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MANAGEMENT ACCOUNTING (MARKS 100)
(3 hours)
Q.1 ABC Limited deals in a single product called HGV. It had prepared a budget for the year ending December 31, 2009 which was based on the following key assumptions:
Sales 504,000 units @ Rs. 430 Variable cost (40% is direct labour) Rs. 300 per unit Fixed cost for the year (including depreciation @ 10%) Rs. 25,000, Cost of raw material per kg Rs. 56. Raw material consumption per unit of finished product 2 kgs
However, the position as shown by the management accounts prepared up to May 31, 2009 is not very encouraging and depicts the following actual results:
ย 105,000 units were sold @ Rs. 350 per unit. ย Average cost of raw material used amounted to Rs. 90/- per unit of finished product. ย Other variable costs were as per the budget.
The marketing department advised the management that the failure to achieve targeted sale is because a competitor has introduced another product which has been very popular in the low income areas.
After due deliberations, the management has prepared a revised plan for the remaining period of the financial year. The plan involves launching of a low grade version of the existing product named LGV, to capture the low income market. Salient features of the plan are as under:
(i) Sales mix of HGV and LGV is expected to be in the ratio of 1:2. Sale price of HGV would be increased to Rs. 385, whereas sale price of LGV would be Rs. 270. (ii) A new machine will have to be purchased for Rs. 1.2 million. (iii) For LGV two different types of raw materials i.e. A and B will be used in the ratio of 5:3. However, the total weight of raw material used shall be the same in case of both products. Presently A is available at the rate of Rs. 25 per kg whereas B is available at the rate of Rs 45 per kg. The raw material consumption per unit of HGV shall continue to be Rs. 90 per unit. (iv) Production of HGV is carried out by skilled workers. However, only unskilled workers would be required for the production of LGV. The wages of unskilled workers would be 40% lower but labour hours per unit would be 10% higher than HGV. (v) Variable factory overhead cost per unit of LGV would be 10% lower than HGV. (vi) Additional marketing cost would be Rs. 3 million.
Required : Compute the sales amount and quantities for the remaining period, to achieve a break even in 2009. (18)
Q.2 Extract from the records of AMAX Limited are as under:
Budget Actual ---------- Rupees ---------- Sales 27,000,000 27,295, Variable costs: Raw Material (7,500,000) (8,461,450) Labour (9,375,000) (9,463,125) Variable overheads (3,000,000) (2,974,125) Contribution 7,125,000 6,396,
An analysis of the above figures has revealed the following: ย Actual units sold were 3% (1,500 units) more than the budgeted sales quantity and actual sale price was lower by Rs. 10/- per unit. ย One unit of finished product requires 3 kgs of raw material and actual raw material price was 6% higher than the budgeted price. ย Budgeted labour cost per hour was equivalent to 150% of budgeted raw material cost per kg. ย Production department records show that labour utilization per unit of finished product was 1/8 hour more than the budget. ย Variable overheads varied in line with labour hours.
Required: Compute eight relevant variances and prepare a statement reconciling budgeted contribution with the actual contribution. (18)
Q.3 Clifton Hospital is interested in an analysis of the fixed and variable cost of supplies related to patient days of occupancy. The following actual data has been accumulated by the management:
Month Cost of supplies(Rs. โ000โ) Occupancyratio (%)
December 2008 1,665 90 January 2009 1,804 93 February 2009 1,717 98 March 2009 1,735 94 April 2009 1,597 86 May 2009 1,802 99
Required: Compute the variable cost of supplies per bed per day using the method of least square, if the total number of beds in the hospital is 300. (08)
Q.4 SMD Corporation has commenced a project with the following time schedule:
Activity 0 โ 1 1 โ 2 1 โ 3 2 โ 4 2 โ 5 3 โ 4 3 โ 6 4 โ 7 5 โ 7 6 โ 7
Duration in days
Required: Construct network diagram and compute: (a) Total float for each activity. (b) Critical path and its duration. (11)
The factor shall charge interest @ 15 percent per annum on the amount of money advanced. He shall also charge factoring fee of 2 percent.
The company estimates that as a result of the above arrangement, it will save on bad debts and the cost of credit control, aggregating Rs. 200,000 per month. Moreover, the company can use any surplus funds made available to reduce its overdraft, which is costing 1 percent per month.
Required: Advise the company as to which of the three alternatives is cheaper. (12)
Q.7 XYZ Ltd presently uses a single plant wide factory overhead rate for allocating factory overheads to products, based on direct labour hours. A break-up of factory overheads is as follows:
Factory overheads Production Support 1,225, Others 175, Total cost (Rs.) 1,400,
It now plans to use activity-based costing to determine costs of its products. The company performs four major activities in the Production Support Department. These activities and related costs are as follows:
Production Support Activities Rupees Set up costs 428, Production control 245, Quality control 183, Materials management 367, Total 1,225,
The planning department has gathered the relevant information which is given below:
Products Productionin units
Direct labour hours per unit
Batch size (units)
Machine hours per unit
Inspections hours per unit
No. of Material requisitions raised Product X 10,000 2.5 125 7.50 0.2 320 Product Y 2,000 5.0 50 10.00 0.5 400 Product Z 50,000 2.8 10,000 3.00 0.1 30
The quality control department follows a policy of inspecting 5% of all production in case of X and Y and 2% of all units of Z.
Required: Determine the factory overhead cost per unit for Products X, Y and Z under: (a) Single factory overhead rate method. (b) Activity Based Costing. (18)
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