CMA Mock: Suggested solution CAF-03

Answer-1
a.

Rs. Rs.
Material costs
Component 1 – circuit board 4.10
Delivery cost (Rs. 2,400 / 4,000 batches) 0.60 4.70
Component 2 - Wiring 0.13
(Rs. 0.50 per meter  25/100 meter  100/98)
Other materials 8.10
12.93
Labour costs 7.00
(Rs. 12.60/hours  30/60 hours  100/90)
Production overheads
Variable overheads (Rs. 20/hour (W-1)  30/60 hours) 10.00
Fixed overheads (Rs. 12/hour  30/60 hours) 6.00 16.00
Target cost 35.93
Less: Desired cost (Rs. 44  0.80) 35.20
Cost gap 0.73

WORKINGS
W-1 Production overhead cost (using high low method)
Extra overhead cost between month 1 and 2 (700,000 – 620,000) 80,000
Extra assembly hours (23,000 – 19,000) 4,000
Variable cost per hour (80,000/4,000) Rs. 20/hour
Monthly fixed production overhead (Rs. 700,000 − (23,000  Rs. 20/hour)) Rs. 240,000
Annual fixed production overhead (Rs. 240,000  12) Rs. 2,880,000
Absorption rate of fixed overheads (Rs. 2,880,000/24,000 hours) Rs. 12/hour

b.

Total input quantity 10,000

Price per unit 21
Total input cost 210,000
By product cost (15%) 31,500

Other charges 30,000

Power cost (33%) (9,900)
Remaining costs 20,100
Joint product cost allocation (15%) 3,015

Power costs 9,900

Joint product cost allocation (10 : 9) 4,689

Total by-product costs 39,204

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CMA Mock: Suggested solution CAF-03

Answer-2
Operating statement
Rs. Rs. Rs.
Budgeted profit 112,000
Sales volume profit variance (W-1) (22,400)
Standard profit on actual sales 89,600
Sales price variance (W-2) 16,000
105,600
Cost Variances Favorable Adverse
Material price (W-3) 24,000
Material usage (W-4) 32,000
Labour rate (W-5) 16,000
Labour efficiency (W-6) 12,800
Variable overhead efficiency (W-7) 6,400
Variable overhead expenditure (W-8) 4,000
8Fixed overhead expenditure (W-9) 60,000
Fixed overhead efficiency (W-10) 25,600
Fixed overhead capacity (W-11) 0
Total cost variances 112,000 68,800 43,200
Actual Profit 148,800

WORKINGS
(W-1) Sales volume profit variance = (Actual sales quantity - Budgeted sales quantity) x Std. Profit/Unit
= (3,200 units – 4,000 units) x Rs. 28
= Rs. 22,400 (A)
(W-2) Sales price variance = (Actual selling price per unit - Standard selling price per unit) x Actual qty.
= (Rs 225 – Rs. 220) x 3,200 units
= Rs. 16,000 (F)
(W-3) Material Price Variance = (Standard Price - Actual Price) x Actual Quantity
= (Rs. 3.2 – Rs. 3.5) x 80.000 kg
= Rs. 24,000 (A)
(W-4) Material Usage Variance = (Standard quantity for actual production - Actual quantity) x Std price
= [(3,600 x 25 kg) – 80,000 kg) x Rs. 3.2
= Rs. 32,000 (F)
(W-5) Labour rate variance = (Standard wages rate/hour - Actual wages rate/hour) x Actual labour hours
= (Rs.8 – Rs.7) x 16,000 hours
= Rs. 16,000 (F)
(W-6) Labour efficiency variance = (SLH for act. production – ALH worked) x Std. wage rate/hour
= [(4 hrs x 3,600 units) – 16,000 hrs] x Rs. 8
= Rs. 12,800 (A)
(W-7) Variable OH efficiency variance = (Std. hrs for act. production – Act. hrs) x Std. VFOH rate/hour
= [(4 hrs x 3,600 units – 16,000 hrs) x Rs. 4]
= Rs. 6,400 (A)

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CMA Mock: Suggested solution CAF-03

