SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2018 EXAMINATIONS 1 of 6

MANAGEMENT ACCOUNTING [G3] – GRADUATION LEVEL

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Question No. 2
(a) Standard Production Cost and Standard Profit per Unit using Absorption Costing System:
Rs. per Unit
Selling price 7,150 0.25
Direct material 2,200 0.25
Direct labour 1,100 0.25
Variable production overhead 1,760 0.25
Marginal cost per unit 5,060 0.25
Fixed production overhead (8,510,000 ÷ 11,500) 740 0.25
Standard production cost (absorption) 5,800 0.75
Profit per unit 1,350 0.75

(b) Smart Care Limited

Statement of Profit or Loss [Using Absorption Costing Method]
Rupees
January February
Revenue 62,205,000 69,355,000 0.5
Opening inventory (800 x Rs.5,800) – 4,640,000 0.5
Cost of production (9,500 x Rs.5,800); (10,500 x Rs.5,800) 55,100,000 60,900,000 0.5
Less: Closing inventory (800 x Rs.5,800); (1,600 x Rs.5,800) (4,640,000) (9,280,000) 0.5
Cost of sales 50,460,000 56,260,000 0.5
Profit 11,745,000 13,095,000 01
Less: Under absorption of fixed production overhead [W-1] (1,480,000) (740,000) 0.25
Adjusted profit 10,265,000 12,355,000 01

W-1: Under Absorption of Fixed Production Overhead:

Rupees
January February
Budgeted overhead 8,510,000 8,510,000 0.25
Less: Actual overhead absorbed (9,500 x Rs.740); (10,500 x
Rs.740) (7,030,000) (7,770,000) 0.25
Under absorption 1,480,000 740,000 0.25

Smart Care Limited

Statement of Profit or Loss [Using Marginal Costing Method]
Rupees
January February
Revenue 62,205,000 69,355,000 0.5
Opening inventory (800 x Rs.5,060) – 4,048,000 0.5
Cost of production (9,500 x Rs.5,060); (10,500 x Rs.5,060) 48,070,000 53,130,000 0.5
Less: Closing inventory (800 x Rs.5,060); (1,600 x Rs.5,060) (4,048,000) (8,096,000) 0.5
Variable cost of sales 44,022,000 49,082,000 0.5
Contribution 18,183,000 20,273,000 0.5
Less: Fixed cost (8,510,000) (8,510,000) 0.5
Profit 9,673,000 11,763,000 01
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stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
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provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
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 SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2018 EXAMINATIONS 2 of 6
MANAGEMENT ACCOUNTING [G3] – GRADUATION LEVEL
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(c) Reconciliation of Profit:
Rupees
January February
Absorption costing 10,265,000 12,355,000 0.25
Marginal costing (9,673,000) (11,763,000) 0.25
Difference 592,000 592,000 0.25
Being
Opening inventory (@ Rs.740 per unit) – (592,000) 0.25
Closing inventory (@ Rs.740 per unit) 592,000 1,184,000 0.25
592,000 592,000 0.75

The reason for the difference in profit is due to the difference in the valuation of inventory.

Question No. 3
(a) Determination of Actual Cost:
Rupees
Standard Cost Variances Actual Per Unit
(18,000 units) Favourable Adverse Cost Cost
Direct material 900,000 10,200 41,300 931,100 51.73 0.5
Direct labour 720,000 32,200 38,000 725,800 40.32 0.5
Direct expense 180,000 10.00 0.5
Factory Overhead:
Variable expenditure 90,000 5,000 – 85,000 4.72 0.5
Fixed expenditure and
volume 108,000 5,000 17,500 120,500 6.69 0.5
Administrative Overheads:
Expenditure 108,000 – 5,000 – –
Volume – – 17,500 130,500 7.25 0.5
2,172,900 120.72 01

(b) Fine Electronics Inc.

