Answers to questions are to be given only in English except in the cases of candidates who have opted for Hindi

medium. If a candidate who has not opted for Hindi medium, his answers in Hindi will not be valued. Q.No. 1 is compulsory. Attempt any five questions from the remaining six questions. Working notes should form part of the answer. Marks 1. (a) The standard cost for producing 180 kgs of a product whose raw material inputs are A and B is given below : Standard Cost (Rs.) Material A 60 kgs @ Rs.10 per kg Material B 140 kgs @ Rs.2 per kg 600 280 880 5

(0)

The actual prices of A and B were Rs.12 and Rs.8 per kg respectively. Consumption of B was 108 kg. The actual output at 80% yield was 144 kg. Calculate the following direct material variances : (i) Mix variance (ii) Yield variance (iii) Price variance (iv) Usage variance (b)Sportswear Ltd. manufactures sportswear shirts and shorts. The production budget for these two products has to be prepared for the next three months, November 2010, December 2010 and January 2011. The following information is given : (i) Sales volume every month will be 2% more than the previous months volume for each product. (ii) The company carries stock of finished garments sufficient to meet 40% of the next months sale. (iii) Closing stock for October 2010 was 6000 shirts and 8000 shorts. You are required to prepare the production budget for each product for November, December 2010 and January 2011. (c)A factory has a special offer to produce 4 units of a labour intensive product by using its existing 5(0) 5(0)

facilities after the regular shift timings. The product can be produced by using only overtime hours which entails normal rate plus 25%, so that usual production is not affected. Two workers are interested in taking up this additional job every evening after their usual shift is over. One is an experienced man who has been working on a similar product. His normal wages are Rs.48 per hour. The other worker is a new person who earns Rs.42 an hour as normal wages. He can be safely considered to have a learning curve ratio of 90% for this work. The company wants to minimize labour cost for the order and only one person is to be chosen for the job. The experienced man will take 20 hours for the first unit while the new worker will take 30 hours for the first unit. Evaluate who should be chosen for the job. (d)You are given the following linear program. Introduce appropriate variables and restate the problem to set up the simplex tableau. (Do not attempt further solution.) Maximise : 8x S.t. 2x 3x 2x x
1 1 1 1 1

5(0)

+ 4x -x -x

- 3x

+ 10x

2 3

+x +x

3 4

+ 2x 90
4

40

+x
2

+x
3

= 60
4

,x

,x

,x

0 9(0)

2. (a)M Ltd. makes two products, X and Y, in their respective divisions. Each unit of Y needs one unit of X. Divisions X and Y are profit centres and can function according to their divisional interests. In the external domestic market, X can sell either 6000 units at Rs.1,000 per unit or 5000 units at Rs.1,120 per unit. X has a production capacity of 7000 units, with each unit requiring 2 hours. Y also has a production and demand of 7000 units. Y can buy product X from outside as follows : Order Quantity (Units) 6001 4001 2001 0 7000 6000 4000 2000 Price for the entire order (Rs./u) 900 920 1,000 1,120

Y resorts to bulk purchase to avail maximum possible discount. (i) There is an export order (that may either be fully accepted or fully rejected) for X to supply 800 units @ Rs.900 per unit. (ii) There is an offer to hire out Xs capacity of 1600 hours at Rs.130 per hour, pie hiring offer may either be fully accepted or fully rejected. (iii) Y will not buy from X at any price more than it will incur in the outside market. Y does not place restrictions on quantities to be supplied by X, provided its pricing condition is not

violated. Given that any one or more of the offers may be accepted, what will be X's best strategy ? What will be the corresponding transfer price ? [A detailed cost statement is not essential. Only figures relevant for decision making are required to be considered under each analysis.] (b)State the pricing strategy that you would advise in the following situations which are independent of each other : (i) A new product is to be launched. It has had high promotional expenditure and its demand in the market is not known. (ii) A new product is to be launched. It is to be mass manufactured. (iii) A product which has an external market demand is to be transferred to another division of the same company. For the external market, variable selling costs of Rs.10 per unit and fixed selling costs amounting to Rs.10 lacs p.a. are incurred. These costs are not applicable to divisional transfers. The divisional transfer can take up only 20% of the output produced. (iv) A special one-time order for the use of idle capacity is offered. This order will not impact the existing sales of the company. The product has competition in the market. (v) There is stock of a discontinued product. It has severe competition and the product is perishable. 3. (a)ABC Ltd. manufactures four products A, B, C & D in the same factory. The following information is 9(0) given for a certain period : Product Good output (No. of units) Average yield (%) Machine hours per unit of input A 720 80 4 B 600 80 3 C 480 96 2 D 504 90 1 7(0)

