INDIAN INSTITUTE OF MANAGEMENT, BANGALORE MANAGERIAL ACCOUNTING END TERM EXAMINATION, 23RD FEBRUARY 2011 Name of Candidate ID No.

INSTRUCTIONS 1. This is a closed book examination. Calculators are allowed. Computers, mobile phones are NOT allowed 2. Please use only black or blue pens 3. This is a question cum answer booklet. Additional sheets if required may be provided; this should be pinned to the booklet 4. There are 7 questions and all 7 questions need to be answered. 5. There is no negative marking 6. Duration 1 Hour 30 minutes 7. Maximum marks 100; weightage 40%

For Faculty use Question No. 1 2 3 4 5 6 7 Total

Marks

Remarks

FACULTY SIGNATURE

INDIAN INSTITUTE OF MANAGEMENT, BANGALORE MANAGERIAL ACCOUNTING END TERM EXAMINATION, 23RD FEBRUARY 2011

1. Delta Screens Corporation is currently operating at 60% of capacity producing 6,000 screens
annually. Delta recently received an offer from a company in Germany to purchase 2,000 screens at Rs500 per unit. Delta has not previously sold products in Germany. Budgeted production costs for 6,000 and 8,000 screens follow: NUMBER OF UNITS PRODUCED 6,000 8,000 Rs 750,000 Rs 1,000,000 750,000 1,000,000 2,100,000 2,400,000 Rs 3,600,000 Rs 4,400,000 Rs 600 Rs 550

COSTS Direct materials Direct labor Support Total costs Full cost per unit

Delta has been selling its product at a markup of 10% above full cost. Deltas marketing manager believes that although the price offered by the German customer is lower than current prices, Delta should accept the order to gain a foothold in the German market. The production manager, however, believes that Delta should reject the order because the unit cost is higher than the price offered. Required: 1. Should this order be accepted or rejected? Give justification for your answer 2. Give three reasons to reject the offer

(7 marks) (3 marks)

SOLUTION: Computation of Variable costs for 2000 screens Direct material Direct Labour Support Total cost Variable cost per unit Since German order price exceeds the variable cost, the contribution of Rs.100 per screen will increase profits by Rs.2,00,000 2 a. Is this the best way of using surplus capacity. b. Fixed costs may not be fixed for increased production c. Will we be inviting our own competition 250,000 250,000 300,000 800,000 400

2. Pharout Company uses a standard cost system. Job 822 is for the manufacture of 500 units of the product P521. The companys standards for one unit of product P521 are as follows: QUANTITY 5 gm 2 hrs. PRICE Rs 2 per gm Rs 10 per hr.

Direct material Direct labor

The job required 2,800gms of raw material costing Rs 5,880. An unfavorable labor rate variance of Rs 250 and a favorable labor efficiency variance of Rs 100 also were determined for this job. Required: 1. Determine the direct material price variance for job 822. 2. Determine the direct material quantity variance for job 822. 3. Determine the actual quantity of direct labor hours used on job 822. 4. Determine the actual labor costs incurred for job 822. 5. Give three possible reasons for any adverse material usage variance 6. Give three possible reasons for any adverse labor efficiency variance

(2 marks) (2 marks) (4 marks) (4 marks) (3marks) (3marks)

SOLUTION: 1. Direct Material variance 2800 ( 2.1- 2.0) = 280 U 2. Direct Material Quantity variance 2 ( 2500-2800) = 600 U 3. Actual labor hours Efficiency variance = Std rate (Std. LH - Actual LH) 100 F = 10 (1000 x); x = 990 hours 4. Actual Labor cost = Rs.10, 150 Total variance = 250 U + 100 F = 150 U Std Cost + variance = Actual cost 10,000 + 150 = 10,150 or Rate variance = ALH (Std. Rate Actual rate) 250 U = 990 (10 y) Y = 10.2525 Actual Labor costs = 10.2525 x 990 = Rs.10, 150 5. Poor quality of material; inefficiency in process; lack of training/ carelessness, 6. Lack of training/ knowledge, operational inefficiency machine break down, power cut, no raw material, motivation

3. BB Limited makes three components: S, T and U. The following costs have been recorded: Component S Unit Cost Rs. 2.50 2.00 4.50 Component T Unit Cost Rs. 8.00 8.30 16.30 Component U Unit Cost Rs. 5.00 3.75 8.75

Variable cost Fixed cost Total cost

Another company has offered to supply the components to BB Limited at the following prices: Component S Component T Component U Price each Required: 1. Which component(s), if any, should BB Limited consider buying in? Why? (4 marks) 2. Give three factors that BB Ltd should focus on, given the above situation (6 marks) Rs. 4 Rs. 7 Rs.5.50

SOLUTION: 1. Component T should be bought in - as the price at which it can be bought in is lesser than the variable cost of production; In the other components, in addition to the price paid the fixed costs will continue to be incurred and hence the total cost will be more than the current cost. 2. Efficiency of production of all the components, as the price at which it can be bought in, is less than total cost. Economies of scale Access to more cost effective source of RM or other variable cost Whether fixed costs are directly attributable to the component production and whether they are avoidable

4.

