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Cost Academy Advanced Management Accounting 1

10F, Shyama Prasad Mukherjee RoadKolkata: 700025.

For Information Purpose: Office : (033) 2486- 4919 & 2419-1631

o!i"e : 9830#- 16#88 ($an%an)98#40- 423#4 ( ip"a!)

'e!site : costmana*ement net in+-mai" : ,a,a!ou,i .a/oo com

On". tu,. ( p"annin* & uestions) purposes:

a"" "o /a ra!ort. : 98301- 05664

http://www.costmanagement.net.in/mailto:[email protected]://www.costmanagement.net.in/mailto:[email protected]

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ome a,,itiona" er. important pro!"ems &

so"utions /ic/ are not in t/e stu,. materia"of I I

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ontent Page No.

1 Pro!"em on 7ransfer Pricin* 004

2 Pro!"em ar*ina" ostin* 0063 cti it. ase, ostin* 00#3 I7 & $P 0224 7ota" ua"it. mana*ement 0265 ;a"ue c/ain & cost re,uction 0286 7ar*et costin* 031#

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Pro!"em on 7ransfer pricin*

1 The PillerCat corporation is a highly decentralized company. Each division manager has fullauthority for sourcing decisions and selling decisions. The Machining division of Pillercat has

been the major supplier of the 2 !!! cran"shafts that the Tractor #ivision needs each year.

The tractor division ho$ever has just announced that it plans to purchase all its cran"shafts inthe forthcoming year from t$o e%ternal suppliers at &s. 2!! per cran"shaft. The Machining#ivision of Pillercat recently increased its selling price for the forthcoming year to &s. 22! per unit'from &s. 2!! per unit in the current year(.

)uan *omez manager of the Machining division feels that the +!, price increase is justified. -tresults from a higher depreciation charge on some ne$ specialized e uipment used tomanufacture cran"shafts and an increase in labour costs. *omez $ants the president of PillercatCorporation to force the Tractor #ivision to buy all its cran"shafts from the machining #ivision atthe price of &s. 22!. The follo$ing table summarizes the "ey data. / 0+. Number of cran"shafts purchased by Tractor division 2 !!!2. E%ternal supplier1s mar"et price per cran"shaft &s. 2!!

. 3ariable cost per cran"shaft in Machining #ivision &s. +4!5. 6i%ed cost per cran"shaft in Machining #ivision &s. 2!

&e uired7+. Compute the advantage or disadvantage in terms of annual operating income to the

Pillercat corporation as a $hole if the Tractor #ivision buys cran"shafts internally from theMachining division under each of the follo$ing cases7'a( The Machining #ivision has no alternative use for the facilities used to manufacture

cran"shafts.

'b( The machining division can use the facilities for other production operations $hich $illresult in annual cash operating savings of &s. 24 !!!.

'c( The Machining #ivision has no alternative use for its facilities and the e%ternalsupplier drops the price to &s. +89 per cran"shaft.

2. /s the president of Pillercat ho$ $ould you respond to )uan *omez1s re uest that youforce the Tractor #ivision to purchase all of its cran"shafts from the Machining #ivision:;ould you response differ according to the three cases described in re uirement +:

E%plain.

o"ution1 Computations for the Tractor #ivision buying cran"shafts internally for one year under cases a b

and c are7

Case a b cNumber of cran"shafts purchased byTractor #ivision 2 !!! 2 !!! 2 !!!

E%ternal supplier1s mar"et price per cran"shaft '&s.( 2!! 2!! +89

-ncremental cost per cran"shaft in Machining #iv. '&s.( +4! +4! +4!

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Total purchase costs if buying from an e%ternal >upplier '2 !!! shafts ?&s. 2!!&s. 2!! &s. +89 per shaft( '&s.( 5 !! !!! 5 !! !!! @! !!!

-ncremental costs of buying from the Machining#iv. '2 !!! shafts? &s. +4! per shaft( 8! !!! 8! !!! 8! !!!

Total opportunity costs of the Machining #iv. AAAAAAA== 24 !!! AAAAAAA==Total relevant costs 8! !!! 5 !4 !!! 8! !!!

/nnual operating income advantage'disadvantage( to Pillercat of buying from theMachining #ivision '&s.( 2! !!! '4 !!!( '+! !!!(

The general guideline that $as introduce as a first step in setting a transfer price can be used tohighlight the alternatives7Case incremental cost opportunity cost E%ternal

Per unit incurred to per unit to the transfer mar"et Point of transfer B supplying div. price Price

a &s. +4! B &s. ! &s. +4! &s. 2!!b &s. +4! B &s. +5.9! &s. 2!5.9! &s. 2!!c &s. +4! B &s. ! &s. +4! &s. +89

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On ar*ina" costin*

1 ;embley Travel /gency specializes in flights bet$een os /ngeles and ondon. -t boo"spassengers on Fnited /irlines at &s. 4!! per round=trip tic"et. Fntil last month united paid;embley a commission of +!9 of the tic"et price paid by each passenger. This commission $as;embley1s only source of revenues. ;embley1s fi%ed costs are &s. +5 !!! per month 'for salaries rent and so on( and its variable costs are &s. 2! per tic"et purchased for a passenger.This &s. 2! includes a &s. +9 per tic"et delivery fee paid to 6ederal E%press. 'To "eep theanalysis simple $e assume each round=trip tic"et purchased is delivered in a separate pac"age.Thus the &s. +9 delivery fee applies to each tic"et(.

&e uired7+. Fnder the old +!, commission structure ho$ many round=trip tic"ets must ;embley sell

each month 'a( to brea" even and 'b( to earn an operating income of &s. @ !!!:

2. Go$ does Fnited1s revised payment schedule affect yours ans$ers to 'a( and 'b( inre uirement +:

o"ution1 ;embley receives a +!, commission on each tic"et7 +!, ?&s. 4!! &s. 4! thus

>elling price &s. 4! per tic"et3ariable cost per unit &s. 2! per tic"etContribution margin p.u. &s. 4!= &s. 2! &s. @! per tic"et6i%ed costs &s. +5 !!! per month

a. 0rea" even number of tic"ets 6i%ed costs DContribution margin per unit &s. +5 !!! D&s. @! per tic"et 2!! tic"ets

b. ;hen target operating income &s. @ !!! per month7

Hty. of tic"ets re uiredto be sold '6i%ed costs B Target operating income(DContribution margin

per unit. '&s. +5 !!!B&s. @ !!!(D&s. @! per tic"et &s. 2+ !!! D&s. @! per tic"et !! tic"ets

2 Fnder the ne$ system ;embley $ould receive only &s. 9! on the &s. 4!! tic"et. Thus>elling price &s. 9! per tic"et3ariable cost p. u. &s. 2! per tic"etContribution margin p. u. &s. 9! I&s. 2! per tic"et6i%ed costs &s. +5 !!! per month

a. 0rea"even number of tic"ets &s. 2+ !!!D&s. ! per tic"ets @!! tic"ets re uired to be sold

The &s. 9! cap on the commission paid per tic"et causes the brea"even point to more thandouble 'from 2!! to 5J@ tic"ets( and the tic"ets re uired to be sold to earn &s. @ !!! per monthto also more than double 4from !! to @!! tic"ets(. /s $ould be e%pected travel agents reacted

very negatively to the Fnited /irlines decisions to change commission payments. Fnfortunatelyfor travel agents other airlines also changed their commission structures in similar $ays.

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On cti it. ase ostin*

1 The follo$ing information provides details of costs volume K cost drivers for a particulars periodin respect of /0C td. for product L and .

Product L product Product Total+. production K sales 'units( ! !!! 2! !!! 8 !!!2. &a$ material usage 'units( 9 9 ++

. #irect material cost '&s.( 29 2! ++ +2 8 !!!

5. #irect labour hours3

11 2 + 88 !!!

9. Machine hours +3

1+ 2 @J !!!

J. #irect labour cost '&s.( 8 +2 J@. No. of production runs @ 2! !8. No. of deliveries 4 2! 24. No. of receipts '2 ×@(O +9 9 22! 2@!+!. No. of production orders +9 +! 29 9!++. et=up ! !!!Machines @ J! !!!&eceiving 5 9 !!!Pac"ing 2 9! !!!Engineering @ !!!

&s. +8 58 !!!

O The company operates a just=in=time inventory policy and receives each component once per production run. -n the past the company has allocated overheads to products on the basis of direct labour hours. Go$ever the majority of overheads are related to machine hours rather thandirect labour hours. The company has recently redesigned its cost system by recoveringoverheads using t$o volume related bases7 machine hours and a materials handling overheadrate for recovering overheads of the receiving department. 0oth the current and the previous costsystem reported lo$ profit margins for product L $hich is the company1s highest=selling product.The management accountant has recently attended a conference on activity=based costing andthe overhead costs for the last period have been analyzed by the major activities in order to

compute activity based costs.

6rom the above information you are re uired to7

'a( Compute the product costs using a traditional volume=related costing system based onThe assumption that7'i( /ll overheads are recovered on the basis of direct labour hours 'i.e. the company1s past

product costing system(

'ii( The overheads of the receiving department are recovered by a materials handlingoverhead rate and the remaining overheads are recovered using a machine hour rate

'i.e. the company current costing system(.

'b( Compute product costs using an activity=based costing system.

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o"ution(a) omputation of t/e pro,uct cost usin* a tra,itiona" o"ume re"ate, costin* s.stem !ase,

on assumption t/at:'i( /ll overheads are recovered on the basis of direct labour hours 'i.e. the company product

Costing system(

tatement s/o in* t/e pro,uct costProducts L &s. &s. &s. #irect labour 8 +2 J#irect materials 29 2! ++

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.000,76

000,13,14.hrs

Rs +8.94 per machine hours.

(!) tatement s/o in* t/e pro,uct costs usin* an acti it. !ase, costin* s.stem Products L &s. &s. &s. #irect labour 8 +2 J#irect material 29 2! ++Machine overheads + . +! 2!

'&efer to $or"ing note +( '+3

1hrs. ×&s. +!( '+ hr. ×&s. +!( '2 hr. ×&s. +!(

>et=up costs !.+! !. 9 2.9!

'&ef. To $or"ing note 2 'i((

000,30

3000,1. x Rs

000,20

7000,1. x Rs

000,8

20000,1. x Rs

&eceiving !.8+ 2.82 55. J

'&ef. To $or"ing note 2'ii((

000,30

15611,1. x Rs

000,20

35611,1. x Rs

000,8

200611,1. x Rs

Pac"ing 2. 5 +.+@ +4.9

'&ef. To $or"ing note 2 'iii((

000,30

9812,7. x Rs

000,20

3812,7. x Rs

000,8

20812,7. x Rs

Engineering .@ .@ 2 . +

'&ef. To $or"ing note 2 'iv((

000,30

15460,7. x Rs

000,20

10460,7. x Rs

000,8

25460,7. x Rs

=========== =========== =========Total manufacturing cost 9 . + 9!.!@ +2J.J5

'or in* note:+. Machine overhead rate per hour hrs

Rs

000,76

000,60,7. &s. +!

