ADVANCED MANAGEMENT ACCOUNTING PART (A) COSTING … · ADVANCED MANAGEMENT ACCOUNTING PART (A) COSTING Name of the Topic Page No 1 Developments in the business environment 01-16 A

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ADVANCED MANAGEMENT ACCOUNTING

PART (A) COSTING

Name of the Topic Page No1 Developments in the business environment 01-16A Total Quality Management 02-04B Target Costing 05-06C Activity Based Costing 07-11D Just In Time 12-14E Theory of Constraints 15F Life Cycle Costing 16

2 Decision Making Using Cost Concepts and CVP Analysis17-28

3 Pricing DecisionA External Pricing Policy 29-31B Pareto Analysis 32

4 Budget & Budgetary Control 33-355 Standard Costing 36-446 Costing of Service Sector 45-497 Transfer Pricing Policy (Internal Pricing Policy) 50-558 Uniform Costing and Inter-firm Comparison9 Cost Sheet, Profitability Analysis and Reporting 56-60

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Table Showing Marks of Past Examination Questions

Year Practical Theory Year Practical Theory2006 May 16 Marks 20 Marks 2011 May 17 Marks 13 Marks2006 Nov. 20 Marks 2011 Nov. 8 Marks 13 Marks2007 May 14 Marks 2012 May 14 Marks2007 Nov. 28 Marks 2012 Nov. 10 Marks 16 Marks2008 May 11 Marks 2013 May 16 Marks 4 Marks2008 Nov. 9 Marks 11 Marks 2013 Nov. 8 Marks 8 Marks2009 May 12 Marks 9 Marks 2014 May 13 Marks 4 Marks2009 Nov. 10 Marks 12 Marks 2014 Nov. 10 Marks 8 Marks2010 May 12 Marks 9 Marks 2015 May 16 Marks 8 Marks2010 Nov. 16 Marks 8 Marks 2015 Nov.

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Q.-1. Carlon Ltd. makes and sells a single product: the unit specifications are as follows:Direct Materials X : 8sq. metre at Rs.40 per spare metreMachine Time : 0.6 Running hoursMachine cost per gross hour : Rs.400Selling price : Rs.1,000Carlon Ltd. requires to fulfill orders for 5,000 product units per period. There are no stock of product units at the beginning or end of the period under review. The stock level of material X remains unchanged throughout the period.Carlon Ltd. is planning to implement a Quality Management Programme (QPM).

The following additional information regarding costs and revenues are given as of now and after implementation of Quality Management Programme.

Before the implementation of QMP After the implementation

1. 5% of incoming material from suppliers scrapped due to poor receipt and storage organisation.

1. Reduced to 3%.

2. 4% of material X input to the machine process in wasted due to processing problems.

2. Reduced to 2.5%

3. Inspection and storage of Material X costs Re.1 per square metre purchased.

3. No change in the unit rate

4. Inspection during the production cycle, calibration checks on inspection equipment vendor rating

4. Reduction of 40% of the existing cost.

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and other checks cost Rs.2,50,000 per period

5. Production Qty. is increased to allow for the downgrading of 12.5% of the production units at the final inspection stage. Downgraded units are sold as seconds at a discount of 30% of the standard selling price.

5. Reduction to 7.5%

6. Production Quantity is increased to allow for return from customers (these are replaced free of charge) due to specification failure and account for 5% of units actually delivered to customer.


7. Product liability and other claims by customers is estimated at 3% of sales revenue from standard product sale.

7. Reduction to 1%

8. Machine idle time is 20% of Gross machine hrs used (i.e. running hour = 80% of gross/hrs.).


9. Sundry costs of Administration, Selling and Distribution total – Rs.6,00,000 per period.

9. Reduction by 10% of the existing.

10.

Prevention programme costs Rs.2,00,000

10. Increase to Rs.6,00,000

The Total Quality management Programme will have a reduction in Machine Run Time required per product unit to 0.5 hr.

Required(a) Prepare summaries showing the calculation of

(i) Total production units (pre inspection),

(ii) Purchase of Materials X (square metres),

(iii) Gross Machine Hours. In each case, the figures are required for the situation both before and after the

implementation of the Quality Management Programme so that orders for 5,000 product units can be fulfilled.

(b) Prepare Profit and Loss Account for Carlon Ltd. for the period showing the profit earned both before and after the implementation of the Total Quality Programme.

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(May 2005)

Q.-2.Asha Road Carriers is a transporting company that transports goods from one place to

another. It measures quality of service in terms of:

(i) Time required to transport goods.(ii) On-time delivery(iii) Number of lost or damaged cartons.

To improve its business prospects and performance the company is seriously considering to install a scheduling and tacking system, which involves an annual outlay of Rs.1,50,000 besides equipments costing Rs.2,00,000 needed for installation of the system.

The company proposes to utilize the proceeds of the fixed deposit maturing next month of purchase the equipment. The rate of interest at present on deposit is 10%. The company furnishes the following information about its present and anticipated future performance:

Current Expected

On-time delivery 85% 95%

Variable costs per carton lost or damaged Rs.50 Rs.50

Fixed costs per carton lost Rs.30 Rs.30

Number of cartons lost or damaged 3,000 1,000

The company expects that each per cent point increase in on-time performance will result in revenue increase of Rs.18,000 per annum. Contribution margin of 45% is required. Should Asha Road Carriers acquire and install the new system?Q.-3.A company manufactures a single product, which requires two components. The company purchases one of the components from two suppliers: X Limited and Y Limited.

The price quoted by X Limited is Rs.180 per hundred units of the component and it is found that on an average 3 per cent of the total receipt from this suppliers is defective. The corresponding quotation from Y Limited is Rs.174 per hundred units, but the defective would go up to 5 per cent.

If the defectives are not detected, they are utilized in production causing a damage of Rs.180 per 100 units of the component.The company intends to introduce a system of inspection for the components on receipt. The inspection cost is estimated at Rs.24 per 100 units of the component. Such an inspection will be able to detect only 90 per cent of the defective components received. No payment will be made for components found to be defective in inspection.

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Required:(i) Advise whether inspection at the point of receipt is justified?(ii) Which of the two suppliers should be asked to supply?(Assume total requirement is 10,000 units of the component).

Q.-4. Businessman employees 20 swing machinists, but he is aware that ten are the better workers than others. He is considering to conduct a training programme for his ten less efficient mechanists to increase their efficiency to be equal to that achieved by “better” workers. Relevant data are as follows:

There is one sewing machine for each machinist. All the machinists are engaged on similar work are paid Rs2.20 each good

garment produced on piece work system. To rectify each rejected garment costs Rs4, this work is done by

subcontractor. Garment machining department operates 2,000 hours a year. Average output of per machinist (on the basis of all 20 machinists) is 12

good garments with one rejected per worker per hour. However 10 less efficient machinists averages only 10 good garments with 1.5 rejected per worker per hour.

Depreciation of each sewing machine is Rs10,000 per year and the variable cost of power, clearing and preventive maintenance is Rs.5 per hour per machine.

Fixed production overhead other than depreciation is Rs.20 per machine hour.

Selling price per garment is Rs.18 Direct material cost per garment is Rs.12 Training will not reduce productive hours There is no problem in selling increased output.

You are required(a)To prepare a statement of comparative costs for the “better” worker and the “less efficient”

workers excluding materials costs.(b)To find out the benefit derived over a one year period, if Rs.1,00,000 is spent on a training

course for the “less efficient” workers to match the efficiency with the “better” workers. (Nov. 2005)

Q.-1. MJE Ltd appointed to you for computing the target costs and the total cost reduction targets from the following information.

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Particular M J E

Expected market price Rs. 8000 Rs. 6800 Rs. 420

Required return on sales 37% 20% 25%

Current feasible cost Rs.6000 Rs. 5200 Rs. 350

Total expected sales units 4000 18,000 2,00,000

Q.-2.MJS manufactures one brand of personal computers called Samsung Following is the profitability statement for Samsung personal computer.

Particulars Per Unit Rs. Per Unit Rs.

Revenues 2000

Cost of Goods sold:

Direct Materials Cost 920

Direct Manufacturing labour Costs 128

Direct Machining costs (fixed) 152

Manufacturing Overheads cost 160 1360

R and D Costs 72

Design Cost of product and processes 80

Marketing Costs 200

Distribution Costs 48

Customer Service Costs 40 440

Full Product Costs 1800

Operating Income 200

Following further information has been provided:-(1) No opening or closing inventory.(2) Manufacturing Overhead Cost = Ordering and Receiving cost + Testing and Inspection Cost + Rework Cost(3) MJE expects its competitors to lower the prices of PCs that compete against Samsung by 15%. MJS’s management believes that it must respond aggressively by reducing Samsung price by 20%

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(4) Production Qty. 1,50,000 units.

Required:(a) Compute the target cost?(b) Compute difference between target and allocable cost?

Q.-3. (A) Compute the target cost and cost reduction target for kidney replacement surgeries.

A Hospital is a service organization that specializes in the kidney replacement surgery. Consider the following information for a kidney replacement surgery:

Expected charge / reimbursement (sales price) Rs. 84,000

Required return on charges (return on sales) 20%

Current average cost per Kidney replacement Rs.79,600

(B) A cross-functional team of administrators, surgeons, nurses, and support personnel analyzed the hospital’s kidney-replacement procedure and estimated that, through better scheduling and post-operative care, hospital stays could be reduced from an average of 8 days to 4 days, with no loss of quality of care improvements in procedure could result in a reduction of the average cost of a kidney replacement by Rs. 15,000 if this were accomplished, what would be the expected return on charges for a kidney replacement?

Q.-4.A company has the capacity of production of 80,000 units and presently sells 20,000 units at Rs. 100 each. The demand is sensitive to selling price and it has been observed that every reduction of Rs. 10 in selling price the demand is doubled. What should be the target cost at full capacity if profit margin on sale is taken as 25%?What should be the cost reduction scheme if at present 40% of cost is variable with same % of profit? If Rate of Returned is 15%, what will be maximum investment at full capacity?

Q.-5. Sterling Enterprises has prepared a draft budget for the next year as follows:

Rs. Rs.

Sales price per unit 30

Variable cost per unit:

Direct Materials 8

Direct Labour (2 hours x Rs. 3) 6

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Variable overheads (2 hours x Rs. 0.50) 1 (15)

Contribution per unit 15

Budgeted contribution (10,000 Units x 15) 1,50,000

Budgeted fixed costs (1,40,000)

Budgeted Profit 10,000

The board of Directors is dissatisfied with this budget, and asks a working party to come up with an alternate budget with a higher profit figures.

The working party reports back with the following suggestions, which will lead to a budgeted profit of Rs. 25,000.The company should spend Rs. 28,500 on advertising and put the sales price up to Rs. 32 per unit.

It is expected that the sales volume would also rise, in spite of the price increase, to 12,000 units. In order to achieve the extra production capacity, however, the work force must be able to reduce the time taken to make each unit of the product.

It is proposed to offer a pay and productivity deal, in which the wage rate per hour is increased to Rs. 4. The hourly rate for variable overhead will be unaffected. Ascertain the target labour time required per unit to achieve the target profit

Q.-1. MJ Ltd. manufactures four products namely A, B, C, and D using the same plant and process. The following information relates to a production period:

A B C D

Output in units 720 600 480 504

Cost per unit Rs. Rs. Rs. Rs.

Direct Material 42 45 40 48

Direct Labour 10 9 7 8

Machine hours per unit 4 3 2 1

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The four products are similar and are usually produced in production runs of 24 units and sold in batches of 12 units. Using machine hour rate currently absorbs the production overhead. The total overheads incurred by the company for the period is as follows:

Rs.

Machine operation and Maintenance cost 63,000

Setup costs 20,000

Store receiving 15,000

Inspection 10,000

Materials handling and dispatch 2,592

During the period the following cost drivers are to be used for the overhead cost.

Cost Cost driver

Setup cost No of production run

Store receiving Requisition raised

Inspection No. of production run

Materials handling and dispatch order executed

It is also determine that: Machine operation and maintenance cost should be apportioned between setup cost, store receiving and inspection activity in 4:3:2. Number of requisition raised on store is 50 for each product and the no. of order executed is 192 each other being for a batch of 12 of a product.

Required: (I) Calculate the total cost of each product, if all overhead costs are absorbed on machine hour rate basis. (II) Calculate the total cost of each product using activity base costing. (III) Comment briefly on differences disclosed between overhead traced by present System and those traced by activity base costing. (Nov 2004)

Q.-2. A Company manufactures several products of varying levels of designs and models. It uses a single overhead recovery rate based on direct labour hours. The overheads incurred by the company in the first half of the year are as under:

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Rs.

Machine operation expenses 10,12,500

Machine maintenance expenses 1,87,500

Salaries of technical staff 6,37,500

Wages and salaries of stores staff 2,62,500

During this period, the company introduced activity based costing system and the following significant activities were identified.

- receiving materials and components- set up of machines for production runs- quality inspection

It is also determined that:- The machine operation and machine maintenance expenses should be apportioned between stores and production activity in 20:80 ratios.- The technical staff salaries should be apportioned between machine maintenance, set up and quality inspection in 30:40:30 ratios.

