For Professional BBA Students (Management Accounting) of all

universities and Colleges.

Management Accounting
Questions & Solutions

Written by-
Mohammad Salim Hossain
B.Com (Hons), M.Com (Accounting), MBA major in Finance (BOU)
Assistant Professor & Head, Department of Business Administration
Model Institute of Science & Technology (MIST), Gazipur.
Examiner of National University (BBA & MBA Program)
Author of many books and articles

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 Preface to 1st Edition
Bismillahir Rahmanir Rahim.

Alhamdulilah. I have great pleasure in placing the book

"Management Accounting" for students of BBA (Hons). and other
professionals. Finance is undergoing a renaissance in response to
technological changes, globalization and growing risk management
concerns. In these challenging times, "Management Accounting" will be
helpful to make tactical decision in business concern, from this point of
view I have just written this book.
The Primary objective of this book is to provide the basic concepts
and applications of "Management Accounting" to the needs of students
appearing in the examinations of BBA (Hons), & professional
examinations.
I have tried my best to make this book in a simple language, most
systematic manner and free from errors and omission. To improve the book
considerably its next edition, I will be grateful if the mistakes and
deficiencies are pointed out to me by the readers. Constructive criticisms
and suggestions for improvement are most welcome.

Mohammad Salim Hossain

E-mail: salimmist@yahoo.com
 ACKNOWLEDGEMENT
At the beginning, I would like to express my sincere gratefulness to the Almighty most
merciful and beneficiary for empowering me conduct the report within scheduled time. I
am also grateful to my mother who provided me with the basic necessities of life since my
early childhood.
I would like to express our profound gratitude and wholehearted respect to my honourable
Advisor sir Professor Dr. Md. Sirajul Haque Mollah, DUET Gazipur. I am most
sincerely express my thanks and gratitude to, Prof. Mamtaz uddin Ahmed, Chairman, Dept.
of Accounting & Information System, Dhaka University, Prof. Dr. Swapan Kumar Bala,
Dept. of Accounting & Information System, Dhaka University. I would also like to thank
Prof. Dr. Arabida Saha, Chairman, Dept. of Accounting & Information System, Islamic
University, B.M. Abdul Hannan, Head, Dept. of Accounting, Bhawal Badre Alam Govt.
College. Gazipur. Sohel Ahmed, Coordinator, Dept. of Business Administration, Dhaka
City College, Dhaka. Par Mosiur, Head, Dept. of Business Administration, ISTT, Dhaka.
Md. Fashiar Rahman, Head, Dept.of Business Administration, KBM College,
Dinajpur.Sultan Mohammad Salauddin, Head, Dept.of Business Administration,
HABHIT, Tangail. Md. Masuduzzman Biswas Head, Dept.of Business Administration,
Pabna College, Pabna. for his co-operation and guidance.
I am sincerely grateful to all other Teachers and Students for providing necessary
information and extending valuable time to highlight the problems through discussion.
Indeed we are grateful to all faculty members of MIST, Gazipur. I am also indebted to the
entire library and staffs of MIST who helped me to search information and assist us when
i call for. I would like to take this opportunity to express our whole hearted gratitude to my
fellow friends, near and dear ones who offered encouragement, information, inspiration
and assistance during the course of construction this dissertation book.
Finally, I want to express my deep gratitude to my family members and also remember my
friends whose enormous helps assist us to complete our book.
 Syllabus
MANAGEMENT ACCOUNTING
BBA-4102
1. Introduction to Management Accounting : Concepts of Management Accounting,
Role of Management Accountant in Organizations, Relations and Differences between
Financial Accounting, Management Accounting and Cost Accounting. Techniques of
Management Accounting.
2. Cost Behavior : Concepts Related to Costs, Separation of Fixed Cost and Variable
Cost Elements of A Mixed Cost.
3. Costing Methods : Income Measurement under variable and Absorption Costing, Uses
of Variable Costing in Planning, Controlling and Decision Making.
4. C-V-P and Break-even Analysis : Computation of Break-even Point, Construction of
Break-even Chart, Techniques used in C-V-P Analysis - Break-even Analysis for
Decision Making under changes in fixed cost, volume, price, sales mix and margin of
safety.
5. Income Measurement under Direct Costing and Absorption Costing : Uses of
Direct Costing in Planning Controlling and Decision Making.
6. Budget : Different types of Budgets and their preparation, Sales Budget, Production
Budget, Production Cost Budget, Cash Budget, Master Budget.
7. Budgetary Control : Meaning, Objectives; Essential Conditions, Benefits and
Limitations, Difference between Forecasting and Budget.
8. Segment Reporting, Profitability Analysis and Decentralization : Segment
Reporting Level of Segment Statement, Costs and Revenues of Segments, Segment
Margin, Customer Profitability Analysis, Responsibility Accounting, Decentralization
and Segment Reporting, Cost, Profit and Investment Centers, Rate of Return for
Measuring Managerial Performance, controlling the Rate of Return, Residual Income,
Divisional Comparison.
9. Relevant Information and Decision Making : Qualitative Characteristics of
Accounting Information, Meaning of Relevance Special Sales Order, Make or buy,
Delection of Addition of Products in Product Line, Joint Product Cost, Irrelevance of
Future costs.
Recommended Books
1. T. Horngern. G Foster, and S. M. Datar, Introduction To Management Accounting,
(10th edition), Prentice Hall, Inc.
2. Pierre L Titard, Managerial Accounting.
 Contents
Chapter 1 Introduction to Management Accounting :.......................... Page 01-25
Concepts of Management Accounting, Role of Management Accountant in
Organizations, Relations and Differences between Financial Accounting,
Management Accounting and Cost Accounting. Techniques of
Management Accounting.
Chapter 2 Cost Behavior : .................................................................... Page 01-25
Concepts Related to Costs, Separation of Fixed Cost and Variable Cost
Elements of A Mixed Cost.
Chapter 3 Costing Methods :.........................Page 40-45
Chapter 5 Income Measurement under variable and Absorption Costing, Uses of
Variable Costing in Planning, Controlling and Decision Making.
Chapter 4 C-V-P and Break-even Analysis :.......................................... Page 60-65
Computation of Break-even Point, Construction of Break-even Chart,
Techniques used in C-V-P Analysis - Break-even Analysis for Decision
Making under changes in fixed cost, volume, price, sales mix and margin
of safety.
Chapter 6 Budget :...........................Page 65-75
Different types of Budets and their preparation, Sales Budget, Production
Budget, Production Cost Budget, Cash Budget, Master Budget.
Chapter 7 Budgetary Control:.................................. Page 85-90
Meaning, Objectives; Essential Conditions, Benefits and Limitations,
Difference between Forecasting and Budget.
Chapter 8 Segment Reporting, Profitability Analysis and Decentralization........ Page 95-110
Segment Reporting Level of Segment Statement, Costs and Revenues of
Segments, Segment Margin, Customer Profitability Analysis,
Responsibility Accounting, Decentralization and Segment Reporting,
Cost, Profit and Investment Centers, Rate of Return for Measuring
Managerial Performance, controlling the Rate of Return, Residual Income,
Divisional Comparison.
Chapter 9 Relevant Information and Decision Making :..Page 25-
Qualitative Characteristics of Accounting Information, Meaning of
Relevance Special Sales Order, Make or buy, Delection of Addition of
Products in Product Line, Joint Product Cost, Irrelevance of Future costs.
 Chapter 01
Introduction to Management Accounting
Highlight of the Chapter :
1.01 Explain the term Management1 .05 Briefly explain the scope of
Accounting (2007) management accounting. (2010)
What are the implications of1.06 What are the various techniques of
management accounting in a management accounting? (2008)
modern business organization? 1.07 Explain any three of them. 2010
(2011) Information provided by
1.2 Distinguish between Management management accounting is not
Accounting and Cost Accounting. prepared by following GAAP. Do
(2007) you agree with the statement?(2008)
1.3 Distinguish between Management1 .8 Explain the term Management by
Accounting and Financial exception (2008)
Accounting. (2009) 1.9 The area and scope of management
1.4 What are the ethical responsibilities accounting is different with
of management accounting? (2009) comparing financial accounting.-
Explain. (2011)

Question.1.01. Explain the term Management Accounting 2007 What

are the implications of management accounting in a modern business
organization? 2011
Answer:
Management Accounting is "the process of identification, measurement, accumulation,
analysis, preparation, interpretation and communication of information used by
management to plan, evaluate and control within an entity and to assure appropriate use of
and accountability for its resources.
The Institute of Chartered Accountants of England has defined it
Any form of accounting which enables a business to be conducted more efficiently can
be regarded as Management Accounting.
Robert N. Anthony has defined Management Accounting as follows-
Management Accounting is concerned with accounting information that is useful to
management.
According to American Accounting Association, Management Accounting includes the
methods and concepts necessary for effective planning for, choosing among
alternative business actions and for control through the evaluation and interpretation of
performance. This definition is fairly illustrative.
According to Kohler, Forward Accounting includes Standard costs, budgeted costs and
revenues, estimates of cash requirements, break even charts and projected financial
statements and the various studies required for their estimation, also the internal controls
regulating and safeguarding future operating.
According to James Batty, Blending together into a coherent whole financial accounting,
cost accounting and all aspects of financial management. He has used this term to include
the accounting methods, systems and techniques which, coupled with special knowledge
and ability, assist manageme4nt in its task of maximizing profits or minimizing losses.
Thus all accounting which directly or indirectly providing effective tools to managers in
enterprises and government organizations lead to increase in productivity is Management
Accounting.
Implications of management accounting in a modern business organization are:
1. Managing the business: Consistent with other roles in today's corporation,
management accountants have a dual reporting relationship. As a strategic partner and
provider of decision based financial and operational information, management accountants
are responsible for managing the business team and at the same time having to report
relationships and responsibilities to the corporation's finance organization.
2. Forecasting: The activities management accountants provide inclusive of forecasting
and planning, performing variance analysis, reviewing and monitoring costs inherent in the
business are ones that have dual accountability to both finance and the business team.
3. Corporate cost: In corporations that derive much of their profits from the information
economy, such as banks IT costs are a significant source of uncontrollable spending, which
in size is often the greatest corporate cost after total compensation costs and property
related costs. A function of management accounting in such organizations is to work
closely with the IT department to provide IT Cost Transparency.
4. Financial results: To determine financial results in the manner described above,
management use Financial analysis techniques.
Management also need to look at how Accounting resources are allocated within an
organization.
5. Budgeting process: Management also need to anticipate future expenses. Management
should use the variable budgeting to get a better understanding of the accuracy of the
budgeting process.
6. Reduce Expenses: Management accounting can help companies lower their
operational expenses. Business owners often use management accounting information to
review the cost of economic resources and other business operations. This information
allows owners to better understand how much money it costs to run the business. Business
owners can also use management accounting to conduct an analysis on the quality of
economic resources used to produce goods or services. If overall product quality would not
suffer by using a cheaper raw material, business owners can make this change to reduce
production costs.
7. Improve Cash Flow: Budgets are a major part of management accounting. Business
owners often use budgets so they have a financial road map for future business
expenditures. Many budgets are based on a company historical financial information.
Management accountants will comb through this information and create a master budget
for the entire company. Larger business organizations may use several smaller budgets for
divisions or departments. These individual budgets usually roll up into the company overall
master budget. The main purpose of budgets is to save the company money through careful
analysis of necessary and unnecessary cash expenditures.
8. Business Decisions: Management accounting often improves the business owner
decision-making process. Rather than making business decisions based solely on
qualitative analysis, business owners or managers can use management accounting
information as a decision-making tool. Management accounting usually provides a
quantitative analysis for various decision opportunities. Business owners can review each
opportunity through the prism of quantitative analysis to assure they have a clear
understanding relating to business decisions.
9. Increase Financial Returns: Business owners can also use management accounting to
increase their company financial returns. Management accountants can prepare financial
forecasts relating to consumer demand, potential sales or the effects of consumer price
changes in the economic marketplace. Business owners will often use this information to
ensure they can produce enough goods or services to meet consumer demand at current
prices. Companies also pay close attention to the amount of competition in the economic
marketplace. Competition can reduce the company financial returns from business
operations
Question:1.02. Distinguish between Management Accounting and Cost
Accounting. 2007
Answer:
Point of
Cost Accounting Management Accounting
Difference
Cost Accounting is that branch of A management accounting system
1.External Vs. accounting information system produces information that is used
Internal: which records, measures and reports within an organization, by managers
information about costs. and employees.
Cost Accounting emphasizes on the
No specific time span is fixed for
2.Time span: preservation of current years
producing financial statements.
costing reports.
The main objectives of Management
The primary purpose of the Cost
Accounting are to help management
Accounting is cost ascertainment
3.Objectives: by providing information that used by
and its use in decision-making
management to plan, evaluate, and
performance evaluation.
control.
Cost Accounting preserves cost
Cost accounts are not preserved under
accounts by maintaining double-
4.Accounting Management Accounting but analyses
entry accounting process if felt
process: necessary data from financial
necessary. Cost Ledger is used under
statements and cost ledgers.
it.
Cost Accounting is mainly Management accounting uses cost
concerned with the costing and data for provision of information for
provision of more accurate cost data strategic management decisions. It is
5.Center of
to the management. The main focus mainly concerned with the provision of
importance:
of cost accounting is costing, cost help to the managers to asses them in
assignment, cost variance analysis, the process of decision making and
costing reports, budgeting, etc. design business strategies.
Question.1.03. Distinguish between Financial Accounting and
Management Accounting. 2009
Answer:
The difference between Financial accounting & Management accounting are as follows.
Point of Difference Financial Accounting Management Accounting
Financial accounts are supposed to
be in accordance with a specifi Nc o specific format is designed
1. Format format by IAS so that financia folr management accounting
accounts of different organization ssystems.
can be easily compared.

Management Accounting helps

2. Planning Financial accounting helps in
management to record, plan and
and control making investment decision, in
control activities to aid decision-
credit rating.
making process.
A financial accounting system A management accounting
3. External Vs. produces information that is used system produces information
Internal by parties external to the that is used within an
organization, such as shareholders, organization, by managers and
bank and creditors. employees.

Management accounting
4. Focus Financial accounting focuses on focuses on future.
history.
Financial accounting reports are Management accounting reports
5. Users primarily used by external users, are exclusively used by internal
such as shareholders, bank and users viz. managers and
creditors. employees.
Managerial accounting is not

6. Department Preparing financial accounting is specific task of particular

department. co-ordination of all
the work of finance department. department creates management
accounting.
7. Mandatory Vs. Preparing financial accounting There are no legal requirements
optional reports are mandatory especially to prepare reports on
for limited companies. management accounting.
Point of Difference Financial Accounting Management Accounting
Financial accounting statements
No specific time span is fixed for
8. Time span are required to be produced for the
producing financial statements.
period of 12 months.
Most financial accounting Management accounting
9. Monetary Vs.
information is of a monetary information may be monetary or
non-monetary:
nature. alternatively non monetary.
The main objectives of
The main objectives of financial
Management Accounting are to
accounting are :i)to disclose the end
help management by providing
10. Objectives: results of the business, and ii)to
information that used by
depect the financial condition of the
management to plan, evaluate,
business on a particular date.
and control.
Follows a full process of recording, Cost accounts are not preserved
classifying, and summarizing for under Management Accounting
11.Accounting
the purpose of analysis and but analyses necessary data from
process:
interpretation of the financial financial statements and cost
information. ledgers.
Management accounting uses
The financial accounting , the
cost data for provision of
origin of preservation of knowledge
information for strategic
gives emphasis on recording
management decisions. It is
12.Center of keeping on a whole firm basis for
mainly concerned with the
importance: the purpose of decisions by all the
provision of help to the managers
users of accounting information,
to asses them in the process of
both external and internal.
decision making and design
business strategies.
Question.1.04. What are the ethical responsibilities of management
accounting? 2009
Answer:
1.Competence: Management accountants have a responsibility to perform their
professional duties in accordance with relevant laws and regulations and to keep abreast of
current developments or changes affecting the practice of accounting.
2. Confidentiality: Management accountants must refrain from disclosing confidential
information unless legally obligated to do so.
3. Integrity: Management accountants have a responsibility to refrain from either actively
or passively subverting the attainment of the organizations legitimate and ethical
objectives. And to communicate favorable as well as unfavorable information and
professional judgments or opinions.
4. Objectivity: Management accountants must fully disclose all relevant information that
could reasonably be expected to influence an intended users understanding of the
reports, comments, and recommendations.

Question.1.05. Briefly explain the scope of management accounting.2010

Answer:
The scope of Management Accounting is wide and broad based. It encompasses within its
fold a searching analysis and branches of business operations. However, the following
facets of Management Accounting indicate the scope of the subject.
1. Financial Accounting.
2. Cost Accounting
3. Budgeting & Forecasting
4. Cost Control Procedure
5. Statistical Methods
6. Legal Provisions
7. Organisation & Methods

1. Financial Accounting: This includes recording of external transactions covering

receipts and payments of cash, recording of inventory and sales and recognition of
liabilities and setting up of receivables. It also preparation of regular financial
statements. Without a properly designed accounting system, management cannot
obtain full control and co-ordination.
2. Cost Accounting : It acts as a supplement to financial accounting. It is concerned
with the application of cost to job, product, process and operation. It plays an
important role in assisting the management in the creation of policy and the
operation of undertaking.
3. Budgeting & Forecasting: These are concerned with the preparation of fixed and
flexible budgets, cash forecast, profit and loss forecasts etc., in co-operation with
operating and other departments. Management is helped by them.
4. Cost Control Procedure: It is concerned with the establishment and operation of
internal report in order to convert the budget in to operating service. Management
is helped by them by measuring actual results budgetary standards of performance.
5. Statistical Methods : These are concerned with generating statistical and analytical
information in the form of graphs charts etc. of all department of the
 organization. Management need not waste time in understanding the facts and
more time and energy can be utilized in sound plans and conclusions.
6. Legal Provisions: Many management decisions depend upon the provisions of
various laws and statutory requirements. For example, the decision to make a fresh
issue of shares depends upon the permission of controller of capital issues.
Similarly, the form of published accounts, the external audit the authority to float
loans, the computation and verification of income, filing tax returns, making tax
payments for excise, sales, payroll income etc., all depend on various rules and
regulations passes from time to time.
7. Organization & Methods: They deal with organization, reducing the cost and
improving the efficiency of accounting as also of office operations, including the
preparation and issuance of accounting and other manuals, where these will prove
useful.
It is clear that Management Accounting has a vital relation with all those areas explained
above.
Question.1.06. What are the various techniques of management
accounting? 2008 Explain any three of them. 2010
Answer:
Management Accounting uses various tools and techniques for providing necessary and
effective information to the management for performing its managerial functions.
Various tools and techniques that are commonly used in Management Accounting are
discussed as follows:
1. Financial Statement Analysis: It is a methodical and systematic analysis and
interpretation of the data as disclosed in the balance sheet and income statement
with a view to extract necessary and relevant information for proving them to the
management for determining liquidity, solvency, profitability, activity and the
managerial performance of the enterprise. Various tools of Financial Statement
Analysis such as Ratio Analysis, Comparative Financial Statement, Common-Size
Statement and Trend Analysis are frequently used in Management Accounting for
analysis and interpretation of financial statements.
2. Fund Flow Analysis: It is a detailed analysis of inflows and outflows of fund (i.e.,
the working capital) of an enterprise during a particular accounting period. Such
analysis is done by preparing a Fund Flow Statement at the end of an accounting
period. The Fund Flow Statement exhibits inflows and outflows of fund from
various activities of the enterprise during an accounting period. As working capital
is considered as the life-blood of every business concern, efficient
 management of working capital is highly effective for the smooth running of all
operating activities of the concern. For an effective and efficient management of
the working capital of a concern, Fund Flow Analysis is frequently used as a tool
of the Management Accounting.
3. Cash Flow Analysis: It is a detailed analysis of inflows and outflows of cash and
cash equivalents (i.e., cash in hand, cash at bank and short-term investments) of an
enterprise during a particular accounting period. Such analysis is done by preparing
a Cash Flow Statement at the end of an accounting period. The Cash Flow
Statement so prepared exhibits the inflows and outflows of cash from various
activities of the enterprise during an accounting period. As the movement of cash
is very much significant to every business concern, an efficient management of cash
is highly effective for the liquidity planning of the concern. For an effective and
efficient management of cash of a concern, Cash Flow Analysis is frequently used
as a tool of Management Accounting.
4. Costing techniques: Various costing techniques such as Marginal Costing,
Standard Costing and Differential Costing are frequently used as tools of
Management Accounting in its process of cost control and decision-making.
5. Budgetary control: Budgetary control involves framing of budgets, comparison
of actual results with budgeted estimates, ascertainment of any deviation of actual
results from budgeted estimates by computation of variances and adoption of
necessary remedial measures against such deviation. It is an essential tool widely
used in the Management Accounting in the process of its controlling, planning and
performance evaluation of an enterprise.
6. Statistical and operational research techniques: Various statistical and
operational research techniques such as charts, graphs, index number, sampling,
time series, Regression Analysis, Linear Programming, Games Theory, and
Programme Evaluation and Review Technique (PERT) are frequently used as tools
of Management Accounting in its process of performance evaluation and decision-
making.
7. Responsibility Accounting: It involves preparation of budget for various
responsibility centres and assignment of specific responsibilities to the concerned
individual managers for carrying out the budget directions. In the process of cost
control, responsibility accounting is widely used as a tool of Management
Accounting.
8. Management Reporting: It involves preparation and submission of reports of
performance of various activities of a concern to the management on regular
 intervals for its effective planning, controlling, performance evaluation and
decision-making. Management Reporting is widely used as an essential tool in
Management Accounting.

Question.1.07.Information provided by management accounting is not

prepared by following GAAP. Do you agree with the statement? 2008
Answer:
No I am not agree with the statement, Management accounting is not bound by GAAP.
Managers set their own rules concerning the content and form of internal reports. The only
constraint is that the expected benefits from using the information should outweigh the
costs of collecting, analyzing, and summarizing the data.
Managerial accounting is concerned with providing information to managers-that is
people inside an organization who direct and control its operation.

Question.1.08.Explain the term Management by exception 2008

Answer:
Management by Exception is an employee empowerment and management style, policy
or philosophy wherein managers intervene only when their employees fail to meet their
performance standards or when things go wrong. If the personnel are performing as
expected, the manager will take no action. Time and effort should not be wasted focusing
on employees or parts of the organization where things are going smoothly. MBE
normally involves substantial delegation by the manager to his team. The idea
behind management by exception is that managers should only spend their limited and
valuable time to important, more tactical or even strategic activities.
Question.1.09. The area and scope of management accounting is
different with comparing financial accounting.- Explain. 2011
Answer:
The difference between Financial accounting & Management accounting are as follows.
Point of Difference Financial Accounting Management Accounting
Financial accounts are supposed to
be in accordance with a specifi Nc o specific format is designed
1. Format format by IAS so that financia folr management accounting
accounts of different organization ssystems.
can be easily compared.

2. Planning Financial accounting helps in Management Accounting helps

and control making investment decision, in management to record, plan and
Point of Difference Financial Accounting
credit rating.
A financial accounting system
3. External Vs. produces information that is used
Internal by parties external to the
organization, such as shareholders,
bank and creditors.
Management Accounting
control activities to aid decision-
making process.
A management accounting
system produces information
that is used within an
organization, by managers and
employees.

4. Focus Financial accounting focuses on Management accounting

history. focuses on future.
Financial accounting reports are Management accounting reports
5. Users primarily used by external users, are exclusively used by internal
such as shareholders, bank and users viz. managers and
creditors. employees.
Managerial accounting is not

6. Department Preparing financial accounting is specific task of particular

department. co-ordination of all
the work of finance department. department creates management
accounting.
7. Mandatory Vs. Preparing financial accounting There are no legal requirements
optional reports are mandatory especially to prepare reports on
for limited companies. management accounting.
Financial accounting statements
No specific time span is fixed for
8. Time span are required to be produced for the
producing financial statements.
period of 12 months.
Most financial accounting Management accounting
9. Monetary Vs.
information is of a monetary information may be monetary or
non-monetary:
nature. alternatively non monetary.
The main objectives of
The main objectives of financial
Management Accounting are to
accounting are :i)to disclose the end
help management by providing
10. Objectives: results of the business, and ii)to
information that used by
depect the financial condition of the
management to plan, evaluate,
business on a particular date.
and control.
11.Accounting Follows a full process of recording, Cost accounts are not preserved
process: classifying, and summarizing for under Management Accounting
the purpose of analysis and but analyses necessary data from
Point of Difference Financial Accounting Management Accounting
interpretation of the financial financial statements and cost
information. ledgers.
Management accounting uses
The financial accounting , the
cost data for provision of
origin of preservation of knowledge
information for strategic
gives emphasis on recording
management decisions. It is
12.Center of keeping on a whole firm basis for
mainly concerned with the
importance: the purpose of decisions by all the
provision of help to the managers
users of accounting information,
to asses them in the process of
both external and internal.
decision making and design
business strategies.
 Chapter 02

Highlight of the Chapter :
2.1 Distinguish between product cost2.10
and period cost. Why are product
costs sometimes called inventor2.11
able costs? (2006, 2009)
2.2 State the main features of fixed
Cost Behavior
Distinguish between committed cost
and discretionary cost. (2007)
The relevant range pertains to fixed
cost, not variable cost Do you
agree?-Explain. (2009)

cost. (2006) 2.12 How will you classify cost according

2.0 Mention the methods of segregating to managerial decision making?

3 mixed cost. (2006, 2010)
State the main features of variable2.13
2.04 costing. (2006)
A variable cost is a cost that
2.05 varies per unit of product, whereas2.14
a fixed cost is constant per unit of
product Do you agree? Explain.2.15
(2006)
What do you mean by cost
(2010)
Distinguish between (i) a variable
cost (ii) a fixed cost and (iii) a mixed
cost. (2010)
How do fixed cost create difficulties
in costing units of products? (2011)
Why is manufacturing overhead
considered and indirect cost of a unit
of product? (2011)

2.6 behaviors? (2007) 2.16 Only variable costs can be

Classify fixed cost according to its differential costs. Do you agree?
2.7 behavior. (2007) Explain. (2011)

What do you mean by step variable2.17 Math Problem Solutions

2.08 cost? (2007)
What effect does an increase in
2.9 volume have on:-
(i) Unit fixed cost?
(ii) Unit variable cost?
(iii) Total fixed cost?
(iv) Total variable cost?
(v) Total mixed cost?

Question.2.01.Distinguish between product cost and period cost. Why

are product costs sometimes called inventoriable costs? 2006, 2009
Answer:
The Difference Between Product Cost and Period Cost. (Cost Accounting)
Product costs are also called variable costs. It refers to that cost which varies in direct
proportion to the volume of output. The cost per unit of product cost remains unchanged
as production increases or decreases but total cost increases. So such type of costs are called
product costs. For example; cost of direct material, direct labor and direct expenses.
Period cost is the fixed cost. It refers to that cost which remains unchanged by change in
volume of out put. Fixed cost per unit decreases as production increases and increases as
production declines. These costs are called period costs because it is dependant on the time
rather than the volume of out put. Example of fixed costs are rent of the factory building,
Salary of managers, Insurance of building etc.

Inventoriable costs are all costs that can be assigned to an inventory asset, rather than being
charged to expense as incurred. Once an inventory item is consumed through sale to a
customer or disposal in some other way, the inventory asset is charged to expense.
Thus, inventoriable costs are initially recorded as assets and appear on the balance sheet as
such, and are eventually charged to expense, moving from the balance sheet to the cost of
goods sold expense line item in the income statement. This means it is possible that
inventoriable costs may not be charged to expense in the period in which they were
originally incurred.
Inventoriable costs include the following items:
Direct materials
Direct labor
Freight in
Manufacturing overhead (both fixed and variable)
Conceptually, inventoriable costs are the costs incurred to obtain inventory items, as well
as to bring them to the location and condition required for their eventual sale.
Question.2.02.State the main features of fixed cost. 2006
Answer:
Fixed Cost:
A fixed cost is a cost that does not vary in the short term, irrespective of changes in
production or sales levels, or other measures of activity. For example, the rent on a building
will not change until the lease runs out or is re-negotiated, irrespective of the level of
business activity within that building. Examples of other fixed costs are insurance,
depreciation, and property taxes.
When a company has a large fixed cost component, it must generate a significant amount
of sales volume in order to have sufficient contribution margin to offset the fixed cost.
Once that sales level has been reached, however, this type of business generally has a
relatively low variable cost per unit, and so can generate outsized profits above the
breakeven level.
Fixed costs are allocated under the absorption basis of cost accounting. Under this
arrangement, fixed manufacturing overhead costs are proportionally assigned to the units
produced in a reporting period, and so are recorded as assets. Once the units are sold, the
costs are charged to the cost of goods sold. Thus, there can be a delay in the recognition of
those fixed costs that are allocated to inventory.

