MA2 Managing Cost & Finance Notes Complete File

MA2 Managing Cost and Finance:
INDEX
Topics Page Number
CVP Analysis 2
Capital Investment Appraisal 14
Short term decision making 25
Cash Management 40
Job, Batch & Service Costing 56
Process Costing & Joint and By Products 67
Expenses 74
Cost bookkeeping 75
Absorption and Marginal Costing 76
Overheads 86
Material 97
Labour 105
Information For Comparison 119
Management Information 125
Role of Information technology 126
Reporting Management information 128
Sir Ahmed Shafi: Page 1

CVP Analysis:
o It is the study of interrelationship between Cost, Volume and Profit.
Topic#1
Breakeven Point:
A point at which:
o No profit No loss
o Total sales revenue= Total cost
o Fixed cost=contribution
Breakeven point (units)=Total Fixed cost

Contribution per unit
Contribution/unit= Selling price per unit- All variable cost/unit
Breakeven point (Revenue/$) = Breakeven point units× selling price per unit
OR
Breakeven point (Revenue/$) = Total Fixed cost
Contribution/sales ratio
Contribution/sales ratio=Contribution
Sales
Question#1:
Following data relates to a product ‘S’
Selling price: $10/unit
Material: $2/unit
Labour: $3/unit
Variable overheads: $1/unit
Fixed Overheads: $20,000
Required: How many units company should sell to avoid loss or to reach at No Profit No Loss
Question#2:
Following data relates to a product ‘T’
Material: $8/unit
Labour: $5/unit
Variable overheads: $7/unit
Fixed overheads: $40,000
Required: How many units should company sell to avoid loss and also state in monetary form.

Topic#2:
Target Profit:
Units to earn target profit=Total fixed cost+ Target profit
Contribution per unit
Contribution/unit= Selling price per unit- All variable cost/unit
Revenue/$ to earn target profit=Units to earn target profit× selling price per unit
OR
Revenue/$ to earn target profit=Total Fixed cost+ Target profit
Contribution/sales ratio
Question#1
Following data relates to a product ’T’
Material: $2/unit
Labour: $6/unit
V.OH: $4/unit
F.OH: $36,000
Required:
a) How many units company should sell to avoid loss or to reach at no profit no loss or to reach at
breakeven
b) How many units company should sell to earn a target profit of $15,000
Question#2:
Following data relates to a product ’Z’
Material: $6/unit
Labour: $4/unit
F.OH: $150,000
Required:
c) How many units company should sell to avoid loss or to reach at no profit no loss or to reach at
breakeven
d) How many units company should sell to earn a target profit of $60,000

Topic#3:
Margin of Safety (MOS):
o It is the difference between Budgeted sales and Breakeven sales
MOS(Units)= Budgeted sales unit – Breakeven sales unit

MOS(Rev/$)=MOS units × selling price per unit
MOS(%)=Budgeted sales unit – Breakeven sales unit ×100
Budgeted sales unit
Note: If Budgeted sales are not given use actual sales
Question#1:
Following data relates to a product ’S’
Material: $6/unit
Labour: $8/unit
V.Oh: $1/unit
F.OH: $20,000
Company planned to sell 5,000 units.
Required:
a) Units and revenue to avoid loss
b) MOS (units,revenue,%)
Question#2:
Following data relates to a company
Material: $4/unit
Labour: $3/unit
V.Oh: $5/unit
F.OH: $96,000
Company planned to sell 15,000 units.
Required:
b) How many units company should sell to earn a profit of $15,000. Also state in monetary form
c) MOS (units, revenue, %)

Question#3:
A company makes a product T and plans to sell 10,000 units of T.
Data is as follows:
Material: $8/unit
Labour: $6/unit
V.Oh: $1/unit
F.OH: $40,000
Required:
b) How many units company should sell to earn a profit of $10,000. Also state in monetary form
c) MOS (units, revenue, %)
Assumptions/Limitations of CVP Analysis:

o S.P/unit will remain constant.
o V.C/unit will remain constant.
o Total fixed costs will remain constant.
o Company will hold no stock i.e. production=sales

Exam Kit Questions:

13.1:
A company makes a single product and incurs fixed costs of $30,000 per month. Variable cost per unit is $5
and each unit sells for $15.Monthly sales demand is 7,000 units
What is the breakeven point in terms of monthly sales units ?
13.2:
Which of the following describes the Margin of Safety?
A. Actual contribution margin achieved compared with that required to breakeven.
B. Actual sales compared with sales required to breakeven.
C. Actual verses budgeted net profit
D. Actual verses budgeted sales
Data for questions 13.3 & 13.4:
13.3:
Information concerning K Co’s single product is as follows
$ per unit
Selling price 6.00
Variable production cost 1.20
Variable selling cost 0.40
Fixed production cost 4.00
Fixed selling cost 0.80
Budgeted production and sales for the year are 10,000 units.
What is the company’s breakeven point, to the nearest whole unit ?
13.4:
How many units must be sold if K Co wants to achieve a profit of $11,000 for the year?
A. 2,500 units
B. 9,833 units
C. 10,625 units
D. 13,409 units
13.5:
The following forecast relate to a single-product business for a period:
Variable cost $38,640
Fixed cost $39,975
Sales revenue $84,000
Sales unit 6,000
What sales revenue is required to achieve a profit $12,000 in the period?
A. $74,030
B. $90,615
C. $96,250
D. $112,990

13.6:
On the above breakeven chart, which of the following shows the contribution at level of activity R?
A. D less A
B. D less B
C. B + C
D. A + B
13.7:
A company makes a single product which it sells for $10 per unit. Fixed cost are$48,000 per month and the
product has a contribution to sales ratio of 40%.
Actual sales for the month were $140,000.
What was A Co’s margin of safety(in units)?
A. 2,000
B. 12,000
C. 14,000
D. 20,000
13.8:
A single product company has a contribution to sales ratio of 40%. Fixed cost amount to $90,000 per annum.
How many units required to breakeven?
A. $36,000
B. $150,000
C. $225,000
D. Impossible calculate without further information
13.9:
A company’s breakeven point is 6,000 units per annum. The selling price is $90/unit and the variable cost is
$40 per unit.
What are the company’s annual fixed costs $ ?

The following graph relates to questions 13.10 and 13.11:
13.10:
What does point K on the graph indicate?
A. Semi-variable cost
B. Total cost
C. Variable cost
D. Fixed cost
13.11:
What is the above graph known as?
A. Conventional breakeven chart
B. Contribution breakeven chart
C. Semi-variable cost chart
D. Profit/volume chart
13.12:
Windy company manufactures a single product Q, data for which are as follows.
$ per unit
Selling price 60
Direct material cost 14
Direct labour cost 12
Variable overhead cost 19
Fixed overhead cost 11
Profit 4
What is the contribution/sales ratio for product Q % (to the nearest percent)?

13.13:
E Co manufactures a single product P, data for which are as follows.
$ per unit
Selling price 20
Direct material cost 4
Direct labour cost 3
Variable production overhead cost 2
Variable selling overhead cost 1
Fixed overhead cost 5
Profit per unit 5
What is the contribution/sales ratio for product P?
A. 25%
B. 50%
C. 55%
D. 60%
Data for questions 13.14 & 13.15:
W Co sells one product for which data is given below:
$ per unit
Selling price 10
Variable cost 6
Fixed cost 2
The fixed costs are based on a budgeted level of activity of 5,000 units for the period.
13.14:
How many units must be sold if W Co wishes to earn a profit of $6,000 for one period?
A. 1,500
B. 1,600
C. 4,000
D. 8,000
13.15:
What is W Co’s margin of safety for the period if fixed costs prove to be 20% higher than budgeted and the
actual activity is as per budget?
A. 29%
B. 40%
C. 50%
D. 66%

Data for questions 13.16 and 13.17:

Sales units 128,000
Sales revenue $640,000
Variable costs $384,000
Fixed costs $210,000
13.16:
What sales revenue is required to earn a profit of $65,000?
A. $458,333
B. $590,000
C. $687,500
D. $705,000
13.17:
How many sales units are required to earn a profit of $52,000?
A. 52,400 units
B. 87,333 units
C. 131,000 units
D. 160,500 units
3.18:
This question has been taken from the January- June 2016 examining team report.
The following data relates to a single product business:
$ per unit
Selling price 30.00
Prime costs 11.20
Production overheads 8.60(15%variable)
Non production overheads 5.70 (10% variable)
Net profit 4.50
What is the contribution/sales (C/S) ratio?
A. 15.0%
B. 34.0%
C. 56.5%
D. 58.4%

238:
A company has put together the following budget based on production and sales of 5,000 units.
$
Sales 45,000
Cost of sales (29,000)
Gross profit 16,000
Administration cost (12,000)
Net profit 4,000
The following information is also available:
The variable production cost per unit is budgeted to be $5.
Administration costs include a $2 per unit selling cost with the remainder representing fixed administration
overhead.
What is the margin of safety in percentage terms?
A. 30%
B. 120%
C. 167%
D. 40%
239:
GG manufactures a product that has a selling price of $15 and a variable cost of $6 per unit. Annual fixed
costs are $43,875 and annual sales demand is 6,000 units.
New manufacturing methods are being considered for the product. These would result in a rise of 20% in
fixed costs and a reduction in the variable cost per unit to $5. The new manufacturing methods would create
a higher quality product and sales demand would increase to 7,000 units each year at a higher sales price of
$20 per unit.
lf the changes in manufacturing methods are implemented, and if the selling price is raised to $20, what
would the break-even level be?
A. 975 units higher
B. 1,365 units higher
C. 1,950 units lower
D. 1,365 units lower
240:
If both the selling price per unit and variable cost per unit of a company rise by 10%, the break-even point
will be:
A. Remain constant
B. Increase
C. Fall
D. Decrease

241:
The budgeted cost of the only type of product made in the factory of SD, based on an expected monthly level
of production and sales of 1,000 is as follows:
$
Variable production costs 5.60
Fixed production costs 5.80
Variable selling costs 3.40
Fixed selling costs 4.60
Profit 5.50
Selling price 24.90
The breakeven point is:
A. 365 units
B. 513 units
C. 654 units
D. 920 units
244:
Dane makes and sells a single product which has a selling price of $26, prime cost are $10 and overheads (all
fixed) are absorbed at 50% of prime cost. Fixed overheads are $50,000
The break-even point(to the nearest whole unit) is units
245:
A company has established the following information for the costs and revenues at an activity level of 500
units:
$
Direct materials 2,500
Direct labour 5,000
Production overheads 1,000
Selling costs 1,250
Total cost 9,750
Sales revenue 17,500
Profit 7,750
20% of the selling costs and 50% of the production overheads are fixed over all levels of activity.
The profit at an activity level of 1,000 units would be $ ?
246:
A company has calculated its margin of safety as 20% on budgeted sales and budgeted sales are 5,000 units
per month.
What would be the budgeted fixed cost if the budgeted contribution was $25 per unit?
A. $100,000
B. $125,000
C. $150,000
D. $160,000

248:
E plc operates a marginal costing system. For the forthcoming year, variable costs are budgeted to be 60% of
sales value and fixed costs are budgeted to be 30% of sales value.
If plc increases its selling prices by 10%, and if fixed costs, variable cost per unit and sales volume remain
unchanged.
What would be the effect on E plc’s contribution would be:
A. A decrease of 6%
B. An increase of 10%
C. An increase of 25%
D. An increase of 100%
249:
A company has established a budgeted sales revenue for the forthcoming period of $500,000 with an
associated contribution of $275,000. Fixed production costs are $137,500 and fixed selling costs are $27,500.
The breakeven sales revenue is $ ?
252:
The following data relates to a company with a single product:
Selling price $12.50 per unit
Fixed production costs $77,000 per period
Fixed non-production costs $46,000 per period
Breakeven- sales per period 24,600 units
What is the contribution per unit?
A. $3.13
B. $5.00
C. $7.50
D. $9.37
256:
An organization currently produces one product. The cost per unit of that product is as follows:
$
Selling price 130
Direct Material 22
Direct labour 15
Direct expenses 3
Variable overheads 10
Total cost 50
Total fixed costs for the period amount to $1,600,000.
How many units (to the nearest whole unit) will the organization need to produce and sell to generate a
profit of $250,000?
A. 20,000
B. 20,555
C. 23,125
D. 26,428

Capital Investment Appraisal:

Capital Investment:
o Any investment which is for a longer period of time and returns from it are also expected over a longer
period of time.
Appraisal:
Means to evaluate
Capital Investment Appraisal:

o In capital investment appraisal company has to therefore evaluate any investment opportunity to check
whether it is feasible or not
o Investment is feasible if returns are higher than investment
o Investment is not feasible if returns are lower than investment
Time Value of Money:

Rs 100 ≠ Rs 100 in one year
$1 ≠ $1 in one year
Reasons of Time Value of Money:

o Inflation
o Risk
o Potential for earning interest
Interest:
o Interest is the amount of money which an investment earns over time
Simple interest (principal amount)
Compound interest (Merged amount)
Formula for compound interest:

S=P(1+r)^n
S=Future value
P=Principal amount
r=rate of interest per annum
n=no of periods
Question#1:
If we invest $2,000 now, how much we will have in our account after 4 years if interest rate is 20%
compound.
Question#2:
If we invest $6,000 now how much we will have in our account after 7 years if interest rate is 10% compound.
Question#3:
If we invest $12,000 now how much we will have in our account after 12 years if interest rate is 7%
compound.

Effective Annual Interest:

Effective annual interest=(1+r)^12/n -1
r=rate to be converted
n=no of months in time period to be converted
Question#4:
If we invest $2,000 now, how much we will have in our account after 4 years if interest rate is 3% per quarter.
Question#5:
Convert the following into per annum:
o 4% per month.
o 7% per quarter.
o 10% per half year.
Question#6:
If we invest $9,000 now, how much we will have in our account after 11 years if interest rate is 6%.
Question#7:
If we invest $7,000 now, how much we will have in our account after 8 years if interest rate is 5%per half
year.
Question#8:
If we invest $12,000 now, how much we will have in our account after 13 years if interest rate is 2%per
quarter.
Question#9:
If we invest $7,000 now, how much we will have in our account after 13 years if interest rate is 3%per month.
Question#10:
If we invest $10,000 now, how much we will have in our account after 6 months if interest rate is 10%.

Present Values:
S=P (1+r)n
P=S × 1_
(1+r)n
Present value=Future value × Discount Factor
Question#11:
If we invest $1,000 now, how much we will have in our account after 7 years if interest rate is 8%.
Question#12:
A company will receive $4,000 in year 1, $3,000 in year 2 and $2,000 in year 3.Interest rate is 10%.
Find Present Values.
Question#13:
A company will receive $7,000 in year 1, $5,000 in year 2, $3,000 in year 3& $4,500 in year 4. Interest rate is
12%. Find Present Values.
Question#14:
If we invest $6,000 now, how much we will have in our account after 9 years if interest rate is 3% per quarter.
Question#15:
A company will receive $2,000 in year 1, $3,500 in year 2 and $6,000 in year 3. Interest rate is 8% per half
year. Find Present values.
Question#16:
A company will receive $4,000 in year 1, $4,000 in year 2, $4,000 in year 3& $4,000 in year 4. Interest rate is
10%. Find Present values.
Annuity:
o Series of payments at regular interval and of similar amounts called Annuity.
Question#17:
A company will receive $8,000 in year 1, $5,000 in year 2 and $7,000 in year 3, $5,500 in year 4. Interest rate
is 12% per month. Find Present values.
Question#18:
A company will receive $3,000 in year 1, $3,000 in year 2, $3,000 in year 3& $3,000 in year 4& $3,000 in year
5. Interest rate is 8%. Find Present values.
Question#19:
A company will receive $8,000 per year for next 10 years. Interest rate is 6% per half year. Find present values
Question#20:
A company will receive $2,000 per year for the next 8 years .Interest rate is 7%.
Find present values.
Question#21:
A company will receive $2,000 each year for next 8 years with first amount in advance/due now.Interest rate
is 7%. Find present values.
Question#22:
A company will receive $5,000 each year for next 10 years. Interest rate is 10%. Find Present values.

Perpetuity:
o A series of payment of similar amount at regular intervals for infinite period of time.
Question#23:
A company will receive $5,000 per year forever/for infinite period of time. Interest rate is 10%.
Find present value.
Techniques/ Methods of Investment Appraisal:

1. NPV Method
2. IRR Method
3. Payback Method
Net Present Value(NPV):

NPV=Present value of returns– Initial Investment
NOTE:
If NPV is positive, accept the project
If NPV is negative, reject the project
Question#24:
We will receive $2,000 in year 1, $1,500 in year 2 & $2,500 in year 3 on investment of $5,000.
Interest rate is 10%.Find NPV.
Question#25:
We will receive $5,000 in year 1, $3,000 in year 2, $2,000 in year 3 & $1,500 in year 4 on investment of
$10,500.
Interest rate is 12%.Find NPV.
Question#26:
We will receive $4,000 in year 1, $4,000 in year 2, $4,000 in year 3 & $4,000 in year 4 on investment of
$8,000.
Interest rate is 6% per half year. Find NPV.
Question#27:
We will receive $6,000 each year for next 12 years on investment of $50,000. Interest rate is 8%.
Find NPV.
Question#28:
We will receive $10,000 each year for next 15 years on investment of $120,000 with first amount due now.
Interest rate is 3% per quarter.
Find NPV.
Question#29:
We will receive $6,000 per year forever/for infinite period of time. Interest rate is 10% & investment is
$75,000.
Find NPV.
Question#30:
We will receive $2,000 per year forever/for infinite period of time with first amount due now. Interest rate is
0.5% per month & investment is $20,000.
Find NPV.

Question#31:
A co will receive $3,000 in year 1, $3,000 in year 2, $3,000 in year 3 , $3,500 in year 4 & $4,500 in year 5
Interest rate is 10%. Find PV.
Question#32:
A co will receive $2,000 in year 1, $2,500 in year 2, $3,000 in year 3, $3,000 in year 4 & $3,000 in year 5
Interest rate is 12%. Find PV.
Question#33:
We will receive $2,000 each year for next 4 years & $5,000 in year 5 & $3,000 in year 6. Interest rate is 10% &
investment is $9,000.
Find NPV.
Question#34:
We will receive $3,000 in year 1, $2,000 in year 2, $4,500 in year 3 & $1,000 per year for next 5 years. Interest
rate is 12 % & investment is $11,000.
Find NPV.
Technique#2 Internal Rate of return (IRR):

IRR identifies a rate at which, if funds are acquired, NPV of a project will be zero.
Decision Rule:
Accept project if IRR exceeds cost of capital.
Formula to Calculate IRR:
IRR=a+ A ×(b-a)
A-B
Where:
A=Positive NPV a=rate of positive NPV
B=Negative NPV b=rate of negative NPV
Question#35:
A co has NPV of $1,000 positive at 10% & $500 negative and at 15%.
Find IRR.
Question#36:
A co has NPV of $200 -ve at 11% & $500 +ve and at 8%.
Find IRR
Question#37:
A co has NPV of $2,000 +ve at 10% & $1,500 -ve and at 20%.
a) Find IRR
b) Decide whether to accept or reject loan from bank if bank is lending fund at 13%
Question#38:
A project will generate $2,000 in year 1, $2,500 in year 2 & $2,200 in year 3 on investment of $5,500.
Interest rate is 10%. Find IRR.
Question#39:
A project will generate $4,000 in year 1, $2,500 in year 2, $3,500 in year 3 & $2,000 in year 4 on investment of
$9,000.