2. The cost per transaction or activity for each of the cost Centres is as follo$s7

'i( >et=up costCost per setup ============================================== &s. + !!!

'ii( &eceiving costCost pre receiving order =============================================== &s. + J++

'iii( Pac"ing CostCost per pac"ing order ================================================= &s. @ 8+2

'iv( EngineeringCost per production order ============================================= &s. @ 5J!

2 /pollo plc manufactures and sells several products t$o of $hich are /lpha and 0eta. Estimateddata. 6or the t$o products for the forthcoming period is as follo$s7

'i(Product data /lpha 0eta

ProductionQsales units 9 !!! +! !!! 5! !!!

&s.!!! &s.!!! &s.!!!Total direct material cost 8! !! 2 !2!Total direct labour cost 5! +!! JJ!

>etup cost '&s. ! !!!(Number of production runs ' !(

&eceiving cost '&s. 5 9 !!!(No. of orders '2@!(

Pac"ing cost '&s. 2 9! !!!(Number of orders ' 2(

Engineering cost '&s. @ !!!(No. of production order '9!(

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'ii( 3ariable overhead cost is &s.+ 9!! !!! of $hich 5! percent is related to the ac uisitionstorage and use of direct materials and the remainder is related to the control and use of direct labour.

'iii( -t is current practice for /pollo plc to absorb the t$o types of variable overhead cost toproducts using an overall company=$ide percentage based on either direct material costand direct labour cost as appropriate.

'iv( /pollo are considering the use of activity=based costing. The cost drivers for material andlabour related overheads have been identified as follo$s7

/lpha 0eta other Product#irect material related

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/lpha 0eta &s. &s. #irect materials +J !#irect labour AA8 AA+!Prime cost 25 5!Material related overhead '29,( 5 @.9

abour related overheads '++2.9,(4 ++.29Total variable costs @ 98.@9

'iii( =nit costs !ase, on acti it.-!ase, costin*

/lpha 0eta

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(c) The use of target costing in conjunction $ith /0C $ill enable /pollo to find $ays of reducing thecosts of /lpha to arrive at a target cost. Cost reduction methods such as value analysis andvalue engineering could be used to achieve this. Though 0eta just meets the re uired 5! per cent CQ> ratio /pollo could decide to increase margins further by carrying out a similar e%erciseon 0eta. Target costing should also be used to identify selling prices for specific mar"ets.

3 Trima"e td ma"es three main products using broadly the same production methods ande uipment for each. / conventional product costing system is used at present although anactivity=based costing '/0C( system is being considered. #etails of the three products for atypical period are7

Gours per unit Material 3olumeabour Machine per unit units

Gours hours &s.Product % !.9 +.9 2! @9!Product +.9 + +2 + 29!Product + 29 @ !!!

#irect labour costs &s.J per hour and production overheads are absorbed on a machine hour basis. The rate for the period is &s.28 per machine hour.

&e uirements'a( Calculated the cost per unit for each product using conventional methods

6urther analysis sho$s that the total of production over heads can be divided as follo$s7

,Costs relating to set=up 9Costs relating to machinery 2!Costs relating to material handling +9Costs relating to inspection !Total production overhead +!!

The follo$ing total activity volumes are associated $ith the product line for the period as a $hole7

Number of Movements Number of >et=ups of materials inspections

Product L @9 +2 +9!Product ++9 2+ +8!Product 58! 8@ J@!

J@! +2! + !!!'b( Calculate the cost per unit for each product using /0C principles.'c( Comment on the reasons for any differences in the costs in your ans$ers to 'a( and 'b(.

o"ution(a) on entiona" cost per unit

L&s. &s. &s.

Materials 2! +2 29abour AA AA4 AAJ

#irect cost 2 2+ +Production overheads '&s.28Qhour( 52 28 85Total production cost per unit J9 54 ++9

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(!) cost per unitna".sis of tota" o er/ea,s an, cost per unit of acti it.

, Total evel Cost per unitet=ups 9 224 !@9 J@! 5+.4!

Machining 2! + ! 4!! 2 @9 9.JMaterials movement +9 48 +@9 +2! 8+8.+-nspection ! +4J 9! + !!! +4J. 9

+!! J95 9!! O'or in*

OTotal overheadsProduction Machine hours Total

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/ctivities per +!!! units >et=ups Material -nspections Movement

L +!! +J 2!!42 +@ +55J4 +2 4J

This highlights7• Product has fe$er set=ups material movements and inspections per + !!! units that Lor .

• /s a conse uence product 1s overhead cost per unit for these three activities has fallen.• The machine overhead cost per unit is still t$o to three times greater than L and .

4 Gaving attended a -C/- course on activity=based costing '/0C( you decide to e%periment byapplying the principles of /0C to the four products currently made and sold by your company.#etails of the four products and relevant information are given belo$ for one period 7

Product / 0 C #

et=up costs 9 29!>tores receiving J!!-nspection Q Huality control 2 +!!Materials handling and dispatch 5 J2!

ou have ascertain that the cost drivers1 to be used are as listed belo$ for the overhead costssho$n 7

Cost Cost #river>et up costs Number of production runs>tores receiving &e uisition raised-nspection Q Huality control Number of production runs

Materials handling and dispatch

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o"ution(a) Total machine hours '+2!? 5 hrs.( B '+!!? hrs( B '8!? 2 hrs( B '+2!? hrs.( + !! hrs.

&s.+! 5 ! B &s.929! B &s. J!! B &s.2+!! B &s.5J2!Machine hour overhead rate

+ !! hours

&s.2! per machine hour

Product / 0 C #&s. &s. &s. &s.

#irect material 5! 9! ! J!#irect labour 28 2+ +5 2+et=up costs 9 29! Production runs 2+ 29!>tores receiving J!! &e uisitions raised 8! '5?2!( 59-nspectionQ uality control2 +!! Production runs 2+ +!!Materials handling 5 J2! Number of orders

E%ecuted 52 ++!Note7Number of production runs Total output '52! units(D 2! unit per set=up.Number of orders e%ecuted Total output '52! units(D +! units per order.

The total cost for each product are computed by multiplying the cost driver rate per unit by theuantity of the cost driver consumed by each product.

/ 0 C #Prime Costs 8 +J! '&s.J8?+2!( @ +!! 92! 4 @2!>et=up + 9!! '&s.29!? J( + 29! '&s.29!?9( +!!! +9!!>toresQ receiving 4!! '&s.59?2!( 4!! 4!! 4!!-nspectionQ uality J!! '&s.+!!?J( 9!! 5!! J!!Gandling dispatch + 2! '&s.++!?+2( ++!! '&s.++!?+!( 88! + 2!Machine dept. cost 89+ 25!@ +285 2888

Total Costs +J + + 29@ @485 +J 428

Note7a / +2! units? 5 hrs? &s.8.!2 0 +!! units? hrs? &s.8.!2

(c) Cost per unit

Costs from 'a( +58.!! + +.!! 85.!! +5+.!!Cost from 'b( + J.!! + 2.9@ 44.8! +5+.!@

'++.4+( +.9@ +9.8! !.!@

Product / is over=costed $ith the traditional system. Production 0 and C are under costed and

similar costs are reported $ith Product #. -t is claimed that /0C more accurately measuresresources consumed by products 'see Errors arising from relying on misleading product costs1in Chapter +!(. ;here cost=plus pricing is used the transfer to an /0C system $ill result in

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different product prices. -f activity=based costs are used for stoc" valuations then stoc" valuationand reported profits $ill differ.

5 The follo$ing budgeted information relates to 0runti for the forthcoming period

ProductsL - T /0;

>ales and production 'unit( 9! 5! !

&s. &s. &s.>elling price 'per unit( 59 49 @Prime cost 'per unit( 2 85 J9

Gours Gours GoursMachine department 2 9 5'Machine hours per unit(

/ssembly department @ 2'#irect labour hours per unit(

ales volume '!!! units( 9! 5! !

&s. &s. &s.

'2( >elling pricing per unit 59 49 @' ( Prime cost per unit 2 85 J9'5( Contribution per unit + ++ 8'9( Total contri. is &s.!!! is '+ ? 5( J9! 55! 25!'J( Machine department overheads a +2! 25! +55

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'@( /ssembly department overhead b 288.@9 44 54.9Profits '&s.!!!s( 25+.9 +!+ 5J.9

Total profit &s. 88 @9!

Note7a L - 9! !!! ? 2 hrs.? &s.+.2! T 5! !!! ? 9 hrs. ? &s.+.2!b

L - 9! !!! ? @ hrs.? &s.!.829 T 5! !!!? hrs. ? &s.!.829

'ii( Cost poolsMachine /ssembly >et=up ervice service processing

&s.!!! 9@ +8 2J +9J 85

Cost drivers 52! !!! 9 ! !!! 92! 2 !!! ++ 2!!

Machine direct set=ups customer suppliers1 Gours labour hours orders orders

Cost driver &s.!.89 &s.!.J! &s.9! per &s.5.8@9 per &[email protected]! per &ates machine direct set=up customer suppliers1

Gour labour hour order order

/0C Profit >tatement7L - T /0;

'&s.!!!( '&s.!!!( '&s.!!!(Total contribution J9! 55! 25!6e$er overheadsMachine department at &s.!.89 per hour 89 +@! +!2

/ssembly at &s.!.J! per hour 2+! @2 J>et=up costs at &s.9! per set=up J +! +!

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/dditional information as 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 theyear to ! )une has been estimated as follo$s7

'i( abour and overhead costs have been identified as attributable to each $or" centres Ireceipt and inspection storage and pac"ing as follo$s

ost a""ocation proportions

&eceipt K-nspection >torage Pac"ing

, , ,abour == basic +9 +! @9

== torages 's uare metres( !. !. !.2Pac"ing 'minutes( J 59 J!

&e uired'a( Calculate the budgeted average cost per cubic metre of pac"ing products for each customer

for each of the follo$ing t$o circumstances

/dditional information has been obtained in order to enable unit costs to be prepared fro each of the three customers using and activity=based costing approach. The additional information for theyear to ! )une has been estimated as follo$s7

'i( abour and overhead costs have been identified as attributable to each of three $or"centres I receipt and inspection storage and pac"ing as follo$s 7

Cost allocation Proportions

&eceipt K-nspection >torage Pac"ing, , ,

abour == basic +9 +! @9==

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&eceipt and inspection 'minutes( 9 4 +9>torage 's uare metres( !. !. !.2Pac"ing 'minutes( J 59 J!

&e uired'a( Calculate the budgeted average cost per cubic metre of pac"aged products for each

customer for each of the follo$ing t$o circumstances 'i( $here only the basis budget information is to be used

'ii( ;here the additional information enables an activity= based costing approach to beapplied.

o"ution'a( 'i( The pac"age material re uirements are as follo$s 7

)ohn td. ! !!! units ' ! !!!?+(*orge td. 4! !!! units '59 !!!? 2(

Paul td. @9 !!! units '29 !!!? (+49 !!! units

Cost per unit of pac"ing &s.+ 49! !!!D+49 !!! &s.+!

