Life Cycle Q&a

AGGARWAL EDUCATION CENTRE PVT. LTD.
D-223, Laxmi Chamber, Laxmi Nagar, Delhi-92.

Ph. No:- 9811374374, 9213600402.
Topic:- JUST –IN-TIME
Question1- :- Rosen Manufacturing Corporation produces office furniture and sells it wholesale
to furniture distributors. Rosen’s management is reviewing a proposal to purchase a Just-in-time
inventory (JIT) system to better serve its customers. The JIT system will include a computer system
and materials handling equipment .The decision will be based on whether the new JIT system is cost
effective to the organization for the next five years.
The computer system, including hardware and software, will initially cost $ 1,250,000. Materials
handling equipment will cost $450,000.Both groups of equipment will have a five-years useful life for
tax reporting of depreciation (straight-line) calculated assuming a $0 terminal disposal value. At the
end of the five years, the newly acquired materials-handling equipment is expected to be sold for
$150,000.The computer system will have a $0 terminal disposal value at the end of five years.
Other factors to be considered over the next five years for this proposal include the following
* Due to the service improvement resulting from this new JIT system, Rosen will realize a $ 800,000
revenue increase to continue to grow by 10%per year thereafter.
* The contribution margin is 60%.
* Annual material- ordering costs will increase $50,000due to a greater level of purchase orders.
* There will be a one–time decrease in working capital investment of $150,000 at the end of the first
year.
There will be a 20% savings in warehouse rent due to less space being needed. The current annual
rent is $300,000.
Rosen uses an after-tax required rate of return of 10% and is subject to an income tax rate of
40%.Assume that all cash flows occur at year-end for tax purposes except for any initial purchase
amounts.
1:- Prepare an analysis of the after tax effects for the purchase of the JIT system at Rosen using the
net present value method for evaluating capital expenditures. Be sure to show all of your
computations.
2:- Determine whether Rosen should purchase the jit system. Explain your answer.
STATEMENT OF CASH INFLOW
Year I II III IV V
$ $ $ $ $
Sale 8,00,000 8,80,000 9,68,000 1064800 11,71,280
Cont@60% 4,80,000 5,28,000 5,80,800 6,38,880 7,02,768
Rent Saving 60,000 60,000 60,000 60,000 60,000
Mat. Handling (50,000) (50,000) (50,000) (50,000) (50,000)
Cost
Cash Inflow 4,90,000 5,38,000 5,90,800 6,48,880 7,12,768
Tax@40% 1,96,000 2,15,200 2,36,320 2,59,552 2,85,107
Cash Inflow 2,94,000 3,22,800 3,54,480 3,27,328 4,27,661

after tax
Tax saving on 1,36,000 1,36,000 1,36,000 1,36,000 1,36,000
Dep
Total Cash 4,30,000 4,58,800 4,90,480 525,328 5,63,661
Saving
OV Factor .909 .826 .751 .683 .621
Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 1

PV of total 3,90,870 3,78,969 3,68,351 3,58,800 3,50,033
Cash inflow
Total Cash Inflow = $ 18,47,023.
STATEMENT OF NPV
$
PV of Cash outflow 17,00,000
Reduction in working capital at end
Of 1st year (1,36,350)
1,50,000 X .909
Net of tax of capital gain 1,50,000
- tax@40% 60,000
90,000X .621 (55,890)
Total PV of cash out flow 15,07,760
Total PV of C in flow 18,47,023
NPV 3,39,263
It is better to Implement JIT System.
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JUST –IN-TIME
Question2-:- (JIT production, relevant benefits, relevant costs). The Evans Corporation
manufactures wireless telephone. Events are deciding whether to implement a JIT production system,
which would require annual tooling costs of $150,000. Evens estimates that the following annual benefits
would arise from JIT production.
a. Average inventory would decline by $700,000, from $900,000 to $200,000.
b. Insurance, space, materials-handing, and setup costs, which currently total $200,000, would
decline by 30%.
c. The emphasis on quality inherent in JIT systems would reduce rework costs by 20%. Evans
currently incurs $350,000 on rework.
d. Better quality would enable Evans to raise the selling prices of its products by $3 per unit. Evans
sells 30,000 units each year.
Evans’s required rate of return on inventory investment is 12% per year.
1. Calculate the net benefit or cost to the Evans Corporation from implementing a JIT
production system.
2. What other non financial and qualitative factors should Evans consider before deciding
whether it should implement a JIT system?
3. Suppose Evans implements JIT production. (a) Give examples of performance measures
Evans could use to evaluate and control JIT production. (b) What is the benefit to Evans
of implementing an enterprise planning (ERP) system?
Solution:-
STATEMENT OF RELEVANT COST COMPARATIVE

Present policy Under JIT
Annual totaling Cost ---- 1,50,000
Opportunity Cost 9,00,000 X12% 2,00,000 X12%
Insurance, Space, Material 2,00,000 1,40,000
Handling & Setup cost
Rework Cost 3,50,000 2,80,000
Incremental Revenue from ---- (90,000)
Higher selling price
6,58,000 5,04,000
Cost Saving due to JIT = 6,58,000 - 5,04,000
= $1,54,000.

It is better to adopt JIT Policy.
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Question3:- A company manufactures a single product ,the estimated costs of which are as follow:
Direct Materials Rs 10 each
Direct wages 8 hours at Rs. 0.50 per hour
Overhead absorption rate Rs. 1.75 per hour.(50% fixed overhead included)
During this period 1,000 units will be produced and sold as follow:-
900 Units of first at Rs.30 each
50 units of second at Rs.20 each
50 units of third at Rs.10 each
Present information to management showing the loss due to the production of inferior units.
By reprocessing the inferior units taking the full reprocessing time of a further 8 hours and adding further
material Costing Rs.4 per unit these, “seconds” and “thirds” can be converted into firsts.
Present information to the management.
Solution
Present Position
Cost per unit:-
Direct materials 10
Direct wages ( 8 Hrs. @ Rs. 0.50) 4
Overheads ( 8 Hrs. @ RS. 1.75) 14
Total 28
Per unit Units Total

Particulars Sales Price Profit/Loss Profit Loss
Firsts 30 2 900 1,800 ---
Seconds 20 (-) 8 50 --- 400
Thirds 10 ( - ) 18 50 --- 900
1,800 1,300
Net Profit 500
Reprocessing of Inferior Units

(a) Additional expenditure for reprocessing per unit:-
Rs.
Direct material 4
Direct wages 8 hrs. 4
Variable Overhead @ Rs. 0.875 7
Total 15
Total expenditure for 100 units Rs. 1,500
(b) Additional Revenue Rs.
Seconds (Rs. 30 – Rs. 20 ) X 50 units 500
Thirds ( Rs. 30 – Rs. 10 ) X 50 1,000
1,500
Note:- No change in the profit position hence this need not be considered.
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TQM
Question4:-A company manufactures a component on batches of 2000 each .Each component is
tested before being sent to the agents for sales. Each components can be tested at the factory at a cost
of Rs.25 .If any component is found to be defective, it can be rectified by spending Rs.200. In view of the
large demand for the components and the sophisticated system of manufactures ,a proposal came up
that the practice of pre-testing of the components be dispensed with to save costs. In that event, any

defective component is received back from the customer under warranty ,the cost of rectification and
redispatch will be Rs.400 per component.
States at what percentage of manufacture of components will the company find it cheaper to pre-
test each component.
Solution4:-
(i) If each component is tested before being sent to the agents for sales
No. of components in a batch = Rs. 2,000
Cost of testing each components = Rs. 20
Cost of rectification before dispatch = Rs. 200
Total Cost = (2,000 X 25 )+ 200d
(ii) If components dispatched without pre-testing and any defective received back for rectification under
warranty
Total Cost = Rs. 400d
In different point of two alternative
(2,000 X 25 ) +200d = 400d
400d – 200d = 2,000 X25
200d = 50,000
d = 50,000/200
= 250
Defective Components = 250 Components
= 250
Percentage of defective to total components --------- X 100 = 12.5%
2,000
If defective exceed 12.5%of the total number of components, Pre-testing is recommended.
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TQM
Question5:- A Manufacturing company purchase one of the components required for the
manufactures of product from two sources ,viz, suppliers, A and supplier B .The price quoted by supplier
a is Rs. 15.00 per hundred numbers of the component and is found that on the average 3% of the total
receipt from this source is defective. The corresponding quotation from supplier B is Rs .14.50 but the
defectives would go up to 5% For the total supply .If the defectives are not detected ,they are utilised in
production causing a damage of Rs. 15.00 per hundred components.
The company intends to introduce a system of inspection for the components on receipt which
would cost Rs.2.00 per hundred components such an inspection will, however ,be able to detect only 90%
of the defective components received .No payment will be made for components found to be defective in
inspection.
Offer your opinion ,(a) whether inspection at the point of receipt is justified ,and (b) which of the
two suppliers should be asked to supply. Assume total requirements of components to be 10,000
numbers.
Solution:-
(i) If not inspected
Supplier A B
Units supplies (Nos.) 10,000 10,000
Defective expected ( Nos.) 300 500
Costs Rs. Rs.
Purchase cost of components 1,500 1,450
Production damage on defective components 45.00 75.00
Total
1,545 1,525
Good components ( Nos.) 9,700 9,500
Cost per 100 good components Rs. 15.93 Rs.16.05
(ii) If inspected

Supplier A B
Defectives not detected ( Nos.) 30 50
Defectives detected (Nos.) 270 450
Components paid for ( Nos.) 9,730 9,550
Costs Rs. Rs.
Purchase Cost 1,459.50 1,384.75
Inspection cost 200.00 200.00
Production damage @ Rs. 15 per 100 4.50 7.50
components
Total 1,664.00 1,589.25
Good components ( Nos.) 9,700 9,500
Cost per 100 good components Rs. 17.15 Rs.16.73
On comparing the cost under I and II above, We find that it will not be economical to install system of
inspection. Further, it will be advantageous to purchase the components from Supplier A.
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TQM
Question6:- Your company plans to operate department D at normal capacity next year producing
one lakh units of product P. Assuming no defective works, these units can be manufactured in 2.5 lakhs
labour hours at a cost of Rs.0.50 per hour .factory overhead would amount to Rs.1,50,000 of which Rs.
50,000 would be fixed five units of materials can be purchased in two qualities ; a high quality at Rs. 1.05
per unit or lower quality at 0.80 per unit.
Under expected conditions, using high quality materials 10%of the work will be defective requiring
complete replacement of the material additional labor costs and variable overhead. scrap materials
recovered from defectives production could be sold at Re. 0.30 per unit of high quality material used.
As an alternative to this arrangement .the use of the lower quality material is being considered but
this would require an extra operation to be performed on it. An additional machine and tooling would be
needed at a cost of Rs. 3,000 per annum. The additional operation would take half an hour for each unit
of product P produced ,not talking defective work into a account.
It is estimated that 20% of the work would be defective all of which would be defective all of which would
require complete replacement. Scrap material from the lower quality material could be sold for Rs. 5,000.
Present information to management indicating the more profitable course of action.
Solution:-
Ascertainment of Total Cost
1:- Using high quality materials (Scrap 10%) (Rs.)
Material (5,00,000 units/0.90 X Rs. 1.05) 5,83,333
Labour (2,50,000 hours/0.90 X Rs.0.50) 1,38,889
Variable overhead (Rs. 1,00,000/ 0.90) 1,11,111
Fixed overhead 50,000
8,83,333
Less: Scrap (5,00,000/0.90)-5,00,000) XRs. 0.30 16,667
Cost of 1,00,000 pieces of P 8,66,666
II. Using Lower quality material (Scrap 20%) (Rs.)

Material (5,00,000 units /0.80 X Rs.0.80 5,00,000
Labour (2,50,000 hours/0.80 X0.50) 1,56,250
Variable Overhead (Rs. 1,00,000 / 0.80) 1,25,000
Fixed Overhead 50,000
Machine and Tooling Cost 3,000
Additional Labour (1,00,000 units X 0.5 hours X Rs. 0.50) 25,000
Additional overhead for additional labour
(1,00,000 units X 0.5 hours) X (Rs. 20,000
1,00,00/2,50,000 hours)

8,79,250
Less: Realizable value of value 5,000
Cost of 1,00,000 pieces of P. 8,74,250
Analysis:- Hence the high quality material should be used.
TQM
Question7:-The Photon Corporation manufactures and sells 20,000 copies each year. The
variable and fixed costs of rework and repair are as follows:
Variable costs Fixed costs Total
Costs
Rework cost per hour $ 40 $60 $100
Repair costs
Customers support costs per 20 30 50
Transparency costs per load 180 60 240
Warranty repair costs pre hour 45 65 110
Photon’s engineers are currently working to solve the problem of copies being too light or too dark. They
propose changing the lens of the Copier. The new lens will cost $ 50 more than the old lens. Each copier
uses one lens. Photon uses a one-year time horizon for this decision, because it plans to introduce a new
copier at the end of the year. Photon believes that even as it improve quality, it will not be able to save
any of the fixed costs of rework or repair.
By changing the lens, Photon expects that it will (1) Save 12,000 hours of rework, (2) Save 800 hours of
customers support, (3) Move 200 fewer loads, (4) Save 8,000 hours of repair, and (5) Sell 100 additional
copiers for a total contribution margin of $6,000,000.
Required:- Should Photon change to the new lens? Show your calculations.
Solution:-
Quality improvement, relevant costs, and relevant revenues.
Relevant costs over the next year of choosing the new lens = $ 50 X 20,000 copiers = $ 1,000,000
Relevant benefits over the
next year of choosing the
New Lens
Costs of quality items
Saving on rework costs
$ 40 X 12,000 rework hours $ 480,000
Saving in customer-support costs
$ 20 X 800 customer- support- hours 16,000
Saving in transportation costs for parts
$ 180 X 200 fewer loads 36,000
Savings in warranty repair costs
$ 45 X 8,000 repair- hours 360,000
Cost saving 8,92,000
Opportunity costs
Contribution margin from increased sales 600,000
Cost savings and additional contribution margin $1,492,000
Because the expected relevant benefits of $1,492,000 exceed the expected relevant costs of the new
lens of $1,000,000, photon should introduce the new lens. Note that the opportunity cost benefits in the
form of higher contribution margin from increased sales is an important component for justifying the
investment in the new lens. The incremental cost of the new lens of $1,000,000 is greater than the
incremental savings in rework and repair costs of $892,000. Investing in the new lens is beneficial,
provided it generates additional contribution margin of at least $108,000 ($1,000,000-$892,000), that is
additional sales of at least $108,000  $6,000 = 18 copiers.
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TQM