Question#40:
A project will generate $2,000 in year 1, $2,500 in year 2 & $1,000 in year 3 on investment of $5,000.
Question#41:
A co will receive $5,000 each year for next 8 years on investment of $28,000. Interest rate is 10%.
Find IRR.
Question#42:
A co will receive $2,000 each year for next 15 years on investment of $12,000. Interest rate is 12%.
Find IRR.
Payback Period:
Payback period is the time period in which a company recovers its initial investment.
Rule:
Accept the project offering lowest payback or accept project if payback is less than target payback.
Question#43:
Investment: $2,000
Returns:
Year 1 $1,200
Year 2 $800
Year 3 $600
Year 4 $200
Find Payback period.
Question#44:
Investment: $3,000
Returns:
Year 1 $1,000
Year 2 $1,500
Year 3 $1,000
Year 4 $600
Find Payback period
Question#45:
Investment: $5,000
Returns:
Year 1 $1,800
Year 2 $900
Year 3 $2,000
Year 4 $1,200
Year 5 $1,500
Find Payback period

Question#46:
Two projects are under consideration:
A B
Investment: $5,000 $6,000
$ $
Year 1 1,500 1,800
Year 2 1,800 1,900
Year 3 1,200 2,000
Year 4 2,000 1,500
Year 5 1,100 -----
Required:
Which project should be opted on the basis of Payback period?
Question#47:
Investment: $5,000
Returns:
Year 1 $1,500
Year 2 $2,900
Year 3 $2,400
Year 4 $1,100
Target payback is 2.5 years
Decide whether to accept or reject the project.
Payback Period:
Simple Payback Discounted payback

Use given cash flows to find payback Use Present values to find payback
Question#48:
Investment: $5,000
Returns:
Year 1 $2,000
Year 2 $2,500
Year 3 $3,000
Year 4 $2,800
Interest rate is 10%
Find simple & discounted Payback period.

Question#49:
Investment: $15,000
Returns:
Year 1 $4,000
Year 2 $8,000
Year 3 $1,500
Year 4 $6,000
Year 5 $9,000
Interest rate is 12%
Find simple & discounted Payback period.
Question#50:
Investment: $50,000
Returns:
Year 1 $10,000
Year 2 $12,000
Year 3 $15,000
Year 4 $6,000
Year 5 $4,000
Scrap value of machine is $10,000 and depreciation is at straight line basis.
Find Payback period.
NOTE:
o Discounted Payback is always longer than Simple Payback
o The higher the interest rate the longer the payback period.

Exam Kit Questions:

15.1:
A building society adds interest monthly to investor’s account even though interest rates are expressed
in annual terms. The current nominal rate of interest is 6% per annum.
An investor deposits $1,000 on 1 January.
How much interest will have been earned by 30 June?
A. $30.00
B. $30.38
C. $60.00
D. $300
15.2:
A one-year investment yields a return of 15%. The cash returned from the investment, including principal and
interest, is $2,070.
How much interest has been earned?
A. $250
B. $270
C. $300
D. 310.50
15.3:
A single sum of $12,000 is invested at 8% per annum (nominal) with interest compounded quarterly.
What is the amount to which the principal will have grown by the end of year three (to the nearest $)?
A. $15,117
B. $9,528
C. $15,219
D. $30,924
15.4:
Which is worth most, at present values, assuming an annual rate of interest of 8%?
A. $ 1,200 in exactly one years from now
B. $ 1,400 in exactly two years from now
C. $ 1,600 in exactly three years from now
D. $ 1,800 in exactly four years from now
15.5:
A bank offers depositors a nominal 4% per annum, with interest payable quarterly.
What is the effective annual rate of interest (to two decimal places)?
15.6:
A project has an NPV of $22 at 9% and an NPV of -$4 at 10%
What is the IRR for the project (to two decimal places)?
15.7:
A sum of money was invested for 10 years at 7% per annum and is now worth $2,000.
What was the original amount invested (to the nearest)?
A. $1,026
B. $1,016
C. $3,937
D. $14,048

15.8:
House price rise at 2% per calendar month.
What is the annual effective rate of increase correct to one decimal place?
A. 24%
B. 26.8%
C. 12.7%
D. 12.2%
15.9:
What is the present value of ten annual payments of $700 discounted at 8% per annum, with the first
payment being made immediately?
A. $4,697
B. $4,723
C. $4,435
D. $5,073
15.10
A machine has an investment cost of $60,000 at time 0. The present values (at time 0) of the expected net cash
inflows from the machine over its useful life are:
Discount rate Present value of cash inflows
10% $64,600
15% $58,200
20% $52,100
What is the internal rate of return (IRR) of the machine investment?
A. Below 10%
B. Between 10% and 15%
C. Between 15% and 20%
D. Over 20%
15.11
An investment project has a positive net present value (NPV) of $7,222 when its cash flows are discounted at the
cost of capital of 10% per annum. Net cash inflows from the project are expected to be $18,000 per annum for
five years. The cumulative discount (annuity) factor for five years at 10% is 3.791.
What is the investment at the start of the project?
A. $61,016
B. $68,238
C. $75,460
D. $82,778
15.12
Which TWO of the following statements, relating to an investment project that has been discounted at rates
of 10% and 20%, are true?
o The discounted payback period at 10% will be longer than the discounted payback period at 20%.
o The discounted payback period at 20% will be longer than the discounted payback period at 10%.
o The non-discounted payback period will be longer than the discounted payback period.
o The non-discounted payback period will be shorter than the discounted payback period.

15.13
Which of the following accurately defines the internal rate of return (IRR)?
A. The average annual profit from an investment expressed as a percentage of the investment sum.
B. The discount rate (%) at which the net present value of the cash flows from an investment is zero.
C. The net present value of the cash flows from an investment discounted at the required rate of return.
D. The rate (%) at which discounted net profits from an investment are zero.
15.14
An investment project has the following discounted cash flows ($'000):
Year Discount rate
0% 10% 20%
0 (90) (90) (90)
1 30 27.3 25.0
2 30 24.8 29.8
3 30 22.5 17.4
4 30 20.5 14.5
30 5.1 (12.3)
The required rate of return on investment is 10% per annum.
What is the discounted payback period of the investment project?
A. Less than three years
B. Three years
C. Between three years and four years
D. More than four years
15.15:
An investment project has net present values as follows:
Discount rate 10% per annum, net present value $24,760 positive
Discount rate 20% per annum, net present value $16,110 negative
Using the data above, what is the best estimate of the internal rate of return?
A. 10.6%
B. 13.9%
C. 16.1%
D. 38.6%
15.16:
A company is considering an immediate investment in new machinery. The machinery would cost $100,000
with expected net cash inflows of $30,000 per year starting in year 1. The disposal value of the machine after
five years is expected to be $10,000. $15,000 has already been incurred on development costs.
What is the payback period of the investment based on future incremental cash flows?
A. 3.0 years
B. 3.3 years
C. 3.5 years
D. 3.8 years

17
What is the present value of a perpetuity of $8,652 per year given an interest rate of 7% per year, assuming that
the first cash flow occurs today?
A. $8,652
B. $16,738
C. $123,600
D. $132,252
18:
If the cost of capital is 8%, the present value of a stream of five annual revenues of $1,000, the first one due now, is
closest to:
A. $3,312
B. $3,993
C. $4,312
D. $4,993
Cumulative discount factor at 8%, years 1 - 4 = 3.312
19
The present value of a five-year annuity which begins in one year's time is $60,000 at a cost of capital of 5% per
annum.
What is the amount of the annuity?
A. $11,259
B. $12,000
C. $13,860
D. $259,740
20
A company has arranged a ten-year lease at an annual rental of $8,000. The first rental payment has to be made
immediately (i.e. in advance) and the others are to be paid at the start of each succeeding year.
The present value of the lease at a discount rate of 12% per annum is $_____(round to the nearest $)
Cumulative discount factor at 12% for years 1 to 9 = 5.328
Cumulative discount factor at 12% for years 1 to 10 = 5.650
21
Dalby is currently considering an investment that gives a positive net present value of $3,664 at 15%. At a discount
rate of 20% it has a negative net present value of $21,451.
What is the internal rate of return of this investment?
A 15.7%
B 16.0%
C 19.3%
D19.9%
22
A capital investment project has an initial investment followed by constant annual returns.
How is the payback period calculated?
A. Initial investment / Annual profit
B. Initial investment /Annual net cash inflow
C. (Initial investment - Residual value) /Annual profit
D. (Initial investment - Residual value) /Annual net cash inflow

Short Term Decision Making:

Topc#1:
Limiting Factor:
o A limiting factor is any factor which limits the organization activities. E.g. shortage of material, labour etc.
o In the presence of limiting factors we cannot fulfill demand, we have to make ‘best combination’ of
product called ‘Optimal plan’.
Optimal plan is determined through a six step approach.
SIX STEP APPROACH OF OPTIMAL PLAN:

1. Identify Limiting Factors.
2. Calculate contribution per unit.
3. Calculate contribution per limiting factor.
4. Ranking
5. Determine optimal plan.
6. Find profit at optimal plan.
Question#1:
A Co makes three products as follows:
A B C
$ $ $
Selling price/unit 20 25 28
Material/unit 3 4 6
Labour/unit 7 8 5
V.POh /unit 1 2 3
Demand units 500 1,000 500
Kg’s required/unit 3 2.5 5
Only 5,500 kg’s of material is available.
Fixed cost: 11,000
Requirement: How many units of each product shall be produced to maximize profit and also state value of
that profit.
Question#2:
A co makes four products:
W X Y Z
Demand units 1,000 2,000 1,500 1,000
$ $ $ $
Selling price/unit 40 45 55 50
Material/unit 20 25 28 28
Labour/unit 10 6 8 11
Variable POHs/unit 5 8 7 6
Hours required/unit 1 1.5 2 2.5
Only 8,500 hours are available and fixed cost was $6,000.
Required: How many units of each product shall be produced to maximize profit and also state value of
profit.

Question#3:
A company makes and sells three product
P Q R
$ $ $
Material($2/kg) 8 10 6
Labour/unit 3 6 5
V.POH 2 3 4
Demand units 1,000 1,000 1,000
Fixed cost:$8,000
Only 10,000 Kg Material are available.
Required: How many units of each product should produce to maximize the profit and also state value of that
profit.
Question#4:
A company makes three products.
P Q R
$ $ $
Selling Price/unit 60 50 75
Material/unit 12 20 16
Labour/unit 8 14 18
V.POH 15 3 12
Demand units 1,000 1,000 1,000
Kgs per unit 2 3 6
Hours per unit 5 4 5
Fixed cost: 32,000
Only 12,000 kg material and 13,000 hours are available.
Required: How many units of each product should be produced to maximize the profit and also state the
value of that profit.
Question#5:
A company makes four products:
A B C D
$ $ $ $
Material/unit 6 3 7 2
Labour/unit (5/hour) 10 20 15 25
V.POH 5 7 2 5
Demand units 500 1,000 500 1,000
Fixed cost:$16,000
Only 10,000 hours of labour is available.
Required: How many units of each product should be made to maximize profit and value of that profit.

Question#6:
A B C
$ $ $
Material/unit 6 5 6
Labour/unit 3 6 4
Demand units 1,000 1,500 500
Kg’s required/unit 2 3 5
Only 8,500 kg’s of material is available.
Fixed cost is $5,000
Requirement: Best Combination
Question#7:
A B C
$ $ $
V. Cost /unit 11 12 13
Hours/unit 4 2 4
Demand units 1,000 1,000 1,000
Kg’s required/unit 3 5 2
Only 9,000 kg’s of material and 12,000 hours is available.
Fixed cost is $6,000
Requirement: Best Combination
Question#8:
A company makes four products:
W X Y Z
$ $ $ $
Material@$3/kg 9 12 15 6
Labour(2/hour) 8 6 10 4
V.POH 6 5 7 3
Demand units 500 500 500 500
Fixed cost:$20,000
Only 8,000 kg material and 6,500 hours of labour is available.
Required: How many units of each product should be made to maximize profit and value of that profit.

Topic#2:
Make Or Buy Decision:
o Decide whether to buy a product from outside supplier or make it in house.
Decision Rule:
o A company should buy a product from outside supplier if variable cost of making a product is higher than
buying cost.
Question#1:
A company makes and sells three products as follows:
P Q R
$ $ $
Variable cost/unit 8 9 7
Fixed cost/unit 3 4 1
Total cost/unit 11 13 8
An external supplier has quoted the following rates:
P: $10
Q: $8
R: $9
Required: Which product to make and which product to buy.
Question#2:
A company makes three products as follows:
A B C
$ $ $
Direct Material 5 6 7
Direct Labour 3 4 3
V.POH 2 5 1
F.POH 1 2 4
Total Cost 11 17 15
An external supplier has quoted following rates:

A:$8
B:$9
C:$6
Required: Which product to make and which product to buy.

Question#3:
A company makes four products as follows:
P Q R S
$ $ $ $
Direct Material 5 8 4 6
Direct Labour 6 7 8 5
V.POH 4 3 2 7
F.POH 3 2 1 3
Directly Attributable F.C $6,000 $5,000 $12,000 $1,000
Units made 2,000 1,000 3,000 5,000
An external supplier has quoted following prices.
P:$21
Q:$20
R:$22
S:$18
Required: Decide whether to make or buy a product.
Question#4:
A company makes three products:
X Y Z
$ $ $
Direct Material 2 4 2
Direct Labour 5 4 5
V.POH 1 3 6
Fixed POH 3 2 1
Directly attributable F.C 5,000 7,500 6,000
Units 2,000 1,500 3,000
Supplier Rates 10 19 14
Required: Decide whether to make or buy a product.
NOTE:
In some cases company has to buy one product from supplier than it is better to choose the one
having lowest extra cost of buying.
Question#5:
A B C
$ $ $
Supplier rate 10 11 7
Required: Decide which product should be bought from outside supplier if company must buy one product
from outside supplier.

Question#6:
P Q R S
$ $ $ $
V.POH 3 4 3 7
F.POH 2 3 1 2
P:$19
Q:$20
R:$25
S:$22
Required:
Company has to buy some product from outside supplier. State the priority in which product must be
preferred to buy from outside.
NOTE:
Sometimes in case of limiting factors we are forced to buy some products from outside in such a case we
select the one offering “lowest incremental cost of buying per limiting factor” as our preferred option.
Question#7:
W X Y
$ $ $
Hours per unit 1 3 0.5
Supplier rate 10 12 11
Required: Which product must be preferred to buy from outside supplier if labour is limiting factor.

Question#8:
P Q R S
$ $ $ $
V.POH 5 7 2 3
F.POH 4 2 5 1
Kgs /unit 3 0.5 0.25 2
P:$15
Q:$18
R:$13
S:$14
Required: If material is limiting factor priorities as to what order should be selected if company has to buy
some product from outside supplier.

Topic#3:
Relevant Costing:
A Cost Accounting technique:
o Does not apply to normal production
o Only applies to special order
Objective of this technique:

To find the lowest possible cost or minimum possible cost of any special order
Relevant Cost:
A cost which effects our decision.
A cost which will occur if we take the decision and won’t occur if we back off from the decision
o Incremental cost
o Opportunity cost/Differential Cost
Irrelevant Cost:
A cost which does not effects our decision.
A cost which will occur regardless of decision is called ‘’Irrelevant Cost”
o Sunk cost (Past Cost)
o Notional cost (Non Cash)
o Committed Cost (Unavoidable cost)
General Rule of Relevant Costing:

o All variable costs are relevant
o All Fixed costs are irrelevant
o However a special/directly attributable fixed cost are relevant
Cases of Material:
Case 1:
If material is not in stock (than it has to be purchased) = Relevant cost is the current purchase price or
replacement cost.
Case 2:
If material is in stock but has a future or regular use = Relevant cost is current purchase price or replacement
cost.
Case 3:
If material is in stock but has no future or regular use = Relevant cost is the scrap value. If there is no scrap
value than Relevant cost will be zero.
Case 4:
If material is in stock and has no future or regular use but it will incur disposal cost = cost savings from
disposal are relevant.
o Negative cost reflects saving

Cases of Labour:
Case 1:
If labour needs to be hired from outside the organization= Relevant cost is the hiring costi.e normal
rate/hour.
Case 2:
If labour has spare capacity or idle time =Relevant cost will be zero for those hours
Case 3:
If labour is in short supply and need to be diverted from normal production to fulfill special order relevant
cost is made of two items:
Normal cost of labour X
Contribution lost due to diversion X
Total relevant cost X
Question#1:
A special order requires three material as follows:
Material Kgs required Kgs already in stock Book value Scrap Value Replacement cost
A 1,000 0 $2/Kg $3/kg $6/kg
B 500 300 $3/Kg $5/kg $8/kg
C 800 650 $5/Kg $4/kg $7/kg
Material B is regularly used while material C has not in regular use.
Required: Find relevant cost of each material and total relevant cost.
Question#2:
A company currently makes product T and has the following details:
Material $4
Labour (5hours@2/hour) $10
V.OH $5
Variable cost $19
S.P $30
Contribution $11
A special order is under consideration which requires 3 hours of labour.
Required:
a) What is the relevant cost of labour if labour is to be hired from outside the organization?
b) What is the relevant cost of labour if labour has spare capacity of 2 hours?
c) What is the relevant cost of labour if labour is in short supply?
Question#3:
A special contract requires 500 kgs of material X, 300 litres of material Y.
There are 280 kgs of material X in stock bought few years ago for $3/kg they can be sold as a scrap value of
$1.5/kg and can be bought for $6/kg they are use in a variety of jobs.
Material Y has no other use and can be scrapped for $3/litre 100 litres in stock bougt for $2/litre but today’s
price is $7/litre
Required: Relevant cost of material.

