Advanced Management Accounting

St. Joseph’s College of Commerce (Autonomous)

End Semester Examination – April 2011

M.Com – II semester

Advanced Management Accounting

Time : 3 hrs                                                                                                    Max. Marks: 100

Section – A

I)Answer ALL the following questions.                                                           (10×2 = 20)

 

1. What is capital rationing?
2. What are the uses of benchmarking? In what areas is it applicable?
3. What is marginal costing?
4. What is essence of beta in CAPM model.
5. What is present value annuity factor?
6. What are the steps towards implementing an activity based costing system?
7. What are applications of marginal costing?
8. Write the meaning of synergy.
9. What are the four perspectives of balance score card?
10. What are the various pricing strategies?

 

Section – B

II)Answer any FOUR out of SIX questions.                                         (4 x 5 = 20)

 

11. What is a arms length principle? Explain the methods of transfer pricing.

 

12. What is performance measurement? What are the various techniques of measuring financial performance?  Explain any two.

 

13. A company has prepared the following budget of sales:

Product	Sales	PV ratio(%)
A B C	6,00,000 9,00,000 10,00,000	40 30 25

 

You are required to revise the sales mix to ensure a profit of Rs. 10,000 in such a way that not more than Rs. 8,00,000 of sales of product A is possible and that the present total value  of sales should not be altered.

 

14. A company engaged in plantation activities has 200 hectares of virgin land which can be used for growing jointly or individually tea, coffee and cardamom. The yield per hectare of the different crops and their selling price per kg are as under:

	yield	Selling price per kg
Tea Coffee cardomom	2,000 kg 500 100	Rs. 20 40 250

The relevant cost data are given below

Variable cost per kg

	Tea (Rs.)	coffee(Rs.)	Cardamom(Rs.)
Labour charges Packing materials Other costs	8 2 4	10 2 1	120 10 20

 

Fixed costs per annum

Cultivation and growing cost Rs. 10,00,000

Administration cost Rs. 2,00,000

Land revenue Rs. 50,000

Repair and maintenance Rs. 2,50,000

Other costs Rs. 3,00,000

The policy of the company is to produce and sell all the three kinds of products and the maximum and minimum area to be cultivated per product is as follows:

	maximum	Minimum
Tea Coffee cardomom	160 hectares 50 30	120 hectares 30 10

Calculate the most profitable product mix and the maximum profit which can be achieved.

 

15. Fill in the blanks for each of the following independent situations

	A	B	C
Selling price per unit Variable cost as % of selling price No. of units sold Marginal contribution Fixed costs Profit/loss	? 60   10,000 20,000 12,000 ?	Rs. 50 ?   4,000 80,000 ? 20,000	Rs. 20 75   ? ? 1,20,000 30,000

 

16. Explain the concept of marginal costing? Describe the characteristics and limitations of marginal costing?

 

 

Section – C

III) Answer any THREE out of FIVE of the following questions.                 (3 x 15 = 45)

 

17. Relevant data relating to a company are

Particulars	P	Q	R	Total
Production and sales (units) Raw materials usage in units Raw material costs Direct labour hours Machine hours Direct labour costs No. of production runs No. deliveries No. of receipts No. of production orders	60,000 10 50/- 2.5 2.5 16/- 6 18 60 30	40,000 10 40/- 4 2 24/- 14 6 140 20	16,000 22 22/- 2 4 12/- 40 40 880 50	24,76,000 3,42,000 2,94,000   60 64 1080 1000

Over heads

• Set up Rs. 60,000
• Machines- Rs. 15,20,000
• Receiving – Rs. 8,70,000
• Packing Rs. 5,00,000
• Engineering Rs. 7,46,000

The company operates a JIT inventory policy and receives each component once per production run.

Required:

• Compute the product cost based on direct labour hour recovery rate of overheads
• Compute the product costs using activity based costing

 

18. What is business process re engineering? Explain its methodology.
19. Explain the concept of balance scorecard and its applications.

 

19. Mars are manufacturing three products. The cost details are as follows:

Particulars	Product A  Rs.		Product B		Product C
Direct materials Direct labour Direct expenses Selling price No. of units sold Total contribution Less : fixed costs Profit	4 units	12 5 8 35 20000 2,00,000	5 units	15 6 9 40 40000 4,00,000	6 units	18 6 11 50 20,000 3,00,000 7,50,000 1,50,000

 

The direct materials were all imported.  Due to foreign exchange restrictions, henceforth the company can import only 3,00,000 units of raw materials.  The company can produce in all 1,00,000 units maximum.  However they can market only 20,000 units of product A and C each.  There is a local substitute material which is available at a price of Rs.3.75 per unit.  Besides, the company has to spend Rs. 50,000 on intermediaries and consumables, if local substitute material is used in the production process.  There was also a third party who was willing to take a part of the plant on lease up to 50,000 units capacity of B and willing to pay lease charges of Rs. 2,75,000.