Product costs per cubic metre)ohn td. *eorge td. Paul td.

&s. &s. &s.Pac"aging materials +! '+ %&s.+!( 2! '2 L&s.+!( ! ' ? &s.+!(

abour ad overhead a 4.5! 4.5! 4.5!+4.5! 24.5! 4.5!

Note7 a abour and overhead average cost per metre &s.45! !!! Q +!! !!! meter

&s.4.5!'ii( The costs are assigned to the follo$ing activities

&eceipt and-nspection >torage Pac"ing

&s. &s. &s. abour7 0asic 92 9!! '+9,( 9 !!! '+!,( 2J2 9!! '@9,(

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&s.+2 9J5 per m 2 of materials stored '&s. 59 9!! Q 2@ 9!! m 2 (&s.9.29+ per pac"ing hours '&s.5! !!! Q @J @9! hrs. (

Product cost per cubic metre)hon td. *eorge td. Paul td.

&s. &s. &s.Pac"ing materials +!.!! 2!.!! !.!!&eceipts and inspection a +.! +.89 .!4>torage cost b .@@ .@@ 2.9+Pac"ing cost c .+9 .45 9.29

[email protected] 24.9J 5!.89

Notesa &s.+2 99? 9QJ! hrs. &s.+.!

&s.+2 99 ? 4Q9! hrs. &s.+2 99? +9QJ! hrs. &s. .!4b &s.+2 9J5?!. m &s. .@@ &s.+2 9J5 L !.2m &s.2.9+.

c &s.9.29 ? JQJ! hrs. &s. .+9 9.29? 59QJ! hrs. &s. .45 &s.9.29 L + hrs.

# L plc. Manufactures four products namely / 0 C and # using the same plant andprocesses. The follo$ing information relates to a production period

Material #irect Machine abour cost labour time cost

Product 3olume per unit per unit per unit per unit

/ 9!! &s.9 U hour V hours &s.0 9 !!! &s.9 U hour V hours &s.C J!! &s.+J 2 hours + hours &s.+2# @ !!! &s.+@ + U hours + U hours &s.4

Total production overhead recorded by the cost accounting system is analysed under thefollo$ing headings7

6actory overhead applied to machine=oriented activity is &s. @ 525

>et=up costs are &s.5 99. The cost of ordering materials is &s.+42!. Gandling materials=&s.@98!. /dministration for spare parts =&s.8J!!.

These overhead costs are absorbed by products on a machine hour rate of &s.5.8! per hourgiving an overhead cost per product of .

/ &s.+.2! 0 &s.+.2! C &s.5.8! # &[email protected]!

Go$ever investigation into the production overhead activities for the period reveals the follo$ingtotals

Number of

Number times Number Number of materials of

of materials $as spareProduct set=up orders handled parts

/ + + 2 20 J 5 +! 9C 2 + +# 8 5 +2 5

ou are re uired7

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'i( to compare an overhead cost per product using activity=based costing tracing overheads toproduction units by means of cost drivers.

'ii( To comment briefly on the differences disclosed bet$een overheads traced by the presentsystem and those traced by activity=based costing.

o"utionMachine=related costsMachine hours for the period7

/ 9!!? V +290 9!!!? V + 29!C J!!? + J!!# @!!!?+ U +! 9!!

+2 5@9

Machine hours rate &s. per hours '&s. @525Q+2 5@9 hrs.(

>et=up related costs. Cost per set=up &s.29J.+8 '&s.5 99D+@(

>et=up cost per unit of output7

Product / '+? &s.29J.+8( Q 9!! &s.!.9+0 'J? &s.29J.+8( Q 9!!! &s.!. +C '2? &s.29J.+8( Q J!! &s.!.89# '8? &s.29J.+8( Q @!!! &s.!.24

Materials ordering related costs. Costs per order &s.+42!D+! orders &s. +42 per orderMaterials ordering cost per unit of output7

Product / '+? &s.+42( Q9!! &s.!. 80 '5? &s.+42( Q 9!!! &s.!.+9C '+? &s.+42( Q J!! &s.!. 2# '5? &s.+42( Q @!!! &s.!.++

Materials handling related costs. Cost materials handling &s.@ 98!D2@ &s.28!.@5Materials handling cost per unit of output7

Product / '2? &s.28!.@9( Q 9!! &s.+.+20 '+!? &s.28!.@5( Q 9!!! &s.!.9JC ' ? &s.28!.@5( Q J!! &s.+.+!# '+2? &s.28!.@5( Q@!!! &s.!.58

>pare partsCost per part &s.8 J!!D +2 &s.@+J.J@. /dministration of spare parts cost per unit of output7

Product / '2? &s.@+J.J@( Q 9!! &s.2.8@0 '9 ? &s.@+J.J@( Q 9!!! &s.!.@2C '+? &s.@+J.J@( Q J!! &s.+.+4# '5? &s.@+J.J@( Q @!!! &s.!.5+

et=ups !.9+ !. + !.89 !.24Materials ordering !. 8 !.+9 !. 2 !.++Materials handling +.+2 !.9J +.5! !.58>pare parts 2.8@ !.@2 +.+4 !.5+

9.9 2.54 J.@J 9.@4Present system +.2! +.2! 5.8! @.2!

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#ifference B5.5 B+.24 B+.4J == +.5!Production # is the lo$ volume product and thus the present volume=based recovery sho$s alarge share of overheads for the product. -n contract the /0C system recognizes that product #consumers overheads according to activities consumption and traces to lo$ amount of overheadto this product as a result proper pricing of the product can be made.

I7 & $P 1 The annual demand for an item of ra$ material is 5 !!! units and the purchase price is e%pected

to be &s. 4! per unit. The incremental cost of processing an order is &s. + 9 and the cost fostorage is estimated to be &s. +2 p.u. ;hat is the optimal order uantity and total relevant costof this order uantity:

>uppose that &s. + 9 is estimated to be the incremental cost of processing an order is incorrectand should have been &s. 8!. /ll other estimates are correct. ;hat is the difference in cost onaccount of this error:

/ssume at the commencement of the period that a supplier offers 5 !!! units at a price of &s. 8Jeach unit. The materials $ill be delivered immediately and placed in the stores. /ssume that theincremental cost of placing the order is zero and original estimate of &s. + 9 for placing an order for the economic batch is correct. >hould the order be accepted:

o"ution

tatement of cost at special offer and at the original estimateTotal units price order Total cost of ordering Carrying TotalPurchased size 'in purchase cost cost cost

&s. &s. &s. &s. &s. 5 !!! 8J 5 !!! 55 !!! nil 25 !!! J8 !!!

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'5 !!! ×&s. 8J(5 !!! 4! !! J! !!! + 8!! + 8!! J J!! '5 !!! ×&s. 4!(

Cost difference 5 5!!

/dditional cost of special offer7>ince the special offer of &s. 8J per unit on the initial purchase of 5 !!! units imposes anadditional cost of &s. 5 5!! therefore such purchase is not recommended.

X6or a detailed discussion of other aspects of inventory control students should refer to institutematerial of cost accounting at PE I-- level and prescribed boo"s.Y

2 L td. Manufactures and distributes three types of car 'the C+ C2 and C (. Each type of car has its o$n production line. The company is $orried by e%tremely difficult mar"et condition andforecasts losses for the forthcoming year.

Current operations7The budgeted details for ne%t year are as follo$s7

C+ C2 C &s. &s. &s. #irect materials 2 92! 2 425 4J!#irect labour + +2! + 242 + 48!Total direct cost per car J5! 5 2+J 9 45!0udgeted production 'cars( @9 !!! @9 !!! @9 !!!Number of production runs + !!! + !!! + 9!!Number of order e%ecuted 5 !!! 9 !!! 9 !!!Machine hours +! 8! !!! +8 !! !!! +J 8! !!!

/nnual overheads7 6i%ed 3ariable &s.1!!! &s.>et ups 52 JJ! + !!! per production runMaterials handling 92 84! 5 !!! per order e%ecuted-nspection 94 88! +8 !!! per production runMachining + 55 95! 5! per machine hour #istribution and $arehousing 52 4!! !!! per order e%ecuted

Proposed )-T systemManagement has hired a consultant to advices them on ho$ to reduce costs. The constant hassuggested that the company adopts a just in time ')-T( manufacturing system. The introduction

of )-T system $ould have the follo$ing impact on costs 'fi%ed and variable(7

#irect labour -ncrease by 2!,>et ups #ecrease by !,Materials handling #ecrease by !,-nspection #ecrease by !,Machining #ecrease by +9,#istribution K ;are housing Eliminated

&e uired7'a( 0ased on the budgeted production levels calculate the total annual savings that $ould be

achieved by introducing the )-T system.

The follo$ing table sho$s the priceQ demand relationship for each type of car per annum.

C+ C2 C

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Price #emand Price #emand Price #emand'&s.( '&s.( '&s.(9 !!! @9 !!! 9 @9! @9 !!! J 9!! @9 !!!9 @9! J9 !!! J 29! J! !!! J @9! J! !!!J !!! 9! !!! J 9!! 59 !!! @ @9! 59 !!!J 9!! 9 !!! @ 9!! 9 !!! 8 !!! ! !!!

&e uired7'b( /ssuming that L td. /dopts the )-T system and that revised variable overhead cost per car remains constant 'as per the proposed )-T system budget( calculate the profit I ma%imizingprice and output level for each type of car.

-nvestigations have revealed that some of the fi%ed costs are directly attributable to the individualproduction lines and could be avoided if a line is closed do$n for the year. The specific fi%edcosts for ach of the production lines e%pressed as a percentage of the total fi%ed costs are7

C+ 5,C2 9,C 8,

&e uired7'c( #etermine the optimum production plan for the forthcoming year 'based on the )-T cost

structure and the prices and output levels you recommended in ans$er to re uirement 'b((.

'b( ;rite a report to the management of L td. ;hich e%plains the conditions that arenecessary for the successful implementation of a )-T manufacturing system.

o"ution(a) The annual cost savings are as follo$s7

&s.1!!!#irect labour !.2 '&s. + +2! B &s. + 242 B &s. + 48!( ? @9 !!! B J9 88!3ariable set I ups ' !, ? &s. + !!!( ? 9!! = + J9!3ariable materials handling ' !, ? 5 !!! ? +5 J!!( = +@ 92!3ariable inspection ' !, ? &s. +8 !!! ? 9!!( = +8 4!!3ariable machine '+9, ? &s. 5! ? 59 J! !!!( = 2@ J!3ariable distribution and $arehousing '&s. !!! ? +5 J!!( = 5 8!!'+9, ? &s. + 55 95!( B &s. 52 4!!Y = + ++ 2+!Total savings + JJ 9J!