Question.2.03. Mention the methods of segregating mixed cost. 2006, 2010

Answer:
To segregate semi variable cost into fixed cost and variable cost is necessary because with
this, we can add fixed cost proportion in total fixed cost and variable cost proportion in
total variable cost. So, with following method, we can carry out this.
1. Graphical Method: With graphical method, we draw the graphic line of semi variable
cost by taking output on x'ax and total semi variable cost at y'ax. After this, we do judgment
and select a point where will be our fixed cost in semi variable cost. After this, we draw
the line of best fit. This line shows the fixed cost which will not be changed after changing
output.
2. High Points and Low Points Method: Under this method, we calculate total sale and
total cost at highest level of production. Then we calculate total sale and total cost at lowest
level of production. Because, semi variable cost have both variable and fixed cost. We first
calculate variable rate with following formula:
Highest value Lowest value
Variable Cost (b) = Highest activiy Lowest activity

Estimate The fixed Cost Level:

Fixed Cost (a) = Total Cost Variable Cost.
3. Analytical Method
Under this method, cost accountant does some analysis for dividing semi variable cost into
fixed cost and variable cost. After this, he calculate fixed cost on that rate which analyzed.
Suppose, a cost accountant says that in the total semi variable cost, there may be 30% fixed
cost and 70% variable cost. Now total semi variable cost will be divided on this basis.
If production level will increase, variable cost's proportion will increase with same rate.
But fixed cost will not change.
4. Level of Activity Method
In this method, we compare two level of production with the amount of expenses in these
levels. Variable cost will be calculated with following method
Change in semi variable cost / Change in production volume
5. Least Square Method
This is statistical method in which we use this method for calculating a line of best fit. This
method is based on the linear equation y = mx +c , y is total cost, x is volume of output and
c is total fixed cost. By solving this equation mathematically, we can calculate variable
cost(M) at different level of production.
Question.2.04.State the main features of variable costing. 2006
Answer:
The main characteristics of variable costing are as follows :

(1) All the costs like production , administration, selling and distribution costs are
classified into fixed and variable cost.

(2) Variable costs are charged to production cost. Fixed costs are not charged to
production costs .Rather, it is charged to contribution margin.

(3) All the fixed costs are taken as periodical cost and it is charged to the profit and loss
account of that year when it occurred.

(4) Finished goods and work in progress are valued by taking variable manufacturing cost
only.

(5) It has its own method of calculation of profit . The profit is determined by deducting
total fixed cost from contribution margin . The contribution margin is ascertained by
deducting total variable cost from sales .

Question.2.06.What do you mean by cost behaviors? 2007

Answer:
Cost behavior refers to the way different types of production costs change when there is a
change in level of production.

There are three main types of costs according to their behavior:

Fixed Costs:
Fixed costs are those which do not change with the level of activity within the relevant
range. These costs will incur even if no units are produced. For example rent expense,
straight-line depreciation expense, etc.

Fixed cost per unit decreases with increase in production. Following example explains
this fact:
Total Fixed Cost $30,000 $30,000 $30,000
Units Produced 5,000 10,000 15,000
Fixed Cost per Unit $6.00 $3.00 $2.00

Variable Costs:
Variable costs change in direct proportion to the level of production. This means that
total variable cost increase when more units are produced and decreases when less units
are produced. Although variable in total, these costs are constant per unit. For example
Total Variable Cost $10,000 $20,000 $30,000
Units Produced 5,000 10,000 15,000
Variable Cost per Unit $2.00 $2.00 $2.00

Mixed Costs:
Mixed costs or semi-variable costs have properties of both fixed and variable costs due to
presence of both variable and fixed components in them. An example of mixed cost is
telephone expense because it usually consists of a fixed component such as line rent and
fixed subscription charges as well as variable cost charged per minute cost. Another
example of mixed cost is delivery cost which has a fixed component of depreciation cost
of trucks and a variable component of fuel expense.

Since mixed cost figures are not useful in their raw form, therefore they are split into their
fixed and variable components by using cost behavior analysis techniques such as High-
Low Method, Scatter Diagram Method and Regression Analysis.

Question.2.07.Classify fixed cost according to its behavior. 2007

Answer:
Fixed Cost
The terminology of CIMA defines fixed cost as "the cost which accrues in relation to the
passage of time and which, within certain limits, tends to be unaffected by fluctuations in
the level of activity".

A going business should have physical facilities and an organization for use. These things
provide the capacity to manufacture and sell. The continuing costs of having capacity
incurred in anticipation of future activity are termed as "capacity costs". In case capacity
is utilized, additional costs are incurred. Such additional costs of manufacturing and selling
are controllable with current activity, while capacity costs tend to continue regardless of
the current rate of activity as long as the same capacity is maintained.

Fixed costs are those which are not expected to change in total within the current budget
year, irrespective of variations in the volume of activity. Such costs are fixed for a given
period over a relevant range of output, on the assumption that technology and methods of
manufacturing remain unchanged.

For the purpose of cost analysis, fixed costs may be classified as follows:

1. Committed Costs: These costs cannot be eliminated instantly. These costs are
incurred to maintain basic facilities. Example: Rent, rates, taxes, insurance.
2. Policy and managed costs: Policy costs are incurred in enforcing management
policies. Example: Housing scheme for employees. Managed costs are incurred to
ensure the operating existence of the company. Example: Staff services.
3. Discretionary costs: These are not related to operations. These can be controlled
by the management. These occur at the discretion of the management.
Question.2.08.What do you mean by step variable cost? 2007
Answer:
Step Cost
Step costs remain unchanged (constant) for a given level of output and then increase by a
fixed amount at higher level of output, i.e., from one level of output to another higher
level. Example: Salary of supervisors in a factory.

Figure 1.4 Semi-variable cost

Assume that a supervisor can supervise effectively 10

workers, a second supervisor would be needed if workers exceed 10, and a third supervisor
if workers exceed 20 and so on. There would be a sudden increase in the salary of the
supervisors, if the activity level increases from one range to next.

Depending upon the period up to which an expense can be kept up to a certain level in spite
of increase in activity, the height and width of steps vary. In case, if the steps are small and
narrow, the behaviour of cost is like that of "pure variable cost". This is called "step variable
cost". In case, if the steps are wider, cost is like that of "fixed cost". This is called "step
fixed cost". Figure A and B show the behaviour of step fixed costs and step variable costs.
Figure 1.5A Step fixed costs

Figure 1.5B Step variable costs

Question.9.What effect does an increase in volume have on:-

VI. Unit fixed cost?
VII. Unit variable cost ?
VIII. Total fixed cost?
IX. Total variable cost?
X. Total mixed cost?

Answer:
a. Unit fixed costs decrease as volume increases.
b. Unit variable costs remain constant as volume increases.
c. Total fixed costs remain constant as volume increases.
d. Total variable costs increase as volume increases.
Question.2.10.Distinguish between committed cost and discretionary
cost.2007
Answer:
Fixed costs are expenses associated with businesses that remain constant regardless of
activities within the organization. Fixed costs are generally divided into two categories --
committed and discretionary costs -- with several significant differences between them.
Description
Both discretionary and committed costs are considered fixed costs. Fixed costs that are
considered committed costs are generally big decisions that companies are locked into for
a long time. Discretionary costs are also fixed costs; however, companies have more
flexibility with these. Most companies monitor all fixed costs closely to constantly look
for ways to improve the budget and profitability.
Time Length
The two categories of fixed costs are distinguished by several factors including time length.
Committed costs are generally long-term costs, while discretionary costs are short-term. In
business, long-term refers to more than one year; while short-term refers to one year or
less. Discretionary costs are generally determined each year and are subject to change
whenever the company decides to do so. Committed costs on the other hand cannot be
changed as easily and should be carefully thought out.
Examples
There are several common committed fixed costs businesses incur. These include real-
estate taxes, insurance, professional salaries and depreciation. Common types of
discretionary costs are advertising, research, public relations and repairs and maintenance.
Each type of cost is generally worked into the budget each year; however, there are many
times when a company does not spend the budgeted amount for discretionary costs.
Considerations
One key aspect of committed costs is that they cannot be reduced significantly. If they are,
the profitability of the business is often compromised as well as the long-term goals of the
business. When the management of an organization makes decisions regarding committed
costs, they must take many issues into consideration. They must analyze the situation and
determine if the decisions are good for the business. On the other hand, companies can
reduce discretionary costs for a period of time without extreme damage done to the
company.
Question.2.12.How will you classify cost according to managerial decision
making? 2010
Answer:
Imputed costs: Imputed costs do not involve actual cash outlay (cash payment). They are
not recorded in the books of accounts. They are not measurable accurately. However,
imputed costs are useful while taking decisions. Imputed costs can be estimated from
similar situations. Imputed costs can be estimated from similar situations outside the
organization. Although these are hypothetical costs, in making comparison, in performance
evaluation, in making decision, the inclusion of imputed costs is inevitable. Examples:
Interest on invested capital, rental value of company-owned building, salaries of owner-
directors of sole proprietorship firms.

Sunk costs: Sunk cost is invested cost or recorded cost. A sunk cost is one which has been
incurred already and cannot be avoided by decision taken in future. Sunk cost may be
defined as "an expenditure for equipment or productive resources which has no economic
relevance to the present decision-making process". Sunk cost is a past cost which cannot
be taken into account in decision making. Sunk cost may also be defined as the difference
between the purchase price of an asset and its salvage value. Non- incremental costs (i.e.,
cost which do not increase) are also, at times, termed as sunk costs (one specific group of
non-incremental costs).

Differential costs: Differential costs arise on account of the change in total costs associated
with each alternative. In the language of the AAA committee, "it is the increase or decrease
in total costs, or the changes in the specific elements of cost that results from any variation
in operation." Differential cost consists of both variable and fixed costs. The differential
cost between any two levels of production is (i) the difference between two marginal costs
(variable cost) at these two levels and (ii) the increase or decrease in fixed costs. A
distinction has to be understood between differential cost and incremental cost. Incremental
cost applies to increase in production and restricted to cost only, whereas differential cost
confines to both increase or decrease in output.

Differential cost is of much use in decision-making process, especially in choosing the best
alternative and in ascertaining profit where additional investments are introduced in the
business.
Opportunity costs: Opportunity costs are the economic resources which have been
foregone as the result of choosing one alternative instead of another. The unique feature of
an opportunity cost is that no cash has changed hands. There is no exchange of economic
resources. It results from sacrificing some action. They are never shown in regular cost
accounting records.

Question.2.13.Distinguish between (i) a variable cost (ii) a fixed cost

and (iii) a mixed cost. 2010
Answer:
Fixed Costs:
Fixed costs are those costs which do not vary with volume of output and therefore fixed
costs are defined in terms of daily, weekly, monthly and even yearly. These remain constant
throughout the relevant range. For example if fixed cost of a company is $5000 and
company produces whether 10000 units or 20000 units, in this case total fixed cost will
remain unchanged but cost per unit will be $ 2 if company produces 10000 units and
$ 4 if company produces 20000 units. Examples of fixed costs are salary of supervisors,
office rent, taxes. Fixed costs accrue or are incurred with the passage of time and not with
the production of the product or job.

Fixed costs may be

Committed costs
Managed costs
Discretionary costs
Step costs
Variable Costs:
Variable costs are those costs that changes directly with the production level changes and
therefore they are expressed in terms of units of production. Generally variable costs
increase at a constant rate relative to labour and capital. For example if direct material cost
is $ 2 per unit and if company produces 10000 units then total cost will be $ 20000 and if
company produces 20000 units then cost will be $80000. Examples of variable cost are
direct labour, depreciation on plan and machinery, power and electricity.

A mixed cost is one that contains both variable and fixed cost elements. Mixed cost is also
known as semi variable cost. Examples of mixed costs include electricity and telephone
bills. A portion of these expenses are usually consists line rent. Line rent normally is fixed
for each month. Variable portion consists units consumed or calls made. The relationship
between mixed cost and level of activity can be expressed by the following equation or
formula:

Y = a + bX

In this equation,

Y = The total mixed cost

a = The total fixed cost
b = The variable cost per unit
X = The level of activity

The equation makes it very easy to calculate what the total mixed cost would be for any
level of activity within the relevant range For example, Suppose that the company expects
to produce 800 units and company has to pay a fixed cost of $25,000 and a
variable manufacturing cost is $3.00 per unit. The total mixed cost would be calculated as
follows:

Y = a + bX

Y = $25,000 + ($3.00 800 units)

= $27,400

A characteristic of mixed cost that needs to be understood is that we usually have to

separate fixed and variable components of the
Problem.1. BBA-2006
The Lakeshore Hotels guest-days of occupancy and custodial supplies expense over the
last seven month were :
Month Guest-Pays of Custodial
Occupancy Supplies
March 4,000 7,500
April 6,500 8,250
May 8,000 10,500
June 10,500 12,000
July 12,000 13,500
August 9,000 10,750
September 7,500 9,750
Guest-day is a measure of the overall activity at the hotel. For example, a guest who stays
at the hotel for three days is counted as three guest-days.
(a) Using the high-low method, estimate a cot formula for custodial supplies expense.
(b) Express the variable and fixed costs in the form Y = a + bX.
(c) Using the cost formula you derived above, what amount of custodial supplies expense
would you expect to be incurred at an occupancy level of 11,000 guest-days?
Solution
Req(a)
The High-Low Method :-
Step -1. Estimate The Variable Cost Level:
Highest value Lowest value
Variable Cost (b) = Highest activiy Lowest activity

= 13,500 - 7500
12,000 - 4,000
= .75 Supplies.
 Step -2. Estimate The fixed Cost Level:
Fixed Cost (a) = Total Cost Variable Cost.
= 13500-.75x12,000
= 4500
Req. (b) Express The Variable and Fixed Cost in The From, Y = a+b
= 4500+.75

Req. (c) Total Amount /Total Cost = Fixed Cost +Variable Cost
= 4,500 + 11000x.75 = 12,750

Problem.2. BBA-2006
The maintenance cost and patient days for the first seven months of X hospital are as
follows:-
Month Activity Level Maintenance
Patient days Cost Incurred
January 5,600 7,900
February 7,100 8,500
March 5,000 7,400
April 6,500 8,200
May 7,300 9,100
June 8,000 9,800
July 6,200 7,800
Required :
(a) Using the lest squares regression method, estimate the variable cost per patient.
(b) From the data in (a) above, express the cost formula in linear equation
form Y = a + bX.
(c) Using the derived cost formula, determine the expense expected to be incurred for
9,00 Patients.
Solution
The Least- Squares Regression Method:-
Month Activity X Cost Y XY X2 Y2
January 5600 7,900 44240,000 31,360,000 62,410,000
February 7100 8,500 60350,000 50,410,000 72,250,000
March 5000 7,400 37000,000 25,000,000 54,760,000
April 6500 8,200 533,00,000 42,250,000 67,240,000
May 7300 9,100 664,30,000 53,290,000 82,810,000
June 8000 9,800 75,200,000 64,000,000 96,040,000
July 6,200 7,800 48,360,000 38,440,000 60,840,000
 N=7 X=45700 Y=587000 XY=384880,000 X2=304750,000 Y2=496350,000

Variable Cost (b) =

= 7(384880,000) - (45700)(58700)
7(304750,000) - (45700)2
= .26

Fixed cost (a) =

=
= 57,003

(b) Express the Cost Formula in Liner Equation

From Y= a+b
= 57003+.26

(c) Cost Formula,

Y=a+b
= 57,00,+.26x9000
= 59,343

Problem.3. BBA-2007
The following information relating to production and mixed cost are extracted from the
books of a manufacturing firm :
Production Mixed cost
(Units) (Taka)
January 6,800 31,580
February 6,400 30,420
March 7,200 32,740
April 8,000 35,060
May 6,600 31,000
June 7,000 32,160
Required :
(i) Calculate variable cost per unit and total fixed cost by using Least Square
Method.
(ii) What will be the mixed cost of producing 7,500 units of the month of July?
Solution
Req(1)Calculate. The Least Square Method:-
Month Unit X Cost Y Xy X2 Y2
January 6,800 31,580 2,14,744,000 46,240,000 9,97,296,400
February 6,400 30,420 1,94,688,000 40,960,000 9,25,376,400
March 7,200 32,740 2,35,728,000 51,840,000 10,71,907,600
April 8,000 35,060 2,80,480,000 64,000,000 12,29,203,600
May 6,600 31,000 2,04,600,000 43,560,000 9,61,000,000
June 7,000 32,160 2,25,120,000 49,000,000 10,34,265,600
N=6 X=42000 Y=192960 XY=13,55,360,000 X2=2956,00,000 Y2=6219049600
Variable Cost (b)= N(XY)-(X) (Y)
N(X2-(X)2
= 6()(1355360,000042,000) (192960)
6(295600,000)-(42000)2
= 8132160,000-8104320,000
1773600,000-1,764,000,000

= 27840,000
96,00,000
= 2.9

Fixed Cost (a) =(Y)- b(X)

N
= (1929690)-2.9(42000)
6
= 1,92,960-121,800
6
= 71,160
6
= 11,860
Req.(ii)

Mixed Cost of Producing 7500 Units of the Month of july:-

Mixed Cost, Y=a+b
= 11,860+2.9(7500)
= 11,860+21,750
= 33,610
Problem.4. BBA-2009
St. Paul's Hospital contains 450 beds. The average occupancy rate is 80% per month. In
other words, on average. 80% of the hospital's beds are occupied by patients. At this level
of occupancy, the hospital's operating costs are Tk. 32 per occupied bed per day. assuming
a 30-day month. This Tk. 32 figure contains both variable and fixed cost elements. During
June, the hospital's occupancy rate was only 60%. A total of Tk. 3,26,700 in operating cost
was incurred during the month.
Required :
(i) Using the high-low method, estimate:
(a) The variable cost per occupied bed on a daily basis.
(b) The total fixed operating costs per month.
(ii) Assume an occupancy rate of 70% per month. What amount of total operating cost
would you expect the hospital to incur?

Solution
Req.(i)
Difference in cost
When Occupancy level is 80% (450 80%) 32 30 3, 45,600
When Occupancy level is 60% 3, 26,700
18,900
Difference is activity level-
When Occupancy level is 80% (450 80%) 80% 10,800
When Occupancy level is 60% (450 60%) 30 8,100
2700
Variable cost (b) =
=
= 7 per Occupied bed
(b) Fixed cost = Total cost Variable cost
= 3,45,600 (10,800 7)
= 2,70,000
Req.(ii) In case of occupancy rate 70% the total amount of operating cost will be
Fixed cost 2,70,000
Variable cost (315 beds 30 days TK.7) 66,150
Total cost TK. 3, 36,150

Problem.5. BBA-2009
The following data relating to units shipped and total shipping expense have been
assembled by Arche Company, a wholesaler of large, custom-built air-conditioning units
tor commercial buildings :
Month Units Total Shipping
Shipped Expense (Taka)
January 3 1,800
 February 6 2,300
March 4 1,700
April 5 2,000
May 7 2,300
June 8 2,700
July 2 1,200
Required :
( i ) Using the least-squares regression method, estimate the variable and fixed
elements of shipping expense.
( ii ) Express the cost data in (i) above in the form Y = a + bX
Solution
Req.(i) Least squares regression table -

Month Unit, x Cost, y Xy X2

January 3 1,800 5,400 9
February 6 2,300 12,800 36
March 4 1,700 6,800 16
April 5 2,000 10,000 25
May 7 2,300 16,100 49
June 8 2,700 21,600 64
July 2 1,200 2,400 4
N=7 x = 35 y = 14,000 xy= 76,100 x2 = 203

Variable cost (b) =

=
=
= 217.86 per Unit shipped
Fixed cost (a) =
=
= 911
Req.(ii) cost formula, y = a + bx
= 911 + 217.86x
Problem.6.
BBA-2010
The Big Star Hotel in Dhaka has accumulated records of the total electrical costs of the
hotel and the number of occupancy-days over the last year. An occupancy-day
represents a room rented out for one day. The hotel's business is highly seasonal, with
peaks occurring using the ski season and in the summer.

Month Occupancy Electrical

days costs(Taka)
January- 1,736 4,127
February 1,904 4,207
March 2,356 5,083
April 960 2,857
May 360 1,871
June 744 2,696
July 2,108 4,670
August 2,406 5,148
September 840 2,691
October- 124 1,588
November 720 2,454
December 1,364 3,529
Required:
(i) Using the high-low method estimate th e fixed cost of electricity per month and the
variable cost of electricity per cost formula for occupancy-day. Almost estimate a
electrical cost.
(ii) Using the cost formula you derived above, what amount of electrical costs would you
expect to be incurred at an occupancy level of 1,100 occupancy-days?

Solution

Req.(i)
Step 1. Identify the lowest and highest costs and activity level

Occupancy days Electrical costs

High 2406 5148
Low 124 1588
Step 2. Estimation of variable cost per unit =
Variable cost (b) =
=
 = 1.56 per unit cost
Step 3. Estimation of fixed cost
Fixed cost (a) = Total cost Variable costs
= 5148 2406 1.56
= 1395
Cost formula, y = a + bx
= 1395 + 1.56x
Req.(ii) In cost of Occupancy level of 1100 Occupancy days the amount of electrical
costs
Fixed cost 1395
Variable cost (1100 1.56) 1716
Total cost 3111

Problem.7. BBA-2011
ABC Co. Ltd. operates a fleet of delivery trucks in Malaysia. The Co. has determined that
if a truck is driven 105,000 kilometers during a year, the average operating costs is Tk.
11.40 per kilometer. If a truck is driven only 70,000 kilometers during a year, the average
operating costs increases to Tk. 13.4 per kilometer.
Required :
(i) Using the high-low method, estimate the variable and fixed costs element of the
Annual cost of truck operations.
(ii) Express the variable and fixed costs in the form Y= a + bx.
(iii) If a truck were driven 80,000 kilometers during a year, what total costs would you
expect to be incurred?

Solution
In cost of truck driven 1,05,000 Km
The operation cost is (1,05,000 11.40) 11,97,000
In cost of truck driven 70,000 Km
The operating cost is (70,000 13.4) 9,38,000
Req.(i) Step(i)Identify the cost and activity level
Truck driven Km Operating cost
High 1,05,000 11,97,000
Low 70,000 9,38,000
Step 2. Estimation of variable cost per Unit
Variable cost (b) =
=
=
 = 7.4 Per Kn driven

Step-3 Estimation of fixed cost-

Fixed cost= Total cost Variable cost
= 1197000 (10,500 7.4)
= 420000
Req.(ii) Express the variable cost and fixed cost in cost formula-
Y= a + bx
= 420000 + 7.4x
Req.(iii) In cost of truck driven 80000 km the total cost-
Fixed cost 420000
Variable cost (80000 7.4) 592000
Total cost 1012000
Problem.8. BBA-2012
Hoi Chong Transport Ltd. operates a fleet of delivery trucks in Singapore. The company
has determined that if a truck is driven 105,000 kilometers during a year, the average
operating cost is Tk.11.40 per kilometer. If a truck is driven only 70,000 kilometers during
a year, the average operating cost increases to Tk. 13.4 per kilometer.
Required :
(i) Using the high low method, estimate the variable and fixed cost elements of the annual
cost of truck operation.
(ii) Express the variable and fixed costs in the form Y = a + bX.
(iii) If a truck were driven 80,000 kilometers during a year, what total cost would you
expect to be incurred?

Solution

1.
Kilometers Total Annual
Driven Cost*
High level of activity.................................................... 1,05,000 $11,970
Low level of activity............................ 70,000 9,380
Change............................................. 35,000 2,590
* 105,000 kilometers x Tk.0.114 per kilometer = Tk.11,970
70,000 kilometers x Tk.0.134 per kilometer = Tk.9,380

Variable cost per kilometer:

Change in Cost 2590 0.074 perkilometer.

Change in Activity 35,000 kilometers
Fixed cost per year:
Total cost at 105,000 kilometers.......................................... 11,970
Less variable portion:
105,000 kilometers x Tk.0.074 per kilometer .................... 7,770
Fixed cost per year.......................................... 4,200

2. Y = Tk.4,200 + Tk.0.074X

3. Fixed cost...................................................................... 4,200

Variable cost:
80,000 kilometers x Tk.0.074 per kilometer........................ 5.920
Total annual cost.................................................................. 10,120
Problem.9. BBA-2012
The following data relating to units shipped and total shipping expense have been
assembled by Molian Company, a wholesaler of large, custom-built air-conditioning units
tor commercial buildings :
Month Units Total Shipping
Shipped Expense (Taka)
January 3 1,800
February 6 2,300
March 4 1,700
April 5 2,000
May 7 2,300
June 8 2,700
July 2 1,200
Required :
( i ) Using the least-squares regression method, estimate the variable and fixed
elements of shipping expense.

Req.(i) Least squares regression table -

Month Unit, x Cost, y Xy X2

January 3 1,800 5,400 9
February 6 2,300 12,800 36
March 4 1,700 6,800 16
 April 5 2,000 10,000 25
May 7 2,300 16,100 49
June 8 2,700 21,600 64
July 2 1,200 2,400 4
N=7 x = 35 y = 14,000 xy= 76,100 x2 = 203

Variable cost (b) =

=
=
= 217.86 per Unit shipped
Fixed cost (a) =
=
= 911

Chapter 03
Costing Methods/ Direct Costing & Absorption Costing
Highlight of the Chapter :
 3.01 Why variable costing and absorption
net income figures may or may not
be equal?2006
3.02 Distinguish between variable costing
and absorption costing.
2007,2008,2009
3.03 Discuss the uses of direct costing in
decision making. 2007
3.04 Absorption costing considers more
categories of costs as product cost-
Explain.2009
3.05 When and why profit will be higher
in case of absorption costing and
variable costing?2010
3.06 What are the arguments in favor
of not charging fixed cost in the
valuation of inventory under
direct costing? 2008
3.07 Define variable costing and
absorption costing. 2011
3.08 Explain how manufacturing
overhead costs are shifted from
one period to another under
absorption costing.2011
3.09 Math Problem Solutions

Question.3.01.Why variable costing and absorption net income figures

may or may not be equal?2006
Answer
Differences in reported net operating income between absorption and variable costing arise
because of changing levels of inventory. In lean production, goods are produced strictly to
customers orders. With production geared to sales, inventories are largely (or entirely)
eliminated. If inventories are completely eliminated, they cannot change from one period
to another and absorption costing and variable costing will report the same net operating
income.
Question.3.02. Distinguish between variable costing and absorption
costing. 2007,2008,2009
Answer:
Absorption costing Direct costing
1) Both fixed and variable cost are1) Only variable cost is considered for
considered for product costing and inventory product costing and inventory valuation.
valuation.
2) The fixed cost is charged to cost of2) Treatment of fixed overhead is different.
production. Each product is to bear aFixed cost is considered as a period cost.
reasonable share of fixed cost and profitabilityAnd profitability of different product is
of product is thus influenced by judged by P/V ratio.
subjective apportionment of fixed cost.
3) Presentation of cost is on conventional 3) Production of data is oriented to
pattern. Net profit of each product ishighlight the total contribution and
determined after deducting fixed overheads. contribution from each product.
4) The difference in the magnitude of opening4) The difference in the magnitude of
stock and closing stock affects the unit cost ofopening stock and closing stock does not
production due to the impact of related fixedaffect the unit cost of production.
overheads.
Question.3.03.Discuss the uses of direct costing in decision making. 2007
Answer:
Direct costing is a specialized form of cost analysis that only uses variable costs to make
decisions. It does not consider fixed costs, which are assumed to be associated with the
time periods in which they were incurred. The direct costing concept is extremely useful
for short-term decisions, but can lead to harmful results if used for long-term decision
making, since it does not include all costs that may apply to a longer-term decision.

