Cost and Management Accounting

Suggested Answers
Certificate in Accounting and Finance – Spring 2021

A.1 (a) Mehnat Limited

Statement of equivalent production units: Equivalent units Quantity
Material Conversion schedule
Process A --------------------- Kg -------------------
Opening WIP - - 2,000
Material 18,000
20,000
Goods transferred during the month 16,000 16,000 16,000
Closing WIP (60% conversion) 3,000 1,800 3,000
Normal loss [(18,000–3,000)×12%] - - 1,800
Abnormal gain (75% conversion) (Bal.) (800) (600) (800)
A 18,200 17,200 20,000

(b) Computation of costs: Material Conversion

---------- Rs. in '000 ----------
Opening WIP 3,600 1,400
Cost for the month 36,000 12,000
Normal loss (1,800×400) (720) -
Total cost B 38,880 13,400

--------------- Rupees -------------

Cost per unit (B÷A) 2,136 779 2,915
--------------- Rs. in '000 -----------
Finished goods 34,176 12,464 46,640
Closing WIP 6,408 1,402 7,810
Abnormal gain 1,709 467 2,176

(c) Accounting entries to account for production losses: Debit Credit

-------- Rs. in '000 --------
Scrap inventory 720
WIP – Process A 720
WIP – Process A 2,176
Scrap inventory (800×400) 320
Profit and loss account (Balancing) 1,856

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

A.2 (a) It is a report published by a company or organization:

 about the economic, environmental and social impacts caused by its everyday
activities.
 about its values and governance model.
 that demonstrates the link between its strategy and its commitments to a
sustainable global economy.

External benefits of a sustainability reporting:

(i) Mitigates or reverses negative environmental, social and governance impacts.
(ii) Improves reputation and brand loyalty.
(iii) Enables external stakeholders to understand the organization's true value and
tangible and intangible assets
(iv) Demonstrates how the organization influences, and is influenced by,
expectations about sustainable development

(b) (i) Cap: A cap is a ceiling agreed to an interest rate which is 14% in the given
scenario.

Floor: A floor is lower limit set for an interest rate which is 8% in the given
scenario.

Collar: A collar combines both caps and floors thus maintaining the interest rate
within a particular range e.g. 8% to 14% in the given scenario.

(ii) Platinum (Private) Limited Rs. in million

Interest payable by PPL to GE:
At interest rate of 15% 500×15% 75.00
At interest rate of 9% 500×9% 45.00

Settlement between PPL and MI:

Payable by MI to PPL [(15%–
At interest rate of 15% 14%)×500] 5.00
At interest rate of 9% No amounts to be settled between PPL
and MI, as interest is payable at a rate
which is less than agreed cap and more
than agreed floor rates. Nil

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

A.3 Elements Limited

Cash budget for six months ending 31 December 2021
Rupees
CASH INFLOWS:
Cash sales (14,000+30,000)×1,416 62,304,000
Credit sales [56,000+(120,000/90×50)]×1,511 185,350,000
Sale proceeds from solid waste [(120,000+150,000)×45] 12,150,000
259,804,000
CASH OUTFLOWS:
Material purchase [210,000+(232,500/90×40)]×360 112,800,000
Direct labour (120,000+150,000)×288 77,760,000
Factory overheads - variable [120,000+(150,000/90×60)]×216 47,520,000
Factory overheads - fixed (1,000,000–450,000)×5 2,750,000
Operating expenses [(120,000+(150,000/90×60)]×94 20,680,000
Royalty per unit [70,000+(150,000/90×60)]×40 6,800,000
Fixed annual royalty amount 2,800,000
Salaries excluding head office allocated salaries [(1,200,000–250,000)×5] 4,750,000
Sales promotion campaign (6,000,000×0.4) 2,400,000
278,260,000

Net cash out-flow (18,456,000)

W-1: Sales quantity 1st Quarter 2nd Quarter

--------- Units ---------
Production (800,000/12×3×60%; 75%) A 120,000 150,000
Opening inventory - 50,000
Units available for sale B 120,000 200,000
Closing inventory [(150,000/90)×30] (50,000) (50,000)
Total units to be sold C 70,000 150,000
Credit sales (C÷1.25) D 56,000 120,000
Cash sales (D×0.25) 14,000 30,000

