Management Accounting

Time allowed – 3 hours

Maximum marks – 100

[N.B. – Questions must be answered in English. Figures in the margin indicate full marks. All
workings are to be submitted. Examiner will take account of the quality of language and of
the manner in which the answers are presented. Different parts, if any of the same
question must be answered in one place in order of sequence.]

Marks
1. (i) Distinguish between variable costs and differential costs and highlight the importance of
differential costs in non-routine decisions. 4
(ii) SV Ltd. is able to obtain 200,000 kgs of AXE and 400,000 kgs of BXE from the input of
600,000 kgs of raw material “F”. The selling prices of these articles are AXE Tk.6 per kg
and BXE Tk.4.50 per kg. The processing costs amount to Tk.20 lacs per month as under:
Raw material “F” (600,000 kgs x Tk.2) Tk. 1,200,000
Variable processing costs 600,000
Fixed processing costs 200,000
Total 2,000,000
The company has the following three proposals under consideration:
(1) Product AXE can be further processed by mixing it with other purchased materials.
There is a market potential for absorbing the entire product AXE when processed
further into PXE. The selling price of PXE is Tk.13 per kg. Each kg of PXE requires
one kg of AXE raw material. Additional cost of other material labour and overheads to
process AXE into PXE amounts to Tk.1,600,000 per month.
(2) There is an offer to purchase an additional quantity of 40,000 kgs of BXE at a price of
Tk.3.50 per kg. The existing market for BXE would not be affected by the acceptance
of this proposal. All units of AXE will be sold at a uniform price.
(3) A new raw material has just become available. The processing costs will remain the
same but the process will yield 2 kgs of AXE for every 3 kgs of BXE. The total
quantity of the new raw material is limited to 600,000 kgs.
Required:
(a) Find the profitability arising from the sale of AXE and BXE as originally envisaged. 4
(b) Evaluate the proposal for further processing of AXE into PXE and present a statement of
profitability. 4
(c) Analyse the proposal for the manufacture of an additional quantity of 40,000 kgs of BXE
contained in (2) above. In view of the increased quantum of sales of AXE, the price will go
down. Find the minimum reduced average price for AXE to sustain the increased sales. 4
(d) Evaluate the proposal for substitution of the existing raw materials by new raw materials
and find the maximum price the Company can afford to pay for the new raw materials for
retaining the existing profitability. 4

2. (i) What reasons might influence a company to undertake the processing of by-product from
scrap materials? State any factors which limit their production. What costing treatment do
you recommend? 4
(ii) The following are standard cost data for a company manufacturing single product:
Tk.
Direct materials 50 kgs. @ Tk.4.20 per kg 210
Direct labour 20 hrs. @ Tk.3.50 per hr. 70
Variable production overhead 20 hrs. @ Tk.1.20 per hr. 24
Fixed production overhead 20 hrs. @ Tk.4.50 per hr. 90
394
Standard selling price 600

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Budgeted production for the month of May was 260 units and this figure was used in
calculating the fixed overhead absorption. Overhead is absorbed into production on the basis
of units produced but the variable overhead is deemed to vary with hours worked.

An abridged trading and profit and loss statement prepared in the conventional way shows the
following:

Tk. Tk.
Sales 1,65,000
Materials used 50,200
Direct wages 22,400
Production overhead Variable 6,600
Fixed 23,500 1,02,700
Gross profit 62,300
Selling and administration 29,300
Net profit 33,000

Additional information appropriate to May:

Sales and production 250 units

There was no working progress
Actual hours worked by direct labour 5,600
Materials used cost Tk.4 per kilo.

(a) To calculate the following variances: 9

i. Due to selling prices.

ii. Direct materials prices.
iii. Direct materials usage.
iv. Direct wages rate.
v. Direct labour efficiency.
vi. Variable production overhead expenditure.
vii. Variable production overhead efficiency.
viii. Fixed production overhead expenditure.
ix. Fixed production overhead volume.

