1

Cost Classification
1.

Identify the type of cost along with the reasons.

(i)

An advertising program has been set and management has signed the non negotiable contract for a
year with an agency. Under the terms of contract, agency will create 5 advertisements within the
contract duration for the company and company will pay 12,00,000 for each advertisement.

(ii)

A manager has to decide to run a fully automated operation that produces 100,000 widgets per year
at a cost 1,200,000, or of using direct labour to manually produce the same number of widgets for
1,400,000.

(iii)

A Company had paid 5,00,000 a Marketing Research company to find expected demand of the
newly developed product of the company.

(iv)

A company has invested 25 lacs in a project. Company could have earned 2 lacs by investing the
amount in Government securities.

(v)

A Oil Refining Co. has paid a salary of 20,00,000 to the chairman for a particular year. The
Company has sold 25 MT or Oil in that particular year.

(vi)

Accountant of a cloth factory paid 25,000 for water that has been used for washing clothes before
they go for final drying process.

Cost of Quality
2.

NJ assembles and sells racing bicycles. In an attempt to improve profit, during the latest year NJ reduced the
training it provided to its manufacturing staff. The following actual selling price and cost information is
available for the latest year:
Selling price
Frame cost
Other material cost
Assembly cost
Delivery cost
Contribution

$ per bicycle
1350
820
85
100
15
330

Annual quality cost information for the latest year

Inspection costs (manufacturing)
Staff training costs
Total cost of dismantling and
reassembling per bike (this includes the
collection cost of the faulty bicycle at $20)
Estimated market size (number of bicycles)

$2,300,000
$780,000
$200

2,500,000

Additional information for the latest year

3,000 completed bicycles were found to have a faulty frame before delivery to the customer. Each
faulty frame had to be replaced and the bicycle had to be reassembled. NJ is unable to recover the
cost of faulty frames from the supplier as the supplier has gone into liquidation.

NJ had to replace 1,500 bicycles that had already been delivered to customers due to a failure of the
frame.

The management team at NJ estimated that its market share fell to 8% from a forecast 8.5% due to
adverse consumer reaction as a result of criticism in the bicycle racing press.

Prepare a cost of quality report for NJ for the latest year under appropriate headings.

Transportation Problem - Maximization of Revenue

3.

Q & A Partners a leading CA firm has three managers. Each manager can work up to 176 hours during the
next month, during which time three assignments must be completed. Transfer Pricing Assignment will
take 143 hours, Corporate Valuation will take 154 hours, and Statutory Audit will take 176 hours. The
amount per hour that can be billed for assigning each manager to each assignment is given below:
Manager
Peter
Johns
Albert

Transfer Pricing
( )
1,800
2,100
2,400

Assignment
Corporate Valuation
( )
2,250
1,950
2,100

Statutory Audit
( )
2,850
1,800
2,250

Formulate this as a transportation problem and find the optimal solution. Also find out the maximum total
billings during the next month.
Note: A manager may be involved in more than one assignment.
Learning Curve
4.
SVC is a car manufacturer. SVC is planning the development of a prototype hydrogen powered car, the
Model Q. The prototype Model Q car will have a limited production run of 250 cars. To ensure that the Model
Q is ready by SVCs stated deadline, production will take place over the course of one month. Details for the
development and production of the prototype Model Q are shown below.
Note: a prototype is defined as a preliminary version of a vehicle from which other forms may be developed.
Forecast development cost
$6,500,000
Forecast design cost
$1,300,000
Forecast manufacturing costs
7

Material cost
Variable production overhead cost
Direct labour

$25,500 per car

$780 per car (this is not related to labour hours)
$60 per hour (see note 2 below)

Direct labour
SVC plans to hire a team of 12 specialist production staff. The specialist production staff will be paid a
premium on their basic hourly rate of pay dependent on the total number of labour hours required to produce
all 250 prototype Model Q cars as follows:
Total labour hours
0 2,000
2,001 2,500
2,501 3,000
3,001 3,500
More than 3,500

Premium on basic hourly labour rate

35%
30%
25%
20%
0%

The premium on the basic hourly labour rate will be applicable to all labour hours during production.
Learning curve
It is estimated that the manufacture of the first car will take 13 labour hours. There is expected to be a 95%
learning curve that will continue until 128 cars have been produced. Thereafter, each car will take the same
time to produce as the 128th.
Notes:
1.

The learning index for a 95% learning curve = -0.074

2.

