Cost and Management Accounting Page 1 of 6

Certificate in Accounting and Finance Stage Examination

ARTT Business School 15 February 2024

Fellow RAET of the ICAP 3 hours – 100 marks
Prepared by Ahmed Raza Mir, FCA Additional reading time – 15 minutes

Cost and Management Accounting

Instructions to examinees:
(i) Answer all Eight questions.
(ii) Answer in black pen only.

Q1. Yahzu Limited produces and sells three products. Details are as under:

J K L
Selling Price per unit (Rs) 240 130 215
Direct Material usage (Rs) 90 30 92
Direct Labour Cost (Rs) 66 42 54
Labour efficiency 80% 70% 78%
Demand (Units) 5,600 2,400 5,200

1. Variable overheads per hour would be Rs 2 per worked hour and Labour cost is Rs 6 per hour
paid
2. Fixed Cost for the year shall be Rs 430,000.

Other information:

1. Labour hours are short in supply and exat amount is uncertain.

2. All the products are sold in different markets and have no relationship in between.

Required
Calculate the minimum number of labour hours that should be arranged to avoid any loss. (09)

Q2. Krunal Hotels is a chain of hotels. The Chief Financial Officer needs your help to find out price
per room day to be charged in the upcoming year. Details of the costs are as under:

Cost Head --Rupees-- Frequency

Fixed Operating Cost 41,630,400 Per Anum
Food and beverages per person 980 per day
Use of sundry assets 700 per day

There are 60 rooms of standard size and facilities in the hotel. Average occupancy remained:

Jan – April May to Aug Sept to Dec

Occupancy 80% 75% 90%

Room is on average occupied by 4 people. The company charges a markup of 25% on cost
to price a room per day. It should be assumed that every month is of 30 days and year 360
days.

Required:
Calculate price per room day the company should charge. (06)
 Cost and Management Accounting Page 2 of 6
Q3. Shiraz limited is launching a new battery which will be a breakthrough in the mobile phone industry
as the battery will need a single charge for the entire month for an average use of five hours per day.
The product will be produced by highly skilled labor which are short in supply. Each unit will be
completely produced by a single individual. The company has arranged 280 skilled workers each
will be working a 50-hour week. 120 workers will leave after 30 weeks, and the rest will work for the
entire year.

1. Material will cost Rs. 2,000 per unit for the first 15 units thereafter the wastage will reduce due
to labor experience and material usage will be reduced by 7.5%
2. Hourly rate for labour would be Rs 500 and variable overheads would be Rs 250
3. A special equipment will be purchased at a cost of 1.6 million and will be returned to the
supplier at residual value of rs 700,000 at the end of one year
4. Working weeks will be 48 during the year
5. First unit will be produced in 25 hours for every worker thereafter a learning curve of 80%
would be applicable till the completion of the year.
6. The company would charge a selling price that covers all the production cost and a markup of
25% on production cost.

Required
Calculate the profit that will be earned by the company during the first year of operations. (10)

Q4. ABC Ltd. specializes in the production of four distinct products—A, B, C, and D—within a unified
manufacturing facility. Detailed below is a snapshot of operational data for a specified reporting
period. Product Output and Efficiency Metrics:

Good Output Average Machine

Product (Units) Yield (%) Hours/Input Unit
A 720 80 4
B 600 80 3
C 480 96 2
D 504 96 1

Operational Process Notes:

Post-machining, defective units are segregated and deposited in a separate container. Non-defective
units proceed for further quality assurance checks. Quality control is conducted on a per-batch basis,
with charges accruing accordingly.

Production and Overhead Costs:

Expense Category Amount (Rupees)

Machine Operation & Maintenance 66,375
Set Up Costs 19,200
Stores Receiving 21,400
Inspection 24,000
Finished Goods - Packing/Dispatch 14,400

Additional Operational Information

1. Material requisitions are raised for every 25 units of input material.
2. Machinery requires setup and tuning after each production cycle.
3. Production is structured in batches of 24 good units for all products.
4. Packaging:
a. Products A and B are boxed in containers holding 24 units each.
b. Products C and D utilize smaller boxes, each with a 12-unit capacity, priced at 50% of
the larger box.
c. Packing is product-specific with no intermingling.
 Cost and Management Accounting Page 3 of 6
Required
Chose appropriate activity cost drivers for each overhead cost and calculate the overhead cost per
unit of good output for each of the products under ABC system (10)

