MAC QP All

Management Accounting
Final Examination
Summer 2014
Module F
Q.1
2 June 2014
100 marks - 3 hours
Additional reading time - 15 minutes
(a)
Briefly discuss any four criticisms on standard costing system.
(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.
(04)
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)
Q.2
Page 2 of 4
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 managements 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:
Production capacity
Existing demand (outside customers)
Maximum demand (outside customers)
Current selling price per unit (outside customers)
Variable cost per unit
Units
Units
Units
Rs.
Rs.
Division A Division B
1,500
1,500
300
900
600
1,800
44,000
84,000
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
Page 3 of 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.
SELs 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)
(v)
(vi)
(vii)
(viii)
Cost of production would be Rs. 5 per unit plus fixed costs of Rs. 50 million per
annum (excluding depreciation).
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.
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.
Surplus funds can be placed with banks at 10% per annum while local borrowing is
available at 14% per annum.
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:
Selling price
Material cost
Variable manufacturing costs (other than labour and machine cost)
Applied fixed overheads
Machine hours
Labour hours
Rs.
Rs.
Rs.
Rs.
Alpha
6,800
3,500
380
250
5
3
Beta
5,800
2,600
340
180
4
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.
Page 4 of 4
Required:
(a)
Determine the optimal production plan for the next year which maximizes the profit
of the company.
(b)
Compute the shadow prices of scarce resources assuming that maximum demand
remains constant.
Q.6
(13)
(04)
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:
Monthly production capacity in 2 shifts (Sheets)

Number of workers per shift
Actual capacity utilization of 2 shifts
Existing net realizable value of machines (Rs.)
Monthly fixed costs
Depreciation
Labour
Rent
Machine-1
4,500,000
45
80%
14,280,000
Machine-2
5,500,000
35
85%
22,950,000
Amount in Rs.
340,000
425,000
1,354,500
1,172,500
330,000
350,000
Machine-3
7,000,000
54
90%
54,000,000
750,000
1,971,000
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 companys required rate of return on capital is 15%.
Required:
Prepare calculation to show which machine is the most feasible to dispose of.
(THE END)
(15)
Final Examination
Winter 2013
Module F
Q.1
3 December 2013
100 marks 3 hours
Additional reading time 15 minutes
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:
Component Y
Other raw materials
Labour
Variable overheads
Rupees
600,000
50,000
50,000
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)
0
10
20
30
Probability of occurrence
90%
5%
3%
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.
(b) Safety stock of component Y that should be in hand when the next order is placed, so
as to maximize the profit.
Q.2
(04)
(10)
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
Page 2 of 4
Taj Limited deals in production and marketing of fast moving consumer goods. Its financial
statements for the latest year depict the following position:
Revenue and expenses

Sales revenue
Cost of goods sold
Gross profit
Selling expenses
Common expenses
Segment profit/(loss)
Assets
Fixed assets at book value
Stock in trade
Trade debts
Unallocated assets
Total assets
Personal
Tea
Total
Detergents
care
-------------------Rs. in million------------------22,040
8,420
4,160
34,620
(14,909)
(6,044)
(3,226)
(24,179)
7,131
2,376
934
10,441
(1,519)
(602)
(604)
(2,725)
(2,655)
(1,014)
(501)
(4,170)
2,957
760
(171)
3,546
21,450
1,864
2,436
-
8,630
556
670
-
3,420
432
575
-
33,500
2,852
3,681
4,356
44,389
22,624
2,720
25,344
9,500
2,555
3,570
3,420
44,389
Equity and liabilities

Share capital
Revaluation surplus
1,546
10% long term loan

Trade creditors
Short term borrowings
Other liabilities
1,670
-
542
632
-
520
-
365
-
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.
Page 3 of 4
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
Material (100 kg @ Rs. 8 per kg)
Direct labour (10 hours per unit @ Rs. 250 per hour)
Variable overheads (60% of direct labour)
Fixed overheads allocated costs
specific costs
Cost per unit (Rs.)

800
2,500
1,500
200
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
Page 4 of 4
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:
Sales
Cost of goods sold
Material
Labour
Manufacturing overheads
Gross profit
Selling expenses (60% variable)
Administration expenses (100% fixed)
Net profit before tax
Rs. in million
3,400
(1,493)
(367)
(635)
905
(287)
(105)
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 201314 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 201314, 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
Less than 35,000
35,000 40,000
40,000 50,000
Above
50,000
Commission % on total sale

1.00%
1.25%
1.50%
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 201314.
(THE END)
(20)
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Final Examination
Summer 2013
Module F
Q.1
4 June 2013
100 marks 3 hours
ABC Limited deals in manufacturing of consumer goods. The management is concerned

about the companys 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)
500
Income tax @ 35%
(175)
Net profit after tax
325
Assets
Non current assets
Current assets
Trade debtors
Stock in trade
Other current assets
BALANCE SHEET
Rs. in million
Equity and liabilities
Rs. in million
10,560 Share capital and reserves
2,370
13.5% TFCs
7,630
2,590
Current liabilities
1,530
Short term loans
3,510
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.
(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)
Q.2
Page 2 of 4
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
Printing and lamination film
Ink
Chemical
Glue
Price per kg
(Rs.)
260
180
150
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.
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
Demand (units)
Probability
Working capital required (Rs.)
Low
7,000,000
0.50
50,000,000
Moderate
8,000,000
0.30
56,500,000
High
9,000,000
0.20
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
CM per unit (Rs.)
Probability
US$1 = Rs. 100

