COST AND MANAGEMENT ACCOUNTING

MOCK EXAM (SOLUTION)

Ans. #1
A Company
Cumulative Production Cumulative Average time Cumulative Total days (X x Y) Marks
machines (x) per unit (y= axb)
15 10 (15)-0.152 = 6.6257 days 15 machines x 6.6257 days per 1.5
machine = 99.38 days
14 10 (14)-0.152 = 6.69558days 14 machines x 6.69558 days per 1.5
machine = 93.73 days
13 10 (13)-0.152 = 6.77days 13 machines x 6.77 days per 1.5
machine = 88.03 days
Since only 92 days are available, company cannot supply 15 machines or 14 machines. It can only
supply 13 machines in time. For balance 2 machines, only alternative is to supply with penalty or
work overtime. (0.5)
Rs. Marks
If overtime is not worked: 0.5
Sales (15 machines x Rs. 400,000) 6,000,000

Less Cost:
Direct material (15 machines x Rs. 240,000) 3,600,000 0.5
Direct labour for 15 machines (99.4 days x Rs. 994,000 0.5
10,000)
Overheads (92 days x Rs. 12,000) 1,104,000 0.5
Penalty (2 machines) 80,000 0.25
Total cost (5,778,000)

Profit 222,000

If overtime is worked:
Sales (15 machines x Rs. 400,000) 6,000,000 0.25

Less Cost:
Direct material (15 machines x Rs. 240,000) 3,600,000 0.5
Direct labour for 15 machines (92 days x Rs. 10,000) 920,000 0.5
Overheads (92 days x Rs. 12,000) 1,104,000 0.5
Overtime for 7.4 days @ Rs. 20,000 148,000 0.5
Total cost (5,772,000)

Profit 228,000
From the comparison, it is apparent that company should work overtime which will help the
company to make additional profit of Rs. 6,000. (0.5)
Ans. # 2
Marks
Suppose sale of 1st quarter of 2015 = x
Total sale of 2015 = x +(x + 1) +(x +2) + (x+3) = Rs. 100 million
4x + 6 = 100 0.75
x = 94 ÷ 4 =23.5
Cash sale of 1st quarter of 2015 = (x + 3) x 18% = Rs. 4.77 million
Credit sale of 1st quarter of 2015 = (x + 3) x 82% = Rs. 21.73 million 0.75

Material cost = 82 x 50% = Rs. 41 million

Suppose material cost of 2 nd, 3rd quarter would be x, 1.05x and 1.05x respectively
Hence x + 1.05x + 1.05x = 4.1x =Rs. 41 million
Hence x = Rs. 10 million
Therefore, material cost of 4th quarter = 10 x 1.05 = Rs. 10.5 million 0.75

Labour cost = 82 x 30% = Rs. 24.6 million

Supposing labour cost of 1st quarter = x
Labour cost of 2nd, 3rd and 4th quarter would be x, x and 1.1x respectively 0.75
Total labour cost = x + x + x + 1.1x = 4.1x =24.6
Hence x = 24.6 ÷ 4.1 = Rs. 6 million
Therefor labour cost of 4 th quarter = 6 x 1.1 = 6.6 million
Overheads other than depreciation = 82 x 20% - 2 =Rs. 14.4 million 0.75
Supposing overheads of 1st quarter = x
Cost of 2nd, 3rd and 4th quarter = 1.02x + (1.02)2x and (1.02)3x
Total overhead cost = x + 1.02x + (1.02)2x + (1.02)3x = Rs. 14.4 million
Hence x = x + 1.02x +1.0404x +1.0612x = Rs. 14.4 million
Hence x = 14.4 ÷ 4.1216 = Rs. 3.494 million
Therefore overheads (other than depreciation) of 4th quarter = 1.0612x = Rs. 3.708 0.75
million

Determination of sale / cost of 1 st quarter of 2016

April-June 2016 Increase July-Sep. 2016 Marks

Rs. in million
Cash sales 4.770 0.18 4.950 0.5
Credit sale in 4th quarter 21.730 0.82 22.550 0.5

