| 1. | (a) | In each of the cases/statements given below, one out of the four alternatives is correct. Indicate the correct answer (=1 mark). | 1x8 | |
| | | (i) | Joint Cost are useful for: (A)
(B)
(C)
(D) | Selling the selling price of a product
Determining whether to continue producing an item.
Evaluating management by means of a responsibility reporting system
Determining inventory Cost for accounting purposes. |
| | (0) |
| | | (ii) | The combination of management by objectives, developed with input from the individual manager and the budgeting process is an example of: (A)
(B)
(C)
(D) | Flexible budgeting,
Human resource management,
Responsibility accounting,
Capital budgeting. |
| | (0) |
| | | (iii) | Which of the following is not a cost of decentralization? | (A) | Dysfunctional decision making owing to disagreements of managers regarding overall goals and sub–goals of the individual decision–makers. | (B)
(C)
(D) | A decreased understanding of the overall goals of the organization,
Increased costs for developing the information system,
Decreased costs of corporate–level staff services and management talent. |
| | (0) |
| | | (iv) | Automark makes a special gadget for the cars it produces. The machine for the gadget works to full capacity and incurs Rs. 15 Lacs and Rs. 40 Lacs respectively as variable and fixed costs. If all the gadgets were purchased from an outside suppliers, the machine could be used to produce other items, which would earn a total contribution of Rs. 25 Lacs. What is the maximum price that Automart should be willing to pay to the outside suppliers for the gadgets, assuming there is no change in fixed costs: (A)
(B)
(C)
(D) | Rs. 40 Lacs,
Rs. 65 Lacs,
Rs. 25 Lacs,
Rs. 15 Lacs. |
| | (0) |
| | | (v) | Proforma financial statements are part of the budgeting process, Normally, the last proforma statement prepared happens to be the (A)
(B)
(C)
(D) | Cash Flow Statement,
Statement of Economic value added,
Income Statement,
Balance Sheet Statement. |
| | (0) |
| | | (vi) | In determining cost behavior in business, the cost function is often expressed as y = a + bx. Which one of the cost estimation methods should not be used in estimating fixed and variable costs for the equation? (A)
(B)
(C)
(D) | High and low point method,
Multiple regression,
Simple regression,
Graphic method. |
| | (0) |
| | | (vii) | Premium Pricing | (A) | Offers the main product at a relatively low price so as to induce customers to buy the extras or optional advantageous spare parts which are highly priced. | (B)
(C)
(D) | Starts with a high price initially but is lowered subsequently.
Is pricing above competition on a permanent basis,
Is set with a low price initially but is increased subsequently. |
| | (0) |
| | | (viii) | Following is a table of probabilities for two separate product lines, X and Y: | Probability | X Profit
Rs. | Y Profit
Rs. | 0.20
0.70
0.10 | 500
300
600 | 50
400
800 |
The Product line to obtain maximum utility for a risk–averse decision maker is (A)
(B)
(C)
(D) | X because it has the higher expected profit,
Y because it has the higher expected profit,
Y because it has the higher dispersion,
X because it has the lower dispersion. |
| | (0) |
| | (b) | In each of the cases given below one out of four answers is correct. Indicate the correct answer (= 1 mark) and give your working/reasons in support of your answer (= 3 marks): | 4x3 | |
| | | (i) | A company manufactures and sells two products P and Q. The cost sheet of the two products is as under: | Product P
Rs. | Product Q
Rs. | Direct materials @ Rs. 6 per kg
Variable conversion costs
Total variable costs | 30
90
120 | 24
100
124 |
The optimal production plan obtained by use of graphical method of linear programming revealed that the optimal plan was given at any point on the part of the feasible region that was formed by the constraint line for the availability of direct materials.
