Cost and Management Accounting

Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

Ans.1 Platinum Chemicals

(a) Cost of sales for the month of August 2017 - Product J101 and J-plus
J101 J-plus
Quantity sold Ltrs. 5,000 3,400
-------------- Rupees --------------
Allocated joint costs from process I (W-1) 4,147,792 -
3,456,494(W-1)÷(3,400+650)×3,400 - 2,901,748
Process II – Conversion cost (3,400×400) - 1,360,000
Packing cost (5,000×120) 600,000 -
4,747,792 4,261,748

W-1: Allocation of joint cost - Process I (on the basis of NRV)

Joint cost
Joint NRV per unit at split-off Units produced Total NRV
allocation
product
------------ Rs. ------------ Liters --------------- Rupees ---------------
J101 (1,200-120) 1,080 5,000 5,400,000 4,147,792
J202 [1,400-400(W-3)] 1,000 4,500 4,500,000 3,456,494
9,900,000 (W-2) 7,604,286

W-2: Joint costs - Process I Rupees

Direct material 5,748,000
Proceeds from sale of solid waste - normal loss 1,200(W-4)×80%×100 (96,000)
Proceeds from sale of by-product BP01 1,000(W-4)×500 (500,000)
5,152,000
Cost of abnormal loss 5,152,000×300÷9,800 (157,714)
Conversion cost 2,610,000
Cost allocation between joint products J101 and J202 7,604,286

W-3: Conversion cost per unit - Process II Rupees

Conversion cost of process II A 1,542,000
Equivalent units 3,400(W-4)+(650×0.7) B 3,855
Cost per unit (A÷B) C 400

W-4: Normal and abnormal losses quantity Process I Process II

--------- Liters ---------
Input quantity 12,000 4,500
Less: J101 (5,000) -
J202 – Transfer to process II (4,500)
By-product BP01 (1,000) -
J-plus - (3,400)
Closing work in process (70% conversion) - (650)
Normal loss - 10% of input (12,000×10%); (4,500×10%) (1,200) (450)
Abnormal loss 300 -

(b) Journal entries to record production and disposal of solid waste

Debit Credit
Date Description
-------- Rupees --------
30-Jun-2017 Solid waste inventory (normal loss at sale price) (W-2) 96,000
Solid waste inventory (abnormal loss at cost) (W-2) 157,714
WIP - Process I 253,714
(Normal losses at sale price and abnormal losses at cost credited
to WIP)
30-Jun-2017 Bank (1,200+300)×0.8×100 120,000
Profit and loss account Balancing 133,714
Solid waste inventory 253,714
(Sale of normal and abnormal solid waste)

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

Ans.2 (a) Integrated reporting is a method of presentation about how the organization interacts
with the external environment and how an organization’s strategy, governance,
performance and prospects, in the context of its external environment, lead to the
creation of value over the short, medium and long term.

(b) Different categories of ‘capitals’ in the context of integrated reporting:

(i) Financial (ii) Human

(iii) Manufactured (iv) Social and relationship
(v) Intellectual (vi) Natural

Ans.3 Opal Industries Limited

(a) Allocation of support departments' actual overheads:
Production departments Support departments
Processing Finishing Logistics Maintenance
------------------------- Rupees -------------------------
Cost incurred 536,000 258,000 56,700 45,000
Allocation of support departments' costs:
Logistics 50%:40%:0%:10% 28,350 22,680 (56,700) 5,670
Maintenance 35%:45%:20%:0% 17,734 22,802 10,134 (50,670)
Logistics 5,067 4,054 (10,134) 1,013
Maintenance 354 456 203 (1,013)
Logistics (Being immaterial amount,
allocated to production dept. only) 50:40 113 90 (203) -
Total - Actual overhead costs A 587,618 308,082 - -

(b) Under/over applied overheads:

Predetermined overhead rate:
Budgeted direct labour hours B 14,000 10,000
Budgeted overhead costs C 560,000 320,000
Budgeted overhead rate (C÷B) D 40.00 32.00
Overheads applied:
Actual direct labour hours E 14,350 9,800
Overheads applied (D×E) F 574,000 313,600

Overheads under/(over) applied (A-F) 13,618 (5,518)

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

Ans.4 Cloudy Company Limited

Introduction of new version D44
Year 0 Year 1 Year 2 Year 3 Year 4
Projected production and sales of D44 Units (A) - 20,000 25,000 27,000 29,000

