CMA JUNE, 2019 EXAMINATION
PROFESSIONAL LEVEL-I
SUBJECT: 102. COST ACCOUNTING
Model Solution
Solution of Question # 1.
(a) ) Definition of Cost Accounting :
Cost Accounting is the field of accounting that is used to record, summarise and report the cost
information on a periodical basis. Its primary function is to ascertain and control costs. It helps the
users of cost data to make decisions regarding the determination of selling price, controlling costs,
projecting plans and actions, efficiency measurement of the labour, etc.
Cost Accounting adds to the effectiveness of the financial accounting by providing relevant
information which ultimately results in the good decision-making process of the organisation. It
traces the cost incurred at each level of production, i.e. right from the input of the material till the
output produced, each and every cost is recorded. There are two types of Cost Accounting
systems, they are:
 Non – Integrated Accounting System: The accounting system in which separate set of books
is maintained for cost information.

Integrated Accounting System: The accounting system in which cost and financial data
are maintained in a single set of books.
Production (or factory) overhead includes all indirect material cost, indirect wages and indirect
expenses incurred in the factory from receipt of the order until its completion, including:
(a) Indirect materials which cannot be traced in the finished product.
Consumable stores, eg material used in negligible amounts
(b) Indirect wages, meaning all wages not charged directly to a product.
Salaries of non-productive personnel in the production department, eg supervisor
(c) Indirect expenses (other than material and labour) not charged directly to production
(i) Rent, rates and insurance of a factory
(ii) Depreciation, fuel, power and maintenance of plant and buildings
(b) Managers use information about operating costs to plan, perform, evaluate, and communicate
the results of operating activities.
* Service organization: managers find the estimated cost of services helpful in monitoring
profitability and making decisions about such matters as bidding on future business, lowering or
negotiating their fees, or dropping one of their services.
* In retail organizations, such as Good Foods Store, which we used as an example in the last
chapter, managers work with the estimated cost of merchandise purchases to predict gross
margin, operating income, and value of merchandise sold. They also use this information to make
decisions about matters like reducing selling prices for clearance sales, lowering selling prices for
bulk sales, or dropping a product line.
* Managers at manufacturing companies like Hershey’s use estimated product costs to predict the
gross margin and operating income on sales and to make decisions about such matters as
dropping a product line, outsourcing the manufacture of a part to another company, bidding on a
special order, or negotiating a selling price. In this chapter, we will use The Choice Candy
Company, the hypothetical manufacturer of gourmet chocolate candy bars, to illustrate how
managers of manufacturing companies use cost information.
The cost information system plays an important role in every organization within the decisionmaking process. An important task of management is to ensure the control over operations,
processes, activity sectors, and not ultimately on costs. Although in reaching the goals of an
organization compete many control systems (production control, quality control and stocks
control), the cost information system is important because it monitors the results of the others. The
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detailed analysis of costs, the calculation of production cost, the loss quantification, the estimating
of work efficiency provides a solid basis for the financial control.
(c) HL methods
21,500−13,000
455−115
(i) Slope coefficient (b) =
=
8,500
340
= 25Tk.
Constant (a) = Tk. 10,125 = 21,500 – (455 x 25) = Tk. 10,125
Cost function = Tk. 10,125 + (Tk. 25.00 X no of service reports) or 𝑇𝑘. 10,125 + 25𝑥
(ii) Regression model
(8 𝛸 42,915,000)− (2,340 𝛸 139,800) 16,188,000
𝑛 ∑ 𝑥𝑦−∑ 𝑥 ∑ 𝑦
Slope coefficient (b) =
= 659,200 = Tk. 24.55704
2 =
2
8 𝛸 766,850−(2,340)2
𝑛 ∑ 𝑥 −(∑ 𝑥)
Constant (a) =
∑ 𝑦−𝑏 ∑ 𝑥
3
=
139,800−24.55704 𝛸 2,340
8
= Tk. 10,292.07
Cost function = Tk. 10,292.07 + (Tk. 24.5574 X no of service reports)
Cost of 210 service reports = Tk. 15449.04 = (10,292.04 +24.55704 x 210) = Tk. 15,449.02
d)
Name of
the item
i)
ii)
iii)
iv)
v)
vi)
vii)
viii)
ix)
Variabl
e
cost
X
X
Fixed
Cost
Period
cost
Direct
Material
Direct
Labor
Manufacturi
ng O/H
Sunk
Cost
X
X
X
X*
Opportunit
y Cost
X
X
X
X
X
X
X
X
X
X
X
X**
*This is a sunk cost because the outlay for the equipment was made in a previous period.
