Cost Management Test Questions & Suggested Solutions

Table of contents

Management Test Questions & Suggested Solutions by L. Muralidharan, FCA, Grad. CWA

Question 1

Bharata Ltd is considering proposals for design changes in one of a range of soft toys.

The proposals are as follows:

  • Eliminate some of the decorative stitching from the toy.
  • Use plastic eyes instead of glass eyes in the toys (two eyes per toy).
  • Change the filling material used. It is proposed that scrap fabric left over from the body manufacture be used instead of the synthetic material which is currently used.

The design change proposals have been considered by the management team and the following information has been gathered:

  • Plastic eyes will cost Rs. 15 per hundred whereas the existing glass eyes cost Rs. 20 per hundred. The plastic eyes will be more liable to damage on insertion into the toy.

It is estimated that scrap plastic eyes will be 10% of the quantity issued from stores as compared to 5% of issues of glass eyes at present.

  • The synthetic filling material costs Rs. 80 per tonne. One tonne of filling is sufficient for 2,000 soft toys.
  • Scrap fabric to be used as filling material will need to be cut into smaller pieces before as and this will cost Rs. 0. 05 per soft toy.There is sufficient scrap fabric for the purpose.
  • The elimination of the decorative stitching is expected to reduce the appeal of the product, with an estimated fall in sales by 10% from the current level. It is not felt that the change in eyes or filling material will adversely affect sales volume. The elimination of the stitching will reduce production costs by Rs. 0. 60 per soft toy.
  • The current sales level of the soft toy is 3,00,000 units per annum.

Apportioned fixed costs per annum are Rs. 4,50,000. The net profit per soft toy at the current sales level is Rs. 3.


Using the information given in the question, prepare an analysis which shows the estimated effect on annual profit if all three proposals are implemented, and which enables management to check whether each proposal will achieve an annual target profit increase of Rs. 25,000. The proposals for plastic eyes and the use of scrap fabric should be evaluated after the stitching elimination proposal has been evaluated.

Calculate the ercentage reduction in sales due to the stitching elimination at which the implementation of all three design change proposals would result in the same total profit from the toy as that earned before the implementation of the changes in design.

Question 2

ABC Ltd manufactures a simple garden tool.At present the company is working at full capacity producing the three components A,B,C one of each being required for the assembly of the tool. All the machines are capable of making all the components. Current cost data concerning and hundred tools are as follows:

  • Machine Hours 10 16 20 46
  • Variable Cost Rs. 6 32 32 42 142
  • Fixed Cost Rs. 10 2 32 22 76
  • Total Rs. 36 44 64 74 218 250
  • Components – A Components – B Components – C
  • Assembly
  • Selling Price

The management is engaged in preparing next year’s budget an increase in sales is to be provided for. The factory already has to work at full machine capacity to meet current demand and no increase in the present machine capacity can be effected for over 12 months. Though facilities involving variable costs can be increase data very short notice. It is decided that one of the components will have to be bought out.

Cost management – test questions; solutions

The Sales manager feels sure that he can sell at least 50% more tools than at present and probably 75% more provided the factory capacity is available. You are required to prepare a report for management giving your recommendations as to which component should be ordered from outside supplied for the coming year if production is increased by 50% and 75% respectively.

Question 3

The Chakrapani Ltd’s Cost behaviour is as follows: Production range in units 0- 20000 20001 – 65000 65001 – 90000 90001 – 100000 Fixed cost Rs. 160000 Rs. 190000 Rs. 210000 Rs.

250000 At an activity of 70000 units per year, variable costs total 280000. Full capacity is 100000 units per year.


  • Production is now set at 50000 units per year with a sales price of Rs. 7. 50 per unit. What is the minimum number of additional units needed to be sold in an unrelated market at Rs. 5. 50 per unit to show a net profit of Rs. 3000 per year?
  • Production is now set at 60000 units per year. By how much may sales promotion costs be increased to bring production up to 80000 units and still earn a net profit of 5% of total sales if the selling price is held at Rs. 7. 50?
  • If net profit is currently Rs. 10000 with fixed costs at Rs. 160000 and a 2% increase in price will leave units sold unchanged but increase profits by Rs.5000.

What is the present volume in units?

Question 4

The manager of a business has received enquiries about printing three different types of advertising leaflet.Information concerning these three leaflets is shown below:

A Selling prices per 1000 leaf lets Estimated printing costs: Variable per 1000 leaflets Specific fixed costs per month 40 2,400 70 4,000 130 9,500 100 B 220 C 450 In addition to specific fixed costs a further Rs. 4,000/- per month would be incurred in renting special premises if any or all of the above three leaflets were printed. The minimum printing order would be for 30,000 of each type of leaflet per month and the maximum possible order is estimated to be 60,000 of each leaflet per month.


