Cost and Management Accounting

Suggested Answer
Certificate in Accounting and Finance – Spring 2023

A.1 Ace Contractors Limited

Computation of minimum bid price
Rs. in '000
Raw material consumption (250,317(W-1)×600) 150,190.20
Total labour cost (327,726(W-2)×300) 98,317.80
Overheads [131,090,400(327,726 (W-2)×400)×80%] 104,872.32
Total cost of contract 353,380.32
Add: Margin (353,380.32÷0.65×0.35) 190,281.71
Minimum bid price 543,662.03

W-1: Raw material quantity consumption (in kg)

Batch Numbers
Total
1 2 3 4
Quantity forming part of the product
(63,000×100÷105) 60,000 60,000 60,000 60,000 240,000
Wastage 3,000 2,700 2,430 2,187 10,317
Total quantity of raw material
consumed 63,000 62,700 62,430 62,187 250,317

W-2: Labour hours used

Hours for first 3 batches [300,000{3×(25,000×4)}×3−0.152 ] 253,863
Hours for first 2 batches [200,000{2×(25,000×4)}×2−0.152 ] 180,000
For the 4th batch 73,863

Total labour hours (253,863+73,863) 327,726

Page 1 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

A.2 Masroor Limited

Computation of Shortfall in production: Delay in lead time by
4 Days 10 Days
----------- Units -----------
Units (MCRM) to be used in delay period 8,000 20,000
(2,000×4) (2,000×10)
Safety stock (2,000) (2,000)
Shortfall in MCRM 6,000 18,000
Shortfall in production of final product 2,000 6,000
(6,000÷3) (18,000÷3)

Computation of stock out cost: ----------- Rupees -----------

Loss of contribution margin 3,600,000 10,800,000
(2,000×1,800) (6,000×1,800)

Probability 0.10 0.06

Estimated loss of contribution margin (stock out
cost for one order) 360,000 648,000
Annual stock out cost 3,600,000 6,480,000
(360,000×10) (648,000×10)

Computation of holding cost of additional safety stock:

Delay in lead time by
4 days 10 days
Additional safety units (MCRM) to be maintained 6,000 18,000
Holding cost of additional safety stock (Rs.) 144,000 432,000
(6,000×24(W-1)) (18,000×24(W-1))

W-1: Computation of annual holding cost per unit

(2 × Annual demand × Oc)
EOQ = √
Hc

(2 × 720,000 × 86,400)
72,000 = √ ⇒ 24.00
Hc

Recommendation:
Since holding cost of additional safety stock is less than probable loss from stock-out in both
situations, hence maintaining additional safety stock is recommended.

Page 2 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

A.3 Faiza Company Limited

 Variance analysis can only be relied upon if the system of setting the standards and
budgets is reasonably accurate. The existence of high variances on either side creates
doubt about the accuracy of the budgeting and the standard setting process.
 The purchase price variance shows that purchases were made at around 12%
(2,600/22,000) below the standard, which seems unrealistic. It is necessary to ensure that
quality was not compromised, as this may lead to lower quality of the finished product.
 The unfavorable yield variance is indicative of compromise in either the quality of
material or the quality of labour, which can result in more wastages.
 The favourable material mix variance mostly requires careful analysis because it
indicates that some relatively lower value or quality material was used in place of some
relatively higher value or quality material.
 The favourable labour rate variance could be due to the hiring of relatively cheaper
labour which could lead to quality issues reflected in the final product’s quality or higher
wastage.
 Level of inventory is quite high which could lead to higher holding costs.

A.4 If sufficient safety stock is not maintained by an entity, following non-financial consequences
may occur:
(i) Poor customer service:
The company may be unable to meet customer demand in a timely manner so this may
lead to dissatisfaction of customers.

(ii) Reduced operational efficiency:

Production and distribution process may be affected, which lead to reduced productivity
and decreased quality.

(iii) Increase in supply chain risk:

A company may be more vulnerable to supply chain disruptions such as delays, quality
issues or production shutdowns.

(iv) Increase in stress on employees:

Employees who are responsible for managing inventory and fulfilling order may become
stressed and demoralized when they are unable to meet customer demand due to stock
out.

(v) Reduced customer loyalty OR loss of goodwill:

If the situation persists, customers may consider alternative products or choose to shop
elsewhere in the future.

