CAF-8 (Class Test)

Skans Schools of Accountancy

CAF-8
COST and Management Accounting-Test

Question 1 Proposed Time: 32.4 Minutes

A division of Bud plc is engaged in the manual assembly of finished products F1 and F2 from bought-in
components. These products are sold to external customers. The budgeted sales volumes and prices for
Month 9 are as follows:

Product Units Rs.

F1 34,000 50.00
F2 58,000 30.00

Finished goods stockholding budgeted for the end of Month 9, is 1,000 units of F1 and 2,000 units of F2,
with no stock at the beginning of that month. The purchased components C3 and C4 are used in the
finished products in the quantities shown below. The unit price is for just-in-time delivery of the
components; the company holds no component stocks.

Product C3 C4
F1 (per unit) 8 units 4 units
F2 (per unit) 4 units 3 units
Price Rs. (each) 1.25 1.80

The standard direct labour times and labour rates and the budgeted monthly manufacturing overhead costs
for the assembly and finishing departments for Month 9 are given below

Product Assembly Finishing

F1 (per unit) 30 minutes 12 minutes
F2 (per unit) 15 minutes 10 minutes
Labour rate per hour Rs. 5.00 6.00
Manufacturing overhead cost for
the month Rs. 617,500 204,000

Every month a predetermined direct labour hour recovery rate is computed in each department for
manufacturing overhead and applied to items produced in that month.
The selling overhead of Rs. 344,000 per month is applied to products based on a predetermined percentage
of the budgeted sales value in each month.
Required:
a) Prepare summaries of the following budgets for Month 9:
i. Component purchase and usage (units and value);
ii. Direct labour (hours and value);
iii. Departmental manufacturing overhead recovery rates;
iv. Selling overhead recovery rate;
v. Stock value at the month-end. (8 marks)
b) Tabulate the standard unit cost and profit of each of F1 and F2 in Month 9. (3 Marks)
c) Prepare a budgeted profit and loss account for Month 9 which clearly incorporates the budget values
obtained in (a) above. (3 Marks)
d) Explain clearly the implications of the company’s treatment of manufacturing overheads, i.e. computing
a monthly overhead rate, compared to a predetermined overhead rate prepared annually. (4 Marks)

By: Abdul Azeem Page |1

 CAF-8 (Class Test)

Question 2 Proposed Time: 27 Minutes

A redundant manager who received compensation of Rs.80000 decides to commence business on 4 January,
manufacturing a product for which he knows there is a ready market. He intends to employ some of his former
workers who were also made redundant but they will not all commence on 4 January. Suitable premises have
been found to rent and second-hand machinery costing Rs. 60,000 has been bought out of the Rs. 80,000. This
machinery has an estimated life of five years from January and no residual value.
Other data:
1. Production will begin on 4 January and 25% of the following month’s sales will be manufactured in January.
Each month thereafter the production will consist of 75% of the current month’s sales and 25% of the
following month’s sales.
2. Estimated sales are
Units Rs.
January - -
February 3,200 80,000
March 3,600 90,000
April 4,000 100,000
May 4,000 100,000
3. Variable production cost per unit
Rs.
Direct material 7.00
Direct wages 6.00
Variable overheads 2.00
15.00
4. Raw material stocks costing Rs. 10,000 have been purchased (out of the manager’s Rs. 80,000) to enable
production to commence and it is intended to buy, each month, 50% of the materials required for the
following month’s production requirements. The other 50% will be purchased in the month of production.
Payment will be made 30 days after purchase.
5. Direct workers have agreed to have their wages paid into bank accounts on the seventh working day of
each month in respect of the previous month’s earnings.
6. Variable production overhead: 60% is to be paid in the month following the month it was incurred and
40% is to be paid one month later.
7. Fixed overheads are Rs. 4,000 per month. One quarter of this is paid in the month incurred, one half in
the following month, and the remainder represents depreciation on the second-hand machinery.
8. Amounts receivable: a 5% cash discount is allowed for payment in the current month and 20% of each
month’s sales qualify for this discount. 50% of each month’s sales are received in the following month,
20% in the third month and 8% in the fourth month. The balance of 2% represents anticipated bad debts.
Required:

(a)
(i) Prepare a cash budget for each of the first four months, assuming that overdraft facilities will be
available; (Marks 9)
(ii) state the amount receivable from customers in May; (Marks 3)
(b) Describe briefly the benefits to cash budgeting from the use of a particular type of software package.
(Marks 3)

By:Abdul Azeem Page |2