Examine and comment upon the potential profitability of leaflet printing. Make whatever calculations you consider appropriate.

It is possible that a special type of paper used in printing leaflets will be difficult to obtain during the first few months.

Three estimated consumption of this special paper for each type of leaflet is: Leaflet Leaflet Leaflet A B C 2 packs per 6 packs per 6 packs per 1000 leaflets 1000 leaflets 1000 leaflets Advise the manager on the quantity of each leaflet which should be printed in order to maximise profit in the first month, if 50,000 of each type of leaflet have been printed there remains unfulfilled order of 10,000 for each type of leaflet and there 170 packs of special paper available for the rest of the month. What will be your reaction if the printing quantity is to be pack of 1000 leaflets.

Question 5

For the past 20 years a charity organisation has held an annual dinner and dance with the primary intention of raising funds. This year there is concern that an economic recession may adversely affect both the number of persons attending the function and the advertising space that will be sold in the programme published for the occasion. Based on past experience and current prices and quotations, it is expected that the following costs and revenues will apply for the function.

You are required to:

  • Calculate the expected value of the profit to be earned from the dinner and dance this year;
  • Recommend, with relevant supporting financial and cost data, whether or not the charity should spent Rs. 00 on the market research enquiry and indicate the possible benefits the enquiry could provide. NB: All workings for tickets should be in steps of 100 tickets and for advertising in steps of 8 pages.

Question 6

The budgeted production for period 7 in the finishing department of a pottery manufacturer is, 4,500 cups, 4,000 saucers and 6,250 plates. In one standard hour a direct operative is expected to be able to finish either, 30 cups, or 40 saucers, or 25 plates.During period 7, 400 direct labour hours were worked and actual production was, 4,260 cups, 6,400 saucers and 3,950 plates.


Using the above information calculate for period 7:  The productivity of the direct operatives;  An appropriate ratio expressing the department’s actual production relative to that budgeted; Another ratio which you consider may be useful to management and explain the meaning of the ratio you have calculated.

Question 7

The Bashyam Co Ltd manufactures a variety of products of basically similar composition.Production is carried on by subjecting the various raw materials to a number of standardised operations, each major series of operations being carried out in a different department. All products are subject to the same initial processing which is carried out in departments A, B and C; the order and extent of further processing then depending upon the type of end product to be produced. It has been decided that a standard costing system could be usefully employed within Bashyam and pilot schemed to be operated for six months based initially only on epartment B, the second department in the initial common same of operations. If the pilot scheme produces useful results then a management accountant will be employed and the system would be incorporated as appropriate throughout the whole firm.


Prepare a brief statement which clearly indicates the reasons for the performance of department B and the extent to which that performance is attributable to department B. the statement should utilize variance analysis to the extent it is applicable and relevant

Question 8

Mathanakesari Ltd manufactures and sells a single product.In the quarter to 30 November 2002 sales of 10,000 units were budgeted at a unit selling price of Rs. 5 and a unit contribution of Rs. 1 (after charging variable costs). The budget had been prepared in the previous spring, and proved to be inaccurate.

Actual sales for the November quarter were 7,000 units at a unit selling price of Rs. 8, giving a unit contribution of Rs. 3. You are required to calculate appropriate sales margin variances on the basis of this information. (ii) When reviewing the results for the quarter to 30 November the sales manager ascertained several additional facts.

You are required to calculate a set of variances to take appropriate notice of this additional information, and to discuss their significance.

Question 9

From past experience a company operating a standard cost system has accumulated the following information in relation to variances in its monthly management accounts: Percentage of total number of variances.

Its variances fall into two categories: Category 1: those which are not worth investigating Category 2: those which are worth investigating 64 36 100 (2) Of category 2, corrective action has eliminated 70% of the variances, but the remainder have continued.

The cost of investigation averages Rs. 350 and that of correcting variances averages Rs. 550. The average size of any variance not corrected is Rs.

525 per month and the company’s policy is to assess the present value of such costs at 2% per month for a period of five months.You are required to:

  • Prepare two decision trees, to represent the position if an investigation is: Carried out; Not carried out;
  • Recommend, with supporting calculations, whether or not the company should follow a policy of investigating variances as a matter of routine;
  • Explain briefly two types of circumstance that would give rise to variances in Category 1 and two to those in Category 2;
  • Mention any one variation in the information used that you feel would be beneficial too the company if you wished to improve the quality of the decision-making rule recommended in above. Explain briefly why you have suggested it.

Question 10

Vishwakarma is a builder. His business will have spare capacity over the coming six months and he has been investigating two projects. Project A Vishwakarma is tendering for a school extension contract. Normally he prices a contract by adding 100% to direct costs, to cover overheads and profit.