The plant works such that after machining, the defectives in each run are automatically segregated and dumped separately in a container. The good units pass through the process and are further checked for quality by the inspectors of quality control who charge by the number of batches inspected. The total production and selling overheads of the company are the following for the period : Rs. Machine operation and maintenance Set up costs Stores receiving Inspection Finished goods packing/dispatch The following additional information is given : (i) A material requisition is made for every 25 units of input. (ii) Machines need to be set up and tuned after each production run. 66,375 19,200 21,400 24,000 14,400

(iii) Production is in batches of 24 good units for all the products. (iv) Units of A and B are packed in boxes that have 24 units capacity each and C & D are packed in smaller boxes of 12 units capacity. The smaller box costs half the price of the bigger box. Each box contains only one type of product. There is no product mix up in packing. Choose appropriate activity cost drivers for each overhead cost and calculate the overhead cost per unit of good output for each of the products under the ABC system. (b)At the end of activity 6-7, a product is to be launched and the date has been announced for the 7(0) inaugural function, based on the normal duration of activities as given in the network below. Activities have been subcontracted by the project manager to contractors A, B, C, D, E, F, G & H as indicated in the table below. Each subcontractor offers a discount on his contract price for each day given to him in addition to the normal days indicated in the network. What will be the maximum discount that the project manager may earn for the company without delaying the launch of the product ?

Activity 12 13 14 25 35 46 56 67

Contractor A B C D E F G H

Discount Rs./Day 300 200 1,200 500 400 1,000 600 500 7(0)

4. (a)The manager of a hotel providing lodging facilities wants to expand his services to include manual booking (reservation or cancellation) of railway tickets for his clients. He does not want to have electronic booking due to operational difficulty. He has the following information : Rs./Month Proportion of rent allocated for office space General Telephone expenses allocated to this service Proportion of security charges / maintenance expenses allocated Salary to person exclusively doing the booking of tickets Mobile phone charges exclusive to person booking ticket Share of general miscellaneous fixed expenses allocated 4,000 2,400 1,600 20,000 3,000 1,000 4,000

Conveyance incurred to book tickets (to and fro charges to the nearest booking station) [fixed per month] The manager estimates that there will be 2,500 bookings per month for 3 months of peak season. 1,000 bookings per month for 2 months of moderate business and 700 bookings per month during the remaining period. He cannot charge more than the prevailing rate of ? 30 per booking charged by other agents. Calculate the total cost per booking. What is the estimated profit the manager hopes to achieve for the full year ? What should be the average minimum volume to justify the setting up of the new service ? (Detailed breakup of monthly revenues or costs is not essential.) (b)A manufacturing company makes 4 products that are sold through 8 regional offices countrywide. The products pass through 3 production processes in a factory. A separate market research division monitors outside competition. This division is outside the sales management hierarchy. As a management accountant, suggest some routine reports for performance measurement to be made to : (a) The Sales Management (b) The Works Manager 5. (a)A company has 3 factories F1, F2 and F3 which supply the same product to 5 agencies, Ap A2, A3, A4 and A5. Unit production costs, shipping costs and selling prices differ among the different sources and destinations and are given below : F1 Production Cost (Rs./Unit) Production Capacity (No.of units) Agencies Selling Price Rs./u. Demand (No. of units) Shipping Costs Rs./u. A1 F1 F2 F3 3 6 3 A2 9 10 10 A3 8 6 3 A4 12 2 6 A5 8 5 8 A1 40 80 A2 48 100 28 110 A3 42 75 F2 35 240 A4 45 45 F3 29 125 A5 41 125 10(0) 9(0)

(i) Set up the initial transportation matrix for minimisation. (ii) After doing (i) above, you are given the following additional information : (a) 40 units must be transported from F2 to A2 as per an earlier agreement made by F2 with A2s customer. This quantity is included in the figures given for total production and demand at these locations.