Q5. Dazzling Stationers, renowned for manufacturing replacement nibs for the iPencil 2, operates
within a well-defined supply chain and market structure, as evidenced by the previous year's
operational data. The following summary encapsulates the company's performance and strategic
positioning last year:

1. The total market demand for iPencils was 8 million units, with Dazzling Stationers securing a
market share of 27%.

2. The company enhances product value by including two additional nibs with each iPencil, aside
from the one pre-attached.
3. The procurement cost for each nib is Rs 60.
4. Transit losses have been calculated at 6% of total purchases.
5. Sales of iPencils are distributed evenly across the year, accompanied by a six-month warranty
for the nibs, covering two replacement nibs for issues related to pressure sensitivity. A 5%
warranty claim rate is generally observed.
6. The company follows a policy of placing orders once every quarter.
7. The annual holding costs are detailed as follows:
a. a warehouse cost of Rs 25 per month for every set of 10 nibs and
b. an annual finance cost of 16%.

8. Ordering costs encompass:

a. a transportation fee of Rs 7,600 per order and
b. insurance and transit costs of Rs 3,000 per order.

Anticipations for the Following Year:

1. An estimated 10% growth in market size is anticipated, with the company's market share
projected to increase to 30%.
2. Non-interest holding costs are expected to rise by 10% due to inflation, and ordering costs
will see a 5% increase per order.

Recommendations from a Consultant:

A thorough review by a hired consultant has led to several recommendations aimed at optimizing
operations:

1. Implementation of a quality control system at the point of purchase, promising to halve

warranty claims at an annual cost of Rs 4,000,000.
2. Renting of a new vehicle for Rs 1,000,000 annually to reduce transit losses to 4%.
3. Adoption of the Economic Order Quantity (EOQ) model for nib orders.

Required
1. Calculate EOQ for next year (07)
2. Decide whether the company should follow the new mechanism for next year or should
continue with the old system even for next year (06)

Q6. Spares Ltd produces spare part X for cars. The company has an annual production capacity of 180,000
units of X. However, the actual production is carried out according to the volume of orders received.
For the next year, the company has received an order for the value of Rs. 64,00,000. To meet the
requirements of the order, the company has to work at 70% capacity for the first four months, 80%
capacity for the next 6 months and 90% capacity for the remaining period of the year. Assume no
opening or closing stock.
 Cost and Management Accounting Page 4 of 6
The following information is available:
Material Rs. 20 per unit
Rs. 12 per unit, subject to a minimum of Rs. 1,30,000
Labour p.m.
Variable Overheads Rs. 5 per unit
Fixed Overheads Rs. 16000 per month
Semi-variable overheads Rs. 75,000 per annum incurred up to 70% of average
annual capacity utilization. Thereafter, it increases at Rs.
5000 p.a. for every 10% average annual capacity increase.

Required
Calculate cost gap if the target profit is 27% of total production cost. (07)

Q7. Seljan Limited specializes in the production and sale of Hexa. For the financial year concluded on
31 December 2023, the company reported the following operational and financial data:

1. Total sales amounted to 2,000 units, with a unit price of Rs 375.

2. Work-in-process (WIP) inventory details are as follows:

Work in Process Units Stage of Completion for

Material Conversion Cost
Opening 200 100% 75%
Closing 350 100% 60%

1. The finished goods inventory observed an increase of 100 units, closing the year at 400 units.
2. The company accounted for an allowable loss (normal) of 100 units; however, the actual loss
exceeded this by 50 units. These losses were recognized at the end of the manufacturing
process, with no residual value attributed to the lost units.
3. Manufacturing and non-manufacturing costs incurred during the year:

Account Head Rupees

Material consumed 303,600
Variable Conversion Cost 143,208
Fixed Production Cost 47,736
Variable Selling Cost 30,000

4. The company uses FIFO method for valuation of all types of Inventories.
5. Cost per unit calculated on FIFO basis during the current year is 10% higher for material and
8% higher for conversion cost.

