Certificate in Accounting and Finance Stage Examination

25th August 2022

180 mins – 100 marks
Additional reading time – 15 minutes

Cost and Management Accounting – Final Mock

Instructions to examinees:
(i) Answer all 9 questions.
(ii) Answer in black pen only.
(iii) Start new question on new page
(iv) Write page number on top of your answer scripts.

Section A

Question No. 1
Ijaz Engineering (IE) is a building business that provides a range of building services to the public. Recently they have been asked to
quote for garage conversions (GC) and extensions to properties (EX) and have found that they are winning fewer GC contracts than
expected.

IE has a policy to price all jobs at budgeted total cost plus 50%. Overheads are currently absorbed on a labour hour basis. IE thinks
that a switch to activity based costing (ABC) to absorb overheads would reduce the cost associated to GC and hence make them
more competitive.

You are provided with the following data:

Overheads Overheads Activity Driver No. of Activities
Costs (Rs.) per year
Supervisors 90,000 Site Visits 500
Planners 70,000 Planning Documents 250
Property Related 240,000 Labour Hours 40,000
Total 400,000

A typical GC costs Rs. 3,500 in materials and takes 300 labour hours to complete. A GC requires only one site visit by a supervisor
and needs only one planning document to be raised. The typical EX costs Rs. 8,000 in materials and takes 500 hours to complete. An
EX requires six site visits and five planning documents. In all cases labour is paid Rs. 15 per hour.

Required:
Calculate the cost and the quoted price of a GC and of an EX using ABC to absorb overheads. (08)

Question No. 2
After years of research, Rashid (Private) Limited (RPL) has developed a new product ‘ALPHA’. The planning department has provided
the following estimates related to the production cost of first batch of 5,000 units of ALPHA:
Particulars [Cost per Unit] Rs.
Material (100 Kgs per unit @ Rs. 8 per kg) 800
Direct labour (10 hours per unit @ Rs. 250 per hour) 2,500
Variable overheads (60% of direct labour) 1,500
Fixed overheads – Allocated costs 200
Fixed overheads – Specific costs 100
Rate of learning is estimated at 80% but the learning effect is expected to apply to the first 5 batches only. The marketing
department has informed that the demand for ALPHA would be around 50,000 units per annum for five years and RPL can charge a
price of Rs. 3,200 per unit. Selling expenses are estimated at Rs. 200 per unit.
Required:
Using the data for five years of operation, evaluate and recommend whether it would be feasible to produce and sell ALPHA. (09)
Question No. 3
Black Vigo Company Limited is expected to achieve a sale of Rs. 160 million during the current year. The contribution margin is
expected to be 25% whereas the margin of safety is estimated at 30%.
During the next year, the company intends to reduce its prices by 4% and plans to market its products vigorously to increase the
sales volume.
40% of the fixed costs are consisted of depreciation and the remaining fixed costs are estimated to inflate by 15%.
Required:
Compute the percentage of increase in sales volume that the company should achieve to maintain a safety margin of 30%. (08)

Question No. 4
AMR started a new manufacturing business. The records of first month has shown the following transactions:
 Raw material inventory was purchased on 1st July 2021 amounting to Rs. 225,000. Payment of Rs. 150,000 was made on 8th
July.
 Indirect material of Rs. 75,000 was also purchased on the 1st July, but no payment was made during the month.
 On 3rd July, direct material was issued to production amounting to Rs. 175,000 along with the indirect material of Rs. 50,000.
 During inspection on 7th July, it was identified that the direct material of Rs. 25,000 and indirect material of Rs. 15,000 is
defective. The supervisor immediately instructed to send back the defective units to storeroom. These defective materials were
returned to supplier on 11th July.
 Actual overheads include electricity of Rs. 18,000, rent Rs. 32,000, other fixed overheads of Rs. 35,000 and depreciation
amounting to Rs. 15,000.
 Overheads are absorbed at 2/3 of direct material purchased.
 Direct labour is paid at Rs. 25 per hour and 4,400 hours were worked during the month. Indirect labour amounted to Rs.
30,000.
 Goods completed during the month were amounted to Rs. 360,000.
 75% of finished goods were sold during the month for Rs. 400,000. The cash received amounted to Rs. 290,000 and the
remaining is expected to receive in the following month.
Required:
Prepare journal entries to record above transactions. (10)

Question No. 5
Hot Spring Limited (HSL) have been producing microwaves for the last five years. The production of microwaves requires the use of
special component MG3 which helps to increase the useful life of the microwave. Each unit of microwave will require 1 unit of
component MG3. Each unit of MG3 will cost Rs. 20 per unit. Currently the HSL places the 20 orders in a year of component MG3. The
cost of ordering MG3 will be Rs. 25 per order and cost to store MG3 will be Rs. 3 per unit per annum. The company’s cost of
financing is 10% per annum.
Required:
If Economic Order Quantity (EOQ) is 100 Components. Calculate the No. of components per order of MG3. (07)

Question No. 6
Mythic Private Limited (MPL) uses the periodic inventory system. The opening inventory of an item “X-Suit” and data pertaining to its
sales and purchases during July, 2022 are shown below:
Date Particulars Units Rate (Rs.)
July 1 Opening Inventory 3,000 6.00
July 4 Purchase 500 5.40
July 9 Sale 2,000
July 12 Purchase 3,000 5.10
July 20 Sale 800
July 24 Sale 1,600
July 26 Purchase 1,200 4.80
July 27 Sale 300

On 28th July, 2022 the estimated selling price of X-Suit had declined to Rs. 4.50 per unit.

