chap1 marginal costing & decision making

Decision Making Marginal Costing &Fixed and Variable Costs:There are many different ways to classify the costs. For the purpose of decision making the most useful classification of costs is according to their behaviour; i.e. Fixed, Variable and Semi Variable costs. Costs may alter for a variety of reasons but most commonly they vary due to changes in level of activity. This is normally defined as changes in level of production or sales.

ost per unit. This is because certain items of cost will tend to remain fixed, irrespective of level of output. Therefore

Meaning of "Marginal Costing":

fferent products, processes and cost centres in the course of decision making. It can therefore be used in conjunct Marginal Costing is a technique of decision making, which involves: Ascertainment of total costs

ation of total costs into fixed and variable Use of such information for decision making Application of "Marginal Costing": Assume the following: S=Sales V = Variable Costs F = Fixed Costs P = Profit C = "CONTRIBUTION"

We know that Total Sales is equal to Total costs plus Profit. S = V + F + P SV=F+P C Under marginal costing the term "Contribution" refers to the difference between the Sales and Variable Costs.

Profit Volume Ratio (P/V):

with Sales, usually represented in terms of percentage. Therefore if P/V = 30%, it would mean that 30% of total sales

Sales X P/V = Total Contribution

on is ascertained the profit can be concluded as: Contribution Total Fixed Costs = Profit

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IDEAL FLEXICLASS / Final CA /Advanced ManagementAccounting/ Volume 1Alternatively Profit-Volume Ratio can be calculated as:Difference in Profit Profit-Volume Ratio Difference in Sales X 100

Similarly,Difference in Cost Variable Cost Ratio Difference in Sales X 100

Break Even Point:

ere the firm earn no profit neither incurs any loss. It is known as "No Profit No Loss" situation. At Break Even, follow

? ? ?

Total Costs Fixed Costs Profit/Loss

Total Revenue Contribution Nil

Break Even Point (in units) = Total Fixed Costs divided by Contribution per unit. Break Even Point (in Rs.) (Also known as Break Even Sales) Total Fixed Costs divided by Contribution per unit multiplied by selling price per unit. OR Break Even Point (in Rs.) (Also known as Break Even Sales) Total Fixed Costs divided by P/V RatioTotal Fixed Costs Break Even Sales P/V Required Sales to earn Desired Profit: Total Fixed Costs + Desired Profit X 100 P/V X 100

Required Sales (to earn Desired Profit)

Margin of Safety:

en Sales, usually in terms of amount, but some times represented even in terms of number of units. In other words

Margin of Safety % Actual Sales

X 100

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IDEAL FLEXICLASS / Final CA /Advanced ManagementAccounting/ Volume 1

Q. 3. 320 and its variable cost per unit is Rs. 192. The company earns a net profit at present @ Rs. 30 per unit at a pre

Questions Section 1 to calculate the following: (CVP Analysis)1. Profit Volume Ratio

2. Break Even Point (BEP) in units Q.1. Consider the following information: 3. Break Even Level of sales 4.

Rs. 5. Direct material cost per unit ales to earn a desired profit of Rs. 7,52,000 Required Sales to earn a desired profit of 26% on sales Required Sale 20 30 10 6. Direct labour cost per unit 60 Variable overheads per unit 7. (Nov 1999) Variable cost per unit Q. 4. manufactures and sells 3 products, details of which are mentioned below: X Ltd

Variable Percentage of Selling eads Rs. 4,00,000 Selling price per unit Rs. 125 Normal capacity 10,000 units Price Per Cost Per Total units produced and sold unit10 (Rs.) unit (Rs.) 30 A 70 Practical capacity 12,500 units 0 % B 60 There is an offer to supply additional 2,500 units at a price of Rs. 80 per unit. This sale will not affect the 80 30 37.5 present market of 50 product. the % C

You Rs. 16,80,000. ost for the year is are required to calculate the following: BEP in units maintaining theper unit at present as above and also calculate the number of units of each product a 1. Full cost same product mix 2. Amount of profit earned at present Revised amount of cost per unit, as under: Q.5. he3. T budgeted results of A Ltd. are when production increases from 10,000 units to 12,500 units on accepting the offer. Products Sales value P/V ratio Sales mix Should the offer be accepted? Indicate the financial implication of accepting the offer. (%) (%) (Rs.) 2,50,000 20 50 Q.2. (Behaviour of Costs) YXZ 32 4,00,000 40 Consider the data given below: 6,00,000 30 48 Year 2 Particulars 12,50,000 Year 1 100 Total

Output in units Fixed overheads for the period are Rs. 10,000 5,02,200. 12,000 Overheads (1) Rs. 3,28,000 3,28,000 The management is worried about the results. You are required to prepare: Overheads (2) Rs. 3,00,000 3,60,000 Overheads a Rs. g incurred at present and recommend(3) change in 3,18,000 value of each product as well as in the total sales value the sale 3,80,160 Overheads (4) Rs. 3,28,000 3,53,600 Overheadsthe additional 3,26,500 any individual product to recover the loss. (5) Rs. ii. Recommend sales of 3,51,800 Overheads (6) Rs. 3,28,000 3,93,600 (May1999) (I. C. W.A Dec 1998 & June 1999) Overheads (7) Rs. 3,29,500 3,81,400 Q. 6. are required to identifySales from theof overheads and classify these into: Calculate the Break Even the behavior following details: You Particulars Fixed Overheads Sales (Rs.) Variable Overheads Total Costs (Rs.) Semi Variable Overheads Year 1 30.0 Lakhs 27.0 Lakhs Year 2 36.0 Lakhs 31.8 Lakhs

If the overheads are identified as Semi Variable, then segregate these into their: Fixed Portion (in terms of per annum) Variable Portion (in terms of per unit)

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IDEAL FLEXICLASS / Final CA /Advanced ManagementAccounting/ Volume 1Q.7.

uld give up his job as an engineer, with a current salary of Rs.14,800 per month and go into business on his ow manufacture the component from a supplier. It is very difficult to forecast the sales potential of the component, but after some research your friend has estimated the sales as follows I. Between 600 to 900 components per month at a selling price of rs.250 per component. Between 901 to 1,250 components per month at a selling price of Rs.220 per component for the II. entire lot.

.140 for each completed component. However if more than 1,000 components are produced in each month, a disco parts on all purchases. Assembly costs would be Rs.60,000 per month upto 750 components. Beyond this level of activity assembly costs would increase to Rs.70,000 per month.

our friend has already spent Rs.30,000 on development, which he would write-off over the first five years of the Required: I.Calculate for each of the possible sales levels at which your friend could expect to benefit by going into the venture on his own.

II. the break-even point of the venture for each of the selling price. Advise your friend as to the viability of the venture III. (Nov1996)

Q. 8. ifference Point) following are cost data for three alternative way of processing the clerical work for cases brought before the LC Co (Rs) Particulars Fixed costs Occupancy Maintenance contract Equipment lease 15,000 0 0 15,000 Variable costs (per report) Supplies Labour 40 5hrsX40 or 200 240 Required: I. alculate cost indifference points. Interpret your results. C II. If the present case load is 600 cases and it is expected to go up to 850 cases in near future, which (May-2001) method is most appropriate on cost considerations? Q. 9. (Absorption vs. Marginal Costing) 80 1hrX60 or60 140 20 0.25hrX80 or20 40 15,000 5,000 25,000 45,000 15,000 10,000 1,00,000 1,25,000 A Manual C Semi automaticFully automatic B

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IDEAL FLEXICLASS / Final CA /Advanced ManagementAccounting/ Volume 1Consider the data given below for the first two years of operations of NJ Ltd.:

ParticularsBudgeted Fixed Overheads (Rs.) Actual Fixed Overheads (Rs.) Budgeted Production (units) Actual Production (units) Actual Sale (units) Selling Price per unit (Rs.) Variable Cost per unit (Rs.) 1. Marginal Costing Absorption Costing 2.

Year 113,20,000 13,60,000 100,000 120,000 108,000 50 30

Year 21,350,000 1,480,000 125,000 120,000 132,000 50 30

You are required to calculate profit of the two years as per:

Home Work SectionQ.10. If fixed costs are Rs.4,000, variable costs Rs.32,000 and break even point Rs.20,000 find out: (1) ()Profit volume ratio; (2) () Sales; (3) () Net Profit; (4) () Margin of safety (Nov1999) If fixed costs are Rs.24,000, Margin of safety Rs.40,000 and Break even Rs.80,000 find out: Q.11. (1) Sales; (2) Profit volume ratio; (3) Net Profit and (4) Variable costs. Q.12. Veejay Ltd. makes and sells two products, Vee and Jay. The budgeted selling price of Vee is Rs. 1,800 and that of Jay is Rs. 2,160. Variable costs associated with producing and selling the Vee are Rs. 900 and with Jay Rs. 1,800. Annual fixed production and selling cost of Veejay Ltd. are Rs. 88,000.

