PM Summer Exam 2011 by muaz007

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```									                                    Summer Exam-2011
PUNJAB FINANCE SECTOR
Performance Measurement (03-05-2011)
Duration: 3 hrs.                                                                           Marks-100
[Instructions]
•    Ensure that the question paper delivered to you is the same, in which you intend to appear.
•    Read the instructions given on the title page of Answer Copy.

Q.1. (a) Alpha Ltd. is considering a reduction in the price of its product A by 10%, as it is felt (06)
by the management that it may lead to an increase in the sales volume. There is no
prospect of a change in fixed costs or variable cost per unit. The management wishes
to maintain profit at the present level, so the loss which will be incurred by reducing
the selling price must be offset by a gain due to increased sales volume. The
following information is available:

Sales (100,000 units)               Rs. 2,000,000
Variable costs                  Rs. 150 per unit
Fixed costs                           Rs. 400,000
State the volume of sales required to maintain the existing profit.

(b) Performance standards are used to set efficiency targets. Briefly describe its types.      (04)
(c) Capacity levels are needed to establish a standard absorption rate for fixed (03)
production overhead, when standard absorption costing is used. Briefly explain the
capacity levels that might be used for budgeting.
(d) Explain the terms ‘Planning’ & ‘Operational’ variances.                                    (03)

Q.2. BETA Ltd. manufactures three products for which the maximum sales for the forth-coming
year are estimated at:

Product         Rs.
A          287,500
B          480,000
C          625,000
Summarized unit cost data are as follows:
Products             A             B        C
Rs.         Rs.       Rs.

Direct material          100           90       70
Variable costs            80         160       100
Fixed costs               25           50       40
Total costs              205         300       210

Contd. on back
2

The allocation of fixed cost was derived from last year’s production level and this may be
reviewed if current output plans are different.
Estimated selling prices are:
Products         Price (Rs.)
A               230
B               320
C               248
The products are processed on machines housed in three buildings.
Building 101 contains type 1 machine which has an estimated maximum of 19,600
machine hours available in the forth coming year with fixed overhead cost of is Rs. 98,000
per annum.
Building 202 contains type II machine of which 10,000 machine hours are estimated in the
forth-coming year with a fixed overhead cost of Rs. 75,000 per annum.
Building 303 also contains type II machine which also has an estimate of 8,000 machine
hours available in the forth-coming year. The fixed overhead cost of Rs. 37,000 is
estimated per annum for building 303.
The required machine hours for one unit of output for each product on each type of
machine are as follows:
P R O D U C TS
A      B    C
Type I machine          2      4    6
Type II machine         3      6    2

Required:

a) Determine the optimal production plan which BETA Ltd should adopt.                        (12)
b) Calculate the total profit that would be made if the production plan in (a) above is      (04)
c) What do you understand by the term ‘Limiting Factor’?                                     (02)

Q.3. The Happy Day Motels Ltd. is developing a cost accounting system. Initially it has been
decided to create four cost centers. Residential and catering are to deal directly with
customers while house keeping and maintenance are internal service cost centers.
The following overhead details have been estimated for the next period.
House
Residential     Catering               Maintenance    Total
Keeping
Rs.            Rs.           Rs.       Rs.           Rs.
Consumable materials            14,000         23,000        27,000     9,000        73,000
Staff costs                     16,500         13,000        11,500     5,500        46,500
Rent and rates                     -              -             -         -          37,500
Insurance                          -              -             -         -          14,000
Heating and lighting               -              -             -         -          18,500
Depreciation on equipment          -              -             -         -          37,500
Total                              -              -             -         -         227,000

Contd……
3

The following information is also available:
Residential    Catering    House Keeping         Maintenance       Total
Rs.          Rs.              Rs.                  Rs.         Rs.
2
Floor Area (M )                    2,750       1,350                 600                   300   5,000
Value of equipment               350,000     250,000              75,000                75,000 750,000
Number of employees                   20           20                 15                     5       60
During the period, it is estimated that there will be 2,800 guest-nights and 16,000 meals
will be served. Housekeeping works 70% for residential, 30% for catering, maintenance
works 20% for housekeeping, 30% for catering and 50% for residential.
Required:
a) Prepare an overhead statement showing clearly allocations and apportionments                        (12)
of each cost centre.
b) Calculate appropriate overhead absorption rates for residential and catering.                       (02)
c) Calculate the under or over absorption of overheads if actual results were as follows: (04)
•    Residential: 3,050 guest-nights with overheads of Rs. 144,600
•    Catering:    15,250 meals with overheads of Rs. 89,250

Q.4. Gamma Ltd. employs a standard cost system. It manufactures product Y by mixing
three raw material components. Materials standard and cost for the production of 100
kg output are as follows:

Cost Per Kg        Amounts
Material            Kg.
(Rs.)            (Rs.)

