Pm Exam Pattern

Marks
SectionA OT 15q * 2m 30
Section B OT Case 3case * 5q 30
Section C CR 2CR*20m 40
100

(target)
Time
Sections min max avg
A 30 45 40
B 30 45 40
C 120 90 100
180 180 180
High Low Method
Step1 : Find VC per unit

VC per unit or b = Cost of High Level - Cost of Low Level / High Level - Low Level

Step 2 : Find TFC by substituting in Cost Function

Cost Function ( Formulae)

Total Cost = Total Fixed Cost + Total Variable Cost

Total Cost = Total Fixed Cost + (VC per unit * Units)
Y = a + bX

Step3 : Calculate Total Cost of any Level by substituting in Cost Function

Traditional Costing Systems

Absorption vs Marginal Costing

used for Financial Reporting Purpose used for Decision Making and Internal Analysis Purpose
Absorption Costing Marginal Costing
Absorption Costing and Marginal Costing
Absorption DM Marginal (Variable Costing)
DL Product Cost
Product Cost
V.MOH
F.MOH
V.NMOH Period Cost
Period Cost
F.NMOH

Activity or Cost Driver : Production Units

Step1
OAR : Overhead Absorption Rate (at year starting)
OAR = Budgeted Total MOH Cost / Budgeted Total Activity

Step2 (during the year)

Aborbtion Amount = OAR * Actual Total Activity

Step3 (at the year end)

Under or Over Absorption Amount = Abosrbed MOH - Actual MOH
Target Costing (modern apporach)

Step1 Step2 Step3

Tradtional Approach Cost/u (+) Profit/u (=)Selling Price
(cost plus pricing) 38 8 46

Step1 Step2 Step3

Traget Costing Target SP (-) Profit/u (=)Target Cost/u
42 8 34
Step4
Current or Estimated C(-)Target Cos(=)Cost Gap
38 34 4

Step5 : Attempt to Close the Cost Gap

Value engineering and Value analysis devides costs in to two:
(1) Value added cost : are those costs, that customer percieves adding value to the product
(2) Non Value added cost :are those costs, that are not critical to customer preferance
and often are not known by customers

we can close the cost gap by reducing or eliminating non value added costs

Life Cycle Costing

nal Analysis Purpose
Limiting Factor or Constraint or Bottle-neck

Note:Limiting Factor : Limitation under which a company must operate, such as limited availabilty
of raw material,labour hours,machine time etc,which restricts the company's
ability to meet the Total Demand

Total Required > Total Available : Constraint

Total Required < Total Available : Not a Constraint

Key Factor Analysis

Steps
1 CM per Product
2 CM per Limiting Factor unit = CM per Product / LF unit per Product
3 Ranking or Preferance Order (step 2 : High to Low)
4 Production:
Demand
Ranking
Availability

Slack unused portion of constraint

Note : if there is Slack ; There is no Shadow Price ;(Shadow Price = 0)

Shadow Price will be only computed for Fully utilized Constraints

Under Key factor Analysis , 'Shadow price' will be 'CM per LF unit' of next product that will be produced

Throughput Accounting

Throughput Accounting or Throughput Costing : It is a Costing method of Theory of Constraints

Theory of Constraints

TOC states that every production process has atleast one constraint
TOC focuses on identifying this constraint and improve them
TOC states that a company can only improve productivity and profitability by improving the constraint

Throughput Accounting or Throughput Costing : It is a Costing method of Theory of Constraints

Throughput Costing is also known as Super Variable Costing

It helps in short-term decision making (very short term)

Assumptions of Throughput Accounting
(1) Only Variable Cost is Material
(2) All other costs (other than material) are called Factory Cost or Conversion Cost , and
they all are assumed to Fixed in nature

Costing Methods Benefit Used For

Absorption Costing Profit FR purpose

Marginal Costing or Variable Costing Contributi Decision Making

Margin

Throughput Costing or Super variable costing ThroughpuShort- term decision making

(SP - Material Cost/u = Throughput Contribution per unit)

(Sales Revenue - Total Material Cost = Total Throughput)

Throuhput Accouting is like Key Factor Analyis

steps KFA TP
1 CM per product TP per product
2 CM per LF unit TP per LF unit
3 Ranking Ranking
4 Production Production
(demand,availability,ranking) (demand,availability,ranking)

Throughput Accounting Ratio

(TP per LF hr / FC per LF hr)
TPAR > 1 : Viable
TPAR < 1 : Not Viable

TP per LF unit= TP per product/ LF unit per product

TP per LF unit= TP per product * Products per LF unit

bution per unit)
al Throughput)
CVP Analysis
Breakeven units = TFC/ CM per unit

Breakeven Revenue = Breakeven Units * Selling Price

BEP (u) = TFC/CM BEP (u) = TFC/CM

BEP (R.) = BEP(U) * SP BEP (R.) = BEP(U) * SP
BEP(R.) = TFC/CSR BEP(R.) = TFC/CSR

CSR = CM/SP or TCM/SR CSR = CM/SP or TCM/SR

VSR = VC/SP or TVC/SR
100% = CSR + VSR
CSR : Contribution to Sales Ratio
CSR expresses CM as % of SP
CSR = CM/SP

