Final Examination

Module F
The Institute of 1 December 2014
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Management Accounting
Q.1 Owais Limited (OL) deals in a single product. For 2013-14, the sale was projected at 40,000
units. OL followed a policy of maintaining safety stock of 500 units and placed orders on
the basis of Economic Order Quantity (EOQ). The total carrying costs amounted to
Rs. 900,000 whereas carrying cost per unit per month was Rs. 30.

The projections for 2014-15 are as follows:

Annual sales would be 52,800 units.

Expected sale price of the product is Rs. 4,000 per unit and expected contribution
margin is 5% of sales.

Carrying cost per unit is expected to increase by 20%.

Fixed costs of the ordering department would increase by 15% over last year whereas
variable costs associated with processing an order would increase by 10%.

There would be no change in the policy for maintenance of safety stock.

Required:
(a) Compute the following for the year 2014-15:

(i) Economic Order Quantity

(ii) Total ordering and carrying costs (11)

(b) Suggest revised safety stock level based on the assumption that lead time usage and
the related probabilities are as follows:

Market condition Units Probability

Favourable 5,000 0.15
Moderate 4,500 0.50
Slow 4,000 0.35 (05)

Q.2 Umair (Private) Limited manufactures a single product in batches. Relevant details for the
current financial year are as under:

Raw materials Standard usage per unit Actual input

Alpha 20 kg @ Rs. 29 5,933,750 kgs @ Rs. 25
Beta 15 kg @ Rs. 40 4,279,875 kgs @ Rs. 43
Gamma 12 kg @ Rs. 45 3,598,125 kgs @ Rs. 51

The actual output was 252,500 units.

Required:
Calculate the following material variances component wise:
(a) price (b) usage
(c) mix (d) yield (12)
 Management Accounting Page 2 of 3

Q.3 ABC Limited deals in manufacturing of tables and chairs. The profit and loss account of the
company for the year ended 30 June 2014 is as follows:

Rs. in '000'
Sales 243,000
Cost of goods sold (211,500)
Gross profit 31,500
Operating expenses (57,300)
Net loss before taxation (25,800)
Taxation -
Net loss after taxation (25,800)

Additional information

(i) Selling price per table and chair is Rs. 22,000 and Rs. 8,000 per unit having
contribution margin of 35% and 30% respectively. Tables and chairs are sold in the
ratio of 1:4.
(ii) 80% of the operating expenses are fixed while the remaining expenses are directly
attributable to the number of units sold.
(iii) The corporate tax is applicable @ 34% while no tax is required to be paid in case of
loss.
(iv) The share capital of the company is Rs. 180 million.

Required:
(a) Determine the break even sales revenue. (08)
(b) Determine the number of tables and chairs that need to be sold if the company wants
to pay a dividend of 10% and retain profits amounting to 4% of sales. (08)

Q.4 Cinemax Limited has recently constructed a fully equipped theatre and 3 cinema houses at a
cost of Rs. 30 million. The theatre has a capacity of 800 seats and each cinema has a
capacity of 600 seats. Information and projections for the first year of operations are as
follows:

(i) Fixed administration and maintenance cost of the entire facility is Rs. 4.5 million per
year.
(ii) The average cost of master print of a Hollywood film is Rs. 4 million while the cost of
master print of a Bollywood film is Rs. 6.5 million.
(iii) Two cinema houses are dedicated for Hollywood films which show the same film at
the same time while one cinema house will show Bollywood films.
(iv) Each Bollywood film is displayed for 6 weeks and the average occupancy level is
70%. Each Hollywood film is displayed for 4 weeks and the average occupancy level
is 65%. On weekdays, there are 2 shows while on weekends (Sat and Sun), 3 shows
are displayed. Ticket price has been fixed at Rs. 350.
(v) Variable cost per show is Rs. 35,000 and setup cost of each film is Rs. 500,000.
(vi) No films would be shown during 8 weeks of the year.
(vii) Theatre is rented to production houses at Rs. 60,000 per day. Each play requires setup
time of 2 days while rehearsal time needs 1 day. Each play is staged 45 times. One
show is staged on weekdays whereas two shows are staged on weekends.
(viii) There is an interval of 2 days whenever a new play is to be staged. No plays are
staged during the month of Ramadan and first 10 days of Muharram.
(ix) The construction costs of theatre and cinema houses are to be depreciated over a
period of 15 years.
(x) Assume 52 weeks in a year and 30 days in a month.

Required:
Prepare budgeted profit and loss account for the first year. (16)
 Management Accounting Page 3 of 3

Q.5 (a) Briefly explain the various types of quality costs in Total Quality Management. Give
one example of each. (05)

(b) Hamid (Private) Limited (HPL) has received an order for supply of a new product.
The planning department has estimated that for the first batch of 500 units, the per
unit revenue/costs would be as follows:

Selling price Rs. 450

Direct material 1 kg @ Rs. 180 per kg.
Direct labour 2 labour hours @ Rs. 100 per hour
Variable production overheads 25% of direct labour costs
Fixed production overheads Rs. 30
Selling expenses Rs. 20

HPL has a learning curve of 80% for all new products. The units are produced in
batches of 500 units and the learning effect applies to the first 8 batches only.

Note: log 0.8/log 2 = –0.322

Required:
Compute the minimum quantity that would allow HPL to earn a contribution margin
of 20% of sales. (15)

Q.6 Centre-point Hotel has 50 rooms of various categories. The occupancy levels are as follows:

Period Occupancy
Jan - May 60%
Jun - Jul 90%
Aug - Oct 40%
Nov - Dec 80%

There are two halls which are rented out for seminars, conferences and private functions.
The average occupancy during the year is 20%.

The revenues and expenses for the latest year are as follows:

Room rent Restaurant Halls

Revenue 125,400,000 75,000,000 10,950,000
Variable cost 18,810,000 41,250,000 2,737,500

Fixed cost for the year is Rs. 45 million.

Restaurant revenue includes revenue from walk-in-customers, food served during functions
held in the halls and to room occupants, in the proportion of 2:3:5 respectively. The food for
functions is provided at a discount of 25% of price list.

The management is considering to increase the sale volume by offering attractive discount
packages during off-peak seasons (having occupancy level of 70% and below) as follows:

(i) 10% discount on room rent which is expected to increase the occupancy by 15%.
(ii) Discount of 30% on hall rent, which would increase the occupancy by 50%.
(iii) The related restaurant revenues will also increase in the same proportion.

Required:
Prepare feasibility of the discount schemes assuming that each month has 30 days. (20)

(THE END)