SYMBIOSIS CENTER FOR MANAGEMENT & HRD

COST ACCOUNTING
PRACTICE SESSION II

Q.1 Subhdra Ltd. manufactures and sells a single product P whose selling
price is Rs. 40 per unit and the variable cost is Rs. 16 per unit.
(i) If the Fixed Costs for this year are Rs. 4,80,000 and the annual sales are at
60% margin of safety, calculate the rate of net return on sales, assuming an
income tax level of 40%
(ii) For the next year, it is proposed to add another product line Q whose selling
price would be Rs. 50 per unit and the variable cost Rs. 10 per unit. The total
fixed costs are estimated at Rs. 6,66,600. The sales mix of P : Q would be 7 : 3.
At what level of sales next year, would Subhdra Ltd. break even? Give separately
for both P and Q the break even sales in rupee and quantities.

Q.2 Indian Metals & Ferro Alloys Limited. supplies spare parts to an air craft company
Y Ltd. The production capacity of Indian Metals & Ferro Alloys Limited. facilitates
production of any one spare part for a particular period of time. The following are
the cost and other information for the production of the two different spare parts
A and B:

Per unit Part A Part B

Alloy usage............................................. 1.6 kgs. 1.6 kgs.
Machine Time: Machine A.......................... 0.6 hrs. 0.25 hrs.
Machine Time: Machine B.......................... 0.5 hrs. 0.55 hrs.
Target Price (Rs.)...................................... 145 115
Total hours available:................................ Machine A 4,000 hours
Machine B 4,500 hours
Alloy available is 13,000 kgs. @ Rs. 12.50 per kg.
Variable overheads per machine hours:....... Machine A: Rs. 80
Machine B: Rs.100 Required

(i) Identify the spare part which will optimize contribution at the offered price.
(ii) If Y Ltd. reduces target price by 10% and offers Rs. 60 per hour of
unutilized machine hour, what will be the total contribution from the spare part
identified above?

Q.3 The profit for the year of KSS Limited. works out to 12.5% of the capital
employed and the relevant figures are as under:

Sales........................................................................ Rs. 5,00,000

Direct Materials......................................................... Rs. 2,50,000
Direct Labour.............................................................. Rs. 1,00,000
Variable Overheads........................................................ Rs. 40,000
Capital Employed...................................................... Rs. 4,00,000

The new Sales Manager who has joined the company recently estimates for next
year a profit of about 23% on capital employed, provided the volume of sales is
increased by 10% and simultaneously there is an increase in Selling Price of 4%
and an overall cost reduction in all the elements of cost by 2%.

Required

Find out by computing in detail the cost and profit for next year, whether the
proposal of Sales Manager can be adopted.

Q.3 Himalaya Herbal Healthcare manufactures two types of herbal product, A and
B. Its budget shows profit figures after apportioning the fixed joint cost of Rs.15
lacs in the proportion of the numbers of units sold. The budget for 2016,
indicates:

A B
Profit (Rs.) 1,50,000 30,000
Selling Price / unit (Rs.) 200 120
P/V Ratio (%) 40 50

Required
Advise on the best option among the following, if the company expects that the
number of units to be sold would be equal.

(i) Due to exchange in a manufacturing process, the joint fixed cost would be
reduced by 15% and the variables would be increased by 7 %.
(ii) Price of A could be increased by 20% as it is expected that the price
elasticity of demand would be unity over the range of price.
(iii) Simultaneous introduction of both the option, viz, (i) and (ii) above.

