MANAGEMENTACCOUNTING

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FinalExaminationWinter2011

A.1

Relevant costs for the tender

Existing capacity's CM lost
Material A (8,000 Rs. 820)
Material B (500 Rs. 600)
Material B - loss on sale of redundant stock
Labour costs for project
Factory overhead
Cost of machine

Working
s
1
2
3
4
5

Profit margin on cost (20%)

Bidding price
W-1:

Rs. in 000
6,913
6,560
300
30
3495
2,752
1,140
21,190
4,238
25,428

Contribution margin lost

Capacity required for order
Present Idle capacity
Existing utilized capacity to be used for new project
Present quarterly contribution margin
[Rs. 350,000 (Sales) - Rs. 234,500 (material) - Rs. 28,650 (labour inclusive of idle
labour) - Rs. 23,000 (variable FOH) - Rs. 12,000(variable selling expenses)]

40%
25%
15%
51,850

Contribution forgone for 60 days (15%/75% Rs. 51,850 2/3)

W-2:

6,913

Loss on sale of redundant Material B stock

Kgs
6,000
(2,000)
(3,200)
(500)
300

Available stock
Usage during first 30 days
Usage during next 60 days (6,000 2/360/75)
Usage for new project
Redundant stock
Loss on sale of redundant stock at current sale price [(Rs. 700-600)300)
W-3:

30

Labour cost for the project

Total hours required for project
Idle hours available
Idle hours due to curtailment of activity from 75 to 60%
22,500 15/75 2
36,000 15/75 2
Present idle hours
22,500 10/90 2
36,000 4/96 2

Skilled
6,000

Unskilled
15,000

9,000
14,400
5,000
14,000

Payment for the tender activity

6,000 200
3,000 200 80%
14,400 125
600 125 20%

Rs. in 000
1,200
480
1,680

Total labour cost

Page 1 of 6

3,000
17,400

1,800
15
1,815
3,495

MANAGEMENTACCOUNTING
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FinalExaminationWinter2011

W-4:

Variable overheads of the project

Rs. in 000
0.13105
21,000
2,752

Variable factory overhead rate 23,000/(58,5003)

No. of hours required for the new project
Variable overhead for two months
W-5:

Cost of machine relevant for the project

Purchased cost of machine

4,500

Less: Resale price or savings in labour costs whichever is higher:

Resale price
Savings in labour costs
Machine life in # of months
36
Less: Project life
2
Life after the project
34
Labour costs for one months(Rs. 20022,500+ Rs. 125 36,000)
9,000
Savings in 34 months (Rs. 9,000 5% 34)
Less : 80% payable for idle time
Add: Sale of old machine

A.2

15300
(12240)
300
3,360

3,360
1,140

(a) Sales volume variance

Budgeted sales (units)
Actual sales (units)
Volume variance in units
standard margin per unit
XA : 200,000 - 39,500 - 80,000 - 100,000
YA : 300,000- 54,000 -100,000- 125,000
ZA : 475,000 - 78,000 -150,000- 187,500
Volume variance

XA
60
80
(20) F
(19,500)

Products
YA
ZA
28
20
24
30
4 A
(10) F
----- Rupees -----

Total

21,000
390,000 A

59,500
84,000 A (595,000) F (121,000) F

(b) Sales price - planning variance

Actual sales of XA at budgeted price (Rs. 200,000 80)
Revision in Budget
Promotional Sales (180,000 35)
Other than Promotional Sales (200,000 45)

Sales price - operational variance

Actual sales of XA [Rs.37,425,000 - (Rs.300,000 24) - (Rs. 475,000 30)]
Actual sales of XA at revised budgeted price (6,300 + 9,000 as above)
(c) Labour efficiency - planning variance
Standard time
XA: 80 (80,000 100)
YA: 24 (100,000 100 )
ZA: 30 (150,000 100)
Revision in standard (8% improved performance) [133.000 92%]
Variance in hours (saved)
standard rate per hour (Rs. 100 1.05)

Page 2 of 6

3,000

16,000,000
(6,300,000)
(9,000,000)
(700,000) A
15,975,000
(15,300,000)
675,000 F

64,000
24,000
45,000
133,000
122,360
10,640
105
1,117,200 F

MANAGEMENTACCOUNTING
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FinalExaminationWinter2011