Page 3 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

A.5 Karsaz Industries

Computation of units produced:
A B C
-------------- Rs. per unit --------------
Selling price 2,000 3,000 5,000
Less: Variable manufacturing cost
Raw material 600 1,160 1,200
Labour 300 240 900
Variable FOH 480 960 1,440
1,380 2,360 3,540
Contribution margin (a) 620 640 1,460

Limiting factor i.e. required hours (b) 1.25 1 3.75

(300÷240) (240÷240) (900÷240)
Contribution margin (Rs.) per hour (a÷b) 496 640 389.33
Ranking based on CM per hour 2nd 1st 3rd
Required hours (c) 50,000 30,000 (bal) 60,000
Units produced (c÷b) 40,000 30,000 16,000

Computation of profit:
A B C Total
----------------- Rs. in million -----------------
Sales 80.00 90.00 80.00 250.00
(40,000×2,000) (30,000×3,000) (16,000×5,000)
Less: Cost of sales
Variable cost (55.20) (70.80) (56.64) (182.64)
(40,000×1,380) (30,000×2,360) (16,000×3,540)
Fixed OH (4.00) (4.50) (4.80) (13.30)
(40,000×100) (30,000×150) (20,000×240)
(59.2) (75.30) (61.44) (195.94)
Net Profit 20.80 14.70 18.56 54.06

A.6 Computation of units to be produced internally:

A B C
-------------- Rs. per unit --------------
Contribution margin if produced internally 620 640 1,460
Contribution margin if purchased from outside 400 600 1,000
(2,000×20%) (3,000×20%) (5,000×20%)
Difference in contribution margin (a) 220 40 460

Hours required for producing one unit (b) 1.25 1 3.75

(300÷240) (240÷240) (900÷240)
Difference in C/M (Rs.) per labour hour (a÷b) 176 40 122.67
Ranking based on CM per hour 1st 3rd 2nd
Required hours (c) 50,000 (bal)15,000 75,000
Units produced (c÷b) 40,000 15,000 20,000

Page 4 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

A.7 Asghar Ali Associates

Manufacturing cost per unit X Y Total
-------Rs. in '000---------
Cost of raw material per unit
A [6 × 0.492 (W-1)] 2.95 -
B [5 × 0.574 (W-1)] - 2.87
C [3 × 0.698 (W-1)] - 2.09
Cost of labour per unit [X: 300×5÷1,000]; [Y: 300×3÷1,000] 1.50 0.90
Factory overhead per unit [X: 5×0.109(W-2)];[Y: 3×0.109(W-2)] 0.55 0.33
Cost per unit 5.00 6.19

Closing inventory (goods units) – value

[X: 4,400(W-3)×5]; [Y: 4,600(W-3)×6.19] 22,000 28,474 50,474
Closing inventory (defective units) – value
[X: 200×4.75(W-4)]; [Y: 400×6.19(W-4)] 950 2,476 3,426
Total value of closing stocks 53,900

WORKINGS

W-1: Cost of raw material per kg A B C Total

---------------------------- kg ----------------------------
Raw material purchased (a) 132,000 90,000 50,000 272,000

------------------------- Rs. in '000 -------------------------

Invoice value 52,800 43,200 30,000 126,000
Freight (allocated in the ratio of quantity
purchased) 10,560 7,200 4,000 21,760
Insurance in transit (allocated in the ratio
of invoice value) 1,584 1,296 900 3,780
Total cost (b) 64,944 51,696 34,900 151,540

Purchase cost per kg (b ÷ a) 0.492 0.574 0.698

W-2: Computation of factory overhead per labour hour

X Y Total
Units produced
[X: 96,000(W-2.1)÷6];
[Y: 70,000(W-2.1)÷5 OR 42,000(W-2.1)÷3] 16,000 14,000
Labour hours used [X: 16,000×5]; [Y: 14,000×3] 80,000 42,000 122,000
Total overheads (Rs. in '000) 13,320

Overhead per labour hour (Rs. in '000)(13,320,000÷122,000) 0.109

W-2.1: Computation of raw material consumed

A B C
---------------------- kg ----------------------
Raw material purchased 132,000 90,000 50,000
Less : Closing inventory (36,000) (20,000) (8,000)
RM consumed 96,000 70,000 42,000

W-3: Closing finished goods units X Y

----------- Units -----------
Produced 16,000 14,000
Gross sales (11,600) (9,400)
Closing - good units 4,400 4,600

Page 5 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

W-4: Per unit value of defective units X Y

--------- Rs. in '000 ---------
Normal selling price (5×1.25); (6.19×1.25) 6.25 7.74
Less: Rework cost (1.50) (0.80)
NRV 4.75 6.94

Cost 5.00 6.19

Lower of cost or NRV 4.75 6.19

A.8 Rafiqi Industry Limited

(a) Statement of Equivalent Production Units
Department A
Total % of work Equivalent units
Units done Material Conversion
Work done this period on opening
work in process 20,000 0, 60% - 12,000
Units started and completed this
period (140,000–20,000) 120,000 100% 120,000 120,000
120,000 132,000
Closing work in process 25,000 100%;60% 25,000 15,000
Equivalent production units before
abnormal loss 145,000 147,000
Abnormal loss (W-1) 3,000 2,700
Normal loss - -
Equivalent production units 148,000 149,700

