MANAGEMENT

ACCOUNITNG
Suggested Answers  
Final Examination – Winter 2015 

A.1 Current Position Proposed

Sales in units A 1,200,000 1,140,000
Replacement/returns B=A5%, 2% 60,000 22,800
C 1,260,000 1,162,800
Selling price per unit D 2,000 2,200
Leather used E=C2 2,520,000 2,325,600
Loss in storage (current E×4÷96, propose E×3÷97) F 105,000 71,926
Leather required G 2,625,000 2,397,526
Cost of leather per ft. H 300 360

Profit & Loss Rs. in 000 Rs. in 000

Sales I=AD 2,400,000 2,508,000
Recovery from replacement/returns B600 36,000 13,680
Recovery for storage loss F180 18,900 12,947
Total revenue 2,454,900 2,534,627

Cost of sales
Leather used J=GH 787,500 863,109
Other materials used *1[39,375÷1,260,0001,162,800] J5% 39,375 *1
36,338
Labour cost (C×160×1.25×0.9) C160 201,600 209,304
Distributors' commission I5%, 8% 120,000 200,640
Stockholding costs W-1 14,400 -
1,162,875 1,309,391
Margin 1,292,025 1,225,236

Cost of funds [(2,400,000–120,000)×90/360×10%] (57,000)

[(2,508,000–200,640)×60/360×10%] (38,456)

Production overheads:
Variable (60% of 24 million), *2[14,400÷1,260,000×1,162,800×90%] (14,400) *2
(11,960)
Fixed (40% of 24 million) (9,600) (9,600)
Training cost - (5,000)
Net profit 1,211,025 1,160,220

Decrease in profit (1,211,025 – 1,160,220) 50,805

W-1 : Stockholding costs

Units Sold &
Quarter Opening stock Units produced Closing stock
replaced
a b c a+b-c
*2 *2
1 420,000 315,000 195,000 540,000
*2 *2 *1
2 540,000 315,000 195,000 660,000
*1 *2
3 660,000 315,000 675,000 300,000
*2 *2
4 300,000 315,000 195,000 420,000
1,260,000 1,260,000
*1
- given
*2
- evenly distributed

Average quarterly stock [(540+660+300+420)÷4] 480,000

Stockholding costs (480,000  30) Rs. 14,400,000

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 MANAGEMENT ACCOUNITNG
Suggested Answers  
Final Examination – Winter 2015 

A.2 Existing working capital Rs. 180 million

Additional working capital required (180×40%) Rs. 72 million
Working capital cycle in days (60+50-20) 90 days
Possible sale under existing working capital (180×360÷90) Rs. 720 million
Sale after increase in working capital (720×140%) Rs. 1,008 million

Evaluation of the alternative sources

Cash sale Creditor Factoring Borrowing
------------------------- Rs in million -------------------------
Working capital available annually (A) 8.00 21.54 126.00 10.00
(48×60÷360) (1008÷1.3× 10÷360) (1008×60÷360×75%)

Cost of the change in policy

Discount on sales (50×4%) 2.00 - - -
Interest (126×12%) ; (10×15%) - - 15.12 1.50
Loss of discount (21.50×1%)× 360÷10 - 7.75 - -
Factoring commission (1,008×0.04) - - 40.32
Savings of collection costs
(2%×50); (2%×1,008) (1.00) - (20.16) -
Savings in bad debts
(1%×50); (1%×1,008) (0.50) - (10.08) -
Net cost (B) 0.50 7.75 25.20 1.50

Cost per annum (B÷A×100) 6.25% 36% 20% 15%

Or (1%/10×360)
Ranking 1 4 3 2
Additional working capital of Rs. 72
million would be acquired from 8.00 - (72-8-10)=54.00 10.00

Accordingly the P&L account would be as follows:

Proposed Existing
--------- Rs. in million ---------
Net sales after discount of Rs. 2 million on cash sales 1,008.00 720.00
Production cost [(1,008 + 2) ÷ 1.3] 776.92 553.85
Administration and selling costs [35–(3%×720)] 13.40 35.00
Interest on new borrowings 1.50 -
Factoring – commission [(1,008–50)×4%] 38.32 -
Interest on advance from factor [(72-8-10)×12%] 6.48 -
836.62 588.85
Profit 171.38 131.15
Increase in profit (171.38 – 131.15) 40.23

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 MANAGEMENT ACCOUNITNG
Suggested Answers  
Final Examination – Winter 2015 

A.3 The constraints are:

0.35x + 0.60y ≤ 210 eq. 1
0.70x + 0.45y ≤ 252 eq. 2
x + y ≤ 600 (630÷1.05)
In eq. (1), if x = 0, y = 350 and if y = 0 , x = 600
In eq. (2), if x = 0, y = 560 and if y = 0 , x = 360
Solving eq. (1) & (2); x = 216, y = 224
PROFIT MARGINS PER TON
From Existing Material If material B is purchased
X Y X Y
------------------------------ Rupees ------------------------------
Selling price 155,000 150,000 155,000 150,000
Material A 14,000 24,000 14,000 24,000
Material B 63,000 40,500 105,000 67,500
Labour 40,000 40,000 40,000 40,000
Processing costs 20,000 20,000 20,000 20,000
Total costs 137,000 124,500 179,000 151,500
Profit margin 18,000 25,500 (24,000) (1,500)

Objective function for existing material 18,000x + 25,500y

Putting values in the objective functions:

Profit from sale Sale of
X Y of X and Y material A & B Total profit (Rs.)
(Rs.) (Rs.) [W-1]
0 350 8,925,000 8,505,000 17,430,000
360 0 6,480,000 3,360,000 9,840,000
216 224 9,600,000 - 9,600,000

Conclusion: Producing 350 units of Y and selling the surplus material B is the most feasible
alternative.

W-1: Sales value of remaining raw material after production

Production Consumption (Tons) Material (Tons) Sale value (Rs.)
X Y A B A B [email protected],000 [email protected],000
- 350.00 210.00 157.50 - 94.50 - 8,505,000
360.00 - 126.00 252.00 84.00 - 3,360,000 -
216.00 224.00 210.00 252.00 - - - -
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 MANAGEMENT ACCOUNITNG
Suggested Answers  
Final Examination – Winter 2015 

Statement of expected
A.4 (a)
quality costs
Present Proposed
Rupees
Prevention costs 10,000,000
Appraisal costs (600,000  12) 7,200,000
External failure costs – (W-1) 8,016,000 3,936,000
Internal failure costs – (W-2) 26,128,000 16,330,000
Total 34,144,000 37,466,000
Quality costs (37,466,000 – 34,144,000) 3,322,000

W-1: Cost of defective units delivered to customers (External failure)

Present : 167 (4÷96 ×4,000) units @ Rs. 50,000 per unit 8,350,000
Cost of bringing back defectives: 167×1,000 167,000
Cost of delivery (replaced units) 167,000
Salvage value : 167 @ Rs. 4,000 per unit (668,000)
8,016,000
Proposed : 82 (2÷98 × 4,000) units @ Rs. 50,000 per unit 4,100,000
Cost of bringing back defectives: 82×1000 82,000
Cost of delivery (replaced units) 82,000
Salvage value : 82 @ Rs. 4,000 per unit (328,000)
3,936,000

W-2: Defective units prior to delivery (Internal failure)

Present : 568 (12÷88 ×4,167) units @ Rs. 50,000 per unit 28,400,000
Salvage value : 568 @ Rs. 4,000 per unit (2,272,000)
26,128,000
Proposed : 355(8÷92 × 4,082) units @ Rs. 50,000 per unit 17,750,000
Salvage value : 355 @ Rs. 4,000 per unit (1,420,000)
16,330,000
Cost per unit (Rs)
Direct material 25,000
Direct labour 15,000
Variable overhead 10,000
50,000

(b) On purely financial grounds the company would incur an additional cost of
Rs. 3,322,000. However, the following factors should also be considered while making
a final decision:
 Greater customer satisfaction
 Impact on the reputation of the company
 Further savings if the sale is increased

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 MANAGEMENT ACCOUNITNG
Suggested Answers  
Final Examination – Winter 2015 

A.5 (a) Risk:

A condition in which there exists a quantifiable dispersion in the possible outcomes
from any activity.