Statement of Profit or Loss
Rupees
Sales revenue (18,000 x 135) 2,430,000 01
Less: Costs:
Direct material 931,100 0.5
Direct labour 725,800 0.5
Direct expenses (assumed to have no variance) 180,000 0.5
Factory overheads:
Variable 85,000 0.5
Fixed 120,500 205,500 0.5
Administrative overheads 130,500 2,172,900 0.5
Actual profit 257,100 01

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2018 EXAMINATIONS 3 of 6
MANAGEMENT ACCOUNTING [G3] – GRADUATION LEVEL
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(c) Statement of Reconciliation of Actual Profit with Standard Profit:
Rupees
Favourable Adverse
Standard profit (25,000 x 18) 450,000 0.5
Sales volume 126,000 0.25
Material price variance 41,300 0.25
Material usage variance 10,200 0.25
Labour rate variance 38,000 0.25
Labour efficiency variance 32,200 0.25
Factory Overheads:
Expenditure variance (variable) 5,000 0.25
Expenditure variance (fixed) 5,000 0.25
Volume (fixed) 17,500 0.25
Administrative Overheads:
Expenditure variance 5,000 0.25
Volume variance 17,500 0.25
52,400 (245,300) (192,900) 0.5
Actual profit 257,100 0.5
Sales Variances:
Sales price variance = (SR – AR) x AQ (Rs.135 – Rs.135) x 18,000 = NIL
Sales volume variance = (SQ – AQ) x SP per unit = (7,000 x Rs.18) = Rs.126,000 Adverse 01

Question No. 4
(a) Financial Accounting v/s Managerial Accounting: 03
Financial accounting is concerned with the principles, practices and systems employed to compile
transactions of an entity and present financial information for use by an entity’s internal and external
stakeholders. Managerial accounting on the other hand is done to help its managers make
business decisions that affect the entity’s future profits and cash flows.

(b) Decision Analysis:

Rs. ‘000’
Profit Without Profit With
Expansion Expansion
Sales revenue 1,170,000 1,638,000 01
Less: Variable cost:
Raw material (180,000 x Rs.2,580); (252,000 x Rs.2,451) 464,400 617,652 02
Direct labour (180,000 x Rs.648); [(180,000 x Rs.648) + 116,640 172,627 02
(72,000 x Rs.648 x 1.20)]
Variable manufacturing overhead 116,640 163,296 01
Total variable cost 697,680 953,575
Contribution 472,320 684,425 0.5
Less: Fixed costs (180,000 x Rs.1,300) (234,000) (351,000) 01
Net income 238,320 333,425 01
Yes, it would be profitable to add the second shift as it would increase profits by Rs.95,105,000. 0.5
DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2018 EXAMINATIONS 4 of 6
MANAGEMENT ACCOUNTING [G3] – GRADUATION LEVEL
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Question No. 5
(a) Budgeting: 02
A sales forecast is the projection of the potential sales for an entire industry, as well as the market
share for the firm preparing the forecast.
A sales budget is a translation of the sales forecast for a budget period in to detailed information
concerning the products or services expected to be sold.

(b) (i) Production Budget:

Budgeted sales units 50,000 0.25
Budgeted ending finished units 7,400 0.25
Total units needed 57,400 0.5
Less: Opening finished units (12,100) 0.5
Required production – units 45,300 0.5

(ii) Materials Purchase Budget:

Material ‘A’ Material ‘B’ Empty Bags
Production units 45,300 45,300 45,300 0.75
Material required per unit (kg/ bags) 20 30 1
Required material (kg/ bags) 906,000 1,359,000 45,300 0.75
Desired ending materials(kg/ bags) 62,500 90,000 21,000 0.75
Total material required (kg/ bags) 968,500 1,449,000 66,300 0.75
Beginning materials (kg/ bags) 77,500 109,000 32,000 0.75
Material need to purchase (kg/ bags) 891,000 1,340,000 34,300 0.75
Cost per kg / bag (Rupees) 57.00 19.20 120.00 0.75
Cost of purchase (Rupees) 50,787,000 25,728,000 4,116,000 0.75
Total cost (Rupees) 80,631,000

(iii) Budgeted unit Cost (using variable costing):

Rupees
Material ‘A’ (20 x Rs.57) 1,140 0.5
Material ‘B’ (30 x Rs.19.2) 576 0.5
Empty bag (1 x Rs.120) 120 1,836 0.5
Direct labour 240 0.5
Manufacturing overhead 86 0.5
Total variable cost per bag 2,162 0.5
(iv) Pure Food Company
Statement of Profit or Loss [Budgeted]
for the 3rd quarter of 2018
Rs. ‘000’
Sales (50,000 x Rs.3,000) 150,000 0.5
Less: Cost of goods sold (50,000 x Rs.2,162) (108,100) 0.5
Manufacturing margin 41,900 0.5
Less: Variable selling and administrative cost (50,000 x Rs.150) (7,500) 0.5
Contribution margin 34,400 0.5
Fixed costs:
Manufacturing 11,520
Selling and administrative expenses 6,480 0.5
Less: Total fixed cost (18,000) 0.5
Net operating income 16,400 0.5