1 = (CM/SP) + (VC/SP)
1 or 100% = CSR + VSR

Variable Cost to Sales Ratio

VSR = VC per unit / SP or TVC/SR
Multiple Products' Break Even Point

Wieghted Average CM = Sum of (CM/u * Sales Mix)

BEP(Total units) = TFC/WACM

Splitted BEP(u) = BEP (TU) * Sales Mix

Single Product Multiple Products

BEP(U) = TFC/CM BEP(TU) = TFC/WACM

BEP(R) = TFC/CSR BEP(TR) = TFC/WACSR

WACSR = Total Contribution/ Sales Revenue (of any sales mix)

Minimum Breakeven point Revenue

Prefer Product having highest CSR first

Targeted or Planned Sales Units = TFC + Profit / CM per unit

Targeted or Planned Sales Revenue = Planned Units * SP

Single Product Multiple Products

BEP(U) = TFC/CM BEP(TU) = TFC/WACM

BEP(R) = TFC/CSR BEP(TR) = TFC/WACSR

Planned Units = TFC+Profit / CM Planned Total Units = TFC+Profit / WACM

Palnned Revenue = TFC+Profit/CSR Palnned Total Revenue = TFC+Profit/WACSR

Margin of Safety: How far the Planned sales is beyond Breakeven

MOS(u) = PS(u) - BEP(u)

MOS(R.) = PS(R.) - BEP(R.) or MOS(R.) = MOS(u) * SP

MOS Ratio (%) = MOS/PS

it builkd relationship between MOS and PS
MOS ratio expresess MOS as a % of PS

Note : MOS Ratio is Maximum % of Sales a Company can afford to lose before it stops being Profitable

Limitations of CVP

1) Sales Mix Constant assumption in Multiple product situation

2) CVP assumes that Production units = Sales units
3) Certanity assumption : CVP assumes that Future SP, VC/u and TFC are known
4) CVP assumes that all costs are either Fixed or Variable
5) CVP ignores Time Value of Money
6) Linearity assumption : TC and TR are assumed to be linear
> CVP assumes that TC and TR will only change due to the change in Units.
> SP,VC/u and TFC remains Constant

Pricing
Law of Demand Customer Prespective

Price Demand
Increase Decrease
Decrease Increase

Law of demand states that Price and Quantity Demand of a product has a 'inverse relationship'.

Law of Demand : Measuring Tool : Price Elasticity of Demand

change (delta)

% change in Price change in Price/Base Price

 % change in Qty DD change in Qty DD/ Base Qty DD

Price Elasticity of Demand is Ratio of % change in Qty DD and % change in Price

PED measures the impact on Qty DD due to price change
Price Elasticity of Demand = % change in Qty DD / % change in Price

P = a - bQ Demand Function
P : Price
Q : Qty DD
a : Price at which Q is Zero : a is known as Y intercept
b : The change in Price required to change Qty DD by 1u
b = change in Price / change in Qty' : b is known as Slope of the Line or Gradient

Optimum Price or Profit Maximization Price

Two methods:
(1) Tabular Method
 (2) Algebric Method

MR : Marginal Revenue : Additional Revenue from one additional unit

MC : Marginal Cost : Additional Cost from one additional unit
Usually MC is equal to Variable Cost/u

if MR > MC : Continue Production

if MR = MC : Stop Production (Profit Maximization Point)
if MR < MC : No production

(2) Algebric Method

P Q P= a-bQ
Price Qty DD

Step 1 : Calculate 'b' b = change in Price / change in Q

Step 2 : calculate 'a' by substituting in Demand Function

Step 3 : Formulate MR Function MR = a-2bQ

Step 4 : Find Optimal 'Q' by substituting in MR=MC (MC is usually VC/u)

Step 5 : Find Optimal 'Price' by substituting in Demand Function

Tools to manage Risk and Uncertainity

1 Market Research
2 Expected Value
3 Maximax
4 Maximin
5 Minimax Regret
6 Decision Tree (using Expected Value)
7 Simulation
8 Sensitivity Analysis
9 Scenario Planning
Risk Attitudes
Tools
Maximin Risk Averter (avoids risk) Pesimestic
Maximax Risk Seeker (desire for risk) Optimistic
Expected Value Risk Netral
Minimax Regret Sore Loser (the one who gets angry when he fails)

example
Pay-off Table
Outcomes Actions (control)
Weather Probability Coffee Softdrinks
Cold 40% ₹ 2,000.00 ₹ 800.00
Hot 60% ₹ 1,000.00 ₹ 2,400.00

EV ₹ 1,400.00 ₹ 1,760.00

Risk Neutral Decision maker will select the Action having Highest EV
here the decision maker will select Soft-drinks
EV with Perfect Information
EV with Perfect Information
(-) EV without Information (highest EV)
(=) Value of Perfect Information (maximum amount you will be willing to pay

Note : if there is any Cost related to obtaining the Information, it should be deducted while computing Expected Value of Pe

Maximin , Maximax and Minimax Regret

Maximin Risk Averter (avoids risk) Pesimestic
Maximax Risk Seeker (desire for risk) Optimistic