The hourly direct labour rate stated above under Forecast manufacturing cost is inclusive of a
premium on the basic hourly labour rate, which has been calculated assuming that each of the 250
cars takes the same time to produce as the first.

3
5.

Calculate the total labour cost of producing 250 cars.

Great Eastern Appliances Ltd. (GEAL) manufactures consumer durable products in a very highly
competitive market. GEAL is considering launching a new product Kitchen Care into the market and
gathered the following data:
Expected Market Price
5,000 p.u.
Direct Material Cost- 1,850 p.u.
Direct Labour Cost
80 p.u.
Variable Overhead Cost- 1,000 p.u.
Packing Machine Cost (specially to be purchased for this product)- 5,00,000
GEAL expects the selling price for the new product will continue throughout the products life and a total of
1,000 units can be sold over the entire lifetime of the product.
Direct labour costs are expected to reduce as the volume of output increases due to the effects of 80%
learning curve (index is -0.3219). The expected time to be taken for the first unit is 30 hours and the
learning effect is expected to end after 250 units have been produced. Units produced after first 250 units
will take the same time as the 250th unit.
(i)

Calculate the expected total labour hours over the life time of the product Kitchen Care.

(ii)

Profitability of product Kitchen Care the GEAL will earn over the life time of the product.

(iii)

Average target labour cost per unit over the life time of the product if GEAL requires average profit of
800 per unit, to achieve its long term objectives. Note: 250 -0.3219 = 0.1691, 249 -0.3219 = 0.1693

Just in Time
6.

KP Ltd. (KPL) manufactures and sells one product called KEIA. Managing Director is not happy with its
current purchasing and production system. There has been considerable discussion at the corporate level
as to use of Just in Time system for KEIA:. As per the opinion of managing director of KPL Ltd.. - Justin-time system is a pull system, which responds to demand, in contrast to a push system, in which stocks
act as buffers between the different elements of the system such as purchasing, production and sales. By
using Just in Time system, it is possible to reduce carrying cost as well as other overheads.
KPL is dependent on contractual labour which has efficiency of 95%, for its production. The labour has to
be paid for minimum of 4,000 hours per month to which they produce 3,800 standard hours.
For availing services of labour above 4,000 hours in a month, KPL has to pay overtime rate which is 4%
premium to the normal hourly rate of 110 per hour. For avoiding this overtime payment. KPL in its current
production and purchase plan utilizes full available normal working hours so that the higher inventory
levels in the month of lower demand would be able to meet sales of month with higher demand level. KPL
has determined that the cost of holding inventory is 70 per month for each standard hour of output that is
held in inventory.
KPL has forecast the demand for its products for the first six months of year 2014 as follows:
Month
Jan14
Feb14
Mar14
Apr14
May14
Jun14

Demand
(Standard Hrs)
3,150
3,760
4,060
3,350
3,650
4,830

Following other information is given:

(a) All other production costs are either fixed or are not driven by labour hours worked.
(b) Production and sales occur evenly during each month and at present there is no stock at the end of
Dec13.
(c) The labour are to be paid for their minimum contracted hours in each month irrespective of any
purchase and production system.
As a chief accountant you are requested to comment on managing directors view.

4
Pareto Analysis
7.

Generation 2050 Technologies Ltd. Develops cutting-edge innovations that are powering the next
revolution in mobility and has nine tablet smart phone models currently in the market whose previous year
financial data is given below:
Model
Tab - A001
Tab - B002
Tab - C003
Tab - D004
Tab - E005
Tab - F006
Tab - G007
Tab - H008
Tab I009

Sales ( 000)
5,100
3,000
2,100
1,800
1,050
750
450
225
75

Profit-Volume (PV) Ratio

3.53%
23.00%
14.29%
14.17%
41.43%
26.00%
26.67%
6.67%
60.00%

Using the financial data, carry out a Pareto analysis (80/20 rule) of Sales and Contribution. Discuss your
findings with appropriate recommendations.
Life Cycle Costing and Pricing Strategy
Optimal Plant Capacity
8.

Y-Connections, China based firm, has just developed ultra-thintablet S-5 with few features like the ability to
open two apps at the same time. This tablet cost 5,00,000 to develop; it has undergone extensive
research and is ready for production. Currently, the firm is deciding on plant capacity, which could cost
either 35,00,000 or 52,00,000. The additional outlay would allow the plant to increase capacity from 500
units to 750 units. The relevant data for the life cycle of the tablet at different capacity level are as under:
Expected Sales
Sale Price
Variable Selling Costs
Salvage Value Plant
Profit Volume Ratio

500 units
79,600 per unit
10% of Selling Price
6,25,000
40%

750 units
69,600 per unit
10% of Selling Price
9,00,000

Required:
ADVISE Y-Connections, regarding the OPTIMAL PLANT CAPACITY to install. The tablets life cycle is two
years.
Note: Ignore the time value of money.

