Review Questions

(1) (a) Sketch a break even chart and mark the relevant elements

(b) Manufacturing firm has provided the following information

Selling price Rs.100
Variable cost per unit Rs.80

Fixed manufacturing overhead cost Rs.400,000

Total sales capacity 600,000 units

You are required to calculate

i. Break Even Point
 In terms of units
 In terms of rupee value
 As a percentage of capacity
ii. Profit of the firm when the sales are 50,000 units

(2) A company is often faced with the decision as to whether it should manufacture a
component or buy it outside.

Take it Easy Co.. makes four components, W, X, Y and Z, with expected costs for the
coming year as follows:

W X Y Z

Production (units) 1,000 2,000 4,000 3,000

Rs Rs Rs
Unit marginal costs Rs

Direct materials 4 5 2 4

Direct labour 8 9 4 6

Variable production overheads 2 3 1 2

14 17 7 12

Direct fixed costs/annum and committed fixed costs are as follows: Rs

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 Incurred as a direct consequence of making W 1,000

Incurred as a direct consequence of making X 5,000

Incurred as a direct consequence of making Y 6,000

Incurred as a direct consequence of making Z 8,000

Unavoidable fixed costs 30,000

50,000

A subcontractor has offered to supply units W, X, Y and Z for Rs12, Rs21, Rs10 and
Rs.14 respectively.

Decide whether Take it Easy Co. should make or buy the components.

(3) Prepare a flexible budget at 75% capacity.

Production capacity at 50% capacity- 6000 units

Raw materials- Rs. 75 per unit
Direct labour- Rs. 40 per unit
Direct expenses- Rs. 12 per unit
Factory expenses- Rs. 60,000(50% fixed)
Admin expenses- Rs. 70,000(60% variable)

(4) Birds Co. manufactures three products, Swans, Ducks and Chicks. The present net
annual income from each item is as follows:

  Swans Ducks Chicks Total

Rs Rs Rs
Rs

Sales 50,000 40,000 60,000 150,000

Variable costs 30,000 25,000 35,000 90,000

Contribution 20,000 15,000 25,000 60,000

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 Fixed costs 17,000 18,000 20,000 55,000

Profit/(loss) 3,000 (3,000) 5,000 5,000

Birds Co. is concerned about its poor profit performance, and is considering whether or
not to cease selling Ducks. It is felt that selling prices cannot be increased or lowered
without adversely affecting net income. Rs.5,000 of the fixed costs of Ducks are direct
fixed costs which would be saved if production ceased. All other fixed costs will remain
the same.

Advise Birds Co. whether or not to cease production of Ducks.

(5) Write up following transactions in a store card using FIFO,LIFO, Weighted Average
Simple Average methods.

Receipts Purchase price Issues

Date 1/10 150 units Rs.4.00
5/10 100 units Rs.4.50
6/10 80 units
12/10 100 units
20/10 90 units Rs.4.80
24/10 80 units
(6) The following figures are extracted from the books of a manufacturing concern for the
year 2009/10.

Direct Materials 205,000

Direct Labor 75,000
Fixed Overheads 60,000
Variable Overheads 100,000
Sales 500,000

Calculate the break even point .What will be the effect on BEP of an increase of 10% in
(i) Fixed expenses
(ii) Variable expenses

(7) On 30th September, 2009 the balance sheet of “M” Ltd (retailer) was as under:

Rs. Rs.
Equity – 2000 shares 20,000 Equipment (at cost) 20,000
Reserves 10,000 Less: depreciation 5,000
Trade creditors 40,000 15,000
Proposed dividend 15,000 Stock 20,000
Trade debtors 15,000
Balance at bank 35,000

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 85,000 85,000

The company is developing a system of forward planning and on 01st October 2009 it
supplies the following information.

Month Sales Purchases

Credit Cash Credit
September, 2009 (Actual) 15,000 14,000 40,000
October, 2009 (Budget) 18,000 5,000 23,000
November, 2009 (Budget) 20,000 6,000 27,000
December, 2009 (Budget) 25,000 8,000 26,000

All trade debtors are allowed one month’s credit and are expected to settle promptly. All
trade creditors are paid in the months following delivery.

On 01st October, 2009, all equipments were replaced at a cost of Rs.30,000.Rs.14,000

was allowed in exchange for the old equipment and a net payment of Rs.16,000 was
made.
The proposed dividend will be paid:
Wages Rs.3,000 per month
Administration Rs.1,500 per month
Rent Rs.3,600 for the year upto 30th September, 2010 (to be paid in October, 2009)

You are required to prepare a cash budget for the months of October, November and
December 2009.

(8) A company producing product ‘A’ and ‘B’ using a single production process, has the
following cost data.

A B
Selling piece per unit Rs. 20 30
Variable cost per unit Rs. 11 16
Machine hours required per unit production 1 2
Demand 100,000 250,000

Total machine hours available 400,000 hrs

Fixed cost per annum Rs.26,000,000

You are required to indicate the best combination of products to give optimum
contribution.

(9)A company is preparing its production overheads budgets and determines the
apportionment of those overheads to products. Cost center expenses and related
information have been budgeted as follows.

