CA Final Exam Papers Group II Cost Management November 2002

CA Final  Exam Papers Group II

 Cost Management

November 2002


This Paper has 18 answerable questions with 0 answered.

Total No. of Questions— 6]
Time Allowed : 3 Hours

Maximum Marks : 100
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, answers in Hindi, his answers in Hindi will not be valued.
Question No. 1 is compulsory.
Answer any four Questions from the rest.
All working notes should form part of the answer
Make assumptions wherever necessary.
(Log table, antilog table, graph sheet will be provided on request.)
1. (a) Explain, how does value chain approach help an organisation to assess its competitive advantage. 3 (0)
(b) State the requirements for operation of a Materials Requirement Planning (MRP) system. 5 (0)
(c) A construction Company has accepted contract AX and work, thereon is about to begin. However, the company has received an offer for another contract BX. The company cannot, due to certain constraints, take up both the contracts simultaneously. In case the company is desirous of taking up contract. BX, it can get the first contract AX rescinded upon payment of a penalty of Rs. 70,000
Contract AX Contract AX
Material X —in stock at original cost 54,000 —
Material Y —in stock at original cost — 62,000
Material X —firm orders placed at original cost 76,000 —
Material X —Not yet ordered (at current cost) 1,50,000 —
Material Z —Not yet ordered (at current cost) — 1,78,000
Labour —to be engaged and paid for 2,15,000 2,75,000
Site Management Costs 85,000 85,000
Travel and other expenses 17,000 14,000
Depreciation of Plant 24,000 32,000
Interest on Capital at 12% 12,800 16,000
Head Office expenses allocated to contracts 31,690 33,100
Total 6,65,490 6,95,100
Contract Price 7,20,000 8,80,000
Estimated Profit 54,510 1,84,900
The following additional information is available:

— Material X is not in regular use. It can be used as a substitute for other materials, which are currently quoted at 10% less than the original cost of X.
— Material Y is in regular use and its price has doubled since it was purchased. Its net realisable value if sold will be its new price less 15%. It can, however, be kept in store for use in other contracts to be taken up in the next year.
— If contract AX is undertaken, a part of the plant having spare capacity can be hired out for a rental of Rs. 15,000 for the period.
— It is the policy of the company to charge notional interest on the estimated working capital at 12% per annum.
— Either of two contracts can be completed by 31st March, 2003, which is the close of the company’s financial year.
— Site management cost is fixed.

(i) Using the relevancy of cost concept prepare a comparative statement to show the net beenfit resulting from each contract.
(ii) Advise the management of the company as to which of two contracts should be undertaken.
16 (0)
2. (a) State the benefits of product life–cycle costing. 4 (0)
(b) What are the common methods of obtaining initial feasible solution in a transportation problem. 3 (0)
(c) A single product company has prepared the following cost sheet based on 8,000 units of output per month:
Direct Materials 1.5 kag @ Rs. 24 per kg 36.00
Direct Labour 3 Hours @ Rs. 4 per hour 12.00
Factory overheads 12.00
Toal 60.00
The flexible budget for factory overheads is as under:

Output (Units) 6,000 7,500 9,000 10,500
Factory overheads (Rs.) 81,600 92,400 1,03,200 1,14,500
The actual results for the month of October, 2002 are given below:

— Direct Materials purchased and consumed were 11,224 kg at Rs. 2,66,570.
— Direct Labour hours worked were 22,400 and Direct Wages paid amounted to rs. 96,320
— Factory overheads incurred amounted to Rs. 96,440 out of which the variable overhead is Rs. 2.60 per Direct Labour hour worked.
— Actual output is 7,620 units.
— Work–in–process :
Opening WIP : 300 units:
Materials 100% complete
Labour and overheads 60% complete
Closing WIP : 200 units:
Materials 50% complete
Labour and overheads 40% complete
You are required to analyse the variances.

12 (0)
3. (a) Explain briefly four different categories of activities that drive the expenses at the product level. 3 (0)
(b) State, how is Zero base Budgeting superior to Traditional Budgeting 4 (0)
(c) A company has developed a new product. The sales volume of the new product was estimated to be between 15,000 and 20,000 units per month at a price of Rs. 20 per unit. Alternatively, if the selling price is reduced to rs. 18 per unit, the sales volume will be between 24,000 and 36,000 units per month. If the production is maintained below 20,000 units per month, the variable manufcturing cost will be Rs. 16.50 per unit and the fixed costs Rs. 48,500 per month. If the production exceeds 20,000 units per month, the variable manufacturing cost will be reduced to Rs. 15.50 per unit, but the fixed costs will increase to Rs. 64,500 per month. The company paid Rs. 40,000 as fee for market survey and in addition incurred a cost of Rs. 60,000 in developing the new product.
In the event of taking up this new line of business, it will be necessary to use the building space, which has been let out for a rental of Rs. 5,600 per month.