Required
1. Calculate equivalent production units for Materials and Conversion Costs
2. Prepare a profit and loss account using
a. Marginal Costing
b. Absorption Costing
3. Reconcile the profits calculated under Absorption and Marginal Costing above (16)
 Cost and Management Accounting Page 5 of 6
Q8. Fine Chemicals Ltd. produces A, B, C from a common mixing process. The products are made in
batches and from an input of 1,100 kg. of material the standard output is:

Products A B C By Product
Qty (Kgs) 400 300 200 100
Waste is normal and has no value.

The common costs per batch for the mixing are:

Direct Material (1,100 Kgs) Rs 450

Direct Labour (100 Hours) Rs 300
Variable Overheads Rs 200

1. Fixed overheads in the mixing department are budgeted at Rs. 26,000 per month. The normal
production is 100 batches per month.
2. All production costs are allocated on the basis of output. The byproduct is sold immediately
after it is produced.

Further processing decision

1. The products are all capable of further processing and the company has idle space available.
2. Fixed and variable cost in further processing and details of selling prices are as under:

a) Additional capital equipment would be required at a cost of Rs. 120,000 to be

depreciated over a 10-year period on a straight lines basis with no residual value. Rent,
rates and other fixed costs of further processing are budgeted to be Rs. 1,500 per month.

b) Variable cost per kg at split-off point and after further processing:

Particulars A B C
Direct Material (Rs) 1.00 0.5 0.8
Direct Labour (Rs) 1.5 3.00 2.25
VOH (Rs) 1.00 2.00 1.50

Direct wages are Rs. 3 per hour and variable overhead is calculated at Rs. 2 per hour.

c) The sales value of products before and after further processing are:

Particulars At Split off After further

point (Rs/Kg) Processing (Rs/Kg)
A 1.25 5.35
B 1.50 7.15
C 2.00 7.55
By Product 0.50 Not Applicable

3. Only 25,000 direct labour hours will be available for further processing during the coming year.

Required:
1. Assume that 20% of the output of three main products is in stock and all the units of byproduct
it's sold out calculate the value of closing stock. (06)
2. Recommend whether the company should indulge in further processing and (if yes) which
products should be processed further. (09)
 Cost and Management Accounting Page 6 of 6
Q9. Faiscal Limited is concerned about the productivity of its labour force and wishes to evaluate its
impact on the productivity of the company. Following data pertains to the year just completed:

1. The company produces a single product, LMN using semi-skilled labour.

2. Labour hours required per unit is 4.75 and no idle is generally expected.
3. Following is the data pertaining to budgeted and actual labour hours:

Actual Budgeted
Labour hours paid 10,395 10,450
Labour Hours worked 9,801 10,450

4. Standard and actual cost per unit for labour and overhead:

Budgeted Actual
Labour 95.00 110.25
Overheads 85.50 99.00

5. Overheads rate include fixed overheads of Rs 52,250 (Budgeted) and Rs 58,806(Actual).

6. Actual production was 10% lower than budgeted production.

Required
Calculate all possible variances pertaining to:
1. Labour
2. Variable production overheads
3. Fixed production overheads (including efficiency and capacity variances)
(14)
Solution 1

Products J K L
Selling Price 240.00 130.00 215.00
Material (90.00) (30.00) (92.00)
Labour (66.00) (42.00) (54.00)
VOH (W1) (17.60) (9.80) (14.04)
CM per unit 66.40 48.20 54.96
CM per Hr paid 6.04 6.89 6.11
Ranking 3.00 1.00 2.00

Since hours are limited so we should produce products according to the

ranking above

Units CM Remaining FC Hrs Used

430,000
K 2,400 115,680 314,320 16,800 (2400x7)
L 5,200 285,792 28,528 46,800 (5200x9)
J 429.64 28,528 - 4,726 (429.64x11)
68,326

Conclusion
Minimum hours for breakeven is 68,326

Labour hours paid (Working 1)

Labour Cost 66.00 42.00 54.00
Hourly rate 6.00 6.00 6.00
Hours paid 11.00 7.00 9.00
Efficiency 80% 70% 78%
Effective hours 8.80 4.90 7.02

VOH only incurs in effective hours so VOH would be

VOH 17.60 9.80 14.04

Solution 2

Days hotel remained occupied

Days Occupy % Rooms Occ Rooms Room Days

Jan-Apr 120 80% 60 48.00 5,760
May-Aug 120 75% 60 45.00 5,400
Sep-Dec 120 90% 60 54.00 6,480
17,640
Occupied Rooms = Rooms x Occupancy %

