AGGARWAL EDUCATION CENTRE PVT. LTD.

D-223, Laxmi Chamber, Laxmi Nagar, Delhi-92.Ph. NO:- 22543053, 9811374374.

TQMQ1:- A Manufacturing company purchase one of the components required for the manufactures of product from two sources ,viz, suppliers, A and supplier B .The price quoted by supplier a is Rs. 15.00 per hundred numbers of the component and is found that on the average 3% of the total receipt from this source is defective. The corresponding quotation from supplier B is Rs .14.50 but the defectives would go up to 5% For the total supply .If the defectives are not detected ,they are utilised in production causing a damage of Rs. 15.00 per hundred components.

The company intends to introduce a system of inspection for the components on receipt which would cost Rs.2.00 per hundred components such an inspection will, however ,be able to detect only 90% of the defective components received .No payment will be made for components found to be defective in inspection.

Offer your opinion ,(a) whether inspection at the point of receipt is justified ,and (b) which of the two suppliers should be asked to supply. Assume total requirements of components to be 10,000 numbers.---------------------------------------------------------------------------------------------------------------------Q2:- Your company plans to operate department D at normal capacity next year producing one lakh units of product P. Assuming no defective works, these units can be manufactured in 2.5 lakhs labour hours at a cost of Rs.0.50 per hour .factory overhead would amount to Rs.1,50,000 of which Rs. 50,000 would be fixed five units of materials can be purchased in two qualities ; a high quality at Rs. 1.05 per unit or lower quality at 0.80 per unit.

Under expected conditions, using high quality materials 10%of the work will be defective requiring complete replacement of the material additional labor costs and variable overhead. scrap materials recovered from defectives production could be sold at Re. 0.30 per unit of high quality material used.

As an alternative to this arrangement .the use of the lower quality material is being considered but this would require an extra operation to be performed on it. An additional machine and tooling would be needed at a cost of Rs. 3,000 per annum. The additional operation would take half an hour for each unit of product P produced ,not talking defective work into a account.It is estimated that 20% of the work would be defective all of which would be defective all of which would require complete replacement. Scrap material from the lower quality material could be sold for Rs. 5,000.

Present information to management indicating the more profitable course of action.---------------------------------------------------------------------------------------------------------------------

Q3:- A company manufactures a single product ,the estimated costs of which are as follow:Direct Materials Rs 10 eachDirect wages 8 hours at Rs. 0.50 per hour Overhead absorption rate Rs. 1.75 per hour.(50% fixed overhead included) During this period 1,000 units will be produced and sold as follow:-

900 Units of first at50 units of second at50 units of third at

Rs.30 eachRs.20 eachRs.10 each

Present information to management showing the loss due to the production of inferior units.By reprocessing the inferior units taking the full reprocessing time of a further 8 hours and adding further material Costing Rs.4 per unit these, “seconds” and “thirds” can be converted into firsts.Present information to the management.Answer:- Loss 600.--------------------------------------------------------------------------------------------------------------------

TQM- Cost IndifferenceQ4:-A company manufactures a component on batches of 2000 each .Each component is tested before being sent to the agents for sales. Each components can be tested at the factory at a cost of Rs.25 .If any component is found to be defective, it can be rectified by spending Rs.200. In view of the large demand for the components and the sophisticated system of manufactures ,a proposal came up that the practice of pre-testing of the components be dispensed with to save costs. In that event, any defective component is received back from the customer under warranty ,the cost of rectification and redispatch will be Rs.400 per component.

States at what percentage of manufacture of components will the company find it cheaper to pre-test each component.Answer: - 250 Components (12.5%)---------------------------------------------------------------------------------------------------------------------Q5:- Carlon Ltd. makes and sells a single product, the unit specifications are as follows:-

Direct Materials X 8 Sq meter at Rs. 40 per square meterMachine Time 0.6 Running hoursMachine cost per gross hour Rs. 400Selling price Rs. 1,000

Carlon Ltd. requires to fulfill orders for 5,000 product units per period. There are no stocks 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 (QMP) 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

implementation1: 5% of incoming material from suppliers scrapped due to poor receipt and storage organization

1: Reduced to 3%.

2: 4% of materials X input to the machine process is wasted due to processing problems.

2: Reduced to 2.5%

3: Inspection and Storage of Material X costs Re. 1 per square meter purchased.

3 No change in the unit rate.

4: Inspection during the production cycle, calibration checks on inspection equipment vendor rating and other checks cost Rs. 2,50,000 per period.

4 Reduction of 40% of the existing cost.

5 Production Qty. is increased to allow for the downgrading of 12.5% of the production units at the final inspection stage. Down graded 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.

6 Reduction to 2.5%

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.)

8: Reduction to 12.5%

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 meters), (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 products 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.

---------------------------------------------------------------------------------------------------------------------Q6:-The Bushworks Ltd convert synthetic slabs into components AX and BX for use in the car industry. Bushworks Ltd. Is planning a quality management programme at a cost of$250,000. The following information relates to the costs incurred by Bushworks Ltd. Both before and after the implementation of the quality management programme:1:- Synthetic slabs:Synthetic slabs cost $40 per hundred. On average 2.5% of synthetic slabs received are returned to the supplier as scrap because of deterioration in stores. The supplier allows a credit of $1 per hundred slabs for such returns. In addition, on receipt in stores, checks to ensure that the slabs received conform to specification costs $14,000 per annum.A move to adjust in time purchasing system will eliminate the holding of stocks of synthetic slabs. This has been negotiated with the supplier who will deliver slabs of guaranteed design specification for $44 per hundred units, eliminating all stockholding costs. 2:- Curing /moulding processThe synthetic salbs are issued to a curing/holding process, which has variable conversion costs of $20 per hundred slabs input. This process produces sub-components A and B, which have the same cost structure. Lossess of 10% of input to the process because of incorrect temperature control during the process are sold as scrapat$5perhundred units. The quality programme will rectify the temperature control problem thus reducing losses to 1% of input to the process.3:- Finishing ProcessThe finishing process has a bank of machines which perform additional operations on type A and B sub- components as required and converts them into final components AX and BX are $15 and $25 per hundred units respectively. At the end of the finishing process15%of units are found to be defective. Defective units are sold for scrap at $10 per hundred units. The quality programme will convert the finishing process into two dedicated cell, one for each of components types AX and BX. The dedicated cell variable costs per hundred sub- components A and B processed will be $12 and $20 respectively. Defective units of components AX and BX are expected to fall to 2.5% of the input to each cell. Defective components will be sold as scrap as at present.4:- Finished goodsA finished goods stock of components AX and BX of 15,000 and 30,000units respectively is held throughout the year in order to allow for customer demand fluctuations and free replacement of units returned by customers due to specification faults. Customers returns are currently 2.5% of components delivered to customers. Variable stock holding costs are $15 per thousand components units.

The proposed dedicated cell layout of the finishing process will eliminate the need tp hold stocks of finished components, other than sufficient to allow for the free replacement of those found to be defective in customer hands. This stock level will be set at one month’s free replacement to customers which is estimated at 500 and 1000 units for types AX and BX respectively. Variable stockholding costs will remain at $15 per thousand components units.5:- Quantitative data:

Some preliminary work has already been carried out in calculating the number of units of synthetic salbs, sub-components A and B and components AX and BX which will be required both before and after the implementation of the quality management programme, making use of the information in the question. Table 1 summarises the relevant figures. Table 1

Existing Situation Amended SituationType A/Ax Type B/ BX Type A/ AX Type B/ BX(units) (units) (units) (units)

Sales 800,000 1200,000 800,000 1200,000Customer returns

20,000 30,000 6,000 12,000

Finsihed goods delivered

820,000 1230,000 806,000 1212,000

Finished process losses

144,706 217059 20667 31077

Input to finishing process

964 706 1447 059 826667 1243 077

2411765 2069744Curing/moulding losses 267974 20 907Input to curing /moulding 2679739 2090651Stores losses 68 711 --Purchase of Synthetic slabs 2748450 2090651Required:-

(a) Evaluate and Present a statement showing the net financial benefit or loss per annum of implementing the quality management programme, using the information in the question and the data in Table 1.

( All relevant working must be shown)(b) Explain the meaning of the terms internal failure costs, external failure costs,

appraisal costs and prevention costs giving examples of each.--------------------------------------------------------------------------------------------------------------------Q7:- Cost of Quality reporting Burdoy Plc has a dedicated set of production facilities for component X. A just-in-time system is in place such that no stock of materials; Work-in-progress or finished goods are held.

At the beginning of period 1, the planned information relating to the production of component X through the dedicated facilities is as follows:

(i) Each unit of component X has input materials: 3 units of material A at $ 18 per unit and 2 units of material B at $9 per unit.(ii) Variable cost per unit of component X (excluding materials) is $15 per unit worked on.(iii) Fixed costs of the dedicated facilities for the period $162,000.

(iv) It is anticipated that 10% of the units of X worked on in the process will be defective and will be scrapped.

It is estimated that customers will require replacement (free of charge) of faulty units of components X at the rate of 2% of the quantity invoiced to them in fulfillment of orders.

Burdoy plc is pursuing a total quality management philosophy. Consequently all losses will be treated as abnormal in recognition of a zero defect policy and will be valued at variable cost of production.

Actual results for each period 1 to 3 for component X are shown in Appendix 3.1. No changes have occurred form the planned price levels for materials, variable overhead or fixed overhead costs.Required:-

(a) Prepare an analysis of the relevant figures provided in Appendix 3.1 to show that the period 1 actual results were achieved at the planned level in respect of (i) Quantities and losses and (ii) Unit cost levels for materials and variable costs.

(b) Use your analysis from (a) in order to calculate the value of the planned level of each of internal and external failure costs for period 1.

( c ) Actual free replacements of component X to customers were 170 units and 40 units in periods 2 and 3 respectively. Other data relating to periods 2 and 3 is shown in Appendix 3.1.

Burdoy plc authorized additional expenditure during periods 2 and 3 as follows:Period 2: Equipment accuracy checks of $ 10,000 and staff training of $ 5,000Period 3: Equipment accuracy checks of $10,000 plus $ 5,000 of inspection costs; also staff training costs of $5,000 plus $3,000 on extra planned maintenance of equipment .Required:-( d) Prepare an analysis for Each of period 2 and 3 which reconciles the number of components invoiced to customers with those worked on in the production process. The analysis should show the changes from the planned quantity of process losses and changes from the planned quantity of replacement of faulty components in customer hands:( e)Prepare a cost analysis for each of periods 2 and 3, which shows actual internal failure costs, external failure costs, appraisal costs and prevention costs.

Appendix 3.1Actual Stastics for component X

Period1 Period 2 Period 3Invoices to customers (units) 5,400 5,500 5,450Worked on in the process(units) 6,120 6,200 5,780Total Costs:Materials A and B ($) 440,640 446,400 416,160Variable cost of production ($)(excluding materials cost) 91,800 93,000 86,700Fixed cost ($) 162,000 177,000 185,000

------------------------------------------------------------------------------------------------------------------------------------------Q8:-Q uality improvement theory of constraints) . The Wellesley Corporation makes printed cloth in two operations, weaving and printing. Direct materials costs are Wellesley’s only variable costs. The demand for Wellesley’s cloth is very strong. Wellesley can sell whatever output Quantity produces at $1,250 per roll to a distributor who markets, distributes and provides customer service for the product.

Weaving PrintingMonthly capacity 10,000 rolls 15,000 rollsMonthly production 9,500 rolls 8,550 rollsDirect materials costs per roll of clothProcessed at each operation $500 $100Fixed operating costs $2,850,000 $427,500Fixed operating costs per roll($2,850,000 /9,500; $427,500/8,550) $300 per roll $50 per roll

Wellesley can start only 10,000 rolls of cloth in the Weaving Department because of capacity constraints of the weaving machines. If the weaving operation produces defective cloth, the cloth must be scrapped and yield zero net disposal value. Of the 10,000 rolls of cloth started at the weaving operation, 500 rolls (5%) are scrapped. Scrap costs per roll, based on total ( fixed and variable) manufacturing costs per roll incurred up to the end of the weaving opera ration, equal $785 per roll as follows:

Direct materials costs per roll (variable) $500Fixed operating costs per roll ($2,850/10,000 rolls) 285Total manufacturing costs per roll in Weaving Department

$785

The good rolls from the Weaving Department (called gray cloth) are sent to the Printing Department of the 9,500 good rolls started at the printing operation, 950 rolls (10%) are scrapped and yield zero net disposal value, Scrap costs, based on total ( fixed and variable) manufacturing costs per unit incurred up to the end of the printing operation, equal $930 per roll calculated as follows:-

Total Manufacturing costs per roll in Weaving Department $785Printing Department manufacturing costsDirect materials costs per roll (variable) $100Fixed operating costs per roll ($427,500 / 9,500 rolls) 45Total manufacturing costs per roll in Printing Department 145Total manufacturing costs per roll $930

The Wellesley Corporation total monthly sale of printed cloth equal the Printing Department’s output.Required:- Each requirement refers only to the preceding data. There is no connection between the requirements.1:- The printing Department is considering buying 5,000 additional rolls of gray cloth from an outside supplier at $900 per roll. The Printing Department manager is concerned that the cost of purchasing the gray cloth is much higher than Wellesley cost of manufacturing it. The quality of the graw cloth acquired from outside is very similar to

that manufactures in-house. The Printing Department expects that 10% of the rolls obtained from the outside supplier will be defective. Show your calculations.2:- Wellesley engineers have developed a method that would lower the Printing Department’s scrap rate to 6% at the printing operation. Implementing the new method would cost $350,000 per month. Should Wellesley implement the change? Show your calculations.3:- The design engineering team has proposed a modification that would lower the Weaving Department’s scrap rate to 3%. The modification would cost the company $175,000 per month. Should Wellesley implement the change? Show your calculations.---------------------------------------------------------------------------------------------------------------------Q9:-The Photon Corporation manufactures and sells 20,000 copies each year. The variable and fixed costs of rework and repair are as follows:

Variable costs Fixed costs Total Costs

Rework cost per hour $ 40 $60 $100Repair costsCustomers support costs per 20 30 50Transparency costs per load 180 60 240Warranty repair costs pre hour 45 65 110

Photon’s engineers are currently working to solve the problem of copies being too light or too dark. They propose changing the lens of the Copier. The new lens will cost $ 50 more than the old lens. Each copier uses one lens. Photon uses a one-year time horizon for this decision, because it plans to introduce a new copier at the end of the year. Photon believes that even as it improve quality, it will not be able to save any of the fixed costs of rework or repair. By changing the lens, Photon expects that it will (1) Save 12,000 hours of rework, (2) Save 800 hours of customers support, (3) Move 200 fewer loads, (4) Save 8,000 hours of repair, and (5) Sell 100 additional copiers for a total contribution margin of $6,000,000.Required:- Should Photon change to the new lens? Show your calculations.-------------------------------------------------------------------------------------------------------------------------------------------- Q10:-The Tan Corporation uses multicolor molding to make plastic lamps. The molding operation has a capacity of 2,000,000 units per year. The demand for lamps is very strong. Tan will be able to sell whatever output quantities it can produce at $40 per lamp.