**This is an opportunity cost because it represents the potential benefit that is lost or sacrificed as
a result of using the factory space to produce tables. Opportunity cost is a special category of cost
that is not ordinarily recorded in an organization’s accounting records. To avoid possible confusion
with other costs, we will not attempt to classify this cost in any other way except as an opportunity
cost.
Solution of Question # 2.
(a)
1
2
3
4
5
6
7
Order Size
No. of Order
[5,000 /
Order size]
Buying cost
per order
Average
stock
Average
stock value
Carrying cost
(20% of
average cost)
Purchase cost
400
12.5
500
10
1,000
5
2,000
2.5
3,000
1.66
4,000
1.25
5,000
1
=1,200*12.5
=15,000
200
=1,200*10
=12,000
250
=1,200*5
=6,000
500
=1,200*2.5
=3,000
1,000
=1,200*1.66
=1,992
1,500
=1,200*1.25
=1,500
2,000
=1,200*1
=1,200
2,500
=200*1,200
=240,000
=250*1,180
=295,000
=500*1,160
= 580,000
=1,500*1,12
0= 16,80,000
=2,500*1,120
=28,00,000
336,000
=2,000*1,12
0
=22,40,000
448,000
=5,000*1,12
0=56,00,000
=5,000*1,12
0 =56,00,000
=5,000*1,120
=56,00,000
48,000
59,000
116,000
=1,000*1,14
0
=11,40,000
228,000
=5,000*1200=
60,00,000
=5,000*1,18
0=59,00,000
=5,000*1,160
=58,00,000
=5,000*1,14
0 =57,00,000
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560,000
8
Total cost
(Purchase
cost+
Ordering
cost+
Carrying
cost)
60,63,000
59,71,000
59,22,000
59,31,000
59,37,992
60,49,500
61,61,200
Economic
Order
Quantity
(EOQ)
(b)
Item
Original
Cost
Replacement
Cost
Sales
price
Estimated cost to
complete & sell
Normal Profit
Margin
NRV
[45]
1
2
.67
2.20
.19
.93
3
.62
2.12
.20
.87
4
.72
2.22
.24
.97
5
.04
.12
.03
.05
6
.08
.08
.01
.04
7
0.68
2.1
0.21
0.92
A
B
C
D
Inventory value as
Per IAS-2 (Lower of
cost or NRV)
8
0.67
2.1
0.19
0.92
(c)
SNP Company
Calculation of Combined Cost
Annual
Number of
Orders
1
5
5
5
5
Probability of
stockout
2
0.4
0.2
0.1
0.05
Expected annual
stockouts
Cost per
stockout
Annual
stockout
cost
Annual safety
stock carrying
cost (Tk.1 per
unit)
3= 1*2
4
5=3*4
6
2
75
150
10
1
75
75
20
0.5
75
37.5
40
0.25
75
18.75
80
The recommended level of safety stock is 40 units
Annual
combined cost
7=5+6
160
95
77.50
98.75
(d)
Order is charged with the cost of defective work
i
a
WIP
9,375
Materials
Payroll
Applied Factory overhead
b
c
5,000
1,750
2,625
WIP
71.25
Materials
Payroll
Applied Factory overhead
Finished goods
WIP
15
22.50
33.75
9,446.25
9,446.25
Defective work is not charged to a specific order
ii
a
b
c
WIP
9,550
Materials
Payroll
Applied Factory overhead
Factory Overhead Control
Materials
Payroll
Applied Factory overhead
Finished goods
WIP
5,000
1,750
2,800
73.50
15
22.50
36
9,550
9,550
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Solution of Question # 3.
(a)
i.
ii.
