CA Pakistan - MAC Past Papers

Final Examination (Transitional Scheme)
The Institute of 7 June 2017

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes
Management Accounting
Q.1 Go Travel Limited manufactures a popular brand of travel cases in Pakistan. CEO of the
company wants to encash the growing demand and popularity of the brand by expanding
the manufacturing facilities of the company.
The current level of production is 300,000 travel cases on an annual basis, whereas the
expected level of production after expansion is estimated at 420,000 travel cases.
The senior accountant has reported per unit selling price and cost for the current level of
production as follows:
Rupees
Selling price 12,180
Raw material - ballistic nylon 3,300
Packing material 350
Direct labor 1,500
Fixed manufacturing overheads 1,850
Variable manufacturing overheads 600
Total administrative overheads 420
Fixed selling and distribution expenses 280
Variable selling and distribution expenses 500
Following information is available in respect of the above:

(i) Approximately 70% of sales are made on cash. Remaining sales are made to corporate
clients on a credit period of 90 days. The management believes that after expansion,
sales to corporate customers would be 20% of total sales.
(ii) Selling price is inclusive of sales tax @ 16%. Payment of sales tax is made with an
average time-lag of 30 days.
(iii) Raw materials – ballistic nylon is imported from a foreign supplier who allows
30 days credit. Import duty is paid on arrival of the materials at 10% of the C&F
value.
(iv) Packing materials are purchased locally on 30 days credit.
(v) The average time-lag in payment of overheads is 30 days whereas wages are paid in
the same month.
(vi) Production process requires 15 days. Raw material is added in the beginning of
manufacturing process while conversion costs are incurred evenly throughout the
production process. The estimated completion is 50% at any point of time.
(vii) The company has a policy to maintain raw material inventory equivalent to
production requirement of 60 days while for packing material and finished goods the
requirement is 30 days.
(viii) The company maintains minimum cash balance of Rs. 2.75 million at all times.
(ix) The existing working capital requirement is approximately Rs. 489.50 million.
The following changes are expected as a result of the expansion:

(i) Fixed manufacturing overheads would increase by Rs. 75 million.
(ii) Additional sales promotion expenses amounting to Rs. 16.80 million would be
incurred to boost the sales.
(iii) Requirement of maintaining minimum cash balance would increase to Rs. 4 million.
Management Accounting Page 2 of 4
Required:
Compute the additional working capital required if the company decides to increase the
production capacity. (16)
Note: Assume 360 days in a year
Q.2 Wahid 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 – Materials A and B are mixed in the ratio of 3:2. The mixture is then heated
resulting in an evaporation loss of 20%. The processing results in residue Z which is 10% of
the output. The remaining liquid distills into extracts of chemical X and Y in equal
proportion.
Process II – One liter of material C is added with one liter of extract of chemical X to
produce chemical X and a by product P in the ratio of 75:25. Material D is added with
extract of chemical Y in proportion of 3:1 respectively to produce chemical Y after 5%
normal loss of input.
The costs involved are as under:

Process I Process II
---- Rs. per liter of input ----
Material A 170 -
Material B 145 -
Material C - 225
Material D - 280
Conversion costs 50 40
Chemical X is sold in 10 liter pack at a price of Rs. 3,600 per pack while chemical Y is sold
in two liter packing for Rs. 900 per pack. The packing cost per 10 liter pack is Rs. 50 and per
two liter pack is Rs. 30. Residue Z needs to be disposed off at a cost of Rs. 5 per liter. By
product P is sold in bulk at Rs. 40 per liter. There is no market for extract of chemical X and
chemical Y.
The demand of chemical X is 1.2 million liters, while the market of chemical Y is quite huge
and the entire production could be absorbed by the market.
Required:
(a) Compute the gross profit for each product by allocating joint product costs on the
basis of net realisable value at the split-off point. (17)
(b) Determine any additional contribution margin that could be earned from producing
chemical Y using any surplus capacity, assuming annual production capacity of the
existing plant is to process a total of 8 million liters of input material through all the
processes i.e., the total quantities of materials A, B, C, D and extracts of X and Y
which can be processed cannot exceed 8 million liters. (06)
Q.3 Khizr Limited (KL) manufactures a single product HGV. It has 100,000 labour hours
available per month and has fixed monthly cost of Rs. 2,000,000. The current market
demand is 80,000 units per month. Selling price per unit is Rs. 900.
Other relevant details are as follows:

(i) Based on the last year's production data, each unit requires 1.25 labour hours.
(ii) The production department employs labour at standard wage rate of Rs. 25,000 per
month with 180 standard working hours per month.
(iii) The normal rejection is allowed at 6% of the total units put into process, while the
actual rejection is 5%. The rejected units are sold at Rs. 250 per unit.
(iv) Material cost per unit is Rs. 540 and variable overhead cost is Rs. 40 per labour hour.
The management believes that currently the labour is working at 70% efficiency level. It is
considering to introduce incentives to increase the efficiency. Following suggestions have
been provided by production manager which need to be financially evaluated:
Option 1:
Efficiency could go up to 80% if the labour is paid at the rate of Rs. 185 per unit of good
output. It is also expected to reduce the rejection to 4%.
Option 2:
Introduce efficiency bonus at Rs. 20 per good unit if the efficiency is increased above 85%.
The introduction of bonus is expected to increase the labour efficiency to 90%. However,
the rejection is also expected to increase to 6%.
Required:
(a) Advise the management about which of the above options, if any, should be adopted. (16)
(b) The management has received a special order of 5000 units. KL follows a policy of
bidding at 5% margin on sales value. The cost used to arrive at the sales value includes
the fixed cost allocated on the basis of 80% of production capacity. Suggest a bid price
under each of the options discussed above. (06)
Q.4 Wilson Electronics is planning to manufacture a new gadget which would require capital
investment of Rs. 2.5 billion in plant and machinery. The market demand of the gadget is
expected to vary with the state of the economy as follows:
State of the economy Growing Stable

Market demand (in units) 3,000,000 2,500,000
Probability 0.30 0.70
Other related information is given below:

(i) Production of each gadget would require one unit of X3. The cost would vary due to
fluctuation in international prices and exchange rates. Following probabilities are
assigned to cost of X3:
Cost per unit (Rs.) 25,000 30,000

The supplier of X3 normally offers the following discounts:
Quantity purchased (units) 120,000 or more 150,000 or more

Discount 2% 4%
(ii) Variable labour and overhead cost is estimated at Rs. 4,500 per unit.
(iii) Fixed costs related to new plant (other than depreciation) are estimated at
Rs. 180 million upto a production of 125,000 units beyond which the cost would
increase by Rs. 20 million. The useful life of plant and machinery is estimated at
15 years with a salvage value of 10% of the cost.
(iv) The maximum production capacity would be 150,000 units.
(v) Working capital requirement per 1,000 units of output would be Rs. 12 million.
Management is currently considering two pricing options i.e., Rs. 40,000 per unit and
Rs. 37,500 per unit. The market share under the above price is estimated at 4% and 5.5%
respectively of the market demand.
Required:
Evaluate the pricing options on the basis of expected rate of return on capital employed. (13)
Q.5 Sigma Limited (SL) produces sports equipment according to customers’ specifications. It
has received an order for supply of 2,500 units.
The following information is available:
(i) Production process is carried out in batches of 50 units each. Cost of the first batch is
estimated as under:
Rupees
Direct material 200 kg 64,800
Direct labour cost at normal rate 300 hours 60,000
Overheads at normal rate 300 hours 75,000
(ii) After completion of the first 10 batches, material wastage is expected to be reduced
from 8% to 6%.
(iii) It is estimated that due to learning curve effect, completion of the first, second, third
and fourth batch would require 300, 240, 221 and 211 hours respectively. This
learning effect would continue till completion of 22 batches only. Learning effect at
various learning levels is as under:
80% 85% 90%

−0.322 −0.235 −0.152
(iv) SL works a single shift of 8 hours per day. For the above order, SL can spare 7,000
direct labour hours. Overtime hours can be worked at 1.6 times the normal rate.
During the overtime hours, overheads would increase by 40%.
Required:
Compute the bid price that SL should quote in order to earn a margin of 25% of the selling
price. (12)
Q.6 A company has two factories X and Y. Each factory produces product Z and has a capacity
of 100,000 units per annum. The production is carried out in lots of 25,000 units each. Total
costs of each factory at different levels of annual production are given below:
Total costs
Level of annual production Factory X Factory Y
-------- Rs. in '000 --------
Zero 1,040 1,300
25,000 units 1,850 2,000
50,000 units 2,570 2,800
75,000 units 3,200 3,700
100,000 units (maximum level) 4,200 5,000
The company is in a position to sell 200,000 units at Rs. 60 per unit. The price can be
increased upto Rs. 120 per unit. However, each increase of Rs. 10 per unit would result in
lowering the demand by 25,000 units.
Required:
Determine the maximum profit which the company could earn. (14)
(THE END)
Final Examinations (Transitional Scheme)
Module F
The Institute of 7 December 2016
Q.1 Chips and Chicks (C&C) is a fast food restaurant in DHA. It intends to open a new
restaurant in Bahria Town (BT). The owner has hired you to design a suitable strategy to be
able to achieve a target profit of Rs. 1.6 million per month from the new restaurant.
C&C does not maintain any record other than a cash register on which details of all
payments are noted.
To analyse the situation you have gathered the following information in consultation with
the owner.
(i) Total sale at DHA is around Rs. 5 million per month and total average payments are
Rs. 4 million per month.
(ii) Chicken burgers, beef burgers and club sandwiches are sold in the ratio of 4:3:2.
(iii) In 70% of the cases, the sale of burger or sandwich is accompanied by the sale of fries,
whereas in the case of cold drink, this ratio is 90%.
(iv) Following is the detail of per unit sale price and cost of different items:
Cost of ingredients/
Items Sales price
purchase price
------------------ Rupees ------------------
Chicken burger 150 36
Beef burger 170 48
Club sandwich 200 60
Fries 80 18
Cold drinks 60 12
Analysis of cash register has revealed the following payments during the last month:
Rs. in million Rs. in million
Purchases 1.24 Electricity 0.30
Wages 0.60 Gas 0.20
Rent 0.40 Repair and maintenance 0.25
Commission to riders 0.20 Sales tax 0.73
C&C plans to offer the same products at the BT restaurant and it is projected that the
productwise sale at BT restaurant would also follow the same pattern. However, the total
sale is estimated at Rs. 5.5 million per month. The expenses would remain the same except
wages and rent which are expected to increase by 20%.
Based on your initial review, you have been able to predict that the desired target profit
could not be achieved in the above situation. Consequently, you have suggested that a
combo meal should also be introduced.
The owner envisages that the combo meal would consist of any one burger plus fries and
drinks. The combo meal would be priced at Rs. 260. It is estimated that 60% of the combos
would involve a beef burger whereas 40% combos would include a chicken burger. Further,
it is estimated that for sale of each combo, the sale of burgers would decline by 40%.
Required:
Determine the number of combos that would have to be sold, in order to earn an income of
Rs. 1.6 million at BT restaurant. (20)
Q.2 Brown Limited (BL) uses a single factory overhead rate for allocating factory overheads to
products, based on direct labour hours. However, for better planning and to bring more
accuracy in costing the products, BL intends to introduce Activity Based Costing.
Information pertaining to the latest quarter is as follows:
(i) Actual expenses:

Rupees
Direct wages 1,380,000
Machine setup costs 160,000
IT department overheads 120,000
Machine operating expenses 500,000
Production control 200,000
Material management 140,000
Quality control 240,000
Other expenses 750,000
Administrative and selling expenses 300,000
(ii) Production department:

Direct Direct Direct Number of
Machine Inspection
Units material labour labour material Number of
Products hours hours
produced per unit per unit hours requisitions units per
(per unit) (per unit)
(Rupees) (Rupees) (per unit) issued batch
Wye 30,000 60 30 4 2 0.4 400 3,000
Zee 60,000 35 8 1 5 0.5 500 4,000
(iii) The quality control department follows a policy of inspecting 5% and 2% of all units
of Wye and Zee respectively.
(iv) Basis of allocation of support services:
Departments IT Department Other expenses

Production 30% 25%
Material management 15% 25%
Quality control 15% 25%
Engineering 40% 25%
Required:
Compute the unit cost of Wye and Zee using both methods. (16)
Q.3 ABC Limited deals in production and marketing of edible oil. Currently, the company sells
the product in packing size of 1 litre and 3 litres. ABC’s market share is 8% and it sold
30 million litres of oil in the year 2015-16. 1-litre packs contributed 60% of the sale.
The profit and loss account of the company for the year 2015-16 is as follows:
Rs. in million
Sales - net 7,632
Cost of goods sold (5,068)
Gross profit 2,564
Less: Selling and administration expenses (750)
Net profit before tax 1,814
Following further details are available:

(i) 1-litre pack 3-litre pack
Retail price Rs. 264 720
Packing cost Rs. 15 40
(ii) Cost of goods sold includes depreciation of Rs. 170 million and other fixed costs of
Rs. 128 million.
(iii) Variable production cost (excluding packing material) comprises 70% raw material,
20% direct labour and 10% factory overheads.
(iv) The company maintains finished goods inventory equivalent to 2 months’ sales.
(v) 70% of selling and administration expenses are variable. All other expenses are fixed.
(vi) Estimated impact of inflation on fixed and variable costs is 8% and 6% respectively.
To increase the market share and profitability of the company, the management intends to:
(i) launch economy pack of 5 litres at retail price of Rs. 1,100. As a result, the total
quantity of oil sold under the existing packs would reduce by 15%. This pack would
be produced using existing facilities. The packing cost would be Rs. 50 per pack.
(ii) increase selling price of 1-litre pack by 5% and reduce selling price of 3-litre pack by
10%. As a result, ratio of sale of 1 and 3 litre packs would change to 1:1.
(iii) launch premium quality brand in 2 litre pack at Rs. 800 per pack. Annual demand is
expected to be 1.75 million packs. The variable and fixed production costs per litre are
estimated at Rs. 200 and Rs. 45 respectively. The packing cost would be Rs. 100 per
pack. Fixed production cost comprises of amount pertaining to the new production
facility established for the production of premium brand as well as amount allocated
from existing fixed costs of the company on the basis of production quantities. The
variable selling and administration cost is estimated at Rs. 50 per pack.
As a result of the above measures, the company’s market share is expected to increase from
8% to 10%. It is also estimated that the overall size of the market would expand by 4%.
Required:
Prepare budgeted profit and loss account for the year 2017. (23)
Q.4 Alpha Limited (AL) is a manufacturing concern. The management believes that it can
improve the profitability significantly if more working capital is available. However, in the
existing situation, the banks are not inclined to provide further financing. Consequently, AL
has approached few high net worth individuals who have offered to provide financing at
fixed rate of interest.
In order to evaluate the offer, you have gathered the following information:
(i) Credit sales amounted to Rs. 600 million representing 80% of total sales. Credit
period is 30 days.
(ii) Annual consumption of raw materials is 3 million units @ Rs. 160 per unit.
(iii) Raw material is purchased at the start of each month. The credit period is 60 days.
(iv) Monthly storage cost is Rs. 1.50 per unit of raw material.
(v) Labour and variable factory overheads are approximately 30% of the cost of material.
(vi) AL has a running finance facility of Rs. 120 million which mostly remains fully
utilized. It carries interest @ 12% per annum.
(vii) The management has prepared the following plans for utilization of funds:
Avail bulk purchase discount of 3% on raw material which would be available if
the quantity purchased is one million units and payment is made within 10 days.
50 days credit term would be offered to customers. The extended credit period
would increase credit sales by 10%. However, the provision for bad debts will also
increase from 2% of average debtors to 3%.
(viii) Surplus funds can be invested @ 5% per annum.
Required:
Determine the financing rate at which it would be feasible for AL to acquire the loan,
assuming that the investors want to invest a minimum of Rs. 300 million and AL wants to
earn a minimum of Rs. 10 million from this arrangement. Assume a 360 day year. (15)
Q.5 Ali Industries Limited (AIL) deals in a specialty chemical. Production is carried out on two
different plants which are installed in the same premises. The related data is as follows:
PM-1 PM-2
Production capacity per annum (tons) 230 270
Labour hours required per ton 30 50
Remaining useful life 10 years 8 years
Written down value (Rupees) 35,000,000 30,000,000
Variable overheads (% of direct labour) 60% 50%
Normal loss (% of input) 5% 8%
Due to rising demand, AIL plans to increase its production capacity. It is therefore
considering to:
(i) spend Rs. 25 million on balancing and modernization of PM-2. This expenditure is
expected to bring about the following benefits:
Production capacity would increase by 40 tons per annum.
The remaining useful life of the plant would increase by 4 years.
Normal loss would reduce from 8% to 6%.
Labour hours would reduce by 10%.
(ii) purchase a new plant to replace anyone of the two plants, at a cost of Rs. 80 million
having useful life of 20 years with annual capacity to produce 400 tons. The new plant
would reduce the normal loss to 4%. The labour required by the new plant would be
to 20 hours per ton. Variable overheads would be 40% of direct labour.
Other related information is as under:

(i) Annual demand is 600,000 litres. Selling price is Rs. 50,000 per ton.
(ii) Cost of raw material is Rs. 17,480 per ton. Labour is paid at the rate of Rs. 120 per
hour.
(iii) The current disposal value of the existing machines is estimated at 30% of their WDV.
The new machine is expected to have a salvage value of 10% of cost at the end of its
useful life. The machines are depreciated on straight line basis.
(iv) Cost of financing is 10% per annum.
(v) Fixed overheads other than depreciation would remain the same.
Required:
Suggest the most feasible strategy for Ali Industries Limited. (12)
Q.6 Target Manufactures Limited (TML) produces two products BM-1 and BM-2. The total
time required to manufacture each product and time available during a month are as
follows:
Machine hours Labour hours

BM-1 15 8
BM-2 12 10
Available hours 41,400 30,000
The per unit contribution margin of BM-1 and BM-2 is estimated at Rs. 9,000 and Rs. 5,500
respectively.
In order to maintain the market for BM-2, a minimum of 2,000 units of BM-2 have to be
produced.
Required:
Calculate the shadow price per machine hour if 5,000 machine hours can be added to the
capacity, at a cost of Rs. 0.2 million per month. (14)
(THE END)
Suggested Answer
Final Examination (Transitional Scheme) – Winter 2016
A.1 Rupees
Sale price of combo (inclusive of sales tax) 260.00
Variable cost of combo:
Cost of ingredients [(36 × 40%) + (48 × 60%)] +18 + 12 73.20
Commission to riders (260 × 200,000 ÷ 5,000,000) 10.40
Sales tax (260 × 0.73 ÷ 5) 37.96
121.56
Contribution margin of combo 138.44
Less: Contribution forgone due to introduction of combos (W-1) 61.92
Adjusted contribution margin 76.52
Difference of profit to be achieved through sale of combo (W-2) 433,920
Number of combos to be sold (433,920 ÷ 76.52) 5,671
WORKINGS
W-1 : Contribution Foregone
Per unit CM Reduction % in Reduction in
(Rs.) CM CM (Rs.)
A B A×B
Chicken Burger [150–63.90(W-3)] 86.10 16% 13.78
Beef Burger [170–79.62(W-3)] 90.38 24% 21.69
Fries [80–32.88(W-3)] 47.12 28% 13.19
Cold drinks [60–23.16(W-3)] 36.84 36% 13.26
61.92
W-2: Difference of profit to be achieved through sale of combos

Rupees
Total contribution margin (W-3) 3,116,080
Less: Fixed costs
Wages (720,000)
Rent (480,000)
Gas (200,000)
Electricity (300,000)
Repairs and maintenance (250,000)
(1,950,000)
Profit 1,166,080
Target profit 1,600,000
Difference of profit to be achieved through sale of combos (433,920)
W-3 : Total contribution margin

Basis of Chicken Beef Club
Fries Cold drink
allocation Burger Burger Sandwich
No. of units sold (W-4) 8,800 6,600 4,400 13,860 17,820
Sales value in Rs. (W-4) (A) 1,320,000 1,122,000 880,000 1,108,800 1,069,200
----------------------------- Rupees -----------------------------
Cost of ingredients (Units×PU cost) 316,800 316,800 264,000 249,480 213,840
Commission to riders
(200,000÷5,000,000) × A Sales value 52,800 44,880 35,200 44,352 42,768
Sales tax (0.73÷ 5 × sales value) Sales value 192,720 163,812 128,480 161,885 156,103
Total variable costs (B) 562,320 525,492 427,680 455,717 412,711
Variable costs per unit 63.90 79.62 97.20 32.88 23.16
Contribution margin (A– B) 757,680 596,508 452,320 653,083 656,489

Total contribution margin 3,116,080
Page 1 of 8
Suggested Answer
W-4: Number of units sold at BT
BT
Ratio Weighted ratio Allocation of total
No. of units sold
sales (Rs.)
A B=A×SP C=5.5m×B÷∑ B D=C÷SP
Chicken burger 4 600 1,320,000 8,800
Beef Burger 3 510 1,122,000 6,600
Club sandwich 2 400 880,000 4,400
Fries [(4+3+2)×70%] 6.3 504 1,108,800 13,860
Cold drink [(4+3+2)×90%] 8.1 486 1,069,200 17,820
23.4 2,500 5,500,000
A.2 Determination of cost per unit

Under Activity Based Costing Under single FOH rate
Wye Zee Wye Zee
--------------------------------------- Rupees ---------------------------------------
Direct raw material
(30,000×60, 60,000×35) 1,800,000 2,100,000 1,800,000 2,100,000
Direct wages
(30,000×30, 60,000×8) 900,000 480,000 900,000 480,000
Overheads 688,423 1,421,577 1,406,667 703,333
(W-1) (W-1) (120÷180×2,110,000) (60÷180×2,110,000)
Total costs 3,388,423 4,001,577 4,106,667 3,283,333
Number of units produced 30,000 60,000 30,000 60,000
Cost per unit 112.95 66.69 136.89 54.72
W-1: Determination of overheads of each product under ABC

Wye Zee Total
Production
Machine hours (30,000×2, 60,000×5) 60,000 300,000
Allocation of production overheads – Rs. (A) 153,917 769,583 (W-2) 923,500
Material management
Number of requisitions 400 500
Allocation of material management overheads – Rs. (B) 153,556 191,944 (W-2) 345,500
Quality control
Units produced 30,000 60,000
% of units inspected 5% 2%
No. of units inspected 1,500 1,200
Inspection hour per unit 0.40 0.50
No. of hours inspected 600 600
Allocation of quality control overheads – Rs. (C) 222,750 222,750 (W-2) 445,500
Engineering
Units produced 30,000 60,000
Batch size 3,000 4,000
Number of batches 10 15
Allocation of engineering overheads – Rs. (D) 158,200 237,300 (W-2) 395,500
– Rs. (A+B+C+D) 688,423 1,421,577 2,110,000
W-2: Computation of cost driver rate:
Department
Total
Material Quality
Production Engineering (Given)
management control
-------------------------------------------Rupees----------------------------------------
Machine set-up costs - - - 160,000 160,000
IT department’s overheads
(120,000 × 30%, 15%, 15%, 40%) 36,000 18,000 18,000 48,000 120,000
Machine operating expenses 500,000 - - - 500,000
Production control 200,000 - - - 200,000
Material management - 140,000 - - 140,000
Quality control - - 240,000 - 240,000
Other expenses (750,000 ÷ 4) 187,500 187,500 187,500 187,500 750,000
Department wise overheads 923,500 345,500 445,500 395,500 2,110,000
Page 2 of 8
Suggested Answer
A.3 Budget for the year 2016-17

Premium
1 litre pack 3 litre pack 5 litre pack Total
brand
Volume (in litres) [W-1] 6,375,000 19,125,000 10,000,000 3,500,000
Volume (in packs) 6,375,000 6,375,000 2,000,000 1,750,000
Selling price per pack – Rs. 277.20 648.00 1,100 800
-----------------------------Rs. in million-----------------------------------------
Sales (Volume × pack price) 1,767.15 4,131.00 2,200.00 1,400.00 9,498.15
Cost of goods sold
Opening inventory [W-2] 463.81 309.21 - - 773.02
Variable cost of sales [W-2] 680.54 3,115.12 1,789.20 816.67 6,401.53
Fixed overheads [W-2] 35.87 164.15 94.28 183.75 478.05
Packing cost [W-2] 98.67 268.70 100.00 175.00 642.37
Less: Closing inventory [W-2] (171.54) (514.60) (269.07) (142.92) (1,098.13)
1,107.35 3,342.58 1,714.41 1,032.50 7,196.84
Gross profit 659.80 788.42 485.59 367.50 2,301.31
Selling and admin. expenses[W-2] 108.95 498.68 286.42 126.58 1,020.63
Net profit 550.85 289.74 199.17 240.92 1,280.68
Note: it is assumed that 1:1 ratio will be applicable with reference to no. of packs.
W-1: Determination of number of packs/litres
New quantities
in liters in packs
Total market (30m ÷ 0.08 × 1.04) 390,000,000 -
Sales in liters (390m × 10%) [A] 39,000,000 -
New sales of existing packs (30m × 85%) [B] 25,500,000 -
1 liter pack (25.5m × 1 ÷ 4) 6,375,000 6,375,000
3 liter pack (25.5m × 3 ÷ 4) 19,125,000 6,375,000
2 liter Premium quality brand [C] 3,500,0000 1,750,0000
5 liter pack [A – B – C] 10,000,000 2,000,000 balancing
W-2: Production requirements

Premium
1 litre pack 3 litre pack 5 litre pack Total
brand
Sales quantities (as worked out above) - in litres 6,375,000 19,125,000 10,000,000 3,500,000 39,000,000
-----------------------in packs----------------------------
Number of packs sold A 6,375,000 6,375,000 2,000,000 1,750,000 16,500,000
Closing quantities required
(no. of pack sold ÷ 12 × 2) B 1,062,500 1,062,500 333,333 291,667 2,750,000
Less: Op. quantities available
[(30m ÷12 × 2 60%, 40%) ÷ pack liters] C 3,000,000 666,667 - - 3,666,666
Number of packs to be produced D 4,437,500 6,770,833 2,333,333 2,041,667 15,583,333
Number of liters to be produced E 4,437,500 20,312,499 11,666,665 4,083,334 40,499,998
Total liters produced F 40,499,998
Value of opening stock

Opening stock in litre
(30,000,000 × 2 ÷ 12 × 60%, 40%) G 3,000,000 2,000,000 - - 5,000,000
Variable cost [G × 144.67(W-3)] Rs. in million 434.01 289.34 - - 723.35

Fixed cost [(128 + 170) ÷ 30m × G] Rs. in million 29.80 19.87 - - 49.67
Rs. in million 463.81 309.21 - - 773.02
----------------------- Rs. in million -----------------------

Variable cost of sales [E×153.36(W-3)], [E×200] 680.54 3,115.12 1,789.20 816.67 6,401.53
Fixed cost of sales

Depreciation [170 × E ÷ (F – 4,083,334)] 20.72 94.82 54.46 - 170.00
Other fixed costs (128 × 1.08 × E ÷ F) H 15.15 69.33 39.82 13.94 138.24
Additional fixed costs [(45 × E) – H] - - - 169.81 169.81
I 35.87 164.15 94.28 183.75 478.05
Page 3 of 8
Suggested Answer
Packing cost
Per unit packing cost J 15.00 40.00 50.00 100.00
Opening packing inventory (J×C) 45.00 26.67 - - 71.67

Packing cost of produced units (J×D×1.06) 70.56 287.08 116.67 204.17 678.48
Closing packing inventory (J×B×1.06) (16.89) (45.05) (16.67) (29.17) (107.78)
Packing cost for the year 98.67 268.70 100.00 175.00 642.37
Value of closing stock

Closing stock in liters (B × number of liters) K 1,062,500 3,187,500 1,666,665 583,334 6,499,999
Variable cost [K × 153.36(W-3)], (K×200) 162.95 488.84 255.60 116.67 1,024.06

Fixed cost (K × I ÷ E) 8.59 25.76 13.47 26.25 74.07
171.54 514.60 269.07 142.92 1,098.13
Selling and administration expenses
Fixed : [(750 × 0.3 × E ÷ F) × 1.08] 26.63 121.88 70.00 24.50 243.01
Variable : [(750 × 0.7 ÷ 30) × 1.06) × E], D×50 82.32 376.80 216.42 102.08 777.62
108.95 498.68 286.42 126.58 1,020.63
W-3: Determination of variable costs

Rs. in million
Cost of goods sold 5,068.00
Less: Fixed cost (170 + 128) 298.00
Variable cost of sales 4,770.00
Less: Packing cost (30 × 60% × 15) + (30 × 40% ÷ 3 × 40) 430.00
Variable cost excluding packing cost 4,340.00
Variable cost per liter (4,340 ÷ 30m) 144.67
Existing Revised (Existing + 6%)
Raw material costs per litre (70%) 101.27 107.35
Direct labour costs per litre (20%) 28.93 30.67
Factory overheads per litre (10%) 14.47 15.34
144.67 153.36
A.4 Additional CM exluding target profit (𝐖 − 𝟏)

Financing rate = = 7.08%
Loan from investors (i. e. Rs. 300m)
W-1: Additional CM excluding target profit

Rs. in million
CM on increase in credit sales (600 × 10% × 16.8%(W-2)) 10.08
Increase in bad debts (W-3) (1.75)
Avail bulk discount [3.24 (W-4) × 160 × 3%] 15.55
Storage costs (W-4) (7.47)
Savings in RF interest (120 × 12%) 14.40
Income from surplus funds [8.49 (W-5) × 5%] 0.42
31.23
Less: Target profit (10.00)
Maximum interest to be paid on the amount 21.23
W-2: Determination of Contribution Margin

Rs. in million
Sales 750
Less: Raw material (3 × 160) (480)
Less: Labour and FOH (30% × 480) (144)
Contribution margin 126
Contribution margin % (126 ÷ 750) 16.8%

Page 4 of 8
Suggested Answer
W-3: Increase in bad debts

Existing Projected Increase
------------- Rs. in million -------------
Debtors 50.00 91.67 41.67
Bad debts 1.00 2.75 1.75
W-4: Average RM Inventory/Storage costs/Creditors

Existing Projected Increase
---------- Units in million ----------
RM inventory requirement 3.00 3.00
Increase in RM due to 10% increase (3 × 80%× 10%) 0.24
3.00 3.24
Average RM inventory (3÷12÷2, 3.24÷12×4÷2) 0.125 0.54

Number of months inventory to be kept 1.00 4.00
Storage cost per unit per month 1.50 1.50
Storage cost 2.25 9.72 7.47
(0.125×1×1.5×12) (0.54×4×1.5×3)
Average RM Inventory – Rs. in million (@ Rs. 160 PU) 20.00 83.81 63.81
(After discount of 3%)
Creditors payment period – in days 60 10

Creditors – Rs. in million 80.00 13.97 66.03
(60÷360×3×160) (10÷360×3.24×160×0.97)
W-5: Availability of surplus funds

Further
Existing Projected funding
requirement
------------- Rs. in million ------------
Debtors (W-3) 50.00 91.67 41.67
Average RM Inventory (W-3) 20.00 83.81 63.81
Creditors (W-3) 80.00 13.97 66.03
Settlement of running finance facility 120 - 120.00
291.51
Less: Loan from investors 300.00
Surplus funds 8.49
Page 5 of 8
Suggested Answer
A.5 PM-2
PM-1 PM-2 PM 3
(After BMR)
Data
Prod capacity per annum – in tons A 230 270 310 400
Normal loss % B 5% 8% 6% 4%
Labour hours required per ton C 30 50 45 20
Variable OH - in % of DL D 60% 50% 50% 40%
Machine WDV – Rs. E 35,000,000 30,000,000 55,000,000 80,000,000
Machine useful life (years) F 10 8 12 20
Determination of CM per ton --------------------- Rupees ---------------------
Sale price 50,000 50,000 50,000 50,000
Less: Variable cost per ton
Raw material [17,480 ÷ (1 – B)] (18,400) (19,000) (18,596) (18,208)
Labour (120 × C) (3,600) (6,000) (5,400) (2,400)
Variable overheads (Labour × D) (2,160) (3,000) (2,700) (960)
Contribution margin per ton 25,840 22,000 23,304 28,432
Total contribution margin (CM per ton × A) 5,943,200 5,940,000 7,224,240 11,372,800
Less: Depreciation (E × F) (3,500,000) (3,750,000) (4,583,333) (3,600,000)
Profit from each plant 2,443,200 2,190,000 2,640,907 7,772,800
* Depreciation is worked out after deducting 10% salvage value from cost.
Profit from
Profit before Financing
PM-2 Net profit
Options available to AIL PM-1 PM-2 PM-3 fin. cost cost (W-1)
(after BMR)
------------------------------------------- Rs. in million -------------------------------------------
I Continue with existing
plant without
replacement and BMR 2,443,200 2,190,000 - - 4,633,200 - 4,633,200
II Replace PM-1 with new
machine and no BMR
(400 ton from PM-3 and 650,000 7,772,800
200 ton from PM-2) - - 8,422,800 6,950,000 1,472,800
III Replace PM-2 with new
machine (400 machine
from PM-3 and 200 ton
from PM-1) 1,668,000 - - 7,772,800 9,440,800 7,100,000 2,340,800
IV Replace PM-1 with new
machine and spend on
BMR (400 ton from PM-
3 and 200 ton from PM-
2(after BMR)) - - 77,467 7,772,800 7,850,267 9,450,000 (1,599,733)
V Only go for BMR 2,443,200 - 2,640,907 - 5,084,107 2,500,000 2,584,107
Conclusion
Continue with existing option is feasible as it results in highest net profit.
W-1: Determination of financing costs

Cost of new Disposal value Financing Cost of
Cost of BMR
Options machine of old machine required financing 10%
------------------------------------ Rupees ------------------------------
I - - - - -
II 80,000,000 - (10,500,000) 69,500,000 6,950,000
III 80,000,000 - (9,000,000) 71,000,000 7,100,000
IV 80,000,000 25,000,000 (10,500,000) 94,500,000 9,450,000
V - 25,000,000 - 25,000,000 2,500,000
Page 6 of 8
Suggested Answer
A.6 Let BM-1 = x and BM-2 = y
Objective Function
Maximize Z: 9000x +5500y
15x + 12y = 41,400 ------------------------ Equation 1

8x + 10y = 30,000 -------------------------- Equation 2
From equation 1
At x = 0 then (0 , 3,450)
At y = 2,000 then (1,160 , 2,000)
From equation 2
At x = 0 then (0 , 3,000)
At y = 2,000 then (1,250 , 2,000)
Multiply equation 1 by 8 and equation 2 by 15
120x + 96y = 331,200 ------------------------ Equation 3

120x + 150y = 450,000 ----------------------- Equation 4
Subtracting equation 3 from equation 4
Determination of maximum quantities of x and y under original constraints:-
54y = 118,800 y = 2,200
Put the value of y in equation 3

120x + 96×2,200 = 331,200 120x = 120,000 x= 1,000
Present options Contribution Total contribution

x y x y
1160 2000 10,440,000 11,000,000 21,440,000
1000 2200 9,000,000 12,100,000 21,100,000
0 3000 - 16,500,000 16,500,000
Revised constraints
15x + 12y = 46,400 ------------------------ Equation 5
8x + 10y = 30,000 -------------------------- Equation 2
From equation 5
At x = 0 then (0 , 3,867)
At y = 2,000 then (1,493 , 2,000)
From equation 2 (Above)

At x = 0 then (0 , 3,000)
At y = 2,000 then (1,250 , 2,000)
Determination of maximum quantities under revised constraints:-
Solving equation 5 and 2
x = 1925.926 y = 1459.259
Page 7 of 8
Suggested Answer
As the quantity of y is 1,459 which is less than 2,000 ∴ the production plan is not possible and
the company has to revert to the production plan of producing minimum 2,000 quantities of
product y i.e.
At y = 2,000 then (1,250 , 2,000)
Revised options Contribution Total contribution

x y x y
1250 2000 11,250,000 11,000,000 22,250,000
1250 2000 11,250,000 11,000,000 22,250,000
0 3000 0 16,500,000 16,500,000
Additional contribution (22,250,000 – 21,440,000) – 200,000 610,000

Additional number of hours 5,000
Shadow price 122.00
(The End)
Page 8 of 8
Final Examinations
Module F
Q.1 Alpha (Pvt.) Limited has two divisions, A and B. Division A makes product Y which is sold
in the market as well as used as an input in Division B. Product Z manufactured by Division
B is sold in the market. Following is the available data:
Product Y Product Z
Variable cost per unit (Rs.) 1,750 2,300
(plus 1 unit of product Y)
Production capacity in units per month 15,000 12,000
Fixed costs per month (Rs.) 2,200,000 5,700,000
Monthly demand of the products at various selling prices have been projected as under:
Product Y
Selling price (Rs.) 2,800 2,600 2,400 2,200
Demand in units 5,000 7,500 10,500 13,500
Product Z
Selling price (Rs.) 6,000 5,700 5,400 5,100
Demand in units 5,000 7,000 9,000 11,000
The variable cost of product Y includes transportation cost of Rs. 75 per unit for delivering
it to the customers.
Management of the company has decided to concentrate on the production of product Z

being the value added product.
Required:
Determine the most feasible production plan for the Company giving priority to product Z. (12)
Q.2 An engineering company has launched a new product. The production is carried out in
batches of 250 units and the first batch took 800 labour hours. Production manager has
estimated that there will be 90% learning curve on labour hours that will continue till 128
batches after which the learning curve effect will cease.
Cost of production consists of material cost of Rs. 2,400 per unit, labour wages of Rs. 230
per hour and applied overheads of Rs. 450 per labour hour based on annual capacity of
1 million hours.
Fixed cost of production is estimated at Rs.180 million per annum.
According to the projections of the marketing department, demand would be for 15,000 and
20,000 units respectively in the first two quarters at selling price of Rs. 3,500 per unit.
Note: The learning index for a 90% learning curve is -0.152
Required:
(a) Prepare the profit and loss account for the first two quarters. (10)
(b) The company's marketing department is worried about the prospects of the product
next year, when the costs of material, labour and overheads would rise by 5%.
Compute the learning curve rate at which the company can make sure that it earns a
contribution margin of 20%, next year, assuming that the price of the product can be
increased by a maximum of 5%. (05)
Q.3 Efficient Company Limited (ECL) consumes 375 units of a raw material per day. The cost
of the raw material is Rs. 20,000 per unit. 5 units of the raw material are used for producing
each unit of product ZYX which is sold to a single customer. Deliveries to the customer are
made on a daily basis. When ECL is unable to deliver the product due to any reason, the
sale is lost and a penalty of Rs. 50,000 per day has to be paid under the agreement with the
customer. ECL earns a contribution margin of Rs. 5,000 per unit of product ZYX.
The following details are also available:

(i) After considering all aspects, the management has worked out the EOQ as 5400 units.
(ii) Safety stock of 225 units of Product ZYX and 750 units of the raw material is
maintained.
(iii) The minimum and the maximum delivery time is 30 days and 45 days respectively.
Note: Assume 360 days in a year
Required:
(a) Compute the stock out costs per annum if 8% of all raw material orders are delayed by
12 days and 4% of all orders are delayed by 15 days. (08)
(b) Determine the revised EOQ if consumption increases to 480 units per day, ordering
costs increase by 50%, holding costs decrease by 25% and safety stock of raw material
is increased by 20%. (03)
(c) Discuss the practical limitations of using the EOQ approach for determining the order
quantities. (04)
Q.4 A chemical company produces three products P, Q and R. The processing is carried out in
four departments. Material processed in department 1 is transferred to department 2 and 3
in equal proportion. Product P is obtained after processing of material in department 2.
Processing of material in department 3 produces product R along with other processed
material which is transferred to department 4 from which product Q is obtained.
The related data for the year ended 31 March 2016 are as follows:
Departments
1 2 3 4
Material input (litres) 1,250,000
Cost of material input (Rs.) 2,000,000
Processing costs (Rs.) 1,500,000 6,200,000 20,000,000 1,500,000
Normal wastage (% of input) 2% 12% 1% 20%
Transfer – in (litres) 600,000 600,000 500,000
Transfer – out
to next department (litres) (1,200,000) - (500,000)
as finished product (litres) (560,000) (90,000) (400,000)
The per litre prices of products P, Q and R are Rs. 20, Rs. 60 and Rs. 25 respectively. Joint
costs of department 3 are allocated between product Q & R on the basis of net realisable
value at the time of separation.
Required:
(a) Prepare a profit and loss statement for the year ended 31 March 2016 showing product
wise results also. The abnormal loss/gain may be transferred to other income/expense
accounts. (16)
(b) Based on your working in (a) above, give appropriate recommendations to the
management as regards the matter that may be considered to improve the company’s
profitability. (04)
Q.5 XYZ Limited is a call center company. Its summarised profit and loss account for the year
ended 31 December 2015 is as follows:
Rs. in ‘000
Revenue 3,474,200
Cost of service delivery:
Salaries (2,030,400)
Telephone and internet (67,200)
Other fixed costs (432,000)
Other variable expenses (370,400)
Gross profit 574,200
Operating expenses (469,200)
Net profit 105,000
Some other related information is as under:
(i) The company has 4 call centre locations with 750 seats each. The total number of
agents employed by the company is 6000.
(ii) Salary of every agent is Rs. 27,000 per month. One supervisor manages 50 agents who
is paid a salary amounting to Rs. 45,000 per month. There is one manager at each
location for each shift whose salary is Rs. 150,000 per month. The salaries are raised
annually at an average rate of 10%.
The agents work in shifts of 8 hours each. The call center is operational round the
clock. Each agent works 6 days a week and is allowed to avail 4 weeks leave each
year. In 2015, on average, an agent was occupied as follows:
In attending calls 6 hours

Internal reporting and other work 1 hour
Break for rest 0.5 hour
Idle time 0.5 hour
(iii) Internet and telephone expenses vary in accordance with call timings. The rate of
charge is expected to remain the same over the next three years.
(iv) The variable overheads vary in proportion to the number of agents.
(v) All operating expenses are fixed.
(vi) Increase due to inflation is expected at 10% per annum, unless specified otherwise.
To increase the revenues, the company has signed an agreement with ABC Limited which
provides data entry services. Under the agreement, which would be effective from 1 January
2017, ABC Limited would use the call centers’ computers on a three shift basis for which it
would pay @ Rs. 20 per hour per operator. ABC Limited has agreed to utilise as many seats
as may be available.
The management is also considering a proposal by a software house regarding development
of a new application. The cost of development is estimated at Rs. 700 million with
maintenance cost of Rs. 35 million per annum whereas the application can be made
available on 1 January 2017. This would help to reduce the call time as under:
New
Current
application
Average call time - Inbound 125 sec 110 sec
Average call time - Outbound 95 sec 80 sec
88% of all the calls are inbound. The call center’s business is expected to increase by 15%
per annum whether the new application is deployed or not.
Required:
Determine whether the company should accept the proposal if it expects to recover 50% of
cost of new application in the first year. Assume that one year constitutes 52 weeks. (18)
Q.6 Following are the extracts of the profit and loss account of Company A for the accounting
year ended 30 June 20X6:
Rs. in million
Sales 100
Cost of sales (including depreciation amounting to Rs. 2 million) (82)
Operating and financial charges (9)
Profit before tax 9
Zahid is the company’s managing director who has not maintained detailed records. He has
now handed over the charge to his son Abid who has recently completed his Masters. Abid
wants to run the company in a professional manner. He has taken various steps in this
regard which include preparation of a cash budget, for which the following details have been
gathered:
(i) Sales include cash sales of Rs. 18 million. Credit period is 30 days and 90% of the
sale is collected within the credit period whereas remaining amount is collected in the
next month.
(ii) Sales have been increasing at the rate of Rs. 1.0 million per quarter for the last few
years. This increase is only on account of price increase as there is no volumetric
growth in sales. This trend is expected to continue in 20X6-7.
(iii) Cost of sales includes cost of raw material 50%, labour 30% and overheads 20%. Raw
material prices increased by 5% on 1 January 20X6 and labour rate increased by 10%
with effect from 1 April 20X6. Impact of inflation on overheads has been 2% per
quarter.
(iv) The prices of material, labour and overheads are expected to increase by 8%, 5% and
3% respectively with effect from 1 July 20X6
(v) Operating and financial charges are expected to increase by 10% in 20X6-7.
(vi) Cost of labour and 40% of all other expenses including purchases are paid in the
same month. 60% of the expenses are paid in the next month.
(vii) All expenses and revenues unless stated otherwise, are incurred evenly over the
period.
(viii) The balance of cash as on 1 July 20X6 was Rs. 1.5 million.
(ix) There are no opening or closing stocks.
Required:
Prepare cash budget for the months of July, August and September 20X6. (20)
(THE END)
MANAGEMENT ACCOUNITNG
Suggested Answers
Final Examination – Summer 2016
Ans.1
Product Z Product Y
CM at Higher
CM Total Total Higher of Total of
Maximum maximum contribution at
Quantity per unit* contribution contribution 6&7 3&8
quantity quantity (W-1) lower quantity
-------- Rupees -------- -------------------------------- Rupees --------------------------------
1 2 3 4 5 6 7 8 9
(1 × 2) (4 × 5)
Option 1 5,000 2,025 10,125,000 10,000 650 6,500,000 6,375,000 6,500,000 16,625,000
Option 2 7,000 1,725 12,075,000 8,000 650 5,200,000 6,375,000 6,375,000 18,450,000
Option 3 9,000 1,425 12,825,000 6,000 850 5,100,000 5,250,000 5,250,000 18,075,000
Option 4 11,000 1,125 12,375,000 4,000 1,050 4,200,000 4,200,000 4,200,000 16,575,000
*SP – 2,300 (VC of product Z) – 1,675 (VC of product y excluding transportation charges)
W-1: Contribution margin of Y at various demand levels
Selling Price CM
Total CM
Demand (SP) (SP-1,750)
---------------------- Rupees ----------------------
Option 1 5,000 2,800 1,050 5,250,000
Option 2 7,500 2,600 850 6,375,000
Option 3 10,500 2,400 650 6,825,000
Option 4 13,500 2,200 450 6,075,000
Conclusion:
The most feasible production plan is at option 2 where company would earn the highest contribution margin.
SMEX SMEX
MAK MSS MUR RIA
AFN AAF
Page 1 of 7
Suggested Answers
A.2 (a) y = ax-0.152

Units Batches Hours / batch Labour hours
15,000 60 (15,000 ÷ 250) 429.35 (800 × 60-0.152) 25,761
31,750 (127 × 250) 127 383.10 (800 × 127-0.152) 48,653
32,000 (128 × 250) 128 382.64 (800 × 128-0.152) 48,978
The total time of 128th and subsequent batches is (48,978 – 48,653) 325
The hours to be taken for 20,000 units in 2nd quarter will be:
Time taken for 32,000 units as per learning curve effect 48,978
Less: Time taken for initial 15,000 units (25,761)
Add: time taken for remaining 3,000 units (3000 ÷ 250 × 325) 3,900
27,117
Quarter 1 Quarter 2
Units 15,000 20,000
------------ Rupees ------------

Sales revenue (15,000 × 3,500), (20,000 × 3,500) 52,500,000 70,000,000
Variable cost
Material (15,000 × 2,400), (20,000 × 2,400) 36,000,000 48,000,000
Labour (25,761 × 230), (27,117 × 230) 5,925,030 6,236,910
Other variable overheads (25,761 × 270), (27,117 × 270) 6,955,470 7,321,590
48,880,500 61,558,500
Contribution margin (52,500,000 – 48,880,500), (70,000,000 – 61,558,500) 3,619,500 8,441,500
Applied Fixed overheads (180*25761)), (180*27117) 4,636,980 4,881,060
Net profit (1,017,480) 3,560,440
(b) Rupees
Variable cost target (1.05 × 3,500)*80% 2,940
Less: Cost of material [1.05 × 2,400] 2,520
Cost target for labour and other overheads 420
y= where b = log (Y ÷ a) = log of Learning Curve ÷

Log of LR = {log(Y / a) ÷ logx} ×
Since Y = 200 and a = 800, therefore
 Y / a (200/800) = 0.2500; and
 log (Y / a) = – 0.60206
x = 128 and its log is 2.10721
= 0.3010
Now inserting the value for determining the log of LR

Log of LR = (-0.6021 ÷ 2.1072) × 0.3010 = – 0.086
LR = 10-0.086 = 0.82035
A.3 (a) Rupees

Loss of contribution margin per day (75 × 5,000) 375,000
Penalty per day 50,000
Total stock-out cost per day 425,000
Total stock out cost for the year [24(W-1) × 425,000] 10,200,000
Page 2 of 7
Suggested Answers
W-1: Determination of number of days delayed

8% chance 4% chance Total
Delay in number of days 12 15
Safety stock – finished goods (225 ÷ 75) (3) (3)
Raw material (750 ÷ 375) (2) (2)
No. of days lost in each delay - net (A) 7 10
No. of orders delayed (W-2) (B) 2 1
Total idle days due to stock out (A×B) 14 10 24
W-2: Number of orders delayed

