CA Final - Group II : Cost Management - November 2010

CA Final - Group II • Cost Management • November 2010

This Paper has 19 answerable questions with 0 answered.

Roll No………
Total No. of Questions — 7]	[Total No. of Printed Pages — 12
Time Allowed : 3 Hours	Maximum Marks : 100

Answers to questions are to be given only in English except in the cases of candidates who have opted for Hindi medium. If a candidate who has not opted for Hindi medium, his answers in Hindi will not be valued.

Q.No. 1 is compulsory.

Attempt any five questions from the remaining six questions.

Working notes should form part of the answer.

Marks

(a)

The standard cost for producing 180 kgs of a product whose raw material inputs are A and B is given below :

	Standard Cost (Rs.)
Material A 60 kgs @ Rs.10 per kg Material B 140 kgs @ Rs.2 per kg	600 280 880

The actual prices of A and B were Rs.12 and Rs.8 per kg respectively. Consumption of B was 108 kg. The actual output at 80% yield was 144 kg.

Calculate the following direct material variances :

(i)	Mix variance
(ii)	Yield variance
(iii)	Price variance
(iv)	Usage variance

(0)

(b)

Sportswear Ltd. manufactures sportswear shirts and shorts. The production budget for these two products has to be prepared for the next three months, November 2010, December 2010 and January 2011.

The following information is given :

(i)	Sales volume every month will be 2% more than the previous month’s volume for each product.
(ii)	The company carries stock of finished garments sufficient to meet 40% of the next month’s sale.
(iii)	Closing stock for October 2010 was 6000 shirts and 8000 shorts.

You are required to prepare the production budget for each product for November, December 2010 and January 2011.

(0)

(c)

A factory has a special offer to produce 4 units of a labour intensive product by using its existing facilities after the regular shift timings. The product can be produced by using only overtime hours which entails normal rate plus 25%, so that usual production is not affected. Two workers are interested in taking up this additional job every evening after their usual shift is over. One is an experienced man who has been working on a similar product. His normal wages are Rs.48 per hour. The other worker is a new person who earns Rs.42 an hour as normal wages. He can be safely considered to have a learning curve ratio of 90% for this work. The company wants to minimize labour cost for the order and only one person is to be chosen for the job. The experienced man will take 20 hours for the first unit while the new worker will take 30 hours for the first unit. Evaluate who should be chosen for the job.

(0)

(d)

You are given the following linear program. Introduce appropriate variables and restate the problem to set up the simplex tableau. (Do not attempt further solution.)

Maximise :

8x ₁ + 4x ₂ - 3x ₃ + 10x ₄

S.t.

2x ₁ - x ₂ + x ₃ + 2x ₄ ≥ 40

3x ₁ - x ₃ + x ₄ ≤ 90

2x ₁ + x ₂ + x ₄ = 60

x ₁ , x ₂ , x ₃ , x ₄ ≥ 0

(0)

(a)

M Ltd. makes two products, X and Y, in their respective divisions. Each unit of Y needs one unit of X. Divisions X and Y are profit centres and can function according to their divisional interests.

In the external domestic market, X can sell either 6000 units at Rs.1,000 per unit or 5000 units at Rs.1,120 per unit.

X has a production capacity of 7000 units, with each unit requiring 2 hours. Y also has a production and demand of 7000 units.

Y can buy product X from outside as follows :

Order Quantity (Units)			Price for the entire order (Rs./u)
6001 4001 2001 0	– – – –	7000 6000 4000 2000	900 920 1,000 1,120

Y resorts to bulk purchase to avail maximum possible discount.

(i)	There is an export order (that may either be fully accepted or fully rejected) for X to supply 800 units @ Rs.900 per unit.
(ii)	There is an offer to hire out X’s capacity of 1600 hours at Rs.130 per hour, pie hiring offer may either be fully accepted or fully rejected.
(iii)	Y will not buy from X at any price more than it will incur in the outside market. Y does not place restrictions on quantities to be supplied by X, provided its pricing condition is not violated.

Given that any one or more of the offers may be accepted, what will be X's best strategy ?

What will be the corresponding transfer price ?

[A detailed cost statement is not essential. Only figures relevant for decision making are required to be considered under each analysis.]

(0)

(b)

State the pricing strategy that you would advise in the following situations which are independent of each other :

(i)	A new product is to be launched. It has had high promotional expenditure and its demand in the market is not known.
(ii)	A new product is to be launched. It is to be mass manufactured.
(iii)	A product which has an external market demand is to be transferred to another division of the same company. For the external market, variable selling costs of Rs.10 per unit and fixed selling costs amounting to Rs.10 lacs p.a. are incurred. These costs are not applicable to divisional transfers. The divisional transfer can take up only 20% of the output produced.
(iv)	A special one-time order for the use of idle capacity is offered. This order will not impact the existing sales of the company. The product has competition in the market.
(v)	There is stock of a discontinued product. It has severe competition and the product is perishable.