Uncertainty:
The inability to predict the outcome from an activity due to a lack of information
about the required input/output relationships or about the environment within which
the activity takes place.

TOOLS FOR MANAGING RISKS

(i) Insurance:
Insurance is a means of providing a degree of protection against losses.

(ii) Diversification:
The reasons for diversifications are:
 To minimise the risks – If its main line is subject to trade fluctuations or
going out of fashion, a firm may diversify into an expanding area to
protect itself.
 Diversification helps to minimize risk by spreading the risk over many
products, locations, etc.

(iii) Internal control:

Internal control may be defined as the process designed, put in place and
maintained to provide assurance of a reasonable level regarding the
achievement of the objectives of an entity. These objectives relate to the
reliability of the financial reports, the efficiency and effectiveness of operations
and adherence to relevant and applicable laws and regulations.

(iv) Research and data collection:

Research and data collection provides information which can be used to reduce
risks and uncertainty by taking remedial measures.

(b) Advantages of zero-based budgeting

(i) It is possible to identify and remove inefficient or obsolete operations.
(ii) It adds a psychological impetus to employees to avoid wasteful expenditure.
(iii) It obliges an organization to look very closely into its cost behavior patterns in
order to decide the effect of alternative course of action.
(iv) Zero-based budgeting results in a more efficient allocation of resources to
activities and departments of the organization.

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 MANAGEMENT ACCOUNITNG
Suggested Answers  
Final Examination – Winter 2015 

A.6 WORK-IN-PROCESS ACCOUNTS (Rupees)

Chemical Chemical
Heating Refining Heating Refining
Treatment Treatment
Opening WIP 1,000,000 3,000,000 5,000,000 Recovery from
Material – A (i) 15,000,000 0 0 normal loss (vii) 80,000 331,200 204,000
Material – B (ii) 12,500,000 0 0 PL account
(Abnormal loss)
Material – E (iii) 0 46,000,000 0 (W-3) 947,871 0 0
Material from previous Transferred out
department (W-3) (iv) 0 29,068,035 80,503,628 (W-3) 29,068,035 80,503,628 84,439,344
Direct wages (v) 2,000,000 3,000,000 1,800,000 Closing WIP
FOH (40% of wages) (vi) 800,000 1,200,000 720,000 (W-3) 1,204,094 3,516,830 3,485,833
PL account (Abnormal
gain) (W-3) 0 2,083,623 105,549
31,300,000 84,351,658 88,129,177 31,300,000 84,351,658 88,129,177

W-1: Quantity Schedule (in Kgs)

Heating Chemical Treatment Refining
Opening WIP 400 760 684
Material added 10,000 18,400 17,000
Closing WIP (400) (760) (684)
10,000 18,400 17,000
Quantity transferred out (9,200) (17,000) (16,000)
Normal loss 5% (500) 10% (1,840) 6% (1,020)
Abnormal loss/(gain) 300 (440) (20)

W-2: Equivalent units (EU) and cost per unit (CPU)

Heating Chemical Treatment Refining
Material Processing Material Processing Material Processing
Work on opening WIP 0 160 0 304 0 273.6
Units started and completed 8,800 8,800 16,240 16,240 15,316 15,316
Work on closing WIP 400 160 760 304 684 273.6
Abnormal loss/(gain) (W-1) 300 300 (440) (440) (20) (20)
Equivalent units (EU) 9,500 9,420 16,560 16,408 15,980 15,843.2