(b) Not more than 30 units may be sent from F1 to A1, since the transporters vehicle lacks space in this route. Incorporating conditions (a) and (b) above, obtain the initial solution by Vogels Approximation Method. (Do not attempt to continue for the full and final solution.) (iii)After doing the initial solution as in (ii) above, you are informed that the route from F2 to A1 is blocked by sudden flooding of the roads. Without actual re-calculation, briefly explain how your solution is likely to be affected. (b)The selling price per unit of a product is Rs.14. For the forthcoming period, the demand will be only 5,000 units. The fixed expenses at 50% activity (5,000 units) will be Rs.30,000. The company is thinking of shutting down operations, in which case an additional amount of Rs.2,000 will have to be incurred for shutting down and only Rs.20,000 of the above fixed costs can be avoided. What should be the variable cost per unit to recommend a shut down ? 6. (a)Aero Ltd. has hired an aircraft to specially operate between cities A and B. All the seats of the aircraft are economy class. The following information is available : Seating capacity of the aircraft Average number of passengers per flight Average one way fare from A to B Variable fuel costs per flight from A to B Food Cost (no charge to passenger) Commission to travel agents (All tickets are through agents) Annual lease costs allocated to each flight Ground services, baggage handling / check in services costs per flight A to B Flight crew salaries per flight A to B = 320 passengers = 240 passengers = Rs. 5,000 per passenger Rs. 90,000 Rs. 300 per passenger 10% of the fare Rs. 2,00,000 Rs. 40,000 Rs. 48,000 12(0) 6(0)

There is an offer from another airlines operator, Mid Air Ltd. for a stopover at destination D, which is on the way from A to B. Due to this, the flight will operate from A to D, then D to B. The following terms are to be considered for the stopover : 50 seats will be booked by Mid Air at Rs.2,500 per ticket, whether or not Mid Air is able to sell them to its customers. No agents' commission is payable on these tickets. 60 new passengers will be booked by Aeros travel agents for travel from A to D at a fare of Rs.2,000 per passenger. Since the stopover wastes more time, 25 of Aeros original passengers from A to B will drop out and seek other airlines which fly directly from A to B. Due to the stopover, fuel costs will increase from Rs.90,000 to Rs.1,35,000, Additional airport

landing / baggage handling charges of Rs.19,000 per stopover will have to be incurred by Aero Ltd. Aero Ltd. will have to serve snacks to all passengers in the D to B sector at no charge to passenger. Each snack will cost Aero Ltd. Rs.200. This will be in addition to the original food at Rs.300 served in the A to D sector. You may assume that fuel costs are not affected by the actual number of passengers in a flight. You may ignore nonfinancial considerations, additional wear and tear to aircraft due to extra landing / takeoff. Without considering Mid Airs offer, (i) What is the profit earned by Aero Ltd. per flight from A to B ? (ii) What is the break-even number of passengers for each flight from AtoB? Considering the effects of Mid Airs offer (iii) Evaluate whether Aero should accept the offer. (A detailed profitability statement is not essential, a relevant costrevenue analysis would suffice). (b)How can simulation be applied in practical situations ? 7.Answer any four of the following: (a)Discuss the impact of JIT systems on overhead costs. (b)What are benefits of Enterprise Resource Planning ? (c)A companys four products, M, N, O and P are in the market. Identify the phase of life cycle for each product with a brief reason. M : There is a lot of competition. Quantity sold has been increasing at 10%, 8% and 7% in the last 3 years. N : Until last year, N had no competition. Suddenly the company finds 4 new products very similar to N in the market. However, N continues to have good sales. O : There is intense competition. Achieving targeted sales is becoming increasingly difficult. Hence the company is introducing slightly modified features in the fresh production. P : Huge inventory of P is available. P is being sold, but there are many products in the market which are priced lesser than P, but have the same utility as P. (d)Three different salesmen X, Y and Z are to be assigned three different regions A, B and C so that the company's revenue is maximised. The following matrix gives the sales revenue : X A B C 10 20 60 Y 60 30 40 Z 30 15 10 4(0) 4(0) 4(0) 4(0) 4(0)

You are required to use the assignment technique to maximise revenue. (e)TP Ltd. produces a product which passes through two processes cutting and finishing. The following information is provided: 4(0)

Cutting Finishing Hours available per annum Hours needed per unit of product Fixed operating costs per annum excluding direct material 50,000 60,000 5 12 10,00,000 10,00,000

The selling price of the product is Rs.1,000 per unit and the only variable cost per unit is direct material, which costs Rs.400 per unit. There is demand for all units produced. Evaluate each of the following proposals independent of each other : (i) An outside agency is willing to do the finishing operation of any number of units between 5,000 and 7,000 at Rs.400 per unit. (ii) An outside agency is willing to do the cutting operation of 2,000 units at Rs.200 per unit. (iii) Additional equipment for cutting can be bought for Rs.10,00,000 to increase the cutting facility by 50,000 hours, with annual fixed costs increased by Rs.2 lacs.