Meals on Wheels operates a home meal delivery service. It has agreements with 20 restaurants to pick up and deliver to customers who phone or fax orders. MOW is currently reviewing its overhead costs for December 2010. Variable overhead costs for December were budgeted at $2 per hour of home delivery time. Fixed overhead costs were budgeted at $24,000. The budgeted numbers of home deliveries were 8000. Delivery time, the allocation base for variable and fixed overhead costs, is budgeted to be 0.8 hour per delivery. Actual results for December were: Variable overhead Fixed overhead Number of home deliveries Hours of delivery time

$ 14,174 $ 27,600 7,460 5,595

REQUIRED: 1. Compute the spending and efficiency variances for MOWs variable overhead budget and budget and volume fixed overhead variance in December (8 marks) 2. Comment on the results Given: Actual variable overhead Actual No. of home deliveries Actual hours of delivery time Actual fixed overhead 14,174 7,460 5,595 27,600 (4 marks)

Budgeted delivery time per home delivery - hrs Budgeted rate per hour - $ Budgeted home deliveries Budgeted Fixed o.h

0.80 2.00 8,000 24,000

Variable O.H spending Variance = Actual hours( svohr avohr) Actual vohr = 14174/5595 = 2.5333 Variable OH spending variance = 5595 ( 2.00 - 2.5333) Variable O.H efficiency variance = SVOHR ( Std.hours for actual home deliveries - Actual hours of delivery) Std hours for actual home deliveries = 7460 x 0.8 = 5968 VOH efficiency variance = 2 x ( 5968 -5595) Fixed OH budget variance = Budgeted FOH - Actual FOH

2984 U

746 F 3600 U

Fixed OH volume variance = Budgeted FOH - Applied FOH Applied FOH = Pretermined FOH rate x Std allowed hours Predetermined FOH rate = 24000/ (8000*0.8) = 3.75 Std hours for actual home deliveries = 7460 x 0.8 = 5968 FOH Volume variance = 24000 - (5968 x 3.75) = 1620

1620 U

Comments 1. The variable oh expenditure is more than budgeted 2. The operational efficiency in terms of delivery time is better than budgeted 3. Actual fixed expenditure is more than plan. This is the real control variance. 4. If fixed over heads are absorbed on a pre determined fixed overhead rate then the overhead would have been under-absorbed by 1620. However this should not be viewed in isolation.

5.

BDL plc is current preparing its cash budget for the year to 31 March 2003. An extract from its sales budget for the same year shows the following sales values: Rs. March April May June 60 000 70 000 55 000 65 000

40% of its sales are expected to be for cash. Of its credit sales, 70% are expected to pay in the month after sale and take a 2% discount: 27% are expected to pay in the second month after the sale, and the remaining 3% are expected to be bad debts. Determine the value of sales receipts to be shown in the cash budget for May 2002 (15 marks) Solution: March Sales 60,000 April 70,000 May 55,000 June 65,000

Cash sales Credit Sales Credit sale collections: March April May June May collections

24,000 36,000

28,000 42,000

22,000 33,000

26,000 39,000

24,696

9,720 28,812

11,340 22,638

60,532

6. A division of PLR plc operates a small private aircraft that carries passengers and small parcels for other divisions. During the year ended 31 December 2010, it carried 1024 passengers and 24 250 kg of small parcels. It incurred costs of 924 400. The division has found that 70% of its total costs are variable, and that 60% of these vary with the number of passengers and the remainder varies with the weight of the parcels. The company is preparing its budget for the 3 months ending 31 March 2011 using an incremental budgeting approach. In this period it expects: All prices to be 3% higher than the average paid in the year ended 31.12.2010 Efficiency levels to be unchanged; Activity levels to be: 209 passengers; 7200 kg small parcels.
st

a. The budgeted passenger related cost (to the nearest 100) for the three months ending 31st
March 2011 would be (5 marks) A. 81 600 B. 97 100 C. 100 000 D. 138 700 A

b. The budgeted small parcel related cost (to the nearest 100) for the three months ending 31 March 2011 would be (5 Marks) A. 64 700 B. 66 600 C. 79 200 C D. 95 213 c. The budgeted profit/loss for the quarter assuming the average passenger rate is 550 and parcel rate is 20, and fixed costs are incurred evenly through the year (give your answer to the nearest 100) 26,800

st

(5 Marks)
Actual for the year ended 31.12.2010 Passenger Sales Variable cost contribution Fixed costs Total 1,024 388,248 Per unit 379.15 Small Parcel Total 24,250 258,832 Per unit 10.67 Total Total 647,080 277,320

Budget for the quarter Total Sales Variable cost contribution Fixed costs Profit 209 114,950 81,619 33,331 Passenger Per unit 550 390.52 Small Parcel Total Per unit 7,200 144,000 79,155 64,845 20 10.99 Total Total 258,950 160,774 98,176 71,410 26,766

7. Best Bakery operates a bakery that produces French bread. The following information pertains to a particular month.

Actual results Units produced and sold Revenues 20,000

Flexible Budget Variances ? 1,000 U

Flexible Budget ? 20,000 ? 41,000 ? 24,600 ? 16,400 9,800

Sales Volume Variances ? 1,000 F ? 2,050 F ? 1,230 U ? 820 F ? ? 820 F

Static Budget ? 19,000

? 40,000 ? 25,000 ? 15,000 ? 10,000 5,000

38,950
? 23,370 ? 15,580 ? 9,800 ? 5,780

Variable costs

? 400 U ? 1,400 U ? 200 U ? 1,600 U

Contribution Margin Fixed Costs

Operating Income

? 6,600

Additional Information: a. Actual selling price per loaf = 2.00 b. Actual variable cost per loaf = 1.25 c. Budgeted contribution margin per loaf = 0.82 REQUIRED 1. Fill in the missing blanks ( 15 marks) 2. Give reasons why the actual operating income of 5,000 differed from the budgeted operating income ( 5 marks) SOLUTION : 2. The budgeted operating income is 5,780 while actual is .5000 for the following reasons: The sales volume variance indicates that the number of units sold is more due to which there is an additional contribution of 820. However the price realization is only 2 as against the budgeted 2.05 due to which revenue is less than budget by 1000 The variable cost that should have been incurred for the actual sales is 24,600 whereas actual was 25,000 indicating a lower efficiency than budgeted of 400 Fixed costs spend is more than budget by 200