Neither X nor W is currently used; X has no foreseeable use in the business, but W could be used on other jobs in place of material currently costing Rs. 6 per unit. The contract will last for six months and requires two craftsmen, whose basic annual wage cost is Rs. 16,000 each. To complete the contract in time it will also be necessary to pay them a bonus of Rs. 700 each. Without the contract they would be retained at their normal pay rate, doing work which will otherwise be done by temporary workers engaged for the contract period at a total cost of Rs.

11,800. Three causal labourers would also be employed specifically for the contract at a cost of Rs. 4,000 each. The contract will require two types of equipment: general- purpose equipment already owned by Vishwakarma, which will be retained at the end of the contract, and specialized equipment to be purchased second-hand, which will be sold at the end of the contract. The general-purpose equipment cost Rs. 21,000 two years ago and is being depreciated on a straightline basis over a seven-year life (with assumed zero scrap value). Equivalent new equipment can be purchased currently for Rs. 49,000.

Second-hand prices for comparable general-purpose equipment, and those for the relevant specialized equipment, are shown below.General – purpose equipment Purchase Resale Price Price (Rs. ) (Rs. ) Current After 6 months: If used for 6 months If not used 15,000 19,000 12,600 16,400 7,000 8,000 5,800 6,500 20,000 17,200 Specialized equipment Purchase Resale Pricep Price (Rs. ) (Rs. ) 9,000 7,400 The contract will require the use of a yard on which Vishwakarma has a four-year lease at a fixed rental of Rs. 2,000 per year. If Vishwakarma does not get the contract the yard will probably remain empty. The contract will also incur administrative expenses estimated at Rs. 5,000.Project B If Vishwakarma does not get the contract he will buy a building plot for Rs. 20,000 and build a house.

Building costs will depend on weather conditions: Weather condition Probability Building costs (excluding land) A 0.4 Rs. 60,000 B 0. 4 Rs. 80,000 C 0. 2 Rs. 95,000 Similarly the price obtained for the house will depend on market conditions: Market condition Probability Sale price (net of selling expenses) D 0. 7 Rs.

1,00,000 E 0. 3 Rs. 1,20,000 Vishwakarma does not have the resources to undertake both projects. The costs of his supervision time can be ignored.


  • Ignoring the possibility of undertaking project B, calculate: (i) The price at which Vishwakarma would tender for the school extension contract if he used his normal pricing method, and (ii) The tender price at which you consider Vishwakarma would neither gain nor lose by taking the contract.
  • Explain, with supporting calculations, how the availability of project B should affect Vishwakarma’s tender for the school extension contract.

Question 11

Narendran Products has two main products. X and Y, which have unit costs of Rs. 12 and Rs. 24 respectively.

The company uses a markup of 33? % in establishing its selling prices and the current prices are thus Rs. 16 and Rs. 32. With these prices, in the year which is just ending, the company expects to make a profit of Rs. 3,00,000 from having produced and sold 15,000 units of X and 30,000 units of Y. This programme will have used all the available processing time in the finishing department. Each unit of X requires an hour of processing time in this department and every unit of Y correspondingly requires half an hour.

Fixed overhead was Rs. 3,60,000 for the year and this has been charged to the products on the basis of the total processing hours used. All other cots may be assumed variable in relation to processing hours. In the current year it is estimated that Rs. 60,000 of the fixed overhead will be absorbed by X and Rs. 3,00,000 by Y. With the existing selling prices it is considered that the potential annual demand for X is 20,000 units and that for Y, 40,000 units.

You are required to comment critically on the product mix adopted by Narendran Products.Calculate what would have been the optimal plan given that there was no intention of changing the selling prices. (a) For the forthcoming year increased capacity has been installed in the finishing department so that this will no longer be a constraint for any feasible sales programme. Annual fixed overhead will be increased to Rs. 4,00,000 as a consequences of this expansion of facilities, but variable costs per unit are unchanged. A study commissioned by the Sales Director estimates the effect that alterations to the selling prices would have on the sales that could be achieved. It is thought reasonable to assume that the price/demand relationship is linear. Assuming that the company is now willing to abandon its cost plus pricing practices, if these can be shown to be deficient, you are required to calculate the optimal selling price for each product and the optimal output levels for these prices. State clearly any assumptions that you find it necessary to make.

Question 12

Division A of a large divisionalized organization manufactures a single standardized product. Some of the output is sold externally whilst the remainder is transferred to Division B where it is a subassembly in the manufacture of that division’s product.

