The Institute of Chartered Accountants of Pakistan

Cost Accounting
Intermediate Examination
Spring 2013
Module D
Q.1

8 March 2013
100 marks - 3 hours
Additional reading time - 15 minutes

(a) What do you understand by the terms Scrap, Defectives and Spoilage? Briefly
describe the accounting treatment of scrap and defective units.

(10)

(b) Replica Limited (RL) produces and markets a single product. The product requires a
specialised component P which RL procures from a supplier using economic order
quantity. Following information is available from RLs records for component P:
Price of component P
Cost of placing an order
Carrying cost per unit per annum
Total of holding and ordering costs
Normal lead time
Safety stock

Rs. 150 per unit

Rs. 50
10% of purchase price
Rs. 3,000 per annum
12 days
Nil

Assume 300 working days in a year.

Required:
(i) Calculate the economic order quantity (EOQ) and re-order level of component P.
(ii) What would be your advice to the company, if the supplier offers a 2% price
discount on purchases in lots of 3,000 components?

Q.2

(10)

Hulk Limited (HL) produces and markets a single product. The company uses standard
costing system. Following is the standard cost card per unit of the finished product:
Direct material
Direct labour
Variable production overheads
Fixed production overheads

2.8 kg at Rs. 6.75 per kg

Rs. 150 per hour
Rs. 12 per direct labour hour
Rs. 18 per direct labour hour

The standard labour hours required for producing one unit of finished product is 30 minutes
whereas HLs standard operating capacity per month is 15,000 hours.
Actual results for the month of February 2013 were as under:
Direct material @ Rs. 6.25 per kg
Direct labour
Variable production overheads
Fixed production overheads

Rs. 504,000
Rs. 160 per hour
Rs. 175,000
Rs. 17 per direct labour hour

Actual labour hours consumed by HL for producing 27,000 units was 33 minutes per unit of
finished product.
Required:
(a) Compute material, labour and overhead variances. Use four variance method.
(b) List any four causes of unfavourable material price variance.

(14)
(02)

Cost Accounting

Q.3

Page 2 of 4

Z Limited (ZL) manufactures various products. Following information relating to product-A

has been extracted from ZLs business plan for the year ending 30 June 2014:
Direct material per unit
Average labour rate per worker
Average working hours in a day
Average labour efficiency
Standard time required for each unit of product-A
Variable overheads
Fixed overheads
Annual production

12 kg at Rs. 2 per kg
Rs. 56 per day
8 hours
65%
2.6 hours
Rs. 10 per labour hour
2% of direct material cost
25,000 units

In order to improve the production efficiency and reduce cost of conversion, the
management has sought suggestions from the workers. It has announced a reward equal to
three months savings in labour cost to the worker, whose suggestion would be accepted.
In response to managements offer, one of the workers has suggested to use electric cutter in
the manufacturing process. The proposal is expected to reduce standard time for making
each unit of product-A by 20%. It would also improve labour efficiency from 65% to 80%.
The cutter can be purchased at a cost of Rs. 15,000 and is estimated to have an effective life
of one year.
Required:
Assuming there is no beginning or ending inventory of product-A:
(a) Calculate the amount of reward payable to the worker as announced by ZL.
(b) Prepare a statement showing annual cost of production and net savings (if any) in total
cost of production of product-A.

Q.4

(06)
(05)

Neutron Limited (NL) is engaged in the business of manufacture and supply of plastic toys.
The company uses 5 identical injection moulding machines in its machining department
which were acquired at a cost of Rs. 1,000,000. These machines have a useful life of 10 years
and are manned by three dedicated operators. Following information has been extracted
from NLs records for a period of six months:
Normal time available per month per operator
Absenteeism without pay per month per operator
Leave with pay per month per operator
Average idle time per month per operator
Average labour rate per hour per operator
Average estimated rate of production bonus
Fuel and power
Indirect labour
Lighting and electricity

220 hours
20 hours
25 hours
15 hours
Rs. 35
15% of labour cost
Rs. 118,000
Rs. 115,000
Rs. 95,000

Other expenses related to the department are as follows:

Repair and maintenance per annum
Insurance
Sundry expenses
Allocated administrative overheads

6% of machine cost
Rs. 140,000 per annum
Rs. 131,800 per annum
Rs. 120,000 per annum

Required:
Calculate a machine hour rate (inclusive of operators wages) for the machining department.