Normal time per piece is 20 minutes or 1/3 hour
Normal output per week 120 pieces
Hence, standard time for 120 pieces: 120*(1/3) = 40 hours
Time for completing 150 pieces: 150*(1/3)= 50 hours
Number of working hours per week being 48, 50 hours job is completed in 48 hours.
Accordingly, standard time for 150 pieces = 50 hours
Time taken for same
= 48 hours
Time saved
= 2 hours
Straight piece rate : = Tk.1.50 per piece for 150 pieces = Tk.225
Differential piece rate : Piece rate Tk.1.5
Low piece rate = 80% of Tk.1.5 = Tk.1.2
High piece rate = 120% of Tk.1.5 = Tk.1.8
The actual output being more than the standard output, the worker is paid at the high piece rate. He
thus gets 150*1.8 = Tk.270
iii. Halsey : Wages for time taken : 48 hours 3.75
=
Tk.180
Bonus for the time saved: 50% of 2 hours = Tk.3.75
Total earnings
= Tk.183.75
iv. Rowan plan : Wages for time taken : 48 hours * 3.75 = 180
Bonus: ((time taken/time allowed)*time saved*hourly rate)
= ((48/50*2*3.75)) = 7.20
Total earnings: 187.20
(b)
Hours worked
Units produced
Standard production
Efficiency ratio
Base wage
Weekly earnings
Effective hourly rate
Labor cost per unit
(40*30)
(1,280/1,200)
9*40*106.67%
Tk.384/40
Tk.384/1,280
40
1280
1200
106.67%
Tk. 9
Tk.384
Tk.9.6
Tk.0.30
(c)
Hours* Hourly rate
Units above standard
Hours saved
Value of time saved
80% of value of time saved
Earnings
Total
Monday
60
0
Tk.60
Tuesday
60
10
0.50
Tk.3.75
Tk.3.00
Tk.63
Tk.187.50
Wednesday
60
15
0.75
Tk.5.625
Tk.4.5
Tk.64.5
(d)
Monday
Units produced
3,800
Standard hours for production
76
Actual hours
80
Daily group wage (Tk.)
640
Bonus (Tk.)
Total labor cost (Tk.)
640
Unit labor cost (Tk.)
0.168
Unit overhead cost (Tk.)
0.034**
Unit conversion cost (Tk.)
0.202
*10 hours saved@ Tk.8 per hour = Tk.80
** [(9+7)*8hours)]/3,800units = Tk.0.034
Tuesday
4,500
90
80
640
80*
720
.160
0.028
0.188
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Wednesday
4,600
92
80
640
96
736
0.160
0.028
0.188
Thursday
4,500
90
80
640
80
720
.160
0.028
0.188
Friday
4,400
88
80
640
64
704
.160
.029
0.189
Solution of Question No. 4
(a) Equivalent production is a measure that applies a percentage-of-completion factor to partially completed
units to compute the equivalent number of whole units produced in an accounting period for each type of
input. Equivalent units are computed from (1) units in the beginning work in process inventory and their
percentage of completion, (2) units started and completed during the period, and (3) units in the ending work
in process inventory and their percentage of completion. The computation of equivalent units differs
depending on whether the FIFO method or the average costing method is used.
(b) The three methods managers can use are the direct, the step-down, and the reciprocal methods. The
direct method allocates each support department’s costs to operating departments without allocating a
support department’s costs to other support departments. The step-down method allocates supportdepartment costs to other support departments and to operating departments in a sequential manner that
partially recognizes the mutual services provided among all support departments. The reciprocal method
fully recognizes mutual services provided among all support departments.
