# Cost Management-May 2004

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.
Working notes should form part of the answer.
Make assumptions wherever necessary.
[Graph sheet will be provided on request]
Marks
1. (a) State the need for emergence of activity based costing. 4 (0)
(b) Explain the limitations of linear programming. 4 (0)
(c) A company manufactures two products. Each product passes through two departments A and B before it becomes a finished product. The data for a year are as under :

(i)
(ii) Products
Maximum sales potential in units
Product unit data :
Selling price per unit
Machine hours per unit :
Dept. A Hours
Dept. B Hours Aristocrat
7,400

Rs. 90

0.50
0.40 Deluxe
10,000

Rs. 80

0.30
0.45
(iii) Maximum capacity of Department A is 3,400 hours and of Department B is 3,840 hours.
(iv) Maximum quantity of direct materials available is 17,000 kg. Each product requires 2 kg of direct materials. The purchase price of the direct materials is Rs. 5 per kg.
(v) Variable costs are budgeted at Rs. 50 per hour for Department A and Rs. 60 per hour for Department B.
In view of the aforesaid production capacity constraints, the company has decided to produce only one of the two products during the year under review.
Required :

(i) Which of the two products should be produced and sold in the year under review to maximise the profit. State the number of units of that product and the resultant contribution.
(ii) The surplus capacity available in Department A or Department B after manufacture of either Aristocrat or Deluxe is proposed to be hired out to earn a contribution of Rs. 40 per hour in the case of Department A and Rs. 60 per hour in the case of Department B. Prepare a statement to show whether Aristocrat or Deluxe should now be produced to maximise the total contribution. Calculate such total contribution.
(iii) The company has been advised to produce 4,250 units of each product and also to hire out the surplus capacity of Department A and/or Department B. You are required to examine the feasibility of this proposal and to prepare a budget analysis showing the total contribution for the year.
16 (0)
2. (a) Explain the concept of relevancy of cost in the context of decision making. 4 (0)
(b) State the merits of cost–plus contracts. 3 (0)
(c) A single product company operates a system of standard costing. The following data relate to actual output, sales, costs and variances for a month :
Actual output

Actual sales and costs incurred :
Sales
Direct materials purchased and used 63,000 kg
Direct wages
Total costs 18,000 units
Rs.

12,15,000
2,04,760
2,12,040
2,77,020
3,25,000
10,18,810
Profit 1,96,190
Standard wage rate is Rs. 6 per hour. Budgeted output for the month is 20,000 units.
Variances are :

Direct materials

Direct labour

— Price variance
— Usage variance
— Rate variance
— Efficiency variance
— Efficiency variance
— Expense variance
— Expense variance
— Sales price variance 15,750A
27,000A
6,840A
10,800F
14,400F
3,420A
25,000A
45,000F
Required :

(i) Present the original budget along with cost sheet showing the standard cost and profit per unit.
(ii) Calculate the sales gross margin volume and fixed overheads volume variances.
(iii) Prepare an operating statement reconciling the budgeted profit with actual profit.
12 (0)
3. (a) Trace the stages involved in target costing. 4 (0)
(b) Explain the concept of learning curve and discuss its relevance to pricing decisions. 4 (0)
(c) A company has a normal manufacturing capacity of 1,50,000 units of a product per annum. The actual costs based on this output achieved during the last year were as under :

Direct materials
Direct labour
36
20
20
20
The budget for the next year envisages the following increases :

Direct materials
Direct labour
10%
5%
15%
In view of the substantial increase in material costs, the company explored the posibilities of using a substitute material. The company has been able to identify a cheaper source of direct materials which will cost Rs. 40 per unit of output. The tests reveal that the use of cheaper direct material as above will make the following impact on the costs:

– the direct labour cost will increase by Re. 1 per unit of output.
– it will lead to 5% rejection in output.
– it will result in a final quality testing programme evaluating an additional fixed cost of Rs. 4,00,000.
The selling prices are estimated as under for different levels of sales volume for the next year :

Selling price per unit (Rs.) :
Demand (1,000 units) : 128
190 136
170 144
150 152
140 160
125 168
110 176
95
Required :

(i) Advise whether the company should use the regular direct materials or cheaper direct materials to maximise its profitability by producing the normal volume of output.
(ii) Considering the range of selling prices estimated at different volumes of output, determine the selling price which will maximise the profit if : (A) regular direct materials are used and (B) cheaper direct materials are used.
(iii) Calculate for the price selected by you in (ii) above, the amount of fixed cost at which the company will be indifferent in choice of direct materials.
11 (0)
4. (a) What are the shortcomings in the use of simulation approach in solving operations research problems? 3 (0)
(b) State the benefits according from Enterprise Resource Planning (ERP). 4 (0)
(c) A company manufactures three products namely A, B and C. The current pattern of sales of A, B and C is in the ratio of 8 : 2 : 1 respectively. The relevant data are as under :
Products
Selling price per unit Rs.
Raw materials per unit Kg.
Direct materials per unit Kg.
Skilled labour hours/unit
Semi–skilled labour hours per unit
Variable overheads Rs. per unit A
130
0.50
0.25
4
2
20 B
230
1.2

