MAC QP All

Management Accounting

Final Examination 2 June 2014 Summer 2014 100 marks - 3 hours Module F Additional reading time - 15 minutes

Q.1 (a) Briefly discuss any four criticisms on standard costing system. (04) (b) SMPL is a leading construction company and is working on major projects

throughout the country. It has been awarded a construction contract having a total value of Rs. 9,600 million. The project has to be completed within 6 months.

Following are the relevant details: (i) SMPL would receive a mobilization advance of 10% of contract value which

will be adjustable against progress bills. (ii) Progress bills would be raised at the end of each month on the basis of

percentage of work completed. Preparation of monthly progress bills would require 15 days. A further 45 days would be required for verification and processing of progress bills.

(iii) 5% retention money shall be withheld from the progress bills and shall be released at the end of maintenance period of four months.

(iv) All receipts are subject to withholding of 6% income tax. (v) The projected work completion schedule shows that work would be completed

in three stages. 20% work would be completed in the first stage, 30% in the second stage and 50% in the third stage. Work on each stage would be evenly distributed and each stage would be completed in 2 months’ time.

(vi) The following projections have been prepared by SMPL: � Net profits are estimated at 20% of cost.

� Cost of cement & steel would be 55% of total project cost. The ratio of quantities of cement and steel is 3.75:1 respectively and their prices are Rs. 10,000 and Rs. 60,000 per ton respectively. 80% of the steel and 60% of cement would be required in the first stage. 25% of the remaining quantities would be required in each of the four remaining months.

� 50% payments are required to be made to cement & steel suppliers at the time of delivery and the remaining 50% after 30 days.

� Cost of sub-contracting work is estimated at Rs. 1,500 million. Sub-contractors will start work in the second month and the work would be evenly distributed over the next five months. Progress bills would be raised on 10th of the next month while SMPL would be liable to release the payment within 20 days of receipt of progress bill.

� Other costs on the project would be incurred evenly over the period of the contract. 30 days credit would be available on all expenditures.

(vii) The entire project would be financed by utilising the running finance facility

carrying interest @ 12% per annum which would be charged on month end balance.

Required: Assuming that the project commences on the first day of the year, prepare a

statement showing monthly cash flows relating to the project for the first eight months of the year. (18)

Management Accounting Page 2 of 4

Q.2 ABC Limited which produces and sells a single product is faced with liquidity issues. In order to improve its financial position, it intends to revise its working capital policies as follows:

(i) The standard price of the product is Rs. 100 per unit. 500,000 units are sold per month. Presently, 20% of all units are sold for cash and ABC offers a cash discount of 8% on such sales. The present credit terms are 3/30, net 60 and 40% of the credit customers pay within 30 days.

ABC intends to revise the credit terms to 4/15, net 30. As a result, the overall sales volume is expected to decline by 5% whereas the proportion of cash sales is expected to increase to 30% of total sales. It is also envisaged that 50% of credit customers would avail 4% discount.

(ii) The existing policy of holding 45 days of stock would be revised downwards to 30 days.

(iii) The suppliers offer credit terms of 2/20, net 60. Presently, prompt payments are made to avail the discount. ABC has now decided to utilize the maximum credit period offered by the suppliers.

The variable cost per unit is Rs. 80 of which 70% constitutes raw material cost. The company's cost of funds is 15%.

Required:

Evaluate and discuss the management’s decision as regards the revision of its working capital policies. (15)

Q.3 Sigma Limited is the manufacturer of a single product which passes through two divisions A and B. The semi-finished goods produced in Division A are sold in the open market as well as supplied to Division B where each unit is processed further. The performance of managers of both the divisions are evaluated based on the divisional profitability. Managers are free to adopt policies which maximize profits of their divisions.

Information related to two divisions is given below:

Division A Division B

Production capacity Units 1,500 1,500

Existing demand (outside customers) Units 300 900

Maximum demand (outside customers) Units 600 1,800

Current selling price per unit (outside customers) Rs. 44,000 84,000

Variable cost per unit Rs. 32,000 34,000

Division A offers 10% discount on its selling price to Division B.

The marketing director is reviewing the pricing policy to explore the possibility of increasing the sales. He has carried out a research which shows that:

� sale of semi-finished product would be stable at this level in the coming years; and � market dynamics do not allow the company to increase current prices of finished

goods produced by Division B; however, sale would increase by 300 units for every 2% decrease in price of finished goods.

Required: (a) Determine how the company could maximize its profits. (12) (b) Determine the transfer price at which manager of Division A would agree to the

decision based on (a) above. Also describe the possible viewpoint of manager of Division B. (04)


Q.4 Sajjad Enterprises Limited (SEL) has signed an MOU with the government to set up a plant for production of a medicine which would be distributed to the general public at a highly subsidised rate. The MOU envisages that the arrangement would last a total of 5 years from the commencement of sale. Negotiations are underway for determination of price at which the government would purchase the medicine.

Following are the relevant details: (i) A foreign supplier has agreed to supply the plant at a cost of US$ 20 million. An

advance of 30% is required to be paid at the time of placing the order while balance amount is payable after 6 years of the supply of the plant. A mark-up of 5% would be required to be paid on the outstanding amount at the end of each year.

(ii) SEL would be required to submit a bank guarantee to the supplier in US Dollars. SEL’s bankers have agreed to issue the guarantee at a cost of 0.35% per quarter subject to maintaining a cash margin in Pak Rupees equivalent of 25% of the guaranteed amount. Bank has agreed to pay a return of 4% per annum on amount placed as margin.

(iii) 15 acres of land will be required for the plant and a local authority has offered to lease the land at a consideration of Rs. 2 million per acre for 6 years, besides an annual ground rent of Rs. 95,000 per acre. An amount of Rs. 600,000 per acre will be required for the development of the project site.

Other related supplies will be procured against payment on delivery basis at a cost of Rs. 600 million. A period of one year will be required to complete the project from the date of lease of land and receiving of plant.

(iv) Cost of production would be Rs. 5 per unit plus fixed costs of Rs. 50 million per annum (excluding depreciation).

(v) SEL would depreciate the plant over 5 years. It is expected that at the end of 5 years’ term, the plant would be sold for Rs. 50 million.

(vi) Estimated capacity of the plant is 100,000 units per day with 5 days annual shut down plan for maintenance and other reasons. Assume 365 days in a year.

(vii) Surplus funds can be placed with banks at 10% per annum while local borrowing is available at 14% per annum.

(viii) Current exchange rate is Rs. 100 per US$ and the rupee is expected to depreciate at 3% per annum.

Required: Calculate the price per unit that SEL should accept to earn a profit of 20% on its total costs,

over the life of the plant. (15) Q.5 A company manufactures two products Alpha and Beta. Alpha can only be used in

combination with Beta in the ratio of 4:1 respectively. Beta has separate uses also. Projected information per unit for the next year is as follows:

Alpha Beta

Selling price Rs. 6,800 5,800

Material cost Rs. 3,500 2,600

Variable manufacturing costs (other than labour and machine cost) Rs. 380 340

Applied fixed overheads Rs. 250 180

Machine hours 5 4

Labour hours 3 6

The available capacity for the next year is 40,000 machine hours and 30,000 labour hours. Machine time costs Rs. 320 per hour and labour is paid at Rs. 140 per hour.

Maximum demand for Alpha is 6,000 units. Beta has unlimited demand.


Required: (a) Determine the optimal production plan for the next year which maximizes the profit

of the company. (13) (b) Compute the shadow prices of scarce resources assuming that maximum demand

remains constant. (04) Q.6 Zee Printing is a partnership concern, operating with three different printing machines. The

production is carried out in two shifts of eight hours each. The related information is as follows:

Machine-1 Machine-2 Machine-3

Monthly production capacity in 2 shifts (Sheets) 4,500,000 5,500,000 7,000,000

Number of workers per shift 45 35 54

Actual capacity utilization of 2 shifts 80% 85% 90%

Existing net realizable value of machines (Rs.) 14,280,000 22,950,000 54,000,000

Monthly fixed costs Amount in Rs.

Depreciation 340,000 425,000 750,000

Labour 1,354,500 1,172,500 1,971,000

Rent 330,000 350,000 400,000

The management is unable to get the projected printing orders as the market conditions are

not conducive enough and the situation is not expected to change in the foreseeable future. The management has therefore decided to dispose of one of the machines to reduce fixed costs.

After the disposal of the machine, the existing demand will be met by working overtime

hours. Management wants to keep an additional spare capacity of at least 2.6 million sheets to meet any special order.

The company's policy is to pay overtime to labour at one and a half time of normal rate. As

per the agreement with labour union, all workers will be allowed to work the same number of overtime hours.

The company’s required rate of return on capital is 15%. Required: Prepare calculation to show which machine is the most feasible to dispose of. (15)

(THE END)


Final Examination 3 December 2013 Winter 2013 100 marks – 3 hours Module F Additional reading time – 15 minutes

Q.1 Alpha Motors (Private) Ltd. (AMPL) manufactures a product X22 at an approximate cost of Rs. 750,000 per unit. Breakup of the cost is as follows:

Rupees

Component Y 600,000

Other raw materials 50,000

Labour 50,000

Variable overheads 50,000

Annual sale of X22 is estimated at 900 units at Rs. 0.8 million per unit. Fixed costs are estimated at Rs. 12 million per annum.

Component Y has to be imported from Italy and ideally it takes around 30 days to reach the company after the placement of order. However, the process is sometimes delayed by upto 30 days. The number of days for which the process may be delayed and the probability thereof are given below:

Delay (in days) Probability of occurrence

0 90%

10 5%

20 3%

30 2%

The ordering costs are Rs. 10,800 per order whereas the inventory is kept in a third party godown which charges Rs. 350 per day per unit of component Y. Incremental cost of financing for AMPL is 15% per annum. During idle time, AMPL pays 50% wages to the labour force.

It may be assumed that AMPL works throughout the year and one year has 360 days.

Required: Analyse the above data to determine the following: (a) Economic order quantity (EOQ) of component Y. (04) (b) Safety stock of component Y that should be in hand when the next order is placed, so

as to maximize the profit. (10)

Q.2 Twinkle Company Limited is expected to achieve a sale of Rs. 120 million during the current year. The contribution margin is expected to be 20% whereas the margin of safety is estimated at 25%.

During the next year, the company intends to reduce its prices by 5% and plans to market its products vigorously to increase the sales volume.

Salaries constitute 40% of the total fixed costs and according to the union agreement an increment of 20% is to be given to all staff. Other fixed costs are likely to remain constant.

Required: Compute the percentage of increase in sales volume that the company should achieve so as

to maintain a safety margin of 25%. (07)


Q.3 Taj Limited deals in production and marketing of fast moving consumer goods. Its financial statements for the latest year depict the following position:

Personal

care Detergents Tea Total

Revenue and expenses -------------------Rs. in million-------------------

Sales revenue 22,040 8,420 4,160 34,620

Cost of goods sold (14,909) (6,044) (3,226) (24,179)

Gross profit 7,131 2,376 934 10,441

Selling expenses (1,519) (602) (604) (2,725)

Common expenses (2,655) (1,014) (501) (4,170)

Segment profit/(loss) 2,957 760 (171) 3,546

Assets

Fixed assets at book value 21,450 8,630 3,420 33,500

Stock in trade 1,864 556 432 2,852

Trade debts 2,436 670 575 3,681

Unallocated assets - - - 4,356

Total assets

44,389

Equity and liabilities

Share capital - - - 22,624

Revaluation surplus 1,546 542 632 2,720

25,344

10% long term loan - - - 9,500

Trade creditors 1,670 520 365 2,555

Short term borrowings - - - 3,570

Other liabilities - - - 3,420

44,389

Management is considering to dispose of the tea segment due to stiff competition and

constantly declining margins. Following information is available in this regard: (i) Market research suggests that the quantity of tea sold would decline by 1% per year

for the next two years. The company can increase the price of tea by 5% each year whereas the effect of inflation on costs would be 6% per annum. Reliable projections beyond the two year period cannot be made.

(ii) Entire selling expenses are variable. Common expenses include financial and fixed administration expenses which are allocated on the basis of sales.

(iii) The administration expenses could be reduced by 5% due to decrease in overall work load because of sale of tea segment.

(iv) The existing direct labour can be laid off by paying six months’ salaries amounting to Rs. 625 million.

(v) Average annual utilization of short-term borrowings are Rs. 2,000 million and carry interest at 12%.

(vi) Stock in trade could be sold in the market at 10% less than the cost. (vii) Trade debts are net of 3% provision for doubtful debts. However, if the company

discontinues business, the write-offs will be 12%. (viii) Depreciation is charged on plant and machinery at 10%, building at 5% and other

fixed assets at 20% on written down value. (ix) Fixed assets other than factory building could be sold at a loss of 20%. The factory

building which has a book value of Rs. 600 million including revaluation surplus of Rs. 135 million, can be sold at a profit of 20%.

(x) The tea factory building could be used for future expansion. Initially, the current godown used for storage of goods outside the factory premises could be shifted to the vacant building using 40% of the area. The annual expenses of godown includes rent, utilities and labour amounting to Rs. 20 million, Rs. 6 million and Rs. 3 million respectively.


Required: Analyse the above data and prepare recommendations for the management clearly

specifying the pros and cons of the decision to dispose of the tea segment. (Ignore taxation) (23) Q.4 After years of research, Hamid (Private) Limited (HPL) has developed a new product

‘CRISP’. The planning department has provided the following estimates related to the production cost of first batch of 5,000 units of CRISP:

Particulars Cost per unit (Rs.)

Material (100 kg @ Rs. 8 per kg) 800

Direct labour (10 hours per unit @ Rs. 250 per hour) 2,500

Variable overheads (60% of direct labour) 1,500

Fixed overheads – allocated costs 200

– specific costs 100

Rate of learning is estimated at 80% but the learning effect is expected to apply to the first 5

batches only. The marketing department has informed that the demand for CRISP would be around

50,000 units per annum for the next 5 years and HPL can charge a price of Rs. 3,200 per unit. Selling expenses are estimated at Rs. 200 per unit.

Required: Based on the above data, recommend whether it would be feasible to produce and sell

CRISP. (15)

Note: log 0.8/log 2 = – 0.322 Q.5 Mujahid (Private) Limited (MPL) is engaged in the manufacture of a product OY-1 which

requires two kg of raw material ZL. The first kg of ZL is employed at the start of the manufacturing process whereas the second kg is used when the process is 70% complete.

ZL is currently supplied by local suppliers at Rs. 5,000 per kg whereas it can also be

imported at a cost of Rs. 6,000 per kg. The Economic Order Quantity for local purchases is 400 kg whereas import orders of less than 1,000 kg are not possible.

Following information pertains to the manufacturing process: � All units in process are inspected at two different stages i.e. when the process is 60%

complete and again when it is 80% complete. At each stage 10% of the units in process are identified as defective. This loss can be reduced to 3% if imported material is used.

� Defective units identified on first and second inspection are sold on as is where is basis for Rs. 500 and Rs. 800 per unit respectively.

Each unit of OY-1 requires raw material (excluding ZL), labour and variable overheads of

Rs. 3,000, Rs. 2,000 and Rs. 1,000 respectively. Labour is paid at Rs. 100 per hour. All costs are incurred evenly during the manufacturing process. Total of 200,000 labour hours are available with MPL.

Market for OY-1 is fairly competitive; however, any quantity of OY-1 can be sold for

Rs. 22,000 per unit. Incremental cost of financing for MPL is 15%. Required: (a) Analyse the above data and determine whether the raw material ZL should be

acquired locally or imported. (17) (b) Briefly describe some of the risks associated with shifting from local purchases to

imports and what measures can be taken to mitigate these risks. (04)


Q.6 Beta (Private) Limited (BPL) deals in manufacturing and marketing of bed sheets. The management of the company is in the phase of preparation of budget for the year 2013-14. BPL has production capacity of 4 million bed sheets per annum. Currently the factory is operating at 68% of the capacity. The results for the recently concluded year is as follows:

Rs. in million

Sales 3,400

Cost of goods sold Material (1,493)

Labour (367)

Manufacturing overheads (635)

Gross profit 905

Selling expenses (60% variable) (287)

Administration expenses (100% fixed) (105)

Net profit before tax 513

Other relevant information is as under: (i) The raw material and labour costs are expected to increase by 5%, while selling and

distribution costs will increase by 4% and 8% respectively. All overheads and fixed expenses except depreciation will increase by 5%.

(ii) Manufacturing overheads include depreciation of Rs. 285 million and other fixed overheads of Rs. 165 million. During the year 2013–14 major overhaul of a machine is planned at a cost of Rs. 35 million which will increase the remaining life from 5 to 12 years. The current book value of the machine is Rs. 40 million and it has a salvage value of Rs. 5 million. At the end of 12 years, salvage value will increase on account of general inflation to Rs. 9 million. The company uses straight line method for depreciating the assets.

(iii) Variable manufacturing overheads are directly proportional to the production volume of production.

(iv) Selling expenses include distribution expenses of Rs. 85 million, which are all variable.

(v) Administration expenses include depreciation of Rs. 18 million. During 2013–14, an asset having book value of Rs. 1.5 million will be sold at Rs. 1.8 million. No replacement will be made during the year. Depreciation for the year 2013-14 would reduce to Rs. 17 million.

The management has planned to take following steps to increase the sale and improve cost efficiency:

� Increase selling price by Rs. 150 per unit. � The sales are to be increased by 25%. To achieve this, commission on sales will be

introduced besides fixed salaries. The commission will be paid on the entire sale and the rate of commission will be as follows:

No. of units Commission % on total sale

Less than 35,000 1.00%

35,000 – 40,000 1.25%

40,000 – 50,000 1.50%

Above 50,000 1.75%

Currently the sales force is categorized into categories A, B and C. Number of persons in each category is 20, 30 and 40 respectively. Previous data shows that total sales generated by each category is same. Moreover, sales generated by each person in a particular category is also the same. The trend is expected to continue in future.

� The overall efficiency of the workforce can be increased by 15% if management allows a bonus of 20%. Further increase in production can be achieved by hiring additional labour at Rs. 180 per unit.

Required: Prepare profit and loss budget for the year 2013–14. (20)

(THE END)


Final Examination 4 June 2013 Summer 2013 100 marks – 3 hours Module F Additional reading time – 15 minutes

Q.1

ABC Limited deals in manufacturing of consumer goods. The management is concerned about the company’s operating cash flows and is reviewing the working capital policies.

