The Institute of Cost and Management Accountants of Bangladesh

Professional Level-III 302.

Advanced Cost Accounting
Knowledge Assessment Test
Q. No. 1
a. “You should always think of variance analysis as providing suggestions for further
investigation rather than as establishing conclusive evidence of good or bad performance”
Explain.
b. Discuss why the adoption of total quality management is important within a just-in-time
environment.
c. Describe two major methods to allocate costs into joint products.
Joint cost is the manufacturing cost incurred on a joint production process which takes common
inputs but simultaneously produces multiple products called joint-products e.g. processing of
crude oil simultaneously yields gasoline, diesel, jet fuel, lubricants and other products. In order
to allocate costs to such joint products, costs accountants employ one of the several cost
allocation methods. Most common of those methods are:

Physical measurement method :Joint costs are allocated based on number of units or physical
quantity such as weight, volume or length of each product relative to total production. This
method can be represented in the following formula:

Quantity of the Product

Cost Allocated to a Joint Product = × Total Joint Costs
Quantity of Total Production

Relative sales value method: This method allocates joint costs on the basis of estimated sales
value of a given joint product relative to the sales value of total joint production. This is
illustrated in the following formula:

Sale Value of the Product

Cost Allocated to a Joint Product = ×Total Joint Costs
Sales Value of Total Production

d. Make differences between Delivery Cycle Time and Throughput time.

Delivery cycle time: The amount of time from when an order is received from a customer to
when the completed order is shipped is called delivery cycle time. This time is clearly a key
concern to many customers, who would like the delivery cycle time to be as short as possible.
Cutting the delivery cycle time may give a company a key competitive advantage - and may be
necessary for survival. Consequently, many companies would include this performance
measure on their balanced scorecard.

throughput time: Manufacturing throughput time is the amount of time required for a product
to pass through a manufacturing process, thereby being converted from raw materials into
finished goods. The concept also applies to the processing of raw materials into a component or
sub-assembly.
Delivery cycle time=Wait time +Throughput (manufacturing cycle) time
 Q. No. 2

Modern Pharma makes a unique syrup using cane sugar and local herbs. The syrup is sold in small
bottles and is prized as a flavoring for drinks and for use in desserts. The bottles are sold for Tk. 12 each.
The first stage in the production process is carried out in the Mixing Department, which removes foreign
matter from the raw materials and mixes them in the proper proportions in large vats. The Company
uses the weighted-average method in its process costing system. A hastily prepared report for the
Mixing Department for April appears below:

Quantity Schedule
Units to be accounted for:
Work in process, April 1 (materials 90% complete; conversion 80% complete) Tk. 30,000
Started into production Tk. 200,000
Total Units to be accounted for Tk. 230,000
Units accounted for as follows:
Transferred to next department Tk. 190,000
Work in process, April 30 (materials 75% complete; conversion 60% complete) Tk. 40,000
Total Units accounted for Tk. 230,000
Cost to be accounted for:
Work in process, April 1 Tk.98,000
Cost added during the month Tk.827,000
Total Cost to be accounted for Tk. 925,000
Cost accounted for as follows:
Transferred to next department Tk.805,600
Work in process, April 30 Tk. 119,400
Total Cost accounted for Tk.925,000
Modern Pharma has just been acquired by another company, and the management of the acquiring
company wants some additional information about Modern Pharma’s operations.

Other Information
The beginning inventory consisted of the following costs: Materials, Tk. 67,800; and conversion cost, Tk.
30,200. The cost added during the month consisted of: Materials, Tk. 579,000; and conversion cost, Tk.
248,000.
Required:
a. What were equivalent units for the month under weighted average method?
b. What were the costs per equivalent unit for the month under weighted-average system?
c. How many of the units transferred to the next department were started and completed during the
month?
d. What were the costs per equivalent unit for the month under FIFO method?
e. The manager of the mixing department, anxious to make a good impression on the new owners,
stated, “Materials prices jumped from Tk. 2.50 per unit in March to Tk. 3 per unit in April, but due to
good cost control I was able to hold our materials cost to less than Tk. 3 per unit for the month.” Should
this manager be rewarded for good cost control system? Explain.

Garrison-4-24
 Q. No. 3

DANISH Food Ltd manufactures condensed milk at its Narayanganj Plant. The plant has been
experiencing problems as shown by its June contribution format income statement below:

Particulars Budgeted (Tk.) Actual (Tk.)