Tan can start only 200,000 units into production in the Molding Department because of capacity constraints on the molding machines. If a defective unit is produced at the molding operation, it must be scrapped and the net disposal value of scrap is zero. Of the 2,00,000 units started at the molding operation 30,000 units (15%) are scrapped. Scrap costs, based on total (fixed and variable) manufacturing costs incurred up to molding operation equal $25 per unit as follows:-

Direct materials (variable) $16per unitDirect manufacturing labor, Setup laborAnd materials handling labor (variable) 3 per unitEquipment, rent and other allocatedoverehad, including

Inspection and testing costs on scrapped parts (Fixed) 6 per unit Total $ 25 per unit

Tan’s designers have determined that adding a different type of material to the easting direct materials would reduce scrap to zero, but it would increased the variable costs by $4 per lamp In the Molding Department.Required:- Should Tan use the new material? Show your calculations.--------------------------------------------------------------------------------------------------------------------------------------------

Q11:-Eastern Switching Co. (ESC) produces telecommunications equipment Charles, ESC’s president believes that product quality is the key to gaining competitive advantage. Laurent implemented a total quality management (TQM) program with an emphasis on customer satisfaction. The following information is available for the first year (2004) of the TQM program compared with the previous year.

(2003) (20004)Total number of units produced and sold 10,000 11,000Units delivered before scheduled delivery data 8,500 9,900Number of defective units shipped 400 330Number of customers complaints other than for defective units

500 517

Average time from when customer places fro defective unit toWhen unit is delivered to the customer 30days 25 daysNumber of units reworked during production 600 627Manufacturing lead time 20days 16 daysDirect and indirect manufacturing labor-hours 90,000 110,000 Required: -1: - For each of the years 2003 and 2004 calculate.

A:- Percentage of defective units shipped.B:- On time delivery rate.C:- Customer complaints a percentage of units shipped.D:- Percentage of units reworked during production.

2: - On the basis of your calculations in requirement 1. Has ESC’s performance on quality and timeliness improved?3: - Philip Larkin, a member of ESC’s board of directors, comments that regardless of the effect that the program has had on quality, the output per labor hour has declined between 2003 and 2004. Larkin believes that lower output per lab our hour will lead to an increase in cost and lower operating income.A:- How did Larkin conclude that output per lab our hour declined in 2004 relative to 2003?B:- Why might output lab our hour decline in 2004?C:- Do you think that a lower output per lab our hour will decrease operating income in 2004?Explain briefly.------------------------------------------------------------------------------------------------------------------------------------------

Q12:- The budget estimates of a company using sophisticated high speed machines based on a normal working of 50,000 machine hours during 1986 are as under:

Rs. LacsSales (1,00,000 units) 100Raw Materials 20Direct wages 20Factory Overheads: Variable 10 Fixed 10Selling & Distribution Overheads: variable 5 Fixed 5Administration Overheads- Fixed 10Total costs 80Profit 20

Since the demand for the company’s product is high, the possibilities of increasing the production are explored by the budget committee. The Technical Director stated that maintenance has not been given due importance in the budget and that if preventive maintenance is introduced, the breakdown repair costs and the hours lost due to breakdown can be reduced and consequently production can be increased.

In support of this, he presented the following data, showing how injection of more and more funds on preventive maintenance will bring down the break down repair costs and reduce or eliminate the machine stoppages due to breakdown:Proposed exp. OnPreventive Maintenance

Exp. Estimated to be incurred on Breakdown Repairs

Machine hours saved

Rs. Rs. 19,200 1,92,000 Nil 38,400 1,53,600 800 76,800 1,15,200 1,6001,53,600 76,800 2,4003,07,200 57,600 3,2006,14,400 --- 4,000

Using differential and contribution concept, advice the management up to what level breakdown hours can be reduced to increase production and maximize profits of the company consistent with minimum costs.Ans:- 1 Contribution per unit = Rs. 45, Contribution per machine hour = Rs. 90Up to IV level it is justify spending P.M. 1,53,600.---------------------------------------------------------------------------------------------------------------------Q13-:- Bergen, Inc produces telephone equipment. Jerry Holman, Bergen’s president, decided to devote more resources to the improvement of product quality after learning that his company’s products has been ranked fourth in product quality in a 2002 survey of telephone equipment users. Bargen’s quality- improvement program has now been in operation for two years, and the cost report shown below has recently been issued.

Semi-annual Costs of Quality Report, Bergen. Inc.

(in thousands)6/30/2003 12/31/2003 6/30/2004 12/31/2004

Prevention CostsMachine maintenance $ 215 $ 215 $ 190 $ 160Training Suppliers 5 45 20 15Design reviews 20 102 100 95Total prevention costs 240 362 310 270Appraisal costsIncoming inspection 45 53 36 22Final testing 160 160 140 94Total appraisal costs 205 213 176 116internal failure costsRework 120 106 88 62Scrap 68 64 42 40Total internal failure costs 188 170 130 102External failure costsWarranty repairs 69 31 25 23Customers returns 262 251 116 80Total external failure costs 331 282 141 103Total quality costs $964 $1,027 $757 $591Total production and revenue $ 4,120 $4,540 $4,650 $4,510Required:-1:- Calculate the ratio of each COQ category to revenue for each period. Has Bergen’s quality improvement program been successful? Explain.2:- Jerry Holman believed that a quality improvement program was essential and that Bargen, Inc, could no longer afford to ignore the importance of product quality. Discuss how Bergen could measure the opportunity cost of not implementing the quality improvement program.------------------------------------------------------------------------------------------------------------

TQMQ14- ( Costs of quality analysis, non financial quality measures). Ontario Industries manufactures two years of refrigerators, Oliva and Solta. Information on each Refrigerator is as follows:

Olivia SoltaUnits manufactured and sold 10,000 units 5,000 unitsSelling Price $ 2,000 $ 1,500Variable costs per unit $ 1,200 $ 800Hours spent on design 6,000 1,000Testing and inspection hours per unit 1 0.5Percentage of Units reworked in plant 5% 10%Rework costs per refrigerator $500 $400Percentage of units repaired at customer site 4% 8%Repair costs per refrigerator $600 $ 450Estimated lost sales from poor quality ----- 300 unitsThe labor rates per hour for two activities are as follows:-

Design $75per hourTesting and inspection $40per hour

1:- Calculate the costs of quality for Olivia and Solta, classified into prevention, appraisal, internal failure and external failure categories.2:- For each type of refrigerator, calculate the ratio of each COQ category as a percentage of revenues Compare and Comment on the costs of quality for Olivia and Solta.3:- Give two examples of non financial quality measures that Ontario Industries could monitor as part of a total quality control program.---------------------------------------------------------------------------------------------------------------------------------Q15- Customer-response time, on time delivery. Pizza fest, Inc makes and delivers pizzas to homes and offices in the Boston area. Fast, on time delivery is one of pizza fest’s key strategies. Pizza fest provides the following information for2004 about its customer- response time- the amount of time from when a customer calls to place an order to when the pizza is delivered. January – June July – DecemberPizzas delivered in 30 minutes or less 100,000 150,000Pizzas delivered in between 31 and 45 minutes 200,000 260,000Pizzas delivered in between 46 and 60 minutes 80,000 70,000Pizzas delivered in between 61 and 75 minutes 20,000 20,000Total pizzas delivered 400,000 500,000Required: 1. For January – June and July – December 2004, Calculate the percentage of pizzas delivered in each of the four time intervals (30 minutes or less, 31- 45 minutes, and 61 – 75 minutes). On the basis of these calculations, has customer- response time improved in July- December compared with January- June?2. When customers call pizza fest, they often ask how long it will take for the pizza to be delivered to their homes or offices. If pizza fest quotes a long time interval, customers often will not place the order. If pizza fest quotes too short a time interval and the pizza is not delivered on time, customers get upset and pizza fest will lose repeat business. Based on the January – June 2004 data, what customer- responses time should pizza fest quote to its customers if

A. It wants to have an on- time delivery performance of 75%?B. It wants to have an on- time delivery performance of 95%?

3. If pizza fest had quoted the customer- response times you calculated in requirements 2a and 2b, would it have met its on – time delivery performance targets of 75% and 95% respectively. For July- December 2004? Explain.4. Pizza fest is considering giving an on-time guarantee for January- June 2005. if the pizza is not delivered within 60 minutes of placing the order the customer gets the pizza fest estimates that it will make additional sales of 20,000 pizzas as a result of giving this guarantee. It estimates that it will fail to deliver a total of 15,000 pizzas on time. The average price of a pizza is $13, and variable cost of a pizza is $7.

A. What is the effect on pizza fest’s operating income of making this offer?B. What non financial and qualitative factors should pizza fest consider before

making this offer?C. What actions can pizza fest take to reduce customer- response time?

------------------------------------------------------------------------------------------------------------Q16-: (Quality improvement, relevant costs, and relevant revenues). The Thomas Corporation sells 300,000 V262 valves to the automobile and truck industry. Thomas has a capacity of 110,000 machine-hours and can produce 3 valves per machine-hour. V262’s

contribution margin per unit is $8. Thomas sells only 300,000 valves because 30,000 valves (10% of the good valves) need to be reworked. It takes 1 machine-hour to rework 3 valves, so 10,000 hours of capacity are used in the rework process. Thomas’s rework costs are $2,10,000.

Direct materials and direct rework labor (variable costs): $3 per unit Fixed costs of equipment rent and overhead allocation: $4 per unit

Thomas’s process designers have developed a modification that would maintain the speed of the process and ensure 100%. Quality and no rework. The new process would cost $315,000 per year. The following additional information is available:

The demand for Thomas’s V262 valves is 370,000 per year. The jackson corporation has asked Thomas to supply 22,000 T971 valves

(another product) if Thomas implements the new design. The contribution margin per T971 value is $10.Thomas can make two T971 valves per machine- hour with 100% quality and no rework.

Required 1. Suppose Thomas’s designers implement the new design. Should Thomas accept Jackson’s order for 22,000 T971 valves? Show your calculation.

2.Should Thomas implement the new design? Show your calculation.2. What non financial and qualitative factors should Thomas consider in deciding

whether to implement the new design?------------------------------------------------------------------------------------------------------------Q17-: - (Supplier evaluation and relevant costs of quality and timely deliveries). Copeland sporting goods is evaluating two suppliers of footballs, Big red and quality sports. Pertinent information about each potential supplier follows:

Relevant Item Big red Quality sportsPurchase price per unit (case) $50 $51Ordering costs per order $6 $6Inspection costs per unit $.02 0Insurance, material handling, and $4.00 $4.50So on per unit per yearAnnual demand 12,000 units 12,000 unitsAverage quantity of inventory held 100 units 100 units During the yearRequired return on investment 15% 15%Stock out costs per unit $20 $10Stock outs per year 350 units 60 unitsCustomer returns 300 units 25 unitsCustomer- return costs per unit $25 $25Required: Calculate the relevant costs of purchasing (1) from big red and (2) from quality sports using the format presecribed. from whom should cape land buy footballs?-------------------------------------------------------------------------------------------------------------

Q18- (Costs of Quality analysis non financial quality measure). The Hartono Corporation manufactures and sells industrial grinders. The following table presents financial information pertaining to quality in 2004 and 2005 (in thousands):Year 2005 2004

Revenue $ 12,500 $10,000Inspection of Production 85 110Scrap 200 250Design engineering 240 100Cost of returned goods 145 60Product-testing equipment 50 50Customers support 30 40Rework costs 135 160Preventive equipment maintenance 90 35Product liability claims 100 200Incoming materials inspection 40 20Breakdown maintenance 40 90Product testing labor 75 220Training 120 45Warranty repair 200 300Supplier evaluation 50 20Required:- 1:- Classify the cost items in the table into prevention, appraisal, internal failure, or external failure categories.2:- Calculate the ratio of each COQ category to revenues in 2004 and 2005.Comment on the trends in costs of quality between 2004 and 2005.3:- Give two examples of non financial quality measures that Hartono Corporation could monitor as part of a total quality control effort.------------------------------------------------------------------------------------------------------------Q19-:- Information from a quality report for 2004 prepared by Lindsey Williams assistant controller of Citocell a manufacturer of electric motors, is as follows:

Revenues $10,000,000Inspection of Production 90,000Warranty liability 260,000Product testing 210,000Scrap 230,000Design engineering 200,000Percentage of customer complaints 5%On-time delivery rate 93%

Davey Evans, the plant manager of Citocell, is eligible for a bonus if the total costs of quality as a percentage of revenues are less than 10% the percentage of customer complaints is less than 4%, and the on time delivery rate exceeds 92%Evans is unhappy about the customer complaints of 5% because when preparing her report, Williams actually surveyed customers regarding customer satisfaction. Evans expected Williams to be less proactive and waits for customers to complain. Evan’s concern with William’s approach is that it introduces subjectivity into the results and also fails to capture the seriousness of customers concerns.” When you wait for a customer to complain, you know they are complaining because it is something important. When you do customer surveys, customers mention whatever is on their mind, even if it is not terribly important”.John Roche, the controller, asks Williams to see him. HE tells her about Evans’s concerns. “I think Davey has a point .See what you can do.” Williams is confidant that

the customer complaints are genuine and that customers are concerned about quality and service. She believes it is important for citocell to be proactive and obtain systematic and quick customer feedback, and then to use this information to make improvements. She is also well aware that Citocell has not done customer surveys in the past, and except for her surveys, Evans would probably be eligible for the bonus. She is confused about how to handle Roche’s requires.1:- Calculate the ratio of each cost-of quality category (prevention, appraisal, internal failure, and external failure) to revenues in 2004.Are the total costs of quality as a percentage of revenues less than 10%?2:- Would it be unethical for Williams to modify her analysis ? What steps should Williams take to resolve this situation?---------------------------------------------------------------------------------------------------------------------Q20- :- A drug treatment day center run by a charity organization wishes to improve the quality of its service to patients by the addition of extra facilities.After much research it has drawn up a short list of five Separate possible improvements and has assessed their outcomes using the following criteria:

Criterion A: Reduced average number of waiting hours per month per patient.Criterion B: Increased percentage frequency of seeing patients when they attend.Criterion C: Reduced average number of month to cure per patient.Criterion D: Increased percentage frequency of patient attendance at the center.