Raw material required per annum – units (375 × 360) 135,000
EOQ 5,400
No. of orders (135,000 ÷ 5,400) 25
Orders delayed by 12 days (25 × 0.08) 2
Orders delayed by 15 days (25 × 0.04) 1
(b) Current EOQ = 5,400 units
( )
√ = 5,400
( )
Taking square on both sides
Under revised condition
Revised annual requirement

(480 × 360) + (225 × 20%) = 172,845
Therefore,
Revised EOQ = √ = 8,641 units
(c) The practical limitations of EOQ are:

(i) The formula assumes that demand can be accurately estimated and that usage is
constant throughout the period. In practice, demand may be uncertain and subject to
seasonal variations.
(ii) The ordering costs are assumed to be constant per order placed. In practice, most of the
ordering costs are fixed or subject to step functions. It is therefore, difficult to estimate
the incremental cost per order.
(iii) Holding cost per unit are assumed to be constant. The financing charge for the
investment in stocks is based on the average investment multiplied by the cost of capital.
This will result in reasonable estimate provided that demand can be accurately estimated
and that usage and the purchase price are constant throughout the period. Many holding
costs are fixed throughout the period and not relevant to the model whereas some costs
(e.g. store keepers' salaries) are fixed but change in steps.
(iv) Purchasing cost per unit is assumed to be constant for all purchase quantities. In
practice, quantity discounts can result in purchasing economies of scale.
Page 3 of 7
Suggested Answers
A.4 (a) Profit and loss statement

P Q R Total
Sales in units 560,000 400,000 90,000
Sale price per unit (Rs.) 20 60 25
------------------ Rupees ------------------
Sales 11,200,000 24,000,000 2,250,000 37,450,000
Cost of sales (W-1) 8,394,400 21,109,455 1,960,945 31,464,800
2,805,600 2,890,545 289,055 5,985,200
Contribution margin – %age of sales 25 12 13
Less: Abnormal loss (Department 1) (68,000)
Add: Abnormal gain (Department 2) 478,400
Less: Abnormal loss (Department 3) (145,600)
Gross Profit 6,250,000
W-1: Determination of cost of sales and abnormal gain / loss

Department
1 2 3 4
--------------------------- Rupees ---------------------------
Material input/transferred in 2,000,000 1,716,000 1,716,000 19,609,455
Processing 1,500,000 6,200,000 20,000,000 1,500,000
Total departmental costs 3,500,000 7,916,000 21,716,000 21,109,455
Less: Cost of actual production (W-2) 3,432,000 8,394,400 21,570,400 21,109,455
Abnormal loss / (gain) 68,000 (478,400) 145,600 -
W-2: Cost of actual production

Material input (litres) 1,250,000 600,000 600,000 500,000
Normal production (litres)
(Input less normal loss) 1,225,000 528,000 594,000 400,000
Cost per unit (Rs.)
[total dept. costs ÷normal prod.] 2.86 14.99 36.56 52.77
Actual production 1,200,000 560,000 590,000 400,000
Cost of actual production
(actual prod. × cost per unit) 3,432,000 8,394,400 21,570,400 21,109,455
W-3: Allocation of joint costs between product Q and R

Rupees
Realisable value of R (90,000 × 25) A 2,250,000
Value of Q produced in department 4 (60 × 400,000) 24,000,000
Less: Processing costs of department 4 1,500,000
Cost of Q at the time of separation at department 3 B 22,500,000
Cost allocated to Product R [21,570,400 × A ÷ (A+B)] 1,960,945
Cost allocated to quantity transferred to department 4 [21,570,400 × B ÷ (A+B)] 19,609,455
(b) The company should evaluate its policy for transferring of processed material in equal
proportion to Department 2 and 3. Presently, product P which is being produced in
department 2, has profit margin of 25% [2,805,600 ÷ (560,000 × 20)] which is much higher in
comparison with product Q {12% [2,890,545 ÷ (400,000 × 60)]} and product R {13% [289,055
÷ (90,000 × 25)]}.
However, any decision to be taken in this regard, should be made after considering the fixed
cost relating to production of each product, capacity limitation, if any and available demand.
The normal loss % in department 2 is 12% whereas actual loss % is just 7%. It shows that the
normal loss % needs to be investigated for this department. Any decline in normal loss %
would further improve the contribution margin of product P.
Page 4 of 7
Suggested Answers
A.5 NEW
EXISTING
APPLICATION
Number of agents 2015 (A) 6,000 -
Number of days worked in a year (48 × 6) (B) 288.00 288.00
Hours utilised during 2015 (A × B × 6) (C) 10,368,000 -
Average duration of call (in seconds) (D) 121.4 106.40
(125×0.88+95×0.12) (110×0.88+80×0.12)
Number of seconds in an hour (E) 3,600 3,600

No. of calls during 2015 (in ‘000) (C×E÷D)÷1,000 (F) 307,453 -
No. of calls during 2017 (in '000) (F×1.15×1.15) (G) 406,607 406,607
Number of hours an agent can work per day (H) 6.50 6.50
Number of agents required in 2017 (I) 7,325 6,420
(G×1,000×D)÷(E×B×H) (G×1,000×D)÷(E×B× H)
Relevant expenses / income in 2017 Savings/

Without new application With new application income
-------------------------- Rupees --------------------------
Agents salaries 2,871,693,600 2,516,896,800 354,796,800
[(I × 27,000 × 1.1 × 1.1 × 12] [(I × 27,000 × 1.1 × 1.1× 12]
Supervisor salaries 95,723,100 83,896,560 11,826,540
[I÷50×45,000×1.1×1.×12] [I÷50×45,000×1.1×1.1×12]
Internet and telephone expenses 82,035,692 71,899,486 10,136,206
[67,200×1,000×1.15× 1.15× 6]÷ 6.5 (82,035,692×106.40)÷121.4
Other variable overheads 547,157,967 479,551,958 67,606,009

[370,400×1,000×1.1×1.1×I÷A] [547,157,967×106.40÷121.4]
Income from ABC Ltd. (W-1) 97,493,760 150,259,200 52,765,440

Total savings 497,130,995
Less: Maintenance cost of software (35,000,000)
Net savings 462,130,995
Conclusion:
As the savings are more than 50% of cost of development, therefore it is feasible to develop the new
software.
W-1: Income from ABC Limited in 2017

Without new With new
application application
Available seats (750×4) 3,000 3,000
Seats utilized (7,325÷3), (6,420÷3) 2,442 2,140
Extra seats available 558 860
Revenue per seat per year (20×24×7×52) 174,720 174,720
Total revenue(extra seat available × revenue per seat) 97,493,760 150,259,200
Page 5 of 7
Suggested Answers
A.6 Suppose sale of 1st quarter of 20X5 = x

Total sale of 20X5 = x + (x + 1) + (x + 2) + (x + 3) = Rs. 100 million
4x + 6 = 100
x = 94/4 = 23.5
Cash sale of last quarter of 20X5 = (x + 3) × 18% = Rs. 4.77 million
Credit sale of last quarter of 20X5 = (x+3) × 82% = Rs. 21.73 million
Material Cost = 82 × 50% = Rs. 41 million
Suppose material cost of 1st quarter = x
Production cost of 2nd, 3rd and 4th quarter would be x, 1.05x and 1.05x respectively
Hence x + x + 1.05x + 1.05x = 4.1x = Rs. 41 million
Hence x = Rs. 10 million
Therefore, material cost of 4th qtr = 10×1.05 = Rs. 10.5 million
Labour cost = 82 × 30% = Rs. 24.6 million

Supposing labour cost of 1st quarter = x
Labour cost of 2nd, 3rd, and 4th quarter would be x, x and 1.1x respectively
Total labour cost = x + x + x + 1.1x = 4.1x = 24.6
Hence x = 24.6/4.1 = Rs. 6 million
Therefore, labour cost of 4th qtr = 6×1.10 = Rs. 6.6 million
Overheads other than depreciation = 82 × 20% –2 = Rs. 14.4 million

Supposing overheads of 1st quarter = x
Cost of 2, 3, and 4th quarter = 1.02x, x(1.02)2 and x(1.02)3
Total Overhead cost = x + 1.02x + (1.02)2x + (1.02)3x = Rs. 14.4 million
Hence x + 1.02x + 1.0404x + 1.0612x = Rs. 14.4 million
Hence x = 14.4 ÷ 4.1216 = Rs. 3.494 million
Therefore, overheads (other than depreciation) of 4th qtr = 1.0612x = Rs. 3.708 million
Determination of Sales / Cost of first quarter of 20X6

Apr-June 20X6 Increase Jul-Sep 20X6
------------------ Rs. in million ------------------
Cash sales 4.770 0.18 4.950
Credit sales in 4 quarter 21.730 0.82 22.550
Production cost
Material (8%) 10.500 0.84 11.340
Labour(5%) 6.600 0.33 6.930
Overheads(3%) 3.708 0.111 3.819
Operating and financial charges(10% 2.250 0.225 2.475
Page 6 of 7
Suggested Answers
COMPANY A
Cash budget 20X6
Jul Aug Sep
Receipts -----------Rs. in million-----------
Cash sales (4.95÷3) 1.650 1.650 1.650
Credit sales - 90% of previous month 6.519 6.765 6.765
- 10% of second last month 0.724 0.724 0.752
8.893 9.139 9.167
Payments
Production cost
Material (40% of same month) 1.512 1.512 1.512
Material (60% of previous month) 2.100 2.268 2.268
Labour 2.310 2.310 2.310
Overheads (40% of same month) 0.509 0.509 0.509
Overheads (60% of previous month) 0.742 0.764 0.764
Operating and financial charges (40%) 0.330 0.330 0.330
Operating and financial charges (60%) 0.450 0.495 0.495
7.953 8.188 8.188
Excess of receipts over payments 0.941 0.951 0.979
Add: Opening balance 1.500 2.441 3.392
Closing balance 2.441 3.392 4.371
(The End)
Page 7 of 7
Final Examinations
Module F
Q.1 Nasim Limited (NL) is engaged in the manufacturing of leather shoes. NL has recently
appointed a new managing director. He has taken upon him the task of improving the
profitability of the company. In this regard, the CFO has provided him the following
information:
(i) Annual sale of the company is 1.2 million pair of shoes (unit). These are supplied to
retailers through a sole distributor. The demand varies on a seasonal basis but the
quantity of production has to remain constant. As a result, stock levels are subject to
significant variations. Annual stockholding cost of each unit is approximately
Rs. 30.
(ii) The average price charged from retailers is Rs. 2,000 per unit. The distributor is
allowed a commission of 5%. Approximately 55% of all sales are made in the period
containing the two Eids i.e. the third quarter. To cater to this sale, stock is built to a
level of 660,000 units, at the start of the third quarter. Sale in all other quarters is
evenly distributed.
(iii) The company allows a warranty of 3 months. Approximately 5% of the units are
returned during the warranty period. These are replaced and the returned items are
sold in the secondary market at an average of Rs. 600 per unit.
(iv) Cost of leather used by NL is Rs. 300 per square foot. Approximately 2 square feet of
leather is required to manufacture a pair of shoes. Cost of other materials is
approximately 5% of the cost of leather.
(v) During storage, 4% of the leather loses its essential characteristics and is sold to a
buyer for Rs. 180 per square foot.
(vi) Cost of labour is Rs. 160 per unit consisting of 2 hours at Rs. 80 per hour.
(vii) Total production overheads amount to Rs. 24 million, of which 40% are fixed.
Variable production overheads are directly proportional to labour hours.
(viii) Opportunity cost of funds is 10% per annum.
Based on the above information, the managing director has prepared the following plan:
(i) Better quality leather would be purchased at a price of Rs. 360 per square foot which
would reduce the returns during warranty period to 2% and the wastage during
storage would be reduced to 3%.
(ii) Production employees would be trained at a cost of Rs. 5 million and their wages
would be increased by 25%. As a result, labour time is expected to decline by 10%.
(iii) New arrangement has been agreed with the distributor according to which all
production would be purchased by him immediately at retail price less commission
and the rate of commission would be increased to 8%. Presently, on average,
payments are made by retailers in 90 days. The distributor would make payment
within 60 days.
(iv) Based on the improved quality, the retail price would be increased by 10%. However,
this increase is expected to reduce the demand by 5%.
Required:
Calculate the net increase/decrease in annual profit of the company after the above changes
have been made. (17)
Q.2 Alpha Trading Company (ATC) had seen significant growth in the past few years.
However, the company's growth has now been restrained because of its limitations as
regards working capital financing.
Presently, the entire sale of the company is on the basis of 60 days credit which is the market
norm. In order to ensure prompt supply, ATC maintains average inventory of
approximately 50 days. A credit period of 20 days is available in respect of all purchases.
The annual sale is directly related to the availability of working capital. The existing
financing available to the company makes it possible for it to maintain a working capital of
Rs. 180 million.
The management is of the view that the sale can be increased by 40% provided that funds
are available to manage the increase in working capital. Consequently, ATC is considering
the following:
(i) Introduce cash sale at a price which would be 4% less than the credit sale price. The
marketing department estimates that the amount of annual cash sale would be
Rs. 48 million.
(ii) Request all creditors to increase the credit period by 10 days. This would involve
additional cost of 1%.
(iii) Arrange factoring facility under the following terms:
The factor would be responsible for making collections from debtors and any
bad debt would be to his account. He would be allowed a commission of 4%.
He would advance a maximum of 75% of the trade debts as soon as the sale is
made for which he would charge an interest of 12% per annum.
(iv) Borrow Rs. 10 million from the bank at a mark-up of 15% per annum.
ATC earns a profit margin of 30% on production costs. Administrative and selling costs
amount to Rs. 35 million per annum which include costs incurred on making collections
from debtors and bad debts amounting to 2% and 1% of credit sales respectively.
Required:
Determine which of the above measures should ATC adopt and the increase in total profit
that would be generated, as a result thereof. (16)
Q.3 Ali Limited (AL) has been manufacturing two types of speciality products. Their selling
prices and the costs per ton are summarised below:
Product X Product Y
Selling price Rs. 155,000 150,000
Labour cost Rs. 40,000 40,000
Variable overheads Rs. 20,000 20,000
Quantities required
Material A Ton 0.35 0.60
Material B Ton 0.70 0.45
Recently, AL’s research department has finalised the development of a new product Z
which is expected to fetch a high price and a much higher profit margin and will require the
use of materials C and D. Due to production constraints, AL has decided to discontinue the
production of X and Y within a month.
Following information is also available in respect of the existing raw materials:

(i) Sufficient demand exists to ensure that all production can be sold at existing prices.
(ii) Material A is readily available in the market at Rs. 40,000 per ton. Material B is short
because of which its price has shot up to Rs. 150,000 per ton.
(iii) The existing stock of A and B is 210 and 252 tons respectively and the average cost
thereof is Rs. 30,000 and Rs. 50,000 respectively per ton.
(iv) Any unused quantity of A and B can be sold in the market for Rs. 40,000 and
Rs. 90,000 per ton respectively.
(v) The factory has available capacity to process input of 630 tons in one month.
(vi) Normal loss is 5% of output.
Required:
Determine the optimal production plan of AL for the next month. (15)
Q.4 A company manufactures a single product whose annual demand is 4,000 units. The selling
price and costs/profit per unit are estimated as follows:
Rupees per unit

Selling price 80,000
Cost of sales
Direct materials (components) 25,000
Direct labour 15,000
Variable overheads 10,000
Fixed overheads 5,000 (55,000)
Administrative and selling expenses

Administrative expenses – Fixed 3,000
Selling expenses – Variable
Cost of delivery 1,000
Commission on sale 2,000 (6,000)
Net profit 19,000
The above costs do not include the impact of defective units. Previous experience of the
company shows that:
12% of the items manufactured are identified as defective prior to delivery to

customers. 4% of the items delivered to customers are returned because of defects
which are identified within a week of their use.
Defective units identified by the customers are brought to the factory and replaced
immediately, free of cost.
All the defective units are sold from the factory on as is where is basis at Rs. 4,000 per
unit.
The company is now considering the following proposal:
(i) Improving the production process which would reduce the defective units produced to
8%. The recurring cost associated with such improvement would be Rs. 10 million per
annum; and
(ii) Setting up a quality control unit with a per month cost of Rs. 600,000, which would
reduce the percentage of defective units delivered to customers to 2%.
Required:
(a) Prepare a statement showing the quality costs that the company is expected to incur
before and after taking the above steps, duly categorised using the four recognised
quality cost headings. (10)
(b) Recommend with reasons, whether or not the company should accept the proposal. (02)
Q.5 (a) Differentiate between risk and uncertainty. Briefly describe any four tools for
managing risks. (07)
(b) Briefly describe the advantages of zero-based budgeting. (03)

Q.6 ABC Limited is involved in manufacturing of Chemical M. In the first stage Chemical A
and Chemical B are heated to produce a Chemical D. Chemical D is then chemically treated
with equal quantity of Chemical E to produce Chemical M which has to be refined further
to bring it into saleable condition. All losses are in the form of residual waste and are sold in
the market.
The actual data for the month of November is as follows:
Process
Chemical
Heating Refining
treatment
Chemical - A (Rs. 4,000 per kg) Kg 3,750
Chemical - B (Rs. 2,000 per kg) Kg 6,250
Chemical - E (Rs. 5,000 per kg) Kg 9,200
Direct wages Rs. ‘000 2,000 3,000 1,800
Output Kg 9,200 17,000 16,000
Opening & Closing work in process Kg 400 760 684
Opening work in process Rs. ‘000 1,000 3,000 5,000
Stage of processing - opening % 60 60 60
- closing % 40 40 40
Scrap price of residual waste Rs. per kg 160 180 200
Normal loss (on input) (%) 5 10 6
The factory overheads are budgeted @ 40% of direct wages and are absorbed on the basis of
direct wages.
Required:
Prepare the process accounts for Heating, Chemical treatment and Refining processes. (17)
Q.7 XYZ Limited has provided you with the following budgeted and actual data for the year
ended 30 September 2015:
Budget Actual
Production Units 12,000 13,000
Sale Rs. 36,000,000 40,300,000
Material Rs. 21,600,000 23,210,000
Labour Rs. 5,760,000 6,365,000
Overheads
Fixed Rs. 3,000,000 2,800,000
Variable Rs. 3,240,000 3,549,000
The CFO has analysed the variation between the budgeted and actual figures and
ascertained the following reasons:
No price increase was envisaged but due to improvement in market situation, a 10%
price increase was made on 1 January 2015.
The cost of material decreased by 5% below the standard price.
The wages increased by 2% above the standard rate.
The company’s policy is to absorb overheads at a predetermined rate per labour hour.
Required:
Prepare a statement reconciling the budgeted profit and the actual profit and for the purpose
thereof, calculate all possible and relevant variances for sales, material, labour and
overheads. (13)
(THE END)
Suggested Answers
Final Examination – Winter 2015
A.1 Current Position Proposed

Sales in units A 1,200,000 1,140,000
Replacement/returns B=A5%, 2% 60,000 22,800
C 1,260,000 1,162,800
Selling price per unit D 2,000 2,200
Leather used E=C2 2,520,000 2,325,600
Loss in storage (current E×4÷96, propose E×3÷97) F 105,000 71,926
Leather required G 2,625,000 2,397,526
Cost of leather per ft. H 300 360
Profit & Loss Rs. in 000 Rs. in 000

Sales I=AD 2,400,000 2,508,000
Recovery from replacement/returns B600 36,000 13,680
Recovery for storage loss F180 18,900 12,947
Total revenue 2,454,900 2,534,627
Cost of sales
Leather used J=GH 787,500 863,109
Other materials used *1[39,375÷1,260,0001,162,800] J5% 39,375 *1
36,338
Labour cost (C×160×1.25×0.9) C160 201,600 209,304
Distributors' commission I5%, 8% 120,000 200,640
Stockholding costs W-1 14,400 -
1,162,875 1,309,391
Margin 1,292,025 1,225,236
Cost of funds [(2,400,000–120,000)×90/360×10%] (57,000)

[(2,508,000–200,640)×60/360×10%] (38,456)
Production overheads:
Variable (60% of 24 million), *2[14,400÷1,260,000×1,162,800×90%] (14,400) *2
(11,960)
Fixed (40% of 24 million) (9,600) (9,600)
Training cost - (5,000)
Net profit 1,211,025 1,160,220
Decrease in profit (1,211,025 – 1,160,220) 50,805
W-1 : Stockholding costs

Units Sold &
Quarter Opening stock Units produced Closing stock
replaced
a b c a+b-c
*2 *2
1 420,000 315,000 195,000 540,000
*2 *2 *1
2 540,000 315,000 195,000 660,000
*1 *2
3 660,000 315,000 675,000 300,000
*2 *2
4 300,000 315,000 195,000 420,000
1,260,000 1,260,000
*1
- given
*2
- evenly distributed
Average quarterly stock [(540+660+300+420)÷4] 480,000
Stockholding costs (480,000  30) Rs. 14,400,000
Page 1 of 7
Suggested Answers
A.2 Existing working capital Rs. 180 million

Additional working capital required (180×40%) Rs. 72 million
Working capital cycle in days (60+50-20) 90 days
Possible sale under existing working capital (180×360÷90) Rs. 720 million
Sale after increase in working capital (720×140%) Rs. 1,008 million
Evaluation of the alternative sources

Cash sale Creditor Factoring Borrowing
------------------------- Rs in million -------------------------
Working capital available annually (A) 8.00 21.54 126.00 10.00
(48×60÷360) (1008÷1.3× 10÷360) (1008×60÷360×75%)
Cost of the change in policy

Discount on sales (50×4%) 2.00 - - -
Interest (126×12%) ; (10×15%) - - 15.12 1.50
Loss of discount (21.50×1%)× 360÷10 - 7.75 - -
Factoring commission (1,008×0.04) - - 40.32
Savings of collection costs
(2%×50); (2%×1,008) (1.00) - (20.16) -
Savings in bad debts
(1%×50); (1%×1,008) (0.50) - (10.08) -
Net cost (B) 0.50 7.75 25.20 1.50
Cost per annum (B÷A×100) 6.25% 36% 20% 15%

Or (1%/10×360)
Ranking 1 4 3 2
Additional working capital of Rs. 72
million would be acquired from 8.00 - (72-8-10)=54.00 10.00
Accordingly the P&L account would be as follows:

Proposed Existing
--------- Rs. in million ---------
Net sales after discount of Rs. 2 million on cash sales 1,008.00 720.00
Production cost [(1,008 + 2) ÷ 1.3] 776.92 553.85
Administration and selling costs [35–(3%×720)] 13.40 35.00
Interest on new borrowings 1.50 -
Factoring – commission [(1,008–50)×4%] 38.32 -
Interest on advance from factor [(72-8-10)×12%] 6.48 -
836.62 588.85
Profit 171.38 131.15
Increase in profit (171.38 – 131.15) 40.23
Page 2 of 7
Suggested Answers
A.3 The constraints are:

0.35x + 0.60y ≤ 210 eq. 1
0.70x + 0.45y ≤ 252 eq. 2
x + y ≤ 600 (630÷1.05)
In eq. (1), if x = 0, y = 350 and if y = 0 , x = 600
In eq. (2), if x = 0, y = 560 and if y = 0 , x = 360
Solving eq. (1) & (2); x = 216, y = 224
PROFIT MARGINS PER TON
From Existing Material If material B is purchased
X Y X Y
------------------------------ Rupees ------------------------------
Selling price 155,000 150,000 155,000 150,000
Material A 14,000 24,000 14,000 24,000
Material B 63,000 40,500 105,000 67,500
Labour 40,000 40,000 40,000 40,000
Processing costs 20,000 20,000 20,000 20,000
Total costs 137,000 124,500 179,000 151,500
Profit margin 18,000 25,500 (24,000) (1,500)
Objective function for existing material 18,000x + 25,500y
Putting values in the objective functions:

Profit from sale Sale of
X Y of X and Y material A & B Total profit (Rs.)
(Rs.) (Rs.) [W-1]
0 350 8,925,000 8,505,000 17,430,000
360 0 6,480,000 3,360,000 9,840,000
216 224 9,600,000 - 9,600,000
Conclusion: Producing 350 units of Y and selling the surplus material B is the most feasible
alternative.
W-1: Sales value of remaining raw material after production

Production Consumption (Tons) Material (Tons) Sale value (Rs.)
X Y A B A B A@Rs.40,000 B@Rs.90,000
- 350.00 210.00 157.50 - 94.50 - 8,505,000
360.00 - 126.00 252.00 84.00 - 3,360,000 -
216.00 224.00 210.00 252.00 - - - -
Page 3 of 7
Suggested Answers
Statement of expected
A.4 (a)
quality costs
Present Proposed
Rupees
Prevention costs 10,000,000
Appraisal costs (600,000  12) 7,200,000
External failure costs – (W-1) 8,016,000 3,936,000
Internal failure costs – (W-2) 26,128,000 16,330,000
Total 34,144,000 37,466,000
Quality costs (37,466,000 – 34,144,000) 3,322,000
W-1: Cost of defective units delivered to customers (External failure)

Present : 167 (4÷96 ×4,000) units @ Rs. 50,000 per unit 8,350,000
Cost of bringing back defectives: 167×1,000 167,000
Cost of delivery (replaced units) 167,000
Salvage value : 167 @ Rs. 4,000 per unit (668,000)
8,016,000
Proposed : 82 (2÷98 × 4,000) units @ Rs. 50,000 per unit 4,100,000
Cost of bringing back defectives: 82×1000 82,000
Cost of delivery (replaced units) 82,000
Salvage value : 82 @ Rs. 4,000 per unit (328,000)
3,936,000
W-2: Defective units prior to delivery (Internal failure)

Present : 568 (12÷88 ×4,167) units @ Rs. 50,000 per unit 28,400,000
Salvage value : 568 @ Rs. 4,000 per unit (2,272,000)
26,128,000
Proposed : 355(8÷92 × 4,082) units @ Rs. 50,000 per unit 17,750,000
Salvage value : 355 @ Rs. 4,000 per unit (1,420,000)
16,330,000
Cost per unit (Rs)
Direct material 25,000
Variable overhead 10,000
50,000
(b) On purely financial grounds the company would incur an additional cost of
Rs. 3,322,000. However, the following factors should also be considered while making
a final decision:
 Greater customer satisfaction
 Impact on the reputation of the company
 Further savings if the sale is increased
Page 4 of 7
Suggested Answers
A.5 (a) Risk:

A condition in which there exists a quantifiable dispersion in the possible outcomes
from any activity.
Uncertainty:
The inability to predict the outcome from an activity due to a lack of information
about the required input/output relationships or about the environment within which
the activity takes place.
TOOLS FOR MANAGING RISKS

(i) Insurance:
Insurance is a means of providing a degree of protection against losses.
(ii) Diversification:
The reasons for diversifications are:
 To minimise the risks – If its main line is subject to trade fluctuations or
going out of fashion, a firm may diversify into an expanding area to
protect itself.
 Diversification helps to minimize risk by spreading the risk over many
products, locations, etc.
(iii) Internal control:

Internal control may be defined as the process designed, put in place and
maintained to provide assurance of a reasonable level regarding the
achievement of the objectives of an entity. These objectives relate to the
reliability of the financial reports, the efficiency and effectiveness of operations
and adherence to relevant and applicable laws and regulations.
(iv) Research and data collection:

Research and data collection provides information which can be used to reduce
risks and uncertainty by taking remedial measures.
(b) Advantages of zero-based budgeting

(i) It is possible to identify and remove inefficient or obsolete operations.
(ii) It adds a psychological impetus to employees to avoid wasteful expenditure.
(iii) It obliges an organization to look very closely into its cost behavior patterns in
order to decide the effect of alternative course of action.
(iv) Zero-based budgeting results in a more efficient allocation of resources to
activities and departments of the organization.
Page 5 of 7
Suggested Answers
A.6 WORK-IN-PROCESS ACCOUNTS (Rupees)

Chemical Chemical
Heating Refining Heating Refining
Treatment Treatment
Opening WIP 1,000,000 3,000,000 5,000,000 Recovery from
Material – A (i) 15,000,000 0 0 normal loss (vii) 80,000 331,200 204,000
Material – B (ii) 12,500,000 0 0 PL account
(Abnormal loss)
Material – E (iii) 0 46,000,000 0 (W-3) 947,871 0 0
Material from previous Transferred out
department (W-3) (iv) 0 29,068,035 80,503,628 (W-3) 29,068,035 80,503,628 84,439,344
Direct wages (v) 2,000,000 3,000,000 1,800,000 Closing WIP
FOH (40% of wages) (vi) 800,000 1,200,000 720,000 (W-3) 1,204,094 3,516,830 3,485,833
PL account (Abnormal
gain) (W-3) 0 2,083,623 105,549
31,300,000 84,351,658 88,129,177 31,300,000 84,351,658 88,129,177
W-1: Quantity Schedule (in Kgs)

Heating Chemical Treatment Refining
Opening WIP 400 760 684
Material added 10,000 18,400 17,000
Closing WIP (400) (760) (684)
10,000 18,400 17,000
Quantity transferred out (9,200) (17,000) (16,000)
Normal loss 5% (500) 10% (1,840) 6% (1,020)
Abnormal loss/(gain) 300 (440) (20)
W-2: Equivalent units (EU) and cost per unit (CPU)

Heating Chemical Treatment Refining
Material Processing Material Processing Material Processing
Work on opening WIP 0 160 0 304 0 273.6
Units started and completed 8,800 8,800 16,240 16,240 15,316 15,316
Work on closing WIP 400 160 760 304 684 273.6
Abnormal loss/(gain) (W-1) 300 300 (440) (440) (20) (20)
Equivalent units (EU) 9,500 9,420 16,560 16,408 15,980 15,843.2
Cost during the month 27,500,000 2,720,000 75,068,035 3,868,800 80,503,628 2,316,000
(taken from respective process a/c) (i) + (ii) (v)+(vi) – (vii) (iii) + (iv) (v)+(vi) –(vii) (iv) (v)+(vi)–(vii)
Cost per unit (CPU) 2,894.737 288.74735 4,533.094 235.78742 5,037.774 146.18259
W-3: Cost of units transferred out / Abnormal loss and gain / Closing WIP
Chemical
Heating Refining
Treatment
Rs. Rs. Rs.
Opening WIP (given) 1,000,000 3,000,000 5,000,000
Processing cost on opening WIP [CPU (processing)  EU (opening WIP)] 46,200 71,679 39,996
Cost of units started and completed incl. abnormal loss/(gain)
[CPU (material+processing)EU(units started & completed incl. abnormal loss/(gain))] 28,969,706 75,348,325 79,293,800
A 30,015,906 78,420,004 84,333,796
Less: Cost of abnormal gain/(loss)
[A÷EU× abnormal gain/loss units] (947,871) 2,083,623 105,549
Cost of units transferred out B 29,068,035 80,503,627 84,439,345
Cost of closing WIP

- Material [CPU (material) x EU (Closing WIP)] 1,157,895 3,445,151 3,445,837
- Processing cost [CPU (processing)  EU (Closing WIP)] 46,200 71,679 39,996
C 1,204,094 3,516,830 3,485,833
Total cost B+C 30,272,129 84,020,457 87,925,178
Page 6 of 7
Suggested Answers
A.7 XYZ Limited

Reconciliation of budgeted and actual profit
------- Rs. in '000 -------
Budgeted net profit (36,000–21,600–5,760–3,000–3,240) 2,400.00
Sales margin price variance

Actual sales quantity at budgeted price 36,000÷12×13 39,000.00
Actual sales quantity at actual price 40,300.00
Fav. 1,300.00
Sales margin volume variances:

Budgeted sales quantity at budgeted profit 12,000×200 2,400
Actual sales quantity at budgeted profit 13,000×200 2,600
Fav. 200 1,500.00
Budgeted profit per unit (36,000–21,600–5,760–3,000–3,240)÷12,000 = 200
Material price variance

Actual quantity used at actual price 23,210.00
Actual quantity used at standard price 23,210÷0.95 24,431.58
Fav. 1,221.58
Material usage variance
Actual quantity used at standard price 23,210 ÷ 0.95 24,431.58
Budgeted quantity used at standard price 21,600÷12×13 23,400.00
Adv. (1,031.58) 190.00
Labor rate variance
Actual hours used at actual rate 6,365.00
Actual hours used at standard rate 6,365÷1.02 6,240.20
Adv. (124.80)
Labor efficiency variance
Actual hours used at standard rate 6,365÷1.02 6,240.20
Budgeted hours used at standard price 5,760÷12×13 6,240.00
Adv. (0.20) (125.00)
Variable overhead expenditure variance
Actual hours used at actual rate 3,549.00
Actual hours used at standard rate 3,240÷12×13 3,510.00
Adv. (39.00)
Variable overhead efficiency variance
Actual hours used at standard rate 3,240÷12×13 3,510.00
Budgeted hours used at standard price 3,240÷12×13 3,510.00
- (39.00)
Fixed overhead spending variance
Actual fixed overhead 2,800.00
Budgeted fixed overhead 3,000.00
Fav. 200.00
Fixed overhead volume variance
Actual capacity availed at standard hours 3,000÷12×13 3,250.00
Available capacity 3,000.00
Fav. 250.00 450.00
Actual profit (40,300–23,210–6,365–2,800–3,549) 4,376.00
(The End)
Page 7 of 7
Final Examinations
Module F
Q.1 Umair Limited has recently established a factory in Nowshera which will produce two
products Mori and Naga. According to the budget for the first year, the company would
operate at normal capacity of the plant which is 50,000 units of Mori and 60,000 units of
Naga. The budget prepared by the finance department for the first year includes the
following projections:
Mori Naga
Price per unit – Exports Rs. 4,000 Rs. 5,200
– Local sales Rs. 4,500 Rs. 6,000
Discount would be allowed on local sales depending upon the credit period as follows:
X type customers with 60 days credit NIL

Y type customers with 30 days credit 10%
Volume of local sales is estimated at 80% of total sales. Ratio of sales to X and Y type of
customers would be 3:2 respectively.
Production costs per unit of finished products have been budgeted as under:
Mori Naga
Raw material 5 kg @ Rs. 300 per kg 10 kg @ Rs. 200 per kg
Direct labour 6 hours @ Rs. 200 per hour 7 hours @ Rs. 250 per hour
Overhead* (30% fixed and 70% variable) 40% of direct labour
*excluding ordering and holding costs of inventory
The size of raw material orders would be 30,000 kg and 40,000 kg in respect of Mori and
Naga respectively. The company would follow a policy of maintaining 5,000 units of
inventory of finished goods of each product and safety stocks of 10,000 kg for each raw
material.
Administration expenses are fixed and are estimated at Rs. 28 million per annum. Selling
costs are estimated at Rs. 61 million of which 80% are variable. Variable selling costs are
related to local sales only. The variable selling expenses pertaining to Naga are 40% more
than selling expenses on Mori.
Total depreciation on all assets is estimated at Rs. 3 million which has already been
incorporated in the above costs.
In addition to the above costs, the raw material holding costs are estimated at Rs. 4 per kg
per month. The annual ordering costs are estimated at Rs. 600,000 which mostly constitute
fixed expenses as the variable costs are negligible.
Required:
Compute the break-even sales in Rupees assuming that the export orders are confirmed and
volume of local sales of Mori and Naga would maintain the ratio as per budget. (21)
Q.2 Junaid Ltd. is in the process of setting up a plant for production of LED lights. The land for
the plant was purchased at a cost of Rs. 100 million whereas the plant and its installation
would cost Rs. 250 million. The annual capacity of the plant is 1.5 million LEDs.
Technical & Commercial departments of the company have forwarded the following
information:
(i) Plant would operate in a single shift of 8 hours for 25 days per month.
(ii) Cost of raw material for the LEDs is estimated at Rs. 40 per unit.
(iii) The LED holder will cost Rs. 25 per unit. It is expected that 4% holders would be
defective and would have to be sold in scrap for Rs. 2 per unit.
(iv) Average direct labour time would be 3 minutes per unit. Labour would consist of
32 workers who would be hired on a permanent basis and paid a salary of Rs. 20,000
per month. Other benefits and perquisites would be 15% of the salary.
(v) Variable overheads are estimated at Rs. 480 per labour hour.
(vi) Fixed overheads are estimated at Rs. 3,800,000 per month.
The following information is based on a market survey which was conducted recently.
(i) The current market price of an LED is Rs. 180 per unit.
(ii) It is estimated that the company can annually sell 1,240,000 units at the above price.
However, the demand is price sensitive. The relationship between quantity demanded
(x) and sales price (SP) can be expressed as under:
SP = 273 – 0.000075x
Required:
Determine the optimum selling price which would maximise the company’s profitability for
the first year of operations and calculate the optimum profit. (12)
Q.3 Muntazim Limited produces three products. Its budget for the year ending 30 June 2016
depicts the following:
X Y Z
Sales volume units 840,000 660,000 520,000
Sales Rs. 140,000,000 200,000,000 250,000,000
Cost of raw material per unit of production Rs. 60 110 180
Direct labour hours per unit 0.5 1.0 1.5
Machine hours per unit 0.1 0.2 0.3
Material requisitions to be issued per day number 5 3 2
Inspection time per unit minutes 12 15 20
% of units to be inspected - 1% 2% 4%
Average time taken to process a sales order hours 5 10 15
Average size of the sales order units 20,000 12,000 10,000
Opening inventory units 60,000 50,000 40,000
Closing inventory units 20,000 90,000 120,000
Other related information is as under:

(i) Manufacturing overheads are estimated at 50% of direct labour cost. Labour rate is
Rs. 50 per hour. Manufacturing overheads represent the cost of Production
department (40%), Quality control department (30%), Materials management
department (20%) and Engineering department (10%).
(ii) Total administration and selling expenses are budgeted at Rs. 40 million. These
represent head office costs (60%) and sales department costs (40%). Head office
expenses are allocated on the basis of sales value.
(iii) Cost of opening inventory per unit is the same as production costs for the budget
period.
(iv) Units are inspected at the time of transfer to finished goods warehouse.
Required:
Prepare a product wise profit and loss account using activity based costing. (19)
Q.4 Riaz Limited finances its working capital through running finance. Since the company’s
borrowings have reached 95% of its borrowing limit, it is negotiating with the bankers for
enhancement of the borrowing limit.
The working capital of the company as shown in its financial statements for the year ended
31 May 2015 amounted to Rs. 3,162 million.
The details are as follows:

Rs. in million
Debtors 1,512
Finished goods inventory 1,890
Raw material inventory 1,200
Payable to suppliers of raw material (1,080)
Other expenses payable (360)
3,162
The company's budget for the next year contains the following projections:
(i) Sale price would increase by 5% and sales volume would increase by 20%.
(ii) Raw material prices would increase by 10% whereas labour rate would increase by
6%.
(iii) Prices/rates of other expenses which include factory overheads and selling/
administration expenses would increase by 8%.
(iv) The ratio of factory overhead to administration and selling expenses is 1:3. 40% of
overhead expenses and all administration and selling expenses are fixed.
(v) Analysis of production cost reveals that the ratio of raw material costs, labour and
overheads is 5:3:2 respectively.
The company is considering to change its working capital policy as follows:

(i) Finished goods inventory turnover would reduce from 7 times to 6 times per annum.
(ii) Raw material inventory levels would be increased from 20 days to 30 days
(iii) Credit period offered to customers would increase from 30 days to 45 days.
(iv) Policy for payment to suppliers would not be changed, however, payment of other
expenses would be delayed by 5 days. At present the company pays all expenses in 15
days.
Required:
Determine the minimum increase in the running finance limit which the company should
seek from its bankers. (13)
Q.5 Asim Limited (AL) manufactures two types of products X and Y. The production of each
product involves three departments. The relevant details are as follows:
Departments Contribution
Description
A B C margin per unit
Production hours per unit
X 60 50 25 Rs. 198,000
Y 35 30 32 Rs. 120,000
Annual capacity of the

252,000 180,000 144,000 -
departments (hours)
Recently, AL has received a proposal whereby it would be able to increase the production
capacity of department C by 2,000 hours per month. The additional cost associated with this
facility would be Rs. 2 million per annum.
Required:
Determine whether the company should accept the above proposal. (15)
Q.6 Adil Limited deals in a single product which is processed through three production
departments. The standard cost card of the first department is as under:
Raw material: 1.25 kg @ Rs. 30 per kg

Labour: 8 minutes per unit @ Rs. 210 per hour
Variable factory overheads: Rs. 21 per unit
Fixed factory overheads have been budgeted at Rs. 15 million for this department for
the production of 1.2 million units.
The company uses FIFO method for inventory valuation. All entries in raw material,
labour, factory overheads and work-in-process accounts are recorded at standard cost and all
possible variances are closed into the Cost of Goods Sold account.
Normal loss is estimated at 5% of the output quantity.
Actual production related information of the first department, for the period ended 31
March 2015 is as follows:
(i) There was no beginning inventory of raw material.

(ii) Raw material introduced during the period was 1,500,000 kg.
(iii) 1,650,000 kg of raw material was purchased during the period at a total cost of
Rs. 50,737,500.
(iv) 160,000 labour hours were worked during the period at a cost of Rs. 32,750,000.
(v) Actual factory overhead costs were Rs. 40 million of which 60% were variable.
(vi) Number of units in process at the start and at the end of the period were 112,000 and
270,000 respectively.
(vii) The stage of completion of the units in process was as follows:
Opening Closing
Raw material 80% 60%
Labour 60% 45%
Factory overheads 40% 30%
(viii) 950,000 units were completed and transferred out to the next department.
(ix) 44,500 units were lost when the plant had to be shut down due to a short circuit.
These units were 90% complete as to material and 70% complete as to labour and
factory overheads.
Required:
Prepare the entries for the period ended 31 March 2015 to record the following:
(a) All entries related to material, labour and overhead on the basis of standard cost. (13)
(b) Accounting for abnormal loss. (03)
(c) Transfer of material to the next department. (02)
(d) Closure of variances. (02)
(THE END)
Suggested Answers
Ans.1 Mori Naga

Rs. Rs.
Variable cost per unit
Raw material 1,500 2,000
Direct labour 1,200 1,750
Production overhead - variable (1,200 & 1,750×40%×70%) 336 490
Selling expenses (W-1) 500 700
3,536 4,940
Fixed costs
Cost per unit (1,200 & 1,750 × 40% × 30%) 144 210
Normal capacity 50,000 60,000
Total fixed production overheads 7,200,000 12,600,000 19,800,000
Fixed holding costs
((30,000/2+10,000)×4×12),(40,000/2+10,000)×4×12)* 1,200,000 1,440,000 2,640,000
Fixed ordering costs 600,000
Administration expenses (all fixed) 28,000,000
Fixed selling expenses (61 million × 20%) 12,200,000
63,240,000
Less Margin on exports (W-2) 19,236,000
Further margin required to break-even (Balancing) 44,004,000
Local sales to break even (44,004,000/15.72% (W-3) 279,923,664
Workings:
W-1: Variable selling expenses
Mori Naga
Total
Units Units
Normal capacity 50,000 60,000
Less Closing inventory 5,000 5,000
Budgeted sales 45,000 55,000
Local sales (80% of sales) 36,000 44,000
Impact of additional weightage (40% addition in Naga) 36,000 61,600 97,600
Total budgeted variable costs Rs. 18,000,000 Rs. 30,800,000 Rs. 48,800,000
Cost per unit (18,000,000/36,000),(30,800,000/44,000) Rs. 500 Rs. 700
W-2: Contribution on exports

Sale volume (20% of budgeted sales (W-1) 9,000 11,000
Rs. Rs. Rs.
Sale price 4,000 5,200
Cost per unit 3,036 4,240
Contribution margin per unit 964 960
Total contribution margin 8,676,000 10,560,000 19,236,000
W-3: Calculation of contribution margin on local sales of Mori and Naga
Mori Naga
Type of customers Type of customers
Total Total
X Y X Y
Sale price 4,500 4,500 6,000 6,000
Discount @ 10% - 450 - 600
Net sale price 4,500 4,050 6,000 5,400
Variable cost 3,536 3,536 4,940 4,940
CM per unit 964 514 1,060 460
Sales volume ratio 3 2 3 2
Sales quantity 21,600 14,400 36,000 26,400 17,600 44,000
Sales value (Rs.) 97,200,000 58,320,000 155,520,000 158,400,000 95,040,000 253,440,000
Cost (Rs.) 76,377,600 50,918,400 127,296,000 130,416,000 86,944,000 217,360,000
Total sales (155,520,000 + 253,440,000) 408,960,000

Total cost (127,296,000 + 217,360,000) 344,656,000
Overall CM 64,304,000
Overall CM ratio (64,304,000 / 408,960,000 × 100) 15.72%

Page 1 of 7
Suggested Answers
Ans.2 Fixed cost for the year Rs. in Million

Labour (20000 × 1.15 × 32 × 12) 8.83
Annual fixed overhead (3.8 million × 12) 45.60
54.43
Variable cost of each LED Rupees

Raw material 40.00
Cost of holder (Rs. 25.00/96%) 26.04
Scrap value (Rs. 2 × 4%) (0.08)
Variable overhead (3/60 × 480) 24.00
89.96
Assume that number of units produced is x:

Total cost (TC) = Rs. 54,430,000 + Rs. 89.96 x (Annual units of LED)
Selling price i.e. Average Revenue (AR) for an output of x units = 273 – 0.000075x
Hence Total Revenue (TR)=(273–0.000075 x)× x = 273 x –0.000075 x 2
Optimum price is the price where Marginal Revenue(MR) = Marginal Cost (MC)
MR = first derivative of TR = 273 -0.00015 x
MC = first derivative of TC = 89.96
Optimum price is where 273 - 0.00015 x = 89.96
where x = (89.96–273)/–0.00015 = 1,220,267 units
Hence Optimum selling price = 273 – 0.000075 × 1,220,267 = Rs. 181.479975 say Rs. 181
Contribution at optimum sale price = [(181-Rs. 89.96) × 1,220267] = Rs. 111,093,108
Optimum profit (Rs. 111,093,108 – 54,430,000) = Rs. 56,663,108
Page 2 of 7
Suggested Answers
Ans.3 Allocation of production cost on the basis of production units to compute per unit cost
MUNTAZIM LIMITED
PRODUCT WISE PROFIT AND LOSS ACCOUNT
X Y Z Total
Rs. Rs. Rs. Rs.
Sales 140,000,000 200,000,000 250,000,000 590,000,000
Cost of sales (W-1) (83,823,664) (120,457,197) (152,022,265) (356,303,126)
Admin and selling costs (W-2) (7,876,733) (13,849,879) (18,273,388) (40,000,000)
Net profit 48,299,603 65,692,924 79,704,347 193,696,874
W-1: Cost of goods sold

Sales in units 840,000 660,000 520,000
Add: Closing inventory 20,000 90,000 120,000
Less: Opening inventory 60,000 50,000 40,000
Production in units 800,000 700,000 600,000 2,100,000
Raw material cost

(Production × per unit) (A) 48,000,000 77,000,000 108,000,000
Labour hours per unit 0.5 1.0 1.5

Labour cost per unit 25 50 75
Total labour cost
(Production in units × cost per unit) (B) 20,000,000 35,000,000 45,000,000 100,000,000
Total manufacturing overhead (50% of

direct labour) 50,000,000
Total Labour hours 400,000 700,000 900,000 2,000,000

*Allocation of Production department
cost i.e. Rs. 50,000,000 × 40% in the
ratio of labour hours (C) 4,000,000 7,000,000 9,000,000 20,000,000
*Can be allocated on the basis of machine
hours
Basis of inspection 1% 2% 4%
No. of units inspected
(Production × basis) 8,000 14,000 24,000
Minutes per inspection 12 15 20
Total inspection time (hours) 1,600 3,500 8,000 13,100
Allocation of Quality control department
cost i.e. (50,000,000 × 30%) in the ratio
of total inspect time (D) 1,832,061 4,007,634 9,160,305 15,000,000
Material requisitions issued per day 5 3 2

Allocation of Material Management
department i.e. Rs. 50,000,000 × 20% in
the ratio of material requisitions per day
(E) 5,000,000 3,000,000 2,000,000 10,000,000

Total machine hrs
(Production × per unit machine hrs) 80,000 140,000 180,000 400,000
Allocation of Engineering department
cost i.e. Rs. 50,000,000 × 10% in the
ratio of machine hours (F) 1,000,000 1,750,000 2,250,000 5,000,000
Cost of production A to F 79,832,061 127,757,634 175,410,305
Cost per unit 99.79 182.51 292.35
Cost of sales 83,823,664 120,457,197 152,022,265 356,303,126
Page 3 of 7
Suggested Answers
W-2: Administrative costs

X Y Z Total
Average size of the sales order 20,000 12,000 10,000
Number of orders processed
(sales volume ÷ average size) 42 55 52 149
Average time to process a sales order - hrs 5 10 15
Total time to process sales orders 210 550 780 1,540
Allocation of head office costs i.e. Rs.
24,000,000 in the ratio of sales value (G) 5,694,915 8,135,593 10,169,492 24,000,000
Allocation of sales department costs i.e.

