AGGARWAL EDUCATION CENTRE PVT.

LTD.
D-223, Laxmi Chamber, Laxmi Nagar, Delhi-92.
Ph. NO:- 22543053, 9811374374.
TQM
Q1:- A Manufacturing company purchase one of the components required for the
manufactures of product from two sources ,viz, suppliers, A and supplier B .The price
quoted by supplier a is Rs. 15.00 per hundred numbers of the component and is found
that on the average 3% of the total receipt from this source is defective. The
corresponding quotation from supplier B is Rs .14.50 but the defectives would go up to
5% For the total supply .If the defectives are not detected ,they are utilised in production
causing a damage of Rs. 15.00 per hundred components.
The company intends to introduce a system of inspection for the components on
receipt which would cost Rs.2.00 per hundred components such an inspection will,
however ,be able to detect only 90% of the defective components received .No payment
will be made for components found to be defective in inspection.
Offer your opinion ,(a) whether inspection at the point of receipt is justified ,and
(b) which of the two suppliers should be asked to supply. Assume total requirements of
components to be 10,000 numbers.
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Q2:- Your company plans to operate department D at normal capacity next year
producing one lakh units of product P. Assuming no defective works, these units can be
manufactured in 2.5 lakhs labour hours at a cost of Rs.0.50 per hour .factory overhead
would amount to Rs.1,50,000 of which Rs. 50,000 would be fixed five units of materials
can be purchased in two qualities ; a high quality at Rs. 1.05 per unit or lower quality at
0.80 per unit.
Under expected conditions, using high quality materials 10%of the work will be
defective requiring complete replacement of the material additional labor costs and
variable overhead. scrap materials recovered from defectives production could be sold at
Re. 0.30 per unit of high quality material used.
As an alternative to this arrangement .the use of the lower quality material is
being considered but this would require an extra operation to be performed on it. An
additional machine and tooling would be needed at a cost of Rs. 3,000 per annum. The
additional operation would take half an hour for each unit of product P produced ,not
talking defective work into a account.
It is estimated that 20% of the work would be defective all of which would be defective
all of which would require complete replacement. Scrap material from the lower quality
material could be sold for Rs. 5,000.
Present information to management indicating the more profitable course of
action.
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Q3:- A company manufactures a single product ,the estimated costs of which are as
follow:
Direct Materials Rs 10 each
Direct wages 8 hours at Rs. 0.50 per hour
Overhead absorption rate Rs. 1.75 per hour.(50% fixed overhead included)
During this period 1,000 units will be produced and sold as follow:-
900 Units of first at Rs.30 each
50 units of second at Rs.20 each
50 units of third at Rs.10 each
Present information to management showing the loss due to the production of inferior
units.
By reprocessing the inferior units taking the full reprocessing time of a further 8 hours
and adding further material Costing Rs.4 per unit these, “seconds” and “thirds” can be
converted into firsts.
Present information to the management.
Answer:- Loss 600.
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TQM- Cost Indifference
Q4:-A company manufactures a component on batches of 2000 each .Each component
is tested before being sent to the agents for sales. Each components can be tested at the
factory at a cost of Rs.25 .If any component is found to be defective, it can be rectified by
spending Rs.200. In view of the large demand for the components and the sophisticated
system of manufactures ,a proposal came up that the practice of pre-testing of the
components be dispensed with to save costs. In that event, any defective component is
received back from the customer under warranty ,the cost of rectification and redispatch
will be Rs.400 per component.
States at what percentage of manufacture of components will the company find it
cheaper to pre-test each component.
Answer: - 250 Components (12.5%)
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Q5:- Carlon Ltd. makes and sells a single product, the unit specifications are as
follows:-
Direct Materials X 8 Sq meter at Rs. 40 per square meter
Machine Time 0.6 Running hours
Machine cost per gross hour Rs. 400
 Selling price Rs. 1,000

Carlon Ltd. requires to fulfill orders for 5,000 product units per period. 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.
Carlon Ltd. is planning to implement a Quality Management Programme (QMP) the
following additional information regarding costs and revenues are given as of now and
after implementation of Quality Management Programme.
Before the implementation of QMP After the
implementation
1: 5% of incoming material from suppliers scrapped due 1: Reduced to 3%.
to poor receipt and storage organization
2: 4% of materials X input to the machine process is 2: Reduced to 2.5%
wasted due to processing problems.
3: Inspection and Storage of Material X costs Re. 1 per 3 No change in the unit
square meter purchased. rate.
4: Inspection during the production cycle, calibration 4 Reduction of 40% of the
checks on inspection equipment vendor rating and other existing cost.
checks cost Rs. 2,50,000 per period.
5 Production Qty. is increased to allow for the 5 Reduction to 7.5%
downgrading of 12.5% of the production units at the final
inspection stage. Down graded units are sold as seconds at
a discount of 30% of the standard selling price.
6: Production Quantity is increased to allow for return 6 Reduction to 2.5%
from customers (these are replaced free of charge) due to
specification failure and account for 5% of units actually
delivered to customer.
7: Product liability and other claims by customers is 7: Reduction to 1%
estimated at 3% of sales revenue from standard product
sale.
8: Machine idle time is 20% of Gross machine hrs. used 8: Reduction to 12.5%
(i.e. running hour = 80% of gross/ hrs.)
9: Sundry costs of Administration, Selling and 9: Reduction by 10% of
Distribution total- Rs. 6,00,000 per period. the existing.
10: Prevention programme costs Rs. 2,00,000 10: Increase to Rs. 6,00,000
The Total Quality Management Programme will have a reduction in Machine Run Time
required per product unit to 0.5 hr.
