CMA SEPTEMBER 2023 EXAMINATION

INTERMEDIATE LEVEL 1
SUBJECT: CM121. COST ACCOUNTING

MODEL SOLUTION
Solution of the Question No. 1
i. (c)
ii. (c)
iii. (b)
iv. (b)
v. (d)
vi. (d)
vii. (c)
viii. (c)
ix. (c)
x. (b)

Solution of the Question No. 2

(a) False. Correct answer: Expense is a part of cost.
(b) True.
(c) False. Correct answer: Manufacturing cost is equal to sum of direct materials and
conversion cost. Or, Manufacturing cost is equal to sum of prime cost and manufacturing
overhead.
(d) True.
(e) True.
Solution of the Question No. 3
Column A Column B
(1) Expense (d) Expired portion of cost
(2) Direct cost (i) Traceable with the cost object
(3) Variable cost (b) Cost that varies in total and remains constant per unit
(4) Sunk cost (f) Cost that has already been incurred but cannot be recovered
(5) Relevant cost (h) Cost that only relates to a specific management decision

Solution of the Question No. 4

(a)
i. The controller is correct that the salary cost should be classified as a selling (marketing)
cost. The duties described in the problem have nothing to do with manufacturing the
product, but rather deal with order-taking and shipping finished goods to customers. As
stated in the text, selling costs include all costs necessary to secure customer orders and
get the finished product into the hands of customers.
ii. No, the president is not correct; how the salary cost is classified can affect the reported net
operating income for the year. If the salary cost is classified as a selling expense all of it will
appear on the income statement as a period cost. However, if the salary cost is classified
as a manufacturing (product) cost, then it will be added to Work in Process Inventory along
with other manufacturing costs for the period. To the extent that goods are still in process at
the end of the period, part of the salary cost will remain with these goods in the Work in
Process Inventory account. Only that portion of the salary cost that has been assigned to
finished units will leave the Work in Process Inventory account and be transferred into the
Finished Goods Inventory account. In like manner, to the extent that goods are unsold at
the end of the period, part of the salary cost will remain with these goods in the Finished

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 Goods Inventory account. Only that portion of the salary that has been assigned to finished
units that are sold during the period will appear on the income statement as an expense
(part of Cost of Goods Sold) for the period.

(b)
Statement Showing Cost and Selling Price for 500 Units
Tk. Tk.
Material used 20,000
Less returned (1000) 19,000
Wages 1,500
Prime Cost 20,500
Work Overhead: Hours x Rate
Machine No. I 250
Machine No. II 900
Machine No. III 960
Machine No. IV 250 2,360
Work Cost 22,860
Office Overheads: 60% of works cost 13,716
36,576
Less: Sale of discarded units
10 % discarded 3657.6
Half to be realised 1828.8
Loss 1828.8
Total Cost 34,747.2
Profit 20% on selling price or 25% on cost 8,686.8
Sales 43,434.00

Selling Price per unit =Tk. 43,434/500 = Tk. 86.86 approx.

Note: It has been presumed that net resulted output is 500 units, that is, the quantum of work
order, after the discarded units have been adjusted for.
(c)
i. A straightforward approach to the requirement is to construct the following table for EOQ at
relevant carrying and ordering costs. Annual demand is 10,000 units. The formula for the
EOQ model is:
2DP DP QC
EOQ = and for Relevant Total Costs (RTC) = 
C Q 2
where D = demand in units per year
P = relevant ordering costs per purchase order
C = relevant carrying costs of one unit in stock for the time period used for D (one year in
this problem.

