CWA/ICWA Inter :: Management Accounting—Performance Management : June 2006

I—9(MPM)
Revised Syllabus

Time Allowed : 3 Hours Full Marks : 100
The figures in the margin on the right side indicate full marks
Answer Question No. 1 which is compulsory and any five from the rest
Marks
1. (a) Fill in the blanks:
(i)Change of management is caused by _______ factors.
(ii)

Simulation is particularly appropriate when it is difficult to build a model for the _______ situation mathematically.

(iii)Transfer Pricing have a significance for the purpose of measurement of _______ performance.
(iv)Formulation of LPP involves a series of mathematical constraints and _______ functions.
(v)MNC consciously manipulate the transfer prices as an instrument of maximizing achievement of _______.
 1x5
(b) Match each expression under column I with column II:
Column IColumn II
(i)Labour efficiency variance(a)Absorbed overhead
(ii)Standard sales(b)Material price variance
(iii)Recovered overhead(c)Aggregate of the expenditure
variance and volume variance
(iv)Fixed overhead cost variance(d)Difference between standard
hrs. for actual output and actual hrs.
(v)Purchase department is responsible for(e)Budgeted sales
 1x5
(c) Which of the following statements are TRUE or FALSE:
(i)Production budget is prepared before sales budget.
(ii)Responsibility center emphasizes on the division of organization among different subunit.
(iii)

A key factor, which at a particular time or over a period will not limit the activities of the organization.

(iv)In ZBB important reference if made to previous level of expenditure.
(v)Profit planning and control is not a part of budgetary control mechanism.
 1x5
(d) Define the following terms in not more than two sentences:
(i)Absorption costing,
(ii)Backflush costing,
(iii)Capacity costs.
(iv)High-Low method of costing,
(v)Responsibility accounting.
 1x5
2.

A review, made by the top management of M/s. Sweat and Struggle Ltd., which makes only one product, of the result of first quarter of the year revealed the following:

 16
Sales in units10,000
Loss in Rs.10,000
Fixed cost (for the year Rs. 1,20,000) in Rs.30,000
Variable cost per unit in Rs.8

The Finance Manager who feels perturbed suggests that the company should at least break even in the second quarter with a drive for increased sales. Towards this, the company should introduce a better packing which will increase the cost by Re. 0.50 per unit.

The Sales Manager has an alternate proposal. For the second quarter additional sales promotion expenses can be increased to the extent of Rs. 5,000 and a profit of Rs. 5,000 can be aimed at for the period with increased sales.

The Production Manager feels otherwise. To improve the demand, the selling price per unit has to be reduced by 3 per cent. As a result the sales volume can be increased to attain a profit level of Rs. 4,000 for the quarter.

The Managing Director asks you as a Cost Accountant to evaluate these three proposals and calculate the additional Sales Volumes that would be required in each case, in order to help him take a decision.
Please turn over

( 2 )

I—9(MPM)
Revised syllabus
Marks
3. (a)

A book store wishes to carry a particular book in stock. Demand is probabilistic and replenishment of stock takes 2 days (i.e., if an order is placed on March 1, it will be delivered on the 3rd day i.e., at the end of the day on 3rd March). The probabilities of demand is given below:
Demand (daily)01234
Probability0.050.100.300.450.10

 8

Each time an order is placed, the store incurs an ordering cost of Rs. 10 per order. It also incurs a carrying cost of Re. 0.50 per book per day. The inventory carrying cost is calculated on the basis of the stock at the end of each day.
The manager of the book store wishes to compare two options for his inventory decision.
Option A—

Order 5 books when the inventory at the beginning of the day plus order outstanding is less than 8 books.

Option B—

Order 8 books when the inventory at the beginning of the day plus order outstanding is less than 8 books.

Currently, i.e., at the beginning of 1st day, the store has a stock of 8 books plus 6 books ordered two days ago and is expected to arrive next day.

Using Monte Carlo simulation for 10 cycles, recommend which option the manager should choose.
Use the following 10 two digits random numbers as are given below:
89,   34,   78,   63,   61,   81,   39,   16,   13,   73.
(b)

A shop has one cashier who handles all customer payments. The cashier takes on an average 4 minutes per customer. Customers come to the cashier area in a random manner but on an average of 10 people per hour. The management received a large number of complaints and decides to investigate the following questions:
(i)What is the average length of the waiting line to be expected under existing conditions?
(ii)What portion of his time is the cashier expected to be idle?
(iii)

What is the average length of time that a customer would be expected to wait to pay for his purchase?

