The Institute of Chartered Accountants of Pakistan

Cost Accounting
Intermediate Examination 7 September 2012
Autumn 2012 100 marks - 3 hours
Module D Additional reading time - 15 minutes

Q.1 (a) Following data is available from the records of Cortex Limited (CL) for the year ended 30
June 2012:
Rupees
Profit as per cost accounts 150,000
Under-recovery of production overheads 11,500
Under-recovery of administrative overheads 18,000
Over-recovery of selling and distribution overheads 21,000
Overvaluation of opening stock in cost accounts 9,000
Overvaluation of closing stock in cost accounts 4,500
Loss on sale of fixed assets 1,000
Interest expenses 2,500
Preliminary expenses written off 12,000
Income tax 8,000
Notional rent on own building 5,000
Transfer to reserve fund 10,000
Dividend received 3,000
Interest earned on deposits 1,500
Share transfer fees 2,000
Discount on early payments to suppliers 4,000

Required:
Compute CL’s financial profit after tax for the year ended 30 June 2012. (10 marks)

(b) Bile Limited (BL) produces and markets a single product Plasma. The projected levels of
demand of Plasma at various prices are as under:

Demand Selling price Cost per unit

(Units) per unit (Rs.) (Rs.)
1,000 55 29
1,100 53 28
1,200 52 27
1,300 49 26

Required:
Using tabular approach, calculate the marginal revenues and marginal costs for Plasma at different
levels of demand. Also determine the price at which BL could earn maximum profits. (05 marks)

Q.2 Jadeed Limited (JL) operates a multiple piece rate plan at its factory as follows:

(i) Basic piece rate of Rs. 3 per piece is paid up to 80% efficiency;
(ii) 120% basic piece rate where efficiency is more than 80% but less than or equal to 100%;
(iii) 130% basic piece rate for above 100% efficiency.

The workers are eligible for a “Guaranteed Day Rate “which is equal to 70% efficiency.

Required:
Compute the labour cost per piece at 10% intervals between 60% and 130% efficiency, assuming
that at 100% efficiency 80 pieces are produced per day. (10 marks)
 Cost Accounting Page 2 of 4

Q.3 (a) Stem Limited (SL) is engaged in the manufacture and sale of two products Petal and Leaf.
Following information is available from SL’s records for the year ended 30 June 2012:

Petal Leaf
Direct material 250 kg. @ Rs. 80 per kg. 125 kg. @ Rs. 128 per kg.
Direct labour @ Rs. 25 per hour 720 hours 960 hours
Sales Rs. 65,000 Rs. 80,000
Profit margin 25% on cost 30% on sales price

Factory overheads are allocated to the products as a percentage of direct labour whereas
administrative overheads are allocated as a percentage of direct material cost.

Required:
Compute the amount of factory and administrative overheads using simultaneous equations.
(10 marks)

(b) What is Idle Time? Discuss the treatment of idle time in cost accounting. (05 marks)

Q.4 Mehanti Limited (ML) produces and markets a single product Wee. Two chemicals Bee and Gee
are used in the ratio of 60:40 for producing 1 litre of Wee. ML follows perpetual inventory system
and uses weighted average method for inventory valuation. The purchase and issue of Bee and Gee
for May 2012, are as follows:

Date Bee Gee

Receipt Issue Receipt Issue
Litre Rate Litre Litre Rate Litre
02-05-2012 - - 450 110 -
05-05-2012 - - 560 - - 650
09-05-2012 - - 300 - - 300
12-05-2012 420 52 - 700 115 -
18-05-2012 - - 250 - - 150
24-05-2012 500 55 - 250 124 -
31-05-2012 - - 500 - - 450

Following further information is also available:

(i) Opening inventory of Bee and Gee was 1,000 litres at the rate of Rs. 50 per litre and 500
litres at the rate of Rs. 115 per litre respectively.
(ii) The physical inventories of Bee and Gee were 535 litres and 140 litres respectively. The
stock check was conducted on 01 June and 31 May 2012 for Bee and Gee respectively.
(iii) Due to contamination, 95 litres of Bee and 105 litres of Gee were excluded from the stock
check. Their net realisable values were Rs 20 and Rs. 50 per litre respectively.
(iv) 250 litres of Bee which was received on 01 June 2012 and 95 litres of Gee which was issued
on 31 May 2012 after the physical count were included in the physical inventory.
(v) 150 litres of chemical Bee was held by ML on behalf of a customer, whereas 100 litres of
chemical Gee was held by one of the suppliers on ML’s behalf.
(vi) 100 litres of Bee and 200 litres of Gee were returned from the production process on 31 May
and 01 June 2012 respectively.
(vii) 240 litres of chemical Bee purchased on 12th May and 150 litres of chemical Gee purchased
on 24th May 2012 were inadvertently recorded as 420 litres and 250 litres respectively.

