ADVANCED MANAGEMENT ACCOUNTING PART (A) COSTING

ADVANCED MANAGEMENT ACCOUNTING PART (A) COSTING Name of the Topic Page No 1 Developments in the business environment 01-16 A Total Quality Management 02-04 B Target 05-06 C Activity Based 07-11 D Just In Time 12-14 E Theory of Constraints 15 F Life Cycle 16 2 Decision Making Using Cost Concepts and CVP Analysis 17-28 3 Pricing Decision A External Pricing Policy 29-31 B Pareto Analysis 32 4 Budget & Budgetary Control 33-35 5 Standard 36-44 6 of Service Sector 45-49 7 Transfer Pricing Policy (Internal Pricing Policy) 50-55 8 Uniform and Inter-firm Comparison 9 Cost Sheet, Profitability Analysis and Reporting 56-60 1

Table Showing Marks of Past Examination Questions Year Practical Theory Year Practical Theory 2006 May 16 Marks 20 Marks 2011 May 17 Marks 13 Marks 2006 Nov. 20 Marks 2011 Nov. 8 Marks 13 Marks 2007 May 14 Marks 2012 May 14 Marks 2007 Nov. 28 Marks 2012 Nov. 10 Marks 16 Marks 2008 May 11 Marks 2013 May 16 Marks 4 Marks 2008 Nov. 9 Marks 11 Marks 2013 Nov. 8 Marks 8 Marks 2009 May 12 Marks 9 Marks 2014 May 13 Marks 4 Marks 2009 Nov. 10 Marks 12 Marks 2014 Nov. 10 Marks 8 Marks 2010 May 12 Marks 9 Marks 2015 May 16 Marks 8 Marks 2010 Nov. 16 Marks 8 Marks 2015 Nov. 2

Q.-1. Carlon Ltd. makes and sells a single product: the unit specifications are as follows: Direct Materials X : 8sq. metre at Rs.40 per spare metre Machine Time : 0.6 Running hours Machine cost per gross hour : Rs.400 Selling price : Rs.1,000 Carlon Ltd. requires to fulfill orders for 5,000 product units per period. There are no stock of product units at the beginning or end of the period under review. The stock level of material X remains unchanged throughout the period. Carlon Ltd. is planning to implement a Quality Management Programme (QPM). The following additional information regarding costs and revenues are given as of now and after implementation of Quality Management Programme. Before the implementation of QMP 1. 5% of incoming material from suppliers scrapped due to poor receipt and storage organisation. 2. 4% of material X input to the machine process in wasted due to processing problems. 3. Inspection and storage of Material X costs Re.1 per square metre purchased. 4. Inspection during the production cycle, calibration checks on inspection equipment vendor rating After the implementation 1. Reduced to 3%. 2. Reduced to 2.5% 3. No change in the unit rate 4. Reduction of 40% of the existing cost. 3

and other checks cost Rs.2,50,000 per period 5. Production Qty. is increased to allow for the downgrading of 12.5% of the production units at the final inspection stage. Downgraded units are sold as seconds at a discount of 30% of the standard selling price. 6. Production Quantity is increased to allow for return from customers (these are replaced free of charge) due to specification failure and account for 5% of units actually delivered to customer. 7. Product liability and other claims by customers is estimated at 3% of sales revenue from standard product sale. 8. Machine idle time is 20% of Gross machine hrs used (i.e. running hour = 80% of gross/hrs.). 9. Sundry costs of Administration, Selling and Distribution total 10. Rs.6,00,000 per period. Prevention programme costs Rs.2,00,000 5. Reduction to 7.5% 6. Reduction to 2.5% 7. Reduction to 1% 8. Reduction to 12.5% 9. Reduction by 10% of the existing. 10. Increase to Rs.6,00,000 The Total Quality management Programme will have a reduction in Machine Run Time required per product unit to 0.5 hr. Required (a) Prepare summaries showing the calculation of (i) Total production units (pre inspection), (ii) Purchase of Materials X (square metres), (iii) Gross Machine Hours. In each case, the figures are required for the situation both before and after the implementation of the Quality Management Programme so that orders for 5,000 product units can be fulfilled. (b) Prepare Profit and Loss Account for Carlon Ltd. for the period showing the profit earned both before and after the implementation of the Total Quality Programme. 4

(May 2005) Q.-2. Asha Road Carriers is a transporting company that transports goods from one place to another. It measures quality of service in terms of: (i) Time required to transport goods. (ii) On-time delivery (iii) Number of lost or damaged cartons. To improve its business prospects and performance the company is seriously considering to install a scheduling and tacking system, which involves an annual outlay of Rs.1,50,000 besides equipments costing Rs.2,00,000 needed for installation of the system. The company proposes to utilize the proceeds of the fixed deposit maturing next month of purchase the equipment. The rate of interest at present on deposit is 10%. The company furnishes the following information about its present and anticipated future performance: Current Expected On-time delivery 85% 95% Variable costs per carton lost or damaged Rs.50 Rs.50 Fixed costs per carton lost Rs.30 Rs.30 Number of cartons lost or damaged 3,000 1,000 The company expects that each per cent point increase in on-time performance will result in revenue increase of Rs.18,000 per annum. Contribution margin of 45% is required. Should Asha Road Carriers acquire and install the new system? Q.-3. A company manufactures a single product, which requires two components. The company purchases one of the components from two suppliers: X Limited and Y Limited. The price quoted by X Limited is Rs.180 per hundred units of the component and it is found that on an average 3 per cent of the total receipt from this suppliers is defective. The corresponding quotation from Y Limited is Rs.174 per hundred units, but the defective would go up to 5 per cent. If the defectives are not detected, they are utilized in production causing a damage of Rs.180 per 100 units of the component. The company intends to introduce a system of inspection for the components on receipt. The inspection cost is estimated at Rs.24 per 100 units of the component. Such an inspection will be able to detect only 90 per cent of the defective components received. No payment will be made for components found to be defective in inspection. 5