Question#4:
A special order requires 400 hours of skilled worker, 200 hours of semi skilled worker and 100 hours of
unskilled worker.
Skilled worker will be hired at $8/hour, semi skilled at $6/hour and unskilled at $4/hour.
150 hours of unskilled labour is available as idle time but semi skilled labour is in short supply and will be
moved from other work generation a contribution of $2/hour.
Required: Find relevant cost of labour.
Question#5:
A special contract requires 100 kgs of material T, 200 kgs of material S.
Both materials have no future use and 50kg of each material is available in stock
Material T was bought for $3/kg can be sold for $2/kg and can be bought for $6/kg.
Material S was bought for $3/kg can be sold at a cost of $0.5/kg and can be bought for $7/kg.
Required: What is the relevant cost of material.

Exam Kit Questions:

260:
Worth produces four products L, E, W and S which have the following costs per unit:
L E W S
$ $ $ $
Direct materials (at $10/kg) 15 10 12.50 20
Direct labour (at $12/hour) 12 12 18.00 18
Overheads (at $6 /labour hour) 12 6 9.00 9
Total cost 39 28 39.50 47
Contribution/unit 10 15 12.00 20
Maximum demand per month 3,000 2,000 1,500 2,500
Only 15,000 kg of materials and 10,250 labour hours are available.
In order to maximise profits, the product that Worth would prefer to produce first is product
261:
A company manufactures three products (X, Y and Z), all of which pass through the same finishing process.
For the coming month the number of hours available in the finishing process is 6,000.
Data relating to each product are as follows:
Product X Y Z
Selling price per unit ($) 30 36 41
Variable cost per unit ($) 20 27 35
Minutes in the finishing process per unit 45 36 25
Maximum monthly demand (units) 4,500 4,500 4,500
Place a tick to indicate the ranking of the products for production given that the company wishes to
maximise contribution.
1st 2nd 3rd
X
Y
Z
262:
The cost most relevant to be used in decision making are:
A. Sunk cost
B. Current cost
C. Estimated future costs
D. Notional and full costs
263:
A firm has some material which originally cost $45,000. It has a scrap value of $12,500 but if reworked at a
cost of $7,500, it could be sold for $17,500.
The incremental effect of reworking and selling the material would be a loss of $

264:
In order to utilise some spare capacity, Zola is preparing a quotation for a special order which requires 1,000
kilograms of Material R.
Zola has 600 kilograms of Material R in inventory (original cost $5.00 per kg). Material R is used in the
company's main product Q.
The resale value of Material R is $4.00 per kg. The present replacement price of Material R is $6.00. Material
R is readily available on the market.
The relevant cost of the 1,000 kilograms of Material R to be included in the quotation is:
A. $4,000
B. $5,000
C. $5,400
D. $6,000
265:
Which Two of the following are not normally included in relevant cost of decision making?
Not relevant?
Future costs
Committed costs
Sunk costs
Incremental variable costs
Incremental fixed costs
266:
A sunk cost is:
A. A cost committed to be spent in the current period
B. A cost that is irrelevant for decision making
C. A cost connected with oil exploration in the North sea
D. A cost unaffected by fluctuations in the level of activity
267:
For decision making purposes which of the following are relevant cost? (Select all that apply)
Relevant?
Avoidable cost
Future cost
Opportunity cost
Differential cost
268:
The labour requirements for a special contract are 250 skilled labour hours paid $10 per hour and 750 semi-
skilled labour hours paid $8 per hour.
At present skilled labour is in short supply, and all such labour used on this contract will be at the expense of
other work which generates $12 contribution per hour (after charging labour costs). There is currently a
surfeit of 1,200 semi-skilled labour hours, but the firm temporarily has a policy of no redundancies.
The relevant cost of labour for the special contract is:
A. $3,000
B. $5,500
C. $8,500
D. $11,500

269:
A company is considering accepting a one-year contract that will require four skilled employees.
The four skilled employees could be recruited on a one-year contract at a cost of $40,000 per employee. The
employees would be supervised by an existing manager who earns $60,000 per annum. It is expected that
supervision of the contract would take 10% of the manager's time.
Instead of recruiting new employees, the company could retrain some existing employees who currently earn
$30,000 per year. The training would cost $15,000 in total. If these employees were used they would need to
be replaced at a total cost of $100,000.
The relevant labour cost of the contract is $ .
270:
A company produces three products which have the following details:
Product
I II III
Per unit Per unit Per unit
Direct materials (at $5/kg) 8 kg 5 kg 6 kg
Contribution per unit $35 $25 $48
Contribution per kg of material $4.375 $5 $8
Demand (excluding special contract) (units) 3,000 5,000 2,000
The company must produce 1,000 units of Product I for a special contract before meeting normal demand.
Unfortunately there are only 35,000 kg of material available.
What is the optimal production plan?
Product
I II III
A. 1,000 4,600 2,000
B. 1,000 3,000 2,000
C. 2,875 --- 2,000
D. 3,000 2,200 ---
271:
GR manufactures two products for which details are shown below:
Product X Y
Selling price per unit $66 $100
Variable cost per unit $42 $75
Fixed cost per unit $30 $34
Skilled labour per unit 0.40 hours 0.50 hours
Maximum quarterly demand 5,000 5,000
For the current period, GR is experiencing a shortage of skilled labour, of which only 1,000 hours will be
available. If products are not produced internally they can be bought in at prices of $50 for X and $80 for Y.
How many units of Product Y should be produced in the period?
A. 0 units
B. 500 units
C. 2,000 units
D. 2,500 units

273:
Which term is used to represent the benefit sacrificed when one course of action is chosen in preference to
an alternative?
A. Avoidable cost
B. Direct cost
C. Incremental cost
D. Opportunity cost
274:
A company is considering the use of Material X in a special order. A sufficient quantity of the material, which
is used regularly by the company in its normal business, is available from inventory.
What is the relevant cost per kg of Material X in the evaluation of the special order?
A. Cost of the last purchase
B. Nil
C. Replacement cost
D. Saleable value
275:
A company manufactures and sells four products. Sales demand cannot be met owing to a shortage of skilled
labour.
Details of the four products are:
Product A Product B Product C Product D
Sales demands (units) 1,500 2,000 1,800 1,900
Contribution ($/units) 2.80 2.60 1.90 2.40
Contribution/sales % 30 40 50 45
Skilled labour (hours/units) 1.4 1.2 0.9 1.0
Rank the products in the order in which each should be made in order to maximise profits:
Product Rank
A
B
C
D
The following information is relevant to Questions 276 and 277.

A special contract requires 100 hours of skilled labour, 200 hours of unskilled labour and 20 hours of
management time. Skilled workers are in short supply and would have to be moved from work which is
currently earning a contribution of $3.50 per hour. Skilled workers are paid $9 per hour and semi-skilled
workers are paid $5 per hour. Management salaries are regarded as fixed costs in the company.
The contract would also require 100 kg of Material N and 300 kg of Material T. Material N is in constant use in
the business and there is currently 200 kg of this material held in inventory which is valued at $600. The cost
of replacing N is $4 per kg. Material T has no other use in the business,
There are currently 200 kg in inventory which could be sold at a value of $4 per kg. The replacement cost of T
is $8 per kg.

276:
What is the relevant cost of labour?
A. $1,350
B. $2,250
C. $2,600
D. $2,650
277:
The relevant cost of material is $ ?
278:
A company currently produces and sells two products, A and B.
Details- per unit are as follows:
A B
$ $
Selling price 16 20
Raw material cost (6) (8)
Direct labour (4) (4)
Fixed cost apportionment (2) (4)
Profit per unit $4 $4
If one of the resources is in short supply and B is preferred to A as a result, the resource in short supply is:
A. impossible to determine
B. raw materials
C. direct labour
D. fixed costs
279:
A company manufactures and sells four types of component. The labour hours available for manufacture are
restricted but any quantities of the components can be bought-in from an outside supplier in order to satisfy
sales demand.
The following further information is provided:
Component
A B C D
Per unit Per unit Per unit Per unit
Selling price ($) 12.00 15.00 18.00 20.00
Variable manufacturing costs ($) 6.00 8.00 9.00 11.50
Bought-in price ($) 11.00 11.50 13.00 16.00
Labour (hours) 0.8 0.8 0.8 0.8
The best component to BUY-IN in order to maximise profit is Component

Cash Management:
Topic#1:
Cash Budget:
Preparation of cash budgets or cash flow forecast
Note:
Transactions are recorded not on their occurrence date but on the date of movement of cash.
Question#1:
A company’s expected sales are as follows:
January February March
Sales $1,000 $1,500 $1,800
40% customers pay in month of sales, 30% customers pay in month after sale, 25% customer pay in 2nd
month after sale and remaining 5% are Bad debts.
Required: Amount of cash received in March
Question#2:
June July August September
Sales $5,000 $6,000 $4,000 $7,000
30% customers pay in month after sale, 55% pay in 2 month after sale, 12% pay in 3rd month after sale and
nd
remaining 3% are Bad debts.

Required: Amount of cash received in September
Question#3:
April May June
Sales $4,000 $8,000 $6,000
30% customers pay in month of sales, 45% customers pay in month after sale, 22% customer pay in 2nd month
after sale and remaining 3% are Bad debts.
Customers paying in month of sale will get 1% discount.
Required: Amount of cash received in June.
Question#4:
September October November December
Sales $10,000 $15,000 $14,000 $8,000
20% customers pay in month after sale, 60% pay in 2 month after sale, 15% pay in 3rd month after sale and
nd
remaining 5% are Bad debts.

Customer paying in month after sale get 2% discount.
Required: Cash Received in December.

Question#5:
August September October November
Sales $10,000 $11,000 $9,000 $8,000
50% of the above sales are cash sales.
Of credit sales 30% pay in month of sale 25% in month after sales, 20% pay in 2nd month after sale, 15% pay in
3rd month after sales and 10% are bad debts.
Required: Cash received in November
Question#6:
Following sales are available:
September October November December
Sales $10,000 $12,000 $16,000 $18,000
10% of the above sales are cash sales.
Of credit sales 50% customers pay in month after sales, 20% pay in 2nd month after sale, 25% pay in 3rd month
after sales and 5% are Bad debts.
Customer paying in month after sale get 2 % discount.
Required: Cash Received in December.

Topic#2:
Time Series Analysis:
What is Time Series?

Value of Variable recorded over a period of time is called Time Series i.e. past data.
Example of Time Series:
Year Sales
20X1 $5,000
20X2 $6,000
20X2 $8,000
There are three trends in time series:

1. Rising Trend (Value of variable is increasing)
2. Falling Trend(Value of variable is decreasing)
3. Mixed Trend(Value of variable is fluctuating)
To study time series we have two models:

1. Additive Model
2. Multiplicative Model
Additive Model:
Relation between components of time series is of Addition.
Y=T+S+C+R
Multiplicative Model:
Relation between components of time series is of Multiplication
Y=T×S×C×R
Components of Time Series:

1. Long Term Trend (T): Underlying movement in value of variable.
2. Seasonal Variation (S): Movement due to seasons
3. Cyclical Variation (C ):Effects of economic cycle i.e. boom or recession
4. Random Variation (R): Movement due to one off events like flood earthquake etc.
Time Series Analysis:

‘’It is a forecasting technique which considers the impact of seasonal fluctuations in making forecast’’
Technique to find ‘’T’’ is moving Averages
In our syllabus:
Y=T+S
Y=T×S
No one can forecast random variation

Question#1:
Following Data relates to a company
Year Sales
$
20X4
Qtr 1 5,000
Qtr 2 5,200
Qtr 3 5,500
Qtr 4 4,800
20X5
Qtr 1 5,100
Qtr 2 5,250
Qtr 3 5,700
Qtr 4 4,900
20X6
Qtr 1 5,200
Qtr 2 5,350
Qtr 3 5,800
Qtr4 5,000
Required:
1. Compute Trend figure through Three point moving average
2. Find seasonal variation through Additive and Multiplicative model
Question#2:
Following sales are available:
Year Sales
$
20X5
Qtr 1 10,000
Qtr 2 11,500
Qtr 3 10,500
Qtr 4 9,500
20X6
Qtr 1 11,000
Qtr 2 12,500
Qtr 3 10,700
Qtr 4 10,000
Required:
1. Compute Trend figure through Four point Moving Average
2. Find Seasonal variation through Additive and Multiplicative model

Question#3:
Following data relates to a company
20X8 Sales
January 5,000
February 5,500
March 5,800
April 5,900
May 5,600
June 6,300
July 6,400
August 6,200
September 7,100
October 7,500
November 7,000
December 6,500
Required:
1. Compute trend figure through three point moving average
2. Find seasonal variation using both models
3. Find a monthly growth in trend.
4. Forecast sales of May 20X9 using both models
Question#4:
20X6 Sales
January 8,000
February 9,000
March 9,500
April 9,100
May 9,700
June 10,200
July 8,800
August 9,000
September 10,100
October 10,600
November 9,500
December 9,000
Required:
1. Compute trend figure through four point moving average
2. Find seasonal variation using both models
3. Find a monthly growth in trend.
4. Forecast sales of June20X7 using both models

Topic#3:
Index Number/Indices:
The purpose of index numbers is to find variation in prices compared to a base.
Index= Current year price(Pn)

Base year (Po)
Question#1:
Prices of product T in last few years were.
Year Price
20X4 200
20X5 240
20X6 260
Required:
Index for each year using 20X4 as a base year
Question#2:
Prices of product A in last few years were.
Year Price
20X2 200
20X3 210
20X4 225
Required:
Index for each year using 20X2 as a base year
Question#3:
Price of product T in 20X8 was $4 and index at that time was 110%. Index now stands at 200%. Find current
price of T.
Question#4:
Price of product X in 20X5 was $600 and index at that time was 150%. Index in 20X8 became 225%
Find price in 20X8.
Question#5:
Price of product X in 20X7 was $80/unit and index at that time was 250%. Today’s Index is 410%
Find today’s price.
Question#6:
Price of product T in 20X7 was $60 kg and index at that time was 220%. Index in 20X9 became 510%
Find price in 20X9.
Question#7:
Index of last 4 years is:
20X5 110%
20X6 125%
20X7 155%
20X8 180%
Price of product X was $3/litre in 20X6.
Find price in 20X8.

Topic#4:
Cash Management Theory:
Difference between cash accounting & accrual accounting.
Working Capital:
Amount of capital required to conduct day to day operations normally classified as the excess of current
assets over current liabilities.
Working Capital=Current Asset-Current Liabilities
Working Capital Cycle/Cash Operating Cycle:

o A firm buys Material on credit
o Material is held in stores for few days before going to production
o It takes some time to make the Finished good
o Finished goods are kept in stores for few days before selling
o Goods are sold on credit and payment is received after few days.
o The difference between supplier being paid and money being received from customer is called “Working
Capital Cycle”
Raw Material Holding period xxx
+WIP period xxx
+F.G holding period xxx
+Debtor collection period xxx
-Creditor payment period (xxx)
Working Capital Cycle xxx
The above cycle is for a manufacturing business. A retail business will not have first two items.
Retailer: Cash realized immedietly
Manufacturing: Cash realized later
Question:
Raw material of ABC limited remains in stores for 8 days before entering in production. It takes 3 days to
produce the item while our marketing team takes 5 days to sell the items. Customers make payment in 11
days while supplier of raw material must be paid in 20 days.
Required: Working Capital Cycle
Types of Cash Transactions:

1. Capital and Revenue transactions
2. Exceptional and Unexceptional transactions
3. Regular and Irregular transactions
Examples of Cash Inflows:

o Sales
o Disposal of Asset
o Loan taken
Examples of Cash outflows:

Wages
Material Purchase
Dividends

There is always a difference between cash and profit
Opening Receivables XXX

Add: Sales during the year XXX
Total money due from customers XXX
Less: Closing Receivables (XXX)
Cash received from customers during the year XXX
Cost of Sales XXX

Add: Closing stock XXX
Less: Opening stock (XXX)
Purchases during the year XXX
Purchases XXX
Add: Opening Stock XXX
Less: Closing Stock (XXX)
Cost of sales XXX
Purchases XXX
Add: Opening Payables XXX
Less: Closing Payables (XXX)
Cash paid to supplier during the year XXX
Difference between Surplus and Deficit:

When inflows are higher than outflows is surplus.
When outflows are higher than inflows is deficit
Positive cash flows is a surplus and Negative cash flows is a Deficit.
Cash flow Management & Liquidity Management:

It involves careful observation & monitoring of working capital to ensure organization has suffiecient cash to
pay off its liabilities as they fall due.
This may involve:
o Selling inventory quickly
o Collecting money from receivables quickly
o Make late payment to supplier
Economic & Financial Environment:

Trends in an economy can effect management of cash balances.
When economy is slow business are reluctant to borrow and they preserves cash.
When economy grows business take risk and keep low cash balance and invest.

Treasury Management:
Certain large organizations have a separate area to cover all cash related issues. Such area is called ‘Treasury
Department’.
Head of treasury department is called ‘Treasurer’
Roles of Treasurer:
o Corporate financial objectives
o Liquidity management
o Corporate finance
o Funding management
o Currency Management
o Related subjects
Purpose of making cash budgets:

It provides early warning of liquidity problems and funding needs.
If cash budget shows cash deficit it will need to be funded via borrowing, selling assets, leading i.e. delay
payments to suppliers and lagging i.e. early payments from customers.
If forecast shows surplus it needs to be invested somewhere.
Why cash flow problems arises:

o Losses
o Growth
o Inflation
o Seasonal effects
o One off expenditure
Corrective actions for cash flow problems:

o Take more credits
o Keep low inventory
o Take money quickly from customers
How to ease cash flow shortage:

o Postpone capital expenditure
o Reschedule loan payments
o Sell assets
Cash Deficit:
Shortage of funds to satisfy current obligations
o Insufficient funds
o Seasonal factors
Cash Surplus:
Funds available above current obligations
o Good Sales
o Seasonal factors
What to do with Surplus:

1. Transaction Motive (To satisfy day to day Transactions)
2. Precautionary motive (Cash saved for emergency)
3. Speculative motive (Cash used for investment)

Investing surplus funds:

Relation between risk and returns. High risk means high returns.
1. Bank Deposits:
o Fixed time
o Low risk
o No withdrawal, withdrawal with penalty if done before due date
o No decline in Principal
2. Money Market Deposits:
o Fixed or notice period
o Money is given to banks who invest in stock and bonds
3. Certificates of Deposits:
o Issued by bank against cash indicating that a sum has been invested with bank and will be paid back at
specific date.
o COD’s can be bought and sold
4. “Gilts” UK government bonds:
o Money invested with government
o Least risk so less return
5. Local Authority Bonds:
o Money invested with local bodies or authorities.
o Security is less than Government
All investments can have risk therefore “Diversification” is the best solution
Diversification:
Diversification means spreading the risk that is not investing all money in one area but maintaining a
diversified portfolio that is investing small, small money in different sectors
How to Raise Finance from Bank:

1. Overdraft
2. Term loan
3. Committed facility
4. Revolving facility
5. Uncommitted facility
6. Bankers acceptance
1. Overdraft: For short term and repayable on demand.