(W-8) Variable OH exp. variance = (Std. VFOH rate – Act. VFOH rate) x Act. hrs worked
= [(Rs.4 x 16,000 hrs) – Rs. 60,000]
= Rs. 4,000 (F)
(W-9) Fixed FOH exp. variance = Budgeted fixed overhead - Actual expenditure on fixed overhead
= [(4,000 units x Rs. 64) – Rs. 196,000]
= (Rs. 256,000 – Rs. 196,000)
= Rs. 60,000 (F)
(W10) FFOH eff. variance = (Std hrs for act. production – Act. hrs worked) x Fixed FOH absorption rate
= [(4 hrs x 3,600 units) - 16,000 hrs)] x Rs. 16
= Rs. 25,600 (A)
(W11)Fixed overhead capacity variance = (Budgeted hours – Actual hours) x Fixed overhead absorption rate.
= [(4 hrs x 4,000 units) – 16,000 hrs] x Rs. 16
= Rs. 0

Answer-3

Current system for the next year: Rs. in ‘000’

Sale of bangles (1,000 x 250,000) 250,000
Bangles Diamonds
Direct materials (10% increase) 110,000 42,000 (152,000)
Direct skilled labor (15% increase) 23,000 11,500 (34,500)
Direct unskilled labor (15% increase) 5,750 2,875 (8,625)
Variable production overheads 6,000 2,000 (8,000)
Other fixed production overheads (60%) 6,000 2,400 (8,400)
Current profit 38,475

Proposed system for the next year:

Sale of bangles (1,500 x 250,000) 375,000
Bangles Diamonds
Direct materials (100,000/1,000 x 1,500) 165,000 - (165,000)
Direct skilled labor 34,500 - (34,500)
Direct unskilled labor 8,625 - (8,625)
Variable production overheads 9,000 - (9,000)
Other fixed production overheads (60%) 6,000 - (6,000)
Imported diamonds (3,400 x 1,500 x 20) - 102,000 (102,000)
Machinery maintenance cost - 5,000 (5,000)
Proposed profit 44,875

Since there is an additional profit of Rs. 6.5 million, it is financially worthwile to use imported diamonds
and increase production to 1,500 units

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CMA Mock: Suggested solution CAF-03

Answer-4
a. Optimal Production Plan

AR2 GL3 HT4

Material R2 (Rs./unit) 2.5 x 2 = 5.00 2.5 x 3 = 7.50 2.5 x 3 = 7.50
Material R3 (Rs./unit) 2 x 2 = 4.00 2 x 2.2 = 4.40 2 x 1.5 = 3.20
Labour (Rs./unit) 4 x 0.6 = 2.40 4 x 1.2 = 4.80 4 x 1.5 = 6.00
Variable OH (Rs./unit) 1.10 1.30 1.10
Variable costs (Rs./unit) 12.50 18.00 17.80
Selling price (Rs./unit) 21.00 28.50 27.30
Contribution (Rs./unit) 8.50 10.50 9.50
Material R2 (kg/unit) 2.00 3.00 3.00
Contribution (Rs./kg of R2) 9.5/2 = 4.25 10.5/3 = 3.50 9.5/3 = 3.17
Ranking 1 2 3

Product Demand R2 used (kg) Production Contribution Contribution

(Units) (Units) per unit (Rs.) (Rs.)
(Units
produced x
contribution
per unit)
AR2 950 1,900 950 8.5 8,075
GL3 1,000 3,000 1,000 10.5 10,500
HT4 900 600* 200 9.5 1,500
5,500 20,475

*Balancing quantity of R2 used to produce 200 units of HT4

The optimum production schedule is 950 units of Product AR2, 1,000 unit of GL3 and 200 units
of HT4, giving a total contribution of Rs. 20,475. The fixed production overheads are ignored in
this analysis because they are assumed not to vary with changes in the level of production.

b. Maximum Price the Company will Pay

Rs.
Material R2 (3 x 5.67) 17.01
Material R3 (1.6 x 2) 3.20
Labour (4 x 1.5) 6.00
Variable overhead 1.10
27.31
Selling price 27.30
Hence Contribution 00.00

Further supplies of Material R2 will be used to produce additional units of project HT4 since we
already produced the required quantities for the maximum demand of AR2 and GL3. The ruling
market price for R2 is Rs. 2.50 and the contribution per kg of material R2 for Product HT4 is Rs.

