CWA ICWA Inter Stage II : Management Accounting Performance Management - December 2003

CWA ICWA Inter - Stage II • Management Accounting Performance Management • December 2003

This Paper has 32 answerable questions with 16 answered.

I—9(MPM) Revised Syllabus
Time Allowed : 3 Hours	Full Marks : 100

Answer Question No. 1 of Part A which is compulsory and any five questions from Part B.
	Marks

(a)

Match the following (choose the correct statement from Column II for each expression under Column I):

Column I		Column II
(i)	JIT Production	(a)	Each man should report only to one Manager or Superior
(ii)	Budgeted Cost	(b)	Added value of new product.
(iii)	Enterprise Resource Planning (ERP)	(c)	What costs are expected to be.
(iv)	Unity of Command	(d)	Bridges the information gap across the organization.
(v)	Incremental Cost	(e)	Production line runs on a demand pull basis.

1x5=5

(1)

(b)

Fill in the blanks:

1x5=5

(i)

Manager's Philosophy of change should encompass at least three elements which are trust, _______ and _______ (Competence/Effectiveness/Learning/Stability/Adaptive ness).

(1)

(ii)

The profit–volume (P/V) graph exhibits the relationship between _______ to _______ . (Contribution/Profits/Margin of Safety/Sales Volume/Angle of Incidence).

(1)

(iii)

The L.P. Problem must have a well–defined objective function to _______ (Maximise Profit/Minimise Cost/Optimize).

(1)

(iv)

In ZBB all activities are _______ each time when a budget is set. (Planned/Estimated/Re–evaluated/Monitored)

(1)

(v)

Under _______ the selling division transfers at Marginal Cost Including any opportunity cost. (Transfer Price/Marginal Costing Technique/Two–part Tariff).

(1)

(c)

In the following cases one of the answers is correct, indicate it by the small alphabet (a, b, c or d):

½x10

(i)

External factor causing change of management may include

(a)	Technology, Competition, Government Policies, Economic Variables and Social Values etc;
(b)	Managerial Policies, Styles, System and Procedure;
(c)	Emotional, Economical, Social and Personal;
(d)	All of the above.

(1)

(ii)

The main objectives of the public undertakings involve

(a)	To stimulate the economic growth;
(b)	To ensure national defense;
(c)	To control monopoly;
(d)	All of the above.

(1)

(iii)

The word "linear" in L.P. means

(a)	Minimization of profit;
(b)	Profit and cost are linearly related;
(c)	The variables are linearly related;
(d)	Both (b) and (c).

(1)

(iv)

If profit–volume (P/V) ratio is 40% and sales value if Rs. 10,000, the variable cost will be

(a)	Rs. 4,000;
(b)	Rs. 6,000;
(c)	Rs. 5,000;
(d)	None of the above.

(1)

(v)

A basic Cost Accounting method in which fixed factory overhead is added to inventory is

(a)	Direct Costing;
(b)	Variable Costing;
(c)	Absorption Costing;
(d)	Process Costing.

(1)

(vi)

An Increase in sales price.

(a)	Does not affect the BEP;
(b)	Increases the BEP;
(c)	Lower the BEP;
(d)	None of the above.

(1)

(vii)

A three product, three limiting–factor problem requires which of the following techniques to find profit maximizing product mix?

(a)	Linear Programming;
(b)	Graphical representation of the constraints;
(c)	Use of a profit-volume graph;
(d)	All of the above.

(1)

(viii)

A standard that is developed using utopain conditions for a given manufacturing process is known as a (n)

(a)	Basic Standard;
(b)	Projected Standard;
(c)	Ideal Standard;
(d)	None of the above.

(1)

(ix)

In a service department manned by one server, on an average one customer arrives every 5 minutes, the service time is 4 minutes per customer. The probability of the server being idle is

(a)	40%
(b)	20%
(c)	15%
(d)	None of the above.

(1)

(x)

A company budgets for fixed overhead of Rs. 24,000 and production of 4800 units. Actual production is 4200 units and fixed overhead cost incurred is Rs. 22,000. The fixed overhead volume variance is

(a)	Rs. 3,000 (Adv)
(b)	Rs. 1,000 (Adv)
(c)	Rs. 2,000 (Fav)
(d)	Rs. 3,000 (Fav).

(1)

(a)

Fenton Paints Ltd. manufactures three grades of paints — Venus, Diana and Aurota. The plant operates on a three shift basis and the following data are made available from the production records:

Requirement of resource	Grade			Availability
Special Additive (Kgs per litre) Milling (kilo litres per machine shift) Packing (kilo litres per shift)	Venus 0.3 2.5 12	Diana 0.25 3.5 12	Aurota 0.75 5 12	(Capacity per month) 650 tonnes 110 Machine Shifts 100 Shifts.

There are no limitations on other resources. The particulars of sale forecasts and estimated contribution to overheads and profits are given below:

Maximum possible Sales per monthn (kilo litres)
Contribution (Rs. per kilo litre)

Venus
120
4,000

Diana
450
3,600

Aurota
600
2,500

Due to commitments already made, a minimum of 200 kilo litres per month of Aurota has to be necessarily supplied during the next year. Just as the company was able to finalise the monthly production programme for the next 12 months, an offer was received from a nearby competitor for hiring 50 machine shifts per month of milling capacity for grinding Diana paint, that can be spared for at least a year. However, due to additional handling and the profit margin of the competitor involved, by using this facility, the contribution from Diana will get reduced by Rs. 1.50 per litre.
Formulate this problem as a Linear Programming model for determining the monthly production programme to maximize contribution. You are not required to solve the L.P. model.

(0)

(b)

How does the Management help the organization in achieving the Objective? Discuss.

(0)

(a)

What is meant by Cost–Volume–Profit (C.V.P.) analysis? How C. V. P. analysis is useful for the Management?

2+4=6

(0)

(b)

Vikas Textiles Ltd. has just completed the first year of operation on 31^st March, 2003 and the summarised result of the operating is given below:

Installed Capacity
Production and Sales

: 20000 kgs of yam
: 14000 kgs of yam

Income and Expenditure details:

Income
Expenditure
Variable Cost
Materials
Labour
Overheads:
Factory
Marketing
Contribution
Fixed Cost
Profit

Rs.

350000
420000

280000
210000

Rs.
2730000

1260000
147000
980000
490000

(i)

The Managing Director wishes to expand the operation for the year 2003–2004 and has asked you to prepare Flexible Budgets on capacity utilization levels of 80%, 90% and 100% based on the following estimate.

(a)

Price (Rs. per kg. of yam)

80%
90%
100%

Level
Level
Level

–
–
–

210
200
195

What ever produced during the year is expected to be sold within the year

(b)

Increase in variable cost components:

Materials
Labour
Overheads:
Factory
Marketing

@ 12%
@ 10%

@ 15%
@ 20%

(c)

Inflation rate applicable to fixed cost is 15%. Additionally, if the capacity utilization exceeds 80% level, fixed cost is expected to increase by 10% up to 100% capacity utilization level.

(ii)	To avoid the incidence of increase in fixed cost for production levels beyond 80% capacity utilization, the Production Manager has submitted a pain to subcontract the additional production of 4000 kgs to a party at a cost of Rs. 105 per kg. including marketing cost.
	You are requested to comment on this plan of subcontracting with a view to maximizing the profit of the company.

6+4=10

(0)

(a)

A food storage agency receives stocks of food grains at an average rate of 8 trucks per hour. A crew of 3 operatives can unload on an average 10 trucks per hour. Operatives are paid a wage rate of Rs. 20 per hour. If the crew size was doubled then unloading rate can be increased to 18 trucks per hour. When 1 truck is kept waiting idle an hourly demurrage charge at the rate of Rs. 60 has to be paid.
Determine whether it would be worthwhile to employ a second crew. You must assume that the conditions of a (M/M/1) queue system is applicable.

(0)

(b)

Shree Lakshmi Finance Corporation is an investment company. The Management of the company wants to study the investment in a project based on the following three factors.

1. Market demand
2. Profitability, and
3. Amount of investment required.
In analyzing a new consumer product, the corporation estimates the following probability distributions:

Annual Demand		Profit per unit		Investment required
Units	Probability	Rs.	Probability	Rs.	Probability
20,000 25,000 30,000 35,000 40,000 45,000 50,000	0.05 0.10 0.20 0.30 0.20 0.10 0.05	3.00 5.00 7.00 9.00 10.00	0.10 0.20 0.40 0.20 0.10	17,50,000 20,00,000 25,00,000	0.25 0.50 0.25

The following random numbers are to be used:

For Demand
For Profit
For Investment

28
19
18

57
07
67

60
90
16

17
02
71

64
57
43

20
28
68

27
29
47

58
83
24

61
58
19

30
41
97

Required
Using Simultaneous technique, repeat the trial ten times, compute the return on investment for each trial considering these factors into account. Approximately what is the highest likely return?

(0)

(a)

Auto India Company Limited (AICL) is engaged in manufacturing automobile parts. The following particulars for 2002–2003 are available from the records of AICL:

Sales
Less: Variable Cost
Contribution
Less: Fixed Cost
Net Income

Rs.
50,00,000
33,25,000
16,75,000
9,00,000
7,75,000

Following additional information concerning the performance of 3 departments has been given below: (Figure in Rs.)

Particulars	Departments
	P	Q	R
Sales Variable Cost Direct Fixed Cost	21,40,000 14,23,000 2,80,000	17,90,000 11,90,000 2,45,000	10,70,000 7,12,000 1,75,000

(i)	Rank the three departments on the basis of their proportionate measure of relative profitability.

(ii)	Corporate Marketing Department AICL proposes to increase advertisement expenses by Rs. 1,25,000 with an expectation of 10% increase in Sales in all three departments.
	Analyse the effect of this proposal on the Company as a whole and on each department and give your suitable recommendation.

5+3=8

(0)

(b)

Akash Industries Ltd. has two divisions – P (Production) and S (Selling) P – Division produces an intermediate for which there is no external market. Using this intermediate. S–Division turns it to finished product – FM and sells in the market. Each unit of finished product consumes one unit of intermediate. The sales quantity is sensitive to the price charged and S (selling) Division has developed the following sales schedule:

Selling Price per unit (Rs.)
Sales Units (No.):

500
1000

450
2000

400
3000

350
4000

300
5000

250
6000

The cost details are as follows:

Variable Cost per unit (Rs.):
Fixed Cost per annum (Rs.):

P – Division
55
3,00,000

S – Division
35
4,50,000

The transfer price is Rs. 175 based on the full – cost basis.
Required

(i) Prepare a profit statement showing the profits of both the departments separately and the Company as a whole.
(ii) Determine the selling price that will maximize the S ’ Division’s profit and the price that will maximize the Company’s profit.

6+2=8

(0)

(a)

Jumbo Food Products Ltd. operates a system of standard costing and in respect of one of its products which is manufactured within a single cost centre, data for one week have been analysed as follows:

Standard Cost Data	(Per Unit)	Rs.
Direct Materials Direct Wages Production Overheads	10 Kgs of Rs. 15.00 5 hours at Rs. 4.00 5 hours at Rs. 5.00	15.00 20.00 25.00
		60.00

Other Overheads may be ignored
Profit Margin is 20% of Sale price.
Budgeted Sales are Rs. 60,000 per week.

Actual Data:
Sales
Direct materials
Direct Wages

Rs.
59,760
12,870
16,324

Analysis of variance:

Direct Materials:

Direct Labour:

Production Overhead:

Price
Usage
Rate
Efficiency
Expenditure
Volume

Adverse
1170
–
–
360
–
–

Favourable
–
750
636
–
400
750

The production and sales achieved resulted in no changes of stock.
You are required to compute:

(i)	The actual output;

(ii)	Actual profit;

(iii)

Actual price per kg. of material;

(iv)	Actual rate per labour hour;

(v)	amount of production overhead incurred;

(vi)	Amount of production overhead absorbed;

(vii)

Production overhead efficiency variance;

(viii)

Selling price variance;

(ix)	Sales volume profit variance

1x9=9

(0)

(b)

In analysing variance, It is found frequently that an adverse variance from one standard is related directly to a favourable variance from another.
Give two examples of such a situation and comment briefly on each.

(0)

(c)

SVL Ltd. uses a basic plan Standard Costing System in its factory. Unfavourable variances in a process have been about Rs. 3,000 a month. If the cause of variance can be found out and If that cause is correctible, it will take two months to correct it. The correction, if made, would be effective for two months. Investigation of variance will cost Rs. 980. Correcting the cause, if a cause is found, will cost Rs. 2,500. Management believes the probability of finding a correctible cause is 0.70.
Required

(i)	Would you recommend launching an investigation?

(ii)	What is the minimum probability of finding a correctable cause that would justify an investigation?

3+2=5

(0)

(a)

Explain the concepts of Activity–based costing and Cost drivers.

Standard Cost of the Products
Particular	Product P	Product Q	Product R
Direct Materials Direct Labour @ Rs. 5 per hour Production Overheads	25.000 15.00 15.00	20.00 20.00 20.00	20.00 25.00 25.00
Quantity produced (units)	55.000 10,000	60.00 20.000	70.00 30.000

Absorbed on the basis of Direct Labour Hours. Statusline & Company wishes to Introduce Activity Based Costing (ABC) system and has identified four major cost pools for production overhead and their associated cost drivers. Information on these activity cost pools and their drivers is given below:

Activity cost pool	Cost Driver	Cost Associated with Activity cost pool Rs.
Stores Receiving	Purchase requisition	1,48,000
Inspection/Quality control	Number of production runs	4,47,000
Material handling & despatch Production scheduling/Machine set–ups	Ordersexecuted Number of set–ups	1,05,000 6,00,000

Further relevant information on the three products is also given below:

Particular	Product P	Product Q	Product R
No. of Purchase requisitions No. of Production runs No. of Orders executed No. of set–ups	300 750 180 360	450 1050 270 390	500 1200 300 450

Required:

(i)	Calculate the activity based production cost of all the three products.
(ii)	Comment on the differences between the original traditionally Calculated Costs and Activity Based Costs (ABC) you calculated.

5+8+3

(0)

Write short notes on the following:-

4x4=16

(a)

Benchmarking:

(0)

(b)

Enterprise Resource Planning

(0)

(c)

Performance Budgeting.