In brief, direct costing is the analysis of incremental costs. Direct costs are most easily
illustrated through examples, such as:

The costs actually consumed when you manufacture a product

The incremental increase in costs when you ramp up production
The costs that disappear when you shut down a production line
The costs that disappear when you shut down an entire subsidiary

Direct costing is of great use as an analysis tool. The following decisions all involve the
use of direct costs as inputs to decision models. They contain no allocations of overhead,
which are not only irrelevant for many short-term decisions, but which can be difficult to
explain to someone not trained in accounting.

Automation investments. A common scenario is for a company to invest in

automated production equipment in order to reduce the amount it pays to its direct
labor staff. Under direct costing, the key information to collect is the incremental
labor cost of any employees who will be terminated, as well as the new period
costs to be incurred as part of the equipment purchase, such as the depreciation on
the equipment and maintenance costs.
Cost reporting. Direct costing is very useful for controlling variable costs,
because you can create a variance analysis report that compares the actual
variable cost to what the variable cost per unit should have been. Fixed costs are
not included in this analysis, since they are associated with the period in which
they are incurred, and so are not direct costs.
 Customer profitability. Some customers require a great deal of support, but also
place such large orders that a company still earns a considerable profit from the
relationship. If there are such resource-intensive situations, it makes sense to
occasionally calculate how much money the company really earns from each
customer. This analysis may reveal that the company would be better off
eliminating some of its customers, even if this results in a noticeable revenue
decline.
Internal inventory reporting. Generally accepted accounting principles and
international financial reporting standards require that a company allocate indirect
costs to its inventory asset for external reporting purposes. Overhead allocation
can require a prolonged amount of time to complete, so it is relatively common
for company controllers to avoid updating the overhead allocation during
reporting periods when there will be no external reporting.

Question.3.07.Define variable costing and absorption costing. 2011

Answer:
Variable Costing
Variable Costing is also called 'Marginal Costing'. It may be defined as the technique which
charges only the Variable Cost to the cost unit.

According to the Chartered Institute of Management Accountants (CIMA), United

Kingdom, Marginal Costing is 'the technique of ascertainment of Marginal Cost and of the
effect on profit of changes in volume by differentiating between Fixed and Variable Costs.'

CIMA also defines Marginal Cost as 'the cost for producing one additional unit of the
product.' Generally, the cost of a product includes the Fixed and Variable Costs. If one unit
of output of the product is increased, only the Variable Cost increases, as the Fixed Cost
remains constant even in the change of output level. Therefore, the additional cost incurred
for producing one additional unit represents the Variable Cost only. This increase in cost
(i.e., the Variable Cost) due to increase in one additional unit of output is called Marginal
Cost. Hence, Marginal Cost is nothing but Variable Cost. That is why Variable Costing is
also called Marginal Costing.

Absorption Costing
Absorption Costing may be defined as the technique which takes into account both Fixed
and Variable Costs for determining unit cost of the goods produced or the operation
carried on.
The Chartered Institute of Management Accountants (CIMA), United Kingdom, defines
Absorption Costing as 'the practice of charging all costs, both variable and fixed, to
operations, processes or products'.
Under this technique, the cost per unit of the goods produced represents the Variable Cost
per unit plus the allocated share of Fixed Cost per unit. Here, 'Absorbed Cost' is the total
of direct cost and overheads cost. Accordingly, Absorption Costing is also called Full or
Total Costing. Wherever this technique of costing is applied, the cost per unit remains the
same only when the level of output remains constant. When the level of output changes,
the cost per unit also changes because of the existence of Fixed Cost in the unit cost. The
Fixed Cost remains constant even when there is a change in the output level. Under this
technique, closing inventory is also valued at total cost, which includes Variable Cost as
well as Fixed Cost.

Problem.1. BBA-2006
The following particulars are obtained from the records of a manufacturing company :

Cost per unit of a product :

Taka
Direct materials 1.50
Direct labour 1.80
Variable factory overhead .40
Fixed factory overhead .40
(Based on 1,00,000 units of normal production)
Sale price per unit Tk. 5
Selling and administrative expenses :
Fixed Tk. 22,000
Variable 10% of sales
Production and Sales units :
Year 1 Year 2
Production 1,10,000 95,000
Sales 96,000 1,00,000
Closing inventory 14,000 9,000
Required :
Prepare cost statements for both the years under
(a) Absorption costing; and
(b) Variable costing

Working: 1. Calculation of opening inventory:

Year-1 Year-2
Opening inventory ---- 14,000
Add. Production overhead 1,10,000 95,000
1,10,000 1,09,000
Less, Sales 96,000 1,00,000
14,000 9,000
W-2
Calculation of cost per unit under Absorption costing & Variable costing:

Absorption Variable
costing costing
Direct material 1.50 1.50
Direct labour 1.80 1.80
Variable factory O.H .40 .40
Fixed factory O.H .40 ---
4.10 3.70

-------Manufacturing company
Income Statement
Solution (Absorption Costing)
Req.(a)

Explanation Year-1 Year-2

Sales 4,80,000 5,00,000
Less, Cost of goods sold:
Beginning inventory ----- 57,400
Direct materials 1,65,000 1,42,500
Direct labour 1,98,000 1,71,000
Variable Factory overhead 44,000 38,000
Fixed Factory overhead 44,000 38,000
 4,51,000 4,46,900
Less, Ending inventory 57,400 36,900
3,93,600 4,10,000

86,400 90,000
Less, Selling& administration:
22,000
Fixed 22,000 50,000
Variable 10% 48,000
70,000 72,000
Net operating income 16,400 18,000

-------Manufacturing company
Req.(b) Income Statement
(Direct Costing/Variable)
Explanation Year-1 Year-2
Sales 4,80,000 5,00,000
Less, variable Cost of goods sold:
Beginning inventory ----- 51,800
Direct materials 1,65,000 1,42,500
Direct labour 1,98,000 1,71,000
Variable Factory overhead 44,000 38,000
 4,07,000 4,03,300
Less, Ending inventory 51,800 33,300
3,55,200 3,70,000
1,24,800 1,30,000
Less, Factory overhead 44,000 38,000
80,800 92,000
Less, Selling& administration:
Fixed 22,000 22,000
Variable 10% 48,000 50,000
70,000 72,000
Net operating income 10,800 20,000

Problem.2. BBA-2007
The following particulars are available from the books of ABC Ltd. For the year 2006 :-
Sales 75,000 units.
Finished Goods Inventory (January 1,2006) 12,000 units.
Finished Goods Inventory (December 31,2006) 17,000 units.
Sales price Tk. 10 per unit.
Manufacturing cost :
Variable cost per unit of production Tk. 4
Fixed Factory overhead (Normal capacity 80,000 units) Tk. 1,60,000
Marketing and Administrative Expenses :
Variable cost per unit of sales Tk. 1
Fixed marketing and Administrative Expenses Tk. 1,50,000
Required :
(i) Income statement for 2006 under the absorption costing method and direct costing
method.
(ii) An account showing the difference in net operating income under the above two
methods.

Solution

Working: Calculation of Production during the year:

Sales= 75,000 units
Add, Ending Inventory 17,000 units
92,000
Less, Opening Inventory 12,000
80,000 units
W-2 Calculation of fixed factory overhead per unit:

Fixed factory overhead per unit= Fixed Factory OH =1,60,000 2

Normal capacity 80,000
W-3.Caalculation of manufacturing cost per units:
Variable cost per units Tk. 4
Fixed OH per units Tk. 2
6

Req.(i)
Income Statement
Absorption Costing
For the year ended 31st December,2006
Explanation Tk. Tk.
Sales (75000x10) 7,50,000
Less: Cost of good Sold:-
Beginning inventory (12,000 x Tk.6 ) 72,000
Variable Manufacturing(80,000 x Tk.6) 4,80,000
5,52,000
Less: Ending Inventory 1,02,000
4,50,000
Gross Profit 3,00,000
Less: Marketing and administrative exp:-
Variable(75,000 x 1) 75,000
Fixed 1,50,000 2,25,000
75,000
Net operating income
Income Statement
Direct Costing
For the year ended 31st December,2006
Explanation Tk. Tk.
 Sales (75000x10) 7,50,000
Less: Cost of good Sold:-
Beginning inventory (12,000 x Tk.4 ) 48,000
Variable Manufacturing(80,000 x Tk.4) 3,20,000
3,68,000
Less: Ending Inventory 68,000
3,00,000
Gross contribution 4,50,000

Less: Variable Marketing and administrative exp:-(75,000 x 75,000

1) 3,75,000
Contribution
Less, Fixed cost: 1,60,000
Fixed factory overhead 1,50,000 3,10,000
Fixed Marketing and administrative exp 65,000
Net operating income

Req.(ii)
Reconciliation Statement
Explanation Tk. Tk.
Net income Under absorption costing 75,000
Net loss under variable costing 65,000
Difference 10,000
Changes in inventory(Ending- Beginning)
In Absorption costing(1,02,000-72,000) 30,000
In Direct costing(68,000-48,000) 20,000
10,000

Problem.3. BBA-2008
Essex private limited company has developed the following statement for the first two years
of their operation. They sold the same number of unit each year but the profit is more than
double in the second year of their operation. The CEO was quite confused about their
operating results.

Year 1 Year 2
Taka Taka
Sales (20000 units each year) 7,00,000 7,00,000
Less : Cost of goods sold 4,60,000 4,00,000
Gross margin 240,000 300,000
Less: Selling and administrative expenses 200,000 200,000
Net operating income 40,000 1,00,000
The information related to the production of the company for these years was as
follows:

Year 2 Year 2
Actual production in units 20,000 25,000
Standard production, per year 20,000 20,000
Variable manufacturing cost per. unit of production Tk.8 Tk.8
Variable selling and administration cost per unit Tk. 1 Tk. 1
Fixed manufacturing overhead costs -(total) 3,00,000 3,00,000

Required :
(a) Compute the standard unit product cost for each year under absorption costing
and variable costing.
(b) Prepare a variable costing income statement for each year.
(c) Reconcile the - variable. Costing and absorption net operating income figures
for year 2
(d) Explain to the CEO why, under absorption costing, the net operating income for
year 2 was higher than the net operating, income of. Year 1, though the same
number of units was sold in each year.

Solution
Req.(a)
Absorption Costing Variable Costing
Year-1 Year-2 Year-1 Year-2
Variable production cost 8 8 8 8
Fixed manufacturing overhead 15 12
(3,00,00020,000 unites)(3,00,00025,000 unites) 23 20 8 8

Req.(b)
Income Statement
(Direct Costing/Variable)
Explanation Year-1 Year-2
Sales 7,00,000 7,00,000
Less, variable Cost of goods sold:
Beginning inventory ----- -----
Add, variable manufacturing cost 1,60,000 2,00,000
1,60,000 2,00,000
Less, Ending inventory ----- 40,000
variable cost of goods sold 1,60,000 1,60,000
variable Selling& administration 20,000 20,000
(20,000 unites x Tk.1 per unit) 1,80,000 1,80,000
Contribution margin 5,20,000 5,20,000

Less, Fixed expense: Fixed

Manufacturing o.H 3,00,000 3,00,000
Fixed Selling& administration 1,80,000 1,80,000
4,80,000 4,80,000
Net operating income 40,000 40,000

Year-1 Year-2
Req.(c) Variable costing net operating income Tk. 40,000 Tk. 40,000
Add. Manufacturing overhead cost deferred in inventory
Under absorption costing(5,000 x 12) --- 60,000
Absorption costing net operating income 40,000 1,00,000

Req.(d) The increase in production in Year 2, in the face of level sales, caused a buildup of
inventory and a deferral of a portion of Year 2's fixed manufacturing overhead costs to the next
year. This deferral of cost relieved Year 2 of Tk. 60,000 (5,000 units x Tk.12 per unit) of fixed
manufacturing overhead cost that it otherwise would have borne. Thus, net operating
income was Tk.60,000 higher in Year 2 than in Year 1, even though the same number of units
was sold each year. In sum, by increasing production and building-up inventory, profits
increased without any increase in sales or reduction in costs. This is a major criticism of the
absorption costing approach.

Problem.4. BBA-2009

Far North Telecom Ltd. of Ontario has organized a new division to manufacture
and sell specialty cellular telephones. The division's monthly costs are shown
below:
Manufacturing costs:
Direct materials Tk. 48
Variable manufacturing overhead Tk. 2
Fixed manufacturing overhead costs (total) Tk. 3, 60,000
Selling and administrative costs :
Variable 12% of sales
Fixed (total) Tk. 4, 70,000

Far North Telecom regards till of its workers as full time employees and the company has
a long standing no layoff policy. Furthermore, production is highly automated.
Accordingly the company includes its labor costs in its fixed manufacturing overhead. The
cellular phones sell for Tk. 150 each. During September, the first month of operation, the
following activity was recorded:
Units sold 10,000
Units produced 12,000
Required .
(i) Compute the unit product cost under
(a) Absorption costing;
(b) Variable costing.
(ii) Prepare income statement for September using standard Absorption costing.
(iii) Prepare income statement for September using Variable costing.
(iv) Reconcile the operating income under adsorption costing with operating income
under variable costing.

Solution
Req.(i). a.b. unit product cost
 Explanation Absorption Variable
costing costing
Direct materials $48 $48
Variable manufacturing overhead 2 2
Fixed manufacturing O.H(3,60,00012,000 unites ) 30 ----
$80 $50

North Telecom Ltd.

Req.(ii) Absorption Costing
Income statement
Particulars/Details Amount Amount
Sales (10000 150) 15,00,000
Less : Cost of goods sold
Beginning inventory ------
Add : Cost of goods manufacture( 12,000 80) 9,60,000
Goods available for bale 9,60,000
1,60,000
Less : Ending inventory (2000 80)
Gross Margin 8,00,000

Less: selling & administrative exp. 1,80,000 7,00,000

4,70,000
Variable (15,00,000 12%)
Fixed 6,50,000
Net operating income
50,000

North Telecom Ltd.

Req.(iii) Variable Costing
Income statement
Particulars/Details Amount Amount
Sales (10000 150) 15,00,000
Less : Variable expenses
Beginning inventory 0
Add : Variable le manufacturing exp. O.H (5ox 12,000) 6,00,000
Goods available for bale 6,00,000
Less : Ending inventory (2000 50) 1,00,000 5,00,000
Cost of goods sold 10,00,000
Variable selling & administrative costs 1,80,000
Gross Margin 8,20,000
Less : Fixed expense: 3,60,000
Manufacturing O.H 4,70,000
Selling & administrative costs 8,30,000
 Net Operating Loss. (10,000)

Req.(iv) Reconciliation of operating income Under absorption costing with operating

income under variable costing

Net income Under absorption costing 50,000

Net loss under Direct costing (10,000)
Difference 60,000
Changes in inventory(Ending- Beginning)
In Absorption costing(1,60,000-0) 1,60,000
In Direct costing(1,00,000-0) 1,00,000
60,000

Problem.5. BBA-2010

Computer Desk incorporation makes an oak desk specially designed for personal
computers. The desk sells for Tk. 200 each. Data for last years operation follow:-
Units in beginning inventory 00
Units produce 10,000
Units sold 8,000
Unit in ending inventory 2,000
Variable costs per unit : Taka
Direct labour 60
Direct labour 30
Variable manufacturing overhead 10
Variable selling and administrative overhead 20
Total variable cost per unit 120
Fixed costs :
Fixed manufacturing overhead 3,00,000
Fixed selling and administrative overhead 4,50,000
Total variable 7,50,000
Required :
(i) Prepare an income statement using variable costing.
(ii) Prepare an income statement using absorption costing.
(iii)Prepare a reconciliation statement.

Solution Computer Desk incorporation

Req.(i) Variable costing
 Income Statement
Explanation Tk. Tk.
Sales (8000 200) 16,00,000
Less : Variable expenses
Beginning inventory -----
Add : Variable manufacturing. Costs (100 10,000) 10,00,00
Goods available for sale 0
Less : Ending inventory (2,000 100) 10,00,00
Cost of goods sold 0 8,00,000
2,00,00 8,00,000
Variable selling and administrative O.H (20 8,000) 0 1,60,000
Gross Margin 6,40,000
Less : Fixed expenses :
Manufacturing O. H
Selling and administrative O.H
7,50,000
Net operating Loss 3,00,000 (1,10,000)
4,50,000

Computer Desk incorporation

Req.(ii) Absorption Costing
Income Statement
Particulars/Details Amount Amount
Sales (8000 200) 16,00,000
Less : Cost of goods sold :
Beginning inventory ------
Add : Cost of good manufacturing (10,000 130) 13,00,00
Less : Ending inventory (2000 130) 0 10,40,000
Gross Marin 2,60,000 5,60,000
Less : Selling administrative exp.
Fixed
Variable (8000 20) 4,50,000 6,10,000
Net operating Loss 1,60,000 (50,000)

Reconciliation Statement
Explanation Tk. Tk.
 Net income Under absorption costing (50,000)
Net loss under variable costing (1,10,000)
Difference 60,000
Changes in inventory(Ending- Beginning)
In Absorption costing(2,60,000-0) 2,60,000
In Direct costing(2,00,000-0) 2,00,000
60,000

Unit contribution = Selling price variable per Unit

Problem.6.
BBA-2011

CompuDesk,. Inc., makes an oak desk specially designed for personal computers. The
desk sells for Tk. 200. Data for last year's operations follow :
Units in beginning inventory 0
Units produced 10,000
Units sold 9,000
Units in ending inventory 1,000
Variable costs pr unit:
Taka
Direct materials 60
Direct Labour 30
Variable manufacturing overhead 10
Variable selling overhead 20
Total variable cost per unit 120
Fixed costs : Taka
Fixed manufacturing overhead 300,000
Fixed selling and administrative overhead 450,000
Total fixed costs 750,000
Required :
(i) Compute the unit product costs under variable costing and absorption costing.
(ii) Assume that the Co. uses variable costing. Prepare an income statement using
contribution format.
(iii) What is the Co's break-even point in terms of units sold and amount in Taka?

Solution
Req.(i) Unit product cost under absorption costing and variable costing
Particulars Absorption Variable
Costing Costing
Direct materials 60 60

Direct labor 30 30

Variable manufacturing overhead 10 10

Fixed manufacturing overhead (3,00,000 10,000 30 ----
units)
Unit product cost Tk. 130 Tk. 100

Computer Desk incorporation

Req.(i) Variable costing
Income Statement
Explanation Tk. Tk.
Sales (9000 200) 18,00,000
Less : Variable expenses
Beginning inventory -----
Add : Variable manufacturing. Costs (100 10,000) 10,00,00
Goods available for sale 0
Less : Ending inventory (1,000 100) 10,00,00
Cost of goods sold 0 9,00,000
1,00,00 8,00,000
Variable selling and administrative O.H (20 9,000) 0 1,80,000
Gross Margin 7,20,000
Less : Fixed expenses :
Manufacturing O. H
Selling and administrative O.H
7,50,000
Net operating Loss 3,00,000 (30,000)
4,50,000

Req.(iii)The Co's break-even point in terms of units sold and amount in Taka:
Selling price per unit Tk. 200
Variable cost per unit Tk. 120
Contribution margin per unit Tk. 80

Fixed exp ense 7,50,000

Break-even sales(in units)= Un int contribution = 9,375units
Tk.80
Break-even sales(in Tk)= BEP units x Selling Price unit
 (9,375 x 200)= Tk. 1,87,500

Problem.7. BBA-2012

XYZ Company manufactures and sells a single product. Cost data for the product are
given below :

Variable cost per unit: Taka

Direct materials 7
Direct labor 10
Variable manufacturing overhead 5
Variable selling and administrative 3
Fixed costs per month :
Fixed manufacturing overhead 315,000
Fixed selling and administrative 245,000
Total fixed cost per month 560,000
The product sells for Tk. 60 per unit. Production and sales data for July and August, the
first two months of operations, follows :
Units produced Units sold
July 17,500 15,000
August 17,500 20,000
The company's accounting department has prepared absorption costing income
statements for July and August as presented below :
July August
Sales 9,00,000 1,200,000
Less : Cost of goods sold :
Beginning Inventory 0 1,00,000
Add : Cost of goods manufactured 7,00,000 700,000
Cost of goods available for sales 7,00,000 8,00,000
Less : Ending inventory 1,00,000 0
Cost of goods sold 6,00,000 8,00,000
Gross Margin 3,00,000 4,00,000
Less : Selling and Administrative 2,90,000 3,05,000
expenses
Net operating income 10,000 95,000
Required :
(i) Determine the unit product cost under absorption costing and variable costing.
(ii) Prepare variable costing income statement for July and
August using the contribution approach.
(iii) Reconcile the variable costing and absorption costing net
operating income figures.
(iv) The BEP according to the company's present information is 16,000 units per month,
computed as follows :
Fixed cos t per month,Tk.5,60,000 16,000units

Unit contribution m arg in,Tk.35 perunit

If the BEP is 16,000 units per month how the company shows a profit of Tk. 10,000 in
the month of July when the sales is only 15,000 units? Explain

Solution
Req.(i) Unit product cost under absorption costing and variable costing
Particulars Absorption Variable
Costing Costing
Direct materials 7 7

Direct labor 10 10

Variable manufacturing overhead 5 5

Fixed manufacturing overhead ($315,000 17,500 18 ----
units)
Unit product cost Tk. 40 Tk. 22

Req.(ii) Variable costing

Income statement
Particulars July August
Sales...................................................... 9,00,000 1,200,000
Less variable expenses:
Variable cost of goods sold @ $22 per unit, 3,30,000 4,40,000
Variable selling and administrative expenses @ $3 per unit 45,000 60,000
Total variable Expenses.............................................................. 3,75,000 5,00,000
Contribution Margin ................................................................. 5,25,000 7,00,000

Less fixed expenses:

Fixed manufacturing overhead ................................................... 3,15,000 3,15,000
Fixed selling and administrative expenses 2,45,000 2,45,000
Total Fixed Expenses ................................................................. 5,60,000 5,60,000
Net operating income (loss).................................. (35,000) 1,40,000
Req.(iii)
Particulars July August
Variable costing net operating income (loss)... (35,000) 140,000
Add: Fixed manufacturing overhead cost deferred in inventory
under absorption costing (2,500 units x $18 per unit).................. 45,000
Deduct: Fixed manufacturing overhead cost released from
inventory under absorption costing (2,500 units x $18 per unit).. (45,000)
Absorption costing net operating income..................................... 10,000 95,000

As shown in the reconciliation in part (3) above, $45,000 of fixed manufacturing overhead cost
was deferred in inventory under absorption costing at the end of July, since $18 of fixed
manufacturing overhead cost "attached" to each of the 2,500 unsold units that went into
inventory at the end of that month. This $45,000 was*part of the $560,000 total fixed cost that
has to be covered each month in order for the company to break even. Since the $45,000 was
added to the inventory' ac- count, and thus did not appear on the income statement for July as
an expense, the company was able to report a small profit for the month even though it sold
less than the breakeven volume of sales. In short, only $515,000 of fixed cost ($560,000 -
$45,000) was expensed for July, rather than the full $560,005') as contemplated in the break-
even analysis. As stated in the text, this is a major problem with the use of absorption costing
internally for management purposes. The method does not harmonize well with the principles
of cost-volume-profit analysis, and can result in data that are unclear or confusing to
management.
Problem.8. BBA-2012
Telecom Ltd. has organized a new division to manufacture and sell cellular phone. The
division's monthly cost are shown below :
Manufacturing costs:
Variable costs per unit:
Direct material $48
Variable manufacturing overhead $2
Fixed manufacturing overhead costs (total) $360,000
Selling and administrative costs : .
Variable 12% of sales
Fixed (total) $470,000
The cellular phones sell for $150 each, During September, the first month of operations
the following activity was recorded:-
Units produced 12,000
Units sold 10,000
Required :
(i) Compute the unit product cost under :
(a) Absorption costing.
(b) Variable costing.
(ii) Prepare an absorption costing income statement for September.

Solution

Req.(i). a.b unit product cost

Explanation Absorption Variable
costing costing
Direct materials $48 $48
Variable manufacturing overhead 2 2
Fixed manufacturing O.H(3,60,00012,000 unites ) 30 ----
$80 $50
Telecom Ltd.
Income statement
Req.(ii) Absorption Costing
Particulars/Details Amount Amount
Sales (10000 150) 15,00,000
Less : Cost of goods sold
Beginning inventory ------
Add : Cost of goods manufacture( 12,000 80) 9,60,000
Goods available for bale 9,60,000
1,60,000
Less : Ending inventory (2000 80)
Gross Margin 8,00,000

Less: selling & administrative exp. 1,80,000 7,00,000

4,70,000
Variable (15,00,000 12%)
Fixed 6,50,000

Net operating income 50,000

-------------------------
 Chapter 04
C-V-P and Break-even Analysis
Highlight of the Chapter :
4.01 What is break-even chart? 2006 4.7 Briefly explain the different
techniques applied for CVP
4.02 Describe the uses of cost volume analysis. 2010
profit analysis.2007 4.8 Contribution margin is the excess of
4.03 Explain the significance of margin sales over fixed cost. Do you
of safety. 2007 agree? Explain. 2010
4.04 What is break-even analysis? State 4.0 Why do you analyze break-even
its importance.2007 9 point? 2010
4.05 Write the assumptions of CVP How does an increase in income tax
analysis.2007,2008,2009,2011 4.1 rate affect the break-even point?
4.06 What is meant by a products 0 2011
contribution margin (CM) ratio? Define Margin of Safety.2011
How is this ratio useful in Math Problem solutions
planning business operations? 4.1
Question. 4.01.What is break-even chart? 2006
Answer:
Question.4.02.Describe the uses of cost volume profit analysis.2007
Answer:
1. Forecast: CVP analysis assists in forecasting costs and profits on account of
change in volumein both production and sales.
2. Determination of relative profit: This analysis extends a helping hand in the
determination of profitability of each product.
3. Inter-firm comparison: By applying the CVP-analysis technique, interfirm
comparison of profitability among firms can be easily made to assess the prevailing
conditions in the market.
4. Studying the effect of change in volume: Any change in the volume of sales will
have a deterrent impact on other important associated factorscost and profit. CVP
analysis assists in learning such impacts.
5. Segregation of costs: As costs can be segregated into fixed and variable, CVP
analysis helps to a great extent in this task. As variable costs can affect to a great

extent with respect to contribution, contribution to sales and, in turn,

their impact on other related factors, such costs should be identified in order to
forecast better planning.

Question.4.03. Explain the significance of margin of safety. 2007

Answer:
In break-even analysis, margin of safety is the extent by which actual or projected sales
exceed the break-even sales. It may be calculated simply as the difference between actual
or projected sales and the break-even sales. However, it is best to calculate margin of safety
in the form of a ratio. Thus we have the following two formulas to calculate margin of
safety:
MOS = Budgeted Sales Break-even Sales
Budgeted Sales Break-even Sales
MOS =
Budgeted Sales

Margin of Safety can be expressed both in terms of sales units and currency units.

The margin of safety is a measure of risk. It represents the amount of drop in sales which
a company can tolerate. Higher the margin of safety, the more the company can withstand
fluctuations in sales. A drop in sales greater than margin of safety will cause net loss for
the period.

Companies use the margin of safety in management accounting to establish the strength
and potency of the business. The higher the margin of safety, the sturdier it deems
business. Companies attempt to place their selling price at such a point in order to cover
fixed and variable costs.

Question.4.04. What is break-even analysis? State its importance.2007

Answer:
Break-even analysis is a technique widely used by production management and
management accountants. It is based on categorising production costs between those which
are "variable" (costs that change when the production output changes) and those that are
"fixed" (costs not directly related to the volume of production).