The consumption of activities during the period under review is as under:

Direct labour hours worked 40,000

Production set – ups 2,040

Material and component consignments received from suppliers 1,960

Number of quality inspections carries out 1,280

Direct wage rate Rs. 6 per hour

The data relating to two products manufactured by the company during the period are as under:

Particular P Q

D.M. Cost Rs. 6,000 4,000

D.L. Hours 960 100

D.M. Consignments Received 48 52


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Production runs 36 24

No. of quality inspection done 30 10

Quantity Produced (units) 15,000 5,000

A potential customer has approached the company for the supply of 24,000 units of a component K to be delivered in lots of 3,000 units per quarter. The job will involve initial design costs of Rs. 60,000 and the manufacture will involve the following per quarter.

D.M. cost Rs. 12,000

D.L. Hours 300

Production runs 6

No. of consignment of direct materials to be received 20

Inspections 24

The company desires a markup of 25% on cost.Required (i)Calculate the cost of products P and Q based on the existing system of single overhead recovery rate. (ii) Determine the cost of product P and Q using activity based costing system. (iii) Compute the sales value per quarter of component K using activity based costing system. (May 2003)

Q.-3. ABC electronics make audio player model ‘AB 100’. It has 80 components. ABC sells 10,000 units each month at Rs. 3,000 per unit. The cost of manufacturing is Rs. 2,000 per unit or Rs. 200 lakhs per month for the production of 10,000 units. Monthly manufacturing costs incurred are as follows:

(Rs. in lakhs)

D.M. Cost 100.00

Direct manufacturing labour cost 20.00

Machining cost 20.00

Testing cost 25.00

Rework cost 15.00


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Ordering cost 0.20

Engineering Costs 19.80

200.00

Labour is paid on piece rate basis. Therefore, ABC considers direct manufacturing labour cost as variable cost.The following additional information is available for ‘AB 100’.(i) Testing and inspection time per unit is 2 hours.(ii) 10 per cent of ‘AB 100’ manufactured is reworked.(iii) It currently takes 1 hour to manufacture each unit of ‘AB 100’.(iv) ABC places two orders per month for each component, each component being supplied by a different supplier.

ABC has identified activity cost pools and cost drivers for each activity. The cost per unit of the cost driver for each activity cost pool is as follows: ManufacturingActivity

Description of activity

Cost driver Cost per unit ofcost driver

1. Machining costs Machining Components

Machine hours of capacity

Rs.200

2. Testing costs Testing component and finished products. (Each unit of ‘AB 100’ is tested individually)

Testing hours Rs.125

3. Rework costs Correcting and fixing Errors and defects

Units reworked Rs.1500

4. Ordering costs Ordering of Component

Number of orders Rs.125

5.Engineering costs

Designing and Managing of products and processes

Engineering hours Rs. 198

Over a long run horizon, each of the overhead costs described above vary with chosen cost driver. In response to competitive pressure ABC must reduce the price of its product to Rs. 2,600 and to reduce the cost by at least Rs. 400 per unit.

ABC does not anticipate increase in sales due to price reduction. However, if it does not reduce price it will not be able to maintain the current sales level. Cost reduction on the existing model is almost impossible. Therefore, ABC had decided to replace ‘AB 100’ by a new model ‘AB 200’, which is modified version of ‘AB 100’. The expected effects of design modifications are as follows:The number if components will be reduced to 50.


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Direct material costs to be lower by Rs. 200 per unit. Direct manufacturing labour costs to be below by Rs. 20 per unit. Machining time required to be lower by 20 per cent. Testing time required to be lower by 20 per cent.Rework to decline to 5 per cent. Machining capacity and engineering hours capacity to remain the same. ABC currently out sources the rework on defective units.

Required: Compare the manufacturing cost per unit of AB 100 and AB 200.

Q.-4. Computo Ltd. manufactures two parts ‘P’ and ‘Q’ for Computer Industry.P: annual production and sales of 1,00,000 units at a selling price of Rs.100.05 per unit. Q: annual production and sales of 50,000 units at a selling price of Rs.150 per unit. Direct and Indirect costs incurred on these two parts are as follow.

(Rs. in thousands)

P Q Total

Direct Material cost (variable) 4,200 3,000 7,200

Labour cost (variable) 1,500 1,000 2,500

Direct Machining cost (See Note)* 700 550 1,250

Indirect Costs: (Rs. in thousands)

Machine set up cost 462

Testing cost 2,375

Engineering cost 2,250

16,037

Note: Direct machining costs represent the cost of machine capacity dedicated to the production of each product. These costs are fixed and are not expected to vary over the long-run horizon.Additional information is as follows:

P Q

Production Batch Size 1,000 units 500 units

Set up time per batch 30 hours 36 hours


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Testing time per unit 5 hours 9 hours

Engineering cost incurred on each product 8.40 lacs 14.10 lacs

A foreign competitor has introduced product very similar to ‘P’. To maintain the company’s share and profit, Computo Ltd. has to reduce the price to Rs.86.25. The company calls for a meeting and comes up with a proposal to change design of product ‘P’. The expected effect of new design is as follows:

Direct Material cost is expected to decrease by Rs.5 per unit. Labour cost is expected to decrease by Rs.2 per unit. Machine time is expected to decrease by 15 minutes; previously it took 3 hours to produce

1 unit of ‘P’. The machine will be dedicated to the production of new design. Set up time will be 28 hours for each set up. Time required for testing each unit will be reduced by 1 hour. Engineering cost and batch size will be unchanged.

Required:(a) Company management identifies that cost driver for Machine set-up costs is ‘set up hours used in batch setting’ and for testing costs is ‘testing time’. Engineering costs are assigned to products by special study. Calculate the full cost per unit for ‘P’ and ‘Q’ using Activity-based costing.(b) What is the Mark-up on full cost per unit of P?(c) What is the Target cost per unit for new design to maintain the same mark up percentage on full cost per unit as it had earlier? Assume cost per unit of cost drivers for the new design remains unchanged.(d) Will the new design achieve the cost reduction target? (16 Marks) (May 2006)


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Q.-1.ABC manufacture of battery operated cars for children, has decided to establish an Electronic Data interchange hook-up to V firm (supplier of batteries) ABC will trigger a purchase order for batteries by a single computer entry.

Computer programs will match receiving documents with purchase orders. Payments will be made electronically for batches of deliveries rather than for each individual delivery. These changes make ordering costs negligible (current ordering costs are Rs. 400 per order).

ABC is negotiating to have V deliver 130 packages of batteries 100 times a year. V agrees, however in return charges a premium of Rs.1 to the price per package. (Current purchasing price is Rs. 138).

The relevant annual carrying cost of insurance, material handling and breakage and so on will be Rs. 50 per unit if JIT purchasing is adopted. The current annual carrying cost is Rs. 41.6 per annum.

ABC incurs no stock out costs under the current purchasing system because both demand and purchase provide for sufficient lead time.

However there is a threat of stock out if JIT purchasing policy is followed. V has installed a new manufacturing process which enables it respond rapidly to the changing demand patterns.

Despite this ABC is expecting a stock out costs on 100 battery packages each year if JIT purchasing is adopted. In the event of stock out, ABC will be able to obtain the supplies only at a premium of Rs. 25 per package.

Unit = 1 package consisting of two batteriesEach unit of the final product requires one battery package.

Required :


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(1) Calculate EOQ under the current system(2) Calculate EOQ if JIT is adopted(3) Should the JIT System be implemented?

Q.-2.L & C Manufacture fairly similar remote-controlled toy cars. K a retailer of children’s toys; expects to buy and sell 4000 of these cars each year. Both L and C individually meet the entire demand of K and K prefers to use only one supplier. Besides it needs the toy cars to be delivered in lots of 100 resulting in 40 deliveries in a year.Following Cost information has been obtained:

1) An electronic hook-up will make ordering costs negligible for either supplier.2) L has quoted a price of Rs. 2000 whereas C has quoted a price of Rs. 1960.3) Purchase from L will lead to an inspection cost of Rs. 400 per delivery and that from C

will lead to an inspection cost of Rs. 560 per deliver.4) Relevant incremental carrying costs of insurance, materials handling, breakage, etc. per

toy car is expected to be Rs. 220 per year in the case of L and Rs.200 per year in the case of C.

5) Late deliveries in the case of L will lead to a stock out of 40 cars per year at an expected stock out cost of Rs. 500 per toy car. The same in the case of C is expected to be 300 cars at a stock out cost of Rs. 520 per car.

6) Expected number of cars sold that will be returned owing to quality and other problems: L 160 cars and C 280 cars. Additional costs to K of handling each returned car us expected to be Rs. 420 irrespective of the supplier.

7) K’s rate of return on inventory is 15% per annum.Which supplier should K choose?

Q.-3. X Video Company sells package of blank video tape to its customer. It purchase video tapes from Y Tape Company @ Rs140 a packet. Y Tape Company pays all freight to X Video Company. No incoming inspection is necessary because Y Tape Company has a superb reputation for delivery of quality merchandise. Annual demand of X Video Company is 13,000 packages. X Video Co. requires 15% annual return on investment. The purchase order lead time is two weeks. The purchase order is passed through Internet and it costs Rs2 per order. The relevant insurance, material handling etc Rs3.10 per package per year. X Video Company has to decide whether or not to shift to JIT purchasing. Y Tape Company agrees to deliver 100 packages of video tapes 130 times per year (5 times every two weeks) instead of existing delivery system of 1,000 packages 13 times a year with additional amount of Rs.0.02 per package. X Video Co. incurs no stock out under its current purchasing policy. It is estimated X Video Co. incurs stock out cost on 50 video tape packages under a JIT Purchasing policy. In the event of a stock out, X Video Co. has to rush order tape packages which costs Rs.4 per package. Comment whether X Video Company should implement JIT Purchasing system.

Z Co. also supplies video tapes. It agrees to supply @ Rs.13.60 per package under JIT Delivery system. If video tape purchased from Z Co., relevant carrying cost would be Rs 3 per package against Rs 3.10 in case of purchasing from Y Tape Co. However Z Co. doesn’t


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enjoy so sterling a reputation for quality. X Video Co. anticipates following negative aspects of purchasing tapes from Z Co.

- To incur additional inspection cost of 5 paisa per package.- Average stock out of 360 tapes packages per year would occur, largely resulting from late

deliveries. Z co. cannot rush order at short notice. X video co. anticipates lost contribution margin per package of Rs. 8 from stock out.

- Customer would likely return 2% of all packages due to poor quality of the tape and to handle this return a additional cost of Rs. 25 per package. Comment whether X Video Co. places order to Z co. (Nov. 2005 – 12 Marks)

Q.-4.MVS Enterprises has decided to adopt JIT policy for materials. The following effects of JIT policy are identified:-

1. To implement JIT, the company has to modify its production and material receipt facilities at a capital cost of Rs.12,00,000.

2. The new facilities will require a cash operating cost Rs.96,000 p.a.3. Raw Materials stockholding will be reduced from Rs.56,00,000 to Rs.16,00,000.4. The company earns 15% on its long term investment.5. The company can avoid rental expenditure on storage facilities amounting to

Rs.60,000 p.a. 6. Property taxes and insurance amounting to Rs.24,000 will be saved due to JIT

programmed.7. Presently there are 28 workers in the stores department at a salary of Rs.1,500 each

per month. After implementing JIT scheme, only 8 worker will be required in this department. Of the balance 20 worker, 12 will be transferred to other departments, while 8 workers’ employment will be terminated.

8. Due to receipts of smaller lots of Raw Materials, there will be some disruption of production. The cost of stock out will be Rs.6,80,000 in the first year only. This stock out cost can be brought down from the second year onwards.

Determine the financial impact of the JIT policy. Is it advisable for the company to implement JIT system?


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Q.-1.Z ltd. Produce three products using three different machines. The following information is available for a period.

Production P Q RContribution 2400 2000 1200(Sales – Material)

Machine Hours Per UnitMachine X 6 2 1Machine Y 12 4 2Machine Z 18 6 3Estimated Sales Demand 100 100 100

Machine capacity is limited to 1600 hours for each Machine.


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You are required to find out:

1) Identify the bottleneck activity and allocate the machine time. 2) Find out spare capacity in Non-bottleneck activity.3) Compute Through put accounting ratio, if total factory cost are Rs. 3,20,000 for the period.

Q.-1.

B Ltd launches a deluxe type walkman in the market.

The market research study reveals that a market size of 20,000 units per month of such products exists.


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The variable cost per unit is Rs. 640 and the total fixed overhead is Rs. 20,00,000 per month. The selling price is 125% of the variable cost. The company adopts a policy of penetrating pricing.

The demand for the walkman per month is given by the equation Q1 = 2000 t1 – 50t21

where Q is the demand in units and t is the time in months from its introduction in the market.

When 50 % of the market has been penetrated, the company changes its pricing policy to 150% of the variable cost for the subsequent months, till it captures the whole market. The profit earned during the maturity stage is Rs. 33.0 crores. A competitor W ltd then is likely to enter the market with a people’s brand walkman having a demand function of Q2 = 2,500 t2 – 30 t2

2 when people is introduced, the demand in the market rises to 21,500 units per month.

Deluxe’s price is reduced to Rs. 880 to combat the price of people at Rs. 880 each. When people are introduced, the demand of deluxe declines, the total market demands remaining the same. When the sale of deluxe drops around 1500 units per month, B ltd. discards the product.