Required:-
(a) Prepare summaries showing the calculation of (i) Total production units (pre
inspection), (ii) Purchase of Materials X (Square meters), (iii) Gross machine
Hours.
In each case, the figures are required for the situation both before and after the
implementation of the Quality Management Programme so that orders for 5,000
products can be fulfilled.
 (b) Prepare Profit and Loss Account for Carlon Ltd. for the period showing the
profit earned both before and after the implementation of the total Quality
programme.
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Q6:-The Bushworks Ltd convert synthetic slabs into components AX and BX for use
in the car industry. Bushworks Ltd. Is planning a quality management programme at a
cost of$250,000. The following information relates to the costs incurred by Bushworks
Ltd. Both before and after the implementation of the quality management programme:
1:- Synthetic slabs:
Synthetic slabs cost $40 per hundred. On average 2.5% of synthetic slabs received are
returned to the supplier as scrap because of deterioration in stores. The supplier allows a
credit of $1 per hundred slabs for such returns. In addition, on receipt in stores, checks to
ensure that the slabs received conform to specification costs $14,000 per annum.
A move to adjust in time purchasing system will eliminate the holding of stocks of
synthetic slabs. This has been negotiated with the supplier who will deliver slabs of
guaranteed design specification for $44 per hundred units, eliminating all stockholding
costs.
2:- Curing /moulding process
The synthetic salbs are issued to a curing/holding process, which has variable conversion
costs of $20 per hundred slabs input. This process produces sub-components A and B,
which have the same cost structure. Lossess of 10% of input to the process because of
incorrect temperature control during the process are sold as scrapat$5perhundred units.
The quality programme will rectify the temperature control problem thus reducing losses
to 1% of input to the process.
3:- Finishing Process
The finishing process has a bank of machines which perform additional operations on
type A and B sub- components as required and converts them into final components AX
and BX are $15 and $25 per hundred units respectively. At the end of the finishing
process15%of units are found to be defective. Defective units are sold for scrap at $10
per hundred units. The quality programme will convert the finishing process into two
dedicated cell, one for each of components types AX and BX. The dedicated cell variable
costs per hundred sub- components A and B processed will be $12 and $20 respectively.
Defective units of components AX and BX are expected to fall to 2.5% of the input to
each cell. Defective components will be sold as scrap as at present.
4:- Finished goods
A finished goods stock of components AX and BX of 15,000 and 30,000units
respectively is held throughout the year in order to allow for customer demand
fluctuations and free replacement of units returned by customers due to specification
faults. Customers returns are currently 2.5% of components delivered to customers.
Variable stock holding costs are $15 per thousand components units.
The proposed dedicated cell layout of the finishing process will eliminate the need
tp hold stocks of finished components, other than sufficient to allow for the free
replacement of those found to be defective in customer hands. This stock level will be set
at one month’s free replacement to customers which is estimated at 500 and 1000 units
for types AX and BX respectively. Variable stockholding costs will remain at $15 per
thousand components units.
5:- Quantitative data:
Some preliminary work has already been carried out in calculating the number of units of
synthetic salbs, sub-components A and B and components AX and BX which will be
required both before and after the implementation of the quality management programme,
making use of the information in the question. Table 1 summarises the relevant figures.
Table 1
Existing Situation Amended Situation
Type A/Ax Type B/ BX Type A/ AX Type B/ BX
(units) (units) (units) (units)
Sales 800,000 1200,000 800,000 1200,000
Customer 20,000 30,000 6,000 12,000
returns
Finsihed goods 820,000 1230,000 806,000 1212,000
delivered
Finished 144,706 217059 20667 31077
process losses
Input to 964 706 1447 059 826667 1243 077
finishing
process

2411765 2069744
Curing/moulding losses 267974 20 907
Input to curing /moulding 2679739 2090651
Stores losses 68 711 --
Purchase of Synthetic slabs 2748450 2090651
Required:-
(a) Evaluate and Present a statement showing the net financial benefit or loss per
annum of implementing the quality management programme, using the
information in the question and the data in Table 1.
( All relevant working must be shown)
(b) Explain the meaning of the terms internal failure costs, external failure costs,
appraisal costs and prevention costs giving examples of each.
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Q7:- Cost of Quality reporting
Burdoy Plc has a dedicated set of production facilities for component X. A just-in-time
system is in place such that no stock of materials; Work-in-progress or finished goods are
held.
At the beginning of period 1, the planned information relating to the production of
component X through the dedicated facilities is as follows:
(i) Each unit of component X has input materials: 3 units of material A at $ 18 per
unit and 2 units of material B at $9 per unit.
(ii) Variable cost per unit of component X (excluding materials) is $15 per unit
worked on.
(iii) Fixed costs of the dedicated facilities for the period $162,000.
(iv) It is anticipated that 10% of the units of X worked on in the process will be
defective and will be scrapped.
It is estimated that customers will require replacement (free of charge) of faulty
units of components X at the rate of 2% of the quantity invoiced to them in
fulfillment of orders.
Burdoy plc is pursuing a total quality management philosophy. Consequently all
losses will be treated as abnormal in recognition of a zero defect policy and will be
valued at variable cost of production.
Actual results for each period 1 to 3 for component X are shown in Appendix 3.1.
No changes have occurred form the planned price levels for materials, variable
overhead or fixed overhead costs.
Required:-
(a) Prepare an analysis of the relevant figures provided in Appendix 3.1 to
show that the period 1 actual results were achieved at the planned level in
respect of (i) Quantities and losses and (ii) Unit cost levels for materials
and variable costs.
(b) Use your analysis from (a) in order to calculate the value of the planned
level of each of internal and external failure costs for period 1.
