KALPESH CLASSES

Dear Friends,

t is a great pleasure in presenting this workbook on Cost Management. The aim of this
venture is to impart expert knowledge on various topics, which are of current I importance
world over. Most of the topics not only call for deeper understanding on the subject but also
involve better presentation and transparency of information to investors, etc.

This workbook is intended primarily for students who are preparing for Cost
Management paper at a senior level for all professional bodies.

The workbook basically confines to classroom discussions and the problems chosen here
have been modeled from various standard works on the topics.

AUTHORS
June 1, 2005
Page Number : 1
KALPESH CLASSES

Index

Cost management

Ch. No. Description
Page No of
No.
problem
s
1
Marginal Costing
3
50
2
Relevant Costing
31
16
3
Transfer Pricing
41
13
4
Activity Based Costing
52
8
5
Standard Costing
60
36
6
Learning Curve
80
7
7
Material Requirement
83
5
Planning
8
Budgetary Control
87
7
9
Strategic Cost Management
94
14
10
Assignment
105
15
11
Transportation
111
12
12
Linear Programming
117
14
13
Network Analysis
124
10
14
Simulation
128
9

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KALPESH CLASSES
CHAPTER

MARGINAL COSTING


PVR, BEP & MOS-FORMULA APPLICATION:

A: Single product profit statement

Particulars
Amount
Sales
XXX
Less: Variable cost
XXX
Contribution
XXX
Less: Fixed cost
XXX
Profit
XXX


B: Multi-product profit statement

Particulars
A
B
C
Total
Sales
XXX
XXX
XXX
XXX
Less: Variable cost
XXX
XXX
XXX
XXX
Contribution
XXX
XXX
XXX
XXX
Less:Specific Fixed cost XXX
XXX
XXX
XXX
Total
XXX
XXX
XXX
XXX
Less:General fixed cost


XXX
Profit



XXX

C: Formula
1) PVR

= (Contribution / Sales) (or) (Change in profit/change in sales) * 100
2) Contribution
= Sales X PVR
3) Sales

= Contribution/PVR
4) BEP (in units)
= Fixed Cost / Unit contribution.
5) BEP (in Rs.)
= Fixed Cost / PVR.
6) MOS (in units)
= Profit/unit contribution
7) MOS (in Rs.)
= Actual Sales Break even sales (or) Profit / PVR
8) Indifference point = Difference in Fixed Cost / Difference in Unit Variable Cost (or)
unit (in units)
contribution
9) Indifference point = Difference in Fixed Cost / PVR

(in Rs.)
10) Shut down point (Rs)
= [Avoidable Fixed Cost-Shut down Cost]/PVR
11) Shut down point (units) = [Avoidable Fixed Cost-Shut down Cost]/ Contribution per
unit D: Assumptions in Marginal Costing
1) Absolute fixed cost is constant irrespective of level of activity.
2) Unit variable cost & selling price are constant.
3) Only volume is influencing the cost & revenue.
4) Constant sales mix.

E: Steps in solving pro blems involving limiting factor
1) Identification of limiting factor.
2) Finding unit contribution.
3) Finding contribution per unit of limiting factor.
4) Ranking products based on (3).
5) Allocation of scarce resources.
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KALPESH CLASSES




F: Marginal Costing Vs Absorption Costing

Marginal Costing




Total Cost



Manufacturing
Non-Manufacturing
cost

Cost



DM
DL
OH


Treated as period cost

V
F
& charged to costing

P&L A/c.



Treated as product

cost i.e., considered

for stock valuation.

Absorption Costing



Total Cost


Manufacturing
Non-Manufacturing

Cost
Costs





Treated as
Treated as period &

Product Cost.
charged to costing
P&L A/c.

Note: Stock valuation
1. Under marginal costing system the stock is valued at Variable manufacturing cost 2.
Under absorption costing system the stoc k is valued at total manufacturing cost





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KALPESH CLASSES

Question 1:

Single product marginal cost sheet
A company producing a single article sells it at Rs.10 each. The marginal cost of
production is Rs.6 each and fixed cost is Rs.400 per annum.
Calculate
(a)
The P/V ratio;
(b)
The break-even sales;
(c)
The sales to earn a profit Rs.500;
(d)
Profit at sales Rs.3, 000;
(e)
New break-even point if sales price is reduced by 10%.
(f)
MOS when the profit earned in Rs.200 and PVR 40%.

Question 2:

Sensitivity analysis

The Super company owns and operates six outlets in and around Kansas City. You are
given the following corporate budget data for next year:

Revenues
10,000,000
Fixed costs
1,700,000
Variable costs
8,200,000

Variable costs change with respect to the number of units sold.

Required
Compute the budget operating income for each of the following deviations from the
original budget data. (Consider each case independently.)
a. A 10% increase in contribution margin, holding revenues constant.
b.
A 10% decrease in contribution margin, holding revenues constant.
c.
A 5% increase in fixed costs.
d.
A 5% decrease in fixed costs.
e.
An 8% increase in units sold.
f.
An 8% decrease in units sold.
g.
A 10% increase in fixed costs and 10% increase in units sold.
h. A 5% increase in fixed costs and 5% decrease in variable costs.

Question: 3

Sensitivity analysis
If labour costs and material cost are likely to go up by 10% and 5% respectively per unit,
what is the percentage increase necessary in selling price to keep the P/V of 20% as before,
assuming that the ratio between material and labour is 3:2, and variable overheads is nil.
Question: 4

Merger of plants

A, B and C are three similar plants under the same management who want them to be
merged for better operation. The details are as under:-
Plant
A
B
C
Capacity Operated %
100
70
50

Rs.
Rs.
Rs.

(in lakhs)
(in lakhs)
(in lakhs)
Turnover
300
280
150
Variable cost
200
210
75
Fixed costs
70
50
62

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KALPESH CLASSES
Find out
a.
The capacity of the merged plant for break-even.
b.
The profit at 75% capacity of the merged plant.
c.
The turnover from the merged plant to give a profit of Rs.28 lakhs.

Question: 5

Segregation of Variable and Fixed Overhead

From the following information in respect of the semi-variable expenses obtain the fixed
and variable elements using the following methods.
a. Level of activity method.
b.
High low method.
c.
Simultaneous method.
d.
Scatter Graph method
e.
Least squares method
Find the probable amount o the semi-variable expense for the month of July, when the
volume of production would be 60 units.

Month
Production Semi variable expense
January
40
110
February
20
90
March
50
130
April
100
190
May
70
150
June
80
170

Question :6

Volume analysis
The following figures for profit & sales are obtained from the accounts of X Co. Ltd.
Year
Sales
Profit

Rs.
Rs.
2002
20,000
2,000
2003
30,000
4,000
(i)
Find out Contribution Sales Ratio.
(ii)
What is Break Even Sales
(iii)
Find out the sales to earn a profit of Rs.6000 in 2004.
(iv)
What is the profit when sales are Rs.12000 in 2004?

Question 7(a)

Shut down/Continue point
A firm incurs a fixed cost of Rs.1, 20,000 at 60% capacity. At 0% capacity, fixed cost is
only Rs.40, 000. If its VC Ratio is 80%, find out the Shutdown point.

Question 7(b)

Shut down/Continue point
A paint manufacturing company manufacture 2,00,000 per annum medium sized tins
of
Spray Lac Paints when working at normal capacity. It incurs the following costs of
manufacturing per unit:

(Rs.)
Direct Material
7.80
Direct Labour
2.10
Variable overheads
2.50
Fixed overheads
4.00
Product Cost per unit 16.40
The selling price is Rs.21 per and variable selling and administrative expenses is 60 paise
per tin.
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KALPESH CLASSES
During the next quarter only 10,000 units can be produced and sold. Management plans
to shut down the plant estimating that the fixed manufacturing cost can be reduced to Rs.74, 000
for the quarter. When the plant is operating, the fixed overheads are incurred at a uniform rate
throughout the year. Additional costs of plant shutdown for the quarter are estimated at Rs.14,
000.
(a)
Express your opinion, as to whether the plant should be shut down during the quarter, and
(b)
Calculate the shut down point for the quarter in terms of number of tins.

Question: 8

Shut down or continue
The annual budget of a company at 60% and 80% levels of performance is as under:
Level of Performance
60%
80%

Rs.(000)
Rs.(000)
Direct Material
360
480
Direct Labour
480
640
Production Overhead
252
276
Administration Overhead
124
132
Selling & Distribution Overhead
136
148

1352
1676
The company is in great difficulties at the present moment in selling its products and is
now operating at 50% level.
The sales revenue for the year is estimated at Rs.9,90,000. The Directors are seriously
considering suspending operations till the market picks up.
Market Research undertaken by the Company reveals that there is every indication that in
about twelve months time, the sales will pick up and the company can comfortably operate at
75%
level of performance and earn a sales income of Rs.18 lakhs in that year.
The Sales personnel of the company do not want to suspend operations for fear of
adverse reactions in the market; but the Directors want to decide the issue purely on financial
consideration.
If the manufacturing and other operations of the company are suspended for a year, it is
estimated that:
a.
The present fixed costs could be reduced to Rs.2,20,000 per annum.
b.
The settlement cost of personnel not required would amount to Rs.1,50,000.
c.
The maintenance of plant has to go on and that would cost Rs.20,000 per annum.
d.
On resuming operations, the costs connected with opening after a shut-down would
amount to Rs.80,000.
Submit a report to the Directors and indicate therein, based on purely financial
consideration, whether it would be advisable or not to suspend the companys operation in the
current year.

Question: 9

Indifference pointRudimentary

Two businesses AB Ltd. and CD. Ltd. sell the same type of product in the same type of
market.
Their budgeted Profit and Loss Accounts for the year ending 2005 are as follows: A.B
Ltd.
C.D Ltd.

Rs.
Rs.
Rs.
Rs.
Sales

1,50,000

1,50,000
Less: Variable costs
1,20,000

1,00,000

Fixed costs
15,000

35,000



1,35,000

1,35,000
Net profit budgeted

15,000

15,000
You are required to:
a.
Calculating the break-even point of each business;
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KALPESH CLASSES
b.
Calculate the sales volume at which each of the business will earn Rs.5,000 profit; and c.
State which business is likely to earn greater profits in conditions of: i. Heavy demand for
the product;
ii. Low demand for the product.
Give your reasons.
Question: 10

Indifference point-- Rudimentary

Company Variable cost per unit Fixed cost
P
9
60000
Q
5
90000

At what sale range is P more profitable than Q and vice versa? Assume that both the
products have the same selling price.

Question: 11

Differential costing

A company has a capacity of producing 1,00,000 units of certain products in a month.
The Sales Department reports that the following schedule of sale prices is possible.

Volume of production

Selling price per unit

%
Rs.
60
0.90
70
0.80
80
0.75
90
0.67
100
0.61

The variable cost of manufacture between these levels is Re.0.15 per unit and fixed cost
Rs.40,000.
a.
Prepare a statement showing incremental revenue and differential cost at each stage. At
which volume of production will the profit be maximum?
b.
If there is a bulk offer at Rs.0.50 per unit for the balance capacity over the maximum
profit volume for export and price quoted will not affect the internal sale, will you advise
accepting this bid and why?

Question :12

Differential costing

X Ltd., having an installed capacity of 1,00,000 units of a product is currently operating
at 70%
utilisation. At current levels of input prices, the FOB unit costs (after taking credit for
applicable export incentives) work out as follows:

Capacity
FOB Unit
Utilisation
Costs Rs.
%
70
97
80
92
90
87
100
82

The company has received three foreign offers from different sources as under: Source A
5,000 units at Rs.55 per unit FOB
Source B
10,000 units at Rs.52 per unit FOB
Source C
10,000 units at Rs.51 per unit FOB
Advise the company as to whether any or all export orders should be accepted or not.
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KALPESH CLASSES
Question :13

Sales mix and BEP
Aravind Ltd. Manufactures and sells four products under the brand names A, B, C & D.
the following details are provided in respect of the products.

Product
A
B
C
D
% in Sales Value
30
40
20
10
% of Variable cost to selling price
60
70
80
30
The total budgetary sales (100%) are Rs.10, 00,000 p.m. fixed costs are Rs.2, 50,000 p.m.
The companys new sales manager Aravind has suggested a change in sales mix keeping
the total sales at Rs.10, 00,000 per month. His suggestion is as under: Product
A
B
C
D
% in Sales Value
25
40
30
5
(1) Calculate the break-even point for the Company, under the existing sales mix.
(2) Compute the effect of implementing the suggested change in sales mix.
(3) Explain the reasons for the effect of change in sales mix despite total sales and fixed
cost being the same.
Question: 14

Sales mix and BEP
The budgeted results of A Co. Ltd. include:

Product Sales value (Rs.) P/V ratio
A
50,000
50%
C
80,000
40%
O
1,20,000
30%
Fixed overhead for the period Rs.1,00,000.
The directors are worried about the results of the company. They have requested you to
prepare a statement showing the amount of loss of expected and recommend a change in the
sales of each product or in total mix which will eliminate the expected loss.

Question: 15

Multiple break even points
A firm sells its product at Rs.25 per unit. Its Cost behaviour for various production
ranges is: Units of
Cumulative fixed
Variable Cost per
production
Cost
Unit
0 16,000
2,50,000
16.00
16,001 60,000
3,50,000
17.00
60,001 and above
5,00,000
20.00

Identify the break-even point(s) in units.
Question :16

Multiple break even points
SCV is a leading cable TV service provider with its operations spread over different
cities. It has recently been approached by the city of Chennai to operate its cable television
operations.
Chennai city officials have become tired to reporting on the cable television company
they have operated for the past five years.
SCV makes the following assumptions in its planning after negotiations with key parties.
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KALPESH CLASSES
A basic set of 10 cable television stations will be offered at Rs.20 per month per
subscriber.
These 10 stations include a sports channel, a news channel and other general audience
channels.
Chennai would remain ownership of the physical facilities and would maintain them in
working condition. Under a leasing agreement, SCV will pay Chennai the following charges:

Fixed Commitment Charges: Rs.50, 000 per month if number of subscribers is 10,000 or
less and Rs.75, 000 per month, if the number of subscribers is more than 10,000.

Variable Revenue Share: 10% of the monthly revenues from the first 10,000 subscribers
and 5% from additional subscribers.

SCV will receive the ten channels in its basic service form Interlink cable. Interlink acts
as an intermediary between cable television stations and companies such as SCV, which sell to
individual subscribers. Interlink charges a monthly-fixed fees of Rs.20, 000 plus monthly charge
of Rs.8 per subscriber for the first 20,000 subscribers and Rs.6 per subsequent subscriber.
SCV estimates its own operating costs to include both a fixed and a variable component.
The fixed component is Rs.55, 000 per month upto 20,000 subscribers. It is expected to increase
by Rs.15, 000 per month, if number of subscribers exceeds 20,000. The variable cost per
subscriber is Rs.2 per month.
Required:
a) How does the contribution margin per subscriber behave over the 0 to 30,000
subscriber range?
b) Calculate the break even number of subscribers per month for SCV.
c) What is the operating income per month to SCV with (a) 10,000 (b) 20,000 & (c)
30,000
subscribers? Comment on the results.

Question: 17

Multiple break even points

Kalyan University conducts a special course on Computer Applications during summer.
For this purpose, it invites applications from graduates. An entrance test is given to the
candidates and based on the same, a final selection of a hundred candidates is made. The
entrance test consists of four objective type of Examination and is spread over four days, one
examination per day.
Each candidate is charged a fee of Rs.50 for taking up the entrance test. The following
data was gathered for the past two years:

Statement of Net Revenue from the Entrance Test for the course on Computer
Application

Year 1 Year 2
(Rs.)
(Rs.)
Gross Revenue (Fees collected)
1,00,000
1,50,000
Costs


Valuation
40,000
60,000
Question booklets
20,000
30,000
Hall rent at Rs.2, 000 per day
8,000
8,000
Honorarium to Chief Administrator
6,000
6,000
Supervision charges (1 supervisor for every 100 candidates at 4,000
6,000
Rs.50/- per day)
General Administration Expenses
6,000
6,000
Total Cost
84,000
1,16,000
Net revenue
16,000
34,000
Required to compute:
(a) The budgeted net revenue if 4,000 candidates take up the entrance test in Year 3.
(b) The break even number of candidates.
(c) The number of candidates to be enrolled if the net income desired is Rs.20, 000/-.


Page Number : 10
KALPESH CLASSES
Question: 18

Step fixed cost

The Chakrapani Ltds Cost behaviour is as follows:

Production range in units Fixed cost
0- 20000
Rs. 160000
20001 65000
Rs. 190000
65001 90000
Rs. 210000
90001 100000
Rs. 250000
At an activity of 70000 units per year, variable costs total 280000.Full capacity is 100000
units per year.

Required:
1. Production is now set at 50000 units per year with a sales price of Rs.7.50 per unit.
What is the minimum number of additional units needed to be sold in an unrelated market at
Rs.5.50 per unit to show a bet profit of Rs.3000 per year?
2. Production is now set at 60000 units per year. By how much may sales promotion costs
be increased to bring production up to 80000 units and still earn a net profit of 5% of total sales
if the selling price is held at Rs.7.50?
3. If net profit is currently R.s10000 with fixed costs at Rs.160000 and a 2% increase in
price will leave units sold unchanged but increase profits by Rs.5000.What is the present volume
in units?

Question: 19

Marginal costing vs Absorption costing

From the following data compute the profit under (a) Marginal costing, and (b)
Absorption costing and reconcile the difference in profit.


Rs.per unit
Selling price
8
Variable cost
4
Fixed cost
2

Normal volume of production is 26,000 units per quarter.
The opening and closing stocks consisting of both finished goods and equivalent units of
work-in-progress are as follows:-


Qr. I
Qr. II
Qr. III
Qr. IV
Total
Opening
-
-
6,000
2,000
-
stock [units]
Production
26,000
30,000
24,000
30,000 1,10,000
Sales
26,000
24,000
28,000
32,000 1,10,000
Closing stock
-
6,000
2,000
-
-
Question: 20

Marginal costing vs Absorption costing
A new subsidiary of a group of companies was established for the manufacture and sale
of Product X. during the first year of operations 90,000 units were sold at Rs.20 per unit. At the
end of the year, the closing stocks were 8,000 units in finished goods store and 4,000 units in
workin-progress, which were complete as regards material content, but only half complete in
respect of labour and overheads. You are to assume that there were no opening stocks. The
work-in-progress account had been debited during the year with the following costs: Page
Number : 11
KALPESH CLASSES
Cost item
(Rs.)
Direct materials
7,14,000
Direct labour
4,00,000
Variable overhead
1,00,000
Fixed overhead
3,50,000
Selling and administration costs for the year were:

Cost item
Variable cost per unit sold Fixed cost
Selling (Rs.)
1.50
2,00,000
Administration (Rs.)
0.10
50,000

The accountant of the subsidiary company had prepared a profit statement on the
absorption costing principle, which showed a profit of Rs.11, 000.
The financial controller of the group, however, had prepared a profit statement on a
marginal costing basis, which showed a loss. Faced with these two profit statements, the director
responsible for this particular subsidiary company is confused.
Required to
(a) Prepare a statement showing the equivalent units produced and the production cost of
one unit of Product X by element of cost and in total;
(b) Prepare a profit statement on the absorption costing principle which agrees with the
company accountants statement;
(c) Prepare a profit statement on the marginal costing basis; (d) Reconcile the difference
between the profits arrived in (b) & (c).
Question : 21

Indifference point -- Advanced
The current average weekly trading results of the HOTEL SARAVANA BHAVAN are
shown below: (Rs.)
(Rs.)
Turnover

2,800
Operating costs:


Materials
1,540

Power
280

Staff
340

Building occupancy costs
460
2,620
Profit

Rs.180
The average selling price of each meal is Rs.4; materials and power may be regarded as a
variable cost varying with the number of meals provided. Staff costs are semi-variable with a
fixed cost element of Rs.200 per week; the building occupancy costs are all fixed.
Required:
Calculate the number of meals required to be sold in order to earn a profit of Rs.300 per
week.
(a) The owners of the restaurant are considering expanding their business and using
under-utilized space by diversifying into
Either (1) take away foods, or (2) high quality meals.
The sales estimates for both proposals are rather uncertain and it is recognized that actual
sales volume could be up to 20% either higher or lower than that estimated.
The estimated sales and costs of each proposal are:

Sales volume, per week
Take-away
High quality
foods 720
meals 200

Meals (Rs.)
Meals (Rs.)
Average selling price, per meal
1.60
6.00
Variable costs, per meal
0.85
4.66
Incremental fixed costs, per week
610.00
282.00

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KALPESH CLASSES
If either of the above proposals were implemented it has been estimated that the existing
restaurants operations would be affected as follows:
(i) As a result of bulk purchasing, material costs incurred would be reduced by 10 p per
meal. This saving would apply to all meals produced in the existing restaurant.
(ii) Because more people would be aware of the existence of the restaurant it is estimated
that turnover would increase. If the take-away food section were opened then for every ten
take-away meals sold the existing restaurants sales would increase by one meal, alternatively if
the high quality meals section were open then for every five such meals sold the existing
restaurants sales would increase by one meal.
A specific effect of implementing the take-away food proposal would be a change in the
terms of employment of the staff in the existing restaurant, the result of which would be that the
staff wage of Rs.340 per week would have to be regarded as a fixed cost.
Required:
Calculate, for each of the proposed methods of diversification: (i) The additional profit,
which would be earned by the owners of the restaurant if the, estimated sales were achieved.
(ii) The sales volume at which the owners of the restaurant would earn no additional
profit from the proposed diversification.

Question :22

Indifference point -- Advanced

Super Press Ltd is considering launching a new monthly magazine at a selling price of
Rs.1 per copy. Sales of the magazine are expected to be 5,00,000 copies per month, but it is
possible that the actual sales could differ quite significantly from this estimate.
Two different methods of producing the magazine are being considered and neither
would involve any additional capital expenditure. The estimated production costs for each of the
two methods of manufacture, together with the additional marketing and distribution costs of
selling the new magazine, are summarized below:


Method A
Method B
Variable costs
55p per copy
50p per copy
Specific fixed costs
Rs.80, 000 per month Rs.1, 20,000 per month
For semi-variable cost the following estimates have been obtained: 3,50,000 copies
Rs.55, 000 per month Rs.47, 500 p.m.
4,50,000 copies
Rs.65, 000 per month Rs.52, 500 p.m.
6,50,000 copies
Rs.85, 000 per month Rs.62, 500 p.m.
It may be assumed that the fixed cost content of the semi-variable costs will remain
constant throughout the range of activity shown.
The company currently sells a magazine covering related topics to those that will be
included in the new publication and consequently it is anticipated that sales of this existing
magazine will be adversely affected. It is estimated that for every ten copies sold of the new
publication, sales of the existing magazine will be reduced by one copy.

Sales and cost data of the existing magazine are shown below: Sales
2,20,000 copies per month
Selling price
85p per copy
Variable costs
35p per copy
Specific fixed costs Rs.80, 000 per month
Required:
(a) Calculate, for each production method, the net increase in company profits which will
result from the introduction of the new magazine, at each of the following levels of activity:
5,00,000 copies per month
4,00,000 copies per month
6,00,000 copies per month
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KALPESH CLASSES
(b) Calculate, for each production method, the amount by which sales volume of the new
magazine could decline from the anticipated 5,00,000 copies per month, before the company
makes no additional profit from the introduction of the new publication.
(c) Briefly identify and conclusions which may be drawn from your calculations.
Question: 23

Limiting factor -Basic

The following particulars are extracted from the records company:-


Product A Product B

Per unit
Per unit
Sales
Rs.100
Rs.120
Consumption of material
2 kg.
3 kg.
Material Cost
Rs.10
Rs.15
Direct wages cost
Rs.15
Rs.10
Direct expenses
Rs.5
Rs.6
Machine Hours used
3
2
Overhead expenses:


Fixed
Rs.5
Rs.10
Variable
Rs.15
Rs.20
Direct wages per hour is Rs.5.
a.
Comment on profitability of each product (both use the same raw material) when i.
Total sales potential is limited;
ii. Raw material is in short supply;
iii.
Production capacity (in terms of machine hours) is the limiting factor.

b.
Assuming Raw Material as the key factor, availability of which is 10,000 kg. and
maximum sales potential of each product being 3,500 units, find out the product mix which will
yield the maximum profit.
Question: 24

Limiting factor - ADVANCED
As a part of its rural upliftment programme, the Government has put under cultivation a
farm of 96 hectares to grow tomatoes of four varities: Royal Red, Golden Yellow, Juicy Crimson
and Sunny Scarlet. Of the total, 68 hectares are suitable for all four varieties but the remaining 28
hectares are suitable for growing only Golden Yellow and Juicy Crimson. Labour is
available for all kinds of farm and is no constraint. The market requirement is that all four
varieties of tomatoes must be produced with a minimum of 1,000 boxes of any one variety.
The farmers engaged have decided that the area devoted to any crop should be in terms of
complete hectares and not in fractions of a hectare. The other limitation is that not more than
20,000 boxes of any one variety should be produced. The following data are relevant.


Varieties

Royal Red Golden Yellow Juicy Crimson Sunny Scarlet
Annual Yield:




Boxes per hectare
350
100
70
180
Costs:
Rs.
Rs.
Rs.
Rs.
Direct materials per
476
216
196
312
hectare
Labour:




Growing per hectare
896
608
371
528
Harvesting and
3.60
3.28
4.40
5.20
packing per box
Transport per box
5.20
5.20
4.00
9.60
Market price per box
15.38
15.87
18.38
22.27

Page Number : 14
KALPESH CLASSES
Fixed overheads per annum
Rs.
Growing
11,200
Harvesting
7,400
Transport
7,200
General Administration
10,200
Required:
a.
Within the given constraints, the area to be cultivated with each variety of tomatoes if the
largest total profit has to be earned.
b.
The amount of such profit in rupees.

Question: 25

Limiting factor - MAKE OR BUY

A company is preparing its production budget for the year ahead. Two of its processes are
concerned with the manufacture of three components, which are used in several of the
companys products. Capacity (machine hours) in each of these two processes is limited to 2,000
hours.
Production costs are as follows:


Component
Component
Component
X
Y
Z

(Rs. per unit)
(Rs. per unit)
(Rs. Per unit)
Direct materials
15.00
18.50
4.50
Direct labour
12.00
12.50
8.00
Variable overhead
6.00
6.25
4.00
Fixed overhead



Process M
6.00
6.00
4.50
Process N
10.50
10.50
3.50

49.50
53.75
24.50
Requirements for components X, Y and Z (in units) for the following year: X
300
Y
300
Z
450
Fixed overhead is absorbed on the basis of machine hours at the following rates: Process
M
Rs.3.00 per hour
Process N
Rs.3.50 per hour
Components X and Z could be obtained from an outside supplier at following prices per
unit X
Rs.44.00
Z
Rs.23.00
Required:
(a) Demonstrate that insufficient capacity is available to produce the requirements for
components X, Y and Z in the year ahead, and calculate the extent of the shortfall.
(b) Determine the requirements for bought-in components in order to satisfy the demand
for components at minimum cost.

Question: 26

Limiting factor - MAKE OR BUY

A processing company, EF, is extremely busy. It has increased its output and sales from
12,900
kg in quarter 1 to 17,300 kg in quarter 2 but, though demand is still rising, it cannot
increase its outputs more than another 5% from is existing labour force which is now at its
maximum. Data in quarter 2 for its four products were:

Page Number : 15
KALPESH CLASSES

P
Q
R
S
Output (kg)
4,560 6,960 3,480 2,300
Selling price (Rs. per kg)
16.20 11.64
9.92 13.68
Costs (Rs. per kg):




Direct labour (at Rs.6 per hour)
1.96
1.30
0.99
1.70
Direct materials
6.52
4.90
4.10
5.42
Direct packaging
0.84
0.74
0.56
0.70
Fixed overhead (absorbed on basis of direct labour cost)
3.92
2.60
1.98
3.40
Total
13.24
9.54
7.63 11.22
The XY Company has offered to supply 2,000 kg of any one of the products at a
delivered price of 90% of EFs selling price. The company will then be able to produce extra
another product in its place up to the plants total capacity.

Required to state, with supporting calculations:
Which product should be purchased and which other product should be produced in its
place up to the plants total capacity so that the company reports the maximum profit? Assume
XYs quality and delivery are acceptable.
Question: 27

Limiting factor - ADVERTISE OR NOT
X Ltd manufactures and sells a range of sports equipments. The marketing director
would like to increase X Ltds share of the market, and is considering an advertising campaign in
order to stimulate demands for the products.
Two alternative sales budgets have been put forwarded for the year ahead.


Product (000 units)

A
B
C
D
Budget 1 without advertising 180 280 260 150
Budget 2 with advertising
200 310 285 165

The advertising campaign would cost Rs.2, 90,000.
Selling prices and variable production costs are budgets as follows: [Rs. per unit]

Products
A
B
C
D
Selling prices
9.95 11.95 22.95 19.95
Variable production costs:




Direct materials
4.20
5.50 12.70 10.40
Direct labour
1.70
1.70
2.80
2.65
Variable overheads
0.60
0.60
1.00
0.90

The variable overheads are absorbed on a machine hour basis at a rate of Rs.1.00 per
machine hour. Fixed overheads total Rs.25, 70,000. Production capacity is limited to 7,15,000
machine hours in the year ahead. Products A and C could be bought-in, and X Ltd would be
prepared to do this to make up any shortfall of production requirements if necessary and justify.
Products A and C could be bought-in for Rs.8.90 per unit and Rs.20.00 per unit respectively.
If the advertising campaign was shown to be successful, increased production
requirements would then be met in the long run by investment in additional facilities. In the
meantime, the company would like to assess the potential of the advertising campaign in the year
ahead, and if justified, determine the best way to obtain the required quantities of Products A and
C.
Required:
On the basis of expectations for the year ahead, determine whether investment in the
advertising campaign would be worthwhile and how production facilities would be best utilized.


Page Number : 16
KALPESH CLASSES
Question: 28

Limiting factor - SPACE CONSTRAINT IN A RETAIL SHOP

Z Ltd is a retailer with a number of shops selling a variety of merchandise. The company
is seeking to determine the optimum location of selling space in its shops. Space is devoted to
ranges merchandise in modular units, each module occupying seventy square meters of space.
Either one or two modules can be devoted each range. Each shop has seven modular
units.
Z Ltd has tested the sale of different ranges of merchandise and determined the following
sales productivities:

Sales in Rs.per module per week

1 Module
2 Module
Range A
6,750
6,250
Range B
3,500
3,150
Range C
4,800
4,600
Range D
6,400
5,200
Range E
3,333
3,667
The contribution (selling price product cost) percentages of sales the five ranges are as
follows:
Range A
20%
Range B
40%
Range C
25%
Range D
25%
Range E
30%
Operating costs are Rs.5, 600 per shop per week and are apportioned to ranges based on
an average rate per module.
Required:
(a) Determine the allocation of shop space that will optimize profit, clearly showing the
ranking order for the allocation of modules.
(b) Calculate the profit of each of the merchandise ranges selected in (a) above, and of
the total shop.

Question: 29

ENQUIRY ON STAND - ALONE STATUS

The manager of a business has received enquiries about printing three different types of
advertising leaflet. Information concerning these three leaflets is shown below: A
B
C
Selling prices per 1000 leaf lets
100
220
450
Estimated printing costs:



Variable per 1000 leaflets
40
70
130
Specific fixed costs per month
2,400
4,000
9,500
In addition to specific fixed costs a further Rs. 4,000/- per month would be incurred in
renting special premises if any or all of the above three leaflets were printed. The minimum
printing order would be for 30,000 of each type of leaflet per month and the maximum possible
order is estimated to be 60,000 of each leaflet per month.
Required
i.
Assuming that orders have been received to print each month 50,000 of both leaflet A
and leaflet B calculate the quantity of leaflet C which would need to be ordered to produce an
overall profit, for all three leaflets of Rs. 1,800/- per month.
ii.
It is possible that a special type of paper used in printing leaflets will be difficult to obtain
during the first few months. Three estimated consumption of this special paper for each type of
leaflet is:



Page Number : 17
KALPESH CLASSES
Leaflet A 2 packs per 1000 leaflets
Leaflet B 6 packs per 1000 leaflets
Leaflet C 16 packs per 1000 leaflets

Advise the manager on the quantity of each leaflet which should be printed in order to
maximize profit in the first month, if 50,000 of each type of leaflet have been printed there
remains unfulfilled order of 10,000 for each type of leaflet and there 170 packs of special paper
available for the rest of the month. What will be your reaction if the printing quantity is to be
pack of 1000 leaflets?
iii.
Comment on the profitability of the leaflets assuming that they are stand-alone products.
iv.
Comment on the profitability, without making the above assumption.
Question: 30

Deleting a product line

The budgeted product profitability report of Midland Ltd for each of its products for the
forthcoming year is as follows:
(Rupees in thousands)
Product
V
W
X
Y
Z
Total
Sales
4,400 4,900 6,500 5,100 9,100 30,000
Manufacturing Costs:






Materials
220
660 1,320 1,100 1,650
4,950
Labour
500
800 1,500 1,400 1,800
6,000
Production OH Variable
250
350
400
500
720
2,220
Production OH Fixed
350
600 1,100 1,000
950
4,000
Sub-total
1,320 2,410 4,320 4,000 5,120 17,170
Transport and Delivery Cost:






Transport
120
360
720
600
650
2,450
Packaging
200
100
200
100
300
900
Sub-total
320
460
920
700
950
3,350
Selling and Advertising Expenses
720
545
525
555
755
3,100
Administration
660
735
975
765 1,365
4,500
Total Cost (Rs.)
3,020 4,250 6,740 6,020 8,190 28,120
Profit (Rs.)
1,380
750 (240) (920)
920
1,880
The management accounts provides the following additional information concerning the
basis on which the above report was prepared.
(1) Material costs are a combination of variable material cost and a 10% surcharge which
is added to the basic variable material cost in order to recover the fixed cost of storage and stores
administration.
(2) Labour is to be considered a variable cost.
(3) Fixed production overhead comprises some directly attributable fixed costs, which are
allocated to their appropriate product together with an apportionment of general fixed production
overhead. The general production overhead amounts to Rs.30, 00,000 and is apportioned in
proportion to labour costs, i.e. 50% of labour costs. The attributable fixed cost is avoidable if the
product to which it relates is not produced.
(4) Transport charge comprises a fixed cost of Rs.4, 50,000 and a variable charge. The
fixed cost is apportioned to products in proportion to their material costs.
(5) Selling and advertising expenses comprise advertising expenses directly related, and
therefore directly attributed to each product and a sales commission, which equals 5% of sales
revenue. Advertising costs are avoidable fixed costs.
(6) Administration is a fixed cost and is apportioned in proportion to sales revenue.
(7) Packaging is a variable cost.
The managing director feels that product X and Y should not be produced as they both
result in a loss.
The marketing manager makes two points:
Page Number : 18
KALPESH CLASSES
1)
Sales of any product can be increased by up to 40% of the sales figures contained on the
above report merely by pursuing an additional expensive advertising campaign. If any product
were selected to have its sales increased the additional advertising campaign would cost three
times the currently planned cost of advertising that product. The relationship between advertising
cost and increased sales applies to each product and has a proportional relationship, e.g. sales
could be increased by 20% if advertising costs were increased by 150%.
2)
By reducing sales (and production) of product X the demand for either V or W will rise
depending upon which product is offered as a substitute for X. if V is offered as the substitute
then each Rs.1 reduction in sales of X will cause a increase in sales of V of Rs.0.45. if W is the
substitute then each Rs.1 reduction in sales of X will cause an increase in sales of W of Rs.0.50.
Required:
a) Advise the managing director of the desirability of ceasing production of products X
and Y
and prepare a statement, which shows the effect that not producing X and Y will have on
the profits of Midland Ltd.
b) Show the effect of pursing the advertising campaign mentioned by the marketing
manager in order to increase sales of each product by 40%. Indicate which products it would be
worth be worthwhile advertising.
c) If only Rs.12, 00,000 is available for advertising indicate which products should then
be advertised?
d) Should sales (and production) of X be reduced in favour of either V or W? Show the
effect of reducing sales of X to zero.

Question: 31

Deleting a factory

Lakshmana Ltd. manufactures a particulars type of lawn mower, which sells for Rs.150.
Head office is in Ayodhya and its factories, are in three widely separated towns Brindavan
Mathura and Panchavati.The company is facing not only increasing competition, but also a
falling market for its product. The sales director forecasts that this years sales will be 16? less
than those for the year ended 30th April and that there is no possibility of an increase in selling
price. It can be assumed that cost prices will not change during the year.
You are required to evaluate for management the possibility of closing one of the
factories and of changing the output of one or both of the remaining two to maximise profit.

The summarised profit and loss statement for the year ended 30th April are as follows:


Factories (in 000)

Brindavan Mathura Panchavati
Direct materials
1,200
4,800
2,400
Direct wages
600
3,000
1,440
Price cost
1,800
7,800
3,840
Variable production overhead
150
840
360
Fixed production overhead
750
2,640
1,200
Production cost
2,700
11,280
5,400
Administration overhead
300
1,800
840
Variable selling overhead
300
1,440
480
Fixed selling overhead
450
1,560
1,080
Head office costs
300
1,200
600
Total cost
4,050
17,280
8,400
Profit
450
720
600
Sales
4,500
18,000
9,000
Additional data:
(i)
Costs of closing down each factory can be ignored; it has been forecast that such costs
will be offset by sale of plant, etc.
Page Number : 19
KALPESH CLASSES
(ii)
In general, there is sufficient capacity available at each factory to undertake additional
production, if required. Each factory could increase its output up to twice the past years level
without the need for major investment, but additional costs would be incurred in respect of
supervision, storage, maintenance etc. these additional facilities are readily available in each
factory and their costs are forecast as follows: Brindavan Mathura Panchavati

Rs.000
Rs.000
Rs.000
If output compared with that of past year rises by


1% - 25%
300
500
300
26% - 50%
350
600
400
51% - 75%
400
800
600
76% - 100%
500
1,000
700
(iii)
Transport costs would be affected if one of the factories were closed because the
remaining factories would be required to supply customers in the particular area concerned.
It is expected that sales in each area will be reduced in line with the sales directors
forecast. Extra costs of transport per unit are forecasted as: To factory Brindavan area Rs.10
To factory Mathura area
Rs.15
To factory Panchavati area Rs.12

Question: 32
Deletion SERVICE SECTOR
As assistant to the accountant of a public passenger transport authority, you have been
asked to:
a.
Prepare a statement showing the profitability of routes R1, R2 and R3 including the
contribution per vehicle and contribution per mile after deducting all direct costs; b.
Comment on a proposal that route R3 be discontinued;
c.
Comment on a proposal to reduce the service on route R3 by half on the assumption that
only 4 vehicles would be used, operating for a total of 100,000 miles per annum and that the
estimated revenue from passengers would be reduced by Rs.40,000 per annum. (You may
assume that any surplus vehicles could be readily sold for their written down values.) The latest
information available for the last twelve months is as follows: Routes
R1
R2
R3
Total
Number of vehicles used
12
16
8
36
Total mileage on each route in thousands
300
400
200
900

Rs.000 Rs.000 Rs.000 Rs.000
Revenue from passengers
210
296
116
622
Direct costs variable
150
200
100
450
Direct costs fixed (specific to vehicles)
36
48
24
108
Fixed costs apportioned (garage maintenance and
24
32
16
72
administration)
Question: 33

Export or not

The Everest Snow Company manufactures and sells direct to consumers 10,000 jars of
Everest Snow per month at Rs.1.25 per jar. The companys normal production capacity is
20,000 jars of snow per month. An analysis of costs for 10,000 jar show:

Direct material
1,000
Direct labour
2,475
Power
140
Miscellaneous supplies
430
Jars
600
Fixed expenditure for manufacture, selling & distribution 7,955
Total
12,600
Page Number : 20
KALPESH CLASSES
The company has received an offer for the export under a different brand name of
1,20,000 jars per annum at Re.0.75 a jar.
Write a short report on the advisability or otherwise of accepting the offer.

Question: 34

Sell or further process
A chemical company carries on production operations in two processes. Materials first
pass through Process I, where a compound is produced. During the year the company produced
160000 kg of compound at a cost of Rs 160000.
Any quantity of the compound can be sold for Rs.1.60 per kg. Alternatively, it can be
transferred to process II for further processing and packing to be sold as Star comp for Rs.2.00
per kg.
Further materials are added in process II such that for every kg of compound used, 2 kg
of star comp result.

Out of 1,60,000 kg, 40,000 kg are sold as compound and 1,20,000 kg are passed through
process II for sale as Star comp. Process II has facilities to handle up to 1,60,000 kg of
compound if required. The costs incurred in process II (other than the cost of the compound) are:


1,20,000 kg of compound Input 1,60,000 Kg of Compound Input
Material (Rs.)
1,20,000
1,60,000
Processing Costs (Rs.)
1,20,000
1,40,000
Required:

(a)
Demonstrate that it is worthwhile further processing 1,20,000 kg of compound.
(b)
Calculate the minimum acceptable selling price per kg, if a potential buyer could be
found for the additional output of Starcomp that could be produced with the remaining
compound.
Question: 35

Preventive maintenance vs. break down maintenance
The budget estimates of a company using sophisticated high-speed machines based on a
normal working of 50,000 machine hours during 2002 are as under:


(Rs. Lakhs)
Sales (1,00,000 units)
100
Raw materials
20
Direct wages
20
Factory overheads variable
10



- Fixed
10
Selling and distribution overheads variable
5




- Fixed
5
Administration overheads-fixed
10
Total costs
80
Profit
20
Since the demand for companys product is high, the budget committee explores the
possibilities of increasing the production. The Technical Director stated that maintenance has not
been given due importance in the budget and that if preventive maintenance is introduced, the
breakdown repair costs and hours lost due to break-down can be reduced and consequently
production can be increased.
In support of this, he presented the following data, showing how injection of more and
more funds on preventive maintenance will bring down the breakdown repair costs and reduce or
eliminate the machine stoppages due to breakdown:

Page Number : 21
KALPESH CLASSES
Proposed Expenditure on
Expenditure estimated
Machine hours saved
Preventive maintenance to be incurred on break-down
Rs. 19,200
Rs. 1,92,000
Nil
38,400
1,53,600
800
76,800
1,15,200
1,600
1,53,600
76,800
2,400
3,07,200
57,600
3,200
6,14,400
-
4,000

Using the differential cost and contribution concept, advise the management up to what
level breakdown hours can be reduced to increase production and maximise profits of the
company consistent with minimum costs.
Question: 36

Reprocessing defectives
Random samples of the product of a Factory reveals that 70% products are of standard
quality, 15% are of second grade, 10% are of third grade, and the balance is scrapped. Selling
price per unit of the product is Rs.100. out of the aforesaid list price 20% discount is allowed. In
case of the second and third grades the discounts are 40% and 60% respectively.
The monthly production is 5,000 units gross. Variable Cost per unit is Rs.40. fixed
Overheads amount to Rs.100000 per month.
The second grade product will require Rs.10, and the third grade Rs.20 per unit for
reprocessing.
Consider if reprocessing of the defectives should be undertaken.
Question: 37

Pricing and optimum output
A manufacturer has three products, A, B, and C. Currently sales, cost and selling price
details and processing time requirements are as follows:


Product Product Product
A
B
C
Annual sales (units)
6,000
6,000
750
Selling price (Rs.)
20.00
31.00
39.00
Unit cost (Rs.)
18.00
24.00
30.00
Processing time required per unit (hours)
1
1
2
The firm is working at full capacity (13,500 processing hours per year). Fixed
manufacturing overheads are absorbed into unit costs by a charge of 200% of variable cost. This
procedure fully absorbs the fixed manufacturing overhead.
A review of the selling prices is in progress and it has been estimated that, for each
product, an increase in the selling price would result in a fall in demand at the rate of 2,000 units
for an increase of Rs.1 and similarly, that a decrease of Rs.1 would increase demand by 2,000
units.
Specifically the following price/demand relationships would apply: Product A
Product B
Product C
Selling
Estimated
Selling
Estimated
Selling
Estimated
price
demand
price
demand
price
demand
24.50
2,000
34.00
2,000
39.00
2,000
23.50
4,000
33.00
4,000
38.00
4,000
22.50
6,000
32.00
6,000
37.00
6,000
21.50
8,000
31.00
8,000
36.00
8,000
20.50
10,000
30.00
10,000
35.00
10,000
19.50
12,000
29.00
12,000
34.00
12,000
18.50
14,000
28.00
14,000
33.00
14,000
From this information you are required to calculate the best selling prices, the best
production plan and the net profit that this plan should produce.

Page Number : 22
KALPESH CLASSES
Question: 38

Competitive bidding

XY Ltd is to quote for contract No. 1701 to supply 10,000 units of a certain product to a
large group with branches throughout the country.
It knows that the group will accept the lowest bid and, from past experience and good
intelligence within the industry, estimates the following probabilities of bids at various levels (in
multiples of Rs.5 only).
Price bid Probability of bids at that price
45
0.05
50
0.10
55
0.20
60
0.25
65
0.25
70
0.10
75
0.05

1.00

XY Ltds out-of-pocket costs for these items are Rs.32 per unit.
Required to calculate the price XY Ltd should bid for this contract if it wishes to obtain
the contract and maximize its profit margin.

Question: 39

Pricing under uncertainty
Z Ltd is considering various product pricing and material purchasing options with regard
to a new product it has in development. Estimates of demand and costs are as follows: Sales
volume at
Selling price

Rs.15
Rs.20
Forecasts
Probability
(000
(000
units)
units)
Optimistic
0.3
36
28
Most likely
0.5
28
23
Pessimistic
0.2
18
13
Variable manufacturing costs (excluding materials) per
Rs.3
Rs.3
unit
Advertising and selling costs

Rs.25, 000 Rs.96, 000
General fixed costs

Rs.40, 000 Rs.40, 000
Each unit requires 3 kg of material and because of storage problems any unused material
must be sold at Re.1 per kg. The sole suppliers of the material offer three purchase options,
which must be decided at the outset, as follows:
(i)
Any quantity at Rs.3 per kg, or
(ii)
A price of Rs.2.75 per kg for a minimum quantity of 50,000 kg, or (iii)
A price of Rs.2.50 per kg for a minimum quantity of 70,000 kg.
You are required, assuming that the company is risk neutral, to (a)
Prepare calculations to show what pricing and purchasing decisions the company should
make, clearly indicating the recommended decisions;
(b)
Calculate the maximum price you would pay for perfect information as to whether the
demand would be optimistic or most likely pessimistic.

Question: 40

Marginal costing under uncertainty

Nooks Ltd. which makes only one product, sells 10,000 units of its product making a loss
of Rs.10000/-. The variable cost per unit of the product is Rs.8/- and the fixed cost is Rs.30000/-.
Page Number : 23
KALPESH CLASSES

Sales Units Probability
10,000
0.10
12,000
0.15
14,000
0.20
16,000
0.30
18,000
0.25
a. What is the probability that the company will continue to make losses?
b.
What is the probability that the company will make a profit of Rs.6000?
c.
What is the probability that the profit will be at the most Rs.2000?

Question: 41

Expected value of perfect information
D. Ltd. has to choose one between two machines Machine A has low fixed cots and
high unit variable costs whereas Machine B has high fixed costs and low unit variable costs.
Consequently machine A is suited to low level demand while Machine B is suited to high level
demand. It is assumed that there are only two possible demand levels low and high and the
estimated probability of each of these events is 0.5. The estimated profits for each demand level
are as follows;


Low demand High Demand

Rs.
Rs.
Machine A
1,00,000
1,60,000
Machine B
10,000
2,00,000
There is a possibility of employing a firm of marketing consultants who would be able to
provide a perfect prediction of the actual demand. What is the maximum amount the company
should be prepared to pay the consultants for the additional information?
If D. Ltd. does not employ the marketing consultants; it has, by itself, to choose between
the two machines. In that case work out the regret criteria.
Question: 42

Subcontract or not
A Company producing and selling a range of consumer durable appliances has its
after-sales service work done by local approved sub-contractors.
The company is now considering carrying out asll or some of the work itself and it has
chosen one area in which to experiment with the new routine.
Some of the appliances are so large and bulky that repair / service work can only be done
at the customers homes. Others are small enough for sub-contractors to take them back to their
local repair workshops, repair them, and re-deliver them to the customer. If the company does its
own after-sales service, it proposes that customers would bring these smaller items for repair to a
local company service centre which would be located and organized to deal with visitors.
There is a list price to customers for the labour content of any work done and for
materials used. However, the majority of the after sales service work is done under an annual
maintenance contract taken out by customers on purchasing the product; this covers the labour
content of any service work to be done; but customers pay for materials used.
The price structure is:
For materials:
Price to sub-contractor
: Company cost plus 10%
Price to customer

: Sub-contractors price plus 25%
For labour: Price to sub-contractor:
Work done under maintenance contract: 90% of list price
Ad hoc work (i.e. work NOT done under ma intenance contract): 85% of list price.
Records show that 60% by value of the work has to be carried out customers homes,
while the remainder can be done anywhere appropriate.
The annual income that the company currently receives from sub-contractors for the area
in which the experiment is to take place is:
Page Number : 24
KALPESH CLASSES



(Rs. 000)
Labour
- Under maintenance contract
30

- Ad hoc
12
Materials - Under maintenance contract
18

- Ad hoc
6


66
The company expects the volume of after sales work to remain the same as last year for
the period of the experiment.
The company is considering the following options:
(1)
Set up a local service centre at which it can service small appliances only. Work at
customers houses would continue to be done under sub-contract.
(2)
Set up a local service centre to act only as a base for its own employees who would only
service appliances at customers homes. Servicing of small appliances would continue to be done
under sub-contract.
(3)
Set up a local combined service centre plus base for all work. No work would be
subcontracted.
If the company were to do service work, annual fixed costs are budgeted to be: Options
1
2
3

(Rs.000) (Rs.000) (Rs.000)
Establishment costs (rent, rates, light, etc.)
40
15
45
Management costs
20
15
30
Storage staff costs
10
10
15
Transport costs (all vans / cars hired)
8
65
70
Repair / service staff
70
180
225
You are required:
To recommend which of the three options the company should adopt from a financial
viewpoint.

Question: 43

Subcontract or own work force
A construction company has accepted a contract to lay underground pipe work. The
contract requires that 2500m of 10 pipe and 2000m of 18 pipe be laid each week.
The limiting factor is the availability of specialized equipment. The company owns 15
excavating machines (type A) and 13 lifting and joining machines (type B). The normal
operating time is 40
hours a week but up to 50% overtime is acceptable to the employees.
The time taken to handle each meter of pipe is:

Size of pipe
Minutes per meter

Machine A Machine B
10
6
12
18
18
12
The costs of operating the machines are:

Machine Machine
A
B

(Rs.)
(Rs.)
Fixed costs, per week, each
450
160
Labour, per crew, per hour:


Up to 40 hours per week
10
12
Over 40 hours per week
15
18
The costs of materials and supplies per meter are:
10 Rs.10
18 Rs.5

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KALPESH CLASSES
A subcontractor has offered to lay any quantity of the 10 pipe at Rs.18 per meter and of
the 18
pipe at Rs.12 per meter.
You are required to:
(a) Calculate the most economical way of undertaking the contract; (b) State they weekly
cost involved in your solution to (a) above; Question: 44

Production location
The PTO Division of the Galva Manufacturing Company produces the same power
take-off units for the farm equipment business in two plants, a newly renovated, automated plant
in Peoria, and an older, less automated plant in Moline. The PTO Division expected to produce
and sell 192,000 power take-off units during the coming year. The following data are available
for the two plants.


Peoria
Moline
Selling price

150.00

150.00
Variable manufacturing cost per unit
72.00

88.00

Fixed manufacturing cost per unit
30.00

15.00

Sales commission (5% of revenues)
7.50

7.50

Variable marketing and distribution
6.50

6.50

cost per unit
Fixed marketing and distribution cost
19.00

14.50

per unit
Total cost per unit

135.00

131.50
Operating income per unit

Rs.15.00

Rs.18.50
Production rate per day
400 units

320 units


All fixed costs per unit are calculated based on a normal year of 240 working days. When
the number of working days exceeds 240, variable manufacturing costs increase by Rs.3.00 per
unit in Peoria and Rs.8.00 per unit in Moline. Capacity for each plant is 300 working days per
year.
Wishing to take advantage of the higher operating income per unit at Moline, PTOs
production manager has decided to manufacture 96,000 units at each plant. This production plan
results in Moline operating at capacity (320 units per day x 300 days) and Peoria operating at its
normal volume (400 units per day x 240 days). Galvas corporate controller is not happy with
this plan because he does not believe it represents optimal usage of PTOs plants.
Required:
a.
Determine the breakeven point in units for the Peoria and Moline plants.
b.
Calculate the operating income that would result from the production managers plan to
produce 96,000 units at each plant.
c. Determine how the production of the 192000 units should be allocated between the
Peoria and Moline plants to maximize operating income for the PTO Division. What is the
maximum operating income that the PTO Division can earn? Show your calculations.

Question: 45

Cost of prediction error
Modern Packaging Corporation specializes in the manufacture of plastic bottles through
moulding operations. The firm has four moulding machines, each capable of producing 100
bottles per hour. The firm estimates that the variable cost of producing a plastic bottle is 20
paise. The bottles are sold for 50 paise each.
A local toy company that would like the firm to produce a moulded plastic toy for them
has approached management. The Toy Company is willing to pay Rs.3 per unit for the toy. The
variable cost to manufacture the toy will be Rs.2.40. In addition, Modern Packaging Corporation
would have to incur a cost of Rs.20000 to construct the needed mould exclusively for this order.
Because the toy uses more plastic and is of a more intricate shape than a bottle, a
moulding machine can produce only 40 units per hour. The customers want 1,00,000 units.
Assume that modern packaging corporation has the total capacity of 10,000 machine hours
available during the period in which the toy company wants the delivery of toys. The firms
fixed costs, excluding the costs to construct the toy mould, during the same period will be
Rs.200000.
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KALPESH CLASSES
Required
(a) If the management predicts that the demand for its bottles will require the use of 7,500
machine hours (or) less during the period, should the special order be accepted? Give
reasons.
(b) If the management predicts that the demand for its bottles will be higher than its
ability to produce bottles, should the order be accepted? Why?
(c) The management has located a firm that has just entered the moulded plastic business.
This firm has considerable excess capacity and more efficient moulding machines and is
willing to subcontract the toy job (or) any portion of it, for Rs.2.80 per unit. It will construct its
own toy mould. Determine modern Packaging Corporations minimum expected excess machine
hour capacity needed to justify production any portion of the order itself rather than
subcontracting it entirely.
(d) The management predicted that it would have 1600 hours of excess machine capacity
available during the period. Consequently, it accepted the toy order and subcontracted 36000
units to the other plastic company. In fact, demand for bottles turned out to be 9,00,000 units for
the period. The firm was able to produce only 8,40,000 units because it had produced the toys.
What was the cost of the prediction error of failure to predict demand correctly?

Question: 46

Market penetration INCREMENTAL ANALYSIS

Cool ltd., sells a gadget and has estimated the market capacity as 50,000 units a year. The
directors have set the company, a sales objective of between 50% and 80% of this potential.
The sales force is divided into five equal areas and the objective is expected to be
achieved by using the salesmen in the following manner.

No of salesmen used per area
5
6
7
8
9
10 11
Penetration expected % market 50 58 65 71 76 78 80

All the products are manufactured at one location at an ex-factory cost of Rs.80 each and
are sold at a standardised price of Rs.100 each. The transport and installation cost varies in
relation to the distance from the factory as under

Sales area
1
2 3 4 5
Variable distribution cost Rs. per unit 10 8 6 4 2

At present 35 salesmen are employed at an average cost of Rs. 8,000/- each per annum.
In 2001 the company employed its sales force equally in all these 5 areas. However in 2002 the
company decided to use 25 salesmen to meet the basic 50% penetration in all areas and to
concentrate the other ten salesmen equally in the two areas where the unit contribution is highest.
The calculations shown below indicate that in 2002 the profit will be nearly 6% lower
than that in 2001.


(Rs. In 000)

2001
2002
Income from Sales

3,250
3,060
Ex-factory cost
2,600
2,448

Distribution cost
195

167

Salesmen cost
280
3,075
280 2,895
Total Contribution

175

165
You are required to:
a) Analyze the total contribution area-wise for both 2001 and 2002.
b) Explain briefly why concentrating on highest contribution areas has not increased
profit.
c) Calculate the highest total contribution possible using 35 salesmen.


Page Number : 27
KALPESH CLASSES
Question: 47

Inferior or Superior Grade Of Material
In the last quarter of 2001/02 it is estimated that RAGHUVARA LTD will have produced
and sold 20,000 units of their main product by the end of the year. At this level of activity it is
estimated that the average unit cost will be:


(Rs.)
Direct material
30
Direct labour
10
Overhead: Fixed
10
Variable
10

60

This is in line with the standard set at the start of the year. The management accountant of
RAGHUVARA LTD is now preparing the budget for 2002/03. He has incorporated into his
preliminary calculations the following expected cost increases: Raw material: price increase of
20%
Direct labour: wage rate increased of 5%
Variable overhead: increase of 5%
Fixed overhead: increase of 25%
The production manager believes that if a cheaper grade of raw material were to be used,
this would enable the direct material cost per unit to be kept to Rs.31.25 for 2002/03. The
cheaper material would, however, lead to a reject rate estimated at 5% of the completed output
and it would be necessary to introduce an inspection stage at the end of the manufacturing
process to identify the faulty items. The cost of this inspection process would be Rs.40, 000 per
year (including Rs.10, 000 allocation of existing factory overhead).
Established practice has been to reconsider the products selling price at the time the
budget is being prepared. The selling price is normally determined by adding a mark-up of 50%
to unit cost. On this basis the products selling price for 2001/02 has been Rs.90 but the sales
manager is worried about the imp lications of continuing the cost-plus 50% rule for 2002/03. He
estimates that demand for the product varies with price as follows:

Price Rs.
80
84
88 90 92
96
100
Demand (000)
25
23
21 20 19
17
15
You are required to decide whether RAGHUVARA LTD should use the regular or the
cheaper grade of material and to calculate the best price for the product, the optimal level of
production and the profit that this should yield.

Question: 48

CVP Analysis- A Guide To Product Design

Bharat Ltd is considering proposals for design changes in one of a range of soft toys. The
proposals are as follows:
(a) Eliminate some of the decorative stitching from the toy.
(b) Use plastic eyes instead of glass eyes in the toys (two eyes per toy).
(c) Change the filling material used. It is proposed that scrap fabric left over from the
body manufacture be used instead of the synthetic material, which is currently used.
The design change proposals have bee considered by the management team and the
following information has been gathered:
(i)
Plastic eyes will cost Rs.15 per hundred whereas the existing glass eyes cost Rs.20 per
hundred. The plastic eyes will be more liable to damage on insertion into the toy. It is estimated
that scrap plastic eyes will be 10% of the quantity issued from stores as compared to 5% of
issues of glass eyes at present.
(ii) The synthetic filling material costs Rs.80 per tonne. One tonne of filling is sufficient
for 2,000 soft boys.
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KALPESH CLASSES
(iii) Scrap fabric to be used as filling material will need to be cut into smaller pieces
before as and this will cost Rs.0.05 per soft toy. There is sufficient scrap fabric for the purpose.
(iv) The elimination of the decorative stitching is expected to reduce the appeal of the
product, with an estimated fall in sales by 10% from the current level. It is not felt that the
change in eyes or filling material will adversely affect sales volume. The elimination of the
stitching will reduce production costs by Rs.0.60 per soft toy.
(v) The current sales level of the soft toy is 3,00,000 units per annum. Apportioned fixed
costs per annum are Rs.4, 50,000. The net profit per soft toy at the current sales level is Rs.3.

Required:
(a) Using the information given in the question, prepare an analysis, which shows the
estimated effect on annual profit if all three proposals are implemented, and which enables
management to check whether each proposal will achieve an annual target profit increase of
Rs.25, 000. The proposals for plastic eyes and the use of scrap fabric should be evaluated after
the stitching elimination proposal has been evaluated.

(b) Calculate the percentage reduction in sales due to the stitching elimination at which
the implementation of all three design change proposals would result in the same total profit
from the toy as that earned before the implementation of the changes in design.
Question: 49

CVP Analysis in Hotel Industry
A hotel budget for the year 2002 shows the following room occupancy: Average %
January
-
March
45
April
-
June
60
July
-
September
90
October
-
December
55
Revenue for the year is estimated to be Rs.3 million and arises from three profit centers:
Accommodation* 45%: Restaurant 35%: Bar 20%: Total 100%
*The accommodation revenue is earned from several different categories of guest, each
of which pays a different rate per room.
The three profit centers have the following percentage gross margins: Accommodation
Restaurant
Bar

(%)
(%)
(%)
Revenue

100

100
100
Wages
20

30

15

Cost of sales
-

40

50

Direct costs
10

10

5



30

80

70
Gross margin

70

20

30

Fixed costs for the year are estimated to be Rs.5, 65,000.
Capital employed is Rs.7 million.
As a means of improving the return on capital employed, two suggestions have been
made: (i)
To offer special two-night holidays at a reduced price of Rs.25 per night. It is expected
that those accepting the offer would spend an amount equal to 40% of the accommodation
charge in the restaurant, and 20% in the bar. Assume that the same PVR is maintained.
(ii)
To increase prices. Management is confident that there will be no drop in volume of sales
if restaurant prices are increased by 10% and bar prices by 5%. Accommodation prices would
also need to be increased.
You are required:
(a) To calculate the budgeted return on capital employed before tax; (b) To calculate
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KALPESH CLASSES
(i)
How many two-night holidays would need to be sold each week in the three off-peak
quarters to improve the return on capital employed (ROCE) by a further 4% above the
percentage calculated in (a) above;
(ii)
By what percentage the prices of accommodation would need to be increased to achieve
the desired increase in ROCE shown in (b) (i) above;
Question: 50

Break even charts
A company produces a single article and sells at Rs.10 each. The marginal cost of
production is Rs.6 each and total fixed cost of the concern is Rs.400 per annum.
(i) Construct a break-even chart and show: -
(a) Break-even point;
(b) Margin of safety at sales Rs.1, 500;
(c) Angle of incidence;
(ii) Construct contribution chart & Profit chart.

Page Number : 30

CHAPTER

KALPESH CLASSES


RELEVANT COSTING
Page Number : 31
KALPESH CLASSES
Question: 1

Relevant cost of materials

X Ltd. has been approached by a customer who would like a special job to be done for
him and is willing to pay Rs. 22,000 for it. The job would require the following materials
Material
Total
Units
Book value of

Realisable

Replacement
units
already in
units in stock
value
cost Rs./unit
required
stock
Rs./unit
Rs./unit
A
1,000
0
-
-
6
B
1,000
600
2
2.5
5
C
1,000
700
3
2.5
4
D
200
200
4
6
9
a) Material B is used regularly by X Ltd. and if stocks were required for this job they
would need to be replaced to meet other production demand.
b) Materials C and D are in stock as the result of previous excess purchase and they have
a restricted use. No other use could be found for material C but material D cold be used in
another job as substitute for 300 units of Material E, which currently cost Rs. 5 per unit (of
which the company has no units in stock at the moment).
What are the relevant costs of material, in deciding whether or not to accept the contract?
Assume all other expenses on this contract to be specially incurred beside the relevant
cost of material are Rs.550.
Question: 2

Relevant cost of labour
Ram Ltd is evaluating the feasibility of a contract requiring supply of 1000 units of
component ZED. The labour specification for this contract is as follows: Type of labour Hours
per unit Rate per hour
Remarks
Skilled labour
4
5
#Difficult to recruit.
#Paid on time -guaranteed basis.
Unskilled labour
6
3
#To be specifically hired for this contract.
Ascertain the relevant cost of labour for this contract.
Question: 3

Opportunity cost of labour
A Ltd is at present carrying out a research project, which requires spending of Rs 40000
towards skilled labour. They are highly skilled and it is difficult to replace them. They are paid
on time guaranteed basis. Had they not been employed in this project, they could have been used
in some other productive job fetching revenue of Rs 150000 to the company. For this job, the
company has to incur a prime cost of Rs 100000.
Ascertain the relevant labour cost for this research project.
Question: 4

Relevance of temporary workers wages
XYZ Ltd received an order to produce 10000 units of a Component named super-X. It
requires 5
hours of skilled labour. The company already has in its roll an employee possessing the
necessary skills, who is currently paid Rs 5 per hour on time guaranteed basis. At present he is
busy with an urgent job, which would be affected on undertaking this order. To get this job
continued the company has to hire a temporary employee who will be paid at Rs 4 per hour.
Ascertain the relevant labour cost for producing the component super-X.

Question: 5

Cost savings due to deployment of labour

A Ltd is in construction business, which also carries out painting and maintenance work
during severe, winter not being conduciv e for construction activities. At present the company is
evaluating the viability of a proposal to build a housing complex, for which it has to employ
contract basis a team of highly skilled craftsmen. The compensation for this team works out to
Page Number : 32
KALPESH CLASSES
Rs 300000. Though a period of 9 months is sufficient for completion of the contract, due
to spells of bad weather it is estimated to be over in a years time. During winter, this team could
be used for painting and maintenance work already undertaken by the company, which otherwise
would required to be subcontracted to outsiders. For this, the company has received quotations
from two jobbing builders, one for Rs 50000 and another for Rs 40000. This painting and
maintenance work, which if done by the company requires spending on material Rs 10000.
Ascertain the relevant labour cost for building the housing complex.
Question: 6

Relevance of overheads
ABC Ltd receives an offer for producing 1000 units of components used in manufacture
of aircraft. For manufacturing each and every unit 4 machine hours are required. The company
absorbs overheads on the basis of machine hours. Currently, the machine hour rate is Rs 20 per
hour, of which Rs 7 is variable and Rs 13 is fixed. If the contract is accepted, the company will
additionally incur a fixed overhead of Rs 3200. Ascertain the relevant overhead cost for this
contract.

Question: 7

Continue or abandon project
A research project, which to date has cost the company Rs.1, 50,000, is under review. It
is anticipated that should the project be allowed to proceed, it will be completed in
approximately one year when the results would be sold to a government agency for Rs.3, 00,000.
Shown below are the additional expenses, which the managing director estimates will be
necessary to complete the work.
Materials - Rs.60, 000.
This material, which has just been received, is extremely toxic and if not used on the
project would have to be disposed of by special means, at cost of Rs.5,000.
Labour - Rs.40, 000.
The men are highly skilled and very difficult to recruit. They were transferred to the
project from a production department and, at a recent board meeting, the works director claimed
that if the men were returned to him he could earn the company each year Rs.1, 50,000 extra
sales. The accountant calculated that the prime cost of those sales would be Rs.1, 00,000 and the
overhead absorbed (all fixed) would amount to Rs.20, 000.
Research staff - Rs.60, 000.
A decision has already been taken that this will be the last major piece of research
undertaken, and consequently when work on the project ceases the staff involved will be made
redundant.
Redundancy and severance pay have been estimated at Rs.25, 000.
Share of general building services - Rs.35, 000.
The managing director is not very sure what is included in this expense. He knows,
however, that the accounts staff charges similar amounts every year to each department.
Required:
Assuming the estimates are accurate, advice the managing director whether the project
should be allowed to proceed. You must carefully and clearly explain the reasons for your
treatment of each expense item.
Question: 8

Accept or reject contract
JB Limited is a small specialist manufacturer of electronic components and the makers
of aircraft for both civil and military purposes use much of its output. One of the few aircraft
manufactures has offered a contract to JB Limited for the supply, over the next twelve months, of
400 identical components.
The data relating to the production of each component is as follows: (i)
Material requirements:
3 kg material M1 see note 1 below
2 kg material P2 see note 2 below
1 Part No. 678 see note 3 below
Note 1. Material M1 is in continuous use by the company. 1000 kg are currently held in
stock at a book value of Rs.4.70 per kg but it is shown that future purchases will cost Rs.5.50 per
kg.
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KALPESH CLASSES
Note 2. 1,200 kg of material P2 are held in stock. The original cost of this material was
Rs.4.30
per kg but as the material has not been required for the last two years it has been written
down to Rs.1.50 per kg scrap value. The only foreseeable alternative use is as a substitute for
material P4 (in current use) but this would involve further processing costs of Rs.1.60 per kg.
The current cost of material P4 is Rs.3.60 per kg.
Note 3. It is estimated that the Park No. 678 could be bought for Rs.50 each.
(ii)
Labour requirements: Each component would require five hours of skilled labour and five
hours of semi-skilled. An employee possessing the necessary skills is available and is current ly
paid Rs.5 per hour. A replacement would, however, have to be obtained at a rate of Rs.4 per hour
for the work, which would otherwise be done by the skilled employee. The current rate for
semi-skilled work is Rs.3 per hour and an additional employee could be appointed for this work.
(iii)
Overhead: JB Limited absorbs overhead by a machine hour rate, currently Rs.20 per hour
of which Rs.7 is for variable overhead and Rs.13 for fixed overhead. If this contract is
undertaken it is estimated that fixed costs will increase for the duration of the contract by Rs.3,
200. Spare machine capacity is available and each component would require four machine hours.
You are required to:
State whether or not the contract should be accepted and support your conclusion with
appropriate figures for presentation to management.
Question: 9

Accept or reject contract

The Arya Ltd has been offered a contract that, if accepted, would significantly increase
next years activity levels. The contract required the production of 20,000 kg of Product X and
specifies a contract price of Rs.100 per kg. The resources used in the production of each kg of X
include the following:
Cost item
Resources per kg of X
Labour

Grade 1
2 hours
Grade 2
6 hours
Materials

A
2 units
B
1 litre

Grade 1 labour is highly skilled and, although it is currently under-utilized in the firm, it
is Arya Ltds policy to continue to pay grade 1 labour in full. Acceptance of the contract would
reduce the idle time of grade 1 labour. Idle time payments are treated as non-production
overheads.
Grade 2 is unskilled labour with a high turnover, and is considered a variable cost.
The costs to Arya of each type of labour are

Grade 1 Rs.4 per hour
Grade 2 Rs.2 per hour
The material required to fulfill the contract would be drawn from those materials already
in stock. Material A is widely used within the firm, and any usage for this contract will
necessitate replacement. Material B was purchased to fulfill an expected order that was not
received; if material B is not used for the contract, it will be sold. For accounting purposes FIFO
is used. The various values and costs for A and B are:


A per unit (Rs.) B per litre (Rs.)
Book value

8

30
Replacement cost
10
32
Net realizable value
9
25
A single recovery rate for fixed factory overheads is used throughout the firm, even
though some fixed production overheads could be attributed to single products or departments.
The overhead is recovered per productive labor hour, initial estimates of next years activity
which exc ludes the Page Number : 34
KALPESH CLASSES
current contract, show fixed production overhead Rs. 6,00,000 and productive labour
hours of 3,00,000. Acceptance of the contract would increase fixed production overheads by
Rs.2, 28,000.
Variable production overheads are accurately estimated at Rs.3 per productive labour
hour.
Acceptance of the contract would be expected to encroach on the sales and production of
another product Y, which is also made by Arya Ltd. It is estimated that sales of Y would then
decrease by 5,000 units in the next year only. However, this forecast reduction in sales of Y
would enable attributable fixed factory overheads of Rs.58, 000 to be avoided.
Information on Y
is as follows:

Per unit
Sales price
Rs.70
Labour: Grade 2
4 hours
Materials: relevant variable costs
Rs.12
Required:
Advise Arya on the desirability of the contract.
Question: 10

Minimum short-run pricing
Vishwakarma is a builder. His business will have spare capacity over the coming six
months and he has been investigating two projects.
Project A
Vishwakarma is tendering for a school extension contract. Normally he prices a contract
by adding 100% to direct costs, to cover overheads and profit. He calculates direct costs as the
actual cost of materials valued on a first-in-first-out basis, plus the estimated wages of direct
labour. But for this contract he has prepared more detailed information.
Four types of material will be needed:
Material
Quantity (units):
Price per unit: (in Rs.)

Needed for
Already in
Purchase price
Current
Current
contract
stock
of units in stock purchase price resale price
Z
1,100
100
7.00
10.00
8.00
Y
150
200
40.00
44.00
38.00
X
600
300
35.00
33.00
25.00
W
200
400
20.00
21.00
10.00

Z and Y are in regular use. Neither X nor W is currently used; X has no foreseeable use
in the business, but W could be used on other jobs in place of material currently costing Rs.16
per unit.
The contract will last for six months and requires two craftsmen, whose basic annual
wage cost is Rs.16, 000 each. To complete the contract in time it will also be necessary to pay
them a bonus of Rs.700 each. Without the contract they would be retained at their normal pay
rate, doing work, which will otherwise be done by temporary workers, engaged for the contract
period at a total cost of Rs.11, 800.
Three causal labourers would also be employed specifically for the contract at a cost of
Rs.4, 000
each.
The contract will require two types of equipment: general- purpose equipment already
owned by Vishwakarma, which will be retained at the end of the contract, and specialized
equipment to be purchased second-hand, which will be sold at the end of the contract.
The general-purpose equipment cost Rs.21, 000 two years ago and is being depreciated
on a straight-line basis over a seven-year life (with assumed zero scrap value). Equivalent new
equipment can be purchased currently for Rs.49, 000. Second-hand prices for comparable
general-purpose equipment, and those for the relevant specialized equipment, are shown below.


Page Number : 35
KALPESH CLASSES


General purpose equipment
Specialized equipment

Purchase price Resale price Purchase price Resale price (Rs.)
(Rs.)
(Rs.)
(Rs.)
Current
20,000
17,200
9,000
7,400
After 6 months:




If used for 6 months
15,000
12,600
7,000
5,800
If not used
19,000
16,400
8,000
6,500
The contract will require the use of a yard on which Vishwakarma has a four-year lease at
a fixed rental of Rs.2, 000 per year. If Vishwakarma does not get the contract the yard will
probably remain empty. The contract will also incur administrative expenses estimated at Rs.5,
000.

Project B
If Vishwakarma does not get the contract he will buy a building plot for Rs.20, 000 and
build a house. Building costs will depend on weather conditions:
Weather condition
A
B
C
Probability
0.4
0.4
0.2
Building costs (excluding land) Rs.60, 000 Rs.80, 000 Rs.95, 000
Similarly the price obtained for the house will depend on market conditions: Market
condition
D
E
Probability
0.7
0.3
Sale price (net of selling expenses) Rs.1, 00,000 Rs.1, 20,000
Vishwakarma does not have the resources to undertake both projects. The costs of his
supervision time can be ignored.
Requirements:
(a) Ignoring the possibility of undertaking project B, calculate: (i)
The price at which Vishwakarma would tender for the school extension contract if he
used his normal pricing method, and
(ii)
The tender price at which you consider Vishwakarma would neither gain nor lose by
taking the contract.
(b) Explain, with supporting calculations, how the availability of project B should affect
Vishwakarmas tender for the school extension contract.
Question: 11

Limiting factor and relevant costing
Following a fire at the factory of Elgar Ltd, the management team met to review the
proposed operations for the next quarter. The fire had destroyed all the finished goods stock,
some of the raw materials and about half of the machines in the forming shop.
At the meeting of the management team the following additional information was
provided.
(i) Only 27,000 machine hours of forming capacity will be available in the forthcoming
quarter.
Although previously it was thought that sales demand would be the only binding
limitation on production it has now become apparent that for the forthcoming quarter the forming
capacity would be a limiting factor.
(ii) It will take about three months to reinstate the forming shop to its previous
operational capacity. Hence the restriction on forming capacity is for the next quarter only.
(iii)
Some details of the product range manufactured by Elgar are provided in the following
table:
Product
A
B
C
D
E
Sales price (Rs.)
50
60
40
50
80
Units of special material required for production:





W or X
2
2
2
1
3
Y
-
-
-
-
6
Z
1
2
1
1
-
Other direct material costs (Rs.)
6
12
6
5
13
Other variable production costs (Rs.)
8
4
8
4
4
Fixed production costs (based on standard costs) (Rs.)
6
3
6
3
3
Forming hours required
5
6
2
10
6
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(iv) The forecasts of demand, in units, for the forthcoming quarter are:

Product Product Product Product Product

A
B
C
D
E
Units demanded
2,000
2,000
4,000
3,000
4,000
It was originally intended that the number of units produced would equal the units
demanded for each product.
(v)
Due to a purchasing error there is an excess of material W in stock. This has a book value
of Rs.6 per unit, which is also its current replacement cost. This could be sold to realize Rs.4 per
unit after sales and transport costs. Material X could be used instead of material W; material X is
not in stock and has a current replacement cost of Rs.5 per unit.
(vi)
Material Y was in stock at a book value of Rs.2 per unit, which is it s normal cost if
ordered 3 months in advance, but the stocks of this material were entirely destroyed by the fire.
In order to obtain the material quickly a price of Rs.3 per unit will have to be paid for the
first 3000 units obtained in the quarter and any additional units required will cost Rs.6 per unit.
These special prices will apply only to this quarters purchases.
(vii) The fire destroyed some of the stock of material Z. The remaining stocks of 2,000
units have a book value of Rs.7 per unit. The replaceme nt price for Z is currently Rs.8 per unit.
(viii) As a result of the fire it is estimated that the fixed production costs will be Rs.42,
000 for the next quarter and the administration and office overheads will amount to Rs.11, 500.
(ix)
The demand figures shown in note (iv) include a regular order from a single customer for
3,000 units of C, and
3,000 units of E.
This order is usually placed quarterly and the customer always specifies that the order be
fulfilled in total or not at all.
Required:
(a) Ignoring the informa tion contained in note (ix) for this section of the question,
determine the optimum production plan for the forthcoming quarter and the resulting profit.
(b) Prepare a statement, which clearly shows the management of the company the
financial consequences of both acceptance and rejection of the order mentioned in note (ix).

Question: 12

Launching of new product using spare capacity.

Ram Ltd has spare capacity in two of its manufacturing departments Department 4 and
Department 5. A five-day week of 40 hours is worked but there is only enough internal work for
three days per week so that two days per week (16 hours) could be available in each department.
In recent months Ram Ltd has sold this time to another manufacturer but there is some concern
about the profitability of this work.
The accountant has prepared a table giving the hourly operating costs in each department.
The summarized figures are as follows:

Department 4
Department 5

(Rs.)
(Rs.)
Power costs
40
60
Labour costs
40
20
Overhead costs
40
40

120
120
The labour force is paid on a time basis and there is no change in the weekly wage bill
whether or not the plant is working at full capacity. The overhead figures are taken from the
firms current overhead absorption rates. These rates are designed to absorb all budgeted
overhead (fixed and variable) when the departments are operating at 90% of full capacity
(assume a 50
week year). The budgeted fixed overhead attributed to Department 4 is Rs.36, 000 p.a.
and that for Department 5 is Rs.50, 400 p.a.
As a short term expedient the company has been selling processing time to another
manufacturer who has been paying Rs.70 per hour for time in either department. This customer
is very willing to continue this arrangement and to purchase any spare time available but Ram
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Ltd is considering the introduction of a new product on a minor scale to absorb the spare
capacity.
Each unit of the new product would require 45 minutes in Department 4 and 20 minutes
in Department 5. The variable cost of the required input material is Rs.10 per unit. It is
considered that:

With a selling price of Rs.100 the demand would be 1,500 units p.a.;

With a selling price of Rs.110 the demand would be 1,000 units p.a.; and

With a selling price of Rs.120 the demand would be 500 units p.a.
You are required to calculate the best weekly programme for the slack time in the two
manufacturing departments and to determine the best price to charge for the new product.
Question: 13

Allow strike or not

(a) A company manufacturing agricultural machinery is faced with the possibility of a
strike by its direct production workers engaged on the assembly of one of its machine.
The trade union is demanding an increase of 7% back-dated to the beginning of its
financial year and the company expect that if a strike does take place, it will last four weeks after
which the union will settle for an increase of 5% similarly back-dated.
The machine whose production would be affected by the strike is sold to distributors at a
discount of 20% from the current recommend-selling price of Rs.3, 000.
Estimated costs for the machines are:

Fixed per
Variable per
year
machine

Rs.
Rs.
Production
16,000
1,800
Distribution
1,000
100
Direct labour costs comprise 40% of the variable production costs.
The budget ed output is 27,500 machines in 50 working weeks per year.
If the strike takes the company expects the following events:
-
Maintenance staff, whose wages are included in the fixed production costs, would be
used to carry out an overhaul of the conveyor system using Rs.25, 000 worth of material. An
outside contractor at a cost of Rs.1, 00,000 including materials, would otherwise undertake this
overhaul.
-
Sales of 650 machines would be lost to competition. The balance that would ordinarily
have been produced during the strike period could, however, be sold, but these machines would
have to be made up in overtime working which would be at an efficiency rate of 90% of normal.
This would entail additional fixed costs of Rs.10, 000
and wage payments at time and one-half.
-

You are required to
State, with explanations and full supporting data, whether from a purely economic point
of view you would advise the management to allow the strike to go ahead, rather than agree to
the unions demand.
(b) Assume that the strike goes ahead, and that it lasts three weeks, after which agreement
is reached between the company and the union for a 6% pay increase backdated to 1st January.
Assume also that the anticipated loss of sales to competitors of 650 machines occurs and
overtime working makes up the balance.
A newspaper reports that the cost of the strike to the company was Rs.5 million. The
trade union counters this claim by insisting that the company, to its benefit, contrived the strike,
as the machines were selling at a loss.
You are required to
(i) Comment on the statements made by the press and the trade union; (ii) State, with
supporting calculations, whether the company was justified in using overtime working to
produce the balance of machines saleable but not produced during the strike.

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Question: 14

Effect of strike

Supreme Auto Ltd suffered a strike by production labour that lasted for two weeks.
During that period, no cars were produced. The company issued a statement to the press that the
cost of the strike was Rs.50 crores this figures was estimated on the basis of lost production of
1000
vehicles of an average price of Rs.5 lakhs each. The companys accountant feels that this
figure is released in a hurry and overstates the cost of the strike.
He produces the following statement to support his views:

Rs. in lakhs
Materials (Rs.1 lakh per car)
1,000
Production Labour (Rs.0.50 lakh per car)
500
Depreciation of machinery
1,750
Overhead (200% of production labour)
1,000
Total expenses avoided
4,250
Loss of revenue
5,000
Cost of strike
750
The following additional information is available
(a) Depreciation of machines is based on the straight-line method of calculation.
However, the plant manager estimates that the machines will fall in value by Rs.125 lakhs per
week regardless of the level of production. He feels that in addition, its value will fall by Rs.150
lakhs for every 100 cars that are produced.
(b) Overhead expenses are recorded at the rate of 200% on production labour. Most of the
overhead expenses are unaffected by the level of production; for example, rent, rates,
maintenance and staff wages. But some such as power and lighting vary directly with production.
The general manager estimates that the later type of overhead expenses amount to Rs.10 lakhs
for every 100 cars produced.
(c) During the period of the strike, the maintenance staff, whose wages are included in
the fixed overhead expenses, carried out a major overhaul on some of the machines using
material costing Rs.10 lakhs. This overhaul would normally have been performed by an outside
contractor at a price (including materials) of Rs.100 lakhs.
(d) The sales manager feels that about 50% of the production lost could be made up and
sold in the next month by the production labour working overtime. Labour is paid at the rate of
time and half for overtime working.
You are requested to advise a major shareholder who doubts the validity of both and
press statement and the accountants statement as to the true cost of the strike.
Question: 15

Relevant costing and uncertainty
W Ltd. is to produce new products in Short-term Venture which will utilize some
obsolete materials and expected spare capacity. The new product will be advertised in Quarter I
with production and sales taking place in Quarter II. No further production or sales are
anticipated.
Sales volumes are uncertain but will, to some extent, be a function of sales price. The
possible sales volumes and the advertising costs associated with each potential sales price are
follows: Sales price
Sales price
Sales price
Rs.20 per unit
Rs.25 per unit
Rs.40 per unit
Sales

Sales

Sales

Volume

Probability

Volume

Probability

Volume

Probability

(units000s)
(units000s)
(units 000s)
4
0.1
2
0.1
0
0.2
6
0.4
5
0.2
3
0.5
8
0.5
6
0.2
10
0.2
-
-
8
0.5
15
0.1
Advertising
Rs.20,000

Rs.50,000
Rs.1,00,000
cost

The resources use in the production of each unit of the product are Page Number : 39
KALPESH CLASSES

Production
: Grade I 2 Hours

: Grade II 1 Hours
Materials
X 1 units

Y 2 units

The normal cost per hour of labour is

Grade I Rs.2
Grade II Rs.3
However, before considering the effect of the current venture there is expected to be
4,000
hours of idle time for each grade of labour in Quarter II. Idle time is paid at the normal
rates.
Material X is in stock at a book value of Rs.8 per unit is widely used within the firm and
any usage for the purposes of this venture will require replacing. Replacement cost in Rs.9 per
unit.
Material Y is obsolete stock. There are 16,000 units in stock at a book value of Rs.3.50
per unit any stock not used will have to be disposed of a cost, to W. Ltd. of Rs.2 per unit. Further
quantities of Y can be purchased for Rs.4 per unit.
Overhead recovery rates are:
Variable Overhead Rs.2 per direct labour hour worked. Fixed Overhead Rs.3 per direct
labour hour worked. Total fixed overheads not alter as a result of the current venture.
Feedback from advertising will enable the extract demand to be determined at the end of
Quarter I and production in Quarter II and production in Quarter if will be set to equal that
demand. However it is necessary to decide now on the sales price in order that it can be
incorporated into the advertising campaign.
Required:
(a) Calculate the expected money value of the venture at each sales price and on the basis
of this advice W Ltd. of its best Course of action.
(b) Briefly explain why the management of w. Ltd. might rationally reject the sales price
leading to the highest expected money value and prefer one of the other sales prices.
Question: 16

Joint products and relevant costing
A Company processes a raw material into five products. In Process 1, products AXE and
BXE are produced in 1 : 1 ratio. Product AXE then passes on to Process 2 where it is processed
into CXE
and DXE. Product BXE is used in Process 3 to produce the product EXE.
Product AXE yields products CXE and DXE in the ratio of 7 : 3. CXE is processed
further in Process 4 after which it is sold for Rs.18 per unit. DXE may be sold immediately at
Rs.14.40 per unit or it may be processed further in Process 5 after which it can be sold for
Rs.20.80 per unit.
EXE is processed in Process 6 where normal spoilage of 5% occurs. The spoiled units are
disposed of at a price of Rs.2 per unit. EXE sells at Rs.15.20 per unit.
The costs incurred during a period are as under:

Process Output Units
Costs Rs.
1
1,00,000
5,41,500
2
50,000
1,50,000
3
50,000
1,08,000
4
35,000
1,30,000
5
15,000
1,00,000
6
47,500
97,000
The output of Process 6 represents good units. The process costs are variable costs.
Required:
(i)
Prepare a statement showing the apportionment of joint costs to Products AXE and BXE
and Products CXE and DXE.
(ii)
State with supporting calculations whether the Product DXE should be processed in
Process 5 or not.
(iii)
Prepare a statement of profit for the period based on your decision at (ii) above.
Page Number : 40
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CHAPTER



TRANSFER PRICING

Objectives
a) Goal congruence.
b) Reasonable performance measurement
c) Divisional authority


Intermediate

product



No perfect competitive
Has perfect

market

market
Optimum transfer price = external
market price of the intermediate
Capacity
Capacity constraints

constraints exists
doesnt exists
product selling cost avoided due
to internal transfer.


Optimum transfer
Optimum transfer price =

= Marginal cost +
Marginal cost at the optimum

opp. Cost (i.e.
output level.

contribution lost)

Note: Optimum output level means output level at which the marginal cost of the
supplying division equals the net marginal revenue of the receiving division.

Page Number : 41
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Question: 1

Transfer pricing conflicts

A Company with two manufacturing divisions is organised on profit centre basis.
Division A is the only source for the supply of a component that is used in Division B in the
manufacture of a product KLIM. One such part is used in each unit of the product KLIM. As the
demand for the product is not steady, Division B can obtain order in increased quantities only by
spending more on sales promotion and by reducing the selling prices. The Manager of Division
B has accordingly prepared the following forecast of sales quantities and selling prices.

Sales in units per day
Average selling price per unit of klim
Rs.
1,000
5.25
2,000
3.98
3,000
3.30
4,000
2.78
5,000
2.40
6,000
2.01
The manufacturing cost of KLIM in Division B is Rs.3, 750 for first 1000 units and
Rs.750 per 1000 units in excess of 1000 units. Division A incurs a total cost of Rs.1, 500 per day
for an output upto 1000 components and the total cost s will increase by Rs.900 per day for every
additional 1000 components manufactured.
The manager of Division A states that the operating results of his division will be
optimized if the transfer price of Component is set at Rs.1.20 per unit and he has accordingly set
the aforesaid transfer price for his supplies of the component to Division B.
Required:
a)
Prepare a schedule showing the profitability at each level of output of Division A and
Division B.
b)
Find the Profitability of the Company as a whole at the output level at which I
Division As net profit is maximum.
II
Division Bs net profit is maximum.
c)
If the Company is not organised on profit centre basis, what level of output will be
chosen to yield the maximum profit.
Question: 2

Transfer pricing conflicts
A Company has two divisions. South division manufactures an intermediate product for
which there is no immediate external market. North division incorporates this intermediate
product into a final product, which it sells. One unit of the intermediate product is used in the
production of the final product. The expected units of the final product, which North division
estimates it can sell at various selling prices, are as follows:

Net selling
Quantity sold
price
(Rs.)
(Units)
100
1,000
90
2,000
80
3,000
70
4,000
60
5,000
50
6,000
The costs of each division are as follows:


South Division North Division

(Rs.)
(Rs.)
Variable cost per unit
11
7
Fixed costs per annum
60,000
90,000
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The transfer price is Rs. 35 for the intermediate products, and is determined on a full
cost-plus basis.
You are required to:
(a) Prepare profit statements for each division and the company as a whole for the various
selling prices.
(b) State which selling price maximizes the profit of North division and the company as a
whole, and comment on why the latter selling price is not selected by North division.
(c) State which transfer pricing policy will maximize the companys profit under a
divisional organization. Assume that there is no capacity constraint.
(d) State the implicat ions of transfer pricing policy in (c) above on south divisions
profitability.
Question: 3

Goal congruence in transfer pricing

Division A of a large divisionalized organization manufactures a single standardized
product.
Some of the output is sold ext ernally whilst the remainder is transferred to Division B
where it is a sub-assembly in the manufacture of that divisions product. The unit costs of
Division As product are as follows:


(Rs.)
Direct material
4
Direct labour
2
Direct expense
2
Variable manufacturing overheads
2
Fixed manufacturing overheads
4
Selling and packing expense variable
1

15
Annually 10,000 units of the product are sold externally at the standard price of Rs.30.
In addition to the external sales, 5,000 units are transferred annually to Division B at an
internal transfer charge of Rs.29 per unit. This transfer price is obtained by deducting variable
selling and packing expense from the external price since this expense is not incurred for internal
transfers.
Division B incorporates the transferred-in goods into a more advanced product. The unit
costs of this product are as follows:


(Rs.)
Transferred-in term (from Division A)
29
Direct material and components
23
Direct labour
3
Variable overheads
12
Fixed overheads
12
Selling and packing expense variable
1

80

Division Bs manager disagrees with the basis used to set the transfer price. He argues
that the transfers should be made at variable cost plus an agreed (minimal) mark-up since he
claims that his division is taking output that Division A would be unable to sell at the price of
Rs.30.
Partly because of this disagreement, the companys sales director has recently made a
study of the relationship between selling price and demand for each division. The resulting report
contains the following table:
Customer demand at various selling prices:

Division A
Selling price
Rs.20
Rs.30
Rs.40
Demand
15,000
10,000
5,000
Division B
Selling price
Rs.80
Rs.90
100
Demand
7,200
5,000
2,800
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The manager of Division B claims that this study supports his case. He suggests that a
transfer price of Rs.12 would give Division A a reasonable contribution to its fixed overheads
while allowing Division B to earn a reasonable profit. He also believes that it would lead to an
increase of output and an improvement in the overall level of company profits.
You are required:
(a) To calculated the effect that the transfer pricing system has had on the companys
profits, and
(b) To establish the likely effect on profit of adopting the suggestion by the manager of
Division B of a transfer price of Rs.12.
Question: 4

Conflict resolution
A and B are two manufacturing divisions of C Ltd. Both of these divisions make a
single standardized product; A makes product I and B makes product J. Every unit of J requires
one unit of I. The required input of I is normally purchased from division A but sometimes it is
purchased from an outside source.
The following table gives details of selling price and cost for each product:


Product I
Product J

(Rs.)
(Rs.)
Established selling price
30
50
Variable costs


Direct material
8
5
Transfers from A
-
30
Direct labour
5
3
Variable overhead
2
2

15
40
Divisional fixed cost (per annum)
Rs.5, 00,000
Rs.2, 25,000
Annual outside demand with current selling prices (units)
1,00,000
25,000
Capacity of plant (units)
1,30,000
30,000
Investment in division
Rs.66, 25,000
Rs.12, 50,000
Division B is currently achieving a rate of return well below the target set by the central
office.
Its manager blames this situation on the high transfer price of product I. Division A
charges division B for the transfers of I at the outside supply price of Rs.30. The manager of
division A claims that this is appropriate since this is the price determined by market forces.
The manager of B has consistently argued that intra group transfers should be charged at a lower
price based on the costs of the producing division plus a reasonable mark-up.
The board of C Ltd is concerned about Bs low rate of return and the divisional manager
has been asked to submit proposals for improving the situation. The board has now received a
report from Bs manager in which he asks the board to intervene to reduce the transfer price
charged for product I. The manager of B also informs the board that he is considering the
possibility of opening a branch office in rented premises in a nearby town, which should enlarge
the market for product J by 5,000 units per year at the existing price. He estimates that the branch
office establishment costs would be Rs.50, 000 per annum.
Advise the management as to how the above transfer pricing conflict could be resolved.
Also compute the ROCE of both the divisions before and after the implementation of your
recommendation. Also evaluate the proposal for opening of the new branch.
Question: 5

Make or buy decision- Group company reaction
Companies RP, RR, RS and RT are members of a group. RP wishes to buy an electronic
control system for its factory and, in accordance with group policy, must obtain quotations from
companies inside and outside of the group.
From outside of the group the following quotations are received: Company A quoted
Rs.33,200.
Company B quoted Rs.35,000 but would buy a special unit from RS for Rs.13,000. To
make this unit, however, RS would need to buy parts from RR at a price of Rs.7,500.The inside
quotation Page Number : 44
KALPESH CLASSES
was from RS whose price was Rs.48,000. This would require RS buying parts from RR at
a price of Rs.8,000 and units from RT at a price of Rs.30,000. However, RT would need to buy
parts from RR at a price of Rs.11,000.
Additional data are as follows:
(1) RR is extremely busy with work outside the group and has quoted current market
prices for all its products.
(2) RS costs for the RP contract, including purchases from RR and RT, total Rs.42,000.
For the Company B contract it expects a profit of 25% on the cost of its own work.
(3) RT prices provide for a 20% profit margin on total costs.
(4) The variable costs of the group companies in respect of the work under consideration
are: RR: 20% of selling price.
RS: 70% of own cost (excluding purchases from other group companies) RT: 65% of
own cost (excluding purchases from other group companies).
You are required, from a group point of view, to recommend, with appropriate
calculations, whether the contract should be placed with RS or Company A or Company B.
Question: 6

Apportionment of companys profit
AB LIMITED, which buys and sells machinery, has three departments: New
machines (manager, Newman)
Second-hand machines (manager, Handley)
Repair workshops (manager, Walker)
In selling new machines Newman is often asked to accept an old machine in part
exchange. In such cases the old machine is disposed of by Handley. The workshops do work
both for outside customers and also for the other two departments. Walker charges his outside
customers for materials at cost and for labour time at Rs.8 per hour. This Rs.8 is made up as
follows: Per hour

(Rs.)
Fixed costs
2.00 (10,000 budgeted hours per annum)
Variable costs
4.50
Profit
1.50

Rs.8.00
AB Limited wishes to go over to a profit centre basis of calculations so as to be able to
reward its three managers according to their results. It wishes to assess the situation in the
context of the following transaction:
Newman sold to PQ Limited a new machine at list price of Rs.16, 000, the cost of which
to AB
Limited was Rs.12, 000. To make the sale, however, Newman had to allow PQ Limited
Rs.5, 000
for its old machine in part exchange.
PQ Limiteds old machine was in need of repair before it could be re-sold and Newman
and Handley were agreed in their estimate of those repairs as Rs.50 in materials and 100 hours of
workshops labour time. That estimate was proved to be correct when the workshops undertook
the repair. At the time of taking PQ Limiteds machine in part exchange Handley would have
been able to buy a similar machine from other dealers for Rs.3, 700 without the need for any
repair. When the machine had been repaired he sold it to ST Limited for Rs.4, 200.
You are required to:
(a) Show how you would calculate to profit contribution for each of the three departments
from the above transaction.
(b) Re-calculate the profit contribution for each department if there were the following
alternative changes of circumstances:
1) When the workshops came to repair the old machine they found that they required an
extra 50 hours of labour time because of a fault not previously noticed.
2) Before deciding on the figure he would allow PQ Limited for their old machine,
Newman asks Walker to estimate the cost of repairs. This estimates is Rs.50 in materials and 100
hours of workshops labour time. When, however, workshops came to repair the old
machine, it took them 50% longer than estimated.
Page Number : 45
KALPESH CLASSES
Question: 7

Scarce capacity and shadow price
Black and Brown are two divisions in a group of companies and both require
intermediate products Alpha and Beta which are available from divisions A and B respectively.
Black and Brown divisions convert the intermediate products into products Blackalls and
Brownalls respectively. The market demand for Blackalls and Brownalls considerably exceeds
the production possible, because of the limited availability of intermediate products Alpha and
Beta.
No external market exists for Alpha and Beta and no other intermediate product market is
available to Black and Brown divisions.
Other data are as follows:
Black division
Blackalls:
Selling price per unit Rs.45

Processing cost per unit Rs.12

Intermediate products required per unit:

Alpha: 3 units

Beta: 2 units
Brown division
Brownalls:
Selling price per unit Rs.54

Processing cost per unit Rs.14

Intermediate products required per unit:

Alpha: 2 units

Beta: 4 units
A division
Alpha
Variable cost per unit Rs.6

Maximum production capacity 1,200 units
B division
Beta:
Variable cost per unit Rs.4

Maximum production capacity 1,600 units
The solution to a linear programming model of the situation shows that the imputed
scarcity value (shadow price) of Alpha and Beta is Rs.0.50 and Rs.2.75 per unit respectively and
indicates that the intermediate products be transferred such that 200 units of Blackalls and 300
units of Brownalls are produced and sold.
Required:
(a) Calculate the contribution earned by the group if the sales pattern indicated by the
linear programming model is implemented.
(b) Where the transfer prices are set on the basis of variable cost plus shadow price, show
detailed calculations for
(i)
The contribution per unit of intermediate product earned by divisions A and B and (ii)
The contribution per unit of final product earned by Black and Brown divisions.
(c) Comment on the results derived in (b) and on the possible attitude of management of
the various divisions to the proposed transfer pricing and product deployment policy.
(d) In the following year the capacities of divisions A and B have each doubled and the
following changes have taken place:
(1)
Alpha: There is still no external market for this product, but A division has a large
demand for other products which could use the capacity and earn a contribution of 5% over cost.
Variable cost per unit for the other products would be the same as for Alpha and such products
would use the capacity at the same rate as Alpha.
(2)
Beta: An intermediate market for this product now exists and Beta can be bought and
sold in unlimited amounts at Rs.7.50 per unit. External sales of Beta would incur additional
transport costs of Rs.0.50 per unit, which are not incurred in interdivisional transfers.
The market demand for Blackalls and Brownalls will still exceed the production
availability of Alpha and Beta.
Page Number : 46
KALPESH CLASSES
(i)
Calculate the transfer prices at which Alpha and Beta should now be offered to Black and
Brown divisions in order that the transfer policy implemented will lead to the maximization of
group profit.
(ii) Determine the production and sales pattern for Alpha, Beta, Blackalls and Brownalls,
which will now maximize group contribution and calculate the group contribution thus achieved.
It may be assumed that divisions will make decisions consistent with the financial data available.
Question: 8

Sensitivity analysis vis--vis transfer pricing
An industrial group of companies includes two divisions: A and B. the output of Division
A is product A, two units of which are used by Division B for every one of its product B.
Division B
has first call on Division As output but there is a separate market outside the group for
the balance of Division As output. All the output of Division B is sold outside the group.
The maximum capacity of Division A is 1,30,000 units of A and that of Division B is
50,000 units of B per annum. Each division maintains a stable level of stocks throughout the
year.
The group would like to examine the results of using different bases of transfer pricing
under different scenarios (ie situations that could be expected to arise).
The bases of transfer pricing are
Absorbed standard cost
AS
Market price
MP
Variable cost plus a lump sum of 80% of Division As fixed cost VC




Scenario
Product A
Product B
number
Market price
Total demand
Market price
Total demand
(per unit)
(thousand units)
(per unit)
(thousand units)

Rs.

Rs.

15
30
100
100
40
23
25
70
90
30
29
35
130
90
30
Costs per unit are:

Product A Product B
Variable cost
Rs.20
Rs.12 (Exclusive of 2 units of Product
A)
Fixed cost
Rs.5
Rs.18
Budgeted volume in units per
1,00,000
40,000
annum
Part 1
You are required to calculate the profits shown by Division A and by Division B for the
following seven situations:
Scenario Basis of Transfer pricing
15
MP
VC
-
23
-
VC
AS
29
MP
VC
AS
Part 2
Assume that Division B receives an overseas order for 20,000 units of B that will in no
way influence its other clientele.
(a) As manager of Division B state, with supporting calculations, whether you would
recommend acceptance of the order in the following two situations: Scenario
Price per unit (ex
Basic of transfer
factory)
pricing
23
Rs.55
AS
29
Rs.65
MP
(b) If you were Managing Director of the whole group state, with very brief reasons,
whether you would recommend acceptance of the orders in (a) (i) and (a) (ii) above.
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KALPESH CLASSES
Question: 9

Effect of transfer pricing for MNCs
IBM Inc. manufactures and sells desktop computers. IBM has three divisions, each of
which is located in a different country;
a. China Division Manufactures memory devices and keyboard.
b. South Korea division Assembles desktop computers, using internally manufactured
parts and memory devices and keyboards from china division.
c. U.S. Division packages and distribution desktop computers.
Each division is run as a profit center. The costs for the work done in each division that is
associated with a single desktop computer unit are as follows: Variable costs:

China Division
1000 Yuan
South Korean division
240000 won
US division
100Rs.
Fixed costs:

China Division
1800 Yuan
South Korean division
320000 won
US division
200Rs.
Chinese income tax rate on China divisions operating income
40%
South Korean Division income tax rate
20%
US income tax rate on US division operating income
30%
Each desktop computer is sold to retail outlets in the United States for Rs.3,200. Assume
that the current foreign exchange rates are:
8 Yuan = 1Rs.
800 won = 1Rs..
Both the China and the South Korea divisions sell part of their production under a private
label.
The china division sells the comparable memory/keyboard package used in each IBM
desktop computer to a Chinese manufacturer for 3600 Yuan. The South Korea division sells the
comparable desktop computer to a South Korean distributor for 1040000 won.
Required:
1. Calculate the after tax operating income per unit earned by each division under each
of the following transfer-pricing methods:
(a)
Market price
(b)
200% of full costs
(c)
300% of variable costs
2. Which transfer pricing methods will maximise the net income per unit of user IBM
Inc.?
Question: 10

Different basis of transfer pricing
SV Ltd. manufactures a product, which is obtained basically from a series of mixing
operations.
The finished product is packaged in the company made glass bottles and packed in
attractive cartons.
The company is organised into two independent divisions viz. One for the manufacture of
the end product and the other for the manufacture of glass bottles. The product manufacturing
division can buy all the bottle requirements from the bottle manufacturing division.
The general manager of the bottle manufacturing division has obtained the following
quotations from the outside manufacturers for the empty bottles.

Volume empty bottles Total purchase value (Rs.)
8,00,000
14,00,000
12,00,000
20,00,000
A cost analysis of the bottle manufacturing division for the manufacture of empty bottles
reveals the following production costs:

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KALPESH CLASSES
Volume empty bottles Total Cost (Rs.)
8,00,000
10,40,000
12,00,000
14,40,000
The production cost and sales value of the end product marketed by the product
manufacturing division are as under.

Volume (Bottle
Total cost of end
Sales value (packed
of end Product)
product* (Rs.)
in bottles) (Rs.)
8,00,000
64,80,000
91,20,000
12,00,000
96,80,000
1,27,80,000
There has been considerable discussion at the corporate levels as to the use of proper
price for transfer of empty bottles from the bottle manufacturing division to product manufacture
division.
This interest is heightened because a significant portion of the Divisional General
Managers salary is in incentive bonus based on profit centre results.

As the corporate management accountant is responsible for defining the proper transfer
prices for the supply of empty bottles by the bottle manufacturing division to the product
manufacturing division, you are required to show for the two levels of volume of 8,00,000 and
12,00,000 bottles the profitability by using (i) market price and (ii) share profit relative, to the
cost involved basis for the determination of transfer prices. The profitability position should be
furnished separately for the two divisions and the company as a whole under each method.
Discuss also the effect of these methods on the profitability of the two divisions.
*Excluding the cost of empty bottles.
Question: 11

Optimum transfer price- No intermediate market
A group of highly integrated divisions wishes to be advised as to how it should set
transfer prices for the following interdivisional transactions:
Division L sells all its output of product LX to Division M. To 1 kg of LX, Division M
adds other direct materials and processes it to produce 2 kg of product MX that it sells outside
the group.
The price of MX is influenced by volume offered and the following cost and revenue data
are available:
Division L:
The variable costs of LX are (per kg) at 50000 kg:

Direct materials 4.00
Direct labour
2.00

6.00
The following cost increases are expected at different levels of production per annum:
Direct materials At 60,000 kg p.a. increases to Rs.5.00 per kg At 90,000 kg p.a. increases to
Rs.5.50 per kg

At 1,00,000 kg p.a. increases to Rs.6.00 per kg
Direct labour:
At 80,000 kg p.a. increases to Rs.2.50 per kg

At 1,00,000 kg p.a. increases to Rs.3.00 per kg

Fixed
Under 70,000 kg
Rs.2, 10,000 p.a.
Overhead 70,000 79,999 kg
2,60,000 p.a.

80,000 89,999 kg
2,80,000 p.a.

90,000 or more kg
3,10,000 p.a.
Division M:
To produce 1 kg of product MX, the following variable cost is incurred for each 0.5 kg of
LX used (at 100000 kg of MX):


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KALPESH CLASSES
Other direct materials Rs.1.50
Processing cost
Rs.3.50

Rs.5.00 Per kg MX produced

The following cost increases are expected at different levels of production of MX per
annum: Other direct At 1,40,000 kg p.a. increase to Rs.1.75 per kg.
Materials:
At 1,60,000 kg p.a. increase to Rs.2.00 per kg.


Processing:
At 1,80,000 kg p.a. increase to Rs.4.00 per kg.




(Rs.)
Fixed overhead:
Under 1,20,000 kg
2,50,000 p.a.

1,20,000 1,39,999 kg
2,80,000 p.a.

1,40,000 1,59,999 kg
2,90,000 p.a.

1,60,000 1,99,999 kg
3,20,000 p.a.

2,00,000 or more kg
3,60,000 p.a.
Selling price:
Up to 1,99,999 kg
Rs.16.00 per kg

2,00,000 or more kg
Rs.15.50 per kg
You are required to:
Recommend, with supporting calculations and explanations, the most appropriate narrow
range of transfer price per kg for product LX as between the two divisions; assume that any
changes in output are in steps of 10,000 kg of product LX and 20,000 kg of product MX.
Question: 12

Optimum output in imperfect markets

Easwar and Bramha are divisions of Krishna Ltd. Both divisions have a wide range of
activities.
You are an accountant employed by Krishna Ltd and the Finance Director has asked you
to investigate a transfer-pricing problem.
Easwar makes an engine, the Z80, which it has been selling to external customers at Rs.1,
350
per unit. Bramha wanted to buy Z80 engines to use in its own production of dories; each
dory requires one engine. Easwar would only sell if Bramha paid Rs.1, 350 per unit. The
managing director of Easwar commented:
We have developed a good market for this engine and Rs.1, 350 is the current market
price.
Just because Bramha is not efficient enough to make a profit is no reason for us to give a
subsidy.
Bramha has now found that engines suitable for its purpose can be bought for Rs.1, 300
per unit from another manufacturer. Bramha is preparing to buy engines from this source.
From information supplied by the divisions you have derived the following production
and revenue schedules, which are applicable over the capacity range of the two divisions:
Annual
Easwars Total
Easwars Total
Bramhas Total
BramhasTotal
no. of
manufacturing cost
revenue from
cost of
revenue from
units
for Z80 engines
outside sales
producing dories
sales of dories
(Rs.000)
of Z80 engines excluding engine
(Rs.000)
(Rs.000)
costs (Rs.000)
100
115
204
570
703
200
185
362
1,120
1,375
300
261
486
1,670
2,036
400
344
598
2,220
2,676
500
435
703
2,770
3,305
600
535
803
3,320
3,923
700
645
898
3,870
4,530
800
766
988
4,420
5,126

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KALPESH CLASSES
Requirements:
(a) Ignoring the possibility that Bramha could buy engines from another manufacturer,
calculate to the nearest 100 units:
(i)
The quantity of Z80 production that would maximize profits for Krishna Ltd, and (ii)
The consequent quantity of Z80 units that would be sold to external customers and the
quantity that would be transferred to Bramha.
(b) Explain the issues raised by the problems of transfer pricing between Easwar and
Bramha, and discuss the advantages and disadvantages of the courses of action, which could to
taken.
Question: 13

Produce or procure

Versatile Vehicles Ltd., manufacturers of specialised vehicles, are organised along
decentralised lines with each manufacturing division operating as a separate profit centre.
Division A normally purchases its entire requirements of Components X from division E at a
unit price of Rs.175.
division E has informed division A that the unit price will have to be increased to Rs.200.
division A has ascertained that it can still purchase an equivalent component from another
external manufacturer for Rs.175 and has decided to change suppliers. Division E has appealed
to the group chairman for the decision to be reversed. Data available are: As annual purchase of
X (number) 5,000
Es variable costs per unit of X
Rs.140
Es fixed costs per unit
Rs.40
You are required to state with reasons whether in each of the following cases, Division A
should purchase externally.
(a) Assuming that there are no alternative uses for Es internal facilities; (b) Assuming
that by not producing the 5,000 units of X for A the manufacturing facilities at E
could be used for other products so as to produce an annual net cash operating
contribution of Rs.1, 70,000.
Assuming that there are no alternative uses for Es internal facilities and that the price
from external suppliers drops a further Rs.40.
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CHAPTER

KALPESH CLASSES

ACTIVITY BASED COSTING
Question: 1

Traditional product costing Vs ABC.
Having attended a CIMA course on activity-based costing (ABC) you decide to
experiment by applying the principles of ABC to the four products currently made and sold by
your company.
Details of the four products and relevant information are given below for one period:
Product
A
B
C
D
Output in units
120
100
80
120
Costs per unit:
(Rs.)
(Rs.)
(Rs.)
(Rs.)
Direct material
40
50
30
60
Direct labour
28
21
14
21
Machine hours (per unit)
4
3
2
3
The four products are similar and are usually produced in production runs of 20 units and
sold in batches of 10 units.
Using a machine hour rate currently absorbs the production overhead, and the total of the
production overhead for the period has been analysed as follows: (Rs.)
Machine department costs (rent, business rates, depreciation and supervision) 10,430
Set-up costs
5,250
Stores receiving
3,600
Inspection / Quality control
2,100
Materials handling and despatch
4,620
Total
26000
You have ascertained that the cost drivers to be used are as listed below for the
overhead cost shown:
Cost
Cost Driver
Set up costs
Number of production runs
Stores receiving
Requisition raised
Inspection / Quality control
Number of production runs
Materials handling and despatch Orders executed
The number of requisition raised on the stores was 20 for each product and the number of
orders executed was 42, each orders being for a batch of 10 of a product. You are required.
(a) To calculate the total costs for each product if all overhead costs are absorbed on a
machine hour basis;
(b) To calculate the total costs for each product, using activity-based costing; (c) To
calculate and list the unit product cost from your figures in (a) and (b) above, to show the
differences and to comment briefly on any conclusions, which may be drawn which could have
pricing and profit implications.
Question: 2

Construction of cost pool

Trimake Limited makes three main products, using broadly the same production methods
and equipment for each. A conventional product costing system is used at present, although an
activity-based costing (ABC) system is being considered. Details of the three products for a
typical period are:

Product Labour hours Machine hours
Material cost
Volume

per unit

per unit
per unit (Rs)
(Units)
X

1
20
750
Y
1
1
12
1,250
Z
1
3
2
7,000
Direct labour costs Rs.6 per hour and production overheads are absorbed on a machine
hour basis.
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KALPESH CLASSES
The rate for the period is Rs.28 per machine hour.
You are required to calculate the cost per unit for each product using conventional
methods.
Further analysis shows that the total of production overheads can be divided as follows:
(%)
Costs relating to set-ups
35
Costs relating to machinery
20
Costs relating to materials handling
15
Costs relating to inspection
30
Total production overhead
100%
The following activity volumes are associated with the product line for the period as a
whole.
Total activities for the period:

Product Number of
Number of
Number of
set-ups
movements
inspections
of materials
X
75
12
150
Y
115
21
180
Z
480
87
670

670
120
1,000
You are required to
Calculate the cost per unit for each product using ABC principles.

Question: 3

Traditional costing vs. ABC
Damodar Ltd., produces two products A and B. Product A requires two components
(namely part-1 & part-2) whereas product B requires part-3 & part-4. There are two production
departments (machinery and fitting), which are supported by five service activities (material
procurement, material handling, maintenance, quality control and set up).
Additional information is as follows:
Production details:
Product A
Product B
Annual volume produced
3,00,000 units 3,00,000 units
Annual direct labour hours:

Machinery department
5,00,000 DLH 6,00,000 DLH
Fitting department
1,50,000 DLH 2,00,000 DLH
Overhead Cost Analysis


(Rs.000s)
Material handling
1,500
Material procurement
2,000
Set-up
1,500
Maintenance
2,500
Quality control
3,000
Machinery (machinery power, depreciation etc.) b
2,500
Fitting (machine, depreciation, power etc.) b
2,000

15,000

(a) It may be assumed that these represent fairly homogeneous activity-based cost pools.
(b) It is assumed these costs (depreciation, power etc.) are primarily production volume
driven and that direct labour hours are an appropriate surrogate measure of this.




Page Number : 53
KALPESH CLASSES
Cost Driver Analysis


Annual Cost Driver Volume per Component
Cost Driver
Part 1
Part 2
Part 3
Part 4

Material movements

180
160
1,000
1,200
Number of orders
200
300
2,000
4,000
Number of set-ups
12
12
300
300
Maintenance hours
7,000
5,000
10,000
8,000
Number of inspections
360
360
2,400
1,000
Direct labour hours-machinery-fitting 1,50,000
3,50,000
2,00,000
4,00,000
Direct labour hours
50,000
1,00,000
60,000
1,40,000
You are required to compute the unit costs for products A and B using (i) a traditional
volume-based product costing system and (ii) an activity-based costing system.
Note: Under traditional system, the overheads of service department are allocated to
production departments in the ratio of 13:8.

Question: 4

ABC, retail product-line profitability

Family Supermarkets (FS) decides to apply ABC analysis to three product lines backed
goods, milk and fruit juice, and frozen foods. It identifies four activities and activity-cost rates
for each activity as follows:
Ordering
Rs.100 per purchase order
Delivery and receipt of merchandise Rs.80 per delivery
Shelf-stocking
Rs.20 per hour
Customer support and assistance
Rs.0.20 per item sold.
The revenues, cost of goods sold, store support costs, and activity area usage of the three
product lines are as follows:

Baked
Milk and
Frozen
Goods
Fruit Juice
Products
Financial data



Revenue
Rs.57, 000
Rs.63, 000
Rs.52, 000
Cost of goods sold
38,000
47,000
35,000
Store support
11,400
14,100
10,500
Activity area usage (cost-allocation



base)
Ordering (purchase orders)
30
25
13
Delivery (deliveries)
98
36
28
Shelf-stocking (hours)
183
166
24
Customer support (items sold)
15,500
20,500
7,900

Under its previous costing system, FS allocated support costs to products at the rate of
30% of cost goods sold.
Required:
(1) Use the previous costing system to prepare a product-line profitability report for FS.
(2) Use the ABC system to prepare a product-line profitability report for FS.
(3) What new insights does the ABC system in requirement 2 provide to FS managers?
Question: 5

ABC in Health Centre
Shanthi Health Center runs four programs: (1) alcoholic rehabilitation, (2) drug-addict
rehabilitation, (3) childrens services, and (4) after-care (counseling and support of patients after
release from a mental hospital).



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KALPESH CLASSES
The centers budgets for 2005 is as follows:

Professional salaries:


6 physicians x Rs.1, 00,000
6,00,000

19 psychologists x Rs.50, 000
9,50,000

23 nurses x Rs.25, 000
5,75,000 21,25,000
Medical supplies

3,00,000
General overhead (administrative salaries, rent, utilities, etc.) 12,75,000

37,00,000
Ramaa, the director of the center, is keen on determining the cost of each program. She
has limited funds and needs to decide on whether to allocate funds to alcoholic rehabilitation or
drug-addict rehabilitation. Her decision rule is that if the cost to treat a drug-addict patient for a
year were more than 15% higher than the cost to treat an alcoholic patient for a year, the alcohol
program would receive additional funds.
At present she allocates costs of medical supplies on the basis of number of physicians
employed in each program and general overhead on the basis of direct-labor costs (where direct
labor is defined to include the time of doctors, psychologists, and nurses multiplied by the salary
rate of each).
Ramaa compiled the following data describing employee allocations to individual
programs:

Alcohol Drug
Children After Care Total employees
Physicians

2
4

6
Psychologists
6
4

9
19
Nurses
4
6
4
9
23
Eighty patients are in residence in the alcohol program, each staying about six months.
Thus, the clinic provides 40 patient-years of service in the alcohol program. Similarly, 100
patients are involved in the drug program for about six months each. Thus the clinic provides 50
patient-years of service in the drug program.
Ramaa has recently become aware of activity-based costing as a method to refine costing
systems. She asks her accountant, Pavan, how she should apply this new technique. Pavan
obtains the following information:
(1) Consumption of medical supplies depends on the number of patients in each
department and the length of their stays (that is, patient-years).
(2) General overhead costs consists of
(3)
Rent and clinic maintenance
Rs.2, 00,000
Administrative costs to manage patient charts, food, laundry
8,00,000
Laboratory services
2,75,000
Total
Rs.12, 75,000
(4) Other information about individual departments:

Alcohol Drug Children
After
Total
care
Square feet of space occupied by each
9,000 9,000
10,000
12,000 40,000
program
Patient-years of service
40
50
50
60
200
Number of laboratory tests
400 1,400
3,000
700
5,500
Required
(1) (a) Compute indirect cost-rates for medical supplies and general overhead under
Ramaas existing costing system.
(b) What is the cost of each program and the cost per patient-year of the alcohol and drug
programs, using Ramaas existing costing system?
(c) Using the existing costing system, should Ramaa allocate additional funds to the drug
program or to the alcohol program?

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KALPESH CLASSES
(2) (a) Selecting cost-allocation bases that you believe are the most appropriate for
allocating indirect costs to programs, calculate the indirect-cost rates for medical supplies, rent
and clinic maintenance; administrative cost rate for patient charts, food, and laundry; and
laboratory services.
(b) Using an activity-based costing approach to cost analysis, calculate the cost of each
program and the cost per patient-year of the alcohol and drug programs.
(c) Using the ABC system, should Ramaa allocate additional funds to the drug program
or to the alcohol program?
Question: 6

ABC and traditional product costs
Repak Ltd is a Warehousing and Distribution Company, which receives products from
customers, stores the products and then re-packs them for distribution as required. There are
three customers for whom the service is provided John Ltd, George Ltd and Paul Ltd. The
products from all three customers are similar in nature but have varying degrees of fragility.
Basic budget information has been gathered for the year to 30 June and is shown in the following
table: Products handled (cubic metres)
John Ltd
30,000
George Ltd
45,000
Paul Ltd
25,000

Costs

(Rs.000)
Packaging materials (see note 1)
1,950
Labour basic
350
- Overtime
30
Occupancy
500
Administration and management
60
Note 1: Packaging materials are used in re-packing each cubic metre of product for John
Ltd, George Ltd and Paul Ltd in the ratio 1:2:3 respectively. This ratio is linked to the relative
fragility of the goods for each customer.
Additional information has been obtained in order to enable unit costs to be prepared for
each of the three customers using an activity-based costing approach. The additional information
for the year to 30 June has been estimated as follows:
(i)
Labour and overhead costs have been identified as attributable to each of three work
centres receipts and inspection, storage and packing as follows:


Cost allocation proportions

Receipt and Storage
Packing
inspection

%
%
%
Labour basic
15
10
75
- Overtime
50
15
35
Occupancy
20
60
20
Administration and management
40
10
50
(ii) Studies have revealed that the fragility of different goods affects the receipt and
inspection time needed for the products for each customer. Storage required is related to the
average size of the basic incoming product units from each customer. The re-packing of goods
for distribution is related to the complexity of packaging required by each customer. The relevant
requirements per cubic metre of product for each customer have been evaluated as follows:

John Ltd. George Ltd. Paul Ltd.
Receipt and inspection (minutes)
5
9
15
Storage (square metres)
0.3
0.3
0.2
Packing (minutes)
36
45
60

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KALPESH CLASSES
Required
Calculate the budgeted average cost per cubic metre of pac kaged products for each
customer each of the following two circumstances:
(i)
Where only the basic budget information is to be used,
(ii)
Where the additional information enables an activity-based costing approach to be
applied.
Question: 7

ABC & Product pricing
KL currently manufactures over 100 products of varying levels of design complexity. A
single, plant-wide overhead absorption rate (OAR), based on direct labour hours, is used to
absorb overhead costs.
In the quarter-ended march, KLs manufacturing overhead costs were; (Rs.000)
Equipment operation expenses
125
Equipment maintenance expenses
25
Wages paid to technicians
85
Wages paid to stores men
35
Wages paid to dispatch staff
40

310
During the quarter, RAM Management Consultants were engaged to conduct a review of
KLs cost accounting systems. RAM report includes the following statement:
In KLs circumstances, absorbing overhead costs in individual products on a labour hour
absorption basis is meaningless. Overhead costs should be attributed to products using an activity
based costing (ABC) system. We have identified the following as being the most significant
activities:
(1) Receiving component consignments from suppliers
(2) Setting up equipment for production runs
(3) Quality inspections
(4) Dispatching goods orders to customers.
Our research has indicated that, in the short term, KLs overheads are 40% fixed costs
and 60%
variable. Approximately half the variable overheads vary in relation to direct labour
hours worked and half vary in relation to the number of quality inspections. This model applies
only to relatively small changes in the level of output during a period of two years or less.
Equipment operation and maintenance expenses are apportionable as follows:

Component stores (15%), manufacturing (70%) and goods dispatch (15%).
Technician wages are apportionable as follows:

Equipment maintenance (30%), setting up equipment for production runs (40%) and
quality inspections (30%).
During the quarter

A total of 2,000 direct labour hours were worked (paid at Rs.12 per hour),

980 component consignments were received from suppliers,

1,020 production runs were set up,

640 quality inspections were carried out, and

420 goods orders were dispatched to customers.
KLs production during the quarter included components R,S and T. the following
information is available:

Component R Component S Component T
Direct labour hours worked
25
480
50
Direct material costs
Rs.1, 200
Rs.2, 900
Rs.1, 800
Component consignments received
42
24
28
Production runs
16
18
12
Quality inspections
10
8
18
Goods orders dispatched
22
85
46
Quantity produced
560
12,800
2,400
In April 2001 a potential customer asked KL to quote for the supply of a new component
(Z) to a given specification. 1,000 units of Z are to be supplied each quarter for a two-year
period. They will be paid for in equal installments on the last day of each quarter. The job will
involve an initial Page Number : 57
KALPESH CLASSES
design cost of Rs.40, 000 and production will involve 80 direct labour hours, Rs.2, 000
materials, 20 component consignments, 15 production runs, 30 quality inspections and 4 goods
dispatches per quarter.
KLs Sales Director comments:
Now we have a modern ABC system, we can quote selling prices with confidence. The
quarterly charge we quote should be the forecast ABC production cost of the units plus the
design cost of the Z depreciated on a straight-line basis over the two years of the job-to which we
should add a 25% mark-up for profit. We can base our forecast on costs experienced in the
quarter-ended march.

Requirements
(a) Calculate the unit cost of components R,S and T using KLs existing cost accounting
system (single factory labour OAR).
(b) Explain how an ABC system would be developed using the information given.
Calculate the unit cost of components R, S and T, using this ABC system.
(c) Calculate the charge per quarter that should be quoted for supply of components Z in
a manner consistent with the Sales Directors comments. Advise KLs management on the merits
of this selling price, having regard to factor you consider relevant.
Note: KLs cost of capital is 3% per quarter.
Question: 8

ABC & Sales promotion strategy
Manchester Technology Ltd., manufactures two types of printed circuit boards, namely
PC board and TV board. The market for TV board is competitive and price-sensitive. Manchester
plans to sell 65,000 TV boards in 2001 at a price of Rs.150 per unit. PC board is a recent
addition to Manchesters product line, which incorporates the latest technology, enabling it to be
sold at a premium price. The 2001 plans also include the sale of 40,000 PC boards at Rs.300 per
unit.
Manchesters management group is meeting to discuss how to spend the sales and
promotion Rupees for 2001. The sales manager believes in concentrating sales promotion efforts
on TV
board, while the production manager recommends the other, since the cost sheet project
the contribution from PC board to be twice as that of TV board.
The present cost-accounting system shows that the following costs apply to the PC and
TV
boards.


PC Board
TV Board
Direct material
Rs.140
Rs.80
Direct labour
4 hr.
1.5 hr.
Machine time
1.5 hr.
0.5 hr.
Variable manufacturing overhead is applied on the basis of direct-labor hours. For 2001,
variable overhead is budgeted at Rs.11, 20,000, and direct-labor hours are estimated at 2,80,000.
The hourly rates for machine time and direct labor are Rs.10 and Rs.14, respectively. The
company applies a material-handling charge at 10 percent of material cost. This
material-handling charge is not included in variable manufacturing overhead.
The financial controller Mr. Frank intends to install ABC system and has collected the
relevant information to this end.
The only cost that remains the same for both the costing systems is the cost of direct
material.
The cost drivers will replace all other costs in the traditional system.




Page Number : 58
KALPESH CLASSES

Budgeted Cost
In Rs.
Cost Driver
Budgeted Annual
Activity for Cost Driver
Procurement
4,00,000 Number of parts
40,00,000 parts
Production scheduling
2,20,000 Number of boards
1,10,000 boards
Packaging and shipping
4,40,000 Number of boards
1,10,000 boards
Machine setup
4,46,000 Number of setups
2,78,750 setups
Hazardous waste
48,000 Pounds of waste
16000 pounds
disposal
Quality control
5,60,000 Number of inspections
1,60,000 inspections
General supplies
66,000 Number of boards
1,10,000 boards

Machine insertions
1200000 Number of machine 3000000 machine
insertions
insertions
Manual insertions
4000000 Number of manual 1000000 manual
insertions
insertions
Wave soldering
132000 Number of boards
110000 boards


Required per Unit
PC Board TV Board
Parts:
55
25
Machine insertions
35
24
Manual insertions
20
1
Machine setups
3
2
Hazardous waste disposal
0.35 lb.
0.02 lb.
Inspections
2
1
Required
(1) On the basis of Manchesters unit cost data given in the problem, calculate the total
contribution margin expected in 2001 for the PC board and the TV board.
(2) On the basis of an activity-based costing system, calculate the total contribution
margin expected in 2001 for the PC board and the TV board.
(3) Explain how a comparison of the results of the two costing methods may impact the
decisions made by Manchesters management group.
Page Number : 59
CHAPTER

KALPESH CLASSES

STANDARD COSTING
Material Variance

Cost variance


Price
Usage


Mix
Yield

SQ x SP
AQ x AP
AQ x SP
RSQ x SP
1
2
3
4
Formula
Cost variance
= 1-2

Price variance
= 3-2

Usage variance
= 1-3

Mix variance
= 4-3

Yield variance
= 1-4

Note:
SQ
= Standard Quantity
AQ
= Actual Quantity (Input)
RSQ
= Revised Standard Quantity (standard mix of actual input)
SP
= Standard price
AP
= Actual price
Note: Under Partial Plan, price variance will be computed only on the quantity
consumed/issued for production. Under Single Plan, price variance will be computed at the time
of purchases for the entire quantity bought. Unless the problem states that it should be tried
under Single Plan, all problems will be handled only under Partial Plan

Labour Variance

Cost

Variance


Rate
Efficiency


Idle time
Revised Efficiency

variance
Variance


Gang
Productivity

Variance
Variance

Page Number : 60
KALPESH CLASSES

SH x SR
AH x AR
AH x SR
RSH x SR
1
2
3
4

Formula
Cost variance

= 1-2
Rate variance

= 3-2
Efficiency variance

= 1-3
Gang Mix variance

= 4-3
Productivity/Yield variance
= 1-4
Note:
Where there is idle time:
Idle time variance = Idle time x Standard Rate. It will always be adverse.
Revised efficiency variance = SH x SR AH (worked) x SR
SH = Standard Hours.
AH
= Actual Hours
RSH
= Revised Standard Hours. (Standard mix of actual hours worked) AR
= Actual rate per hour.
SR
= Standard rate per hour.
Variable overhead variance:

AO x SR p.u
Actual variable AH x SR (per hr)
overhead
1
2
3
Formula
Variable OH Cost Variance

= 1-2
Variable OH Expenditure Variance
= 3-2
Variable OH Efficiency variance
= 1-3.

AO
= Actual output
AH
=Actual Hours.
SR
= Standard rate
Computation
SR/unit = Budgeted variable overhead/Budgeted output.
SR/hour= Budgeted variable overhead/Budgeted hours
Fixed overhead variance:
Implies under/over absorption.
Relevant only in absorption costing system.


Fixed OH

variance



Expenditure
Volume

Variance

Variance


Capacity
CalendarVa
Efficiency

Variance
riance
Variance



Relevant in both
marginal and
absorption costing
Page Number : 61
system
KALPESH CLASSES


Actual fixed Budgeted
AH x SR
Possible
AO x SR
OH
fixed OH
(per hour)
fixed
overhead
1
2
3
4
5
Formula
Fixed OH cost variance

= 1-2.
Fixed OH expenditure variance
= 3-2
Fixed OH volume variance

= 1-3
Fixed OH capacity variance
= 4-3 or 4-5*
Fixed OH calendar variance
= 5-3
Fixed OH efficiency variance
= 1-4.

* Usage of 4-5 shall be called for only when there is a difference between actual days
worked and days budgeted. Only on such occasions calendar variance would emerge.
Computation
SR/unit = Budgeted Fixed overhead/Budgeted output.
SR/hour= Budgeted Fixed overhead/Budgeted hours
Possible fixed overhead: (Budgeted Fixed Overhead/Budgeted days) x Actual days
worked Sales variance:
This can be approached in two ways,
Total approach.
Margin approach.

Total approach:

BQ x BP
AQ x AP
AQ x BP
RBQ x BP
1
2
3
4

Margin approach:

BQ x BM
AQ x AM
AQ x BM
RBQ x BM
1
2
3
4
Formula
Sales variance
= 1-2.
Price variance
= 3-2.
Volume variance

= 1-3.

Mix variance
= 4-3.
Quantity variance
= 1-4.

Note: Unlike cost variances, the negative value variances would indicate favourable
attribute and the positive value would be reflecting adverse quality.
BQ = Budgeted Quantity.
AQ
= Actual Quantity.
RBQ
= Revised Budgeted Quantity. ( Budgeted mix on actual sales value) BP
= Budgeted Price.
AP
= Actual Price.
BM
= Budgeted Margin.
AM
= Actual Margin.
Computation:
BM
= BP Standard cost (including fixed cost)
Page Number : 62
KALPESH CLASSES
AM
= AP Standard cost (including fixed cost). It is to be understood that actual cost was
already compared with standard cost; hence the influence of cost variance is not affecting sales
variances at all. Therefore actual price is compared only with standard cost.

In marginal costing system, Margin means contribution.
BM = BP Standard cost (only variable cost)
AM = AP Standard cost (only variable cost)
Standard Costing Ratios:
Efficiency Ratio = (Output Expressed in terms of standard hours) (Actual hours spent
for producing the output.)
Production volume ratio (activity ratio) = (Actual output in standard hours) (Budgeted
output in standard hours).
Capacity utilization ratio = (Practical capacity in std. Hours Budgeted capacity)
(Practical capacity in std. Hours).
Page Number : 63
KALPESH CLASSES
Basic issues in standard costing

Question: 1 Find out missing items for the following situations: Situations
Std
N L
Actual
Actual
Std
SM of
Std
mix
in
output
Input
Qty
Actual Output
ratio
%
of
Input
input
1
75:25
10
4095
4750


2
60:40
15
16150
18900


3
80:20
14
10406
11900


4
2:1
17.5 104775 130000


5
50:50
16
29400
34500


6
1000
NA
14000
9000


Kgs of
cms
kgs
input =
1600
cms of
output

Question: 2 The following data are available for a product. Standard material cost per
unit of output: 2Kgs @ Rs.20 per kg.
During a period actual details are as under

Actual output
10000 units
Material used
22000 kgs
Actual price per kg Rs.25

Find out material variances.

Question: 3 Find out the in Direct Material, the missing figures: Rs. Lacs Price variance
Favourable
2.5
Mix variance Adverse
1.2
Yield variance Favourable
1.6
Usage Variance
?
Cost Variance
?
Question: 4 Find out the details of variance of Direct Labour: Rate variance
Favourable
7.5
Gang Mix variance Adverse
2.2
Yield variance Favourable
3.6
Efficiency variance
2.1
Idle time variance
?
Cost Variance
?
Revised Efficiency variance
?
Question: 5 The standard set for a chemical mixture of a firm is as under: Material
Standard
Standard price
mix %
per kg (Rs.)
A
40
20
B
60
30
The standard loss in production is 10%. During a period, the actual consumption and
price paid for a good output of 189 kg are as under:
Page Number : 64
KALPESH CLASSES
Material Quantity
Actual price
in kg.
per kg (Rs.)
A
90
18
B
110
34
Calculate material variances.

Question: 6 V Ltd produces an article by blending two basic raw materials. It operates a
standard costing system and the following standards have been set for raw materials: Material
Standard
Standard
mix
price per Kg
A
40%
Rs.4.00
B
60%
Rs.3.00

The standard loss in processing is 15%. During April the company produced 1700 Kgs of
finished product. The positions of stocks and purchases for the month of April are as under
Material Opening
Closing
Purchases Purchase
stock
stock
price
A
35 Kgs
5 Kgs
800 Kgs
Rs.4.25
B
40 Kgs
50 Kgs
1200 Kgs
Rs.2.50
Calculate the material variances
(a) on the assumption that the company follows FIFO basis of accounting for inventories
and the opening stock is to be taken at standard prices
(b) on the assumption that the company follows FIFO basis of accounting for inventories
and the opening stock is to be taken at Rs.4.15 and 2.90 respectively (c) On the assumption that
the company follows LIFO and the consumption above current purchases in A shall be taken at
Standard price.
Question: 7 SC Limited manufactures a special floor tile which measures 1/2 m x m x
0.01m.
The tiles are manufactured in a process, which requires the following standard mix:
Material Quantity Price Amount


(Rs.)
(Rs.)
A
40
1.5
60
B
30
1.2
36
C
10
1.4
14
D
20
0.5
10



Rs.120
Each mix should produce 100 square metres of floor tiles of 0.01 m thickness. During
April, the actual output was 46,400 tiles from an input of:

Material Quantity Price
Amount


(Rs.)
(Rs.)
A
2,200
1.6
3,520
B
2,000
1.1
2,200
C
500
1.5
750
D
1,400
0.5
700



Rs.7,170

Calculate material variances.



Page Number : 65
KALPESH CLASSES
Question: 8 Following are the information on Direct Material items Items

Standard Price per unit of input
Rs.2.50
Standard quantity for actual 12000 Kgs
output
No of Kgs bought during a period
13700 Kgs
Rate of Purchases
Rs.2.45
No of Kgs sent to production
12125 Kgs

Find out material cost variances under
(a) Partial Plan
(b) Single Plan.
Pass journal entries under both the plans.
Question: 9

(a) Find out the missing figures from the following:

Variable overhead efficiency variance Favourable
Rs. 7500
Variable overhead expenditure variance Favourable Rs.10000
Variable overhead cost variance
?

(b) Find out the missing figures from the following:

Fixed overhead efficiency variance
10000 A
Fixed overhead capacity variance
12000 F
Fixed overhead volume variance
3000 F
Fixed overhead expenditure variance 7500 A
Fixed overhead calendar variance
?
Fixed overhead cost variance
?

Question: 10

Investigation of variance

A company using a detailed system of standard costing finds that the cost of investigation
of variances is Rs.20000. If after investigation an out of control situation is discovered, the cost
of correction is Rs.30000. If no investigation is made, the present value of extra cost involved is
Rs.150000. The probability of the process being in control is 0.82 and the probability of the
process being out of control is 0.18. You are required to advise: i.
Whether investigation of the variances should be undertaken or not; and
ii.
The probability at which it is desirable not to institute investigation into variances.
Question: 11

Price variance- at the time of purchase

Shown below is the standard material cost of a tube of industrial adhesive, which is the
only product manufactured by Gum Ltd:

(Rs. per tube)
Materials:

Powder
1.50
Chemical
0.60
Tube
0.30
Total standard material
2.40
cost



Page Number : 66
KALPESH CLASSES

Items
Requirement Opening
Purchases
Issues
per unit of
stock
output
Powder
2 lb
1500 lb
10000 lb. @ Rs 0.70 per 9800 lb
lb.
Chemicals
litre
200 litres Lot-1 600 litres @ Rs 2.3
1050
per litre.
litres
Lot-2 600 litres @ Rs 2.5
per litre.
Tubes
1 tube
100 tubes Lot-1: 200 tubes @ Rs
0.40 per tube.
Lot-2: 5000 tubes @ Rs
0.30 per tube

During the previous month 4,500 tubes of adhesive were produced, there were no work in
progress stocks at the beginning or end of the month.
The above materials are used exclusively in the production of the adhesive and it is the
policy of the company to calculate any price variance when the materials are purchased.
Required:
Compute material variances.
Question: 12

Labour variances
The data obtained from a manufacturing concern are:

Particulars
Men Women
Number in standard gang
20
10
Standard rate per hour
9
8
Number in actual gang
16
14
Actual rate per hour (Rs)
10
7
In a 48 hour-week, the gang as actually composed, produced 1200 standard hours.
Compute labour variances.
Question: 13

Idle time variance
In a certain factory-
Normal number of operators in department
50
Normal number of hours paid for in a week
40
Standard rate per hour (Rs)
8
standard output of department per hour, taking 20
into account the normal idle time (units)
Actual rate per hour (Rs)
9
In a particular week, it was ascertained that 1000 units were produced despite 20% of the
time paid for was lost owing to power failure. Compute labour variances.
Question: 14

Variable overhead variance
XYZ Company has established the following standards for variable factory overhead.
Standard hours per unit: 6
Variable overhead per hour: Rs.2/-
The actual data for the month are as follows:


Page Number : 67
KALPESH CLASSES
Actual variable overheads incurred
Rs.2,00,000
Actual output (units)
20,000
Actual hours worked
1,12,000
Required:
Calculate variable overhead variances:
a. Variable overhead cost variance.
b. Variable overhead expenditure variance.
c. Variable overhead efficiency variance.
Question: 15

Fixed overhead variance
A manufacturing company operating a standard costing system has the following data in
respect of July, 2006:-
Actual number of working days
22
Actual man-hours worked during the month
8,600
Units produced
850
Actual fixed overhead incurred
Rs.3,600
The following information is obtained from the companys budget and standard cost data:
-
Budgeted number of working days per month
20
Budgeted man-hours per month
8,000
Standard man-hours per unit produced
10
Standard fixed overhead rate per man-hour
Re.0.50
Calculate fixed overhead variances.
Question: 16

Variable and fixed overhead variances
From the following figures are extracted from the books of a company, compute
appropriate variances:
Particulars
Budget
Actual
Output in units
12000
13000
Hours
6000
6600
Fixed overhead
Rs.2400
2500
Variable overhead Rs.12000 13300
No of days
50
54
Question: 17 Fixed overhead variance- Closing WIP
Calculate fixed production overhead variances in as much details as possible, in the
following situation:

Budget
Actual
Fixed overhead (Rs.)
2,46,000
2,59,000
Direct labour (hours)
1,23,000
1,41,000
Output (units)
6,15,000
(see below)
The company operates a process costing system. At the beginning of the period 42,000
half completed units were in stock. During the period 6, 80,000 units were completed and 50,000
half completed units remained in stock at the end of the period.
Question: 18

Production ratios
The budgeted production for July in the finishing department of a pottery manufacturer
is, 4,500
cups, 4,000 saucers and 6,250 plates. In one standard hour a direct operative is expected
to be able to finish either, 30 cups, or 40 saucers, or 25 plates. During period July, 400 direct
labour hours were worked and actual production was, 4,260 cups, 6,400 saucers and 3,950 plates.
Required:
Page Number : 68
KALPESH CLASSES
Using the above information calculate for July:
(i)
Productivity/ efficiency ratio
(ii)
Production volume/activity ratio
(iii)
Capacity utilization ratio.
Question: 19

Sales variances Total and Margin approach

You are required to calculate sales variances under total and margin approach using the
data given below:

Unit
Unit
Unit
Qty
Total
Sales
selling
Cost
profit (units)
profit
(Rs)
price
(Rs)
(Rs)
(Rs)
(Rs)
Budget






A
30
16
14
1,500


B
10
9
1
3,500


C
20
18
2
1,000


Actual:






A


15
1,100
16,500
34,100
B


1
5,200
5,200
52,000
C


4
1,100
4,400
24,200
Total (Rs)




26,100
1,10,300
Question: 20 Market size and market share variance
Super computers manufacture and sell three related PC models. The budgeted and actual
data for 2002 is as follows:
Budgeted for 2002

Selling
Variable
Contribution
Sales
price per
cost per
margin per
volume in

unit

unit
unit
units

Rs.
Rs.
Rs.
Rs.
PC
24,000
14,000
10,000
7,000
Portable PC
16,000
10,000
6,000
1,000
Super PC
1,00,000
60,000
40,000
2,000
Actual for 2002

Selling
Variable
Contribution
Sales
price per
cost per
margin per
volume in

unit

unit
unit
units

Rs.
Rs.
Rs.
Rs.
PC
22,000
10,000
12,000
8,250
Portable PC
13,000
8,000
5,000
1,650
Super PC
70,000
50,000
20,000
1,100
Super computers derived its total unit sales budget for 2002 from the internal
management estimate of a 20% market share and an industry sales forecast by computer
manufactures association of 50,000 units. At the end of the year the association reported actual
industry sales of 68,750 units.
Required to compute:
1. Market share variance
2. Market size variance
3. Sales quantity variance.



Page Number : 69
KALPESH CLASSES
Question: 21

Missing figures

Compute the missing data indicated by ? from the following: Particulars
Product-R Product-S
Budgeted units
?
400
Actual units
500
?
Budgeted unit selling price
12
15
Actual unit selling price
15
20
Sales price variance
?
?
Sales volume variance
1200F
?
Total sales variance
?
?
Sales mix variance for both the products together was Rs 450F.

Question: 22

Missing figures
A Company manufactures two products, which have the following standard costs for
direct materials and direct labour:
Product-1
Actual production= 42, 100 units
Material requirement per 100 units of Labour requirement per 100 units of output
output
Material-M 98 kg @ 0.78 per kg
Department-X 10 hours @ Rs 4.2 per
hour
Actual material consumed = 41200 Kg Actual labour hours worked = 4190
hours.
Actual price per Kg = Rs 0.785
Actual labour rate = Rs. 4.2.
Actual material cost= Rs 32342.
Actual labour cost = Rs 17598.

Product-2
Actual production=?
Material requirement per 100 units of Labour requirement per 100 units of output
output
Material-N 33 kg @ 2.931 per kg
Department-Y 9 hours @ Rs 4.5 per
hour
Actual material consumed =?
Actual labour hours worked =?
Actual price per Kg =?
Actual labour rate = Rs 4.55
Actual material cost= Rs 23828.
Actual labour cost =?
Overheads:
Department Predetermined Amount
recovery rate
X
Rs 3.60 per DLH
Rs 14763
Y
Rs 2.90 per DLH
?
Variances:
Direct materials
Material-M
Material-N
Price
?
Rs.233A
Usage
?
Rs.5F
Total
?
Rs.228A



Direct labour
Department-X
Department-Y
Rate
?
?
Efficiency
?
Rs.342F
Total
Rs.84F
?
Production overhead
?
Rs.142A
Required:
Calculate the missing figures.

Page Number : 70
KALPESH CLASSES
Question: 23

Variances and reconciliation

The budgeted production of a company is 20000 units per month. The standard cost sheet
is as under:
Direct Material
1.5 Kgs @ Rs.6 per Kg
Direct Labour
6 hours @ Rs.5 per hour
Variable Overhead 6 hours @ Rs.4 per hour
Fixed Overhead
Rs.3 per unit
Selling price
Rs.72 per unit
The following are the actual details for a month:
Actual sales
18750 units
Actual production
18750 units
Direct Material
29860 Kgs @ Rs.5.25 per Kg
Direct Labour
118125 hours @ Rs.6 per
hour
Fixed Overhead
Rs.40000
Variable overhead Rs.525000
Required:
(i)
Calculate all variances

(ii)
Prepare reconciliation statement from budgeted profit as well as from standard profit.
Question: 24

Variances and reconciliation

From the following information show how profit had gone up in detail: Particulars
2004
2005
Materials
100000
132000
Labour
60000
66000
Variable overhead
12000
14000
Fixed overhead
20000
24000
Total cost
192000
236000
Profit
8000
17000
Sales
200000 253000
During the year 2005, selling price and material prices have each gone up by 10% and
labour rate by 15%, when compared to 2004.
Question: 25

Variance, Reconciliation in Process industry

The following particulars being a standard for a product set as under: Particulars
Qty or hrs Rate in Amount
per unit
Rs.
per unit
Direct Material A
2 Kgs
3
6
B
1 Kg
4
4
Direct Wages
5 hours
4
20
Variable overheads
5 hours
1
5
Fixed overheads
5 hours
2
10
Total


45
Standard profit


5
Standard Selling price


50
Budgeted output is 8000 units per month. In June 2005, the company produced and sold
6000
units
Other actual data are as follows:


Page Number : 71
KALPESH CLASSES
Particulars
Rs.
Sales value
305000
Material A 14850 Kgs
43065
Material B 7260 Kgs
29750
Direct Wages 32000 127500
hours
Variable overhead
30000
Fixed overhead
80600
Closing working in progress was 600 units in respect of which materials A and B were
fully issued and labour and overhead were 50% complete. The direct labour hours worked were
31800.
Analyze the variances and present reconciliation statement in all possible ways.

Question: 26

Reconciliation-marginal costing system

A company which employs a salesman in each of its territories has decided to use the
following standards salesmens performance:
a) Target sales are based on each territorys annual potential. For territory 1 these are
Rs.1, 80,000 p.a. and for territory 2 these are Rs.2, 95,000 p.a.
b) Each territorys standard sales mix contribution is 32%
I. Commission is payable at 3% of sales.
II. If sales exceed 110% of target, an extra 1% of the excess is payable.
III. If the contribution percentage is above standard, commission increases by 20% of the
gain.
IV. If the contribution percentage is below standard, commission decreased by 10% of
the loss.
c) Standard salesmens expenses and travelling costs:
d) Mileage allowance at 0.2 miles per Rs. of sales
e) Travelling costs at Rs.0.15 per mile.

Territory
Actual
Actual sales
Actual
Fixed
Budgeted
sales
mix
mileage expenses
fixed
contribution
run
incurred
expenses
1
Rs.2,40,000
29%
58,000
Rs.2,900
Rs 2000
2
Rs.2,70,000
33%
42,000
Rs.1,800
Rs 2000

You are required to:
(a) Calculate
1. The standard profit for Territory 1
2. The actual profit for Territory 2;
(b) Calculate variances that show the performance of the salesman in each of the two
territories.

Question: 27
Reconciliation-under traditional & opportunity cost method
Blue Ltd manufactures a single product, the standards of which are as follows:
Standard per unit:
(Rs.) (Rs.)
Standard selling price

268
Less: Standard cost:


Material (16 units at Rs.4)
64

Labour (4 hours at Rs.3)
12

*Overheads (4 hours at Rs.24)
96
172
Standard profit

96

*Total overhead costs are allocated on the basis of budgeted direct labour hours. The
following information relates to last months activities:


Page Number : 72
KALPESH CLASSES

Budgeted
Actual
Production and 600 units
500 units
sales
Direct labour
2,400 hours at Rs.3
2,300 hours at Rs.3
Fixed overheads Rs.19,200
Rs.20,000
Variable
Rs.38,400
Rs.40,400
Materials
9,600 units at Rs.4 per unit 9,600 units at Rs.4 per unit
The actual selling price was identical to the budgeted selling price and there was no
opening or closing stocks during the period.
You are required to calculate the variances and reconcile the budgeted and actual profit
for each of the following methods:
a) The traditional method.
b) The opportunity cost method assuming materials are the limiting factor and materials
are restricted to 9,600 units for the period.
c) The opportunity cost method assuming labour hours are the limiting factor and labour
hours are restricted to 2,400 hours for the period.
d) The opportunity cost method assuming there are no scarce inputs.
Question: 28

Reconciliation for a service business unit
Tardy Taxis operates a fleet of taxis is a provincial town. In planning its operations for
November 2002 it estimated that it would carry fare-paying passengers for 40,000 miles at an
average price of Rs.1 per mile. However, past experience suggested that the total miles run
would amount to 250% of the fare-paid miles. At the beginning of November it employed ten
drivers and decided that this number would be adequate for the month ahead.
The following cost estimates were available:
Employment costs of a driver Rs.1,000 per month
Fuel costs
Rs.0.08 per mile run
Variable overhead costs
Rs.0.05 per mile run
Fixed overhead costs
Rs.9,000 per month
In November 2002 revenue of Rs.36, 100 were generated by carrying passengers for
38,000
miles. The total actual mileage was 1, 05,000 miles. Other costs amounted to:
Employment costs of drivers Rs.9,600
Fuel costs
Rs.8,820
Variable overhead costs
Rs.5,040
Fixed overhead costs
Rs.9,300
Requirements:
(a) Prepare a budgeted and actual profit and loss account for November 2002, indicating
the total profit variance.
(b) Under marginal costing system, reconcile the budgeted and actual profits.
Question: 29

Reverse working
A small company making a single product produces accounts for a costing period as
follows: Direct materials
396
Direct wages
596
Variable overheads 970
Fixed overheads
520
Profit
488
Sales
2970
Budgeted units = 1000.
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Actual units produced and sold = 960.
Standard direct wages rate Rs 0.3 per hour.
Standard variable overhead rate Rs. 0.5 per hour.
Cost variances during the period are as follows:

Variances
Favourable
Unfavourable
Material price
-
4
Material usage
-
8
Wage rate
10
-
Labour efficiency
-
30
Variable overhead efficiency
-
50
Variable overhead expenditure
40
-
Fixed overhead expenditure
-
20
Sales price
30
-
From this informa tion prepare for the period the original budgeted income statement
clearly showing the standards with respect to each element of cost.
Question: 30

Reverse working
A company manufactures a food product, data for which for one week have been
analysed as follows:

Standard cost data:
(Rs.)
Direct materials: 10 units at Rs.1.50
15
Direct wages : 5 hours at Rs.4.00
20
Production overhead: 5 hours at Rs.5.00
25
Total
Rs.60
Profit margin is 20% of sales price.
Budgeted sales are Rs.30, 000 per week.
Actual data:
Rs
Sales
29,880
Direct materials
6,435
Direct wages
8,162
Analysis of variances:


Adverse Favourable
Direct Materials:
Price
585


Usage

375
Direct Labour:
Rate

318

Efficiency
180

Production Overhead: Expenditure

200

Volume

375

It can be assumed that the production and sales achieved resulted in no changes of stock.
You are required, from the data given, to calculate:
a. The actual output;
b. The actual profit;
c. The actual price per unit of material;
d. The actual rate per labour hour;
e. The amount of production overhead incurred;
f. The amount of production overhead absorbed;
g. The production overhead efficiency variance;
h. The selling price variance;
i. The sales volume profit variance;

Question: 31

Reverse working

A Company produces a product, which has a standard variable production cost of Rs 8
per unit made up as follows:

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Direct materials
Rs 4.6 (2 Kg * Rs 2.3)
Direct labour
Rs 2.1 (0.7 hours * Rs 3 per hour)
Variable overheads Rs 1.3
Fixed manufacturing costs are treated as period cost. The following information is
available for the period just ended:

Variable manufacturing cost of sales (at standard 263520
cost)
Opening stock of finished goods (at standard cost)
120800
Closing stock of finished goods (at standard cost)
146080
Direct material price variance
2571A
Raw material used in manufacture (at actual cost)
170310
Direct labour rate variance
4760A
Direct labour efficiency variance
3240F
Required for the period ended:
1. Number of units produced
2. Raw material usage variance
3. Total actual direct labour cost
4. Actual cost per Kg of raw material.
Question: 32

Partial plan

Material purchased 10,000 pieces at Rs.1.10
Rs.11,000
Material consumed 9,500 pieces at Rs.1.10
Rs.10,450
Actual wages paid 2,475 hours at Rs.3.50
Rs.8,662.50
Actual factory expenses incurred Rs.17,000
(Budgeted Rs.16,500)
Units produced:
900 units and sold at Rs.60
per unit.
The standard rates and prices are as under:

Direct materials
Re.1.00 per unit
Standard input
10 pieces per unit
Direct labour rate
Rs.3.00 per hour
Standard labour requirement
2.5 hours per unit
Overheads
Rs.6.00 per labour hour
Pass journal entries


Question: 33

Single plan-comprehensive

From the information given below relating to a manufacturing company.

A. Write up the cost ledger and prepare a costing profit and loss account showing the
appropriate variance for the year ended 30th April.
B. Ascertain the profit stated in the financial accounts for the year ended 30th April, and
reconcile this with the profit shown in your answer to a. above.
In addition to the normal financial accounts, the company kept cost control accounts. The
balances on these accounts on 30th April of the previous year were as follows: Particular

At Standard Cost
General Ledger Control A/c

69,00,000
Raw materials
20,50,000

Work-in-progress
36,80,000

Finished Goods
11,70,000


69,00,000
69,00,000

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The following is a summary of transactions during the current year ended 30th April.

S.no
Particulars
Rs.000
1

Purchase of Raw Materials on credit
8090
2

Material price variance, calculated at the time of purchase
190
(A)
3

Material usage variance (A)
50
4

Direct Wages actual (13,00,000 hours)
6780
5

Standard @ Rs.5 per hour
6550
6

Indirect Wages
2310
7

Depreciation
1050
8

Indirect Material and expenses
1930
9

Administration, selling and distribution expenses
5850
10
Debenture interest
360
11
Donation
20
12
Grant to staff benevolent fund
250
13
Material issued to production at Standard prices
8000
14
Factory OH absorbed to production at Rs.4 per standard
5240
DLH
15
Sales on credit
31470
16
Payment received from borrowers (interest on loans)
70
17
Abnormal loss account
100
Note:
(i)
The following items of expenditure and income will not be considered in cost books: (a)
Debenture interest, (b) Donation, (c) Grant to staff benevolent Fund, (d) Income from interest.
(ii)
All variances, viz. material usage variance, direct wage variance, overhead variance and
abnormal loss will be charge to costing profit and loss account administration selling and
distribution overhead will be charged to costing profit and loss account.
(iii)


At Standard At Actual
Cost (Rs.)
Cost (Rs.)
Opening Stock


Raw material
20,50,000
21,00,000
Work-in-progress
36,80,000
36,50,000
Finished Goods
11,70,000
12,50,000
Closing Stock


Raw Material
18,00,000
17,90,000
Work-in-Progress
34,50,000
35,10,000
Finished Goods
11,90,000
12,00,000

Question: 34

Planning and operating variances




County Preserves produce jams, marmalade and preserves. All products are produced in a
similar fashion; the fruits are low temperature cooked in a vacuum process and then blended with
glucose syrup with added citric acid and pectin to help setting.
Margins are tight and the firm operates a system of standard costing for each batch of
jam.
The standard cost dat a for a batch of raspberry jam are:

Fruit extract
400 kg
At Rs.0.16
Per kg
Glucose syrup
700 kg
At Rs.0.10
Per kg
Pectin
99 kg
At Rs.0.332
Per kg
Citric acid
1 kg
At Rs.2.00
Per kg
Labour
18 hrs
At Rs.36.25
Per hour

Standard processing loss 3%
The summer of 2002 proved disastrous for the raspberry crop with a late frost and cool,
cloudy conditions at the ripening period, resulting in a low national yield. As a consequence,
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KALPESH CLASSES
prices in the trade were Rs.0.19 per kg for fruit extract although good buying could
achieve some savings. The impact of exchange rates on imports of sugar has caused the price of
syrup to increase by 20%.
The actual results for the batch were:

Fruit extract
428 kg
At Rs.0.18
Per kg
Glucose syrup
742 kg
At Rs.0.12
Per kg
Pectin
125 kg
At Rs.0.328
Per kg
Citric acid
1 kg
At Rs.0.95
Per kg
Labour
20 hrs
At Rs.3.00
Per hour

Actual output was 1,164 kg of raspberry jam.
You are required to
(a) Calculate the ingredients planning variances that are deemed uncontrollable; (b)
Calculate the ingredients operating variances that are deemed controllable; (c) Comment on the
advantages and disadvantages of variance analysis using planning and operating variances;
(d) Calculate the mixture and yield variances;
(e) Calculate the total variances for the batch.
Question: 35

Planning and operating variances
Tungach Ltd make and sell a single product. Demand for the product exceeds the
expected production capacity of Tungach Ltd. The holding of stocks of the finished product is
avoided if possible because the physical nature of the product is such that it deteriorates quickly
and stocks may become unsaleable.
A standard marginal cost system is in operation. Feedback reporting takes planning and
operational variances into consideration.
The management accountant has produced the following operating statement for period
9: Tungach Ltd.
Operating Statement Period 9

(Rs.)
(Rs.)
Original budgeted contribution

36,000
Revision variances:


Material usage
9,600(A)

Material price
3,600(F)

Wage rate
1,600(F)
4,400(A)
Revised budgeted contribution

31,600
Sales volume variance:


Causal factor


Extra capacity
4,740(F)

Productivity drop
987.5(A)

Idle time
592.5(A)

Stock increase
2,370(A)
790(F)
Revised standard contribution for sales

32,390
achieved
Other variances:


Material usage
900(F)

Material price
3,120(A)

Labour efficiency
1,075(A)

Labour idle time
645(A)

Wage rate
2,760(A)



6,700A
Actual contribution

25,690

(F) = Favourable (A) = adverse
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Other data are available as follows:
(i)
The original standard contribution per product unit as determined at period 1 was:


(Rs.)
(Rs.)
Selling price

30
Less: Direct material 1.5 kilos at Rs.8
12

Direct labour 2 hours at Rs.4.50
9
21
Contribution

9

(ii)
A permanent change in the product specification was implemented from period 7
onwards. It was estimated that this change would require 20% additional material per
product unit. The current efficient price of the material has settled at Rs.7.50 per kilo.
(iii)
Actual direct material used during period 9 was 7,800 kilos of Rs.7.90 per kilo. Any
residual are due to operational problems.
(iv)
The original standard wage rate overestimated the degree of trade union pressure during
negotiations and was 20p higher than the rate subsequently agreed. Tungach Ltd made a
short-term operational decision to pay the workforce at Rs.4.60 per hour during periods 7
to 9 in an attempt to minimize the drop in efficiency likely because of the product
specification change. Management succeeded in extending the production capacity during period
9 and the total labour hours paid for were 9,200 hours. These included 150 hours of idle time.
(v)

Budgeted prodn. and sales quantity (period 9) 4,000 units
Actual sales quantity (period 9)
4,100 units
Actual production quantity (period 9)
4,400 units
(vi)
Stocks of finished goods are valued at the current efficient standard cost.
Required:
(a)
Prepare detailed figures showing how the material and labour variances in the operating
in the operating statement have been calculated.
(b)
Prepare det ailed figures showing how the sales volume variance has been calculated for
each causal factor shown in the operating statement.
Question: 36

Operating & planning variances

Casement Ltd makes windows with two types of frame; plastic and mahogany. Products
using the two types of materials are made in separate premises under the supervision of separate
production managers.
Data for the three months ended 30 November 2002 are shown below.


Plastic
Mahogany
Totals

Budget Actual Budget Actual Budget Actual
Sales units
3,000
2,500
1,000
1,250
4,000
3,750
(Rs.000)






Sales
660
520
340
460
1,000
980
revenue
Materials
(147)
(120)
(131)
(160)
(278)
(280)
Labour
(108)
(105)
(84)
(85)
(192)
(190)
Fixed
(162)
(166)
(79)
(83)
(241)
(249)
production
overheads
Sales
(33)
(26)
(17)
(23)
(50)
(49)
commissions
Other selling




(128)
(133)
and admn.
Costs
Net profit




111
79

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Casement Ltd sells to a wide variety of users, so that window sizes and shapes vary
widely; consequently a square metre of window is adopted as the standard unit for pricing and
costing.
Sales budgets were based on the exception that the companys share of the regional
market in windows would be 12%. The Window Federations quarterly report reveals that sales
in the regional market totalled 25,000 units in the three months ended 30 November 2002.
The managing director of Casement Ltd is concerned that the company that the
companys sales and profit are below budget; she wants a full analysis of sales variances as well
as an analysis of the cost variances which can be obtained from the data.
Labour costs comprise the wages of shop-floor employees who receive a fixed wage for a
40-hour week; no overtime is worked. Production managers receive a fixed monthly salary
which is included in production overheads, plus an annual personal performance bonus
(excluded from the above data) which is decided by the board of directors at the end of each
year. Sales representatives are paid a monthly retainer plus commission of 5% on all sales.

Requirements:
Prepare a variance report for the managing director on the results for the quarter ended 30
November 2002, providing market share and market volume (or size) variances, sales
mix variance and basic cost variances, from the available information.

Page Number : 79
KALPESH CLASSES
CHAPTER



LEARNING CURVE

Learning Curve
y = axb.
y = Average time taken per unit for x units.
x = Cumulative units.
a = Time taken for 1st unit.
B = Log (learning rate expressed in decimals)
Log 2.

Log Computation steps:
Ascertain number of digits.
From the total digits deduct 1.
The result from step 2 is the integer portion.
Take the Log book, see Log for the 1st two digits (from the left) Eg., log of 15, go to
15 on the left and check up on the top against 0. Since the no of digits being 2, the answer shall
be 1.1761. Similarly if the log of 1.5 should be ascertained from the same 15 but it will be taken
as 0.1761, similarly for 150, the answer is 2.1761 and so on. The decimal portion picked up from
the log table is technically referred to as mantissa. So mantisaa shall be added or deducted from
the integer portion.
Page Number : 80
KALPESH CLASSES
Question:1

Learning curve- method-1 & method-2 (Formula method)
Direct labour hours to assemble the first unit of new equipment were 400. Assuming
that this type of assembly will experience a learning effect of 90%. Compute the average direct
labour for the 3rd & the 4th units as also for the 5th to 8th units.
Find also the average labour for the 6th & 7th units. B = -0.1520.
Question: 2

Formula method for batches
A first batch of 25 transistor radios took a total of 250 direct labour hours. It is proposed
to assemble another 40 units. What will be the average labour per unit in this lot? Assume that
there is 85% learning rate. B=-0.23455.

Question: 3

Computation of cumulative units
A company has found that the average direct labour just after completion of X units was
26.4
hours. The average at the end of the first unit was 52 hours. If there is learning curve
effect of 85% what been the total output to date?
Question: 4

Learning curve- A bidding tool

Suraksha, an electronics firm, has designed a new model of fire alarm system and
assembled a first unit as a prototype for demonstration. The direct labour expended on this unit
was 260
hours and the direct material cost was Rs.37, 000. The direct labour rate is Rs.30 per
hour.
Following successful demonstrations to potential customers, confirmed orders have been
received for supply of 50 units during the first six months and a supply of 75 units during the
following six months.
The company wishes to set competitive prices for the supplies in each of the periods by
passing on the benefits of learning curve effect of 80% that is normally applicable to this type of
product assembly. Further, the variable overhead in regular production runs is estimated to be
125% of the direct labour cost and the fixed overhead is charged at 75% of direct labour cost. In
view of the large production volumes it is expected that a 5% discount can be got on the
materials used for the first six months and a 10% discount for the second six months.
The company sets the selling price with a 40% mark-up on the cost. Determine the selling
price per unit that should be set for the orders in each of the six months. B=-0.3220.

Question: 5

Learning curve- A bidding tool
Bandookwala & Co, a firearms manufacturer, has designed a new type of gun and a first
lot of 25
guns assembled for test purposes had the following costs:

Direct materials
24,500
Direct labour
22,500
Variable overheads 16,875
Fixed overheads
11,250 Proportional to direct labour
Total costs
75,125
BSF being satisfied with this gun have asked the lowest bid for supply of 1,000 guns. The
company will pass on the benefits of learning of 85% to the client in setting the bid. The
company will set a selling price to earn 40% gross profit margin. Determine the unit price that
should be bid.

Question: 6

Learning curve & capital budgeting

EGM manufactures electrical goods on behalf of various clients as per their requirements.
Currently having lost one major client, EGM is left with a large surplus of skilled labour.
This labour cannot be retrenched nor can additional be recruited. EGM located HHDG a
marketing firm in household goods, for whom it can offer manufacturing facilities to find gainful
work for the Page Number : 81
KALPESH CLASSES
skilled labour that may be otherwise idle. EGM has compiled the following information
so as to arrive at a decision whether to undertake manufacture on behalf of HHDG.
Capital outlay on special machine Rs.2 lakhs (machine having no salvage value).
Incremental overheads Rs.1 lakh per annum. Cost of materials Rs.180 per unit. Skilled labour
rate Rs.30 per hour. The contract if entered into must be for a period of three years and HHDG
will offer a unit price of Rs.260 valid for all the three years. A first unit trial run took 10 hours of
direct labour of a skilled workman. It is expected that on repetitive production there will be
learning effect of 82%.
HHDG will accept all the production that EGM is capable of. It was also assessed that the
surplus skilled labour available will be adequate to manufacture 3,000 units in the first year. The
cost of capital for EGM is 18%. You may assume that all cash flows occur at the year-end,
except for the capital outlay that has to be at the start of year 1.
What decision should EGM take with regard to acceptance of the contract for HHDG?
B=-0.2864.

Question: 7

Learning curve in fixing labour standards
Sundaram Products Ltd manufactures complex electronic measuring instruments for
which highly skilled labour required. Conventional standard costing has been used for some time
but problems have been experienced in setting realistic standards for labour costs.
Analysis of production times has shown that there is a learning effect of 90%.
During period 11 the following data were recorded:

Cumulative production at start of period 526 units
Production in period
86 units
Wages paid
Rs.71, 823 for 6,861 actual hours
Material actual cost
Rs.20, 850
Actual overheads for period
Rs.1, 52,600
Budgeted and standard cost data for Electronometers:

Budgeted production
86 units
Budgeted overhead
Rs.1, 50,903
Standard labour cost
Rs.10 per hour
Standard material cost per unit Rs.250
You are required to:
(a) Calculate and analyse where possible the materials, labour and overhead cost
variances; (b) Calculate a total standard cost for Electronometers.
Page Number : 82


KALPESH CLASSES
CHAPTER



MATERIAL REQUIREMENT PLANNING


Page Number : 83




KALPESH CLASSES



Page Number : 84
KALPESH CLASSES
Question: 1

Timing of order release



The product structure and the lead times for a finished product X are given in figure
below If 100 units of X are required in week 12 and if none of the components, sub-assemblies
and the end product are either on hand or on order. Compute the amounts and dates of the
planned order releases for all the components and sub-assemblies. Assume that there is no
particular order size and therefore all the order quantities are lot for lot.
X, LT = 2








P (1),


Q (2),

LT = 3
LT = 1







R (3), LT
S (2),

P (2), LT
= 3
LT = 3
= 3











R (3),
S (2),
LT = 3
LT = 3
Question: 2

Construction of product tree

The manufacture of Product x, requires the assembly of modules a, b and c. Two
modules, each of a and c and only one module of b is needed to make one unit of x. Module a is
made from the sub-assemblies d (2 needed), e (1 needed) and (2 needed). D is made from
components i j and k. To make one sub-assembly of d, two components each of j and I are
required and 1 of component k. Sub-assembly needs components l and m (one each). Module c
needs sub-modules of g and h in quantities of two units and one unit, respectively. Sub-module g
is, in turn, assembled from five units each of components i and j. Item i needs 1 unit each of
components n and o.
Draw the product structure based on the above information.
If 100 units of x are to be produced, what are the requirements at the various levels of the
product? Write an indented Bill of Materials and calculate the requirement of materials at the
various levels.
Calculate the net requirements if the quantities on hand and/or on order are as shown
below. A safety stock of i of 400 is seen as essential as it is used sometimes in another product y
whose demand is not all that predictable.
Item
On Hand On Order
D
70
-
E
-
100

50
100
I
500
500

Question: 3

Preparation of MRP
Given the following information, how many units are on hand at the end of week 9?
Which are the weeks in which the orders may be placed?
Order Quantity = 200
Week
Lead Time = 2 weeks
1
2
3
4
5 6
7
8
9
Requirements

90 10 140 55 5 15 115 95 100
Scheduled Receipts










On Hand at the End of the Period 110








Planned Order Release











Page Number : 85
KALPESH CLASSES
Question: 4 MRP with safety stock

Geetha Industries uses MRP for its production materials planning. The table below
provides the information about a particular component X. The demand for this component is
somewhat uncertain and in order to take care of a sudden spurt in the demand, a safety stock of
50 items is recommended.
Order quantity=250
Weeks
Lead Time = 3 weeks
1
2
3
4
5
6
7
8
9
Requirements
40 100 70 150 20 20 50 100 70
Scheduled Receipts

250






On Hand at the end of the period 150








Planned Order release










During which week/weeks should the receipts be planned? When should the orders be
placed?
What is the expected on hand position at the end of week 9?
Question: 5 MRP-comprehensive

Bhagyadeep Industries is a small-scale unit which assembles decorative lamps. These are
available in two models, Lakshmi (L) and Saraswathi (S). The lamp base assembly (A)
consisting of the Base (B), the Holder (H) and Wire coil (W) is common to both the models;
however, the shades or covers (C) for the two models of lamps are different. The lead times are
as given if figure below:
L, LT = 1



S, LT = 1






CS(1), A(1),
LT = 1 LT=1
CL (1),

A (1), LT = 1




LT = 3




B(1),
H(1) W(1)
LT=2
LT=2 LT = 1

B (1)
H (1)
W (1)

LT=2
LT=2
LT=1








At the beginning of week 1, the materials position is as follows: On Hand
Scheduled Receipts
Base:
25 units
Cover (Saraswathi):
During week 2,
Holders:
100 units

50 units


Wiress-coil: (During week 3), 100 units
If an order of 100 Lakshmis and 50 Saraswatis is to be filed by the sixth week, calculate
the materials requirements plan. Assume that the items are ordered as required (there is no fixed
lot size).
Page Number : 86


CHAPTER

KALPESH CLASSES


BUDGETARY CONTROL



Page Number : 87
KALPESH CLASSES
Question: 1

Labour utilization budget
The direct labour requirement of three of the products manufactured in a factory, each
involving more than one labour operation, are estimated as follows:

Direct labour hours per unit (in minutes)




Product
X
Y
Z
Operation
A
18
42
30
B
-
12
24
C
9
6
-

The factory works 8 hours per day, 6 days in a week. The budget quarter is taken as 13
weeks and during a quarter, lost hours due to leave and holidays and other causes are
estimated to be 124 hours. The budgeted hourly rates for the workers manning the operation A, B
and C are Rs.2, Rs.2.50 and Rs.3 respectively. The budgeted sales of the products during the
quarter are X-9000 units, Y-15000 units and Z-12000 units.

There is a opening stock of 5000 units of Y and 4000 units of Z and it is proposed to
build up a stock at the end of the budget quarter as X-1000 units and Z-2000 units prepare a
manpower budget for the quarter showing for each operation
a. Direct labour hours
b. Direct labour cost and
c. The number of workers
Question: 2

Master Budget

ABC Ltd. makes 2 types of polish, one for floors and one for cars. It sells both types to
industrial users only in one-litre containers. The specification for the 2 types of products per
batch of 100 litres.

Materials
Floor-Polish Car-Polish
Delta
120 litres
100 litres
Gamma
20 Kg
10 KG
Containers cost per 100
Rs.100
Rs.100
Direct labour manufacturing 12 man hours 16 man hours
Primary packing
5 man hours
5 man hours

During the months to end of 30th September, the company expects to sell 15000 litres of
floor polish at Rs.9 per litre and 25000 litre of car polish at Rs.7 per litre.
Materials are expected to cost Re.1 per litre for delta and Rs.8 a kg for gamma.
Manufacturing wages in the industry look like being stable at Rs.6 per hour and packing
wages at Rs 4 per hour throughout the period.

Flexible overhead expense are operated for manufacture and packing departments based
on the number of man-hours worked. These budgets for six months to end of September are:
Manufacturing Department Primary Packing Department
5000 man hours Rs 40,000
1700 man hours Rs 26,000
6000 man hours Rs.50,000
1900 man hours Rs.28,000
7000 man hours Rs.60,000
2100 man hours Rs 30,000
8000 man hours Rs 80,000
2300 man hours Rs 32,000
General administrative overhead are budgeted at Rs.37,000. At the beginning of the
period 1st April packed stocks will be:

Floor polish 2000 litres
Cat polish
3000 litres
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KALPESH CLASSES
By end of the period 30th September, it is desired to maintain the packed stocks of the
products at 3000 litres and 4000 litres respectively.
The following are required:
1. A statement of standard prime cost per 100 litres of each product 2. A sales and
production budget (in quantities) of the six months to 30th September 3. A profit forecast for the
period. Show separate gross profit for the two products but do not attempt to allocate overhead
between them. No overheads are included in to stock valuations
Question: 3

Master Budget

Manufactures Ltd. produce three products from three basic raw materials in three
departments. The company operates a budgetary control system and values its stock of finished
goods on a total cost basis. From the following data, you are required to produce for the month of
July 2004 the following budgets.
Production
Material usage
Purchases
Profit and loss account for each product and in total.

Budgeted data for July 2004

A
B
C
Sales
1500000
1080000
1680000
Stock of finished products at 3000 units
2000 units
2500
July 2004
units
Department
I
II
III
Production overhead
239000
201300
391200
Direct labour hours
47800
67100
65200

Direct material stock at July 1, 2004 is M1-24500, M2-20500 and M3-17500 units. The
company is introducing a new system of inventory control which should reduce stocks. The
forecast is that stocks as at 31st July 2004 will be reduced as follows. Raw materials by 10%
and finished products by 20%.

Fixed production overhead is absorbed on a direct labour hour basis. It is expected that
there will be no work-in-progress at the beginning or end of the month.

Administration cost absorbed by products at a rate of 20% of production cost and selling
and distribution cost is absorbed by products at a rate of 40% of production cost.

Profit is budgeted as a percentage of total cost as follows.

Product A-25%
product B-12.5%
product C-16 2/3%

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KALPESH CLASSES
Standard cost data per unit of product:


Price per unit Product (units)



A
B
C
Direct material
M1 2.00
5
-
12

M2 4.00
-
10
9

M3 1.00
5
5
-








Rate per hour (Hours)
Direct wages



Department
I
2.50
4
2
2

II
2.00
6
2
3

III 1.50
2
4
6
Other variable costs

Rs. 10 Rs. 20 Rs. 15

Question: 4

Production; Purchase & Labour budgets

(a)
A company manufactures three products: chairs, tables and benches. From the following
information you are to produce:
(i)
A production budget showing quantities to be manufactured and factory unit costs of
each product;
(ii)
A purchasing budget detailing quantities to be purchased and the total cost of materials;
(iii) A direct wages budget showing hours to be worked in total and gross wages to be
paid.

Chairs
Tables Benches

Sales in the next trading period (unit)
4,000
1,000
500
Material requirements



Timber (per unit) @ Rs. 8 per ft3
0.5 ft3
1.2 ft3 2.5 ft3
Upholstery per unit @ Rs.4 per yd2
0.2 yds2 -
-

Fixing and finishing material costs, 5% total material cost.

Labour requirements:

Chairs Tables Benches
Carpenters (hours per unit) @ Rs. 6 per hour
0.75
0.8
1.3
Fixers and finishers (hours per unit) @ Rs. 4.8 per hour 0.25
0.3
1.0
Fixed factory overheads are estimated at Rs.6253 for the trading period and these are
recovered on the basis of labour hours.


Chairs Tables Benches
Finished stocks at beginning of period 200
300
40
Finished stocks at end of period
400
100
50

Particulars
Timber Upholstery
Opening stock 600 ft3 400 yd2
Closing stock 650 ft3 260 yd2

(b)
The trading period to which this budget relates is of four weeks duration. The labour
force is expected to perform as follows:

Carpenters Fixers
Normal hours per week, per person 40
40
Absenteeism and lateness
10%
15%
Calculate how many carpenters and fixers should be employed?

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KALPESH CLASSES
Question: 5

Functional budgets

Vista Electronics manufactures two different types of coils used in electric motors. In the
falls of the current year. Erica Becker, the controller, compiled the following data.
Sales forecast for 2000 (all units to be shipped in 2000):
Product
Units
Price
Light coil
60,000
Rs.65
Heavy coil
40,000
95
Raw material prices and inventory levels:
Raw
Expected
Desired Inventories, Anticipated
Material
Inventories January December 31, 2000
Purchase
1, 2000
Price in Rs.
Sheet
32,000 lb.
36,000 lb.
8
metal
Copper
29,000 lb
32,000 lb.
5
wire
Platform
6,000 units
7,000 units
3
Use of raw material:

Amount Used per Unit
Raw Material
Light Coll
Heavy Coll
Sheet metal
4 lb
5 lb
Platform

1 unit
Direct-labor requirements and rates:
Product
Hours per Unit Rate per Hour
Light coil
2
Rs.15
Heavy coil
3
20
Overhead is applied at the rate of Rs.2 per direct-labor hour.
Finished-goods inventories (in units):
Product
Expected January
Desired December
1, 2000
31, 2000
Light coil
20,000
25,000
Heavy coil
8,000
9,000
Manufacturing overhead:
Overhead Cost Item
Activity-Based Budget Rate
Purchasing and material Rs.25 per Rupee of sheet metal and
handling
cooper wire purchased.
Depreciation, utilities and Rs.4.00 per coil produced (either inspection
type)
Shipping
Rs.1.00 per coil shipped (either type)
General manufacturing Rs.3.00 per direct-labor hour
overhead
Required: Prepare the following budgets for 2000.
1) Sales budget (in Rupees).
2) Production budget (in units).
3) Raw-material purchases budget (in quantities).
4) Raw-material purchases budget (in Rupees).
5) Direct-labor budget (in Rupees).
6) Manufacturing overhead budget (in Rupees).





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KALPESH CLASSES
Question: 6


Principal budget factor

In its budgets for the period ahead, a company is considering two possible sales forecasts
for its three products:
Product
A
B
C
(i)
Sales units
22,000 40,000 6,000
Selling price per unit
10.00
6.00
7.50
(ii)
Sales units
30,000 50,000 7,000
Selling price per unit
9.00
5.70
7.10
Variable costs per unit expected to be the same at the different levels of possible sales.
The variable costs per units are as follows:


Product A Product B Product C

(Rs.)
(Rs.)
(Rs.)
Direct
3.00
2.00
4.00
material
Direct
2.00
1.50
1.00
labour
Variable
1.00
0.50
0.50
overhead
Fixed overheads are expected to total Rs.1,50,000. These are expected to be unaffected
by the possible changes in activity which are being considered.
Due to recent high labour turnover and problems of recruitment, direct labour will be
restricted to a maximum of Rs.1,35,000 in the period. It can be assumed that all labour is of the
same grade and is freely transferable between products. Other resources are expected to be
generally available.
Required :
Take each of the possible forecasts in turn.
(i)
Say what the principal budget factor is for each of the forecasts.
(ii)
For each forecast, calculate the sales budget that you would recommend to maximize
profits.
(iii) What profit would you expect from each sales budget?
In order to answer these questions you must assume that the three products must be sold
either all the higher prices or all at the lower prices.

Question: 7

Revised operating budget

Toronto Business Associates, a division of Maple Leaf Services Corporation, offers
management and computer consulting services to clients throughout Canada and the northeastern
United states. The division specializes in website development and other Internet applications.
The corporate management at Maple Leaf Services is pleased with the performance of Toronto
Business Associates for the first nine months of the current year and has recommended that the
division manager. Richard Howell, submit a revised forecast for the remaining quarter, as the
division has exceeded the annual plan year-to-date by 20 percent of operating income. An
unexpected increase in billed hour volume over the original plan is the main reason for this
increase in income. The original operating budget for the first three quarters for Toronto
Business Associates follows.



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KALPESH CLASSES
TORONTO BUSINESS ASSOCIATES 20x1 Operating Budget

1st
2nd
3rd
Total for First
Quarter
Quarter
Quarter Three Quarters
Revenue:




Consulting fees:




Computer system consulting
4,21,875
4,21,875
4,21,875
12,65,625
Management consulting
3,15,000
3,15,000
3,15,000
9,45,000
Total consulting fees
7,36,875
7,36,875
7,36,875
22,10,625
Other revenue
10,000
10,000
10,000
30,000
Total revenue
7,46,875 7,46,875 7,46,875
22,40,625
Expenses:




Consultant salary expenses
3,86,750
3,86,750
3,86,750
11,60,250
Travel and related expense
45,625
45,625
45,625
1,36,875
General and administrative
1,00,000
1,00,000
1,00,000
3,00,000
expenses
Depreciation expense
40,000
40,000
40,000
1,20,000
Corporate expense allocation
50,000
50,000
50,000
1,50,000
Total expenses
6,22,375 6,22,375 6,22,375
18,67,125
Operating income
1,24,500 1,24,500 1,24,500
3,73,500

Howell will reflect the following information in his revised forecast for the fourth
quarter.

Toronto Business Associates currently has 25 consultants on staff, 10 for management
consulting and 15 for computer systems consulting. Three additional management consultant
have been hired to start work at the beginning of the fourth quarter in order to meet the increased
client demand.

The hourly billing rate for consulting revenue will remain at 90 per hour for each
management consultant and 75 per hour for each computer consultant. However, due to the
favorable increase in billing hour volume when compared to the plan, the hours for each
consultant will be increased by 50 hours per quarter.

The budgeted annual salaries and actual annual salaries, paid monthly, are the same:
50,000 for a management consultant and 46,000 for a computer consultant. Corporate
management has approved a merit increase of 10 percent at the beginning of the fourth quarter
for all 25 existing consultants, while the new consultants will be compensated at the planned
rate.

The planned salary expense includes a provision for employee fringe benefits amounting
to 30 percent of the annual salaries. However, the improvement of some corporate wide
employee programs will increase the fringe benefits to 40 percent.

The original plan assumes a fixed hourly rate for travel and other related expenses for
each billing hour of consulting. These are expense that are not reimbursed by the client, and the
previously determined hourly rate has proven to be adequate to cover these costs.

Other revenue is derived from temporary rentals and interest income and remains
unchanged for the fourth quarter.

General and administrative expense have been favourable at 7 percent below the plan;
this 7 percent savings on fourth quarter expenses will be reflected in the revised plan.

Depreciation of office equipment and personal computers will stay constant at the
projected straight-line rate.

Due to the favourable experience for the first three quarters and the divisions increased
ability to absorb costs, the corporate management at Maple Leaf Services has increased the
corporate expenses allocation by 50 percent.
Required:
1) Prepare a revised operating budget for the fourth quarter for Toronto Business
Associates that Richard Howell will present to corporate management.
2) Discuss the reasons why an organization would prepare a revised operating budget.
Page Number : 93


KALPESH CLASSES
CHAPTER



STRATEGIC COST MANAGEMENT

SN TOPICS
1
Just in time & Back flush costing
2
Target costing
3
Life cycle costing
4
Total quality management

Page Number : 94


KALPESH CLASSES

Life Cycle Costing (LCC):
Usually a products, life has four phases introduction, growth, maturity, and decline.
Life cycle costing has been developed indirectly by rapid development in technology,
which has shortened the life cycle of most products. Standard costing aims at controlling costs
over a products productive (economic) life - which used to be a long period in earlier days. On
the other hand Capital budgeting considers a project life up to the time the asset becomes
commercially operative. In life cycle costing when the products life has been shortened all those
costs that enter the whole life of it are taken into account in management decision making. It is
thus an improvement over traditional cost follows cost by functions life Correlation Coefficient
& D, production, marketing, etc. The aim is to adopt a policy which will maximize the return
over the cost objects total life.
Since, the whole life cycle of the cost object is considered the importance of cost
reduction and revenue opportunity is stressed under Product Life Costing.
Life cycle costing as it compasses all business functions in the value chain from R & D
to customer service expected to be incurred on a product or a project including environmental
cleanup costs as well is also called cradle to grave costing.
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KALPESH CLASSES
Just in time & Back flushing
Question: 1

JIT-a cost reduction tool
The management of Alliance Enterprises recently decided to adopt a just-in-time
inventory policy to curb steadily rising costs and free up cash for purposes of investment. The
company anticipates that inventory will decrease from Rs.36, 00,000 to Rs.6, 00,000, with the
released funds to be invested at a 12 percent return for the firm. Additional data follow:
?
Reduced inventories should produce savings in insurance and property taxes of Rs.27,
000.
?
Alliance will lease 75 % of an existing warehouse to another firm for Rs.2 per square
foot.
The warehouse has 30,000 square feet.
?
Because of the need to handle an increased number of small shipments from suppliers,
Alliance will remodel production and receiving-dock facilities at a cost of Rs.6, 00,000. The
construction costs will be depreciated over a 10-year life.
?
A shift in suppliers is expected to result in the purchase and use of more expensive raw
materials. However, these materials should give rise to fewer warranty and repair problems after
Alliances finished product is sold, resulting in a net savings for the firm of Rs.25, 000.
?
Three employees who currently earn Rs.30, 000 each will be directly affected by the
just-in-time adoption decision. Two employees will be transferred to other positions with
Alliance; one will be terminated.
?
Reduced raw material inventory levels and accompanying stock outs will cost Alliance
Rs.70, 000.
Required:
Compute the annual financial impact of Alliances decision to adopt a just-in-time
inventory system.
Question: 2

Just in time-cost savings
SteelTech Ltd., is an automotive supplier that uses automatic screw machines to
manufacture precision parts from steel bars. SteelTechs inventory of raw steel averages Rs.6,
00,000 with a turnover rate of four times per year. John, president of SteelTech, is concerned
about the costs of carrying inventory. He is considering the adoption of just-in-time inventory
procedures in order to eliminate the need to carry any raw steel inventory. John has asked the
companys financial controller, to evaluate the feasibility of JIT for the corporation. He has
identified the following effects of adopting JIT.
?
Without scheduling any overtime, lost sales due to stock outs would increase by 35,000
units per year. However, by incurring overtime premiums of Rs.40, 000 per year, the
increase in lost sales could be reduced to 20,000 units. This would be the maximum amount of
overtime that would be feasible for SteelTech.
?
Two warehouses presently used for steel bar storage would no longer be needed.
SteelTech rents one warehouse from another company at an annual cost of Rs.60, 000. The other
warehouse is owned by SteelTech and contains 12,000 square feet. Three-fourths of the space in
the owned warehouse could be rented out for Rs.1.50 per square foot per year.
?
Insurance totaling Rs.14, 000 per year would be eliminated.
SteelTechs projected operating results for 2001 are as follows. Long-term capital
investments by SteelTech are expected to produce a rat e of return of 20 percent before taxes.

STEELTECH, INC.
Budgeted Income Statement
For the Year Ended December 31, 2001 (in thousands)
Sales (9,00,000 units)
Rs.10, 800
Cost of goods sold:


Variable
Rs.4, 050

Fixed
1,450
5,500
Gross margin

Rs.5, 300
Selling and administrative expenses:


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KALPESH CLASSES
Variable
Rs.900

Fixed
1,500
2,400
Income before interest and income taxes

Rs.2, 900
Interest expenses

900
Income before taxes

Rs.2, 000
Required
Calculate the estimated savings or loss for SteelTech, Ltd. that would result in 2001 from
the adoption of just-in-time inventory methods. Ignore income taxes.
Question: 3

Back flush costing-version-1

Road Warrior Corp., assembles hand-held computers that have scaled-down capabilities
of laptop computers. Each hand-held computer takes 6 hours to assemble. Road Warrior uses a
JIT
production system a back flush costing system with three trigger points:
Purchase of direct (raw) materials.
Completion of finished units of product.
Sale of finished goods.
There are no beginning inventories of materials or finished goods. The following data are
for August 2000:
Direct (raw) materials purchased Rs.27, 54,000
Direct (raw) materials used
27,33,600
Conversion cost incurred
7,23,600
Conversion costs allocated
7,50,400
Road Warrior records direct materials purchased and conversion costs incurred at actual
costs.
When finished goods are sold, the back flush costing system pulls through standard
direct materials costs (Rs.102 per unit) and standard conversion costs (Rs.28 per unit). It
produced 26,800 finished goods units in August 2000 and sold 26,400 units. The actual direct
materials cost per unit in August 2000 was Rs.102 while the actual conversion cost per unit was
Rs.27.
Required:
(1) Prepare summary journal entries for August 2000
(2) Post the entries in requirement 1 to T-accounts for applicable Inventory: Raw and
In-Process, Conversion Costs Control, Conversion Costs Allocated, and Cost of Goods Sold.
Question: 4

Back flush costing version-2
Assume the same facts in P3, except for the following change. Road Warrior Corp., now
uses a back flush costing system with the following two trigger points:
Purchase of direct (raw) materials
Sale of finished goods
The Inventory Control account here will include direct materials purchased but not yet in
production, materials in work in process, and materials in finished goods but not sold. No
conversion costs are inventoried. Any under-or over allocated conversion costs are written off
monthly to costing P&L account.
Required :
(1) Prepare summary journal entries for August.
(2) Post the entries in requirement 1 to T-accounts for Inventory Control, Conversion
Costs Control, Conversion Costs Allocated, and Cost of Goods Sold.
Question: 5

Back flush costing-version-3

Assume the same facts as in Question 3 except now Road Warrior uses only two trigger
points, the completion of finished unit of product and the sale of finished goods. Any under or
over allocated costs are written off monthly to costing P&L account.
Required:
(1) Prepare summary journal entries for August
Page Number : 97
KALPESH CLASSES
(2) Post the entries in requirement 1 to T-accounts for Finished Goods Control,
Conversion Cost Control, Conversion Costs Allocated, and Costs of Goods Sold.
Target costing
Question: 6

Target costing-an insight

For many years, Leno Corporation has used a straightforward cost-plus pricing system,
marking its goods up approximately 25 percent of total cost. The company has been profitable;
however, it has recently lost considerable business to foreign competitors that have become vary
aggressive in the marketplace. These firms appear to be using target costing.
An example of Lenos problem is typified by item no. 8976, which has the following
unit-cost characteristics:

Direct material
Rs.30
Direct labor
75
Manufacturing overhead
50
Selling and administrative expenses
25

The going market price of an identical product of comparable quality is Rs.195, which is
significantly below what Leno is charging.
Required:
(1) Contrast cost-plus pricing and target costing. Which of the two approaches could be
aptly labeled price-led costing? Why?
(2) What is Lenos current selling price of item no.8976?
(3) If Leno used target costing for item no.8976, what must happen to costs if the
company desires to meet the ma rket price and maintain its current rate of profit on sales? By
how much?
(4) Would the identification of value-added and non-value-added costs assist Leno in this
situation? Briefly explain.
(5) Suppose that by previous cost-cutting drives, costs had already been pared to the
bone on item no.8976. What might Leno be forced to do with its markup on cost to remain
competitive? By how much?

Question: 7

Product modification strategy

Danish Furniture (DF) manufactures easy-to-assemble wooden furniture for home and
office. The firm is considering modification of a table to make it more attractive to individuals
and businesses. The table is small, can be used to hold a computer printer or fax machine, and
has several shelves for storage.
The companys marketing department surveyed potential buyers of the table regarding
five proposed modifications. The 200 survey participants were asked to evaluate the
modifications by using a five-point scale that ranged from 1 (strongly disagree) to 5 (strongly
agree). Their responses, along with DFs related unit costs for the modifications, follow.
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KALPESH CLASSES


1
2
3
4
5

Strongly
Disagree Neutral Agree Strongly
Disagree
Agree
Add cabinet doors in storage area
10
20
30
60
80
(Rs.6.00)
Expand storage area (Rs.2.50)
10
40
70
50
30
Add sec urity lock to storage area
30
60
50
40
20
(Rs.1.65)
Give table top a more rich, marble
10
20
50
60
60
appearance (Rs.4.25)
Extend warranty to five years
40
70
30
35
25
(Rs.5.10)
The table currently costs Rs.64 to produce and distribute and DFs selling price for this
unit averages Rs.80. The current selling price for these tables with all or some of the aforesaid
features averages Rs.95.
Required :
(1) Why is there a need in target costing to (a) focus on the customer and (b) have a
marketing team become involved with product design?
(2) DFs marketing team will evaluate the survey responses by computing a
weighted-average rating of each of the modifications. This will be accomplished by weighting
(multiplying) the point values (1, 2, etc.) by the frequency of responses, summing the results, and
dividing by 200. Rank the popularity of the five modifications using this approach.
(3) Management desires to earn approximately the same rate of profit on sales that is
being earned with the current design.
(a)
If DF uses target costing and desires to meet the current competitive selling price, what is
the maximum cost of the modified table?
(b)
Which of the modifications should DF consider?
Assume that DF wanted to add a modification or two that you excluded in your answer to
requirement 3(b). What process might management adopt to allow the company to make its
target profit for the table? Briefly explain.

Question: 8

Cost-plus pricing Vs target pricing

Ford ltd. manufactures and sells 15,000 units of a raft, RF17, in 2001. The full cost per
unit is Rs.200. Ford earns a 20% return on an investment of Rs.18, 00,000 in 2001.
Required:
(1) Calculate the selling price of RF17 in 2001. Calculate the markup percentage on the
full cost per unit of RF17 in 2001.
(2) If the selling price in requirement 1 represents a markup percentage of 40% on
variable costs per unit, calculate the variable cost per unit of RF17 in 2001.
(3) Calculate fords operating income if it had increased the selling price to Rs.230. at
this price ford would have sold 13,500 units of RF17. Assume no change in total fixed costs.
Should ford have increased the selling price of RF17 to Rs.230?
In response to competitive pressure, ford must reduce the price of RF17 to Rs.210 in
2002, in order to achieve sales of 15,000 units. Ford plans to reduce its investment to Rs.16,
50,000. If ford wants to maintain a 20% return on investment, what is the target cost per unit in
2002?
Question: 9

Target costing & value engineering

Cauvery ltd. manufactures two component parts for the television industry:
T: Annual production and sales of 50,000 units at a selling price of Rs.40.60 per unit.
Premia: Annual production and sales of 25,000 units at a selling price of Rs.60 per unit.
Cauvery includes all R & D and design costs in engineering costs. Assume that Cauvery
has no marketing, distribution, or customer-service costs.
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KALPESH CLASSES
The direct and indirect costs incurred by Cauvery on T and Premia are as follows:

T
Premia
Total
Direct materials costs (variable)
8,50,000 6,00,000 14,50,000
Direct manufacturing labor costs (variable) 3,00,000 2,00,000 5,00,000
Direct machining costs (fixed)
1,50,000 1,00,000
2,50,000
Indirect manufacturing costs



Machine setup costs


86,250
Testing costs


4,87,500
Engineering costs


4,50,000
Indirect manufacturing costs

10,23,750
Total costs

32,23,750
Cauverys management identifies the following activity cost pools, cost drivers for each
activity, and the cost per unit of cost driver for each overhead cost pool: Manufacturing
Description of Activity
Cost Driver
Cost Per Unit of
Activity
Cost Driver
(1) Setup
Preparing machine to manufacture Setups-hours
Rs.25 per setup-
a new batch of products
hour
(2) Testing
Testing components and final Testing-hours
Rs.2 per testing-
product (Cauvery tests each unit
hour
of T and Premia individually)
(3) Engineering
Designing products and processes Complexity of Costs assigned to and ensuring their
smooth product and products by
functioning
process
special study
Over a long-run horizon, Cauverys management views direct materials costs and direct
manufacturing labor costs as variable with respect to the units of T and Premia produced, and
overhead costs as variable with respect to their chosen cost drivers. For example, setup costs
vary with the number of setup-hours. Direct machining costs represent the cost of machine
capacity dedicated to the production of each product (50,000 hours at Rs.3 per hour for T).
These costs are fixed and are not expected to vary over the long-run horizon. Additional
information is as follows:

T
Premia
(1) Production batch sizes
500 units
200 units
(2) Setup time per batch
12 hours
18 hours
(3) Testing and inspection time per unit of product produced 2.5 hours
4.75 hours
(4) Engineering costs incurred on each product
Rs.1, 70,000 Rs.2, 80,000
Cauvery is facing competitive pressure to reduce the price of T and has set a target price
of Rs.34.80, well below its current price of Rs.40.60. the challenge for Cauvery is to reduce the
cost of T. Cauverys engineers have proposed new product design and process improvements for
the
New T to replace T. The new design would improve product quality, and reduce scrap
and waste. The reduction in prices will not enable Cauvery to increase its current unit sales.
(However, if Cauvery does not reduce prices, it will lose sales.) The expected effects of
the new design relative to T are as follows: (a) Direct materials costs for New T are expected to
decrease by Rs.2.00 per unit.
(b) Direct manufacturing labor costs for New T are expected to decrease by Rs.0.50 per
unit.
(c) Machining time required to make New T is expected to decrease by 20 minutes. It
currently takes 1 hour to manufacture 1 unit of T. The machines will be dedicated to the
production of New T.
(d) New T will take 7 setup-hours for each setup.
(e) Time required for testing each unit of New T is expected to be reduced by 0.5 hour.
(f) Engineering costs will be unchanged.
Assume that the batch sizes are the same for New T as for T. If Cauvery requires
additional resources to implement the new design, it can acquire these additional resources in the
quantities needed. Further assume the costs per unit of cost driver for the New T are the same as
those for T.
Page Number : 100
KALPESH CLASSES
Required:
(1) Calculate the full cost per unit for T and Premia using activity-based costing.
(2) What is the markup on the full cost per unit for T?
(3) What is Cauverys target cost per unit for New T if it is to maintain the same markup
percentage on the full cost per unit as it had for T?
(4) Will the New T design achieve the cost reduction targets that Cauvery has set?
Explain.
(5) What price will Cauvery charge for New T if it uses the same markup percentage on
the full cost per unit for New T as it did for T?
(6) What price should Cauvery charge for New T? Specify any other management actions
that Cauvery should take regarding New T.
Question: 10

Value-added & non value-added cost
Vijay Associates, a small structural design firm, prepares architectural drawings for
various clients to ensure the structural safety of buildings. The architectural plans are then
submitted to local government departments for approval. Vijays income statement for 2001
follows: Revenues
Rs.6, 80,000
Salaries of professional staff
4,00,000
(8,000 hours x Rs.50 per hour)
Travel
18,000
Administration and support
1,60,000
Total costs
Rs.78, 000
Operating income
Rs.1, 02,000

An analysis of the percentage of time spent by professional staff on various activities
gives this data:
Doing calculations and preparing drawings for clients
75%
Checking calculations and drawings
4%
Correcting errors found in drawings (not billed to clients)
7%
Making changes in response to client requests (billed to clients) 6%
Correcting errors to meet government building code requirements (not billed to clients)
8%
Total
100%
Assume administration and support costs vary with professional labor costs.
Required:
Consider each requirement independently. There is no connection between the
requirements.
(1) How much of the total costs in 2001 are value-added, non value-added, or in the gray
area in between? Explain your answers briefly. What actions can Vijay take to reduce its costs?
(2) Suppose Vijay continued to check all calculations and drawings but could eliminate
all errors so that it did not need to spend any time making corrections and, as a result, could
proportionately reduce professional labor costs. Calculate Vijays operating income.
Now suppose Vijay could take on as much business as it could get done, but it could not
add more professional staff. Assume, as in requirement 2, that Vijay could eliminate all errors so
that it does not need to spend any time making corrections. Suppose Vijay could use the time
saved to increase revenues proportionately. Assume travel costs will remain at Rs.18, 000.
Calculate Vijays operating income.

Life cycle costing
Question: 11

Product life cycle income statement
Decision Support Systems (DSS) is examining the profitability and pricing policies of
its software division. The DSS software division develops software packages for engineers. DSS
has collected data on three of its more recent packages:
EE 46: package for electrical engineers.
ME 83: package for mechanical engineers.
IE 17: package for industrial engineers.

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Summary details on each package over their two-year cradle-to-grave product lives are
as follows:


Number of
Units Sold
Package Selling Price
Year 1 Year 2
EE 46
Rs.250
2,000
8,000
ME 83
300
2,000
3,000
IE 17
200
5,000
3,000

Assume that no inventory remains on hand at the end of year 2.
DSS is deciding which product lines to emphasize in its software division. In the past two
years, the profitability of this division has been mediocre. DSS is particularly concerned with the
increase in R & D costs in several of its divisions. An analyst at the software division pointed out
that for one of its most recent packages (IE 17), major efforts had been made to reduce R & D
costs.
Last week Nancy Sullivan, the software division manager, attended a seminar on product
life-cycle management. The topic of life cycle reporting was discussed. Sullivan decides to use
this approach in her own division. She collects the following life-cycle revenue and cost
information for the EE 46, ME 83, and IE 17 packages:

(Rs. in 000)

EE 46
ME 83
IE 17

Year 1 Year 2 Year 1 Year 2 Year 1 Year 2
Revenues
500
200
600
900
1000
600
Costs






R & D
700
0
450
0
240
0
Design of product
185
15
110
10
80
16
Manufacturing
75
225
105
105
143
65
Marketing
140
3,60
1,20
150
240
208
Distribution
15
60
24
36
60
36
Customer service
50
325
45
105
220
388
Required:
(1) How does a product life-cycle statement differ from an income statement that is
calendar-based? What are the benefits of using a product life-cycle reporting format?
(2) Present a product life-cycle income statement for each software package. Which
package is the most profitable, and which is the least profitable? Ignore the time value of money.
How do the three software packages differ in their cost structure (the percentage of total
costs in each category)?
Question: 12

Life cycle costing
Destin Products makes digital watches. Destin is preparing a product life-cycle budget
for a new watch, MX3. Development on the new watch is to start shortly. Estimates about MX3
are as follows:
Life-cycle units manufactured and sold
4,00,000
Selling price per watch
Rs.40
Life-cycle cost s

R & D and design costs
Rs.10, 00,000
Manufacturing

Variable costs per watch
Rs.15
Variable costs per batch
Rs.600
Watches per batch
500
Fixed costs
Rs.18, 00,000
Marketing

Variable costs per watch
Rs.3.20
Fixed costs
Rs.10, 00,000
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KALPESH CLASSES
Distribution

Variable costs per batch
Rs.280
Watches per batch
160
Fixed costs
Rs.7, 20,000
Customer-service costs per watch
Rs.1.50

Ignore the time value of money.

Required:
(1) Calculate the budgeted life-cycle operating income for the new watch.
(2) What percentage of the budgeted total product life-cycle costs the end of the R&D
and design stages will incur?
(3) An analysis reveals that 80% of the budgeted total product life-cycle costs of the new
watch will be locked in at the end of the R & D and design stages. What implications do this
finding have for managing MX3s costs?
(4) Destins Market Research Department estimates that reducing MX3s price by Rs.3
will increase life-cycle unit sales by 10 percent. If unit sales increase by 10%, Destin plans to
increase manufacturing and distribution batch sizes by 10% as well. Assume that all variable
costs per watch, variable costs per batch, and fixed costs will remain the same.
Should Destin reduce MX3s price by Rs.3? Show your calculations.
Total quality management

Question: 13

Effect of quality management Programme

Calton Ltd. makes and sell a single product. The existing product unit specifications are
as follows:
Direct material X:
8 sq. metres at Rs.4 per sq. metre
Machine time:
0.6 running hours
Machine cost per gross hour: Rs.40
Selling price:
Rs.100

Calton Ltd., require to fulfil orders for 5,000 product units per period. There are no stocks
of product units at the beginning or end of the period under review. The stock level of material X
remains unchanged throughout the period.
The following additional information affects the costs and revenues: (1) 5% of incoming
material from suppliers is scrapped due to poor receipt and storage organization.
(2) 4% of material X input to the machine process is wasted due to processing problems.
(3) Inspection and storage of material X costs Rs.0.10 pence per sq. metre purchased.
(4) Inspection during the production cycle, calibration checks on inspection equipment,
vendor rating and other checks costs Rs.25,000 per period
(5) Production quantity is increased to allow for the downgrading of 12.5% of product
units at the final inspection stage. Downgraded units are sold as second quality units at a
discount of 30% on the standard selling price.
(6) Production quantity is increased to allow for returns from customers which are
replaced free of charge. Returns are due to specification failure and account for 5% of units
initially delivered to customers. Replacement units incur a delivery cost of Rs.8 per unit. 80% of
the returns from customers are rectified using 0.2 hours of machine running time per unit and are
re-sold as third quality products at a discount of 50% on the standard selling price. The
remaining returned units are sold as scrap for Rs.5 per unit.
(7) Product liability and other claims by customers is estimated at 3% of sales revenue
from standard product sales.
(8) Machine idle time is 20% of gross machine hours used (i.e. running hours = 80% of
gross hours).
(9) Sundry costs of administration, selling and distribution total Rs.60,000 per period.
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(10) Calton Ltd is aware of the problem of excess costs and currently spends Rs.20,000
per period in efforts to prevent a number of such problems from occurring.
Calton Ltd. is planning a quality management programme which will increase its excess
cost prevention expenditure from Rs.20,000 to Rs.60,000 per period. It is estimated that this will
have the following impact.
(1) A reduction in stores losses of material X to 3% of incoming material.
(2) A reduction in the downgrading of product units at inspection to 7.5% of units
inspected.
(3) A reduction in material X losses in process to 2.5% of input to the machine process.
(4) A reduction in returns of products from customers to 2.5% of units delivered.
(5) A reduction in machine idle time to 12.5% of gross hours used.
(6) A reduction in product liability and other claims to 1% of sales revenue from standard
product sales.
(7) A reduction in inspection, calibration, vendor rating and other checks by 40% of the
existing figure.
(8) A reduction in sundry administration, selling and distribution costs by 10% of the
existing figure.
(9) A reduction in machine running time required per product unit to 0.5 hours.
Required:
(a) Prepare summaries showing the calculation of (I) total production units
(pre-inspection), (ii) purchases of material X (sq. metres), (iii) gross machine hours. In each case
the figures are required for the situation both before and after the implementation of the
additional quality management programme, in order that the orders for 5,000 product units may
be fulfilled.
(b) Prepare profit and loss account for Calton Ltd for the period showing the profit earned
both before and after the implementation of the additional quality management programme.
(c) Comment on the relevance of a quality management programme and explain the
meaning of the terms internal failure costs, external failure costs, appraisal costs and prevention
costs giving examples for each, taken where possible from the information in the question.
Question: 14

Sell, rework or reconstitute

Novel Accessories have been manufacturing alloy figurettes to be fitted on car bonnets.
One of the figurettes resembles a tiny model of Asokan Pillar with the Lion Capitol. As the cars
fitted with these have been mistaken by public as belonging to Government dignitaries, on a
complaint, the police authorities have banned the use of this on car bonnets. The company is now
left with inventories of 8,000 units of this figurettee and manufacturing cost per unit were as
follows:

Rs.
Material
1.20
Labour
0.80
Fixed overhead
0.50

2.50
Prior to being banned, the selling price was Rs.5 per unit. The casts for this figurette costs
Rs.1,000, when originally acquired. The company has examined the situation and has come out
with three alternative courses or action.
(i)
Sell the units as scrap for Rs.6,500.
(ii)
Rework them by putting a base on them which would allow them to be sold as drawing
room curios at a price of Rs.3.20 each. Such work would require Rs.2 per unit of additional
labour and a fixed overhead charge of Re.1 each would be entailed in terms of the companys
absorption costing system. No further materials would be required.
(iii)
Melt them down and use the material as substitute in a strong selling line where the metal
currently used costs 50% more than the metal used in the figurette. This process would incur a
material loss of three-eighths of the original metal.
You are required to examine each of these alternatives and arrive at the decision which
would result in the greatest benefit to the company. Your calculations should be justified by
appropriate reasoning and explanation.
Page Number : 104
KALPESH CLASSES
CHAPTER



ASSIGNMENT

1. Hungarian method for solving assignment problem:

1. Row operation: Identify least number in each row & subtract it from all numbers in
that row.
2. Column operation: In the matrix resulting from the step 1, identify least number in
each column & subtract it from all numbers in that column.
3. Cover all the Zeros in the matrix resulting after step 2 with minimum number of lines.
If number of lines = order of matrix then go to step 5 else go to step 4.
4. Identify the least uncovered number; add it to numbers lying in the intersection of two
lines; subtract it from uncovered numbers.
5. Allocation: Identify row with only one zero & make allocation in the call having zero
as its value & draw line against in the column where the cell is placed. Continue in the process
till you make all the allocation.
Note:
The above steps solve a minimisation balance assignment problem.
2. Maximisation balance assignment problem.
Convert the problem into minimisation problem by identifying highest number in the
assignment matrix and reducing all other numbers from it. Then apply Hungarian method to
solve the problem.

3. Minimisation unbalanced assignment problem.
An assignment problem it said to be unbalanced if the number of rows not equal to
number of columns. The first step is to balanced the given matrix by adding a dummy row or
column and then proceed to apply Hungarian method. Dummy row or column should be
assigned zero as value.
4. Maximisation unbalanced assignment problem.
First balance the problem and then convert it into minimisation and proceed to apply
Hungarian method.
5. Prohibited routes
Where an assignment problem prohibits making an allocation in the particular cell such
problem is said to be having prohibit routes. In such case allocate a very high cost M or 8 to
such cell and proceed to apply Hungarian method.
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KALPESH CLASSES
Rudimentary problems
Question: 1

Minimisation balanced

A machine tool company decides to make four subassemblies through four persons. Each
person is to receive only one subassembly. The cost of each assembly is determined by the bids
by each person and is shown in the table in hundreds of rupees. Assign the different
subassemblies to contractors so as to minimize the total cost.


Persons
Subassembly
1
2
3
4
1
15
13
14 17
2
11
12
15 13
3
13
12
10 11
4
15
17
14 16
Question: 2

Maximisation balanced
A manager has 4 subordinates and 4 tasks. The subordinates differ in efficiency. His
estimate of the production each would do is given in the table. How the task should be allocated
one to one man, so that total production is maximized.

Subordinates
Task
I
II
III
IV
1
8
26
17
11
2
13
28
4
26
3
38
19
18
15
4
19
26
24
10
Question: 3

Minimisation- unbalanced
A has one surplus truck in each cities A, B, C, D & E and one deficit truck in each of the
cities 1, 2, 3, 4, 5 & 6. The distance between the cities in kilometers is shown in the matrix
below.

Cities
1
2
3
4
5
6
A
12
10
15
22
18
8
B
10
18
25
15
16
12
C
11
10
3
8
5
9
D
6
14
10
13
13
12
E
8
12
11
7
3
10
Find the assignment of trucks from the cities in surplus to cities in deficit so that the total
distance covered by vehicles in minimum.
Question: 4

Maximisation-unbalanced
A management consulting firm has a backlog of 4 contracts. Work on these contracts
must be started immediately. 3 project leaders are available for assignment to the contracts.
Because of the varying work experience of the leaders, the profit to consulting firm will vary
based on the assignment as shown below. The unassigned contract can be completed by
subcontracting the work to an outside consultant. The profit on the subcontract is zero. Find the
optimal assignment.

Contract
Project Leader
1
2
3
4
A
13
10
9
11
B
15
17
13
20
C
6
8
11
7

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KALPESH CLASSES
Question: 5

Multiple optimal solutions

Solve the minimal assignment problem whose effectiveness matrix is

Men
Jobs
1
2
3
4
I
2
3
4
5
II
4
5
6
7
III
7
8
9
8
IV
3
5
8
4

Question: 6

Prohibited routes
WELLDONE Company has taken the third floor of a multi-storeyed building for rent
with a view to locate one of their zonal offices. There are five main rooms in this floor to be
assigned to five managers. Each room has its own advantages and disadvantages. Some have
windows; some are closer to the washrooms or to the canteen or secretarial pool. The rooms are
of all different sizes and shapes. Each of the five managers was asked to rank their room
preferences amongst the rooms 301, 302, 303, 304 and 305. Their preferences were recorded in a
table as indicated below:
MANAGER
M1
M2
M3
M4
M5
302
302
303
302
301
303
304
301
305
302
304
305
304
304
304
*
301
305
303
*
*
*
302
*
*
Most of the managers did not list all the five rooms since they were not satisfied with
some of these rooms and they have left off these from the list. Assuming that their preferences
can be quantified by numbers, find out as to which manager should be assigned to which room so
that their total preference ranking is a minimum.
Formulation problems

Question: 7

Airline scheduling

An airline operates seven days a week has time -table as shown below. Crews must have
a minimum layover of 5 hours between flights. Obtain the pairing of flights that minimizes
layover time away from home. For any given pairing the crew will be based at the city that
results in smaller layover. For each pair also mention the town where the crew should be based.


Delhi
Jaipur

Jaipur
Delhi
Flight
Departure Arrival Flight no. Departure Arrival
no.
1
7.00
8.00
101
8.00
9.15
2
8.00
9.00
102
8.30
9.45
3
13.30
14.30
103
12.00
13.15
4
18.30
19.30
104
17.30
18.45

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KALPESH CLASSES
Question: 8

Travelling salesmen

A travelling salesman has to visit 5 cities. He whishes to start from a particular city, visit
each city once and return to his starting point. The travelling cost for each city from a particular
city is given below:
To city


A
B
C
D
E

A
X
4
7
3
4

B
4
X
6
3
4
From city C
7
6
X
7
5

D
3
3
7
X
7

E
4
4
5
7
X
What is the sequence of visit of the salesman, so that the cost is minimum?
Question: 9

Production scheduling

An organization producing 4 different products viz. A, B, C and D having 4 operators
viz. P, Q, R
and S, who are capable of producing any of the four products, works effectively 7 hours a
day.
The time (in minutes) required for each operator for producing each of the product are
given in the cells of the following matrix along with profit (Rs. Per unit).

Operator
Product

A
B
C
D
P
6
10
14
12
Q
7
5
3
4
R
6
7
10
10
S
20
10
15
15
Profit (Rs. / Unit)
3
2
4
1
Find out the assignment of operators to products which will maximize the profit.
Question: 10

Data entry job allocation

A firm employs typists for piecemeal work on an hourly basis. There are five typists
available and their charges and speeds are different. According to an earlier understanding, only
one job is given to one typist and the typist is paid for full hours even if he works for a fraction
of an hour.
Find the least cost allocation for the following data:
Typist
Rate/Hour
Pages/Hour
Job
No. of Pages
A
Rs.5
12
P
200
B
Rs.6
14
Q
176
C
Rs.3
8
R
150
D
Rs.4
10
S
300
E
Rs.4
11
T
180
Question: 11

Seminar scheduling
To stimulate interest and provide an atmosphere for intellectual discussion, a finance
faculty in a management school decides to hold special seminars on four contemp orary topics -
leasing, portfolio management, private mutual funds, swaps and options. Such seminars should
be held once a week in the afternoons. However, scheduling these seminars (one for each topic,
and not more than one seminar per afternoon) has to be done carefully so that the number of
students who cannot attend a particulars seminar on a specific day is as follows: Page Number :
108
KALPESH CLASSES

Leasing
Portfolio
Private
Swaps and
Management Mutual Funds
Options
Monday
50
40
60
20
Tuesday
40
30
40
30
Wednesday
60
20
30
20
Thursday
30
30
20
30
Friday
10
20
10
30
Find an optimal schedule of the seminars. Also find out the total number of students who
will be missing at least one seminar.
Question: 12

Replacement decisions
Average time taken by an operator on a specific machine is tabulated below. The
management is considering replacing one of the old machines by a new one and the estimated
time for operation by each operator on the new machine is also indicated.
Machines
Operators 1
2
3
4
5
6 New
A
10 12
8 10
8 12
11
B
9 10
8
7
8
9
10
C
8
7
8
8
8
6
8
D
12 13 14 14 15 14
11
E
9
9
9
8
8 10
9
F
7
8
9
9
9
8
8
Find out an allocation of operators to the old machines to achieve a minimum operation
time.
(a) Reset the problem with the new machine and find out the allocation of the operators to
each machine and comment on whether it is advantageous to replace an old machine to achieve a
reduction in operating time only.
(b) How will the operators be reallocated to the machines after replacement?

Question: 13

Territorial allocation
Six salesmen are to be allocated to six sales regions so that the cost of allocation of the
job will be minimum. Each salesman is capable of doing the job at different cost in each region.
The cost matrix is given below:
Region



I
II
III
IV
V
VI

A
15 35
0 25
10
45

B
40
5
45 20
15
20
Salesman C
25 60
10 65
25
10

D
25 20
35 10
25
60

E
30 70
40
5
40
50

F
10 25
30 40
50
15
(Figures are in rupees)

(a) Find the allocation to give minimum cost. What is the cost?
(b) Now suppose the above table gives earning of each salesman at each region. How can
you find an allocation so that the earning will be maximum?
Determine the solution with optimum earning.
(c) There are restrictions for commercial reasons that A cannot be posted to region V and
E
cannot be posted to region II.
Write down the cost matrix suitably after imposing the restrictions.



Page Number : 109
KALPESH CLASSES
Question: 14

Liquidity management
X holds stock of different companies. For a certain problem he is compelled to sell off
four of his holdings. Since he want s the money over the next five months, he sells not more than
one stock in any month. He has estimated the sale proceeds in each of the next five months as
follows: (Rs. 000)

June July
Aug
Sep Oct
S1
13
16
14
19
17
S2
18
20
13
18
12
S3
17
15
10
22
18
S4
19
18
14
21
15
Find what will be the optimum plan of X and how much money can he realise by sales?
Question: 15

Market research and assignment

The market research team of the Look Forward Company requires some household data
from four different cities. The team has to perform this job in two days- the next Saturday and
Sunday. It plans to spend half a-day in each of the cities. The relevant data are given here:


Probability of a Household
Contact
Day and Time
City 1
City 2
City 3
City 4
Saturday Morning
0.32
0.85
0.16
0.64
Saturday Evening
0.60
0.56
0.95
0.80
Sunday Morning
0.70
0.35
0.40
0.62
Sunday Evening
0.10
0.72
0.64
0.90
Number of households expected to interview
150
100
200
200
How should the team plan its visit to the four cities so that the expected response may be
maximised? State this expected response.
Page Number : 110
CHAPTER

KALPESH CLASSES


TRANSPORTATION

Stages in solving transportation problems

Stage 1



Stage 2





Initial basic feasible solution


Optimality test










Northwest corner method

Vogels method

Modi optimality method

Steps in Vogels method

1. Find the difference between two least cost cells in every row and column.
2. Identify the row or column with the highest of the difference. It is in this row or
column where allocation should be made.
3. In the row or column selected in step two, identify the least cost cell. It is in this cell
allocation should be made.
4. Quantity to be allocated is the least of demand and supply.
5. Reduce the quantity allocated from they respect demand and supply.
6. Cancel other cells in the row or column where the demand or supply has became zero.
7. Continue the above steps till all allocations are made.
Note:
Where there arises a tie in differences in rows or columns, select that row or column
which is having least of least cost cell. If there arises tie there also make allocation in any of the
rows or columns which is tied.
Page Number : 111
KALPESH CLASSES
Rudimentary problems
Question: 1

Minimisation-balanced
Obtain the IBFS for the following & also determine whether they satisfy the optimality
test.


Warehouse-1 Warehouse-2
Warehouse-3
Supply
Factory-1
6
8
4
14
Factory-2
4
9
8
12
Factory-3
1
2
6
5
Demand
6
10
15
-
Question: 2

Minimisation-balanced-degeneracy

Find optimal solution for the following problem


Warehouse-1 Warehouse-2
Warehouse-3
Supply
Factory-1
50
30
220
1
Factory-2
30
45
170
3
Factory-3
250
200
50
4
Demand
4
2
2

Question: 3

Maximisation-unbalanced

Consider the following transportation profit table & determine the optimal solution


Warehouse-1 Warehouse-2
Warehouse-3
Warehouse-4 Supply
Factory-1
40
25
22
33
100
Factory-2
44
35
30
30
30
Factory-3
38
38
28
30
70
Demand
40
20
60
30

Question: 4

Multiple optimal solutions
Solve the following Transportation problem


Warehouse-1 Warehouse-2 Warehouse-3 Warehouse-4 Supply
Factory-1
5
3
6
2
19
Factory-2
4
7
9
1
37
Factory-3
3
4
7
5
34
Demand
16
18
31
25
-
Question: 5

Prohibited routes


Godown1 Godown2 Godown3 Godown4 Godown5 Godown6
Stock
availability
Factory1
7
5
7
7
5
3
60
Factory2
9
11
6
11
*
5
20
Factory3
11
10
3
2
2
8
90
Factory4
9
10
9
6
9
12
50
Demand
60
20
40
20
40
40


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KALPESH CLASSES
Formulation problems
Question: 6

Trans-shipment
Madhav Ltd. has decided to launch an addition to its product range. The new product
may be distributed through any combination of the two company warehouses W1 and W2. The
available annual production capacities for the new product are:
100 units at plant P1
200 units at plant P2
100 units at plant P3
The three major concentrations of customer demand are at locations D1, D2 and D3
which are estimated to require each year:
90 units at D1
80 units at D2
90 units at D3
The unit production costs amount to 3, 4 and 1 at P1, P2 and P3 respectively. The unit
handling costs at the warehouse amount to 2 and 3 at W1 and W2 respectively.
The unit transportation costs from plant to warehouse and unit delivery costs from
warehouse to customer are as follows:

W1
W2

D1
D2
D3
P1
6
6
W1
3
5
8
P2
5
5
W2
5
3
9
P3
13
4




(All costs are in Rs.)
Required:
Determine an optimu m production and distribution schedule.

Question: 7

Cash management
A firm is facing a short term cash flow problem which, over the next three months, will
necessitate a bank loan. The timing of this loan, which will be at an interest rate of 2% per month
is seen to the important as the loan will be used to balance the cash inflow from accounts
receivable and the cash outflow from accounts payable, which are estimated to be as follows:
Month
Accounts
Accounts
receivable (Rs. 000) payable (Rs. 000)
July
15
20
August
25
30
September
35
40

You many assume that both accounts receivable and accounts payable have to be settled
by the end of September. In any month, accounts will be received at sufficient time to finance the
firms own payments in that month, however, in July and August, payment to suppliers can be
delayed by at most one month but in doing so, and the firm will lose the 2% discount that it
would otherwise receive for payment within 30 days.
All bank loans must be agreed at the start of any month and they attract a minimum of
one months interest. Any surplus cash can be deposited with the bank earning 1% interest per
month. (Due to the short-term nature of the problem, you may ignore the compounding of
interest).
Required:
(a) Determine the optimum solution using the transportation algorithm.
(b) If the discount offered for the payment of August accounts within 30 days is increased
to 3%, explain whether this would affect the optimum solutions.
Question: 8

Supply management
The Brown Chemical Company produces a special oil-based material which is currently
in short supply. Four of Browns customers have already placed orders which in total exceed the
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KALPESH CLASSES
combined capacity of its two plants and the company needs to know how it should
allocate its production capacity to maximise profits.
The following distribution costs per unit have been determined.

Customer
C1
C2
C3
C4
Rs.
Rs.
Rs.
Rs.
Plant X
16
15
14
18
Plant Y
15
15
14
15

The variable unit production costs are Rs. 10 per plant X and Rs. 12 for plant Y. Since
the four customers are in different industries, the pricing structure allows different prices to be
charged to different customers. (The material undergoes slight variations for each customer at
negligible costs). These prices are Rs. 46 for C1, Rs. 42 for C2, Rs. 40 for C3 and Rs. 44 for C4.
The customers orders (in units) are:

C1
C2
C3
C4
2000
5000
3500
2500
and the plant capacities at X and Y in the period concerned are 6000 and 3000 units
respectively.
Due to an industrial dispute the company can only supply customer C3 from plant Y.
Required:
(a) Use the transportation algorithm to determine the optimum solution.
(b) If the industrial disputes were to be resolved so that customer C3 could be supplied
from plant X, how would this affect your solution?
Question: 9

Recruitment planning
As a result of an expansion in production capacity, the management of Minerva
Manufacturing Ltd., has decided to take additional employees at each of its five plants in the
South-West of India. The numbers required at each plant are:

Plant
1
2
3
4
5
Employees required
45 74 50 82 63
All its employees currently come from three large towns in the area. Upon contracting the
main employment agency in each town, Minerva finds that the numbers of suitable people
available for employment are as follows:

Agency (town)
A
B
C
People available
120 100 154

Because of the rural situations of the five plants, Minerva has agreed with the trade
unions concerned that daily return travelling expenses from each town will be paid by the
company to all employees. The rate is currently 12p per mile, and the distances (in miles)
between each plant and each town are as follows:

Town
1
2
3
4
5
A
6
2
2
6
3
B
14 9
4
5
3
C
10 4
11
3
4

(a) How many people should Minerva aim to employ from each town in order to
minimise the additional travelling expenses incurred?
(b) What is the minimum value of these expenses in connection with the additional 314
employees?
(c) In order to appear not to be unfair to potential employees from any one of the three
towns, it has now been decided that the 60 people who are surplus to requirements should be
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KALPESH CLASSES
spread equally between the three towns, i.e., 20 from each. How much more than in (a)
would the company have to pay out each day in travelling expenses in order to achieve this at
minimum cost?
Question: 10

Retrenchment planning

Management of Ranga Ltd is very much worried about the continuing recession in the
country.
The company has 7 divisions (A to G). They have decided to close four divisions namely
A, B, C
and D and transfer some of the employees to the remaining divisions. Personnel at the
units to be closed have signified a willingness to move to any of the three remaining units and
the company is willing to provide them with removal costs. The technology of production is
different to some degree at each unit and retraining expenses will be incurred on transfer. Not all
existing personnel can be absorbed by transfer and a number of redundancies will arise.
Cost of redundancy is given as a general figure at each unit is to be closed.
Number employed A-200 B-400 C-300 D-200





Rs. thousands per person
Retraining costs
A
B
C
D
Transfer to :




Unit E
0.5
0.4
0.6
1.3
Unit F
0.6
0.4
0.6
0.3
Unit G
0.5
0.3
0.7
0.3
Removal costs:




Transfer to :




Unit E
2.5
3.6
3.4
3.7
Unit F
2.4
4.6
3.4
1.7
Unit G
2.5
2.7
3.3
2.7
Redundancy payments
6.0
5.0
6.0
7.0
Additional personnel required at units remaining open: E-350 F-450 G-200.
Use the transportation method to obtain an optimal solution to the problem of the
cheapest means to transfer personnel from the units to be closed to those which will be
expanded.

Question: 11

Product disrtibution
The XYZ Tobacco Company purchases tobacco and stores in warehouses located in the
following four cities:

Warehouse
Capacity
Location
(Tonnes)
City A
90
City B
50
City C
80
City D
60
The warehouses supply to cigarette companies in three cities that have the following
demand:-

Cigarette company
Demand (Tonnes)
Bharat
120
Janata
100
Red Lamp
110

The following railroad shipping costs per tonne (in hundred rupees) have been
determined: From
To
Bharat
Janata
Red Lamp
A

7
10
5
B

12
9
4
C

7
3
11
D

9
5
7
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KALPESH CLASSES
Because of railroad construction, shipments are temporarily prohibited from warehouse at
city A to Bharat Cigaretee Company.
(a) Find the optimal distribution of XYZ Tobacco Company.
(b) Are there multiple optimal solutions? If there are alternative optimal solutions,
identify them.
Question: 12

Regular or overtime production
A company has factories at A, B and C which supply warehouses at D, E, F and G.
monthly factory capacities are 250, 300 and 400 units respectively for regular production. If
overtime production is utilised, factories A and B can produce 50 and 75 additional units
respectiv ely at overtime-incremental costs of Rs.4 and Rs.5 respectively. The current warehouse
requirements are 200, 225, 275 and 300 units respectively. Unit transportation costs in rupees
from factories to warehouses are as follows:

From To
D
E
F
G
A

11
13
17
14
B

16
18
14
10
C

21
24
13
10

Determine the optimum distribution for this company to minimize costs.

Question: 13

Inventory management and transportation

ABC manufacturing company wishes to develop a monthly production schedule for the
next months. Depending upon the sales commitments, the company can either keep the
production constant, allowing fluctuations in inventory or inventories can be maintained at a
constant level, with fluctuating production. Fluctuating production necessitates in working
overtime, the cost of which is estimated to be double the normal production cost of Rs.12 per
unit. Fluctuating inventories result in inventory carrying cost of Rs.2 per unit. If the company
fails to fulfil its sales commitment, it incurs a shortage cost of Rs.4 per unit per month. The
production capacities for the next the three months are shows below.

Production capacity
Month
Regular
0vertime
Sales
1
50
30
60
2
50
0
120
3
60
50
40

Determine the optimal production schedule.
Page Number : 116
CHAPTER

KALPESH CLASSES


LINEAR PROGRAMMING
Steps in solving a Maximisation simplex problem

1. Conversion of inequalities in to equalities
Convert of inequalities in to equalities by adding slack variables in the constraint
equations.
Slack variable represents idle or unused resources. Since idle resource do not generate
any profit, the value of slack variable in the objective function is zero.

2. Construct the initial simplex table
The table should have the following columns:
FR PROGRAM PROFIT QUANTITY X1 X2 S1 S2 RR

Write the co-efficients of the constraint functions in the first table, against the respective
variables.
Identify the variables forming unit matrix among themselves. These variables are the
ones, which should enter the program column as basic variables.
Assume the value of all non-basic variables to be zero and find out the value of basic
variables to be entered in quantity column.
Calculate the values in net-evaluation row (NER). NER = Cj-Zj.
Cj is the co-efficient of the variables in the objective function and Zj is the product of
numbers in profit column and respective variable columns.
If all the numbers in NER are either negative or Zero the solution is optimal; Else, we
have to go for improvement.
FR: Fixed ratio = Key column number/Key number.
RR: Replacement ratio = Quantity column/Key number.
3. Steps for improvement:
(c) Identify the variable with highest positive number in NER. This will be called as
incoming variable (I). The column in which this variable is placed is called as key column.
(d) Calculate the replacement rat ios for the existing basic variables.
(e) That variable having the least replacement ratio will be the out going variable (O).
(f) The number lying at the inter-section of key row and key column is referred to as key
number.
(g) Construct the second simplex table where the incoming variable will enter the
program column.
(h) The value of basic variables from quantity column till the replacement ratio column
should be computed as follows:

New basic variable

Continuing basic variable



Divide the existing values of the
Values are computed using A-B formula,
variable in the first table by key
where A is the value of the variables in
number. The resulting values
the previous table, and B is the product
should be entered in new table.
of fixed ratio and key row number.

(i) Calculate values in NER for the new table and check for optimality.
(j) Repeat the above steps until the optimal solution is obtained.

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KALPESH CLASSES
Note:
Slack variables are used when there is < sign in the constraint functions. If the sign is >
then surplus variables are to be used. When surplus variables are used then artificial variables
should be included in the solution.
Note:
When artificial variable is used then it should be assigned a very high cost M in the
objective function so that it will not form part of our final solution

Note:
Steps for minimisation problem are all most same as that of maximisation. However in
ascertaining whether solution is optimal there should be no negative number in the NER.
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KALPESH CLASSES
Question: 1

Maximisation-simplex

Maximize
Z = 3x1 + 4x2

Subject to
2x1 + 3x2 = 16
(machining time)

4x1 + 2x2 = 16
(assembly time)

X1 = 0, x2 = 0


Question: 2

Minimization simplex
A small township of 15,000 people requires, on the average, 3, 00,000 gallons of water
daily.
The city is supplied water from a central water-works where the water is purified by such
conventional methods as filtration and chlorination. In addition, two different chemical
compound (i) softening chemical and (ii) health chemical are needed for softening the water and
for health purposes. The waterworks plans to purchase two popular brands that contain these
chemicals.
One unit of Chemico Corporations product gives 8 Pounds of softening chemical and 3
Pounds of health chemical. One unit of Indian Chemicals product contains 4 Pounds and 9
Pounds per unit, respectively, for the same purposes.
To maintain the water at a minimum level of softness and to meet a minimum programme
of health protection, experts have decided that 150 and 100 Pounds of the two chemicals that
make up eac h product must be added to water daily. At a cost of Rs.8 and Rs.10 per unit
respectively for Chemicos and Indian Chemicals products, what is the optional quantity of each
product that should be used to meet the minimum level of softness and minimum health
standard?
Question: 3

Infeasible solution

Maximize
Z = 20x1 + 30x2
Subject to
2x1
+ X2
= 40

4x1
- X2
= 20

X1


= 30

X1,
X2
= 0
Question: 4

Unbounded solution

Maximize
Z = 10x1 + 20x2
Subject to
2x1 + 4x2
= 16

X1 + 5x2
= 15

x1, x2
= 0
Question: 5

Multiple optimal solution

Maximize
Z = 8x1 + 16x2
Subject to
x1 + x2
= 200

x2
= 125

3x1 + 6x2
= 900

x1, x2
= 0
Question: 6

Construction of dual
Write the dual for the following LPP:
(a)
Type-1
Maximize
Z = 40 x1 + 35 x2
Subject to
2 x1 + 3 x2
=
60

4 x1 + 3 x2
=
96

X1 , x2
=
0


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KALPESH CLASSES
(b)
Type-2
Minimize
Z = 10 x1 + 20 x2
Subject to
3 x1 + 2 x2
=
18

x1 + 3 x2
=
8

2 x1 - x2
=
6

X1, x2
=
0

(c)
Type-3
Maximise
Z = 8x1 + 10x2 + 5 x3
Subject to
x1


- x3
= 4

2x1 + 4x2


= 12

x1
+ x2
+ x3
= 2

3x1 + 2x2
- x3
= 8



x1, x2, x3
= 0

(d)
Type-4
Maximise
Z = 3x1 + 5x2 + 7x3

Subject to
x1
+ x2 + 3x3
= 10

4x1
- x2 + 2x3
= 15




x1, x2
= 0


X3 unrestricted in sign

Question: 7

Interpretation of dual

One unit of product A contributes Rs.7 and requires 3 units of raw material and 2 hours
of labour. One unit of product B contributes Rs.5 and requires one unit of raw material and one
hour of labour. Availability of the raw material at present is 48 units and there are 40 hours of
labour.
(a)
Formulate it as a linear programming problem.
(b)
Write its dual.
(c)
Solve the dual with Simplex method and find the optimal product mix and shadow prices
of the raw material and labour.
Question: 8

Short cut substitution

Maximise
Z = 6x1 + 20x2
Subject to
2x1 + x2
= 32

3x1 + 4x2
= 80

x1
= 8

x2
= 10
Question: 9

Interpretation of final simplex table

The simplex tableau for a maximization problem of linear programming is given here: C j
x j
X l x2 S1 S2 Quantity (b i)
5 x2
1 1 1 0 10
0 S2
1 0 -1 1 3

c j
4 5 0 0

z j
5 5 5 0

c j - z j -1 0 -5 0
Answer the following questions, giving reasons in brief:
(a)
Is this solution optimal?
(b)
Are there more than one optimal solution?
(c)
Is this solution degenerate?
(d)
Is this solution feasible?
(e)
If S1 is slack in machine A (in hours / week and S2 is slack in machine B (in hours /
week), which of these machines is being used to the full capacity when producing according to
this solution?
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KALPESH CLASSES
(f)
A customer would like to have one unit of product x1 and is willing to pay in excess of
the normal price in order to get it. How much should the price be increased in order to ensure no
reduction of profits?
Formulation problems

Question: 10

Optimum Product-mix

WELL TYPE Manufacturing Company produces three types of typewriters; Manual
type-writer Electronic typewriters, and Deluxe Electronic typewriters. All the three models are
required to be machined first and then assembled. The time required for the various models are
as follows: Type
Machine Time (in hour) Assembly Time (in hour)
Manual Typewriter
15
4
Electronic Typewriter
12
3
Deluxe Electronic Typewriter
14
5

The total available machine time and assembly time are 3,000 hours and 1,200 hours
respectively. The data regarding the selling price and variable costs for the three types are:
Manual Electronic Deluxe Electronic
Selling Price (Rs.)
4,100
7,500
14,600
Labour, Material and other variable costs (Rs.)
2,500
4,500
9,000

The company sells all the three types on credit basis, but will collect the amounts of the
first next month. The labour, material and other variable expenses will have to be paid in cash.
The company has taken a loan of Rs.40, 000 from a co-operative bank and this company will
have repaid it to the bank on 1st April, 2005. The TNC Bank from whom this company has
borrowed Rs.60, 000 has expressed its approval to renew the loan.

The Balance Sheet of this Company as on 31.3.05 is as follows: Liabilities
Rs.
Assets
Rs.
Equity Share Capital
1,50,000 Land
90,000
Capital Reserve
15,000 Building
70,000
General Reserve
1,10,000 Plant & Machinery
1,00,000
Profit & Loss a/c
25,000 Furniture & Fixtures
15,000
Long term loan
1,00,000 Vehicles
30,000
Loan from TNC Bank
60,000 Inventory
5,000
Loan from Co-op. Bank
40,000 Receivables
50,000

Cash
1,40,000
Total
5,00,000
Total
5,00,000
The company will have to pay a sum of Rs.10, 000 towards the salary from top
management executives and other fixed overheads for the month. Interest on long term loans is
to be per every month at 24% per annum. Interest on loans from TNC and Co-operative Banks
may be taken to be Rs.1, 200 for the month. Also this company has promised to deliver 2 Manual
typewriters and 8 Deluxe Electronic typewriters to one of its valued customers next month.
Also make sure that the level of operation in this company is subject to the availability of
cash next month. This company will also to able to sell all their types of typewriter in the market.
The Senior Manager of this company desires to know as to how many units of each typewriter
must be manufactured in the factory next month so as to maximize the profits of the company.
Formulate this as a linear programming problem. The formulated problem need not be
solved.

Question: 11

Planning-production & financing

Consider a company that must produce two products over a production period of three
months of duration. The company can pay for materials and labour from two sources: The firm
faces three decisions:
(1)
How many units should it produce of Product 1?
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KALPESH CLASSES
(2)
How many units should it produce of Product 2?
(3)
How much money should it borrow to support the production of the two products?
In making these decisions, the firm wishes to maximize the profit contribution subject to
the conditions stated below:
(i)
Since the companys products are enjoying a sellers market, it can sell as many units as
it can produce. The company would therefore like to produce as many units as possible subject to
production capacity and financial constraints. The capacity constrains, together with cost and
price data, are given in Table -1.

Capacity, Price and Cost data
Product
Selling Price
Cost of Production
Requirement Hours per unit in
( Per unit)
( Per unit)
Department



A
B
C
1
14
10
0.5
0.3
0.2
2
11
8
0.3
0.4
0.1
Available hours per production period of three months
500
400
200

(ii)
The available company funds during the production period will be Rs.3 lakhs.
(iii)
A bank will give loans up to Rs.2 lakhs per production period at an interest rate of 20
percent per annum provided the companys acid (quick) test rat io is at least 1 to 1
while the loan is outstanding. Take simplified acid-test ratio given by Surplus cash on
hand after production + Accounts receivable
Bank Borrowing + Interest accrued thereon
(iv)
Also make sure that the needed funds are made available for meeting the production
costs.
Formulate the above as a Linear Programming Problem.

Question: 12

Input mix planning

A refinery makes 3 grades of petrol (A, B, C) from 3 crude oils (d, e, f) Crude can be
used in any grade but the others satisfy the following specifications.

Grade
Specifications
Selling Price per litre
A
Not less than 50% crude d
8.0

Not more than 25% crude e

B
Not less than 25% crude d
6.5

Not less than 50% crude e

C
No specifications
5.5
There are capacity limitations on the amount of the three crude elements that can be used;
Crude Capacity Price per litre
D
500
9.5
E
500
5.5
F
300
6.5
It is required to produce the maximum profit.

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KALPESH CLASSES
Question: 13

Graphical approach-Maximisation

Maximise z= 22x + 18y
Subject to
X +y =20
360x +240y =5760
x, y =0.
Solve the LPP under graphical method.

Question: 14

Graphical approach-Minimisation
Minimise Z= 10x + 4y
Subject to
4x + y = 80
2x + y = 60
x, y = 0.
Solve the LPP under graphical method.
Page Number : 123
CHAPTER

KALPESH CLASSES

NETWORK ANALYSIS
Question: 1

Drawing network
Draw a network for the following data:

Task Immediate predecessor
A
-
B
-
C
B
D
B
E
B
F
E
G
A, D, C
Question: 2

Drawing network
Draw a network for the following data:

Task Immediate predecessor
A
-
B
A
C
A
D
B
E
A
F
B, E
G
C
H
D, F
I
G
J
H, I
Question: 3

Calculation of floats
With the help of activities given below draw a network and find out:-
(a) Earliest start time (b) Earliest finish time (c) Latest start time (d) Latest finish time (f)
Total float (g) Free float (h) Independent float
The following are the activities and their duration:

Activity
Duration
1-2
6
2-3
8
2-4
10
3-4
0
3-5
6
4-5
20
5-6
16

Question: 4

PERT
A small project network is composed of 7 activities whose time estimates are listed in
the table below.
(a)
Draw the project network and identify all the paths through it.
(b)
Find the expected duration and variance for each activity. What is the expected project
length?
(c)
Calculate the variance and the standard deviation of project length. What is the
probability that the project will be completed
i)
Atleast 3 weeks earlier than expected.
ii)
No more than 3 weeks later than expected.
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KALPESH CLASSES
(d)
If the project due date is 18 weeks what is the probability of not meeting the due date.
(e)
What due date has about 90% chance of being met?
(f)
Find probability of reaching event-5 in 9 days.
(g)
Also find the event variances.
Duration of weeks

Activities (I-j) to tm tp
1-2
1
1
7
1-3
1
4
7
1-4
2
2
8
2-5
1
1
1
3-5
2
5 14
4-6
2
5
8
5-6
3
6 15
Question: 5

PERT

A small project consisting of eight activities has the following characteristics



Time estimates in weeks
Activity
Preceding
Most
Most
Most
activity
optimistic
likely
pessimistic

A
None
2
4
12
B
None
10
12
26
C
A
8
9
10
D
A
10
15
20
E
A
7
7.5
11
F
B,C
9
9
9
G
D
3
3.5
7
H
E,F,G
5
5
5

a. Draw the PERT network for the project
b. Determine the critical path
c. Prepare the activity schedule for the project
d. If a 30 week deadline is imposed , what is the probability of completing the project
within the time limit.
e. If the project manager wants to be 99% sure that the project is completed on the
scheduled date, how many weeks before that date should he start the project work?

Question: 6

Crashing

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: Job(i-j)
Normal days
Crash days
Crash cost per day
1-2
9
6
20
1-3
8
5
25
1-4
15
10
30
2-4
5
3
10
3-4
10
6
15
4-5
2
1
40

a) What is the normal project length and minimum project length?
b) Determine the minimum crashing cost of schedules ranging from normal length down
to, and including, the minimum length schedule.
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KALPESH CLASSES
c) Overhead costs total Rs.60/day. What is the optimum length schedule in terms of both
crashing and overhead cost?
Question: 7

Crashing
A small project is having 7 activities. The relevant data about these activities is given
below: Activity
Dependence
Normal
Crash
Normal cost
Crash cost
duration
duration
(Rs)
(Rs)
(days)
(days)
A
-
7
5
500
900
B
A
4
2
400
600
C
A
5
5
500
500
D
A
6
4
800
1000
E
B, C
7
4
700
1000
F
C, D
5
2
800
1400
G
E, F
6
4
800
1600
(a) Find out normal and minimum duration
(b) What is the percentage increase in cost to complete the project in 21 days?

Question: 8


Crashing
The following table shows for each activity needed to complete the project the normal
time, shortest time in which the activity can be completed of a building contract and the cost per
day for reducing the time of each activity. The contract includes a penalty clause of Rs 100 per
day over 17 days. The overhead cost per day is Rs 160.

Activity
Normal time
Shortest time Cost of reduction
(in days)
(in days)
per day
1-2
6
4
80
1-3
8
4
90
1-4
5
3
30
2-4
3
3
-
2-5
5
3
40
3-6
12
8
200
4-6
8
5
50
5-6
6
6
-

The cost of completing the eight activities in normal time is Rs. 6500.
a. Calculate the normal duration of the project, its cost and the critical path.
b. Calculate and plot on graph the cost time function for the project and state (i) The
lowest cost and associated time.
(ii) The shortest time and associated cost.

Question: 9

Resource allocation
Find out the time required to complete the project. No. of persons: 4

Job (I-j)
tn
Men
1-2
10
1
1-3
6
2
1-5
5
3
2-3
0
0
2-6
8
1
3-4
10
2
4-7
10
3
5-6
7
1
6-7
5
2
Page Number : 126
KALPESH CLASSES




Question: 10

Resource leveling with times scale diagram

Activity
Activity time
Men required
1-2
4
3
1-3
6
6
3-5
5
7
2-4
5
5
3-6
4
5
4-7
5
4
5-7
3
3
6-7
7
4
Calculate the minimum number of men required to complete the above project in time.
Page Number : 127
CHAPTER

KALPESH CLASSES

SIMULATION

Question: 1

Estimating production time
The tit-fit Scientific Laboratories is engaged in producing different types of High-class
equipments for use in Science labs. The company has two different assembly lines to produce its
popular product P.

Processing time (minutes)
10
11
12
13
14
Assembly A1
0.10 0.15 0.40 0.25 0.10
Assembly A2
0.20 0.40 0.20 0.15 0.05

Use the following Random numbers, generate data on the process times for 15units of the
item and complete the expected process time for the product.

4134 8343 3602 7505 7428
7476 1183 9445 0089 3424
4943 1915 5415 0880 9309

Question: 2

Stock simulation
Bright Bakery keeps stocks of a popular brand of cake. Previous experience indicates
the daily demand as given here.

Daily demand
0
10
20
30
40
50
Probability
0.01 0.20 0.15 0.50 0.12 0.02

Consider the following sequence of random numbers

48 78 19 51 56
77 15 14 68 09

Using the sequence simulate the demand for next 10days. Find out the stock stimulation
if owner of the Bakery decides to make 30 cakes every day. Also estimate the daily Average
demand for the cakes.

Question: 3

Cash simulation
A small retailer has studied the weekly receipts and payments over past 200 weeks and
has developed the following set of information:

Weekly receipts
3000 5000 7000 12000
Probabilities
0.20
0.30
0.40
0.10
Weekly payments
4000 6000 8000 10000
Probabilities
0.30
0.40
0.20
0.10

Simulate the weekly pattern of the receipts and payments for the 12 weeks of the next
quarter, assuming further that the beginning Bank balance is Rs.8000,
i) What is the balance at the end of 12th week?
ii) What is the highest balance during the quarter?
iii) What is the average weekly balance during the quarter?
Note: Use random numbers given in P1.



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KALPESH CLASSES
Question: 4

Network simulation

A project consists of 7 activities. The time for performance of each of the activity is as
follows:-

Activity Immediate Time Probability
A
-
3
0.2


4
0.6


5
0.2
B
-
4
1.0
C
A
1
1.0
D
B,C
4
0.8


5
0.2
E
D
3
0.1


4
0.3


5
0.3


6
0.3
F
D
5
0.20


7
0.80
G
E,F
2
0.5


3
0.5
a) Draw a network and identify critical path using expected time.
b) Simulate the project for 5 times using random number and find the critical paths?

68
13
09
20
73
07
72
99
93
18
24
22
07
29
57
33
49
65
92
98
00
57
12
31
96
85
92
91
77
37
34
11
27
10
59
Question: 5

Simulation in dental clinic
Dr. Strong is a dentist who schedules all her patients for 30 minutes appointments. Some
of the patients take more or less than 30 minutes depending on the type of dental work to be
done.
The following summary shows the various categories of the work, their probabilities and
time required to complete them: -
Category
Filling Crown Cleaning Extraction Check up
Time Required (minutes) 45
60
15
45
15
Probability
0.40
0.15
0.15
0.10
0.20
Simulation the dentist clinic for 4 hours and determine the average waiting time for the
patients as well as idleness of the doctor. Arrival time of 1st patient is 8 A.M. Random numbers
are as follows,
40 82 11 34
25 66 17 79

Question: 6

Repair team strength
A plant has a large number of similar machines. The machines breakdown randomly and
the breakdowns are independent of each other. Once a machine breaks down, it has to be taken
out of production till the time it is repaired. On the basis of the past data, the following
distributions have been constructed.
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KALPESH CLASSES

No. of Break
Probability
No.of Hours Required
Probability
downs per
for Repair Per
Hour
Breakdown
0
0.900
1
0.100
1
0.085
2
0.240
2
0.012
3
0.450
3
0.003
4
0.165


5
0.040


6
0.005

Each hour that a machine remains idle due to being, or waiting to be repaired, it costs the
plant Rs.80 per hour by way of lost production. If a repairma n is paid at Rs.8 per hour, how
many repairmen should be hired by the company to service the machine breakdowns? For the
purpose, simulate the system for a 50-hour period and use the following random numbers,
reading row-wise starting with the NW corner.
For breakdowns
100 375
084
990
128
660
310
852
635
737
985 118
834
886
995
654
801
743
699
098
914 803
441
125
636
611
154
945
424
235
044 005
359
598
460
321
692
195
451
948
980 331
809
797
186
740
541
116
483
690
For Repair times
765 648
196
093
801
340
455
020
053
035
672 121
099
195
981
783
389
421
125
623
Question: 7

Purchase Quantity Decision

Great Book Stores, a leading bookstore, wishes to carry Cost Management in stock.
Demand is probabilistic and replenishment of stock takes 2 days (eg., if an order is placed on
April 1, it will be delivered on April 3). The probabilities of demand are given: -
Daily Demand
0
1
2
3
4
Probability
0.05
0.10
0.30
0.45
0.10
Each time an order is placed, the store incurs an ordering cost of Rs.10 per order. A
carrying cost of Rs.0.50 per book per day is also incurred by the store. The inventory carrying
cost is calculated on the basis of stock at the end of each day. The manager of the bookstore
wishes to compare two options for inventory decision
(A) Order 5 books, when the inventory at the beginning of the day plus orders
outstanding is less than 8 books.
(B) Order 8 books, when the inventory at the beginning of the day plus order outstanding
is less than 8 books.
Currently (beginning of the 1st day) the store of 8 books plus 6 books ordered 2 day ago
and expected to arrive the next day. Using Monte Carlo Simulation for 10 cycles, recommend
which option the manager should choose? The following random numbers may be used 89, 34,
78, 63, 61, 81, 93, 16, 13, 73. Assume that the demand on any day can be met out of opening
stock and quantities received during the day.
Question: 8

Machinery Idle Time Estimation
A process involves the production of a particular component, which is then installed into
an end product. Past observation has indicated that the average production time for the
component is 4
minutes but fluctuations about the average do occur. The following probability
distribution has been derived:

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KALPESH CLASSES
Production time (min)
2
3
4
5
6
7
Probability
0.10
0.25
0.40
0.10
0.10
0.05
The average time taken to install a component is 3 minutes but this also fluctuates and the
following probability distribution has been derived:

Installation time (min)
2
3
4
5
Probability
0.30
0.45
0.15
0.10

The current system uses one operative for installation but the company is considering
employing another operative on the installation process. Simulate 10 the current system, using
the following 2 digit random numbers:
20, 74, 94, 22, 93, 45, 44, 16, 04, 32; and 03, 62, 61, 89, 01, 27, 49, 50, 90, 98.

Question: 9 Evaluation of Storage Facilities Single Digit Random Numbers Arial
Ltd. trades in a perishable commodity. Each day it receive supplies of the goods from a
wholesaler but the quantity supplied is a random variable, as is subsequent retail customer
demand for the commodity. Both supply and demand are expressed in batches of 50 units and
over the past working year (consider 300 days) the company has kept records of supplies and
demands. The results are given in the following table:

Wholesaler No. of days Customers
No. of days
supplies
occurring
Demand
occurring
50
60
50
60
100
90
100
60
150
90
150
150
200
60
200
30

Arial buys the commodity at Rs.6 p.u. and sells at Rs.10 p.u. at present, there are no
storage facilities and unsold units at the end of the day are worthless. Arial estimates that each
unit of unsatisfied demand on any day costs them Rs.2.
Use the following random numbers for supply 8, 4, 8, 0, 3, 3 and for demand 4, 7, 9,
6, 1, 5.
Simulate six days trading and estimate annual profit. Return the exercise to estimate
value of storage facilities.
Page Number : 131