Cost of Management Accounting - Mock

Suggested Answers
Certificate in Accounting and Finance – Spring 2024
Answer :01 EOQ and Safety Stock Risk of Stockout

(a)
(i) Economic order quantity (EOQ):
2 × Co × D 2 × 50,000 ×273,600
EOQ = � =� = 6,804 Units
Ch 591

Co= Variable= 50,000

Ch= Holding Cost per unit per annum=
Annual Carrying Cost Rs. 441
Finance Cost (1000 x 15%) Rate = 1.25% x 12 = 15% Rs. 150
Total Rs. 591

(ii) TOTAL ORDERING COSTS : VC + FC = Co D/Q = 50,000 × 273,600/6,804 = Rs. 2,010,582

(b) Average daily requirement/Average daily Usage

Annual Demand /Requirement 273,600
= = = 760 Units / day
No of Days in Year 360

Cumulative Prob of Risk of stockout

Delivery time (in days) Probability of Occurrence Occurrence
20 57% 57% 1-57%=43%
22 13% 70% 1-70%=30%
24 14% 84% 1-84%=16%
25 10% 94% 1-94%=6%
26 6% 100% 1-100%=0%
I would be 100% secure/safe when I will reach at 100%

At 30% risk of stock-out, Delivery time is 22 days, (i.e Max Lt is 22 days) as against normal LT of 20 days
ROL= Max consumption or Usage in Max LT 760 × 22 16,720 Units

SS=ROL - (Average Usage in Average Lead Time) 16,720 – (760 × 20) 1,520 Units

At 16% risk of stock-out, Delivery time is 24 days, (i.e Max Lt is 22 days) as against normal LT of 20 days
ROL= Max consumption or Usage x Max LT 760 × 24 18,240 Units

SS=ROL - (Average Usage × Average Lead Time) 18,240 – (760 × 20) 3,040 Units

Answer : 02 Waseem Fibres Limited- Labour learning Curve

Formula of learning curve y= axb
Where
a is the labour cost for the 1st lot
x is the cumulative number of lots
b equals log(0.9)/log(2) = -0.152

For 1,000 units (10 lots)
For 46,000 units (460 lots)
For 50,000 units (500 lots)
For 49,900 units (499 lots)
Cost for the last 100 units (500 lot)
th
Rs.
10 x (20,000 x 10-0152) A 140,939
460 x (20,000 x 460-0152) B 3,622,836
500 x (20,000 x 500-0152) C 3,888,271
499 x (20,000 x 499-0152) D 3,881,676
E=C-D 6,595

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 Cost of Management Accounting - Mock
Suggested Answers
Certificate in Accounting and Finance – Spring 2024

Quantity of Sale F 45,000 units 70,000 units

G (450 lots) (700 lots)
Rate H Rs. 650/unit Rs. 550/unit
Material Cost / lot J Rs. 30,000/lot Rs. 30,000/lot

Rs. Rs.
Revenue F×G 29,250,000 38,500,000
Material cost G×J 13,500,000 21,000,000
Labour upto 460 lots B 3,622,836 -
Labour upto 500 lots C - 3,888,270
Labour for additional 210 lots 210 × E - 1,384,740
Less: labour upto 10 lots A (140,939) (140,939)
M 3,481,897 5,132,071
Variable overheads - 25% of labour cost M ×25% 870,474 1,283,018
Fixed overhead – same at both levels - -
17,852,371 28,715,089
Net profit 10,097,629 9,784,911
Conclusion:
It will be more profitable to sell 45,000 units at a unit price of Rs. 650.
(0.5 Marks whatever logical decision made)

Waseem Akram Comments: Students were unable to judge that 10 lots have already been made and
next 450 lots have to be made. (i.e 11-460)

