Indian Institute Management, Lucknow PGP I (Term II) Mid-Term Examination Management Accounting (Section B&F) Max.

Time: 90 Minutes Max. Marks: 35

Note: (1) There are five questions. All questions are compulsory. (2) Marks carried by each question have been mentioned next to the respective question. (3) In case you need to make any assumption (tenable), mention it clearly.

Ques. No. 1: Preetam India manufactures a variety of apparels. It proposes to launch a new
product. For the new product, cost accountant of the company has prepared a monthly budget assuming 1000 units as expected level of monthly activity. The product is to be sold @ ` 525 per unit. The budgeted cost statement is as follows: Particulars Fabric Other Material (Buttons, Fabric for collars and cuffs, etc.) Direct labour (Paid based on piece-rate) Variable Overheads Wages Salaries Allocated Fixed Overheads (Factory Level) Other Fixed Costs ( including interest of ` 5000 per month) (3+4 Marks) Amount (`) 200 50 50 25 10 50 50 40

Required: (i) What is that minimum level of output (in terms of units) beyond which each unit sold will start generating profit? (ii) If the company desires to earn 30% p.a. ROI (before taxes) from the new product, what should the revised price be to attain the desired level of ROI? From the market survey, it is clear that company will not be able to sell more than 1000 units per months for next 4-5 years. (Assume, total investment made for the new product is ` 24 Lakh).
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Ques. No. 2: Zanta Ltd. manufactures two products, X and Y. Information related to these
products, collected in current month, is given below. Based on the past experience, it can be assumed that this information will be equally relevant for the coming month as well. (3 +2 Marks) Particulars Sales Price (Per Unit) Variable Costs (Per Unit) Direct Material Direct Labour Variable Overheads Total Fixed Costs (per month) Material Used (per unit) Labour hours required (per unit) Machine hours required (per unit) 4 Kg. 5 Hrs 2 Hrs 80 150 250 100 120 200 ` 5,00,000 5 Kg. 4 Hrs 3 Hrs Product X (`) 600 Product Y (`) 580

Required: Determine the optimal product-mix that will maximize profit of the company in following situation. Calculate corresponding profit as well. (1) Both products use the same material. The maximum amount of material available to the company is 21,400 Kgs per month. Besides, sales potential of the firm is limited to maximum of 5000 units per month. (2) Will there be any change in the optimal mix, given that maximum labour hours available are 25000 hrs per month {in addition to the constraints given in part (1)}.

Ques. No. 3: Following data relate to one of the three processes needed to manufacture a product at
XYZ Ltd. The company follows FIFO method of inventory valuation. (4+2 marks) Opening WIP: 1,000 units, worth ` 5,000 (Degree of completion: material 80%; Labour & Overheads 60%). Units (material) introduced in the beginning of process: 20,000 units, worth ` 78,400. Closing Inventory: 2000 units (Degree of Completion: material 100%; labour & overheads 80%) Total units transferred to the next process were 17,500. Normal loss: 5% on the fresh units (material) introduced in the process. Abnormal loss: (Degree of Completion: material 80%; labour & overheads 60%). Scrap can be sold @ ` 2 and ` 5 per unit in the case of normal and abnormal loss respectively. Required: (i) Calculate the number of equivalent units and cost of material per equivalent unit.
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(ii) Determine total cost of output/ units transferred to the next process (as per FIFO), given that labour and overhead costs are ` 2.00 and ` 1.50 per equivalent unit, respectively.

Ques. No. 4: Budgeted information of Beta Ltd. for the coming Quarter, July- Sep. 2010, is as
follows. Prepare Budgeted Cash A/C from the following information. (5 marks)

a. Manufacturing costs:
Raw Material (5 kg. per unit) : ` 25 per unit; Direct Labour (per unit) : ` 6; Variable Overheads (per unit) : ` 5. Total Fixed Overheads : ` 5,40,000 per annum (including depreciation of `40,000).

b. Normal capacity of the company is 60000 units per annum. c. Other Information:
Quarter I Particulars (Apr-Jun) Cash Balance as on June 30, 2010 Sundry Debtors as on June 30, 2010 Taxes Payable as on June 30, 2010 Budgeted Sales (in units; @ ` 60 per unit) Budgeted Production (units) Budgeted Labour Cost (`) ` 2,25,000 ` 3,00,000 ` 40,000 10,000 12,000 12,400 74,400 14,000 14,400 (Jul-Sep) (Oct-Dec) Quarter II Quarter III

d. Company maintains two types of inventories. Raw material inventory is maintained @ 10% of next
quarters production; finished goods inventory is maintained @ 20% of current quarters sales. e. All sales are on credit basis. In the previous quarter, 50% of the sales were received within the quarter of sales; the remaining amount was to be collected in the next quarter. The same trend is expected for the coming quarter. f. All the purchases (Raw Material) are on cash basis.

g. Selling & Admin. Expenses: Fixed ` 10,000; Variable ` 2 per unit sold. h. Taxes are paid in the next quarter; all other expenses are paid within the Quarter they were incurred. i. Purchases=Current production + Closing Inventory - Opening Inventory

Ques. No. 5: Indicate whether the following statements are True or False. Give suitable reasoning
(preferably within 30 words) to support your answers.
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(1.5 x 8= 12 Marks)

(i) Throughput and Contribution are the same concepts. (ii) Operating Costing is applicable to the firms providing services to themselves/ outside customers / both internal as well as outside customers.

(iii)In a transport company, all costs for a month before adding driver and conductors commission amount to ` 3,57,500. The company pays commission @ 15% of takings; and desires to earn 20% profit (before tax) on takings. The total takings to the company will be ` 5,50,000. (iv) For the allocation of Joint costs, Sale value at split-off method can be applied invariably to all the products, irrespective of the need for further processing to make them saleable.

(v) Under-absorption refers to the situation when the overheads actually incurred are more than those absorbed based on POHR. (vi) In ABC, overhead costs are accumulated across different Activity Cost Pools. The costs so accumulated are then absorbed by choosing a suitable driver for each cost pool. (vii) Firm XYZ has implemented ABC, and identified two major activity cost pools, viz., Machinery and Stores. The most suitable drivers for these cost pools will be value of the machine and direct material used, respectively. (viii) Cost of Product X will be ` 500 per unit; given that per unit costs of direct material & direct labour are ` 150 & 100, respectively. Besides, the product uses 20 machine hours and 5 transactions for handing of material to complete. Absorption rates for Machining and Stores are `10 per machine hour and `6 per transaction, respectively.