SKANS SCHOOL OF ACCOUNTANCY

COST & MANAGEMENT ACCOUNTING

MOCK EXAM
Total Marks: 100 marks Time allowed: 3 hours 15 minutes
INSTRUCTIOS
 Each new question shall be started from a new page. Otherwise question will not be checked.
 Using any pen other than black shall result in cancellation of paper.
 Writing page number on top of the page is compulsory for the facilitation of marking.

Question No. 1 – 18 minutes allowed

A company has recently received a proposal to manufacture 15 specialized machines at a price of Rs. 400,000 each. The delivery
is completed within 4 months. The company works 23 days a month and pays normal daily direct wages of Rs. 10,000. However,
in case of need, the company can work overtime up to 8 days during the said period at doubled the normal rate of wages.
Production overheads amount to Rs. 12,000 per normal working day but no overheads are charged on overtime working days.
The material cost is Rs. 240,000 per machine. The company has estimated that it will take 10 days to manufacture the first
machine. The company is expected to experience a learning effect of 90% (b = 0.152). The contract stipulates a penalty of Rs.
40,000 per machine delivered beyond the schedule of 4 month.
Required: Evaluate whether company should work during normal working days and pay penalty for any delayed
delivery of the machines or to work overtime to avoid paying penalty. (10)
Question No. 2 – 24 minutes allowed
Following are the extracts of the profit and loss account of a company for the accounting year ended 30 th June 2018:
Rs. (in million)
Sales 100
Cost of sales (including depreciation amounting to Rs. 2 million) (82)
Operating and financial charges (9)
Profit before tax 9
Mr. Zahid is the company managing director who has not maintained detailed records. He has now handed over the charge to
his son Abid who has recently completed his Chartered Accountancy. Abid wants to run the company in a professional manner.
He has taken various steps in this regard which include preparation of cash budget, for which the following details have been
gathered:
(i) Sales include cash sales of Rs. 18 million. Credit period is 30 days and 90% of the sales is collected within the credit
period whereas remaining amount is collected in the next month.
(ii) Sales have been increasing at the rate of Rs. 1 million per quarter for the last few years. This increase is only on account
of price increase as there is no growth in sales due to volume. This trend is expected to continue in 2018 - 19.
(iii) Cost of sales includes 50% cost of raw material, 30% cost of labour and 20% factory overheads cost. Raw material
prices increase by 5% on 1st January 2018 and labour rate increased by 10%with effect from 1 st April 2018 impact of
inflation on overheads has been 2% per quarter.
(iv) The prices of material, labour, and overheads are expected to increase by 8%, 5% and 3% respectively with effect from
1st July 2018.
(v) Operating and finance charges are expected to increase by 10% in 2018 - 19.
(vi) Cost of labour and 40% of all other expenses including purchases are paid in the same month. 60% of the expenses
are paid in the next month.
(vii) All expenses and revenues unless stated otherwise, are incurred evenly over the period.
(viii)The balance of cash as on 1st July 2018 was Rs. 1.5 million.
(ix) There is no opening or closing stocks.
Required: Prepare cash budget for the months of July, August, and September 2018. (13)
Question No. 3 – 25 minutes allowed
Agrocaps Limited engage in manufacturing of agricultural machinery, is preparing its annual budget for the coming year. The
company has metal pressing capacity of 20,000 hours, which will be insufficient for manufacture of all requirements of
components A, B, C and D. The data for the current year are given below:
Components A B C D
Requirements in units 2,000 3,500 1,500 2,800
Rs. Rs. Rs. Rs.
Variable cost:
Direct material 37 27 25 44
 Direct wages 10 8 22 40
Direct expenses 10 20 10 60
Fixed overheads 5 4 11 20
Total production cost 62 59 68 164