Sales (15,000 containers) 450,000 450,000
Variable Expense:
Variable cost of goods sold [Direct Materials, Direct labor, and 180,000 196,290
variable manufacturing overhead)
Variable selling expenses 20,000 20,000
Total variable expenses 200,000 216,290
Contribution margin 250,000 233,710
Fixed Expenses:
Manufacturing Overhead 130,000 130,000
Selling and administrative 84,000 84,000
Total Fixed Expenses 214,000 214,000
Net Operating Income 36,000 19,710
Mr. Mahmud, who has just been appointed general manager of the Plant, has been given instructions
to “get things under control”. Upon reviewing the plant’s income statement, Mr. Mahmud has
concluded that the major problem lies in the variable cost of goods sold. He has been provided with the
following standard cost per Milk Container:

Standard Quantity or Standard Price or Standard Cost

Hours rate (Tk.) (Tk.)
Direct Materials 0.30 pounds 20.00 6.00
Direct Labor 0.20 hours 24.00 4.80
Variable Manufacturing Overhead 0.10 hours* 12.00 1.20
Total Standard Variable Cost 12.00
*based on machine hours
Mr. Mahmud has determined that during June, the plant produced 15,000 containers of condensed milk
and incurred the following costs:
a. Purchased 6,000 pounds of materials at a cost of Tk. 19.50 per pound.
b. Used 4,920 pounds of materials in production. (Finished goods and work in process inventories are
insignificant and can be ignored).
c. Worked 2,950 direct labor hours at a cost of at a cost of Tk. 28 per hour. d. Incurred variable
manufacturing overhead cost totaling Tk. 18,290 for the month. A total 1,475 machine hours were
recorded. It is the company’s policy to close all variances to cost of goods sold on a monthly basis.
Required:
1. Compute the following variances for June:
a. Direct materials price and quantity variances.
b. Direct labor rate and efficiency variances.
c. Variable overhead spending and efficiency variances.
2. Summarize the variances that you computed in
(1) above by showing the net overall favorable or unfavorable variance for the month. What impact did
this figure have on the company’s income statement?
3. Pick out two most significant variances that you computed in (1) above. Explain to Mr. Mahmud
possible causes of these variances.
Garrison-10-16
 Q. No. 4

a) Six Seasons Food and Beverage Ltd has always been negligent regarding its quality of its products due
to stable sales during the many years. But rise of competitors in the industry has led the company to
think over quality of the product and the company has felt the increased urgency to improve the quality
of its product to retain its market share. A statistical process control system has been installed and other
steps have been taken to decrease the amount of warranty and other field costs, which have been
trending upward over the past several years. Costs relating to quality and quality control over the last
two years are given below:

Costs Taka in million

2015 2014
Inspection 0.90 0.75
Quality Engineering 0.57 0.42
Depreciation f Test Equipment 0.24 0.21
Rework Labor 1.50 1.05
Statistical Process Control 0.18 0.00
Cost of Field Servicing 0.90 1.20
Supplies used in testing 0.06 0.03
System Development 0.75 0.48
Warranty Repairs 1.05 3.60
Loss due to Scraps 1.12 0.63
Producing testing 1.20 0.81
Product Recalls 0.75 2.10
Costs of disposal of defective products 0.98 0.72
Total 10.20 12.00
Sales have been flat over the past few years at Tk. 75 million per year. A great deal of money has been
spent in the effort to upgrade quality, and management is anxious to see whether or not the effort has
been effective.
Required:
(i) Prepare quality cost report that contains data for both years of 2015 and 2014 with percentage of
total sales. (Round to two decimals)
(ii) Prepare a written evaluation to accompany the report with discussion on the distribution of quality
costs in the company, change in the distribution that you see taking place and the reasons for changes in
broad four kinds of costs of quality.

b) A company is planning a new product. Market research information suggests that the product should
sell 20,000 units over five years’ life.

Year 1 Year 2 Year 3 Year 4 Year 5

Expected sales (units) 2000 5000 7000 4000 2000
Unit price (Tk.) 2100 2100 1800 1200 1000
Investment in fixed assets will be Tk. 5000,000 and which will be recovered after five years when plant
will be closed. The company expects to earn 12% p.a. on its investment, in addition to 20% required
margin on sales to maintain its dividend policy of the company. Per unit variable cost will be 60% of
selling price of the goods. It is estimated that the lifetime costs of the product will be as follows:
1. Design and development costs Tk. 500,000
2. Fixed marketing expense Tk. 200,000
3. End of life costs Tk. 200,000
4. Ignore time value of money
Required:
What is the average life cycle cost per unit and is the product worth making on that basis?
 Q. No. 5

Cutler Electronics makes radio-cassette player, CE100, which has 80 components. Cutler sells 7,000 units
each month for Tk. 70 each. The costs of manufacturing CE 100 are Tk. 45 per unit, or 315,000 per
month. Monthly manufacturing costs incurred are:

Direct Material costs TK. 182,000

Direct Manufacturing labor costs Tk. 28,000
Machining Costs (fixed) Tk. 31,500
Testing costs Tk. 35,000
Rework Costs Tk. 14,000
Ordering Costs Tk. 3,360
Engineering Costs (fixed) Tk. 21,140
Total Manufacturing Costs Tk. 315,000
Cutler’s Management identifies the activity cost pools, the cost driver for each activity, and the cost per
unit of the cost driver for each overhead cost pool as follows:

Manufacturing Description of Activity Cost Driver Cost per unit of Cost

Activity Driver
Machining costs Machining Components Machine-hour TK. 4.50 per machine
capacity hour
Testing Costs Testing Components and final Testing Hours TK. 2 testing hour
products (Each unit of CE100
is tested individually)
Rework Costs Correcting and fixing errors Units of CE100 TK. 20 per unit
and defects reworked
Ordering Costs Ordering of components Number of orders TK. 21 per order
Engineering Costs Designing and managing of Engineering hour Tk. 35 per engineering-
products and processes capacity hour
Cutler’s management views direct material costs and direct manufacturing labor costs as variable with
respect to the units of CE 100 manufactured. Over a long-run horizon, each of the overhead costs
described in the preceding table varies, as described with the chosen cost driver.

The following additional information describes the existing design:

a. Testing and Inspection time per unit is 2.5 hours
b. 10% of the CE 100s manufactured are reworked.
c. Cutler places two orders with each component supplier each month. Each component is supplied by a
different supplier.
d. It currently takes 1 hour to manufacture each unit of CE 100.
In response to competitive pressure, Cutler must reduce its price to Tk. 62 per unit and its costs by Tk. 8
per unit. No additional sales are anticipated at this lower price. However, Cutler stands to lose
significant sales if it does not reduce its price. Manufacturing has been asked to reduce its costs by Tk.6
per unit. Improvements in manufacturing efficiency are expected to yield a net savings of Tk. 1.50 per
radio-cassette player, but that is not enough. The chief engineer has proposed a new modular design
that reduces the number of components to 50 and also simplifies testing. The newly designed radio
cassette player, called “New CE100” will replace CE 100.

The Expected effects of the new design are as follows:

a. Direct material cost for the new CE 100 is expected to be lower by Tk. 2.20 per unit.
b. Direct Manufacturing labor cost for the New CE 100 is expected to be lower by Tk. 0.50 per unit.
c. Machining time required to manufacture the New CE 100 is expected to be 20% less, but machine
hour capacity will not be reduced.
d. Time required for testing the New CE 100 is expected to be lower by 20%.
e. Re-work is expected to decline to 4% of New CE 100 manufactured.
f. Engineering-hours capacity will remain same.
g. Assume that the cost per unit of each cost driver of CE 100 continues to apply to New CE100.
Required:
a. Calculate Cutler’s new manufacturing cost per unit of New CE 100.
b. Will the new design achieve the per-unit-cost-reduction targets that have been set for the
manufacturing costs of New CE 100? Show your calculations.
c. The problem describes two strategies to reduce costs: (a) Improving Manufacturing Efficiency and (b)
modifying product design. Which strategy has more impact on Cutler’s cost? Why? Explain briefly.
 Q. No. 6

Topline Surf Boards manufactures a single product. The standard cost of one unit of this product is as
follows:

Direct materials: 6 feet at Tk. 1 Tk. 6.00

Direct labor: 1 hour at Tk. 4.50 Tk. 4.50
Variable manufacturing overhead: 1 hour at Tk. 3 Tk. 3.00
Total standard variable cost per unit Tk. 13.50
During October, 6,000 units were produced. Selected cost data relating to the month's production are:

Material purchased: 60,000 feet at Tk. 0.95 per feet Tk. 57,000
Material used in production: 38,000 feet -
Direct labor: ? hours at Tk. ? per hour Tk. 27,950
Variable manufacturing overhead cost incurred Tk. 20,475
Variable manufacturing overhead efficiency variance Tk. 1,500 U
There was no beginning inventory of raw materials. The variable manufacturing overhead rate is based
on direct labor-hours.

Required:
1. For direct materials:
a) Compute the price and quantity variances for October.
b) Prepare journal entries to record activity for October.
2. For direct labor:
a) Compute the rate and efficiency variances for October.
b) Prepare a journal entry to record labor activity for October.
3. For variable manufacturing overhead:
a) Compute the spending variance for October, and verify the efficiency variance given above.
b) If manufacturing overhead is applied to production on the basis of direct labor-hours, is it
possible to have a favorable direct labor efficiency variance and an unfavorable variable
overhead efficiency variance? Explain.
4. State possible causes of each variance that you have computed.
 Q. No.7

a) How normal and abnormal spoilage should be reported for management purpose?

