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THE ASSOCIATION OF ACCOUNTING TECHNICIANS OF SRI LANKA

FINAL EXAMINATION – DECEMBER 2009

02-01-2010
(34) Cost & Management Accounting & Afternoon
Quantitative Techniques [2.00-5.00]
Time: 3 hours
No. of Pages: 08
• Instructions to candidates:
No. of questions: 07
(1) This paper consists of two parts I and II.
(2) All questions of both parts should be answered.
(3) Answers should be in one language, in the medium applied for, in the booklets provided.
(4) Use of calculators is permitted.
(5) Show all workings. State clearly assumptions made by you, if any.
(6) Graph paper will be provided.
(7) 100 marks.

PART I
Cost & Management Accounting (80 marks)

01. (A) (i) Distinguish between Normal Loss and Abnormal Loss in process costing.
(02 marks)

(ii) Nalin Advertising Co. Ltd. has been in the business of production and sale
of “Name Boards”. The following details about the production cost are
available for your consideration.

Material cost – per sq.ft.

Coloured name boards - Rs.275/-
Black & White name boards - Rs.225/-

Labour Cost

This could be identified as relating to three processes of production.

(1) Preparation process:

It takes ½ man hour per sq.ft. to make a board. The employees

working in this section are paid at the rate of Rs.75/- per hour.

(2) Painting Process:

It takes 2½ man hours per sq.ft. to paint a name board. The

employees working in this section are paid at the rate of Rs.112.50
per hour.

(3) Finalization Process:

In this process it takes 1 man hour per sq.ft. for finishing, final
quality check and packing. The employees working in this section are
paid at the rate of Rs.87.50 per hour.
 Variable overhead

Preparation process - Rs.25/- per sq.ft.

Painting process - Rs.40/- per sq.ft.
Finalization process - Rs.75/- per sq.ft.

The estimated fixed overhead cost is Rs.36,000/- for 6,000 man hours.

The Company has received an order from one corporate client to produce 15
name boards which includes five black and white name boards. The size of a
board ordered is 8 x 12 sq.ft.

If the Company keeps a margin of 30% on total cost, calculate the price at
which each,
(a) Coloured name board,
(b) Black and White name board,

of 8 x 12 sq.ft. should be sold. (10 marks)

(B) Zigma Ltd. has provided the following cost information of Process I relating to
a product for the month of December 2009:

Rs.
Materials (added at the beginning of the Process) 11,040
Direct labour 19,800
Production overheads 9,450

At the end of December 2009, there were 6,000 completed units, and the
Work-in-Progress was 1,200 units. Assume that there was no Work-in-Progress
at the beginning of the month.

The percentage of completion of the Work-in-Progress was as follows:

Materials 75%
Direct labour 50%
Production overheads 25%

Using the above information, You are required to prepare,

(a) Production cost and statement of evaluation.

(b) Process I Account for the month of December 2009. (08 marks)
(Total 20 marks)

02. (A) Briefly explain the following concepts relating to short term decision making:

(a) Relevant Cost

(b) Sunk Cost (02 marks)

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(B) Kapila is the owner of a Tea Factory. He has been producing three types of tea-
products BOP, FBOP & FFSP using three different machines, each of which has
capacity to produce 7,500 kg per day. The following information is available
about the three products, for your consideration.

Products BOP FBOP FFSP

Raw Leaves (green leaf) required
4.5Kg 6 Kg 5 Kg
to produce 1kg of Tea
Normal loss in the process from
4% 6% 5%
input

Labour hours required to

90 minutes 105 minutes 72 minutes
produce 1kg of tea

Market price per 1 kg of tea (Rs.) 475/- 650/- 500/-

Turnover for a day (Rs.) 1.9 million 1.625 million 1.625 million

Prevailing labour rate is Rs.65/- per hour and Kapila pays Rs.60/- for 1kg of raw
leaves purchased. Variable overhead rate per labour hour is Rs.20/-.

Due to a labour strike going on, supply of raw leaves (green leaf) has been
significantly reduced. As a result maximum raw leaves (green leaf) that could be
obtained for a day is limited to 45,000 kgs. Kapila expects that this strike will
continue at least for another three months.