(!) The total variable overhead costs allocated to each product is as follo$s7

C+ '&s.!!!( C2 '&s.!!!( C '&s.!!!(>et up costs at &s. 4 +!! per Production run 4 +!! 4 +!! + J9!Materials handling at &s. 2 8!!Per order ++ 2!! +5 !!! +9 J8!-nspection at &s. +2 J!! per Production run +2 J!! +2 J!! +8 4!!Machining at &s. 5 per machineGours @ @2! J+ 2!! 9@ +2!

J4 J2! 4J 4!! + !9 9!Total output '!!!1s( @9 @9 @93ariable overhead per car '&s.( 428.2J + 242.!! + 5!5.J@

#irect materials per car '&s( 2 92!.!! 2 425.!! 4J!.!!#irect labour + 55.!! + 99!.5! 2 @J.!!Total variable cost per car 5 @42.2J 9 @JJ.5! @ @5!.J@

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The above variable costs per car are no$ used to derive the follo$ing contributions for variouspriceQ demand levels7

>elling #emand unit TotalPrice '&s.( Contribution '&s.( Contribution '&s.1!!!(C+ car 9 !!! @9 !!! 2!@.@5 +9 98+9 @9! J9 !!! 49@.@5 J2 29J !!! 9! !!! + 2!@.@5 J! 8@J 9!! 9 !!! + @!@.@5 94 @@+

C2 car 9 @9! @9 !!! = +J.5! = + 2 !J 29! J! !!! 58 .J! 24 !+JJ 9!! 59 !!! @ .J! !+2@ 9!! 9 !!! + @ .J! J! J@J

C car J 9!! @9 !!! = + 25!.J@ = 4 !9!J @9! J! !!! = 44!.J@ = 94 55!@ @9! 59 !!! 4. 52!8 !!! ! !!! 294. @ @8!

The profit ma%imizing price and output levels are &s. 9 @9! and J9 !!! demand for C+ &s.@ 9!! and 9 !!! for C2 and &s. 8 !!! and ! !!! for C .

(c) C+ '&s.1!!!( C2 '&s. !!!( C2 '&s.1!!!(Total contribution J2 29 J! J@J @ @8!

/voidable fi%ed costs 4 2JJ ++ 98 +8 9Contribution to general fi%ed costs K profit 92 48@ 54 !4 = +! @9

The above analysis suggests 'ignoring any ualitative factors( that C should be discontinuedand that C+ and C2 are produced.

(,) The report should include the follo$ing points7+. The need to avoid fluctuations in production rates since this $ill lead to e%cess $or" in

progress.

2. / description of the pullQ Zanban system

. The need to ensure a cell production layout and that $or"ers have multiple s"ills.

5. 6ocus on eliminating non I value added activities

9. 6ocus on routine and preventative maintenance to avoid machine do$ntime.

J. 6ocus on reducing set I up times to a minimum

@. Establishment of )-T purchasing arrangements accompanied by establishing close

relationships $ith suppliers.

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7ota" ua"it. mana*ement

1 The budget estimates of a company using sophisticated high speed machines based ona normal $or"ing of 9! !!! machine hours during +48J are as under7I

'&s. la"hs(

>ales '+ !! !!! units( +!!&a$ materials 2!#irect ;ages 2!6actory elling and #istribution ales '+ !! !!! units( +!!&a$ materials 2!#irect $ages 2!6actory overheads '3ariable( +!>elling K distribution overheads '3ariable( AAA9

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Total variable costs 99Contribution 59Contribution per unit7 &s. 59 !! !!!D+ !! !!! &s. 59

Machine hours planned 9! !!!Production units + !! !!!

-n one machine hour 2 units $ill be produced. Gence contribution p. hour7 &s. 59 × 2 &s. 4!.

tatement s/o in* ,ifferentia" cost an, incrementa" contri!ution at ,ifferent"e e"s of mac/ine /ours sa e,

Machine hours saved ! 8!! + J!! 2 5!! J 2!! 5 !!!Estimated brea"do$n

&epair costs '&s.( + 42 !!! + 9 J!! + +9 J!! + +9 2!! @J 8!! 9@ J!!

#ifferential savings in0rea"do$n repair Costs '&s.( ! 8 5!! 8 5!! 8 5!! +4 2!! 9@ J!!

-ncremental contri=bution '&s.( 'seenote belo$( ! @2 !!! @2 !!! @2 !!! @2 !!! @2 !!!

Total dif ferential>avings &s. '/( ! + +! 5!! + +! 5!! + +! 5!! 4+ 2!! + 24 J!!

E%penditure on pre=ventive maintenance +4 2!! 8 5!! @J 8!! + 9 J!! !@ 2!! J +5 5!!

#ifferential e%pendi=ture on preventivemaintenance '&s.( '0( ! +4 2!! 8 5!! @J 8!! + 9 J!! !@ 2!!

-ncremental profit'&s.( '/I0( ! 4+ 2!! @2 !!! J!! IJ2 5!! I+ @@ J!!

>ote: -ncremental contribution is calculated by multiplying differential hours saved bycontribution per hour i.e. 8!! × &s. 4! &s. @2 !!!

&ecommendation 7 -t may be observed from the above table that savings in machinehours up to 2 5!! yields incremental profit. 0eyond this level the differentialmaintenance costs e%ceed the differential savings. Therefore the management isadvised to reduce the level of brea"do$n hours upto +J!! '5 !!! I 2 !!!( or save 2 5!!brea"do$n hours to increase production. /T his level the company $ill be able toma%imise profits consistent $ith minimum costs.

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;a"ue c/ain & ost $e,uction

1 /CE td has applied 3alue /nalysis during last year. The financial controller of /CE td. hasprepared the follo$ing estimates of $or"ing results after applying the benefit of vale engineeringfor the year ending + st March 2!!J

#irect Materials &s. Q units +J.!!#irect ;ages &s. Q units 5!.!!

3ariable elling Price &s. Q units +29.!!6i%ed E%penses &s. J @9 !!! per annum>ales &s. 29 !! !!! per annum

#uring the year 2!!J=!@ various steps in value analysis are implemented7

+. -dentification of the problem of lo$ labour efficiency /s a result of re=engineering of business processes the overall direct labour efficiency $ill increase by +2, but the $agerate $ill go up by 9,.

2. Collecting information about function design materials labour overhead costs etc. of theproduct and finding out the availability of the competitive products in the mar"et. -t ise%pected that the materials prices and variable overheads $ill go up by +!, and 9,respectively.

. E%ploring and evaluating alternatives and developing them as a result fi%ed overheads arealso e%pected to increase by &s. + 29 !!!.

The 3PI Manufacturing states that the same level of output as obtained in 2!!9=!J should bemaintained in 2!!J=!@ also and efforts should be made to maintain the same level of profit bysuitable increase the selling price.

The 3PIMar"eting states that the mar"et $ill not absorb any increase in the selling price. tatement for 2!!9=!J.

'b( 6ind the revised price and the percentage of increase in the price for 2!!J=!@ if the vie$sof the 3PIManufacturing are accepted.

'c( Evaluate the four alternative proposals put forth by the 3PIMar"eting. #etermine the bestoutput level to be budgeted and prepare an over=all -ncome >tatement for 2!!J=!@ at thatlevel of output.

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o"ution(a) 'or in* notes:

+. Number of units produced and sold for the year ending on + st March

Total sales revenue upto + st MarchD >elling price p.u. &s. 29 !! !!!D &s. +29 p.u. 2! !!! units

2. tatement of aria!"e cost per unit

ear 2!!9=!J 2!!J=!@ &s. &s.#irect materials +J [email protected]!

'&s. +J B +!, ?&s. +J(#irect $ages 5! @.9! '&s. 5!? +!!Q++2?+!9Q+!!(3ariable overheads +2 +2.J!

'&s. +2 B 9,? &s. +2(

3ariable cost per unit J8 J@.@!

. Contribution per unit during +444 =2!!! >elling price per unitI 3ariable cost p.u. &s. +29I &s. J@.@! &s. 9@. !

5. Profit in +448=+444Contribution per unit >.P 'p.u.(= 3.C. 'p.u.( &s. +29 I &s. J8 &s. 9@ p.u.

Total contribution &s. ++ 5! !!!2! !!! units? &s. 9@Q= p. u.

ess7 6i%ed e%penses J @9 !!!Profit 5 J9 !!!

(a) Income tatement for t/e .ear 1999-2000 &s.

>ales revenue 2! !!! units? &s. +29 29 !! !!!ess7 3ariable cost + 95 !!!

2! !!! units L &s. J@.@! '&efer to $or"ing note 2( Total contribution ++ 5J !!!

ess7 6i%ed e%penses 8 !! !!!Profit 5J !!!

(!) tatement for ,eterminin* re ise, price an, t/e percenta*e of increase in t/e price for 1999-2000 !ase, on t/e ie s of ;ice-Presi,ent- anufacturin*

&s.3ariable cost '2! !!! unit1s? &s. J@.@!(+ 95 !!!6i%ed e%penses 8 !! !!!Profit '&efer $or"ing note 5( 5 J9 !!!#esired sales revenue 2J +4 !!!&evised selling price 'per unit( + !.49'&s. 2J +4 !!!Q2! !!! units(

Percentage increase in selling price7 &s. + !.49= &s. +29D &s. +29? +!! 5.@J,

(c) + a"uation of four a"ternati e proposa"s of ;ice-Presi,ent ? ar etin*

/ddition units of sales 2 !!! 5 !!! J !!! 8 !!! &s. &s. &s. &s.

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Total contribution + +5 J!! 2 24 2!! 5 8!! 5 98 5!!

ess7 /dvertisement e%penses 8! !!! + 45 !!! 2! !!! 5 J! !!! /ddition Profit Q' oss( 5 J!! 9 2!! 2 8!! '+ J!!(

Evaluation of four alternatives 7 >ince the additional profit is ma%imum at the additional sales of

5 !!! units therefore the second alternative is adjudged as the best out of the four alternativesproposed by the 3ice=President of Mar"eting. Gence the concern should produce and sell 25 !!!units during the year 2!!9=!J

tatement for 2!!9=!Jales revenue25 !!! units ? &s. +29Q= ! !! !!!

ess7 3ariable cost 25 !!! units? &s. J@.@! +J 25 8!!Contribution + @9 2!!

ess7 /dvertisement e%penses &s. + 45 !!!

6i%ed e%penses &s. 8 !! !!! 4 45 !!!Profit 8+ 2!!

2 Even 6or$ard td. is manufacturing and selling t$o products7 >plash and 6lash at selling price of &s and &s. 5 respectively. The follo$ing sales strategy has been outlined for the year 7==

'i( >ales planned for year $ill be &s. @.2! la"hs in the case of >plash and &s. .9! la"hs in thecase of 6lash.

'ii( To meet competition the selling price of >plash $ill be reduced by 2!, and that of 6lash by+2 U ,.