b) Supreme Industries manufactures plastic molded chairs. The three models of molded chairs, all
variations of the same design, are Standard, Deluxe, and Executive. The company uses an operation-
costing system. Supreme has extrusion, form, trim, and finish operations. Plastic sheets are produced by
the extrusion operation. During the forming operation, the plastic sheets are molded into chair seats
and the legs are added. The Standard model is sold after this operation. During the trim operation, the
arms are added to Deluxe and Executive models and the chair edges are smoothed. Only the Executive
model enters the finish operation, in which padding is added. All of the units produced receive the same
steps within each operation. The May units of production and direct materials costs incurred are as
follows:

Units Extrusion Form Trim Finish

Produced Materials Materials Materials Materials
Standard model 6,000 Tk.7,20,000 Tk. 2,40,000 Tk. 0 Tk. 0
Deluxe model 3,000 3,60,000 1,20,000 90,000 0
Executive model 2,000 2,40,000 80,000 60,000 1,20,000
11,000 Tk.13,20,000 Tk. 4,40,000 Tk. 1,50,000 Tk. 1,20,000
The total conversion costs for the month of May are:

Extrusion Form Trim Finish

Operation Operation Operation Operation
Total conversion costs Tk. 2,695,000 Tk. 1,320,000 Tk. 690,000 Tk. 420,000

Required
i) For each product produced by Supreme Industries during May, determine (a) the unit cost and (b)
total cost. Support your answer with appropriate calculations.
ii) Now consider the following information for June. All unit costs in June are identical to the May costs
calculated in i(a). At the end of June, 1,000 units of the Deluxe model remained in wok process. These
units were 100% complete as to materials costs and 60% complete in the trim operation. Determine the
cost of the Deluxe model work-in-process inventory at the end of June.
 Q. No. 8

a) Contrast between scrap, by products and Joint products.

Scrap: Scrap is a left over or residue after a product has been manufactured. The leftover of
material resulting after producing the product is scrap. Thus, the residue of raw material
incidentally realized in course of manufacturing goods is called scrap. Low quality raw material
or abnormal size of raw material gives scrap material.
Joint products: Joint products are two or more products separated in the course of processing,
each having a sufficiently high saleable value to merit recognition as a main product. Joint
products include products produced as a result of the oil-refining process, for example, petrol
and paraffin. Petrol and paraffin have similar sales values and are therefore equally important
(joint) products.
By-products: By-products are outputs of some value produced incidentally in manufacturing
something else (main products). By-products, such as sawdust and bark, are secondary
products from the timber industry (where timber is the main or principal product from the
process). Sawdust and bark have a relatively low sales value compared to the timber which is
produced and are therefore classified as by-products

b) Nestle manufactures chocolates and distributes chocolate products. It purchases cocoa beans and
processes them into two intermediate products:
• Chocolate-powder liquor base
• Milk-chocolate liquor base
These two intermediate products become separately identifiable at a single splitoff point. Every 500 kg
of cocoa beans yields 50 litres of chocolate-powder liquor base and 75 litres of milk-chocolate liquor
base. The chocolate-powder liquor base is further processed into chocolate powder. Every 50 litres of
chocolate-powder liquor base yield 200 kg of chocolate powder. The milk-chocolate liquor base is
further processed into milk chocolate. Every 75 litres of milk-chocolate liquor base yield 340 kg of milk
chocolate. An overview of the manufacturing operations at Nestle Chocolates follows:
Production and sales data for August are:
• Cocoa beans processed, 5,000 kg
• Costs of processing cocoa beans to split off point (including purchase of beans) =Tk 5,00,000
Production Sales Selling price
Chocolate powder 2000 Kgs 2000 Kgs Tk. 200 per Kg.
Milk Chocolate 3400 3400 250 per Kg
The August separable costs of processing Chocolate powder liquor base into Chocolate powder are Tk.
212,500. The August separable costs of processing Milk chocolate liquor base into Milk chocolate are Tk.
437,500.
Nestle fully processes both of its intermediate products into Chocolate powder or Milk chocolate. There
is an active market for these intermediate products. In August, Nestle could have sold the Chocolate
powder liquor base for Tk. 420 a litre and the Milk Chocolate liquor base for Tk. 520 a litre.
Required:
a) Calculate how the joint cost would be allocated under the following methods:
i) Physical measure
ii) NRV
iii) Constant gross margin % NRV
b) What are the gross margin percentages of the Chocolate powder and Milk chocolate liquor bases
under each of the methods in above requirements?

