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Question 1 : Intel ltd produces and sells four products A,B,C, & D These products are similar and usually produced in production run of 10 units and sold in a batch of 5 units. The production details of these produce are as follows: Products Production (Units) Cost Per Unit: Direct Material (`) Direct labout (`) Machine hour rate (per unit) Factory work expense 22,500 Stores receiving costs 8,100 Machine setup costs 12,200 Cost relating to quality control 4,600 Material handling and dispatch 9,600 57,000 The cost drivers for these overheads are detailed below: Cost Factory work expense Stores receiving costs Machine setup costs Cost relating to quality control Material handling and dispatch Cost drivers Machine hours Requisitions raised No. of Production runs No. of Production runs No. of Production runs 30 25 5 40 30 4 35 30 3 45 40 4 A 100 B 110 C 120 D 150

The number of requisitions raised on the stores was 25 for each product and number of orders executed was 96 each order was in a batch of 0.5 units. Required (i) Total cost of each products assuming the absorption of overhead on machine hour basis.

(ii) (iii)

Total cost of each product assuming the absorption of overhead by using activity base costing, and Show the differences between (i) and (ii) and comment.

Problem: - 2 The following information has been extracted from the records of a Sun Shine chemical company; Standard price Standard mix (by weight) Standard yield Raw material A- ` 2 per kg. Raw material B - ` 10 per kg. A : 75% B : 25% 90%

In a period, the actual costs, usages and output were as follows: Used Output Calculate material cost variances. Problem: - 3 Supply the missing data in the following table: Particulars Sales Operating Income Operating assets Return on investment (ROI) Minimum required rate of return Residual income (RI) Division A ` 60,000 (a) ` 30,000 15% 10% (b) Division B 75,000 ` 25,000 (c) 10% (d) ` 5,000 Division C 1,00,000 (e) ` 50,000 20% (f) 0 2,200 kgs. of A, costing ` 4,650 : 800 kgs. of B, Costing ` 7, 850 2,850 kgs. of products

Problem: - 4

A company is organized on decentralized lines, with each manufacturing division operating as a separate profit center. Each division manager has full authority to decide on sale of the division s out siders and to other divisions. Division C has always purchase its requirements of a component from Division A. But when informed that Division A was increasing its selling price to ` 150, the manager of Division C decided to look at outside suppliers. Division C can buy the component from an outside supplier for ` 135. But Division A refuses to lower its price in view of its need to maintain its return on the investment. The top management has the following information: Cs annual purchase of the component 1,000 units

As variable costs per unit As fixed cost per unit Required: (i) (ii)

` 120 ` 20

Will the company as a whole benefit, if Division C buy the component at ` 135 from an outside supplier ? If A did not produce the material for C, it could use the facilities for other activities resulting in a cash operating saving of ` 18,000. Should C then purchase from outside sources? Suppose there is no alternative use of As facilities and the market price per unit for the component drops by ` 20. Should C now buy from outside?


Question 5 What is revenue and expense centre in an organisation ? Explain in brief what are the discretionary expenses and engineered expenses? Question 6 How variance analysis is helpful in management control system ? Question 7 Write short notes on any four a. Goal Congruence b. Internal Audit c. Properties of Management Control System d. EVA e. Objectives of Transfer Pricing f. Profit Centre


Problem: - 1 Raw Products Ltd.manufactures four products, namely A,B,C and D using the same plant and process. The following information relates to a production period: Products Output Cost per unit: Direct Material Direct Labour Machine hours per unit (`) (`) 42 10 4 hrs. 45 9 3 hrs. 40 7 2 hrs. 48 8 1 hr. (units) A 720 B 600 C 480 D 504

The four products are similar and are usually produces in production runs of 24 units and hold in batches of 12 units. Using machine hour rate currently absorbs the production overheads. The total overheads incurred by the company for the period is as follows: (`) Machine operation and maintenance cost 63,000 Setup costs 20,000 Store receiving 15,000 Inspection 10,000 Material handling and dispatch 2,592

During the period the following cost drivers are to be used for the overhead cost: Cost Setup cost Store receiving Inspection Material handling and dispatch Cost driver No. of production runs Requisition raised No. of production runs Orders executed

It is also determined that: Machine operation and maintenance cost should be apportioned between setup cost, store receiving and inspection activity in 4 : 3 : 2, Number of requisitions raised on store is 50 for each product and the number of orders executed is 192, each order being for a batch of 12 of a product. Required: (i) (ii) (iii) Calculate the total cost of each product, if all overhead costs are absorbed on machine hour rate basis. Calculate the total cost of each product using activity base costing. Comment briefly on differences disclosed between overheads traced by present system and those traced by activity base costing.

