| 1. | Please show your workings or give reasons for your chosen answer from each of the following multiple–choice questions. (No credit for an answer without workings/reasons) | | |
| | (a) | A company determines its selling price by marking up variable costs 60%. In addition, the company uses frequent selling price mark down to stimulate sales. If the mark downs average 10%, what is the company’s contribution margin ratio? | (A) | 27.5% | (B) | 30.6% | (C) | 37.5% | (D) | 41.75% |
| 3 | (0) |
| | (b) | B. Ltd has earned net profit of Rs.1 lakh, and its overall P/V ratio and margin of safety are 25% and 50% respectively. What is the total fixed cost of the company? | (A) | Rs.1,00,000 | (B) | Rs.50,000 | (C) | Rs. 2,00,000 | (D) | None of these |
| 3 | (0) |
| | (c) | B. ltd which manufactures components for VCD, has a capacity to produce 4 lakh units. The market demand is sensitive ti the sale price and the company could sell 1 lakh units at a price of Rs.50 each. The demand thereafter would double for each Rs.5 per unit fall in the selling price. The company expects a minimum margin of 25% what would be the target cost of the company to sell at full capacity utilization? | (A) | Rs.35 | (B) | Rs.30 | (C) | Rs.25 | (D) | Rs.20 |
| 3 | (0) |
| | (d) | A company issues commercial paper for Rs.2 crore with a maturity period of 90 days. The interest rate is 12%p.a what is the net amount received by the company? | (A) | Rs. 1.76 crore | (B) | Rs. 1.94 crore | (C) | Rs. 1.50 crore | (D) | Rs. 1.85 crore |
| 3 | (0) |
| | (e) | If back orders can be taken (at an added cost per item back ordered)
(A) EOQ will decrease
(B) EOQ will increase
(C) Lead time will decrease
(D) No change will occur, Back orders do not affect the EOQ model. | 3 | (0) |
| | (f) | Which of the following would decrease unit contribution margin the most? | (A) | 15% decrease in selling price | (B) | 15% increases in variable costs | (C) | 15% decrease in variable costs | (D) | 15% decrease in fixed costs |
| 3 | (0) |
| | (g) | When allocating service department costs to production departments, the method that does not consider different cost behaviour patterns is the | (A) | Step method | (B) | Reciprocal method | (C) | Single – rate method | (D) | Dual – rate method |
| 3 | (0) |
| 2. | (a) | What is Goal congruence and how is it important in Transfer pricing? | 4 | (0) |
| | (b) | Division P of Wider Horizons Ltd. has been given a budgeted target of selling 2 lakhs companies, ‘Santran 84’ that it manufactures, at a price which would result in a return of 25% on the average assets employed by it. The following figures are relevant: Fixed overheads
Variable cost
Average Assets: | Rs. 4,00,000
Re. 1 per unit | Sales debtors
Stocks
Plant and other assets | Rs. 2,00,000
Rs.6,00,000
Rs.4,00,000 |
However, the marketing department of the company finds out by a survey that the maximum number of Santran 84 that the market can take at the proposed price is only 1,40,000 unts. Fortunately, Division B of the company is willing to purchase the balance 60,000 units. The manager of Division P is willing to sell to Division B at a concessional price of Rs.4 per units. But the Manager of Division B is ready to pay Rs.2.25 only per unit, as he can himself make Santran 84 in his Division at that price. Rather than sell to Division B at Rs.2.25, the Manager of Division P, feels he will restrict the activity of his Division to the manufacture and sale of 1,40,000 components only. By this he could reduce Rs.80,000 in stocks. Rs.1,20,000 of plant and other assets and Rs.40,000 in selling and administrative expenses. You are required to work out the various computations and show that selling 60,000 Santran 84 to Division P at Rs.2.25 per unit would be in the overall interest of the company. | 12 | (0) |
| 3. | Autocare, famous for its automobiles care and services is run on scientific lines, and its service charges are considered fair and reasonable, which the customers do nor grudge to pay. Find how much the firm should charge for service to a client for the month of June, when the expected units if service would be 2,500 and the installation rate forecast will be 174.