The company has two production / sales options. The Vee and Jay can be sold either in the ratio of two Vees to three Jays or in the ratio of one Vee to two Jays. What will be the optimal mix and why? (Nov 1999) Q. 13. (a) manufactures and sells four types of products under the brand names Ace, Utility, Luxury and Supreme. The sales m Brand Ace Utility Luxury Supreme Total Percentage 33 1 3% 41 2 3% 16 2 3% 8 1 3% 100 %

The total budgeted sales (100%) are Rs. 6, 00,000 per month. The operating costs are: Ace 60% of selling price

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IDEAL FLEXICLASS / Final CA /Advanced ManagementAccounting/ Volume 1Utility 68% of selling price Luxury 80% of selling price Supreme 40% of selling price The fixed costs are Rs. 1, 59,000 per month. Calculate the break-even point for the products on an overall basis.

(b) It has been proposed to change the sales mix as follows, the total sales per month remaining Rs. 6.00,0 Brand Ace Utility Luxury Supreme Percentage 25% 40% 30% 5% 100%

Assuming that this proposal is implemented, calculate the new break-even point. Q.14. (Multiple BEP)

dents once in an academic session during winter break to visit park, zoo, planetarium and aquarium.

sited with city Municipal Corporation. Each bus is 52 seater. Two seats are reserved for teachers who accompany

afternoon tea respectively at Rs. 7, Rs. 30 and Rs. 3 per student.

h for the zoo and the aquarium. As regards planetarium the authorities charge block entrance fee as under for g Number of Students in a Group Upto 100 101-200 201 & above Block Entrance Fee Rs. 200 300 450

Cost of prizes to be awarded to the winners in different games being arranged in the park depends upon the strength of students in a trip. Costs of prizes to be distributed are: Number of Students in a Trip Upto 50 51-125 126-150 151-200 201-250 251& above Cost of Prizes Rs. 900 1,050 1,200 1,300 1,400 1,500

s the college collects Rs. 65 from each student who wish to join the trip. The college releases subsidy of Rs. 10 pe

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IDEAL FLEXICLASS / Final CA /Advanced ManagementAccounting/ Volume 1You are required to: Prepare a tabulated statement showing total costs at the levels of 60, 120, 180, 240 and 300 1. students indicating each item of cost.

2. cost per student at each of the above levels. 3. mber of students to break even for the trip as the college suffered loss during the previous year despite 72% of the st Q. 15. (Multiple BEP)

s Toys, J Ltd. of U.S.A have approached Satish Enterprises for Exporting a special toy named "Jumping Monkey". Th toys per month. The export price of the toy will be $4. Cost data per toy is as follows: (Rs.) Material Labour Variable Overheads Primary packing of the toy 60 25 20 15

The toys will be packed in lot of 50 each. For this purpose a special box, which will contain the 50 toys will have to be purchased, cost being Rs. 400 per box.

be at 12%. The machine will have an effective life of 3 years and depreciation is to be charged on straight line meth incurred uniformly over the year. Assuming the average conversion rate to be Rs. 50 per $, you are required to: Prepare a monthly and yearly profitability statements for the first year and second year assuming (i) the production at 3,000 toys per month. Compute a monthly and yearly break even units in respect of the first year. (ii) (Nov 1999)

s of dolls for children. It also produces and sells a set of dress kit for the dolls. The company has worked out the fo Doll Standard Standard Materials Cost Labour Cost Demand (Units) Per unit (Rs) Per unit (Rs) 50,000 40,000 35,000 30,000 2,00,000 20 25 32 50 15 15 15 18 20 5 Estimated Estimated Sales Price Per unit (Rs) 60 80 100 120 50

A B C D Dress Kit

,000 units, as above, a discount of 20% in its price is offered if it were to be purchased along with the doll. It is exp buy the dress kit.

oducts on that basis. The labour hour rate is Rs 15. Overtime of a labour has to be paid at double the normal rate.

(May 1998)

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Following are the details available from the Q.20. (Absorption vs. Marginal Costing) The cost to A for each typein similar business line: Rs 40 per and may be considered as variable cost. records of two companies of labour are: Grade I Q.17. hour, Grade 2 Rs 20 per hour. (all figures in Rs. Lakhs) taffs best efforts, although the sales are increasing; the profits are declining over the last three years. He sup Zero Ltd Hero Ltd in stock. Material Saleswidely used within the firm and 20 usage for the contract will necessitate replacement. Ma A is any 20 10,000 Kgs (Rs. '000's) Q. 22. Required Quantity of Material Less: the contract, Costs Particular 2004 2002 2003 Book Value ofit will be sold. (12) (8) 1. Variable existing stock s (At Rs. 20 per is used. The various values and costs for A and B1,200 follows: For accounting purposes FIFO are as Sales 1,000 1,100 (4) (Actual Purchase Price) Rs. 50(8) kg per 2. Fixed Costs unit) (Rs. Per unit) kg Rs. 60 4 per Cost of production:Profit 4 Current purchase price (Replacement price) Resale Value (NRV) Rs. 45 companies as to which is better and per B 260 160 VariableParticulars on the performanceA the above two 240 kg You are required to comment of 80 390 30 Book What why? be the relevant cost of the required 10,000 kgs of the material? shall (applied) 240 Fixed value 360 500 (-) 30 10 0 Replacement 550 200 250 50 Condition 1: Q.18. (Indifference Closing Opening inventory (Added) Point) inventory (Deducted) costrealizable Net in regular use and 24,000 Kgs are available in current stock.200 250 50 Material is 600 (i--)120 Condition firms current copier, which is worn out. The analysis of alternative machines has been n g machines to replace the2: 470 Material is in regular use and 6,000 Kgs are available in current stock. 550 Adjustment for overheads applied Actual cost of goods sold ecovered by applying a pre-determined rate per productive labour hour. Initial estimates of next years activity Condition 3: Cost per 100 copies 720 Gross Profit Machine B 530 490 Machine A Machine C 550 530 Rs 22,80,000. also be used for another offer where net contribution from the offer (after considering the purchase cost of mat Rs. Rs. Less: Selling expenses (semi-variables) Net Profit (-i-) / Loss (-)Rs. 480 570 20 Materials costs 60 40 (i--) 40 labour cost 80 30 (i--)20 20 Condition 4: 1,00,000 Annual lease cost 30,000 58,000 (-)90 ade byat the beginning the2002. Fixedsale of Yand it is idle/non moving in nature (Material has noyear. However, th 10,000 kgs of of material is manufacturing then decrease by 5,000 production next on planned stock A Ltd. It is estimated that the in stock would overheads are applied tounits in the based other use). activit Required: Condition 5: (May1994) i.Compute the cost indifference points for the three alternatives. 6,000 kgs of the material is in stock and it is idle/non moving in nature (Per unit) (Material has no other use). ii.What do the cost indifference points suggest Q.21. (Absorption vs. Marginal Costing) as a course of action in this regard? Condition 6: Selling price Rs 700 Wonder Ltd. manufactures to single87,000 copies next year, whichfigures would be most for a one-year If the management expects a need product, Zest. The following copier relate to Zest economical? Labour Grade 2 4 hours gs of the materialperiod: is in stock and it is idle/non moving in nature (Material has no other use). There is no resale value Q.19. (Absorptionrelevant variable costs Materials vs. Marginal Costing) Rs 120 100% Activity Level 50% ToplessCondition 7: Products a sales manager in charge of each product line and Required: Ltd. has several product lines with 400 Sales and production (units) 800 he is paid a bonus based on the net income generated by his product line. Advise Ain stockthe desirability of the acceptance of the contract purely Lakhs Ltd on and it is idle/non moving in nature (Material has noRs. on economic considerations. Rs. Lakhs of the material is other use). There is no resale value (May-2002) Show your calculations 16 Sales 8 Condition 8: costs: the current year. Productionthe product a wide range received a utilities. The company year because net income in However, Q.24. Jobanputra Ltd. manufactures line Manager of kitchen larger bonus than last is considering whether to Variable 3.2 6.4 add a further product the "Niks" to the range. The demand for the "Niks" will be 60,000 units that could al has no other use). There isFixed no resale value of the material. The material is also toxic in nature. So, management w 1.6 1.6 be sold in sales. per unit. with aSelling at Rs. 285 He also wants to know how net income increased, when sales declined. decline and administration costs: Variable 1.6 The following information offered a regarding the cost of manufacturing "Niks": 3.2 Direct Materials: Q.23. A Limited has beenis availablecontract that, if accepted, would significantly increase next years activity which the bonus was paid. Explain with supporting figures why net income increased when sales declined. What d Fixed 2.4 2.4 Quantity Current Costs per raw material product X and specifies a contract price of Rs. 1,000 per kg. The actual fixedunit ofthe production of budgeted. include 00 units. Fixed costs are incurred evenly throughout the year, & resources required inare the same as each kg of X There costs required stock Original Current and 160 units were sold. RawLabour: per unit level cost 2 Replacement Year Year 1 Particulars Material 20 of Niks cost 2 Units sold @ Rs. 30,000 40,000 Grade 1 Required: Rs. Rs. 8 8 Grade2 Standard variable cost of production per unit (Rs.) 2.4 2,00,000 Fixed factory by Zest 2 1 absorption 60,000 is used? What would be the2,00,000 (Rs.) xed production costs absorbedoverheadifcost costing under/over-recovery of over Materials ii. 9 1,40,000 62 60,000 5 2 1,40,000 (Rs.) rofit& distribution expenses (fixed) Standard Fixed factory overhead per unit ing using absorption costing?AB ACDBE 10 5 0.5 60,000 iii. units (Rs.) 5 1 80,000 6.550,000 1 30,000 iv. Units produced the profit using marginal costing? What would be 20 75,000 Units opening finished1.5 Acceptance ofanswers to (iii)12 (iv)? goods inventory to continue to pay Grade I labour in full. between the the contract would reduce the 10,000 v. Why is there a difference and idle time of Grade I labour. All factory overhead variances are written off to cost of goods sold. (May1990)