Required: (i) Advise whether inspection at the point of receipt is justified? (ii) Which of the two suppliers should be asked to supply? (Assume total requirement is 10,000 units of the component). Q.-4. Businessman employees 20 swing machinists, but he is aware that ten are the better workers than others. He is considering to conduct a training programme for his ten less efficient mechanists to increase their efficiency to be equal to that achieved by better workers. Relevant data are as follows: There is one sewing machine for each machinist. All the machinists are engaged on similar work are paid Rs2.20 each good garment produced on piece work system. To rectify each rejected garment costs Rs4, this work is done by subcontractor. Garment machining department operates 2,000 hours a year. Average output of per machinist (on the basis of all 20 machinists) is 12 good garments with one rejected per worker per hour. However 10 less efficient machinists averages only 10 good garments with 1.5 rejected per worker per hour. Depreciation of each sewing machine is Rs10,000 per year and the variable cost of power, clearing and preventive maintenance is Rs.5 per hour per machine. Fixed production overhead other than depreciation is Rs.20 per machine hour. Selling price per garment is Rs.18 Direct material cost per garment is Rs.12 Training will not reduce productive hours There is no problem in selling increased output. You are required (a)to prepare a statement of comparative costs for the better worker and the less efficient workers excluding materials costs. (b)to find out the benefit derived over a one year period, if Rs.1,00,000 is spent on a training course for the less efficient workers to match the efficiency with the better workers. (Nov. 2005) Q.-1. MJE Ltd appointed to you for computing the target costs and the total cost reduction targets from the following information. 6

Particular M J E Expected market price Rs. 8000 Rs. 6800 Rs. 420 Required return on sales 37% 20% 25% Current feasible cost Rs.6000 Rs. 5200 Rs. 350 Total expected sales units 4000 18,000 2,00,000 Q.-2. MJS manufactures one brand of personal computers called Samsung Following is the profitability statement for Samsung personal computer. Particulars Per Unit Rs. Per Unit Rs. Revenues 2000 Cost of Goods sold: Direct Materials Cost 920 Direct Manufacturing labour Costs 128 Direct Machining costs (fixed) 152 Manufacturing Overheads cost 160 1360 R and D Costs 72 Design Cost of product and processes 80 Marketing Costs 200 Distribution Costs 48 Customer Service Costs 40 440 Full Product Costs 1800 Operating Income 200 Following further information has been provided:- (1) No opening or closing inventory. (2) Manufacturing Overhead Cost = Ordering and Receiving cost + Testing and Inspection Cost + Rework Cost (3) MJE expects its competitors to lower the prices of PCs that compete against Samsung by 15%. MJS s management believes that it must respond aggressively by reducing Samsung price by 20% 7

(4) Production Qty. 1,50,000 units. Required: (a) Compute the target cost? (b) Compute difference between target and allocable cost? Q.-3. (A) Compute the target cost and cost reduction target for kidney replacement surgeries. A Hospital is a service organization that specializes in the kidney replacement surgery. Consider the following information for a kidney replacement surgery: Expected charge / reimbursement (sales price) Rs. 84,000 Required return on charges (return on sales) 20% Current average cost per Kidney replacement Rs.79,600 (B) A cross-functional team of administrators, surgeons, nurses, and support personnel analyzed the hospital s kidney-replacement procedure and estimated that, through better scheduling and post-operative care, hospital stays could be reduced from an average of 8 days to 4 days, with no loss of quality of care improvements in procedure could result in a reduction of the average cost of a kidney replacement by Rs. 15,000 if this were accomplished, what would be the expected return on charges for a kidney replacement? Q.-4. A company has the capacity of production of 80,000 units and presently sells 20,000 units at Rs. 100 each. The demand is sensitive to selling price and it has been observed that every reduction of Rs. 10 in selling price the demand is doubled. What should be the target cost at full capacity if profit margin on sale is taken as 25%? What should be the cost reduction scheme if at present 40% of cost is variable with same % of profit? If Rate of Returned is 15%, what will be maximum investment at full capacity? Q.-5. Sterling Enterprises has prepared a draft budget for the next year as follows: Rs. Rs. Sales price per unit 30 Variable cost per unit: Direct Materials 8 Direct Labour (2 hours x Rs. 3) 6 8

Variable overheads (2 hours x Rs. 0.50) 1 (15) Contribution per unit 15 Budgeted contribution (10,000 Units x 15) 1,50,000 Budgeted fixed costs (1,40,000) Budgeted Profit 10,000 The board of Directors is dissatisfied with this budget, and asks a working party to come up with an alternate budget with a higher profit figures. The working party reports back with the following suggestions, which will lead to a budgeted profit of Rs. 25,000. The company should spend Rs. 28,500 on advertising and put the sales price up to Rs. 32 per unit. It is expected that the sales volume would also rise, in spite of the price increase, to 12,000 units. In order to achieve the extra production capacity, however, the work force must be able to reduce the time taken to make each unit of the product. It is proposed to offer a pay and productivity deal, in which the wage rate per hour is increased to Rs. 4. The hourly rate for variable overhead will be unaffected. Ascertain the target labour time required per unit to achieve the target profit Q.-1. MJ Ltd. manufactures four products namely A, B, C, and D using the same plant and process. The following information relates to a production period: A B C D Output in units 720 600 480 504 Cost per unit Rs. Rs. Rs. Rs. Direct Material 42 45 40 48 Direct Labour 10 9 7 8 Machine hours per unit 4 3 2 1 9