( c ) Actual free replacements of component X to customers were 170 units
and 40 units in periods 2 and 3 respectively. Other data relating to periods 2
and 3 is shown in Appendix 3.1.
Burdoy plc authorized additional expenditure during periods 2 and 3 as follows:
Period 2: Equipment accuracy checks of $ 10,000 and staff training of $ 5,000
Period 3: Equipment accuracy checks of $10,000 plus $ 5,000 of inspection costs;
also staff training costs of $5,000 plus $3,000 on extra planned maintenance of
equipment .
Required:-
( d) Prepare an analysis for Each of period 2 and 3 which reconciles the number of
components invoiced to customers with those worked on in the production
process. The analysis should show the changes from the planned quantity of
process losses and changes from the planned quantity of replacement of faulty
components in customer hands:
( e)Prepare a cost analysis for each of periods 2 and 3, which shows actual
internal failure costs, external failure costs, appraisal costs and prevention costs.
Appendix 3.1
Actual Stastics for component X
Period1 Period 2 Period 3
Invoices to customers (units) 5,400 5,500 5,450
Worked on in the process(units) 6,120 6,200 5,780
Total Costs:
Materials A and B ($) 440,640 446,400 416,160
Variable cost of production ($)
(excluding materials cost) 91,800 93,000 86,700
 Fixed cost ($) 162,000 177,000 185,000

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Q8:-Quality improvement theory of constraints). The Wellesley Corporation makes
printed cloth in two operations, weaving and printing. Direct materials costs are
Wellesley’s only variable costs. The demand for Wellesley’s cloth is very strong.
Wellesley can sell whatever output Quantity produces at $1,250 per roll to a distributor
who markets, distributes and provides customer service for the product.
Weaving Printing
Monthly capacity 10,000 rolls 15,000 rolls
Monthly production 9,500 rolls 8,550 rolls
Direct materials costs per roll of cloth
Processed at each operation $500 $100
Fixed operating costs $2,850,000 $427,500
Fixed operating costs per roll
($2,850,000 /9,500; $427,500/8,550) $300 per roll $50 per roll
Wellesley can start only 10,000 rolls of cloth in the Weaving Department because of
capacity constraints of the weaving machines. If the weaving operation produces
defective cloth, the cloth must be scrapped and yield zero net disposal value. Of the
10,000 rolls of cloth started at the weaving operation, 500 rolls (5%) are scrapped. Scrap
costs per roll, based on total ( fixed and variable) manufacturing costs per roll incurred up
to the end of the weaving opera ration, equal $785 per roll as follows:
Direct materials costs per roll (variable) $500
Fixed operating costs per roll ($2,850/10,000 rolls) 285
Total manufacturing costs per roll in Weaving $785
Department
The good rolls from the Weaving Department (called gray cloth) are sent to the Printing
Department of the 9,500 good rolls started at the printing operation, 950 rolls (10%) are
scrapped and yield zero net disposal value, Scrap costs, based on total ( fixed and
variable) manufacturing costs per unit incurred up to the end of the printing operation,
equal $930 per roll calculated as follows:-
Total Manufacturing costs per roll in Weaving Department $785
Printing Department manufacturing costs
Direct materials costs per roll (variable) $100
Fixed operating costs per roll ($427,500 / 9,500 rolls) 45
Total manufacturing costs per roll in Printing Department 145
Total manufacturing costs per roll $930
The Wellesley Corporation total monthly sale of printed cloth equal the Printing
Department’s output.
Required:- Each requirement refers only to the preceding data. There is no connection
between the requirements.
1:- The printing Department is considering buying 5,000 additional rolls of gray cloth
from an outside supplier at $900 per roll. The Printing Department manager is concerned
that the cost of purchasing the gray cloth is much higher than Wellesley cost of
manufacturing it. The quality of the graw cloth acquired from outside is very similar to
that manufactures in-house. The Printing Department expects that 10% of the rolls
obtained from the outside supplier will be defective. Show your calculations.
2:- Wellesley engineers have developed a method that would lower the Printing
Department’s scrap rate to 6% at the printing operation. Implementing the new method
would cost $350,000 per month. Should Wellesley implement the change? Show your
calculations.
3:- The design engineering team has proposed a modification that would lower the
Weaving Department’s scrap rate to 3%. The modification would cost the company
$175,000 per month. Should Wellesley implement the change? Show your calculations.
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Q9:-The Photon Corporation manufactures and sells 20,000 copies each year. The
variable and fixed costs of rework and repair are as follows:
Variable costs Fixed costs Total
Costs
Rework cost per hour $ 40 $60 $100
Repair costs
Customers support costs per 20 30 50
Transparency costs per load 180 60 240
Warranty repair costs pre hour 45 65 110
Photon’s engineers are currently working to solve the problem of copies being too light
or too dark. They propose changing the lens of the Copier. The new lens will cost $ 50
more than the old lens. Each copier uses one lens. Photon uses a one-year time horizon
for this decision, because it plans to introduce a new copier at the end of the year. Photon
believes that even as it improve quality, it will not be able to save any of the fixed costs
of rework or repair.
By changing the lens, Photon expects that it will (1) Save 12,000 hours of rework, (2)
Save 800 hours of customers support, (3) Move 200 fewer loads, (4) Save 8,000 hours of
repair, and (5) Sell 100 additional copiers for a total contribution margin of $6,000,000.
Required:- Should Photon change to the new lens? Show your calculations.
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Q10:-The Tan Corporation uses multicolor molding to make plastic lamps. The
molding operation has a capacity of 2,000,000 units per year. The demand for lamps is
very strong. Tan will be able to sell whatever output quantities it can produce at $40 per
lamp.
