CMA JANUARY-2023 EXAMINATION

INTERMEDIATE LEVEL I
SUB: CM121. COST ACCOUNTING

MODEL SOLUTION

SECTION: A
Solution of the Question No. 1
(i) (a)
(ii) (a)
(iii) (d)
(iv) (d)
(v) (a)
(vi) (a)
(vii) (d)
(viii) (b)
(ix) (b)
(x) (c)
Solution of the Question No. 2
(a) True.
(b) False. Correct answer: The difference between traditional and activity-based costing
system lies in indirect costs.
(c) True.
(d) True.
(e) False. Correct answer: A joint cost is incurred before the split-off point.

Solution of the Question No. 3

Column A
(1) Activity-based costing
(2) Marginal costing
(3) Target costing
(4) Relevant costing
(5) Quality costing
Column B
(e) Using multiple bases for overhead cost
(i) Classifying costs as variable and fixed
(a) Estimating cost based on estimated selling price
(c) Making a difference among the alternatives
(g) Maintaining degree of excellence of a product

SECTION: B
Solution of the Question No. 4
(a) Effective cost control reduces the units and amounts associated with materials consumed
in production and materials carried in inventory. However, effective control is relative to
plant capacity, production schedules, and sales requirements. Therefore, materials costs
and inventories should increase as well as decrease in a predetermined and predictable
response to sales and production requirements.
(b)
Working Notes:
1. Total available hours per week (60 workers x 40 hours) 2,400
2. Total standard hours required to produced 19,200 units (19,200 units/6 units per hour) 3,200
3. Total labor hours required after the introduction of bonus scheme to produce 19,200 units
2,400
(19,200 units/8 units per man hour)
4. Time saved in hours (3,200 hours - 2,400 hours) 800
5. Wage rate per hour (Tk. ) (Tk. 400/40 hours) 10
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6. Bonus:
(i) Halsey Scheme = ½ x Time saved x Wage rate per hour
=1/2x800x10 = Tk. 4,000
(ii) Rowan Scheme = Time saved / Time allowed x Time taken x Wage rate per hour
= 800 hours / 3,200 hours x 2,400 hours x Tk. 10
= Tk. 6,000
Statement showing the effect on the Company’s Weekly present profit by the introduction of
Halsey and Rowan schemes
Present (Tk. ) Halsey (Tk. ) Rowan (Tk. )
Sales revenue: (A) 211,200 211,200 211,200
(19,200 units x Tk. 11)
Direct material cost 153,600 153,600 153,600
(19,200 units x Tk. 8)
Direct wages 32,000 24,000 24,000
(Refer to working notes 2 and 3) (3,200 hrs. x (2,400 hrs. x (2,400 hrs. x
Tk. 10) Tk. 10) Tk. 10)
Overtime premium 4,000
(800 hrs. x Tk.
5)
Bonus (Refer to working notes 6 (i) and - 4,000 6,000
(ii))
Variable overheads 1,600 1,200 1,200
(3,200 hrs. x (2,400 hrs. (2,400 hrs.
0.50 P) x 0.50 P) x 0.50 P)
Fixed overheads 9,000 9,000 9,000
Total cost: (B) 200,200 191,800 193,800
Profit: {(A) - (B)} 11,000 19,400 17,400
(c)
Let x be the total overhead costs S1 and y that of S2. Then we get the simultaneous equations:
x = 16,000 + 0.1y
y = 24,000 + 0.2x
Solving these equations we get x = 18,775; y = 27,755
The distribution/apportionment of overheads among the three production departments would be
as under:
Overheads Distribution Summary
P1 (Tk.) P2 (Tk.) P3 (Tk.)
Direct allocation 48,000 112,000 52,000
Apportionment of Overhead Cost of S1 3,755 7,510 3,755
Apportionment of Overhead Cost of S2 2,776 16,653 5,551
Total 54,531 136,163 61,306
Budgeted Capacity 5000 12,000 6,000
Labor hrs. Machine hrs. Labor hrs.
Overhead Cost per hour Tk. 10.91 Tk. 11.35 Tk. 10.22

Solution of the Question No. 5

(a) Open-ended.
(b) Open-ended.
(c)
Physical Units:
Input:
Beginning work-in-process 12,500
Started in the process 87,500
Total 100,000
Output:
Transferred to finished goods 62,500
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 Ending work-in-process 25,000
Normal loss (62,500+25,000)×10% 8,750
Abnormal loss 3,750
Total 100.000