Rs. 16,000,000 in ratio of no. of
processed orders (H) 2,181,818 5,714,286 8,103,896 16,000,000
Administrative and selling costs (G+H) 7,876,733 13,849,879 18,273,388 40,000,000
Ans.4 Rs. in million

Proposed
Debtors (Rs. 1,512 × 45/30 × 1.2 × 1.05) 2,857.68
Finished goods inventory (Rs. 1,890×7/6×1.084 (W-1)× 1.2) 2,868.26
Raw Material inventory (1,200 × 1.1 × 30/20 × 1.2) 2,376.00
Payable to suppliers of raw material (Rs. 1,080 × 1.2 × 1.1 ) (1,425.60)
Other expenses payable (400.46(W-2) × 20/15) (533.95)
6,142.40
Less: Present working capital (3,162/0.95) (3,328.42)
Minimum increase in working capital limit 2,813.98
W-1: Determination of increase in unit cost
Weight Increase % After increase

Raw material 0.50 10% 0.5500
Labour 0.30 6% 0.3180
Factory overhead
Fixed (20% × 40%) 0.08 8% 0.0864
Variable (20%–8%) 0.12 8% 0.1296
1.0840
W-2: Determination of other expenses payable
Present Proposed
other Increase in Volume other
Weight
expense rate % increase % expenses
payable payable
FOH (1/4)
Fixed (1/4 × 40%) 10% 36 8% - 38.88
Variable (1/4 × 60%) 15% 54 8% 20% 69.98
Admin & Selling (3/4) - all fixed 75% 270 8% - 291.60
360 400.46
Page 4 of 7
Suggested Answers
Ans.5 Based on annual production capacity
Departments
A B C
Annual capacity (hours) 252,000 180,000 144,000
Objective function: Maximize 198X + 120Y (× 1,000 Rupees)
Current constraints:
60X + 35Y = 252,000 Eq. 1 if Y=0, X=4200; if X=0, Y=7200
50X + 30Y = 180,000 Eq. 2 if Y=0, X=3600; if X=0, Y=6000
25X + 32Y = 144,000 Eq. 3 if Y=0, X=5760; if X=0, Y=4500
X>0 , Y>0
In equation 1, X as well as Y intercept is greater than in case of Eq. 2, hence, Eq. 1 is redundant.
Therefore, solving equations 2 and 3 we have:

50X + 30Y = 180,000 Eq.2
50X + 64Y = 288,000 Eq. 4 Eq. 3 × 2
34Y = 108,000
Y = 3176.47
50X + 30Y = 180,000 Eq. 2

50X + 95,294 = 180,000
50X = 84,706
X = 1694.12
Revised constraints:
50X + 30Y = 180,000 Eq. 2 if Y=0, X=3600; if X=0, Y=6000
25X + 32Y = 168,000 Eq. 3 if Y=0, X=6720; if X=0, Y=5250
50X + 30Y = 180,000 Eq. 2

50X + 64Y = 336,000 Eq. 5 Eq. 3 × 2
34Y= 156,000
Y = 4588.24
50X + 30Y = 180,000 Eq. 2

50X + 137,647= 180,000
50X= 42353
X= 847.06
Production Contributions
X Y
Present Options: 1 3,600 0 712,800
2 1,694 3,176 716,532
3 0 4,500 540,000
Production Contributions
X Y Rs.
Revised Options: 1 3,600 0 712,800
2 847 4,588 718,266
3 0 5,250 630,000
Additional revenue due to increased capacity is Rs. 1,734,000 (718,266 – 716,532 = 1734×1,000). As
the additional revenue is less than Rs. 2 million, the company should not accept the proposal.
Page 5 of 7
Suggested Answers
A.6 Equivalent production units Material Labour FOH

Units completed 950,000 950,000 950,000
Work on Ending WIP 162,000 121,500 81,000
Beginning WIP (89,600) (67,200) (44,800)
Abnormal Loss 40,050 31,150 31,150
Equivalent production units 1,062,450 1,035,450 1,017,350
Alternate Working
Equivalent production units Material Labour FOH

Units completed 950,000 950,000 950,000
Less: From Beginning WIP (112,000) (112,000) (112,000)
Introduced & completed during period 838,000 838,000 838,000
Work on Beginning WIP 22,400 44,800 67,200
Abnormal Loss 40,050 31,150 31,150
Work on Ending WIP 162,000 121,500 81,000
Equivalent production units 1,062,450 1,035,450 1,017,350
(a) Description Debit Credit

Amount in Rs.
Material A/c (1,650,000 × 30) 49,500,000
Material price variance (balancing) 1,237,500
Creditors A/c 50,737,500
(Record purchase of material and its price variance)
WIP A/c (1,062,450×1.25×30) 39,841,875
Material Quantity Variance (balancing) 5,158,125
Material A/c (1,500,000×30) 45,000,000
(Record issuance of material and its usage variance)
Labour cost (160,000 × Rs. 210) 33,600,000
Accrued Payroll 32,750,000
Labour Rate Variance (balancing) 850,000
(Record labour cost and its rate variance)
WIP A/c (1,035,450 × 8 ÷ 60) × 210 28,992,600
Labour Efficiency Variance (balancing) 4,607,400
Labour cost (160,000 × Rs. 210) 33,600,000
(Record charging of labour cost to the process a/c and
labour efficiency variance)
Production overhead control a/c 40,000,000
Bank / creditors 40,000,000
(Record actual overhead)
WIP A/c (1,017,350 × 21) 21,364,350
Variable overhead total cost variance (balancing) 2,635,650
Production overhead control A/c (40 × 60%) 24,000,000
(Record charging of variable overhead to the process and
variable overhead total cost variance)
WIP A/c (1,017,350 × Rs. 12.5) 12,716,875
Fixed production expenditure variance (W-1) 1,000,000
Fixed production volume variance (W-2) 2,283,125
Production overhead control a/c (40×40%) 16,000,000
(Record charging of fixed overhead to the process and fixed
overhead variances)
Page 6 of 7
Suggested Answers
(b) Abnormal losses account (W-3) 3,417,600

WIP A/c 3,417,600
(Record abnormal loss)
(c) Department -2 (950,000 × [37.5+28+21+12.5]) 94,050,000
WIP A/c 94,050,000
(Transfer the completed units to Department 2)
(d) Cost of goods sold (balancing) 16,071,800
Labour rate variance 850,000
Material price variance 1,237,500
Material quantity variance 5,158,125
Labour efficiency variance 4,607,400
Variable overhead total cost variance 2,635,650
Fixed production expenditure variance 1,000,000
Fixed production volume variance 2,283,125
(Record closure of all variance to cost of goods sold)
WORKINGS
W-1: Fixed production overhead expenditure variance

Standard fixed overhead 15,000,000
Actual fixed overhead expenditure (40 × 40%) 16,000,000
(A) (1,000,000)
W-2: Fixed production overhead volume variance

Standard units 1,200,000
Actual units 1,017,350
182,650
× Standard rate i.e. Rs. 12.5 (15÷1.2) Fav. 2,283,125
W-3: Abnormal loss reversed from WIP

Raw Material (40,050 × 1.25 × 30) 1,501,875
Labour (31,150 × 8 ÷ 60 × 210) 872,200
FOH (31,150 × 21) – Variable 654,150
FOH (31,150 × 12.50) – Fixed 389,375
3,417,600
(The End)
Page 7 of 7
Final Examination
Module F
Q.1 Owais Limited (OL) deals in a single product. For 2013-14, the sale was projected at 40,000
units. OL followed a policy of maintaining safety stock of 500 units and placed orders on
the basis of Economic Order Quantity (EOQ). The total carrying costs amounted to
Rs. 900,000 whereas carrying cost per unit per month was Rs. 30.
The projections for 2014-15 are as follows:
Annual sales would be 52,800 units.

Expected sale price of the product is Rs. 4,000 per unit and expected contribution
margin is 5% of sales.
Carrying cost per unit is expected to increase by 20%.
Fixed costs of the ordering department would increase by 15% over last year whereas
variable costs associated with processing an order would increase by 10%.
There would be no change in the policy for maintenance of safety stock.
Required:
(a) Compute the following for the year 2014-15:
(i) Economic Order Quantity

(ii) Total ordering and carrying costs (11)
(b) Suggest revised safety stock level based on the assumption that lead time usage and
the related probabilities are as follows:
Market condition Units Probability

Favourable 5,000 0.15
Moderate 4,500 0.50
Slow 4,000 0.35 (05)
Q.2 Umair (Private) Limited manufactures a single product in batches. Relevant details for the
current financial year are as under:
Raw materials Standard usage per unit Actual input

Alpha 20 kg @ Rs. 29 5,933,750 kgs @ Rs. 25
Beta 15 kg @ Rs. 40 4,279,875 kgs @ Rs. 43
Gamma 12 kg @ Rs. 45 3,598,125 kgs @ Rs. 51
The actual output was 252,500 units.
Required:
Calculate the following material variances component wise:
(a) price (b) usage
(c) mix (d) yield (12)
Q.3 ABC Limited deals in manufacturing of tables and chairs. The profit and loss account of the
company for the year ended 30 June 2014 is as follows:
Rs. in '000'
Sales 243,000
Gross profit 31,500
Operating expenses (57,300)
Net loss before taxation (25,800)
Taxation -
Net loss after taxation (25,800)
Additional information
(i) Selling price per table and chair is Rs. 22,000 and Rs. 8,000 per unit having
contribution margin of 35% and 30% respectively. Tables and chairs are sold in the
ratio of 1:4.
(ii) 80% of the operating expenses are fixed while the remaining expenses are directly
attributable to the number of units sold.
(iii) The corporate tax is applicable @ 34% while no tax is required to be paid in case of
loss.
(iv) The share capital of the company is Rs. 180 million.
Required:
(a) Determine the break even sales revenue. (08)
(b) Determine the number of tables and chairs that need to be sold if the company wants
to pay a dividend of 10% and retain profits amounting to 4% of sales. (08)
Q.4 Cinemax Limited has recently constructed a fully equipped theatre and 3 cinema houses at a
cost of Rs. 30 million. The theatre has a capacity of 800 seats and each cinema has a
capacity of 600 seats. Information and projections for the first year of operations are as
follows:
(i) Fixed administration and maintenance cost of the entire facility is Rs. 4.5 million per
year.
(ii) The average cost of master print of a Hollywood film is Rs. 4 million while the cost of
master print of a Bollywood film is Rs. 6.5 million.
(iii) Two cinema houses are dedicated for Hollywood films which show the same film at
the same time while one cinema house will show Bollywood films.
(iv) Each Bollywood film is displayed for 6 weeks and the average occupancy level is
70%. Each Hollywood film is displayed for 4 weeks and the average occupancy level
is 65%. On weekdays, there are 2 shows while on weekends (Sat and Sun), 3 shows
are displayed. Ticket price has been fixed at Rs. 350.
(v) Variable cost per show is Rs. 35,000 and setup cost of each film is Rs. 500,000.
(vi) No films would be shown during 8 weeks of the year.
(vii) Theatre is rented to production houses at Rs. 60,000 per day. Each play requires setup
time of 2 days while rehearsal time needs 1 day. Each play is staged 45 times. One
show is staged on weekdays whereas two shows are staged on weekends.
(viii) There is an interval of 2 days whenever a new play is to be staged. No plays are
staged during the month of Ramadan and first 10 days of Muharram.
(ix) The construction costs of theatre and cinema houses are to be depreciated over a
period of 15 years.
(x) Assume 52 weeks in a year and 30 days in a month.
Required:
Prepare budgeted profit and loss account for the first year. (16)
Q.5 (a) Briefly explain the various types of quality costs in Total Quality Management. Give
one example of each. (05)
(b) Hamid (Private) Limited (HPL) has received an order for supply of a new product.
The planning department has estimated that for the first batch of 500 units, the per
unit revenue/costs would be as follows:
Selling price Rs. 450

Direct material 1 kg @ Rs. 180 per kg.
Direct labour 2 labour hours @ Rs. 100 per hour
Variable production overheads 25% of direct labour costs
Fixed production overheads Rs. 30
Selling expenses Rs. 20
HPL has a learning curve of 80% for all new products. The units are produced in
batches of 500 units and the learning effect applies to the first 8 batches only.
Note: log 0.8/log 2 = –0.322
Required:
Compute the minimum quantity that would allow HPL to earn a contribution margin
of 20% of sales. (15)
Q.6 Centre-point Hotel has 50 rooms of various categories. The occupancy levels are as follows:
Period Occupancy
Jan - May 60%
Jun - Jul 90%
Aug - Oct 40%
Nov - Dec 80%
There are two halls which are rented out for seminars, conferences and private functions.
The average occupancy during the year is 20%.
The revenues and expenses for the latest year are as follows:
Room rent Restaurant Halls

Revenue 125,400,000 75,000,000 10,950,000
Variable cost 18,810,000 41,250,000 2,737,500
Fixed cost for the year is Rs. 45 million.
Restaurant revenue includes revenue from walk-in-customers, food served during functions
held in the halls and to room occupants, in the proportion of 2:3:5 respectively. The food for
functions is provided at a discount of 25% of price list.
The management is considering to increase the sale volume by offering attractive discount
packages during off-peak seasons (having occupancy level of 70% and below) as follows:
(i) 10% discount on room rent which is expected to increase the occupancy by 15%.
(ii) Discount of 30% on hall rent, which would increase the occupancy by 50%.
(iii) The related restaurant revenues will also increase in the same proportion.
Required:
Prepare feasibility of the discount schemes assuming that each month has 30 days. (20)
(THE END)
Suggested Answers
Ans.1 (a) (i) Actual 2013-2014

Sales Units 40,000
Average inventory including safety stock (900000/30/12) Units 2,500
Safety stock Units 500
Average inventory excluding safety stock (2500–500) Units 2,000
EOQ (2000×2) Units 4,000
Ordering costs (900,000 *2,000 /2,500) Rs. 720,000
No of orders (40,000/4000) 10
Cost per order (720,000/10) Rs. 72,000
Projections for 2014-2015: Rupees

Carrying cost per unit (30 × 12 × 1.2) 432
Ordering cost per order (72,000×1.1) 79,200
EOQ = 2 × Annual requirement × cost per order ÷ Annual carrying cost per unit
EOQ = 2 × 52,800 × 79,200 ÷ 432
EOQ = 4,400
(ii) Average inventory excluding safety stock(4,400/2) Units 2,200

No. of orders (52,800/4,400) 12
Cost of ordering (79,200×12) Rs. 950,400
Average inventory (2,200+500(safety stock) Units 2,700
Carrying cost of inventory (2,700 × 432) Rs. 1,166,400
(b
Units ------------------- Rupees -------------------
)
Safety Re-order Probability Annual cost
Expected Stock Annual cost Total
stock level of stock-out
Demand* out of carrying cost
(Balancing) (Given) (loss of CM)
1 4400 600 5000 0 0 - 259,200 259,200
2 4400 100 4500 500 0.15 180,000 43,200 223,200
3 4400 0 4400 600 0.15 216,000 - 216,000
100 0.50 120,000 - 120,000
336,000 - 336,000
*Expected demand = 5000 × 0.15 + 4500 × 0.5 + 4000 × 0.35 = 4400

Conclusion: Maintaining a stock of 4,500 units is the most economical alternative.
Ans.2 (a) Material Price Variance:

Price
Standard Actual Actual Material Price
Variance
Price (Rs.) Price (Rs.) Qty (Kgs) Variance (Rs.)
Per unit
Alpha 29 25 4 5,933,750 23,735,000 Fav.
Beta 40 43 (3) 4,279,875 (12,839,625) Adv.
Gamma 45 51 (6) 3,598,125 (21,588,750) Adv.
(10,693,375) Adv.
(b
) Material Usage Variance:
*SQA in Kgs Standard
Actual Qty Quantity over Material Usage
for actual price
(Kgs) consumed Variance (Rs.)
Prod. per unit
Alpha 5,933,750 5,050,000 883,750 29 25,628,750 Adv.
Beta 4,279,875 3,787,500 492,375 40 19,695,000 Adv.
Page 1 of 5
Suggested Answers
Gamma 3,598,125 3,030,000 568,125 45 25,565,625 Adv.

70,889,375 Adv.
*Standard Quantity allowed
(c) Material Mix Variance:

Variance
Standard Standard Qty at between Mix
Actual Qty
Qty/Unit price Standard Actual & Variance
(Kgs)
(Kgs) per unit Mix (kg) Standard (Rs.)
Qty
Alpha 5,933,750 20 29 5,877,341 (56,409) (1,635,861) Adv.
Beta 4,279,875 15 40 4,408,005 128,130 5,125,200 Fav.
Gamma 3,598,125 12 45 3,526,404 (71,721) (3,227,445) Adv.
13,811,75
0 47 261,904 Fav.
(d
) Yield Variance:
Finished
Yield Variance Product units
Standard yield (TAQ/SQ per Unit) (13,811,750/47) 293,867
Actual yield 252,500
Yield variance in qty 41,367 Adv.
Rs.
Alpha 41,367×29×20 23,992,860
Beta 41,367×15×40 24,820,200
Gamma 41,367×12×45 22,338,180
(St. yield – Actual yield) x Standard price of respective raw material 71,151,240
Ans.3 (a) Units

Tables [243,000,000/{(8,000×4)+22000}] 4,500
Chairs (4,500 × 4) 18,000
22,500
Rs.
Sales (4,500×22,000)+(18,000×8,000) 243,000,000
Less: Total variable cost (4,500×22,000×65%)+(18,000×8,000×70%) (165,150,000)
Contribution margin 77,850,000
Contribution margin – Percentage 32.04%
Cost of goods sold 211,500,000

Add: Operating expenses 57,300,000
Total cost 268,800,000
Less: Variable cost (165,150,000)
Fixed costs 103,650,000
Breakeven sales (103,650,000/32.04%) 323,501,873
(b 18,000,000
) Ordinary dividend before tax - 10% to pay dividend
Profit required (18m/66%) 27,272,727
Add: Fixed costs [as worked out in (a) above] 103,650,000
Contribution margin A 130,922,727
Contribution margin% 32.04%

Page 2 of 5
Suggested Answers
Less: Retained profits 4% out of 66% 6.06%

Net margin B 25.98%
Sales revenue to yield 10% dividend + 4% retained profits of sales

A÷B 503,842,565
No. of tables (503,842,565/54,000×22,000)/22,000 9,330

No. of chairs (503,842,565/54,000×32,000)/8,000 37,322
Ans.4 BUDGETED PROFIT AND LOSS STATEMENT

Revenues Rupees
Revenue from Cinemas [192,192,000(W-1)+103,488,000(W-1)] 295,680,000
Rental income from theatre 18,240,000
313,920,000
Expenses
Variable costs of films [98,780,000(W-2)+75,938,800(W-2)] 174,718,800
Depreciation on Cinema and Theatre houses (30m÷15) 2,000,000
Fixed administration and maintenance cost 4,500,000
181,218,800
Budgeted profit 132,701,200
W-1: Revenue from Cinemas

Bollywood
Hollywood film film
No. of weeks 52 52
No shows (8) (8)
No. of weeks during which show to be displayed A 44 44
No. of weeks each film is displayed B 4 6
No. of cinemas C 2 1
Total no. of films D= A/B 11 7.33
No. of shows per week (2×5+3×2) F 16 16
Total shows per film G=B×C×F 128 96
Averaeg occupancy per show (600×65%,70%) H 390 420
Ticket price I 350 350
Revenue from Cinemas G×H×I×D 192,192,000 103,488,000
W-2: Variable costs
Hollywood film Bollywood film
Cost per film Rs. 4,000,000 6,500,000
Setup cost Rs. 500,000 500,000
Show cost [35,000×128/96(G from W-1)] Rs. 4,480,000 3,360,000
Variable cost per film Rs. 8,980,000 10,360,000
Total number of films in a year (E from W-1) 11 7.33
Total variable costs Rs. 98,780,000 75,938,800
W-3: No. of days theater rented out.

No. of available days (360─30─10) A 320
No. of days one play will be staged (45/9×7) C 35
Gap between two plays D 2
Setup and rehearsal time E 3
F 40
Total no. of plays G=A÷F 8
Per day rental Rs. 60,000
Page 3 of 5
Suggested Answers
Rental income from theater [320─(2×8) × 60,000] Rs. 18,240,000
Ans.5 (a There are four types of quality costs:

)
(i) Internal failure costs: The cost incurred when defective products or services
are detected before leaving the business.
Examples: Scrap, rework, retest, downtime, material disposals, lost
contribution margin from scrapped products.
(ii) External failure costs: the costs incurred because defective products or
services are delivered to customers.
Examples: Sales returns, warranty claims, processing customer complaints,
legal fees, service callouts, lost contribution margin from current and future
sales.
(iii) Appraisal costs: the costs of determining whether defects exist.
Examples: monitoring, inspecting materials, inspecting work in progress,
inspecting finished goods, testing equipment.
(iv) Prevention costs: the costs incurred in preventing defects and in minimizing
appraisal activities.
Examples: quality engineering, quality planning, training, quality
improvement programs, reporting.
(b Rs.
) per unit
Sales price 450
Less: Contribution margin (20% of sale price) 90
Maximum variable cost 360
Less: Variable costs other than labour & OH
Raw material (180)
Selling expenses (20)
Maximum labour and overheads that can be incurred A 160
Cost of labour and overhead of first batch (200 × 1.25) B 250
Labour hours per unit for 1st batch 2
Maximum labour hours allowed (A*2)/B 1.28
Assuming that 'x' is the no of batches for which average labour hours per unit
would be 1.28 and using the formula we have: 2x-0.322= 1.28
.
= 0.64
.
1
=
0.64
1 .
=
0.64
Hence x = 4
Minimum number of units for which the company would be able to earn a
Page 4 of 5
Suggested Answers
contribution margin of 20% = 4 × 500 = 2000 units
Ans.6 COST VOLUME PROFIT ANALYSIS
Jan - May Jun - Jul Aug - Oct Nov - Dec Total

No. of months A 5 2 3 2 12
Occupancy B 60% 90% 40% 80%
Occupied rooms (days) C 4,500 2,700 1,800 2,400 11,400
(50×30×A×B)
Existing revenue from room rent 49,500,00
0 29,700,000 19,800,000 26,400,000 125,400,000
Revenue from restaurant relating
to room occupant (In proportion to 14,802,63
occupied days) 2 8,881,579 5,921,053 7,894,737 37,500,000
Rooms
Halls
Existing contribution margin Jan - May Aug - Oct
Revenue from rent (@11,000) 49,500,000 19,800,000 10,950,000
Variable cost - @15%:15%:25% (7,425,000) (2,970,000) (2,737,500)
Contribution margin from rent 42,075,000 16,830,000 8,212,500
Revenue from Restaurant 14,802,632 5,921,053 22,500,000
Variable cost - restaurant - 50% (W-1) (7,401,316) (2,960,526) (15,000,000)
Contribution margin from restaurant 7,401,316 2,960,526 7,500,000
Existing CM 49,476,316 19,790,526 15,712,500
Contribution margin after discount

Revenue from rent 51,232,500 20,493,000 11,497,500
(49,500,000×90%×115%) (19,800,000×90%×115%) (10,950,000×70%×150%)
Less: Variable cost 8,538,750 3,415,500 4,106,250
(7,425,000×115%) (2,970,000×115%) (2,737,500×150%)
Contribution margin from rent 42,693,750 17,077,500 7,391,250
Revenue from restaurant 17,023,026 6,809,211 33,750,000
(14,802,632×1.15) (5,921,053×1.15) (22,500,000×1.5)
Less: Variable cost - restaurant (50%) (8,511,513) (3,404,605) (22,500,000)
Contribution margin from restaurant 8,511,513 3,404,605 11,250,000
CM after discount 51,205,263 20,482,105 18,641,250
Increase in CM due to introduction of

discounts 1,728,947 691,579 2,928,750
W-1: Contribution margin on restaurant
Sales after Sales before

Revenue from Restaurant
discount discount
Walk in customers (75,000,000*2/10) 15,000,000 15,000,000
Halls (75,000,000×3/10=22,500,000÷0.75) 22,500,000 30,000,000
Room occupants (75,000,000*5/10) 37,500,000 37,500,000
75,000,000 82,500,000
Variable cost (given) 41,250,000
CM margin (Rupees) 41,250,000
CM margin (%) 50%
(THE END)
Page 5 of 5
Final Examination 2 June 2014
Summer 2014 100 marks - 3 hours
Module F Additional reading time - 15 minutes
Q.1 (a) Briefly discuss any four criticisms on standard costing system. (04)
(b) SMPL is a leading construction company and is working on major projects

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

(i) SMPL would receive a mobilization advance of 10% of contract value which
will be adjustable against progress bills.
(ii) Progress bills would be raised at the end of each month on the basis of
percentage of work completed. Preparation of monthly progress bills would
require 15 days. A further 45 days would be required for verification and
processing of progress bills.
(iii) 5% retention money shall be withheld from the progress bills and shall be
released at the end of maintenance period of four months.
(iv) All receipts are subject to withholding of 6% income tax.
(v) The projected work completion schedule shows that work would be completed
in three stages. 20% work would be completed in the first stage, 30% in the
second stage and 50% in the third stage. Work on each stage would be evenly
distributed and each stage would be completed in 2 months’ time.
(vi) The following projections have been prepared by SMPL:
Net profits are estimated at 20% of cost.
Cost of cement & steel would be 55% of total project cost. The ratio of
quantities of cement and steel is 3.75:1 respectively and their prices are
Rs. 10,000 and Rs. 60,000 per ton respectively. 80% of the steel and 60%
of cement would be required in the first stage. 25% of the remaining
quantities would be required in each of the four remaining months.
50% payments are required to be made to cement & steel suppliers at the
time of delivery and the remaining 50% after 30 days.
Cost of sub-contracting work is estimated at Rs. 1,500 million.
Sub-contractors will start work in the second month and the work would
be evenly distributed over the next five months. Progress bills would be
raised on 10th of the next month while SMPL would be liable to release
the payment within 20 days of receipt of progress bill.
Other costs on the project would be incurred evenly over the period of the
contract. 30 days credit would be available on all expenditures.
(vii) The entire project would be financed by utilising the running finance facility
carrying interest @ 12% per annum which would be charged on month end
balance.
Required:
Assuming that the project commences on the first day of the year, prepare a
statement showing monthly cash flows relating to the project for the first eight
months of the year. (18)
Q.2 ABC Limited which produces and sells a single product is faced with liquidity issues. In
order to improve its financial position, it intends to revise its working capital policies as
follows:
(i) The standard price of the product is Rs. 100 per unit. 500,000 units are sold per
month. Presently, 20% of all units are sold for cash and ABC offers a cash discount
of 8% on such sales. The present credit terms are 3/30, net 60 and 40% of the credit
customers pay within 30 days.
ABC intends to revise the credit terms to 4/15, net 30. As a result, the overall sales
volume is expected to decline by 5% whereas the proportion of cash sales is expected
to increase to 30% of total sales. It is also envisaged that 50% of credit customers
would avail 4% discount.
(ii) The existing policy of holding 45 days of stock would be revised downwards to
30 days.
(iii) The suppliers offer credit terms of 2/20, net 60. Presently, prompt payments are
made to avail the discount. ABC has now decided to utilize the maximum credit
period offered by the suppliers.
The variable cost per unit is Rs. 80 of which 70% constitutes raw material cost. The
company's cost of funds is 15%.
Required:
Evaluate and discuss the management’s decision as regards the revision of its working
capital policies. (15)
Q.3 Sigma Limited is the manufacturer of a single product which passes through two divisions
A and B. The semi-finished goods produced in Division A are sold in the open market as
well as supplied to Division B where each unit is processed further. The performance of
managers of both the divisions are evaluated based on the divisional profitability. Managers
are free to adopt policies which maximize profits of their divisions.
Information related to two divisions is given below:
Division A Division B
Production capacity Units 1,500 1,500
Existing demand (outside customers) Units 300 900
Maximum demand (outside customers) Units 600 1,800
Current selling price per unit (outside customers) Rs. 44,000 84,000
Variable cost per unit Rs. 32,000 34,000
Division A offers 10% discount on its selling price to Division B.
The marketing director is reviewing the pricing policy to explore the possibility of increasing
the sales. He has carried out a research which shows that:
sale of semi-finished product would be stable at this level in the coming years; and
market dynamics do not allow the company to increase current prices of finished
goods produced by Division B; however, sale would increase by 300 units for every
2% decrease in price of finished goods.
Required:
(a) Determine how the company could maximize its profits. (12)
(b) Determine the transfer price at which manager of Division A would agree to the
decision based on (a) above. Also describe the possible viewpoint of manager of
Division B. (04)
Q.4 Sajjad Enterprises Limited (SEL) has signed an MOU with the government to set up a plant
for production of a medicine which would be distributed to the general public at a highly
subsidised rate. The MOU envisages that the arrangement would last a total of 5 years from
the commencement of sale. Negotiations are underway for determination of price at which
the government would purchase the medicine.
Following are the relevant details:

(i) A foreign supplier has agreed to supply the plant at a cost of US$ 20 million. An
advance of 30% is required to be paid at the time of placing the order while balance
amount is payable after 6 years of the supply of the plant. A mark-up of 5% would be
required to be paid on the outstanding amount at the end of each year.
(ii) SEL would be required to submit a bank guarantee to the supplier in US Dollars.
SEL’s bankers have agreed to issue the guarantee at a cost of 0.35% per quarter
subject to maintaining a cash margin in Pak Rupees equivalent of 25% of the
guaranteed amount. Bank has agreed to pay a return of 4% per annum on amount
placed as margin.
(iii) 15 acres of land will be required for the plant and a local authority has offered to
lease the land at a consideration of Rs. 2 million per acre for 6 years, besides an
annual ground rent of Rs. 95,000 per acre. An amount of Rs. 600,000 per acre will
be required for the development of the project site.
Other related supplies will be procured against payment on delivery basis at a cost of
Rs. 600 million. A period of one year will be required to complete the project from
the date of lease of land and receiving of plant.
(iv) Cost of production would be Rs. 5 per unit plus fixed costs of Rs. 50 million per
annum (excluding depreciation).
(v) SEL would depreciate the plant over 5 years. It is expected that at the end of 5 years’
term, the plant would be sold for Rs. 50 million.
(vi) Estimated capacity of the plant is 100,000 units per day with 5 days annual shut
down plan for maintenance and other reasons. Assume 365 days in a year.
(vii) Surplus funds can be placed with banks at 10% per annum while local borrowing is
available at 14% per annum.
(viii) Current exchange rate is Rs. 100 per US$ and the rupee is expected to depreciate at
3% per annum.
Required:
Calculate the price per unit that SEL should accept to earn a profit of 20% on its total costs,
over the life of the plant. (15)
Q.5 A company manufactures two products Alpha and Beta. Alpha can only be used in
combination with Beta in the ratio of 4:1 respectively. Beta has separate uses also. Projected
information per unit for the next year is as follows:
Alpha Beta
Selling price Rs. 6,800 5,800
Material cost Rs. 3,500 2,600
Variable manufacturing costs (other than labour and machine cost) Rs. 380 340
Applied fixed overheads Rs. 250 180
Machine hours 5 4
Labour hours 3 6
The available capacity for the next year is 40,000 machine hours and 30,000 labour hours.
Machine time costs Rs. 320 per hour and labour is paid at Rs. 140 per hour.
Maximum demand for Alpha is 6,000 units. Beta has unlimited demand.
Required:
(a) Determine the optimal production plan for the next year which maximizes the profit
of the company. (13)
(b) Compute the shadow prices of scarce resources assuming that maximum demand
remains constant. (04)
Q.6 Zee Printing is a partnership concern, operating with three different printing machines. The
production is carried out in two shifts of eight hours each. The related information is as
follows:
Machine-1 Machine-2 Machine-3

Monthly production capacity in 2 shifts (Sheets) 4,500,000 5,500,000 7,000,000
Number of workers per shift 45 35 54
Actual capacity utilization of 2 shifts 80% 85% 90%
Existing net realizable value of machines (Rs.) 14,280,000 22,950,000 54,000,000
Monthly fixed costs Amount in Rs.

Depreciation 340,000 425,000 750,000
Labour 1,354,500 1,172,500 1,971,000
Rent 330,000 350,000 400,000
The management is unable to get the projected printing orders as the market conditions are
not conducive enough and the situation is not expected to change in the foreseeable future.
The management has therefore decided to dispose of one of the machines to reduce fixed
costs.
After the disposal of the machine, the existing demand will be met by working overtime
hours. Management wants to keep an additional spare capacity of at least 2.6 million sheets
to meet any special order.
The company's policy is to pay overtime to labour at one and a half time of normal rate. As
per the agreement with labour union, all workers will be allowed to work the same number
of overtime hours.
The company’s required rate of return on capital is 15%.
Required:
Prepare calculation to show which machine is the most feasible to dispose of. (15)
(THE END)
Suggested Answers
Ans.1 (a) The limitations of standard costing systems are as follows:
(i) Standard costing systems place too much emphasis on the cost of direct
material, direct labour and overheads whereas many managers require
information about the cost performance of product line, production
batches, work activities, and conventional standard costing systems do not
provide this.
(ii) Variances reports are produced too late and are resultantly of little use.
(iii) Standard costing systems may provide incentives to decrease costs, but
actions to minimize costs may impact unfavourably on other areas of
strategic importance such as product quality or customers services.
(iv) The life cycle of products in the modern business environment is
shorter and therefore standards become quickly out of date.
(v) There is generally a high level of cost aggregation in overheads.
Standard costing focuses on total overheads and resultantly provide
only a limited basis for controlling costs.
Page 1 of 7
Suggested Answers
Month-wise project cash flows

Monthly budgeted cash flows in Millions of Rupees
Description
1st 2nd 3rd 4th 5th 6th 7th 8th
----------------------------------All Amount in Rupees----------------------------------
Opening balance - (695.28) (2,661.84) (2,878.34) (3,095.99) (2,928.99) (2,760.32) (1,507.24)
Mobilization advance (Rs. 9,600×10%× 94%) 902.40 - - - - - - -
Receipts against progress billing (W-1) - - 767 767 1,151 1,151 1,918 1,918
Payment for cement (W-2) (508) (507) (169) (169) (169) (170) - -
Payment for steel (W-2) (1,083) (1,083) (136) (135) (136) (135) - -
Payment to sub-contractor Rs. 1,500÷5 - - (300) (300) (300) (300) (300) -
Payment for other local materials
(8,000–4,400–1,500)=2,100÷6 - (350) (350) (350) (350) (350) (350) -
Net amount (688.40) (2,635.28) (2,849.84) (3,065.34) (2,899.99) (2,732.99) (1,492.32) 410.76
Interest 1% of above (6.88) (26.35) (28.50) (30.65) (29.00) (27.33) (14.92) -
(695.28) (2,661.63) (2,878.34) (3,095.99) (2,928.99) (2,760.32) (1,507.24) 410.76
W-1: Receipts against progress billings

Work done (10%:10%:15%:15%:25%:25%) × 9,600 A 960 960 1,440 1,440 2,400 2,400
Less: 10% advances B (96) (96) (144) (144) (240) (240)
5% retention C (48) (48) (72) (72) (120) (120)
6% Withholding tax (A–B–C) ×6% D (49) (49) (73) (73) (122) (122)
Payment less withholding tax 767 767 1151 1151 1918 1918
W-2: Determination of steel and cement cost

Rs. in million
Cost of the project (9,600 X 100/120) 8,000
Cement Rs. 4,400 × 37,500÷ (3.75×10,000+60,000) 1,692

Steel Rs. 4,400 × 60,000÷ (3.75×10,000+60,000) 2,708
Total amount of cement & steel 4,400
Cement:
Utilization of cement at first stage (60%×1,692÷2) 508 507
“ “ “ “ 2nd & 3rd stage (40%x40%÷4) 169 169 169 170
Steel:
Utilization of steel at first stage (80%×2,708÷2) 1083 1083
“ “ “ “ 2nd & 3rd stage (20%2,708÷4) 136 135 136 135
Page 2 of 7
Suggested Answers
Ans.2 Current Proposed

Annual production (units) A 6,000,000 5,700,000
(500,000 × 12) (500,000 × 12 × 95%)
Credit stock purchases (Rs.) B 336,000,000 319,200,000

(A × 80 × 70%) (A × 80 × 70% )
Credit sales (Rs.) C 480,000,000 399,000,000

(A × 100 × 80%) (A × 100 × 70%)
Working capital requirement ---------------Rs.-------------------
Debtors - Availing discount 15,520,000 7,980,000

(C × 40% × 97%)/12 (C × 50% × 96%) × 15/360
Debtors - Not availing discount 48,000,000 16,625,000

(C × 60%) × 2/12 (C × 50%) × 30/360
Stocks 42,000,000 26,600,000

(B × 45/360) (B × 30/360)
Creditors (18,667,000) (53,200,000)

(B × 20 / 360) (B × 60 / 360)
Net working capital requirement D 86,853,000 (1,995,000)
Cost of financing the working capital
Interest (D × 15%) 13,027,950 (299,250)

Discount from creditors (B × 2%) (6,720,000) -
Loss of margin on reduction in sales
(300,000 × 20) - 6,000,000
Discount to cash customers 9,600,000 13,680,000
(A × 100 × 20% × 8%) (A × 100 × 30% × 8%)
Discount to debtors 5,760,000 7,980,000

(C × 40% × 3%) (C × 50% × 4%)
Net results - costs 21,667,950 27,360,750

Net result loss (5,692,800)
Conclusion:
The proposed working capital strategy does not seem feasible as it shows a net revenue loss of
Rs. 5.693 million. However, the proposed strategy frees a working capital of Rs. 88.85
million (giving a cost of 6.41%). The management should therefore consider the later
alternative also, as it may resolve its liquidity issues.
Page 3 of 7
Suggested Answers
Ans.3 (a) Division A
Outside
Internal Total Total Total
customers CM
demand demand revenue variable cost
demand
900 300 1,200 48,840,000 38,400,000 10,440,000
900 600 1,500 62,040,000 48,000,000 14,040,000
1,200 300 1,500 60,720,000 48,000,000 12,720,000
1,500 - 1,500 59,400,000 48,000,000 11,400,000
Division B
Total variable
Quantity Price / unit Total Revenue CM
costs
900 84,000 75,600,000 66,240,000 9,360,000
1,200 82,320 98,784,000 88,320,000 10,464,000
1,500 80,640 120,960,000 110,400,000 10,560,000
Beta Limited
600 units to
No external
Outsiders by
sales by Div A
Div A
Sales 120,960,000 102,000,000
VC (99,000,000) (78,600,000)
21,960,000 23,400,000
Maximum
(b) Since profit of Division A is also maximized at the same level at which the overall profit
is maximized, therefore the Manager of Division A would not have any issue even if the
existing price is charged.
However, since the profit of Division B can only be maximized if the entire production
of Division A is sold to Division B, therefore its Manager may request that all of
Division A’s production may be sold to Division B but such a policy would reduce the
overall profit. Division B may however request the Division A and the Marketing
Director to consider the fixed costs (selling, distribution and marketing) which can be
avoided if Division A does not sell anything to the outside parties.
Page 4 of 7
Suggested Answers
Ans.4 Total cost Rs. in million

(i) Cost of plant (W-1) 2,272.00
Total financing cost of supplier credits (W-2) 452.80
(ii) Cost of bank guarantee (W-3) 126.79

Financing cost of cash margins (W-4) 226.40
(iii) Cost of land (Rs. 2 Million × 15 acres) 30.00

Land development cost (Rs. 0.6 M × 15 acres) 9.00
Ground rent (Rs. 95,000 × 15 acres × 6 years) 8.55
Other supplies 600.00
(iv) Cost of production - variable (5×100,000×360×5) 900.00

Cost of production - fixed (50m×5) 250.00
(v) Sale value of plant (50.00)

4,825.54
Profit : 20% of above cost 965.11
Total amount to be recovered 5,790.65
No. of units to be produced over 5 years (100,000 × 360 × 5) (million) 180
Price per unit (Rs.) 32.17
W-1: Cost of plant (see note)

Amount of advance payment (20m × 30% × Rs.100) 600.00
Balance amount (20m × 70% × Rs. 100 × (1.03) ) 1,672.00
2,272.00
W-2: Total financing cost of supplier credits
Cost of first year [(20m × 100 ×70%) × 5%] 70.00
Financing Cost 1st to 6th year [Rs.70m×{(1.03) –1)÷0.03}] 452.80
W-3: Cost of bank guarantee (BG)

At inception [0.35% × 4 × (20m × 100 ×70%) 19.60
Cost of BG for 1st to 6th year [Rs. 19.6m × {(1.03) – 1)÷0.03}] 126.79
Alternate working
Cost of BG for 1st year (0.35% × 4 × 20m × 100 ×70%) 19.60
Cost of BG for 2nd year (19.60 ×1.03) 20.19
Cost of BG for 3rd year (20.19 ×1.03) 20.80
Cost of BG for 4th year (20.80 ×1.03) 21.42
126.79
W-4: Financing cost of amounts paid as cash margin

For the first year [(20m × 100 ×70%) × 25% × (14-4%)] 35.00
Cost of funds 1st to 6th year [Rs. 35.00m × {(1.03) – 1) ÷ 0.03}] 226.4
Page 5 of 7
Suggested Answers
Ans.5 (a) LINEAR PROGRAMMING
Variables
let x = number of Alpha units
let y = number of Beta units
Constraints
Machine hours 5.0x + 4 y <= 40,000
Labour hours 3.0x + 6y <= 30,000
x <= 4y
x <= 6,000
Contribution margin per unit Alpha Beta

Sale price 6,800 5,800
Cost of sales
Material 3,500 2,600
Machine cost 1,600 1,280
Labour 420 840
Other manufacturing costs 380 340
(5,900) (5,060)
Margin 900 740
5.0x + 4 y <= 40,000 3.0x + 6y <= 30,000 x <= 4y x <= 6,000

x y x y x y x y
1 - 10,000 - 5,000 - - 6,000 2,500
2 8,000 - 10,000 - 10,000 2,500 6,000 2,000
In order to maximize the profit, we will find the points where the constraints line
intersects each other, at feasible region.
Objective function is to maximize 900x +740y
x <= 4y
x <= 6,000
x = 6,000 y = 2,500 Profit = 7,250,000
x <= 6,000
3.0x + 6y <= 30,000
x = 6,000 y = 2,000 Profit = 6,880,000
Hence the company should plan to produce 6,000 units of Alpha and 2,000 units of Beta
to maximize the profit
Page 6 of 7
Suggested Answers
(b) The machine hours are not fully utilized there being a surplus; as such there is no
shadow price associated with machine hours.
Shadow price for labour hour is:

3x + 6y <= 30,001
x = 6,000; y=2,000.17; Profit = 6,880,126
Shadow price for additional labour hour is Rs. 126.
Ans.6 Machine-1 Machine-2 Machine-3 Total

Production capacity in 2 shifts 4,500,000 5,500,000 7,000,000
Capacity utilization 80% 85% 90%
Production 3,600,000 4,675,000 6,300,000 14,575,000
Spare capacity required 2,600,000
Minimum capacity required to be
maintained 17,175,000
Max. capacity in three shifts 6,750,000 8,250,000 10,500,000

Max. production capacity for
machine 1 and 2 15,000,000
machine 2 and 3 18,750,000
machine 1 and 3 17,250,000
Since the removal of machine 3 will reduce the minimum required capacity, only machine 1
or 2 could be sold.
Machine Machine
1 and 3 2 and 3
Required production 14,575,000 14,575,000
Production in 2 shifts (11,500,000) (12,500,000)
Production in 3rd shift 3,075,000 2,075,000
Saving on sale of Machine Machine 2 Machine 1
Net realizable value of machines 22,950,000 14,280,000
Reduction in fixed cost 1,947,500 2,024,500
Cost of producing above quantities at 1.5 times the normal rate of labour
2075/12500*(1172500+1971000)*1.5 (782,732)
3075/11500*(1354500+1971000)*1.5 (1,333,815)
Saving on required return on capital per month @ 15% pa 286,875 178,500
Net cost reduction 900,560 1,420,269
The management should sell machine 1 as the cost saving by selling machine 1 is more as
compared to machine 2.
(THE END)
Page 7 of 7
Final Examination 3 December 2013
Winter 2013 100 marks – 3 hours
Module F Additional reading time – 15 minutes
Q.1 Alpha Motors (Private) Ltd. (AMPL) manufactures a product X22 at an approximate cost
of Rs. 750,000 per unit. Breakup of the cost is as follows:
Rupees
Component Y 600,000
Other raw materials 50,000
Labour 50,000
Annual sale of X22 is estimated at 900 units at Rs. 0.8 million per unit. Fixed costs are
estimated at Rs. 12 million per annum.
Component Y has to be imported from Italy and ideally it takes around 30 days to reach the
company after the placement of order. However, the process is sometimes delayed by upto
30 days. The number of days for which the process may be delayed and the probability
thereof are given below:
Delay (in days) Probability of occurrence

0 90%
10 5%
20 3%
30 2%
The ordering costs are Rs. 10,800 per order whereas the inventory is kept in a third party
godown which charges Rs. 350 per day per unit of component Y. Incremental cost of
financing for AMPL is 15% per annum. During idle time, AMPL pays 50% wages to the
labour force.
It may be assumed that AMPL works throughout the year and one year has 360 days.
Required:
Analyse the above data to determine the following:
(a) Economic order quantity (EOQ) of component Y. (04)
(b) Safety stock of component Y that should be in hand when the next order is placed, so
as to maximize the profit. (10)
Q.2 Twinkle Company Limited is expected to achieve a sale of Rs. 120 million during the
current year. The contribution margin is expected to be 20% whereas the margin of safety is
estimated at 25%.
During the next year, the company intends to reduce its prices by 5% and plans to market its
products vigorously to increase the sales volume.
Salaries constitute 40% of the total fixed costs and according to the union agreement an
increment of 20% is to be given to all staff. Other fixed costs are likely to remain constant.
Required:
Compute the percentage of increase in sales volume that the company should achieve so as
to maintain a safety margin of 25%. (07)
Q.3 Taj Limited deals in production and marketing of fast moving consumer goods. Its financial
statements for the latest year depict the following position:
Personal
Detergents Tea Total
care
Revenue and expenses -------------------Rs. in million-------------------
Sales revenue 22,040 8,420 4,160 34,620
Cost of goods sold (14,909) (6,044) (3,226) (24,179)
Gross profit 7,131 2,376 934 10,441
Selling expenses (1,519) (602) (604) (2,725)
Common expenses (2,655) (1,014) (501) (4,170)
Segment profit/(loss) 2,957 760 (171) 3,546
Assets
Fixed assets at book value 21,450 8,630 3,420 33,500
Stock in trade 1,864 556 432 2,852
Trade debts 2,436 670 575 3,681
Unallocated assets - - - 4,356
Total assets 44,389
Equity and liabilities

Share capital - - - 22,624
Revaluation surplus 1,546 542 632 2,720
25,344
10% long term loan - - - 9,500
Trade creditors 1,670 520 365 2,555
Short term borrowings - - - 3,570
Other liabilities - - - 3,420
44,389
Management is considering to dispose of the tea segment due to stiff competition and
constantly declining margins. Following information is available in this regard:
(i) Market research suggests that the quantity of tea sold would decline by 1% per year
for the next two years. The company can increase the price of tea by 5% each year
whereas the effect of inflation on costs would be 6% per annum. Reliable projections
beyond the two year period cannot be made.
(ii) Entire selling expenses are variable. Common expenses include financial and fixed
administration expenses which are allocated on the basis of sales.
(iii) The administration expenses could be reduced by 5% due to decrease in overall work
load because of sale of tea segment.
(iv) The existing direct labour can be laid off by paying six months’ salaries amounting to
Rs. 625 million.
(v) Average annual utilization of short-term borrowings are Rs. 2,000 million and carry
interest at 12%.
(vi) Stock in trade could be sold in the market at 10% less than the cost.
(vii) Trade debts are net of 3% provision for doubtful debts. However, if the company
discontinues business, the write-offs will be 12%.
(viii) Depreciation is charged on plant and machinery at 10%, building at 5% and other
fixed assets at 20% on written down value.
(ix) Fixed assets other than factory building could be sold at a loss of 20%. The factory
building which has a book value of Rs. 600 million including revaluation surplus of
Rs. 135 million, can be sold at a profit of 20%.
(x) The tea factory building could be used for future expansion. Initially, the current
godown used for storage of goods outside the factory premises could be shifted to the
vacant building using 40% of the area. The annual expenses of godown includes rent,
utilities and labour amounting to Rs. 20 million, Rs. 6 million and Rs. 3 million
respectively.
Required:
Analyse the above data and prepare recommendations for the management clearly
specifying the pros and cons of the decision to dispose of the tea segment. (Ignore taxation) (23)
Q.4 After years of research, Hamid (Private) Limited (HPL) has developed a new product
‘CRISP’. The planning department has provided the following estimates related to the
production cost of first batch of 5,000 units of CRISP:
Particulars Cost per unit (Rs.)