2. Term loan: Loan involves taking physical cash from which can be paid in monthly installments scheduled
in advance
3. Committed Facility: Bank committed to lend you a certain amount which will be given to you when
demanded
4. Revolving Facility: A facility in which bank gives you a certain amount as a loan and further payment will
only be given if we clear the previous loan
5. Uncommitted Facility: The bank has agreed to provide you money but without any commitment
6. Bankers Acceptance: Bank undertakes to make payment on behalf of customer & customer repays bank
after certain time with interest.
Bank/Customer Relationship:
1. Receivable/Payable relation
2. Bailor /Bailee relation
3. Principle/Agent relation
4. Mortgagor/Mortgagee
5. Fiduciary relation

Bank Criteria for Lending:

o Character of borrower
o Ability to repay
o Margin of profit
o Purpose of borrowing
o Amount
o Repayment terms
o Insurance
Bank may take security for lending:

Security should be:
o Easy to take
o Easy to value
o Easy to realize
Loan repayment methods:

1. Bullet (whole principal is paid in end)
2. Balloon( some principal is repaid during term of loan)
3. Amortizing /straight repayment(principal is paid gradually with interest)
Loan interest can be variable or fixed i.e. LIBOR
Loan Covenants:
Some loans carry conditions or obligations called ”Loan Covenants”
1. Positive Covenants( requires borrower to do something)
2. Negative Covenants( requires borrower not to do something)
3. Quantitative Covenants( sets limitations on borrower’s in ratios, inflation etc)
Financial intermediary:
Any person/institution bringing together providers and users of finance i.e. middle man.
Redemption Yield:
How much interest/return we are generating from investment in bonds.
Redemption yield=interest rate/current value×100
Question:
An investment has a market value of $90 and pays interest at 9%.
Required: Redemption yield.
Cash Handling Procedures:

o Record all money received
o Bank all money received
o Protect cash and cheques
o Authorize all payments
o Don’t pay twice
o Do reconciliation
o Restrict access to cash and cheques
o Segregation
o Set limits on Distribution

Exam Kit Questions:

16.1:
Which of the following statements about working capital is correct?
A. Working capital is the difference between a company's total assets and its total liabilities.
B. Working capital is the difference between a company's total assets and its current liabilities.
C. Working capital is the difference between a company's current assets and its total liabilities.
D. Working capital is the difference between a company's current assets and its current liabilities.
16.2:
Which of the following is not classed as working capital?
A. Overdraft
B. Inventory
C. Accruals
D. Bank loan
16.4:
Which of the following is a way of improving operational cash flows in a business?
A. Taking more credit from suppliers
B. Giving more credit to customers
C. Increasing inventories
D. Taking advantage of early settlement discounts from suppliers
16.5:
Which of the following functions are carried out by a company’s treasury department?
(i) Working capital management
(ii) Preparation of annual financial statements
(iii) Exchange dealing, including futures and options
A. (i) and (ii) only
B. (ii) and (iii) only
C. (i) and (iii) only
D. (i),(ii) and (iii)
16.6:
Which of the following are ways of funding a forecast cash deficit?
(i) Leading and lagging
(ii) Borrowing from the bank
(iii) Selling short-term financial investments
B. (i) and (iii) only
C. (ii) and (iii) only
D. (i), (ii) and (iii)
16.7:
Which of the following may be causes of cash flow problems?
(i) Losses
(ii) Growth
(iii) Seasonal business

16.8:
The revenue for Y Co is as follows:
Year Revenue
$
20X1 26,500
20X2 28,680
20X3 29,530
20X4 27,670
20X5 30,230
Using 20X1 as the base year, what is the index for 20X4 ?
16.9:
Which of the following statements about UK government securities are correct?
(i) Most are fixed interest
(ii) Most have a face value of £100
(iii) The yield is higher than local authority stocks
16.10:
Which of the following statements about certificates of deposit is correct?
А Certificates of deposit are issued by the UK government.
B Ownership of certificates of deposit is transferred by physical delivery from buyer
C Certificates of deposit are not negotiable.
D The deposit is invested in stocks and bonds.
16.11:
Which of the following uses of an overdraft is a bank most likely to approve of?
A. To purchase new machinery
B. To cover a temporary cash shortfall
C. To invest in a new company
D. To expand overseas
16.12:
Which of the following describes exceptional cash transactions?
A. Relate to the long-term functioning of the business
B. Capitalized in the accounts
C. Occur at regular intervals
D. Unusual costs such as the closure of part of a business
16.14:
Which TWO of the following are important procedures to follow when handling cash payments?
A. Restricting access to cash and cheques
B. Ensuring prompt banking of cash
C. Ensuring all cash banked is reconciled
D. Completing appropriate supporting documentation
16.15:
Are the following statements true or false?
True False
1. When economic conditions are unfavourable, businesses are
likely to try to preserve cash balances.
2. When economic conditions are unfavourable, businesses are
likely to be reluctant to borrow funds.

16.20:
In the additive model, where A = Actual figure, T = Trend figure and S = Seasonal variation, how is seasonal
variation calculated?
A. S = A – T
B. S = A × T
C. S = A/ T
D. S = A + T
303:
Which of the following is a capital payment?
A. Payment of salaries to directors
B. Payment of interest on a loan
C. Purchase of a motor vehicle
D. Money raised from a new share issue
304:
Which of the following items would affect a company's cash flow but not its profits:
A. Payment of salaries to directors
B. Payment of interest on a loan
C. Depreciation of a motor vehicle
D. Money raised from a new share issue
306:
A company has provided the following information:
Receivables collection period 38 days
Raw material inventory holding period 8 days
Production period (WIP) 4 days
Suppliers' payment period 28 days
Finished goods holding period 26 days
The working capital cycle for the business is days.?
308:
Which of the following is most likely to result in a cash inflow?
A. Decrease in equity
B. Decrease in long term debt
C. Decrease in current assets
D. Decrease in current liabilities
309:
A cash budget prepared for the forthcoming three months shows a substantial cash surplus in the first two
months.
Which TWO of the following would be suitable actions:
True
1. Pay suppliers early to receive a cash discount
2. Buy new plant and machinery
3. Invest in treasury bills.

318:
A business has experienced the following sales figures (in $000) over the last three years:
Year Jan to Apr May to Aug Sep to Dec
20X1 60 94 65
20x2 64 99 68
20X3 70 106 71
The business uses a three period moving average technique to determine both a trend line and seasonal
variations. What is the seasonal variation for September to December 20X2?
A. +$11,000
B. +$31,000
C. $-11,000
D. $-31,000
321:
A business experiences seasonal sales. It uses the multiplicative model for time series analysis and has
determined the following seasonal variations for each quarter of the year:
Quarter Seasonal Variation
1 0.96
2 1.03
3 0.68
4 1.33
The forecast trend in sales for quarter 3 in the following year is $64,000.
What is forecast sales for quarter 3 in the following year?
A. $43,520
B. $64,000
C. $107,520
D. $170,880
325:
A business policy is that one member of staff deals with cash receipts recording whilst another staff member
reconciles cash receipts to sales and banking records.
This is an example of what?
A. Segregation of duties
B. Accountability
C. Physical cash security
D. Reconciliation
326:
Which of the following would be considered to be poor physical security measures with respect to the
handling of cash? (Select all that apply.)
Poor security?
1. Safe combinations are the same for all safes
2. Keys are kept in a locked cabinet
3. Cash counting is not performed in a visible area
4. Cash is only banked once a month

328:
Which of the following investments is likely to provide the lowest level of return?
A. Gilts
B. Certificates of deposit
C. Local authority stock
D. Bank deposits
329:
GYH plc has just taken out a loan that involves repaying mainly interest payments each period with only a
small amount of principle repaid during the life of the loan. The bulk of the capital will be repaid on maturity.
What type of repayment pattern is being described here?
A. Bullet
B. Balloon
C. Mortgage-style (amortising)
D. Irredeemable
330:
6% treasury stock is currently valued at $92 and is redeemable in one year’s time.
What is the redemption yield?
A. 6%
B. 6.5%
C. 8.7%
D. 15.2%
332:
Which of the following would not be considered to be an external influence on cash balances?
A. Interest rates in the economy
B. Company treasury management policies
C. Economic recessions
D. Changes in banks' willingness to lend
333:
UNQ has an overdraft limit of $60,000. In March the company is $25,000 overdrawn. Overdraft interest is
charged at 1% per month.
The overdraft interest charged in March will be $ ?

Job, Batch & Service Costing:

Job:
A job is a cost unit which consist of single order or contract.
Batch:
Consists of Multiple items
Job
Batch Manufacturing Sector
Service costing is used in service sector.
How to price a job:

Direct material X
Direct labor X
Direct Expenses X
Prime cost X
Production OH X
Non- Production OH X
Total costs of job X
Add: profit margin/markup X
Quoted Job price X
Markup = profit based on cost (cost - 100%)

Margin = profit based on sales (sales – 100%)
Selling price = Cost + profit

Question#1:
Following Data relates to Job#123
Material: 800 kgs @$4/kg
Labour: 200 Hours @$2/hour
Production Oh: $6/hour
Admin Oh: 10% of Production cost
Profit margin: 15%
Required: Price of Job#123
Question#2:
Following data relates to Job#456
Material A: 200 kgs @$5/kg
Material B: 800 litres @$2/litre
Labour: 600 hours@$7hour
Production Oh: $3/hour
Admin Oh: 5% of Labour cost
Selling Oh: 10% of Production Cost
Markup: 10%
Required: Price of Job#456
NOTE:
Profit margin is 15% on Cost
Now here we take cost 100%
Profit markup is 25% on Sales

Now here we take Sales 100%
Question#3:
Following data relates to Job 456
Material: 900 kgs@$3/kg
Labour:
Dept X 200 hours@$4/hour
Dept Y 300 hours@$3/hour
Production Oh:
Dept X $2/hour
Dept Y $3/hour
Marketing Oh: 5% of material cost
Profit markup is 20% on sales
Required: Price of Job 456

Question#4:
Following detail relates to Job 151.
Material: 600 kgs @$2/kg
Labour:
Dept 1 400 hours @$6/hour
Dept 2 300 hours@$3/hour
Production Oh:
Budgeted Prod Oh:
Dept 1 $10,000
Dept 2 $12,000
Budgeted hours:
Dept 1 5,000
Dept 2 3,000
Admin Oh: 15% of Production Cost
Profit margin: 10%
Required: Price of Job 151.

Exam Type MCQ’S:

Question#1:
A furniture making business manufactures quality furniture’s to customers’ orders. It has 3 production
departments (D, E and F) which have overhead absorption rates (per direct hour) of £11.99, £10.40 and
£13.33 respectively.
Two furniture’s are to be manufactured for the customers. Direct costs are as follows:
JOB ABC JOB XYZ
Direct Material £94 £78
Direct Labor
12 hour’s dept D 14 hour’s dept D
8 hours dept E 11 Hours dept E
6 hours dept F 5 hours dept F
Labor rate are as follows: £4.66(D); £3.45(E) £3.29 (F)
The firm quote prices to customers that reflect a required profit of 35% on selling price.
Required: Calculate the total cost and selling price of each job
Question#2:
Pansy Ltd is a company that carries out jobbing work. One of the job carried out in May was job 2409, to
which following information relates.
Direct Material Y: 400 Kilos were issued from stores at a cost of £5 per kilo.
Direct Material Z: 800 Kilos were issued from stores at a cost of £6 per kilos .60 kilos were returned to store.
Department P: 300 labor hours were worked
Department Q: 200 labor hours were worked
Labor is paid £6 per hour in dept. p and £8 per hour in dept. Q.
Overhead is absorbed at the rate of £3 per direct labor hour in both departments. The profit margin is 28% on
cost.
Required: Calculate the total cost and selling price of job 2409.
Question#3:
A Company manufactures medicines to order and has the following budgeted overheads for the year, based
on normal activity level.
Budgeted Overheads Budgeted Activity
Department:
Manufacturing £11000 1700 Labor Hours
Finishing £13000 1100 Labors Hours
Selling and administrative overheads are 25% of the production cost. An order of 250 Capsules type
medicines, made as batch #3456, incurred the following cost.
Materials £12000
Labour 190 hours manufacturing shop £8/hour
220 hours finishing shop at £9/hour
£700 was paid for the hire of special equipment for shaping the medicines.
Required: Calculate the cost per unit for batch #3456.

Question#2:
P Ltd manufactures ring binders, which are embossed with the customers own logo. A customer has ordered
a batch of 300 binders.
The following data illustrate the cot for typical batch of 100 binders.
Direct Material £30
Direct Labor £10
Machine setup £3
Design and art work £15
£58
Direct employees are paid on a piece of paperwork basis.
P LTD absorbs production overheads at the rate of 20% of direct wages cost. 5% added to the total
production cost of each batch to allow for selling, distribution administration overhead.
P LTD requires a profit margin of 25% of sales value.
The selling price for a batch of 300 binders will be
A. £189.00
B. £193.20
C. £201.60
D. £252.00
Question#5:
BE Ltd are preparing a quote for job 731. The cost and other related information includes:
Raw material £4,250
Direct Labor £7,200
Production overhead £5.50 per labor hour
Admin overhead 10% of production cost
Profit margin 25% on selling price
Direct Labor is paid £7.20 per hour.
The sale price of job 731 to the customer would have been:
A. £2,882.50
B. £23,306.25
C. £24,680.00
D. £24,860.00
Question#6:
Job XX has been completed at a total production cost of 3633. Administration and selling overheads are
applied at 20% of production cost. The selling price of each job is established so as to provide a GROSS PROFIT
margin of 30%
What is the selling price of Job XX?
A. £4,732
B. £5,190
C. £5,668
D. £6,228

The following information relates to question number 8,9,10

XY taxis runs a fleet of a vehicles .Vehicle M9 Dun is a part of the fleet and its budget for year 20X5 is:
Drivers wages £13,500
Fuel £8,500
Maintenance £750
Tax and Insurance £1,000
Depreciation 25% reducing balance method. The vehicle has been purchased for £16000 in 20X3. The planned
mileage is 50,000 per annum.
Question#8:
What were the total operating costs for the year?
A. £27,750
B. £25,000
C. £26,000
D. £23,750
Question#9:
What was the operating cost per mile?
A. £0.56
B. £0.50
C. £0.52
D. £0.48
Question#10:
If the owner wishes to make a profit of 25% of the taxi fare income, what must be the revenue to achieve
this objective?
A. £32,500
B. £31,200
C. £36,447
D. £34,667

Overheads Charging To Products:

Question#1:
Total Overheads: $100,000
Product A Product B
Machine Hours 15,000 10,000
Overheads are absorbed/recovered on the basis of machine hours
Required: How much overheads will be charged to A and B
Question#2:
Product X Product Y Product Z
Labor Hours 12,000 11,000 7,000
Overheads are absorbed/recovered on the basis of Labor hours
Required: How much overheads will be charged to X,Y and Z
Question#3:
Product L Product M
Labor Cost $8,000 $12,000
Overheads will be recovered on the basis of labor cost
Required: How much overheads will be charged to Product L and M.
Question#4:
Product D Product E Product F
Material Cost $6,000 $11,000 $8,000
Overheads are absorbed on the basis of material cost
Required: How much overheads will be charged to Product D,E and F
Question#5:
Product R Product S
Production Cost $30,000 $50,000
Overheads are absorbed on the basis of production cost
Required: How much overheads will be charged to R and S
Question#6:
Material: 900 kgs @ $8/kg
Labour: 400 Hours @$2/hour
Production overheads are $30,000 and will be recovered on 10,000 labour hours
Admin overheads are $50,000 and will be recovered on production cost of $25,000
Margin 30%.
Required: Price of Job 123

Question#7:
Material: 800 kg @ $6/kg
Labour: 400 hours @$10/hour
Production overheads are $30,000 and are recovered on 5,000 labour hours
Admin overheads are $10,000 and are recovered on material cost of $5,000.
Selling overheads are $90,000 and are recovered on production cost of $3,000.
Markup 15%.
Required: Price of job 123.
Practice Questions:
Question#3:
JC Ltd operates a job costing system. The company standard net profit margin is 20% of sales value. The
estimated costs for the job B124 are as follows:
Direct material 3kg @ £5 per kg
Direct labor 4 hrs @ £9 per hour
Production overheads are budgeted to be £240,000 for the period, to be recovered on the basis of 30,000
labor hours.
Other overheads, related to selling, distribution and admin are budgeted to be £150,000 for the period. They
are to be recovered on the basis of total budgeted production cost of £750,000 for the period.
What is the price to be quoted for job B124?
A. 99.60
B. 124.50
C. 110.11
D. 99.99
Question#1:
A firm uses job costing and recovers overheads as a percentage of direct labor cost. Three jobs were worked
during a period, the details of which are as follows:
Job 1 Job 2 Job 3
Opening WIP £8,500 0 £46,000
Material in the period £17,150 £29,025 0
Labor for the period £12,500 £23,000 £4,500
The overhead for the period were £140,000
Job 3 was completed during the period and consisted of 2400 identical circuits boards. The firm adds 50%
to total production costs to arrival at selling price.
What is the selling price of circuit board?
A. Cannot be calculated from given information
B. £31.56
C. £41.41
D. £55.21

Service Costing:
Applicable in service industries like:
o Railway
o Airline
o Hotel
o Teaching Sector e.g. MHA etc
Differences between manufacturing and service industries:

OR
Characteristics of Service Industries:
1. Intangibility (No Physical existence)
2. Heterogeneity (Lack of Consistency)
3. Simultaneity (Gap between Production and Consumption)
4. Perishability (Cannot be stored)
5. No Transfer of ownership
Calculation of cost per service unit

Cost/service unit=Total cost of service
# of service units
Service unit must be composite cost unit
Question#1:
An institution had total cost for the year was $50,000
Details are:
Month # of students Subject
Jan 10 3
Feb 15 2
March 12 5
Required: Cost per service unit

Question#5:
The following information is related to a company involved in the business of loading and delivering goods
Journey Tones Carried Distance in km
1 4 80
2 6 90
3 8 100
4 3 60
5 7 125
Required:
If the total cost incurred was $33000, calculate the cost per tonne-km.
Question#4:
The following information is available for the Green Hotel company for the latest thirty day period:
Numbers of rooms available per night 72
Percentage occupancy achieved 73%
Room service cost incurred £4,400
Required:
Calculate the room servicing cost per occupied room night
Question#5:
Happy returns Ltd operates a haulage business with large 3 vehicles. During week 26 it is expected all 3
vehicles will be used at a total cost of £10390 kilometers will be travelled (including return journeys when
empty) as shown in the following table:
Journey Tonnes carried Kilometers
1 34 180
2 28 265
3 40 390
4 32 115
5 26 220
6 40 480
7 29 90
8 26 100
9 25 135
The total tonne- km in a week, 26 is
The average cost per tonne- k m for a week 26 is

