Dean's Office Official Model Question Paper

Answer: Cost Accounting: The process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. Primary Users: Financial accounting reports primarily to external users (shareholders, creditors, tax authorities, banks); cost accounting serves internal managerial users (department heads, executives) for cost control and planning.

Answer:

• Product Cost (Inventoriable Cost): Costs necessary to manufacture a product (Direct Material, Direct Labor, Factory Overhead); they attach to units of product and remain in inventory until the goods are sold.
• Period Cost: Costs expensed on the income statement in the accounting period in which they are incurred (Selling, Administrative, and General overheads).

Answer: Margin of Safety (MOS): The excess of actual or budgeted sales revenue over the break-even sales revenue, representing the cushion by which sales can decline before the company begins incurring operating losses:

$$\text{MOS (Value)} = \text{Actual Sales} - \text{Break-Even Sales} = \frac{\text{Net Profit}}{\text{P/V Ratio}}$$

Answer: Activity-Based Costing (ABC): An advanced costing methodology that assigns overhead costs to specific business activities and then assigns the cost of those activities to products based on their actual consumption of those activities. Two Core Building Blocks:

1. Cost Pools (Activity Cost Pools)
2. Cost Drivers (Resource & Activity Cost Drivers)

Answer: Flexible Budget: A dynamic financial budget that adjusts and recalculates allowable costs and revenues for different actual levels of operational activity attained. Unlike a Static (Fixed) Budget, which remains rigid regardless of actual production volume, a flexible budget facilitates meaningful variance analysis.

Solution: Cost Segregation via High-Low Method

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Step 1: Segregation of Mixed Costs

1. Maintenance Costs:

$$\text{Variable Maintenance Cost per Unit } (v_m) = \frac{\Delta \text{Cost}}{\Delta \text{Activity}} = \frac{63,000 - 45,000}{8,000 - 5,000} = \frac{18,000}{3,000} = \mathbf{\text{Rs. } 6.00 \text{ per unit}}$$

$$\text{Fixed Maintenance Cost } (F_m) = \text{Total Cost} - (v_m \times Q) = 45,000 - (6 \times 5,000) = 45,000 - 30,000 = \mathbf{\text{Rs. } 15,000}$$

2. Electricity & Utility Costs:

$$\text{Variable Utility Cost per Unit } (v_u) = \frac{44,000 - 32,000}{8,000 - 5,000} = \frac{12,000}{3,000} = \mathbf{\text{Rs. } 4.00 \text{ per unit}}$$

$$\text{Fixed Utility Cost } (F_u) = 32,000 - (4 \times 5,000) = 32,000 - 20,000 = \mathbf{\text{Rs. } 12,000}$$

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Step 2: Total Cost Equation

• Total Variable Cost per Unit ($v$):
  $$v = \text{Direct Materials } (25) + \text{Direct Labor } (15) + \text{Var. Maintenance } (6) + \text{Var. Utility } (4) = \mathbf{\text{Rs. } 50.00 \text{ per unit}}$$
• Total Fixed Costs ($F$):
  $$F = \text{Fixed Maintenance } (15,000) + \text{Fixed Utility } (12,000) + \text{Administrative Overhead } (120,000) = \mathbf{\text{Rs. } 147,000}$$

$$\mathbf{\text{Total Cost Equation: }} TC = 147,000 + 50 Q$$

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Step 3: Total Cost & Profit Computation at $Q = 9,000$ Units

1. Total Cost:
   $$TC = 147,000 + (50 \times 9,000) = 147,000 + 450,000 = \mathbf{\text{Rs. } 597,000}$$
2. Total Sales Revenue:
   $$\text{Revenue} = 9,000 \times \text{Rs. } 80 = \mathbf{\text{Rs. } 720,000}$$
3. Expected Net Profit:
   $$\mathbf{\text{Net Profit}} = \text{Revenue} - TC = 720,000 - 597,000 = \mathbf{\text{Rs. } 123,000}$$

Solution: Cost-Volume-Profit (CVP) Analysis

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Part (a): P/V Ratio and Break-Even Point

• Selling Price ($SP$) = Rs. 100
• Variable Cost ($VC$) = Rs. 60
• Contribution Margin per unit ($CM$) = $\text{Rs. } 100 - 60 = \mathbf{\text{Rs. } 40}$
• Fixed Costs ($FC$) = Rs. 400,000

$$\mathbf{\text{P/V Ratio}} = \frac{CM}{SP} \times 100\% = \frac{40}{100} \times 100\% = \mathbf{40.00\%}$$

$$\mathbf{\text{BEP (Units)}} = \frac{FC}{CM} = \frac{400,000}{40} = \mathbf{10,000 \text{ Units}}$$

$$\mathbf{\text{BEP (Rs.)}} = \text{BEP (Units)} \times SP = 10,000 \times 100 = \mathbf{\text{Rs. } 1,000,000}$$