Problem: - 2 The standard output of product EXE is 25 units per hour in manufacturing department of a company employing 100 workers. The standard wage rate per labour hours is ` 6. In a 42 hour week, the department produced 1,040 units of EXE despite 5% of the time paid was lost due to an abnormal reason. The hourly wage rate actually paid were `6.20, ` 5.70 respectively to 10, 30 and 60 of the workers. Compute relevant variances.

Problem: - 3 A and B are the two newly established divisions of SUV Ltd. These two divisions operate as independent units, They have agreed to a 20% per annum charge for capital provided by SV Ltd. The budget for the divisions are as under: (` crores)

A Initial Investment Expected net cash flows: First year Years 2 to 8 (per annum) 10 1.9 2.9

B 15 3.2 4.2

In the first year of operation, A secured 5% increase in market share in sale of its products at the cost of B. Required: (i) Evaluate the performance of the two divisions as envisaged in the budget using ROI and residual income bases.


Calculate the net profit of the two divisions for the first year of operation based on the achievement of market share increase of 5% for A with corresponding reduction in market share for B.

Problem: - 4 Luxury Ltd. has two Division, Division A and Division B. Division A has a budget of selling 2,00,000 Nos. of a particular component EX to fetch a return of 20% on the average assets employed. The following particulars of Division A are also known: Fixed overhead Variable cost Average Assets: Sundry debtors Inventories Plant and equipments ` 2 lakhs ` 5 lakhs ` 5 lakhs ` 5 lakhs ` 1 per unit

However, there is constraint in marketing and only 1,50,000 units of the component EX can be directly sold to the market at the proposed price. It has been gathered that the balance 50,000 units of component EX can be taken up by Division B Division A wants a price of ` 4 per unit of EX but Division B is prepared to pay ` 2 per unit of EX Division A has another option in hand, which is to produce only, 1,50,000 units of component EX This will reduce the holding of assets by ` 2 lakhs and fixed overhead by ` 25,000. You are required to advise the most profitable course of action for Division A Question 5 How the management Control System helps to assess the divisional performance and divisional profit ? Question 6 Discuss the important factors influencing the balance score card? Question 7 Write short notes on any four a. Divisional Autonomy b. Role of a Financial Auditor c. Target Costing d. ROI Approach e. Transfer Pricing f. Activity Based Costing


Question 1 The abridged financial statements of Deportivo Ltd. for the years 2008-09 and 2009-10 are given below: (Rs. Million) Balance sheet as at 2010 Fixed assets Net current assets 31-3-2009 31-3-

370 400 770

480 500 980

Financed by: Shareholders funds Medium and long-term bank loans 595 175 770 720 260 980

(Rs. Million) Profit and Loss Account for the years Turnover Pre-tax accounting profit Taxation Profit after tax Dividend Retained earnings 2008-09 995 210 63 147 50 97 2009-10 1,180 265 80 185 60 125

Pre-tax accounting profit is taken after deducting the economic depreciation of the companys fixed assets (also depreciation used for tax purpose).

Additionally, the following information are available:

(a) (b) (c) 10. (d)

Economic depreciation was Rs. 95 million in 2008-09 and Rs. 105 million in 2009-10. Interest expenses were Rs. 13 million in 2008-09 and Rs. 18 million in 2009-10. Other non-cash expenses were Rs. 32 million in 2008-09 and Rs. 36 million in 2009-

Corporate tax rate in 2008-09 and 2009-10 was 30%.