(10)

Cost Accounting

Q.5

Page 3 of 4

Colon Limited (CL) manufactures two joint products Pollen and Stigma in the ratio of
65:35. The company has two production departments A and B. Pollen can either be sold at
split off point or can further be processed at department-B and sold as a new product Seeds.
Stigma is sold without further processing. Following information relating to the three
products is available from CLs records:

Sales price per kg

Total selling expenses

Pollen
Stigma
Seeds
---------------Rupees--------------90
300
125
135,000
306,000
180,000

Following further information relating to the two departments is available:

Material X
Material Y
Labour @ Rs. 150 per hour
Variable overheads
Fixed overheads
Material input output ratio

Department A
75,000 kg at Rs. 60 per kg
12,000 hours
Rs. 125 per labour hour
Rs. 100 per labour hour
100:88

Department B
12,000 kg at Rs. 25 per kg
3,600 hours
Rs. 65 per labour hour
Rs. 50 per labour hour
100:96

Material is added at the beginning of the process. Joint costs are allocated on the basis of net
realisable value at split off point.
Required:
(a) Calculate the joint costs and apportion them to the two products.
(b) Advise CL whether it should produce Seeds or sell Pollen without further processing.

Q.6

(10)
(06)

Altar Limited (AL) produces and markets a single product. Following information is
available from ALs records for the month of February 2013:
Sales price
Direct material (2 kg at Rs. 5 per kg)
Direct labour
Variable overheads
Fixed overheads
Selling expenses
Administration expenses
Production (Good units)
Closing inventory

Rs. 26 per unit

Rs. 10 per unit
Rs. 2 per unit
Rs. 4 per unit
Rs. 3.50 per unit
Rs. 295,000
Rs. 101,400
175,000 units
30,000 units

Additional information:
(i) Inspection is performed at the end of production and defective units are estimated at
20% of the inspected units. The defective units are sold as scrap at Rs. 5 per unit.
(ii) Fixed overheads per unit are calculated on the basis of good units produced.
(iii) As compared to last month, selling expenses in February 2013 have decreased by
Rs. 42,000.
(iv) In January 2013, AL produced and sold 180,000 units.
Required:
Assuming there was no inventory at the beginning of February 2013, calculate break-even
sales in quantity for the month of February 2013.

(12)

Cost Accounting

Q.7

Page 4 of 4

Qamber Limited (QL) is engaged in the manufacture and sale of textile products. In
February 2013 QL received an order from JCP, a chain of stores, for the supply of 11,000
packed boxes of its products per month at an agreed price of Rs. 8,000 per box. The boxes
would be supplied every month for a period of one year. It was further agreed that:

Each box would contain a pillow cover, a bed sheet and a quilt cover.

QL would be solely responsible for the quality of supplied products whether they are
being manufactured at its own facility or outsourced to third party, either wholly or
partially.

JCP would provide its logo and printed materials for the packing of these boxes.
Following information is available for the manufacture of each unit of these products:

Cloth required
(Meters)
Cost of cloth per meter
(Rs.)
Direct labour per meter
(Minutes)
Machine time
(Minutes)
Variable overheads per machine minute
(Rs.)
Outsourcing cost
(Rs.)

Pillow
Cover
1
200
30
30
5
750

Products
Bed
Sheet
4
300
15
75
4
2,000

Quilt
Cover
5
400
18
120
3.75
3,500

For in-house completion of the above order, a total of 45,000 machine hours and 25,500
labour hours are estimated to be available each month. The labourers are paid at a uniform
rate of Rs. 400 per hour. The cost incurred on quality check, before supply of the boxes to
JCP, is estimated at Rs. 300 per box. Fixed overheads are estimated at Rs. 10,000,000 per
month.
Required:
Calculate net profit for the month, assuming QL wants to produce as many products as
possible within the available resources, and outsource the rest to a third party.
(THE END)

(15)