'iii( 0rea"= even is planned at J!, of the total sale of each product.

'iv( Profit for the year to be achieved is planned as &s J4 +2! in the case of >plash and &s+@ 9!! in the case of 6lash. This $ould be possible by launching a cost reductionprogramme and reducing the present annual fi%ed e%penses of &s. + 9 !!! allocated as&s. + !8 !!! to >plash and &s. 2@ !!! to 6lash.

ou are re uired to present the proposal in financial terms giving clearly the follo$inginformation7

Number of units to be sold of >plash and 6lash to brea"=even as $ell as the total number of unitsof >plash and 6lash to be sold during the year.

&eduction in fi%ed e%penses product=$ise that is envisaged by the Cost &eduction Programme.

o"ution >plash 6lash

'a( >ales '&s.( @ 2! !!! 9! !!!'b( >pQu '&evised( 2.5 .9

'8!, of ( '[email protected], of 5('c( >. units 'aQb( !! !!! + !! !!!'d( 0EP J!, J!,'e( 0EP 'c ×d( + 8! !!! J! !!!

>plash flash'a( M 5!, 5!,2 88 !!! + 5! !!!

'+ 2! !!! ×2.5( '5! !!! × .9(

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'b( Profit J4 +2! +@ 9!!'c( Previous 6i%ed cost +! 8 !!! 2@ !!!'d( Ne$ PQ3 ratio 'bQa ×+!!( 25, +2.9,'e( &evised fi%ed cost '0E> ×PQ3( + ! J8! 2J 29!'f( &eduction in fi%ed cost 'c=e( 5 2! @9!

7ar*et costin*

1 -0M td. Manufactures and sells computers peripherals to several retail outlets throughout thecountry. /mar is the manager of the printer division. -ts t$o largest=selling printers are P+ K P2.The manufacturing cost of each printer is calculated using -0M1s activity based costing system.-0M has one direct manufacturing cost category 'direct materials( and the follo$ing five indirectmanufacturing cost pools. -ndirect manufacturing cost pool /llocation 0ase /llocation &ate '&s.(+. Materials handling No. of parts &s. +.2! per part2. /ssembly management Gours of assembly time &s. 5! per hour of assembly time

. Machine insertion of parts No. of machine inserted parts. &s. !.@! per machine inserted part5. Manual insertion of parts No. of manually inserted parts &s. 2.+! per manually inserted part9. Huality testing Gours of uality testing time &s. 29 per testing hour.

Product characteristics of P+ and P2 are as follo$s7 Product P+ P2#irect materials costs &s. [email protected]! &s. 242.+!Number of parts 89 5JGours of assembly time .2 +.4Number of machine I inserted parts 58 +Number of manually inserted parts J +9Gours of uality testing time +.5 +.+

/ foreign competitor has introduced products very similar to P+ and P2. *iven their announcedselling prices to maintain the company1s mar"et share and profits. /mar estimated the P+ tohave manufacturing cost of appro%imately &s. J8! and P2 to have a manufacturing cost of appro%imately &s. 4!. he calls a meeting of product designers and manufacturing personnel atthe printer division. They all agreed to have the &s. J8! and &s. 4! figures become target costs

for designed version of P+ and P2 respectively. Product designers e%amine alternative $ays of designing printer $ith comparable performance but lo$er costs. They come up $ith the follo$ingrevised designs for P+ and P2 'termed P+ I &E3 and P2 I &E3 respectively(.

Particulars P+ I &E3 P2 I &E3#irect materials cost &s. 8+.2! &s. 2J .+!Number of parts @+ 4Gours of assembly time 2.+ +.JNumber of machine I inserted parts 94 24Number of manually I inserted parts +2 +!Gours of uality testing time +.2 !.4&e uired7• Compute the present costs of products P+ and P2 using /0C system.

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• Compute the manufacturing costs of P+ I &E3 and P2 I &E3. Go$ do they compare $iththe &s. J8! and &s. 4! target costs:

• -f the allocation rate in the assembly management activity area can be reduced from &s. 5!to &s. 28 per assembly hours ho$ $ill this activity area cost reduction affect themanufacturing costs of P+ I &E3 and P2 I &E3: Comment on the results.

o"utionP+ P2

&sQunit &s.Qunit

Material [email protected] 242.+

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>ote-3 7Total profit is maturity &s. crore.∴ 'contributionQunit ×unitQmonth I6i%ed costQMonth( crores

' 2! ×2! !!! I2! ( months 55 !! !!! per month.

>o re uired no. of months &s cr. D rs. 55 lac"s p.m. @9 months

∴ Maturity period 2!=4 rd months

>ote-4: /t #ecline total demand 2+ 9!!

#emand e uation of ne$ product 2.

H 2 9!! t 2 I !t 22

!t22 I2 9!!t2 B2! !!! !t22 I29!t2 B2 !!! !

t ==========================================================

t @5. @ or 8.4J

∴ #ecline 4 monthsGence the ife of product of 0C

-ntroduction 9 months*ro$th +5 \

Maturity @9 \#ecline 4 \Total +!2 months

+250 + √250 #4×2,000 ×36

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/ut,o n & ,i estment

1 6i%ed e%penses at 9!, activity &s.+9 !!!6i%ed e%penses $hen the factory is shut do$n +! !!!

/dditional e%penses in closing do$n + !!!Production at 9!, activity 9 !!! unitsContribution per unit &e. +

o"ution&s.

/. -f the plant is shut do$n the sun" costs or fi%ed e%penses ++ !!!0. -f it is $or"ing at 9!, activity the fi%ed e%penses +9 !!!C. /dditional fi%ed e%penses7 X'0=/(Y 5 !!!#. Contribution '9 !!! units ×&e. + p.u.( 9 !!!

0y $or"ing at 9!, activity the firm is able to recover the additional fi%ed e%penses of &s. 5 !!!and earn an e%tra contribution of &s. + !!! to$ards shut do$n e%penses. Gence it is advisableto continue production in the factory instead of closing it do$n. -f on the other hand thecontribution is &e. !.@9 per unit the total contribution of &s. @9! being less than the additionalfi%ed e%penses it is not advisable to continue the operations. Gence in the latter case shut do$nis economically justified.

2 / firm produces +! !!! product units a month. Each unit re uires 2 "g. of L at &e +Q= per "g. +tonne of at &s. J and Component at &s. 2. These prices are all fi%ed by contract $ith thefirm. To terminate the supply contracts the firm must give 2 months1 notice to supplier L threemonths to supplier and one month to supplier .

Materials supplied could be sold on$ard on the follo$ing terms7

Fnit >ales price Fnit variable selling costs Fnit contribution&s.

L per "g &s. +Q= &s. +.2! '!.2!( per tonne &s. 5.8! &s. .2! +.J!

&s.+.4! &s. +.9! !.5!

The firm must pay its suppliers during the notice periods but need not ta"e delivery of thematerials if it chooses not to.

3ariable conversion costs to the firm are &s. 29 an hour for +!! hours a month on the product inuestion. /mong the fi%ed overheads are machines on hire at &s. 2! !!! a month on a hire

contract subject to three months notice of termination.

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The product could be supplied in a finished condition by M. td. $hich indicated a price of &s.8 per unit $ould be charged for +! !!! units a month. >hould the firm continue to ma"e theproduct or buy:

;hat is the best time to give notice to suppliers and the best time to s$itch from ma"ing tobuying.

o"ution tatement of >et income (if Pro,uction stops no )

>aving or C-6 Contribution M+ M2 M M5 K on $ards &s. &s. &s. &s. Material % ] 2! !!! p.m.2 months == == 2! !!! 2! !!!&esale of mat % == == == ==

Material ] J! !!! p.m. m == == == J! !!!&esale ] +J !!! p.m. +J !!! +J !!! +J !!! ==

Material ] 2! !!! p.m. +m == 2! !!! 2! !!! 2! !!!&esale ] 5 !!! 5 !!! == == ==

Conversion cost Nil month 2 9!! 2 9!! 2 9!! 2 9!!] &s. 29 for +!! hrs.

Machine rent ] 2! !!! p.m. m == == == 2! !!! AAAAA AAAAA AAAAAAA AAAAAAAAA

Σ C-6 22 9!! 8 9!! 98 9!! + 22 9!!C

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staff member $ill be paid at his present salary of &s.+ 5!! per month $hich is &s.+!! morethan that of the staff member $ho is e%pected to leave. aving in 6ees 'J9 !!! ×9( 29 !!!ess7 &elevant Cost for 9 months

> K ; 'N=+( 45 9!!M K > 'N=2( + 92 28!

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Note=+7Present cost '+8 !!!B5 !!!( 22 !!! ×9 + +! !!!

ess7 >alary of staff 2J retained '22 !!!(i.e. fi%ed '2 ×+ 9!!B+ 5!!( ×9 AAAAAAA

88 !!! /dd7 >alary of temporary staff in publishing #ept. for 9 months '+ !! ×9( AAJ 9!!

45 9!!&edundancy 0enefit of 2 month salary is committed either !QJ or !Q++ IThey are al$ays >un".

Note=27Material K >upplyTotal cost for 9 months ' + !!! B+ +!!( ×9 + J! 9!!

ess7 >toc" in hand AA+8 !!!+ 52 9!!

/dd7 ave in cost due to proper notice $ith the supplier $hich other$ise a cost

/lternative +7 Cancellation change !! /lternative 27 *oods purchased K sold to

2 '9!!= 8!( 25! /lternative 7 one month cancellation +!!

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$e"e ant costin* & @ecision a in*:

1 Tiptop Te%tiles manufactures a $ide range of fashion fabrics. The company is considered$hether to add a further product the \>uperb^ to the range. / mar"et research survey recentlyunderta"en at a cost of &s. 9! !!! suggests that demand for the \>uperb^ $ill last for only oneyear during $hich 9! !!! units could be sold at &s. +8 per unit. Production and sale of \>uperb^$ould ta"e place evenly throughout the years. The follo$ing information is available regardingthe cost of manufacturing \>uperb̂ .

&a$ Materials7 Each \>uperb^ $ould re uire types of ra$ material Posh 6lash and >plash.Huantities re uired current stoc" levels and cost of each ra$ material are sho$n belo$. Posh isused regularly by the company and stoc"s are replaced as they are used. The current stoc" of 6lash is the result of overbuying for an earlier contract. The material is not used regularly byTiptop Te%tiles and any stoc" that $as not used to manufacture \>uperb^ $ould be sold. Thecompany does not carry a stoc" of >plash and the units re uired $ould be specially purchased.