W-2: Raw material purchases --------- kg ---------

Required for production A×1.5 180,000 225,000
Closing inventory (180,000;225,000/90×15) 30,000 37,500
Raw material requirement 210,000 262,500
Opening inventory - (30,000)
Purchases 210,000 232,500

W-3: Selling price per unit Rupees

Direct material (1.5×360) 540
Direct labour (1.2×240) 288
Variable factory overheads (1.2×180) 216
Royalty per unit 40
Operating cost 94
Proceeds from solid waste [(1.5×0.1×0.6)×500] (45)
Total variable cost per unit E 1,133
Selling price - Cash sales at 20% CM (E/0.80) 1,416
Selling price - Credit sales at 25% CM (E/0.75) 1,511

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

A.4 Standard Limited

General Journal
Debit Credit
Date Description
----------------- Rs. in '000 -----------------
05-Feb-2021 Inventory 2,016,000
Account payable 2,016,000
(Inventory purchased)
10-Feb-2021 Cost of goods sold 1,280,160
Inventory 1,280,160
(Sales made to KL)
12-Feb-2021 Inventory 35,560
Cost of goods sold 35,560
(Defective units returned by KL)
15-Feb-2021 Account Payable 10,800
Inventory 10,800
(Defective units returned to supplier)
20-Feb-2021 Cash (3,500×2,000) 7,000
Profit & loss account (Bal.) 17,891
Inventory 24,891
(Defective units sold as scrap)
22-Feb-2021 Cost of goods sold 35,558
Inventory 35,558
(Replacement of defective units to KL)
25-Feb-2021 Cost of goods sold 1,066,739
Inventory 1,066,739
(Sales made)
28-Feb-2021 Profit & loss account - NRV
Adjustment [4,500×(7,111.59–
6,000)] 5,002
Profit & loss account – Shortage
(7,111.59×500) 3,556
Inventory 8,558
(Cost of obsolete and shortages charged
to factory overheads)

Receipts/(Issues)
Date Particulars
Quantity Rate Rs. in '000
01-Feb-21 Balance 220,000 7,000.00 1,540,000
05-Feb-21 Purchases 280,000 7,200.00 2,016,000
Balance 500,000 7,112.00 3,556,000
10-Feb-21 Sales to KL (180,000) 7,112.00 (1,280,160)
12-Feb-21 Returned by KL 5,000 7,112.00 35,560
15-Feb-21 Returned to supplier - defective (1,500) 7,200.00 (10,800)
Balance 323,500 7,111.59 2,300,600
20-Feb-21 Defective goods scrapped (3,500) 7,111.59 (24,891)
22-Feb-21 Replacement of defective to KL (5,000) 7,111.59 (35,558)
25-Feb-21 Sales (150,000) 7,111.59 (1,066,739)
28-Feb-21 Short inventory found in physical count (500) 7,111.59 (3,556)
Balance 164,500 7,111.59 1,169,856

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

A.5 Bright Limited

Actual overheads for production of Shine and Glow
(a) Cost allocation to production department:
Production Service
Items Allocation basis Total departments departments
A B X Y
Salaries & wages No. of employees 115,000 69,000 23,000 11,500 11,500
Depreciation Cost of machine 80,000 50,000 30,000 - -
Building insurance Floor Area 25,000 12,500 5,000 5,000 2,500
Electricity Floor Area 60,000 30,000 12,000 12,000 6,000
28,500 20,000
Service departments:
Department Y 75:15:10 20,000 15,000 3000 2000 (20,000)
30,500
Department X 80:20 30,500 24,400 6,100 (30,500)
200,900 79,100 - -

Cost allocation to Shine and Glow: Shine Glow Total

Actual units produced 100,000 60,000 160,000

Overheads allocation on the basis of units:

 Department A 125,563 75,337 200,900
 Department B 49,437 29,663 79,100
175,000 105,000 280,000

(b) Under/over absorbed production overheads

Absorbed Actual Under/(Over)
overheads overheads absorbed
Shine @ Rs. 1,800 180,000 175,000 (5,000)
Glow @ Rs. 1,700 102,000 105,000 3,000
282,000 280,000 (2,000)

Page 5 of 7
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

A.6 Bounce Enterprises (BE)

(a) Year-wise relevant cost
Description Year 1 Year 2 Year 3
No. of units to supply A 10,000 11,000 12,000