You are required to advise the management

• What should be the quantum of production/sales mix of products with existing import restrictions
• Whether the company can optimize production of 1,00,000 units with local substitute materials
• Whether the company can enhance profits by leasing out a part of the plant to the third party and restricting its own production?

 

20. S ltd has Rs. 10,00,000 allocated for capital budgeting purpose. The following proposal and associated profitability indexes have been determined.

Project	Amount Rs.	Profitability index
1 2 3 4 5 6	3,00,000 1,50,000 3,50,000 4,50,000 2,00,000 4,00,000	1.22 0.95 1.20 1.18 1.20 1.05

Which of the above investment should be undertaken?  Assume that projects are indivisible and there is not alternative use of the money allocated for capital budgeting.

 

21. As an investment manager you are given the following information

	Initial price Rs.	Dividends Rs.	Market price at the year endRs.	Beta
Investment in equity shares of Cement ltd Steel ltd Liquor ltd Government of India bonds	25 35 45 1000	2 2 2 140	50 60 135 1005	0.8 0.7 0.5 0.99

Risk free return may be taken at 14%

You are requested to calculate

• Expected rate of returns of the portfolio in each using CAPM
• Average return of the portfolio.

 

Section – D

 

1. IV) Answer the following question. (15 marks)

                                                                       

22. Lacquer Painters undertake painting jobs of cars, scooters,, buses etc. the pain materials of desired shades are purchased from market and then painted by spray gun in paint shop by skilled painters. The budget for next year is given below:

	Rs.
Paint materials 100 kilo litres Direct labour 25000 hours Total variable costs Fixed overheads Total expected costs Profit 25% Expected job work revenue	15,00,000 5,00,000 10,00,000 20,00,000 50,00,000 12,50,000 62,50,000

The firm always faced problems in getting paint materials from markets as the customer needs only a particular shade .  the skilled labour is also sometimes not available due to rush of jobs.

A customer wants to get his moped painted urgently.  It is estimated that one litre  paint is sufficient for painting the moped.  Four labour hours will be required to complete the job.

Required

• What should be the painting charges if fixed costs are absorbed on the basis of variable costs and profit at 25% on total costs
• What should be the charges in case the paint material is a limiting factor
• What should be the charges in case the skilled labour is a limiting factor
• Which price out of above three would you recommend to the customer and why
• Would your answer to (4) above differ if the customer has no urgency?

 

 

 

ST.JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)

End Semester Examination – APRIL 2012

M.Com – II semester

ADVANCED MANAGEMENT ACCOUNTING

Duration: 3 Hrs                                                                                                             Max. Marks: 100 

Section – A

1. Answer SEVEN questions out of Ten.                  (7 x 5 = 35 )

 

1. What is ABC? Why is it needed?  What is a cost driver?  What is the role of cost driver in tracing costs to product?
2. What is a transfer price? Explain any 4 transfer pricing systems.
3. A company has a capacity of producing 1, 00,000 units of a certain product in a month. The sales department reports that the following schedule of sale price is possible:

Volume of production	Selling price per unit
60% 70% 80% 90% 100%	0.90 0.90 0.75 0.67 0.61

The variable cost of manufacture between these levels is Rs. 0.15 per unit and fixed cost Rs. 40,000.  At which volume of production will the profit be maximum?

 

4. BC limited has the following book value capital structure:

Particulars	Rs. Million
Equity shares capital (150 million shares Rs. 10 par) Reserves and surplus 10.5% Preference share capital (1 million shares of Rs 100 each) 9.5% debentures (1.5 million debentures Rs. 1000 par) 15% term loans from financial institutions	1500 2250   100 1500 500

The debentures of ABC limited are redeemable after three years and are quoting Rs. 981.05 per debenture.  The applicable income tax rate is 35%

The current market price per equity share is Rs. 602.  The prevailing default risk free interest is 5.5%.  The average market risk premium is 8%.  The beta of the company is 1.1875.

The preferred stock of the company is redeemable after 5 years and is currently selling Rs. 98.15 per preference share.

Calculate weighted cost of capital of the company using market value weights.

 

5. What are the various pricing strategies? Explain any 4.
6. Explain the process of implementing a balance score card in a company.
7. What is Benchmarking? What is the process of benchmarking?
8. Explain the concept of cost of quality in relation to Total quality management
9. Explain the concept of marginal costing as a cost accounting technique.
10. Explain the concept of value chain management.

 

Section – B

1. Answer THREE question  out of Five.                                        (3 x 15 = 45)

 

11. An agriculturist has 480hectares of land on which he grows potatoes, peas, and carrots. Out of the total area of land 340 hectares are suitable for all four vegetables but the remaining 140 hectares of land are suitable only for growing peas and carrots.  Labour for all kinds of farm works is available in plenty.  The market requirement is that all the four types of vegetables must be produced with the minimum of 5000 boxes each.  The farmer has decided that the area devoted to any one crop should be in terms of complete hectares and not in fractions of a hectare.  The only other limitations are that not more than 1, 13,750 boxes of any one vegetable should be produced.

