COMSATS University Islamabad, Lahore Campus

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Terminal Examination –Spring 2020
Course Title: Advance Management Accounting Course Code: Acc Credit 3(3,0
Instructor Imran ur Rehman Programme BAF
Semester: 7th Batch Section: A Date:
Time 3 Hrs. (including uploading Maximum Marks: 50
Student’s Reg. No.
Important Instructions / Guidelines:
 Attempt all questions. Read all questions carefully before attempting.

Question 1: (Marks 4+4+4+4+4)

Required:
1. Compute the company’s CM ratio and its break-even point in both units and dollars.
2. The president believes that a $16,000 increase in the monthly advertising budget,
combined with an intensified effort by the sales staff, will result in an $80,000 increase in
monthly sales. If the president is right, what will be the effect on the company’s monthly
net operating income or loss?
3. Refer to the original data. The sales manager is convinced that a 10% reduction in the
selling price, combined with an increase of $60,000 in the monthly advertising budget,
will cause unit sales to double. What will the new contribution format income statement
look like if these changes are adopted?
4. Refer to the original data. The Marketing Department thinks that a fancy new package for
the laptop computer battery would help sales. The new package would increase
packaging costs by 75 cents per unit. Assuming no other changes, how many units would
have to be sold each month to earn a profi t of $9,750?
5. Refer to the original data. By automating certain operations, the company could reduce
variable costs by $3 per unit. However, fixed costs would increase by $72,000 each
month.
a. Compute the new CM ratio and the new break-even point in both units and dollars.
b. Assume that the company expects to sell 26,000 units next month. Prepare two contribution
format income statements, one assuming that operations are not automated and one assuming that
they are. (Show data on a per unit and percentage basis, as well as in total, for each alternative.)
 c. Would you recommend that the company automate its operations? Explain.
Question 2
Weston Products manufactures an industrial cleaning compound that goes through three processing
departments—Grinding, Mixing, and Cooking. All raw materials are introduced at the start of work in the
Grinding Department. The Work in Process T-account for the Grinding Department for May is given
below:

The May 1 work in process inventory consisted of 18,000 pounds with $14,600 in materials cost and
$7,200 in conversion cost. The May 1 work in process inventory was 100% complete with respect to
materials and 30% complete with respect to conversion. During May, 167,000 pounds were started into
production. The May 31 inventory consisted of 15,000 pounds that were 100% complete with respect to
materials and 60% complete with respect to conversion. The company
uses the weighted-average method to account for units and costs.
Required:
1. Determine the equivalent units of production for May. (Marks 3)
2. Determine the costs per equivalent unit for May. (Marks 3)
3. Determine the cost of the units completed and transferred to the Mixing Department during May.
(Marks 4) (Total Marks 10)

Question 3
Huntington Products manufactures 10,000 units of Part M-1 annually for use in its production. The
following costs are reported:
Direct Material Rs.20,000
Direct Labor 55,000
Variable factory overhead 45,000
Fixed factory overhead 70,000

Lufkin company has offered to sell Huntington 10,000 units of Part M-1 annually for Rs.20 per unit. If
Huntington accepts the offer, some of the facilities presently used to manufacture Part M-1 could be
rented to a third party at an annual rental of Rs.15,000. Additionally, Rs.4 per unit of the fixed factory
overhead applied to Part M-1 would be totally eliminated.
Required
Should Huntington accepts Lufkin’s offer, and why? (Marks 10)

Question 4
Entity RH makes and sells one product. Currently, it uses absorption costing to measure profits and
inventory values. The budgeted production cost per unit is as follows:
Direct Labour 3 hours at 6 per hour Rs.18
Direct Material 4 kilograms at Rs.7 per 28
kilo
Production overhead Fixed cost 20
 66

Normal output volume is 16,000 units per year and this volume is used to establish the fixed overhead
absorption rate for each year. Costs relating to sales, distribution and administration are:
 Variable 20% of sales value
 Fixed Rs.180,000 per year.
There were no units of finished goods inventory at 1 October Year 5. The fixed overhead expenditure is
spread evenly throughout the year. The selling price per unit is Rs.140. For the two six-monthly periods
detailed below, the number of units to be produced and sold is budgeted as follows:

Six months ending Six months ending

The entity is considering whether to abandon absorption costing and use marginal costing instead for
profit reporting and inventory valuation.

Required:
a. Calculate the budgeted fixed production overhead costs for the year. (Marks 2)
b. Prepare statements for management showing sales, costs and profits for each of the six-
monthly periods, using: (i) marginal costing (ii) absorption costing (Marks 6)
c. Prepare an explanatory statement reconciling for each six-monthly period the profit using
marginal costing with the profit using absorption costing. (Marks 2) (Total Marks 10)