CAF8 cost and management accounting question bank ICAP

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Bank

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Cost and management accounting


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Certificate in Accounting and Finance
Cost and management accounting

C
Contents
Page

Question and Answers Index

v

Questions
Section A

Objective test and long-form questions

1

Objective test and long-form answers

83

Answers
Section B

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Cost and management accounting

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I

Certificate in Accounting and Finance
Cost and management accounting

Index to Objective test and
long-form questions and
answers
Question
page

Answer
page

Chapter 1 - Inventory valuation
1.1

Steel Rods

1

83

1.2

XYZ Limited

2

84

1.3

Mehanti Limited

2

85

Chapter 2 - Inventory management

2.1

Stock items 6786 and 6787

4

87

2.2

Inventory control

4

87

2.3

Alpha Motors (Pvt) Ltd

5

88

2.4

ABC

5

88

2.5

Karachi Limited

6

89

2.6

Moder Distributors Limited

7

90

2.7

Robin Limited

7

90

2.8

Ore Limited

8

91

2.9

Explain

8

92

9

93

Chapter 3 - Accounting for overheads
3.1

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Overhead cost per unit

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Cost and management accounting

Question
page

Answer
page

3.2

Apportionment

9

93

3.3

Service departments

10

94

3.4

Zia Textile Mills

11

95

3.5

Ternary Engineering Limited

12

96

3.6

Production and service

13

97

3.7

RT Limited

13

98

3.8

Ahsan Enterprises

14

99

3.9

Amber Limited

15

100

3.10

Sparrow (Pvt) Limited

16

101

Chapter 4 - Marginal costing and absorption costing
4.1

Differences

17

102

4.2

Marginal and absorption

17

102

4.3

Zulfiqar Limited

18

104

4.4

ATF Limited

19

106

4.5

Mazahir (Pakistan) Limited

19

107

4.6

Silver Limited

20

108

Chapter 5 - Cost flow in production
5.1

Cost ledger

21

109

5.2

Kaat Limited

21

111

5.3

Mirza Limited

23

112

5.4

Quality Limited

24

113

5.5

Sapphire Limited

25

115

Chapter 6 - Job, batch and service costing
6.1

Job 6789

26

118

6.2

Ahmer and company

26

118

Chapter 7 - Process costing
7.1

Process costing: The basic rules

27

120

7.2

Process 1 and process 2

27

122

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Index to questions and answers

Question
page

Answer
page

7.3

Equivalent units

28

123

7.4

Yahya Limited

29

124

7.5

Two processes

30

125

7.6

Smart Processing Limited

30

127

7.7

Hornbill Limited

31

129

7.8

Fowl Limited

32

130

7.9

Joint process

33

131

7.10

Binary Ltd

33

132

7.11

Platinum limited

34

133

Chapter 8 - Budgeting
8.1

Budgeted profit and loss account

35

134

8.2

Budgeted profit and loss account 2

35

136

8.3

Budgeted profit and loss account 3

37

137

8.4

Cash requirements

37

138

8.5

Budgeted profit

38

139

8.6

Profit forecast statement

40

141

8.7

Cash budget

41

143

8.8

Regression method

42

146

8.9

Production cost budget

42

146

8.10

Cash budget

43

147

Chapter 9 - Standard costing
9.1

Standard cost – ICA

44

148

9.2

Standard cost - Idle time

44

148

Chapter 10 - Variance analysis
10.1

Reconcile

45

149

10.2

Simple variances

45

150

10.3

Overhead variances

46

152

10.4

Manufacturing cost variance

46

152

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Cost and management accounting