Key financial data for the year ended 31 March 2013 is as follows:

PROFIT AND LOSS ACCOUNT

Rs. in million

Sales

15,575

Cost of goods sold

(13,770)

Gross profit

1,805

Operating expenses (978) Financial charges (453) Other income 126 (1,305)

Net profit before tax

500

Income tax @ 35%

(175)

Net profit after tax

325

BALANCE SHEET

Assets Rs. in million Equity and liabilities Rs. in million Non current assets 10,560 Share capital and reserves 2,370

Current assets 13.5% TFCs 7,630

Trade debtors 2,590 Current liabilities

Stock in trade 1,530 Short term loans 3,510

Other current assets 615 4,735 Trade creditors 1,020

Accrued & other liabilities 765 5,295

15,295 15,295

In respect of debtors, the management proposes to allow an early payment discount of 1% if payment is received within 30 days; however, any delay in payment beyond the credit period of 40 days will be subject to a surcharge of 45 paisa per Rs. 1,000 per day of default. Credit sales are 80% of the total sales of the company. By introducing the above change, it is expected that:

(i) Credit sales will decrease by 8% and bad debts would reduce from 4% to 3% of credit sales.

(ii) 40% of the customers will avail early payment discount whereas 35% would pay within the credit period of 40 days.

(iii) Debtors overall turnover will reduce to 42 days of credit sale. The credit period allowed by the suppliers is 60 days. However, in order to avail 1%

discount, the payment is made within 40 days. It is now being proposed that full credit period of 60 days should be availed.

Other relevant information is as under: (i) Cost of goods sold includes conversion costs which are approximately 50% of the cost

of raw material. 20% of the conversion costs are fixed.

(ii) Short term debt carries interest @ 15% per annum. (iii) Income tax rate applicable to the company is 35%.

Required Evaluate the above situations and give your recommendations about the suitability of the

changes proposed by the management. (Assume that one year equals 360 days) (18)

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Q.2 Sophisticated Packaging Limited (SPL) has received an order for supply of 2 million packing wrappers. The wrapping material is in the form of a film. The manufacturing involves two processes: printing and lamination. One packing wrapper requires 0.04 running meter of film in each process.

Printing Ink and a chemical are applied to the first layer of film. One running meter of film

consumes 2 grams of ink and 4 grams of chemical.

1 kg of film has 35 running meters. Normal wastage during the process of printing is estimated at 3%. In addition, it is estimated that approximately 1,200 meters of film would be wasted at the time of setting up the machine.

Lamination During the process of lamination, a second layer of the film is applied on the first layer

using glue. 1 kg of glue is used to laminate 250 meters. There is a normal wastage of 2% during lamination.

The raw materials prices are as follows:

Raw materials

Price per kg

(Rs.)

Printing and lamination film 260

Ink 180

Chemical 150

Glue 110

Both processes would require 1,000 productive labour hours in total (at 100% efficiency) comprising of 25% skilled and 75% unskilled workers who are paid @ Rs. 35,000 and Rs. 15,000 per month respectively. Both skilled and unskilled workers work an average of 200 hours per month at 90% and 85% efficiency respectively.

Printing and lamination overheads are estimated at Rs. 5 and Rs. 3 per running meter respectively.

Required: Compute the selling price of the order if SPL wishes to earn a 20% margin on sale price. (17)

Q.3 XYZ Limited is planning to launch a new product with a capital investment of Rs. 300 million. The demand of the product is dependent on the state of economy. Hence, three different estimates of demand have been prepared by the company, i.e. under low, moderate and high growth scenarios. The annual expected demand along with their probabilities are as follows:

Demand growth Low Moderate High

Demand (units) 7,000,000 8,000,000 9,000,000

Probability 0.50 0.30 0.20

Working capital required (Rs.) 50,000,000 56,500,000 62,000,000

Since all raw materials have to be imported, the contribution margin (CM) under two different exchange rates and their probabilities are shown below:

Exchange rate US$1 = Rs. 100 US$1 = Rs. 105

CM per unit (Rs.) 12 11

Probability 0.35 0.65

Fixed operating expenses (other than depreciation) per annum are Rs.15 million. The fixed assets have a useful life of 15 years and a salvage value of 10% of the cost. According to the company's policy, the total investment would be financed through equity and bank borrowings in the ratio of 40:60.

Cost of bank borrowings is 12% per annum, while the company’s required rate of return on equity is 20%.


Required: (a) Calculate the probability that the project would yield the required return on equity. (b) Determine the expected rate of return on equity based on all the possible scenarios. (12)

Q.4 Ahmed (Private) Limited (APL) produces and sells 2 products. It started business 5 years ago with a single product 'A'. 3 years ago it introduced product B which is a low-end version of product 'A' but is produced and sold through an entirely different infrastructure.

Initially, product 'B' started well but due to uncertain market condition, its sale declined by 85% in 2013. The results of previous two years are as follows:

Amount in Rs.

A B

Year ended 31 March 2013 31 March 2013 31 March 2012

Sales 20,000,000 1,500,000 10,000,000

Raw material consumption 5,000,000 600,000 3,000,000

Direct wages 3,750,000 400,000 2,000,000

Variable and fixed overheads 3,000,000 1,800,000 2,500,000

Units sold 10,000 2,000 10,000

In respect of product ‘B’, the management does not foresee any improvement in 2014; however, it is quite hopeful that the sale would revive in 2015. Management is therefore contemplating the option of shutting down the plant of product 'B' for the year ending 31 March 2014 which would reduce fixed costs by 90%.

Following estimates pertain to the year ending 31 March 2014: Rupees

Total variable and fixed overhead expenses for product A 3,400,000

Increase in fixed cost of product A 250,000

Plant shut down costs for product B 450,000

Sale of A (units) 13,000

Increase in raw material prices (both for A and B) 15%

Required: (a) Determine the minimum number of units of product B that should be sold in order to

justify the continuation of the sale of product B during the year ending 31 March 2014.

(b) Assuming that the sale of product B is discontinued, calculate the unit price of A that should be charged to increase the profit by 20% over the total net profit for the year ended 31 March 2013. (18)

Q.5 MNC Limited is a manufacturer of textile machinery. The company has received an order for manufacturing a machine which would involve various processes. Each process has been assigned a code number. The estimated time for each process is given below:

Process 1 – 2 1 – 3 1 – 4 2 – 4 2 – 5 3 – 6 4 – 6 5 – 7 6 – 8 7 – 8

Duration (in days) 5 9 8 6 5 9 10 10 7 11

Required: (a) Draw a network diagram representing above processes of work. (b) Calculate total float for each process. (c) Find the critical path and its duration. (10)


Q.6 (a) Mehmood (Private) Limited operates two divisions. Division "South" was established five years ago whereas Division “East” was established two years ago with substantial expenditure on automated production lines. The company’s management uses Return on Investment (ROI) and Residual Income (RI) to compare the results of the divisions in order to evaluate the managerial performance. The required rate of return for both divisions is 15%. Following data is available for the year ended 31 May 2013:

South East

Sales (units) 24,000 26,400

----------Rupees----------

Average operating assets 11,100,000 25,800,000

Selling price per unit 900 1,100

Cost per unit Material 300 375

Labour 250 225

Variable overheads 150 175

Fixed overheads 100 150

Required: (i) Calculate ROI and RI and comment on the performance of the two divisions

under each of the two methods. Also give possible reasons for the different results produced under the two methods and your suggestions in this regard.

(ii) Calculate the number of units which should be sold by the underperforming division in order to be able to achieve the ROI of the other division. (13)

(b) Division East has an opportunity to invest in new machinery at a cost of Rs. 4 million. The machinery is expected to have useful economic life of five years, after which it could be sold for Rs. 400,000. Depreciation is charged on machinery under the straight line method. The machinery is expected to expand division East’s production capacity by 12.5%.

Required:

Under each of the two methods mentioned in (a) above, determine whether the manager in-charge would make a decision that is in the best interest of the company as a whole. (05)

Q.7 A company manufactures a single product Y. During May 2013, it processed 120 batches of the product. Further relevant information for the month of May 2013 is as follows:

Actual materials used: Materials Kg Price per kg (Rs.) Rupees

P 1,680 42.50 71,400

Q 1,650 28.00 46,200

R 870 64.00 55,680

4,200 173,280

Loss 552

Yield 3,648

Standard costs/yield per batch: Materials Kg Price per kg (Rs.) Rupees

P 15 40 600

Q 12 30 360

R 8 60 480

35 1,440

Less: Standard loss 3

Standard yield 32

Required: Calculate the following material variances: (i) price (ii) usage (iii) mix (iv) yield (07)

(THE END)

The Institute of Chartered Accountants of Pakistan


Final Examination 4 December 2012 Winter 2012 100 marks - 3 hours Module F Additional reading time - 15 minutes

Q.1 SGL Limited is a manufacturer of engineering goods. It is in the process of preparing budget for the year ending 31 December 2013. The following data has been extracted from the projected Profit and Loss Account for the year ending 31 December 2012.

Summarised Profit and Loss Account

Rs. in million

Sales 1,000

Cost of sales: Manufacturing costs (722)

Opening finished goods inventory (81)

Closing finished goods inventory 89

(714)

Operating costs (100)

Financial charges (16)

Profit before tax 170

Other relevant information is as under: (i) For the year 2013 SGL plans to earn a mark-up of 50% on cost of sales. The sales

volume is expected to increase by 20%. Cash sales would be made at a discount of 2% and it is estimated that net cash sales after discount would constitute 20% of total sales.

(ii) Opening balances of trade debtors and trade creditors are Rs. 90 million and Rs. 40 million respectively. Trade debtors are expected to increase by 20%.

(iii) Purchases and other expenses are paid in 60 days and 35 days respectively. (iv) Manufacturing costs comprise raw materials consumed and variable and fixed

conversion costs in the ratio of 35:45:20. Fixed costs include depreciation of Rs. 3 million. Effect of price increase in 2013 on raw materials and variable and fixed costs (excluding depreciation) is estimated at 8%, 10% and 6% respectively.

(v) Operating costs for 2012 include depreciation amounting to Rs. 9 million and advertisement cost of Rs. 16 million. All other costs vary in line with the variation in sales. Price effect on advertisement costs and other variable costs for 2013 is estimated at 6% and 10% respectively.

(vi) Depreciation for 2013 would be the same as in 2012. (vii) Closing inventory of finished goods is estimated at Rs. 97 million on 31 December

2013. Raw material inventory would be maintained at 30 days consumption.

(viii) SGL uses absorption costing. FIFO method is used for valuation of inventories. (ix) Financial charges are expected to increase by 10% and are payable on quarterly basis

on 1st day of the next quarter.

(x) SGL’s paid-up share capital is Rs. 80 million. Dividend is estimated as under:

2012 Final dividend of 20% cash and 10% bonus shares.

2013 Interim cash dividend of 15% and final cash dividend of 20%.

Required: Prepare a projected cash flow statement for the year ending December 31, 2013.

[Assume that except stated otherwise, all transactions are evenly distributed over the year (360 days)] (17)


Q.2 (a) Briefly describe three areas where the learning curve can effectively be used by a manufacturing concern. (03)

(b) Quality Plastics Limited (QPL) produces plastic bodies of various appliances according to the customers’ specifications. It has received an order for supply of 10,000 plastic bodies of a washing machine. The supply is to be made within 30 days.

The following information is available: (i) QPL carries out production process in batches of 100 units each. Cost of the

first batch is estimated as under:

Rupees

Direct material (inclusive of 10% input losses) 1,100 kg 66,000

Direct labour cost at normal rate 200 hours 44,000

Overheads at normal rate 200 hours 30,000

(ii) It is estimated that due to learning curve effect, completion of the first, second, third and fourth batch would require 200, 160, 148 and 140 hours respectively. This learning effect would continue till completion of 64 batches only. Learning effect at various learning levels is as under:

80% 85% 90%

–0.322 –0.235 –0.152

(iii) It is estimated that after completion of the first 16 batches, material input losses would be reduced from 10% to 6%.

(iv) QPL works a single shift of 8 hours per day. For the above order, QPL can spare 8,000 direct labour hours. Overtime hours can be worked at 1.5 times the normal rate. During the overtime hours, overheads would be 1.25 times the normal rate.

Required: Compute the price that QPL should quote in order to earn a margin of 25% of the

selling price. (12)

Q.3 RCL manufactures three products. Presently, overheads are allocated to each product on the basis of direct labour hours. In order to determine the cost of products more accurately, RCL has decided to implement Activity Based Costing for allocation of overheads.

The following data has been extracted from RCL’s budget for the next year: Products X Y Z

Cost per unit: -------------Rupees -------------

Direct material @ Rs. 200 per kg 400 300 500

Direct labour @ Rs. 50 per hour 300 350 250

Other data:

Production units 50,000 40,000 25,000

Batch size units 500 250 250

Inspection time per batch hours 20 15 18

Economic order quantity (EOQ) kg 10,000 12,000 6,250

Details of factory overheads budgeted for the next year are as under: Rs. in ‘000

Procurement department costs 2,500

Batch set up costs 3,600

Quality control department costs 4,510

Utilities 4,230

Salaries of supervisors and foremen 3,525

Salaries of cleaners and maintenance staff 1,410

Miscellaneous costs 705

Total 20,480

Required: Compute product-wise cost per unit using Activity Based Costing. (12)


Q.4 Industrial Tools Limited (ITL) manufactures heavy tools for auto industry. Due to slack business conditions, approximately 30,000 labour hours remain idle each month. Due to highly technical nature of this job additional labour is not available. Moreover, since the company does not want to lose the existing workers, idles hours are paid at 50% of the normal wage rate of Rs. 100 per hour. Overheads are estimated at Rs. 150 per labour hour which includes variable as well as fixed overheads. Idle hours result in unabsorbed fixed overheads of Rs. 0.9 million.

ITL is considering an offer for supply of 10,000 units of tool Zee. In this respect, the following information is available:

(i) Each unit of Zee would require 2 kg of material Alpha which is available in the market at Rs. 1,100 per kg. Alternatively, ITL could use 2.5 kg of a substitute material Beta which can be produced internally. Production of each kg of Beta would require raw materials costing Rs. 520 and 1.25 labour hours. Processing of Beta would also require a special equipment which is available at a rent of Rs. 188,000 per month.

(ii) To improve productivity, ITL plans to pay wages of Rs. 210 per unit of Zee or Rs. 100 per hour, whichever is higher. It is estimated that production of Zee at various efficiency levels would be as follows:

� 50% units in 2.2 hours per unit,

� 30% units in 2.0 hours per unit, and

� Remaining units in 1.8 hours per unit.

Required:

Compute selling price which ITL may offer for supply of Zee, if ITL requires a margin of 30% above the relevant costs. (13)

Q.5 ICL has two divisions. Division A produces Gamma which is transferred to division B and is also sold in the open market. Division B converts Gamma into an advanced version Gamma-plus. Both divisions are managed by their respective managers who are free to adopt policies which maximise profits of their respective divisions. In addition to monthly salaries, the division managers are paid bonus equivalent to 15% of profit after bonus.

ICL is in the process of finalising its strategy for the next year. Extracts from the budget are given below:

Division

A B

Annual installed capacity kg 200,000 250,000

Raw material cost per kg Rs. 102.00 637.50

Total conversion costs per kg of finished products Rs. 108.00 230.00

Variable selling expenses per kg Rs. 14.00 15.00

Fixed manufacturing costs based on installed capacity Rs. 7 million 6 million

Production of Division A is transferred to Division B at market price subject to a maximum mark-up of 25% on total costs. In Division B, 1 kg of raw material Y is added for every kg of Gamma received from Division A.

According to a market study recently carried out by ICL, the relationship between selling price and demand for the two products is as under:

Gamma

Selling price per kg Rs. 300 375 450

Expected annual demand kg 150,000 100,000 50,000

Gamma-plus

Selling price per kg Rs. 960 1,080 1,200

Expected annual demand kg 70,000 50,000 30,000

The newly appointed CEO of ICL has realised that the policy of independent decision making by the divisions is affecting the overall profitability of the company. However, he realises that any revision in policy may be resisted by one or both the divisional managers on account of change in their bonuses.


Required: (a) Determine the strategy to be adopted for maximisation of profit of the company. (10) (b) Compute the increase/decrease in the bonus amounts on account of the revision in

the company’s policy, if any. (10)

Q.6 (a) Explain the difference between fixed overhead variances calculated under the absorption costing as compared to marginal costing. (03)

(b) Ancient Pharma Limited (APL) a subsidiary of a foreign company uses standard

costing system. It produces a single product Sigma. The standard cost per unit of the product Sigma is as follows:

Rs. per unit

Direct material 8 kg @ Rs. 500 4,000

Direct labour 10 hours @ Rs. 80 800

Overheads (fixed and variable) 10 hours @ Rs. 50 500

Standards are reviewed and updated every six months, in January and July. Overhead rate is based on normal operating capacity of 57,500 hours and budgeted fixed overheads of Rs. 1.15 million per month.

Actual data for the month of November 2012 is as under:

Direct material purchases Rs. 24.30 million

Direct labour cost Rs. 5.28 million

Overheads (fixed and variable) Rs. 3.50 million

Units put into process 6,300 units

Units lost in process (normal loss) 250 units

The position of inventories was as under: 1 November 2012 30 November 2012

Raw material 4,000 kg 5,000 kg

Units in process 100 units (60% converted) 150 units (80% converted)

Finished goods 200 units 800 units

APL uses FIFO method for valuing the output from the process. Losses occur at the end of the process.

Other relevant information is as under: (i) The normal sale price of the product is Rs. 7,000 per unit. Actual sale includes

exports (20% of total sales) at 15% above the normal price and sales to a corporate buyer (25% of total sales) at a discount of 10%.

(ii) Raw material price effective 1 November 2012 has decreased to Rs. 486 per kg. APL records material price variance at the time of purchase.

(iii) To reduce labour turnover, APL decided to increase wages of direct labour to Rs. 88 per hour effective 1 November 2012. A 10% increase was allowed to all other employees.

(iv) Salaries and wages form 25% of the fixed overheads. Remaining fixed overheads have increased to 4% above standard.

(v) Conversion costs are applied uniformly throughout the process. (vi) The variances (price and volume) are treated as period cost and charged to

profit and loss account.

Required:

Using standard costing, prepare profit statements for the month of November 2012 under absorption costing. (20)

(The End)



Final Examination 5 June 2012 Summer 2012 100 marks – 3 hours Module F Additional reading time – 15 minutes

Q.1 Himalaya Chemicals Limited (HCL) manufactures an industrial chemical AXE. It has two

processing departments A and B. The operating capacity of each department is 42,000 labour hours per annum. The budgeted operating costs of the departments are as under:

Department A Department B

------------Rupees------------

Direct wages per hour 120 90

Factory overhead rate per labour hour 145 105

Annual fixed overheads 1,356,600 1,117,200

Direct wages are paid on a monthly basis irrespective of the production. Factory overhead rates have been worked out to absorb all budgeted variable and fixed overheads based on 95% operating capacity utilisation.