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
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suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2018 EXAMINATIONS 5 of 6
MANAGEMENT ACCOUNTING [G3] – GRADUATION LEVEL
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Question No. 6
Computation of Net Present Value (NPV) of the Project:
Project ‘X’:
Rs. ‘000’
Before Present Value
Taxable Tax Cash Flow Present
Year Tax Cash Depreciation Factor
Expense Saving After Tax Value
Flow [@ 15%]
0 (50,000) – – – (50,000) 1.000 (50,000) 01
1-10 (17,500) (4,800) (22,300) 6,690 (10,810) 5.019 (54,255) 03
10 2,000 – – – 2,000 0.247 494 01
(103,761) 01

Project ‘Y’:
Rs. ‘000’
Before Present Value
Taxable Tax Cash Flow Present
Year Tax Cash Depreciation Factor
Expense Saving After Tax Value
Flow [@ 15%]
0 (75,000) – – – (75,000) 1.000 (75,000) 01
1-10 (10,000) (6,800) (16,800) 5,040 (4,960) 5.019 (24,894) 03
10 7,000 – – – 7,000 0.247 1,729 01
(98,165) 01
Project ‘Y’ is better as it has less present value of cost. 01

Question No. 7
(a) & (b)

Equivalent Production Units

Quantity Schedule: Material Conversion Total
Opening stock-in-process
Put into process 100,000 0.25
Normal loss (5,000) 0.25
95,000 95,000 95,000 0.5
Transferred to Finished Goods
64,000
Department (FGD)
Closing stock-in-process 25,000 (15,000)* 01
(89,000) 0.5
Abnormal loss 6,000 95,000 80,000 1.5
Total cost (Rupees) 900,000 4,250,000 5,150,000 1.5
62.598 or
Cost per unit (Rupees) 9.473 53.125 1.5
62.60
Cost transferred to FGD (adjusted for rounding off error) (64,000 x 62.6) (Rupees) 4,006,400 0.5
Cost of abnormal loss (6,000 x 62.6) (Rupees) 375,600 0.5
Cost of ending work-in-process (25,000 x 9.473); (10,000 x
53.125) (Rupees) 236,825 531,250 768,075 0.5
5,150,075 0.5
* 25,000 x 60% = 15,000
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stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2018 EXAMINATIONS 6 of 6
MANAGEMENT ACCOUNTING [G3] – GRADUATION LEVEL
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Question No. 8
(a) Types of Costs that the Business might Suffer Internally: 03
 Environmental prevention costs are the costs required to eliminate environmental impacts
before they occur. For example, forming environmental policies, performing site and
feasibility studies, staff training.
 Environmental appraisal costs are the costs involved with establishing whether activities are
complying with environmental standards and policies. For example, developing performance
measures, monitoring, testing and inspection costs, site survey costs.
 Failure costs are also sometimes categorised into environmental internal failure costs and
environmental external failure costs.
 Environmental internal failure costs are the costs of activities that must be undertaken
when contaminants and waste have been created by a business but not released into
the environment.
 Environmental external failure costs are the costs which arise when a business releases
harmful waste into the environment. A business can harm its reputation by doing this.

(b) (i) (1) Return per Factory Hour:

Rupees
Sales per day (1,500 x Rs.2,500) 3,750,000 0.5
Direct material (1,500 x Rs.1,000) 1,500,000 0.5
2,250,000 0.5
Usage of bottle-neck hours (per day) 8 0.5
Return per factory hour (Rs.2,250,000 ÷ 8) 281,250 01

(2) Throughput Accounting (TA) Ratio:

Return per factory hour (Rupees) 281,250 0.5
Total factory cost per hour (Rs.600,000 ÷ 8) (Rupees) 75,000 0.5
Throughput accounting ratio (Rs.281,250 ÷ 75,000) 3.75 01

(ii) To improve the throughput accounting ratio a firm may: 02

 Increase the selling price per unit
 Reduce material costs per unit if possible
 Reduce the time on the bottleneck process
 Redesign the bottleneck process
 Invest in capacity to increase the bottleneck

THE END

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suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.