Question
page

Answer
page

10.5

Variances and operating statements

47

157

10.6

Volume and expenditure variances

48

158

10.7

Lettuce

49

159

10.8

Moongazer

49

162

10.9

BRK

50

165

10.10

Carat

51

166

10.11

Hexa Limited

52

170

10.12

Excellent Limited

53

171

10.13

Watool Limited

54

174

10.14

ABC Limited

55

176

10.15

Standard cost sheet

55

178

Chapter 11 - Target costing
11.1

Scriba company

56

180

11.2

Target

56

81

Chapter 12 - Relevant costs
12.1

Jimco

58

183

12.2

Materials and relevant costs

58

183

12.3

Printing leaflets

59

184

12.4

JD

59

185

12.5

Product B22

60

186

12.6

Fazal Industries Limited

62

187

12.7

Describe terms

63

188

12.8

Topaz Limited

63

188

12.9

Tychy Limited

64

189

Chapter 13 - Cost-Volume-Profit (CVP) analysis
13.1

Octa Electronics

65

190

13.2

Soft drink company

65

191

13.3

Solvent Limited

66

192

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Index to questions and answers

Question
page

Answer
page

Chapter 14 - Decision making techniques
14.1

Limiting factors

67

193

14.2

Shortages

68

194

14.3

Make or buy

69

196

14.4

Condaco

70

198

14.5

Decimal world Limited

70

199

14.6

Three products

71

200

14.7

Areesh Limited

71

201

14.8

Jaseem Limited

72

202

14.9

Bauxite Limited

73

202

14.10

Artery Limited

73

203

Chapter 15 - Introduction to financial instruments
15.1

Sources of finance

75

205

15.2

Direct and indirect investment

75

207

15.3

FI definitions 1

75

208

15.4

FI definitions 2

75

209

Chapter 16 - Time value of money
16.1

DCF and relevant costs

76

210

16.2

Annuities and perpetuities

77

210

16.3

Investment appraisal and inflation

77

211

16.4

DCF exercises

78

212

16.5

Conto Company

78

213

16.6

Baypack Company

79

214

16.7

Larkana Fabrication Limited

79

214

16.8

Badger

80

216

Chapter 17 – Sustainability reporting
17.1

Benefits of sustainability reporting

82

217

17.2

IFAC sustainability framework 2.0

82

218

17.3

Key considerations for professional
accountants

82

218

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Cost and management accounting

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SECTION

Certificate in Accounting and Finance
Cost and management accounting

A

Objective test and
long-form questions
CHAPTER 1 – INVENTORY VALUATION
1.1

STEEL RODS
During the month of February the following transactions in steel rods took place:
1 February
2 February
3 February
5 February
6 February
10 February
12 February
15 February
16 February
20 February
25 February

Purchased
Purchased
Sold
Purchased
Sold
Purchased
Sold
Purchased
Sold
Purchased
Sold

10 tons
3 tons
2 tons
2 tons
3 tons
8 tons
8 tons
2 tons
2 tons
5 tons
7 tons

@ Rs.600 per ton
@ Rs.550 per ton
@ Rs.560 per ton
@ Rs.555 per ton
@ Rs.555 per ton
@ Rs.560 per ton

Required
Calculate the prices to be applied to the issues and the closing balance figures
using:
(a)

FIFO

(6)

(b)

Weighted average.

(8)
(14)

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Cost and management accounting

1.2

XYZ LIMITED
Q.1 XYZ Limited manufactures four products. The related data for the year ended

December 31, 20X3 is given below:
A
Opening inventory
- Units
- Cost (Rs.)
- NRV (Rs.)
- Production in units
Costs of goods produced (Rs.)
Variable selling costs (Rs.)
Closing inventory (units)
Damaged units included in closing
inventory
300

B

Unit cost of purchase from market (Rs.)
Selling price per unit (Rs.)
10.00
Unit cost to repair damaged units (Rs.)
3.00

D

10,000

15,000

20,000

25,000

70,000

120,000

180,000

310,000

75,000

110,000

180,000

300,000

50,000

60,000

75,000

100,000

400,000

600,000

60,000

80,000

90,000

100,000

5,000

10,000

15,000

24,000

600

800

Weighted
Average

Inventory valuation method in use

C

10.50

825,000 1,200,000

1,500

Weighted
Average

FIFO

FIFO

11.00

11.50

13.00

12.00

12.00

12.50

2.00

2.50

3.50

The company estimates that selling expenses will increase by 10% in January 20X4.
Required

