Cost and Management Accounting Suggested Answers Certificate in Accounting and Finance – Autumn 2014

Ans.1

Ababeel Foods Cooking department production and cost for June 2014

Opening WIP Material Labour Overheads (20,000*1.2)

Process account - Cooking department Rs. in Kg. '000' 30,000 (W-2)9,094 Normal loss: 420,000 50,000  weight loss 20,000  rejection 24,000 Abnormal loss:  weight loss  rejection Transferred out Closing WIP

W-1: Normal and abnormal losses: Total loss

Weight loss: Opening WIP Input for the month Transferred to finishing department Closing WIP Total loss Weight loss (450,000-440,000) Rejection loss (balancing)

7,700 11,550

693

(W.1) (W.1) (W.2) (W.2) (W.2)

2,300 1,450 3,750 362,000 65,000 450,000

829 88,328 13,244 103,094

Normal loss (Cooking loss at 2% & rejection loss at 3% of input) Kg.

Opening WIP Cost added Normal rejection valued @ Rs. 60 per kg Total cost

Abnormal loss (Balancing)

30,000 420,000 450,000 (362,000) (65,000) 23,000 10,000 13,000 23,000

(450,000-65,000)×2% (450,000-65,000)×3%

W-2: Cost and equivalent quantity:

Cost per kg.

(W.1) (W.1)

103,094

450,000

Rs. in '000'

Kg.

7,700 11,550 19,250

2,300 1,450 3,750

Material cost 1,288*2.2 20,000*2.2 11,550*60 (A)

(A×1,000)÷(B)

Conv. Total cost cost Rs. in '000' 6,260 2,834 9,094 50,000 44,000 94,000 (693) (693) 55,567 46,834 102,401

129.0

Rupees 115.0

Equivalent kg. Finished goods Closing WIP (100% to material and 65% to conv.) Total abnormal loss (100% to material and 80% to conv.) Total equivalent quantity and cost

(B)

Material

Conv.

362,000 65,000 3,750 430,750

362,000 42,250 3,000 407,250

244.0 Total cost (Rs. in ‘000) 88,328 13,244 829 102,401

Page 1 of 6

Cost and Management Accounting Suggested Answers Certificate in Accounting and Finance – Autumn 2014

Ans.2

(a)

Auto Industries Limited Profit statement

Sales Variable cost of sales Contribution margin Fixed cost Net profit (b)

(125+25), 150*1.3*0.95 (150*80%), 120*90%*1.3) (125×20%), 25+5+ (40*15%)

Break-even sales Margin of safety

Ans.3

Current Proposed Rs. in million 150.00 185.25 (120.00) (140.40) 30.00 44.85 (25.00) (36.00) 5.00 8.85 148.70 36.55

(185.25÷44.85)×36 (185.25-148.7)

Omega Limited Net present value of the project Year 0 Land (40.00) Factory building (10.00) Plant installation Loan Working capital Sales (10% growth) Cost of goods sold (8% growth) Royalty (3% of sales) Interest on loan Net cash flows (50.00) PV factor at 12% 1.00 Present value (50.00) Net present value of the project

W.1

1

2 3 4 5 Cash inflows/(outflows) – Rs. in million (20.00) (100.00) 50.00 (15.00) 300.00 330.00 363.00 399.30 W.1 (195.00) (210.60) (227.45) (245.64) (9.00) (9.90) (10.89) (11.98) (85.00) 96.00 109.50 124.66 141.68 0.89 0.80 0.71 0.64 0.57 (75.65) 76.80 77.75 79.78 80.76

6 70.00 15.00 10.00 (50.00) 15.00 439.23 (265.30) (13.18) 220.75 0.51 112.58 302.02

Cost of goods sold: Cost of own production (Including depreciation) Depreciation – factory building Depreciation – Plant

