Final Examination (Transitional Scheme)

The Institute of 6 December 2017

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Management Accounting
Q.1 Thar Express Limited (TEL) manufactures a single product Sigma. It commenced its
operations on 1 April 2017. TEL prepares its profit or loss account using absorption costing.
However, while reviewing the profit or loss account for the quarter ended
30 September 2017, the CEO has advised the CFO to also submit the analyses using the
marginal costing.
The following information had been extracted while preparing the quarterly profit or loss
account and its comparison with the budget:
(i) Standard sales price and costs per unit:

Rupees
Sales price 15,000
Direct material 12 kg @ Rs. 500 6,000
Direct labour hours 14 hours @ Rs. 200 2,800
Overheads (fixed as well as variable) Rs. 150 per labour hour 2,100
(ii) During the quarter 98,000 kg direct material was purchased. The price paid was lower
than the budgeted price resulting in savings of Rs. 2.45 million.
Direct material is added at the beginning of the process. Actual material losses were
8% of the input as compared to budgeted losses of 5%.
(iii) Effective 1 July 2017, wages were increased by 10% as against 8% increase projected
in the budget. The first unit of Sigma took 26 hours. Learning curve effect of 95% was
observed upto the first 4,096 units of which 2,048 units were produced upto
30 June 2017.
(iv) Budgeted fixed overheads amounted to Rs. 6.12 million. Applied fixed overheads
exceeded actual overheads by Rs. 0.84 million. Actual fixed and variable overheads
amounted to Rs. 13 million.
(v) Effective 1 September 2017, sales price was reduced by 5%. Sales quantity for the
month of September 2017 was 50% of the total sales of the quarter. The actual sales
volume for the quarter ended 30 September 2017 exceeded the budgeted sales resulting
in an additional profit of Rs. 2.46 million, at the standard rate.
(vi) Budgeted and actual closing inventories were as under:
Budget Actual
Direct material 30 days budgeted consumption 12,000 kg
Finished goods 12 days budgeted sales 540 units
Work-in-process - 400 units (75% as to conversion)

(vii) There were no opening inventories on 1 July 2017.

Required:
(a) Compute budgeted profit of Sigma for the quarter ended 30 September 2017, using
marginal costing. (04)
(b) Compute all possible variances/adjustments and incorporate them in the budgeted
profit as computed in (a) above to arrive at the actual profit under marginal costing. (18)
 Management Accounting Page 2 of 5

Q.2 Bravo Limited manufactures two products X and Y from different quantities of the same
types of raw materials. Selling price of products X and Y per kg are Rs. 15,000 and
Rs. 16,500 respectively. Information related to the budgeted consumption is given below:
Product X Product Y
Quantity required per kg of output ----------- kg -----------
Material A 0.40 0.60
Material B 0.50 0.30
Material C 0.20 0.30
Conversion cost per kg ---------- Rupees ----------
Labour cost per kg of input 3,200 4,500
Variable overheads per kg of output 2,000 2,500
Applied fixed overheads per kg of output 5,000 5,500
Materials A and B are specialized materials and have limited life of one month. Both the
materials are not available in the market. The suppliers have assured the availability after
two months. Material C is available and can be purchased locally for the same price and has
a life of 6 months. Following information regarding these materials are available:

Material A Material B Material C

Available material kg 18,000 12,000 10,000
Actual purchase price per kg Rs. 3,000 5,000 4,800
Price per kg at which material can be
resold in open market Rs. 3,600 6,600 4,400
The factory has available capacity to process output of 40,000 kg in one month.