Compute the amount of closing inventory that should be reported in the statement of
financial position as on December 31, 20X3.
(15)

1.3

MEHANTI LIMITED
Mehanti Limited (ML) produces and markets a single product Wee. Two chemicals
Bee and Gee are used in the ratio of 60:40 for producing 1 litre of Wee. ML follows
perpetual inventory system and uses weighted average method for inventory
valuation. The purchase and issue of Bee and Gee for May 20X3, are as follows:
Date

Bee

Gee

Receipt
Litre

Issue

Rate

Litre

Receipt

Issue

Litre

Rate

Litre

450

110

-

02-05-20X3

-

-

05-05-20X3

-

-

560

-

-

650

09-05-20X3

-

-

300

-

-

300

12-05-20X3

420

52

-

700

115

-

18-05-20X3

-

-

250

-

-

150

24-05-20X3

500

55

-

250

124

-

31-05-20X3

-

-

500

-

-

450

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Question bank: Objective test and long-form questions

Following further information is also available:
(i)

Opening inventory of Bee and Gee was 1,000 litres at the rate of Rs. 50
per litre and 500 litres at the rate of Rs. 115 per litre respectively.

(ii)

The physical inventories of Bee and Gee were 535 litres and 140 litres

respectively. The stock check was conducted on 01 June and 31 May 20X3 for
Bee and Gee respectively.

(iii)

Due to contamination, 95 litres of Bee and 105 litres of Gee were excluded
from the stock check. Their net realisable values were Rs 20 and Rs. 50 per
litre respectively.

(iv)

250 litres of Bee which was received on 01 June 20X3 and 95 litres of Gee
which was issued on 31 May 20X3 after the physical count were included in
the physical inventory.

(v)

150 litres of chemical Bee was held by ML on behalf of a customer,
whereas 100 litres of chemical Gee was held by one of the suppliers on ML’s
behalf.

(vi)

100 litres of Bee and 200 litres of Gee were returned from the production
process on 31 May and 01 June 20X3 respectively.

(vii) 240 litres of chemical Bee purchased on 12th May and 150 litres of chemical
Gee purchased on 24th May 20X3 were inadvertently recorded as 420 litres
and 250 litres respectively.
Required

(a)

Reconcile the physical inventory balances with the balances as per book.

(b)

Determine the cost of closing inventory of chemical Bee and Gee. Also
compute the cost of contaminated materials as on 31 May 20X3.

© Emile Woolf International

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(15)

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Cost and management accounting

CHAPTER 2 - INVENTORY MANAGEMENT
2.1

STOCK ITEMS 6786 AND 6787
(a)

A company uses 15,000 units of stock item 6786 each year. The item has a
purchase cost of Rs.4 per unit. The cost of placing an order for re-supply is
Rs.220. The annual holding cost of one unit of the item is 10% of its purchase
cost.

Required

(b)

(i)

What is the economic order quantity for item 6786, to the nearest unit?

(ii)

What would be the effect of an increase in the annual holding cost per
unit on (1) the EOQ and (2) total annual ordering costs?

Data relating to stores item 6787 are as follows.
Daily use:
Lead time for re-supply:
Reorder quantity:

300 units
5 – 20 days
10,000 units

Required
What should be the reorder level for this stock item, to avoid the possibility of
inventory-outs?

2.2

INVENTORY CONTROL
Entity G uses 105 units of an item of inventory every week. These cost Rs.150 per

unit. They are stored in special storage units and the variable costs of holding the
item is Rs.4 per unit each year plus 2% of the inventory’s cost.
Required
(a)

If placing an order for this item of material costs Rs.390 for each order, what is
the optimum order quantity to minimise annual costs? Assume that there are
52 weeks in each year.

(b)

Suppose that the supplier offers a discount of 1% on the purchase price for
order sizes of 2,000 units or more. What will be the order size to minimise total
annual costs?