The following figures are relevant:
The following figures are relevant: | Month | Units of service | Charges Made | Inflation Index | October
November
December
January
February
March
April | 2100
1800
2600
2400
6300
1900
2800 | 1750
1630
2050
1984
5025
1870
2266 | 160
163
164
162
167
170
171 |
As per the fir’s practice, the service charges contain an adjustment for inflation and it has been revised from January. | 16 | (0) |
| 4. | In a firm, the annual demand for Raw Material R is 4000 units and the purchase price is expected to be Rs.90 per unit. The incremental cost of processing an order is Rs.135 and the cost of storage is estimated to be R.12 per unit. | (a) | What is the optimal order quantity and the total relevant cost of this order quantity? |
| (b) | Suppose that the Rs.135 estimate of the incremental cost of processing an order is incorrect and should have been Rs.80. Assume that all other estimates are correct. What is the cost of this prediction error assuming the solution to part (a) is implemented for one year? |
| (c) | Assume at the start of the period a supplier offers 400units at a price of Rs.86. The materials will be delivered immediately and placed in the stores. Assume that the incremental cost of placing this order is zero and the original estimate of Rs.135 for placing an order for the economic batch size is correct. Would the order be accepted? |
| 5+5+6 | (0) |
|
| 5. | (a) | Brilliant Co. has provided you with the following summarized working results for two years: | Year
2002 | Year
2002 | | (Figures in Rs. Cr.) | | Sales | 444.44 | 480.00 | Cost of Sales:
Material
Variable Expenses
Fixed Expenses |
280.00
100.00
50.00 |
318.85
120.00
61.15 | | 430.00 | 500.00 | | Profit/(Loss) | 14.44 | (20.00) |
It has been also observed that during the year 2003 the following increases in average prices were recorded: Sale price – by 20%
Material price – by 15%
Expenses – by 15% |
You are required to analyze the reasons for change in profitability from 2002 to 2003 in a tabular form showing variances arising due to sales price variance, volume of sales variance (contribution), material price variance, material usage variance, variable expenses expenditure variance, variable expense efficiency variance, fixed expenses expenditure variance and fixed expenses volume variance. | 8 | (0) |
| | (b) | What is the responsibility centre? Explain the purpose of different types of responsibility centres. | 8 | (0) |
| 6. | Hudco Ltd requires its various operating divisions to meet the company‘s target return of 15% on investment, as specified by the board. Besides the ROI of 15% of the board also requires an annual positive cash flow. The Steady Division has achieved the 15% target for many years. Steady‘s assets are mainly plant and equipment (its properly rented), plus net current assets. The average age of its assets has increased by 10 months per year over the last four years. A recent bench marking exercise has shown that Steady‘s productivity is below that of its competitors, although its financial performance appears very good. The divisional operations director has recently presented a proposal for a major investment in new plant and machinery. He argued that without substantial investment Steady would not be able to complete on either quantity or delivery time. The divisional sales director agreed that these factors had become the two most important features in winning new orders. The budgeted financial figures for 2004 are shown here: | Steady Division — 2004
(Rs. Cr) | Sales
Operating profit before depreciation
Depreciation
Operating profit
Interest payable
Divisional net profit before tax
Plant and equipment
Net current assets
Total divisional assets | 168.60
22.20
3.00
19.20
1.80
17.40
60.00
36.00
96.00 |
The proposal s for new investment would lead to a net increase in plant and equipment of Rs.36 crore and a reduction in net current assets of Rs.12 crore. Steady expects that the new assets would lead to an increase in operating profit before depreciation of Rs.8.4 crore and a net increase in depreciation of Rs..8 crore. Hudco charges 12% on all funds used by divisions.
You are required to :— | (a) | Calculate the return on investment for steady Division for 2004., with and with out the new investment proposal. Briefly comment on the expected performance of Steady Division for each option. |
| (b) | Calculate the Residual Income (RI) for Steady Division for 2004, with or without the new investment proposal/ briefly comment on whether using RI would improve the measurement of Steady’s performance. |
| (c) | Outline the major features of Economic value Added (EVA) and briefly discuss whether its use could improve divisional performance measurement for Hudco. |
| 5+5+6 | (0) |
| 7. | (a) | What do you understand by the term ‘Management by Exception’? briefly explain the areas of cost and Management Accounting which are based on this principle. | 8 | (0) |
| | (b) | What is meant by customer costing in service sector? | 8 | (0) |
| 8. | Write short notes on: | 4x4=16 | |
| | (a) | Relevant Costs in Decision Making; | | (0) |
| | (b) | Back Flush Accounting; | | (0) |
| | (c) | Target Costing; | | (0) |
| | (d) | Loss Leaders. | | (0) |
