PESIT Bangalore South Campus Hosur road, 1km before Electronic City, Bengaluru -100

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Priscilla Nichols
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INTERNAL ASSESSMENT TEST 3 Date : 09/11/2016 Max Marks : 50 Subject & Code : Cost Management (14MBAFM305) Section : Finance Name of faculty : Dr.R.Duraipandian Time: 8:30 10:00 AM Note: Answer all questions 1(a) What do you mean by variance analysis?

1 INTERNAL ASSESSMENT TEST 3 Date : 09/11/2016 Max Marks : 50 Subject & Code : Cost Management (14MBAFM305) Section : Finance Name of faculty : Dr.R.Duraipandian Time: 8:30 10:00 AM Note: Answer all questions 1(a) What do you mean by variance analysis? Variances Analysis: is an exercise to classify the variances according causes for highlighting the situations requiring managerial attention. (3 marks) (b) Explain the classification of reports. (7 marks) (c) From the following information compute 1) Material cost variance 2) Material price variance, 3) Material usage variance, 4) Material mix variance and 5) Material sub-usage variance. Material Standard Quantity (Kilos) Standard Unit Price Actual Quantity (Kilos) Actual Unit Price Total Total A B (10 marks)

2 C Total Material Cost Variance = (SQ x SP) (AQ x AP) A = 5 (F), B = 0, C = 45 (F) Total Material Cost Variance = 50 (F) 2. Material Price Variance = (SP AP) AQ A = 5 (A), B = 30 (A), C = 15 (F) Total Material Price Variance = 20 (A) 3. Material Usage Variance = (SQ AQ) SP A = 10 (F), B = 30 (F), C = 30 (F) Total Material Usage Variance = 70 (F) 4. Material Mix Variance = (RSQ AQ) SP Revised Standard Quantity = SQ of each material / Total SQ x Total AQ A = 2 (F), B = 6 (F), C = 18 (A) Total Material Mix Variance = 10 (A) 2(a) 5. Material Sub-Usage Variance = (SQ RSQ) SP A = 8 (F), B = 24 (F), C = 48 (F) Total Material Sub-Usage Variance = 80 (F) What do you mean by balanced scorecard? The balanced scorecard translates an organization s mission and strategy into a comprehensive set of performance measures. The balanced scorecard does not focus solely on achieving financial objectives. It highlights the nonfinancial objectives that an organization must achieve in order to meet its financial objectives. (3 marks) (b) What are the features of marginal costing? Features of Marginal costing: (i) All the costs are classified into fixed and variable. (ii) Only the variable costs (Marginal Costs) are treated as the cost of the product. (iii) The stock of finished goods and work in progress are valued at marginal cost only. (iv) Fixed costs are charged against the contribution earned during the period. (v) Prices are based on Marginal Cost Plus contribution. Contribution is the difference between selling price and variable cost (7 marks)

3 (c) Assuming that the cost structure and selling prices remain the same in periods I and II find out: (i) P/V ratio (ii) B.E. sales (iii) Profit when sales are 1,00,000 (iv) Sales required to earn a profit of 20,000 (v) Margin of safety in IInd period. Period Sales Profit I 1, 20,000 9,000 II 1, 40,000 13,000 (i) P/V ratio = 20% P/V ratio = Contribution / Sales x 100 (or) = Changes in profit / Changes in Sales x 100 (ii) B.E. sales = 75,000 B.E. Sales = Fixed expenses / P.V. ratio (10marks) Fixed Expenses = 15,000 p.a. (iii) Profit when sales are 1,00,000: Contribution = Sales x P.V. ratio = 20,000 Less: Fixed expenses Profit = 15, (iv) Sales required to earn a profit of 20,000 = (Fixed expenses + Desired profit) / P.V. ratio Therefore, Sales = 1,75,000 (v) Margin of safety in II nd period Margin of safety = Profit / P.V. ratio Therefore, Margin of safety in II period = 65,000 3 A toy manufacturer earns an average net profit of 3 per piece in a selling price of 15 by producing and selling 60,000 pieces at 60% of the potential capacity. Composition of his cost of sales is: (10marks)

4 Direct material : 4 Direct wages : Re.1 Works overhead : 6 (50% fixed) Sales overhead : Re.1 (25% variable) During the current year, he intends to produce the same number but anticipates that: His fixed charges will go up by 10% Rates of direct labour will increase by 20% Rates of direct material will increase by 5% Selling price cannot be increased. Under these circumstances, he obtains an order for a further 20% of his capacity. What minimum price will you recommend for accepting the order to ensure the manufacture an overall profit of 1,80,500? Marginal Cost for the current year Direct material 4.20 Direct wages 1.20 Variable overheads: Works overhead 3.00 Sales overhead 0.25 Total marginal cost 8.65 Contribution per unit 6.35 Selling price Statement of profit on sale of 60,000 units Sales 9,00,000 Less: Variable cost 5,19,000 Contribution 3,81,000 Less: Fixed cost: Works overheads 1,98,000 Sales overheads 49,500 2,47,500 Profit 1,33,500

5 Profit required 1,80,500 Profit on 60,000 units 1,33,500 Profit to be earned on 20,000 units 47,000

VARIANCE ANALYSIS: ILLUSTRATION

VARIANCE ANALYSIS: ILLUSTRATION The following information relates to the production of product Alpha for the month of August Standard Cost Card Budgeted production overhead based on 10,000 units $ $ Selling