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MSC Sums Solution (MBA)
MSC Sums Solution (MBA)
MSC Sums Solution (MBA)
Actual Variance
Direct Labour 100.13 0.21 (Favourable)
Indirect Labour 66.34 8.10 (Unfavourable)
Total Controllable Costs 168.47 8.50 (Unfavourable)
Department Fixed Costs 38.82 --------
Allocated Costs 53.62 --------
Questions:
1. Why no variance is shown in two items? Is this correct approach in performance
reporting?
2. Should overhead expenses mentioned above be included in Controllable Costs?
Why? Why not?
Solution (a):
Solution (b):
Overhead Expenses mentioned above should not be included in
controllable costs because some costs are uncontrollable like fixed
costs. . They don't vary with the change in short run managerial
decisions and output. And some costs are controllable i.e. they can be
managed and changed with the managerial decisions and output.
As the above overhead expenses would have certain portion of fixed
expenses this is hard to control. So, these should not be a part of
controllable cost.
Kiran Company (MCS-2004) Numerical
From the given data, we see that there is a certain amount of variance
between the budgeted operating profit and actual operating profit. In
order to analyze the variances, we need to understand the key causal
factors that affect profit, namely, revenues and cost structure. The profit
budget has embedded in it certain expectations about the state of total
industry, company’s market share, selling prices and cost structure.
Results from variance computation are actionable if changes in actual
results are analyzed against each of this expectation.
One more factor could have been the overall industry volume. However,
this factor is beyond the managements control and largely dependent on
the state of economy.
A cause of concern is that despite lower sales, the net working capital is
more than budgeted which indicates capital block in higher inventory.
Another issue is that the fixed assets are lower than the budget by Rs 12
lakhs which may indicate slower capacity expansion then expected or
distressed sale of assets to tide over cash flow.
(b) What are the remedial measures if any would you suggest
based on analysis?
The budgeted estimates may be too optimistic and far from reality, one
needs to ensure that estimates the as realistic as possible. Given the
estimates are correct, in that case depending upon the above analysis,
the management needs to take corrective action areas needing
improvement, sales volume could be improved by better marketing,
quality standards and promotional efforts, product mix could be improved
by selling more of higher contribution products. Better sales will ensure a
higher inventory turnover. Better credit management to recover
receivables, will ensure improve cash flow situation since less capital will
be tied up in working capital.
Q.5ABC ltd. (MCS-2008) Numerical
Division X
ROI = (Profit / investment)* 100
Profit = (28/100)*25lacs
= 7lacs
Division Y
ROI = (Profit / investment)* 100
Profit = (26/100)*100lacs
= 26lacs
Profit margin of X is better than profit margin of division Y. Turnover of investment of division Y is better than
Division X.
ANSWER
Sales
Investment
COMMENTS:-
Division ‘A’ – Although ‘A’ has more profit margin than Division ‘B’ that is 10% as compared to
6.6% of ‘B’, so it has more profitability but inspite of it, division ‘A’ has lower turnover of
investment that its assets management is bad than Division ‘B’, it can be improved by increased sales
or reducing investment.
Division ‘B’ – Needs to improve profit margin by increasing sales and reduce variable cost and sales
at same price or by reducing salesprice and increase the volume of sales so that its profit would
improve. As it has good assets management shown by its turnoverof Division ‘B’ that is 3 times
which is better than Division ‘A’. So it can become profitable organisation by improving Profit
Margin
Current Assets 400 360 800 760 1200 1400 2400 2520
Fixed Assets 1600 1600 1600 1800 2000 2200 5200 5600
Solution:
Q 2)Suresh Ltd. (Numerical) (MCS-2007) and same as Ananya Ltd (MCS 2009)
(a) Define profit in this case and prepare a statement for both divisions and overall company.
Solution:
Particulars Amount(Rs.)
Selling price p.u. 35
Variable Cost p.u. 11
Contribution p.u. 24
Contribution p.u. Expected sales Total contribution Total Fixed cost Net profit (Rs.)
(no. of units) (Rs.)
24 2000 48000 60000 (12000)
24 3000 72000 60000 12000
24 6000 144000 60000 84000
ii) Profitability statement of Division B:-
Selling p.u. Total Contribution Expected Total Total Fixed Net profit
variable p.u. sales (no. of contribution cost (Rs.) (Rs.)
cost p.u. units)
90 42 48 2000 96000 90000 6000
80 42 38 3000 114000 90000 24000
50 42 8 6000 48000 90000 (42000)
[Note: Total Variable cost p.u. = Variable cost p.u. (Rs.7) + Transfer price of intermediate product
(Rs.35)]
Expected sales Net profit of division A Net profit of Division Total Net profit
(Rs.) B (Rs.)
2000 (12000) 6000 (6000)
3000 12000 24000 36000
6000 84000 (42000) 42000
(b) State the selling price which maximizes profits for division B and company as a whole.
Comment on why the latter price is unlikely to be selected by division B.