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Part (b): Required Sales for Target Profit of Rs. 160,000

$$\mathbf{\text{Required Sales (Units)}} = \frac{FC + \text{Target Profit}}{CM} = \frac{400,000 + 160,000}{40} = \frac{560,000}{40} = \mathbf{14,000 \text{ Units}}$$

$$\text{Required Sales Value} = 14,000 \times 100 = \mathbf{\text{Rs. } 1,400,000}$$

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Part (c): Revised BEP under Price Reduction & Fixed Cost Increase

• New Selling Price ($SP'$) = $\text{Rs. } 100 - (10\% \times 100) = \mathbf{\text{Rs. } 90}$
• Variable Cost ($VC$) remains = Rs. 60
• New Contribution Margin ($CM'$) = $\text{Rs. } 90 - 60 = \mathbf{\text{Rs. } 30 \text{ per unit}}$
• New Fixed Costs ($FC'$) = $\text{Rs. } 400,000 + 50,000 = \mathbf{\text{Rs. } 450,000}$$\mathbf{\text{New BEP (Units)}} = \frac{FC'}{CM'} = \frac{450,000}{30} = \mathbf{15,000 \text{ Units}}$$ The break-even point increases from 10,000 units to 15,000 units (a 50% increase), significantly raising operating risk.

1. Conceptual Distinction

Absorption Costing (Full Costing)          Variable Costing (Direct / Marginal Costing)
- Product Costs include:                   - Product Costs include:
  * Direct Materials                         * Direct Materials
  * Direct Labor                             * Direct Labor
  * Variable Factory Overhead                * Variable Factory Overhead
  * Fixed Factory Overhead (Inventoriable!) - Fixed Factory Overhead expensed as PERIOD cost!

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2. Reconciliation of Net Operating Income

$$\mathbf{\text{Income Difference}} = (\text{Closing Stock Units} - \text{Opening Stock Units}) \times \text{Fixed Manufacturing Overhead Rate per unit}$$

Solution: Standard Costing Variance Analysis

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Given Parameters:

• Actual Output ($AO$) = 1,200 containers
• Standard for Actual Output:
  • Standard Quantity of Material ($SQ$): $1,200 \times 4 \text{ kg} = \mathbf{4,800 \text{ kg}}$
  • Standard Price ($SP$): $\text{Rs. } 50 \text{ per kg}$
  • Standard Labor Hours ($SH$): $1,200 \times 3 \text{ hrs} = \mathbf{3,600 \text{ hours}}$
  • Standard Wage Rate ($SR$): $\text{Rs. } 40 \text{ per hour}$
• Actual Figures:
  • Actual Quantity ($AQ$): $5,100 \text{ kg}$
  • Actual Price ($AP$): $\frac{244,800}{5,100} = \mathbf{\text{Rs. } 48.00 \text{ per kg}}$
  • Actual Hours ($AH$): $3,400 \text{ hours}$
  • Actual Wage Rate ($AR$): $\frac{142,800}{3,400} = \mathbf{\text{Rs. } 42.00 \text{ per hour}}$

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Part (a): Material Variances

1. Material Price Variance (MPV):
   $$\text{MPV} = AQ \times (SP - AP) = 5,100 \times (50 - 48) = 5,100 \times (+2) = \mathbf{\text{Rs. } 10,200 \text{ (Favorable)}}$$
2. Material Usage Variance (MUV):
   $$\text{MUV} = SP \times (SQ - AQ) = 50 \times (4,800 - 5,100) = 50 \times (-300) = \mathbf{\text{Rs. } 15,000 \text{ (Unfavorable)}}$$
3. Material Cost Variance (MCV):
   $$\text{MCV} = (SQ \times SP) - (AQ \times AP) = (4,800 \times 50) - 244,800 = 240,000 - 244,800 = \mathbf{\text{Rs. } 4,800 \text{ (Unfavorable)}}$$
   Verification: $\text{MCV} = \text{MPV} + \text{MUV} = 10,200(F) - 15,000(U) = \mathbf{4,800(U)}$.

