MANAGERIAL COSTING

1) ABC Ltd. manufactures staple. All parts of the staplers are manufactured by the Company
except its metal base plate which is bought from Metal Kings & Co. at a price of 300 per
thousand plates Annual stapler sales are 1,00,000 units and these are expected to remain at
the same level, Metal Kings & Co. have informed that they would be increasing the price
of the plates to 400 per thousand plates. ABC Ltd. has unutilised plant space and capacity
and is thinking to use the same for manufacture of these plates as an alternative to buying
from Metal Kings & Co. ABC Ltd. has also now received an offer for use of the same
unutilised plant space at an annual rent of ₹ 5,000. The Cost department of ABC Ltd. has
gathered the following relevant data for self-manufacture of the 1,00,000 plates:

Particulars ₹
Raw Materials 8500
Direct Labours 8000
Variable Overheads 10500
General(Fixed)Overheads 14000

You are required to advise ABC Ltd. giving detailed workings and reasonings as to whether
it should buy the plates or manufacture them.

2) The ABC Company Ltd. produces most of its own parts and components. The standard
wage rate in the parts department is 30 per hour. Variable manufacturing overheads is
applied at a standard rate of 20 per labour-hour and fixed manufacturing overheads are
charged at a standard rate of ₹ 25 per hour. For its current year's output, the company will
require a new part. This part can be made in the parts department without any expansion of
existing facilities. Nevertheless, it would be necessary to increase the cost of product
testing and inspection by 50,000 per month. Estimated labour time for the new part is half
an hour per unit. Raw materials cost has been estimated at 60 per unit. The alternative
choice before the company is to purchase part from an outside supplier at 90 per unit. The
company has estimated that it will need 2,00,000 new parts during the current year. Advise
the company whether it would be more economical to buy or make the new parts. Would
your answer be different if the requirement of new parts was only 1,00,000 parts?

3) Following information is available for Usha Ltd.

 Direct materials per unit
Product X ₹ 20
Product Y ₹ 16
Direct wages per unit

Product X 4 hours @₹ 5 per hour

Product Y 6 hours @₹ 4 per hour
Variable overheads: 125% of direct wages
Fixed overheads (Total) ₹2,500
Selling price per unit of product X ₹80
Selling price per unit of product Y₹90
You are required to prepare:
(a) Statement showing marginal cost and contribution per unit for product X and Y.
(b) The total contribution and profits resulting from each of the suggested sales mixes and
suggest which of the alternative sales mixes you would recommend to the management.
(i) 250 units of X and 250 units of Y.
(ii) 300 units of X and 200 units of Y.
(iii) 200 units of X and 300 units of Y.
(iv) 500 units of X.

4) Ram Ltd. produces three product A, B and C from the same manufacturing facilities. The
cost and other details of the three products are as follows:

Particulars A B C
Selling price per unit (₹ ) 200 160 100
Variable Cost per unit (₹ ) 120 120 40
Maximum Production per month (units) 5000 8000 6000
Maximum Demand per month(units) 2000 4000 2400

Fixed expenses per month ₹ 2,76,000.

Total hours available for the month 200 hour

The processing hours cannot be increased beyond 200 hours per month.
(a) Compute the most profitable product-mix.
(b) Compute the overall break-even sales of the company for the month based on the mix
calculated in (a) above.
5) From the following particulars, find the most profitable product mix and prepare a statement
of profitability of that product mix:

Particulars Product Product Product

A B C
Units budgeted to be produced and 1800 3000 1200
sold
Selling price per unit ₹ 60 55 50
Requirement per unit:
Direct Materials 5kg 3kg 4kg
Direct Labour 4hrs 3hrs 2hrs
Variable Overheads ₹7 ₹ 13 ₹8
Fixed Overheads ₹ 10 ₹ 10 ₹ 10
Cost of Direct Materials per kg. ₹4 ₹4 ₹4
Direct Labour Hour Rate ₹2 ₹2 ₹2
Maximum possible units of sales 4000 5000 1500

All the three products are produced from the same direct material using the same type of
machines and labour. Direct labour, which is the key factor, is limited to 18,600 hours.

6) From the following data, which product would you recommend to be manufactured in a
factory, time being the key factor:

Per unit of Product A B

Direct Material 24 14
Direct Labour (₹ 1 per hr) 2 13
Variable Overheads (₹ 2 per hr) 4 6
Selling Price 100 110
Standard time to produce 2 hrs 3hrs
7) From the following particulars, find the most profitable Product-mix and prepare a
statement of profitability of that product-mix.