Questions Section 2 (Relevant Cost Approach)

11 9 10 12


only be used on another product, the material for which is available at Rs 95,000. For this purpose, Material A re would cost Rs 15,000. Material B was ordered for some other product which is no longer required. It now has a residual value of Rs 2,00,000.

used within the firm. Although present stocks together with orders already planned will be sufficient to facilitate nor this alternative will necessitate such materials being replaced immediately.

ed for some considerable time. At the present time Material D is normally used in the production of Product "Ash", wh unit of Product "Ash" uses four units of Material D.

another job as substitute for material X which currently cost Rs.8 per unit (of which the company has no units

Direct Labour: The following categories of labour shall be required: Kalakaari labour paid @ 20 per hour

Mehnati labour paid @ 16 per hour Manmaani labour paid @ 12 per hour paid @ 10 per hour Ghulaami labour Each unit of "Niks" requires: 2 H rs of Kalakaari labour 3 H rs of Mehnati labour 5 H rs of Manmaani labour 8 Hrs of Ghulaami labour

not be increased significantly in the short term; this labour is presently engaged in meeting the demand for produ labour. The contribution from the sale of one unit of product "Jumbo" is Rs 60, as shown below: Rs. Selling price per unit Direct Material Direct Labour (Kalakaari) (4 Hrs @ 20 per hour) Variable Overheads Contribution per unit 120 60 320 60 80

000 hours and this will not be sufficient for Production of "Niks". For the remaining requirement, it would require dive

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IDEAL FLEXICLASS / Final CA /Advanced ManagementAccounting/ Volume 1Rs. Selling price per unit Direct Material Direct Labour (Mehnati) Acquisition cost at the time of (1 Hr @ 16 per value purchase Net realizable hour) 90 Material A 40 16 100 per (Rs) Material B Rs 10 per unit Rs 18 per unit

unit 85 24 Variable per unit Replacement costOverheads 90 per 10 Contribution per unit ete materials for use as a substitute for a sub assembly that is regularly used Manmaani labour is employed on a casual basis and sufficient labour the production requirements. 1,000 units Material C

with in the firm details of the extra can be acquired to exactly meet

Direct Labour and although currently under-utilised, it is policy of company to continue to pay Ghulaami labour in full. Acceptance 4,000 hours unskilled 1,000 hours semi-skilled

4,000 hours highly skilled The variable overheads incurred on each unit of "Niks" are at a constant rate of Rs. 40 per unit including selling commission. the quantity of the sub assembly purchased from outside the firm to 900 units for the next quarter only. Howeve

Overheads:

ministrative fixed cost to be incurred for "Niks" is Rs. 12 Lakhs. Avoidable Fixed cost on diversion of labour force fro per unit for that quarter.

ough 1000 units required would be available from stocks, it would be produced as extra production. The standard Q. 25. B Ltd is a company that has in stock materials type XY that cost Rs 75,000, but that are now obsolete (Rs) have a scrap value of only Rs 21,000. Other than selling the material for scrap, there are only two Direct materials 13 alternative uses for them. Direct labour 18 6 hours unskilled labour ve I - Converting Variable overhead the obsolete materials into a specialized product which would require the following additional wo 6 hours at Rs 1 6 18 Fixed overhead 6 hours at Rs 3 Material A 600 units 55 Material B 1,000 units Direct Labour Rs 1 per direct Ltd are: The wage rates and overhead recovery rates for Blabour hour Variable overhead Fixed5,000 hoursRs 3 per direct labour hour overhead semi skilled 5,000 hours unskilled Unskilled labour Rs 3 per direct labour hour 5,000 hours highly skilled 4 Semi skilled labour Highly skilled labourper direct labour hour Rs Rs 27,000 Rs 5 per direct labour hour Extra selling & delivery expenses Extra advertising Rs 18,000

saleable product has these could be sold for Rs 300 per unit. but the company and temporary excess supply of this type of labour at the present time. Highly skilled labour is in used within the firm. Although present stocks together with orders already planned will be sufficient to facilitate nor this alternative will necessitate such materials being replaced immediately. from the sale of one unit of product L is Rs 24.

Given the above information you are required to present cost information advising whether the stocks an industrial dispute. At the present time Material B is specialized product (Alternative I)of Product Z, which as a a of Material XY should be sold converted into a normally used in the production or adopted for use sells (Nov-2000) substitute for a sub assembly (Alternative 2).

15 14


uct A is manufactured in Shop 1 and customers jobs against specific orders are being carried out in Shop 2.Its ann Shop - 1 (Product - A) (Rs) Total 3,75,000 90,000 1,45,000 49,500 5,500 35,000 3,500 6,500

Shop - 2 Particulars (Job Works) 1,25,000 2,50,000 Sales / Income Material 40,000 50,000 1,00,000 Wages 45,000 Depreciation 18,000 31,500 2,000 Power 3,500 Rent 5,000 30,000 1,15,000 Heat & Light 500 3,000 2,20,000 2,000 Other Expenses 4,500 3,35,000 Total Costs 10,000 Net Income 30,000 40,000 ines used in the shops. The rent and heat and light are apportioned between identified with the output in a particular shop.

the shops on the basis of floor are

the said job. The customer is willing to pay Rs 25 per unit of X. The material and labour will cost Rs 10 and Rs 1

(b) Full Cost (c) Opportunity Cost (d) Sunk Cost State whether the company should accept the job. (May-1996) Q.27. A company had nearly completed a job relating to construction of a specialized equipment, when it discovered that the customer had gone out of business. At this stage, the position of the job was as under: (Rs) 1,75,200 Original cost estimate Costs incurred so far 1,48,500 29,700 Costs to be incurred 1,00,000 Progress payment received from original customer

ain modifications are carried out. The new customer wanted the equipment in its original condition, but without

Direct materials (at cost) Direct wages Dept: A Dept: B

Rs 1,050 15 man days 25 man days

variable overheads Delivery costs 25% of direct wages in each department Rs 1,350

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ads will be absorbed at 50% of direct wages in each department. The following additional information is available;

or the modification are in stock and if not used for modification of this order, they will be used in another job in pla

(2) tment A is working normally and hence any engagement of labour will have to be paid at the direct wage rate of Rs

(3) s extremely busy. Its direct wages rate is Rs. 100 per man day and it is currently yielding a contribution of Rs. 3.2 (4) Supervisory overtime payable for the modification is Rs.1050. (5)

out, it can be used in another job in place of a different mechanism. The latter mechanism has otherwise to be boug (6)

terials that would have cost Rs, 12000. It would have taken 2 man day of work in Dept A to make them suitable for You are required to calculate the minimum price which the company can afford to quote for the new (May-2001) customer as stated.

Home Work Section

customer who would like a special job to be done for him and is willing to pay Rs. 22,000 for it. The job would requ Total units Required 1,000 1,000 1,000 200 Units already in stock 0 600 700 200 2 3 4 Bookvalueof units in stock Rs/unit Realisable value Rs/unit 2.5 2.5 6 Replacement cost Rs/unit 6 5 4 9

Material A B C D

Material B is used regularly by X Ltd. and if stocks are required for this job they would need to be I. replaced to meet other production demand.

II. d they have a restricted use. No other use could be found for material C but material D could be used in another jo has no units in stock at the moment).

n deciding whether or not accept the contract? Assuming all other expenses on this contract to be specially incurred

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IDEAL FLEXICLASS / Final CA /Advanced ManagementAccounting/ Volume 1Q.29. Tiptop Textiles manufactures a wide range of fashion fabrics. The company is considering whether to

he "Superb" will last only for one year, during which 50,000 units could be sold at Rs. 18 per unit. Production an

Raw Material:

ocks are replaced as they are used. The current stock of Flash is the result of overbuying for an earlier contract. Th

Raw Material

Quantity required Per unit of Superb (metres) 21 0.5

Current Stock Level (metres)

Costs per metre of raw material Original Current Current replacecost resale ment cost value Rs. 2.1 3.3 Rs. 2.5 2.8 5.5 Rs. 1.8 1.1 5.5

Posh Flash Splash

1,00,000 60,000 0

unskilled labour. Current wage rates are Rs. 3 per hour for skilled labour and Rs. 2 per hour for unskilled labour. of the production of Superb. He is currently paid an annual salary of Rs. 15,000.

ed from another job on which they are earning a contribution surplus of Rs. 1.50 per labour hour, comprising sales re during the coming year. Because the company intends to expand in the future, it has decided not to terminate the services of any unskilled worker in the foreseeable future who are idle at present.

ual pension of Rs. 6,000 payable by the company. He has been prevailed upon to stay on for a further year and to d Machinery:

Two machines would be required to manufacture "Superb" MT 4 and MT 7. Details of each machine are as und Start of the year Rs. 80,000 60,000 13,000 11,000 End of the year Rs. 65,000 47,000 9,000 8,000

MT 4 MT 7

Replacement cost Resale value Replacement cost Resale value

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IDEAL FLEXICLASS / Final CA /Advanced ManagementAccounting/ Volume 1Q. 31. Star Bicycle Company, produced and sold 1,10,000 bicycles annually, under the brand name Smart with Q.33.

hich are used regularly on various products. Each MT 4 is replaced as soon as it reaches the end of its useful life ty. of casting a months which is less than was-material Rs. 300, labour Rs. casting Manufacturing overhead Rs. 300 nesThe manufacturing cost of these cycles half of its, capacity. The price of 200 andvaries with the composition of th of labour would "Superb", itcost. be sold immediately.