Total variable and fixed costs are compared with sales revenue in order to determine the
level of sales volume, sales value or production at which the business makes neither a
profit nor a loss (the "break-even point").

The Break-Even Chart

In its simplest form, the break-even chart is a graphical representation of costs at various
levels of activity shown on the same chart as the variation of income (or sales, revenue)
with the same variation in activity. The point at which neither profit nor loss is made is
known as the "break-even point" and is represented on the chart below by the intersection
of the two lines:

In the diagram above, the line OA represents the variation of income at varying levels of
production activity ("output"). OB represents the total fixed costs in the business. As
output increases, variable costs are incurred, meaning that total costs (fixed + variable) also
increase. At low levels of output, Costs are greater than Income. At the point of
intersection, P, costs are exactly equal to income, and hence neither profit nor loss is made.

In economics and business, the break-even point (BEP) represents the point where
there is no net loss or gain because costs and revenue are equal.
Break-even analysis represents the minimum quantity a company needs to sell to
cover costs like rent, building expenses, utilities, or other aspects of running day-
to-day operations.

As long as a business can cover the minimum costs, they are "breaking even" and
can remain in business even though they are not turning a profit.

Break-even analysis lets companies compare their production or sales to the

minimum point they need to achieve in order to stay in business.

Break-even point is very important for decision making point of view because it
helps the management in determining that how much number of units must be
produced and sales to at least earn so much to cover the cost of production and
company at no profit no loss point.

Question.4.05.Write the assumptions of CVP analysis.2007,2008,2009,2011

Answer:
The CVP Analysis is based on the following assumptions:
1. Total Cost consists of two componentsFixed Cost and Variable Cost.
2. Variable Cost varies with the change in the output level whereas Fixed Cost
remains constant even at different levels of output.
3. Selling Price per unit remains constant at different volumes of sales.
4. Only one product is sold by the concern or if it sells multiple products, the sales
mix remains constant at different volumes of sales.
5. Volume of production is equal to the sales volume, that is, there would be no
opening or closing inventory during a period.
6. The efficiency and productivity level is constant at different levels of output.
7. There would be no change in the price of material, rate of wages, and so on, at all
the levels of production.

Question.4.06. What is meant by a products contribution margin (CM)

ratio? How is this ratio useful in planning business operations? 2009
Answer:
The contribution ratio is an important financial ratio within management accounting. It is
used to represent the contribution margin in percentage terms, and plays an important role
in cost volume profit analysis, which analyzes the relationship between cost, volume and
profit. The contribution margin ratio is used internally within businesses and helps
management make important financial and operational decisions in an effort to increase
profits.
1.Contribution Margin Ratio Components
You can think of the contribution margin ratio as the percentage of sales needed to pay for
fixed costs. Fixed costs do not fluctuate based on production, but remain constant every
month. Sales and variable costs are the two components that make up the contribution
margin ratio. Sales are the amount the company brings in from its business operations.
Variable costs fluctuate as changes in the business occur. They are directly related to the
production of a business. Common variable costs include utilities, shipping, raw materials,
hourly wages and inventory.
Calculation
The formula for the contribution margin ratio is CM Ratio = Contribution Margin / Sales.
Revenue minus variable expenses results in the contribution margin. For example, if the
revenue of a company is $600,000, and the variable costs are $360,000, then the
contribution margin is $240,000. Therefore, the contribution margin ratio is 40 percent
($240,000 / $600,000). You can also calculate the contribution margin per unit.
Importance
The contribution margin ratio is important because it shows the impact a change in sales
will have on the contribution margin. For example, if a company has a contribution margin
ratio of 60 percent, it means that the contribution margin increases $0.60 for every $1
increase in sales. Net income also increases by 60 percent if fixed costs remain the same.
Companies use the contribution margin to quickly calculate how much a future increase in
sales affects net income. Companies can analyze which of their products yields the highest
contribution margin ratio and focus on that product to increase sales.

The contribution margin is also useful for determining the impact on profits of changes in
sales. In particular, it can be used to estimate the decline in profits if sales drop, and so is
a standard tool in the formulation of budgets.

Formula: To calculate the contribution margin ratio, divide the contribution margin by
sales. The contribution margin is calculated by subtracting all variable costs from sales.
The formula is:

Sales-Variable expenses
Sales
Question.4.07. Briefly explain the different techniques applied for CVP
analysis. 2010
Answer:
Techniques of CVP Analysis
The CVP analysis deals with the price costs structure and the sales volume and identifies
the profit figure with one or other combination of these variables . the key elements in the
CVP analysis are selling price sales volume variable cost per unit total fixed costs and the
sales mix (if the firm is dealing with more than one product at a time ).there are two basic
techniques of CVP analysis these are :

1) The contribution margin analysis

2) Profit volume ratio

3) The break even analysis .

The contribution margin analysis:

Formula: To calculate the contribution margin ratio, divide the contribution margin by
sales. The contribution margin is calculated by subtracting all variable costs from sales.
The formula is:

Sales-Variable expenses
Sales

Profit volume ratio:

When the contribution from sales is expressed as a sales value percentage, then it is known
as profit/volume ratio (or P/V ratio). The relationship between the contribution & sales is
expressed by it. Sound financial health of a companys product is indicated by better P/V
ratio. The change in profit due to change in volume is reflected by this is reflected by this
ratio. If expressed on equal footing with sales, it will show how large the contribution will
appear. If size of sales is $ 100, then P/V ratio of 60% will mean that contribution is $ 60.

One important characteristic of P/V ratio is that at all levels of output it will remain
constant because at various levels, variable cost as a proportion of sales remains constant..
When P/V ratio is considered in conjunction with margin of safety, it becomes particularly
useful. P/V ratio can be referred by other terms like: (a) marginal income ratio, (b)
contribution to sales ratio, & (c) variable profit ratio.
P/V ratio may be expressed as:

P/V ratio= Contribution / Sales

= Sales Variable cost

Sales

= 1- Variable cost
Sales

Or, P/V ratio = Fixed Cost + Profit

Sales

It is also possible to express the ratio in terms of percentage by multiplying by 100. Thus
a relationship between the contribution & sales is established by the profit/volume ratio.
Hence it might be better to call it as a Contribution/Sales ratio (or C/S ratio), though the
term Profit/Volume ratio (P/V ratio) is now widely called.

The break even analysis:

Break-even analysis is a technique widely used by production management and

management accountants. It is based on categorising production costs between those which
are "variable" (costs that change when the production output changes) and those that are
"fixed" (costs not directly related to the volume of production).

Total variable and fixed costs are compared with sales revenue in order to determine the
level of sales volume, sales value or production at which the business makes neither a
profit nor a loss (the "break-even point").

The Break-Even Chart

In its simplest form, the break-even chart is a graphical representation of costs at various
levels of activity shown on the same chart as the variation of income (or sales, revenue)
with the same variation in activity. The point at which neither profit nor loss is made is
known as the "break-even point" and is represented on the chart below by the intersection
of the two lines:
In the diagram above, the line OA represents the variation of income at varying levels of
production activity ("output"). OB represents the total fixed costs in the business. As output
increases, variable costs are incurred, meaning that total costs (fixed + variable) also
increase. At low levels of output, Costs are greater than Income. At the point of
intersection, P, costs are exactly equal to income, and hence neither profit nor loss is made.

Question.4.09. Why do you analyze break-even point? 2010

Answer:
In its simplest form, the break-even chart is a graphical representation of costs at various
levels of activity shown on the same chart as the variation of income (or sales, revenue)
with the same variation in activity. The point at which neither profit nor loss is made is
known as the "break-even point" and is represented on the chart below by the intersection
of the two lines:
 In economics and business, the break-even point (BEP) represents the point where
there is no net loss or gain because costs and revenue are equal.
Break-even analysis represents the minimum quantity a company needs to sell to
cover costs like rent, building expenses, utilities, or other aspects of running day-
to-day operations.

As long as a business can cover the minimum costs, they are "breaking even" and
can remain in business even though they are not turning a profit.

Break-even analysis lets companies compare their production or sales to the

minimum point they need to achieve in order to stay in business.

Break even point is very important for decision making point of view because ithelps
the management in determining that how much number of units must be produced
and sales to at least earn so much to cover the cost of production and company at
no profit no loss point.

Question.4.10. How does an increase in income tax rate affect the break-
even point? 2011
Answer:
Although investors and business executives are concerned about the activity levels required
to break even and to achieve certain target operating incomes, net income is another key
financial measure, so it is important to understand how income taxes affect
the CVP analysis. The breakeven point is not affected by income taxes because at
breakeven point total revenues equals total costs so there is no operating income to be
taxed. However, income taxes do affect how much of the target operating income flows to
the bottom line, so CVP analysis commonly uses target net income (TNI) instead of
target operating income as part of the analysis. The relationship between the two is
illustrated as follows:

Target Operating Income (TOI) = Target Net Income (1Tax Rate)

Target Net Income Point = (Fixed Costs +TNI/ (1Tax Rate)) Contribution
Margin
Question. 4.11.Define Margin of Safety.2011
Answer:
Margin of safety (MOS) is the excess of budgeted or actual sales over the break even
volume of sales. It stats the amount by which sales can drop before losses begin to be
incurred. The higher the margin of safety, the lower the risk of not breaking even.

Formula of Margin of Safety:

The formula or equation for the calculation of margin of safety is as follows:

[Margin of Safety = Total budgeted or actual sales Break even sales]

The margin of safety can also be expressed in percentage form. This percentage is
obtained by dividing the margin of safety in dollar terms by total sales. Following
equation is used for this purpose.

[Margin of Safety = Margin of safety in dollars / Total budgeted or actual

sales]

Problem.1. BBA-2006
Operations of X Company for the year disclosed M/S ration of 30% and C/M ration of
50%. Fixed cost amounted to Tk. 20,000. Compute (i) Break-even sales ; (ii) the amount
of profit; and (iii) the contribution margin.

Solution

(i) Break -Even Sales =

= 20,000
50%
 = 40,000
(ii) The Amount of Profit =
= 20,000
40,000
= 0.5
(iii) Contribution Margin = BEP Sales x CM Ratio
= 40,000x50%
= 20,000

Problem.2. BBA-2006
The information relating to two levels of output of a product is given below : -

Output 12,000 units 16,000 units

Taka Taka
Materials 1,08,000 1,44,000
Wages 72,000 94,000
Overhead 60,000 72,000

The product is sold at Tk. 30 each.

Required:
(i) Calculate the fixed cost.
(ii) Determine the break-even sales volume.
(iii) Ascertain the sales units that will ensure an after tax profit of Tk. 12,000. Tax rate is
40%.

Problem.3. BBA-2007
In September 2007, X Ltd. Sells 4,000 units of product and earns 20% on sales. Cost of
direct materials is Tk. 2,60,000.Other manufacturing and non-manufacturing costs during
the month are Tk. 1,20,000 and Tk. 1,00,000 respectively. 50% of manufacturing and 40%
of non-manufacturing costs are variable.
Required :
(i) Calculate the break-even sales in units and volume.
(ii) Ascertain the amount of profit earned.
(iii) What would be the profit if sales are 3,600 units?
(iv) What would be the break even sales of the price is increased by 20%?
(v) What would be the selling price if break-even is to be achieved at 1,600 units?
 Solution
(i) BEP (Unit) =
= 120,000
150-90
= 2000
BEP(TK:) = BEP (unit)x selling Per Price Unit
= 2000x150
= 3,00,000
(ii) Profit = Sales - Fixed Cost - Variable Cost
= 6,00,000-1,20,000-3,60,000
= 60,000
(iv) BEP (Unit) =1,20,000
150-90
= 1333.33
BEP (TK.) = 1333.33x180
= 2,40,000
(v) Variable Cost (1600x90) =1,44,000
Fixed Cost = 1,20,000
Total Cost = 2,64,000
Selling Price = 2,64,000
1600 = 165

Working:-
Variable Cost:-
Direct Materials =2,60,000
Manufacturing (50%) = 60,000
Non- Manufacturing (40%) = 40,000
3,60,000

Fixed Cost:-
Manufacturing (50%) - 60,000
Non-manufacturing (60%) - 60,000
1,20,000
Cost Per Unit = 3,60,000
4000 = 90

Let,
Selling Price -
20% or 4000-4000 (4000x90)-1,20,000
 800 = 4000-360,0001,20,000
800 = 4000- (360,000+1,20,000)
32000 = 4,80,000
= 4,80,000
3200
=150
Aales=4000x150=6,00,000

Problem.4. BBA-2008
Rock Inc. distributed a high quality wooden bird house that sells for Tk. 20 per unit
Variable costs are Tk. 8 per unit and the fixed cost for the year is Tk.1,80,000.
Required:
(a) What is the product's CM ratio?
(b) Break-even point in sales in taka and in unit.
(c) Due to an Increase in demand, the. Company estimates that sales will increase by
Tk. 75,000, during the next year. How much will the operating income increase
(or net loss decrease) assuming that no change in fixed cost occurred.
(d) What is the amount of sales required to earn a profit of Tk. 24,000.
(e) Calculate the margin of safety at a profit of Tk. 30,000.

Solution

Contribution per unit

(a) CM ratio= 100
Selling price per unit
20 8
= 100 60%
20
(b) Break-even point(in Unites) = Fixed cos t 1,80,000
15,000 unites

Contribution per unit 12

Break-even point (in Tk.)= BEP unites x Selling Price per unit
= 15,000x 20= Tk.3,00,000
(c)Tk.75,000 increased sales x 0.60 CM ratio = Tk.45,000 increased contribution margin.
Since the fixed costs will not change, net operating income should also increase by
Tk.45,000. Contribution margin Tk. 2,40,000
(d) Total Fixed Cost Desired Pr ofit
Required Sales(value) C / M Ratio

1,80,000 24,000
.60 = 3,40,000
(e)

Problem.5. BBA-2009

Following is the information relating to XYZ Co:-

Taka
Selling price per unit 2.00
Variable expense per unit 0.80
Contribution Margin per unit 1.20
Fixed Expenses per year 60,000

Required :
(i) Calculate the annual break-even sales in taka and in units
(ii) How many units must be sold to earn a Tk. 9,000 target profit for the year?
(iii)XYZ Co. now has one full-time and one part-time salesperson working in the store.
It will cost an additional Tk. 8,000 per year to convert the part-time position to a
full-time position. This change would bring in an additional Tk. 20,000 in sales
each year. Should the company convert the position? Use the incremental approach.
(iv) Refer to the original data, actual operating results for the first year are as follows :
Taka
Sales 1,25,000
Less : Variable expenses 50,000
Contribution Margin 75,000
Less : Fixed expenses 60,000
Net operating income 15,000

(a) What is the Companys degree of operating leverage?

(b) If the sales increase by 20% in next year, what would be the expected percentage
increase in net operating income? Use the degree of operating leverage concept to compute
your answer.
Solution
Req-1 BEP in Units =
60,000
=
2.00 .80
= 50,000 Units
BEP in Taka =
=

= 1,00,000
CM =
=
= 60%

Req.(ii) To earn Tk. 9000 target profit

Sales = Variable expenses + fixed expenses + Profit
2.00 Q = 0.80Q + 60,000 + 9000
1.20Q= 69,000
Q= 57,500 Units

Req.(iii) Using Incremental Approach

Incremental sales 20,000
Contribution margin ratio .60
Incremental C/M 12,000
Less : Additional costs 8000
Incremental NOI 4000

Req.(iv)
(a) Degree of operating leverage -
=
=
(b) Expected increase in sales 20%
Degree it operating leverage 5
Expected increase in NOI 100%

Problem.6.
BBA-2010
The following data are obtained from the records of a factory :
Taka Taka
Sales, 8000 units @ Tk 25 each 2.00,000
Direct material consumed 80,000
Variable overhead Labour 25,000
Labour 35,000
 Fixed overhead 36,000 1,76,000
Net profits 24,000
Required :
(i) Calculate break-even-point in units and Taka.
(ii) The sales needed to earn a profit of Tk. 54,000
(iii) If selling price is reduced by 20%, calculate break-even point in Taka and units
(iv)To find out selling price if the break-even-point is 2000 units.

Solution
BEP in units =
=
= 4800 Units.
Working :
Variable cost per unit =
=
= 17.5
BEP in sales =
=
= 1,20,000

= 100
= 30%
Req. (ii) Sales needed to earn a profit of Tk. 54,000
Sales = Variable cost + Fixed cost + Profit
250 = 17.50 + 36,000 + 54,000
7.5Q = 90,000
Q = 12,000 Units
Req. (iii) If the selling price reduced by 20%, the selling price will be
2,00,000 (2,00,000 20%)
= 2,00,000 40,000
= 1,60,000
BEP Only in Units = = 6400 Units
Sales (6400 25) 1,60,000 25
(-) Variable expanses (6400 17.5) 1,12,000 17.5
Contribution Margin 48,000 7.5
(-) Fixed cost 36,000
NOI = 12,000
BEP in Units =
= = 4800 Units
Req.(iv) If the break even pint is 20,000 Units
The selling price = selling price per Unit cost
= 25 20,000 Units
= 50,000

Problem.7. BBA-2011
Minto Company manufactures and sells a single product. The company's sales and
expenses for last quarter follow :
Total Per unit
(Taka)
Sales 450,000 30
Less : Variable expense 180,000 12
Contribution margin 270,000 18
Less : Fixed expenses Net income 216,000
Net income 54,000
Required :
(a) What is the quarterly break-even point in units sold and in sales dollars?
(b) What is the total contribution margin at the break-even point?
(c) How many units would have to be sold each quarter to earn a target profit of Tk.
100,000? Use the unit contribution method. Verify your answer by preparing a
contribution income statement at the target level of sales.
(d) Compute the company's margin of safety in both dollar and percentage terms.
(e) What is the company's CM ratio? If sales increase by Tk. 40,000 per quarter and
there is no change in fixed expenses, by how much would you expect quarterly net
income to increase?

Problem.8.
BBA-2012
PQR Company distributes a high quality wooden birdhouse that sells for Tk. 20 per unit.
Variable costs are Tk. 8 per unit and fixed costs total Tk. 180,000 per year.
Required :
(i) What is the product's CM ratio?
(ii) Use the CM ratio to determine the break-even point in
sales dollars.
(iii) Prepare a CVP graph for the company from a zero level of
activity up to 25,000 units sold each year. Indicate the break-even point on your graph.
(iv) Due to an increase in demand, the company estimates that
sales will increase by Tk. 75,000 during the next year. By how much should net operating
income increase (or net loss decrease) assuming that fixed costs do not change?
(v) Assume that the operating results for last year were :
Total Per unit
Sales Tk. 400,000 Tk. 20
Less variable expenses 160,000 8
Contribution margin 240,000 Tk. 12
Less fixed expenses 180,000
Net operating income Tk. 60,000

(a) Compute the company's margin of safety in both dollar and percentage terms.
(b) Compute the degree of operating leverage at the current level of sales.
(c) The president expects sales to increase by 20% next year. By what percentage should
net operating income increase?
(vi) Assume that the company sold 18,000 units last year. The sales manager is
convinced that a 10% reduction in the selling price, combined with a Tk. 30,000 increase
in advertising, would cause annual sales in units to increase by one-third. Prepare two
contribution income statements, one showing the results of last year's operations and one
showing the results of operations if these changes are made. Would you recommend, that
the company do as the sales manager suggests?
Solution
1.
Sales price....................................................... 20.00 100%
Less variable expenses 8.00 40
Contribution margin.............................................. 12.00 60%

Fixed Expense 180000

2. Break-even point in total sales dollars = CM Ratio
3,00,000
0.60
3. Tk.75,000 increased sales x 0.60 CM ratio = Tk.45,000 increased contribution margin.
Since the fixed costs will not change, net operating income should also increase by
Tk.45,000. Contribution margin Tk. 240000
ContributionM arg in
2,40,000
4. a. Degree of operating leverage = Net Operating Income 60,000 4

b. 4 x 20% = 80% increase in net operating income.

5. Last Year: 18,000 units Proposed: 24,000 units*
Amount Per Unit Amount Per
Unit
 Sales......................................................... 3,60,000 20.00 4,32,000 18.00
Less variable expenses............................ 1,44,000 8.00 1,92,000 8.00
Contribution margin................................ 2,16,000 12.00 2,40,000 10.00
Less fixed expenses................................. 1,80,000 2,10,000
Net operating income.............................. 36,000 30,000

*18,000 units + 6,000 units = 24,000 units

**$20.00 x 0.9 - $18.00
No, the changes should not be made.
6. Expected total contribution margin:
18,000 units x 1.25 x $11.00 per unit*............................... 2,47,500
Present total contribution margin:
18,000 units x $12.00 per unit............................................. 2,16,000
Incremental contribution margin, and the amount by which
advertising can be increased with net operating income
remaining unchanged 31,500

*$20.00 - ($8.00 4- SI.00) = $11.00

-------------------

Chapter 06

Budget
Highlight of the Chapter :
6.01 What do you understand by master 6.07
budget? 2006 Briefly describe its
components.2011
6.02 State the difference between cash
budget and cash flow statement.
2007
6.03 What are the essentials of a sound
budgeting system? Explain. 2007
6.04 Mention some of the major
benefits of budgeting.2007
6.05 State the main features of flexible
budget. 2009
6.06 Why is budgeted performance
better than past performance as a
basis for judging actual results?
2010
Differentiate between a sales
forecast and sales budget. 2010
6.08 What is a flexible budget? How does
flexible budget differ from fixed
budget? 2008
6.09 How does Zero based budgeting
differ from traditional budgeting?
2011
6.10 Explain the functions of a budget
committee.2007

Question.6.01.What do you understand by master budget? 2006 Briefly

describe its components.2011
Answer: The master budget is a summary of company's plans that sets specific targets
for sales, production, distribution and financing activities. It generally culminates in a
cash budget, a budgeted income statement, and a budgeted balance sheet. In short, this
budget represents a comprehensive expression of management's plans for future and how
these plans are to be accomplished.
It usually consists of a number of separate but interdependent budgets. One budget may
be necessary before the other can be initiated. More one budget estimate effects other
budget estimates because the figures of one budget is usually used in the preparation of
other budget. This is the reason why these budgets are called interdependent budgets.
Following are the major components or parts of master budget.
1. Sales Budget
2. Production Budget
3. Material Budgeting | Direct Materials Budget
4. Labor Budget
5. Manufacturing Overhead Budget
6. Ending Finished Goods Inventory Budget
7. Cash Budget
8. Selling and Administrative Expense Budget
9. Purchases Budget for a Merchandising Firm
10. Budgeted Income Statement
11. Budgeted Balance Sheet
 THE MASTER BUDGET INTERRELATIONSHIP

Sales Budget

Ending

Inventory Production Budget

Budget

Direct Materials
Direct Labor Budget Overhead Budget
Budget

Cash Budget

Budgeted
Budgeted Balance Selling an d
Income
Sheet Admn. Budget
Statement

Question. 6.02.State the difference between cash budget and cash flow
statement. 2007
Answer:
The following are the important points of distinction between a cash budget & a cash
flow statement:
1. A cash budget is futuristic in approach. It is prepared on the basis of future plan of
action & in advance. On the other hand, a cash flow statement is prepared on the
basis of past data.
2. A cash budget relates with the objectives that are to be achieved & is a plan for
inflows of cash & outflows of cash. Whereas, cash flow statement does a post
mortem analysis of actual inflows of cash & outflows of cash.
3. The cash budget is usually prepared for a short period (may be a week, fortnight,
month or quarter). For a long period also (say, a year), a cash budget may be
prepared but division into short sub-budget periods is made (say, a month or
quarter). Depending upon the nature of the business of the firm & how accurately
the estimates can be made; the time span which will be covered by the cash budget
will vary from one firm to another firm. On the other hand, a relatively longer
period, usually an accounting year, is covered by a cash flow statement & it is not
divided into sub-periods.
 4. A cash budget is a tool used for budgeting & controlling of cash. While, cash flow
statement, for the past accounting year, analyses the working of the concern.
5. A cash budget, for the purpose of judicious forecasting, requires only the previous
data. While, preparation of cash flow statement is made from the accounting data
at the beginning of an accounting year & at the end of an accounting year.
6. Usually, the purpose of the management only is served by a cash budget whereas
the purposes of the management along with the external parties are served by the
cash flow statement.

Question.6.03. What are the essentials of a sound budgeting system?

Explain. 2007
Answer:
Elements of a Sound Budget System
A transparent budget reduces the scope of leakages in public expenditure by empowering
the elected representatives and citizens to scrutinize government actions by subjecting the
factual basis on which allocations are made. This openness ensures that the government is
vigilant that the data supporting their decisions is timely, accurate and verifiable. Improved
transparency in the budget process can disclose the basis on which priorities are formulated
and clarify the roles and responsibilities of individuals in the executive who take these
decisions. Hence, a more open budgetary process both confers legitimacy on the budget
process and the validity of executive decision holding the latter accountable for the budget
policies made.
Effective Legal Framework:
The objective of the legal framework is to ensure that the right checks and balances are in
place and the roles and responsibilities of the legislature and executive branch of the
government are clearly defined. The legal system also ensures that institutions such as the
Auditor General, PAC, etc are kept independent and their powers well defined to establish
accountability.

Comprehensive Budget Presentation:

The budget document should capture all the information of the financial transactions of the
government, including the revenues collected, debts repaid in the financial year and the
ones to be repaid, old and new liabilities to be incurred, etc. This will present the true
financial status of the government thus enabling the policy makers to identify the areas that
need attention.
The current estimation and accounting do not cover total transactions of the government,
due to off budget items and single entry system. Further, the moneys parked with the
executive agencies/ government bodies are escaping the monitoring and oversight of the
Auditor General and Parliament/Legislature. Presently, the budget is prepared for one year
in most of the countries. Due to fear of funds lapsing many departments resort to
rush of expenditure in the month of March giving raise to unnecessary and unproductive
expenditures. Such a last minute rush happens due to many factors poor cash
management, lack of incentive to economize / save due to practice of basing future
allocations on previous years actual expenditure and so on. Also one year is too short a
span for many projects to be implemented. There is also a view that independent of the
frequency (one year or more) of budget presentation, the actual exercise should involve a
multi-year perspective. That is, there must be a medium term expenditure framework,
which itself should be based on fairly long term goals/strategy.

Accurate and Timely Information and Projections

Accurate information regarding the requirements of the individual line departments is
needed for the preparation of a quality budget to achieve the desired results. It is a prudent
practice to assess utilization of funds allocated to the Department in the preceding year
with the projection for the budget year.

Media and Dissemination Issues

The fundamental objective of the applied budget work is to bring closer the budget and
budgetary process to the common population for improved transparency and accountability
of Governance. The intention is not just to make an analysis but to enable a larger audience
participate and contribute to the debate. Therefore, it is imperative to identify the target
audience and prepare the report in a reader-friendly manner that will cater to the
requirements of all. The media is an important component in the applied budget work since
it has the capacity to reach large groups of target audience and hence, the budget groups
involved in the applied budget work has to ensure that the media receives accurate
information at the right time. The choice of the mode of media whether print or audio-
visual medium has to be identified depending upon the target audience. In areas where
literacy is low, the focus shall be on the use of radio to get across the analyses. Often the
strategy calls for a combination of different types of media.

Stakeholders
Applied budget work, therefore has a vital role in the budget process helping in
demystifying the complex budget statements in comprehensive, user-friendly analysis
document to be used by a larger and wider group beyond the strategists, for appreciating
and involving in better budget process. The stake holders of the applied budget work are:
1. The government - the President/Prime Minister and his Cabinet who formulate the
budget and other economic policies and the executive branch of the government;
2. Parliament/Assembly which gives approval to the budget proposals submitted by
the government and the legislative committees that subject the proposals detailed
scrutiny before they are voted by the legislature;
3. Civil society, especially organized groups, by creating awareness as well as
 interests in budgets so as to encourage them to engage decision-makers on
budgeting;
4. The multi-lateral International Financial Institutions and other donors and creditors
who, as part of their development assistance, tend to play a very important role in
determining the type of economic policies we put in place, and

5. Media that plays an important role in the dissemination of the analysis.

Question.6.04. Mention some of the major benefits of budgeting.2007

Answer:
The major benefits of budgeting system are as follows:

(1)The objectives of the organization as a whole & the results which should be achieved
by each department within this overall framework are defined by the budgetary control.