9.

PGI Ltd. (PGIL) has developed a new product a3 which is about to be launched into the market. Company
has spent 30,00,000 on R&D of product a3. It has also bought a machine to produce the product a3
costing 11,25,000 with a capacity of producing 1,100 units per week. Machine has no residual value. The
co. has decided to charge price that will change with the cumulative numbers of units sold:
Cumulative Saes (units)
0 to 2,200
2,201 to 7,700
7,701 to 15,950
15,951 to 59,950
59,951 and above

Selling Price
750
600
525
450
300

per unit

5
Based on these selling prices, it is expected that sales demand will be as shown below:
Weeks
1-10
11-20
21-30
31-70
71-80
81-90
91-100
101-110
Thereafter

Sales Demand per week (units)

220
550
825
1,100
880
660
440
220
NIL

Unit variable costs are expected to be as follows:

per unit
375
300
225
188
225

First 2,200 units

Next 13,750 units
Next 22,000 units
Next 22,000 units
Thereafter

Required:
(i)
Prepare the total contribution statement for each of the phases of the products life cycle.
(ii) Discuss Pricing Strategy of the product a3 in last 2 phases.
Balance Score Card
10.

Aditya Decors Ltd. (ADL) is a leading manufacturer of luxury sanitary products and has divided its whole
business into different product segments. At the Last year the management of ADL has decided to make
some changes in its one of product-line AADee the improved version was made available for sale from 1st
of April 2014.
At the end of the financial year 2014-15, the finance and accounts department has extracted some
relevant data for the product line AADee to analyse the decision taken last year. The data related with
AADee for the financial year 2013-14 and 2014-15 are as follows:
2013-14
4,00,000
4,175
24,00,000 kg.
470
32,00,000 hrs.
30
1,60,00,000

No. of Units Sold

Selling Price per unit
Direct Materials Consumed
Cost per kg. Of Direct Materials
Direct Labour Used
Rate per labour hour
Fixed Costs

2014-15
4,30,000
4,325
25,10,000 kg.
485
34,80,000 hrs.
31
1,76,00,000

ADL has the capacity to produce 5,00,000 units of AADee a year.

Required:
(i)

ANALYSE the changes in the operating income from financial year 2013-14 to 2014-15 with respect
to the following components:
(a)

(ii)

Growth,

(b)

Price- Recovery and

(c)

Productivity Components

RECONCILIATION of Operating Profit from 2013-14 to 2014-15.

6
Assignment Problem Maximization of Revenue
11.

Imagine yourself to be the Executive Director of a 5-Star Hotel which has four banquet halls that can be
used for all functions including weddings. The halls were all about the same size and the facilities in each
hall differed. During a heavy marriage season, 4 parties approached you to reserve a hall for the marriage
to be celebrated on the same day. These marriage parties were told that the first choice among these 4
halls would cost 25,000 for the day. They were also required to indicate the second, third and fourth
preferences and the price that they would be willing to pay. Marriage party A & D indicated that they wont
be interested in Halls 3 & 4. Other particulars are given in the following table:
Revenue/Hall
Marriage Party
A
B
C
D

Hall 1
25,000
20,000
17,500
25,000

Hall 2
22,500
25,000
25,000
20,000

Hall 3
X
20,000
15,000
X

Hall4
X
12,500
20,000
X

Where X indicates that the party does not want that hall. Decide on an allocation that will maximize the
revenue to your hotel.
Standard Costing
12. A co. has recently launched a new product. The following information is available for 1st month of production:
Budget
Production volume (units)
Direct material cost ($)
Direct labour cost ($)
Variable overhead cost ($)
Fixed costs ($)

Actual
300
11,400
15,000
6,000
125,000

Variance
256
10,500
4,000
1,750
115,000

44 A
900 F
11,000 F
4,250 F
10,000 F

The standard labour cost per unit of $50 that was used to calculate the budgeted labour cost was made up
of 2 hours at $25 per hour. However this ignored the impact of a learning curve which was expected to apply
for the first 300 units produced. The learning rate was expected to be 90%.
The variable overhead absorption rate is based on direct labour hours.
The actual rate of pay during the month was $25 per labour hour.
Note: The learning index for a 90% learning curve = -0.152.
Required:
(a) (i)
Prepare
performance report for the first month of production taking into account the learning effect.
(ii) Calculate the labour efficiency planning variance for the first month of production.
(b)
13.