-------------------- Rupees --------------------

RAW MATERIAL
Conversion cost per kg of Z-plus:
- Opportunity cost of selling back Z1
[400×40%×(12,000÷8,000)] = 240
- Processing cost per kg
[(12,000×550)÷8,000]×1.05 = 866
1,106
Purchase cost per kg of Z-plus (1,000×1.05) 1,050
Purchase option is cheaper than conversion of Z1
Relevant cost of raw material (A×2×1,050);1.05 21,000,000 24,255,000 27,783,000

DIRECT LABOUR
Direct labour - Skilled
Idle hours available from existing labour (Not
relevant) - - -
[B(W-1)–
Cost of additional hrs. required 2,200)×260×1.05] 4,216,212 4,199,996 4,871,101
Direct labour - Semi-skilled
In house [(1,200÷1,000)×150×1.05] 189
Outsourced (195×1.05) 205
In house is cheaper (189×A×1.05) 1,890,000 2,182,950 2,500,470
Relevant cost of direct labour 6,106,212 6,382,946 7,371,571

OVERHEADS
Variable overheads (B×140×1.05) 2,593,668 2,601,106 2,979,449
Depreciation on specialized machine (8,000,000×25%) 2,000,000 1,500,000 1,125,000
(Gain)/loss on sale of specialized machine - (W-2) - - 975,000
Allocated fixed overheads (Not relevant) - - -
Directly attributable fixed overheads
(3,200,000×75%×1.05) 2,520,000 2,646,000 2,778,300
Relevant cost of overheads 7,113,668 6,747,106 7,857,749

Total relevant costs of Crystal 34,219,880 37,385,052 43,012,320

W-1:
Hours required (W-1.1)
[16,112+(1×1,532)]; [11×1,532]; [12×1,532] B 17,644 16,852 18,384

W-1.1:
Labour hours per batch for batch 9 and onwards:
Hours for the first 9 batches [9×2,500×(9)–0.152] 16,112
Hours for the first 8 batches [8×2,500×(8)–0.152] (14,580)
1,532

W-2:
Loss on sale of specialized machine
Net book value [8,000,000×(0.75)3] 3,375,000
Sales proceeds (8,000,000×30%) 2,400,000
Loss on disposal 975,000

Page 6 of 7
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

(b) Feasibility of the proposal at cost of capital of 15%

Year 0 Year 1 Year 2 Year 3
Description
Cash inflows/(outflows) - Rupees
Sales revenue (A×3,600×1.05) 37,800,000 43,659,000 50,009,400

(34,219,880 (37,385,052 (43,012,320

Relevant cost of Crystal as (a) above ) ) )
3,580,120 6,273,948 6,997,080
Tax at 30% (1,074,036) (1,882,184) (2,099,124)
Add: Deprecation on the specialized machine 2,000,000 1,500,000 1,125,000
Add: Loss on sale of the specialized machine - - 975,000
Purchase/sale of specialized machine (8,000,000) - - 2,400,000

Net cash flows (8,000,000) 4,506,084 5,891,764 9,397,956

Present value factor at 15% 1.0000 0.8696 0.7561 0.6575

Present value at 15% (8,000,000) 3,918,490 4,454,763 6,179,156

NPV 6,552,409

Conclusion:
The proposal should be accepted as it generates positive NPV.

A.7 Fine Limited

Units
Revised sales volume 500,000×1.1 550,000

Rs. in '000
Material - from existing supplier 22,500×1.1×40% 9,900
Material - from new supplier 22,500×1.1×60%×95%×(100/99) 14,250
Skilled labour 10,000×1.1×0.6 6,600
Semi-skilled labour 100,760(W-1)×100 10,076
production overhead - variable 4,500×0.5×1.1 2,475
production overhead - fixed 4,500×0.5 2,250
Total costs 45,551
Add: Inflation @10% 4,555
Target cost 50,106
Add: Target gross profit @ 25% 50,106×25/75 16,702
Target sales 66,808

Rupees
Target selling price 66,808,000/550,000 121.47

W-1: --- Hours ---

Semi-skilled labour hours required:
(10,000,000/125)×1.1×40%×1.
- in replacement of skilled labour 3 45,760
- existing requirement (50,000/100)×1.1 55,000
100,760

(THE END)

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