Labour efficiency - operational variance

Standard time (revised)
Actual time
Variance in hours
standard rate per hour

A.3

Jan-12
Receipts
Mobilization advance
Running bills (RB)
Less: Mobilization advance (in the ratio of
RB)
Retention money (5% of RB)
Sales tax @16% of billing amount less
mob adv
Withholding tax @ 6%
Release of retention money
Net receipts
Payment of sales tax
Payment to supplier of equipments
Installation charges

122,360
(120,000)
2,360
105
247,800 F

Feb-12

Mar-12
Apr-12
----- Rupees in '000 -----

May12

35,000
42,000

63,000

35,000

(10,500)
(2,100)
29,400

(15,750)
(3,150)
44,100

(8,750)
(1,750)
24,500

5,600
(2,436)
38,164

5,040
(2,066)
32,374

4,200
(1,722)
26,978
(4,200)

(11,131)
27,033

32,374

7,560
(3,100)
48,560
(5,097)
(95,000)
(25,972)
(77,509)

WORKINGS:
Input/output adjustment of sales tax
Output tax as worked out above
Less: Input adjustment (16/11695,000)
Paid / (excess) carried forward

Jan-12
5,600
(13,103)
(7,503)

22,778

(420)
7,000
6,580
6,580

Feb-12
Mar-12
5,040
7,560
(7,503)
(2,463)
(2,463)
5,097

Cost of installation and related works

Contract price
Less: Profit margin @15%
Project cost
Less: Cost of equipments (100 / 116
95,000)
Cost of installation and related works

Total
35,000
140,000
(35,000)
(7,000)
98,000
22,400
(9,744)
7,000
152,580
(9,297)
(95,000)
(37,103)
11,256

Apr-12
4,200
4,200
140,000
21,000
119,000
81,897
37,103

A.4 STATEMENT OF SAVINGS AND ADDITIONAL COSTS

Materials
Labour
Warranty
Factory overheads - ordering and holding costs
Savings in factory overheads (other than ordering & holding costs & depreciation)
Increase in factory overheads due to increase in depreciation (9,000-2,700)

Workings Rs. in 000

1
5,329
1
56,481
2
728
3
13,331
4
5,264
(6,300)
74,833

Conclusion:
Implementation of the consultants' suggestions would increase the gross margin by more than
17% (74,833 434,000 = 17.2%) and therefore consultants' suggestions should be accepted.
However, their suggestion as regards JIT system is not feasible as against the savings of
Rs.13.3 million on inventory ordering and holding costs, discount on bulk purchases
amounting to Rs.14.5 million would be lost.
Page 3 of 6

MANAGEMENTACCOUNTING
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FinalExaminationWinter2011

W-1 : Savings in cost of labour and material on account of purchase of new machine
Material
Labour
Cost of labour and material if new machine is NOT purchased
Rs. in 000
Current years cost (A) Note: 26,000 units = 3540 + 24960 2500
834,400
138,600
Cost to produce 2000 additional units in next year at current rates
(2,000 units / 26,000 A)
64,185
10,662
Cost to produce 28,000 units at current rates
898,585
149,262
71,887
14,926
Impact of 8% increment in material and 10% increase in labour costs
Cost of labour and material if new machine is NOT purchased
970,472
164,188
Cost of labour and material if new machine is purchased
Cost of material before wastage (970,472 0.96)
Wastage under new machine (931,653 2 /98)
Cost of material after discount
Loss of discount if bulk purchases discontinued (950,6661.5/98.5)
Skilled labour (164,188 8 /25)
Unskilled labour (164,188 /25 12 70%)

931,653
19,013
950,666
14,477
52,540
55,167

Cost of labour and material if new machine is purchased

Net savings in labour and material costs
W-2 : Savings in cost of warranty
Costs under present conditions (Rs. 4,000 28000 1%)
Less: Costs if new machine is purchased (Rs. 3,500 28000 0.4%)
Net savings

965,143

107,707

5,329

56,481

Rs.in000
1,120
392
728

W-3: Savings in ordering/holding costs

Size of order
No. of orders (28,000 B)
Avg. inventory (B/2+ 4,000)
Ordering costs (Rs. 45,000 C)
Holding costs (970,472 D / 28000 4%)
Total ordering and holding costs