The assessed outcomes are:Improvement Extra facilities Outcome according to criterionReference number

A B C D

Hours % Months%

1 Increase medical staff by 2 4.8 35 15Doctors and 1 nurse

2 Increase counseling staff by 2 6 20 1.2510Counselors and 1 nurse

3 Taxi service to bring patients to 2 12 0.7522And from the center

4 Extend by 20 hours per month 4 30 1.510The time the center is open

5 Introduce group counseling - 10 1.7515Sessions.

At present the center is open for 160 hours per month and deals with 3,000 patients. The proposed improvement will have no effect on the number of patients seen. The professional staffs currently employed are 5 doctors, 7 counselors and 4 nurses. The taxi service is expected to be used by 60% of patients with an average attendance of once per month. Each taxi carry an average of 1.2 patients and the cost to the center will be Rs. 0.20 per mile. Total distances that patients are expected to be carried per attendance are:

(%) Percentage of patients10miles 2020 miles 4030 miles 40

100The costs of extra facilities would be:

Cost p.a. Associated capitalEquipment costs

Doctors salary Rs. 22,000 Rs. 5,000Doctors expenses 3,000 ---Counselors salary 16,000 2,000Counselors expenses 1,500 --Nurse’s salary 10,000 1,000Nurse’s expenses 2,000 --These costs are depreciated over five years on a straight-line basis with no residual value.Extra administration/ establishment costs are Rs. 200 per month per perso.

If hours are extended beyond 160 per month, overtime will need to be paid at a premium of 25% on salaries (but not expenses) and an extra Rs. 4,000 per annum will be incurred for administration/ establishment costs.Group counseling sessions will require:1 Specialist counselor costing Rs. 3,000 p.a. more than ordinary counselors.1 assistant counselor costing Rs. 2,000 p.a. less than ordinary counselors.1 nurseCapital costs will be the same as for ordinary counselors.The Centers capital requirements will be borrowed from the bank at 12% p.a. The interest and all other costs will be met by donations. The depreciation charge will be used to reduce the loan at the end of each year. Cost of working capital can be ignored.You are required to:

(a) Calculate for each improvement the incremental cost:(i) Per patient per month(j) For the appropriate unit of each of the four criteria.(b) Identify the improvement with the lowest cost in (a) (ii) above for each of

the four criteria.--------------------------------------------------------------------------------------------------------------------

JIT PURCHASING

Q21:- (Relevant benefits and Costs of JIT purchasing). Hardestry Medical Instruments is considering JIT implementation in 2003. Hardestry’s annual demand for Product XJ-200, a surgical scalpel, is 20,000 units. If Hardesty implements JIT, the purchase price of the scalpal is expected to increase from $10 to $10.05 because of frequent deliveries by Merrison Manufacturing, Inc. Morrison enjoys a sterling reputation for quality and reliability. Ordering costs will remain at $5 per order. However, the annual number of orders placed will be 200 instead of the current 20. As a result of frequent ordering. Hardesty’s order size will decrease proportionally. Hardesty’s required rate of return on Investment is 20%. Other carrying Costs (insurance, materials handling and so on) will remain at $4.50 per unit. Currently Hardesty has no stock out costs. Lower inventory levels from implementing JIT will lead to $3 per unit stock out costs on 100 units during the year.Required:- Calculate the estimated dollar savings ( Loss) for Hardesty Medical instruments from the adoption of JIT purchasing.Answer:- $ 724.50--------------------------------------------------------------------------------------------------------------------- Q22:- The Margro Corporation is an automotive supplier that uses automatic turning machines to manufacture precision parts from steel bars. Margro’s inventory of raw steel averages $6,00,000. John Oates, President of Margro, and Helen Gorman. Margro’s controller, are concerned about the costs of carrying inventory. The steel suppliers is witling to supply steel in smaller lots at no additional charge. Helen Gorman identified the following effects of adopting a JIT inventory program to virtually eliminate steel inventory.

Without scheduling any overtime, lost sales due to stock outs would increase by 35,000 units per year. However, by incurring overtime premiums of $40,000 per year, the increase in lost sales could be reduced to 20,000 units. This would be the maximum amount of overtime that would be feasible for Margro.

Two warehouses currently used for steel bar storage would no longer be needed. Margo rents one warehouse from another company, under a cancelable leasing arrangement, at an annual cost of $60,000. The other warehouse is owned by Margro and contains 12,000 square feet. Three-fourths of the space in the owned warehouse could be rented for $1.50 per square foot per year. Insurance and properly tax costs totaling $14,000 per year would be eliminated.

Long – term capital investments by Margro are expected to Produce an annual rate of return of 20%. Margro Corporation Budgeted income statement for the year ending December 31,2003,(in thousands) is as follows:-

Revenues ( 900.000 units) $10,800Cost of goods soldVariable costs $4,050Fixed costs 1,450Total costs of goods sold 5,500Gross Margin 5,300Marketing and distribution costsVariable costs $900Fixed Costs 1,500

Total marketing and distribution costs 2,400Operating income $ 2,900

Calculate the estimated dollar savings (loss) for the Margro Corporation that would result in 2003 from. Required the adoption of the JIT inventory –control method.Answer:- $ 37,500.

Q23:- ( Calculation of reduction in storage costs arising from the implementation of JIT production and purchasing)Product plc has an annual turnover of Rs. 6,00,00,000 from a range of products, Material costs and conversion costs account for 30% and 25% of turnover respectively.Other information relating to the company is as follows:

(i) Stock values are currently at a constant level, being:(a) Raw materials stock:10% of the material element of annual turnover.(a) Work in Progress: 15% of the material element of annual turnover

together with a proportionate element of conversion costs allowing for 60% completion of work in progress as to conversion cost and 100% completion for material . The Ratio is constant for all products.

(b) Finished goods stock:12% of the material element of annual turnover together with a proportionate element of conversion cost.

(ii) Holding and acquisition costs of materials comprise fixed costs of Rs.2,00,000 per annum plus variable costs of Rs. 0.10 per Rs. of Stock held.

(iii) Movement and control costs of work in progress comprise fixed costs of Rs. 2,80,000 per annum plus variable costs of Rs. 0.05 per Rs. of material value of work-in-progress.

(iv) Holding and control costs of finished goods comprise fixed costs of Rs.3,60,000 per annum plus variable costs of Rs. 0.02 per Rs. of finished goods(material cost + Conversion cost)

(v) Financial charges due to the impact of stock holding on working capital requirement are incurred at 20% per annum on the value of stocks held.

Product plc are considering a number of changes which it is estimated will affect stock levels and costs as follows:-1:- Raw material Stock: Negotiate delivery from suppliers on a just in time basis. Stock levels will be reduced to 20% of the present level. Fixed costs of holding and acquiring stock will be reduced to 20% of the present level and variable costs to Rs.0.07 per Rs. of stock held.2:- Work in Progress : Convert the layout of the production area into a dedicated cell format for each product type instead of the existing system which comprises groups of similar machines to which each product type must be taken .Work in progress volume will be reduced to 20% of the present level with the same stage of completion as at present .Fixed costs of movement and control will be reduced to 40% of the present level and variable costs to Rs.0.03 per Rs. of material value of work in progress.3:- Finished goods stock:- Improved control of the flow of each product type from the production area will enable stocks to be reduced to 25% of the present level. Fixed

costs of holding and control will be reduced to 40% of the present level and variable costs to Rs. 0.01 per Rs. of finished goods held.-------------------------------------------------------------------------------------------------------------------- Q24:- X Ltd. manufactures and distributes three types of Car (the C1, C2 and C), Each type of car has its own production line. The company is worried by extremely difficult market conditions and forecasts losses for the forthcoming year.The budgeted details for next year are as follows”

C1 C2 C3$ $ $

Direct Materials 2,520 2,924 3960Direct labour 1120 1,292 1980Total Direct cost per car 3640 4216 5940Budgeted production (cars) 75,000 75,000 75.000Number of production runs 1,000 1,000 1,500Number of orders executed 4,000 5,000 5,600Machine hours 1080,000 1800,000 1680,000Annual overheads

Fixed$

Variable$

Set ups 42,600 13,000 per production runMaterials handling 52,890 4,000 per order executedInspection 59,880 18,000 per production runMachining 1,44,540 40 per machine hourDistribution and warehousing 42,900 3,000 per order executed

Proposed JIT SystemManagement has hired a consultant to advise them on how to reduce costs. The consultant has suggested that the company adopts a just-in-time(JIT) manufacturing system. The introduction of the JIT system would have the following impact on costs ( Fixed and variable):Direct labour Increase by 20%Set ups Decrease by 30%Materials handling Decrease by 30%Inspection Decrease by 30%Machining Decrease by 15%Distribution and warehousingEliminatedRequired:-

(a) Based on the budgeted production levels, calculate the total annual savings that would be achieved by introducing the JIT system.

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Q25-:- (JIT production, relevant benefits, relevant costs). The Evans Corporation manufactures wireless telephone. Events are deciding whether to implement a JIT

production system, which would require annual tooling costs of $150,000. Evens estimates that the following annual benefits would arise from JIT production.

a. Average inventory would decline by $700,000, from $900,000 to $200,000.b. Insurance, space, materials-handing, and setup costs, which currently total

$200,000, would decline by 30%.c. The emphasis on quality inherent in JIT systems would reduce rework costs by

20%. Evans currently incurs $350,000 on rework.d. Better quality would enable Evans to raise the selling prices of its products by $3

per unit. Evans sells 30,000 units each year. Evans’s required rate of return on inventory investment is 12% per year.

1. Calculate the net benefit or cost to the Evans Corporation from implementing a JIT production system.

2. What other non financial and qualitative factors should Evans consider before deciding whether it should implement a JIT system?

3. Suppose Evans implements JIT production. (a) Give examples of performance measures Evans could use to evaluate and control JIT production. (b) What is the benefit to Evans of implementing an enterprise planning (ERP) system?

---------------------------------------------------------------------------------------------------------------------------------Q26- :- Rosen Manufacturing Corporation produces office furniture and sells it wholesale to furniture distributors. Rosen’s management is reviewing a proposal to purchase a Just-in-time inventory (JIT) system to better serve its customers. The JIT system will include a computer system and materials handling equipment .The decision will be based on wheather the new JIT system is cost effective to the organization for the next five years.The computer system, including hardware and software, will initially cost $ 1,250,000. Materials handling equipment will cost $450,000.Both groups of equipment will have a five-years useful life for tax reporting of depreciation (straight-line) calculated assuming a $0 terminal disposal value. At the end of the five years, the newly acquired materials-handling equipment is expected to be sold for $150,000.The computer system will have a $0 terminal disposal value at the end of five years.Other factors to be considered over the next five years for this proposal include the following * Due to the service improvement resulting from this new JIT system, Rosen will realize a $ 800,000 revenue increase to continue to grow by 10%per year thereafter.* The contribution margin is 60%.* Annual material- ordering costs will increase $50,000due to a greater level of purchase orders.* There will be a one–time decrease in working capital investment of $150,000 at the end of the first year.There will be a 20% savings in warehouse rent due to less space being needed. The current annual rent is $300,000.Rosen uses an after-tax required rate of return of 10% and is subject to an income tax rate of 40%.Assume that all cash flows occur at year-end for tax purposes except for any initial purchase amounts.

1:- Prepare an analysis of the after tax effects for the purchase of the JIT system at Rosen using the net present value method for evaluating capital expenditures. Be sure to show all of your computations.2:- Determine whether Rosen should purchase the jit system. Explain your answer.----------------------------------------------------------------------------------------------------------------

LIFE CYCLE COSTINGQ27:- A Company proposes to replace its old and obsolete machine. Two models of machines available are as under:

(1) Automatic machine involving an initial capital outlay of Rs. 5,00,000. The annual operating cost of this model is Rs. 1,50,000. Salvage value at the end of its life of 5 years is Rs. 20,000.

(2) Semi Automatic machine involving an initial capital cost of Rs. 3,00,000. The annual operating cost is Rs. 2,10,000. Salvage value at the end of its life of 5 years is Rs. 10,000.

The company’s cost of capital is 14%. Which alternative is to be preferred? Ignore tax.Answer:- Total Cost:- Rs. 8,16,160-------------------------------------------------------------------------------------------------------------------------------Q28:-- Life-cycle product costing activity-based costing. Destin products makes digital watches. Destin is preparing a product life-cycle budget for a new watch MX3. Development on the new watch is to start shortly. Estimates for MX3 are as follows: Life- cycle units manufactured and sold 400,000 Selling price per watch $40 Life-cycle costs R&D and design costs $1,000,000

ManufacturingVariable cost per watch $15Variable cost per batch $600Watches per batch 500Fixed costs $1,800,000MarketingVariable cost per watch $3.20Fixed costs $1,000,000DistributionVariable cost per batch $280Watches per batch 160Fixed costs $720,000Customer-service cost per watch $1.50Ignore the time value of money.Required 1. Calculate the budgeted life-cycle operating income for the new watch.

2.What percentage of the budgeted total product life-cycle costs will be incurred by the end of the R&D and design stages?

2. An analysis reveals that 80% of the budgeted total product life-cycle costs of the new watch will be locked in at the R&D and design stage. what are the implications for managing MX3’s costs?

3. Destin’s market research department estimates that reducing MX3’s price by $3 will increase life-cycle unit sales by 10%. If unit sales increase by 10% destin plans to increase manufacturing and distribution batch sizes by 10% as well. Assume that all variable costs per watch variable costs per batch, and fixed costs will remain the same. Should destin reduce MX3’s price by $3? Show your calculations.

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Q52:- Life cycle product costing. Product mix.Decision support systems (DSS) is examining the productivity and pricing policies of three of its recent engineering software packages: EE –46: Package for electrical engineers ME- 83: package for mechanical engineers IE – 17 package for industrial engineersSummary details on each package over their two-year “cradle-to-grave” product lives are as follows: Number of units sold Selling Package Price Year 1 Year 2EE –46 S250 2,000 8,000ME- 83 300 2,000 3,000IE –17 200 5,000 3,000Assume that no inventory remains on hand at the end of year 2.DSS is deciding which product lines to emphasize. In the past two years, profitability has been mediocre. DSS is particularly concerned with the increase in R & D costs. An analyst pointed out that for one of its most recent package (IE-17), major efforts had been made to reduce R&D costs.Nancy Sullivan the engineering software manager, decides to collect the following life-cycle revenue and cost information for the EE – 46, ME- 83, and IE-17 package:

EE-46 ME-83 IE-17 Year 1 Year 2 Year 1 Year 2 Year1 Year 2

Revenues S500,000 S2,000,000 S600,000 S900,000 S1,000,000 $600,000CostsR & D 700,000 0 450,000 0 240,000 0

Design of product 185,000 15,000 110,000 10,000 80,000 16,000Manufacturing 75,000 225,000 105,000 105,000 143,000 65,000Marketing 140,000 360,000 120,000 150,000 240,000 208,000

Distribution 15,000 60,000 24,000 36,000 60,000 36,000Customer service 50,000 325,000 45,000 105,000 220,000 388,0001:- How does a product life- cycle income statement differ from a conventional income statement? What are the benefits of using a product life – cycle reporting format?2:- Present a product life- cycle income statement for each software package. Which package is the most profitable, and which is the least profitable? Ignore the time value of money.3:- How do the three software packages differ in their cost structure (the percentage of total costs in each cost category)?------------------------------------------------------------------------------------------------------------

---------Q30:- Activates have been identified and the budget quantifies for the three months

ended 31 March 2001 as follows:-Activities Cost Driver

Unit basisUnits ofCost Driver

Cost($000)

Product Design Design hours 8,000 2000 (See note1)PurchasingProduction

Purchase orderMachine hours

4,00012,000

2001500 (See note 2)

PackingDistribution

Volume(Cu.M)Weight (Kg)

20,0001,20,000

400600

Note1:- this includes all design costs for new products released this period.Note2:- this includes a depreciation provision of $300,000 of which $8000 applies to 3 months depreciation on a straight line basis for a new product (NPD). The remainder applies to other products.

