BBA Managerial Accounting

Limiting Factor
A scarce resource is a resource of which there is a limited supply. Once a source affect the ability
of an organization to earn profits, a scarce resource become known as a limiting factor

A limiting factor or key is anything which limits the activity of an entity. An entity seek to
optimize the benefit it obtain the limiting factor

If resources are limiting factor, contribution will be maximized by earning the biggest possible
contribution per unit of limiting factor.
Where there is just one limiting factor, the technique for establishing the contribution-
maximizing product or service mix is to rank the product or service in order of contribution
earning ability per unit of limiting factor.

Question # 1.1
Rahim & Co. is producing four products and is planning its production mix for the next year.
Estimated cost, sales and production data for the next year are as follows.

Product A B C D
Selling price per unit Rs.50 Rs.64 Rs.106 Rs.88
Material @ Rs.2 per kg Rs.12 Rs.36 Rs.20 Rs.24
Labour @ Rs.10 per hour Rs.30 Rs.20 Rs.70 Rs.50

Maximum demand in units 5,000 5,000 5,000 5,000

Required:
(a) Base on the above data, which is the most appropriate mix under the following two
assumptions
If labour hours are limited to 50,000 in a period.
If material is limited to 110,000 kg in a period.
(b) Calculate the utilization of labour and material by each product.

Question # 1.2
Sangdil Ltd makes two products, SS and TT. Variable cost per unit is as follows.
SS TT
Direct material Rs.6 Rs.18
Direct labour @ Rs.18 per hour Rs.36 Rs.18
Variable overhead Rs.6 Rs.6
Total variable cost Rs.48 Rs.48

The selling price per unit is Rs.84 for SS and Rs.66 for TT. During July 2001 the available direct
labour is limited to 48,000 hours. Sales demand in July is expected to be 18,000 units for SS and
30,000 units for TT. Fixed cost is Rs. 200,000 per month.

Required:
Determine profit-maximizing production level for product SS & TT.
 BBA Managerial Accounting
Question # 1.3
Fine electrical company manufactures capacitors, which consist of four components namely A,
B, C & D. The company is in the process of preparing its budget for year 2001. The production
managers review shows that it will not be possible to manufacture all requirements for
components A, B, C & D because of mental pressing limitation of 20,000 hours. It is further
informed that:

(a) Standard cost per unit

Component A B C D
Variable cost Rs. Rs. Rs. Rs.
Direct material 18.50 13.50 12.50 22.00
Direct wages 5.00 4.00 11.00 20.00
Direct expenses 5.00 10.00 5.00 30.00
Fixed overheads 2.50 2.00 5.50 10.00
Total production cost 31.00 29.50 34.00 82.00

(b) Requirement in units 2,000 3,500 1,500 2,800

(c) Direct expenses relating to the processing of metal amount in Rs.5.00 per machine
hours.
(d) Fixed overhead are absorbed as percentage of direct wages.

Required:
Which components & in what quantities, should be manufactured in the 20,000 hours of press
time available.

Question # 1.4
M/S Mechanical Engineering manufactures four types of wire heads of power loons by using
same machinery. The following details to its products:
Type A Type B Type C Type D
Rs. Per box Rs. Per box Rs. Per box Rs. Per box
Selling price 2,380 2,550 3,825 3,570
Direct material 425 510 680 510
Direct labour 340 340 680 680
Variable Overhead 255 255 510 510
Fixed Overhead* 680 680 1,360 1,360
Profit 680 765 595 510
Labour hours 10 10 20 20
Machine hours 40 30 40 50
Maximum demand (box) 200 180 250 100

*Absorption is based on budgeted labour hours of 10,000 per week.

There is a maximum of 20,000 machine hours available per week.

Required:
Determine the production plan, which will maximize the weekly profit of Mechanical
Engineering & prepare statement showing the profit your plan will earn.
 BBA Managerial Accounting
Question # 1.5
Sausage makes two products, the mash and the sauce. Unit variable cost is as follows
Mash sauce
Direct materials 1 3
Direct labour (RS.3 per hour) 6 3
Variable overhead 1 1
8 7
The sales price per unit is Rs. 14 per mash and Rs.11 per sauce. During July the available direct
labour is limited to 8,000 hour. Sales demand in July is expected to be as follows

MASH 3,000 units

SAUCE 5,000 units

Required:
Determine the production budget that will maximize profit, assuming that fixed cost per
months are RS,20,000 and that is there is no opening inventory of good or work in progress.

Question # 1.6
Lucky manufactures and sells three product X, Y, Z for which budgeted sales demand, unit selling
price and unit variable cost are as follows.

X Y Z
Budget sales demand 550 units 500 units 400 units
Rs. Rs. Rs. Rs. Rs. Rs.
Unit sales price 16 18 14
Variable cost : 8 6 2
Material
Labour 4 6 9
12 12 11
Unit contribution 4 6 3
The organization has existing inventory of 250 units of X and 200 unit of Z, which it is quite
willing to use up to meet sales demand. All three products use the same direct material and the
same type of direct labour. In the next year, the available supply of material will be restricted to
RS 4,800 (at cost) and the available supply of Rs 6,600 (at cost).
Required:
Determine what product mix and sales mix would maximize the organizations profits in the next
year.
 BBA Managerial Accounting
Question # 1.8
Harvey is currently preparing its budget for the year ending 30 September 20X2 .The companies
manufactures and sells three product, beta, delta and gamma
The unit selling price and cost structure of each product is budget as follows.

Beta (Rs.) Delta (Rs.) Gamma (Rs.)

Selling price 100 124 32
Variable costs:
Labour 24 48 6
Material 26 7 8
Overhead 10 5 6
60 60 20

Direct labour rate is budgeted at RS 6 per hour and fixed costs at RS 1,300,000 per annum .The
Company has a maximum production capacity of 228,000 direct labour hour.
A meeting of the board of directors has been convened to discuss the budget and to resolve the
problem as to the quantity of each product which should be made and sold. The sales director
presented the result of a recent market survey which reveals that market demand the
companys product will be as follows.
PRODUCT UNIT
Beta 24000
Delta 12000
Gamma 60000
The production director proposes that since Gamma only contribution Rs 12 per units, the
product should no longer be produced and the surplus capacity transferred to produce
additional quantities of Beta and Delta. The sales director does not agree with the proposal.
Gamma is considered necessary to complement the product range and to maintain customer
goodwill. If Gamma is not offered, the sales director believes that sales of Beta and Delta will be
seriously affected. After further discussion the board decided that a minimum of 10,000 units of
each product should be produced. The remaining production capacity would then be allocated
so as to achieve the maximum profit possible.

Required:
Prepare a budget statement which clearly shows the maximum profit which could be achieved
in the year ending 30september 20X2.