If the selling price of product P is Rs. 200 per unit, the selling price of Product Q per unit is: | (A) | Rs. 88 | (B) | Rs. 100 | (C) | Rs. 160 | (D) | Rs. 188 |
| | (0) |
| | | (ii) | A company uses a combination of time series and regression analysis in forecasting its sales for the next year. On the basis of the past analysis, the company has developed the following equation y = 26x + 8850 for obtaining the quarterly trend of sales. In the aforesaid equation the value of x represents the quarterly period and the value of y represents the quarterly trend of sales in units. The value of x for the first quarter of the next year will be 25.
Using the multiplicative (proportional) model, the quarterly seasonal variations have been estimated as under: Quarter
1
2
3
4 | Variation
–15%
–5%
+5%
+15% |
The manufacturing of the product will take place at a constant level and the company does not hold any stocks of finished products at the end of any year.
The difference between the budgeted sales of the first quarter and the fourth quarter of the next year will be: | (A) | 2850 units | (B) | 78 units | (C) | 2940 units | (D) | 1468 units. |
| | (0) |
| | | (iii) | A company manufactures two products and a component which is used in these products. One component is used in each of the two products and the purchase price of the components is Rs. 25 each. The data relating to the products and component are as under: | Product A
Rs. | Product B
Rs. | Component
Rs. | Selling price per unit
Direct Material cost per unit
Component cost per unit
Conversion costs per unit
Specific fixed costs
General fixed costs | 146
15
25
22
18,000
72,000 | 159
26
25
33
40,000
1,60,000 | —
10
—
11
10,000
36,000 |
The specific fixed costs can be avoided if the manufacture of the product or component is discontinued. The company has surplus plant capacity and it is proposed to manufacture its requirement of 5,000 components during the period under review. In pursuance of this decision, the break–even sales value of the company if the units of products A and B are sold in the ratio of 4 : 3 respectively will be nearest to: | (A) | Rs. 5,06,000 | (B) | Rs. 6,02,000 | (C) | Rs. 4,94,000 | (D) | Rs. 6,24,000 |
| | (0) |
| 2. | (a) | Poor Dhanchand Kuberji! The newspapers claim that he is making Rs. 5.7 crore a year. He claims that this is not true in a present value sense and that he will really be making the following amounts for the next five years: Year
0 (now)
1
2
3
4
5 | Amount
Rs. 5.5 crore (sign–up Bonus)
Rs. 4 crores
Rs. 4 crores
Rs. 4 crores
Rs. 4 crores
Rs. 7 crores |
| (i) | Assuming that Kuberji can make 7% on his investments, what is the present value of the contract? |
| (ii) | If you wanted to raise the nominal value of his contract to Rs. 30 crore, while preserving the present value. How would you do it? (You can adjust only the sign–up bonus and the final year‘s cash flow). |
You are given the 7% discount factors as:
Years 1–0.935, Years 2–0.873, Years 3–0.816, Year 4–0.763, Years 5–0.713. | 2+6 | (0) |
| | (b) | The Shadow company products three products–A, B and C. The current sales, costs, selling prices, and processing times are as follows: | A | B | C | Annual sales
Selling price
Unit cost
Processing time/unit | Units
Rs.
Rs.
Hours | 6,000
20
18
1 | 6,000
31
24
1 | 750
39
30
2 |
The firm is working at full capacity i.e., 13,500 processing hours per year. Fixed manufacturing overheads are absorbed into unit costs by a charge of 200% of variable costs. This procedure fully absorbs the fixed manufacturing overheads.