Production cost
Material (8%) 10.500 0.84 11.340 0.5
Labour (5%) 6.600 0.33 6.930 0.5
Overheads (3%) 3.708 0.111 3.819 0.5
Operating and finance charges 2.250 0.225 2.475 0.5
 Company A
Cash budget 2016
July August September Marks
Rs. in Million
Receipts
Cash sales 94.95 ÷ 3) 1.650 1.650 1.650 0.5
Credit sale 90% of previous month 6.519 6.675 6.765 0.5
10% of second last month 0.724 0.724 0.752 0.5
8.893 9.139 9.167
Payments
Production cost
Material (40% same month) 1.512 1.512 1.512 0.5
Material (60% of previous month) 2.100 2.268 2.268 0.5
Labour 2.310 2.310 2.310 0.5
Overheads (40% of same month) 0.509 0.509 0.509 0.5
Overheads (60% of previous month) 0.742 0.764 0.764 0.5
Operating and financial charges (40% of same month) 0.330 0.330 0.330 0.5
Operating and financial charges (60% of previous month) 0.450 0.495 0.495 0.5
7.953 8.188 8.188
Excess of receipt over payments 0.941 0.951 0.979
Add: opening balance 1.500 2.441 3.392 0.5
Closing balance 2.441 3.992 4.371

Ans. # 3
Step 1: Verification of limiting factor (i.e. Machine Hours) Marks
Demand Direct
(units) Hours
A 2,000 2,000
B 3,500 7,000
C 1,500 1,500
D 2,800 16,800
= Total machine hours required to meet demand 27,300
Less: Available direct hours (20,000)
Shortage 7,300
Note: Verification of limiting factor is options
2.0
Step 2: Contribution of per unit of limiting factor and Ranking
A B C D Marks
Sub-contracting cost per unit (Rs.) 60 59 52 168
Less: Variable cost
Material cost (Rs.) 37 27 25 44
Direct wages
Direct expenses (Rs.) 10 8 22 40
Assembly (Rs.) 10 20 10 60
57 55 57 144
= Contribution per unit (Rs.) 3 4 (5) 24
÷ Machine hours per unit ÷1 ÷2 ÷1 ÷6
= Contribution per direct labour (Rs.) 3 2 4
hour

Ranking of production 2nd 3rd 4th 1st

3.5
Step 3: Optimum production plan, purchase
Product Hours Production Purchase Marks

Units Units

D 16,800 2,800
A 2,000 2,000
B 1,200 600 2,900
C 1,500
20,000 1.5

b) Because purchase price of component C is Rs. 52 and cost of manufacturing is Rs. 57 per unit it
will not be profitable to manufacture C even in second shift. It should be purchased from outside.
Now it is to be seen whether 2,900 of product B should be purchased in second shift or purchased
from outside. The relevant position is as follows: (1.5 marks)
cost of producing 2,900 units of Product B in second shift
Rs. Marks
Variable cost 55.00
Increase in direct wages 2.00 1.5
57.00
Total variable cost (2,900 units x Rs. 57) 165,300
Extra fixed cost [ (2,900 units x 2 hours) Rs. 500 for each 1,000 hours 3,000 1.5
Total cost for producing of 2,900 units 168,300
Purchase price of product B (2,900 units x Rs. 59) 171,100 1.5
Disadvantage in buying 2,800
It is in the interest of the company to manufactured product B in the second shift instead of buying it
from outside market. The disadvantage of the decision to buy product B from outside will be Rs.
2,800. : (1.0 marks)

Ans.# 4
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:
Marks
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
For LGV two different types of materials i.e. A and B will be used in the ratio of 5:3.
(i)
However, the total weight
ABC Limited.
Actual Jan-May 2019
Rs. Marks
Sales (105,000 units x Rs. 350) 36,750,000
Variable cots
Raw material (105,000 units x Rs. 90) (9,450,000)
Direct labour (Rs. 300 x 0.4) x 105,000 units (12,600,000)
Other variable costs (Rs. 300 – Rs. 112.5) x 105,000 units) (7,087,500)
Contribution margin 7,612,500 2.0
 Revised Plan Jun-Dec.2019
LGV HGV Total Marks.
Rs. Rs.
Simple price per unit 270.00 385.00
Raw material
A (Rs. 25 x 2 x 5 ÷8) (31.25)
B (Rs. 45 x 2 x 3 ÷8) (33.75)
(65.00) (90.00)
Direct labour cost
[(Rs. 300 x 0.4) x 0.6 x1.1] (79.20)
(Rs. 300 x 0.4) (120.00)
Factory overhead cost
(300 – 112.5 – 120) (67.5)
(67.5 x 0.9) (60.75)
(204.95) (277.50)
65.05 107.50
Sales mix ratio 2 1 3
Aggregate contribution margin 130.10 107.50 237.6 7.0

Fixed cost Jan.-Dec.