Determine:1. The product life cycle of deluxe;2. Total contribution earned by deluxe;3. Total Sales of deluxe.


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Year Practical Theory Year Practical Theory

2006 May 33 Marks 12 Marks 2011 May 25 Marks

2006 Nov. 27 Marks 2011 Nov. 16 Marks

2007 May 31 Marks 2012 May 42 Marks

2007 Nov. 43 Marks 2012 Nov. 5 Marks 4 Marks





2010 May 18 Marks 2015 May 21 Marks

2010 Nov. 33 Marks 2015 Nov.

Q.-1.Your company has a production capacity of 2,00,000 units per year. Normal capacity utilization is reckoned as 90%. Standard variable production costs are Rs. 11 per unit. The fixed costs are budgeted at Rs. 3,60,000/- per year. Variable selling costs are Rs. 3 per unit and fixed selling costs are Rs. 2,70,000 per year. The unit selling price is Rs. 20. In the year just ended on 31st March 2011, the production was 1,60,000 units and sales were 1,50,000/- units. The Closing inventory on 31-03-2011 was 20,000 units. The actual variable production costs for the year were Rs. 35,000 higher than the standard. The actual fixed production overheads incurred were Rs. 3,80,000/- for the year.i) Calculate the profit for the year:

(a) by absorption costing method, and (b) by marginal costing method.

ii) Explain the difference in the profits.

Q.-2.JB Company has been so far producing & selling following three products. Information about selling price & the cost is given below.

Particular X Y Z


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Selling Price 14 16.00 13.00

Material 5 10.00 2.00

Labour 2 1.00 3.00

V. Overheads 1 0.50 1.50

F. Overheads 5 2.50 7.50

Net profit/(loss) 1 2.00 (1.00)

The company at present has been producing 5000 units of X, 8000 units of Y & 1000 Units of Z. As product Z has been consistently fetching sizeable amount of loss only, the company virtually is putting no worth nothing effort to argument the sales of the same. In fact it is seriously thinking of dropping this product.

The fixed overhead in all amount to Rs. 52500/- p.a. & they are apportioned to three products on the basis of labour cost.You are required to state profit implications of dropping product Z.

Q.-3. A firm can produce 3 different products from the same raw material using the same production facilities. The requisite labour is available in plenty at Rs.8/- per hour for all products. The supply of raw materials, which is imported at Rs.8/- per kg is limited to 10,400 kgs. for the budget period. The variable overheads are Rs.5.60/- per hours. The fix overheads are Rs.40,000. The selling commission is 10% on sales. (A) From the following information, you are required to suggest the most suitable sales mix, which will maximize the firm’s profits. Also determine the profit that will be earned at that level:

Product A B C

Market Demand (units) 8,000 6,000 5,000

Selling Price per unit 30 40 50

Labour hours require per unit 1 2 1.50

Raw Material require per unit 0.70 0.40 1.50

(B) Assume, in above situation, if additional 4,500 Kg of raw materials is made for production, should the firm go in for further production, if it will result in additional fixed


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overheads of Rs. 20,000 & 25% increase in the rates per hour for labour & variable overheads?

Q.-4.Find the cost breakeven point between various pairs of plants.

Machine Fixed Cost Per Annum (Rs) Variable Cost Per Unit (Rs.)

A 5,00,000 10

B 8,00,000 8

C 7,00,000 6

Q.-5.PQR Limited. is manufacturing and selling two products:- Splash and Flash at selling prices of Rs.3 and Rs.4 respectively. The following sales strategy has been outlined for the year 2012.(i)Sales planned for year will be Rs. 7.20 lakhs in the case of Splash and Rs. 3.50 lakhs in the case of Flash.(ii)To meet the competition, the selling price of Splash will be reduced by 20% and that of Flash by 12.5%(iii) Break-even is planned at 60% of the total sales of each product.(iv)Profit for the year to be achieved is planned as Rs. 69,120 in the case of Splash and Rs. 17,500 in the case of Flash.This would be possible by launching a cost reduction programme and reducing the present annual fixed expenses of Rs. 1,35,000 allocated as Rs. 108,000 to Splash and Rs. 27,000 to Flash.You are required to present the proposal in financial terms giving clearly the following information:-(a) Number of units to be sold of Splash and Flash to break even as well as the total number of units of splash and Flash to be sold during the year.(b) Reduction in fixed expenses product-wise that is envisaged by the Cost Reduction Programme.

Q.-6.The Particulars two plants producing an identical product with the same selling price are as under:

Plant – P Plant –R

Capacity utilization 70% 60%

(Rs. In Lakhs ) (Rs. In Lakhs)

Sales 150 90


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Variable Costs 105 75

Fixed costs 30 20

In has been decided to merge Plant “R” with Plant “P”, the additional fixed expenses involved in the merger will amount to Rs. 2 lakhs p.a

Required:a. Find the break–even point Plant ‘A’ and plant ‘R’ before merger and the break-even point of

merged plant.b. Find the capacity utilization of the integrated plant required to earn a profit of Rs. 18 lakhs.

Q.-7.A toy manufacturing company is at present operating at the 80% capacity level, the production being 15,000 units per annum. The following relevant figures are obtained from the Company’s budgets at different capacity utilization levels:

Capacity utilization

80% 100%

Sales 20,00,000 25,00,000

Variable – overhead 2,25,000 2,50,000

Semi- variable overhead 1,05,000 1,11,000

Fixed overhead 4,00,000 4,70,000

Output in units 15,000 18,750

The management earns a profit margin of 10% on sales.You are required to work out the differential cost of producing the additional 3,750 units by increasing the capacity utilization level to 100% Q.-8. X Ltd. manufactures a semiconductor for which the cost and price structure is given below:

Rs. per unitSelling price 500Direct material 150Direct labour 100Variable overhead 50


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Fixed cost is Rs.2 lakhs.The product is manufactured by a machine, whose spare part costing Rs.2,000 needs replacement after every 100 pieces of output. This is in addition to the above costs.

Assume that no defectives are produced and that the spare part is readily available in the market at all times at Rs.2,000.

(i)Prepare the profitability statement for production levels of 2,000 units and 3,000 units(ii) What is the break-even point (BEP) for the above data? (Nov. 2006)

Q.-9. Supreme Ltd., which manufactures the component EXCEL, has achieved a turnover of

Rs.6,00,000 for the calendar year 2002. The Manger of the company has informed that the company has worked at a profit volume ratio of 25% and margin of safety of 20%. But he feels due to severe competition, the selling price is to be reduced to maintain the same volume of sales for the year 2003. He does not expect any change in variable costs. He expects that due to cost reduction programme, the profit volume ratio and margin of safety will be 20% and 30% respectively and considerable saving in Fixed cost for 2003.

Even if the company prefers to shut down its operations for 2003, it expects to incur a minimum fixed cost of Rs.60,000. You are expected to:(i)Present the comparative statement for the year 2002 and 2003 showing under marginal costing.(ii)What will be minimum sales required, if it decides to shut down its unit in 2003? (Nov 2006)Q.-10.The Management of M/S. J Ltd. has prepared the following estimates of working results for the year ending 31st December 2016 for the purpose of preparing the budget for the year ending 31st December 2016:

RupeesDirect Materials Per unit 8.00Direct wages Per unit 20.00Variable overheads Per unit 6.00Selling price Per unit 62.50Fixed overheads Per annum Rs. 3,37,500.00Sales Per annum Rs. 12,50,000.00

It is expected that during the year 2017, the material prices and variable overheads will go up by 10% and 5% respectively. As a result of reorganization of production methods, the


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overall direct labour efficiency will increase by 12% but the wage rate will go up by 5%. The fixed overheads are expected to increase by Rs. 62,500/-

The marketing manager states that market will not absorb any increase in the selling price. However, he is of the view that if advertisement expenditure is increased, the sales quantity will increase as under:

Advertisement Expenses 40,000

97,000 1,60,000 2,30,000

Additional Units of sales 2,000 4,000 6,000 8,000

You are required to:Evaluate the four alternative proposals put forth by the marketing manager, determine the best output and sales level to be budgeted and prepare an overall income statement for 2017 at that level of output and sales: Q.-11.A company using a continuous manufacturing operation achieves an output of 3 kg. per hour. The selling price is Rs.450 per kg. The raw material cost is Rs.125 per kg. of output and the direct labour and variable overheads amount to Rs.316 per kgs. of output. The company has provided an expenditure of Rs.640 on maintenance and Rs.6,400 on breakdown repairs per month in its budget. Breakdowns averaging 300 hours per month occur due to mechanical faults. These could be reduced or eliminated, if additional maintenance on the following scale were undertaken:Breakdown Hours Maintenance Costs

Rs.Repair Cost Rs.

0 20,480 060 10,240 1,920120 5,120 2,560180 2,560 3,840240 1,280 5,120300 640 6,400Using the incremental cost and incremental revenue concept, you are required to:(i)Determine the optimum level up to which breakdown can be reduced to increase production.(ii)Calculate the additional profits obtainable at that level as compared to the present situation.

Q.-12.A company has an opening stock of 6,000 units of output. The production planned for the current period is 24,000 units and expected sales for the current period amount to 28,000 units.

The selling price per unit of output is Rs. 10 variable cost per unit is expected to be Rs. 6 per unit while it was only Rs. 5 per unit during the previous period.


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What is the break even volume for the current period if the total fixed costs for the current period are Rs. 86,000? Assume that the first in first out system is followed. (Nov. 87)

Q.-13. As a part of its rural upliftment programme, the Government has put under cultivation a farm of 96 hectares to grow tomatoes of four varieties: Royal Red, Golden Yellow, Juicy Crimson and Sunny Scarlet.

Out of the total 68 hectares are suitable for all four varieties, but the remaining 28 hectares are suitable for growing only Golden Yellow & Juicy Crimson. Labour is available for all kinds of farm work and is no constraint.

The market requirement is that all four varieties of tomatoes must be produced with a minimum of 1,000 boxes.

The farmers engaged have decided that the area devoted to any crop should be in terms of complete hectares and not in fractions of a hectare.

The other limitation is that not more than 22,750 boxes of any one variety should be produced. The following data are relevant:

Varieties Royal Red

Golden Yellow

Juicy Crimson

Sunny Scarlet

Annual Yield Boxes per hectare 350 100 70 180Cost Rs. Rs. Rs. Rs.Materials per hectare 476 216 196 312Labour Growing per hectare 896 608 371 528Harvesting and Packaging per box 3.60 3.28 4.40 5.20Transport per box 5.20 5.20 4.00 9.60Market price per box 15.38 15.87 18.38 22.27 Fixed overhead per annum: Rs. Growing 11,200Harvesting 7,400Transport 7,200General Administration 10,200

Find Out:Find out the area to be cultivated within given constraints with each variety of tomatoes. If the largest total profit have to be achieved. The amount such profit in rupees.

Q.-14.


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K. Ltd. manufactures and sells a range of sport goods. Management is considering a proposal for an advertising campaign, which would cost the company Rs. 3,00,000. The marketing department has put forward the following two alternative sales budget for the following year.

Products (‘000 unit)A B C D

Budget – 1 – without advertisement 216 336 312 180Budget – 2 – with advertisement 240 372 342 198

Selling prices and variable production costs are budget as follows:Products (Rs. per unit)

A B C DSelling prices 11.94 14.34 27.54 23.94Variable production costs Direct Material 5.04 6.60 15.24 12.48Direct Labour 2.04 2.04 3.36 3.18Variable Overheads 0.72 0.72 1.20 1.08Other Data:

(1) The variable overheads are absorbed on a machine hour basis at a rate of Rs. 1.20 per machine hour.

(2) Fixed overheads total Rs. 30,84,000 per annum. (3) Production capacity during the budget period 8,15,000 machine hours. (4) Products A and C could be brought in at Rs. 10.68 per unit and Rs. 24 per unit

respectively. Required:

1) Determine whether investment in the advertising campaign would be worthwhile and how production facilities would be best utilized.2) Explain the assumptions and reasoning behind your advise

Q.-15.P.W. Perfume Company manufactures various qualities of perfumes and colognes. One popular line of colognes includes three products that result from a joint production process. Below are data from the most recent month of production-

Product Sales Price

Quantity Joint Cost

Cost After Split off

Total Cost

Evergreen Rs. 40 10,000 Rs.28 Rs.20 Rs.48Morning Flower

Rs.100 6,000 Rs.28 Rs.40 Rs.68

Evening Flower

Rs.150 4,000 Rs.28 Rs.50 Rs.78

As the Controller you are called into the President’s office with the Director of Marketing. The President says, “I don’t understand your product cost report. Either, we are selling our largest-volume product at a loss or the product cost data are all wrong. Now what is it?”


