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


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      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)
           adopted.
        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

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                                                         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

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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)


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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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