Question8- Customer-response time, on time delivery. Pizza fest, Inc makes and delivers pizzas to
homes and offices in the Boston area. Fast, on time delivery is one of pizza fest’s key strategies. Pizza
fest provides the following information for2004 about its customer- response time- the amount of time
from when a customer calls to place an order to when the pizza is delivered.
January – June July – December
Pizzas delivered in 30 minutes or less 100,000 150,000
Pizzas delivered in between 31 and 45 minutes 200,000 260,000
Total pizzas delivered 400,000 500,000
Required: 1. For January – June and July – December 2004, Calculate the percentage of pizzas
delivered in each of the four time intervals (30 minutes or less, 31- 45 minutes, and 61 – 75 minutes). On
the basis of these calculations, has customer- response time improved in July- December compared with
January- June?
2. When customers call pizza fest, they often ask how long it will take for the pizza to be delivered to their
homes or offices. If pizza fest quotes a long time interval, customers often will not place the order. If pizza
fest quotes too short a time interval and the pizza is not delivered on time, customers get upset and pizza
fest will lose repeat business. Based on the January – June 2004 data, what customer- responses time
should pizza fest quote to its customers if
A. It wants to have an on- time delivery performance of 75%?
B. It wants to have an on- time delivery performance of 95%?
3. If pizza fest had quoted the customer- response times you calculated in requirements 2a and 2b, would
it have met its on – time delivery performance targets of 75% and 95% respectively. For July- December
2004? Explain.
4. Pizza fest is considering giving an on-time guarantee for January- June 2005. if the pizza is not
delivered within 60 minutes of placing the order the customer gets the pizza fest estimates that it will
make additional sales of 20,000 pizzas as a result of giving this guarantee. It estimates that it will fail to
deliver a total of 15,000 pizzas on time. The average price of a pizza is $13, and variable cost of a pizza
is $7.
A. What is the effect on pizza fest’s operating income of making this offer?
B. What non financial and qualitative factors should pizza fest consider before making this offer?
C. What actions can pizza fest take to reduce customer- response time?
Solution:-
Customer- response time, on-time delivery.
January-June July-December
Pizzas delivered in 30 minutes or less 100,000 = 25% 150,000 = 30%
400,000 500,000
Pizzas delivered in between 31 and 45 minutes 200,000 = 50% 260,000 = 52%
400,000 500,000
400,000 500,000
400,000 500,000
Total 100% 100%
Yes, customer-response time has improved from January-June 2004 to July-December 2004. The
percentage of pizzas delivered in less than 30 minutes increased by 5%, and pizzas delivered in less than
or equal to 45 minutes increased by &%[82% (30% + 52%) in July- December minus 75% (25% + 50%) in
January- June]. In turn, pizzas delivered in greater than 45 minutes decreased by 7% [25% (20% + 5%) in
January- June minus 18% (14%) in July- December].
2. In the January- June 2004 period, pizza fest should quote a customer- response time of (a) 45 minutes
to achieve on-time delivery performance of 75% (75% of all pizzas were delivered within this time frame)

and (b) 60 minutes to achieve on-time delivery performance of 95% (95% of all pizzas were delivered
within this time frame).
3. Yes in the July- December 2004 period, pizza fest would achieve on-time delivery performance of (a)
82% (greater than its target performance level of 75%) if it had quoted a customer- response time of 45
minutes and (b) 96% (greater than its target performance level of 95%) if it had quoted a customer-
response time of 60 minutes.
4a Contribution margin from selling 20,000 additional pizzas
20,000 X ($ 13- $7) $120,000
Cost of having to give 15,000 pizzas free because
Of late deliveries, 15,000 X $7 105,000
Increase in operating income of making the free pizza offer $ 15,000
4b. Pizza fest should carefully monitor the quality of its pizzas. In its desire to deliver pizzas
on time, pizza fest should not compromise on the time needed to cook the pizza, nor should it
increase oven temperatures beyond acceptable levels in order to cook the pizza faster.
Pizza fest should also ensure that drivers responsible for delivering the pizza drive carefully.
In their desire to reach a customer quickly, road safety should not be compromised.
4c. Some ways to reduce customer- response times are:-
(i)Start making the pizza soon after a customer calls. Waiting to start making a pizza is a nonvalue-
added delaly.
(ii) Ensure that adequate labor is available to start preparing the pizza for cookin, and adequate oven
capacity is available to minimize waiting time before cooking commences.
(iii) Have drivers available to deliver the pizza.
(i) Maintain ovens well to avoid down time.
(ii) Clean ovens quickly after a pizza is done in preparation for cooking the next pizza.
(iii) Keep some basic cheese pizzas ready ahead of time so that only toppings need to
be added after an order is received.
(iv) Make sure each pizza cooked is of good quality (not overcooked or undercooked) so
that no pizzas have to be thrown away and redone. Poor quality will cause delays.
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THROUGHPUT COSTING
Question9-: Theory of constraints throughput contribution relevant costs. The Mayfield
corporation manufactures filing cabinets in two operations: machining and finishing. It provides the
following information.
Machining Finishing
Annual capacity 100,000 units 80,000 units
Annual production 80,000 units $400,000
Fixed operating costs $640,000 $400,000
(Excluding direct materials)
Fixed operating costs per unit produced
($640,000 – 80,000; $400,000-80,000) $8 per unit $5 per unit
Each cabinet sells for $72 and has direct materials costs of $32 incurred at the start of the machining
operation. Mayfield has no other variable costs. Mayfield can sell whatever output it produces. The
following requirements refer only to the preceding data. there is no connection between the requirements.
1. Mayfield is considering using some modern jigs and tools in the finishing operation that would
increase annual finishing output by 1,000 units. The annual cost of these jigs and tools is
$30,000. Should Mayfield acquire these tools? Show your calculations.
2. the production manager of the machining department has submitted a proposal to do faster
setups that would increase the annual capacity of the machining department by 10,000 units and
cost $5,000 per year. Should Mayfield implement the change? Show your calculations.
SOLUTION:-
Theory of constraints, throughput contribution, relevant costs.

1. Finishing is a bottleneck operation. Hence, producing 1,000 more units will generate additional
throughput contribution and operating income.
Increase in throughput contribution ($72-$32) X 1,000 $40,000
Incremental costs of the jigs and tools 30,000
Net benefit of investing in jigs and tools $10,000
Mayfield should invest in the modern jigs and tools because the benefits of higher throughput contribution
of $40,000 exceeds the costof $30,000.
2:- The machining Department has excess capacity and is not a bottleneck operation. Increasing its
capacity further will not increase throughput contribution .There is there fore no benefits from spendi ng
$5,000 to increase the Machining Department’s capacity by 10,000 units. Mayfield should not implement
the change todo setups faster.
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Question10-: The Thomas Corporation sells 300,000 V262 valves to the automobile and truck
industry. Thomas has a capacity of 110,000 machine-hours and can produce 3 valves per machine-hour.
V262’s contribution margin per unit is $8. Thomas sells only 300,000 valves because 30,000 valves (10%
of the good valves) need to be reworked. It takes 1 machine-hour to rework 3 valves, so 10,000 hours of
capacity are used in the rework process. Thomas’s rework costs are $2,10,000.
 Direct materials and direct rework labor (variable costs): $3 per unit
 Fixed costs of equipment rent and overhead allocation: $4 per unit
Thomas’s process designers have developed a modification that would maintain the speed of the process
and ensure 100%. Quality and no rework. The new process would cost $315,000 per year. The following
additional information is available:
 The demand for Thomas’s V262 valves is 370,000 per year.
 The jackson corporation has asked Thomas to supply 22,000 T971 valves (another
product) if Thomas implements the new design. The contribution margin per T971 value
is $10.Thomas can make two T971 valves per machine- hour with 100% quality and no
rework.
Required 1. Suppose Thomas’s designers implement the new design. Should Thomas accept
Jackson’s order for 22,000 T971 valves? Show your calculation.
2.Should Thomas implement the new design? Show your calculation.
3. What non financial and qualitative factors should Thomas consider in deciding whether to
implement the new design?
Solution
0ne way to present the alternatives is via a decision tree, as shown below.
The idea is to first evaluate the best action that Thomas should take if it implements the new design
(that is, make or not make T971). Thomas can then compare the best mix of products to produce if it
implements the new design against the status quo of not implementing the new design.
1. Thomas has capacity constraints. Demand for V262 valves(370,000 valves) exceeds production
capacity of 330,000 valves (3 valves per hour X 110,000 machine-hours). Since capacity is
constrained, Thomas will choose to sell the product that maximizes contribution margin per
machine-hour (the constrained resource).
Contribution margin per
Machine-hour for V262 = $8 per valve x 3 valves per hour = $24
Contribution margin per machine hour for T971 = $10 per value X 2 valves per hour = $20.
Thomas should reject Jackson corporation’s offer and continue to manufacture only V262 valves.
2. Now compare the alternatives of (a) not implementing the new design versus
(b) Implementing the new design. By implementing the new design, Thomas will save 10,000
machine-hours of rework time. This time can than be used to make and sell 30,000 (3 valves per
hour X 10,000 hours) additional V262 valves. The relevant costs and benefits of implementing the
new design follow:
The relevant costs of implementing the new design $(315,000)
Relevant benefits:

(a) Savings in rework costs ($3 per V262 valve X 30,000 valves) 90,000
(c) Additional contribution margin from selling another
30,000 V262 valves (3 valves per hour X 10,000 hours)
because capacity previously used for rework is freed up
($8 per valve X 30,000 units) 240,000
Net relevant benefit $ 15,000
Note that the fixed rework costs of equipment rent and allocated overhead are irrelevant because these
costs will be incurred whether Thomas should implement the new design. Since relevant benefit exceeds
the relevant cost by Rs.15000$.
3. Thomas corporation should also consider other benefits of improving quality. For example the
process of quality improvement will help Thomas’s managers and workers gain expertise about
the product and the manufacturing process that may lead to further cost reductions in the future.
Improving quality within the plant is also likely to translate into delivering better quality products to
customers. The increased reputation and customer goodwill may well lead to higher future
revenues through greater unit sales and higher sales prices.
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Question11:-The Tan Corporation uses multicolor molding to make plastic lamps. The molding
operation has a capacity of 2,000,000 units per year. The demand for lamps is very strong. Tan will be
able to sell whatever output quantities it can produce at $40 per lamp.
Tan can start only 200,000 units into production in the Molding Department because of capacity
constraints on the molding machines. If a defective unit is produced at the molding operation, it must be
scrapped and the net disposal value of scrap is zero. Of the 2,00,000 units started at the molding
operation 30,000 units (15%) are scrapped. Scrap costs, based on total (fixed and variable)
manufacturing costs incurred up to molding operation equal $25 per unit as follows:-
Direct materials (variable) $16per unit
Direct manufacturing labor, Setup labor
And materials handling labor (variable) 3 per unit
Equipment, rent and other allocated overhead, including
Inspection and testing costs on scrapped parts (Fixed) 6 per unit
Total $ 25 per unit
Tan’s designers have determined that adding a different type of material to the easting direct materials
would reduce scrap to zero, but it would increased the variable costs by $4 per lamp In the Molding
Department.
Required:- Should Tan use the new material? Show your calculations.
Solution:-
1. By implementing the new method, tan would incur additional direct materials costs on all the
200,000 units started at the molding operation.
Additional direct materials costs = $4 per lamp X 200,000 lamps $800,000
The relevant benefits of adding the new material are:
Increased revenue from selling 30,000 more lamps
$40 per lamp X 30,000 lamps $1,200,000
Note that tan corporation continues to incur the same total variable costs of direct materials direct
manufacturing labor, setup labor and materials handling labor, and the same fixed costs of equipment
rent and allocated overhead that it is currently incurring, even when it improves quality. Since these
costs do not differ among the alternatives of adding the new material or not adding the new material,
they are excluded from the analysis. The relevant benefit of adding the new material is the extra
revenue that tan would get from producing 30,000 good lamps.
An alternative approach to analyzing the problem is to focus on scrap costs and the benefits of
reducing scrap.
The relevant benefits of adding the new material are:
a. cost savings from eliminating scrap:

Variable costs per lamp, $19a X 30,000 lamps $570,000
b. Additional contribution margin from selling
Another 30,000 lamps because 30,000 lamps
Will no longer be scrapped:
Unit contribution margin $21 b X 30,000 lamps 630,000
Total benefits to tan of adding new material to improve quality $1,200,000
a Note that only the variable scrap costs of $19 per lamp (direct materials,$16per lam; direct
manufacturing labor, setup labor; and materials handling labor, $3 per lamp) are relevant because
improving quality will save these costs. Fixed scrap costs of equipment, rent, and other allocated
overhead are irrelevant because these costs will be incurred whether tan corporation adds or does not
add the new material.
Contribution margin per unit $40.00
Selling price
Variable costs:
Direct materials costs per lamp $16.00
Molding department variable manufacturing costs
Per lamp (direct manufacturing labor, setup labor, and
Materials handling labor) 3.00
Variable costs (19.00)
Unit contribution margin $21.00
On the basis of quantitative considerations alone, Tan should use the new material. Relevant benefits of
$1,200,000 exceed the relevant costs of $800,000 by $400,000.
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Question12- (Costs of Quality analysis non financial quality measure). The Hartono
Corporation manufactures and sells industrial grinders. The following table presents financial information
pertaining to quality in 2004 and 2005 (in thousands):
Year 2005 2004
Revenue $ 12,500 $10,000
Inspection of Production 85 110
Scrap 200 250
Design engineering 240 100
Cost of returned goods 145 60
Product-testing equipment 50 50
Customers support 30 40
Rework costs 135 160
Preventive equipment maintenance 90 35
Product liability claims 100 200
Incoming materials inspection 40 20
Breakdown maintenance 40 90
Product testing labor 75 220
Training 120 45
Warranty repair 200 300
Supplier evaluation 50 20
Required:- 1:- Classify the cost items in the table into prevention, appraisal, internal failure, or external
failure categories.
2:- Calculate the ratio of each COQ category to revenues in 2004 and 2005.Comment on the trends in
costs of quality between 2004 and 2005.
3:- Give two examples of non financial quality measures that Hartono Corporation could monitor as part of
a total quality control effort.
Solution:-
Costs of quality analysis, nonfinancial quality measures.

