A.

Relevant costs for the tender

MANAGEMENT ACCOUNTING Suggested Answers Final Examination Winter 2011

Existing capacity's CM lost Material A (8,000 Rs. 820) Material B (500 Rs. 600) Material B - loss on sale of redundant stock Labour costs for project Factory overhead Cost of machine Profit margin on cost (20%) Bidding price W-1:

Contribution margin lost Capacity required for order Present Idle capacity Existing utilized capacity to be used for new project Present quarterly contribution margin [Rs. 350,000 (Sales) - Rs. 234,500 (material) - Rs. 28,650 (labour inclusive of idle labour) - Rs. 23,000 (variable FOH) - Rs. 12,000(variable selling expenses)] Contribution forgone for 60 days (15%/75% Rs. 51,850 2/3) Loss on sale of redundant Material B stock Available stock Usage during first 30 days Usage during next 60 days (6,000 2/360/75) Usage for new project Redundant stock Labour cost for the project

51,850

W-2:

W-3:

Loss on sale of redundant stock at current sale price [(Rs. 700-600)300) Total hours required for project Idle hours available Idle hours due to curtailment of activity from 75 to 60% 22,500 15/75 2 36,000 15/75 2 Present idle hours 22,500 10/90 2 36,000 4/96

Kgs 6,000 (2,000) (3,200) (500) 300 Unskilled 15,000 14,400

6,913

Skilled 6,000 9,000 5,000

30

Payment for the tender activity 6,000 200 3,000 200 80% 14,400 125 600 125 20% Total labour cost

14,000

Rs. in 000 1,200 480 1,680

3,000 17,400

1,800 15 1,815 3,495

Page 1 of 6

W-4: W-5:

Variable overheads of the project

MANAGEMENT ACCOUNTING Suggested Answers Final Examination Winter 2011

Variable factory overhead rate 23,000/(58,5003) No. of hours required for the new project Variable overhead for two months Cost of machine relevant for the project Purchased cost of machine

Less: Resale price or savings in labour costs whichever is higher: Resale price Savings in labour costs Machine life in # of months Less: Project life Life after the project Labour costs for one months(Rs. 20022,500+ Rs. 125 36,000) Savings in 34 months (Rs. 9,000 5% 34) Less : 80% payable for idle time Add: Sale of old machine XA 60 80 (20) F

36 2 34 9,000

A.2

(a) Sales volume variance

(b) Sales price - planning variance Actual sales of XA at budgeted price (Rs. 200,000 80) Revision in Budget Promotional Sales (180,000 35) Other than Promotional Sales (200,000 45)

Budgeted sales (units) Actual sales (units) Volume variance in units standard margin per unit XA : 200,000 - 39,500 - 80,000 - 100,000 (19,500) YA : 300,000- 54,000 -100,000- 125,000 ZA : 475,000 - 78,000 -150,000- 187,500 Volume variance 390,000 A

21,000

59,500 84,000 A (595,000) F (121,000) F

Products YA ZA 28 20 24 30 4 A (10) F ----- Rupees -----

Total

3,360 1,140

16,000,000

(c) Labour efficiency - planning variance Standard time XA: 80 (80,000 100) YA: 24 (100,000 100 ) ZA: 30 (150,000 100)

Sales price - operational variance Actual sales of XA [Rs.37,425,000 - (Rs.300,000 24) - (Rs. 475,000 30)] Actual sales of XA at revised budgeted price (6,300 + 9,000 as above)

15,975,000 (15,300,000) 675,000 F 64,000 24,000 45,000 133,000 122,360 10,640 105 1,117,200 F

(6,300,000) (9,000,000) (700,000) A

Revision in standard (8% improved performance) [133.000 92%] Variance in hours (saved) standard rate per hour (Rs. 100 1.05)