Q. No. 9

Coffee Bean, Inc. (CBI) is a processor and distributor of a variety of blends of coffee. The company buys
coffee beans from around the world and roasts, blends, and packages them for resale. CBI currently has
40 different coffees that it offers to gourmet shops in one-pound bags. The major cost of the coffee is
raw materials. However, the company's predominantly automated roasting, blending, and packing
process requires a substantial amount of manufacturing overhead. The company uses relatively little
direct labor. Some of CBI's coffees are very popular and sell in large volumes, while a few of the newer
blends have very low volumes. CBI prices its coffee at manufacturing cost plus a markup of 30%. If CBI's
prices for certain coffees are significantly higher than market, adjustments are made to bring CBI's prices
more into alignment with the market since customers are somewhat price conscious.
For the coming year, CBI's budget includes estimated manufacturing overhead cost of Tk. 3,000,000. CBI
assigns manufacturing overhead to products on the basis of direct labor-hours. The expected direct
labor cost totals Tk. 600,000 which represents 50,000 hours of direct labor time. Based on the sales
budget and expected raw materials costs, the company will purchase and use Tk. 6,000,000 of raw
materials (mostly coffee beans) during the year.
The expected costs for direct materials and direct labor for one-pound bags of two of the company’s
coffee products appear below:
Mona Loa Malaysian
Direct material Tk. 4.20 Tk. 3.20
Direct labor (.025 hrs per bag) .30 .30
CBI's-controller believes that the company's traditional costing system may be providing misleading cost
information. To determine whether or not this is correct, the controller has prepared an analysis of the
year's expected manufacturing overhead costs, as shown in the following table:
Activity cost pool Activity measures Expected activity for Expected cost
the year for the year
Purchasing Purchase order 1,710 order Tk. 513,000
Material handling No. of setups 1,800 setups 720,000
Quality control No. of batches 600 batches 144,000
Roasting Roasting hrs 96,100 hrs 961,000
Blending Blending hrs 35,500 hrs 402,000
Packing Packaging hrs 26,000 hrs 260,000
Total manufacturing overhead 30,00,000
cost
Data regarding the expected production of Mona Loa and Malaysian coffee are presented below. There
will be no material inventory for either of these coffees at the beginning of the year.

Activity cost pool Mona Loa Malaysian

Expected sales 1,00,000 lbs 2,000 lbs
Batch size 10,000 lbs 500 lbs
Set ups 3 per batch 3 per batch
Purchase order size 20,000 lbs 500 lbs
Roasting time per100 lbs 1.0 hour 1.0 hour
Blending time per 100 lbs 0.5 hour 0.5 hour
Packaging time per100 lbs 0.1 hour 0.1 hour

Required:
1) Using direct labor hours as the base for assigning manufacturing overhead cost to products, do the
following:
a) Determine the predetermined overhead rate that will be used during the year.
b) Determined the unit product cost of one pound of the Mona Loa coffee and one pound of the
Malaysian coffee.
c) Determine the selling price of one pound of the Mona Loa coffee and one pound of the Malaysian
coffee using the company's 30% markup
2) Using activity-based costing as the basis for assigning manufacturing overhead. cost to products, do
the following:
a) Determine the total amount of manufacturing overhead cost assigned to the Mona Loa coffee and to
the Malaysian coffee for the year.
b) Using the data developed in (2a) above, compute the amount of manufacturing overhead cost per
pound of the Mona Loa coffee and the Malaysian coffee. Round all computations to the nearest Taka.
c) Determine the unit product cost of one pound of the Mona Loa coffee and one pound of the
Malaysian coffee.
 Q. No. 10
a) What is the difference between quality of design and quality of conformance?
Quality of design is the quality which the producer or supplier is intending to offer to the
customer. When the producer is making the quality of design of the product, he should take
into consideration the customer's requirements in order to satisfy them with fitness for use of
the product. If the quality of design does not reflect the customer's requirements, the product
which the producer offers him would not probably satisfy the customer, even if it does
sufficiently conform to the design. Quality of design is usually indicated by completeness and
correctness of specifications, drawings, catalogues, etc. and is measured with fitness for use.

Quality of conformance is the level of the quality of product actually produced and delivered
through the production or service process of the organization as per the specifications or
design. When the quality of a product entirely conforms to the specification (design), the
quality of conformance is deemed excellent. Specifications are targets and tolerances
determined by the designer of a product. Targets are the ideal values for which production is
expected to strive; tolerances are acceptable deviations from these ideal values recognizing
that it is difficult to meet the exact targets all the time due to variability in material, machine,
men and process.
b) Why managers are often unaware of the magnitude of quality costs?

The main reason of managers is often unaware of the magnitude of quality costs are:
Most accounting system do not truck and accumulate cost of quality
Difficulty to get a feel for magnitude of quality cost since they are incurred in many departments
through the organization.

c) In response to intensive foreign competition, the management of Falcon Incorporation has attempted
over the past year to improve the quality of its product. A statistical process control system has been
installed and other steps have been taken to decrease the amount of warranty and other field costs,
which have been trending upward over the past several years. Cost relating to quality and quality
control over the last two years are given below:
This year (Tk.) Last year (Tk.)
Inspection 900,000 750,000
Quality engineering 570,000 420,000
Depreciation of test equipment 240,000 210,000
Rework Labor 1,500,000 1,050,000
Statistical process control 180,000 -
Cost of field servicing 900,000 1,200,000
Supplies used in testing 60,000 30,000
System development 750,000 480,000
Warranty repairs 1,050,000 3,600,000
Net cost of scrap 1,125,000 630,000
Producing testing 1,200,000 810,000
Product recalls 750,000 2,100,000
 Disposed of defective products 975,000 720,000

Sales have been flat over the past few years, at Tk. 75,000,000 per year. A great deal of money has been
spent in the effort to upgrade quality, and management is anxious to see whether or not the effort has
been effective.