Material (100 kg @ Rs. 8 per kg) 800
Direct labour (10 hours per unit @ Rs. 250 per hour) 2,500
Variable overheads (60% of direct labour) 1,500
Fixed overheads – allocated costs 200
– specific costs 100
Rate of learning is estimated at 80% but the learning effect is expected to apply to the first 5
batches only.
The marketing department has informed that the demand for CRISP would be around
50,000 units per annum for the next 5 years and HPL can charge a price of Rs. 3,200 per
unit. Selling expenses are estimated at Rs. 200 per unit.
Required:
Based on the above data, recommend whether it would be feasible to produce and sell
CRISP. (15)
Note: log 0.8/log 2 = – 0.322
Q.5 Mujahid (Private) Limited (MPL) is engaged in the manufacture of a product OY-1 which
requires two kg of raw material ZL. The first kg of ZL is employed at the start of the
manufacturing process whereas the second kg is used when the process is 70% complete.
ZL is currently supplied by local suppliers at Rs. 5,000 per kg whereas it can also be
imported at a cost of Rs. 6,000 per kg. The Economic Order Quantity for local purchases is
400 kg whereas import orders of less than 1,000 kg are not possible.
Following information pertains to the manufacturing process:

All units in process are inspected at two different stages i.e. when the process is 60%
complete and again when it is 80% complete. At each stage 10% of the units in process
are identified as defective. This loss can be reduced to 3% if imported material is used.
Defective units identified on first and second inspection are sold on as is where is basis
for Rs. 500 and Rs. 800 per unit respectively.
Each unit of OY-1 requires raw material (excluding ZL), labour and variable overheads of
Rs. 3,000, Rs. 2,000 and Rs. 1,000 respectively. Labour is paid at Rs. 100 per hour. All costs
are incurred evenly during the manufacturing process. Total of 200,000 labour hours are
available with MPL.
Market for OY-1 is fairly competitive; however, any quantity of OY-1 can be sold for
Rs. 22,000 per unit. Incremental cost of financing for MPL is 15%.
Required:
(a) Analyse the above data and determine whether the raw material ZL should be
acquired locally or imported. (17)
(b) Briefly describe some of the risks associated with shifting from local purchases to
imports and what measures can be taken to mitigate these risks. (04)
Q.6 Beta (Private) Limited (BPL) deals in manufacturing and marketing of bed sheets. The
management of the company is in the phase of preparation of budget for the year 2013-14.
BPL has production capacity of 4 million bed sheets per annum. Currently the factory is
operating at 68% of the capacity. The results for the recently concluded year is as follows:
Rs. in million
Sales 3,400
Cost of goods sold
Material (1,493)
Labour (367)
Manufacturing overheads (635)
Gross profit 905
Selling expenses (60% variable) (287)
Administration expenses (100% fixed) (105)
Net profit before tax 513
Other relevant information is as under:

(i) The raw material and labour costs are expected to increase by 5%, while selling and
distribution costs will increase by 4% and 8% respectively. All overheads and fixed
expenses except depreciation will increase by 5%.
(ii) Manufacturing overheads include depreciation of Rs. 285 million and other fixed
overheads of Rs. 165 million. During the year 2013–14 major overhaul of a machine
is planned at a cost of Rs. 35 million which will increase the remaining life from 5 to
12 years. The current book value of the machine is Rs. 40 million and it has a salvage
value of Rs. 5 million. At the end of 12 years, salvage value will increase on account
of general inflation to Rs. 9 million. The company uses straight line method for
depreciating the assets.
(iii) Variable manufacturing overheads are directly proportional to the production volume
of production.
(iv) Selling expenses include distribution expenses of Rs. 85 million, which are all
variable.
(v) Administration expenses include depreciation of Rs. 18 million. During 2013–14, an
asset having book value of Rs. 1.5 million will be sold at Rs. 1.8 million. No
replacement will be made during the year. Depreciation for the year 2013-14 would
reduce to Rs. 17 million.
The management has planned to take following steps to increase the sale and improve cost
efficiency:
Increase selling price by Rs. 150 per unit.
The sales are to be increased by 25%. To achieve this, commission on sales will be
introduced besides fixed salaries. The commission will be paid on the entire sale and
the rate of commission will be as follows:
No. of units Commission % on total sale

Less than 35,000 1.00%
35,000 – 40,000 1.25%
40,000 – 50,000 1.50%
Above 50,000 1.75%
Currently the sales force is categorized into categories A, B and C. Number of
persons in each category is 20, 30 and 40 respectively. Previous data shows that total
sales generated by each category is same. Moreover, sales generated by each person
in a particular category is also the same. The trend is expected to continue in future.
The overall efficiency of the workforce can be increased by 15% if management
allows a bonus of 20%. Further increase in production can be achieved by hiring
additional labour at Rs. 180 per unit.
Required:
Prepare profit and loss budget for the year 2013–14. (20)
(THE END)
MANAGEMENT ACCOUNTING
Suggested Solution
Final Examination – Winter2013

Ans.1 (a)
Holding costs per unit Rupees
- Godown rent 350
- Financial cost (600,000×15%÷360) 250
Holding cost per day per unit 600
EOQ = 2 900 10800 350 360 600,000 15%

= √2 900 10800 216,000
= 9.49
= 10
(b) No of days in which order received
30 40 50 60
Average requirement of component Y

[900/360] 2.50 2.50 2.50 2.50
If order placed with 0 safety stock

Stock out days - 10 20 30
No of days excess inventory - - - -
Excess inventory to be kept in units - - - -
Excess holding costs (Rs.) - - - -
Stockout cost (per unit *175,000) (Rs.) - 1,875,000 3,750,000 5,625,000
Probability 0.90 0.05 0.03 0.02
Expected costs (Rs.) - 93,750 112,500 112,500 318,750
If order placed with safety stock of 25

units
Stock out days - - 10 20
No of days excess inventory 10 - - -
Excess inventory to be kept in units 25 - - -
Excess holding costs (Rs.) 5,400,000 - - -
Stockout cost(per unit *175,000) (Rs.) - - 1,875,000 3,750,000
Probability 0.90 0.05 0.03 0.02
Expected costs (Rs.) 4,860,000 - 56,250 75,000 5,531,250

units
Stock out days - - - 10
No of days excess inventory 20 10 - -
Excess inventory to be kept in units 50 25 - -
Excess holding costs (Rs.) 10,800,000 5,400,000 - -
Stockout cost(per unit *175,000) (Rs.) - - - 1,875,000
Probability 0.90 0.05 0.03 0.02
Expected costs (Rs.) 9,720,000 270,000 - 37,500 10,027,500

units
Stock out days - - - -
No of days excess inventory 30 20 10 -
Excess inventory to be kept in units 75 50 25 -
Excess holding costs (Rs.) 16,200,000 10,800,000 5,400,000 -
Stockout cost(per unit *175,000) (Rs.) - - - -
Probability 0.90 0.05 0.03 0.02
Expected costs (Rs.) 14,580,000 540,000 162,000 - 15,282,000
*1[(800–600–50–50–50)+(50×50%)] = 75,000
To maximize profit, option of zero safety stock of component Y is to be adopted.
Page 1 of 7
Suggested Solution

Ans.2 Rs. in million

Salaries [(15% × 40% × 120) × 1.2)] 8.64
Other fixed costs (15% × 60% × 120) 10.80
Total fixed costs 19.44
Sales [19.44 × 95/11.25(W-1)] 164.16
Previous year sales at current price [120 × (1–5%)] 114.00
% of volume increase 44.0%
W-1: Existing ratio Revised ratio
Sales (100 – 5%) 100.00 95.00
Variable costs (80% of 100) 80.00 80.00
Contribution margin 20.00 15.00
Margin of safety (25% of CM) 5.00 3.75
Fixed costs 15.00 11.25
Ans.3 Analysis and recommendations for the management

(i) The forecasted contribution margin of tea business is only around 6-7% (W-1)
which is quite low. Such a low contribution margin carries a risk that the margin
may turn into a loss in case of any unforeseen event.
(ii) Estimated contribution margin of tea business for the Year 1 is Rs. 305 million and
is expected todecline to Rs. 277 million in the Year 2. Whereas, if the tea business is
sold, the company can reduce expenses (net of loss of contribution margin) as
follows:
If factory building If factory building
is sold is not sold
Year 1 Year 2 Year 1 Year 2
Financial charges saved ----------------Rs. in million----------------
- Short term borrowing
[2,000×0.12]/[1,779(W-2)×0.12] 240 240 213 213
- Long-term borrowing
[2,337 (W-2) – 2,000] × 0.1 34 34 - -
Rent saved by using tea factory
building as godown - - 20 20
Reduction of common expenses
[4,170–(9,500×0.1)–(2,000×0.12)]×0.05 149 149 149 149
423 423 382 382
Less: Loss of contribution margin(W-1) 305 277 305 277
Net savings 118 146 77 105
Saving % 28% 35% 20% 27%
Apparently, on the basis of the above analysis it can safely be said that the decision
of themanagement to sell tea business seems appropriate.However, the following
issues need to bekept in perspective while taking a final decision:
Page 2 of 7
Suggested Solution

(iii) (a) The selling expenses for tea business are much higher than those of other
segments. This needs further analysis. The company needs to see whether:
 incurring such a high proportion of selling expenses is appropriate; or

 is it on account of inconsistent policies being followed in this segment.
A significant saving on this account can significantly alter the dynamics of the
wholesituation.
(b) Selling a business segment when it is still earning a positive contribution of

around 7% is asignificant decision specially in view of the fact that the
alternative would generate savings 20-30% only above the current
contribution.
(c) To base this decision on a projection of 2 years only should as far as possible
be avoided andmanagement should evaluate other means of reviving the
business, before taking such a significant decision.
(d) Sale of tea segment may affect morale of the remaining employees. It may also
affect the performance of other segments. Both these aspects should be looked
into before makinga final decision.
(iv) If the company decides to sell the tea segment, the factory building may be utilized
for expansion of other two segments’ businesses. This would further save up to
Rs. 30 million (Rs. 20m × 60/40).
W-1: Forecast contribution margin for two years

Year 1 Year 2
---------Rs. in million---------
Sales(0.99×1.05×4,160) 4,324 4,495
Cost of goods sold (0.99×1.06×3,226) etc 3,385 3,553
Gross profit - constantly declining 939 942
Selling expenses(604×0.99×1.06) 634 665
Contribution 305 277
Contribution margin % 7.1% 6.2%
W-2: Amount realizable on sale of tea segment
Realizable
Book value
value
Fixed assets (3,420 – 600) 2,820
Less: Revaluation reserve (632 – 135) (497)
Book value of fixed assets excl. building 2,323 1,858
Stock in trade 432 389
Trade debts 575 522
Creditors (365) (365)
Net assets 2,404
Golden handshake to workers (625)
Total realizable value (if tea factory building is not sold) 1,779
Sale of tea factory building (600 – 135) × 120% 558
Total realizable value (if tea factory building is sold) 2,337
Page 3 of 7
Suggested Solution

Ans.4 Labour hours

Average Cumulative
5th batch [50,000 × (5)-0.322] 29,778 148,893
4th batch [50,000 × (4)-0.322] 31,997 127,988
Hours for the 5th batch onwards 20,905
Hours for the first 10 batches [148,893+(5×20,905)] 253,418
Hours for subsequent 10 batches (10×20,905) 209,050
Profit for Profit for
1st year subsequent years
-------------Rupees-------------
Sales (50,000 × 3,200) 160,000,000 160,000,000
Less:
Direct material (800 × 50,000) 40,000,000 40,000,000
Direct labour for (253,418/209,050)hrs 63,354,500 52,262,500
Variable overheads (60% of above) 38,012,700 31,357,500
Fixed expenses-specific (100 × 50,000) 5,000,000 5,000,000
Selling expense (200 × 50,000) 10,000,000 10,000,000
156,367,200 138,620,000
Contribution margin 3,632,800 21,380,000
Contribution margin % of sales 2.27% 13.36%
Although the profit for the first year will be only 2.27%, the profits increase to 13.36% in
subsequent years. This indicates that the production of CRISP is worthwhile.
Alternative of Ans.4
Labour hours
Average Cumulative
5th batch [50,000 × (5)-0.322] 29,778 148,890
4th batch [50,000 × (4)-0.322] 31,997 127,988
Hours for the 5th batch onwards 20,902
Hours for the subsequent 45 batches [45×20,902)] 940,590
Hours for 50 batches 1,089,480
Profit for 5 years

Rupees
Sales (50,000 × 3,200) 800,000,000
Less:
Direct material (800 × 250,000) 200,000,000
Direct labour for (1,089,480 × 250)hrs 272,370,000
Variable overheads (60% of above) 163,422,000
Fixed expenses-specific (100 × 250,000) 25,000,000
Selling expense (200 × 250,000) 50,000,000
710,792,000
Contribution for 50 batches 89,208,000
Contribution as percent of sales 11.15%
The contribution of 11.15% on sales seems reasonable and therefore it is feasible to
produce and sell CRISP.
Page 4 of 7
Suggested Solution

Ans.5 (a) Local Imported

----------Rupees----------
Total contribution margin before financing cost of average
inventory
Local: [8,599(W-1) × 3,444(W-2)] 29,614,956 -
Imported:[9,580(W-1) × 3,215(W-2)] - 30,799,700
Financing cost of holding average inventory

Local: [(400÷2)×5,000×0.15] (150,000) -
Imported:[(1,000÷2)×6,000×0.15] - (450,000)
Net contribution margin 29,464,956 30,349,700
It is economical to use imported raw material ZL
W-1: Production capacity Units

Percentage / Ratio of defective units
Assuming that units put in process are A 100 100
Identified as defective at 60% stage B=10% and 3% of A 10 3
Units cleared from 1st inspection C=A-B 90 97
Identified as defective at 80% stage D=10% and 3% of A 9 2.91
Good units produced E=C-D 81 94.09
Hours required to produce the good units F=E×20 1,620 1,881.8

Hours consumed on units rejected at 1st
inspection G=20×60%×B 120 36
Hours consumed on units rejected at 2nd
inspection H=20×80%×D 144 46.56
Total hours consumed I=F+G+H 1,884 1,964.36
Hours per good unit J=I÷E 23.259 20.877
Production capacity K=200,000÷J 8,599 9,580
W-2: Contribution margin per unit -----------Rupees-----

Raw material ZL (2 units) 10,000 12,000
Other raw material 3,000 3,000
Labour 2,000 2,000
Overheads 1,000 1,000
16,000 18,000
Cost of defective units after 1st inspection
Local: [8,600(5,000+60%×6,000)–500]×[10÷81] 1,000
Import: [9,600(6,000+60%× 6,000)–500]×[3÷94.09] 290
Cost of defective units after 2nd inspection

Local: [14,800(10,000+80%×6,000)–800]×[9÷81] 1,556
Import: [16,800(12,000+80%×6,000)–800]×[2.91÷94.09] 495
Total variable costs per unit (cost per good unit) 18,556 18,785
Selling price 22,000 22,000
Contribution margin per unit 3,444 3,215
Page 5 of 7
Suggested Solution

(b) The risks associated with shifting from local purchases to imports and measures to
mitigate these risks are as follows:
(i) Foreign exchange risks due to adverse movements in foreign exchange rates.
These risks can be mitigated by using hedging methods like forward cover,
futures etc.
(ii) Political (country) risks: a company can face economic and political measures
taken by the government. Since political (country) risk applies to specific
nations, its impact may be reduced through diversification or avoided entirely
by not investing in countries with unstable and volatile economies or
government.
(iii) Litigation risks: To minimize these risks, attention should be paid to
legislation and regulations covering the product. Care should be taken to
comply with contract terms.
(iv) Risk of loss of goods in transit: It may be possible to insure against this risk.
Ans.6 Production capacity 4,000,000

Actual production (4,000,000 × 68% = 2,720,000 × 1.25) 3,400,000
Selling price / unit [(3,400 ÷ 2,720,000) + 150] Rs. 1,400
Rs.in million
Sales (1,400 × 3,400,000) 4,760.00
Less: sales commission (W-1) (63.50)
4,696.50
Cost of goods sold (W–2) (3,170.70)
Gross profit 1,525.80
Selling expenses
Distribution expenses (1.08 × 1.25 × 85m) (114.75)
Selling expenses -Variable [(287 × 60% – 85m) × 1.04% × 1.25] (113.36)
Selling expenses - Fixed [(287 × 40%) × 1.05] (120.50)
(348.61
Administration expenses
Admin expenses - other than dep [(105 – 18)m × 1.05] (91.40)
Admin expenses - depreciation (18 – 1)m (17.00)
(108.40)
Other income (Gain on sale of asset) (1.8 – 1.5)m 0.30
Net profit / (loss) 1,068.49
W-1: Sales commission
Commission
Units to Commission
No. of Avg. unit (Rs.)
Categories Ratio be sold %
persons sale/person A×B×Rs.
(A) (B)
1,400
A 33.33% 1,133,333 20 56,667 1.75% 27,767
B 33.33% 1,133,333 30 37,778 1.25% 19,833
C 33.33% 1,133,334 40 28,333 1.00% 15,867
100% 3,400,000 90 63,467
W-2:Cost of goods sold

Rs. in million
Material (1,493 × 1.05 × 1.25) 1,959.6
Labour(W-2.2) 511.5
Variable overheads [(635-285-165)×1.05×3,400÷2,720] 242.8
Overheads fixed - other than depreciation(165 × 1.05) 173.3
Overheads fixed - depreciation (W-2.1) 283.5
3,170.7
Page 6 of 7
Suggested Solution

W-2.1: Depreciation
Existing depreciation 285.0
Less: depreciation on machine to be overhauled[(40 – 5)m ÷ 5] 7.0
278.0
Add: Depreciation on machine after overhauling[(40+35–9)m ÷12] 5.5
283.5
W-2.2: Labour Cost

Units Total cost
Cost of existing units (367 × 1.05) 2,720,000 385.4
15% increase in production by paying bonus @ 20%
(2,720,000 × 15%) (385.4 × 20%) 408,000 77.1
Existing labour cost with increased efficiency 3,128,000 462.5
Cost of remaining units by hiring additional labour
@ Rs. 180 (3,400,000 – 2,720,000 – 408,000) 272,000 49.0
3,400,000 511.5
(THE END)
Page 7 of 7
Summer 2013 100 marks – 3 hours
Q.1 ABC Limited deals in manufacturing of consumer goods. The management is concerned
about the company’s operating cash flows and is reviewing the working capital policies.
Key financial data for the year ended 31 March 2013 is as follows:
PROFIT AND LOSS ACCOUNT
Rs. in million
Sales 15,575
Gross profit 1,805
Operating expenses (978)
Financial charges (453)
Other income 126 (1,305)
Net profit before tax 500
Income tax @ 35% (175)
Net profit after tax 325
BALANCE SHEET
Assets Rs. in million Equity and liabilities Rs. in million
Non current assets 10,560 Share capital and reserves 2,370
Current assets 13.5% TFCs 7,630
Trade debtors 2,590 Current liabilities
Stock in trade 1,530 Short term loans 3,510
Other current assets 615 4,735 Trade creditors 1,020
Accrued & other liabilities 765 5,295
15,295 15,295
In respect of debtors, the management proposes to allow an early payment discount of 1% if

payment is received within 30 days; however, any delay in payment beyond the credit
period of 40 days will be subject to a surcharge of 45 paisa per Rs. 1,000 per day of default.
Credit sales are 80% of the total sales of the company. By introducing the above change, it is
expected that:
(i) Credit sales will decrease by 8% and bad debts would reduce from 4% to 3% of credit
sales.
(ii) 40% of the customers will avail early payment discount whereas 35% would pay
within the credit period of 40 days.
(iii) Debtors overall turnover will reduce to 42 days of credit sale.
The credit period allowed by the suppliers is 60 days. However, in order to avail 1%
discount, the payment is made within 40 days. It is now being proposed that full credit
period of 60 days should be availed.
(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 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:
Price per kg
Raw materials
(Rs.)
Printing and lamination film 260
Ink 180
Chemical 150
Glue 110
Both processes would require 1,000 productive labour hours in total (at 100% efficiency)
comprising of 25% skilled and 75% unskilled workers who are paid @ Rs. 35,000 and
Rs. 15,000 per month respectively. Both skilled and unskilled workers work an average of
200 hours per month at 90% and 85% efficiency respectively.
Printing and lamination overheads are estimated at Rs. 5 and Rs. 3 per running meter
respectively.
Required:
Compute the selling price of the order if SPL wishes to earn a 20% margin on sale price. (17)
Q.3 XYZ Limited is planning to launch a new product with a capital investment of Rs. 300
million. The demand of the product is dependent on the state of economy. Hence, three
different estimates of demand have been prepared by the company, i.e. under low, moderate
and high growth scenarios. The annual expected demand along with their probabilities are
as follows:
Demand growth Low Moderate High

Demand (units) 7,000,000 8,000,000 9,000,000
Probability 0.50 0.30 0.20
Working capital required (Rs.) 50,000,000 56,500,000 62,000,000
Since all raw materials have to be imported, the contribution margin (CM) under two
different exchange rates and their probabilities are shown below:
Exchange rate US$1 = Rs. 100 US$1 = Rs. 105

CM per unit (Rs.) 12 11
Fixed operating expenses (other than depreciation) per annum are Rs.15 million. The fixed
assets have a useful life of 15 years and a salvage value of 10% of the cost. According to the
company's policy, the total investment would be financed through equity and bank
borrowings in the ratio of 40:60.
Cost of bank borrowings is 12% per annum, while the company’s required rate of return on
equity is 20%.
Required:
(a) Calculate the probability that the project would yield the required return on equity.
(b) Determine the expected rate of return on equity based on all the possible scenarios. (12)
Q.4 Ahmed (Private) Limited (APL) produces and sells 2 products. It started business 5 years
ago with a single product 'A'. 3 years ago it introduced product B which is a low-end version
of product 'A' but is produced and sold through an entirely different infrastructure.
Initially, product 'B' started well but due to uncertain market condition, its sale declined by
85% in 2013. The results of previous two years are as follows:
Amount in Rs.
A B
Year ended 31 March 2013 31 March 2013 31 March 2012
Sales 20,000,000 1,500,000 10,000,000
Raw material consumption 5,000,000 600,000 3,000,000
Direct wages 3,750,000 400,000 2,000,000
Variable and fixed overheads 3,000,000 1,800,000 2,500,000
Units sold 10,000 2,000 10,000
In respect of product ‘B’, the management does not foresee any improvement in 2014;
however, it is quite hopeful that the sale would revive in 2015. Management is therefore
contemplating the option of shutting down the plant of product 'B' for the year ending
31 March 2014 which would reduce fixed costs by 90%.
Following estimates pertain to the year ending 31 March 2014:
Rupees
Total variable and fixed overhead expenses for product A 3,400,000
Increase in fixed cost of product A 250,000
Plant shut down costs for product B 450,000
Sale of A (units) 13,000

Increase in raw material prices (both for A and B) 15%
Required:
(a) Determine the minimum number of units of product B that should be sold in order to
justify the continuation of the sale of product B during the year ending
31 March 2014.
(b) Assuming that the sale of product B is discontinued, calculate the unit price of A that
should be charged to increase the profit by 20% over the total net profit for the year
ended 31 March 2013. (18)
Q.5 MNC Limited is a manufacturer of textile machinery. The company has received an order
for manufacturing a machine which would involve various processes. Each process has been
assigned a code number. The estimated time for each process is given below:
Process 1–2 1–3 1–4 2–4 2–5 3–6 4–6 5–7 6–8 7–8
Duration (in days) 5 9 8 6 5 9 10 10 7 11
Required:
(a) Draw a network diagram representing above processes of work.
(b) Calculate total float for each process.
(c) Find the critical path and its duration. (10)
Q.6 (a) Mehmood (Private) Limited operates two divisions. Division "South" was established
five years ago whereas Division “East” was established two years ago with substantial
expenditure on automated production lines. The company’s management uses Return
on Investment (ROI) and Residual Income (RI) to compare the results of the divisions
in order to evaluate the managerial performance. The required rate of return for both
divisions is 15%. Following data is available for the year ended 31 May 2013:
South East
Sales (units) 24,000 26,400
----------Rupees----------
Average operating assets 11,100,000 25,800,000
Selling price per unit 900 1,100
Cost per unit
Material 300 375
Labour 250 225
Variable overheads 150 175
Fixed overheads 100 150
Required:
(i) Calculate ROI and RI and comment on the performance of the two divisions
under each of the two methods. Also give possible reasons for the different
results produced under the two methods and your suggestions in this regard.
(ii) Calculate the number of units which should be sold by the underperforming
division in order to be able to achieve the ROI of the other division. (13)
(b) Division East has an opportunity to invest in new machinery at a cost of
Rs. 4 million. The machinery is expected to have useful economic life of five years,
after which it could be sold for Rs. 400,000. Depreciation is charged on machinery
under the straight line method. The machinery is expected to expand division East’s
production capacity by 12.5%.
Required:
Under each of the two methods mentioned in (a) above, determine whether the
manager in-charge would make a decision that is in the best interest of the company
as a whole. (05)
Q.7 A company manufactures a single product Y. During May 2013, it processed 120 batches of
the product. Further relevant information for the month of May 2013 is as follows:
Actual materials used:
Materials Kg Price per kg (Rs.) Rupees
P 1,680 42.50 71,400
Q 1,650 28.00 46,200
R 870 64.00 55,680
4,200 173,280
Loss 552
Yield 3,648
Standard costs/yield per batch:

Materials Kg Price per kg (Rs.) Rupees
P 15 40 600
Q 12 30 360
R 8 60 480
35 1,440
Less: Standard loss 3
Standard yield 32
Required:
Calculate the following material variances:
(i) price (ii) usage (iii) mix (iv) yield (07)
(THE END)
Suggested Answers
Final Examination –Summer 2013

A.1 Effect of change in debt collection policy Rs. in million

Existing sale 15,575
Existing credit sale (80% of 15,575) 12,460
Existing Debtors 2,590
Debtors turnover (2,590 × 360 ÷ 12,460) 75 days
Conversion costs (13,770 × 50 ÷ 150) 4,590
Fixed cost (20% of 4,590) 918
Contribution margin (%) [(1805 + 918) ÷ 15,575] 17.48%
New credit sale as per proposal (92% of 12,460) 11,463

Decrease in credit sales (12,460 – 11,463) 997
Loss of contribution margin on decrease in sale (17.48% × 997) (174.28)

Reduction in bad debts [(4% × 12,460) – (3% × 11,463)] 154.51
Early payment discount to debtors (11,463 × 40% × 1%) (45.85)
Surcharge from late payment [2866 (W-1) × 24 × 45 ÷ 1,000] 30.95
Savings from decrease in debtors [(2,590 – 1,337) × 15%] 187.95
153.28
Revising the credit policy is feasible
W-1:
Debtors
Debtors analysis Credit sale Debtors
turnover
Debtors availing discount 4,585 382 30 days
Debtors paying within 40 days 4,012 446 40 days
Other debtors 2,866 509 64 days
11,463 1,337 42 days
Effect of change in creditors payment policy
Creditors turnover in days as given in the question 40.00
Cost of materials (13,770 × 2 ÷ 3) for the year 9,180
Creditors outstanding (9,180 × 40 ÷ 360) 1,020
Revised creditors with turnover of 60 days (1,020 × 60 ÷ 40) 1,530.00
Increase in creditors / release of funds (1,530 – 1020) 510.00
Saving from funds released (15% × 510) 76.50
Discount lost due to delayed payment to creditors (9,180 × 1%) 91.80
Loss due to delayed payment to creditors (15.30)
Delayed payments to creditors is not feasible -
Page 1 of 6
Suggested Answers

A.2 Job Costing

Order quantity 2,000,000
Finished running meters (0.04 × 2,000,000) 80,000
Lamination film input in meters (80,000 ÷ 98%) 81,633
Printing film input in meters (81,633 ÷ 97%) 84,158
Set-up consumption 1,200
85,358
Meters Kg Rate Amount in Rs.

Raw materials
Printing film 85,358 * 2,439 260 634,140
Lamination film 81,633 **2,332 260 606,320
Ink (2 × 84,158 ÷ 1,000) 168 180 30,240
Chemical (4 × 84,158 ÷1,000) 337 150 50,550
Glue (81,633 ÷ 250) 327 110 35,970
1,357,220
Labour cost
Skilled labour [250 ÷ (200 × 90%) × 35,000] 48,611
Unskilled labour [750 ÷ (200 × 85%) × 15,000] 66,176
114,788
Overheads
Printing overhead (85,358 × 5) 426,790
Lamination overhead (81,633 × 3) 244,899
671,689
Profit margin (25% on cost) 535,924
Selling price 2,679,621
*85,358 ÷ 35 = 2,439 **81,633 ÷ 35 = 2,332
A.3 --------------------------------------Amount in thousands-------------------------------------

Scenarios 1 2 3 4 5 6
Demand 7,000 7,000 8,000 8,000 9,000 9,000
CM per unit 12.00 11.00 12.00 11.00 12.00 11.00
Contribution Margin 84,000 77,000 96,000 88,000 108,000 99,000
Fixed cost other than dep. (15,000) (15,000) (15,000) (15,000) (15,000) (15,000)
Depreciation (300 – 30)÷15 (18,000) (18,000) (18,000) (18,000) (18,000) (18,000)
Financial charges (W-1) (25,200) (25,200) (25,668) (25,668) (26,064) (26,064)
Net profit 25,800 18,800 37,332 29,332 48,936 39,936
Equity 140,000 140,000 142,600 142,600 144,800 144,800

Rate of return-% 18.43 13.43 26.180 20.570 33.800 27.580
Probability (Demand) 0.50 0.50 0.30 0.30 0.20 0.20

Probability (CM / unit) 0.35 0.65 0.35 0.65 0.35 0.65
Probability of scenario 0.175 0.325 0.105 0.195 0.070 0.130
Estimated rate of return-% 3.23 4.36 2.749 4.011 2.366 3.585
Probability for getting required rate of return of 20% 0.50
Rate of return based on all the possible scenarios - % cumulative 20.30
W-1: Financial charges

Capital investment 300,000 300,000 300,000 300,000 300,000 300,000
Working capital 50,000 50,000 56,500 56,500 62,000 62,000
350,000 350,000 356,500 356,500 362,000 362,000
Equity 40% 140,000 140,000 142,600 142,600 144,800 144,800
Bank borrowing 210,000 210,000 213,900 213,900 217,200 217,200
Finance charges @ 12% 25,200 25,200 25,668 25,668 26,064 26,064
Page 2 of 6
Suggested Answers

A.4 (a) Fixed cost of B: Rupees

Decrease in variable and fixed costs (2,500,000 – 1,800,000) 700,000
Decrease in units of product B (10,000 – 2,000) 8,000
Variable cost per unit (700,000 ÷ 8,000) 87.50
VC for 2,000 units @ 87.50 per unit 175,000
Fixed cost of B (1,800,000 – 175,000 ) 1,625,000
Contribution margin (CM) per unit of B (based on 2013 results)

Sales 750.00
Raw material (300 + 15%) 345.00
Direct wages 200.00
Variable overheads 87.50
632.50
CM per unit of B 117.50
Shut down point:

Avoidable FC / CM per unit
Avoidable FC (1,625,000 – 162,500 – 450,000) 1,012,500
Units to breakeven i.e. shut down point (1012500 ÷ 117.50) 8,617
(b) Contribution Margin (CM) per unit of A :

Sales 2000
Raw material (500 + 15%) 575
Direct wages 375
Variable overheads W-1 50
1000
1000
Net profit of A for 31.03.13 (20 – 5 – 3.75 – 3) 8,250,000

Net loss of B for 31.03.13 (1.5 – 6 – 4 – 1.8) (1,300,000)
Profit for 2013 6,950,000
Increase in profit required (20% of 6,950,000) 1,390,000
Fixed cost – A W-1 2,750,000
Fixed cost – B (162,500 + 450,000) (plant is shut down) 612,500
Variable cost of 13,000 units at Rs. 1,000 per unit 13,000,000
Contribution Required 24,702,500
No. of units to be produced 13,000
Price per unit of A to be charged (24,702,500 ÷ 13,000) 1900
W-1:
Fixed cost of A 2014 2013
Total variable and fixed cost of 13,000 and 10,000 units of A 3,400,000 3,000,000
Increase in fixed cost during 2014 250,000
3,150,000 3,000,000
Variable cost of 3,000 units 150,000
Variable cost per unit (150,000 ÷ 3,000) 50
VC at 13,000 and 10,000 units 650,000 500,000
Fixed cost of A 2,750,000 2,500,000
Page 3 of 6
Suggested Answers

A.5
Expected
Activity ES EF LS LF Float
Time
1–2 5 0 5 0 5 0
1–3 9 0 9 6 15 6
1–4 8 0 8 6 14 6
2–4 6 5 11 8 14 3
2–5 5 5 10 5 10 0
3–6 9 9 18 15 24 6
4–6 10 11 21 14 24 3
5–7 10 10 20 10 20 0
6–8 7 21 28 24 31 3
7–8 11 20 31 20 31 0
S. No. Path Duration in hours

(i) 1-2-5-7-8 31
(ii) 1 - 2- 4 - 6 - 8 28
(iii) 1-3-6-8 25
(iv) 1-4-6-8 25
Therefore, the critical path is path (i)
Page 4 of 6
Suggested Answers

A.6 (a) (i) Net profit for the year South East
Sales (24,000 × 900), (26,400 × 1,100) 21,600,000 29,040,000
VC (24,000 × 700), (26,400 × 775) (16,800,000) (20,460,000)
Contribution margin for the year 4,800,000 8,580,000
FC (24,000 × 100), (26,400 × 150) (2,400,000) (3,960,000)
Net profit for the year 2,400,000 4,620,000
Residual Income for the year

Net profit 2,400,000 4,620,000
Required return on assets [15% × (11.10)] [15% × (25.8)] 1,665,000 3,870,000
Residual Income for the year 735,000 750,000
Return on investment (ROI)

Net profit 2,400,000 4,620,000
Average operating assets 11,100,000 25,800,000
ROI % [2,400,000 ÷ 11,100,000] [25,800,000 ÷ 4,620,000] 21.62% 17.91%
 RI reveals the same level of performance for each division.

 ROI indicates that division East is the underperforming division. However,
one reason could be that South has older plant and machinery and East has
been established relatively recently and therefore the ROI of South is higher
due to the fact that its plant may have been substantially written down due to
depreciation.
 To make a better comparison, a more appropriate base should be used. These
may include fair value of assets or historical cost duly adjusted for rate of
inflation. However, in case the base is changed, due recognition should be
given to the fact that older machinery is less efficient and requires more
maintenance etc.
(ii) Units that should be sold to achieve ROI as that of South division
Required return 21.62%
Average operating assets 25,800,000
Amount of return 5,577,960
Fixed costs per annum 3,960,000
Total contribution required 9,537,960
Contribution margin per unit: Amount in Rs.

Sale price 1,100
Variable costs (375 + 225 + 175) 775
Contribution margin per unit: 325
Units required to be sold per annum (9,537,960 ÷ 325) 29,348
(b) Additional contribution (12.5 × 8,580,000) 1,072,500

Depreciation (4,000,000 – 400,000) ÷ 5 (720,000)
Revised total annual profit (4,620,000 + 1,072,500 – 720,000) 4,972,500
Operating investment (25,800,000 + 4,000,000) 29,800,000
ROI 16.69%
Revised total annual contribution 4,972,500

Return on assets (15% × 29,800,000) 4,470,000
Residual income 502,500
Page 5 of 6
Suggested Answers

A.7 Rupees
(a) Actual quantity at actual prices (given) 173,280
(b) Actual quantity in actual mix at standard prices
P 1,680 40 67,200
Q 1,650 30 49,500
R 870 60 52,200
168,900
(c) Actual quantity in standard mix at standard prices

St. Mix St. Price
P 4,200 15÷35 1,800 40 72,000
Q 4,200 12÷35 1,440 30 43,200
R 4,200 8÷35 960 60 57,600
172,800
(i) Material price variance (a) - (b) 4,380 Adverse
(ii) Material usage variance

(1) Standard cost of actual output
[3,648 × (1,440 ÷ 32)] 164,160
(2) Actual quantity at standard price 168,900
(3) Difference in above 4,740 Adverse
(iii) Mix variance (c) - (b) 3,900 Favourable
(iv) Yield variance kg

(1) Actual yield 3,648
(2) Standard yield for actual input
(4,200 × 32) ÷ 35 3,840
(3) Difference in above at standard cost
per unit of output [192 × (1,440 ÷ 32)] 8,640 Adverse
(THE END)
Page 6 of 6
The Institute of Chartered Accountants of Pakistan
Winter 2012 100 marks - 3 hours
Q.1 SGL Limited is a manufacturer of engineering goods. It is in the process of preparing

budget for the year ending 31 December 2013. The following data has been extracted from
the projected Profit and Loss Account for the year ending 31 December 2012.
Summarised Profit and Loss Account

Rs. in million
Sales 1,000
Cost of sales:
Manufacturing costs (722)
Opening finished goods inventory (81)
Closing finished goods inventory 89
(714)
Operating costs (100)
Financial charges (16)
Profit before tax 170

(i) For the year 2013 SGL plans to earn a mark-up of 50% on cost of sales. The sales
volume is expected to increase by 20%. Cash sales would be made at a discount of
2% and it is estimated that net cash sales after discount would constitute 20% of total
sales.
(ii) Opening balances of trade debtors and trade creditors are Rs. 90 million and Rs. 40
million respectively. Trade debtors are expected to increase by 20%.
(iii) Purchases and other expenses are paid in 60 days and 35 days respectively.
(iv) Manufacturing costs comprise raw materials consumed and variable and fixed
conversion costs in the ratio of 35:45:20. Fixed costs include depreciation of Rs. 3
million. Effect of price increase in 2013 on raw materials and variable and fixed costs
(excluding depreciation) is estimated at 8%, 10% and 6% respectively.
(v) Operating costs for 2012 include depreciation amounting to Rs. 9 million and
advertisement cost of Rs. 16 million. All other costs vary in line with the variation in
sales. Price effect on advertisement costs and other variable costs for 2013 is
estimated at 6% and 10% respectively.
(vi) Depreciation for 2013 would be the same as in 2012.
(vii) Closing inventory of finished goods is estimated at Rs. 97 million on 31 December
2013. Raw material inventory would be maintained at 30 days consumption.
(viii) SGL uses absorption costing. FIFO method is used for valuation of inventories.
(ix) Financial charges are expected to increase by 10% and are payable on quarterly basis
on 1st day of the next quarter.
(x) SGL’s paid-up share capital is Rs. 80 million. Dividend is estimated as under:
2012 Final dividend of 20% cash and 10% bonus shares.

2013 Interim cash dividend of 15% and final cash dividend of 20%.
Required:
Prepare a projected cash flow statement for the year ending December 31, 2013.
[Assume that except stated otherwise, all transactions are evenly distributed over the year (360
days)] (17)
Q.2 (a) Briefly describe three areas where the learning curve can effectively be used by a
manufacturing concern. (03)
(b) Quality Plastics Limited (QPL) produces plastic bodies of various appliances
according to the customers’ specifications. It has received an order for supply of
10,000 plastic bodies of a washing machine. The supply is to be made within 30 days.
The following information is available:
(i) QPL carries out production process in batches of 100 units each. Cost of the
first batch is estimated as under:
Rupees
Direct material (inclusive of 10% input losses) 1,100 kg 66,000
Direct labour cost at normal rate 200 hours 44,000
Overheads at normal rate 200 hours 30,000
(ii) It is estimated that due to learning curve effect, completion of the first, second,
third and fourth batch would require 200, 160, 148 and 140 hours respectively.
This learning effect would continue till completion of 64 batches only.
Learning effect at various learning levels is as under:
80% 85% 90%
–0.322 –0.235 –0.152
(iii) It is estimated that after completion of the first 16 batches, material input losses
would be reduced from 10% to 6%.
(iv) QPL works a single shift of 8 hours per day. For the above order, QPL can
spare 8,000 direct labour hours. Overtime hours can be worked at 1.5 times the
normal rate. During the overtime hours, overheads would be 1.25 times the
normal rate.
Required:
Compute the price that QPL should quote in order to earn a margin of 25% of the
selling price. (12)
Q.3 RCL manufactures three products. Presently, overheads are allocated to each product on
the basis of direct labour hours. In order to determine the cost of products more accurately,
RCL has decided to implement Activity Based Costing for allocation of overheads.
The following data has been extracted from RCL’s budget for the next year:
Products X Y Z
Cost per unit: -------------Rupees -------------
Direct material @ Rs. 200 per kg 400 300 500
Direct labour @ Rs. 50 per hour 300 350 250
Other data:
Production units 50,000 40,000 25,000
Batch size units 500 250 250
Q.4 Industrial Tools Limited (ITL) manufactures heavy tools for auto industry. Due to slack
business conditions, approximately 30,000 labour hours remain idle each month. Due to
highly technical nature of this job additional labour is not available. Moreover, since the
company does not want to lose the existing workers, idles hours are paid at 50% of the
normal wage rate of Rs. 100 per hour. Overheads are estimated at Rs. 150 per labour hour
which includes variable as well as fixed overheads. Idle hours result in unabsorbed fixed
overheads of Rs. 0.9 million.
ITL is considering an offer for supply of 10,000 units of tool Zee. In this respect, the
following information is available:
(i) Each unit of Zee would require 2 kg of material Alpha which is available in the
market at Rs. 1,100 per kg. Alternatively, ITL could use 2.5 kg of a substitute
material Beta which can be produced internally. Production of each kg of Beta would
require raw materials costing Rs. 520 and 1.25 labour hours. Processing of Beta
would also require a special equipment which is available at a rent of Rs. 188,000 per
month.
(ii) To improve productivity, ITL plans to pay wages of Rs. 210 per unit of Zee or Rs.
100 per hour, whichever is higher. It is estimated that production of Zee at various
efficiency levels would be as follows:
50% units in 2.2 hours per unit,
30% units in 2.0 hours per unit, and
Remaining units in 1.8 hours per unit.
Required:
Compute selling price which ITL may offer for supply of Zee, if ITL requires a margin of
30% above the relevant costs. (13)
Q.5 ICL has two divisions. Division A produces Gamma which is transferred to division B and
is also sold in the open market. Division B converts Gamma into an advanced version
Gamma-plus. Both divisions are managed by their respective managers who are free to
adopt policies which maximise profits of their respective divisions. In addition to monthly
salaries, the division managers are paid bonus equivalent to 15% of profit after bonus.
ICL is in the process of finalising its strategy for the next year. Extracts from the budget are
given below:
Division
A B
Annual installed capacity kg 200,000 250,000
Raw material cost per kg Rs. 102.00 637.50
Total conversion costs per kg of finished products Rs. 108.00 230.00
Variable selling expenses per kg Rs. 14.00 15.00
Fixed manufacturing costs based on installed capacity Rs. 7 million 6 million
Production of Division A is transferred to Division B at market price subject to a maximum
mark-up of 25% on total costs. In Division B, 1 kg of raw material Y is added for every kg
of Gamma received from Division A.
According to a market study recently carried out by ICL, the relationship between selling
price and demand for the two products is as under:
Gamma
Selling price per kg Rs. 300 375 450
Expected annual demand kg 150,000 100,000 50,000
Gamma-plus
Selling price per kg Rs. 960 1,080 1,200
Expected annual demand kg 70,000 50,000 30,000
The newly appointed CEO of ICL has realised that the policy of independent decision
making by the divisions is affecting the overall profitability of the company. However, he
realises that any revision in policy may be resisted by one or both the divisional managers
on account of change in their bonuses.
Required:
(a) Determine the strategy to be adopted for maximisation of profit of the company. (10)
(b) Compute the increase/decrease in the bonus amounts on account of the revision in
the company’s policy, if any. (10)
Q.6 (a) Explain the difference between fixed overhead variances calculated under the
absorption costing as compared to marginal costing. (03)
(b) Ancient Pharma Limited (APL) a subsidiary of a foreign company uses standard
costing system. It produces a single product Sigma. The standard cost per unit of the
product Sigma is as follows:
Rs. per unit
Direct material 8 kg @ Rs. 500 4,000
Direct labour 10 hours @ Rs. 80 800
Overheads (fixed and variable) 10 hours @ Rs. 50 500
Standards are reviewed and updated every six months, in January and July.
Overhead rate is based on normal operating capacity of 57,500 hours and budgeted
fixed overheads of Rs. 1.15 million per month.
Actual data for the month of November 2012 is as under:
Direct material purchases Rs. 24.30 million
Direct labour cost Rs. 5.28 million
Overheads (fixed and variable) Rs. 3.50 million
Units put into process 6,300 units
Units lost in process (normal loss) 250 units
The position of inventories was as under:
1 November 2012 30 November 2012
Raw material 4,000 kg 5,000 kg
Units in process 100 units (60% converted) 150 units (80% converted)
Finished goods 200 units 800 units
APL uses FIFO method for valuing the output from the process. Losses occur at the
end of the process.
(i) The normal sale price of the product is Rs. 7,000 per unit. Actual sale includes
exports (20% of total sales) at 15% above the normal price and sales to a
corporate buyer (25% of total sales) at a discount of 10%.
(ii) Raw material price effective 1 November 2012 has decreased to Rs. 486 per kg.
APL records material price variance at the time of purchase.
(iii) To reduce labour turnover, APL decided to increase wages of direct labour to
Rs. 88 per hour effective 1 November 2012. A 10% increase was allowed to all
other employees.
(iv) Salaries and wages form 25% of the fixed overheads. Remaining fixed
overheads have increased to 4% above standard.
(v) Conversion costs are applied uniformly throughout the process.
(vi) The variances (price and volume) are treated as period cost and charged to
profit and loss account.
Required:
Using standard costing, prepare profit statements for the month of November 2012
under absorption costing. (20)
(The End)
Suggested Answers
Final Examination - Winter 2012
A.1 SGL Limited

Projected cash-flow statement for the year ending 31 December 2013
Rs. in million
Inflows
Cash from customers W.1 1,328.36
Outflows
Payments for purchases W.3 (318.11)
Payments for expenses W.4 (681.35)
Payments for financial charges 16/4+(16*1.1*3/4) (17.20)
Payments for dividend (80*20%)+(80*1.1*15%) (29.20)
(1,045.86)
Net inflows 282.50
Workings:
W.1: Cash from customers:
Gross sales for 2013 (W.2) 901.25*1.5 1,351.88
Cash sales net of 2% discount 1351.88*20% 270.38
Collection from trade debtors:
Trade debtors: Opening Balance 90.00
Credit sales for 2013 1351.88-(270.38/0.98) 1,075.98
Trade debtors: Closing Balance 90*1.2 (108.00)
1,057.98
1,328.36
W.2: Cost of sales for 2013

Raw material consumption 722*35%*1.2*1.08 327.50
Variable conversion cost 722*45%*1.2*1.1 428.87
Fixed conversion cost (722*20%-3)*1.06+3 152.88
Cost of goods manufactured 909.25
Opening finished goods inventory 89.00
Closing finished goods inventory (97.00)
Cost of sales 901.25
W.3: Payments for purchases

Raw material consumption W.2 327.50
Raw material - opening inventories (722*35%)*30/360 (21.06)
Raw material - closing inventories 327.5*30/360 27.29
Total purchases for 2013 333.73
Trade creditors - opening balance 40.00
Trade creditors - closing balance 333.73*60/360 (55.62)
318.11
W.4: Payments for expenses

Variable and fixed conversion costs 428.87+152.88-3 578.75
Variable operating cost (100-9-16)*1.2*1.1 99.00
Fixed operating costs (advertisement) 16*1.06 16.96
Total costs for 2013 (excluding depreciation) 694.71
Payables for expenses – Opening Balance (722*65%-3+100-9)*35/360 54.18
Payable for expenses – Closing Balance 694.71*35/360 (67.54)
681.35
Page 1 of 6
Suggested Answers
A.2 (a) Learning curve applications

Learning curves may assist the management in the following areas.
1 Pricing decisions
Application of a learning technique may assist the management in determining the
cost of a project/order more accurately and thereby quoting the right price especially
where bidding is expected to be highly competitive.
2 Work scheduling
Learning curves enable management to predict the labour requirement more
effectively and to prepare more accurate delivery schedules.
3 Standard setting
Learning curves may assist management in setting of more accurate budgets and
standards.
(b) Cost of producing ordered bodies of washing machines
Material
First 16 batches (16*66,000) 1,056,000
Next 84 batches 84*(66,000/1.1*1.06) 5,342,400
Direct labour cost
Normal hours at Rs. 220 1,760,000
Overtime hours at Rs. 330 686,070
Overheads
Normal hours at Rs. 150 1,200,000
Overtime hours at Rs. 187.5 389,813
Total costs Rs. 10,434,283
Order price at a margin of 25% of the selling price Rs. 13,912,377
W.1: Learning curve %:

Average hours per Learning
Batch No. Cumulative hours
batch curve %
1 200.00 200.00
2 (200+160) 360.00 180.00 (180/200) 90%
4 (360+148+140) 648.00 162.00 (162/180) 90%
W.2: Overtime hours:

Learning effect at 90% learning curve -0.152
Hours for first 64 batches 64*200*(64)-0.152 6,803
Hours for first 63 batches 63*200*(63) -0.152 ( 6,712)
Hours per batch after batch 91
Hours required:
First 64 batches 6,803
Last 36 batches (91×36) 3,276
Total hours 10,079
Overtime hours (10,079 – 8,000) 2,079
Page 2 of 6
Suggested Answers
A.3 RCL
X Y Z Total
Production Units A 50,000 40,000 25,000
Cost allocation by activity:
1. Procurement department
Direct material cost per units at
Rs. 200 per kg. B 400 300 500
Raw material consumption - kg B/200*A C 100,000 60,000 62,500
EOQ - kg D 10,000 12,000 6,250
No. of purchase orders C/D 10 5 10 25
Procurement department cost E 1,000 500 1,000 2,500
2. Batch set up cost
Batch size F 500 250 250
No. of batches A/F G 100 160 100 360
Batch set-up costs H 1,000 1,600 1,000 3,600
3. Quality control department
Inspection hours per batch J 20 15 18
Inspection hours G*J K 2,000 2,400 1,800 6,200
Quality department costs L 1,455 1,746 1,309 4,510
4. Other overheads
Direct labour cost per unit M 300 350 250
Direct labour hour per unit M/50* N 6 7 5
Total direct labour hours A*N O 300,000 280,000 125,000 705,000
Utilities 1,800 1,680 750 4,230
Salaries of supervisors and foreman 1,500 1,400 625 3,525
Salaries of cleaners and
maintenance staff 600 560 250 1,410
Miscellaneous expenses 300 280 125 705
P 4,200 3,920 1,750 9,870
Total costs Rs. (E+H+L+P) R 7,655 7,766 5,059 20,480
Costs per unit using ABC:

Direct material 400.00 300.00 500.00
Direct labour 300.00 350.00 250.00
Factory overheads R/A 153.10 194.15 202.36
Total Rs. 853.10 844.15 952.36
Page 3 of 6
Suggested Answers
A.4 Industrial Tools Limited

Relevant costs of producing Zee
Material
cost Internal production of Beta (W.2) 7,520*757.50 5,696,400
External buying of Alpha (W.2) 13,984*1,100 15,382,400
Direct labour cost W.4 1,120,000
Variable overheads (W.4) 20,600*120 2,472,000
Total relevant cost Rs. 24,670,800
Zee selling price at 30% above the relevant costs 24,670,800*1.3 Rs. 32,072,040
W.1: Decision to produce Beta internally or not

Beta - internal production costs per kg
- Variable 520+(50*1.25)+(120*1.25) 732.50
- Fixed (existing) (Not relevant) -
- Fixed (additional) 188,000/9,400*1.25 25.00
757.50
Cost of Beta for each unit of Zee 757.5*2.5 1,894.00
Cost of material Alpha for each unit of Zee 1,100*2 2,200.00
Saving on producing Beta internally 306.00
Hence it is beneficial to produce Beta internally.
W.2: Internal production capacity for the substitute material Beta and buying of Alpha externally
Total hours available 30,000
Hours required for production of Zee W.4 20,600
Capacity available for production of Beta Hrs. 9,400
Beta production from the available capacity 9,400/1.25 Kg 7,520
Quantity of Alpha to be purchased externally (10,000-(7,520/2.5))*2 Kg 13,984
W.3: Variable overhead rate per labour hour for Zee and Beta
Variable overhead rate per labour hour 150-(900,000/30,000) 120.00
W.4: Direct Labour Cost for Zee

Hours per Wages at higher of Rs. 100 per hour and
Units Hours
unit Rs. 210 per unit
5,000 2.2 11,000 100 per hour 1,100,000
3,000 2.0 6,000 210 per unit 630,000
2,000 1.8 3,600 210 per unit 420,000
10,000 20,600 2,150,000
Payment of idle hours at 50% (non relevant cost) 20,600 *100/2 (1,030,000)
Relevant labour cost for Zee 1,120,000
Page 4 of 6
Suggested Answers
A.5 ICL
(a) Maximisation of profit using revised policy Division A Division B
(Gamma) (Gamma-plus)
--------------- Rupees ----------------
Contribution margin W.1 18,600,000 23,292,500
Fixed cost (7,000,000) (6,000,000)
Profit before Division managers' bonus 11,600,000 17,292,500
Bonus to division managers at 15% of profit after bonus (A) (1,513,043) (2,255,543)
Estimated profit - using revised policy 10,086,957 15,036,957
W.1: Determination of optimal option based on actual cost

Gamma (Division A) Gamma-plus (Division B)
Selling CM per kg Selling CM per kg
Demand Total CM Demand Total CM
price (Sale-189 price (Sale-627.25
(kg) (Rs.) (kg) (Rs.)
per kg W.3) per kg W.3)
300 111 150,000 16,650,000 960 332.75 70,000 23,292,500
375 186 100,000 18,600,000 1,080 452.75 50,000 22,637,500
450 261 50,000 13,050,000 1,200 572.75 30,000 17,182,500
W.2: Determination of the optimal option based on transfer price:

Gamma-plus (Division B)
CM per kg
Selling price per kg Demand (kg) Total CM (Rs.)
(Sale-671 – W.3)
960 289 70,000 20,230,000
1,080 409 50,000 20,450,000
1,200 529 30,000 15,870,000
W.3 Actual variable costs/transfer price Division A Division B

Gamma Gamma Plus
----------Rupees----------
Inter-transfer cost from Division A (102+73)/2 - 87.5
Raw material (B) 637.50/2 102.00 318.75
Conversion costs - Variable and fixed 108.00 230.00
Conversion costs - Fixed (7/0.2), (6/0.25) (35.00) (24.00)
Conversion costs - Variable 73.00 206.00
Selling expenses - Variable 14.00 15.00
Total variable cost - Actual 189.00 627.25
Margin of profit to Division A on internal transfers
(W-4) 87.5/2 43.75
Cost based on transfer price 671.00
(b) Profit using transfer price:

CM from external sale W.1 & W.2 18,600,000 20,450,000
CM from internal sale (50,000/2*87.5) 2,187,500 -
Total CM 20,787,500 20,450,000
Fixed costs (7,000,000) (6,000,000)
Profit before Division managers' bonus 13,787,500 14,450,000
Bonus to division managers at 15% of profit after bonus (B) (1,798,370) (1,884,783)
Estimated profit - using transfer price 11,989,130 12,565,217
Increase/(decrease) in bonus on revision of policy (A-B) (285,327) 370,760
W.4: CM per unit on internal transfer of Gamma to Division B:

Maximum transfer price of Gamma (102+108)*1.25 262.50
Variable cost 102+73 175.00
Division A CM from internal transfers 87.50
Page 5 of 6
Suggested Answers
A.6
(a) Fixed overheads variances calculation under absorption and marginal costing:
Absorption costing Marginal costing
1 Fixed overheads are allocated to Fixed overheads are treated as period cost
production at a standard fixed rate by using and charged to profit and loss account.
budgeted production.
2 Difference of actual and budgeted As fixed overheads are not allocated to
production results in under/over recovery production, volume variance does not
of fixed overheads and a volume variance. arise.
3 Two variances are worked out i.e. Only one variance is worked out i.e.
expenditure and volume variances. expenditure variance.
(b) Ancient Pharma Limited

Profit statement for the month of November 2012
Standard costing using absorption:

Working Units Rupees
Sales - Export J (5,400*20%)*7,000*1.15 1,080 8,694,000
- Local, corporate (5,400*25%)*7,000*90% 1,350 8,505,000
- Local, others (5,400*55%)*7,000 2,970 20,790,000
5,400 37,989,000
Standard cost of sales 5,400*(4,000+800+500) (28,620,000)
Gross profit 9,369,000
Favorable/(Adverse) variances:
Material purchase price A 50,000*(486-500) 700,000
Material usage G,B (6,050*8)-49,000)*500 (300,000)
Labour rate C 60,000*(80-88) (480,000)
Labour efficiency H,C [(6,060*10)-60,000]*80 48,000
Variable overhead expenditure C,D,E [60,000*(50-20)-(3,500,000-1,213,250)] (486,750)
Variable overhead efficiency H,C (6060*10-60,000)*(50-20) 18,000
Fixed overhead expenditure D,E (57,500*20)-1,213,250 (63,250)
Fixed overhead volume variance H,D (6,060*10-57,500)*20 62,000
(502,000)
Gross profit after variances 8,867,000
Workings:
A Actual purchased quantity 24,300,000/ 486 kg 50,000
B Actual material usage 4,000+50,000-5,000 kg 49,000
C Actual labour hours used 5,280,000/88 Hours 60,000
D Standard fixed overhead rate (1,150,000/57,500) Rs./hr 20
E Actual fixed overheads (1,150,000*25%*1.10)+(1,150,000*75%*1.04) 1,213,250
F Finished goods production – Qty (100+6,300)-(150+250) Units 6,000
Equivalent units:
G - Material 6,000-100+150 Units 6,050
H - Conversion costs 6,000-(100*60%) + (150*80%) Units 6,060
J Sales quantity 6,000+200-800 Units 5,400
(THE END)
Page 6 of 6
Summer 2012 100 marks – 3 hours
Q.1 Himalaya Chemicals Limited (HCL) manufactures an industrial chemical AXE. It has two
processing departments A and B. The operating capacity of each department is 42,000 labour hours
per annum. The budgeted operating costs of the departments are as under:
Department A Department B
------------Rupees------------
Direct wages per hour 120 90
Factory overhead rate per labour hour 145 105
Annual fixed overheads 1,356,600 1,117,200
Direct wages are paid on a monthly basis irrespective of the production. Factory overhead rates
have been worked out to absorb all budgeted variable and fixed overheads based on 95% operating
capacity utilisation.
HCL expects a decrease in demand for AXE as a result of which operating capacity utilisation is
estimated to reduce to 70%. Therefore, HCL is considering to introduce a new product WYE.
According to a market research carried out by the company the annual demand for WYE would
vary according to its price as shown below:
Selling price per unit (Rs.) 190 200 210
Demand in units 18,000 15,000 12,000
Direct material cost of WYE is estimated at Rs. 30 per unit and direct labour hours are estimated at
0.75 and 0.50 per unit for department A and B respectively.
HCL has also received an offer from a third party who wants to acquire all the spare operating
facilities on rent at an hourly rate of Rs. 140 and Rs. 100 for departments A and B respectively.
Third party would bring its own raw material but would use HCL’s labour for which no additional
amount would be paid.
Required:
(a) Determine which of the two options would be financially beneficial for HCL. (13 marks)
(b) Briefly describe other matters which you would consider in deciding between the two options.
(03 marks)
Q.2 Quality Appliances Limited (QAL) produces two products HX and HY. Budgeted data for these
products is as under:
HX HY
Rupees per unit
Selling price 6,000 5,500
Direct material cost at Rs. 400 per kg 2,000 2,000
Labour cost at Rs. 200 per labour hour 960 650
Machine operating cost at Rs. 500 per machine hour 1,000 1,500
Overheads (including 20% fixed overheads) 625 375
To meet the demand of some of its important customers, QAL needs to produce a minimum of 100
units of each of the two products. The supply of raw material is limited to 2,700 kg. The available
labour hours and machine hours are 2,000 and 1,340 respectively.
Required:
Draw the relevant constraints on a graph and determine the production mix which would maximize
the monthly contribution. (15 marks)
Q.3 Spicy Foods Limited (SFL) offers three types of spices BX, BY and BZ. The profitability of SFL is
declining and it has incurred a loss during the year ended 31 March 2012. The product wise results
are as under:
BX BY BZ
No of units sold 400,000 600,000 300,000
------Rupees in million------
Sales 140 180 126
Cost of sales (105) (135) (120)
Operating cost (30) (49) (13)
Net profit / (loss) 5 (4) (7)

(i) Cost of sales includes fixed costs of Rs. 135 million. Fixed costs have been allocated to the
products on the basis of labour hours. BX, BY and BZ require 1.50, 1.75, and 2.00 labour
hours per unit respectively.
(ii) Variable operating costs of BX, BY, and BZ are Rs. 45, Rs. 49, and Rs. 26 per unit
respectively.
(iii) In order to increase sales and improve operating results, SFL is considering a proposal to
introduce a ‘Jumbo economy pack’. The details of the proposal are as under:
The Jumbo pack would consist of one packet of each of the three types of spices. It would
be sold at a price equivalent to 90% of the total price of the three packs. It has been
projected that on introduction of the Jumbo pack, the sale of the individual packets would
reduce by 20%.
The existing packing machine would need to be replaced. The new machine would reduce
the variable costs of production by 2%. However, annual fixed costs would increase by
Rs. 3 million.
To market the Jumbo pack, SFL plans to launch a sale campaign at a cost of Rs. 4 million.
Required:
Calculate the number of Jumbo packs that should be sold during the year to achieve a net profit of
Rs. 5 million. (14 marks)
Q.4 Sky Limited (SL) manufactures a product Alpha. Its demand is highly elastic and is expected to vary
with the selling price as under:
Selling price per unit (Rs.) 650 700 750

Annual demand (Units in ‘000) 200 160 120
To utilize available spare capacity and keeping in view the increasing market competition faced by
Alpha, SL is working on a feasibility for introducing a new product Gamma. To produce Gamma, a
component Beta would have to be produced using the existing facility. A new facility would have to
be established for further processing of Beta to convert it into Gamma. The existing facility has a
capacity of 440,000 machine hours while the new facility would have a capacity of 144,000 machine
hours.
The data available for the products is as under:

New
Existing facility
facility
Alpha Beta Gamma
Total cost per unit (Rs.) 590.00 735.00 300.00
The annual demand for Gamma is projected at 100,000 units at a price of Rs. 970 per unit. Fixed
overheads for the existing facility amount to Rs. 23.1 million per annum whereas annual fixed
overheads for the new facility are estimated at Rs. 12 million. Fixed overheads are allocated on the
basis of machine hours.
Required:
(a) Determine the product mix that could optimize profit of Sky Limited. (17 marks)
(b) Determine minimum transfer price of the component Beta. (03 marks)
Q.5 Super Autos (SA) manufactures components for auto industries. It started its business in 1960 in a
small workshop which has now developed into a fully automated factory with latest computerized
machines.
For allocating overheads, SA has been using single plant-wide factory overhead absorption rate
based on direct labour hours. In view of strong competition, the company’s management is
reviewing its pricing strategies and wants to introduce a more accurate method of product costing.
The pertinent information is as under:
(i) Actual expenses for the quarter ended 31 March 2012 were as under:
Rupees
Direct wages (30,000 labour hours) 3,000,000
Machines operating expenses (50,000 machine hours) 2,500,000
Maintenance expenses 1,500,000
Technical staff expenses 2,000,000
Expenses of procurement 1,000,000
Expenses of finished goods stores and dispatch 1,600,000
Administration and selling expenses 5,000,000
Total 16,600,000
(ii) During the quarter:

60 purchase orders were processed and received.
120 sales orders were acquired and delivered.
150 batches were set for production.
(iii) Maintenance expenses pertain to:

Production 70%
Procurement 5%
Finished goods stores and dispatch 15%
Quality control 10%
(iv) It is estimated that Technical staff devotes 50% of its time to maintenance, 30% to production,
8% to quality control and 12% to procurement.
(v) Quality inspection is carried out at the commencement and completion of each batch.
(vi) SA produces a number of components. Information related to two major products of the
company, for the quarter ended 31 March 2012 is as under:
LV MV
No. of units produced and sold 10,000 12,000
Batch size (no. of units) 400 500
Machine hours per batch 200 150
Direct labour hours worked 1,000 1,500
Direct material costs (Rs.) 850,000 900,000
Average size of a purchase order (Rs.) 170,000 150,000
No. of sales orders delivered 8 10
Required:
Compute the unit cost of components LV and MV using:
Activity Based Costing; and
A single factory overhead rate based on direct labour hours. (20 marks)
Q.6 Zen Trading Limited (ZTL) is facing working capital constraints due to slow collection of trade
debts. Since the management anticipates that any change in the collection policy will have adverse
effect on sales, it is negotiating with a factoring company. The terms and conditions proposed by the
factoring company are as follows:
Credit invoices would be submitted to the factor on a daily basis. The factor would make the
payment in fifteen days.
The factor would charge a fee of 5% of the invoice amount which would be deducted at the time
of payment to ZTL.
The factor would be responsible for bad debts, if any.
For evaluating the proposal, the following information is available:
(i) Monthly average cash and credit sales are Rs. 20 million and Rs.100 million respectively.
(ii) ZTL allows a discount of 1% on the invoices which are settled in one month.
(iii) 26% customers avail the discount, 34% pay in two months and 30% pay in three months.
(iv) 5% of the amount is recovered after intense follow-up which takes an average of five months
and requires an expenditure of 10% of the invoice amount.
(v) 1% of the amount comprises of small balances and is written off.
(vi) Remaining customers are referred to a legal firm. The legal proceedings take an average of six
months and 80% debts are recovered. The legal firm charges a monthly retention fee of Rs.
0.025 million plus 20% of the amount recovered.
(vii) ZTL maintains a Credit Control Department at a cost of Rs. 1.2 million per annum.
(viii) ZTL has a running finance facility of Rs. 150 million at an interest rate of 16% per annum. 5%
of the facility is unutilized.
Required:
(a) Determine whether it would be feasible for ZTL to accept the factoring proposal. (12 marks)
(b) Do you anticipate any difficulties which ZTL may have to encounter after accepting the above
arrangement and how can these be resolved. (03 marks)
(THE END)
Suggested Answers
A.1 (a) Himalaya Chemicals Limited
Introduction of the new product WYE

Selling price per unit 190.00 200.00 210.00
Direct material cost per unit (30.00)
Variable operating cost for dep’t. A and B W.1 (121.75)
(151.75) (151.75) (151.75)
Contribution margin per unit (A) Rs. 38.25 48.25 58.25
Demand in units (B) 18,000 15,000 12,000

Production at lower of demand or capacity of
16,800 units (12,600/0.75) (C) 16,800 15,000 12,000
Total contribution margin (A×C) Rs. 642,600 723,750 699,000
Renting out of spare operating facilities Dep't. A Dep't. B

Renting of spare operating hours (42,000×30%) 12,600.00 12,600.00
Rental income per hour 140.00 100.00
Variable operating cost per hour W.1 (111.00) (77.00)
Contribution margin per hour 29.00 23.00
Total contribution margin (12,600× (29+23)) Rs. 655,200
HCL should produce 15,000 units of WYE having selling price of Rs. 200 per units which gives the
highest CM to the company.
W.1 Variable operating costs - WYE Dep't. A Dep't. B

Total overheads per hour 145.00 105.00
Fixed overheads per hour {1,356,600/ (42,000×95%)},
{1,117,200/ (42,000×95%)} (34.00) (28.00)
Variable operating cost per hour 111.00 77.00
Department-wise cost per unit (111*0.75), (77*0.5) 83.25 38.50
Total variable cost per unit Rs. 121.75
(b) Other matters to be considered in deciding between the two options:
(i) Risk
Introduction of a new product WYE involves a risk that it may not be able to capture the
market at the projected selling price.
(ii) Interference and difficulties with the tenant

In case of renting out of the facilities, the management may have to face day to day disputes
and interferences.
(iii) Timely discontinuation of the contract

HCL may not be able to discontinue the arrangement in time when the facilities are needed for
its own use.
Page 1 of 6
Suggested Answers
A.2 Quality Appliances Limited
Material (kg) Labour hours Machine hours

Kg / Hours per unit HX (2,000/400) 5.00 (960/200) 4.80 (1,000/500) 2.00
HY (2,000/400) 5.00 (650/200) 3.25 (1,500/500) 3.00
Resources available 2,700 2,000 1,340
Objective function:
* **
Maximise Contribution = 1,540HX+ 1,050HY subject to the constraints as mentioned below.
*
HX contribution margin: 6,000-2,000-960-1,000-(625×80%)=1,540
**
HY contribution margin: 5,500-2,000-650-1,500-(375×80%)=1,050
Constraints:
Material 5HX+5HY ≤ 2,700 Eq. 1
Labour hours 4.8HX+3.25HY ≤ 2,000 Eq. 2
Machine hours 2HX+3HY ≤ 1,340 Eq. 3
HX, HY ≥ 100 Eq. 4
Plotting of constraints on the graph:
Number of units at feasible points A, B and C of the graph are worked out as below:
Point A
Putting the value of 100 for HX in equation 3, we get (2×100) + 3HY ≤ 1,340
∴HY = 380
Point B
Multiplying equation 3 by 2.4, we get 4.8HX+7.2HY=3,216 Eq. 5
Subtracting equation 2 from Equation 5 we get 3.95HY=1,216
∴HY = 308
Putting the value of HY in equation 5, we get 4.8HX+2,218=3,216
∴HX = 208
Page 2 of 6
Suggested Answers
Point C
Putting the value of 100 for HY in equation 2, we get 4.8HX+(3.25×100) ≤ 2,000
∴HX =349
CM at feasible points A, B and C CM

HX (Units) HY (Units) (at Rs. 1,540 and Rs.
1,050 per unit)
A Including minimum required 100 units 100 380 553,000
B Including minimum required 100 units 208 308 643,720
C Including minimum required 100 units 349 100 642,460
QAL should produce 208 units of HX and 308 units of HY to maximise the contribution.
A.3 Spicy Foods Limited
BX BY BZ TOTAL
Units sold (in millions) A 0.400 0.600 0.300 1.300
Labour hours per unit B 1.50 1.75 2.00
Labour hours (in millions) C A×B 0.600 1.050 0.600 2.250
Required CM from sale of Jumbo pack to earn a profit of Rs 5 million

Rupees in million
Present sales D 140.000 180.00 126.00 446,000
Variable cost
Total cost of sales E 105.000 135.000 120.000 360.000
Fixed cost of sales 135/2.25×C (36.000) (63.000) (36.000) (135.000)
Variable cost of sales F 69.000 72.000 84.000 225.000
VC of sales reduced by 2% F×98% 67.620 70.560 82.320 220.500
Variable operating costs G A×45, 49, 26 18.000 29.400 7.800 55.200
Revised total variable costs H 85.620 99.960 90.120 275.700
CM from present sales J D-H 170.300
CM from reduced 80% sales (170.300/80%) 136.240
Fixed COS and operating costs 135+(30+49+13-55.2) (171.800)
Additional fixed cost (3+4) (7.000)
Required profit for the year (5.000)
(47.560)
Number of Jumbo packs to earn a profit of Rs. 5.0 million:
Sales price per Jumbo pack (350+300+420)×90% 963.00
VC of sales per Jumbo pack H/A 214.05 166.60 300.40 (681.05)
CM per unit per Jumbo pack Rs. 281.95
Number of Jumbo packs to be sold ( 47,560,000/281.95) Units 168,682
Page 3 of 6
Suggested Answers
A.4 Sky Limited

(a)
GAMMA
ALPHA (Existing facility)
(New facility)
Option 1 Option 2 Option 3
Selling price per unit A 970.00 650.00 700.00 750.00
Variable cost per unit B W.1 (651.25) (485.00) (485.00) (485.00)
CM per unit C A-B 318.75 165.00 215.00 265.00
Hours per unit (existing
facility) D 3.50* 2.00 2.00 2.00
CM per hour (Rs.) E C/D 91.07 82.50 107.50 132.50
Demand in units F 100,000 200,000 160,000 120,000
Production capacity:
 Hours G 144,000 440,000 440,000 440,000
 Units H (G/2.4) G/2.0 G/2.0 (G/2.0
60,000 220,000 220,000 220,000
Demand in units J 100,000 200,000 160,000 120,000
Product having higher CM per hour will be produced Note 1 Alpha Alpha
first and restricted to lower of capacity / demand - units K Beta 160,000 120,000
60,000
Remaining capacity will be used for the products Alpha Beta Beta
having lower CM per hour - units L (G-(K*3.5)/2 (G-(K*2)/3.5 (G-(K*2)/3.5
115,000 34,286 57,143
Contribution margin; Alpha L*265
M (Note.2) K*C K*C
30,475,000 34,400,000 31,800,000
Contribution margin; Gamma (at Rs. 318.75 per unit) N 19,125,000 10,929,663 18,214,331
Total contribution margin 49,600,000 45,329,663 50,014,331
*Hours for Beta only (conversion from Beta to Gamma would take place in the new facility)
Conclusion: SL should use option # 3 for producing 120,000 units of Alpha and 57,143 units of Beta and
Gamma to maximise the profit.
Note 1 In case of option # 1 production of Beta / Gamma would be restricted to 60,000 units which is
the maximum capacity of the proposed new facility for producing Gamma.
Note 2 Alpha would be produced by utilising the capacity remained after producing Beta. As a result,
production of Alpha will be restricted to 115,000 units and the sale price of Rs. 750 will be
applicable as per option # 3 resulting in CM of Rs. 265 per unit.
W-1 Per unit variable cost of Alpha (590-(23,100,000/440,000×2) 485.00

Per unit variable cost of Gamma:
Var. cost of Beta in the existing facility (735-23,100,000/440,000×3.5) 551.25
Var. cost of Gamma in the new facility (300-(12,000,000/144,000×2.4) 100.00
Var. cost of producing Gamma 651.25
(b) Transfer price of Beta

Before establishment of the proposed facility for Gamma, Option # 2
maximum contribution margin can be obtained from Alpha 160,000×215 34,400,000
After establishment of the proposed facility for Gamma, Option # 3
maximum contribution margin can be obtained from Alpha 120,000×265 31,800,000
Loss of CM due to decrease in production of Alpha 2,600,000
Loss of CM per unit of Beta 2,600,000 / 57,143 45.50
Variable cost per unit of beta in the existing facility W -1 551.25
Minimum transfer price per unit for Beta 596.75
Page 4 of 6
Suggested Answers
A.5 Super Autos

LV MV
----- Rupees -----
Cost per unit under Activity Based Costing:
Direct raw material 850,000/10,000; 900,000/12,000 85.00 75.00
Direct wages (3,000,000/30,000) ×1,000/10,000 10.00
(3,000,000/30,000) ×1,500/12,000 12.50
Overheads 798,750/10,000; 715,883/12,000 79.88 59.66
174.88 147.16
Cost per unit under the single factory overhead rate based on direct labour hours:
Direct raw material 85.00 75.00
Direct wages 10.00 12.50
Overheads *(8,600,000/30,000) ×1,000/10,000 28.67
*(8,600,000/30,000) ×1,500/12,000 35.83
123.67 123.33
*(2,500,000+1,500,000+2,000,000+1,000,000+1,600,000) = 8,600,000
W.1 Overheads allocation to LV and MV based on ABC method: LV MV

Production; 97×A 485,000 349200
Procurement 22,750×B 113,750 136,500
Finished goods stores and dispatch 16,458.33×8, 10 i.e. No. of sales orders 131,667 164,583
Quality control 1,366.67×C 68,333 65,600
798,750 715,883
LV MV
W.2 Machine hours A (25×200)= 5,000 (24×150) = 3,600
No. of purchase orders B (850,000/170,000)= 5 (900,000/150,000)= 6
No. of quality inspections C (10,000/400×2)= 50 (12,000/500×2)= 48
F. goods
Quality
W.3 Computation of cost driver rate: Production Procurement stores &
control
dispatch
Machines operating expenses 2,500,000 - - -
Maintenance expenses;
1,500,000×70%, 5%,15%, 10% 1,050,000 75,000 225,000 150,000
Technical staff expenses:
- Maintenance; (2,000,000×50%)×70%,
5%,15%, 10% 700,000 50,000 150,000 100,000
- Others; 2,000,000×30%, 12%, 0%, 8% 600,000 240,000 - 160,000
Procurement - 1,000,000 - -
Finished goods stores & dispatch - - 1,600,000 -
Overheads by department 4,850,000 1,365,000 1,975,000 410,000
Cost drivers 50,000 300 (150×2)
60 Purchase 120 Sales
machine Quality
orders orders
hours inspections
Cost per driver 97 22,750 16,458.33 1,366.67
Page 5 of 6
Suggested Answers
A. 6 Zen Trading Limited

(a)
Present cost of recoveries:
Interest cost
Rs. in
Delay in collection Amounts collected Interest at 16%
million
1 Month 26%×100×99% 25.740 0.343
2 Months 34%×100 34.000 0.907
3 Months 30%×100 30.000 1.200
5 Months 5%×100 5.000 0.333
11 Months 4%×100 ×80% 3.200 0.469 3.252
Discount cost for payment in one month 26×1% 0.260
Credit Control Department cost 1.2/12 0.100
Recovery cost of Credit Control Department 100×5%×10% 0.500
Immaterial balances written off 100×1% 1.000
Retention fee for the legal firm 0.025
Recovery fee of the legal firm 100×4%×80%×20% 0.640
Balances written off after legal proceedings 100×4%×20% 0.800
6.572
Cost of recoveries under factoring:
Factoring service charges at 5% 100×5% 5.000
Interest charges for recovery in 15 days 100×95%×16%×0.5/12 0.633
5.633
Savings on accepting factoring proposal 0.944
Conclusion:
ZTL should accept the proposal of the factoring company as it will result in a saving of Rs.
944,000.
(b) Difficulties ZTL may have to encounter after accepting factoring arrangement.
(i) There may be disagreements between the factor and the company, over credit evaluation of
the customer.
(ii) A customer may feel uncomfortable in dealing with a factor.
(iii) The factoring of trade debts may be considered as a symptom of weakness of the
management.
The above difficulties can be resolved by:

(i) Incorporating appropriate clauses in the agreement with the factor to avoid disagreements
over credit evaluation of the customers.
(ii) Keeping continuous personal contacts with customers and resolving their problems
promptly.
(iii) Effective public relationing with all the stakeholders.
(THE END)
Page 6 of 6
Winter 2011 100 marks - 3 hours
Q.1 Hunarmand Limited is engaged in manufacturing of a product ELT for the local industry. Its latest
quarterly profit and loss account is as follows:
Rs. in ‘000
Sales 350,000
Less: Material 234,500
Labour (including idle labour) 28,650
Factory overheads 57,000 320,150
Gross profit 29,850
Less: Admin expenses 8,000
Selling and distribution expenses 15,000 23,000
Net profit 6,850
The existing production requires 22,500 and 36,000 labour hours of skilled and unskilled labour per
month respectively. The company’s agreement with the labour union does not allow it to lay off
workers and consequently, 10% of the skilled and 4% of unskilled labour remain idle. The skilled
labour is paid at Rs. 200 and unskilled labour at Rs. 125 per hour. Idle labour is paid 80% of the
above amounts.
The factory overheads include rent and depreciation of Rs. 20 million and Rs. 14 million
respectively; the remaining overheads are directly proportional to the total (skilled and unskilled)
labour hours worked.
Admin expenses are all fixed whereas 80% of selling and distribution expenses are variable.
In order to utilise the idle capacity, the management is considering bidding for a tender which
requires a modified version of ELT to be supplied to a buyer. The relevant information is as follows:
(i) The order would occupy 40% of the existing capacity. If accepted, the production is expected to
commence after 30 days. The work would be completed within 60 days from the date of
commencement.
(ii) On account of intense competition, the company is currently operating at 75% capacity and
expects to operate at the same level for the next few years.
(iii) In order to make the necessary modification, a machine would need to be purchased at a cost of
Rs. 4.5 million, having a life of 3 years with no residual value. After completion of the order,
the company would be able to sell the machine for Rs. 3 million. However, the company may
decide to keep the machine and dispose of another machine for Rs. 300,000. Such an exchange
would reduce the labour hours required to produce ELT by 5%.
(iv) 8,000 kg of material A and 500 kg of material B will be required for the proposed order. These
are available in the market at Rs. 820 and Rs. 750 per kg respectively. Material B is also used in
the existing production. Its cost as per inventory ledger is Rs. 700 per kg and 6,000 kg of
material B is presently available which is sufficient to meet the next three months’ production
requirements at the existing level. The balance of the existing stock of Material B would become
obsolete if it is not used within the next three months after which it would have a market value
of Rs. 50 per kg. Currently the company could sell this material at Rs. 600 per kg.
(v) The new order would require 6,000 skilled and 15,000 unskilled labour hours.
Required:
Determine the bid price if the company wants to earn a margin of 20% on relevant cost. (20 marks)
Q.2 Sanatkar Limited (SL) manufactures and sells three products i.e. XA, YA and ZA. The following
information relates to the budgeted and actual operations during the month of November 2011.
(i) The standard selling price and standards cost per unit of the three products were as follows:
XA YA ZA
Rupees
Selling price 200,000 300,000 475,000
Material costs 39,500 54,000 78,000
Direct labour costs (Rs. 100 per hour) 80,000 100,000 150,000
Overheads 125% of direct labour cost
(ii) At the start of the month, SL increased the salaries by 5% on account of which the management
anticipates an 8% increase in efficiency.
(iii) The budgeted sales of XA, YA and ZA were 60, 28 and 20 units whereas actual sales of the
three products were 80, 24 and 30 units respectively.
(iv) The budgeted and actual operating results for November 2011 are summarized below:
Budgeted Actual
Rupees
Sales revenue 29,900,000 37,425,000
Material costs (5,442,000) (6,931,920)
Labour costs (120,000 labour hours) (10,600,000) (12,887,700)
Overheads (13,250,000) (16,882,900)
Profit 608,000 722,480
(v) SL launched a promotion campaign for XA in which 35 units were sold at Rs. 180,000 per unit.
The remaining units of XA were sold at Rs. 215,000. Sales of YA and ZA were made at
standard price.
Required:
Calculate the following variances for inclusion in the Management Report:
(a) Sales volume variance;
(b) Sales price variance bifurcated into planning and operational components; and
(c) Labour efficiency variance bifurcated into planning and operational components. (16 marks)
Q.3 Takneek Company Limited (TCL) has been awarded a contract for supply and installation of
technical equipments. The amount of contract is Rs. 140 million plus sales tax. Other terms,
conditions and other relevant information are as follows:
(i) The customer will provide 25% mobilization advance in January 2012.
(ii) Percentage of completion is estimated at 30, 75 and 100 percent by the end of January,
February and March 2012 respectively. TCL would raise invoices for the same in subsequent
months. The amounts would be received in the month in which the invoices are raised.
(iii) All receipts would be subject to withholding tax at 6%.
(iv) The running bills would be subject to retention @ 5% of the value before sales tax. The
retention money would be released after 60 days of completion of contract.
(v) The mobilization advance would be adjusted proportionately from the running bills.
(vi) The equipments required for the contract would be purchased in January 2012 at a cost of Rs.
95 million inclusive of sales tax. The supplier is registered under the Sales Tax Act, 1990 and
would provide a credit of 60 days.
(vii) TCL would sub-contract the installation and related work to Expert Systems Limited. 30%
payment will be made at the commencement of the project and the balance would be paid in
the month of March 2012. Installation charges are not subject to sales tax.
(viii) Sales tax is paid/claimed subsequent to the month in which the invoice is raised. Any excess
input is available to be carried forward for adjustment in the next month.
(ix) The sales tax rate is 16%. The projected profit is estimated at 15% of the contract price.
Required:
A month-wise cash flow for the project. (14 marks)
Q.4 Sawari Limited manufactures 100cc motorcycles. Due to acute competition in the market, the
profitability of the company has been decreasing since the last three years. The management has
hired a consultant to suggest measures to improve the profitability. Following is the latest annual
profit and loss account of the company:
Rs. in ‘000
Sales (24,960 units) 1,560,000
Material 834,400
Labour 138,600
Warranty costs 998
Factory overheads 193,502
Cost of goods manufactured 1,167,500
Opening inventory 126,000
Closing inventory (167,500) 1,126,000
The consultant has made the following suggestions on the basis of which the cost could be reduced:
I. Replace the plant and machinery which was purchased 12 years ago at a cost of Rs. 54 million
and has a remaining useful life of 6 years. The new machinery with advanced technology is
available at a cost of Rs. 200 million with a useful life of 20 years. The change is expected to
bring following benefits:
Currently, 25 skilled labour hours are required to produce one unit of output. New plant is
more automized and will require 12 semi-skilled labour hours and 8 skilled labour hours.
Semi skilled labour can be hired at 70% of the cost of skilled labour.
The raw material wastage would be reduced from 4% to 2% of input. Furthermore, the
improvement in quality will reduce the warranty claims from 1% to 0.4% of the units sold.
The average cost of warranty claim will also be reduced from Rs. 4,000 to Rs. 3,500 per
claim.
The company follows straight line method for charging depreciation with the residual value of
the plant assumed at 10% of cost.
II. Presently, the material is purchased in bulk quantity which is sufficient to produce 14,000 units.
The ordering cost is Rs. 45 thousand per order. On account of bulk purchases, the suppliers
allow a discount of 1.5% of the purchase value. The company maintains a safety stock of raw
material which is sufficient to produce 4,000 units. The annual stock holding cost is 4% of the
cost of inventory.
The consultant has recommended the introduction of a Just in Time (JIT) system of stock
management which would have the following effects:
reduction in order size by 85.71%
safety stock would not be required
discount would not be available
Additional Information
(i) Opening and closing inventory of motorcycles in the above profit and loss account is 2,500 and
3,540 units respectively. Next year the company expects to produce and sell 28,000 units.
(ii) Fixed overheads amount to Rs. 25 million excluding depreciation.
(iii) Material prices and labour rates are projected to increase by 8% and 10% respectively. Factory
overheads other than ordering and holding costs and depreciation would increase by 10%.
However, if the new machine is purchased, the savings in maintenance cost would limit the
increase to 7%.
Required:
Evaluate the consultant’s suggestions and give your recommendations for the next year. (23 marks)
Q.5 Karobar International manufactures a single product. The product is processed in three different
departments. The company uses first-in-first-out method for process costing.
During November 2011, the costs incurred and units processed in department 2 were as follows:
Units Rs.
Opening work in process 2,000 128,750
Units received from department 1 53,000 2,057,500
Cost added by department 2
Materials 988,000
Production overheads 244,000
Units transferred to department 3 48,000
Closing work in process 5,000
Defective units 2,000
The normal loss is 5% of the units produced (including defective units) and is identified at the start of
the process. The defective units are sold at Rs. 15 per unit. Details of percentage of completion of
opening and closing work in process are as follows:
Work in process
Opening Closing
Materials 80% 70%
Labour and production overheads 60% 50%
Required:
Prepare process account of department 2 for the month of November 2011. (13 marks)
Q.6 Khudkar Limited (KL) manufactures customized equipments using a semi automated plant. It has
recently received an inquiry from a well-reputed customer for the manufacturing of 500 units of a
new type of equipment for Rs. 10,500 per unit. Based on the initial estimates, KL is not much
inclined to accept this order as the gross profit margin is quite low. However, the customer has
assured KL that at least one repeat order would be made.
The cost estimates per unit for the first order are as follows:
Department
A B
Rupees
3 hours of semi skilled labour 720
Direct labour
20 hours of skilled labour 4,000
Fixed overhead absorbed (per labour hour) 40 15
Variable overheads 25% of direct labour cost
Based on the data available with the company, an 80% learning curve is applicable to the company’s
skilled labour. Extract from 80% learning curve table are as follows:
X 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0
Y% 100 97.0 94.3 91.7 89.5 87.6 86.1 84.4 83.0 81.5 80.0
Required:
Determine what should be the size of the repeat order if the company wants to earn an average gross
profit margin of 20% on the two orders. (14 marks)
(THE END)
Suggested Answers
Final Examination –Winter 2011

A.1 Relevant costs for the tender
Working
s Rs. in ‘000
Existing capacity's CM lost 1 6,913
Material A (8,000 × Rs. 820) 6,560
Material B (500 × Rs. 600) 300
Material B - loss on sale of redundant stock 2 30
Labour costs for project 3 3495
Factory overhead 4 2,752
Cost of machine 5 1,140
21,190
Profit margin on cost (20%) 4,238
Bidding price 25,428
W-1: Contribution margin lost

Capacity required for order 40%
Present Idle capacity 25%
Existing utilized capacity to be used for new project 15%
Present quarterly contribution margin
[Rs. 350,000 (Sales) - Rs. 234,500 (material) - Rs. 28,650 (labour inclusive of idle
labour) - Rs. 23,000 (variable FOH) - Rs. 12,000(variable selling expenses)] 51,850
Contribution forgone for 60 days (15%/75% × Rs. 51,850 × 2/3) 6,913
W-2: Loss on sale of redundant Material B stock

Kgs
Available stock 6,000
Usage during first 30 days (2,000)
Usage during next 60 days (6,000 × 2/3×60/75) (3,200)
Usage for new project (500)
Redundant stock 300
Loss on sale of redundant stock at current sale price [(Rs. 700-600)×300) 30
W-3: Labour cost for the project

Skilled Unskilled
Total hours required for project 6,000 15,000
Idle hours available
Idle hours due to curtailment of activity from 75 to 60%
22,500 × 15/75 × 2 9,000
36,000 × 15/75 × 2 14,400
Present idle hours
22,500 × 10/90 × 2 5,000
36,000 × 4/96 × 2 3,000
14,000 17,400
Payment for the tender activity Rs. in ‘000

6,000 × 200 1,200
3,000 × 200 × 80% 480
14,400 × 125 1,800
600 × 125 × 20% 15
1,680 1,815
Total labour cost 3,495
Page 1 of 6
Suggested Answers

W-4: Variable overheads of the project

Rs. in ‘000
Variable factory overhead rate 23,000/(58,500×3) 0.13105
No. of hours required for the new project 21,000
Variable overhead for two months 2,752
W-5: Cost of machine relevant for the project

Purchased cost of machine 4,500
Less: Resale price or savings in labour costs whichever is higher:
Resale price 3,000
Savings in labour costs
Machine life in # of months 36
Less: Project life 2
Life after the project 34
Labour costs for one months(Rs. 200×22,500+ Rs. 125× 36,000) 9,000
Savings in 34 months (Rs. 9,000 × 5% × 34) 15300
Less : 80% payable for idle time (12240)
Add: Sale of old machine 300
3,360 3,360
1,140
A.2 (a) Sales volume variance

Products
Total
XA YA ZA
Budgeted sales (units) 60 28 20
Actual sales (units) 80 24 30
Volume variance in units (20) F 4 A (10) F
× standard margin per unit ----- Rupees -----
XA : 200,000 - 39,500 - 80,000 - 100,000 (19,500)
YA : 300,000- 54,000 -100,000- 125,000 21,000
ZA : 475,000 - 78,000 -150,000- 187,500 59,500
Volume variance 390,000 A 84,000 A (595,000) F (121,000) F
(b) Sales price - planning variance

Actual sales of XA at budgeted price (Rs. 200,000 × 80) 16,000,000
Revision in Budget
Promotional Sales (180,000 × 35) (6,300,000)
Other than Promotional Sales (200,000 × 45) (9,000,000)
(700,000) A
Sales price - operational variance

Actual sales of XA [Rs.37,425,000 - (Rs.300,000 × 24) - (Rs. 475,000 × 30)] 15,975,000
Actual sales of XA at revised budgeted price (6,300 + 9,000 as above) (15,300,000)
675,000 F
(c) Labour efficiency - planning variance

Standard time
XA: 80 × (80,000 ÷ 100) 64,000
YA: 24 × (100,000 ÷ 100 ) 24,000
ZA: 30 × (150,000 ÷ 100) 45,000
133,000
Revision in standard (8% improved performance) [133.000 × 92%] 122,360
Variance in hours (saved) 10,640
× standard rate per hour (Rs. 100 × 1.05) 105
1,117,200 F
Page 2 of 6
Suggested Answers

Labour efficiency - operational variance
Standard time (revised) 122,360
Actual time (120,000)
Variance in hours 2,360
× standard rate per hour 105
247,800 F
May-
A.3 Jan-12 Feb-12 Mar-12 Apr-12 12 Total
----- Rupees in '000 -----
Receipts
Mobilization advance 35,000 35,000
Running bills (RB) 42,000 63,000 35,000 - 140,000
Less: Mobilization advance (in the ratio of
RB) (10,500) (15,750) (8,750) - (35,000)
Retention money (5% of RB) (2,100) (3,150) (1,750) - (7,000)
29,400 44,100 24,500 98,000
Sales tax @16% of billing amount less
mob adv 5,600 5,040 7,560 4,200 22,400
Withholding tax @ 6% (2,436) (2,066) (3,100) (1,722) (420) (9,744)
Release of retention money - - - - 7,000 7,000
Net receipts 38,164 32,374 48,560 26,978 6,580 152,580
Payment of sales tax (5,097) (4,200) (9,297)
Payment to supplier of equipments (95,000) (95,000)
Installation charges (11,131) (25,972) - (37,103)
27,033 32,374 (77,509) 22,778 6,580 11,256
WORKINGS:
Input/output adjustment of sales tax Jan-12 Feb-12 Mar-12 Apr-12
Output tax as worked out above 5,600 5,040 7,560 4,200
Less: Input adjustment (16/116×95,000) (13,103) (7,503) (2,463)
Paid / (excess) carried forward (7,503) (2,463) 5,097 4,200
Cost of installation and related works

Contract price 140,000
Less: Profit margin @15% 21,000
Project cost 119,000
Less: Cost of equipments (100 / 116 ×
95,000) 81,897
Cost of installation and related works 37,103
A.4 STATEMENT OF SAVINGS AND ADDITIONAL COSTS

Workings Rs. in ‘000
Materials 1 5,329
Labour 1 56,481
Warranty 2 728
Factory overheads - ordering and holding costs 3 13,331
Savings in factory overheads (other than ordering & holding costs & depreciation) 4 5,264
Increase in factory overheads due to increase in depreciation (9,000-2,700) (6,300)
74,833
Conclusion:
Implementation of the consultants' suggestions would increase the gross margin by more than
17% (74,833 ÷ 434,000 = 17.2%) and therefore consultants' suggestions should be accepted.
However, their suggestion as regards JIT system is not feasible as against the savings of
Rs.13.3 million on inventory ordering and holding costs, discount on bulk purchases
amounting to Rs.14.5 million would be lost.
Page 3 of 6
Suggested Answers

W-1 : Savings in cost of labour and material on account of purchase of new machine
Material Labour
Cost of labour and material if new machine is NOT purchased Rs. in ‘000
Current years cost (A) Note: 26,000 units = 3540 + 24960 – 2500 834,400 138,600
Cost to produce 2000 additional units in next year at current rates
(2,000 units / 26,000 × A) 64,185 10,662
Cost to produce 28,000 units at current rates 898,585 149,262
Impact of 8% increment in material and 10% increase in labour costs 71,887 14,926
Cost of labour and material if new machine is NOT purchased 970,472 164,188
Cost of labour and material if new machine is purchased

Cost of material before wastage (970,472 ×0.96) 931,653
Wastage under new machine (931,653 ×2 /98) 19,013
Cost of material after discount 950,666
Loss of discount if bulk purchases discontinued (950,666×1.5/98.5) 14,477
Skilled labour (164,188 × 8 /25) 52,540
Unskilled labour (164,188 /25 ×12× 70%) 55,167
Cost of labour and material if new machine is purchased 965,143 107,707
Net savings in labour and material costs 5,329 56,481
W-2 : Savings in cost of warranty Rs.in‘000

Costs under present conditions (Rs. 4,000 × 28000 × 1%) 1,120
Less: Costs if new machine is purchased (Rs. 3,500 × 28000 × 0.4%) 392
Net savings 728
W-3: Savings in ordering/holding costs

Existing Proposed
Size of order (B) 14,000 [14,000 × (1-85.71%)] 2,000
No. of orders (28,000 ÷ B) (C) 2 14
Avg. inventory (B/2+ 4,000) (D) 11,000 (B/2) 1,000
Rs.in‘000 Rs.in‘000
Ordering costs (Rs. 45,000 × C) 90 630
(965,144 × D/28,000 x
Holding costs (970,472 × D / 28000 × 4%) 15,250 4%) 1,379
Total ordering and holding costs 15,340 2,009
Savings in ordering and holding costs (Rs. 15,340 - Rs. 2,009) 13,331
W-4: Factory overheads

Existing
As per annual accounts 193,502
Less: Depreciation (Rs. 54 - Rs. 5.4) /18 (2,700)
Ordering and holding costs as above (15,340)
175,462
Savings in factory overheads {175,462x(10%-7%} (other than depreciation and
inventory ordering and hold costs 5,264
Page 4 of 6
Suggested Answers

A.5 Process Account - Department 2
Units Rs. Units Rs.
Opening work in process 2,000 128,750 Normal loss account (W-1) 2,500 37,500
Received from Dept 1 53,000 2,057,500 Transferred to Dept 3(W-1) 48,000 3,598,750
Direct Material 988,000 Closing work in process (W-1) 5,000 307,500
Direct wages 488,000
Production overheads 244,000
Abnormal gain (500 × 75) 500 37,500
55,500 3,943,750 55,500 3,943,750
W-1: Costs computation

Rs.
Cost of units transferred to Department 3
Opening
WIP: Balance as at November 1, 2011 (2,000 units) 128,750
Material (400 [W-2] x Rs. 20 [W-3]) 8,000
(800 [W-2] x Rs. 15 [W-
Labour & Prod OH 3]) 12,000
148,750
Introduced and completed within the month (46,000 x Rs. 75) 3,450,000
3,598,750
Cost of closing work in process

Transferred from Department 1 (5000 x Rs. 40 ) 200,000
(3,500 [W-2]xRs.20 [W-
Material 3]) 70,000
(2,500 [W-2]xRs.15 [W-
Labour & Prod OH 3]) 37,500
307,500
W-2 : Equivalent Production Unit (EPU)

Material
Transferred Labour &
Total introduced
from dept 1 Prod. OH
in dept 2
------------ Units ------------
Opening WIP 2,000
Transfer in 53,000
55,000
Accounted for
Opening WIP Completed 2,000 - 400 800
Started and completed 46,000 46,000 46,000 46,000
Closing WIP 5,000 5,000 3,500 2,500
Normal loss [(55,000 - 5,000)×0.05) 2,500 - - -
Abnormal gain (2,500 - 2,000) (500) (500) (500) (500)
55,000 50,500 49,400 48,800
W-3 : Cost per unit for each element

EPU Cost per
Cost (Rs.)
(W-2) unit (Rs.)
Transfers from dept 1 2,057,500
Less: Scrap value of normal loss (2,500 × Rs. 15) 37,500
2,020,000 50,500 40
Material 988,000 49,400 20
Wages 488,000 48,800 10
Overheads 244,000 48,800 5
Total costs per unit 75
Page 5 of 6
Suggested Answers

A.6 Computation of total hours required for 1st and repeat orders
Rupees
Sale price per unit 10,500
Less: Margin @ 20% 2,100
Cost 8,400
Less: Costs not affected by learning curve (W-1) 4,250
Costs dependent on learning curve A 4,150
Variable cost (labour & overheads) per hour–Dept B (Rs.

