Certificate in Accounting and Finance Stage Examination

The Institute of Model paper

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

Cost and Management Accounting

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.

Section A

Q.1 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
August 2021:

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
August 2021.

Required:
Compute product wise actual overheads for Alpha and Beta for the month of August 2021. (10)
 Cost and Management Accounting Page 2 of 5

Q.2 MZ Limited (MZL) manufactures a single product X and uses standard marginal costing
system. The standard cost card of product X is as follows:

Rupees
Raw material (13 kg @ Rs. 135 per kg) 1,755
Labour (14 hours @ Rs. 100 per hour) 1,400

Following data is available in respect of operations for the month of August 2021:
(i) 55,000 units were put into process. 1,500 units were lost in process which were
considered to be normal loss. Process losses occur at the end of the process.
(ii) 698,000 kg of material was purchased at Rs. 145 per kg. Material is added at the start
of the process and conversion costs are incurred evenly throughout the process.
(iii) 755,000 labour hours were worked during the month. However, due to certain labour
related issues, wages were paid at Rs. 115 per hour.
(iv) Inventory balances were as under:

1 August 2021 31 August 2021

Raw material (kg) 15,000 17,000
Work in process (units) 5,000 (60% converted) 6,000 (80% converted)
Finished goods (units) 10,000 12,000

(v) MZL uses FIFO method for valuing the inventories.

Required:
Compute material and labour variances. (09)

Q.3 Francisco Limited (FL) is a manufacturer of product Z and has annual operational capacity
of 82,500 machine hours. FL uses absorption costing.

Below is a summary of FL’s profit or loss statement for the years ended 31 August 2020 and
2021:
31 August 2021 31 August 2020
Units Rs. in '000 Units Rs. in '000
Sales 9,950 149,250 10,500 155,500
Opening inventory – finished goods 3,500 31,000 2,500 20,000
Cost of production 10,450 94,050 11,500 97,750
Closing inventory – finished goods 4,000 (36,000) 3,500 (31,000)
Cost of goods sold (89,050) (86,750)
Gross profit 60,200 68,750
(Under)/over absorbed production
overheads (400) 650
Selling and administration cost (20,900) (22,475)
Net profit 38,900 46,925

In both years, the actual and standard machine usage per unit are 6 hours. However, the
standard machine usage was 80% and 82% of the operational capacity in 2020 and 2021
respectively.

Fixed overhead absorption rate of Rs. 700 per machine hour was applied in 2020. FL revises
its fixed overhead absorption rate for each year on the basis of prior year’s actual fixed
overhead expenditure.

Required:
(a) Calculate budgeted and actual fixed overheads for 2020 and 2021. (04)
(b) Prepare profit or loss statement for the year ended 31 August 2021, using marginal
costing. (05)
 Cost and Management Accounting Page 3 of 5

Q.4 Explain the meaning of over/under applied overheads and how it should be treated in the
books of account. (05)

Q.5 Smart Processing Limited (SPL) is considering to sign a contract for manufacturing 10,000
auto parts for a large automobile assembler. The parts would be produced in batches of
500 units each. The estimated cost of the first batch is as under:

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.6 KPK Dairies Limited (KDL) is planning to introduce three types of energy flavored milk
from 31 August 2021. In this respect, following projections have been made:

C-Plus I-Plus V-Plus

Planned production (No. of packets) 540,000 275,000 185,000
Sales (No. of packets) 425,000 255,000 170,000
Production cost per packet: ----------- Rupees -----------
Direct material 100 98 97
Direct labour 15 13 12
Variable overheads 23 19 16
Fixed overheads 25 22 20
Selling and distribution cost per packet:
Variable overheads 12 8 10
Fixed overheads 5 5 5
Total cost per packet 180 165 160

KDL will sell its products through a distributor at a commission of 5% of sale price and
expects to earn a contribution margin of 40% of net sales i.e. sales minus distributor's
commission.

