final-g2 - Prime Academy

PRIME ACADEMY 31st SESSION MODEL EXAM - FINAL – ADVANCED MANAGEMENT ACCOUNTING QUESTION PAPER AMT No. of Pages: 5 No of Questions: 7

Total Marks: 100 Time Allowed: 3 Hrs Qn. 1 is Compulsory Answer any 5 questions from the rest

1.

a)

A company manufactures three products from an intermediate produced in its own plant. The downstream unit at full capacity operations require one lakh kilos of intermediate. However in view of certain constraints, this output would be affected by 25%. Intermediate is charged to user division at Rs.10 per kilo inclusive of its variable cost of Rs.8 per kg. Following particulars are furnished Downstream units A B C (Units) Capacity 60,000 40,000 20,000 (Kgs) Intermediate required 66,000 20,000 14,000 (Rs./Unit) Variable Cost 14 8 9 (Rs./Unit) Fixed Cost 3 5 3 (Rs./Unit) Profit 3 2 4 (Rs./Unit) Total Price 20 15 16 It is further given that: (a) Constraints would prevail throughout the year and no other arrangement is possible to meet shortage; (b) Company had an opening stock of 7,500 kgs and minimum stock of 2,500 kgs has to be maintained in any case; and (c) For economic operations plants have to be operated at a minimum of 70% capacity. Required (i) To suggest the most profitable mix (ii) To compute the loss suffered as a result of main plant operating at 75% capacity and (iii) To re-fix the price of the products so as to retain the same profit.

b)

Discuss the impact of JIT on product prices.

a)

X Ltd manufactures and sells a special component. It follows a standard Marginal Costing system. For the year ended 31.03.2010, it produced 1500 components against a budgeted capacity of 2000 components. Out of the production 100 components were scrapped. Due to a computer virus most of the financials could not be retrieved. However the Chief Cost Accountant gave the following information.

(20 Marks)

2.

PRIME / ME31 / FINAL

1

Particulars Selling Price per component Direct materials total cost Direct labour cost per component (Actual efficiency 80%) Variable manufacturing overhead per component Variable selling overhead per component Fixed selling and Administration overheads Fixed overhead manufacturing absorption rate per component (on the basis of budgeted capacity) Closing stock (200 units) (Valued at prime cost for financial purpose) You are required to prepare 1. The Profitability statements as per Marginal Costing, Absorption Costing and the actual Profit & Loss Account. 2. Compute the Break-even Volume under Marginal Costing as well as Absorption Costing. 3. Reconcile the actual profit with that of the Break-even profit under Marginal Costing. b)

What are the non-financial considerations with regard to shut down decisions. (16 Marks)

a)

A small maintenance project consists of jobs in the table below. With each job is listed its normal time and a minimum, or crash time, in days. The cost(in Rs. Per day) of each job is also given.

3.

Job

a.

b.

b)

Normal day

Minimum(Crash)

Cost/day

i-j Duration day duration 1-2 10 7 20 1-3 8 6 25 1-4 15 11 30 2-4 5 3 10 3-4 7 5 15 4-5 5 3 40 Determine the minimum crashing cost of schedules ranging from normal length down to, and including, the minimum length schedule. That is, if L =length of the schedule, find the costs of schedules which are L, L-1, L-2 and so on days long. Overhead cost total Rs.60 per day. What is the optimum length schedule in terms of both crashing and overhead cost? List the scheduled duration of each job for your solution.

Define Simulation. List down the various steps in Simulation process.

4. PRIME / ME31 / FINAL

2

(16 Marks)

Rs. 213 90,000 ? 15 8 48,000 30 18,000

a)

Vikas Associates a firm of Chartered Accountants offers three different types of services namely accounting and auditing, taxation and management consultancy. Each service is charged on the basis of number of billable hours. The average charge per billable hours is Rs.500. For the year ending 31.03.2008 the firm projects the following estimate of direct and indirect costs:

Direct Costs :

Indirect Costs :

Accounting and Auditing Taxation Management consultancy Planning and review Computer processing Professional salaries Books. Seminars, periodicals Programming costs Building costs General administration costs TOTAL

Rs. (Lakhs) 100.00 100.00 50.00 7.50 7.20 5.60 1.80 8.00 4.90 15.00

250.00

50.00 300.00

Until 31.03.2007 the firm has been allocating the indirect costs on the basis of billable hours. For the year ending 31.03.2008 it was decided to introduce a system of activity based costing to capture the indirect cost more accurately. The following data was gathered accordingly: Accounting and Auditing 55,000 5,000 30 57,500 1,250 8,000 150