Direct expenses relate to the use of the metal presses which cost Rs. 10 per hour to operate and fixed overheads are absorbed
as a percentage of direct wages. Supply of all or any part of the total requirement can be obtained at the following prices:
Components A B C D
Purchase price per unit (Rs.) 60 59 52 168
Required:
(a) Which component, and in what quantities should be manufactured in the 20,000 hours of press time available? (7)
Director of the company are proposing to work in second shift to manufacture the components which are presently purchased
from supplier in part (a) above. Due to second shift working, company has to pay 25% overtime premium to its metal workers
and fixed overheads cost will increase by Rs. 500 for each 1000 hours or part thereof.
(b) Advise whether overtime working is financially viable for the company or not? (7)
Question No. 4 – 27 minutes allowed
ABC limited deals in a single product called HGV. It had prepared a budget for the year ending December 31, 2019 which was
based on the following key assumptions:
Sales 504,000 units @ Rs. 430
Variable cost (40% is direct labour) Rs. 300 per unit
Fixed cost for the year (including depreciation @ 10%) Rs. 25,000,000
Cost of raw material per kg Rs. 56.25
Raw material consumption per unit of finished product 2 kg
However, the position as shown by the management accounts prepared up to May 31, 2019. is not very encouraging and
depicts the following actuals results:
 105,000 units were sold @ Rs. 350 per unit
 Average cost of raw material used amounted to Rs. 90.00 per unit of finished product
 Other variable costs were as per the budget.
After due deliberations, the management has prepared a revised plan for the remaining period of the financial year. The plan
involves launching of a low-grade version of the existing product named LGV, to capture the low-income market. Salient
features of the plan are as under.
(i) Sales mix of HGV and LGV is expected to be in the ration of 1:2 sale price of HGV would be increased to Rs. 385,
whereas sale price of LGV would be Rs. 270.
(ii) A new machine would have to be purchased for Rs. 1.2 million.
(iii) For LGV two different types of materials i.e. A and B will be used in the ratio of 5:3. However, the total weight of
raw material used shall be the same in case of both products. Presently A is available at the rate of Rs. 25 per kg
whereas B is available at the rate of Rs. 45 per kg. the new material consumption per unit of HGV shall continue to
be Rs. 90 per unit.
(iv) Production of HGV is carried out by skilled workers. However only unskilled worker would be required for the
production LGV. The wages of unskilled workers would be 40% lower but labour hours per unit would be 10% higher
than HGV.
(v) Variable overhead cost per unit of LGV would be 10% lower than HGV.
(vi) Additional marketing cost would be Rs. 3 million.
Required: Compute the sales quantities for the remaining period to achieve a breakeven in 2019. (15)
Question No. 5 – 36 minutes allowed
a) Briefly explain direct and indirect investments with examples. (5)
b) AC Limited (ACL) manufactures metal containers for the paints industry. Presently, ACL has eight machines which were purchased 3
years ago at a cost of Rs. 1.8 million each having useful life of 8 years with zero salvage value. The production capacity of these machines
is 300,000 containers per annum which is sufficient to meet the existing demand.
ACL anticipates that the demand would increase to 540,000 containers next year and would remain stable in the foreseeable future.
The new demand can be met by replacing all the existing machines with 3 hi-tech machines that are available in the market at a cost of
Rs. 10 million each. The new machines will have an estimated useful life of 5 years with salvage value of Rs. 2 million each.
The following information is also available:
(i) Selling price of each container is Rs. 50 which is expected to increase by 10% per annum from year 2 onwards.
(ii) Existing raw material cost is 45% of sales which is anticipated to reduce to 42% of sales by using the new machines.
(iii) The introduction of new machines would reduce the monthly labour cost by Rs. 146,000 but would increase the overhead expenses,
excluding depreciation by Rs. 2 million per annum.
 (iv) All expenses are expected to increase by 8% from year 2 onwards.
(v) The existing machines can be sold at Rs. 1.2 million each excluding disposal costs of Rs. 60,000 per machine.
(vi) The increased production capacity will require additional working capital of Rs. 3 million.
(vii) ACL follows a policy of charging depreciation using straight line method and tax depreciation is calculated on same basis.
(viii)It evaluates cost of investment by applying the discount rate of 20%.
(ix) Applicable tax rate for ACL is 35%
Required: Calculate NPV if the existing machines are replaced with the new hi-tech machines and recommend its viability? (15)
Question No. 6 – 22 minutes allowed
Harris Limited (HL) manufactures and sells a single product. Following data relates to the recent year ended on 30 th June 2019:
Materials Actual usage and actual rate Standard usage and standard rate
Beta 5,933,750 kgs @ Rs. 25 per Kg 20 Kgs per unit @ Rs. 29 per Kg
Gamma 4,279,875 kgs @ Rs. 43 per Kg 15 Kgs per unit @ Rs. 40 per Kg
Zeta 3,598,125 Kgs @ Rs. 51 per Kg 12 Kgs per unit @ Rs. 45 per Kg
The actual production was 252,500 units.
Required: Calculate following material variances:
(a) Price (b) Usage
(c) Mix (d) Yield
(12)
Question No. 7 – 28 minutes allowed
Beta Enterprises (BE) produces a chemical that requires two separate processes for its completion. Following information pertains to
process II for the month of December 2019:
Kg Rs. in '000
Opening work in process (85% to conversion) 10,000 4,000
Costs for the month:
Received from process I 60,000 36,000
Material added in process II 30,000 20,000
Conversion cost incurred in process II -- 22,000
Finished goods transferred to warehouse 80,000 --
Closing work in process (60% to conversion) 8,000 --
In process II, material is added at start of the process and conversion costs are incurred evenly throughout the process. Process losses are
determined on inspection which is carried out on 80% completion of the process. Process loss is estimated at 10% of the inspected
quantity and is sold for Rs. 200 per kg. Company uses FIFO method for inventory valuation.
Required:
(a) Calculate cost of finished goods, closing WIP and abnormal loss/gain
(b) Pass all necessary journal entries of process II for the month of December 2019. s (16)