Calculate the actual rate of learning that occurred during the first month of production assuming that
the actual time taken to produce the first unit was 2 hours.

Managing Director of Petro-KL Ltd (PTKLL) thinks that Standard Costing has little to offer in the reporting
of material variances due to frequently change in price of materials.
PTKLL can utilize one of two equally suitable raw materials and always plan to utilize the raw material
which will lead to cheapest total production costs. However PTKLL is frequently trapped by price changes
and the material actually used often provides, after the event, to have been more expensive than the
alternative which was originally rejected.
During last accounting period, to produce a unit of P PTKLL could use either 2.50 Kg of PG or 2.50 kg of
PD. PTKLL planned to use PG as it appeared it would be cheaper of the two and plans were based on a
cost of PG of 1.50 per Kg. Due to market movements the actual prices changed and if PTKLL has
purchased efficiently the cost would have been:
PG 2.25 per Kg;

PD 2.00 per Kg

7
Production of p was 1,000 units and usage of PG amounted to 2,700 Kg at a total cost of 6,480/You are required to analyze the material variance for P by:
(i)
(ii)
14.

Traditional Variance Analysis; and

An approach which distinguishes between Planning and Operational Variances.

S. Ltd operates a system of standard costing in respect of one of its products which is manufactured within
a single cost centre, the following information is available:
For one unit of product the standard material input is 20 litres at a standard price of 2 per litre. The
standard wage rate is 6 per hour and 5 hours are allowed to produce one unit. Fixed production overhead
is absorbed at the rate of 10% of direct wages cost.
During the month just ended the following occurred.
Actual Price (paid for material purchased)

1.95 per unit

Total Direct Wages Cost

1,56,000

Fixed Production Overhead

1,58,000

Variance
Direct Material Price
Direct Material Usage
Direct Labour Rate
Direct Labour Efficiency
Fixed Production Overhead Expenditure

Favourable
( )
8,000
2,760
-

Adverse
( )
5,000
5,760
8,000

Calculate the following for the month.

(i)
(ii)
(iii)

Budgeted output in units.

Number of litres used above standard allowed.
Actual hours worked.

(iv) Number of litres purchased.

(v) Actual units produced.
(vi) Average actual wage rate per hour.

Relevant Costing
15.

GF is a company that manufactures clothes for the fashion industry. The fashion industry is fast moving
and consumer demand can change quickly due to the emergence of new trends. GF manufactures three
items of clothing: the S, the T and the B using the same resources but in different amounts. Budget
information per unit is as follows:
S
T
B
$
$
$
Selling price
250
40
100
Direct materials ($20 per m2)
100
10
30
Direct labour ($12 per hour)
36
12
27
Variable overhead ($3 per machine hour)9
3
6.75
Total fixed costs are $300,000 per month. Included in the original budget constructed at the start of the
year, was the sales demand for the month of March as shown below:
S
T
B
Demand in March (units)
2,000
6,000
4,000

After the original budget had been constructed, items of clothing S, T and B have featured in a fashion magazine.
As a result of this, a new customer (a fashion retailer), has ordered 1,000 units each of S, T and B for
delivery in March. The budgeted demand shown above does not include this order from the new customer.
In March there will be limited resources available. Resources will be limited to:
Direct materials

14,500 m2 &

Direct labour 30,000 hours

There will be no opening inventory of material, work in progress or finished goods in March.
Required:

8
(a)

Produce a statement that shows the optimal production plan and the resulting profit or loss for
March. Note: you should assume that the new customers order must be supplied in full.