ANSWER-3 PTWG Limited – Relevant Costing

Rs. in million
Incremental Benefit
Sales (3,500 x 38,000) A 133.00
Less Incremental Cost -
Material 12.95
Existing material -
Sale Value (70-20)=50 million x 60% 30.00
Alternate use Higher of 20 m x 60% =12m
(2,400 x 5500)-1,000,000=12.2 12.20

Direct Labour (30,000 LH x 300) 9.00

Fixed Cost Ignored
Variable FOH (9m x 240%) 21.60
Incremental fixed 3.30
Contribution lost of Pingpong W-1 46.55
Incremental Cost 135.60
Incremental Loss (2.60)
Conclusion: As there is incremental loss on this Pingpong production for Tillu, it should not be accepted.

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 Cost of Management Accounting - Mock
Suggested Answers
Certificate in Accounting and Finance – Spring 2024

WORKING: W-1
Contribution of Pingpong Rs./unit
Selling Price 20,000
Less: Material (5,500)
Labour 450 employeex 210 Hrs x 12 months (1,890)
300 x 6.3hr/Unit � �
180,000 Units
Variable FOH (1,890 x 150%) (2,835)
(10,225)
Contribution per unit 9,775
Total Contribution earning if Order (9,775 × 4,762 (W-1.1)) 46,548,550
not accepted
46.55 million

W-1.1
Units that can be produced in 30,000 hours.
30,000/6.3 Hrs per Unit of Pingpong =4,762 Units

ANSWER-04 ‘opportunity cost’

An opportunity cost is a cost that measures the opportunity lost or sacrificed when the choice of one course of action
requires that an alternative course of action be given up.
The following are examples of opportunity costs:
1. If scarce resources such as machine hours are required for a special contract then the opportunity cost
represents the lost profit that would have been earned from the alternative use of the machine hours.
2. An employee is paid Rs. 100 per hour and is charged out at Rs. 250 per hour for committed work. If that
employee is redirected to other assignment, the lost contribution of Rs. 150 per hour represents the opportunity
cost of the employee’s time.
3. A company owns the building in which it operates, and thus pays no rent for office space. If the building was
rented out, the company would receive rent of Rs. 4 million per annum. The foregone money from this
alternative use of the property (i.e. rent of Rs. 4 million) is an opportunity cost of using it as office space.
4. A private investor purchased shares of Rs.100,000 and after one year the investment has appreciated in value
of Rs. 105,000. The investor’s return is 5 percent. If the investor invested in a bank certificate with an annual
yield of 7 percent, after a year, the opportunity cost of purchasing shares is Rs. 7,000.

ANSWER-5
Normal Sale price of Alpha and beta was Rs. 3,000 per unit and 2700 respectively. This adjustment was
missed in the question (you should assume any value)

Lower of
Selling other Cost (B)
Cost per Price per CTS / unit selling NRV per & NRV Inventory
Units Unit Unit Tranport Exp Unit (F) Value
A B C D E F=C-D-E G= B vs F AxG
Alpha 70
Good 70*75% 52 2,782.50 3,000 160 2,840 2,782.50 144,690
Slighly Damag 70*15% 11 2,782.50 3,000 160 300 2,540 2,540.00 27,940
Damaged 70*10% 7 2,782.50 1,200 160 1,040 1,040.00 7,280
(3000*40%)

Beta 60 2,136.91 2,700 160 2,540 2,136.91 128,215

TOTAL 308,125
Note: Since CTS and CTC information was available in question. The only information missing was Sale
price. So students should assumed any sale value for the products. (normal selling price should be assumed).
Still if someone has only calculated Cost, he/she should be given full marks.