In addition to the external sales, 5,000 units are transferred annually to Division B at an internal transfer charge of Rs. 29 per unit. This transfer price is obtained by deducting variable selling and packing expense from the external price since this expense is not incurred for internal transfers.  Division B’s manager disagrees with the basis used to set the transfer price. He argues that the transfers should be made at variable cost plus an agreed (minimal) mark-up since he claims that his division is taking output that Division A would be unable to sell at the price of Rs. 30. Partly because of this disagreement, a study of the relationship between selling price and demand has recently been made for each division by the company’s sales director.

The resulting report contains the following table: Customer demand at various selling prices: Division A Selling price Demand Division B Selling price Demand Rs. 80 7,200 Rs. 90 5,000 100 2,800 Rs. 20 15,000 Rs. 30 10,000 Rs. 40 5,000 The manager of Division B claims that this study supports his case. He suggests that a transfer price of Rs.

12 would give Division A a reasonable contribution to its fixed overheads while allowing Division B to earn a reasonable profit. He also believes that it would lead to an increase of output and an improvement in the overall level of company profits. You are required:

  • To calculated the effect that the transfer pricing system has had on the company’s profits, and
  • To establish the likely effect on profit of adopting the suggestion by the manager of Division B of a transfer price of Rs. 12.

Question 13

Companies RP, RR, RS and RT are members of a group. RP wishes to buy an electronic control system for its factory and, in accordance with group policy, must obtain quotations from companies inside and outside of the group. From outside of the group the following quotations are received: Company A quoted Rs. 33,200. Company B quoted Rs. 5,000 but would buy a special unit from RS for Rs. 13,000. To make this unit, however, RS would need to buy parts from RR at a price of Rs. 7,500. The inside quotation was from RS whose price was Rs. 48,000. This would require RS buying parts from RR at a price of Rs. 8,000 and units from RT at a price of Rs. 30,000. However, RT would need to buy parts from RR at a price of Rs. 11,000. Additional data are as follows:

  •  RR is extremely busy with work outside the group and has quoted current market prices for all its products.
  •  RS costs for the RP contract, including purchases from RR and RT, total Rs. 2,000. For the Company B contract it expects a profit of 25% on the cost of its own work.
  • Recommend, with appropriate calculations, whether the contract should be placed with RS or Company A or Company B;
  • State briefly two assumptions you have made in arriving at your recommendations.

Question 14

An industrial group of companies includes two divisions: A and B. the output of Division A is product A, two units of which are used by Division B for every one of its product B. Division B has first call on Division A’s output but there is a separate market outside the group for the balance of Division A’s output. All the output of Division B is sold outside the group.

The maximum capacity of Division A is 1,30,000 units of A and that of Division B is 50,000 units of B per annum. Each division maintains a stable level of stocks throughout the year. The group would like to examine the results of using different bases of transfer pricing under different scenarios (ie situations that could be expected to arise). The bases of transfer pricing are Absorbed standard cost Market price Variable cost plus a lump sum of 80% of Division A’s fixed cost Scenario Number Product A Market price Total Demand (per unit) (thousand units) Rs. 5 23 29 30 25 35 100 70 130 Product A Rs. 20 Rs. 5 Product B Rs.

  •  As manager of Division B state, with supporting calculations, whether you would recommend acceptance of the order in the following two situations: Scenario 23 Price per unit (ex factory) Rs. 55 Rs. 65 Basic of transfer pricing AS MP
  • If you were Managing Director of the whole group state, with very brief reasons, whether you would recommend acceptance of the orders i

Question 15

Vista Electronics manufactures two different types of coils used in electric motors. In the falls of the current year. Erica Becker, the controller, compiled the following data. Sales forecast for 2000 (all units to be shipped in 2000): Product Light coil Heavy coil Raw material prices and inventory levels: Raw Material Expected Inventories January 1, 2000 32,000 lb.

29,000 lb 6,000 units Desired Inventories December 31, 2000 36,000 lb. 32,000 lb. 7,000 units Anticipated Purchase Price in Rs. 8 5 3 Units 60,000 40,000 Price Rs. 65 Rs. 95Sheet metal Copper wire Platform Use of raw material: Raw Material Sheet metal Copper wire Platform Direct-labor requirements and rates: Product Light coil Heavy coil Amount Used per Unit Light Coll Heavy Coll 4 lb 2 5 lb 3 1 unit Hours per Unit 2 3 Rate per Hour Rs. 15 20 Overhead is applied at the rate of Rs. 2 per direct-labor hour.


Prepare the following budgets for 2000.

  1. Sales budget (in Rupees).
  2. Production budget (in units).
  3. Raw-material purchases budget (in quantities).
  4. Raw-material purchases budget (in Rupees). ) Direct-labor budget (in Rupees). 6) Manufacturing overhead budget (in Rupees).

Question 16

Toronto Business Associates, a division of Maple Leaf Services Corporation, offers management and computer consulting services to clients throughout Canada and the northeastern United states.