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Required:1) Respond to the President’s question.2) Another Company has just introduced products that compete directly with Morning Flower. To compete successfully with the other Company’s product, the price of Morning Flower cologne must be reduced to Rs.60. Should the Company do so and sell below cost?3) If P.W. perfume Company has a policy of maintaining a gross margin of 20 percent on sales, what would your answer be in response to the price reduction in part (2)?4) What is the minimum price for which Morning Flower can sell and still meet the 20 percent product gross margin for the group of products? (Nov. 2002)

Q.-16.A Chemical Factory processes Raw Material R and produces three similar products P1, P2 and P3 out of a joint process. The joint costs of processing 5,000 kg of R are: Labour – Rs.6,000 and Overheads – Rs.2,000.Raw Material R is purchased at Rs.2.40 per kg. This rate is after a trade discount of 20% on list price. Normal Loss is estimated at 10% of input weight. The scrap generated from processing R is recovered to the extent of 25% (by weight) and sold as such in the market at Rs.4. The products P1, P2 and P3 can be sold at Rs.5.00, Rs.6.00 and Rs.6.50 per kg respectively without any further processing.However, Product P1 and P2 can also be further jointly processed at an additional cost of Rs.2 per kg of, input to get product J1. The further processing cost of J1 will be Re 1 per kg of output weight. Similarly, products P2 and P3 can be jointly processed to get a product J2 at an additional cost of Rs.5 per kg of input. The further processing cost of J2 will be Rs.2 per kg of output weight. The normal loss of processing J1 out of P1 and P2 will be 5% of input weight. No processing loss is expected on processing J2. The selling prices of J1 and J2 including the input composition is given below –

Input Output J1 Output J2 Output weight ratioP1 40% 3P2 60% 50% 4P3 50% 2Price per kg Rs.10 Rs.12

1. Ascertain the profitability of processing P1, P2 and P3 from 5,000 kg of R assuming sale at split-off point.2. Compute the profits after both J1 and J2 are further processed and marketed using P2 in the ratio of 3:2 for J1 and J2 respectively.

Q.-17. The following information of a Company is available for the year 2006:

Sales Rs. 40,000 Variable and Fixed OH

Rs. 10,000

Raw Materials Rs. 20,000 Profit Rs. 4,000


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Direct Wages Rs. 6,000 Units sold 200 Nos.

In the year 2007, wages rate will increase by 50% and fixed cost will decrease by Rs.600. If 300 units are sold in 2007, the total fixed and variable OH will be 11,400. How many units should be sold in 2007, so that the same amount of profit per unit as in year 2006 may be earned? (May 2007)

O.-18.A company following standard marginal costing system has the following interim trading statement for the quarter ending 31st December, 2016, which reveals a loss of Rs.17,000 detailed below.

Rs.Sales 4,99,200Closing stock (at prime cost) 18,000

5,17,200Costs:Direct material 1,68,000Direct labour 1,05,000Variable overhead 42,000

3,15,000Fixed overhead 1,20,000Fixed Admn. Overhead 40,000Variable distribution Overhead 19,200Fixed selling Overhead 40,000

2,19,200Total costs 5,34,000Loss 17,000Additional information is as follows:

(i) Sales for the quarter were 1,200 units. Production was 1,400 units, of which 100 units were scrapped after complete manufacture. The factory capacity is estimated at 2,000 units.

(ii) Because of low production, labour efficiency during the quarter is estimated to be 20% below normal level.You are required to analyses the above and report to the management giving the reasons for the loss. (Nov. 2006)

Q.-19. A Ltd. Makes and sells a single product. The company’s trading result for the year 2007 is:

Particular Rs 000 Rs 000Sales 3,000Direct materials 900Direct labour 600


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Overheads 900 2,400Profits 600

For the year 2008, the following are expected:(i) Reduction in the selling price by 10%(ii) Increase in the quantity sold by 50%(iii) Inflation of direct material cost by 8%.(iv) Price inflation in variable overhead by 6%.(v) Reduction of fixed overhead expenses by 25%.

It is also known that:(a) In 2006, overhead expenditure totaled to Rs.8,00,000.(b) Total overhead cost inflation for 2007 has been 5% more than 2006.(c) Production and sales volumes have been 25% higher in 2007 than in 2006.

The high-low method is being used by the company to estimate overhead expenditure.

You are required to:(i) Prepare a statement showing the estimated trading result for 2008.(ii) Calculate the Break-even point for 2007 and 2008.(iii) Comment on the BEP and profits of the years 2007 and 2008.

Q.-20. SENAPATI LTD. Manufactures plastic cans of a standard size. The variable cost per can is Rs.4 and the selling price is Rs.10 each. The factory of the Company has 8 machines of identical size. Any individual machine can produce 30 cans per hour. The factory works on a 300 days per annum basic and the actual available hour per machine per day is 7.5. The Company has to supply an order of 4,20,000 cans to an oil Company. The yearly fixed cost of the Company is Rs.20 Lakhs. The Company has received an order from another Firm for supplying 60,000 nos. of plastic moulded toys. The price of the toys is Rs.60 each and the variable cost is Rs.50 each. While this order would be acceptable for supplying in total quantities only, on acceptance, a special mould costing Rs.2,25,000 would be required to manufacture the toys. The time study exercise has revealed that 15 nos. of toys can be produced per hour by any of the machines.

Advise the Company, with reasons in the following situations –1) Whether to accept the order of manufacturing moulded toys, in addition to

supplying 4,20,000 cans or not,

2) Whether to accept the order of manufacturing moulded toys, if the order of cans increases to 5,40,000 cans or not,

3) While a sub-contractor is willing to supply the toys, the toys, either in whole or part of the required quantities at an all inclusive rate of Rs.57.50 each, what would be the minimum


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excess capacity needed to justify the manufacturing of any portion of the toys order, instead of sub-contracting?

4) The Company had an understanding that the orders of the cans will be increased during the year on negotiation, and planned and manufactured 4,50,000 cans during the year. For utilizing the excess capacity, they also accepted the toys order and sub-contracted only 15,000 nos. of toys. At the year end, however, it was revealed that the order of cans could be for 4,80,000 , if it was properly negotiated. How much loss has been suffered by the Company due to improper prediction of demand and negotiation? (Nov. 2001)

Q.-21.Tiptop Textile Manufacturers a wide range of fashion fabrics. The company is considering whether to add a further product the ‘Superb” to the range. A market research survey recently undertaken at a cost of Rs. 50,000 suggests the demand for the “Superb” will last for only one year during which 50,000 units could be sold at Rs. 18 per unit. Production and Sale of “Superb” would take place evenly throughout the year. The following information is available regarding the cost of manufacturing “Superb”.

Raw Materials : Each “Superb” would require 3 types of raw material Posh, Flash and Splash, Quantities required, current stock levels and cost of each raw material are shown below. Posh is used regularly by the company and stock are replaced as they are used. The current stock of Flash is the result of overbuying for an earlier contract. The material is not used regularly by Tiptop Textile and any stock that was not used to manufacture “Superb” would be sold. The company does not carry a stock of Splash and the units required would be specially purchased.

Costs per metre of raw materialRaw Material

Quantity Reqd. per unit of Superb (Metres)

Current stock level (Metres)

Original cost

Rs.

Current replacement costRs.

Current resale valueRs.

Posh 1.00 1,00,000 2.10 2.50 1.80Flash 2.00 60,000 3.30 2.80 1.10Splash 0.5 0 5.50 5.00

Labour : Production of each “Superb” current wage rates are Rs. 3 per hour for skilled labour and Rs. 2 per hour for unskilled labour would require a quarter of an hour of skilled labour and two hours of unskilled labour. In addition, one foreman would be required to devote all his working time for one year in supervision of the production of “Superb”. He is currently paid an annual salary of Rs. 15,000. Tiptop Textile is currently finding it very difficult to get skilled labour.

The skilled worker needed to manufacture “Superb” would be transferred from another job on which they are earning a contribution surplus of Rs. 1.50 per labour hour, comprising sales revenue of Rs. 10.00 less skilled labour wages of Rs. 3.00 and other variable costs of


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Rs. 5.50. It would not be possible to employ additional skilled labour during the coming year. If “Superb” are not manufactured the company expects to have available 2,00,000 surplus unskilled labour hours during the coming year, Because the company intends to expand in the future.

It has decided not to terminate the services of any unskilled worker in the foreseeable future. The foreman is due to retire immediately on an annual pension payable by the company of Rs. 6,000. He has been prevailed upon to stay on for a further year and to defer his pension for one year in return for his annual salary.

Machinery: Two machines would be required to manufacture “Superb” MT4 and MT7. Details of each machine are as under.

Start of the year End of the year Rs. Rs.MT4Replacement cost 80,000 65,000Resale value 60,000 47,000MT7Replacement cost 13,000 9,000Resale value 11,000 8,000

Straight line method of depreciation has been charged on each machine for each year of its life. Tiptop Textile owns a number of MT4 machines, which are used regularly on various products. Each MT4 is replaced as soon at it reaches the end of its useful life.

MT7 machines are no longer used and the one which would be used for “Superb” is the only one the company now has. If it was not used to produce “Superb”, it would be sold immediately.

Overhead: A predetermined rate of recovery for overhead is in operation and the overheads are recovered fully from the regular production at Rs. 3.50 per labour hour. Variable overhead costs for superb are estimated at Rs. 1.20 per unit produced. For decision-making incremental costs based on relevant cost and opportunity costs are usually computed. You are required to compute such a cost sheet for “Superb” with all details of material Labour, overhead etc., substantiating the figures with necessary explanations.

Q.-22. S Limited is engaged in manufacturing activities. It has received a request from one of its important customers to supply a product which will require conversions of materials ‘M’, which is a non-moving item. The following details are available:

Book value of material M Rs.60


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Realizable value of material M Rs.80Replacement cost of material M Rs.100

It is estimated that conversion of one unit of ‘M’ into one unit of the finished product will require one labour hour. At present, labour is paid at the rate of Rs.20 per hour. Other costs are as follows:

Out-of-pocket expenses Rs.30 per unitAllocated overheads Rs.10 per unit

The labour will be re-deployed from other activities. It is estimated that the temporary redeployment will not result in loss of contribution. The employees to be re-deployed are permanent employees of the company.Required:Estimate the minimum price to be charged from the customer so that the company is not worse off by executing the order. (Nov. 2007)

Q.-23. A construction company has accepted contract AX and work thereon is about to begin. However, the company has received an offer for another contract BX. The Company cannot, due to certain constraints, take up both the contracts simultaneously. In case the company is desirous of taking up contract BX, it can get the first contract AX rescinded upon payment of a penalty for Rs. 70,000.

The following are the estimates relating to the two Contracts:Particular Contract

AXContract BX

Rs. Rs.Material X - in stock at original cost 54,000 -Material Y - in stock at original cost - 62,000Material X- firm orders placed at original cost 76,000Material X-Not yet ordered (at current cost) 1,50,000Material Z-Not yet ordered (at current cost) - 1,78,000Labour - to be engaged and paid for 2,15,000 2,75,000Site Management Costs 85,000 85,000Travel and other expenses 17,000 14,000Depreciation of Plant 24,000 32,000Interest on Capital at 12% 12,800 16,000Head Office expenses allocated to contracts 31,690 33,100Total 6,65,490 6,95, 100Contract Price 7,20,000 8,80,000Estimated Profit 54,510 1,84,900

The following additional information is available: Material X is not in regular use it can be used as a substitute for other materials, which are currently quoted at 10% less than the original cost of X.


CA Final

Material Y is in regular use and its price has doubled since it was purchased. Its net reliable value if sold will be its new price less! 5%. It can, however, be kept in store for use in other contracts to be taken up in the next year. If contract AX is undertaken, a part of the plant having spare capacity can be hired out for a rental of Rs.15,000 for the period. It is the policy of the company to charge notional interest on the estimated working capital at 12% per annum. Either of two contracts can be completed by 31st March, 2003, which is the close of the company's financial year. Site management cost is fixed.

Required:(i) Using the relevancy of cost concept prepare a comparative statement to show the net benefit

resulting from each contract.(ii) Advise the management of the company as to which of two contracts should be undertaken.

(Nov.2002)


Year Practical Theory Year Practical Theory2006 May 11 Marks 2011 May 5 Marks2006 Nov. 6 Marks 2011 Nov. 8 Marks2007 May 2012 May2007 Nov. 2012 Nov. 12 Marks2008 May 5 Marks 2013 May 4 Marks2008 Nov. 7 Marks 4 Marks 2013 Nov.2009 May 2014 May 4 Marks2009 Nov. 6 Marks 2 Marks 2014 Nov. 10 Marks2010 May 4 Marks 2015 May 5 Marks 4 Marks2010 Nov. 4 Marks 2015 Nov.

Q.-1. A Ltd. manufactures product ‘P’ in departments X & Y which also manufactures other products using the same machines. The particulars per unit of the product ‘P’ are as under:

Direct Material: M 8 kg at Rs. 3 per kg used in Dept. XJ 4 kg at RS. 5 per kg used in Dept. Y


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Direct Labour: 2 hour at Rs. 12 per hour in Dept. X3 hour at Rs. 10 per hour in Dept. Y

DEPT. X DEPT. YOverheads:Method of recovery Direct Labour Hours Direct Labour HoursOverhead rates:FixedVariable

Rs. 6 per hourRs. 5 per hour

Rs. 3 per hourRs. 2 per hour

Value of plant & machinery Rs. 16,00,000 Rs. 8,00,000

Variable selling & distribution overheads relating to product ‘P’ amount to Rs. 20,000/- per month. The product requires a working capital of Rs. 3,00,000/- at the target volume of 1,000 units per month, occupying 25% of the practical capacity.

Required:1. Using the return on investment pricing formula, find the price of product ‘P’ to yield a

contribution to cover 24% rate of return on investment.

2. If product ‘P’ is a well established product in the market, what should be the basis for fixation of price? Set the minimum price on that basis.

