Question 1:

Trex Ltd is a shoe manufacturer producing 3 categories of shoes ranging over Formal, Semi Formal
and Casual. The company uses standard material for all its production where there is total
production of 217000 shoes, 75000 are Semi-formal, 60000, Casual and 82000 Formal. The direct
Material involved in manufacturing of shoes cost around $10 for Casual, $12 for Semi-Formal and
$14 for Formal. Direct Labour costs $8 per hour where Formal use take 45 min, Casual shoes take
quarter of an hour and Semi formal take half an hour to be manufactured.

There are additional costs associated to the manufacturing of the range. After every 10000 formal
shoes sold, the company would change the design of the shoe and this would be done by hiring a
designer. Similar is for Semi-formal and Casual shoes where the company introduces new designers
after 3000 and 5000 shoes sold. Last year the company paid the designer $40,000 for 8 designs of
work he rendered to the designing department.

The company has an extensive packaging policy where Formal shoes are packed in a fancy box, Semi
Formal are packed in a regular box and Casual are tagged and sold without a box. It takes the labour
15 mins to pack Formal and Semi Formal Shoes while 10 mins to tag Casual shoes. Last year the
packaging labours were paid $18000 for 6000 hours of work.

Advertising cost incurred by the company totals up to $435,000 which is divided in the ratio of
production of each category.

Required:

 Calculate the cost per shoe using ABC.

 Calculate the Difference of amount between ABC and Conventional Costing.
 Calculate the profit per category of shoe if every category is sold at 65% Profit Margin.
 What would be the difference if conventional costing method was used instead of ABC.
 Explain the terms Transaction Drivers and Duration Drivers, with the help of example.

Question 2:

ABC Ltd is currently selling 600 books per month at $250 per Book for total monthly sales of
$600,000. The company is bearing a Variable cost of $ 100 per book and a Fixed cost of $41000.
Considering the following options, recommend if the proposal should be accepted or rejected.
Support you answer with the help of CALCULATIONS:
 1. The sales manager feels that $18,000 increase in the monthly advertising budget would
increase monthly sales by $48,000. Should the advertising budget be increased?

2. The production manager feels that if a better quality of paper is used in the publishing
process, the sales will increase to 3000 Units. A higher quality of paper would require an
extra cost of $8 per book.

3. The sales manager has proposed to reduce the sales price by 5% and increase the
monthly marketing budget by $15000. If this option is considered, it will give a boost of
40% in sales.

4. With the aforementioned data, calculate the number of units to be sold to achieve a
target profit of $960,000.

5. Calculate the number of books sold if the profit achieved by ABC Ltd is $1020,000.

Theory:

 Margin of Safety.
 Operating Leverage.
 Contribution Margin

Question 3
 Outline and explain 2 advantages and drawbacks of standard costing.
 Explain the term Variance and why is it important for decision making.

1. TAK is a T-shirt manufacturing company with standard consumption of 700gms of cloth per
T-shirt. The cost of cloth is $10 per Kilogram. Last month TAK used 280 Kg of cloth to
produce 420 T-shirts with material costing of $2670. Calculate Price Variance and Quantity
variance for TAK.

2. Bing Ltd is a mobile manufacturer having a direct labor standard cost of 2.8 standard hours
per mobile phone at $18 per direct labor hour. Last month 1,857 direct labor hours were
worked at a total labor cost of $34,826 to make 710 mobiles. Calculate the following:

I. Actual rate of labor for Bing Ltd.

II. Labour Rate Variance for the week.
III. Standard hour of Labor that should have been worked to produce 710 Mobiles.
IV. Labour Efficiency Variance.