Pay-off Table
Outcomes Actions (control)
Weather Probability Coffee Softdrinks Maximax :
Cold 40% ₹ 2,000.00 ₹ 800.00 Maximin :
Hot 60% ₹ 1,000.00 ₹ 2,400.00
Maximin Steps
₹ 1,000.00 ₹ 800.00 Step1 : Select Worst Outocme of Each Actio
Step2 : Select Action having least worst Out

Minimax Regret

Minimax Regret Sore Loser (the one who gets angry when he fails)

Step 1 : Prepare Regret Table

Regret amount = best outcome - each outcome

Step 2: Select Maximum Regret of Each action

Step3 : Select Action having Least Regret

(minimum of maximum regret)

Pay-off Table
Outcomes Actions (control)
Weather Probability Coffee Softdrinks
Cold 40% ₹ 2,000.00 ₹ 800.00
Hot 60% ₹ 1,000.00 ₹ 2,400.00

Regret Table
Outcomes Actions (control)
Weather Probability Coffee Softdrinks
Cold 40% ₹ - ₹ 1,200.00
Hot 60% ₹ 1,400.00 ₹ -

Maximum Regret : ₹ 1,400.00 ₹ 1,200.00

Sensitivity Analysis
(1) Selling Price Senstivity (%) = Profit / Sales Revenue * 100

(2) Variable Cost Sensitivity (%) = Profit / TVC *100

(3) Fixed Cost Sensitivity (%) = Profit / TFC * 100

(4) Sales Units Senstivity (%) = Profit / TCM *100

or Margin of Safety Ratio (%) = MOS/ Planned Sales

Senstivity % Risk (sensitive, critical)

Low High
High Low

Simulation (only theory)

(problem no need)
Scenario Planning
 CSR=CM/SP
CSR=TCM/SR
VSR=VC/SP
VSR=TVC/SR

CSR+VSR=100%

CM*units =TCM
SP*units =SR

1=CM/SP+VC/SP
pe of the Line or Gradient
sually VC/u)
t you will be willing to pay for getting Perfect Information)

ting Expected Value of Perfect Information

(select action having the highest possible outcome)

Decision
Softdrinks
 Coffee

st Outocme of Each Action

on having least worst Outcome
Relevant Costing

Shutdown Decision
Make or Buy
Sell or Process Further decision
Accepting or Rejecting One-off Contract (Relevant Cost of Material , Labour and NCA)

Shutdown Decision

Example Forecasted data:

Soap Shampoo
Sales revenue 1000 3000
(-) TVC 400 1200
(=) TCM 600 1800
(-) TFC 900 300 (need more infor abt Fixed Costs)
(=) Profit -300 1500 1200
Loss Profit

Shutdown Soap or Not?

Fixed Cost can be devided in to two types:

Specific Avoidable Direct Traceable

General Unavoidable Indirect Allocated

Soap Shampoo
Specific 500 200
General 400 100
TFC 900 300

method 1:-
Avoidable Cost - Lost Sales Revenue = Incremental Profit or Loss if we shutdown

decision creteria :-
Inc P/L Decision
AC < LSR Inc Loss Continue
AC > LSR Inc Profit Close
Relevant Method no :2 (ACCA style)

decision creteria :-
Inc P/L Decision
AFC < LCM Inc Loss Continue
AFC > LCM Inc Profit Close

Make or Buy
Insourcing or Outsourcing

Avoidable Cost - Buying Cost = Incremental Profit or Loss if we Buy

Decision Creteria
if Inc P/L if Decision
AC > BC Inc Profit Buy
AC < BC Inc Loss Make

Sell or Process Further and Sell

Benefit Cost
Incremental Revenue (-) Incremental Cost (=) Incremental P/L if further processed

Decision Cretria: Inc P/L if processed f Decision

if IR > IC : Inc Profit Process Further & Sell
IR < IC : Inc Loss Sell (Don’t process further)

Note: Sunk Costs are past costs, which is already incured and cannot be recovered.
Sunk cost are irrelevant in Decision making
Joint Cost is an example of sunk cost

One-off contracts or Special one-time Contract

(Special SP - Minimum SP) * Ordered units = Incremental P/L if we accept

Opportunity Cost Approach

Minimum Price = Additional Cost + Opportunit Cost (Lost CM)

Relevant Cost:- Irrelevant

(1) Future (sunk cost )
(2) Incremental (unavoidable)
(3) Cash Transactions (notional : non cash)
(committed cost )
 Learning Curve

LC is based on 'Wrights Law'

It states that Learning only happens when the total activity 'doubles'.
It also assumes that , the learning rate will be 'constant'

Concept:
It is an idea that efficiency increases, the more expieriance a person have
with the given task. As a result, the time required for performing
that task decreases.