The relevant data concerning production, market prices and costs are as under

particulars	Potatoes	Peas	Carrots	Tomatoes
Annual yield : boxes per hectare Costs Direct material per hectare Direct labour per hectare Harvesting per box Transport per box Market price per box	350 Rs. 952 1792 7.20 10.4 30.76	100 Rs. 432 1216 6.56 10.40 31.76	70 Rs. 384 744 8.80 8.00 36.80	180 Rs. 624 1056 10.40 19.20 44.55

It is possible to make the land presently suitable for peas and carrots, viable for growing potatoes and tomatoes if certain land development work is undertaken. This work will involve a capital expenditure of Rs. 6,000 per hectare which a bank is prepared to finance at the rate of 15% per annum.  If such improvement is undertaken, harvesting cost of the entire crop of tomatoes will decrease on an average by Rs. 2.60 per box.

 

Required

• Calculate the area to be cultivated with respect to each crop within the constraints and profits before land development work is undertaken

1. After development of land, find the acres of land for each product and also find maximum profits.

 

 

12. A toy manufacturer earns an average net profit of Rs. 3 per piece in a selling price of 15 by producing and selling 60,000 pieces at 60% of the potential capacity. Composition of his cost of sales is

• Direct material Rs. 4
• Direct wages Rs. 1
• Works overhead Rs. 6 (50% fixed)
• Sales Re. 1 (25% variable)

During the current year, he intends to produce the same number but anticipates that:

1. The fixed charge will go up by 10%
2. Rates of direct labour will increase by 20%.
3. Rates of direct material will increase by 5%.
4. Selling price cannot be increased.

Under these circumstances he obtains an order for a further 20% of his capacity.  What minimum price will you recommend for accepting the order to ensure the manufacture an overall profit of Rs. 1,80,500?

 

 

13. The cost per unit of the three products A,B and C of a concern is as follows:

	A	B	C
Direct materials Direct labour Variable expenses Fixed expenses Total cost Profit Selling price Number of units produced	10 6 4 3 23 9 32 10,000	8 7 5 3 23 7 30 5000	9 6 3 2 20 6 26 8000

Production arrangements are such that if one product is given up the production of the others can be raised by 50%.  The directors propose that C should be given up because the contribution in that case is the lowest.  Do you agree?

 

14. Alpha limited is considering fiver capital projects for the years 2010 and 2011. The company is financed by equity entirely and its cost of capital is 12%.  The expected cash flows of the project are as below:

(‘000)

Project	Year 1	Year 2	Year3	Year 4
A B C D E	(70) (40) (50)   (60)	35 (30) (60) (90) (20)	35 45 70 55 40	20 55 80 65 50

Figures in brackets represent cash outflows

All projects are divisible.  None of the projects can be delayed or undertaken more than once.  Calculate which project the company should undertake if the capital available for investment is limited to Rs. 1, 10,000 in year 1 and with no limitation in subsequent years.

 

15. Explain the financial and non financial measures of business performance measurement.

 

                                                                                                                             P.T.O……

 

 

 

 

 

Section – C

1. Compulsory Case study (No choice)                                  (1 x 20= 20)
2. A businessman employs 20swing machinists, but he is aware that ten are the better workers than others. He is considering conducting a training programme for his ten less efficient mechanists to increase their efficiency to be equal to that achieved by better workers.  Relevant data are as follows:

• There is one sewing machine for each machinist
• All the mechanists are engaged on similar work  are paid Rs. 2.20 each for good garment produced on piece work system
• To rectify each rejected garment costs Rs. 4, this work is done by subcontractor
• Garment machining department operates 2000 hours a year
• Average output of per machinist (on the basis of 20 machinists) is 12 good garments with one rejected per worker per hour.  However 10 less efficient machinists averages only 10 good garments with 1.5 rejected per worker per hour
• Depreciation of each machine is Rs. 10,000 per year and the variable cost of power, cleaning, preventive maintenance is Rs 5per hour per machine
• Fixed production overhead other than depreciation is Rs. 20 per machine hour
• Selling price per garment Rs. 18
• Direct material cost per garment Rs. 12
• Training will not reduce productive hours
• There is no problem in selling increased output.

You are required:

• To prepare a statement of comparative costs for the better workers and the less efficient workers excluding material cost.
• To find out the benefit derived over a one year period if Rs. 1, 00,000 is spent on a training course for the less efficient workers to match the efficiency with the better workers.

 

1. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)

End Semester Examinations – MARCH / April 2013

m.com – ii semester

ADVANCED MANAGEMENT ACCOUNTING

Duration: 3 Hrs                                                                                                       Max. Marks: 100

Section – A

1. Answer any SEVEN questions ( out of TEN)         (7 x 5  = 35)

 

1. The following particulars are extracted from the records of a company

	Product A (per unit)	Product B (per unit)
Sale price (Rs) Consumption of materials (kg) Material cost (Rs) Direct wages (Rs) Machine hours used Variable overheads	100 5 24 2 2 4	110 4 14 3 3 6

 

Comment on the profitability of each product (both use the same raw material) when

1. Total sales potential in units is the key factor
2. Total sales potential in value is limited
3. Raw materials is in short supply
4. Production capacity (in terms of machine hour) is the key factor

 

2. A firm can purchase a spare part from an outside source @Rs.11 per unit. There is a proposal that the spare part be produced in the factory itself.  For this purpose a machine costing Rs. 100000 with annual capacity of 20000 units and a life of 10 years will be required.  A foreman with a monthly salary of Rs.500 will have to be engaged.  Materials required will be Rs.4.00 per unit and wages Rs. 2.00 per unit.  Variable overheads are 150% of direct labor.  The firm can easily raise funds @ 10% p.a.  Advice the firm whether the proposal should be accepted.