(300×80%×90%) (30×50%)÷5 (100×90%)÷5

Rs. in million 216.00 (3.00) (18.00) 195.00

Page 2 of 6

Cost and Management Accounting Suggested Answers Certificate in Accounting and Finance – Autumn 2014

Ans.4

(a)

(b)

Actual direct material cost Standard material cost Un-favorable material usage variance Un-favorable material price variance

Direct labour variances 1

2

(c)

3

4

(a)

Rupees 17,000,000 820,000 600,000 18,420,000 Favorable/ (Adverse)

Direct labour rate variance (Standard rate per hour-Actual rate per hour)*Actual hours [(150/1.25)-(16,250,000/130,000)]*130,000

(650,000)

Direct labour efficiency variance (Standard hours-Actual hours)*Standard rate per hour (100,000*1.25)-130,000)*120

(600,000)

Overhead variances 1 Overhead spending variance Standard variable overheads for actual hours Standard fixed overheads Total standard overheads Total Actual overheads 2

Ans.5

100,000*170

130,000*90 (W-1)

11,700,000 2,560,000 14,260,000 15,500,000 (1,240,000)

Variable overhead efficiency variance (Standard hours-Actual hours)*Standard rate per hour (125,000-130,000)*90

(450,000)

Fixed overhead efficiency variance (Standard hours used-Actual hours used)*Standard rate per hour (125,000-130,000)*20

(100,000)

Fixed overhead capacity variance (Normal capacity - Actual capacity used)*Standard fixed rate (128,000-130,000)*20

40,000

W-1: Fixed and variable overheads rate per direct labour hour Standard total overheads rate per labour hour 137.5/1.25 Standard fixed overhead rate per labour hour 2,560,000/128,000 Standard variable overhead rate per labour hour Rs.

110.00 20.00 90.00

Non-financial considerations relevant to make or buy decision: Risks of outsourcing work: (i) Supplier may produce items to a lower standard of quality. (ii) The supplier may fail to meet delivery dates and the buyer may dependent on the supplier to commit onward delivery to its buyer. In case of buying of a component, production process of the end-product may be held up by a lack of component. Benefits of outsourcing work: (i) Outsourcing work will enable the management to focus all of its efforts on those aspects of operation the entity does best. (ii) The external supplier may have specialist expertise which enables it to provide outsourced products more efficiently and at a cheaper price.

Page 3 of 6

Cost and Management Accounting Suggested Answers Certificate in Accounting and Finance – Autumn 2014

Ans.5

(b)

Alpha Limited Production/import plan to maximise AL's profit Capacity utilisation

Machine hours (A)

Sales of units to be produced Sales of units to be imported Total sale units

(B) (C)

Product-A 240,000

Product-B 225,000

Product-C 270,000

30,000 12,000 42,000

25,000 10,000 35,000

22,500 4,000 26,500

Rupees in million Variable Cost of production: Direct material Direct labour overheads Total cost

Cost per produced unit

(D)

F (D÷B)

48.00 45.00 33.00 126.00

31.25 40.00 25.00 96.25

40.50 56.25 29.25 126.00

4,200.00

Rupees 3,850.00

5,600.00

Rupees in million Cost of imports: Existing cost of imported finished goods: Bulk discount offered Discounted price of imported goods

Cost per imported unit Loss per unit on imports

(F)

G (F÷B) Rs. (F-G)

Production Plan: Machine hours per unit H (A÷B) Loss per machine hour on imports Rs. Production priority to save loss on imports Production from available hours of 735,000 in sequence of the above priority: Product-A Units demand Hrs. utilized (42,000×8) Product-B Units demand Hrs. utilized (35,000×9) Product-C Units from remaining hrs. Remaining hrs, [735-336-315] Import plan: Product-C: Demand exceeding production Total units

(26,500-7,000)

68.40 15% 58.14

47.00 10% 42.30

26.88 12% 23.65

4,845.00

Rupees 4,230.00

5,912.00

(645.00)

(380.00)

(312.50)

8.00 (80.63) 1st.