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 Cost of Management Accounting - Mock
Suggested Answers
Certificate in Accounting and Finance – Spring 2024
W-1
Purchase cost Per Unit Alpha
Units purchased Z 420
Invoice Value Per Unit 2500*420 1050000
Import duty per Unit 123,000*0.8 98400
Transportation 39375
(1250km x 0.75)/10 x420
Purchase cost Per Unit Y 1,187,775

Purchase cost Per Unit Beta

Units purchased Z 890
Invoice Value Per Unit 2000*890 1,780,000
Discount if units >500 10% (178,000)
Import duty 300000*0.8 240000
Transportation 83438
(1250km x 0.75)/10 x890
Purchase cost Per Unit Y 1,925,438

W-2 Weighted Avg Cost per Unit

Opening Value 120,000 126,000
+Purchase Cost Y*Z 1,187,777 1,925,435
Opening + Purchase Value J 1,307,777 2,051,435

Opening Units 50 70
Purchased Units 420 890
K 470 960

Per Unit Avg Cost J÷K 2,782.50 2,136.91

Waseem Akram Comments: Students were unable to judge 160 as CTS.

Discount on beta not dealt.

ANSWER-6 Process Costing

Dr. Process Account Cr.
Particulars Quantity Rs. Particulars Quantity Rs.
Opening WIP 8,500 43,860 Transferred Units 7,500
Transferred from A 12,000 45,600
Normal Loss- 7500×6%-Opening 450 -
Direct Material 27,654 Abnormal Loss-opening (Bal) 550

Conversion Cost 47,689

Closing WIP 12,000
20,500 164,803 20,500
N-1 V.Imp Note to understand the Question.
Since we have 8500 opening Qty. we used FIFO method. It means 7500 FG is from opening as well as Losses (both NL
450 and AL 550). Due to this reason, we have to assign NL value only to FG.(normally we used to bifurcate NL value
to FG, Cl WIP and AL). NL value should only be assigned to FG as NL is also complete. This is why I will consider
NL as also a part of FG in EU working so that its value is only assigned to FG, rather bifurcated between all FG,WIP
and AL

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 Cost of Management Accounting - Mock
Suggested Answers
Certificate in Accounting and Finance – Spring 2024
N-3 material added in current month Rs. 27654 belongs to all units (FG, NL, AL, WIP) but material transferred from
Department A is only belong to Closing WIP (i.e 12,000)

W-1: Statement of Equivalent units (EU) (FIFO = Only for Current Month/period only)
% of completion Equivalent Units
Units Mat. % Con. % Direct Mat Conv cost

Finished Goods
FG-Under process at start & completed 7500 80% 75% 6,000 5,625.0
FG-Normal Loss-Under process at start & 450 80% 75% 360 337.5
Completed (see N-2) 6,360 5962.5
AL-Under process at start & completed 550 80% 75% 440 412.5
8,500
Closing WIP 12,000 50% 25% 6,000 3,000
A 12,800 9,375
Current Month Cost Incurred (Rs.000) Rs. Rs.
Added in Process II 27,654 47,689
Total cost B 27,654 47,689
Cost per Equivalent unit Rs. 𝑩𝑩/𝑨𝑨 Rs. 2.16 5.08
Total Cost per Unit C F
W-3: Statement of Evaluation
Cost of goods transferred out: Rupees
FG-Units started last month and completed this month (Last month Cost) 38,700
43860/8500×7500
NL value assign to FG-out of opening 43860/8500×450 2,322
Units started last month and completed this month (Current month Cost)
(6360×2.2 C+(5962.5×5.15 F) 44,699
85,721

Waseem Akram Comments: many students don’t bother to make percentage and made mistakes. They
have not considered that the method given is FIFO and in FIFO a percentage on opening WIP is crucial.