Huantity Current Costs per metre of ra$ Materials&e uired stoc" original current current

&a$ per unit level cost replacement resaleMaterials of >uperb 'metres( cost 3alue 'Metres(

&s. &s. &s.Posh +.!! + !! !!! 2.+! 2.9! +.8!6lash 2.!! J! !!! . ! 2.8! +.+!>plash !.9 ! = 9.9! 9.!!

uperb^ $ould re uire a uarter of an hour of s"illed labour and t$ohours of uns"illed labour. Current $age rates are &s. per hour for s"illed labour and &s. 2 per hour for uns"illed labour. -n addition one foreman $ould be re uired to devote all his $or"ingtime for one year in supervision of the production of >uperb. Ge is currently paid an annualsalary of &s. +9 !!!. Tiptop Te%tiles is currently finding it very difficult to get s"illed labour. Thes"illed $or"ers needed to manufacture \>uperb^ $ould be transferred from another job on $hichthey are earning a contribution surplus of &s. +.9! per labour hour comprising sales revenue of &s. +!.!! less s"illed labour $ages of &s. .!! and other variable costs of &s. 9.9!. it $ould notbe possible to employ additional s"illed labour during the coming year. 0ecause the companyintends to e%pand in the future it has decided not to terminate the services of any uns"illed$or"er in the foreseeable future. The foreman is due to retire immediately on an annual pensionof &s. J !!! payable by the company. Ge has been prevailed upon to stay on for a further year and to defer his pension for one year in return for his annual salary.

ac/iner.: T$o machines $ould be re uired to manufacture \>uperb^ MT 5 and MT @. #etailsof each machine are as under7

>tart of the year&s. &s.

MT 5 &eplacement cost 8! !!! J9 !!!

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&esale value J! !!! 5@ !!!MT @ &eplacement cost + !!! 4 !!! &esale value ++ !!! 8 !!!

>traight=line depreciation has been charged on each machine for each year of its life TiptopTe%tiles o$ns a number of MT 5 machines $hich are used regularly on various products. Each

MT 5 is replaced as soon as it reaches the end of its useful life. MT @ machines are no longer used and the one $hich $ould be used for \>uperb^ is the only one the company no$ has. -f it$as not used to produce \>uperb^ it $ould be sold immediately.uperb^ are estimated at &s. +.2! per unit produced.

ou are re uired to compute such a cost sheet for \>uperb^ $ith all details of materials labouroverhead etc. substantiating the figures $ith necessary e%planations.

o"ution#etails of relevant costs $ith e%planations7'i( Mar"et &esearch >urvey e%penses of &s. 9! !!! is sun" cost and hence not relevant for

the decision on hand.'ii( &a$ materials

'a( Posh is used regularly and stoc"s are replaced as they are used. Therefore its Posh79! !!! metres ×&s. 2.9! &s. + 29 !!!.

'b( + !! !!! metres of 6lash are re uired for the output of \>uperb .̂ There are already J! !!!metres in stoc" as a result of overbuying for an earlier contract purchased ] &s. . ! per metre and 5! !!! metres additionally $ould be purchased at the current replacement costof &s. 2.8! per metre. -f \>uperb^ $ere not produced the company $ould have sold J! !!!metres of 6lash at &s. +.+!. This is an opportunity foregone and relevant. Gence

6lash7= &s.

-ncremental cost5! !!! metres ×&s. 2.8! + +2 !!!

uperb^>"illed labour re uired7 9! !!! ×+Q5 +2 9!! hours andFns"illed labour re uired7 9! !!! ×2 + !! !!! hours

;age rate for s"illed labour is &s. per hour. -f \>uperb^ $ere not manufactured and thes"illed labour $ere not transferred they $ould have given a clean contribution of &s. +.9!per hour. This is the cost of an opportunity foregone7Therefore7Cost of s"illed labour7 &s.Cost of deployment '+2 9!! ×&s. ( @ 9!!

/dd7

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No $or" has suffered and no e%tra cost is involved hence cost of uns"illed labour7 zero

6oreman7 &s. /nnual salary +9 !!!

ess7 Pension saved AAJ !!!Effective cost AA4 !!!

'iv( Machinery7 MT 5 machines are used and replaced regularly. The difference of thereplacement cost bet$een start and end of the year is relevant. Gence MT 5 cost of using7&s. +9 !!!MT @ machine is not in vogue and $ill be sold no$ or in near future. The fall in its resalevalue represents the relevant cost.

Gence cost of using MT @7 &s. ++ !!! I&s. 8 !!! &s. !!!

'v( o its rateof recovery is not relevant. 3ariable overheads7 9! !!! ×&s. +.2! &s. J! !!!

No$ $e can prepare the cost sheet.ost s/eet for 50A000 units of B uper!C

&s. &s.&a$ Materials7

Posh + 29 !!!6lash + @8 !!!>plash + @ 9!! 5 5! 9!!

abour7>"illed 9J 29!Fns"illed !6oreman AAA4 !!! J9 29!

Machinery costs7MT 5 +9 !!!MT @ AA !!! +8 !!!

3ariable overheads AAJ! !!!Total cost 9 8 @9!Profit '&s. 4 !! !!! I&s. 9 8 @9!( +J 29!>ales revenue '9! !!! ×&s. +8( 4 !! !!!

AAAAAAAAAAAAAAAA

2 The officers1 &ecreation Club of a large public sector underta"ing has a cinema theatre for thee%clusive use of themselves and their families. -t is a bit difficult to get good motion pictures for sho$ and so pictures are boo"ed as and $hen available. The theater has been sho$ing thepicture \0lood 0atĥ for the past t$o $ee"s. This picture $hich is strictly for adults only hasbeen great hit and the Manager of the theatre is convinced that the attendance $ill continue to beabove normal for another t$o $ee"s if the sho$ of \0lood 0atch^ is e%tended. Go$ever another popular movie eagerly loo"ed for$ard to by both adults and children ali"e =\/ppu on the /irbuŝis boo"ed for the ne%t t$o $ee"s. Even if \0lood 0ath^ is e%tended the theatre has to pay theregular rental on \/ppu on the /irbus^ as $ell.

Normal attendance at the theater is 2 !!! patrons per $ee"s appro%imately one=fourth of $homare children under the age of +2. /ttendance for \0lood 0ath^ has been 9!, greater than thenormal total. The manager believes that this $ould taper off during a second t$o $ee"s 29,belo$ that of the first t$o $ee"s during the third $ee" and . , belo$ that of the first t$o$ee"s during the fourth $ee"s. /ttendance for \/ppu on the /irbus^ $ould be e%pected to benormal throughout its run regardless of the duration.

/ll runs at the treatre are sho$n at the regular price of &s. 2 for adults and &s. +.2! for childrenunder +2. The rental charge for \0lood 0ath^ is &s. 4!! for one $ee" or &s. + 9!! for t$o

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$ee"s. 6or \/ppu on the /irbus^ it is &s. @9! for one $ee" or &s. + 2!! for t$o $ee"s. /ll other operating costs are fi%ed &s. 5 2!! per $ee" e%cept for the cost of potato $afers and ca"es$hich average J!, of their selling price. >ales of potato $afers and ca"es regularly average &s.+.2! per patron regardless of age.The Manager can arrange to sho$ \0lood 0ath^ for one $ee" and \/ppu on the /irbus^ for thefollo$ing $ee" or he can e%tend the sho$ of \0lood 0ath^ for t$o $ee"s or else he can sho$

\/ppu on the /irbus^ for the $ee"s as originally boo"ed. >ho$ by computation the mostprofitable course of action he has to pursue.o"ution

The officers1 recreation club Comparative predicted income for t$o $ee"s

Three decision alternatives>ho$ \0lood 0ath^ >ho$ \0lood 0ath^

6or t$o $ee"s for one $ee" and\/ppu on the /irbus^ t$o $ee"s

for the follo$ing $ee"

/ttendance7 /dults76irst $ee" 2 29! 2 29! + 9!!>econd $ee" 2 !!! + 9!! + 9!!

9 29! @9! !!!Children76irst $ee" === === 9!!>econd $ee" AAA==AA AA9!! AA9!!Total attendance A5 29! 5 29! 5 !!!

&evenue7 &s. &s. &s.>ales of Tic"ets7

/dults] &s. 2Q= 8 9!! @ 9!! J !!!Children ] &s. +.2! === J!! + 2!!>ale of potato $afers K ca"es] &s. +.2! per patron 9 +!! 9 +!! 5 8!!Total revenue7 '/( + J!! + 2!! +2 !!!

Costs 'only relevant(7Gire Charges of \0lood 0ath^ + 9!! 4!! ===Cost of potato $afers K Ca"es'J!, of their selling price( !J! !J! 2 88!Total relevant cost7 '0( 5 9J! 4J! 2 88!

Profit7 R'/( I '0(S 4 !5! 4 25! 4 +2!-t is seen from the above statement that the most profitable course of action is to sho$ each filmfor one $ee". Gence the manager should arrange to sho$ \0lood 0ath^ for one $ee" and\/ppu on the /irbus^ for the follo$ing $ee".

Note7 The hire charge for \/ppu on the /irbus^ and the fi%ed operating costs of &s. 5 2!! per $ee" are irrelevant to this analysis as these are committed fi%ed costs.

AAAAAAAAAAAAAAA

3 'a( / machine $hich originally cost &s. +2 !!! has an estimated life of +! years and is depreciated

at the rate of &s. + 2!! per year. -t has been unused for sometime ho$ever as e%pectedproduction orders did not materialize. / special order has no$ been received $hich $ouldre uired the use of the machine for t$o months.

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The current net realizable value of the machine is &s. 8 !!!. -f it is used for the job its value ise%pected to fall to &s. @ 9!!. The net boo" value of the machine is &s. 8 5!!. &outinemaintenance of the machine currently costs &s. 5! per month. ;ith use the cost of maintenance and repairs $ould increase to &s. J! per month.

;hat $ould be the relevant cost of using the machine for the order so that it can be charged as

the minimum price for the order:

'b( L td. has been approached by a customer $ho $ould li"e a special job to be done for him andis $illing to pay &s. 22 !!! for it. The job $ould re uire the follo$ing materials7

Material Total Fnits &ealizable &eplacement

Fnits already value cost

&e uired in stoc" &s.Qunits&s.Qunits

/ + !!! ! === === J0 + !!! J!! 2 2.9 9C + !!! @!! 2.9 5# 2!! 2!! 5 J 4

'i( Material 0 is used regularly by L td. and if stoc"s are re uired for this job they $ould needto be replaced to meet other production demand.

'ii( Materials C and # are in stoc"s as a result of previous e%cess purchase and they haverestricted use. No other use could be found for material C but material # could be used inanother job as substitute for !! units of material E $hich currently costs &s. 9 per unit 'of $hich the company has no units in stoc" at the moment(.

;hat are the relevant costs of material in deciding $hether or not to accept the contract: /ssume all other e%penses on this contract to be specially incurred besides the relevant costof material is &s. 99!.

o"ution(a) $e"e ant costs of usin* t/e mac/ine for t/e or,er &s.

'i( oss in the net realizable value of machine by using it on the order 9!!'&s. 8 !!! I&s. @ 9!!(

'ii( /dditional maintenance and repair for t$o months i.e. '&s. J! I&s. 5!( ×2 AA5!Minimum price AAA95!

