Cost Management

AGGARWAL EDUCATION CENTRE PVT. LTD.
D-223, Laxmi Chamber, Laxmi Nagar, Delhi-92. Ph. No:- 9811374374, 9213600402.
To i!:- "#$T %&N-T&'(
Question1- :- Rosen Manufacturing Corporation produces office furniture and sells it wholesale
to furniture distributors. Rosens management is reviewing a proposal to purchase a Just-in-time inventory (JI ! system to better serve its customers. he JI system will include a computer system and materials handling e"uipment . he decision will be based on whether the new JI system is cost effective to the organi#ation for the ne$t five years. he computer system% including hardware and software% will initially cost & '%()*%***. Materials handling e"uipment will cost &+)*%***.,oth groups of e"uipment will have a five-years useful life for ta$ reporting of depreciation (straight-line! calculated assuming a &* terminal disposal value. -t the end of the five years% the newly ac"uired materials-handling e"uipment is e$pected to be sold for &')*%***. he computer system will have a &* terminal disposal value at the end of five years. .ther factors to be considered over the ne$t five years for this proposal include the following / 0ue to the service improvement resulting from this new JI system% Rosen will reali#e a & 1**%*** revenue increase to continue to grow by '*2per year thereafter. / he contribution margin is 3*2. / -nnual material- ordering costs will increase &)*%***due to a greater level of purchase orders. / here will be a one4time decrease in wor5ing capital investment of &')*%*** at the end of the first year. here will be a (*2 savings in warehouse rent due to less space being needed. he current annual rent is &6**%***. Rosen uses an after-ta$ re"uired rate of return of '*2 and is sub7ect to an income ta$ rate of +*2.-ssume that all cash flows occur at year-end for ta$ purposes e$cept for any initial purchase amounts. '8- 9repare an analysis of the after ta$ effects for the purchase of the JI system at Rosen using the net present value method for evaluating capital e$penditures. ,e sure to show all of your computations. (8- 0etermine whether Rosen should purchase the 7it system. :$plain your answer.
Year Sale C!"#$60% (e"# Sa)*"+ Ma#, Ha"-l*"+ C!0# Ca01 I"2l!3 Ta4$40% Ca01 I"2l!3 a2#er #a4 Ta4 0a)*"+ !" 5e6 T!#al Ca01 Sa)*"+ OV Fa7#!r
I $ 8,00,000 4,80,000 60,000 .&0,000/ 4,90,000 1,96,000 ,94,000 1,'6,000 4,'0,000 ,909
STATEMENT OF CASH INFLOW II III IV $ $ $ 8,80,000 9,68,000 1064800 &, 8,000 &,80,800 6,'8,880 60,000 60,000 60,000 .&0,000/ .&0,000/ .&0,000/ &,'8,000 ,1&, 00 ', ,800 &,90,800 ,'6,' 0 ',&4,480 1,'6,000 4,90,480 ,7&1 6,48,880 ,&9,&& ', 7,' 8 1,'6,000 & &,' 8 ,68'
V $ 11,71, 80 7,0 ,768 60,000 .&0,000/ 7,1 ,768 ,8&,107 4, 7,661 1,'6,000 &,6',661 ,6 1
1,'6,000 4,&8,800 ,8 6
Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402
8V !2 #!#al Ca01 *"2l!3
',90,870
',78,969
',68,'&1
',&8,800 18,47,0 ',
',&0,0''
T!#al Ca01 I"2l!3 9 $ STATEMENT OF N8V $

9; of Cash outflow Reduction in wor5ing capital at end .f 'st year '%)*%*** = .>*> ?et of ta$ of capital gain '%)*%*** - ta$@+*2 3*%*** >*%***= .3(' otal 9; of cash out flow otal 9; of C in flow ?9; It is better to Implement JI Aystem.
'<%**%*** ('%63%6)*!
())%1>*! ')%*<%<3* '1%+<%*(6 6%6>%(36
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Question2- ! )"&T ro*+!,io-, rele.a-, be-e/i,0, rele.a-, !o0,01.
he :vans Corporation manufactures wireless telephone. :vents are deciding whether to implement a JI production system% which would re"uire annual tooling costs of &')*%***. :vens estimates that the following annual benefits would arise from JI production. a. -verage inventory would decline by &<**%***% from &>**%*** to &(**%***. b. Insurance% space% materials-handing% and setup costs% which currently total &(**%***% would decline by 6*2. c. he emphasis on "uality inherent in JI systems would reduce rewor5 costs by (*2. :vans currently incurs &6)*%*** on rewor5. d. ,etter "uality would enable :vans to raise the selling prices of its products by &6 per unit. :vans sells 6*%*** units each year. :vanss re"uired rate of return on inventory investment is '(2 per year. '. Calculate the net benefit or cost to the :vans Corporation from implementing a JI production system. (. Bhat other non financial and "ualitative factors should :vans consider before deciding whether it should implement a JI systemC 6. Auppose :vans implements JI production. (a! Dive e$amples of performance measures :vans could use to evaluate and control JI production. (b! Bhat is the benefit to :vans of implementing an enterprise planning (:R9! systemC
Solution:STATEMENT OF (ELEVANT COST COM8A(ATIVE

-nnual totaling Cost .pportunity Cost Insurance% Apace% Material Fandling G Aetup cost Rewor5 Cost Incremental Revenue from Figher selling price Cost Aaving due to JI H 9resent policy --->%**%*** ='(2 (%**%*** 6%)*%*** ---3%)1%*** 3%)1%*** - )%*+%*** Ender JI '%)*%*** (%**%*** ='(2 '%+*%*** (%1*%*** (>*%***! )%*+%***
H It is better to adopt JI 9olicy.
&'%)+%***.
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Question3:- - company manufactures a single product %the estimated costs of which are as follow8
0irect Materials Rs '* each 0irect wages 1 hours at Rs. *.)* per hour .verhead absorption rate Rs. '.<) per hour.()*2 fi$ed overhead included! 0uring this period '%*** units will be produced and sold as follow8>** Enits of first at Rs.6* each )* units of second at Rs.(* each )* units of third at Rs.'* each 9resent information to management showing the loss due to the production of inferior units. ,y reprocessing the inferior units ta5ing the full reprocessing time of a further 1 hours and adding further material Costing Rs.+ per unit these% IsecondsJ and IthirdsJ can be converted into firsts. 9resent information to the management.
Solution
9resent 9osition Cost per unit80irect materials 0irect wages .verheads otal 9er unit 9articulars Mirsts Aeconds hirds ( 1 Frs. @ Rs. *.)*! ( 1 Frs. @ RA. '.<)! '* + '+ (1 Enits Aales 9rice 6* (* '* 9rofitKLoss ( (-! 1 ( - ! '1 >** )* )* 9rofit '%1** ----'%1** ?et 9rofit otal Loss --+** >** '%6** )**
Reprocessing of Inferior Enits (a! -dditional e$penditure for reprocessing per unit8Rs. 0irect material + 0irect wages 1 hrs. + ;ariable .verhead @ Rs. *.1<) < otal ') otal e$penditure for '** units Rs. '%)** (b! -dditional Revenue Rs. Aeconds (Rs. 6* 4 Rs. (* ! = )* units )** hirds ( Rs. 6* 4 Rs. '* ! = )* '%*** '%)** ?ote8- ?o change in the profit position hence this need not be considered.
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Question4:-- company manufactures a component on batches of (*** each .:ach component is

tested before being sent to the agents for sales. :ach components can be tested at the factory at a cost of Rs.() .If any component is found to be defective% it can be rectified by spending Rs.(**. In view of the
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large demand for the components and the sophisticated system of manufactures %a proposal came up that the practice of pre-testing of the components be dispensed with to save costs. In that event% any defective component is received bac5 from the customer under warranty %the cost of rectification and redispatch will be Rs.+** per component. Atates at what percentage of manufacture of components will the company find it cheaper to pretest each component. Solution4:(i! If each component is tested before being sent to the agents for sales ?o. of components in a batch H Rs. (%*** Cost of testing each components H Rs. (* Cost of rectification before dispatch H Rs. (** otal Cost H ((%*** = () !N (**d (ii! If components dispatched without pre-testing and any defective received bac5 for rectification under warranty otal Cost H Rs. +**d In different point of two alternative ((%*** = () ! N(**d H +**d +**d 4 (**d H (%*** =() (**d H )*%*** d H )*%***K(** H ()* 0efective Components H ()* Components H ()* 9ercentage of defective to total components --------- = '** H '(.)2 (%*** If defective e$ceed '(.)2of the total number of components% 9re-testing is recommended.
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Question5:- - Manufacturing company
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purchase one of the components re"uired for the manufactures of product from two sources %vi#% suppliers% - and supplier , . he price "uoted by supplier a is Rs. ').** per hundred numbers of the component and is found that on the average 62 of the total receipt from this source is defective. he corresponding "uotation from supplier , is Rs .'+.)* but the defectives would go up to )2 Mor the total supply .If the defectives are not detected %they are utilised in production causing a damage of Rs. ').** per hundred components. he company intends to introduce a system of inspection for the components on receipt which would cost Rs.(.** per hundred components such an inspection will% however %be able to detect only >*2 of the defective components received .?o payment will be made for components found to be defective in inspection. .ffer your opinion %(a! whether inspection at the point of receipt is 7ustified %and (b! which of the two suppliers should be as5ed to supply. -ssume total re"uirements of components to be '*%*** numbers.
Solution:.*/ I2 "!# *"06e7#eAupplier Enits supplies (?os.! 0efective e$pected ( ?os.! Costs 9urchase cost of components 9roduction damage on defective components otal Dood components ( ?os.! '*%*** 6** Rs. '%)** +).** '%)+) >%<** , '*%*** )** Rs. '%+)* <).** '%)() >%)**
Cost per '** good components
Rs. ').>6
Rs.'3.*)
.**/ I2 *"06e7#eAupplier , 0efectives not detected ( ?os.! 6* )* 0efectives detected (?os.! (<* +)* Components paid for ( ?os.! >%<6* >%))* Costs Rs. Rs. 9urchase Cost '%+)>.)* '%61+.<) Inspection cost (**.** (**.** 9roduction damage @ Rs. ') per '** +.)* <.)* components otal '%33+.** '%)1>.() Dood components ( ?os.! >%<** >%)** Cost per '** good components Rs. '<.') Rs.'3.<6 .n comparing the cost under I and II above% Be find that it will not be economical to install system of inspection. Murther% it will be advantageous to purchase the components from Aupplier -.
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Question6:- Oour company plans to operate department 0 at normal capacity ne$t year producing
one la5h units of product 9. -ssuming no defective wor5s% these units can be manufactured in (.) la5hs labour hours at a cost of Rs.*.)* per hour .factory overhead would amount to Rs.'%)*%*** of which Rs. )*%*** would be fi$ed five units of materials can be purchased in two "ualities P a high "uality at Rs. '.*) per unit or lower "uality at *.1* per unit. Ender e$pected conditions% using high "uality materials '*2of the wor5 will be defective re"uiring complete replacement of the material additional labor costs and variable overhead. scrap materials recovered from defectives production could be sold at Re. *.6* per unit of high "uality material used. -s an alternative to this arrangement .the use of the lower "uality material is being considered but this would re"uire an e$tra operation to be performed on it. -n additional machine and tooling would be needed at a cost of Rs. 6%*** per annum. he additional operation would ta5e half an hour for each unit of product 9 produced %not tal5ing defective wor5 into a account. It is estimated that (*2 of the wor5 would be defective all of which would be defective all of which would re"uire complete replacement. Acrap material from the lower "uality material could be sold for Rs. )%***. 9resent information to management indicating the more profitable course of action.
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Solution:-scertainment of otal Cost '8- Esing high "uality materials Material Labour ;ariable overhead Mi$ed overhead Less8 Acrap Cost of '%**%*** pieces of 9 II. Esing Lower "uality material Material Labour ;ariable .verhead Mi$ed .verhead Machine and ooling Cost (Acrap '*2! (Rs.! ()%**%*** unitsK*.>* = Rs. '.*)! ((%)*%*** hoursK*.>* = Rs.*.)*! (Rs. '%**%***K *.>*! ()%**%***K*.>*!-)%**%***! =Rs. *.6* (Acrap (*2! ()%**%*** units K*.1* = Rs.*.1* ((%)*%*** hoursK*.1* =*.)*! (Rs. '%**%*** K *.1*! )%16%666 '%61%11> '%''%''' )*%*** 1%16%666 '3%33< 1%33%333 (Rs.! )%**%*** '%)3%()* '%()%*** )*%*** 6%***
-dditional Labour -dditional overhead for additional labour ('%**%*** units = *.) hours! = (Rs. '%**%**K(%)*%*** hours!
('%**%*** units = *.) hours = Rs. *.)*!
()%*** (*%*** 1%<>%()* )%*** 1%<+%()*
Less8 Reali#able value of value Cost of '%**%*** pieces of 9. -nalysis8- Fence the high "uality material should be used.
Question7:-
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2ariable !o0,0 3ixe* !o0,0 To,al Co0,0
he 9hoton Corporation manufactures and sells (*%*** copies each year. he variable and fi$ed costs of rewor5 and repair are as follows8
Rewor5 cost per hour & +* &3* &'** Repair costs Customers support costs per (* 6* )* ransparency costs per load '1* 3* (+* Barranty repair costs pre hour +) 3) ''* 9hotons engineers are currently wor5ing to solve the problem of copies being too light or too dar5. hey propose changing the lens of the Copier. he new lens will cost & )* more than the old lens. :ach copier uses one lens. 9hoton uses a one-year time hori#on for this decision% because it plans to introduce a new copier at the end of the year. 9hoton believes that even as it improve "uality% it will not be able to save any of the fi$ed costs of rewor5 or repair. ,y changing the lens% 9hoton e$pects that it will ('! Aave '(%*** hours of rewor5% ((! Aave 1** hours of customers support% (6! Move (** fewer loads% (+! Aave 1%*** hours of repair% and ()! Aell '** additional copiers for a total contribution margin of &3%***%***. Re"uired8- Ahould 9hoton change to the new lensC Ahow your calculations.
$ol+,io-:Quality improvement% relevant costs% and relevant revenues. Relevant costs over the ne$t year of choosing the new lens H & )* = (*%*** copiers H & '%***%*** Relevant benefits over the ne$t year of choosing the ?ew Lens Costs of "uality items Aaving on rewor5 costs & +* = '(%*** rewor5 hours & +1*%*** Aaving in customer-support costs & (* = 1** customer- support- hours '3%*** Aaving in transportation costs for parts & '1* = (** fewer loads 63%*** Aavings in warranty repair costs & +) = 1%*** repair- hours 63*%*** Cost saving 1%>(%*** .pportunity costs Contribution margin from increased sales 3**%*** Cost savings and additional contribution margin &'%+>(%*** ,ecause the e$pected relevant benefits of &'%+>(%*** e$ceed the e$pected relevant costs of the new lens of &'%***%***% photon should introduce the new lens. ?ote that the opportunity cost benefits in the form of higher contribution margin from increased sales is an important component for 7ustifying the investment in the new lens. he incremental cost of the new lens of &'%***%*** is greater than the incremental savings in rewor5 and repair costs of &1>(%***. Investing in the new lens is beneficial%
provided it generates additional contribution margin of at least &'*1%*** (&'%***%***-&1>(%***!% that is additional sales of at least &'*1%*** &3%*** H '1 copiers.
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Question8-
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Customer-response time% on time delivery. 9i##a fest% Inc ma5es and delivers pi##as to homes and offices in the ,oston area. Mast% on time delivery is one of pi##a fests 5ey strategies. 9i##a fest provides the following information for(**+ about its customerresponse time- the amount of time from when a customer calls to place an order to when the pi##a is delivered.
:a";ar< = :;"e :;l< = 5e7e>?er 8*@@a0 -el*)ere- *" '0 >*";#e0 !r le00 100,000 1&0,000 8*@@a0 -el*)ere- *" ?e#3ee" '1 a"- 4& >*";#e0 00,000 60,000 8*@@a0 -el*)ere- *" ?e#3ee" 46 a"- 60 >*";#e0 80,000 70,000 8*@@a0 -el*)ere- *" ?e#3ee" 61 a"- 7& >*";#e0 0,000 0,000 T!#al 6*@@a0 -el*)ere400,000 &00,000 (eA;*re-: 1. Mor January 4 June and July 4 0ecember (**+% Calculate the percentage of pi##as
delivered in each of the four time intervals (6* minutes or less% 6'- +) minutes% and 3' 4 <) minutes!. .n the basis of these calculations% has customerresponse time improved in July- 0ecember compared with January- JuneC (. Bhen customers call pi##a fest% they often as5 how long it will ta5e for the pi##a to be delivered to their homes or offices. If pi##a fest "uotes a long time interval% customers often will not place the order. If pi##a fest "uotes too short a time interval and the pi##a is not delivered on time% customers get upset and pi##a fest will lose repeat business. ,ased on the January 4 June (**+ data% what customer- responses time should pi##a fest "uote to its customers if -. It wants to have an on- time delivery performance of <)2C ,. It wants to have an on- time delivery performance of >)2C 6. If pi##a fest had "uoted the customerresponse times you calculated in re"uirements (a and (b% would it have met its on 4 time delivery performance targets of <)2 and >)2 respectively. Mor July- 0ecember (**+C :$plain. +. 9i##a fest is considering giving an on-time guarantee for January- June (**). if the pi##a is not delivered within 3* minutes of placing the order the customer gets the pi##a fest estimates that it will ma5e additional sales of (*%*** pi##as as a result of giving this guarantee. It estimates that it will fail to deliver a total of ')%*** pi##as on time. he average price of a pi##a is &'6% and variable cost of a pi##a is &<. -. Bhat is the effect on pi##a fests operating income of ma5ing this offerC ,. Bhat non financial and "ualitative factors should pi##a fest consider before ma5ing this offerC C. Bhat actions can pi##a fest ta5e to reduce customerresponse timeC
$ol+,io-:Customer- response time% on-time delivery. January-June July-0ecember '**%*** H ()2 ')*%*** H 6*2 +**%*** )**%*** 9i##as delivered in between 6' and +) minutes (**%*** H )*2 (3*%*** H )(2 +**%*** )**%*** 9i##as delivered in between +3 and 3* minutes 1*%*** H (*2 <*%*** H '+2 +**%*** )**%*** 9i##as delivered in between 3' and <) minutes (*%*** H )2 (*%*** H '+2 +**%*** )**%*** otal '**2 '**2 9i##as delivered in 6* minutes or less
Oes% customer-response time has improved from January-June (**+ to July-0ecember (**+. he percentage of pi##as delivered in less than 6* minutes increased by )2% and pi##as delivered in less than or e"ual to +) minutes increased by G2R1(2 (6*2 N )(2! in July- 0ecember minus <)2 (()2 N )*2! in January- JuneS. In turn% pi##as delivered in greater than +) minutes decreased by <2 R()2 ((*2 N )2! in January- June minus '12 ('+2! in July- 0ecemberS. (. In the January- June (**+ period% pi##a fest should "uote a customerresponse time of (a! +) minutes to achieve on-time delivery performance of <)2 (<)2 of all pi##as were delivered within this time frame! and (b! 3* minutes to achieve on-time delivery performance of >)2 (>)2 of all pi##as were delivered within this time frame!. 6. Oes in the July- 0ecember (**+ period% pi##a fest would achieve on-time delivery performance of (a! 1(2 (greater than its target performance level of <)2! if it had "uoted a customerresponse time of +) minutes and (b! >32 (greater than its target performance level of >)2! if it had "uoted a customerresponse time of 3* minutes. +a Contribution margin from selling (*%*** additional pi##as (*%*** = (& '6- &<! &'(*%*** Cost of having to give ')%*** pi##as free because .f late deliveries% ')%*** = &< '*)%*** Increase in operating income of ma5ing the free pi##a offer & ')%*** +b. 9i##a fest should carefully monitor the "uality of its pi##as. In its desire to deliver pi##as on time% pi##a fest should not compromise on the time needed to coo5 the pi##a% nor should it increase oven temperatures beyond acceptable levels in order to coo5 the pi##a faster. 9i##a fest should also ensure that drivers responsible for delivering the pi##a drive carefully. In their desire to reach a customer "uic5ly% road safety should not be compromised. +c. Aome ways to reduce customerresponse times are8(i!Atart ma5ing the pi##a soon after a customer calls. Baiting to start ma5ing a pi##a is a nonvalueadded delaly. (ii! :nsure that ade"uate labor is available to start preparing the pi##a for coo5in% and ade"uate oven capacity is available to minimi#e waiting time before coo5ing commences. (iii! Fave drivers available to deliver the pi##a. (i! Maintain ovens well to avoid down time. (ii! Clean ovens "uic5ly after a pi##a is done in preparation for coo5ing the ne$t pi##a. (iii! Teep some basic cheese pi##as ready ahead of time so that only toppings need to be added after an order is received. (iv! Ma5e sure each pi##a coo5ed is of good "uality (not overcoo5ed or undercoo5ed! so that no pi##as have to be thrown away and redone. 9oor "uality will cause delays.
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THROUGHPUT COSTING Question9-: "#eor$ o% con&traint& t#roug#'ut contri(ution relevant co&t&.

