THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Winter 2006

December 5, 2006

MANAGEMENT ACCOUNTING (MARKS 100)

Module F (3 hours)

Q.1 AZKA Manufacturing Company is involved in manufacturing and sale of a single

product called AZKA. Sales and operating profits of the company for the first two
quarters of the year were as follows:

First Quarter Second Quarter

Increase %
(Rs.) (Rs.)
Sales 750,000,000 1,125,000,000 50%
Operating profit 198,750,000 208,650,000 4.9%

Directors of the company are concerned about the lower profitability in the second
quarter, as despite 50% increase in sales, operating profit increased by a nominal
percentage only. The other data relating to the company’s operations is as under:

First Second
Quarter Quarter
Sales in units - actual 1,000,000 1,500,000
- budgeted 1,500,000 1,500,000
Production in units - actual 1,500,000 1,200,000
- budgeted 1,500,000 1,500,000
Ending inventory in units 500,000 200,000
Sales price per unit 750 750
Variable manufacturing cost per unit 250 250
Fixed manufacturing costs Rs. 450,000,000 450,000,000
Marketing and administrative expenses
(Rs. 1,250,000 fixed) 1,250,000 1,350,000

Required:
(a) Prepare an income statement for second quarter under:
(i) Absorption costing
(ii) Direct costing
(b) Reconcile the profits of the two quarters in such a way as to highlight the
reasons for low profit percentage in the second quarter. (12)

Q.2 Leads Pharmaceuticals Limited is engaged in the production and marketing of a

number of products. PQR is their main product. This product is produced in three
different formats. Following data pertains to one month of production:

Final Product:
Product Production Capacity Sale Price (Rs. Per unit)
PQR – Tablets 1,000,000 tablets 1.00
PQR – Syrup 50,000 bottles 10.00
PQR – Injections 100,000 injections 2.00
 (2)

Raw Materials:
Item Source Price (per unit)
ABC Imported from a single source Rs. 10.00
DEG Both Imported / Local Rs. 5.00
XY Local Rs. 2.00
YZ Imported Rs. 0.50

Quantities Required for Production:

Material
Tablets Syrup Injections
Item
ABC 1 unit for 100 Tablets 1 unit for 10 bottles 1 unit for 50 injections
DEG 1 unit for 50 Tablets 1 unit for 5 bottles 1 unit for 25 injections
XY -- 1 unit per bottle --
YZ -- -- 1 unit per injection

Packing:
Material Price per
Tablets Syrup Injections
Item unit (Rs.)
Strips 10 Tab/Strip -- -- 1.00
Bottles -- 1 -- 1.00
Spoons -- 1 -- 0.10
Vials -- -- 1 0.50
Boxes 20 Strips / Box 4 Bottles / Box 10 Injections / Box 2.00
Cartons 10 Boxes / Carton 10 Boxes / Carton 10 Boxes / Carton 10.00

Other direct costs are as follows:

Tablets Re. 0.01 per unit
Syrup Re. 0.09 per unit
Injections Re. 0.03 per unit

- The product is in high demand and the company is able to sell as much as it can
produce. However, there is a shortage of raw material ABC. Only 15,000 units of
ABC are available with the company for production in the next month.

- To maintain the market share, the marketing staff has suggested that at least 25%
of the production of each format should be maintained in the market.

Required:
Prepare a production plan for next month which would give maximum profit while
maintaining the market share at a reasonable level in each category. (20)

Q.3 A company manufactures three products. Extracts from its standard cost data are given
below:

Units of Material in Final Product

Unit cost
Material Product A Product B Product C
Rs.
V 55 5 4 -
W 50 3 2 6
X 35 - 3 5
Y 60 - 1 4
Z 80 1 1 -

No losses occur in the use of materials V, W, X, and Y. The expected yield of material
Z is 80% although 90% is considered as an ideal standard.
 (3)

For the next four-week period, budgeted sales are:

Product Sales Units

A 12, 000
B 15, 000
C 10, 000

It is anticipated that 5% of the production of Product B will be rejected during

inspection and will be disposed of immediately at 10% of the normal selling price.

The stocks on hand at the beginning of the period are expected to be:

Units
Finished goods A 1,800
B 2,000
C 1,600
Raw Materials V 20,000
W 30,000
X 15,000
Y 5,000
Z 9,000

It is planned to increase finished goods stocks by 10% in order to reduce the chances of
stock outs. However, raw material stocks are considered to be too high and a reduction
of 10% is planned by the end of the period.