Equivalent Production Units:

Particulars Physical Transferred-in Direct MaterialsConversion
Units Cost Cost
Percent Units Percent Units Percent Units
Transferred to finished 62,500 100% 62,500 100% 62,500 100% 62,500
goods
Ending work-in-process 25,000 100% 25,000 100% 25,000 95% 23,750
Normal loss 8,750 100% 8,750 0% 0 80% 7,000
Abnormal loss 3,750 100% 3,750 0% 0 80% 3,000
Equivalent Units 100,000 100,000 87,500 96,250

Cost to Account for:

Particulars Transferred- Direct Conversion Total
in Cost Materials Cost Cost
Beginning work-in-process 103,625 0 52,500 156,125
Added during the year 809,375 819,000 794,500+770,00 3,192,87
0 =1,564,500 5
Total Cost 913,000 819,000 1,617,000 3,349,00
0
Equivalent Units 100,000 87,500 96,250
Cost per equivalent unit 9.13 9.36 16.80 35.29

Cost Accounted for:

Particulars Finished Goods Ending work-in- Normal loss Abnormal loss
process
Transferred-in 62,500×9.13 25,000×9.13 8,750×9.13 3,750×9.13
Cost =570,625 =228,250 =79,888 =34,237
Direct Materials 62,500×9.36 25,000×9.36 0×9.36 0×9.36
=585,000 =234,000 =0 =0
Conversion Cost 62,500×16.80 23,750×16.80 7,000×16.80 3,000×16.80
=1,050,000 =399,000 =117,600 =50,400
Total 2,205,625 861,250 197,488 84,637
Share of Normal 197,488 - (197,488) -
Loss
Total Cost 2,403,113 861,250 - 84,637
Assigned

Solution of the Question No. 6

(a) Open-ended.
(b) Open-ended.
(c)
1.
Costs Job 410 Job 411
Direct materials Tk. 9,700 Tk. 59,900
Direct labor 750 11,250
Manufacturing overhead (115×25; 115×375) 2,875 43,125
Total manufacturing cost Tk. 13,325 Tk. 114,275
Number of units 10 200
Manufacturing cost per unit Tk. 1,332.50 Tk. 571.375

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 2.
Costs Job 410 Job 411
Direct materials Tk. 9,700 Tk. 59,900
Direct labor 750 11,250
Manufacturing overhead (note-1) 7,750 38,250
Total manufacturing cost Tk. 18,200 Tk. 109,400
Number of units 10 200
Manufacturing cost per unit Tk. 1,820 Tk. 547

Note-1:
Cost Drivers Job 410 Job 411
Material handling (0.40×500; 0.40×2,000) 200 800
Lathe work (0.40×500; 0.40×2,000) 4,000 11,850
Milling (20.00×150; 20.00×1,050) 3,000 21,000
Grinding (0.80×500; 0.80×2,000) 400 1,600
Testing (15.00×10; 15.00×200) 150 3,000
Total 7,750 38,250

Solution of the Question No.7

(a)
i. iCover’s managers plan to increase spending on design changes and process
engineering to improve product quality. These are prevention activities, iCover’s
managers plan to increase prevention costs to improve quality. This is consistent with
much of the research on quality. Preventing defects from occurring in the first place
generally gives the best cost to benefit gains from quality improvement.

ii. Cost of making quality improvements = Tk. 125,000 + Tk. 210,000 = Tk. 335,000
Benefits of quality improvements:
(1) 55% decrease in product repair costs = 55% × Tk. 400,000 = Tk. 220,000
(1) 70% decrease in lost sales from customer returns = 70% × Tk. 650,000 = Tk. 455,000
Increase in contribution margin = Contribution margin % × Increase in sales
= 40% × Tk. 455,000 = Tk. 182,000
Total benefit = Tk. 220,000 + Tk. 182,000 = Tk. 402,000
The benefits of making the quality improvements exceed the costs by Tk. 67,000 (Tk.
402,000 – Tk. 335,000), so iCover should implement the changes to improve quality.

iii. The following table shows the actual costs of quality at iCover, as a percentage of total
costs of quality, and as a percentage of revenues, before the change in the production process.
Note that sales revenues = Tk. 20 × 1,000,000 units = Tk. 20,000,000.

