Cost and Management Accounting

Suggested Answer
Certificate in Accounting and Finance – Spring 2024

A.1 Indus Limited

Processes
A B
Cost brought forward from previous process - 1,640
Cost of material 1,000 700
Cost of labour 400 750
(2×200) (3×250)
Variable overhead 240 360
(2×120) (3×120)
Total cost of a unit 1,640 3,450

Units processed / produced in a month by a single worker 120 80

(240÷2) (240÷3)
No. of rejected units per worker per month 12 4
(120×10%) (80×5%)

Cost of rejected units per worker per month 19,680 13,800

(1,640×12) (3,450×4)

Savings in costs / Bonus to the worker for every one 1,968 2,760
percent decrease in the wastage percentage (19,680÷10) (13,800÷5)

A.2 Noble Industries Limited

Production departments Service departments
Total
A B X Y
---------------------- Rs. in '000 ----------------------
Direct factory overheads 105,000 85,000 30,000 20,000 240,000
Common overheads (based
on floor area*) 24,000 21,000 5,000 3,000 53,000
129,000 106,000 35,000 23,000 293,000
Allocation of department X 17,500 14,000 (35,000) 3,500 0
146,500 120,000 0 26,500 293,000
Allocation of department Y 11,925 10,600 3,975 (26,500) 0
158,425 130,600 3,975 0 293,000
Allocation of department X 1,988 1,590 (3,975) 397 0
160,413 132,190 0 397 293,000
Allocation of department Y 179 159 59 (397) 0
160,592 132,349 59 0 293,000
Allocation of department X 29 24 (59) 6 0
160,621 132,373 0 6 293,000
Allocation of department Y 3 2 1 (6) 0
160,624 132,375 1 0 293,000

Machine hours 1,890 1,710

FOH per machine hour 84.99 77.41

*(OR on the basis of direct factory overheads)

Page 1 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2024

A.3 (a) Toor Industries Limited

 Computation of production quantity of product Y to produce Z Kgs
Required production of Z 8,000
Add: Wastage during the process (8,000×20÷80) 2,000
Total input required including wastage 10,000
Quantity of Y required to produce Z (10,000÷1.6) 6,250

 Computation of production quantity of product Y, sold without further processing

Hours
Labour hours required to produce 6,250 kg of Y for Z [6,250×4(W-1)] 25,000
Further processing hours for production of Z (8,000×2) 16,000
Total labour hours required to produce Z 41,000
Total capacity in terms of labour hours 80,000
Remaining labour hours 39,000
Production of Y without further processing (39,000÷4) 9,750

W-1:
Existing labour hour utilisation (21,600,000÷300) hours 72,000
Existing production of Y (450,000,000÷25,000) kg 18,000
Labour hours per kg of Y (72,000÷18,000) hours 4

(b) Contribution margin after introduction of Z

Product Y Product Z Total
Quantity produced / sold (Kgs) [Part (a)] 9,750 8,000
Contribution margin per kg 13,000 (W-2)30,375
[234,000,000÷
18,000(W-1)]
Total contribution margin (Rs. in '000) 126,750 243,000 369,750

Conclusion:
Since contribution margin after introduction of Z would be more than the existing
contribution margin of Rs. 234 million, TIL should produce Product Z.

W-2: Contribution margin per kg of product Z Rupees

Sale price per kg 50,000
Less: Cost per kg
Raw material costs 18,375
(147,000,000(W-3)÷8,000)
Labour 600
(2×300)
Variable overheads 650
(325×2)
19,625
Contribution margin per kg 30,375

W-3: Material cost of Z Rupees

6,250 kg of Y [6,250×12,000(216,000,000÷18,000(W-1))] 75,000,000
3,750 kg of TS 38 [3,750(10,000–6,250) × 19,200] 72,000,000
Total 147,000,000

Page 2 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2024

A.4 Nauman Engineering Limited

Net increase in profit if order is accepted Rupees

CM foregone of EMV33 [1,440(W-1)×30,900(29,400+1,500)] (44,496,000)
Increase in fixed costs (idle labour) (550,800+685,440)(W-2) (1,236,240)
Contribution from production of LTM78 [105,000–41,640(W-3)]×990 62,726,400
16,994,160

Conclusion: NEW should accept the order for the supply of LTM78.