Ma71*"*"+ 100,000 ;"*#0 80,000 ;"*#0 $640,000 $8 6er ;"*#
he Mayfield corporation manufactures filing cabinets in two operations8 machining and finishing. It provides the following information.
A"";al 7a6a7*#< A"";al 6r!-;7#*!" F*4e- !6era#*"+ 7!0#0 .E47l;-*"+ -*re7# >a#er*al0/ F*4e- !6era#*"+ 7!0#0 6er ;"*# 6r!-;7e.$640,000 = 80,000B $400,000-80,000/
F*"*01*"+ 80,000 ;"*#0 $400,000 $400,000 $& 6er ;"*#
:ach cabinet sells for &<( and has direct materials costs of &6( incurred at the start of the machining operation. Mayfield has no other variable costs. Mayfield can sell whatever output it produces. he following re"uirements refer only to the preceding data. there is no connection between the re"uirements.
'. Mayfield is considering using some modern 7igs and tools in the finishing operation that would increase annual finishing output by '%*** units. he annual cost of these 7igs and tools is &6*%***. Ahould Mayfield ac"uire these toolsC Ahow your calculations. (. the production manager of the machining department has submitted a proposal to do faster setups that would increase the annual capacity of the machining department by '*%*** units and cost &)%*** per year. Ahould Mayfield implement the changeC Ahow your calculations.
SOLUTION:heory of constraints% throughput contribution% relevant costs. 1. Minishing is a bottlenec5 operation. Fence% producing '%*** more units will generate additional throughput contribution and operating income.
I"7rea0e *" #1r!;+16;# 7!"#r*?;#*!" .$7 -$' / C 1,000 I"7re>e"#al 7!0#0 !2 #1e D*+0 a"- #!!l0 Ne# ?e"e2*# !2 *")e0#*"+ *" D*+0 a"- #!!l0
$40,000 '0,000 $10,000
Mayfield should invest in the modern 7igs and tools because the benefits of higher throughput contribution of &+*%*** e$ceeds the costof &6*%***. (8- he machining 0epartment has e$cess capacity and is not a bottlenec5 operation. Increasing its capacity further will not increase throughput contribution . here is there fore no benefits from spendi "+ &)%*** to increase the Machining 0epartments capacity by '*%*** units. Mayfield should not implement the change todo setups faster.
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Question10-:
he homas Corporation sells 6**%*** ;(3( valves to the automobile and truc5 industry. homas has a capacity of ''*%*** machine-hours and can produce 6 valves per machine-hour. ;(3(s contribution margin per unit is &1. homas sells only 6**%*** valves because 6*%*** valves ('*2 of the good valves! need to be rewor5ed. It ta5es ' machine-hour to rewor5 6 valves% so '*%*** hours of capacity are used in the rewor5 process. homass rewor5 costs are &(%'*%***. 0irect materials and direct rewor5 labor (variable costs!8 &6 per unit Mi$ed costs of e"uipment rent and overhead allocation8 &+ per unit homass process designers have developed a modification that would maintain the speed of the process and ensure '**2. Quality and no rewor5. he new process would cost &6')%*** per year. he following additional information is available8 he demand for homass ;(3( valves is 6<*%*** per year. he 7ac5son corporation has as5ed homas to supply ((%*** "971 valves (another product! if homas implements the new design. he contribution margin per ><' value is &'*. homas can ma5e two ><' valves per machine- hour with '**2 "uality and no rewor5. 4e5+ire* 1, Auppose homass designers implement the new design. Ahould homas accept Jac5sons order for ((%*** ><' valvesC Ahow your calculation. (.Ahould homas implement the new designC Ahow your calculation. 6. Bhat non financial and "ualitative factors should homas consider in deciding whether to implement the new designC
Solution
Quality improvement% relevant costs% and relevant revenues. *ne way to present the alternatives is via a decision tree% as shown below. he idea is to first evaluate the best action that homas should ta5e if it implements the new design (that is% ma5e or not ma5e ><'!. homas can then compare the best mi$ of products to produce if it implements the new design against the status "uo of not implementing the new design. '. homas has capacity constraints. 0emand for ;(3( valves(6<*%*** valves! e$ceeds production capacity of 66*%*** valves (6 valves per hour = ''*%*** machine-hours!. Aince capacity is constrained% homas will choose to sell the product that ma$imi#es contribution margin per machine-hour (the constrained resource!. Contribution margin per Machine-hour for ;(3( H &1 per valve $ 6 valves per hour H &(+
Contribution margin per machine hour for ><' H &'* per value = ( valves per hour H &(*. homas should re7ect Jac5son corporations offer and continue to manufacture only ;(3( valves. (. ?ow compare the alternatives of (a! not implementing the new design versus (b! Implementing the new design. ,y implementing the new design% homas will save '*%*** machine-hours of rewor5 time. his time can than be used to ma5e and sell 6*%*** (6 valves per hour = '*%*** hours! additional ;(3( valves. he relevant costs and benefits of implementing the new design follow8 he relevant costs of implementing the new design &(6')%***! Relevant benefits8 (a! Aavings in rewor5 costs (&6 per ;(3( valve = 6*%*** valves! >*%*** (c! -dditional contribution margin from selling another 6*%*** ;(3( valves (6 valves per hour = '*%*** hours! because capacity previously used for rewor5 is freed up (&1 per valve = 6*%*** units! (+*%*** ?et relevant benefit & ')%*** ?ote that the fi$ed rewor5 costs of e"uipment rent and allocated overhead are irrelevant because these costs will be incurred whether homas should implement the new design. Aince relevant benefit e$ceeds the relevant cost by Rs.')***&. 6. homas corporation should also consider other benefits of improving "uality. Mor e$ample the process of "uality improvement will help homass managers and wor5ers gain e$pertise about the product and the manufacturing process that may lead to further cost reductions in the future. Improving "uality within the plant is also li5ely to translate into delivering better "uality products to customers. he increased reputation and customer goodwill may well lead to higher future revenues through greater unit sales and higher sales prices.
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Question11:-
he an Corporation uses multicolor molding to ma5e plastic lamps. he molding operation has a capacity of (%***%*** units per year. he demand for lamps is very strong. an will be able to sell whatever output "uantities it can produce at &+* per lamp. an can start only (**%*** units into production in the Molding 0epartment because of capacity constraints on the molding machines. If a defective unit is produced at the molding operation% it must be scrapped and the net disposal value of scrap is #ero. .f the (%**%*** units started at the molding operation 6*%*** units (')2! are scrapped. Acrap costs% based on total (fi$ed and variable! manufacturing costs incurred up to molding operation e"ual &() per unit as follows8-
5*re7# >a#er*al0 .)ar*a?le/ 5*re7# >a";2a7#;r*"+ la?!r, Se#;6 la?!r A"- >a#er*al0 1a"-l*"+ la?!r .)ar*a?le/ EA;*6>e"#, re"# a"- !#1er all!7a#e- !)er1ea-, *"7l;-*"+ I"06e7#*!" a"- #e0#*"+ 7!0#0 !" 07ra66e- 6ar#0 .F*4e-/ T!#al
$166er ;"*# ' 6er ;"*# 6 6er ;"*# $ & 6er ;"*#
ans designers have determined that adding a different type of material to the easting direct materials would reduce scrap to #ero% but it would increased the variable costs by &+ per lamp In the Molding 0epartment. 4e5+ire*:- Ahould an use the new materialC Ahow your calculations.
Solution:Quality improvement% relevant costs% and relevant revenues. '. ,y implementing the new method% tan would incur additional direct materials costs on all the (**%*** units started at the molding operation. -dditional direct materials costs H &+ per lamp = (**%*** lamps &1**%*** he relevant benefits of adding the new material are8 Increased revenue from selling 6*%*** more lamps &+* per lamp = 6*%*** lamps &'%(**%***
10
?ote that tan corporation continues to incur the same total variable costs of direct materials direct manufacturing labor% setup labor and materials handling labor% and the same fi$ed costs of e"uipment rent and allocated overhead that it is currently incurring% even when it improves "uality. Aince these costs do not differ among the alternatives of adding the new material or not adding the new material% they are e$cluded from the analysis. he relevant benefit of adding the new material is the e$tra revenue that tan would get from producing 6*%*** good lamps. -n alternative approach to analy#ing the problem is to focus on scrap costs and the benefits of reducing scrap. he relevant benefits of adding the new material are8 a. cost savings from eliminating scrap8 ;ariable costs per lamp% &'>a = 6*%*** lamps &)<*%*** b. -dditional contribution margin from selling -nother 6*%*** lamps because 6*%*** lamps Bill no longer be scrapped8 Enit contribution margin &(' b = 6*%*** lamps 36*%*** otal benefits to tan of adding new material to improve "uality &'%(**%*** a ?ote that only the variable scrap costs of &'> per lamp (direct materials%&'3per lamP direct manufacturing labor% setup laborP and materials handling labor% &6 per lamp! are relevant because improving "uality will save these costs. Mi$ed scrap costs of e"uipment% rent% and other allocated overhead are irrelevant because these costs will be incurred whether tan corporation adds or does not add the new material. Contribution margin per unit &+*.** Aelling price ;ariable costs8 0irect materials costs per lamp &'3.** Molding department variable manufacturing costs 9er lamp (direct manufacturing labor% setup labor% and Materials handling labor! 6.** ;ariable costs ('>.**! Enit contribution margin &('.** .n the basis of "uantitative considerations alone% an should use the new material. Relevant benefits of &'%(**%*** e$ceed the relevant costs of &1**%*** by &+**%***.
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Question12- )Co0,0 o/ 6+ali,7 a-al70i0 -o- /i-a-!ial 5+ali,7 mea0+re1,

Year (e)e";e I"06e7#*!" !2 8r!-;7#*!" S7ra6 5e0*+" e"+*"eer*"+ C!0# !2 re#;r"e- +!!-0 8r!-;7#-#e0#*"+ eA;*6>e"# C;0#!>er0 0;66!r# (e3!rE 7!0#0 8re)e"#*)e eA;*6>e"# >a*"#e"a"7e 8r!-;7# l*a?*l*#< 7la*>0 I"7!>*"+ >a#er*al0 *"06e7#*!" FreaE-!3" >a*"#e"a"7e 8r!-;7# #e0#*"+ la?!r Tra*"*"+ 00& $ 1 ,&00 8& 00 40 14& &0 '0 1'& 90 100 40 40 7& 1 0 004 $10,000 110 &0 100 60 &0 40 160 '& 00 0 90 0 4&
he Fartono Corporation manufactures and sells industrial grinders. he following table presents financial information pertaining to "uality in (**+ and (**) (in thousands!8
11
Warra"#< re6a*r 00 '00 S;66l*er e)al;a#*!" &0 0 (eA;*re-:- 1:- Classify the cost items in the table into prevention% appraisal% internal failure% or e$ternal
failure categories. (8- Calculate the ratio of each C.Q category to revenues in (**+ and (**).Comment on the trends in costs of "uality between (**+ and (**). 68- Dive two e$amples of non financial "uality measures that Fartono Corporation could monitor as part of a total "uality control effort.
Solution:Costs of "uality analysis% nonfinancial "uality measures. '. G (. (**) (**+ Revenues &'(%)**%*** &'*%***%*** 9ercentage percentage .f revenues of revenues Cost ((! H ('! cost (+! H (6! Costs of "uality ('! (6! &'*%***%*** 9revention costs & (+*%*** & '**%*** 9reventive e"uipment Maintenance >*%*** 6)%*** raining '(*%*** +)%*** Aupplier evaluation )*%*** (*%*** otal prevention costs )**%*** +.*2 (**%*** (.*2 -ppraisal costs Inspection of production 1)%*** ''*%*** 9roduct-testing e"uipment )*%*** )*%*** Incoming materials inspection +*%*** (*%*** 9roduct- testing labor <)%*** ((*%*** otal appraisal costs ()*%*** +**%*** +.*2 Internal failure costs Acrap (**%*** ()*%*** Rewor5 '6)%*** '3*%*** ,rea5down maintenance +*%*** >*%*** otal Internal failure costs 6%<)%*** 6.*2 )**%*** ).*2 :$ternal failure costs Returned goods '+)%*** 3*%*** Customer support 6*%*** +*%*** 9roduct liability claims '**%*** (**%*** Barranty repair (**%*** 6**%** +<)%*** 3**%*** 3.*2 otal costs of Quality &'%3**%*** '(.12 &'%<**%*** '<.*2 ,etween (**+ and (**)% FartonoPs costs of "uality have declined from '<2 of sales to '(.12 of sales. he analysis of individual costs of "uality categories indicates that Fartono began allocating more resources to prevention activities design engineering % preventive maintenance% training and supplier evaluation in (**) relative to (**+. -s a result appraisal costs declined from +2 of sales to (2% costs of internal failure fell from )2 of sales to 62 and e$ternal failure costs decreased% the cost of returned goods has increased. Fartonos management should investigate the reason for this and initiate corrective action. 68- :$amples of no financial "uality measures that Fartono Corporation could monitor are8 a8- ?umber of defective grinders shipped to customers as a percentage of total units of grinders shipped. ,8- Ratio of good output to total output at each production process. C8- :mployee turnover. Quality% ime and the heory of Constraints
Har#!"! C!r6!ra#*!"
00& 004 12
(e)e";e0
$1 ,&00 C!0# a0 a C!0# % !2 (e)e";e0 40 90 1 0 &0 &00 8& &0 40 7& &0 00 1'& 40 '7&
$10,000 C!0# a0 a C!0# % !2 (e)e";e0 100 '& 4& 0 00 110 &0 0 0 400 &0 160 90 &00
8re)e"#*!" C!0#0 5e0*+" e"+*"eer*"+ 8re)e"#*)e eA6>#, Ma*"#e"a"7e Tra*"*"+ S;66l*er e)al;a#*!" T!#al 8re)e"#*!" 7!0#0 A66ra*0al 7!0#0 I"06e7#*!" !2 8r!-;7#*!" 8r!-;7# #e0#*"+ eA;*6>e"# I"7!>*"+ >a#er*al0 *"06e7#*!" 8r!-;7# #e0#*"+ la?!r T!#al a66ra*0al 7!0#0 I"#er"al Fa*l;re 7!0#0 S7ra6 (e3!rE FreaE-!3" >a*"#e"a"7e T!#al *"#er"al 2a*l;re 7!0#0 E4#er"al Fa*l;re 7!0#0 (e#;r"e- +!!-0 C;0#!>er 0;66!r# 8r!-;7# l*a?*l*#< 7la*>0 Warra"#< re6a*r T!#al e4#er"al 2a*l;re 7!0#0 T!#al 7!0#0 !2 A;al*#< COG #re"- a"al<0*0 COG 7a#e+!r<
4,0%
,0%
,0%
4,0%
',0%
&,0%
14& '0 100 00 47& ',8% $1,600 1 ,8%
60 40 00 '00 600 6,0% $1,700 17,0%
% !2 re)e";e0 % !2 (e)e";e0 00& 004 8re)e"#*!" 7!0#0 4,0% ,0% A66ra*0al 7!0#0 ,0% 4,0% I"#er"al 2a*l;re 7!0#0 ',0% &,0% E4#er"al 2a*l;re 7!0#0 ',8% 6,0% T!#al 7!0#0 !2 A;al*#< 1 ,8% 17,0% --------------------------------------------------------------------------------------------------------------------
Question13- )Co&t& o% )ualit$ anal$&i&, non %inancial )ualit$ *ea&ure&+. .ntario Industries
manufactures two years of refrigerators% .liva and Aolta. Information on each Refrigerator is as follows8
H"*#0 >a";2a7#;re- a"- 0!lSell*"+ 8r*7e Var*a?le 7!0#0 6er ;"*# H!;r0 06e"# !" -e0*+" Te0#*"+ a"- *"06e7#*!" 1!;r0 6er ;"*#
Ol*)*a 10,000 ;"*#0 $ ,000 $ 1, 00 6,000 1
S!l#a &,000 ;"*#0 $ 1,&00 $ 800 1,000 0,& 13
8er7e"#a+e !2 H"*#0 re3!rEe- *" 6la"# &% (e3!rE 7!0#0 6er re2r*+era#!r $&00 8er7e"#a+e !2 ;"*#0 re6a*re- a# 7;0#!>er 0*#e 4% (e6a*r 7!0#0 6er re2r*+era#!r $600 E0#*>a#e- l!0# 0ale0 2r!> 6!!r A;al*#< ----T1e la?!r ra#e0 6er 1!;r 2!r #3! a7#*)*#*e0 are a0 2!ll!30:5e0*+" $7&6er 1!;r Te0#*"+ a"- *"06e7#*!" $406er 1!;r
10% $400 8% $ 4&0 '00 ;"*#0
'8- Calculate the costs of "uality for .livia and Aolta% classified into prevention% appraisal% internal failure and e$ternal failure categories. (8- Mor each type of refrigerator% calculate the ratio of each C.Q category as a percentage of revenues Compare and Comment on the costs of "uality for .livia and Aolta. 68- Dive two e$amples of non financial "uality measures that .ntario Industries could monitor as part of a total "uality control program.
Solution:COSTS OF GHALITY ANALYSIS NONFINANCIAL GHALITY MEASH(ES (e)e";e0, C!0#0 !2 A;al*#< a"- 7!0#0 !2 A;al*#< A0 a 8er7e"#a+e !2 (e)e";e0 2!r Ol*)*a (e)e";e09 $ ,000 C 10,000 ;"*#0 9 $ 0,000,000 8er7e"#a+e !2 (e)e";e0 C!0# . / 9 .1/ I C!0#0 !2 G;al*#< .*/ $ 0,000,000 8re)e"#*!" 7!0#0 5e0*+" e"+*"eer*"+ .$7& C 6,000 1!;r0/ $4&0,000 , &% A66ra*0al 7!0#0 Te0#*"+ a"- *"06e7#*!" .$40C11!;r C 10,000 ;"*#0/ 400,000 ,00% I"#er"al 2a*l;re 7!0#0 (e3!rE .$&00C&% C 10,000 ;"*#0/ &0,000 1, &% E4#er"al 2a*l;re 7!0#0 (e6a*r.$600C4% C 10,000 ;"*#0/ 40,000 1, 0% T!#al 7!0#0 !2 G;al*#< $1,'40,000 6,70% (e)e";e0, C!0#0 2! G;al*#< a"- C!0#0 !2 G;al*#< A0 a 8er7e"#a+e !2 (e)e";e0 2!r S!l#a (e)e";e0 $1,&00 C &,000 ;"*#0 9 $7,&00,000 8er7e"#a+e !2 C!0#0 (e)e";e0 C!0#0 !2 G;al*#< .*/ . /9.1/I $7,&00,000 8re)e"#*!" 7!0#0 5e0*+" e"+*"eer*"+ .$7&C1,000 1!;r0/ $7&,000 1,00% A66ra*0al 7!0#0 Te0#*"+ a"- *"06e7#*!".$40C0,&C&,000;"*#0/ 100,000 1,''% I"#er"al 2a*l;re 7!0#0 (e3!rE .$400C10%C&,000 ;"*#0/ 00,000 ,67% E4#er"al 2a*l;re 7!0#0 (e6a*r .$4&0C8%C&,000 ;"*#0/ 180,000 ,40% E0#*>a#e- 2!r+!"e 7!"#r*?;#*!" >ar+*" Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402 14
O" l!0# 0ale0.$1,&00 - $800/ C'00/ T!#al e4#er"al 2a*l;re 7!0#0 T!#al 7!0#0 !2 G;al*#<
10,000 '90,000 $76&,000
,80% &, 0% 10, 0%
Costs of "uality as a percentage of sales are significantly different for Aolta ('*.(*2! compared with .livia (3.<*2! .ntario spends very little on prevention and appraisal activities for Aolta% and incurs high costs of internal and e$ternal failures. .ntario follows a different strategy with respect to .livia% spending a greater percentage of sales on prevention and appraisal activities. he result8 fewer internal and e$ternal failure costs and lower overall costs of "uality as a percentage of sales compared with Aolta. 68-:$amples of non financial "uality measures that .ntario Industries could monitor as part of a total "uality control effort are8 a8- .utgoing "uality yield for each product. ,8- Returned refrigerator percentage for each product. C8- .n-time delivery 08- :mployee turnover.
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Question14:-:astern Awitching Co. (:AC! produces telecommunications e"uipment Charles%