HCL expects a decrease in demand for AXE as a result of which operating capacity utilisation is estimated to reduce to 70%. Therefore, HCL is considering to introduce a new product WYE. According to a market research carried out by the company the annual demand for WYE would vary according to its price as shown below:

Selling price per unit (Rs.) 190 200 210

Demand in units 18,000 15,000 12,000

Direct material cost of WYE is estimated at Rs. 30 per unit and direct labour hours are estimated at 0.75 and 0.50 per unit for department A and B respectively.

HCL has also received an offer from a third party who wants to acquire all the spare operating facilities on rent at an hourly rate of Rs. 140 and Rs. 100 for departments A and B respectively. Third party would bring its own raw material but would use HCL’s labour for which no additional amount would be paid.

Required:

(a) Determine which of the two options would be financially beneficial for HCL. (13 marks)

(b) Briefly describe other matters which you would consider in deciding between the two options. (03 marks)

Q.2 Quality Appliances Limited (QAL) produces two products HX and HY. Budgeted data for these products is as under:

HX HY

Rupees per unit

Selling price 6,000 5,500

Direct material cost at Rs. 400 per kg 2,000 2,000

Labour cost at Rs. 200 per labour hour 960 650

Machine operating cost at Rs. 500 per machine hour 1,000 1,500

Overheads (including 20% fixed overheads) 625 375

To meet the demand of some of its important customers, QAL needs to produce a minimum of 100 units of each of the two products. The supply of raw material is limited to 2,700 kg. The available labour hours and machine hours are 2,000 and 1,340 respectively.

Required:

Draw the relevant constraints on a graph and determine the production mix which would maximize the monthly contribution. (15 marks)


Q.3 Spicy Foods Limited (SFL) offers three types of spices BX, BY and BZ. The profitability of SFL is declining and it has incurred a loss during the year ended 31 March 2012. The product wise results are as under:

BX BY BZ

No of units sold 400,000 600,000 300,000

------Rupees in million------

Sales 140 180 126

Cost of sales (105) (135) (120)

Operating cost (30) (49) (13)

Net profit / (loss) 5 (4) (7)

Other relevant information is as under:

(i) Cost of sales includes fixed costs of Rs. 135 million. Fixed costs have been allocated to the products on the basis of labour hours. BX, BY and BZ require 1.50, 1.75, and 2.00 labour hours per unit respectively.

(ii) Variable operating costs of BX, BY, and BZ are Rs. 45, Rs. 49, and Rs. 26 per unit respectively.

(iii) In order to increase sales and improve operating results, SFL is considering a proposal to introduce a ‘Jumbo economy pack’. The details of the proposal are as under:

� The Jumbo pack would consist of one packet of each of the three types of spices. It would be sold at a price equivalent to 90% of the total price of the three packs. It has been projected that on introduction of the Jumbo pack, the sale of the individual packets would reduce by 20%.

� The existing packing machine would need to be replaced. The new machine would reduce the variable costs of production by 2%. However, annual fixed costs would increase by Rs. 3 million.

� To market the Jumbo pack, SFL plans to launch a sale campaign at a cost of Rs. 4 million.

Required:

Calculate the number of Jumbo packs that should be sold during the year to achieve a net profit of Rs. 5 million. (14 marks)

Q.4 Sky Limited (SL) manufactures a product Alpha. Its demand is highly elastic and is expected to vary

with the selling price as under: Selling price per unit (Rs.) 650 700 750

Annual demand (Units in ‘000) 200 160 120

To utilize available spare capacity and keeping in view the increasing market competition faced by

Alpha, SL is working on a feasibility for introducing a new product Gamma. To produce Gamma, a component Beta would have to be produced using the existing facility. A new facility would have to be established for further processing of Beta to convert it into Gamma. The existing facility has a capacity of 440,000 machine hours while the new facility would have a capacity of 144,000 machine hours.

The data available for the products is as under:

Existing facility

New

facility

Alpha Beta Gamma

Machine hours per unit 2.00 3.50 2.40

Total cost per unit (Rs.) 590.00 735.00 300.00

The annual demand for Gamma is projected at 100,000 units at a price of Rs. 970 per unit. Fixed

overheads for the existing facility amount to Rs. 23.1 million per annum whereas annual fixed overheads for the new facility are estimated at Rs. 12 million. Fixed overheads are allocated on the basis of machine hours.


Required:

(a) Determine the product mix that could optimize profit of Sky Limited. (17 marks)

(b) Determine minimum transfer price of the component Beta. (03 marks)

Q.5 Super Autos (SA) manufactures components for auto industries. It started its business in 1960 in a

small workshop which has now developed into a fully automated factory with latest computerized machines.

For allocating overheads, SA has been using single plant-wide factory overhead absorption rate based on direct labour hours. In view of strong competition, the company’s management is reviewing its pricing strategies and wants to introduce a more accurate method of product costing.

The pertinent information is as under:

(i) Actual expenses for the quarter ended 31 March 2012 were as under:

Rupees

Direct wages (30,000 labour hours) 3,000,000

Machines operating expenses (50,000 machine hours) 2,500,000

Maintenance expenses 1,500,000

Technical staff expenses 2,000,000

Expenses of procurement 1,000,000

Expenses of finished goods stores and dispatch 1,600,000

Administration and selling expenses 5,000,000

Total 16,600,000

(ii) During the quarter:

� 60 purchase orders were processed and received. � 120 sales orders were acquired and delivered. � 150 batches were set for production.

(iii) Maintenance expenses pertain to:

Production 70%

Procurement 5%

Finished goods stores and dispatch 15%

Quality control 10%

(iv) It is estimated that Technical staff devotes 50% of its time to maintenance, 30% to production, 8% to quality control and 12% to procurement.

(v) Quality inspection is carried out at the commencement and completion of each batch.

(vi) SA produces a number of components. Information related to two major products of the company, for the quarter ended 31 March 2012 is as under:

LV MV

No. of units produced and sold 10,000 12,000

Batch size (no. of units) 400 500

Machine hours per batch 200 150

Direct labour hours worked 1,000 1,500

Direct material costs (Rs.) 850,000 900,000

Average size of a purchase order (Rs.) 170,000 150,000

No. of sales orders delivered 8 10

Required: Compute the unit cost of components LV and MV using:

� Activity Based Costing; and

� A single factory overhead rate based on direct labour hours. (20 marks)


Q.6 Zen Trading Limited (ZTL) is facing working capital constraints due to slow collection of trade debts. Since the management anticipates that any change in the collection policy will have adverse effect on sales, it is negotiating with a factoring company. The terms and conditions proposed by the factoring company are as follows:

� Credit invoices would be submitted to the factor on a daily basis. The factor would make the

payment in fifteen days. � The factor would charge a fee of 5% of the invoice amount which would be deducted at the time

of payment to ZTL. � The factor would be responsible for bad debts, if any.

For evaluating the proposal, the following information is available:

(i) Monthly average cash and credit sales are Rs. 20 million and Rs.100 million respectively.

(ii) ZTL allows a discount of 1% on the invoices which are settled in one month.

(iii) 26% customers avail the discount, 34% pay in two months and 30% pay in three months.

(iv) 5% of the amount is recovered after intense follow-up which takes an average of five months and requires an expenditure of 10% of the invoice amount.

(v) 1% of the amount comprises of small balances and is written off.

(vi) Remaining customers are referred to a legal firm. The legal proceedings take an average of six months and 80% debts are recovered. The legal firm charges a monthly retention fee of Rs. 0.025 million plus 20% of the amount recovered.

(vii) ZTL maintains a Credit Control Department at a cost of Rs. 1.2 million per annum.

(viii) ZTL has a running finance facility of Rs. 150 million at an interest rate of 16% per annum. 5% of the facility is unutilized.

Required:

(a) Determine whether it would be feasible for ZTL to accept the factoring proposal. (12 marks)

(b) Do you anticipate any difficulties which ZTL may have to encounter after accepting the above arrangement and how can these be resolved. (03 marks)

(THE END)



Final Examination 10 December 2011 Winter 2011 100 marks - 3 hours Module F Additional reading time - 15 minutes

Q.1 Hunarmand Limited is engaged in manufacturing of a product ELT for the local industry. Its latest quarterly profit and loss account is as follows:

Rs. in ‘000

Sales 350,000

Less: Material 234,500

Labour (including idle labour) 28,650

Factory overheads 57,000 320,150

Gross profit 29,850

Less: Admin expenses 8,000

Selling and distribution expenses 15,000 23,000

Net profit 6,850

The existing production requires 22,500 and 36,000 labour hours of skilled and unskilled labour per month respectively. The company’s agreement with the labour union does not allow it to lay off workers and consequently, 10% of the skilled and 4% of unskilled labour remain idle. The skilled labour is paid at Rs. 200 and unskilled labour at Rs. 125 per hour. Idle labour is paid 80% of the above amounts.

The factory overheads include rent and depreciation of Rs. 20 million and Rs. 14 million respectively; the remaining overheads are directly proportional to the total (skilled and unskilled) labour hours worked.

Admin expenses are all fixed whereas 80% of selling and distribution expenses are variable.

In order to utilise the idle capacity, the management is considering bidding for a tender which requires a modified version of ELT to be supplied to a buyer. The relevant information is as follows:

(i) The order would occupy 40% of the existing capacity. If accepted, the production is expected to commence after 30 days. The work would be completed within 60 days from the date of commencement.

(ii) On account of intense competition, the company is currently operating at 75% capacity and expects to operate at the same level for the next few years.

(iii) In order to make the necessary modification, a machine would need to be purchased at a cost of Rs. 4.5 million, having a life of 3 years with no residual value. After completion of the order, the company would be able to sell the machine for Rs. 3 million. However, the company may decide to keep the machine and dispose of another machine for Rs. 300,000. Such an exchange would reduce the labour hours required to produce ELT by 5%.

(iv) 8,000 kg of material A and 500 kg of material B will be required for the proposed order. These are available in the market at Rs. 820 and Rs. 750 per kg respectively. Material B is also used in the existing production. Its cost as per inventory ledger is Rs. 700 per kg and 6,000 kg of material B is presently available which is sufficient to meet the next three months’ production requirements at the existing level. The balance of the existing stock of Material B would become obsolete if it is not used within the next three months after which it would have a market value of Rs. 50 per kg. Currently the company could sell this material at Rs. 600 per kg.

(v) The new order would require 6,000 skilled and 15,000 unskilled labour hours.

Required: Determine the bid price if the company wants to earn a margin of 20% on relevant cost. (20 marks)


Q.2 Sanatkar Limited (SL) manufactures and sells three products i.e. XA, YA and ZA. The following information relates to the budgeted and actual operations during the month of November 2011.

(i) The standard selling price and standards cost per unit of the three products were as follows:

XA YA ZA

Rupees

Selling price 200,000 300,000 475,000

Material costs 39,500 54,000 78,000

Direct labour costs (Rs. 100 per hour) 80,000 100,000 150,000

Overheads 125% of direct labour cost

(ii) At the start of the month, SL increased the salaries by 5% on account of which the management anticipates an 8% increase in efficiency.

(iii) The budgeted sales of XA, YA and ZA were 60, 28 and 20 units whereas actual sales of the three products were 80, 24 and 30 units respectively.

(iv) The budgeted and actual operating results for November 2011 are summarized below:

Budgeted Actual

Rupees

Sales revenue 29,900,000 37,425,000

Material costs (5,442,000) (6,931,920)

Labour costs (120,000 labour hours) (10,600,000) (12,887,700)

Overheads (13,250,000) (16,882,900)

Profit 608,000 722,480

(v) SL launched a promotion campaign for XA in which 35 units were sold at Rs. 180,000 per unit. The remaining units of XA were sold at Rs. 215,000. Sales of YA and ZA were made at standard price.

Required: Calculate the following variances for inclusion in the Management Report: (a) Sales volume variance; (b) Sales price variance bifurcated into planning and operational components; and (c) Labour efficiency variance bifurcated into planning and operational components. (16 marks)

Q.3 Takneek Company Limited (TCL) has been awarded a contract for supply and installation of technical equipments. The amount of contract is Rs. 140 million plus sales tax. Other terms, conditions and other relevant information are as follows:

(i) The customer will provide 25% mobilization advance in January 2012. (ii) Percentage of completion is estimated at 30, 75 and 100 percent by the end of January,

February and March 2012 respectively. TCL would raise invoices for the same in subsequent months. The amounts would be received in the month in which the invoices are raised.

(iii) All receipts would be subject to withholding tax at 6%. (iv) The running bills would be subject to retention @ 5% of the value before sales tax. The

retention money would be released after 60 days of completion of contract. (v) The mobilization advance would be adjusted proportionately from the running bills. (vi) The equipments required for the contract would be purchased in January 2012 at a cost of Rs.

95 million inclusive of sales tax. The supplier is registered under the Sales Tax Act, 1990 and would provide a credit of 60 days.

(vii) TCL would sub-contract the installation and related work to Expert Systems Limited. 30% payment will be made at the commencement of the project and the balance would be paid in the month of March 2012. Installation charges are not subject to sales tax.

(viii) Sales tax is paid/claimed subsequent to the month in which the invoice is raised. Any excess input is available to be carried forward for adjustment in the next month.

(ix) The sales tax rate is 16%. The projected profit is estimated at 15% of the contract price.

Required: A month-wise cash flow for the project. (14 marks)


Q.4 Sawari Limited manufactures 100cc motorcycles. Due to acute competition in the market, the profitability of the company has been decreasing since the last three years. The management has hired a consultant to suggest measures to improve the profitability. Following is the latest annual profit and loss account of the company:

Rs. in ‘000

Sales (24,960 units) 1,560,000

Material 834,400

Labour 138,600

Warranty costs 998

Factory overheads 193,502

Cost of goods manufactured 1,167,500

Opening inventory 126,000

Closing inventory (167,500) 1,126,000

Gross profit 434,000

The consultant has made the following suggestions on the basis of which the cost could be reduced: I. Replace the plant and machinery which was purchased 12 years ago at a cost of Rs. 54 million

and has a remaining useful life of 6 years. The new machinery with advanced technology is available at a cost of Rs. 200 million with a useful life of 20 years. The change is expected to bring following benefits:

� Currently, 25 skilled labour hours are required to produce one unit of output. New plant is more automized and will require 12 semi-skilled labour hours and 8 skilled labour hours. Semi skilled labour can be hired at 70% of the cost of skilled labour.

� The raw material wastage would be reduced from 4% to 2% of input. Furthermore, the improvement in quality will reduce the warranty claims from 1% to 0.4% of the units sold. The average cost of warranty claim will also be reduced from Rs. 4,000 to Rs. 3,500 per claim.

The company follows straight line method for charging depreciation with the residual value of the plant assumed at 10% of cost.

II. Presently, the material is purchased in bulk quantity which is sufficient to produce 14,000 units.

The ordering cost is Rs. 45 thousand per order. On account of bulk purchases, the suppliers allow a discount of 1.5% of the purchase value. The company maintains a safety stock of raw material which is sufficient to produce 4,000 units. The annual stock holding cost is 4% of the cost of inventory.

The consultant has recommended the introduction of a Just in Time (JIT) system of stock

management which would have the following effects:

� reduction in order size by 85.71% � safety stock would not be required � discount would not be available

Additional Information

(i) Opening and closing inventory of motorcycles in the above profit and loss account is 2,500 and 3,540 units respectively. Next year the company expects to produce and sell 28,000 units.

(ii) Fixed overheads amount to Rs. 25 million excluding depreciation. (iii) Material prices and labour rates are projected to increase by 8% and 10% respectively. Factory

overheads other than ordering and holding costs and depreciation would increase by 10%. However, if the new machine is purchased, the savings in maintenance cost would limit the increase to 7%.

Required: Evaluate the consultant’s suggestions and give your recommendations for the next year. (23 marks)


Q.5 Karobar International manufactures a single product. The product is processed in three different departments. The company uses first-in-first-out method for process costing.

During November 2011, the costs incurred and units processed in department 2 were as follows: Units Rs.

Opening work in process 2,000 128,750

Units received from department 1 53,000 2,057,500

Cost added by department 2

Materials 988,000

Direct labour 488,000

Production overheads 244,000

Units transferred to department 3 48,000

Closing work in process 5,000

Defective units 2,000

The normal loss is 5% of the units produced (including defective units) and is identified at the start of

the process. The defective units are sold at Rs. 15 per unit. Details of percentage of completion of opening and closing work in process are as follows:

Work in process

Opening Closing

Materials 80% 70%

Labour and production overheads 60% 50%

Required: Prepare process account of department 2 for the month of November 2011. (13 marks) Q.6 Khudkar Limited (KL) manufactures customized equipments using a semi automated plant. It has

recently received an inquiry from a well-reputed customer for the manufacturing of 500 units of a new type of equipment for Rs. 10,500 per unit. Based on the initial estimates, KL is not much inclined to accept this order as the gross profit margin is quite low. However, the customer has assured KL that at least one repeat order would be made.

The cost estimates per unit for the first order are as follows:

Department

A B

Rupees

Direct material 3,350

Direct labour 3 hours of semi skilled labour 720

20 hours of skilled labour 4,000

Fixed overhead absorbed (per labour hour) 40 15

Variable overheads 25% of direct labour cost

Based on the data available with the company, an 80% learning curve is applicable to the company’s skilled labour. Extract from 80% learning curve table are as follows:

X 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0

Y% 100 97.0 94.3 91.7 89.5 87.6 86.1 84.4 83.0 81.5 80.0

Required: Determine what should be the size of the repeat order if the company wants to earn an average gross

profit margin of 20% on the two orders. (14 marks)

(THE END)



Final Examinations Reading time – 15 minutes

June 7, 2011 Module F – Summer 2011 100 marks – 3 hours

Q.1 Mubin Limited (ML) manufactures Alpha which consumes two units of raw material A and three

units of raw material B having standard cost of Rs. 35 and Rs. 20 per unit respectively. One unit of Alpha requires 1.5 labour hours. The following information pertains to the quarter ended March 31, 2011:

Budget Actual

------Rupees------ Sales 8,250,000 8,745,000 Material consumed 3,900,000 4,464,460 Direct labour 2,700,000 3,041,920

Other related information is given below: (i) Sales in January and February were made at the budgeted price of Rs. 275 per unit. For the

month of March, the company allowed a 10% discount which was not budgeted. As a result, the number of units sold in March 2011 exceeded the budget by 20%.