1. & 2. 2005 2004
Revenues $12,500,000 $10,000,000
Percentage percentage
Of revenues of revenues
Cost (2) = (1)  cost (4) = (3) 
Costs of quality (1) (3) $10,000,000
Prevention costs $ 240,000 $ 100,000
Preventive equipment
Maintenance 90,000 35,000
Training 120,000 45,000
Supplier evaluation 50,000 20,000
Total prevention costs 500,000 4.0% 200,000 2.0%
Appraisal costs
Inspection of production 85,000 110,000
Product-testing equipment 50,000 50,000
Incoming materials inspection 40,000 20,000
Product- testing labor 75,000 220,000
Total appraisal costs 250,000 400,000 4.0%
Internal failure costs
Scrap 200,000 250,000
Rework 135,000 160,000
Breakdown maintenance 40,000 90,000
Total Internal failure costs 3,75,000 3.0% 500,000 5.0%
External failure costs
Returned goods 145,000 60,000
Customer support 30,000 40,000
Product liability claims 100,000 200,000
Warranty repair 200,000 300,00
475,000 600,000 6.0%
Total costs of Quality $1,600,000 12.8% $1,700,000 17.0%
Between 2004 and 2005, Hartono;s costs of quality have declined from 17% of sales to 12.8% of sales.
The analysis of individual costs of quality categories indicates that Hartono began allocating more
resources to prevention activities design engineering , preventive maintenance, training and supplier
evaluation in 2005 relative to 2004. As a result appraisal costs declined from 4% of sales to 2%, costs of
internal failure fell from 5% of sales to 3% and external failure costs decreased, the cost of returned
goods has increased. Hartono’s management should investigate the reason for this and initiate corrective
action.
3:- Examples of no financial quality measures that Hartono Corporation could monitor are:
a:- Number of defective grinders shipped to customers as a percentage of total units of grinders shipped.
B:- Ratio of good output to total output at each production process.
C:- Employee turnover.
Quality, Time and the Theory of Constraints
Hartono Corporation
2005 2004
Revenues $12,500 $10,000
Cost as a Cost as a
Cost % of Cost % of
Revenues Revenues
Prevention Costs
Design engineering 240 100
Preventive eqpmt. Maintenance 90 35
Training 120 45
Supplier evaluation 50 20

Total Prevention costs 500 4.0% 200 2.0%
Appraisal costs
Inspection of Production 85 110
Product testing equipment 50 50
Incoming materials inspection 40 20
Product testing labor 75 220
Total appraisal costs 250 2.0% 400 4.0%
Internal Failure costs
Scrap 200 250
Rework 135 160
Breakdown maintenance 40 90
Total internal failure costs 375 3.0% 500 5.0%
External Failure costs
Returned goods 145 60
Customer support 30 40
Product liability claims 100 200
Warranty repair 200 300
Total external failure costs 475 3.8% 600 6.0%
Total costs of quality $1,600 12.8% $1,700 17.0%
COQ trend analysis
COQ category % of revenues % of Revenues
2005 2004
Prevention costs 4.0% 2.0%
Appraisal costs 2.0% 4.0%
Internal failure costs 3.0% 5.0%
External failure costs 3.8% 6.0%
Total costs of quality 12.8% 17.0%
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Question13- (Costs of quality analysis, non financial quality measures). Ontario Industries
manufactures two years of refrigerators, Oliva and Solta. Information on each Refrigerator is as follows:
Olivia Solta
Units manufactured and sold 10,000 units 5,000 units
Selling Price $ 2,000 $ 1,500
Variable costs per unit $ 1,200 $ 800
Hours spent on design 6,000 1,000
Testing and inspection hours per unit 1 0.5
Percentage of Units reworked in plant 5% 10%
Rework costs per refrigerator $500 $400
Percentage of units repaired at customer site 4% 8%
Repair costs per refrigerator $600 $ 450
Estimated lost sales from poor quality ----- 300 units
The labor rates per hour for two activities are as follows:-
Design $75per hour
Testing and inspection $40per hour
1:- Calculate the costs of quality for Olivia and Solta, classified into prevention, appraisal, internal failure
and external failure categories.

2:- For each type of refrigerator, calculate the ratio of each COQ category as a percentage of revenues
Compare and Comment on the costs of quality for Olivia and Solta.
3:- Give two examples of non financial quality measures that Ontario Industries could monitor as part of a
total quality control program.
Solution:-
COSTS OF QUALITY ANALYSIS NONFINANCIAL QUALITY MEASURES
Revenues, Costs of quality and costs of quality
As a Percentage of Revenues for Olivia
Revenues= $2,000 X 10,000 units = $20,000,000
Percentage of
Revenues
Cost (2) = (1) /
Costs of Quality (i) $20,000,000
Prevention costs
Design engineering ($75 X 6,000 hours) $450,000 2.25%
Appraisal costs
Testing and inspection ($40X1hour X 10,000 units) 400,000 2.00%
Rework ($500X5% X 10,000 units) 250,000 1.25%
Repair($600X4% X 10,000 units) 240.000 1.20%
Total costs of Quality $1,340,000 6.70%
Revenues, Costs fo Quality and Costs of Quality
As a Percentage of Revenues for Solta
Revenues $1,500 X 5,000 units = $7,500,000
Percentage of
Costs Revenues
Costs of Quality (i) (2)=(1)/ $7,500,000
Prevention costs
Design engineering ($75X1,000 hours) $75,000 1.00%
Appraisal costs
Testing and inspection($40X0.5X5,000units) 100,000 1.33%
Rework ($400X10%X5,000 units) 200,000 2.67%
Repair ($450X8%X5,000 units) 180,000 2.40%
Estimated forgone contribution margin
On lost sales($1,500 - $800) X300) 210,000 2.80%
Total external failure costs 390,000 5.20%
Total costs of Quality $765,000 10.20%
Costs of quality as a percentage of sales are significantly different for Solta (10.20%) compared with
Olivia (6.70%) Ontario spends very little on prevention and appraisal activities for Solta, and incurs high
costs of internal and external failures. Ontario follows a different strategy with respect to Olivia, spending
a greater percentage of sales on prevention and appraisal activities. The result: fewer internal and
external failure costs and lower overall costs of quality as a percentage of sales compared with Solta.
3:-Examples of non financial quality measures that Ontario Industries could monitor as part of a total
quality control effort are:
a:- Outgoing quality yield for each product.

B:- Returned refrigerator percentage for each product.
C:- On-time delivery
D:- Employee turnover.
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Question14:-Eastern Switching Co. (ESC) produces telecommunications equipment Charles,
ESC’s president believes that product quality is the key to gaining competitive advantage.
Laurent implemented a total quality management (TQM) program with an emphasis on customer
satisfaction. The following information is available for the first year (2004) of the TQM program
compared with the previous year.
(2003) (20004)
Total number of units produced and sold 10,000 11,000
Units delivered before scheduled delivery data 8,500 9,900
Number of defective units shipped 400 330
Number of customers complaints other than for defective units 500 517
Average time from when customer places fro defective unit to
When unit is delivered to the customer 30days 25 days
Number of units reworked during production 600 627
Manufacturing lead time 20days 16 days
Direct and indirect manufacturing labor-hours 90,000 110,000
Required: -
1: - For each of the years 2003 and 2004 calculate.
A:- Percentage of defective units shipped.
B:- On time delivery rate.
C:- Customer complaints a percentage of units shipped.
D:- Percentage of units reworked during production.
2: - On the basis of your calculations in requirement 1. Has ESC’s performance on quality and timeliness
improved?
3: - Philip Larkin, a member of ESC’s board of directors, comments that regardless of the effect that the
program has had on quality, the output per labor hour has declined between 2003 and 2004. Larkin
believes that lower output per lab our hour will lead to an increase in cost and lower operating income.
A:- How did Larkin conclude that output per lab our hour declined in 2004 relative to 2003?
B:- Why might output lab our hour decline in 2004?
C:- Do you think that a lower output per lab our hour will decrease operating income in 2004?
Explain briefly.
Solution:-
Non financial measures of quality and time
2003 2004
400 330
a. Percentage of defective units shipped ----= 4% ----- = 3%
10,000 11,000
b Customer complaints as a 500 517
percentage of units shipped ----= 5% ----= 4.7%
10,000 11,000
c. On-time delivery 8,500 9,900
----- = 85% ------- = 90%
10,000 11,000
d: Percentage of units reworked 600 627
---- = 6% ---- = 5.7%
during production 10,000 11,000

2:- The calculations in requirements 1 indicate that ESC’s performance on both quality and timeless ahs
improved . Quality has improved because(a) percentage of defective units shipped has decreased from
4% to 3%, (b) customer complaints have decreased from 5% to 4.7% and (c) percentage of units
reworked during production has decreased from 6% to 5.7%. Timeliness has improved as on-time
delivery has increased from 85% to90%. Of-course there is a relationship between the improvements in
quality and timeliness. Better quality and less rework reduces delays in production and enables faster and
on- time delivery to customers.
3a. 2003 2004
The output per labor- hour
Between 2003 and 2004 10,000 11,000
= 0.11 =0.10
Can be calculated as follows 90,000 110,000
3b. Output per labor- hour may have declined from 2003 to 2004 either because workers were less
productive or more likely because the initial implantation of the quality program may have resulted in lost
production time as employees were trained and became more adept as solving production quality
problems. As workers implement good quality practices and defects and rework decrease over time, it is
possible that both quality and productivity (output per labor- hour) will increase.
3c. It is not clear that the lower output per labor- hour will decrease operating income in 2004. The higher
labor costs in 2004 could pay off in many ways. Higher quality and lower defects will likely result in lower
material costs because of lower defects and rework. Internal and external failure costs will also be lower,
resulting in lower customer returns and warranty costs. Customer satisfaction will likely increase in the
umber of units produced and sold in 2004may well have been due to quality improvements. Overall, the
benefits of higher quality in 2004 may very well exceed the higher labor costs
--------------------------------------------------------------------------------------------------------------------
Step1:- the number of batches in which the travel expense should have been processed = 948,000
actual units /500 budgeted units per batch = 1,896 batches.
Step2: The flexible budget amount for travel expenses

= 1,896 batches X $7.60 budgeted cost per batch
= $14,410
The Flexible budget variance can be calculated as follows:
Flexible budget variance = Actual costs – Flexible –budget costs
= (1,890 X $7.40)-( 1,896 X $7.60)
=$13,986- $14,410 =$424F
2:- The Flexible budget variances can be subdivided into price and efficiency variances.
Actual price Budgeted price Actual quantity
Price Variance Of input - of input X of Input
Actual quantity Budgeted quantity of Budgeted price

Efficiency Variance Of input used - input allowed for X of Input
Actual output
Receivable
Price Variance = ($0.750 - $0.639) X 948,000
= $ 105,228 U
Efficiency variance = (948,000-948,000) X $0.639
= $0
Payables
Price Variance = ($2.80 - $2.90) X 212,175
= $21,218F

Efficiency variance = (212,175 – 189,600) X $2.90
= $65,468 U
Travel expenses
Price variance = ($7.40 - $7.60 ) X 1,890
= $378 F
Efficiency variance= (1,890 – 1,896) X $7.60
= $46F
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Finance function activities, benchmarking (continuation of 7-30).
1. The key new insight is how bouquets.com compares with “World- class” organizations. At face
value, there is much room for improvement. The per unit cost differences are dramatic:
Bouquets. Com
2004 2004 “World- class”
Budgeted Actual Cost performance
Receivables $0.639 $0.75 $10 per remittance
Payables $ 2.900 $ 2.80 $0.71 per invoice
Travel $ 7.600 $ 7.40 $1.58 Per travel claim
2.For any meaningful comparison, the figures being compared must be comparable sanchez should first
determine whether there is an “apples to apples” comparison with these figures. Are costs of the finance
department activities measured the same across. Bouquets. Com and the company with”World-class”
cost performance? Suppose Bouguets.com allocated other costs into the finance area(such as the
President’s Salary), while the$1.58 per travel claim figure is for finance department costs only.
Sanchez should consider whether the benchmark company also obtains information on why the large cost
differences occur. For example is it because the “world class” performer is using new technologies in the
finance area? If this is the case, then is sanchez willing to invest in new technologies in the same way that
“World-class” finance function organizations do? If not, then the $1.58 benchmark, could be unattainable,
no matter how hard and smart the travel claim-processing group performs.
In addition Sanchez should consider whether the benchmark company provides a valid comparison point.
The benchmark company is a world-class retail company that has traditional retail and internet-based
retail functions.Bouquest.com is an internet company. Costs and activities of internet companies are
going to differ from those of traditional retailers.
------------------------------------------------------------------------------------------------------------
Question:- Cost-plus pricing
1:- Direct manufacturing 1,000,000 does to be packaged
labor – hours (DMLH) = -------------------------------------- = 1,000 DMLH
required for Job 1,000 doeses /DMLH
Incremental costs:
Direct manufacturing labor costs, $16.00X1,000 $16,000
Variable overhad costs, $9.00 X 1,000 9,000
Incremental administrative costs 5,000
Total incremental costs $30,000
Total incremental costs 30,000
Minimum price per dose = ------------------------------- = ---------- = $0.03
1,000,000 doses 1,000,000
2:- As in part1, 1,000 DMLH are required for the job
Direct manufacturing labor costs $16 X 1,000 $16,000
Variable overhead costs $9 X1,000 9,000
Fixed overhead costs,$30 X 1,000 30,000
Incremental administrative costs 5,000
Total (Full ) costs 60,000
Maximum allowable return before taxes(15%) 9,000
Total bid price $69,000
Total bid price $69,000

