COST Management

st. joseph’s college of commerce (autonomous)

The company is frequently affected by acute scarcity of raw material and high labour turnover. During the next period it is expected to have one of the following situations:

a)      Raw material available will be only 12,100 kg.

b)     Direct labour hours available will be only 5000 hours

Suggest the best production plan in each case and the resultant profit that the company would earn.

Budgeted output 80,000 units. Fixed expenses Rs.4,00,000; Variable expenses per unit is Rs.10. Selling price per unit is Rs.20. Draw a break even chart and ascertain the breakeven point. If the selling price is reduced to Rs.18 per unit find the new break even point from the chart.

a)      Find the profit for the year if the price is fixed at fullcost plus 25% margin.

b)     Find the profit for the year if profit maximizing pricing is used.

Should the company purchase the new machine?

Stock of finished goods at the end of every month is to be equal to 25% of estimated sales of next month. On 1^st July 2016,  2,700 units of stock are expected. There shall be no work in progress at the end of any month. Every unit of the product requires 4 kg of material A. Material equal to 50% of the requirement of the next month’s production are to be in hand at the end of every month. This requirement will be met on 1^st July 2016 also.

Prepare (a) Production budget in Units and (b) Material purchase budget in kg. for the 3 months July 2016 – Sept 2016

Which is the most profitable division using

a)      Division’s contribution margin criterion

b)     Return on investment (ROI) criterion

c)      Residual income criterion (company’s minimum rate of return is 15%)

d)     List few non financial performance measures that can be used to evaluate the divisional managers.

The fabricating department manufactures 24,000 components during the year, out of which it sells 4,000 units in the open market at Rs.5 per unit and transfers the balance at the same rate of Rs.5 per unit to plating department. The material and conversion cost in fabricating department is Rs.3.50 per unit and its fixed cost is Rs.20,000.

The plating department further works on the material received from fabricating department and sells all the 20,000 units in the open market at Rs.17 per unit. Material and conversion cost per unit for plating department is Rs.15.75 per unit and its fixed cost is Rs.15,000.

a)      Calculate the profit for each department and the total profit of the company.

b)     The plating department could buy its material from open market at Rs.4 per unit and hence insists that fabricating department should supply the material at Rs.4 per unit. Should fabricating department agree to the proposal?

c)      If fabricating department agrees to supply to plating department at Rs.4 per unit but decides to break even, how many units should it sell in the open market at Rs.5 per unit and how many can it sell to plating department? Maximum capacity for fabricating department is 24,000 units only.

Its five activities and its cost drivers are:

Compute the customer level operating income for the four customers and comment on the results.

a)      Fixed expenses Rs.1,49,500

b)     Semi variable expenses at 50% capacity Rs.89,500

c)      Variable expenses at 50% capacity Rs.2,67,000

Semi Variable expenses remained constant between 40% and 70% capacity, increase by 10% between 70% and 80% capacity and by 15% between 85% and 100% capacity. Sales at 60% capacity are Rs.5,10,000; at 80% capacity are Rs.6,80,000 and at 100% capacity are Rs.8,50,000. Assume all products produced are sold.

The firm has received an export order which requires utilization of 40% of plant capacity. The order cannot be split and has to be executed in one lot. The export price offered is 10%less than the current domestic price. Further 10% additional variable selling and administration cost is to be incurred due to special export packing requirement. The firm is considering the following options:

a)      Reject the export order and carry on with the domestic sales.

b)     Accept the export order and allow the domestic sales to fall to the extent required.

c)      Create additional plant capacity by installing new machinery which will result in increased fixed cost of Rs.20 lakh p.a.

Evaluate each of these options and suggest the best course of action.

Since the demand for the company’s product is high, the possibilities of increasing the production are explored by the budget committee. The technical director stated that if preventive maintenance is introduced, the breakdown repair costs and hours lost due to breakdown can be reduced and consequently production can be increased. In support of this he presented the following data, showing how pumping of more and more funds on preventive maintenance will bring down the break down repair costs and reduce/eliminate machine stoppage due to breakdown:

Using differential cost and contribution concept, advice the management on, up to what level breakdown hours can be reduced to increase production and maximize profits of the company consistent with minimum costs.

SECTION – C

It operates at single shift a day of 8 hours for 300 days in a year. The number of workmen engaged are 3,01,618 and 24 in departments A,B,C and D respectively. Neither the workers are subject to transfer from one department to another or any new recruitment is possible at present. Fixed costs are Rs.12,000 per month.

a)      Find the product mix to yield maximum profit.

b)     The most profitable product if only one product is to be manufactured.