Tan can start only 200,000 units into production in the Molding Department
because of capacity constraints on the molding machines. If a defective unit is produced
at the molding operation, it must be scrapped and the net disposal value of scrap is zero.
Of the 2,00,000 units started at the molding operation 30,000 units (15%) are scrapped.
Scrap costs, based on total (fixed and variable) manufacturing costs incurred up to
molding operation equal $25 per unit as follows:-
Direct materials (variable) $16per unit
Direct manufacturing labor, Setup labor
And materials handling labor (variable) 3 per unit
Equipment, rent and other allocatedoverehad, including
 Inspection and testing costs on scrapped parts (Fixed) 6 per unit
Total $ 25 per unit
Tan’s designers have determined that adding a different type of material to the easting
direct materials would reduce scrap to zero, but it would increased the variable costs by
$4 per lamp In the Molding Department.
Required:- Should Tan use the new material? Show your calculations.
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Q11:-Eastern Switching Co. (ESC) produces telecommunications equipment Charles,

ESC’s president believes that product quality is the key to gaining competitive advantage.
Laurent implemented a total quality management (TQM) program with an emphasis on
customer satisfaction. The following information is available for the first year (2004) of
the TQM program compared with the previous year.
(2003) (20004)
Total number of units produced and sold 10,000 11,000
Units delivered before scheduled delivery data 8,500 9,900
Number of defective units shipped 400 330
Number of customers complaints other than for defective 500 517
units
Average time from when customer places fro defective unit
to
When unit is delivered to the customer 30days 25 days
Number of units reworked during production 600 627
Manufacturing lead time 20days 16 days
Direct and indirect manufacturing labor-hours 90,000 110,000
Required: -
1: - For each of the years 2003 and 2004 calculate.
A:- Percentage of defective units shipped.
B:- On time delivery rate.
C:- Customer complaints a percentage of units shipped.
D:- Percentage of units reworked during production.
2: - On the basis of your calculations in requirement 1. Has ESC’s performance on
quality and timeliness improved?
3: - Philip Larkin, a member of ESC’s board of directors, comments that regardless of the
effect that the program has had on quality, the output per labor hour has declined between
2003 and 2004. Larkin believes that lower output per lab our hour will lead to an increase
in cost and lower operating income.
A:- How did Larkin conclude that output per lab our hour declined in 2004 relative to
2003?
B:- Why might output lab our hour decline in 2004?
C:- Do you think that a lower output per lab our hour will decrease operating income in
2004?
Explain briefly.
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Q12:- The budget estimates of a company using sophisticated high speed
machines based on a normal working of 50,000 machine hours during 1986 are as
under:
Rs. Lacs
Sales (1,00,000 units) 100
Raw Materials 20
Direct wages 20
Factory Overheads: Variable 10
Fixed 10
Selling & Distribution Overheads: variable 5
Fixed 5
Administration Overheads- Fixed 10
Total costs 80
Profit 20
Since the demand for the company’s product is high, the possibilities of
increasing the production are explored by the budget committee. The Technical
Director stated that maintenance has not been given due importance in the budget
and that if preventive maintenance is introduced, the breakdown repair costs and
the hours lost due to breakdown can be reduced and consequently production can
be increased.
In support of this, he presented the following data, showing how injection of more
and more funds on preventive maintenance will bring down the break down repair
costs and reduce or eliminate the machine stoppages due to breakdown:
Proposed exp. On Exp. Estimated to be incurred Machine hours saved
Preventive Maintenance on Breakdown Repairs
Rs. Rs.
19,200 1,92,000 Nil
38,400 1,53,600 800
76,800 1,15,200 1,600
1,53,600 76,800 2,400
3,07,200 57,600 3,200
6,14,400 --- 4,000
Using differential and contribution concept, advice the management up to what
level breakdown hours can be reduced to increase production and maximize profits
of the company consistent with minimum costs.
Ans:- 1 Contribution per unit = Rs. 45, Contribution per machine hour = Rs. 90
Up to IV level it is justify spending P.M. 1,53,600.
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Q13-:- Bergen, Inc produces telephone equipment. Jerry Holman, Bergen’s president,
decided to devote more resources to the improvement of product quality after learning
that his company’s products has been ranked fourth in product quality in a 2002 survey of
telephone equipment users. Bargen’s quality- improvement program has now been in
operation for two years, and the cost report shown below has recently been issued.
Semi-annual Costs of Quality Report, Bergen. Inc.
 (in thousands)
6/30/2003 12/31/2003 6/30/2004 12/31/2004
Prevention Costs
Machine maintenance $ 215 $ 215 $ 190 $ 160
Training Suppliers 5 45 20 15
Design reviews 20 102 100 95
Total prevention costs 240 362 310 270
Appraisal costs
Incoming inspection 45 53 36 22
Final testing 160 160 140 94
Total appraisal costs 205 213 176 116
internal failure costs
Rework 120 106 88 62
Scrap 68 64 42 40
Total internal failure costs 188 170 130 102
External failure costs
Warranty repairs 69 31 25 23
Customers returns 262 251 116 80
Total external failure costs 331 282 141 103
Total quality costs $964 $1,027 $757 $591
Total production and revenue $ 4,120 $4,540 $4,650 $4,510
Required:-
1:- Calculate the ratio of each COQ category to revenue for each period. Has Bergen’s
quality improvement program been successful? Explain.
2:- Jerry Holman believed that a quality improvement program was essential and that
Bargen, Inc, could no longer afford to ignore the importance of product quality. Discuss
how Bergen could measure the opportunity cost of not implementing the quality
improvement program.