------------------- Rs. in million -------------------

Contribution margin of D44 (40,000-32,000)×1.1×A - 160.00 220.00 261.36 308.79
Research cost To be ignored - - - - -
Loss of CM of X85 (5,500×2,000×1.1) - (11.00) (24.20) (39.93) (58.56)
Existing fixed cost To be ignored - - - - -
Incremental fixed cost (75-45)×1.1 - (30.00) (33.00) (36.30) (39.93)
Tax/Accounting depreciation 450×0.25 - (112.50) (84.38) (63.29) (47.47)
Net profit before tax - 6.50 78.42 121.84 162.83
Tax liability @ 30% - (1.95) (23.53) (36.55) (48.85)
Net (loss)/profit after tax - 4.55 54.89 85.29 113.98
Add back non-cash item of depreciation - 112.50 84.38 63.29 47.47
Plant cost/residual value at the end of useful life (450.00) - - - 142.36
Total cash (outflows) / inflows (450.00) 117.05 139.27 148.58 303.81

Net cash inflows 258.71

Discount factor at 15% 1.0000 0.8696 0.7561 0.6575 0.5718

Present value (450.00) 101.79 105.30 97.69 173.72

Net present value at 15% NPVa 28.50

Discount factor at 20% 1.0000 0.8333 0.6944 0.5787 0.4823

Present value (450.00) 97.54 96.71 85.98 146.53

Net present value at 20% NPVb (23.24)

IRR = A% + [NPVa ÷ ( NPVa - NPVb) × (B% - A%)] 15%+[28.50÷{28.50-(-23.24)} × (20%-15%)] 17.75%

Conclusion:
IRR 17.75% is higher than CCL's cost of capital (12%), therefore, CCL should introduce D44.

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

Ans.5 Falcon (Private) Limited

Budgeted statement of cost of sales for the next year
Rupees
Opening work in process:
Raw material cost 1,500×980 1,470,000
Conversion cost 1,500×60%×(800+500+400) 1,530,000
A 3,000,000
Manufacturing expenses:
Raw material cost (W-4) 25,497,753
Conversion cost 25,170(W-1)×1,791(W-2) 45,079,470
B 70,577,223
Closing work in process:
Raw material cost 1,500×1,026(W-2) (1,539,000)
Conversion cost 1,500×60%×1,791(W-2) (1,611,900)
C (3,150,900)
Finished goods:
Opening stock 2,000(W-1)×2,680
D 5,360,000
Closing stock 2,090(W-1) ×2,817(W-2)
E (5,887,530)
Cost of sales (A+B+C+D+E) 69,898,793

W-1: Budgeted production for the next year Units

Sales for the next year 22,800×1.1 25,080
Finished goods inventory: Closing 25,080÷12 2,090
Opening 24,000÷12 (2,000)
Work in progress: Closing (100% to material and 60% to conversion) 1,500
Opening (100% to material and 60% to conversion) (1,500)
25,170

W-2: Budgeted cost per unit for the next year Rupees
Raw material 980×0.95÷0.98×1.08 1,026
Direct labour 800×93%×1.1 818
Variable overheads 500×1.08 540
Fixed overheads 10,906,000(W-3)÷25,170(W-1) 433
1,791
2,817

W-3: Budgeted fixed overheads for the next year Rupees

Current year's fixed overheads (excluding depreciation) (400×23,760)-5,800,000 3,704,000
5% increase for next year's fixed overheads (excluding depreciation) 3,704,000×1.05 3,889,200
Depreciation for the next year 7,016,800
10,906,000

W-4: Budgeted raw material consumption for the next year Kg

Required raw material including 2% wastage 25,170(W-1)×(49×0.95÷0.98) 1,195,575

Opening raw material inventory (25,000×49×2÷12) 204,167

Raw material issues on FIFO basis from: Rupees

- Opening raw material inventory 204,167×(980÷49) 4,083,340
- Current purchases at revised price (1,195,575-204,167)×(980÷49)×1.08 21,414,413
25,497,753

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

Ans.6 DEL Limited

Acceptance of order from NTR Limited for truck radiators
Rs. in million
Revenue from NTR Limited 40,000×4,000 160.00
Additional raw material (12.00)
Raw material already procured – sales value (60-10)×70% (35.00)
– use value for truck radiators (10,000×3,000×30%)-1 (8.00)
Labour cost [22,647.91 (W-1)×250] (5.66)
Variable overheads (5.66×240%) (13.58)
Preparation and resetting cost of the plant (4.00)
Fixed overheads applied To be ignored -
81.76
Loss of CM for not producing car radiators 4,194 (W-2) ×8,625 (W-3) (36.17)
Profit on acceptance of the order from NTR 45.59