(2) When there is a difference between actual results & budget, then the extent by which
actual results have exceeded or fallen short of the budget is revealed by the budgetary
control.

(3) The variances or other measures of performance along with the reasons of difference
between the actual results with those from budgeted is indicated by the budgetary control.
Also, the magnitude of differences is established by it.

(4) As the budgetary control reports on actual performance along with variances & other
measures of performance; for correcting adverse trends, a basis for guiding executive
action is provided by it.
(5) A basis by which future budget can be prepared or the current budget can be revised
is provided by the budgetary control.

(6) A system whereby in the most efficient way possible the resources of the organization
are being used is provided by the budgetary control.

(7) The budgetary control indicates how efficiently the various departments of the
organization are being coordinated.

(8) Situations where activities & responsibilities are decentralized, some centralizing
control is provided by the budgetary control.

(9) The budgetary control provides means by which the activities of the organization can
be stabilized, where the organizations activities are subject to seasonal variations.

(10) By regularly examining the departmental results, a basis for internal audit is
established by the budgetary control.

(11) The standard costs which are to be used are provided by it.

(12) For the purpose of paying a bonus to employees, a basis by which the productive
efficiency can be measured is provided by the budgetary control.

Question.6.05. State the main features of flexible budget. 2009

Answer: Estimation of future levels of activity with any accuracy is extremely difficult
in some businesses because of presence of external incontrollable influences. For example,
a business which provides luxury goods & services may be very sensitive to changes
occurred in the economic climate. Weather may affect some business & prediction of
weather conditions is difficult. In such cases, if comparison is done between actual results
& budgeted figures, the result may be extremely misleading. It would not be clear without
making detailed investigation, for example, whether either because of overspending or
merely because the business activity level was above the budgeted level or both, there had
arisen a large adverse cost variance. As a result, it becomes really difficult to control &
appraisal of performance.

With the preparation of a flexible budget the problem can be solved. Thus, a flexible
budget can be defined as a range of budgets which covers a number of different expected
levels of activity. It becomes possible to draw up an appropriate flexible budget from the
range once actual production is known, also the expenses can be set out which would be
appropriate to the achieved level of activity.
 The main requirement of a flexible budget is that the analysis of expenses should be
done into three distinct categories:
a. Fixed expenses, i.e. irrespective of the levels of activity, these expenses would be
remaining the same.
b. Variable expenses, i.e. with the change in levels of activity, these expenses
would change in proportion to that level.
c. Semi-variable expenses, i.e. analysis of these expenses into fixed & variable
elements are needed to be done.
As already stated, the advantage of flexing a budget is that, for the purposes of control
& appraisal of performance, the comparison can be done of the actual performance with
the flexed budget.
Question.6.07. Differentiate between a sales forecast and sales budget. 2010
Answer:
SalesBudget
The sales forecast provides the framework for the detailed planning presented in the master
budget of an organization. Based on planned strategies and its best business judgment,
management converts a sales forecast into a sales plan through the commitment of
resources and the establishment of control mechanisms. The sales budget provides an
evaluative tool by presenting monthly indexes of volume of units and returns as hard targets
for the sales team. Deviations from these indexes indicate to small business owners and
managers where they need to adjust their efforts to take advantage of hot products or to
remedy difficult situations. Management determines its sales policies and strategies within
its ability to respond to customer needs, technological changes, and the financial
prerequisites of marketing. The sales budget projects that portion of potential sales the sales
team believes it can achieve. The forecast, then, sets the parameters on the top side while
the production capacity and sales acumen of the team sets the
floor. Although sales forecasts may accurately project
significant changes in market conditions, a company needs to thoroughly examine its own
resources to determine its ability to respond to these changes. A huge drop in demand may
decrease the strain on the production process to where a company regains cost efficiencies,
or a large increase in demand might be required by a company that needs cash for other
projects. The sales budget, therefore, is predicated on a company's ability to meet expected
demand at or near its maximum profit potential.
SalesForecasting
Sales forecasting on the other hand is the prediction of the future sales of a particular
product over a specific period of time based on past performance of the product, inflation
rates, unemployment, consumer spending patterns, market trends, and interest rates. In the
preparation of a comprehensive marketing plan, sales forecasts help the marketer or
manager
Question.6.08. What is a flexible budget? How does flexible budget
differ from fixed budget? 2008
Answer:
A flexible budget is a budget that adjusts or flexes for changes in the volume of activity.
The flexible budget is more sophisticated and useful than a static budget, which remains at
one amount regardless of the volume of activity A flexible budget is a budget which is
designed to change in accordance with the LEVEL OF ACTIVITY attained.

It is also known as Variable budget as the budget recognizes the difference in cost behavior
namely fixed and variable costs in relations to fluctuations in output or turnover. The
budget is designed to change appropriately with such fluctuation.

Fixed Budget Flexible Budget

Fixed budget is inflexible and does not
Flexible budget can be suitably recasted quickly
change with the actual volume of output
according to level of activity attained.
achieved.
Fixed budget assumes that conditions Flexible budget is design to change according
would remain static. to changed conditions.
Costs are not classified according to their
Coasts are classified according to the nature of
variability i.e. fixed, variable and semi
their variability.
variable.
Comparison of actual and budgeted
Comparisons are realistic as the changed plan
performance cannot be done correctly if
figures are placed against actual ones.
the volume of output differs.
Flexible budget clearly shows the impact of
It is difficult o forecast accurately the
various expenses on the operational aspects of
results in it.
the business.
Only one budget at a fixed level of activity
is prepared due to an unrealistic Series of budgets are prepared at different level
expectation on the part of the management of activities.

Fixed budget has a limited application Flexible budget has more application and can
and is inefficient as a tool for cost control. be used as a tool for cost control.
If the budgeted and actual activity levels Flexible budget helps in fixation of prices and
vary, the correct ascertainment os coasts submission of tenders due to correct
 Fixed Budget Flexible Budget
and fixation of prices becomes difficult. ascertainment of coasts.
Question.6.09. How does Zero based budgeting differ from traditional
budgeting? 2011
Answer:
According to the Official Terminology of CIMA, London, Zero-based Budgeting is
defined as 'a method of Budgeting whereby all activities are re-evaluated each time a
Budget is formulated. Each functional Budget starts with the assumption that the function
does not exist and is at zero cost. Increments of cost are compared with increments of
benefits culminating in the planned maximum benefit given the Budgeted cost.'

Zero-based Budgeting (ZBB) is an alternative budgeting system that starts with zero base.
It is a newly invented Budget technique where executives are required to start at Zero
Budget level every year and justify all the costs of the existing function in comparison with
all present and future functions. It attempts to review and defend all functions and costs
every year.

Difference between ZBB & Traditional Budgeting:

The distinction between the traditional budgeting & zero-base budgeting are the
following:
a. In traditional budgeting, emphasis is given on previous level of expenditure,
whereas, in ZBB, every time a budget is prepared, new economic appraisal is made.
b. Traditional budgeting is a function which is accounting oriented, whereas, ZBB is
a function which is project or decision oriented.
c. For the preparation of a traditional project, rejustification of the existing
programme is not needed, whereas, for the preparation of a zero-base budgeting,
the justification of existing & new projects is needed to be done in the light of
benefits & costs.
d. In the case of traditional budget, the justification regarding why, for a particular
decision unit, a particular amount of expenditure is decided upon, is justified by the
top management, whereas, in case of ZBB, the amount of expenditure is justified
by the manager of the decision unit & not the top management.
 e. In the case of traditional budgeting, the amount to added with or deleted from the
figures of the previous budget figures is only taken into account, whereas, in case
of ZBB, existing level of expenditure is appraised & the justification of future
proposal for expenditure is done from different angles.
f. Preparation of a traditional budget is a simple job which is done year after year
monotonously, whereas, preparation of a zero-base budgeting requires logical
approach & many complex steps are involved for the establishment of logic behind
a proposal.

Question.6.10.Explain the functions of a budget committee.2007

Answer:
Budget Committee:
In a large concern a frequent establishment of budget committee is needed. It is a useful
device which coordinates & reviews the budget programme. The heads of the various
departments or other high level executives should constitute the budget committee. It is
generally advisory in nature.

The main functions of the budget committee are:

1. formulation of guidelines so that the budgets can be prepared;

2. receiving & reviewing of all the budgets;

3. suggesting of amendments & revisions;
4. approving of original, revised or amended budgets;
5. recommendation of actions which are needed to taken for the improvement of the
effectiveness;
6. coordinating all the activities which are related to budgeting.

Problem.1. BBA-2007
X Ltd. Has the following forecast date available :
September October
Taka Taka
Cash Sales 80,000 1,20,000
Credit Sales 1,45,000 1,90,000
Cash Purchases 40,000 40,000
 Credit Purchase 2,00,000 1,60,000
Purchase discount 10,000 5,000
Accounts payable beginning 20,000 25,000
Accounts payable ending 25,000 20,000
Cash operating expenses 55,000 20,000
Net sales on credit are collected 50% in the month of sale, 40% in the following month
and 10% in the second following month. Such sales in July and August were Tk.
2,00,000 and Tk. 2,40,000 respectively. The estimated cash balance in September is Tk.
25,000.
Prepare a Cash budget for September and October.

Solution
Working.1.Calculation of collection from credit sales:
Months Total sales %of collection September October
July 2,00,000 50%,40%,10 20,000 ----
%
August 2,40,000 50%,40%,10 96,000 24,000
%
September 1,45,000 50%,40%,10 72,500 58,000
%
October 1,90,000 50%,40%,10 ---- 95,000
%
1,88,500 1,77,000

Cash Budget
Explanation September October
Balance b/d 25,000 1,98,500
Add, Collection:
Cash sales 80,000 1,20,000
Collection from credit sales 1,88,500 1,77,000
Total Collection (a) 2,93,500 4,95,500
Payments:
Cash purchase 40,000 40,000
Cash operating expense 55,000 20,000
Paid to accounts payable (25,000-20,000) ---- 5,000
Total payment(b) 95,000 65,000
Balance c/d(a-b) 1,98,500 4,30,500
 Problem.2. BBA-2007
Star Ltd. Manufactures two products A and B. An estimate of the number of units to
be sold in the 1st seven months of 2007 is given below :
Product January February March April May June July
A 1,600 2,000 2,400 3,200 3,600 3,600 3,200
B 4,400 3,000 3,600 2,800 2,400 2,400 2,800
It is anticipated that :
(i) There will be no work-in-process at the end of any month.
(ii) Finished Units equal to 30% of anticipated sales for the next month will be in
stock at the end of each month including December, 2006.
You are required to prepare a Production Budget for the six month period from January
to July 2007.

Solution

Production Budget(in unites)

Product -A

Explanation January February March April May June Total

Sales 1,600 2000 2,400 3,200 3,600 3,600 16,400

Add: Ending 48 600 720 960 1080 1080 960 5,400

(30% of next 0
month Sales)
2,200 2,720 3,360 4,280 4,680 4,560 21,800
Less: opening
480 600 720 960 1080 1080 4920
Stock

1720 2120 2640 3320 3,600 3,480 16,880

Production Budget(in unites)

Product-B

Particulars January Feb March April May June Total

2,60 2,40 2,40
Sales 4400 3000 3600 18,400
0 0 0
Add: Ending 900 1080 780 720 720 840 5040
unites( 30% of
next month sales) 1,320 3,32 3,12 3,24
5,300 4080 4,380 23,440
0 0 0
Less: Opening
Stock 1320 900 1080 780 720 720 5,520
3,18 2,54 2,40 2,52
3980 3,300 17,920
0 0 0 0

Problem.3. BBA-2008
Tanis kids fashion is ready to begin its third quarter, in which Peak sales occur. The
company has their. highest cash requirement in this quarter and they has got an option of
borrowing from bank in the multiple of Tk. 10,000 with and interest of 10%. They generally
borrow at the beginning of the month and repay at the end. The following data have been
assembled to find their cash need for the upcoming months:
* On July 1 the company have a cash balance of Tk. 44,500.
* Actual sales for the last two months and budgeted sales (all sales are on account) are as
follows :

Taka.
 May (actual), 2,50,000
June (actual), 3,00,000
July (budgeted), 4,00,000
August (budgeted), 6,00,000
September (budgeted), 3,20,000
Past experience- shows that the sales are collected in the following pattern:
25% of sales are collected in the month of sales
75% of sales are collected in the month following sales
* B ud geted mer ch and ise pu rchase and o th er exp en ditu re are g iv en b elow
:
July August September
Taka Taka Taka
Merchandise purchases 2,40,00 3,50,000 1,75,000
0
Salaries and Wages 45,000 50,000 40,000

Advertising 1,30,000 1,45,000 80,000

Rent payments 9,000 9,000 9,000

Depreciation 10,000 10,000 10,000

* Merchandise purchases are paid in full in the month following purchase.

Accounts payable for the merchandise purchases on June 30 was Tk. 180,000.
* Equipment costing Tk. 10,000 will be purchased in July for cash.
* The company needs a minimum cash balance of Tk. 20,000 to start each month.
R eq u ired :
(a) Prepare a cash collection schedule for the month of July, August and
September and for the quarter in total.
(b) Prepare a cash budget from July to September.

Req.(a) Schedule of cash collection:

Months
Solution Total % of July August September Quarter
sales collection
May 2,50,000 25%, 75% ---- ----- ---- ------
June 3,00,000 25%, 75% 2,25,000 ------ ------ 2,25,000
July 4,00,000 25%, 75% 1,00,000 3,00,000 ------ 4,00,0000
August 6,00,000 25%, 75% ------ 1,50,000 4,50,000 6,00,000
 September 3,20,000 25%, 75% ------- ------ 80,000 80,000
3,25,000 4,50,000 5,30,000 13,05,000

Req.(b) Tanis kids

Cash Budget
Explanation July August September Quarter
Balance b/d 44,500 20,000 26,000 44,500
Add. receipts:
Collection from customers 3,25,00 4,50,00 5,30,000 13,05,000
Total received (a) 0 0
Disbursements/ Payments: 3,69,50 4,70,00 5,56,000 13,49,500
Merchandise purchase 0 0
Salaries & Wages
Advertising 1,80,00 2,40,00 3,50,000 7,70,000
Rent payments 0 0 40,000 1,35,000
Equipment Purchase 45,000 50,000 80,000 3,55,000
Total Payments(b) 1,30,00 1,45,00 9,000 27,000
Excess/deficiency 0 0 ----- 10,000
Financing: 9,000 9,000
Borrowings 10,000 -----
Repayments 3,74,00 4,44,00 4,79,000 12,97,000
Interest 0 0
Total financing (4,500) 26,000 77,000 52,500

Cash balance c/d 24,500 ----- ----- 24,500

----- ----- (24,500) (24,500)
----- ----- (612.5) (612.5)
24,500 ----- (25,112.5) (612.5)
20,000 26,000 5,187.5 51,887.5

Problem.4. BBA-2009

Prepare a flexible budget from the following data made available in respect of a half-
yearly period and forecast the working result at 70%, 85% and 100% of capacity when
sales are Tk. 50 lacs, Tk. 60 lacs and Tk. 85 lacs respectively, while fixed expenses remain
constant, semi-variable expenses are constant between 55% and 75% of capacity increasing
by 10% between 75% and 90% of capacity and by 20% between 90% and 100%; of
capacity. The expenses at 60% capacity are as follows :

(Taka in lacs)
Semi-variable :
Maintenance and repair 1.25
Indirect labour 5.00
Sales expenses 1.50
Sundry overheads 1.52
Variable :
Materials 12.00
Labour 13.00
Other expenses 2.00
Fixed expenses :
Wages and salaries 4.20
Rent and taxes 2.80
Depreciation 3.50
Sundry overheads 4.50
51.00
Solution
Flexible Budget
Explanation Level of Activity
60% 70% 85% 100%
Semi variable :
Maintenance and repair 1.25 1.25 1.375 1.50
Indirect Labour 5.00 5.00 5.50 6.00
Sales expenses 1.50 1.50 1.65 1.80
Sundry Overheads 1.52 1.52 1.672 1.824
Total (A) 9.27 9.27 10.197 11 . 124
Variable :
Materials 12.00 14 17 20
Labour 13.00 15.17 18.42 21.67
Other expenses 2.00 2.33 2.83 3.33
Total (B) 27.00 31.50 38.25 45
Fixed expenses :
Wages & salaries 4.20 4.20 4.20 4.20
Rent and taxes 2.80 2.80 2.80 2.80
Depreciation 3.50 3.50 3.50 3.50
Sundry Overhead 4.50 4.50 4.50 4.50
 Total (c) 15.00 15.00 15.00 15.00
GrantTotal (A + B + C) 51.27 55.77 63.447 71.124

Problem.5. BBA-2010

Minder Company is a wholesale distributor of premium chocolates. The company's

balance sheet as of April 30 is below :
Minden Company
Balance Sheet
April 30

Assets

Taka
Cash 9,000
Accounts receivable 54,000
Inventory 30,000
Buildings and equipment, net of depreciation 207,000
Total assets 300,000
Liabilities and Stockholders' Equity
Accounts payable 63,000
Notes payable 14,500
Capital stock, no par 180,000
Retained earnings 42,500
Total liabilities and stockholders' equity 3,00,000
The company is in the process of preparing budget data for May. A number of
budget items have already been prepared, as stated below :
(a) Sales are budgeted at Tk. 200,000 for May. Of these sales, Tk. 60,000 will be for cash;
the remainder will be- credit sales. One-half of a month's credit sales are collected in
the month the sales are made, and the remainder is collected in the following month.
All of the April 30 accounts receivable will be collected in May.
(b) Purchases of inventory are expected to total Tk. 120,000 during may. These purchases
will all be on account. Forty percent of all purchases are paid for in the month of
purchase; the remainder are paid in the following month. All of the April 30 accounts
payable to suppliers will be paid during May.
c) The May 31 inventory balance is budgeted at Tk. 40.000.
d) Operating expenses for May are budgeted at Tk. 72.000, exclusive of depreciation.
These expenses will be paid in cash. Depreciation is budgeted at Tk. 2,000 for the
month.
(e) The note payable on the April 30 balance .sheet will be paid during May. with Tk. 100
in interest. (All of the interest relates to May)
(f) New refrigerating equipment costing Tk. 6.500 will be purchased for cash during May.
(g) During May. the company will borrow Tk. 20.000 from its bank by giving a new note
payable to the bank for that amount. The new note will be due in one year.
Required :
(i) Prepare a cash budget for May. Support your budget with a schedule of expected cash
collections from sales and a schedule of expected cash disbursements for merchandise
purchases.
(ii) Prepare a budgeted income statement for May. Use the absorption costing income
statement.
(iii) Prepare a budgeted balance sheet as of May 31

Solution

Req.(i) Schedule of cash receipts for the month of May

May
Cash sales 60,00
Account receivables (May sales) (2,00,000 50%) 60,000 70,000
Account receivables 54,000
Total Collections 1,84,000

Schedule of expected cash disbursements for the merchandise purchases

Accounts payable 63,000
Account payable (May purchases) (1,20,000 40%) 48,000
Total Disbursement 1,11,000

Cash Budget
For the month of May
Explanations/Details Tk. Tk.
Balance b/d 9,000
Collection from A/C Receive 1,84,000
 (a) Total cash collection- 1,93,000
Disbursement/Payment :
Payment from A/C Payable 1,11,000
Purchase of Equipment 6,500
Operating expenses 72,000 1,89,500
(b) Total disbursement 3,500
Excess or Deficiency (a-b) 3,500
Borrowing 20,000
Interest 100 14,600 5,400
Payment 14,500 8,900

Req.(ii) Budgeted Income Statement For the month of May

Particulars Tk. Tk.

Sales 2,00,000
Cost of goods sold :
Begging inventory 30,000
Add : Purchases 1,20,000
Goods Available for sale 1,50,000
Less: Finding inventory 40,000 1,10,000
Gross Margin 90,000
Operating expenses (72009 + 2000) 74,000
Interest expenses 100 74,100
Net income 15,900

Req.(iii) Budgeted balance Sheet

For the month of May
Particulars Amount Amount
Assets :
Cash 8900
Account Receivable (1,40,000 50%) 70,000
Inventory 40,000
Building and equipment (2,07,000 + 6500 2000) 2,11,500
Total Assets 3,30,400
Liablilies and Stoekholders Equity
Account payable (1,20,000 60%) 72,000
Notes Payable (Loon) 20,000
Capital Stock 1,80,000
Retained earnings (42500 + 15900) 58,400
Total Liabilities 3,30,400
 Problem.6. BBA-2011
Mr. X, President of XYZ Co. Ltd. has just approached the Co's bank with a request for a
Tk. 30,000, 90 day loan. The loan officer has asked for a cash budget to help determine
whether the loan should be made. The following data are available for the month April
June, during which the loan will be used :
(a) On April 01, the start of the loan period, the cash balance will be Tk. 26,000. Accounts
Receivable on April 01 will total Tk. 151,500, of which Tk. 141,000 will, be collected
during April and Tk. 7,200 will be collected during May. The remainder will be
uncollectible.
(b) Past experiences shows that 20% of a month's sales are collected in the month of
sale, 75% in the following sale, and 4% in the second month following sale. The other
1% represts bad.
Budgeted sales and expenses for the period follow :
April May June
Taka Taka Taka
Sales 200,000 300,000 250,000
Merchandise purchase 120,000 180,000 150,000
Payroll 9,000 9,000 8,000
Lease payments 15,000 15,000 15,000
Advertising 70,000 80,000 60,000
Equipment purchase 8,000 - -
Depreciation 10,000 10,000 10,000
(c) Merchandise purchases are paid in full during the month following purchase.
Accounts payable for merchandise purchase on March 31, which will be paid during
April, total Tk. 108,000.
(d) In preparing the cash budget, assume that the Tk. 30,000 loan will be made in April
and repaid in June. Interest on the loan will total Tk. 1,200.
Required :
(i) Prepare a schedule of expected cash collections for April, May and June and the
three months in total.
(ii) Prepare a cash budget, by month and in total for the three-month period.
Problem.4. BBA-2012
You have been asked to prepare a December cash budget for Hassan Company, a
distributor of exercise equipment. The following information is available about the
company's operations:
(a)The cash balance on December 1 is $40,000.
(b)Actual sales for October and November and expected sales for December are as
follows :
October November December
Cash sales $65,000 $70,000 $83,000
Sales on discount $400,000 $525,000 $600,000
Sales on account are collected over a three month period as follows :
20% collected in the month of sale, 60% collected in the month following sale and 18%
collected in the second month following sale. The remaining 2% is uncollectible.
(c)Purchases of inventory will total $280,000 for December. 30% of a month's inventory
purchases are paid during the month of purchase. The accounts payable remaining from
November's inventory purchases total $161,000, all of which will be paid in December.
(d)Selling and administrative expenses are budgeted at $430,000 for December. Of this
amount $ 50,000 is for depreciation.
(e)Marketing costing $76,000 will be purchased for cash during December and dividends
totaling $9,000 will be paid during the month.
The company maintains a minimum cash balance of $20,000.
Required:
(i)Prepare a schedule of expected cash collection for December.
(ii) Prepare a schedule of expected cash disbursement for purchase for December.
(iii) Prepare a cash budget for December.

Solution
(i)Schedule of expected cash collection

December cash sales $83,000

Collections on account:
October sales: $400,00018% 72,000
November sales: $525,00060% 3,15,000
December sales: $600,00020% 1,20,000
Total cash collections $5,90,000

(ii) Schedule of expected cash disbursement

 November Purchases(accounts payable) $1,61,000
December Purchase: $2,80,00030% 84,000
Total cash payment $2,45,000

Cash Budget
For the Month of December

Cash balance, beginning $40,000

Add. Cash receipts: Collection from customers 5,90,000
Total cash available before current financing 6,30,000
Less, Disbursements:
Payment to suppliers for inventory $2,45,000
Selling & administrative exp.(4,30,000-50,000) 3,80,000
New web server 76,000
Dividend paid 9,000
Total disbursements 7,10,000
Excess(deficiency)of cash available over
disbursements (80,000)
Financing:
Borrowing 1,00,000
Repayment -------
Interest -----
Total financing 1,00,000
Cash balance, ending $20,000
 Chapter 07

Highlight of the Chapter :
7.01 State the main objectives of
budgetary control system.
2007,2008,2009
7.02 What do you mean by budget and 7.05
budgetary control.2007,2009
7.03 Distinguish between forecasting and
budgeting. 2008
Budgetary Control
7.04 Define budgetary control.
Distinguish between budget and
budgetary control. 2011
State some pre-requisites for
establishing a budgetary control
system. 2011
7.06 Math Problem Solutions

Question.7.01.State the main objectives of budgetary control system.

2007,2008,2009

Answer:

The objectives of budgetary control are:

(1)Compel for planning: As management is forced to look ahead, responsible for

setting of targets, anticipating of problems & giving purpose & direction to the
organization, this feature is the most important feature of budgetary control.

(2) Communication of ideas & plans: Communication of ideas & plans to

everyone is effected by budgetary control. In order to make sure that each person
is aware of what he is supposed to do, it is necessary that there is a formal system.

(3) Coordinating the activities: The budgetary control coordinates the activities of
different departments or sub-units of the organization. The coordination concept
implies, for example, on production requirements, the purchasing department
should base its budget & similarly, on sales expectations, the production budget
should in turn be4 based.

(4) Establishing a system of control: A system of control can be established by

 having a plan against which progressive comparison can be made of actual
results.

(5) Motivating employees: Employees are motivated for improving their

performances by budgetary control.
Question.7.02.What do you mean by budget and budgetary control.2007,2009
Answer:
BUDGET
Budget is an important task of planning and control. It is based on the idea of plan. It is
planning relating to a period of time expressed in monetary or quantitative terms. It is also
serves as a basis for performance evaluation. It is prepared for a definite future period. It
implements the policies formulated by management for affirming to given objectives,
preparing charts, budgetary control.
A budget is a detailed plan of operations for some specific future period. It is an estimate
prepared in advance of the period to which it applies. It acts as a business barometer as it
is a complete program of activities of the business for the period covered. Budgets are
nothing but the expressions largely in financial terms of managements plans for operating
and financing the enterprises during specific period of time.
According to J.G BLOCKER: The budget is a detailed schedule of the proposed
combination of the various factors of production which the management deems to be the
most profitable for the ensuring period.
According to GROWN AND HOWARD: The budget is a predetermined statement of
management policy which provides a standard for comparison with results actually
achieved.
A financial and for quantitative statement, prepared prior to a defined period of time,
of the policy to be pursued that period for the purpose of staining a given objective.
-Institute of Cost & Management Accounting, London
BUDGETARY CONTROL
The establishment of budgets relating to the responsibilities of executive to the
requirement of policy and the continuous comparison of actual with budgeted, result
either to secure by individual action, the objective of the policy or to provide fore a
revision.
-Institute of Cost & Management Accounting, London
Budgetary control involves the use of company annual budgetary report. Evaluate and
control day-to-day operation in accordance with the budgets. Preparation of budget with
proper planning and co-ordination. Control purpose, which will bring maximum advantage
to the concern.
Budgetary control embraces all and in addition includes the science of planning the budgets
themselves and utilization of such budgets to effect an overall management tool for the
business planning and control. Budgetary control has therefore become an essential tool of
management for controlling costs and maximizing profits.
According to HOWARD: Budgetary control is a system of coordinating costs which
includes the preparation of budgets, coordinating the work of the department and
establishing responsibilities, comparing the actual performance with the budgeted and
acting upon results to achieve maximum profitability.
Budgetary control can be defined as, A means of achieving the financial control of an
entity whereby the actual results for a defined period of time are compared with the
budgeted results, any differences (or variances) being noted, and some corrective action
taken to bring the actual activities back into line with the budgeted ones if such variances
need to be dealt with.
Question.7.03.Distinguish between forecasting and budgeting. 2008
Answer:
Both are relating to the estimation of future but , if we deeply study the both concept we
can get following differences between them. :-
1st Difference
Budget is based on planned events . We actually makes stand in advance and then control
our position
forecasting is just estimation of uncertain future for making planning .

