A CA (Final) model paper on cost management

Question 1 is compulsory. Answer any four questions from the remaining five questions:

1(a) Distinguish between marginal costing and absorption costing. (4 marks)

(b) What is opportunity cost? Give example to explain. (4)

(c) QSS Ltd is engaged in software production and its sales are all exports. For the year ended March 31, 2006, the cost structure of the company is as shown in Table 1.

Other direct costs represent rent, power, software, training and other direct expenses. The company has an employee strength of 250 people. As per industry norms, 15 per cent of employees will be on training, bench, etc., not engaged in productive work.

The annual productive capacity per person, that is, billable hours per person is 1,800 hours. The company currently has its office on an area of 20,000 sq.ft., of which, 15,000 sq.ft. is only utilised. Other direct costs and depreciation decrease by $0.5 at the enhanced capacity utilisation of 20,000 sq.ft. At this level, it can absorb 100 more people.

Required:

a) What is the selling price that the company ought to fix if it has to make a margin of 20 per cent at existing level of 250 people?

b) The COO is under pressure from the management to improve margins. He plans to reduce the non-billable category from 15 to 10 per cent.

At this level, what should be the sales level he should achieve to make a margin of 25 per cent? Give your views on the proposal.

c) Maintaining the margin at 20 per cent if the spare capacity is used, raising the billable capacity to 350, what hourly rate should be quoted? Comment on the result. (16)

2(a) What is responsibility accounting? What are its prerequisites? (5)

(b) APAC Ltd is in a sector that is recovering from a recent recession. It is currently operating at 65 per cent capacity, but the directors are optimistic about taking the productivity levels to 85 per cent. At 65 per cent capacity, the output is at 10,000 units. It deploys 100 labourers and the annual labour hours are 2,00,000. The flexed budgets for the current year are as shown in Table 2.

Table 3 presents the changes expected to occur in cost next year.

You are required to prepare for the next year a flexible budget statement on the assumption that the company operates at 80 per cent of capacity. Present the results at both contribution and profit levels. Discuss three critical issues that could possibly impact the company from the proposed change. (14)

3(a) What is dual pricing. When is it normally resorted to? (5)

(b) Prepare a cash forecast for Q1 of 2006 for TQM Ltd, the balance-sheet of which (as at December 31, 2005) is presented in Table 4.

Given:

TQM has to make AMC payments of Rs 50,000 in January for the whole year.

Salaries and incentives Rs 30,000 per month.

SG&A expenses Rs 15,000 per month

Rent of Rs 36,000 for first half of the year falls due in February 2006. Table 5 gives sales, cash and credit information. Out of the receivables of December 2005, Rs 1,00,000 pertains to December billing and the balance is a delinquent account, of which, 30 per cent is expected to be realised in January, 40 per cent in February and the rest in March. All credit sales are realised within 30 days (Table 6).

Credit period for purchases is 30 days. December creditors represent last one month outstanding. Loan represents term loan from bank, and monthly instalment towards principal is Rs 30,000. Interest is payable at 12 per cent on monthly rests. (14)

4(a) Distinguish between current and ideal standards. (5)

(b) M Ltd is a subsidiary of Japan-based S Ltd engaged in manufacture of tool kits for automobiles.

Some of the inputs are locally purchased while some others are imported. It uses both standard and non-standard items. Further information is given in Table 7.

M Ltd will pay 10 per cent to S Ltd as royalty on the sales made by it in the local market less cost of standard items bought locally less landed cost of imported items.

Considering these facts, calculate the selling price that needs to be fixed by M Ltd to achieve a profit of 20 per cent on sales. (10)

(c) Distinguish between forecasts and budgets. (4)

(Source: Prime Academy, Chennai.)

(This article was published in the Business Line print edition dated October 30, 2006)
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