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CMA Mock: Suggested solution CAF-03

3.17. In order to cover, the costs the product should recover an amount equal to the additional
costs incurred.
Hence if Denver Limited pays 3.17 + 2.50 = Rs. 5.67 per kg for Material R2, the additional units
of product HT4 produce will make a zero contribution towards fixed costs. Rs. 5.67 is therefore
the maximum price.
This is because we increased the cost of material R2, to an extent that resulted in the total cost of
the produced HT4 being equal to its selling price.
The total cost when material R2 is purchased at Rs. 5.67 per kg.

c. The variable cost of Product XY5

Rs. per unit
Material R3 (3 x 2) 6.0
Labour (1.7 x 4) 6.8
Variable overhead: 1.4
14.2
Price offered by Helsinki Limited (10.2)
Saving per unit 4.0
The substitute offered by Helsinki Limited gives a saving of Rs. 4 per unit. However, Denver
Limited would also pay an annual fee of Rs. 50,000 for the right to use the substitute. In order to
make the buying option cheaper we need to manufacture as many numbers of units that will lead
to the total buying cost (fixed fee Rs. 50,000 plus per unit cost Rs. 10.20) to be less than the
existing in house manufacturing cost
Minimum number of units to be manufactured so that in house costs and buying costs are the
same:
Annual fixed fee Rs.50,000
Saving per unit by buying substitute Rs.4
Units to be manufactured (Rs.50.000/Rs. 4) units p a 12,500
Units to be manufactured per month (12,500/12) 1,042

The company would need to manufacture more than 12,500 units per year of Product XY5, or 1,042 units
per month, in order for the offered substitute to be financially acceptable. If it needed less than 12,500
units of Product XY5 per year, it would be cheaper to manufacture the product in house.

Answer-5
a.
Amount Amount

Total production overheads actually incurred 880,000

Less: Amount paid to worker as court order 50,000

Less: Wages paid for the strike period as award 38,000

Less: Stores written off 22,000

Less: Expenses of previous year booked in current year 18,500 128,500

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CMA Mock: Suggested solution CAF-03

Actual production overheads 751,500

Less: Production overheads absorbed as per machine hour rate

517,500
(45,000 hours x Rs. 11.50 (W-1))

Amount of under absorbed production overheads 234,000

(W-1) Absorption Rate

Budgeted machine hour rate (Blanket rate)

Rs. 11.50 per machine hour
1,035,000/90,000

b.

As 1/3rd of under absorbed overheads were due to defective production planning, this being abnormal,
hence should be debited to profit and loss account.

Amount to be debited to profit and loss account = 234,000 x 1/3 = Rs. 78,000

Dr. Profit & Loss Account 78,000

Cr. FOH Control Account 78,000

Balance of under absorbed production overheads should be distributed over finished goods and cost of
sales.

Amount to be distributed = 234,000 x 2/3 = Rs. 156,000

Dr. Finished Goods Account 156,000

Cr. FOH Control Account 156,000

c.

Amount to be distributed per unit = 156,000/30,000 = Rs. 5.20 per unit

Finished goods (3,000 units x Rs. 5.20) Rs. 15,600

Cost of sales (27,000 units x Rs. 5.20) Rs. 140,400

Answer-6

Total room days in a year:

Season Occupancy (Room-days) Equivalent full room charge

days
Season – 80% occupancy 200 rooms x 80% x 6 months x 30 days 28,800 room days x 100% =
= 28,800 room days 28,800
Off season – 40% 200 rooms x 40% x 6 months x 30 days 14,400 room days x 50% = 7,200
occupancy = 14,400 room days
Total room days 28,800 + 14,400 = 43,200 room days 36,000 full room days

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CMA Mock: Suggested solution CAF-03

Lighting charges:
It is given in the question that lighting charges for 8 months are Rs. 110 per month and during winter
season of 4 months, it is Rs. 30 per month. Further, it is also given that peak season is 6 months and off
season is 6 months.