Department B
Total % of work Equivalent Units
Units done Material Conversion
Work done this period on opening
work in process 18,000 0, 40% - 7,200
Units started and completed this
period (120,000–18,000) 102,000 100% 102,000 102,000
102,000 109,200
Closing work in process 30,000 100%; 80% 30,000 24,000
Equivalent production units before
abnormal loss 132,000 133,200
Abnormal loss (W-1) 2,000 1,800
Normal loss - -
Equivalent production units 134,000 135,000

W-1: Quantity schedule Department A Department B

------------- Units -------------
Opening WIP 20,000 18,000
Started in process 155,000 140,000
175,000 158,000
Less: Transferred out (140,000) (120,000)
Less: Closing WIP (25,000) (30,000)
Lost in process 10,000 8,000
Normal loss (Dep. A: 140,000×0.05, Dep. B: 120,000×0.05) (7,000) (6,000)
Abnormal loss – material 3,000 2,000

Abnormal loss – conversion (90%) 2,700 1,800

Page 6 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

(b) Cost of finished goods, closing WIP and abnormal loss:

Department A
Material Conversion Total
---------------- Rs. in '000 ----------------
Total cost incurred in the department during the
month 920,400 673,650
Less: Cost recovered from sale of normal loss
[7,000×0.4[4,000÷10,000(part a)] (2,800) -
Net cost 917,600 673,650

EPU 148,000 149,700

Cost per unit (Net cost ÷ EPU) 6.20 4.50

Cost transferred out to dept. B

[1,284,000(120,000 × 10.7) + 152,000 +
54,000(4.5×12,000)] 1,490,000

Cost of closing WIP (25,000×6.2) ; (15,000×4.5) 155,000 67,500 222,500

Abnormal loss (3,000×6.2) ; (2,700×4.5) 18,600 12,150 30,750

Department B
Material Conversion Total
---------------- Rs. in '000 ----------------
Cost transferred from Dept. A 1,490,000 -
Total cost incurred in the department during the
month 194,900 445,500
Less: Cost recovered from sale of normal loss
[6,000× 0.75[6,000÷8,000(part a)] (4,500) -
Net cost 1,680,400 445,500

EPU 134,000 135,000

Cost per unit (Net cost ÷ EPU) 12.54 3.30

Cost of finished goods [1,615,680(102,000

×15.84)+180,000+23,760(3.30×7,200)] 1,819,470

Cost of closing WIP (30,000×12.54) ; (24,000×3.3) 376,200 79,200 455,400

Abnormal loss (2,000×12.54) ; (1,800×3.3) 25,080 5,940 31,020

Page 7 of 8
 Cost and Management Accounting
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

A.9 Faisal Enterprises Limited

Production Services
Total Basis
A B C R&M Stores
----------------------- Rs. in '000 ---------------------
Indirect material 1,500 180 240 120 930 30
Indirect labour 600 160 210 150 60 20
Fuel and electricity 1,520 400 480 640 - - Machine hours
Air conditioning
150 30 45 60 9 6 Area
and lighting
Depreciation and
665 175 210 280 - - Machine hours
insurance - machine
Depreciation and
50 10 15 20 3 2 Area
insurance - building
Raw material
Other insurance 270 120 90 60 - -
cost
4,755 1,075 1,290 1,330 1,002 58

M = 1,002 + 0.2S ----------- (i)

S = 58 + 0.1M ----------- (ii)

Rearrange:
1,002 = M – 0.2S
58 = – 0.1M + S
Multiply (ii) by 0.2
11.6 = – 0.02 M + 0.2 S --------- (iii)
Add (i) and (iii)
1,013.6 = 0.98 M
M = 1,034
Therefore from (i) substituting M = 1,034
S = 58 + 0.1 (1,034)
S = 161

Total A B C R&M Stores

------------------------------- Rs. in '000 -------------------------------
Cost as above 4,755 1,075 1,290 1,330 1,002 58
Maintenance - 259 310 362 (1,034) 103
Store - 49 40 40 32 (161)
1,383 1,640 1,732 0 0

Computation of cost per unit:

Total A B C
---------------------- Rs. in '000 ----------------------
Raw material cost 135,000 60,000 45,000 30,000
Labour cost 2,700 600 900 1,200
(2,000×300) (3,000×300) (4,000×300)
Factory overheads (as above) 4,755 1,383 1,640 1,732
Total production cost 61,983 47,540 32,932

Units produced 5,000 6,000 4,000

(5,500+1,500–2,000) (5,000+3,000–2,000) (4,500+2,000–2,500)

Cost per unit (in Rs.) 12,397 7,923 8,233

(THE END)
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