| 1. | (a) | State if each of the following statements is T(true) or F(false): | 1x6=6 | |
| | | (i) | When it becomes difficult to use an optimization technique for solving a problem one has to resort to simulation. | | (0) |
| | | (ii) | An effective action is not necessarily efficient. | | (0) |
| | | (iii) | The after–sales service is a distribution overhead. | | (0) |
| | | (iv) | Customers loyalty makes a product relatively price elastic. | | (0) |
| | | (v) | A business earns maximum profit from its product when the difference between its marginal revenue and marginal cost is maximum. | | (0) |
| | | (vi) | To derive the cash generated by operation from a corporate Profit and Loss A/c, you need only to add depreciation to the bottom–line profit. | | (0) |
| | (b) | Examine if each of the following statements is true or false,–
If true, write only T as your answer;
If false, write the correct statement as your answer. | 1x5=5 | |
| | | (i) | In economic theory, relevant cost=opportunity cost=avoidable cost. | | (0) |
| | | (ii) | ‘Cost–Centre’ is responsible for costs, revenues and profits in relation to investment. | | (0) |
| | | (iii) | ‘Target Cost’ is a cost that bears an observable and known relationship to a quantifiable activity base. | | (0) |
| | | (iv) | A management decision may be beneficial for a given ‘profit–centre’ but not for the entire company. From the overall company’s view point, this decision leads to maximization of benefit. | | (0) |
| | | (v) | ‘Full absorption cost’ is the term that refers to cost incurred in the past that are not relevant to a future decision. | | (0) |
| | (c) | Find the correct answer from the given four to each of the problems below, with your working: | 3x3=9 | |
| | | (i) | A firm had opening stocks and purchases totaling 12,400 kg and closing stocks of 9,600kg. Profits using marginal costing were Rs.76,456 and using absorption costing were Rs.61,056.
What was the fixed overhead absorption rate per kilogram? | (A) | Rs.1.60; | (B) | Rs.5.50; | (C) | Rs.6.17; | (D) | 0Rs.6.36; |
| | (0) |
| | | (ii) | MFG Limited has recently introduced an Activity Based Costing system. It manufactures three products details of which are set out below: | Product | M | F | G | Budgeted annual production(units)
Batch size(units)
Machine set–ups per batch
Purchase orders per batch
Processing time per unit (minutes) | 1,00,000
100
3
2
2 | 1,00,000
50
4
1
3 | 50,000
25
6
1
3 |
Three cost pools have been identified. Their budgeted cost for the year ending 30 June 2010 are as follows: | Rs. | Machine set–up cost
Purchasing of materials
Processing | 1,50,000
70,000
80,000 |
The budgeted machine set–up cost per unit of product F is nearest to | (A) | Re.0.52; | (B) | Re.0.60; | (C) | Rs.6.52; | (D) | Rs.26.09. |
| | (0) |
| | | (iii) | PQR Ltd. is about to launch a new product. Facilities will allow the company to produce up to 20 units per week. The marketing department has estimated that at a price of Rs.8,000 no units will be sold, but for each Rs.150 reduction in price one additional unit per week will be sold.
Fixed costs associated with manufacture are expected to be Rs.12,000 per week.
Variable costs are expected to be Rs.4,000 per unit for each of the first 10 units; thereafter each unit will cost Rs.400 more than the preceding one.
The most profitable level of output per week for the new product is | (A) | 10 units; | (B) | 11 units; | (C) | 13 units; | (D) | 14 units; |
| | (0) |
| 2. | (a) | Financeguru is a large consultancy firm with a cost of capital of 14%. The firm is trying to determine the optimal replacement cycle for the laptop computers used by its assistants. The following information is relevant to the decision.