Relevant Relevant
Carrying Ordering
Costs per Costs per
Unit Purchase
per Year Order
(C) (P)

2  10, 000  $400 10,000  $400 895  $10

Tk. 10 Tk. 400 EOQ =  895, RTC=   $8, 944
$10 895 2
2 10, 000  $200 10,000  $200 447  $20
Tk. 20 Tk. 200 EOQ =  447, RTC=   $8,944
$20 447 2
2 10, 000  $100 10,000  $100 224  $40
Tk. 40 Tk. 100 EOQ =  224, RTC=   $8, 944
$40 224 2

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ii. For a given demand level, as relevant carrying costs increase and relevant ordering costs
decrease, EOQ becomes smaller. That is EOQ decreases to compensate for increases in
carrying costs and to take advantage of decreases in ordering costs. That is, the EOQ
offsets the effect on total costs of the increase in carrying costs and the decrease in
ordering costs.
In this example, the change in EOQ results in relevant total costs (RTC) being the same
across all three cases. The fact that the total costs are the same is a function of the specific
numbers chosen in this example. For example, in the last combination, if relevant carrying
costs per unit per year were Tk. 35 instead of Tk. 40 and relevant ordering costs per
purchase order remained at Tk. 100, the relevant total costs would equal Tk. 8,367.
2 10, 000  $100 10,000  $100 239  $35
EOQ =  239, RTC=   $8,367
$35 239 2
iii. If Alpha estimates C = Tk. 10 per unit per year and P = Tk. 400 per order, then from
requirement i,
EOQ = 224 units and Relevant Total Cost (RTC) = Tk. 8,944
For EOQ = 224 units, C = Tk. 20 per unit per year and P = Tk. 200 per order,
DP QC
Relevant total costs (RTC) = 
Q 2
10, 000  $200 224  $20
 
224 2
= Tk. 8,929 + Tk. 2,240 = Tk. 11,169
The prediction error equals Tk. 11,169 – Tk. 8,944 = Tk. 2,225, which is 25% (Tk. 2,225 ÷ Tk.
8,944) of the relevant total cost had there been no prediction error. The error in prediction results
in a significantly higher cost but is still limited, given that the estimate of the carrying cost was half
the actual amount and the estimate of the ordering cost was twice the actual amount. The square
root function dampens the effect of the errors.

Solution of the Question No. 5

(a) Open-ended.
(b) Open-ended.
(c)
Global Transport Ltd
Operating Cost and Profit Statement
For the month of January 2023
Particulars Taka
Fixed costs (600,000/12) 50,000
Maintenance charges (120,000/12) 10,000
Running charges 29,440
Total operating cost 89,440
Cost per absolute ton-km (89,440/44,720) 0.20
Net revenue received 121,680
Total operating cost 89,440
Profit 32,240

Workings:
1. Outward journey:
(i) From city A to city B:
10 journeys×300 kms×6 tons = 18,000 ton-kms
(ii) From city A to city C:
2 journeys×140 kms×6 tons = 1,680 ton-kms
(iii) From city C to city B:
2 journeys×160 kms×4 tons = 1,280 ton-kms
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 Total: 18,000+1,680+1,280 = 20,960 ton-kms
2. Return journey:
(i) From city B to city A:
5 journeys×300 kms×8 tons = 12,000 ton-kms
6 journeys×300 kms×6 tons = 10,800 ton-kms
(ii) From city B to city C:
1 journey×160 kms×6 tons = 660 ton-kms
Total: 12,000+10,800+660 = 23,760 ton-kms
3. Total absolute ton-kms:
Outward + Return journeys: 20,960+23,760 = 44,720 ton-kms
4. Net revenue received:
(i) From city A to city B:
12 trucks×6 tons ×Tk. 900= Tk. 64,800
(ii) From city B to city A:
5 trucks×8 tons ×Tk. 840= Tk. 33,600
(iii) From city B to city A:
6 trucks×6 tons ×Tk. 840= Tk. 30,240
(iv) From city B to city C:
1 truck×6 tons ×Tk. 840 = Tk. 5,040
Total revenue: 64,800+33,600+30,240+5,040 = Tk. 133,680
Net revenue: Total revenue – Fine paid = 133,680-12,000 = Tk. 121,680