Bid price per dose = ---------------------- = -------------- = $0.069
1,000,000 does 1,000,000
3:-The factors that Hall Should consider before deciding whether or not to submit a bid at the
maximum allowable price include(a)whether Hall has excess capacity,(b) whether there are available jobs
for which profitability might be greather, and (c)whether the maximum bid of $0.07 per dose contributes
toward recovering fixed costs.
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Question15:-Decision support systems (DSS) is examining the productivity and pricing policies of
three of its recent engineering software packages:
 EE –46: Package for electrical engineers
 ME- 83: package for mechanical engineers
 IE – 17 package for industrial engineers
Summary details on each package over their two-year “cradle-to-grave” product lives are as follows:
Number of units sold
Selling
Package Price Year 1 Year 2
EE –46 S250 2,000 8,000
ME- 83 300 2,000 3,000
IE –17 200 5,000 3,000
Assume that no inventory remains on hand at the end of year 2.
DSS is deciding which product lines to emphasize. In the past two years, profitability has been
mediocre. DSS is particularly concerned with the increase in R & D costs. An analyst pointed out that
for one of its most recent package (IE-17), major efforts had been made to reduce R&D costs.
Nancy Sullivan the engineering software manager, decides to collect the following life-cycle revenue
and cost information for the EE – 46, ME- 83, and IE-17 package:
EE-46 ME-83 IE-17
Year 1 Year 2 Year 1 Year 2 Year1 Year 2
Revenues S500,000 S2,000,000 S600,000 S900,000 S1,000,000 $600,000
Costs
R&D 700,000 0 450,000 0 240,000 0
Design of product 185,000 15,000 110,000 10,000 80,000 16,000
Manufacturing 75,000 225,000 105,000 105,000 143,000 65,000
Marketing 140,000 360,000 120,000 150,000 240,000 208,000
Distribution 15,000 60,000 24,000 36,000 60,000 36,000
Customer service 50,000 325,000 45,000 105,000 220,000 388,000
1:- How does a product life- cycle income statement differ from a conventional income statement? What
are the benefits of using a product life – cycle reporting format?
2:- Present a product life- cycle income statement for each software package. Which package is the most
profitable, and which is the least profitable? Ignore the time value of money.
3:- How do the three software packages differ in their cost structure (the percentage of total costs in each
cost category)?
Solution:-
Life Cycle product costing, Product mix.
1:- A life-cycle income statement traces revenue and costs of each individual software package from its
initial research and development to its final customer servicing and support. The two main differences
from a conventional income statement are:
a:- Costs incurred in different calendar periods are included in the same statement.
B:- Costs and revenue of each package are reported, separately rather than aggregated into company
wide categories.

The benefits of using a product life-cycle report are:
A:- The full set of revenues and costs associated with each product becomes visible.
B:- Differences among products in the percentage of total costs committed at early stages in the life
cycle are high lighted.
C:- Interrelationships among among business function cost categories are highlighted. Whatis the effect,
for example, of cutting back on R&D and Product- design cost categories on customer service costs in
subsequent years?
2:-
EE-46 ME-83 IE-17
Revenue($000s) $2,500 $1,500 $1,600
Costs($000s)
Research & development $700 $450 $240
Design 200 120 96
Production 300 210 208
Marketing 500 270 448
Distribution 75 60 96
Customer service 375 2,150 150 1,260 608 1,696
Operating Income($000s) $ 350 $ 240 $(96)
As emphasized in this chapter, the time value of money is not taken into account when summing
life-cycle revenue or life –cycle costs.
Ranking of the three package on profitability (and relative profitability) are:
Operating income Operating income
Revenues
1. EE –46: $350,000 1. ME-83: 16.0%
2. ME-83: $ 240,000 2:- EE–46: 14.0%
3. IE-17:$ (96,000) 3:- IE –17: (6.0%)
The EE-46 and ME-83packages should be emphasized and theIE-17package should be deemphasized.
It is interesting thatIE-17 had the lowest R &D costs but was the least profitable. DSS should evaluate
whether reducing R& D costs contributed in any way to IE-17’s poor performance.
3:-Thecost structures of the three software package are:
EE-46 ME-83 IE-17

Research & Development 32.5% 35.7% 14.1%
Design 9.3 9.5 5.7
Production 14.0 16.7 12.3
Marketing 23.3 21.4 26.4
Distribution 3.5 4.8 5.7
Customer service 17.4 11.9 35.8
100.0% 100.0% 100.0%
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ACTIVITY BASED COSTING
Question16:- The Excel Ltd. Make and sell two products ,VG4U and VG2.Both products are
manufactures through two consecutive process-making and packing Raw materials is input at the
commencement of the making process. The following estimated information is available for the period
ending 31st March.
Making Packing
($000) ($000)
Conversion Cost

Variable 350 280
Fixed 210 140
40% of fixed costs are product specific, the remainder are company fixed costs. Fixed Costs will
remain unchanged thoughout a wide activity range.
Product information VG4 UVG2
Production time per unit
Making (minutes) 5.25 5.25
Packing (minutes) 6 4
Production Sales (units) 5000 3000
Selling Price per unit($) 150 180
Direct Material per unit (S) 30 30
(iii)Conversion costs are absorbed by products using estimated time based rates.
Required:-
(a) Using the above information
(b) Calculate unit costs for each product, analysed as relevant.
(c) Comment on management suggestion that the production and sale of one of the product should
not proceed in the period ending 31 st March.
(d) Additional information is gathered for the period ending 31stMArchas follows:
(i) The making process consist of two consecutive activities, mounding and trimming. The
moulding variable conversion costs are incurred in proportion to the temperate required in
the moulds. The variable trimming conversion costs are incurred in proportion to the time
required for each product. Packing materials (which are part of the variable packing
cost)requirements depends on the complexity of packing specified for each product.
(ii) The Proportion of product specific conversion costs (variable and fixed) are analysed as
follows:
Making Process: moulding (60%); trimming (40%)
Packing Process; Conversion (70%), Packing material(30%)
(iii) An investigation into the effect of the cost drivers on costs has indicated that the proportions
in which the total product specific conversion costs are attributable to VG4U and VG2are
as follows:
VG4U VG
Temperature(moulding) 2 1
Material consistency(trimming) 2 5
Time(packing) 3 2
Packing (complexity) 1 3
(iv)Company fixed costs is apportioned to product at an overall average rate per product unit based on
the estimated figures.
Required:-
Calculate amended unit costs for each product where activity based costing is used and company fixed
costs are apportioned as detailed above.
Comment on the relevance of the amended unit cost in evaluating the management suggestion that one
of the products be discontinued in the period ending 31st March.
Management wish to achieve an overall net profit margin of 15% on sales in the period ending 31 st March
in order to meet return on capital targets.
Required:-
Explain how target costing may be used in achieving the required return and suggest specific areas of
investigation.
Solution:-
flexible- budget variances for finance function activities.
1. Receivables

Receivable is an output unit level activity. Its flexible- budget variance can be calculated as follows:
Flexible-budget Actual Flexible-budget

Variance = costs - Costs
= ($0.75 X 948,000) – ($0. 639 X 948,000)
= $ 711,000 - $605,772
= $105,228 U
Payables
Payables is a batch level activity
Static- budget
Amounts Actual amounts
.a. Number of deliveries 1,000,000 948,000
b. Batch size (units per batch) 5 4.468
c. Number of batches (a b) 200,000 212,175
d. cost per batch $2.90 $2.80
e. Total payables activity cost
(c Xd) $580,000 $594,090
Step 1: The number of batches in which payables should have been processed = 948,000 actual
Units – 5 budgeted units per batch = 189,600 batches
Step 2: The flexible- budget amount for payables
= 189,600 batches X $2.90 budgeted cost per batch
$ 549,840
The flexible – budget variance can be computed as follows:
Flexible- budget variance = Actual costs – flexible – budget costs
= (212,175 X $2.80) – (189,600 X $2.90)
=$ 594,090 - $549,840 = $44,250 U
Travel expenses
Travel expenses is a batch level activity
Static- budget
Amounts Actual amounts
a. Number of deliveries 1,000,000 948,000
b. Batch size (units per batch) 500 501.587
c. Number of batches (ab) 2,000 1,890
d. Cost per batch $7.60 $7.40
e.Total travel expenses activity
(c X d) $15,200 $13,986
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Question17-:- EVALUATION MANAGERS, ROI VALUE-CHAIN ANALYSIS OF COST
STRUCTURE: User Friendly Computer is one of the largest personal computer companies in the
world .The board of directors was recently informed that User Friendly president is resigning. An
executive search firm recommends the board consider appointing Peter Diamond ( Current president of
Computer Power) or Norma Provan (current president of Peach Computer).You Collect the following
financial information (in millions) on computer Power and Peach Computer for 2002 and 2003:
Computer Power Peach Computer
2002 2003 2002 2003
Revenues $400.0 $320.0 $200.0 $350.0
Costs
R&D 36.0 16.8 18.0 43.5
Design 15.0 8.4 3.6 11.6
Production 102.0 112.0 82.8 98.6
Marketing 75.0 92.4 36.0 66.7
Distribution 27.0 22.4 18.0 23.2
Customer service 45.0 28.0 21.6 46.4

Total costs 300.0 280.0 180.0 290.0
Operating income $100.0 $40.0 $20.0 $60.0
Total assets $360.0 $340.0 $160.0 $240.0
In early 2004.0a leading computer magazine gave Peach Computer’s main product five stars, its
highest rating. Computer Power’s main product was given three stars, down from five stars a years ago,
because of customer-service problems. The computer magazine also ran an article on new product
introductions. Peach Computer received high marks for new products in 2003.Computer Power’s
performance was called “mediocre.”
Required:-
1:- Use the Dupont method of probability analysis to compute the ROI of computer Power and
Peach Computer in 2002 and 2003.Comment on the results.
2:- Compute the percentage of costs in each of the six business-function cost categories for
computer Power and Peach Computer in 2002 and 2003. Comment on the results.
3:- Rank Diamond and Provan as potential candidates for president of User Friendly Computer.
Explain your ranking.
Solution:-
Evaluating managers, ROI, value- chain analysis of Cost Structure
Revenues Operating Income Operating Income
------------- X ----------------------- = -------------------------
Total Assets Revenues Total Assets
Computer Power
2002 1.111 0.250 0.278
2003 0.941 0.125 0.118
Peach Computer
2002 1.250 0.100 0.125
2003 1.458 0.171 0.250
Computer Power’s ROI has declined sizably from 2002 to 2003, Largely because of a decline in
operating income to revenues. Pearch Computer’s ROI has doubled from 2002 to 2003, in large part due
to an increase in operating income to revenues.

Business Function 2002 2003 2002 2003
Research and development 12.0% 6.0% 10.00 15.0%
Design 5.0 3.0 2.0 4.0
Production 34.0 40.0 46.0 34.0
Marketing 25.0 33.0 20.0 23.0
Distribution 9.0 8.0 10.0 8.0
Customer Service 15.0 10.0 12.0 16.0
Total costs 100.0% 100.0% 100.0% 100.0%
Business Functions with increase /decrease in the percentage of total costs from 2002 to 2003
are:
Increase Production Research and development
Marketing Design
Marketing
Customer service
Decreases Research & Development Production
Design Distribution
Distribution
Customer Service
Computer Power has decreased expenditures in servel Key business functions that are critical to its long-
term survival-notary research and development and design. These costs are discretionary and can be

reduced in the Short run without any short-run effect without any short-run effect on customers, but such
action is likely to create serious problems in the long run.
3:- Based on the information provided, Provan is the better candidate for president of User Friendly
Computer. Both Computer Power and Reach Computer are in the same industry. Provan has headed
Peach Computer at a time when it has considerably outperformed Computer Power.
A:- The ROI of Peach Computer has increased from 2002 to 2003, while that of Computer Power has
decreased.
B:- The Computer magazine has increased the ranking of Peach Computer’s main product, while it has
decreased the ranking of Computer Power’s main Product.
C:- Peach Computer has received high marks for new products (the lifeblood of a computer company),
while Computer Power new-product introductions have been described as “mediocre.”
-------------------------------------------------------------------------------------------------------------------------------
INCENTIVE SCHEME
Question18-:- Enton company compensates its junior employees based on 10% of actual income
distributed equally among the 1000 employees payable within 30 days after the and of the year plus 5%
of stock appreciation for the year , 20% of planned income plus 10% of stock- appreciation for the 100
mid- level employees payable within seven months of the current year based on stock values on june 30 th
of the current year, and pays its 10 top- level executives, 30% of the revised income for the current year
and 30% of stock appreciation as of the end September during October of each year.
Planned sales for 2003 amounted to 1.3 bilion dollars. Planned costs included fixed costs .35 billion
dollars and variable costs amounting to 40% of sales. Taxes amount to 24% of income. Revised sales on
9/30th for the year is expected to be 1.1 billion dollars with a 10% increase in variable costs and a 5%
reduction in fixed costs. Actual sales, however, amounted to 8 billion dollars with both fixed and variable
costs being 12% higher the anticipated level.
Stock prices were at $22 at the beginning of the year , $26 as of june 30 th , and $27 as of September 30 th
At the end of the year, in spite of multi- million-dollar audits. Several frauds and manipulation of records
were discovered and the stock price plunged to $1.25. There were a total of 67 million share outstanding
during the year.
Required: Determine planned and actual income and compute compensation per employee for each
group .
Solution:-
In thousands Forecast Revised Actual
Sales $1,300,000 $1,100,000 $800,000
Variable Costs $520,000 $484,000 $358,400
Fixed Costs $350,000 $332,500 $382,000
Operating Income $430,000 $283,500 $49,600
Taxes $103,200 $68,040 $11,904
Net income $326,800 $215,460 $37,696
Stock value $1,474,000 $1,742,000 $83,750
$1,809,000
Compensation Executive Managers Employees
Income percentage $64,638 $65,360 $ 8,375
Stock apprec% $100,500 $26,800 ---
Total Compensation $165,138 $92,160 8,375
Number of employees 10 100 1000
Comp. Per employee $16,513,80 $921,600 8,375
The student and the professor are asked to provide comments and analysis based on their own
understanding of the above secnario and analysis.
-------------------------------------------------------------------------------------------------------------------------------
BALANCESCORE CARD