Question#7:
The cost of unit of a transport business with a single vehicle is tonee /kilometer. Total cost were£4,558 in a
week during which the following journeys were made:
Journey Load in tones Distance in km
1 5 80
2 7 100
3 3 40
4 5 60
5 4 150
What was the cost per tone- kilometer in the week?
A. £0.44
B. £2.15
C. £10.60
D. £57.57

Process Costing:
Process Costing is a costing method used where it is not possible to identify the separable unit of production
due to the continuous nature of production process
Normal Scenario:
Input Process Output
Process Scenario:
Input Process 1 Process 2 Process 3 Output
o Continuous nature of work
o Output of one process become the input of other
Important Terminologies used In Process Costing:

1. Normal Loss:
o It is the loss expected during the process
o It is uncontrollable
2. Abnormal Loss:
o When actual loss is greater than normal or expected loss.
o It is controllable
3. Abnormal Gain:
o When actual loss is less than the normal or expected loss
Abnormal Gain/ loss = Actual Output – Expected Output
Examinable Topic:
Find the value of output and losses
This is done through a T-account called ‘’Process Account’’
Dr Process Account Cr
Unit Rate $ Unit Rate $
Material X X X Finished goods X X X
Labour X Normal Loss X X X
Production Oh X Abnormal Loss X X X
X X
Abnormal gain X X X
(If any) X X X X
Rate=Total cost- S.V of Normal Loss

Expected output
Expected output=Input units-Normal loss unit
Note:
This rate will be applied on Abnormal Loss, Abnormal gain and finished goods. This rate will not be applied on
Normal Loss as the value of normal loss in T-account is always zero, unless it has some scrap value

Question#1:
Input: 1000 kg
Normal Loss: 20% of input
Find Abnormal loss or Abnormal gain if:
i)If actual output is 790kg
ii)If actual output is 820kg
Question#2:
Input: 20,000 kg
Normal loss: 25% of input
Find Abnormal loss or Abnormal gain if:
i)If actual output is 1,550 kg
ii)If actual output is1,470 kg
Question#3:
In a process 2,000 kg are input at a cost of $5,000.Labour cost is $3,000 and Overheads $2,000.Normal loss is
10% of input.
Required: Prepare process Account
Question#4:
In a process 3,000 kg are input at a cost of $8,000.Labour cost is $4,000 and Oh $2,000. Normal loss is 5% of
input having a scrap value of $0.5/kg
Required: Prepare a Process Account
Question#5:
In a process 2,000 kg are input at a cost of $8,000. Labour cost is $3,000 and Oh $2,000. Normal loss is 20% of
input but actual output was 1,500 kg.
Question#6:
In a process 3,000 units are input at a cost of $6,000. Conversion cost (i.e. lab+oh) is $4,000. Normal loss is
15% of input but actual output was 3,300 units.
Lost units have a scrap value of 0.5/unit.
Question#7:
In a process 4,000 kg are input at a cost of $8,000. Labour cost is $2,000 and Overheads $1,000. Normal loss is
10% of input but actual output was 3,700 kg
Question#8:
In a process 1,000 kg are input at a cost of $8,000. Labour cost is $4,000 and Overheads is $3,000.Normal loss
was 20% of input but actual output was 750kg. Lost units have a scrap value of $1/kg
Question#9:
In a process 2,500 kg are input at a cost of $10,000. Labour cost is $4,000 and Overheads is $1,000. Normal
loss is 10% of input but actual output was 2,300 kg.

Question#10:
In a process 1,500 kg are input at a cost of $10,000. Conversion cost is $8,000. Normal loss was 20% of input
but actual loss was 350 kg.
Required: Prepare a Process Account.
Question#11:
In a process 3,000 kg are input at a cost of $5,000. Labour cost is $2,000 and Overheads is $1,000. Normal loss
was 10% of input but actual loss was 200 kg.
Exam Kit Questions:

209:
Pickersons manufactures a series of cleaning materials which pass through separate processes.
The input to Process A for the month of January was:
Material Z 10,000 tones at $3.00 per tone
Direct labour $6,500
Process overheads $11,500
Normal losses are estimated as 5% of input and all losses have a scrap value of $2 per tone.
Output during the month to Process B was 9,450 tones and there is no work-in-progress.
What was the value of normal losses credited to the process account in January?
A. $500
B. $750
C. $1,250
D. $1,000
211:
A company operates a continuous process into which it inputs 30,000 tones of material costing $6 per tone. It
also incurs direct labour costs of $25,000 and process overheads of $145,000.
Normal losses are estimated at 10% of input and all losses have a scrap value of $3 per tone.
What is the cost per unit of output?
A. $12.63
B. $11.67
C. $12.96
D. $11.39
212:
In which circumstances would a normal loss be given a value or cost of nil?
A. If an abnormal loss also exists
B. If an abnormal gain also exists
C. If the scrap value is excessively high
D. If it has no scrap value

213:
Burgess operates a continuous process into which 3,000 units of material costing $9,000 was input in a
period.
Conversion costs for this period were $11,970 and losses, which have a scrap value of $1.50 per unit, are
expected at a rate of 10% of input. There was no opening or closing inventory and output for the period was
2,900 units.
The valuation of the output was $ (round to the nearest $)
215:
Perth operates a process costing system. The process is expected to lose 25% of input and this can be sold for
$8 per kg.
Inputs for the month were:
Direct materials 3,500 kg at a total cost of $52,500
Direct labour $9,625 for the period
There is no opening or closing work-in-progress in the period. Actual output was 2,800 kg.
What is the valuation of the output?
A. $44,100
B. $49,700
C. $58,800
D. $56,525
216:
A company discovers, at the end of a process, that abnormal losses had occurred.
At what value would a unit of abnormal loss be recorded in the process account?
A. The total cost per unit of normal output
B. Scrap value
C. The direct cost per unit of normal output
D. Nil value
222:
Are the following statements relating to process costing true or false?
True False
1. The higher the net realizable value of normal losses the lower will be
the cost per unit of normal output.
2. The higher the abnormal losses the higher will be the cost per unit
of normal output.

Practice Questions:
Question#1:
In a process 500 litres are input at a cost of $2,000. Conversation cost are $4000. N.L is 10% input but actual
output was 420 litres.
Required: Prepare process account
Question#2:
In a process 400 Kgs are input at a cost of $6000. Labor cost is $1,000 & OH $2,000. N.L is 20% of input and
actual output was 350kgs. Lost units have a scrap value of $2/ kg.
Question#3:
In a process 2,000 litres are input at a cost of $5,000. Labor cost is $2,000 and OH $1,000. N.L is 5% of input
but actual loss was 125 litres lost units have scrap value of$1.5/litre.
Question#4:
In a process 1,000 kgs are input at a cost of $6,000. Conversation cost are $2000 N.L is 20% of input but actual
loss was 170 kgs.
Question#5:
A company wants to make 450 kg of product Z and estimates its N.L to 8% of input. In one period company
did produce 450 kgs of material Z but there was an abnormal loss of 2% of input.
Required: How many kgs were input to the process?
Question#6:
A company wants to make 1,800 litres of product X & estimates N.L to be 13% of input. In one period
company did produce 1,800 litres of product X but there was abnormal gain of 3% of input.
Required: How many litres were input to the process?
Question#7:
A company wants to make 3,375 kgs of product Z and estimates N.L to be 23% of input. In one period
company did produce 3,375 kgs of Z but actual loss was 25% of input.
Required: How many Kgs were input to the process?
Question#8:
1,200 litres of a liquid were introduced in a process at a cost of £1,200. Labor costs were £600 while
overheads were £200. The normal loss is expected to be 200 litres but the output from the process only 900
litres. Any lost units can be sold as scrap for 50 pence/litre.
Required: Prepare a process account.
Question#9:
1,200litres of liquid were introduced in a process at a cost of£ 1,200. Labor costs were £ 600 while overheads
were £200.From the past experience, a normal loss of one sixth of input is expected, but the actual output
was 1,100 litre. Any lost units can be sold as scrap for £0.5 litre.
Required: Prepare a process account.

Joint and by Products:

Joint Product:
Two or more product which are output from same processing operations, but which are indistinguishable
from each other up to their point separation.
By Product:
A by product is an accidental product arising as a result of process
Main product Expensive
By Product Cheap
Product A (Main Product)

Input Process Product B (Main Product)
Product C (By Product)
This point is called split off point or point of separation

Split off Point/Point of Separation:
o The point at which joint and by products became separately identifiable is called ‘’Split off point or Point
of Separation’’
o Costs incurred prior to split off point are called ‘’Joint Cost or Common Cost’’
o Cost incurred after split off point are called ‘’Further Cost or separable Cost’’
Problems in Accounting for Joint Products:

o How should joint cost be apportioned between different products
o Weather a product shall be sold at split off point or processed further
Problems in Accounting for By Products:

o How should income from by product be treated in PnL.
o
Problem#1: Cost Apportionment
Methods of Cost Apportionment:
1. Physical Output Basis
2. Net realizable value basis(S.P less all selling cost)

Question#1:
Joint Cost = $50,000
Products Units Produced Units Sold Selling price/unit
A 10,000 9,800 $9
B 15,000 14,700 $11
Required:
1. How much cost will be apportioned to A and B using physical output basis.
2. Closing stock value of each product under physical output basis.
Question#2:
Joint Cost = $400,000
Products Units Produced Units Sold Selling price/unit
P 10,000 9,600 $20
Q 12,000 11,800 $25
R 15,000 14,500 $18
P incurs further process cost of $2/unit before being sold, Q incurs further processing cost of $3/unit and R
incurs $1/unit.
Required:
1. How much cost will be apportioned to P, Q and R using NRV basis.
2. Closing stock value of each product under NRV basis.
Problem#2:
Weather a Product shall be sold at split off point or processed further:
Question#1:
A company makes a product ‘A’ at split off point 5,000 units of A will be sold for $10/unit. The company can
process A further to convert it into 2,000 units of an advanced product ‘’AA’’ which will be sold for $40/unit.
Further Processing Cost:
Variable cost: $1.5 per unit of A
Fixed cost: $5,000
Required:
Weather Company should sell A at split off point or processed further
Problem#3:
Allowed Treatment of by products:
1. Income from by product can be treated as a separate source of income.
2. Income from by product is added to sales value of main product OR Income from by product is credited
to sales account
3. Income from by product is deducted from production cost of main product OR Income from by product is
credited to Process Account
4. NRV of by product is deducted from production cost of main products

Question 1:
Following data is available.
Joint cost: $200,000
Product units produced units sold Sp/unit

A 10000 10000 $20
B 15000 15000 $25
C 14000 14000 $30
All products require further processing costs of $3/unit before being sold.
Required:
How much cost will be apportioned to A, B, C under:
- Physical output basis
- NRV basis
Question 2:
A company makes a product T.
At split off point 5000 unit of T can be sold for $3/unit
Company can process T further to convert it into 3000 units of an advanced product T plus to be sold for $10/unit.
Further costs are:
variable: $2/unit of T plus
fixed: $7000
Required:
Whether to sell T at split off point or processed further
Question 3:
A co makes a product B at split off point 4000 units of B can be sold for $30/unit. Company can process B further to
convert it into 2000 units of an advanced product BBB to be sold for $70 / unit.
Further costs are:
variable: 4/unit of B
fixed : $10,000
Required:
Whether to sell B at split off point or processed further

Expenses:
Expense: Any cost other than material and labour is expense.
Direct Expense: which arises due to a specific unit.
Indirect Expense: which arises due to multiple units.
Capital expenditure: which results in acquisition or improvement of Non current asset.
Revenue expenditure: which incurred for the purpose of trade of business or to maintain it.
Methods of Depreciation:
1. Straight line
2. Reducing balance.
3. Hourly basis
4. Unitary basis
Question#1:
Machine cost $10,000.
Scrap value $2,000
Life is 5 years
Required:
Depreciation expense for each year using straight line method.
Question#2:
Scrap value $2,000
Life is 5 years
Required:
Depreciation expense for each year if charged on 25% RBM.
Question#3:
Scrap value $2,000
Company makes three products as follows:
A: 500 units
B: 300 units
C: 200 units
Required:
Depreciation expense for product B on unitary basis.

Cost Bookkeeping:
o Refers to double entry bookkeeping in cost accounting
o There are two systems of bookkeeping in cost accounting
1. Integrated System:
An integrated system combines cost ledger and financial ledger into one system of account
2. Interlocking System:
An interlocking system maintains separate ledger for cost accounting and financial accounting
In integrated system entries will remain same as financial accounting due to the upper hand of Financial
Accounting
Entries:
Goods Purchased:
Material XXX
Cash XXX
Issued To Production:
WIP XXX
Material XXX
Transferred To Warehouse:
Finished goods XXX
Sales XXX
Sold on Credit:
Debtor XXX
Sales XXX
Interlocking:
Financial Accounting: Entries will remain same as financial accounting
Cost Accounting: Replace the terms Cash, Debtor and Creditor with CLCA ( Cost ledger control Account)
Question#1:
A company sold goods worth $3,000 for cash and integrated system is in place
Question#2:
A company sold goods worth $5,000 for cash and interlocking system with financial accounting is in place
Question3:
A company sold goods worth $3,000 for cash and interlocking system with cost accounting is in place
Question#4:
A company purchased goods worth $4,000 on credit and interlocking system with cost accounting is in place.

Absorption And Marginal Costing:

Two approaches which are differ in their treatment of Fixed cost.
Absorption Costing Marginal Costing

Under Absorption Costing Under Marginal Costing
Fixed cost is treated as Product Fixed Cost is treated as Period cost
Cost
Product cost means Fixed cost Period cost means Fixed cost is not
is included in the cost of production included in cost of product, rather it
is deducted as an expense.
This means:
o Under Absorption Costing Product cost is made up of Variable Cost + Fixed Cost i.e.
(D.Mat+D.Lab+V.POH+F.POH)
o Under Marginal Costing Product cost is made up of Variable Cost only i.e. (D.Mat+D.Lab+V.POH)

Topic#1:
Stock Valuation:
Question#1:
A company had opening stock of 400 units. 800 units were produced and 1,000 units were sold
Standard Cost Card:
D. Mat $4
D. Lab $3
Production OH $6
One third of the Production Overheads are Fixed
Required: Find closing stock value under Absorption and Marginal Costing
Question#2:
A company had opening stock of 600 units. 900 units were produced and 1,200 units were sold
Standard Cost Card:
D. Mat $5
D. Lab $4
Production OH $8
Quarter of Production Overheads are Fixed
Required: Find closing stock value under Absorption and Marginal Costing
Question#3:
A company had 800 units in stock.500 units were produced & 1,000 units were sold.
Standard Cost Card:
D. Mat $3
D. Lab $6
Prod OH $9
One third of Prod OH are fixed.
Required: Closing stock value under absorption & marginal costing.
Question#4:
A company had opening stock of 5,000 units. 8,000 units were produced and 11,000 units were sold
Standard Cost Card:
D. Mat $6
D. Lab $3
Production OH $4
Admin OH $6
Quarter of Production Overheads are Fixed and half of admin overheads are variable
Required: Find closing stock value under Absorption and Marginal Costing.
Question#5:
A company had 600 units in stock.300 units were produced & 800 units were sold.
Standard Cost Card:
D. Mat $4
D. Lab $3
Prod OH $8
V. Admin OH $6
Fix selling OH $7
Quarter of prod OH are variable.
Required: Find closing stock value at under Absorption & Marginal costing.

Question#6:
A company had 500 units in stock.800 units were produced & closing stock is 200 units.
Standard Cost Card:
D. Mat $6
D. Lab $5
Prod OH $8
Selling OH $4
Half of selling overheads are variable and half of production overheads are fixed.
Required: Find closing stock value under absorption & marginal costing.

Topic#2:
P&L Format under Absorption Costing:
Sales xxx
Less: Cost of goods sold (Production Cost)
Opening Stock xxx
Production Cost xxx
Closing Stock (xxx) (xxx)
Gross Profit xxx
Less: Expenses (Non Production Cost): (xxx)
Net Profit xxx
P&L Format under Marginal Costing:

Sales xxx
Less: Variable Cost of goods sold:
Opening Stock xxx
Production Cost xxx
Closing Stock (xxx) (xxx)
Contribution xxx
Less: All Fixed Cost (xxx)
Net Profit xxx

Question#1:
Following data is available:
Period 1 Period 2 Period 3
Opening Stock units --- --- 1,000
Closing stock units --- 1,000 ---
Production units 5,000 6,000 5,500
Sales unit 5,000 5,000 6,500
Standard Cost Card:
D. Mat $3
D. Lab $6
Production OH $9
One third of Production OH are Fixed
Selling Price is $33/unit
Fixed Admin cost is $10,000 per period.
Required: P&L Account for each product under Absorption and Marginal Costing
Question#2:
Qtr 1 Qtr 2 Qtr 3
Opening Stock units --- --- 200
Closing stock units --- 200 ---
Production units 5,000 6,000 6,200
Sales unit 5,000 5,800 6,400
Standard Cost Card:
D. Mat $3
D. Lab $4
Production OH $5
One fifth of Production OH are Fixed
Selling Price is $25/unit
Fixed selling oh is $5,000
Required: P&L Account for each product under Absorption and Marginal Costing

Profit Reconciliation Statement:

o PUM+ (Increase in stock level × Fixed Production OH rate/unit)=PUA
o PUM- (Decrease in stock level × Fixed Production OH rate/unit)=PUA
Important Points to Note:

o Whenever stock level increases Absorption costing shows higher profits than Marginal Costing
o Whenever stock level decreases Marginal costing shows higher profits than Absorption Costing
o Whenever stock level remain same both shows same profits
Question#1:
Opening stocks: 1,000.
Closing stock: 1,500 units
P.U.M: $8,000
Fixed overhead rate is £3/unit
Required: Calculate the profit under absorption costing.
Question#2:
Opening stocks: 200.
Closing stock: 150 units
P.U.M: $9,000
Required: Calculate the profit under absorption costing.
Question#3:
P.U.A: $40,000
Required: Calculate the profit under marginal costing.
Question#4:
P.U.A: $8,000
Required: Calculate the profit under marginal costing.
Question#5:
Opening stocks: 2,000.
Closing stock: 2,500 units
P.U.A: $8,000
P.U.M $10,000
Required: F.OH rate per unit.