New product NPD is included in the above budget. The following additional information applies to NPD.

(i) Estimated total output over the product life cycle: 5,000 units ( 4 years life cycle)

(ii) Product design requirement : 400 design hours.(iii) Output in quarter ended 31 ch 2001:250 units(iv) Equivalent batch size per purchase order: 50 units.(v) Other product unit data: production time 0.75 machine hours: volume 0.4 cu.

Meters: weight 3 kg.Required:-(vi) Prepare a unit overhead cost for product NPD using an activity based

approach which includes an appropriate share of life cycle costs using the information provided in (b) above.

VALUE ENGINEERING Q31:- The Operating result of a department provide the following information for a particular week:

Average output per week 48,000 unitsSalable value of output Rs. 60,000

Contribution on above Rs. 24,000The management is contenting to bring about more mechanization in the

department at a capital cost of Rs. 16,000 which will result in reduction in number of workmen from the present strength of 160 nos. to 120 nos. However due to mechanical help, the output of individual workmen will increase by 60%. The existing piece rate is Rs. 0.10 per article and as an incentive, the management propose to increase the existing piece rate by 5% for every 10% increase in the individual output achieved.

There will be a reduction in sale price by 4% to sell the increased production.You are required to calculate extra weekly contribution resulting due to proposed changes.---------------------------------------------------------------------------------------------------------------------Q32:- BC electronics makes 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. Lakhs)Direct material costs 100.00Direct manufacturing labour costs 20.00Machining costs 20.00Testing costs 25.00Rework costs 15.00Ordering costs 0.20Engineering costs 19.80

200.00Labour 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”:1:- Testing and inspection time per unit is 2 hours.2:- 10 per cent of “AB 100’ manufactured are reworked.3:- It currently takes 1 hour to manufacture each unit of “AB 100”.4:- ABC places two orders per month for each component. Each component is supplied by a different supplier.ABC has identifies 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:Manufacturing Description of activity Cost Driver Cost perActivity unit of

Cost driver--------------------------------------------------------------------------------------------------------------------1:Machining Costs Machining components Mach. Hours of Rs.2002: Testing costs Testing components and Capacity Testing Rs. 125

finished products(each hours unit of AB 100’ is tested

individually)3:- Rework costs Correcting and fixing Units of AB 100’ Rs. 1,500

errors and defects reworked per unit

4:- Ordering Costs Ordering of components No. of orders Rs. 125 per order

5:- Eng. costs Designing & managing Engineering Rs.1980 per of products and hours engineering Processes hour.

Overs long-run horizon, each of the overhead costs described above vary with chosen cost drivers.

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 be able to minimum the current sales level.

Cost reduction on the existing model is almost impossible. Therefore ABC has decided to replace AB 100 by a new model ‘AB 200’ which is a modified version of AB 100’. The expected effect of design modifications is as follows:1:- The number of component will be reduced to 50.2:- Direct material costs to be lower by Rs. 200 per unit.3:- Direct manufacturing labour cots to be lower by Rs. 20 per unit.4:- Machining time required to be lower by 20 per cent.5:- Testing time required to be lower by 20 per cent.6:- Rework to decline to 5 per cent.7:- Machining capacity and engineering hours capacity to remain the same.ABC currently outsourcers the rework on defective units.Required:-1: - Compare the manufacturing cost per unit of ‘AB 100; and ‘AB 200’.2: - Determine the immediate effect of design change and pricing decision on the operating income of ABC.Ignore income tax. Assume that the cost per unit of each cost driver for ‘AB 100’ continues to apply to ‘AB 200’.Answer: - Total manufacturing cost per unit:- 2,000.00, 1,614.00Net effect on operating income:- (10.50)--------------------------------------------------------------------------------------------------------------------

TARGET COSTINGQ33- Samsung is developing a high speed modem:-A:- Given the following information .Compute Samsungs cost reduction target.

Expected market price Rs. 500Required return on sales 20%Product life 3 yearsCurrent feasible cost Rs. 7,50,00,000Expected average annual sales 50,000 units

B:- If Samsung believes it-can reduce the cost of the modem by no more than 18% is this a feasible product for Samsung? Why or Why no?--------------------------------------------------------------------------------------------------------------------------------------------Q34:- MR Limited undertake market research for clients. A typical study takes three months and uses two types of staff as follows:Type of staff used Proportion of variable costs incurred in

Month Month Month Total 1 2 3

------------------------------------------------------------------------------------------------------------------Research 40% ---- 60% 100%Tabulating --- ---- 100% 100%------------------------------------------------------------------------------------------------------------------

Research staff and tabulating staff account for 80 per cent and 20 per cent respectively of the variable costs of a study.

When quoting a price for a study MR Ltd adds the following contribution on the estimated variable cost: Research Staff 112.50 per cent of Variable Cost. Tabulating Staff 50 per cent of VC. In April MR started work on orders of Rs. 30,000 & In May Rs. 40,000 & In June Rs. 23,000. For calculation of monthly income the value of an order is divided on the basis of first month 34 per cent, second month 6 per cent and third month 60 per cent. MR’s target contribution is 10 per cent above fixed cost which is Rs.16,000 per month. Calculate the value of additional orders which should be received, by MR for work to start in June to achieve the target contribution in June.Answer:- Contribution:- Rs.18, Rs.6, Rs.26, Rs.50, Additional order:- 18111.111-------------------------------------------------------------------------------------------------------------------------------Q35:- Toshiba manufacture on brand of personal computers calles Toshiba. Following is the profitability statement for Toshiba personal computer:Particulars Amount(Rs.) For

75,000 unitsAmount (Rs.) per unit

Revenues (A)Cost of Goods soldDirect Materials CostDirect manufacturing labour costsDirect machining costs (Fixed)Manufacturing Overheads costCost of Goods Sold(b)R & D CostsDesign Cost of product and processorMarketing costsDistribution CostsCustomer Service CostsOperating Costs ( C)

30,00,00,000

13,80,00,000 1,92,00,000 2,28,00,000 2,40,00,00020,40,00,000 1,08,00,000 1,20,00,000 3,00,00,000 72,00,000 60,00,000 6,60,00,00027,00,00,000

4,000

1,840 256 304 3202,720 144 160 400 96 80 880 3,600

Full product Costs ( D = B + C)Operating income ( A –D)

3,00,00,000 400

Following further information has been provided:- (ii) No opening closing inventory.(iii) Manufacturing Overhead Cost = Ordering and Receiving cost + Testing and

inspection Cost = Rework Cost.(iv) Toshiba expects its competitors to lower the prices of PCs that compete

against Toshiba by 15%. Toshiba’s management Delivers that it must responded aggressively by reducing Toshiba’s price by 20%.

Required:-(1) Compute the target cost?(2) Compute difference between target and allocable cost.?

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Q36- Toshiba’s value engineering team focus their cost-reduction efforts on analyzing the Toshiba design. Their goal? To design a high-quality, highly reliable machine with fewer features that meets customers price expectations and achievers target cost.

Toshiba is discontinued in its place. Toshiba introduced Toshiba II. Toshiba II has fewer component s than Toshiba and is easier to manufacture and test. The following tables compare the direct costs and the manufacturing overhead costs and cost drivers of Toshiba and Toshiba II. In place of the 75,000 Toshiba units manufactured and sold in 2002. Toshiba expects to make and sell 1,00,000 Toshiba II units in 2003 on account of the reduction in prices.

Direct Cost Category Costs per unit in Rs.Toshiba Toshiba II Explanation of Costs for Toshiba II

1 Direct materials

2. Direct manufacturing

3. Direct machining Costs

1840

256

304

1540

212

228

The Toshiba II design will use a simplified main printed circuit board, fewer components and no audio features.Toshiba II will require less labour and assembly time.

Toshiba can use the machine capacity to produce 100,000 units of Toshiba II. The new design will enable Toshiba to manufacture each unit of Toshiba II in less time than a unit of Toshiba.

Cost Driver Quantity

of CostExplanation for quantity of Cost Driver Toshiba

Quantity of Cost Driver for Toshiba II

Explanation for Quantity Driver Used by Toshiba II

1. Number of orders

22,500 Toshiba places 50 orders for each of the 450 components in Toshiba Cost per order

21,250 Toshiba will place 50 orders for each of the 425 components

Rs. 160 in Toshiba II2. Testing- hours 22,50,000 Toshiba required 30

testing hours p.u. Cost per testing hour is Rs. 8.

15,00,000 Toshiba II is easier to lest and will require 15 testing hours per unit.

3. Units reworked 6,000 The rework rate is 8% of the units manufactures. The rework cost is Rs. 400 per unit reworked.

6,500 Toshiba II will have a lower re-work rate of 6.5% because it is easier manufacture.

Further there is a change in the non- manufacturing cost as follows:R & D 80,00,000Design of Product & Process cost 1,20,00,000Marketing Costs 3,60,00,000Distribution costs 1,00,00,000Customer- Service Costs 60,00,000

Required:-Determine whether Toshiba achieves the Target Cost?---------------------------------------------------------------------------------------------------------------------

THROUGHPUT CONTRIBUTIONQ37-: Theory of constraints throughput contribution relevant costs. The Mayfield corporation manufactures filing cabinets in two operations: machining and finishing. It provides the following information. Machining Finishing Annual capacity 100,000 units 80,000 units Annual production 80,000 units $400,000 Fixed operating costs $640,000 $400,000 (Excluding direct materials) Fixed operating costs per unit produced ($640,000 – 80,000; $400,000-80,000) $8 per unit $5 per unitEach cabinet sells for $72 and has direct materials costs of $32 incurred at the start of the machining operation. Mayfield has no other variable costs. Mayfield can sell whatever output it produces. The following requirements refer only to the preceding data. there is no connection between the requirements.

3. Mayfield is considering using some modern jigs and tools in the finishing operation that would increase annual finishing output by 1,000 units. The annual cost of these jigs and tools is $30,000. Should Mayfield acquire these tools? Show your calculations.

4. the production manager of the machining department has submitted a proposal to do faster setups that would increase the annual capacity of the machining department by 10,000 units and cost $5,000 per year. Should Mayfield implement the change? Show your calculations.

----------------------------------------------------------------------------------------------------------THROUGH PUT CONTRIBUTION

Q38-:- The Waterloo, Ontario, plant of Maple Leaf Motors assembles the carus motor vehicle. The standard unit manufacturing cost per vehicle in 2003 is

Direct materials $6,000Direct manufacturing labor 1,800Variable manufacturing overhead 2,000Fixed manufacturing overhead?

The Waterloo plant is highly automated. Maximum productive capacity per month is 4,000 vehicles. Variable manufacturing overhead is allocated to vehicle on the basis of assembly time. The standard assembly time per vehicle is 20 hours. Fixed manufacturing overhead in 2003 is allocated on the basis of the standard assembly time for the budgeted normal capacity utilization of the plant. In 2003, the budgeted normal capacity utilization is 3,000 vehicles per month. The budgeted monthly fixed manufacturing overhead is $7,500,000.On January 1, 2003 there is Zero beginning inventory of Lcarus vehicles. The actual unit production and sales figures for the first months of 2003 are

January February MarchProduction 3,200 2,400 3,800Sales 2,000 2,900 3,200Assume no direct materials variances , no direct manufacturing labor variances, and no manufacturing overhead spending or efficiency variances in the first three months of 2003.

Bret Hart, a vice president of Mapale Leaf Motors, is the manager of the Waterloo plant. His compensation includes a bonus that is 0.5% of quarterly operating income. Operating income is calculated using absorption costing. Maple Leaf Motors prepares absorption-costing income statements monthly, which includes an adjustment to cost of goods sold for the total manufacturing variances occurring in that month .

The Wasterloo plant ”Sells” each Lcarus to maple Leaf’s marketing subsidiary at $16,000 per vehicle. No marketing costs are incurred by the Waterloo plant.Required:- 1:- Compute (a) the fixed manufacturing overhead cost per unit and (b) the total manufacturing cost per unit.2:- Compute the monthly operating income for January, February and March under absorption costing What bonus is paid each ,month to Bret Hart?3:- How much would use of variable costing change Hart’s bonus each month if the same 0.5% figure were applied to variable costing operating income?4:- Explain the differences in Hart’s bonuses in requirements 2 and 3.5:- How much would use of throughout costing change Hart’s bonus if the same 0.5% figure were applied to throughout costing operating income?6:- Outline different approaches Maple Leaf Motors could use to reduce possible undesirable behaviour associated with the use of absorption costing at its Waterloo plant.--------------------------------------------------------------------------------------------------------------------- Q39-:- Corrie produces three products X,Y and Z. The capacity of Corrie plant is restricted by process alpha. Process alpha is expected to be operational for eight hours per day and can produce 1,200 units of X per hour, 1,500 units of Y per hour and 600 units of Z per hour.

Selling prices and material costs for each product are as follows:Product Selling Price Material Cost Throughput contribution

$ per unit $ per unit $ per unitX 150 70 80Y 120 40 80X 300 100 200Conversion costs are $720,000 per day.Requirements:-

(a) Calculate the profit per day if daily output achieved is 6,000 units of X, 4,500 units of Y and 1,200 units of Z.

(b) Determine the efficiency of the bottleneck process given the output in (a)(c) Calculate the TA ratio for each product.(d) In the absence of demand restrictions for the three products advise Corrie

management on the optimal production plan.-----------------------------------------------------------------------------------------------------------------------------Q40-:- WAQ produces a single product X, which passes through three different processes, A,B and C. The throughput per hour of the three processes is 12,10 and 15 units of X respectively. The company works an 8 hour day. 6 day week, 48 week a year. The SP of “X”is $ 150 p.u.& material cost$ 30 p.u. Conversion costs are planned to be $24,000 per week.Requirements:-

(a) Determine the throughout accounting (TA) ratio per day.(b) Calculate how much the company could spend on equipment to improve the

throughout of process B if this wished to recover its costs in the following time periods.2 years12weeks

(c ) Calculate the revised TA ratio if this money is spent.------------------------------------------------------------------------------------------------------------------------------Q41-:- Products can also be ranked according to the throughput accounting ratio(TA Ratio)

Throughput contribution on value added per time periodTA Ratio ---------------------------------------------------------------------

Conversion cost per time period(sales - Material costs ) per time period---------------------------------------------------------------------(labour + Overhead) per time period

This measure has the advantage of including the costs involved in running the factory>The higher the ratio, the more profitable the company.