May 2010

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CA Final - Group II : Cost Management - May 2010

This Paper has 13 answerable questions with 0 answered.

Roll No Total No. of Questions 5] Time Allowed : 3 Hours Answer all questions.

[Total No. of Printed Pages Maximum Marks

M 1. (a) A company uses absorption costing system based on standard costs. The total variable manufacturing cost is Rs. 6 per unit. The standard production rate is 10 units per machine hour. Total budgeted and actual fixed production overhead costs are Rs. 8,40,000. Fixed production overhead is allocated at Rs. 14 per machine hour. Assume this same standard for the last year and current year. Selling price is Rs. 10 per unit. Variable selling overheads are Rs. 2 per unit and fixed selling costs are Rs. 2,40,000. Assume that there are no price, spending or efficiency variances. Beginning inventory was 30,000 units and ending inventory was 40,000 units. (i) Compute the break-even point under absorption costing, assuming that there will be an under absorption of overhead and that production variance is written off at year end as adjustment to cost of goods sold. (ii) Compute the break-even point under marginal costing. (iii Assuming that sales were at break-even level computed under (ii) above, and that ) production variance is written off at the year end as adjustment to cost of goods sold, and that stock levels were as given above, find the profit under absorption costing. (detailed cost statement not essential) (b A Project Manager has to manage various projects. For each project given below, you are ) required to advise him whether to use PERT or CPM and briefly state the reason: (i) Project K is yet to begin. The manager has recently successfully handled similar projects. He is able to break down the project into smaller modules and knows when he may comfortably finish each module. (ii) Project L has been sanctioned some fixed amount. Though the manager is familiar about what time it will take, he expects pressure towards the end to finish the project slightly earlier, by deploying additional resources of the company. (iii Project M is new to the manager. He has never handled such a project. He can break up the ) project into smaller modules, but even then, he is not sure of their exact times. (iv) Project N has a limitation on the skilled workforce available. But the manager knows from earlier experience, the slack on each event in the project. He is confident of handling the bottleneck of labour. (v Project O is a research project, bound to produce immense benefit to the company in future. ) 5
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19

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2. (a) Spares Ltd. Produces spare part X for cars. The company has an annual production capacity of 1,80,000 units of X. However, the actual production is carried out according to the volume of order received. For the next year, the company has received an order for a value of Rs. 64,00,000. To meet the requirements of the order, the company has to work at 70% capacity for the first four months, 80% capacity for next six months, and 90% capacity for the remaining period of the year. Assume no opening or closing stocks. The following information is available: Material cost is Rs. 15 per unit. Labour Rs. 12 per unit, subject to a minimum of Rs. 1,30,000 p.m. Variable overheads Rs. 5 per unit. Fixed overheads Rs. 16,000 per month. Semivariable overheads Rs. 75,000 per annum incurred upto 70% average annual capacity utilisation. Thereafter, it increases at Rs. 5,000 per annum for every 10% average annual capacity increase. If the company targets a return of 27% on budgeted cost, should the order be accepted ? Justify your answer showing budgeted annual values for each element of cost for the next year. (b What are the benefits of a target costing system ? ) (c) What is product life cycle costing? What are its benefits? 3. (a) A company produces two products, x1 and x2 with respective unit contributions of Rs. 8 and Rs. 6. Each product passes through machining operations in two machining centres, MI and MII, whose capacities are limited to 60 and 48 hours respectively with corresponding slack variables S 1 and S 2 . The following table gives the values for an interaction under the simplex method for maximising the contribution: Basic Variables X1 X2 You are required to: (i) Evaluate if this iteration represents the optimal solution. (ii) Find out what will be the optimum contribution. (b A hospital has to pay nurses for 40 hours a week. One nurse is assigned to one patient. ) The cost per hour for each of the nurses is given below: (i) Find the nurse-patient combination to minimise cost to the hospital.. (ii) How much does each nurse earn per week? Nurse \ Patient W X Y K 10 10 30 L 30 10 20 X1 X2 S1 1 0 1/3 0 1 1/6 S2 -1/6 1/3 (MI constraint) (MII constraint)