Cleaning and Melting and very for overhead is in operation and the fixed overheads are recovered fully from the regular production at Rs. 3. grinding Pouring Core making Moulding et it as their own product. Expenditure for producingunit Rs. "Superb" are estimated at Rs. 1.20 per Jeet will be the Rs. produced. same as thatRs. Smart, asRs. of design of Jeet will e 10,0 16,0 6,00 4,50 For the decision making, incremental cost based on relevant cost and opportunity cost are usually Labour 0 00 00 0 computed. Variable the store will reduce the sale of Smart by 10,000 units. Overhead Fixed overhead pute such a cost sheet for "Superb" with all details of materials, labour, overheads etc., substantiating the figu 6,500 18,000 9,000 e the relevant cost Tota of Jeet, given that the weighted average cost of26,000 Star Co. is 15%. Also show the impact o capital (ICWA Dec-2002) l Labour and overhead per direct hour 9 6.5 6 5.2 Q. 30. Mahila Griha Udyog Industries is considering to supply its products a special range of namkeens to a Q.32. A departmental store. The contract will last consumer durable appliance. It given below: sales service Ltd. produces and markets a range of for 50 weeks, and the details are ensures after through X Ltd. The big appliances are serviced at customers residence while small appliances are Material: Rs. serviced at workshop of X Ltd. 1,50,000 X (in stock at original cost) later on. The wonder, the Works Manager at this juncturecost plus 10%. X Ltd charges castings, each 25% over about No material supplied to X Ltd. is charged at welcome an order for 90.000 customers at weighing the 1,80,000 Yabove price. on contract) (on order Z (to be ordered) 3,00,000

Labour: es service agreement and 15% of the rate fixed in case of jobs not covered under the agreement, from X Ltd. 60% Materials required would cost Re. 1 per casting after deducting scrap credits. The direct labour hours Skilled 5,40,000 perNon-skilled casting during the previous year. appliances required for each department would be: 3,00,000 Core making 0.09 1,00,000 Supervisory Melting area in the 0.15 work itself and has chosen one and pouringfirst instance. During the previous year the company earned a profit of 10,80,000 General overheads Moulding 0.06 26,50,000 Total cost Labour Cleaning and grinding 0.06 Material 18,00,000 Price offered by department store Rs. Rs. Net Loss 8,50,000 60,00 1,00,0 Under after sales service agreement considered? the extra Should requirements would not be the following additional information is 00 in variable overhead. The t labour the contract be accepted if accompanied by proportionate increases 0 For jobs not covered under the (i) Material X is an obsolete material. It can only be 20,000 another product, the material for which used on agreement 36,000 The is available at Rs 135000 (Materialof work in that area for the ensuing period. costsfollowing three company forecasts same volume X requires some adaptation to be used and The Rs 27000) options in under consideration no labour variances operationareeach department andof the management: are anticipated. Material Y is ordered for some other product which is no longer required. It now has a residual (ii) 1.To set up aof Rs service centre to provide service for small appliances only. The existing system is value local 210000. continue for big amounting ctory overheads (iii)to labour can work on other contracts1,000 aare presently operated by semi-skilled labour at would be necessary appliances. to Rs. which month for all departments put together. Producti Skilled To 2. up a local service centre to provide service for big appliances only. The existing system is to set acostofRs570000. You continue for small appliances.employed for this contract. Non-skilled labour (iv)are required to: are specially ToPset up a local service centre to provide service for all appliances. The addition of this then 3. I.(v) repare a revised monthly Labour and Overhead Cost Budget, reflectingexisting system the stands or not the y staff will remain whether withdrawn. contract is accepted. Only two of them can replace other positions where order. The Determine the lowest price outwhichunder the above options for 90,000 castings without incurring relevant costs for carrying jobs are as under: II. Overheads are charged at at 200% ofquotation can beOnly Rs 125000 would be avoidable, if the skilled labour, given (vi) (Rs. '000) a loss. (May-1999) contract is not accepted. Option 1 Option 2 Option 3 Heat, rent, light etc. Management cost Service staff costs Transport costs 125 108 230 25 50 83 440 220 150 150 750 230 (Nov1996)

You are required to find out the most profitable option. 21 20 19


two products AB and CD by utilizing 25% and 40% of its total capacity respectively. The cost data per unit for Particulars Production & sales Selling price (units) (Rs) Direct material (Rs) Direct labour (Rs 5 per hour) (Rs) AB' 5,000 10,000 80 10 25 100 30 20 CD'

hourly rate will rise by 25 paise and variable overheads will continue to maintain same relationship with wages as 5% in case of AB and 4% in case of CD.

The company has the following proposals for consideration of the management for 2004-05 to improve profitabili (a) Utilize the balance capacity to produce AB and to sell this increased production at the existing selling price of Rs 80.

(b) oduce CD, while doing so the efficiency will however go down by 16% on account of newly recruited labour in resp and distribution expenses of Rs 50000 will have to be spent to sell this additional output.

(c) e manufactured in 7 labour hours. Direct material will cost Rs 40 per unit. Its selling price per unit will be Rs 145. sales of EF special advertising expenses of Rs 30000 will be spent.

and 40% capacities for AB and CD cannot be changed and only the spare capacity is required to be used for pro Required: (i) Present a statement of profit for 2003-04

(ii) Using incremental revenue and differential cost approach, find out which proposal is more profitable for 2 Present a statement of profit for 2004-05 based on above recommendation. (iii) (Nov-1995)

22


y Ke Questions Section 3 Factor or Limiting Factors ysis Anal

(Key Factor)

ssary when one or more factors of production or other business resources are short in supply. Marginal costing really Q.35. (Key Factor Simple) X Ltd manufactures and sells 3 products, details of which are mentioned below: Limit to the availability of a particular grade of labour Shortage of raw material No. of units produced and 20,000 20,000 sold Limit of Price per unit (Rs.) machine capacity 50 50 Selling Direct Material Cost per unit (Rs.) 15 9 C 20,000 50 6

(@Rs. 3/- per Kg) Direct Labour Cost per unit (Rs.) 20 28 32 aced with the problem of deciding what to produce and what not to produce, because there are insufficient resource (@Rs. 4/- per Hr.) 2 Other Variable Cost per unit (Rs.) 5 3 provided that sales of the goods earn a positive contribution towards fixed costs and profits. The total fixed cost for the year is Rs. 2,40,000. esource, the business must decide which part of sales demand it should meet, and which part must be left un 1. 2. indicate the profit-maximising.

y to the extent of 80% of the total requirement, find the optimal product mix for the next year in order to maxim e "Limiting Factor" exists: the contribution must be maximised, within the constraints given. The simple approach to tackle this kind of situa

ing Factor or Key Factor. Q.36. (Key Factor Desirable Capacity Level) The relevant data of X Ltd. for its three products A, B and C are as under:

Doubt: How to identify whether a key factor exist?Particulars A

B

C

That is very simple: Direct Material 260 250 300 i. Calculate the volume of resources required to produce maximum units demanded Direct Labour 130 270 260 ii. Calculate the volume of resources available 110 230 180 Variable Overheads iii. Compare the two volumes above; if (i) exceed (ii), there is a limiting factor. 1040 Selling Price 860 930 12 Machine Hours Required 6 3

Step 2 Ascertain the contribution per unit of the various products. 8,400 and 10,800 machine hours are Rs.1,50,000, Rs 2,20,000 and Rs 3,00,000 respectively. The maximum deman Step 3 Ascertain the contribution per unit of the Key Factor. For example, if raw material is the Key Factor,

You are required raw material; if labour is in short supply, calculate the contribution per hour of e the contribution per kg of theto find out 1. .The most profitable product-mix at each level and

(May 1997) 2. Step 4 Rank the.The level of activity wherethe contribution be maximum. Key Factor. (The product with the products on the basis of the profit would per unit of the

contribution per unit of the scarce or Buy) should receive priority in the allocation of the resource in the prod Q.37. (Key Factor Make resource

& R and sells it at Rs. 37.50 per unit. It has two divisions. In production division it produces all the types of com cate the scarce resources on the basis of the ranks given above, taking into account the maximum demand. performed by the workers manually before N is ready for sale:

Product N is manufactured in batches of 100 units and the data relating to the current production per batch ar

Particulars

Machine24 23

Variable

Fixed

Total


66 labour: per Assembly 800 1,216 325 Rs. 744 1125Rs. 1,056 Growing Rs. 1,792 Rs. Rs. hectare 3,175 Harvesting & packing per Rs. 7.20 2,075 6.561,100 Rs. Rs. Rs. 10.40 7850% 8.80 the year and with a little The marketingyear the company has estimated increased at least by up by 50% more than the present during box For the next manager feels that sales can be that its Rs. 10.40 sale would go Rs. 8.00 Transport per Rs. 19.20 advertisement even by 75% if the Rs. 10.40 sales and probablysupport even 75%. production capacity is made available. box Market price per Rs. 44.55 Rs. 30.76 Rs. 31.74 Rs. 36.80 ve your recommendation boxto which components should be bought from outside if production is to be increased by as (I.C.W.A. June, 1996) Fixed expenses per annum:

The relevant data concerning production, market prices and costs are as under: hours costs Costs costs Potatoes Rs. Peas Rs. Carrots Rs.Tomatoes factory are capable of making all the components X, Y and Z, increase of machine capacity can not be achieved / m Annual Production Division yield: Component-P Boxes per 180 15 350 150 375 100 525 70 hectare Component-Q 25 175 450 625 Costs: Component-R per 30 952 450 432 450 Rs. 384 Compone Price per unit 900 624 Direct material Rs. Rs. Rs. nt hectare Assembly Division YDirect ZX Rs.

