SUGGESTED SOLUTION FINAL NOV EXAM. Prelims (Test Code - F N J )

SUGGESTED SOLUTION FINAL NOV. 2014 EXAM ADVANCED MANAGEMENT ACCOUNTING Prelims (Test Code - F N J 4 0 2 0) Head Office : Shraddha, 3 rd Floor, Near Chinai College, Andheri (E), Mumbai 69. Tel : (022) 26836666 1 P a g e

Ans. 1 (a) 1. STATEMENT FOR CALCULATION OF REQUIRED HOURS Hours Ranking Sayona A Alpha 15,000 2 30,000 I Beta 40,000 ½ 20,000 II 50,000 A Division has no spare capacity, hence in order to produce extra unit of Alpha for transfer, A division will have to sacrifice the required labour from the product having least Contribution / hour. STATEMENT OF RANKING ALPHA BETA Selling Price 600 120 Variable Cost 300 80 Contribution per unit 300 40 Hours per unit 2 1/2 Contribution per hour 150 80 Ranking I II STATEMENT OF OPTIMUM PRODUCT MIX Units Hours per unit Hours Alpha 15,000 2 30,000 Beta 40,000 ½ 20,000 (B/F) 50,000 The requirement of B division is 6,000 (units) of ALPHA to replace circuit board which can be produced by division A by releasing labour from BETA subject to the interest of Company. STATEMENT OF COMPARATIVE COST Manufacture Per unit Purchase Per unit ALPHA V.C 300 Purchase cost of Board 600 Contribution to be lost 2 hour 40/½ 160 460 Extra Cost to be incurred by B 100 Total Relevant Cost 560 Purchase Cost 600 A division can produce extra units of Alpha as 6,000 (units) for B division but maximum unit would be 20,000/2 10,000 (units). 2. Transfer Price would be `460 for each unit of Alpha up to 6,000 (units) Transfer Price `460 to `500. 3. If the requirement of B dept. increase to 12,000 (units) then A dept. can Produce & transfer 10,000 units of ALPHA by reducing it s product BETA. However in order to produce & transfer over and above 10,000 (units) A dept. will have to reduce existing demand of ALPHA which should be reduced subject to the interest of Co. STATEMENT OF COMPARATIVE COST Manufacture Per unit Purchase Per unit V.C. 300 Purchase Cost 600 Contribution lost (Alpha) 300 600 Extra Cost 100 700 600 A dept. should not produce & transfer over and above 10,000 (units) of ALPHA. 2 P a g e

(b) Statement of Flexible Budget Level 75% 90% Quantity 15,000 18,000 Cost - Direct material @ 10.5 (W.N.1) 1,57,500 1,89,000 Labour @ 17.1666 (W.N.2) 2,57,500 3,09,000 Production overhead Variable @ 27.6042 (W.N.3) 4,14,063 4,96,875.6 Fixed 3,85,000 4,27,000 Adm. overhead (fixed) 1,38,000 1,38,000 Selling expense Variable @ 11 1,65,000 1,98,000 Fixed 1,20,000 1,20,000 Total cost 16,37,063 18,77,875.6 Add: Profit 4,09,265.75 Sale 20,46,328.75 Cost per unit 109.14 104.33 Statement of cost benefit Amount (`) Incremental revenue (92 3,000) 2,76,000 Less: Incremental cost 2,40,812.60 Net benefit 35,187.40 Decision: It is better to accept the offer as the revenue amount is sufficient to cover the cost Working Notes 1. Raw material cost ` `10 Increment 5% New price `10.5 2. Labour ` `16 Increment 3% New labour rate 16 3% of 16 `16.48 After adjustment of Efficiency (4% decrease) new labour rate ` `17.1666 3. Overhead Variable overhead `25 per Hr. Inflation 6% New rate `25 6% of `25 `26.5 After efficiency effect new rate = (`26.5/96) 100 = `27.6042 Out of total production overheads 6,00,000 Variable overhead 25 10,000 2,50,000 Fixed overhead 3,50,000 Add: 10% inflation up to 80% 35,000 Revised variable overhead 3,85,000 Add: 22% inflation after 80% 77,000 Revised variable overhead 4,27,000 (c) Assignment table 01 02 03 04 05 T1 4 2 5 0 0 T2 6 3 3 0 3 T3 4 0 0 0 1 T4 0 0 5 3 0 T5(Dummy) 0 0 3 3 0 3 P a g e

