Cost and Management Accounting

Suggested Answers
Certificate in Accounting and Finance – Spring 2022

A.1 Nigeria Limited

Reorder Buffer Holding

Demand Probability Stock out Stock out cost
level stock cost
A B C D=A–B E=D×C×25 F=B–A G=F×C×12(W-1)×10
1,425(W-1) 1,000 35% 425 3,719 - -
1,500 45% - - 75 4,050
2,000 20% - - 575 13,800
3,719 17,850

Total cost (3,719+17,850) 21,569

Reorder Buffer
Demand Probability Holding cost Stock out Stock out cost
level stock
A B C D=A–B E=D×C×25 F=B–A G=F×C×12(W-1)×10
1,600 1,000 35% 600 5,250 - -
1,500 45% 100 1,125 - -
2,000 20% - - 400 9,600
6,375 9,600

Total cost (6,375+9,600) 15,975

W-1:
Average demand during lead time [(1000×35%)+(1500×45%)+(2000×20%)] 1,425
Average annual demand [(1,425×48)/2] 34,200
Batch size 3,000
Number of orders (34,200/3000) 12

NL should set reorder level of 1600 Kgs because total cost is lower at that level.

A.2 Denmark Ice Cream

(a) Target profit 14 %

Rs. in '000
Sales revenue - ice cream (500×1.1) 550
Sales revenue - frozen yogurt at market price (800×190) 152
Total sales 702

Target profit (702×14%) 98

Target cost (702-98) 604

Expected cost (W-1) 617
Cost gap (617–604) 13

W-1: Rs. in '000

Variable cost - ice cream (350×1.1) (385)
Variable cost - frozen yogurt (800×150) (120)
Fixed cost (100×1.12) (112)
Total expected cost (617)

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

(b) (i) Re-design products to make use of common processes and components that are
already used in the manufacture of other products by the company
(ii) Discuss with key supplier’s methods of reducing materials costs. Target costing
involves the entire ‘value chain’ from original suppliers of raw materials to the
customer for the end-product, and negotiations and collaborations with suppliers
might be an appropriate method of finding important reductions in cost.
(iii) Achieve cost efficiency by reducing the wastages.
(iv) Eliminate non-value added activities or non-value added features of the product
design. Something is ‘non-value added’ if it fails to add anything in value for the
customer. The cost of non-value added product features or activities can therefore
be saved without any loss of value for the customer. Value analysis may be used
to systematically examine all aspects of a product cost to provide the product at
the required quality at the lowest possible cost.
(v) Use standardized components that will reduce the cost. However, it might impact
the innovation element for the product.
(vi) Cost efficiency may also be achieved by reducing idle time.
(vii) Train staff in more efficient techniques and working methods. Improvements in
efficiency will reduce costs.

A.3 Argentina Limited

Hire substitute labour Rupees

Material Cost (125,000(W-1)×4.042(W-2)×100) 50,525,000
Labour Cost (125,000(W-1)×1.5×200) 37,500,000
Variable Cost (125,000(W-1)×125) 15,625,000
Proceeds from rejection (125,000(W-1)×4%)×300 (1,500,000)
Total cost 102,150,000

Introduction of revised wage plan

Material Cost (123,711(W-3)×4×100) 49,484,400
Labour Cost
Wages (123,711(W-3)×1.5×94%×200×1.07) 37,328,557
Premium (123,711(W-3)×1.5×70×6%) 779,379
Variable Cost (123,711(W-3)×125) 15,463,875
Proceeds from rejection (123711(W-3)×3%)×300 (1,113,399)
Total cost 101,942,812

W-1: Units
Production units including normal loss (proposed) 120,000/0.96 125,000

W-2: kg
Existing raw material input 4.000
Existing raw material net of normal loss (4×0.96) 3.840
Revised raw material input (3.84/0.95) 4.042

W-3: Units
Production units including normal loss (existing) 120,000/0.97 123,711

Conclusion:
AL should go ahead with the wage plan because the cost of hiring substitute labour is higher than
the cost of retaining its existing skilled labour.

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

A.4 Rio Limited

Option I Option II
------ Rs. in '000 ------
Sales - Donuts (4,500×1.3×0.8) 4,680 4,680
Sales - Custom donuts (4,500×1.3×0.2×1.15) 1,346 1,346
Net sales A 6,026 6,026
Variable cost - regular donuts (W-1) (3,781) (3,781)
Variable cost - customized donuts (W-1) (980) (980)
Commission at 2% on total sales (A×2%) (121)
Contribution margin B 1,265 1,144
Fixed costs including rent [800+(2,520/12)]; [800+100] (1,010) (900)
Interest on annual rent amount payable in advance 2,520×0.14/12 (29) -
Total fixed costs C (1,039) (900)
Profit 226 244

Contribution margin % (B/A) = D 20.99% 18.98%

Break-even sales (in Rs.) (C/D) = E 4,950 4,742

Margin of safety (%) (A–E)/A 17.86% 21.31%

Conclusion:
Option II is more appropriate as profit and margin of safety both are higher than option I.

