Cost and Management Accounting

Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A.1 Oceanic Chemicals

Product-wise cost of Sigma and Theta
Sigma Theta
----------- Rs. in '000’ -----------
Joint costs of production W.2 4,303.49 2770.98
Cost of refining (350+890) - 1,240.00
(A) 4,303.49 4,010.98
No. of units produced Ltr. (B) 34,800 15,252
Cost per Litre Rs. (A÷B) 123.66 262.98
W.1: Joint cost of production
Rs. in '000’
Joint cost of production (3,000+2,500+1,850) 7,350.00
Sale proceeds from by-product ZEE (5,84540) (233.80)
7116.20
Cost of abnormal loss of production [7,116.20÷(34,800+16,055+300)300] (41.73)
7,074.47

W.2: Allocation of joint costs

NRV at Units Joint cost
Total NRV
split-off produced allocation
Rs. Ltrs -------- Rs. in '000 --------
Sigma 300.00 34,800 10,440.00 4,303.49
Beta 500-[(350+890)÷15,252)] 418.70 16,055 6,722.23 2,770.98
17,162.23 7,074.47

W.3: Abnormal loss quantity

Production Refining
---------- Litres ----------
Input quantity 3,000,000÷50 60,000 16,055
Output quantity (34,800+16,055+5,845) (56,700) (15,200)
Production losses 3,300 855
Normal losses up to 5% of input (60,000×5%), (16,055×5%) 3,000 803
Abnormal loss 300 52

A.2 Project’s Internal rate of return Year 0 1 2 3 4

---------------------- Rs. in million ----------------------
Sales - 155.00 155.00 65.00 65.00
Cost of sales (50%) - (77.50) (77.50) (32.50) (32.50)
Operating expense (10%) - (15.50) (15.50) (6.50) (6.50)
5% of sales for technical support by CL - (7.75) (7.75) (3.25) (3.25)
Investment (175.00) - - - 100.00
Net cash flows (175.00) 54.25 54.25 22.75 122.75

Discount factor (15%) 1.00 0.87 0.76 0.66 0.57

Present value (175.00) 47.20 41.23 15.02 69.97
Net present value at 15% NPVA (1.58)
Discount factor (12%) 1.00 0.89 0.79 0.71 0.63
Present value (175.00) 48.28 42.86 16.15 77.33
Net present value at 12% NPVB 9.62
Using the interpolation formula A%+ [NPVA÷ (NPVA-NPVB)] × (B%-A %)
Internal rate of return (IRR) 15%+ [-1.58 ÷ (-1.58-9.62)] (12%-15%)
14.58%

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A.3 (a) Units to be sold to maintain the current profit:

Rs.
Sales (6,000 units × 1,600) 9,600,000
Variable cost [6,000 × (960+240)] (7,200,000)
Contribution margin A 2,400,000
Revised contribution margin per unit [1,600–960–(240×1.15)] B 364
Units to be sold A÷B 6,593 Units

(b) Selling price per unit to earn a profit of Rs. 2 million:

Revised capacity (6,000 ÷ 0.8 × 1.25) Units 9,375
Revised fixed cost 850,000 + (760,000 × 10%) Rs. 926,000
(  ) Rs. 1,548

A.4 Jack and Jill

(a) Equivalent units using FIFO: Quantity Equivalent production units

schedule Material Conversion
(Units) (Units) (Units)
Opening WIP (80% conversion) 8,000 (8,000) (6,400)
Units started during the month 50,000
58,000
Units transferred to finished goods 48,000 48,000 48,000
Closing WIP (60% conversion) 7,000 7,000 4,200
Normal loss 3% of input (58,000-7,000)  3% 1,530 - -
Abnormal loss (90% conversion) Bal. 1,470 1,470 1,323
58,000 48,470 47,123

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A B (A×B)
(b) Variances: kg/Hrs. Fav./(adv.)
(Standard-Actual)
/ Rs. Rupees
Material price variance:
Actual material usage W.2 50,000 40 - 38 = Rs. 2.00 100,000
Actual material usage W.2 200,000 40 - 42 = (Rs. 2.00) (400,000)
(300,000)
Material usage variance:
Standard material rate per kg 40.00 242,350 - 250,000 = (7,650 kgs) (306,000)

