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COST AND MANAGEMENT ACCOUNTING

MID TERM EXAM
Date: 2nd July, 2020
Total Marks: 100 marks Time Allowed: 3 Hours & 15 minutes

INSTRUCTIO NS
 Each new question shall be started from a new page. O therwise question will not be checked.
 Using any pen other than black shall result in cancellation of paper.
 Writing page number on top of the page is compulsory for the facilitation of marking.

Question No. 1 – 18 minutes allowed

Jazzy Limited (JL) is expected to achieve a sale of Rs. 120 million during the current year. The contribution margin is expected
to be 20% whereas the margin of safety is estimated at 25%.
During the next year, the company intends to reduce its prices by 5% and plans to market its products vigorously to increase the
sales volume. Salaries constitute 40% of the total fixed costs and according to the union agreement an increment of 20% is to be
given to all staff. Other fixed costs are likely to remain constant.
Required:
(i) Compute Break even Sales for the next year?
(ii) Compute projected sales revenue for the next year in order the maintain 25% margin of safety?
(iii) Compute rate of increase in project sales volume on the basis of sales computed in part (ii) above? (10)
Question No. 2 – 21.6 minutes allowed
Amir Limited (AL) manufactures three products A, B and C. The sales director estimates that demand for these products in 2018
will be as follows:
A B C
Units 12,000 20,000 16,000
Selling price per unit (Rs.) 135 120 105

Cost per unit: Rs. Rs. Rs.

Material cost per unit 57 36 54
Labour cost per unit
Machining (@ Rs. 6 per hour) 24 36 12
Assembly (@ Rs.3 per hour) 9 12 6
Fixed overheads are estimated to be Rs. 600,000 and the production director informed that the capacity of existing machines i s
156,000 hours per annum in year 2018. This capacity will be increased to 200,000 hours in next year (i.e., 2019) when new plant
which is currently on order will be delivered. In the meanwhile a neighboring firm has offered to manufacture any of a produc ts
on a sub-contract basis at the following prices:
A B C
Sub-contracting cost per unit (Rs.) 114 102 70
Required.
(a) Advise the managing director to what extent the services of the sub-contractor should be utilized in order to meet the
expected demand for A, B and C. (07)
(b) Prepare a statement showing the profit you would expect if your adv ice is followed. (05)

Question No. 3 – 21.6 minutes allowed

Hi-Tech Ltd., is an engineering company, it uses absorption costing to calculate its monthly profit . Management has some
reservatins on the method of absorption costing and decided to use direct costing method. Being a management accountant of
Hi-Tech Ltd., you are asked to calculate monthly profit on the basis of direct costing and absorption costing. Following data has
been extracted from financial recorded of Hi-Tech Ltd:
 Normal capacity of plant is 40,000 units per month or 480,000 units a year
 Variable cost per unit are as follows
Rs.
Direct material cost per unit 6.00
Direct labour cost per unit 4.50
Variable factory overhead cost per unit 1.50
12.00

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 The sales price per unit is Rs.20. Actual production, sale and finished goods inventories in units as follows:

Opening inventory 6,000 units Units produced 38,000 units

Ending inventory 2,000 units Units sold 42,000 units

The following additional data is also available:

(i) Fixed factory overheads are Rs. 600,000 per year or Rs. 1.25 per unit at normal capacity.
(ii) Company is using of ‘units of product’ as basis for applying overheads.
(iii) Fixed administrative and selling expenses are Rs. 120,000 per year
(iv) Variable selling and administrative expenses are Rs. 8,000.
(v) Actual and applied variable overheads remain same and likewise no material or labour variance exists.
(vi) There is no work in process.
Required:
(a) Prepare income statement for the month of July using
 Direct costing method.
 Absorption costing method
(b) Reconcile the profit under two methods (16)