The costs of each laptop is Rs.24,000. Maintenance costs are payable at the end of each full year of ownership, but not in the year of replacement, e.g. if the laptop is owned for two years, then the maintenance cost is payable at the end of year 1. Interval between replacement
(Years) | Trade–in value
Rs. | Maintenance cost
Rs. | 1
2
3 | 12,000
8,000
3,000 | Zero
750 (payable at end of year 1)
1500(payable at end of year 2) |
You are a junior qualified assistant at Financeguru.
You are asked by a Senior Partner– | (i) | To calculate the equivalent annual cost of the three different replacement cycles, and to recommend which should be adopted. |
| (ii) | What other factors the firm should take into account when determining the optimm cycle? |
| 6+2 | (0) |
| | (b) | In general, budget preparation is started by the identification of a ‘limiting factor’ or the ‘Principal budget’ factor. | | |
| | | (i) | List four possible limitations on activity that could be principal budget factors. | 2 | (0) |
| | | (ii) | For each, suggest two means of overcoming the limitation. | 4 | (0) |
| | | (iii) | State which limitation will be most frequently encountered, and hence choose the first individual budget to be prepared. | 2 | (0) |
| 3. | (a) | Boraco Ltd. has been offered supplies of special ingredient S at a transfer price of Rs.15 per kg by Chhotaco Ltd. which is part of the same group of companies. Chhotaco Ltd. processes and sells S to customers external to the group at Rs.15 per kg. Chhotaco Ltd bases its transfer price on cost plus 25% profit mark’up. Total cost has been estimated as 75% variable and 25% fixed.
You are required to: Discuss the transfer prices at which Chhotaco Ltd. should offer to transfer special ingredient S to Boraco Ltd in order that group profit maximizing decisions may be taken on financial grounds in each of the following situations; | (i) | Chhotaco Ltd has an external market for all of its production of S at a selling price of RS.15 per kg. Internal transfers to Boraco Ltd. would enable Rs.1.50 per kg. of variable packing cost to be avoided. |
| (ii) | Conditions are as per (i) but Chhotaco Ltd. has production capacity for 3,000 kg of S for which no external market is available. |
| (iii) | Conditions are as per (ii) but Chhotaco Ltd. has an alternative use for some of its spare production capacity. This alternative use is equivalent to 2,000 kg of S and would earn a contribution of Rs.6,000. |
| 5+3+3 | (0) |
| | (b) | Briefly describe five primary types of transfer prices that companies can use to transfer goods and services. | 5 | (0) |
| 4. | Titan Engineering is operating at 70% capacity and presents the following information: Break–even point
P/v ratio
Margin of safety | Rs.200 crores
40%
Rs.50 crores |
Titan’s management has decided to increase production to 95% capacity level with the following modifications; | (i) | The selling price will be reduced by 8%. | | (ii) | The variable cost will be reduced by 5% on sales. | | (iii) | The fixed cost will increase by Rs.20 crores, including depreciation on additions but excluding interest on additional capital. | | (iv) | Additional capital of Rs.50 crores will be needed for capital expenditure and working capital. |
Required: | (a) | Indicate the sales figures, with the working, that will be needed to earn Rs.10 crores over and above the present Profit and also meet 20% interest on the additional capital. |
| (b) | What will be the revised |
| 10+2+2+2 | (0) |
|
| 5. | (a) | What are the areas in which linear programming is used? | 4 | (0) |
| | (b) | XYZ Ltd. manufactures two sub–assemblies A and B. One unite of each is assembled to produce the final product AB.
The following information is available: | Sub–assembly
A | Sub–assembly
B | Final Product
AB | Material used – special steel plates
Other direct manufacturing cost
Final assembly cost | 20 kg
Rs. 500 | 20 kg
Rs. 500 |
Rs. 1,000 |
XYZ Ltd. has procured an order for supply of 40,000 units of the final product AB on an urgent basis at a price of Rs.3,000 per unit. However, XYZ Ltd. can arrange for only 800mt of special steel plate required for production. However, on enquiry in the market a supplier has been located who has got ready stock of 40,000 units of Sub–assembly B and is willing to sell the entire quantity to XYZ Ltd. Considering that if Sub–assembly B is procured from the outside supplier and there will be an additional handling cost of Rs.100 per unit, what is the maximum price that XYZ Ltd. can pay to the supplier for procuring Sub–assembly B? | 12 | (0) |
| 6. | (a) | What is the theory of constraints? | 4 | (0) |
| | (b) | A company produces two products X and Y, the production costs of which are shown below: | X
Rs. | Y
Rs. | Direct material cost
Direct labour cost
Variable overhead
Fixed overhead | 10
5
5
5
25 | 10
9
9
9
37 |
Fixed overhead is absorbed on the basis of direct labour cost.