Notes7'a( 'i( 0oo"s value of &s. 8 5!! is irrelevant for decision.

'ii( Net realizable value of the machine fall from &s. 8 !!! to &s. @ 9!!. This loss of &s. 9!!is relevant for decision because it is influenced e%clusively by the decision.

'iii( &s. @ 9!! $ill be realized after months at least. Therefore time value of &s. @ 9!! for t$omonth at least. Therefore present value of future realizable value of &s. @ 9!! should befound out K this present value should be deducted from &s. 8 !!!. This $ill be the correctrelevant cost in place of &s. 9!! sho$n above in the absence of discounting factor.

'b( 'i( Material / is not yet o$ned. -t $ould have to be purchased in full at the replacement cost

of &s. J.!! per unit. &elevant cost is therefore + !!! units at the replacement cost.

'ii( Material 0 is used by the company regularly. There is already e%isting a stoc" of J!!units. -f these are used in the contract a further 5!! units $ould have to be purchased.

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&elevant cost is therefore + !!! units at the replacement cost.

'iii( Material C7 + !!! units of material C are re uired. @!! units are already in stoc". -f it isused for the contract a further !! units $ill have to be purchased at a replacement costof &s. 5.!! each. The e%isting stoc" of @!! units $ill not be replaced. -f they are used for the contract they cannot be used ] &s. 2.9! each unit. The realizable value of these

units @!! units ] &s. 2.9! per unit represent opportunity cost.

'iv( Material # is already in stoc" and $ill not be replaced. There is an opportunity cost of using # in the contract. -t has follo$ing t$o uses7-t can be sold to fetch &s. + 2!! i.e. J!! ×&s. 2. it can also be used for E $hich $ouldcost &s. + 9!! i.e. !! ×&s. 29. >ince substitution is more useful &s. + 9!! is theopportunity cost.

(c) ummar. of re"e ant costs: &s.

Material / + !!! units ×&s. J J !!!

Material 0 + !!! units×

&s. 9 9 !!!Material C @!! units ×&s. 2.9 + @9!!! units ×&s. 5 + 2!!

Material # !! units ×&s. 9 + 9!!

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of $aste product. ;hile analyzing the profitability of processing the $aste further the salvagevalue of $aste should therefore be ta"en into consideration as opportunity cost as under7

;aste ;aste>old processed

&s. &s.

-ncome per "g. '/( !.4! +.J!abour K overheads == !.@9alesQ-ncome + 29 !!! 2 9! !!! @9 !!!Material 5! !!! 9! !!! 4! !!!

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;ages 59 !!! + !! !!! + 59 !!!#epreciation +8 !!! + 9!! 54 9!!Po$er 2 !!! 9!! 9 9!!&ent 9 !!! ! !!! 9 !!!Geat K light 9!! !!! 9!!ales product / J2 9!!

ess7 Material 2! !!!

abour 22 9!!Po$er + !!!

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(,) >un" cost of the jobs7 &s.

#epreciation 4 !!!Po$erO + !!!&ent 2 9!!Geat K light AAA29!

+2 @9!

O -f a student treats po$er as a relevant cost in that case it $ould not appear here., ice re*ar,in* t/e %o!s:ed td. should not accept the job as there $ill be a cash disadvantage of &s. 52 @9! as

computed belo$7&s. &s.

-ncremental revenue9 !!! units ] &s. 29 + 29 !!!

ess7 >ale of product / AAJ2 9!! J2 9!!#ifferential costs 'a( + !9 29!Cash disadvantage AA52 @9!

AAAAAAAAAAAAA

# The company o$ns a operates a chain of 29 stores. 0udgeted data for the *arden stores areas follo$s7

&s. /nnual sales 5 29 !!! /nnual cost of goods sold and other operating e%penses 82 !!! /nnual building o$nership costs 'not included above( 2! !!!

The company can lease the building to a large flo$er shop for &s. 5 !!! per month decide$hether to continue operations of this store or to lease using7'i( The total project 'or comparative statement( approach'ii( The incremental 'or relevant cost( approach'iii( The opportunity cost approach

o"ution(i) Comparative statement sho$ing the profitability of t$o alternatives

Continue operation ease the building&s. &s.

/nnual sales 5 29 !!! 58 !!!'] 5 !!! p.m.(ess7 Cost of goods sold 82 !!! ===

'E%cluding o$nership costs(

0uilding o$nership costs AA2! !!! 2! !!!Net income AA2 !!! 28 !!!

Net income is &s. 28 !!! if the building is leased out and thus leasing is a profitable proposition.

(ii) Incrementa" or re"e ant cost approac/ .0uilding o$nership costs are not relevant as there is no change in these costs under both thealternatives. Therefore the correct approach $ill be to consider to incremental cash inflo$s fromthe continuing operation.

&s.Net cash flo$ from continuing the operation '&s. 5 29 !!! I&s. 82 !!!( 5 !!!

ess7 -ncome from leasing 58 !!!

-ncremental loss from continuing operations '9 !!!(Therefore company should not continue the operation

(iii) 7/e opportunit. cost approac/

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&s.Total sale revenue 5 29 !!!

ess7 Cost of goods sold ' 82 !!!( P=3C( contribution&s. &s. '&s. a"hs( &s. &s. '&s. a"hs(++! @! 9 !!! .9 @8 28 ! !!! 8.5+!8 J8 @ 9!! 9.+ @@ 2@ 2 !!! 8.J5+!@ J@ 8 !!! 9. J @9 29 9 !!! 8.@9+! J 8 5!! 9.242 @2 22 5! !!! 8.8!4J 9J 4 !!! 9.!5 J4 +4 59 !!! 8.99

Change in total cost of a product

Change in the output of the product

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Ma%imum contribution of t$o products L and are &s. 9. J ' a"hs( and &s. 8.8! ' a"hs( atselling prices &s. +!@ and &s. @2 respectively.

. -ncremental contribution per labour hour of products L and '&efer to $or"ing note 2(

Product=L Product I>elling incremental incremental contribution selling incremental incremental contributionPrice contribution labour hrs per hour price contribution labour hrs per hour Per unit per unit&s. &s. a"hs units ×5 hrs &s. &s. &s. a"hs 'Fnits ×2 hrs( &s. '+( '2( ' ( '2(Q' ( '5(

'J( '@( 'J(Q'@( '8(++! .9 2! !!! [email protected]! @8 8.5! J! !!! +5.!!+!8 +.J +! !!! +J.!! @@ !.25 5 !!! J.!!+!@ !.2J 2 !!! + .!! @9 !.++ J !!! +.8+! '=!.!J8( + J!! '=5.29( @2 !.!9 +! !!! !.9! 4J '=!.292( 2 5!! '=+!.9!( J4 '=!.29( +! !!! '=2.9!(

5. &an"ing of products L and based on the incremental Contribution per hour as per $or"ing note >l No. selling price

Product &an"ing Contribution per hour

&s. &s.

+. ++! [email protected]! L -2. +!8 +J.!! L --

. @8 +5.!! ---5. +!@ + .!! L -39. @@ J.!! 3J. @9 +.8 3-@. @2 !.9! 3--

(a) >tatement of selling price and units to earn ma%imum profit 'No restriction on the availability of labour hours(

Products L Total elling price p.u. '&s.( +!@ @2Contribution '&s.Qunits( '2( J@ 22Total contribution '&s.( '+( ×'2( 9 J !!! 8 8! !!! +5 +J !!!

ess7 6i%ed cost '&s.( !! !!! !! !!! J !! !!! AAAAAAAAA

Profit 8 +J !!!

(!) >tatement of selling price and units to earn Ma%imum profit $hen only 49 !!! labour hours are available

Products selling incrementalincremental abour

Price contributionunits hours contribution

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Per labour in ' a"hs(Gour

&s. &s.

'+( '2( ' ('9( ' ( ×'9( 'J(

L ++! [email protected]! 9 !!! 2! !!! .9!L +!8 +J.!! 2 9!! +! !!! +.J!

@8 +5.!! ! !!! J! !!! 8.5!L +!@ + .!! 9!! 2 !!! !.2J

@@ J.!! + 9!!O !!!O AAA!.+849 !!! + .45

ess7 6i%ed costs AAJ.!!Profit @.450alancing figure

9 / Company produces three products from an imported material. The cost structure per unit of the products are as under7Products / 0 C

&s. &s. &s.>ales value 2!! !! 29!#irect materials 9! 8! J!#irect $ages &s. J per hour J! +2! +!83ariable overheads ! J! 95

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Contribution per "g. pecific re uirement. Gence the material

Ftilized $ill be 'Zg.( 5 !!! J!! 2 5!!No. of units + !!! 9J2 9!!

Ma%imum profit '&s.( J! !!! 22 58! +5 !!!

10 >omesh of /gra presently operates its plant at 8!, of the normal capacity to manufacture aproduct only to meet the demand of *overnment of Tamil Nadu under a rate Contract.

Ge supplies the product for &s. 5 !! !!! and earns a profit margin of 2!, on sales realizations.#irect cost per unit is constant.

The indirect costs as per his budget projections are7 -ndirect costs 2! !!! units 22 9!! units 29 !!! units

'8!, capacity( '4!, capacity( '+!!, capacity( &s. &s. &s. 3ariable cost 8! !!! 4! !!! + !! !!!>emi=variable 5! !!! 52 9!! 59 !!!6i%ed cost 8! !!! 8! !!! 8! !!!

Ge has received an e%port order for the product e ual to 2!, of its present operations. /dditional pac"ing charges on this order $ill be &s. + !!!.

/rrive at the price to be uoted for the e%port to give him a profit margin of +!, on the e%portprice.

o"ution;or"ing notes7+. #irect cost per unit &s.

>elling price per unit 2!'&s. 5 !! !!!Q2! !!! units(

ess7 profit margin '2!, ×&s. 2!( AA5Total cost +J

ess7 -ndirect costs AA+!'&s. 2 !! !!!Q2! !!! units(

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#irect cost per unit AAAJ

2. >tatement of differential cost for 5 !!! units '2!, of 2! !!! units(

Present proposed #ifferentialProduction production cost for

2! !!! 25 !!! 5 !!!units units units &s. &s. &s. #irect cost ] &s. JQ= p.u. + 2! !!! + 55 !!! 25 !!!-ndirect cost73ariable ] &s. 5Q= p.u. 8! !!! 4J !!! +J !!!>emi Ivariable 5! !!! 55 !!! 5 !!!6i%ed 8! !!! 8+ !!! + !!!Total 2! !!! J9 !!! 59 !!!

Computation for the price to be uoted for the e%port order of 5 !!! units.&s.

#ifferential cost 59 !!!'&ef. To $or"ing note 2(

/dd7 Profit 9 !!!'+!, of e%port price or +Q4 th of cost( AAAAAAA Price to be uoted A9! !!!