Question#3:
When opening stocks were 1000 units and closing stocks were 1900 units, a firm had a profit of £44000 under
marginal costing .If fixed overhead is £3/unit, calculate the profit under absorption costing.
Question#4:
When opening stocks were 6000 units and closing stocks was 5500 units, a firm had a profit of E69000 using
marginal costing. If fixed overhead is £4/unit, calculate profit.
Question#5:
When opening stocks were 4000 units and closing stocks was 4800 units, a firm had a profit of £39000 using
absorption costing. If fixed overhead rate is £4/unit, calculate profit under marginal costing.
Question#6:
When opening stocks were 1100 units and closing stock was 800 units, a firm had a profit of £28000 using
absorption costing. If fixed overhead rate is £2.5/unit, Calculate profit under marginal costing
Question#7:
In a period a firm had a profit of £77000 using absorption costing and £70000 using marginal
costing. Opening stock was1900 units and closing stock was 2800units
Required: What is the fixed overhead rate per unit?
Question#8:
A firm budgets its overheads to be £100, 000. In a Period the firm had a profit of £36000 using absorption
costing and £44000 using marginal costing. If opening stock was 3100 units and closing stock was 2800 units,
what is the budgeted activity level?
Question#9:
A firm has a normal activity level of 30000 units. In a period the firm has a profit of £49000 using absorption
costing and £45000 using marginal costing. If opening stock was 2700 units and closing stock was 3800 units,
what were the budgeted overheads?

Question#2:
When opening stocks were 8500 liters and closing stock £6750 liters, a company reported a profit of £62100
using, marginal costing. Assuming that the fixed overhead absorption rate was £3 per liter
Required: What would be the profit using absorption costing?
Question#3:
The overhead absorption rate for product Y is £10 per machine hour. Each unit of product requires
five machine hours. Stock of product Y on 1.1.X1 was 150 units on 31.12, X1 it was 100 units.
Required:
What is the difference in profit b/w results reported using absorption and results reported using
absorption and results reported using absorption and results reporting marginal costing?
A. The absorption costing profit would be £2500less
B. The absorption costing profit would be £2500greater
C. The absorption costing profit would be £500lesser
D. The absorption costing profit would be £500greater
Question#4:
A new product has a direct material cost £5.50. A direct labor cost £2, and a fixed overhead
apportionment of £3.50, Production during the first month was 23000 units while sales were 21000
units.
Required: Calculate the stock valuation under both marginal and absorption costing
Question#5:
In a period opening stock were 12600 units and closing stocks were 14100 units. The profit based
on marginal costing was £50400 and profit using absorption costingwas£60150.
Required: Calculate the fixed overhead absorption rate per unit
Question#6:
When opening stocks were 8500 liters and closing stock 7100 liters, ABC Ltd had a profit of £61000
using marginal costing. Assuming that fixed overhead absorption rate was £4 per liter, what would
be the profit using absorption costing?
Question#7:
ABC Limited produces a single product and currently uses absorption costing for its internal
management accounts report. The fixed production overhead absorption rate is £20 per unit.
Opening stocks for the year were 100 units and closing stocks were 50 units. The company’s
management accountant is considering switching to marginal costing as the stock valuation basis.
If marginal costing is used, the management accounting profit, compared with the profit using the
absorption method would then be.
A. 1000 lower
B. 2000higher
C. 2000lower
D. 1000higher
Question#8:
Profits under absorption costing were £101500 whilst under marginal costing the profit was £95000.
Given that the fixed overhead are absorbed at £8 per unit and that 2250 units are held in closing
stocks.
How many units of opening stocks were there?
Question#9:
Profits under marginal costing were £56800 but under absorption costing wereonly£55000. If fixed overheads
are absorbed at £2 per unit and opening stock is 1500 units, what is closing stock?
Question#10:
Channel 6 plc recorded a profit under marginal costing of £3500. Over the period stocks increased by
50 units. It wishes to restate its profit using absorption costing and establishes a pre-determined
overhead absorption rate of $4 per labor hour. Each unit uses 2 hours labor.
What is the restated profit?

Question#11:
Given the following:
Direct Material £ 20
Direct Labor £ 40
Production OH (V) £ 10
Production OH (F) £ 5
Sales(V) £ 5
Sales(F) £ 10
Total £ 90
What is the marginal cost?
Question#12:
A new company sets up to manufacture luxury and standard items. The relate cost of each are
Luxury Standard
Direct Material £ 16 £12

Direct Labor £ 21 £9
Variable production overhead £10 £8
Direct labor is paid £6 per hour. Fixed costs were £120400 in total recovered on the basis of direct
labor hour.
Production in the first period which agreed to budget 3500 luxury and 3300 standard units. There
are 290 luxury and 570 standard items in the stock at the end of the period.
Calculate the value of stock under marginal and absorption.
Standard Luxury
Marginal Absorption Marginal Absorption
A. £16530 £22515 £13630 £20735

B. £16530 £13630 £22515 £20735
C. £20735 £13630 £ 22515 £16530
D. £22515 £16530 £20735 £13630
Question#13:
A company produces a single product for which cost and selling price details are as follows:
Selling price £ 28/unit
Direct material £10/unit
Direct Labor £4/unit
Variable overhead £2/unit
Fixed overhead £5/unit
Last period 8000 units were produced and 8500 units were sold. The opening stock was 3000 units
and profit reported using marginal costing was £60000.
The profit reported using absorption costing will be:
A. 47,500
B. 57,500
C. 59,500
D. 62,500

Question#14:
A company manufactures a single product. Production and sales quantities for a period were:
Production Sales
Budget 100,000units 102,000units
Actual 97,000units 96,000 units
The fixed production overhead absorption rate is £1.40 per unit.
If marginal costing had been used instead of absorption costing how the profit would for the
period have differed?
A. 1400 less using marginal costing
B. 1400 more using marginal costing
C. 4200 less using marginal costing
D. 4200 more using marginal costing

Overheads:
o Sum of all Indirect cost is called Overheads.
Overheads= Indirect Material+ Indirect Labour +Indirect Expenses
o OHs are usually charged to product through a four step approach called Absorption Costing.
Topic#1:
Over/Under Absorption of Fixed Overheads:
o Absorption means charging
o Absorbed means charged
o Over absorbed means overcharged i.e. more overheads are charged than actually incurred
o Under absorbed means uncharged i.e. less overheads are charged than actually incurred
o Over/under absorption of overheads arise because, the predetermined absorption
rates are based on estimates
o To find any over/under absorbed overheads we compare Actual overheads with absorbed
overheads.
Over/under Absorption=Actual Overhead- Absorbed overheads
Absorbed Overheads= OAR × Actual Activity level
Formula’s:
1. Budgeted Fixed Overheads= Budgeted rate × Budgeted Activity level
2. Actual Fixed Overheads= Actual rate × Actual Activity level
3. Absorbed Overheads = Budgeted rate/OAR × Actual activity level

Question#1:
Budget Actual
Fixed Overheads $5,000 $6,000
Units 2,500 3,100
Required: Over/Under Absorption
Question#2:
Budget Actual
Units 2,000 2,500
Question#3:
Budget Actual
Units 30,000 32,000
Question#4:
Budget Actual
Units 20,000 21,000
Question#5:
Budget Actual
Units 12,000 13,000
Reverse Working in Over/Under Absorption:

Find Budgeted rate or Actual Activity level:
Question#6:
A company actual overheads were $20,000 and overheads were over absorbed by $5,000.
Company actually produced 10,000 units. Find Budgeted rate
Question#7:
A company actual overheads were $30,000 and overheads were under absorbed by
$6,000. Its budgeted overheads were $20,000 and budgeted units were $2,000.
Find actual activity level.

Over/Under Absorption:
Question#1:
A company produced 10,000 units in this period. Actual OH was $80,000 and Oh were under
absorbed by $5,000. Calculate budgeted rate.
Question#2:
Actual OH were $70,000 and OH were over absorbed by $20000, Budgeted Oh Were $100,000
and budgeted units were 10,000. Calculate units produced.
Question#3:
A company budgeted its OH to be $80,000. Actual OH were $75,000 and 15,000 units were
actually produced. Oh were over absorbed by $7000. Calculate Budgeted Activity level.
Question#4:
A company planned to produce 10,000 units. It actually produced 12,000 units & actual OH
were $106,000.OH were under absorbed by $10,000. Calculate Budgeted OH.
Question#5:
Actual OH were $100,000 and budgeted Oh were $120,000. The company budgeted to
produce 20,000 units and its OH were over absorbed by $ 8,000. Calculate actual rate/unit.
Question#6:
In a period the actual overheads were $110,000. The actual activity level was 55,000 units and
the OH were over absorbed by 10,000. Calculate the budgeted activity level if the actual OH
exactly totaled the budgeted overheads.
Question#10:
There are 100,000 budgeted machine hours for the forthcoming period. The fixed production
overhead absorption rate was £2.50 per machine hour. During the period the following actual
results were recorded
Standard machine hours 110,000
Fixed Production overheads £300,000
Calculate the over/under absorption of fixed overheads?
Question#11:
The following data is available:
Budgeted machine hours 17000
Actual machine hours 21250
Budgeted overheads £85000
Actual overheads £110500
The machine hour absorption rate is per machine hour
The overhead for the period was absorbed by .

Question#2:
A company has the following actual & budgeted data for the year4:
Budget Actual
Production (units) 8000 9000
Variable overheads rate per unit £3 £3
Fixed production overheads £360000 £432000
Sales (units) 6000 8000
Calculate the absorbed production overheads and the over/under absorbed overheads?
Question#3:
A company absorbs overheads on machine hours. In a period actual machine hours were 22,435
actual overheads were £496500 and there was over absorption of £64375. What was the budgeted
overhead absorption rate per machine hour?
Question#4:
A company has over absorbed fixed production overheads for the period by £6000. The fixed
production overheads absorption rate was £8 per unit and is based on the normal activity level of
5000units. Actual production was 4500 units.
What was the actual fixed production overheads incurred for the period?

Topic#2:
How to charge overheads to product cost:
Step 1:Allocation:
Charging specific items of cost to cost centers.
Step 2: Apportionment:
Charging joint items of cost to cost centers.
Step 3: Reapportionment:
Transfer service department cost to production department
Step 4: Absorption:
Overheads are charged on each unit through absorption rate.
OAR= Budgeted production overheads
Budgeted activity level
Basis of Apportionment:
1. Rent/Rates/Heating/Lighting= Floor Area
2. Depreciation/Insurance of Factory =Floor Area
3. Depreciation/Insurance of Machine= Cost or Book Value
4. Personal/Office/Canteen/Welfare/Wages Cost= Number of Employees
5. Power Cost= Power Usage % or Machine Hour

Question#1:
TRI-D Ltd has three production departments – Extrusion, Machining and finishing and a service
department known as production services which works for the production departments in the
ratio of3:2:1.
The following data has been budgeted for the period ending 31 December 20X6:
Extrusion Machining Finishing Prod. Services Total

Direct wages £58,000 £72,000 £90,000 ----- £220,000
Direct Material £40,000 £29,000 £15,000 ----- £84,000
Indirect Wages £15,000 £21,000 £8,000 £58000 £102,000
Depreciation (Equip) £84,000
Rent £22,000
Power £180,000
Personnel £60,000
Insurance (Equip) £48,000
Other Data:
Direct lab. Hrs 7,250 9,000 15,000 ----- 31,250
Machine Hrs 15,500 20,000 2,500 2,000 40,000
Floor area sqm. 800 1,200 1,000 1,400 4,400
NBV £160,000 £140000 £30,000 £70,000 £400,000
Employees 40 56 94 50 240
a. Allocate and apportion the overheads to the respective departments and re-apportion the
service department cost to the production department.
b. Calculate appropriate OH absorption rates for the three departments.

Question#2:
A company has two production departments and two service departments as follows:
P1 P2 S1 S2 Total
Indirect Material $4,000 $2,000 $3,000 $1,000 $10,000
Indirect Labour $2,000 $1,000 $500 $500 $4,000
D.Mat $6,000 $6,000 $12,000
Rent $20,000
Depreciation of equipment $50,000
Insurance of equipment $60,000
Welfare $15,000
Other Data:
P1 P2 S1 S Total
Number of Employees 6 5 7 3 21
Floor Area 1,000 1,500 200 300 3,000
NBV $10,000 $8,000 $6,000 $11,000 $35,000
Machine Hours 10,000 12,000 8,000 6,000 36,000
Required:
1. Allocate and Apportion OH to all Departments
2. Reapportion service departments OHs to production departments if S1 does 60% work for P1 and 40%
work for P2 and S2 does 30% work for P1 and 70% work for P2
3. Find Absorption rate for all departments

Methods of Reapportionment:
1. Direct Method
2. Step down Method
3. Reciprocal/Repeated Distribution Method
Question#1:
A company has the following departments:
P1 P2 S1 S2
Allocated and Apportioned OH 5,000 8,000 2,000 1,000
Service Department costs are shared as follows:
S1: 50% to P1, 30% to P2, 20% to S2
S2: 40% to P1, 45% to P2, 15% to S1
Required:
Find overheads after Reapportionment using:
1. Direct Method
2. Step down Method
3. Reciprocal Method
Question#2:
A company has the following departments:
Cutting Machining Assembly Store Maintenance
Allocated & Apportioned OH $10,000 $6,000 $5,000 $2,000 $1,200
Service department costs are shared as follows:
Store: 20% to cutting, 30% to machining, 40% to assembly & 10% to maintenance.
Maintenance: 40% to cutting, 25% to machining, 30% to assembly & 5% to store.
Required:
Find overheads after Reapportionment using:
1. Direct Method
2. Step down Method
3. Reciprocal Method

Practice Questions:
Question#1:
The factory Oh worksheet for the caramel products company had the following totals after the actual direct
charges and the indirect department express allocations had been made:
Service dept A: £16480 Production dept. X: £50000
Service dept B: £14000 Production dept. Y: £60000
Required:
Reapportion the service department costs to the production departments using as the three methods of costs
are allocated as follows:
A 25 % to B, 40% to X, 35% to Y
B 20% to A, 45 to X, 35%to Y.
Question#2:
York Ltd has decided to distribute the costs of service departments by reciprocal method. The
following departments are in the factory with the monthly data as follows:
Departments Factory OH before distribution Service provided by
S1 S2
P1 $84,000 40% 50%
P2 $58,000 50% 30%
S1 $20,000 ------ 20%
S2 $17,600 10% ------
Required:
Total Factory OH of depts. P1 after distribution of service depts costs?
Question#3:
Fountain Plc has the following Oh expenses:
Total Cutting Machining Assembling Canteen Maintenance
Wages £67000 £14000 £18000 £20000 £9000 £6000

Material £49100 £6600 £7500 £30000 £3000 £2000
Rent £19000
Power £8400
Heating £4400
Depreciation £48100
(Machinery)
First aid £11000
The following information is also relevant
Cutting Machining Assembling Canteen Maintenance
Area (sq. m) 11000 13000 12000 4000 3200

Power usage 55% 25% 10% 5% 5%
No of employees 23 15 12 8 5
NBV of machine £40000 £38000 £ 26000 £10000 £5000
The service department costs are shared as follows:
Canteen: 50% to cutting, 30% to machining,15% to assembly,5% to maintenance
Maintenance:45% to cutting,35% to machining,12% to assembly,8% to canteen

Required:
(i) Allocate and apportion the overheads to the five cost centers
(ii) Re-apportion the service department overheads to the production departments using Direct,
Step down and repeated Distribution method.
Question#4:
An Overhead absorption rate of 12/ per direct labor hour was established based on a budget of 2,100 hours.
Actual direct labor hours worked was 2,180 and actual overhead expenditure was £25,470.
What was the over/under absorption of overhead?
Question#8:
Overheads in a production cost center for a period are:
Budget 74,600
Absorbed 71,890
Actual 73,220
What is the overhead over/under absorption?
Question#9:
Overheads are absorbed at a predetermined rate based on direct labor hours.
The following additional information is available for a period:
Budget £164,000 overhead expenditure 10,000 direct labor hours
Actual £158000 overhead expenditure 9800 direct labor hours
What was the overhead over/under absorption in the period?
Question#10:
A company planned to produce 4000 units of product X during a particular year and had budgeted its fix
production overheads for the year £20000.During the year it actually produced 4,200 units of product X and it
incurred fix production overheads of £21,840 A predetermined fixed production overhead absorption rate
per unit is applied.
Calculate the over/under absorption of overhead?
Question#6:
In a period absorbed overheads were £66000.Budgeted overheads for the period were £80000 while
budgeted activity was 14000 units.
Calculate the actual activity level?
Question#7:
The budgeted overheads in a period were £100000. Actual overhead rate was £4/unit while actual activity
level was 22000 units. Overheads were over absorbed by £6000.
Calculate budgeted OH rate/unit?
Question#5:
Machine hours are used to absorb overheads in a production cost center. Overheads allocated and
apportioned to the cost center are:
Allocated $13,122
Apportioned $7,920
Reapportioned from service cost service center $2,988
216,000 units of product are manufactured at rate of 120 units per machine hour.
What is the OH absorption rate per machine hour?

Question#1:
The following information is available concerning the four cost centers of EG limited
Machinery Finishing Packing Canteen

Numbers of direct employees 7 6 2 -
Number of Indirect employees 3 2 1 4
Allocated & apportioned OH £28,500 £18,300 £8,960 £8,400
The overhead cost of canteen is to be reapportioned to the production cost centers on the basis of
number of employees in each production cost center.
After the re-apportionment, what will be the total overhead cost of the packing department?

