CA Final Group II : Cost Management - May 2006

CA Final - Group II • Cost Management • May 2006

This Paper has 18 answerable questions with 0 answered.

Roll No………………………
Total No. of Questions— 6]	[Total No. of Printed Pages—4
Time Allowed : 3 Hours	Maximum Marks : 100

Answers to questions are to be given only in English except in the cases of candidates who have opted for Hindi medium. If a candidate who has not opted for Hindi medium, answers in Hindi, his answers in Hindi will not be valued.
Question No. 1 is compulsory. Answer any four Questions from the rest. Working notes should form part of the answer. Make assumptions wherever necessary.
Marks

Answers to questions are to be given only in English except in the cases of candidates who have opted for Hindi medium. If a candidate who has not opted for Hindi medium, answers in Hindi, his answers in Hindi will not be valued.

Question No. 1 is compulsory.
Answer any four Questions from the rest. Working notes should form part of the answer.
Make assumptions wherever necessary.

Marks

(a)

What are the elements of a Balanced Score card? Also explain how it can be used as a Financial Planning model.

(0)

(b)

What is the concept of ‘Value–chain’ and why is it important for Cost Management?

(0)

(c)

Compute Ltd. manufactures two parts ‘P’ and ‘Q’ for Computer Industry.

P:	annual production and sales of 1, 00,000 units at a selling price of Rs. 100.05per unit.
Q:	annual production and sales of 50,000 units at a selling price of Rs. 150 per unit. Direct and Indirect costs incurred on these two parts are as follows:

	(Rs. in thousand)
	P	Q	Total
Direct Material cost (variable) Labour cost (variable) Direct Machining cost (See Note)^∗ Indirect Costs:	4,200 1,500 700	3,000 1,000 550	7,200 2,500 1,250
Machine set up cost Testing cost Engineering cost			462 2,375 2,250 16,037

Direct machining costs represent the cost of machine capacity dedicated to the production of each product. These costs are fixed and are not expected to vary over the long-run horizon.

	P	Q
Production Batch Size Set up time per batch Testing time per unit Engineering cost incurred on each product	1,000 units 30 hours 5 hours 8.40 lacs	500 units 36 hours 9 hours 14.10 lacs

A foreign competitor has introduced product very similar to ‘P’. To maintain the company’s share and profit, Computer Ltd. has to reduce the price to Rs. 86.25. The company calls for a meeting and comes up with a proposal to change design of product ‘P’. The expected effect of new design is as follows:

•	Direct Material cost is expected to decrease by Rs. 5 per unit.
•	Labour cost is expected to decrease by Rs. 2 per unit.
•	Machine time is expected to decrease by 15 minutes; previously it took 3 hours to produce 1 unit of ‘P’. The machine will be dedicated to the production of new design.
•	Set up time will be 28 hours for each set up.
•	Time required for testing each unit will be reduced by 1 hour.
•	Engineering cost and batch size will be unchanged.

Required:

(a)	Company management identifies that cost driver for Machine set-up costs is ‘set up hours used in batch setting’ and for testing costs is ‘testing time’. Engineering costs are assigned to products by special study. Calculate the full cost per unit for ‘P’ and ‘Q’ using Activity-based costing.
(b)	What is the Mark-up on full cost per unit of P?
(c)	What is the Target cost per unit for new design to maintain the same mark up percentage on full cost per unit as it had earlier? Assume cost per unit of cost drivers for the new design remains unchanged.
(d)	Will the new design achieve the cost reduction target?
(e)	List four possible management actions that the Computo Ltd. should take regarding new design.

(0)

(a)

Zilmil Ltd. makes two products ‘Brightly’ and ‘Lightly’. Both the products use the same labour force, the size of which is restricted to 78,000 hours per month. Brightly needs 2 hours per unit to make whereas lightly needs one hour. The estimated production and sales, manufacturing and selling expenses per month are as follows:

	Brightly		Lightly
Production and Sales (in Nos.) Cost per month (Rs.)	12,000 34,00,000	16,000 38,00,000	40,000 62,00,000	48,000 66,80,000

The Company is considering pricing option in a highly competitive market. It has estimated sales demand at various selling prices:

Brightly:
Selling Price per unit (Rs.) Sales demand per month	276 12,000	272 14,000	268 16,000	264 18,000	260 20,000	254 22,000
Lightly:
Selling Price per unit (Rs.) Sales demand per month	163 40,000	162 42,000	161 44,000	160 46,000	156 48,000	152 50,000

You are required to compute profit maximizing price and quantity for each product.