The division specializes in website development and other Internet applications. The corporate management at Maple Leaf Services is pleased with the performance of Toronto Business Associates for the first nine months of the current year and has recommended that the division manager.Ramachandran, submit a revised forecast for the remaining quarter, as the division has exceeded the annual plan year-to-date by 20 percent of operating income. An unexpected increase in billed hour volume over the original plan is the main reason for this increase in income. The original operating budget for the first three quarters for Toronto Business Associates follows. Howell will reflect the following information in his revised forecast for the fourth quarter. Toronto Business Associates currently has 25 consultants on staff, 10 for management consulting and 15 for computer systems consulting. Three additional management consultant have been hired to start work at the beginning of the fourth quarter in order to meet the increased client demand.

The hourly billing rate for consulting revenue will remain at 90 per hour for each management consultant and 75 per hour for each computer consultant. However, due to the favorable increase in billing hour volume when compared to the plan, the hours for each consultant will be increased by 50 hours per quarter.

  • The budgeted annual salaries and actual annual salaries, paid monthly, are the same: 50,000 for a management consultant and 46,000 for a computer consultant.Corporate management has approved a merit increase of 10 percent at the beginning of the fourth quarter for all 25 existing consultants, while the new consultants will be compensated at the planned rate.
  • The planned salary expense includes a provision for employee fringe benefits amounting to 30 percent of the annual salaries. However, the improvement of some corporate wide employee programs will increase the fringe benefits to 40 percent.
  • The original plan assumes a fixed hourly rate for travel and other related expenses for each billing hour of consulting. These are expense that are not reimbursed by the client, and the previously determined hourly rate has proven to be adequate to cover these costs. • Other revenue is derived from temporary rentals and interest income and remains unchanged for the fourth quarter.

General and administrative expense have been favourable at 7 percent below the plan; this 7 percent savings on fourth quarter expenses will be reflected in the revised plan.

  • Depreciation of office equipment and personal computers will stay constant at the projected straight-line rate.
  • Due to the favourable experience for the first three quarters and the division’s increased ability to absorb costs, the corporate management at Maple Leaf Services has increased the corporate expenses allocation by 50 percent.


  1. Prepare a revised operating budget for the fourth quarter for Toronto Business Associates that Ramachandran will present to corporate management.
  2. Discuss the reasons why an organization would prepare a revised operating budget.

Question 17

Ford ltd. anufactures and sells 15,000 units of a raft, RF17, in 2001.

The full cost per unit is Rs. 200. Ford earns a 20% return on an investment of Rs. 18,00,000 in 2001.


  1. Calculate the selling price of RF17 in 2001. Calculate the markup percentage on the full cost per unit of RF17 in 2001.
  2. If the selling price in requirement 1 represents a markup percentage of 40% on variable costs per unit, calculate the variable cost per unit of RF17 in 2001
  3. Calculate ford’s operating income if it had increased the selling price to Rs. 230. at this price ford would have sold 13,500 units of RF17. Assume no change in total fixed costs. Should ford have increased the selling price of RF17 to Rs. 230?

In response to competitive pressure, ford must reduce the price of RF17 to Rs. 210 in 2002, in order to achieve sales of 15,000 units. Ford plans to reduce its investment to Rs. 16,50,000. If ford wants to maintain a 20% return on investment, what is the target cost per unit in 2002?

The report indicates another price reduction is needed to meet anticipated competitors’ reductions in sales prices. The current selling price for their 10-disk car CD changers is Rs. 350 per unit. It is expected that within three months PE’s two major competitors will be selling their 10-disk car CD changers for Rs. 300 per unit. This concerns Amrutha because their current cost of producing the CD changers is Rs. 315, which yields a Rs. 35 profit on each unit sold. The situation is especially disturbing because PE had implemented an activity-based costing (ABC) system about two years ago. The ABC system helped them better identify costs, cost pools, cost drivers, and cost reduction opportunities. Changes made when adopting ABC reduced costs on this product by approximately 15 percent during the last two years. Now it appears that costs will need to be reduced considerably more to remain competitive and to earn a profit on the 10-disk car CD changers.

Total costs to produce, sell, and service the CD changer units are as follows: 10-Disk Car CD Changer Per Unit Material Purchased components All other material Labor Manufacturing, direct Setups Materials handling Inspection Machining Cutting, shaping, and drilling Bending and finishing Other Finished-goods warehousing Warranty Total unit cost Rs. 110 40 65 9 18 23 21 14 5 10 Rs. 315 Amrutha has decided to hire Damodar, a consultant, to help decide how to proceed.After two weeks of review, discussion, and value engineering analysis, Chandran suggested that PE adopt a just-intime (JIT) cell manufacturing process to help reduce costs. He also suggested that using target costing would help in meeting the new target price. By changing to a JIT cell manufacturing system, PE expects that manufacturing direct labor will increase by Rs. 15 per finished unit. However, setup, material handling, inspection, and finished goods warehousing will all be eliminated. Machine costs will be reduced from Rs. 35 to Rs. 30 per unit, and warranty costs are expected to be reduced by 40 percent.