Junction values at dummy was the minimum uncovered element. Previous step was 01 02 03 04 05 T1 7 5 5 0 3 T2 9 6 3 0 6 T3 7 3 0 0 4 T4 0 0 2 0 0 T5(Dummy) 0 0 0 0 0 1. At step ll the matrix was 01 02 03 04 05 T1 7 5 5 0 3 T2 9 6 3 0 6 T3 7 3 0 0 4 T4 0 0 2 0 0 2. Allocation: For operator l, most difficult task will be indicated by hours Operator ll T2. Operator V T2. 3. Most efficient operator operator 4. 4. If Nishant s mistake was not known 01 02 03 04 05 T1 4 2 5 0 0 T2 6 3 3 0 3 T3 4 0 0 0 1 T4 0 0 5 3 0 T5(Dummy) 0 0 3 3 0 We continue the assignment: T1 05. T2----------04, T3----------03 are fixed. Between T4 and T5,01 or 02 can be allotted. So either 01 or 02 can be denied the job. 5. Yes, Mr. Nishant can go ahead with the optimal assignment. Row minimum is not affected by when the dummy was introduced. Column minimum was affected. But in the process, more zeros were generated to provide better solution. Ans. 2 (a) 1. The network for the given project is shown in the following. Network Diagram. 2. The various path and their length are as follows: Path Length (weeks) (i) 24 (ii) 31 (iii) 39 4 P a g e

(iv) 38 (v) 40 (vi) 42* Thus, the critical path is and the direct of the project is 42 weeks. 3. The required information is given in the following schedule. Activity Duration ES EF LS LF Slack A 5 0 5 0 5 0 B 2 5 7 5 7 0 C 6 5 11 23 29 18 D 12 7 19 7 19 0 E 10 19 29 19 29 0 F 9 19 28 21 30 2 G 5 19 24 22 27 3 H 9 7 16 18 27 11 I 1 29 30 29 30 0 J 2 24 26 28 30 4 K 3 30 33 30 33 0 L 9 33 42 33 42 0 M 7 24 31 27 34 3 N 8 31 39 34 42 3 4. If activity G (4 6) takes 10 weeks instead of 5, the paths (iii) and (iv) would become 44 and 43 weeks respectively. In that case path would become critical. (b) Basic Calculations Computation of present sales and profit Total sales Break-even sales Margin of safety ` 200 crores ` 50 crores ` 250 crores P/V ratio 40% (Given) Variable cost 60% of sales (Given) ` 250 crores 60% `150 crores Fixed cost Break even sales P/V ratio ` 200 crores 40% `80 crores Total cost variable cost fixed cost ` 150 crores ` 80 crores ` 230 crores Profit total sales total cost ` 250 crores ` 230 crores ` 20 crores 1. Computation of revised sales for profit of `30 crores (i.e. 20 10) (` in crores) Revised fixed cost: Present fixed cost 80 Add: increase in fixed cost 20 Interest at 20% on additional capital (`50 crores 20%) 10 Total revised fixed cost 110 Revised contribution Presuming that the present selling price is `100 ` Revised selling price will be (100 8) 92.00 New variable cost (60 5 55% of sales) 55.00 Contribution per unit 37.00 New P/V ratio 37/92 100 40.21% Revised sales for desired profit `348 crores approx 5 P a g e