W-1: Variable cost Regular donuts Customized donuts

Cost of making 2,808 737
4,680×0.8×0.75 4,500×1.3×0.2×0.8×0.75×1.05
Cost of packing 973 243
4,680×0.8×0.25×1.04 4,500×1.3×0.2×0.8×0.25×1.04
Total variable cost 3,781 980

A.5 California Limited

Allocation AB AC SA SB Total
basis -------------------------- Rupees --------------------------
Factory rent
Floor area 1,250,000 937,500 187,500 125,000 2,500,000
(2500×6/12;4.5/12;0.9/12;0.6/12)
Fuel cost Machine hrs.(fuel
990,000 810,000 - - 1,800,000
(1800×22/40;18/40(W-1)) consumption)
Depreciation
Machine hrs. 1,294,118 705,882 - - 2,000,000
(2000×22/34;12/34)
Electricity and utilities
Floor area 550,000 412,500 82,500 55,000 1,100,000
(1100×6/12;4.5/12;0.9/12;6/12)
4,084,118 2,865,882 270,000 180,000 7,400,000
Allocation of service departments cost
SA (40%:40%:20%) 122,474 122,474 (306,186) 61,238 -
SB (45%:40%:15%) 108,556 96,495 36,186 (241,237) -
Total overhead apportionment 4,315,149 3,084,851 - - -

Allocation basis Machine hours Labour hours

Overhead absorption rate per hour (in Rs.) 196.14/machine hour 308.49/labour hour
4,315,419/22,000 3,084,851/10,000

W-1:
Weighted machine hours: Hours
- AB (22,000×1) 22,000
- AB (12,000×1.5) 18,000
40,000
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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

W-2:
Let X= cost of service dept SA
Let Y= cost of service dept SB
Form equations:
X = 270,000 + 0.15Y ----------- (i)
Y = 180,000 + 0.2X ----------- (ii)

By solving simultaneously:
X = 306,186
Y = 241,237

A.6 Spain Limited

(a) Material price variance = Actual material purchased × (SR-AR)

15,000 = Actual material purchased × [120–(120×0.98)]
Actual material purchased = 6,250

(b) Fixed overhead expenditure variance = Budgeted FOH – Actual FOH

(9,500) = (Budgeted units × 150) – 380,000
Budgeted units = 2,470

(c) Material usage variance = SR × (Standard material used – Actual material used)
(14,000) = 120 × [(3×2,520) – Actual material used]
Actual material used = 7,677

(d) Labour efficiency variance = SR × (SH allowed – Actual hours)

12,000 = 100 × [(2×2,520) – Actual hours]
Actual hours = 4,920

A.7 Zimbabwe Limited

Close the Continue
operation and operating with
rent the premises labour contract
---------- Rs. in '000 ----------
Relevant Income:
Sales (W-1) 60,000+14,250 - 74,250
Rental income 20,000 -
Benefits from processing raw material (W-2) 150 -
Proceeds from sale of plant and machinery 2,800;2,800×(1–20%) 2,800 2,240
Scrap proceeds of defective units - irrelevant - -

Relevant costs:
Penalty of not fulfilling contractual commitments (3,800) -
Purchase of direct material (36,000×0.9)–3,400 (29,000)
Contract skilled labour cost (W-3) (14,663)
Variable production overheads 11,000×0.9 (9,900)
Training cost (W-5) (450)
Incremental payment to factory supervisor (3,600×(3/9) (1,200) -
Payment of relocation allowance (W-4) (2,000)
Technical fee paid in advance - sunk cost - -
Depreciation - -
Allocated general overheads - fixed production overheads - -
Cost of defective units - sunk cost - -
Net savings 15,950 22,477

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

Conclusion:
ZL should operate the segment with contract skilled labour because it has an incremental benefit of
Rs. 6,527 million (22,477–15,950).
Contract sales Other sales
W-1:
-------- Rs. in '000 -------
Sales revenue (37,500(W-1.1)×1600(W-1.2));(7,500(W-1.1)×1900(W-1.2)) 60,000 14,250

W-1.1: ----------- in units -----------

Sales quantity (50,000×0.75); [(45,000–37,500)] 37,500 7,500

W-1.2: -------- in Rs. -------

Budgeted Price[83,750,000/{(50,000×0.75×0.8)+(50,000×0.25×0.95)}] A 2,000 2,000
Selling price per unit - contractual A×0.8 1,600
Selling price - remaining customers A×0.95 1,900

W-2: Processing vs. purchasing of Rita Rs. in '000

Purchase cost of Rita 9000×350 3,150
Processing cost of Rita 10,000×140 (1,400)
Net savings from processing raw material 1,750
Less: Scrap proceeds from sale of raw material forgone 160×10000 (1,600)
Net benefit of processing raw material 150

W-3: Contract skilled labour cost

Total no. of batches 45,000/3,000 15
Skilled labour hours per batch for 5th. batch and onwards:
- Hours for the first 5 batches [5×2,750×(5)–0.152] 10,766
- Hours for the first 4 batches [4×2,750×(4)–0.152] (8,910)
1,856
Skilled labour cost (in Rs.) [10,766+(1,856×(15–5))]×500 14,663

W-4: in Rs.
Penalty on early termination of contract (30%×8200) 2,460
Relocation allowance 2,000

Since the relocation allowance is lower ZL should use the staff at its factory in Lahore.

