THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2010

March 5, 2010

COST ACCOUNTING (MARKS 100)

Module D (3 hours)

Q.1 XYZ Limited manufactures four products. The related data for the year ended December 31,
2009 is given below:
A B C D
Opening stock:
- Units 10,000 15,000 20,000 25,000
- Cost (Rs.) 70,000 120,000 180,000 310,000
- NRV (Rs.) 75,000 110,000 180,000 300,000
Production in units 50,000 60,000 75,000 100,000
Costs of goods produced (Rs.) 400,000 600,000 825,000 1,200,000
Variable selling costs (Rs.) 60,000 80,000 90,000 100,000
Closing stock (units) 5,000 10,000 15,000 24,000
Unit cost of purchase from market (Rs.) 10.50 11.00 11.50 13.00
Selling price per unit (Rs.) 10.00 12.00 12.00 12.50
Damaged units included in closing stock 300 600 800 1,500
Unit cost to repair damaged units (Rs.) 3.00 2.00 2.50 3.50
Stock valuation method in use Weighted Weighted
FIFO FIFO
Average Average

The company estimates that in January 2010 selling expenses would increase by 10%.

Required:
Compute the amount of closing stock that should be reported in the balance sheet as on
December 31, 2009. (15)

Q.2 Modern Distributors Limited (MDL) is a distributor of CALTIN which is used in various
industries and its demand is evenly distributed throughout the year.

The related information is as under:

(i) Annual demand in the country is 240,000 tons whereas MDL’s share is 32.5% thereof.
(ii) The average sale price is Rs. 22,125 per ton whereas the profit margin is 25% of cost.
(iii) The annual variable costs associated with purchasing department are expected to be
Rs. 4,224,000 during the current year. It has been estimated that 10% of the variable
costs relate to purchasing of CALTIN.
(iv) Presently, MDL follows the policy of purchasing 6,500 tons at a time.
(v) Carrying cost is estimated at 1% of cost of material.
(vi) MDL maintains a buffer stock of 2,000 tons.

Required:
Compute the amount of savings that can be achieved if MDL adopts the policy of placing
orders based on Economic Order Quantity. (15)
 (2)

Q.3 Smart Processing Limited produces lubricants for industrial machines. Material COX is
introduced at the start of the process in department A and subsequently transferred to
department B. Normal loss in department A is 5% of the units transferred.

In department B, material COY is added just after inspection which takes place when the
production is 60% complete. 10% of the units processed are evaporated before the inspection
stage. However, no evaporation takes place after adding material COY. During the year,
actual evaporation in department B was 10% higher than the estimated normal losses because
of high level of Sulpher contents in natural gas used for processing.

Other details for the year ended December 31, 2009 are as under:

Department A Department B
---------- Rupees ----------
Opening work in process 2,184,000 2,080,000
Material input - 600,000 Litres 17,085,000
- 500,000 Litres 9,693,000
Labour 8,821,000 6,389,000
Overheads 2,940,000 3,727,000

Department A Department B
Completion % Completion %
Litres Conversion Litres Conversion
Material Material
costs costs
Opening WIP 64,500 100 60 40,000 100 60
Closing WIP 24,000 100 70 50,000 100 80

Conversion costs are incurred evenly throughout the process in both departments. The
company uses FIFO method for inventory valuation.

Required:
(a) Equivalent production units
(b) Cost of abnormal loss and closing WIP
(c) Cost of finished goods produced (22)

Q.4 You have recently been appointed as the Financial Controller of Watool Limited. Your
immediate task is to prepare a presentation on the company’s performance for the recently
concluded year. You have noticed that the records related to cost of production have not been
maintained properly. However, while scrutinizing the files you have come across certain
details prepared by your predecessor which are as follows:

(i) Annual production was 50,000 units which is equal to the designed capacity of the
plant.
(ii) The standard cost per unit of finished product is as follows:

Raw material X 6 kg at Rs. 50 per kg

Raw material Y 3 kg at Rs. 30 per kg
Labour- skilled 1.5 hours at Rs. 150 per hour
Labour- unskilled 2 hours at Rs. 100 per hour
Factory overheads Variable overheads per hour are Rs. 100 for skilled labour and
Rs. 80 for unskilled labour. Fixed overheads are Rs. 4,000,000.

(iii) Data related to variation in cost of materials is as under:

Material X price variance Rs. 95,000 (Adverse)

Material Y actual price 6% below the standard price
Material X quantity variance Nil
Material Y quantity variance Rs. 150,000 (Adverse)
 (3)

(iv) Opening raw material inventories comprised of 25 days of standard consumption

whereas closing inventories comprised of 20 days of standard consumption.
(v) Actual labour rate for skilled and unskilled workers was 10% and 5% higher
respectively.
(vi) Actual hours worked by the workers were 168,000 and the ratio of skilled and unskilled
labour hours was 3:4 respectively.
(vii) Actual variable overheads during the year amounted to Rs. 16,680,000. Fixed
overheads were 6% more than the budgeted amount.

Required:
(a) Actual purchases of each type of raw materials.
(b) Labour and overhead variances. (20)

Q.5 Areesh Limited deals in various products. Relevant details of the products are as under:

AW AX AY AZ
Estimated annual demand (units) 5,000 10,000 7,000 8,000
Sales price per unit (Rs.) 150 180 140 175
Material consumption:
Q (kg) 2 2.5 1.5 1.75
S (kg) 0.5 0.6 0.4 0.65
Labour hours 2 2.25 1.75 2.5
Variable overheads (based on labour cost) 75% 80% 100% 90%
Fixed overheads per unit (Rs.)
(based on 80% capacity utilization) 10 20 14 16
Machine hours required:
Processing machine hours 5 6 8 10
Packing machine hours 2 3 2 4

Company has a long term contract for purchase of material Q and S at a price of Rs. 15 and
Rs. 20 per kg respectively. Wage rate for 8 hours shift is Rs. 200.

The estimated overheads given in the above table are exclusive of depreciation expenses.
The company provides depreciation on number of hours used basis. The depreciation on
each machine based on full capacity utilization is as under:

Hours Rs.
Processing machine 150,000 150,000
Packing machine 100,000 50,000

The company has launched an advertising campaign to promote the sale of its products. Rs. 2
millions have been spent on such campaign. This cost is allocated to the products on the basis
of sale.

Required:
Compute the number of units of each product that the company should produce in order to
maximize the profit and also compute the product wise and total contribution at optimal
product mix. (15)

Q.6 Briefly describe the following terms giving an example in each case:

(a) Opportunity cost (b) Sunk cost (c) Relevant cost (06)
 (4)

Q.7 The records of direct labour hours and total factory overheads of IMI Limited over first six
months of its operations are given below:

Total factory
Direct labour
overheads
Hours in 000 Rs. in 000
September 2009 50 14,800
October 2009 80 17,000
November 2009 120 23,800
December 2009 40 11,900
January 2010 100 22,100
February 2010 60 16,150

The management is interested in distinguishing between the fixed and variable portion of the
overheads.

Required:
Using the least square regression method, estimate the variable cost per direct labour hour
and the total fixed cost per month. (07)

(THE END)