Management Accounting

Management Accounting Time allowed – 3 hours Maximum marks – 100

[N.B. – Questions must be answered in English. Figures in the margin indicate full marks. All workings are to be submitted. Examiner will take account of the quality of language and of the manner in which the answers are presented. Different parts, if any of the same question must be answered in one place in order of sequence.] 1. (i) (ii)

Marks Distinguish between variable costs and differential costs and highlight the importance of differential costs in non-routine decisions. 4 SV Ltd. is able to obtain 200,000 kgs of AXE and 400,000 kgs of BXE from the input of 600,000 kgs of raw material “F”. The selling prices of these articles are AXE Tk.6 per kg and BXE Tk.4.50 per kg. The processing costs amount to Tk.20 lacs per month as under: Raw material “F” (600,000 kgs x Tk.2) Variable processing costs Fixed processing costs Total

Tk. 1,200,000 600,000 200,000 2,000,000

The company has the following three proposals under consideration: (1) Product AXE can be further processed by mixing it with other purchased materials. There is a market potential for absorbing the entire product AXE when processed further into PXE. The selling price of PXE is Tk.13 per kg. Each kg of PXE requires one kg of AXE raw material. Additional cost of other material labour and overheads to process AXE into PXE amounts to Tk.1,600,000 per month. (2) There is an offer to purchase an additional quantity of 40,000 kgs of BXE at a price of Tk.3.50 per kg. The existing market for BXE would not be affected by the acceptance of this proposal. All units of AXE will be sold at a uniform price. (3) A new raw material has just become available. The processing costs will remain the same but the process will yield 2 kgs of AXE for every 3 kgs of BXE. The total quantity of the new raw material is limited to 600,000 kgs. Required: (a) Find the profitability arising from the sale of AXE and BXE as originally envisaged. (b) Evaluate the proposal for further processing of AXE into PXE and present a statement of profitability. (c) Analyse the proposal for the manufacture of an additional quantity of 40,000 kgs of BXE contained in (2) above. In view of the increased quantum of sales of AXE, the price will go down. Find the minimum reduced average price for AXE to sustain the increased sales. (d) Evaluate the proposal for substitution of the existing raw materials by new raw materials and find the maximum price the Company can afford to pay for the new raw materials for retaining the existing profitability. 2. (i)

(ii)

What reasons might influence a company to undertake the processing of by-product from scrap materials? State any factors which limit their production. What costing treatment do you recommend? The following are standard cost data for a company manufacturing single product: Direct materials Direct labour Variable production overhead Fixed production overhead Standard selling price

50 kgs. @ Tk.4.20 per kg 20 hrs. @ Tk.3.50 per hr. 20 hrs. @ Tk.1.20 per hr. 20 hrs. @ Tk.4.50 per hr.

Tk. 210 70 24 90 394 600 [Please turn over]

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2 Budgeted production for the month of May was 260 units and this figure was used in calculating the fixed overhead absorption. Overhead is absorbed into production on the basis of units produced but the variable overhead is deemed to vary with hours worked. An abridged trading and profit and loss statement prepared in the conventional way shows the following: Tk. Sales Materials used Direct wages Production overhead Variable Fixed Gross profit Selling and administration Net profit

Tk. 1,65,000

50,200 22,400 6,600 23,500

1,02,700 62,300 29,300 33,000

Additional information appropriate to May: Sales and production 250 units There was no working progress Actual hours worked by direct labour 5,600 Materials used cost Tk.4 per kilo. (a) To calculate the following variances:

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i. Due to selling prices. ii. Direct materials prices. iii. Direct materials usage. iv. Direct wages rate. v. Direct labour efficiency. vi. Variable production overhead expenditure. vii. Variable production overhead efficiency. viii. Fixed production overhead expenditure. ix. Fixed production overhead volume. (b) To present a profit statement utilizing standard costs and showing the variances.

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(c) i. To comment on possible reasons for each of the variances you show for (a); and ii. To state what ought to be done by the appropriate executive responsible for the direct labour efficiency variance. 4 3. (i) How does the presence or absence of idle capacity affect the optimal transfer pricing policy?

