The Hindu Business Line : Manage costs to stay in the black

c) Table 1 provides unit-cost information for a product for different cost systems — conventional, activity based and JIT. The conventional system assigns overhead using unit-based drivers. The activity-based system assigns overhead using both unit-based and non-unit-based cost drivers. The JIT system uses a focussed approach to trace costs and activity-based costing for costs not directly associated with a manufacturing cell. The company produces 1,000 units of the product each year.

Required: Assume that the product is a sub-assembly. What is the maximum amount, according to each cost system, that should be paid for the sub-assembly to an outside supplier? Explain why the amounts differ.

Assume that the product is a finished good that can be sold to a consumer for Rs 200 per unit. For each cost system, prepare a product income statement that shows contribution margin and product margin assuming sales of 1,000 units. How do you think a manger would react to the product performance reported by the conventional system and the JIT system? What are the strategic cost implications?

Assume that the product can be sold for Rs 200 per unit. Compute the units of each system that must be sold to cover traceable expenses.

2 (a) What are the advantages of a balanced scorecard.

2 (b) F Ltd makes and sells two products A and B, each of which passes through the same automated production operations. The estimated information presented in Table 2 is available for period 1.

ii) Production/sales of products A and B are 1,20,000 units and 45,000 units respectively. The selling prices per unit of A and B are Rs 60 and Rs 70 respectively.

iii) Maximum demand for each product is 20 per cent above the estimated sales levels.

iv) Total fixed production overhead cost is Rs 14,70,000. This is absorbed by products A and B at an average rate per hour based on the estimated production levels.

Required: a) Using net profit as the decision measure, show why the management of F Ltd argues that it is indifferent on financial grounds as to the mix of products A and B which should be produced and sold, and calculate the total net profit for period 1.

b) One of the production operations has a maximum capacity of 3,075 hours which has been identified as a bottleneck which limits the overall production/sales of products A and B. The bottleneck hours required per product unit for products A and B are 0.02 and 0.015 respectively.

All other information detailed in (a) still applies.

Calculate the mix (units) of products A and B which will maximise net profit and the value of the maximum net profit.

3(a) F Company has implemented a JIT system and is considering the use of back-flush costing. F had the following transactions for the first quarter of the current fiscal-year (conversion cost variances are recognised quarterly):

i) raw materials were purchased on account for Rs 4,00,000; ii) all materials received were placed into production; iii) actual direct labour costs, Rs 60,000; iv) actual overhead costs, Rs 4,00,000; v) conversion costs applied, Rs 4,70,000; vi) all work was completed for the month; vii) all completed work was sold; and viii) the difference between actual and applied costs is computed.

Prepare journal entries for variations two and four of back-flush costing

3(b) One kg of product `K' requires two chemicals A and B. The following are the details of product K for a month:

a) Standard mix: chemical A, 50 per cent; and chemical B, 50 per cent.

b) Standard price per kg of chemical A, Rs 12; and chemical B, Rs 15.

c) Actual input of chemical B, 70 kg.

d) Actual price per kg of Chemical A, Rs 15.

e) Standard normal loss, 10 per cent of total input.

f) Materials cost variance of Chemical A, nil; Chemical B, Rs 650 adverse.

g) Materials yield variance total, Rs 135 adverse.

Calculate all the variances in detail.

3(c) Discuss the limitations of zero-based budgeting.

4(a) Write a brief note on logical sequences and connection of activities with respect to network.

4(b) A Ltd has three divisions. Division S supplies a special grain to divisions X and Y (in lots of 100 tonnes), which each utilises in the preparation of its own final products. There is no other market for the special grain.

Division S has the following cost structure:

Tonnage produced 400, cost Rs 4,00,000; 500 (Rs 4,20,000); 600 (Rs 4,50,000); 700 (Rs 4,85,000); 800 (Rs 5,25,000); 900 (Rs 5,85,000); 1,000 (Rs 6,65,000).

Divisions X and Y can generate total new revenues (after meeting their own respective independent processing costs) as follows, in relation to the tonnage of special grain processed:

Division X: Tonnage processed 100, total net revenues Rs 1,20,000; 200 (Rs 1,80,000); 300 (Rs 2,20,000); 400 (Rs 2,40,000).

Division Y: Tonnage processed 100, total net revenues Rs 1,20,000; 200 (Rs 2,40,000) 300 (Rs 3,60,000); 400 (Rs 4,20,000) 500 (Rs 4,60,000); and 600 (Rs 4,80,000).

Show the price at which the special grain should be transferred from division S to divisions X and Y, stating your reasons.

5(a) Discuss the distinctive features of manufacturing environment leading to the essence of learning curve theory.

5(b) The activities in a construction project and other relevant information are presented Table 3.

Required: a) Draw a network for the project; b) Using all information "crash" or "shorten" the project step by step until the shortest duration is reached.

6(a) A refinery makes three grades of petrol — A, B, and C — from three crude oils — d, e and f. Crude can be used in any grade, but the others satisfy the specifications shown in Table 4. There are capacity limitations on the amount of the three crude elements that can be used.

Formulate the information given in Table 5 into a linear programming model to produce the maximum profit. Need not solve the same.

6(b) Develop a simulation model for the following situation. The ERS (Equipment Repair Service) staff has the responsibility for servicing the computer labs on campus. Assume that the time between service calls has the distribution given in Table 6. The source of the call will determine the time the technician will be out of the office, as shown in Table 6.

Use the random numbers: 56, 96, 76, 73, 44, 84, 87, 51, 99, 12 and 20.

a) For the first six calls, simulate the time between calls and the repair time for each call; and

b) Using a clock, keep track of the sequence of calls and the activities of the repair technician. Assume that if the technician will not return within ten minutes of an incoming call, then a supervisor (whose time is billed at twice the cost) is sent on the call. Keep track of the number of times the supervisor has to go on a call.

(Source: Southern India Regional Council of the ICAI.)

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