Final Examinations

Module F
The Institute of 9 June 2016
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Management Accounting
Q.1 Alpha (Pvt.) Limited has two divisions, A and B. Division A makes product Y which is sold
in the market as well as used as an input in Division B. Product Z manufactured by Division
B is sold in the market. Following is the available data:
Product Y Product Z
Variable cost per unit (Rs.) 1,750 2,300
(plus 1 unit of product Y)
Production capacity in units per month 15,000 12,000
Fixed costs per month (Rs.) 2,200,000 5,700,000

Monthly demand of the products at various selling prices have been projected as under:
Product Y
Selling price (Rs.) 2,800 2,600 2,400 2,200
Demand in units 5,000 7,500 10,500 13,500
Product Z
Selling price (Rs.) 6,000 5,700 5,400 5,100
Demand in units 5,000 7,000 9,000 11,000

The variable cost of product Y includes transportation cost of Rs. 75 per unit for delivering
it to the customers.

Management of the company has decided to concentrate on the production of product Z

being the value added product.

Required:
Determine the most feasible production plan for the Company giving priority to product Z. (12)

Q.2 An engineering company has launched a new product. The production is carried out in
batches of 250 units and the first batch took 800 labour hours. Production manager has
estimated that there will be 90% learning curve on labour hours that will continue till 128
batches after which the learning curve effect will cease.

Cost of production consists of material cost of Rs. 2,400 per unit, labour wages of Rs. 230
per hour and applied overheads of Rs. 450 per labour hour based on annual capacity of
1 million hours.

Fixed cost of production is estimated at Rs.180 million per annum.

According to the projections of the marketing department, demand would be for 15,000 and
20,000 units respectively in the first two quarters at selling price of Rs. 3,500 per unit.
Note: The learning index for a 90% learning curve is -0.152
Required:
(a) Prepare the profit and loss account for the first two quarters. (10)
(b) The company's marketing department is worried about the prospects of the product
next year, when the costs of material, labour and overheads would rise by 5%.
Compute the learning curve rate at which the company can make sure that it earns a
contribution margin of 20%, next year, assuming that the price of the product can be
increased by a maximum of 5%. (05)
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Q.3 Efficient Company Limited (ECL) consumes 375 units of a raw material per day. The cost
of the raw material is Rs. 20,000 per unit. 5 units of the raw material are used for producing
each unit of product ZYX which is sold to a single customer. Deliveries to the customer are
made on a daily basis. When ECL is unable to deliver the product due to any reason, the
sale is lost and a penalty of Rs. 50,000 per day has to be paid under the agreement with the
customer. ECL earns a contribution margin of Rs. 5,000 per unit of product ZYX.

The following details are also available:

(i) After considering all aspects, the management has worked out the EOQ as 5400 units.
(ii) Safety stock of 225 units of Product ZYX and 750 units of the raw material is
maintained.
(iii) The minimum and the maximum delivery time is 30 days and 45 days respectively.

Note: Assume 360 days in a year

Required:
(a) Compute the stock out costs per annum if 8% of all raw material orders are delayed by
12 days and 4% of all orders are delayed by 15 days. (08)
(b) Determine the revised EOQ if consumption increases to 480 units per day, ordering
costs increase by 50%, holding costs decrease by 25% and safety stock of raw material
is increased by 20%. (03)
(c) Discuss the practical limitations of using the EOQ approach for determining the order
quantities. (04)

Q.4 A chemical company produces three products P, Q and R. The processing is carried out in
four departments. Material processed in department 1 is transferred to department 2 and 3
in equal proportion. Product P is obtained after processing of material in department 2.
Processing of material in department 3 produces product R along with other processed
material which is transferred to department 4 from which product Q is obtained.

The related data for the year ended 31 March 2016 are as follows:

Departments
1 2 3 4
Material input (litres) 1,250,000
Cost of material input (Rs.) 2,000,000
Processing costs (Rs.) 1,500,000 6,200,000 20,000,000 1,500,000
Normal wastage (% of input) 2% 12% 1% 20%
Transfer – in (litres) 600,000 600,000 500,000
Transfer – out

to next department (litres) (1,200,000) - (500,000)

as finished product (litres) (560,000) (90,000) (400,000)

The per litre prices of products P, Q and R are Rs. 20, Rs. 60 and Rs. 25 respectively. Joint
costs of department 3 are allocated between product Q & R on the basis of net realisable
value at the time of separation.

