Certificate in Accounting and Finance Stage Examinations

The Institute of 10 September 2015

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Cost and Management Accounting

Q.1 Oceanic Chemicals manufactures two joint products Sigma and Beta in a single process at its
production department. Incidental to the production of these products, it produces a by-
product known as ZEE. Sigma and ZEE are sold upon completion of processing in
production department whereas Beta goes to refining department where it is converted into
Theta.

Joint costs are allocated to Sigma and Beta on the basis of their net realizable values.
Proceeds from sale of by-product are treated as reduction in joint costs. In both the
departments, losses upto 5% of the input are considered as a normal loss.

Actual data for the month of June 2015:

Department
Production Refining
Cost ------ Rs. in '000 ------
Material input at Rs. 50 per kg 3,000 -
Direct labour at Rs. 100 per hour 2,500 350
Production overheads 1,850 890
Output ---------- Liters----------
Sigma 34,800 -
Beta 16,055 -
ZEE (by-product) 5,845 -
Theta - 15,200
Sigma, Theta and by-product ZEE were sold at Rs. 300, Rs. 500 and Rs. 40 per liter
respectively. There was no work in process at the beginning and the end of the month.

Required:
Compute the cost per liter of Sigma and Theta, for the month of June 2015. (12)

Q.2 Sona Limited (SL) is considering investment in a joint venture. The entire cash outlay of the
project is Rs. 175 million which would require to be invested by SL immediately. The joint
venture partner, Chandi Limited (CL) would provide all the necessary technical support.
The other details of the project are estimated as follows:
(i) The project would extend over a period of four years.
(ii) Sales are estimated at Rs. 155 million per annum for the first two years and
Rs. 65 million per annum during the last two years.
(iii) Cost of sales and operating expenses excluding depreciation would be 50% and 10% of
sales respectively.
(iv) CL would be entitled to share equal to 5% of sales and the remaining profit would
belong to SL.
(v) At the end of the project, SL would be able to recover Rs. 100 million of the invested
amount.

Assume that all cash flows other than the initial cash outlay arise annually in arrears.

Required:
Calculate the project’s internal rate of return. (09)
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Q.3 The following information pertains to Hope Limited for the latest financial year:
Rupees
Sales price per unit 1,600
Direct labour per unit 240
Variable cost (other than direct labour) per unit 960
Fixed cost (no labour cost included) 850,000
Volume of sales and production was 6,000 units which represent 80% of normal capacity.
The management of the company is planning to increase wages of direct labour by 15% with
effect from next financial year.

Required:
(a) Calculate the number of units to be sold to maintain the current profit if the sales price
remains at Rs. 1,600 and the 15% wage increase goes into effect. (02)
(b) The management believes that an additional investment of Rs. 760,000 in machinery
(to be depreciated at 10% annually) will increase total capacity by 25%. Determine the
selling price in order to earn a profit of Rs. 2 million assuming that all units produced
at increased capacity can be sold and that the wage increase goes into effect. (03)

Q.4 Jack and Jill (JJ) manufactures various products. The following information pertains to one
of its main products:
(i) Standard cost card per unit
Rupees
Direct material (5 kg at Rs. 40 per kg) 200
Direct labour (1.5 hours at Rs. 80 per hour) 120
Factory overheads 130% of direct labour
(ii) Fixed overheads are budgeted at Rs. 3 million based on normal capacity of 75,000
direct labour hours per month.
(iii) Actual data for the month of June 2015
Units
Opening work in process (80% converted) 8,000
Started during the month 50,000
Transferred to finished goods 48,000
Closing work in process (60% converted) 7,000
Rupees
Material issued to production at: Rs. 38 per kg 1,900,000
Rs. 42 per kg 8,400,000
Direct labour at Rs. 84 per hour 6,048,000
Variable factory overheads 6,350,000
Fixed factory overheads 2,850,000
(iv) Materials are added at the beginning of the process. Conversion costs are incurred
evenly throughout the process. Losses up to 3% of the input are considered as normal.
However, losses are determined at the time of inspection which takes place when units
are 90% complete.
(v) JJ uses FIFO method for inventory valuation.

Required:
(a) Compute equivalent production units (05)
(b) Calculate the following variances for the month of June 2015:

Material rate and usage (03)

Labour rate and efficiency (03)

Variable factory overhead expenditure and efficiency (04)

Fixed factory overhead expenditure and volume (04)

Q.5 (a) In the context of ‘Options’, briefly discuss the term “Intrinsic value”. Also state how
the intrinsic value in the case of call option and put option would be computed. (02)
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(b) An investor paid a premium of Rs. 60 to buy a put option at a strike price of Rs. 300.
The current market price of the share is Rs. 260.
Required:
Calculate the profit/loss of the investor if the market price of the shares on the expiry
date of the option i.e. 30 days from now is:
(i) Rs. 180 (ii) Rs. 260 (iii) Rs. 380 (04)