Assuming that: – Processing time can be switched from one product line to another, – the selling prices are fixed for the products, – the demands at current selling prices are A–11,000, B–8,000, C–2,000 (units). | (i) | Calculate the best production program for the next operating year and indicate the increase in net profit that this should yield. |
| (ii) | Identify the shadow price of a processing hour |
| 6+2 | (0) |
| 3. | (a) | Standard Pump Ltd. is making petrol and diesel operated pumps. The company wants to have a customer survey on this. You are asked to work out the economics of choice between the two types of pumps. You are provided with the following data: | Petrol operated
pump X | Diesel Operated
pump Y | Selling price
Cost of fuel/litre
Operating time/litre | Rs. 8,000
Rs. 8
20 hours | Rs. 17,750
Rs. 3
40 hours |
Using the above data, answer the following questions: | (i) | How many hours the pumps should run so that the customer willing to buy is indifferent in choice between X and Y? Assume that the fuel cost has linear function with respect to time. |
| (ii) | Assuming the price of X remains unchanged and the customer wants to run the pump for only 10,000 hours, how much should be agree to pay for Y? |
| 4+4 | (0) |
| | (b) | Many traditional management accounting practices are criticized because of their failure to include assumptions about human behavior.
for the following area, vig., | (i) | Absorption costing,and | | (ii) | Installation of Costing and Management Accounting System. |
discuss, with reference to practical situations, how the effects of human behavior should be recognized in the introduction and operation of the system. | 4+4 | (0) |
| 4. | The following data relate to time estimates of three activities with discrete probabilities of each: | Activity | Time (Weeks) | Probability | | X | 4
7 | 0.5
>0.5 | | Y | 3
>5 | 0.4
>0.6 | | Z | 10
12
>15 | 0.5
0.3
>0.2 |
| Note: | Activity X and Z start at the same time;
Activity Y follows Activity X;
Activity Y and Z are the last activities for the project. |
You are required to:
(i) Draw the Project Network showing the expected time of each activity. What is the duration of the critical path?
(ii) State the probability of completing the project within the largest time of 12 weeks. | 4+2+10 | (0) |
|
| 5. | A company engaged in job order business has received an order from a large customer for executing a job which is outside the range of its normal activities. Since the company has surplus capacity, the management is desirous of quoting for the job.
The designing department staff visited the customer’s site and spent 200 hours in designing and estimation work. They also incurred travelling expenses for this purpose. The following is the estimate prepared by them: Direct Materials A: 4,000 kg at Rs. 40 per kg
Direct Materials B: 800 units at Rs. 25 per unit
Components
Direct Labour:
1,200 hours of skilled labour @ Rs. 50 per hour
2,000 hours of unskilled labour @ Rs. 25 per hour
Overheads:
Department X: 800 hours @ Rs. 40 per hour
Department Y: 1,600 hours @ Rs. 25 per hour
Designing department:
Designing and estimating 200 hours @ Rs. 80 per hour
Travelling expenses
Planning department: 400 hours @ Rs. 60
Total
Profit 10%
Contract price | 1,60,000
20,000
25,000
60,000
50,000
32,000
40,000
16,000
40,000
24,000
4,67,000
46,700
5,13,700 |
The following additional information is available: | (i) | Material A is in regular use in the jobs usually undertaken by the company. The stock held is more than that required for this job. The average purchase price of this material is Rs. 40 per kg but the current replacement price is Rs. 35 per kg. | | (ii) | Material B is a show moving item and there is a stock of 1,200 units as a result of overbuying in an earlier contract. It was purchased three years ago at Rs. 25 per unit and its resale price is Rs. 15 per unit. The current replacement price is Rs. 30 per unit. The entire material can be used in another contract where it will replace a material costing Rs. 20 per unit. | | (iii) | The components are required to be purchased specially for this contract and ae valued at current market price. | | (iv) | The company has shortage of skilled workers who are paid at Rs. 50 per hour. In the event of accepting this job, the company has to divert the skilled workers from some other jobs where they earn a contribution of Rs. 20 per hour. | | (v) | Unskilled workers who are paid at Rs. 25 per hour are surplus to the requirement of the company and presently the company pay idle time wages for 8,000 hours per annum under an agreement. | | (vi) | Department X is the one department which is working at full capacity. The break–up of the overhead rate per hour of this department is as under: Variable overheads