Cumulative Total Time = Cumulative Average Time * Total Units

TT = YX

Y = ar^n
a time taken for the first unit
r learning rate
n no;of times doubled(or learned)

Learning Curve Formulaes

Tabular Y=ar^n TT=YX
Algebric Y=aX^b TT=YX

b : learning index : b= log(r.)/log(2)

Limitations of Learning Curve

Learning Rate constant assumption
It assumes that leanring happens only when the activity doubles
Less suitable for Machine -intensive productions
Not suitable for non-repetative tasks
Less suitable for old products
Accuracy is hard to achieve
, Labour and NCA)

Traceable
tal P/L if further processed
vity doubles
Material Variance

Summary
MCV = MUV + MPV SQ = SIO * AO
MCV = SQ*SP - AQ*AP SIO = BQ/BO
MUV = (SQ-AQ)*SP AQSM = Total AQ *Std Mix
MPV = (SP-AP)*AQ SO = Total AQ / Total SIO
Total SIO = Total BQ / BO
MUV = MMV + MYV
MMV = (AQSM-AQ)*SP
MYV =(AO-SO)*SP per Output
MYV = (SQ-AQSM)*SP

Planning and Operational Varainces of Material

Traditional MPV = (SP- AP)AQ

Operational MPV = (Revised SP - AP)*AQ
Planning MPV = (SP - Revised SP)*AQ

Traditinal MUV = (SQ - AQ)*SP

Operational MUV = (Revised SQ - AQ)*SP
Planning MUV = (SQ - Revised SQ)*SP

SQ : Std Qty allowed for Actual Output = SIO * AO

RSQ : Revised Qty allowed for Actual Output = Revised SIO * AO

Labour Variances

Labour Cost Variance = Labour Efficiency Varaiance + Labour Rate Variance

LCV = SH*SR - AH*AR SH = SIO * AO
LEV = (SH-AH)*SR SIO = BH/BO
LRV = (SR-AR)*AH AHSM = Total AH *Std Mix
SO = Total AH / Total SIO
Total SIO = Total BH / BO
LEV = Labour Mix Variance + Labour Yield Variance
LMV = (AHSM-AH)*SR
LYV =(AO-SO)*SR per Output
LYV = (SH-AHSM)*SR

Planning and Operational Varainces of Labour

Traditional LRV = (SR- AR)AH

 Operational LRV = (Revised SR - AR)*AH
Planning LRV = (SR - Revised SR)*AH

Traditinal LEV = (SH - AH)*SR

Operational LEV = (Revised SH - AH)*SR
Planning LEV = (SH - Revised SH)*SR

SH : Std Hour allowed for Actual Output = SIO * AO

RH : Revised Hour allowed for Actual Output = Revised SIO * AO

Sales Variances

Total Sales Variance = Actual Sales Revenue - Budgeted Sales Revenue

Total Sales Varaince = (AO * AP) - (BO * SP)

Traditional SPV = (AP - SP )* AO :-

Planning SPV = (RP - SP ) * AO
Operational SPV = (AP - RP) * AO

Traditional SVV = (AO - BO) *Std benfit per unit:-

Planning SVV = (RO - BO) *Std benfit per unit
Operational SVV = (AO - RO) *Std benfit per unit

SMV = (AO - AOSM)*Std benfit/u

SQV = (AOSM - BO)Std benefit/u
AOSM = Total AO * Std Sales Mix

Market Variances

Planning Sales Volume Variance is also known as Market Size Variance

Operational Sales Volume Variance is also known as Market Share Variance

Operational SVV or Market Share Variance = (AO - RO)*Std benefit/u

Planning SVV or Market Size Variance = (RO - BO) Std benfit/u

Revised Output =Actual Market Size * Std Market Share

Revised Output = Budgeted Output +/-% change in market size
Overehad Cost Variance can be devided in to two:
Variable Overhead Variance
Fixed Overhead Variance

Variable Overhead Variance

VOH Cost Variance= (SH*SR) - (AH*AR)

VOH Cost Variance can be devided in to two:-
VOH Expenditure Varaiance = (SR-AR)*AH
VOH Efficiency Variance = (SH-AH)*SR

Fixed Overhead Variance

under Marginal Costing - there is no Fixed OH Variances

under Absotption Costing
Fixed OH Total Variance = Absorbed - Actual
FOH Expenditure Variance = Budgeted - Actual
FOH Volume Variance = Absorbed - Budgeted
FOH Efficicency Variance = Absorbed - Standard
FOH Capacity Variance = Standard - Budgeted

Formulae
Hour Output
Budgeted BH*SR/h BO*SR/o
Standard AH*SR/h SO*SR/o
Absorbed SH*SR/h AO*SR/o
Actual AH*AR/h AO*AR/o
Budgeting
Decision Cretria:

Company aNew Inst ROI > WACC : Accept

New Inst ROI < WACC : Reject

Segment Manager :
New Invst ROI > Current ROI : Accept
New Invst ROI < Current ROI : Reject

Residual Income
Decision Creteria under RI for both CO as a whole and Segment Manager

RI : Positiv --------------New Ivst ROI > WACC

RI : Negati --------------New Ivst ROI < WACC
Advantages
Minimum TP = Marginal Cost (additional cost) + Opportunity Cost (Lost CM)
OC = Sacrificed units * CM/u
 Income statement - SOPL
SALES 2311
less COGS 1344
= GP 967
less OPERATING EXP 691
= EBIT/PBIT/OP 276
less INTEREST 141
= PBT 135
less TAX 45
= NET INCOME/NP/PAT/EAT 90