Rs. Marks.
Fixed cost for the year 25,000,000
Additional marketing cost 3,000,000
10% depreciation on machine cost Jun- Dec (1,200,000 x 10% x 7 ÷ 12) 70,000
28,070,000
Contribution recovered Jan - May 2019 (7,612,500)
Required contribution for June-Dec. 2019 20,457,500 4.0

Breakeven sale quantity June-Dec. 2019:

Rs. Rs. Rs. Marks
Breakeven quantity for
High grade (20,457,500 ÷ 237.60) 86,101
Low grade (86,101 x 2) 172,202
Breakeven sale amount June-Dec. 2019 46,494,540 33,148,885 79,643,425 2.0

Ans.# 5
a)
Direct expense Marks
Direct expense is an expense incurred that varies directly with changes in the volume of a cost object.
A cost object is any item for which you are measuring expenses, such as products, product lines, 2.5
services, sales regions, employees, and customers. Here are several examples of direct expenses:
• The materials used to construct a product for sale
• The cost of the freight needed to transport goods to and from a manufacturing facility
• The labor incurred to produce hours billable to a client
• Labor and payroll taxes paid based on the number of units produced
• Production materials consumed during the manufacture of goods
• The commission and payroll taxes related to the sale of goods or services

Indirect expense 2.5

ndirect expenses are those expenses that are incurred to operate a business as a whole or a segment of
a business, and so cannot be directly associated with a cost object, such as a product, service, or
customer. A cost object is any item for which you are separately measuring costs. Examples of indirect
expenses are:
 • Accounting, audit, and legal fees
• Business permit
• Office expenses
• Rent
• Supervisor salaries
• Telephone expense
• Utilities

b) AC Limited (ACL)
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Marks.

Incremental sales(w1) 12,000,000 13,200,000 14,520,000 15,972,000 17,569,200 2.5

Incremental costs (W1) (4,838,000) (5,225,040) (5,643,043) (6,094,486) (6,582,045) 2.5

Less: incremental
Depreciation (3,000,000) (3,000,000) (3,000,000) (3,000,000) (3,000,000) 1.0
4,162,000 4,974,960 5,876,957 6,877,514 7,987,155
Tax @ 35% (1,456,700) (1,741,236) (2,056,935) (2,407,130) (2,795,504) 1.0
Profit after tax 2,705,300 3,233,724 3,820,022 4,470,384 5,191,651
Add back depreciation 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 1.0
Operating cash flow 5,705,300 6,233,724 6,820,022 7,470,380 8,191,651
Recovery of salvage value 6,000,000 0.5
Working capital released 3,000,000 0.5
Initial outlay (W2) (23,922,000)
Total cash flow (23,922,000) 5,705,300 6,233,724 6,820,022 7,470,380 17,191,651

Discount factor @ 20% 1.000 0.833 0.694 0.579 0.482 0.402 1.0

Present value (23,922,000) 4,752,515 4,326,204 3,948,793 3,600,725 6,911,044 1.0

Net present value (382,719) 1.0

Conclusion:
Since the NPV of acquiring the new machines is negative, it is not worthwhile for ACL to replace
the existing machine with the new one. (1.0 Marks)
Workings:
(W1) Incremental revenue and expenses
Existing Revised Incremental Marks
Rs. Rs. Rs.
Sales (300,000 ÷ 540,000) @ Rs. 50 15,000,000 27,000,000 12,000,000
Expenses
Raw materials (45% ÷ 42% of sales) 6,750,000 11,340,000 (4,590,000)
Labour costs (146,000 x 12) 1,752,000
Other overheads (2,000,000)
Incremental costs (4,838,000)
Depreciation [(1.8 x 8) ÷ 8 – {(10 x 3) – (2 x 3) ÷ 5}] 3,000,000 1.0
(W2) Initial outlay
Rs. Marks
Purchase of new machines (10m x 3) 30,000,000
Net sales proceeds from old machines (W2.1) (9,078,000)
Incremental working capital 3,000,000
Initial outlay 23,922,000 0.5
 (W2.1) Net sale proceeds from disposal of old machines
Rs. Marks
Sale proceeds (1.2m x 8) 9,600,000
Less: Disposal costs (60,000 x 8) (480,000)
Less: Tax [9.6 – (1.8m x 8 x 5 ÷ 8) -0.48) x 0.35] (42,000)
Initial outlay 9,078,000 0.5