The four products are similar and are usually produced in production runs of 24 units and sold in batches of 12 units. Using machine hour rate currently absorbs the production overhead. The total overheads incurred by the company for the period is as follows: Machine operation and Maintenance cost 63,000 Setup costs 20,000 Store receiving 15,000 Inspection 10,000 Materials handling and dispatch 2,592 Rs. During the period the following cost drivers are to be used for the overhead cost. Cost Setup cost Store receiving Inspection Materials handling and dispatch Cost driver No of production run Requisition raised No. of production run order executed It is also determine that: Machine operation and maintenance cost should be apportioned between setup cost, store receiving and inspection activity in 4:3:2. Number of requisition raised on store is 50 for each product and the no. of order executed is 192 each other being for a batch of 12 of a product. Required: (I) Calculate the total cost of each product, if all overhead costs are absorbed on machine hour rate basis. (II) Calculate the total cost of each product using activity base costing. (III) Comment briefly on differences disclosed between overhead traced by present System and those traced by activity base costing. (Nov 2004) Q.-2. A Company manufactures several products of varying levels of designs and models. It uses a single overhead recovery rate based on direct labour hours. The overheads incurred by the company in the first half of the year are as under: 10

Rs. Machine operation expenses 10,12,500 Machine maintenance expenses 1,87,500 Salaries of technical staff 6,37,500 Wages and salaries of stores staff 2,62,500 During this period, the company introduced activity based costing system and the following significant activities were identified. - receiving materials and components - set up of machines for production runs - quality inspection It is also determined that: - The machine operation and machine maintenance expenses should be apportioned between stores and production activity in 20:80 ratios. - The technical staff salaries should be apportioned between machine maintenance, set up and quality inspection in 30:40:30 ratios. The consumption of activities during the period under review is as under: Direct labour hours worked 40,000 Production set ups 2,040 Material and component consignments received from suppliers 1,960 Number of quality inspections carries out 1,280 Direct wage rate Rs. 6 per hour The data relating to two products manufactured by the company during the period are as under: Particular P Q D.M. Cost Rs. 6,000 4,000 D.L. Hours 960 100 D.M. Consignments Received 48 52 11

Production runs 36 24 No. of quality inspection done 30 10 Quantity Produced (units) 15,000 5,000 A potential customer has approached the company for the supply of 24,000 units of a component K to be delivered in lots of 3,000 units per quarter. The job will involve initial design costs of Rs. 60,000 and the manufacture will involve the following per quarter. D.M. cost Rs. 12,000 D.L. Hours 300 Production runs 6 No. of consignment of direct materials to be received 20 Inspections 24 The company desires a markup of 25% on cost. Required (i)calculate the cost of products P and Q based on the existing system of single overhead recovery rate. (ii) Determine the cost of product P and Q using activity based costing system. (iii) Compute the sales value per quarter of component K using activity based costing system. (May 2003) Q.-3. ABC electronics make audio player model AB 100. It has 80 components. ABC sells 10,000 units each month at Rs. 3,000 per unit. The cost of manufacturing is Rs. 2,000 per unit or Rs. 200 lakhs per month for the production of 10,000 units. Monthly manufacturing costs incurred are as follows: (Rs. in lakhs) D.M. Cost 100.00 Direct manufacturing labour cost 20.00 Machining cost 20.00 Testing cost 25.00 Rework cost 15.00 12

Ordering cost 0.20 Engineering Costs 19.80 200.00 Labour is paid on piece rate basis. Therefore, ABC considers direct manufacturing labour cost as variable cost. The following additional information is available for AB 100. (i) Testing and inspection time per unit is 2 hours. (ii) 10 per cent of AB 100 manufactured is reworked. (iii) It currently takes 1 hour to manufacture each unit of AB 100. (iv) ABC places two orders per month for each component, each component being supplied by a different supplier. ABC has identified activity cost pools and cost drivers for each activity. The cost per unit of the cost driver for each activity cost pool is as follows: Manufacturing Description of Activity activity 1. Machining costs Machining Components 2. Testing costs Testing component and finished products. (Each unit of AB 100 is tested individually) 3. Rework costs Correcting and fixing Errors and defects 4. Ordering costs Ordering of Component 5.Engineering Designing and costs Managing of products and Cost driver Machine hours of capacity Testing hours Units reworked Number of orders Cost per unit of cost driver Rs.200 Rs.125 Rs.1500 Rs.125 Engineering hours Rs. 198 processes Over a long run horizon, each of the overhead costs described above vary with chosen cost driver. In response to competitive pressure ABC must reduce the price of its product to Rs. 2,600 and to reduce the cost by at least Rs. 400 per unit. ABC does not anticipate increase in sales due to price reduction. However, if it does not reduce price it will not be able to maintain the current sales level. Cost reduction on the existing model is almost impossible. Therefore, ABC had decided to replace AB 100 by a new model AB 200, which is modified version of AB 100. The expected effects of design modifications are as follows: The number if components will be reduced to 50. 13

Direct material costs to be lower by Rs. 200 per unit. Direct manufacturing labour costs to be below by Rs. 20 per unit. Machining time required to be lower by 20 per cent. Testing time required to be lower by 20 per cent. Rework to decline to 5 per cent. Machining capacity and engineering hours capacity to remain the same. ABC currently out sources the rework on defective units. Required: Compare the manufacturing cost per unit of AB 100 and AB 200. Q.-4. Computo Ltd. manufactures two parts P and Q for Computer Industry. P: annual production and sales of 1,00,000 units at a selling price of Rs.100.05 per unit. Q: annual production and sales of 50,000 units at a selling price of Rs.150 per unit. Direct and Indirect costs incurred on these two parts are as follow. (Rs. in thousands) P Q Total Direct Material cost (variable) 4,200 3,000 7,200 Labour cost (variable) 1,500 1,000 2,500 Direct Machining cost (See Note)* 700 550 1,250 Indirect Costs: (Rs. in thousands) Machine set up cost 462 Testing cost 2,375 Engineering cost 2,250 16,037 Note: Direct machining costs represent the cost of machine capacity dedicated to the production of each product. These costs are fixed and are not expected to vary over the longrun horizon. Additional information is as follows: P Q Production Batch Size 1,000 units 500 units Set up time per batch 30 hours 36 hours 14