Required:

(i) Prepare quality cost report that contains data for both this year and last year. Carry
percentage computations to two decimal places.
(ii) Prepare a written evaluation to accompany the reports you have been prepared in (i) above.
This evaluation should discuss the distribution of quality costs in the company, changes in
the distribution that you see taking place, the reasons for changes in costs in the various
categories, and any other information that would be of value to management.
 Q. No. 11

a) What is the classification of costs in Transport Company?

b) What are the goals of JIT and how does JIT attempt to achieve these goals?

Goals of JIT can vary, but there are a few that should be constant in any JIT system. Increasing the
organization’s ability to compete with others and remain competitive over the long run is very important
There are three main objectives:

1. Increasing the organization’s ability to compete with others and remain competitive over the long
run. The competitiveness of the firms is increased by the use of JIT manufacturing process as they can
develop a more optimal process for their firms.
2. Increasing efficiency within the production process. Efficiency is obtained through the increase of
productivity and decrease of cost.
3. Reducing wasted materials, time and effort. It can help to reduce the costs.

There are many other goal of JIT. Such as :

 Identify and response to consumer’s needs. Customers’ needs and wants seem to be the major
focus for business now, this objective will help the firm on what is demanded from customers,
and what is required of production.
 Optimal quality/cost relationship. The organization should focus on zero-defect production
process. Although it seems to be unrealistic, in the long run, it will eliminate a huge amount of
resources and effort in inspecting, reworking and the production of defected goods.
 Reduce unwanted wastes. Wastes that do not add value to the products itself should be
eliminated.
 Develop a reliable relationship between the suppliers. A good and long-term relationship
between organization and its suppliers helps to manage a more efficient process in inventory
management, material management and delivery system. It will also assure that the supply is
stable and available when needed.
 Plant design for maximizing efficiency. The design of plant is essential in terms of manufacturing
efficiency and utility of resources.
 Adopt the work ethnic of Japanese workers for continuous improvement. Commit a long-term
continuous improvement throughout the organization. It will help the organization to remain
competitive in the long run.

c) From the following data, find out in an appropriate cost sheet from the generating cost of electricity
per unit in an Iron and Steel Works during the month of April, 2013;
(a) Fuel:
Cost at the beginning of the month: 500 tonnes
Supply during the month: 1,100 tonnes
Balance at the end of the month: 400 tonnes
Annual contract for supply of coal: F.O.R. colliery at Tk.10 per tonne
Add 10% to cover freight and handling charges.
(b) Oil: 10 tonnes at Tk. 250 per tonne.
(c) Water: 50,000 litres. Pumping charges at 25 paise per 100 litres.
(d) Depreciation of Steam Boiler: Capital Value Tk. 24,000 and the rate of Depreciation 12.50% per
annum.
(e) Salaries and Wages of the Boiler House. 10 men at Tk. 100 per month each. 40 coolies at Tk. 20
per month each.
(f) Recovery on account of sale of Ashes: 100 tonnes at Tk. 1 per tonne.
(g) Salaries and Wages of the Generating Station: 50 men at Tk. 100 per month each. 20 coolies at
Tk. 20 per month each.
(h) Repairs and Maintenance of the Generating Equipment: Tk. 2,600.
(i) Depreciation of Generating Equipment: Capital Value Tk. 120,000 and the rate of depreciation
12.50% per annum.
(j) Share of Administration Charges: Tk. 1,750.
(k) Number of units generated: 146,000.
(l) Loss in the process 2,000 units generated.
 Question No.12.

QP plc is a food processing company that produces pre-prepared meals for sale to consumers through a
number of different supermarkets. The company specializes in three particular re-prepared meals and
has invested significantly in modern manufacturing processes to ensure a high quality product. The
company is very aware of the importance of training and retaining high quality staff in all areas of the
company and, in order to ensure their production employees’ commitment to the company, the
employees are guaranteed a weekly salary that is equivalent to their normal working hours paid at their
normal hourly rate of £7 per hour.
The meals are produced in batches of 100 units. Costs and selling prices per batch are as follows:
Meal TR £/batch PN £/batch BE £/batch
Selling Price 340 450 270
Ingredient K (£5/kg) 150 120 90
Ingredient L (£10/kg) 70 90 40
Ingredient M (£15/kg) 30 75 45
Labour (£7/hour) 21 28 42
Factory costs absorbed 20 80 40

QP plc has adopted throughput accounting for its short-term decisions.