Balace sheet - SOFP Quickness

CASH 84 1
MARKETABLE SECURITIES 65 2
A/R 100 3
INVENTORY 393 Not Quick
TOTAL CA 642

PPE 2731

TOTAL ASSETS 3373

A/P 312
SHORT TERM LOAN 231
TOTAL CL 543

LONG TERM DEBT 531

TOTAL LIABILTIES 1074

OWNER'S EQUITY 500

RETAINED EARNINGS 1799
TOTAL EQUITY 2299

TOTAL LIABILITIES AND EQUITY 3373

PURCHASE 1737
DIVIDEND 100
WORKING CAPITAL 99
*Prepaid not Quick so deduct from CA
Balanced Score Card
Objective Measure
PerspectivGoals/CSF KPI Target Actual

Financial Sales Growth Sales Growth % 20% 18%

Cost Reduction Cost/u $10 $9.5
Profit Maximization Profit Margin 25% 27%
Asset Utlizatiation Asset Turnover 3$ 2.8$

Customer Customer Satisfaction Cstmr Sat score(o 9.5 8

Customer Retention Retention % 80% 75%
Customer Acquisition No of new custo 200 220
Quality of the Product Quality Ratings (o 4 3.5
Increase Market Share Market Share %

Internal Business Process & innovation

Improve Speed of Production Cycle time 5h 6h
Increase Efficiecny Idle time % 10% 15%
Reduce Defective units Spoilage % 2% 3%
New Products lauches no of new produc 2 1
Simplification of Process no of process sim 15 16

Learning and Growth

Employee Satisfaction Satisfaction Ratin 7.5 8
Training no of trainjing se 15 20
Quality of Employees % of employees pr 60% 30%
Profitability Ratios
1)Gross profit margin GP/Sales 41.8%
2)Operating profit margin OP/Sales 11.9%
3)Net profit margin NP/Sales 3.89%
4)ROCE Op/CE
Capital Employed Total Equi 2830
Total Asset 2830
PPE+WC 2830
ROCE OP/CE 9.75%

Asset TOR Sales/CE 81.66%

ROCE Asset TOR 9.75%

Liquidity Ratios

1)Current ratio CA/CL 1.18232 times

2)Quick ratio QA/CL 0.458564 times
or Acid Test ratio Quick Asse 249

3)Inventory Holding Period Avg inv/C 106.7299 days

4)Debtors Collection Period Avg A/R/Cr 15.79403 days

5)Paybales payment period Avg AP/Cre 65.56131 days

or Avg AP/COS*365
Risk Ratios

1)Financial Gearing Ratio Debt/Equit 23%

or Debt to Equity Ratio Debt/(Debt 18.8%
Higher the gearing ratio, higher the risk

2)Interest Coverage Ratio OP/Interes 1.957447 times

3)Dividend Coverage Ratio NP/Divden 0.9

 comment
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Financial Statement Analysis - Framework

Headings (Particular or Standrrd Ratios)

change
change (brackets : computations) good/bad
% Increase or Decrease (change / base) why?impact?
% point Increase or Decrease
$ or any unit Increase or Decrease

(if ratio : meaning)

Good/ Bad

why?or /and impact?

Connect it to the scenerio
Connect between the headings
general

Overall Conclusion
 X Y
Productiuon Total Cost
200 ₹ 2,000.00
500 ₹ 3,500.00
300 1,500.00
b= cost at high level - Cost at low level
5.00 VC/u high level - low level

Y = a+bX

2000 = a + 5*200
a 1000
a= 1000 b 5

30000 1000 u
31600 1400 u

1600 400
4 Vc/u Y = a + bX
30000 = a + 4*1000

2100 u a 26000
b 4

34400

LL 400 36880
440 39840
420 36800
HL 460 40000
60 3120

52 b 52

a 16080

Q3
Acitivity Cost
hrs 500 $ 4,750.00
hrs 1200 $ 9,700.00 400 $ 9,300.00

Total Fixed Cost will Step Up (Jump) by $400 after 1000 hrs
Calculate total cost of b 6.5
(a) 700 hrs a 1500
(b) 1350 hrs a after 1000 1900

6050
10675

X Acitivity Level 800u 1200u

Y Total Cost $ 16,400.00 $ 23,600.00

TFC will step up or jump by 40% after 900u

Calculate Total Cost of

(a) 1325u 16400 = 1a +800b
(b) 975u 23600 = 1.4a +1200b
c 600
16857.14286 a+ 857.1429

14200 457.1428571
21800 57.14285714
24600
8b
10000 a
14000 a +40%

X Level (Units) 750 1400

Y Total Cost ₹ 4,925.00 ₹ 8,660.00

The Fixed Cost will Step Up by 20% after 1000 units

(i) TC of 1250u
(ii) TFC of 500u

4925 = a + 750b
8660 = 1.2a + 1400b

7216.666667 1166.666667

2291.666667 416.6666667

5.5 b
800 a
960 a1.2
 3550
7835
7010

Q6
Activity (u) TC$
8000 $ 39,400.00
20000 $ 68,000.00 $ 73,000.00

At activity level above 15000u , VC/u drops by $1/u for all subsequent units
$ 33,600.00
Calculate 12000
$ 1.80 (i) VC/u above 15000
$ 60,800.00 (ii) TC of 16000u
$ 71,600.00 (iii) TC of 22000u
$ 38,000.00 (iv) TC of 7500u