Testing time per unit 5 hours 9 hours Engineering cost incurred on each product 8.40 lacs 14.10 lacs A foreign competitor has introduced product very similar to P. To maintain the company s share and profit, Computo Ltd. has to reduce the price to Rs.86.25. The company calls for a meeting and comes up with a proposal to change design of product P. The expected effect of new design is as follows: Direct Material cost is expected to decrease by Rs.5 per unit. Labour cost is expected to decrease by Rs.2 per unit. Machine time is expected to decrease by 15 minutes; previously it took 3 hours to produce 1 unit of P. The machine will be dedicated to the production of new design. Set up time will be 28 hours for each set up. Time required for testing each unit will be reduced by 1 hour. Engineering cost and batch size will be unchanged. Required: (a) Company management identifies that cost driver for Machine set-up costs is set up hours used in batch setting and for testing costs is testing time. Engineering costs are assigned to products by special study. Calculate the full cost per unit for P and Q using Activity-based costing. (b) What is the Mark-up on full cost per unit of P? (c) What is the Target cost per unit for new design to maintain the same mark up percentage on full cost per unit as it had earlier? Assume cost per unit of cost drivers for the new design remains unchanged. (d) Will the new design achieve the cost reduction target? (16 Marks) (May 2006) 15

Q.-1. ABC manufacture of battery operated cars for children, has decided to establish an Electronic Data interchange hook-up to V firm (supplier of batteries) ABC will trigger a purchase order for batteries by a single computer entry. Computer programs will match receiving documents with purchase orders. Payments will be made electronically for batches of deliveries rather than for each individual delivery. These changes make ordering costs negligible (current ordering costs are Rs. 400 per order). ABC is negotiating to have V deliver 130 packages of batteries 100 times a year. V agrees, however in return charges a premium of Rs.1 to the price per package. (Current purchasing price is Rs. 138). The relevant annual carrying cost of insurance, material handling and breakage and so on will be Rs. 50 per unit if JIT purchasing is adopted. The current annual carrying cost is Rs. 41.6 per annum. ABC incurs no stock out costs under the current purchasing system because both demand and purchase provide for sufficient lead time. However there is a threat of stock out if JIT purchasing policy is followed. V has installed a new manufacturing process which enables it respond rapidly to the changing demand patterns. Despite this ABC is expecting a stock out costs on 100 battery packages each year if JIT purchasing is adopted. In the event of stock out, ABC will be able to obtain the supplies only at a premium of Rs. 25 per package. Unit = 1 package consisting of two batteries Each unit of the final product requires one battery package. Required : 16

(1) Calculate EOQ under the current system (2) Calculate EOQ if JIT is adopted (3) Should the JIT System be implemented? Q.-2. L & C Manufacture fairly similar remote-controlled toy cars. K a retailer of children s toys; expects to buy and sell 4000 of these cars each year. Both L and C individually meet the entire demand of K and K prefers to use only one supplier. Besides it needs the toy cars to be delivered in lots of 100 resulting in 40 deliveries in a year. Following Cost information has been obtained: 1) An electronic hook-up will make ordering costs negligible for either supplier. 2) L has quoted a price of Rs. 2000 whereas C has quoted a price of Rs. 1960. 3) Purchase from L will lead to an inspection cost of Rs. 400 per delivery and that from C will lead to an inspection cost of Rs. 560 per deliver. 4) Relevant incremental carrying costs of insurance, materials handling, breakage, etc. per toy car is expected to be Rs. 220 per year in the case of L and Rs.200 per year in the case of C. 5) Late deliveries in the case of L will lead to a stock out of 40 cars per year at an expected stock out cost of Rs. 500 per toy car. The same in the case of C is expected to be 300 cars at a stock out cost of Rs. 520 per car. 6) Expected number of cars sold that will be returned owing to quality and other problems: L 160 cars and C 280 cars. Additional costs to K of handling each returned car us expected to be Rs. 420 irrespective of the supplier. 7) K s rate of return on inventory is 15% per annum. Which supplier should K choose? Q.-3. X Video Company sells package of blank video tape to its customer. It purchase video tapes from Y Tape Company @ Rs140 a packet. Y Tape Company pays all freight to X Video Company. No incoming inspection is necessary because Y Tape Company has a superb reputation for delivery of quality merchandise. Annual demand of X Video Company is 13,000 packages. X Video Co. requires 15% annual return on investment. The purchase order lead time is two weeks. The purchase order is passed through Internet and it costs Rs2 per order. The relevant insurance, material handling etc Rs3.10 per package per year. X Video Company has to decide whether or not to shift to JIT purchasing. Y Tape Company agrees to deliver 100 packages of video tapes 130 times per year (5 times every two weeks) instead of existing delivery system of 1,000 packages 13 times a year with additional amount of Rs.0.02 per package. X Video Co. incurs no stock out under its current purchasing policy. It is estimated X Video Co. incurs stock out cost on 50 video tape packages under a JIT Purchasing policy. In the event of a stock out, X Video Co. has to rush order tape packages which costs Rs.4 per package. Comment whether X Video Company should implement JIT Purchasing system. Z Co. also supplies video tapes. It agrees to supply @ Rs.13.60 per package under JIT Delivery system. If video tape purchased from Z Co., relevant carrying cost would be Rs 3 per package against Rs 3.10 in case of purchasing from Y Tape Co. However Z Co. doesn t 17

