THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2005

March 12, 2005

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 (a) It is often stated that ‘actual product cost’ cannot practically be worked out.

(i) Why do you think this statement is made? (05)

(ii) If the statement is correct, is the whole cost accounting process
worthwhile? (04)

(b) (i) Explain with reasons the significance of chart of accounts for the
purpose of cost accounting. (03)
(ii) Give reasons why over- or under-absorptions of overheads may arise. (03)

Q.2 A company manufactures and retails clothing.

You are required to group costs which are listed below and numbered 1 to 20 in the
following classifications (each cost is intended to belong to only one classification):

(i) Direct material

(ii) Direct labour
(iii) Direct expenses
(iv) Indirect production overhead
(v) Research and development costs
(vi) Selling and distribution costs
(vii) Administration costs
(viii) Finance costs
1. Lubricant for sewing machines
2. Floppy disks for general office computer
3. Maintenance contract for general office photocopy machine
4. Telephone rental plus metered calls
5. Interest on bank overdraft
6. Performing Rights Society charge for music broadcast throughout the factory
7. Market research undertaken prior to a new launch
8. Wages of security guards for factory
9. Carriage on purchases of basic raw material
10. Royalty payable on production of XY
11. Road licenses for delivery vehicles
12. Parcels sent to customers
13. Cost of advertising products on television
14. Audit fee
15. Chief accountant’s salary
16. Wages of operatives in the cutting department
17. Cost of painting advertising slogans on delivery vans
18. Wages of storekeepers in a material store
19. Wages of fork lift drivers who handle raw materials
20. Developing a new product in the laboratory (10)
 (2)
Q.3 Omega Limited is a manufacturer producing various items. One of its main
products has a constant monthly demand of 20,000 units. The production of this
product requires two kg of chemical A. The cost of the chemical is Rs.5/- per kg.
The supplier of the chemical takes six days to deliver the same from the date of the
order. The ordering cost is Rs.12/- per order and the holding cost is 10% per
annum.

Required:

(a) Calculate the following :

(i) The economic order quantity
(ii) The number of orders required per year
(iii) The total cost of ordering and holding the chemical A for the year.
(b) Assuming that there is no safety stock and that the present stock level is
4000 kg, when should the next order be placed?
(c) Assuming that a safety stock of 4,000 kg of chemical is maintained, what
will be the holding cost per year?
(d) Discuss the problems which most firms would have in attempting to apply
the EOQ formula. (12)

Q.4 The yield of a certain process is 80% as to the main product and 15% as to the by-
product. Remaining 5% is the process loss. The material put in process (10,000
units) costed Rs.21 per unit and all other charges amounted to Rs.30,000 of which
power cost accounted for 33? %. It is ascertained that power is chargeable to the
main product and by-product in the ratio of 10:9.

Required:

Draw up a statement showing the cost of the by-product. (06)

Q.5 Total Surveys Limited conducts market research surveys for a variety of clients.
Extracts from its records are as follows:

2003 2004
Rupees in million Rupees in million
Total Costs 6.000 6.615

Activity in 2004 was 20% greater than in 2003 and there was an increase of 5% in
general costs.

Activity in 2005 is expected to be 25% greater than 2004 and general costs are
expected to increase by 4%.

Required:

(a) Derive the expected variable and fixed costs for 2005. (07)
(b) Calculate the target sales required for 2005 if Total Surveys Limited wishes to
achieve a contribution to sales ratio of 80%. (03)
(c) Discuss briefly the problems in analyzing costs into fixed and variable
elements. (05)
 (3)
Q.6 Gala Promotions Limited is planning a concert in Karachi. The following are the
estimated costs of the proposed concert:

Rs.(000)
Rent of premises 1,300
Advertising 1,000
Printing of tickets 250
Ticket sellers, security 400
Wages of Gala Promotions Limited Personnel employed at the concert 600
Fee of artist 1,000

There are no variable costs of staging the concert. The company is considering a
selling price for tickets at either Rs.4,000/- or Rs.5,000/- each.

Required:

(i) Calculate the number of tickets which must be sold at each price in order to
break-even. (03)
(ii) Recalculate the number of tickets which must be sold at each price in order to
break-even, if the artist agrees to change from fixed fee of Rs. 1 million to a
fee equal to 25% of the gross sales proceeds. (04)
(iii) Calculate the level of ticket sales for each price, at which the company would
be indifferent as between the fixed and percentage fee alternative. (04)
(iv) Comment on the factors, which you think, the company might consider in
choosing between the fixed fee and percentage fee alternative. (04)

Q.7 Ali Limited makes and sells one product, the standard production cost of which is
as follows for one unit:

Rs.
Direct labour 3 hours at Rs.6 per hour 18
Direct materials 4 kilograms at Rs.7 per kg 28
Production overhead Variable 3
Fixed 20
Standard production cost 69

Normal output is 16,000 units per annum and this figure is used for the fixed
production overhead calculation.

Costs relating to selling, distribution and administration are:

Variable 20 percent of sales value

Fixed Rs.180,000 per annum

The only variance is a fixed production overhead volume variance. There are no
units in finished goods stock at 1 October 2003. The fixed overhead expenditure is
spread evenly throughout the year. The selling price per unit is Rs.140.

For each of the six monthly periods, the number of units to be produced and sold
are budgeted as :
 (4)
Six months ending Six months ending
31 March 2004 30 September 2004
Production units 8,500 7,000
Sales units 7,000 8,000

Required:

(a) Prepare statements for the management showing sales, costs and profits for
each of the six monthly periods, using
(i) marginal costing (05)
(ii) absorption costing (08)
(b) Prepare an explanatory statement reconciling for each six monthly period the
profit using marginal costing with the profit using absorption costing. (03)

Q.8 Pink Ltd. is considering proposals for design changes in one of a range of soft toys.
The proposals are as follows:

(a) Eliminate some of the decorative stitching from the toy.

(b) Use plastic eyes instead of glass eyes in the toys.
(c) Change the filling material used. It is proposed that scrap fabric left over from
the body manufacture be used instead of synthetic material which is currently
being used.

On above proposals following information has been gathered by management:

(1) Plastic eyes will cost Rs.30 per hundred whereas the existing glass eyes cost
Rs.40 per hundred. The eyes will be more liable to damage during insertion. It
is estimated that scrap plastic eyes will be 10% of the quantity issued from
stores as compared to 5% in case of glass eyes.
(2) The synthetic filling materials costs Rs.1,600 per ton. One ton of filling is
sufficient for 2,000 soft toys.
(3) Scrap fabric to be used as filling material will need to be cut into smaller
pieces before use and will cost Re.1 per soft toy. Scrap fabric is sufficiently
available for this purpose.
(4) The elimination of decorative stitching is expected to reduce the appeal of the
product, with an estimated fall in sales by 10% from the current level. It is not
felt that the change in eyes or filling material will adversely affect sales
volume. The elimination of the stitching will reduce production costs by Rs.6
per soft toy.
(5) Current sales level of the soft toy is 300,000 units per annum. Apportioned
fixed costs per annum are Rs.4,500,000. The net profit per soft toy at the
current sales level is Rs.30.

Required:

Prepare an analysis which shows the estimated effect on annual profit if all three
proposals are implemented and which enables management to evaluate each
proposal. The proposals for plastic eyes and the use of scrap fabric should be
evaluated after the stitching elimination proposal has been evaluated. (11)

(THE END)