  • Determine PAL Electronics’ unit target cost the Rs. 300 competitive sales price while maintaining the same percentage of profit on sales as is earned on the current Rs. 350 sales price.
  • If the just-in-time cell manufacturing process is implemented with the changes noted, will PAL Electronics meet the unit target cost you determined in requirement
  • Prepare a schedule detailing cost reductions and the unit cost under the proposed JIT cell manufacturing process.

Question 19

The management of Alliance Enterprises recently decided to adopt a just-in-time inventory policy to curb steadily rising costs and free up cash for purposes of investment.

The company anticipates that inventory will decrease from Rs. 36,00,000 to Rs. 6,00,000, with the released funds to be invested at a 12 percent return for the firm.

  • Reduced inventories should produce savings in insurance and property taxes of Rs. 27,000.
  • Alliance will lease 75 % of an existing warehouse to another firm for Rs. 2 per square foot. The warehouse has 30,000 square feet.
  • Because of the need to handle an increased number of small shipments from suppliers, Alliance will remodel production and receiving-dock facilities at a cost of Rs. 6,00,000.

The construction costs will be depreciated over a 10-year life.

  • A shift in suppliers is expected to result in the purchase and use of more expensive raw materials.However, these materials should give rise to fewer warranty and repair problems after Alliance’s finished product is sold, resulting in a net savings for the firm of Rs. 25,000.
  • Three employees who currently earn Rs. 30,000 each will be directly affected by the just-in-time adoption decision. Two employees will be transferred to other positions with Alliance; one will be terminated.
  • Reduced raw material inventory levels and accompanying stockouts will cost Alliance Rs. 70,000.


  • Compute the annual financial impact of Alliance’s decision to adopt a just-in-time inventory system.
  • If the just-in-time system is implemented in proper fashion, what is the likelihood of excessive raw material stockouts?Briefly explain.
  • Adoption of a just-in-time purchasing system will often result in less need for the inspection of incoming materials and parts. Why?
  • In comparison with a traditional purchasing system, why does a just-in-time system give rise to an increased number of small shipments to the buying firm?

Question 20

The product structure and the lead times for a finished product ‘X’ are given in figure below If 100 units of X are required in week 12 and if none of the components, sub-assemblies and the end product are either on hand or on order, compute the amounts and dates of the planned order releases for all the components and sub-assemblies.Assume that there is no particular order size and therefore all the order quantities are lot for lot.

X, LT = 2 P (1), LT = 3 Q (2), LT = 1 R (3), LT = 3 S (2), LT = 3 P (2), LT = 3 R (3), LT = 3

Question 21

S (2), LT = 3 The lead time to procure Paracetamol from a supplier is four weeks. At present, 54 kg of the drug is available with us. There is also a scheduled receipt of 45 kg of it in four weeks. The production requirements of paracetamol over the next nine weeks are as: Week Amount in kg 1 24 2 3 29 4 11 15 5 – 6 5 7 19 8 27 9 18 L. Muralidharan, FCA. , Grad. CWA., Sreeram Coaching Point COST MANAGEMENT – TEST QUESTIONS & SOLUTIONS If we use an order quantity of 45 kg, when shall we release the orders for Paracetamol?

Question 22

Having attended a CIMA course on activity-based costing (ABC) you decide to experiment by applying the principles of ABC to the four products currently made and sold by your company. Details of the four products and relevant information are given below for one period: Product Output in units Costs per unit: Direct material Direct labour Machine hours (per unit) A 120 (Rs. ) 40 28 4 B 100 (Rs. ) 50 21 3 C 80 (Rs. ) 30 14 2 D 120 (Rs. ) 60 21 3 The four products are similar and are usually produced in production runs of 20 units and sold in batches of 10 units. The production overhead is currently absorbed by using a machine hour rate, and the total of the production overhead for the period has been analysed as follows: (Rs.Machine department costs (rent, business rates, depreciation and supervision) Set-up costs Stores receiving Inspection / Quality control Materials handling and despatch 10,430 5,250 3,600 2,100 4,620 You have ascertained that the ‘cost drivers’ to be used are as listed below for the overhead cost shown: Cost Set up costs Stores receiving Inspection / Quality control Materials handling and despatch Cost Driver Number of production runs Requisition raised Number of production runs Orders executed The number of requisition raised on the stores was 20 for each product and the number of orders executed was 42, each orders being for a batch of 10 of a product. You are required.