Q7 Activity TC$
8000 39400
20000 68000 16000 52000

At activity level above 12000u , VC/u rise by $2/u for all subsequent units
12600 12000
3.05 (i)VC after 12000u? 1.05
1.05 (ii)VC before 12000u?
31000 (iii)TFC? 31000
52750 (iv)TC of 15000u
43075 (v)TC of 11500u

Example :
MOH Cost: $
Rent 2000
Factory Maintana 500 OAR 3500 1.75
Power 1000
Total MOH 3500 2800 700
(i) Under Traditional Absorption Costing:
(a)Activity: Production units (1600 : 400)

(b) Activity : Square Feet (250 : 750) 3.5

875 2625
© Acitivty : No; of Machines (1 : 4)

700
 700 2800

Q
Products X Y Z MOH Cost:
Production (u) 100 200 250 550 Factory rent 20000
total Sqft usage 200 200 100 500 Fac Maint 5000
Machine hrs/u 5 4 0.8 Machine Runn 10000
Prime Cost/u 50 30 45 Power 2000
37000
Calculate:
(i)Product Cost/u of X,Y &Z under Plant-wide Method/Traditional Absorbtion Method, Blanket Method
if allocation Base is (a) Production Units , (b)Sqft, ( c)Machine Hrs
(a)
OAR = $37000/550

(b)
OAR = $37000/500sf

c machine hrs

67.27272727273 67.27272727 67.27272727

117.2727272727 97.27272727 112.2727273

74 74 74
14800 14800 7400
198 104 74.6

500 800 200 1500

24.66666666667 24.66666667 24.66666667

123.3333333333 98.66666667 19.73333333
173.3333333333 128.6666667 64.73333333

(ii)Product cost/u of X,Y & Z under ABC

Activities Cost pool Cost driver OAR = CP/CD

Factory rent 20000 25000 500 50
Fac Maint 5000
Machine Running 10000 12000 1500 8
Power 2000

Sq 10000 10000 5000

machine 4000 6400 1600
14000 16400 6600

140 82 26.4
190 112 71.4
(a) Calculate Overhead Absroption Rate per Direct Labour hour under Plant-w
(b) Calculate Product Cost/u of X,Y and Z under Traditional Method if Allocatio
(c.) Calculate Product Cost/u of X,Y and Z under ABC Method ?

OAR = Total OH/ total labour hr

total OH 1377400

X Y
labour 30 36
per hr 12 12
Total labour hr per unit 2.5 3
Production unit 20000 16000
50000 48000

OAR 9.7

Units 20000 16000

Machine hr 1.5 1.25
30000 20000
511410.8911 340940.6
per unit 25.57054455 21.30879
Direct material 25 22
Direct labour 30 36
80.57054455 79.30879

(c.) Calculate Product Cost/u of X,Y and Z under ABC Method ?

X Y Z
Direct material 25 22 28
Direct labour 30 36 24

OH Cost pool Cost driver

Machine setup cost 280000 115 Number of batches
Material Ordering cost 316000 480 Number of purchase or
Machine running costs 420000 80800 Number of machine ho
General facilities cost 361400 80800 Number of machine ho
Allocation = OAR * Total activity

X Y Z
Machine setup cost 97391.30435 48695.65217 133913
Material Ordering cost 105333.3333 65833.33333 144833.3
Machine running costs 155940.5941 103960.396 160099
General facilities cost 134183.1683 89455.44554 137761.4

492848.4001 307944.8271 576606.8

MOH Per unit 24.64242 19.24655169 26.2094

Total Per unit cost 79.64242 77.24655169 78.2094

250 per price

500 units

250000
37500 75
175
 6 8
Max demand 300 125

Products A B

Step 1 CM per unit 46 52

Step 2 Cm per limitin 7.666666667 6.5

Step 3 Ranking 2 4

Step 4 Production
226.6666667

Product
D 400
A 226

Z1 Z2
CM 70 60
CM per limitni 10 15
3 2
Cloth : 3s + 2t ≤ 90
Labour : 10s + 15t ≤ 600
Demand : T≤ 30 (max)

Optimal solution is at the point where Demand constraint and Cloth constraint

Find Optimal Solution?

3s+2t =90

s 10
C
 22 20 16
0.333333333333 0.416666666667 0.25
66 48 64
1 3 2

1
2
3
4
 X Y Z
TP per pdt 80 80 200
products per hr 1200 1500 600
TP per hr 96000 120000 120000
720000 90000 90000 90000
or 1.066666667 1.333333333 1.333333333
TP
 Breakeven point units =TFC/CM

TFC 2800
CM per unit 0.16

17500

20 21.6
8 8.416
79104 79104

6592 6000 0.089805825

8.980582524
CSR 30%
TFC $ 9,600.00 30 7.5 CM
SP $ 25.00 100 25

Calculate BEP (u)? $ 1,280.00

BEP (R.)? $ 32,000.00
CM per unit? 25

VC per Unit is 60% of SP

CM/u $ 8.00 $ 20.00 SP
TFC $ 4,500.00 0.4 csr

Calculate SP , BEP(u) & BEP (R.)?

562.5

$ 11,250.00

Vc/u 36
CSR 25% vsr 48 12 CM
VSR 75% CM/u
TFC 18000 0

1500
 40 20
10 4 TFC
150000 100000

BEP u 184210.5263158 6 1.6 7.6

BEP r 5894736.842105

10.5
600000

57142.85714286
914285.7142857
1900000
8000000
0.2375
5894736.842105

600000
0.65625 914285.7142857
(a) Calculate Break Even Point in Units?