(ii) Actual material input during the quarter were 63,900 units of A and 105,600 units of B. (iii) The suppliers of raw material had increased the prices by 4% with effect from February 1,

2011. (iv) As an incentive, the management had increased the wages by Rs. 6.0 per hour with effect

from February 1, 2011. This increase was not budgeted. (v) The purchases and production were carried out evenly over the period. Required: (a) Compute the following for the quarter ended March 31, 2011: (i) sale price and volume variances; (ii) material price, mix and yield variances; and (iii) labour rate and efficiency variances. (b) Comment on the adverse variances giving possible reasons for the same and your suggestions

to the management, if any. (20 marks) Q.2 Punjnad Juice Company is launching a new product. The annual capacity of this product is 24,000

units and per unit cost has been estimated as follows: Rupees

Material 80 Labour cost 30 Variable overheads 10 Fixed overheads 20 Depreciation 10 150


The selling price would be Rs. 200 per unit. Selling expenses are estimated at Rs. 10 per unit. 80% of the selling expenses are considered variable. Projections related to the first two years are as follows:

Year 1 Year 2

Production units 15,000 20,000 Sales units 14,000 18,000

Other related estimates are given below: Stock of raw material 3 months average consumption Stock of finished goods To be valued at average cost on the basis of

absorption costing Debtors 1 month’s sales Creditors for supply of material 2 months’ average purchases Creditors for variable and fixed overheads 1 month’s average Bad debts 0.75% Required: Prepare a statement showing projected working capital requirements for both the years related to

the new product. (15 marks)

Q.3 ABC (Private) Limited operates a fast food chain and has 15 outlets all over Pakistan. The company’s turnover for the year ending June 30, 2011 is estimated at Rs. 181 million and the annual fixed costs are estimated at Rs. 30 million. The analysis of sale has revealed the following:

Product Sale price

(Rs.) Quantity wise

sales ratio Contribution margin

as % of sale price Burger 150 6 40 Fries 50 7 45 Cold drink 40 8 50 Ice-cream 80 3 60

The company has witnessed very little growth in turnover and profitability during the past two

years. In order to increase the profitability, the management is considering the following options: Option 1: To introduce the following deals: Deal 1 offering burger, fries and cold drink for Rs. 210 Deal 2 offering burger, fries, cold drink and ice-cream for Rs. 280

As a result, the total turnover is expected to increase by 25%. The ratio between sale of Deal 1 and Deal 2 would be 60% and 40% respectively. 70% of the revenues would be generated from the sale of deals and 30% from the sale of individual items in the existing ratio.

Option 2: Under this option the price of all the products would be reduced by 20% to make the prices

competitive in the market. In addition, home delivery would be allowed for orders of Rs. 250 and above. Home delivery would require additional fixed costs of Rs. 850,000 per annum and variable cost of Rs. 20 per delivery.

It is estimated that the above measures would increase the total sales revenue by 35% inclusive of

sales through home delivery service which is estimated at Rs. 30 million. The average revenue per delivery is estimated at Rs. 600. All sales would increase in the existing ratio except that ice-cream would not be sold through home deliveries.

Required: Evaluate each of the above options and give your recommendations. (20 marks)


Q.4 Khizr Limited (KL) owns a factory which produces specialized products whose demand is seasonal. Three machines of the same type, are installed in the factory which operate round the clock. During the past few years the capacity utilisation has been as follows:

October to March single machine at 80% capacity

April to July two machines at 90% capacity August and September three machines at 100% capacity

In view of frequent disruptions in power supply, KL has decided to buy a power plant having a

generation capacity of 5 megawatts. The power requirement of the factory is 4 megawatts when all the machines are operating at 100% capacity. The power consumption is 0.25 megawatts when all the machines are non-operational. The power consumed by the machines is directly proportional to their utilized capacity.

A utility company has offered to buy all the surplus power for a period of 5 years. It would require

an interconnection structure which would be constructed at an estimated cost of Rs. 15 million. The utility company has agreed to reimburse the cost after five years. The bankers of KL have expressed their willingness to provide these funds at a cost of 16% per annum. Fuel cost is estimated at Rs. 24 million per month when the plant is running at 100% capacity. Other relevant costs are as follows:

Rupees per month

Operational costs 1,500,000 Labour 250,000 Miscellaneous related costs 500,000

The cost of the power plant is Rs. 100 million with expected useful life of six years and scrap value

of Rs. 4 million. KL uses straight line method to calculate depreciation. Presently KL pays approximately Rs. 180 million per annum to the utility company to purchase electricity for its own use.

Required: Calculate the price per unit that should be offered to the utility company for sale of the surplus

power, if KL desires to achieve a return (profit on electricity generation plus cost savings on own electricity consumption) of Rs. 60 million per annum. (One megawatt of electricity produced throughout the year = 1000 × 24 hours × 360 days = 8,640,000 units. It may be assumed that 1 year has 360 days and each month has 30 days.) (12 marks)

Q.5 Ahram Limited manufactures an industrial product MRG. Its primary raw material is in the form

of semi-completed units. Further processing is carried out in Department A after which the units meeting the quality control standards are transferred for processing in Department B.

There are three economical sources of primary raw material as shown below:

Supplier Price Freight-in Maximum supplies as per

agreement --------Rupees per unit-------- FML – Pakistan 287.50 2.00 1.60 million LMN – China 265.00 9.00 2.00 million PQR – Singapore 280.00 5.00 3.00 million Import duty and sales tax are payable on the import of raw material @ 26.5% of the C&F value.

Sales tax is paid at 15% of C&F value plus import duty and is refundable. The percentage of defective units in local and imported raw material is 7% and 1% respectively. The defective raw material can be sold for Rs. 40 per unit.


Other relevant details are as follows: Department A Department B Annual capacity net of process losses 5 million units 4 million units Normal process loss 10% of input 5% of output Scrap value of units rejected after processing Rs. 75 per unit Rs. 125 per unit Time required for each unit of output 18 minutes 12 minutes Wage rate Rs. 200/hour Rs. 250/hour Variable overheads 60% of labour cost 75% of labour cost Fixed overheads are estimated at Rs. 10 million per annum. Fixed overheads are allocated to the

departments on the basis of labour hours. The realizable value of scrap is deducted from the cost of goods manufactured.

Required: Determine the priority in which the material is to be purchased and prepare a statement showing

the department wise budgeted total and unit cost. (Assume that there would be no opening or closing inventories) (17 marks)

Q.6 A company manufactures tables and chairs. The total time available during each month and the

time required to manufacture each table and chair are as follows: Machine hours Labour hours

Table 1.00 1.50 Chair 0.50 2.00 Available hours 715 2,250

The direct cost of operating the machines is Rs. 450 per hour. The labour costs Rs. 60 per hour.

Details of material and other costs are as follows: Table Chair

----Rupees---- Material 1,000 300 Variable overheads other than direct labour and machine costs 200 50 Applied fixed overhead 105 45

Sale price of each table and chair has been fixed at Rs. 2,300 and Rs. 900 respectively. The

company has already signed a contract for supply of 40 tables and 150 chairs which needs to be supplied in July 2011. Apart from this contract, the pattern of demand suggests that each month, the company should manufacture:

(i) at least 100 tables; and (ii) at least 2 chairs per table. Required: (a) Construct a set of constraints in the form of inequalities, plot them on a graph and identify the

feasible region. (b) Determine the number of tables and chairs that should be produced in July 2011 to earn

maximum profit. (16 marks)

(THE END)



Final Examinations – Winter 2010 December 7, 2010 Module F 100 marks - 3 hours

Q.1 The home appliances division of Umair Enterprises assembles and markets television sets. The

company has a long term agreement with a foreign supplier for the supply of electronic kits for its television sets.

Relevant details extracted from the budget for the next financial year are as follows: Rupees

C&F value of each electronic kit 9,500 Estimated cost of import related expenses, duties etc. 900 Variable cost of local value addition for each set 3,500 Variable selling and admin expenses per set 900 Annual fixed production expenses 12,000,000 Annual fixed selling and admin expenses 9,000,000

Fixed production overheads are allocated on the basis of budgeted production which is 5,000 units. The present supply chain is as follows: (i) The company sells to distributors at cost of production plus 25% mark-up. (ii) Distributors sell to wholesalers at 10% margin. (iii) Wholesalers sell to retailers at 4% margin. (iv) Retailers sell to consumers at retail price i.e. at 10% mark-up on their cost. Performance of the division had not been satisfactory for the last few years. A business consulting

firm was hired to assess the situation and it has recommended the following steps: (i) Reduce the existing supply chain by eliminating the distributors and wholesalers. (ii) Reduce the retail price by 5%. (iii) Offer sales commission to retailers at 15% of retail price. (iv) Provide after sales services. (v) Launch advertisement campaign; expected cost of campaign would be around Rs. 5 million. It is expected that the above steps will increase the demand by 1,500 sets. The average cost of

providing after sales service is estimated at Rs. 450 per set. Required: (a) Compute the total budgeted profit: (i) under the present situation; and (ii) if the recommendations of the consultants are accepted and implemented. (b) Briefly describe what other factors would you consider while implementing the consultants’

recommendations. (20 marks)


Q.2 Ibrahim Limited manufactures a variety of products. It has launched a new product in November 2010 and has produced 1,000 units (10 lots) upto the year ended November 30, 2010. The variable cost of producing the first lot was as follows:

Particulars Cost per

100-unit lot (Rs.) Material 30,000 Direct labour 20,000 Variable overheads (25% of direct labour) 5,000

Fixed manufacturing overheads have been estimated at Rs. 1.3 million per annum. Based on past experience, the company expects 90% learning curve ratio to apply on each

production lot size of 100 units and the learning curve effect is expected to prevail upto 500 lots. The expected demand of the product for the next year at two different price levels is as follows: Price per

unit (Rs.) Demand in

units 650 45,000 550 70,000

Required: Determine which of the above price the company should charge for the next year ending

November 30, 2011. It is given that b = log (0.9) / log (2) = − 0.152. (16 marks) Q.3 Faheem Limited (FL) is a retailer and sells product PR at a price of Rs. 3,400 per unit. The product

is purchased from a supplier in Islamabad at a cost of Rs. 2,400 per unit plus transportation charges amounting to Rs. 6,000 for each delivery.

The records over a 5-year period show that monthly sales ranged between 900 units to 1,200 units,

as shown below: Units Probability

900 0.30 1,000 0.45 1,100 0.20 1,200 0.05

The following further information is available: (i) The supplier requires 30 days to fulfil an order. (ii) The costs of the ordering department are as follows: Variable costs – Rs. 3,000 per order Fixed costs – Rs. 480,000 per annum Purchases of PR constitute 5% of the total purchases of FL. (iii) The holding costs associated with PR are as follows: Warehouse rent Rs. 360,000 per annum. 2% of the warehouse space is required to store

1,000 units of PR. Cost of Insurance @ 1.0% of the cost of goods stored in the warehouse, per annum. (iv) FL places its surplus funds in an account which earns interest @ 8% per annum on a daily

basis. Required: (a) Determine the level of inventory at which it would be most profitable for FL to reorder the

product PR. (b) If the supplier offers a discount of 5% for ordering a minimum of 6,000 units, should FL

accept this offer? (16 marks)


Q.4 Kaleem Limited is organized into two divisions. For operating purposes, each of its division A and B are treated as investment centres. Following are the extracts from the divisional profit and loss accounts for the year ended November 30, 2010.

Rs in ‘000 Division A Division B Sales 2,450,000 860,000 Divisional manufacturing costs (1,580,000) (575,000) 870,000 285,000 Divisional operating costs (390,000) (170,000) Divisional profit 480,000 115,000 Financial charges (34,600) (20,500) Apportioned head office cost (243,000) (45,600) Net Profit 202,400 48,900 The values of assets and liabilities on November 30, 2010 are as follows: Rs in ‘000 Head Office Division A Division B Non current assets 120,000 2,082,500 516,000 Current assets 23,000 350,600 127,000 143,000 2,433,100 643,000 Long term borrowings - 275,000 165,000 Current liabilities 45,000 638,000 234,600 45,000 913,000 399,600 The company uses return on capital employed (ROCE) and residual income methods for

performance evaluation. In computing capital employed and equity, year-end values of assets and liabilities are used. Depreciation is charged under straight line method.

The company's average rate of borrowing is 14% and its cost of equity is 20%. The company is evaluating the following opportunities: (i) Purchase of additional machinery for Division A at a cost of Rs. 80 million having an

estimated life of 5 years with no residual value. The production from the machine would require working capital of Rs. 10 million and would generate additional net profit of Rs. 6 million per annum. The investment would be financed equally through borrowings and equity. The borrowing would be repaid after five years.

(ii) Sell a fixed asset belonging to Division B for Rs. 8 million. The asset was purchased 9 years

ago at Rs. 200 million. It has a remaining useful life of 1 year and would not have any resale value at the end of its useful life. The sale would reduce divisional contribution margin by Rs. 9 million. 50% of the proceeds would be used to reduce the long term borrowings and the remaining 50% to pay off the current liabilities.

Required: (a) Evaluate and comment on the existing performance of the two divisions and their impact on

company’s overall performance. (b) Evaluate and discuss the above opportunities from the point of view of the: Divisional Managers The CEO of the Company Ignore taxation. (23 marks)


Q.5 Sheraz Limited produces two chemicals for textile industry, chemical X for dyeing and chemical Y for coating. The chemicals are jointly manufactured as follows:

Process I - Raw materials A and B are mixed in the ratio of 2:1. The mixture is then heated

resulting in an evaporation of 20%. The remaining mixture distils into extracts P and Q in the ratio of 3:2 respectively.

Process II - Four litres of material C is added to one litre of extract P to form chemical X. Material

D and extract Q are mixed in equal proportion to form chemical Y. The costs involved are as under: Process I Process II

Rs. per litre of input Material A 25 - Material B 40 - Material C - 75 Material D - 55 Direct Labour 80 50 Variable overheads 57 32

The fixed costs are Rs. 5 million. The demand for product X is 600,000 litres and for product Y 180,000 litres. The current per litre

market price of product X is Rs. 250 and product Y Rs. 450. Upto 25,000 litres of P and Q can be sold without further processing at Rs. 100 and Rs. 120 per

litre respectively. Required: Determine the product mix which would produce maximum profit for the company. (25 marks)

(THE END)

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Final Examinations Summer 2010 June 8, 2010

MANAGEMENT ACCOUNTING (MARKS 100) (3 hours)

Q.1 Shahid Limited is engaged in manufacturing and sale of footwear. The company sells its

products through company operated retail outlets as well as through distributors. The management is in the process of preparing the budget for the year 2010-11 on the basis of following information:

(i) The marketing director has provided the following annual sales projections: No. of units Retail price range

Men 1,200,000 Rs. 1,000 – 4,000 Women 500,000 Rs. 800 – 2,500

The previous pattern of sales indicates that 60% of units are sold at the minimum

price; 10% units are sold at the maximum price and remaining 30% at a price of Rs. 2,000 and Rs. 1,200 per footwear for men and women respectively.

(ii) It has been estimated that 30% of the units would be sold through distributors who are offered 20% commission on retail price. The remaining 70% will be sold through company operated retail outlets.

(iii) The company operates 22 outlets all over the country. The fixed costs per outlet are Rs. 1.2 million per month and include rent, electricity, maintenance, salaries etc.

(iv) Sales through company outlets include sales of cut size footwears which are sold at 40% below the normal retail price and represent 5% of the total sales of the retail outlets.

(v) The company keeps a profit margin of 120% on variable cost (excluding distributors’ commission) while calculating the retail price.

(vi) Fixed costs of the factory and head office are Rs. 45 million and Rs. 15 million per month respectively.

Required: Prepare budgeted profit and loss account for the year 2010 – 2011. (16) Q.2 Buraq Motors manufactures two types of cars i.e. X and Y. The production of each type of

car involves two departments. Details of production time are as follows:

Production hours per unit Departments Car type Assembly Finishing

X 120 80 Y 80 50

Contribution margin per unit of X is Rs. 150,000 and per unit of Y is Rs. 100,000. Total

capacity of assembly and finishing departments is 18,200 and 12,000 hours per month respectively.

Required:

Calculate the shadow price per hour of capacity if 200 hours are added to the capacity of assembly department, assuming that the capacity of finishing department is not altered. (14)

(2)

Q.3 During the year ending June 30, 2011 Abdul Habib Company Limited has planned to launch a new product which is expected to generate a profit of Rs. 9.3 million as shown below:

Rs. in ‘000’ Sales revenue (24,000 units) 51,600 Less: cost of goods sold 37,500 Gross profit 14,100 Less: operating expenses 4,800 Net profit before tax 9,300

The following additional information is available: (i) 75% of the units would be sold on 30 days credit. Credit prices would be 10% higher

than the cash price. It is estimated that 70% of the customers will settle their account within the credit term while rest of the customers would pay within 60 days. Bad debts have been estimated @ 2% of credit sales. All cash and credit receipts are subject to withholding tax @ 6%.

(ii) 80% of the expenses forming part of cost of goods sold are variable. These are to be paid one month in arrears.

(iii) The production will require additional machinery which will be purchased on July 1, 2010 at a cost of Rs. 60 million. The machine is expected to have a useful life of 15 years and salvage value of Rs. 7.5 million. The company has a policy to charge depreciation on straight line basis. The depreciation on the machinery is included in the cost of goods sold as shown above.

(iv) Variable operating expenses excluding bad debts are Rs. 105 per unit. These are to be paid in the same month in which the sale is made.

(v) 50% of the fixed costs would be paid immediately when incurred while the remaining 50% would be paid 15 days in arrears.

(vi) The management has decided to maintain finished goods stock of 1,000 units. Required: Calculate the cash requirements for the first two quarters. (17) Q.4 Noureen Industries Limited produces and sells sports goods. The management accountant

has developed the following budget for the year ending June 30, 2011.

Budgeted Income Statement Rs. in ‘000’ Sales 80,000 Variable costs 44,800 Fixed overheads 6,500 51,300 Gross profit 28,700 Selling and admin expenses: Sales commission 8,000 Depreciation on assets 700 Fixed administrative costs 2,200 10,900 Net operating income 17,800 Finance costs (80% is fixed) 750 Net profit 17,050 The company had a policy of hiring salesmen on commission basis. The rate of commission

varied with the increase in sales. However, recently the sales team had informed the management that they would be willing to work only if the rate of commission is fixed at 20% irrespective of the amount of sales.