Q.4 You have been approached by a friend who is seeking your advice as to
whether he should give up his job as an engineer, with a current salary of Rs.
14,800 per month and go into business on his own assembling and selling a
component which he has invented. He can procure the parts required to
manufacture the component from a supplier. It is very difficult to forecast the
sales potential of the component, but after some research, your friend has
estimated the sales as follows:
(i) Between 600 to 900 components per month at a selling price of Rs. 250 per
component.
(ii) Between 901 to 1,250 components per month at a selling price of Rs.220 per
component for the entire lot.
The costs of the parts required would be Rs.140 for each completed component.
However if more than 1,000 components are produced in each month, a discount
of 5% would be received from the supplier of parts on all purchases.
Assembly costs would be Rs.60,000 per month up to 750 components. Beyond
this level of activity assembly costs would increases to Rs. 70,000 per month.
Your friend has already spent Rs. 30,000 on development, which he would write
off over the first five years of the venture.
Required
(i) Calculate for each of the possible sales levels at which your friend could
expect to benefit by going into the venture on his own.
(ii) Calculate the Break Even Point of the venture for each of the selling price.
(iii) Advice your friend as to the viability of the venture.

Q.5 Gourmet Food Products is a new entrant in the market for chocolates. It
has introduced a new productSweetee. This is a small rectangular chocolate
bar. The bars are wrapped in aluminium foil and packed in attractive cartons
containing 50 bars. A carton, is therefore, considered the basic sales unit.
Although management had made detailed estimates of costs and volumes prior
to undertaking this venture, new projections based on actual cost experience are
now required.

Income Statements for the last two quarters are each thought to be
representative of the costs and productive efficiency we can expected in the next
few quarter. There were virtually no inventories on hand at the end of each
quarter.

The income statements reveal the following:

First Quarter (Rs.) Second Quarter (Rs.)
Sales :
50,000 Rs. 24 12,00,000
70,000 Rs. 24 16,80,000
Less: Cost of Goods Sold 7,00,000 8,80,000
Gross Margin 5,00,000 8,00,000
Less: Selling and Administration 6,50,000 6,90,000
Net Income / (Loss) before Taxes (1,50,000) 1,10,000
Less: Tax (60,000) 44,000
Net Income / (Loss) (90,000) 66,000

The firms overall marginal and average income tax rate is 40%. This 40% figure
has been used to estimate the tax liability arising from the chocolate operations.

Required
(i) Management would like to know the breakeven point in terms of quarterly
carton sales for the chocolates.
(ii) Management estimates that there is an investment of Rs. 30,00,000 in this
product line. What quarterly carton sales and total revenue are required in each
quarter to earn an after tax return of 20% per annum on investment?
(iii) The firms marketing people predict that if the selling price is reduced by Rs.
1.50 per carton (Rs. 0.03 off per chocolate bar) and a Rs. 1,50,000 advertising
campaign among school children is mounted, sales will increase by 20% over the
second quarter sales. Should the plan be implemented?
Q.6 Maruthi Agencies has received an order from a valuable client forsupplying
3,00,000 pieces of a component at Rs. 550 per unit at a uniform rate of 25,000
units a month.
Variable manufacturing costs amount to Rs. 404.70 per unit, of which direct
materials is Rs. 355 per unit. Fixed production overheads amount to Rs. 30 lacs
per annum, including depreciation. There is a penalty/reward clause of Rs. 30
per unit for supplying less/more than 25,000 units per month. To adhere to the
schedule of supply, the company procured a machine worth Rs. 14.20 lacs which
will wear out by the end of the year and will fetch Rs. 3.55 lacs at the year end.
After this supply of machine, the supplier offers another advanced machine which
will cost Rs. 10.65 lacs, will wear out by the year end and not have any resale
value. If the advanced machine is purchased immediately, the purchaser will
exchange the earlier machine supplied at the price of the new machine. Fixed
costs of maintaining the advanced machine will increase by Rs. 14,200/- per
month for the whole year. While the old machine had the capacity to complete
the production in 1 year, the new machine can complete the entire job in 10
months. The new machine will have material wastage of 0.5%. Assume uniform
production throughout the year for both the machines.

Required

Using incremental cost/revenue approach, decide whether the company should

opt for the advanced version.

Q.7The following are cost data for three alternative ways of processing the
clerical work for cases brought before the LC Court System:

A B C
Manual (Rs.) Semi-Automatic Fully-Automatic
(Rs.) (Rs.)