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TQM
Q14- (Costs of quality analysis, non financial quality measures). Ontario Industries
manufactures two years of refrigerators, Oliva and Solta. Information on each
Refrigerator is as follows:
Olivia Solta
Units manufactured and sold 10,000 units 5,000 units
Selling Price $ 2,000 $ 1,500
Variable costs per unit $ 1,200 $ 800
Hours spent on design 6,000 1,000
Testing and inspection hours per unit 1 0.5
Percentage of Units reworked in plant 5% 10%
Rework costs per refrigerator $500 $400
Percentage of units repaired at customer site 4% 8%
Repair costs per refrigerator $600 $ 450
Estimated lost sales from poor quality ----- 300 units
The labor rates per hour for two activities are as follows:-
Design $75per hour
 Testing and inspection $40per hour
1:- Calculate the costs of quality for Olivia and Solta, classified into prevention,
appraisal, internal failure and external failure categories.
2:- For each type of refrigerator, calculate the ratio of each COQ category as a percentage
of revenues Compare and Comment on the costs of quality for Olivia and Solta.
3:- Give two examples of non financial quality measures that Ontario Industries could
monitor as part of a total quality control program.
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Q15- Customer-response time, on time delivery. Pizza fest, Inc makes and delivers
pizzas to homes and offices in the Boston area. Fast, on time delivery is one of pizza
fest’s key strategies. Pizza fest provides the following information for2004 about its
customer- response time- the amount of time from when a customer calls to place an
order to when the pizza is delivered.
January – June July – December
Pizzas delivered in 30 minutes or less 100,000 150,000
Pizzas delivered in between 31 and 45 minutes 200,000 260,000
Pizzas delivered in between 46 and 60 minutes 80,000 70,000
Pizzas delivered in between 61 and 75 minutes 20,000 20,000
Total pizzas delivered 400,000 500,000
Required: 1. For January – June and July – December 2004, Calculate the percentage of
pizzas delivered in each of the four time intervals (30 minutes or less, 31- 45 minutes,
and 61 – 75 minutes). On the basis of these calculations, has customer- response time
improved in July- December compared with January- June?
2. When customers call pizza fest, they often ask how long it will take for the pizza to be
delivered to their homes or offices. If pizza fest quotes a long time interval, customers
often will not place the order. If pizza fest quotes too short a time interval and the pizza is
not delivered on time, customers get upset and pizza fest will lose repeat business. Based
on the January – June 2004 data, what customer- responses time should pizza fest quote
to its customers if
A. It wants to have an on- time delivery performance of 75%?
B. It wants to have an on- time delivery performance of 95%?
3. If pizza fest had quoted the customer- response times you calculated in requirements
2a and 2b, would it have met its on – time delivery performance targets of 75% and 95%
respectively. For July- December 2004? Explain.
4. Pizza fest is considering giving an on-time guarantee for January- June 2005. if the
pizza is not delivered within 60 minutes of placing the order the customer gets the pizza
fest estimates that it will make additional sales of 20,000 pizzas as a result of giving this
guarantee. It estimates that it will fail to deliver a total of 15,000 pizzas on time. The
average price of a pizza is $13, and variable cost of a pizza is $7.
A. What is the effect on pizza fest’s operating income of making this offer?
B. What non financial and qualitative factors should pizza fest consider before
making this offer?
C. What actions can pizza fest take to reduce customer- response time?
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Q16-: (Quality improvement, relevant costs, and relevant revenues). The Thomas
Corporation sells 300,000 V262 valves to the automobile and truck industry. Thomas has
a capacity of 110,000 machine-hours and can produce 3 valves per machine-hour. V262’s
contribution margin per unit is $8. Thomas sells only 300,000 valves because 30,000
valves (10% of the good valves) need to be reworked. It takes 1 machine-hour to rework
3 valves, so 10,000 hours of capacity are used in the rework process. Thomas’s rework
costs are $2,10,000.
• Direct materials and direct rework labor (variable costs): $3 per unit
• Fixed costs of equipment rent and overhead allocation: $4 per unit
Thomas’s process designers have developed a modification that would maintain the
speed of the process and ensure 100%. Quality and no rework. The new process would
cost $315,000 per year. The following additional information is available:
• The demand for Thomas’s V262 valves is 370,000 per year.
• The jackson corporation has asked Thomas to supply 22,000 T971 valves
(another product) if Thomas implements the new design. The contribution
margin per T971 value is $10.Thomas can make two T971 valves per
machine- hour with 100% quality and no rework.
Required 1. Suppose Thomas’s designers implement the new design. Should Thomas
accept Jackson’s order for 22,000 T971 valves? Show your calculation.
2.Should Thomas implement the new design? Show your calculation.
2. What non financial and qualitative factors should Thomas consider in deciding
whether to implement the new design?
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Q17-: - (Supplier evaluation and relevant costs of quality and timely deliveries).
Copeland sporting goods is evaluating two suppliers of footballs, Big red and quality
sports. Pertinent information about each potential supplier follows:
Relevant Item Big red Quality sports
Purchase price per unit (case) $50 $51
Ordering costs per order $6 $6
Inspection costs per unit $.02 0
Insurance, material handling, and $4.00 $4.50
So on per unit per year
Annual demand 12,000 units 12,000 units
Average quantity of inventory held 100 units 100 units
During the year
Required return on investment 15% 15%
Stock out costs per unit $20 $10
Stock outs per year 350 units 60 units
Customer returns 300 units 25 units
Customer- return costs per unit $25 $25
Required: Calculate the relevant costs of purchasing (1) from big red and (2) from
quality sports using the format presecribed. from whom should cape land buy
footballs?