Question19:- Alan enterprises spent $ 28,600 in employee training in 2002. from a total of 160
employees, eight employees resigned during the year and were replaced with new ones. Employees
succeeded in introducing five innovative ideas for which management gave them recognition and prizes
amounting to $7,500. Defective products amounted to 192 units from a total of 2,400 units produced.
Productive time amounted to 22,500 from a total of 25,000 recorded as processing time. The company’s
sales amounted to $630,000 from a market which is around 9 times this size.3 out of 50 major customers
have gone bankrupt leaving an uncollectible bad debts of around $ 19,700. Variable cost of production
amounted to 56% of sales. Sales commission is at 6%. Fixed costs amount to $129,500 and general and
administration costs amount to $87,450. This is in addition to the employee related costs stated above.
The company has a total asset of $243,000. The company expects to increase the employee related
costs by 25% in 2003 but hope that defects will be reduced by 30%, production efficiency will increase by
7%,sales will increase by 18% - although market will not change in total, and variable costs will decrease
by 8% fixed costs will increase by 3% G & A will increase by 4% . Bad debts will be the same amount.
Total assets will remain at the same level.
Required: Prepare a balanced scorecard for 2002 and its forecast for 2003.
Solution:
Balanced Scorecard for Alan Enterprises
Item Year2002 %change Year2003

1:- ,Organizational growth and learning
Employee training 28,600 25% 35,750
Innovations 7,500 25% 9,375
2:- Business and production process efficiency
Defective Products 0.08 -30% 0.056
Prod. Efficiency 0.9 7% 96.30%
3:- Customer value
Customer risk 3 failed 3 Failure
Market Share 11.11% 13.11%
4:- Financial:
Sales Growth $630.000 18% $743.400
Profitability -5.3% 3.6%
Return on assets -13.72% 10.96%
Income Statement:
Sales $630.000 18% $743,400
Variable Costs $352,800 -8% $383,000
Sales Commission $37,800 $44,604
Fixed costs $129,500 $133.385
G& A $87,450 $90,948
Bad debts $19,700 $19,700
Employee training $28,600 25% $35,750
Innovations $7,500 25% $9,375
Profit $(33,350) $26,638
Assets $243,000 $243,000
THROUGHTPUT COSTING
Question20-:- Billington Corporation makes bicycle frames in two processes, tube cutting and
welding. The tube-cutting and welding process have a practical capacity of 150,000 and 100,000
units per year, respectively. Committed costs of quality activities follows:-
Design of product and process costs…………………………………….$ 220,000.
Inspection and testing costs…………………………………………………..85,000

The demand is very strong. Billington can sell all output it can produce at $180 per frame. It begins
producing only 100,00 units in the tube-cutting department because of the capacity constraint on the
welding process; any defective units it produces are scrapped. Of the 100,000 units started at the
tube-cutting department,1,000 units( 1 percent) normally are scrapped(Scrap is detected at the end
of the tube- cutting operation) Full costs, based on total manufacturing costs incurred through the
tube –cutting operation. Equal $105 per unit.
Direct materials (variables per unit)…………………………… $88
Direct manufacturing setup, and materials handling labor……… 7
Equipment rent, and other overhead(fixed for the year)…….. 10
Full cost per unit …………………………….. $ 105
The tube-cutting department sends its good units to the Welding department. Unit level
manufacturing costs at the welding department are $43.50 per unit. Welders are very highly trained,
and the welding departments has no scrap. Therefore, Billington’s total sales quantity equals the
tube-cutting department’s output. Billington designers are considering several alternative
improvements to reduce scrap in the tube- cutting department.
Alternative1: Leaving the process unchanged but starting enough units in the tube- cutting
department so that the Welding departments can operate at procaticla capacity.
Alternative2:- Using a different type of tubing that is more resistant to damage and would reduce
scrap by 80 percent. It would increase the unit-level costs per unit in the tube- cutting department by
$ 10 but would reduce costs in the welding department by $5.
Alternative 3:- Spending an additional amount on training to reduce scrap in the tube- cutting
process.
Required:-
Form small groups to respond to each of the following items:-
A:- Which alternative 1 or 2 is more attractive financially?
B:- How much would the company be willing to spend on training and how much would scrap
have to be reduced to make alternative 3 as attractive4 as either alternative 1 or 2?
C:- What other qualitative factors should Bilington consider in making the decision?
SOLUTION:-
Date Input Present Alternative 1 Alternative 2
Tubing Capacity 150,000 150,000 150,000
Welding capacity 100,000 100,000 100,000
Units started in tubing 100,000 101,010 100,200
Scrap rate 1.00% 1.00% 0.20%
Units scrapped 1,000 1,010 200
Units completed and sold 99,000 100,000 100,000
Sales Price $180 $180 $180
Costs:
Direct materials, per unit 88 88 98
Variable tube manufacturing per unit 7 7 7
Welding costs, per unit 43.5 43.5 38.5
Manufacturing overhead 1,000,000 1,000,000 1,000,000
Design 220,000 220,000 220,000
Inspection 85,000 85,000 85,000
Solution Present Alternative 1 Alternative 2
Sales $17,820,000 $18,000,000 $18,000,000
Variable costs of units sold
Direct materials 8,712,000 8,800,000 9,800,000
Costs of Scrap 138,500 139,899 28,700
Variable tube manufacturing 693,000 700,000 700,000
Welding 4,306,500 4,350,000 3,850,000
Total variable costs 13,850,000 13,989,899 14,378,700

Contribution margin 3,970,000 4,010,101 3,621,300
Committed costs
Manufacturing overhead 1,000,000 1,000,000 1,000,000
Design 220,000 220,000 220,000
Inspection 85,000 85,000 85,000
Total Committed costs 1,305,000 1,305,000 1,305,000
Operating Profit $2,665,000 $2,705,101 $2,316,300
-------------------------------------------------------------------------------------------------------------------------------
TQM
Question21- :- A drug treatment day center run by a charity organization wishes to improve the
quality of its service to patients by the addition of extra facilities.
After much research it has drawn up a short list of five Separate possible improvements and has
assessed their outcomes using the following criteria:
Criterion A: Reduced average number of waiting hours per month per patient.
Criterion B: Increased percentage frequency of seeing patients when they attend.
Criterion C: Reduced average number of month to cure per patient.
Criterion D: Increased percentage frequency of patient attendance at the center.
The assessed outcomes are:
Improvement Extra facilities Outcome according to criterion
Reference number
A B C D
Hours % Months %
1 Increase medical staff by 2 4.8 35 1 5
Doctors and 1 nurse
2 Increase counseling staff by 2 6 20 1.25 10
Counselors and 1 nurse
3 Taxi service to bring patients to 2 12 0.75 22
And from the center
4 Extend by 20 hours per month 4 30 1.5 10
The time the center is open
5 Introduce group counseling - 10 1.75 15
Sessions.
At present the center is open for 160 hours per month and deals with 3,000 patients. The
proposed improvement will have no effect on the number of patients seen. The professional staffs
currently employed are 5 doctors, 7 counselors and 4 nurses. The taxi service is expected to be
used by 60% of patients with an average attendance of once per month. Each taxi carry an
average of 1.2 patients and the cost to the center will be Rs. 0.20 per mile. Total distances that
patients are expected to be carried per attendance are:
(%) Percentage of patients
10miles 20
20 miles 40
30 miles 40
100
The costs of extra facilities would be:
Cost p.a. Associated capital
Equipment costs
Doctors salary Rs. 22,000 Rs. 5,000
Doctors expenses 3,000 ---
Counselors salary 16,000 2,000
Counselors expenses 1,500 --
Nurse’s salary 10,000 1,000

Nurse’s expenses 2,000 --
These costs are depreciated over five years on a straight-line basis with no residual value.
Extra administration/ establishment costs are Rs. 200 per month per person.
If hours are extended beyond 160 per month, overtime will need to be paid at a premium of 25%
on salaries (but not expenses) and an extra Rs. 4,000 per annum will be incurred for
administration/ establishment costs.
Group counseling sessions will require:
1 Specialist counselor costing Rs. 3,000 p.a. more than ordinary counselors.
1 assistant counselor costing Rs. 2,000 p.a. less than ordinary counselors.
1 nurse
Capital costs will be the same as for ordinary counselors.
The Centers capital requirements will be borrowed from the bank at 12% p.a. The interest and all
other costs will be met by donations. The depreciation charge will be used to reduce the loan at
the end of each year. Cost of working capital can be ignored.
You are required to:
(a) Calculate for each improvement the incremental cost:
(i) Per patient per month
(j) For the appropriate unit of each of the four criteria.
(b) Identify the improvement with the lowest cost in (a) (ii) above for each of the four criteria.
SOLUTION:-
(a) Incremental costs.
Improvement No. 1 Rs. Per annum
Extra 2 doctors- salary and expenses 50,000
Extra 1 nurse- salary and expenses(1000 +2500) 12,000
Administration costs 3 X 2,400 7,200
Depreciation 20% of Rs. 11,000 2,200
Interest on loan for capital equipment 12% of 11,000 + Rs. 8,800 + Rs. 6.600 792
+ Rs. 4,400+ Rs. 2,200 )  5 ______
*2 X Rs. 5,000 + Rs. 1,000 72,192
Improvement No. 2
Extra 2 counselors- salary and expenses 35,000
Extra 1 nurse- salary and allowances 12,000
Administration cost 3 X Rs. 2,400 7,200
Depreciation 20%of Rs. 5,000 1,000
Interest on loan for capital equipment 12% of 360
(Rs. 5,000 + Rs. 4,000 + Rs. 3,000+ Rs. 2,000 + Rs. 1,000)  5 ---------
55,560
Improvement No. 3
Taxi service 3,000  1.2 patients X 0.6 X 12 month X 79,200
22 miles* X Re. 0.20
*(10X0.2 +20 X 0.4 + 30 X 0.4) = 22 miles
Improvement No.4
Doctor’s salaries(5 X Rs. 22,000) Rs. 1,10,000
Counselors salary (7 X Rs 16,000) 1,12,000
Nurses salary (4X Rs 10,000) 40,000
2,62,000 X (20  160 X 1.25)
40,938
Extra administration cost 4,000
Total 44,938
Improvement No 5

1 specialist counselor –salary & expenses Rs 20,500
1 assistant counselor- salary & expenses 15,500
1 nurse – salary & expenses 12,000
Administration costs 3X Rs 2,400 7,200
Depreciation20% of Rs. 5,000 1,000
Interest on loan for capital equipment12%of(Rs 360
5,000 + Rs 4,000+ Rs 3,000+Rs2,000+ Rs 1,000)
5 -------------
56,560
(i)Incremental cost per patient per month
Improvement No Rs Rs
1 72,192 36,000 2.01
2 55,56036,000 1.54
3 79,20036,000 2.2
4 44,93836,000 1.25
5 56,560 36,000 1.57
(ii)Incremental cost for each of the four criteria

Improvement No. 1 A Rs. 2.01 / 4.8 Rs. 0.42
B Rs. 72,192/ (12X 35) 171.89
C Rs. 72,192 / ( 36,000 X1 ) 2.01
D Rs. 72,192/ (12X 5) 1,203.20
Improvement No.2 A Rs. 1.54 / 6 0.26
B Rs. 55,560 / ( 12X 20) 231.50
C Rs. 55,560/ ( 36,000 X 1.25) 1.23
D Rs. 55,560 / (12X 10) 463
Improvement No 3 A Rs. 2.20/ 2 1.10
B Rs. 79,200 / (12X 12) 550.00
C Rs. 79,200 /(36,000 X 0.75) 2.93
D Rs. 79,200 / ( 12X 22) 300
Improvement No.4` A Rs.1.25/4 0.31
B 44,938/ (12X30) 124.83
C 44,938/ ( 36,000 X 1.5) 0.83
D 44,938/ ( 12 X 10) 374.48
Improvement No.5 A
B 56,560/ (12 X 10) 471.33
C 56,560 /(36,000 X1.75) 0.90
D 56,560/ (12X 15) 314.22
(a) Improvements with lowest costs under each criterion.
A Improvement 2
B Improvement 4
C Improvement 4
D Improvement 3
-------------------------------------------------------------------------------------------------------------------------------
VALUE ENGINEERING
Question22:- The Operating result of a department provide the following information for a
particular week:
Average output per week 48,000 units
Salable value of output Rs. 60,000
Contribution on above Rs. 24,000
The management is contenting to bring about more mechanization in the department at a capital
cost of Rs. 16,000 which will result in reduction in number of workmen from the present strength of 160
nos. to 120 nos. However due to mechanical help, the output of individual workmen will increase by 60%.

The existing piece rate is Rs. 0.10 per article and as an incentive, the management propose to increase
the existing piece rate by 5% for every 10% increase in the individual output achieved.
There will be a reduction in sale price by 4% to sell the increased production.
You are required to calculate extra weekly contribution resulting due to proposed changes.
Solution:- The operating results of a department provide the following information for a
particular week:
Average output per week 48,000 units
Saleable value of output Rs. 60,000
Contribution on above Rs.24,000
The management is contemplating to bring about more mechanization in the department at a capital cost
of Rs. 16,000whuch will result in reduction in number of workmen from the present strength of 160nos.to
120 nos..However due to mechanical help, the output of individual workmen will increase by 60%.The
existing piece rate is Rs. 0.10 per article and as an incentive , the management propose to increase the
existing piece rate by 5% for every 10% increase in the individual output achieved. There will be a
reduction in sale price by 4% to sell the increased production.
You are required to calculate extra weekly contribution resulting due to proposed changes.
Rs.
(i) Sales per week 60,000
Contribution 24,000
Variable cost 36,000
Less wages(010X48,000pc) 4,800
Variable cost excluding wages 31,200 i.e 31,20/48,000 = Rs/ 0.65 per Pc
(ii) Future expected production Units/ employee
Production per employee = 48,000/160 = 300
Add increase by 60% 180
480
Total future production from 120 workmen = 57,600.
Rs.
(iii) Expected selling price
Present price Rs. 60,000/48,000= 1.25
Less reduction by 4% = 0.05
Revised Price 1.20
(iv) Revised piece rate wages Rs.