:ACs president believes that product "uality is the 5ey to gaining competitive advantage. Laurent implemented a total "uality management ( QM! program with an emphasis on customer satisfaction. he following information is available for the first year ((**+! of the QM program compared with the previous year.
T!#al ";>?er !2 ;"*#0 6r!-;7e- a"- 0!lH"*#0 -el*)ere- ?e2!re 071e-;le- -el*)er< -a#a N;>?er !2 -e2e7#*)e ;"*#0 01*66eN;>?er !2 7;0#!>er0 7!>6la*"#0 !#1er #1a" 2!r -e2e7#*)e ;"*#0 A)era+e #*>e 2r!> 31e" 7;0#!>er 6la7e0 2r! -e2e7#*)e ;"*# #! W1e" ;"*# *0 -el*)ere- #! #1e 7;0#!>er N;>?er !2 ;"*#0 re3!rEe- -;r*"+ 6r!-;7#*!" Ma";2a7#;r*"+ lea- #*>e 5*re7# a"- *"-*re7# >a";2a7#;r*"+ la?!r-1!;r0
,e)uired !
. 00'/ 10,000 8,&00 400 &00 '0-a<0 600 0-a<0 90,000
. 0004/ 11,000 9,900 ''0 &17 & -a<0 6 7 16 -a<0 110,000
1: - Mor each of the years (**6 and (**+ calculate.

-8- 9ercentage of defective units shipped. ,8- .n time delivery rate. C8- Customer complaints a percentage of units shipped. 08- 9ercentage of units rewor5ed during production. (8 - .n the basis of your calculations in re"uirement '. Fas :ACs performance on "uality and timeliness improvedC 68 - 9hilip Lar5in% a member of :ACs board of directors% comments that regardless of the effect that the program has had on "uality% the output per labor hour has declined between (**6 and (**+. Lar5in believes that lower output per lab our hour will lead to an increase in cost and lower operating income. -8- Fow did Lar5in conclude that output per lab our hour declined in (**+ relative to (**6C ,8- Bhy might output lab our hour decline in (**+C C8- 0o you thin5 that a lower output per lab our hour will decrease operating income in (**+C :$plain briefly.
Solution:N!" 2*"a"7*al >ea0;re0 !2 A;al*#< a"- #*>e 00' 400 004 ''0 15
a, 8er7e"#a+e !2 -e2e7#*)e ;"*#0 01*66e? C;0#!>er 7!>6la*"#0 a0 a 6er7e"#a+e !2 ;"*#0 01*66e7, O"-#*>e -el*)er< -: 8er7e"#a+e !2 ;"*#0 re3!rEe-;r*"+ 6r!-;7#*!"
----9 4% 10,000 &00 ----9 &% 10,000 8,&00 ----- 9 8&% 10,000 600 ---- 9 6% 10,000
----- 9 '% 11,000 &17 ----9 4,7% 11,000 9,900 ------- 9 90% 11,000 6 7 ---- 9 &,7% 11,000
(8- he calculations in re"uirements ' indicate that :ACs performance on both "uality and timeless ahs improved . Quality has improved because(a! percentage of defective units shipped has decreased from +2 to 62% (b! customer complaints have decreased from )2 to +.<2 and (c! percentage of units rewor5ed during production has decreased from 32 to ).<2. imeliness has improved as on-time delivery has increased from 1)2 to>*2. .f-course there is a relationship between the improvements in "uality and timeliness. ,etter "uality and less rewor5 reduces delays in production and enables faster and on- time delivery to customers.
'a, T1e !;#6;# 6er la?!r- 1!;r Fe#3ee" 00' a"- 004 Ca" ?e 7al7;la#e- a0 2!ll!30
00' 10,000 9 0,11 90,000
004 11,000 90,10 110,000
'?. .utput per labor- hour may have declined from (**6 to (**+ either because wor5ers were less
productive or more li5ely because the initial implantation of the "uality program may have resulted in lost production time as employees were trained and became more adept as solving production "uality problems. -s wor5ers implement good "uality practices and defects and rewor5 decrease over time% it is possible that both "uality and productivity (output per labor- hour! will increase. 6c. It is not clear that the lower output per labor- hour will decrease operating income in (**+. he higher labor costs in (**+ could pay off in many ways. Figher "uality and lower defects will li5ely result in lower material costs because of lower defects and rewor5. Internal and e$ternal failure costs will also be lower% resulting in lower customer returns and warranty costs. Customer satisfaction will li5ely increase in the umber of units produced and sold in (**+may well have been due to "uality improvements. .verall% the benefits of higher "uality in (**+ may very well e$ceed the higher labor costs
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$,e 1:- the number of batches in which the travel e$pense should have been processed H >+1%***
actual units K)** budgeted units per batch H '%1>3 batches.
$,e 2:
he fle$ible budget amount for travel e$penses H '%1>3 batches = &<.3* budgeted cost per batch H &'+%+'* he Mle$ible budget variance can be calculated as follows8 Mle$ible budget variance H -ctual costs 4 Mle$ible 4budget costs H ('%1>* = &<.+*!-( '%1>3 = &<.3*!
9$1',986- $14,410 9$4 4F :- he Mle$ible budget variances can be subdivided into price and efficiency variances.
9rice ;ariance -ctual price .f input ,udgeted price of input = -ctual "uantity of Input
16
:fficiency ;ariance
-ctual "uantity ,udgeted "uantity of .f input used - input allowed for = -ctual output
,udgeted price of Input
Receivable 9rice ;ariance H (&*.<)* - &*.36>! = >+1%*** H & '*)%((1 E :fficiency variance H (>+1%***->+1%***! = &*.36> H &* 9ayables 9rice ;ariance H (&(.1* - &(.>*! = ('(%'<) H &('%('1M :fficiency variance H (('(%'<) 4 '1>%3**! = &(.>* H &3)%+31 E ravel e$penses 9rice variance H (&<.+* - &<.3* ! = '%1>* H &6<1 M :fficiency varianceH ('%1>* 4 '%1>3! = &<.3* H &+3M
-------------------------------------------------------------------------------------------------------------------F*"a"7e 2;"7#*!" a7#*)*#*e0, ?e"71>arE*"+ .7!"#*";a#*!" !2 7-'0/,

'. he 5ey new insight is how bou"uets.com compares with IBorld- classJ organi#ations. -t face value% there is much room for improvement. he per unit cost differences are dramatic8
(e7e*)a?le0 8a<a?le0 Tra)el
F!;A;e#0, C!> 004 004 F;-+e#eA7#;al $0,6'9 $0,7& $ ,900 $ ,80 $ 7,600 $ 7,40
JW!rl-- 7la00K C!0# 6er2!r>a"7e $10 6er re>*##a"7e $0,71 6er *")!*7e $1,&8 8er #ra)el 7la*>
(.Mor any meaningful comparison% the figures being compared must be comparable sanche# should first determine whether there is an Iapples to applesJ comparison with these figures. -re costs of the finance department activities measured the same across. ,ou"uets. Com and the company withJBorld-classJ cost performanceC Auppose ,ouguets.com allocated other costs into the finance area(such as the 9residents Aalary!% while the&'.)1 per travel claim figure is for finance department costs only. Aanche# should consider whether the benchmar5 company also obtains information on why the large cost differences occur. Mor e$ample is it because the Iworld classJ performer is using new technologies in the finance areaC If this is the case% then is sanche# willing to invest in new technologies in the same way that IBorld-classJ finance function organi#ations doC If not% then the &'.)1 benchmar5% could be unattainable% no matter how hard and smart the travel claim-processing group performs. In addition Aanche# should consider whether the benchmar5 company provides a valid comparison point. he benchmar5 company is a world-class retail company that has traditional retail and internet-based retail functions.,ou"uest.com is an internet company. Costs and activities of internet companies are going to differ from those of traditional retailers.
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6+e0,io-:- Cost-plus pricing