enjoy so sterling a reputation for quality. X Video Co. anticipates following negative aspects of purchasing tapes from Z Co. - To incur additional inspection cost of 5 paisa per package. - Average stock out of 360 tapes packages per year would occur, largely resulting from late deliveries. Z co. cannot rush order at short notice. X video co. anticipates lost contribution margin per package of Rs. 8 from stock out. - Customer would likely return 2% of all packages due to poor quality of the tape and to handle this return a additional cost of Rs. 25 per package. Comment whether X Video Co. places order to Z co. (Nov. 2005 12 Marks) Q.-4. MVS Enterprises has decided to adopt JIT policy for materials. The following effects of JIT policy are identified:- 1. To implement JIT, the company has to modify its production and material receipt facilities at a capital cost of Rs.12,00,000. 2. The new facilities will require a cash operating cost Rs.96,000 p.a. 3. Raw Materials stockholding will be reduced from Rs.56,00,000 to Rs.16,00,000. 4. The company earns 15% on its long term investment. 5. The company can avoid rental expenditure on storage facilities amounting to Rs.60,000 p.a. 6. Property taxes and insurance amounting to Rs.24,000 will be saved due to JIT programmed. 7. Presently there are 28 workers in the stores department at a salary of Rs.1,500 each per month. After implementing JIT scheme, only 8 worker will be required in this department. Of the balance 20 worker, 12 will be transferred to other departments, while 8 workers employment will be terminated. 8. Due to receipts of smaller lots of Raw Materials, there will be some disruption of production. The cost of stock out will be Rs.6,80,000 in the first year only. This stock out cost can be brought down from the second year onwards. Determine the financial impact of the JIT policy. Is it advisable for the company to implement JIT system? 18

Q.-1. Z ltd. Produce three products using three different machines. The following information is available for a period. Production P Q R Contribution 2400 2000 1200 (Sales Material) Machine Hours Per Unit Machine X 6 2 1 Machine Y 12 4 2 Machine Z 18 6 3 Estimated Sales Demand 100 100 100 Machine capacity is limited to 1600 hours for each Machine. 19

You are required to find out: 1) Identify the bottleneck activity and allocate the machine time. 2) Find out spare capacity in Non-bottleneck activity. 3) Compute Through put accounting ratio, if total factory cost are Rs. 3,20,000 for the period. Q.-1. B Ltd launches a deluxe type walkman in the market. The market research study reveals that a market size of 20,000 units per month of such products exists. 20

The variable cost per unit is Rs. 640 and the total fixed overhead is Rs. 20,00,000 per month. The selling price is 125% of the variable cost. The company adopts a policy of penetrating pricing. The demand for the walkman per month is given by the equation Q 1 = 2000 t 1 50t 2 1 where Q is the demand in units and t is the time in months from its introduction in the market. When 50 % of the market has been penetrated, the company changes its pricing policy to 150% of the variable cost for the subsequent months, till it captures the whole market. The profit earned during the maturity stage is Rs. 33.0 crores. A competitor W ltd then is likely to enter the market with a people s brand walkman having a demand function of Q 2 = 2,500 t 2 30 t 2 2 when people is introduced, the demand in the market rises to 21,500 units per month. Deluxe s price is reduced to Rs. 880 to combat the price of people at Rs. 880 each. When people are introduced, the demand of deluxe declines, the total market demands remaining the same. When the sale of deluxe drops around 1500 units per month, B ltd. discards the product. Determine: 1. The product life cycle of deluxe; 2. Total contribution earned by deluxe; 3. Total Sales of deluxe. 21

Table Showing Marks of Past Examination Questions Year Practical Theory Year Practical Theory 2006 May 33 Marks 12 Marks 2011 May 25 Marks 2006 Nov. 27 Marks 2011 Nov. 16 Marks 2007 May 31 Marks 2012 May 42 Marks 2007 Nov. 43 Marks 2012 Nov. 5 Marks 4 Marks 2008 May 12 Marks 13 Marks 2013 May 22 Marks 2008 Nov. 18 Marks 2013 Nov. 22 Marks 4 Marks 2009 May 25 Marks 4 Marks 2014 May 43 Marks 2009 Nov. 18 Marks 2014 Nov. 8 Marks 4 Marks 2010 May 18 Marks 2015 May 21 Marks 2010 Nov. 33 Marks 2015 Nov. Q.-1. Your company has a production capacity of 2,00,000 units per year. Normal capacity utilization is reckoned as 90%. Standard variable production costs are Rs. 11 per unit. The fixed costs are budgeted at Rs. 3,60,000/- per year. Variable selling costs are Rs. 3 per unit and fixed selling costs are Rs. 2,70,000 per year. The unit selling price is Rs. 20. In the year just ended on 31 st March 2011, the production was 1,60,000 units and sales were 1,50,000/- units. The Closing inventory on 31-03-2011 was 20,000 units. The actual variable production costs for the year were Rs. 35,000 higher than the standard. The actual fixed production overheads incurred were Rs. 3,80,000/- for the year. i) Calculate the profit for the year: (a) by absorption costing method, and (b) by marginal costing method. ii) Explain the difference in the profits. Q.-2. JB Company has been so far producing & selling following three products. Information about selling price & the cost is given below. Particular X Y Z 22

Selling Price 14 16.00 13.00 Material 5 10.00 2.00 Labour 2 1.00 3.00 V. Overheads 1 0.50 1.50 F. Overheads 5 2.50 7.50 Net profit/(loss) 1 2.00 (1.00) The company at present has been producing 5000 units of X, 8000 units of Y & 1000 Units of Z. As product Z has been consistently fetching sizeable amount of loss only, the company virtually is putting no worth nothing effort to argument the sales of the same. In fact it is seriously thinking of dropping this product. The fixed overhead in all amount to Rs. 52500/- p.a. & they are apportioned to three products on the basis of labour cost. You are required to state profit implications of dropping product Z. Q.-3. A firm can produce 3 different products from the same raw material using the same production facilities. The requisite labour is available in plenty at Rs.8/- per hour for all products. The supply of raw materials, which is imported at Rs.8/- per kg is limited to 10,400 kgs. for the budget period. The variable overheads are Rs.5.60/- per hours. The fix overheads are Rs.40,000. The selling commission is 10% on sales. (A) From the following information, you are required to suggest the most suitable sales mix, which will maximize the firm s profits. Also determine the profit that will be earned at that level: Product A B C Market Demand (units) 8,000 6,000 5,000 Selling Price per unit 30 40 50 Labour hours require per unit 1 2 1.50 Raw Material require per unit 0.70 0.40 1.50 (B) Assume, in above situation, if additional 4,500 Kg of raw materials is made for production, should the firm go in for further production, if it will result in additional fixed 23