Present rate 0.10
Incentive 0.03
(5% X 60% = 3%) 0.13
(iv) Forecast of Profitability
Sales (57,600 units X Rs. 1.20) 69,120
Less Variable cost Rs.
Wages @ Rs. 0.13 7,4800
Other overheads
(excluding wages @ Rs. 0.65) 37,440 44,928
Contribution 24,192
Present Contribution 24,000
Increase in contribution Rs. 192
----------------------------------------------------------------------------------------------------------------
BALANCE SCORE CARD

Question23:- Caltex, Inc, refines gasoline and sells it through its own Gas stations. On the basis of
market research. Caltex determines that 60% of the overall gasoline market consist of “ service –oriented
customers,” medium to high income individuals who are willing to pay a higher price for gas if the gas
stations can provide excellent customer service, such as a clean facility a convince store, friendly
employees, a quick turnaround, the ability to pay by credit card, and high substance premium fuel. The
remaining 40% of the overall market are “Price shoppers” who look to buy the cheapest gasoline
available. Caltex’s strategy is to focus on the 60% of service oriented customers. Caltex’s balance
scorecard for 2004 follows. For brevity the initiatives taken under each objective are omitted.
Target Actual
Objectives Measures Performance Performance
Financial Perspective
Increse shareholder value Operating income changes $90,000,000 $95,000,000
From price recovery
Operating income changes $65,000,000 $67,000,000
From Growth
Customer Perspective
Increase market share Market share of overall 10% 9.8%
Gasoline market
Internal Business Process Perspective
Improve gasoline quality Quality index 94 points 95 points
Improve refinery Refinery reliability index (%) 91% 91%
Performance
Ensure gasoline Product availability index (%) 99% 100%
Availability
Learning and Growth Perspective
Increase refinery Process Percentage of refinery 88% 90%
Processes with advanced
Controls
1. Was caltex successful in implementing its strategy in 2004? Explain your answer.
2. Would you have included some measure of employee statislaction and employee training in the
learning and growth perspective? Are these objectives critical to caltex for implementing its
stategy? Why or why not? Explain briefly.
3. Explain how caltex did not achieve its target market share in the total gasoline market but still
exceeded its financial targets. Is “ market share of overall gasoline market” the correct measure
of market share? Explain briefly.
4. Is there a cause- and – effect linkage between improvements in the measures in the internal
business process perspective and the measures in the customers perspective? That is would you
add other measures to the internal business process perspective of the customer perspective?
Why or why not? Explain briefly.
5. Do you agree with Caltex’s decision not to include measures of changes in operating income from
productivity improvements under the financial perspective of the balanced scorecard? Explain
briefly.
Solution:-
1:- Caltex’s strategy is to focus on “Service –oriented customers ”who are willing to pay a higher
price for services. Even though its product is largely a commodity product, gasoline, Caltex
wants to differentiate itself though the service it provides at its retailing station
Does the scorecard represent Caltex’s strategy? By and large it does . The focus of the
scorecard ison measures of process improvement, quality, market share, and financial success
from product differentiation and charging higher prices for customer service. There are some
deficiences that the subsequent assignment questions raise but, abstracting from these
concerns for the moment, the scorecard does focus on implementing a product differentiation
strategy.

Having concluded that the scorecard has been reasonably well designed, how has Caltex
performed relative to its strategy in 2004? It appears from the scorecard that Caltex was
Successful in implementing its strategy in 2004. It achieved all targets in the financial,
internal successful in implementing its strategy in 2004. It achieved all targets in the financial,
internal business, and learning and growth perspectives. The only target it missed was the
market business and learning and growth perspectives. The only target it missed was the
market share target in the customer perspective. At this stage, students may raise some
questions about whether this si a good scorecard measure .Requirement 3 gets at this issue in
more detail. The bottom line is that measuring ”market share in the overall gasoline market”
rather than in the “Service-oriented customer” market segment is not a good scorecard
measure, so not achieving this target may not be as issue as it may seem at first.
2:- Yes, Caltex should include some measure of employee satisfaction and employee training in
the learning and growth perspective. Clatex’s differentiation strategy and ability to charge a
premium price is based on customer service. The key to good, fast and friendly customer
service is well trained and satisfied employees. Untrined and dissatisfied employees will have
poor interactions with customers and cause the strategy to fail. Hence, training and employee
satisfaction are very important to Caltex for implementing its strategy. These measures are
leading indicators of whether Caltex will be able to successfully implement its strategy and
hence, should be measured on the balanced scorecard.
3:- Caltex’s strategy is to focus on the 60% of gasoline consumers who are service-oriented not
on the 40% price-shopper segment. To evaluate if it has been successful in implementing its
strategy. Caltex needs to measure its market share in its targeted market segment. “Service
oriented customer” not its market share in the overall market. Given caltex’s strategy, it should
not be concerned if its market share in the price-shopper segment decline. In fact, charging
premium prices will probably cause its market share in this, segment to decline.
Caltex should replace “market share in overall gasoline market” with “market share in the
service- oriented customer segment” in its balanced scorecard customer measure. Caltex may
also want to consider putting a customer satisfaction measure on the scorecard. This measure
should capture an overall evaluation of customer reactions to the facility, the convenience store,
employee interactions, and quick turnaround. The customer satisfaction measure would serve
as a leading indicator of market share in the service-oriented customer segment.
3. Although there is a cause-and-effect link between internal business process measures

and customer measures on the current scorecard, caltex should add more measures to
tighten this linkage. In particular, the current scorecard measures focus exclusively on
refinery operations and not on gas station operations. Caltex should add measures of
gas station performance such as cleanliness of the facility, turnaround time at the gas
pumps, the shopping experience at the convenience store, and the service provided by
employees. Many companies do random audits of their facilities to evaluate how well
their branches and retail outlets are performing. These measures would serve as leading
indicators of customer satisfaction and market share in caltex’s targeted segments.
4. Caltex is correct in not measuring changes in operating income from productivity

improvements on its scorecard under the financial perspective. Caltex,s strategy is to
grow by charging premium prices for customer service. The scorecard measures focus
on caltex’s success in implementing this strategy. Productivity gains per se are not
critical to caltex’s strategy and, hence, should not be measured on the scorecard
-------------------------------------------------------------------------------------------------------------------------

Question24:- Road Warrior Corporation assembles handheld computers that have scaled –down
capabilities of laptop computers. Each handheld computer takes 6 hours to assemble. Road Warrior uses
a Jit production system a backflush costing system with three trigger points:
Purchase of direct (raw)Materials Sale of finished goods
Completion of good finished units of product
There are no beginning inventories of materials or finished goods. The following data are for August
2003:
Direct (Raw ) Materials purchased $2,754,000 Conversion costs incurred $723,600
Direct (raw) materials used 2,733,600 Conversion costs allocated 750,400
Road Warrior records direct materials purchased and conversion costs incurred at actual costs. When
finished goods are sold, the backflush costing system “pulls through” standard direct materials costs
($102 per unit) and standard conversion costs ($28 per unit). Road Warrior produced 26,800 finished
units in August 2003 and sold 26,400 units. The actual direct materials cost per unit in August 2003 was
$102, and the actual conversion cost per unit was $27.
Required:-
1:- Prepare summary journal entries for August 2003 ( without disposing of under or over allocated
conversion Cost).
2:- Post the entries in requirements 1 to T-accounts for applicable inventory. Direct and in-Process
Conversion Costs Control, Conversion Costs Allocated and cost of goods Sold.
3:- Under an ideal JIT production system, how would the amounts in your journal entries differ from those
in requirements 1 ?
(a) The Backflush costing, two trigger points, materials purchase and sale ( continuation of previous
question).
Assume the same facts as in Previous question except that Road Warrior now uses a backflush costing
system with the following two trigger points:
Purchase of direct (raw) materials Sale of finished goods
The inventory Control account will include direct materials purchased but not yet in production, materials
in work in process, and materials in finished goods but not sold. No conversion costs are inventioned. Any
under- or over allocated conversion costs are written off monthly to Cost of goods Sold.
( B) The backflush costing, two trigger points, completion of production and sale ( continuations of last
question) Assume the same facts as in last question , except now Road Warrior uses only two trigger
points, the completion of good finished units of product and the sale of finished goods. Any under-or over
allocated conversion costs are written off monthly to Cost of goods Sold.
Required:-
1:- Prepare summary journal entries for August including the disposition of under – or over allocated
conversion costs.
2:-Post the entries in requirement 1 to T-accounts for Finished goods control, Conversion Cost Control,
Conversion Costs Allocated and Cost of goods Sold.
Solution:-
BACKFLUSH COSTING AND JIT PRODUCTION
(a) Purchases of Inventory: Direct and In-Process Control 2,754,000 2,754,000
direct materials Accounts Payable Control
Incur conversion Conversion Costs Control 723,600
costs Various Accounts 723,600
Completion of Finished Goods Control(a) 3,484,000
finished goods Inventory :Direct and In-Process Control 2,733,600
Conversion Costs Allocated 750,400
Sale of finished Cost of Goods Sold(b) 3,432,000
goods Finished Goods Control 3,432,000
A:- 26,800 X($102 + $28) = $3,484,000.
B:- 26,400 X($102 + $28) = $3,432,000

Inventory: FinishedGoods
Direct and in-Process Control Control Cost of Goods Sold
Direct
Direct (a) 2,754,000 (c)2,733,600 (c) 3,484,000 (d) 3,432,000 (d)3,432,000
Materials
Materials Bal. 20,400 Bal.52,000
Conversion Costs Allocated

© 750,400
Conversion
Conversion
Costs
Costs Conversion Costs Control
(b) 723,600
3:- Under an ideal JIT production system, there could be zero inventories at the end of each
day. Entry © would be $ 3,432,000 finished goods production, not $3,484,000. Also there
would be no inventory of direct materials instead of $2,754,000 - $2,733,600 = $20,400.
Back Flush costing, two trigger points, materials purchase and sale
(a) Purchases of Inventory Direct and In-Process Control 2,754,000 2,754,000

direct materials Accounts Payable Control
Completion of
finished goods
Sale of finished Cost of Goods Sold 3,432,000
goods Inventory Control 2,692,800
Under allocated or Conversion Costs Allocated 739,200
Over allocated Costs of Goods Sold 15,600
Conversion Costs
Conversion Costs Control 723,600
Inventory:
Control Cost of Goods Sold
Direct
Direct (a) 2,754,000 (d)2,692,800 (c) 3,432,000 (e) 15,600
Materials
Materials Bal. 61,200

(e) 739,200 (d) 739,200,
Conversion
Conversion
Costs

(b) 723,600 (e)723,600
(a) Purchases of No entry

direct materials
Completion of Finished Goods Control 3,484,00
finished goods Accounts Payable Control 2,733,600
750,400
Sale of finished Cost of Goods Sold 3,432,000
goods Finished Goods Control 3,432,000
Under allocated or Conversion Costs Allocated 750,400
Over allocated Costs of goods Sold 26,800
Conversion Costs Conversion Costs Control 723,600
Finished Goods Control Cost of Goods Sold
Direct © 3,484,000 (d) 3,432,000 (d) 3,432,000 (e) 26,800

Materials Bal. 52,000

(e) 750,400 © 750,400
Conversion Conversion Costs Control

Costs (b) 723,600 (e) 723,600
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Question25-:- (Theory of constraints, throughput contribution, relevant cost). Colorado
industries manufactures electronic testing equipment Colorado also installs the equipment at customers’
sites and ensures that it functions smoothly. Additional information on the manufacturing and installation
departments is as follows (capacities are expressed in terms of the number of units of electronic testing
equipment):
Equipment Equipment
Manufactured Installed
Annual capacity 400 units per year 300 units per year
Equipment manufactured and installed 300 units per year 300 units per year
Colorado manufactures only 300 units per year because the installation Department has only enough
capacity to install 300 units. The equipment sells for $40,000 per unit (installed) and has direct materials
costs of $ 15,000. All costs other than direct materials costs are fixed. The following requirements refer
only to the preceding data. There is no connection between the requirements.

