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Cost Management

Time : 3 hours Full Marks : 100


Answer to q. no. 1 is compulsory & answer any four questions from rest. Question 1 a. ABC Ltd. manufactures and sells four types of products under the brand names of P,Q, R and S. The sales mix in value comprises 33 1 / 3 %, 41 2 / 3 %, 16 2 / 3 % and 8 1 / 2 % Products P,Q,R & S respectively, The total budgeted sales (100%) are Rs. 60,000 month. Operating costs are Variable Costs: Product A Variable Costs: Product B Variable Costs: Product C Variable Costs: Product D Fixed cost Rs. 14,700 per month. 60% 68% 80% 40% of of of of the the the the selling selling selling selling price. price. price. price. 6

Calculate the break even point for the products on an over all basis. b.

X Ltd. having an installed capacity of 1,00,000 units of a product is currently operating at 70% utilisation. At current levels of input prices, the FOB unit costs (after taking credit for applicable export incentives) work out as follows: Capacity utilisation% 70 80 90 100 FOB Unit Costs (Rs.) 97 92 87 82

The company has received three foreign offers from different sources as under: Source A 5,000 units at Rs. 55 per unit FOB Source B 10,000 units at Rs. 52 per unit FOB Source C 10,000 units at Rs. 51 per unit FOB Advise the company as to whether any or all the export orders should be accepted or not

6.

c. d.

Explain, how does value chain approach helps an organisation to assess its competitive advantage. 4 What are the common methods of obtaining initial feasible solution in a transportation problem. 4

Question 2 a. Tip-top Textiles manufactures a wide range of fashion fabrics. The company considering whether to add a further product the Superb tot he range. A market research survey recently undertaken at a cost of Rs. 50,000 suggests test demand for the Superb will last for only one year during which 50,000 units could be sold at Rs. 18 per unit. Production and Sale of Superb would take place evenly throughout the year. The following information is available regarding the cost of manufacturing Superb: Raw Materials: Each Superb would require 3 types of raw material Posh, Flash and Splash. Quantities required, current stock levels and cost of each raw material are shown below. Posh is used regularly by the company and stocks are replaced as they are used. The current stock of Flash is the result of overbuying for an earlier contact. The material is not used regularly by Tiptop Textiles and any such that was not used to manufacture Superb would be sold. The company does not carry a stock of Splash and the units required would be specially purchased. Raw Material Quantity reqd. per unit of Superb (metres) 1.00 2.00 0.5 Current stock level (metres) 1,00,000 60,000 0 Costs per metre of raw material Original Current Current cost replacement resale cost value Rs. Rs. Rs. 2.10 3.30 2.50 2.80 5.50 1.80 1.10 5.00

Posh Flash Splash

Labour: Production of each Superb would require a quarter of an hour of skilled labour and two hours of unskilled labour. Current wages rates are Rs. 3 per hours for skilled labour and Rs. 2 per hour for unskilled labour. In addition, one foreman would be required to devote all his working time for one year in supervision of the production of Superb. He is currently paid an annual salary of Rs. 15,000. Tip-top Textiles is currently finding it very difficult to get skilled labour. The skilled workers needed to manufacture Superb would be transferred from another job on which they are earning a contribution surplus of Rs. 1.50 per labour hour, comprising sales revenue of Rs. 10.00 less skilled labour wages of Rs. 3.00 and other variable costs of Rs. 5.50. It would not be possible to employ additional skilled labour during the coming year. If Superb are not manufactured, the company expects to have available 2,00,000 surplus unskilled labour hours during the coming year. Because the company intends to expand in the future, it has decided not to terminate the services of any unskilled worker in the foreseeable future. The foreman is due to retire immediately on an annual pension payable by the company of Rs. 6,000. He has been prevailed upon to stay on for a further year and to defer his pension for one year in return for his annual salary. Machinery: Two Machines would be required to manufacture Superb MT4 and MT7. Details of each machine are as under: Start of the year End of the year Rs. Rs. MT4 Replacement Cost 80,000 65,000 Resale Value 60,000 47,000 MT7 Replacement Cost 13,000 9,000 Resale Value 11,000 8,000 Straight-line depreciation has been charged on each machine for each year of its life. Tip-top Textile owns a number of MT4 machines, which are used regularly on various products. Each MT4 is replaced as soon as it reaches the end of its useful life. MT7 machines are no longer used and the one which would be used for Superb is the only one the company now has. If it was not used to produce Superb, it would be sold immediately. Overheads: A predetermined rate of recover for overheads is in operation and the fixed overheads are recovered fully from the regular production at Rs. 3.50 per labour hours. Variable overhead costs of Superb are estimated at Rs. 1.20 per unit produced. For decision-making, incremental costs based on relevant costs and opportunity costs are usually computed. You are required to compute such a cost sheet for Superb with all details of material, labour, overhead etc., substantiating the figures with necessary explanations. 12

b.

Explain the terms Responsibility Accounting . .

Question 3 a. A company manufacturing a consumer product and marketing through its net-work of 400 depots all over the country is considering closing down the depots and resorting to dealership arrangement. The total turnover of the company is Rs. 200 crores p.a. The average turnover, costs etc. in respect of a depot is given below: Annual Turnover Average Inventory Administrative expenses Staff salary Rs. Rs. Rs. Rs. 50 lakhs 5 lakhs 50,000 p.a. 80,000 p.a.