overheads of Rs. 20,000 & 25% increase in the rates per hour for labour & variable overheads? Q.-4. Find the cost breakeven point between various pairs of plants. Machine Fixed Cost Per Annum (Rs) Variable Cost Per Unit (Rs.) A 5,00,000 10 B 8,00,000 8 C 7,00,000 6 Q.-5. PQR Limited. is manufacturing and selling two products:- Splash and Flash at selling prices of Rs.3 and Rs.4 respectively. The following sales strategy has been outlined for the year 2012. (i)sales planned for year will be Rs. 7.20 lakhs in the case of Splash and Rs. 3.50 lakhs in the case of Flash. (ii)to meet the competition, the selling price of Splash will be reduced by 20% and that of Flash by 12.5% (iii) Break-even is planned at 60% of the total sales of each product. (iv)profit for the year to be achieved is planned as Rs. 69,120 in the case of Splash and Rs. 17,500 in the case of Flash. This would be possible by launching a cost reduction programme and reducing the present annual fixed expenses of Rs. 1,35,000 allocated as Rs. 108,000 to Splash and Rs. 27,000 to Flash. You are required to present the proposal in financial terms giving clearly the following information:- (a) Number of units to be sold of Splash and Flash to break even as well as the total number of units of splash and Flash to be sold during the year. (b) Reduction in fixed expenses product-wise that is envisaged by the Cost Reduction Programme. Q.-6. The Particulars two plants producing an identical product with the same selling price are as under: Plant P Plant R Capacity utilization 70% 60% (Rs. In Lakhs ) (Rs. In Lakhs) Sales 150 90 24

Variable Costs 105 75 Fixed costs 30 20 In has been decided to merge Plant R with Plant P, the additional fixed expenses involved in the merger will amount to Rs. 2 lakhs p.a Required: a. Find the break even point Plant A and plant R before merger and the break-even point of merged plant. b. Find the capacity utilization of the integrated plant required to earn a profit of Rs. 18 lakhs. Q.-7. A toy manufacturing company is at present operating at the 80% capacity level, the production being 15,000 units per annum. The following relevant figures are obtained from the Company s budgets at different capacity utilization levels: Capacity utilization 80% 100% Sales 20,00,000 25,00,000 Variable overhead 2,25,000 2,50,000 Semi- variable overhead 1,05,000 1,11,000 Fixed overhead 4,00,000 4,70,000 Output in units 15,000 18,750 The management earns a profit margin of 10% on sales. You are required to work out the differential cost of producing the additional 3,750 units by increasing the capacity utilization level to 100% Q.-8. X Ltd. manufactures a semiconductor for which the cost and price structure is given below: Rs. per unit Selling price 500 Direct material 150 Direct labour 100 Variable overhead 50 25

Fixed cost is Rs.2 lakhs. The product is manufactured by a machine, whose spare part costing Rs.2,000 needs replacement after every 100 pieces of output. This is in addition to the above costs. Assume that no defectives are produced and that the spare part is readily available in the market at all times at Rs.2,000. (i)prepare the profitability statement for production levels of 2,000 units and 3,000 units (ii) What is the break-even point (BEP) for the above data? (Nov. 2006) Q.-9. Supreme Ltd., which manufactures the component EXCEL, has achieved a turnover of Rs.6,00,000 for the calendar year 2002. The Manger of the company has informed that the company has worked at a profit volume ratio of 25% and margin of safety of 20%. But he feels due to severe competition, the selling price is to be reduced to maintain the same volume of sales for the year 2003. He does not expect any change in variable costs. He expects that due to cost reduction programme, the profit volume ratio and margin of safety will be 20% and 30% respectively and considerable saving in Fixed cost for 2003. Even if the company prefers to shut down its operations for 2003, it expects to incur a minimum fixed cost of Rs.60,000. You are expected to: (i)present the comparative statement for the year 2002 and 2003 showing under marginal costing. (ii)what will be minimum sales required, if it decides to shut down its unit in 2003? (Nov 2006) Q.-10. The Management of M/S. J Ltd. has prepared the following estimates of working results for the year ending 31 st December 2016 for the purpose of preparing the budget for the year ending 31 st December 2016: Rupees Direct Materials Per unit 8.00 Direct wages Per unit 20.00 Variable overheads Per unit 6.00 Selling price Per unit 62.50 Fixed overheads Per annum Rs. 3,37,500.00 Sales Per annum Rs. 12,50,000.00 It is expected that during the year 2017, the material prices and variable overheads will go up by 10% and 5% respectively. As a result of reorganization of production methods, the 26

overall direct labour efficiency will increase by 12% but the wage rate will go up by 5%. The fixed overheads are expected to increase by Rs. 62,500/- The marketing manager states that market will not absorb any increase in the selling price. However, he is of the view that if advertisement expenditure is increased, the sales quantity will increase as under: Advertisement Expenses 40,00 97,000 1,60,000 2,30,000 0 Additional Units of sales 2,000 4,000 6,000 8,000 You are required to: Evaluate the four alternative proposals put forth by the marketing manager, determine the best output and sales level to be budgeted and prepare an overall income statement for 2017 at that level of output and sales: Q.-11. A company using a continuous manufacturing operation achieves an output of 3 kg. per hour. The selling price is Rs.450 per kg. The raw material cost is Rs.125 per kg. of output and the direct labour and variable overheads amount to Rs.316 per kgs. of output. The company has provided an expenditure of Rs.640 on maintenance and Rs.6,400 on breakdown repairs per month in its budget. Breakdowns averaging 300 hours per month occur due to mechanical faults. These could be reduced or eliminated, if additional maintenance on the following scale were undertaken: Breakdown Hours Maintenance Costs Repair Cost Rs. Rs. 0 20,480 0 60 10,240 1,920 120 5,120 2,560 180 2,560 3,840 240 1,280 5,120 300 640 6,400 Using the incremental cost and incremental revenue concept, you are required to: (i)determine the optimum level up to which breakdown can be reduced to increase production. (ii)calculate the additional profits obtainable at that level as compared to the present situation. Q.-12. A company has an opening stock of 6,000 units of output. The production planned for the current period is 24,000 units and expected sales for the current period amount to 28,000 units. The selling price per unit of output is Rs. 10 variable cost per unit is expected to be Rs. 6 per unit while it was only Rs. 5 per unit during the previous period. 27