Percentage of Total Percentage of

Costs of Quality Revenues (4) =
Description Amount (3) = (2) ÷ Tk. (2) ÷ Tk.
(1) (2) 1,610,000 20,000,000
Prevention costs Tk. 400,000 24.8% 2.00%
Appraisal costs 150,000 9.3% 0.75%
Internal failure costs
Rework 325,000
Scrap 75,000
Total internal failure costs 400,000 24.9% 2.00%
External failure costs
Product repair costs 400,000
Lost contr. margin from
customer returns1 260,000
Total external failure costs 660,000 41.0% 3.30%
Total costs of quality Tk. 1,610,000 100.0%
8.05%
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1
Lost contribution margin from customer returns = 40% × Lost sales from customer returns.
= 40% × Tk. 650,000
= Tk. 260,000

The following table shows the actual costs of quality at iCover, as a percentage of total costs of
quality, and as a percentage of revenues, after the change in the production process. Note that
as a result of these changes, lost sales from customer returns decrease by 70% × Tk. 650,000
= Tk. 455,000, so sales revenues increase by the same amount. Sales revenues in this case =
Tk. 20,000,000 + Tk. 455,000 = Tk. 20,455,000

Percentage
Percentage of of
Total Costs of Revenues
Quality (4) = (2) ÷
Description Amount (3) = (2) ÷ Tk. Tk.
(1) (2) 1,543,000 20,455,000
Prevention costs1 Tk. 735,000 47.7% 3.6%
Appraisal costs 150,000 9.7% 0.7%
Internal failure costs
Rework 325,000
Scrap 75,000
Total internal failure costs 400,000 25.9% 2.0%
External failure costs
Product repair costs2 180,000
Lost contr. margin from customer returns3 78,000
Total external failure costs 258,000 16.7% 1.3%
Total costs of quality Tk. 1,543,000 100.0% 7.6%
1
Prevention costs = Existing prevention costs + costs of design changes costs + costs of process
engineering improvements
= Tk. 400,000 + Tk. 125,000 + Tk. 210,000 = Tk. 735,000
2
Product repair costs = Tk. 400,000 × (1 – 0.55) = Tk. 180,000
3
Lost contribution margin from customer returns = 40% × Lost sales from customer returns
= 40% × Tk. 650,000 × (1 – 0.70)
= 40% × Tk. 195,000 = Tk. 78,000
(b)
i. Projected Life Cycle Income Statement

Revenues [Tk. 400 × (12,000 + 24,000 + 24,000 + 10,000)] Tk. 28,000,000

Variable costs:
Months 7–12 (Tk. 112 × 12,000 ) 1,344,000

Months 13–36 (Tk. 90 × 48,000 ) 4,320,000

Months 37–42 (Tk. 84 × 10,000 ) 840,000

Total variable costs 6,504,000

Fixed costs:
Design costs 600,000
Production (Tk. 1,600,000 + Tk. 6,000,000 + Tk.
1,000,000) 8,600,000
Marketing (Tk. 1,200,000 + Tk. 2,800,000 + Tk. 550,000) 4,550,000
Distribution (Tk. 250,000 + Tk. 800,000 + Tk. 150,000) 1,200,000
Total fixed costs 14,950,000
Life cycle operating income Tk. 6,546,000
Average profit per vacuum-cleaner = Tk. 6,546,000/(12,000 + 48,000 + 10,000) = Tk. 93.51
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 ii. Projected Life Cycle Income Statement (in 000s)
Months 7–12

Revenues (Tk. 400 × 12,000) Tk. 4,800,000

Variable costs:
Months 7–12 (Tk. 112 × 12,000 ) 1,344,000

Fixed costs:
Production 1,600,000
Marketing 1,200,000
Distribution 250,000
Total fixed costs 3,050,000
Operating income Tk. 406,000

Average profit per vacuum-cleaner = Tk. 406,000/12,000 = Tk. 33.83

Projected Life Cycle Income Statement (in 000s)
Months 13–36

Revenues (Tk. 400 × 48,000) Tk. 19,200,000

Variable costs:
Months 13-36 (Tk. 90 × 48,000 ) 4,320,000

Fixed costs:
Production 6,000,000
Marketing 2,800,000
Distribution 800,000
Total fixed costs 9,600,000
Operating income Tk. 5,280.000