Cost during the month 27,500,000 2,720,000 75,068,035 3,868,800 80,503,628 2,316,000
(taken from respective process a/c) (i) + (ii) (v)+(vi) – (vii) (iii) + (iv) (v)+(vi) –(vii) (iv) (v)+(vi)–(vii)

Cost per unit (CPU) 2,894.737 288.74735 4,533.094 235.78742 5,037.774 146.18259

W-3: Cost of units transferred out / Abnormal loss and gain / Closing WIP
Chemical
Heating Refining
Treatment
Rs. Rs. Rs.
Opening WIP (given) 1,000,000 3,000,000 5,000,000
Processing cost on opening WIP [CPU (processing)  EU (opening WIP)] 46,200 71,679 39,996
Cost of units started and completed incl. abnormal loss/(gain)
[CPU (material+processing)EU(units started & completed incl. abnormal loss/(gain))] 28,969,706 75,348,325 79,293,800
A 30,015,906 78,420,004 84,333,796
Less: Cost of abnormal gain/(loss)
[A÷EU× abnormal gain/loss units] (947,871) 2,083,623 105,549
Cost of units transferred out B 29,068,035 80,503,627 84,439,345

Cost of closing WIP

- Material [CPU (material) x EU (Closing WIP)] 1,157,895 3,445,151 3,445,837
- Processing cost [CPU (processing)  EU (Closing WIP)] 46,200 71,679 39,996
C 1,204,094 3,516,830 3,485,833
Total cost B+C 30,272,129 84,020,457 87,925,178

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 MANAGEMENT ACCOUNITNG
Suggested Answers  
Final Examination – Winter 2015 

A.7 XYZ Limited

Reconciliation of budgeted and actual profit
------- Rs. in '000 -------
Budgeted net profit (36,000–21,600–5,760–3,000–3,240) 2,400.00

Sales margin price variance

Actual sales quantity at budgeted price 36,000÷12×13 39,000.00
Actual sales quantity at actual price 40,300.00
Fav. 1,300.00

Sales margin volume variances:

Budgeted sales quantity at budgeted profit 12,000×200 2,400
Actual sales quantity at budgeted profit 13,000×200 2,600
Fav. 200 1,500.00
Budgeted profit per unit (36,000–21,600–5,760–3,000–3,240)÷12,000 = 200

Material price variance

Actual quantity used at actual price 23,210.00
Actual quantity used at standard price 23,210÷0.95 24,431.58
Fav. 1,221.58
Material usage variance
Actual quantity used at standard price 23,210 ÷ 0.95 24,431.58
Budgeted quantity used at standard price 21,600÷12×13 23,400.00
Adv. (1,031.58) 190.00
Labor rate variance
Actual hours used at actual rate 6,365.00
Actual hours used at standard rate 6,365÷1.02 6,240.20
Adv. (124.80)
Labor efficiency variance
Actual hours used at standard rate 6,365÷1.02 6,240.20
Budgeted hours used at standard price 5,760÷12×13 6,240.00
Adv. (0.20) (125.00)
Variable overhead expenditure variance
Actual hours used at actual rate 3,549.00
Actual hours used at standard rate 3,240÷12×13 3,510.00
Adv. (39.00)
Variable overhead efficiency variance
Actual hours used at standard rate 3,240÷12×13 3,510.00
Budgeted hours used at standard price 3,240÷12×13 3,510.00
- (39.00)
Fixed overhead spending variance
Actual fixed overhead 2,800.00
Budgeted fixed overhead 3,000.00
Fav. 200.00
Fixed overhead volume variance
Actual capacity availed at standard hours 3,000÷12×13 3,250.00
Available capacity 3,000.00
Fav. 250.00 450.00
Actual profit (40,300–23,210–6,365–2,800–3,549) 4,376.00

(The End)

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