Cadm Pre Mid Term 2016 - Soln

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3-41 CVP analysis, shoe stores. The Liberty Shoe Company operates a chain of shoe stores.

The stores sell 10


different styles of inexpensive mens shoes with identical unit costs and selling prices. A unit is defined as a pair of
shoes. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a fixed salary and a
sales commission. Liberty is trying to determine whether to open another store, which is expected to have the
following revenue and cost relationships:
Unit variable data (per pair of shoe)
Selling price
Rs 300
Cost of shoes
195
Sales commissions
15
Variable costs per unit
210
Annual fixed costs
Rent
1,20,000
Salaries
4,00,000
Advertising
1,60,000
Other fixed costs
40,000
Total fixed costs
7,20,000
Consider each question independently.
1. What is the annual breakeven point in (a) units sold and (b) revenues?
2. If 35,000 units are sold, what will be the stores operating income (loss)?
3. If sales commissions were discontinued for individual salespeople in favor of
Rs 1,62,000 increase in fixed salaries, what would be the annual breakeven point in (a) units sold and (b)
revenues?
4. Refer to the original data. If the store manager were paid Re 0.3 per unit sold in addition to his current fixed
salary, what would be the annual breakeven point in (a) units sold and (b) revenues?
5. Refer to the original data. If the store manager were paid Re 0.3 per unit commission on each unit sold in
excess of the breakeven point, what would be stores operating income if 50,000 units were sold? (This Re
0.3 is in addition to both the commission paid to the sales staff and the store managers fixed salary.)
Solution
1. Contribution margin per pair = Selling price Variable costs per pair
= Rs 300 210 = Rs 90 per pair
Breakeven point in number of pairs:
Fixed costs/Contribution margin per pair = Rs 7,20,000/Rs 90 = 8,000 pairs
Breakeven points in revenues:
Fixed
costs/Contribution
margin
%
per
rupee
Rs 7,20,000/(100%-70%) = Rs 24,00,000
2.
Revenues, Rs 300 x 35,000
Variable costs, 210 x 35,000
Contribution margin
Fixed costs
Operating income (loss)
3.

4.

5.

of

sales

Rs 1,05,00,000
73,50,000
31,50,000
7,20,000
24,30,000

Fixed costs: Rs 7,20,000 + 1,62,000 = Rs 8,82,000


Contribution margin per pair = Rs 300 195 = Rs 105
a. Breakeven point in units = Rs 8,82,000/105 = 8,400 pairs
b. Breakeven point in revenues = Rs 300 x 8,400 = Rs 25,20,000
Fixed costs = Rs 7,20,000
Contribution margin per pair = Rs 300 Rs 210 Re 0.30 = Rs 89.7
a. Breakeven point in units = Rs 7,20,000/89.70 = 8,027 pairs (rounded)
b. Breakeven point in revenues = Rs 300 x 8027 = Rs 24,08,100
Breakeven point = 8000 pairs
Store manager receives commission on 42,000 pairs.
Revenues, Rs 300 x 50,000
Variable costs
Cost of shoes

Rs 1,50,00,000
Rs 97,50,000

Sales person commission


Store manager commission
Contribution margin
Fixed costs
Operating income

7,50,000
12,600

1,05,12,600
44,87,400
7,20,000
37,67,400

4-31 Service industry, job costing, law firm. Viash & Associates is a law firm specializing in labor relations and
employee-related work. It employs 50 professionals (10 partners and 40 associates) who work directly with its
clients. The average budgeted total compensation per professional for current year is Rs 2,08,000. Each professional
is budgeted to have 3,200 billable hours to clients in current year. Viash & Associates is a highly respected firm; all
professional work for clients to their maximum 3,200 billable hours available. All professional labor costs are
included in a single direct-cost category and are traced to jobs on a per-hour basis.
All costs of Viash & Associates other than professional labor costs are included in a single indirect-cost
pool (legal support) and are allocated to jobs using professional labor-hours as the allocation base. The budgeted
level of indirect costs in current year is Rs 44,00,000.
Required
Present an overview diagram of Vaishs job-costing system.
Compute the current year budgeted direct-cost rate per hour of professional labor.
3. Compute the current year budgeted indirect-cost rate per hour of professional labor.
Viash & Associates is considering bidding on two jobs:
a. Litigation work for Saw Pipes Ltd. which requires 100 budgeted hours of professional labor.
b. Labor contract work for J K Paper Ltd. which requires 150 budgeted hours of professional labor.
Prepare a cost estimate for each job.
Solution

1.

An overview of the job costing system is:


INDIRECT
COST
POOL

Legal
Support

COST
ALLOCATION
BASE

Professional
Labor-Hours

COST OBJECT:
JOB FOR
CLIENT

DIRECT
COST

2.

3.