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Question bank: Objective test and long-form questions

2.3

ALPHA MOTORS (PVT.) LTD
Alpha Motors (Pvt.) Ltd. uses a special gasket for its automobiles which is
purchased from a local manufacturer. The following information has been made
available by the procurement department:

Annual requirement (no. of gaskets)
Cost per gasket (Rs.)
Ordering cost per order (Rs.)
Carrying cost per gasket (Rs.)

162,000
1,000
27,000
300

The gaskets are used evenly throughout the year. The lead time for an order is
normally 11 days but it can take as much as 15 days. The delivery time and the
probability of their occurrence are given below:
Delivery time (in days)
11
12
13
14
15

Probability of occurrence
68%
12%
10%
6%
4%

Required
(a)

Compute the Economic Order Quantity (EOQ) and the total Ordering Costs
based on EOQ.
(04)
(b) What would be the safety stock and re-order level if the company is willing to
take:

a 20% risk of being out of stock?

a 10% risk of being out of stock?
(08)
Note: Assume a 360 day year.

2.4

ABC
ABC has recently established a new unit in Multan. Its planning for the first
year of operation depicts the following:
(i)
(ii)
(iii)
(iv)
(v)
(vi)

Cash sales
600,000 units
Credit sales
1,200,000 units
Ending inventory
Equivalent to 15 days sales

Number of working days in the year
300
Expected purchase price
Rs. 450 per unit
Manufacturer offers 2% discount on purchase of 500 units or more as bulk
quantity discount. The company intends to avail this discount.
(vii) Carrying costs include:

Financial cost of investment in inventory @ 16% per annum.

Godown rent of Rs. 10,000 per month.
(viii) Ordering costs are Rs. 300 per order.
Required
Compute the Economic Order Quantity (EOQ) and the estimated carrying costs and
ordering costs for the first year of operation.
(10)

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Cost and management accounting

2.5

KARACHI LIMITED
(a)

Karachi Limited is a large retailer of sports goods. The company buys footballs
from a supplier in Sialkot. Karachi Limited uses its own truck to pick the
footballs from Sialkot. The truck capacity is 2,000 footballs per trip and
the company has been getting a full load of footballs at each trip, making 12
trips each year.
Recently the supplier revised its prices and offered quantity discount as under:
Quantity
2,000
3,000
4,000
6,000
8,000

Unit price (Rs.)
400
390
380
370
360

Other related data is given below:


All the purchases are required to be made in lots of 1,000 footballs.



The cost of making one trip is Rs. 15,000. The company has the option
to hire a third party for transportation which would charge Rs. 9 per

football.



The cost of placing an order is Rs. 2,000.



The carrying cost of one football for one year is Rs. 80.

Required

(b)

(i)

Work out the most economical option.

(ii)

Compute the annual savings in case the company revises its
policy in accordance with the computation in (i) above.
(10)

Briefly describe:
(i)

Stock out costs

(ii)

Lead time

(iii)

Reorder point

(iv)

Safety stock

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(04)

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Question bank: Objective test and long-form questions

2.6

MODERN DISTRIBUTORS LIMITED
Modern Distributors Limited (MDL) is a distributor of CALTIN which is used in
various industries and its demand is evenly distributed throughout the year.
The related information is as follows:
(i)

Annual demand in the country is 240,000 tons whereas MDL’s share is 32.5%
thereof.

(ii)

The average sale price is Rs. 22,125 per ton whereas the profit margin is 25%
of cost.

(iii)

The annual variable costs associated with purchasing department are
expected to be Rs. 4,224,000 during the current year. It has been estimated
that 10% of the variable costs relate to purchasing of CALTIN.

(iv)

Presently, MDL follows the policy of purchasing 6,500 tons at a time.

(v)

Carrying cost is estimated at 1% of cost of material.

(vi)

MDL maintains a buffer stock of 2,000 tons.

Required
Compute the amount of savings that can be achieved if MDL adopts the policy of
placing orders based on Economic Order Quantity.
(15)

2.7

ROBIN LIMITED
Robin Limited (RL) imports a high value component for its manufacturing process.
Following data, relating to the component, has been extracted from RL’s records for
the last twelve months:
Maximum usage in a month
Minimum usage in a month
Average usage in a month
Maximum lead time
Minimum lead time
Re-order quantity

300 units
200 units
225 units
6 months
2 months
750 units

Required
Calculate the average stock level for the component.