2nd Difference
Budget is made for one financial period

Forecasting is for long time.

3rd Difference

It is necessary for budget or corporate to make budget

forecasting is suitable in that field where we do not make budget.

The table below summarizes the main differences between a budget and a forecast.
Budget The financial expression of your target.
This is the course you have actively decided upon and
set for yourself; it is your intention.
It is where you want to go.

It is normally prepared just once for each financial year.

Forecast This is your latest expectation of what really will happen
over the next few months, based on what is happening in
your business now.
It is where you are going.
It is your financial radar.

Is most useful if prepared every month.

Question.7.04.Define budgetary control. Distinguish between budget

and budgetary control. 2011
Answer:
Budgetary control is a system of coordinating costs which includes the preparation of
budgets, coordinating the work of the department and establishing responsibilities,
comparing the actual performance with the budgeted and acting upon results to achieve
maximum profitability.
Budgetary control involves the use of company annual budgetary report. Evaluate and
control day-to-day operation in accordance with the budgets. Preparation of budget with
proper planning and co-ordination. Control purpose, which will bring maximum advantage
to the concern.
 Budgetary control embraces all and in addition includes the science of planning the
budgets themselves and utilization of such budgets to effect an overall management tool
for the business planning and control. Budgetary control has therefore become an essential
tool of management for controlling costs and maximizing profits.
Thus, budgetary control involves the following,
1. Establishment of budgets.
2. Continuous comparison of actual with budgets for achievement of targets and
placing the responsibility for failure to achieve the Budget figures.
3. Revision of budgets in the light of changed circumstances.

Budgetary control is the process of ascertaining several budgeted figures for the
future of a business enterprise and then making comparison of these budgeted figures with
the actual results for finding out discrepancies, if any. The comparison of budgeted and
actual figures will allow the management to take curative actions at a proper time.

Budgetary control can be defined as, A means of achieving the financial control
of an entity whereby the actual results for a defined period of time are compared with the
budgeted results, any differences (or variances) being noted, and some corrective action
taken to bring the actual activities back into line with the budgeted ones if such variances
need to be dealt with.

Budgetary control is a continuous process that helps in planning, coordination and

controlling of business decisions. A budget is a means and budgetary control is the end-
result. The budgetary control system assists an organization in setting up the goals and
efforts are made for its achievements. It enables economies in the enterprise.

A Budget

Is a predetermined statement of a companys

objectives during a period of time.
 The budget is like a plan which guides the managers
who are responsible for achieving certain business
objectives.

The budget normally has an overall or master budget

which is made up of sectional/subsidiary budgets
prepared by the different sections in the company.

Be careful that a budget is a plan but a forecast is

merely a prediction of what will happen as a result
of a given set of circumstances.

Budgetary Control

Is a system which uses the budgets for planning and

controlling a business activities.

It quantifies and is financially oriented to guides the

managers to achieve certain business objectives..

Managers will compare the actual with the budgeted

figures and the variances will then be investigated
and corrective actions be taken

Question.7.05.State some pre-requisites for establishing a budgetary

control system. 2011
Answer:
(a) There should be a clearly defined organizational structure where are area of
responsibility is emphasized.

(b) Within the budgeting process, the employees should participate.

(c) For the purpose of relying the measurement of performance, there should be
adequate accounting records & procedures.

(d) Budgetary control needs to be flexible, so that the plans & objectives may be
revised.

(e) An awareness of the uses of the budgetary control system should be spread by
the management.

(f) An awareness regarding the problems of budgetary control & especially the
individuals reactions to budgets should be spread by the top management.

------------------------
 Chapter 08
Segment Reporting, Profitability Analysis and Decentralization
Highlight of the Chapter :
8.01 What are the benefits that result 8.06 Explain how the segment margin
from decentralization? 2009 differs from the contribution
8.02 Distinguish between a cost center, margin.2011
profit center, and an investment 8.07 How can we measure the
center. 2009 performance of manager of a cost
8.03 What is responsibility accounting? center, a profit center, and an
Why is it necessary to prepare investment center? Briefly explain
income statement in a segmented with examples.2011
form? 2010 8.08 Define return on investment(ROI)
8.04 What are the six steps in designing 2011
accounting based performance 8.09 Define Incremental cost. 2011
measures? 2008 8.10 Math Problem solutions
8.05 What is meant by the term
decentralization?2011

Question.8.01.What are the benefits that result from decentralization?

2009
Answer:
1. Reduces burden of top executives:
Decentralization of authority relieves top executives from operating details or routine work
so that they can concentrate on more important functions of policy-making, coor- dination
and control. As a company grows beyond the reach of the chief executive, decentralisation
becomes necessary. By delegating authority for operating decisions, top management can
extend its leadership over a giant enterprise.

2. Quick and better decisions:

Decentralization permits prompt and more accurate decisions because decisions are made
by those who are fully aware of the realities of the situation. Decisions can be made near
the point of action without consulting higher levels and without waiting for approval of top
executives.
3. Growth and diversification:
Decentralisation facilitates growth and diversification of products and markets. Under
decentralisation, each product line is treated as a separate division so that it can respond
quickly to the changing demands of its special market. The self-contained product divisions
enjoy considerable independence and proper emphasis can be put on each product line
under the overall coordination and control of top management.
4. Better communication:
Decentralisation improves organizational communication and efficiency because there are
fewer levels of authority. The problems of red-tape and bureaucratic delays are reduced.
5. Development of executives:
Decentralisation provides an opportunity to subordinate managers to take initiative and
acquire leadership qualities. Lower level executives learn to manage by exercising
delegated authority. A reservoir of promotable managers becomes available which
simplifies management successions and helps to ensure continuity of management.
Decentralisation promotes autonomy, initiative and creativity on the part of subordinates.
As the success and survival of the organisation does not depend upon a few individuals at
the top, decentralisation makes for stability and continuity of the enterprise.
5. Improvement in motivation and morale:
Decentralisation improves the job satisfaction, motivation and morale of subordinates.
Opportunity to make decisions provides sense of belonging and satisfies the needs for
power, prestige, status and independence. A climate of competition is generated. High
motivation and morale help in improving productivity and working relationships. Better
utilization of talents at lower levels can be made.
7. Effective supervision and control:
Decentralisation results in effective supervision because managers at the lower levels have
complete authority to make changes in work assignment, to take disciplinary action, to
recommend promotions and to change production schedule. Decentralisation also promotes
effective control through comparative evaluation of performance and clear-cut
accountability for results.
8. Democratic management:
Decentralisation makes for democratic management and flexibility of operations. People
at lower levels do not feel alienated from the top and there is little danger of administration
becoming top heavy or monolithic. Necessary changes can be made without dislocating
the entire structure.
Question.8.02. Distinguish between a cost center, profit center, and an
investment center. 2009
Answer:
Cost classification in accounting also involves the allocation of costs, revenues and
responsibilities to various centres or departments. These centres include:

== Cost centres

== Profit centres

== Investment centres

Cost Centres

A cost centre (CC) is a unit, location or department where cost data is collected. The
purpose of the cost centre is to collect, analyze and ascertain costs in its immediate context.
Cost centres usually have cost unitsunits or equipment for which costs are determinable
or attributable. Overheads and direct costs constitute the cost structure of a CC. Since many
activities in an organisation involve costs, a cost centre is a fundamental aspect, especially
as profit and investment centres can be cost centres.

According to the ACCA Study Text (Management accounting, c 1999), cost centres can
manifest themselves as a project, a machine, department or overhead costs. One should
note that a specific cost centre might not necessarily have other functions. CCs are not
limited to production and manufacturing, since they can also be attributed to service
centres, like commercial bank branches for example.

Profit centre

The profit centre addresses both costs and revenue. Therefore, the manager responsible
for a profit centre is accountable for the purchases and sales for that unit, department or
branch. Since both revenue and costs fall under the purview of the profit centre, it is both
a cost and revenue centre, although a revenue centre is not a profit centre and a cost
centre might not necessarily be a profit centre.

Investment centres
Investment centres are profit centres that are accountable for cost, revenues and net assets
for capital investment. This unit is assessed by return on investment and is a cost centre.
Managers in an investment centre are responsible for purchasing capital or non- current
assets and making investment decisions with capital.
Question.8.03. What is responsibility accounting? Why is it necessary to
prepare income statement in a segmented form? 2010
Answer:
MEANING AND CONCEPT OF RESPONSIBILITY ACCOUNTING
An organization uses various techniques of costing such as Standard Costing, Budgetary
Control for Control of Costs and so on. Under these costing techniques, focus is given on
the cost and not on the person who has the authority to control the costs. In every well-
structured organization, the responsibilities of every person's actions are clearly defined
and a manager is engaged in every section of actions of the organization. Every such person
is accountable to his/her superior authority for the responsibility assigned to him/her.
Responsibility Accounting may be defined as a system of control where a responsibility is
assigned to different executives of a concern for control of cost or increase of revenue. It
is one of the basic components of a good control system. In this system, an executive is
held responsible only for those activities for which he/she has been delegated a
responsibility.

Question.8.04. What are the six steps in designing accounting based performance
measures? 2008
Answer:

The six steps in designing an accounting-based performance measure are:

1. Choose performance measures that align with top management's financial goals
2. Choose the time horizon of each performance measure in Step 1
3. Choose a definition of the components in each performance measure in Step 1
4. Choose a measurement alternative for each performance measure in Step 1
5. Choose a target level of performance
6. Choose the timing of feedback

Question.8.05.What is meant by the term decentralization?2011

Answer:
Decentralisation means diffusion of authority. The dispersal of authority of decision-
making to the lower level management is termed as decentralisation. Decentralisation of
authority is a fundamental phase of delegation and the extent to which authority is not
delegated is called centralisation.

According to Fayol "Everything that goes to increase the importance of the subordinate's
role is called decentralisation."

Decentralisation in relation to office denotes disperse of office services and activities. The
necessity of decentralisation of office services occurs when official activities are performed
at functional departmental level. Thus, decentralisation in relation to office may include
departmentation of activities. When authority is dispersed, decentralisation is present.

The need for decentralisation is felt when the business grows in its size which necessiates
diversification of office activities. Decentralisation occurs at the time of decisions of
routine nature but if decisions are vital, the authority is not decentralised. The technological
development, political factors, availability of managers also affects the degree of
decentralisation. Decentralisation does not exist in its pure sense.

Question.8.06. Explain how the segment margin differs from the

contribution margin.2011
Answer:
The contribution margin is the difference between sales revenue and variable expenses.
The segment margin is the amount remaining after deducting traceable fixed expenses from
the contribution margin. The contribution margin is useful as a planning tool for many
decisions, including those in which fixed costs dont change. The segment margin is useful
in assessing the overall profitability of a segment.
Problem.1. BBA-2008

Due to the declining popularity of digital watches, Sweiz Company's digital watch line has
not reported a profit for several years. An income statement for last year follows :

Segment Income StatementDigital Watches

Taka. Taka.
Sales 500,000
Less : Variable expenses :
 Variable manufacturing costs 120,000
Variable shipping costs 5,000
Commissions 75,000 200,000
Contribution margin 300,000
Less : Fixed expenses :
General factory overhead* 60,000
Salary of produce line manager. 90,000
Depreciation of equipment** 50,000
Product line advertising 100,000
Rentfactory space*** 70,000
General administrative expense* 30,000 400,000
Net operating loss (100,000)
* Allocated common costs that would be redistributed to other product lines if digital
watches were dropped.
* This equipment has no resale value and does not wear out through use.
*** The digital watches are manufactured in their own facility.
Required :
What do you think; the company should retain or drop the digital watch line?
(support your answer with necessary calculation)

Problem.2. BBA-2008
Y Company process an ore in department 1, from which come, three products L, W and
X. Product L is processed further in department 2. Product W is sold without further
processing. Product X is consider a by-product and is process further in department 3.
Costs in department 1 are Tk.8,00,000, department 2 costs are Tk. 1,00,000 and
department 3 costs are Tk. 50,000. Processing 6,00,000 pounds in department 1 is results
in 50,000 product L, 3,00,000.pounds of product W and 1,00,000 product of X. Product
L sells for Tk.,10 per pound. Product W sells for Tk. 2 per pound and product X sells for
Tk. 3 per pound.
Requirement:
(i) Compute unit coats per pound for products L, W and X treating X as a by-product.
Deduct the NRV (Net Realizable Value) of the by-product from the foint costa of
products L and W.
(ii) Compute unit costs per pound per products L, W and X treating all three as joint
products and by allocating costs by the NRV method.
 Problem.3. BBA-2008
The Base Ball Division of Home Run Sports manufactures and sells baseballs. Budgeted
data for February, 2009 are

Current assets Tk. 4,00,000

Long-term assets 6,00,000
Total Assets Tk. 10,00,000
Production output 2,00,000 base balls per month
Target (RODI) 30%
Fixed costs Tk. 4,00,000 per month
Variable costs Tk.4 per baseball
R equ irem ent :
(i) Compute the minimum selling price per. baseball necessary to achieve the
target ROI of 30%.
(ii) Using the selling price from requirement I, separate the target ROI
into its two components using the DuPont method

Problem.4. BBA-2009

Bovine Company, a wholesale distributor of DVDs, has been experiencing losses for
sometime, as shown by i t s most recent monthly income statement below:
Taka
Sales 15,00,000
Less : variable expenses 5,88,000
Contribution margin 9,12,000
Less : Fixed expenses Net operation loss 9,45,000
Net operation loss (33,000)

In an effort to isolate the problem, the president has asked for an income statement
segmented by geographic market. Accordingly, the Accounting Department has
developed the following data .
 Geographic Market South Central North

Sales Tk.4,00.000 Tk. 6,00,000 Tk 5,00,000

Variable expenses as a 52% 30% 40%

percentage of sales

Traceable fixed expenses Tk. 2,24,000 Tk. 3,30,000 Tk. 2,00,000

Required :
(i) Prepare a contribution format income statement segmented by geographic market,
as desired by the president. Show both Amount and Percent columns lot the company as
a whole and for each geographic market.
(ii) The Company's sales manager believes that sales in t h e Central geographic market
could be increased by 15% if advertising were increased by Tk.25,000 each month.
Would you recommend the increased advertising? Show computations to support your
answer.

Solution
9.
Req (i) Contribution Formal
Income Slatement
Total South Central North
Particulors Amount Percnt Amount Percent Amount Percent Amount Percent
Sales 12,00,000 4,00,000 100 6,00,000 100 5,00,000 100
Less : Variable
expense
5,80,000 58 2,08,000 52 1,80,000 30 2,00,00 40
Contribution Margin
Less : Traseable fixed 9,20,000 62 1,92,000 48 4,20,000 70 3,00,000 60
cost

7,70,000 51 2,40,000 60 3,30,000 55 2,00,000 40

Segmented Margin (48,000) (12) 90,000 15 1,00,000 20
Less: Common Fixed 1,50,000 11
cost
(9,45,000-1,70,000)
 1,75,000 12

(25000) (1) (48,000) (12) 90,000 15 1,00,000 20

Req.(ii) In case of geographic central market Incremental sates (6,00,000 15%)90,000

Contribution margin ration 70
Incremental contribution margin 63,000
Less : Advertising expenses 15,000
Incremental NOI 38,000
The advertising program should be initiated

Problem.5.
BBA-2010

Royal Lawncare Company produces and sells two packaged products, Weedban and
Greengrow. Revenue and cost information relating to the products foilou :

Product

Weedban(TK.) Greengrow(Tk.)
Selling price per unit 6 7.50
Variable expenses per unit 2.40 5.25

Traceable fixed expenses per year 45,000 21,000

Common fixed expenses in the company total Tk. 33,000 annually. Last year the
company produced and sold 15,000 units of Weedban and 28,000 units of
Greengrow
Required: Prepare a contribution format income statement segmented by product lines.
Show both Amount and Percent columns for the company as a whole and for each of
the products.
9. (a) Contribution format Income statement.
Particulars Total Weedban Greengrow
Amount Percent Amount Percent Amount Percent
Sales 3,00,000 100 90,000 100 2,10,000 100
Less: Variable 1,83,000 61 36,000 40 1,47,000 70
cost
Contribution 1,17,000 39 54,000 60 63,000 30
Margin
Less : Traceable 66,000 22 45,000 50 21,000 10
fixed cost
Segment Margin 51,000 17 9000 10 42,000 20
Less : 33,000 11
Commorfiyed cost
Not 18,000 6

King :
Weedbon bales = 15000 Unit 6 per Unit cost
= 90,000
Greengrow Sales = 28,000 7.50
= 2,10,000

Problem.6. BBA-2010

(b) Alaska Services Company of Bangladesh has two regional divisions with
headquarters in Dhaka and Chittagong. Selected data on the two divisions divisions
follows:

Divisions

Dhaka Chittagong
(TK.) (Tk.)
Sales 3,000,000 9,000,000

Net operating income 2,10,000 7,20,000

Average operating assets 1,000,000 4,000,000

Required:
(i) For each division, compute the return on investment (ROI) in terms of margin and
turnover.
 (ii) Assume that the company evaluates performance using residual income and that
the minimum required rate of return for any division is 15%. Compute the residual
income for each division.
(iii)Is Chittagong's greater -amount of residual income an indication that it is better
managed? Explain.

Solution

9. (b) ROI (i) In case of Dhaka Division

Margin = 100
=
ROI = Margin Turnover
= 7% 3
= 21%
In csse of Chittagong Division
Marin = 100
= 8%
Turnover =
=
= 2.25
ROI = Margin Turnover
= 8% 2.25
= 18%
Req.(ii) In case of Dhaka Division
residual Income = Net operating (Average operating assets Minimum Required
Rate of Return)
= 2,10,000 (10,00,000 15%)
= 2,10,000 1,50,000
= 60,000
In case of Chittagong Division,
Residual Income = Net operating income(Average operating assetMinimum
Required rata at return)
= 72000 (40,00,000 15%)
= 7,20,000 6,00,000
= 1, 20,000
Req.(iii) No, the Chittagong Division is simpty larger than the Dhaka Division and for this
reason one would exect that it would have a greater amount of residual income.
Residual income cant be used to compare the per formance of divisions of different,
Sizes. In fact the Chittagong Division does not appear to be as well manged as the
Dhaka Division.
 Problem.7.
BBA-2011
(b) Selected operating data for two divisions of Ali Co. Ltd. are gi ven below :

Division

Dhaka Chittagong
Taka Taka
Sales 4,000,000 7,000,000
Average operating assets 2,000,000 2,000,000
Net operating income 360,000 420,000
Property, Plant and Equipment (Net) 950,000 800,000
Required :
(i) Compute the rate of return for each division using the return on investment (ROI)
formula stated in terms of margin and turnover.
(ii) Which divisional manager seems to be doing the better job? Why?

9. (b) Req (i) In cose of Dhaka Division

Margin = 100
= 100
= 9%
Turnover =
=
=2
ROI = Margin T/turnover
= 9% 2
= 18%
Case of Chittagong Division
Margin = 100
= 100
= 6%
Turnover =
=
= 3.54%
ROI = Margin Turnover
= 6% 3.5
= 21%
Req-ii) The manager of the Chittagong Division seems to be doing the better job.
Although her margin is-three percentage points lower than the margin of the Dhaka
 division, her turnover is higher. The greater turnover more than offsets the lower margin.
Resulting in a 21% ROI, as compared to an 18% ROI. For the other division.
So, the Chittagong Division is doing the better job.

Chapter 09

Relevant Information and Decision Making

Highlight of the Chapter :
9.01 What is relevant cost in decision 9.5 Are variable costs always relevant
making? (2006) costs? Explain. (2010)
9.02 How does opportunity cost enter 9.6 Define the term opportunity cost-
into the make or buy decision? with appropriate example.(2008)
(2009) Define the 9.7 Distinguish between joint product
9.03 following terms:- (2009) and by -product? (2008)
1.Joint product. 9.8 Describe two methods to account for
2.Joint cost. by-product? (2008)
3.Split-off point. 9.09 Define opportunity cost and sunk
If a product line is generating a costs with example? (2011)
9.04 loss, than it should be
discontinued. Do you agree? 9.10 Math Problem solve

Question.9.01. What is relevant coat in decision making? (2006)

Answer:
Making correct decisions is one of the most important tasks of a successful manager. Every
decision involves a choice between at least two alternatives. The decision process may be
complicated by volumes of data, irrelevant data, incomplete information, an unlimited
array of alternatives, etc. The role of the managerial accountant in this process is often that
of a gatherer and summarizer of relevant information rather than the ultimate decision
maker.

The costs and benefits of the alternatives need to be compared and contrasted before
making a decision.

The decision should be based only on RELEVANT information. Relevant information

includes the predicted future costs and revenues that differ among the alternatives. Any
cost or benefit that does not differ between alternatives is irrelevant and can be ignored in
a decision. All future revenues and/or costs that do not differ between the alternatives are
irrelevant. Sunk costs (costs already irrevocably incurred) are always irrelevant since they
will be the same for any alternative.

To identify which costs are relevant in a particular situation, take this three step
approach:

1. Eliminate sunk costs

2. Eliminate costs and benefits that do not differ between alternatives

3. Compare the remaining costs and benefits that do differ between alternatives to
make the
proper decision

Question.9.02. How does opportunity cost enter into the make or buy
decision?(2009)
Answer:
Opportunity cost is the contribution to income that is forgone by not using a limited
resource in its next-best alternative use. Opportunity cost is included in decision making
because it represents the best alternative way in which an organization may have used its
resources had it not made the decision it did.
If the company makes the part internally, rather than buying it, then they have to use their
production facilities. The benefit that could be derived from the best use of that facility is
quality, thus the opportunity cost for buying would be losing quality.

Question.9.03.Define the following terms:- (2009)

1. Joint product.
2. Joint cost.
3. Split-off point.
Answer:
Joint products
If all the products are of equal economic importance and none of them can
be termed as major products, these will be referred to as joint products.
Joint products are the result of same raw materials & process operation.
These products usually require further processing.
The processing of a particular raw material may result in the output of two
or more products.
Joint products cannot be produced separately.
CIMA has defined it as two or more products separated in processing, each
having a sufficiently high saleable value to merit recognition as a main
product.
Some of the examples of joint products are given below.
(a) In dairy industry skimmed milk, butter, cream and ice cream.
(b) In petroleum industry petrol, diesel, liquid

Joint costs
Joint costs are those costs, which are common to the processing of joint-
products or by products up to the point of separation.
In other words, joint costs represent pre-separation cost of joint products or
by-products.
These are the costs of a single process that yields multiple products
simultaneously.
After the point of separation, the products can be separately identified and
post-separation costs can be readily attributed to individual products.
Split off point
This is the point at which the joint products become separately identifiable.
 The costs incurred until this point cannot be identified to any particular product as
they are incurred for producing all the products.
The products arising at that split off point can either be sold at that point ( if there is
adequate market ) or they can either be further processed ( if no market is available
at split off point ).
The costs incurred beyond point are called separable costs.
After this point, the joint products or by-products gain individual identity.
This point has a special relevance in the discussion about joint products and by-
products, because the joint cost incurred before this points is to be apportioned
appropriately in the jointly produced multiple product-group i.e. to the joint
products or by products.

Question. 9.04. If a product line is generating a loss, than it should be

discontinued. Do you agree? Explain. (2010)

Answer:
Not necessarily. An apparent loss may be the result of allocated common costs or of sunk
costs that cannot be avoided if the product line is dropped. A product line should be
discontinued only if the contribution margin that will be lost as a result of dropping the line
is less than the fixed costs that would be avoided. Even in that situation the product line
may be retained if its presence promotes the sale of other products.

Question.9.05. Are variable costs always relevant costs? Explain. (2010)

Answer:
A relevant cost (also called avoidable cost or differential cost)[1] is a cost that differs
between alternatives being considered.[2] It is often important for businesses to distinguish
between relevant and irrelevant costs when analyzing alternatives because erroneously
considering irrelevant costs can lead to unsound business decisions.
No, variable costs are only relevant if they differ between alternatives under
consideration.
Question.9.06. Define the term opportunity cost- with appropriate
example.(2008)
Answer:
Opportunity cost is the cost of a foregone alternative. If you chose one alternative over
another, then the cost of choosing that alternative is an opportunity cost. Opportunity cost
is the benefits you lose by choosing one alternative over another one. The opportunity cost
of choosing one investment over another one.
Question.9.07. Distinguish between joint product and by -product?
(2008)
Answer:
Joint products
Joint products are the result of same raw materials & process operation.
These products usually require further processing.
The processing of a particular raw material may result in the output of two or
more products.
If all the products are of equal economic importance and none of them can be
termed as major products, these will be referred to as joint products.
Joint products cannot be produced separately.
There can be various products arising from a single input.
Out off such products, the products that have relatively higher sales value are
treated as joint products and the products with relatively very lower sales
value are called as by-products.
The products with minimal sales value are treated as scrap.
Among the joint products the product, which has a comparatively higher sales,
value that the other joint products are called Main product.
CIMA has defined it as two or more products separated in processing, each
having a sufficiently high saleable value to merit recognition as a main
product.
Some of the examples of joint products are given below.
(a) In dairy industry skimmed milk, butter, cream and ice cream.
(b) In petroleum industry petrol, diesel, liquid petroleum gas and kerosene.
By-product
By-product is a secondary product.
By-products are also produced form the same raw material and same process
operations, but they are secondary result of operation.
A joint product is usually of greater commercial importance than a by-product.
 A joint product principally differs from a by-product in importance.
Examples of by-products are given below:
(a) In the dairy industry, the production of butter and cheese is accompanied by
the production of butter milk (Butter-milk is the by-product)
(b) In the manufacture of soap, in the process of mixing and boiling ingredients,
some rejections take place. There rejections are collected for recovery as by-
products, such as glycerin.
Question.9.08. Describe two methods to account for by-product? (2008)
Answer:
By-product accounting depends on the circumstances under which it is realized The
following could be the possible circumstances of a by-product realization.
* At the separation point
* After further processing
Based on the possible circumstances for the by-product realization, the following are the
main types of by-product accounting.

1. Non-cost or sales value method

Existence of sales value method focuses more on sharing joint costs by by-products
realized determining cost of by-product. These methods are the followings:
* Other income or miscellaneous income method
* By-product sales added to the main product sales
* By-product sales value deducted from total cost.
* Credit of by-product sales value less selling and distribution expenses.
* Credit of by-product sales value less selling and distribution expenses as well as cost
incurred after split off.
* Credit of by-product sales value less selling and distribution expenses costs incurred
after split off and estimated profit or reverse cost method.

2. Costs Methods
The existence of a cost method provides opportunities to ascertain the cost of by-
products. It takes a closer look on the cost front and seeks to allocate joint cost to the by-
product realized incidentally in the process of producing the main product. The types of
the techniques available under cost method are following:
* Opportunity or replacement cost method
* Standard cost method
* Apportionment on suitable basis.
Question.9.09. Define opportunity cost and sunk costs with example?
(2011)
Answer:
Opportunity cost
Opportunity cost is the cost of a foregone alternative. If you chose one alternative over
another, then the cost of choosing that alternative is an opportunity cost. Opportunity cost
is the benefits you lose by choosing one alternative over another one. The opportunity cost
of choosing one investment over another one.
Sunk costs
Sunk costs are expenses which cannot be recovered once they have been incurred. An
example of sunk cost would be advertising expenses -- once a company pays for such an
expense, there is no way undo it.
Companies spend money each year for research and development as they work to come up
with new products and services to offer their customers, or as they try to refine existing
products and services. While the nature of research varies from business to business, it's
recognized as a sunk cost.