Ans. # 6

Harris Limited (HL) manufactures

a) Material price variance
Standard Actual Price variance Actual Material price Marks
price price Rs. per unit Qty. Kgs variance Rs.
Beta 29 25 4 5,933,750 23,735,000 Fav.
Gamma 40 43 (3) 4,279,875 (12,839,625) Adv.
Zeta 45 51 (6) 3,598,125 (21,588,75) Adv.
(10,693,375) Adv. 3.0

b) Material usage variance:

Actual Qty. SQA in kgs Quantity over Standard Material Marks
Kgs for actual consumed price per unit usage
period Rs. variance
Beta 5,933,750 5,050,000 883,750 29 25,628,750 Adv.
Gamma 4,279,875 3,787,500 492,375 40 19,695,000 Adv.
Zeta 3,598,125 3,030,000 568,125 45 25,565,625 Adv.
70,889,375 Adv. 3.0

c) Material mix variance

Actual Standard Standard Qty. @ Variance Mix Marks
Qty. Kgs Qty. per price per standard between variance
unit Kgs. unit Rs. mix kgs. actual & Rs.
standard Qty
Beta 5,933,750 29 20 5,877,341 (56,409) (1,635,861) Adv.
Gamma 4,279,875 40 15 4,408,005 128,130 5,125,200 Fav.
Zeta 3,598,125 45 12 3,526,404 (71,721) (3,227,445) Adv.
13,811,750 47 261,904 Fav. 3.0

Yield variance
Finished product Marks
units
Standard yield (TAQ ÷ SQ per unit) (13,811,750 ÷ 47) 293,867
Actual yield 252,500
Yield variance 41,367 1.5

Rs. Marks
Beta (41, 367 x 29 x 20) 23,992,860
Gamma (41, 367 x 15 x 40) 24,820,200
Zeta (41, 367 x 12 x 45) 22,338,180
(St. yield – actual yield) x standard price of respective raw material 71,151,240 1.5
Ans. # 7
Bele Enterprises
a) Statement of equivalent units
Equivalent units Quantity Marks
Material Conversion schedule
Kg
Opening WIP (85% to conversion) (10,000) (8,500) 10,000 0.75
Received from process I 60,000 0.25
Material added in process II 30,000 0.25
100,000
Transferred to finished goods 80,000 80,000 80,000
Goods started and completed during the month A 70,000 71,500 0.5
Closing WIP (60% to conversion) B 8,000 4,800 8,000 0.75
Normal loss at 10% (100,000−10,000−8,000) × 10% 8,200 0.75
Abnormal loss (80% conversion) (Balancing) C 3,800 3,040 3,800 0.75
D 81,800 79,340 100,000

Computation of costs:
Cost per unit Material Conversion Total Marks
Rs 000.
Opening WIP 4,000 0.25
Cost for the month: Process I 36,000 - 0.25
Cost for the month: Process II 20,000 22,000 42,000 1.0
Normal loss quantity at sale price (8,200 x 200) 1,640 1,640 1.0
Total cost E 5,360 22,000 80,360
Rs.
Cost per unit F = (E ÷ D) 664.5 277.29 1.0
Rs 000.
(i) Cost of finished goods:
Opening WIP 4,000 0.25
Cost for the month (A x F) 46,515 19,826 66,341 1.0
70,341 0.25
(ii) Cost of closing WIP (B x F) 5,316 1,331 6,647 1.0
(iii) Cost of abnormal loss (C x F) 2,525 843 3,368 1.0

Accounting entries to account for production losses

Date Description Debit Credit Marks
Rs. in ‘000
Scrap inventory (normal loss quantity) (8,200 x 200) 1,640
WIP – II 1,640 2.0
(Normal loss quantity credited to WIP at sales value)
2 Scrapped inventory (abnormal loss quantity) 760
Profit and loss account 2,608
WIP – II As 3,368 2.0
(Loss on abnormal loss quantity debited to profit and loss account)