Solution:
As per the calculation in part (a), selling price p.u. of Rs.80 maximizes profit for division B
whereas selling price p.u. of Rs.50 maximizes profit for the Company as a whole. However, if
Division B opts for selling price p.u. of Rs.50 in order to maximize Company’s profit, it would
suffer a loss of Rs.42000. Therefore, Division B would not select Selling price p.u. of Rs.50.
MCS – 2007
Two Divisions A and B of Satyam Enterprises operate as Profit centers. Division A normally
purchases annually 10,000 nos. of required components from Div. B; which has recently
informed Div. A that it will increase selling price per unit to Rs.1,100. Div.A decided to
purchase the components from open market available at Rs. 1000 per unit. Naturally, Div. B is
not happy and justified its decision to increase price due to inflation and added that overall
company profitability will reduce and the decision will lead to excess capacity in Div. B, whose
variable and fixed costs per unit are respectively Rs. 950 and Rs. 1,100.
Assuming that no alternate use exists for excess capacity in Div. B, will company as a whole
benefit if div A buys from the market.
If the market price reduces by Rs. 80 per unit. What would be the effect on the company
(assuming Div. B still has excess capacity) if A buys from the market
If excess capacity of Div. B could be used for alternative sales at yearly cost savings of Rs. 14.5
lacs, should Div. A purchase from outside?
Justify your answers with figures.
Solution
Option A ( Div A buys from outside)
Total Purchase Cost = 10,000 Units * Rs. 1000 = Rs. 1,00,00,000
Total outlay if transferred inside = 10,000 Units * Rs. 950 = Rs. 95,00,000
Since total outlay if transferred inside is lesser than total purchase cost if bought from outside,
relevant cost is the lesser one i.e. Rs. 95,00,000 and overall benefit for the company would be Rs.
5,00,000
a) Option B ( if the market price is reduced by Rs. 80 per unit and A buys from the market)
Total Purchase Cost = 10,000 Units * Rs. 920 = Rs. 92,00,000
Total outlay if transferred inside = 10,000 Units * Rs. 950 = Rs. 95,00,000
Since total purchase cost is lesser than the total outlay if transferred inside, relevant cost is the
lesser one i.e. 92,00,000 and overall benefit for the company would be Rs. 3,00,000
b) Option C ( if excess capacity of Div B could be used for alternative sales at yearly cost
savings of Rs 14.5 lacs, should Div A purchase from outside)
Total Purchase Cost = 10,000 Units * Rs. 1,000 = Rs. 1,00,00,000
Total outlay if transferred inside = 10,000 Units * Rs. 950 = Rs. 95,00,000
Total opportunity cost if transferred inside = Rs. 14,50,000
Total relevant cost becomes Rs. 1,00,00,000
If Div A purchase from outside, overall benefit for the company would be Rs. 9,50,000.
Therefore, Div A should purchase from outside.
components which goes into the final product made by Div. B. The transfer price for this
internal transaction was set at Rs. 120 per unit by mutual agreement. This comprises of
(per unit) Direct and Variable labour cost of Rs. 20; Material Cost of Rs.60; Fixed
overheads of Rs.20 (lumpsum Rs.4 lacs) and Rs.20 lacs that Div. A would require for this
additional activity. During the year, actual off take of Div. B from Div. A was 19,600
units. Div. A was able to reduce material consumption by 5% but its budgeted
Solution:
a)
Budgeted
Direct and 20 4,00,000 20 3,92,000
Variable Labour
Cost
Material Cost 60 12,00,000 57 11,17,200
Fixed Overheads 20 4,00,000 4,00,000
Total Cost 100 20,00,000 19,09,200
Transfer Price 120 24,00,000 119.86 23,49,200
Profit 20 4,00,000 4,40,000
Investment 20 20,00,000 22,00,000
ROI = 20% 20%
Profit/Investment
Despite of increase in investment by 10%, there is negligible difference in transfer price. Also the
sales have decreased by 400 units. Therefore we can say that additional investment has not achieved
(a) Determine from above data, transfer prices for Products A, B and Standard Cost of
Product C.
(b) Product C could become uncompetitive since upstream margins are added. Comment.
Answer
(a):Standard Cost of Product A
Outside material (40 * 2 lac units) 80,00,000
Direct Labour (20 * 2 lac units) 40,00,000
Variable O.H. (20 * 2 lac units) 40,00,000
1,60,00,000
+ 10% on (FA + Inventory)
i.e. 10% on 20 lacs 2,00,000
1,62,00,000
2,00,00,000
+ 10% on (FA + Inventory)
i.e. 10% on 12 lacs 1,20,000
2,01,20,000
Transfer Price for Product A = 2,01,20,000 = 100.6
2,00,000
(b): While arriving at the cost of Product C, margins of Product A, which become an input to Product
B, and Product B, which in turn become an input to Product C, are added. So when it is sold to
outside market, it suffers a disadvantage from its competitors as far as pricing is concerned, as its
price will normally be high compared to products of similar category. So it might become
uncompetitive.