 

3. A company manufacturing two products furnishes the following data for a year:

Product	Annual output (uts)	Total machine hours	Total number of purchase orders	Total number of set ups
A B	5000 60000	20000 120000	160 384	20 44

 

The annual overheads are as under

Volume related activity costs Rs. 550000

Set up costs Rs. 820000

Purchase related costs Rs. 618000

 

You are required to calculate the cost per unit of each product based on activity based costing.

 

4. The cost per unit of the three products A,B and C of a concern is as follows

Particulars	A	B	C
Direct materials Direct labour Variable expenses Fixed expenses Total cost Profit Selling price Number of units produced	10 6 4 3 23 9 32 10000	8 7 5 3 23 7 30 5000	9 6 3 2 20 6 26 8000

 

Production arrangements are such that if one product is given up, the production of the others can be raised by 50%.  The directors propose that C should be given up because the contribution in the case is the lowest.  Do you agree?

 

5. Ram Dass pvt ltd Nasik, is currently operating at 80% capacity.  The profit and loss account shows the following

Sales Cost of sales: Direct materials Direct expenses Variable overheads Fixed overheads   Profit	280 80 40 260	640           580 60

The managing director has been discussing an offer from Middle East of a quantity which will require 50% capacity of the factory .  The price is 10% less than the current price in the local market.  Order cannot be split.  You are asked by him to find out the most profitable alternative.  The factory capacity can be augmented by 10% by adding facilities at the increase of Rs. 40 lakhs in fixed cost.

 

6. For the final assemble of product in an engineering company, a certain component is required. The company has the options either to produce the component itself or purchase it from the market.  The production department which can make the component is currently working to full capacity and earning a contribution of Rs 10 per hour on an order which will last for another ten months.  Repeat orders are very likely.  Variable cost of making the component is Rs. 42 and it takes one hour per unit.  Market price of the component is Rs. 45 per unit

 

What advice will you give to the management of the company?

 

7. What is a balance score card? What are the perspectives under the balance score card?
8. What is a transfer price? Explain any four types of transfer pricing method
9. Explain the concept of benchmarking with its process.
10. Define business process re engineering process. Explain its methodology.

 

 

Section – B

1. Answer any THREE out of FIVE questions.                   (3 x 15   = 45)
   
2. A company engaged in plantation activities has 200 hectares of virgin land which can be used for growing jointly or individually tea, coffee and cardamom. The yield per hectare of the different crops and their selling prices per kg are as under

	Yield (kgs)	Selling price per kg
Tea Coffee Cardamom	2000 500 100	20 40 250

Variable cost per kg

	Tea (Rs.)	Coffee (Rs.)	Cardamom (Rs.)
Labour charges Packing materials Other costs Total costs	8 2 4 14	10 2 1 13	120 10 20 150

Fixed cost per annum

Cultivation and growing cost Rs. 10,00,000

Administrative cost s. 200000

Land revenue Rs. 50000

Repairs and maintenance Rs. 250000

Other costs Rs. 300000

The policy of the company is to produce and sell all the three kinds of products and the maximum and minimum area to be cultivated per product is as follows

	Max hectares	Min hectares
Tea Coffee Cardamom	160 50 30	120 30 10

 

Calculate the most profitable product mix and the maximum profit which can be achieved.

 

12. An organization manufacture a product, particulars of which are detailed below;

Annual production Material costs Other variable costs Fixed cost Total cost Apportioned investment	20000 units Rs. 60000 120000 40000 220000 200000

Determine the unit selling price under each of the following.  Assume that the organizational tax rate is 52%

1. 20% return on investment
2. 30% mark up based on total cost

• 20% profit on net sales price

1. 15% profit on list sales when trade discount is 35%
2. 40% mark up based on incremental cost
3. 50% mark up based on value added by manufacturer.

 

13. A machine used on a production line must be replaced at least every four years. The cost incurred in running the machine according to its age are

Age of machine (years)

particulars	0	1	2	3	4
Purchase price Maintenance Repairs Net realizable value	3000	800   1600	900 200 1200	1000 400 800	1000 800 400

 

Future replacement will be identical machines with the same costs.  Revenue is unaffected by the age f the machine.  Assume there is not inflation and ignore tax.  The cost of capital is 15%.  Determine the optimum replacement cycle.