Particulars Product A Product B Product

C
Budgeted Production(units) 4000 5000 1500
Selling Price/Unit (₹ ) 60 55 50
Requirement/Unit:
Direct Material(kg) 5 3 4
Direct Labours (Hours) 4 3 2
Variable Overheads (₹ ) 7 13 8
Fixed Overheads (₹ ) 5 10 15
Cost of Direct Material/kg (₹ ) 4 4 4
Direct Labour Hour Rate (₹ ) 2 2 2

All the 3 products are produced from the same Direct Material, using the same type of
machines and labour.
Direct labour is the key-factor which is limited to 18,600 hours

8) A pen manufacturer makes an average net profit of ₹ 25.00 per pen on a selling price of ₹
143.00 by producing and selling 60,000 pens, or 60% of the potential capacity. His cost of
sales is:

Particulars ₹
Direct Materials 35
Direct Wages 12.50
Works Overheads (50% Fixed) 62.50
Sales Overheads (25% Variable) 8

During the current year he intends to produce the same number of pens but anticipates that
his fixed charges will go up by 10% while rates of direct labour and direct material will
increase by 8% and 6% respectively. But he has no option of increasing the selling price.
Under this situation, he obtains an offer for a further 20% of his capacity. What minimum
price will you recommend for acceptance to ensure the manufacturer an overall profit of ₹
16,73,000.
9) A manufacturer has planned his level of operation at 50% of his plant capacity of 30,000
units. His expenses are estimated as follows, if 50% of the plant capacity is utilized.
(i) Direct Materials ₹8,280
(ii) Direct Wages ₹11,160
(iii) Variable and Other Manufacturing Expenses ₹3,960
(iv) Total Fixed Expenses irrespective of Capacity utilization ₹6,000
The expected selling price in the domestic market is 2 per unit. Recently the manufacturer
has received a trade enquiry from an Overseas Organisation interested in purchasing 6,000
units at a price of 1.45 per unit. As a Professional Management Accountant, what should be
your suggestion regarding acceptance or rejection of the offer? Support your suggestion
with suitable quantitative information.

10) Following relevant data of a firm is given:

Particulars Activity Levels

50000 60000 70000 80000
tons tons tons tons
Variable Cost (₹ in thousands) 5000 6000 7000 8000
Semi-Variable Cost (₹ in thousands) 1500 1600 1650 1700
Fixed Cost (₹ in thousands) 2500 2500 3000 3000
Total Cost (₹ in thousands) 9000 10100 11650 12700

The fixed costs follow step-graph pattern as is clear from the above and the semi-variable
costs change at uniform rate between the above given activity levels. Given that the firm
operates 55,000 tons level at present –
1. Calculate the additional / incremental costs if it manufactures additional (a) 10,000
tons (b) 15,000 tons.
2. Advise whether the firm should accept 'any one' of the following additional (special)
export market offers and if Yes, 'which one' should it accept:
(i) For 10,000 tons at a selling price of ₹125/- per ton.
(ii) for 15,000 tons at a selling price of ₹150/- per ton.
11) A firm already in production gives you its following details:

Annual Capacity Unit Cost Unit Price

Units ₹ ₹
6000 80 100
7000 75 97
8000 74 95
9000 72
10000 71

The firm is operating at 8,000 units' capacity at present and cannot exceed, in any case,
totally 15,000 units' capacity level by any means. Under the circumstances, the firm
receives two alternative additional orders, only one of which it can accept:
a) For 2,000 units from an export market at a price of ₹70 per unit.

b) For 7,000 units from another export market at a price of ₹75 per unit and it is given
that the firm has to increase its establishment for going from 10,000 units to 15,000
units which would result into additional fixed cost of ₹30,000 per annum, in addition
to the 'per unit' cost of ₹71 at 10,000 units level which would remain the same even
subsequently i.e. at the level of 15,000 units.
Advise the firm as to whether any of the alternative additional export orders should be
accepted or not, any if yes, which one?
12) At 100% capacity a factory can produce 5,000 articles. At present the production is 1,000
articles for home consumption. The cost incurred:

Particulars ₹ ₹
Materials 40000
Wages 36000
Factory Overheads:
Fixed 12000
Variable 20000 32000
Administrative Overheads (Fixed) 18000
Selling and Distribution Overheads:
Fixed 10000
Variable 16000 26000
Total 152000
The home market can consume only 1,000 articles at a selling price of ₹155 per article.
The foreign market for this product can however consume additional 4,000 articles if the
price is reduced to ₹125. Is the foreign market worth trying?
Support your answer with calculations.
13) A manufacturer of packing cases makes three main types- Delux, Luxury and Economy.
Overheads are incurred on the basis of labour hour Wages are paid at ₹1.00 per hour.
Estimates for the cases show the following:

Delux Luxury Economy

Particulars
(₹) (₹) (₹)
Materials 10 8 3
Wages 6 3 2
Overheads 12 6 4
28 17 9
Net Profit/Loss 2 3 3
Average Selling Price 26 20 12
Annual Sales (Units) 10000 20000 5000

The manufacturer felt that he would be well advised to discontinue producing the Delux
and Economy cases even though it would mean that some of production facilities would
remain unused. He cannot increase the sale of Luxury cases. It has been ascertained that
60% of the overheads is fixed. You are required to advise the manufacturer

14) Sameeksha Ltd. produces and sells three products: B, N and D. The income statement of
the company, prepared in the absorption-costing format, is shown below
Income Statement of Sameeksha Ltd.

Particulars B (₹) N (₹) D (₹) Total (₹)

Sales 3000000 1500000 900000 5400000
Cost of Goods Sold:
Variable 1800000 1000000 650000 3450000
Fixed 500000 250000 150000 900000
Total 2300000 1250000 800000 4350000
Gross Margin 700000 250000 100000 1050000
Selling Expenses:
Variable 200000 120000 80000 400000
Fixed 150000 75000 45000 270000
Total 350000 195000 125000 670000
Gross Margin 350000 55000 (25000) 380000
The management of the company is considering dropping D since it shows a loss on the
income statement. Evaluate the suggestion and suggest management a suitable course of
action showing the impact of alternatives on the profit of the company.
15) Paints Ltd. manufactures 2,00,000 tins of paint at normal capacity. It incurs the following
manufacturing costs per unit:

Particulars ₹
Direct Material 7.80
Direct Labour 2.10
Variable Overhead 2.50
Fixed Overhead 4.00
Production Cost/Unit 16.40

Each unit is sold for ₹21, with an additional variable selling overhead incurred at ₹0.60 per
unit. During the next quarter, only 10,000 units can be produced and sold. Management
plans to shut down the plant estimating that the fixed manufacturing cost can be reduced to
₹74,000 for the quarter.
When the plant is operating, the fixed overheads are incurred at a uniform rate throughout
the year. Additional costs of plant shut down for the quarter are estimated at ₹14,000
You are required:
(i) To advise whether it is more economical to shut down the plant during the quarter rather
than operate the plant.
(ii) Calculate the shutdown point for the quarter in terms of number of units.

16) Vijaya Chemicals Ltd. has to factories with similar plants and machineries for the
manufacture of chemical liquid. The Board of Directors of the company had expressed the
desire to merge them and run them as one integrated unit. Following data are available in
respect of these two factories:

Factory A Factory B
Particulars
₹ ₹
Capacity 60% 100%
Sales 1200000 3000000
Variable Cost 900000 2200000
Fixed Cost 250000 400000
You are required to find out:
(1) What should be the capacity of the merged factory to be operated for break-even?
(2) What is the profitability of working 80% of the integrated capacity?
(3) What sales will give overall Profit of ₹ 6,00,000?
17) There are two plants manufacturing the same products under one corporate management
which has decided to merge them. The following particulars are available regarding the two
plants:

Particulars Plant 1(₹) Plant 2(₹)

Capacity Operation 100% 60%
Sales 600000 240000
Variable Cost 440000 180000
Fixed Cost 80000 50000
Calculate:
1. Break-even Point of the merged plant.
2. Capacity of the merged plant to be operated at the break-even point?
3. Profit earned if the merged plant is operated at capacity level of 80%.

18) A manufacturing company makes two products - Luxury and Delux. The results for 2003
were as under:

Particulars Luxury Delux

₹ ₹
Sales 200000 160000
Variable Cost 120000 132000
Fixed Cost 40000 32000
Profit/Loss 40000 (-)4000

The managing director has suggested that Delux should be dropped as it is making loss. It
is estimated that 8,000 will be saved in fixed overheads if his suggestion in implemented.
Should Delux be dropped, if:
(1) His decision has no effect on sales of luxury; or
(2) By using the vacant factory space, sales of luxury could be increased by ₹ 1,00,000 the
extra production would lead to increase in the total fixed cost to ₹ 76,000.