The Board of Directors have now addressed the shortage of key resources at GF to ensure that production will
meet demand in April. The production plan for the month of April is shown below:
S
T
B
Production (Units)
4,000
5,000
4,000
Required:
(b)
For April,
(i)
Calculate the breakeven sales revenue for the given product mix in the production plan.
(ii) Calculate the margin of safety percentage.
Question 16.
A company sells three products: D, E and F. The market for the products dictates that the numbers of
products sold are always in the ratio of 3D:4E:5F.
Budgeted sales volumes and prices, and cost details for the previous period were as follows:
Sales units
Selling price per unit
Contribution to sales ratio

D
300
$80
70%

E
400
$55
65%

F
500
$70
50%

The budgeted total fixed costs for that period were $31,200.
Required:
(a) Calculate for that period:
(i) the break-even sales revenue.
(ii) the volume of each product that would have needed to be sold if the company had wanted to earn
a profit of $29,520 in that period.
The budget for the previous period was based on the company having a 20% share of the total market of
6,000 units. It has now been realised that the size of the market had been under-estimated. The actual
total market size for that period was 7,500 units. During that period the company actually sold 1,740 units
for a total of $109,500. Unit variable costs were as expected but total fixed costs were 10% higher than
budgeted. The company reports variances using a standard marginal costing system.
(b) Calculate for the company for the previous period:
(i) The market size variance.
(ii) The market share variance.

Transfer pricing
Question 17.
Dust Co has two divisions, A and B. Each division is currently considering the following separate projects:
Division A
Division B
Capital required for the project
$326 million
$222 million
Sales generated by project
$144 million
$88 million
Operating profit margin
30%
24%
Cost of capital
10%
10%
Current return on investment of division
15%
9%
If residual income is used as the basis for the investment decision, which Division(s) would choose to
invest in the project?
A
B
C

Division A only
Division B only
Both Division A and Division B

9
D

Neither Division A nor Division B

Linear programme
Question 18
PTP produces two products from different combinations of the same resources. Details of the selling price and
costs per unit for each product are shown below:

Selling price
Material A ($12 per kg)
Material B ($5 per kg)
Labour ($20 per hour)
Variable overhead ($7 per machine hour)

Product E
$
175
60
10
40
14

Product M
$
125
24
15
20
28

The fixed costs of the company are $50,000 per month.

PTP aims to maximise profits from production and sales. The production plan for June is currently under
consideration. The following resources are available in June:
Material A
Material B
Labour
Machine hours

4,800kg
3,900kg
2,500 hours
5,000 hours

Identify the objective function and the constraints to be used in a linear programming model to determine
the optimum production plan for June. The solution to the linear programming model shows that the only
binding constraints in June are those for Material A and Material B. Produce, using simultaneous
equations, the optimum production plan and resulting profit for June. (You are NOT required to draw or
sketch a graph.)
19.

A linear programming model has been formulated for two products, X and Y. The objective function is
depicted by the formula C = 5X + 6Y, where C = contribution, X = the number of product X to be produced
and Y = the number of product Y to be produced.
Each unit of X uses 2 kg of material Z and each unit of Y uses 3 kg of material Z. The standard cost of
material Z is $2 per kg.
The shadow price for material Z has been worked out and found to be $280 per kg.
If an extra 20 kg of material Z becomes available at $2 per kg, what will the maximum increase in
contribution be?
A
Increase of $96
B
Increase of $56
C
Increase of $16
D
No change

Target Costing
Question 20
PBB is a toy manufacturer and retailer. PBB sells toys to consumers through its large network of retail
outlets in its home country and via the companys website.
PBB purchases the materials and components that it needs to manufacture toys from a number of different
suppliers. All of the purchases are delivered to PBBs raw material store at its factory and are held there until
they are needed for production.
Finished toys are transported from the factory to PBBs retail outlets by PBBs fleet of vehicles. The vehicles
follow the same schedule each week irrespective of the load they are carrying. Finished toys that are
destined for sale via the companys website are transported to PBBs distribution centre.
PBB has recently won the contract to manufacture and sell a new toy. The new toy, Toy Z, is a doll based on
a character from a very popular international childrens film. PBB is free to set the selling price of Toy Z as it

10
sees fit, but must pay a royalty fee of 15% of the selling price to the film company. PBB intends to sell Toy Z
through its network of retail outlets.
PBB plans to adopt a target costing approach for Toy Z. Market research has determined that the selling
price will be $25 per Toy Z. PBB requires a profit margin of 25% of the selling price of Toy Z.
The forecast costs per Toy Z are:
Component A
Component B
Other materials
Labour (0.4 hours at $15 per hour)
Product-specific production overhead cost
Product-specific selling and distribution cost

$
2.15
1.75
see note below for additional information
6.00
1.89
2.38

Note: Each Toy Z requires 0.6kg of other materials. These other materials are purchased from a supplier
at a cost of $4 per kg and 4% of all materials purchased are found to be substandard.
Calculate the cost gap that exists between the forecast total cost p.u. & the target cost p.u. of Toy Z.