 

14. German remedies ltd has prepared the following budge estimates for the year

Sales (uts)	Product A 6000	Product B 16000
Selling price Direct materials Direct wages @ Re 1 per hour Variable overheads Fixed overheads Total profit	40 12 8 4 8 32 8	64 22 12 6 12 52 12

After the finalization of above manufacturing program me, it is observed that one third capacity of the company is till idle.  In order to improve the working the following proposals are put up for consideration

1. Discontinue product A and the capacity so released will be used on product B. The selling price of product B however will be reduced by Rs. 2 per unit on the entire sales.
2. Discontinue product B and divert the capacity to Product C whose unit cost data are as under

Selling price Direct material Direct labour Variable overheads

52 15 10 5

1. Utilize the idle capacity for meeting an export demand for the product D whose unit cost data are as under

Selling price Direct materials Direct labour Variable overheads

72 40 20 10

1. Hire out the idle capacity hours by fixing up a price in such a way that the same rate of profit per direct labour hour as obtained in the original budget estimates is achieved. Indicate the hire charges per direct labour hour.

 

• Prepare a statement showing the profitability as envisaged in the original program me
• Evaluate the above proposals and prepare profit statement under each.

 

15. What do you mean by philosophy of continuous process improvement? What are its challenges.

 

Section – C

 

• ONE Compulsory Case study (No choice)                   (1 x 20 = 20)

 

• A manufacturing company purchase one of the components required for the manufacture f product from two sources supplier A and supplier B. The price quoted by Supplier A is Rs. 15.00 per hundred numbers of the component and it is found that on the average 3% of the total receipt from this source is defective. The corresponding quotation from supplier B is Rs. 14.50 but the defectives would go  up to 5% for the total supply.  If the defectives are not detected, they are utilized in production causing a damage of Rs. 15.00 per hundred components.

The company intends to introduce a system of inspection for the components on receipt which would cost Rs. 2.00 per hundred components.  Such an inspection will however be able to detect only 90% of the defective component received.  No payment will be made for components found to be defective in inspection.

Offer your opinion.

• Whether inspection at the point of receipt is justified
• Which of the two suppliers should be asked to supply
• Assume total requirement of components to be 10000units (10 marks)

 

• The details of the output presently available from a manufacturing department of Hi tech industries are as follows

Average output per week 48000 units from 160 employees

Saleable value of output Rs. 600000

Contribution made by the output towards fixed expenses and profit Rs. 240000

The board of directors plans to introduce more automation in the department at a capital cost of Rs. 160000.  The effect of its will be to reduce the number of employees to 120 but to increase the output per individual employee by 60%.  To provide the necessary incentive to achieve the increased output the board intends to offer a 1% increase in the piecework rate of one rupee per article for every 2% increase in average individual output achieved.  To sell the increased output , it will be necessary to decrease the selling price by 4%

Required

Calculate the extra weekly contribution resulting from the proposed change and evaluate for the board’s information the worth of the project.

(10 marks)

 

1. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)

End Semester Examinations – MARCH /APRIL 2014

m.com – ii semester

ADVANCED MANAGEMENT ACCOUNTING

Duration: 3 Hrs                                                                                               Max. Marks: 100

Section – A

1. Answer any SEVEN out of 10 questions. Each carries 5 marks.       (7 x 5  = 35)

 

• XYZ Ltd. has on hand 5,000 units of a product that cannot be sold through regular sales. These were produced at a total cost of Rs. 1,50,000, and would normally have been sold for Rs. 40 per unit. Three alternatives are being considered:
• Sell the items as scrap for Rs. 2 per unit
• Repackage at a cost of Rs. 20,000, and sell them at Rs. 8 per unit
• Dispose them off at the city dump at removal cost of Rs. 500.

Which alternative should be accepted?

 

• Fine Garments Ltd. manufactures readymade garments and uses its cut-pieces of cloth to manufacture dolls. The following statement of cost has been prepared:

Particulars	Readymade garments	Dolls	Total
Direct materials	Rs. 80,000	Rs. 6,000	Rs. 86,000
Direct labour	13,000	1,200	14,200
Variable overheads	17,000	2,800	19,800
Fixed overheads	24,000	3,000	27,000
Total cost	1,34,000	13,000	1,47,000
Sales	1,70,000	12,000	1,82,000
Profit(loss)	36,000	(1,000)	35,000

The cut-pieces used in dolls have a scrap value of Rs. 1,000 if sold in the market. As there is a loss of Rs. 1000 in the manufacturing of dolls, it is suggested to discontinue their manufacture. Advise the management.

 

• The Premier Chemicals Ltd manufactures two chemical solvents, A and B, in fixed proportions of 1:2 respectively. During one month, 60,000 litres were produced and common processing costs of Rs. 2,40,000 were incurred. A and B solvents could be sold in their present form for Rs. 6 and Rs. 8 per litre respectively. However, solvent A can be sold as A-plus for Rs. 8 per litre by adding an extra ingredient costing Rs. 1.50 per litre. Solvent B can be sold as Super-B for Rs.12 per litre if it is processed at an additional cost for Rs. 4 per litre plus an additional Rs. 40,000 per month for hiring a special filtering machine with a capacity of 40,000 litres per month.