(ii) Indicate which of the component(s) should be purchased and in what quantities at the two () estimated machine hours viz. increase by 50% and the of existing production. overheads on the basis of levels of output which are fully utilized by 75%budgeted production and cannot be further Prepare a statement showing the companys profitability at both the estimated levels of output. aints, the area to (iii) cultivated in respect of each crop to achieve the largest total profit and the amount of such t be be altered to yield optimum profit. (May 1994) undertaken. Q. 38. (Key Factor Make or Buy) 2. a machine involving a capital outlay of Rs. 2,00,000 is to be installed for processing Product C. The additional fixed e grower whether of land development It has three components X, Y and Z one the maximum total profit that All th a modified versionthe a popular gadgets. scheme should be undertaken and if so of each is required per gadget. woul

nt without any increase Growing costs. To meet the increased 1,24,000 production can be taken up and processed in in fixed Rs. demand, Q.39. (Key Factor Introduction of New Product) Harvesting Rs. 75,000 V-Ltd produces two products P and Q. The draft budget for the next month is as under: P Transport Particulars Rs. 75,000 P Q Q (Rs.) Rs. 1,50,000 Budgeted production and sale(units) 40,000 80,000 R 5.55 25 Selling price (Rs./unit) 50 Price offered per component 7.00 20 Total costs (Rs./unit) 40 8.40 You This work will involve a capital expenditure of Rs. 6,000 per hectare, which a bank is prepared is undertaken. are required to: 2 1 Machine (Hours/unit) (i) Maximum sales potential ()Determine the production and profits being earned at present. 1,00,000 (units) 60,000

full. Required: Q.41. (Key Factor Pricing Decision) pecial machiningCalculate the profit as per draftfor which the company has provided for double the existing produc and (1) fixing a new attachment budget for the next month.

and Y. it is facing severe competition in the market. The monthly salesto yield optimum profit. Revise the product mix based on data given for P and Q potential in units at different selling price (2) demand.

The (3) structure of the modified gadget is as under: cost Product X Product V Machine Variable Product C in such a way as to yield 15% p.a. ret Fixed cost Sales Fix the selling price of Sales Total Potential and proposes to substitute Product C instead.Potential Selling Price Selling allocated Price Component hours cost cost Per Unit (Rs.) Per Unit (Rs.) (Nov1989) per unit per unit per unit 110 5,000 78 30,000 Hours Rs. Rs. Rs. 108 7,500 77 32,000 Q.40. An agriculturist has 480 hectares of land on which he grows potatoes, tomatoes peas and carrots, out of 16 15 50 65 107 8,000 75 35,000 YZX 24 56 76 suitable for all the four vegetables but the remaining 140 hectares of 20 land are suitable only for growing peas a 103 72 8,400 40,000 32 54 84 96 9,000 69 30 45,000 available in plenty.& assembly 105 Special machining 60 45 220 110 330 The total costs as disclosed by the budgets of the company are as follows: Selling price that the area devoted to any crop should be in terms of complete hectares and not 500 ariety. The farmer has decided Product X Product V 27 25 26

IDEAL FLEXICLASS / Final CA /Advanced ManagementAccounting/ Volume 130,000 18 60,000 45,000 25.5 90,000

5,000 9,000 tput and sales per month (units) Total costs per month (Rs. In lacs) 5 6.6 Labour hours needed per month 20,000 36,000

You are required to find out the selling price and units to be sold to earn maximum profit where: 1. Labour hours are available without any restrictions and Only 95,000 hours are available. 2.

Home Work SectionQ. 42. (Key Factor Desirable Capacity Level)

al competency, marketing potentials and production flexibility as regards these products. In fact, P, Q and R can all b

ProductsDirect material per unit Directlabourperunit Variable overheads per unit Selling price per unit Demand in units per cost period (on the basis of the above selling price Machine hours required per unit of production

PRs. 100 50 50 350 200 15

QRs. 120 70 130 420 125 5

RRs. 90 90 100 370 750 3

ent levels of activity viz. 1,800, 2,300, 2,800, 3,300 and 3,800 machine hours per cost period. The fixed overhea Rs.20,000, Rs. 26,000, Rs. 33,0000 and Rs.39,000 respectively.

duct or products to be manufactured and in what quantities at each of the five contemplated levels of activity that w

Q.43. (Key Factor Overtime Possibility)

all the products. The factory overhead rate is Rs. 8 per hour, comprising Rs. 5.60 per hour as fixed overhead and

Product

Market

Selling 28

Labour Hours

Raw Material

IDEAL FLEXICLASS / Final CA /Advanced ManagementAccounting/ Volume 1demands (units)A B C D E 4,000 3,600 4,500 6,000 5,000

price (Rs.)32.00 30.00 48.00 36.00 44.00

required per Unit1.00 0.80 1.50 1.10 1.40

required per unit (in gms.)700 500 1,500 1,300 1,500

Assume, in above situation, 3,500 hours of overtime working is possible. It will result in additional (b) fixed overheads of Rs. 20,000, a doubling of labour rates and a 50% increase in variable overhead (May 1992) rates for such overtime. Do you recommend the overtime working? Q. 44. (Key Factor Make or Buy)

dering a proposal for an advertising campaign which would cost the company Rs. 3,00,000. The marketing departm (000 units) Products

Particulars

A

B 336 372

C 312 342

D 180 198

216 Budget 1 -Without Advertising Budget 2 -With Advertising 240

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

ParticularsSelling Prices Variable Production Costs:

A 11.94 5.04 2.04 0.72

B 14.34 6.60 2.04 0.72

C 27.54 15.24 3.36 1.20

D 23.94 12.48 3.18 1.08

-Direct Material - -Direct Labour - -VariableOverheadsOther 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. Products A and C could be bought in at Rs. 10.68 per unit and Rs. 24 per unit respectively. 4. Required: (i) Determine whether investment in the advertising campaign would be worthwhile and how production facilities would be best utilized. Explain the assumptions and reasoning behind your advice. (ii) (May1996)

Q.45. (Key Factor Make or Buy)

29


agriculture machinery, is preparing its annual budget for the coming year. The company has a metal pressing capa manufacture of all requirements of components A, B, C and D. The company has the following choice to overcome the shortage of capacity:(i)Buy the components from outside suppliers. (ii) Buy from outside suppliers and/or use a partial second shift. Standard Production cost per unit Component Variable Cost: Direct materials Direct wages A 37 10 B 27 8 20 C 25 (Rs.) D 44

22 40 62 Direct expenses 10 60 59 10 20 Fixed overhead 5 4 68 11 164 Total production cost 2000 Requirement in units 3500 1500 Direct expenses relate to the use of the metal presses which cost Rs 10 per hour, to operate. Fixed 2800 overheads are absorbed as a percentage of direct wages.

Supply of all or any part of the total requirement can be obtained at following prices, each delivered to the fact Component ACDB (Rs) 60 59 52 168

d increased direct wages by 25 per cent over the normal shift and fixed overhead by Rs 500 for each 1,000 (or par

with calculations:- 1. Which component, and in what quantities should be manufactured in the 20,000 hours of press time available?

ould be profitable to make any of the balance of components required on a second shift basis instead of buying the

2.