'8- 0irect manufacturing '%***%*** does to be pac5aged labor 4 hours (0MLF! H -------------------------------------- H '%*** 0MLF re"uired for Job '%*** doeses K0MLF
I"7re>e"#al 7!0#0:
0irect manufacturing labor costs% &'3.**='%*** ;ariable overhad costs% &>.** = '%*** Incremental administrative costs &'3%*** >%*** )%***
17
&6*%*** otal incremental costs 6*%*** Minimum price per dose H ------------------------------- H ---------- H &*.*6 '%***%*** doses '%***%*** (8- -s in part'% '%*** 0MLF are re"uired for the 7ob 0irect manufacturing labor costs &'3 = '%*** &'3%*** ;ariable overhead costs &> ='%*** >%*** Mi$ed overhead costs%&6* = '%*** 6*%*** Incremental administrative costs )%*** otal (Mull ! costs 3*%*** Ma$imum allowable return before ta$es(')2! >%*** otal bid price &3>%*** otal bid price &3>%*** ,id price per dose H ---------------------- H -------------- H &*.*3> '%***%*** does '%***%*** 68- he factors that Fall Ahould consider before deciding whether or not to submit a bid at the ma$imum allowable price include(a!whether Fall has e$cess capacity%(b! whether there are available 7obs for which profitability might be greather% and (c!whether the ma$imum bid of &*.*< per dose contributes toward recovering fi$ed costs.
otal incremental costs
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Question15:-0ecision support systems (0AA! is e$amining the productivity and pricing policies of
three of its recent engineering software pac5ages8 :: 4+38 9ac5age for electrical engineers M:- 168 pac5age for mechanical engineers I: 4 '< pac5age for industrial engineers Aummary details on each pac5age over their two-year Icradle-to-graveJ product lives are as follows8
Pa!8age EE =46 ME- 8' IE =17
N+mber o/ +-i,0 0ol* $elli-g Pri!e 9ear 1 9ear 2 S &0 ,000 8,000 '00 ,000 ',000 00 &,000 ',000
-ssume that no inventory remains on hand at the end of year (. 0AA is deciding which product lines to emphasi#e. In the past two years% profitability has been mediocre. 0AA is particularly concerned with the increase in R G 0 costs. -n analyst pointed out that for one of its most recent pac5age (I:-'<!% ma7or efforts had been made to reduce RG0 costs. ?ancy Aullivan the engineering software manager% decides to collect the following life-cycle revenue and cost information for the :: 4 +3% M:- 16% and I:-'< pac5age8
((-46 '(-83 9ear 1 9ear 2 9ear 1 9ear 2 (e)e";e0 S&00,000 S ,000,000 S600,000 S900,000 C!0#0 (L5 700,000 0 4&0,000 0 5e0*+" !2 6r!-;7# 18&,000 1&,000 110,000 10,000 Ma";2a7#;r*"+ 7&,000 &,000 10&,000 10&,000 MarEe#*"+ 140,000 '60,000 1 0,000 1&0,000 5*0#r*?;#*!" 1&,000 60,000 4,000 '6,000 C;0#!>er 0er)*7e &0,000 ' &,000 4&,000 10&,000
&(-17 9ear1 S1,000,000 40,000 80,000 14',000 40,000 60,000 0,000 9ear 2 $600,000 0 16,000 6&,000 08,000 '6,000 '88,000
'8- Fow does a product life- cycle income statement differ from a conventional income statementC Bhat are the benefits of using a product life 4 cycle reporting formatC
18
(8- 9resent a product life- cycle income statement for each software pac5age. Bhich pac5age is the most profitable% and which is the least profitableC Ignore the time value of money. 68- Fow do the three software pac5ages differ in their cost structure (the percentage of total costs in each cost category!C
Solution:Life Cycle product costing% 9roduct mi$. '8- - life-cycle income statement traces revenue and costs of each individual software pac5age from its initial research and development to its final customer servicing and support. he two main differences from a conventional income statement are8 a8- Costs incurred in different calendar periods are included in the same statement. ,8- Costs and revenue of each pac5age are reported% separately rather than aggregated into company wide categories. he benefits of using a product life-cycle report are8 -8- he full set of revenues and costs associated with each product becomes visible. ,8- 0ifferences among products in the percentage of total costs committed at early stages in the life cycle are high lighted. C:- Interrelationships among among business function cost categories are highlighted. Bhatis the effect% for e$ample% of cutting bac5 on RG0 and 9roduct- design cost categories on customer service costs in subse"uent yearsC
:EE-46 (e)e";e.$0000/ C!0#0.$0000/ (e0ear71 L -e)el!6>e"# 5e0*+" 8r!-;7#*!" MarEe#*"+ 5*0#r*?;#*!" C;0#!>er 0er)*7e O6era#*"+ I"7!>e.$0000/ $ ,&00 $700 00 '00 &00 7& '7& $4&0 1 0 10 70 60 1&0 ME-8' $1,&00 $ 40 96 08 448 96 608 IE-17 $1,600
,1&0 $ '&0
1, 60 $ 40
1,696 $.96/
-s emphasi#ed in this chapter% the time value of money is not ta5en into account when summing life-cycle revenue or life 4cycle costs. Ran5ing of the three pac5age on profitability (and relative profitability! are8
O6era#*"+ *"7!>e 1, EE =46: $'&0,000 , ME-8': $ 40,000 ', IE-17:$ .96,000/
O6era#*"+ *"7!>e (e)e";e0 1, ME-8': 16,0% :- EE=46: 14,0% ':- IE =17: .6,0%/
he ::-+3 and M:-16pac5ages should be emphasi#ed and theI:-'<pac5age should be deemphasi#ed. It is interesting thatI:-'< had the lowest R G0 costs but was the least profitable. 0AA should evaluate whether reducing RG 0 costs contributed in any way to I:-'<s poor performance. 68- hecost structures of the three software pac5age are8
(e0ear71 L 5e)el!6>e"# 5e0*+" 8r!-;7#*!" MarEe#*"+ 5*0#r*?;#*!"
EE-46 ' ,&% 9,' 14,0 ',' ',&
ME-8' '&,7% 9,& 16,7 1,4 4,8
IE-17 14,1% &,7 1 ,' 6,4 &,7 19
C;0#!>er 0er)*7e
17,4 11,9 '&,8 100,0% 100,0% 100,0% -------------------------------------------------------------------------------------------------------------------ACTIVITY BASED COSTIN
Question16:-
he :$cel Ltd. Ma5e and sell two products %;D+E and ;D(.,oth products are manufactures through two consecutive process-ma5ing and pac5ing Raw materials is input at the commencement of the ma5ing process. he following estimated information is available for the period ending 6'st March.
MaE*"+ .$000/ C!")er0*!" C!0# Var*a?le F*4e8r!-;7# *"2!r>a#*!" 8r!-;7#*!" #*>e 6er ;"*# MaE*"+ .>*";#e0/ 8a7E*"+ .>*";#e0/ 8r!-;7#*!" Sale0 .;"*#0/ Sell*"+ 8r*7e 6er ;"*#.$/ 0irect Material per unit (A! '&0 10 VM4 &, & 6 &000 1&0 6*
8a7E*"+ .$000/ 80 140 HVM &, & 4 '000 180 6*
+*2 of fi$ed costs are product specific% the remainder are company fi$ed costs. Mi$ed Costs will remain unchanged thoughout a wide activity range.
(iii!Conversion costs are absorbed by products using estimated time based rates. (eA;*re-:(a! Esing the above information (b! Calculate unit costs for each product% analysed as relevant. (c! Comment on management suggestion that the production and sale of one of the product should not proceed in the period ending 6' st March. (d! -dditional information is gathered for the period ending 6'stM-rchas follows8 (i! he ma5ing process consist of two consecutive activities% mounding and trimming. he moulding variable conversion costs are incurred in proportion to the temperate re"uired in the moulds. he variable trimming conversion costs are incurred in proportion to the time re"uired for each product. 9ac5ing materials (which are part of the variable pac5ing cost!re"uirements depends on the comple$ity of pac5ing specified for each product. (ii! he 9roportion of product specific conversion costs (variable and fi$ed! are analysed as follows8 Ma5ing 9rocess8 moulding (3*2!P trimming (+*2! 9ac5ing 9rocessP Conversion (<*2!% 9ac5ing material(6*2! .***/ -n investigation into the effect of the cost drivers on costs has indicated that the proportions in which the total product specific conversion costs are attributable to ;D+E and ;D(are as follows8
VM4H Te>6era#;re.>!;l-*"+/ Ma#er*al 7!"0*0#e"7<.#r*>>*"+/ T*>e.6a7E*"+/ 8a7E*"+ .7!>6le4*#</ ' 1
VM 1 &
' .*)/Company fi$ed costs is apportioned to product at an overall average rate per product unit based on
the estimated figures.
20
Re"uired8Calculate amended unit costs for each product where activity based costing is used and company fi$ed costs are apportioned as detailed above. Comment on the relevance of the amended unit cost in evaluating the management suggestion that one of the products be discontinued in the period ending 6'st March. Management wish to achieve an overall net profit margin of ')2 on sales in the period ending 6' st March in order to meet return on capital targets. Re"uired8:$plain how target costing may be used in achieving the re"uired return and suggest specific areas of investigation.
Solution:fle$ible- budget variances for finance function activities. '. Receivables Receivable is an output unit level activity. Its fle$ible- budget variance can be calculated as follows8 Mle$ible-budget -ctual Mle$ible-budget ;ariance H costs Costs H (&*.<) = >+1%***! 4 (&*. 36> = >+1%***! H & <''%*** - &3*)%<<( H &'*)%((1 E 9ayables 9ayables is a batch level activity -tatic! (udget A*ount& Actual a*ount& .a. ?umber of deliveries '%***%*** >+1%*** b. ,atch si#e (units per batch! ) +.+31 c. ?umber of batches (a b! (**%*** ('(%'<) d. cost per batch &(.>* &(.1* e. otal payables activity cost (c =d! &)1*%*** &)>+%*>* Atep '8 he number of batches in which payables should have been processed H >+1%*** actual Enits 4 ) budgeted units per batch H '1>%3** batches Atep (8 he fle$ible- budget amount for payables H '1>%3** batches = &(.>* budgeted cost per batch & )+>%1+* he fle$ible 4 budget variance can be computed as follows8 Mle$ible- budget variance H -ctual costs 4 fle$ible 4 budget costs H (('(%'<) = &(.1*! 4 ('1>%3** = &(.>*! H& )>+%*>* - &)+>%1+* H &++%()* E ravel e$penses ravel e$penses is a batch level activity Atatic- budget -mounts -ctual amounts a. ?umber of deliveries '%***%*** >+1%*** b. ,atch si#e (units per batch! )** )*'.)1< c. ?umber of batches (ab! (%*** '%1>* d. Cost per batch &<.3* &<.+* e. otal travel e$penses activity (c = d! &')%(** &'6%>13 !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Question17-:- (2:L#:T&;N ':N:<(4$, 4;& 2:L#(-C=:&N :N:L9$&$ ;3 C;$T

$T4#CT#4(: Eser Mriendly Computer is one of the largest personal computer companies in the
world . he board of directors was recently informed that Eser Mriendly president is resigning. -n
21
e$ecutive search firm recommends the board consider appointing 9eter 0iamond ( Current president of Computer 9ower! or ?orma 9rovan (current president of 9each Computer!.Oou Collect the following financial information (in millions! on computer 9ower and 9each Computer for (**( and (**68
Com +,er Po>er

4e.e-+e0 Co0,0 4AD De0igPro*+!,io'ar8e,i-g Di0,rib+,ioC+0,omer 0er.i!e To,al !o0,0 ; era,i-g i-!ome To,al a00e,0 2002 ?400.0 36.0 1@.0 102.0 7@.0 27.0 4@.0 300.0 ?100.0 ?360.0 2003 ?320.0 16.8 8.4 112.0 92.4 22.4 28.0 280.0 ?40.0 ?340.0
Pea!h Com +,er

2002 ?200.0 18.0 3.6 82.8 36.0 18.0 21.6 180.0 ?20.0 ?160.0 2003 ?3@0.0 43.@ 11.6 98.6 66.7 23.2 46.4 290.0 ?60.0 ?240.0
In early (**+.*a leading computer maga#ine gave 9each Computers main product five stars% its highest rating. Computer 9owers main product was given three stars% down from five stars a years ago% because of customer-service problems. he computer maga#ine also ran an article on new product introductions. 9each Computer received high mar5s for new products in (**6.Computer 9owers performance was called Imediocre.J
4e5+ire*:'8- Ese the 0upont method of probability analysis to compute the R.I of computer 9ower and 9each Computer in (**( and (**6.Comment on the results. (8- Compute the percentage of costs in each of the si$ business-function cost categories for computer 9ower and 9each Computer in (**( and (**6. Comment on the results. 68- Ran5 0iamond and 9rovan as potential candidates for president of Eser Mriendly Computer. :$plain your ran5ing.
Solution::valuating managers% R.I% value- chain analysis of Cost Atructure ,evenue& .'erating /nco*e .'erating /nco*e !!!!!!!!!!!!! 0 !!!!!!!!!!!!!!!!!!!!!!! 1 !!!!!!!!!!!!!!!!!!!!!!!!! "otal A&&et& ,evenue& "otal A&&et& Co*'uter Power 2002 1.111 0.220 0.278 2003 0.941 0.122 0.118 Peac# Co*'uter 2002 1.220 0.100 0.122 2003 1.428 0.171 0.220 Computer 9owers R.I has declined si#ably from (**( to (**6% Largely because of a decline in operating income to revenues. 9earch Computers R.I has doubled from (**( to (**6% in large part due to an increase in operating income to revenues. 3u&ine&& 4unction ,e&earc# and develo'*ent 5e&ign Production 6ar7eting 5i&tri(ution Cu&to*er -ervice "otal co&t& Co*'uter Power 2002 2003 12.08 6.08 2.0 3.0 34.0 40.0 22.0 33.0 9.0 8.0 12.0 10.0 100.08 100.08 Peac# Co*'uter 2002 2003 10.00 12.08 2.0 4.0 46.0 34.0 20.0 23.0 10.0 8.0 12.0 16.0 100.08 100.08
22
,usiness Munctions with increase Kdecrease in the percentage of total costs from (**( to (**6 are8 Co*'uter Power Peac# Co*'uter /ncrea&e Production ,e&earc# and develo'*ent 6ar7eting 5e&ign 6ar7eting Cu&to*er &ervice 5ecrea&e& ,e&earc# 9 5evelo'*ent Production 5e&ign 5i&tri(ution 5i&tri(ution Cu&to*er -ervice Computer 9ower has decreased e$penditures in servel Tey business functions that are critical to its longterm survival-notary research and development and design. hese costs are discretionary and can be reduced in the Ahort run without any short-run effect without any short-run effect on customers% but such action is li5ely to create serious problems in the long run. 68- ,ased on the information provided% 9rovan is the better candidate for president of Eser Mriendly Computer. ,oth Computer 9ower and Reach Computer are in the same industry. 9rovan has headed 9each Computer at a time when it has considerably outperformed Computer 9ower. -8- he R.I of 9each Computer has increased from (**( to (**6% while that of Computer 9ower has decreased. ,8- he Computer maga#ine has increased the ran5ing of 9each Computers main product% while it has decreased the ran5ing of Computer 9owers main 9roduct. C8- 9each Computer has received high mar5s for new products (the lifeblood of a computer company!% while Computer 9ower new-product introductions have been described as Imediocre.J !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
/:CE:"/;E -C<E6E
Question18- !
:nton company compensates its 7unior employees based on '*2 of actual income distributed e"ually among the '*** employees payable within 6* days after the and of the year plus )2 of stoc5 appreciation for the year % (*2 of planned income plus '*2 of stoc5- appreciation for the '** mid- level employees payable within seven months of the current year based on stoc5 values on 7une 6* th of the current year% and pays its '* top- level e$ecutives% 6*2 of the revised income for the current year and 6*2 of stoc5 appreciation as of the end Aeptember during .ctober of each year. 9lanned sales for (**6 amounted to '.6 bilion dollars. 9lanned costs included fi$ed costs .6) billion dollars and variable costs amounting to +*2 of sales. a$es amount to (+2 of income. Revised sales on >K6*th for the year is e$pected to be '.' billion dollars with a '*2 increase in variable costs and a )2 reduction in fi$ed costs. -ctual sales% however% amounted to 1 billion dollars with both fi$ed and variable costs being '(2 higher the anticipated level. Atoc5 prices were at &(( at the beginning of the year % &(3 as of 7une 6* th % and &(< as of Aeptember 6* th -t the end of the year% in spite of multi- million-dollar audits. Aeveral frauds and manipulation of records were discovered and the stoc5 price plunged to &'.(). here were a total of 3< million share outstanding during the year. Re"uired8 0etermine planned and actual income and compute compensation per employee for each group .
Solution:/n t#ou&and& Aales ;ariable Costs Mi$ed Costs .perating Income a$es ?et income Atoc5 value 4oreca&t &'%6**%*** &)(*%*** &6)*%*** &+6*%*** &'*6%(** &6(3%1** &'%+<+%*** ,evi&ed &'%'**%*** &+1+%*** &66(%)** &(16%)** &31%*+* &(')%+3* &'%<+(%*** Actual &1**%*** &6)1%+** &61(%*** &+>%3** &''%>*+ &6<%3>3 &16%<)*
23
&'%1*>%*** Co*'en&ation E=ecutive 6anager& E*'lo$ee& Income percentage &3+%361 &3)%63* & 1%6<) Atoc5 apprec2 &'**%)** &(3%1** --otal Compensation &'3)%'61 &>(%'3* 1%6<) ?umber of employees '* '** '*** Comp. 9er employee &'3%)'6%1* &>('%3** 1%6<) he student and the professor are as5ed to provide comments and analysis based on their own understanding of the above secnario and analysis. -------------------------------------------------------------------------------------------------------------------------------
3ALA:CE-C.,E CA,5
Question198-
-lan enterprises spent & (1%3** in employee training in (**(. from a total of '3* employees% eight employees resigned during the year and were replaced with new ones. :mployees succeeded in introducing five innovative ideas for which management gave them recognition and pri#es amounting to &<%)**. 0efective products amounted to '>( units from a total of (%+** units produced. 9roductive time amounted to ((%)** from a total of ()%*** recorded as processing time. he companys sales amounted to &36*%*** from a mar5et which is around > times this si#e.6 out of )* ma7or customers have gone ban5rupt leaving an uncollectible bad debts of around & '>%<**. ;ariable cost of production amounted to )32 of sales. Aales commission is at 32. Mi$ed costs amount to &'(>%)** and general and administration costs amount to &1<%+)*. his is in addition to the employee related costs stated above. he company has a total asset of &(+6%***. he company e$pects to increase the employee related costs by ()2 in (**6 but hope that defects will be reduced by 6*2% production efficiency will increase by <2%sales will increase by '12 - although mar5et will not change in total% and variable costs will decrease by 12 fi$ed costs will increase by 62 D G - will increase by +2 . ,ad debts will be the same amount. otal assets will remain at the same level. Re"uired8 9repare a balanced scorecard for (**( and its forecast for (**6.
Solution:
,alanced Acorecard for -lan :nterprises
/te* >ear2002 8c#ange 1 ! ,.rgani?ational growt# and learning :mployee training (1%3** ()2 Innovations <%)** ()2 2 ! 3u&ine&& and 'roduction 'roce&& e%%icienc$ 0efective 9roducts *.*1 -6*2 9rod. :fficiency *.> <2 3 ! Cu&to*er value Customer ris5 6 failed Mar5et Ahare ''.''2 4 ! 4inancial Aales Drowth &36*.*** '12 9rofitability -).62 Return on assets -'6.<(2 /nco*e -tate*ent Aales &36*.*** '12 ;ariable Costs &6)(%1** -12 Aales Commission &6<%1** Mi$ed costs &'(>%)** DG &1<%+)* ,ad debts &'>%<**
>ear2003 6)%<)* >%6<) *.*)3 >3.6*2 6 Mailure '6.''2 &<+6.+** 6.32 '*.>32 &<+6%+** &616%*** &++%3*+ &'66.61) &>*%>+1 &'>%<**
24
:mployee training Innovations 9rofit -ssets
&(1%3** &<%)** &(66%6)*! &(+6%***
()2 ()2
&6)%<)* &>%6<) &(3%361 &(+6%***
Question20- ! ,illington Corporation ma5es bicycle frames in two processes% tube cutting and
welding. he tube-cutting and welding process have a practical capacity of ')*%*** and '**%*** units per year% respectively. Committed costs of "uality activities follows80esign of product and process costsUUUUUUUUUUUUUU.& ((*%***. Inspection and testing costsUUUUUUUUUUUUUUUUUUU..1)%*** he demand is very strong. ,illington can sell all output it can produce at &'1* per frame. It begins producing only '**%** units in the tube-cutting department because of the capacity constraint on the welding processP any defective units it produces are scrapped. .f the '**%*** units started at the tube-cutting department%'%*** units( ' percent! normally are scrapped(Acrap is detected at the end of the tube- cutting operation! Mull costs% based on total manufacturing costs incurred through the tube 4cutting operation. :"ual &'*) per unit. 0irect materials (variables per unit!UUUUUUUUUUU &11 0irect manufacturing setup% and materials handling laborUUU < :"uipment rent% and other overhead(fi$ed for the year!UU.. '* Mull cost per unit UUUUUUUUUUU.. & '*) he tube-cutting department sends its good units to the Belding department. Enit level manufacturing costs at the welding department are &+6.)* per unit. Belders are very highly trained% and the welding departments has no scrap. herefore% ,illingtons total sales "uantity e"uals the tube-cutting departments output. ,illington designers are considering several alternative improvements to reduce scrap in the tube- cutting department. Alternative1 Leaving the process unchanged but starting enough units in the tube- cutting department so that the Belding departments can operate at procaticla capacity. Alternative2 ! Esing a different type of tubing that is more resistant to damage and would reduce scrap by 1* percent. It would increase the unit-level costs per unit in the tube- cutting department by & '* but would reduce costs in the welding department by &). Alternative 3 ! Apending an additional amount on training to reduce scrap in the tube- cutting process. ,e)uired ! Morm small groups to respond to each of the following items8A ! Bhich alternative ' or ( is more attractive financiallyC 3 ! Fow much would the company be willing to spend on training and how much would scrap have to be reduced to ma5e alternative 6 as attractive+ as either alternative ' or (C C ! Bhat other "ualitative factors should ,ilington consider in ma5ing the decisionC
THROUGHTPUT COST !G
SOLUTION:5ate /n'ut ubing Capacity Belding capacity Enits started in tubing Acrap rate Enits scrapped Enits completed and sold Aales 9rice Costs8 0irect materials% per unit ;ariable tube manufacturing per unit Belding costs% per unit Pre&ent ')*%*** '**%*** '**%*** '.**2 '%*** >>%*** &'1* 11 < +6.) Alternative 1 ')*%*** '**%*** '*'%*'* '.**2 '%*'* '**%*** &'1* 11 < +6.) Alternative 2 ')*%*** '**%*** '**%(** *.(*2 (** '**%*** &'1* >1 < 61.)
25
Manufacturing overhead 0esign Inspection -olution Aales ;aria(le co&t& o% unit& &old 0irect materials Costs of Acrap ;ariable tube manufacturing Belding otal variable costs Contribution margin Co**itted co&t& Manufacturing overhead 0esign Inspection otal Committed costs .perating 9rofit
'%***%*** ((*%*** 1)%*** Pre&ent &'<%1(*%*** 1%<'(%*** '61%)** 3>6%*** +%6*3%)** '6%1)*%*** 6%><*%*** '%***%*** ((*%*** 1)%*** '%6*)%*** &(%33)%***
'%***%*** ((*%*** 1)%*** Alternative 1 &'1%***%*** 1%1**%*** '6>%1>> <**%*** +%6)*%*** '6%>1>%1>> +%*'*%'*' '%***%*** ((*%*** 1)%*** '%6*)%*** &(%<*)%'*'
'%***%*** ((*%*** 1)%*** Alternative 2 &'1%***%*** >%1**%*** (1%<** <**%*** 6%1)*%*** '+%6<1%<** 6%3('%6** '%***%*** ((*%*** 1)%*** '%6*)%*** &(%6'3%6**
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Question21- :- - drug treatment day center run by a charity organi#ation wishes to improve the
"uality of its service to patients by the addition of e$tra facilities. -fter much research it has drawn up a short list of five Aeparate possible improvements and has assessed their outcomes using the following criteria8 Criterion -8 Reduced average number of waiting hours per month per patient. Criterion ,8 Increased percentage fre"uency of seeing patients when they attend. Criterion C8 Reduced average number of month to cure per patient. Criterion 08 Increased percentage fre"uency of patient attendance at the center. he assessed outcomes are8 /*'rove*ent E=tra %acilitie& .utco*e according to criterion ,e%erence nu*(er A 3 C 5 <our& 8 6ont#& 8 Increase medical staff by ( +.1 6) ' ) 0octors and ' nurse ( Increase counseling staff by ( 3 (* '.() '* Counselors and ' nurse 6 a$i service to bring patients to ( '( *.<) (( -nd from the center + :$tend by (* hours per month + 6* '.) '* he time the center is open ) Introduce group counseling '* '.<) ') Aessions. -t present the center is open for '3* hours per month and deals with 6%*** patients. he proposed improvement will have no effect on the number of patients seen. he professional staffs currently employed are ) doctors% < counselors and + nurses. he ta$i service is e$pected to be used by 3*2 of patients with an average attendance of once per month. :ach ta$i carry an average of '.( patients and the cost to the center will be Rs. *.(* per mile. otal distances that patients are e$pected to be carried per attendance are8 @8+ Percentage o% 'atient& '
TQM
26
'*miles (* miles 6* miles he costs of e$tra facilities would be8
(* +* +* '** Co&t '.a.
A&&ociated ca'ital E)ui'*ent co&t& 0octors salary Rs. ((%*** Rs. )%*** 0octors e$penses 6%*** --Counselors salary '3%*** (%*** Counselors e$penses '%)** -?urses salary '*%*** '%*** ?urses e$penses (%*** -hese costs are depreciated over five years on a straight-line basis with no residual value. :$tra administrationK establishment costs are Rs. (** per month per person. If hours are e$tended beyond '3* per month% overtime will need to be paid at a premium of ()2 on salaries (but not e$penses! and an e$tra Rs. +%*** per annum will be incurred for administrationK establishment costs. Arou' coun&eling &e&&ion& will re)uire ' Apecialist counselor costing Rs. 6%*** p.a. more than ordinary counselors. ' assistant counselor costing Rs. (%*** p.a. less than ordinary counselors. ' nurse Capital costs will be the same as for ordinary counselors. he Centers capital re"uirements will be borrowed from the ban5 at '(2 p.a. he interest and all other costs will be met by donations. he depreciation charge will be used to reduce the loan at the end of each year. Cost of wor5ing capital can be ignored. >ou are re)uired to (a! Calculate for each improvement the incremental cost8 (i! 9er patient per month (7! Mor the appropriate unit of each of the four criteria. (b! Identify the improvement with the lowest cost in (a! (ii! above for each of the four criteria.
SOLUTION:@a+ /ncre*ental co&t&.