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(05)

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Cost and management accounting

2.8

ORE LIMITED
Ore Limited (OL) is a manufacturer of sports bicycles. The company buys tyres from
a local vendor.
Following data, relating to a pair of tyres, has been extracted from OL’s records:
Cost (per unit)
Storage cost based on average inventory
Insurance cost based on average inventory
Store keeper’s salary (included in absorbed overheads)
Cost incurred on final quality check at the time of delivery

Rs.
80
60
8
10

Other relevant details are as follows:
(i)

The purchase price is Rs. 900 per pair.

(ii)

The annual demand for tyres is 200,000 pairs.

(iii)

The ordering cost per order is Rs. 8,000.

(iv)

The delivery cost per order is Rs. 3,000.

(v)

OL’s rate of return on investment in inventory is 15%.

(vi)

Recently the vendor has offered a quantity discount of 3% on orders of a
minimum of 5,000 pairs.

Required
Evaluate whether OL should avail the quantity discount from the vendor.

2.9

(10)

EXPLAIN
Explain briefly what is meant by the term inventory control. Describe, giving reasons,
the method of stock valuation which should be used in times of fluctuating prices.
(05)

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Question bank: Objective test and long-form questions

CHAPTER 3 - ACCOUNTING FOR OVERHEADS
3.1

OVERHEAD COST PER UNIT
A company makes two products, Product X and Product Y. Each product is
processed through two cost centres, CC1 and CC2. The following budgeted data is
available.
Allocated and apportioned overheads
(All overheads are fixed costs.)
Direct labour hours per unit
Product X
Product Y

CC1

CC2

Rs.126,000

Rs.180,000

1.5
1.2

2.0
2.6

The budgeted production is 12,000 units of Product X and 10,000 units of Product Y.
Fixed overheads are absorbed into costs on a direct labour hour basis.
Required
Calculate the budgeted total fixed overhead cost per unit for Product X and for
Product Y.

3.2

APPORTIONMENT
A production centre has three production departments, A, B and C.
Budgeted production overhead costs for the next period are as follows:
Rs.
Factory rent
Equipment depreciation
Insurance
Heating and lighting
Indirect materials:
Department A
Department B
Department C
Indirect labour:
Department A
Department B

Department C

60,000
80,000
20,000
18,000
7,000
6,600
9,400
40,000
27,000
20,000

Insurance costs relate mainly to health and safety insurance, and will be
apportioned on the basis of the number of employees in each department. Heating
and lighting costs will be apportioned on the basis of volume.
Other relevant information is as follows:
Total
Direct labour hours
Number of employees
Floor area (square metres)
Cost of equipment
(Rs.000s)
Volume (cubic metres)

© Emile Woolf International

Department
A

Department
B

Department
C

18,000
50
1,200
1,000

8,000
20
300
200

6,000
16
400
600

4,000
14
500
200

18,000

8,000

6,000

4,000

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Cost and management accounting

Required

3.3

(a)

Calculate the overhead costs for each production department.

(b)

Calculate an overhead absorption rate for the period for each department,
assuming that a separate direct labour hour absorption rate is used for each
department.

(c)

Calculate an overhead absorption rate for the period, assuming that a single
factory-wide direct labour hour absorption rate is used.

SERVICE DEPARTMENTS
In a factory with four production departments and two service departments, the
operating costs for the month of October were as shown below.
Rs.
Production Department 1
Production Department 2
Production Department 3
Service departments
Canteen
Boiler house

700,000
300,000
400,000
78,000
100,000
1,578,000

The costs of running the canteen are apportioned to each department on the basis
of the estimated use of the canteen by employees in each department.
The costs of the boiler house are apportioned on the basis of the estimated
consumption of power by each department.
The service departments’ costs are therefore apportioned as follows:

Production Department 1
Production Department 2
Production Department 3
Service departments
Canteen
Boiler house

Canteen

Boiler
house

%
40
20
30

%
30
30
20

10

20
-

Required
Prepare a statement showing the allocation of costs to the production departments
using:
(a)

the repeated distribution method

(b)

the simultaneous equations method.