W-1: Loss of EMV33 production and CM forgone Departments

Production capacity of EMV33 per month A B
Capacity based on machine hours (5,400÷6) ; (3,600÷5) 900 720
Capacity based on labour hours (5,600÷7) ; (7,500÷10) 800 750
Production capacity of EMV33 is therefore 720 units per month (i.e. machine hours in
department B are limiting factor)
Departments
Production capacity of LTM78 per month A B
Capacity based on machine hours (5,400÷10) ; (3,600÷6) 540 600
Capacity based on labour hours (5,600÷8) ; (7,500÷12) 700 625
Production capacity of LTM78 is therefore 540 units per month (i.e. machine hours in
department A are limiting factor)
Time required to produce 990 units of LTM 78 ⇒ 990÷540×30 = 55 days.
Total time required including machine set-up and revert back time ⇒ 55+3+2 = 60 days.
Production of 60 days (720×2) ⇒ 1,440 units

W-2: Increase in fixed costs (Idle labour) Departments

A B
------ Rupees ------
Labour hours worked – EMV33 forgone a 10,080 14,400
(7×1,440) (10×1,440)
Labour hours worked – LTM78 b 7,920 11,880
(8×990) (12×990)
Increase in idle labour hours c=a-b 2,160 2,520
Idle labour hour rate d 255 272
(300×0.85) (320×0.85)
Payment to idle labour (Rs.) e=c×d 550,800 685,440

W-3: Total variable cost per unit of LTM78 Departments

Total
A B
------------------- Rupees -------------------
Raw material 20,000 10,000 30,000
Cost of labour 2,400 3,840 6,240
[8×300(2,100÷7)] [12×320(3,200÷10)]
Variable overheads 3,000 2,400 5,400
[10×300(1,800÷6)] [6×400(2,000÷5)]
Total variable cost per unit 41,640

Page 3 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2024

A.5 Shadman Enterprises Limited

Product A Product B
---------- Rupees ----------
Raw material consumed – as reported 2,200,000 3,141,000
Impact of correction of discount (W-1) (80,000) 99,000
RM Consumed – after correction 2,120,000 3,240,000

Direct labour – as reported 1,100,000 1,200,000

Less: Indirect labour charged to A (250 × 400) (100,000) -
Direct labour – after correction 1,000,000 1,200,000

Factory overheads – as reported 1,320,000 1,440,000

Add: Indirect labour previously charged to A (Bal. fig.) (20,000) 120,000
FOH after correction (allocated on the basis of labour cost) 1,300,000 1,560,000
[1,000÷2,200× (1,200÷2,200×2,860)
2,860{2,760(1,320+
1,440) + 100}]

Cost of goods manufactured – after corrections (Rs.) 4,420,000 6,000,000

Production (Units) 50,000 60,000

(12,000+48,000–10,000) (16,000+59,000–15,000)

Manufacturing cost per unit – after corrections (Rs.) 88.4 100

Closing inventory of good finished goods at cost (Rs.) 884,000 1,500,000
(10,000×88.4) (15,000×100)
Closing inventory of damaged finished goods at lower of cost 168,000 100,000
or NRV (Rs.) [2,000×84(W-2)] [1,000×100(W-2)]
Closing inventory (Rs.) 1,052,000 1,600,000

W-1: Impact of correction of discount Material Y Material Z

Discount per unit (Rs.) 4 3
(120,000÷30,000) (120,000÷40,000)
Closing inventory of raw material (Units) 10,000 7,000
Adjustment in value of closing inventory (Rs.) (40,000) 21,000
(4×10,000) (3×7,000)
Adjustment in raw material consumed (Rs.) (80,000) 99,000
(120,000–40,000) (120,000–21,000)

W-2: Adjustment for damaged units Product A Product B

---------- Rupees ----------
Sale price per unit 105 130
(5,040,000÷48,000) (7,670,000÷59,000)
NRV of damaged units 84 104
(105×80%) (130×80%)
Cost per unit (as above) 88.4 100
Lower of cost or NRV 84 100

Page 4 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2024

A.6 Shahid Pakistan Limited

Profitability before implementation of activity based costing

Revenue / Expenses
Description
J K L Total
Quantity produced & sold A 50,000 40,000 30,000
Sales price per unit (Rs.) B 10,000 12,000 14,000
----------------- Rs. in '000 -----------------
Sales A×B 500,000 480,000 420,000 1,400,000
Less: Total cost 290,000 352,000 351,000 993,000
Profit 210,000 128,000 69,000 407,000