Required:
Determine the optimal production plan for the next month which maximises the profit of
the company. (12)

Q.3 Ravi Limited (RL) deals in manufacturing and marketing of various products. RL is
planning to launch a new product Alpha in January 2018. In this respect, following
information has been worked out:
(i) RL had incurred costs of Rs. 5.4 million on development of Alpha. Estimated shelf life
of Alpha is six years.
(ii) A plant with production capacity of 10,000 units would be acquired at a cost of
Rs. 30 million. It has a useful life of six years. RL charges depreciation using straight
line method over the useful life of the assets.
(iii) The plant would be installed on RL's own building which has a cost and market value
of Rs. 25 million and Rs. 40 million respectively. Presently, the building is rented out
to a third party at a monthly rent of Rs. 0.5 million.
(iv) To operate and maintain the plant, technical staff would be hired at a monthly salary
of Rs. 150,000.
(v) One unit of Alpha would require:

12 kg of raw material which would be purchased in 25 kg bags at Rs. 15,000 per
bag; and

variable conversion cost of Rs. 2,000.
(vi) Quality inspection would be carried out at the end of the production process.
Defective units are estimated at 5% of the units transferred to finished goods
warehouse and it is estimated that these could be disposed of at 10% above their
variable cost.
(vii) The new product would be sold through a distributor who would be entitled for
commission at 10% of the gross sales.
(viii) Average working capital requirement relating to Alpha would be Rs. 4 million which
would be arranged by way of a running finance facility at 12% per annum.
 Management Accounting Page 3 of 5

In order to ascertain the price of Alpha, the marketing department gathers the following
information pertaining to demand and price:

If price is fixed at Rs. 13,000 which is the current selling price per unit of a similar
product, the demand of Alpha would be 8,000 units.

It is estimated that each increase of Rs. 100 in the per unit selling price would reduce
the demand by 250 units.

At selling price of Rs. 16,200, demand would be zero.

Required:
Compute the optimum output and the corresponding selling price to maximise profit. (15)

Q.4 Bela Chemicals Limited (BCL) manufactures industrial chemicals AXE and ZEE. Both
chemicals are produced through a single process and sold to a refinery. To increase its
profitability, BCL is considering the following options:

Expansion of the existing facility by installing an additional plant

Installation of a refining plant
To evaluate the above options, following information has been gathered:
(i) Actual data for the month of November 2017:
Production Sales price per
Joint cost
and sales liter
Liters Rs. Rs. in '000
AXE 16,000 1,500 -
ZEE 8,000 1,200 -
Direct material - - 26,000
Variable conversion cost at
Rs. 250 per machine hour - - 4,500
Fixed costs - - 1,000
(ii) Details of proposed options:
Expansion Refining
plant plant
Capacity per month Machine hours 6,000 6,000
---- Rs. in '000 ----
Cost of the plant 8,000 10,000
Estimated annual fixed costs of operation and maintenance 480 600
Estimated residual value at the end of useful life of 10 years 800 1,000
The new plant is expected to have a better efficiency as compared to the existing plant
as under:

Production per hour would be higher by 6%.

Input losses would be 5% as compared to 10% in the existing plant.
Estimated selling price of refined products and cost of refining per liter is as under:
AXE ZEE
Required machine hours per liter of production 0.80 0.75
Rs. per liter
Sales price (after refining) 2,100 1,600
Refining cost 245 205
During the refining process, evaporation losses are estimated at 5% of input. Actual
loss is determined at the end of the process.
(iii) Presently the chemicals are sold in bulk, ex-factory. However, refined chemicals
would be delivered at the customer premises at a cost of Rs. 5 per liter.

Required:
Advise the most feasible option to the company. (15)
 Management Accounting Page 4 of 5

Q.5 Khyber (Private) Limited (KPL) is in the process of preparing its budget for the year ending
31 December 2018. Following information has been extracted from the projected financial
statements for the year ending 31 December 2017:

Summarised profit or loss account

Rs. in million
Sales 263
Cost of goods sold (193)
Gross profit 70
Selling expenses (20)
Administration expenses (24)
Operating profit 26
Interest and bank charges (6)
Profit before tax 20

Summarised statement of financial position

Rs. in Rs. in
Assets Equity and liabilities
million million
Property, plant and equipment 225 Share capital 200
Trade debtors 30 Retained earnings 65
Inventories - Raw material 10 10% Long-term loan 20
- Finished goods 27 Current maturity of long-term loan 20
Cash and bank 23 Trade creditors 6
Accrued and other liabilities 4
315 315