Total persons took benefit of the hotel 70,560 (17,640x4)

Total Cost
Fixed Operating Cost 41,630,400
Food and beverages 69,148,800 (980x70,560)
Use of Sundry Assets 12,348,000 (17,640x700)
Total Cost 123,127,200
Room days 17,640
Cost per room per day 6,980.00
Markup (25%) 1,745.00
Selling Price 8,725.00
Solution 3
There are 48 working weeks in a year. Some workers will stay for 48 weeks and some
will leave at 30 weeks. So there are two types of labour:

30-Week 48-week
Workers 120 160
Hours per week 50 50
Weeks 30 48
Total Hrs/ worker 1,500 2,400

Now find maximum production per person considering their hours

Max production per worker in 1,500 hours

Y = a x X^(Log80% / Log2)
X = Total Units
Y = Average time
XY = Total time for X units
If we multiply the above equation's both sides by X we will get:

XY = a x X^(Log80% / Log2) x X
XY here are 1,500 Hours, a = 25
1,500 = 25xX^(Log80%/log2) X
Solving for X we will get

X 419.14 Units

Max production per worker in 2,400 hours

XY = a x X^(Log80% / Log2) x X
XY here are 2,400 Hours, a = 25
2,400= 25xX^(Log80%/log2) X
Solving for X we will get

X 838.29 Units

Max production (Total) 1,257.43 Units

Total Cost
Material (2,000x1,257.43) 2,514,867
Labour (1,500+2400)x400 1,950,000
VOH (1,500+2,400)x250 975,000
Total Production Cost 5,439,867
Markeup (25%) 1,359,967
Total Sales 6,799,834
Units in total 1,257.43
Price per unit (Average) 5,407.71

Total Profit 1,359,967

Solution 4

A B C D Total
Output Units 720 600 480 504
Yield Ratio 80% 80% 96% 96%
Input 900 750 500 525

Machine Hrs / Unit 4 3 2 1

Total Machine Hrs 3,600 2,250 1,000 525 7,375.00
Requisitions 36.00 30.00 20.00 21.00 107.00 (Input / 25)
Batches 30.00 25.00 20.00 21.00 96.00 (Output/24)
Boxes 30 25 40 42 (output / 12 or 24)
Size of Boxes 1 1 2 2
Equivalent Boxes 30 25 20 21 96.00

Cost Driver Value Cost/Driver A B C D

Mach Operating 66,375 Mach Hrs 7,375 9.00 32,400 20,250 9,000 4,725
Setup Cost 19,200 Batches 96.00 200.00 6,000 5,000 4,000 4,200
Stores 21,400 Requisitions 107 200.00 7,200 6,000 4,000 4,200
Inspection 24,000 Batches 96 250.00 7,500 6,250 5,000 5,250
FG Packing 14,400 Boxes 96 150.00 4,500 3,750 3,000 3,150
Total Allocated Overheads 57,600 41,250 25,000 21,525
Per unit Overheads 80.00 68.75 52.08 42.71
Solution 5
Last year Next yr
Demand for ipencils
Market Size 8,000,000 8,800,000 (10% increase)
Our Share 27% 30%
Demand for ipencils for Co. 2,160,000 2,640,000
Sales of nibs 6,480,000 7,920,000 (ipencils x 3)

Working for next yer

Without Advice
With Advice
Demand for nibs for sales 7,920,000 7,920,000
Warranty replacement 5.00% 2.50%
Grossed up demand 8,336,842 8,123,077
Transit loses 6.00% 4.00%
Grossed up demand 8,868,981 8,461,538

Holding cost per unit / Yr

Warehousing cost 33.00 33.00 (25/10 x 12 x 1.1)
Interest cost 9.60 9.60
Holding Cost per unit / Yr 42.60 42.60

Ordering Cost / Order

Transportation Cost 7,980.00 7,980.00
Insurance in transit 3,150.00 3,150.00
Ordering cost / Order 11,130.00 11,130.00

Order Size (Demand/4) 2,217,245 66,494 EOQ (working below)

Annual Holding Cost 47,227,324 1,416,322 (Q/2xHC)