Labour rate variance:

Actual labour hours W.2 72,000 80 - 84 = (Rs. 4.00) (288,000)

Labour efficiency variance:

Standard labour rate per hour 80.00 70,685 - 72,000 = (1,315 Hrs.) (105,200)

Variable overhead expenditure variance:

Actual labour hours at standard rate 72,000 (W.1) 64.00 4,608,000
Actual variable overheads (6,350,000)
(1,742,000)

Variable overhead efficiency variance:

Standard variable overhead rate per hour W.1 64.00 70,685 - 72,000 = (1,315 Hrs.) (84,160)

Fixed overhead expenditure variance:

Budgeted fixed production overhead 3,000,000
Actual fixed production overhead (2,850,000)
150,000
Fixed overhead volume variance:
Standard fixed overhead rate per hour W.1 40.00 70,685 - 75,000 = (4,315 Hrs.) (172,600)

W.1: Statement of standard factory overhead rate per hour: Rs.

Standard factory overhead rate per hour (120130%)÷1.5 104.00
Standard fixed factory overhead rate per hour 3,000,000÷75,000 40.00
Standard variable factory overhead rate per hour 104-40 64.00

W.2: Standard usage of material/labour Actual usage of material/labour/overheads

Per kg/hrs.
Eq. units Per unit Kg/hrs. Amount kg/hrs.
(Rs.)
Material 48,470 5.0 kg 242,350 1,900,000 38.00 50,000
8,400,000 42.00 200,000
10,300,000 250,000
D. labour 47,123 1.5 hrs. 70,685 6,048,000 84.00 72,000
V. overheads 6,350,000 88.1944 72,000

A.5 (a) In the case of ‘in the money’ option, intrinsic value is the difference between the underlying
price and the strike price. An “out-the-money” option has no intrinsic value.

Intrinsic value in the case of call option is computed by deducting the strike price from the
underlying price.

Intrinsic value in the case of put option is computed by deducting the underlying price from
the strike price.

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

(b) Profit/(loss) of the investor on exercising put option at various market prices of shares:
(i) (ii) (iii)
----------- Rupees -----------
Shares’ strike price under the option 300 300 -
Premium paid (60) (60) (60)
Shares’ market price on expiry date of the option (180) (260) -
Net profit/(loss) of the investor 60 (20) (60)

In case of (iii) investor will not exercise the option and only book loss of premium.
A.6 Queen Jewels
Cash budget for the Quarter ending 31 December 2015

Rs. in '000’
RECEIPTS:
Collection from sales excluding 10% sales of high valued items:
- 7 days sale in September received in October (4,600÷30790%) 966
- Sales for the quarter ending 31 December 2015 (5,000+4,200+5,800)90% 13,500
- 7 days sale in December collected in January 2015 (5,800/30790%) (1,218)
13,248
Collection in advance from 10% sales of high valued items:
- 8 days(15-7) sales in October received in September (5,000/30810%) (133)
- Sales for the quarter ending 31 December 2015 (5,000+4,200+5,800)10% 1,500
- 8 days sale of Jan. 2016 collected in Dec. 2015 (6,000÷30810%) 160
1,527
Deduction of courier charges from collection
- No. of orders recorded in the previous month (400+450+470) 1,320
- No. of high value orders of Aug. delivered in Sep. 2015 -
- No. of high value orders of Nov. delivered in Dec. 2015 (47010%÷2) (24)
No. of orders delivered previous month 1,296
Courier charges at Rs. 300 per order 1,296300 (389)
Total collection for the quarter 14,386

PAYMENTS:
Cost of sales for the quarter (cost plus 30%) (5,000+4,200+5,800)÷1.3 11,538
Opening stock 1 October 2015 5,00090%25%÷1.3 (865)
Closing stock 31 December 2015 6,00090%25%÷1.3 1,038
Purchases 11,712
60% of Sept. purchases paid in Oct. (3,20060%) 1,920
60% of Dec. purchases to be paid in Jan. 2016 (W.1) 4,49660% (2,698)
Payments for purchases 10,934