Other relevant information:

(i) Finished goods inventory on 1 January 2017 amounted to Rs. 20 million.
(ii) Ratio of variable cost of manufacturing is 40:35:25 for raw material, direct labour and
overheads, respectively. This is expected to remain the same in the next year as well.
(iii) Total manufacturing overheads, selling expenses and administration expenses include
fixed costs of 10%, 20% and 100% respectively.
(iv) Total depreciation amounted to Rs. 10 million. Its distribution between manufacturing,
selling and administration expenses was approximately in the ratio of 6:1:3 respectively.
Depreciation for the next year would remain the same.
(v) Selling and administration expenses include staff salaries of Rs. 5 million each.

Information and projections for the next year:

Due to severe market competition, so far, the sale is well below the target and it is expected
that capacity utilization would be restricted to 70% of the available capacity. However, the
management is confident that during the next year sales would pick up because of the
following:

Selling price would be reduced by 5%.

Credit sales period would be increased to 45 days.
The above measures are expected to increase the sales volume by 20%. Production would
increase in line with increase in sales.

Following are some of the other projections/information to be used in the preparation of the
budget:
(i) Raw material prices would increase by 8% and purchases would be paid within 30 days.
(ii) Impact of inflation on all other costs would be 5%. Salaries and wages would be paid in
the same month. Other payments would require 15 days for processing.
(iii) The closing raw material inventory would be approximately equal to 45 days of
consumption. KPL uses absorption costing and follows FIFO method for valuation of
inventories.
(iv) Principal amount of the long-term loan is being repaid in half yearly instalments of
Rs. 10 million each; along with the amount of interest. The instalments become due on
1 April and 1 October each year.
 Management Accounting Page 5 of 5

Required:
Prepare cash budget for the year ending 31 December 2018. Assume that except stated
otherwise, all transactions are evenly distributed over the year (360 days). (20)

Q.6 Tulip Limited (TL) manufactures and sells a single product. It had increased its production
capacity with effect from 1 December 2016. However, due to expansion, TL is experiencing
liquidity issues because of increase of approximately Rs. 500 million in the working capital
requirement. TL’s bank has offered the required financing @ 13% per annum. However, TL
is considering the following measures also:

Adopt a conservative credit policy which would reduce the debtors’ turnover by 20 days
and bad debts from 2% to 1% of credit sales. However, this would also result in decrease
in credit sales by 8%.

Reduce the stock level of raw material inventory by adopting the economic order
quantity model. This would require maintenance of buffer stock of 1,500 tons.

Balance amount, if any, would be financed through the existing running finance facility
which carries interest at the rate of 12% per annum.

Following are the summarized latest financial statements of TL:

Statement of financial position
Rs. in Rs. in
Assets Equity and liabilities
million million
Non-current assets 5,380 Shareholders’ equity 5,000
Debtors 1,000 12% running finance 1,280
Inventories (40% raw material) 700 Creditors 800
7,080 7,080
Statement of profit or loss
Rs. in million
Sales (40% cash sales) 7,500
Cost of sales (including fixed cost of Rs. 718 million) (5,218)
Gross profit 2,282
Operating expenses (50% variable) (1,250)
Financial charges (370)
Profit before tax 662

Following further information is available:

(i) Finished goods inventory is maintained in TL’s own warehouse. The finished goods
inventory is directly proportional to the sales volume.
(ii) Raw material is stored in a public warehouse. The raw material inventory appearing
in the financial statements represent one-months’ production requirement. Cost of raw
material is Rs. 40,000 per ton whereas warehousing costs is Rs. 2,500 per ton.
(iii) Ordering cost is Rs. 300,000 per order and presently 6 orders are issued each year.
(iv) There is no opening and closing work in process.

Required:
Evaluate the above situation and recommend the best course of action to TL. (Assuming 360
days in a year) (16)
(THE END)