PRODUCT A PRODUCT B$ Per hour $ Per hour

Sale Price 100 150Material Cost (40) (50)

Conversion Cost (50) (50)Profit 10 50TA RATIO 60/50 = 1.2 100/50=2.0Profit will be maximized by manufacturing as much of product B as possible.---------------------------------------------------------------------------------------------------------------------Q42-:- (Theory of constraints, throughput contribution, relevant cost). Colorado industries manufactures electronic testing equipment Colorado also installs the equipment at customers’ sites and ensures that it functions smoothly. Additional information on the manufacturing and installation departments is as follows (capacities are expressed in terms of the number of units of electronic testing equipment): Equipment Equipment Manufactured Installed Annual capacity 400 units per year 300 units per yearEquipment manufactured and installed 300 units per year 300 units per yearColorado manufactures only 300 units per year because the installation Department has only enough capacity to install 300 units. The equipment sells for $40,000 per unit (installed) and has direct materials costs of $ 15,000. All costs other than direct materials costs are fixed. The following requirements refer only to the preceding data. There is no connection between the requirements.Required:-

1. Colorado’s engineers have found a way to reduce equipment manufacturing time. The new method would cost an additional $50 per unit and would allow Colorado to manufacture 20 additional units a year. Should Colorado implement the new method? Show your calculations.

2. Colorado’s designers have proposed a change in direct materials that would increase direct materials costs by $2,000 per unit. This change would enable Colorado to install 320 units of equipment each year. If Colorado makes the change, it will implement the new design on all equipment sold. Should Colorado use the new design? Show your calculation.

3. A new installation technique has been developed that will enable Colorado’s engineers to install 10 additional units of equipment a year. The new method will increase installation costs by $50,000 each year. Should Colorado implement the new techniques? Show your calculations.

4. Colorado is considering how to motivate workers to improve their productivity (output per hour). One proposal is to evaluate and compensate workers in the manufacturing and installation departments on the basis of their productivities. Do you think the new proposal is a good idea? Explain briefly.

--------------------------------------------------------------------------------------------------------------------Q43:- Theory of Constraints, throughout contribution, quality, relevant costs. Aardee industries manufactures pharmaceutical products in two departments: Mixing and Tablet –Making. Additional information on the two departments follows. Each tablet contains 0.5 gram of direct materials.

Mixing Tablet MakingCapacity per hour 150 grams 200 tabletsMonthly capacity (2,000 hours availableIn each of mixing and tablet making) 300,000 grams 400,000 tabletsMonthly production 200,000 grams 390,000 tabletsFixed operating costs(excluding direct materials) $16,000 $ 39,000Fixed operating costs per tablet($16,000 / 200,000; $39,000 / 390,000) $0.08 per gram $0.10 per tablet

The Mixing Departments makes 200,000 grams of direct materials mixture(enough to make 400,000 tablets) because the Tablet-Making Departments has only enough capacity to process 400,000 tablets. All direct materials costs are incurred in the Mixing Department. Aardee incurs $156,000 in direct materials costs. The tablet –Making Department manufactures only 390.000 tablet from the 200,000 grams of mixture processed; 2.5% of the direct materials mixture is lost in the tablet-making process. Each tablet sells for $1.All costs other than direct materials costs are fixed costs. The following requirements refer only to the preceding data. There is no connection between the requirements.

1:- An outside contractor makes the following offer. If Aardee will supply the contractor with 10,000 grams of mixture, the contractor will manufacture 19,500 tablets for Aardee following for the normal 2.5% loss during the tablet-making process at $0.12 per tablet. Should Aardee accept the company’s offer? Show your calculations.

2:- Another company offers to prepare 20,000 grams of mixture a month from direct materials Aardee supplies. The company will charge $0.07 per gram of mixture. Should Aardee accept the company’s offer? Show your calculations.

3:- Aardee’s engineers have devised a method that would improve quality in the tablet-making operation. The estimate that the 10,000 tablets currently being lost would be saved. The modification would cost $7,000 a month. Should Aardee implement the new method? Show your calculation.

4:- Suppose that Aardee also loses 10,000 grams of mixture in its mixing opertion. These losses can be reduced to zero if the company is willing to spend $9,000 per month in quality-improvement methods. Should Aardee adopt the quality improvement method? Show your calculations.

5:- What are the benefits of improving quality at the mixing operation compared with improving quality at the tablet-making operation?--------------------------------------------------------------------------------------------------------------

Q44-:- Billington Corporation makes bicycle frames in two processes, tube cutting and welding. The tube-cutting and welding process have a practical capacity of 150,000 and 100,000 units per year, respectively. Committed costs of quality activities follows:-Design of product and process costs…………………………………….$ 220,000.Inspection and testing costs…………………………………………………..85,000The demand is very strong. Billington can sell all output it can produce at $180 per frame. It begins producing only 100,00 units in the tube-cutting department because of the capacity constraint on the welding process; any defective units it produces are scrapped. Of the 100,000 units started at the tube-cutting department,1,000 units( 1 percent) normally are scrapped(Scrap is detected at the end of the tube- cutting operation) Full costs, based on total manufacturing costs incurred through the tube –cutting operation. Equal $105 per unit.

Direct materials (variables per unit)…………………………… $88Direct manufacturing setup, and materials handling labor……… 7Equipment rent, and other overhead(fixed for the year)…….. 10Full cost per unit …………………………….. $ 105The tube-cutting department sends its good units to the Welding department. Unit

level manufacturing costs at the welding department are $43.50 per unit. Welders are very highly trained, and the welding departments has no scrap. Therefore, Billington’s total sales quantity equals the tube-cutting department’s output. Billington designers are considering several alternative improvements to reduce scrap in the tube- cutting department.

Alternative1: Leaving the process unchanged but starting enough units in the tube- cutting department so that the Welding departments can operate at procaticla capacity.

Alternative2:- Using a different type of tubing that is more resistant to damage and would reduce scrap by 80 percent. It would increase the unit-level costs per unit in the tube- cutting department by $ 10 but would reduce costs in the welding department by $5.

Alternative 3:- Spending an additional amount on training to reduce scrap in the tube- cutting process.

Required:-Form small groups to respond to each of the following items:-A:- Which alternative 1 or 2 is more attractive financially?B:- How much would the company be willing to spend on training and how much

would scrap have to be reduced to make alternative 3 as attractive4 as either alternative 1 or 2?

C:- What other qualitative factors should Bilingtomn consider in making the decision? ---------------------------------------------------------------------------------------------------------------

Q45- Z Ltd. produced a single product X, which passes through three different process. A,B and C. The through out per hour of the three processes is 12,10 and 15 units of X respectively The company works an 8- hour day. 6 days a week, 48 weeks a year.

The selling price of X is Rs.b150 per unit and its material cost is Rs. 30 per unit. Conversion costs are planned to be Rs. 24,000per week.Required:-

(i) Determine the throughout accounting (TA) ratio per day.(ii) Calculate how much the company could spend on equipment to

improve the throughout of process B if it wished to recover its costs in the following time periods.(a) 2 years (b) 12 weeks.

(iii) Calculate the revised TA ratio if this money is spent.-------------------------------------------------------------------------------------------------------------------------------

BACKFLUSH COSTINGQ46- - Back flush costing and JIT production. The Acton Corporation manufactures electrical meters. For august, there were no beginning inventories of direct materials and no beginning or ending work process. Acton uses a JIT production system and back flush costing with three trigger poins for making entries in the accounting system:

Purchase of direct materials- debited to inventory: direct and In- process control Completion of good finished units of product- debited to finished goods control Sale of finished goodsActon’s August standard cost per meter is direct materials $25, and conversion costs $20. The following data apply to August manufacturing: Direct materials purchased $550,000 Number of finished units Conversion costs incurred $440,000 manufactured 21,000 Number of finished units sold 20,000

Continuations of Previous Question:- Assume the same facts as in Previous question except that Road Warrior now uses a backflush costing system with the following two trigger points:

Purchase of direct (raw) materials Sale of finished goodsThe inventory Control account will include direct materials purchased but not yet in production, materials in work in process, and materials in finished goods but not sold. No conversion costs are inventioned. Any under- or over allocated conversion costs are written off monthly to Cost of goods Sold.Continuations of Previous Question:- Assume the same facts as in last question , except now Road Warrior uses only two trigger points, the completion of good finished units of product and the sale of finished goods. Any under-or over allocated conversion costs are written off monthly to Cost of goods Sold.Required:-1:- Prepare summary journal entries for August including the disposition of under – or over allocated conversion costs. 2:-Post the entries in requirement 1 to T-accounts for Finished goods control, Conversion Cost Control, Conversion Costs Allocated and Cost of goods Sold.-------------------------------------------------------------------------------------------------------------------Q47- - Example: accounting entries at different trigger points

The transactions for period 8 20 X 1 for Clive are as follows.Purchase of raw materials {24,990Conversion costs incurred {20,220Finished goods produced (used in methods 2&3 only) 4,900 unitsSales 4,850 unitsThere are no opening inventories of raw materials,WIP or finished goods. The standard costs unit is made up of {5.10 for materials and {4.20 for conversion costs.Solution for 1 trigger point – When goods are sold (method)This is the simplest method of back flush costing. There is only one trigger point and that is when the entry to the cost of goods sold account is required when the goods are sold. (this method assumes that units are sold as soon as they are produced.) $ $(a) DEBIT Conversion costs control 20,220 CREDIT Expense creditors 20,220Being the actual conversion costs incurred(b) DEBIT Costs of goods sold (4,850X {9.30) 45,105 CREDIT Creditors (4,850x { 5.10) 24,735 CREDIT Conversion costs allocated (4,850x {4.20) 20,370Being the standard cost of goods sold(c) DEBIT Conversion costs allocated 20,370 CREDIT Cost of goods sold 150 CREDIT Conversion costs control 20,220Being the under or over allocation of conversion costs:- Back flush accounting---------------------------------------------------------------------------------------------------------------------Q48-:- RM uses back flush accounting in conjunction with JIT. The system does not include a raw material inventory control account. During control period 7,300 units were produced and sold and conversation costs of {7,000-incurred. The standard unit cost is {55, which includes material of {25.What is the debit balance on the cost of goods sold account at the end of control period .

A {16,500B {14,500C {23,500D {18,500

Solution:- $Conversion cost allocated to cost of goods sold a/c = 300x ({55 - 25) 9,000Conversion cost incurred 7,000Difference set against cost of goods sold a/c 2,000Standard charge to cost of goods sold a/c (300x{55) 16,500Charge to cost of goods sold a/c 14,500Option A is the standard charge. Option C is the sum of conversion cost incurred and the standard charge.Option D results from adding the difference instead of deducting it.

---------------------------------------------------------------------------------------------------------------------Q49-:- TXl manufactures a single product. Standard costs for materials and conversion costs are $40 and $30 per unit respectively. The company uses a backflushing accounting system with two trigger points: raw materials purchased and goods transferred to finishes goods store. At the beginning of March there was no opening inventory of raw materials or WIP and at the end of the month there was no WIP.Other data for the monthNumber of completed production units 15,000Number of products sold 14,000Raw Materials purchased $630,000Conversion costs incurred $470,000Requirements:-Prepare summary journal entries for March assuming that there was no material cost variances and without writing off under or over absorbed conversion costs.

Explain how you would modify the accounting system if the company switched to a total JIT system. Prepare specimen journal entries using the data above and the new trigger points(s) Write off the under-or over absorbed conversion costs.---------------------------------------------------------------------------------------------------------------------Q50-:- Games R Us manufactures various games. For March there were no beginning inventories of direct materials and no beginning or ending work in process. Conversion costs is the only indirect manufacturing cost category currently used. Journal entries are recorded when materials are purchased and when conversion costs re allocated under backflush costing.Conversion costs- March $ 800,000Direct materials purchased-March $ 2,140,000Units produced- March 117,600Units Sold- March 83,600(a) Which of the following entries in above question Properly records the cost of goods sold for the month?A:- Finished goods $2,090,000

Work-in-Process $2,090,000B:- Cost of goods Sold $2,090,000

Finished Goods $ 2,090,000C:- Finished Goods $2,090,000

Cost of goods Sold $2,090,000D:- Cost of Goods Sold $2,090,000

Work in Process $2,090,000Answer:- B.---------------------------------------------------------------------------------------------------------------------Q51-:- Complete Microfilm Products manufactures microfilm cameras. Fro October there was no beginning inventories of direct materials and no beginning or ending work

in process. Conversion costs is the only indirect manufacturing cost category currently used. Journal entries are recorded when materials are purchased and when units are sold.