It should be noted that being Hill station, winter season is to be considered as part of off season. Hence,
non-winter season of 8 months include peak season of 6 months and off season of 2 months.

Accordingly, the lighting charges are calculated as follows:

Season Lighting charges

Season & non-winter – 80% occupancy 200 rooms x 80% x 6 months x Rs. 110 per month = Rs.
105,600

Off season & non winter – 40% 200 rooms x 40% x 2 months x Rs. 110 per month = Rs.
occupancy 17,600

Off season & winter – 40% occupancy 200 rooms x 40% x 4 months x Rs. 30 per month = Rs. 9,600

Total lighting charges 105,600 + 17,600 + 9,600 = 132,800

Statement of total cost:

Particulars Amount
Staff salary 800,000
Repairs to building 300,000
Laundry 140,000
Interior 250,000
Miscellaneous expenses 200,200
Depreciation on building (300,000,000 x 80% x 5%) 12,000,000
Depreciation on furniture and equipment (300,000,000 x 20% x 15%) 9,000,000
Room attendant’s wages (Rs. 15 per room day for 43,200 room days) 648,000
Lighting charges 132,800
Total cost 23,471,000
Add: Profit margin (20% of room rent) 5,867,750
Total rent to be charged 29,338,750
Room rent per day = Total rent / Equivalent full room days = 29,338,750 / 36,000 = Rs. 814.97

Room rent during season = Rs. 814.97

Room rent during off season = Rs. 814.97 x 50% = Rs. 407.49

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CMA Mock: Suggested solution CAF-03

Answer-7

a.

Annual demand (2,400,000/5) 480,000 units

Monthly orders (480,000/12) 40,000 units
Current ordering cost (12 x 248.44) Rs. 2,981 per annum
Average inventory of component (40,000/2) 20,000 units
K
Current holding cost (20,000 x 1.06) Rs, 21,200 per annum
Total cost of current ordering (2,981 + 21,200) Rs. 24,181
policy
2 x Annual Demand of direct raw material x Ordering cost per order
EOQ = √ Carrying cost/kg p.a

2 x 480,000 x 248.44
=√ 1.06

= 15,000 units per order

Order size 15,000 units
Annual demand 480,000
Number of orders ( ) = 32 orders
order size 15,000
Total ordering cost (No of orders x ordering cost per order) 32 x 248.44=
Rs. 7,950
15,000
Average stock (Order size(EOQ) / 2) =
2
7,500 𝑢𝑛𝑖𝑡𝑠
Total Carrying cost (Average stock x Carrying cost/kg per 7,500 x 1.06 =
Annum) Rs. 7,950
Total Cost = Total ordering cost + Total carrying cost Rs. 15,900
(7,950 + 7,950)
On financial grounds, Asif Co. should adopt an EOQ approach to ordering component K as there is a
reduction in cost of Rs. 8,281.

b. Cost of current ordering policy:

Ordering cost = 12 x 267 = Rs. 3,204 per year
Monthly demand = 300,000/12 = 25,000 units
Buffer inventory = 25,000 x 0.4 = 10,000 units
Average inventory = (25,000/2) + 10,000 = 22,500 units
Holding cost = 22,500 x 0.1 = Rs. 2,250 per annum
Total cost = 3,204 + 2,250 = Rs. 5,454 per annum
Cost of current ordering policy:
2 x Annual Demand of direct raw material x Ordering cost per order
EOQ = √ Carrying cost/kg p.a

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CMA Mock: Suggested solution CAF-03

2 x 300,000 x 267
=√ 0.10

= 40,000 units per order

No. of orders per year = 300,000/40,000 = 7.5 orders
Ordering cost = 7.5 x 267 = Rs. 2,003
Average inventory = (40,000/2) + 10,000 = 30,000 units
Holding cost = 30,000 x 0.1 = Rs. 3,000 per annum
Total cost = 2,003 + 3,000 = Rs. 5,003 per annum
Savings from introducing EOQ = 5,454 – 5,003 = Rs. 451 per annum

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