Should the solvents be sold at the split-off point or be processed further?

• Garden Products Ltd. manufactures the ‘Rainpour’ garden spray. The accounts of the company for the year 2013 are expected to reveal a profit of Rs. 14,00,000 from the manufacture of ‘Rainpour’ after charging fixed costs of Rs. 10,00,000. The ‘Rainpour’ is sold for Rs. 50 per unit and has a variable unit cost of Rs. 20.

Market sensitivity test suggest the following responses to price changes:

Alternatives	Selling price reduced by	Quantity sold increased by
A	5%	10%
B	7%	20%
C	10%	25%

Evaluate these alternatives and state which, on profitability consideration, should be adopted for the forthcoming year, assuming cost structure unchanged from 2013.

 

• The following particular are given to you:

Particulars	Product A	Product B
Units produced	20	20
Material handling per product unit	6	14
Direct labour hours per unit	870	870

Budgeted material handling costs are Rs. 1,74,000. You are required to determine cost per unit of the products under ABC method.

 

• ABC Ltd. is producing a spare part no. 009, for its product. The cost of manufacturing 5000 units of 009 is as under:

Direct material           Rs. 11,750

Direct wages Rs. 94,000

Variable overheads    Rs. 47,000

Fixed overheads         Rs. 58,750

 

Another manufacturer is offering to sell the same spare part for Rs. 41. It is estimated that by avoiding the production of this spare part, the company has to incur Rs. 35200 as fixed overheads.

Should the company make or buy this spare part?

 

• What is a balance score card? What are the perspectives under the balance score card?

 

• What is decentralization? What are the advantages of decentralization?

 

• Write a note on Business Process Outsourcing and value chain management in Indian companies.

1. What do you understand by capital rationing?
2. What are the uses of WACC?

Section – B

1. Answer any THREE Each carries 15 marks.                             (3 x 15   = 45)

11) A company manufactures and markets three products A,B, and C. All the three products are made from the same set of machines. Production is limited by machine capacity. From the data given below indicate priorities for products A,B and C with a view to maximizing profits:

particulars	Product A (Rs.)	Product B (Rs.)	Product C (Rs.)
Raw material cost per unit	2.25	3.25	4.25
Direct labour cost per unit	0.50	0.50	0.50
Other variable cost per unit	0.30	0.45	0.71
Selling price per unit	5.00	6.00	7.00
Standard machine time required per unit	39 mts	20 mts	28 mts

In the following year, the company faces extreme shortage of raw materials. It is noted that 3 kgs, 4 kgs, and 5 kgs of raw materials are required to produce one unit of A,B, and C, respectively. How would products priorities change?

 

12) Anand Furnishing Ltd. Manufactures a variety of premium board room chairs. Its job-costing system is designed using an activity-based approach. There are two direct cost categories of direct materials and direct manufacturing labour and three indirect costs pools representing three activity areas at the plant:

Manufacturing Activity area	Budgeted costs	Cost driver used as Allocation base	Cost allocation rate
Material handling	Rs.  2,00,000	parts	Rs.0.25
Cutting	Rs. 21,60,000	parts	2.50
Assembly	Rs. 20,00,000	Direct manufacturing labour-hours	25.00

Two styles of chairs were produced in March: executive chair and chairman chair. Their quantities, direct material costs and other data for March are as follows:

Type of chair	Units produced	Direct material costs	Number of parts	Direct manufacturing labour-hours
Executive	5000	Rs. 6,00,000	1,00,000	7,500
chairman	100	Rs.    25,000	3,500	500

The direct manufacturing labour rate is Rs. 20 per hour. Assuming no beginning/ending inventory, compute the total manufacturing costs and units costs of the two type of chairs.

 

13) Ambitious Enterprises is currently working at 50% capacity and produces 10,000 units. At 60% working, raw material cost increases by 2% and selling price falls by 2%. At 80% working, raw material cost increases by 5% and selling price falls by 5%. At 50% capacity working, the product costs Rs. 180 per unit and is sold at Rs. 200 per unit. The unit cost of Rs.180 is made up as follows:

Material                                  Rs. 100

Wages                                     Rs.  30

Factory overheads                 Rs. 30 (40%fixed)

Administration overheads    Rs. 20 (50% fixed)

Prepare a marginal cost statement showing the estimated profit of the business when it is operated at 60% and 80% capacity.

 

14) What is transfer pricing? What are the different methods of transfer pricing?

 

15) Write a note on the following:

1. a) Life cycle costing
2. b) Target costing
3. c) Business Process Re-engineering
4. d) Cost of quality

Section – C

 

• Compulsory Case study.                                                                               (1 x 20 = 20)
• a) Royal industries Ltd. Manufactures three different products from single raw materials and by a common process.