Conversion costs- October $90,400Direct materials purchased-October $250,400Units produced-October 80,000untisUnits Sold- October 75,000untisSelling price $ 10 each

(a) Which of the following journal entries in above question properly reflects the purchase of materials in a JIT environment?A:-Inventory: Raw and In –Process $250,400

Accounts Payable Control $250,400B:- Accounts Payable Control $250,400

Allocated Costs: Direct Materials $250,400C:- Accounts Payable Control $250,400

Materials Inventory $250,400 D:- Allocated Costs: Direct Materials $250,400

Inventory: Raw and Materials $250,400Answer:- (a).(b) Which of the following journal entries in above question would be recorded when units are sold for the month?A:- Cost of Goods Sold $319,500

Inventory: Raw and In-Process $319,500B:- Cost of goods Sold $3,19,500

Inventory: Raw and In-Process $234,750Conversion Costs Allocated $84,750

C:- Inventory: Raw and In-Progress $ 234,750Conversion Costs Allocated $84,750

Cost of Goods Sold $319,500D:- Cost of Goods Sold $319,500

Inventory : Raw and in- Process $229,500Conversion Costs Allocated $90,000

Answer:- B.Direct materials ($250,400/80,000) $3.13Conversion costs($90,400/80,000) 1.13Total $4.2675,000 X $4.26 = $319,50075,000 X$3.13 = $234.75075,000 X $ 1.13= $ 84,750(c ) Which of the following entries would occur if the only trigger points the production of finished units?A:- Cost of goods Sold $319,500

Inventory: Raw and In-Process Control $229,500Conversion Costs Allocated $ 90,000

B:- Inventory: Raw and In-Progress Control $234,750Conversion Costs Allocated $84,750

Cost of Goods Sold $319,500C:- Finished Goods $340,800

Accounts Payable Control $250,400Conversion Costs Allocated $90,400

D:- Accounts Payable Control $250,400Conversion Costs Allocated $90,400

Finished Goods $340,800Answer:-80,000 X$4.26 =$340,80080,000 X$3.13 = $250,40080,000 X$1.13 = $90,400.---------------------------------------------------------------------------------------------------------------------Q52-:- Tornado Electronics manufactures stereos. All processing is initiated when an order is received. For April there were no beginning inventories. Conversion Costs and Direct Materials are the only manufacturing cost accounts. Direct Materials are purchased under a just-in-time system. Backflush costing is used with a finished goods trigger point. Additional information is a follows: Actual conversion costs $232,000 Standard materials costs per unit 60 Standard conversion cost per unit 140 Units produced 3,200 Units sold 2,800Required:-Record all journal entries for the monthly activities related to the above transactions if backflush costing is used.---------------------------------------------------------------------------------------------------------------------Q53-:- Corry Corporation manufactures filters for cars, Vans and trucks. A backflush costing system is used and standard costs for a filter are as follows:

Direct materials $2.60Conversion costs 4.20Total $6.80

Filters are scheduled for production only after orders are received, and are shipped immediately upon completion. This results in Product costs being charged directly to cost of goods sold. In December 3,000 filters were produced and shipped. Materials were purchased at a cost of $8,450 and actual conversion costs of $13,650were recorded.Required:-Prepare journal entries to record December’s costs for the production of the filters.Answer: Materials Inventory $ 8,450 Accounts payable $8,450Conversion costs $13,650Various credits $13,650Cost of goods sold $22,100Materials inventory $8,450

Conversion costs $13,650---------------------------------------------------------------------------------------------------------------------Q54-:- X Ltd. Manufactures a single product .Standard costs for materials and conversion costs are Rs. 40 and Rs. 30 per unit respectively. The company uses a backflash accounting system with two trigger points ; raw materials purchased and goods transferred to finished goods store. At the beginning of March there was no opening stock of raw materials or WIP and at the end of the month there was no WIP.Other data for the monthNumber of completed production units 15,000Number of products sold 14,000Raw Material purchased Rs. 6,30,000Conversion costs incurred Rs. 4,70,000Prepare summary journal entries for March assuming that there were no material cost variances and without writing off under or over absorbed conversion costs.---------------------------------------------------------------------------------------------------------------------Q55:- The Littlefield Company uses a backflush costing system with three trigger points:

Purchase of direct materials sale of finished goodsCompletion of good finished units of product

There are no beginning inventories. Data for April 2003 areDirect materials purchased $880,000 Conversion costs allocated

$400,000Direct materials used 850,000 Costs transferred to finished goods

1,250,000Conversion costs incurred 422,000 Costs of goods sold

1,190,000Required1:- Prepare summary journal entries fro April (Without disposing of under allocated or over allocated conversion costs).Assume no direct materials variances.2:- Under an ideal JIT production system, how would the amount in your journal entries differ from the journal entries in requirements 1 ?--------------------------------------------------------------------------------------------------------------------Q56:- Road Warrior Corporation assembles handheld computers that have scaled –down capabilities of laptop computers. Each handheld computer takes 6 hours to assemble. Road Warrior uses a Jit production system a backflush costing system with three trigger points:Purchase of direct (raw)Materials Sale of finished goodsCompletion of good finished units of productThere are no beginning inventories of materials or finished goods. The following data are for August 2003:Direct (Raw ) Materials purchased $2,754,000 Conversion costs incurred

$723,600

Direct (raw) materials used 2,733,600 Conversion costs allocated 750,400Road Warrior records direct materials purchased and conversion costs incurred at actual costs. When finished goods are sold, the backflush costing system “pulls through” standard direct materials costs ($102 per unit) and standard conversion costs ($28 per unit). Road Warrior produced 26,800 finished units in August 2003 and sold 26,400 units. The actual direct materials cost per unit in August 2003 was $102, and the actual conversion cost per unit was $27.Required:-1:- Prepare summary journal entries for August 2003 ( without disposing of under or over allocated conversion Cost).2:- Post the entries in requirements 1 to T-accounts for applicable inventory. Direct and in-Process Conversion Costs Control, Conversion Costs Allocated and cost of goods Sold.3:- Under an ideal JIT production system, how would the amounts in your journal entries differ from those in requirements 1 ?(a) The Backflush costing, two trigger points, materials purchase and sale ( continuation of previous question).Assume the same facts as in Previous question except that Road Warrior now uses a backflush costing system with the following two trigger points:

Purchase of direct (raw) materials Sale of finished goodsThe inventory Control account will include direct materials purchased but not yet in production, materials in work in process, and materials in finished goods but not sold. No conversion costs are inventioned. Any under- or over allocated conversion costs are written off monthly to Cost of goods Sold.( B) The backflush costing, two trigger points, completion of production and sale ( continuations of last question) Assume the same facts as in last question , except now Road Warrior uses only two trigger points, the completion of good finished units of product and the sale of finished goods. Any under-or over allocated conversion costs are written off monthly to Cost of goods Sold.Required:-1:- Prepare summary journal entries for August including the disposition of under – or over allocated conversion costs. 2:-Post the entries in requirement 1 to T-accounts for Finished goods control, Conversion Cost Control, Conversion Costs Allocated and Cost of goods Sold.---------------------------------------------------------------------------------------------------------------------

BALANCE SCORE CARDQ57:- Caltex, Inc, refines gasoline and sells it through its own Gas stations. On the basis of market research. Clatex determines that 60% of the overall gasoline market consist of “ service –oriented customers,” medium to high income individuals who are willing to pay a higher price for gas if the gas stations can provide excellent customer service, such as a clean facility a convince store, friendly employees, a quick turnaround, the ability to pay by credit card, and high substance premium fuel. The remaining 40% of the overall market are “Price shoppers” who look to buy the cheapest gasoline available. Caltex’s strategy is to focus on the 60% of service oriented customers. Caltex’s balance

scorecard for 2004 follows. For brevity the initiatives taken under each objective are omitted.

Target ActualObjectives Measures Performance PerformanceFinancial PerspectiveIncrese shareholder value Operating income changes $90,000,000 $95,000,000

From price recoveryOperating income changes $65,000,000 $67,000,000From Growth

Customer PerspectiveIncrease market share Market share of overall 10% 9.8%

Gasoline marketInternal Business Process PerspectiveImprove gasoline quality Quality index 94 points 95 pointsImprove refinery Refinery reliability index (%) 91% 91%PerformanceEnsure gasoline Product availability index (%) 99% 100%AvailabilityLearningandGrowth PerspectiveIncrease refinery Process Percentage of refinery 88% 90%

Processes with advanced Controls

1. Was caltex successful in implementing its strategy in 2004? Explain your answer.2. Would you have included some measure of employee statislactionand employee

training in the learningandgrowthperspective? Are these objectives critical tocaltex for implementing its stategy? Why or why not? Explain briefly.

3. Explain how caltex did not achieve its target market share in the total gasoline market but still exceeded its financial targets. Is “ market share of overall gasoline market” the correct measure of market share? Explain briefly.

4. Is there a cause- and – effect linkage between improvements in the measures in the internal business process perspective and the measures in the customers perspective? That is would you add other measures to the internal business process perspective of the customer perspective? Why or why not? Explain briefly.

5. Do you agree with Caltex’s decision not to include measures of changes in operating income from productivity improvements under the financial perspective of the balanced scorecard? Explain briefly.

---------------------------------------------------------------------------------------------------------------------BALANCE SCORE CARD

Q58:- Alan enterprises spent $ 28,600 in employee training in 2002. from a total of 160 employees, eight employees resigned during the year and were replaced with new ones. Employees succeeded in introducing five innovative ideas for which management gave them recognition and prizes amounting to $7,500. Defective products amounted to 192 units from a total of 2,400 units produced. Productive time amounted to 22,500 from a total of 25,000 recorded as processing time. The company’s sales amounted to $630,000 from a market which is around 9 times this size.3 out of 50 major customers have gone bankrupt leaving an uncollectible bad debts of around $ 19,700. Variable cost of production amounted to 56% of sales. Sales commission is at 6%. Fixed costs amount to $129,500 and general and administration costs amount to $87,450. This is in addition to the employee related costs stated above. The company has a total asset of $243,000.

The company expects to increase the employee related costs by 25% in 2003 but hope that defects will be reduced by 30%, production efficiency will increase by 7%,sales will increase by 18% - although market will not change in total, and variable costs will decrease by 8% fixed costs will increase by 3% G & A will increase by 4% . Bad debts will be the same amount.

Total assets will remain at the same level.Required: Prepare a balanced scorecard for 2002 and its forecast for 2003.

-------------------------------------------------------------------------------------------------------------------------Q59:- (Growth, price-recovery, and productivity components). Oceano T-shirt company sells a variety of T-shirts. Oceano presents the following data for its first two years of operations,2003 and 2004. for simplicity, assume that all purchasing and selling costs are included in the average cost per T-shirt and that each customer buys one T-shirt.

2002 2004Number of T-shirts purchased 20,000 30,000Number of T-shirts lost 400 300Number of T-shirts sold 19,600 29,700Average selling price $15 $14Average cost per T-shirt $10 $9Administrative capacity in terms ofNumber of customers that can beServed 40,000 36,000Administrative costs $80,000 $68,400Administrative cost per customer $2 $1,90Administrative costs depend on the number of customers that Oceano has created capacity to support, not the actual number of customers served.

1. Calculate the growth price-recovery, and productivity components of changes in operating income between 2003 and 2004.

2. Comment on your results in requirement 1.---------------------------------------------------------------------------------------------------------------------Q60:- Strategy balanced scorecard. Meredith corporation makes a special-purpose machine D4H used in the textile industry. Meredith has designed the D4H machine for 2003 to be distinct from its competitors. It has been generally regarded as a superior machine. Meredith presents the following data for 2002 and 2003. 2002 20031. Units of D4H produced and sold 200 2102. Selling price $40,000 $42,0003. Direct materials(Kilograms) 300,000 310,0004. Direct materials cost per kilogram $8 $8.505. Manufacturing capacity in units of D4H 250 2506.Total conversion costs $2,000,000 $20,025,0007. Conversion cost per unit of capacity $8,000 $8,1008.Selling and customer-service capacity 100 customers 95 customers9. Total selling and customer-service costs $1,000,000 $940,50010. Selling and customer-service capacity cost

per customer $10,000 $9,90011.Design staff 12 1212. Total design costs $1,200,000 $1,212,000 13. Design cost per employee $100,000 $101,000Meredith produces no defective machines, but it wants to reduce direct materials usage per D4H machine in 2003. conversion costs in each year depend on production capacity defined in terms of D4H units that can be produced not the actual units produced. Selling and customer-service costs depand on the number of customer that Meredith can support not the actual number of customers it serves Meredith has 75 customers in 2002 and 80 customers in 2003. at the of each year management uses its discretion to determine the number of design staff for the year. The design staff and its costs have no direct relationship with the quantity of D4H produced or the number of customers to whom D4H is sold.

1. Is Meredith’s strategy one of product differentiation or cost leadership? Explain briefly.

Describe briefly key elements that you would include in merediths’s balanced scorecard and the reasons for doing so.------------------------------------------------------------------------------------------------------------------------Q61:- (Strategy, balanced scorecard service company). Snyder corporation is a small information systems consulting firm that specializes in helping companies implement sales management software. The market for snyder’s products is very competitive .To compete, snyder must deliver quality service at a low cost snyder bills clients in terms of units of work preformed. which depends on the size and complexity of the sales management system. Snyder presents the following data for 2002 and 2003.

2002 2003

1. Units of work performed 60 702. Selling price $50,000 $48,0003. Software implementation labor-hours 30,000 32,0004. Cost per software implementation labour-hour $60

$635. Software implementation support capacity(in units work)90

906. Total cost of software implementation support $360,000 $369,0007.Software implementation support capacity cost

per unit of work $4,000 $4,100

8. Number of employees doing software development 3 3

9. Total software development costs $375,000 $390,000

10. Software development cost per employee $125,000 $130,000 Software implementation labour-hour costs are variable costs. Software implementation support costs for each year depend on the software implementation support capacity(defined in terms of units of work) that snyder chooses to maintain each year. It does not vary with actual units of work performed that year. At the start of each year management uses its discretion to determine the number of software development employees. The software development staff and costs have no direct relationship with the number of units of work performed.1. Is snyder corporation’s strategy one of product differentiation or cost leadership? Explain briefly. 2.Describe key elements you would include in snyder’s balanced scorecard and your reasons for doing so.LAST QUESTION:-1. Calculate the operating income of snyder corporation in 2002 and 2003.2. Calculate the growth price-recovery and productivity components that explain the change in operating income from 2002 to 2003.

1. Comment on your answer in requirement 2. what do these components indicate?---------------------------------------------------------------------------------------------------------------------Q62:- Analysis of growth price-recovery, and productivity components(continuation of Last Quesation). Suppose that during 2003 the market for implementing sales management software increases by 5% and that snyder experiences a 1 % decline in selling prices. Assume that any further decrease in selling price and increases in market share are strategic choices by snyder’s management to implement their cost leadership strategy.Required: Calculate how much of the change in operating income from 2002 to 2003 is due to the industry market size factor cost leadership and product differentiation. How successful has snyder been in implementing its strategy? Explain .---------------------------------------------------------------------------------------------------------------------Q63- Identifying and managing unused capacity(continuation of Last question). Refer to the snyder corporation information in Exercise 13-24. 1.There possible, calculate the amount and cost of unused capacity for (a) software implementation support and (b) software development at the beginning of 2003, based on units of work performed in 2003. If you could not calculate the amount and cost of unused capacity indicate why not. 2. Suppose snyder can add or reduce its software implementation support capacity in increments of 15 units. What is the maximum amount of costs that snyder could save in 2003 by downsizing software implementation support capacity?

2. Snyder in fact does not eliminate any of its unused software implementation support capacity. Why might snyder not downsize?

Problems ---------------------------------------------------------------------------------------------------------------------

Q64:- Balanced scorecard. (R.Kaplan adapted). Caltex Inc refines gasoline and sells it through its own caltex gas stations on the basis of market research, Caltex determines that 60% of the overall gasoline market consists of “service-oriented customers” medium-to high-income individuals who are willing to pay a higher price for gas if the gas stations can provide excellent customer service such as a clean facility a convenience store friendly employees,a quick turnaround the ability to pay by credit card and high octane premium fuel. The remaining 40% of the overall market are “priceshoppers” who look to buy the cheapest gasoline available. Caltex’s strategy is to focus on the 60% of service- oriented customers. Caltex’s balanced scorecard for 2004 follows. For brevity the initiatives taken under each objective are omitted. Target ActualObjectives Measures Performance Performance Financial PerspectiveIncrease shareholder value Operating income changes $90,000,000

$95,000,000 From price recovery Operating income changes $65,000,000

$67,000,000 from growthCustomer PrespectiveIncrease market share Market share of overall 10%

9.8% Gasoline marketInternal Business Process PerspectiveImprove gasoline quality Quality index 94 points 95 pointsImprove refinery Refinery reliability index(%) 91% 91%PerformanceEnsure gasoline Product availability index (%) 99% 100%Learning and growth perspectiveIncrease refinery process Precentage of refinery 88% 90%Capability processes with advanced Controls

1. Was caltex successful in implementing its strategy in 2004? Explain your answer.2. Would you have included some measure of employee satisfaction and employee

training in the learning and growth perspective? Are these objectives critical to caltex for implementing its strategy? Why or why not? Explain briefly.