12
0.35
US$1 = Rs. 105

11
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 companys required rate of return on
equity is 20%.
(17)
Q.4
Page 3 of 4
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)
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:
Total variable and fixed overhead expenses for product A

Increase in fixed cost of product A
Plant shut down costs for product B
Sale of A
(units)
Increase in raw material prices (both for A and B)
Rupees
3,400,000
250,000
450,000
13,000
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
Duration (in days)
12 13 14 24 25 36 46 57 68 78
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)
Page 4 of 4
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 companys 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
24,000
26,400
----------Rupees---------11,100,000
25,800,000
900
1,100
Sales (units)
Average operating assets
Selling price per unit
Cost per unit
Material
Labour
Variable overheads
Fixed overheads
300
250
150
100
375
225
175
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 Easts
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
P
Q
R
Loss
Yield
Kg
1,680
1,650
870
4,200
552
3,648
Price per kg (Rs.)

42.50
28.00
64.00
Rupees
71,400
46,200
55,680
173,280
Kg
15
12
8
35
3
32
Price per kg (Rs.)

40
30
60
Rupees
600
360
480
1,440
Standard costs/yield per batch:

Materials
P
Q
R
Less: Standard loss
Standard yield
Required:
Calculate the following material variances:
(i)
price
(ii)
usage
(iii)
(THE END)
mix
(iv)
yield
(07)
The Institute of Chartered Accountants of Pakistan

Final Examination
Winter 2012
Module F
Q.1
4 December 2012
100 marks - 3 hours
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
(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)
SGLs paid-up share capital is Rs. 80 million. Dividend is estimated as under:
2012
2013
Final dividend of 20% cash and 10% bonus shares.

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)
(b)
Page 2 of 4
Briefly describe three areas where the learning curve can effectively be used by a
manufacturing concern.
(03)
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%
0.322
85%
0.235
90%
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.
Q.3
(12)
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 RCLs 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
Page 3 of 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)
(ii)
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.
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.
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:
Selling price per kg
Expected annual demand
Expected annual demand
Gamma
Rs.
300
kg
150,000
Gamma-plus
Rs.
960
kg
70,000
375
100,000
450
50,000
1,080
50,000
1,200
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.
(13)
Page 4 of 4
Required:
(a)
Determine the strategy to be adopted for maximisation of profit of the company.
(b)
Compute the increase/decrease in the bonus amounts on account of the revision in
the companys policy, if any.
Q.6
(a)
(b)
Explain the difference between fixed overhead variances calculated under the
absorption costing as compared to marginal costing.
(10)
(10)
(03)
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:
Direct material
Direct labour
Overheads (fixed and variable)
8 kg @ Rs. 500
10 hours @ Rs. 80
10 hours @ Rs. 50
Rs. per unit

4,000
800
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
Direct labour cost
Overheads (fixed and variable)
Units put into process
Units lost in process (normal loss)
The position of inventories was as under:
1 November 2012
Raw material
4,000 kg
Units in process
100 units (60% converted)
Finished goods
200 units
Rs. 24.30 million

Rs. 5.28 million
Rs. 3.50 million
6,300 units
250 units
30 November 2012
5,000 kg
150 units (80% converted)
800 units
APL uses FIFO method for valuing the output from the process. Losses occur at the
end of the process.
(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.
(The End)
(20)
Final Examination
Summer 2012
Module F
Q.1
5 June 2012
100 marks 3 hours
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:
Direct wages per hour

Factory overhead rate per labour hour
Annual fixed overheads
Department A Department B
------------Rupees-----------120
90
145
105
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.)
Demand in units
190
18,000
200
15,000
210
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 HCLs 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
Page 2 of 4
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)
Cost of sales includes fixed costs of Rs. 135 million. Fixed costs have been allocated to the
(i)
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
Annual demand
(Rs.)
(Units in 000)
650
200
700
160
750
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
Machine hours per unit
Total cost per unit (Rs.)
Alpha
2.00
590.00
Beta
3.50
735.00
New
facility
Gamma
2.40
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.
(b) Determine minimum transfer price of the component Beta.
Q.5
Page 3 of 4
(17 marks)
(03 marks)
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 companys 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
3,000,000
2,500,000
1,500,000
2,000,000
1,000,000
1,600,000
5,000,000
16,600,000
Direct wages (30,000 labour hours)

Machines operating expenses (50,000 machine hours)
Maintenance expenses
Technical staff expenses
Expenses of procurement
Expenses of finished goods stores and dispatch
Administration and selling expenses
Total
(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
Procurement
Finished goods stores and dispatch
Quality control
(iv)
(v)
(vi)
70%
5%
15%
10%
It is estimated that Technical staff devotes 50% of its time to maintenance, 30% to production,
8% to quality control and 12% to procurement.
Quality inspection is carried out at the commencement and completion of each batch.
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:
No. of units produced and sold

Batch size (no. of units)
Machine hours per batch
Direct labour hours worked
Direct material costs (Rs.)
Average size of a purchase order (Rs.)
No. of sales orders delivered
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.
LV
10,000
400
200
1,000
850,000
170,000
8
MV
12,000
500
150
1,500
900,000
150,000
10
(20 marks)
Q.6
Page 4 of 4
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:

Monthly average cash and credit sales are Rs. 20 million and Rs.100 million respectively.
ZTL allows a discount of 1% on the invoices which are settled in one month.
26% customers avail the discount, 34% pay in two months and 30% pay in three months.
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.
1% of the amount comprises of small balances and is written off.
(v)
(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.
(i)
(ii)
(iii)
(iv)
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
Winter 2011
Module F
Q.1
10 December 2011
100 marks - 3 hours
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
Less: Material
Labour (including idle labour)
Factory overheads
Gross profit
Less: Admin expenses
Selling and distribution expenses
Net profit
350,000
234,500
28,650
57,000
8,000
15,000
320,150
29,850
23,000
6,850
The existing production requires 22,500 and 36,000 labour hours of skilled and unskilled labour per
month respectively. The companys 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
Page 2 of 4
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
Selling price
Material costs
Direct labour costs (Rs. 100 per hour)
Overheads
YA
ZA
Rupees
200,000
300,000
475,000
39,500
54,000
78,000
80,000
100,000
150,000
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
Sales revenue
Material costs
Labour costs (120,000 labour hours)
Overheads
Profit
(v)
Actual
Rupees
29,900,000
37,425,000
(5,442,000)
(6,931,920)
(10,600,000)
(12,887,700)
(13,250,000)
(16,882,900)
722,480
608,000
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.
Q.3
(16 marks)
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)
(ii)
The customer will provide 25% mobilization advance in January 2012.

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
Page 3 of 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:
Sales (24,960 units)
Material
Labour
Warranty costs
Factory overheads
Cost of goods manufactured
Opening inventory
Closing inventory
Gross profit
Rs. in 000
1,560,000
834,400
138,600
998
193,502
1,167,500
126,000
(167,500)
1,126,000
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 consultants suggestions and give your recommendations for the next year.
(23 marks)
Q.5
Page 4 of 4
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
2,000
53,000
Opening work in process

Units received from department 1
Cost added by department 2
Materials
Direct labour
Production overheads
Units transferred to department 3
Closing work in process
Defective units
Rs.
128,750
2,057,500
988,000
488,000
244,000
48,000
5,000
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:
Materials
Labour and production overheads
Work in process
Opening
Closing
80%
70%
60%
50%
Required:
Prepare process account of department 2 for the month of November 2011.
Q.6
(13 marks)
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:
Direct material
3 hours of semi skilled labour
20 hours of skilled labour
Fixed overhead absorbed (per labour hour)
Variable overheads
Direct labour
Department
A
B
Rupees
3,350
720
4,000
40
15
25% of direct labour cost
Based on the data available with the company, an 80% learning curve is applicable to the companys
skilled labour. Extract from 80% learning curve table are as follows:
X
Y%
1.0
100
1.1
97.0
1.2
94.3
1.3
91.7
1.4
89.5
1.5
87.6
1.6
86.1
1.7
84.4
1.8
83.0
1.9
81.5
2.0
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
Module F Summer 2011
Q.1
June 7, 2011
100 marks 3 hours
Reading time 15 minutes
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:
Sales
Material consumed
Direct labour
Budget
Actual
------Rupees-----8,250,000
8,745,000
3,900,000
4,464,460
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)
Q.2
Comment on the adverse variances giving possible reasons for the same and your suggestions
to the management, if any.
(20 marks)
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:
Material
Labour cost
Variable overheads
Fixed overheads
Depreciation
Rupees
80
30
10
20
10
150
ManagementAccounting
Page2 of4
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:
Production units
Sales units
Year 1
15,000
14,000
Year 2
20,000
18,000
Other related estimates are given below:

Stock of raw material
Stock of finished goods
Debtors
Creditors for supply of material
Creditors for variable and fixed overheads
Bad debts
3 months average consumption

To be valued at average cost on the basis of
absorption costing
1 months sales
2 months average purchases
1 months average
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
companys 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
Burger
Fries
Cold drink
Ice-cream
Sale price
(Rs.)
150
50
40
80
Quantity wise
sales ratio
6
7
8
3
Contribution margin
as % of sale price
40
45
50
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
Page3 of4
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
April to July
August and September
single machine at 80% capacity

two machines at 90% capacity
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:
Operational costs
Labour
Miscellaneous related costs
Rupees per month

1,500,000
250,000
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
FML Pakistan
LMN China
PQR Singapore
Price
Freight-in
--------Rupees per unit-------287.50
2.00
265.00
9.00
280.00
5.00
Maximum supplies as per

agreement
1.60 million
2.00 million
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.
Page4 of4
Other relevant details are as follows:

Annual capacity net of process losses
Normal process loss
Scrap value of units rejected after processing
Time required for each unit of output
Wage rate
Variable overheads
Department A
5 million units
10% of input
Rs. 75 per unit
18 minutes
Rs. 200/hour
60% of labour cost
Department B
4 million units
5% of output
Rs. 125 per unit
12 minutes
Rs. 250/hour
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:
Table
Chair
Available hours
Machine hours
1.00
0.50
715
Labour hours
1.50
2.00
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:
Material
Variable overheads other than direct labour and machine costs
Applied fixed overhead
Table
Chair
----Rupees---1,000
300
200
50
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)
(ii)
at least 100 tables; and

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
Module F
Q.1
December 7, 2010
100 marks - 3 hours
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:
C&F value of each electronic kit
Estimated cost of import related expenses, duties etc.
Variable cost of local value addition for each set
Variable selling and admin expenses per set
Annual fixed production expenses
Annual fixed selling and admin expenses
Rupees
9,500
900
3,500
900
12,000,000
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)
(ii)
(iii)
(iv)
The company sells to distributors at cost of production plus 25% mark-up.