The inventory carrying cost is 16% p.a. which is the rate of working capital finance. Marketing through dealers would involve engaging dealers for each area. The dealres will assure a minimum sale for each area. This would result in increasing the capacity utilisation from 75% as at present to 90%. The Company P/V Ratio at present is 10% and the BEP is 50% of the capacity. The current profit is Rs. 150 lakhs. Marketing through dealers would involve payment of a commission of 5% on sales. But 50% of existing Depot staff will have to be absorbed in the company. The dealers will deposit Rs. 5 crores with the company on which interest at 12% p.a. will be paid.

(1) You are required to work out the impact on profitability of the Company by accepting the proposal. (2) What will be your reaction if the commission to dealers is 4% on sales? (3) What other non financial considerations should be kept in view in the decision?

b.

Out line the limitations of Simulation.

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Five professors of MBA program have given assignments to five overloaded MBA students to be completed in a day. The Students do the assignments together. The time requirement, (in hours) for each of the students for any assignment and the time each student goes to bed (must) are indicated. Student Must I II III IV V go to bed at Wily Waman 2 5 1.5 3 5 10 pm Tricky Theresa 4 2 3 1 4 11 pm Bhola Babloo 1 3 4 2 1.5 9 pm Dont matter Damle 1.5 2.5 3.5 3 3 10 pm No-good Nagarajan 5 4 3.5 2 4 12 midnight It is now 7 p.m. Assuming that the students have read and followed this chapter, who would do which assignment ? Will they be able to do all the assignments ? 6
Question 4 a. An enthusiastic marketing manager suggests to his Managing Director that if only he is permitted to reduce the selling price of a product by 20 percent, he would be able to achieve a 30 per cent increase in sales volume. The Managing Director, finding that the sales volume increase exceeds in percentage the extent of requested reduction in price, gives the clearance. You are given the following information: Present Selling price per unit Present volume of Sales Total Variable Costs Total Fixed Costs Rs. 7.50 200,000 Nos. Rs. 10,50,000 Rs. 3,60,000

c.

Assuming no changes in the cost pattern in the coming period, i) Examine the consequences of the Managing Directors decision assuming that 30% increse in sales is realised. ii) AT what volume of sales can be present quantum of profits be sustained, after effecting the price reduction? 7 b. What is the significant of determining contribution per unit of key factor or limiting factor? Explain with suitable illustrations. 3 RAIMA project is having the following activities and their time estimates : Activity A B C D E F G H (a) (b) (c) Predecessor A A B C,B E D F,G Optimistic 2 8 14 4 6 6 18 8 Time (days) Likely 4 12 16 10 12 8 18 14 Pessimistic 6 16 30 16 18 22 30 32 2 2 2

c.

Draw the PERT Network for the project. Identify the critical path and calculate the expected time to complete the project. What is the probability that the project will require at least 75 days ?

Question 5 a. A company manufacturing a highly successful line of cosmetics intends to diversify the product line to achieve fuller utilisation of its plant capacity. As a result of considerable research made, the company has been able to develop a new product called EMO. EMO is packed in tubes of 50 gram capacity and is sold to the wholesalers in cartons of 24 tubes at Rs. 240 per carton. Since the company uses its spare capacity for the manufacture of EMO, no additional fixed expenses will be incurred. However the cost accountant has allocated a share of Rs. 4,50,000 per month as fixed expenses to be absorbed by EMO as a fair share of the companys present fixed costs to the new product for costing purposes. The company estimates the production and sale of EMO at 3,00,000 tubes per month and on this basis the following cost estimates have been developed: Direct Materials Direct Wages All Overheads Total Costs Rs. per carton 108 72 54 234

After a detailed market survey the economy is confident that the production and sales of EMO can be increased to 3,50,000 tubes per month and ultimately to 4,50,000 tubes per month. The company at present has a capacity for the manufacture of 3,00,000 empty tubes and the cost of the empty tubes if purchased from outside will result in a saving of 20% in material and 10% in direct wages and variable overhead costs of EMO. The price at which the outside firm is willing to supply the empty tubes is Rs. 1.35 per empty tube. If the company desires to manufacture empty tubes in excess of 3,00,000 tubes, a machine involving an additional fixed overhead of Rs. 30,000 per month will have to be installed. Required: i) State by showing your workings whether the company should make or buy the empty tubes at each of the three volumes of production of EMO namely, 3,00,000, 3,50,000 and 4,50,000 tubes. ii) iii) At what volume of sales will it be economical for the company to install the additional equipment for the manufacture of empty tubes? Evaluate the profitability on the sale of EMO at each of the aforesaid three levels of output based on your decision and showing the cost of empty tubes as a separate element of cost.

b.

8 A project consists of 7 activities. The time for performance of each of the activities is a random variable with the respective probability distribution as given below : Activity A B C D E F G Immediate predecessor A B, C D D E, F 0.50

3 0.20 4 0.10 1 0.15 4 0.80 3 0.10 5 0.20 2 0.50

4 0.60 5 0.30 3 0.75 5 0.20 4 0.30 7 0.80 3

5 0.20 6 0.30 5 0.10 5 0.30

7 0.20

8 0.10

6 0.30

(a) Draw the network diagram and identify the critical path using the expected activity times, 4 (b) Simulate the project using random numbers to determine the activity times. Find the critical path and the project duration.( two times ) A B C D E F G Run-1 97 95 12 11 90 49 57 Run-2 80 67 14 99 16 89 96 4 Question 6. a.
b. Outline the key attributes of an operational database. State the assumption of cost-volume profit analysis. 4 4

c.
A company has three factory and four customers. The company furnishes the following schedule of profit per unit on transportation of goods to the customers in rupees: Customers Factory A B C D Supply P 40 25 22 33 100 Q 44 35 30 30 30 R 38 38 28 30 70 Demand 40 20 60 30 You are required to solve the transportation problem to maximize the profit and determine the resultant optimal profit. 8