(c)
Allocate the total Support Department costs to the production departments under the Direct Allocation
Method:
Clothing(`000)
Shoes(`000)
Departmental Costs
Tk. 10,000
Tk. 8,000
From:
Information Technology
(5,000/8,000) × Tk. 2,000
Tk. 1,250
(3,000/8,000) × Tk. 2,000
Tk. 750
Human Resources
(120/160) × Tk. 1,000
Tk. 750
(40/160) × Tk. 1,000 ______
Tk. 250
Total Departmental Costs
Tk. 12,000
Tk. 9,000
Allocate the Support Department Costs to the Production Department under the Step-down (Sequential)
Allocation Method IT first sequentially:
IT(`000)
HR(`000)
Clothing(`000)
Shoes(`000)
Departmental Costs
Tk. 2,000
Tk. 1,000
Tk. 10,000
Tk. 8,000
From:
Information Technology
Tk. (2,000)
(2,000/10,000) × Tk. 2,000
Tk. 400
(5,000/10,000) × Tk. 2,000
Tk. 1,000
(3,000/10,000) × Tk. 2,000
Tk. 600
Human Resources
Tk. (1,400)
(120/160) × Tk. 1,400
Tk. 1,050
Tk. 350
(40/160) × Tk. 1,400
Total Departmental Costs
Tk. 0
Tk. 0
Tk. 12,050
Tk. 8,950
Allocate the Support Department Costs to the Production Department
Allocation Method HR first sequentially:
HR(`000)
IT(`000)
Departmental Costs
Tk. 1,000
Tk. 2,000
From:
Human Resources
Tk. (1,000)
(40/200) × Tk. 1,000
Tk. 200
(120/200) × Tk. 1,000
(40/200) × Tk. 1,000
Information Technology
Tk. (2,200)
(5,000/8,000) × Tk. 2,200 Tk.
(3,000/8,000) × Tk. 2,200
Total Departmental Costs
Tk. 0
Tk. 0
under the Step-down (Sequential)
Clothing(`000) Shoes(`000)
Tk. 10,000
Tk. 8,000
Tk. 600
Tk. 200
1,375
Tk. 825
Tk. 11,975
Tk. 9,025
Allocate the Support Department Costs to the Production Department under the Reciprocal Allocation
Method:
IT = (Tk. 2,000 + .20 HR)
HR = (Tk. 1,000 + .20 IT)
IT = Tk. 2,000 + .20 HR
IT = Tk. 2,000 + .20(Tk. 1,000 + .20 IT)
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IT = Tk. 2,000 + Tk. 200 +.04 IT
.96 IT = Tk. 2,200
IT = Tk. 2,291.67
HR = Tk. 1,000 + .20 IT
HR = Tk. 1,000 + .20(2,291.67)
HR = Tk. 1,000 + 458.33
HR = Tk. 1,458.33
IT(`000)
HR(`000)
Clothing(`000) Shoes(`000)
Departmental Costs
Tk. 2,000
Tk. 1,000
Tk. 10,000
Tk. 8,000
Information Technology
(2,000/10,000) × Tk. 2,292
Tk. 458
(5,000/10,000) × Tk. 2,292
Tk. 1,146
(3,000/10,000) × Tk. 2,292
Tk. 688
Human Resources (40/200) × Tk. 1,458
292
(120/200) × Tk. 1,458
Tk. 874
(40/200) × Tk. 1,458
Tk. 292
Total Department Costs
Tk. 2,292
Tk. 1,458
Tk. 12,020
Tk. 8,980
Allocated to production
(Tk. 2,292)
(Tk. 1,458)
Total Departmental Costs
Tk. 0
Tk. 0
Tk. 12,020
Tk. 8,980
ii) If Spirit decides to outsource its Information Technology needs, the company has to pay Tk. 97.50 per
hour for the 10,000 hours of IT services it needs, for a total outlay of Tk. 975,000. In return, Spirit saves 30%
of the IT department’s fixed costs (Tk. 1,500,000 × 0.30 = Tk. 450,000).
The issue then is how much it saves in variable costs. The key is to recognize that Spirit saves more than
the Tk. 500,000 of variable costs assigned to IT because of the interlinks between the IT and HR groups. To
quantify this, we have to calculate the reciprocated cost of the IT department using the variable costs alone.
IT = Tk. 500,000 + .20 HR
IT = Tk. 500,000 + .20(Tk. 100,000 + .20 IT)
IT = Tk. 520,000 + .04 IT
.96 IT = Tk. 520,000
IT = Tk. 541,667
Spirit’s total savings therefore amount to Tk. 450,000 + Tk. 541,667 = Tk. 991,667, which exceeds the direct
outsourcing payment of Tk. 975,000. Therefore, on financial grounds alone, Spirit should outsource its
Information Technology services.