Problem.1. BBA-2008
Imperial jewelries is considering a special order for 20 handcrafted gold bracelets to be
given as gift of a wedding party. The normal selling price for the product is Tk.
189.95 and its unit product cost is Tk. 149.00 as shown below :
Taka
Direct materials 84.00
Direct labour 45.00
Manufacturing overheads 20.00
Unit product cost 149.00

Most of the manufacturing overhead is fixed and unaffected by variation in how much
jewelry is produced in any given period. However Tk.4.00 of the overhead is variable with
respect to the number of bracelet produced. The customer, who is interested in the special
order would like special filigree applied to the bracelets. This filigree would require
additional materials Costing 2.00 per bracelets and would also require acquisition of a
special tool costing Tk. 250.00 that would have no, other use once the special order is
completed. This order would have no effect on the company's regular sales and the
order could be fulfilled using the company's existing capacity without affecting any other
order.
Required :
(i)What effect would accepting this order have in the company's net operating income if a
special price of tk. 169.95 per bracelet is offered for this order?
(ii)Should this order be accepted at this price?
Solution
Only the incremental costs and benefits are relevant. In particular, only the variable
manufacturing overhead and the cost of the special tool are relevant overhead costs in this
situation. The other manufacturing overhead costs are fixed and are not affected by the
decision.

Explanation Per Unit. Total cost

Tk. for 20
Bracelets
Incremental revenue 169.95 3,399.00
Incremental Cost: Variable cost:
Direct materials 84.00 1,680.00
Direct labor 45.00 900
Variable manufacturing overhead 4.00 80.00
Special filigree 2.00 40.00
Total variable cost 135.00 2,700
Fixed cost:
Purchase of special tool 250.00
Total incremental cost 2,950
Incremental net operating income 449.00
Even through the price for the special order is below the companys regular price for such
an item, the special order would add to the companys net operating income and should be
accepted. This conclusion would not necessarily follow if the special order affected the
regular selling price of bracelets or if it required the use of a constrained resource.

Problem.2. BBA-2009
Blueline Company manufacturers 30,000 units of part S-3 each year for use on its
production line. The cost per unit for part S-3 follows :
Taka
 Direct materials 3.60
Direct labor 10.00
Variable manufacturing overhead 2.40
Fixed manufacturing overhead 9.00
Total cost per part 25.00
An outside supplier has offered to sell 30,000 units of part S-3 each year to Blucline
Company for Tk. 21 per part. If Blueline Company accepts this offer, the facilities now
being used to manufacture part S-3 could be rented to another company at an annual
rental of Tk. 80,000. However. Blueline Company has determined that Tk. 6 of the fixed
manufacturing overhead being applied to part S- 3 would continue even if part S-3
were purchased from the outside supplier.
Required:
Prepare computations to show the net amount of taka advantage or disadvantage of
accepting the outside supplier's offer.

Solution

30,000 Units
Particulars Make Buy
Per Amount Per 1amount
unit Unit
Cost of purchasing 21 6,30,000
Cost of making :
Direct Materials 3.60 1,08,000
Direct labor 10.00 3,00,000
Variable Manu. O.H 2.4 72,000
Fixed manufacturing. O.H 3.00 90,000
Total cost 19.00 5,70,000 21 6,30,000
The 80,000 rental value of the space being used to product part 5-6 represents an
opportunity cost of continuing to produce the part 5-6 represents an opportunity cost of
continuing to produce the part internally. The completed analysis
Make Buy
Total cost 5,70,000 6,30,000
Dentel value of the space (opportunity cost) 8,000
Total cost 65,000 63,000
Net Advantage in favour of buying 20,000

Selling vatue ot further process (7000 12) 84,000

Selling value at split at pint (7000 + 9) 63,000
 21,000
Less : Further processing cost 95,000
Net advantage 11,500

Problem.3. BBA-2009
Dorsey Company manufactures three products from a common input in a joint- processing
operation. Joint processing costs up to the split-off point total Tk. 3,50,000 per quarter.
The company allocates these costs to the joint products on the basis of their relative
sales value at the split-off point. Unit selling prices and total output at the split-off
point are as follows :

Product Selling Price Quarterly Output

A Tk. 16 per pound 15,000 pounds
B Tk. 8 per pound 20,000 pounds
C Tk. 25 per gallon 4,000 gallons
Each product can be processed further after the split-off point. Additional
processing requires no special facilities. The additional processing costs (per
quarter) and unit selling prices after further processing are given below :

Product Additional Soiling Price

Processing Costs
A Tk. 63,000 Tk. 20 per pound
B Tk. 80,000 Tk. 13 per pound
C Tk. 36,000 Tk. 32 per gallon
Required :
Which product or products should be sold at the split-off point and which product
or products should be processed further? Show computations.

Solution
Incremental revenue per pound or gallon:
 A B C
Selling price after further Processing 20 13 32
Less, Selling price at the split of point 16 8 25
4 5 7

A B C
Selling price of further prices 3,00,000 2,60,000 1,28,000
Selling price of spilt at pint 2,40,000 1,60,000 1,00,000
60,000 1,00,000 28,000
Less : Additional cost of further 63,000 80,000 36,000
Process
(3000) 20,000 (40,000)

Product B should be further process. Product A & C should be sold at the spilt off
point

Problem.4. BBA-2010
Delta Company manufactures 30,000 units of part S-5 each year for use on its
production line. At this level of activity, the cost per unit for part S-5 is as follow
:
Taka
Direct materials 3.60

Direct labor 10.00

Variable manufacturing overhead 2.40
Fixed manufacturing overhead 9.00
Total cost per part 25.00

An outside supplier has offered to sell 30,000 units of part S-6 each year Delta
Company for Fk. 21 per part. If Delta Company accepts this offer, the facilities now
being used to manufacture part S-6 could be rented to another company at an annual
rental of Tk. 80,000. However, Delta Company has determined hat Uvo-thirds of the
fixed manufacturing overhead being applied to part S-5 would continue e\en if part S-
5 were purchased from the outside supplier.
Required: Prepare computations showing how much profits will increase or decrease
if the outside supplier's offer is accepted.
 Problem.5. BBA-2010
(b) Benoit Inc., produces several products from processing 1 ton of clypton, a rare mineral.
Material and processing costs total Tk. 60,000 per ton, one-fourth of which is
allocated to product X. Seven Thousand units of product X are produced from each
ton of clypton. The units can either be sold at the split-off point for Tk. 9 each, or
processed further at a total cost of Tk. 9,500 and then sold for Tk. 12 each.
Required: Should product X be processed further or sold at the split-off point?

Solution

Sales value if processed further (7,000 unites x Tk.12 ) = Tk. 84,000

Sales value at the split-off point (7,000 unites x Tk.9 ) = Tk. 63,000
Incremental revenue 21,000
Less, Further processing cost 9,500
Net advantage of processing further 11,500

Problem.5. BBA-2011
A company is contemplating the purchase of a new labor-saving machine that will cost Tk.
30,000 and have a 10-year useful life. Data concerning the company's annual sales and
costs with and without the new machine are shown below :
Current New
Machine Machine
Units produced and sold 5,000 5,000
Selling price per unit Tk. 40 Tk. 40
Direct materials cost per unit 14 14
Direct labour cost per unit 8 5
Variable overhead cost per unit 2 2
Fixed costs, other 62,000 62,000
Fixed costs, new machine ---- 3,000
Required :
(i) Use differential costs and benefits analysis to help the company determine
should the company buy the new machine.
(ii) In the above problem indicate which costs and benefits are irrelevant in your
decision making. 2
 Problem.6. BBA-2012
Blueline Company manufactures 30,000 units of part S-3 each year for use on its
production line. The cost per unit for part S-3 follows :
Direct materials Tk.3.60
Direct labor 10.00
Variable manufacturing overhead 2.40
Fixed manufacturing overhead 9.00
Total cost per part Tk. 25.00
An outside supplier has offered to sell 30,000 units of part S-3 each year to Blueline
Company for Tk. 21 per part. If Blueline Company accepts this offer, the facilities now
being used to manufacture part S-3 could be rented to another company at an annual rental
of Tk. 80,000. However, Buleline Company has determined that Tk. 6 of the fixed
manufacturing overhead being applied to part S-3 would continue even if part S-3 were
purchased from the outside supplier.
Required:
Prepare computations to show the net amount of Taka advantage or disadvantage of
accepting the outside supplier's offer.

The costs that are relevant in a make or buy decision are those costs that can be avoided
as a result of purchasing from the outside. The analysis for this exercise is:

Per unit differential 30,000 units

cost
Make Buy Make Buy
Cost of purchasing 21 6,30,000
Cost of making:
Direct Materials 3.60 1,08,00
0
Direct Labor 10.00 3,00,00
0
Variable overhead 2.40 72,000
Fixed overhead 3.00* 90,000
Total Cost 19.00 21.00 5,70,00 6,30,000
0
The remaining Tk. 6 of fixed overhead cost would not be relevant, since it will continue
regardless
 ------------------------

BBA (PART-IV) SEVENTH SEMESTER EXAMINATION, 2006

MAN AGEMENT ACCOUNTING
BUS-404
Time 3 hour
Full marks 40
[N. B.- the figures in the right margin indicate full marks. Answer any for questions from
Group A and Two questions from Group B.]
Group-A
Marks
1. (a) Distinguish between product cost and period cost. 2.5
(b) What is relevant cost in decision making? 2.5
2. (a) State the main features of fixed cost. 2.5
(b) Mention the methods of segregating mixed cost. 2.5
3. (a) State the main features of variable costing. 2.5
(b) What do you understand by master budget? 2.5
4. Operations of X Company for the year disclosed M/S ration of 30% and C/M ration of
50%. Fixed cost amounted to Tk. 20,000. Compute (i) Break-even sales ; (ii) the
amount of profit; and (iii) the contribution margin.
5. The Lakeshore Hotels guest-days of occupancy and custodial supplies expense over
the last seven months were :
Month Guest-Pays of Custodial
Occupancy Supplies(in Tk.)
March 4,000 7,500
April 6,500 8,250
May 8,000 10,500
June 10,500 12,000
July 12,000 13,500
August 9,000 10,750
September 7,500 9,750
Guest-day is a measure of the overall activity at the hotel. For example, a guest who stays
at the hotel for three days is counted as three guest-days.
(a) Using the high-low method, estimate a cot formula for custodial supplies expense. 2
(b) Express the variable and fixed costs in the form Y = a + bX. 1.5
(c) Using the cost formula you derived above, what amount of custodial supplies expense
would you expect to be incurred at an occupancy level of 11,000 guest-days?
6.(a) Why variable costing and absorption net income figures may or may not be equal?
2.5
(b) A variable cost is constant per unit of product. Do you agree? Explain. 2.5

Group B
7. (a) What is break even chart? 2
(b) The information relating to two levels of output of a product is given below : -

Output 12,000 units 16,000 units

Taka Taka
Materials 1,08,000 1,44,000
Wages 72,000 94,000
Overhead 60,000 72,000

The product is sold at Tk. 30 each.

Required :
(i) Calculate the fixed cost. 2
(ii) Determine the break-even sales volume. 3
(iii) Ascertain the sales units that will ensure an after tax profit of Tk. 12,000.
Tax rate is 40%. 3

8. The maintenance cost and patient days for the first seven months of X hospital are as
follows:-

Month Activity Level : Maintenance Cost

Patient days Incurred
January 5,600 7,900
February 7,100 8,500
March 5,000 7,400
April 6,500 8,200
May 7,300 9,100
June 8,000 9,800
July 6,200 7,800
Required :
(a) Using the lest squares regression method, estimate the variable cost per patient. 7
(b) From the data in (a) above, express the cost formula in linear e4quation form
Y = a + bX. 1.5
(c) Using the derived cost formula, determine the expense expected to be incurred for
9,00 Patients. 1.6
9. The following particulars are obtained from the records of a manufacturing company :
Cost per unit of a product :
Taka
Direct materials 1.50
Direct labour 1.80
Variable factory overhead .40
Fixed factory overhead .40
(Based on 1,00,000 units of normal production)
Sale price per unit Tk. 5
Selling and administrative expenses :
Fixed Tk. 22,000
Variable 10% of sales
Production and Sales units :
Year 1 Year 2
Production 1,10,000 95,000
Sales 96,000 1,00,000
Closing inventory 14,000 9,000
Required :
Prepare cost statements for both the years under
(a) Absorption costing; and 5
(b) Variable costing 5

BBA (PART-IV) SEVENTH SEMESTER EXAMINATION,2007

MAN AGEMENT ACCOUNTING
BUS-404
Time 3 hour
Full marks 60
[N.B The figures in the merging indicate full marks. All parts (a, b, c) of a question
must be answered sequentially.]
Part A Short Questions
(Answer any four questions)
Marks 5 5 = 30
Marks
1. (a) Explain the term Management Accounting. 2
(b) Distinguish between Management Accounting and Cost 3
2. (a) What do you mean by cost behavior? 2
(b) Classify fixed cost according to its behavior. 3
3. (a) Distinguish between variable costing and absorption costing. 3
(b) What do you mean by step variable cost? 2
4. (a) Describe the uses of Cost Volume-Profit analysis. 3
(b) Explain the significance of margin of safety. 2
5. (a) State the main objectives of budgetary control system. 3
(b) Explain the functions of a budget committee. 2
6. (a) Explain the need for financial statement analysis. 2
(b) Narrate the significance and limitations of ration analysis. 3
7. What effect does an increase in volume have on :
(i) Unit fixed costs?
(ii) Unit variable costs?
(iii) Total fixed costs?
(iv)Total variable costs?
(v) Total mixed cost?

Part B Broad Questions

(Answer any four questions)
Marks 10 4 = 40
Marks
8. (a) Distinguish between committed cost and discretionary cost. 2
(b) The following information relating to production and mixed cost are extracted
from the books of a manufacturing firm : 6+2=8

Production Mixed cost

(Units) (Taka)
January 6,800 31,580
February 6,400 30,420
March 7,200 32,740
April 8,000 35,060
May 6,600 31,000
June 7,000 32,160
Required :
(i) Calculate variable cost per unit and total fixed cost by using Least Square
Method.
(ii) What will be the mixed cost of producing 7,500 units of the month of July?
9. (a) Discuss the uses of direct costing in decision making. 2
 (b) The following particulars are available form the books of ABC Ltd. For the year
2006 :- 6+2=8
Sales 75,000 units.
Finished Goods Inventory (January 1,2006) 12,000 units.
Finished Good Inventory (December 31,2006) 17,000 units.
Sales price Tk. 10 per unit.
Manufacturing cost :
Variable cost per unit of production Tk. 4
Fixed Factory overhead (Normal capacity 80,000 units) Tk. 1,60,000
Marketing and Administrative Expenses :
Variable cost per unit of sales Tk. 1
Fixed marketing and Administrative Expenses Tk. 1,50,000
Required :
(i) Income statement for 2006 under the absorption costing method and direct costing
method.
(ii) An account showing the difference in net operating income under the above two
methods.
10. (a) What is Break-even Analysis? State its importance. 2+2=4
(b) In September 2007, X Ltd. Sells 4,000 units of product and earns 20% on sales. Cost
of direct materials is Tk. 2,60,000.Other manufacturing and non-manufacturing
costs during the month are Tk. 1,20,000 and Tk. 1,00,000 respectively. 50% of
manufacturing and 40% of non-manufacturing costs ar variable. 6
Required :
(i) Calculate the break-even sales in units and volume.
(ii) Ascertain the amount of profit earned.
(iii) What would be the profit if sales are 3,600 units?
(iv) What would be the break even sales of the price is increased by 20%?
(v) What would be the selling price if break-even is to be achieved at 1,600 units?
11. (a) State the difference between cash budget and cash flow statement. 3
(b) X Ltd. Has the following forecast date available : 7

September October
Taka Taka
Cash Sales 80,000 1,20,000
Credit Sales 1,45,000 1,90,000
Cash Purchases 40,000 40,000
Credit Purchase 2,00,000 1,60,000
Purchase discount 10,000 5,000
Accounts payable beginning 20,000 25,000
Accounts payable ending 25,000 20,000
Cash operating expenses 55,000 20,000
Net sales on credit are collected 50% in the month of sale, 40% in the following month and
10% in the second following month. Such sales in July and August were Tk.
2,00,000 and Tk. 2,40,000 respectively. The estimated cash balance in September
is Tk. 25,000.
Prepare a Cash budget for September and October.
12. (a) What are the essentials of a sound budgeting system? 3
(b) Star Ltd. Manufactures two products A and B. An estimate of the number of
units to be sold in the 1st seven months of 2007 is given below :
Product January February March April May June July
A 1,600 2,000 2,400 3,200 3,600 3,600 3,200
B 4,400 3,000 3,600 2,800 2,400 2,400 2,800
It is anticipated that :
(i) There will be no work-in-process at the end of any month.
(ii) Finished Units equal to 30% of anticipated sales for the next month will be in
stock at the end of each month including December, 2006.
You are required to prepare a Production Budget for the six month period from
January to July 2007.
13. (a) What do you mean by budget and budgetary control? 4
(b) Mention some of the major benefits of budgeting. 3
(c) Write the assumptions of CPV analysis. 3

BBA FOURTH YEAR SEVENTH SEMESTER EXAMINATION, 2008

MANAGEMENT ACCOUNTING
Subject Code: 4102 Examination Code 607
Time3 hours
Full marks70
[N.B.The figures in the margin indicate full marks. All parts (a, b, c) of c question must
be answered sequentially.]
Part AShort Questions
(Answer any five questions)
Marks6x5=30
1. (a) Information provided by management accounting is not prepared by
following GAAP."Do you agree with the statement? 4
(b) Explain the term "management by exception". 2
2. Briefly state the various techniques of cost accounting.
3. ( a) "Variable costs are always relevant cost'- Do you agree?,, 4
(b) Define the terra "opportunity cost" with appropriate example. 2

4. Discuss the underlying assumptions in the cost volume profit analysis. 6

5. Shat is a flexible budget? How does flexible budget differ from
fixed budget? 6
6. ( a)Differentiate between absorption costing and. direct costing.
(b) What are the arguments In favor of hot charging fixed cost in the valuation of
inventory under direct costing?
7. (a) State the objectives of budgetary control. 3
(b) Distinguish between forecasting and budgeting. 3

Part B - Broad Questions

(Answer any four questions)

8. Essex private limited company has developed the following statement for the first two
years of their operation. They sold the same number of unit each year but the profit is
more than double in the second year of their operation. The CEO was quite confused about
their operating results.

Year 1 Year 2
Taka Taka
Sales (20000 units each year) 7,00,000 7,00,000
Less : Cost of goods sold 4,60,000 4,00,000
Gross margin 240,000 300,000
Less: Selling and administrative expenses 200,000 200,000
Net operating income 40,000 1,00,000
The information related to the production of the company for these years was as
follows :

Year 2 Year 2
Actual production in units 20,000 25,000
Standard production, per year 20,000 20,000
Variable manufacturing cost per. unit of production Tk.8 Tk.8
Variable selling and administration cost per unit Tk. 1 Tk. 1
Fixed manufacturing overhead costs -(total) 3,00,000 3,00,000

Required : 3+4+1.5+1.5-10
(a) Compute the standard unit product cost for each year under absorption costing
and variable costing.
(b) Prepare a variable costing income statement for each year.
 (c) Reconcile the - variable. costing and absorption net operating income
figures for year 2
(d) Explain to the CEO why, under absorption costing, the net operating income for
year 2 was higher than the net operating, income of. year 1, though the same
number of units was sold in each year.
9. Rock Inc. distributed a high quality wooden bird house that sells for Tk. 20 per unit
Variable costs are Tk. 8 per unit and the fixed cost for the year is Tk. 1,80,000.
Required:
(a) What is the product's CM ratio?
(b) Break-even point in sales in taka and in unit.
(c) Due to an Increase in demand, the company estimates that sales will increase by
Tk. 75,000,during the next year. How much will the operating income increase (or
net loss decrease) assuming that no change in fixed cost occurred.
(d) What is the amount of sales required to earn a profit of Tk. 24,000.
(c) Calculate the margin of safety at a profit of Tk. 30,000.
10. Tanis kids fashion is ready to begin its third quarter, in which Peak sales occur. The
company has their. highest cash requirement in this quarter and they has got an
option of borrowing from bank in the multiple of Tk. 10,000 with and interest of
10%. They generally borrow at the beginning of the month and repay at the end.
The following data have been assembled to find their cash need for the upcoming
months :
* On July 1 the company have a cash balance of Tk. 44,500.
* Actual sales for the last two months and budgeted sales (all sales are on account) are as
follows :

Taka.
May (actual), 2,50,000
June (actual), 3,00,000
July (budgeted), 4,00,000
August (budgeted), 6,00,000
September (budgeted), 3,20,000
Past experience- shows that the sales are collected in the following pattern:
25%.of sales are collected in the month of sales
75%'of sales are collected in the month following sales
* B ud geted mer ch and ise pu rchase and o th er exp en ditu re are g iv en b elow
:
July August September
Taka Taka Taka
Merchandise purchases 2,40,00 3,50,000 1,75,000
0
 Salaries and Wages 45,000 50,000 40,000

Advertising 1,30,000 1,45,000 80,000

Rent payments 9,000 9,000 9,000

Depreciation 10,000 10,000 10,000

* Merchandise purchases are paid in full in the month following purchase.

Accounts payable for the merchandise purchases on June 30 was Tk. 180,000.
* Equipment costing Tk. 10,000 will be purchased in July for cash.
* The company needs a minimum cash balance of Tk. 20,000 to start each month.
R eq u ired :
(a) Prepare a cash collection schedule for the month of July, August and
September and for the quarter in total.
(b) Prepare a cash budget from July to September.
11. (a) Imperial jewelries is considering a special order for 20 handcrafted gold bracelets
to be given as gift of a wedding party. The normal selling price for the product
is Tk. 189.95 and its unit product cost is Tk. 149.00 as shown below :
Taka
Direct materials 84.00
Direct labour 45.00
Manufacturing overheads 20.00
Unit product cost 149.00

Most of the manufacturing overhead is fixed and unaffected by variation in how much
jewelry is produced in any given period. However Tk.4.00 of the overhead is variable with
respect to the number of bracelet produced. The customer, who is interested in the special
order would like special filigree applied to the bracelets. This filigree would require
additional materials Costing. 2.00 per bracelets and would also require acquisition of a
special tool costing Tk. 250.00 that would have no, other use once the special order is
completed. This order would have no effect on the company's regular sales and the order
could be fulfilled using the company's existing capacity without affecting any other order.
Required :
(i) What effect would accepting this order have in the company's net operating
income if a special price of tk. 169.95 per bracelet is offered for this order?
(ii) Should this order be accepted at this price?
(b)Due to the declining popularity of digital watches, Sweiz Company's digital watch line
has not reported a profit for several years. An income statement for last year follows :
 Segment Income StatementDigital Watches
Taka. Taka.
Sales 500,000
Less : Variable expenses :
Variable manufacturing costs 120,000
Variable shipping costs 5,000
Commissions 75,000 200,000
Contribution margin 300,000
Less : Fixed expenses :
General factory overhead* 60,000
Salary of produce line manager. 90,000
Depreciation of equipment** 50,000
Product line advertising 100,000
Rentfactory space*** 70,000
General administrative expense* 30,000 400,000
Net operating loss (100,000)
* Allocated common cost that would be redistributed to other product lines if digital
watches were dropped.
* This equipment has. no resale value and does not wear out through use.
*** The digital watches are manufactured in their own facility.
Required : 5
What do you think; the company should retain or drop the digital watch line? (support
your answer with necessary calculation
12. (a) Distinguish between join product and by-product.
(b) Describe two methods to account for by-product.
(c) Company process an ore in department 1, from which come, three products L, W
and X. Product L is processed further in department 2. Product W is sold without
further processing. Product X is consider a by-product and is process further in
department 3. Costs in department 1 are Tk. 8,00,000, department 2 costs are Tk.
1,00,000 and department 3 costs are Tk. 50,000. Processing 6,00,000 pounds in
department 1 is results in 50,000 product L, 3,00,000.pounds of product W and
1,00,000 product of X. Product L sells for Tk.,10 per pound. Product W sells for Tk.
2 per pound and product X sells for Tk. 3 per pound.
Requirement:
(i) Compute unit coats per pound for products L, W and X treating X as a by-product.
Deduct the NRV (Net Realizable Value) of the by-product from the foint costa of
products L and W.
(ii) Compute unit costs per pound per products L, W and X treating all three as joint
products and by allocating costs by the NRV method.
13. (a) What are the six steps in designing accounting-based performance measures?
(b) The Base Ball Division of Home Run Sports manufactures and sells baseballs.
Budgeted data for February, 2009 are

Current assets Tk. 4,00,000

Long-term assets 6,00,000
Total Assets Tk. 10,00,000
Production 2,00,000 baseballs per month
output Target 30%
(ROI) Fixed costs Tk. 4,00,000 per month
Variable costs Tk.4 per baseball
R equ irem ent :
(i) Compute the minimum selling price per. baseball necessary to achieve the
target ROI of 30%.
(ii) Using the selling price from requirement I, separate the target ROI into its
two components using the DuPont method.

BBA (PART-IV) SEVENTH SEMESTER EXAMINATION,2009

MAN AGEMENT ACCOUNTING
BUS-4102
Examination Code : 607
Time 3 hour
Full marks 70
[N.B The figures in the merging indicate full marks. All parts (a, b, c) of a question
must be answered sequentially.]
Part A Short Questions
(Answer any four questions)
Marks 5 5 = 30

1. (a) Distinguish between management accounting and financial accounting. 3

(b) What are the ethical responsibilities of management accountants? 3
2. (a) Explain the difference between a product cost and a period cost. Why are product
costs sometimes called inventoriable costs? 3
(b) The relevant range pertains to fixed costs. Not variable costs.
Do you agree? Explain. 3
3. (a) What are the benefits that result from decentralization? 3
(b) Distinguish between a cost center, a profit center and an investment center. 3
4. (a) How does opportunity cost enter into the make or buy decision? 3
(b) Define the following terms :
(i) Joint products;
(ii) Joint costs;
(iii) Split-off point.
5.(a) "Absorption costing considers more categories of costs as product cost." Explain.
(b)What are the basic difference, between absorption costing and variable
costing?
6. (a) What arc the underlying assumptions of' CVP analysis?
(b) What is meant by a product's Contribution Margin (CM) ratio? How
is this ratio useful in planning business operations?
7. (a) Distinguish between budget and budgetary control. 3
(b) State the objects of budgetary control. 3

Part B Broad Questions

(Answer any four questions)
Marks 10 4 = 40
8. Following is the information relating to XYZ Co:-
Taka
Selling price per unit 2.00
Variable expense per unit 0.80
Contribution Margin per unit 1.20
Fixed Expenses per year 60,000

Required :
(i) Calculate the annual break-even sales in taka and in units 2
(ii) How many units must be sold to earn a Tk. 9,000 target profit for the year? 2
(iii)XYZ Co. now has one full-time and one part-time salesperson working in the store.
It will cost an additional Tk. 8,000 per year to convert the part-time position to a
full-time position. This change would bring in an additional Tk. 20,000 in sales
each year. Should the company convert the position? Use the incremental approach.
(iv) Refer to the original data, actual operating results for the first year are as follow :
Taka
Sales 1,25,000
Less : Variable expenses 50,000
Contribution Margin 75,000
Less : Fixed expenses 60,000
 Net operating income 15,000

(a) What is the Companys degree of operating leverage? 2

(b) If the sales increase by 20% in next year, what would be the expected percentage
increase in net operating income? Use the degree of operating leverage concept
to compute your answer. 2
9. Bovine Company, a wholesale distributor of DVDs, has been experiencing losses for
sometime, as shown by i t s most recent monthly income statement below :
Taka
Sales 1.500.000
Less : variable expenses 5,88,000
Contribution margin 9,12,000
Less : Fixed expenses Net operation loss 9,45,000
Net operation loss (33,000)

In an effort to isolate the problem, the president has asked toi an income statement
segmented by geographic market. Accordingly, the Accounting Department has
developed the following data .
Geographic Market South Central North

Sales Tk.4,00.000 Tk. 6,00,000 Tk. 5,00,000

Variable expenses as a 52% 30% 40%

percentage of sales

Traceable fixed expenses Tk. 2,24,000 Tk. 3,30,000 Tk. 2,00,000

Required :
(i) Prepare a contribution format income statement segmented by geographic
market, as desired by the president. Show both Amount and Percent columns for
the company as a whole and for- each geographic market.
(ii) The Company's sales manager believes that sales in t h e Central geographic market
could be increased by 15% if advertising were increased by Tk.25,000 each
month. Would you recommend the increased advertising? Show computations to
support your answer.