Q.6 Queen Jewels (QJ) deals in imitated ornaments and operates its business on-line through a
web-portal. Orders are received through the website and dispatched through a courier.
The mode of payments available to customers are as follows:
Mode of payments % of sales
Cash on delivery which is collected by the courier 60%
Advance payments through credit cards 40%
Cash collected by the courier is settled after every 7 days. The courier company’s charges are
Rs. 300 per order which are deducted on a monthly basis from the first payment due in the
subsequent month. Payments through credit cards are credited by the bank in 7 days.
High value items which represent 25% of the sales through credit cards are dispatched after
15 days of receipt of payment. All other dispatches are made immediately and delivered on
the same day.
Following further information is available:
(i) Sales are made at cost plus 30%.
(ii) Sales and sales orders are projected as under:
Sep. 2015 Oct. 2015 Nov. 2015 Dec. 2015 Jan. 2016
Sales (Rs.) 4,600,000 5,000,000 4,200,000 5,800,000 6,000,000
Sales orders (Nos.) 400 450 470 490 520
(iii) High value items are purchased on receipt of the order. Stock level of other goods is
maintained at 25% of projected sales of the next month. 40% of all purchases are paid
in the same month whereas balance is paid in the next month.
(iv) Purchases during the month of September 2015 amounted to Rs. 3.2 million.
(v) Selling and administrative expenses are estimated at Rs. 50 million per annum and
include depreciation of tangible and amortisation of intangible assets amounting to
Rs. 8 million and Rs. 2 million respectively.
(vi) Cash and bank balances as at 30 September 2015 amounted to Rs. 5.5 million.
(vii) Purchases/sales occur evenly throughout the quarter.

Required:
Prepare a cash budget of QJ for the quarter ending 31 December 2015. (Month-wise cash
budget is not required) (14)

Q.7 Chocó-king Limited (CL) produces and markets various brands of chocolates having annual
demand of 80,000 kg. The following information is available in respect of coco powder
which is the main component of the chocolate and represents 90% of the total ingredients.
(i) Cost per kg is Rs. 600.
(ii) Process losses are 4% of the input.
(iii) Purchase and storage costs are as follows:

Annual variable cost of the procurement office is Rs. 6 million. The total number
of orders (of all products) is estimated at 120.

Storage and handling cost is Rs. 20 per kg per month.

Other carrying cost is estimated at Rs. 5 per kg per month.
(iv) CL maintains a buffer stock of 2,000 kg.

Required:
(a) Calculate economic order quantity. (07)
(b) A vendor has offered to CL a quantity discount of 2% on all orders of minimum of
7,500 kg. Advise CL, whether the offer of the vendor may be accepted. (06)
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Q.8 Reporting Perspective is an important part of the IFAC Sustainability Framework which
comprises of five sections.

Required:
State any three key considerations for professional accountants as mentioned in each of the
following sections of Reporting Perspective:
(a) Determining materiality (03)
(b) External review and assurance of sustainability disclosures (03)

Q.9 In May 2015, the board of directors of Sahil Limited (SL) had decided to close one of SL’s
operating segments at the end of the next year. The sales and production for the next year
were budgeted at 50,000 units and on the basis thereof, the budget of the segment for the
next year was approved as follows:
Rs. in ‘000
Sales 5,000
Direct material (50,000 kg) (950)
Direct labour (1,000)
Variable production overheads (500)
Fixed production overheads (1,750)
Administrative and selling overheads (500)
Budgeted net profit 300
However, rumours of the closure prompted majority of the segment’s skilled labour to leave
the company. Consequently, the management is considering the following alternatives to
cope with the issue:

Close the segment immediately and rent the factory space for one year at a rent of
Rs. 40,000 per month; or

Employ contract labour which would be able to produce a maximum of 40,000 units in
the year. The quality of the product is however expected to suffer due to this change.
The following further information is available:
(i) The sales manager estimates that a sales volume of 30,000 units could be achieved at
the current selling price whereas sales volume of 40,000 units would only be achieved
if the price was reduced to Rs. 90 per unit.
(ii) 25,000 kg of raw material is in stock. Any quantity of the material may be sold in the
market at a price of Rs. 19 per kg after incurring a cost of Rs. 2 per kg. Up to 15,000 kg
can be used in another segment of the company in place of a material which currently
costs Rs. 18 per kg.
(iii) Wages of contract labour would be Rs. 24 per unit. SL would also be required to spend
Rs. 40,000 on the training of the contract labour.
(iv) Due to utilization of contract labour, variable production overheads per unit are
expected to increase by 20%.
(v) Fixed production overheads include:

Depreciation of three machines used in the segment amounting to Rs. 170,000.
These machines originally costed Rs. 1.7 million and could currently be sold for
Rs. 830,000. If the machines are used for production in the next year, their sales
value would reduce by Rs. 5 per unit of production.

All other costs included in ‘fixed production overheads’ represent apportionments
of general overheads.
(vi) 40% of administrative and selling overheads are variable whereas the remaining
amounts represent apportionment of general overheads.

Required:
Advise the best course of action for Sahil Limited. (16)

(THE END)