E%port price per unit &s. +2.9!'&s. 9! !!!Q5 !!! units(

AAAAAAAAAAA

11 / company can produce and sell at its ma%imum capacity 2! !!! units of a product. The sale of price is &s. +!!. The present sales +9 !!! units. To produce over 2! !!! units and up toanother +! !!! units some balancing e uipments are to be installed at a cost of &s. +! la"hs andthe same $ill have a life span of +! years.

The current cost structure is as under7#irect material !, of sales value#irect labour 2!, of sales value3ariable overheads &s. 2! per unitProfit &s. +9 per unit

The present cost is estimated to go up due to price escalation as under7+!, in #irect material from present level of !,

29, in #irect abour from present level of 2!,&s. 9! !!! in 6i%ed overheads per year.

There is a concrete proposal from a party to ta"e +! !!! units additionally over the present levelof output on a long=term basis at a unit price of &s. 4!. /part from the investment of &s. +!la"hs as sho$n above the fi%ed overheads $ill increase by &s. 9! !!! due to additionaladministrative e%penses.

The Company is in a dilemma as to $hether to accept the order for +! !!! units or to use thepresent unused capacity of 9 !!! units for $hich there $ill be additional selling e%penditure of &s. 9! !!!.

-gnore financing charges and give your recommendation.

o"ution;or"ing Note7 &s.6i%ed overheads7

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Present sales value7 '/( '+9 !!! units ×&s. +!!( +9 !! !!!#irect Materials ' !, of sale value( 5 9! !!!

#irect labour '2!, of sale value( !! !!!3ariable overheads '&s. 2! per unit( !! !!!Total variable costs7 '0( +! 9! !!!

Contribution7 'C( 7 '/( I'0( 5 9! !!!Profit7 '#( '+9 !!! units ×+9( 2 29 !!!6i%ed overheads7 'C( I'#( 'current level( 2 29 !!!

/dd7 /dditional fi%ed overheads due to price escalation AA9! !!!Total fi%ed overheads 2 @9 !!!

>tatement of profitability for various alternatives /lternatives - -- --- -3

&ejecting the proposal rejecting the proposals /ccepting the /ccepting the6or the purchase of for the purchase of proposal of proposal of

+! !!! units K +! !!! units from a the party to ta"e party to ta"eContinuing $ith party and attaining +! !!! units ] +! !!! units ]Present level of the ma%imum capacity &s. 4! p.u. by &s. 4! p.u. by

>ales only by incurring additional installing a installing a>elling e%penditure balancing e uipment balancing

K Continuing $ith e uipment KPresent level of attaining sale of

>ales ma%imum availableCapacity by incurring

/dditional selling E%penditure>ales 'Fnits( +9 !!! 2! !!! 29 !!! ! !!!

&s. &s. &s. &s.>ales value7 '/( +9 !! !!! 2! !! !!! 25 !! !!! 24 !! !!!

'+9 !!! ×&s. +!!( '2! !!! ×&s. +!!( '+9 !!! ×&s. +!! '2! !!! ×&s. +!!B +! !!! ×&s. 4!( B +! !!! ×&s. 4!( B '+! !!! ×&s. 4!(

3ariable costs7#irect materials 5 49 !!! J J! !!! 8 29 !!!O 4 4! !!!O' , of sales value(#irect abour @9 !!! 9 !! !!! J 29 !!!O @ 9! !!!O'29, of sale value(variable overheads !! !!! 5 !! !!! 9 !! !!! J !! !!!'] &s. 2! per unit( AAAAAAAAA

total 3ariable costs7 '0( ++ @! !!! +9 J! !!! +4 9! !!! 2 5! !!!

6i%ed costs7'&ef. To $or"ing note( 2 @9 !!! 2 @9 !!! 2 @9 !!! 2 @9 !!!

/dditional sellingE%penditure === 9! !!! === 9! !!!#eprecation for0alancing e uipment === === + !! !!! + !! !!!

/dditional administrativeE%penses AAAAAA=== === 9! !!! 9! !!!Total fi%ed costs7 'C( 2 @9 !!! 29 !!! 5 29 !!! 5 @9 !!!Total costs #7 X'0(B'C(Y +5 59 !!! +8 89 !!! 2 @9 !!! 28 +9 !!!

Profit 7 '/( I '#( 99 !!! + +9 !!! 29 !!! 89 !!!O Note7 6or computing the material and labour cost under alternative --- K -3 the notional saleprice of &s. +!! is ta"en for additional +! !!! units.

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&ecommendations7 /lternative -- is the best as it gives ma%imum profit.

11 &. td. $ill produce !! !!! "gs. and J !! !!! "gs. to sustain the increased sales.o"ution

>ince > K are produced simultaneously from an input of ra$ material therefore $henadditional J! !!! "gs. of $ill be produced then ! !!! "gs. of > $ill also be producedsimultaneously. The input of material re uired for these additional J! !!! "gs of and ! !!!"gs. of > $ill be 4! !!! "gs. of material . Gence the cost of processing 4! !!! "gs. of material$ill be as follo$s7

&s.Cost of ra$ material 2 @! !!!'4! !!! "gs. ×&s. (3ariable processing cost + 8! !!!'4! !!! "gs. ×&s. 2( AAAAAAAA Total cost of processing 5 9! !!!

ess7 >ales revenue from J! !!! "gs. of 2 5! !!!

'J! !!! "gs×

&s. 5( AAAAAAAAA 0alance cost to be recovered 2 +! !!!Current sales revenue from the sale of !! !!! "gs. of > 25 !! !!!' !! !!! "gs. ×&s. 8(total sales revenue to be earned from the sale of > 2J +! !!!' !! !!! "gs B ! !!! "gs.(

Gence minimum price per "g. to recover &s. 2J +! !!! from the sale of ! !!! "gs. of > @.4+'&s. 2J +! !!!Q ! !!! "gs.(

a e or u. ,ecision: 3ery often management is faced $ith the problem as to $hether a partshould be manufactured or it should be purchased from outside mar"et. Fnder suchcircumstances t$o factors are to be considered7

a( ;hether surplus capacity is available andb( The marginal cost.

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u,*et

1 The budgeted level of activity of a production department of a manufacturing company is 9 !!!hours in a period. 0ut a technical study assumes overhead behaviour mentioned belo$ 7=

&s' !!( Per hr. Total in &s' !!!(.-ndirect $ages variable cost !.5!&ent and Ta% fi%ed cost 2!Consumable supplies variable !.25

&epairs 7 up to 2 !!! hours +!! additional each e%tra 9!! hrs up to 5 !!! hrs. 9 additional 5 !!+ to 9 !!! hrs J! additional above 9 !!! hrs @!

>upervision up to 2 9!! hrs 5!!additional each e%tra J!! hrs up to 5 4!! hrs +!!additional above 5 4!! hrs +9!

Po$er variable up to J!! hrs !.29for hrs above J!! additional cost !.2!

#epreciation up to 9 !!! hrs J9! above 9 !!! hrs. 82!

Clearing up to 5 !!! hrs J!

above 5 !!! hrs 8!ighting 2 +!! to 9!! hrs +2!

9!+ hrs to 9 !!! hrs +9!above 9 !!! hrs +@9

'a( Prepare fi%ed budget and a fle%ible budget at @!, 89, and ++!, of budgeted level of activity in one statement.

'b( Calculate a departmental hourly rate of overhead absorption.

o"utionParticulars 6le%ible budget 6i%ed budget

a. Capacity @!, 89, ++!, +!!,b. Gours 9!! 5 29! 9 9!! 9 !!!&s. !!! &s. !!! &s. !!! &s. !!!

-ndirect $ages ] &s. 5!Qhr. +5! +@! 22! 2!!&ates K ta%es 2! 2! 2! 2!

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Consumable supplies] &s. 25Qhr. 85 5!2 + 2 +2!

&epair 2!9 !! @! !!'+!!B 9 × ( '+!!B 9 ×5BJ!( '+!!B 9 ×5BJ!B@!('+!!B 9 ×5BJ!(

>upervision J!! @!! 49! 49!3,500×25! 3,600×25+650 ×20! 3,600×25+1,900 ×20! ' J!! ×29B+ 5!! ×2!(

Po$er [email protected] +! +28 ++8#epreciation. J9! J9! 82! J9!

Clearing J! 8! 8! 8!ighting +2! +9! +@9 +9!

Total cost 2 2JJ.9 2 9@9 +49 2 @88 /bsolute terms [email protected]@ J!9.88 98!.4+ [email protected]&ateQmonth !.J5@ !.J!9 !.98!4+ !.9@@J

2 6rom the information given belo$ prepare a fle%ible budget of MQs piston 0earings td. for aproduction capacity of +9 !! !!! 29 !!! and ! !!! tonnes.

'a( The production capacity of the plant is ! !!! tonnes.

'b( The sales for the year just concluded have been 29 !!! tonnes at a unit realization of &s.5!! per tonne e%=$or"s. This rate is li"ely to be maintained in the coming year as $ell.

'c( The sales manager feels that $ith a little more effort on the part of the sales staff he canachieve a sales programme of ! !!! tonnes.

'd( &a$ material consumption is t$ice the uantum of finished products and the price of ra$material is &s. 5! per tonne.

'e( The other major material used is furnace oil $hich is available at &s. !! per tonne and theconsumption ratio of oil to the finished products is !,.

'f( Po$er is bought outside from the >tate Electricity 0oard and a per present tariffs the cost of po$er $ould be as under7

Z$h purchased per &ent per unit /nnum 'in la"hs( 'applicable to entire purchase=in paise(29 to ! +9

+ to 9 +5J to 5! +

5+ to 59 +2over 59 +!

Po$er re uirements of the plant are normally 2!! "$h per tonne of product at a productionlevel of 2! !!! tonnes and are estimated to come do$n to +@ "$h per tonne at aproduction level of 29 !!! tonnes per annum and +9! "$h per tonne at ! !!! tonnes per annum. >imilarly the consumption is e%pected to be 22! "$h per tonne at a productionlevel lo$er than 2! !!! tonne p.a.

'g( abour is employed on a daily rate basis of &s. +! per day on an employment of !! daysp.a. There are at present 9! men employed and though lo$er production $ould result insome 2!, of them being rendered surplus because of an agreement $ith the labour union

there cannot be any retrenchment.'h( Consumption of stores during the last four years had been as under7

ear production level stores consumed+485 29 !!! tonnes &s. 9 2! la"hs

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+48 2! !!! tonnes .85 la"hs+482 22 9!! tonnes .49 la"hs+48+ 29 !!! tonnes 5.!! la"hs

Prices over the base year +48+ have been increasing at the rate of +!, p.a. in the currentyear the increases is e%pected to be maintained at the same rate over the prices of +485.

'i( >elling and distribution overheads are e%pected to be maintained at &s. +9 per tonne.

'j( /dministrative e%penses of the organization in +48+ $ere &s. @.9! la"hs and have beenincreasing at the rate of 9, p.a. over the immediately preceding year1s level. No additionalstaff is e%pected to be employed for achieving addition production.

our

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