(Nov1992)

Q. 46. (Key Factor Make or Buy)

anufactures and sells an equipment called water purifier. The cost data for each batch often numbers of water purifie Components Machines Hours Labour Hours Variable costs (Rs.) Fixed Costs as Apportioned (Rs.) A 20 64 36 B 28 108 52 C 24 116 64 D 4 24 26 E 2 8 22

lling price is Rs 800 per batch. ng components A, B and C is 10,800 hours and it cannot be increased further. Labour is available for making co

30

Pessimistic Probability View Rs. Most Likely IDEAL FLEXICLASS / Final CA /Advanced ManagementAccounting/ Volume 1 Probability View 50% and fixed costs in general may increase by Rs. 10,000. In order to increase production capacity to meet inc Rs.

purchase one of the machine made Optimistic components. Probability View only supplier of components A, B and C. Because of incomplete records, it is unable to quote single figure prices. It Rs. ACB Component 120 200 160 0.25 0.25 0.25

110 0.5 n the companies that the price of each of the components will be determined on an overall basis based on informati 130 o: I. 0.5 Indicate in the context of key factor, 140 maximum number of batches that could be produced, if the each of the three alternatives namely buying A or0.5or C is considered. B

80 Analyse the financial implication of purchase and advice which component is to be bought keeping II. 0.25 in view the fact that production capacity will be limited to a 50% increase. 140 III. e a Profit Statement for the period assuming that the component0.25 chosen by you is bought out and extra production (May 2000) 120 0.25 Q. 47. (Key Factor Make or Buy)

h two of the companys departments P and Q. The machine hour capacity of each department is limited to 6,000 Components Demand (units) Direct material/unit Direct labour/unit Variable overheads/unit Fixed overheads P @ Rs. 8 per hour Q@Rs. 10 per hour Total A 900 Rs. 45 36 18 16 30 145 B 900 Rs. 56 38 20 16 30 160 C 1,350 Rs. 14 24 12 12 10 72

Rs. 129 each and Rs 70. each respectively. You are required to prepare a statement to show which of the compone (Nov 2002)

31

IDEAL FLEXICLASS / Final CA /Advanced ManagementAccounting/ Volume 1Q. 48. (Key Factor Introduction of New Product) XYZ Ltd is currently manufacturing 5000 units of the product XY 100 annually, making full use of its machine capacity. The selling price and total costs per unit associated with XY 100 are as follows: (Rs.) Selling price per unit Cost per unit: Direct material 200 900

Variable machine operating costs (Rs. 100 per machine hour) 150 180 170

verhead costs Marketing and administrative costs Operating income 200 unit of 'XYZ 100' per 730

additional 3000 units of XY 100, if it can outsource additional units. ier of quality products, has agreed to supply upto 6,000 units of XY 100 per year at a price of Rs. 650 per unit de

product XY 200. It can sell up to 12000 units of XY 200 annually. Estimated selling price and total costs per unit to (Rs.) Selling price per unit Cost per unit: 200 600

Direct material

50 Variable machine operating costs (Rs. 100 per machine hour) Manufacturing overhead costs 60 Marketing and administrative costs 110 420 perating income per unit of 'XYZ 200' 180 Other information pertaining to the operation of XYZ Ltd is as follows:

e basis for assigning fixed manufacturing overhead. The fixed manufacturing overhead for the current year is Rs. the product-mix decision. Variable marketing and administrative costs per unit for various products are as follows: ii. (Rs.) 'XY100' Manufactured 80 'XY100' Purchased 40 'XY200' Manufactured 60 Fixed marketing and administrative costs for the current year is Rs. 6,00,000. These costs will not be affected by the product-mix decision.

he quantity of each product that XYZ Ltd. should manufacture and/ or purchase to maximize operating income. Show (May 2002) Q. 49. (Key Factor Up-gradation of Machinery)

Q can be used for the production of either Product X or Product Y or both. In order to maintain customer relation

32


100 250 Cardamom per unitof output 1.25 1.25 1.0 Demand Delivery terms Distance 0.8 from Customers Price Rs. Rs. Rs. Rs. (tonnes p.a.) (per tonne) Surat (kms) he relevant cost data are given below: a) Variable cost per Kg. 200 250 256 Selling price per unit 300 Rs.) Rs. (in Direct materials 100 100 per unit 80 80 200 Tea At Customer's site Cardamom 6,000 9 per machine hour Direct labour 100 125 90 Coffee 80 Ex-factory Surat 188 6,000 Labour 120 10 12 12 20 20 Variable overheads per machine hour 8 Ex-factory Surat 15,000 170 charges Packing 10 2 2 Ex-factory Surat M O Q N PR L 150 9,000 materials Other 20 4 1 At Customer's site 10,000 192 22 costs nnum will convert the Machine P and Q into a versatile centre such that any four of 150 products can be manufactu the Total 14 At Customer's site 13 220 14 9,000 cost At Customer's site 10,000 200 25 b) Fixed cost per annum 65,000 Required: Cultivation and growing cost Rs. 10,00,000

Machine hours available: P: 4,500 hours Particulars Source of procurement ies, has 200 hectares of virgin land which can be used for growing jointly or individually tea, coffee and cardam Q: 5,100 hours Town B Town A Town C and their selling price per Kg. are as under: Quantity available 9,000 8,000 (Tonnes p.a.) Products 45,000 Yield (in Kg.) Selling Price per Kg. (in Rs.) Distance from Surat (kms.) 250 300 500 2,000 tonne) 20 110 Tea offered AP PB QX 78 Q Y Price (Rs. per 90 Machine used Coffee has demand of 500 40 The company its finished product XA from the following customers: Machine hour(s) required

Administration cost Rs. 2,00,000 mal product mix purchase of raw materialmarket commitmentssale of finished product XA and transportmachine proposal for the subject to the minimum X , the break-up of both before and after the conversion of the plan fo Land revenue Rs. 50,000 maximize the profit. Also presentunder the twoto show product mixes. above recommendation. ii. Evaluate the profitability a statement sets of net profit as per 2,50,000 Rs. (Nov 1995) Repair and maintenance Other costs the % iii. Advise the Management whether Mix conversion of machines should be undertaken or not. Rs. 3,00,000 Q.53. to total The budgeted unit cost and resource requirements of each sales garden furniture products chairs, benches and tables. (Nov 1984) Total fixed costs Rs. 18,00,000 PV ratio % The policy of the Margin of produce Table Chair Bench Q.50. (Key Factor company is toSafety) and sell all the three kinds of products and the maximum and minimum area to be cultivated per Raw material product is5as follows: 15 Timber 10 res in 1984, a large manufacturing companyas % ona profitvalue before interest and depreciation which were-fix earned sales of 10% Cost Labour Maximum (hectares) Minimum (hectares) Direct 8 10 P 4 160 120 Tea Products Cost Variable Overhead 6 7.5 10 3 Cost Coffee Overhead 50 30 30 4.5 Fixed 9 11.25 40% Cost 10 Cardamom 30 33 16.5 43.75 Q Budgeted profitableper Volumes product mix 30 the maximum profit which1,500 achieved. 4,000 2,000 Calculate the most and can be annum 20 market demand for these products. These volumes are believed to equal the Q.52. 35% The fixed overhead costs are attributed to the 3 products on the basis of direct labour hours. R The labour rate is Rs. 4.00 per hour. 20 to finished product XA after treatment in its plant having a capacity to treat 60,000 tonnes of X per annum. There 40 50% and the annual fixed costs amount to Rs. 7,50,000. S cial a value is limited in supply to 20,000 square order to counteractThe sales director has already materials an order f timber of Rs. 1,023 lacs at 1985 prices. In metres40 annum. the increase in costs of raw accepted the comp per of 10 60% to 8 paise per tonne-km. The company delivers XA to customers through another transport agency at 15 paise per The selling prices of the 3 products are: goods or work in process in both the years. Chair Rs.20 Bench Set an optimal productRs. 50 1985 and find the profitability. mix for The company Table has three sources in overall price is required in 1985 to raise the sales value to maintain Rs.40 What percentage increase of procurement of raw material X, the relevant details being: ii. Requirements: of safety at 10%. the margin 1. Q.51. (Key Factor Minimum Supply Requirements) he net profit that 2. should yield per annum. Calculate and explain the maximum prices which should be paid p this

34 33 35


Required: Price per kg of output 0 per annum irrespective of the supplier to be contacted. The output of the finishing process can be sold to three pr etween sub-contracting facility, which of the two per month (Rs) the sales realisation is Rs. 3 per metre. The average and se the shifts. The production is 18 lakh meters products and in what quantity should be produced and sold by th Trade discount Conditions Customer (%) capacity to earn maximum profit? Calculate the resultant maximum profit. direct wages. ii. A Q.54. (Plant wise and Overall are to be considered:C B The units of WYE by using sub?contracting s of EXE or 31,500 following suggestions Profitability) facility, state which of the two products should be produced 32.50 32.00 30.90 (May2003) i.Labour productivity can be improved by changing the layout of the machines. and another at Pune producing 7,200 tonnes and 10,800- 2 2 tonnes of a product against the maximum production c Maximum quantity 40,000 kgs Maximum quantity layout, only Given the space available, with the proposed change in 80,000 kgs 1,008 looms can be reii. Q.59. (Captive Consumption) at Lucknow and Pune.looms in output is sold to him Provided the installed, With 48 entire each section. will be Rs. 1,500 per month and the variable delivery costs will be 65 paise and 36 paise per kg. respectively. Cus iii. es of raw will be necessary to increase the wage of13,000 labour, for Rs. 720 and Rs. 729 per tonnehead per month. 6,000 and direct tonnes at obber. It material, available locally are is consumed for making EDC such EDC is consumed forper at Lucknow and mely Ethelene, EDC and VCL. Ethelene and sections, by Rs. 110 making VCL. One m

Questions Section 5 (Miscellaneous)

