NITIE 3 Q1 Mukand Steel Ltd. manufacturers of four products namely A, B, C & D, using the same plant and process.

The following information relates to a production period.

Product Volume

Material cost per unit 5 5 16 17

Direct labor Per unit hour hour 2 hours 1 hour

A B C D

500 5000 600 7000

Machine time Per unit hour hour 1 hour 1 hour

:Labor cost per unit 3 3 12 9

Total production overhead recorded by the cost accounting system is analyzed under the following headings

Factory overhead applicable to machine oriented activity Handling materials Set up costs are Cost of ordering materials Administration for spare parts

Rs. 37,424 7,580 4,355 1,920 8,600

These overhead costs are absorbed by products on a machine-hour rate of Rs.4.80 per hour giving an overhead cost per product of A= Rs.1.20 C= Rs.4.80 B= Rs.1.20 D=Rs 7.20 However, investigation into the production overhead activities for the period reveals the following totals:

Product

No. of setups

No. of materials orders 1 4 1 4

No. of times material was handled 2 10 3 12

No. of spare parts 2 5 1 4

A B C D You are required

1 6 2 8

1) To compute an overhead cost per product using Activity Based Costing. Tracing overheads to production units by means of cost drivers. 2) To comment briefly on the difference disclosed between overhead traced by the present system . and those traced by Activity Based Costing. Q.2 ABC manufacturing two products A & B uses the same equipment and similar processes. Following data for these products are available Particulars Product A Product B Quantity produced (units) 5000 7000 Direct labour hours per unit 1 2 Machine hours per unit 3 1 Setups in the period 10 40 Orders handled in the period 15 60 Over head costs: Relating to machine activity .Rs.2, 20,000 Relating to production run setups-Rs. 20,000 Relating to handling orders Rs. 45,000 Required: Calculate overhead cost per unit. a) Under traditional costing approach using a direct labour hour rate and b) An ABC approach using suitable cost drivers to trace overheads to products. Give your comments on the result. Q.3 Reliance Engineering Company is considering replacing or repairing a particular machine, which has just broken down. Last year this machine costed Rs.40, 000 to run and maintain. These costs have been increasing in real terms in recent years with the age of the machine. A

further useful life of 5 years is expected, if immediate repairs of Rs.38, 000 are carried out. If the machine is not repaired it can be sold immediately to realize about Rs.10, 000 (ignore loss/gain on such disposal). Alternatively, the company can buy a new machine for Rs.98, 000 with an expected life of 10 years with no salvage value after providing depreciation on straight line basis. In this case, running and maintenance costs will reduce to Rs. 28,000 each year and are not expected to increase much in real terms for few years at least. Reliance Engineering Company regards normal return of 10% per annum after tax as a minimum requirement on any new investment. Considering capital budgeting techniques, which alternative will you choose? Take corporate tax rate of 35% and assume that depreciation on straight line basis will be accepted for tax purposes also. Given cumulative present value of Rs.1 per annum at 10% for 5 years Rs.3.791, 10 years 6.145. Q.4 XYZ Ltd. manufactures four products, namely A, B, C and D using the same plant and process. The following information relates to a production period:

Product Output Cost per unit; Direct Material Direct Labour Machine hours per unit

A (units) 720 (Rs.) (Rs.) 42 10 4 hrs

B 600 45 9 3 hrs.

C 480 40 7 2 hrs.

D 504 48 8 1 hr.

The four products are similar and are usually produced in production runs of 24 units and sold in batches of 12 units. Using machine hour rate, currently absorbs the production overheads. The total overheads incurred by the company for the period are as follows: Machine operation and maintenance cost Set-up costs Store receiving Inspection Material handling and dispatch Rs. 63,000 20,000 15,000 10,000 2,592

During the period the following cost drivers are to be used for the overhead cost: Cost Cost driver

Set-up cost Store receiving Inspection Material handling and dispatch

No. of production runs Requisition raised No. of production runs Orders executed

It is also determined that: Machine operation and maintenance cost to be apportioned between set-up cost, store receiving and inspection activity in 4:3:2 Number of requisitions raised on store is 50 for each product and the number of orders executed is 192, each order being for a batch of 12 of a product. Required: i. Calculate the total cost of each product, if all overhead costs are absorbed on machine hour rates. ii. Calculate the total cost of each product using activity base costing. iii. Comment briefly on differences disclosed between overheads traced by present system and those traced by activity base costing. Q.5 ABC Company has two divisions. Division A of a manufacturing product has set a target sales of 8,00,000 units of a product at a price to fetch a return of 25% on the assets employed. The following data is available: Fixed costs Rs. 8,00,000 Variable cost Rs. 2 per unit Assets employed: Fixed Assets Rs. 16,00,000 Current Assets Rs. 32,00,000 The market can however absorb only 5, 60,000 units consequently. Division B is advised to buy 2,40,000 units. Division A is willing to supply this quantity to Division B at Rs.9 per unit. Division B however wants it at Rs.4.50 per unit. If A refuses to supply B its requirement of 2,40,000 units at Rs.4.50 per unit and restricts its activity to 5,60,000 units of market sales it could reduce the investments in stocks to the tune of Rs.3,20,000 and the fixed assets by Rs.4,80,000. Besides its selling expenses will also go down by Rs.1,60,000.You are required to prepare a statement and advise whether A should agree to supply Bs requirement of 2,40,000 units at Rs.4.50 per unit. Q.6 Division Z is a profit centre, which produces four products A, B, C and D. Each product is sold in the external market also. Data for the period is as follows:

Market price per unit (Rs.) Variable cost of production per unit (Rs.) Labour hours required per unit

A 150 130 3

B 146 100 4

C 140 90 2

D 130 85 3

Product D can be transferred to division Y, but the maximum quantity that might be required for transfer is 2,000 units of D. The maximum sales in the external market are: A 2,800 units B 2,500 units C 2,300 units D 1,600 units Division Y can purchase the same product at a slightly cheaper price of Rs.125/- per unit instead of receiving transfers of product D from division Z. What should be the transfer price for each unit of 2,000 unit of D, if the total labour hours available in division Z are (1) 15,000 hours and (2) 28,000 hours? Q7 Ceat Ltd. has three divisions. One of these manufactures product X, which is sold to another division as component of product Y. Product Y is in-turn sold to the third division which uses it as a component in its product Z. Product Z is sold in the outside market. Company has a rule that when products/components are transferred from one division to another, standard cost plus a 10% return on fixed assets and inventory would be charged to the buying division. Transfer price of product X and Y as well as standard cost of product Z are required.

Standard cost per unit Purchase of outside materials (Rs.) Direct Labour (Rs.) Variable overheads (Rs.) Fixed overhead per unit (Rs.) Ave. inventory (Rs.) Net fixed assets (Rs.) Standard production (units)

Product X 40 20 20 60 14 lacs 6 lacs 2 lacs

Product Y 60 20 20 80 3 lacs 9 lacs 2 lacs

Product Z 20 40 40 20 6 lacs 3.2 lacs 2 lacs

Q8 A company is organized on decentralized lines with each manufacturing division operating a separate profit centre. Each divisional manager has full authority to decide on the sale of divisional output to outsider and to other divisions. Division C has always purchased its requirement from division A, but was informed that A was increasing its selling price to

Rs.300/-. The manager of division C decided to look at outside suppliers. C can buy the component from an outside supplier for Rs.270/-, but division A refuses to lower its price. In view of its ideas to maintain the rate of return on its investment the top management has the following information. C annual purchases of components 2,000 units. A variable cost per unit Rs.240/A fixed cost per unit Rs. 40/ Required:1) Will the company have a whole benefit if C bought the component at Rs.270/- from outside supplier? 2) If A did not produce the material for C it should use the facilities for other activities resulting in cash operating savings of Rs.36,000/-, should C then purchase from outside sources. 3) Suppose there is no alternative use of As facilities and the market price per unit for the component drops by Rs.40/-, should C buy from outside. Q.9 A TV dealership, Veena Television (VT) is organized into four profit centres- Colour TV sales(CTV), Black and White(BW) TV sales(BTV), Spare Parts(SP), and Servicing(SG)- each headed by a manager. BTV, in addition to BW TV sales, also sells old TVs exchanged (under scheme) by customers while purchasing new CTVs. In one particular instance, a new TV was sold for RS.14,150 (financed by cash Rs.2,000, bank loan Rs.7,350 and Rs.4,800- exchanged price for old TV agreed by CTV Manager. Cost of new TV was Rs.11420. Shivangi Manager of BTV examined the old TV (valued at Rs.3,500 by TV Trade magazines) and felt that she could get Rs.5,000 for that TV after repairing the cabinet, resettling and servicing for which she would use services of (SP) and (SG). Prices chargeable to BTV by (SP) and (SG) are at market ratesRs.235 for parts (by SP) and Rs.470 for services (by SG). Market prices are arrived at after marking up cost by 3.5 times (SG) and 1.4 times (SP). BTV pays a service commission of Rs.250 per TV sold. Overhead fixed allocations per sale are: CTV- Rs.835; BTV-Rs.665; SPRs.32; SG-Rs.114. a) Treating each as an independent Profit Center, arrive at Sales Revenue, total cost and profit of each profit center. b) Can each of these profit centers survive if they were independent business entitites. c) Also calculate Gross Profit and Net Profit of each. Q.10 The following information relates to budgeted operation of division X of a manufacturing company. Sales 50,000 units at Rs.8/-

Variable cost @Rs.6/- per unit Fixed costs Rs.75,000/The amount of divisional investment is Rs.1,50,000/- and the minimum desired rate of return on the investment is the cost of capital of 20%. Required: a) Calculate divisional expected ROI b) Calculate divisional expected RI c) Comment on the result of (a) & (b). The divisional manager has the opportunity to sell 10,000 units at Rs.7.50 per unit. Variable cost per unit would be the same as budgeted but fixed costs would increase by Rs.5,000/-.. Additional investment of Rs.20,000/- would also be required. If the manager accepts the special order, by how much and in what direction would his residual income change? Q.11 ABC Company Ltd. manufactures readymade garments by a simple process of cutting the cloth in various shapes and sewing the corresponding the pieces together to form the finished product. The sewing department and the cutting department report to the production manager, who along with the engineering manager, reports to the director-manufacturing. The sales manager, publicity manager and the credit manager report to the director-marketing, who, along with the director-manufacturing, reports to the Managing Director of the Company. The accounts department reports the following for the last quarter of the year:Budgeted(Rs.) Bad debt losses Cloth used Advertising Audit fees Credit reports Sales representatives travelling expenses Sales commission Cutting labour Thread Sewing Labour Credit dept. salaries Cutting utilities Sewing utilities Director-marketing salaries & Administrative expenses Production engineer expenses Sales management office expenses 5,000 31,000 4,000 7,500 1,200 9,000 7,000 6,000 500 17,000 8,000 800 900 20,000 13,000 16,000 Actuals (Rs.) 3,000 36,000 4,000 7,500 1,050 10,200 7,000 6,600 450 18,400 8,000 700 950 21,400 12,200 15,700

Production manager: office expenses Director-manufacturing: salaries & administrative expenses

18,000 21,000

17,000 20,100

Required: Using the above data, prepare responsibility accounting reports for (1) the production manager (2) the Director-Manufacturing and (3) the Director- marketing. Q.12. ABC Company limited has furnished you the following data: Budget: 25 20,000 30,000 Actual(April): 26 22,000 31,000

No. of working days : Production in units : Fixed Overhead(Rs.):

Budgeted fixed overhead rate is Rs. 1.00 per hour. In April , the actual hours worked were 31,500. Calculate the following variances :1. 2. 3. 4. 5. 6. Efficiency variance ; Capacity variance ; Calendar variance ; Volume variance ; Expenditure variance ; Total overhead variance ;

Q 13 ABC Company Ltd. produces an article by bending two basic raw materials. It operates a standard costing system and the following standards have been set for the new materials. Material Standard mix Standard price per Kg. A 40% Rs.8.00 B 60% Rs.6.00 The standard loss in processing is 15%. During August, 2011 the company produced 3400Kgs. of finished output. The positions of stocks and purchases for the month of August 2011 are as under:

Material

A B

Stock on 1st August Kgs. 70 80

Stock on 31st August Kgs. 10 100

Purchases during August Kgs. 1600 2400 Cost Rs. 6800 6000

1) 2) 3) 4) 5)

Calculate the following variances: Material price variance Material usage variance Material yield variance Material mix variance Total material cost variance