2. (i) Revised break-even point `273.56 crores (ii) P/V ratio (iii) Revised margin of safety revised sales revised break-even sales = ` 348 crores ` 273.5 crores = ` 74.44 crores Ans. 3 (a) Statement of Learning Curve Cumulative Production ACPU TC 50(1 lot) 100 5000 100(2 lots) 90 9000 200(4 lots) 81 16,200 400(8 lots) 72.9 29,160 800(16 lots) 65.61 52,488 1000(20 lots) 63.38 63,380 In order to calculate A.C.P.U for 1 st 1000 (units). we should apply mathematical relation in the following manner. ( ) ACPU for 1000 units Statement of cost & selling price First 400(u) ` First 800(u) ` First 1000(u) ` Material 150 400 150 800 150 1000 Labour 29,160 52,488 63,380 V.OH 400 50 800 50 1000 50 T. Cost 1,09,160 2,12,488 2,63,380 Profit 25% 27,290 53,122 65,845 Sale rates 1,36,450 2,65,610 3,29,225 (b) Statement showing the Position, If Contract is Accepted or Rejected Particulars Decision If contract is acceptedrelevant cost If contract is rejected-relevant cost Cash inflows: Contract price `18,00,000 Sale of material B (Note 3) `2,10,000 Total cash inflows (A) 18,00,000 2,10,000 Cash outflows: Material A (Note 2) 1,35,000 - Adaption required for use of obsolete material A 27,000 Material C 300000 Skilled worker-replacement of semi-skilled labour 570000 Non-skilled labour 300000 Supervisory staff 35000 Avoidable overhead 100000 6 P a g e

Total cash outflow (B) 1440000 27,000 Net cash outflow (A) (B) 3,60,000 1,83,000 The net benefit on accepting the contract is (i.e. `3,60,000 1,83,000). `1,77,000 Conclusion: The contract should be accepted as it yields net incremental cash inflow of `1,77,000. Note: 1. For accepting the contract there will not be any cash outflow for material A as it is obsolete and it is already in stock. Still it is necessary to consider that it can be used for another product, the material for which is available for `1,35,000. Therefore for accepting contract, relevant cost of material A is `1,35,000. If contract is not accepted, then material A will require adaptation of `27,000 to be used. Therefore `27,000 becomes the relevant cost for the alternatively rejecting the contract. 2. If contract is rejected material B which was ordered for some other product which is no longer required, will have a residual value of `2,10,000. Therefore the amount of `2,10,000 become relevant cash inflow for alternative reject the contract; 3. For accepting the contract, relevant cost of skilled labour is `5,70,000,i.e. if skilled labour is used for accepting the contract,`5,70,000 will have to be spent on other contract, which is presently operated by semi-skilled labour at a cost of `5,70,000. 4. If contract is accepted, payment of `35,000 will have to be made for the two positions, that supervisory staff can replace. Therefore only `35,000 is relevant cost for accepting the contract. Balance payment to supervisory staff will have to be made whether or not the contract is accepted. 5. Only `1,00,000 of avoidable overhead is the relevant cost to the decision accept the contract; (c) Data for Resource Variances Material Original standard Revised standard Actual Qty. Rate Amount (`) Qty. Rate Amount (`) Qty. Rate Amount (`) Fruit 400 1 400 400 2 800 428 4 1,712 extract Glucose 700 2 1,400 700 24 1,680 742 5 3,710 syrup Pectin 99 1 99 99 1 99 125 2 250 Citric 1 5 5 1 5 5 1 6 6 acid 1,200 1,904 1,200 2,584 1296 5,678 Labour 18 2 36 18 2 36 20 4 80 1,940 2,620 5,758 Ingredients Traditional Variance (Original-actual) Statement of Variances Planning Variances (Original standard- Revised standard) Operating Variances (revised stand-actual) Cost variance Fruit extract 400 1,712 1,312(A) 400 800 400(A) 800 1,712 912(A) (D.M.) Glucose syrup 1,400 3,710 2,310(A) 1,400 1,680 280(A) 1,680 3,710 2,030(A) Pecting 99 250 151(A) 99 99 NIL 99 250 151(A) Citric acid 5 6 1(A) 5 5 NIL 5 6 1(A) Labour Variance 35 80 45(A) 36 36 NIL 36 80 44(A) 7 P a g e

