Certificate in Accounting and Finance Stage Examinations

(Term Test 1) Nov 22, 2024

1 Hour 10 minutes – 45 marks
Additional reading time – 10 minutes

Cost and Management Accounting

Q.1 Leather PLC manufactures product A and the following information relates to Leather PLC for the
month of June 2017:
i)
No. of Units
Production during the month 2,000
Sales made during the month 1,800
Opening stock as at 01st June 2017 300
Budgeted production for the month 1,800
ii) Variable production cost per unit is as follows:
Rs.
Direct material 70
Direct labour 40
Variable production overheads 20
130
iii) Selling price per unit is Rs.300/- and variable selling and distribution expenses are Rs. 36,000/-.
iv) Fixed overhead for the month is as follows:
Budgeted Actual
(Rs.) (Rs.)
Production overhead 50,400 60,000
Administration overhead 40,000 40,000
Selling and distribution overhead 50,000 50,000
v) Fixed overheads are absorbed on the production unit basis.
(Assume that production cost per unit is same for the units of opening stocks and units
produced during the year).
Required:
Prepare Income Statement under the absorption costing method for the month ended 30th June 2017. (06)
Q.2 Nauman Engineering Works (NEW) is engaged in the manufacturing and sale of electricmotors of a single
specification, Model EMV33. The production process of EMV33 involves two departments, A and B. Relevant
details are as follows:
Available monthly Hours required
hours (30 days) per unit
Machine Labour Machine Labour
Department A 5,400 5,600 6 7
Department B 3,600 7,500 5 10
Department A Department B Total
Profit details of EMV33 -------------- Rs. per unit --------------
Sales price 60,000
Less: Cost of production
Material 14,000 6,000 20,000
Labour 2,100 3,200 5,300
Fixed overheads 600 900 1,500
Variable overheads (based on machine hours) 1,800 2,000 3,800
Total cost per unit 30,600
Profit 29,400
NEW has recently been approached by a customer interested in purchasing 990 units of aspecial type of
motor, Model LTM78, offering Rs. 105,000 for each unit. However, accepting this order would require
suspending the production of EMV33.
The following information has been gathered in relation to the proposed order:

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Cost & Management Accounting

- Details relating to each unit of LTM78:

Department A Department B
Cost of raw material (Rs. per unit) 20,000 10,000
Machine hours per unit 10 6
Labour hours per unit 8 12
- The setup time required to prepare for production of LTM78 is 3 days. Another 2 days would be
required to revert back to the production of EMV33.
- Labour is not allowed to work overtime. Further, the labour of each department is
specifically trained for tasks within that department and cannot be used in other departments.
- Idle labour is paid at 85% of the normal wage rate. Idle labour hours related to EMV33 have
already been included in fixed overheads.
Required:
Determine whether NEW should accept the order for supply of LTM78. (10)
Q.3 Shehzore (Pvt.) Ltd (SPL) is engaged in the manufacture of two products A and B. These productsare
manufactured on two machines M1 and M2 and are passed through two service departments, Inspection and
Packing, before being delivered to the warehouse for final distribution. SPL's overhead expenses for the
month of August 2011 were as follows:
Rs.
Electricity* 2,238,000
Rent 1,492,000
Operational expenses of machine M1 5,500,000
Operational expenses of machine M2 3,200,000
Following information relates to production of the two products during the month:
A B
Units produced 5,600 7,500
Labour time per unit - Inspection dept. 15 minutes 12 minutes
Labour time per unit - Packing dept. 12 minutes 10 minutes
The area occupied by the two machines M1 and M2 and the two service departments is as follows:
Square feet
Machine M1 5,500
Machine M2 4,800
Inspection department 12,000
Packing department 15,000
Machine M1 has produced 50% units of product A and 65% units of product B whereas machineM2 has
produced 50% units of product A and 35% units of product B.
*Note: Electricity cost should be divided based on KW consumption which is not given in the question. In
*
the absence of KW consumption, we can divide the cost based on area occupied.
Required:
Allocate overhead expenses to both the products A and B. (15)
Q.4 The Telephone Co (T Co) is a company specializing in the provision of telephone systems for commercial
clients. There are two parts of the business:
- Installing telephone system in the business, either first time installations or replacement installations
- Supporting the telephone systems with annually renewable maintenance contracts, T Co has been
approached by a potential customer, Push Co, who wants to install a telephone system in the new
offices itis opening. Whilst the job is not a particularly large one, T Co is hopeful of future business
in the form of replacement systems and support Contracts for Push Co. T Co is therefore keen to quote
a competitive pricefor the job. The following information should be considered:
1) One of the company’s salesmen has already been to visit the push Co., to give them demonstration of
the new system, together with a complementary lunch, the costs of which totaled Rs. 400.
2) The installation is expected to take one week to complete and would require three engineers, each of
whom is currently paid a monthly salary of Rs. 4,000. The engineers have just had their annually
renewable contract with T Co. One of the three engineers has spare capacity to complete the work, But
the other two would have to be moved from contact X in order to complete this one. Contact X generates
a contribution of Rs. 5 per engineer hour. There are no other engineers available to continue the product

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Cost & Management Accounting

X if these two engineers are taken off the job, it would mean that T Co. would miss its contractual
completion deadline on contact X by one week. As a result, T Co. would have to pay a one-off penalty
of Rs. 500.Since there is no other work scheduled for those engineers in one’s week time, it will not be
a problem for them to complete contract X at this point.
3) T Co’s technical advisor would also need to dedicate 8 hours of his time to the job. He is working at
full capacity, so he would have to work overtime in order to do this. He is paid an hourly rate of Rs. 40
and is paid all overtime at a premium of 50% above his usual hourly rate.
4) Two visits would need to be made by the site inspector to approve the completed work. He is an
independent contractor who is not employed by T Co, and charges Push Co directly for the work. His
cost is Rs. 200 for each visit made.
5) T Company’s system trainer would need to spend one day at Push Company delivering training. He
iscurrently paid a monthly salary of Rs. 1,500 but also receives commission of Rs. 125 for each day
spentdelivering training at a client’s site.
6) 120 telephone handsets would need to be supplied push Co. The current cost of these is Rs. 18.20 each,
although T Co already has 80 handsets in inventory. These were bought at the price of Rs. 16.80 each.
The handsets are the most popular model on the market and frequently requested by T Co.’s customers.
7) Push Co would also need a computerized control system called swipe 2. The current market price of
swipe 2 is Rs. 10,800, although T Co has an older version of the system. Swipe 1 is available in
inventory, and it could be modified at cost of Rs. 4,600. T Co paid Rs. 5,400 for swipe 1 when it ordered
it in error two months ago and has no other use for it. T Co paid Rs. 5,400 for swipe 1 when it ordered
in error two months ago and has no other use for it. The current market price of swipe 1 is Rs. 5,450,
although if T Co tried to sell the one they have, it would be deemed to be used and therefore only worth
Rs. 3,000.
8) 1,000 meters of cable would be required to wire up the system. The cable is used frequently by T Co,
and it has 200 meters in inventory, which costs Rs. 1.20 per meter. The current market price for the
cable is Rs. 1.30 per meter.
9) You should assume that there are four weeks in each month and that the standard working week is 40
hours week.
Required:
Prepare a cost statement using relevant costing principles showing the minimum cost that T Co should charge
for the contract. Make Detailed notes showing how each cost have been arrived at and EXPLAINING why each
of the costs above has been included or excluded from your cost statement (14)

***Good Luck***

3 (CMA TermTest-01: 22 Nov 2024)