Cost and Management Accounting

Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

A.1 Lotus Enterprises

Cash budget for the next year
Rs. in million
Inflows:
Sale proceeds from:
– Cash sales (net of cash discount) (3,000×1.3)×20%×98% 764.40
– Credit sales:
Credit sales for the year (3,000×1.3)×80% 3,120.00
Trade debtors – closing balance 3,120×40÷360 (346.67)
2,773.33
Trade debtors – opening balance 3,000×45÷360 375.00
Collection from credit sales 3,148.33
(A) 3,912.73
Outflows:
Payments for raw material imports and local purchases:
Imports Local purchases
Imports and local purchases for the year W.1 544.14 792.00 1,336.14
Trade creditors - closing balance 792×50÷360 - (110.00) (110.00)
544.14 682.00 1,226.14
Adjustment of advance for imports (30.00) - (30.00)
Trade creditors - opening balance - 95.00 95.00
514.14 777.00
(B) 1,291.14
Payments for expenses:
Conversion cost Operating cost
Variable Fixed Variable Fixed
Cost for the year 760.27 25.92 1,024.92 100.44 1,911.55
570×1.3×95%×1.08 (4016)×1.08 730×1.3×1.08 (12027)×1.08
Closing–payables (52.80) (1.80) (71.18) (6.97) (132.75)
(760.27÷360×25) (25.92÷360×25) (1,024.92÷360×25) (100.44)÷360×25
707.47 24.12 953.74 93.47 1,778.80
Opening–payables 39.58 1.67 50.69 6.46 98.40
570÷360×25 (40-16)÷360×25 730÷360×25 (120-27)÷360×25
Payments 747.05 25.79 1,004.43 99.93
(C) 1,877.20
Net cash inflows (A-B-C) 744.39

W-1: Imports/purchases for the next year: Local

Imports
purchases
--------- Rs. in million ---------
Raw material consumption using FIFO:
- From current year’s import : at old price 30.00 -
at revised price [(900×1.3×40%)(98+30)]×1.1 374.00 -
- Current year’s purchases: at revised price [(900×1.3×60%)60]×1.1 - 706.20
404.00 706.20
Closing raw material inventory (98×1.3×1.1), (60×1.3×1.1) 140.14 85.80
Total imports/local purchases for the next year 544.14 792.00

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

A.2 Tropical Juices

Investment appraisal - Expansion of production facility
Year 0 Year 1 Year 2 Year 3 Year 4
Cash inflows/(outflows)
------------------------ Rs. in million ------------------------
Loss of opportunity (Bldg. rent) - (6.30) (6.62) (6.95) (7.29)
Cost of plant and its installation (60.00) 6.00
Working capital (25.00) - - - 25.00
Sales 87.50 110.25 123.48 117.50
2 3
(0.25×350) (0.3×350×1.05) (0.32×350×1.05 ) (0.29×350×1.05 )
Variable cost (45.00) (56.70) (63.50) (60.43)
2 3
(0.25×180) (0.3×180×1.05) (0.32×180×1.05 ) (0.29×180×1.05 )
Fixed cost (12.00) (12.60) (13.23) (13.89)
2 3
(0.28×100)-16 (12×1.05) (12×1.05 ) (12×1.05 )
Net cash flows (85.00) 24.20 34.33 39.80 66.89

Present value factor at 15% 1.000 0.870 0.756 0.658 0.572

Present value at 15% (85.00) 21.05 25.95 26.19 38.26
Net present value (NPV) at 15% 26.45

Conclusion: The expansion of production facility is generating positive NPV at TJ's cost of capital of 15%.
Therefore, it is feasible for TJ to expand the production facility.

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

A.3 Bela Enterprises

(a) Statement of equivalent units: Equivalent units Quantity
Material Conversion schedule
------------------- kg -------------------
Opening WIP (85% to conversion) (5,000) (4,250) 5,000
Received from process I 30,000
Material added in process II 15,000
50,000
Transferred to finished goods 40,000 40,000 40,000
Goods started and completed during the month A 35,000 35,750
Closing WIP (60% to conversion) B 4,000 2,400 4,000
Normal loss at 10% (50,0005,0004,000)×10% 4,100
Abnormal loss (80% conversion) (Balancing) C 1,900 1,520 1,900
D 40,900 39,670 50,000