B
200×1.25) 250
Avg. labour hours per unit for 1st and repeat order C=A/B 16.60
Labour hours per unit for 1st order D 20
Learning curve factor E=C/D 0.83
Relevant cumulative total volume factor as per table F 1.80
Units for 1st order G 500
Total units for 1st and repeat order H (F × G) 900
Repeat order J (H-G) 400
Applied fixed overheads - to be ignored
Working 1
Costs not to be affected by learning curve
Direct Material 3,350
Direct labour in Department A 720
Variable overheads (25% of labour cost in Department A) 180
4,250
(THE END)
Page 6 of 6

Final Examinations June 7, 2011
Reading time – 15 minutes
Module F – Summer 2011 100 marks – 3 hours
Q.1 Mubin Limited (ML) manufactures Alpha which consumes two units of raw material A and three
units of raw material B having standard cost of Rs. 35 and Rs. 20 per unit respectively. One unit of
Alpha requires 1.5 labour hours. The following information pertains to the quarter ended March
31, 2011:
Budget Actual
------Rupees------
Sales 8,250,000 8,745,000
Material consumed 3,900,000 4,464,460
Direct labour 2,700,000 3,041,920
Other related information is given below:
(i) Sales in January and February were made at the budgeted price of Rs. 275 per unit. For the
month of March, the company allowed a 10% discount which was not budgeted. As a result,
the number of units sold in March 2011 exceeded the budget by 20%.
(ii) Actual material input during the quarter were 63,900 units of A and 105,600 units of B.
(iii) The suppliers of raw material had increased the prices by 4% with effect from February 1,
2011.
(iv) As an incentive, the management had increased the wages by Rs. 6.0 per hour with effect
from February 1, 2011. This increase was not budgeted.
(v) The purchases and production were carried out evenly over the period.
Required:
(a) Compute the following for the quarter ended March 31, 2011:
(i) sale price and volume variances;
(ii) material price, mix and yield variances; and
(iii) labour rate and efficiency variances.
(b) Comment on the adverse variances giving possible reasons for the same and your suggestions
to the management, if any. (20 marks)
Q.2 Punjnad Juice Company is launching a new product. The annual capacity of this product is 24,000
units and per unit cost has been estimated as follows:
Rupees
Material 80
Labour cost 30
Variable overheads 10
Fixed overheads 20
Depreciation 10
150
The selling price would be Rs. 200 per unit. Selling expenses are estimated at Rs. 10 per unit. 80%
of the selling expenses are considered variable. Projections related to the first two years are as
follows:
Year 1 Year 2
Production units 15,000 20,000
Sales units 14,000 18,000
Other related estimates are given below:
 Stock of raw material 3 months average consumption

 Stock of finished goods To be valued at average cost on the basis of
absorption costing
 Debtors 1 month’s sales
 Creditors for supply of material 2 months’ average purchases
 Creditors for variable and fixed overheads 1 month’s average
 Bad debts 0.75%
Required:
Prepare a statement showing projected working capital requirements for both the years related to
the new product. (15 marks)
Q.3 ABC (Private) Limited operates a fast food chain and has 15 outlets all over Pakistan. The
company’s turnover for the year ending June 30, 2011 is estimated at Rs. 181 million and the
annual fixed costs are estimated at Rs. 30 million. The analysis of sale has revealed the following:
Sale price Quantity wise Contribution margin

Product
(Rs.) sales ratio as % of sale price
Burger 150 6 40
Fries 50 7 45
Cold drink 40 8 50
Ice-cream 80 3 60
The company has witnessed very little growth in turnover and profitability during the past two
years. In order to increase the profitability, the management is considering the following options:
Option 1:
To introduce the following deals:
 Deal 1 offering burger, fries and cold drink for Rs. 210
 Deal 2 offering burger, fries, cold drink and ice-cream for Rs. 280
As a result, the total turnover is expected to increase by 25%. The ratio between sale of Deal 1 and
Deal 2 would be 60% and 40% respectively. 70% of the revenues would be generated from the sale
of deals and 30% from the sale of individual items in the existing ratio.
Option 2:
Under this option the price of all the products would be reduced by 20% to make the prices
competitive in the market. In addition, home delivery would be allowed for orders of Rs. 250 and
above. Home delivery would require additional fixed costs of Rs. 850,000 per annum and variable
cost of Rs. 20 per delivery.
It is estimated that the above measures would increase the total sales revenue by 35% inclusive of
sales through home delivery service which is estimated at Rs. 30 million. The average revenue per
delivery is estimated at Rs. 600. All sales would increase in the existing ratio except that ice-cream
would not be sold through home deliveries.
Required:
Evaluate each of the above options and give your recommendations. (20 marks)
Q.4 Khizr Limited (KL) owns a factory which produces specialized products whose demand is
seasonal. Three machines of the same type, are installed in the factory which operate round the
clock. During the past few years the capacity utilisation has been as follows:
 October to March single machine at 80% capacity

 April to July two machines at 90% capacity
 August and September three machines at 100% capacity
In view of frequent disruptions in power supply, KL has decided to buy a power plant having a
generation capacity of 5 megawatts. The power requirement of the factory is 4 megawatts when all
the machines are operating at 100% capacity. The power consumption is 0.25 megawatts when all
the machines are non-operational. The power consumed by the machines is directly proportional to
their utilized capacity.
A utility company has offered to buy all the surplus power for a period of 5 years. It would require
an interconnection structure which would be constructed at an estimated cost of Rs. 15 million.
The utility company has agreed to reimburse the cost after five years. The bankers of KL have
expressed their willingness to provide these funds at a cost of 16% per annum. Fuel cost is
estimated at Rs. 24 million per month when the plant is running at 100% capacity. Other relevant
costs are as follows:
Rupees per month

Operational costs 1,500,000
Labour 250,000
Miscellaneous related costs 500,000
The cost of the power plant is Rs. 100 million with expected useful life of six years and scrap value
of Rs. 4 million. KL uses straight line method to calculate depreciation. Presently KL pays
approximately Rs. 180 million per annum to the utility company to purchase electricity for its own
use.
Required:
Calculate the price per unit that should be offered to the utility company for sale of the surplus
power, if KL desires to achieve a return (profit on electricity generation plus cost savings on own
electricity consumption) of Rs. 60 million per annum. (One megawatt of electricity produced
throughout the year = 1000 × 24 hours × 360 days = 8,640,000 units. It may be assumed that 1 year has
360 days and each month has 30 days.) (12 marks)
Q.5 Ahram Limited manufactures an industrial product MRG. Its primary raw material is in the form
of semi-completed units. Further processing is carried out in Department A after which the units
meeting the quality control standards are transferred for processing in Department B.
There are three economical sources of primary raw material as shown below:
Price Freight-in Maximum supplies as per

Supplier
--------Rupees per unit-------- agreement
FML – Pakistan 287.50 2.00 1.60 million
LMN – China 265.00 9.00 2.00 million
PQR – Singapore 280.00 5.00 3.00 million
Import duty and sales tax are payable on the import of raw material @ 26.5% of the C&F value.
Sales tax is paid at 15% of C&F value plus import duty and is refundable. The percentage of
defective units in local and imported raw material is 7% and 1% respectively. The defective raw
material can be sold for Rs. 40 per unit.
Other relevant details are as follows:
Department A Department B
Annual capacity net of process losses 5 million units 4 million units
Normal process loss 10% of input 5% of output
Scrap value of units rejected after processing Rs. 75 per unit Rs. 125 per unit
Time required for each unit of output 18 minutes 12 minutes
Wage rate Rs. 200/hour Rs. 250/hour
Variable overheads 60% of labour cost 75% of labour cost
Fixed overheads are estimated at Rs. 10 million per annum. Fixed overheads are allocated to the
departments on the basis of labour hours. The realizable value of scrap is deducted from the cost of
goods manufactured.
Required:
Determine the priority in which the material is to be purchased and prepare a statement showing
the department wise budgeted total and unit cost. (Assume that there would be no opening or closing
inventories) (17 marks)
Q.6 A company manufactures tables and chairs. The total time available during each month and the
time required to manufacture each table and chair are as follows:
Machine hours Labour hours

Table 1.00 1.50
Chair 0.50 2.00
Available hours 715 2,250
The direct cost of operating the machines is Rs. 450 per hour. The labour costs Rs. 60 per hour.
Details of material and other costs are as follows:
Table Chair
----Rupees----
Material 1,000 300
Variable overheads other than direct labour and machine costs 200 50
Applied fixed overhead 105 45
Sale price of each table and chair has been fixed at Rs. 2,300 and Rs. 900 respectively. The
company has already signed a contract for supply of 40 tables and 150 chairs which needs to be
supplied in July 2011. Apart from this contract, the pattern of demand suggests that each month,
the company should manufacture:
(i) at least 100 tables; and

(ii) at least 2 chairs per table.
Required:
(a) Construct a set of constraints in the form of inequalities, plot them on a graph and identify the
feasible region.
(b) Determine the number of tables and chairs that should be produced in July 2011 to earn
maximum profit. (16 marks)
(THE END)
Suggested Answers
Final Examinations –Summer 2011
A.1 (a) Budgeted sales 8,250,000 / 275 units 30,000

Sale price variance 275 × 10% × Rs. 330,000 A
(30,000/3x1.2)
Actual sales (8,745,000 + 330,000) / units 33,000
275
Sale volume variance (33,000 – 30,000) × 275 Rs. 825,000 F
Material price variance – A (36.4 – 35) × 63,900 × 2/3 Rs. 59,640 A
B (20.8 – 20) × 105,600 × 2/3 Rs. 56,320 A
Total material price variance Rs. 115,960 A
Material mix variance

Actual mix at standard cost- Material A 63,900 × 35 Rs. 2,236,500
- Material B 105,600 × 20 Rs. 2,112,000
Rs. 4,348,500
Standard mix* (35 × 2 + 20 × 3) 169,500 × (130* / 5) 4,407,000
Mix variance Rs. 58,500 F
Material yield variance:

Standard output from actual input 169,500 / 5 units 33,900
Actual output units 33,000
Yield variance units 900 s
Yield variance 900 × 130 Rs. 117,000 A
Labour rate variance

Standard rate per hour 2,700,000 / (30,000 × 1.5) Rs. 60
Actual average rate per hour (60 + 66 + 66) / 3 Rs. 64
Actual labour hours worked 3,041,920 / 64 hours 47,530
Labour rate variance 47,530 × (64-60) Rs. 190,120 A
Labour efficiency variance:

Standard labour hours required 33,000 × 1.5 49,500
Actual labour hours used 47,530
Efficiency variance hours 1,970 F
Labour efficiency variance 1,970 × 60 Rs. 118,200 F
(b) (1) Sales price variance:

The variance arose on account of discount allowed by the company in March 2011.
The decision to allow this discount does not seem appropriate on account of the following:
 The company had already managed to surpass the budgeted sales quantity in January & February 2011.
 The raw material prices and labour rate have seen increased from February, 2011.
 After allowing discount, the sale in March made less contribution margin as compared to February.
(2) Yield variance:
Although there could have been more than one reason for the above variance, it may have been due to.
use of cheaper materials as indicated by favourable mix variance.
Another important point is that the adverse yield variance may have been partly on account of poor labour
performance. This aspect needs to be investigated.
(3) Adverse labour rate variance:

It was on account of increase in wages which was a conscious decision of the management. It seems that in
the short run i.e. in February and March the extra cost could not be recouped by the increased efficiency.
However, in the long run it may have far reaching positive effect.
Suggested Answers
Punjnad Juice Company statement for projected working capital:
A.2
No. of Units
Year 1 Year 2
Opening stock A 1,000
Production B 15,000 20,000
Sales C 14,000 18,000
Closing stock D 1,000 3,000
--------------- Rupees -------------------
-- -
Current Assets:
Stock – Raw material (B × 80 × 3/12) 300,000 400,000
Finished goods W-1 168,000 469,714
Debtors rate of provision for doubtful debts (200 × 231,583 297,750
C/12)X0.9925
699,583 1,167,464
Current liabilities:
Creditors for supply of raw material W-2 250,000 283,333
Creditors for expenses W-3 65,833 72,667
315,833 356,000
Working capital required – Net 383,750 811,464
W-1 Finished goods
Materials ( B x 80) 1,200,000 1,600,000

Labour & variable overheads (B × 40) 600,000 800,000
Fixed overheads (20 × 24,000) 480,000 480,000
Depreciation (10 x 24,000) 240,000 240,000
Cost of goods manufactured E 2,520,000 3,120,000
Finished goods
{E/B×1,000} and {(E+168,000)/(B+A) ×D} 168,000 469,714
W-2 Creditors for raw material

Material consumed(B × 80) 1,200,000 1,600,000
Closing stock (1,200,000 x 3/12) 300,000 400,000
Opening stock - -300,000
Purchases during the year F 1,500,000 1,700,000
Creditors outstanding (F × 2/12) 250,000 283,333
W-3 Creditors for expenses

Variable overheads (10 × B/12) 12,500 16,667
Fixed overheads (20 × 24,000/12) 40,000 40,000
Fixed selling expenses (2 × 24,000/12) 4,000 4,000
Variable selling expenses (8 × C/12) 9,333 12,000
65,833 72,667
After option 2
A.3 W-1 Burger Fries Cold drink Ice cream Total
Sale price per unit A 150 50 40 80
Sale ratio B 6 7 8 3
Weightage (A × B) C 900 350 320 240 1810
Item wise Sale (Rs. in million) D 90 35 32 24 181
Contribution % E 40% 45% 50% 60%
Contribution Margin (Rs. in million) (D × E) F 36.00 15.75 16.00 14.40 82.15
Average contribution margin %
(82.15/181×100) 45.39%
Cost per deal{A × (100–E)}
90.00 27.50 20.00 32.00 137.50
90.00 27.50 20.00 32.00 169.50
Cost per Deal 2
Suggested Answers
OPTION – 1 Rupees
Sale of individual items 30% ×(1.25x181 million) 67,875,000
Sale of deals 70% ×(1.25x181 million) 158,375,000
Total sale @ 25% (1.25 × 181 million) 226,250,000
Contribution Sale CM % W-1 30,808,463

Individual items 67,875,000 45.39 W–1 32,802,630
Deal 1 (60% of 158,375,000) 95,025,000 34.52 W–1 24,997,910
Deal 2 (40% of 158,375,000) 63,350,000 39.46 88,609,003
Total contribution from option I 226,250,000
W – 1: Contribution margin on Deals

Deal 1 Deal 2
Selling price 210.00 280.00
Cost of deals 137.50 169.50
Contribution margin 72.50 110.50
Contribution margin % 34.52 39.46
OPTION - 2
Total sale (1.35 × 181 million) 244,350,000
Home delivery sale 30,000,000
Outlet sales 214,350,000
Item wise Sale Contri-

Sale Sale
Weight-age bution Contribution
price ratio Outlets Home Delivery Total
%(W.2) Margin
Burger 120 6 720 106,582,873 17,197,452 123,780,325 25.00 30,945,081
Fries 40 7 280 41,448,895 6,687,898 48,136,793 31.25 15,042,748
Cold
drink 32 8 256 37,896,133 6,114,650 44,010,783 37.50 16,504,044
Ice
cream 64 3 192 28,422,099 - 28,422,099 50.00 14,211,050
1448 214,350,000 30,000,000 244,350,000 76,702,923
Additional cost on home delivery sets:

Variable cost of home delivery 30,000,000/600*20 (1,000,000)
Fixed cost of home delivery (850,000)
Total contribution from option II 74,852,923
W-2 COMPUTATION OF REVISED CONTRIBUTION MARGIN PER UNIT
Sale price Present cost

Revised CM (Rs.) CM %
(Rs.) (Rs.)
Burger 120 90 30.00 25.00
Fries 40 27.5 12.50 31.25
Cold
drink 32 20 12.00 37.50
Ice
cream 64 32 32.00 50.00
Conclusion: Option 1 is more profitable
A.4 MW Oct-Mar Apr-Jly Aug-Sep Total
W-1 Factory consumption capacity A 4.00
Non-production use B 0.25 0.25 0.25 0.25
Factory consumption @100 cap. C 3.75
Machine / capacity usage D 1/3×80% 2/3x90% 3/3×100%
Factory consumption (C×D) – E 1 2.25 3.75
MW
Total consumption F 1.25 2.5 4
Available for sale (5.0 Mw – F) G 3.75 2.5 1
Number of DAYS H 180 120 60
Chargeable units to utility 16,200,000 7,200,000 1440,000 24,840,000
Suggested Answers
Computation of total and per megawatt costs:
Rupees
Operational (12*1,500,000) 18,000,000
Labour Cost (12x250,000) 3,000,000
Other related costs (12x500,000) 6,000,000
Depreciation (Rs 100 - 4 million) / 6 years 16,000,000
Fuel Cost (12x24,000,000) 288,000,000
Total generation cost 331,000,000
Financing cost of interconnecting structure (15M*16%) 2,400,000

Profit required 60,000,000
393,400,000
Less: Amount presently being paid 180,000,000
Amount to be charged from utility company 213,400,000
Chargeable units to the utility company to be charged to the utility company 8.59
Landed cost price of good unit

A.5
W-1 FML – LMN China PQR

Pak Singapore
----------- -- Rupees- -------------
Purchase price per units 287.50 265.00 280.00
Freight-in per unit 2.00 9.00 5.00
C & F value space 289.50 274.00 285.00
Import duty at 10%{(126.50/1.15)-100} - 27.40 28.50
289.50 301.40 313.50
Cost per good unit (289.50 / 0.93) (301.40/0.99)
(313.50/0.99) 311.29 304.44 316.67
Recovery through sale of defective rang material @Rs.4 (40/100)(40/100)
(40x0.0.07) / (40x0.01) per unit (2.80) (0.40) (0.40)
308.49 304.04 316.27
Purchasing priority 2 1 3
W-2 ANNUAL REQUIREMENT OF PRIMARY RAW MATERIAL AND QUANTITIES OUGHT TO BE PURCHASED FROM EACH SUPPLIER
Units
Capacity of Department B net of normal losses 4,000,000
Output loss -(5/95*4,000,000) 210,526
required in department B 4,210,526
Material required to be put into Department-A to get above output (4,210,526/90%) 4,678,362
C&F per Cost

Totals Defective Good
units Rupees
To be purchased from LMN 2,000,000 20,000 1,980,000 301.40 602,800,000

To be purchased from FML 1,600,000 112,000 1,488,000 289.50 463,200,000
To be purchased from PQR (Balancing) 1,222,588 12,226 1,210,362 313.50 383,281,338
144,226 4,678,362 1,449,281,338

Proceeds from sale of scrap units (144226*40) (5,769,040)
Cost material 1,443,512,298
Statement of department wise cost
Quantities: -------------------No. of units---------------------
Received from preceding dept(4000,000/0.95) 4,210,526
Put into department (4,210,526/0.9) 4,678,362
Process losses (467,836) (210,526)
4210,526 4,000,000
Cost uncured: Depart-B Depart-B
Rupees
Raw material/cost from provably dept W-2 1,443,512,298 1,818,635,094
Wages (4,210,526 × 18/60×200);(4,210,526 ×12/60×250) 252,631,560 210,526,300
Variable over heads (60% and 75% of wages) 151,578,936 157,894,725
Fixed over heads (10M
6,000,000 4,000,000
×1,263,158/2,105,263)(10M×842,105/2,105,263)
Sales of Scrap (75×467,836)(125×210,526) (35,087,700) (26,315,750)
Total cost of goods manufactured 1,818,635,094 2,164,740,369
Cost per unit 431.93 541.19
LINEAR PROGRAMMING
A-6
Variables
Let x = number of tables
Let y = number of chairs
Constraints
Machine hours x + 0.5y ,<=600 Eq. 1
Labour hours 1.5x + 2y <=1,890 Eq. 2
2x <= y Eq. 3
x>=100 Eq. 4
Machine Labour
Available hours 715 2,250
Less: Hours required for confirmed order
Tables (40) (60)
Chairs (75) (300)
(115) (360)
600 1,890
Contribution margin per unit Table Chair
Sale price 2,300 900
Cost of sales
Material 1,000 300
Machine cost 450 225
Labour 90 120
Other manufacturing cost 200 50
1,740 695
560 205
Objective function is to maximize 560x + 205y
x + 0.5y =600-------------------- Eq. 1 if y = 0, x = 600; if x = 0, y = 1,200
1.5x + 2y = 1,890 ----------------Eq. 2 if y = 0, x = 1,260; if x = 0, y = 945
Optimal solution is at points P,Q and R
Point P can be ascertained by solving equation 2 and 4

Putting the value of x = 100 i.e. Equation 2, in Equation 4 we get:
150 + 2y = 1,890
y = (1,890 - 150) /2 = 870
Point Q can be ascertained by solving equation 1 and 2

Multiplying Eq. 1 by 4, we get 4x +2y = 2,400 ------- Eq. 5
Subtracting Equation 5 from Equation 2, we get:
2.5x = 510
x = 204
Putting the value of x in Equation 1 we get:
204 + 0.5y = 600
∴ y = 792
Point R can be ascertained by solving equation 1 and 3

x + 0.5y = 600
2x = y OR x = 0.5y
0.5y +0.5y = 600
y = 600
Putting the value of y in equation 1 we get:
x + 300 = 600
∴ x = 300
Putting the above values in objective function we get:

At point P: x = 100 × 560 = 56,000; y = 870 × 205 = 178,350; Total = 234,350
At point Q: x = 204 × 560 = 114,240 y = 792 × 205 = 162,360; Total = 276,600
At point R: x = 300 × 560 = 168,000; y = 600 × 205 = 123,000; Total = 291,000
Contribution is maximized at point R, profit = Rs. 291,000
(THE END)

Final Examinations – Winter 2010 December 7, 2010
Module F 100 marks - 3 hours
Q.1 The home appliances division of Umair Enterprises assembles and markets television sets. The
company has a long term agreement with a foreign supplier for the supply of electronic kits for its
television sets.
Relevant details extracted from the budget for the next financial year are as follows:
Rupees
C&F value of each electronic kit 9,500
Estimated cost of import related expenses, duties etc. 900
Variable cost of local value addition for each set 3,500
Variable selling and admin expenses per set 900
Annual fixed production expenses 12,000,000
Annual fixed selling and admin expenses 9,000,000
Fixed production overheads are allocated on the basis of budgeted production which is 5,000 units.
The present supply chain is as follows:
(i) The company sells to distributors at cost of production plus 25% mark-up.
(ii) Distributors sell to wholesalers at 10% margin.
(iii) Wholesalers sell to retailers at 4% margin.
(iv) Retailers sell to consumers at retail price i.e. at 10% mark-up on their cost.
Performance of the division had not been satisfactory for the last few years. A business consulting
firm was hired to assess the situation and it has recommended the following steps:
(i) Reduce the existing supply chain by eliminating the distributors and wholesalers.
(ii) Reduce the retail price by 5%.
(iii) Offer sales commission to retailers at 15% of retail price.
(iv) Provide after sales services.
(v) Launch advertisement campaign; expected cost of campaign would be around Rs. 5 million.
It is expected that the above steps will increase the demand by 1,500 sets. The average cost of
providing after sales service is estimated at Rs. 450 per set.
Required:
(a) Compute the total budgeted profit:
(i) under the present situation; and
(ii) if the recommendations of the consultants are accepted and implemented.
(b) Briefly describe what other factors would you consider while implementing the consultants’
recommendations. (20 marks)
Q.2 Ibrahim Limited manufactures a variety of products. It has launched a new product in November
2010 and has produced 1,000 units (10 lots) upto the year ended November 30, 2010. The variable
cost of producing the first lot was as follows:
Cost per
Particulars
100-unit lot (Rs.)
Material 30,000
Variable overheads (25% of direct labour) 5,000
Fixed manufacturing overheads have been estimated at Rs. 1.3 million per annum.
Based on past experience, the company expects 90% learning curve ratio to apply on each
production lot size of 100 units and the learning curve effect is expected to prevail upto 500 lots.
The expected demand of the product for the next year at two different price levels is as follows:
Price per Demand in

unit (Rs.) units
650 45,000
550 70,000
Required:
Determine which of the above price the company should charge for the next year ending
November 30, 2011. It is given that b = log (0.9) / log (2) = − 0.152. (16 marks)
Q.3 Faheem Limited (FL) is a retailer and sells product PR at a price of Rs. 3,400 per unit. The product
is purchased from a supplier in Islamabad at a cost of Rs. 2,400 per unit plus transportation charges
amounting to Rs. 6,000 for each delivery.
The records over a 5-year period show that monthly sales ranged between 900 units to 1,200 units,
as shown below:
Units Probability
900 0.30
1,000 0.45
1,100 0.20
1,200 0.05
The following further information is available:
(i) The supplier requires 30 days to fulfil an order.

(ii) The costs of the ordering department are as follows:
Variable costs – Rs. 3,000 per order
Fixed costs – Rs. 480,000 per annum
Purchases of PR constitute 5% of the total purchases of FL.
(iii) The holding costs associated with PR are as follows:
Warehouse rent Rs. 360,000 per annum. 2% of the warehouse space is required to store
1,000 units of PR.
Cost of Insurance @ 1.0% of the cost of goods stored in the warehouse, per annum.
(iv) FL places its surplus funds in an account which earns interest @ 8% per annum on a daily
basis.
Required:
(a) Determine the level of inventory at which it would be most profitable for FL to reorder the
product PR.
(b) If the supplier offers a discount of 5% for ordering a minimum of 6,000 units, should FL
accept this offer? (16 marks)
Q.4 Kaleem Limited is organized into two divisions. For operating purposes, each of its division A and
B are treated as investment centres. Following are the extracts from the divisional profit and loss
accounts for the year ended November 30, 2010.
Rs in ‘000
Division A Division B
Sales 2,450,000 860,000
Divisional manufacturing costs (1,580,000) (575,000)
870,000 285,000
Divisional operating costs (390,000) (170,000)
Divisional profit 480,000 115,000
Financial charges (34,600) (20,500)
Apportioned head office cost (243,000) (45,600)
Net Profit 202,400 48,900
The values of assets and liabilities on November 30, 2010 are as follows:
Rs in ‘000
Head Office Division A Division B
Non current assets 120,000 2,082,500 516,000
Current assets 23,000 350,600 127,000
143,000 2,433,100 643,000
Long term borrowings - 275,000 165,000

Current liabilities 45,000 638,000 234,600
45,000 913,000 399,600
The company uses return on capital employed (ROCE) and residual income methods for
performance evaluation. In computing capital employed and equity, year-end values of assets and
liabilities are used. Depreciation is charged under straight line method.
The company's average rate of borrowing is 14% and its cost of equity is 20%.
The company is evaluating the following opportunities:
(i) Purchase of additional machinery for Division A at a cost of Rs. 80 million having an
estimated life of 5 years with no residual value. The production from the machine would
require working capital of Rs. 10 million and would generate additional net profit of Rs. 6
million per annum. The investment would be financed equally through borrowings and equity.
The borrowing would be repaid after five years.
(ii) Sell a fixed asset belonging to Division B for Rs. 8 million. The asset was purchased 9 years
ago at Rs. 200 million. It has a remaining useful life of 1 year and would not have any resale
value at the end of its useful life. The sale would reduce divisional contribution margin by Rs.
9 million. 50% of the proceeds would be used to reduce the long term borrowings and the
remaining 50% to pay off the current liabilities.
Required:
(a) Evaluate and comment on the existing performance of the two divisions and their impact on
company’s overall performance.
(b) Evaluate and discuss the above opportunities from the point of view of the:
Divisional Managers
The CEO of the Company
Ignore taxation. (23 marks)
Q.5 Sheraz Limited produces two chemicals for textile industry, chemical X for dyeing and chemical Y
for coating. The chemicals are jointly manufactured as follows:
Process I - Raw materials A and B are mixed in the ratio of 2:1. The mixture is then heated
resulting in an evaporation of 20%. The remaining mixture distils into extracts P and Q in the ratio
of 3:2 respectively.
Process II - Four litres of material C is added to one litre of extract P to form chemical X. Material
D and extract Q are mixed in equal proportion to form chemical Y.
The costs involved are as under:
Process I Process II
Rs. per litre of input
Material A 25 -
Material B 40 -
Material C - 75
Material D - 55
Direct Labour 80 50
Variable overheads 57 32
The fixed costs are Rs. 5 million.
The demand for product X is 600,000 litres and for product Y 180,000 litres. The current per litre
market price of product X is Rs. 250 and product Y Rs. 450.
Upto 25,000 litres of P and Q can be sold without further processing at Rs. 100 and Rs. 120 per
litre respectively.
Required:
Determine the product mix which would produce maximum profit for the company. (25 marks)
(THE END)
Suggested Answers
Final Examinations –Winter 2010
A.1 (a) (i) Budgeted cost and sales price per set Rupees
C & F value 9,500
Import related costs and duties 900
Variable cost of local value addition 3,500
Variable cost per set 13,900
Fixed production overheads (Rs. 12,000,000/5,000 sets) 2,400
Budgeted cost of production per set 16,300
Add: Gross profit (Rs. 16,300 × 25%) 4,075
Budgeted sales price per set to distributor 20,375
Budgeted gross profit (Rs 4,075 × 5,000 sets) 20,375,000

Less: Admin & selling expenses
Variable (Rs. 900 × 5,000 sets) (4,500,000)
Fixed (9,000,000)
Budgeted annual profit 6,875,000
(ii) Computation of budgeted consumer price of each set

Budgeted sales price of the company 20,375.00
Add: distributor margin (Rs. 20,375 × 10/90) 2,263.88
Budgeted sales price of the distributor 22,638.88
Add: wholesaler margin (Rs. 22,638.88 × 4/96) 943.29
Budgeted sales price of wholesaler 23,582.17
Add: retailer’s markup (Rs. 23,582.17 × 10%) 2,358.21
Budgeted retail price 25,940.39
Revised retail price (Rs. 25,940.39 × 95%) 24,643.37
Revised profit forecast after considering consultants’ recommendation:

Rupees
Sales (6,500 sets × Rs. 24,643.37) 160,181,905
Less: Cost of goods sold for 6,500 units
Electronic Kits @ Rs 9,500 61,750,000
Cost of import and duty @ Rs 900 5,850,000
Local value addition @ Rs 3,500 22,750,000
Fixed overhead cost 12,000,000
(102,350,000)
Gross Profit 57,831,905
Less: Selling & Admin expenses

Variable (6,500 sets × Rs 900) 5,850,000
Fixed 9,000,000
Cost of advertisement campaign 5,000,000
Cost of after-sale service (6,500 × Rs. 450) 2,925,000
Retailers commission (Rs. 160,181,905 × 15%) 24,027,285
(46,802,285)
Profit by implementing the proposal of consultant 11,029,620
Based on above results, management should accept the recommendation of the
consultant.
Page 1 of 6
Suggested Answers
(b) In the light of the changes recommended by the consultant, the company will have to
consider whether it has the necessary infrastructure to:
(i) deal with a far larger number of retailers as against the present few distributors.
(ii) produce and sell extra 30% t.v. sets.
(iii) attend to after sale activities on its own. The question is silent as to who presently
attends to this activity.
(iv) conduct effective advertisement campaign.
Fixed expenses related to manufacturing as well as selling and admin are likely to
increase but no such increase has been anticipated.
A.2 Formula of learning curve y = ax b
Where
a is the labour cost for the 1st lot
x is the cumulative number of lots
b equals log(0.9)/log(2) = −0.152
Average cost Total cost

For 1,000 units (10 lots) y = 20,000 × 10 -0.152
14,093.86 140,939
For 46,000 units (460 lots) y = 20,000 × 460 -0.152 7,875.73 3,622,836
For 50,000 units (500 lots) y = 20,000 × 500-0.152 7,776.54 3,888,270
For 49,900 units (499 lots) y = 20,000 × 499 -0.152
7,778.91 3,881,676
Cost for the last 100 units (500th 6,594
lot)
45,000 units 70,000 units

(450 lots) (700 lots)
Revenue 29,250,000 38,500,000
Material cost 13,500,000 21,000,000

Labour upto 460 lots 3,622,836 -
Labour upto 5oo lots - 3,888,270
Labour for additional 210 lots - 1,384,740
Less: labour upto 10 lots (140,939) (140,939)
3,481,897 5,132,071
Variable overheads – 25% of labour cost 870,474 1,283,018
Fixed cost 1,300,000 1,300,000
19,152,371 28,715,089
Net profit 10,097 ,629 9,784,911
Conclusion: It will be more profitable to sell 45,000 units at a unit price of Rs. 650.
Page 2 of 6
Suggested Answers
A.3 (a) Carrying costs: Rupees

Interest @ 8.0% on Rs. 2,400 192
Insurance @1% on Rs. 2,400 24
216
Costs associated with each order:

Purchase department costs 3,000
Cost of delivery 6,000
9,000
Carrying costs per unit for special order:
Interest @ 8.0% on Rs. 2,400 x 95% 182.40
Insurance @1% on Rs. 2,400 x 95% 22.80
205.20
Determining stock-out and carrying costs:

Loss of Carrying
Stock Incremental Stock Loss of
Probability margin costs Total
level stock out sales
(1,000x) (216x)
900 100 0.45 45 45,000
200 0.20 40 40,000
300 0.05 15 15,000
100,000 - 100,000
1,000 100 100 0.20 20 20,000
200 0.05 10 10,000
- 30,000 21,600 51,600
1,100 200 100 0.05 5 5,000 43,200 48,200
1,200 300 - - 64,800 64,800
Therefore, the company should reorder when the stock reaches 1100 units.
(b) Units Probability
Expected monthly sales 900 0.30 270
1,000 0.45 450
1,100 0.20 220
1,200 0.05 60
1,000
Expected yearly sales 12,000
EOQ = (2 × 12,000 × 9,000)/ 216 = 1,000 units

Annual costs:
EOQ Special offer
Total cost Rupees
(2,400 x
Cost of purchase 12,000) 28,800,000 27,360,000 (2,400 x 95% x 12,000)
Ordering costs (9,000 x 12) 108,000 18,000 (9,000 x 2)
Carrying costs 1,000 / 2 x 216 108,000 615,600 6,000 / 2 x 205.20
29,016,000 27,993,600
Conclusion: FL should accept the offer
Page 3 of 6
Suggested Answers
A.4 (a) Return on capital employed Division A Division B

Divisional profit as per question 480,000 115,000
Capital employed:
Assets 2,433,100 643,000
Less: Liabilities 638,000 234,600
Net assets 1,795,100 408,400
Return on capital employed 26.74% 28.16%
Residual Income method

Net profit 202,400 48,900
Add: Apportioned head office cost 243,000 45,600
445,400 94,500
Return on equity (A × 20%) 304,020 48,680
Residual Income 141,380 45,820
Equity(Assets-Liabilities) [2,433,100-913,000] [643,000-399,600] (A) 1,520,100 243,400
Division B has slightly higher return but on account of the far larger size of division A, this
small difference does not definitely indicate better performance from division B. Division
A is contributing 80% of the company’s profit and seems more important for the company.
However, in the absence of information such as nature of business, nature and magnitude
of business risks and reasons for significant differences between debt equity ratios of the
two divisions, a meaningful comparison is difficult. It would be advisable for the company
to compare the returns with those of similar industries in the region.
(b) (i) Return on capital employed Rs. in ‘000

Net profit from new investment 6,000
Add: financial charges (90m × 50% × 14%) 6,300
Return on net investment 12,300
Net investment (80+10 −16 being depreciation) 74,000

Return on capital employed 16.62%
Residual income Rs. in ‘000

Net profit on investments 6,000
Return on equity [29,000(W-1) × 20%] 5,800
Residual income 200
W–1:
Increase in assets 74,000
Less: increase in liabilities (90 ÷ 2) 45,000
Increase in net assets 29,000
ROCE 25%
 In view of low return i.e. 16.62% on new investment compared to existing return of
26.74%, the project will not be acceptable to the divisional manager.
 However, the return of 16.62% pertains to the first year only. In future years, the
net investment would reduce and hence return percentage would increase
significantly. If the divisional manager takes a long term perspective, he may decide
to accept the proposal.
Page 4 of 6
Suggested Answers
 In view of positive residual income, the project will be beneficial for the company.
 Although ROCE and residual income are accepted as proper short-term measures
for large investment/disinvestment projects and for inter-division comparisons,
the evaluation must also consider NPV and DCF methods which take account of
time value of money as well as cover the entire life of the project.
(ii) Return on capital employed:

Impact on return
Contribution loss (9,000)
Reduced depreciation 20,000
Operating profit 11,000
Loss on sale of asset (12,000)
Net loss (1,000)
Capital employed:
Asset – no change* -
Decrease in current liabilities (50% of 8.0 million) 4,000
Increase in capital employed 4,000
Residual income method:

Net loss before financial year as computed above (1,000)
Less: financial charges saved (14% of 4.0 million) 560
Net loss (440)
Increase in required return from equity (8,000**x20%) (1,600)
Residual income (2,040)
If the company follows a policy whereby gain/loss on sale of asset do not form part of
the division’s performance, the divisional profit would increase by Rs. 11 million
whereas the capital employed would increase by Rs. 4 million only and hence sale of
asset would be favourable from the divisional manager’s point of view.
However, if gain or loss on sale of asset is treated a part of divisional performance

then as a result of sale, the divisional profit would be reduced by Rs. 1.0 million
whereas capital employed would increase by Rs. 4.0 million. Hence in this case the
sale of asset would not be favoured by the divisional manager.
From the CEO’s point of view, the sale would not be acceptable in any case as it would
contribute to a net reduction in residual income of the company by Rs. 2.04 million.
A.5 Since chemicals X & Y are produced from extracts P and Q which are produced in a joint
process and in a specified ratio, the production of each chemical is interdependent. Based on
the market demand, the company has 2 options as follows:
Production Option1: Produce 600,000 litres of product X and 160,000 Litres of product Y
(Working 1)
Production Option2: Produce 180,000 litres of product Y and 600,000 litres of product X and
dispose off any excess quantity of extract P in raw form D. (Working 2)
Working 1 Litres
Quantity of P required to produce 600,000 litres of chemical X (600,000 ×1/5) 120,000
Qty of Q produced in the joint process 1 (120,000 × 2/3) 80,000
Hence quantity of Y to be produced = (80,000 × 2) 160,000
Page 5 of 6
Suggested Answers
Working 2
Quantity of Q required to produce 180,000 litres of chemical Y (180,000 ×1/2) 90,000
Quantity of P produced in the joint process (90,000 × 3/2) 135,000
Quantity of P required to produce 600,000 litres of X being maximum demand for P 120,000
Surplus quantity of P to be sold without further processing 15,000
Option 1 Option 2
Litres Cost Litres Cost
Raw Material Costs
Quantity to be produced -P 120,000 135,000
Q 80,000 90,000
Total 200,000 225,000
Wastage (Total Qty / 0.2 × 0.8) 50,000 56,250
Inputs required in Process 1 (A) 250,000 281,250
Material A 2/3 166,667 4,166,667 187,500 4,687,500

Material B 1/3 83,333 3,333,333 93,750 3,750,000
Material C (Qty of Ext P × 4) 480,000 36,000,000 480,000 36,000,000
Material D (Qty of Ext Q × 1) 80,000 4,400,000 90,000 4,950,000
Total
Direct Labour - Process 1 80×(A) 20,000,000 22,500,000
Direct Labour - Process 2 (50×(600+160)) 38,000,000 (50×(600+180)) 39,000,000
Variable overheads - Process 1 (57×250) 14,250,000 (57×281.25) 16,031,250
Variable overheads - Process 2 (32×(600+160)) 24,320,000 (32×(600+180)) 24,960,000
Total variable Costs 144,470,000 151,878,750
Option 1 Option 2
Profit & Loss
Sale of X (600000×250) 150,000,000 150,000,000
Sale of Y (160000×450)/(180000×450) 72,000,000 81,000,000
Sale of P(15000×100) 1,500,000
Sales revenue 222,000,000 232,500,000
(151,878,750
Variable cost of production (144,470,000) )
Fixed costs (5,000,000) (5,000,000)
Net profit 72,530,000 75,621,250
Option 2 produces higher profit.
(THE END)
Page 6 of 6
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Final Examinations Summer 2010
June 8, 2010
MANAGEMENT ACCOUNTING (MARKS 100)

(3 hours)
Q.1 Shahid Limited is engaged in manufacturing and sale of footwear. The company sells its
products through company operated retail outlets as well as through distributors. The
management is in the process of preparing the budget for the year 2010-11 on the basis of
following information:
(i) The marketing director has provided the following annual sales projections:
No. of units Retail price range

Men 1,200,000 Rs. 1,000 – 4,000
Women 500,000 Rs. 800 – 2,500
The previous pattern of sales indicates that 60% of units are sold at the minimum
price; 10% units are sold at the maximum price and remaining 30% at a price of Rs.
2,000 and Rs. 1,200 per footwear for men and women respectively.
(ii) It has been estimated that 30% of the units would be sold through distributors who are
offered 20% commission on retail price. The remaining 70% will be sold through
company operated retail outlets.
(iii) The company operates 22 outlets all over the country. The fixed costs per outlet are
Rs. 1.2 million per month and include rent, electricity, maintenance, salaries etc.
(iv) Sales through company outlets include sales of cut size footwears which are sold at
40% below the normal retail price and represent 5% of the total sales of the retail
outlets.
(v) The company keeps a profit margin of 120% on variable cost (excluding distributors’
commission) while calculating the retail price.
(vi) Fixed costs of the factory and head office are Rs. 45 million and Rs. 15 million per
month respectively.
Required:
Prepare budgeted profit and loss account for the year 2010 – 2011. (16)
Q.2 Buraq Motors manufactures two types of cars i.e. X and Y. The production of each type of
car involves two departments. Details of production time are as follows:
Production hours per unit
Departments
Car type Assembly Finishing
X 120 80
Y 80 50
Contribution margin per unit of X is Rs. 150,000 and per unit of Y is Rs. 100,000. Total
capacity of assembly and finishing departments is 18,200 and 12,000 hours per month
respectively.
Required:
Calculate the shadow price per hour of capacity if 200 hours are added to the capacity of
assembly department, assuming that the capacity of finishing department is not altered. (14)
(2)
Q.3 During the year ending June 30, 2011 Abdul Habib Company Limited has planned to
launch a new product which is expected to generate a profit of Rs. 9.3 million as shown
below:
Rs. in ‘000’
Sales revenue (24,000 units) 51,600
Less: cost of goods sold 37,500
Gross profit 14,100
Less: operating expenses 4,800
Net profit before tax 9,300
The following additional information is available:

(i) 75% of the units would be sold on 30 days credit. Credit prices would be 10% higher
than the cash price. It is estimated that 70% of the customers will settle their account
within the credit term while rest of the customers would pay within 60 days. Bad
debts have been estimated @ 2% of credit sales. All cash and credit receipts are
subject to withholding tax @ 6%.
(ii) 80% of the expenses forming part of cost of goods sold are variable. These are to be
paid one month in arrears.
(iii) The production will require additional machinery which will be purchased on July 1,
2010 at a cost of Rs. 60 million. The machine is expected to have a useful life of 15
years and salvage value of Rs. 7.5 million. The company has a policy to charge
depreciation on straight line basis. The depreciation on the machinery is included in
the cost of goods sold as shown above.
(iv) Variable operating expenses excluding bad debts are Rs. 105 per unit. These are to be
paid in the same month in which the sale is made.
(v) 50% of the fixed costs would be paid immediately when incurred while the remaining
50% would be paid 15 days in arrears.
(vi) The management has decided to maintain finished goods stock of 1,000 units.
Required:
Calculate the cash requirements for the first two quarters. (17)
Q.4 Noureen Industries Limited produces and sells sports goods. The management accountant
has developed the following budget for the year ending June 30, 2011.
Budgeted Income Statement
Rs. in ‘000’
Sales 80,000
Variable costs 44,800
Fixed overheads 6,500
51,300
Gross profit 28,700
Selling and admin expenses:
Sales commission 8,000
Depreciation on assets 700
Fixed administrative costs 2,200
10,900
Net operating income 17,800
Finance costs (80% is fixed) 750
Net profit 17,050
The company had a policy of hiring salesmen on commission basis. The rate of commission
varied with the increase in sales. However, recently the sales team had informed the
management that they would be willing to work only if the rate of commission is fixed at
20% irrespective of the amount of sales.
(3)
The only other alternative available to the company is to establish a full-fledged sales
department. It has been estimated that the annual cost of this department would be as
follows:
Rs. in ‘000’
Salaries – Sales Manager 1,200
– Sales persons 2,400
Advertising 1,600
Travel for promotion 1,200
Training costs 600
In addition, a commission of 5% would also be payable to the sales team.

Required:
Determine the volume of sales beyond which the company would be inclined to establish a
sales department instead of meeting the demand of the current sales force. (13)
Q.5 Haji Amin (Private) Limited (HAPL) is engaged in manufacturing of spare parts. In May
2010, the utilized production capacity of the company was 60%. The management has
received an order to produce 100,000 units of product M, which will utilize 20% of the
production capacity for a period of 6 months.
All the materials are added at the beginning of the process. Labour and overheads are
distributed evenly throughout the process. Inspection is conducted when the product is 60%
complete. Normal loss is equal to 5% of the units produced.
The following information is also available:
(i) Materials
Each unit of product M requires 1 kg of material A and 2 kg of material B. Material
A is available in the market at a cost of Rs. 250 per kg. Alternatively, another
material C can be used, which is produced in-house at a variable cost of Rs. 220 and
is sold at a selling price of Rs. 260 per kg. C has unlimited demand.
300,000 kgs of Material B is available in stock at a cost of Rs. 50 per kg. 60% of the
available stock is required for use in the current production. The current market price
of material B is Rs. 70 per kg. However, the present stock available with HAPL can
only be sold for Rs. 60 per kg.
(ii) Labour
Each worker will take 6 hours per unit for initial 50 units. Thereafter the average time
would be reduced to 5 hours per unit. Each worker would be hired on six months
contract at the rate of Rs. 60 per hour with 200 working hours per month.
(iii) Variable overheads

These are estimated at Rs. 8 per labour hour.
(iv) Fixed overheads
These are estimated at Rs. 45 million per annum at 100% capacity. Some of the
facilities can be relieved, if the company does not want to work at more than 70%
capacity. As a result of relieving these facilities, the annual fixed costs would reduce
to Rs. 33.75 million. If the excess production capacity is used to produce material C,
the company can earn a contribution margin of Rs. 200,000 per month for each 10%
capacity utilization.
Required:
Compute the manufacturing cost of product M using the relevant cost approach. (18)
(4)
Q.6 Emmad Limited has two factories, one at Lahore and the other at Faisalabad. The factory at
Faisalablad produces product AMY whereas BNZ is produced at Lahore. The demand of
these products is quite elastic.
BNZ uses XPY as an input which is available in the market at Rs. 725 per unit. AMY can
also be used as an alternate of XPY.
The data in respect of revenue and costs at various levels of output is as follows:
Faisalabad Lahore
Output Cost excluding
Revenue Total Cost Revenue
(No. of units) XPY
-------------------------------Rupees-------------------------------
1,500 1,275,000 870,000 1,800,000 535,000
3,000 2,475,000 1,680,000 3,480,000 985,000
3,500 2,800,000 1,950,000 3,920,000 1,135,000
4,000 3,100,000 2,220,000 4,320,000 1,285,000
5,000 3,500,000 2,760,000 5,150,000 1,585,000
Maximum production capacity of each factory is 5,000 units.