Page 2 of 6

A.3

Labour efficiency - operational variance Standard time (revised) Actual time Variance in hours standard rate per hour
Receipts Mobilization advance Running bills (RB) Less: Mobilization advance (in the ratio of RB) Retention money (5% of RB) Sales tax @16% of billing amount less mob adv Withholding tax @ 6% Release of retention money Net receipts Payment of sales tax Payment to supplier of equipments Installation charges Jan-12

MANAGEMENT ACCOUNTING Suggested Answers Final Examination Winter 2011 122,360 (120,000) 2,360 105 247,800 F
35,000 140,000 Total

35,000

Feb-12

WORKINGS: Input/output adjustment of sales tax Output tax as worked out above Less: Input adjustment (16/11695,000) Paid / (excess) carried forward Cost of installation and related works Contract price Less: Profit margin @15% Project cost Less: Cost of equipments (100 / 116 95,000) Cost of installation and related works

(11,131) 27,033

5,600 (2,436) 38,164

(10,500) (2,100) 29,400 5,040 (2,066) 32,374 32,374

42,000

Mar-12 Apr-12 ----- Rupees in '000 ----(15,750) (3,150) 44,100 7,560 (3,100) 48,560 (5,097) (95,000) (25,972) (77,509) 63,000

4,200 (1,722) 26,978 (4,200) 22,778

(8,750) (1,750) 24,500

35,000

May-12 -

(420) 7,000 6,580

(35,000) (7,000) 98,000

Jan-12 5,600 (13,103) (7,503)

Feb-12 Mar-12 5,040 7,560 (7,503) (2,463) (2,463) 5,097

6,580

Apr-12 4,200

22,400 (9,744) 7,000 152,580 (9,297) (95,000) (37,103) 11,256

140,000 21,000 119,000 81,897 37,103

4,200

A.4

STATEMENT OF SAVINGS AND ADDITIONAL COSTS

Materials Labour Warranty Factory overheads - ordering and holding costs Savings in factory overheads (other than ordering & holding costs & depreciation) Increase in factory overheads due to increase in depreciation (9,0002,700)

Page 3 of 6

Conclusion: Implementation of the consultants' suggestions would increase the gross margin by more than 17% (74,833 434,000 = 17.2%) and therefore consultants' suggestions should be accepted. However, their suggestion as regards JIT system is not feasible as against the savings of Rs.13.3 million on inventory ordering and holding costs, discount on bulk purchases amounting to Rs.14.5 million would be lost.

Workings Rs. in 000 1 5,329 1 56,481 2 728 3 13,331 4 5,264 (6,300) 74,833

W-1 : Savings in cost of labour and material on account of purchase of new machine Material Labour Cost of labour and material if new machine is NOT purchased Rs. in 000 Current years cost (A) Note: 26,000 units = 3540 + 24960 2500 834,400 138,600 Cost to produce 2000 additional units in next year at current rates (2,000 units / 26,000 A) 64,185 10,662 Cost to produce 28,000 units at current rates 898,585 149,262 71,887 14,926 Impact of 8% increment in material and 10% increase in labour costs Cost of labour and material if new machine is NOT purchased 970,472 164,188
Cost of labour and material if new machine is purchased
Cost of material before wastage (970,472 0.96) Wastage under new machine (931,653 2 /98) Cost of material after discount Loss of discount if bulk purchases discontinued (950,6661.5/98.5) Skilled labour (164,188 8 /25) Unskilled labour (164,188 /25 12 70%) Cost of labour and material if new machine is purchased Net savings in labour and material costs 931,653 19,013 950,666 14,477

MANAGEMENT ACCOUNTING Suggested Answers Final Examination Winter 2011

W-2 : Savings in cost of warranty Costs under present conditions (Rs. 4,000 28000 1%) Less: Costs if new machine is purchased (Rs. 3,500 28000 0.4%) Net savings W-3: Savings in ordering/holding costs

Size of order No. of orders (28,000 B) Avg. inventory (B/2+ 4,000)

Savings in ordering and holding costs (Rs. 15,340 - Rs. 2,009) W-4: Factory overheads As per annual accounts Less: Depreciation (Rs. 54 - Rs. 5.4) /18 Ordering and holding costs as above