W-5: in Rs.
Increase in variable production overheads 11,000×0.9×0.05 495
Training cost 450

Since training cost is lower than the increase in variable OH, training should be provided.

A.8 (a) For the purpose of marginal costing, the following assumptions are normally made:
 All elements of cost-production, administration and selling and distribution can be
segregated into fixed and variable components.
 Variable cost remains constant per unit of output irrespective of the level of output and
thus fluctuates directly in proportion to changes in the volume of output.
 The selling price per unit remains unchanged or constant at all levels of activity.
 Fixed cost remains unchanged or constant for the entire volume of production.
 The volume of production or output is the only factor which influences the costs.

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 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

(b) (i) Profit Statement under Marginal Costing

Rupees
Sales (47000×210) 9,870,000
Cost of sales
Opening stock [(1,600,000–(10,000×40)] 1,200,000
Cost of production [(75+45)×45,000(W-1)] 5,400,000
Less: Closing stock [(75+45)×8,000(W-1)] (960,000)
(5,640,000)
Variable selling and admin cost (47,000×15) (705,000)
Contribution margin 3,525,000
Less: Fixed cost (2,016,000+500,000+800,000) (3,316,000)
Profit 209,000

Profit Statement under Absorption Costing

Rupees
Sales (47,000×210) 9,870,000
Cost of sales
Opening stock 1,600,000
Cost of production [(75+45+42(W-2))×45,000(W-1)] 7,290,000
Less: Closing stock [(75+45+42(W-2))×8,000(W-1)] (1,296,000)
Under/over applied FOH (W-3) 626,000
(8,220,000)
Gross profit 1,650,000
Less: selling and admin [(47,000×15)+800,000] (1,505,000)
Profit 145,000

W-1:
Opening stock 10,000
Production (60,000×75%) 45,000
Less: Sales (47,000)
Closing stock 8,000

W-2:
Budgeted fixed factory overheads 2,016,000
Normal capacity (60,000×80%) 48,000
OAR (2,016,000/48,000) 42

W-3:
Applied overheads (45,000×42) 1,890,000
Actual overheads (2,016,000+500,000) 2,516,000
Under absorbed overheads (2,516,000 - 1,890,000) 626,000

(ii) Reconciliation of profit worked out under marginal and absorption costing
Rupees
Profit under absorption costing 145,000
Less: Difference in closing stock [8,000(W-1)×42(W-2)] (336,000)
Add: Difference in opening stock [10,000×40] 400,000
Profit under marginal costing 209,000

Page 6 of 7
 Cost and Management Accounting
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

A.9 Beijing Limited

(a) Quantity Schedule Process II
(in liters)
WIP opening 40,000
Received from preceding department 295,000
Started in process / material added 200,000
535,000

Transferred to finished goods 450,500

WIP closing 50,000
Normal loss (40,000+295000)×10% 33,500
Abnormal loss – Balancing figure 1,000
535,000

Equivalent Production Unit Process II (in liters)

PI Material Conversion
Units started and finished
410,500 410,500 410,500
(450,500–40,000)
Opening inventory - (40,000×60%) - 40,000 24,000
410,500 450,500 434,500

Normal loss - - -
Abnormal loss/(gain) (1000×60%) 1,000 - 600
Closing inventory (50,000×70%) 50,000 50,000 35,000
461,500 500,500 470,100

(b) Cost of finished goods, closing WIP and abnormal gain/loss

Process II
Total cost EPU Cost per unit
Rs. '000 (in liters) in Rs.
WIP- opening inventory 3,000 - -
Cost transferred from PI 21,000 461,500 45.50
Material 8,000 500,500 15.98
Conversion costs - Labour and
overheads (8,500+3,200) 11,700 470,100 24.89
Total cost per unit 86.37

Process II
(Rs. in '000)
Opening stock 3,000
Finished goods:
Opening Stock (40,000×15.98)+(24,000×24.89) 1,237
Started and finished (410,500×86.37) 35,455
Cost of finished goods (3,000 + 36,678) 39,692

Cost of closing stock [(50,000×45.5)+(50,000×15.98)+(35,000×24.89)] 3,945

Cost of abnormal loss [(1,000×45.5)+(600×24.89)] 60

(THE END)

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