(0)

(b)

What are some goals of a ‘transfer–pricing’ system in an organization?

(0)

(c)

“Overhead variances should be viewed as interdependent rather than independent”. Explain.

(0)

(a)

Jay Kay Limited is a single product manufacturing company. The following information relates to the months of May and June, 2003:

		May Rs.	June Rs.
(i)	Budgeted Costs and Selling prices: Variable manufacturing cost per unit Total fixed manufacturing cost (based on budgeted output of 25,000 units per month) Total fixed marketing cost Selling price per unit	2.00 40,000 14,000 5.00	2.20 44,000 15,400 5.50
(ii)	Actual production and sales:
		Units	Units
	Production Sales	24,000 21,000	24,000 26,500
(iii)	There was no stock of finished goods at the beginning of May, 2003. There was no wastage or loss of finished goods during May or June, 2003.
(iv)	Actual costs incurred corresponded to those budgeted for each month.

You are required to calculate the relative effects on the monthly operating profits of applying: (a) Absorption costing and (b) Marginal costing.

(0)

(b)

What is total–life–cycle costing approach? What is it important?

(0)

(c)

Why are conventional product costing systems more likely to distort product costs in highly automated plants? How do activity–based costing systems deal with such a situation?

(0)

(a)

An organisation manufactures a product, particulars of which are detailed below:

Annual Production (Units)
Cost per annum (Rs.)
Material
Other variable cost
Fixed cost
Apportioned Investment (Rs.)

20,000

50,000
60,000
40,000
1,50,000

Determine the unit selling price under two strategies mentioned below. Assume that the organisation’s Tax rate is 40%—

(a) 20% return on investment.

(b) 6% profit on list sales, when trade discount is 40%.

(0)

(b)

“Sunk cost is irrelevant in decision-making, but irrelevant costs are not sunk costs”. Explain with example.

(0)

(c)

How will you apply customer costing in service sector? Explain with the help of a suitable example.

(0)

(a)

A Company is engaged in manufacturing two products ‘X’ and ‘Y’. Product X uses one unit of component ‘P’ and two units of component ‘Q’. Product ‘Y’; uses two units of component ‘P’, one unit of component ‘Q’ and two units of component ‘R’. Component ‘R’ which is assembled in the factory uses one unit of component ‘Q’.

Component ‘P’ and ‘Q’ are purchased from the market. The company has prepared the following forecast of sales and inventory for the next year:

	Product 'X'	Product 'Y'
Sales (in units) At the end of the year At the beginning of the year	80,000 10,000 30,000	1,50,000 20,000 50,000

The production of both the products and the assembling of the component ‘R’ will be spread out uniformly throughout the year. The company at present orders its inventory of ‘P’ and ‘Q’ in quantities equivalent to 3 months production. The company has compiled the following data related to two components:

	P	Q
Price per unit (Rs.) Order placing cost per order (Rs.) Carrying cost per annum	20 1,500 20%	8 1,500 20%

Required:

(a) Prepare a Budget of production and requirements of components during next year.

(b) Suggest the optimal order quantity of components ‘P’ and ‘Q’.

(0)

(b)

Differentiate between ‘Value–added’ and ‘Non–value–added’ activities in the context of Activity–based costing.

Give examples of Value–added and Non–value–added activities.

(0)

(c)

“The use of Absorption costing method in decision-making process leads to anomalies.” Discuss.

(0)

(a)

A Company manufactures two products ‘X’ and ‘Y’. Company’s fixed cost per annum is Rs. 5 lacs. These products are sold for Rs. 288 per unit of ‘X’ and Rs. 432 per unit of ‘Y’. Standard cost data are:

	Product 'X' Rs.	Product 'Y' Rs.
Direct Raw Material Direct wages Rs. 8 per hour in Departments:	40	80
1 2 3 4	48 24 72 —	72 48 — 96
Variable overhead	32	28

The Company operates 8 hours shift for 300 days in a year. Number of workers engaged by each department is given below:

Department
No. of Workers

1
45

2
24

3
27

4
36

Required:

(a)	How many units of each product should be manufactured and what is the resultant maximum profit, if numbers of employees cannot be increased or transferred?
(b)	If only one product is to be manufactured by the Company, which of the products would give the maximum profit and what is the amount of such profit?

(0)

(b)

How has the composition of manufacturing costs changed during recent years? How has this change affected the design of cost accounting systems?

(0)

(c)

Explain the concept ‘Learning curve’. How can it be applied for Cost management?

(0)

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