(e) Deportivo Ltd. had non-capitalized leases valued at Rs. 35 million in each year 200708 to 2009-10. (f) (g) 10. (h) (i) The companys cost of equity was estimated as 14% in 2008-09 and 16% in 2009-10. The companys pre-tax cost of debt was estimated as 7% in 2008-09 and 8% in 2009-

The target capital structure is 75% equity and 25% debt. Balance sheet capital employed at the end of 2007-08 was Rs. 695 million.

Required: Estimate the Economic Value Added for Deportivo Ltd. for the years 2008-09 and 2009-10.

Question 2 A large company is organized into several manufacturing divisions. The policy of the company is to allow the divisional Managers to choose their sources of supply and when buying from or selling to sister divisions, to negotiate the prices just as they will for outside purchases or sales. Division X buys all of its requirements of its raw materials R from Division Y. The full manufacturing cost of R for Division Y is Rs. 88 per kg at normal volume. Till recently Division Y was willing to supply R to Division X at a transfer price of Rs 80 per kg. The incremental cost of R for Division Y is Rs.76 per kg. Since Division Y is now operating at its full capacity, it is unable to meet the outside customers demand for R at its market price of Rs 100 per kg. Division Y, therefore, threatened to cut off supplies to Division X unless the latter agrees to pay the market price for R.

Division X is resisting the pressure because its budget based on the consumption of 1,00,000 kgs. per month at a price of Rs.80 per kg. is expected to yield a profit of Rs.25,00,000 per month and so a price increase to Rs.100 per kg. will bring the Division X close to break-even point.

Division X has even found an outside source for a substitute material at a price of Rs.95 per kg. Although the substitute material is slightly different from R, it would meet the needs of Division X. Alternatively Division X is prepared to pay Division Y even the manufacturing cost of Rs. 88 per Kg.


i) Using each of the transfer price of Rs 80,Rs 88 ,Rs 95 and Rs.100 show with supporting calculations ,the financial results as projected by the a) b) c) Manager of Division X Manager of Division Y Company

ii) Comment on the effect of each transfer price on the performance of the managers of Division X and Division Y iii) If you were to make a decision in the matter without regard to the views of the Divisional Managers where should Division X obtain its raw materials from and at what price?
Question 3 A company has 20 cars in operation. The budget for the transport department based on 4,80,000 km of run for a year is Rs. 51,00,000 out of which a sum of Rs. 15,00,000 is fixed. During the year 2011 the total kilometers run by all the 20 cars were 4,50,000 and the costs incurred were Rs. 47,50,000. The cost of hiring a car would have been Rs.12 per km.

Evaluate the performance of the transport department on the basis of (i) (ii) Marks) (b) A company has two departments which are organized into profit centres. Department A produces a component which is used in department B for assembly into finished product P. one of component is required for each unit of P. Department B has prepared the following forecast of sales quantities and selling prices: (13 Marks) Sales quantity per week Average selling price per unit of P (Rs.) Cost center Profit center. (9

1000 2000 3000 4000 5000 6000

10.50 7.96 6.60 5.56 4.80 4.02

The manufacturing cost of P in Department B is Rs.7,500 for first 1000 units and Rs.1,500 per every 1000 units in excess of 1000 units. Department A incurs a total cost of Rs.3,000 for the first 1000 components and the cost will increase by Rs. 1,800 for every 1000 additional components produced in excess of 1000 components. The company has set at transfer price of Rs 2.40 per component for supplies to Department B. Required: (i) Prepare a schedule of profitability per week at each of the six levels of output for Departments A and B separately. (ii) Find the companys overall profitability per week at the output level at which Department As profit is maximum , and Department Bs profit is maximum. (iii) If the company is not organized into profit centre basis, what level of output will yield maximum profit to the company as a whole?
Question 5 How Relevant Costing is important for the analysis of the performance of the organization Question 6 Write short notes o any four 1. Impact of Fixed cost on the profitability of the organisation 2. Methods of measuring the divisional performance 3. Decision making through Activity Based Costing 4. Relevant Costing 5. Comparison between Internal Audit and Financial Audit 6. Investment Centre