Budgeted data for the coming years are presented below. The production costs identified with the individual products are only the separate processing costs incurred after the split-off point.

particulars	Product A	B	C	Joint cost
Out put (units)	45,000	30,000	15,000
Selling price per unit	6	12	18
Production units:
Direct material	——-	———	——-	3,00,000
Direct labour	24,000	36,000	30,000	1,50,000
Variable manufacturing overheads	12,000	18,000	12,000	48,000
Fixed manufacturing overheads	18,000	30,000	24,000	96,000

 

The sales manager has suggested the following sales-mix of products – A: 30,000; B:  40,000 and C: 20,000 involving additional joint processing costs of Rs. 1,00,000.

Comment on the economic feasibility of the proposed mix.                                       (10 Marks)

 

1. b) Olive Ltd.(OL) is a shoe manufacturing company that started two year back. Their target group of customers is kids below age of five. Its production capacity is 6,500 pairs of shoes per month and there is inventory of 200 pairs of shoes on hand. Expected sales at regular prices for the coming month are 6,000 pairs of shoes. Price and cost data per unit are as follows:

Selling price                                                     Rs. 500

Variable cost:

Production                  Rs.240

Selling                                     Rs.   60                                300

Profit contribution                                                 200

The OL has received an order from a store to buy 1000 pairs at Rs. 350 each. The variable selling costs on the special order would be Rs. 10 per unit. The delivery is to be mad within 30 days.

• Should OL go for the offer or reject it straight away?
• What should be the lowest price that the OL should charge on the special order and not reduce its income?
• Suppose now that the shopkeeper offers to buy 800 pairs per month at Rs. 350 per pair. The offer would be for an entire year. Expected sales are 6000 pairs per month without accepting the special order. Assuming further that is no beginning inventory, determine whether the offer should be accepted by OL.                                              (10 Marks)    

