CAF-8 (Class Test)

SKANS SCHOOL OF ACCOUNTANCY

COST & MANAGEMENT ACCOUNTING TEST – 1
Factory overheads and learning Curve
Total Time allowed: 47 minutes Total Marks: 26
Question 1 Proposed Time: 27 Minutes
Zaheer Limited (ZL) is preparing its budget for the year ended 31st December 2019. The
company has two production departments, Department L and Department M, and two service
departments, which are the storeroom and canteen. The estimated overheads costs for the
year ending 31 December 2019 are:
Rs.
Factory rent 52,000
Factory premises insurance 6,700
Machinery depreciation 8,800
Machinery insurance 2,400
Security costs 6,200
Supervisor’s salaries 44,000
Storeroom costs 12,000
Canteen costs 15,600
Total 147,000

The following information is also relevant:

Department L Department M Storeroom Canteen Total
Floor area (Sq. meters) 12,500 7,500 3,500 2,500 26,000
Machinery value (Rs.) 30,000 22,500 10,000 4,500 67,000
No. of supervisors 2 3 - - 5
No. of employees 12 15 3 3 33
Time spent by
Storeroom (%) 70 30 - - 100
Direct labour hours 25,000 31,200
Annual Production units 10,000 10,000

Required:
a) Calculate departmental overheads absorption rate by using suitable base. (12)
b) Calculate product cost of a product which is manufactured from department L and then
in department M and has following cost details: (3)
Department L Department M
Direct material cost per unit Rs. 25 Rs. 35
Direct labour hours per unit 3 4
Wages Rate per hour Rs. 15 Rs. 15

By: Abdul Azeem Page |1

 CAF-8 (Class Test)

Question 2 Proposed Time: 19.8 Minutes

Sialkot Sports is manufacturing new cricket balls for a tournament. It is estimated that
400,000 units of the new ball will be sold for Rs. 450 per ball and production will be in batches
of 25,000 balls throughout the expected life of balls. The direct labour cost is expected to
reduce due to the effects of learning for the first 8 batches produced. Thereafter, the labour
cost 9per batch) would remain same as that of 8 th batch. The direct labour cost of the 1st
batch of 25,000 balls is expected to be Rs. 4,000,000 and 80% learning effect is also expected
to occur. There are no fixed costs that there are specific to the balls.

Required:
(i) Calculate Contribution Margin to be earned from sale of the product over its
lifetime. (07)
(ii) Due to the low lifetime product volume of 400,000 units, the company now
believe that’s learning may continue throughout its entire life. Calculate the rate
of learning required (to the nearest whole percentage) to achieve a lifetime
product required contribution of Rs. 1,600,000, assuming that a constant rate of
learning applies throughout the life of cricket balls. (04)

By:Abdul Azeem Page |2