Accounting For Material:

Topic#1:
Stock Valuation:
1. Perpetual inventory system: Real time stock updation (FIFO,LIFO,AVCO)
2. Periodic inventory system
Question#1:
Following data relates to a company:
1stJan Opening inventory consists of 100 kg @$3 each
8th Jan Purchased 200 kg @$3.2/kg
11th Jan Purchased 250 kgs @$3.5/kg
18th Jan Issued 400 kgs @$4/kg
21st Jan Purchased 100 kgs @$4.5/kg.
31stJan Issued 200 kgs
Required: Valuation of closing stock under FIFO, LIFO, AVCO.
Question#2:
1stFeb Opening inventory consists of 200 kg @$5 each
6th Feb Purchased 300 kg @$7/kg
th
10 Feb Purchased 100 kgs @$8/kg
12th Feb Issued 550 kgs
18th Feb Purchased 100 kgs @$10/kg.
20th Feb Issued 120 kgs @$1/kg.
Important Points:
o In the time of rising prices (inflation) FIFO will give the highest value of stock and the
highest value of profits and therefore lowest value of cost production.
o In the time of rising prices (inflation) LIFO will give the lowest value of stock and the lowest
value of profit and therefore highest value of cost production.
o In the time of falling prices (deflation) FIFO will give the lowest value of stock and the
lowest value of profit and therefore highest value of cost production.
o In the time of falling prices (deflation) LIFO will give the highest value of stock and the
highest value of profits and therefore lowest value of cost production
Question#3:
1st March Opening inventory consists of 200 kg @$3 each
th
6 March Purchased 100 kg @$4/kg
10th March Issued 250 kgs
12th March Purchased 200 kgs @$7/kg
17th March Issued 150 kgs.
23rd March Purchased 50 kgs @$8/kg.
26th March Purchased 30 kgs @$9/kg
30th March Issued 160 kgs @$10/kg

Topic#2:
Stock Control:
Stock control refers to management of stock because it is believed that company will suffer badly if stock is
mismanaged.
1. Reorder level (When to order)
2. Reorder Quantity (How much to order)
3. Maximum Stock level (Upper limit)
4. Minimum Stock level (Lower limit)
5. Average stock
Formula’s:
1. Reorder level= Maximum usage × Maximum Lead time
2. Reorder Quantity= √2𝐶𝑜𝐷
CH
Co= Ordering cost per order
D= Annual Demand
CH= Holding cost per unit per annum
3. Maximum Stock level= Reorder level +Reorder Qty – (Minimum usage ×Minimum Lead Time)
4. Minimum Stock level= Reorder Level – (Average usage × Average Lead Time)
5. Average Stock= Safety or Buffer Stock +1/2 Reorder Quantity
Lead Time:
The time period between placing an order and receiving the delivery of goods is called Lead Time
Question#1:
Following Data is Available:
Usage 400 – 600 kgs per day
Lead Time 2- 5 days
Purchase Price $40/kg
Demand 4,000 kg per annum
Ordering Cost $20/order
Storage cost 1% of Purchase price
Safety Stock 200 kgs
Requirement: Calculate all five items
Question#2:
Usage 600 – 800 kgs
Lead Time 3- 6 days
Demand 600 kg per quarter
Purchase price $30
Storage cost 2% of purchase price

Question#3:
Usage 200 – 300 kgs
Lead Time 5- 6 days
Demand 200 kg per month
Storage cost $0.3 per unit per quarter
Safety Stock 100 kgs
NOTE:
1. Reorder Quantity= Economic Order Quantity
2. Usage and lead time may be in days, weak or in month. Use the instruction of question no need of
conversion
3. If Average usage is not given than calculate it but if already given in question use the given figures. No
need to calculate it

Practice Questions:
Question#1:
J Ltd. Produces a product called Klik. The cost of the raw material used to make is £10 per kg. During a
typical year 15000 Kgs of the raw material are used. The cost for placing a typical order for the raw
material is £250 and the annual cost of holding stock as a percentage of cost is 10%.
What is J Ltd’s EOQ?
Question#2:
A component has a safely stock of 700 units, a reorder quantity of 2000 units and a rate of a demand
which varies between 90 and 110 units per day.
What is the average stock of the component?
Question#3:
F limited wishes to minimize the stock costs. Order costs are £20 per order and holding costs are £0.20
per unit per month. Fall Limited estimates annual demand to be 6000 units.
What is the economic order quantity in units?
Question#4:
The following information is available for partWTC-11.
Minimum usage per day 200 units
Average usage per day 100 units
Maximum usage per day 400 units
Lead time for replenishment 2-5 days
Reorder quantity 2200units
What is the maximum level of stock?
Question#5:
A Company orders a particular raw material in order of 550 units. No safely stock is held, the stock
holding cost is £4 per unit per annum and the annual demand is 3500 units. What is the total annual
demand are 3500 units.
What is the total annual stock holding cost of the material?
The following data relates to question 6 and 7:

The reorder level of material M is 1900 kg and the order quantity is 1300 kg Lead time and usage
as follows:
Lead Time:
Minimum 1 week
Average 1 ½Weeks
Maximum 2 weeks
Usage:
Minimum 200 kg per week
Average 300 kg per week
Maximum 500 kg per week
Question#6:
What is the maximum stock control level of material M?
Question#7:
What is the minimum stock control level of material M?

The following information relates to question number 8,9,10:

The following information relates to raw material’C260’:
Usage per month:
Maximum: 3,000 kg
Minimum: 1,500 kg
Delivery:
Maximum: 3 months
Minimum: 1 month
Reorder quantity: 4000 Units
Question#8:
What is the reorder level?
Question#9:
Using information above, what is the maximum stock level?
Question#10:
What is the minimum stock level?
Question#11:
In formula of EOQ, if CO=£20, D=2400 units and Q=400 units, then what is the value of Ch?
Question#12:
Typo Ltd uses the economic order quantity formula (EQQ) to establish its optimal reorder quantity for its
single raw material. The following data relates to stock costs:
Purchase Price: £15 per item
Carriage Costs: £50 per order
Ordering Costs: £5 per order
Storage Costs: 10% of purchase price plus £0.20 per unit per annum
Annual demand is 4000 units.
What is the economic order quantity?
Question#13:
Hill Ltd wishes to minimize its stock costs. At the moment the reorder quantity is 1000 units. Order
costs are £10 per order and holding costs are £0.10 per unit per month. Hill Ltd estimates annual
demand to be 15000 units.
What is the optimal reorder quantity?

Co=Ordering cost per order

Total Ordering Cost= Co × No of orders
No of orders= Annual Demand
EOQ
CH= Holding cost per unit per annum

Total Holding Cost= CH× Average stock
Annual Demand =5,000 Annual Demand=5,000

EOQ= 500 EOQ= 1,000
No of orders = 10 No of orders= 5
o Increase in Reorder Qty leads to decrease in number of orders, this will decrease the total ordering
cost but total holding cost will increase
o Decrease in Reorder Qty leads to increase in number of orders, this will increase the total ordering cost
but total holding cost will decrease
o At EOQ:TOC=THC
Question#1:
Ordering cost: $20/order
Demand: 2,400 kg per annum
Holding cost: $0.15 per unit per quarter
Required:
1. EOQ
2. TOC and THC
Question#2:
A company uses a raw material whose demand is 7,500 kg for half year. Ordering cost is $10/order and
holding cost is $0.1 per unit per month
Required:
1. EOQ
2. TOC and THC
Question#3:
A company uses a raw material whose annual demand is 4,800 kg. Ordering cost is $20/order and holding
cost is $0.6 per unit per half year.
Required:
3. EOQ
4. TOC and THC

Total Annual cost of Stock:

How much cost is being incurred by the company on its stock in whole year.
It is calculated as follows:
Total Purchase Cost (Purchase price/unit× Annual Demand) xxx
Total Ordering Cost (Co ×No of orders) xxx
Total Holding Cost (Ch× Average stock) xxx
Total Annual Cost of Stock xxx
Question#1:
A company uses a raw material whose annual demand is 15,000 kg. Ordering cost is $10/order and holding
cost for one unit for one year is 10% of purchase cost. Each unit cost $12 to purchase.
Required: Total Annual Cost of stock
Question#2:
A company uses a raw material whose monthly demand is 200 kg. Ordering cost is $20/order and holding
cost is $0.15 per unit per quarter. Each unit cost $8 to purchase.
Required: Total Annual Cost of stock
Question#3:
What would be the effect on EOQ & Total holding cost of a decrease in ordering cost per order?
EOQ Total holding cost
A. Lower No effect
B. Lower Higher
C. Lower Lower
D. Higher Lower
Question#4:
What would be the effect on EOQ & Total ordering cost of an increase in holding cost per unit per
annum?
EOQ Total ordering cost
A. Lower No effect
B. Lower Higher
C. Lower Lower
D. Higher Lower
Assumptions of EOQ Model:

1. CH will remain constant
2. Co will remain constant
3. Demand will remains constant
4. Company will hold no stock

Accounting Entries for Material:

For Direct Material:
WIP A/C XXX
Material A/C XXX
For Indirect Material:
Production OH A/C XXX
Material A/C XXX
Question#1:
Make the entries for the following transactions
1. Direct Material of $8,000 was issued from stores
2. Indirect Material of $6,000 was issued from stores
3. Direct Material of $9,000 was issued from store.
4. $2,000 of direct material returned to stores.
5. Direct Material of $5,000 was issued from stores.
6. Indirect Material of $6,000 was issued from stores
7. Material worth of $10,000 was issued of which 30% was direct.
Accounting Entries for Labour:

For Direct Worker:
Work In Progress A/C xxx
Wages A/C xxx
For Indirect Worker:
Production OH A/C xxx
Wages A/C xxx
Question#1:
Make Entries for the following transactions.
1. Direct wages of $2,000 were paid
2. Indirect wages of $3,000 were paid
3. Wages of $10,000 were paid of which one fifth were indirect.
Documents used in material & labour:

1. Bin card(Document used to record movement of material)
2. Timesheet(Document used to record details of hours worked by employee)
3. Pay slip(Document which details how an individual pay has been calculated)

Accounting for Labour:

Definition: Workforce which is used to produce a product or company’s upper staff is called labor
Labour cost: Amount paid to that work force
Topic#1:
Remuneration Methods:
1. Hourly Rate System(A system in which an employees are paid according to hours worked)
2. Piecework System(A system in which employees are paid as per unit produced)
3. Time saved Bonus System(A system in which employees are paid according to hourly rate but they
get a bonus for any time saving)
4. Profit Sharing System(A system in which employees are given a percentage share in profit)
5. Employee Share Option System(A system in which employees is given an option to take shares of
company)
Question#1:
An employee is paid $6/ hour.
In one week his output was as follows:
Mon Tue Wed Thu Fri
Hours 8 6 3 5 10
Required: Calculate gross pay for the week.
Question#2:
An employee is paid $2/ unit. In one week his output was as follows:
Mon Tue Wed Thu Fri
Units 20 40 30 60 50

Piecework System:
Employee is paid as per unit produced.
Piecework
Simple Piecework System Differential Piecework System
(Paid a single rate/unit) (Paid different rate/unit)
Question1:
An employee is paid $2/unit.
Details are:
Mon Tue Wed Thu Fri
Units 20 25 28 32 30
Question#2:
An employee is paid as follows:
Up to 100 units ----------$2/unit
101-150 units ------------- $3/unit
151-175 units ---------- $3.5/unit
Above 175 units ---------$4/unit
Required: Find the gross pay if employee makes 181 units.
Question#3:
An employee is paid $3/unit. In one week output was as follows:
Mon Tue Wed Thu Fri
Units 33 35 36 32 35
Required: Calculate gross pay for the week if guaranteed minimum wage is $100/day
Question#4:
An employee is paid $4/unit. In one week output was as follows:
Mon Tue Wed Thu Fri Sat
Units 40 37 38 36 32 41
Required: Calculate gross pay for the week if guaranteed minimum wage is $150/day
Question#5:
Up to 25 units ---------- $2/unit
26-75 units ------------ $2.2/unit
76-150 units ------------ $2.5/unit
151-250 units ------------ $3/unit
Above 250 units -------- $4/unit
Required: Find the gross pay if employee makes 261 units

Question#6:
Up to 9 units ---------- $3/unit
10-20 units ------------- $4/unit
21-49 units ----------- $5/unit
50-100 units ------------$6/unit
Above 100 units ---------$7/unit
Required: Find the gross pay if employee makes 106 units
Question#7:
A company pays its employees $0.2/unit but guarantees that each staff member receives at least $15/day.
Details of output are:
Mon Tue Wed Thu Fri
Units 60 75 90 80 70
Find gross pay for the week.

Time Saved Bonus System:

Question#1:
Following Data is available:
On a particular day employee produced 210 units
Normal working Days 8hrs
Basic rate of pay per hour $6
Standard time allowed to produce a unit 3min
Premium bonus payable at the hourly rate 20% of time saved
Required: Calculate his gross pay for the day
Qustion#2:
Normal working Days 8hrs
Basic rate of pay per hour $6/hour
Standard time allowed to produce a unit 2min
Premium bonus payable at the hourly rate 20/hour
Question#3:
NormalworkingDays 10hrs
Basic rate of payperhour $5
Standardtimeallowedtoproduceaunit 43 seconds
Premium bonus payable athourlyrate 60% of timesaved
Practice Questions:
Question#1:
On a particular day an employee produced 210 units
Normal working day 9 hrs.
Standard time allowed to produce a unit 3min.
Premium Payable bonus @Basic rate 90% of time saved.
Required: Calculate gross pay for the day
Question#2:
On a particular day an employee produced 900 units.
Normal working day 10hrs.
Standard time allowed to produce a unit 43 seconds.
Premium payable Bonusat$15/hr 30% of time saved.
Required: Calculate gross pay for the day

Question#3:
On a particular day an employee produced 150 units.
Basic rate of pay per hr $4
Standard time allowed to produce a unit 3.5min
Premium payable bonus at$15/hr 30% of time saved.
Required: Calculate gross pay for the day.
Question#4:
On a particular day an employee produce 300 units.
Standard time allowed to produce two units 4.5min.
Premium Payable bonus at Basic rate 70% of time saved.
Question#5:
On a particular day an employee produced 300 units
Basic rate of a pay per hour $5
Standard time allowed to produce3 units 7.5min.
Premium payable bonus at $20/hr 10% of time saved.
Question#6:
Mr. A works as part of 3 member team which is paid a group bonus scheme in which team leader takes
40% of any bonus earned by the team and remaining bonus is shared evenly between Mr. A and other
team member.
Details are:
Units produced 1850.
Hrs. worked 130.
Std time/unit 4.5mins.
Bonus @$40/hr 60% of time saved.
Calculate the bonus earned by Mr. A
Question#7:
Jane is a staff of hair dressing saloon, normally works 30 hrs per week and is paid $7/hrs. Std time allowed
per customer is 45 min. In one Jane dealt with 50 customers. She is paid a bonus of $20/hr for all hrs saved
in excess of 4.
Calculate gross earnings of Jane for the week.

Overtime and Its Treatment:

Overtime Hours:
Hours worked in the excess of normal hours is called Overtime Hours.
Overtime payment = Basic pay of O.T + Overtime premium
This means if worker works overtime on a particular day his pay is made up of three items.
1. Basic pay
2. Basic pay of O.T
3. Overtime premium
Labour cost classification:

For Direct labor:
o Basic rate for normal and overtime hrs is direct cost
o Overtime premium for overtime hrs is indirect cost
o Basic rate and premium paid for specific Job is direct cost
o Amount paid for Idle time is indirect cost
For In-Direct labor:
o Basic rate for normal and overtime hrs is indirect cost
o Overtime premium for overtime hrs is indirect cost
o Basic rate and premium paid for specific job is direct cost
o Amount paid for idle time is indirect cost
Note:
Bonus/shift allowance/sick pay for both workers is an indirect cost
Question#1:
A and B are two workers paid $8/hour and $6/hour respectively. A is direct worker and normally works 30
hours in a week while B is an indirect worker and normally works 20 hours in a week.
In one week A worked 33 hours and B worked 22 hours. Overtime is paid at a time and a half.
Required: Calculate direct and indirect cost
Question#2:
A and B are two workers paid $9/hour and $6/hour respectively. A is direct worker and normally works 50
hours in a week while B is an indirect worker and normally works 40 hours in a week.
In one week A worked 57 hours and B worked 45 hours. Overtime is paid at a time and one third.
Required: Calculate direct and indirect cost.

Practice Questions:
Question#1:
A and B are two employees who work in a factory. As a direct worker and paid $10/hour and B is
an indirect worker paid $8/hr. A normally works a 50 hours week while B normally works a 40
hours Week. In a week A worked 53 hours & B worked 44 hrs. OT is paid at a time and a half.
Question#2:
A and B are two employees who work in a factory. A is a direct worker paid $12/hour and B is an indirect
worker paid $8/hr. A normally works a 30 hours week while B normally works 55 hours a week. In a week a
worked 67 hrs. And B worked 59 hrs. OT is paid at a time and quarter.
Question#3:
A and B are two employees who work in a factory. A is a direct worker and paid 10/hour and B is an
indirect worker paid $8/hr. A normally works 30 hours Week while B normally works a 25 hours week. In a
week A worked 36 hrs and B worked 28 hrs. OT is paid at a time and a half.
Question#4:
A and B are two employees who work in a factory. A is a direct worker and paid 9/hr and B is an indirect
worker paid $6/hr. A normally works 60 hrs week while B normally works a 50 hrs week. In a week A
worked 67 hrs and B worked 54 hrs. OT is paid at a time and one third. Out of total hrs of A 5 hrs were at
special request of customer.
Question#5:
worker paid $8/hr. A normally works 40 hrs week while B normally works a 30 hrs week. In a week A
worked 43 hrs. And B worked 36 hrs. OT is paid at a time and a quarter. Out of total hours of B 4 hrs were
at special request of customer.
Question#6:
A and B are two employees who work in a factory. A is a direct worker and paid 15/hr. and B is an indirect
worker paid $10/hr. A normally works 50 hrs a week while B normally works a 40 hrs week. In a week a
worked 58 hrs And B worked 43 hrs. OT is paid at a time and one fifth. Out of total hrs5 hrs of A and 2 hrs
of B were at special request of customer.
Question#7:
worker paid $8/hr. A normally works 50 hrs a week while B normally works 40hr a week. In a week A
worked 63 hrs and B worked 48 hrs. OT is paid at a time and half for special hrs and time an one fifth for
general hrs. Out of total hrs10 hrs of A and 7 hrs of B were at special request of customer.

Question#8:
John and Rio work as hourly rate employees. John is direct worker paid $15/hr. while Rio is an indirect
worker paid $15/hr. Normal working hrs Are 40 for each worker but in a particular week John worked for
43 hrs And Rio worked for 46 hrs. 2 hrs of Rio worked at the special request of customer .over time is paid
at time one –third.
Calculate the direct and indirect cost.
Question#9:
James and peter work as hourly rate employees. James is a direct worker and peter is indirect worker.
Both normally work a 40hr week and both are paid hourly rates of $5/hr. In one particular week James
worked for 47 hrs.And Peter worked for 53 hrs. Overtime is paid at a time and half for weekends and time
and a quarter for weekdays. The breakup is as follows: James Peter Weekdays (General) 5hrs 9 hrs.
Weekends (Special Request) 2 hrs 4hrs
Calculate the direct and indirect cost
Question#10:
The following wages cost was incurred:
Direct Worker Indirect Worker
Normal Pay $60000 $30000
Overtime Basic $30000 $24000
Overtime premium $110000 $9000
Sick pay $8000 $8000
Shift Allowance $6000 $1000
Required: What is the direct cost?
Question:
A,B and C are 3 workers paid $10/hour,$8/hour & $6/hour respectively. A is a direct worker & B &C are
indirect workers all workers normally works 100 hours but in one month A worked 110 hours, b worked
105 hours & C worked 108 hours.
O.T is paid at a time and half for special hours and time and one fourth for general hours 2 hours of A, 3
hours of B and 1 hour of C is at special request
Required: Calculate Direct and Indirect cost

Idle Time/Idle Hours:

Those hours in which there is no production are called Idle hours although there is no fault of workers.
Example: Machine breakdown, Power failure, shortage of material etc
Note:
Idle hours are paid at basic rate per hour
The cost of idle time is an indirect cost
Question#1:
A and B are paid $8/hour and $6/hour respectively. A is a direct worker and normally works 40 hours week
while B is an indirect worker and normally works 30 hour week. In one week A worked 42 hours and B
worked 33 hours. Overtime is paid at a time and quarter. Out of total hours of A 2 hours were idle.
Question#2:
A and B are paid $10/hour and $15/hour respectively. A is a direct worker and normally works 50 hours
week while B is an indirect worker and normally works 40 hour week. In one week A worked 55 hours and
B worked 43 hours. Overtime is paid at a time and one fifth. Out of total hours of A 1 hours were idle.
Question#3:
A and B are paid $6/hour and $9/hour respectively. A is a direct worker and normally works 30 hours week
while B is an indirect worker and normally works 25 hour week. In one week A worked 37 hours and B
worked 28 hours. Overtime is paid at a time and one third. Out of total hours 3 hours of A and 2 hours of B
were at a special request . Out of total hours 2 hours of A were idle.

