Q1. Sharmila Limited manufactures CD players for different well-known companies. The CD playersdiffer significantly in their complexity and their manufacturing batch sizes. The following costs wereincurred in the year 2015.i. Product designing including drawing process charts and engineering process changes for products,Rs. 10,00,000ii. Procurement costs of placing purchase orders, receiving materials and paying suppliers related tothe number of purchase orders placed, Rs. 5,00,000iii. Direct material costs, Rs. 7,00,000iv. Costs of setting up machines, Rs. 6,00,000v. Direct manufacturing labor costs, Rs. 10,00,000vi. Plant management, plant rent, and insurance, Rs. 8,00,000Required:a) Classify each of the preceding costs as output unit-level, batch-level, product-level or facility-level.Briefly explain each answer.b) Consider two types of CD players produced by Sharmila Limited. One is complex to make and isproduced in many batches (small batch size). The other is simple to make and is produced in fewbatches (big batch size). Suppose both CD players require same number of machine-hours andSharmila Limited allocates all overhead costs using machine-hours as the only cost allocation base,would the costing of the CD players be appropriate? Briefly explain how and why.
(0.5*6 +2 = 5)Q2. ABC Ltd manufactures component parts. One component part, P-100, has annual sales of 50,000 unitsand sells for Rs. 406 per unit. ABC includes all R&D and design costs in engineering costs. ABC has nomarketing, distribution, or customer-service costs.Direct costs of P-100 including long-run fixed cost of machine capacity dedicated to P-100 are:Direct material costs (variable) Rs. 85,00,000Direct manufacturing labor costs (variable) 30,00,000Direct machining costs (fixed, 50,000 hour * Rs. 30 per hour) 15,00,000ABC’s management identifies the following cost activity pools, cost drivers for each activity, and the costper unit of each cost driver:Activity Cost Driver Cost per Unit of Cost DriverSetup Setup-hours Rs. 250 per setup-hourTesting Testing-hours Rs. 20 per testing-hourEngineering Complexity of product & process Costs assigned to products by special study
Over a long-run horizon, management views indirect costs as variable with respect to their chosen costdrivers. Additional data for P-100 are:Production batch size 500 unitsSetup time per batch 12 hoursTesting and inspection time per unit of products produced 2.5 hoursEngineering costs incurred on P-100 Rs. 17,00,000Facing competitive pressures, ABC wants to reduce the price of P-100 to Rs. 348, well below its currentprice of Rs. 406. The reduction in price will allow ABC to maintain its current unit sales. If ABC does notreduce price, it will lose sales. The challenge for ABC is to reduce the cost of P-100. ABC’s engineers haveproposed product design and process improvements for the “New P-100” to replace P-100.The expected effects of the new design relative to P-100 are as follows:1. Direct material costs for New P-100 are expected to decrease by Rs. 30 per unit.2. Direct manufacturing labor costs for New P-100 are expected to decrease by Rs. 7.5 per unit.3. New P-100 will take 6 setup-hours for each setup.4. Time required for testing each unit of New P-100, is expected to be reduced by 0.5 hour.5. Engineering costs will be unchanged.Assume that the batch sizes are the same for New P-100 as for P-100. Further assume the cost per unit ofeach cost driver for the New P-100 is the same as for P-100.Required:a) Calculate the full cost per unit for P-100 using activity-based costing.b) What is the mark-up percentage on the full cost per unit for P-100?c) What is ABC’s target cost per unit for New P-100 if it is to maintain the same markuppercentage on the full cost per unit as for P-100d) Will the New P-100 design achieve the target cost calculated in requirement c)? Explain.(2.5+1+1+2.5 = 7)Q3. The Cello Company manufactures and sells pens. Currently 6,00,000 units are sold per year at Rs. 10per unit. Fixed costs are Rs. 15,00,000 per year. Variable costs are Rs. 6 per unit.Required:Consider each case separatelya) Calculate the followingi. Present operating income for a year.ii. Present breakeven point in units.b) Compute the new operating income for each of the following changes.i. Quality Control leading to 10 percent increase in fixed costs and a 10 percent increase inunits sold.ii. Major Cost reduction leading to 20 percent decrease in fixed costs, a 20 percent decrease inselling price, a 10 percent decrease in variable cost per unit and a 40 percent increase inunits sold.
c) Which option from the above (Quality Control or Major Cost Reduction) will lead to higheroperating Income? If Cello wants to be a cost leader in the pen industry, which of the aboveoptions (Quality Control or Major Cost Reduction) should it opt for?
(1+3+1 = 5)
Q4. Sony Corporation manufactures and sells 50-inch television sets at a selling price of Rs. 25,000. Datarelating to the months of January and February are:Units Data January FebruaryBeginning Inventory 0 300Production 1000 800Sales 700 1000Costs DataVariable CostsManufacturing cost per unit produced Rs. 9000 Rs. 9000Operating costs per unit sold Rs. 6000 Rs. 6000Fixed CostsManufacturing Costs Rs. 40,00,000 Rs. 40,00,000Operating Costs Rs. 14,00,000 Rs. 14,00,000Required:Present income statements for Sony in January and February undera) Marginal costingb) Absorption costingc) Briefly explain the difference in income levels using the two costing methods
(2+2+1 = 5)Q5. Amit Surfboards manufactures fiberglass surfboards. The standard cost of direct materials and directmanufacturing labor is Rs. 500 per board. This includes 20 kg of direct materials, at the budgeted price ofRs. 10 per kg, and 5 hours of direct manufacturing labor, at the budgeted rate of Rs. 60 per hour. Followingare the data for the month of July (there were no beginning inventories in July).Units Completed 6000 unitsDirect material purchases 1,50,000 kgCost of direct material purchases Rs. 14,62,500Actual direct manufacturing labor-hours 32,000 hoursActual direct labor cost Rs. 18,40,000Direct materials efficiency variance Rs. 62,500 URequired:a) Compute direct manufacturing labor variance for July.b) Compute the actual kg of direct materials used in production in July.c) Calculate direct materials price variance for July.d) Calculate total direct material variance for July.e) Why is total direct material variance unfavorable when actual per unit price of the material islower than the budgeted price? Should the procurement officer be responsible for this?
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