Question No. 4 – 18 minutes

Bruce Lee Chairs (BLC) manufactures and sells executive leather chairs. They are considering a new design of massaging chair
to launch into the competitive market in which they operate. They have carried out an investigation in the market and using a
target costing system have targeted a competitive selling price of Rs. 120 for the chair. BLC wants a margin on selling price of
20% (ignoring any overheads).
 The frame and massage mechanism will be bought in for Rs. 51 per chair and BLC will upholster it in l eather and
assemble it ready for dispatch.
 Leather costs Rs. 10 per meter and two meters are needed for a complete chair although 20% of all leather is wasted in
the upholstery process.
 The upholstery and assembly process will be subject to a learning effect as the workers get used to the new design. BLC
estimates that the first chair will take two hours to prepare but this will be subject to a learning rate (LR) of 95%. The
learning improvement will stop once 128 chairs have been made and the time for the 128th chair will be the time for all
subsequent chairs. The cost of labor is Rs. 15 per hour.
The learning formula is shown on the formula sheet and at the 95% learning rate the value of b is –0·074000581.
Required: Calculate the average cost per chair for the first 128 chairs made and identify any target cost gap that may be present
at that stage. (10)
Question No. 5 – 28.8 minutes
Faysal Builders & Marketing Company (FBMC) is pioneer of constructing light gauge steel structured buildings in Pakistan.
FBMC has been asked by a manufacturing company to build a 3,000 square meter warehouse to store its semi -finished g oods.
Mr. Faysal, the owner of the company, has asked the accountant of the company to prepare a minimum price quotat ion for
building the warehouse. He has compiled the following data together with relevant notes as a basis for the quotation:
Notes Rs.
Direct material:
Material-A (140,000 kg at Rs. 125 per kg) N-2 17,500,000
Material-B (120,000 kg at Rs. 160 per kg) N-3 19,200,000
Other direct materials N-4 2,000,000
Labour cost
Skilled (25,200 hours at Rs. 165 per hour) N-5 4,158,000
Un-skilled (22,00 hours at Rs. 80 per hour) N-6 1,760,000
Other costs:
Miscellaneous site charges – variable N-7 1,200,000
Lease cost of general purpose machinery N-8 1,500,000
General overheads (23,6000 hours at Rs. 65 per hour) N-9
Feasibility report, plans and drawing costs N-10 495,000
Total cost 49,347,000
Add: Profit (35%) 17,271,450
= Suggested minimum price of the project 66,618,450

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Notes to minimum price quotation:

N-1:Mr. Faysal recently met the potential client of discuss the warehouse project. The meeting was held at a hotel that cost him
Rs. 15,000.
N-2: Material-A is regular used by the company 160 tonnes of material-A is already in stock at a cost of Rs. 125 per kg. The
current replacement cost of the material is rs. 115 per kg. The company is confident that, if the Material -A is not used on this job,
then it could be used in any project in pipeline.
N-3: 120 tonnes of Material-B will also be required for this project, which will have to be purchased exclusively for this project.
The minimum order quantity from the supplier is 125 tonnes at a cost of Rs. 160 per kg. FBMC does not expect to have any other
use of the remaining Material-after the projected.
N-4: Other materials will be bought when required. This cost represents the purchase price.
N-5: Mr. Faysal is required to be on-site whilst the building work is performed. He, therefore, intends to work for 550 hours as
a skilled labour himself. The reminder skilled labour will be hired on an hourly basis. The current cost of skilled labour is Rs. 165
per hour. If the company does not undertake the project for this client, My Faysal may either work as a skilled labour for another
project at a rate Rs.165 per hour or may spend 550 hours for repairing his own warehouse on urgent basis. He has recently
received a quotation of Rs. 130,000 for skilled labour to repair his own warehouse.
N-6: Mr. Faysal has 10 unskilled labours on contract, guaranteeing them a 40 hours week wage at Rs. 80 per hour. These
unskilled labours are currently idle for 12 weeks and can be delivered to the proposed project.
N-7: The estimated cost of hiring scaffolding and other machinery.
N-8: 2,700 machines hours will be required for this project. The machine, to be used, has already been leased for a weekly
leasing cost of Rs. 60,000 for the period of 25 weeks. It has a capacity of 40 hours per week and has a sufficient available capacity
for the project to be completed. Variable running cost of machine is Rs. 1,500 per hour.
N-9: This represents the rental cost of Mr. Faysal‘s storage yard. If he does not undertake this pr oject, he can rent out this yard
to a competitor, who will pay him a rent of Rs. 50,000 per week for a25 -week period.
N-10: The costs of feasibility report, plans and drawing that Mr. Faysal has already drawn for the project.
Mr. Faysal after reviewing the proposed quotation, is of the review that the price offered for this project is very high and need
revision.
Required:
(a) Calculate the revised minimum price that Mr. Faysal may quote for the client’s warehouse, using relevant costing
principles. Also explain each item of the revises quotation. (16)
(b) Explain any two reasons, why relevant costing method may not be a suitable approach for pricing in the long term for
FBMC. (06)
Question No. 6
The Khalid Mahmood & Company has two departments Molding and Painting and uses A single production overhead absorption
rate based on direct labour hours. It produces wireless Bluetooth mouse. The budgeted and actual data for period is given bel ow:
Direct Labour Machine Factory
wages hours hours overheads
B udget (Rs.) (Rs.)
Moulding 24,000 4,000 12,000 180,000
Painting 70,000 10,000 1,000 100,000
94,000 14,000 13,000 280,000

Actual
Moulding 30,000 5,000 14,000 200,000
Painting 59,500 8,500 800 95,000
89,500 13,500 14,800 295,000
During period, a batch of mouse was made which had the following costs and time:
Direct Labour Machine
wages (Rs.) hours hours
Moulding 726 120 460
Painting 2,490 415 38
3,216 535 498
The direct material cost of the batch was Rs. 890.

Required:
(a) Calculate the cost of the batch of mouse using a single company-wide overhead absorption rate based on labor hours.
(04 Marks)
It has suggested that appropriate departmental overheads absorption rate may be more realistic.
(b) Calculate appropriate departmental overhead absorption rates. (03 Marks)
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(c) Calculate the cost of batch using departmental absorption rates. (03 Marks)
Question No. 7 – 27 minutes
Assume that you have been appointed finance director of Breckhall Inc. The company is considering investing in the production
of an electronic security device, with an expected market life of five years. The previous finance director has undertaken an
analysis of the proposed project; the main features of his analysis are shown below:
Proposed Electronic Security Device Project Rs. 000
Now Year Year Year Year Year
(0) 1 2 3 4 5
Capital Investment 4,500
Cumulative investment in 300 400 500 600 700 700
Working Capital

Sales Revenue 3500 4900 5320 5740 5320

Material cost 535 750 900 1050 900
Labour cost 1070 1500 1800 2100 1800
Attributable Fixed Overhead 50 100 100 100 100
Interest payment 576 576 576 576 576
Depreciation 900 900 900 900 900
Taxable Profits 369 1074 1044 1014 1044
Taxation 129 376 365 355 365
Profit After Tax 240 698 679 659 679

All the above cash flows have been prepared in the present day terms without incorporating inflation and relevant costing
principles accurately.

You have available the following additional information.

1.) Selling prices, working capital requirements, and overhead expenses are expected to increase by 5% per year.
2.) Material cost and labour costs are expected to increase by 10% per year.
3.) Depreciation on assets is allowable for taxation purposes against profits at 25% per year on a reducing balance basis.
4.) Taxation of profits is at a rate of 35% payable one year in arrears.
5.) The non-current assets have no expected salvage value at the end of the five years.
6.) The company’s real cost of capital is estimated to be 8% per year and nominal cost of capital is 15% per year.

Required: Evaluate on the basis of NPV whether project is financially viable or not? (20)

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