  • To calculate the total costs for each product if all overhead costs are absorbed on a machine hour basis;
  • To calculate the total costs for each product, using activity-based costing;
  • To calculate and list the unit product cost from your figures in (a) and (b) above, to show the differences and to comment briefly on any conclusions which may be drawn which could have pricing and profit implications.

Question 23

Sumantra Technology Ltd. ,. manufactures several different types of printed circuit boards; however, two of the boards account for the majority of the company’s sales. The first of these boards, a television circuit board, has been a standard in the industry for several years.

The market for this type of board is competitive and price-sensitive. Sumantra plans to sell 65,000 of the TV boards in 2001 at a price of Rs. 50 per unit. The second high-volume product, a personal computer circuit board, is a recent addition to Sumantra’s product line. Because the PC board incorporates the latest technology it can be sold at a premium price. The 2001 plans include the sale of 40,000 PC boards at Rs. 300 per unit.

I know we get a premium price for the PC board. Selling it should help overall profitability. ” The cost-accounting system shows that the following costs apply to the PC and TV boards. PC Board Direct material Direct labour Machine time Rs. 140 4 hr. 1. 5 hr.

TV Board Rs. 80 1. 5 hr. .5 hr. Variable manufacturing overhead is applied on the basis of direct-labor hours. For 2001, variable overhead is budgeted at Rs.

1,20,000, and direct-labor hours are estimated at 2,80,000. The hourly rates for machine time and direct labor are Rs. 10 and Rs. 14, respectively. The company applies a material-handling charge at 10 percent of material cost. This material-handling charge is not included in variable manufacturing overhead. Total 2001 expenditures for direct material are budgeted at Rs.

1,06,00,000. Andrew Fulton, Sumantra’s controller, believes that before the management group proceeds with the discussion about allocating sales and promotional Rupees to individual products, it might be worth while to look at these products on the basis of the activities involved in their production.Fulton has prepared the following schedule to help the management group understand this concept. “Using this information,” Fulton explained, “we can calculate an activity-based cost for each TV board and each PC board and then compare it to the standard cost we have been using. The only cost that remains the same for both cost methods is the cost of direct material.


  • dentify at least four general advantages associated with activity-based costing.
  • On the basis of Sumantra’s unit cost data given in the problem, calculate the total contribution margin expected in 2001 for the PC board and the TV board.
  • On the basis of an activity-based costing system, calculate the total contribution margin expected in 2001 for the PC board and the TV board.
  • Explain how a comparison of the results of the two costing methods may impact the decisions made by Sumantra’s management group.

Question 24

Calton Ltd. make and sell a single product. There are no stocks of product units at the beginning or end of the period under review. The stock level of material X remains unchanged throughout the period. The following additional information affects the costs and revenues:  5% of incoming material from suppliers is scrapped due to poor receipt and storage organisation. 4% of material X input to the machine process is wasted due to processing problems. Inspection and storage of material X costs Rs. 0.10 pence per sq. metre purchased.

Inspection during the production cycle, calibration checks on inspection equipment, vendor rating and other checks costs Rs. 25,000 per period Production quantity is increased to allow for the downgrading of 12. 5% of product units at the final inspection stage. Downgraded units are sold as ‘second quality’ units at a discount of 30% on the standard selling price. Production quantity is increased to allow for returns from customers which are replaced free of charge.

Returns are due to specification failure and account for 5% of units initially delivered to customers. Replacement units incur a delivery cost of Rs. 8 per unit. 80% of the returns from customers are rectified using 0. hours of machine running time per unit and are re-sold as ‘third quality’ products at a discount of 50% on the standard selling price. The remaining returned units are sold as scrap for Rs. 5 per unit.

Product liability and other claims by customers is estimated at 3% of sales revenue from standard product sales. Machine idle time is 20% of gross machine hours used (i. e. running hours = 80% of gross hours). Sundry costs of administration, selling and distribution total Rs. 60,000 per period. Calton Ltd is aware of the problem of excess costs and currently spends Rs. 20,000 per period in efforts to prevent a number of such problems from occurring. Calton Ltd. is planning a quality management programme which will increase its excess cost prevention expenditure from Rs. 20,000 to Rs. 60,000 per period. It is estimated that this will have the following impact.

  •  A reduction in stores losses of material X to 3% of incoming material.
  •  A reduction in the downgrading of product units at inspection to 7. 5% of units inspected.
  •  A reduction in material X losses in process to 2. 5% of input to the machine process. L. Muralidharan, FCA. , Grad.
  •  A reduction in returns of products from customers to 2. % of units delivered.
  •  A reduction in machine idle time to 12. 5% of gross hours used.
  •  A reduction in product liability and other claims to 1% of sales revenue from standard product sales.
  •  A reduction in inspection, calibration, vendor rating and other checks by 40% of the existing figure.
  •  A reduction in sundry administration, selling and distribution costs by 10% of the existing figure.
  • A reduction in machine running time required per product unit to 0. 5 hours.