Indirect Costs
Direct Costs

Professional
Labor

Budgeted professional labor-hour direct cost rate = Budgeted direct labor compensation per
professional/Budgeted direct labor-hours per professional
= Rs 2,08,000/3,200 = Rs 65 per professional labor-hour
Note that the budgeted professional labor-hour direct cost rate can also be calculated dividing total
budgeted professional labor costs of Rs 1,04,00,000 (Rs 2,08,000 per professional x 50 professionals) by
total budgeted professional labor-hours of 1,60,000 (3,200 hours per professional x 50 professionals),
Rs 1,04,00,000/1,60,000 = Rs 65 per professional labor-hour.
Budgeted indirect cost rate = Budgeted total costs in indirect cost pool/Budgeted total professional laborhours
= Rs 44,00,000/3,200 hours x 50

= Rs 44,00,000/1,60,000 = Rs 27.5 per professional labor-hour


4. Direct costs:
Particulars
Saw Pipes
Professional labor, Rs 65 x 100; Rs 65 x 150
Rs 6,500
Indirect costs
Legal support, Rs 27.5 x 100; Rs 27.5 x 150
2,750
9,250

J. K. Paper
Rs 9,750
4,125
13,875

5-40 Activity-based costing, cost hierarchy. (CMA, adapted) Basista Coffee Ltd. (BCL) buys coffee beans from
around the world and roasts, blends, and packages them for resale. The major cost is direct materials; however, there
is substantial manufacturing overhead in the predominantly automated roasting and packing process. The company
uses relatively little direct labor.
Some of the coffees are very popular and sell in large volumes, whereas a few of the newer blends sell in
very low volumes (BCL) prices its coffee at budgeted cost, including allocated overhead, plus a markup on
cost of 30 per cent.
Data for the current year budget include manufacturing overhead of Rs 30,00,000, which has been allocated
on the basis of each products budgeted direct-labor cost. The budget direct-labor cost for current year totals Rs
6,00,000. purchases and use of materials (mostly coffee beans) are budgeted to total Rs 60,00,000.
The budgeted direct costs for one-kg bags of two of the companys products are
Indian
Malaysian
Direct materials
Rs 42
Rs 32
Direct labor
3
3
BCLs controller believes the existing costing system may be providing misleading cost information. She has
developed an activity-based analysis of current year budgeted manufacturing overhead costs shown in the following
table.
Activity
Cost driver
Cost driver rate
Purchasing
Purchase orders
Rs 5,000
Materials handling
Setups
4,000
Quality control
Batches
2,400
Roasting
Roasting-hours
100
Blending
Blending-hours
100
Packaging
Packaging-hours
100
Data regarding the current year production of the Indian and Malaysian coffee follow. There will be no beginning or
ending materials inventory for either of these coffees.
Particulars
Indian
Malaysian
Expected sales
1,00,000 kgs
2,000 kgs
Purchase orders
4
4
Batches
10
4
Setups
30
12
Roasting-hours
1,000
20
Blending-hours
500
10
Packaging-hours
100
2
Required
1. Using BCLs existing costing system:
a. Determine the companys current year budgeted manufacturing overhead rate using direct-labor
cost as the single allocation base.
b. Determine the current year budgeted costs and selling prices of 1 kg of Indian coffee and 1 kg of
Malaysian coffee.
2. Use the controllers activity-based approach to estimate the current year budgeted cost for 1 kg of
a. Indian coffee
b. Malaysian coffee
Allocate all costs to the 1,00,000 kg of Indian and the 2,000 kg of Malaysian. Compare the results with those in
requirement 1.
3. Examine the implications of your answers to requirement 2 for BCLs pricing and product-mix strategy.
Solution

Budgeted manufactur ing overhead


Budgeted direct labor cost
1a.
Budgeted manufacturing overhead rate =
= Rs 30,00,000/Rs 6,00,000 = Rs 5 for each rupee of direct labor
1b.
Particulars
Direct costs
Direct materials
Direct labor
Indirect costs
Manufacturing overhead(3 5)
Total costs
Budgeted selling prices per pound:
Indian (Rs 60 1.30)
Malaysian (Rs 50 1.30)

Indian

Malaysian

Rs 42
3
45
15
60

Rs 32
3
35
15
50

= Rs 78
= 65

2.
The total budgeted unit costs per kg are:
Indian Coffee
Direct costs per unit
Direct materials
Rs 42
Direct labor
3
Rs 45
Indirect costs per unit
Purchase orders
0.20
(4 orders x Rs 5,000/1,00,000 kgs)
Material handling
1.2
(30 setups x Rs 4,000/1,00,000 kgs)
Quality control
0.20
(10 batches x Rs 2,400/1,00,000
kgs)
Roasting
1
(1,000 hours x Rs 100/1,00,000
kgs)
Blending
0.50
(500 hours x Rs 100/1,00,000 kgs)
Packaging
0.10
(100 hours x Rs 100/1,00,000 kgs)
____
Total cost per unit
48.20

Malaysian Coffee
Direct costs per unit
Direct materials
Direct labor
Indirect costs per unit
Purchase orders
(4 orders x Rs 5,000/2,000 kgs)
Material handling
(12 setups x Rs 4,000/2,000 kgs)
Quality control
(4 batches x Rs 2,400/2,000 kgs)

Rs 32
3

Rs 35
10
24
4.8

Roasting
(20 hours x Rs 100/2,000 kgs)

Blending
(10 hours x Rs 100/2,000 kgs)
Packaging
(2 hours x Rs 100/2,000 kgs)

0.50

Total cost per unit

0.10
_____
75.40

The comparative cost numbers are:


Indian
Malaysian
Requirement 1
Rs 60
Rs 50
Requirement 2
48.20
75.40
The ABC system in requirement 2 reports a decreased cost for the high-volume Mauna Loa and an increased cost for
the low-volume Malaysian.
3.

The traditional costing approach leads to cross-subsidization between the two products.
With the traditional approach, the high-volume Indian is overcosted, while the low-volume Malaysian is
undercosted. The ABC system indicates that Indian is profitable and should be emphasized.

Pricing of Indian can be reduced to make it more competitive. In contrast, Malaysian should be
priced at a much higher level if the strategy is to cover the current periods cost. Barista Coffee may wish
to have lower margins with its low-volume products in an attempt to build up volume.

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