(Total 25 Marks) Question No. 02

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1 UNIVERSITY OF KELANIYA Faculty of Commerce and Management Studies Bachelor of Business Management (Special) Degree in Accountancy Examinations June/July /2014 Academic year Year I First Semester BACC Cost Accounting No. of Questions 05 (Five) Answer any 04 (Four) questions Time: 2 (Two) Hours Question No. 01 I. Success of any manufacturing organization is dependent upon an efficient production plan. One of the key essential of a production plan is material and production planning system. Materials planning plays a pivotal role in production department in the organization. (a) Discuss the above statement by elaborate the significance of material planning for a manufacturing company. (b) Discuss the essential requirements of the material planning of an organization. Milkshake Ltd purchases 800,000 liters of a material each year from a single supplier. At the moment, the company obtains the material in batch sizes of 40,000 liters. The material costs Rs.10/- per liter; the cost of ordering a new batch from the supplier is Rs. 24/- and the cost of holding one liter in stock, due to certain technical difficulties, is Rs.4/- per annum plus an interest cost equal to 10% of the purchase price of the material. You are required to: (a) Determine the most appropriate order quantity for the Milkshake Ltd. (b) State why you are recommending the above (a) order quantity for Milkshake Ltd (you are advice to show necessary calculations for this recommendation)? (06 Marks) (c) Purchasing manager of the company always focus on increase the order quantity in order to save ordering cost and to avoid running out of stock. But finance manager is against with purchasing manager s view and he argue that the order quantity should be optimum order quantity but not more than that. Comment on these managers views. Question No. 02 I. Different organizations use different wage system as per their nature of the business. Comment with merits and demerits of different wage systems. ABC manufacturing limited has an individual incentive scheme to improve the efficiency of workers. Workers of the company are paid incentive bonus in addition to their normal wages at hourly rates. Incentive bonus is calculated in proportion of time taken to time allowed of the time saved. The following details are made available in respect of employees Page 1 of 5

2 in different departments of the company, namely Amal, Kamal and Sumal for the last month. Worker Amal Kamal Sumal Normal Wages per hour (Rs.) Completed Units of Production Time allowed per unit 20 Minutes 20 Minutes 20 Minuets Actual Time Taken(Hours) You are required to work out for each employee; (a) (b) The amount of bonus earned under Halsey-Weir and Rowan incentive plan. The total amount of wages earned by each worker. (06 Marks) VI. Geel Ltd is a company that manufacturing technical equipment, it has three production departments (Assembly, Machining and Finishing) and two services departments (Stores and Canteen). The Overhead costs of the company have been budgeted as follows together with other relevant information: Total Assembly Machining Finishing Stores Canteen Allocated costs: Indirect Expenses 55,300 49,600 29,400 15,300 9,500 Indirect Materials 5,300 4,100 3,600 2,900 3,000 Unallocated costs: Indirect Labour Rs. 200,000 Rent and Rates Rs.100,000 Power Rs.200,000 Insurance of buildings Rs. 50,000 Depreciation of Rs.140,000 Machines Other information: Floor area (metres) 30,000 30,000 20,000 10,000 10,000 Horse power Plant and Machine at 200, ,000 80,000-20,000 cost (Rs) Building costs (Rs) 200, , ,000 50,000 50,000 Number of employees Direct labour hours 300, ,000 50,000 Machine Hours 100, ,000 20,000 Stores requisitions 20% 40% 30% - 10% Canteen costs 40% 20% 20% 20% - Page 2 of 5