You are required to,

(a) Identify the product mix which will maximize the contribution. (07 marks)

(b) Prepare the statement of contribution for a day based on the answer you
have arrived for (a) above. (04 marks)

(c) State two (2) qualitative factors to be considered when making the
decision on the product mix. (02 marks)

(C) Beta Ltd. produces a product which sells at Rs.160/- per unit. Annual fixed cost
of the Company is Rs.640,000/- and the annual sales quantity is 25,000 units.
The contribution to sales ratio of the Company is 40%.

You are required to calculate,

(a) Breakeven point in units.

(b) Margin of safety in rupees.

(c) Number of units to be sold to earn an annual profit of Rs.200,000/-.

(04 marks)
(Total 19 marks)

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03. (A) Briefly explain how standard costing could be used as a controlling
technique / tool. (02 marks)

(B) Standard cost of manufacturing one unit of product B is as follows:

Direct Material

Material “P” - 2kg @ Rs.10/- per kg

Material “Y” - 1.5 Liters @ Rs.4/- per Liter.

Direct Wages - 5 hours @ Rs.6/- per hour.

Budgeted Variable overhead for a month – Rs.60,000/-

Budgeted Fixed overhead for a month – Rs.120,000/-

The Company has planned to produce 10,000 units of product B per month and
the standard selling price of one unit of product B is Rs.80/-.

The following information relating to actuals is available for the month of

December 2009:

Number of units manufactured & sold - 9,000

Selling price per unit - Rs.82/-

Direct material consumed

- Material “P” – 19,000 Kg @ Rs.11/- per kg

- Material “Y” – 10,100 Liters @ Rs.4.20 per Liter

28,500 hours of direct labour were used and paid at the rate of Rs.6.20 per
hour. Actual variable and fixed overheads for the month of December 2009 were
Rs.52,500/- and Rs.132,000/- respectively.

Your are required to calculate,

(a) Direct material price variance for material “P” and “Y”.
(b) Direct Labour rate variance and efficiency variance.
(c) Variable overhead total variance.
(d) Fixed overhead expenditure variance.
(e) Sales margin price variance.
(f) Sales margin volume variance. (09 marks)
(Total 11 marks)

04. (A) The following terms are commonly used in project evaluation. Briefly explain each
of the terms:
(i) Payback period.
(ii) Time value of money.
(iii) Cost of capital. (03 marks)

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(B) KJ Enterprises (Pvt) Ltd. has been in the business of renting out showroom
space. For this purpose KJ Enterprises (Pvt) Ltd. acquires buildings on long
term leases. Managing Director of KJ Enterprises (Pvt) Ltd. is considering the
financial viability of the following project:

A building is available in Colombo which could be taken for a period of six years
on lease, from 01st January 2011. Ramesh who is the owner of this building has
informed that annual lease rent for a year for the building is Rs.5 million for the
year 2011, and it will be increased by 10% per annum over previous year lease
rent every year until 2016. Annual lease rent should be paid on or before 31st
December of each year.

Further, Ramesh has informed that he needs Rs.5 million in advance as a

deposit at the time of signing the lease agreement. It is expected that the
agreement will be signed on 01st January 2011. This will be refunded at the end
of the lease period.

Further, if KJ Enterprises (Pvt) Ltd. takes this building on lease, Rs.2 million
should be spent by them at the time of signing the agreement to meet other
expenses.

This building could be rented out for ten show rooms. KJ Enterprises (Pvt)
Ltd. has already negotiated and found ten customers to whom the building could
be rented out.

Out of the ten showroom spaces, six show room spaces could be rented out with
effect from 01st January 2011, while the balance four show room spaces could be
rented out with effect from 01st January 2012. All prospective tenants have
agreed to stay and continue till 31st December 2016. The following have been
agreed with all ten tenants by the Company.

Monthly Rent - Rs. 60,000/- per month for the year 2011 and this will
(for a show room) be increased annually by 10% over the previous year
rent. Rent receivable for a year ending 31st December is
expected to be collected at the end of each year.

Rent deposit - Rs.360,000/- each should be deposited with KJ

Enterprises (Pvt) Ltd. by all ten customers on 01st
January 2011. This will be refunded when the rent
period is over.

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 The other operating and administration expenditure for the six year period is as
follows:
Rs.
Year
( million)
2011 0.90
2012 1.20
2013 1.35
2014 1.50
2015 1.80
2016 1.20

Cost of capital of the Company is 12%.