Improvement ?o. ' Rs. 9er annum :$tra ( doctors- salary and e$penses )*%*** :$tra ' nurse- salary and e$penses('*** N()**! '(%*** -dministration costs 6 = (%+** <%(** 0epreciation (*2 of Rs. ''%*** (%(** Interest on loan for capital e"uipment '(2 of ''%*** N Rs. 1%1** N Rs. 3.3** <>( N Rs. +%+**N Rs. (%(** ! ) VVVVVV /( = Rs. )%*** N Rs. '%*** 72,192 Improvement ?o. ( :$tra ( counselors- salary and e$penses :$tra ' nurse- salary and allowances -dministration cost 6 = Rs. (%+** 0epreciation (*2of Rs. )%*** Interest on loan for capital e"uipment '(2 of (Rs. )%*** N Rs. +%*** N Rs. 6%***N Rs. (%*** N Rs. '%***! ) Improvement ?o. 6 a$i service 6%*** '.( patients = *.3 = '( month = <>%(** (( miles/ = Re. *.(* 6)%*** '(%*** <%(** '%*** 63* --------22,260
27
/('*=*.( N(* = *.+ N 6* = *.+! H (( miles Improvement ?o.+ 0octors salaries() = Rs. ((%***! Counselors salary (< = Rs '3%***! ?urses salary (+= Rs '*%***! :$tra administration cost otal Improvement ?o ) ' specialist counselor 4salary G e$penses ' assistant counselor- salary G e$penses ' nurse 4 salary G e$penses -dministration costs 6= Rs (%+** 0epreciation(*2 of Rs. )%*** Interest on loan for capital e"uipment'(2of(Rs )%*** N Rs +%***N Rs 6%***NRs(%***N Rs '%***! ) (i!Incremental cost per patient per month Improvement ?o ,& ' <(%'>( 63%*** ( ))%)3*63%*** 6 <>%(**63%*** + ++%>6163%*** ) )3%)3* 63%*** (ii!Incremental cost for each of the four criteria /*'rove*ent :o. 1 A ,&. 2.01 B 4.8 , Rs. <(%'>(K ('(= 6)! C Rs. <(%'>( K ( 63%*** =' ! 0 Rs. <(%'>(K ('(= )! /*'rove*ent :o.2 A ,&. 1.24 B 6 , Rs. ))%)3* K ( '(= (*! C Rs. ))%)3*K ( 63%*** = '.()! 0 Rs. ))%)3* K ('(= '*! /*'rove*ent :o 3 A ,&. 2.20B 2 , Rs. <>%(** K ('(= '(! C Rs. <>%(** K(63%*** = *.<)! 0 Rs. <>%(** K ( '(= ((! /*'rove*ent :o.4C A ,&.1.22B4 , ++%>61K ('(=6*! C ++%>61K ( 63%*** = '.)! 0 ++%>61K ( '( = '*! /*'rove*ent :o.2 A , )3%)3*K ('( = '*! C )3%)3* K(63%*** ='.<)! 0 )3%)3*K ('(= ')! (a! Improvements with lowest costs under each criterion. Improvement ( , Improvement + C Improvement + 0 Improvement 6 ,& (.*' '.)+ (.( '.() '.)< Rs. *.+( '<'.1> (.*' '%(*6.(* *.(3 (6'.)* '.(6 +36 '.'* ))*.** (.>6 6** *.6' '(+.16 *.16 6<+.+1 +<'.66 *.>* 6'+.(( Rs. '%'*%*** '%'(%*** +*%*** (%3(%*** = ((* '3* = '.()! +*%>61 +%*** ++%>61 Rs (*%)** ')%)** '(%*** <%(** '%*** 63* ------------26,260
28
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
;ALDE E:A/:EE,/:A
Question22:he .perating result of a department provide the following information for a particular wee58 -verage output per wee5 +1%*** units Aalable value of output Rs. 3*%*** Contribution on above Rs. (+%*** he management is contenting to bring about more mechani#ation in the department at a capital cost of Rs. '3%*** which will result in reduction in number of wor5men from the present strength of '3* nos. to '(* nos. Fowever due to mechanical help% the output of individual wor5men will increase by 3*2. he e$isting piece rate is Rs. *.'* per article and as an incentive% the management propose to increase the e$isting piece rate by )2 for every '*2 increase in the individual output achieved. here will be a reduction in sale price by +2 to sell the increased production. Oou are re"uired to calculate e$tra wee5ly contribution resulting due to proposed changes.
Solution:- "#e o'erating re&ult& o% a de'art*ent 'rovide t#e %ollowing in%or*ation %or a
particular wee58 -verage output per wee5 +1%*** units Aaleable value of output Rs. 3*%*** Contribution on above Rs.(+%*** he management is contemplating to bring about more mechani#ation in the department at a capital cost of Rs. '3%***whuch will result in reduction in number of wor5men from the present strength of '3*nos.to '(* nos..Fowever due to mechanical help% the output of individual wor5men will increase by 3*2. he e$isting piece rate is Rs. *.'* per article and as an incentive % the management propose to increase the e$isting piece rate by )2 for every '*2 increase in the individual output achieved. here will be a reduction in sale price by +2 to sell the increased production. Oou are re"uired to calculate e$tra wee5ly contribution resulting due to proposed changes.
,&. (i! Aales per wee5 3*%*** Contribution (+%*** ;ariable cost 63%*** Less wages(*'*=+1%***pc! +%1** ;ariable cost e$cluding wages 6'%(** i.e 6'%(*K+1%*** H RsK *.3) per 9c (ii! Muture e$pected production EnitsK employee 9roduction per employee H +1%***K'3* H 6** -dd increase by 3*2 '1* +1* otal future production from '(* wor5men H )<%3**. Rs. (iii! :$pected selling price 9resent price Rs. 3*%***K+1%***H Less reduction by +2 H Revised 9rice (iv! Revised piece rate wages 9resent rate Incentive ()2 = 3*2 H 62! Morecast of 9rofitability Aales ()<%3** units = Rs. '.(*! Less ;ariable cost Rs. '.() *.*) '.(* ,&. *.'* *.*6 *.'6 3>%'(*
(iv!
29
Bages @ Rs. *.'6 .ther overheads (e$cluding wages @ Rs. *.3)!
<%+1** 6<%++* ++%>(1
Contribution (+%'>( 9resent Contribution (+%*** Increase in contribution Rs. '>( ----------------------------------------------------------------------------------------------------------------
,-L-?C: AC.R: C-R0

Question23:- Calte$% Inc% refines gasoline and sells it through its own Das stations. .n the basis of
mar5et research. Calte$ determines that 3*2 of the overall gasoline mar5et consist of I service 4oriented customers%J medium to high income individuals who are willing to pay a higher price for gas if the gas stations can provide e$cellent customer service% such as a clean facility a convince store% friendly employees% a "uic5 turnaround% the ability to pay by credit card% and high substance premium fuel. he remaining +*2 of the overall mar5et are I9rice shoppersJ who loo5 to buy the cheapest gasoline available. Calte$s strategy is to focus on the 3*2 of service oriented customers. Calte$s balance scorecard for (**+ follows. Mor brevity the initiatives ta5en under each ob7ective are omitted.
O?De7#*)e0 Mea0;re0 F*"a"7*al 8er06e7#*)e

I"7re0e 01are1!l-er )al;e O6era#*"+ *"7!>e 71a"+e0 Fr!> 6r*7e re7!)er< O6era#*"+ *"7!>e 71a"+e0 Fr!> Mr!3#1
Tar+e# 8er2!r>a"7e
$90,000,000 $6&,000,000 10% 94 6!*"#0 91% 99% 88%
A7#;al 8er2!r>a"7e
$9&,000,000 $67,000,000 9,8% 9& 6!*"#0 91% 100% 90%
C;0#!>er 8er06e7#*)e I"7rea0e >arEe# 01are
MarEe# 01are !2 !)erall Ma0!l*"e >arEe# I"#er"al F;0*"e00 8r!7e00 8er06e7#*)e I>6r!)e +a0!l*"e A;al*#< G;al*#< *"-e4 I>6r!)e re2*"er< (e2*"er< rel*a?*l*#< *"-e4 .%/ 8er2!r>a"7e E"0;re +a0!l*"e 8r!-;7# a)a*la?*l*#< *"-e4 .%/ A)a*la?*l*#< Lear"*"+ a"- Mr!3#1 8er06e7#*)e I"7rea0e re2*"er< 8r!7e00 8er7e"#a+e !2 re2*"er< 8r!7e00e0 3*#1 a-)a"7eC!"#r!l0
'. Bas calte$ successful in implementing its strategy in (**+C :$plain your answer. (. Bould you have included some measure of employee statislaction and employee training in the learning and growth perspectiveC -re these ob7ectives critical to calte$ for implementing its stategyC Bhy or why notC :$plain briefly. 6. :$plain how calte$ did not achieve its target mar5et share in the total gasoline mar5et but still e$ceeded its financial targets. Is I mar5et share of overall gasoline mar5etJ the correct measure of mar5et shareC :$plain briefly. +. Is there a cause- and 4 effect lin5age between improvements in the measures in the internal business process perspective and the measures in the customers perspectiveC hat is would you add other measures to the internal business process perspective of the customer perspectiveC Bhy or why notC :$plain briefly. ). 0o you agree with Calte$s decision not to include measures of changes in operating income from productivity improvements under the financial perspective of the balanced scorecardC :$plain briefly.
Solution:-
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'8- Calte$s strategy is to focus on IAervice 4oriented customers Jwho are willing to pay a higher price for services. :ven though its product is largely a commodity product% gasoline% Calte$ wants to differentiate itself though the service it provides at its retailing station 0oes the scorecard represent Calte$s strategyC ,y and large it does . he focus of the scorecard ison measures of process improvement% "uality% mar5et share% and financial success from product differentiation and charging higher prices for customer service. here are some deficiences that the subse"uent assignment "uestions raise but% abstracting from these concerns for the moment% the scorecard does focus on implementing a product differentiation strategy. Faving concluded that the scorecard has been reasonably well designed% how has Calte$ performed relative to its strategy in (**+C It appears from the scorecard that Calte$ was Auccessful in implementing its strategy in (**+. It achieved all targets in the financial% internal successful in implementing its strategy in (**+. It achieved all targets in the financial% internal business% and learning and growth perspectives. he only target it missed was the mar5et business and learning and growth perspectives. he only target it missed was the mar5et share target in the customer perspective. -t this stage% students may raise some "uestions about whether this si a good scorecard measure .Re"uirement 6 gets at this issue in more detail. he bottom line is that measuring Jmar5et share in the overall gasoline mar5etJ rather than in the IAervice-oriented customerJ mar5et segment is not a good scorecard measure% so not achieving this target may not be as issue as it may seem at first. (8- Oes% Calte$ should include some measure of employee satisfaction and employee training in the learning and growth perspective. Clate$s differentiation strategy and ability to charge a premium price is based on customer service. he 5ey to good% fast and friendly customer service is well trained and satisfied employees. Entrined and dissatisfied employees will have poor interactions with customers and cause the strategy to fail. Fence% training and employee satisfaction are very important to Calte$ for implementing its strategy. hese measures are leading indicators of whether Calte$ will be able to successfully implement its strategy and hence% should be measured on the balanced scorecard. 68- Calte$s strategy is to focus on the 3*2 of gasoline consumers who are service-oriented not on the +*2 price-shopper segment. o evaluate if it has been successful in implementing its strategy. Calte$ needs to measure its mar5et share in its targeted mar5et segment. IAervice oriented customerJ not its mar5et share in the overall mar5et. Diven calte$s strategy% it should not be concerned if its mar5et share in the price-shopper segment decline. In fact% charging premium prices will probably cause its mar5et share in this% segment to decline. Calte$ should replace Imar5et share in overall gasoline mar5etJ with Imar5et share in the service- oriented customer segmentJ in its balanced scorecard customer measure. Calte$ may also want to consider putting a customer satisfaction measure on the scorecard. his measure should capture an overall evaluation of customer reactions to the facility% the convenience store% employee interactions% and "uic5 turnaround. he customer satisfaction measure would serve as a leading indicator of mar5et share in the service-oriented customer segment. 6. -lthough there is a cause-and-effect lin5 between internal business process measures and customer measures on the current scorecard% calte$ should add more measures to tighten this lin5age. In particular% the current scorecard measures focus e$clusively on refinery operations and not on gas station operations. Calte$ should add measures of gas station performance such as cleanliness of the facility% turnaround time at the gas pumps% the shopping e$perience at the convenience store% and the service provided by employees. Many companies do random audits of their facilities to evaluate how well
31
their branches and retail outlets are performing. hese measures would serve as leading indicators of customer satisfaction and mar5et share in calte$s targeted segments. +. Calte$ is correct in not measuring changes in operating income from productivity improvements on its scorecard under the financial perspective. Calte$%s strategy is to grow by charging premium prices for customer service. he scorecard measures focus on calte$s success in implementing this strategy. 9roductivity gains per se are not critical to calte$s strategy and% hence% should not be measured on the scorecard -------------------------------------------------------------------------------------------------------------------------
Question24:- Road Barrior Corporation assembles handheld computers that have scaled 4down
capabilities of laptop computers. :ach handheld computer ta5es 3 hours to assemble. Road Barrior uses a Jit production system a bac5flush costing system with three trigger points8 9urchase of direct (raw!Materials Aale of finished goods Completion of good finished units of product here are no beginning inventories of materials or finished goods. he following data are for -ugust (**68 0irect (Raw ! Materials purchased &(%<)+%*** Conversion costs incurred &<(6%3** 0irect (raw! materials used (%<66%3** Conversion costs allocated <)*%+** Road Barrior records direct materials purchased and conversion costs incurred at actual costs. Bhen finished goods are sold% the bac5flush costing system Ipulls throughJ standard direct materials costs (&'*( per unit! and standard conversion costs (&(1 per unit!. Road Barrior produced (3%1** finished units in -ugust (**6 and sold (3%+** units. he actual direct materials cost per unit in -ugust (**6 was &'*(% and the actual conversion cost per unit was &(<.
(eA;*re-:'8- 9repare summary 7ournal entries for -ugust (**6 ( without disposing of under or over allocated conversion Cost!. (8- 9ost the entries in re"uirements ' to -accounts for applicable inventory. 0irect and in-9rocess Conversion Costs Control% Conversion Costs -llocated and cost of goods Aold. 68- Ender an ideal JI production system% how would the amounts in your 7ournal entries differ from those in re"uirements ' C (a! he ,ac5flush costing% two trigger points% materials purchase and sale ( continuation of previous "uestion!. -ssume the same facts as in 9revious "uestion e$cept that Road Barrior now uses a bac5flush costing system with the following two trigger points8 9urchase of direct (raw! materials Aale of finished goods he inventory Control account will include direct materials purchased but not yet in production% materials in wor5 in process% and materials in finished goods but not sold. ?o conversion costs are inventioned. -ny under- or over allocated conversion costs are written off monthly to Cost of goods Aold. ( ,! he bac5flush costing% two trigger points% completion of production and sale ( continuations of last "uestion! -ssume the same facts as in last "uestion % e$cept now Road Barrior uses only two trigger points% the completion of good finished units of product and the sale of finished goods. -ny under-or over allocated conversion costs are written off monthly to Cost of goods Aold. Re"uired8'8- 9repare summary 7ournal entries for -ugust including the disposition of under 4 or over allocated conversion costs. (8-9ost the entries in re"uirement ' to -accounts for Minished goods control% Conversion Cost Control% Conversion Costs -llocated and Cost of goods Aol-,
Solution:3ACE4LD-< C.-"/:A A:5 F/" P,.5DC"/.: (a! 9urchases of Inventory8 0irect and In-9rocess Control direct materials -ccounts 9ayable Control Incur conversion Conversion Costs Control costs ;arious -ccounts (%<)+%*** <(6%3** <(6%3** (%<)+%***
32
Completion of finished goods
Minished Doods Control(a! Inventory 80irect and In-9rocess Control Conversion Costs -llocated Aale of finished Cost of Doods Aold(b! goods Minished Doods Control -8- (3%1** =(&'*( N &(1! H &6%+1+%***. ,8- (3%+** =(&'*( N &(1! H &6%+6(%***
6%+1+%*** (%<66%3** <)*%+** 6%+6(%*** 6%+6(%***
0irect 5*re7# Materials Ma#er*al0
Inventory8 0irect and in-9rocess Control (a! (%<)+%*** (c!(%<66%3** ,al. (*%+**
MinishedDoods Control (c! 6%+1+%*** (d! 6%+6(%*** ,al.)(%***
Cost of Doods Aold (d!6%+6(%***
Conversion Costs -llocated W <)*%+** C!")er0*!" Conversion C!0#0 Costs
Conversion Costs Control (b! <(6%3**
68- Ender an ideal JI production system% there could be #ero inventories at the end of each day. :ntry W would be & 6%+6(%*** finished goods production% not &6%+1+%***. -lso there would be no inventory of direct materials instead of &(%<)+%*** - &(%<66%3** H &(*%+**. 3ac7 4lu&# co&ting, two trigger 'oint&, *aterial& 'urc#a&e and &ale (a! 9urchases of direct materials Incur conversion costs Completion of finished goods Aale of finished goods Ender allocated or .ver allocated Conversion Costs Inventory 0irect and In-9rocess Control -ccounts 9ayable Control Conversion Costs Control ;arious -ccounts Cost of Doods Aold Inventory Control Conversion Costs -llocated Conversion Costs -llocated Costs of Doods Aold Conversion Costs Control
Inventory8 Control 5*re7# Ma#er*al0 Cost of Doods Aold
(%<)+%*** <(6%3**
(%<)+%*** <(6%3**
6%+6(%*** (%3>(%1** <6>%(** <6>%(** ')%3** <(6%3**
33
0irect Materials
(a! (%<)+%*** ,al. 3'%(**
(d!(%3>(%1**
(c! 6%+6(%*** (e! ')%3**
Conversion Costs -llocated (e! <6>%(** (d! <6>%(**% C!")er0*!" Conversion C!0#0 Costs
Conversion Costs Control (b! <(6%3** (e!<(6%3**
(a! 9urchases of direct materials Incur conversion costs Completion of finished goods Aale of finished goods Ender allocated or .ver allocated Conversion Costs
?o entry Conversion Costs Control ;arious -ccounts Minished Doods Control -ccounts 9ayable Control Cost of Doods Aold Minished Doods Control Conversion Costs -llocated Costs of goods Aold Conversion Costs Control
Minished Doods Control
<(6%3** <(6%3** 6%+1+%** (%<66%3** <)*%+** 6%+6(%*** 6%+6(%*** <)*%+** (3%1** <(6%3**
Cost of Doods Aold (d! 6%+6(%*** (e! (3%1**
0irect Materials
W 6%+1+%*** (d! 6%+6(%*** ,al. )(%***
Conversion Costs -llocated (e! <)*%+** W <)*%+** Conversion Costs Conversion Costs Control (b! <(6%3** (e! <(6%3**
-------------------------------------------------------------------------------------------------------------------------------
Question25-:- )Theor7 o/ !o-0,rai-,0, ,hro+gh +, !o-,rib+,io-, rele.a-, !o0,1, Colorado