T C R
Selling 1600 1800 1400
Units 420 400 380 1200
672000 720000 532000 1924000

Material 430 500 360

Labour variable 88 96 76
Labour fixed 132 144 114
VOH 110 120 95

CM 972 1084 869

Sales mix 0.35 0.333333333 0.316666667
340.2 361.3333333 275.1833333 976.7166667

WACM

55440 57600 43320 156360

55000

TFC 211360

75.73946726277 72.13282596 68.52618467 216.3984779 216.3984779 216.3985

(b) Calculate Weighted Average CM?

408240 433600 330220 1172060
672000 720000 532000 1924000

0.609178794
 346958.8928894

BEP u TFC/CM

0.9 2.4
0.654545454545 0.654545455 1.309090909 WACM

2.181818181818 1.309090909 3.490909091

6875
24000
Q
X Y
SP $ 10.00 $ 20.00
VC $ 6.00 $ 18.00

Maximum Deman 150 225 375

TFC $ 700.00

(a) Calaculate BEP in Revenue

(b) Calculate Minimum BEP Revenue

CM $ 4.00 $ 2.00
$ 1.60 $ 1.20 $ 2.80

100 150 250

$ 1,000.00 $ 3,000.00 $ 4,000.00

$ 600.00 $ -100.00
$ 50.00

150 50

$ 1,500.00 $ 1,000.00 $ 2,500.00

SP 20
VSR 60%
TFC 64000

Calculate Units and Sales Revenue needed to achieve a profit of $8000?

CM -8

72000

units 9000
Rev 180000
 1 2
X Y
CM 10 4

CM 18
ACM 6
135000
22500

2 3 5 10
A b c
CM 9 6 6
18 18 30 66

20 18 24
40 54 120 214

0.308411215 CM

1.6
5.187878787879
TFC 300000
66 100 166
X Y
VCR 60% 70%
CSR 40% 30%
SP 10 30
CM 4 9 3.975903614 18.07228916 22.04819277
1.590361446 5.421686747 7.012048193

42783.50515
943298.9691

1500 45% 675

1302.083333333 48% 625
280208% 1300
 VSR CSR
25 800000 75000< 60% 40% 10
25 1200000 75000> 50% 50% 12.5

75000 10 750000
36000 12.5 450000
111000 1200000

PS 10000

BEP (u) 0

360 FC
400 MOS
2400 Sale

MOS = PS - BEP
400 = 2400- s

BEP 2000 =TFC/CSR

360 2400
CSR 0.18 360
VSR 0.82
2040
 55 30
15.8 10.8
2.4 1.2
CM 36.8 18

385000
u 10461.95652

-9538.04348

-0.47690217

20000 14000 34000

55 30 1520000
36.8 18 988000
0.65

348416.2896 243891.4027 592307.6923

20 14 34
55 30
500 CM 36.8 18 29.05882
736 252 988

CM 29.05882353

885000 1100 420 1520

20 14 34
17914.97976 12540.48583 30455.46559
800904.9774

Demand Function of a company : P = 800 - 0.004Q

(a) if Company set a SP of $500 ; calculate Qty Demand?

500 = 800 - 0.004Q

0.004Q = 800-500

440
P Q P= a-bQ
Price Qty DD
70 1

60 2

10
1 10

70 = a - 10
80

P=80-10Q

MR = MC
MC = 80-20Q 30 = 80-20Q
20Q =80-30

50/20
2.5 Q

55
 0.04
400= a- 5000*0.04

600 -
B

80=600-2*0.04Q

0.08Q =

6500

340

145 5000
120 11250

27 VC/u MC

0.004 b

145 = a - 5000*0.004
96
17250
a 165

27

Outcome Probability Action

40 50 60
40 0.1 80 0 -80
50 0.2 80 100 20
60 0.4 80 100 120
70 0.3 80 100 120

1 80 90 -8
4
48
36

80 90 80
 118
90

28

X Y 14100
13300 13500 13500
600

1 2 3 17500
7500 8000 10000

7500

1 2 40000 35500
34000 26000 34000

1500

Outcome Probability Action

40 50 60
40 0.1 80 0 -80
50 0.2 80 100 20
60 0.4 80 100 120
70 0.3 80 100 120

0 80 160
20 0 80
40 20 0
60 40 20

60 80 160
C
1200 1800 0
 3100 2600 0
0 2100 1000

3100 2600 1000

425 500 600

170 0.4 255000 240900 180600
210 0.25 215000 211700 163800
260 0.35 165000 175200 142800

102000 96360 72240

53750 52925 40950
57750 61320 49980

213500 210605 163170

1 9500
2 9200
3 9400
4 9800

A
B 17.2
C 15
D 9.3
4.3

546
506
6600
-400

462.5 490

-27.5
 516.6666666667 490
26.66666667

W X Y Z

Cost To ma 8 12 9 10
1.5 4 2 1.75

9.5 16 11 11.75

2000 3000 3000

37000
12000

49000 48000

6
5500 2 4950
9500
4000 3 3800
5

44550 33000 11550

34200 20000 14200

8
105
3 126
5 50 250
376
 100
3000
132 30870
133 2200 2000 19600
134
135
136 10290