Labour Ratio:
How to assess performance of workers:
Efficiency: A rate that uses a lowest amount of inputs to get or create the greatest amount of output
Efficiency ratio= Std hours @ actual output ×100
Actual hours worked
Capacity: A maximum amount a labor can produce is called their capacity

Capacity ratio= Actual hours worked ×100
Budgeted Hours
Productivity or Activity: It is a measure of the efficiency with which output has been produced
Productivity ratio = Efficiency ratio × Capacity ratio
100
OR
Productivity ratio = Std hours @ actual output×100
Budgeted Hours
Example#1:
Budget Actual
90,000 hours 94,000 hours
30,000 units 31,000 units
Required: Find Efficiency, Capacity and Productivity ratio
Question#1:
Budget Actual
Question#2:
Budget Actual
Question#3:
Budget Actual
Question#4:
Budget Actual

Labour Turnover Ratio:

It is the measure of number of employees leaving or being recruited over a period of time expressed as a
percentage of total labour force.
Labour Turn over should be less
L.T.R= Replacement ×100
Average No of Employees
Question#1:
A company had 500 employees at year start and 400 employees at year end. During the year 120
employees left.
Required: Find L.T.R
Question#2:
A company had 1,000 employees at year start and 1,200 employees at year end. During the year 250
employees joined.
Question#3:
A company had 600 employees at year start. During the year 200 employees joined and 760 employees at
year end.
Question#4:
A company had 2,000 employees at year start. During the year 200 employees left and at year end
company had 1,830 employees.
Labour Turnover ratio:

It should be less as low as possible because it has some attached costs called cost of turnover.
They are divided into 2 categories.
1. Preventative Cost: To prevent workers from leaving the organization e.g. Pay rise, Allowance etc
2. Replacement Cost: To bring new workers e.g. Interview, Advertisement cost etc
Idle Time Ratio:

How much hours are idle as a percentage of total hours.
Idle Time Ratio = Idle hours ×100
Total hours
Question:
In one month 50 hours were lost due to power failure and 5 hours due to shortage of material. There are
20 employees and each employee works 40 hours a month.
Required: Idle Time ratio

Practice Questions:
Question#1:
Rytrend Ltd budgets to make 25000 standard units of output (in four hours each) during a budged period
of 100000 hours. Actual output during the period was 27000 units which took 120000 hours to make.
Calculate the efficiency, capacity and activity ratio.
Question#2:
A company makes a product for which the standard labor time is 2 hours per unit. The budgeted
production hours for a week were 820.During the week the production staff were able to produce 380
units of the product. Staff were paid for 800 hours.20 hours were lost during the week due to shortage of
materials.
Calculate the efficiency ratio?
Question#3:
A Company had planned to produce 5200 units of product X next month and has allowed a total standard
time for this of 325 hours. The actual output for the month was 5616, units, which was actually achieved in
357 hours.
Calculate the efficiency ratio
Question#4:
9T9 Ltd operates an incentive scheme based o differential piecework.
Employees are paid on the following basis:
Up to 600 units £0.40 per unit
601-650 units £0.50 per unit
650 units + £0.75 per unit
In a particular week an employee produced 660 good units.
Calculate his gross pay for this week?
Question#5:
An employee is paid £4 per piecework hour produced. In a 25 hour week he produced the following
output: Piecework time allowed per unit 3 units of A 2.5 hours 5 units of B 8.0 hours
Calculate the employees pay for the week.
Question#6:
The following data relate to a work at a certain factory:
Normal working day 8 hours
Basic rate of pay per hour £6
Standard time allowed to produce one unit 120 seconds
Premium bonus 75% of time saved at basic rate
What will be the labor cost in a day when 340 units are made?

Question#7:
A company pays its worker a basic wage of £8.5/hrs plus a bonus. Bonus is calculated as [time
allowed – time taken)*(basic rate per hour/3)]the time allowed is 2.4 per unit. A worker produced
1065 units in a 37.5 hour week.
Calculate the total earnings of the worker in the week.
Question#8:
W Ltd operates a bonus schemed base on time saved against a predetermined time allowance time
allowance for actual output. In week 6, an operative produced 750 units of R in 32 hours.
The standard allowance is 20 units of R in one hour.
Calculate the time saved by this employee in week 6?
Question#9:
Tinko employee two types of labor: skilled workers considered to be direct workers, and semi -
skilled workers considered to be indirect workers. Skilled workers are paid £10 per hour and semi-
skilled £5 per hour.
The skilled workers have worked 20 hours of overtime this week, 12 hours on specific order and 8
hours on general overtime. The semi-skilled workers have worked 30 hours overtime, 20 hours for a
specific order at a customer request and rest for general purposes. Overtime is paid at a time and at
a quarter.
What would be the total overtime pay considered to be direct cost for the week?
Question#10:
A company employees 20 direct production workers and 10 indirect staff in a department. The
normal operating hours for all employees is 38 hours per week and all staff are paid £5 per hour.
Overtime hours are paid at basic rate plus 50%. During a particular week all employees worked for
44 hours.
What amount would be charged to production overheads?
Question#11:
In a factory there are 25 workers and each worker works 20 hours per week. On an average each
worker works 2 hours of overtime per week. In a particular week 45 hours week lost due to power
failure and 3 hour due to an accident suffered by one of the worker.
Calculate the idle time ratio for the week?
Question#12:
H Ltd employed an average 55 employees during the year. There had been 8 leavers all of whom
were replaced.
What is the labor turnover ratio?

Question#13:
Leon Plc had a staff of 2000 at the beginning of the year and 1000 at the end of the year.1500
people left the company at the end of the June,500 more than the company had anticipated, and
these excess staff shortage was immediately replaced by new joiners.
Calculate the labor turnover ratio?

Information For Comparison:

Variance:
Any difference between budget and actual is called variance.
Variance
Can be favorable Can be adverse

(When actual results (When actual results
are better than expectations) are worst than expectations)
Question#1:
Budget:
Material Cost=$1,000
Actual:
Material Cost= $1,500
Required: Variance
Question#2:
Budget:
Labour cost= $2,000
Actual:
Labour cost =$2,200
Required: Variance
Question#3:
Budget:
V.OH=$5,000
Actual:
V.OH=$5,800
Required: Variance
Question#4:
Budget:
Sales $10,000
Actual:
Sales $10,600
Required: Variance

Question#1:
Budget:
Material cost =$1,000
Units= 500
Actual:
Material Cost = $1,100
Units= 500
Required: Variance
Question#2:
Budget:
Units= 500
Actual:
Units= 580
Required: Variance
Question#3:
Budget:
Sales revenue=$5,000
Units= 1,000
Actual:
Sales revenue = $5,800
Units= 1,200
Required: Variance
Question#4:
Budget:
Units= 2,000
Actual:
Units= 2,500
Required: Variance

Question#5:
Budget:
Labour cost=$50,000
Units =$12,500
Actual:
Labour cost =$51,700
Units =$13,000
Required: Variance
Question#6:
Budget:
Variable Overheads= $6,000
Units=12,000
Actual:
Variable Overheads=$7,800
Units=13,500
Required: Variance
Question#7:
Budget:
Fixed Overheads= $5,000
Units=1,000
Actual:
Variable Overheads=$5,200
Units=1,100
Required: Variance
Variance Reporting:
All variances calculated are reported to senior management. This process is called ‘’Variance reporting’’
Exception Reporting:
Reporting of only those variances which exceed a certain percentage is called ‘’Exception Reporting’’
Variance %:
Variance%=Variance ×100
Budget

Question#1:
Budget Actual
$
Mat 5,000 5,500
Labour 6,000 6,600
V.OH 1,000 1,100
F.OH 500 500
Required: Calculate Total Variance
Question#2:
Budget Actual
$
Mat 4,000 4,100
Labour 5,000 5,300
V.OH 2,000 2,150
Question#3:
Budget Actual
$ $
Mat 6,000 5,600
Labour 15,000 12,000
V.OH 20,000 16,000
F.OH 10,000 11,500
Revenue 90,000 78,000
Only Variance which exceeds 10% will be reported to senior management
Required: Which variance shall be reported
Question#4:
Budget Actual
$
Mat 10,000 10,900
Labour 15,000 14,800
F.OH 5,000 5,100

Question#5:
Budget Actual
$
Lab 2,000 2,700
V.OH 5,00 660
F.OH 1,000 1,150
Required: Calculate Variance %.
Question#6:
Budget Actual
$ $
Mat 3,000 3,300
Labour 2,000 2,600
V.OH 5,000 4,500
F.OH 2,000 2,500
Only Variance which exceeds 12% will be reported to senior management
Required: Which variance shall be reported
Control Cycle:
1. Decide goals & Objectives
2. Develop plan
3. Decide resources needed
4. Start operation
5. Compare actual performance with plan
6. Compare goals with the achieved
Sales Variance:
Sales price variance= Actual Units Sold x (Std selling price/unit – Actual selling price/unit)
Activity variance or volume variance= Budgeted S.P×(Budgeted Sales unit-Actual units sold)
Total sales revenue variance =Activity variance+ selling price variance
Direct cost variance for material:

MPV= Actual units x (bud mat cost –act mat cost)
Activity/volume variance= budgeted cost per unit×(bud prod volume- actual prod volume)
Direct cost variance for labour:
Rate Variance=Actual unit x (bud lab rate cost – actual lab cost)
Activity/volume variance= budgeted cost per unit×(bud prod volume- actual prod volume)

Question#1:
The following budgeted cost and selling price data relate to SM Limited's single product.
$ per unit $ per unit
Selling price 21.00
Direct cost 12.25
Overhead cost 1.75
14.00
Budgeted profit 7.00
Data for last period were as follows.
Budgeted sales units 740
Actual sales units 795
Actual sales revenue $16,200
Required: Total Sales revenue variance
Question#2:
Jasper Ltd has the following budget and actual figures for 20X4.
Budget Actual
Sales units 600 620
Selling price per unit $30 $29
Budgeted full cost of production = $28 per unit.
Required: Calculate the total sales revenue variance.
Question#3:
The budgeted sales of SM Ltd were 740 units at a selling price of $21. The actual sales were 795 units at a
total sales revenue of $16,200.
What is the activity variance?
Question#4:
The budgeted materials for CTF Ltd were 800 units at a cost of $20 each. Actual materials costs for the
month were $17,600 and 820 units were produced. Calculate the price/efficiency variance.
Question#5:
The budgeted labour cost for Blob Co was $10.20 per unit for 20,000 units. Actual labour costs were
$10.50 per unit for 22,000 units. Calculate the rate/efficiency variance and the activity variance.

Management Information :
1.2 For whom are management accounts prepared?
A. Employees
B. Internal managers
C. Shareholders
D. Providers of finance
Which TWO of the following are necessary features of useful management information?
A. Clear to the user
B. Detailed and completely accurate
C. Provided whatever the cost
D. Relevant for purpose
What is the purpose of management information

A. Planning only
B. planning and control only
C. Planning control and decision-making only
D. Planning, control, decision-making and research and development
Which Two of the following are characteristics of good management information?

A. Relevant
B. Detailed
C. Expensive to obtain
D. Timely
Which of the following describes a faceted code?

A. Each digit represents a classification, and each digit further to the right represents a smaller subset than
those to the left
B. The code is an abbreviation of the item being coded.
C. Each digit of the code gives information about the item.
D. A digit, usually the first one, indicates the classification of the item.
In a large business which of the following activities is most likely to be the responsibility of a trainee
accountant?
A. Coding invoices
B. Determining selling price strategy
C. Interpreting cost variances
D. Making capital investment decisions
Which of the following is NOT an internal source of management information?
A. Personnel records
B. Production department records
C. Financial statements of competitors
D. Detailed time records

Role of Information technology :
Which of the following correctly describes a management information system?
A. A system which measures and corrects the performance of activities of subordinates in order to make sure
that the objectives of an organization are being met and the plans devised to attain them are being carried
out.
B. A system by which managers ensure that information is obtained and used effectively and efficiently in the
accomplishment of the organization’s objectives.
C. A system which involves selecting appropriate information so that management can prepare a long-term
plan to attain the objectives of the organization.
D. A collective term for the hardware and software used to drive a database system with the
Outputs, both to screen and print, being designed to provide easily assimilated information for management.
When visiting your local supermarket, the items that you have purchased are scanned by a device which
actsas a cash register.
What is this device known as?
A. MICR
B. OCR
C. OMR
D. EPOS
Which of the following printers can print a whole page at a time?

A. Bubble jet printers
B. Inkjet printers
C. Scanners
D. Laser printers
1.7 Which TWO of the following are features of graphical user interfaces?
A. Icons
B. Keyboard
C. Optical mark reading
D. Pull-down menu
1.9 Which of the following are used for the capture and storage of management accounting data by computer?
(i) Barcode
(ii)Hard disk
(iii)Printer
(iv) DVD
A. (i)and (ii) only
B. (i), (ii) and (iv) only
C. (i), (iii) and (iv) only
D. (ii), (iii) and (iv) only

1.12 Which of the following correctly describes the card reading method known as MICR?
A. A device that can read text or illustrations printed on paper and translate the information into a form the
computer can use
B. A device which can sense the marks made by a ballpoint pen or typed line or cross by using an electric current
and is able to translate it into machine code
C. Groups of marks which, by their spacing and thickness, indicate specific codes or values
D. The recognition by a machine of special formatted characters printed in magnetic ink

Reporting Management information:
When communicating information, which of the following combinations of factors would influence method
of communication used?
1) Timeliness
2) Confidentiality
3) Complexity
A. All three
B. 1 and 2 only
C. 1 and 3 only
D. 2 and 3 only
A complaint is to be made to a supplier about quality and reliability of the goods supplied. Which is the most
appropriate form of communication?
A. Memo
B. Email
C. Letter
D. Report
Which of the following is true about a line graph?

A. The independent variable is always shown on the y axis.
B. The independent variable is always shown on the x axis.
C. There is not necessarily a dependent variable.
D. It does not matter on which axis each variable is shown.
Information about the trend in monthly sales and profit for a product for the last two years is to be presented
visually.
Which would be the most appropriate method of presentation?
A. Pie chart
B. Bar chart
C. Table
D. graph
A visual method of presenting the percentage of total sales for the last year made by each of a company's
ten divisions is required.
Which of the following would be the most appropriate method?
A. Pie chart
B. Bar chart
C. Line graph
D. Spreadsheet

A colleague asks you for your computer password in order to access supplier information which he does not
normally deal with, He explains that this is in order to produce a special report for the management
accountant
What should you do?

A. Give your password to your colleague
B. Access the information yourself and print it out for your colleague
C. Give your password to your colleague on this occasion and then change your password
D. Refer the query to the management accountant
Which of the following methods of communication is most suitable for a message that a managing
director wishes to send to all members of staff?
A. Letter
B. Memo
C. Email
D. Telephone
Which of the following is NOT an element of a formal report?

A. Terms of reference
B. Index
C. Conclusion
D. Recommendations
Which of the following is the correct definition of a data subject?

A. An organization that controls personal data
B. An individual who collects and uses personal data
C. Information about a living individual
D. An individual who is the subject of personal data
4.13Why might an organization NOT use a house style for its documents?
A. To make each document look completely different
B. To present a consistent external image
C. To make it easier to read documents
D. To make it easier to produce documents

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MA2 Managing Cost and Finance:

Capital Investment Appraisal 14

Short term decision making 25

Job, Batch & Service Costing 56

Process Costing & Joint and By Products 67

Absorption and Marginal Costing 76

Information For Comparison 119

Management Information 125

Role of Information technology 126

Reporting Management information 128

Sir Ahmed Shafi: Page 1

Breakeven point (units)=Total Fixed cost

Sir Ahmed Shafi: Page 2

Sir Ahmed Shafi: Page 3

MOS(Units)= Budgeted sales unit – Breakeven sales unit

Note: If Budgeted sales are not given use actual sales

Sir Ahmed Shafi: Page 4

Assumptions/Limitations of CVP Analysis:

Sir Ahmed Shafi: Page 5

Exam Kit Questions:

Sir Ahmed Shafi: Page 6

Sir Ahmed Shafi: Page 7

The following graph relates to questions 13.10 and 13.11:

Sir Ahmed Shafi: Page 8

Sir Ahmed Shafi: Page 9

Data for questions 13.16 and 13.17:

Sir Ahmed Shafi: Page 10

Sir Ahmed Shafi: Page 11

Sir Ahmed Shafi: Page 12

Sir Ahmed Shafi: Page 13

Capital Investment Appraisal:

Capital Investment Appraisal:

Time Value of Money:

Reasons of Time Value of Money:

Formula for compound interest:

Sir Ahmed Shafi: Page 14

Effective Annual Interest:

Sir Ahmed Shafi: Page 15

Sir Ahmed Shafi: Page 16

Techniques/ Methods of Investment Appraisal:

Net Present Value(NPV):

Sir Ahmed Shafi: Page 17

Technique#2 Internal Rate of return (IRR):

Sir Ahmed Shafi: Page 18

Sir Ahmed Shafi: Page 19

Simple Payback Discounted payback

Sir Ahmed Shafi: Page 20

Sir Ahmed Shafi: Page 21

Exam Kit Questions:

Sir Ahmed Shafi: Page 22

Sir Ahmed Shafi: Page 23

Sir Ahmed Shafi: Page 24

Sir Ahmed Shafi: Page 25

Short Term Decision Making:

SIX STEP APPROACH OF OPTIMAL PLAN:

Sir Ahmed Shafi: Page 26

Sir Ahmed Shafi: Page 27