Required:
Using the concept of lower of cost and NRV, calculate the value of ending inventory of X- Suit on 31st July, 2022 using store ledger
card. Assume that MPL uses First in First out (FIFO) method for valuation of inventory. (08)
 Section B
Question No. 7
A company has been asked to provide a quotation for a project that will take one year to complete. An analysis of the project has
already been completed and the following resource requirements have been identified.
i. A specialized machine will be required for a total of 10 weeks. The machine can be hired from a reputable supplier, who
would guarantee its availability when it is required for Rs 4,000 per week. Alternatively it could be purchased at a cost of Rs
250,000. If it were purchased it could be sold in 1 years’ time for Rs. 150,000. If the machine were purchased, it could be
put to hire to other companies for Rs. 2,500 per week and it is believed that it would be hired out for a total of 30 weeks.
ii. The machine has a running cost of Rs. 720 per week. The cost is incurred by the user of the machine.
iii. It is the company's policy to depreciate non-current assets by 10% per year on reducing balance basis.
iv. Skilled labor would be required for a total of 9000 hours during the year. The labor required could be recruited at an hourly
rate of Rs. 12. Alternatively some of the employees currently working on other projects within the company could be
transferred to this project. Their hourly rate is Rs. 10 per hour. If these existing employees were to be transferred to this
project then they would need to be replaced on their existing project work. Replacements for their existing project work
would cost Rs. 11 per hour.
v. Unskilled labor would be required for a total of 12,000 hours during the year. These workers need to be recruited on a one
year contract at a cost of Rs. 8 per hour.
vi. The project would need to be supervised and it is estimated that there would be a total of 500 hours of supervision required
during the year. One of the existing supervisors could undertake this work, but if he did so he would have to work a total of
300 hours overtime during the year to carry out the supervision on this project as well as his existing duties. The supervisor
earns a salary of Rs. 50,000 per year for working 2,000 hours and is not paid for overtime work; if this project goes ahead,
the supervisor would be paid a bonus of Rs. 500 which would not be paid if the project is not undertaken.
vii. The direct material required for the project is as follows:
Material WX:
The total amount required would be 10,000 square meters. The company purchased 25,000 square meters of this material
for a project two years ago at a total cost of Rs. 100,000. This earlier project used 20,000 square meters of the material
and the remainder is currently held in inventory. The company does not foresee another use of material in the future and
could sell it in for Rs. 2 per square meter. The current purchase price of the material is Rs. 5 per square meter.
viii. It is the company policy to attribute overhead cost to project using an absorption rate of 40% of prime costs.
ix. It is company policy to add a 10% profit markup to total costs when setting its prices.
Required:
Company has been offered the price of Rs. 312,500. Calculate the cost gap is company plans to achieve the profit margin of 20%.
(20)

Question No. 8
Stable Limited (SL) manufactures three products, A, B and C. It is the policy of the company to apportion the joint costs on the basis
of estimated sales value at split off point. SL incurred the following joint costs during the month of October, 2021:
Rupees in ‘000
Direct Material 8,000
Direct Labour 1,600
Overheads (Including Depreciation) 1,100
Total Joint Costs 10,700
During the month of October 2021, the production and sales of product A, B and C were 6,000 8,000 and 10,000 units respectively.
Their average selling prices were Rs. 600, Rs. 700 and Rs. 925 per unit.
In October 2021, processing costs incurred on product A after the split off point amounted to Rs. 950,000.
Product B and C are sold after being packed on a specialized machine. The packing material costs Rs. 20 per square foot and each
unit requires the following:
Product Square Feet
B 2.25
C 3.75
The monthly operating costs associated with the packing machine are as follows:
Rupees
Depreciation 240,000
Labour 360,000
Other Costs 330,000
All the above costs are fixed and are apportioned on the basis of packing material consumption in square feet.
Required:
Calculate the Joint costs to be apportioned to each product. (15)
Question No. 9
Blomster Limited (BL) manufactures various products. The following information pertains to one of its main products:
(i) Standard cost card per unit
Rs.
Direct Material (5 kg at Rs 20 per kg) 100
Direct Labour (1.5 hours at Rs 40 per hour ) 60
Factory overheads 140% of direct labour
(ii) Fixed overheads are budgeted at Rs. 1.5 million based on normal capacity of 37,500 direct labour hours per month.
(iii) Actual data for the month of June 2015:
Units
Opening Work in process ( 80% Converted) 4,000
Started during the month 25,000
Transferred to finsished goods 24,000
Closing work in process ( 60% converted) 3,500
Rs.
Material Issued to production: Rs 19 per kg 475,000
Rs. 21 per kg 2,100,000
Direct labour at Rs 42 per hour 1,512,000
Variable factory overheads 648,000
Fixed factory overheads 1,425,000
(iv) Materials are added at the beginning of the process. Conversion costs are incurred evenly throughout the process. Losses up to
3% of the input are considered as normal. However, losses are determined at the time of inspection which takes place when units
are 90% complete.
(v) BL uses FIFO method for inventory valuation.

Required:
Calculate material, labour and variable overheads variances. Also calculate fixed overheads expenditure and efficiency variance. (15)

(THE END)