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Question bank: Objective test and long-form questions

3.4

ZIA TEXTILE MILLS
(a)

Explain the treatment of under-absorbed and over-absorbed factory
overheads. Give three reasons for under-absorbed / over absorbed factory
overheads.
(06)

(b)

On December 1, 20X3 Zia Textile Mills Limited purchased a new cutting
machine for Rs. 1,300,000 to augment the capacity of five existing machines
in the Cutting Department. The new machine has an estimated life of 10
years after which its scrap value is estimated at Rs. 100,000. It is the policy
of the company to charge depreciation on straight line basis.
The new machine will be available to Cutting Department with effect from
February 1, 20X4. It is budgeted that the machine will work for 2,600

hours in 20X4. The budgeted hours include:


80 hours for setting up the machine; and



120 hours for maintenance.

The related expenses, for the year 20X4 have been estimated as under:
(i)

Electricity used by the machine during the production will be 10 units
per hour @ Rs. 8.50 per unit.

(ii)

Cost of maintenance will be Rs. 25,000 per month.

(iii)

The machine requires replacement of a part at the end of every month
which will cost Rs. 10,000 on each replacement.

(iv)

A machine operator will be employed at Rs. 9,000 per month.

(v)

It is estimated that on installation of the machine, other departmental
overheads will increase by Rs. 5,000 per month.

Cutting Department uses a single rate for the recovery of running costs of the
machines. It has been budgeted that other five machines will work for 12,500
hours during the year 20X4, including 900 hours for maintenance. Presently,
the Cutting Department is charging Rs. 390 per productive hour for recovery
of running cost of the existing machines.
Required
Compute the revised machine hour rate which the Cutting Department
should use during the year 20X4.
(08)

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The Institute of Chartered Accountants of Pakistan


Cost and management accounting

3.5

TERNARY ENGINEERING LIMITED
Ternary Engineering Limited produces front and rear fenders for a motorcycle
manufacturer.
It has three production departments and two service departments. Overheads are
allocated on the basis of direct labour hours. The management is considering
changing the basis of overhead allocation from a single overhead absorption rate to

departmental overhead rate. The estimated annual overheads for the five
departments are as under:
Production Departments
Fabrication Phosphate
Rs.000

Rs.000

Painting
Rs.000

Direct materials

6,750

300

750

Direct labour

1,200

385

480

Indirect material

Service

Inspection Maintenance
Rs.000

Rs.000

30

75

Other variable overheads

200

70

100

30

15

Fixed overheads

480

65

115

150

210

Total departmental expenses

8,630

820

1,445

210

300

Maximum production capacity

20,000

25,000

30,000

Direct labour hours

24,000

9,600

12,000

9,000

1,000

1,200

630

273

147

1,000

500

1,500

Machine hours
Use of service departments:
Maintenance - Labour
hours
Inspection - Inspection
hours

Required
(a)

Compute the single overhead absorption rate for the next year. (06)

(b)

Compute the departmental overhead absorption rates in accordance with the
following:


The Maintenance Department costs are allocated to the production
department on the basis of labour hours.



The Inspection Department costs are allocated on the basis of inspection
hours.



The Fabrication Department overhead absorption rate is based on
machine hours whereas the overhead rates for Phosphate and Painting
Departments is based on direct labour hours.
(10)

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The Institute of Chartered Accountants of Pakistan


Question bank: Objective test and long-form questions

3.6

PRODUCTION AND SERVICE
The expenses of the production and service departments of a company for a
year are as follows:
Department

Production department - A
-B

Expenses before
distribution of service
department costs
Rs. ‘000
500
400

Service department – X
-Y

100
60

Service provided (%age)
Dept. X

Dept. Y

50

30

40
50

20

10
-

Required
Allocate the service departments expenses to production departments by:

3.7



Repeated distribution method



Simultaneous equation method

(13)