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Q18- (Costs of Quality analysis non financial quality measure). The Hartono
Corporation manufactures and sells industrial grinders. The following table presents
financial information pertaining to quality in 2004 and 2005 (in thousands):
Year 2005 2004
Revenue $ 12,500 $10,000
Inspection of Production 85 110
Scrap 200 250
Design engineering 240 100
Cost of returned goods 145 60
Product-testing equipment 50 50
Customers support 30 40
Rework costs 135 160
Preventive equipment maintenance 90 35
Product liability claims 100 200
Incoming materials inspection 40 20
Breakdown maintenance 40 90
Product testing labor 75 220
Training 120 45
Warranty repair 200 300
Supplier evaluation 50 20
Required:- 1:- Classify the cost items in the table into prevention, appraisal, internal
failure, or external failure categories.
2:- Calculate the ratio of each COQ category to revenues in 2004 and 2005.Comment on
the trends in costs of quality between 2004 and 2005.
3:- Give two examples of non financial quality measures that Hartono Corporation could
monitor as part of a total quality control effort.
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-
Q19-:- Information from a quality report for 2004 prepared by Lindsey Williams
assistant controller of Citocell a manufacturer of electric motors, is as follows:
Revenues $10,000,000
Inspection of Production 90,000
Warranty liability 260,000
Product testing 210,000
Scrap 230,000
Design engineering 200,000
Percentage of customer complaints 5%
On-time delivery rate 93%
Davey Evans, the plant manager of Citocell, is eligible for a bonus if the total costs of
quality as a percentage of revenues are less than 10% the percentage of customer
complaints is less than 4%, and the on time delivery rate exceeds 92%Evans is unhappy
about the customer complaints of 5% because when preparing her report, Williams
actually surveyed customers regarding customer satisfaction. Evans expected Williams to
be less proactive and waits for customers to complain. Evan’s concern with William’s
approach is that it introduces subjectivity into the results and also fails to capture the
seriousness of customers concerns.” When you wait for a customer to complain, you
know they are complaining because it is something important. When you do customer
surveys, customers mention whatever is on their mind, even if it is not terribly
important”.
John Roche, the controller, asks Williams to see him. HE tells her about Evans’s
concerns. “I think Davey has a point .See what you can do.” Williams is confidant that
the customer complaints are genuine and that customers are concerned about quality and
service. She believes it is important for citocell to be proactive and obtain systematic and
quick customer feedback, and then to use this information to make improvements. She is
also well aware that Citocell has not done customer surveys in the past, and except for
her surveys, Evans would probably be eligible for the bonus. She is confused about how
to handle Roche’s requires.
1:- Calculate the ratio of each cost-of quality category (prevention, appraisal, internal
failure, and external failure) to revenues in 2004.Are the total costs of quality as a
percentage of revenues less than 10%?
2:- Would it be unethical for Williams to modify her analysis ? What steps should
Williams take to resolve this situation?
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Q20- :- A drug treatment day center run by a charity organization wishes to improve the
quality of its service to patients by the addition of extra facilities.
After much research it has drawn up a short list of five Separate possible improvements
and has assessed their outcomes using the following criteria:
Criterion A: Reduced average number of waiting hours per month per patient.
Criterion B: Increased percentage frequency of seeing patients when they
attend.
Criterion C: Reduced average number of month to cure per patient.
Criterion D: Increased percentage frequency of patient attendance at the center.
The assessed outcomes are:
Improvement Extra facilities Outcome according to
criterion
Reference number
A B C
D
Hours % Months
%
1 Increase medical staff by 2 4.8 35 1
5
Doctors and 1 nurse
2 Increase counseling staff by 2 6 20 1.25
10
Counselors and 1 nurse
3 Taxi service to bring patients to 2 12 0.75
22
And from the center
4 Extend by 20 hours per month 4 30 1.5
10
 The time the center is open
5 Introduce group counseling - 10 1.75
15
Sessions.
At present the center is open for 160 hours per month and deals with 3,000
patients. The proposed improvement will have no effect on the number of patients
seen. The professional staffs currently employed are 5 doctors, 7 counselors and 4
nurses. The taxi service is expected to be used by 60% of patients with an average
attendance of once per month. Each taxi carry an average of 1.2 patients and the
cost to the center will be Rs. 0.20 per mile. Total distances that patients are
expected to be carried per attendance are:
(%) Percentage of patients
10miles 20
20 miles 40
30 miles 40
100
The costs of extra facilities would be:
Cost p.a. Associated capital
Equipment costs
Doctors salary Rs. 22,000 Rs. 5,000
Doctors expenses 3,000 ---
Counselors salary 16,000 2,000
Counselors expenses 1,500 --
Nurse’s salary 10,000 1,000
Nurse’s expenses 2,000 --
These costs are depreciated over five years on a straight-line basis with no
residual value.
Extra administration/ establishment costs are Rs. 200 per month per perso.

If hours are extended beyond 160 per month, overtime will need to be paid at a
premium of 25% on salaries (but not expenses) and an extra Rs. 4,000 per annum
will be incurred for administration/ establishment costs.
Group counseling sessions will require:
1 Specialist counselor costing Rs. 3,000 p.a. more than ordinary counselors.
1 assistant counselor costing Rs. 2,000 p.a. less than ordinary counselors.
1 nurse
Capital costs will be the same as for ordinary counselors.
The Centers capital requirements will be borrowed from the bank at 12% p.a. The
interest and all other costs will be met by donations. The depreciation charge will
be used to reduce the loan at the end of each year. Cost of working capital can be
ignored.
You are required to:
(a) Calculate for each improvement the incremental cost:
(i) Per patient per month
(j) For the appropriate unit of each of the four criteria.