9.00 (42.22) 2nd.

12.00 (26.04) 3rd.

42,000 336,000 35,000 315,000 7,000 84,000

42,000

35,000

19,500 26,500

Page 4 of 6

Cost and Management Accounting Suggested Answers Certificate in Accounting and Finance – Autumn 2014

Ans.6

Modern Engineering Works Journal entries Date

Particulars

Debit Credit Rs. in '000 10,000 31,000 41,000

1

Work in process Job # 101 Work in process Job # 202 Raw material (Raw material consumed for jobs)

2

Work in process Job # 101 Work in process Job # 202 Payroll (Direct labour cost allocated to jobs)

5,000 8,000

Work in process Job # 101 5,000/100*25 Work in process Job # 202 8,000/100*25 Factory overheads applied (Overheads applied to the jobs @ Rs. 25 per direct labour hour)

1,250 2,000

Factory overheads applied Cost of sales – overhead under applied (4,000–3,250) Factory overheads control (Transfer of applied factory overheads to control a/c and under applied overheads charged to cost of sales)

3,250 750

3

4

5

6

7

Finished goods (Job # 101) (15,000+10,000+5,000+1,250)*3,840/4,000 Damaged goods (at NRV) Profit and loss account (damaged goods cost exceeding NRV) (31,250×160/4,000)-500 Work in process Job # 101 (WIP of Job order # 101 transferred to finished goods) Cost of sales Finished goods (Finished goods of Jobs # 101 transferred to cost of sales) Finished goods (31,000+8,000+2,000)/(2,000+3,000*0.7)*2,000 Work in process Job # 202 (Units fully completed for Job # 202 transferred to finished goods)

13,000

3,250

4,000

30,000 500 750 31,250 30,000 30,000

20,000 20,000

Page 5 of 6

Cost and Management Accounting Suggested Answers Certificate in Accounting and Finance – Autumn 2014

Ans.7 (a)

(i)

Incremental cost

An incremental cost is the additional cost that will occur if a particular decision is taken. Provided that this additional cost is a cash flow. Example: To produce 1,000 units, a company incurred variable cost of Rs. 1.2 million. At a normal capacity of 2,000 units, fixed cost incurred was Rs. 0.6 million. The incremental cost of making one extra unit would be Rs. 1,200 and it would not affect the fixed cost.

(ii)

Avoidable and unavoidable costs

An avoidable cost could be saved (avoided), depending whether or not a particular decision is taken. An unavoidable cost is a cost that will be incurred anyway. Example: A company is paying Rs. 0.5 million annually for a warehouse on a short term lease and incurring an annual cost of Rs. 0.4 million on maintenance and security of the warehouse. One year of the lease is remaining and the warehouse is no more required. The rental cost of the warehouse is unavoidable cost; therefore, it should be ignored while taking any decision. However, by closing down the warehouse the company can avoid annual maintenance and security costs of Rs. 0.4 million.

(b)

Salman Limited Allocation of overheads and overheads absorption rate Allocation basis Direct labour Direct material Indirect labour Indirect materials Factory rent Power Depreciation

Floor area Kilowatt hrs. Machine hrs.

Total 1,340 1,515 3,500

Allocation of service departments cost: SD-1 30:65:5 SD-2 55:35:10 SD-1 30:65:5 SD-2 55:35:10

Allocation basis Machine/D. labour hours Overhead absorption rate per hour

Rs.

PD-A 1,900 900 670 758 1,925 6,153

PD-B Rs. in 000 600 1,100 536 568 1,225 4,029

178 211 12 1 6,555

386 134 25 1 4,576

Machine hrs.

D. labour hrs.

19,250 340.52

30,400 150.53

SD-1

SD-2

-

50 150 67 47 280 594

20 55 67 142 70 354

(594) 39 (39) 0 -

30 (384) 2 (2) -

800×38

(THE END)

Page 6 of 6