Required:
(a) Determine how the company can maximize its profit. (17)
(b) If the company decides to use product AMY internally, what would be the minimum
price acceptable to Faisalabad factory and the maximum price which the Lahore
factory may agree to pay? (05)
(THE END)
Suggested Answers
Final Examinations – Summer 2010
A.1 Price Units Amount (Rs. ‘000s)

Men Women Men Women Men Women
Minimum 1,000 800 720,000 300,000 720,000 240,000
Maximum 4,000 2,500 120,000 50,000 480,000 125,000
Average 2,000 1,200 360,000 150,000 720,000 180,000
Total 1,200,000 500,000 1,920,000 545,000
Rs. 000s
Sales revenue – gross (1,920,0000 + 545,000) 2,465,000
Less : Commission to distributors 20% ×30% of above 147,900
Cut size discount 40% × (5% of 70%) 34,510
182,410
Sales – net 2,282,590
Variable cost 100/220 of gross revenue 1,120,455
1,162,135
Less : Factory overheads 12 × 45m 540,000
Less : Admin overheads 12 ×15m 180,000
Cost of retail outlets 12 × 22 × 1.2m 316,800
496,800
Net profit 125,335
A.2 Objective function: Maximize Z = 150,000x + 100,000y
Current constraints:
120x + 80y = 18200 Eq 1 if y = 0, x ≤ 151; if x = 0,y ≤ 227
80x + 50y= 12000 Eq 2 if y = 0, x = 150; if x = 0,y = 240
x>0 and y>0
600x + 400y= 91000 Eq 3 Eq 1×5
640x + 400y 96000 Eq 4 Eq 2×8
−40x= −5000
x= 125
80x +50y= 12000 Eq 2

10000 +50y= 12000
50y= 2000
y= 40
Revised constraints
120x + 80y = 18400 if y = 0, x ≤ 153; if x =0,y = 230
80x + 50y= 12000 Eq 2 if y = 0, x = 150; if x =0,y = 240
x>0 and y>0
600x + 400y= 92000 Eq 3 Eq 1×5
640x + 400y 96000 Eq4 Eq2 × 8
−40x= −4000
x= 100
80x +50y= 12000 Eq 2

8000+50y= 12000
50y= 4000
y= 80
Omair Jamal Page 1 of 7

Suggested Answers
Current Options:
Production
Contributions
x y
A 150 0 22,500,000
B 125 40 22,750,000
C 0 227 22,700,000
Required options:
Production
Contributions
x y
A 150 0 22,500,000
B 100 80 23,000,000
C 0 230 23,000,000
Shadow price for additional capacity: (23,000,000 - 22,750,000) = 250,000/200

= Rs.1,250 per hour
A.3 Cash Management

Total sales Units Weight Sales Ratio
Cash sales – 25% 6,000 1.0 6,000
Credit sales – 75% 18,000 1.1 19,800
24,000 25,800
Sales Revenue (Rs. in ‘000) 51,600

Cash Selling price per unit 2,000
Credit selling price per unit 2,200
Cash Requirement 2010 -11

Qtr. 1 Qtr. 2
Particulars
--- Rs. in ‘000 ---
Purchase of machinery (60,000) -
Sale receipts - -
Cash sales (2,000 × 6,000 / 4 × 94%) 2,820 2,820
Receipts from credit sales – as per working below 5,211 9,120
Cost of goods sold – variable (37,500 x 80%) /12×2 and 3 (5,000) (7,500)
Variable cost of finished stock 30,000 / 24,000 × 1,000 (1,250) -
Variable operating expenses (105 × 3 × 2,000) (630) (630)
Payment of fixed costs (457 × 2.5) / (457 × 3.0) (1,143) (1 ,372)
(59,992) 2,438
Month Month
1st Qtr. 2nd Qtr.
1 2 3 4 5 6
---------- Rs. in ‘000 ----------
Working for credit sales
Credit sales (18,000÷12×2,200) 3,300 3,300 3,300 3,300 3,300 3,300
Settlement – 70% 2,310 2,310 2,310 2,310 2,310
28% 924 924 924 924
Gross receipts 2,310 3,234 5,544 3,234 3,234 3,234 9,702
Tax @ 6% (333) (582)
Receipts net of tax 5,211 9,120

Suggested Answers
Operating expenses
Total operating expenses – given 4,800
Less: Variable cost per unit (105 × 24,000) (2,520)
Bad debt expense (2,200 × 18,000 × 2%) (792)
Fixed operating expenses 1,488
Fixed cost
Fixed factory overheads 7,500
Less: Depreciation (60m – 7.5m) / 15 (3,500)
Fixed operating overheads 1,488
5,488
Fixed cost per month 457
A.4 Noureen Industries Limited

Contribution Margin Increased Own sales
commission 20% department
------------Rs. in ‘000s-----------
Sales 80,000 80,000
Less: Variable expenses
Manufacturing costs 44,800 44,800
Sales commission 16,000 4,000
Finance cost 150 150
60,950 48,950
Contribution margin 19,050 31,050
Contribution margin – as % of sales 23.8 38.8
Fixed expenses
Fixed overheads 6,500 6,500
Depreciation 700 700
Fixed admin costs 2,200 2,200
Finance cost 600 600
Fixed marketing costs 7,000
10,000 17,000
Equal net income level:

Let the required sales level be x.
Net operating income with increased commission = 0.238x – 10,000
Net operating income with own sales force = 0.388x – 17,000
Both will be equal at:
0.388x – 17,000 = 0.238x – 10,000
0.15x = 7,000
x = 46,667
It would be beneficial for NIL to establish a full-fledged sales department if sales exceed Rs. 46,667,000.
A.5 Manufacturing cost of product B
Material A (105,000 × 250) 26,250,000

Material B (120,000 × 60) 7,200,000
(90,000× 70) 6,300,000 13,500,000
Labour (W-1) [60 × 200 × 6 ×448 (W-1)] 32,256,000
Variable factory overhead [200×6×448(W-1) hours×8] 4,300,800
Fixed factory overhead (W–2) 4,425,000
Manufacturing cost of product B 80,731,800
Suggested Answers
W-1: Labour
Total working hours per labour (200 × 6) 1,200
Units produced in first 300 hours (300/6) 50

Units produced in remaining 900 hours (900/5) 180
No. of units produced per worker 230
No. of full units 100,000

Normal loss (5,000 × 60%) 3,000
103,000
No. of workers required (103,000 / 230) 448
W-2: Fixed overheads

Savings at 70% capacity for 6 months [6/12 × (45.0 – 33.75)m] 5,625,000
Contribution from C - 10% capacity (70 – 60) for 6 months 1,200,000
A 6,825,000
Contribution from C - 40% capacity for 6 months B 4,800,000
Higher of A or B above 6,825,000

Less: contribution from C @ 20% capacity for 6 months 2,400,000
Opportunity cost of utilizing 20% capacity 4,425,000
A.6 (a) Most profitable option Costs

Product AMY at Product BNZ at
Faisalabad Lahore
Total Cost of 5,000 units 2,760,000 1,585,000
Total Cost of 1,500 units A 870,000 535,000
Variable cost of 3,500 units 1,890,000 1,050,000
Variable cost per unit 540 300
Variable cost for 1500 units B 810,000 450,000
Fixed cost A –B 60,000 85,000
Option-1 If Lahore Factory purchases XPY from market for production of BNZ, contribution margin
from sale of BNZ could be as follows:
BNZ output Variable cost

Revenue Cost of XPY Contribution margin
(units) excluding XPY
(1) (2) (3) (1)-(2)-(3)
1,500 1,800,000 450,000 1,087,500 262,500
3,000 3,480,000 900,000 2,175,000 405,000
3,500 3,920,000 1,050,000 2,537,500 332,500
4,000 4,320,000 1,200,000 2,900,000 220,000
5,000 5,150,000 1,500,000 3,625,000 25,000

Suggested Answers
In addition, contribution margin earned from AMY produced by Faisalabad and sold outside
could be as follows:
Product AMY output
Revenue Variable cost Contribution margin
(units)
1,500 1,275,000 810,000 465,000
3,000 2,475,000 1,620,000 855,000
3,500 2,800,000 1,890,000 910,000
4,000 3,100,000 2,160,000 940,000
5,000 3,500,000 2,700,000 800,000
Maximum Contribution Margin
Contribution margin from production of 3,000 units of BNZ by Lahore 405,000
Contribution margin from sale of 4,000 units in Faisalabad 940,000
Option-2 If Lahore Factory uses AMY produced by Faisalabad factory contribution margin from sale of
BNZ could be as follows:
BNZ output Variable cost Contribution

Revenue Cost of AMY
(units) excluding AMY margin
(1) (2) (3) (1)-(2)-(3)
1,500 1,800,000 450,000 810,000 540,000
3,000 3,480,000 900,000 1,620,000 960,000
3,500 3,920,000 1,050,000 1,890,000 980,000
4,000 4,320,000 1,200,000 2,160,000 960,000
5,000 5,150,000 1,500,000 2,700,000 950,000
CM from in house production of 3,500 units 980,000

CM on production of 1,500 units in Faisalabad 465,000
1,445,000
To optimize profit, Lahore factory should use AMY produced by Faisalabad.
(b) Minimum price acceptable to Faisalabad Factory

Maximum contribution that could be earned by selling outside 940,000
Contribution earned by selling 1,500 units 465,000
Contribution to be earned by selling 3,500 units to Lahore 475,000
Profit to be earned per unit - 475000/3500 135.71
Variable cost per unit of AMY 540.00
Minimum price Faisalabad should charge for AMY 675.71
Maximum price acceptable to Lahore 725
A.6 (a) Most profitable option Costs

Product AMY at Product BNZ at
Faisalabad Lahore
Marks
Total Cost of 5,000 units 2,760,000 1,585,000
Total Cost of 1,500 units A 870,000 535,000
Variable cost of 3,500 units 1,890,000 1,050,000
Variable cost per unit 540 300
Variable cost for 1500 units B 810,000 450,000
Fixed cost A –B 60,000 85,000
Suggested Answers
Option-1: Contribution margin earned from AMY produced by Faisalabad and sold outside could
be as follows:
Product AMY output

Revenue Variable cost Contribution margin
(units)
1,500 1,275,000 810,000 465,000
3,000 2,475,000 1,620,000 855,000
3,500 2,800,000 1,890,000 910,000
4,000 3,100,000 2,160,000 940,000
5,000 3,500,000 2,700,000 800,000
If Lahore Factory purchases 1,000 units of AMY from Faisalabad and balance units of XPY form
market for production of BNZ contribution margin from sale of BNZ could be as follows:
Cost of
Variable
AMY Cost of XPY
BNZ output cost
Revenue (1,000 (balance Contribution margin
(units) excluding
units units)
XPY
only)
(1) (2) (3) (4) (1)-(2)-(3)-(4)
1,500 1,800,000 450,000 540,000 362,500 447,500
3,000 3,480,000 900,000 540,000 1,450,000 590,000
3,500 3,920,000 1,050,000 540,000 1,812,500 517,500
4,000 4,320,000 1,200,000 540,000 2,175,000 405,000
5,000 5,150,000 1,500,000 540,000 2,900,000 210,000
Maximum Contribution Margin
Contribution margin from sale of 4,000 units in Faisalabad 940,000
Contribution margin from production of 3,000 units of BNZ by Lahore 590,000
Option-2 If Lahore Factory uses AMY produced by Faisalabad factory contribution margin from sale of
BNZ could be as follows:
BNZ output Variable cost Contribution

Revenue Cost of AMY
(units) excluding AMY margin
(1) (2) (3) (1)-(2)-(3)
1,500 1,800,000 450,000 810,000 540,000
3,000 3,480,000 900,000 1,620,000 960,000
3,500 3,920,000 1,050,000 1,890,000 980,000
4,000 4,320,000 1,200,000 2,160,000 960,000
5,000 5,150,000 1,500,000 2,700,000 950,000
CM from in house production of 3,500 units 980,000

CM on production of 1,500 units in Faisalabad 465,000
1,445,000
To optimize profit, Faisalabad factory should sell 4,000 units outside and 1,000 units to Lahore factory at Rs.
540 per unit and Lahore factory should purchase balance units of XPY from market.

Suggested Answers
(b) Minimum price acceptable to Faisalabad Factory

Maximum contribution that could be earned by selling outside 940,000
Contribution earned by selling 1,500 units 465,000
Contribution to be earned by selling 3,500 units to Lahore 475,000
Profit to be earned per unit - 475000/3500 135.71
Variable cost per unit of AMY 540.00
Minimum price Faisalabad should charge for AMY 675.71
Maximum price acceptable to Lahore 725
(THE END)

Final Examinations Winter 2009
December 8, 2009

(3 hours)
Q.1 Zain Limited operates a production unit which produces a chemical which is commonly
used in various industries. Following information has been collected to ascertain the
company’s working capital requirement:
(i) Designed capacity of the plant is 150 tons per hour. However, as in the past, it is
expected that the plant will operate at 70% of the designed capacity.
(ii) The variable cost per ton of finished product would be Rs. 2,500 made up as under:
Raw materials 62.4%

Consumables and spares 12.0%
Other processing costs 25.6%
(iii) Raw material is imported on FOB basis. The supplier allows 45 days credit from the
date of shipment. However, overseas and inland transportation and port and customs
formalities take 30 days.
(iv) Because of the nature of the cargo, only one ship is available in a month, for
transporting the raw material.
(v) Freight, transportation and other import related variable costs of purchases are
estimated at 30% of the FOB value and are paid at the time of receipt of goods at the
plant.
(vi) One ton of finished goods requires 1.25 tons of raw materials.
(vii) Fixed costs are estimated at Rs. 10.584 million per month.
(viii) Budgeted sales price is to be worked out so as to earn a gross profit of 20% over sales.
The details of sales forecast provided by the marketing department are as follows:
 40% sales will be made to corporate clients on 10 days credit. The price would be
2% higher than the budgeted price.
 30% sales will be made to individual customers at budgeted price. The goods are
delivered after two days of receiving the required amount.
 Remaining sales shall comprise of exports. The export documents are presented in
the bank within 2 days of shipment. The export proceeds are credited in the
company’s bank account after 3 days of the date of presenting the documents. The
Federal government allows a rebate of 5% on exports and it is credited to the
company’s account on the date of realization of export proceeds.
(ix) It is estimated that at any point of time the work in progress shall consist of 1,000 tons
of raw material which shall be 50% complete as regards consumables, spares and
processing costs.
(x) Average inventory of finished product is equal to fifteen days production. Till last
year, the company’s policy was to maintain average inventory of 30 days.
(xi) Operational consumables and spares of Rs. 20 million are required to be maintained
throughout the year.
(xii) Production is evenly distributed throughout the year. Except for the facts given above,
all other costs are payable after 15 days of their incurrence.
Required:
Determine the working capital requirement for the year. (Assume 30 days in each month) (18)
(2)
Q.2 Adnan Limited is a manufacturer of specialized furniture and has recently introduced a new
product. The production will commence on January 1, 2010. 200 workers have been trained
to carry out the production. The complete unit will be produced by a single worker and it
would take 40 hours to produce the first unit. The company expects a learning curve of 95%
that will continue till the production of 64 units. Thereafter, average time taken for each unit
will be 28 hours.
Each worker would work for an average of 174 hours each month. They will be paid @
Rs. 100 per hour. In addition, they will be paid a bonus equivalent to 10% of their earnings
provided they work for at least three months during the year. The cost of material and
overhead per unit has been budgeted at Rs. 10,000 and Rs. 4,000 per unit, respectively.
The company’s workers are in high demand and it is estimated that 20% of the workers
would leave by the end of March 2010 whereas a further 7 workers would retire on June 21,
2010. The management is confident that all the units produced would be sold.
Required:
Calculate the minimum price that the company should charge if it wants to earn gross profit
margin of 20% on selling price during the year 2010. (16)
Q.3 Wahid Limited established a plant to manufacture a single product ARIDE. Standard
material costs for the first year of operations were as under:
Raw Standard Price

material per kg (Rs.)
A 6.40
B 4.85
C 5.90
All the raw materials were supplied at same prices throughout the first six months.
Thereafter the prices were increased by 10%.
The company manufactured 1,320,000 units during the year ended 30 September, 2009. All
purchases and the production were made evenly throughout the year.
Losses occurred at an even rate during the processing and are estimated at 12% of the input
quantity. The standard weight of one unit of finished product is 11.88 kgs. The ratio of input
quantities of materials A, B and C is 3:2:1 respectively.
Details of ending inventory are as under:
Raw Value under FIFO % of ending inventory to

Qty (kgs)
material method (Rs.) material quantity consumed
A 1,014,200 6,744,430 11
B 754,000 3,883,100 13
C 228,000 1,390,800 08
Required:
Calculate material price, usage, mix and yield variances. (18)
Q.4 Sajid Industries Limited purchases a component ‘C’ from two different suppliers, Y and Z.
The price quoted by them is Rs. 90 and Rs. 87 per component respectively. However 7% of
the components supplied by Y are defective whereas in case of Z, 11% of the components
are defective. The use of such defective components results in rejection of the final product.
However, the final products to be rejected are identified when the product is 60 % complete.
Such units are sold at a price of Rs. 200.
(3)
The average cost of the final product excluding the cost of component C is as follows:
Rupees
Material (excluding the cost of the component C) 420
Labour (3 hours @ Rs 60 per hour) 180
Overheads (Rs. 40 per hour based on labour hours) 120
720
50% of the material (including the component C) is added at the start of the production
whereas the remaining material is added evenly over the production process.
The company intends to introduce a system of inspection of the components, at the time of
purchase. The inspection would cost Rs. 20 per component. However, even then, only 90%
of the defective components would be detected at the time of purchase whereas 10% will
still go unnoticed. No payments will be made for components which are found to be
defective on inspection. The total requirement of the components is 10,000 units.
Required:
Analyze the above data to determine which supplier should be selected and whether the
inspection should be carried out or not. (18)
Q.5 Aftab Limited manufactures CNG kits for certain automobiles. The management of the
company foresees sudden rise in the demand of CNG kits in the next year and they are
trying to work out a strategy to meet the rising demand.
Following further information has been gathered by the management:
(i) The current market demand is 650,000 units while the company’s share is 40%. The
demand for the next year is projected at 1,000,000 units while the company expects to
maintain its current market share.
(ii) The production capacity of the company while working 8 hours per day is 350,000
units.
(iii) The selling price and average cost of production per unit for the current year, are as
follows:
Rupees
Selling Price 40,000
Less: Cost of production
Material 24,000
Labour (34 hours per unit) 3,400
Overheads (60% variable) 2,800 30,200
Gross Profit 9,800
(iv) Since the company was working below capacity, 15% of the labour remained idle and
were paid at 10% below the normal wages. These wages are included in fixed
overheads.
(v) To increase the production beyond the normal capacity, overtime will have to be
worked which is paid at twice the normal rate. Also, the fixed overheads, other than
the labour idle time, would increase by 10%.
(vi) The management has negotiated with certain vendors and received the following
offers:
 A present supplier of raw material has offered bulk purchasing discount @ 2.5%,
if the total purchases during the year exceeds Rs. 9.0 billion.
 A manufacturer of CNG kits in Italy has offered to supply any number of
finished CNG kits at US$200 per unit. The landed cost of these units in Pakistan
would be Rs. 29,000 per unit.
Required:
Determine the best course of action available to the company. (13)
(4)
Q.6 Rafiq Industries specializes in production of food and personal care products. During the
year 2010, the company intends to launch a new product called PQR. The relevant details
are as follows:
(i) The product would be sold in 3 pack sizes and the sales have been projected as
follows:
Pack size Units
500 grams 200,000
1 kg 120,000
2 kg 90,000
(ii) For producing 1 kg of output, following materials would be required:

 0.5 kg of material A which costs Rs. 300 per kg.
 1 kg of material B. Current stock of material B is 250,000 kgs and it was purchased
@ Rs. 100 per kg. Its current purchase price is Rs. 125 per kg. The expiry date of
the current stock is December 31, 2010. Before the expiry date, it could be
disposed of at the rate of Rs. 110 per kg.
 100,000 kgs of material B could be used in producing another product called UVW
with additional cost of Rs. 4,000,000 which could then be sold at the rate of Rs.
160 per kg. However, both PQR & UVW are produced on the same machine. The
machine has to be worked at 100% capacity for producing the required quantity of
PQR.
(iii) Cost of packing materials have been projected as under:
Pack size Cost per unit

500 grams 30
1 kg 40
2 kg 55
(iv) 100 kgs of product would require 5 hours of skilled labour and 10 hours of unskilled
labour. Skilled labour is paid at Rs. 70 per hour and unskilled labour at Rs. 45 per
hour. Currently, the company has 5,000 idle hours of skilled labour and has a policy to
pay 50% for idle hours.
(v) The production capacity of the factory is 2 million kgs but currently the factory is
operating at 50% capacity. Fixed overheads at 100% capacity are Rs. 25 million.
However, if the factory operates below capacity, the fixed overheads are reduced as
follows:
 by 10% at below 80% of the capacity
 by 25% at below 60% of the capacity
Required:
Calculate the sale price for each pack size of the new product assuming that the company
wants to earn a profit of 25% on the cost of the product which shall include relevant costs
only. (17)
(THE END)
Suggested Answers
Final Examinations – Winter 2009
A.1 Budgeted production

Budget production is 70% of the designed capacity
(150 tons × 70% × 24 hours × 30 days × 12 months) 907,200 tons
(A) Raw material

Quantity of raw material required
(1.25 tons × 907,200 tons of finished product) 1,134,000 tons
Quantity of raw material for each shipment

(1,134,000 tons ÷ 12 of finished product) 94,500 tons
Total cost of purchases including transportation and other variable purchase

cost for each ton of product
(Rs. 2,500 × 62.4%) Rs. 1,560/ton
Per ton FOB price of raw material (Rs. 1,560 × 100 ÷ 130) ÷ 1.25 Rs. 960
Total amount to be paid to supplier for each shipment (Rs. 960 × 94,500 tons) Rs. 90.72 mln
Credit period (45-30 days) 15 days
Trade credit: Average amount of liability (Rs. 90.72 million × 15/30) Rs. 45.36 mln
Cost of consumables, spares and processing per ton (2,500 × 37.6%) Rs. 940
(B) Inventory Rs. in 000’

Raw Material (94,500 tons ÷ 2 × Rs. 960 ×1.3) 58,968
Work in progress (1,000 × Rs. 960 × 1.3) + (1,000 × 940 × 50%) 1,718
Finished products (907,200 × 15 ÷ 30 ÷ 12) × Rs. 2,500 94,500
Spares & consumables 20,000
175,186
(C) Debtors Rupees

 Corporate clients
(40% × 945,000 tons × 10 ÷ 360 × Rs. 3,300 ×1.02) 35,343,000
 Individual clients
(30% × 945,000 tons × 2 ÷ 360 × Rs. 3,300) (5,197,500)
 Export clients
(30% × 945,000 tons × 5 ÷ 360 × Rs. 3,300 ×1.05) 13,643,438
43,788,938
Budgeted Sales quantity: Tons

Production during the year 907,200
Opening inventory – 1/12 of above 75,600
Closing inventory – 1/24 of the above (37,800)
Budgeted sales 945,000
Budgeted Price
Variable cost 2,500
Fixed Cost (Rs. 10.584 million ×12 ÷ 907,200 tons) 140
Total cost 2,640
Gross profit at 20% of selling price 660
Sales Price 3,300
(D) Other credit
Fixed cost (Rs. 10.584 million × 15 / 30 days) 5,292,000
Other variable cost:
940 (Rs. 2,500 – Rs. 1,560) × 907,200 × 15 /360 days 35,532,000
40,824,000
Suggested Answers
Working Capital requirement

Average value of debtors 43,788,938
Average value of inventory 175,186,000
Average value of trade credit (45,360,000)
Average value of other credit (40,824,000)
132,790,938
A.2 Average Cumulative

Units
time time
1 40.00 40
2 38.00 76
4 36.10 144
8 34.30 274
16 32.58 521
32 30.95 990
64 29.40 1,882
No. of Available Average time Production Total No. of

workers hours* per unit per worker production Hours
40 522 32.58 16 640 20,880
7 992 30.95 32 224 6,944
153 1,882 29.40 64 9,792 287,946
153 206 28.00 7 1,071 31,518
11,727 347,288
Available hours: Up to March 31 174 x 3 522

Up to June 21 174 x 5.7 992
Up to December 31 174 x 12 [1,882+206] 2,088
Cost of production
Units Rate Total cost
Materials 11,727 10,000 117,270,000
Labour 347,288 110 38,201,680
Overheads 11,727 4,000 46,908,000
202,379,680
Production (units) 11,727

Average cost per unit 17,258
Selling price per unit 21,573
Labour cost includes 10% bonus
Suggested Answers
A.3 Standard weight of one unit of finished goods 11.88 kgs

Total input of raw material required for one unit of finished product {11.88 ÷ (100% – 12%)} 13.50kgs
Standard material input: A:6.75kgs, B:4.50kgs, C:2.25kgs
Material A B C
A Year-end inventory Given kgs 1,014,200 754,000 228,000
B Ratio of inventory to material consumed Given % 11 13 8
C Material consumed A/B kgs 9,220,000 5,800,000 2,850,000
D Purchases during the year A+C kgs 10,234,200 6,554,000 3,078,000
E Purchases during :
Oct-Mar D/2 kgs 5,117,100 3,277,000 1,539,000
Apr-Sept D/2 kgs 5,117,100 3,277,000 1,539,000
F Value of year-end inventory Given Rs. 6,744,430 3,883,100 1,390,800
G Actual price per kg
Oct-Mar F/A Rs. 6.65 5.15 6.10
H Apr-Sept G/1.1 Rs. 6.05 4.68 5.55
J Average price Oct-Sept (G+H) / 2 Rs. 6.35 4.92 5.83
K Purchases during year J*D Rs. 64,987,170 32,245,680 17,944,740
L Material consumed at actual price K-F Rs. 58,242,740 28,362,580 16,553,940
M Standard price Given kg 6.40 4.85 5.90
N Standard cost CxM Rs. 59,008,000 28,130,000 16,815,000
P Price variance favourable/(unfavourable) L–N Rs. 765,260 (232,580) 261,060
Total price variance – Favourable 793,740
Mix variance:
Raw Actual Standard mix of actual Actual Standard
materia quantity used quantity used Variances price per Variances (rupees)
l (kgs) Ratio kgs (kgs) kg
A 9,220,000 3/6 8,935,000 (285,000) 6.40 (1,824,000)
B 5,800,000 2/6 5,956,667 156,667 4.85 759,835
C 2,850,000 1/6 2,978,333 128,333 5.90 757,165
17,870,000 17,870,000 NIL (307,000)
Yield Variance:
Raw Standard mix Standard
Standard usage for Variances Variances
materia of actual price per
actual output (kgs) (kgs) Rs.
l quantity used kg
A 8,935,000 8,910,000 (25,000) 6.40 (160,000)
B 5,956,667 5,940,000 (16,667) 4.85 (80,835)
C 2,978,333 2,970,000 (8,333) 5.90 (49,165)
17,870,000 *17,820,000 (50,000) (290,000)
{Output 1.32 million units x standard input per unit 13.50 kgs(6.75 + 4.50 + 2.25kgs)}
Material usage variance: Mix + yield variances (597,000)

Suggested Answers
A.4 Cost of components without inspection:

Y Z
Total good components required (A) 10,000 10,000
Defectives expected (7/93 and 11/89 of 10,000) (B) 753 1,236
Total components to be purchased A + B = (C) 10,753 11,236
COSTS:
Purchase price of components @ 90 x (C) and 87 x (C) 967,770 977,532
Production cost of defective units:

Material cost at start - 50% of 420 × (B) 158,130 259,560
Balance processing costs {B*60% of (720-210)} 230,418 378,216
Sale proceeds of defectives (B) x 200 (150,600) (247,200)
Total cost of components (including defective components and
defective units produced) 1,205,718 1,368,108
Cost of components with inspection:

Y Z
Total good components required (D) 10,000 10,000
Defectives expected B ÷ 10 (E) 75 124
Total components required D + E (F) 10,075 10,124
COSTS:
Purchase price of components @ 90 x (F) and 87 x (F) 906,750 880,788
Production cost of defective units:

Material cost at start - 50% of 420 x (E) 15,750 26,040
Balance processing costs (E) * 60% of (720 -210) 22,950 37,944
Sale proceeds of defectives (E) x 200 (15,000) (24,800)
Inspection cost @ Rs. 20 per component {20 x (C)} 215,060 224,720
Total cost of components (including defective components and
defective units produced) 1,145,510 1,144,692
Conclusion: The best option is that company should buy component Z and should carry out the inspection.
A.5 Option 1: Manufacturing all units at own factory

350,000 units 50,000 units 400,000 units
Amount Amount Amount
Rate Rate
Rs. in ‘000’ Rs. in ‘000’ Rs. in ‘000’
Material – units 24,000 8,400,000 24,000 1,200,000
Labour 3,400 1,190,000 6,800 340,000
Overheads 1,680 588,000 1,680 84,000
10,178,000 1,624,000
Existing fixed cost (260,000 x 1,120) 291,200
Less: Cost of idle labour (260,000 x 3,400 x 0.15/0.85 x 90%) (140,400)
150,800
Additional fixed costs (10% of 150,800) 15,080
Discount on material 2.5% of 9.6(8.4+1.2) billion (240,000)
Cost of producing 350,000/50,000/400,000 units 10,328,800 1,399,080 11,728,880
Suggested Answers
Option – 2 Produce 350,000 units locally and import 50,000 units from Italy
Rs. in ‘000’
Production of 350,000 units 10,328,800
Purchase of 50,000 units from outside @ 29,000 1,450,000
Total cost for 400,000 units 11,778,800
Option 3 Impact all (400,000) units from Italy

Purchase of 4000,000 units from outside @ 29,000 11,600,000
Add: fixed cost 150,800
Decision
The company should produce 400,000 units at its own manufacturing facility.
A.6 PRICING OF NEW PRODUCTS

Calculation of expected sale
Pack size Total 500 grams 1 kg 2 kg
Units (a) 200,000 120,000 90,000
Total production (Kgs.) (b) 400,000 100,000 120,000 180,000
Percentage of total production 100% 25% 30% 45%
Consumption of Material A (Kgs) (c) 200,000 50,000 60,000 90,000
Cost of Material A {300 × (c)} (d) 60,000,000 15,000,000 18,000,000 27,000,000
Material B {118.125(W-1) × (a)} (e) 47,250,000 11,812,500 14,175,000 21,262,500
Packaging cost {(a) x 30, 40; 55} (f) 15,750,000 6,000,000 4,800,000 4,950,000
Labour {7.5625 (W-3) × (b)} 3,025,000 756,250 907,500 1,361,250
Fixed overheads {9.375 (W-4) x (b)} 3,750,000 937,500 1,125,000 1,687,500
Total cost 129,775,000 34,506,250 39,007,500 56,261,250
Sales (cost + 25%) 162,218,750 43,132,813 48,759,375 70,326,563
Sale price / unit 216 406 781
W-1 Material B Qty Rate Amount

Opportunity cost of 100,000 kgs (W-2) 100,000 12,000,000
Current disposal price of remaining available material 150,000 110 16,500,000
Purchase price of additional requirement 150,000 125 18,750,000
400,000 118.125 47,250,000
W-2 Opportunity cost of 100,000 kgs

Sale Price 100,000 160 16,000,000
Less: additional cost (4,000,000)
12,000,000
Sale price if sold without processing 11,000,000
Higher of the above 12,000,000
W-3 Labour
Skilled Labour [(400,000 / 100 × 5) × 70 1,400,000
Unskilled Labour (400,000 / 100 × 10) × 45 1,800,000
Less: Skilled Labour - Idle hours now saved (5,000 × 70 /2) (175,000)
3,025,000
Cost per Kg 7.5625
W-4 Current fixed expenses 25,000,000 × (100-25)% = Rs. 18,750,000

Production including new product (2,000,000×50%)kgs + 400,000 kgs = 1,400,000 Kgs.
Capacity utilization after introduction of new product = 70%
Suggested Answers
Fixed expenses “ “ “ “ “ (25,000,000×90%) = 22,500,000

Additional fixed expenses on a/c of new product Rs. 3,750,000
Cost per Kg (for allocation purpose) Rs. 9.375
(The End)
June 2, 2009

(3 hours)
Q.1 ABC Limited deals in a single product called HGV. It had prepared a budget for the year
ending December 31, 2009 which was based on the following key assumptions:
Sales 504,000 units @ Rs. 430

Variable cost (40% is direct labour) Rs. 300 per unit
Fixed cost for the year (including depreciation @ 10%) Rs. 25,000,000
Cost of raw material per kg Rs. 56.25
Raw material consumption per unit of finished product 2 kgs
However, the position as shown by the management accounts prepared up to May 31,
2009 is not very encouraging and depicts the following actual results:
105,000 units were sold @ Rs. 350 per unit.

Average cost of raw material used amounted to Rs. 90/- per unit of finished product.
Other variable costs were as per the budget.
The marketing department advised the management that the failure to achieve targeted
sale is because a competitor has introduced another product which has been very popular
in the low income areas.
After due deliberations, the management has prepared a revised plan for the remaining
period of the financial year. The plan involves launching of a low grade version of the
existing product named LGV, to capture the low income market. Salient features of the
plan are as under:
(i) Sales mix of HGV and LGV is expected to be in the ratio of 1:2. Sale price of
HGV would be increased to Rs. 385, whereas sale price of LGV would be
Rs. 270.
(ii) A new machine will have to be purchased for Rs. 1.2 million.
(iii) For LGV two different types of raw materials i.e. A and B will be used in the ratio
of 5:3. However, the total weight of raw material used shall be the same in case of
both products. Presently A is available at the rate of Rs. 25 per kg whereas B is
available at the rate of Rs 45 per kg. The raw material consumption per unit of
HGV shall continue to be Rs. 90 per unit.
(iv) Production of HGV is carried out by skilled workers. However, only unskilled
workers would be required for the production of LGV. The wages of unskilled
workers would be 40% lower but labour hours per unit would be 10% higher than
HGV.
(v) Variable factory overhead cost per unit of LGV would be 10% lower than HGV.
(vi) Additional marketing cost would be Rs. 3 million.
Required:
Compute the sales amount and quantities for the remaining period, to achieve a break
even in 2009. (18)
(2)
Q.2 Extract from the records of AMAX Limited are as under:
Budget Actual
---------- Rupees ----------
Sales 27,000,000 27,295,000
Variable costs:
Raw Material (7,500,000) (8,461,450)
Labour (9,375,000) (9,463,125)
Variable overheads (3,000,000) (2,974,125)
Contribution 7,125,000 6,396,300
An analysis of the above figures has revealed the following:

Actual units sold were 3% (1,500 units) more than the budgeted sales quantity and
actual sale price was lower by Rs. 10/- per unit.
One unit of finished product requires 3 kgs of raw material and actual raw material
price was 6% higher than the budgeted price.
Budgeted labour cost per hour was equivalent to 150% of budgeted raw material
cost per kg.
Production department records show that labour utilization per unit of finished
product was 1/8 hour more than the budget.
Variable overheads varied in line with labour hours.
Required:
Compute eight relevant variances and prepare a statement reconciling budgeted
contribution with the actual contribution. (18)
Q.3 Clifton Hospital is interested in an analysis of the fixed and variable cost of supplies
related to patient days of occupancy. The following actual data has been accumulated by
the management:
Cost of supplies Occupancy

Month
(Rs. ‘000’) ratio (%)
December 2008 1,665 90
January 2009 1,804 93
February 2009 1,717 98
March 2009 1,735 94
April 2009 1,597 86
May 2009 1,802 99
Required:
Compute the variable cost of supplies per bed per day using the method of least square, if
the total number of beds in the hospital is 300. (08)
Q.4 SMD Corporation has commenced a project with the following time schedule:
Activity 0–1 1–2 1–3 2–4 2–5 3–4 3–6 4–7 5–7 6–7
Duration
2 8 10 6 3 3 7 5 2 8
in days
Required:
Construct network diagram and compute:
(a) Total float for each activity.
(b) Critical path and its duration. (11)
(3)
Q.5 MMTE Limited has witnessed a significant decline in profits over the past few years. A
study has revealed that the company’s sales have been stagnant over the years as it has
been regularly increasing the price of its only product i.e. PDT. However, since the cost
of production has been rising, the company is unable to reduce the price. The company’s
budget for the next year contains the following projections:
(i) Two types of raw materials i.e. A and B will be used in the ratio of 70:30.
(ii) The cost of raw materials would be Rs. 32 and Rs. 10 per kg respectively.
(iii) Wastage is projected at 8% of input quantity.
(iv) Labour rate has been projected at Rs. 400 for 8 working hours / day.
(v) One labour hour is estimated to be consumed for 4 kgs of finished products.
(vi) Variable overheads have been budgeted at Rs. 5 per kg of input.
(vii) Fixed overheads are estimated at Rs. 4,000,000 per annum.
A consultant hired by the company has carried out a detailed study and recommended the
following measures:
Hire a firm of Quality Assurance who would depute its expert staff to control the
ratio of wastage. The company will have to pay Re 0.5 per kg for the inspection of
material. It is expected that overall wastage would decrease by 80%.
It has been identified that factory workers are spending 25% more time as compared
to other manufacturing units of the industry. An incentive plan has therefore been
suggested, according to which the workers would be entitled to share 40% of the time
saved. It is expected that by implementing the incentive plan, the workers will
achieve the industry average.
Certain improvements have been suggested in the production process and this will
result in reduction in variable overheads by 20%.
It has been ascertained that staff performing various support functions is
underutilized. The company should therefore discontinue the services of some
members of the staff and allocate their work between the remaining staff. As a result,
fixed overheads will decrease by 25%.
Required:
Compute the amount of savings that the revised plan is expected to generate if the
required production is 2 million kgs of PDT. (15)
Q.6 Ahmed Sons (Pvt.) Ltd., a small sized manufacturer, is experiencing a short term
liquidity crisis. It needs Rs. 10 million by the end of next month and expects to repay it
within 6 months of the date of receipt.
The company is considering the following three alternatives:
(i) Obtain short term loan at an interest of 18 percent per annum, compounded
monthly.
(ii) Forego cash discount of 2% on some of its purchases. The total purchases are
approximately Rs. 12 million per month. The discount is offered for payment
within 30 days. However, if the payment is delayed beyond 90 days, it could
endanger the company’s relationship with the supplier.
(iii) Make arrangement with a factor who is ready to advance 75 per cent of the value of
the invoices after deduction of all factoring charges, immediately upon receipt of
the invoices. The balance shall be paid within the normal credit period presently
being availed by the customers.
The average sales are Rs. 25 million per month of which 60% are credit sales. The
company's customers pay at the end of the month following the month in which the
sales took place. This level is expected to remain steady over the next year.
(4)
The factor shall charge interest @ 15 percent per annum on the amount of money
advanced. He shall also charge factoring fee of 2 percent.
The company estimates that as a result of the above arrangement, it will save on bad
debts and the cost of credit control, aggregating Rs. 200,000 per month. Moreover,
the company can use any surplus funds made available to reduce its overdraft,
which is costing 1 percent per month.
Required:
Advise the company as to which of the three alternatives is cheaper. (12)
Q.7 XYZ Ltd presently uses a single plant wide factory overhead rate for allocating factory
overheads to products, based on direct labour hours. A break-up of factory overheads is
as follows:
Factory overheads
Production Support 1,225,000
Others 175,000
Total cost (Rs.) 1,400,000
It now plans to use activity-based costing to determine costs of its products. The
company performs four major activities in the Production Support Department. These
activities and related costs are as follows:
Production Support Activities Rupees

Set up costs 428,750
Production control 245,000
Quality control 183,750
Materials management 367,500
Total 1,225,000
The planning department has gathered the relevant information which is given below:
Direct No. of
Batch Machine Inspections
Production labour Material
Products size hours hours per
in units hours per requisitions
(units) per unit unit
unit raised
Product X 10,000 2.5 125 7.50 0.2 320
Product Y 2,000 5.0 50 10.00 0.5 400
Product Z 50,000 2.8 10,000 3.00 0.1 30
The quality control department follows a policy of inspecting 5% of all production in

case of X and Y and 2% of all units of Z.
Required:
Determine the factory overhead cost per unit for Products X, Y and Z under:
(a) Single factory overhead rate method.
(b) Activity Based Costing. (18)
(The End)
Suggested Answer
Ans.1 ABC LIMITED

Actual Jan-May 2009
Rupees
Sales (105,000x350) 36,750,000
Variable costs:
Raw materials (105,000x90) (9,450,000)
Direct labor (300 × 0.4) x 105,000 (12,600,000)
Other variable costs (300-112.50-120) x 105,000 (7,087,500)
Contribution margin 7,612,500
Revised Plan Jun-Dec 2009
LGV HGV Total

Sale price per unit 270 385.00
Variable cost:
Raw material cost
A (25x2x5/8) (31.25)
B (45x3x3/8) (45 × 3 × 2)/8 (33.75)
(65.00) (90.00)
Direct labor cost (300×0.4) (120.00)
(120 × 0.6 × 1.1) (79.20)
Factory overhead cost (300-112.5-120) (67.50)
(67.5 × 0.9) (60.75)
Total variable cost (204.95) (277.50)
Contribution margin Rs 65.05 107.50
Sales mix ratio 2 1 3

Aggregate contribution margin Rs. 130.10 107.50 237.60
Fixed cost Jan-Dec:

Fixed cost for the year 25,000,000
Additional marketing cost 3,000,000
10% depreciation on machine cost Jun-Dec 2009 70,000
28,070,000
Contribution recovered Jan-May 2009 (7,612,500)
Required contribution for Jun-Dec 2009 20,457,500
Break even Sale quantity Jun-Dec 2009:

Break even quantity for:
High grade (20,457,500/237.60) 86,101
Low grade (86,101 × 2) 172,202
Break even Sale amount Jun-Dec 2009 Rs. 46,494,540 33,148,885 79,643,425
Page 1 of 6
Suggested Answer
Ans.2 Sales volume margin/profit/contribution variance

= 7,125,000 / 50,000 × 1,500 = Rs. 213,750 (Fav) (W–1)
Sales Price Variance

= 51,500 units (Rs. 540 – Rs. 530) = Rs. 515,000 (Adv) (W–2, 3, 4)
Raw material Price variance

= (Rs. 53 -50) × 159,650 = Rs. 478,950 (Adv) (W–6, 7, 8)
Raw material quantity variance

= {159,650 – (51,500 × 3)} × 50 = Rs. 257,500 (Adv) (W–6, 8, 9)
Labour rate Variance

= (Rs 75 – Rs. 70) × 51,500 × 2.625 hours = Rs. 675,937.50 (Fav) (W–9, 10, 11, 12, 13)
Labour efficiency variance

= 1/8 hour × Rs. 75 × 51,500 = Rs. 482,812.50 (Adv) (W–2, 12)
Variable overhead efficiency variance

= 1/8 hour × (24x51,500) = 154,500 (Adv) (W–14)
Variable overhead spending / expenditure variance

(24 – 22) × 51,500 × 2.625 = Rs. 270,375 (Fav) (W–14, 15)
W-1: Budgeted Sales quantity:

1,500 / 0.03 = 50,000 units
W-2: Actual Sales quantity

50,000 + 1,500 = 51,500 units
W-3: Budgeted sale price:

27,000,000 / 50,000 = Rs. 540 per unit
W-4: Actual sale price:

540 – 10 = Rs. 530 per unit
W-5: Budgeted raw material quantity

= 50,000 units × 3 kgs = 150,000 kgs
W-6: Budgeted material price

= 7,500,000 ÷ 150,000 kgs = Rs. 50 per kg (W–5)
W-7: Actual material price

= Rs. 50 × 1.06 = Rs. 53 per kg
W-8: Total actual quantity used

= Rs. 8,461,450 ÷ Rs. 53 = 159,650 kgs
W-9: Budgeted labour cost per finished unit

= 9,375,000 ÷ 50,000 = Rs. 187.50
W-10: Budgeted labour time for one finished unit

= [(Rs. 187.5) ÷ (Rs 50 × 150%)] = 2.5 hours (W–10)
W-11: Actual labour time taken for one finished unit

= 2.5 + (1÷ 8) = 2.625 hours
Page 2 of 6
Suggested Answer
W-12: Budgeted labour cost per hour

= (Rs. 187.5 ÷ 2.50 hours) = Rs. 75 per hour
W-13: Actual labour cost per hour

= (Rs. 9,463,125 ÷ (2.625 hours × 51,500) = Rs. 70 per hour
W-14: Budgeted variable overhead rate per hour

3,000,000 / (50,000 × 2.50) = Rs. 24 per labour hour
W-15: Actual variable overhead rate per hour

2,974,125 / (2.625 × 51,500) = Rs. 22 per labour hour
RECONCILIATION OF BUDGETED CONTRIBUTION AND ACTUAL CONTRIBUTION
Rupees
Budgeted profit 7,125,000
Sales volume margin variance 213,750
Sale price variance (515,000)
Material price variance (478,950)
Material quantity (usage) variance (257,500)
Labour rate variance 675,937.50
Labour efficiency variance (482,812.50)
Variable overhead efficiency variance (154,500)
Variable overhead spending / expenditure variance 270,375
Actual profit 6,396,300
Ans.3 Patient days Cost of (2) x (4)

Diff from Diff from Col 2 sqrd
of Supplies Rs. ‘000’
Average (x) Average (y) Σx2
occupancy Rs. ‘000’ Σxy
1 2 3 4 5 6
Dec *8,370 -120 1,665 -55.0 14,400 6,600
Jan 8,649 159 1,804 84.0 25,281 13,356
Feb 8,232 -258 1,717 -3.0 66,564 774
Mar 8,742 252 1,735 15.0 63,504 3,780
Apr 7,740 -750 1,597 -123.0 562,500 92,250
May 9,207 717 1,802 82.0 514,089 58,794
Total 50,940 0 10,320 1,246,338 175,554
Average 8,490 1,720
*8370 = 300 × 90% × 31 days
Variable expenses = Σxy / Σx2

Col 6 / Col 5 = 175,554 / 1,246,338 = 0.14086
= 0.14086 × 1000 = Rs. 140.86 Variable rate per patient per day
Page 3 of 6
Suggested Answer
Alternate answer of Question No.3
Patient days Cost of

1x2 Col 1 squared
of occupancy supplies
1 (x) 2 (y) 3 (x*y) 4 (x2)
Dec 8,370 1,665 13,936,050 70,056,900
Jan 8,649 1,804 15,602,796 74,805,201
Feb 8,232 1,717 14,134,344 67,765,824
Mar 8,742 1,735 15,167,370 76,422,564
Apr 7,740 1,597 12,360,780 59,907,600
May 9,207 1,802 16,591,014 84,768,849
Total 50,940 10,320 87,792,354 433,726,938
Variable Cost b
=
∑ ∑ ∑
n xy − ( x)( y) 6 * 87,792,354 - (50,940 * 10,320) 1,053,324
= = = 0.140855851
∑ ∑
n x 2 − ( x) 2 6 * 433,726,938 - (50,940 * 50,940) 7,478,028
Variable cost = 1,000 × 0.140855851 = Rs. 140.86 per day per patient
Ans.4 (a)
3
2 5
2
8 6
2 5
0 1 4 7
3
10
8
7
3 6
Time in Total
Activity EST EFT LST LFT
days Float*
0–1 2 0 2 0 2 0
1–2 8 2 10 8 16 6
1–3 10 2 12 2 12 0
2–4 6 10 16 16 22 6
2–5 3 10 13 22 25 12
3–4 3 12 15 19 22 7
3–6 7 12 19 12 19 0
4–7 5 16 21 22 27 6
5–7 2 13 15 25 27 12
6–7 8 19 27 19 27 0
* LFT-EST-Time in days
(b) The critical path is 0 – 1 – 3 – 6 – 7. The project duration is 27 days.
Page 4 of 6
Suggested Answer
Ans.5 Computation of budgeted gross profit based on:
Existing Budget based on

budget recommended plan
Rupees Rupees
Material A (2 M kgs x 70% × 32) / 0.92 48,695,652.16 (2 M kgs × 70% x 32) / 0.984 45,528,455
Material B (2M x 30% × 10) / 0.92 6,521,739.13 (2M × 30% × 10) / 0.984 6,097,561
Inspection cost (2M × 0.50) / 0.984 1,016,260.00
Labour Cost (15 /60 × 2M × Rs. 400/8) 25,000,000.00 (Rs.25m-Rs.3m (Note) 22,000,000.00
Variable overhead (2 M × Rs. 5)/0.92 10,869,565.21 (Rs.5 x 80%) × [(2M / (1-0.016)] 8,130,081.30
Fixed Overhead 4,000,000.00 (Rs. 4,000,000–25%) 3,000,000.00
95,086,956.50 85,772,357.30
Savings 9,314,599.20
(Note) Savings in Labour Cost:
Average labour time for industry (15 minutes /1.25) 12 Minutes

Benefits of time saving
[(15 minutes – 12 minutes) /60] × 2 M × 400/8 Rs. 5,000,000
Workers share (Rs. 5 million × 40%) Rs. 2,000,000
Savings Rs. 3,000,000
Ans.6 Option I: Cost of short term loan per month:

Rate 18% per annum = 1.5% per month
Cost of funds for 6 months = {10,000,000 × (1.015) 6}-10,000,000}= Rs. 934,433
Cost of funds for 1 month = 934,433 / 6 = 155,739
Option II: Cost of financing through supplies:
Opportunity cost per month = 200,000 / 9,800,000 = 2.04% / 2 = 1.02% or Rs. 102,041 per month
Option III: Cost of factoring per month:

Rupees
Credit Sales 25,000,000 × 60/100 15,000,000
Interest charges 15,000,000 × 45/30 x 75% × 1.25% 210,938
Fee 15,000,000 × 2% 300,000
Total Charges 510,938
Less : Savings in Bad debts and cost of credit control 200,000

Financial charges saving 63,641* (263,641)
247,297
Cost of funds = Rs. 303,547 per month
* Advance 75% of 15 million x 45/30 16,875,000

Less: interest charges (210,938)
Factors fees (300,000)
16,364,062
Less: requirement (10,000,000)
Overdraft reduction 6,364,062
Interest at 1% per month 63,641
Conclusion:
Option II is the cheapest option. The company should forego the cash discount of 2% and avail
credit for further 60 days.
Page 5 of 6
Suggested Answer
Ans.7 (a) X Y Z Total

Number of units A 10,000 2,000 50,000
Direct labour hours per unit B 2.5 5.0 2.8

Direct labour hours (A× B) C 25,000 10,000 140,000 175,000
Total factory overheads D 1,400,000
Factory overhead rate per hour (D/C) E Rs. 8
Cost per unit - single factory overhead rate
method (B × E) F 20 40 22.40
(b) Activity based costing

Set-up costs
Batch size G 125 50 10,000
Set-ups (A ÷ G) H 80 40 5 125
Set-up costs J 274,400 137,200 17,150 428,750
Production control
Machine hours per unit K 7.5 10.0 3.0
Total machine hours (A × K) L 75,000 20,000 150,000 245,000
Production control M 75,000 20,000 150,000 245,000
Quality control Allocation

No. of inspections N 5% 5% 2%
Units inspected (A × N) P 500 100 1,000
Hours per unit inspected Q 0.2 0.5 0.1
Total inspection hours (P × Q) R 100 50 100 250
Quality control costs S 73,500 36,750 73,500 183,750
Materials management
No. of requisitions T 320 400 30 750
Material management costs U 156,800 196,000 14,700 367,500
Factory overheads – General

Allocated on the basis of direct labour hours V 25,000 10,000 140,000 175,000
Total cost (J+M+S+U+V) W 604,700 399,950 395,350 1,400,000
Factory overhead cost per unit - activity

based costing (W ÷ A) Rs. 60.47 199.98 7.91
(The End)
Page 6 of 6
Final Examinations Winter 2008
December 2, 2008

(3 hours)
Q.1 A division of Electronic Appliances Limited sold 6,000 units of refrigerators during the year
ended September 30, 2008, the sale price being Rs. 24,000 per unit.
The opening work in progress comprised of 500 units which were complete as regards
material but only 40% complete as to labour and overheads. The closing work in progress
comprised of 1200 units which were also complete as regards material but only 50%
complete as to labour and overheads. The finished goods inventory was 800 units at the
beginning of the year and 1000 units at the year end.
The work in progress account had been debited during the year with the following costs:
Rs. in ‘000’
Fixed overheads 17,490
As compared to the previous year, the costs per units have increased as follows:
Direct material 10%

Direct labour 8%
Variable overheads 10%
Fixed overheads 6%
The selling and administration costs for the year were :
Rupees
Variable cost per unit sold 1,600
Fixed costs 12,000,000
Required:
(a) Compute the cost per unit, by element of cost and in total, assuming FIFO basis.
(b) Prepare profit statements on the basis of:
(i) Absorption costing
(ii) Marginal costing. (20)
Q.2 RF Ltd. has established a new division. The total cost of the property, plant and equipment
of the division is Rs. 500 million. The working capital requirements are expected to average
Rs. 100 million. The company plans to finance the division maintaining a debt equity ratio
of 70:30. The cost of debt is 10%.
Annual profit before depreciation and financial charges Rs. 150 million
Life of the assets 10 years
Deprecation method Straight line
(2)
The residual value of the property, plant and equipment is estimated at Rs. 20 million. The
division will start functioning from 1st January, 2009.
Required:
(a) Compute the return on investment (ROI) on the basis of average net assets employed
by the division for the years 2009 and 2015. (08)
(b) Based on the results obtained above, discuss the limitations of ROI as a measure of
performance. (02)
Q.3 ABC Limited is considering to set up a chemical plant to produce a specialized chemical
CP-316. Their technical consultants have examined various plants and have recommended
to install either Model A or Model Z for the project. The specifications of the plants are as
follows:
MODEL A MODEL Z
Per hour capacity 80 kgs 100 kgs
Plant cost including installation Rs. 660 million Rs. 750 million
Natural gas consumption 0.5 MMBTU / kg 0.4 MMBTU / kg
Electricity consumption 2 KWH/ kg 1.5 KWH / kg
Water consumption 5 gallons / kg 4 gallons / kg
Normal evaporation losses 15% of the input 10% of the final production
Annual operating capacity 7,500 hours 7,500 hours
Life of plant 20 years 20 years
The marketing research has indicated that there is a large gap between demand and supply
and the company can market at least one thousand tons annually.
Other relevant information is as follows:
(i) Rupees
Sale value per kg 900
Cost of raw material per kg 400
Electricity per KWH 12
Natural gas per MMBTU 80
Water per gallon 2
(ii) Other expenses at a capacity of 600 tons are as under:
Model A Model Z
Rupees in million
Direct labour 30.0 33.0
Other production overheads (60% variable) 60.0 70.0
Selling and administration (40% variable) 35.0 45.0
Production overheads include depreciation charged on straight line basis.