  • Prepare summaries showing the calculation of (I) total production units (pre-inspection), (ii) purchases of material X (sq. metres), (iii) gross machine hours.In each case the figures are required for the situation both before and after the implementation of the additional quality management programme, in order that the orders for 5,000 product units may be fulfilled.
  • Prepare profit and loss account for Calton Ltd for the period showing the profit earned both before and after the implementation of the additional quality management programme.
  • Comment on the relevance of a quality management programme and explain the meaning of the terms internal failure costs, external failure costs, appraisal costs and preventation costs giving examples for each, taken where possible from the information in the question.

Question 25

Destiny Products makes digital watches. Destiny is preparing a product life-cycle budget for a new watch, MX3. Development on the new watch is to start shortly.Estimates about MX3 are as follows: Life-cycle units manufactured and sold Selling price per watch Life-cycle costs R & D and design costs Manufacturing Variable costs per watch Variable costs per batch Watches per batch Fixed costs Marketing Variable costs per watch Fixed costs Distribution Variable costs per batch Watches per batch Fixed costs Customer-service costs per watch Ignore the time value of money.


  • Calculate the budgeted life-cycle operating income for the new watch.
  • What percentage of the budgeted total product life-cycle costs will be incurred by the end of the R & D and design stages?
  • An analysis reveals that 80% of the budgeted total product life-cycle costs of the new watch will be locked in at the end of the R & D and design stages. What implications does this finding have for managing MX3’s costs?
  • Destiny’s Market Research Department estimates that reducing MX3’s price by Rs. 3 will increase life-cycle unit sales by 10 percent. If unit sales increase by 10%, Destiny plans to increase manufacturing and distribution batch sizes by 10% as well. Assume that all variable costs per watch, variable costs per batch, and fixed costs will remain the same. Should Destiny reduce MX3’s price by Rs.3?Show your calculations.

Question 26

A first batch of 25 transistor radios took a total of 250 direct labour hours. It is proposed to assemble another 40 units. What will be the average labour per unit in this lot? Assume that there is 85% learning rate.

Question 27

Bhakatavatsala & Co, a fire arms manufacturer, has designed a new type of gun and a first lot of 25 guns assembled for test purposes had the following costs: Direct materials Direct labour Variable overheads Fixed overheads Total costs 24,500 22,500 16,875 11,250 75,125 Proportional to direct labour BSF being satisfied with this gun have asked the lowest bid for supply of 1,000 guns.The company will pass on the benefits of learning of 85% to the client in setting the bid. The company will set a selling price to earn 40% gross profit margin. Determine the unit price that should be bid.

Question 28

One unit of product A contributes Rs. 7 and requires 3 units of raw material and 2 hours of labour. One unit of product B contributes Rs. 5 and requires one unit of raw material and one hour of labour. Availability of the raw material at present is 48 units and there are 40 hours of labour.

  • Formulate it as a linear programming problem.
  • Write its dual.
  • Solve the dual with Simplex method and find the optimal product mix and shadow prices of the raw material and labour.

Question 29

The simplex tableau for a maximization problem of linear programming is given here: Product Mix Cj 5 0 xj x2 S2 cj zj cj – zj Xl 1 1 4 5 -1 x2 1 0 5 5 0 S1 1 -1 0 5 -5 S2 0 1 0 0 0 Quantity (bi) 10 3 Answer the following questions, giving reasons in brief:

  • Is this solution optimal?
  • Are there more than one optimal solution?
  • Is this solution degenerate?
  • Is this solution feasible?
  • If S1 is slack in machine A (in hours / week and S2 is slack in machine B (in hours / week), which of these machines is being used to the full capacity when producing according to this solution?
  • A customer would like to have one unit of product x1 and is willing to pay in excess of the normal price in order to get it.
  • How much should the price be increased in order to ensure no reduction of profits?

Question 30

Management of Ranga Ltd are very much worried about the continuing recession in the country. The company has 7 divisions (A to G). they have decided to close four divisions namely A,B,C and D and transfer some of the employees to the remaining divisions. Personnel at the units to be closed have signified a willingness to move to any of the three remaining units and the company is willing to provide them with removal costs.The technology of production is different to some degree at each unit and retraining expenses will be incurred on transfer. Not all existing personnel can be absorbed by transfer and a number of redundancies will arise. Cost of redundancy is given as a general figure at each unit is to be closed.

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