Required:-
1. Colorado’s engineers have found a way to reduce equipment manufacturing time. The new
method would cost an additional $50 per unit and would allow Colorado to manufacture 20
additional units a year. Should Colorado implement the new method? Show your calculations.
2. Colorado’s designers have proposed a change in direct materials that would increase direct
materials costs by $2,000 per unit. This change would enable Colorado to install 320 units of
equipment each year. If Colorado makes the change, it will implement the new design on all
equipment sold. Should Colorado use the new design? Show your calculation.
3. A new installation technique has been developed that will enable Colorado’s engineers to install
10 additional units of equipment a year. The new method will increase installation costs by
$50,000 each year. Should Colorado implement the new techniques? Show your calculations.
4. Colorado is considering how to motivate workers to improve their productivity (output per hour).
One proposal is to evaluate and compensate workers in the manufacturing and installation
departments on the basis of their productivities. Do you think the new proposal is a good idea?
Explain briefly.
Solution:-
It will cost Colorado $50 per unit to reduce manufacturing time. But manufacturing is not a
bottleneck operation; installation is. Therefore manufacturing more equipment will not increase
sales and throughput contribution. Colorado Industries should not implement the new
manufacturing method.
2:- Additional relevant costs of new direct materials$2,000 X320 units $640,000
Increase in throughput contribution $25,000X 20 units $ 500,000
The additional incremental costs exceed the benefits from higher throughout contribution by
$140,000, so ColoraO industries SHOULD NOT IMPLEMENT THE NEW DESIGN.
Alternative, compare throughput contribution under each alternative

Current throughput contribution is $25,000 X 300 $7,500,000
With the modification, throughput contribution is $23,000X 320 $7,360,000
The current thoughput contribution is greater than the throughput contribution resulting from the
proposed change in direct materials. Hence Colordo industries should not implement the new
design.
3:- Increase in throughput contribution $25,000 X10 units $250,000
Increase in relevant costs $50,000
The additional throughput contribution exceeds incremental costs by $200,000, so Colorado
Industries should implement the new installation technique.
4:- Motivating installation workers to increase productivity is worthwhile because installation is a
bottleneck operation, and any increase in productivity at the bottleneck will increase thoughput
contribution. On the other hand, motivating workers in the manufacturing department to increase
productivity is not worthwhile. Manufacturing is not a bottleneck operation, so any increase in
output will result only in extra inventory of equipment. Colorado Industries should encourage
manufacturing to produce only as much equipment as the installation department needs, not to
produce as much as it can. Under these circumstances, it would not be a good idea to evaluate
and compensate manufacturing workers on the basis of their productivity.
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Question26:- Theory of Constraints, throughout contribution, quality, relevant costs.
Aardee industries manufactures pharmaceutical products in two departments: Mixing and Tablet –Making.
Additional information on the two departments follows. Each tablet contains 0.5 gram of direct materials.
Mixing Tablet Making
Capacity per hour 150 grams 200 tablets

Monthly capacity (2,000 hours available
In each of mixing and tablet making) 300,000 grams 400,000 tablets
Monthly production 200,000 grams 390,000 tablets
Fixed operating costs(excluding direct materials) $16,000 $ 39,000
Fixed operating costs per tablet
($16,000 / 200,000; $39,000 / 390,000) $0.08 per gram $0.10 per tablet
The Mixing Departments makes 200,000 grams of direct materials mixture(enough to make 400,000
tablets) because the Tablet-Making Departments has only enough capacity to process 400,000
tablets. All direct materials costs are incurred in the Mixing Department. Aardee incurs $156,000 in
direct materials costs. The tablet –Making Department manufactures only 390.000 tablet from the
200,000 grams of mixture processed; 2.5% of the direct materials mixture is lost in the tablet-making
process. Each tablet sells for $1.All costs other than direct materials costs are fixed costs. The
following requirements refer only to the preceding data.
There is no connection between the requirements.
1:- An outside contractor makes the following offer. If Aardee will supply the contractor with 10,000
grams of mixture, the contractor will manufacture 19,500 tablets for Aardee following for the normal
2.5% loss during the tablet-making process at $0.12 per tablet. Should Aardee accept the
company’s offer? Show your calculations.
2:- Another company offers to prepare 20,000 grams of mixture a month from direct materials
Aardee supplies. The company will charge $0.07 per gram of mixture. Should Aardee accept the
company’s offer? Show your calculations.
3:- Aardee’s engineers have devised a method that would improve quality in the tablet-making
operation. The estimate that the 10,000 tablets currently being lost would be saved. The
modification would cost $7,000 a month. Should Aardee implement the new method? Show your
calculation.
4:- Suppose that Aardee also loses 10,000 grams of mixture in its mixing operation. These losses
can be reduced to zero if the company is willing to spend $9,000 per month in quality-improvement
methods. Should Aardee adopt the quality improvement method? Show your calculations.
5:- What are the benefits of improving quality at the mixing operation compared with improving
quality at the tablet-making operation?
Solution:-
Theory of Contrains, toughput contribution, quality relevant costs.
1:- Direct materials costs to produce 390,000 tablets, $156,000
$156,000
Direct materials costs per tablet = --------------- = $0.40 per tablet
390,000
Selling price per tablet= $1.00
Unit throughput contribution = Selling price – Unit direct materials costs
= $1.00 - $0.40 = $ 0.60 per tablet
Tablet making is a bottleneck operation. Hence producing 19,500 more tablets will generate
additional operating income.
Additional operating income Unit throughput Additional operating
Per contractor made tablet contribution costs per tablet
= $0.60 - $0.12 = $0.48

Increase in operating income $0.48 X 19,500 = $9,360. Hence Aardee should accept the
outside contractor’s offer.

2:- Operating costs for the mixing department are a fixed cost. Contracting out the mixing
activity will not reduce mixing department costs but will cost an additional $0.07 per gram of
mixture. Mixing more direct materials will have no effect on throughput contribution, since tablet
making is the bottleneck operation. Therefore Aardee Should reject the company offer.
3:- The benefit of improved quality is $10,000. Aardee is using the same quantity of direct
mateials as before, so it incurs no extra direct materials costs. The 10,000 extra tablets
produced generate additional revenue of $ 10,000(S1 X 10,000 tablets) a month. The
modification costs $7,000 per month, which results in a net gain of$3,000.
4 $156,000
Cost per gram of mixture = ------------ = $0.78 per gram
200,000
Cost of 10,000 grams of mixture = $0.78 X10,000 = $7,800.
Benefit from better mixing quality $7,800 per month
Cost of improving the mixing operation $9,000 per month
Since the costs exceed the benefits by $1,200 per month, Aardee should not adopt the
proposed quality improvement plan.
5:- Compare the answers to requirements 3 and 4. The benefit of improving quality at the mixing
operation is the savings in materials costs. The benefits of improving quality of the tablet-making
department(the bottleneck operation) is the savings in materials costs plus the additional
throughput contribution from higher sales equal to the total revenues that result from relieving
the bottleneck constraint.
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Question27-: - (Supplier evaluation and relevant costs of quality and timely deliveries).
Copeland sporting goods is evaluating two suppliers of footballs, Big red and quality sports.
Pertinent information about each potential supplier follows:
Relevant Item Big red Quality sports
Purchase price per unit (case) $50 $51
Ordering costs per order $6 $6
Inspection costs per unit $.02 0
Insurance, material handling, and $4.00 $4.50
So on per unit per year
Annual demand 12,000 units 12,000 units
Average quantity of inventory held 100 units 100 units
During the year
Required return on investment 15% 15%
Stock out costs per unit $20 $10
Stock outs per year 350 units 60 units
Customer returns 300 units 25 units
Customer- return costs per unit $25 $25
Required: Calculate the relevant costs of purchasing (1) from big red and (2) from quality
sports using the format prescribed. from whom should cape land buy footballs?
SOLUTION:-
Annual Relevant Costs of Purchasing from Big Red and Quality Sports.
Relevant Costs of Purchasing From
Relevant Item Big Red Quality Sports

Purchasing Costs
$50per unit X12,000 units per year 6,00,000
$51 per unit X 12,000 units per year $612,000
Ordering costs
$6 per order X 60 orders per year 360
$6 per order X 60 orders per year 360
Inspection Costs
$0.02 per unit X 12,000 units 240
No inspection necessary 0
Opportunity carrying costs required return
On investment
15% per year X $50 cost per unit X
100 units of average inventory per year 750
15% per year X $ 51 Cost per
unit X 100 units of average 765
inventory per year
Other carrying costs (insurance, material handling and
so on)
$4 per unit X 100 units of average 400
inventory per year
$4.50 per unit X 100 units of average
inventory per year 450
Stock out costs
$20 per unit X 350 units per year 7,000
$10 per unit X 60 units per year 600
Customer returns costs
$25 per unit X 300 units 7,500
$25 per unit X 25units 625
$616,250 $614,800
Annual difference in favor of Quality Sports $1,450
NO. of order place.
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BACKFLUSH COSTING
Question28- - Back flush costing and JIT production. The Acton Corporation
manufactures electrical meters. For august, there were no beginning inventories of direct
materials and no beginning or ending work process. Acton uses a JIT production system and
back flush costing with three trigger points for making entries in the accounting system:
 Purchase of direct materials- debited to inventory: direct and In- process control
 Completion of good finished units of product- debited to finished goods control
 Sale of finished goods
Acton’s August standard cost per meter is direct materials $25, and conversion costs $20.
The following data apply to August manufacturing:
Direct materials purchased $550,000 Number of finished units
Conversion costs incurred $440,000 manufactured 21,000
Number of finished units sold 20,000

Continuations of Previous Question:- Assume the same facts as in Previous question
except that Road Warrior now uses a backflush costing system with the following two trigger
points:
Purchase of direct (raw) materials Sale of finished goods
The inventory Control account will include direct materials purchased but not yet in production,
materials in work in process, and materials in finished goods but not sold. No conversion costs
are inventioned. Any under- or over allocated conversion costs are written off monthly to Cost
of goods Sold.
Continuations of Previous Question:- Assume the same facts as in last question , except
now Road Warrior uses only two trigger points, the completion of good finished units of product
and the sale of finished goods. Any under-or over allocated conversion costs are written off
monthly to Cost of goods Sold.
Required:-
1:- Prepare summary journal entries for August including the disposition of under – or over
allocated conversion costs.
2:-Post the entries in requirement 1 to T-accounts for Finished goods control, Conversion Cost
Control, Conversion Costs Allocated and Cost of goods Sold.
SOLUTION
Blackflush Costing and JIT Production
(a)
Purchase of Direct Inventory: Direct & in-process 550,000 550,00
materials Control Accounts Payable Control
Incur Conversion costs Conversion Costs Control 440,000
Various Accounts 440,000
Completion of finished goods Finished Goods Controla 945,000
Inventory Direct & in Process Control 525,000
Sale of finished Goods Cost of Goods Soldb 900,000

Finished Goods Control 900,000
A: 21,000 X $45($25+$20) = $945,000
B: 20,000X$45 =$9000,000
2:-
Inventory
Direct Direct and In-Process Control Finsihed Goods Control Cost of goods Sold
Mareial (a) 550,00 (c) 525,000 (c) 945,000 (d) 900,000 (d) 900,000
Bal. 25,000 Bal 45,000
Conversion © 420,000
Costs
Conversion Costs Control
(b) 440,000
BACKFLUSH, TWO TRIGGER POINTS, MATERIALS PURCHASE AND SALE

Purchase of Direct materials Inventory Control 550,000 550,00
Accounts Payable Control
Various Accounts 440,000
(Such as Accounts Payable
Control and Wages Payable)
Completion of finished goods No entry
Sale of finished Goods Cost of Goods Sold 900,000

Inventory Control 500,000
Under allocated Conversion Costs Allocated 400,000

Or Over allocated Cost of Goods Sold 40,000
Inventory Control Cost of Goods Sold
Direct (a) 550,000 (d) 500,000 (d) 900,000

Materials
Bal 50,000
Conversion costs Allocated

(e) 400,000 (d) 400,000
Conversion (e) 40,000
(b) 440,000 (e) 440,000
Purchase of Direct materials No entry

Various Accounts
(such as Accounts Payable)
Control and Wages Payable) 440,000
Completion of finished goods Finished Goods Control 945,000
Accounts Payable Control 525,000
Sale of finished Goods Cost of Goods Sold 900,000
Finished Goods Control 900,000
Under allocated Conversion Costs Allocated 420,000

Or Over allocated Cost of Goods Sold 20,000
Finished Goods Control Cost of Goods Sold

Direct © 945,000 (d) 900,000 (d) 900,000
Mareials

(e) 420,000 © 420,000
Conversion (e) 20,000
Costs
Conversion Costs Control
(b) 440,000 (e) 440,000
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Question29-:- The Waterloo, Ontario, plant of Maple Leaf Motors assembles the carus
motor vehicle. The standard unit manufacturing cost per vehicle in 2003 is
Direct materials $6,000
Direct manufacturing labor 1,800
Variable manufacturing overhead 2,000
Fixed manufacturing overhead?
The Waterloo plant is highly automated. Maximum productive capacity per month is 4,000
vehicles. Variable manufacturing overhead is allocated to vehicle on the basis of assembly time.
The standard assembly time per vehicle is 20 hours. Fixed manufacturing overhead in 2003 is
allocated on the basis of the standard assembly time for the budgeted normal capacity utilization
of the plant. In 2003, the budgeted normal capacity utilization is 3,000 vehicles per month. The
budgeted monthly fixed manufacturing overhead is $7,500,000.
On January 1, 2003 there is Zero beginning inventory of Lcarus vehicles. The actual unit
production and sales figures for the first months of 2003 are
January February March
Production 3,200 2,400 3,800
Sales 2,000 2,900 3,200
Assume no direct materials variances , no direct manufacturing labor variances, and no
manufacturing overhead spending or efficiency variances in the first three months of 2003.
Bret Hart, a vice president of Mapale Leaf Motors, is the manager of the Waterloo plant.
His compensation includes a bonus that is 0.5% of quarterly operating income. Operating income
is calculated using absorption costing. Maple Leaf Motors prepares absorption-costing income
statements monthly, which includes an adjustment to cost of goods sold for the total
manufacturing variances occurring in that month .
The Wasterloo plant ”Sells” each Lcarus to maple Leaf’s marketing subsidiary at
$16,000 per vehicle. No marketing costs are incurred by the Waterloo plant.
Required:- 1:- Compute (a) the fixed manufacturing overhead cost per unit and (b) the total
manufacturing cost per unit.
2:- Compute the monthly operating income for January, February and March under absorption
costing What bonus is paid each ,month to Bret Hart?
3:- How much would use of variable costing change Hart’s bonus each month if the same 0.5%
figure were applied to variable costing operating income?
4:- Explain the differences in Hart’s bonuses in requirements 2 and 3.
5:- How much would use of throughout costing change Hart’s bonus if the same 0.5% figure
were applied to throughout costing operating income?
6:- Outline different approaches Maple Leaf Motors could use to reduce possible undesirable
behaviour associated with the use of absorption costing at its Waterloo plant.
Solution:-