What is the break even volume for the current period if the total fixed costs for the current period are Rs. 86,000? Assume that the first in first out system is followed. (Nov. 87) Q.-13. As a part of its rural upliftment programme, the Government has put under cultivation a farm of 96 hectares to grow tomatoes of four varieties: Royal Red, Golden Yellow, Juicy Crimson and Sunny Scarlet. Out of the total 68 hectares are suitable for all four varieties, but the remaining 28 hectares are suitable for growing only Golden Yellow & Juicy Crimson. Labour is available for all kinds of farm work and is no constraint. The market requirement is that all four varieties of tomatoes must be produced with a minimum of 1,000 boxes. The farmers engaged have decided that the area devoted to any crop should be in terms of complete hectares and not in fractions of a hectare. The other limitation is that not more than 22,750 boxes of any one variety should be produced. The following data are relevant: Varieties Royal Red Golden Yellow Juicy Crimson Sunny Scarlet Annual Yield Boxes per hectare 350 100 70 180 Cost Rs. Rs. Rs. Rs. Materials per hectare 476 216 196 312 Labour Growing per hectare 896 608 371 528 Harvesting and Packaging per box 3.60 3.28 4.40 5.20 Transport per box 5.20 5.20 4.00 9.60 Market price per box 15.38 15.87 18.38 22.27 Fixed overhead per annum: Rs. Growing 11,200 Harvesting 7,400 Transport 7,200 General Administration 10,200 Find Out: Find out the area to be cultivated within given constraints with each variety of tomatoes. If the largest total profit have to be achieved. The amount such profit in rupees. Q.-14. 28

K. Ltd. manufactures and sells a range of sport goods. Management is considering a proposal for an advertising campaign, which would cost the company Rs. 3,00,000. The marketing department has put forward the following two alternative sales budget for the following year. Products ( 000 unit) A B C D Budget 1 without advertisement 216 336 312 180 Budget 2 with advertisement 240 372 342 198 Selling prices and variable production costs are budget as follows: Products (Rs. per unit) A B C D Selling prices 11.94 14.34 27.54 23.94 Variable production costs Direct Material 5.04 6.60 15.24 12.48 Direct Labour 2.04 2.04 3.36 3.18 Variable Overheads 0.72 0.72 1.20 1.08 Other Data: (1) The variable overheads are absorbed on a machine hour basis at a rate of Rs. 1.20 per machine hour. (2) Fixed overheads total Rs. 30,84,000 per annum. (3) Production capacity during the budget period 8,15,000 machine hours. (4) Products A and C could be brought in at Rs. 10.68 per unit and Rs. 24 per unit respectively. Required: 1) Determine whether investment in the advertising campaign would be worthwhile and how production facilities would be best utilized. 2) Explain the assumptions and reasoning behind your advise Q.-15. P.W. Perfume Company manufactures various qualities of perfumes and colognes. One popular line of colognes includes three products that result from a joint production process. Below are data from the most recent month of production- Product Sales Quantity Joint Cost After Split Total Cost Price Cost off Evergreen Rs. 40 10,000 Rs.28 Rs.20 Rs.48 Morning Rs.100 6,000 Rs.28 Rs.40 Rs.68 Flower Evening Flower Rs.150 4,000 Rs.28 Rs.50 Rs.78 As the Controller you are called into the President s office with the Director of Marketing. The President says, I don t understand your product cost report. Either, we are selling our largest-volume product at a loss or the product cost data are all wrong. Now what is it? 29

Required: 1) Respond to the President s question. 2) Another Company has just introduced products that compete directly with Morning Flower. To compete successfully with the other Company s product, the price of Morning Flower cologne must be reduced to Rs.60. Should the Company do so and sell below cost? 3) If P.W. perfume Company has a policy of maintaining a gross margin of 20 percent on sales, what would your answer be in response to the price reduction in part (2)? 4) What is the minimum price for which Morning Flower can sell and still meet the 20 percent product gross margin for the group of products? (Nov. 2002) Q.-16. A Chemical Factory processes Raw Material R and produces three similar products P1, P2 and P3 out of a joint process. The joint costs of processing 5,000 kg of R are: Labour Rs.6,000 and Overheads Rs.2,000. Raw Material R is purchased at Rs.2.40 per kg. This rate is after a trade discount of 20% on list price. Normal Loss is estimated at 10% of input weight. The scrap generated from processing R is recovered to the extent of 25% (by weight) and sold as such in the market at Rs.4. The products P1, P2 and P3 can be sold at Rs.5.00, Rs.6.00 and Rs.6.50 per kg respectively without any further processing. However, Product P1 and P2 can also be further jointly processed at an additional cost of Rs.2 per kg of, input to get product J1. The further processing cost of J1 will be Re 1 per kg of output weight. Similarly, products P2 and P3 can be jointly processed to get a product J2 at an additional cost of Rs.5 per kg of input. The further processing cost of J2 will be Rs.2 per kg of output weight. The normal loss of processing J1 out of P1 and P2 will be 5% of input weight. No processing loss is expected on processing J2. The selling prices of J1 and J2 including the input composition is given below Input Output J1 Output J2 Output weight ratio P1 40% 3 P2 60% 50% 4 P3 50% 2 Price per kg Rs.10 Rs.12 1. Ascertain the profitability of processing P1, P2 and P3 from 5,000 kg of R assuming sale at split-off point. 2. Compute the profits after both J1 and J2 are further processed and marketed using P2 in the ratio of 3:2 for J1 and J2 respectively. Q.-17. The following information of a Company is available for the year 2006: Sales Rs. 40,000 Variable and Fixed Rs. 10,000 OH Raw Materials Rs. 20,000 Profit Rs. 4,000 30