3. If product ‘P’ is a new product about to be launched in the market, what should be the basis for fixation of price? Set the minimum price on that basis.

Q.-2.A company has developed two types of pocket T.V. sets operated on battery having liquid crystal display. Model ‘Deluxe’ is having single channel & model ‘Super Deluxe’ is having multi channels. The management of the company asked their accountant to recommend price for the new products which will fetch a margin of 20% on price.The accountant has collected following data for first year of operation.

Deluxe Super Deluxe [a] Maximum production & sale/units 2,500 1,500[b] Variable cost per unit (Rs.) Direct materials 300 500 Direct labour 100 200[c] Attributable fixed overheads (Rs. In lacs) 2.5 3.0[d] Labour hours per unit 20 40[e] Machine hours per unit 30 15

The marketing department is contemplating to sell the entire output produced during the year. The other common fixed overheads relating to these products are Rs. 8.58 lacs per annum. The management wants to have a statement of costs, revenue & profit for both the products.


CA Final

The accountant accordingly prepared two statements, one with common fixed cost absorbed on labour hour basis & another with common fixed costs absorbed on machine hour basis. However, he is not able to decide as to which one is correct for deciding prices of the products.

Required: (i) Present the statement showing annual cost, revenue & profit for each product

using both the bases that were used by the accountant for absorbing common fixed overheads.

(ii) Which set of prices would you recommend?

(iii) Do you think that cost plus pricing decision is valid for a newly developed product?

Solution(ii) The selection of the price combination depends on the difference between the product as viewed from customer point of view and not on the accounting policy as regards the apportionment of fixed overheads.

Ideally, the pricing policy should be such that the product difference is translated in to the price difference. If the difference between the products is very significant then even the price difference should also be significant because otherwise the cheaper product would fail, likewise if the product difference is rather insignificant then the price difference should also be equally insignificant because otherwise the costlier product would fail.If one of the combinations represents the product difference then that should be selected. Otherwise both the set rejected and some new set should be developed.

(iii) If the new product is new for the market or it is new for the company but there are some strong plus points then cost + pricing is possible in respect of a new product. In all other cases Marginal cost + pricing is the best. Q.-3.The cost profile of a company, manufacturing only one product, is as under:

Particular Rs.Direct material 5.60Direct labour 1.50Variable factory overhead 0.40

7.50 Fixed factory overhead is budgeted at Rs. 3,30,000 for an annual sales of 4,00,000 units. Selling Distribution and Administration costs are budgeted at Rs. 1,80,000. Capital employed is Rs. 4,50,000 in fixed assets and 50% of sales in current assets. Determine a selling price for the product to yield a 20% return on capital employed.

Q.-4.


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Determine the selling price per unit to earn a return of 12% net on capital employed (net of Tax @ 40%)The cost of production and sales of 80,000 units per annum are:Material Rs.4,80,000 Labour Rs.1,60,000Variable overhead Rs.3,20,000 Fixed overhead Rs.5,00,000

The fixed portion of capital employed Rs.12 lacs and the varying portion is 50% of sales turnover. (May 2005)

Q.-5.An Umbrella manufacturer makes an average net profit of Rs. 2.50 per piece on a selling price of Rs. 14.30 by producing and selling 60,000 pieces or 60% of the potential capacity.

His cost of sales is:Direct material 3.50Direct Wages 1.25Work overheads 6.25 (50% fixed)Sales overheads 0.80 (25% Variable)

During the current year, he intends to produce the same number of units but anticipates that his fixed charges will go up by 10% while the direct labour and direct materials will go up by 8% and 6% respectively. But he has no option of increasing the selling price. Under this situation, he obtains an offer for further 20% of his capacity.What minimum price will you recommend for acceptance of offer to ensure the manufacturer an overall profit of Rs.1,67,300?

Q.-1.ABC Company produces a variety of high-quality garden furniture and associated items, mostly in wood and wrought iron. Among its products are specially garden seats, sheds, gates, summer pavilions, outdoor tables and chairs, barbecue equipment etc. ABC currently sells mostly to the trade but there is a flourishing retail outlet on the same site as the factory at Guilford, in the south of England.Some financial details of broad product categories for the year are given below: Product Sales Contribution

Rs. ‘000 Rs. ‘000Tables and chairs 680 24


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Sheds 400 92Barbecue equipment 280 40Garden seats 240 34Pavilions 140 58Gates 100 26Lawnmowers 60 16Tools, toys etc 30 2Cafe 10 6

Required : Using the financial data of products, carry out a Pareto analysis (80/20 rule), of (i) Sales and (ii) Contribution.

Q.-2.A Toy Company performs a Pareto analysis, given a set of defect types’ and frequencies of their occurrence. The sample data consists of information about 84 defective items.

The items have been classified by their ‘defect types’ as follows:Defect Types No. of TypesCracks (due to mishandling of raw material) 10Improper shapes 8Incomplete 8Surface scratches 53Other (due to bad quality raw material) 5

84==

Required: Using the above data carry out a Pareto Analysis of occurrence of defects.



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Year Practical Theory Year Practical Theory2006 May 11 Marks 2011 May 4 Marks2006 Nov. 2011 Nov. 10 Marks2007 May 4 Marks 2012 May 4 Marks2007 Nov. 14 Marks 2012 Nov. 4 Marks2008 May 2 Marks 2013 May 8 Marks 4 Marks2008 Nov. 6 Marks 2013 Nov. 5 Marks2009 May 8 Marks 4 Marks 2014 May 7 Marks2009 Nov. 2014 Nov. 6 Marks2010 May 7 Marks 2015 May 8 Marks2010 Nov. 5 Marks 2015 Nov.

Q.-1. S. V. Ltd. manufactures a single product. The selling price of the product is Rs. 95 per unit.

The following are the results obtained by the company during the last two quarters.

Quarter1 Quarter 2Sales units 5,100 4,800Production units 5,500 4,500

Rs. Rs.Direct materials: A 66,000 54,000 B 55,000 45,000Manufacturing wages 1,56,750 1,38,000Factory overheads 86,000 83,000Selling overheads 79,000 73,000

The company estimates its sales for the next quarter to range between 5,500 units and 6,500 units, the most likely volume being 6,000 units. The manufacturing programme will match the sales quantity such that no increase inventory of finished goods is contemplated in the next quarter.

The following prices and cost changes will, however, apply to the next quarter. -The price of direct material B will increase by 10%. There will be no change in the price of direct material A.

-The wage rates will go up by 8 %. If the production volume increased beyond 5,500 units overtime premium of 50% is payable on the increased volume due to overtime working to be done by the variable labour complement.

-The fixed factory and selling expenses will increase by 20% and 25% respectively.


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-A discount in the selling price of 2% is allowed on all sales made at 6,500 unit level of output. The selling price however will remain unaltered, if the volume of outputs is below 6,500 units. Required: Prepare a flexible budget for the next quarter at 5,500, 6,000 and 6,500 unit levels and determine the profit at the respective volumes.

Q.-2. A company manufactures three products namely A, B and C. The current pattern of sales A, B and C is in the ratio of 8:2:1 respectively. The relevant data are as under:

Product A B CSelling price per unit Rs. 130 230 417Raw materials per unit Kg. 0.50 1.2 2.5Direct materials per unit Kg. 0.25 - -Skilled labour hours / unit 4 6 8Semi-skilled labour hours per unit 2 2 3Variable overheads Rs. per unit 20 40 80

The prices of raw materials and direct materials respectively are Rs.100 and Rs.40 per kg. The wage rates of skilled and semi-skilled labour respectively are Rs.6 and Rs.5. Each operator works 8 hours a day for 25 days in a month.

The position of inventories is as under:

Raw Material

DirectMaterial

AUnits

BUnits

CUnits

Kg. Kg.Opening 600 400 400 100 50Closing 650 260 200 300 50

The fixed overheads amount to Rs.2,00,000 per month and the company desires a profit of Rs.1,20,000 per month.You are required to prepare the following for a month:(i) Sales budget in quantity and value.(ii) Production budget showing the quantity to be manufactured.(iii) Purchase budget showing the quantity and value.(vi) Direct labour budget showing the number of workers and wages (May 2004- 12 Marks)


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Q.-3. A Company manufactures two Products A and B by making use of two types of materials viz., X and Y. Product A requires 10 units of X and 3 units of Y. Product B requires 5 units of X and 2 units of Y. The price of X is Rs.2 per unit and that of Y is Rs.3 per unit. Standard hours allowed per product are 4 and 3, respectively. Budgeted wages rate is Rs.8 per hour. Overtime premium is 50% and is payable, if a worker works for more than 40 hours a week. There are 150 workers.

The sales Manager have estimated the sales of Product A to be 5,000 units and Product B 10,000 units.

The target productivity ratio (or efficiency ratio) for the productive hours worked by the direct worker in actually manufacturing the product is 80%, in addition, the non-productive downtime is budgeted at 20% of the productive hours worked.

There are twelve 5-day weeks in the budget period and it is anticipated that sales and production will occur evenly throughout the whole period.

It is anticipated that stock at the beginning of the period will be:

Product A 800 units; Product B 1,680 units.The targeted closing stock expressed in terms of anticipated activity during the budget period are Product A 12 days sales; Product B 18 days sales. The opening and closing stock of raw material of X and Y will be maintained according to requirement of stock position for Product A and B.

You are required to prepare the following for the next period:(i) Material usage and Material purchase budget in terms of quantities and values.(ii) Production budget.(iii) Wages budget for the direct workers. (Nov 2004)


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Year Practical Theory Year Practical Theory2006 May 4 Marks 2011 May 5 Marks2006 Nov. 12 Marks 6 Marks 2011 Nov. 10 Marks2007 May 14 Marks 5 Marks 2012 May 6 Marks 4 Marks2007 Nov. 2012 Nov. 9 Marks2008 May 6 Marks 2013 May 8 Marks2008 Nov. 11 Marks 2013 Nov. 8 Marks 4 Marks2009 May 4 Marks 2014 May2009 Nov. 10 Marks 2014 Nov. 7 Marks 4 Marks2010 May 12 Marks 2015 May 8 Marks2010 Nov. 10 Marks 4 Marks 2015 Nov.

Q.-1.Toys Ltd. had budgeted the following for a month:

Toy Units Selling Price Per Unit (Rs.) Standard Cost Per Unit (Rs.) X 900 50 45


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Y 600 100 85Z 1,500 75 65

As against this, the actual sales were:

Toy Units Selling Price Per Unit (Rs.) Actual Cost Per Unit (Rs.)X 1,000 55 50Y 700 95 80Z 1,100 78 70

1) Compute necessary profit variances/Sales Margin Variances. 2) Compute necessary Sales/Turnover Variance.

Q.-2.From the following information about sales, calculate necessary sales variances.

STANDARD/BUDGET

ACTUAL

Units S.P. Sales Units S.P. SalesSold Rs. Sold Rs.

A 5000 5 25000 6000 6 36000B 4000 6 24000 5000 5 25000C 3000 7 21000 4000 8 32000

12000 70000 15000 93000

The company’s budgeted market share was 20% and the actual market size was 90,000 units.

Q.-3.X Co. Ltd had budgeted following sales for the year 2015 and as against that the actual for March 2015 was as follows:

Budget ActualProduct Qty. S.P. Total Qty. S.P. TotalA 18000 5 90000 17000 4 68000B 30000 7 210000 28000 6 168000C 6000 4 24000 9000 5 45000

54000 324000 54000 281000

Compute the sales variances that emerge.

Q.-4.Following information is available from the books of V Ltd. STANDARD DATA ACTUAL DATA Days 50 54


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Hours 10,000 11,000Units 5,000 5,100Overheads 100,000 106,000Idle hours Nil 400You are required to compute fixed overheads cost variances & Analysis of fixed overheads cost variances.

Q.-5.PQR Company has established the following standards for variable factory overhead.Standard hours per unit: 6Variable overhead per hour: Rs. 2/-The actual data for the month are as follows:

Actual variable overheads incurred Rs. 2,00,000

Actual output (units) 20,000

Actual hours worked Rs. 1,12,000

Calculate variable overhead variances:1. Variable overhead variance.2. Variable overhead budget variance3. Variable overhead efficiency variance.

Q.-6. The Standard cost of a certain chemical mixture is as under:

40% of material A @ Rs. 30 per kg.60% of material B @ Rs. 40 per kg.A standard loss of 10% of input is expected in production. The following actual cost data is given for the period.350 kg material – A at a cost of Rs. 25400 kg material – B at a cost of Rs. 45

Actual weight produced is 630 Kg.You are required to find out material cost variance & its analysis. (May 2015 – 8 Marks)Calculate the material cost variances & Analysis of materials cost variances.

Q.-7.J Ltd. manufactures product A, each unit of which requires 2 kgs. of raw materials P1 & 3 kgs. of raw materials P2, to be bought at Rs.5/- & Rs.10/-respectively.During the year, the company completed the production of 9600 units & it had 4000 units in closing work-in-process which are estimated to be 60% complete as regards raw material. The details about purchases & stocks are given below:- PARTICULARS TYPE QTY. ACTUAL PRICE


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[1] Opening Stock P1 4000 Rs. 6/-

P2 8000 Rs.8/-

[2] Purchases P1 28000 Rs.4.50/-

P2 34000 Rs.11/-

[3] Closing stock P1 6000 ?

