Bahria University

Islamabad Campus
Final Term Exam (Summer-2020)
Department of Business Studies

Instructor Name: Tanveer Taj Course: Managerial Accouting

Date: 13th September, 2020 Time Allowed: 4 Hours
Max Marks: 40 Program: BBA V
Instructions:
Attempt all questions. There are 4 questions.
All questions should be handwritten with neat and clean legible writing
Use assignment specific wide and long pages to solve
Once completed, properly scan the document with clear focus and upload to CMS in a PDF format

Question No 1: (10 Marks)

The Wilmont Chemical Corporation produced a variety of industrial products, including a specialty chemical called SC. SC was packaged
and sold by the company in 25-liter plastic containers. At the beginning of each year, the company’s controller estimated the unit cost of
SC for the coming year as one factor in the development of the product’s pricing and promotion strategies. In addition, the estimated cost
of SC was used as a benchmark against which to compare the actual cost of production. The estimated direct cost per unit (omitting any
manufacturing-overhead allocation) of SC for the current year was as follows:
Raw material (10 pounds at
$30.00
$3.00/pound)
Direct labor (0.5 hour at $12.00/hour) 6.00
Total direct cost per unit $36.00

Wilmont Chemical also prepared monthly budgets for production volume, sales volume, and nonmanufacturing expenses. In general,
management strove to achieve actual results similar to the budgeted amounts, and tried to minimize the company’s working-capital
investment by maintaining just-in-time inventory levels. Unfortunately, the market demand and sales price for SC were difficult to predict.
In addition, the company’s actual direct-labor costs were somewhat erratic, primarily owing to equipment problems and high employee
turnover. Also, the cost of the raw material used to produce SC was significantly affected by unstable crude-oil prices and variability in the
quality of the available material. Owing to the general instability of the environment in which the company produced and sold SC, it was
not unusual for actual results to deviate from budgeted amounts. For example, the actual operating results for the most recent month
differed from the budgeted amounts as follows:
Actual Budget
Production volume (units) 11,000 11,000
Sales volume (units) 10,000 11,000
Sales price per unit $45.00 $46.00
Direct-labor hours 5,610 5,500
Direct-labor cost $66,759 $66,000
Raw materials purchased (lbs.) 120,000 110,000
Raw materials purchased (cost) $384,000 $330,000
Raw materials used in production (lbs.) 115,500 110,000
Nonmanufacturing expenses $84,000 $80,000

Wilmont Chemical’s accounting policy was to use the actual raw-material cost and the actual direct-labor cost in applying the LIFO
inventory method as the basis for valuation of ending inventory and determination of cost of goods sold. Work-in-process inventory was
not a factor because it was negligible. Each month, the actual unit cost of SC was compared with the estimated unit cost to see if there was
a difference. Significant differences were investigated by management as part of Wilmont Chemical’s continuous-improvement program.
Based on what he had learned at a recent professional-development conference, the company’s controller thought the financial statements
might be more managerially relevant if raw-material inventory were kept at estimated costs and finished-goods inventory were kept at
estimated production costs. Cost of goods sold would be determined using estimated costs, and differences between actual and estimated
costs would be treated as adjustments to the current month’s income. The controller thought this new approach would facilitate the
identification of any variances from plan, which could be broken down into the price and quantity impacts for both materials and labor. In
his opinion, this new approach would enhance management’s ability to take appropriate corrective actions.
Required
1. Prepare an income statement for the most recent month using the company’s actual costing system. Assume that raw-material and
finished-goods inventory were both zero at the beginning of the month. Calculate the ending-inventory costs for raw materials and
finished goods.
2. Prepare an income statement for the most recent month using the controller’s “managerially relevant” approach. Calculate the ending-
inventory costs. Explain the differences in the two income statements and in the ending-inventory balances.
3. A variation of the controller’s “managerially relevant” approach would be to keep raw material inventory at actual cost, recognizing any
differences between the actual and estimated cost only for the material used in production. Using this modified approach, prepare an
income statement for the most recent month and calculate the ending inventory costs. Explain how this income statement and ending-
inventory balances differ from the other two approaches.
4. As a manager, which of these three financial-statement approaches would you prefer? Why?

Question No: 2 (10 Marks)

The management of Thews Corporation is considering dropping product E28I. Data from the company's accounting system appear below:
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed
that $86,000 of the fixed manufacturing expenses and $67,000 of the fixed selling and administrative expenses are avoidable if product
E28I is discontinued.

Required:
Prepare a schedule of dropping the product or retaining the product to decide whether it should be retained or dropped?

Question No 3: (10 Marks)

Shifa Hospital located at H-8 Islamabad has been hit with a number of complaints about its food service from patients, employees, and
cafeteria customers. These complaints, coupled with a very tight local labor market, have prompted the organization to contact a prominent
firm dealing in ready to use food meals, The Tehzeeb Food Services (TFS) about the possibility of an outsourcing arrangement.
The hospital's business office has provided the following information for food service for the year just ended: food costs, $890,000; labor,
$85,000; variable overhead, $35,000; allocated fixed overhead, $60,000; and cafeteria net income, $80,000.
Conversations with TFS personnel revealed the following information:
• TFS will charge Shifa Hospital $14 per day for each patient served. Note: This figure has been "marked up" by TFS to reflect the firm's
cost of operating the hospital cafeteria.
• Shifa's 250-bed facility operates throughout the year and typically has an average occupancy rate of 70%.
• Labor is the primary driver for variable overhead. If an outsourcing agreement is reached, hospital labor costs will drop by 90%. TFS
plans to use Shifa’s facilities for meal preparation.
• Cafeteria net income is expected to increase by 15% because TFS will offer an improved menu selection.

Required:
a) Should Shifa Hospital outsource its food-service operation to TFS?
b) What factors, other than dollars, should Shifa consider before making the final decision?

Question No: 4 (10 Marks)

Khizar & Co. uses a standard cost system and sets predetermined overhead rate on the basis of direct labour hours. The following
data are taken from the company’s budget for the current year:

The standard cost card for the company’s only product is given below:

Direct Material: 2 feet at Rs.8.45 per foot Rs.16.90

Direct labour: 1.4hour at Rs.16 per hour Rs.22.40
Variable manufacturing overhead: 1.4hour at Rs.2.5 per hour Rs.3.50
Fixed manufacturing overhead: 1.4hour at Rs.6 per hour Rs.8.40
Standard cost per unit Rs.51.20
The following additional information is available for the year just completed:
▪ During the year, the company produced 30,000 units of product.
▪ A total of 64,000 feet of material was purchased during the year at a cost of Rs.8.55 per foot. All of this material was
used to manufacture the 30,000 units.
▪ The company worked 43,500 direct labour hours during the year at a direct labour cost of Rs.15.80 per hour.
▪ Overhead was applied to the products on the basis of direct labour hours.Data relating to manufacturing overhead
costs follow:

Denominator activity level (direct labour hours) 35,000

Budgeted fixed overhead costs Rs.210,000
Actual fixed overhead cost incurred Rs.211,800
Actual variable overhead cost incurred Rs.108,000

Required:
i) Compute direct material price and quantity variances.
ii) Compute direct labour rate and efficiency variances.
iii) Compute variable manufacturing overhead rate and efficiency variances.
iv) Compute fixed manufacturing overhead budget and volume variances.