Expenses paid excluding depreciation and amortisation (50,000-8,000-2,000)÷4 10,000

Net outflow for the quarter ended 31 December 2015 (6,548)

Cash and bank balances as at 1 October 2015 5,500

Cash and bank balances as at 31 December 2015 - Overdraft (1,048)

W.1: Purchases for December 2015

Cost of sales for Dec. 2015 (cost plus 30%) 5,800÷1.3 4,462
Opening stock 1 December 2015 4,46290%25% (1,004)
Closing stock 31 December 2015 6,00090%25%÷1.3 1,038
Purchases 4,496

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A.7 Chocó-king Limited

(a) Economic order quantity (EOQ)

Annual requirement of the coco powder 80,000÷0.9690% kg 75,000

Ordering cost per order (6,000,000÷120) Rs. 50,000

Storage and handling 2012 240

Other carrying cost 512 60
Carrying cost per kg Rs. 300

Economic order quantity (EOQ)

SQRT[(2 × Annual demand × Ordering cost per order) ÷ Carrying cost per kg]
SQRT[(275,00050,000)÷300] = √ = 5,000

(b) Analysis of purchases using EOQ / minimum quantity as offered by the vendor:
EOQ Vendor's offer
No. of orders (75,000÷5,000), (75,000÷7,500) A 15.00 10.00
Average inventory including buffer stock
(Order quantity÷2)+2,000 B 4,500 5,750
Rs. Rs.
Annual cost of placing orders (A×50,000) 750,000 500,000
Carrying cost (B×300) 1,350,000 1,725,000
Discount on placing order of 7,500 kg each
(75,0006002%) - (900,000)
Net cost 2,100,000 1,325,000
Annual saving on acceptance of vendor's offer 775,000

A.8 Key considerations for professional accountants as per IFAC sustainability framework for the
following sections of reporting perspective:
(a) Determining materiality
(i) In defining report content, materiality should be considered along with the need for
other important information characteristics
(ii) Accountability for materiality thresholds and judgments
(iii) Linking the determination of materiality to strategy, risk management, and sector
benchmarks
(iv) Determining a process for resolving different expectations regarding materiality
(v) Where information is reported can help (a) to reinforce materiality criteria, and (b) to
keep the length of disclosures manageable (particularly where the application of
materiality might vary between reporting for wider stakeholders from investors)

(b) External review and assurance of sustainability disclosures

(i) The quality of external assurance is directly linked to stakeholder inclusiveness
(ii) Clarifying the purpose and scope of the assurance
(iii) The choice of service provider
(iv) Establishing the type of engagement
(v) Enhancing the assurance statement

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A.9 Sahil Limited

Analysis of options of renting the factory and utilization of contract labour
Available options
Immediate Operation using contract
closure and labour
renting of To produce To produce
factory bldg. 30,000 units 40,000 units
-------------- Rupees --------------
Incremental savings
Sales (30,000100), 40,00090) 3,000,000 3,600,000
Rental income (40,00012) 480,000
Proceeds from sale of machine
(830,000-30,0005), (830,000-40,0005) 830,000 680,000 630,000
Direct material - Use for other segment (15,00018) 270,000 - -
Direct material - sale externally [10,000(19-2)] 170,000 - -
Fixed production overheads; apportionment of
general overheads (1,750-170= 1580) - - -
Fixed admin and selling overheads; apportionment of
general overheads (50060%=300) - - -
Incremental costs
Purchase of direct material (5,00019), (15,00019) - (95,000) (285,000)
Training of contract labour - (40,000) (40,000)
Contract labour cost (30,00024), (40,00024) - (720,000) (960,000)
Variable production overhead
(500÷50 1.2  30,000),(500÷501.240,000) - (360,000) (480,000)
Variable admin. & selling overheads:
[(50040%)÷5030], [(50040%)÷5040] - (120,000) (160,000)
Net savings 1,750,000 2,345,000 2,305,000

Conclusion:
Since the highest savings occur with a production level of 30,000 units, SL should operate the segment
at this level of activity.

(THE END)

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