8 6
120 150 30870

200

800

45000 4
45000 200

2750
1250
1630

4500

6070

55000

26000
40000

80% r 75%
22 a 5
-0.3219 b -0.415

46.34027467189 3 12.81939286 5
4th 56.32219358191 4 14.26226448 6
9.981918910015 1.442871626
Material SQ AQ SP AP MPV MUV
D 4044.444444444 4300 9 9 0 -2300
E 3538.888888889 3600 5 5.5 -1800 -305.5556
F 2527.777777778 2100 2 2.2 -420 855.5556

Material SQ AQ SP
A -1610 -16100
B 9272 7600 5 8360
C 4636 5600 9 -8676

-16416

45000 62000
MPV = (SP-AP)*A 75000 81000 MUV =(SQ-AQ)*SP
120000 102000
SQ AQ SP AP MUV MPV
L 45 62 0.2 0.22 -3.4 -1.24
P 75 81 0.4 0.38 -2.4 1.62
B 120 102 0.8 0.82 14.4 -2.04
8.6 -1.66
 MMV = (AQSM -AQ)*SP
AQSM = Total AQ * Std Mix
AQ Std mix AQSM SP
D 4300 4 4000 9 -2700
E 3600 3.5 3500 5 -500
F 2100 2.5 2500 2 800
10000 10
-2400
AQ Std mix AQSM Diff SP MMV
13200 50 12000 -1200 10 -12000
7600 40 9600 2000 5 10000
5600 20 4800 -800 9 -7200
26400 110 -9200

MMV

AQ Std mix AQSM Diff SP MMV

L 62 30 45.9375 -16.0625 0.2 -3.2125
P 81 50 76.5625 -4.4375 0.4 -1.775
B 102 80 122.5 20.5 0.8 16.4
245 160 11.4125
14500 13200 1300 4 5200
5800 6500 -700 12 -8400
8700 9300 -600 8 -4800

-8000
b
$ 2.80

17000
a OAR = Budgeted total MOH / Budgeted total activity

Machine set up costs 26,550 No of production run

Machine running costs 66,400 Machine hr
Procurement costs 48,000
Delivery costs 54,320 No of purchase
No of deliveries
Total MOH 195,270

A B C
Units 15000 12000 18000
DL hr per u 0.1 0.15 0.2

Total DL 1500 1800 3600 6900 Total DL

MOH 28.3 28.3 28.3

Total Moh 42450 50940 101880

per unit 2.83 4.245 5.66

2.4 3.6 4.8

1.48 2.22 2.96
2.83 4.245 5.66

6.71 10.065 13.42

b Activity
Machine set up costs
11800 8850 5900 Machine running costs
15514.02 17375.7 33510.28 Procurement costs
12255.32 14297.87 21446.81 Delivery costs
18624 11640 24056
58193.34 52163.57 84913.09
Per unit 3.879556 4.346964 4.717394
 2.4 3.6 4.8
1.48 2.22 2.96
3.879556 4.346964 4.717394

7.759556 10.16696 12.47739

bour hour under Plant-wide Method?
tional Method if Allocation Base is Machine hours?

Z
24
12
2
22000
44000 142000

22000
1.4 4.15
30800 80800
525048.5 1377400
23.86584
28
24
75.86584

No of batches
500 800 400
40 20 55 115 Total no of batchez

No of orders
160 100 220 480 Total no of oders
OAR = CP/CD
Number of batches 2434.783 per batch
Number of purchase orders 658.3333 per order
Number of machine hours 5.19802 mh
Number of machine hours 4.472772 mh
 3 2
240 400

C D

21 60

7 30

3 1
2160 hr
400 800
1360

Units
Units

Z3
50
25
1
int and Cloth constraint intersects

2X+4Y =10001 2 4X+8Y =20002

4X+2Y =14000 4X+2Y =14000

6Y = 6002
Y= 1000.333

5999.667

2999.833 35998 36000

18006 18000
 54004 54000
4

X Y
Q1 Q2
8 8.5
3 2.5
2.666667 3.4

2 1
 A
B1 B2
480 Department 1 40 30
840 Department 2 42 56

23.2
1.933333
2000
360
44.70588
 70
-160
-60
40
140

-16
-12
16
42

30
 70
-160
-60
40
140

240
160
80
0

240
 9

11000 550
12000 2200

2750
9.8 10.29

7600
8000

15600
 A B C
No of production run 16 12 8 36
Machine hr 0.5 0.7 0.9
7500 8400 16200 32100
No of purchase 24 28 42 94
No of deliveries 48 30 62 140

Cost pool Cost driverOAR = CP/CD

set up costs 26,550 36 737.5 737.5 737.5
running costs 66,400 32100 2.068536 2.068536 2.068536
48,000 94 510.6383 510.6383 510.6383
54,320 140 388 388 388
Total no of batchez

Total no of oders
 X Y
Labour 5 4 60001 X
Contributi 8 6 10000

50000
10000 2500
80000 15000 95000

10000 2500.25
80000 15001.5 95001.5

1.5
9500
38000
 10001
2500.25