Distributors sell to wholesalers at 10% margin.
Wholesalers sell to retailers at 4% margin.
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)
(ii)
(iii)
(iv)
(v)
Reduce the existing supply chain by eliminating the distributors and wholesalers.
Reduce the retail price by 5%.
Offer sales commission to retailers at 15% of retail price.
Provide after sales services.
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
Page2of4
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
Material
Direct labour
Variable overheads (25% of direct labour)
Cost per
100-unit lot (Rs.)
30,000
20,000
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.)
650
550
Demand in
units
45,000
70,000
Required:
Determine which of the above price the company should charge for the next year ending
(16 marks)
November 30, 2011. It is given that b = log (0.9) / log (2) = 0.152.
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
900
1,000
1,100
1,200
Probability
0.30
0.45
0.20
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
Page3of4
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.
Division A
2,450,000
(1,580,000)
870,000
(390,000)
480,000
(34,600)
(243,000)
202,400
Sales
Divisional manufacturing costs
Divisional operating costs
Divisional profit
Financial charges
Apportioned head office cost
Net Profit
Rs in 000
Division B
860,000
(575,000)
285,000
(170,000)
115,000
(20,500)
(45,600)
48,900
The values of assets and liabilities on November 30, 2010 are as follows:
Non current assets

Current assets
Head Office
120,000
23,000
143,000
Long term borrowings

Current liabilities
45,000
45,000
Division A
2,082,500
350,600
2,433,100
Rs in 000
Division B
516,000
127,000
643,000
275,000
638,000
913,000
165,000
234,600
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
companys 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
Page4of4
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
25
40
75
55
80
50
57
32
Material A
Material B
Material C
Material D
Direct Labour
Variable overheads
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.
(THE END)
(25 marks)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations
Summer 2010
June 8, 2010
MANAGEMENT ACCOUNTING
Q.1
(MARKS 100)
(3 hours)
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:
Men
Women
No. of units
1,200,000
500,000
Retail price range

Rs. 1,000 4,000
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.
Q.2
(16)
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:
Car type
X
Y
Production hours per unit

Departments
Assembly
Finishing
120
80
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
9,300
The following additional information is available:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
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%.
80% of the expenses forming part of cost of goods sold are variable. These are to be
paid one month in arrears.
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.
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.
50% of the fixed costs would be paid immediately when incurred while the remaining
50% would be paid 15 days in arrears.
The management has decided to maintain finished goods stock of 1,000 units.
Required:
Calculate the cash requirements for the first two quarters.
Q.4
(17)
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
Sales
Variable costs
Fixed overheads
Gross profit
Selling and admin expenses:
Sales commission
Depreciation on assets
Fixed administrative costs
Net operating income
Finance costs (80% is fixed)
Net profit
Rs. in 000
80,000
44,800
6,500
51,300
28,700
8,000
700
2,200
10,900
17,800
750
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:
Salaries Sales Manager
Sales persons
Advertising
Travel for promotion
Training costs
Rs. in 000
1,200
2,400
1,600
1,200
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.
Q.5
(13)
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
Output
(No. of units)
1,500
3,000
3,500
4,000
5,000
Lahore
Cost excluding
Revenue
Total Cost
Revenue
XPY
-------------------------------Rupees------------------------------1,275,000
870,000
1,800,000
535,000
2,475,000
1,680,000
3,480,000
985,000
2,800,000
1,950,000
3,920,000
1,135,000
3,100,000
2,220,000
4,320,000
1,285,000
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.
(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?
(THE END)
(17)
(05)

December 8, 2009
Q.1
(MARKS 100)
(3 hours)
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
companys working capital requirement:
(i)
(ii)
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.
The variable cost per ton of finished product would be Rs. 2,500 made up as under:
Raw materials
Consumables and spares
Other processing costs
62.4%
12.0%
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
companys 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
companys 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 companys 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 companys 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.
Q.3
(16)
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
A
B
C
Standard Price
per kg (Rs.)
6.40
4.85
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
A
B
C
Qty (kgs)
1,014,200
754,000
228,000
Value under FIFO

method (Rs.)
6,744,430
3,883,100
1,390,800
% of ending inventory to
material quantity consumed
11
13
08
Required:
Calculate material price, usage, mix and yield variances.
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.
(18)
(3)
The average cost of the final product excluding the cost of component C is as follows:
Rupees
420
180
120
720
Material (excluding the cost of the component C)

Labour (3 hours @ Rs 60 per hour)
Overheads (Rs. 40 per hour based on labour hours)
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.
Q.5
(18)
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 companys 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:
Selling Price
Less: Cost of production
Material
Labour (34 hours per unit)
Overheads (60% variable)
Gross Profit
(iv)
(v)
(vi)
Rupees
40,000
24,000
3,400
2,800
30,200
9,800
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.
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%.
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
500 grams
1 kg
2 kg
Cost per unit

30
40
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.
(THE END)
(17)

Final Examinations
Summer 2009
June 2, 2009
Q.1
(MARKS 100)
(3 hours)
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
Variable cost (40% is direct labour)
Fixed cost for the year (including depreciation @ 10%)
Cost of raw material per kg
Raw material consumption per unit of finished product
504,000 units @ Rs. 430