st. joseph’s college of commerce (autonomous)
END SEMESTER EXAMINATION – MARCH/APRIL 2015
m.com- ii semester
P111202: ADVANCED MANAGEMENT ACCOUNTING
Duration: 3 Hours                                                                                                     Max. Marks: 100
SECTION – A
I)	Answer any SEVEN questions.  Each carries 5 marks.                                             (7×5=35)
	1.	Nishu & Co manufactures three products. The following is the cost data relating to products A,B and C Products A B C Total Sales Variable cost Contribution Fixed cost Profit 150000 120000 30000   90000 63000 27000   60000 36000 24000   300000 219000 81000 40500 40500   You are required to prove how knowledge of marginal costing can help management in changing the sales mix in order to increase profits of the company.
	2.	Shrish and Co ltd has three divisions each of which makes a different product.  the budget data for the next year is as follows Divisions A B C Sales Direct material Direct labour Variable overhead Fixed cost Total cost 112000 14000 5600   14000 28000 61600 56000 7000 7000   7000 14000 35000 84000 14000 22400   28000 28000 92400 The management is considering closing down Division C.  There is not possibility of reducing variable cost.  Advise whether or not Division C should be closed down
	3.	State the main types of information which will be required by a manger to implement the balance scorecard approach to performance measurement.
	4.	S and V pl supports the concept of terotechonology or life cycle costing for new investment decisions covering its engineering activities.  The final side of this philosophy is now well established and its principles extended to all other areas of decision making. The company is t replace a number of its machines and the production manager are torn between the EXE machine, a more expensive machine with the life of 12 years and Wye machine with a life of 6 years.  If the Wye machine chosen it is likely that it would be replaced at the end of 6 years by another Wye machine.  The pattern of maintenance and running costs differs between the two types of machine and relevant data are shown below   EXE WYE Purchase price Trade in value Annual repair costs Overhaul costs   Estimated financing costs averaged over machine life 19000 3000 2000 4000 (at year 8) 10% p a 13000 3000 2600 2000 (at year4) 10% p a You are required to Recommend with supporting figures which machine to purchase
	5.	Rajadhani Furniture ltd manufactures desks.  The following information is provided for per unit Material (3 kgs @ Rs2 per kg) – Rs. 6 Labour Rs. 5 Variable overhead Rs. 4 Allocated Fixed overhead Rs. 2   Material is currently used to make chairs which provide contribution of Rs. 5 per unit.  2 kgs of material is required for each chair.  What is the minimum price per desk if material is plentiful and material is scarce?
	6.	What is transfer pricing? What are the methods of calculating transfer pricing.
	7.	Divisions X and Y are currently considering an outlay on new investment projects   Division X Division Y Investment outlay Net annual return Target ROI 200000 32000 18% 200000 22000 11% The group’s cost of capital is 13%.  Should the project be accepted or rejected?
	8.	Explain how does value chain approach help an organization to assess its competitive advantage?
	9.	What do you mean by benchmarking?  What are the prerequisites of benchmarking?
	10.	What is Total Quality Management?  What are the core concepts of TQM?
SECTION – B
II)	Answer any THREE questions.  Each carries 15 marks.                                (3×15=45)
	11.	Z ltd makes a range of five products to which the following standards apply   A B C D E Sales price Direct materials Direct wages Variable Production OH Variable Selling and Distribution OH Fixed OH   50 9 16 8   5 4 42 60 10 20 10   6 5 51 70 17 24 12   7 6 66 80 12 28 14   8 7 69 90 21 32 16   9 8 86 The direct labour wage rate is Rs. 4 per hour.  Fixed overhead have been allocated on the basis of direct labour hours.  The company has commitments to produce a minimum of 400 units of each product per month.  Direct labour hours cannot exceed 13000 per month due to restriction of space.  The board is now considering an offer of a new three year contract to produce an additional 400 units of product B per month at a selling price of Rs. 58 per unit.  The contract would involve an outlay of Rs. 100000 on the lease of additional factory premises and purchase of new plant and equipment.  There would be no residual value at the end of the contract.  Variable production costs would be in accordance with existing standards, variable selling and distribution costs would be one half of the existing rate and cash outflows on fixed costs would be Rs. 20000 per annum.  An outside supplier has offered to supply 400 units of product B per month at a price of Rs. 48 per unit.  If purchased externally cash flows on additional fixed costs will be Rs. 25000 per annum   Required Give recommendations supported by calculations to show how direct labour hours in the existing factory should be utilized in order to maximize profits Show the budgeted trading results on the basis of your recommendation Give calculations to show whether or not the proposed contract for product B should be accepted and if so, whether it should be purchased externally or manufactured in the new premises.
	12.	Trimake limited makes three main products, using broadly the same production methods and equipment for each.  A conventional product costing system is used at present, although an ABC system is being considered Details of the three products for the typical period are         Hours per unit Material / unit Volumes Product Labour hours Machine hours Rs. Units   X Y Z ½ 1 ½ 1 1 ½ 1 3 20 12 25 750 1250 7000 Direct labour costs Rs. 6 per hour and production overhead are absorbed on a machine hour basis.  The rate for the period is Rs. 28 per machine hour. Further analysis shows that the total of production overheads can be divided as follows   Percentage Set up costs Machinery Materials handling Inspection Total Production overhead 35 20 15 30 100 The following activity volumes are associated with the product line for the period as a whole.  Total activities for the period   No of set ups No of movement of materials No of inspections X Y Z 75 115 480 12 21 87 150 180 670 You are required To calculate the cost per unit for each product using conventional method To calculate the cost per unit for each product using Activity Based Costing Comment on the differences
	13.	XYZ ltd manufactures automobile accessories and parts.  The following are the total and per unit cost of processing a component   Total cost per 100000 units Unit cost   Direct material Direct labour Variable factory overhead Fixed overhead 500000 800000   600000 500000 2400000 5 8   6 5 24 Another manufacturer has offered to sell the same part to XYZ ltd at Rs. 22 each. The fixed overhead would continue to be incurred even when the component is bought out although there would be a reduction to the extent of Rs. 150000 following the savings in salaries of supervisor personnel that could be avoided if the company opts to buy rather than to make. Should the part be made or bought, considering that the present facility when released following the buying decision would remain idle? In case the released capacity can be rented to another manufacturer for Rs. 50000 what will be the position?
	14.	What is business performance measurement?  Explain in detail the non financial and financial business performance measurement with an example each.
	15.	Alpha limited is considering five capital projects for the years 2010 and 2011.  The company is financed by equity entirely and its cost of capital is 12%.  The expected cash flows of the project are as below: (‘000) Project Year 1 Year 2 Year3 Year 4 A B C D E (70) (40) (50)   (60) 35 (30) (60) (90) (20) 35 45 70 55 40 20 55 80 65 50 Figures in brackets represent cash outflows All projects are divisible.  None of the projects can be delayed or undertaken more than once.  Calculate which project the company should undertake if the capital available for investment is limited to Rs. 1, 10,000 in year 1 and with no limitation in subsequent years.
SECTION – C
III)	Case Study                                                                                                                  (1×20=20)
	16.	A manufacturing company has excess capacity up to 120000 units per month of a product.  The company has been approached by a customer SMA to quote for three levels of monthly output of 75000,  90000, and 1,05,000 units.  The cost per unit of the product is as under: Raw materials per unit Rs. 0.45 Direct wages per unit 0.18 Mfg overheads (fixed )200% of direct wages Selling and admin overhead 100% of direct wages Packing per unit Rs. 0.15 Profit margin on total costs 15% for 75000 units 12.5% for 90000 units 10% for 105000 units   The administration overheads are forecast at Rs. 18750 per month.  If the output drops to 75000 units and below, a saving in administration cost of Rs. 1500 per month will be made.  If the contract from SMA does not materialize an administration overheads of Rs. 900 per month will be incurred. Another customer SMB has also approached the company for a quotation for a different version of the product.  The quantity required of this product is 90000 units per month.  The data relating to this contract are as under: Selling price per unit Rs. 1.80 Raw materials per unit Rs. 0.80 Direct wages per unit 0.22 Packing per unit Rs. 0.18   Required: Calculate the unit selling prices for the three levels of output of the contract relating to SMA Prepare a comparative statement of profitability at different levels of output as envisaged in the two contracts of SMA and SMB Advice which contract should be acceptable to the company.