Annual Ordering Cost 44,520 1,416,322 (Demand / Q x OC)
47,271,844 2,832,644
QC cost additional 4,000,000
Vehicle rent 1,000,000
Total Annual Cost 47,271,844 7,832,644
Savings when advice is accepted 39,439,199

Conclusion
The company should accept the advice of consultant as it is resulting in a
savings of approximately Rs 39.4 million

EOQ
Demand 8,461,538
HC / Unit / Yr 42.60
Ordering cost / Order 11,130
EOQ 66,494
Solution 6

Capacity per year 180,000

Monthly Capacity 15,000 (1.8 million /12)

Demand (production)

Months Capacity % Availed Demand Annual Demand

4 15,000 70% 10,500 42,000
6 15,000 80% 12,000 72,000
2 15,000 90% 13,500 27,000
Total Demand for the year 141,000
Total Capacity 180,000
% capacity availed 78.33% 1,410 / 1,800

Actual Cost

Material Cost 2,820,000

Labour Cost (Working 1) 1,708,000
Variable Overheads 705,000 (1,410,000x5)
Fixed Costs 192,000
Semi variable Cost 80,000 (75k+10k)
Total Cost 5,505,000

Labour Cost (Working 1)

4 Months 6 Months 2 Months
Monthly Units 10,500 12,000 13,500
Labour cost as per units 126,000 144,000 162,000
Fixed 130,000 130,000 130,000
Applicable (Higher) 130,000 144,000 162,000
Total Cost 520,000 864,000 324,000 1,708,000
(130k x 4) (144k x 6) (16k2 x 2)

Sales 6,400,000
Target Profit 1,360,630 (6.4million / 127% x 27%)
Target Cost 5,039,370
Expected Cost (5,505,000)
Cost gap (465,630)
Solution 7
Units
Opening FG 300
Closing FG (400)
Sales (2,000)
Production 2,100

Qty Schedule
Opening WIP 200 (Mat 100%, CC 75%)
New Started 2,400
2,600

Completed 2,100
Closing WIP 350 (Mat 100%, CC 60%)
Normal Loss 100
Ab Loss 50
2,600

Cost per unit (Absorption Costing)

Cost Comp op Comp new Closing Ab Loss EPU C/U LY C/U
Matr 303,600 - 1,900 350 50 2,300 132.00 120.00 (132/1.1)
VCC 190,944 50 1,900 210 50 2,210 86.40 80.00 (86.40/1.08)
494,544 218.40 200.00

Completed
From Op
Material Cost 24,000 Last year
Conv Cost 12,000 Last year
Conv Cost 4,320 Current Year

New 414,960
455,280

Closing
Material Cost 46,200
Conv Cost 18,144
64,344

Ab Loss 10,920
Total Cost 530,544

Cost per unit (Marginal Costing)

Cost Comp op Comp new Closing Ab Loss EPU C/U LY C/U
Matr 303,600 - 1,900 350 50 2,300 132.00 120.00 (132/1.1)
VCC 143,208 50 1,900 210 50 2,210 64.80 60.00 (64.8/1.08)
446,808 196.80 180.00

Completed
From Op
Material Cost 24,000 Last year
Conv Cost 9,000 Last year
Conv Cost 3,240 Current Year

New 373,920
410,160
Closing
Material Cost 46,200
Conv Cost 13,608
59,808

Ab Loss 9,840

Total Cost 479,808

Profit and Loss as per Absorption Costing

Sales 600,000

COGS
Opening Finished Goods 60,000 (300 units x200)
Cost of Goods Manuf 455,280 Completed units cost
Closing Finished Goods (87,360) (427,920) (400 units x 218.4)
172,080
Abnormal Loss (10,920)
Variable Selling Cost (30,000)
Net Profit 131,160

Profit and Loss as per Marginal Costing

Sales 600,000

COGS

Opening Finished Goods 54,000 (300 units x 180)

Cost of Goods Manuf 410,160
Closing Finished Goods (78,720) (385,440)
Gross CM 214,560
Variable Selling Cost (30,000)
Net CM 184,560
Ab Loss (9,840)
F. Cost (47,736)
Net Profit 126,984