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Part (b): Labor Variances

1. Labor Rate Variance (LRV):
   $$\text{LRV} = AH \times (SR - AR) = 3,400 \times (40 - 42) = 3,400 \times (-2) = \mathbf{\text{Rs. } 6,800 \text{ (Unfavorable)}}$$
2. Labor Efficiency Variance (LEV):
   $$\text{LEV} = SR \times (SH - AH) = 40 \times (3,600 - 3,400) = 40 \times (+200) = \mathbf{\text{Rs. } 8,000 \text{ (Favorable)}}$$
3. Labor Cost Variance (LCV):
   $$\text{LCV} = (SH \times SR) - (AH \times AR) = (3,600 \times 40) - 142,800 = 144,000 - 142,800 = \mathbf{\text{Rs. } 1,200 \text{ (Favorable)}}$$
   Verification: $\text{LCV} = \text{LRV} + \text{LEV} = -6,800(U) + 8,000(F) = \mathbf{1,200(F)}$.

Case Solution: Traditional Costing vs. Activity-Based Costing (ABC)

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Part (a): Traditional Volume-Based Costing (6 Marks)

$$\text{Plant-Wide Overhead Rate} = \frac{\text{Total Overhead}}{\text{Total Direct Labor Hours}} = \frac{\text{Rs. } 3,600,000}{40,000 \text{ DLH}} = \mathbf{\text{Rs. } 90 \text{ per DLH}}$$

• DLH per unit:
  • Standard Shirts: $\frac{30,000 \text{ DLH}}{60,000 \text{ units}} = 0.50 \text{ DLH per unit}$
  • Designer Jackets: $\frac{10,000 \text{ DLH}}{5,000 \text{ units}} = 2.00 \text{ DLH per unit}$
• Overhead allocated per unit:
  • Standard Shirts: $0.50 \text{ DLH} \times \text{Rs. } 90 = \mathbf{\text{Rs. } 45.00}$
  • Designer Jackets: $2.00 \text{ DLH} \times \text{Rs. } 90 = \mathbf{\text{Rs. } 180.00}$

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Part (b): Activity Cost Driver Rates under ABC (4 Marks)

1. Machine Setups Rate:
   $$\text{Rate} = \frac{\text{Rs. } 1,200,000}{150 \text{ setups}} = \mathbf{\text{Rs. } 8,000 \text{ per setup}}$$
2. Quality Inspections Rate:
   $$\text{Rate} = \frac{\text{Rs. } 1,500,000}{500 \text{ hours}} = \mathbf{\text{Rs. } 3,000 \text{ per inspection hour}}$$
3. Machining & Power Rate:
   $$\text{Rate} = \frac{\text{Rs. } 900,000}{6,000 \text{ machine hrs}} = \mathbf{\text{Rs. } 150 \text{ per machine hour}}$$

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Part (c): Total Unit Manufacturing Cost under ABC (6 Marks)

1. Overhead Allocation:

• Standard Cotton Shirts (60,000 units):

  • Setups: $30 \times \text{Rs. } 8,000 = \text{Rs. } 240,000$
  • Inspections: $100 \times \text{Rs. } 3,000 = \text{Rs. } 300,000$
  • Machining: $4,500 \times \text{Rs. } 150 = \text{Rs. } 675,000$
  • Total Overhead = $\text{Rs. } 1,215,000$
  • Overhead per unit $= \frac{1,215,000}{60,000} = \mathbf{\text{Rs. } 20.25}$

• Designer Silk Jackets (5,000 units):

  • Setups: $120 \times \text{Rs. } 8,000 = \text{Rs. } 960,000$
  • Inspections: $400 \times \text{Rs. } 3,000 = \text{Rs. } 1,200,000$
  • Machining: $1,500 \times \text{Rs. } 150 = \text{Rs. } 225,000$
  • Total Overhead = $\text{Rs. } 2,385,000$
  • Overhead per unit $= \frac{2,385,000}{5,000} = \mathbf{\text{Rs. } 477.00}$

2. Unit Manufacturing Cost under ABC:

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Part (d): Cross-Subsidization Analysis & Pricing Advice (4 Marks)

Strategic Findings:

1. Severe Product Cross-Subsidization: Under traditional costing, the high-volume Standard Cotton Shirts were subsidizing the low-volume Designer Silk Jackets. Designer jackets consume 80% of setups and inspections while generating only 12.5% of unit volume!
2. Pricing Action Plan:
   • Increase Designer Jacket Prices: Jack up the price of Designer Jackets to reflect their true cost of Rs. 2,077 plus profit margin. Currently, BAML was selling complex jackets at an unperceived loss.
   • Lower Standard Shirt Prices: Lower shirt prices to Rs. 370 plus margin, boosting price competitiveness against mass market competitors and driving market share expansion.