Beyond the financial perspective, Spirit should decide how important it is to the company to have control
over its own IT support. It may be critical, especially with information technology, that the knowledge and
expertise need to be maintained within the firm to avoid third party dependence in important decisions. It
may also be critical for security purposes to maintain IT support internally, so that company information is
kept confidential. Additionally, by maintaining IT support in-house, the response time to production
departments and other support departments will likely be greater than the outsourced services. It is also
possible that the quality of the service would be higher as well. Finally, Spirit should consider the internal
repercussions of dismissing a large portion of its workforce. This could create morale issues for the
company’s remaining workers.
Solution of Question No. 5
(a) Job order cost systems are similar to process cost systems in three ways: (1) Both systems track the
same cost elements—direct materials, direct labor, and manufacturing overhead. (2) Both accumulate costs
in the same accounts—Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. (3) Both
assign accumulated costs to the same accounts—Work in Process, Finished Goods Inventory, and Cost of
Goods Sold. However, the method of assigning costs differs significantly. There are four main differences
between the two cost systems: (1) A process cost system uses separate accounts for each department or
manufacturing process, rather than only one work in process account used in a job order cost system. (2) A
process cost system summarizes costs in a production cost report for each department. A job order cost
system charges costs to individual jobs and summarizes them in a job cost sheet. (3) Costs are totaled at
the end of a time period in a process cost system, but at the completion of a job in a job order cost system.
(4) A process cost system calculates unit cost as: Total manufacturing costs for the period / Units produced
during the period. A job order cost system calculates unit cost as: Total cost per job / Units produced.
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(b) Because the operations of service, retail, and manufacturing organizations differ, their financial
statements differ as well. A service organization maintains no inventory accounts on its balance sheet. The
cost of sales on its income statement reflects the net cost of the services sold. A retail organization, which
purchases products ready for resale, maintains only a Merchandise Inventory account, which is used to
record and account for items in inventory. The cost of goods sold is simply the difference between the cost
of goods available for sale and the ending merchandise inventory. A manufacturing organization, because it
creates a product, maintains three inventory accounts: Materials Inventory, Work in Process Inventory, and
Finished Goods Inventory. Manufacturing costs flow through all three inventory accounts. During the
accounting period, the cost of completed products is transferred to the Finished Goods Inventory account,
and the cost of units that have been manufactured and sold is transferred to the Cost of Goods Sold
account.
c)
Job accounts
JOB 6832
Tk.
1,710
2,390
3,440
860
8,400
Balance b/f
Materials (stores a/c)
Labour (wages a/c)
Production overhead (o'hd a/c)
Job 6834 a/c
To stores (materials returned)
Cost of sales (balance)
Tk.
620
870
6,910
8,400
JOB 6833
Tk.
1,680
5,200
1,300
250
8,430
Materials (stores a/c)
Labour (wages a/c)
Production overhead (o'hd a/c)
Job 6834 a/c (materials transfer)
Balance c/f
Tk.
8,430
8,430
JOB 6834
Tk.
3,950
2,240
560
620
7,370
Materials (stores a/c)
Labour (wages a/c)
Production overhead (o'hd a/c)
Job 6832 a/c (materials transfer)
Job 6833 a/c (materials transfer)
Cost of sales (balance)
Tk.
250
7,120
7,370
JOB 6835
Tk.
Tk.
4,420 To stores (materials returned)
170
3,280
820
Cost of sales (balance)
8,350
8,520
8,520
Note that the accounts to which the double entry is made are shown in brackets.
ii) Job cards, summarised
Job 6832
Job 6833
Job 6834
Job 6835
Tk.
Tk.
Tk.
Tk.
Materials
1,530*
1,930
4,320 **
4,250
Labour
4,280
5,200
2,240
3,280
Production overhead
1,100
1,300
560
820
Factory cost
6,910
8,430
7,120
8,350
Admin & marketing o'hd (20%)
1,382
1,424
1,670
Cost of sale
8,292
8,544
10,020
Invoice value
8,500
9,000
9,500
Profit/(loss) on job
208
456
(520)
* Tk. (630 + 2,390 – 620 – 870)
** Tk. (3,950 + 620 – 250)
Materials (stores a/c)
Labour (wages a/c)
Production overhead (o'hd a/c)
= THE END =
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