Reconciliation of Absorption costing profit and Marginal costing profit

Profit as per Absorption Costing 131,160
Difference in Opening WIP 3,000
Difference in Closing WIP (4,536)
Difference in opening FG 6,000
Difference in Closing FG (8,640)
Profit as per Marginal Costing 126,984
Solution 8

Variable Common Costs 95,000.00 (450+300+200)

NRV of by product (5,000.00)
Net Variable Costs 90,000.00

A B C
Common Cost (Allocation) 40,000 30,000 20,000 Units Based
Fixed Cost 12,000 9,000 6,000
52,000 39,000 26,000
Total Units
Units in 1 batch 400 300 200
Total batches per year 100 100 100
Total units 40,000 30,000 20,000

20% Stock
Units 8,000 6,000 4,000
Cost 10,400 7,800 5,200
NRV 10,000 9,000 8,000

Lower of cost / nrv 10,000 7,800 5,200 23,000

Further processing decision

A B C
SP at SOP 1.25 1.50 2.00
SP after SOP 5.35 7.15 7.55
Addition SP 4.10 5.65 5.55
FPC (3.50) (5.50) (4.55)
Additional CM 0.60 0.15 1.00
Hours per unit 0.50 1.00 0.75
CM per hour 1.20 0.15 1.33
Ranking 2.00 3.00 1.00

Total CM in FP

Products Units Hrs Cons Hrs Left Total CM

C 20,000 15,000 10,000 20,000
A 20,000 10,000 - 12,000
32,000
Fixed Cost - Depreciation (12,000)
Fixed Cost - Others (5,000)
Additional Income 15,000
Solution 9
Budgeted Hours 10,450
Std Hours per unit 4.75
Budgeted Production 2,200
Actual Production 1,980

Budgeted per unit rate for Labour 95.00

Standard hours per unit 4.75
Hourly rate (Standard) 20.00

Actual Hours paid 10,395

Actual per unit hours 5.25
Actual per unit rate 110.25
Actual labour cost / Hour 21.00

Labour Rate Variance

Std rate per hour 20.00
Actual Rate per hour 21.00
Actual Hrs paid 10,395
Variance (10,395) Adverse

Labour Efficiency Variance

Std Hrs for actual Output 9,405 1,980x4.75
Actual Hrs worked 9,801
Std hourly rate 20.00
Variance (7,920) Adverse

Idle time variance

Idle hours 594.00 10,395-9,801
Std hourly rate 20.00
Variance 11,880 Adverse

Variable Overheads Rate Variance

Actual hours worked and paid

Units Per unit hours
Actual hours paid 10,395 1,980 5.25
Actual hours worked 9,801 1,980 4.95
We know that overheads are incurred only in active (worked) hours

Budgeted Actual
Fixed Overheads 52,250 58,806
Units 2,200 1,980
OAR per unit 23.75 29.70
Overheads per unit 85.50 99.00
VOH per unit 61.75 69.30
Hours per unit 4.75 4.95
VOH per hour 13.00 14.00
VOH Expenditure Variance
Std rate per hour 13.00
Actual Rate per hour 14.00
Actual Hrs worked 9,801
Variance (9,801) Adverse

VOH Efficiency Variance

Std Hrs for actual Output 9,405 1,980x4.75
Actual Hrs worked 9,801
Std hourly rate 13.00
Variance (5,148)

Fixed Overhead

Total Variance
Actual Output 1,980
Fixed OAR per unit 23.75
Applied FOH 47,025
Actual FOH (58,806)
Variance (11,781) Adverse

FOH Expenditure Variance

Budgeted FOH 52,250
Actual FOH (58,806)
Variance (6,556) Adverse

FOH Volume Variance

Budgeted Units 2,200
Actual Units 1,980
Fixed OAR 23.75
Variance (5,225) Adverse

FOH Capacity and Efficiency Variance

Budgeted Actual
Input hours 10,450 9,801
Output Hrs 10,450 9,405 (1,980x4.75)

Capacity Variance
Budgeted Input Hrs 10,450
Actual Input Hours 9,801
FOH per hour (OAR) 5.00 (23.75/4.75)
Variance (3,245) Adverse (less capacity utilized)

Efficiency Variance
Actual Input Hours 9,801
Actual Output Hrs 9,405
FOH per hour (OAR) 5
Variance (1,980)