(iii) Working capital requirements are estimated at 20% of annual sales.
(iv) Debt equity ratio of 60:40 will be maintained by the company.
(v) Financial charges would be 12%.
(vi) Tax rate applicable to the company is 30%.
Required:
Prepare detailed working to conclude whether the company should purchase Model A or
Model Z. (16)
(3)
Q.4 (a) XYZ Ltd. produces a single product which has a large market. It sells an average of
360,000 units per month at a price of Rs.160 per unit. The variable cost is Rs.120 per
unit.
All sales are made on credit. Debtors are allowed one month to clear off the dues. The
company is thinking of extending the credit term to two months which will help
increase the sale by 25%.
Other information is as follows:
(i) Raw materials constitute 60% of the variable cost.
(ii) The company has a policy of maintaining 60 days stock of finished goods and
30 days stock of raw materials. The suppliers of raw materials allow a credit of
20 days.
(iii) The company’s cost of funds is 16%.
Required:
Calculate the effect of the proposed credit policy on the profitability of the company. (10)
(b) FGH Ltd. needs financing for its short term requirements. A factor has offered to
advance 80% of the credit bills for a fee of 2% per month plus a commission of 4% on
its trade debts which presently amount to Rs. 8 million. FGH allows a credit of 20 days
to all customers. It has estimated that it can save Rs. 600,000 per annum in
Management costs and avoid bad debts to the extent of 1% on the credit sales.
The company is also negotiating with a bank which has offered short term loan at 18%
per annum. Further, a one time processing fee of 3% will have to be paid.
Required:
Advise the company on the preferred mode of financing, assuming that the financing is
required for one year only. (05)
Q.5 EEZ Limited produces a variety of electronic items including flat screen television sets. All
the components are imported and are assembled by a team of highly skilled technicians.
There are 10 employees working in this team, who work 5 days per week and 8 hours per
day. Overtime is paid at double the normal rate.
A new model is produced each year. The production is carried out in batches. The efficiency
of the technicians improves with each batch but a study has not been carried out yet to
determine the extent of learning curve effect. Each batch consists of 40 units. So far, 4
batches have been completed. The first batch required 800 direct labour hours including
overtime of 200 hours. A total of 2,312 hours have been recorded so far.
The company uses standard absorption costing. The following costs were recorded for the
initial batch:
Rupees
Direct materials 400,000
Direct labour including overtime 800,000
Special tools (Re-usable) costing 50,000
Variable overheads (per labour hour) 500
Fixed overheads (per week) 25,000
The company has been asked to bid for an order of 480 units. The order is required to be
completed in 10 weeks. Due to strong competition prevailing in the market, the marketing
director believes that the quotation is unlikely to be accepted if it exceeds Rs. 25,000 per
unit. Moreover, if the order is not accepted, only 8 of the employees will be employed
elsewhere whereas 2 employees will remain idle for the next 6 weeks.
Required:
Recommend whether it is worth accepting this order at Rs. 25,000 per unit. (17)
(4)
Q.6 RS Enterprises is a family concern headed by Mr. Rameez. It is engaged in manufacturing

of a single product but under two brand names i.e. A and B. Brand B is of high quality and
over the past many years, the company has been charging a 60% higher price as compared
to brand A.
As the company has progressed, Mr. Rameez has felt the need for better planning and
control. He has compiled the following data pertaining to the year ended November 30,
2008:
Rupees Rupees
Sales 5,522,400
Production costs:
Raw materials 2,310,000
Overheads 630,000 3,717,600
Selling and administration expenses 800,000
1,004,800
A B
No. of units sold 5400 3600
Labour hours required per unit 5 6
Other information is as follows:

(i) 20% of B was sold to a corporate buyer who was given a discount of 10%. The buyer
has agreed to double the purchases in 2009 and Mr. Rameez has agreed to increase
the discount to 15%.
(ii) In view of better margins in B, Mr. Rameez has decided to promote its sale at a cost
of Rs. 250,000. As a result, its sales to customers other than the corporate customer,
are expected to increase by 30%. However, the production capacity is limited. He
intends to reduce the production/sale of A if necessary. Mr. Rameez has ascertained
that 90% capacity was utilized during the year ended November 30, 2008 whereas the
time required to produce one unit of B is 20% more than the time required to produce
a unit of A.
(iii) 2.4 kgs of the same raw material is used for both brands but the process of
manufacturing B is slightly complex and 10% of all raw material is wasted in the
process. Wastage in processing A is 4%.
(iv) The price of raw material have remained the same for the past many years. However,
the supplier has indicated that the price will be increased by 10% with effect from
March 1, 2009.
(v) Direct labour per hour is expected to increase by 15%.
(vi) 40% of production overheads are fixed. These are expected to increase by 5%.
Variable overheads per unit of B are twice the variable overheads per unit of A. For
2009, the effect of inflation on variable overheads is estimated at 10%.
(vii) Selling and administration expenses (excluding the cost of promotional campaign on
B) are expected to increase by 10%.
Required:
Prepare a profit forecast statement for the year ending November 30, 2009. (22)
(THE END)
Suggested Answers
Ans.1 (a) Total

Variable Fixed
Material Labour Variable Total Cost
overheads overheads
Cost
Equivalent units:
Completed units
(6,000 + 1,000 – 800) 6,200 6,200 6,200 6,200
Closing work-in-progress 1,200 600 600 600
Opening work-in-progress (500) (200) (200) (200)
Total equivalent units 6,900 6,600 6,600 6,600
Total cost (Rs.) 83,490,000 14,256,000 10,890,000 108,636,000 17,490,000 126,126,000

Cost per unit (Rs.) 12,100 2,160 1,650 15,910 2,650 18,560
b
(i) Absorption costing profit statement:
Rupees
Sales (6,000 × 24,000) 144,000,000
Op WIP 6,700,000
Op finished goods (17,000 × 800) 13,600,000
Production cost 126,126,000
Closing WIP (18,396,000)
Closing finished goods stock (18,560 × 1,000) (18,560,000)
109,470,000
Less: variable selling and administration costs (1,600 ×
6,000) 9,600,000
Fixed selling and administration costs 12,000,000
21,600,000
Net profit 12,930,000
(ii) Marginal costing profit statement:

Rupees
Sales 144,000,000
Opening WIP 6,200,000
Opening finished goods (800 x 14,500) 11,600,000
Variable cost of production 108,636,000
Closing WIP (16,806,000)
Closing finished goods stock (1,000 x 15,910) (15,910,000)
Variable cost of sales 93,720,000
Variable selling and administration costs (1,600 × 6,000) 9,600,000
103,320,000
Contribution 40,680,000
Less: Fixed costs (17,490 + 12,000) 29,490,000
Net profit 11,190,000
Working
Closing work-in-progress (Rs.) 14,520,000 1,296,000 990,000 16,806,000 1,590,000 18,396,000
Cost per unit last year 11,000 2,000 1,500 14,500 2,500 17,000
Opening work-in-progress (Rs.) 5,500,000 400,000 300,000 6,200,000 500,000 6,700,000
Page 1 of 7
Suggested Answers
Ans.2 (a) ROI = net profit / total assets (investment)
Computation of net profit

Rs. in million
Annual profit before depreciation and financial charges 150
Depreciation [(Rs. 500 M - 20 M) / 10 years] (48)
Financial Charges (Rs. 600 × 70% × 10%) (42)
60
Computation of net capital employed (mid year) for year 2009

Rs. in million
Net Book Value at 1st January, 2009 500
Net Book Value at 31st December, 2009 [(480 × 9/10) + 20] 452
Mid Year Value for year 2009 [(500 + 452) /2] 476
Working Capital 100
Average net capital employed 576
ROI for the year 2009 [(Rs. 60M / Rs. 576M) × 100] 10.42%
Computation of average net capital employed (mid year) for year 2015
Rs. in million
Net Book Value at 1st January, 2015 [(480 × 4/10) + 20] 212
Net Book Value at 31st December, 2015 [(480 × 3/10) + 20] 164
Mid Year Value for year 2015 [(212 + 164) /2] 188
Working Capital 100
Average net capital employed 288
ROI for the year 2015 [(Rs. 60 / Rs. 288) × 100] 20.83%
(b) Comments on appropriateness of the result
1. ROI method focuses on short term performance whereas investment decision should be
evaluated on the life of the project.
2. Although the net profit for the years 2009 & 2015 are same but the ROI is much higher in
2015 as compared to 2009 which shows that it is not an appropriate ratio for comparing the
performance on year to year basis.
Ans.3 Total Production Capacity

Kgs
Model A (7,500 x 80) 600,000
Model Z (7,500 x 100) 750,000
Computation of per kg cost (Model A)

Per Unit Cost Total Cost
Rupees Rupees
Raw Material Cost (400 / 0.85) 470.59 282,354,000
Natural Gas (0.5 MMBTU × Rs. 80) 40.00 24,000,000
Electricity (2 KWH × 12 Rs.) 24.00 14,400,000
Water (5 gallons × Rs. 2) 10.00 6,000,000
Plant depreciation (33,000,000 / 600,000) 55.00 33,000,000
Labour cost (30,000,000/600000) 50.00 30,000,000
Other production overhead (60,000,000 / 600) 100.00 60,000,000
749.59 449,754,000
Page 2 of 7
Suggested Answers
Computation of per kg cost (Model Z)

Per Unit Cost Total Cost
Rupees Rupees
Raw Material Cost 400.00 300,000,000
Natural Gas (0.4 MMBTU × Rs. 80) 32.00 24,000,000
Electricity (1.5KWH × Rs. 12) 18.00 13,500,000
Water (4 gallons × Rs. 2) 8.00 6,000,000
Plant depreciation (37,500,000 / 750,000) 50.00 37,500,000
Labour Cost (33,000,000/600) 55.00 41,250,000
Other production overheads (80,500,000 / 750,000) 107.33 80,500,000
670.33 502,750,000
Wastage (10/90 x 670.33) 74.48 55,860,000
744.81 558,610,000
Other production overheads for Model Z

Rupees
Fixed cost (40% x 70.0 million) 28,000,000
Variable cost (70 million x 60% × 75 / 60) 52,500,000
80,500,000
Selling and administration expenses for Model Z

Fixed cost (60% x 45 million) 27,000,000
Variable cost (45 million x 40% × 75 / 60) 22,500,000
49,500,000
Computation of financial charges

Rs. in million Rs. in million
Investment Size
Plant Cost 660.000 750.000
Working capital 108.000 135.000
768.000 885.000
60% Debt 460.800 531.000
Annual Financial Charges @ 12% 55.296 63.720
Profitability Analysis of Model A and Model Z

Model A Model Z
Rupees Rupees
Sales @ Rs. 900/ Kg 540,000,000 675,000,000
Cost of goods sold (449,754,000) (558,610,000)
Gross Profit 90,246,000 116,390,000
Admin and selling overheads (35,000,000) (49,500,000)
Financial Charges (55,296,000) (63,720,000)
Net Profit (50,000) 3,170,000
Tax @ 30% - (951,000)
(50,000) 2,219,000
Equity (768 × 40%) 307,200,000 (885 × 40%) 354,000,000
Return on equity (0.02) %) 0.63%

Model Z is to be preferred over Model A.
Page 3 of 7
Suggested Answers
Ans.4 (a) Existing Proposed

Assets/Liabilities level
Rupees Rupees
Debtors 360,000 x 160 57,600,000 360,000 x 160 x 1.25 x 2 144,000,000
Stocks 360,000 x 120 x 60% 25,920,000 360,000 x 120 x 60% x 1.25 32,400,000
Creditors 2/3 of above (17,280,000) 2/3 of above (21,600,000)
Finished goods 360,000*120*2 86,400,000 360,000 x 120 x 2 x 1.25 108,000,000
152,640,000 262,800,000
Rupees
Increase in working capital (Rs. 262,800,000 – Rs. 152,640,000) 110,160,000
Cost of funds @ 16% of above 17,625,600
Profit margin on extra sales 360,000*0.25*40*12 43,200,000
Extra profits are more than 2.4 times the cost of funds; hence the proposed credit policy is feasible.
(b) Cost of factoring per month

Rupees
Fee (8,000,000 x 80% x 2% 128,000
Commission (8,000,000 x 30/20 x 4%) 480,000
608,000
Less : Savings in management costs (600,000 / 12) (50,000)
Savings on bad debts (8,000,000 x 30/20 x 1%) (120,000)
438,000
Cost of short term finance from bank, per month

Rupees
Interest (8,000,000 x 0.8 x 18% / 12 ) 96,000
Processing fee (3% x 8,000,000 x 80%) 192,000
288,000
Obtaining short term loan facility is less costly and hence a better option.
Ans.5 Computation of labour hours required
Assuming that the learning curve rate is x:

800 × 4 × x × x = 2312
x2 = 2312 / 3,200
x = 0.85
Cumulative average
Batches Cumulative quantity Cumulative hours
hours per unit
1 40 20 800
2 80 17 1,360
4 160 14.45 2,312
8 320 12.28 3,930
16 640 10.44 6,682
Hence, additional hours for 480 units = 6,682 – 2,312 = 4,370 hours
Page 4 of 7
Suggested Answers
Labour hour rate:

Rupees
600 normal hours + 200 overtime hours 800,000
600 + 200 x 2 800,000
1,000 hours 800,000
Hourly rate 800
Direct labour:
Direct
Hours labour cost
Rupees
8 workers for 10 weeks for 40 hours 3,200 @ Rs. 800 per hour 2,560,000
2 workers for 4 weeks for 40 hours 800 @ Rs. 800 per hour 256,000
Overtime 370 @ Rs. 1,600 per hour 592,000
4,370 3,408,000
Incremental cost of producing 480 units:

Amount in Rs
Direct materials (480 × 10,000) 4,800,000
Direct labour 3,408,000
Variable overhead (4,370 × 500) 2,185,000
10,393,000
Cost per unit (10,393,000/480) 21,652
Hence, quotation can be accepted at Rs 25,000 per unit.
Ans.6 Computation of Sales for 2008

B B
A Normal Corporate Total
Ratio of sale price 1.00 1.60 1.44
Actual sale Qty 5,400.00 2,880.00 720.00
Ratio of sale value 5,400.00 4,608.00 1,036.80 11,044.80
Sales value 2,700,000.00 2,304,000.00 518,400.00 5,522,400.00
A B
Current year’s production (at 90 % capacity) 5,400.00 3,600.00
Production at full capacity 6,000.00 4,000.00
If only B is produced the company can produce 9,000 units (4,000 + 6,000 / 1.2).
Required production of B in the next year = (2,880 x 1.3) + (2 x 720) = 3744 + 1440 = 5,184 units
Remaining capacity can be utilised to produce 4,579 units of A [(9,000 - 5,184) x 1.2].
Computation of Sales for 2009

Rupees
Sales of A (4,579 x 500) 2,289,500
Sales of B (5,184 x 800) 4,147,200
6,436,700
Discount to Corporate customer (1,440 × 800 × 15%) 172,800
6,263,900
Page 5 of 7
Suggested Answers
Consumption of Raw Material

Kgs
Consumption of raw material in 2008 (A: 5,400 x 2.4 / 0.96) 13,500.00
Consumption of raw material in 2008 (B: 3,600 x 2.4 / 0.90) 9,600.00
Total 23,100.00
Rupees
Price per kg of raw material ( 2,310,000 / 23,100) 100.00
Total expected consumption in 2009 (A: 4,579 x 2.4 / 0.96) 11,447.50

Total expected consumption in 2009 (B: 5,184 x 2.4 / 0.90) 13,824.00
Total consumption for 2009 25,271.50
Average price for 2009 ((100 x 3) + (110 x 9)) / 12 107.50
Total cost of raw material for 2009 2,716,686.25
Computation of Direct Labour

Hours
Labour hours used in 2008 (A: 5,400 × 5) 27,000
Labour hours used in 2008 (B: 3,600 × 6) 21,600
48,600
Labour hours forecast for 2009 (A: 4,579 × 5) 22,895

Labour hours forecast for 2009 (B: 5,184 × 6) 31,104
53,999
Increase in labour hours 5,399
Labour cost for 2009 (1.15 x (777,600 x 53,999 / 48,600) Rs. 993,582
Production overheads for 2008 :

Rupees
Fixed overheads (40% x 630,000) 252,000.00
Variable overheads (630,000-252,000) 378,000.00
A B Total
Ratio of variable overheads 1.00 2.00
Total units produced 5,400.00 3,600.00
Product (units) (K) 5,400.00 7,200.00 12,600.00
Total variable overheads (Rs.) (L) 162,000.00 216,000.00 378,000.00
Per unit variable overheads (Rs.) (L /K) 30.00 60.00
Page 6 of 7
Suggested Answers
Production overheads for 2009:

A B Total
Fixed overheads (1.05 x 252,000) (Rs.) 264,600.00
Per unit variable overheads (Rs.) 33.00 66.00
Total units 4,579 5,184
Total variable overheads (Rs.) 151,107.00 342,144.00 493,251.00
Total overheads (Rs.) 757,851.00
PROFIT FORECAST STATEMENT FOR 2009
Rupees
Sales 6,263,900.00
Material 2,716,686.25
Labour 993,582.00
Overheads 757,851.00 4,468,119.25
Gross margin 1,795,780.75
Selling and administration expenses (800,000 x 1.1) + 250,000 1,130,000.00

665,780.75
(THE END)
Page 7 of 7
June 3, 2008

(3 hours)
Q.1 Azmat Industries is engaged in manufacturing two products, X and Y. Both the products
have a high demand but the company is facing a liquidity crunch. In view of the liberal
credit policy being followed by the company the Finance Director is of the opinion that
sales of only Rs. 200 million can be financed through the present resources. However, a
credit facility of Rs. 25 million can be obtained from local market at a mark-up of 16%. If
this facility is obtained for the whole year, the company will be in a position to increase
its sale to Rs. 260 million.
The following data is available for the year ended June 30, 2008:
X Y
Direct materials per unit – Rs. 300 700
Direct labour per unit – Rs. 180 150
Variable overheads per unit – Rs. 160 180
Selling price per unit – Rs. 900 1,200
Production per machine hour 8 6
The Marketing Director has informed that he has already made commitments for the
supply of 40,000 units of X and 96,000 units of Y. Total available machine hours are
34,000.
Required:
(a) Calculate the maximum profit the company can achieve if the sale is restricted to
Rs. 200 million.
(b) Determine whether it would be feasible for the company to obtain the credit
facility. (14)
Q.2 Yousuf Aziz & Company has achieved significant growth over the years. The Company
is negotiating a working capital loan to finance its fast growing operations. For
determining the working capital requirement, the finance manager has collected the
following data for the current financial year which has just commenced:
(i) The sales will increase by 25% over the previous year’s sales of Rs. 1.0 billion.
Local sales were 60% of total sales last year. The volume of local sales will
increase by 10% whereas prices will increase by 15% on the average. The
remaining growth will come from exports, all of which will be volume driven.
(ii) Cash sales to local customers will be approximately Rs. 100 million. Credit terms
for local sales are 2/10 and 1/20. It is estimated that total discounts to the
customers will amount to Rs. 6 million. The value of sales on which 2% discount
will be claimed shall be twice the value on which 1% discount will be claimed. The
remaining customers will take about 30 days to make the payments. Bad debts are
expected to be 2% of credit sale.
(iii) Export proceeds will be recovered on an average of 30 days.
(iv) Raw materials A, B and C are used in the ratio of 3:2:1 respectively. Last year, the
raw material cost was 48% of sales. Average price of each of the raw materials is
expected to increase by 5%. Opening stocks this year were equal to one month’s
consumption of the previous year and are expected to follow the same trend.
(2 )
(v) The suppliers of A and B allow credit periods of 30 and 45 days respectively
whereas 50% cash payment has to be made while placing order for C and the
balance at the time of delivery which is 15 days after the order.
(vi) Finished goods stock equal to one month’s sale, is maintained by the company.
(vii) During the previous year, labour, factory overheads and other administrative
overheads were 15%, 10% and 8% of sales value respectively but are expected to
be 16%, 12% and 10% this year. On an average, these are paid 15 days in arrears.
Required:
Assuming that all transactions are evenly distributed over the year (360 days), determine
the working capital at the end of the year. (15)
Q.3 (a) GH Scientific Corporation is assessing the possibility of introducing a new product.
The Incharge of production is confident that the product will be successful.
However, the marketing department is apprehensive of the high cost of production
and has advised that an in-depth market research should be carried out before
launching the product. The cost of initial launch of the product is estimated at Rs.
500 million whereas the cost of carrying out the market research shall be Rs. 100
million.
The company’s research analysts have developed the following estimates:
(i) If the company starts production without carrying out market research, there
is a 40% probability that it will earn a profit of Rs. 2 billion from the product,
35% probability of earning Rs. 1.2 billion and 25% probability of incurring a
loss of Rs. 200 million.
(ii) If the company decides to carry out the research there is a 60% probability
that it will find the product feasible.
(iii) If the product is found feasible the chances of profitability are as follows:
Profit of Rs. 2.8 billion 70%

Profit of Rs. 800 million 30%
(iv) If the product is not found feasible the profitability estimates are as follows:
Profit of Rs. 700 million 20%

Loss of Rs. 400 million 80%
Required:
(a) Draw a decision tree to depict the above possibilities. (07)
(b) Determine whether the company should carry out the research or not. (03)
(b) ABC Limited manufactures heavy equipments for use in various industries. It has
recently developed and supplied eight units of a special equipment to an important
customer. It took about 5,000 hours to build the first unit but thereafter a learning
curve of 80% has taken effect which is expected to continue for the next 56 units.
Direct labour cost is Rs. 100 per hour. Cost of direct material is Rs. 400,000 per unit
and variable overheads are estimated at Rs. 80 per direct labour hour.
Required:
A new customer has placed an order for eight units of equipment. Determine the
price that the company may charge to earn a profit of 20% of sales. (06)
(3 )
Q.4 Nihal Limited manufactures a single product and uses a standard costing system. Due to a
technical fault, some of the accounting data has been lost and it will take sometime before
the issue is resolved. The management needs certain information urgently. It has been
able to collect the following data from the available records, relating to the year ended
March 31, 2008:
(i) The following variances have been ascertained:
Rs.
Adverse selling price variance 24,250,000
Favourable sales volume variance 2,000,000
Adverse material price variance – X 2,295,000
Favourable material price variance – Y 2,703,000
Favourable material price variance – Z 3,799,500
• The overall material yield variance is nil but consumption of X is 10% below
the budgeted quantity whereas consumption of Y is 6% in excess of the
budgeted quantity
• Labour rate variance is nil.
(ii) The budgeted sale price of Rs. 100 was 5.26% higher than actual sale price.
(iii) The standard cost data per unit of finished product is as follows:
No. of kgs Standard Cost Total Cost

X 5 3.00 15.00
Y 10 2.00 20.00
Z 15 1.80 27.00
(iv) During the year, the finished goods inventory increased by 230,000 units whereas
there was no change in the inventory levels of the raw materials.
(v) Labour costs are related to the consumption of raw materials and the standard rates
are as follows:
Re. (per kg)
Skilled labour for handling material X 1.00
Semi-skilled labour for handling material Y 0.75
Unskilled labour for handling material Z 0.10
Required:
(a) Total actual cost of each raw material consumed
(b) Material mix variance.
(c) Labour Cost Variance. (20)
Q.5 Ibrahim Industrial Company produces custom made machine tools for various industries.
The prices are quoted by adding 50% mark-up on the cost of production which includes
direct material, direct labour and variable factory overheads. The mark-up is intended to
cover the non-manufacturing overheads and earn a profit. Factory overheads are allocated
on the basis of direct labour hours.
The management has been using this system for many years but recent experiences have
shown that some customers have been dissatisfied with the prices quoted by the company
and have moved to other manufacturers. The CEO was seriously concerned when KSL, a
major client showed its concerns on the prices quoted by the company and has asked the
management accountant to carry out a critical evaluation of the costing and pricing
system.
(4 )
The management accountant has devised an activity based costing system consisting of
four activity centres. The related information is as follows:
Budgeted Activity
Activity Centre Basis of Allocation
level
Activity 1 Manufacturing Direct labour hours 72,000 hours
Activity 2 Customer Service No. of days to 120 order days
complete the order
Activity 3 Order Processing Number of orders 20 orders
Activity 4 Warehousing Cost of Direct material Direct materials usage
of Rs. 40 million
The budgeted costs for the period are given below:
Description Amount (Rs.)

Direct material 40,000,000
Indirect labour 7,200,000
Other manufacturing overheads 9,000,000
Quality control 1,500,000
Administrative salaries 3,000,000
Transportation 1,260,000
79,960,000
On the basis of a careful study, the distribution of costs to activity centres has been
recommended on the following basis:
Activity Activity Activity Activity Not

Total
1 2 3 4 allocated
Indirect labour 60% 20% NIL 20% NIL 100%
Machine-related Costs 95% NIL NIL 05% NIL 100%
Quality control 60% 40% NIL NIL NIL 100%
Transportation 10% 70% NIL 20% NIL 100%
Administrative salaries NIL NIL 20% 25% 55% 100%
The data related to the order placed by KSL is as under:
Estimated direct material cost (Rs.) 3,000,000

Direct labour (hours) 6,000
No. of days to complete the order 10
Required:
(a) Calculate activity cost driver rates for each of the above activities.
(b) Compute the amount of discount that can be offered to KSL on the price that has
been quoted to them, if the Activity Based Costing system is used and the
management wants to earn a minimum contribution margin of 20% of the quoted
price. (15)
Q.6 Kamran Limited (KL) produces a variety of electrical appliances for industrial as well as
domestic use. The average life of the equipments is six years. According to the terms of
sale, the company has to provide free after sales service, including parts, during the
warranty period of one year. Thereafter, the services are provided at market rates. The
company has hired Ahmed Hasan Associates (AHA) to provide these services on the
following terms and conditions:
The material required for repairs carried out during the warranty period is provided
by KL. For customers whose warranty period has expired, the material supplied to
AHA is billed at cost plus a mark-up of 15%.
(5 )
Labour and overheads incurred by AHA on services provided during the warranty
period are billed to KL at cost plus 30%.
KL gets a share in all amounts billed to the customers after the warranty period. 10%
share is received in respect of amounts billed to industrial customers and 15% in case
of domestic customers.
The management of KL is evaluating the possibility of providing the services directly
instead of outsourcing them to AHA. On the instruction of the CEO the management
accountant has compiled the following information in respect of the previous year:
20% of the services were provided to domestic customers and 80% to industrial
customers.
20% of all services were provided during the warranty period.
Mark-up billed to AHA amounted to Rs. 360,000.
An amount of Rs. 990,000 was received from AHA being the KL’s share of amount
billed to the customers.
It has been estimated that the cost of material billed by AHA, to the customers, is
determined by applying a further mark-up of 25% over the amount billed by KL. The
service charges are billed at 50% above the cost of labour and variable overheads.
It is estimated that the cost of labour and variable overheads will increase by 10%, if
the services are provided by KL. However, KL will not be able to pass on this
increase to the customers. Moreover, a supervisor will have to be appointed to
oversee the process, at a consolidated salary of Rs. 40,000 per month. Other fixed
overheads will also increase by Rs. 60,000 per month.
Required:
(a) Compare the two options and determine whether KL should terminate the contract
with AHA and start providing the services itself. (17)
(b) What other qualitative factors should KL consider before taking a final decision? (03)
(THE END)
Suggested Answer
Ans.
1 (a) The company has to supply minimum sales to the customer as follows:
Unit Rate Rs.

X 40,000 900 36,000,000
Y 96,000 1,200 115,200,000
151,200,000
Further sales possible (200,000,000 – 151,200,00) 48,800,000
X Y
Contribution per unit Rs. 260 170
Contribution per hour Rs. 2,080 1,020
Contribution % on sales 29 14
X contributes more than Y.

Therefore, 48,800,000 / Rs.900 = 54,222 units of X should be produced.
Check whether this level of production can be attained in available hours:
Units Hours
X (40,000+ 54,222 ) 94,222 11,778
Y 96,000 16,000
27,778
Therefore, maximum contribution / profit will be as follows:

X Y Total - Rs.
Sales in unit 94,222 96,000

Contribution per unit 260 170
Total contribution 24,497,720 16,320,000 40,817,720
(b) Increase / (decrease) in profit if the loan is taken
Extra Sales of X if loan is taken (60 mln / 900) 66,667 units

Production possible in remaining hours (6,222* x 8) 49,776 units
Contribution on 49,776 units (49,776 x 260) Rs. 12,941,760
Bank charges on Rs.25 mln at 16% 4,000,000
Additional contribution if bank facility availed 8,941,760
*(34,000 – 27,778)
Ans.
2 Computation of working capital
Rupees
Debtors:
Exports (D*30/360) (Working 1) 40,916,667
Local customers with 2% discount (F*0.98*10/360) (Working 2) 6,533,333
Local customers with 1% discount (E*0.99*20/360) (Working 2) 6,600,000
Local customers who do not avail discount (C-100,000,000-E-F-13180000)/12 23,818,333
Advance against raw material C (N x 15/360x0.5) (Working 3) 2,043,215

Page 1 of 8
Suggested Answer
Closing Stock
Raw material (H) (Working 3) 48,342,000
Finished Goods (P) (Working 4) 77,508,667
Creditors - Raw material A (L x 30/360) (24,518,583)

Raw material B (M x 45/360) (24,518,583)
Labour, FOH and Admin Expenses (B x 0.38 x 15/360) (19,791,667)
136,933,382
Working 1
Sales in Previous year A 1,000,000,000
Sales in Current year ( A x 1.25 ) B 1,250,000,000
Local sales ( A x 60%x1.1x1.15 ) C 759,000,000
Exports (B-C) D 491,000,000
Working 2
Assume sale with 1% discount = X
Sale with 2% discount will be = 2X
Discount = 0.01X+(0.02*2X) = 0.05 X = Rs. 6,000,000
Therefore sale on which 1% discount will be given = X = 6,000,000/0.05 E 120,000,000

Therefore sale on which 2% discount will be given = 2X = 120,000,000*2 F 240,000,000
Working 3
Local sales at last year's price (1 billion * 60% * 1.1) 660,000,000
Exports as above 491,000,000
Total Sales excluding the effect of price increase G 1,151,000,000
Purchases of Raw Material
Closing stock of Raw material (G*0.48*1.05/12) H 48,342,000

Raw material included in cost of sales (G*0.48*1.05) I 580,104,000
Opening stock of Raw material (A*0.48/12) J (40,000,000)
Total raw material purchases K 588,446,000
Purchases of A (K*3/6) L 294,223,000

Purchases of B (K*2/6) M 196,148,667
Purchases of C (K*1/6) N 98,074,333
Working 4
Raw material as above (H) 48,342,000

Labour and factory overheads (B*28%/12) 29,166,667
P 77,508,667
Page 2 of 8
Suggested Answer
Ans. (a) (70% = Rs. 2.8 bn)

3
(A) Fav = 60% = -0.5 bn
(30% = Rs. 0.8 bn)

(Research = -0.1 bn)
(20% = Rs. 0.7 bn)
(B) Unfav = 40% = -0.5 bn
(80% = Rs. -0.4 bn)
(40% = 2.0 bn)
(No research = -0.5 bn) (35% = 1.2 bn)

(C)
(25% = -0.2 bn)
Rs.
billion
Feasible 2.8
0.7
Initial launch
0.6
0.3
0.8
Undertake research
0.5 bln
0.7
0.2
0.4
0.1 billion Not feasible

0.8 -0.4
0.4 2.0
Initial launch
0.35
No research 1.2
0.5 bln
0.25 -0.2
= Decision point (DP)
= Chance point (CP)

(i) At CP2, EV = (0.7 × 2.8) + (0.3 × 0.8) = 1.96 + 0.24 = 2.2 billion
(ii) At CP3, EV = (0.2 × 0.7) + (0.8 × –0.4) = 0.14 – 0.32 = –0.18 billion
(iii) At CP1, EV = (0.6 × 2.20) + (0.4 × –0.18) = 1.32 – 0.072 = 0.1248 billion
(iv) At DP B, EV = 1.248 – 0.5 = 0.748 billion
(v) At DP A, EV = 0.748 – 01 = 0.648 billion
(vi) At CP4, EV = (0.4 × 2.0) + (0.35 × 1.20) – 0.25 × –0.2) = 0.8 + 0.42 – 0.05 = 1.17
billion
(vii) At DP C and A, EV = 1.17 – 0.5 = 0.670 billion
The company’s profits would be higher by Rs. 220 million (0.670 billion – 0.648 billion)
if it did not carry out research.
Page 3 of 8
Suggested Answer
(b) Expected profit if the research is carried out

Profit expectation at point A = (2.2 x 70% x 60%) + (0.2 x 30% x 60%)
= 0.924+ 0.036
= 0.960 billion
Profit expectation at point B = (0.1 x 0.2 x 0.4) – (1.0 x 80% x 40%)
= (0.008 - 0.32)
= -0.312
Profit expectation if research is carried out = 0.960 – 0.312 = 0.648 bln
Expected profit if research is not carried out (Point C)

(1.5 x 40%) + (0.7 x 35%) – (0.7 x 25%) = 0.6 + 0.245 – 0.175
= 0.67bn
The company should not carry out research, as then it could earn higher profit of Rs. 22
million (670 – 648).
Ans. (b) Average

No. of units Total hours
3 hours
1 5,000 5,000
2 4,000 8,000
4 3,200 12,800
8 2,560 20,480
16 2,048 32,768
Hours used for 9-16 units (32768-20480) 12,288
Cost of labour 12288 x 100 Rs. 1,228,800
Direct materials 8*400000 Rs. 3,200,000
Variable overheads 12288 x 80% Rs. 983,040

5,411,840
Margin 1,352,960
Sale price Rs. 6,764,800
Ans. Rupees
4 Computation of Units Sold
Actual Sales Price per unit (100 / 1.0526) 95
Sales price variance per unit (100 – 95) (A) 5
Adverse Selling Price Variance (B) 24,250,000
Units Sold during the period B/A 4,850,000
Computation of Units Manufactured

Million units
Units Sold 4.85
Increase in inventory level 0.23
Units Manufactured 5.08
Page 4 of 8
Suggested Answer
(a) Actual cost of raw materials consumed (million rupees)
Mix
Standard cost Price variance Actual cost
variance*
X (5.08*15) 76.2000 2.2950 (7.6200) 70.8750
Y (5.08*20) 101.6000 (2.7030) 6.0960 104.9930
Z (5.08*27) 137.1600 (3.7995) (0.9140) 132.4465
314.9600 (4.2075) (2.4380) 308.3145
*See mix variance working
(b) Material mix variance
Standard mix Actual mix Difference Variance

(millions Kgs) (million Kgs) (million Kgs) (million Rs.)
X (5.08*5) 25.40 22.860 2.540 7.620
Y (5.08*10) 50.80 53.848 -3.048 -6.096
Z (5.08*15) 76.20 75.692 0.508 0.914
152.40 152.400 2.438
(c) Labour Cost Variance
Actual
Quantity Labour cost
labour at Standard
consumed variance
standard labour cost
million Kgs million Rs.
cost
skilled 22.860 22.860 25.400 2.540 Fav

semi-skilled 53.848 40.386 38.100 -2.286 Adv
unskilled 75.692 7.569 7.620 0.051 Fav
152.400 71.094 71.400 0.306
Ans.
5 1 2 3 4
(a) Activity Order Unallocated Total
Manufactur- Customer Ware-
ing
process-
service housing
ing
Indirect labour 4,320,000 1,440,000 - 1,440,000 - 7,200,000
Other manufacturing
overheads 8,550,000 - - 450,000 - 9,000,000
Quality Control 900,000 600,000 - - - 1,500,000
Transportation 126,000 882,000 - 252,000 - 1,260,000
Admin salaries - - 600,000 750,000 1,650,000 3,000,000
13,896,000 2,922,000 600,000 2,892,000 1,650,000 21,960,000
Budgeted activity
level 72,000 120 20 40,000,000
Cost driver rate 193.00 24,350.00 30,000.00 0.0723

per labour per order per order per Re. of
hour day processed material
usage
Page 5 of 8
Suggested Answer
(b) Order by KSL

Costs under present method
Direct material cost 3,000,000

Factory overheads (90% of direct labour) 1,350,000
5,850,000
Mark-up - 50% 2,925,000
Sale price (A) 8,775,000
Costs under ABC Method
Direct material cost 3,000,000

Other manufacturing cost (6,000 x 193) 1,158,000
Customer service (10 x 24,350) 243,500
Order processing (1 x 30,000) 30,000
Warehousing (3,000,000 x 0.0723) 216,900
6,148,400
Margin -20% of sales price 1,537,100
Sale price (B) 7,685,500
Discount that may be allowed (A-B) 1,089,500
Ans.
6 (a) EARNINGS UNDER PROPOSED OPTION
Total billing to customers (working 1) 9,000,000
Less: Cost of raw material used after warranty period (working 3) 2,400,000
Cost of labour & variable overhead (3.8 mln + 10%) (working 2) 4,180,000
Salary of Supervisor 480,000
Increase in other fixed overheads 720,000
7,780,000
Net profit excluding cost of material used during warranty period 1,220,000
LESS: EARNINGS UNDER THE PRESENT OPTION

Mark-up earned on supply of material 360,000
Share of billing received from AHA 990,000
1,350,000
Less: Payment to AHA for services provided during
warranty period (760,000+30%) (working 2) 988,000
362,000
Net savings 858,000
Working 1
Domestic Industrial
Total
Customers Customers
Ratio of services provided by AHA A 20 80 100
Share of KL in % B 15.00% 10.00% N/A
Ratio of KL's share C (A*B) 3 8 11
Page 6 of 8
Suggested Answer
Annual share received from AHA D 270,000 720,000 990,000

Total billing by AHA E (D/B) 1,800,000 7,200,000 9,000,000
Working 2
Net recoveries from customers F (E-D) 1,530,000 6,480,000 8,010,000
Less: Recoveries in respect of material
(See working 3) G 3,450,000
Recoveries in respect of services
(labour & overheads) H (F-G) 4,560,000
Cost of labour and overhead incurred by AHA
(after warranty period) J (H*100/150) 3,040,000
(during warranty period) K (J*20/80) 760,000
Total cost of labour and overhead L(J + K) 3,800,000
Working 3
Mark-up charged by KL on material billed to AHA 360,000
Cost of material despatched (for use after warranty period) 2,400,000
2,760,000
Mark-up charged by AHA on material billed to customers (2,760,000*0.25) 690,000
Total billing in respect of material 3,450,000
Alternative Answer 6(a)
Savings/additional revenues if services provided by KL

Mark-up charged by AHA, from the customers on cost of
material (working 1) 690,000
Mark-up charged by AHA from KL on services provided L (K*0.3)

during warranty period (working 2) 228,000
Mark-up charged by AHA, from the customers on cost of M (H-J)

labour and overhead (working 2) 1,520,000
Total 2,438,000
Less: Additional costs and decline in revenues

Increase in cost of labour and variable overheads N ((J+K)*0.1) 380,000
(working 2)
Supervisor’s salary 480,000
Increase in other fixed overheads 720,000
1,580,000
Net savings 858,000
Working 1
Mark-up charged by KL on material billed to AHA 360,000
Cost of material ispatched (for use after warranty period) 2,400,000
2,760,000
Mark-up charged by AHA on material billed to customers 2760000*0.25 690,000
Total billing in respect of material 3,450,000
Page 7 of 8
Suggested Answer
Working 2
Domestic Industrial
Total
Customers Customers
Ratio of services provided by AHA A 20 80 100
Share of KL in % B 15.00% 10.00% N/A
Ratio of KL’s share C (A*B) 3 8 11
Annual share received from AHA D 270,000 720,000 990,000
Total billing by AHA E (D/B) 1,800,000 7,200,000 9,000,000
Net recoveries from customers F (E-D) 1,530,000 6,480,000 8,010,000
Less: Recoveries in respect of material G (see working 1) 3,450,000
Recoveries in respect of services
(labour & overheads) H (F-G) 4,560,000

(after warranty period) J (H*100/150) 3,040,000

(during warranty period) K (J*20/80) 760,000
Total cost of materials L(J + K) 3,800,000
(b) (i) It might be beneficial for Kamran Limited (KL) to focus on core business rather
than on non-core areas like after-sale service.
(ii) Ahmed Hasan Associates (AHA) might be technically more competent at
providing these services.
(iii) KL should also consider the reliability of AHA as an outside supplier of these
services. If after-sale service is a critical component of KL’s business, it might be
better to do it in-house.
(iv) There is a potential for KL to be inefficient in terms of cost control during parts
production since the company charges a cost-plus margin to AHA. There is not
much incentive for KL to control costs.
(v) The numbers provided by the cost accountant might be misleading since these are
predominantly direct costs of providing the service and possible effects on other
overheads may not have been considered.
(THE END)
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Final Examination (Transitional Scheme)

The Institute of 7 June 2017

Following information is available in respect of the above:

The following changes are expected as a result of the expansion:

The costs involved are as under:

Other relevant details are as follows:

State of the economy Growing Stable

Other related information is given below:

Cost per unit (Rs.) 25,000 30,000

The supplier of X3 normally offers the following discounts:

Quantity purchased (units) 120,000 or more 150,000 or more

The following information is available:

80% 85% 90%

(i) Actual expenses:

(ii) Production department:

(iv) Basis of allocation of support services:

Departments IT Department Other expenses

Following further details are available:

Other related information is as under:

Machine hours Labour hours

Difference of profit to be achieved through sale of combo (W-2) 433,920

Number of combos to be sold (433,920 ÷ 76.52) 5,671

W-2: Difference of profit to be achieved through sale of combos

W-3 : Total contribution margin

Variable costs per unit 63.90 79.62 97.20 32.88 23.16

Contribution margin (A– B) 757,680 596,508 452,320 653,083 656,489

W-4: Number of units sold at BT

A.2 Determination of cost per unit

W-1: Determination of overheads of each product under ABC

A.3 Budget for the year 2016-17

W-2: Production requirements

Number of liters to be produced E 4,437,500 20,312,499 11,666,665 4,083,334 40,499,998

Total liters produced F 40,499,998

Value of opening stock

Variable cost [G × 144.67(W-3)] Rs. in million 434.01 289.34 - - 723.35

----------------------- Rs. in million -----------------------

Fixed cost of sales

Opening packing inventory (J×C) 45.00 26.67 - - 71.67

Value of closing stock

Variable cost [K × 153.36(W-3)], (K×200) 162.95 488.84 255.60 116.67 1,024.06

W-3: Determination of variable costs

A.4 Additional CM exluding target profit (𝐖 − 𝟏)

W-1: Additional CM excluding target profit

W-2: Determination of Contribution Margin

Contribution margin % (126 ÷ 750) 16.8%

W-3: Increase in bad debts

W-4: Average RM Inventory/Storage costs/Creditors

Average RM inventory (3÷12÷2, 3.24÷12×4÷2) 0.125 0.54

Creditors payment period – in days 60 10

W-5: Availability of surplus funds

W-1: Determination of financing costs

A.6 Let BM-1 = x and BM-2 = y

15x + 12y = 41,400 ------------------------ Equation 1

Multiply equation 1 by 8 and equation 2 by 15

120x + 96y = 331,200 ------------------------ Equation 3

Subtracting equation 3 from equation 4

Determination of maximum quantities of x and y under original constraints:-

54y = 118,800 y = 2,200

Put the value of y in equation 3

Present options Contribution Total contribution

From equation 2 (Above)

Determination of maximum quantities under revised constraints:-

Solving equation 5 and 2

At y = 2,000 then (1,250 , 2,000)