(b) Computation of costs:

Cost per unit Material Conversion Total
---------- Rs. in ‘000 ----------
Opening WIP - - 2,000
Cost for the month: Process I 18,000 - 18,000
Process II 10,000 11,000 21,000
Normal loss quantity at sale price (4,100×100) (410) - (410)
Total cost E 27,590 11,000 40,590

----------------- Rupees -----------------

Cost per unit F=(E÷D) 674.57 277.29

(i) Cost of finished goods: ----------------- Rs. in ‘000 -----------------

Opening WIP 2,000
Cost for the month A×F 23,610 9,913 33,523
35,523
(ii) Cost of closing WIP B×F 2,698 666 3,364
(iii) Cost of abnormal loss C×F 1,282 421 1,703

(c) Accounting entries to account for production losses:

Debit Credit
Date Description
--------- Rs. in '000 ---------
1 Scrap inventory (normal loss quantity) 4,100×100 410
WIP – II 410
(Normal loss quantity credited to WIP at sales value)
2 Scrap inventory (abnormal loss quantity) 1,900×100 190
Profit and loss account (Balancing) 1,513
WIP – II As (iii) above 1,703
(Loss on abnormal loss quantity debited to profit and loss account)

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

A.4 (a) Safety stock:

To minimize stock-outs on account of increased demand or delays in delivery etc., a buffer stock in
excess of average requirements is often maintained. Such a buffer stock is called a safety stock.

Reasons of maintaining the safety stock:

(i) Protect against unforeseen variation in supply and/or demand.
(ii) Prevent disruption in manufacturing or deliveries.
(iii) Avoid stock-outs to keep customer service and satisfaction levels high.

(b) Costs associated with holding of inventory:

(i) Cost of capital tied up
(ii) Insurance costs
(iii) Cost of warehousing
(iv) Obsolescence, deterioration and theft

A.5 Ideal Chemicals

Units
Finished units per batch 1,700÷1.25 (A) 1,360
By-product units per batch 225÷1.02 221

Variable production cost per unit: Rupees

Material: Imports 1,200×1,500 1,800,000
Local 800×900 720,000
Direct labour 4,000×165 660,000
Variable production overheads 4,000×120 480,000
Net sales revenue from sale of by-product 221×(400–250) (33,150)
(B) 3,626,850

Variable production cost per unit (B÷A) 2,666.80

Variable selling overheads per unit 175.00
Variable cost per unit (C) 2,841.80

Sales price per unit to earn 40% contribution on sale D=(C÷0.6) 4,736.33

No. of sale units to earn annual profit before tax of Rs. 10,000,000
Incremental fixed overheads and profit:
- Fee for blending and marketing of Z-13 160,000×12 1,920,000
- Sales promotion expenses 3,500,000
- Required incremental profit before tax 10,000,000
(E) 15,420,000

Required annual sales units No. of units E÷ (D-C) 8,139

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

A.6 Galaxy Engineers

Units to be manufactured to earn maximum profit
Product A Product B Product C Material XPI
---------- Units---------- kg
Budgeted sales/requirements 4,500 1,800 3,000
---------- Rupees ----------
For internal
Sales price per unit 20,000 14,100 use only
Opportunity cost per unit (Purchase price) - - 3,000
Cost of production per unit:
Material XPI usage at Rs. 500 per kg (7,000) (6,000) (1,000)
Other material usage at Rs. 300 per kg (1,500) (900) (300)
Direct labour at Rs. 100 per hour (2,000) (1,500) (500)
Variable overheads at 80% of labour cost (1,600) (1,200) (400)
(12,100) (9,600) (2,200)
CM/savings from own manufacturing (A) 7,900 4,500 800

Per unit usage of material XPI (B) kg 14 12 2

CM per one kg of material XPI (A)÷(B) Rs. 564 375 400
Ranking based on CM per XPI kg 1st 3rd 2nd

Production from available material XPI:

Production of committed export sales - 800 - 9,600
Production in ranking order 4,500 200 2,500 70,400
Optimal production Units 4,500 1,000 2,500 80,000

A.7 Zamil Industries

(a) (i) Material variances

Material price variance:

Actual material usage at actual price using FIFO
Axe Zee Net adverse
Issues (kg) Actual rate Rs. Issues (kg) Actual rate Rs. variance Rs.
9,000 150 1,350,000 4,000 120 480,000
7,000 148 1,036,000 6,000 122 732,000
- - - 19,000 125 2,375,000
16,000 2,386,000 29,000 3,587,000

Actual material usage at

standard price:
16,000 160 2,560,000 29,000 (210÷2) 105 3,045,000
Fav./(Adverse) variance 174,000 (542,000) (368,000)

Material mix variance

Actual usage at Mix quantity
Actual mix
(kg)
std. mix ratio variance Std. cost per (kg) Rs.
(kg) (Adv.)/Fav.
Axe 16,000 15,000 (1,000) 160 (160,000)
Zee 29,000 30,000 1,000 105 105,000
45,000 45,000
Material mix variance – adverse (55,000)

Material yield variance

Per unit Std. raw
Yield (no. of units) material usage at Rs.
Std. price
Standard yield (45,000÷3) 15,000 (160+210) 370 5,550,000
Actual yield (12,000+8,5005,000) 15,500 370 5,735,000
Yield variance – favourable 185,000

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

(ii) Labour variance Rs.

Labour rate variance
Actual hours at standard rate 11,780×(200÷0.8) 2,945,000
Actual hours at actual (3,298,400)
Labour rate variance – adverse (353,400)

Labour efficiency variance

Allowable hours at standard rate (15,500×0.8)×(200÷0.8) 3,100,000
Actual hours at standard rate 11,780×(200÷0.8) (2,945,000)
Labour efficiency variance – favourable 155,000

(b) Analyses of under/over applied fixed overheads

Standard fixed overhead rate per hour (540,000÷15,000×0.8) 45

Applied fixed overheads (15,500×0.8×45) 558,000

Actual fixed overheads (583,000)
Under applied overheads (25,000)

Fixed overhead expenditure variance

Budgeted fixed overheads 540,000
Actual fixed overheads (583,000)
Fixed overhead expenditure variance – adverse (A) (43,000)

Fixed overhead efficiency variance

Allowable hrs. for actual production at standard cost 15,500×0.8×45 558,000
Actual hours worked at standard rate 11,780×45 (530,100)
Fixed overhead efficiency variance – favourable (B) 27,900

Fixed overhead capacity variance

Actual hours worked at standard rate 11,780×45 530,100
BU hours at standard rate 12,000×45 (540,000)
Fixed overhead capacity variance – adverse (C) (9,900)

Under applied fixed overheads (A)+(B)+(C) (25,000)

A.8 Sustainability Reporting

According to the Global Reporting Initiative (GRI), sustainability report is published by a company
or organisation about the economic, environmental and social impacts caused by its everyday
activities. The report also presents the organisation's values and governance model. It demonstrates
the link between its strategy and its commitment to a sustainable global economy.

Internal benefits of sustainability reporting can include:

(i) It increases understanding of risk and opportunities.
(ii) It emphasises the link between financial and non-financial performance.
(iii) It provides supports in the development of long term management strategy and policy, and
business plans.
(iv) It helps in streamlining processes, reducing costs and improving efficiency.
(v) It helps in benchmarking and assessing sustainability of performance with respect to laws,
norms, codes, performance standards, and voluntary initiatives.
(vi) It helps in avoiding being implicated in publicized environmental, social and governance
failures.
(vii) It helps in comparing performance internally, and between organisations and sectors.

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

A.9 Abid Foods Limited

Current market value for 8,000 convertible bonds
Current market value for
Cash
Discount 8,000 bonds, when price per
flows/value
Year Description factor at share is
for 8,000
10% (a) (b)
bonds
Rs. 12 Rs. 10
Rupees --------- Rupees ---------
1 Annual interest (8,000×100×8%) 64,000 0.909 58,176 58,176
2 Annual interest (8,000×100×8%) 64,000 0.826 52,864 52,864
3 Annual interest (8,000×100×8%) 64,000 0.751 48,064 48,064
159,104 159,104
Bonds’ value at higher of shares' expected value
and bonds' redemption value:
Expected value of Redemption value
10 shares of one bond
3 (a) 120.00 115.00 960,000*1 0.751 720,960
3 (b) 100.00 115.00 920,000*2 0.751 690,920
Current market value for 8,000 convertible bonds 880,064 850,024
*1
(8,000 × 120)
*2
(8,000 × 115)

(THE END)

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