(iv)

If it was decided that a customer would not tolerate a wait for more than 12 minutes, what is the probability that a customer would have to wait at least that length of time?

 2x4
4.

Comtek India P. Ltd. make computer peripherals. Untill recently production scheduling and control costs were predicted to vary in proportion to labour costs according to the following cost function:

 10
Production Scheduling and Control cost, Y = 2 x labour cost (or 200%) of labour.

Because Production Scheduling and Control cost have been growing but at the same time the labour cost has been shrinking, Comtek is concerned that its cost estimates are not reliable. Comtek's controller has just completed activity analysis to determine the most appropriate drivers of Production Scheduling and Control costs. He obtained two cost functions using different cost drivers:
Y = 2 x labour cost
and		R2 = 0.233
Y = Rs. 10,000 per month + (11 x no. of components used) R2 = 0.233

Required:
(i) What would be good tests of which cost function better predicts Production Scheduling and Control costs? 4
(ii)

During a subsequent month, labour costs were Rs. 12,000 and 2,000 product components were used. Actual Production Scheduling and Control cost were Rs. 31,460. Using each of the preceding cost functions prepare reports that show predicted and actual Production Scheduling and Control costs and the variance between reports that show predicted and actual Production Scheduling and Control costs and the variance between the two.

 8
(iii) What is the meaning and importance of each cost variance? 4
5. (a)

A Ltd. has been offered a choice to buy a machine between M1 and M2. The following data are provided:
M1M2
Annual output in units10,00010,000
Fixed CostRs. 60,000Rs. 32,000
Profit at above levelRs. 60,000Rs. 48,000

The market price of the product is expected to be Rs. 20 per unit.
You are required to compute:
(i)Break Even Profit for each machine
 2
(ii)The level of sales at which both the machines earn equal profit.
 3
(iii)The range of sales at which one is more profitable from the other.
 3
(b)

A company fixes the inter-divisional transfer prices for its products on the basis of cost plus an estimated return on investment in its divisions. The relevant portion of the budget for the Division A for the year 2006-07 is given below:
Fixed assetsRs. 5,00,000
Current assets (other than debtors)3,00,000
Debtors2,00,000
Annual fixed cost of the division8,00,000
Variable cost per unit of product10
Budgeted volume of production per year (units)4,00,000
Desired return on investment28%

 8

You are required to determine the transfer price for the Division A.
Please turn over

( 3 )

I—9(MPM)
Revised syllabus
Marks
6. Based on the following information, prepare a Cash Budget for ABC Ltd:
1st
Quarter
(Rs.)		2nd
Quarter
(Rs.)		3rd
Quarter
(Rs.)		4th
Quarter
(Rs.)
Opening cash balance
Collection from customers
Payments:
Purchase of materials
Other expenses
Salary and wages
Income tax
Purchase of machinery		 10,000
1,25,000

20,000
25,000
90,000
5,000
—		 —
1,50,000

35,000
20,000
95,000
—
—		 —
1,60,000

35,000
20,000
95,000
—
—		 —
2,21,000

17,000
17,000
1,09,200
—
20,000
 8

The company desires to maintain a cash balance of Rs. 15,000 at the end of each quarter. Cash can be borrowed or repaid in multiples or Rs. 500 at an interest of 10% per annum. Management does not want to borrow cash more than what is necessary and wants to repay as early as possible. In any event, loans cannot be extended beyond four quarters. Interest is computed and paid when the principal is repaid. Assume that borrowings take place at the beginning and repayments are made at the end of the quarters.
7. (a) Describe the important advantages of standard costing.
Type of equipmentMachine time (in hrs.)Assembly time (in hrs.)
W1154.4
W2133.5
W3124.0
 8

The total available machine and assembly time are, respectively, 4000 and 1240 hours per month. The data relating to selling price and costs for the three are:
W1W2W3
Selling price (Rs.)11,0005,0003,000
Labour, material and other variable expenses8,0002,4001,500
Total cash available after meeting all expenses is Rs. 1,30,000

Total cash available after meeting all expenses is Rs. 1,30,000.
You are required to put the problem in a linear programming model to maximize profit.
8. Write short notes on the following (any four)
(i)Distinction between Cost Control and Cost Reduction.
(ii)Responsibility Accounting.
(iii)Setting up Production Standards and establishment of Standard Costs.
(iv)Process of Managing Change.
(v)Performance Management.
 4x4

__________

 

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