(3)

The only other alternative available to the company is to establish a full-fledged sales department. It has been estimated that the annual cost of this department would be as follows:

Rs. in ‘000’ Salaries – Sales Manager 1,200 – Sales persons 2,400 Advertising 1,600 Travel for promotion 1,200 Training costs 600 In addition, a commission of 5% would also be payable to the sales team. Required: Determine the volume of sales beyond which the company would be inclined to establish a

sales department instead of meeting the demand of the current sales force. (13) Q.5 Haji Amin (Private) Limited (HAPL) is engaged in manufacturing of spare parts. In May

2010, the utilized production capacity of the company was 60%. The management has received an order to produce 100,000 units of product M, which will utilize 20% of the production capacity for a period of 6 months.

All the materials are added at the beginning of the process. Labour and overheads are

distributed evenly throughout the process. Inspection is conducted when the product is 60% complete. Normal loss is equal to 5% of the units produced.

The following information is also available: (i) Materials Each unit of product M requires 1 kg of material A and 2 kg of material B. Material

A is available in the market at a cost of Rs. 250 per kg. Alternatively, another material C can be used, which is produced in-house at a variable cost of Rs. 220 and is sold at a selling price of Rs. 260 per kg. C has unlimited demand.

300,000 kgs of Material B is available in stock at a cost of Rs. 50 per kg. 60% of the

available stock is required for use in the current production. The current market price of material B is Rs. 70 per kg. However, the present stock available with HAPL can only be sold for Rs. 60 per kg.

(ii) Labour

Each worker will take 6 hours per unit for initial 50 units. Thereafter the average time would be reduced to 5 hours per unit. Each worker would be hired on six months contract at the rate of Rs. 60 per hour with 200 working hours per month.

(iii) Variable overheads

These are estimated at Rs. 8 per labour hour. (iv) Fixed overheads

These are estimated at Rs. 45 million per annum at 100% capacity. Some of the facilities can be relieved, if the company does not want to work at more than 70% capacity. As a result of relieving these facilities, the annual fixed costs would reduce to Rs. 33.75 million. If the excess production capacity is used to produce material C, the company can earn a contribution margin of Rs. 200,000 per month for each 10% capacity utilization.

Required: Compute the manufacturing cost of product M using the relevant cost approach. (18)

(4)

Q.6 Emmad Limited has two factories, one at Lahore and the other at Faisalabad. The factory at Faisalablad produces product AMY whereas BNZ is produced at Lahore. The demand of these products is quite elastic.

BNZ uses XPY as an input which is available in the market at Rs. 725 per unit. AMY can

also be used as an alternate of XPY. The data in respect of revenue and costs at various levels of output is as follows: Faisalabad Lahore

Revenue Total Cost Revenue Cost excluding XPY

Output (No. of units)

-------------------------------Rupees------------------------------- 1,500 1,275,000 870,000 1,800,000 535,000 3,000 2,475,000 1,680,000 3,480,000 985,000 3,500 2,800,000 1,950,000 3,920,000 1,135,000 4,000 3,100,000 2,220,000 4,320,000 1,285,000 5,000 3,500,000 2,760,000 5,150,000 1,585,000

Maximum production capacity of each factory is 5,000 units. Required: (a) Determine how the company can maximize its profit. (17) (b) If the company decides to use product AMY internally, what would be the minimum

price acceptable to Faisalabad factory and the maximum price which the Lahore factory may agree to pay? (05)

(THE END)

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Final Examinations Winter 2009 December 8, 2009


Q.1 Zain Limited operates a production unit which produces a chemical which is commonly

used in various industries. Following information has been collected to ascertain the company’s working capital requirement:

(i) Designed capacity of the plant is 150 tons per hour. However, as in the past, it is expected that the plant will operate at 70% of the designed capacity.

(ii) The variable cost per ton of finished product would be Rs. 2,500 made up as under:

Raw materials 62.4% Consumables and spares 12.0% Other processing costs 25.6%

(iii) Raw material is imported on FOB basis. The supplier allows 45 days credit from the date of shipment. However, overseas and inland transportation and port and customs formalities take 30 days.

(iv) Because of the nature of the cargo, only one ship is available in a month, for transporting the raw material.

(v) Freight, transportation and other import related variable costs of purchases are estimated at 30% of the FOB value and are paid at the time of receipt of goods at the plant.

(vi) One ton of finished goods requires 1.25 tons of raw materials. (vii) Fixed costs are estimated at Rs. 10.584 million per month. (viii) Budgeted sales price is to be worked out so as to earn a gross profit of 20% over sales.

The details of sales forecast provided by the marketing department are as follows: 40% sales will be made to corporate clients on 10 days credit. The price would be

2% higher than the budgeted price. 30% sales will be made to individual customers at budgeted price. The goods are

delivered after two days of receiving the required amount. Remaining sales shall comprise of exports. The export documents are presented in

the bank within 2 days of shipment. The export proceeds are credited in the company’s bank account after 3 days of the date of presenting the documents. The Federal government allows a rebate of 5% on exports and it is credited to the company’s account on the date of realization of export proceeds.

(ix) It is estimated that at any point of time the work in progress shall consist of 1,000 tons of raw material which shall be 50% complete as regards consumables, spares and processing costs.

(x) Average inventory of finished product is equal to fifteen days production. Till last year, the company’s policy was to maintain average inventory of 30 days.

(xi) Operational consumables and spares of Rs. 20 million are required to be maintained throughout the year.

(xii) Production is evenly distributed throughout the year. Except for the facts given above, all other costs are payable after 15 days of their incurrence.

Required: Determine the working capital requirement for the year. (Assume 30 days in each month) (18)

(2)

Q.2 Adnan Limited is a manufacturer of specialized furniture and has recently introduced a new product. The production will commence on January 1, 2010. 200 workers have been trained to carry out the production. The complete unit will be produced by a single worker and it would take 40 hours to produce the first unit. The company expects a learning curve of 95% that will continue till the production of 64 units. Thereafter, average time taken for each unit will be 28 hours.

Each worker would work for an average of 174 hours each month. They will be paid @ Rs. 100 per hour. In addition, they will be paid a bonus equivalent to 10% of their earnings provided they work for at least three months during the year. The cost of material and overhead per unit has been budgeted at Rs. 10,000 and Rs. 4,000 per unit, respectively.

The company’s workers are in high demand and it is estimated that 20% of the workers would leave by the end of March 2010 whereas a further 7 workers would retire on June 21, 2010. The management is confident that all the units produced would be sold.

Required: Calculate the minimum price that the company should charge if it wants to earn gross profit

margin of 20% on selling price during the year 2010. (16)

Q.3 Wahid Limited established a plant to manufacture a single product ARIDE. Standard material costs for the first year of operations were as under:

Raw material

Standard Price per kg (Rs.)

A 6.40 B 4.85 C 5.90

All the raw materials were supplied at same prices throughout the first six months. Thereafter the prices were increased by 10%.

The company manufactured 1,320,000 units during the year ended 30 September, 2009. All purchases and the production were made evenly throughout the year.

Losses occurred at an even rate during the processing and are estimated at 12% of the input quantity. The standard weight of one unit of finished product is 11.88 kgs. The ratio of input quantities of materials A, B and C is 3:2:1 respectively.

Details of ending inventory are as under:

Raw material

Qty (kgs) Value under FIFO

method (Rs.)% of ending inventory to

material quantity consumed A 1,014,200 6,744,430 11 B 754,000 3,883,100 13 C 228,000 1,390,800 08

Required: Calculate material price, usage, mix and yield variances. (18)

Q.4 Sajid Industries Limited purchases a component ‘C’ from two different suppliers, Y and Z. The price quoted by them is Rs. 90 and Rs. 87 per component respectively. However 7% of the components supplied by Y are defective whereas in case of Z, 11% of the components are defective. The use of such defective components results in rejection of the final product. However, the final products to be rejected are identified when the product is 60 % complete. Such units are sold at a price of Rs. 200.

(3)

The average cost of the final product excluding the cost of component C is as follows: Rupees

Material (excluding the cost of the component C) 420 Labour (3 hours @ Rs 60 per hour) 180 Overheads (Rs. 40 per hour based on labour hours) 120 720

50% of the material (including the component C) is added at the start of the production

whereas the remaining material is added evenly over the production process. The company intends to introduce a system of inspection of the components, at the time of

purchase. The inspection would cost Rs. 20 per component. However, even then, only 90% of the defective components would be detected at the time of purchase whereas 10% will still go unnoticed. No payments will be made for components which are found to be defective on inspection. The total requirement of the components is 10,000 units.

Required: Analyze the above data to determine which supplier should be selected and whether the

inspection should be carried out or not. (18)

Q.5 Aftab Limited manufactures CNG kits for certain automobiles. The management of the company foresees sudden rise in the demand of CNG kits in the next year and they are trying to work out a strategy to meet the rising demand.

Following further information has been gathered by the management:

(i) The current market demand is 650,000 units while the company’s share is 40%. The demand for the next year is projected at 1,000,000 units while the company expects to maintain its current market share.

(ii) The production capacity of the company while working 8 hours per day is 350,000 units.

(iii) The selling price and average cost of production per unit for the current year, are as follows:

Rupees Selling Price 40,000 Less: Cost of production Material 24,000 Labour (34 hours per unit) 3,400 Overheads (60% variable) 2,800 30,200 Gross Profit 9,800

(iv) Since the company was working below capacity, 15% of the labour remained idle and were paid at 10% below the normal wages. These wages are included in fixed overheads.

(v) To increase the production beyond the normal capacity, overtime will have to be worked which is paid at twice the normal rate. Also, the fixed overheads, other than the labour idle time, would increase by 10%.

(vi) The management has negotiated with certain vendors and received the following offers:

A present supplier of raw material has offered bulk purchasing discount @ 2.5%, if the total purchases during the year exceeds Rs. 9.0 billion.

A manufacturer of CNG kits in Italy has offered to supply any number of finished CNG kits at US$200 per unit. The landed cost of these units in Pakistan would be Rs. 29,000 per unit.

Required: Determine the best course of action available to the company. (13)

(4)

Q.6 Rafiq Industries specializes in production of food and personal care products. During the year 2010, the company intends to launch a new product called PQR. The relevant details are as follows:

(i) The product would be sold in 3 pack sizes and the sales have been projected as follows:

Pack size Units 500 grams 200,000

1 kg 120,000 2 kg 90,000

(ii) For producing 1 kg of output, following materials would be required:

0.5 kg of material A which costs Rs. 300 per kg. 1 kg of material B. Current stock of material B is 250,000 kgs and it was purchased

@ Rs. 100 per kg. Its current purchase price is Rs. 125 per kg. The expiry date of the current stock is December 31, 2010. Before the expiry date, it could be disposed of at the rate of Rs. 110 per kg.

100,000 kgs of material B could be used in producing another product called UVW with additional cost of Rs. 4,000,000 which could then be sold at the rate of Rs. 160 per kg. However, both PQR & UVW are produced on the same machine. The machine has to be worked at 100% capacity for producing the required quantity of PQR.

(iii) Cost of packing materials have been projected as under:

Pack size Cost per unit 500 grams 30

1 kg 40 2 kg 55

(iv) 100 kgs of product would require 5 hours of skilled labour and 10 hours of unskilled labour. Skilled labour is paid at Rs. 70 per hour and unskilled labour at Rs. 45 per hour. Currently, the company has 5,000 idle hours of skilled labour and has a policy to pay 50% for idle hours.

(v) The production capacity of the factory is 2 million kgs but currently the factory is operating at 50% capacity. Fixed overheads at 100% capacity are Rs. 25 million. However, if the factory operates below capacity, the fixed overheads are reduced as follows:

by 10% at below 80% of the capacity by 25% at below 60% of the capacity

Required: Calculate the sale price for each pack size of the new product assuming that the company

wants to earn a profit of 25% on the cost of the product which shall include relevant costs only. (17)

(THE END)

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Final Examinations Summer 2009 June 2, 2009 MANAGEMENT ACCOUNTING (MARKS 100) (3 hours) Q.1 ABC Limited deals in a single product called HGV. It had prepared a budget for the year

ending December 31, 2009 which was based on the following key assumptions: Sales 504,000 units @ Rs. 430

Variable cost (40% is direct labour) Rs. 300 per unit Fixed cost for the year (including depreciation @ 10%) Rs. 25,000,000 Cost of raw material per kg Rs. 56.25 Raw material consumption per unit of finished product 2 kgs

However, the position as shown by the management accounts prepared up to May 31,

2009 is not very encouraging and depicts the following actual results: 105,000 units were sold @ Rs. 350 per unit. Average cost of raw material used amounted to Rs. 90/- per unit of finished product. Other variable costs were as per the budget. The marketing department advised the management that the failure to achieve targeted

sale is because a competitor has introduced another product which has been very popular in the low income areas. After due deliberations, the management has prepared a revised plan for the remaining period of the financial year. The plan involves launching of a low grade version of the existing product named LGV, to capture the low income market. Salient features of the plan are as under:

(i) Sales mix of HGV and LGV is expected to be in the ratio of 1:2. Sale price of

HGV would be increased to Rs. 385, whereas sale price of LGV would be Rs. 270.

(ii) A new machine will have to be purchased for Rs. 1.2 million. (iii) For LGV two different types of raw materials i.e. A and B will be used in the ratio

of 5:3. However, the total weight of raw material used shall be the same in case of both products. Presently A is available at the rate of Rs. 25 per kg whereas B is available at the rate of Rs 45 per kg. The raw material consumption per unit of HGV shall continue to be Rs. 90 per unit.

(iv) Production of HGV is carried out by skilled workers. However, only unskilled workers would be required for the production of LGV. The wages of unskilled workers would be 40% lower but labour hours per unit would be 10% higher than HGV.

(v) Variable factory overhead cost per unit of LGV would be 10% lower than HGV. (vi) Additional marketing cost would be Rs. 3 million. Required:

Compute the sales amount and quantities for the remaining period, to achieve a break even in 2009. (18)

(2)

Q.2 Extract from the records of AMAX Limited are as under: Budget Actual

---------- Rupees ---------- Sales 27,000,000 27,295,000 Variable costs:

Raw Material (7,500,000) (8,461,450) Labour (9,375,000) (9,463,125) Variable overheads (3,000,000) (2,974,125)

Contribution 7,125,000 6,396,300 An analysis of the above figures has revealed the following: Actual units sold were 3% (1,500 units) more than the budgeted sales quantity and

actual sale price was lower by Rs. 10/- per unit. One unit of finished product requires 3 kgs of raw material and actual raw material

price was 6% higher than the budgeted price. Budgeted labour cost per hour was equivalent to 150% of budgeted raw material

cost per kg. Production department records show that labour utilization per unit of finished

product was 1/8 hour more than the budget. Variable overheads varied in line with labour hours. Required: Compute eight relevant variances and prepare a statement reconciling budgeted

contribution with the actual contribution. (18) Q.3 Clifton Hospital is interested in an analysis of the fixed and variable cost of supplies

related to patient days of occupancy. The following actual data has been accumulated by the management:

Month Cost of supplies

(Rs. ‘000’) Occupancy ratio (%)

December 2008 1,665 90 January 2009 1,804 93 February 2009 1,717 98 March 2009 1,735 94 April 2009 1,597 86 May 2009 1,802 99

Required:

Compute the variable cost of supplies per bed per day using the method of least square, if the total number of beds in the hospital is 300. (08)

Q.4 SMD Corporation has commenced a project with the following time schedule: Activity 0 – 1 1 – 2 1 – 3 2 – 4 2 – 5 3 – 4 3 – 6 4 – 7 5 – 7 6 – 7 Duration

in days 2 8 10 6 3 3 7 5 2 8 Required:

Construct network diagram and compute: (a) Total float for each activity. (b) Critical path and its duration. (11)

(3)

Q.5 MMTE Limited has witnessed a significant decline in profits over the past few years. A study has revealed that the company’s sales have been stagnant over the years as it has been regularly increasing the price of its only product i.e. PDT. However, since the cost of production has been rising, the company is unable to reduce the price. The company’s budget for the next year contains the following projections:

(i) Two types of raw materials i.e. A and B will be used in the ratio of 70:30. (ii) The cost of raw materials would be Rs. 32 and Rs. 10 per kg respectively. (iii) Wastage is projected at 8% of input quantity. (iv) Labour rate has been projected at Rs. 400 for 8 working hours / day. (v) One labour hour is estimated to be consumed for 4 kgs of finished products. (vi) Variable overheads have been budgeted at Rs. 5 per kg of input. (vii) Fixed overheads are estimated at Rs. 4,000,000 per annum. A consultant hired by the company has carried out a detailed study and recommended the

following measures: Hire a firm of Quality Assurance who would depute its expert staff to control the

ratio of wastage. The company will have to pay Re 0.5 per kg for the inspection of material. It is expected that overall wastage would decrease by 80%.

It has been identified that factory workers are spending 25% more time as compared to other manufacturing units of the industry. An incentive plan has therefore been suggested, according to which the workers would be entitled to share 40% of the time saved. It is expected that by implementing the incentive plan, the workers will achieve the industry average.

Certain improvements have been suggested in the production process and this will result in reduction in variable overheads by 20%.

It has been ascertained that staff performing various support functions is underutilized. The company should therefore discontinue the services of some members of the staff and allocate their work between the remaining staff. As a result, fixed overheads will decrease by 25%.

Required: Compute the amount of savings that the revised plan is expected to generate if the

required production is 2 million kgs of PDT. (15) Q.6 Ahmed Sons (Pvt.) Ltd., a small sized manufacturer, is experiencing a short term

liquidity crisis. It needs Rs. 10 million by the end of next month and expects to repay it within 6 months of the date of receipt.

The company is considering the following three alternatives: (i) Obtain short term loan at an interest of 18 percent per annum, compounded

monthly. (ii) Forego cash discount of 2% on some of its purchases. The total purchases are

approximately Rs. 12 million per month. The discount is offered for payment within 30 days. However, if the payment is delayed beyond 90 days, it could endanger the company’s relationship with the supplier.

(iii) Make arrangement with a factor who is ready to advance 75 per cent of the value of

the invoices after deduction of all factoring charges, immediately upon receipt of the invoices. The balance shall be paid within the normal credit period presently being availed by the customers.

The average sales are Rs. 25 million per month of which 60% are credit sales. The

company's customers pay at the end of the month following the month in which the sales took place. This level is expected to remain steady over the next year.

(4)

The factor shall charge interest @ 15 percent per annum on the amount of money advanced. He shall also charge factoring fee of 2 percent.

The company estimates that as a result of the above arrangement, it will save on bad

debts and the cost of credit control, aggregating Rs. 200,000 per month. Moreover, the company can use any surplus funds made available to reduce its overdraft, which is costing 1 percent per month.