Required:
a) State the principles of throughput accounting and the effects of using it for short-term decision
making.
b) QP plc is preparing its production plans for the next three months and has estimated the maximum
demand from its customers to be as follows:
TR 500 batches
PN 400 batches
BE 350 batches
These demand maximums are amended figures because a customer has just delayed its request for a
large order and QP has unusually got some spare capacity over the next three months. However, these
demand maximums do include a contract for the delivery of 50 batches of each to an important
customer. If this minimum contract is not satisfied, then QP plc will have to pay a substantial financial
penalty for non-delivery.
The Production Director is concerned at hearing news that two of the ingredients used are expected to
be in short supply for the next three months. QP plc does not hold inventory of these ingredients and
although there are no supply problems for ingredient K, the supplies of ingredients L and M are
expected to be limited to:
Ingredient L 7,000 kilos
Ingredient M 3,000 kilos
The Production Director has researched the problem and found that ingredient V can be used as a direct
substitute for ingredient M. It also costs the same as ingredient M. There is an unlimited supply of
ingredient V.

Required:
Prepare calculations to determine the production mix that will maximize the profit of QP plc during the
next three months.

Question No. 13.

ZP plc is a marketing consultancy that provides marketing advice and support to small and medium sized
enterprises. ZP plc employs 4 full time marketing consultants who each expect to deliver 1,500
chargeable hours per year and each receive a salary of £60,000 per year. In addition the company
employs 6 marketing support/administration staff whose combined total salary cost is £120,000 per
year.
ZP plc has estimated its other costs for the coming year as follows:
£000 Office premises: rent, rates, heating 50 Advertising 5 Travel to clients 15 Accommodation whilst
visiting clients 11 Telephone, fax, communications 10
ZP plc has been attributing costs to each client (and to the projects undertaken for them) by recording
the chargeable hours spent on each client and using a single cost rate of £75 per chargeable hour. The
same basis has been used to estimate the costs of a project when preparing a quotation for new work.
ZP plc has reviewed its existing client database and determined the following three average profiles of
typical clients:
Client profile D E F Chargeable hours per client 100 700 300 Distance (Miles) to client 50 70 100 Number
of visits per client 3 8 3 Number of clients in each profile 10 5 5
The senior consultant has been reviewing the company’s costing and pricing procedures. He suggests
that the use of a single cost rate should be abandoned and, where possible, activities should be costed
individually. With this in mind he has obtained the following further information: • It is ZP plc’s policy
that where a visit is made to a client and the distance to the client is more than 50 miles, the consultant
will travel the day before the visit and stay in local accommodation so that the maximum time is
available for meeting the client the following day. • The cost of travel to the client is dependent on the
number of miles travelled to visit the client. • Other costs are facility costs – at present the senior
consultant cannot identify an alternative basis to that currently being used to attribute costs to each
client.

Required:
(a) Prepare calculations to show the cost attributed to each client group using an activity based system
of attributing costs.
(b) Discuss the differences between the costs attributed using activity based costing and those
attributed by the current system and advise whether the senior consultant’s suggestion should be
adopted.
 Question No. 14.

(a) M Pvt. produces ‘Biotinct’ in a lengthy distillation and cooling process. Base materials are introduced
at the start of this process, and further chemicals are added when it is 80% complete. Each kilogram of
base materials produces 1 kilogram of Biotinct. Data for October are: Opening work in process: 40 kg of
base materials, 25% processed

Cost of opening work in process:

Base materials $1,550 Processing $720

Costs incurred in October:

Base materials (80 kg) $3,400 Conversion costs $6,864 Further chemicals $7,200 Closing work in process:
50kg of base materials, 90% processed Finished output: 65 kg of Biotinct Under normal
conditions there are no losses of base materials in this process. However, in October 5 kg of partially
complete Biotinct were spoiled immediately after the further chemicals had been added. The 5kg of
spoiled Biotinct were not processed to finished goods stage and were sold for a total of $200.

Required:

Using the FIFO method, prepare the process account for October.

(b) One of the company’s management accountants overheard the Managing Director arguing as
follows, “These process accounts are complicated to produce, and often conceal the true position. As I
see it, the value of partly processed Biotinct is zero. In October we spent $17,464 and the output was 65
kg. So the average cost was $268·68 per kilogram, while the target cost is $170 ($40 for base materials,
$70 for processing and $60 for further chemicals). These figures make me concerned about production
efficiency.”