(0)

(a)

ABC Ltd. manufactures four products A, B, C & D in the same factory. The following information is given for a certain period :

Product	A	B	C	D
Good output (No. of units) Average yield (%) Machine hours per unit of input	720 80 4	600 80 3	480 96 2	504 90 1

The plant works such that after machining, the defectives in each run are automatically segregated and dumped separately in a container. The good units pass through the process and are further checked for quality by the inspectors of quality control who charge by the number of batches inspected.

The total production and selling overheads of the company are the following for the period :

	Rs.
Machine operation and maintenance Set up costs Stores receiving Inspection Finished goods – packing/dispatch	66,375 19,200 21,400 24,000 14,400

The following additional information is given :

(i)	A material requisition is made for every 25 units of input.
(ii)	Machines need to be set up and tuned after each production run.
(iii)	Production is in batches of 24 good units for all the products.
(iv)	Units of A and B are packed in boxes that have 24 units capacity each and C & D are packed in smaller boxes of 12 units capacity. The smaller box costs half the price of the bigger box. Each box contains only one type of product. There is no product mix up in packing.

Choose appropriate activity cost drivers for each overhead cost and calculate the overhead cost per unit of good output for each of the products under the ABC system.

(0)

(b)

At the end of activity 6-7, a product is to be launched and the date has been announced for the inaugural function, based on the normal duration of activities as given in the network below. Activities have been subcontracted by the project manager to contractors A, B, C, D, E, F, G & H as indicated in the table below. Each subcontractor offers a discount on his contract price for each day given to him in addition to the normal days indicated in the network. What will be the maximum discount that the project manager may earn for the company without delaying the launch of the product ?

Activity	Contractor	Discount Rs./Day
1–2 1–3 1–4 2–5 3–5 4–6 5–6 6–7	A B C D E F G H	300 200 1,200 500 400 1,000 600 500

(0)

(a)

The manager of a hotel providing lodging facilities wants to expand his services to include manual booking (reservation or cancellation) of railway tickets for his clients. He does not want to have electronic booking due to operational difficulty. He has the following information :

Rs./Month

Proportion of rent allocated for office space
General Telephone expenses allocated to this service
Proportion of security charges / maintenance expenses allocated
Salary to person exclusively doing the booking of tickets
Mobile phone charges exclusive to person booking ticket
Share of general miscellaneous fixed expenses allocated
Conveyance incurred to book tickets (to and fro charges to the
nearest booking station) [fixed per month]

4,000
2,400
1,600
20,000
3,000
1,000
4,000

The manager estimates that there will be 2,500 bookings per month for 3 months of peak season. 1,000 bookings per month for 2 months of moderate business and 700 bookings per month during the remaining period. He cannot charge more than the prevailing rate of ? 30 per booking charged by other agents.

Calculate the total cost per booking.

What is the estimated profit the manager hopes to achieve for the full year ? What should be the average minimum volume to justify the setting up of the new service ?
(Detailed break–up of monthly revenues or costs is not essential.)

(0)

(b)

A manufacturing company makes 4 products that are sold through 8 regional offices countrywide. The products pass through 3 production processes in a factory. A separate market research division monitors outside competition. This division is outside the sales management hierarchy.

As a management accountant, suggest some routine reports for performance measurement to be made to :

(a)	The Sales Management
(b)	The Works Manager

(0)

(a)

A company has 3 factories F₁, F₂ and F₃ which supply the same product to 5 agencies, Ap A₂, A₃, A₄ and A₅. Unit production costs, shipping costs and selling prices differ among the different sources and destinations and are given below :

	F₁	F₂	F₃
Production Cost (Rs./Unit) Production Capacity (No.of units)	28 110	35 240	29 125

Agencies	A₁	A₂	A₃	A₄	A₅
Selling Price Rs./u. Demand (No. of units)	40 80	48 100	42 75	45 45	41 125

Shipping Costs Rs./u.

	A₁	A₂	A₃	A₄	A₅
F₁ F₂ F₃	3 6 3	9 10 10	8 6 3	12 2 6	8 5 8

(i)

Set up the initial transportation matrix for minimisation.

(ii)

After doing (i) above, you are given the following additional information :

(a)	40 units must be transported from F₂ to A₂ as per an earlier agreement made by F₂ with A₂’s customer. This quantity is included in the figures given for total production and demand at these locations.
(b)	Not more than 30 units may be sent from F₁ to A₁, since the transporter’s vehicle lacks space in this route.

Incorporating conditions (a) and (b) above, obtain the initial solution by Vogel’s Approximation Method. (Do not attempt to continue for the full and final solution.)

(iii)

After doing the initial solution as in (ii) above, you are informed that the route from F₂ to A₁ is blocked by sudden flooding of the roads.