Monthly fixed costs:

Occupancy 15,000 15,000 15,000

Maintenance --- 5,000 10,000

contract
Equipment lease --- 25,000 1,00,000

Unit variable costs

(per report):

Supplies 40 80 20

Labour Rs.200 Rs.60 Rs.20

(5 hrs Rs.40) (1 hr Rs.60) (0.25 hr Rs.80)
Required

(i) Calculate cost indifference points. Interpret your results.

(ii) If the present case load is 600 cases and it is expected to go up to 850 cases
in near future, which method is most appropriate on cost considerations?

Q.8 X Ltd. wants to replace one of its old machines. Three alternative machines
namely M1, M2 and M3 are under its consideration. The costs associated with
these machines are as under:
M1 M2 M3
Rs. Rs. Rs.
Direct material cost p.u....................... 50 100 150
Direct labour cost p.u......................... 40 70 200
Variable overhead p.u........................ 10 30 50
Fixed cost p.a................................... 2,50,000 1,50,000 70,000

Required
(i)Compute the cost indifference points for these alternatives.
(ii)Based on these points suggest a most economical alternative machine to
replace the old one when the expected level of annual production is 1,200 units.

Q.9 A process industry unit manufactures three joint products: A, B and C. C

has no realisable value unless it undergoes further processing after the point of
separation. The cost details of C are as follows:

p.u.
Rs.
Upto point of separation
Marginal cost.................................... 30
Fixed Cost....................................... 20
After point of separation
Marginal cost....................................
15
Fixed cost........................................
5
70
C can be sold at Rs.37 per unit and no more.
(i) Would you recommend production of C?
(ii) Would your recommendation be different if A, B and C are not joint products?

Q. 10 A company processes different products from a certain raw material. The

raw material is processed in process I (where normal loss is 10% of input) to give
products A and B in the ratio 3 : 2. B is sold directly. A is processed further in
process II (where normal loss is 12.5% of output) to give products C and D in the
ratio 5:3. At this point C and D have sale values Rs. 55 and Rs. 40 per kg
respectively. C can be processed further in process III with processing cost Rs.
3,95,600 and normal wastage 5% of input and then be sold at Rs. 66 per kg. D
can be processed further in process IV with processing cost Rs. 3,82,500 and
normal wastage 12.5% of output and then be sold at Rs. 55 per kg. The normal
wastage of each process has no realizable value. During the production period,
2,00,000 kgs of raw material is to be introduced into Process I.
Required
Using incremental cost-revenue approach, advise whether sale at split off or
further processing is better for each of the products C and D.

Q.11 HTM Ltd., by using 12,00,000 units of a material M produces jointly

2,00,000 units of H and 4,00,000 units of T. The costs and sales details are as
under:

Rs.
Direct Material M @ Rs.5 per unit.......................................................60,00,000
Other variable costs....................................................................... 42,00,000
Total fixed costs............................................................................ 18,00,000
Selling price of H per unit.........................................................................25
Selling price of T per unit........................................................................ 20

The company receives an additional order for 40,000 units of T at the rate of Rs.
15 per unit. If this order has been accepted, the existing price of T will not be
affected. However, the present price of H should be reduced evenly on the entire
sale of H to market the additional units to be produced.

Required
Find the minimum average unit price to be charged on H to sustain the increased
sales.
Q.12 X is a multiple product manufacturer. One product line consists of motors
and the company produces three different models. X is currently considering a
proposal from a supplier who wants to sell the company blades for the motors
line. The company currently produces all the blades it requires. In order to meet
customer's needs, X currently produces three different blades for each motor
model (nine different blades).

The supplier would charge Rs. 25 per blade, regardless of blade type. For the
next year X has projected the costs of its own blade production as follows (based
on projected volume of 10,000 units):

Direct materials................................................... Rs. 75,000

Direct labour...................................................... Rs. 65,000
Variable overhead............................................... Rs. 55,000
Fixed overhead
Factory supervision................................. Rs. 35,000
Other fixed cost..................................... Rs. 65,000
Total production costs....................................... Rs. 2,95,000

Assume (1) the equipment utilized to produce the blades has no alternative use
and no market value, (2) the space occupied by blade production will remain idle
if the company purchases rather than makes the blades, and (3) factory
supervision costs reflect the salary of a production supervisor who would be
dismissed from the firm if blade production ceased.
Required
(i) Determine the net profit or loss of purchasing (rather than manufacturing), the
blades required for motor production in the next year.
(ii) Determine the level of motor production where X would be indifferent between
buying and producing the blades. If the future volume level were predicted to
decrease, would that influence the decision?
(iii) For this part only, assume that the space presently occupied by blade
production could be leased to another firm for Rs. 45,000 per year. How would
this affect the make or buy decision?