Rs. 300 per unit
Rs. 25,000,000
Rs. 56.25
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)
(ii)
(iii)
(iv)
(v)
(vi)
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.
A new machine will have to be purchased for Rs. 1.2 million.
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.
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.
Variable factory overhead cost per unit of LGV would be 10% lower than HGV.
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 ---------27,000,000
27,295,000
Sales
Variable costs:
Raw Material
Labour
Variable overheads
Contribution
(7,500,000)
(9,375,000)
(3,000,000)
7,125,000
(8,461,450)
(9,463,125)
(2,974,125)
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.
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
December 2008
January 2009
February 2009
March 2009
April 2009
May 2009
Cost of supplies
(Rs. 000)
1,665
1,804
1,717
1,735
1,597
1,802
Occupancy
ratio (%)
90
93
98
94
86
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.
Q.4
(18)
(08)
SMD Corporation has commenced a project with the following time schedule:
Activity
01
12
13
24
25
34
36
47
57
67
Duration
in days
10
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 companys 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 companys
budget for the next year contains the following projections:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
Two types of raw materials i.e. A and B will be used in the ratio of 70:30.
The cost of raw materials would be Rs. 32 and Rs. 10 per kg respectively.
Wastage is projected at 8% of input quantity.
Labour rate has been projected at Rs. 400 for 8 working hours / day.
One labour hour is estimated to be consumed for 4 kgs of finished products.
Variable overheads have been budgeted at Rs. 5 per kg of input.
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.
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 companys 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.
(15)
(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.
Q.7
(12)
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:
Production Support
Others
Total cost
Factory overheads
1,225,000
175,000
1,400,000
(Rs.)
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
Set up costs
Production control
Quality control
Materials management
Total
Rupees
428,750
245,000
183,750
367,500
1,225,000
The planning department has gathered the relevant information which is given below:
Direct
labour
Production
Products
in units
hours per
unit
Product X
10,000
2.5
Product Y
2,000
5.0
Product Z
50,000
2.8
Batch
size
(units)
Machine
hours
per unit
125
50
10,000
7.50
10.00
3.00
Inspections
hours per
unit
0.2
0.5
0.1
No. of
Material
requisitions
raised
320
400
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.
(The End)
(18)

December 2, 2008
Q.1
(MARKS 100)
(3 hours)
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:
Direct material
Direct labour
Variable overheads
Fixed overheads
Rs. in 000
83,490
14,256
10,890
17,490
As compared to the previous year, the costs per units have increased as follows:
Direct material
Direct labour
Variable overheads
Fixed overheads
10%
8%
10%
6%
The selling and administration costs for the year were :

Variable cost per unit sold
Fixed costs
Rupees
1,600
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.
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%.
Annual profit before depreciation and financial charges
Life of the assets
Deprecation method
Rs. 150 million

10 years
Straight line
(20)
(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.
Q.3
(08)
(02)
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:
Per hour capacity
Plant cost including installation
Natural gas consumption
Electricity consumption
Water consumption
Normal evaporation losses
Annual operating capacity
Life of plant
MODEL A
80 kgs
Rs. 660 million
0.5 MMBTU / kg
2 KWH/ kg
5 gallons / kg
15% of the input
7,500 hours
20 years
MODEL Z
100 kgs
Rs. 750 million
0.4 MMBTU / kg
1.5 KWH / kg
4 gallons / kg
10% of the final production
7,500 hours
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
900
400
12
80
2
Sale value per kg

Cost of raw material per kg
Electricity per KWH
Natural gas per MMBTU
Water per gallon
(ii)
Other expenses at a capacity of 600 tons are as under:
Direct labour
Other production overheads (60% variable)
Selling and administration (40% variable)
Model A
Model Z
Rupees in million
30.0
33.0
60.0
70.0
35.0
45.0
Production overheads include depreciation charged on straight line basis.

(iii)
(iv)
(v)
(vi)
Working capital requirements are estimated at 20% of annual sales.

Debt equity ratio of 60:40 will be maintained by the company.
Financial charges would be 12%.
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 companys cost of funds is 16%.
Required:
Calculate the effect of the proposed credit policy on the profitability of the company.
(b)
(10)
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.
Q.5
(05)
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:
Direct materials
Direct labour including overtime
Special tools (Re-usable) costing
Variable overheads (per labour hour)
Fixed overheads (per week)
Rupees
400,000
800,000
50,000
500
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
Sales
Production costs:
Raw materials
Direct labour
Overheads
Gross profit
Selling and administration expenses
No. of units sold

Labour hours required per unit
2,310,000
777,600
630,000
A
5400
5
Rupees
5,522,400
3,717,600
1,804,800
800,000
1,004,800
B
3600
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.
(THE END)
(22)

Final Examinations
Summer 2008
June 3, 2008
Q.1
(MARKS 100)
(3 hours)
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:
Direct materials per unit Rs.
Direct labour per unit Rs.
Variable overheads per unit Rs.
Selling price per unit Rs.
Production per machine hour
X
300
180
160
900
8
Y
700
150
180
1,200
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.
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)
(ii)
(iii)
(iv)
The sales will increase by 25% over the previous years 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.
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.
Export proceeds will be recovered on an average of 30 days.
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 months
consumption of the previous year and are expected to follow the same trend.
(14)
(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 months 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.
Q.3
(a)
(15)
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 companys research analysts have developed the following estimates:
(i)
(ii)
(iii)
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.
If the company decides to carry out the research there is a 60% probability
that it will find the product feasible.
If the product is found feasible the chances of profitability are as follows:
Profit of Rs. 2.8 billion
Profit of Rs. 800 million
(iv)
70%
30%
If the product is not found feasible the profitability estimates are as follows:
Profit of Rs. 700 million
Loss of Rs. 400 million
20%
80%
Required:
(a)
Draw a decision tree to depict the above possibilities.
(b)
Determine whether the company should carry out the research or not.
(b)
(07)
(03)
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:

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

X
Y
Z
No. of kgs
5
10
15
Standard Cost
3.00
2.00
1.80
Total Cost
15.00
20.00
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.
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.
(20)
(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
Activity 1
Activity 2
Manufacturing
Customer Service
Activity 3
Activity 4
Order Processing
Warehousing
Direct labour hours

No. of days to
complete the order
Number of orders
Cost of Direct material
Budgeted Activity
level
72,000 hours
120 order days
20 orders
Direct materials usage
of Rs. 40 million
The budgeted costs for the period are given below:

Description
Direct material
Direct labour
Indirect labour
Other manufacturing overheads
Quality control
Administrative salaries
Transportation
Amount (Rs.)
40,000,000
18,000,000
7,200,000
9,000,000
1,500,000
3,000,000
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:
Indirect labour
Machine-related Costs
Quality control
Transportation
Administrative salaries
Activity Activity
1
2
60%
20%
95%
NIL
60%
40%
10%
70%
NIL
NIL
Activity Activity
Not
3
4
allocated
NIL
20%
NIL
NIL
05%
NIL
NIL
NIL
NIL
NIL
20%
NIL
20%
25%
55%
Total
100%
100%
100%
100%
100%
The data related to the order placed by KSL is as under:

Estimated direct material cost (Rs.)
Direct labour (hours)
No. of days to complete the order
3,000,000
6,000
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.
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%.
(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 KLs 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?
(THE END)
(17)
(03)

December 4, 2007
Q.1
(MARKS 100)
(3 hours)
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:
Budgeted production kgs
Joint costs
Separate processing costs
Fixed costs
Evaporation loss in the second process
Product A
9,000
264,000
80,000
16,000
10%
60
Product B
17,000
207,000
120,000
24,000
15%
25
Product C
1,920
9,000
10,000
1,000
4%
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.
(b) Describe any other matters which may be relevant in making the above decision.
Q.2
(11)
(02)
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:
Contribution margin per unit Rs.
X
160
Z
360
Production hours per unit

Department A
Department B
20
10
32
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:
Estimated industry sales

Divisional sales
Variable costs
Fixed direct costs
Allocated head office costs
Total costs
Net income
Assets employed
Liabilities
Net investment
Division C
Division E
2005
2006
2007
2005
2006
2007
-------------------Rupees in thousands------------------14,000 17,000 18,000
8,000 10,000 11,000
1,200
1,300
1,400
550
700
900
550
580
620
260
300
350
480
500
520
200
230
260
125
175
200
70
140
185
1,155
1,255
1,340
530
670
795
45
45
60
20
30
105
400
120
280
420
125
295
440
135
305
230
60
170
370
120
250
800
200
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.
(b) What additional measures may be relevant for evaluating the divisional
performance?
(c) Which GM would you recommend for the position of Chief Operating Officer?
Give reasons to support your recommendation.
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.
(05)
(03)
(04)
(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 companys 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.
Q.5
(14)
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 per unit

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

Direct labour per machine hour
Variable production overheads (inclusive of testing
cost)
Fixed overheads per week
Rs. 1,000
50% of direct labour
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 subcontract 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
A
B
C
2400
2000
1150
5550
Labour:
Hours
Department X
Department Y
500
360
Price per Kg
Rs.
7.70
25.60
62.40
Rate per hour

Rs.
52
40
Total
Rs.
18,480
51,200
71,760
141,440
26,000
14,400
40,400
Standard costs per batch as determined by the Technical Department are given below:
Materials
Kg
A
B
C
Less: Standard loss
Standard yield
17.0
11.5
8.5
37
1
36
Labour:
Hours
Department X
Department Y
4
2
Price
per Kg (Rs.)
6
26
60
Total
(Rs.)
102
299
510
911
Rate
per hour (Rs.)
50
36
Total
(Rs.)
200
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.
(THE END)
(24)

Final Examinations
Summer 2007
June 5, 2007
Q. 1
(MARKS 100)
(3 hours)
One of the machines belonging to Aladin and Company was damaged due to fire. All of
the companys 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 companys technical manager has prepared the following estimate for repairing the
existing machine:
Material at cost plus sales tax

Labour:
Department A 400 man hours @ Rs 60
Department B 600 man hours @ Rs 50
50% salary of the supervisor
Factory overheads 60% of direct labour
Total
Rupees
690,000
24,000
30,000
20,000
32,400
796,400
The following information is also available:

Notes:
(1)
The repair material is also available in stores. Its cost in the companys 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)
Companys 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 companys 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
Average price (Rs)
Ratio of quantities sold
X
40,000
6
Y
48,000
2
Z
60,000
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:

Product
X
Y
Z
Purchase price (Rs)
Components
A
B
C
2
3
5
3
3
2
4
6
3
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:

X
120
Products
Y
70
Z
100
A
400
Components
B
300
C
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:
Cost per unit:

Direct material (Rs)
Direct labour @ Rs 22 per hour
Factory overhead
Total cost
Other data:
Output
Batch size
Inspection time per batch - hours
No. of purchase orders raised
348
286
240
874
256
308
400
964
425
220
360
1,005
490
440
300
1,230
2,000
80
20
10
1,500
50
30
6
1,000
50
30
8
1,800
60
20
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
Salaries of time keeping department
Salaries of cleaners and maintenance staff
60%
20%
20%
100%
Required:
Calculate the cost per unit under ABC costing method.
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.
(15)
(4 )
(b)
(c)
Q.5
CHK has offered a discount of 1% if the quantity ordered is 100,000 units or more.
Should HSB accept the offer?
Compute the ordering and holding cost if HSB wants to maintain a safety stock of
20,000 units.
(15)
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:
A
B
Y
4
2
Z
3
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.
(b)
Plot the inequalities constructed in part (a) on a graph and identify the feasible
region.
(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.
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 companys 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.
(02)
(04)
(04)
(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.
(THE END)
(25)

December 5, 2006
(MARKS 100)
(3 hours)
Module F
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:
Sales
Operating profit
First Quarter
(Rs.)
750,000,000
198,750,000
Second Quarter
(Rs.)
1,125,000,000
208,650,000
Increase %
50%
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 companys operations is as under:
- actual
- budgeted
Production in units - actual
- budgeted
Ending inventory in units
Sales price per unit
Variable manufacturing cost per unit
Fixed manufacturing costs
Marketing and administrative expenses
(Rs. 1,250,000 fixed)
Sales in units
Rs.
First
Quarter
1,000,000
1,500,000
1,500,000
1,500,000
500,000
750
250
450,000,000
Second
Quarter
1,500,000
1,500,000
1,200,000
1,500,000
200,000
750
250
450,000,000
1,250,000
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.
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
PQR Tablets
PQR Syrup
PQR Injections
Production Capacity
1,000,000 tablets
50,000 bottles
100,000 injections
Sale Price (Rs. Per unit)

1.00
10.00
2.00
(12)
(2)
Raw Materials:
Item
ABC
DEG
XY
YZ
Source
Imported from a single source
Both Imported / Local
Local
Imported
Price (per unit)

Rs. 10.00
Rs. 5.00
Rs. 2.00
Rs. 0.50
Quantities Required for Production:

Material
Tablets
Syrup
Item
ABC
1 unit for 100 Tablets 1 unit for 10 bottles
DEG
1 unit for 50 Tablets
1 unit for 5 bottles
XY
-1 unit per bottle
YZ
--Packing:
Material
Item
Strips
Bottles
Spoons
Vials
Boxes
Cartons
Tablets
Syrup
10 Tab/Strip
---20 Strips / Box
10 Boxes / Carton
-1
1
-4 Bottles / Box
10 Boxes / Carton
Other direct costs are as follows:

Tablets
Syrup
Injections
Injections
1 unit for 50 injections
1 unit for 25 injections
-1 unit per injection
Price per
unit (Rs.)
-1.00
-1.00
-0.10
1
0.50
10 Injections / Box
2.00
10 Boxes / Carton
10.00
Injections
Re. 0.01 per unit

Re. 0.09 per unit
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.
Q.3
A company manufactures three products. Extracts from its standard cost data are given
below:
Material
V
W
X
Y
Z
Units of Material in Final Product

Unit cost
Product A
Product B
Rs.
55
5
4
50
3
2
35
3
60
1
80
1
1
Product C
6
5
4
-
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.
(20)
(3)
For the next four-week period, budgeted sales are:
Product
A
B
C
Sales Units
12, 000
15, 000
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:
Finished goods
Raw Materials
A
B
C
V
W
X
Y
Z
Units
1,800
2,000
1,600
20,000
30,000
15,000
5,000
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.
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:
Limestone
Other raw materials
Packing material
Direct labour
Fuel
Factory overheads (including deprecation of Rs 20)
Administrative overheads
Selling overheads
Total cost
Profit margin
Selling price
Add: Government levies (20 per cent of selling price)
Invoice price to consumers
Rupees
30
50
20
60
100
60
40
50
410
90
500
100
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.
(03)
(04)
(04)
(02)
(4)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
Work in process is equal to approximately half months production (assume

that full units of materials are required in the beginning; other conversion costs
are to be taken at 50 per cent).
Finished goods are in stock for a period of 1 month before they are sold.
Debtors are extended credit for a period of 3 months.
Average time lag in payment of wages is approximately month and that of
overheads is one month.
Average time lag in payment of government levies is 1 month.
The credit period extended by suppliers of fuel, packing materials and other
raw materials is 1 month, month and 2 months respectively.
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.
Q.5
(15)
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)
(ii)
Equipment and installation costs (payable on 1st January 2007):

Rs.
Gas
1,700,000
Oil
1,500,000
Solid Fuel
1,400,000
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:
Gas
Oil
Solid Fuel
Severe Weather (Rs.)

400,000
530,000
450,000
Mild Weather (Rs.)

240,000
370,000
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
Oil
Solid fuel
Rs. 25,000
Rs. 20,000
Rs.100,000
(per annum)
(per annum)
(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.
150,000
Sales
Standard cost:
direct materials
direct wages
overhead
Standard profit
Variances
Fav / (Adv)
Rs.
Direct materials
price
usage
total
Direct labour
rate
efficiency
total
Overhead
expenditure
volume
total
Total variance
Actual profit
-
Fav / (Adv)
Rs.
(400)
(300)
(700)
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
Labour payments
Actual factory overheads
20 tonnes
4 employees @ Rs. 42 per hour
6 employees @ Rs. 38 per hour
others at standard rate
Rs 18,000
Required:
Complete the above statement for the week ended October 31.
Q.7
(18)
With reference to the concept of Total Quality Management (TQM):

(a)
(b)
Identify and explain the categories of quality costs. Also give two examples in
each case.
How quality can be measured?
(THE END)
(08)

