NARSEE MONJEE INSTITUTE OF MANAGEMENT AND HIGHER STUDIES (DEEMED UNIVERSITY) DISTANCE LEARNING PROGRAMME ON MANAGEMENT COST AND

MANAGEMENT ACCOUNTING DFM/PGDGMII FULL MARKS 100 TIME ALLOWED -THREE HOURS ANSWER ANY FIVE QUESTIONS

Q.1 The summarised operating results of a company for two years are as under: 2003 2004 Rs.Lacs Rs. Lacs 420.00453.60 280.0 318.85 70.0 84.00 52.5 64.75 402.5 467.60 _17.50 (14.00)

Sales Material cost of Sales Variable expenses Fixed expenses Total Profit / Loss

Analysis revealed that during 2004 the average prices increased over those of 2003 in respect of:a) Sales by 20%, b) Materials by 10%, c) Variable Expenses by 10% Prepare a statement showing the variation in profit between two years

Q2 ABC ltd manufactures 1 type of sofa set exclusively. The set contains 7 components: 2 sofas, 1 centre table, 4-chairs. These components can either be manufactured or sub-contracted and the following are relevant information

Sofa

Centre Table 1000 100 2500

Chair

Variable Cost 500 Direct labour hours 50 per component Sub contract price per 1000 component

550 10 750

Sales of sofa sets are currently 8000 per period each set being sold at Rs 7500/-. A capacity constraint of 500000 direct labour hours forces the company to sub contract some component. Fixed cost 55,00,000/- per period. 1) Advice on which component and how many should be manufactured by the company, 2) What is the maximum, profit that could be earned at the current sales. What is the max profit if the sales are unlimited. 3) If the selling price has to be reduced to Rs. 6950/- per sofa set. What is the max profit that the company can obtain? 3 (a) A plant is operating at 60% capacity. The fixed cost for operating the plant amount to Rs 40000 and variable cost to Rs.160000. The sales proceeds of the product realise Rs 2 50 000. The managing Direcror asks you to find out fo him the percentage of capacity at which the plant should operate so that a profit of Rs.60000 is realised. (b) For a department, the standard overhead rate is Rs.2.50 per hour and the overhead allowances are as follows: ACTIVITY LEVEL (HOURS) 3000 7000 11000 BUDGET OVERHEAD ALLOWANCE (Rs) 10000 18000 26000

You are requested to calculate: 1. Fixes cost 2. The standard activity level on which the standard overhead rate has been fixed.

4. A and B manufacture the same product. By a mutual agreement, they cater to the entire needs of the market. A B 20000 units 15000 units 80% 75% 25000 units is satisfied by A and B in the Ratio of 3:2 140000 150000 180000 50 80 160000 175000 200000 45 80

Installed capacity Normal Working Efficiency Market Demand Details of Fixed Cost: Upto 50% of the installed Capacity Between %1% and 75% of the installed capacity Beyond 75% of the installed Capacity Variable Cost ( per unit) (Rs) Selling Price (per unit)(Rs)

In 2005, it is anticipated that a recession will set in and consequently the total market demand for the product will only be 50% of the present position. Market price will suffer a reduction by 20%. They agree that one of them will cater to the needs of the market fully, paying the other 40% of the profits from sales. You are informed that the additional costs of improving machine efficiency beyond the present limits will be Rs 15000 and Rs 25000 for A and B respectively. Ascertain which of the two manufacturers will find it profitable to work. 5. From one basic Raw Material , Kumar Ltd produces two different products known as Alfa and Beeta. The companys direct labour rate is Rs 3 per hour and it absorbs overhead into the cost of its two products by means of variable and fixed overhead rates per 1000 kgs produced. The Budgeted costs and selling price of each products are as follows:

Direct material

ALFA 1000 Kg Rs. 200

BEETA 1000 Kg Rs. 200

Direct labour Variable production overhead Fixed production overheads Selling Price

180 36 240 656 800

300 75 400 975 1050

For the year ending 31st March 2005, Kumar Ltds effective annual production capacity is 120000 labour hours and its estimated fixed production overhead costs is Rs. 4 80 000. The sale policy of Kumar Ltd is to sell 75% of its capacity in the more profitable grade and 25% in less profitable grade. You are required to: 1. State on which of the product the company should concentrate to obtain the highest profit.