RT LIMITED
Following information has been extracted from the records of RT Limited for August
20X3:

Budgeted machine hours

Actual machine hours
Budgeted labour hours
Actual labour hours
Budgeted material cost (Rs.
‘000) material cost (Rs. ‘000)
Actual
Budgeted overheads (Rs. ‘000)
Actual overheads (Rs. ‘000)
Services provided by S-1
Services provided by S-2
Basis of overhead application

P-1
60,000
60,500
50,000
55,000
50,000
50,000
1,200
1,250
20%
30%
Machine
hours

Departments
Production
P-2
P-3

100,000
120,000
110,000
100,000
200,000
75,000
190,000
75,000
40,000
3,000
42,000
3,200
2,000
2,250
2,000
1,800
30%
40%
40%
20%
75% of
Labour
hours Material cost

Service
S-1 S-2

600
500
10%

700
750
10%
-

Required
(a)

Allocate costs of service departments using repeated distribution method.

(b)

Compute department wise over / under applied overheads.

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(12)

The Institute of Chartered Accountants of Pakistan


Cost and management accounting

3.8

AHSAN ENTERPRISES
Ahsan Enterprises (AE) produces three products Alpha, Beta and Gamma. The

management has some reservations on the method of costing. Consequently, the
cost accountant has reviewed the records and gathered the following information:
(i)

The costs incurred during the latest quarter were as follows:
Rupees
240,000
1,680,000
600,000
360,000
468,000
400,000
2,800,000
1,560,000
240,000
60,000
1,800,000
1,200,000

Direct material
Direct labour
Indirect wages – machine maintenance
– stores
– quality control
– cleaning and related services
Fuel and power
Depreciation on plant, machinery and building
Insurance on plant and machinery
Insurance on building
Stores, spares and supplies consumed

Rent, rates and taxes
(ii)

The production report for the previous quarter depicted the following
information:

Alpha
Beta
Gamma
(iii)

Production
(units)
12,000
20,000
45,000

Direct labour Machine hours
Inspection
hours per unit
per unit
hours per unit
20.00
6.00
2.0
5.00
8.00
3.0
4.00
10.00

4.0

Other relevant details are as follows:
Factory space utilization
Cost of machinery (Rs. in thousands)
Stores consumption (Rs. in thousands)
No. of units inspected

Alpha
40%
6,000
720
600

Beta
35%
4,000
270
400

Gamma
25%
3,000
810
1,350

The rate of depreciation for plant and machinery is 10% per annum.
Required
(a)

Determine the factory overhead cost per unit for products Alpha, Beta and
Gamma by using single factory overhead rate based on direct labour hours.

(b)

Recalculate the factory overhead cost per unit, for each product, by
allocating individual expenses on the basis of specific utilisation of related
facilities.
(13)

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The Institute of Chartered Accountants of Pakistan


Question bank: Objective test and long-form questions

3.9

AMBER LIMITED
Amber Limited (AL) manufactures a single product. Following information pertaining
to the year 20X4 has been extracted from the records of the company’s three
production departments.
Department
Budgeted

Actual

A
B
C
A
B
C

Material
Rs. in million
80
150
120
80
150
120

Labour
Machine
Hours
200,000
400,000
500,000
125,000
250,000
350,000
220,000
340,000
530,000
120,000
240,000

320,000

AL produced 3.57 million units during the period. The budgeted labour rate per
hour is Rs. 120. The overheads for department-A is budgeted at Rs. 5.0 million, for
department-B at 15% of labour cost and for department-C at 5% of prime cost of
the respective departments. Actual overheads for department A, B and C are Rs.
5.35 million, Rs. 8.90 million and Rs. 7.45 million respectively.
Overheads are allocated on the following basis:
Department-A

Machine hours

Department-B

Labour hours

Department-C

Percentage of Prime cost

There was no beginning or ending inventory in any of the production departments.
Required
(a)

Budgeted overhead application rate for each department.

(05)

(b)

The total and departmental actual cost for each unit of product.

(08)

(c)

The over or under applied overhead for each department.

(03)

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