Profitability after implementation of activity based costing

Revenue / Basis of
Value of drivers Revenue / Expenses
Expenses allocation
J K L Total
J K L Total
----------- Rs. in '000 -----------
Sales Actual 500,000 480,000 420,000 1,400,000
Costs
Raw material Actual 100,000 200,000 250,000 550,000
Labour Actual 50,000 40,000 25,000 115,000
Repairs & 9,000 12,000 15,000 36,000 6,750 9,000 11,250 27,000
Machine
maintenance of (50,000 × (40,000 × (30,000 ×
hours 0.18) 0.3) 0.5)
machines
Set-up costs No. of 20 40 20 80 6,000 12,000 6,000 24,000
(50,000 ÷ (40,000 ÷ (30,000 ÷
set-ups 2,500) 1,000) 1,500)
Fuel & power Machine 9,000 12,000 15,000 36,000 24,750 33,000 41,250 99,000
hours
Sales ordering No. of 100 80 60 240 2,500 2,000 1,500 6,000
dept. cost orders
(500,000 ÷ (480,000 ÷ (420,000 ÷
5,000) 6,000) 7,000)
Delivery expenses No. of 50,000 40,000 30,000 120,000 22,500 18,000 13,500 54,000
units
Commission Sales 500 480 420 1,400 25,000 24,000 21,000 70,000
on sales value
(Rs. in million)
Fixed Costs Machine 9,000 12,000 15,000 36,000 12,000 16,000 20,000 48,000
hours
Total cost 249,500 354,000 389,500 993,000
Profit 250,500 126,000 30,500

Page 5 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2024

A.7 Sultan Industries Limited

Financial impact of closing production and sales of Product A Rupees
Sales forgone 24,000,000
Less: Savings in
Material cost 12,000,000
Labour cost (W-1) 4,531,200
Factory overheads (W-2) 3,120,000
Sales & distribution expenses (W-3) 1,840,000
Administrative expenses (W-4) 240,000
Financial charges (W-5) 1,824,000
Total savings 23,555,200

Decision:
Since sales foregone exceeds the cost that can be saved, SIL should continue the production
of A.

W-1: Savings in labour cost Rupees

Cost of normal labour hours [72,000(30×200×12)×240] 17,280,000
Total overtime cost (21,600,000 – 17,280,000) A 4,320,000
Overtime for Product A B=A÷3 1,440,000
Normal time wages for Product A (4,800,000 – 1,440,000) 3,360,000
Total labour hours of Product A [14,000(3,360,000÷240)+4,800(1,440,000÷300)] 18,800 Hrs.
Hence if production of Product A is stopped, savings in labour cost would be as follows:
Saving in labour related to overtime of all products 4,320,000
Saving in Normal hours being idle hours
[4,400{18,800–14,400(4,320,000÷300)}×48(240×20%)] 211,200
Total Saving in labour cost 4,531,200

W-2: Savings in factory overheads Rupees

Variable overheads of A (7,200,000×0.6) 4,320,000
Less: Irrelevant generator fuel allocated to A (6,000,000×80÷400) (1,200,000)
Savings in overheads 3,120,000

W-3: Savings in sales & distribution expenses Rupees

Commission on sale of A (24,000,000×5%) 1,200,000
Delivery charges (5×80,000) 400,000
Saving of remaining expenses [(2,400,000–1,200,000–400,000)×30%] 240,000
Savings in sale and distribution expenses 1,840,000

W-4 Savings in administrative expenses

Reduction in production and sales (80,000÷400,000) 20%
Savings in administrative expenses [6,000,000×4%(2%×2)] (Rs.) 240,000

W-5 Savings in financial charges Rupees

Material inventory of A (12,000,000×2÷12) 2,000,000
Finished Goods inventory of A (24,000,000×2÷12) 4,000,000
Debtors of A (24,000,000×80%×30÷360) 1,600,000
Total 7,600,000
Savings in financial charges (7,600,000×24%) 1,824,000

Page 6 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2024

A.8 Cruise Manufacturing Limited

(a) Equivalent Production Units Process A
Total % of Equivalent units
Units completion Material Conversion
WIP – Closing 10,500 80% 10,500 8,400
Add: Units transferred out 45,000 45,000 45,000
55,500 53,400
Abnormal gain
2,500–2,900{58,000(8,000+50,000)×5%} 400 70% (400) (280)
Normal loss 2,900 - -
55,100 53,120