P2 10000 ?

You are required to calculate necessary material cost variances based on:

[i] Single Plan [ii] Partial Plan

Q.-8.

Managing Director of Petro-KL Ltd (PTKLL) thinks that Standard Costing has little to offer in the reporting of material variances due to frequently change in price of materials.

PTKLL can utilize one of two equally suitable raw materials and always plan to utilize the raw material which will lead to cheapest total production costs. However PTKLL is frequently trapped by price changes and the material actually used often provides, after the event, to have been more expensive than the alternative which was originally rejected.

During last accounting period, to produce a unit of ‘P’ PTKLL could use either 2.50 kg of ‘PG’ or 2.50 kg of ‘PD’ as it appeared it would be cheaper of the two and plans were based on a cost of ‘PG’ of Rs. 1.50 per kg. Due to market movements the actual prices changed and if PTKLL had purchased efficiently the cost would have been:

‘PG’ Rs. 2.25 per kg

‘PD’ Rs. 2.00 per kg

Production of ‘P’ was 1,000 units and usage of ‘PG’ amounted to 2,700 kg at atotal cost of Rs. 6,480/-

You are required to analyze the material variance for ‘P’ by:

1. Traditional Variance Analysis: and

2. An approach which distinguishes between Planning and Operational Variances.

Q.-9.

A Company produces a product X, using Raw Materials A and B. The Standard mix of A and B is 1:1 and the Standard Loss is 10% of input. Compute the missing information indicated by “?” based on the data given below.

Particular A B Total

Standard price of Raw Materials (Rs./kg.) 24 30

Actual Input (Kg.) ? 70

Actual Output (Kg.) ?

Actual Price Rs./kg. 30 ?


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Standard Input Quantity (Kg). ? ?

Yield Variance (Sub usage) ? ? 270 (A)

Mix Variance ? ? ?

Usage Variance ? ? ?

Price Variance ? ? ?

Cost Variance 0 ? 1300(A)

Q.-10. JVS Ltd. manufactures product X which requires 2 hours of skilled men, 3 hours of semi-skilled men & 5 hours of unskilled men per unit at Rs. 5, 3 & 2 per hour respectively.During March 2012, the production department reported output of 10000 units of product X. The labour cost incurred was as detailed below TYPE HOURS PAID FOR RATE PER HOUR

Skilled 18000 Rs.7.00

Semi – skilled 34000 Rs.2.75

Unskilled 60000 Rs.1.50

112000

The total hours paid for included 2000 idle hours due to machine break down etc., out of which 1000 hours pertained to skilled men, 800 hours pertained to semi skilled men & balance to unskilled men.

[a] Calculate labour cost variances. [b] Recalculate the labour cost variances, given that the break up 2000 idle hours is not

given

Q.-11. Given the following data of M Ltd., compute the variances.Particular Skilled Semi- Skilled Unskilled

Number of workers in standard gang 16 6 3

Standard rate per hour 3 2 1

Actual number of workers in the gang 14 9 2

Actual rate of pay per Hour (Rs) 4 3 2

In a 40 hour week, the gang as a whole produces 900 standard hour.

Q.-12.


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The following information has been extracted from the books of MJS Enterprises which is using standard costing system:

Actual output = 9,000 units

Direct wages paid = 1,10,000 hours at Rs.22 per hour, of which 5,000 hours, being idle time, were not recorded in production

Standard hours = 10 hours per unit

Labour efficiency variance = Rs.3,75,000 (A)

Standard variable Overhead = Rs.150 per unit

Actual variable Overhead = Rs.16,00,000

You are required to calculate:(1) Idle time variance (2)Total variable overhead variance(3) Variable overhead expenditure variance (4)Variable overhead efficiency variance. (May 2008)

Q.-13.X Ltd. operates standard costing system. The following variances were reported for the month of November 2015.

Materials prices variance 600[A]Materials mix variance 400[F]Usage variance 1000[A]Labour rate variance 600[F]Idle time variance 300[A]Labour mix variance 500[A]Standard Material Cost Rs.20400Actual Labour cost Rs.17400Overheads efficiency variance 800[A]

You are required to calculate (1) Labour time variance (2) Material yield variance(3) Actual material cost (4) Standard labour cost

It is known that standard rate of pay (average) is 50% of fixed overheads rate.

Q.-14.The standard profit per unit of Y is Rs. 3/- ascertained as follows:

Standard cost per unitMaterials (4 Kg at Rs. 1.50 ) 6.00Labour (5 hours at Re. 0.80) 4.00Overheads – variable at Re. 0.30 per hour 1.50fixed at Re.0.50 per hour 2 .50 Total cost per unit 14.00


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Profit per unit 3 .00 Selling price 17 .00

The standard cost statement has been drawn up on the basis of the production and sales of 4000 units per month as against the available capacity of 5000 units. For the month of November, 2015 the following profit and loss emerged:

Particular Rs. Rs.Sales ( 3,500 units ) 66000Less : Cost of goods produced :

Materials at Rs. 1.40 per kg. 21000Labour at Rs. 0.85 per hour 15640Variable overheads 5200Fixed overheads 10500

52340Actual Profit 13660

Other information The number of days worked in November was 23 as against the normal 25 days per month. & Failure of power led to idleness of 1000 hours.You are required to (1) reconcile the actual and Budgeted profit on the basis of variance. (2) Also calculate all possible ratios.

Q.-15.A company manufactures two products X and Y. Product X requires 8 hours to produce while Y requires 12 hours. In April, 2004, of 22 effective working days of 8 hours a day, 1,200 units of X and 800 units of Y were produced. The company employs 100 workers in production department to produce X and Y. The budgeted hours are 1,86,000 for the year.Calculate Capacity, Activity and Efficiency ratio an establish their relationship. (Nov. 04)

Q.-16.The Managing Director of your company has been given the following statement showing the results for a recent month:

Month ending 31st May, 2012Master Actual VarianceBudget

No. of units produced and sold 10000 9000 (1000)Rs. Rs. Rs.

Sales 40000 35000 (5000)Direct materials 10000 9200 800Direct wages 15000 13100 1900Variable overheads 5000 4700 300Fixed overheads 5000 4900 100

35000 31900 3100Net surplus 5000 3100 (1900)


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The standard costs of the product are as follows: Per Unit (Rs.) Direct materials (1 kg. at Re. 1 per kg) 1.00Direct wages (1 hour at Rs. 1.50) 1.50Variable overheads (1 hour at Re. 0.50) 0.50

Actual results for the month showed that 9,800 kgs. Of material were used and 8,800 labour hours were recorded.Calculate the variances which have arisen, based on:(I) Absorption costing technique. (II) Marginal costing technique.

Q.-17. A single product company has prepared the following cost sheet based on 8,000 units of output per month:

Particular Rs.Direct Materials 1.5 kg @ Rs.24 per kg. 36.00Direct Labour 3 Hours @ Rs.4 per hour 12.00Factor overheads 12.00Total 60.00The flexible budget for factory overheads is as under:Output (units) 6,000 7,500 9,000 10,500Factory overheads (Rs.) 81,600 92,400 1,03,200 1,14,000

The actual results for the month of November, 2015 are given below: Direct Materials purchased and consumed were 11,224 kg at Rs.2,66,570 Direct Labour hours worked was 22,400 and Direct Wages paid amounted to Rs.

96,320. Factory overheads incurred amounted to Rs.96,440 out of which the variable

overhead is Rs.2.60 per Direct Labour hour worked. Actual output is 7,620 units. Work-in-progress :

Opening WIP 300 units:Materials 100% completeLabour and Overheads 60% complete

Closing WIP 200 units:Materials 50% completeLabour and Overheads 40% complete


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You are required to analysis the variances. (Nov. 02)

Q.-18.A single product company operates a system of standard costing. The following data relate to actual output, sales, costs and variances for a month: Actual output 18,000 unitsActual sales and costs incurred: Rs.Sales 12,15,000Direct materials purchased and used 63,000 kg

2,04,750

Direct wages 2,12,040Variable overheads 2,77,020Fixed overheads 3,25,000Total costs 10,18,810Profit 1,96,190

Standard wage rate is Rs.6 per hour. Budget output for the month is 20,000 units.Variances are:

Direct materials - Price variance 15,750 A- Usage variance 27,000 A

Direct labour - Rate variance 6,840 A- Efficiency variance 10,800 F

Variable overheads - Efficiency variance 14,400 F- Expense variance 3,420 A

Fixed overheads - Expense variance 25,000 A- Sales price variance 45,000 F

Required: 1) Present the original budget along with cost sheet showing the standard cost and Profit per unit. 2) Calculate the sales gross margin volume and fixed overheads volume variance. 3) Prepare an operating statement reconciling the budgeted profit with actual profit.

(May 04)Q.-19.SWEET DREAMS Ltd. uses a historical cost system and absorbs overheads on the basis of


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predetermined rate. The following data are available for the year ended 31st March. (in Rs.)

Manufacturing Overheads -

Cost of Goods Sold 3,36,000

Amount actually spent 1,70,000 Stock of Finished Goods 96,000Amount absorbed 1,50,000 Work-in-progress Stock 48,000

Compute the amount of variance and explain 3 alternative methods of disposition of variances.

Q.20.The trading results of SIMILAR Ltd for two consecutive years are as follows –

Particular First Year (Rs.)

Second Year (Rs.)

Material 1,60,000 2,05,200Wages 96,000 1,32,000Variable Overheads 40,000 46,000Fixed Overheads 50,000 54,800Total Costs 3,46,000 4,38,000Profit 54,000 90,000Sales 4,00,000 5,28,000

Selling Price was enhanced by 10% in the Year 2. Material prices and wage rates to have increased by 8% and 10% respectively. Prepare a statement showing how much each factor has contributed to the variation in profit.

Q.21.Under the single plan, record the journal entries giving appropriate narration, with indication of amounts of debits or credits alongside the entries, for the following a transactions using the respective control A/c. (1) Material price variance (on purchase of materials)(2) Material usage variance (on consumption)(3) Labour rate variance.

Solution(i) Dr. Material Control A/c

Dr. Or Cr. Material Price Variance A/cCr. Creditors A/c

(ii) Dr. WIP Control A/cDr. or Cr. Material Usage Variance A/cCr. Material Control A/c

(iii) Dr. Wages Control A/c


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Dr. or Cr. Labour Rate Variance A/cCr. Cash

Q.- 22.Mr. M provided the following relating to 1,000 units of product ‘ZED’ during the month of November, 2015.

Standard price per kg of raw material - Rs.3Actual total direct material cost - Rs. 10,000Standard direct labour hours - 1,600Actual direct labour hours - 1,800Total standard direct labour cost - Rs. 8,000Standard variable overhead per direct labour hours - Re.1Standard variable cost per unit of ZED - Rs.1.60Total standard variable overhead - Rs. 1,600Actual total variable overhead - Rs.1,620

The material usage variance is RS. 600 (adverse) & the overall cost variance per unit of ZED is Re.0.07 (adverse) as compared to the total standard cost per unit of ZED of RS.21.You are required to compute the following:a) Standard quantity of raw material per unit of ZEDb) Standard direct labour rate per hour.c) Standard direct material cost per unit of ZED.d) Standard direct labour cost per units of ZED.e) Standard total material cost for the output.f) Actual total direct labour cost for the output.g) Material price variance. h) Labour rate variance.i) Labour efficiency variancej) Variable overhead expenditure variancek) Variable overheads efficiency variance.


CA Final


Year Practical Theory Year Practical Theory2006 May 4 Marks 2011 May2006 Nov. 12 Marks 2011 Nov. 6 Marks2007 May 5 Marks 2012 May 4 Marks2007 Nov. 2012 Nov. 7 Marks2008 May 7 Marks 2013 May2008 Nov. 2013 Nov. 4 Marks2009 May 4 Marks 2014 May2009 Nov. 2014 Nov. 4 Marks2010 May 2015 May2010 Nov. 4 Marks 2015 Nov.

Q.-1.A hospital operates a 40 bed capacity special health care department. The said department levies a charge of Rs.425 per bed day from the patient using its services. The data relating to fees collected and costs for the year 2015 are as under:

Rs.Fees collected during the year 34,95,625Variable costs based on patient days 13,57,125Departmental fixed costs 6,22,500Apportioned costs of the hospital administration charges 10,00,000

Besides the above, nursing staff were employed as per the following scale at Rs.48,000 per annum per nurse.

Annual Patient days No. of Nurses required

Less than 5000 3

5000 – 7000 4

7000 – 9000 6

Above 9000 8


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The projections for the year 2016 are as under: The costs other than apportioned overheads will go up by 10%. The apportioned overheads will increase by Rs.2,50,000 per annum. The salary of the nursing staff will increase to Rs.54,000 per annum per nurse.The occupancy of the bed capacity is not likely to increase in 2016 and consequently the management is actively considering a proposal to close down the department. In that event, the departmental fixed costs can be avoided.

Required:(i) Present statements to show the profitability of the department for the years 2015 and 2016.(ii) Calculate the:

(a) Break-even bed capacity for the year 2016(b) Increase in fee per bed day required to justify continuance of the department.

Q.-2.A hotel operated by a company has 180 single rooms and 60 double rooms. The rent of the double rooms is set at 160% of the rent of the single rooms. The operational costs per day per room are estimated as under:

Single Rooms Double Rooms

Rs. Rs.