Ans. 4 (a) Statement showing standard cost sheet per unit and Original Budget Particulars Standard cost per unit Original budget for 5,000 units. Material(See WN 1) 6 30,000 Labour (See WN 2) 9 45,000 Variable overhead(see WN 3) 15 75,000 Fixed overhead (See WN 4) 7.5 37,500 Total cost 37.5 1,87,500 Profit 7.5 37,500 Selling price(see WN 5) 45 2,25,000 Statement of Reconciliation (Marginal approach) Particulars Amount (`) Budgeted profit 37,500 Sales variance: Sales margin price variance 6,750(F) Volume variance: (WN-6) 3,000(A) Cost variances: Material cost variance: Material price variance 300(A) Material usage variance 600(A) 900(A) Labour cost variance: wage rate variance 750(F) Labour efficiency variance 2250(A) 1,500(A) Variable overhead cost variance: variable overhead expenses 3000(F) Variable overhead efficiency variance 3750(A) 750(A) Fixed overhead expenditure variance 1,500(A) Fixed overhead volume variance N.A. Actual Profit 36,600 Working Notes: 1. Material cost variance Material price variance material usage variance 300 600 900 Material cost variance standard cost actual cost 900 standard cost `29,700 standard cost `28,800 Budgeted cost p.u. actual output 28,800 Budgeted cost p.u. `6 2. Labour cost variance wage rate variance labour efficiency variance 750 ( 2,250) 1,500 Labour cost variance Standard cost actual cost 1,500 standard cost `44,700 Standard cost `44,700 `1,500 Standard cost `43,200 S.C. implies labour cost for actual output S.C for standard output `45,000 3. Variable overhead cost variance variable overhead expenditure variance variable overhead volume variance 3,000 ( 3,750) 750 Variable overhead cost variance standard cost actual cost 750 standard cost `72,750 Standard cost `72,000 Standard cost Budgeted cost for actual output `72,000 Budgeted cost per unit 4,800 Budgeted cost per unit ` 4. Fixed Overhead Expenditure Variance = Budgeted Overhead Actual Overhead -1500 Budgeted overhead `39,000 Budgeted Overhead 1,500 39,000 `37,500 8 P a g e

5. Sales price variance =(Budgeted selling price Actual Selling Price) Actual quantity 6,750 ( ) Budgeted selling Price Budgeted selling Price Budgeted selling Price `45 6. Sales margin volume variance change in Qty Budgeted contribution per unit ( ) ( ) ( ) ( ) Budget Actual Quantity 5,000 4,800 Selling price 45 45 Less: variable cost per unit (Material labour overhead ) 30 30 Contribution per unit 15 15 Total contribution 75,000 72,000 Less: Fixed Cost 37,500 37,500 Profit 37,500 34,500 (b) Let x and y denote the number of units produced for the product J & K respectively. Maximize (Profit) Z 80x 100y Subject to (Machining time) (Fabrication time) (Assembly) Simplex Method By introducing slack variable s1 0,s2 0and s3 0 the linear programming problem in standard form becomes- Maximize Subject to (Machining time) (Fabrication time) (Assembly) We shall prepare the initial simplex tableau as follows: 1. SIMPLEX TABLE - I Cj 80 100 0 0 0 Minimum Ratio Basic variable (B) Value of basic variable b( ) X Y S1 S2 S3 0 S1 720 1 2 1 0 0 360 0 S2 1,800 5 4 0 1 0 450 0 S3 900 3 1 0 0 1 900 0 0 0 0 0 80 100 0 0 0 2. SIMPLEX TABLE - II Cj 80 100 0 0 0 Minimum Ratio Basic variable (B) Value of basic variable b( ) X Y S1 S2 S3 9 P a g e