Conclusion:
DEL should accept the order from NTR Limited

W-1: Direct labour hours for production of truck radiators Hours

Direct labour hours for 1,000 units [1,000×10×(1,000)-0.074] 5,997.91
Direct labour hours for 999 units [999×10×(999)-0.074] (5,992.36)
Hours per unit for 1,001 and onward 5.55
Direct labour hours for first 1,000 units 5,997.91
Direct labour hours for next 3,000 units (5.55×3,000) 16,650.00
22,647.91

W-2: No. of Car radiators to be produced if NTR's order is not accepted

Labour hours per unit of car radiator (500×180×12)÷200,000 Hrs. 5.40
No. of car radiators to be produced 22,647.91 (W-1) ÷ 5.40 Nos. 4,194

W-3: Contribution margin per unit/hour for car radiators Rupees

Selling price 15,000
Raw material cost (3,000)
Labour cost (500×180×250×12)÷200,000 (1,350)
Variable overheads 150%×1,350 (2,025)
Contribution margin per unit 8,625

Ans.7 Silver Industries Limited

(a) (i) Accounting entries to record cost of production:

Debit Credit
Date Description
-------- Rupees --------
30-Jun-17 Work in process/Finished goods
[8,600×(24,000÷8,000)×150(W-1) 3,870,000
PL account (Under absorbed overheads) (Bal.) 30,000
Overhead control account 3,900,000
(Under-absorbed overheads charged to profit & loss account)

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

(ii) Analysis of under absorbed overheads amounted to Rs. 30,000 Rupees

Variable overhead expenditure variance
Actual hours at standard variable rate 25,000×100 2,500,000
Actual variable overheads (W-2) 2,630,000
Adverse variance A (130,000)
Variable overhead efficiency variance
Allowable hours at standard rate 8,600×3×100 2,580,000
Actual hours at standard variable rate 25,000×100 2,500,000
Favourable variance B 80,000
Fixed overhead expenditure variance
Budgeted fixed overheads 1,200,000
Actual fixed overheads (W.2) 1,270,000
Adverse variance C (70,000)
Fixed overhead efficiency variance
Allowable hours at standard rate 8,600×3×50 1,290,000
Actual hours at standard rate 25,000×50 1,250,000
Favourable variance D 40,000
Fixed overhead capacity variance
Budgeted hours at standard rate 24,000×50 1,200,000
Actual hours at standard rate 25,000×50 1,250,000
Favourable variance E 50,000
(A+B+C+D+E) (30,000)

W-1: Standard fixed and variable overhead rate per hour

Standard fixed and variable overhead rate per hour 3,600,000÷24,000 150
Less: Standard fixed overhead rate per hour 1,200,000÷24,000 50
Standard variable overhead rate per hour 100

W-2: Actual fixed overheads

Applied fixed overheads 8,600×(24,000÷8,000)×50 1,290,000
Applied overheads exceeded actual overheads (20,000)
Actual fixed overheads 1,270,000
Actual variable overheads (Balancing) 2,630,000
Total variable overheads 3,900,000

(b) Comments on the difference between overhead variances under marginal and
absorption costing:
All variable and fixed overhead variances under marginal and absorption costing are
same, except for the fixed overhead volume (efficiency and capacity) variances which
can be calculated only under absorption costing.

In absorption costing, fixed overheads are allocated to the products and these are
included in the inventory valuations. Therefore, fixed overhead volume variances can
be computed under absorption costing only.

In marginal costing, only variable overheads are assigned to the product; fixed
overheads are regarded as period costs and written off as a lump sum to the profit and
loss account. Therefore, fixed overhead volume variances cannot be computed under
marginal costing.

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

Ans.8 Digital Industries Limited

Projected sales and margin of safety % for the next year
Rs. in million
Projected sales for the next year (89.6÷0.7)×1.2×0.85×0.98 (A) 127.95

Margin of safety % to projected sales (A-B)÷A×100 15%

Break-even sales [A÷ (A-C) × D] (B) 108.72

Variable cost:
Variable cost – 2017 level of 75% [127.95(A)÷0.98]×0.75 97.92
Variable cost on incorporating impact of changes:
Direct material (97.92×0.45)×0.95×0.9 37.67
Direct labour (97.92×0.35)×0.92×0.9×1.08 30.65
Overheads (97.92×0.20)×1.04 20.37
Variable cost – projected (C) 88.69

Fixed cost - projected:

Fixed cost – 2017 (equal to CM for break-even sales) (89.6÷0.8) ×0.25 28.00
Depreciation - old plant 27÷(15+3) (1.50)
26.50
Impact of 4% inflation 26.5×4% 1.06
Depreciation - new plant 30÷10 3.00
Long-term loan interest at 10% (30-2) ×10% 2.80
(D) 33.36

(THE END)

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