Average profit per vacuum-cleaner = Tk. 5,280,000/48,000 = Tk. 110

Projected Life Cycle Income Statement (in 000s)

Months 37–42

Revenues 400 × 10,000) Tk. 4,000,000

Variable costs:
Months 37–42 (Tk. 84 × 10,000 ) 840,000

Fixed costs:
Production 1,000,000
Marketing 550,000
Distribution 150,000
Total fixed costs 1,700,000
Operating income Tk. 1,460.000

Average profit per vacuum-cleaner = Tk. 1,460,000/10,000 = Tk. 146

iii. In analyzing the relative profitability of the product during the three sales phases of its life
cycle, the results are as expected. During the initial growth phase, all fixed costs, including
marketing, are higher in order to successfully launch the new product. In addition, variable costs
are higher per unit because the company has not yet capitalized on economies of scale. As the
product moves into its maturity phase, the company begins to see the benefits of economies of
scale and leaner production practices. The results are lower variable and fixed costs. Also, the
company will likely not need to spend as much on marketing because the product in now well
established. This phase results in high profit per unit. Lastly, in the decline phase, variable costs
per unit are the lowest because the company is maximizing its efficiencies. Marketing is at its
lowest because the company is expecting to phase out the product. During this final phase of
the product’s life cycle, fixed costs per unit are lower than in the maturity phase because the
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company is not investing in the upkeep of its capacity. The product is more profitable per unit
than in the growth phase and the maturity phase. Of course, the higher volumes in the maturity
phase means the total operating income is much higher in the maturity phase compared to the
growth and decline phases.
The company would need to consider several other factors before it decides to develop the new
vacuum cleaner. The company may need to analyze the probability that the price will be able to
remain constant through the product’s entire life cycle. Because technology is rapidly changing,
this product may become obsolete sooner than expected. The company also has not accounted
for the time value of money, which may make a big difference in the desired outcome,
depending on the company’s required rate of return. In addition, the company has not budgeted
for all possible expenses such as warranty claims and returns. These should be considered as
well in the overall plan. Lastly, the company may want to investigate possible methods of value
engineering to gain even more efficiencies and profitability over the life of the product.
iv.
Projected Life Cycle Income Statement

Revenues [Tk. 450 × 10,000 + Tk. 400 × (48,000 + 10,000)] Tk. 27,700,000
Variable costs:
Months 7–12 (Tk. 112 × 10,000 ) 1,120,000

Months 13–36 (Tk. 90 × 48,000 ) 4,320,000

Months 37–42 (Tk. 84 × 10,000 ) 840,000

Total variable costs 6,280,000

Fixed costs:
Design costs 600,000
Production (Tk. 1,600,000 + Tk. 6,000,000 + Tk.
1,000,000) 8,600,000
Marketing (Tk. 1,200,000 + Tk. 2,800,000 + Tk. 550,000) 4,550,000
Distribution (Tk. 250,000 + Tk. 800,000 + Tk. 150,000) 1,200,000
Total fixed costs 14,950,000
Life cycle operating income Tk. 6,470,000

Average profit per vacuum-cleaner = Tk. 6,470,000/(10,000 + 48,000 + 10,000) = Tk. 95.15
TSN earns more profit under its original plan (Tk. 6,546,000) than it does if it increases the price
to Tk. 450 for the first six months (Tk. 6,470,500). The higher price is more than offset by the
decline in sales decreasing operating income. Therefore, TSN should keep the price of the
vacuum-cleaners at Tk. 400 for the first six months rather than increasing it to Tk. 450.
TSN could also simply have compared the contribution margin in Months 7 − 12 from
increasing prices:
Contribution margin at a price of Tk. 400 = (Tk. 400 − Tk. 112) × 12,000 = Tk. 3,456,000
Contribution margin at a price of Tk. 450 = (Tk. 450 − Tk. 112) × 10,000 = Tk. 3,380,000
TSN earns a higher contribution margin in the Months 7 − 12 at a price of Tk. 400 from selling
12, 000 units. The revenue and costs over the remaining months are identical and so irrelevant.

= THE END =

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