Without actual re-calculation, briefly explain how your solution is likely to be affected.

(0)

(b)

The selling price per unit of a product is Rs.14. For the forthcoming period, the demand will be only 5,000 units. The fixed expenses at 50% activity (5,000 units) will be Rs.30,000. The company is thinking of shutting down operations, in which case an additional amount of Rs.2,000 will have to be incurred for shutting down and only Rs.20,000 of the above fixed costs can be avoided.

What should be the variable cost per unit to recommend a shut down ?

(0)

(a)

Aero Ltd. has hired an aircraft to specially operate between cities A and B. All the seats of the aircraft are economy class.

The following information is available :

Seating capacity of the aircraft
Average number of passengers per flight
Average one way fare from A to B
Variable fuel costs per flight from A to B
Food Cost
(no charge to passenger)
Commission to travel agents
(All tickets are through agents)
Annual lease costs allocated to each flight
Ground services, baggage handling / check–
in services costs per flight A to B
Flight crew salaries per flight A to B

= 320 passengers
= 240 passengers
= Rs. 5,000 per passenger
Rs. 90,000
Rs. 300 per passenger

10% of the fare

Rs. 2,00,000
Rs. 40,000

Rs. 48,000

There is an offer from another airlines operator, Mid Air Ltd. for a stop–over at destination D, which is on the way from A to B. Due to this, the flight will operate from A to D, then D to B.

The following terms are to be considered for the stop–over :

50 seats will be booked by Mid Air at Rs.2,500 per ticket, whether or not Mid Air is able to sell them to its customers. No agents' commission is payable on these tickets.

60 new passengers will be booked by Aero’s travel agents for travel from A to D at a fare of Rs.2,000 per passenger.

Since the stop–over wastes more time, 25 of Aero’s original passengers from A to B will drop out and seek other airlines which fly directly from A to B.

Due to the stop–over, fuel costs will increase from Rs.90,000 to Rs.1,35,000, Additional airport landing / baggage handling charges of Rs.19,000 per stop–over will have to be incurred by Aero Ltd.

Aero Ltd. will have to serve snacks to all passengers in the D to B sector at no charge to passenger. Each snack will cost Aero Ltd. Rs.200. This will be in addition to the original food at Rs.300 served in the A to D sector.

You may assume that fuel costs are not affected by the actual number of passengers in a flight. You may ignore non–financial considerations, additional wear and tear to aircraft due to extra landing / take–off.

Without considering Mid Air’s offer,

(i)	What is the profit earned by Aero Ltd. per flight from A to B ?
(ii)	What is the break-even number of passengers for each flight from AtoB?
Considering the effects of Mid Air’s offer
(iii)	Evaluate whether Aero should accept the offer. (A detailed profitability statement is not essential, a relevant cost–revenue analysis would suffice).

(0)

(b)

How can simulation be applied in practical situations ?

(0)

Answer any four of the following:

(a)

Discuss the impact of JIT systems on overhead costs.

(0)

(b)

What are benefits of Enterprise Resource Planning ?

(0)

(c)

A company’s four products, M, N, O and P are in the market. Identify the phase of life cycle for each product with a brief reason.

M	:	There is a lot of competition. Quantity sold has been increasing at 10%, 8% and 7% in the last 3 years.
N	:	Until last year, N had no competition. Suddenly the company finds 4 new products very similar to N in the market. However, N continues to have good sales.
O	:	There is intense competition. Achieving targeted sales is becoming increasingly difficult. Hence the company is introducing slightly modified features in the fresh production.
P	:	Huge inventory of P is available. P is being sold, but there are many products in the market which are priced lesser than P, but have the same utility as P.

(0)

(d)

Three different salesmen X, Y and Z are to be assigned three different regions A, B and C so that the company's revenue is maximised. The following matrix gives the sales revenue :

	X	Y	Z
A B C	10 20 60	60 30 40	30 15 10

You are required to use the assignment technique to maximise revenue.

(0)

(e)

TP Ltd. produces a product which passes through two processes – cutting and finishing.

The following information is provided:

	Cutting	Finishing
Hours available per annum Hours needed per unit of product Fixed operating costs per annum excluding direct material	50,000 5 10,00,000	60,000 12 10,00,000

The selling price of the product is Rs.1,000 per unit and the only variable cost per unit is direct material, which costs Rs.400 per unit. There is demand for all units produced.

Evaluate each of the following proposals independent of each other :

(i)	An outside agency is willing to do the finishing operation of any number of units between 5,000 and 7,000 at Rs.400 per unit.
(ii)	An outside agency is willing to do the cutting operation of 2,000 units at Rs.200 per unit.
(iii)	Additional equipment for cutting can be bought for Rs.10,00,000 to increase the cutting facility by 50,000 hours, with annual fixed costs increased by Rs.2 lacs.

(0)

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