Ordering costs (Rs. 45,000 C)

Holding costs (970,472 D / 28000 4%) Total ordering and holding costs

(B) (C) (D)

Existing 14,000 2 11,000

Rs.in000 1,120 392 728

965,143

5,329

107,707 56,481

52,540 55,167

15,250 15,340

90

[14,000 (1-85.71%)] (965,144 D/28,000 x 4%) (B/2)

Proposed 2,000 14 1,000

Savings in factory overheads {175,462x(10%-7%} (other than depreciation and inventory ordering and hold costs

Existing 193,502 (2,700) (15,340) 175,462 5,264

13,331

1,379 2,009

630

Page 4 of 6

MANAGEMENT ACCOUNTING Suggested Answers Final Examination Winter 2011 A.5 Process Account - Department 2
Rs. 128,750 2,057,500 988,000 488,000 244,000 37,500 3,943,750

Opening work in process Received from Dept 1 Direct Material Direct wages Production overheads Abnormal gain (500 75)

Units 2,000 53,000 500 55,500

Normal loss account (W-1) Transferred to Dept 3(W-1) Closing work in process (W-1)

Units 2,500 48,000 5,000 55,500

Rs. 37,500 3,598,750 307,500 3,943,750

W-1: Costs computation

Cost of units transferred to Department 3

Opening WIP: Balance as at November 1, 2011 Material Labour & Prod OH Introduced and completed within the month

(2,000 units) (400 [W-2] x Rs. 20 [W-3]) (800 [W-2] x Rs. 15 [W-3]) (46,000 x Rs. 75) (5000 x Rs. 40 ) (3,500 [W-2]xRs.20 [W-3]) (2,500 [W-2]xRs.15 [W-3]) Transferred from dept 1

Cost of closing work in process

Transferred from Department 1 Material Labour & Prod OH

128,750 8,000 12,000 148,750 3,450,000 3,598,750 200,000 70,000 37,500 307,500

Rs.

W-2 : Equivalent Production Unit (EPU) Opening WIP Transfer in

Total

Accounted for Opening WIP Completed Started and completed Closing WIP Normal loss [(55,000 - 5,000)0.05) Abnormal gain (2,500 - 2,000) W-3 : Cost per unit for each element Material Wages Overheads Total costs per unit
Page 5 of 6

2,000 53,000 55,000

Material introduced in dept 2 ------------ Units -----------46,000 5,000 (500) 50,500 400 46,000 3,500 (500) 49,400

Labour & Prod. OH

2,000 46,000 5,000 2,500 (500) 55,000

Transfers from dept 1 Less: Scrap value of normal loss (2,500 Rs. 15)

Cost (Rs.)

2,057,500 37,500 2,020,000 988,000 488,000 244,000

EPU (W-2)

50,500 49,400 48,800 48,800

Cost per unit (Rs.) 40 20 10 5 75

800 46,000 2,500 (500) 48,800

A.6

Computation of total hours required for 1st and repeat orders Sale price per unit Less: Margin @ 20% Cost Less: Costs not affected by learning curve (W-1) Costs dependent on learning curve A B

MANAGEMENT ACCOUNTING Suggested Answers Final Examination Winter 2011

Variable cost (labour & overheads) per hourDept B (Rs. 2001.25) Avg. labour hours per unit for 1st and repeat order Labour hours per unit for 1st order Learning curve factor Relevant cumulative total volume factor as per table Units for 1st order Total units for 1st and repeat order Repeat order Applied fixed overheads - to be ignored

Working 1 Costs not to be affected by learning curve Direct Material Direct labour in Department A Variable overheads (25% of labour cost in Department A) (THE END)

C=A/B D E=C/D F G H (F G) J (H-G)

Rupees 10,500 2,100 8,400 4,250 4,150

250 16.60 20 0.83 1.80 500 900 400 3,350 720 180 4,250

Page 6 of 6