Required:
(a) Reconcile the physical inventory balances with the balances as per book.
(b) Determine the cost of closing inventory of chemical Bee and Gee. Also compute the cost of
contaminated materials as on 31 May 2012. (15 marks)
 Cost Accounting Page 3 of 4

Q.5 Artery Limited (AL) produces and markets three products viz. Alpha, Beta and Gamma. Following
information is available from AL’s records for the manufacture of each unit of these products:

Alpha Beta Gamma

Selling price (Rs.) 66 88 106
Material-A (Rs.4 per kg) (Rs.) 8 0 12
Material-B (Rs.6 per kg) (Rs.) 12 18 24
Direct labour (Rs. 10 per hour) (Rs.) 25 30 25
Variable overhead based on:
− Labour hours (Rs.) 1.5 1.8 1.5
− Machine hours (Rs.) 1.6 1.4 1.2
Total (Rs.) 3.1 3.2 2.7
Other data:
Machine hours 8 7 6
Maximum demand per month (units) 900 3,000 5,000

Additional information:

(i) AL is also engaged in the trading of a fourth product Zeta, which is very popular in the
market and generates a positive contribution. AL currently purchases 600 units per month of
Zeta from a supplier at a cost of Rs. 40 per unit. In-house manufacture of Zeta would
require: 2.5 kg of material-B, 1 hour of direct labour and 2 machine hours.
(ii) Materials A and B are purchased from a single supplier who has restricted the supply of
these materials to 22,000 kg and 34,000 kg per month respectively. This restriction is likely
to continue for the next 8 months.
(iii) AL has recently accepted a Government order for the supply of 200 units of Alpha, 300 units
of Beta and 400 units of Gamma each month for the next 8 months. These quantities are in
addition to the maximum demand stated above.
(iv) There is no beginning or ending inventory.

Required:
Determine whether AL should manufacture Zeta internally or continue to buy it from the supplier
during the next 8 months. (10 marks)

Q.6 Fowl Limited (FL) manufactures two joint products X and Y from a single production process.
Raw material Benz is added at the beginning of the process. Inspection is performed when the units
are 50% complete. Expected loss from rejection is estimated at 10% of the tested units. Following
details are available for the month of May 2012:

Units Material Conversion cost

(Rs.) (Rs.)
Opening work in process 15,000 90,000 25,000
Transferred to finished goods:
− Product- X 50,000
547,125 228,875
− Product- Y 25,000
Loss due to rejection 12,500 - -
Closing work in process 10,000 - -

Additional information:
(i) Opening and closing work in process are 75% complete.
(ii) The normal loss is sold as scrap at the rate of Rs. 1.50 per unit.
(iii) Production costs are allocated to joint products on the basis of weight of output.
(iv) The company uses weighted average method for inventory valuation.

Required:
Cost of production report for the month of May 2012. (15 marks)
 Cost Accounting Page 4 of 4

Q.7 Zodiac Limited (ZL) produces a single product and has a maximum production capacity of
300,000 units per annum. Following information pertains to ZL’s estimated cost of production:

(i) Direct material Rs. 12 per unit.

(ii) Direct labour Rs. 8 per unit. However, based on guaranteed wages, the minimum total cost
of labour is Rs. 150,000 per month.
(iii) Variable overheads Rs. 6 per unit.
(iv) Semi-variable overheads Rs. 450,000 per annum up to 55% capacity. An additional amount
of Rs. 180,000 per annum is estimated for every 20% increase in capacity or a part thereof.
(v) Fixed overheads Rs. 750,000 per annum.

During the first five-months of the year 2012, ZL utilized 70% of its production capacity. However,
it is expected to utilize 92% capacity during the remaining seven-months. The actual selling price
during the first five-months was Rs. 34 per unit.

Required:
Compute selling price per unit which should be charged by ZL for the remaining seven-months to
earn a total profit of Rs. 936,000 for the year 2012. (10 marks)

Q.8 Tychy Limited (TL) is engaged in the manufacture of Specialized motors. The company has been
asked to provide a quotation for building a motor for a large textile industrial unit in Punjab.
Following information has been obtained by TL’s technical manager in a one-hour meeting with
the potential customer. The manager is paid an annual salary equivalent to Rs. 2,500 per eight-hour
day.

(i) The motor would require 120 ft of wire-C which is regularly used by TL in production. TL
has 300 ft of wire-C in inventory at the cost of Rs. 65 per ft. The resale value of wire-C is Rs.
63 and its current replacement cost is Rs. 68 per ft.
(ii) 50 kg of another material viz. Wire-D and 30 other small components would also be
required by TL for the motor. Wire-D would be purchased from a supplier at Rs. 10 per kg.
The supplier sells a minimum quantity of 60 kg per order. However, the remaining quantity
of wire-D will be of no use to TL after the completion of the contract. The other small
components will be purchased from the market at Rs. 80 per component.
(iii) The manufacturing process would require 250 hours of skilled labour and 30 machine hours.
The skilled workers are paid a guaranteed wage of Rs. 20 per hour and the current spare
capacity available with TL for such class of workers is 100 direct labour hours. However,
additional labour hours may be obtained by either:
− Paying overtime at Rs. 23 per hour; or
− Hiring temporary workers at Rs. 21 per hour. These workers would require 5 hours
of supervision by AL’s existing supervisor who would be paid overtime of Rs. 20 per
hour.
The machine on which the motor would be manufactured was leased by TL last year at a
monthly rent of Rs. 5,000 and it has a spare capacity of 110 hours per month. The variable
running cost of the machine is Rs. 15 per hour.
(iv) Fixed overheads are absorbed at the rate of Rs. 25 per direct labour hour.

Required:
Compute the relevant cost of producing textile motor. Give brief reasons for the inclusion or
exclusion of any cost from your computation. (10 marks)

(THE END)