100 Y 360 1 0 0 720 0 S2 360 3 0 2 1 0 120 0 S3 540 0 0 1 216 50 100 50 0 0 30 0 50 0 0 3. SIMPLEX TABLE - III Cj 80 100 0 0 0 Basic variable (B) Value of basic variable X Y S1 S2 S3 b( ) 100 Y 300 0 1 0 80 X 120 1 0 0 0 S3 240 0 0 1 80 100 30 10 0 0 0 30 0 Since all number in the Cj Zj row are either negative or zero, the optimum solution to the given problem has been obtained and is given by units and 300 units Maximum Profit Hence, the optimum solution is to produce 120 units of product J and 300 units of product K to get maximum profit of `39,600. Ans. 5 (a) Statement of Cost Pool (Basis budget) Cost Amount (`) Basis No. of Activity Cost per Activity Packing 19,50,000 Composite 1,950(30:90:75W.N.) 10,000 material Ratio Others 9,40,000 No of Unit 1,00,000(30,000 45,000 25,000) 9.4 Statement of Cost Particulars Jiya Riya Tiya Quantity 30,000 45,000 25,000 Packing `3,00,000 `9,00,000 `7,50,000 material(30:90:75) Other cost `2,82,000 `4,23,000 `2,35,000 (9.4 30,000) (9.4 45,000) (9.4 25,000) Total cost `5,82,000 `13,23,000 `9,85,000 Department of Overhead Particulars Inspection Storage Packing Labour 52,500 35,000 3,63,500 Overtime 15,000 4,500 10,500 Occupancy 1,00,000 3,00,000 1,00,000 Administration & management 24,000 6,000 30,000 Total 1,91,500 3,45,500 4,03,000 Statement of Cost Pool (ABC) Activities Amount (`) Base Inspection 1,91,500 9,30,000 (1,50,000 4,05,000 3,75,000) [(5 30,000) (4,500 9) (2,500 15)] Storage 3,45,500 27,500(9,000 13,500 5,000)] Packing 4,03,000 46,05,000(1,08,000 20,25,000 1,50,0000) 10 P a g e

Statement of Cost (Additional Production) Particulars Jiya Riya Tiya Packing 3,00,000 9,00,000 7,50,000 Receiving & 30,887 83,395 77,218 inspection Storage 1,13,073 1,69,609 62,818 Packing 94,515 1,77,215 1,31,270 Total 5,38,475 13,30,219 10,21,306 Cost /unit 17.95 29.56 40.85 Working Notes: ( ) ( ) ( ) Particulars Jiya Riya Tiya Ratio of packing material used 1 2 3 Qty. 30,000 45,000 25,000 Relative composite material ratio: 30,000 90,000 75,000 30:90:75 (b) Statement of Random no. Range Event (Demand) Probability Cumulative Range Probability 4 8% 8% 0 7 5 20% 28% 8 27 6 32% 60% 28 59 7 28% 88% 60 87 8 12% 100% 88 99 Statement of Simulated Data Day R. No. Demand Car owed Rented Rental lost 1 15 5 6 5-2 48 6 6 6-3 71 7 6 6 1 4 56 6 6 6-5 90 8 6 6 2 29 Average rented car/day on the basis of simulated data would be Total laws of rental would be 3 cars over 5 days of simulation. (c) Statement of Target Cost Per tonne (in `) 1. Jay Ltd selling price to the merchant 1,466 2. Less freight paid by Jay Ltd (30) 3. Less normal sales returns and allowances (60) 4. Our co. capital charge (120) 5. Target cost for New tech Ltd 1,256 6. Ship to distribution centre (11) 7. Distribution center operating cost (25) 8. Subtotal 1,220 9. Distribution center capital charge (58) 10. Mill target manufacturing cost 1,162 11 P a g e