Variable costs 300 500

Fixed costs 500 780

The average occupancy of both the single rooms and double rooms is expected to be 85% throughout a year of 365 days. In fixing the room rent, the company desires to earn a margin of safety of 20%. The hotel has to pay a tax of 20% on its tariff.

Required:(i)Calculate the tariff per day per (1) Single room and (2) Double room.

(ii)The hotel intends to reserve the normal occupancy of 12 single rooms for one of its valued corporate customers at a discount (excluding tax) of 10% of the rent. What increase in the occupancy of the remaining single room days is required to compensate the loss arising from the discount. (May 2004)

Q.-3.A Multinational company runs a Public Medical Health Centre. For this purpose, it has hired a building at a rent of Rs.10,000 per month with 5% of total taking. Health centre has three types of wards for its patients namely. General ward, Cottage ward and Deluxe ward. State the rent to be charged to each bed-day for different type of ward on the basis of the following information:


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(i)The number of beds of each type is General ward 100, Cottage ward 50, Deluxe ward 30.(ii) The rent of Cottage ward bed is to be fixed at 2.5 times of the General ward

bed and that of Deluxe ward bed as twice of the Cottage ward bed.(iii) The occupancy of each type of ward is as follows:

General ward 100%, Cottage ward 80% and Deluxe ward 60%. But, in general ward there were occasions when beds are full, extra beds were hired at a charges of Rs.20 per bed. The total hire charges for the extra beds incurred for the whole year amount to Rs.12,000.

(iv) The Health Centre engaged a heart specialist from outside and on an average fees paid to him was Rs.15,000 per trip. He makes three trips in the whole year.

(v) The other expenses for the year were as under:Rs.

Salary of Supervisors, Nurses, Ward boys 4,25,000

Repairs and maintenance 90,000

Salary of doctors 13,50,000

Food supplied to patients 40,000

Laundry charges for their bed lines 80,500

Medicines supplied 74,000

Cost of oxygen, X-ray etc. other than directly borne for

Treatment of patients 49,500

General administration charges 63,000

(vi) Provide profit @ 20% on total taking.

(vii)The Health Centre imposes 8% service tax on rent received. 360 days may be taken in year. (Nov. 2006)

Q.-4.A manufacturing company runs its boiler on furnace oil obtained from X oil company and Y oil company whose depots are situated at a distance of 24 kms and 16 kms from the factory site.Transportation of furnace oil is made by company’s own tank lorries (two) of 8 ton capacity each. Onward trips are made only with full load and the lorries return empty.

The filling time takes an average of 40 minutes for X Oil Company and 30 minutes for Y Oil Company. The empty time in the factory is only 40 minutes for each. The average speed of lories work out is 24 kms per hour. The varying operating charges average 80 paisa per km covered and fixed charges gives an incidence of Rs.7.5 per hour of operation.Calculate the transportation cost per ton-km for each source of furnace oil.(Nov 2004)


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Q.-5.A city health centre provides health and other related services to the citizens who are covered under insurance plan. The health center receives a payment from the insurance company each time any patient attends the centre for consultation as under:Consulting involving Payment from Insurance company

Rs.No treatment 60Minor treatment 250Major treatment 500

In addition, the adult patients will have to make a co-payment which is equivalent to the amount of payment for the respective category of treatment made by the insurance company. However, children and senior citizens are not required to make any such co-payment.The health centre will remain open for 6 day in a week for 52 weeks in a year. Each physician treated 20 patients per day although the maximum number of patients that could have been treated by a physician on any working day is 24 patients.The health centre received a fixed income of Rs.2,25,280 per annum for promotion of health products from the manufactures.

The annual expenditure of the health centre is estimated as under:Materials and consumable (100% variable) Rs. 22,32,000 Staff salaries per annum per employee (fixed):

Physician Rs. 4,50,000Assistants Rs. 1,50,000Administrative staff Rs. 90,000Establishment and other operating costs (fixed) Rs. 16,00,000 The non-financial information is as under:

(i) Staff :Number of physicians employed 6Assistants 7Administrative staff 2

(ii) Patient Mix:Adults 50%


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Children 40%Senior Citizen 10%

(iii) Mix of patient appointments (%)

Consultation requiring no treatment 70%Minor treatment 20%Major treatment 10%

Required:(i) Calculate the Net income of the city health centre for the next year:(ii)Determine the percentage of maximum capacity required to be utilized next year in order to

break even. (Nov. 2008)Q.-6.Happy Holidays Company contracts to take children on excursion trips. Relevant information for a proposed excursion trip is given below:

Rs.Revenue per trip per child 4,000Expenses that have to be incurred:Train fare per child per trip 1,700Meals per child per trip 300Craft Materials per child per trip 600Room Rent per trip (4 children can be accommodated in a room) 760Local Transport at picnic spots (per vehicle) 1,200(each vehicle can seat 6 children excluding the driver)

Fixed costs that are required to be covered in a trip Rs. 5,18,130Find the minimum number of children to cross the break-even point and start earning a profit. (Nov. 2011 - 6 Marks) Q.-7. A Company presently brings coal to its factory from a nearby yard and the rate paid for transportation of coal from the yard located 6 km. away to factory is Rs. 50 per tonne. The total coal to be handled in a month is 24,000 tonne.

The Company is considering proposal to buy its own truck and has the option of buying either a 10 tonne capacity or 8 tonne capacity truck.

The following information are available:

10 tonne 8 tonneTruck Truck

Purchase price Rs. 10,00,000 8,50,000Life (Year) 5 5Scrap value at the end of 5th year Nil Nil Km. per litre of diesel 3 4Repair/Maint. p.a. per Truck 60,000 48,000


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Other Fixed Expns. p.a. 60,000 36,000Lubricants & Sundries per 100 Km. Rs. 20 20

Each truck will daily make 5 trips (to and fro) on an average for 24 days in month.Cost of Diesel Rs. 15 per litre. Salary of Drivers Rs. 3,000 per month—Two Drivers will be required for a Truck Other staff expenses Rs. 1,08,000 p.a.

Present a comparative Cost Sheet on the basis of above data showing transport cost per tonne of operating 10’ and 8’ Truck at full capacity utilization. (Nov.1998 - 12 marks)


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Year Practical Theory Year Practical Theory2006 May 4 Marks 2011 May 11 marks2006 Nov. 7 Marks 2011 Nov. 8 Marks2007 May 12 Marks 2012 May 10 Marks2007 Nov. 2012 Nov. 11 Marks2008 May 14 Marks 2013 May 4 Marks2008 Nov. 11 Marks 2013 Nov. 12 Marks2009 May 12 Marks 2014 May 8 Marks2009 Nov. 12 Marks 2014 Nov. 10 Marks 2010 May 2015 May 5 Marks2010 Nov. 2015 Nov.

Q.-1. A company has two divisions viz Processing and Refining. Processing Division produces 500 tonnes of product M from 1,000 tonnes of a raw material per month. Refining division produces 300 tonnes of product FM from 500 tonnes of M received from the Processing Division. The cost data are:

Processing Division:Raw materials Rs. 120 per tonne of inputVariable Costs Rs. 80 per tonne of outputFixed costs Rs. 50,000 per month

Refining Division:Variable costs Rs.30 per tonne of outputFixed costs Rs. 21,000 per month

The market price of product M is Rs 500 per tonne and of product FM is Rs. 1,200 per tonne.Required:

1) Compute the overall profit of the company per month.2) Compute the profit of each Division based on the following pricing Methods:

a) 200% of variable costs of Processing Division for Mb) Market price for M


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3) Which method will you recommend and why? (RTP May 2004)

Q.-2.A Ltd producing a range of minerals, is organized into two trading groups. One handles wholesale business and the other sale to retailers.

One of its products is a moulding clay. The wholesale group extracts the clay and sells it to external wholesale customers as well as to the retail group. The production capacity is 2,000 tonnes per month but, at present, sales are limited to 1,000 tonnes wholesale and 600 tonnes retail.

The transfer price was agreed at Rs. 200 per tonne in line with the external wholesale trade price at 1 July which was beginning of the budget year. As from 1 December, however competitive pressure has forced the wholesale trade price down to Rs.180 per tonne. The members of the retail group contend that the transfer price to them should be the same as for outside customer.

The wholesale group refute the argument on the basis that the original budget established the price for the whole budget year.

The retails group produces 100 bags of refined clay from each tonne of moulding clay which it sells at Rs. 4 a bag. It would sell a further 40,000 bags if the retail trade price were reduced to Rs. 3.20 a bag.

Other data relevant to the operations are:

Wholesale Group Rs.

Retail Group Rs.

Variable cost per tonneFixed cost p.m.

70 1,00,000

60 40,000

You are required to:1) prepare profitability statements for the month of December for each group and for A Ltd. as a whole based on transfer prices of Rs. 200 per tonne and Rs. 180 per tonne when producing at:

(a) 80% capacity; and (b) 100% capacity utilizing the extra sales to supply the retail trade.

2) comment on the results achieved under (1) and the effect of the change in the transfer price; and3) Propose an alternative transfer price for the retail sales which would provide greater incentive for increasing sales, detailing any problems that might be encountered.

Solution(2) The highest profit that retails group earns, when operating at 100% level i.e. Rs. 40,000 is lower than the least profit that it would get when operating at 80% level i.e. Rs. 44,000.


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This clearly implies that retail group, under no circumstance would agree to operate at 100% level, even if it is made to pay the transfer price of Rs. 180. On the other hand, the least profit that wholesale group 100% level i.e. Rs. 1,20,000 is significantly more than the highest profit it would make when operating at 80% level i.e. Rs. 88,000. This implies that wholesale group would not mind charging transfer price of only Rs.180, provided the retail group agrees to operate at 100% level. Even the company also gets more profit at 100% level i.e. Rs. 1,60,000 instead of Rs. 1,32,000.This implies that what is in the best interest of the wholesale group and more important, the company is totally against the interest of the retail group. We strongly defend the right of wholesale group to charge transfer price of Rs. 200 because the company follows negotiated price method and not market price method but at the same time we respect the right of retail group to decide how much to buy. Thus, if nothing is else done then present arrangement has to be continued then the transfer price will have to be Rs. 200, the wholesale group will have to operate at 80%, wholesale group And Retail group will make the profit of Rs. 88,000 and 44,000 respectively. The company will have to sacrifice the profit of Rs. 28,000 and this is the price it will have to pay for having followed defective transfer pricing policy.

(3) Re negotiated Price: This is the best option and has no limitation. As already written in part (2), wholesale group is going to make profit of Rs. 88,000 and retail group is going to make profit of Rs. 44,000 and the company of Rs. 1,32,000. This is where both the division is allowed to exercise their respective right. As a result of this, a chance to make additional profit of Rs. 28,000 would be lost. What we suggest is to renegotiate the transfer price in such a way that this additional possible profit of Rs. 28,000 is shared by the two division so that both would get more profit then what otherwise they would get when exercise their right.

The wholesale group will make a profit of Rs. 1,20,000 at 100% level, when the transfer price is Rs. 180.This is Rs. 32,000 more than the normal profit of Rs. 88,000 and if the profit at 100% level falls by Rs. 32,000 because of reduction in the transfer price then also the wholesale group would not be worse off. This means the wholesale group can charge the minimum transfer price of Rs. 148 without being worse off. (148000/1000)

Transfer value Rs. 1,80,000- Reduction Rs. 32,000 Rs. 1,48,000 Likewise Retail group is otherwise going to get Rs. 44,000 at 80% level, if they get profit of Rs. 44,000 then it would not mind operating at 100% level, for this given profit has to be increased by Rs. 4,000 reducing the transfer value to Rs. 1,76,000. This means that the retail group can agree to pay a maximum price of Rs. 176 without being worse off (1,80,000-4000 = 1,76,000/1000).

This means that the renegotiation of transfer price is very much possible. The resultant renegotiated price will be above Rs. 148 but below Rs. 176. Ideally, we would suggest that the price to be Rs. 162 so that both the division get equal benefit for thinking positive. The


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resultant net profit will be Rs. 1,02,000 & Rs. 58,000 for wholesale group & retail group respectively and Rs. 1,60,000 for the company.If this is done then the company would be able to follow a healthy transfer pricing policy without paying price for it.

Q.-3. Tycon Ltd. has two manufacturing departments organised into separate profit centres known as Textile unit and Process House. The Textile unit has a production capacity of 5 lacs metres cloth per month, but at present its sales is limited to 50% to outside market and 30% to process house.

The transfer price for the year 2004 was agreed at Rs. 6 per metre. This price has been fixed in line with the external wholesale trade price on 1st January, 2004. However the price of yarn declined, which was the raw material of textile unit, effect that wholesale trade price reduced to Rs. 5.60 per metre with effect from 1st June, 2004. This price was however not made applicable to the sales made to the processing house of the company. The textile unit turned down the processing house request for revision of price.The Process house refines the cloth and packs the output known as brand Rayon in bundles of 100 metres each. The selling price of the Rayon is Rs. 825 per bundle. The process house has a potential of selling a further quantity of 1,000 bundles of Rayon provided the overall prices is reduced to Rs. 725 per bundle. In that event it can buy the additional 1,00,000 metres of cloth from textile unit, whose capacity can be fully utilized. The outside market has no further scope.