6
2
40 C
417
2.5

8
3
80
The prices of raw materials and direct materials respectively are Rs. 100 and Rs. 40 per kg. The wage rates of skilled and semi–skilled labour respectively are Rs. 6 and Rs. 5. Each operator works 8 hours a day for 25 days in a month.

The position of inventories are as under :

Opening
Closing Raw Materials
Kg.
600
650 Direct Materials
Kg.
400
260 A Units

400
200 B Units

100
300 C Units

50
50
The fixed overheads amount to Rs. 2,00,000 per month and the company desires a profit of Rs. 1,20,000 per month.

You are required to prepare the following for a month :

(i) Sales budget in quantity and value.
(ii) Production budget showing the quantity to be manufactured.
(iii) Purchase budget showing the quantity and value.
(iv) Direct labour budget showing the number of workers and wages.
12 (0)
5. (a) Explain the critical success factors for the implementation of a programme of Total Quality Management (TQM). 4 (0)
(b) A hotel operated by a company has 180 single rooms and 60 double rooms. The rent of the double rooms is set at 160% of the rent of the single rooms. The operational costs per day per room are estimated as under :

Variable costs
Fixed costs Single Rooms
Rs.
300
500 Double Rooms
Rs.
500
780
The average occupancy of both the single rooms and double rooms is expected to be 85% throughout a year of 365 days. In fixing the room rent, the company desires to earn amargin of safety of 20% on its tariff.
Required :

(i) Calculate the tariff per day per (1) Single room and (2) Double room.
(ii) The hotel intends to reserve the normal occupancy of 12 single rooms for one of its valued corporate customers at a discount (excluding tax) of 10% of the rent What increase in the occupancy of the remaining single room days is required to compensate the loss arising from the discount.
7 (0)
(c) The budgeted data relating to two products manufactured by a company for a month are as under :

Selling price
Variable manufacturing costs
Sales commission Product A
300
160
60 Product B
200
60
40
Each unit of product incurs costs in the company’s two departments P and Q. The total capacity available for the month under review is budgeted to be 1,400 hours in department P and 2,000 hours in department Q. The capacity costs amount to Rs. 14,000 and Rs. 20,000 respectively per month for P and Q irrespective of the level of usage made of it. The number of hours required in each of these departments to complete one unit of output in as under :

Department P
Department Q A
2
5 B
4
4
The maximum output which the company can sell in the month is restricted to 400 units of either of the products.

You are required to formulate the Linear Programming (LP) model and solve it graphically to determine the optimal product mix and profit.

8 (0)
6. (a) Outline the objectives of Materials Requirement Planning (MRP). 4 (0)
(b) A project is composed of seven activities as per details given below :
Activity

1-2
1-3
1-4
2-3
2-5
3-5
4-5 Normal Time
(days)
4
2
5
7
7
2
5 Crash Time
(days)
3
2
4
5
6
1
4 Normal Cost
Rs.
1,500
1,000
1,875
1,000
2,000
1,250
1,500 Crash Cost
Rs.
2,000
1,000
2,250
1,500
2,500
1,625
2,125
Indirect cost per day of the project is Rs. 500.
Required :

(i) Draw the project net work
(ii) Determine the critical path and its duration.
(iii) Find the optimum duration and the resultant cost of the project.
8 (0)
(c) A company manufactures a component which requires a high degree of precision. Each unit of the component is therefore subjected to a strict quality control test to ascertain whether there is any defect in it. The defects are classified into three categories viz. A, B and C. If defect A occurs in the output, it is scrapped. If defect B or C occurs in the output, it is reworked to rectify the defect. The machine time required to rework defect B component is 30 minutes and that for defect C is 45 minutes. The probabilities are as under :

Defect occurring
Defect not occurring Defect A
0.15
0.85 Defect B
0.20
0.80 Defect C
0.10
0.90
Using the following random numbers, simulate a study of 10 items of output and determine the number of items with no defects, number of items scrapped due to occurrence of defect A and the total machine time required for rework due to occurrence of defect B or C :

Random number for defect A :

48 55 91 40 93 01 83 63 47 52
Random number for defect B :

47 36 57 04 79 55 10 13 57 9
Random number for defect C :

82 95 18 96 20 84 56 11 52 03
7 (0)