Solution of the Question No. 6

(a) Open-ended.
(b)
(i) Traditional costing approach:
Overhead rate per hour = Total overhead ÷Total labor hours
= (220,000+20,000+45,000) ÷(5,000×1 + 7,000×2)
= Tk. 15 per hour
Overhead to be absorbed per unit:
L M
Labor hour required per unit 1 2
Rate per hour Tk. 15 Tk. 15
Overhead per unit Tk. 15 Tk. 30
(ii) Activity-based costing approach:
L M
Overhead relating to machine activity (3×5,000 : 1×7,000) 150,000 70,000
Overhead relating to production run setup (10 : 40) 4,000 16,000
Overhead relating to handling of orders (15: 60) 9,000 36,000
Total overhead 163,000 122,000
Total unit 5,000 7,000
Overhead per unit Tk. 32.60 Tk. 17.43
(c)
(i) Direct material price, quantity, and total variances:
Actual price Tk. 48
Actual quantity Purchased: 18,000; Used: 14,000
Standard price Tk. 50
Standard quantity 6×2,000=12,000

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 Price variance = (Actual price – Standard price) × Actual quantity purchased
= (48 – 50) × 18,000
= Tk. 36,000 Favorable
Quantity variance = (Actual quantity used – Standard quantity) × Standard price
= (14,000 – 12,000) × 50
= Tk. 100,000 Unfavorable
Total variance = Tk. 36,000 Favorable + Tk. 100,000 Unfavorable
= Tk. 64,000 Unfavorable
(ii) Direct labor rate, efficiency, and total variances:
Actual rate Tk. 315
Actual hour 1,100
Standard rate Tk. 300
Standard hour 0.6×2,000=1,200
Rate variance = (Actual rate – Standard rate) × Actual hour
= (315 – 300) × 1,100
= Tk. 16,500 Unfavorable
Efficiency variance = (Actual hour – Standard hour) × Standard rate
= (1,100 – 1,200) × 300
= Tk. 30,000 Favorable
Total variance = Tk. 16,500 Unfavorable + Tk. 30,000 Favorable
= Tk. 13,500 Favorable
(iii) Variable overhead rate, efficiency, and total variances:
Actual rate 121,000/1,100=Tk. 110
Actual hour 1,100
Standard rate Tk. 100
Standard hour 0.6×2,000=1,200
Rate variance = (Actual rate – Standard rate) × Actual hour
= (110 – 100) × 1,100
= Tk. 11,000 Unfavorable
Efficiency variance = (Actual hour – Standard hour) × Standard rate
= (1,100 – 1,200) × 100
= Tk. 10,000 Favorable
Total variance = Tk. 11,000 Unfavorable + Tk. 10,000 Favorable
= Tk. 1,000 Unfavorable

Solution of the Question No. 7

(a)
i.
Product design and licensing Tk. 1,700,000
Direct materials 4,000,000
Direct manufacturing labor (Tk. 4 × 400,000 units) 1,600,000
Variable manufacturing overhead 400,000
Fixed manufacturing overhead 2,500,000
Fixed marketing 3,000,000
Total cost Tk. 13,200,000
Cost per unit (Tk. 13,200,000 ÷ 400,000) Tk. 33.00
Target cost per unit (Tk. 45 × 0.70) Tk. 31.50

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The original cost estimate of Tk. 13,200,000 does not meet the company’s requirements. Value
engineering will be needed to reduce the cost per unit to the target cost. TSN Cosmetic’s operating
income is estimated to be Tk. 4,800,000 (Tk. 45 × 400,000 – Tk. 13,200,000). Its costs are
expected to be 73.33% (Tk. 13,200,000 ÷ Tk. 18,000,000) of revenues whereas the target costs
are 70% of revenues or Tk. 12,600,000 (70% × Tk. 18,000,000).

ii.
Total cost Tk. 13,200,000
Less: Reduction in material costs (Tk. 4,000,000 × 25%) (1,000,000)
Add: Increase in design costs 300,000
Total costs of redesigned cream Tk. 12,500,000
Revised cost per unit (Tk. 12,500,000 ÷ 400,000 units) Tk. 31.25
Target cost per unit (Tk. 45 × 0.70) Tk. 31.50
The design change allows the cream to meet its goal of target costs less than 70% of
revenue and target operating income greater than 30% of revenue.
iii.
Total cost Tk. 13,200,000
Less: Decrease in fixed manufacturing costs (250,000)
Less: Decrease in variable direct manufacturing costs (Tk. 1 × 400,000 (400,000)
units)
Total costs of redesigned cream Tk. 12,550,000
Revised cost per unit (Tk. 12,550,000 ÷ 400,000 units) Tk. 31.375
Target cost per unit (Tk. 45 × 0.70) Tk. 31.50
Yes, this proposal does allow the company to meet its goal of target costs less than 70% of
revenue and target operating income greater than 30% of revenue.

