BML MUNJAL UNIVERSITY

Master of Business Administrations - MBA

Batch 2016-2018

SAMPLE PAPER

COSTING PRODUCTS & SERVICES

Max Marks: 100 Module -3

Duration: 2 hours Weightage-35%

Instructions to Candidates

1. The exam is closed book.

2. The paper has two sections: Section A and Section B

3. Section A:

a. Section A has five questions (40 Marks).

b. Answer FOUR out of the FIVE questions.

c. Each question carries 10 marks.

4. Section B

a. Section B has four questions (60 Marks)

b. Answer any THREE out of the FOUR questions.

c. Each question carries 20 marks.

5. You are REQUIRED to show all the numerical calculations clearly in your answers

Materials Required:

1. An examination answer book

2. A Non-programmable calculator can be used

Please turn over

SECTION A (Answer FOUR out of the FIVE questions. Each question carries 10 marks.)

Question A.1

Engstrom, Inc., uses 10,000 pounds of a specific component in the production of life
preservers each year. Presently, the component is purchased from an outside supplier for
550 per pound. For some time now, the factory has had idle capacity that could be utilized
to make the component. Engstrom's costs associated with manufacturing the component are
as follows:

Direct materials per lb. 15

0
Direct labor per lb. 150
Variable overhead per lb. 100
Fixed overhead per unit (based on annual production of 10,000 lbs.) 100

In addition, if the component is manufactured by Engstrom, the company will hire a new
factory supervisor at an annual cost of 16,00,000.

Required

If Engstrom chooses to make the component instead of buying it from the outside supplier,
what would be the change, if any, in the company's income?

****

Question A.2

You are trying to determine which of two retail clothing stores would be a more beneficial
investment to you. You have a minimum required rate of return of 8 percent and have
collected the following information about the two retail clothing stores:

Company A Company B
Sales 4,00,00,00 4,50,00,00
0 0
Net operating income 25,00,000 35,00,000
Average operating assets 2,50,00,000 4,00,00,000
Required

Calculate the ROI and residual income for each store. Explain the meaning of your
calculations.

****

Question A.3

The Woods Enterprises prepared the following standard costs for the production of one stuffed bear:

Direct materials 1.5 pounds of stuffing @ 100per

 lb

Actual production costs for the production of 1,000 stuffed bears required 1,750 pounds of stuffing at
a cost of 97.50 per pound.

Required

A. Calculate the direct material price variance.

B. Calculate the direct material usage variance.

****

Question A.4

Delia, Inc., is preparing a budget for next year and requires a breakdown of the cost of steam used in
its factory into fixed and variable components. The following data on the cost of steam used and
direct labor hours worked are available for the last six months:

Required

A. Use the high/low method to calculate the estimated variable cost of steam per direct
labor hour.
B. Calculate the Cost of steam for forecasted 4000 Direct Labour hours.

****

Question A.5

Burger Queen Restaurant had the following information available related to its operations from last
year:

Required

A. What is Burger Queen's operating leverage?

B. If sales increased by 30 percent, what would Burger Queen's net income be?

****

Section B (Answer any THREE out of the FOUR questions. Each question carries 20 marks.)
Question B.1

An umbrella manufacturer makes an average profit of 25 per unit on a selling price of 143,
by producing and selling 60,000 units at 60 per cent of potential capacity. His cost of sales
per unit is as follows:

Direct materials 35.00
Direct labor 12.50
Factory overhead 62.50 (50% fixed)
Selling overhead 8.00 (25% variable)

During the current year, he intends to produce the same number but estimates that his fixed
cost would go up by 10 percent while the rates of direct labour and direct materials will
increase by 8% and 6%, respectively.

Required:

A. What are his Break-Even Sales and Margin of Safety currently?

B. What minimum price would you recommend for the manufacturer to ensure a overall
profit of 16,73,000.

*****

Question B.2

Crystal Glass is a producer of heirloom-quality glassware. The company has a solid reputation and is
widely regarded as a model corporate citizen. You have recently been hired as a staff accountant at a
time when the company is experiencing rapid growth and is looking for a substantial increase in its
line of credit at the local bank. Crystal Glass also is planning on trying to take the company public in
the next three to five years. At the present time, the company is a closely held family-owned business.
One of your first jobs is to review the current month's income statement for accuracy. The income
statement appears as follows:
You are given the following additional information:

Variable costs:
Manufacturing 31,78,26,050
S&A 10,59,42,000
Fixed costs:
Manufacturing 7,38,36,100
S&A 1,84,59,000
Beginning inventory 2,50,000 units
Production 5,00,000 units
Sales 6,00,000 units
Required

A. What type of costing method is used by Crystal Glass- Absorption or Variable

Costing?

B. Does the method comply with GAAP? If not, what costing method should be used?

What would net operating income be?

C. Could the statements be misleading to the bank? Why or why not?

***

Question B.3

Herbert Love Corporation produces two products: A and B. The annual production and sales level of

Product A is 32,000 units. The annual production and sales level of the premium Product B is 18,000.

Currently, the company uses traditional costing and the total overheads of 525,00,000 are

apportioned on the basis on Direct Labour Hours.

The following information is also available:

Product A B

Sales price per unit 3500 3800

Direct material per unit 1500 1800

Direct labor per unit 400 500

Direct Labour Hours 8000 2000

The sales of Product B are increasing but alarmingly the overall profits of the company are declining.
The management accounting of the company advises to use activity-based costing.

The following overhead cost information is available for the Herbert Love Corporation for the prior
year:

Activity Allocation Base Total Activity Activity for Activity for Overhead
Product A Product B Cost()

Purchasing Number of purchase 8000 2000 6000 2,00,00,000

orders

Receiving Number of 25,000 1250 23750 50,00,000

shipments received

Machine setups Number of setups 4,000 2000 2000 2,00,00,000

Quality control Number of 7,500 5000 2500 75,00,000

inspections

Required

A. Determine the overhead allocation for the batch under the traditional overhead
allocation based on direct labor hours.
B. Determine the overhead allocation for the batch under activity-based costing
Question B.4

Hailey's Hats manufactures and distributes hats for every imaginable occasion. Henrietta Hailey
started the company in her house three years ago and has been surprised at her success. She is
considering an expansion of her business and needs to prepare cash budgeting information for
presentation to Second National Bank to secure a loan. Henrietta is not an accountant, so she has
asked you to help her with preparing the necessary reports.

Hailey's Hats began the month with a bank balance of 12,00,000 in April. The budgeted sales for
March through June are as follows:

Henrietta has found that she generally collects payment for credit sales over a two-
month period. Typically, 70 percent is collected in the month of sale and the
remainder is collected in the next month.
Her policy is to purchase inventory each month equivalent to 60 percent of that
month's budgeted sales. She thinks this provides her sufficient inventory levels to
manage unanticipated changes in demand. Hailey's Hats pays for inventory purchases
in the month following purchase.
Selling and administrative expenses are budgeted to be 30 percent of each month's
sales and are paid for in the same month. One-half of the Selling and administrative
expenses is accounted for by depreciation on Henrietta's manufacturing equipment.
The company purchased additional manufacturing equipment in April at a cost of
12,00,000.
Henrietta does not receive a salary, but she does pay herself dividends as company
performance allows. The first quarter of the year was very profitable, so Henrietta
paid herself a dividend of 6,25,000 in April.
Required

Prepare a summary cash budget for April, May, and June.