(a) Unit Fixed manufacturing $7,500,000
Overhead Cost 3,000 vehicles X 20 standard hours
$7,500,000
60,000
= $125 per standard assembly hour or $2,500
per vehicle
(b) Direct materials per unit $6,000
Direct manufacturing labor per unit 1,800
Variable manufacturing overhead per unit 2,000
Fixed manufacturing overhead per unit 2,500
Total manufacturing cost per unit $12,300
2. Accounts in Thousands
Absorption Costing
Revenues ($16,000 X 2,000; 2,900;3,200) $32,000 $46,400 $51,200
Cost of Goods Sold
Beginning inventory 0 14,760 8,610
Variable manufacturing costs($9.8X3,200; 2,400;3800) 31,360 23,520 37,240
Fixed manufacturing costs ($2.5X3,200;2,400;3,800) 8,000 6,000 9,500
Cost of goods available for sale 39,360 44,280 55,350
Debuct ending inventory ($12.3X1,200;700;1,300) 14,760 8,610 15,990
Cost of goods Sold (at standard Cost) 24,600 35,670 39,360
Adjust for manuf.variances 500F 1,500U 2,000F
Total cost of goods sold 24,100 37,170 37,360
Gross margin 7,900 9,230 13,840
Marketing costs 0 0 0
Operating income $7,900 $9,230 $13,840
Inventory Details (units)
Beginning inventory
Production 0 1,200 700
Goods available for sale 3,200 2,400 3,800
Sales 3,200 3,600 4,500
Ending inventory 2,000 2,900 3,200
1,200 700 1,300
Invnetory Details ($12,300 per unit)
Beginning inventory ($12,300 per unit)
Ending inventory ($1,000s) $ 0 $14,760 $8,610
$14,760 $8,610 $15,9900
Computation of Bonus January February March
Operating income $7,900,00 $9,230,0 $13,840,000
X 0.5% 0 00 $69,200
$39,500 $46,150
Production –volume variances= (Denomination level –production) X Budgeted rate
January (3,000 – 3,200) X $ 2,500 per vehicle = $500,000 F
February: (3,000 – 2,400) X $2,500 per vehicle = $1,500,000U
March : (3,000 – 3,800) X $2,500 per vehicle = $2,000,000F

3:- Amounts in thousands Variable Costing
Revenues $32,000 $46,400 $51,200
Variable Costs
Beginning inventory 0 11,760 6,860
Variable manuf costs ($9.80X3,200,2,400, 3,800) 31,360 23,520 37,240
Deduct ending inventory($9.80X1,200;700,1,300) 11,760 6,860 12,740
Variable COGS 19,600 28,420 31,360
Variable marketing costs 0 0 0
Variable costs(at standard cost) 19,600 28,420 31,360
Adjustment for variances 0 0 0
Total variable costs 19,600 28,420 31,360
Contribution margin 12,400 17,980 19,840
Fixed costs
Fixed manuf. Overhead costs 7,500 7,500 7,500
Fixed marketing costs 0 0 0
Fixed costs( at standard cost) 7,500 7,500 7,500
Adjustment for variances 0 0 0
Total fixed costs 7,500 7,500 7,500
Operating income $4,900 $10,480 $12,340
Inventory details ($9,800 per unit)
Beginning inventory (units)
Ending inventory(units) 0 1,200 700
Beginning inventory($000s) 1,200 700 1,300
Ending inventory($000s) $0 $11,760 $6,860
$11,760 $6,860 $12,740
Operating income $4,900,000 $10,480,000 $12,340,000
X0.5% $24,500 $52,400 $61,700
January February March Total

Absorption costing Bonus $39,500 $46,150 $69,200 $154,850
Variable Costing Bonus 24,500 52,400 61,700 138,600
Difference $15,000 $(6,250) $7,500 $16,250
The difference between absorption and variable costing arises because of differences in
production and sales:
Production 3,200 2,400 3,800 9,400
Sales 2,000 2,900 3,200 8,100
Increase(decrease)in inventory 1,200 (500) 600 1,300
With absorption costing by building for inventory, Hart can capitalize $2,500of fixed
manufacturing overhead costs per unit. This will provide a bonus payment of $12.50(0.5X
$2,500) per unit. Operating income under absorption costing will exceed that under variable
costing when production is greater than sales. Over the three-month period, the inventory
buildup is 1,300 units giving a difference of $16,250(S12.50 X 1,300)in bonus payments.
5. Amounts in thousands Throughput Costing

Revenues $32,000 $46,000 $51,200
Direct material cost of goods sold
Beginning inventory ($6X0;1,200;700) 0 7,200 4,200
Direct materials ($6X3,200; 2,400;3,800) 19,200 14,400 22,800
Deduct ending inventory ($6X1,200;700;1.300) 7,200 4,200 7,800
Total direct materials cost of good sold 12,000 17,400 19,200
Throughput contribution 20,000 29,000 32,000
Other costs
Manufacturing 19,660 16,620 21,940
Marketing 0 0 0
Total other costs 19,660 16,620 21,940
Operating income $ 340 $12,380 $10,060
($3,800 X3,200) / $7,500,000
($3,800 X2,400)/ $7,500,000
($3,800 X 3,800) / $7,500,000

Operating income $340,000 $12,380,000 $10,060,000
X0.5% $ 1,700 $ 61,900 $ 50,300
A summary of the bonuses paid is:

Absorption Costing $39,500 $46,150 $69,200 $154,850
Variable Costing 24,500 52,400 61,700 138,600
Throughput Costing 1,700 61,900 50,300 113,900
Throughput Costing
6:- Alternative approaches include:
(a) Careful budgeting and inventory planning.
(b) Use an alternative income computation approach to absorption costing (such as variable
costing or throughput costing)
(c) Use an financial charge for inventory buildup
(d) Change the compensation package to have a longer-term focus using either an external
variable (e.g. stock options) or an internal variable(e.g. five-year average income), and
(e) Adopt non-financial performance targets-e.g. attaining but not exceeding present
inventory levels.
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Question30:- (Relevant benefits and Costs of JIT purchasing). Hardestry Medical
Instruments is considering JIT implementation in 2003. Hardestry’s annual demand for Product
XJ-200, a surgical scalpel, is 20,000 units. If Hardesty implements JIT, the purchase price of the
scalpal is expected to increase from $10 to $10.05 because of frequent deliveries by Merrison
Manufacturing, Inc. Morrison enjoys a sterling reputation for quality and reliability. Ordering
costs will remain at $5 per order. However, the annual number of orders placed will be 200
instead of the current 20. As a result of frequent ordering. Hardesty’s order size will decrease
proportionally. Hardesty’s required rate of return on Investment is 20%. Other carrying Costs
(insurance, materials handling and so on) will remain at $4.50 per unit. Currently Hardesty has
no stock out costs. Lower inventory levels from implementing JIT will lead to $3 per unit stock
out costs on 100 units during the year.

Required:- Calculate the estimated dollar savings ( Loss) for Hardesty Medical instruments from
the adoption of JIT purchasing.
SOLUTION:-
Present the $724.50 cash savings that would result if Hardesty Medical Instruments adopted the
just-in-time inventory system in 2003.
Annual Relevant costs of Current Purchasing policy and JIT Purchasing Policy for Hardesty
Medical Instruments
Relevant Costs Under
Current JIT
Purchasing Purchasing
Relevant Item Policy Policy
Purchasing costs
$10 per unit X 20,000 units $200,000.00
$ 10.05 per unit X20,000 units $201,000.00
Ordering Costs
$5 per order X 20 orders per year 100.00
$5 per order X 200 orders per year 1,000.00
Opportunity carrying costs, required
Return on investment
20% per year X $ 10 Cost per unit X 500
units of average inventory per year 1,000,00
20% per year X $10.05 cost per unit
X 50units of average inventory per year 100.50
Other carrying costs
$4.50 per unit per year X 500 units
of average inventory per year 2,250.00
$4.50 per unit per year X 50 units
of average inventory per year 225.00
Stock out costs
No stock outs 0
$3 per unit X 100 units per year 300.00
Total annual relevant costs $203,350,00 $202,625.50

Annual difference in favor of JIT purchasing $724.50
Order quantity / 2 = 1,000 / 2 = 500
Order quantity /2 = 100 / 2 = 50
2:- Hardesty may benefit from Morrison managing its inventories if there is high order variability
caused by randomness in when consumers purchase surgical scalpels or trade promotions that
prompt retailers to stock for the future. By coordinating their activities and sharing information
about retail sales and inventory held throughout the supply chain, Morrison can plan its
manufacturing activities to ensure adequate supply of product while keeping inventory low. For
this to succeed, Hardesty and Morrison must have compatible information systems build trust
and communicate freely.
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Question31:- The Margro Corporation is an automotive supplier that uses automatic
turning machines to manufacture precision parts from steel bars. Margro’s inventory of raw steel

averages $6,00,000. John Oates, President of Margro, and Helen Gorman. Margro’s controller,
are concerned about the costs of carrying inventory. The steel suppliers is witling to supply steel
in smaller lots at no additional charge. Helen Gorman identified the following effects of adopting
a JIT inventory program to virtually eliminate steel inventory.
 Without scheduling any overtime, lost sales due to stock outs would increase by 35,000
units per year. However, by incurring overtime premiums of $40,000 per year, the
increase in lost sales could be reduced to 20,000 units. This would be the maximum
amount of overtime that would be feasible for Margro.
 Two warehouses currently used for steel bar storage would no longer be needed. Margo
rents one warehouse from another company, under a cancelable leasing arrangement, at
an annual cost of $60,000. The other warehouse is owned by Margro and contains 12,000
square feet. Three-fourths of the space in the owned warehouse could be rented for $1.50
per square foot per year. Insurance and properly tax costs totaling $14,000 per year would
be eliminated.
Long – term capital investments by Margro are expected to Produce an annual rate of return of
20%. Margro Corporation Budgeted income statement for the year ending December 31,2003,(in
thousands) is as follows:-
Revenues ( 900.000 units) $10,800
Cost of goods sold
Variable costs $4,050
Fixed costs 1,450
Total costs of goods sold 5,500
Gross Margin 5,300
Marketing and distribution costs
Variable costs $900
Fixed Costs 1,500
Total marketing and distribution costs 2,400
Operating income $ 2,900
Calculate the estimated dollar savings (loss) for the Margro Corporation that would result in
2003 from.
Required the adoption of the JIT inventory –control method.
Annual Relevant Costs of Current Purchasing Policy and JIT Purchasing Policy for Margro
Corporation
Relevant Relevant
Costs under Costs under
Current Jit
Purchasing Purchasing
Policy Policy
Required return on investment
20% per year X $600,000 of average inventory per year $120,000
20% per year X $0 inventory per year $0
Annual insurance costs 14,000 0
Warehouse rent 60,000 (13,500)
Overtime costs
No Overtime 0
Overtime premium 40,000
Stockout costs
No stockouts 0

$6.50 contribution margin per unit X20,000 units 130,000
Total incremental costs $194,000 $156,500
Difference in favor of JIT purchasing $37,500
$(13,500) = Warehouse rental revenues, (75% X 12,000) X $1.50)
Calculation of unit contribution margin
Selling price
($10,800,000 / 9000, 000 units) $12.00
Variable costs per unit:
Variable manufacturing costs per unit
( $4,050,000 / 900,000 units) $4.50
Variable marketing and distribution costs per unit
($900,000 / 900,000 units) 1.00
Total variable costs per unit 5.50
Contribution margin per unit $6.50
Note that the incremental costs of $40,000 for overtime premiums to make the additional 15,000
units are less than the contribution margin from losing these sales equal to $97,500($6.50X
15,000). Margro would rather incur overtime than lose 15,000 units of sales.
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THEORY QUESTION
Q1:- Describe the Just-In-Time & What is the meaning of JIT Costing?
Q2:- Explain briefly the method of operation of a MRP System?
Q3:- What do you mean by ERP?
Q4:- What is value chain & Its basic tools fro systematics examine for all activites.
Q5:- Define the terms
(a):- Quality Control,
(b):- Quality Assurance
© :- Quality Management (OR)
Define total quality management (TQM) what are core concept of TQM.
Q6:- What is Pareto Analysis? Outline its use?
Q7:- What is Peneteration Pricing? What are the circumstances in which this policy can be
adopted?
Q8:- What is Skimming Pricing Policy?
Q9:- What are the benefits of ABM?
Q10:- What are the benefits of ABM
Q11:- What are the types of Benchmarking?
Q12:- What is Strategy?
Q13:- Define Balance Score Cards & What are the four perspective of Balance Score Card?
Q14:- Define Target Costing?
Q15:- Define Value Engineering?
Q16:- Distinction between PERT and CPM?
Q17:- Write Short notes on Simulation and its applications?
Q18:- Describe the Resources Allocation and Scheduling?
Q19:- Write the Difference between Fixed Budget & Flexible Budget?
Q20:- Explain Concept of Shadow Price.?
Q21:- What is the Meaning of Angle of incidence?
Q22:- Distinguish between “Cost reduction” and “Cost management”?
Q23:- Write a brief note on Theory of Price & What factors influencing?

Q24:- Write Short notes on Sealed Bid Pricing?
Q25:- Write a Short note on Performance Budget?
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What are the benefits of implementing a Just-in-Time inventory system according to the passage?

What are the benefits of implementing a Just-in-Time inventory system according to the passage?

What factors are considered in determining whether Rosen Manufacturing Corporation should purchase a Just-in-Time inventory system?

What factors are considered in determining whether Rosen Manufacturing Corporation should purchase a Just-in-Time inventory system?

AGGARWAL EDUCATION CENTRE PVT. LTD.

D-223, Laxmi Chamber, Laxmi Nagar, Delhi-92.

Cash Inflow 2,94,000 3,22,800 3,54,480 3,27,328 4,27,661

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 1

STATEMENT OF RELEVANT COST COMPARATIVE

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 2

Per unit Units Total

Reprocessing of Inferior Units

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 3

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 4

II. Using Lower quality material (Scrap 20%) (Rs.)

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 5

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 6

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 7

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 8

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 9

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 10

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 11

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 12

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 13

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 14

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 15

Step2: The flexible budget amount for travel expenses

Actual quantity Budgeted quantity of Budgeted price

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 16

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 17

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 18

EE-46 ME-83 IE-17

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 19

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 20

Flexible-budget Actual Flexible-budget

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 21

Computer Power Peach Computer

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 22

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 23

Item Year2002 %change Year2003

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 24

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 25

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 26

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 27

(ii)Incremental cost for each of the four criteria

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 28

(iv) Revised piece rate wages Rs.

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 29

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 30

3. Although there is a cause-and-effect link between internal business process measures

4. Caltex is correct in not measuring changes in operating income from productivity

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 31

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 32

Conversion Costs Allocated

(a) Purchases of Inventory Direct and In-Process Control 2,754,000 2,754,000

Conversion Costs Allocated

Contact at:- Aggarwal Education Centre Pvt.Ltd. Ph:- 9811374374,9213600402 33

(a) Purchases of No entry

Finished Goods Control Cost of Goods Sold