Q.13 Blue Bird Ltd. produces and sells Bicycles. It also manufactures the chains
for its Bicycles. It expects to produce and sell 24,000 Bicycles during 2014 15. It
is considering an offer from an outside vendor to supply any number of chains at
Rs. 12 per chains. The accountant of Blue Bird Ltd. reports the following costs for
producing 24,000 chains:

Particulars Cost per unit (Rs.) Total Cost (Rs.)

Direct material 5.00 1,20,000
Direct labour 4.00 96,000
Variable manufacturing overhead 2.00 48,000
Inspection, set up etc. 1.00 24,000
Machine rent 1.00 24,000
Allocated fixed overhead 1.25 30,000
Total 14.25 3,42,000

The following additional information is available:

(a) Inspection, set up etc. vary with the number of batches in which the chains
are produced. Currently chains are being produced in the batch size of 2,000
units.
(b) Direct labour cost represents wages to four workers who are exclusively
engaged in the manufacturing of chains. These workers are in permanent
capacity and cannot be retrenched.
(c) if Blue Bird Ltd. procures all its chains from outside vendor it will not require
the machine which it has hired for manufacturing chains.

Required

(i) Assume that if Blue Bird Ltd. purchase chains from outside vendor, the
facility (including workers) where the chains are currently manufactured will
remain idle. Should Blue Bird Ltd. accept the offer from outside vendor at the
anticipated production and sale volume of 24,000 units.
(ii) Whether your decision in (i) will change if facilities can be used to upgrade
the Bicycle which will result in an incremental revenue of Rs. 22 per Bicycle. The
variable cost for upgrading would be Rs. 18 and tooling cost would be Rs.
16,000.
(iii) Assume that facilities will be used as stated in (ii) above. Further, assume
that with better planning Blue Bird Ltd. will be able to manufacture chains in the
batch size of 4,000 units (instead of 2,000 units) if it decides to produce chains
inside.
Q.14 A firm needs a component in an assembly operation. If it wants to do the
manufacturing itself, it would need to buy a machine for Rs. 4 lakhs which would
last for 4 years with no salvage value. Manufacturing costs in each of the four
years would be Rs.6 lakhs, Rs. 7 lakhs, Rs.8 lakhs and Rs. 10 lakhs
respectively. If the firm had to buy the component from a supplier the component
would cost Rs. 9 lakhs, Rs. 10 lakhs, Rs.11 lakhs and Rs.14 lakhs respectively
in each of the four years. However, the machine would occupy floor space which
could have been used for another machine. This latter machine could be hired at
no cost to manufacture an item, the sale of which would produce net cash flows
in each of the four years of Rs. 2 lakhs; it is impossible to find room for both the
machines and there are no other external effects. The cost of capital is 10% and
P/V factor for each of the 4 years is 0.909, 8.826, 0.751 and 0.683 respectively.
Should the firm make the component or buy from outside?

Q.15 A company is producing three products X, Y & Z. Relevant information is

given below:

Product X Y Z
Raw material per unit (kg) 20 12 30
Machine hours per unit (hours) 3 5 4
Selling price per unit (Rs.) 500 400 800
Maximum limit of production Unit 1,500 1,500 750

Only 9,200 hours are available for production at a cost of Rs. 20 per hour and
maximum 50,000 kgs. of material @ Rs. 20 per kg., can be obtained.
(Only product mix quantities are to be shown, calculation of total profit at that product
mix not required to be shown)

Required

On the basis of the above information determine the product-mix to give the
highest profit if at least two products are produced.