Required:
Compute break even sales in packets and rupees, assuming that ratio of quantities sold
would be as per projections. (10)
 Cost and Management Accounting Page 4 of 5

Section B

Q.7 Ababeel Foods produces and sells chicken nuggets. Boneless chicken is minced, spiced up,
cut to standard size and semi-cooked in the cooking department. Semi-cooked pieces are
then frozen and packed for shipping in the finishing department.

Inspection is carried out when the process in the cooking department is 80% complete.

Normal loss is 5% of input and comprises of:

 2% weight loss due to cooking; and
 3% rejection of nuggets. The rejected nuggets are sold at Rs. 60 per kg.

Overheads are applied at the rate of 120% of direct labour cost. Inventory is valued using
weighted average cost. Following information pertains to cooking department for the month
of August 2021:

Kg. Material Labour

----- Rs. in '000 -----
Opening work in progress (100% complete to
material and 50% complete to conversion) 30,000 6,260 1,288
Input for the month 420,000 50,000 20,000
Weight after cooking 440,000 - -
Transferred to finishing department 362,000 - -
Closing work in progress (100% complete to
material and 65% complete to conversion) 65,000 - -

Required:
(a) Prepare process account for cooking department for the month of August 2021. (15)
(b) Prepare accounting entries to record production gains/losses and their ultimate
disposal. (04)

Q.8 Chocó-king Limited (CL) produces and markets various brands of chocolates having annual
demand of 80,000 kg. The following information is available in respect of coco powder
which is the main component of the chocolate and represents 90% of the total ingredients.

(i) Cost per kg is Rs. 600.

(ii) Process losses are 4% of the input.
(iii) Purchase and storage costs are as follows:
 Annual variable cost of the procurement office is Rs. 6 million. The total number
of orders (of all products) is estimated at 120.
 Storage and handling cost is Rs. 20 per kg per month.
 Other carrying cost is estimated at Rs. 5 per kg per month.
(iv) CL maintains a buffer stock of 2,000 kg.

Required:
(a) Calculate economic order quantity. (07)
(b) A vendor has offered to CL a quantity discount of 2% on all orders of minimum of
7,500 kg. Advise CL, whether the offer of the vendor may be accepted. (06)
 Cost and Management Accounting Page 5 of 5

Q.9 Sapphire limited (SL) fabricates parts for auto manufacturers and follows job order costing.
The company’s head office is situated in Lahore but the factory is in Karachi. A separate set
of records is kept at the head office and at the factory. Following details were extracted from
SL’s records for the month of August 2021.

Jobs
A B C
Materials issued to production (units)
 Material X 40,000 - 10,000
 Material Y - 75,000 25,000
Direct labour hours worked (hours) 6,000 9,000 15,000
Labour rate per hour (Rs.) 75 60 65

The other related information is as follows:

(i) Materials purchased on account:
 100,000 units of material X at Rs. 25 per unit
 150,000 units of material Y at Rs. 35 per unit

(ii) The head office prepared the payroll and deducted 8% for payroll taxes. The payroll
amounted to Rs. 3.0 million out of which Rs. 1.0 million pertained to selling and
administrative staff salaries. After charging direct labour cost to each job, the balance
amount of payroll cost was attributed to general factory overhead.
(iii) Factory overhead was applied to the jobs at Rs. 25 per direct labour hour.
(iv) Actual factory overheads amounted to Rs. 700,000 including depreciation on
machinery amounting to Rs. 400,000. All payments were made by head office.
(v) Over or under-applied factory overheads are closed to cost of goods sold account.
(vi) Jobs A and B were completed during the month. Job A was sold for Rs. 2.0 million
to one of the auto manufacturer on credit. The customer however, agreed to settle the
transaction at 2% cash discount.
(vii) Selling and administrative expenses, other than salaries paid during the month were
Rs. 500,000.

Required:
Prepare journal entries to record all the above transactions in SL’s factory ledger and general
ledger for the month of August 2021. (15)

(THE END)