3 You are required to: a. Calculate the charge for overhead to each of the three production departments, including the amounts reapportioned from the two service departments, using repeated distribution method. (12 Marks) b. Calculate the overhead rate for each of the production cost centres. Assume that the Machining Department is based on machine hours and the Assembly and Finishing Departments on direct labour hours. (03 Marks) Question No. 03 I. Cost accountants and decision-makers need to extend their thinking beyond the conventional costing models when applying the Activity Based Costing (ABC) since it facilitate for the decision making of the company. Explain how ABC facilitate for the company decision making. Brocken Limited produces three different vacuum cleaners. These are coded BR1, BR2 and BR3. The following budget data has been obtained for the year ended 31st December BR1 BR2 BR3 Direct Material Cost per Unit (Rs.) 2,500 2,000 1,800 Direct Labour Hours per Unit Direct wages per Unit (Rs.) Machine Hours Per Unit Production Quantity 40,000 25,000 10,000 Number of Production batches Number of Component Orders Number of Sales Orders Budgeted production overheads for the year are: Activity Rs. Inspection 1,700,000 Machining Cost 9,300,000 Material Handling 3,300,000 Packing 1,950,000 Setup Costs 1,830,000 At present the company absorbs production overhead costs to products by using a rate per machine hour for machine costs and a rate per direct labour hour for the remaining overheads. Brocken Limited intends to introduce a system of activity-based costing. Cost drivers for the production overheads have been identified as follows: Activity Inspection Machining Material Handling Packing Setup Costs Cost Driver Production batches Machine hours Component orders Sales orders Production batches Page 3 of 5

4 You are required to: i. Calculate the unit costs for each product using absorption costing. ii. Calculate the unit costs for each product using Activity Based Costing. iii. Compare the unit costs provided by each costing system and comment on their impact if selling prices were BR1 Rs. 3,000/- BR2 Rs. 2,700/- and BR3 Rs. 2,500/-per unit. (20 Marks) Question No. 04 I. Cost Accounting and Financial Accounting are different branches of Accounting. Discuss the I differences between cost accounting and financial accounting. In Process costing, unlike normal loss, abnormal loss is not absorbed by good production; rather it is transferred to costing profit and loss account. Comment on this statement. SG Limited is a chemical production company, which carries on the production operations in two processes, namely, CRA and REF. Losses takes place at the start of the processing. The particulars for May 2015 for the process CRA are as follows. Opening work-in-progress 1,500 units Rs. 7,500 Degree of completion Material - 100% Labour and Overhead 33 1/3% Input Materials 18,500 units Rs. 52,000 Direct Labour Rs. 14,000 Overheads Rs. 28,000 Closing working-in-progress 5,000units Degree of completion Material - 90% Labour and Overhead 30% Normal process loss is 10% of total inputs. All units scrapped can be sold at Rs. 2/- per unit. Total units transferred to REF is 15,000. You are required to i. Prepare statement of production, cost and evaluation ii. Prepare Process CRA account with other relevant accounts. (15 Marks) Question No. 05 I. Critically evaluate how far Cost Volume Profit (CVP) analysis can be used for making business decision practically. Page 4 of 5 Alpha limited company has produced electrical equipment. The following estimates are relevant to the next year. Expected Sales in Units 61,000 Units Expected Sales Amount Rs. 12, 81,000 Variable Costs Rs. 13 per unit, Fixed Expenses Rs. 360,000

5 I You are required to: (a) Find the break-even point and margin of safety in units and rupee value. (b) Determine the required number of units of sales in order to earn Rs desirable profit. (c) Calculate the revised P/V ratio, break-even point and margin of safety in each of the following conditions: 1) decrease of selling price by15%, 2) increase of variable costs by 15%, 3) increase of sales volume by 5,000 units: 4) increase of fixed costs by Rs.32,000. (12 Marks) Beta limited is producing and providing three components of computers, C1, C2 and C3 for computer hardware industry. The cost, price and other relevant details for the next year are given below. Product C1 C2 C3 Selling price per component( in Units) (Rs.) 2,400 1,600 1,200 Estimated Sales /Demand ( in Units) Minimum 1,000 1,000 1,000 Maximum 2,000 2,500 3,000 Required Direct Material in Units (DM1) Cost per Unit of DM1 (Rs.) Required Machine Hours per component/unit Other Variable Cost per component/unit (Rs) Required No. of Labour Hours per component /unit Cost per Labour hour(rs) Total Fixed Costs(Rs.) 1,500,000 You are required to determine optimal product mix, a. If maximum supply of DM1 is units per year. b. If maximum available labour hours are per year, c. If maximum machine capacity is machine hours per year, (09 Marks) Page 5 of 5