Management Accounting: T I C A P
Management Accounting: T I C A P
Management Accounting: T I C A P
June 2, 2009
Q.1 ABC Limited deals in a single product called HGV. It had prepared a budget for the year
ending December 31, 2009 which was based on the following key assumptions:
However, the position as shown by the management accounts prepared up to May 31,
2009 is not very encouraging and depicts the following actual results:
The marketing department advised the management that the failure to achieve targeted
sale is because a competitor has introduced another product which has been very popular
in the low income areas.
After due deliberations, the management has prepared a revised plan for the remaining
period of the financial year. The plan involves launching of a low grade version of the
existing product named LGV, to capture the low income market. Salient features of the
plan are as under:
(i) Sales mix of HGV and LGV is expected to be in the ratio of 1:2. Sale price of
HGV would be increased to Rs. 385, whereas sale price of LGV would be
Rs. 270.
(ii) A new machine will have to be purchased for Rs. 1.2 million.
(iii) For LGV two different types of raw materials i.e. A and B will be used in the ratio
of 5:3. However, the total weight of raw material used shall be the same in case of
both products. Presently A is available at the rate of Rs. 25 per kg whereas B is
available at the rate of Rs 45 per kg. The raw material consumption per unit of
HGV shall continue to be Rs. 90 per unit.
(iv) Production of HGV is carried out by skilled workers. However, only unskilled
workers would be required for the production of LGV. The wages of unskilled
workers would be 40% lower but labour hours per unit would be 10% higher than
HGV.
(v) Variable factory overhead cost per unit of LGV would be 10% lower than HGV.
(vi) Additional marketing cost would be Rs. 3 million.
Required:
Compute the sales amount and quantities for the remaining period, to achieve a break
even in 2009. (18)
(2)
Budget Actual
---------- Rupees ----------
Sales 27,000,000 27,295,000
Variable costs:
Raw Material (7,500,000) (8,461,450)
Labour (9,375,000) (9,463,125)
Variable overheads (3,000,000) (2,974,125)
Contribution 7,125,000 6,396,300
Required:
Compute eight relevant variances and prepare a statement reconciling budgeted
contribution with the actual contribution. (18)
Q.3 Clifton Hospital is interested in an analysis of the fixed and variable cost of supplies
related to patient days of occupancy. The following actual data has been accumulated by
the management:
Required:
Compute the variable cost of supplies per bed per day using the method of least square, if
the total number of beds in the hospital is 300. (08)
Q.4 SMD Corporation has commenced a project with the following time schedule:
Activity 0–1 1–2 1–3 2–4 2–5 3–4 3–6 4–7 5–7 6–7
Duration
2 8 10 6 3 3 7 5 2 8
in days
Required:
Construct network diagram and compute:
(a) Total float for each activity.
(b) Critical path and its duration. (11)
(3)
Q.5 MMTE Limited has witnessed a significant decline in profits over the past few years. A
study has revealed that the company’s sales have been stagnant over the years as it has
been regularly increasing the price of its only product i.e. PDT. However, since the cost
of production has been rising, the company is unable to reduce the price. The company’s
budget for the next year contains the following projections:
(i) Two types of raw materials i.e. A and B will be used in the ratio of 70:30.
(ii) The cost of raw materials would be Rs. 32 and Rs. 10 per kg respectively.
(iii) Wastage is projected at 8% of input quantity.
(iv) Labour rate has been projected at Rs. 400 for 8 working hours / day.
(v) One labour hour is estimated to be consumed for 4 kgs of finished products.
(vi) Variable overheads have been budgeted at Rs. 5 per kg of input.
(vii) Fixed overheads are estimated at Rs. 4,000,000 per annum.
A consultant hired by the company has carried out a detailed study and recommended the
following measures:
Hire a firm of Quality Assurance who would depute its expert staff to control the
ratio of wastage. The company will have to pay Re 0.5 per kg for the inspection of
material. It is expected that overall wastage would decrease by 80%.
It has been identified that factory workers are spending 25% more time as compared
to other manufacturing units of the industry. An incentive plan has therefore been
suggested, according to which the workers would be entitled to share 40% of the time
saved. It is expected that by implementing the incentive plan, the workers will
achieve the industry average.
Certain improvements have been suggested in the production process and this will
result in reduction in variable overheads by 20%.
It has been ascertained that staff performing various support functions is
underutilized. The company should therefore discontinue the services of some
members of the staff and allocate their work between the remaining staff. As a result,
fixed overheads will decrease by 25%.
Required:
Compute the amount of savings that the revised plan is expected to generate if the
required production is 2 million kgs of PDT. (15)
Q.6 Ahmed Sons (Pvt.) Ltd., a small sized manufacturer, is experiencing a short term
liquidity crisis. It needs Rs. 10 million by the end of next month and expects to repay it
within 6 months of the date of receipt.
(i) Obtain short term loan at an interest of 18 percent per annum, compounded
monthly.
(ii) Forego cash discount of 2% on some of its purchases. The total purchases are
approximately Rs. 12 million per month. The discount is offered for payment
within 30 days. However, if the payment is delayed beyond 90 days, it could
endanger the company’s relationship with the supplier.
(iii) Make arrangement with a factor who is ready to advance 75 per cent of the value of
the invoices after deduction of all factoring charges, immediately upon receipt of
the invoices. The balance shall be paid within the normal credit period presently
being availed by the customers.
The average sales are Rs. 25 million per month of which 60% are credit sales. The
company's customers pay at the end of the month following the month in which the
sales took place. This level is expected to remain steady over the next year.
(4)
The factor shall charge interest @ 15 percent per annum on the amount of money
advanced. He shall also charge factoring fee of 2 percent.
The company estimates that as a result of the above arrangement, it will save on bad
debts and the cost of credit control, aggregating Rs. 200,000 per month. Moreover,
the company can use any surplus funds made available to reduce its overdraft,
which is costing 1 percent per month.
Required:
Advise the company as to which of the three alternatives is cheaper. (12)
Q.7 XYZ Ltd presently uses a single plant wide factory overhead rate for allocating factory
overheads to products, based on direct labour hours. A break-up of factory overheads is
as follows:
Factory overheads
Production Support 1,225,000
Others 175,000
Total cost (Rs.) 1,400,000
It now plans to use activity-based costing to determine costs of its products. The
company performs four major activities in the Production Support Department. These
activities and related costs are as follows:
The planning department has gathered the relevant information which is given below:
Direct No. of
Batch Machine Inspections
Production labour Material
Products size hours hours per
in units hours per requisitions
(units) per unit unit
unit raised
Product X 10,000 2.5 125 7.50 0.2 320
Product Y 2,000 5.0 50 10.00 0.5 400
Product Z 50,000 2.8 10,000 3.00 0.1 30
Required:
Determine the factory overhead cost per unit for Products X, Y and Z under:
(a) Single factory overhead rate method.
(b) Activity Based Costing. (18)
(The End)