Ans. 6 (a) Costing of Service Sector 1. Per flight basis ` Fare collection 9,60,000 120 x `8000 Commission (5%of 80%of 9,60,000) 38,400 Net fare 9,21,600 Expenses: Fuel 1,60,000 Food (120 `200) 24,000 Total variable cost 1,84,000 Contribution 7,37,600 Less: Fixed Costs: Annual lease apportioned 4,00,000 Ground handing charges 1,00,000 Crew salaries 60,000 5,60,000 Operating income 1,77,600 Calculation of profit as per given proposal: Fare collections (132 `7500) 9,90,000 Commission (5% of 80%of 9,90,000) 39,600 Net fare 9,50,400 Expenses: Fuel 1,60,000 Food (132 `200) 26,400 Total variable cost 1,86,400 Contribution 7,64,000 Fixed costs 5,60,000 Profit 2,04,000 Excess of income is 2,04,000 1,77,600 `26,400 Hence reduction in fare is recommended. (b) Statement of Cost Particulars Amount (`In lakh) Revenue 100 Variable cost ` Material 20 Labour 20 Variable overhead (Factory) 10 Variable overhead (Selling & Distribution) 5 55 Contribution 45 Hours 50,000 Contribution per hour `(45,00,000/50,000) `90/- Statement of Incremental Benefit Breakdown Saving Cost Breakdown S. No. Preventive Machine Extra Cost Contribution Hrs Saving Net Benefit Cost (a) (b) (c) (b) (c) (a) 1. 19,200-1,92,000 - - - 2. 38,400 19,200 1,53,600 38,400 (90 800)720 9,200 0 3. 76,800 38,400 1,15,200 38,400 (90 800)720 72,000 00 4. 1,53,600 76,800 76,800 38,400 72,000 33,600 5. 3,07,200 1,53,600 57,600 19,200 72,000 (62,400) 6. 6,14,400 3,07,200-57,600 72,000 (1,77,600) 12 P a g e

(c) Decision: It is better to select 4 th level to operate preventive maintenance system so that the company can achieve incremental benefit of `1,96,800. Statement of Cost Benefit (on basis of Relevant Cost) 1. Benefit ` Interest on working capital released 3,00,000 (28,00,000 8,00,000) 15% Rental Expenditure 30,000 Savings in property tax 12,000 Savings in salary (2 3,000 12) 72,000 Total (1) 4,14,000 2. Cost Interest on capital cost (6,00,000 15%) 90,000 Cash operating cost 48,000 Stock out cost 3,40,000 Total (2) 4,78,000 Net Benefit (1 2) (64,000) Its better to follow just in time policy for the future year although loss exist in first year but such loss would not exist for the subsequent year because there is no stock out cost for the subsequent years. Ans. 7 (a) Degeneracy in the Transportation Problem It may be noted that total number of stone squares must be equal to the m n 1, i.e. requirement. If this condition is not satisfied the solution is degenerated. Such situation occurs in the following two cases: 1. There may be excessive number of stone squares in a solution than the requirements That is m n 1. This type of degeneracy arises only in developing the initial solution and is caused by an improper assignment or an error in formulating the problem. In such cases there is a need to modify the initial solution so as to satisfy the rule of m n 1 (rim requirements). 2. The second situation occurs when there may be insufficient number of stone squares in a solution. Degeneracy of this type may occur either in the initial solution or in subsequent table. Profit Maximization in A Transportation Problem A method for solving maximization case would be to covert the problem into a minimization case. The method is to select the largest element from the profit may off matrix and then subtracting all the elements from this largest element including itself. The reduced matrix so obtained becomes the minimization case and it can be solved by any of the method as explained earlier i.e. NWCM, LCEM, VAM. (b) Limitation to the usefulness of the Learning Curve: The following points limiting the usefulness of learning curve should be noted: - 1. The learning curve is useful only for new operations where machines do not constitute a major part of the production process. It is not applicable to all productions. E.g. new and experienced workmen. 2. The learning curve assumes that the production will continue without any major interruptions, If for any reason the work is interrupted. The curve may be deflected or assume a new slopes. 3. Changes other than learning may effect the learning curve. For example, improvement in facilities, arrangements, and equipment as well as personnel morale and performance may be factors influencing the curve. On the other hand, negative developments in employee attitudes may also affect the curve and reverse or retard the progress of improvement. 4. The characteristic 80 percent learning curve as originally obtaining in the air force industry in U.S.A. has been usually accepted as the percentage applicable to all industries. Studies show that there cannot be a unique percentage which can be universally applied. 13 P a g e