The company can run a third shift Choice of supplier with comparative cost tables. factory site at Rs. 792 per tonne. between 12 mid-might and 7a.m., with a half an hour interval. iv. Choice of customer with comparative tables of net realizations. (ii) Other variable costs thethe production process are Rs. hours' wage willRs. 32.94 lacs and fixed costs are However, for of six and half hours' work, eight 22.32 lacs and have to be paid. Ethelene EDC VCL(May 1993) Particulars Also18 lacs and Rs. 24.84 lacs respectively for costs and and Pune. Rs. prepare the statements showing process Lucknow overall results. Only 18 lakh meters can be sold at the present price of Rs. 3 per metre. There is an export offer for v. Production capacity annum (Metric Tons) 30,000 30,000 The output is lakh metersPer Rs.2.70 of Rs. 1,450 and25,000 RS. 1,460 per tonne by Lucknow and Pune factory Q.58 4.5 sold at a selling price per metre. at Cost Per Metric Ton: respectively. vi. 20 Variable Costs (Rs.) 30 40 y used for them. A market researchCosts conducted by the 20 cost per tonne and net profit earned in study (Rs.) ProductProgressive conversion to 14 heads per section, for all sections, can be can sell eithe Fixed respect of each factory. company reveals that the company planned, as d 30 40 aving 14 direct labourers each. native production plan for both the factories without any change in present 15 output of 18,000 tonnes whereby total 10 20 Common Fixed Costs (Rs.) 50 100WYE 75 Total EXE amount to Rs. 50,000 per month. 300 Rs. Q. 55. (Shut Down or Continue) 150 Rs. (Rs.) Examine the implications Sales proposals advice. Selling Price Per Metric Ton of the Per Annumfor the companys profit and give your 15,000 (Nov1991) A paintSelling price per company manufactures 2,00,000 per annum medium sized tins of "Spray Lac manufacturing unit 10,000 (Metric Tons) 375 540 Paints" when working at normal capacity. It incurs the following costs of manufacturing per unit: Costs: of Supplier and Customers) Q.57. (Selection (Rs.) Department 1: Direct 7.8 Direct materials material 100 58 ess an input of 1,00,000 kgs of raw material. Normal scrap 5hour 10% and 5% 7.5hour in factory and finishing pro will be of input Directlabour 50 75 Direct labour 2.1 Department 2: Variable overhead 2.5 nt sales volume of VCL, offers to buy 20,000 metric tons of VCL per annum at Rs. 250 per metric ton provided the e Direct materials 21 26 respective process. Fixed overhead 4.00 Directlabour 10hours 120 7.5hour 90 Relevant cost data for thecost (peryear are: 16.40 Product coming unit) Overhead Department 2 Department 1 (Rs.) Each unit (tin) of overhead rate per direct 21 with variable selling and administrative expenses of 60 the product is sold for Rs. s: Variable Rs. 3.60 Particula Finishing Process Factory Process Rs. 2.40 order is perhour Fixed overheads more: paise for 10,000 metric tons or labour tin. Rs. 5,00,000 Rs. 10,00,000 rs Direct 6,00,0 5,50,0 1,75,000 The bases of various costs given above are as follows: 2,80,000 Budgeted direct labour hours Wages 00 00 Overhead s can be produced and sold. Management plans to shut down the plant estimating that the fixed manufacturing co (i) xclude the cost of internallypossible sources of purchase of in the manufacture of EDC and costs of EDC consumed consumed Ethelene consumed xceeded theThere are threeuniform the company has been raw materials: considering costs of plant shut-down for the quarter a verheads are production capacity, rate throughout the year. Additional the use of sub-contracting production fac incurred at a

Maximum quantity (ii) two Supplier Purchase price per kg contractors responded as under: on normal capacity production. You are required: Rs. Kgs. (iii) can be avoided only if there is nil production of the product concerned. Common fixed costs are to be incurred irres 5.00 60,000 (iv) YX of WYE in a year for opinion, along with the calculations, as 1 of the company. The price be shut-down during the qua To express your the type of work done by department to whether the plant should charged by DS is Rs. 138 pe maintained. 5.60 80,000 (v) Provided entire quantity (i.e., in terms of is To calculate of shut-down point for quarter in units of products of 1,00,000 kgs. number of tins.) ii. department 1the the company. You are required to: ordered, otherwise at Rs 5.80 per kg Z 5.30 (May 1991) (a)Draw up a statement of profitability in respect of the year 2003-04 as originally envisaged by the Q. 56. (Effect of change in Plant Layout) required to collect the raw materials from the company. The price charged by DW is Rs. 150 per upon the distanc the type of work done by department 2 of the godown of supplier. Variable transport cost depends unit of EXE and R Jai Textiles Ltd. has been earning low profits. A special task force appointed for reviewing performance (b) and prospects reports the following: Supplier X Y 0,000 metric tons of VCL at Rs. 250 per metric ton and if the balance quantity of production Z VCL can be sold in t of Transport cost (per of 48 looms each. Each section has 24 weavers and paise 25 a (Nov1994) there 30 paise 25 paise shifts per day. There are 25 sections jobber. Thus kg.)

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Home Work SectionQ.60. (Simple Decision Making)

ne which is working at full capacity. B has a selling price of Rs. 100 and variable cost of Rs 60 per unit. A compone

(May 1995) Q.61. (Simple Decision Making)

a particular machine and it has a selling price of Rs. 50 and a marginal cost of Rs. 35. On the same machine, ano marginal cost of Rs. 5 per unit. Suppliers price of product B is Rs. 10 per unit.

Assuming that machine hour is the key factor, advice whether Product B could be bought out or manufactu (Nov1999) Q.62. (Simple Decision Making) A machine manufactures 10,000 units of a part at a total cost of Rs. 21 of which Rs. 18 is variable. This part is readily available in the market at Rs. 19 per unit.

ket then the machine can either be utilized to manufacture a component in same quantity contributing Rs 2 per co (May1997)

s profitable? Q. 63. (Simple Decision Making)

5,000 units per annum, the concern will have to install a new equipment at a cost of Rs. 15 lakhs. The equipment w

of 20,000 units. The cost structure is as under: Direct Material Direct Labour Variable Overhead Profit (Rs/unit) 30 20 10 20

ared to the current year, will increase by 10%. Because of the certain wage agreement direct labour cost will fixed overheads will increase further by Rs. 60,000 due to increased administrative charges.

d of that try to secure order for the balance unused capacity, as available now, through some sales promotion exp (May 2000) Q.64. (Simple Decision Making)

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ngular chocolate bar. The bars are wrapped in aluminum foil and packed in attractive cartons containing 50 bars. A c venture, new projections based on actual cost experience are now required.

ntative of the costs and productive efficiency we can expect in the next few quarters. There were virtually no invento Particulars Sales (50,000 x Rs. 24) (70,000 x Rs. 24) Cost of goods sold Gross margin Selling and administration Net income (loss) before taxes Tax (negative) Net income (loss) First Quarter 12,00,000 Second Quarter 16,80,000

7,00,000 8,80,000 5,00,000 6,50,000 8,00,000 6,90,000 (1,50,000) (60,000) 1,10,000 44,000 (90,000) 66,000

rginal and average income tax rate is 40%. This 40% figure has been used to estimate the tax liability arising f Required:

Management would like to know the break-even point in terms of quarterly carton sales for the chocolate

ii. e is an investment of Rs. 30,00,000 in this product line. What quarterly carton sales and total revenue are required 20% per annum on investment?

iii. ict that if the selling price is reduced by Rs. 1.50 per carton (Rs. 0.03 off per chocolate bar) and a Rs. 1,50,000 a mounted, sales will increase by 20% over the second quarter sales. Should the plan be implemented? (Nov 1990) Q.65. (Simple Decision Making) A firm furnishes the following information: Capacity in Units 2,000 3,000 4,000 5,000 6,000 Unit Cost Rs. 40 35 34 32 31 Unit Price Rs. 100 95 94

perating at 4,000 units capacity and has received an order for 2,000 units from an export market at Rs. 28 per unit. S (May 2000)

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IDEAL FLEXICLASS / Final CA /Advanced ManagementAccounting/ Volume 1Q.66.

le price is Rs 100. The present sales is 15,000 units. To produce over 20,000 units and upto another 10,000 units of 10 years. The current cost structure is as under: Direct Material Direct Labour Variable Overhead Profit 30% of the 20% of the Rs. 20 per Rs. 15 per sale value sale value unit unit

ost is estimated to go up due to price escalation as under: 10% in Direct Material from present level of 30%. Labour from present level of 20%. Rs. 50,000 in fixed overhead per year.

nt level of output, on a long term basis at a unit price of Rs. 90. Apart from the investment of Rs. 10 lakhs, as sh

he present unused capacity of 5,000 units for which there will be additional selling expenditure of Rs. 50,000.

(Nov1996)Q.67. (Plant wise and Overall Profitability)

processing and bottling plants, Danida and Danima, in adjoining districts. The comparatives cost and revenue data b Danida Danima (1,00,000 litres) (75,000 litres) 1,00,000 90,000 14,000 30,000 14,000 40,000 10,000 Total Variable Costs Electricity Salaries and wages Depreciation Total Fixed Cost Total Costs Sales realisation Profit 79,000 71,500 12,500 47,000 14,000 46,000 11,250 2,98,000 2,81,250

Particulars Bottles Closures Crates Milk loss Electricity Fuel Water

13,500 90,000 50,000 11,000 60,000 20,000 1,53,500 91,000 4,51,500 7,00,000 3,72,250 5,25,000 2,48,500 1,52,750

ention. It is also observed that Danida can increase its production by 50 percent with the existing plant capacity

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1. 25,000 litres and increase Danida's production by 25,000 litres. Cut down Danima's production by 50,000 litres and 2.