3. Explain how caltex did not achieve its target market share in the total gasoline market but still exceeded its financial targets. Is “market share of overall gasoline market” the correct measure of market share? Explain briefly.

4. Is there a cause-and-effect linkage between improvements in the measures in the internal business process perspective and the measures in the customer perspective? That is would you add other measures to the internal business

process perspective or the customer perspective? Why or why not? Explain briefly.

5. Do you agree with caltex’s decision not to include measures of changes in operating income from productivity improvements under the financial perspective of the balanced scorecard? Explain briefly.

--------------------------------------------------------------------------------------------------------------------Q65:- Strategic analysis of operating income. Halsey company sells women’s clothing. Halsey’s strategy is to offer a wide selection of clothes and excellent customer service and to charge a premium price. Halsey presents the following data for 2004 and 2005. for simplicity,assume that each customer purchases one piece of clothing.

2003 20051. Pieces of clothing purchased and sold 40,000 40,000 2. Average selling price $60 $59 3. Average cost per piece of clothing $40 $414. Selling and customer-service capacity 51,000 customers 43,000 customers5. Selling and customer-service capacity $357,000

$296,7006.Selling and customer-service capacity $7per customer $6.90 per customer cost per customer (line 5 line 4)7. Purchasing and administrative capacity 980 8508. Purchasing and administrative costs $245,000 $204,000 9. Purchasing and administrative capacity $250 per design $240 per design cost per distinct designTotal selling and customer-service costs depend on the number of customers that halsey has created capacity to support, not the actual number of customers that halsey serves. Total purchasing and administrative costs depend on purchasing and administrative capacity that halsey has created (defined in terms of the number of distinct clothing designs that halsey can purchase and administer). Purchasing and administrative costs do not depend on the actual number of distinct clothing designs purchased. Halsey purchased 930 distinct designs in 2004 and 820 distinct designs in 2005.At the start of 2005, Halsey planned to increase operating income by 10% over operating income in 2004.

1. Is halsey’s strategy one product differentiation or cost leadership? Explain 2. Calculate Halsely’s operating income in 2004 and 2005.3. Calculate the growth price-recovery, and productivity components of changes in

operating income between 2004 and 2005.4. Does the strategic analysis of operating income indicate Halsey was successful in

implementing its strategy in 2005? Explain-------------------------------------------------------------------------------------------------------------------Q66:- Winchester Corporation manufactures special ball bearning. In 2005, it plans to grow and increase operating income by capitalizing on its reputation for manufacturing a

product that is superior to its competitors. An analysis of Winchester’s operating income changes between 2004 and 2005 shows the following:

Operating income for 2004 $3,450,000Add growth components 300,000Add price-recovery components 400,000Add productivity components 350,000Operating income for 2005 $4,500,000Further analysis of these components indicates that had the growth in

Winchester’s sales kept up with market growth, the growth component in 2005would have been $750,000.All decreses in market share (that is, sales increases less than the market growth) are attributable to Winchester’s lack of product differentiation.

1:- Is Winchester’s 2005 strategy one of product differentiation or cost leadership? Explain briefly.

2:- Provide a brief explanation of why the growth, price recovery, and productivity components are favorable.

3:- Was Winchester’s gain in operating income in 2005consistent with the strategy you identified in requirement 1? Explain briefly.---------------------------------------------------------------------------------------------------------------------Q67:- Engineered and discretionary overhead costs, unused capacity, customers help-desk:- Cable Galore, a large cable television operator, had 750,000 subscribers in 2002.Cable Galore employees five customers help desk representatives to respond to customers questions and problems. During 2002, each customers help-desk representatives worked 8 hours per day for 250 day at a fixed annual salary of $36,000. Cable Galore received 45,000 telephone calls from its customers in 2002. Each call took an average of 10 minutes.

Required:- 1:- Do you think customer help desk costs at cable Galore are engineered costs or discretionary costs? Explain your answer.

2:- Where possible, calculate the costs of unused customer help-desk capacity in 2002 under each of the following assumptions (a) customers help-desk costs are engineered costs, and (b) customer help-desk costs are discretionary costs. If you could not calculate the amount and cost of unused capacity, indicate why not.

3:- Assume that Cable Galore had 900,000 subscribes in 2003 and that the 2002 percentage of telephone calla received to total subscribes continues in 2003.Cusotmershelp-desk capacity in 2003 was the same as it was in 2002.Where possible calculate the cost of unused customer help-desk capacity in 2003. Under each of the following assumptions (a) customer-service costs are engineered costs, and (b) customer service costs are discretionary costs. If you could not calculate the amount and cost of unused capacity, indicate why not.---------------------------------------------------------------------------------------------------------------------Q68-:- Following a strategy of product differentiation, Westwood corporation makes a high-end kitchen range hood, KE8. Here’s Westwood’s data for 2002 and 2003.

2004 20031. units of KE8 produced and sold 40,000 42,0002. Selling price $100 $110

3. Direct materials (square feet) 120,000 123,0004. Direct material costs per square foot $10 $115. Manufacturing capacity for KE8 50,000 units 50,000 units6. Conversion costs $1,000,000 $1,100,0007. Conversion costs per unit of capacity (Row 6 – Row 5) $20 $228. Selling and customer-service capacity 30 customers 29 customers9. Selling and customer- service costs $720,000 $725,00010. Cost per customer of selling and customer service capacity (Row 9-Row 8) $24,000 $25,000Westwood produced no defective units and reduce direct material usage per unit of KE8 in 2003. Conversion costs in each year are tied to manufacturing capacity. Selling and customer- service costs are related to the number of customers that the selling and service functions are designed to support. Westwood has 23 customers in 2002 and 25 customers in 2003.Required:-

2. Describe briefly the elements you would include in Westwood’s balanced scorecard.

3. Calculate the growth price-recovery and productivity components that explain the change in operating income from 2002 to 2003.

4. Suppose during 2003 the market for high-end kitchen range hoods grew at 3% in terms of number of units and all increases in market share (that is increases in the number of units sold greater than 3%) are due to Westwood’s product differentiation strategy. Calculate how much of the change in operating income from 2002 to 2003 is due to the industry-market size factor cost leadership and product differentiation.

5. How successful has Westwood been in implementing its strategy? Explain.Solution:-

1. The balanced scorecard should describe Westwood product differentiation strategy. The elements that should be included in its balanced scorecard are.

*Financial perspective increase in operating income from higher margins on KE8 and growth Customer perspective market shares in high-end market and customer satisfaction. Internal business perspective manufacturing quality order delivery time on time

delivery and new product features added. Learning and growth perspective Development time for new products and

improvements in manufacturing processes.2. Operating income for each year is

2002 2003

Revenues($100 per unit X 40,000 units; $110 per

unit X 42,000 units) $4,000,000 $4,620,000CostsDirect material costs

($10 per sq. ft. X 12,000 sq.ft; $11 per sq. ft. X 123,000Sq. ft ) 1,200,000 1,353,000Conversion costs($20 per unit X 50,000 units; $22 per unit X 50,000 units) 1,000,000 1,100,000Selling and customer- service costs($24,000 per customer X 30 customers; $25,000 per customer X 29 customers) 720,000 725,000Total costs 2,920,000 3,178,000Operating income $1,080,000 $1.442,000Change in operating income $362,000 F

Growth componentRevenue effect {Actual units of Actual units of} OutputOf growth = {Output sold - Output sold in} X PriceComponent {in 2003 2002} in 2002 = (42,000 units - 40,000 units) x $100 per unit = $200,000 F { Actual units of input or}Cost effect { Capacity that would Actual units of}Of growth = {have been used to produce inputs or capacity} InputComponent {2003 output assuming to produce} X price {The same input- output 2002 output} in 2002 {Relationship that existed in 2002 }Direct material costs that would be required in 2003 to produce 42,000 units instead of the 40,000 units produced in 2002, assuming the 2002 input-output relationship continued into 2003 can be calculated as follows:“My own expenence indicates that we are doing well on both these dimensions. Until we do a formal survey of employees and customers sometime next year. I think we are doing a disservice to this company and ourselves by reporting such low scores for employee and customer satisfaction. These scores will be an embarrassment for us at the division managers meeting next month. We need to get these numbers up” Ptricia knows that the employee and customer satisfaction scores are subjective but the procedure she used is identical to the procedures she has used in the past. She knows from the comments she had asked for that the scores represent the unhappiness of employees with the latest work rules and the unhappiness of customers with late deliveries. She also Knows that these problems will be corrected in time.

4. Do you think that the household products division should include subjective measures of employee satisfaction and customer satisfaction in its balanced scorecard? Explain.

---------------------------------------------------------------------------------------------------------------------

DOWN SIZINGQ69:- Collaborative learning problem Downsizing.(CMA adapted) Mayfair corporation currently subsidizes cafeteria services for its 200 employees. Mayfair is in

the process of reviewing the cafeteria services because cost cutting measures are needed throughout the organization to keep the prices of its products competitive. Two alternatives are being evaluated: downsize the cafeteria staff and offer a reduced menu or contract with an outside vendor.The current cafeteria operation has four employees with a combined base annual salary of $110,000 plus additional employee benefits at 25% of salary. The cafeteria operates 250 days each year and the costs for utilities and equipment maintenance average $30,000 annually .The daily sales include 100 entrees at $4.00 each, 80 sandwiches of salads at an average price of $3.00 each, plus an additional $200 for beverages and deserts. The cost of all cafeteria supplies is 60% of revenues.The plan for downsizing the current operation envisions retaining two of the current employees whose combined base annual salaries total $65,000.An entrée would no longer be offered, and prices of the remaining items would be increased slightly. Under this arrangement, Mayfair expects daily sales of 150 sandwiches or salads at a higher average price of $ 3.60.The additional revenue for beverages and desserts is expected to increase to$230each day. Because of the elimination of the entrée, the cost of all cafeteria supplies is expected to decline to 50% of revenues. All other conditions of operation would remain the same. Mayfair is willing to continue to subsidize this reduced operation but will not spend more than 20%of the current subsidy.A Proposal has been received from Wilco Foods an outside vendor who is willing to supply cafeteria services. Wilco has proposed to pay Mayfair $1,000 per month for use of the cafeteria and utilities. Mayfair would be expected to cover equipment-repair costs in a addition.Wilco would pay Mayfair 4% of all revenues received above the breakeven point. This payment would be made at the end of the year. All, other costs incurred by Wilco to supply the cafeteria services are variable and equal 75% of revenues. Wilco plans to charge $5.00 for an entrée, and the average price for the sandwich or salad would be $4.00.All other daily sales are expected to average $300.Wilco expects daily sales of 66 entrees and 94 sandwiches or salads.1:-Determine whether the plan for downsizing the current cafeteria operation would be acceptable to Mayfair Corporation. Show your calculations. 2:- Is the Wilco Foods proposal more advantages to Mayfair Corporation than the downsizing plan? Show your calculations.---------------------------------------------------------------------------------------------------------------------Q70:- Activity-based costing. Flexible-budget variances for finance function activities. Josh sanchez is the chief financial officer of bouquets.com an internet company that enables customers to order deliveries of flowers by accessing its Web site. Sanchez is concerned with the efficiency and effectiveness of the finance function. He collects the following information for three finance activities in 2004: Rate per unit of Cost driver Activity CostActivity Level Driver Static budget ActualReceivables Output unit Remittances $0.639 $0.75Payables Batch Invoices 2.900 2.80Travel expenses Batch Travel claims 7.600 7.40

The output measure is the number of delivers, which is the same as the number of remittances. The following is additional information. Static- Budget Amounts Actual amountsNumber of deliveries 1,000,000 948,000Batch size in terms of deliveries Payables 5 4.468 Travel expenses 500 01.587Required: - 1. Calculate the flexible-budget variance for each activity in 2004.

5. Calculate the price and efficiency variances for each activity in 2004.---------------------------------------------------------------------------------------------------------------------

Q71-:- Finance function activities, benchmarking (continuation of Last question). Josh Sanchez, CFO of bouquets COM, engages the Hackett group a consulting firm specializing in benchmarking. He asks Hackett to provide benchmark data of the finance function at “world-class” retail companies (both traditional retail and internet-based retail). Hackett’s cost benchmarks for bouquet. Com’s three finance activities are

Finance Activity “World-class” Cost performance

Payables S0.71 per invoice Receivables S0.10 per remittance Travel expenses S1.58 per travel claim

Required: - 1. What new insights might arise with the Hackett benchmark data using the amounts in Exercise 7-30?

2. Assume you are in charge of travel-claim processing. What concerns might you have with sanchez using the Hackett benchmark of $1.58 per travel claim as the keyto evaluate your performance next period? ---------------------------------------------------------------------------------------------------------------------

BENCH MARKINGQ72-Relevant information with regard to the operation of the sales order department of MM is as follows.

A team of staff deals with existing customers in respect of problems with orders of with prospective customers enquiring about potential orders.

The processing of orders requires communication with the production and dispatch functions of the company.

The nature of the business in such that there is some dispatching of part orders to customers Sales literature is sent out to existing and prospective customers by means of a monthly mail shot.