2. Present a statement for which shows the expected sales, variable costs and contribution for each product together with overall net profit which can be expected for the year ended 31st March, 2005 assuming that the present sales policy of the company is followed. The budgeted fixed selling and distribution costs estimated to be Rs. 90000
6. Super Toys earns an average net profit of Rs.3 per unit at a selling price of Rs. 15 by producing and selling 60,000 units at 60% potential capacity. The composition of cost of sales is as follows: Direct materials Direct labour Production overhead Sales overhead Rs.4.00 Rs.1.00 Rs.6.00 (50 fixed) Re.1.00 (75% fixed)

During the current year the firm intends to produce the same number but anticipates that: (i) (ii) (iii) (iv) its fixed expenses will increase by 10%; rates of direct material will increase by 5%; rates of direct labour will increase by 20%; and selling price can not be increased.

Under these circumstances, the firm obtain an order for an additional 20% of its capacity.

What minimum price, would you recommend for accepting the order to ensure Super Toys an overall profit of Rs.1,80,500 ? 7. A Chemical factory processes raw material R and produces three similar products P1, P2 , and P3 of a joint process. The joint cost of processing 5000 Kg of R are as under: Rs. Labour Cost 6000 Overhead Cost 2000 Total 8000 The Raw Material R is purchased at Rs. 2.40 per Kg. This rate is after a trade discount of 20% on the list price. Normal process loss is estimated at 10% of input weight The scrap generated in processing R is recovered to the extent of 25% ( by weight)and sold as such in the market at Rs.4 per kg. The products---P1, P2 and P3 can also be sold at Rs.5.00, Rs. 6.00 and Rs. 6.50 per Kg. Respectively, without any further processing. However, products P1 and P2 can also be further jointly processed at an additional cost of Rs. 2 per Kg.of the input to get product J1. The further processing cost of J1 will be Re. 1 per Kg. of the output weight. Similarly, products P2 and P3 can be jointly processed to get the 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 the output weight.. The normal loss of processing J1 out of P1 and P2 will be 4% of input weight. The processing loss is expected 2% on processing J2. The selling prices of J1 and J2 including the input composition is given below : Input P1 P2 P3 Selling Price per Kg (Rs.) Output J1 40% 60% 15

J2 50% 50% 17

The output Weight of P1, P2 and P3 will be in the proportion of 3:4:2 You are required to :

Calculate the profit per Kg of P1, P2, P3, J1 and J2 and also show profitability of processing P1, P2 and P3 from 5000 kg of R assuming sale at split off point. ( Joint cost may be allocated based on sales Realisation at split off point) Profitability after both J1 and J2 are further processed and the material P2 is used in the ratio of 3:2 for production of J1 and J2. If only one product is produced ie either J1 or J2, what is the total profitability of the company

8. Company prepares a cost volume profit budget analysis for each plant as per details below:
a) Profit plan for Plant 1 shows annual budgeted fixed costs Rs.12,00,000 variable costs Rs 8,40,000. And sales value of production Rs.22,00,000. Allocated head office budgeted fixed costs are Rs.3,20,000. You are requested to prepare an analysis indicating the break even point before and after cost allocation. Explain why the break even point change (in Rs.) is greater than the allocated amount. b) Plant 2 produces product that sells at Rs.40. It costs Rs.42.50 when 15000 units are produced. At a production level of 20,000 the cost per unit is Rs.38,12. What is the breakeven point in Rs. and in units. c) Plant 3 budgeted income and cost estimates are as follows: Sales (annual) Costs Fixed Variable Head office allocated Loss Rs.10,00,000 Rs.4,00,000 Rs.3,00,000 Rs.3,50,000

Rs.10,50,000 50,000

Sale of Plant 3 is under consideration. What is your recommendation based on the data given? Justify your recommendation. d) Plant 4 produces one product : The budgeted income and cost estimates are as follows: Sales (annual)@ Rs.200 per unit Cost Fixed Variable

Rs.20,00,000 Rs. 7,47,500 Rs.13,50,000

Head office allocated Loss

Rs. 5,02,500

Rs.26,00,000 Rs. 6,00,000

How many additional units must be manufactured in the Plant in order to breakeven? What would be the profit pick up unit above breakeven?

Q 9

Write short notes on: 1. Fixed Cost and Variable Cost 2. Sunk Cost and Opportunity Cost 3. Absorption Costing 4. Zero Based Budgeting