MANAGEMENT ACCOUNTING

Suggested Answers
Final Examination (Transitional Scheme) – Summer 2017

Ans.1 Computation of working capital requirements after expansion:

Revised
Rs. in 000'
Current assets
Raw material inventory (3,300×420,000×60/360) 231,000
Work in process
Raw material inventory (3,300×420,000×15/360) 57,750
Direct labour (1,500×420,000×15/360×0.5) 13,125
Manufacturing overheads (2,100(W-1)×420,000×15/360×0.5) 18,375
Finished goods inventory (7,250(W-2)×420,000×30/360) 253,750
Packing material (350×420,000×30/360) 12,250
Debtors (420,000×0.2×12,180×90/360) 255,780
Minimum cash balance required 4,000
846,030
Current liabilities
Creditors - materials ballistic nylon (3,300/1.1)×(420,000×30/360) (105,000)
Creditors - packing materials (350×420,000×30/360) (12,250)
Overheads (3,140(W-3)×420,000×30/360) (109,900)
Sales tax (12,180/1.16×0.16)×(420,000×30/360) (58,800)
(285,950)
Net working capital required 560,080
Existing working capital 489,500
Increase in working capital required 70,580

WORKINGS:
W-1: Cost of manufacturing overheads Rupees
Fixed manufacturing overheads [{(1,850×300,000)+75,000,000}÷420,000] 1,500
Variable manufacturing overheads 600
2,100

W-2: Cost of finished goods inventory Rupees

Cost of raw material 3,300
Direct labour 1,500
Manufacturing overheads W-1 2,100
Packing material 350
7,250

W-3: Cost of total overheads Rupees

Manufacturing overheads 2,100
Administration overheads (420×300,000/420,000) 300
Selling and distribution – fixed (280×300,000/420,000) 200
Selling and distribution – variable (existing) 500
Selling and distribution – variable - additional (16,800,000/420,000) 40
3,140

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 MANAGEMENT ACCOUNTING
Suggested Answers
Final Examination (Transitional Scheme) – Summer 2017

Ans.2 (a) Quantity Schedule - Chemical X

Maximum production of Chemical X A 1,200,000
Total production including by product P B = A/0.75 1,600,000
Production of By-product P C=B×0.25 400,000
Extract of Chemical X D=B/2 800,000
Chemical C E=D 800,000

Quantity Schedule - Chemical Y

Extract of Chemical Y F=B/2 800,000
Chemcial D G=F×3 2,400,000
Total input H 3,200,000
Normal loss H×5% (160,000)
Output of Chemcial Y I 3,040,000

Quantity Schedule of Material A and B

Extract of Chemcial X and Chemcial Y J=D+F 1,600,000
Residuct Z J/.9×10% 177,778
K 1,777,778
Evaporation loss K/.8×20% 444,445
Before evaporation loss L 2,222,223

Process I: Total joint costs Quantity Cost / litre Total (Rs.)

Material A (L/5×3) 1,333,334 170 226,666,780
Material B (L/5×2) 888,889 145 128,888,905
2,222,223 355,555,685
Evaporation loss at 20% (444,445)
1,777,778
Residue Z (177,778) 5 888,890
1,600,000
Conversion costs L 2,222,223 50 111,111,150
Total joint costs 467,555,725

Allocation of total joint costs Chemcial X Chemical Y Total (Rs.)

Sale proceeds A×3,600/10, I×900/2 432,000,000 1,368,000,000 1,800,000,000
Further processing costs
Material C & D E×225, G×280 180,000,000 672,000,000 852,000,000
Conversion cost - process II B×40, H×40 64,000,000 128,000,000 192,000,000
Packing cost A/10×50, I/2×30 6,000,000 45,600,000 51,600,000
Proceeds from sale of by - product (residue Z) C×40 (16,000,000) - (16,000,000)
Total costs 234,000,000 845,600,000 1,079,600,000
Net realisable value at split off point M 198,000,000 522,400,000 720,400,000
Allocation of Joint Cost on the basis of net realisable
value 128,506,432 339,049,293 467,555,725
Gross profit 69,493,568 183,350,707 252,844,275