industries manufactures electronic testing e"uipment Colorado also installs the e"uipment at customers sites and ensures that it functions smoothly. -dditional information on the manufacturing and installation departments is as follows (capacities are e$pressed in terms of the number of units of electronic testing e"uipment!8
(5+i me-,
(5+i me-,
34
'a-+/a!,+re* &-0,alle* A"";al 7a6a7*#< 400 ;"*#0 6er <ear EA;*6>e"# >a";2a7#;re- a"- *"0#alle- '00 ;"*#0 6er <ear
'00 ;"*#0 6er <ear '00 ;"*#0 6er <ear
Colorado manufactures only 6** units per year because the installation 0epartment has only enough capacity to install 6** units. he e"uipment sells for &+*%*** per unit (installed! and has direct materials costs of & ')%***. -ll costs other than direct materials costs are fi$ed. he following re"uirements refer only to the preceding data. here is no connection between the re"uirements.
4e5+ire*:'. Colorados engineers have found a way to reduce e"uipment manufacturing time. he new method would cost an additional &)* per unit and would allow Colorado to manufacture (* additional units a year. Ahould Colorado implement the new methodC Ahow your calculations. , Colorados designers have proposed a change in direct materials that would increase direct materials costs by &(%*** per unit. his change would enable Colorado to install 6(* units of e"uipment each year. If Colorado ma5es the change% it will implement the new design on all e"uipment sold. Ahould Colorado use the new designC Ahow your calculation. 6. - new installation techni"ue has been developed that will enable Colorados engineers to install '* additional units of e"uipment a year. he new method will increase installation costs by &)*%*** each year. Ahould Colorado implement the new techni"uesC Ahow your calculations. +. Colorado is considering how to motivate wor5ers to improve their productivity (output per hour!. .ne proposal is to evaluate and compensate wor5ers in the manufacturing and installation departments on the basis of their productivities. 0o you thin5 the new proposal is a good ideaC :$plain briefly.
Solution:It will cost Colorado &)* per unit to reduce manufacturing time. ,ut manufacturing is not a bottlenec5 operationP installation is. herefore manufacturing more e"uipment will not increase sales and throughput contribution. Colorado Industries should not implement the new manufacturing method. (8- -dditional relevant costs of new direct materials&(%*** =6(* units &3+*%*** Increase in throughput contribution &()%***= (* units & )**%*** he additional incremental costs e$ceed the benefits from higher throughout contribution by &'+*%***% so Colora. industries AF.EL0 ?. IM9L:M:? F: ?:B 0:AID?. -lternative% compare throughput contribution under each alternative Current throughput contribution is &()%*** = 6** &<%)**%*** Bith the modification% throughput contribution is &(6%***= 6(* &<%63*%*** he current thoughput contribution is greater than the throughput contribution resulting from the proposed change in direct materials. Fence Colordo industries should not implement the new design. 68- Increase in throughput contribution &()%*** ='* units &()*%*** Increase in relevant costs &)*%*** he additional throughput contribution e$ceeds incremental costs by &(**%***% so Colorado Industries should implement the new installation techni"ue. +8- Motivating installation wor5ers to increase productivity is worthwhile because installation is a bottlenec5 operation% and any increase in productivity at the bottlenec5 will increase thoughput contribution. .n the other hand% motivating wor5ers in the manufacturing department to increase productivity is not worthwhile. Manufacturing is not a bottlenec5 operation% so any increase in output will result only in e$tra inventory of e"uipment. Colorado Industries should encourage manufacturing to produce only as much e"uipment as the installation department needs% not to
35
produce as much as it can. Ender these circumstances% it would not be a good idea to evaluate and compensate manufacturing wor5ers on the basis of their productivity. -------------------------------------------------------------------------------------------------------------------------------
Question26 ! Theor7 o/ Co-0,rai-,0, ,hro+gho+, !o-,rib+,io-, 5+ali,7, rele.a-, !o0,0.

-ardee industries manufactures pharmaceutical products in two departments8 Mi$ing and ablet 4Ma5ing. -dditional information on the two departments follows. :ach tablet contains *.) gram of direct materials.
Ca6a7*#< 6er 1!;r M!"#1l< 7a6a7*#< . ,000 1!;r0 a)a*la?le I" ea71 !2 >*4*"+ a"- #a?le# >aE*"+/ '00,000 +ra>0 M!"#1l< 6r!-;7#*!" 00,000 +ra>0 F*4e- !6era#*"+ 7!0#0.e47l;-*"+ -*re7# >a#er*al0/ $16,000 F*4e- !6era#*"+ 7!0#0 6er #a?le# .$16,000 I 00,000B $'9,000 I '90,000/ $0,08 6er +ra>
'ixi-g 1&0 +ra>0
Table, 'a8i-g 00 #a?le#0 400,000 #a?le#0 '90,000 #a?le#0 $ '9,000 $0,10 6er #a?le#
he Mi$ing 0epartments ma5es (**%*** grams of direct materials mi$ture(enough to ma5e +**%*** tablets! because the ablet-Ma5ing 0epartments has only enough capacity to process +**%*** tablets. -ll direct materials costs are incurred in the Mi$ing 0epartment. -ardee incurs &')3%*** in direct materials costs. he tablet 4Ma5ing 0epartment manufactures only 6>*.*** tablet from the (**%*** grams of mi$ture processedP (.)2 of the direct materials mi$ture is lost in the tablet-ma5ing process. :ach tablet sells for &'.-ll costs other than direct materials costs are fi$ed costs. he following re"uirements refer only to the preceding data. "#ere i& no connection (etween t#e re)uire*ent&. '8- -n outside contractor ma5es the following offer. If -ardee will supply the contractor with '*%*** grams of mi$ture% the contractor will manufacture '>%)** tablets for -ardee following for the normal (.)2 loss during the tablet-ma5ing process at &*.'( per tablet. Ahould -ardee accept the companys offerC Ahow your calculations. (8- -nother company offers to prepare (*%*** grams of mi$ture a month from direct materials -ardee supplies. he company will charge &*.*< per gram of mi$ture. Ahould -ardee accept the companys offerC Ahow your calculations. 68- -ardees engineers have devised a method that would improve "uality in the tablet-ma5ing operation. he estimate that the '*%*** tablets currently being lost would be saved. he modification would cost &<%*** a month. Ahould -ardee implement the new methodC Ahow your calculation. +8- Auppose that -ardee also loses '*%*** grams of mi$ture in its mi$ing operation. hese losses can be reduced to #ero if the company is willing to spend &>%*** per month in "uality-improvement methods. Ahould -ardee adopt the "uality improvement methodC Ahow your calculations. )8- Bhat are the benefits of improving "uality at the mi$ing operation compared with improving "uality at the tablet-ma5ing operationC
Solution:heory of Contrains% toughput contribution% "uality relevant costs. '8- 0irect materials costs to produce 6>*%*** tablets% &')3%*** &')3%*** 0irect materials costs per tablet H --------------- H &*.+* per tablet 6>*%*** Aelling price per tabletH &'.** Enit throughput contribution H Aelling price 4 Enit direct materials costs H &'.** - &*.+* H & *.3* per tablet
36
ablet ma5ing is a bottlenec5 operation. Fence producing '>%)** more tablets will generate additional operating income. -dditional operating income Enit throughput -dditional operating 9er contractor made tablet contribution costs per tablet H &*.3* - &*.'( H &*.+1 Increase in operating income &*.+1 = '>%)** H &>%63*. Fence -ardee should accept the outside contractors offer. (8- .perating costs for the mi$ing department are a fi$ed cost. Contracting out the mi$ing activity will not reduce mi$ing department costs but will cost an additional &*.*< per gram of mi$ture. Mi$ing more direct materials will have no effect on throughput contribution% since tablet ma5ing is the bottlenec5 operation. herefore -ardee Ahould re7ect the company offer. 68- he benefit of improved "uality is &'*%***. -ardee is using the same "uantity of direct mateials as before% so it incurs no e$tra direct materials costs. he '*%*** e$tra tablets produced generate additional revenue of & '*%***(A' = '*%*** tablets! a month. he modification costs &<%*** per month% which results in a net gain of&6%***. + &')3%*** Cost per gram of mi$ture H ------------ H &*.<1 per gram (**%*** Cost of '*%*** grams of mi$ture H &*.<1 ='*%*** H &<%1**. ,enefit from better mi$ing "uality &<%1** per month Cost of improving the mi$ing operation &>%*** per month Aince the costs e$ceed the benefits by &'%(** per month% -ardee should not adopt the proposed "uality improvement plan. )8- Compare the answers to re"uirements 6 and +. he benefit of improving "uality at the mi$ing operation is the savings in materials costs. he benefits of improving "uality of the tablet-ma5ing department(the bottlenec5 operation! is the savings in materials costs plus the additional throughput contribution from higher sales e"ual to the total revenues that result from relieving the bottlenec5 constraint. -----------------------------------------------------------------------------------------------------------------------------
Question27- ! .$+ lier e.al+a,io- a-* rele.a-, !o0,0 o/ 5+ali,7 a-* ,imel7 *eli.erie01,
C!6ela"- 06!r#*"+ +!!-0 *0 e)al;a#*"+ #3! 0;66l*er0 !2 2!!#?all0, F*+ re- a"- A;al*#< 06!r#0, 8er#*"e"# *"2!r>a#*!" a?!;# ea71 6!#e"#*al 0;66l*er 2!ll!30: (ele)a"# I#e> F*+ reG;al*#< 06!r#0 8;r71a0e 6r*7e 6er ;"*# .7a0e/ $&0 $&1 Or-er*"+ 7!0#0 6er !r-er $6 $6 I"06e7#*!" 7!0#0 6er ;"*# $,0 0 I"0;ra"7e, >a#er*al 1a"-l*"+, a"$4,00 $4,&0 S! !" 6er ;"*# 6er <ear A"";al -e>a"1 ,000 ;"*#0 1 ,000 ;"*#0 A)era+e A;a"#*#< !2 *")e"#!r< 1el100 ;"*#0 100 ;"*#0 5;r*"+ #1e <ear (eA;*re- re#;r" !" *")e0#>e"# 1&% 1&% S#!7E !;# 7!0#0 6er ;"*# $ 0 $10 S#!7E !;#0 6er <ear '&0 ;"*#0 60 ;"*#0 Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402 37
C;0#!>er re#;r"0 '00 ;"*#0 & ;"*#0 C;0#!>er- re#;r" 7!0#0 6er ;"*# $ & $ & (eA;*re-: Cal!+la,e ,he rele.a-, !o0,0 o/ +r!ha0i-g )11 /rom big re* a-* )21 /rom 5+ali,7 0 or,0 +0i-g ,he /orma, re0!ribe*. /rom >hom 0ho+l* !a e la-* b+7 /oo,ball0B
SOLUTION:-nnual Relevant Costs of 9urchasing from ,ig Red and Quality Aports. Relevant Costs of 9urchasing Mrom Relevant Item ,ig Red Quality Aports 9urchasing Costs &)*per unit ='(%*** units per year 3%**%*** &)' per unit = '(%*** units per year &3'(%*** .rdering costs &3 per order = 3* orders per year 63* &3 per order = 3* orders per year 63* Inspection Costs &*.*( per unit = '(%*** units (+* ?o inspection necessary * .pportunity carrying costs re"uired return .n investment ')2 per year = &)* cost per unit = '** units of average inventory per year <)* ')2 per year = & )' Cost per unit = '** units of average <3) inventory per year .ther carrying costs (insurance% material handling and so on! &+ per unit = '** units of average +** inventory per year &+.)* per unit = '** units of average inventory per year +)* Atoc5 out costs &(* per unit = 6)* units per year <%*** &'* per unit = 3* units per year 3** Customer returns costs &() per unit = 6** units <%)** &() per unit = ()units 3() &3'3%()* &3'+%1** -nnual difference in favor of Quality Aports &'%+)* ?.. of order place. -------------------------------------------------------------------------------------------------------------------------------
,-CTMLEAF C.A I?D