Required: Advise the company as to which of the three alternatives is cheaper. (12) Q.7 XYZ Ltd presently uses a single plant wide factory overhead rate for allocating factory

overheads to products, based on direct labour hours. A break-up of factory overheads is as follows:

Factory overheads

Production Support 1,225,000 Others 175,000 Total cost (Rs.) 1,400,000

It now plans to use activity-based costing to determine costs of its products. The

company performs four major activities in the Production Support Department. These activities and related costs are as follows:

Production Support Activities Rupees

Set up costs 428,750 Production control 245,000 Quality control 183,750 Materials management 367,500 Total 1,225,000

The planning department has gathered the relevant information which is given below:

Products Production in units

Direct labour

hours per unit

Batch size

(units)

Machine hours

per unit

Inspections hours per

unit

No. of Material

requisitions raised

Product X 10,000 2.5 125 7.50 0.2 320 Product Y 2,000 5.0 50 10.00 0.5 400 Product Z 50,000 2.8 10,000 3.00 0.1 30

The quality control department follows a policy of inspecting 5% of all production in

case of X and Y and 2% of all units of Z. Required: Determine the factory overhead cost per unit for Products X, Y and Z under:

(a) Single factory overhead rate method. (b) Activity Based Costing. (18)

(The End)

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Final Examinations Winter 2008 December 2, 2008 MANAGEMENT ACCOUNTING (MARKS 100) (3 hours) Q.1 A division of Electronic Appliances Limited sold 6,000 units of refrigerators during the year

ended September 30, 2008, the sale price being Rs. 24,000 per unit.

The opening work in progress comprised of 500 units which were complete as regards

material but only 40% complete as to labour and overheads. The closing work in progress comprised of 1200 units which were also complete as regards material but only 50% complete as to labour and overheads. The finished goods inventory was 800 units at the beginning of the year and 1000 units at the year end.

The work in progress account had been debited during the year with the following costs: Rs. in ‘000’

Direct material 83,490 Direct labour 14,256 Variable overheads 10,890 Fixed overheads 17,490

As compared to the previous year, the costs per units have increased as follows: Direct material 10%

Direct labour 8% Variable overheads 10% Fixed overheads 6%

The selling and administration costs for the year were : Rupees

Variable cost per unit sold 1,600 Fixed costs 12,000,000

Required:

(a) Compute the cost per unit, by element of cost and in total, assuming FIFO basis. (b) Prepare profit statements on the basis of:

(i) Absorption costing (ii) Marginal costing. (20)

Q.2 RF Ltd. has established a new division. The total cost of the property, plant and equipment

of the division is Rs. 500 million. The working capital requirements are expected to average Rs. 100 million. The company plans to finance the division maintaining a debt equity ratio of 70:30. The cost of debt is 10%.

Other relevant information is as under: Annual profit before depreciation and financial charges Rs. 150 million

Life of the assets 10 years Deprecation method Straight line

(2)

The residual value of the property, plant and equipment is estimated at Rs. 20 million. The division will start functioning from 1st January, 2009.

Required:

(a) Compute the return on investment (ROI) on the basis of average net assets employed by the division for the years 2009 and 2015.

(b) Based on the results obtained above, discuss the limitations of ROI as a measure of performance.

(08)

(02) Q.3 ABC Limited is considering to set up a chemical plant to produce a specialized chemical

CP-316. Their technical consultants have examined various plants and have recommended to install either Model A or Model Z for the project. The specifications of the plants are as follows:

MODEL A MODEL Z

Per hour capacity 80 kgs 100 kgs Plant cost including installation Rs. 660 million Rs. 750 million Natural gas consumption 0.5 MMBTU / kg 0.4 MMBTU / kg Electricity consumption 2 KWH/ kg 1.5 KWH / kg Water consumption 5 gallons / kg 4 gallons / kg Normal evaporation losses 15% of the input 10% of the final productionAnnual operating capacity 7,500 hours 7,500 hours Life of plant 20 years 20 years

The marketing research has indicated that there is a large gap between demand and supply

and the company can market at least one thousand tons annually. Other relevant information is as follows: (i) Rupees

Sale value per kg 900 Cost of raw material per kg 400 Electricity per KWH 12 Natural gas per MMBTU 80 Water per gallon 2

(ii) Other expenses at a capacity of 600 tons are as under: Model A Model Z

Rupees in million Direct labour 30.0 33.0 Other production overheads (60% variable) 60.0 70.0 Selling and administration (40% variable) 35.0 45.0

Production overheads include depreciation charged on straight line basis. (iii) Working capital requirements are estimated at 20% of annual sales. (iv) Debt equity ratio of 60:40 will be maintained by the company. (v) Financial charges would be 12%. (vi) Tax rate applicable to the company is 30%. Required:

Prepare detailed working to conclude whether the company should purchase Model A or Model Z. (16)

(3)

Q.4 (a) XYZ Ltd. produces a single product which has a large market. It sells an average of 360,000 units per month at a price of Rs.160 per unit. The variable cost is Rs.120 per unit.

All sales are made on credit. Debtors are allowed one month to clear off the dues. The

company is thinking of extending the credit term to two months which will help increase the sale by 25%.

Other information is as follows:

(i) Raw materials constitute 60% of the variable cost. (ii) The company has a policy of maintaining 60 days stock of finished goods and

30 days stock of raw materials. The suppliers of raw materials allow a credit of 20 days.

(iii) The company’s cost of funds is 16%. Required:

Calculate the effect of the proposed credit policy on the profitability of the company. (10) (b) FGH Ltd. needs financing for its short term requirements. A factor has offered to

advance 80% of the credit bills for a fee of 2% per month plus a commission of 4% on its trade debts which presently amount to Rs. 8 million. FGH allows a credit of 20 days to all customers. It has estimated that it can save Rs. 600,000 per annum in Management costs and avoid bad debts to the extent of 1% on the credit sales.

The company is also negotiating with a bank which has offered short term loan at 18%

per annum. Further, a one time processing fee of 3% will have to be paid. Required:

Advise the company on the preferred mode of financing, assuming that the financing is required for one year only. (05)

Q.5 EEZ Limited produces a variety of electronic items including flat screen television sets. All

the components are imported and are assembled by a team of highly skilled technicians. There are 10 employees working in this team, who work 5 days per week and 8 hours per day. Overtime is paid at double the normal rate. A new model is produced each year. The production is carried out in batches. The efficiency of the technicians improves with each batch but a study has not been carried out yet to determine the extent of learning curve effect. Each batch consists of 40 units. So far, 4 batches have been completed. The first batch required 800 direct labour hours including overtime of 200 hours. A total of 2,312 hours have been recorded so far. The company uses standard absorption costing. The following costs were recorded for the initial batch:

Rupees Direct materials 400,000 Direct labour including overtime 800,000 Special tools (Re-usable) costing 50,000 Variable overheads (per labour hour) 500 Fixed overheads (per week) 25,000

The company has been asked to bid for an order of 480 units. The order is required to be

completed in 10 weeks. Due to strong competition prevailing in the market, the marketing director believes that the quotation is unlikely to be accepted if it exceeds Rs. 25,000 per unit. Moreover, if the order is not accepted, only 8 of the employees will be employed elsewhere whereas 2 employees will remain idle for the next 6 weeks.

Required:

Recommend whether it is worth accepting this order at Rs. 25,000 per unit. (17)

(4)

Q.6 RS Enterprises is a family concern headed by Mr. Rameez. It is engaged in manufacturing of a single product but under two brand names i.e. A and B. Brand B is of high quality and over the past many years, the company has been charging a 60% higher price as compared to brand A.

As the company has progressed, Mr. Rameez has felt the need for better planning and

control. He has compiled the following data pertaining to the year ended November 30, 2008:

Rupees Rupees

Sales 5,522,400 Production costs: Raw materials 2,310,000 Direct labour 777,600 Overheads 630,000 3,717,600 Gross profit 1,804,800 Selling and administration expenses 800,000 1,004,800

A B

No. of units sold 5400 3600 Labour hours required per unit 5 6

Other information is as follows: (i) 20% of B was sold to a corporate buyer who was given a discount of 10%. The buyer

has agreed to double the purchases in 2009 and Mr. Rameez has agreed to increase the discount to 15%.

(ii) In view of better margins in B, Mr. Rameez has decided to promote its sale at a cost

of Rs. 250,000. As a result, its sales to customers other than the corporate customer, are expected to increase by 30%. However, the production capacity is limited. He intends to reduce the production/sale of A if necessary. Mr. Rameez has ascertained that 90% capacity was utilized during the year ended November 30, 2008 whereas the time required to produce one unit of B is 20% more than the time required to produce a unit of A.

(iii) 2.4 kgs of the same raw material is used for both brands but the process of

manufacturing B is slightly complex and 10% of all raw material is wasted in the process. Wastage in processing A is 4%.

(iv) The price of raw material have remained the same for the past many years. However,

the supplier has indicated that the price will be increased by 10% with effect from March 1, 2009.

(v) Direct labour per hour is expected to increase by 15%. (vi) 40% of production overheads are fixed. These are expected to increase by 5%.

Variable overheads per unit of B are twice the variable overheads per unit of A. For 2009, the effect of inflation on variable overheads is estimated at 10%.

(vii) Selling and administration expenses (excluding the cost of promotional campaign on

B) are expected to increase by 10%. Required: Prepare a profit forecast statement for the year ending November 30, 2009. (22)

(THE END)



Q.1 Azmat Industries is engaged in manufacturing two products, X and Y. Both the products

have a high demand but the company is facing a liquidity crunch. In view of the liberal credit policy being followed by the company the Finance Director is of the opinion that sales of only Rs. 200 million can be financed through the present resources. However, a credit facility of Rs. 25 million can be obtained from local market at a mark-up of 16%. If this facility is obtained for the whole year, the company will be in a position to increase its sale to Rs. 260 million.

The following data is available for the year ended June 30, 2008:

X Y Direct materials per unit – Rs. 300 700 Direct labour per unit – Rs. 180 150 Variable overheads per unit – Rs. 160 180 Selling price per unit – Rs. 900 1,200 Production per machine hour 8 6

The Marketing Director has informed that he has already made commitments for the supply of 40,000 units of X and 96,000 units of Y. Total available machine hours are 34,000. Required: (a) Calculate the maximum profit the company can achieve if the sale is restricted to

Rs. 200 million. (b) Determine whether it would be feasible for the company to obtain the credit

facility. (14)

Q.2 Yousuf Aziz & Company has achieved significant growth over the years. The Company is negotiating a working capital loan to finance its fast growing operations. For determining the working capital requirement, the finance manager has collected the following data for the current financial year which has just commenced: (i) The sales will increase by 25% over the previous year’s sales of Rs. 1.0 billion.

Local sales were 60% of total sales last year. The volume of local sales will increase by 10% whereas prices will increase by 15% on the average. The remaining growth will come from exports, all of which will be volume driven.

(ii) Cash sales to local customers will be approximately Rs. 100 million. Credit terms for local sales are 2/10 and 1/20. It is estimated that total discounts to the customers will amount to Rs. 6 million. The value of sales on which 2% discount will be claimed shall be twice the value on which 1% discount will be claimed. The remaining customers will take about 30 days to make the payments. Bad debts are expected to be 2% of credit sale.

(iii) Export proceeds will be recovered on an average of 30 days. (iv) Raw materials A, B and C are used in the ratio of 3:2:1 respectively. Last year, the

raw material cost was 48% of sales. Average price of each of the raw materials is expected to increase by 5%. Opening stocks this year were equal to one month’s consumption of the previous year and are expected to follow the same trend.

(2)

(v) The suppliers of A and B allow credit periods of 30 and 45 days respectively whereas 50% cash payment has to be made while placing order for C and the balance at the time of delivery which is 15 days after the order.

(vi) Finished goods stock equal to one month’s sale, is maintained by the company. (vii) During the previous year, labour, factory overheads and other administrative

overheads were 15%, 10% and 8% of sales value respectively but are expected to be 16%, 12% and 10% this year. On an average, these are paid 15 days in arrears.

Required:

Assuming that all transactions are evenly distributed over the year (360 days), determine the working capital at the end of the year. (15)

Q.3 (a) GH Scientific Corporation is assessing the possibility of introducing a new product.

The Incharge of production is confident that the product will be successful. However, the marketing department is apprehensive of the high cost of production and has advised that an in-depth market research should be carried out before launching the product. The cost of initial launch of the product is estimated at Rs. 500 million whereas the cost of carrying out the market research shall be Rs. 100 million. The company’s research analysts have developed the following estimates: (i) If the company starts production without carrying out market research, there

is a 40% probability that it will earn a profit of Rs. 2 billion from the product, 35% probability of earning Rs. 1.2 billion and 25% probability of incurring a loss of Rs. 200 million.

(ii) If the company decides to carry out the research there is a 60% probability that it will find the product feasible.

(iii) If the product is found feasible the chances of profitability are as follows:

Profit of Rs. 2.8 billion 70% Profit of Rs. 800 million 30%

(iv) If the product is not found feasible the profitability estimates are as follows:

Profit of Rs. 700 million 20% Loss of Rs. 400 million 80%

Required:

(a) Draw a decision tree to depict the above possibilities. (b) Determine whether the company should carry out the research or not.

(07) (03)

(b) ABC Limited manufactures heavy equipments for use in various industries. It has recently developed and supplied eight units of a special equipment to an important customer. It took about 5,000 hours to build the first unit but thereafter a learning curve of 80% has taken effect which is expected to continue for the next 56 units. Direct labour cost is Rs. 100 per hour. Cost of direct material is Rs. 400,000 per unit and variable overheads are estimated at Rs. 80 per direct labour hour. Required: A new customer has placed an order for eight units of equipment. Determine the price that the company may charge to earn a profit of 20% of sales. (06)

(3)

Q.4 Nihal Limited manufactures a single product and uses a standard costing system. Due to a technical fault, some of the accounting data has been lost and it will take sometime before the issue is resolved. The management needs certain information urgently. It has been able to collect the following data from the available records, relating to the year ended March 31, 2008:

(i) The following variances have been ascertained:

Rs. Adverse selling price variance 24,250,000 Favourable sales volume variance 2,000,000 Adverse material price variance – X 2,295,000 Favourable material price variance – Y 2,703,000 Favourable material price variance – Z 3,799,500

• The overall material yield variance is nil but consumption of X is 10% below

the budgeted quantity whereas consumption of Y is 6% in excess of the budgeted quantity

• Labour rate variance is nil.

(ii) The budgeted sale price of Rs. 100 was 5.26% higher than actual sale price. (iii) The standard cost data per unit of finished product is as follows:

No. of kgs Standard Cost Total Cost

X 5 3.00 15.00 Y 10 2.00 20.00 Z 15 1.80 27.00

(iv) During the year, the finished goods inventory increased by 230,000 units whereas

there was no change in the inventory levels of the raw materials. (v) Labour costs are related to the consumption of raw materials and the standard rates

are as follows: Re. (per kg) Skilled labour for handling material X 1.00 Semi-skilled labour for handling material Y 0.75 Unskilled labour for handling material Z 0.10

Required: (a) Total actual cost of each raw material consumed (b) Material mix variance. (c) Labour Cost Variance. (20)

Q.5 Ibrahim Industrial Company produces custom made machine tools for various industries. The prices are quoted by adding 50% mark-up on the cost of production which includes direct material, direct labour and variable factory overheads. The mark-up is intended to cover the non-manufacturing overheads and earn a profit. Factory overheads are allocated on the basis of direct labour hours. The management has been using this system for many years but recent experiences have shown that some customers have been dissatisfied with the prices quoted by the company and have moved to other manufacturers. The CEO was seriously concerned when KSL, a major client showed its concerns on the prices quoted by the company and has asked the management accountant to carry out a critical evaluation of the costing and pricing system.

(4)

The management accountant has devised an activity based costing system consisting of four activity centres. The related information is as follows:

Activity Centre Basis of Allocation Budgeted Activity

level Activity 1 Manufacturing Direct labour hours 72,000 hours Activity 2 Customer Service No. of days to

complete the order 120 order days

Activity 3 Order Processing Number of orders 20 orders Activity 4 Warehousing Cost of Direct material Direct materials usage

of Rs. 40 million The budgeted costs for the period are given below:

Description Amount (Rs.)

Direct material 40,000,000 Direct labour 18,000,000 Indirect labour 7,200,000 Other manufacturing overheads 9,000,000 Quality control 1,500,000 Administrative salaries 3,000,000 Transportation 1,260,000 79,960,000

On the basis of a careful study, the distribution of costs to activity centres has been

recommended on the following basis: Activity

1 Activity

2 Activity

3 Activity

4 Not

allocated Total

Indirect labour 60% 20% NIL 20% NIL 100% Machine-related Costs 95% NIL NIL 05% NIL 100% Quality control 60% 40% NIL NIL NIL 100% Transportation 10% 70% NIL 20% NIL 100% Administrative salaries NIL NIL 20% 25% 55% 100%

The data related to the order placed by KSL is as under: Estimated direct material cost (Rs.) 3,000,000

Direct labour (hours) 6,000No. of days to complete the order 10

Required:

(a) Calculate activity cost driver rates for each of the above activities. (b) Compute the amount of discount that can be offered to KSL on the price that has

been quoted to them, if the Activity Based Costing system is used and the management wants to earn a minimum contribution margin of 20% of the quoted price. (15)

Q.6 Kamran Limited (KL) produces a variety of electrical appliances for industrial as well as domestic use. The average life of the equipments is six years. According to the terms of sale, the company has to provide free after sales service, including parts, during the warranty period of one year. Thereafter, the services are provided at market rates. The company has hired Ahmed Hasan Associates (AHA) to provide these services on the following terms and conditions:

The material required for repairs carried out during the warranty period is provided by KL. For customers whose warranty period has expired, the material supplied to AHA is billed at cost plus a mark-up of 15%.

(5)

Labour and overheads incurred by AHA on services provided during the warranty period are billed to KL at cost plus 30%.

KL gets a share in all amounts billed to the customers after the warranty period. 10% share is received in respect of amounts billed to industrial customers and 15% in case of domestic customers.

The management of KL is evaluating the possibility of providing the services directly

instead of outsourcing them to AHA. On the instruction of the CEO the management accountant has compiled the following information in respect of the previous year:

20% of the services were provided to domestic customers and 80% to industrial

customers. 20% of all services were provided during the warranty period. Mark-up billed to AHA amounted to Rs. 360,000. An amount of Rs. 990,000 was received from AHA being the KL’s share of amount

billed to the customers. It has been estimated that the cost of material billed by AHA, to the customers, is

determined by applying a further mark-up of 25% over the amount billed by KL. The service charges are billed at 50% above the cost of labour and variable overheads.