(c) Committed Fixed costs, are those fixed costs that arise from the possession of 1. A plant, building and equipment (e.g. depreciation, rent, taxes, etc.) or 2. A functioning organization (i.e. salaries of staff). These costs remain unaffected by any short-run actions. These costs are affected primarily by long-run sales forecasts that, in turn indicates the long-run capacity targets. Hence careful long range planning, rather than day-to-day monitoring, is the key to managing committed costs. Discretionary cost can be explained with the help of following two important features. (i) They arise from periodic (usually yearly) decision regarding the maximum outlay to be incurred. (ii) They are not tied to a clear cause & effect relationship between inputs & outputs. Discretionary costs are so called because of their lack of a clear relationship between the input to the process and the output of the process. Such costs are encountered in all operations but are particularly significant in services. For example, the output of a firm's legal department is hard to measure, making it is very difficult to determine the amount of resource that the organization should devote to this type of activity. This can be contrasted with direct material input requirements for a production process-here, the process is well understood, and it is relatively straightforward to budget for the input required to arrive at any particular desired output. Examples of discretionary costs includes: advertising, public relations, executive training, teaching, research, health care and management consulting services. (d) Pricing by service sector: The service provided by service sector has no physical existence, a value is to be fixed and billed for its clients. Most of the service organizations use a form consisting of time and material pricing to arrive at the price of a service. Service companies such as appliance repair shops, automobile repair business, calculate their prices by using two computations, one for labour and other for materials and parts. A mark-up percentage may also be added to the cost of labour, materials and parts to arrive at the price to be billed. For professionals, direct labour costs and apportioned overhead and indirect costs are considered for pricing. Problem for adoption of ABC system in service organization 1. Facility sustaining costs (such as property, rents etc.) represent a significant portion of total costs and may only be avoidable if the organization ceases business. It may be impossible to establish appropriate cost drivers. 2. It is often difficult to define products where they are of intangible nature. Cost objects can therefore be difficult to specify. 3. Many service organizations have not previously had a costing system and much of the information required to set up a ABC system will be non-existent. Therefore introduction of ABC may be expensive. (e) Backflushing in a JIT system: Backflushing requires no data entry of any kind until a finished product is completed' At that time total amount of information of finished product is entered into computer, information is also fed based on bill of materials, which shows list of components that should have been used in the production process. This is subtracted from the beginning inventory balance to arriving at the amount of inventory that should have been left now in hand. Backflushing is good because data entry occurs once in the entire production process. However there are some serious limitations of backflushing that must be corrected before it will work properly: 1. Production Reporting: The total production figure entered must be correct or otherwise wrong component types and quantities will be subtracted from stock. This is a particular problem when there is high turnover or a low level of training to the production staff that records this information. 2. Scrap Reporting: All abnormal scrap must be diligently tracked and will not be charged to inventory' since scrap can occur anywhere in a production process, a lack of attention by any of the production staff can result in an inaccurate inventory. Once again, high production turnover or a low level of employee training increases this problem. 14 P a g e

3. Lot Tracing: Lot tracing is almost very difficult in backflushing system. It is required when a manufacturer needs to keep records of which production lots were used to create a product in case all items in a lot must be recalled. Only a picking system can adequately record this information. Some computer system allows picking and backflushing system coexist, so that transactions for lot tracing purpose can still be entered in the computer. Lot tracing may then still be possible if the right software is available, however, this feature is generally present only on high-end systems. 4. Inventory Accuracy: It becomes difficult to know accurately the inventory balance, as in a backflushing system; data is fed into the system only once day. This makes it difficult to maintain an accurate set of inventory records in the warehouse. Backflush costing eliminates separate raw material and work-in- progress account. There is single raw material in process account (RIP). The RIP account is used only for tracking of the cost of raw materials. Under JIT system, materials are immediately placed into process. For this reason there is no need to record it under separate inventory account. Combining direct labour and overhead into one category is a second feature of backflush costing. Backflush costing combines labour costs with overhead costs in a temporary account called conversion cost control. This account accumulates the actual conversion cost on debit side and applied conversion cost on the credit side. 15 P a g e