Required:
(a) Prepare a profit and loss statement for the year ended 31 March 2016 showing product
wise results also. The abnormal loss/gain may be transferred to other income/expense
accounts. (16)
(b) Based on your working in (a) above, give appropriate recommendations to the
management as regards the matter that may be considered to improve the company’s
profitability. (04)
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Q.5 XYZ Limited is a call center company. Its summarised profit and loss account for the year
ended 31 December 2015 is as follows:

Rs. in ‘000
Revenue 3,474,200
Cost of service delivery:
Salaries (2,030,400)
Telephone and internet (67,200)
Other fixed costs (432,000)
Other variable expenses (370,400)
Gross profit 574,200
Operating expenses (469,200)
Net profit 105,000

Some other related information is as under:

(i) The company has 4 call centre locations with 750 seats each. The total number of
agents employed by the company is 6000.
(ii) Salary of every agent is Rs. 27,000 per month. One supervisor manages 50 agents who
is paid a salary amounting to Rs. 45,000 per month. There is one manager at each
location for each shift whose salary is Rs. 150,000 per month. The salaries are raised
annually at an average rate of 10%.

The agents work in shifts of 8 hours each. The call center is operational round the
clock. Each agent works 6 days a week and is allowed to avail 4 weeks leave each
year. In 2015, on average, an agent was occupied as follows:

In attending calls 6 hours

Internal reporting and other work 1 hour
Break for rest 0.5 hour
Idle time 0.5 hour

(iii) Internet and telephone expenses vary in accordance with call timings. The rate of
charge is expected to remain the same over the next three years.
(iv) The variable overheads vary in proportion to the number of agents.
(v) All operating expenses are fixed.
(vi) Increase due to inflation is expected at 10% per annum, unless specified otherwise.

To increase the revenues, the company has signed an agreement with ABC Limited which
provides data entry services. Under the agreement, which would be effective from 1 January
2017, ABC Limited would use the call centers’ computers on a three shift basis for which it
would pay @ Rs. 20 per hour per operator. ABC Limited has agreed to utilise as many seats
as may be available.
The management is also considering a proposal by a software house regarding development
of a new application. The cost of development is estimated at Rs. 700 million with
maintenance cost of Rs. 35 million per annum whereas the application can be made
available on 1 January 2017. This would help to reduce the call time as under:

New
Current
application
Average call time - Inbound 125 sec 110 sec
Average call time - Outbound 95 sec 80 sec

88% of all the calls are inbound. The call center’s business is expected to increase by 15%
per annum whether the new application is deployed or not.

Required:
Determine whether the company should accept the proposal if it expects to recover 50% of
cost of new application in the first year. Assume that one year constitutes 52 weeks. (18)
 Management Accounting Page 4 of 4

Q.6 Following are the extracts of the profit and loss account of Company A for the accounting
year ended 30 June 20X6:

Rs. in million
Sales 100
Cost of sales (including depreciation amounting to Rs. 2 million) (82)
Operating and financial charges (9)
Profit before tax 9

Zahid is the company’s managing director who has not maintained detailed records. He has
now handed over the charge to his son Abid who has recently completed his Masters. Abid
wants to run the company in a professional manner. He has taken various steps in this
regard which include preparation of a cash budget, for which the following details have been
gathered:

(i) Sales include cash sales of Rs. 18 million. Credit period is 30 days and 90% of the
sale is collected within the credit period whereas remaining amount is collected in the
next month.
(ii) Sales have been increasing at the rate of Rs. 1.0 million per quarter for the last few
years. This increase is only on account of price increase as there is no volumetric
growth in sales. This trend is expected to continue in 20X6-7.
(iii) Cost of sales includes cost of raw material 50%, labour 30% and overheads 20%. Raw
material prices increased by 5% on 1 January 20X6 and labour rate increased by 10%
with effect from 1 April 20X6. Impact of inflation on overheads has been 2% per
quarter.
(iv) The prices of material, labour and overheads are expected to increase by 8%, 5% and
3% respectively with effect from 1 July 20X6
(v) Operating and financial charges are expected to increase by 10% in 20X6-7.
(vi) Cost of labour and 40% of all other expenses including purchases are paid in the
same month. 60% of the expenses are paid in the next month.
(vii) All expenses and revenues unless stated otherwise, are incurred evenly over the
period.
(viii) The balance of cash as on 1 July 20X6 was Rs. 1.5 million.
(ix) There are no opening or closing stocks.

Required:
Prepare cash budget for the months of July, August and September 20X6. (20)

(THE END)