Discounting factor at 12% is as follows:

Year Discounting factor
1 .893
2 .797
3 .712
4 .636
5 .567
6 .507
7 .452
8 .404

Your are required to, advise the Managing Director of the Company whether this
project is financially viable, using the NPV method. (10 marks)
(Total 13 marks)

05. (A) Briefly explain zero based budgeting and state two advantages and two
disadvantages of zero based budgeting. (05 marks)

(B) Dammika Ltd. has been in the business of buying & selling sugar. The following
information is available from Dhammika Ltd. for your consideration:

The Company sells sugar on cash as well as on credit. Expected turnover of the
Company for the month of January 2010 is Rs.12 million. Turnover is expected
to increase by 20% over and above previous month’s turnover during the period
February 2010 to March 2010. Turnover for the months of April, May & June
2010 are expected to be Rs.21 million, Rs.23.1 million and Rs.24.5 million
respectively. 70% of sales are credit sales and the Company has been offering
30 and 60 days credit to its customers. Customers to whom 60% of the credit
sales are made, are given a credit period of 30 days whereas customers to whom
40% of the credit sales are made, are given a credit period of 60 days.

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Purchase cost is equal to 75% of the turnover. The practice of the Company has
been to purchase the stocks required for budgeted sales in a given month, one
month in advance. Suppliers of the Company have given 30 days credit to the
Company.

The Company has a plan to purchase a reconditioned delivery van for cash
during the month of June 2010 for a consideration of Rs.500,000/-.

1% of the turnover should be paid to the provincial revenue authority being the
business turnover tax. BTT liability of each quarter should be paid on or before
15th of the following month after the relevant quarter.

Details pertaining to expected wages and overhead costs are given below.

Wages Overheads
Rs. (million) Rs. (million)
January 2010 1.8 0.75
February 2010 2.0 0.90
March 2010 3.8 1.20
April 2010 1.4 1.50
May 2010 1.7 2.10
June 2010 2.0 2.70

The Company pays wages for the month on the 10th of the subsequent month
and enjoys one month credit period for overhead payments.

The expected cash balance on 01st April 2010 is Rs.3,725,000/-.

You are required to prepare, cash budget for Dammika Ltd. for the quarter
ended 30th June 2010. (12 marks)
(Total 17 marks)

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 PART II
Quantitative Techniques (20 marks)
06. With Valentine day only a few weeks away the manager of Custom Jewellery
Company expects that the biggest demand is for Gold Bracelets and Gold Earrings.
There are three(03) full-time goldsmiths who work forty(40) hours each per week.
These men can produce a bracelet with three(03) man-hours of labour and a set of
earrings with five(05) man-hours of labour.

The manager has a contract with a supplier for 4,000 grams of gold per week until
Valentine day. Each bracelet will require 200 grams of gold, while a set of earrings
will require 80 grams of gold. The contribution is Rs.3,000/- from each bracelet and
Rs.4,000/- from each set of earrings.

The manager knows from past experience that the number of sets of earrings that he
will sell during this event will not exceed 20 per week. However, he can sell all the
bracelets that his employees can produce.

You are required to,

(a) Formulate a Linear Programming model to determine how many bracelets and
sets of earrings should be produced each week in order to maximize
contribution. (04 marks)

(b) Solve this problem using the Graphical Method. (05 marks)

(c) If the manager of the company is able to contract with the supplier for 4,800
grams of gold per week until Valentine day, how would it affect the present
optimum solution? (04 marks)
(Total 13 marks)

07. A popular retailer in the Super Market, Nugegoda buys fish from wholesale dealers in
Pettah and stores in a cool tank. He purchases fish once a week at a fixed price since
he knows well wholesale dealers for a long time. His purchasing price is Rs.250/- per
kilogram and he sells at Rs.350/- per kilogram. Any leftover fish at the end of the
week is sold for animal food at Rs.50/- per kilogram.

According to the sales records for the past 100 weeks, demand has been as follows:
Weekly Demand (Kg) Number of weeks
1,000 10
1,100 20
1,200 20
1,300 30
1,400 10
1,500 10
100

(a) Construct a payoff table for various demands and stocking quantities.
(03 marks)
(b) Determine the optimum quantity of fish to be stocked in order to maximize the
contribution. (02 marks)

(c) If the retailer can obtain perfect information concerning the following weeks
demand for fish, what would be the value of perfect information? (02 marks)
(Total 07 marks)
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