Question28- - Ca!8 /l+0h !o0,i-g a-* "&T ro*+!,io-. T1e A7#!" C!r6!ra#*!"
>a";2a7#;re0 ele7#r*7al >e#er0, F!r a;+;0#, #1ere 3ere "! ?e+*""*"+ *")e"#!r*e0 !2 -*re7# >a#er*al0 a"- "! ?e+*""*"+ !r e"-*"+ 3!rE 6r!7e00, A7#!" ;0e0 a :IT 6r!-;7#*!" 0<0#e> a"?a7E 2l;01 7!0#*"+ 3*#1 #1ree #r*++er 6!*"#0 2!r >aE*"+ e"#r*e0 *" #1e a77!;"#*"+ 0<0#e>: 8;r71a0e !2 -*re7# >a#er*al0- -e?*#e- #! *")e"#!r<: -*re7# a"- I"- 6r!7e00 7!"#r!l C!>6le#*!" !2 +!!- 2*"*01e- ;"*#0 !2 6r!-;7#- -e?*#e- #! 2*"*01e- +!!-0 7!"#r!l Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402 38
Sale !2 2*"*01e- +!!-0 A7#!"N0 A;+;0# 0#a"-ar- 7!0# 6er >e#er *0 -*re7# >a#er*al0 $ &, a"- 7!")er0*!" 7!0#0 $ 0, T1e 2!ll!3*"+ -a#a a66l< #! A;+;0# >a";2a7#;r*"+: 5*re7# >a#er*al0 6;r71a0e$&&0,000 N;>?er !2 2*"*01e- ;"*#0 C!")er0*!" 7!0#0 *"7;rre$440,000 >a";2a7#;re1,000 N;>?er !2 2*"*01e- ;"*#0 0!l- 0,000 C!"#*";a#*!"0 !2 8re)*!;0 G;e0#*!":- A00;>e #1e 0a>e 2a7#0 a0 *" 8re)*!;0 A;e0#*!" e47e6# #1a# (!a- Warr*!r "!3 ;0e0 a ?a7E2l;01 7!0#*"+ 0<0#e> 3*#1 #1e 2!ll!3*"+ #3! #r*++er 6!*"#0: 8;r71a0e !2 -*re7# .ra3/ >a#er*al0 Sale !2 2*"*01e- +!!-0 T1e *")e"#!r< C!"#r!l a77!;"# 3*ll *"7l;-e -*re7# >a#er*al0 6;r71a0e- ?;# "!# <e# *" 6r!-;7#*!", >a#er*al0 *" 3!rE *" 6r!7e00, a"- >a#er*al0 *" 2*"*01e- +!!-0 ?;# "!# 0!l-, N! 7!")er0*!" 7!0#0 are *")e"#*!"e-, A"< ;"-er- !r !)er all!7a#e- 7!")er0*!" 7!0#0 are 3r*##e" !22 >!"#1l< #! C!0# !2 +!!-0 S!l-, C!"#*";a#*!"0 !2 8re)*!;0 G;e0#*!":- A00;>e #1e 0a>e 2a7#0 a0 *" la0# A;e0#*!" , e47e6# "!3 (!a- Warr*!r ;0e0 !"l< #3! #r*++er 6!*"#0, #1e 7!>6le#*!" !2 +!!- 2*"*01e- ;"*#0 !2 6r!-;7# a"- #1e 0ale !2 2*"*01e- +!!-0, A"< ;"-er-!r !)er all!7a#e- 7!")er0*!" 7!0#0 are 3r*##e" !22 >!"#1l< #! C!0# !2 +!!-0 S!l-, (eA;*re-:1:- 8re6are 0;>>ar< D!;r"al e"#r*e0 2!r A;+;0# *"7l;-*"+ #1e -*06!0*#*!" !2 ;"-er = !r !)er all!7a#e- 7!")er0*!" 7!0#0, :-8!0# #1e e"#r*e0 *" reA;*re>e"# 1 #! T-a77!;"#0 2!r F*"*01e- +!!-0 7!"#r!l, C!")er0*!" C!0# C!"#r!l, C!")er0*!" C!0#0 All!7a#e- a"- C!0# !2 +!!-0 S!l-,
SOLUTION
3lac7%lu&# Co&ting and F/" Production (a! Purc#a&e o% 5irect *aterial& Incur Conversion costs Completion of finished goods /nventor$ 5irect 9 in!'roce&& Control Account& Pa$a(le Control Conversion Costs Control ;arious -ccounts Minished Doods Controla Inventory 0irect G in 9rocess Control Conversion Costs -llocated 220,000 ++*%*** ++*%*** >+)%*** )()%*** +(*%*** >**%*** >**%*** 220,00
Aale of finished Doods
Cost of Doods Aoldb Minished Doods Control -8 ('%*** = &+)(&()N&(*! H &>+)%*** ,8 (*%***=&+) H&>***%*** (8Inventory
0irect Mareial 0irect and In-9rocess Control (a! ))*%** (c! )()%*** ,al. ()%*** Conversion Costs -llocated Minsihed Doods Control (c! >+)%*** (d! >**%*** ,al +)%***
Cost of goods Aold (d! >**%***
39
Conversion Costs
W +(*%*** Conversion Costs Control (b! ++*%***
3ACE4LD-<, "G. ",/AAE, P./:"-, 6A"E,/AL- PD,C<A-E A:5 -ALE 9urchase of 0irect materials Incur Conversion costs Inventory Control -ccounts 9ayable Control Conversion Costs Control ;arious -ccounts (Auch as -ccounts 9ayable Control and Bages 9ayable! ?o entry Cost of Doods Aold Inventory Control Conversion Costs -llocated Conversion Costs -llocated Cost of Doods Aold Conversion Costs Control Inventory Control 0irect Materials (a! ))*%*** ,al )*%*** Conversion costs -llocated (e! +**%*** (d! +**%*** Conversion Costs (e! +*%*** Conversion Costs Control (b! ++*%*** (e! ++*%*** ?o entry Conversion Costs Control ;arious -ccounts (such as -ccounts 9ayable! Control and Bages 9ayable! Minished Doods Control -ccounts 9ayable Control Conversion Costs -llocated Cost of Doods Aold Minished Doods Control Conversion Costs -llocated ++*%*** ++*%*** >+)%*** )()%*** +(*%*** >**%*** >**%*** +(*%*** (d! )**%*** ))*%*** ++*%*** ++*%*** ))*%**
Completion of finished goods Aale of finished Doods
>**%*** )**%*** +**%*** +**%*** +*%*** ++*%***
Ender allocated .r .ver allocated Conversion Costs
Cost of Doods Aold (d! >**%***
9urchase of 0irect materials Incur Conversion costs
Completion of finished goods Aale of finished Doods
Ender allocated
40
.r .ver allocated Conversion Costs 0irect Mareials
Cost of Doods Aold Conversion Costs Control Minished Doods Control W >+)%*** (d! >**%***
(*%*** ++*%*** Cost of Doods Aold (d! >**%***
Conversion Costs -llocated (e! +(*%*** W +(*%*** Conversion Costs Conversion Costs Control (b! ++*%*** (e! ++*%*** ------------------------------------------------------------------------------------------------------------------------------(e! (*%***
Question29-:- T1e Wa#erl!!, O"#ar*!, 6la"# !2 Ma6le Lea2 M!#!r0 a00e>?le0 #1e 7ar;0
>!#!r )e1*7le, T1e 0#a"-ar- ;"*# >a";2a7#;r*"+ 7!0# 6er )e1*7le *" 00' *0 5*re7# >a#er*al0 $6,000 5*re7# >a";2a7#;r*"+ la?!r 1,800 Var*a?le >a";2a7#;r*"+ !)er1ea,000 F*4e- >a";2a7#;r*"+ !)er1ea-O T1e Wa#erl!! 6la"# *0 1*+1l< a;#!>a#e-, Ma4*>;> 6r!-;7#*)e 7a6a7*#< 6er >!"#1 *0 4,000 )e1*7le0, Var*a?le >a";2a7#;r*"+ !)er1ea- *0 all!7a#e- #! )e1*7le !" #1e ?a0*0 !2 a00e>?l< #*>e, T1e 0#a"-ar- a00e>?l< #*>e 6er )e1*7le *0 0 1!;r0, F*4e- >a";2a7#;r*"+ !)er1ea- *" 00' *0 all!7a#e- !" #1e ?a0*0 !2 #1e 0#a"-ar- a00e>?l< #*>e 2!r #1e ?;-+e#e- "!r>al 7a6a7*#< ;#*l*@a#*!" !2 #1e 6la"#, I" 00', #1e ?;-+e#e- "!r>al 7a6a7*#< ;#*l*@a#*!" *0 ',000 )e1*7le0 6er >!"#1, T1e ?;-+e#e- >!"#1l< 2*4e- >a";2a7#;r*"+ !)er1ea- *0 $7,&00,000, O" :a";ar< 1, 00' #1ere *0 Per! ?e+*""*"+ *")e"#!r< !2 L7ar;0 )e1*7le0, T1e a7#;al ;"*# 6r!-;7#*!" a"- 0ale0 2*+;re0 2!r #1e 2*r0# >!"#10 !2 00' are "a-+ar7 3ebr+ar7 'ar!h
Pro*+!,io$ale0 3,200 2,000 2,400 2,900 3,800 3,200
A00;>e "! -*re7# >a#er*al0 )ar*a"7e0 , "! -*re7# >a";2a7#;r*"+ la?!r )ar*a"7e0, a"- "! >a";2a7#;r*"+ !)er1ea- 06e"-*"+ !r e22*7*e"7< )ar*a"7e0 *" #1e 2*r0# #1ree >!"#10 !2 00', Fre# Har#, a )*7e 6re0*-e"# !2 Ma6ale Lea2 M!#!r0, *0 #1e >a"a+er !2 #1e Wa#erl!! 6la"#, H*0 7!>6e"0a#*!" *"7l;-e0 a ?!";0 #1a# *0 0,&% !2 A;ar#erl< !6era#*"+ *"7!>e, O6era#*"+ *"7!>e *0 7al7;la#e- ;0*"+ a?0!r6#*!" 7!0#*"+, Ma6le Lea2 M!#!r0 6re6are0 a?0!r6#*!"-7!0#*"+ *"7!>e 0#a#e>e"#0 >!"#1l<, 31*71 *"7l;-e0 a" a-D;0#>e"# #! 7!0# !2 +!!-0 0!l- 2!r #1e #!#al >a";2a7#;r*"+ )ar*a"7e0 !77;rr*"+ *" #1a# >!"#1 , T1e Wa0#erl!! 6la"# KSell0K ea71 L7ar;0 #! >a6le Lea2N0 >arEe#*"+ 0;?0*-*ar< a# $16,000 6er )e1*7le, N! >arEe#*"+ 7!0#0 are *"7;rre- ?< #1e Wa#erl!! 6la"#, 4e5+ire*:- 1:- C!>6;#e .a/ #1e 2*4e- >a";2a7#;r*"+ !)er1ea- 7!0# 6er ;"*# a"- .?/ #1e #!#al >a";2a7#;r*"+ 7!0# 6er ;"*#, 2:- C!>6;#e #1e >!"#1l< !6era#*"+ *"7!>e 2!r :a";ar<, Fe?r;ar< a"- Mar71 ;"-er a?0!r6#*!" 7!0#*"+ W1a# ?!";0 *0 6a*- ea71 ,>!"#1 #! Fre# Har#O
41
3:- H!3 >;71 3!;l- ;0e !2 )ar*a?le 7!0#*"+ 71a"+e Har#N0 ?!";0 ea71 >!"#1 *2 #1e 0a>e 0,&% 2*+;re 3ere a66l*e- #! )ar*a?le 7!0#*"+ !6era#*"+ *"7!>eO 4:- E46la*" #1e -*22ere"7e0 *" Har#N0 ?!";0e0 *" reA;*re>e"#0 a"- ', @:- H!3 >;71 3!;l- ;0e !2 #1r!;+1!;# 7!0#*"+ 71a"+e Har#N0 ?!";0 *2 #1e 0a>e 0,&% 2*+;re 3ere a66l*e- #! #1r!;+1!;# 7!0#*"+ !6era#*"+ *"7!>eO 6:- O;#l*"e -*22ere"# a66r!a71e0 Ma6le Lea2 M!#!r0 7!;l- ;0e #! re-;7e 6!00*?le ;"-e0*ra?le ?e1a)*!;r a00!7*a#e- 3*#1 #1e ;0e !2 a?0!r6#*!" 7!0#*"+ a# *#0 Wa#erl!! 6la"#,
Solution:(a! Enit Mi$ed manufacturing .verhead Cost &<%)**%*** 6%*** vehicles = (* standard hours
&<%)**%*** 3*%*** H &'() per standard assembly hour or &(%)** per vehicle (b! 0irect materials per unit &3%*** 0irect manufacturing labor per unit '%1** ;ariable manufacturing overhead per unit (%*** Mi$ed manufacturing overhead per unit (%)** otal manufacturing cost per unit &'(%6** (. -ccounts in housands A(&or'tion Co&ting January Revenues (&'3%*** = (%***P (%>**P6%(**! &6(%*** Cost of Doods Aold ,eginning inventory * ;ariable manufacturing costs(&>.1=6%(**P (%+**P61**! 6'%63* Mi$ed manufacturing costs (&(.)=6%(**P(%+**P6%1**! 1%*** Cost of goods available for sale 6>%63* 0ebuct ending inventory (&'(.6='%(**P<**P'%6**! '+%<3* Cost of goods Aold (at standard Cost! (+%3** -d7ust for manuf.variances )**M otal cost of goods sold (+%'** Dross margin <%>** Mar5eting costs * .perating income &<%>** Inventory 0etails (units! ,eginning inventory 9roduction * Doods available for sale 6%(** Aales 6%(** :nding inventory (%*** '%(** Invnetory 0etails (&'(%6** per unit! ,eginning inventory (&'(%6** per unit! :nding inventory (&'%***s! & * &'+%<3* Mebruary &+3%+** '+%<3* (6%)(* 3%*** ++%(1* 1%3'* 6)%3<* '%)**E 6<%'<* >%(6* * &>%(6* '%(** (%+** 6%3** (%>** <** &'+%<3* &1%3'* March &)'%(** 1%3'* 6<%(+* >%)** ))%6)* ')%>>* 6>%63* (%***M 6<%63* '6%1+* * &'6%1+* <** 6%1** +%)** 6%(** '%6** &1%3'* &')%>>**
42
Computation of ,onus .perating income = *.)2
January Mebruary &<%>**%** &>%(6*%* * ** &6>%)** &+3%')* 9roduction 4volume variancesH (0enomination level 4production! = ,udgeted rate January (6%*** 4 6%(**! = & (%)** per vehicle H &)**%*** M Mebruary8 (6%*** 4 (%+**! = &(%)** per vehicle H &'%)**%***E March 8 (6%*** 4 6%1**! = &(%)** per vehicle H &(%***%***M 68- -mounts in thousands Revenues ;ariable Costs ,eginning inventory ;ariable manuf costs (&>.1*=6%(**%(%+**% 6%1**! Cost of goods available for sale 0educt ending inventory(&>.1*='%(**P<**%'%6**! ;ariable C.DA ;ariable mar5eting costs ;ariable costs(at standard cost! -d7ustment for variances otal variable costs Contribution margin Mi$ed costs Mi$ed manuf. .verhead costs Mi$ed mar5eting costs Mi$ed costs( at standard cost! -d7ustment for variances otal fi$ed costs .perating income Inventory details (&>%1** per unit! ,eginning inventory (units! :nding inventory(units! ,eginning inventory(&***s! :nding inventory(&***s! Co*'utation o% 3onu& .perating income =*.)2 Fanuar$ &6>%)** (+%)** H12,000 ;ariable Costing Fanuar$ 4e(ruar$ &6(%*** &+3%+** * 6'%63* 6'%63* ''%<3* '>%3** * '>%3** * '>%3** '(%+** <%)** * <%)** * <%)** &+%>** * '%(** &* &''%<3* Fanuar$ &+%>**%*** &(+%)** 4e(ruar$ &+3%')* )(%+** H@6,220+ ''%<3* (6%)(* 6)%(1* 3%13* (1%+(* * (1%+(* * (1%+(* '<%>1* <%)** * <%)** * <%)** &'*%+1* '%(** <** &''%<3* &3%13* 4e(ruar$ &'*%+1*%*** &)(%+** 6arc# &3>%(** 3'%<** H7,200
March &'6%1+*%*** &3>%(**
6arc# &)'%(** 3%13* 6<%(+* ++%'** '(%<+* 6'%63* * 6'%63* * 6'%63* '>%1+* <%)** * <%)** * <%)** &'(%6+* <** '%6** &3%13* &'(%<+* 6arc# &'(%6+*%*** &3'%<** "otal &')+%1)* '61%3** H16,220
-bsorption costing ,onus ;ariable Costing ,onus 0ifference
he difference between absorption and variable costing arises because of differences in production and sales8 Fanuar$ 4e(ruar$ 6arc# "otal 9roduction 6%(** (%+** 6%1** >%+** Aales (%*** (%>** 6%(** 1%'**
43
Increase(decrease!in inventory
1,200
@200+
600
1,300
Bith absorption costing by building for inventory% Fart can capitali#e &(%)**of fi$ed manufacturing overhead costs per unit. his will provide a bonus payment of &'(.)*(*.)= &(%)**! per unit. .perating income under absorption costing will e$ceed that under variable costing when production is greater than sales. .ver the three-month period% the inventory buildup is '%6** units giving a difference of &'3%()*(A'(.)* = '%6**!in bonus payments. ). -mounts in thousands "#roug#'ut Co&ting Fanuar$ 4e(ruar$ &6(%*** &+3%*** <%(** '+%+** ('%3** +%(** '<%+** (>%*** '3%3(* * '3%3(* &'(%61* 6arc# &)'%(** +%(** ((%1** (<%*** <%1** '>%(** 6(%*** ('%>+* * ('%>+* &'*%*3*
Revenues 0irect material cost of goods sold ,eginning inventory (&3=*P'%(**P<**! * 0irect materials (&3=6%(**P (%+**P6%1**! '>%(** Cost of goods available for sale '>%(** 0educt ending inventory (&3='%(**P<**P'.6**! <%(** otal direct materials cost of good sold '(%*** hroughput contribution (*%*** .ther costs Manufacturing '>%33* Mar5eting * otal other costs '>%33* .perating income & 6+* (&6%1** =6%(**! K &<%)**%*** (&6%1** =(%+**!K &<%)**%*** (&6%1** = 6%1**! K &<%)**%*** Co*'utation o% 3onu& .perating income =*.)2
Fanuar$ &6+*%*** & '%<**
4e(ruar$ 6arc# &'(%61*%*** &'*%*3*%*** & 3'%>** & )*%6**
- summary of the bonuses paid is8 Fanuar$ 4e(ruar$ 6arc# "otal -bsorption Costing &6>%)** &+3%')* &3>%(** &')+%1)* ;ariable Costing (+%)** )(%+** 3'%<** '61%3** hroughput Costing '%<** 3'%>** )*%6** ''6%>** hroughput Costing 38- -lternative approaches include8 (a! Careful budgeting and inventory planning. (b! Ese an alternative income computation approach to absorption costing (such as variable costing or throughput costing! (c! Ese an financial charge for inventory buildup (d! Change the compensation pac5age to have a longer-term focus using either an e$ternal variable (e.g. stoc5 options! or an internal variable(e.g. five-year average income!% and (e! -dopt non-financial performance targets-e.g. attaining but not e$ceeding present inventory levels. -------------------------------------------------------------------------------------------------------------------------------
Question30:- )4ele.a-, be-e/i,0 a-* Co0,0 o/ "&T +r!ha0i-g1. Har-e0#r< Me-*7al