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 MANAGEMENT ACCOUNTING
Suggested Answers
Final Examination (Transitional Scheme) – Summer 2017

(b) Rs.
Sale value / litre 900/2 450.00
Cost per liter of product Y - Process II (845,600,000/3,040,000) 278.16
Allocation of total joint cost to Product Y (467,555,725/3,040,000) 153.80
431.96
CM per litre if additional liters of Y is produced A 18.04

Capacity 8,000,000
Liters processed
In process I [from requirement (a)] 2,222,223
In process II [1,600,000(Product X)+3,200,000(Product Y)] 4,800,000
7,022,223
Capacity available for processing B 977,777

Output product Y [from requirement (a)] C 3,040,000

Material processed - excluding process 2 for material X
[2,222,223+3,200,000] D 5,422,223
Additional units of Product Y could be produced and sold E=B×C/D 548,197
Additional CM from sale of Product Y A×E Rs. 9,889,474

Ans.3 (a) Option 1 Option 2

Existing
Piece wage Bonus plan
Rupees Rupees Rupees
Sales of good units ((W-1) × 900) 68,400,000 72,000,000 72,000,000
Sales of rejected units ((W-1) × 250) 1,000,000 833,333 1,276,595
69,400,000 72,833,333 73,276,595
Material cost (Units put into process (W-1) × 540) 43,200,000 44,999,998 45,957,445
Labor cost (25,000×556(W-2), 80,000(W-1)×185, 25,000×459(W-2)) 13,900,000 14,800,000 11,475,000
Labor efficiency bonus (80,000(W-1) × 20) - - 1,600,000
Variable overhead (100,000,90,833.33,82,553.19 (W-
2)×40) 4,000,000 3,633,333 3,302,128
61,100,000 63,433,331 62,334,573
Contribution Margin 8,300,000 9,400,002 10,942,022

Conclusion:
Based on the above, the profitability of the company is maximized under option 2.

W-1: Determination of sale of good and rejected units

Option 1 Option 2
Existing
Piece wage Bonus plan
Labor hours per unit 1.25 1.09 0.97
1.25×70%/80% 1.25×70%/90%
Total capacity 80,000 91,743.12 103.092.78
(100,000÷1.25) (100,000÷1.09) (100,000÷0.97)
Capacity to produce good units (95%, 96%, 94%) 76,000 88,073.40 96,907.21
Units could be sold (maximum limit = 80,000) 76,000 80,000 80,000
Units to be put in the process 80,000 83,333.33 85,106.38
(80,000÷0.96) (80,000÷0.94)
Rejected units 4,000 3,333.33 5,106.38

W-2: Determination of number of labors required

Total labor hours utilized 100,000 90,833.33 82,553.19
(80,000×1.25) (83,333.33×1.09) (85,106.38×0.97)
No. of labors required 556 505 459
(100,000÷180) (90,833.33÷180) (82,553.19÷180)

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 MANAGEMENT ACCOUNTING
Suggested Answers
Final Examination (Transitional Scheme) – Summer 2017

(b) Option 1 Option 2

Piece wage Bonus plan
Rupees Rupees
Total production capacity [from requirement (a)] 91,743.12 103,092.78
Production capacity at 80% (in units) 73,394.50 82,474.22

Fixed cost per unit at 80% capacity (2,000,000÷73,394.52, 82,474.22) 27.25 24.25
Variable cost per unit (W-1) 782.50 763.22
Total cost 809.75 787.47

Bid price at 5% of sale value (809.78,787.51÷0.95) 852.37 828.92

W-1: Variable cost per unit

Variable cost [from requirement (a)] 63,433,331 62,334,573
Less: Sale proceeds from sale of rejected units [from requirement (a)] (833,333) (1,276,595)

62,599,998 61,057,978

Number of goods units produced 80,000 80,000

Net variable cost per unit 782.50 763.22

Ans.4 Sales price Rs.40,000 Sales price Rs.37,500

Market demand A 2,500,000 3,000,000 2,500,000 3,000,000
Market share B 4% 4% 5.5% 5.5%
Sale volume (A×B) 100,000 120,000 137,500 150,000