Que. No. MARKS ALLOCATION SHEET Sub point No.(if any) Name of Chapter Description of Concept Mark Allocation 1 (a) Transfer pricing Statement 1 calculation of hours 0.5 1 (a) Transfer pricing Statement of Ranking 2 1 (a) Transfer pricing Statement optimum product mix 1 1 (a) Transfer pricing Statement of comparative cost 2 1 (a) Transfer pricing Transfer price point (2) 0.5 1 (a) Transfer pricing Transfer price para point (3) 1 1 (a) Transfer pricing Statement of comparison cost 1 8 1 (b) Budgetary control WN 1 0.5 1 (b) Budgetary control WN 2 1 1 (b) Budgetary control WN 3 1.5 1 (b) Budgetary control Statement of flexible budget 1.5 1 (b) Budgetary control Decision 0.5 1 (b) Budgetary control Statement of cost benefit 1 6 1 (c) Assignment problems Statement 1 1 1 (c) Assignment problems Previous step 1.5 1 (c) Assignment problems Step 1 1 1 (c) Assignment problems Step 2 Allocation 0.5 1 (c) Assignment problems Step 3 Most efficient 0.5 1 (c) Assignment problems Step 4 Manager s mistake 1 1 (c) Assignment problems 5- optimal assignment 0.5 6 2 (a) Pert Diagram 2.5 2 (a) Pert Paths (2) 1.5 Total Marks 2 (a) Pert Paths (3) calculations of ES, EF, 5 LS, LF, each of 1 mark 2 (a) Pert Paths (4) point 1 10 2 (b) Marginal Basic calculation VC, FC, TC Profit 2 each 0.5 mark 2 (b) Marginal (1) Computation of revised sales 3 2 (b) Marginal (2) (1 to 3 point) 1 6 3 (a) LC Statement of learning curve 1.5 3 (a) LC Calculation of ACPU 1.5 3 (a) LC Statement of cost & selling price 3 6 3 (b) Relevant Prepare answer with WN -calculation of inflows 1 3 (b) Relevant -Calculation of outflow 3.5 3 (b) Relevant -Net calculation & conclusion 0.5 5 3 (c) Standard -Statement showing data for 2 resources variance 3 (c) Standard Statement of variances 3 5 4 (a) Standard Statement showing standard cost 1.5 Sheet per unit and original budget 4 (a) Standard Statement of reconciliation 2 4 (a) Standard WN- 1 to 5 each of 1 5 4 (a) Standard WN - 6 1.5 10 4 (b) LPP From the equations 0.5 4 (b) LPP Enter slack variables 0.5 4 (b) LPP Simplex table 1, 2, 3 each of 1.5 4.5 4 (b) LPP Maximum profit 0.5 6 5 (a) ABC Statement of cost pool 1 5 (a) ABC Statement of cost 1.5 5 (a) ABC Department of Overhead 1.5 5 (a) ABC Statement of Cost Pool (ABC) 1.5 5 (a) ABC Statement of Cost (Additional 1.5 Production) 5 (a) ABC WN 1 8 16 P a g e

5 (b) Simulation Statement of Random no. Range 1 5 (b) Simulation Statement of Simulated Data 2 5 (b) Simulation Average rented car 0.5 5 (b) Simulation Total 0.5 4 5 (c) Target Point 1, 2, 3, 4, 6, 7, 9, 10 each of 4 4 0.5 6 (a) Service sector costing Per flight basis 3 6 (a) Service sector costing Calculation of profit as per given 2 proposal: 6 (a) Service sector costing Decision 1 6 6 (b) TQM Statement of Cost 2 6 (b) TQM Statement of Incremental Benefit 3 6 (b) TQM Decision 1 6 6 (c) JIT Statement of Cost Benefit -Benefit 2 6 (c) JIT -Cost 1.5 6 (c) JIT Decision 0.5 4 7 (a) Transportation Degeneracy- basic para 1 7 (a) Transportation Degeneracy Each point 1 marks 2 7 (a) Transportation Profit Maximisation 1 4 7 (b) LC Each point 1 marks 4 4 7 (c) Basic Committed Fixed costs 2 7 (c) Basic Discretionary cost 2 4 7 (d) Service sector Pricing by service sector point 4 2.5 7 (d) Service sector Problem faced in adoption of ABC in 1.5 4 Service Org. Three point each of 0.5 7 (e) JIT Each point 1 marks 4 4 17 P a g e