But in the long run, customers will distinguish between a good product and a bad product and the one
with the best quality will survive. So if the quality of product C is better than its competitors than only
it can survive in this competitive market.
Another strategy for the company is to cut the margins added by Products A and B, and then come out
with Product C with a lower price tag on it. This may do well to the product by making higher
revenues and capturing the market share.
Q) Ananaya& Company comprises of five divisions A, B, C, D and E and
the present performance. metricis return on assets. However, the
controller has suggested management to switch over to economic value
added(EVA) as the criterion rather than return on assets. Compute and
tabulate both return on assets and EVA on the basis of following
information (Rs. lakhs) and comment on divisional performance.
--
- - ----
________
Controller feels corporate finance rates on current assets and.fixed assets should
be 5% and 10% respectively.
Solution:
Working Note:
Total Assets
A = 300/960*100 = 31.25%
B = 220/2000*100 = 11%
C = 100/1600*100 = 6.25%
D = 110/1200*100 = 9.17%
E = 180/1000*100 = 18%
In this case,
Summary
A 31.25% 212
B 11.00% 100
C 6.25% -10
D 9.17% 30
E 18.00% 120
Comments:
1. It appears from the above analysis that division A has performed the best
among the five divisions.
2. Also, it can be clearly noticed that divisions C and D seem to be in trouble.
3. Division A has performed the best when seen in terms of return on assets and
economic value added.
4. The reason why division A has performed the best is that it has the best
working capital management that can be reflected in the total amount invested
in current assets and which is the least among the five divisions.
5. The above reason holds true for the poor performance of divisions C and D as
can be seen that they have a huge amount invested in current assets which
does not indicate good signs about their operational efficiency.
7. Though division C has also invested a huge amount in fixed assets the
advantage is offset due to the fact that it perhaps has a larger investment in
current assets.
9. Though division E has the same amount invested in current assets as that of
division D and perhaps a lesser amount invested in fixed assets its profitability
is much better and hence it has delivered a better performance.
(A) Explain with justification which of the two (1) or (2) is more meaningful for
expense control.
(B) Can the supervisor be held responsible for all overhead expenses
included? Why/why not?
Compute the profitability of the transaction assuming sales commission of $250 for the
trade in on a selling price of $5000
SOLUTION:
➢ SP of New TV by CTV = $14150.
➢ Original cost= $11420 ($14150= $2000 cash down payment + $4800
trade in allowance + $7350 bank loan)
➢ Guide Book Value =$3500
➢ Ms. Shivangi of BTV Dept, believed that she could sell the trade in at $5000
➢ Other Cost: Rs235 for parts by SP and Rs 470 for services by SG
When trade-in is recorded @ $4800
The Company as a whole benefit if ‘A’ buys from outside supplier at Rs. (1000-80) = 920
3) If excess capacity of Div B could be use for alternative sales at yearly costs savings of
Rs. 14.5 lakhs
(1) On the basis of costing, will the manager be interested in accepting the market offer?
Solution:
Thus on the basis of full actual cost incurred by division X, it would suffer a loss of
Rs.10/unit if it accepts the market offer whereas its target profit margin is Rs.60/unit. So,
division X would not accept the market offer.
(2) Is this offer beneficial to the company as a whole? Justify with figures.
Solution:
Working notes:-
Desired RoI =10% of Rs.2.4 Cr. p.a. = Rs.24 lakh p.a. i.e. Rs.2 lakh per month
Total sales value for division Y = 220 * 5000 = Rs.11 lakh per month
So, total Variable cost per month for division Y = 11 lakh – 6 lakh = Rs.5 lakh
(1) If yes, how should the company organize its transfer pricing mechanism?
Illustrate.
Solution:
Currently, Girish Engineering Ltd. is following 2 step transfer pricing method wherein the
selling division charges actual variable cost along with profit mark-up & separately
allocates a particular amount of fixed costs per month to the buying division. However, in
the case of division X (buying division) & division Y (selling division), this method of
transfer pricing is not feasible as division X would suffer loss if it accepts the market
offer under this scenario. So, divisions X & Y can negotiate a transfer price by taking into
account full actual variable cost (Rs.100 p.u.) & half of fixed costs incurred by division Y
that is assigned to division X (Rs.40 p.u.) & add a mark-up of say Rs.10/unit. Taking into
consideration only half of the fixed costs of selling division i.e. division Y prevents
shifting of any operational inefficiencies from selling division to buying division i.e.
division X, which would unnecessarily increase the costs for division X and thereby eat
up its profit margin. In this case, division X’s total costs would turn out to Rs.940 (500 +
290 + 150) & would earn a profit margin of Rs.60 p.u. (desired profit margin). Also,
contribution p.u. for division Y would be Rs.50 (150 – 100). Thus, total contribution for
division Y would be Rs.250000 resulting in RoI of 12.5% (250000/2000000) which is
more than the desired RoI of 10%.