-------------------------- Rs.--------------------------
Sales price per unit 40,000 40,000 37,500 37,500
Less: Variable cost per unit
Material (25,000×0.4+30,000×0.6),×0.98,×0.96) 28,000 27,440 27,440 26,880
Labor and overheads 4,500 4,500 4,500 4,500
(32,500) (31,940) (31,940) (31,380)
Contribution margin per unit 7,500 8,060 5,560 6,120

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

Contribution margin (sales volume × CM per unit) 750 967 765 918
Depreciation expense (2,500×0.9/15) (150) (150) (150) (150)
Fixed cost other than depreciation (180) (180) (200) (200)
Net profit 420 637 415 568

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

Working capital required (sales volume ÷ 1,000×12) 1,200 1,440 1,650 1,800
Capital investment 2,500 2,500 2,500 2,500
Capital employed 3,700 3,940 4,150 4,300

Estimated rate of return (Net profit ÷ capital employed) 11.35% 16.17% 10.00% 13.21%
Probability (Demand) 0.70 0.30 0.70 0.30
Expected return 12.80% 10.96%
(11.35%×0.7+16.17%×0.3) (10%×0.7+13.21%×0.3)

Conclusion: The price of Rs. 40,000 is more appropriate.

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 MANAGEMENT ACCOUNTING
Suggested Answers
Final Examination (Transitional Scheme) – Summer 2017

Ans.5 Cost of production Rupees

Material
First 10 Batches 10×64,800 648,000
Next 40 Batches 40×64,800×1.06/1.08 2,544,000
Direct labour
Normal hours 7,000×200 1,400,000
Overtime hours 1,606×200×1.6 (W-1) 513,920
Overheads
Normal hours 7,000×250 1,750,000
Overtime hours 1,606×250×1.4 562,100
Total cost of production 7,418,020

Order price at a margin of 25% of the selling price (7,418,020/0.75) 9,890,693

Unit price (9,890,693/2,500) 3,956

W-1: Overtime hours at 90% learning curve Hours

Available normal hours 7,000
Hours required for 50 batches 4,126(W-2)+(160(W-2)×28) 8,606
Overtime hours 1,606

W-2: Hours required for 22nd batch Hours

Hours required at 90% (W-3) learning curve for 22 batches 22×300×22-0.152 4,126
Hours required at 90% (W-3) learning curve for 21 batches 21×300×21-0.152 3,966
160
W-3: Learning curve %:
Batch No. Required Hours Cumulative hours Av. hours per batch Learning curve %
1 300 300 300
2 240 540 540÷2=270 270/300×100=90%
3 221
4 211 970 970÷4=243 243/270×100=90%

Ans.6 Total *Best combination (from cost point of view) Selling Total Contribution
output Units Cost (Rs. in '000) price sales margin
units X Y X Y Total (Rs.) ---- Rs. in ‘000 ----
25,000 25,000 700 700 120 3,000 2,300
50,000 50,000 1,500 1,500 120 6,000 4,500
75,000 75,000 2,160 2,160 110 8,250 6,090
100,000 75,000 25,000 2,160 700 2,860 100 10,000 7,140
125,000 75,000 50,000 2,160 1,500 3,660 90 11,250 7,590
150,000 75,000 75,000 2,160 2,400 4,560 80 12,000 7,440
175,000 100,000 75,000 3,160 2,400 5,560 70 12,250 6,690
200,000 100,000 100,000 3,160 3,700 6,860 60 12,000 5,140

* Best combinations are made on the basis of incremental cost as computed below:
Factory X Factory Y
Cumulative Cumulative
Total output Total Incremental Total Incremental
incremental incremental
units costs costs costs costs
cost cost
--------------------------------------- Rs. in '000 ---------------------------------------
Zero 1,040 1,300
25,000 1,850 810 810 2,000 700 700
50,000 2,570 720 1,530 2,800 800 1,500
75,000 3,200 630 2,160 3,700 900 2,400
100,000 4,200 1,000 3,160 5,000 1,300 3,700

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 MANAGEMENT ACCOUNTING
Suggested Answers
Final Examination (Transitional Scheme) – Summer 2017

Conclusion:
Based on the above, output level of 125,000 would maximise the profit of the company i.e., 7,590
– 2,340 = 5,250

(The End)

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