It is estimated that the cost of labour and variable overheads will increase by 10%, if the services are provided by KL. However, KL will not be able to pass on this increase to the customers. Moreover, a supervisor will have to be appointed to oversee the process, at a consolidated salary of Rs. 40,000 per month. Other fixed overheads will also increase by Rs. 60,000 per month.

Required:

(a) Compare the two options and determine whether KL should terminate the contract with AHA and start providing the services itself.

(b) What other qualitative factors should KL consider before taking a final decision? (17) (03)

(THE END)

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Final Examinations Winter 2007 December 4, 2007


Q.1 MTS Limited manufactures chemicals A, B and C. The manufacturing is carried out in

two processes. The first process involves processing of raw material DDM. In the first process, the three products are produced in a raw form. All these products are processed further to bring them into saleable condition. The following budgeted information is available in respect of the manufacturing process:

Product A Product B Product C

Budgeted production – kgs 9,000 17,000 1,920 Joint costs 264,000 207,000 9,000 Separate processing costs 80,000 120,000 10,000 Fixed costs 16,000 24,000 1,000 Evaporation loss in the second process 10% 15% 4% Selling price per kg 60 25 10

Joint costs are allocated in the ratio of sales value of the final output. 75% of the joint

costs represent the cost of raw material DDM. Normal loss in the first process is 20% of the input. The research department has informed the CEO that another raw material FFS is now available in the market at a price which is 33.33% higher than the price of DDM. If FFS is used instead of DDM, the company can derive the following benefits: − The ratio of output after the first process will change to 7:8:1 for A, B and C

respectively. − Evaporation loss in the second process will reduce by 20%.

Required: (a) Assuming that the total input in the first process will remain the same, compute

whether MTS Limited should start using FFS in place of DDM.

(11) (b) Describe any other matters which may be relevant in making the above decision. (02)

Q.2 Muneer Technology Limited (MTL) produces two products i.e. X and Z. The production is carried out in two departments A & B. Following are the details:

X Z

Contribution margin per unit – Rs. 160 360 Production hours per unit Department A 20 32 Department B 10 24

Total hours available in department A & B are 14,000 and 9,000 respectively.

Required:

Calculate shadow or opportunity price per hour of capacity if 2,000 hours are added in the capacity of department A. (16)

(2)

Q.3 Sikandar Enterprises Limited is organized into many autonomous divisions. The head of each division is a General Manager who is responsible for all aspects of the divisional operations including financial management with very little interference from the Head Office. The Chief Operating Officer (COO) of the company will retire in next year and the Board of Directors is looking for a replacement. After considering various candidates, the Board has short listed the GMs of division C and E. GM of division C had been managing the division for the last seven years. GM of division E had served as GM of division B for two years before taking over division E which was formed in 2005. The financial results of their performance in the past three years are reported below:

Division C Division E 2005 2006 2007 2005 2006 2007 -------------------Rupees in thousands-------------------

Estimated industry sales 14,000 17,000 18,000 8,000 10,000 11,000 Divisional sales 1,200 1,300 1,400 550 700 900 Variable costs 550 580 620 260 300 350 Fixed direct costs 480 500 520 200 230 260 Allocated head office costs 125 175 200 70 140 185 Total costs 1,155 1,255 1,340 530 670 795 Net income 45 45 60 20 30 105 Assets employed 400 420 440 230 370 800 Liabilities 120 125 135 60 120 200 Net investment 280 295 305 170 250 600

Required:

(a) Calculate the accounting ratios which in your opinion are best suited for measuring the performance of the General Managers, in the above situation. (05)

(b) What additional measures may be relevant for evaluating the divisional performance? (03)

(c) Which GM would you recommend for the position of Chief Operating Officer? Give reasons to support your recommendation. (04)

Q.4 Pure Chemicals Limted (PCL) are involved in importing a chemical HCC in bulk quantities for use in their factory. Presently they place their orders in quantities of 60 tons each with a manufacturer in Germany. It takes about 5 days to process the order and opening of a sight LC. Once the order is faxed, the consignment is received within 40 days. Payment is made to the supplier as soon as the LC documents are negotiated, which is usually 15 days from the opening of LC. The lead time usage is 45 tons and PCL has a policy of keeping a buffer stock of 30 tons. The cost of import is Rs. 27,600 per ton which includes C & F, customs duty of 20% of C & F and sales tax of 15% of C & F plus customs duty which is subsequently claimed as input tax. The holding costs are Rs. 2, 400 per ton per annum excluding the financial costs. Ordering costs are Rs. 5,000 per order. Recently the procurement department of the company has explored an opportunity of import of the same chemical from a supplier in Singapore. The supplier is offering a price which will result in a cost of import of Rs. 25,300 per ton inclusive of sales tax and customs duty. However, it has informed PCL that it will be supplying a quantity of 120 tons in each order. As a result of the change, the delivery time is expected to be reduced to 30 days from the date the processing of order is commenced. The payment time is expected to remain the same that is 15 days before the receipt of goods.

(3)

It has been estimated that as a result of decrease in delivery time the company will be able to reduce the buffer stock to 20 tons. The company’s incremental cost of borrowing is 12% per annum. Assume that one year consists of 360 days. Required:

Considering all relevant costs, determine whether the company should decide to import from Singapore. (14)

Q.5 Shahbaz Industries Limited (SIL) is engaged in the production of industrial components for various medium sized industries. Over the past many years, it has built up a reputation of being a highly organized company. Its customers rely on it for timely supply of quality products. It has recently accepted an order for supply of 52,000 units of a product ‘SSU’ at the rate of Rs. 85,000 per unit. The supply will continue for a period of one year at the rate of 1,000 units per week. SSU consists of three components X, Y and Z. The production capacity of the company is limited and it can not allocate more than 22,500 machine hours per week for this order. The company can sub-contract the work but in that case, further testing will have to be carried out and the testing cost will increase from Rs. 200 to Rs. 300 per component.

The relevant information is given in the table below: Components

X Y Z Components per unit 2 5 6 Material cost per component Rs. 1,200 2,000 2,500 Machine hour per component 1 2 3 Sub-contracting charges (Rs. per unit) 7,000 28,000 45,000

Following other information is also available:

Direct labour per machine hour Rs. 1,000 Variable production overheads (inclusive of testing cost)

50% of direct labour

Fixed overheads per week Rs. 800,000 SIL is considering two different options as given below: Option A - Produce as many components as possible and sub-contract

the remaining. Option B - Produce maximum possible completed units and sub-

contract the remaining. Required:

Determine the optimal production plan by calculating weekly profits in case of option A and B as stated above. (21)

(4)

Q.6 Chaman Corporation manufactures a single product ANJ. During the month of November 2007, it sold 5,120 kgs of the product @ Rs. 40 per kg. The budgeted sales were 5,000 kgs @ 42 per kg.

150 batches of the product were manufactured during the month. The costs incurred

during the month are as follows:

Materials Kg Price per Kg

Rs. Total Rs.

A 2400 7.70 18,480 B 2000 25.60 51,200 C 1150 62.40 71,760 5550 141,440

Labour:

Hours Rate per hour Rs.

Department X 500 52 26,000 Department Y 360 40 14,400

40,400 Standard costs per batch as determined by the Technical Department are given below: Materials Kg Price

per Kg (Rs.) Total (Rs.)

A 17.0 6 102 B 11.5 26 299 C 8.5 60 510 37 911

Less: Standard loss 1 Standard yield 36

Labour: Hours Rate

per hour (Rs.) Total (Rs.)

Department X 4 50 200 Department Y 2 36 72

272 There was no opening or closing stocks. Required: (a) Calculate the following material variances: price usage mix yield (b) Calculate the following labour variances for each of the production departments: Cost Efficiency rate (c) Calculate the sales margin variances. (24)

(THE END)



Q. 1 One of the machines belonging to Aladin and Company was damaged due to fire. All of

the company’s assets are insured at cost which in this case was Rs 840,000. The accounting written down value of the machine is Rs 640,000. The replacement cost of similar machines is Rs 0.8 million. Annual saving of Rs 10,000 is expected if the new machine is purchased. A new and improved model of the machine is also available for Rs 1.0 million. In case of purchase of the new model, annual savings are estimated at Rs 35,000. The company’s technical manager has prepared the following estimate for repairing the existing machine:

Rupees

Material at cost plus sales tax 690,000 Labour: Department A 400 man hours @ Rs 60 24,000 Department B 600 man hours @ Rs 50 30,000 50% salary of the supervisor 20,000 Factory overheads – 60% of direct labour 32,400 Total 796,400

The following information is also available: Notes: (1) The repair material is also available in stores. Its cost in the company’s records

maintained on weighted average basis is Rs 580,000. The company will need the material for one of its future orders after three months. The supplier of the product increases its prices annually @ 10%. The increase is due after 30 days.

(2) Department A is very busy producing goods which make contribution of Rs 10.0 per Re. 1 of labour. However, there is sufficient idle time in Department B.

(3) 40% of all factory overheads are variable. (4) The cost of dismantling the machine is Rs 30,000 whereas the cost of installing the

new machine is Rs 100,000. (5) Company’s cost of borrowing is 10% per annum. (6) In each of the above case, the machine will be scrapped after five years The

salvage value is estimated at 10% of the cost. (7) The discounting factors are 0.909, 0.826, 0.751, 0.683 and 0.621 for years 1 to 5

respectively. Required:

Make necessary calculations and determine whether the company should repair the machine or purchase one of the two new machines. Give appropriate explanations wherever necessary. (10)

(2)

Q.2 MZ Limited is engaged in the production of three products X, Y and Z. Till now the business was being carried out on an adhoc basis. However, after facing certain difficulties the management has appointed a Management Accountant who has been entrusted to prepare a comprehensive budget. The company’s records are not in a good shape and after working for many days, only the following information could be extracted:

(i) Total sales of the company in the year 2006 were Rs 115,200,000. The company

charges different prices from each customer. Product wise sale is not available but average prices of the three products and ratio of sales has been estimated as under:

Product X Y Z Average price (Rs) 40,000 48,000 60,000 Ratio of quantities sold 6 2 4

The company has increased the prices of its products by 10% in 2007 but the sales

quantity is expected to remain the same. (ii) Three components are used in each of the products as shown below: Components Product A B C

X 2 3 5 Y 3 3 2 Z 4 6 3

Purchase price (Rs) 1,500 2,000 2,400 The suppliers have informed the company that they will increase the prices of the

components by 20% w.e.f. September 1, 2007. (iii) All the products are routed through two departments i.e. P & Q. Ten labour hours

are used for each product in department P, and fifteen hours in department Q. Salaries are paid on the last day of the month. Labour hour rate is Rs 30 per hour.

(iv) Total factory overheads equal 60% of direct labour. 40% of the factory overheads

are fixed. 50% of all overheads are paid in the same month and the remaining in the next month. Factory overheads in June 2007 are estimated to be Rs 85,000.

(v) The closing stocks on June 30, 2007 are estimated as under: Products Components

X Y Z A B C 120 70 100 400 300 500

Total purchases in June 2007 are estimated at Rs 6.0 million. The management was not following any specific policy about stock holdings. But

from July onward it has decided to maintain stock equal to one month requirements.

(vi) 80% of the sales are on credit. The company allows 60 days credit. (vii) All purchases are on 30 days credit. Required: (a) Prepare a statement showing projected gross margin in respect of each product for

the year 2007. (b) Prepare a cash budget for the 3rd quarter of the year 2007. (Monthly figures are not

required) (25)

(3)

Q.3 Wilson Industries Limited had been using a single overhead rate, based on machine hours for determining the costs of its four products. The company has recently reviewed its marketing strategy and has appointed a separate Product Manager for each of the products. Two of the Product Managers are not satisfied with the method of costing and have asked the Management Accountant to devise a more appropriate method. The following data is available for the month of May 2007:

W X Y Z Cost per unit:

Direct material (Rs) 348 256 425 490Direct labour @ Rs 22 per hour 286 308 220 440Factory overhead 240 400 360 300Total cost 874 964 1,005 1,230

Other data: Output 2,000 1,500 1,000 1,800Batch size 80 50 50 60Inspection time per batch - hours 20 30 30 20No. of purchase orders raised 10 6 8 8

A total of 3,300 machine hours were used during the month. Details of actual factory

overheads incurred during the month are as under: Rupees

Indirect labour 600,000 Indirect material 363,000 Purchase department costs 144,000 Inspection department costs 312,000 Set up costs 210,000 Electricity and Gas 200,000 Others 151,000 1,980,000

Break-up of indirect labour is as follows: Salaries of supervisors and foremen 60%

Salaries of time keeping department 20% Salaries of cleaners and maintenance staff 20% 100%

Required: Calculate the cost per unit under ABC costing method. (15) Q.4 HSB & Co. purchases 1.0 million units of a product ‘ABYZ’ per annum from CHK & Co.

The cost of each unit is Rs 300. The annual costs associated with purchasing department were Rs 1,800,000 last year. 85% of the costs are variable and the costs are expected to increase by 10% during the current year. It has been estimated that 15% of the variable costs relate to purchasing of ‘ABYZ’ from CHK & Co. The annual stock holding costs other than financial costs are Rs 30 per unit of which 60% are variable costs. Storage costs will not increase during the year. Over the years, HSB has followed a policy of purchasing 50,000 units at a time. The marginal cost of borrowing for HSB is 10%.

Required: (a) Calculate the number of units that HSB should order to reduce the relevant costs to

the minimum.

(4)

(b) CHK has offered a discount of 1% if the quantity ordered is 100,000 units or more. Should HSB accept the offer?

(c) Compute the ordering and holding cost if HSB wants to maintain a safety stock of 20,000 units. (15)

Q.5 A company produces two products A and B. Each of the products passes through two

departments Y and Z having monthly capacity of 240 and 270 hours respectively. The number of hours required to produce each unit is given below:

Y Z

A 4 3 B 2 4

Each unit of product A contributes Rs 300 whereas each unit of product B contributes

Rs 200 towards the profit of the company Required: (a) Construct the set of constraints in the form of inequalities for the given situation. (02) (b) Plot the inequalities constructed in part (a) on a graph and identify the feasible

region.

(04) (c) Using the co-ordinates of the corner points of the feasible region; determine the

maximum profit that the company can earn and the number of units that will be produced, if the profit is to be maximized. (04)

Q. 6 Gujranwala Furnitures Limited (GFL) manufactures standardized furniture for supply to

factories and offices. The company is a family concern and some young members of the family have recently been inducted into the management. They are confident that the profitability of the company can be improved substantially. In order to achieve this goal, they have planned to introduce a quality management program (QMP). The details of the plan and the related estimates are given below:

(i) Bulk of the company’s sales comprises of two types of special units i.e. A and B

which are produced in bulk quantities. Annual sales are estimated at 80,000 and 120,000 units of product A and B respectively. Approximately 3% of the units are returned by the customers due to defects beyond repairs. Such units are required to be replaced and the returned units are sold as scrap for Rs 400 and Rs 600 per unit of A and B respectively.

(ii) The company maintains a safety stock of 15,000 units of each product and 2,000

cubic feet of wood. Annual stockholding cost of each unit is approximately 5% of the cost per annum.

(iii) Cost of wood is Rs 4,000 per cubic foot. Approximately 0.3 and 0.5 cubic foot of

wood is required to manufacture product A and B respectively. Cost of other material is approximately 2% of the cost of wood, which being immaterial may be ignored. During storage 2% of the wood looses its essential characteristics and is returned to the respective suppliers but only 75% of the cost is refunded by them. The cost of transportation to the suppliers’ godown has to be borne by the company and amounts to approximately Rs 50 per cubic foot. The management intends to introduce a Just in Time (JIT) purchasing and inventory management system. It has made arrangements with three leading suppliers who have assured immediate and quality supplies. As a result, the returns are expected to be reduced to 0.25% and cost of inspections amounting to Rs 1.2 million will also be saved. However, the cost of wood will increase to Rs 4,600 per cubic foot.

(5)

(iv) Wood is issued to the processing department. Most of the workers in the department have been in the employment of the company for a very long time. The management plans to offer suitable training which will improve the standard of manufacturing. Some of the very old employees would be replaced. However, they will be accommodated in other areas, although presently there are no vacancies. The cost of training will be Rs 6.0 million. The total salaries of the department will be increased by Rs 500,000 per month, which include Rs 200,000 payable to the redundant staff. As a result of the above, the quality will improve and it is estimated that the returns from customers will reduce to 0.25%. Moreover, the wastage which currently stands at 5.0% is also expected to be reduced to 2.0%.

(v) New machines will be installed in the finishing department, which will reduce the

overall cost per unit by 12%. Presently, the costs are Rs 400 and Rs 500 for product A and B respectively.

(vi) The proposed process improvements will reduce the stock holding requirement.

Safety stock will be reduced to 500 cubic feet of wood and 200 units of each finished product.

(vii) For implementing the program, the company will appoint a consultant who will

charge Rs 6.0 million for supervising the whole process. (vii) As a result of improved quality of the product the company expects to increase the

price by 8%. However, some of its customers may not be willing to pay the higher price and the sales may drop by 5%. The present selling prices of the products A and B are Rs 2,500 and Rs 4,000 respectively.

Required: Calculate the net increase / decrease in profit that the company is expected to earn after

the above changes have been made. (25)

(THE END)

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Final Examinations Winter 2006 December 5, 2006 MANAGEMENT ACCOUNTING (MARKS 100) Module F (3 hours) Q.1 AZKA Manufacturing Company is involved in manufacturing and sale of a single

product called AZKA. Sales and operating profits of the company for the first two quarters of the year were as follows:

First Quarter (Rs.)

Second Quarter (Rs.) Increase %

Sales 750,000,000 1,125,000,000 50% Operating profit 198,750,000 208,650,000 4.9%

Directors of the company are concerned about the lower profitability in the second quarter, as despite 50% increase in sales, operating profit increased by a nominal percentage only. The other data relating to the company’s operations is as under:

First Quarter

Second Quarter

Sales in units Production in units

- actual - budgeted - actual - budgeted

Ending inventory in units

1,000,000 1,500,000 1,500,000 1,500,000

500,000

1,500,000 1,500,000 1,200,000 1,500,000

200,000 Sales price per unit Variable manufacturing cost per unit Fixed manufacturing costs Marketing and administrative expenses (Rs. 1,250,000 fixed)

Rs.

