted credit sales 2018 (7,500×70%)×95%×1.05 5,236.88
Trade debtor (Opening) (7,500×70%)×(45/360) 656.25
Trade debtor (Closing) 5,236.88×30/360 (436.41)
Collections from debtors B 5,456.72
Total inflows A+B 7,807.97

Outflows
Payment to suppliers (W-1) 2,343.78
Direct labour 4,000×{(70%×1.05)+(30%×1.1)} ×30%×1.06 1,354.68
Variable factory overheads 4,000×{(70%×1.05)+(30%×1.1)}×{(20%–(20%×20%)}×1.05 715.68
Fixed factory overheads [{4,000×(20%×20%)}–{(100×70%)}]×1.05 94.50
Operating expenses {1,250–(100×30%)}×1.05 1,281.00
Total outflows 5,789.64

Net cash inflows 2,018.33

W-1: Payments to material suppliers

Consumption of raw material 2018 at 2017 price (4,000×50%)×{(70%×1.05)+(30%×1.1)} 2,130.00
Opening raw material at 2017 price (4,000×50%)×(45/360) (250.00)
Closing raw material at 2017 price 2,130×30/360 177.50
Purchases of 2018 at 2017 price 2,057.50

Purchases of 2018 – at increased price 2,057.50×1.1 2,263.25

Trade creditor (Opening) 2,098(W-2)×30/360 174.83
Trade creditor (Closing) 2,263.25×15/360 (94.30)
Payment to suppliers 2,343.78

W-2: Purchases 2017

Consumption of raw material 2017 4,000×50% 2,000.00
Opening raw material Given (152.00)
Closing raw material (W-1) 250.00
Purchases 2017 2,098.00

(THE END)

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