(B)
(C)
(D)

Existing
14,000
2
11,000

[14,000 (1-85.71%)]
(B/2)

Rs.in000

Rs.in000

90

15,250
15,340

Proposed
2,000
14
1,000
630

(965,144 D/28,000 x
4%)

Savings in ordering and holding costs (Rs. 15,340 - Rs. 2,009)

1,379
2,009
13,331

W-4: Factory overheads

As per annual accounts
Less: Depreciation (Rs. 54 - Rs. 5.4) /18
Ordering and holding costs as above
Savings in factory overheads {175,462x(10%-7%} (other than depreciation and
inventory ordering and hold costs

Page 4 of 6

Existing
193,502
(2,700)
(15,340)
175,462
5,264

MANAGEMENTACCOUNTING
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FinalExaminationWinter2011

A.5

Process Account - Department 2

Opening work in process
Received from Dept 1
Direct Material
Direct wages
Production overheads
Abnormal gain (500 75)

Units
2,000
53,000

500
55,500

Rs.
128,750
2,057,500
988,000
488,000
244,000
37,500
3,943,750

Normal loss account (W-1)

Transferred to Dept 3(W-1)
Closing work in process (W-1)

Units
2,500
48,000
5,000

Rs.
37,500
3,598,750
307,500

55,500

3,943,750

W-1: Costs computation

Cost of units transferred to Department 3
Opening
WIP:
Balance as at November 1, 2011
Material
Labour & Prod OH
Introduced and completed within the month
Cost of closing work in process
Transferred from Department 1

Rs.
(2,000 units)
(400 [W-2] x Rs. 20 [W-3])
(800 [W-2] x Rs. 15 [W3])
(46,000 x Rs. 75)

(5000 x Rs. 40 )
(3,500 [W-2]xRs.20 [W3])
(2,500 [W-2]xRs.15 [W3])

Material
Labour & Prod OH

128,750
8,000
12,000
148,750
3,450,000
3,598,750
200,000
70,000
37,500
307,500

W-2 : Equivalent Production Unit (EPU)

Total
Opening WIP
Transfer in
Accounted for
Opening WIP Completed
Started and completed
Closing WIP
Normal loss [(55,000 - 5,000)0.05)
Abnormal gain (2,500 - 2,000)

2,000
53,000
55,000
2,000
46,000
5,000
2,500
(500)
55,000

Material
Labour &
introduced
Prod. OH
in dept 2
------------ Units ------------

Transferred
from dept 1

46,000
5,000
(500)
50,500

400
46,000
3,500
(500)
49,400

800
46,000
2,500
(500)
48,800

W-3 : Cost per unit for each element

Cost (Rs.)
Transfers from dept 1
Less: Scrap value of normal loss (2,500 Rs. 15)
Material
Wages
Overheads
Total costs per unit
Page 5 of 6

2,057,500
37,500
2,020,000
988,000
488,000
244,000

EPU
(W-2)
50,500
49,400
48,800
48,800

Cost per
unit (Rs.)
40
20
10
5
75

MANAGEMENTACCOUNTING
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FinalExaminationWinter2011

A.6 Computation of total hours required for 1st and repeat orders
Sale price per unit
Less: Margin @ 20%
Cost
Less: Costs not affected by learning curve (W-1)
Costs dependent on learning curve
Variable cost (labour & overheads) per hourDept B (Rs.
2001.25)
Avg. labour hours per unit for 1st and repeat order
Labour hours per unit for 1st order
Learning curve factor
Relevant cumulative total volume factor as per table
Units for 1st order
Total units for 1st and repeat order
Repeat order

A
B
C=A/B
D
E=C/D
F
G
H (F G)
J (H-G)

Rupees
10,500
2,100
8,400
4,250
4,150

250
16.60
20
0.83
1.80
500
900
400

Applied fixed overheads - to be ignored

Working 1
Costs not to be affected by learning curve
Direct Material
Direct labour in Department A
Variable overheads (25% of labour cost in Department A)

(THE END)

Page 6 of 6

3,350
720
180
4,250