 (b) Identify the improvement with the lowest cost in (a) (ii) above for each of
the four criteria.
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JIT PURCHASING
Q21:- (Relevant benefits and Costs of JIT purchasing). Hardestry Medical
Instruments is considering JIT implementation in 2003. Hardestry’s annual demand for
Product XJ-200, a surgical scalpel, is 20,000 units. If Hardesty implements JIT, the
purchase price of the scalpal is expected to increase from $10 to $10.05 because of
frequent deliveries by Merrison Manufacturing, Inc. Morrison enjoys a sterling reputation
for quality and reliability. Ordering costs will remain at $5 per order. However, the
annual number of orders placed will be 200 instead of the current 20. As a result of
frequent ordering. Hardesty’s order size will decrease proportionally. Hardesty’s required
rate of return on Investment is 20%. Other carrying Costs (insurance, materials handling
and so on) will remain at $4.50 per unit. Currently Hardesty has no stock out costs.
Lower inventory levels from implementing JIT will lead to $3 per unit stock out costs on
100 units during the year.
Required:- Calculate the estimated dollar savings ( Loss) for Hardesty Medical
instruments from the adoption of JIT purchasing.
Answer:- $ 724.50
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Q22:- The Margro Corporation is an automotive supplier that uses automatic turning
machines to manufacture precision parts from steel bars. Margro’s inventory of raw steel
averages $6,00,000. John Oates, President of Margro, and Helen Gorman. Margro’s
controller, are concerned about the costs of carrying inventory. The steel suppliers is
witling to supply steel in smaller lots at no additional charge. Helen Gorman identified
the following effects of adopting a JIT inventory program to virtually eliminate steel
inventory.
• Without scheduling any overtime, lost sales due to stock outs would increase by
35,000 units per year. However, by incurring overtime premiums of $40,000 per
year, the increase in lost sales could be reduced to 20,000 units. This would be the
maximum amount of overtime that would be feasible for Margro.
• Two warehouses currently used for steel bar storage would no longer be needed.
Margo rents one warehouse from another company, under a cancelable leasing
arrangement, at an annual cost of $60,000. The other warehouse is owned by
Margro and contains 12,000 square feet. Three-fourths of the space in the owned
warehouse could be rented for $1.50 per square foot per year. Insurance and
properly tax costs totaling $14,000 per year would be eliminated.
Long – term capital investments by Margro are expected to Produce an annual rate of
return of 20%. Margro Corporation Budgeted income statement for the year ending
December 31,2003,(in thousands) is as follows:-
Revenues ( 900.000 units) $10,800
Cost of goods sold
Variable costs $4,050
Fixed costs 1,450
 Total costs of goods sold 5,500
Gross Margin 5,300
Marketing and distribution costs
Variable costs $900
Fixed Costs 1,500
Total marketing and distribution costs 2,400
Operating income $ 2,900
Calculate the estimated dollar savings (loss) for the Margro Corporation that would result
in 2003 from.
Required the adoption of the JIT inventory –control method.
Answer:- $ 37,500.

Q23:- (Calculation of reduction in storage costs arising from the implementation

of JIT production and purchasing)
Product plc has an annual turnover of Rs. 6,00,00,000 from a range of products, Material
costs and conversion costs account for 30% and 25% of turnover respectively.
Other information relating to the company is as follows:
(i) Stock values are currently at a constant level, being:
(a) Raw materials stock:10% of the material element of annual turnover.
(a) Work in Progress: 15% of the material element of annual turnover
together with a proportionate element of conversion costs allowing for
60% completion of work in progress as to conversion cost and 100%
completion for material . The Ratio is constant for all products.
(b)Finished goods stock:12% of the material element of annual turnover
together with a proportionate element of conversion cost.
(ii) Holding and acquisition costs of materials comprise fixed costs of
Rs.2,00,000 per annum plus variable costs of Rs. 0.10 per Rs. of Stock held.
(iii) Movement and control costs of work in progress comprise fixed costs of Rs.
2,80,000 per annum plus variable costs of Rs. 0.05 per Rs. of material value of
work-in-progress.
(iv) Holding and control costs of finished goods comprise fixed costs of
Rs.3,60,000 per annum plus variable costs of Rs. 0.02 per Rs. of finished
goods(material cost + Conversion cost)
(v) Financial charges due to the impact of stock holding on working capital
requirement are incurred at 20% per annum on the value of stocks held.
Product plc are considering a number of changes which it is estimated will affect stock
levels and costs as follows:-
1:- Raw material Stock: Negotiate delivery from suppliers on a just in time basis.
Stock levels will be reduced to 20% of the present level. Fixed costs of holding and
acquiring stock will be reduced to 20% of the present level and variable costs to Rs.0.07
per Rs. of stock held.
2:- Work in Progress : Convert the layout of the production area into a dedicated
cell format for each product type instead of the existing system which comprises groups
of similar machines to which each product type must be taken .Work in progress volume
will be reduced to 20% of the present level with the same stage of completion as at
present .Fixed costs of movement and control will be reduced to 40% of the present level
and variable costs to Rs.0.03 per Rs. of material value of work in progress.
3:- Finished goods stock:- Improved control of the flow of each product type from
the production area will enable stocks to be reduced to 25% of the present level. Fixed
costs of holding and control will be reduced to 40% of the present level and variable costs
to Rs. 0.01 per Rs. of finished goods held.
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Q24:- X Ltd. manufactures and distributes three types of Car (the C1, C2 and C), Each
type of car has its own production line. The company is worried by extremely difficult
market conditions and forecasts losses for the forthcoming year.