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Item Total Productio Production Assembly Canteen Maintena
n dept 1 dept 2 nce
Rs. Rs. Rs. Rs.
Rs. Rs.
Indirect wages 78,650 8,586 9,190 15,674 29,650 15,460
Consumable Materials 16,900 6,400 8,700 1,200 600
Rent and Rates 16,700
Building Insurance 2,400
Power 8,600
Heat and light 3,400
Depreciation(Machinery) 40,200
Value of Machinery 402,000 201,000 179,000 22,000 - -
Power Usage % 100 55 40 03 - 02
Direct labour (hrs) 35,000 8,000 6,200 20,800 - -
Machine usage (hrs) 25,200 7,200 18,000 - - -
Area (sq ft) 45,000 10,000 12,000 15,000 6,000 2,000

Required:

Using the direct apportionment to production departments method and bases of

apportionment which you consider most appropriate from the information provided,
calculate overhead total for the three production departments

(10)You are the cost accountant of an industrial company and have been given the
following budgeted information regarding the four cost centers within your organization.

Production Maintenance
1 2 dept Canteen Total
Rs. Rs. Rs. Rs. Rs.
Indirect labor 60,000 70,000 25,000 15,000 170,000
Consumables 12,000 16,000 3,000 10,000 41,000
Heating & Lightening 12,000
Rent and Rates 18,000
Depreciation 30,000
Supervision 24,000
Power 20,000
Floor Space (sqm) 10,000 12,000 51,000 3,000 30,000
Book Value of
Machinery 150,000 120,000 20,000 10,000 300,000
No.of employees 40 30 10 - 80
Kilowatt Hrs 4,500 4,000 1,000 500 10,000

You are also told that the canteen staff is outside contractors and that departments 1 and 2
are production cost centers, and the maintenance departments and canteen are service
cost centers.

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Required:

a) Provide an overhead statement showing the allocation of overheads and apportion the
overhead cost of service departments only to the production departments.

b) Using the fact that the maintenance department provides 4,000 service hours to
department 1, 3,000 hours to department 2 and 1,000 hours for the canteen, apportion
the overheads of two service departments using simultaneous equation method.

(11) Diamond industries manufacture a single product with a production cost of Rs.40 per
unit which is sold to three customers. The details are:

Sales Patterns: Customer X 10,000 units per annum

Y 10,000 units per annum
Z 10,000 units per annum
Non – Production Overhead cost is as follows:

Rs.
Delivery 220,000
Quality inspection 200,000
Salesmen cost 80,000
After sales services 100,000
600,000

This is currently absorbed on the basis of labor hours. The MD is unhappy about this and
asks for an analysis based upon ABC method.

The following activity volumes have been identified.

Customer X Y Z
No.of deliveries 2,500 50 12
No.of inspections 10,000 500 0
No.of salesman visits 200 24 6
After sales visits 200 100 50

(12) Southcott Ltd is a firm of financial consultants which offers short revision courses
on taxation and auditing for professional examinations. The firm has budgeted annual
overheads totaling Rs.152, 625.Untill recently the firm has applied overheads on a
volume basis, based on the number of course days offered. The firm has no variable cost
and the only direct costs are the consultants’ own time which they divide equally between
their two courses. The firm is considering the possibility of adopting an Activity Based
Costing system and has identified two overhead costs as shown below.

Details of overheads

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Centre hire Rs.62,500
Enquiries administration Rs.27,125
Broachers Rs.63,100
Rs.152,625
The following information relates to the past year and is expected to remain the same for
the coming year.

Course No.of Duration of No.of enquiries No.of broachers

courses course per course printed per
course
Auditing 50 2 days 175 300
Taxation 30 3 days 70 200

All courses run with a maximum number of students (30), as it is deemed that beyond
this number the leaning experience is severely diminished, and the same centre is hired
for all courses at a standard daily rate. The firm has the human resources to run only one
course at any one time.
Required

(i)Calculate the overhead cost per course for both auditing and taxation using traditional
volume based absorption costing

(ii)Reallocate the overhead costs per course using activity based costing and explain your
choice of cost driver in your answer.

(13) A company proses to undertake one of the two mutually exclusive projects
namely AXE and BXE.The initial capital outlay and annual cash inflows are as under

AXE BXE
Initial capital outlay(Rs.) 2,250,000 3,000,000
Salvage value at the end of the life - -
Economic life (yrs) 4 7

Year Rs.lakhs Rs.lakhs

After tax cash inflows 1 6 5

2 12.5 7.5
3 10 7.5
4 7.5 12.5
5 - 12.5
6 - 10
7 - 8

The company’s cost of capital is 16%

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Required to calculate NPV of each project and recommend the project to be under taken.

(14) ROADS Construction Company is considering two investment projects, each of

which requires an upfront expenditure of Rs.25 million. You estimate that the cost of
capital 10% and the investment will produce the following cash follows after tax.

Year Project A (Rs.Mn) Project B (Rs.Mn)

1 5 20
2 10 10
3 15 8
4 20 6

You are required to calculate followings.

1. What is the regular payback period for each of the projects

2. What is the discounted pay back period for each of the projects
3. If the two projects are independent and cost of capital is 10% which project or
projects should be the firm undertake.

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