QUESTION 1 25marks

The following is an income of June and Jyoti Company, Ghorahi as on ended 31-12-2017.
Particulars Amount (Rs)
Sales revenue @ Rs 20 per unit Rs 200,000
Less: Variable cost:
Production cost @ Rs 10 per unit 90,000
Beginning inventory @ Rs 10 per unit 20,000
Ending inventory @ Rs 10 per unit (10,000)
Total variable cost of goods sold 100,000
Add: Variable selling cost @ Rs 2 per unit 20,000
Total variable costs of sales 120,000
Contribution margin 80,000
Less: Fixed cost:
Manufacturing overhead 20,000
Selling cost 30,000
Total fixed cost 50,000
Net profit 30,000
Standard fixed manufacturing overhead rate is Rs 2 per unit.
REQUIRED
a. Compute the normal capacity (5MARKS)

b. Inventories cost per unit under absorption costing and variable costing(10 MARKS)

c. Reconciled statement under absorption costing (3MARKS)

d. Income statement under absorption costing (7MARKS)

QUESTION 2 25MARKS

D-max Hair styling in Kathmandu has five barbers. Each barber is paid Rs 12 per hour and works
40-hour week and a 50-week year, regardless of the number of haircuts. Rent and other fixed
expenses are Rs 4,000 per month. Assume that the only service performed is the giving of
haircuts, the unit price of which is Rs 30.

REQUIRED

a. What is the contribution margin per haircut? 2MARKS

b. Determine the annual break-even point, in number of haircuts. 2MARKS

c. What will be the operating income if 15,000 haircuts are performed? 4MARKS
d. Suppose D-max revises the compensation method. The barbers will receive Rs 4 per hours plus
Rs 10 for each haircut. What is the new contribution margin per haircut? The annual break-even
point [in number of haircuts]? Do you suggest to revise compensation method?
8MARKS

e. Ignore requirement [c] and [d] and assume that the barbers cease to be paid by the hour but
receive commission Rs 18 for each haircut. What is the new contribution margin per haircut?
The annual break-even point [in number of haircuts]? 4MARKS

f. Refer to requirement [e]. What would be the operating income if 15,000 haircuts are
performed? Compare your answer with the answer in requirement [c]. Also suggest to the D-
max whether or not this courses of action should be adopted? 3MARKS

g. Refer to requirement [e]. If 15,000 haircuts are performed, at what rate of commission would
D-max pay to barber to the same operating income as it earned in requirement [c]?
2MARKS

QUESTION 3 20MARKS
The overheads of a factory are given below:

Items of overhead Amount Cost Drivers

Material handling expenses Rs 74,000 Quantity of materials
Quality control expenses Rs 36,800 Inspections
Manufacturing expenses Rs 46,000 Production runs
Machine operation expenses Rs 100,000 Machine hours
The summary of the overheads are reported below:

Products Outputs Materials Cost per kg of Machine hour DLH per unit
in unit in kg Materials in Rs per unit
P1 25,000 2 2.00 4 0.20
P2 40,000 3 1.50 5 0.25
P3 50,000 4 1.25 4 0.30
Wage rate per hour is Rs 20. One production run realizes 500 units in each product line and one
production run needs 4 inspections.

REQUIRED

a. Compute the Cost per unit under traditional costing approach using DMH. 5MARKS

b. Compute the Cost per unit of each product under activity based costing. 15 MARKS
 QUESTION 4 30 MARKS

The balance sheet and other operating budget of a company has been summarized below:

Balance Sheet at 31st Dec. 2015

Capital and liabilities Amount $ Assets Amount $

Equity share capital 10,00,000 Machinery and plant 7,00,000
Account payable 4,00,000 Merchandise inventory 4,00,000
Retained earning 1,00,000 Account receivable 3,76,000
Cash at bank 24,000
Total 15,00,000 Total 15,00,000

Months Nov. Dec. Jan. 2016 Feb. Mar April

Sales in 6,00,000 7,00,000 8,00,000 9,00,000 10,00,000 9,00,000
$
20% of the sales will be in cash and credit sales will be realized 50% in the month of sales, 30% in
the next month of sales and 18% in the next following next month of sales and bad debts will
amount to 2% of the credit sales. Gross profit 50% of sales. Purchases of merchandise will be
paid in the next months of purchase. Administrative and distribution cost other than
depreciation of $ 20,000 will be 25% of the gross sales value and they will be payable the month
when they become due. The company will maintain a minimum cash balance of $ 20,000 and
merchandise inventories sufficient to meet next month's sales needs. The company will buy a
machine at a cost of $ 3,50,000 on Jan. 1st 2016, and tax payable in the month of March $
1,00,000.

The company has entered into agreement with the NCC Bank for a soft loan to meet cash
deficiency. The borrowing will be in multiple of $ 5,000 and repayment in $ 1,000. The bank will
charge 12% per annum as interest on the amount of loan due.