ANSWER-7 Variance

Sales Price Variance SP x AQ sold -AP x AQ Sold 515,000 Adv

540 ×51,500 units B - 27,295,000
Or
540 ×51,500 units B - 530 ×51,500 units
Sales volume Variance (BQ Sold – AQ Sold) St Margin 213,750 Fav
(50,000 – 51,500) x 142.5 (F)

Material Price (SP × AQU) - (AP × AQU) Or (SP – AP) × AQU 478,950 (Adv)
Variance (50 × 159,650) – (53 × 159,650)
Material Usage (SQ for Actual output × SP)-(AQ × SP) OR (SQ-AQ)×SP 257,500 (Adv)
Variance {(51,500 x 3) x 50 - 159,650 x 50} (W-6, 8, 9)

Labour Rate Variance (SR × AHP)-(AR × AHP) OR (SR - AR) × AHP 675,937 (Fav)
= (Rs 75 - Rs. 70) x 51,500 x 2.625 hours =
Labour Efficiency (SH × SR) - (AH × SR) Or (SH - AHW) × SQ 482,813 (Adv)
Variance = (2.5 x x 51,500 x Rs. 75) –(2.625 x 51,500 x Rs. 75) (W-2, 12)

Variable FOH Rate (SR × AHW)-(AR × AHW) Or (SR - AR) × AHW 154,500 (Adv)
Variance = 24x 51500 – 135187.5 (W-14)
Variable FOH (SH × SR) - (AHW × SR) Or (SH - AHW) × SQ 270,375 (Fav)
Efficiency Variance (24 - 22) x 51,500 x 2,625 = (W-14, 15)

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 Cost of Management Accounting - Mock
Suggested Answers
Certificate in Accounting and Finance – Spring 2024
W-l: Budgeted Sales quantity:
1,500 / 0.03 = 50,000 units
W-2: Actual Sales quantity
50,000 + 1,500 = 51,500 units
W-3: Budgeted sale price:
27,000,000 / 50,000 = Rs. 540 per unit
W-4: Actual sale price:
540 - 10 = Rs. 530 per unit
W-5: Budgeted raw material quantity
= 50,000 units x 3 kgs = 150,000 kgs
W-6: Budgeted material price
= 7,500,000 / 150,000 kgs = Rs. 50 per kg (W-5)
W-7: Actual material price
= Rs. 50 x 1.06 = Rs. 53 per kg
W-8: Total actual quantity used
= Rs. 8,461,450 / Rs. 53 = 159,650 kgs
W-9: Budgeted labour cost per finished unit
= 9,375,000 / 50,000 = Rs. 187.50
W-10: Budgeted labour time for one finished unit
= [(Rs. 187.5) / (Rs 50 x 150%)] = 2.5 hours (W-10)
W-11: Actual labour time taken for one finished unit
= 2.5 + (1/ 8) = 2.625 hours
W-12: Budgeted labour cost per hour
= (Rs. 187.5 / 2.50 hours) = Rs. 75 per hour
W-13: Actual labour cost per hour
= (Rs. 9,463,125 / (2.625 hours x 51,500) = Rs. 70 per hour
W-14: Budgeted variable overhead rate per hour
3,000,000 / (50,000 x 2.50) = Rs. 24 per labour hour
W-15: Actual variable overhead rate per hour
2,974,125 / (2.625 x 51,500) = Rs. 22 per labour hour

RECONCILIATION OF BUDGETED CONTRIBUTION AND ACTUAL CONTRIBUTION

Rupees
Budgeted profit 7,125,000
Sales volume margin variance 213,750
Sale price variance (515,000)
Material price variance (478,950)
Material quantity (usage) variance (257,500)
Labour rate variance 675,937.50
Labour efficiency variance (482,812.50)
Variable overhead efficiency variance (154,500)
Variable overhead spending / expenditure variance 270,375
Actual profit 6,396,300

b) Unfavorable price variance may be caused by:

• Inaccurate standard prices;
• Cost increase due to inflation;
• Scarcity in raw material supplies resulting in higher prices;
• Purchasing department inefficiencies;
• Purchase of better quality products

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 Cost of Management Accounting - Mock
Suggested Answers
Certificate in Accounting and Finance – Spring 2024
Answer: 08 CVP - Breakeven
ABC Limited
Actual Jan – May 2023
Rupees
Sales (105,000 x 350) 36,750,000
Variable cost:
Raw materials (105,000 x 90) (9,450,000)
Direct labor (300 0.4) x 105,000 (12,000,000
Other variable costs (300-112.50-120) x 105,000 (7,087,500)
Contribution margin 7,612,500