The product passes through two processes Assembly and Finishing. The associated labour cost is Rs.10 per direct labour hour in each. The direct labour associated with the two products for these processes are shown below: | Process | Time taken | | Product X | Product Y | Assembly
Painting | 10 minutes
20 minutes | 40 minutes
15 minutes |
The current market price for X is Rs.65 and for Y is Rs.52. At these prices, the market will absorb as many units of X and Y as the company can produce. The capacity of the company to produce X and Y is limited by the available capacity of the two processes. The company operates two shifts of 8 hours each. Painting is a single process line and two hours in each shift will be down time. Assembly can process two units simultaneously, although this will double the requirement of direct labour. Painting can operate for full 16 working hours each day.
What production plan should the company follow in order to maximize profit under (i) Traditional costing System and (ii) Throughput Accounting System? | 12 | (0) |
| 7. | A structural engineering company has received an enquiry an enquiry from a customer for supplying a prefabricated structure and the estimating department has worked out the following cost estimates: | Rs. | Steel sheet 5000 kg @ Rs.40 per kg
Steel Rods 1000 kg @ Rs.30 per kg
Welding Material and other consumables
Wages of monthly rated workmen 2000 hrs @ Rs.10 per hour | 2,00,000
30,000
25,000
20,000 | | Overheads: | Fabrication shop 500 hrs @ Rs.30
Welding shop 200 hrs @ Rs.40
Planning Deptt. 100 hrs @ Rs.25
Design Department 100 hrs @ Rs.20
Mark up at 10% | 15,000
8,000
2,500
2,000
3,02,500
30,250
3,32,750 |
The customer is not willing to pay such a high amount and has requested for a revised quotation. As the company does not want to lose the order, you have been asked to consider the possibility whether a lower price can be quoted by adopting relevant cost approach.
You have gathered the following additional information: | (a) | The steel sheets to be used are lying in stock for a long time and the present market price is Rs.35 per kg; | | (b) | The labour force is always moved from job to job depending on exigency. | | (c) | The Fabrication shop is treated as a profit centre. A transfer price of Rs.30 per hour is charged to other shops in the workshop for utilizing facility. The fabrication job does jobs for outside parties when Rs.40 per hour is charged. The Fabrication shop is fully occupied at present. | | (d) | The transfer prices fixed by Welding shop is Rs.40 per hour. | | (e) | The transfer prices are fixed as under: | Fabrication
Rs. | Welding
Rs. | Variable cost per m/c hr.
Departmental Fixed Cost
Profit | 10
10
10
30 | 15
15
10
40 |
| | (f) | The hourly rate of Planning Department and Design Department Engineers are Rs. 20 and RS.15 per hour respectively but for outside consultancy work the practice is to charge @ Rs.25 and Rs.20 per hour respectively. |
Tabulate the revised cost estimate using the additional information showing reasons for each of the revised figures used in the revised estimate. | 16 | (0) |
| 8. | Write short notes on (any four): | 4x4=16 | |
| | (a) | Queing theory in decision making; | | (0) |
| | (b) | Investing in IT (Information Technology); | | (0) |
| | (c) | Problems before the management in multi–national organization; | | (0) |
| | (d) | Direct Product Profitability; | | (0) |
| | (e) | Decision Tree; | | (0) |
| | (f) | Customer profitability Analysis. | | (0) |