iv. The company must take into account many considerations, when deciding between the
preceding requirements ii and iii. Both options meet the target costing objectives, and
generate roughly similar levels of operating income. The alternative in requirement ii will
result in operating income of (Tk. 45 × 400,000) – Tk. 12,500,000 = Tk. 5,500,000. The
alternative in requirement iii will provide a slightly lower income of (Tk. 45 × 400,000) – Tk.
12,550,000 = Tk. 5,450,000.
In the long run, however, there are other considerations that are important to consider if the
company chooses the alternative in requirement ii by using the chemical equivalent of the
nectar obtained from the plant in South America. For example, will the nectar become more
expensive in future periods? If so, could the product be reengineered at a later time or are
the materials locked-in with the design for the full product life cycle. If the company
chemically engineers the material, will this tarnish the quality of the product or more
importantly, the company’s brand image? How might this affect the price in future periods
and/or the sales of other products within the company? The answers to these questions will
drive the company’s decision to consider the alternative of replacing the nectar with a
chemical equivalent.
Some students might point out that TSN Cosmetics could implement both the alternatives
presented in requirements ii and iii. They could reduce the cost of direct materials by using
the chemical equivalent (assuming there are no other negative effects of making this change
as discussed in the previous paragraph) and reduce fixed manufacturing costs by Tk.
250,000 and variable direct manufacturing costs by Tk. 1 per unit. Assuming there are no
negative effects on quality of the product from reducing fixed manufacturing and direct
manufacturing labor costs, this would be a preferred alternative.

(b) i. Appraisal cost = Inspection cost

= Tk. 5 × 200,000 car seats
= Tk. 1,000,000
Internal failure cost = Rework cost

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 = 5% × 200,000 × Tk. 1
= 10,000 × Tk. 1 = Tk. 10,000
Out of pocket external failure cost = Shipping cost + Repair cost
= 1% × 200,000 × (Tk. 8 + Tk. 1)
= 2,000 × Tk. 9 = Tk. 18,000
Opportunity cost of external failure = Lost future profits
= (1% × 200,000) × Tk. 100
= 2,000 car seats × Tk. 100 = Tk. 200,000
Total cost of quality control = Tk. 1,000,000 + Tk. 10,000 + Tk. 18,000 + Tk. 200,000
= Tk. 1,228,000
ii. Quality control costs under the alternative inspection technique:
Appraisal cost = Tk. 3 × 200,000 = Tk. 600,000
Internal failure cost = 3.5% × 200,000 × Tk. 1 = Tk. 7,000
Out-of-pocket external failure cost = 2.5% × 200,000 × (Tk. 8 + Tk. 1)
= 5,000 × Tk. 9 = Tk. 45,000
Opportunity cost of external failure = (2.5% × 200,000) × Tk. 100
= 5,000 car seats × Tk. 100 = Tk. 500,000
Total cost of quality control = Tk. 600,000 + Tk. 7,000 + Tk. 45,000 + Tk. 500,000
= Tk. 1,152,000

iii. In addition to the lower costs under the alternative inspection plan, Safe Travel should
consider a number of other factors:
a. There could easily be serious reputation effects if the percentage of external failures
increases by 250% (from 1% to 2.5%). This rise in external failures may lead to costs
greater than Tk. 100 per failure due to lost profits.
b. Higher external failure rates may increase the probability of lawsuits and higher
payments for each external failure.
c. Government intervention is a concern with the chances of government regulation
increasing with the number of external failures.
d. Some students might raise the question of ethics. If a product can cause a customer
serious harm and injury, an ethical and moral company should take steps to prevent
that harm and injury. The company’s code of ethics should guide this decision.

= THE END =

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