Revised Plan Jun-Dec 2023

LGV HGV Total
Sale price per unit 270.00 385.00
Variable cost:
Raw material cost
A (25 x 5/8) (31.25)
B (45x3x3/8) (33.75)
(65.00) (90.00)
Direct labor cost (300 x 0.4) (120.00)
(120 x 0.6 x 1.1) (79.20)
Factory overhead cost (200-112.5-120) (67.50)
(67.5 x 0.9) (60.75)
Total variable cost (204.95) (277.50)
Contribution margin 65.05 107.50

Sales mix ratio 1 2 3

Aggregate contribution 130.10 107.50 237.60
margin
Aggregate Sale Price 270.00 770 1,040
C/s Ratio 237.6/1040 22.846%

Fixed cost Jan-Dec: LGV HGV

Fixed cost for the year 25,000,000
Additional marketing cost 3,000,000
10% depreciation on machine cost Jun-Dec 2023 70,000
28,070,000
Contribution recovered Jan to May 2023 (7,612,500)
Required FC to be covered / 20,457,500
contribution for Jun to Dec 2023 to earn
Breakeven Revenue (20,457,500/22.846%) 89,545,216
Break even Sale quantity Jun-Dec 2023:
Break even quantity for:
Low grade (20,457,500/237.60) 86,101
High grade (86,101 x 2) 172,202
Break even Sale amount Jun-Dec 2023 89,545,216

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 Cost of Management Accounting - Mock
Suggested Answers
Certificate in Accounting and Finance – Spring 2024

Answer :09 (ABC)

Income Statement - Absorption Costing A B C Total

Rs. 000's
Sale F=A x B 240,000 380,000 225,000
Less: Prime Cost G=A xC 195,000 336,000 160,000
Less: Overheads
(Total MH x
Machine Deptt 14,400 24,000 12,000 50,400
120)H=Xx120
(Total LH x 8.25)
Assembly Dept 4,950 9900 28,880 43,730
I=Yx82.5
214,350 369,900 200,880
Profit of each product (J=F-G-H-I) 25,650 10,100 24,120 59,870
(Under)/over Absorbed (Absorbed - 50,400+43,730-94100
30
Actual) (K)
Profit (J-K) 59,900

Income Statement - ABC Costing A B C

Rs. 000's
Sale F=A x B 240,000 380,000 225,000
Less: Prime Cost G=A xC 195,000 336,000 160,000
Less: Overheads Z 25,750 32,100 36,250
Profit (F-G-Z) F-G-Z 19,250 11,900 28,750 59,900
Total Profit

Rs.‘000’

Machining services Total MH (10:20:12=42) 10200 17000 8500 35,700

Assembly services Total LH (35:12:6=53) 3600 7200 21000 31,800
Set-up costs Setups (12:20:20=52) 1000 1000 600 2,600
Order Customer
Order processing 7800 3900 3900 15,600
(8:8:16=32)
Order to Supplier
Purchasing 3150 3000 2250 8,400
(3:4:4.2=11.2)
Z 25750 32100 36250

A B C
Sales and production (units) A 30,000 40,000 50,000
Selling price (per unit) Rs. B 8,000 9,500 4,500
Material cost (per unit) C1 4,550 5,880 2,240
Labour cost (per unit) C2 1,950 2,520 960
Prime cost (per unit) Rs. C=C1+C2 6,500 8,400 3,200
Hours Hours Hours
Machine department (MH per unit) D 4 5 2
Assembly department (LH per unit) E 2 3 7
Total Annual MH X=A×D 120,000 200,000 100,000 420,000
Total Annual LH Y=A× E 60,000 120,000 350,000 530,000

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