12

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3 4 7

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(0) (0)

(0)

20

30

20

Suppose that a new patient Z is admitted, and that a new nurse n is appointed. The new patient is charged Rs. 40 per hour by each of the existing nurses. The new nurse charges Rs. 50 per hour irrespective of the patient. (iii What would be your revised calculations? ) (iv) Comment on the new solution. (c) What is benchmarking? What is the code of conduct suggested for ethical and effective benchmarking? 4
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4. (a) AB Ltd. Has two divisions, A and B, making products A and B respectively. One unit of A is an 8+4+3 input for each unit of B. B has production capacity of 45,000 units and ready market for 45,000 units in both the years 2010 and 2011. Other information available: Division A Year 2010 2011 Capacity (production units) 50,000 50,000 Maximum demand in usual external market (units) 25,000 30,000 Special order (units) (to be fully accepted or fully rejected) 10,000 15,000 Fixed cost Rs./annum upto 30,000 units 4,30,00 4,30,00 (Beyond 30,000 units, fixed cost increases by Rs. 1,00,000 0 0 for every additional 10,000 units for each year). Variable manufacturing cost Rs./unit Variable selling cost Rs./unit (only for usual external sales) 35 35 Variable selling cost Rs./unit (only for special order and transfer 10 10 to B) 5 5 Selling price (usual external market) Rs./unit Selling price (only special order) Rs./unit 65 65 55 55 B buys input A from outside at a slightly incomplete stage at Rs. 30 per unit and incurs subcontract charges at Rs. 20 per unit to complete it to a stage to match the output of Division A. In 2011, subcontract charges will increase to Rs. 30 per unit. B is willing to pay A, the price it incurs viz. Rs. 50 and Rs. 60 per unit in 2010 and 2011 respectively, provided A supplies Bs full requirement. For any lesser quantity, (B will accept any quantity), B is willing to pay A only Rs. 45 and Rs. 55 per unit in 2010 and 2011 respectively. Assume no changes in inventory levels. In 2011, A may choose to avoid the variable selling overhead of Rs. 5 per unit on transfers to B or special order, by incurring a fixed overhead of Rs. 50,000 p.a. instead. (i) What will be the maximum profits of A under its best strategy in 2011? (ii) In view of the companys overall interest, calculate the customer wise units to be produced by A in 2010. (iii Assuming that A follows its best strategy between what values of transfer price will B be ) able to negotiate with A, so that As best strategy is unchanged in 2011 (b In an unbalanced minimisation transportation problem, with positive unit transport costs from 3 ) factories to 4 destinations, it is necessary to introduce a dummy destination to make it a 4

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balanced transportation problem. How will you find out if a given solution is optimal? 5. (a) X uses traditional standard costing system. The inspection and setup costs are actually Rs. 1,760 against a budget of Rs. 2,000. ABC system is being implemented and accordingly, the number of batches is identified as the cost driver for inspection and setup costs. The budgeted production is 10,000 units in batches of 1,000 units, whereas actually, 8,800 units were produced in 11 batches. (i) Find the volume and total fixed overhead variance under the traditional standard costing system. (ii) Find the total fixed overhead cost variance under the ABC system. (b What is penetration pricing policy? Why and when it is used? ) (c) With a view to improving the quality of customer services, a Bank is interested in making an assessment of the waiting time of its customers coming to one of its branches located in residential area. This branch has only one tellers counter. The arrival rate of the customers and the service rate of the teller are given below: Time between two consecutive arrivals of customers (in minutes) Probability 3 0.17 4 0.25 5 0.25 6 0.20 7 0.13 Service time by the teller (in minutes) 3 4 5 6 7 Probability 0.10 0.30 0.40 0.15 0.05 7 6
(0)

(0)

(0)

You are required to simulate 10 arrivals of customers in the system starting from 11 AM and show the waiting time of the customers and idle time of the teller. Use the following random numbers taking the first two random numbers in two digits each for first trial and so on : 11, 56, 23, 72, 94, 83, 83, 02, 97, 99, 83, 10, 93, 34, 33, 53, 49, 94, 37 and 97.

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