The activity matrix below shows the budget for the sales order department.Activity cost matrix- sales order department

Total Cost

Customernegotiations

Processing ofHome

OrdersExport

Implementingdispatches

Sales Literature

GeneraladminCost

element $’000

$’000

$’000

$’000

$’000

$’000

$’000

Salaries 500 80 160 100 90 20 50Stores/supplies

90 16 6 8 60

IT 70 10 30 20 10Sundry Costs

80 8 10 6 20 10 26

Total 740 98 216 132 128 90 76Volume of

2,000 3,000 5,000 1,200 11,500

Activity Customers

Negotiations Order Orders Dispatches

MM has decided to acquire additional computer software with internet links in order to improve the effectiveness of the sales order department. The cost to the company of this initiative is estimated at $230,000 pa.If the proposed changes are implemented. There will be cost and volume changes to activities in the sales order department and it is estimated that the following activity cost matrix will result.Activity cost matrix-sales order department after the proposed changes

Total Cost

Customernegotiations

Processing ofHome

OrdersExport

Implementingdispatches

Sales Literature

GeneraladminCost

element $’000

$’000

$’000

$’000

$’000

$’000

$’000

Salaries 450 72 144 90 81 18 45Stores/supplies

54 - 16 6 8 24 --

IT 300 40 120 80 40 20 --Sundry Costs

106 16 11 10 33 10 26

Total 910 128 291 186 162 72 71Volume of

2,600 6,000 5,500 2,000 18,750

Activity Customers

Negotiations Order Orders Dispatches

Recent industry average statistics for sales order department activities in business of similar size, customer mix and product mix are as follows.Cost per customer per year $300Cost per home order processed $50Cost per export order processed $60Cost per dispatch $8Sales literature cost per customer $35Average number of orders per customer per year4.1

Average number of dispatches per order 3.3Requirement:-Prepare an analysis (both discursive and quantitative/ monetary as appropriate) which examines the implications of the IT initiative. The analysis should include a benchmarking exercise on the effectiveness of the sales order department against both its current position and the industry standards provided. You should incorporate comment on additional information likely to improve the relevance of the exercise.---------------------------------------------------------------------------------------------------------------

Q73-:- EVALUATION MANAGERS, ROI VALUE-CHAIN ANALYSIS OF COST STRUCTURE: User Friendly Computer is one of the largest personal computer companies in the world .The board of directors was recently informed that User Friendly president is resigning. An executive search firm recommends the board consider appointing Peter Diamond ( Current president of Computer Power) or Norma Provan (current president of Peach Computer).You Collect the following financial information (in millions) on computer Power and Peach Computer for 2002 and 2003:

Computer Power Peach Computer2002 2003 2002 2003

Revenues $400.0 $320.0 $200.0 $350.0CostsR&D 36.0 16.8 18.0 43.5Design 15.0 8.4 3.6 11.6Production 102.0 112.0 82.8 98.6Marketing 75.0 92.4 36.0 66.7Distribution 27.0 22.4 18.0 23.2Customer service 45.0 28.0 21.6 46.4Total costs 300.0 280.0 180.0 290.0Operating income $100.0 $40.0 $20.0 $60.0Total assets $360.0 $340.0 $160.0 $240.0In early 2004.0a leading computer magazine gave Peach Computer’s main

product five stars, its highest rating. Computer Power’s main product was given three stars, down from five stars a years ago, because of customer-service problems. The computer magazine also ran an article on new product introductions. Peach Computer received high marks for new products in 2003.Computer Power’s performance was called “mediocre.”

Required:-1:- Use the Dupont method of probability analysis to compute the ROI of

computer Power and Peach Computer in 2002 and 2003.Comment on the results.2:- Compute the percentage of costs in each of the six business-function cost

categories for computer Power and Peach Computer in 2002 and 2003. Comment on the results.

3:- Rank Diamond and Provan as potential candidates for president of User Friendly Computer. Explain your ranking.----------------------------------------------------------------------------------------------------------------------

INCENTIVE SCHEME

Q74-:- Enton company compensates its junior employees based on 10% of actual income distributed equally among the 1000 employees payable within 30 days after the and of the year plus 5% of stock appreciation for the year , 20% of planned income plus 10% of stock- appreciation for the 100 mid- level employees payable within seven months of the current year based on stock values on june 30th of the current year, and pays its 10 top- level executives, 30% of the revised income for the current year and 30% of stock appreciation as of the end September during October of each year. Planned sales for 2003 amounted to 1.3 bilion dollars. Planned costs included fixed costs .35 billion dollars and variable costs amounting to 40% of sales. Taxes amount to 24% of income. Revised sales on 9/30th for the year is expected to be 1.1 billion dollars with a 10% increase in variable costs and a 5% reduction in fixed costs. Actual sales, however, amounted to 8 billion dollars with both fixed and variable costs being 12% higher the anticipated level.Stock prices were at $22 at the beginning of the year , $26 as of june 30 th , and $27 as of September 30th At the end of the year, in spite of multi- million-dollar audits. Several frauds and manipulation of records were discovered and the stock price plunged to $1.25. There were a total of 67 million share outstanding during the year.Required: Determine planned and actual income and compute compensation per employee for each group . ---------------------------------------------------------------------------------------------------------------------

PARTIAL PRODUCTIVITYQ75-:- Berkshire corporation makes small steel parts. Berkshire management has some ability to substitute direct materials for direct manufacturing labor. If workers cut the steel carefully, Berkshire can manufacture more parts out of a metal sheet, but this approach will require more direct manufacturing labor- hours. Alternatively, Berkshire can use fewer direct manufacturing labor – hours if it is willing to tolerate a larger quantity of direct materials waste. Berkshire operates in a very competitive market. Its strategy is to produce a quality product at a low cost. Berkshire produces no defective products. Berkshire reports the following data for the past two years of operations:

2004 2005Output units 375,000 525,000Direct materials used, in kilograms 450,000 610,000Direct material cost per kilogram $1.20 $1.25Direct manufacturing labour-hours used 7,500 9.500Wages per hour $20 $25Manufacturing capacity in output units 600,000 582,000Manufacturing capacity –related fixed costs $1,038,000 41,018,500Fixed manufacturing cost per unit of capacity $1.73 $1.75Required 1. Compute the partial productivity ratios for 2005. Compare the partial productivity rations in 2005 with par-tial productivity ratios for 2004 calculated based on 2005 output produced.

1. On the basis of the partial productivity ratios alone, can you conclude whether and by how much productivity improved overall in 2005 relative to 2004? Explain.

2. How might the management of Berkshire corporation use the partial productivity analysis?

Required 1. Compute Berkshire corporation’s total factor productivity (TFP) in 2005.2. Compare Berkshire corporation’s TFP performance in 2005 relative to 2004.3. What does TFP tell you that partial productivity measures do not?----------------------------------------------------------------------------------------------------------------

RESPONSIBILITY ACCOUNTINGQ76:- A Boatyard is divided into three profit centers whose managers are rewarded according to results. Transactions between these profit centers are frequent. Sales centre(S) buys and sells new boats.

If it needs to take part-exchange from a customer in order to sell a new boat, it transfers the part-exchanged boat to B at an agreed price.Brokerage(B) buys and sells second-hand boats:

(i) in part-exchange from S (B names the price at which is can buy a comparable boat that is in a suitable conditions for resale to an end- user customer, but deducts the likely cost of repairs) and

(ii) from other sources, on a normal trading basis.Repairs(R) does repairs for

(i) B(to put boats into saleable condition) and(ii) other customers.

The following situation arises:S can sell to a customer for Rs. 35,000 a new boat which would cost Rs. 29,000.

To do so, it needs to offer Rs. 16,000 in part-exchange for the customer’s old boat. However, the customer’s boat is estimated by R to need repairs that will cost: Materials Rs.3Labour 60 hours at Rs.15 per hour

B can buy for Rs. 15,000 a boat comparable to the one being offered by the customer in part-exchange but which needs no repair. B could then sell that boat for Rs. 19,000.Other data:- R’s labour rate per hour is made up as follows:Variable cost Rs. 6.00Fixed cost 4.50 (based on 20,000 budgeted hours p.a.)Profit 4.50

15.00- 45% of R’s time is reserved for work from B- Annual fixed cost is budgeted at: S- Rs. 70,000 B- Rs. 80,000

You are required, in relation to the above situation, to set out the contribution to profit for each profit center that would result,

(i) Assuming that all estimates and budgets materialised as expected,

(ii) Assuming that all estimates and budgets materialised as in (i), except that the repairs undertaken by R took an extra 10 hours and Rs. 100 of materials due to a problem not noticed by B or R.

[Answer: 1:-Rs. 3,800/- Rs. 4,000, Rs. 540] 2:- 3,550, 4000, 380.-------------------------------------------------------------------------------------------------------------------------------Q77:- A company has a Six-year contract to supply 100,000 machined components DE a year at Rs. 5.80 each. It will have completed three years of the contract at 31 st

December 1979.It has been offered an additional contract to supply 10,000 machined components

FG during the year 1980 at Rs. 7.20 each. There is a good possibility of an annual renewal there after for the same quantity at the same price.This Second contract appears attractive to the sales manger because:

(1) The work would require only 10 per cent additional machine hours and these could be undertaken by working overtime on the existing machines.

(2) Overtime premium is 50 per cent of normal wage rate.(3) Sufficient material is in stock to make a year’s supply to the new components

and is surplus to any other requirement.(4) Spare space amounting to 20 percent of the works area is available for the

handling and storage of the new components.The sales manager has recommended acceptance of the new contract on the basis

of the following calculation for 1980. Profit Forecast Year 1980

Existing contract Future Contacts DE DE FG Rs.000 Rs. 000

Rs.000Costs: - Direct wages—normal 200 200 20

Overtime --- 9 1

Direct material--- DE 60 60 ---

FG --- --- ---

Rent 15 12 3

Depreciation 25 25 1

Other overhead costs (100% of direct wages) 200 209

21

500 515 45

Sales income 580 580 72

Profit 80 65 27

As the management accountant you are asked to review the proposal Year Investigation that:

1: The existing machines have a limited life based on producing a total of 600,000 components DE: it is unlikely that this total output can be exceeded.

2: The machines cost Rs. 150,000 when purchased at the start of the contract but new one are priced at Rs. 180,000.

3: The prod. of each component FG is twice as intensive in machine wear as component DE.

4: Although only 10 per cent more actual machine hours would be required for components FG, because of change over of tools 2 per cent extra labour hours will be needed.

5: The labour hours will be worked in both daily overtime and weekends in the ratio of 2:1, the premium rate for weekends is 100 per cent of normal wage rate.

6: The additional overhead costs in relation to the FG order expected to be incurred amount to Rs.10,000 per year.

7: The material is stock that it is proposed to use for the first 10,000 components FG cost Rs. 13,000 when purchased three year ago, its value was reduced to NIL for inventory purposes at 31st December, 1977 as being surplus and un sale able at that time. Due to changed circumstances it could be reconditioned at a cost of Rs. 5,000 and resold to the original supplier at his current list price of Rs. 15,000 less 20 per cent handling charge;

8: The spare productions space is at present rented to an adjoining company for Rs. 5,000 per year and that company would be willing to take a long- term lease at this figure. The sales manager was not aware of this fact. Prepare a revised profit estimate, separately for components DE and FG, for each of the years 1980-81. Advise about FG order.

Answer:- 85,000, 4,000, 85,000, Loss:- 4,000. --------------------------------------------------------------------------------------------------------------------Q78:- Reel and Roll ltd. manufactures a range of films extensively used in the cinema industry. The films, once manufactured packed in circular containers and stored in specially constructed crates lined with “Pretecto”. These crates are manufactured and maintained by a special department within the company and the department costs last year are as under:

Rs.Direct materials (including” Pretecto”) 1,40,000Direct labour 1,00,000

2,40,000Overheads:

Department manager 16,000Depreciation of machine 30,000Maintenance of machine 7,200Rent ( Portion of Warehouse) 9,000Other miscellaneous costs 31,500 93,700

3,33,700Adm. Overheads( Absorbed 20% of direct costs)

48,000

Total 3,81,700Pack Knack Associates have approached the Reel and Roll Ltd. offering to make

all the crates required on a four-year contract for Rs. 2,50,000 per annum and / or to maintain them for future Rs. 50,000 per annum.

The following data are relevant:1: - The machine used in the department cost Rs. 2,40,000 four years ago and will last

for four more years .It could be currently sold for Rs. 50,000.2: - A stock of “ protecto” was acquired last year for Rs. 2,00,000 and one-fifth was used

last year and included in the material cost. Its original cost was Rs. 1,000 per ton, but the replacement cost is Rs. 1,200 per ton, and it could be currently sold for Rs. 800 per ton.

3:- The Department has acquired Separate warehouse space for Rs. 18,000 per annum. It uses only one-half of the space the rest is idle.

4:- If the department were closed, the Manager will be transferred to another department ; but all the labour force will be made redundant ,and the terminal benefits to be met will amount to Rs. 15,000 per annum. In that event, Pack Knack Associates will undertake to manufacture and maintain the crates.

If reel and Roll Ltd. continued to maintain the crates, but left their manufactures to Pack Knack Associates:1: The machine will not be required.2: The manager will remain in the department.3: The warehouse space requirements will not be reduced.4: Only 10% of all materials will be used.5: Only One worker will be dispensed with and taking the terminal benefit to be met

into account the saving will be Rs. 5,000 per annum.6: The miscellaneous costs will be reduced by 80%.

If Reel and Roll Ltd. continued to manufacture the crates but left their maintenance to pack Knack Associates:1: The machine will be required.2: The manager will remain in the department.3: The warehouse space will be required.4: 90% of all the materials will be required.5: The labour force will continue.6: The miscellaneous cost will be reduced by 20%.

Assuming that for the four year period there is no significant change envisaged in the pattern of other costs. You are required to evaluate the alternative courses of action with supporting figures of cash flows over the four year period and advise accordingly by Preparing statement of cash receipt and cash disbursement for each of the four year.

-------------------------------------------------------------------------------------------------------------------------------

ABC COSTINGQ79:- The Excel Ltd make and sell two products, VG4U and VG2. Both products are manufactured through two consecutive process-making and packing Raw material is input at the commencement of the making process. The following estimated information is available for the period ending 31st March. Making

Packing($000) ($000)

Conversion CostVariable 350 280Fixed 210 14040% of Fixed costs are product specific, the remainder are company fixed costs. Fixed costs will remain unchanged throughout a wide activity range.Product information VG4 UVG2Production time per unit:Making (minutes) 5.25 5.25Packing ( minutes) 6 4Production Sales(units) 5000 3000Selling price per unit($) 150 180Direct material per unit($) 30 30(iii) Conversion costs are absorbed by products using estimated time based rates.Required:

(a) Using the above information,(b) Calculate unit costs for each product, analysed as relevant.(c) Comment on a management suggestion that the production and

sale of one of the products should not proceed in the period ending 31st March.

(c) Additional information is gathered for the period ending 31st March as follows:(i) The making process consists of two consecutive activities, mounding and

trimming. The moulding variable conversion costs are incurred in proportion to the temperature required in the moulds. The variable trimming conversion costs are incurred in proportion to the time required for each product. Packing materials (which are part of the variable packing cost) requirement depends on the complexity of packing specified for each product.

(ii) The proportions of product specific conversion costs (variable and fixed) are analysed as follows:

Making Process: moulding (60%); trimming (40%)Packing process; conversion (70%); packing material (30%)(iii) An investigation into the effect of the cost drivers on costs has indicated that

the proportions in which the total product specific conversion costs are attributable to VG4U and VG2 are as follows:

VG4U VGTemperature (moulding) 2 1Material consistency (trimming) 2 5Time (packing) 3 2

Packing (complexity) 1 3(iv) Company fixed costs is apportioned to products at an overall average rate per

product unit based on the estimated figures.Required:Calculate amended unit costs for each product where activity based costing is used and company fixed costs are apportioned as detailed above.

Comment on the relevance of the amended unit costs in evaluating the management suggestion that one of the products be discontinued in the period ending 31March.

Management wish to achieve an overall net profit margin of 15% on sales in the period ending 31 March in order to meet return on capital targets.Required:-Explain how target costing may be used in achieving the required return and suggest specific areas of investigation.---------------------------------------------------------------------------------------------------------------------

By:-Sanjay

Aggarwal F.C.A.,

I.C.W.A.