The Institute of Chartered Financial Analysts of India University 2010 C.A Chartered Accountant Final Revision Test s- 5 - Advanced Management Accounting (new ) - Question Paper

Total Cost    177.00

Old technology    Advanced Machine technology Machine

Direct. material per unit Rs. 500    Rs. 502.50

Labour Cost 50    41.67

V. overheads 40% of labour 20    16.70

570    560.87

(Rs. Lakhs)    (Rs. Lakhs)

Total variable cost for 3,00,000 unit 1710.00    1682.60

Depreciation 15.00    15.00

Fixed Cost 30.00    32.40

Loss on return of earlier machine    5.00

Bonus earned for 50,000 unit @ 30 -    - 15.00

Total Cost 1741.25    1720.00

Taking into wastage, Material Cost per unit = Rs 500 x 1.005 = Rs 502.5

With Efficiency improvement, Labour cost per unit = Rs 50 / 1.20

Average production per month = 30,000 units

Average advance supply per month ( entitled for reward) = 5,000 units

Total advance supply during 10 months ( entitled for reward) = 50,000 units

As there will be gain of Rs. 21.25 lakhs in handling the project with the help of advanced technology machine, the company should go for advanced version machine.

Operation 80% capacity Export order 40% capacity

(Rs. Lakhs)    (Rs lakhs)

Prime Cost 57.60    12.00

Factory overhead (given) 21.60    8.40

Selling & Dist. Cost-variable 17.28    -

Selling & Dist. Cost - fixed    7.20    2.00

Total Cost of Sales    103.68    22.40

Sales Value ( at 80% capacity)

115.20

144 x 0.80

Profit    11.52    2.49

Profit %    10% on sales    10% of export sales value

Export Price to be quoted    24.89

Let , Sales value = x , then profit = 0.1x

Then 0.9 x = 22.40

Hence x = 24.89

Variable prod. cost per cartoon = Rs 5,00,000 / 2000 = Rs 250

Fixed Production Overheads per Quarters = Rs 2.00 lakhs

Variable Selling & Distribution Expenses per cartoon = 2,00,000/ 2000 = Rs 100

Fixed Selling & Distribution Expenses per Quarters = Rs 1.40 lakhs

For Next year Programme :

Sales targeted for the year = 5000 x 4 x 1.2 = 24,000 cartoons.

i.e reduction in price by Rs 25 i.e 5%.

Current Price per unit is Rs 500 Present price per unit

The aggressive move on increase in marketing expenses coupled with price reduction may help in achieving the target of sales and profit..

9. (a) Variable cost per room-day    = Rs 75

Total occupancy    = (50 x 30 x 8 x 0.8) + (50 x 30 x 4 x 0.5)

= 12,600 room-days Total variable cost    = Rs. 9.45 lakhs

(12,600 x 75)

Fixed Cost    = Rs. 15.75 lakhs

Total Cost    Rs. 25.20 lakhs

Profit    Rs. 6.30 lakhs

Rs. 31.50 lakhs

Tariff per day = 31, 50,000/12,600 = Rs. 250.00

(b)    Contribution per day = Rs. (250 - 75) = Rs. 175.00 BEP ( room -day) = 15, 75, 000/175 = 9000 room-days

During off season for 4 months, rooms occupied ( 50 x 30 x 4 x .5) = 3,000 days For BEP, occupancy during normal period = 6000 days i.e occupancy 50%

(c)    If 10% discount is allowed , tariff will be = 225. per room-day Contribution per room-day with tariff cut ( 225- 75) = Rs 150

Total Occupancy= (50 x 30 x 8 ) + (50 x 30 x 4 x .0.7) = 16,200 room-days Total Contribution for year ( 16,200 x Rs 150) = Rs 24.30 lakhs Fixed Cost ( unchanged)    = Rs 15.75 lakhs

Profit    = Rs 8.55 lakhs

As the proposal increases the profit, it may be accepted.

(d)    To maintain the same profit, contribution required = F + P = Rs 22. 05 lakhs With new tariff, contribution per day = Rs 150

Number of room-days occupied = Rs 22,05,000/ 150 = 14,700 room-days Increase % in occupancy required = ( 14,700 - 12600 ) / 12,600 = 16.67 %

10. Present position on transfer of component at Rs 200:

(a) Renting out Division A's facility & and Div B procures components @ Rs 210

A division    B division AB Ltd

(Rs)    (Rs) (Rs lakhs)

No of Units    10,000

Variable Cost per unit    1120

Thus under scenario 2, the transfer is not advantageous to the company as a whole.

12. Due to cut is price of product, sales value will decrease by Rs 10.00 lakhs.

For maintaining same profit margins i.e Rs 40 lakhs, cost has to be down by Rs 10.00 lakhs. With improvement of labour productivity, wages will be (45/1.20) = Rs 37.50

Rs lakhs

Reduction in wages    7.50.

Elimination of wastage of materials    0.60

Saving in Packaging Cost    1.50

Saving in Maintenance cost    1.20

Loss in disposal of selling of old machine    - 2.30

Difference in Depreciation    - 1.50

Cost of capital investment    - 3.00

Effective cost reduction    4.00

Additional reduction required for target cost    6.00

Hence, number of supervisors to be eliminated = 4

13.

Closing balance of production    148.80

at variable cost

Closing balance of material    111.60

(a) Statement for the period of quarter : April- june 2010 Total Sales

Opening balance of production 148.80 Opening balance of material 111.60 260.40 Cost of Production    1207.80

Closing Balance of production 149.76 Closing balance of material 112.32 Profit

Note 1 : Opening Balance & Closing Balance at Variable cost Note 2 : Adjustment for variable cost expenses not done

(Rs.'000)

Direct Labour Cost (14,400 x 300)    4320

Labour Rate Variance (A)    + 400

Labour Efficiency Variance (F)    - 320

Actual Labour Cost    4400

Direct Expenses (14,400 x 50)    720    720

Actual Prime Cost    11920

Variable factory overhead (14,400 x 25) 360 Variable Expenditure Variance    - 40

Actual Variable Overheads    320

Fixed Factory Overhead (14,400 x 30)    432

Fixed Volume Variance (A)    + 168

Fixed Expenditure Variance (F)    - 40

Actual Fixed overhead    560

Administrative overhead (14,400 x 30)    432

Adm. Expenditure Variance (A)    + 40

Adm. Volume Variance (A)    + 168

Actual Administrative Overhead    640

Total Actual Cost    13440

Sales (14,400 x Rs.1,000)    14400

Actual Profit    9600

15. Total Production Overheads = Rs 1,67,400

Total Machine Hours = ( 720 x 4 ) + (600 x 2) + (480 x 2) + ( 502 x 2) = 6144 hrs Production Overheads per Machine Hours = Rs 172,032/ 6144 = Rs 28 Thus, cost per unit in the present system :

Production Run = No of Requisition = ( 720 + 600 + 480 + 504 ) / 24 = 96 No of orders = 2304 / 12 = 192 No of Requisitions = 50 x 4 = 200

Machine Operation Cost ( Rs 94,500) will be distributed to Set Up, Stores and Inspection in the ratio of 4:3:2 . Thus their shares are : Rs 42,000, Rs 31,500, 21,000

The distribution of overhead under present system on an arbitrary basis distorts apportionment of overheads and thereby misleads calculation of costs of products and decision making. Cost of A & B are shown higher whereas in the case of C & D, costs are shown lower. Differences in cases of A & D are huge.

16. Average labour cost for first 50 units = Rs 100.00

Average labour cost for first 100 units = 0.90 x 100 = Rs 90 Average labour cost for first 200 units = 0.90 x 90 = Rs 81 Average labour cost for first 400 units = 0.90 x 81 = Rs 72.90 Average labour cost for first 800 units = 0.90 x72.90 = Rs 65.61 We know that learning curve equation :

Y= ax ^Ab

Where y = average time for producing x units a = time spent on first unit / batch b= co-efficient of learning curve

b= log ( 1 - % decrease) / Log 2 = log ( 1 - 0.10) / log 2 = - 0.0458/0.3010 =- 0.15206 Thus, for 1000 units, batch = 1000/50 = 20 Y= 100 x 20 a-0.15206

Log y= log (100) - 0.15206( log 20) = 2 - 15206 x 1.3010 = 1.802172

Thus y = antilog (1.802172) = 63.41

Thus, average labour cost for 1000 units = Rs 63.41

Thus the price to be quoted :

17. (a) Backflushing requires no data entry of any kind until a finished product is completed. At that time the total amount finished is entered into the computer system, which multiples it by all the components listed in the bill of materials for each item produced. This yields a lengthy list of components that should have been used in the production process and which is subtracted from the beginning inventory balance to arrive at the amount of inventory that should now be left of hand. Back the entire production process. Given the large transaction volumes associated with JIT, this is an ideal solution to the problem.

The following problems must be corrected before it will work properly:

(i)    Production reporting

(ii)    Scrap reporting

(iii)    Lot tracing

(iv)    Inventory accuracy.

(b) Target Costing: It is a management tool used for reducing a product cost over its entire life cycle. It is driven by external Market factors. Marketing management prior to designing and introducing a new product determines a target market price. This target price is set at a level that will permit the company to achieve a desired market share and sales volume. A desired profit margin is then deducted to determine the target maximum allowable product cost. Target costing also develops methods for achieving those targets and means to test the cost effectiveness of different cost-cutting scenarios.

Target Costing Process

18. (a) The total quality management is a set of concepts and tools for getting all employees focused on continuous improvement in the eyes of the customer. Quality is an important aspect of world-class manufacturing. The success of Japanese companies is grass rooted in their long-term commitment to improvement of quality. A world class manufacturing approach demands that the quality must be designed into product and the production process, rather than an attempt to remove poor

quality by inspection. This means that the objectives of quality assurance in a world-class-manufacturing environment, is not just reject defective product, but to systematically investigate the cause of defects so that they can be gradually eliminated. Though the goal is zero defect, the methodology is one of continuous improvement.

Six Cs of TQM

(i)    Commitment - If a TQM culture is to be developed, so that quality improvement becomes normal part of everyone's job, a clear commitment, from the top must be provided. Without this all else fails.

(ii)    Culture - Training lies at the centre of effecting a change -in culture and attitudes. Negative perceptions must be changed to encourage individual contributions.

(iii)    Continuous improvement - TQM is a process, not a program, necessitating that we are committed in the long term to the never ending search for ways to do the job better.

(iv)    Co-operation: The on-the-job experience of all employees must be fully utilized and their involvement and co-operation sought in the development of improvement strategies and associated performance measures.

(v)    Customer focus: Perfect service with zero defects in all that is acceptable at either internal or external levels.

(vi)    Control: Documentation, procedures and awareness of current best practice are essential if TQM implementations are to function appropriately The need for control mechanisms is frequently overlooked, in practice.

(b) Value chain is the linked set of value creating activities from the basic raw materials and components sources to the ultimate end use of the product or service delivered to the customer.

The six business functions contained in the value chain are (i) Research and Development, (ii) Design (iii) Production (iv) Marketing (v) Distribution and (vi) Customer service.

Most corporations define their mission as one of creating products and services. In contrast, the other companies are acutely aware of the strategic importance of individual activities within their value chain, They are concentrating on those activities that allow them to capture maximum value for their customers and themselves.

These firms use the value chain analysis approach to better understand which segments, distribution channels, price points. product differentiation. selling prepositions and value chain configuration will yield them the greatest competitive advantage.

The way the value chain approach helps these organizations to assess competitive advantage includes the use of following steps of analysis.

(i)    Internal cost analysis - to determine the sources of profitability and the relative cost positions of internal value creating processes;

(ii)    Internal differentiation analysis - to understand the sources of differentiation with internal value-creating process; and

(iii)    Vertical linkage analysis - to understand the relationships and associated costs among external suppliers and customers in order to maximize the value delivered to customers and to minimize the cost.

The value chain approach used for assessing competitive advantages is an integral part of the strategic planning process. Like strategic planning, value chain analysis is a continuous process of gathering, evaluating and communicating information for business decision-making.

19. We solve the problem with graphical method.

Mathematical formulation of the problem : Maximize Z = 50x, + 30x2 Subject to constraints:

2x1 + x2 > 18 x1 + x2 > 12 3x1 + 2x2 34 Co-ordinate of extreme points A (2, 14), B (6, 6), C (10, 2)

At A (2, 14), Z-= 50 x 2 + 30 x 14 = 520 At B (6, 6), Z = 50 x 6 + 30 x 6 = 480 At C (10, 2), Z = 50 x 10 + 30 x 2 = 560 Thus solution is x1 = 10, x2 = 2, max Z = 560

(b)

Critical path : 1 - 2 - 3 - 5 - 6 - 7 Expected project length = 20 weeks.

Variance in project = c² = 0+1 + 4/9 + 0 + 1 = 2.444

(c) Probability that the project will be completed in 23 weeks

21. Based on the given data, profit matrix is derived by the equation is drawn below : Profit = Sales price - production cost - raw material cost - transportation cost

Problem is on maximization of profit. We have to convert the same to minimization one by drawing an equivalent minimization of loss by subtracting all the profit values in the table from the highest profit value (i.e., 15). We apply Vogel's method to find the initial basic feasible solution as shown in table 3 below:

Since the number of occupied cells are 8 which is one less than the required number m + n - 1 = 9, the solution is degenerate and after making an allocation of e the cell (D, 4), the initial solution is tested for optimumity in table 4 using MODI method.

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