COMSATS University Islamabad, Lahore Campus

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Terminal Examination –Fall 2020
Course Title: Advance Management Accounting Course Code: Acc 500 Credit Hours: 3(3,0)
Instructor Imran ur Rehman Programme Name: BAF
Semester: 7th Batch: Section: A Date:
Time Allowed: 3 Hrs. (including uploading time) Maximum Marks: 50
Student’s Name: Reg. No.
Important Instructions / Guidelines:
 Attempt all questions. Read all questions carefully before attempting.
 (Note mistakes in question paper pointed out by students during exam were corrected and
duly notified to students are in red)

Question 1:

James Ltd opened a plant for making spare parts on January 1. Data for the first two months operations
are shown below.

January (units) February (units)

Units started in month 3,900 2,700
Units completed (all sold) 2,400 2,400
Closing work in progress 1,500 1,800
Variable costs: Rupees Rupees
Material 58,500 48,600
Labour 36,000 21,000
Fixed costs 63,000 63,000
Sales Revenue 112,800 120,000

January 31 the units were 100 percent complete for materials and 80 percent complete for labour in
closing work in progress. February 28, the units in closing work in progress were 100 percent complete
for materials and 50 percent complete for labour. The company’s policy for valuation of work in progress
in under review.
The board of directors decided that two alternative profit and loss statement should be prepared for
January and February. One statement would value work in progress on a weighted average cost basis and
the other would adopt a first in first out basis. Fixed costs would be absorbed in proportion to actual
labour costs in both cases. For both bases gave same value of closing work in process as well as profit.
When the statements for February were presented to the board the following suggestions were made:

 We would not have a problem over the valuation basis if we used standard costs.
 It would be simpler and more informative to go to a direct cost valuation basis for
management use.

Required:
1. Prepare profit and loss statements for January and February on two alternative bases
decided by the board of directors showing calculations of cost of production report.
(Marks 10)
 2. Explain with supporting calculations the differences between the results shown by each
statement you have prepared. (Marks 5) (Total Marks 15)

Q.2
Lever Brothers Limited produces following products and is studying the profitability of its product line.
Following data is given to you about the firm for the coming year:

Product X Y Z
Sales in units 100,000 120,000 80,000
Rs. Rs. Rs.
Revenue 1,500,000 1,440,00 880,000
0
Costs:
Material 500,000 480,000 240,000
Labour 400,000 320,000 160,000
Overheads 650,000 600,000 360,000
Total cost 1,550,00 1,400,00 760,00
0 0 0
Profit / (50,000) 40,000 120,000
(Loss)

Chief Executive Officer of the company is concerned about the loss on product X he is considering
ceasing production of it and switching the spare capacity of 100,000 units to product Z. Following
additional information is also available:
1. Units produced are sold.
2. 25 percent of the labour cost for each product is fixed in nature.
3. Fixed administration overheads of Rs.900,000 in total have been apportioned to each
product based on units sold and are included to the overhead costs above. All other
overhead costs are variable in nature.
4. Ceasing production of product, X would eliminate the fixed labour charge associated
with it and one sixth of the fixed administration overhead apportioned to product X.
5. Increasing the production of product Z by 100,000 units would mean that the fixed labour
cost associated with product Z would double, the variable labour cost would raise by 20
percent and its selling price would have to be decreased by Rs.1.50 to achieve the
increase sales.

Required:
a. What is marginal cost per unit of each product based on: (Marks 12)
i. Original budget
ii. If product X is deleted.
b. Prepare a statement showing the total contribution and profit for each product based on:
i. Original budget
ii. If product X is deleted. (Marks 6)
c. Advice whether product X should be deleted from the product range, giving reasons for
your decision using your results from (a) and (b). (Marks 2) (Total Marks 20)

Q:3
ICI Limited follows a standard marginal costing system. It is involved in production of number of
products information relating to product X, which is made in one of the company departments is given
below:

Product X Standard Marginal

Product Cost per unit
Direct Material (6 Kg @ Rs.4 per Kg) 24
Direct Labour (1 hour @ Rs.7 per 7
hour
Variable production overhead 3
Total cost per unit 34

Budgeted fixed factory overhead per month Rs.100,000. Variable production overhead varies with units
produced. Budgeted production for product X is 20,000 units per month. Actual production and costs for
the month are as follows:

Units of X product produced 18,500

Direct Material purchases and used (113,500 Rs. 442,650
Kg)
Direct Labour (17,800 Hours) 129,940
Variable overhead incurred 58,800
Fixed Production overhead incurred 104,000
Total 735,390

Required:
a. Prepare following budgets in column statement showing of costs: (Marks 9)
i. Original Budget
ii. Flexible budget
iii. Actual
b. Calculate Direct Material and Direct Labour variances. (Marks 6) (Total Marks 15)