The cost data relevant to the operations are:

Textile unit Rs.

Process houseRs.

Raw material (Per metre)

On 1st June, 2004 3.00 Transfer price

Variable cost 1.20 (per metre) 80 (per bundle)

Fixed cost (per month) 4,12,000 1,00,000

You are required to: (i) Prepare statement showing the estimated profitability for June, 2004 for Textile Unit and Process house and company as a whole on the following basis:(a) At 80% and 100% capacity utilization of the Textile unit at the market price and the transfer price to the Processing house of Rs. 6 per metre. (b) At 80% capacity utilization of the Textile unit at the market price of Rs. 5.60 per metre and the transfer price to the processing house of Rs. 6 per metre.


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(c) At 100% capacity utilization of the Textile unit at the market price of Rs. 5.60 per metre and the transfer price to the Processing house of Rs. 5.60 per metre.

(ii) Comment on the effect of the company’s transfer pricing policy on the profitability if processing house. (Nov. 2004 - 11 Marks)

Q.-4.AB Cycles Ltd. has 2 divisions, A and B which manufacture bicycle. Division A produces bicycle frame and Division B assembles rest of the bicycle on the frame.

There is a market for sub-assembly and the final product. Each division has been treated as a profit center. The transfer price has been set at the long-run average market price. The following data are available to each division.

Estimated selling price of final product Rs.3,000 p.u.

Long run average market price of sub-assembly Rs.2,000 p.u.

Incremental cost of completing sub-assembly in division B Rs.1,500 p.u.

Incremental cost in Division A Rs.1,200 p.u.

Required:

(i) If Division A’s maximum capacity is 1,000 p.m. and sales 800 units only to outside market, should 200 units be transferred to B on long-term average price basis?

(ii) What would be the transfer price, if manager of Division B should be kept motivated?(iii) If outside market increased to 1,000 units, should Division A continue to transfer 200 units

to Division B or sell entire production to outside market? (May 05 – 9 Marks)

Q.-5.Division A is a profit centre which produces three products X,Y,Z. Each product has an external market.

X Y ZExternal market price per unit Rs. 48 46 40Variable cost of production in Division A Rs. 33 24 28Labour hour required per unit in Division A 3 4 2

Product Y can be transferred to division B. But the maximum quantity that might be required for transfer is 300 units as Y.

The maximum externals sales are:-


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X - 800 unit, Y - 500 unit & Z - 300 unit Instead of receiving transfers of product Y from Division A, Division B could buy similar product in the open market at a slightly cheaper price of Rs. 45 per unit. What should the transfer price be for each unit for 300 units as Y, is the total labour hours available in division A are :- a) 3800 hrs. b) 5600 hrs.

Q.-6.INDUSTRIAL DIAMONDS LTD. has two divisions, one in Philippines and the other in US.

Mining Division – operates a mine in the Philippines containing a rich body of raw diamonds.

Processing Division – processes the raw diamonds into polished diamonds used in industrial applications.The costs of these divisions are –

Division Philippines Mining Division

Per pound of raw diamonds

US Processing DivisionPer pound of Polished

diamonds

Variable Costs 4000 pesos 200 dollars

Fixed Costs 8000 pesos 600 dollars

Industrial Diamonds has a corporate policy of further processing diamonds in Los Angeles.

Several diamond polishing companies in the Philippines buy raw diamonds from other local mining companies at 16,000 pesos per pound, Current Foreign Exchange Rate is 40 pesos = $1. Income Tax rates are 20% and 35% in Philippines and the United State respectively.

It takes 2 pounds of raw industrial diamonds to yield 1 pound of polished industrial diamonds. Polished diamonds sell for $4,000 per pound.

1. Compute the Transfer Price for 1 pound of raw industrial diamonds transferred from the Mining Division to the Processing Division under two methods – (a) 300% of Full Costs, and (b) Market Price.

2. 1,000 pounds of raw industrial diamonds are mined by the Philippine Division and the n processed and sold by the U.S. Processing Division. Compute the after-tax operating income for each division under the Transfer-Pricing methods in requirement (1). Which Transfer-Pricing method in requirement (1) will maximize the total after-tax operating income of the Company?

3. What factors, in addition to global tax minimization, might the Company consider


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in choosing a transfer-pricing method for transfers between its two divisions?

Q.-7.A large business consultancy firm is organized in to several divisions. One of the divisions is the Information Technology (IT) division which provides consultancy services to its clients as well as to the other divisions of the firm.

The consultants in the IT divisions always work in a team of three professional consultants on each day of consulting assignment. The external clients are charged a fee at the rate of Rs. 4,500 for each consulting day. The fee represents the cost plus 150% profit mark up. The breakup of cost involved in the consultancy fee is estimated at 80% as being variable and the balance is fixed.

The textiles division of the consultancy firm which has undertaken a big assignment requires the services of two teams of IT consultants to work five days in a week for a period of 48 weeks. While the director of the textiles division intends to negotiate the transfer price for the consultancy work, the director of IT division proposes to charge the textiles division at Rs.4,500 per consulting day.In respect of the consulting work of the textiles division, IT division will be able to reduce the variable costs by Rs.200 per consulting day. This is possible in all cases of internal consultations because of the use of specialized equipment.

You are required to explain the implications and set transfer prices per consulting day at which the IT division can provide consultancy services to the textiles division such that the profit of the business consultancy firm as a whole is maximized in each of the following scenarios:

(i) Every team of the IT division is fully engaged during the 48 week period in providing consultancy services to external clients and that the IT division has no spare capacity of consultancy teams to take up the textiles division assignment.

(ii) IT division will be able to spare only one team of consultants to provide services to the textiles division during the 48 week period and all other teams are fully engaged in providing services to external clients.

(iii) A new external client has come forward to pay IT division a total fee of Rs. 15,84,000 for engaging the services of two teams of consultants during the aforesaid period of 48 weeks. (Nov. 2008 – 11 Marks)


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Year Practical Theory Year Practical Theory

2006 May 2011 May 3 Marks

2006 Nov. 2011 Nov.

2007 May 2012 May

2007 Nov. 2012 Nov. 10 Marks


2008 Nov. 2013 Nov.


2009 Nov. 2014 Nov. 14 Marks

2010 May 2015 May

2010 Nov. 2015 Nov.

Q.-1.A manufacturing organization has four different customers A, B, C and D.

A single product is sold to them at different prices because of trade discount offered. Data is give for cost per unit of business activity.

You are required to prepare customer profitability statement.The data pertaining to four customers are:

CUSTOMERS


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Particulars A B C D

No. of units sold 60,000 80,000 1,00,000 70,000

Selling price net of discount Rs. 0.25 Rs. 0.23 Rs. 0.21 Rs. 0.22

No. of sales visits 2 4 6 3

No. of purchase orders 30 20 40 20

No. of deliveries 10 15 25 14

Kilometers per journey 20 30 10 50

No. of rush deliveries - - 1 2

Activity Cost Driver Rate

Sales visit Rs. 210 per visit

Order placing Rs. 60 per order

Product handling Rs. 0.10 per item

Normal Delivery cost Rs. 2 per kilometer

Rushed delivery cost Rs. 200 per delivery

Ans.

A B C D

Operating profit Rs. 6,380 7,460 6,640 4,770

Profitability (%) 43 % 41% 32% 31%

Q.2. PQR Limited has decided to analysis the profitability of its five new customers.


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It buys bottled water at Rs. 90 per case & sells to retail customers at a list price of Rs. 108 per case.

The data pertaining to five customers are:

CUSTOMERSA B C D E

Cases sold 4,680 19,688 1,36,800 71,550 8,755

List selling price Rs. 108 108 108 108 108

Actual selling price Rs. 108 106.20 99 104.40 97.20

No. of purchase order 15 25 30 25 30

No. of customer visit 2 3 6 2 3

No. of deliveries 10 30 60 40 20

Kilometers traveled per delivery

20 6 5 10 30

No. of expedited deliveries 0 0 0 0 1

Its five activities & their cost drivers are:

Activity Cost Driver Rate

Order taking Rs. 750 per purchase order

Customer visits Rs. 600 per customer visit

Deliveries Rs. 5.75 per delivery Km traveled

Product handling Rs. 3.75 per case sold

Expedited deliveries Rs. 2,250 Per expedited delivery


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You are required to compute the customer-level operating income of each of the five retail customers.

Ans.

A B C D E

Operating Income 53,090 2,23,531 6,90,375 7,39,757

205

Profitability (%)

Q.3.Fitwell Ltd. a large manufacturing company has three factories namely factory ‘A’ factory ‘B’ and factory ‘C’.

All the three factories produce the same product which is sold at Rs. 375 per unit. The factory wise estimates of operating results for 1986 are as under. Rs. Lacs

A B C Total

Sales 300 1,200 600 2,100

Costs :

Raw Materials 75 350 145 570

Direct labour 75 280 140 495

Factory overheads – variable 20 110 55 185

Fixed 40 120 60 220

Selling Overhead – variable 23 70 40 133

Fixed 15 50 30 95

Administration overhead 20 90 40 150

Head office expenses 12 50 30 92

Total 280 1,120 540 1,940

Profit 20 80 60 160

When the above estimates were under finalization, the company’s legal department advised that the lease of factory ‘A’ was due to expire on 31st December 1985 and that it could be renewed by enhancing the lease rent by Rs. 12 lacs per annum.

Since this enhancement will have a heavy impact on the profitability of the company, the management is constrained to examine the proposals which are as under:


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(i) Renew the lease and bear the impact

(ii) Close down factory ‘A’ sell off the plant, machinery and stocks and liquidate all liabilities, including the staff and workers retrenchment compensation from the sale proceeds which are sufficient for this purpose.

In order however to maintain the customer relations the total planned output of the factory ‘A’ will be transferred to EITHER factory ‘B’ or factory ‘C’ Plant capacity is available at both the factories to take over the manufacture.

The additional cost involved in the manufacture of the extra output so transferred in factories ‘B’ and ‘C’ are estimated as under;

Factory B Factory C

(a) Additional fixed overheads due to increased capacity utilization (Per Annum)

Rs. 50 lacs Rs. 40 lacs

(b) Additional Freight, selling and other overheads to produce and distribute the output to the present customer of factory ‘A’

Rs. 25 per unit

Rs. 35 per unit

You are required to prepare comparative statement of profitability in the aforesaid alternative courses of action and give your recommendation. (Nov. 1985)

Ans.Total Profit of Rs.148 lacs if Company renews the lease of Factory A.

Total profit of Rs.167.50 lacs if Company close factory A and transfer production of factory A to factory B.

Total profit of Rs. 182 lacs if Company closes Factory A and transfer production of Factory A to Factory C.

Decision: Company should close Factory A and transfer production of Factory A to Factory C.

Q.4.A manufacturing company has three factories namely ‘Factory A’, ‘Factory B’ and ‘Factory C’. All three factories produce the same product which is sold at Rs. 750 per unit.

The factory-wise estimates of operation results for 2014 are as follows:

(Rs. In lakhs) Particulars Factory A Factory B Factory C Total

Sales 600 2,400 1,200 2,400


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Costs:

Raw materials 150 700 290 1,140

Direct labour 150 560 280 990

Factory overheads-variable 40 220 110 370

Factory overheads-fixed 80 240 120 440

Selling overheads-variable 46 140 80 266

Selling overheads-fixed 30 100 60 190

Administrative overheads 40 180 80 300

Head office expenses 24 100 60 184

Profit 40 160 120 320

When the above estimates were under finalization, the company’s legal department advised that the lease of factory ‘A’ was due to expire on 31st December, 2013 and that it could be renewed by enhancing the lease rent by Rs. 24 lacs per annum.

Since this enhancement will have a heavy impact on the profitability of the company, the management is constrained to examine the proposals which are as under:

(i) Renew the lease and bear the impact

(ii) Close down factory ‘A’ sell off the plant, machinery and stocks and liquidate all liabilities, including the staff and workers retrenchment compensation from the sale proceeds which are sufficient for this purpose.

In order however to maintain the customer relations the total planned output of the factory ‘A’ will be transferred to EITHER factory ‘B’ or factory ‘C’ Plant capacity is available at both the factories to take over the manufacture.

The additional cost involved in the manufacture of the extra output so transferred in factories ‘B’ and ‘C’ are estimated as under;

Factory B Factory C

(a) Additional fixed overheads due to increased capacity utilization (Per Annum)

Rs. 100 lacs Rs. 80 lacs

(b) Additional Freight, selling and other overheads to produce and distribute the output to the present customer of factory ‘A’

Rs. 50 per unit

Rs. 70 per unit

You are required to prepare comparative statement of profitability in the aforesaid alternative courses of action and give your recommendation.

(Nov. 2014 – 9 Marks)Ans.Total Profit of Rs.296 lacs if Company renew the lease of Factory A.


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Total profit of Rs.335 lacs if Company close factory A and transfer production of factory A to factory B.

Total profit of Rs. 364 lacs if Company closes Factory A and transfer production of Factory A to Factory C.

Decision: Company should close Factory A and transfer production of Factory A to Factory C.


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ADVANCED MANAGEMENT ACCOUNTING PART (A) COSTING … · ADVANCED MANAGEMENT ACCOUNTING PART (A) COSTING Name of the Topic Page No 1 Developments in the business environment 01-16 A