You are required to analyse the Potential profitability of the proposal of the company at different levels of output and make suitable recommendations relating to the price and volume of output to be set.

12 (0)
4. (a) Enumerate the main objectives of Transfer Pricing 3 (0)
(b) Explain the terms Resource smoothing and Resource levelling. 4 (0)
(c) A hospital operates a 40 bed capacity special health care department. The saiddepartment levies a charge of Rs. 425 per bed day from the patient using its services.
The data relating to fees collected and costs for the year 2001 are as under:

Fees collected during the year 34,95,625
Variable costs based on patient days 13,57,125
Departmental fixed costs 6,22,500
Apportioned costs of the hospital administration charges 10,00,000
Besides the above, nursing staff were employed as per the following scale at Rs. 48,000 per annum per nurse.

Annual patient days No. of nurses required
Less than 5000 3
5000 — 7,000 4
7000 — 9,000 6
Above 9,000 8
The projections for the year 2002 are as under:

— The costs other than apportioned overheads will go up by 10%
— The costs apportioned overheads will increase by Rs.2,50,000 per annum.
— The salary of the nursing stall will increase to Rs. 54,000 per annum per nurse.
The ocupancy of the bed capacity is not likely to increase in 2002 and consequently the management is actively considering a proposal to close down the department. In that event, the departmental fixed costs can be avoided.

(i) Present statements to show the profitability of the department for the years 2001 and 2002.
(ii) Calculate the :

— break–even bed capacity for the year 2002
— increase in fee per bed required to justify continuance of the department.
12 (0)
5. (a) Outline the limitations of Simulation. 4 (0)
(b) A company has 10 direct workers, who work for 25 days a month of 8 hours per day. The estimated down time is 25% of the total available time. The company received an order for a new product. The first unit of the new product requires 40 direct labour hours to manufacture the product. The company expects 80% (index is – 0.322) learning curve for this type of work. The company uses standard absorption costing and the cost data are as under:
Direct materials Rs. 60 per unit
Direct labour Rs. 6 per direct labour hour
Variable overheads Re. 1 per direct labour hour
Fixed overheads Rs. 7,500 per month

(i) Calculate the cost per unit of the first order of 30 units.
(ii) If the company receives a repeat order for 20 units, what price will be quoted to yield a profit of 25% on selling price?
8 (0)
(c) A project consists of the following activities with the time estimates noted against each:
Activity Time Estimate
(Weeks) Activity Time Estimate
1—2 2 3—7 5
1—3 2 4—6 3
1—4 1 5—8 1
2—5 4 6—9 5
3—6 8 7—8 4
8—9 3

(i) Draw a network diagram
(ii) Determine the critical path and its duration
(iii) Calculate the total float for each activity
7 (0)
6. (a) How does Total Quality Management (TQM) facilitate value addition in an organisation? 4 (0)
(b) A company manuactures three components. These components pass through two of the company’s departments P and Q. The machine hour capacity of each department is limited to 6,000 hours in a month. The monthly demand for components and cost data are as under:
Components A B C
Demand (units) 900 900 1350
Direct Materials/unit 45 56 14
Direct Labour/unit 36 38 24
Variable Overheads/unit 18 20 12
Fixed Overheads P. @ Rs. 8 per hour 16 16 12
Q. @ Rs. 10 per hour 30 30 10
Total 145 160 72
Components A and C can be purchased from market at Rs. 129 each and Rs. 70 each respectively.

You are required to prepare a statement to show which of the components in what quantities should be purchased to minimise the cost.

7 (0)
(c) A company manufactures two products namely A and B. The contribution per kg of output is Rs. 240 and Rs. 140 respectively for products A and B. The total fixed costs amount to Rs. 1,200 per week.
The production of two products is restricted by limited supplies of three items of raw materials namely P, Q and R. The quantities of P, Q and R which are necessary to produce single units of the products A and B together with the total stock of materials available each week are given below:

A Product
B Total Quantity
available per week
Raw material P 16 20 160
Q 10 25 150
R 4 0 32
Using the graphical approach of Linear Programming (LP), calculate the maximum Profit per week.

8 (0)

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