Management Consultancy 10,000 500 10 60,000 2,250 2,000 100

Particulars Taxation Billable hours 35,000 EDP Hours 2,500 Professionals (No) 16 Books, seminars and periodicals (Rs.) 62,500 Programming hours 500 Building (Sq ft) 4,000 Administration (No of clients) 250 You are required (i) Prepare a comparative profitability statement on the basis of (a) conventional costing and (b) activity based costing (ABC) (ii) Any suggestion for improving the billable charge on the basis of ABC. b)

North– east Aircraft company, which operates out of a central terminal has 8 aircraft of Type I, 15 aircraft of Type II, and 12 aircraft of Type III available for to-day’s flights. The tonnage capacities (in thousands of tons) are 4.5 for Type I, 7 for Type II and 4 for Type III. The company dispatches its planes to cities A and B. Tonnage requirements in thousands of tons are 20 at city A and 30 at city B: excess tonnage capacity supplied to a city has no value. A plane can fly once only during the day.

The cost of sending a plane from the terminal to each city is given by the following tables:


3

City A City B

Type I 23 58

Type II 5 10

Type III 1.4 3.8

Formulate the LPP model to minimize the air – transportation cost. You need not solve the same. (16 Marks) 5.

a)

The following figures relate to A Ltd. Rs. Materials consumed (3,600 units at Rs.52.50 per unit) .1,89,000 Direct wages 22,100 Fixed expenses 1,88,000 Variable expenses 62,000 Output during the period was 3,500 units. For the above period, the standard production capacity was 4,800 units. The break-up of standard cost per unit was as under : Rs. Materials (one unit @ Rs. 50 per unit) 50 Direct Wages 6 Fixed Expenses 40 Variable Expenses 20 Total standard costs per unit 116 The standard wages per unit is based on 9,600 hours for the above period at a rate of Rs.3.00 per hour. 6,400 hours were actually worked during the above period, and in addition wages for 400 hours were paid to compensate for idle time due to break down of a machine and over all wage rate was Rs.3.25 per hour. Compute variances.

6.

b)

Write a short note on sealed bid pricing

a)

K Ltd, which is operating at just above 50% capacity, and L Ltd, which is operating at full capacity (7,000 production hours). L Ltd produces two products, X and Y, using the same labour force for each product. For the next year its budget capacity involves a commitment to the sale of 3,000 kgs of Y, the remainder of its capacity being used on X.

(16 Marks)

Direct costs of these two products are: X Direct Materials 18 Direct Wages (1 prod. hour)

Y 14 10(2/3prod. hour)

The company’s overhead is Rs.126000 per annum relating to X and Y in proportion to their direct wages at full capacity, Rs. 70000 of this overhead is variable. L Ltd prices its products with a 60% mark-up on its total costs. For the coming year, K Ltd. wishes to buy L Ltd. 2000 kgs of product X which it proposes to adapt and sell, as product Z , for Rs.100 per Kg. The direct costs of adaptation are Rs.15/kg. K Ltd’s total fixed costs will not change but variable overhead of Rs.2 per Kg will be incurred. You are required to recommend, as group management accountant, PRIME / ME31 / FINAL

4

b) 7.

a)

At what range of transfer prices, if at all , 2000 kgs of X should be sold to K Ltd; What other points should be borne in mind when making any recommendations about transfer prices in the above circumstances. How is Zero based budgeting superior to traditional budgeting. (16 Marks)

Answer any four A man buys 50 electric bulbs of Type A and 50 electric bulbs of Type B. Type A bulbs give a average life of 1500 hours with a standard deviation of 60 hours and Type B bulbs give a average life of 1512 hours with a standard deviation of 80 hours. Is there a significant difference in the mean life of the two types of bulbs. (Use -0.01)

b)

In an anti-material campaign in a certain area, quinine was administered to 812 persons out of a total population of 3248. the number of fever cases is shown below Treatment Fever No fever Total Quinine 20 792 812 No-Quinine 220 2216 2436 Total 240 3008 3248 Discuss the usefulness of quinine in checking malaria

c)

Write a short note on Pareto analysis.

d)

A company desires to produce 64 units of a special product with in a month. It estimates that the first unit would take 1000 hours. It employs special workers who would be given training for manufacturing the product. For the given month, it employs 80 workers, who will work for 8 hours a day for 25 days. Is it possible to produce the 64 units. Assume a learning curve effect of 80%.

e)

What are the uses of Artificial Variable, in Linear programming models.


5

(16 Marks)

PRIME ACADEMY 31st SESSION MODEL EXAM - FINAL – ADVANCED MANAGEMENT ACCOUNTING SUGGESTED ANSWERS 1. a)

Products Particulars A B Computation of Input Ratio per unit of Output Rs. Rs. Capacity @ 100% (Units) 60,000 40,000 Intermediate Required (Kgs) 66,000 20,000 Intermediate Ratio to Finished Product (Kg) 1.1 0.5 Computation of Contribution and Ranking Rs. Selling Price Per unit 20 Less: Variable Cost 14 Contribution per unit 6 Intermediate Input Ratio per unit 1.1 Contribution/kg of Intermediate 5.45 Ranking 3 Total Quantity of Intermediate available From Opening Stock 5,000 Production @ 75% Capacity 75,000 80,000

Allocation of Intermediate For Minimum Quantity of Output - 70% Additional - Based on Ranking Total Quantity of Intermediate allocated Output Maximum Output Expected Shortfall Opportunity Loss - Contribution/Unit Total Opportunity Loss Loss on Intermediate - 25000x2 Total Loss


Rs. 46,200 46,200 42,000 60,000 18,000 6 108,000

6

Rs.

15 8 7 0.5 14.00 1

C Rs. . 20,000 14,000 0.7 Rs. 16 9 7 0.7 10.00 2

Rs. Rs. 14,000 9,800 6,000 4,000 20,000 13,800 40,000 19,714 40,000 20,000 286 7 2,000

Rs. 70,000 10,000 80,000 101,714 120,000 18,286 110,000 50,000 160,000

b) Impact of JIT on product prices. When a company achieves a higher level of product quality along with ability to deliver products on the dates required, customers may be willing to pay a premium. This is particularly true in industries where quality or delivery reliability is low. If customers are highly sensitive to these two factors, it may be possible to increase prices substantially. Alternatively, if these factors are not of great importance, or if customers place a higher degree of importance on other factors, then there will be no opportunity for a price increase. In industries where many companies are adopting J.I.T systems at the same time or have already installed them, an improvement in product quality and delivery times does not differentiate a company from its peers. Instead, since everyone else is offering the same level of quality and service, it just keeps a company from losing sales to its competitors. In such a situation it is more likely that all companies remaining in the industry will use their new-found lower costs to initiate a price war that will result in a drop in prices. Consequently, the impact of J.I.T system on product pricing is primarily driven by customers’ perceived need for higher product quality and reliable delivery times, as well as the presence of competitors with J.I.T system, the same installation and operational base. 2 a. Break Even volume (108000/100) Working Notes 1) Contribution per Unit Selling Price Less: Variable Cost Prime Cost + Variable Manu & Selling OH Contribution/Unit

1080 Units

2) Total Fixed cost Fixed Manufacturing Overheads (2000*30) Fixed administrative Overheads Total Fixed Cost Break Even volume (absorption costing) X = ((108000+30x(X-1500))/100) Profit Absorption Costing Sales (1200 x 213) Production (1500x135) Less : Closing Stock (300x135) Cost of Goods Manufactured Add: Under Absorption (500x30) Gross Profit Less Fixed Admin Overhead Less Variable Selling Overhead Profit Note Absorption Cost = 105 + 30 = 135 PRIME / ME31 / FINAL

Rs.

213

Rs. Rs

113 100

Rs. Rs. Rs.

.

60,000 48,000 108,000

900 Units Rs. 255,600 202,500 40,500 162,000 15,000 177,000 78,600 48,000 9,600 21,000 7

Actual P&L A/C Sales Materials & Variable OH (1500 X 75) Labour (1500 X 37.5)* Prime Cost Closing Stock Cost of Goods Manufactured Fixed Overhead Selling Overhead TOTAL COST Loss

Rs. 255,600 112,500 56,250 168,750 18,000 150,750 108,000 9,600 268,350 -12,750

*Actual Labour Cost = [Prime Cost – Cost of Materials] / 80% = (90 – 60)/80% = 37.5 Reconciliation Profit at Break Even point – 1080 Units Margin of Safety (120 x 100) Stock Valuation (300x 30) Less Scrap (100 x 135) Less Labour Efficiency (1500 x 7.5) Less Under valuation of closing stock (200 x 45) Loss

Rs.

13500 11250 9000

Rs. 0 12000 9000 33750 -12750

b) Other Considerations in Shut down decisions Cost is not the only criterion for deciding in favour of shut down. Non-cost factors worthy of consideration in this regard are: 1. Interest of the workers – if the workers are discharged it may become difficult to get skilled workers later, on reopening of the factory. Also shut down may create problem for the worker which may far exceed the cost benefits of the shut down. 2. Once the firm is closed down competitors may establish their products and thus it may be difficult to introduce the product in the market again. 3. The plant may become obsolete or depreciate at a larger rate when not in operation. Thus, heavy capital expenditure may have to be incurred on re-opening. 3. a) 2 10

5 15

1

5 4

8

5

10 3

Paths 1-2-4-5 20 days, 1-3-4-5 20 days, 1-4-5 20 days. Therefore all paths are critical Hence the reduction is based on the combination of activities from all the paths. The various combinations are Combination 1 2 3 4 5


Activities 4-5 1-4, 2-4 & 3-4 1-3,1-4 & 2-4 1-2, 1-4 & 3-4 1-2,1-3 & 1-4

Cost Slope / day 40 55 65 65 75

8

Maximum Reduction 2 days 4, 2, 2 Therefore 2 days 2,4,2. Therefore 2 days 3,4,2 Therefore 2 days 3,2,4 Therefore 2 days

Step 1: Reduce Activity 4-5 (since that has the least cost slope) by 2 days. Incremental cost is Rs.40 per day and cumulative cost Rs.80/. Step 2: Reduce activities 1-4, 2-4, and 3-4 by 2 days. Incremental Cost is Rs.55 per day. Total Cost is Rs.110 and cumulative cost is Rs.190/Step 3: Combination 3 & 4 are redundant, since activities 2–4 & 3-4 are fully crashed. Hence reduce activities 1-2, 1-3 and 1-4 by 2 days. Incremental Cost is Rs.75 per day. Total Cost is Rs.150 and cumulative cost is Rs.340/-. No further crashing is possible. The Normal duration of 20 days can be crashed to 14 days. However the optimum duration is 16 days. DURATION Crash cost Cum. crash cost Indirect cost Total cost

20 19 18 17 16 0 40 40 55 55 0 40 80 135 190 1200 1140 1080 1020 960 1200 1180 1160 1155 1150

15 75 265 900 1165

14 75 340 840 1180

b) Simulation is a quantitative procedure which describes a process by developing a model of that process and then conducting a series of organized trial and error experiments to predict the behaviour of the process over time. Steps in the simulation process: 1. Define the problem or system you intend to simulate. 2. Formulate the model you intend to use. 3. Test the model; compare its behaviour with the behaviour of the actual problem environment. 4. Identify and collect the data needed to test the model. 5. Run the simulation. 6. Analyse the results of the simulation and, if desired, change the solution you are evaluating 7. Rerun the simulation to test the new solution 8. Validate the simulation, that is, increase the chances that any inferences you draw about the real situation from running the simulation will be valid. 4. a) SCHEDULE OF ALLOCATION OF INDIRECT COST BY ABC Overhead Planning and Review Computer Processing Professional Salaries Books, Seminar, Periodicals Programmed Costs Building Costs Administration Cost Total PRIME / ME31 / FINAL

Cost Driver Ratio Billable Hrs EDP Hours 30:16:10 Actual 5:2:9 Sq Ft 3:5:2

Total Rs 7.500 7.200 5.600 1.800 8.000 4.900 15.000 50 9

Accounting & Auditing Rs 4.125 4.500 3.000 0.575 2.500 2.800 4.500 22

Taxation Rs 2.625 2.250 1.600 0.625 1.000 1.400 7.500 17

Management consulting Rs 0.750 0.450 1.000 0.600 4.500 0.700 3.000 11

COMPARATIVE PROFITABILITY STATEMENT (Rs. in Lakhs) Conventional ABC A&A Tax MGMT A&A Tax MGMT Revenue 275.00 175.00 50.00 275.00 175.00 50.00 Direct Costs 100.00 100.00 50.00 100.00 100.00 50.00 Overhead Cost 27.50 17.50 5.00 22.00 17.00 11.00 Profit 147.50 57.50 -5.00 153.00 58.00 -11.00 Suggestions On the basis of the ABC system the total cost of each division/service is Rs.122 Lakhs, Rs117 Lakhs and Rs.61 Lakhs respectively. Hence the billable charge should be revised accordingly. Assuming the same margin i.e. 40% of revenue overall or 662/3% on cost the revenue works out to A&A Tax Mgmt Cost 122.00 117.00 61.00 Margin 81.33 78.00 40.67 203.33 195.00 101.67 Billable Hours 55000 195 10000 Charge per Hour 370 560 1017 The analysis clearly reveals that Management Accountancy services are under charged b) TYPE 1 8 4.5 36

No. of Aircraft Tonnage capacity in 000's tons Total tonnage in 000’s tons Cost of sending aircraft to City A 23 to City B 58 Let No. of aircrafts sent to City A X1 to City B X2 Minimise Z = 23X1+58X2+5X3+10X4+1.4X5+3.8X6 X1+X2