10. (a) Blueline Company manufacturers 30,000 units of part S-3 each year for use on its
production line. The cost per unit for part S-3 follows :
Taka
Direct materials 3.60
 Direct labor 10.00
Variable manufacturing overhead 2.40
Fixed manufacturing overhead 9.00
Total cost per part 25.00
An outside supplier has offered to sell 30,000 units of part S-3 each year to Blucline
Company for Tk. 21 per part. If Blueline Company accepts this offer, the
facilities now being used to manufacture part S-3 could be rented to another
company at an annual rental of Tk. 80,000. However. Blueline Company has
determined that Tk. 6 of the fixed manufacturing overhead being applied to part S-
3 would continue even if part S-3 were purchased from the outside supplier.
Required :
Prepare computations to show the net amount of taka advantage or disadvantage of
accepting the outside supplier's offer. 5
(b) Dorsey Company manufactures three products from a common input in a joint-
processing operation. Joint processing costs up to the split-off point total Tk. 3,50,000
per quarter. The company allocates these costs to the joint products on the basis of
their relative sales value at the split-off point. Unit selling prices and total output at
the split-off point are as follows :

Product Selling Price Quarterly Output

A Tk. 16 per pound 15,000 pounds
B Tk. 8 per pound 20,000 pounds
C Tk. 25 per gallon 4,000 galons
Each product can be processed further after the split-off point. Additional
processing requires no special facilities. The additional processing costs (per
quarter) and unit selling prices after further processing are given below :

Product Additional Soiling Price

Processing Costs
A Tk. 63,000 Tk. 20 per pound
B Tk. 80,000 Tk. 13 per pound
C Tk. 36,000 Tk. 32 per gallon
Required :
 Which product or products should be sold at the split-off point and which product or
products should be processed further? Show computations. 5
11. Far North Telecom Ltd. of Ontario has organized a new division to manufacture
and sell specialty cellular telephones. The division's monthly costs are shown
below :
Manufacturing costs :
Direct materials Tk. 48
Variable manufacturing overhead Tk. 2
Fixed manufacturing overhead costs (total) Tk. 3,60,000
Selling and administrative costs :
Variable 12% of sales
Fixed (total) Tk. 4,70,000

Far North Telecom regards till of its workers as full time employees and the
company has a long standing no layoff policy. Furthermore, production is
highly automated. Accordingly the company includes its labor costs in its fixed
manufacturing overhead. The cellular phones sell for Tk. 150 each. During
September, the first month of operation, the following activity was recorded :
Units sold 10,000
Units produced 12,000

Required .
(i) Compute the unit product cost under 2
(a) Absorption costing;
(b) Variable costing.
(ii) Prepare income statement for September using standard Absorption costing. 3
(iii)Prepare income statement for September using Variable costing. 3
(iv)Reconcile the operating income under adsorption costing with operating income
under variable costing.
12. (a)State the main features of flexible budget. 2
(b) Prepare a flexible budget from the following data made available in respect of
a half-yearly period and forecast the working result at 70%, 85% and 100% of
capacity when sales are Tk. 50 lacs, Tk. 60 lacs and Tk. 85 lacs respectively, while
fixed expenses remain constant, semi-variable expenses are constant between 55%
and 75% of capacity increasing by 10% between 75% and 90% of capacity and by 20%
between 90% and 100%; of capacity. The expenses at 60% capacity are as
follows : 8
(Taka in lacs)
Semi-variable :
 Maintenance and repair 1.25
Indirect labour 5.00
Sales expenses 1.50
Sundry overheads 1.52
Variable :
Materials 12.00
Labour 13.00
Other expenses 2.00
Fixed expenses :
Wages and salaries 4.20
Rent and taxes 2.80
Depreciation 3.50
Sundry overheads 4.50
51.00

13. (a) St. Paul's Hospital contains 450 beds. The average occupancy rate is 80% per
month. In other words, on average. 80r:V of the hospital's beds are occupied by
patients. At this level of occupancy, the hospital's operating costs are Tk. 32 per
occupied bed per day. assuming a 30-day month. This Tk. 32 figure contains both
variable and fixed cost elements.
During June, the hospital's occupancy rate was only 60%. A total of Tk.
3,26,700 in operating cost was incurred during the month.
Required :
(i) Using the high-low method, estimate :
(a) The variable cost per occupied bed on a daily basis. 2
(b) The total fixed operating costs per month. 2
(ii) Assume an occupancy rate of 70fr per month. What amount of total operating
cost would you expect the hospital to incur? 2

(b) The following data relating to units shipped and total shipping expense have been
assembled by Arche Company, a wholesaler of large, custom-built air-conditioning units
tor commercial buildings :
Month Units Shipped Total Shipping Expense
(Taka)
January 3 1,800
February 6 2,300
March 4 1,700
 April 5 2,000
May 7 2,300
June 8 2,700
July 2 1,200
Required :
( i ) Using the least-squares regression method, estimate the variable and fixed
elements of shipping expense. 3
( ii ) Express the cost data in ru above in the form Y = a bX. 1

BBA FOURTH YEAR SEVENTH SEMESTER EXAMINATION, 2010

MANAGEMENT ACCOUNTING (4 102)
Time- -3 hours
Full marks 70
[ N.B The figures in the right margin indicate full marks.]
Part A Short Questions
(Answer any five questions)
Marks 6x5=30

1. (a) Briefly explain the scope of management accounting. 3

(b) What are various techniques of Management Accounting? Explain any three
of them. 4
2. (a) Briefly explain the different techniques applied for CVP analysis. 3

(b) "Contribution margin is the excess of sales over fixed costs." Do you agree?
Explain. 3

3. (a) "If a product line is generating a loss, then it should be discontinued." Do you
agree? Explain. 3
(b) Are variable costs always relevant costs? Explain. 3
3
4. (a) Why is budgeted performance better than past performance as a basis for judging
actual results?
(b) Differentiate between a sales forecast and a sales budget. 3
5. Ho\v will you classify costs according to managerial decision making?
(b) State the methods of segregating mixed costs.
3
6. When and why profits will be higher in case of absorption costing and variable
costing? 6
7. (a) What is responsibility accounting? 3
(b) Why is it necessary to prepare income statement in a segmented form? 3

Part BBroad Questions

(Answer any four questions)
Marks10x4=40
8. (a )Distinguish between (i) a variable. (ii) a fixed cost and (iii) a mixed cost,
(b) The Big Star Hotel in Dhaka has accumulated records of the total electrical costs
of the hotel and the number of occupancy-days over the last year. An occupancy-
day represents a room rented out for one day. The hotel's business is highly
seasonal, with peaks occurring during the ski season and in the summer.

Month Occupancy-days Electrical costs(Taka)

January- 1,736 4,127
February 1,904 4,207
March 2,356 5,083
April 960 2,857
May 360 1,871
June 744 2,696
July 2,108 4,670
August 2,406 5,148
September 840 2,691
October- 124 1,588
November 720 2,454
December 1,364 3,529
Required:
(i) Using the high-low method estimate t h e fixed cost of electricity per month and
the variable cost of electricity per cost formula for occupancy-day. Almost
estimate a electrical cost.
 (ii) Using the cost formula you derived above, what amount of electrical costs would
you expect to be incurred at an occupancy level of 1,100 occupancy-days?

9. (a) Royal Lawncare Company produces and sells two packaged products, Weedban
and Greengrow. Revenue and cost information relating to the products following :

Product

Weedban(TK.) Greengrow(Tk.)
Selling price per unit 6 7.50
Variable expenses per unit 2.40 5.25

Traceable fixed expenses per year 45,000 21,000

Common fixed expenses in the company total Tk. 33,000 annually. Last year the
company produced and sold 15,000 units of Weedban and 28,000 units of
Greengrow
Required: Prepare a contribution format income statement segmented by product lines.
Show both Amount and Percent columns for the company as a whole and for each of
the products.
(b) Services Company of Bangladesh has two regional divisions with headquarters in
Dhaka and Chittagong. Selected data on the two divisions divisions follows:

Divisions

Dhaka Chittagong
(TK.) (Tk.)
Sales 3,000,000 9,000,000

Net operating income 2,10,000 7,20,000

Average operating assets 1,000,000 4,000,000

Required:
(i) For each division, compute the return on investment (ROI) in terms of margin and
turnover. 2
 (ii) Assume that the company evaluates performance using residual income and that
the minimum required rate of return for any division is 15%. Compute the residual
income for each division. 2
(iii)Is Chittagong's greater -amount of residual income an indication that it is better
managed? Explain. 2

10. (a) Delta Company manufactures 30,000 units of part S-5 each year for use on
its production line. At this level of activity, the cost per unit for part S-5 is
as follow :
Taka
Direct materials 3.60

Direct labor 10.00

Variable manufacturing overhead 2.40
Fixed manufacturing overhead 9.00
Total cost per part 25.00

An outside supplier has offered to sell 30,000 units of part S-6 each year Delta
Company for Tk. 21 per part. If Delta Company accepts this offer, the facilities now
being used to manufacture part S-6 could be rented to another company at an annual
rental of Tk. 80,000. However, Delta Company has determined hat Uvo-thirds of the
fixed manufacturing overhead being applied to part S-5 would continue e\en if part S-
5 were purchased from the outside supplier.
Required: Prepare computations showing how much profits will increase or decrease
if the outside supplier's offer is accepted.
(b) Benoit Inc., produces several products from processing 1 ton of clypton, a rare
mineral. Material and processing costs total Tk. 60,000 per ton, one-fourth of which
is allocated to product X. Seven Thousand units of product X are produced from
each ton of clypton. The units can either be sold at the split-off point for Tk. 9 each,
or processed further at a total cost of Tk. 9,500 and then sold for Tk. 12 each.
Required: Should product X be processed further or sold at the split-off point?

11. Minder Company is a wholesale distributor of premium chocolates. The

company's balance sheet as of April 30 is below :
Minden Company
Balance Sheet
April 30
 Assets

Taka
Cash 9,000
Accounts receivable 54,000
Inventory 30,000
Buildings and equipment, net of depreciation 207,000
Total assets 300,000
Liabilities and Stockholders' Equity
Accounts payable 63,000
Notes payable 14,500
Capital stock, no par 180,000
Retained earnings 42,500
Total liabilities and stockholders' equity 3,00,000
The company is in the process of preparing budget data for May. A number of
budget items have already been prepared, as stated below :
(c) Sales are budgeted at Tk. 200,000 for May. Of these sales, Tk. 60,000 will be for cash;
the remainder will be- credit sales. One-half of a month's credit sales are collected in
the month the sales are made, and the remainder is collected in the following month.
All of the April 30 accounts receivable will be collected in May.
(d) Purchases of inventory are expected to total Tk. 120,000 during May. These purchases
will all be on account. Forty percent of all purchases are paid for in the month of
purchase; the remainder are paid in the following month. All of the April 30 accounts
payable to suppliers will be paid during May.
e) The May 31 inventory balance is budgeted at Tk. 40.000.
f) Operating expenses for May are budgeted at Tk. 72.000, exclusive of depreciation.
These expenses will be paid in cash. Depreciation is budgeted at Tk. 2,000 for the
month.
(e) The note payable on the April 30 balance .sheet will be paid during May. with Tk. 100
in interest. (All of the interest relates to May)
(f) New refrigerating equipment costing Tk. 6.500 will be purchased for cash during May.
(g) During May. the company will borrow Tk. 20.000 from its bank by giving a new note
payable to the bank for that amount. The new note payable be due in one year.
Required :
(i) Prepare a cash budget for May. Support your budget with a schedule of expected cash
collections from sales and a schedule of expected cash disbursements for merchandise
purchases.
(ii) Prepare a budgeted income statement for May. Use the absorption costing income
statement.
(iii) Prepare a budgeted balance sheet as of May 31
12. (a) Why do you analyze break-even-point?
(b) The following data are obtained from the records of a factory :
Taka Taka
Sales, 8000 units @ Tk 25 each 2,00,000
Direct material consumed 80,000
Variable overhead Labour 25,000
Labour 35,000
Fixed overhead 36,000 1,76,000
Net profits 24,000
Required :
(i) Calculate break-even-point in units and Taka.
(ii) The sales needed to earn a profit of Tk. 54,000
(iii) If selling price is reduced by 20%, calculate break-even point in Taka and units
(iv)To find out selling price if the break-even-point is 2000 units.
13. Computer Desh incorporation makes an oak desk specially designed for personal
computers. The desk sells for Tk. 200 each. Data for last years operation follow
:-
Units in beginning inventory 00
Units produced 10.00
Units sold 8.000
Unit in ending inventory 2.000
Variable costs per unit : Taka
Direct labour 60
Direct labour 30
Variable manufacturing overhead 10
Variable selling and administrative overhead 20
Total variable cost pre unit 120
Fixed costs :
Fixed manufacturing overhead 3,00,000
Fixed selling and administrative overhead 4,50,000
Total variable 7,50,000
Required :
(ii) Prepare an income statement using variable costing.
(ii) Prepare an income statement using absorption costing. 4
(iii) Prepare a reconciliation statement.

BBA FOURTH YEAR SEVENTH SEMESTER EXAMINATION, 2011

 MANAGEMENT ACCOUNTING
Subject Code : 4102
Examination Code : 607
Time3 hours Full
marks70
[N.B.The figures in the margin indicate full marks.]
Part AShort Questions
(Answer any five questions)
Marks6 x 5 = 30
Marks
1. (a) "The area and scope of management accounting is different with comparing
financial accounting."Explain. 3
(b) What is management accounting and what are the implications of
management accounting in a modern business organization?
2. (a) How do fixed costs create difficulties in costing units of products?
(b) Define opportunity costs and sunk costs with example.
3. (a) What are the underlying assumptions of CVP analysis?
(b) How does an increase in income tax rate affect the break-even point?
4. (a) What is meant by the term' decentralization'?
(b) Explain how the segment margin differs from the contribution margin.
5. (a) Define Budgetary control. Distinguish between budgets and budgetary control.
(b) State some pre-requisites for establishing a budgetary control system.
6. (a) Define variable costing and absorption costing.
(b) Explain, how manufacturing overhead costs are shifted from one period to
another under absorption costing.
7. (a) What is a master budget? Briefly describe its components.
(b) How does zero based budgeting differ from traditional budgeting?

Part BBroad Questions

(Answer any four questions)
Marks10x4=40

8. (a) Why is manufacturing overhead considered an indirect cost of a unit of product?

(b) Only variable costs can be differential costs. Do you agree? Explain.
(c) ABC Co. Ltd. operates a fleet of delivery trucks in Malaysia. The Co. has
determined that if a truck is driven 105,000 kilometers during a year, the average
operating costs is Tk. 11.40 per kilometer. If a truck is driven only 70,000
 kilometers during a year, the average operating costs increases to Tk. 13.4 per
kilometer.
Required :
(i) Using the high-low method, estimate the variable and fixed costs element of the
annual cost of truck operations. 2
(ii) Express the variable and fixed costs in the form Y= a + bx. 2
(iii)If a truck were driven 80,000 kilometers during a year, what total costs would you
expect to be incurred? 2
9. (a) How can we measure the performance of manager of a cost center, a profit center
and an investment center? Briefly explain with examples.
(b) Selected operating data for two divisions of Ali Co. Ltd. are given below :

Division

Dhaka Chittagong
Taka Taka
Sales 4,000,000 7,000,000
Average operating assets 2,000,000 2,000,000
Net operating income 360,000 420,000
Property, Plant and Equipment (Net) 950,000 800,000
Required :
(i) Compute the rate of return for each division using the return on investment (ROI)
formula stated in terms of margin and turnover.
(ii) Which divisional manager seems to be doing the better job? Why?

10. CompuDesk,. Inc., makes an oak desk specially designed for personal computers. The
desk sells for Tk. 200. Data for last year's operations follow :
Units in beginning inventory 0
Units produced 10,000
Units sold 9,000
Units in ending inventory 1,000
Variable costs pr unit:
Taka
Direct materials 60
Direct Labour 30
Variable manufacturing overhead 10
Variable selling overhead 20
Total variable cost per unit 120
Fixed costs : Taka
Fixed manufacturing overhead 300,000
 Fixed selling and administrative overhead 450,000
Total fixed costs 750,000
Required :
(i) Compute the unit product costs under variable costing and absorption costing. 3
(ii) Assume that the Co. uses variable costing. Prepare an income statement using
contribution format. 5
(iii) hat is the Go's break-even point in terms of units sold and mount in Taka?
2

11. Mr. X, President of XYZ Co. Ltd. has just approached the Co's bank with a request for
a Tk. 30,000, 90 day loan. The loan officer has asked for a cash budget to help determine
whether the loan should be made. The following data are available for the month
AprilJune, during which the loan will be used :
(a) On April 01, the start of the loan period, the cash balance will be Tk. 26,000. Accounts
Receivable on April 01 will total Tk. 151,500, of which Tk. 141,000 will, be
collected during April and Tk. 7,200 will be collected during May. The remainder
will be uncollectible.
(b) Past experiences shows that 20% of a month's sales are collected in the month of
sale, 75% in the following sale, and 4% in the second month following sale. The other
1% represts bad.
Budgeted sales and expenses for the period follow :
April May June
Taka Taka Taka
Sales 200,000 300,000 250,000
Merchandise purchase 120,000 180,000 150,000
Payroll 9,000 9,000 8,000
Lease payments 15,000 15,000 15,000
Advertising 70,000 80,000 60,000
Equipment purchase 8,000 - -
Depreciation 10,000 10,000 10,000
(c) Merchandise purchases are paid in full during the month following purchase.
Accounts payable for merchandise purchase on March 31, which will be paid during
April, total Tk. 108,000.
(d) In preparing the cash budget, assume that the Tk. 30,000 loan will be made in April
and repaid in June. Interest on the loan will total Tk. 1,200.
Required :
(i) Prepare a schedule of expected cash collections for April, May and June and the
three months in total.
 (ii) Prepare a cash budget, by month and in total for the three-month period.
12. Minto Company manufactures and sells a single product. The company's sales and
expenses for last quarter follow :
Total Per unit
(Taka)
Sales 450,000 30
Less : Variable expense 180,000 12
Contribution margin 270,000 18
Less : Fixed expenses Net income 216,000
Net income 54,000
Required :
(a) What is the quarterly break-even point in units sold and in sales dollars?
(b) What is the total contribution margin at the break-even point?
(c) How many units would have to be sold each quarter to earn a target profit of Tk.
100,000? Use the unit contribution method. Verify your answer by preparing a
contribution income statement at the target level of sales.
(d) Compute the company's margin of safety in both dollar and percentage terms.
(e) What is the company's CM ratio? If sales increase by Tk. 40,000 per quarter and
there is no change in fixed expenses, by how much would you expect quarterly net
income to increase?
13. (a) Define the following terms :
(i) Incremental cost;
(ii) Margin of safety;
(iii) Return on Investment (ROI).

(b) A company is contemplating the purchase of a new labor-saving machine that will cost
Tk. 30,000 and have a 10-year useful life. Data concerning the company's annual sales
and costs with and without the new machine are shown below :
Current New
Machine Machine
Units produced and sold 5,000 5,000
Selling price per unit Tk. 40 Tk. 40
Direct materials cost per unit 14 14
Direct labour cost per unit 8 5
Variable overhead cost per unit^ 2 2
Fixed costs, other 62,000 62,000
Fixed costs, new machine ---- 3,000
Required :
(i) Use differential costs and benefits analysis to help the company determine
should the company buy the new machine.
 (ii) In the above problem indicate which costs and benefits are irrelevant in your
decision making. 2

BBA FOURTH YEAR SEVENTH SEMESTER EXAMINATION, 2012

MANAGEMENT ACCOUNTING
Subject Code : 4102
Examination Code 607
Time3 hours
Full marks70
[N.B.The figures in the right margin indicate full marks. All parts (a, b, c) of a
question must be answered sequentially.]
Part AShort Questions
(Answer any five questions)
Marks6x5=30

Marks
1.What are the major differences between financial accounting and 6
managerial accounting?
2.(a) "A variable cost is a cost that varies per unit of product, 3
whereas a fixed cost is constant per unit of product." Do you agree? Explain.
(b) Why regression analysis is usually preferred to the high-low 3
method of allocation of mixed costs?
3.(a) How we can measure the performance 'of a cost center, a profit 3
center and an investment center?
(b) Why aren't common costs allocated to segments under the 3
contribution approach? .
4.(a) Briefly describe the concept of zero based budgeting. 3
(b)Distinguish between forecasting and budgets. 3
5.(a) When and why profits will be higher in case of absorption 3
costing and variable costing?
(b) Explain the significance of margin of safety. 3
6.(a) Juaria corporation has a single product whose selling price is $120 and whose
variable expenses is $80 per unit. The company's monthly fixed expenses is $ 50000.
Using the equation method solve for the unit sales that are required to earn a target
profit of $ 10000.
(b) What is responsibility accounting? 2
7.(a) "If a product line is generating a loss, then it should be discontinued." Do you
agree? Explain.
(b) What do you mean by CVP? Describe the uses of CVP analysis. 3
 Part BBroad Questions
(Answer any four questions)
Marks10x4=40
XYZ Company manufactures and sells a single product. Cost data for the product are
given below :
,
Variable cost per unit: Taka
Direct materials 7
Direct labor 10
Variable manufacturing overhead 5
Variable selling and administrative 3
Fixed costs per month :
Fixed manufacturing overhead 315,000
Fixed selling and administrative 245,000
Total fixed cost per month 560,000
The product sells for Tk. 60 per unit. Production and sales data for July and August, the
first two months of operations, follows :
Units produced Units sold
July 17,500 15,000
August 17,500 20,000
The company's accounting department has prepared absorption costing income
statements for July and August as presented below :
July August
Sales 900,000 1,200,000
Less : Cost of goods sold :
Beginning Inventory 0 100,000
Add : Cost of goods manufactured 700,000 700,000
Cost of goods available for sales 700,000 800,000
Less : Ending inventory 100,000 0
Cost of goods sold 600,000 800,000
Gross Margin 300,000 400,000
Less : Selling and Administrative 290,000 305,000
expenses
Net operating income 10,000 95,000
Marks
Required :
(i) Determine the unit product cost under absorption costing and
2
variable costing.
(ii) Prepare variable costing income statement for July and 4
August using the contribution approach.
(iii) Reconcile the variable costing and absorption costing net 2
operating income figures.
(iv) The BEP according to the company's present information is 16,000 units per month,
computed as follows :
Fixed cos t per month,Tk.5,60,000 16,000units

Unit contribution m arg in,Tk.35 perunit

If the BEP is 16,000 units per month how the company shows a profit of Tk. 10,000 in
the month of July when the sales is only 15,000 units? Explain.
9. PQR Company distributes a high quality wooden birdhouse that sells for Tk. 20 per
unit. Variable costs are Tk. 8 per unit and fixed costs total Tk. 180,000 per year.
Required :
(i) What is the product's CM ratio? 1
(ii) Use the CM ratio to determine the break-even point in 1
sales dollars.
(iii) Prepare a CVP graph for the company from a zero level of 1
activity up to 25,000 units sold each year. Indicate the break-even point on your graph.
(iv) Due to an increase in demand, the company estimates that 1
sales will increase by Tk. 75,000 during the next year. By how much should net operating
income increase (or net loss decrease) assuming that fixed costs do not change?
(v) Assume that the operating results for last year were :
Total Per unit
Sales Tk. 400,000 Tk. 20
Less variable expenses 160,000 8
Contribution margin 240,000 Tk. 12
Less fixed expenses 180,000
Net operating income Tk. 60,000

Marks
(a) Compute the company's margin of safety in both dollar and 1
percentage terms.
(b) Compute the degree of operating leverage at the current level 1
of sales.
(c) The president expects sales to increase by 20% next year. By 1
what percentage should net operating income increase?
(vi) Assume that the company sold 18,000 units last year. The sales manager is 3
convinced that a 10% reduction in the selling price, combined with a Tk. 30,000 increase
in advertising, would cause annual sales in units to increase by one-third. Prepare two
contribution income statements, one showing the results of last year's operations and one
showing the results of operations if these changes are made. Would you recommend, that
the company do as the sales manager suggests?
10. (a) Hoi Chong Transport Ltd. operates a fleet of delivery trucks in Singapore. The
company has determined that if a truck is driven 105,000 kilometers during a year, the
average operating cost is Tk. 11.40 per kilometer. If a truck is driven only 70,000
kilometers during a year, the average operating cost increases to Tk. 13.4 per kilometer.
Required :
(i) Using the high low method, estimate the variable and 2
fixed cost elements of the annual cost of truck operation.
(ii) Express the variable and fixed costs in the form 1
Y = a + bX.
(iii) If a truck were driven 80,000 kilometers during a year, 2
what total cost would you expect to be incurred?
(b) The following data relating to units shipped and total shipping expenses have been
assembled by Molina Company, a wholesaler of large, custom-built air-conditioning units
for commercial buildings :
Month Units Shipped Total Shipping Expenses
January 3 Tk. 1,800
February 6 2,300
March 4 1,700
April 5 2,000
May 7 2,300
June 8 2,700
July 2 1,200
Required :
Using the least-squares regression method, estimate a cost formula for shipping
expense. 5

Marks
11.(a) How does opportunity cost enter into the make or buy decision? 2
(b) Blueline Company manufactures 30,000 units of part S-3 each year for use on its
production line. The cost per unit for part S-3 follows :
Direct materials Tk.3.60
Direct labor 10.00
Variable manufacturing overhead 2.40
Fixed manufacturing overhead 9.00
Total cost per part Tk. 25.00
An outside supplier has offered to sell 30,000 units of part S-3 each year to Blueline
Company for Tk. 21 per part. If Bluelme Company accepts this offer, the facilities now
being used to manufacture part S-3 could be rented to another company at an annual
rental of Tk. 80,000. However, Buleline Company has determined that Tk. 6 of the fixed
manufacturing overhead being applied to part S-3 would continue even if part S-3 were
purchased from the outside supplier.
Required:
Prepare computations to show the net amount of Taka advantage 8
or disadvantage of accepting the outside supplier's offer.
12.Telecom Ltd. has organized a new division to manufacture and sell cellular phone.
The division's monthly cost are shown below :
Manufacturing costs :
Variable costs per unit:
Direct material $48
Variable manufacturing overhead $2
Fixed manufacturing overhead costs (total) $360,000
Selling and administrative costs : .
Variable 12% of sales
Fixed (total) $470,000
The cellular phones sell for $150 each, During September, the first month of operations
the following activity was recorded:-
Units produced 12,000
Units sold 10,000

Required :
(i) Compute the unit product cost under : 3
(a) Absorption costing.
(b) Variable costing.
(ii) Prepare an absorption costing income statement for September. 7

13.You have been asked to prepare a December cash budget for Hassan Company, a
distributor of exercise equipment. The following information is available about the
company's operations:
(a)The cash balance on December 1 is $40,000.
(b)Actual sales for October and November and expected sales for December are as
follows :
October November December
Cash sales $65,000 $70,000 $83,000
Sales on discount $400,000 $525,000 $600,000
Sales on account are collected over a three month period as follows :
20% collected in the month of sale, 60% collected in the month following sale and 18%
collected in the second month following sale. The remaining 2% is uncollectible.
(c)Purchases of inventory will total $280,000 for December. 30% of a month's inventory
purchases are paid during the month of purchase. The accounts payable remaining from
November's inventory purchases total $161,000, all of which will be paid in December.
(d)Selling and administrative expenses are budgeted at $430,000 for December. Of this
amount $ 50,000 is for depreciation.
(e)Marketing costing $76,000 will be purchased for cash during December and dividends
totaling $9,000 will be paid during the month.
The company maintains a minimum cash balance of $20,000.
Required:
(i)Prepare a schedule of expected cash collection for December. 2
(ii) Prepare a schedule of expected cash disbursement for purchase for December. 2
(iii) Prepare a cash budget for December. 6

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