Required:
Explain to the Managing Director any errors in the comment he had made, and discuss whether the data
from the process account indicate that there has been production inefficiency.
 Question No.15

a) ST plc is a medium-sized engineering company using advanced technology. It has just implemented
an integrated enterprise resource planning (ERP) system in place of an old MRP (manufacturing resource
planning) system. Discuss the changes that are likely to be seen after the implementation of the ERP
system in

(i) the budget-setting process; and

(ii) the budgetary control process

b) The following data relate to Product Z and its raw material content for September.

Budget
Output : 11,000 units of Z
Standard materials content : 3 kg per unit at $4·00 per kg
Actual
Output : 10,000 units of Z
Materials purchased and used : 32,000 kg at $4·80 per kg
It has now been agreed that the standard price for the raw material purchased in September should
have been $5 per kg.
Required:
Calculate the following variances for the month of September:
i) The materials planning price variance
ii) The materials operational usage variance
iii) The materials operational price variance
c) Three products P, Q and R are produced together in a common process. Products P and Q are sold
without further processing, but product R requires an additional process before it can be sold. No
inventories are held. There is no loss of volume in the additional process for product R. The following
data apply to March.

Output Product P 3,600 litres

Product Q 4,100 litres
Product R 2,800 litres
Selling prices Product P £4·60 per litre
Product Q £6·75 per litre
Product R £10·50 per litre
Costs incurred in the common process £42,500
Costs incurred in the additional process for R £19,600

Required:
Calculate the value of the common process costs that would be allocated to product R using the sales
proxy method (notional sales value method).

d) A company is preparing its cash budget for February using the following data. One line in the cash
budget is for purchases of a raw material, J. The opening inventory of J in January is expected to be
1,075 units. The price of J is expected to be £8 per unit. The company pays for purchases at the end of
the month following delivery.

One unit of J is required in the production of each unit of product 2, and J is only used in this product.
Monthly sales of product 2 are expected to be:
January 4,000 units
February 5,000 units
March 6,000 units
The opening inventory of product 2 in January is expected to be 1,200 units.
The company implements the following inventory policies.
At the end of each month the following amounts are held:
Raw materials: 25% of the requirement for the following month’s production
Finished goods: 30% of the following month’s sales
Required:

Calculate the value for purchases of J to be included in the cash budget for February.

Ans:

January February March

Sales 4,000 5,000 6,000
Closing stock 30% of following month sales 1,500 1,800
Opening stock 1,200 1,500 1,800
Production unit 4,300 5,300
Raw Material Required 4,300 5,300
Closing Raw Material 1,325
Opening Raw material 1,075
Raw material Purchase 4,550
Raw material Purchase Price @ Tk. 8 36,400
Payment against purchase 36,400
 Question No. 16

a) K makes many products, one of which is Product Z. K is considering adopting an activity-based

costing approach for setting its budget, in place of the current practice of absorbing overheads
using direct labour hours. The main budget categories and cost driver details for the whole
company for October are set out below, excluding direct material costs:

Budget category £ Cost driver details

Direct labour 128,000 8,000 direct labour hours
Set-up costs 22,000 88 set-ups each month
Quality testing costs* 34,000 40 tests each month
Other overhead costs 32,000 absorbed by direct labour hours
* A quality test is performed after every 75 units produced

The following data for Product Z is provided:

Direct materials : budgeted cost of £21·50 per unit
Direct labour : budgeted at 0·3 hours per unit
Batch size : 30 units
Set-ups : 2 set-ups per batch
Budgeted volume for October : 150 units

Required:
i) Calculate the budgeted unit cost of product Z for October assuming that a direct labour based
absorption method was used for all overheads.
ii) Calculate the budgeted unit cost of product Z for October using an activity-based costing
approach.
iii) Explain in less than 50 words, why the costs absorbed by a product using an activity based
costing approach could be higher than those absorbed if a traditional labour-based absorption
system were used, and identify two implications of this for management.

b) J Limited has recently been taken over by a much larger company. For many years the budgets in J
have been set by adding an inflation adjustment to the previous year’s budget. The new owners of J are
insisting on a ‘zero-base’ approach when the next budget is set, as they believe many of the indirect
costs in J are much higher than in other companies under their control.

Required:

i) Explain the main features of ‘zero-based budgeting’.

Zero based budgeting was originally developed by Peter A Phyrr at Texas instrument. He
defined Zero based budgeting as “an operating, planning and budgeting process which require
each manger to justify his entire budget request in detail from scratch and shifts the burden of
proof to each manger to justify why he should spend any money at all.”
features of ‘zero-based budgeting’:

 It reviews a project from scratch on an assumption that nothing is to be allowed.

 It deals with all aspects of budget requests of managers. Managers have to justify that a
project is essential and of high priority.
 It reviews critically both existing and newly proposed activities.
 It sets priorities in respect of different activities and re-deploys resource accordingly.
ii)Discuss the problems that might arise when implementing this approach in J Limited.