REQUIRED

a. Cash collection and disbursement budget for 1st three month 2016. 15MARKS

b. Budgeted income statement for 1st three months. 7MARKS

c. Budgeted balance sheet on 31st March 2016. 8MARKS

1. Solution
𝑁𝑜𝑟𝑚𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 20,000
a. Normal capacity = = = 10,000 units
𝑆𝐹𝑂𝑅 2
b. Inventorial cost per unit
Under VC Under AC
Variable manufacturing Rs. 1 Rs. 10
 cost
Fixed manufacturing cost - 2
Total Rs. 10 Rs. 12
c. Reconciliation Statement under Absorption Costing

Amount (Rs.)
Net profit under variable costing 30,000
Add: Fixed value of closing stock (1,000 units @ Rs. 2,000
2)
Less: Fixed value of opening stock (2,000 units @ Rs. (4,000)
2)
Net income statement under absorption costing 28,000
d. Income Statement under Absorption Costing

Particulars Amount Amount

Sales @ Rs. 20 200,000
Less: Cost of goods sold:
Variable cost of production @ 10 90,000
Fixed cost of production @ 2 18,000
Total cost of production 108,000
Add: Opening stock @ Rs. 12 24,000
Less: Closing stock @ Rs. 12 (12,000)
Cost of goods sold before adjustment 120,000
Add: Under absorption of fixed cost 2,000 (122,000)
Gross profit 78,000
Less: Non manufacturing cost:
Variable selling cost @ Rs. 2 20,000
Fixed selling cost 30,000 (50,000)
Net income before tax 28,000

2. Solution
a. If compensation is the fixed cost, variable cost is zero.
So, CMPU = SPPU – VCPU = Rs. 30 – 0 = Rs. 30
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡
b. Break even point = 𝐶𝑀𝑃𝑈
168000
= = 5,600 haircuts
30

Fixed cost = Yearly wage payment + Rent

= (5x12x40x50+4000x12) = 120,000 + 4,800 = Rs. 168,000

c. Operating profit = ?
No. of haircuts (sales unit) = 15,000 haircuts
Operating profit = 15,000 x 30 – 168,000 = Rs. 282,000
 d. Variable cost per haircut = Rs. 10
SPPU = Rs. 30
CMPU = 30 – 10 = Rs. 2
New fixed cost = (5x4x40x50) + (4000x12) = 40,000 + 48,000 =
Rs. 88,000
𝐹𝐶 88,000
BEP = 𝐶𝑀𝑃𝑈 = = 4,400 haircuts
20
Yes, I would like to revise the compensation method because there is lower BEP
level on revise method than old compensation method.
e. New VCPU = Rs. 18
SPPU = Rs. 30
New CMPU = 30 – 18 = Rs. 12
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 𝑅𝑠.48,000
Fixed cost = = = 4,000 haircuts
𝐶𝑀𝑃𝑈 12
f. Operating profit = 15,000 x 12 – 48,000 = Rs. 132,000
Company has lower operating profit assuming all commission as variable cost.
So, company should not accept this course of action.
g. Operating profit = Rs. 282,000
SPPU = 30
Operating profit = CM – FC
or, 282,000 = 15,000 (30 – x) – 48,000
or, 426,000 = 450,000 – 15,000x
or, 15,000x = 120,000
120,000
x = = Rs. 8
15,000
3. Solution

a. Cost per unit of product under traditional techniques using machine hour as an
activity base:

Calculation of total machine hour

Product Output MH/Unit Total Machine hour
S1 25,000 4 100,000
S2 40,000 5 200,000
S3 50,000 4 200,000
Total machine hour 500,000
𝑇𝑜𝑡𝑎𝑙 𝑂𝐻 256800
Overhead per MH = 𝑇𝑜𝑡𝑎𝑙𝑀𝐻 = 500000 = 0.5136
Statement showing cost per unit under (Traditional costing)
Products S1 S2 S3
Production units 25,000 40,000 50,000
Machine hour 100,000 200,000 200,000
D. Material cost @ Rs. 4, 5.5, 5 100,000 180,000 250,000
D. Labour cost @ Rs. 4, 5,6 100,000 200,000 300,000
 Prime cost 200,000 380,000 550,000
Overhead cost @ 0.5136 per MH 51,360 102,720 102,720
Total cost 251,360 482,720 652,720
Total cost per unit (Rs.) 10.05 12.07 13.05
b. Cost per unit under ABC system:

Calculation of cost driver rate

Cost pool Amount Cost Volume of cost driver Cost driver

(Rs.) Driver rate
Material handling 74,000 Quantity 50,000+120,000+2000,000= 0.20/handling
material 370,000
Quantity control 36,800 Inspection 200+320+400 = 920 40/inspection
expenses
Manufacturing 46,000 Productio 50+80+100 = 230 200/run
expenses n run
Machine 100,000 Machine 100,000+200,000+200,000 = 0.2/MH
operation hour 500,000
c. Statement of cost per unit under ABC showing overhead allocation to each product:

Particular Cost driver rate S1: 25,000 S2: 40,000 S3: 50,000
units units units
Direct material @ Rs 4, 4.5, 5 100,000 180,000 250,000
Direct labour @ Rs 4, 5, 6 100,000 200,000 300,000
Prime cost (A) 200,000 380,000 550,000
Overhead expenses:
Material handling @ Rs 0.20/unit 10,000 24,000 40,000
Quality control @Rs 80/inspection 8,000 12,800 16,000
Manufacturing expenditure @Rs 200/run 10,000 16,000 20,000
Machine operation @Rs 0.20/MH 20,000 40,000 40,000
Total overhead (B) 48,000 92,800 116,000
Total cost (A+B) 248,000 472,800 666,000
Total cost per unit = (TC ÷ 9.92 11.82 13.32
units)
Calculation of profit per unit.

Cost per unit 9.92 11.82 13.32

Profit per unit 2.08 2.18 2.68
Selling price per unit 12 14 16
Working Notes:

a. No. of production run: ( One production run = 500 units)

S1 = 25,000÷ 500 = 50, S2 = 40,000 ÷ 500 = 80 and S3 = 50,000 ÷ 500 = 100

b. Np. of inspection: (One run = 4 inspection)

 S1 = 50x4 = 200, S2 = 80x4 = 320 and S3 = 100x4 = 400

4. Solution
Schedule 1
Merchandise Purchase Budget
Month Jan. Feb. Mar. Total Apr.
Planned sales ($) 800,000 900,000 1,000,000 2,700,000 900,000
Less:Gross profit @ 50% 400,000 450,000 500,000 1,350,000 450,000
Cost of goods sold 400,000 450,000 500,000 1,350,000 450,000
Add: Ending inventory 450,000 500,000 450,000 450,000 -
Less: Beginning inventory (400,000) (450,000) (500,000) (400,000) -
Planned purchase cost ($) 450,000 500,000 450,000 1,400,000 -

Schedule 2
Cash collection and disbursement budget
Items Jan. Feb. March Remarks
1. Beginning cash balance 24,000 23,400 20,040
2. Cash receipt/collection:
Cash sales 20% 160,000 180,000 200,000
Credit sales collection: A/R
Same month of sales 40% 320,000 360,000 400,000
Previous month of sales 24% 168,000 192,000 216,000 240,000
Previous two month sales 18% 86,400 100,800 115,200 144,000;
Total cash collection 734,400 832,800 931,200 160,000
3. Total cash available (1+2) 758,400 856,200 951,240
4. Cash disbursement:
Payment to purchase (A/P) 400,000 450,000 500,000
(Previous month purchase) 450,000
Administrative expenses (25% of sales) 200,000 225,000 250,000 AP
Purchase of Machine 350,000 - -
Payment of Tax - - 100,000
total cash disbursement 950,000 675,000 850,000
5. Required minimum cash 20,000 20,000 20,000
6. Total cash needed (4+5) 970,000 695,000 870,000
7. Surplus/deficit (3-6) (211,600) 161,200 81,240
8. Borrowing 215,000 - -
9. Repayment of loan - 158,000 57,000
10. Interest on loan paid - 3,160 1,710
11. Surplus from financing (7+8-9-10) 3400 40 22,530
12. Closing cash balance (5+11) 23,400 20,040 42,530
Working Notes:
a) Interest paid in February:
Principal can be paid = 100
 12 2
Add: Interest (100 x 100 x 12 ) = 2
Total payable = 102 = 161200 (Available fund)
161200
Principal can be paid =( 𝑥 100) = $ 158039 = $ 158000
102
12 2
Interest = (158000 𝑥 𝑥 ) = $ 3160
100 12
b) In the month of March
12 3
Interest = (57000 𝑥 𝑥 ) = $ 1710
100 12
Projected Income Statement
For the three months period ending on March, 2016
Particulars Amount ($) Amount ($)
Budgeted sales revenue 2,700,000
Less: Cost of goods sold 50% 1,350,000
Gross profit 1,350,000
Less: Operating expenses:
Depreciation (20,000 x 3 month) 60,000
Administrative cost (25% of sales) 675,000
Bad Debt (9600+11200+12800) 33,600
Interest expenses (3160+1710) 4870 773,470
Net income before tax 576,530
Less: Income tax paid 100,000
Net income 476,530

Schedule 4:
Budgeted Balance Sheet as on March 31, 2016
Liabilities and equity Amount ($) Assets Amount ($)
Equity share capital 1,000,000 Machinery 700,000
Account payable Add: New Purchase 350,000
Retained earning 100,000 Total 1,050,000
Add: Net profit 476,530 less: Depreciation 60,000 990,000
Merchandise Inventory 450,000
Account receivable 544,000
Cash 42530
Total 2,026,530 Total 2,26,530