Final Examinations
Summer 2006
June 06, 2006
Q.1
(MARKS 100)
(3 hours)
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:
Rupees
Selling price
450
Costs
Direct material
100
Direct labour
150
Production overhead: 0.5 machine hour
50
300
The companys 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.
2.
To meet the hotel groups 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.
For the chain of super stores an increase in cost is unavoidable and the cost
structure would be:
Direct material
Direct labour
Production overhead: 0.5 machine hour
Rupees
120
150
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.
Q.2
(12)
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:
Direct material ABC
Direct material XYZ (1.5 kgs @ Rs. 5)
Direct labour (3 hours @ Rs. 23.50)
Variable factory overhead (Rs. 1.50/direct labour hour)
Fixed factory overhead (Rs. 3/direct labour hour)
Rupees
5.00
7.50
70.50
4.50
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 months 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.
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
Materials
Usage
Price
Variable overhead
Total
Rupees
4,200
9,520
(F)
(A)
540
(A)
Labour
Efficiency
Rate
Fixed overhead
Volume
Expenditure
10,780 (A)
4,200 (F)
8,220 (F)
2,620 (A)
(12)
(3)
The following additional information is available:
1.
2.
3.
4.
Price paid for raw material was Re. 0.40 per kg more than the standard price.
Closing stock of raw material was 200 kgs more than the opening stock.
Actual wage rate paid during the month was Rs. 3.40 per hour.
All overheads are absorbed into production costs on the basis of standard hours
produced using the following rates:
Fixed overheads
Variable overheads
5.
6.
There was no opening or closing work-in-progress.

The following actual costs for December 2005 have been incurred:
Materials used
Wages incurred
Variable overheads
Fixed overheads
7.
Rs. 5.00 per standard hour

Rs. 0.50 per standard hour
Rupees
199,920
142,800
20,000
189,000
Actual production of finished goods during December 2005 was 4,865 units.
Required:
Prepare a standard cost sheet.
Q.4
(14)
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
August
September
10,000
10,000
11,000
October
November
December
16,000
20,000
25,000
It is the firms 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
Sales
Cost of goods sold
Consumable stores
Variable costs
Salaries
Financial Costs
Insurance
Depreciation
Others
Fixed costs
Total Costs
Profit/(loss)
Rs.000
23,000
12,650
1,150
13,800
1,380
1,150
920
230
3,680
17,480
5,520
Restaurant
Rs.000
34,600
20,760
5,190
25,950
10,380
1,384
2,076
346
14,186
40,136
(5,536)
Accommodation
Rs.000
118,800
9,225
9,225
22,675
5,000
13,837
23,063
1,845
66,420
75,645
43,155
Total
Rs.000
176,400
33,410
15,565
48,975
34,435
5,000
16,371
26,059
2,421
84,286
133,261
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)
(b)
(c)
Q.6
Prepare a budgeted contribution statement for the year ending 31 May 2007.
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.
Give brief suggestions in respect of the restaurant which is incurring losses.
(20)
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 QLs cost of sales, is highly concerned
about QLs 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.
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(6)
The following estimates have been made:
Materials
Direct Labour
Variable overheads
Rupees
3,000 per unit
600 per hour
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?
(THE END)
(12)

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Management Accounting

Briefly discuss any four criticisms on standard costing system.

SMPL is a leading construction company and is working on major projects

Following are the relevant details:

The existing policy of holding 45 days of stock would be revised downwards to

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

Monthly production capacity in 2 shifts (Sheets)

Revenue and expenses

Equity and liabilities

10% long term loan

Cost per unit (Rs.)

Other relevant information is as under:

Commission % on total sale

Currently the sales force is categorized into categories A, B and C. Number of

The overall efficiency of the workforce can be increased by 15% if management

ABC Limited deals in manufacturing of consumer goods. The management is concerned

In respect of debtors, the management proposes to allow an early payment discount of 1% if

US$1 = Rs. 100

US$1 = Rs. 105

Total variable and fixed overhead expenses for product A

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

Division East has an opportunity to invest in new machinery at a cost of

Price per kg (Rs.)

Price per kg (Rs.)

Standard costs/yield per batch:

The Institute of Chartered Accountants of Pakistan

SGL Limited is a manufacturer of engineering goods. It is in the process of preparing

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

Quality Plastics Limited (QPL) produces plastic bodies of various appliances

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

Rs. per unit

Rs. 24.30 million

The Institute of Chartered Accountants of Pakistan

Direct wages per hour

Direct wages (30,000 labour hours)

During the quarter:

(iii) Maintenance expenses pertain to:

No. of units produced and sold

For evaluating the proposal, the following information is available:

The Institute of Chartered Accountants of Pakistan

The customer will provide 25% mobilization advance in January 2012.

Opening work in process

The Institute of Chartered Accountants of Pakistan

Reading time 15 minutes

Other related information is given below:

Other related estimates are given below:

3 months average consumption

single machine at 80% capacity

Rupees per month

Maximum supplies as per

Other relevant details are as follows:

at least 100 tables; and

The Institute of Chartered Accountants of Pakistan

The company sells to distributors at cost of production plus 25% mark-up.

The following further information is available:

Non current assets

Long term borrowings

Purchase of additional machinery for Division A at a cost of Rs. 80 million having an

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Retail price range

Production hours per unit

In addition, a commission of 5% would also be payable to the sales team.

Maximum production capacity of each factory is 5,000 units.

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN