Final Examination: Suggested Answers To Questions
Final Examination: Suggested Answers To Questions
Final Examination: Suggested Answers To Questions
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)
The figures in the margin on the right side indicate full marks.
1. Choose the most appropriate answer to the following questions giving justification:
2x10=20
(i) A Company requires ` 85,00,000 in sales to meet its target net profit. Its contribution
margin is 30% and the fixed costs are ` 15,00,000. What is the target net profit?
(a) ` 10,50,000
(b) ` 19,50,000
(c) ` 25,50,000
(d) ` 35,00,000
(ii) In a factory where standard costing system is followed, the production department
consumed 1100 kgs of a material @ ` 8 per kg for product X resulting in material price
variance of ` 2200 (Fav) and material usage variance of ` 1000 (Adv). What is the
standard material cost of actual production of product X?
(a) 11,000
(b) 20,000
(c) 14,000
(d) 10,000
(iv) By making and selling 9,000 units of a product, a company makes a profit of ` 10,000,
whereas in the case of 7,000 units, it would lose ` 10,000 instead. The number of units to
break-even is
(a) 7,500 units
(b) 8,000 units
(c) 7,750 units
(d) 8,200 units
(v) 1200 units of microchips are required to be sold to earn a profit of ` 1,06,000 in a
monopoly market. The fixed cost for the period is ` 74,000. The contribution in the
monopoly market is as high as 3/4th of its variable cost. Determine the target selling
price per unit.
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(a) 450
(b) 325
(c) 400
(d) 350
(vi) An operation has a 90% learning curve and the first unit produced took 28 minutes.
The labour cost is ` 20 per hour. How much should the second unit cost?
(a) ` 9.80
(b) ` 7.60
(c) ` 8.40
(d) ` 6.60
(vii) If project A has a net present value (NPV) of ` 30,00,000 and project B has an NPV of `
50,00,000, what is the opportunity cost if project B is selected?
(a) ` 23,00,000
(b) ` 30,00,000
(c) ` 20,00,000
(d) ` 50,00,000
(viii)A company operates an activity based costing (ABC) system to attribute its overhead
costs to cost objects. In its budget for the year-ending 31st August, 2018. The company
expected to place a total of 2000 purchase orders at a total cost of ` 1,00,000. This
activity and its related costs were budgeted to occur at a constant rate throughout the
budget year which is divided into 13 four week periods.
During the four week period ended 30th June 2017, a total of 200 purchase orders
were placed at a cost of ` 9,000. The over recovery of these costs for the four week
period was
(a) ` 2,000
(b) ` 3,000
(c) ` 1,500
(d) ` 1,000
(ix) Empire Hotel has a capacity of 100 single rooms and 20 double rooms. Average
occupancy is 70% for 365 days of the year. The rent for a double room is kept at 130%
of a single room. The total room occupancy days in a year in terms of single room is
(a) 32193
(b) 30660
(c) 31660
(d) 30993
(x) Which of the following is correct in the context of network analysis?
(a) There can be one or more activities without a predecessor in a network.
(b) Where two activities have the same start and end events, the end event of one
activity is numbered differently and then connected by a dummy to the original
start event.
(c) When crashing is carried out, the non-critical paths have to remain non critical.
(d) If the critical path is longer than the other paths, the project may be completed by
using a path having a shorter duration.
Answer:
1. (i) (a)
Explanation: ` 10,50,000
= (85,00,000 × 30%) – 15,00,000 = 10,50,000
Or
Sales × Contribution margin ratio or P.V. Ratio – Fixed Cost
(ii) (d)
Explanation: Actual Cost + Favourable Cost Variance = Standard Cost
1100 × 8 + 2200 – 1000 = 8800 + 1200 = 10,000
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(iii) (c)
Explanation: Differential Costs = Differences in Fixed and Variable Cost = 4000 + 2,000
= 6,000.
(iv) (b)
Explanation:
Contribution for 2000 units = 20,000 (difference in profits for two output
levels)
Hence, contribution per unit = 10.
Substituting in equation 1,00,000 = F + 10,000. Or F = 80,000.
BEP = 80000 / 10 = 8000.
(v) (d)
Explanation: Contribution = 1,06,000 + 74,000 = 1,80,000
Contribution/Unit = 180000/1200 = 150
Variable cost/unit = 150 ÷ ¾ = ` 200
Selling price = 350
(vi) (b)
Explanation:
1st unit = 28 min.
Average time p.u. for 2 units = 0.9 × 28 = 25.2
Total time for 2 units = 25.2 × 2 = 50.4
Time for second unit = 50.4 – 28 = 22.4 minutes
Cost for second unit = 22.4 × 20 ` /hr./60 minutes = 7.47
Since, (b) is close to 7.47, b is acceptable. Otherwise, none of the given data.
(vii) (b)
Explanation:
Opportunity cost represents the next best alternative foregone.
If B is chosen, only A is being foregone and hence the NPV of 30,00,000 is the present
value of the opportunity lost.
(viii) (d)
Explanation:
For 2,000 purchase orders, cost budgeted is 1 lac. For 200, corresponding amount
would be 10,000. But actual = 9,000. Hence over recovered is 10,000 – 9000 = 1000.
Or
(x) (a)
Explanation:
More than 1 activity can begin at the first node, say 1 – 2, 1 – 3, 1 – 4, etc. Each of
these will have no predecessor.
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Section – B
Answer any five questions.
Each Question carries 16 Marks.
16×5=80
2. (a) Relevant data relating to Trident Industries Limited are:
Products
P Q R Total
Production and Sales (Units) 60,000 40,000 16,000
Raw Material Usage (in Units) 10 10 22
Raw Material Costs (`) 50 40 22 24,76,000
Direct Labour Hours 2.5 4 2 3,42,000
Machine Hours 2.5 2 4 2,94,000
Direct Labour Costs (`) 16 24 12
No. of Production Runs 6 14 40 60
No. of Deliveries 18 6 40 64
No. of Receipts 60 140 880 1080
No. of Production Orders 30 20 50 100
Overheads: `
Set-up 60,000
Machines 15,20,000
Receiving 8,70,000
Packing 5,00,000
Engineering 7,46,000
The Company operates a JIT inventory policy and receives each component once
per production run.
Required:
(a) (i) Compute the product cost based on direct labour hour recovery rate of
overheads.
(ii) Compute the product cost using Activity Based Costing. 4+8=12
(b) What is Target Cost? How would you determine it? 2+2=4
Answer:
2. (a) (i) Computation of overhead rate based on direct labour hour hours:
P 60,000 2.5 150000
Q 40,000 4 160000
R 16,000 2 32000
Total 342000
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Overhead allocation to products based on Activity Based Costing: (Total Value for
Production units Basis)
(b) Target Cost is the cost at which a proposed product with specified functionality and
quality must be produced to generate a desired level of profitability at its anticipated
selling price.
Target cost is Target selling price less the required profit margin
The target selling price is the price that is dictated by competition in case there are
comparable products, or the perceived value that a customer will pay for the
product in case there is no competition.
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The desired profit level is fixed by the seller. The difference between the selling price
and the profit margin represents the target cost to be achieved by design or cost
reduction or by economies of scale or by other means.
Details of Work-in-Progress:
Opening : 120 units, materials fully supplied, 50% converted.
Closing : 100 units, materials fully supplied, 50% converted.
Required:
(i) Effective or Equivalent Production for each element of cost.
(ii) Calculate:
(a) Material variances (cost, price and usage)
(b) Labour variances (cost, rate of pay and efficiency)
(c) Overhead variances (expenditure and volume variance, efficiency and capacity
variance) 4+3+6=13
Answer:
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Labour:
Standard Hours : 7,610 @ 6 hours = 45,660 hours
Standard Wages : 45,660 @ ` 4 per hour = ` 1,82,640
(b) Labour cost variance: (SC - AC) = (` 1,82,640 - 1,96,686) = ` 14,046 (A)
which can be further analyzed as follows:
(a) Rate variance: (SR - AR) AT = (4.00 - 4.20) 46,830 = ` 9,366 (A)
(b) Efficiency variance: (AP - SP) SR = (7,610 - 7,805) x ` 24 = ` 4,680 (A)
(c) Factory O.H. cost variance: Std. O.H. - Actual O.H. = `34,245 - 36,340 = `2,095 (A)
which can be analyzed as follows:
(a) Expenditure or Budgeted variance: Budgeted O.H. - Actual O.H.
` 33,750 - 36,340 = ` 2,590 (A)
(b) Volume variance: SR (AP - BP) = ` 4.5 (7,610 - 7,500) = ` 495 (F)
4. (a) A company manufactures two types of herbal product, A and B. Its budget shows
profit figures after apportioning the fixed joint cost of ` 15 laksh in the proportion of the
numbers of units sold. The budget for 2018 indicates:
Particulars A B
Profit (`) 1,50,000 30,000
Selling price per unit (`) 200 120
P/V Ratio (%) 40 50
Required to advise on the best option among the following, if the company expects
that the number of units to be sold would be equal.
(i) Due to change in manufacturing process, the joint fixed cost would be reduced by
15% and the variable cost would be increased by 7%.
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(ii) Price of A could be increased by 20% as it is expected that the price elasticity of
demand would be unity over the range of price.
(iii) Simultaneous introduction of both the options, viz. (i) and (ii) above. 4+4+4=12
Answer:
Average contribution per unit, considering equal units of both = (80 + 60)/2 = 70
15,00,000 + 1,80,000
Total units of production = (Total fixed costs + Profits)/70 = =
70
16,80,000
= 24,000
70
Of which 12000 of A and 12000 of B
Evaluation of Option:
(i)
A B
Selling price/u 200 200 120 120
Variable Cost /u 120 128.4 60 64.20
Contribution/u 80 71.6 60 55.80
Contribution for 12000 units 859200 669600
Total Contribution 1528800
Fixed Cost 15,00,000 x 85% = 12,75,000
Profits 1528800-1275000 = 2,53,800
A B
Selling price/u 200 240 120
Variable Cost /u 120 120 60
Contribution/u 80 120 60
Contribution for 9600 units For 12000 units 1152000 720000
Total Contribution 1872000
Fixed Cost 15,00,000
Profits 1872000-1500000 = 3,72,000
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Decision: Option (iii) has the maximum profits and should be chosen.
5. A regional audit firm offers audit, tax and consulting services. The segmented profit and
loss position for the next year shows the following position:
Audit (`) Tax (`) Consulting (`)
1. Revenues 60,000 1,00,000 1,20,000
2. Costs:
Service-level 50,000 60,000 70,000
Facility-level (apportioned) 10,000 12,000 16,000
Total 60,000 72,000 86,000
3. Operating Profit (1-2) Nil 28,000 34,000
Partners are concerned about the profitability of their audit business and contemplate to
close it down. In the event of closure of audit service, it might do more tax work. If audit
service is discontinued, 50 per cent of the facility costs associated with auditing would be
saved. More tax work would increase tax revenues by 45 per cent, but tax service-level
costs would also increase by 45 per cent.
Required:
(a) Determine whether the firm should drop auditing service and the impact on its closure
on profit. Assume that audit centre facility level costs can be allocated to two other
centres based on revenues. Compare Profitability of Tax and Consulting Services
before and after closure of Audit Centre.
(b) What other considerations are important to drop auditing service? 12+4=16
Answer:
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(ii) While the release of Audit function strengthens the Tax Service, the overall impact
being ` 13,000 increase in profits, it is a major risk that the firm will be taking, since it
is an audit firm.
(iii) In the medium to long term, it could lose other potential clients who may go
elsewhere to have more diversified services.
(iv) The firm should try to improve its costs and increase its fees to have more
comfortable profits.
6. (a) Explain the concept of 'quality' and enumerate 'costs of quality' under different groups.
3+5=8
(b) What is Learning Curve? What factors affect Learning Curve? 4+4=8
Answer:
6. (a) The term quality is a perception which is personal to an individual. In plain terms,
quality is ―features‖ or ―worth‖ or ―value‖.
Conformance to specifications measures how well the product or service meets the
targets and tolerances determined by its designers.
Fitness for use focuses on how well the product performs its intended function or use.
Value for price paid is a definition of quality that consumers often use for product or
service usefulness. Support services provided are often how the quality of a product or
service is judged. Quality does not apply only to the product or service itself; it also
applies to the people, processes, and organizational environment associated with it.
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Quality has many other costs, which can be divided into two categories. The first
category consists of costs necessary for achieving high quality, which are called
quality control costs. These are of two types:
Prevention costs and appraisal costs. The second category consists of the cost
consequences of poor quality, which are called quality failure costs. These include
external failure costs and internal failure costs.
Prevention costs are all costs incurred in the process of preventing poor quality from
occurring. They include quality planning costs, such as the costs of developing and
implementing a quality plan. Also included are the costs of product and process
design, from collecting customer information to designing processes that achieve
conformance to specifications. Employee training in quality measurement is included
as part of this cost, as well as the costs of maintaining records of information and data
related to quality.
Appraisal costs are incurred in the process of uncovering defects. They include the
cost of quality inspections, product testing, and performing audits to make sure that
quality standards are being met. Also included in this category are the costs of worker
time spent measuring quality and the cost of equipment used for quality appraisal.
Internal failure costs are associated with discovering poor product quality before the
product reaches the customer site. One type of internal failure cost is rework, which is
the cost of correcting the defective item. Sometimes the item is so defective that it
cannot be corrected and must be thrown away. This is called scrap, and its costs
include all the material, labor, and machine cost spent in producing the defective
product.
External failure Costs are incurred when inferior products are delivered to customers.
They include cost of handling customer complaints, warranty replacements, repairs of
returned products and cost arising from a damaged company reputation.
(b) Learning Curve Theory is concerned with the idea that when a new job, process or
activity commences for the first time it is likely that the workforce involved will not
achieve maximum efficiency immediately. Repetition of the task is likely to make the
people more confident and knowledgeable and will eventually result in a more
efficient and rapid operation. Eventually the learning process will stop after continually
repeating the job. As a consequence the time to complete a task will initially decline
and then stabilise once efficient working is achieved. The cumulative average time
per unit is assumed to decrease by a constant percentage every time that output
doubles. Cumulative average time refers to the average time per unit for all units
produced so far, from and including the first one made.
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efficiency potential. One of the important requisites of the learning curve concept
is that there should be uninterrupted flow of work. The fewer the interruptions, the
grater will be the improvement in efficiency.
4. Changes in a product or in the methods of production, designs, machinery, or the
tools/used affect the slope of the learning curve. All these have the effect of
starting learning a fresh because of new conditions If the changes are frequent,
there may be no learning at all.
5. Also other factors influencing the learning curve are labour strikes, lock outs and
shut downs due to other cause also/affect the learning curve. In each such case
there is interruption in the progress of learning.
7. (a) A small project is composed of 8 activities whose estimated time are listed below:
Activity 1-2 2-3 2-4 3-5 4-6 5-6 5-7 6-7
Optimistic time (in weeks) 3 3 2 4 4 0 3 2
Most likely time (in weeks) 3 6 4 6 6 0 4 5
Pessimistic time (in weeks) 3 9 6 8 8 0 5 8
Required:
(i) Draw the project network.
(ii) Find the expected duration and variance for each activity.
(iii) Find the critical path and expected project length.
(iv) The probability that the project will be completed in 23 weeks.
Given that:
Z Value: 1.00 1.91 1.92 1.93 1.94
Probability: 0.9713 0.9719 0.9726 0.9732 0.9738
3+3+2+2=10
(b) The management of SAB Ltd. has suggested that a linear programming model might
be used for selecting the best mix of five possible products — A, B, C, D and E. The
following information are available:
Per Unit of Product
A B C D E
Selling Price (`): 96 84 76 62 54
Costs (`):
Material 30 28 32 30 32
Direct Labour 36 32 12 8 8
Fixed Overhead 18 16 6 4 4
Total Costs 84 76 50 42 44
Expected maximum unit demand per week for each product at the prices indicated:
A B C D E
3000 24000 1800 1200 1200
Cost of material includes a special component which is in short supply. It costs ` 6 per
unit. Only 11,600 units are available to the company during the week. The number of
units of the special component needed for a unit of each product is:
A B C D E
2 1 4 3 6
The management of SAB Ltd. has ruled that expenditure on materials must not exceed
a sum of ` 60,000.
All other resources are freely available in sufficient quantities for planned need.
Formulate a linear programming model stating clearly the criterion you use. 6
Answer:
7. (a) (i) The network diagram for the given data is shown below:
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Network Diagram
(ii) The earliest and latest expected time for each event is calculated by considering
the expected time of each activity as shown in the following table:
(iv) Probability that the project will be completed in 23 weeks is given by:
23 - 20
P(0 ≤ X ≤ 23) = P(0 ≤ Z ≤ ) = P(0 ≤ Z ≤ 1.920) = 0.9726 or 97.26%.
2.444
(b)
A B C D E
Selling Price 96 84 76 62 54
Variable Cost 66 60 44 22 40
Contribution 30 24 32 40 14
a ≤ 3000
b ≤ 2400
c ≤ 1800
d ≤ 1200
e ≤ 1200
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Answer:
8. (a) Backflush accounting is when you wait until the manufacture of a product has been
completed, and then record all of the related issuances of inventory from stock that
were required to create the product. This approach has the advantage of avoiding
all manual assignments of costs to products during the various production stages,
thereby eliminating a large number of transactions and the associated labor. This
system records the transaction only at the termination of the production and sales
cycle. The emphasis is to measure cost at the beginning and at the end with greater
emphasis on the end or outputs. Backflush accounting is entirely automated, with a
computer handling all transactions.
(b) Relevant Cost Analysis: For decision making purpose, it is necessary to classify costs
and revenues based on whether they are relevant or irrelevant to the decisions.
Relevant costs and revenues are those, that are influenced by the decisions. Irrelevant
costs and revenues are those, that are not affected or influenced by the decisions.
Relevant costs are those expected future costs that are essential but differ for
alternative courses of action. It is a future cost that would arise as a direct
consequence of the decision under review.
The costs which should be used for decision making are often referred to as ―relevant
costs‖. CIMA defines relevant costs as ‗costs appropriate to aiding the making of
specific management decisions‘.
Relevant costing is an incremental analysis which means that it considers only relevant
costs i.e. costs that differ between alternatives and ignores sunk costs i.e. costs which
have been incurred, which cannot be changed and hence are irrelevant to the
scenario.
(c) In Standard Cost Accounting Systems which contain both actual and standard costs
in the accounting records and financial statements, the question of adjustment of the
cost variances at the end of the accounting period arises.
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Cost of Sales Account‘, the variances are distributed over stocks of finished and partly
finished products and to the cost of sales. The distribution of each variance is made to
the three accounts on a percentage basis according to the closing balance (value)
of each account.
It is not a suggestion program and it is not routine project or plan review. It is not
typical cost reduction in that it doesn‘t ―cheapen‖ the product or service, nor does it
―cut corners.‖
Value Engineering methodology is a powerful tool for resolving system failures and
designing improvements in performance of any process, product, service or
organization.
(e) Life Cycle Costing; aims at cost ascertainment of a product, project etc. over its
projected life. It is a system that tracts and accumulates the actual costs and
revenues attributable to cost object (i.e., product) from its inception to its
abandonment. Sometimes the terms; cradle-to-grave costing and womb-to-tomb
costing convey the meaning of fully capturing all costs associated with the product
from its initial to final stages.
Product Life Cycle is a pattern of expenditure, sale level, revenue and profit over the
period from new idea generation to the deletion of product from product range. It
spans the time from initial R&D on a product to when customer servicing and support
is no longer offered for the product. Product life cycle costing involves tracing of costs
and revenues of each product over several calendar periods throughout their entire
life cycle. Traces research, design and development costs and total magnitude of
these costs for each individual product and compared with product revenue. Assists
report generation for costs and revenues.
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