Required:
(a) Prepare budgets for the next four week period for the following:
(i) Production (in quantity); (03)
(ii) Materials usage (in quantity); (04)
(iii) Materials purchases (in quantity and value). (04)
(b) Briefly describe the four main types of standards under standard costing. (02)

Q.4 Reliable Cement Ltd. has an installed capacity of 125 000 tonnes of cement per annum.
Its present capacity utilization is 80 per cent. The company produces cement in bags of
50 kgs each. Cost structure per bag of cement, as estimated by the management is
given below:

Rupees
Limestone 30
Other raw materials 50
Packing material 20
Direct labour 60
Fuel 100
Factory overheads (including deprecation of Rs 20) 60
Administrative overheads 40
Selling overheads 50
Total cost 410
Profit margin 90
Selling price 500

Add: Government levies (20 per cent of selling price) 100

Invoice price to consumers 600

Following additional information is also available:

(i) Desired holding period of various materials is Limestone : 1 month; Other raw
materials : 3 months; Fuel : 2.5 months; Packing material : 1.5 months.
 (4)

(ii) Work in process is equal to approximately half month’s production (assume

that full units of materials are required in the beginning; other conversion costs
are to be taken at 50 per cent).
(iii) Finished goods are in stock for a period of 1 month before they are sold.
(iv) Debtors are extended credit for a period of 3 months.
(v) Average time lag in payment of wages is approximately ½ month and that of
overheads is one month.
(vi) Average time lag in payment of government levies is 1 month.
(vii) The credit period extended by suppliers of fuel, packing materials and other
raw materials is 1 month, ½ month and 2 months respectively.
(viii) Minimum desired cash balance is Rs. 5 million.

Required:
From the information given above, determine the net working capital requirement of
the company for the current year. (15)

Q.5 Desktop Products propose to install a central air-conditioning system in their city
office building. Three systems - gas, oil and solid fuel are under consideration. The
costs of installing and running the three systems are estimated as follows:

(i) Equipment and installation costs (payable on 1st January 2007):

Rs.
Gas 1,700,000
Oil 1,500,000
Solid Fuel 1,400,000

(ii) Annual fuel costs (payable at the end of each year) will depend on the severity
of the weather and on the rate of increase in fuel prices. At the prices expected
to exist during 2007, annual fuel costs have been estimated as follows:

Severe Weather (Rs.) Mild Weather (Rs.)

Gas 400,000 240,000
Oil 530,000 370,000
Solid Fuel 450,000 360,000

The company estimates that in each year there is a 70% chance of severe
weather and a 30% chance of mild weather. Fuel prices during 2008 and 2009
are expected to increase either by 10% per annum (probability equal to 0.4) or
15% per annum (probability equal to 0.6). The rate of price increase in 2008 is
expected to prevail in 2009 also.

(iii) Maintenance costs (payable at the end of the year in which they are incurred):

Gas Rs. 25,000 (per annum)

Oil Rs. 20,000 (per annum)
Solid fuel Rs.100,000 (in 2008 only)

All maintenance costs are fixed by contract when the system is installed.
Desktop Products have a cost of capital of 10% per annum. The discounting
factors at 10%, for years 1, 2, and 3 are 0.909, 0.826 and 0.751 respectively

Required:
Prepare calculations showing which central air-conditioning system should be
installed, assuming that the decision will be based on the expected present values of the
costs of each system. (14)
 (5)

Q.6 Your assistant has been preparing the profit and loss statement for the week ended
October 31. Unfortunately he had to proceed on leave in an emergency. The
incomplete statement and relevant data are shown below:
Rs. Rs.
Sales 150,000
Standard cost:
direct materials
direct wages
overhead

Standard profit

Variances Fav / (Adv) Fav / (Adv)

Rs. Rs.
Direct materials
price (400)
usage (300)
total (700)
Direct labour
rate
efficiency
total
Overhead
expenditure
volume
total
Total variance
Actual profit

- The standard price of direct materials used is Rs. 600 per ton. It is expected that
2,400 units will be produced from each ton of material;
- Standard labour rate per hour is Rs. 40/-;
- There are 60 employees working as direct labour;
- There are four working weeks in October;
- The budgeted fixed overhead for October is Rs. 76,800/-
- Standard production is 20 units per hour per employee;
- A forty hour week is in operation;

Actual data pertaining to the week is as follows:

Materials issued 20 tonnes

Labour payments 4 employees @ Rs. 42 per hour
6 employees @ Rs. 38 per hour
others at standard rate
Actual factory overheads Rs 18,000

Required:
Complete the above statement for the week ended October 31. (18)

Q.7 With reference to the concept of Total Quality Management (TQM):

(a) Identify and explain the categories of quality costs. Also give two examples in
each case.
(b) How quality can be measured? (08)
(THE END)