00 litres, Danida will incur Re.0.40 per litre towards group incentive. Transporting the additional output from Dan Prepare a statement to show the contribution and the profit for Danida, Danima and for the company as a whole, for each proposal. Comment on the results.b.

in Danima's production should not result in reporting loss, as it would demoralize its employees. If break-even prod balance alone is to be transferred to Danida, show the contribution and the profit for Danida, (Nov 1991) Danima and the company as a whole. Q. 68. (Plant wise and Overall Profitability) A company has two plants one at Sambalpur and the other at Bilaspur, where production of goods takes place.

ally, but are limited to 6,000 M.T. at Rs. 1800 per M.T. at Sambalpur and 16,000 M.T. at Rs. 2,000 per M.T. at Bi

Particulars Annual output Capacity utilisation Other variables Fixed cost (M.T.) (%) (Rs. lakhs) (Rs. lakhs)

For unit at Sambalpur 12,000 80 156 108

For unit at Bilaspur 15,000 60 192 120

You are required to determine: (a)The cost break-up of each unit per M.T. of output. (b)The quantity of production at each unit from the availability of local supplies of basic raw material

g the same total production of the company, as a whole. Cost savings, if any, as per the revised schedule of product (c) (Nov 2001) Q. 69. (Plant wise and Overall Profitability)

products A, B and C in the State of Haryana and Rajasthan. At the end of first half of 2004-05 the following absorptio (Rs. '000) 3,000 2,331 Rajasthan Total 900 699 3,900 3,030 120 184 669 36 169 201 156 353 870 Administration Expenses (i) 304 Selling Expenses (ii) 205 509 Total Expenses 365 Net Profit (4) The expenses are constant and common to both the States. They stand allocated on the basis of 361 sales. Particulars Sales Manufacturing Cost of Sales Gross Profit Haryana The expenses are semi-fixed but specifically relate to the respective State. ii.

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IDEAL FLEXICLASS / Final CA /Advanced ManagementAccounting/ Volume 1The management is worried to note that the decision taken to market the products in Rajasthan to utilize the idle capacity has proved wrong and wish to cover only Haryana State.

He is of the firm opinion that sales affected in the State of Rajasthan is contributing profits. For the next half year he of existing sales. This will utilize the idle capacity in full. The product wise relevant details for the first half of 2004-05 are: Particulars Sales (in Rs. '000): Haryana Rajasthan Variable costs (as a % on sales): Manufacturing Selling Specific fixed manufacturing expenses(in Rs. '000) You are required to: A 1,200 300 40 3 570 B 900 300 35 2 470 C 900 300 30 2 610

ment for the first half of 2004-05 using contribution approach. Also offer your views on the contention of the man marketing division.

ii. Prepare a product-wise profit statement for the same period using contribution approach. iii. Submit your well throughout recommendation as to which the product should be produced to utilize idle ca (Nov 1996) Q.70

tyles of jewellery cases. Management estimates that during the third quarter, the company will be operating at 8 desires a higher utilization of plant capacity, the company will consider a special order.

llery case similar to one of A Co. Ltd.s jewellery cases. JCP jewellery case would be marketed under JCPs own la Ltd. jewellery case that would be similar to the specifications of JCP special order are as follows: (Rs.) Regular selling price per unit 90 Costs per unit 25 Raw Materials Direct Labour (0.5 hour @ Rs. 60) 30 10 Overhead (0.25 machine hour @ Rs. 40) Total Costs 65

ement has estimated that the remaining costs, labour time and machine time will be the same as for A Co. Ltd. je

shipped by the last date of the quarter. However, the K Jewellery case is different from any jewellery case in the A Co. Ltd. line. The estimated per unit cost of this case are as follows: (Rs.)

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IDEAL FLEXICLASS / Final CA /Advanced ManagementAccounting/ Volume 1Raw Materials Direct Labour (0.5 hour @ Rs. 60) Overhead (0.5 machine hour @ Rs. 40) Total Costs 32. 50 30. 00 20.00 82.50

additional setup costs and will have to purchase a Rs. 25,000 special device to manufacture these cases, this de completed.

rrent year amounts to Rs. 21,60,000. All manufacturing overhead costs are applied to production on the basis of mac

when special orders are not expected to generate repeat sales. Required: Should A Co. Ltd. accept either special order? Justify your answer and show the calculations. (Nov 2000) Q. 71. (Special Orders)

ts unit in Tirupur. The unit has a capacity of 60,000 napkins per month. Present monthly production for April is 40,000 (Rs. per unit) Direct Material Direct Labour Manufacturing overhead Total The marketing costs per unit is Rs. 7 (Rs. 5 is variable). Marketing costs include distribution costs and customer service costs. Present selling price is Rs. 22.50 per unit. 62 4 12 No fixed cost Fixed cost 75% Variable 25%

apkin for the month of June. No further sales to the hotel are anticipated. Fixed manufacturing costs and marketing No marketing costs involved in special order. Prepare:

1. me statement for June. 2. e statement under absorption costing for April. Should Jolly Fabrics accept the special order from the hotel or not? 3. (May 1990 Q. 72. (Shut Down or Continue) Universe Ltd. manufactures 20,000 units of X in a year at its normal production capacity. The unit cost as to variable costs and fixed costs at this level are Rs. 13 and Rs. 4 respectively.

ext year. The management plans to shut down the plant. The fixed costs for the next year then is expected to be re be shut-down? What is the shut-down point? Q. 73. (Continuation of a product) (May1996)

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Inspection, set up etc. vary with the number of batches in which the chains are produced. 1. e production and sales volume is are being produced innormal volume of 2,000 units. a substantial unfavorable var Currently chains much lower than the the batch size and so there is (Rs in Lakhs) 2. C wages to four workers who are exclusively engaged in the manufacturing of chains. These workers are in perm Products D from outside vendor, it will not require the machine which it has 3. Total Particulars 400 hired for manufacturing chains. Sales 500 Required: Direct materials 32 173 64 70 7 200 I.Assume that if B Ltd. purchases chains from outside vendor, the facility (including workers) where 100 Direct wages 105 18 271 88 60 the chains are currently manufactured will remain idle. Should B Ltd. accept the offer from outside 1,200 128 120 24 Factory at the anticipated production and sale172 overheads 444 vendor volume of 24,000 units. 100 20 240 80 40 II. Selling&admn. Overheads Total costs hange if facilities can be used to upgrade the Bicycle which will result in an252 incremental69 revenue of Rs. 22 per Bicycle 1,128 360 447 5 (52) 31 Profit (Loss) 40 72 48 18 and tooling cost would be Rs. 16,000. 3 24 Unabsorbed overheads III. Net Profit ove. Further assume that with better planning B Ltd. will be able to manufacture chains in the batch sized of 4,000 50 per cent of the factory overheads is variable at normal operating volume and the variable selling and (Nov1995) administration overheads account for 5% of sales. Q. 75. (Accessories, whether to be provided) volume is used in the market for application in which Product D can be substituted. Thus if Product C is not availab

oduce a new 100 lacs garmentanythe market in the forthcoming Diwali Season. Four metres of cloth (material) are fashion without in change in the fixed selling expenses.

s sold in conjunction with Product A. The customers will not be able to substitute Product D and so the sales of P piece. The left-over material can also be used to manufacture a matching cap & handbag. level if Product C is withdrawn.

ing caps and handbags are made available. The market research indicates that the cap and / or handbag cannot be reduced by Rs. 20 lacs. Alternatively if the production and sales of Product C is maintained to the extent of 2

68% Complete sets of dress, cap and handbag Dress and Cap only 12% Prepare statement to show the financial implication of: Dress and handbag only 9% i. Continuance of Product C Dress only 11% Total discontinuance of Product C ii. 100% iii. Continuance of Product C only as service to customers using Product A whose business will otherwise be lost. b. Make your recommendation on the course of action to be taken by the company with such remnants can be sold for Rs. 5 for each dress to offer. If the cap and handbag are to be manufactured, it requires comments as you may like cut out. (May 1985) Q.74. (Make or Buy)

anufactures the chains for its Bicycles. It expects to produce and sell 24,000 Bicycles duringUnit Other Costs Per 1999-2000. It is cons Selling Price Per Unit 400. 48.0 any number of chains at Rs 12 per chain. Dress 00 0 The accountant of B Ltd. reports the following costs for producing 24,000 chains: (Rs.) Cap Handba Cost Cost per unit Total cost Direct Material 1,20,000 5.00 r unit exclude the Direct Labour cost of material and cutting. 4.00 96,000 ed to prepare a statement showing: Should the company go in for caps and handbags along with dresses ? Subs 2.00 48,000 Variable manufacturing Overhead Inspection, set up etc. 1.00 24,000 (May2001) 1.00 24,000 Machine rent 1.25 allocated fixed overhead 30,000 14.25 3,42,000 The following additional information is available: 46 47

chap1 marginal costing & decision making

Documents

key factor

home work

local service

finished product

simple decision

net income

key factor

quarterly