(b) To present a profit statement utilizing standard costs and showing the variances. 3

(c) i. To comment on possible reasons for each of the variances you show for (a); and
ii. To state what ought to be done by the appropriate executive responsible for the direct
labour efficiency variance. 4

3. (i) How does the presence or absence of idle capacity affect the optimal transfer pricing policy? 3
(ii) “We use variable-cost transfer prices to ensure that no dysfunctional decisions are made.” –
Discuss 3
(iii) Samsung industries had several independent divisions. The company’s Tube division
manufacture a picture tube used in television sets. The tube divisions income statement for
last year, in which 8,000 tubes were sold, is given below:
Total Unit
Sales Tk.13,600,000 Tk.1,700.00
Less cost of goods sold 8,400,000 1,050.00
Gross margin 5,200,000 650.00
Less selling and administrative expense 3,900,000 487.50
Divisional Net Income 1,300,000 162.50

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As shown above, it costs the Tube division Tk.1,050 to produce a single tube. This figure
consists of the following costs:

Direct materials Tk.380

Direct labour Tk.270
Manufacturing overhead (75% fixed) Tk.400
Total cost per tube Tk.1,050

The Tube Division has fixed selling and administrative expenses of Tk.3,50,000 per year.
Samsung Industries has just formed a new division, called the TV division, that will produce
a Television set that requires a high-resolution picture tube. The Tube Division has been
asked to manufacture 2,500 of these tubes each year and sell them to the TV division. As one
step in determining the price that should be charged to the TV division, the Tube Division has
estimated the following cost for each of the new high-resolution tubes:

Direct materials Tk.600

Direct labour Tk.490
Manufacturing overhead (2/3 fixed) Tk.540
Total cost per tube Tk.1,630

To manufacture the new Tubes, the Tube Division would have to reduce production of its
regular tubes by 3000 units per year. There would be no variable selling and administrative
expenses on the intra company business and total fixed overhead costs would not change.
Assume direct labour is a variable cost.

Required:’
(a) Determine the lowest acceptable transfer price from the perspective of the Tube Division
for each of the new high-resolution tubes. 7
(b) Assume that the TV Division has found an outside supplier that will provide the new tube
for only Tk.2000 each. If the Tube Division meets this price, what will be the effect on
the profits of the company as a whole? 7

4. (i) What do you understand by the term “shadow price” in linear programming? Explain the
usefulness of this concept in arriving at management decision. Give an example to illustrate
your answer. 4

(ii) The following table gives the activities and other relevant data for a project:

Activity Normal time Crash time Normal cost Crash Cost

days days Tk. Tk.
1-2 4 3 600 800
1-3 2 2 400 400
1-4 5 4 750 900
2-3 7 5 400 600
2-5 7 6 800 1,000
3-5 2 1 500 650
4-5 5 4 600 850

Indirect cost per day for the project is Tk.200.

(a) Draw the network of the project. 8

(b) Find the critical path, the normal duration and cost of the project. 4
(c) Find the optimum duration and cost of the project showing the detailed analysis. 4

5. (i) What are sunk costs? Are sunk costs relevant in decision making? If so, give one or more
examples. 4

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(ii) T Ltd. makes two products, X and Y with the following cost patterns.

Product X Product Y
Tk. Tk.
Direct materials 27 24
Direct labour at Tk.5 per hour 20 24
Variable production overheads at Tk.6 per hour 24 30
Total Tk.71 Tk.78

Production fixed overhead total Tk.300,000 per month and at present these are absorbed on the
basis of direct labour hours. Budgeted direct labour hours are 25,000 per month. However, the
company has recently carried out an analysis of its production support activities and found that its
“fixed costs” actually vary in accordance with no-volume related factors.

Activity Cost Driver Products Total Cost

X Y Tk
Set ups Production runs 30 20 40,000
Materials handling Production run 30 20 150,000
Inspection Inspection 880 3520 110,000
Tk.300,000

Budgeted production is 1,250 units of product X and 4000 units of product Y.

Required:
Given that the company wishes to make a profit of 20% on full production costs, calculate the
prices that should be charged for product X and product Y using: (a) Full cost-plus pricing, and
(b) Activity – Based cost plus pricing. 14

(iii) Why do responsible people in an organization tend to accept budgetary control in theory but resist
in practice. Explain. 2

The End