I"0#r;>e"#0 *0 7!"0*-er*"+ :IT *>6le>e"#a#*!" *" 00', Har-e0#r<N0 a"";al -e>a"- 2!r 8r!-;7# C:- 00, a 0;r+*7al 07al6el, *0 0,000 ;"*#0, I2 Har-e0#< *>6le>e"#0 :IT, #1e 6;r71a0e 6r*7e !2 #1e Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402 44
07al6al *0 e46e7#e- #! *"7rea0e 2r!> $10 #! $10,0& ?e7a;0e !2 2reA;e"# -el*)er*e0 ?< Merr*0!" Ma";2a7#;r*"+, I"7, M!rr*0!" e"D!<0 a 0#erl*"+ re6;#a#*!" 2!r A;al*#< a"- rel*a?*l*#<, Or-er*"+ 7!0#0 3*ll re>a*" a# $& 6er !r-er, H!3e)er, #1e a"";al ";>?er !2 !r-er0 6la7e- 3*ll ?e 00 *"0#ea- !2 #1e 7;rre"# 0, A0 a re0;l# !2 2reA;e"# !r-er*"+, Har-e0#<N0 !r-er 0*@e 3*ll -e7rea0e 6r!6!r#*!"all<, Har-e0#<N0 reA;*re- ra#e !2 re#;r" !" I")e0#>e"# *0 0%, O#1er 7arr<*"+ C!0#0 .*"0;ra"7e, >a#er*al0 1a"-l*"+ a"- 0! !"/ 3*ll re>a*" a# $4,&0 6er ;"*#, C;rre"#l< Har-e0#< 1a0 "! 0#!7E !;# 7!0#0, L!3er *")e"#!r< le)el0 2r!> *>6le>e"#*"+ :IT 3*ll lea- #! $' 6er ;"*# 0#!7E !;# 7!0#0 !" 100 ;"*#0 -;r*"+ #1e <ear, (eA;*re-:- Cal7;la#e #1e e0#*>a#e- -!llar 0a)*"+0 . L!00/ 2!r Har-e0#< Me-*7al *"0#r;>e"#0 2r!> #1e a-!6#*!" !2 :IT 6;r71a0*"+,
SOLUTION:9resent the &<(+.)* cash savings that would result if Fardesty Medical Instruments adopted the 7ust-in-time inventory system in (**6. -nnual Relevant costs of Current 9urchasing policy and JI 9urchasing 9olicy for Fardesty Medical Instruments ,elevant Co&t& Dnder Current F/" Purc#a&ing Purc#a&ing ,elevant /te* Polic$ Polic$ 9urchasing costs &'* per unit = (*%*** units &(**%***.** & '*.*) per unit =(*%*** units &(*'%***.** .rdering Costs &) per order = (* orders per year '**.** &) per order = (** orders per year '%***.** .pportunity carrying costs% re"uired Return on investment (*2 per year = & '* Cost per unit = )** units of average inventory per year '%***%** (*2 per year = &'*.*) cost per unit = )*units of average inventory per year '**.)* .ther carrying costs &+.)* per unit per year = )** units of average inventory per year (%()*.** &+.)* per unit per year = )* units of average inventory per year (().** Atoc5 out costs ?o stoc5 outs * &6 per unit = '** units per year 6**.** otal annual relevant costs &(*6%6)*%** -nnual difference in favor of JI purchasing &<(+.)* .rder "uantity K ( H '%*** K ( H )** .rder "uantity K( H '** K ( H )* &(*(%3().)*
2 ! Fardesty may benefit from Morrison managing its inventories if there is high order variability caused by randomness in when consumers purchase surgical scalpels or trade promotions that
45
prompt retailers to stoc5 for the future. ,y coordinating their activities and sharing information about retail sales and inventory held throughout the supply chain% Morrison can plan its manufacturing activities to ensure ade"uate supply of product while 5eeping inventory low. Mor this to succeed% Fardesty and Morrison must have compatible information systems build trust and communicate freely. -------------------------------------------------------------------------------------------------------------------------------
Question31:- T1e Mar+r! C!r6!ra#*!" *0 a" a;#!>!#*)e 0;66l*er #1a# ;0e0 a;#!>a#*7
#;r"*"+ >a71*"e0 #! >a";2a7#;re 6re7*0*!" 6ar#0 2r!> 0#eel ?ar0, Mar+r!N0 *")e"#!r< !2 ra3 0#eel a)era+e0 $6,00,000, :!1" Oa#e0, 8re0*-e"# !2 Mar+r!, a"- Hele" M!r>a", Mar+r!N0 7!"#r!ller, are 7!"7er"e- a?!;# #1e 7!0#0 !2 7arr<*"+ *")e"#!r<, T1e 0#eel 0;66l*er0 *0 3*#l*"+ #! 0;66l< 0#eel *" 0>aller l!#0 a# "! a--*#*!"al 71ar+e, Hele" M!r>a" *-e"#*2*e- #1e 2!ll!3*"+ e22e7#0 !2 a-!6#*"+ a :IT *")e"#!r< 6r!+ra> #! )*r#;all< el*>*"a#e 0#eel *")e"#!r<, W*#1!;# 071e-;l*"+ a"< !)er#*>e, l!0# 0ale0 -;e #! 0#!7E !;#0 3!;l- *"7rea0e ?< '&,000 ;"*#0 6er <ear, H!3e)er, ?< *"7;rr*"+ !)er#*>e 6re>*;>0 !2 $40,000 6er <ear, #1e *"7rea0e *" l!0# 0ale0 7!;l- ?e re-;7e- #! 0,000 ;"*#0, T1*0 3!;l- ?e #1e >a4*>;> a>!;"# !2 !)er#*>e #1a# 3!;l- ?e 2ea0*?le 2!r Mar+r!, T3! 3are1!;0e0 7;rre"#l< ;0e- 2!r 0#eel ?ar 0#!ra+e 3!;l- "! l!"+er ?e "ee-e-, Mar+! re"#0 !"e 3are1!;0e 2r!> a"!#1er 7!>6a"<, ;"-er a 7a"7ela?le lea0*"+ arra"+e>e"#, a# a" a"";al 7!0# !2 $60,000, T1e !#1er 3are1!;0e *0 !3"e- ?< Mar+r! a"- 7!"#a*"0 1 ,000 0A;are 2ee#, T1ree-2!;r#10 !2 #1e 06a7e *" #1e !3"e- 3are1!;0e 7!;l- ?e re"#e- 2!r $1,&0 6er 0A;are 2!!# 6er <ear, I"0;ra"7e a"- 6r!6erl< #a4 7!0#0 #!#al*"+ $14,000 6er <ear 3!;l?e el*>*"a#e-, L!"+ = #er> 7a6*#al *")e0#>e"#0 ?< Mar+r! are e46e7#e- #! 8r!-;7e a" a"";al ra#e !2 re#;r" !2 0%, Mar+r! C!r6!ra#*!" F;-+e#e- *"7!>e 0#a#e>e"# 2!r #1e <ear e"-*"+ 5e7e>?er '1, 00',.*" #1!;0a"-0/ *0 a0 2!ll!30:(e)e";e0 . 900,000 ;"*#0/ $10,800 C!0# !2 +!!-0 0!lVar*a?le 7!0#0 $4,0&0 F*4e- 7!0#0 1,4&0 T!#al 7!0#0 !2 +!!-0 0!l&,&00 Mr!00 Mar+*" &,'00 MarEe#*"+ a"- -*0#r*?;#*!" 7!0#0 Var*a?le 7!0#0 $900 F*4e- C!0#0 1,&00 T!#al >arEe#*"+ a"- -*0#r*?;#*!" 7!0#0 ,400 O6era#*"+ *"7!>e $ ,900 Cal7;la#e #1e e0#*>a#e- -!llar 0a)*"+0 .l!00/ 2!r #1e Mar+r! C!r6!ra#*!" #1a# 3!;l- re0;l# *" 00' 2r!>, (eA;*re- #1e a-!6#*!" !2 #1e :IT *")e"#!r< =7!"#r!l >e#1!-,
-nnual Relevant Costs of Current 9urchasing 9olicy and JI 9urchasing 9olicy for Margro Corporation ,elevant ,elevant Co&t& under Co&t& under Current Fit Purc#a&ing Purc#a&ing Polic$ Polic$ Re"uired return on investment
46
(*2 per year = &3**%*** of average inventory per year (*2 per year = &* inventory per year -nnual insurance costs Barehouse rent .vertime costs ?o .vertime .vertime premium Atoc5out costs ?o stoc5outs &3.)* contribution margin per unit =(*%*** units "otal incre*ental co&t& 0ifference in favor of JI purchasing &('6%)**! H Barehouse rental revenues% (<)2 = '(%***! Calculation of unit contribution margin Aelling price (&'*%1**%*** K >***% *** units! ;ariable costs per unit8 ;ariable manufacturing costs per unit ( &+%*)*%*** K >**%*** units! &+.)* ;ariable mar5eting and distribution costs per unit (&>**%*** K >**%*** units! '.** otal variable costs per unit Contribution margin per unit
&'(*%*** '+%*** 3*%*** * +*%*** * H194,000 &6<%)** = &'.)*! &'(.** '6*%*** H126,200 &* * ('6%)**!
).)* H6.20
?ote that the incremental costs of &+*%*** for overtime premiums to ma5e the additional ')%*** units are less than the contribution margin from losing these sales e"ual to &><%)**(&3.)*= ')%***!. Margro would rather incur overtime than lose ')%*** units of sales. -------------------------------------------------------------------------------------------------------------------------------
THEORY QUESTION
I1 ! 0escribe the Just-In- ime G Bhat is the meaning of JI CostingC I2 ! :$plain briefly the method of operation of a MR9 AystemC I3 ! Bhat do you mean by :R9C I4 ! Bhat is value chain G Its basic tools fro systematics e$amine for all activites. I2 ! 0efine the terms @a+ ! Quality Control% @(+ ! Quality -ssurance W ! Quality Management (.R! 0efine total "uality management ( QM! what are core concept of QM. I6 ! Bhat is 9areto -nalysisC .utline its useC I7 ! Bhat is 9eneteration 9ricingC Bhat are the circumstances in which this policy can be adoptedC I8 ! Bhat is A5imming 9ricing 9olicyC I9 ! Bhat are the benefits of -,MC I10 ! Bhat are the benefits of -,M I11 ! Bhat are the types of ,enchmar5ingC I12 ! Bhat is AtrategyC I13 ! 0efine ,alance Acore Cards G Bhat are the four perspective of ,alance Acore CardC I14 ! 0efine arget CostingC
47
I12 ! 0efine ;alue :ngineeringC I16 ! 0istinction between 9:R and C9MC I17 ! Brite Ahort notes on Aimulation and its applicationsC I18 ! 0escribe the Resources -llocation and AchedulingC I19 ! Brite the 0ifference between Mi$ed ,udget G Mle$ible ,udgetC I20 ! :$plain Concept of Ahadow 9rice.C I21 ! Bhat is the Meaning of -ngle of incidenceC I22 ! 0istinguish between ICost reductionJ and ICost managementJC I23 ! Brite a brief note on heory of 9rice G Bhat factors influencingC I24 ! Brite Ahort notes on Aealed ,id 9ricingC I22 ! Brite a Ahort note on 9erformance ,udgetC ------------------------------------------------------------------------------------------------------------------------------
48

Cost Management

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AGGARWAL EDUCATION CENTRE PVT. LTD.

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

8V !2 #!#al Ca01 *"2l!3

',&8,800 18,47,0 ',

T!#al Ca01 I"2l!3 9 $ STATEMENT OF N8V $

())%1>*! ')%*<%<3* '1%+<%*(6 6%6>%(36

Question2- ! )"&T ro*+!,io-, rele.a-, be-e/i,0, rele.a-, !o0,01.

Solution:STATEMENT OF (ELEVANT COST COM8A(ATIVE

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

H It is better to adopt JI 9olicy.

Question4:-- company manufactures a component on batches of (*** each .:ach component is

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

Question5:- - Manufacturing company

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

Cost per '** good components

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

('%**%*** units = *.) hours = Rs. *.)*!

()%*** (*%*** 1%<>%()* )%*** 1%<+%()*

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

THROUGHPUT COSTING Question9-: "#eor$ o% con&traint& t#roug#'ut contri(ution relevant co&t&.

F*"*01*"+ 80,000 ;"*#0 $400,000 $400,000 $& 6er ;"*#

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

$40,000 '0,000 $10,000

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

Question12- )Co0,0 o/ 6+ali,7 a-al70i0 -o- /i-a-!ial 5+ali,7 mea0+re1,

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

14& '0 100 00 47& ',8% $1,600 1 ,8%

60 40 00 '00 600 6,0% $1,700 17,0%

Ol*)*a 10,000 ;"*#0 $ ,000 $ 1, 00 6,000 1

S!l#a &,000 ;"*#0 $ 1,&00 $ 800 1,000 0,& 13

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

10% $400 8% $ 4&0 '00 ;"*#0

10,000 '90,000 $76&,000

,80% &, 0% 10, 0%

Question14:-:astern Awitching Co. (:AC! produces telecommunications e"uipment Charles%

. 00'/ 10,000 8,&00 400 &00 '0-a<0 600 0-a<0 90,000

. 0004/ 11,000 9,900 ''0 &17 & -a<0 6 7 16 -a<0 110,000

1: - Mor each of the years (**6 and (**+ calculate.

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

00' 10,000 9 0,11 90,000

004 11,000 90,10 110,000

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

,udgeted price of Input

-------------------------------------------------------------------------------------------------------------------F*"a"7e 2;"7#*!" a7#*)*#*e0, ?e"71>arE*"+ .7!"#*";a#*!" !2 7-'0/,

(e7e*)a?le0 8a<a?le0 Tra)el

6+e0,io-:- Cost-plus pricing

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

otal incremental costs

Pa!8age EE =46 ME- 8' IE =17

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

O6era#*"+ *"7!>e 1, EE =46: $'&0,000 , ME-8': $ 40,000 ', IE-17:$ .96,000/

(e0ear71 L 5e)el!6>e"# 5e0*+" 8r!-;7#*!" MarEe#*"+ 5*0#r*?;#*!"

EE-46 ' ,&% 9,' 14,0 ',' ',&

ME-8' '&,7% 9,& 16,7 1,4 4,8

IE-17 14,1% &,7 1 ,' 6,4 &,7 19

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

17,4 11,9 '&,8 100,0% 100,0% 100,0% -------------------------------------------------------------------------------------------------------------------ACTIVITY BASED COSTIN

8a7E*"+ .$000/ 80 140 HVM &, & 4 '000 180 6*

VM4H Te>6era#;re.>!;l-*"+/ Ma#er*al 7!"0*0#e"7<.#r*>>*"+/ T*>e.6a7E*"+/ 8a7E*"+ .7!>6le4*#</ ' 1

Contact at:- Aggarwal Education Centre Pvt.Ltd. 9h8- 9811374374,9213600402

())%1>! ')%<%<3* '1%+<%*(6 6%6>%(36

('%%* units = .) hours = Rs. .)*!

F"01"+ 80,000 ;"#0 $400,000 $400,000 $& 6er ;"*#

Ol)a 10,000 ;"*#0 $ ,000 $ 1, 00 6,000 1

1: - Mor each of the years (6 and (+ calculate.

-------------------------------------------------------------------------------------------------------------------F"a"7e 2;"7#!" a7#)#e0, ?e"71>arE"+ .7!"#";a#!" !2 7-'0/,

O6era#"+ "7!>e 1, EE =46: $'&0,000 , ME-8': $ 40,000 ', IE-17:$ .96,000/

(e0ear71 L 5e)el!6>e"# 5e0+" 8r!-;7#!" MarEe#"+ 50#r?;#!"

8a7E"+ .$000/ 80 140 HVM &, & 4 '000 180 6

VM4H Te>6era#;re.>!;l-"+/ Ma#eral 7!"00#e"7<.#r>>"+/ T>e.6a7E"+/ 8a7E"+ .7!>6le4*#</ ' 1

&(1%3 &<%) &(66%6)*! &(+6%***

'miles ( miles 6* miles he costs of e$tra facilities would be8

Bages @ Rs. .'6 .ther overheads (e$cluding wages @ Rs. .3)!

O?De7#)e0 Mea0;re0 F"a"7al 8er06e7#)e

6%+1+%* (%<66%3 <)%+ 6%+6(% 6%+6(%***

0irect 5re7# Materials Ma#eral0

MinishedDoods Control (c! 6%+1+%* (d! 6%+6(%* ,al.)(%***

6%+6(%* (%3>(%1 <6>%( <6>%( ')%3 <(6%3

(a! (%<)+%* ,al. 3'%(

(c! 6%+6(%* (e! ')%3

Conversion Costs Control (b! <(6%3 (e!<(6%3

W 6%+1+%* (d! 6%+6(%* ,al. )(%***

'00 ;"#0 6er <ear '00 ;"#0 6er <ear

Cost of goods Aold (d! >%*

>%* )%* +%* +%* +*%*** ++*%***

Cost of Doods Aold (d! >%*

(*%*** ++% Cost of Doods Aold (d! >%***

March &'6%1+% &3>%(

Fanuar$ &6+% & '%<

4e(ruar$ 6arc# &'(%61*%*** &'%3% & 3'%> & )*%6**