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(ii) “We use variable-cost transfer prices to ensure that no dysfunctional decisions are made.” – Discuss 3 (iii) Samsung industries had several independent divisions. The company’s Tube division manufacture a picture tube used in television sets. The tube divisions income statement for last year, in which 8,000 tubes were sold, is given below: Sales Less cost of goods sold Gross margin Less selling and administrative expense Divisional Net Income

Total Tk.13,600,000 8,400,000 5,200,000 3,900,000 1,300,000

Unit Tk.1,700.00 1,050.00 650.00 487.50 162.50 [Please turn over]

3 As shown above, it costs the Tube division Tk.1,050 to produce a single tube. This figure consists of the following costs: Direct materials Direct labour Manufacturing overhead (75% fixed) Total cost per tube

Tk.380 Tk.270 Tk.400 Tk.1,050

The Tube Division has fixed selling and administrative expenses of Tk.3,50,000 per year. Samsung Industries has just formed a new division, called the TV division, that will produce a Television set that requires a high-resolution picture tube. The Tube Division has been asked to manufacture 2,500 of these tubes each year and sell them to the TV division. As one step in determining the price that should be charged to the TV division, the Tube Division has estimated the following cost for each of the new high-resolution tubes: Direct materials Direct labour Manufacturing overhead (2/3 fixed) Total cost per tube

Tk.600 Tk.490 Tk.540 Tk.1,630

To manufacture the new Tubes, the Tube Division would have to reduce production of its regular tubes by 3000 units per year. There would be no variable selling and administrative expenses on the intra company business and total fixed overhead costs would not change. Assume direct labour is a variable cost. Required:’ (a) Determine the lowest acceptable transfer price from the perspective of the Tube Division for each of the new high-resolution tubes. 7 (b) Assume that the TV Division has found an outside supplier that will provide the new tube for only Tk.2000 each. If the Tube Division meets this price, what will be the effect on the profits of the company as a whole? 7 4. (i) What do you understand by the term “shadow price” in linear programming? Explain the usefulness of this concept in arriving at management decision. Give an example to illustrate your answer. 4 (ii) The following table gives the activities and other relevant data for a project: Activity 1-2 1-3 1-4 2-3 2-5 3-5 4-5

Normal time days 4 2 5 7 7 2 5

Crash days

time 3 2 4 5 6 1 4

Normal cost Tk. 600 400 750 400 800 500 600

Crash Cost Tk. 800 400 900 600 1,000 650 850

Indirect cost per day for the project is Tk.200. (a) (b) (c)

Draw the network of the project. Find the critical path, the normal duration and cost of the project. Find the optimum duration and cost of the project showing the detailed analysis.

5. (i) What are sunk costs? Are sunk costs relevant in decision making? If so, give one or more examples. [Please turn over]

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(ii) T Ltd. makes two products, X and Y with the following cost patterns.

Direct materials Direct labour at Tk.5 per hour Variable production overheads at Tk.6 per hour Total

Product X Tk. 27 20 24 Tk.71

Product Y Tk. 24 24 30 Tk.78

Production fixed overhead total Tk.300,000 per month and at present these are absorbed on the basis of direct labour hours. Budgeted direct labour hours are 25,000 per month. However, the company has recently carried out an analysis of its production support activities and found that its “fixed costs” actually vary in accordance with no-volume related factors. Activity

Cost Driver

Set ups Materials handling Inspection

Production runs Production run Inspection

Products Total Cost X Y Tk 30 20 40,000 30 20 150,000 880 3520 110,000 Tk.300,000

Budgeted production is 1,250 units of product X and 4000 units of product Y. Required: Given that the company wishes to make a profit of 20% on full production costs, calculate the prices that should be charged for product X and product Y using: (a) Full cost-plus pricing, and (b) Activity – Based cost plus pricing. 14 (iii) Why do responsible people in an organization tend to accept budgetary control in theory but resist in practice. Explain. 2

The End