L                      66          50,000        3,300,000
M                      33          35,000        1,155,000
N                      11          20,000          220,000
Input                 110                        4,675,000
Output                100          -                 -
Normal Loss            10          -                 -
To convert 110kgs of raw materials into 100 kgs of finished products requires 450 direct
labour hours at Rs. 20,000 per direct labour hour.
Actual data for the month of May are shown below:
Quantity        Quantity          Price Per Kg
Material
Purchased      Requisitioned           (Rs.)
L            2,400           1,920                     52,000
M            1,200           1,000                     36,000
N             500             380                      19,000
Production of 3,500 kgs of product Y resulted in 15,000 Direct Labor Hours at Rs. 20,300. No
stock of raw materials or work in progress at the beginning of the month of May existed.
The material price variance is assumed to be recorded at the time of purchases.

Calculate:                                                                                                (16)
a) Materials price mix and yield variances
b) Direct labor rate, efficiency and yield variances

Contd. on back
4

Q.5.   Nell Ltd. is a manufacturing company engaged in the manufacture of a fruit drink,
which passes through three processes, A, B & C. The information given below is
extracted from the company’s records, relating to process B for the month of
March 2011.
i)   Work in process(WIP) as at 1st March, 2011 is 3000 units & the cost of WIP is
analyzed as follows:
Rs. (000)
Material X             37,500
Material Y              9,000
Material Z              1,800
Conversion costs       16,200
64,500
ii) The cost of material transferred from previous process A is 21,600 units at a total
cost of Rs. 196,500,000. All of this is charged to material X.
iii) The cost incurred during the month of March is:

Rs. (000)
Material X     54,000
Material Y     99,000
Material Z     37,800
Conversion costs     172,075

iv) Units completed during March were 19,700
v) The following units were scrapped;
Normal   600 units
Abnormal 300 units
The units scrapped were 100% complete for materials & 50% complete for
conversion costs

vi) As at 31st March, 2011, 4000 units in WIP existed & were completed as follows:

Material X            100%
Material Y            62.5%
Material Z              50%
Conversion costs        35%

Required:

a) A statement of equivalent units of production for the various elements of cost.       (08)
b) A statement of cost per equivalent units of production for each element of cost.      (08)

Contd…..
5

Q.6.   ABC Ltd. manufactures a product which is obtained basically from a series of mixing (16)
operations. The finished product is packaged in the company-made plastic boxes. The
company is organized into two independent divisions viz. one for the manufacture of
the end-product and the other for the manufacture of plastic boxes. The product
manufacturing division can buy all the plastic boxes requirements from the box
manufacturing division. The General Manager of the box manufacturing division has
obtained the following quotations from the outside manufacturers for the supply of
plastic boxes.
Total purchase value
No. of plastic boxes
(Rs.)
800,000                             1,400,000
1,200,000                            2,000,000

A cost analysis of the box manufacturing division for the manufacture of plastic boxes
reveals the following production costs:

Total purchase value
No. of plastic boxes
(Rs.)
800,000                             1,040,000
1,200,000                            1,440,000

The production cost and sales value of the end product marketed by the product
manufacturing division are as under:

Volume             Total cost of end product            Sales Value
(Boxes of end product)    (excluding cost of plastic)       (Packed in boxes)
(Rs.)                        (Rs.)
800,000                             6,480,000                 9,120,000
1,200,000                            9,680,000                12,780,000

There has been considerable discussion at the corporate level as to the use of proper
price for transfer of empty boxes from the boxes manufacturing division to product
manufacturing division. This interest is heightened because a significant portion of the
Divisional General Manager’s salary is in incentive bonus based on profit centre results.

As the corporate management accountant, responsible for defining the proper transfer
prices for the supply of empty boxes by the box manufacturing division to the product
manufacturing division.

Required:
To show for the two levels of volumes of 800,000 and 1,200,000 boxes, the profitability
by using (i) market price and (ii) shared profit relative to the costs involved basis for
the determination of transfer prices. The profitability position should be furnished
separately for the two divisions and the company as a whole under each method.

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