Process B
Total % of Equivalent Units
Units completion Material Conversion
WIP – Closing 7,000 50% 7,000 3,500
Add: Units transferred out 40,000 - 40,000 40,000
47,000 43,500
Abnormal loss
3,000–2,150{43,000(5,000+45,000–7000)×5%} 850 80% 850 680
Normal loss 2,150 - -
47,850 44,180

(b) Cost of finished goods, closing WIP and abnormal gain/loss:

Process A
Material Conversion Total
---------------- Rupees ----------------
Opening WIP 16,000,000 6,000,000
Cost incurred during the month 110,000,000 40,000,000
Provision for cost of disposal of normal loss 1,450,000 -
(2,900×500)
127,450,000 46,000,000
Equivalent units 55,100 53,120
Cost per unit 2,313.07 865.96
Cost of units transferred to process B (45,000 units) 104,088,150 38,968,200 143,056,350
Cost of closing WIP (10,500 Material) ; (8,400 conversion) 24,287,235 7,274,064 31,561,299
Abnormal gain (400 material) ; (280 conversion) 925,228 242,469 1,167,697

Process B
Material Conversion Total
---------------- Rupees ----------------
Opening WIP 30,000,000 10,000,000
Cost transferred from Process A 143,056,350 -
Cost incurred during the month 225,000,000 70,000,000
Sale of rejected units of normal loss (4,300,000) -
(2,150×2,000)
393,756,350 80,000,000
Equivalent units 47,850 44,180
Cost per unit 8,228.97 1810.77
Cost of units transferred to finished goods (40,000) 329,158,800 72,430,800 401,589,600
Closing inventory (7,000 material);(3,500 conversion) 57,602,790 6,337,695 63,940,485
Abnormal loss (850 material);(680 conversion) 6,994,625 1,231,324 8,225,949
Page 7 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2024

A.9 Standard Actual

Sales price (Rs.) 3,750 3,818
(37,500,000÷10,000) (42,000,000÷11,000)
Material quantity (Kgs) (based on 11,000 units) 110,000 122,856
(10×11,000) (25,210,000÷205.2)
Material price per kg (Rs.) 228 205.2
[22,800,000÷100,000(10×10,000)] (228×0.9)
Labour hours (based on 11,000 units) 22,000 19,082
(2×11,000) (6,965,000÷365)
Labour rate (Rs. per hour) 338 365
[6,760,000÷20,000(2×10,000)] (338×1.08)
Variable overhead rate (Rs. per hour) 177 206.9
[3,540,000÷20,000(2×10,000)] (3,949,000÷19,082)
Fixed overhead rate (Rs. per unit) 310 263.6
(3,100,000÷10,000) (2,900,000÷11,000)

Favorable/
(Adverse)
Sales price variance:
(Actual price – Standard price) × Actual quantity
68(3,818 – 3,750) × 11,000 748,000

Sales volume variance:

(Actual quantity – Standard quantity) × Standard profit
1,000(11,000–10,000) × 130* 130,000
*Standard profit per unit = (37.5–22.8–6.76–3.1–3.54)÷0.01 = 130

Material price variance:

(Standard price – Actual price) × Actual quantity
22.8(228–205.2) × 122,856 2,801,117

Material usage variance:

(Standard quantity – Actual quantity) × Standard price
12,856(110,000 – 122,856) × 228 (2,931,168)

Labour rate variance:

(Standard rate – Actual rate) × Actual hours
27(338–365) ×19,082 (515,214)

Labour efficiency variance:

(Standard hours – Actual hours) × Standard rate
2,918(22,000 – 19,082) × 338 986,284

Variable overhead expenditure variance:

(Actual hours × Standard variable overhead rate) – Actual variable overhead
3,377,514(19,082×177) – 3,949,000 (571,486)

Variable overhead efficiency variance:

(Standard hours – Actual hours) × Standard variable overhead rate
2,918(22,000 – 19,082) × 177 516,486

Fixed overhead spending variance:

Standard fixed overhead – Actual fixed overhead
3,100,000 – 2,900,000 200,000

Fixed overhead volume variance:

(Actual units – Standard units) × Standard fixed overhead per unit
1,000(11,000 – 10,000) × 310 310,000
(THE END)
Page 8 of 8