CA Final :: Cost Management : May 2005

Carlon Ltd. requires to fulfil orders for 5,000 product units per period. There are no stock of product units at the beginning or end of the period under review. The stock level of material X remains unchanged throughout the period.

Carlon Ltd. is planning to implement a Quality Management Programme (QMP). The following additional information regarding costs and revenues are given as of new and after implementation of Quality Management Programme.

C Preserves produces Jams, Marmalade and Preserves. All the products are produced in a similar fashion; the fruits are cooked at low temperature in a vacuum process and then blended with glucose syrup with added citric acid and pectin to held setting.

Margins are tight and the firm operates, a system of standard costing for each batch of Jam.
The standard cost data for a batch of raspberry jam are

Fruit extract Glucose syrup Pectin Citric acid Labour

400 kgs @ Rs. 16 per kg. 700 kgs @ Rs. 10 per kg. 99 kgs @ Rs. 33.2 per kg. 1 kg @ Rs. 200 per kg. 18 hours @ Rs. 32.50 per hour.

"Balanced score card and performance measurement system endeavours to create a blend of strategic measures, outcomes and drive measures and internal and external measures". Discuss the statement and explain the major components of a balanced score card.

During the Last 20 years, KL Ltd's manufacturing operation has become increasingly automated with Computer-controlled robots replacing operators. KL currently manufactures over 100 products of varying levels of design complexity. A single plant rise overhead absorption rate, based on direct labour hours, is used to absorb overhead costs.
In the quarter ended March, KL's manufacturing overhead costs were :

During the quarter, the company reviewed the Cost Accounting System and concluded that absorbing overhead cost to individual products on a labour hour absorption basis is meaningless. Overhead costs should be attributed to products using an Activity Based Costing (ABC) system and the following was identified as the most significant activities :

(i)	Receiving component consignments from suppliers
(ii)	Setting up equipment for production runs
(iii)	Quality inspections
(iv)	Despatching goods as per customers orders.

It was further observed that in the short-term KL's overheads are 40% fixed and 60% variable. Approximately, half the variable overheads vary in relating to direct labour hours worked and half vary in relation to the number of quality inspections.

• Component stores 15%, manufacturing 70% and goods dispactch 15%
  Technician's wages are apportioned as :

• Equipment maintenance 30%, set up equipment for production runs 40% and quality inspections 30%.

An electronics firm which has developed a new type of fire-alarm system has been asked to quote for a prospective contract. The customer requires separate price quotations for each of the following possible orders :

Determine a price per unit for each of the three orders, assuming the firm uses a mark up of 25% on costs and allows for an 80% learning curve. Extract from 80% Learning curve table :

Y is the learning curve factor, for a given X value, expressed as a percentage of the cost of the initial order.

"The diverse use of routinely recorded cost data give rise to a fundamental danger information prepared for one purpose can grossly misleading in another context".

R Ltd. has spare capacity in two of its manufacturing departments— Department 4 and Department 5. A five day week of 40 hours is worked, but there is only enough internal work for 3 days per week so that 2 days per week (16 hours) could be available in each department. R Ltd. has sold this time to another manufacturer, but there is some concern about the profitability of this work.

The accountant has prepared a table giving the hourly operating cost in each department. The summarised figures are as follows :

The labour is paid on a time basis and there is no charge in the weekly wage bill whether or not the plant is working at full capacity. The overhead figures are based on firm's current overhead absorption rates (fixed and variable) when the departments are operating at 90% of full capacity (assume a 50 week year). The budgeted fixed overhead attributed to department 4 is Rs. 36,000 p.a. and that for Deptt. 5 Rs. 50,400 p.a.

As a short term measure the company has been selling processing time to another manufacturer @ Rs. 70 per hour in either departments. The customer is willing to continue this arrangement and to purchase any spare time available, but R Ltd. is considering the introduction of a new product on a minor scale to absorb the spare capacity.

Each unit of the new product would require 45 minutes in Deptt. 4 and 20 minutes in Deptt. 5. The variable cost of the required input material is Rs. 10 per unit. The market study indicated as follows :

You are required to calculate the best weekly programme for the spare time in the two manufacturing departments, to determine the best price to charge for the new product and to quantity the weekly gain that this programme and price should yield.

"Because a single budget system is normally used to serve several purposes, there is a danger that they may conflict with each other". Do you agree?
Discuss.

AB Cycles Ltd. has 2 divisions. A and B which manufacture bicycle. Division A produces bicycle frame and Division B assembles rest of the bicycle on the frame. There is a market for sub-assembly and the final product. Each division has been treated as a profit centre. The transfer price has been set at the long-run average market price. The following data are available to each division :

Explain which features of the Service organizations may create problems for the application of activity-based costing.

A company manufactures two products A and B, involving three departments— Machining, Fabrication and Assembly. The process time, profit/unit and total capacity of each department is given in the following table :

Set up Linear Programming Problem to maximise profit. What will be the product Mix at Maximum profit level?