Fixed overheads
Profit | 20
10
10 |
The external demand for hiring of the facilities of this department is steadily increasing and the company has an opportunity of hiring out the facilities at Rs. 45 per hour. | | (vii) | Department Y has surplus capacity and uses a transfer price of Rs. 25 per hour for charging out processing time. The break–up of the transfer price per hour is as under: Variable costs
Fixed Assets
Profit | Rs. 12
Rs. 8
Rs. 5 |
| | (viii) | Designing and estimating department charges out time at Rs. 80 per hour which includes salaries of permanent staff and fixed overheads | | (ix) | Planning department costs time at Rs. 60 per hour which includes salaries of permanent staff and fixed overheads. | | (x) | It is the policy of the company to add a mark–up of 10% on the total cost for profit. |
You are required to prepare an estimate of the cost of the job using relevancy and opportunity cost approach. | 16 | (0) |
| 6. | A small insurance company estimates that in the next year it will receive Rs. 50 lakhs in premium that will flow in a steady rate throughout the year. This income will be invested at 20% per annum but the cost to the company of making an investment is Rs. 200 for each investment made and, in addition, 2% of the sum invested. | (a) | Show that this situation is an inventory problem in structure and that ’economic order quantity‘ model may be used to determine the optimum investment policy, i.e., the timing of making the company‘s investments. |
| (b) | Explain why the optimum investment policy is independent of the variable element of the investment costs. |
| (c) | (i) Determine how many investments should be made during the year and the total cost of the policy as given by the economic order quantity model, |
| (ii) Comment critically on this total cost from a financial point of view. |
| (d) | A reorganisation of the company‘s investment department would cause investment costs to change to Rs. 450 for each investment made plus 1½% of the sum invested. How would this affect the company‘s optimum investment policy according to the economic order quantity model? |
| (e) | Instead of reorganization of the investment department the company decided to hold, as a buffer stock, cash to the value of 2% of the yearly premiums. What will be the maximum holding of cash at any one time? |
| (f) | Comment on the practical inadequacies of the economic order quantity model in this situation. |
| 3+2+(3+2)
+3+2+1 | (0) |
| 7. | A manufacturer produces two components A and B. The following details are available: Component A — Annual production and sales of 1 lakh units at a sale price of Rs. 100 per unit. Component B — Annual production and sales of 50,000 units at a sale price of Rs. 160 per unit.
The costs incurred are as under: | Component A
Rs. | Component B
Rs. | Component C
Rs. | Variable Cost
Material
Labour
Fixed Indirect Costs
Machining
Engineering cost |
43,00,000
15,00,000
7,00,000
8,50,000 |
32,00,000
10,00,000
5,50,000
14,00,000 |
75,00,000
25,00,000
12,50,000
22,50,000 |
There are following additional costs and those are allocated to the components A and B as per the following bases: | Rs. | Basis of allocation | Machine set up cost
Testing costs | 5,28,000
21,00,000 | Set up time per batch
Testing time per unit | | Additional Information: | | Component A | Component B | Production batch size
Set up time per batch
Testing time per unit | 1,000 units
30 hours
6 hours | 500 units
36 hours
9 hours |
You are required to work out: | (i) | Percentage of mark–up on full cost for each of Component A and B. |
| (ii) | If the sale price of Component A and Component B are to be brought down to Rs. 90 per unit and Rs. 135 per unit respectively. What should be the target costs for the two products to maintain the same mark–up percentages on full cost per unit as at present? |
| 12+4 | (0) |
| 8. | Write short notes on the following (any four): | 4x4 | |
| | (a) | Just–in–Time System for materials; | | (0) |
| | (b) | Pareto Analysis; | | (0) |
| | (c) | Back Flush Accounting; | | (0) |
| | (d) | Economic Value Added; | | (0) |
| | (e) | Capital Rationing; | | (0) |
| | (f) | Reasons for emergence of Activity Based Costing. | | (0) |