Direct Wages Rs. 6,000 Units sold 200 Nos. In the year 2007, wages rate will increase by 50% and fixed cost will decrease by Rs.600. If 300 units are sold in 2007, the total fixed and variable OH will be 11,400. How many units should be sold in 2007, so that the same amount of profit per unit as in year 2006 may be earned? (May 2007) O.-18. A company following standard marginal costing system has the following interim trading statement for the quarter ending 31 st December, 2016, which reveals a loss of Rs.17,000 detailed below. Rs. Sales 4,99,200 Closing stock (at prime cost) 18,000 5,17,200 Costs: Direct material 1,68,000 Direct labour 1,05,000 Variable overhead 42,000 3,15,000 Fixed overhead 1,20,000 Fixed Admn. Overhead 40,000 Variable distribution Overhead 19,200 Fixed selling Overhead 40,000 2,19,200 Total costs 5,34,000 Loss 17,000 Additional information is as follows: (i) Sales for the quarter were 1,200 units. Production was 1,400 units, of which 100 units were scrapped after complete manufacture. The factory capacity is estimated at 2,000 units. (ii) Because of low production, labour efficiency during the quarter is estimated to be 20% below normal level. You are required to analyses the above and report to the management giving the reasons for the loss. (Nov. 2006) Q.-19. A Ltd. Makes and sells a single product. The company s trading result for the year 2007 is: Particular Rs 000 Rs 000 Sales 3,000 Direct materials 900 Direct labour 600 31

Overheads 900 2,400 Profits 600 For the year 2008, the following are expected: (i) Reduction in the selling price by 10% (ii) Increase in the quantity sold by 50% (iii) Inflation of direct material cost by 8%. (iv) Price inflation in variable overhead by 6%. (v) Reduction of fixed overhead expenses by 25%. It is also known that: (a) In 2006, overhead expenditure totaled to Rs.8,00,000. (b) Total overhead cost inflation for 2007 has been 5% more than 2006. (c) Production and sales volumes have been 25% higher in 2007 than in 2006. The high-low method is being used by the company to estimate overhead expenditure. You are required to: (i) Prepare a statement showing the estimated trading result for 2008. (ii) Calculate the Break-even point for 2007 and 2008. (iii) Comment on the BEP and profits of the years 2007 and 2008. Q.-20. SENAPATI LTD. Manufactures plastic cans of a standard size. The variable cost per can is Rs.4 and the selling price is Rs.10 each. The factory of the Company has 8 machines of identical size. Any individual machine can produce 30 cans per hour. The factory works on a 300 days per annum basic and the actual available hour per machine per day is 7.5. The Company has to supply an order of 4,20,000 cans to an oil Company. The yearly fixed cost of the Company is Rs.20 Lakhs. The Company has received an order from another Firm for supplying 60,000 nos. of plastic moulded toys. The price of the toys is Rs.60 each and the variable cost is Rs.50 each. While this order would be acceptable for supplying in total quantities only, on acceptance, a special mould costing Rs.2,25,000 would be required to manufacture the toys. The time study exercise has revealed that 15 nos. of toys can be produced per hour by any of the machines. Advise the Company, with reasons in the following situations 1) Whether to accept the order of manufacturing moulded toys, in addition to supplying 4,20,000 cans or not, 2) Whether to accept the order of manufacturing moulded toys, if the order of cans increases to 5,40,000 cans or not, 3) While a sub-contractor is willing to supply the toys, the toys, either in whole or part of the required quantities at an all inclusive rate of Rs.57.50 each, what would be the minimum 32

excess capacity needed to justify the manufacturing of any portion of the toys order, instead of sub-contracting? 4) The Company had an understanding that the orders of the cans will be increased during the year on negotiation, and planned and manufactured 4,50,000 cans during the year. For utilizing the excess capacity, they also accepted the toys order and sub-contracted only 15,000 nos. of toys. At the year end, however, it was revealed that the order of cans could be for 4,80,000, if it was properly negotiated. How much loss has been suffered by the Company due to improper prediction of demand and negotiation? (Nov. 2001) Q.-21. Tiptop Textile Manufacturers a wide range of fashion fabrics. The company is considering whether to add a further product the Superb to the range. A market research survey recently undertaken at a cost of Rs. 50,000 suggests the demand for the Superb will last for only one year during which 50,000 units could be sold at Rs. 18 per unit. Production and Sale of Superb would take place evenly throughout the year. The following information is available regarding the cost of manufacturing Superb. Raw Materials : Each Superb would require 3 types of raw material Posh, Flash and Splash, Quantities required, current stock levels and cost of each raw material are shown below. Posh is used regularly by the company and stock are replaced as they are used. The current stock of Flash is the result of overbuying for an earlier contract. The material is not used regularly by Tiptop Textile and any stock that was not used to manufacture Superb would be sold. The company does not carry a stock of Splash and the units required would be specially purchased. Raw Material Quantity Reqd. per unit of Superb (Metres) Current stock level (Metres) Costs per metre of raw material Original cost Current replacement cost Rs. Current resale value Rs. Rs. Posh 1.00 1,00,000 2.10 2.50 1.80 Flash 2.00 60,000 3.30 2.80 1.10 Splash 0.5 0 5.50 5.00 Labour : Production of each Superb current wage rates are Rs. 3 per hour for skilled labour and Rs. 2 per hour for unskilled labour would require a quarter of an hour of skilled labour and two hours of unskilled labour. In addition, one foreman would be required to devote all his working time for one year in supervision of the production of Superb. He is currently paid an annual salary of Rs. 15,000. Tiptop Textile is currently finding it very difficult to get skilled labour. The skilled worker needed to manufacture Superb would be transferred from another job on which they are earning a contribution surplus of Rs. 1.50 per labour hour, comprising sales revenue of Rs. 10.00 less skilled labour wages of Rs. 3.00 and other variable costs of 33