750 250

450,000,000

1,250,000

750 250

450,000,000

1,350,000 Required: (a) Prepare an income statement for second quarter under:

(i) Absorption costing (ii) Direct costing

(b) Reconcile the profits of the two quarters in such a way as to highlight the reasons for low profit percentage in the second quarter. (12)

Q.2 Leads Pharmaceuticals Limited is engaged in the production and marketing of a

number of products. PQR is their main product. This product is produced in three different formats. Following data pertains to one month of production: Final Product:

Product Production Capacity Sale Price (Rs. Per unit) PQR – Tablets 1,000,000 tablets 1.00 PQR – Syrup 50,000 bottles 10.00 PQR – Injections 100,000 injections 2.00

(2)

Raw Materials: Item Source Price (per unit) ABC Imported from a single source Rs. 10.00 DEG Both Imported / Local Rs. 5.00 XY Local Rs. 2.00 YZ Imported Rs. 0.50

Quantities Required for Production: Material

Item Tablets Syrup Injections

ABC 1 unit for 100 Tablets 1 unit for 10 bottles 1 unit for 50 injections DEG 1 unit for 50 Tablets 1 unit for 5 bottles 1 unit for 25 injections XY -- 1 unit per bottle -- YZ -- -- 1 unit per injection

Packing: Material

Item Tablets Syrup Injections Price per unit (Rs.)

Strips 10 Tab/Strip -- -- 1.00 Bottles -- 1 -- 1.00 Spoons -- 1 -- 0.10 Vials -- -- 1 0.50 Boxes 20 Strips / Box 4 Bottles / Box 10 Injections / Box 2.00 Cartons 10 Boxes / Carton 10 Boxes / Carton 10 Boxes / Carton 10.00

Other direct costs are as follows:

Tablets Re. 0.01 per unit Syrup Re. 0.09 per unit Injections Re. 0.03 per unit

- The product is in high demand and the company is able to sell as much as it can

produce. However, there is a shortage of raw material ABC. Only 15,000 units of ABC are available with the company for production in the next month.

- To maintain the market share, the marketing staff has suggested that at least 25%

of the production of each format should be maintained in the market. Required: Prepare a production plan for next month which would give maximum profit while maintaining the market share at a reasonable level in each category. (20)

Q.3 A company manufactures three products. Extracts from its standard cost data are given

below: Units of Material in Final Product

Material Unit cost Rs. Product A Product B Product C

V 55 5 4 - W 50 3 2 6 X 35 - 3 5 Y 60 - 1 4 Z 80 1 1 -

No losses occur in the use of materials V, W, X, and Y. The expected yield of material

Z is 80% although 90% is considered as an ideal standard.

(3)

For the next four-week period, budgeted sales are: Product Sales Units

A 12, 000 B 15, 000 C 10, 000

It is anticipated that 5% of the production of Product B will be rejected during

inspection and will be disposed of immediately at 10% of the normal selling price. The stocks on hand at the beginning of the period are expected to be:

Units

Finished goods A 1,800 B 2,000 C 1,600Raw Materials V 20,000 W 30,000 X 15,000 Y 5,000 Z 9,000

It is planned to increase finished goods stocks by 10% in order to reduce the chances of

stock outs. However, raw material stocks are considered to be too high and a reduction of 10% is planned by the end of the period. Required: (a) Prepare budgets for the next four week period for the following:

(i) Production (in quantity); (ii) Materials usage (in quantity); (iii) Materials purchases (in quantity and value).

(b) Briefly describe the four main types of standards under standard costing.

(03) (04) (04) (02)

Q.4 Reliable Cement Ltd. has an installed capacity of 125 000 tonnes of cement per annum.

Its present capacity utilization is 80 per cent. The company produces cement in bags of 50 kgs each. Cost structure per bag of cement, as estimated by the management is given below:

Rupees

Limestone 30 Other raw materials 50 Packing material 20 Direct labour 60 Fuel 100 Factory overheads (including deprecation of Rs 20) 60 Administrative overheads 40 Selling overheads 50 Total cost 410 Profit margin 90 Selling price 500 Add: Government levies (20 per cent of selling price) 100 Invoice price to consumers 600

Following additional information is also available:

(i) Desired holding period of various materials is Limestone : 1 month; Other raw materials : 3 months; Fuel : 2.5 months; Packing material : 1.5 months.

(4)

(ii) Work in process is equal to approximately half month’s production (assume that full units of materials are required in the beginning; other conversion costs are to be taken at 50 per cent).

(iii) Finished goods are in stock for a period of 1 month before they are sold. (iv) Debtors are extended credit for a period of 3 months. (v) Average time lag in payment of wages is approximately ½ month and that of

overheads is one month. (vi) Average time lag in payment of government levies is 1 month. (vii) The credit period extended by suppliers of fuel, packing materials and other

raw materials is 1 month, ½ month and 2 months respectively. (viii) Minimum desired cash balance is Rs. 5 million.

Required:

From the information given above, determine the net working capital requirement of the company for the current year. (15)

Q.5 Desktop Products propose to install a central air-conditioning system in their city

office building. Three systems - gas, oil and solid fuel are under consideration. The costs of installing and running the three systems are estimated as follows:

(i) Equipment and installation costs (payable on 1st January 2007): Rs.

Gas 1,700,000Oil 1,500,000Solid Fuel 1,400,000

(ii) Annual fuel costs (payable at the end of each year) will depend on the severity

of the weather and on the rate of increase in fuel prices. At the prices expected to exist during 2007, annual fuel costs have been estimated as follows:

Severe Weather (Rs.) Mild Weather (Rs.)

Gas 400,000 240,000 Oil 530,000 370,000 Solid Fuel 450,000 360,000

The company estimates that in each year there is a 70% chance of severe

weather and a 30% chance of mild weather. Fuel prices during 2008 and 2009 are expected to increase either by 10% per annum (probability equal to 0.4) or 15% per annum (probability equal to 0.6). The rate of price increase in 2008 is expected to prevail in 2009 also.

(iii) Maintenance costs (payable at the end of the year in which they are incurred): Gas Rs. 25,000 (per annum)

Oil Rs. 20,000 (per annum) Solid fuel Rs.100,000 (in 2008 only)

All maintenance costs are fixed by contract when the system is installed.

Desktop Products have a cost of capital of 10% per annum. The discounting factors at 10%, for years 1, 2, and 3 are 0.909, 0.826 and 0.751 respectively

Required: Prepare calculations showing which central air-conditioning system should be

installed, assuming that the decision will be based on the expected present values of the costs of each system. (14)

(5)

Q.6 Your assistant has been preparing the profit and loss statement for the week ended October 31. Unfortunately he had to proceed on leave in an emergency. The incomplete statement and relevant data are shown below: Rs. Rs. Sales 150,000Standard cost: direct materials direct wages overhead Standard profit Variances Fav / (Adv) Fav / (Adv) Rs. Rs. Direct materials price (400) usage (300) total (700)Direct labour rate efficiency total Overhead expenditure volume total Total variance Actual profit - The standard price of direct materials used is Rs. 600 per ton. It is expected that

2,400 units will be produced from each ton of material; - Standard labour rate per hour is Rs. 40/-; - There are 60 employees working as direct labour; - There are four working weeks in October; - The budgeted fixed overhead for October is Rs. 76,800/- - Standard production is 20 units per hour per employee; - A forty hour week is in operation;

Actual data pertaining to the week is as follows:

Materials issued 20 tonnes Labour payments 4 employees @ Rs. 42 per hour 6 employees @ Rs. 38 per hour others at standard rate Actual factory overheads Rs 18,000

Required: Complete the above statement for the week ended October 31. (18)

Q.7 With reference to the concept of Total Quality Management (TQM):

(a) Identify and explain the categories of quality costs. Also give two examples in

each case. (b) How quality can be measured? (08)

(THE END)


MANAGEMENT ACCOUNTING (MARKS 100) (3 hours) Q.1 Smart Appliances Limited (SAL) produces an article of modern kitchen equipment.

In July and August, there is usually a shortage of orders. This year, the company expects to be working at only 67.50% of its normal capacity. The selling and cost structure of the article is:

RupeesSelling price 450 Costs Direct material 100 Direct labour 150 Production overhead: 0.5 machine hour 50 300

The company’s fixed production overhead is budgeted at Rs. 6,840,000 for the year

and the normal capacity is 114,000 machine hours. All production overheads, both fixed and variable, are absorbed in the machine hour rate of Rs. 100 per hour. Two enquiries have been received both of which could result in orders being received by the end of June. A large hotel group has enquired about 14,000 articles but has suggested that the finish need not be the same as that of the article sold to housewives. It has offered a price of Rs. 300 each with delivery being required at the end of August. A chain of super stores has expressed interest in ordering 4,000 units of the article provided certain changes were made to make it different from the standard product. In case the order is accepted, the full quantity will have to be delivered on August 31. A price of Rs. 340 each is offered. The production director has stated that it is important to assume that neither of the possible orders will result in repeat orders and that because of quality control difficulties it is not his policy to subcontract work outside the company. He has also given the following information: 1. To meet the hotel group’s requirements the present direct material cost

would reduce by an estimated 20% but the other costs would be the same as for the article currently in production.

2. For the chain of super stores an increase in cost is unavoidable and the cost structure would be:

Rupees

Direct material 120 Direct labour 150 Production overhead: 0.5 machine hour 75 345

(2) The ratio of increase in fixed and variable overhead is projected to remain the same.

There would also be a design charge of Rs. 20,000 and of Rs. 27,500 for a stamping tool associated with the brand name of the chain of super stores, which would have no use after the production run.

Required: Write a report to the Managing Director analyzing the two proposals alongwith your

suggestions. (12) Q.2 Valentia Glass Company is involved in manufacturing and sale of equipment which

is used for scientific research. The standard cost of its product is as under:

Rupees Direct material ABC 5.00 Direct material XYZ (1.5 kgs @ Rs. 5) 7.50 Direct labour (3 hours @ Rs. 23.50) 70.50 Variable factory overhead (Rs. 1.50/direct labour hour) 4.50 Fixed factory overhead (Rs. 3/direct labour hour) 9.00 96.50

The company uses absorption costing, however, the Chief Executive who is a technical person and knows a lot about the trade is confused in using this basis. He feels that business can be better managed if only direct materials, direct labour and variable factory overheads were to be assigned to inventory and all fixed factory overheads were charged to expenses. There is stiff competition in the market, but the company is able to maintain the sale price of Rs. 150 per unit. During the last month 350 units were sold whereas 450 units were produced which equals the normal capacity. 140 units were left unsold at month end. The forecast for next month’s sale is much higher. In respect of the material ABC the company recorded Rs. 184 as favourable materials variance. Actual factory overhead was Rs. 6,297. Administration expenses remain at 5% of the sales value. Price of the other raw material (XYZ) has been going up and the average price of XYZ used last month was Rs. 5.15 per kg but only 98% of the standard quantity was used.

Required: Prepare income statements for submission to the Chief Executive using the

absorption costing method and direct costing method with a reconciliation of any difference in profit. (12)

Q.3 Sarhad Industries Limited is a manufacturing company which produces a single

product. It operates a standard costing system and the management accountant had calculated the following variances for the month of December 2005:

Rupees Rupees Materials Labour Usage 4,200 (F) Efficiency 10,780 (A) Price 9,520 (A) Rate 4,200 (F) Variable overhead Fixed overhead Total 540 (A) Volume 8,220 (F) Expenditure 2,620 (A)

(3) The following additional information is available:

1. Price paid for raw material was Re. 0.40 per kg more than the standard price. 2. Closing stock of raw material was 200 kgs more than the opening stock. 3. Actual wage rate paid during the month was Rs. 3.40 per hour. 4. All overheads are absorbed into production costs on the basis of standard hours

produced using the following rates: Fixed overheads Rs. 5.00 per standard hour Variable overheads Rs. 0.50 per standard hour 5. There was no opening or closing work-in-progress.

6. The following actual costs for December 2005 have been incurred: Rupees Materials used 199,920 Wages incurred 142,800 Variable overheads 20,000 Fixed overheads 189,000 7. Actual production of finished goods during December 2005 was 4,865 units. Required: Prepare a standard cost sheet. (14) Q.4 Sammar Textile is involved in the production and sales of ready-made garments.

The marketing department has prepared the following sales budget (in units) for the half year ending December 31: July 10,000 October 16,000 August 10,000 November 20,000 September 11,000 December 25,000

It is the firm’s policy to have two months supply of finished product on hand. The

Production Manager is not happy with this policy which makes the product expensive due to variation in production levels. His prudent estimate is that the variable manufacturing cost increases by Rs. 20 per unit for production in excess of 18,000 units per month.

The Finance Manager agrees with the Production Manager on this point. His

workings show that it costs the firm Rs. 5 per unit per month in ending inventory on account of insurance, financing and handling costs, which are all variable costs.

Both the Managers however agree that the firm should have an inventory level of

45,000 units at the end of October. Production Manager feels that the required production should be spread evenly over the period of four months. The inventory level on July 1 is 20,000 units.

Required: Prepare detailed working to conclude whether the company should change the

production policy as suggested by the Finance and Production Managers. (12)

(4) Q.5 Windmills Ltd. operates a large hotel. The facilities also include a restaurant and a

Banquet Hall. The season at this location lasts for 120 days from February to May each year. The hotel has a capacity of 100 double rooms for which a rent of Rs. 11,000 per room per day exclusive of all taxes is charged irrespective of the fact whether the room is occupied as single or double. The average number of rooms let per day is 90 throughout the season. The company has obtained a term loan of Rs.50,000,000 from a bank on which markup @ 10% p.a. is charged. Banquet Hall is run by the name of Marry Inn Banquet and is mostly used for weddings and other functions. The sales of the restaurant and banquet hall vary in direct proportion to the number of rooms occupied. Variable costs of Banquet Hall and Restaurant vary in direct proportion to sales while those of hotel vary in direct proportion to the number of rooms occupied.

The following Income Statement has been prepared by the Financial Controller of

Windmills Ltd. for the year ended 31 May 2006:

Banquet Hall Restaurant Accommodation Total

Rs.000 Rs.000 Rs.000 Rs.000 Sales 23,000 34,600 118,800 176,400 Cost of goods sold 12,650 20,760 - 33,410 Consumable stores 1,150 5,190 9,225 15,565 Variable costs 13,800 25,950 9,225 48,975 Salaries 1,380 10,380 22,675 34,435 Financial Costs - - 5,000 5,000 Insurance 1,150 1,384 13,837 16,371 Depreciation 920 2,076 23,063 26,059 Others 230 346 1,845 2,421 Fixed costs 3,680 14,186 66,420 84,286 Total Costs 17,480 40,136 75,645 133,261 Profit/(loss) 5,520 (5,536) 43,155 43,139

Salaries are for the season except for a security guard who is paid Rs. 54,000 p.a.,

wholly chargeable to the hotel. The directors are worried about the low profitability and the loss on Restaurant activities. They have set a target that the total annual profit next year should be Rs. 70.0 million.

The company is considering to keep all the facilities open for an additional 120

days. There will be no change in the room rate of Rs. 11,000 per day but average room lettings will fall to 10 per day during the additional 120 days period.

Another company Florence Ltd., has made an offer to Windmills Ltd., to buy upto

50 rooms at Rs. 7,000 per room per day subject to the condition that the contract will be for the 240 days period. During the additional period all the rooms let to Florence Ltd., will be in addition to the 10 average room lettings per day achieved by Windmills Ltd., itself. However during the season of 120 days any lettings to Florence Ltd., in excess of 10 will be in substitution for those achieved by the company. During the additional 120 days period, banquet hall will be used as a gift shop and for organizing exhibitions, incurring conversion costs of Rs. 500,000 in February and Rs. 500,000 in May. The ratio of sales in shop and restaurant and variable costs of the hotel will continue to vary in direct proportion to the number of rooms let. The variable costs in shop and restaurant will continue to vary in direct proportion to sales.

(5) Required: Assuming that the company accepts the offer by Florence Limited:

(a) Prepare a budgeted contribution statement for the year ending 31 May 2007. (b) Calculate the additional number of rooms per day that should be sold by the

company during the additional season of 120 days to achieve the target profit of Rs. 70,000,000.

(c) Give brief suggestions in respect of the restaurant which is incurring losses. (20) Q.6 Quick Limited (QL) traditionally follows a highly aggressive working capital policy

with no long-term borrowing. Following are the key details from its recently compiled accounts: Rs. in millions Sales (all on credit) 10.00 Earnings before interest and tax 2.00 Interest payments for the year 0.50 Shareholders’ funds (comprising Rs. 1.0 M issued share capital, face value Rs. 10 per share and Rs. 1.0 M revenue reserve) 2.00 Debtors 0.40 Stocks 0.70 Trade creditors 1.50 Bank overdraft 3.00

A major supplier whose supplies are 50% of QL’s cost of sales, is highly concerned

about QL’s policy of taking extended credit. The supplier offers QL the opportunity to pay for supplies within 15 days in return for a discount of 5% on the invoiced value. QL holds no cash balances but can obtain sufficient overdraft limit from its bank at 12%. Tax on corporate profit is 33%.

Required: (i) Determine the costs and benefits to QL of this arrangement with its supplier and

recommend whether QL should accept the offer taking in view the effects on: − The working capital cycle;

− Interest cover; − Profits after tax; − Earnings per share; − Return on equity; − Capital gearing.

(ii) Discuss the dangers of over-reliance on trade credit as a source of finance. (12)

Q.7 Discuss and explain the objectives which just-in-time (JIT) system seeks to achieve. (06) Q.8 Ritz Limited manufactures washing machines. It is investigating whether or not to

accept a one-year contract to make a new model for Sahara Limited. The price being offered is Rs. 4,200 per machine for all the machines it can produce during the year.

(6) The following estimates have been made:

Rupees − Materials - 3,000 per unit − Direct Labour - 600 per hour − Variable overheads - 200 per labour hour

To manufacture this newly designed machine, an additional machine costing

Rs. 640,000 would have to be bought at the start of the contract. The factory manager knows from experience of similar machines that there will be a learning effect for labour. He estimates that the learning rate will be 90%. Further skilled labour is not available. The cost of material includes wastage of 5% of material actually used in the machine. When the labour becomes skilled, wastage is expected to reduce to 4% and 3% after production of 1,000 and 2,000 units respectively. Thereafter it shall remain fixed at 3%. The factory manager estimates that the first batch of 500 units will take 800 hours to produce and that the available labour can produce 4,000 units in the year. Fixed cost of Rs. 2,500,000 will be payable each year, whether any production is carried out or not.

Required: (a) Prepare appropriate workings to show whether the contract should be accepted

under each of the following assumptions: (i) The company does not have any other contract in hand. (ii) It has another contract on which it can earn Rs. 200,000 during the year.

(b) What are the limitations of learning curve theory? (12)

(THE END)

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