The budgeted details for next year are as follows”
C1 C2 C3
$ $ $
Direct Materials 2,520 2,924 3960
Direct labour 1120 1,292 1980
Total Direct cost per car 3640 4216 5940
Budgeted production (cars) 75,000 75,000 75.000
Number of production runs 1,000 1,000 1,500
Number of orders executed 4,000 5,000 5,600
Machine hours 1080,000 1800,000 1680,000
Annual overheads

Fixed Variable
$ $
Set ups 42,600 13,000 per production run
Materials handling 52,890 4,000 per order executed
Inspection 59,880 18,000 per production run
Machining 1,44,540 40 per machine hour
Distribution and warehousing 42,900 3,000 per order executed
Proposed JIT System
Management has hired a consultant to advise them on how to reduce costs. The
consultant has suggested that the company adopts a just-in-time(JIT) manufacturing
system. The introduction of the JIT system would have the following impact on costs
( Fixed and variable):
Direct labour Increase by 20%
Set ups Decrease by 30%
Materials handling Decrease by 30%
Inspection Decrease by 30%
Machining Decrease by 15%
Distribution and warehousing Eliminated
Required:-
(a) Based on the budgeted production levels, calculate the total annual savings that
would be achieved by introducing the JIT system.
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Q25-:- (JIT production, relevant benefits, relevant costs). The Evans Corporation
manufactures wireless telephone. Events are deciding whether to implement a JIT
production system, which would require annual tooling costs of $150,000. Evens
estimates that the following annual benefits would arise from JIT production.
a. Average inventory would decline by $700,000, from $900,000 to $200,000.
b. Insurance, space, materials-handing, and setup costs, which currently total
$200,000, would decline by 30%.
c. The emphasis on quality inherent in JIT systems would reduce rework costs by
20%. Evans currently incurs $350,000 on rework.
d. Better quality would enable Evans to raise the selling prices of its products by $3
per unit. Evans sells 30,000 units each year.
Evans’s required rate of return on inventory investment is 12% per year.
1. Calculate the net benefit or cost to the Evans Corporation from
implementing a JIT production system.
2. What other non financial and qualitative factors should Evans consider
before deciding whether it should implement a JIT system?
3. Suppose Evans implements JIT production. (a) Give examples of
performance measures Evans could use to evaluate and control JIT
production. (b) What is the benefit to Evans of implementing an enterprise
planning (ERP) system?
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Q26- :- Rosen Manufacturing Corporation produces office furniture and sells it
wholesale to furniture distributors. Rosen’s management is reviewing a proposal to
purchase a Just-in-time inventory (JIT) system to better serve its customers. The JIT
system will include a computer system and materials handling equipment .The
decision will be based on wheather the new JIT system is cost effective to the
organization for the next five years.
The computer system, including hardware and software, will initially cost $
1,250,000. Materials handling equipment will cost $450,000.Both groups of
equipment will have a five-years useful life for tax reporting of depreciation (straight-
line) calculated assuming a $0 terminal disposal value. At the end of the five years,
the newly acquired materials-handling equipment is expected to be sold for
$150,000.The computer system will have a $0 terminal disposal value at the end of
five years.
Other factors to be considered over the next five years for this proposal include the
following
* Due to the service improvement resulting from this new JIT system, Rosen will
realize a $ 800,000 revenue increase to continue to grow by 10%per year thereafter.
* The contribution margin is 60%.
* Annual material- ordering costs will increase $50,000due to a greater level of
purchase orders.
* There will be a one–time decrease in working capital investment of $150,000 at the
end of the first year.
 There will be a 20% savings in warehouse rent due to less space being needed. The
current annual rent is $300,000.
Rosen uses an after-tax required rate of return of 10% and is subject to an income tax
rate of 40%.Assume that all cash flows occur at year-end for tax purposes except for
any initial purchase amounts.
1:- Prepare an analysis of the after tax effects for the purchase of the JIT system at
Rosen using the net present value method for evaluating capital expenditures. Be sure
to show all of your computations.
2:- Determine whether Rosen should purchase the jit system. Explain your answer.
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LIFE CYCLE COSTING
Q27:- A Company proposes to replace its old and obsolete machine. Two models of
machines available are as under:
(1) Automatic machine involving an initial capital outlay of Rs. 5,00,000. The
annual operating cost of this model is Rs. 1,50,000. Salvage value at the end
of its life of 5 years is Rs. 20,000.
(2) Semi Automatic machine involving an initial capital cost of Rs. 3,00,000.
The annual operating cost is Rs. 2,10,000. Salvage value at the end of its life
of 5 years is Rs. 10,000.
The company’s cost of capital is 14%. Which alternative is to be preferred?
Ignore tax.
Answer:- Total Cost:- Rs. 8,16,160
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Q28:-- Life-cycle product costing activity-based costing. Destin products makes
digital watches. Destin is preparing a product life-cycle budget for a new watch MX3.
Development on the new watch is to start shortly. Estimates for MX3 are as follows:
Life- cycle units manufactured and sold 400,000
Selling price per watch $40
Life-cycle costs
R&D and design costs $1,000,000
Manufacturing
Variable cost per watch $15
Variable cost per batch $600
Watches per batch 500
Fixed costs $1,800,000
Marketing
Variable cost per watch $3.20
Fixed costs $1,000,000
Distribution
Variable cost per batch $280
Watches per batch 160
Fixed costs $720,000
Customer-service cost per watch $1.50
 Ignore the time value of money.
Required
1. Calculate the budgeted life-cycle operating income for the new watch.
2.What percentage of the budgeted total product life-cycle costs will be incurred
by the end of the R&D and design stages?
2. An analysis reveals that 80% of the budgeted total product life-cycle costs of the
new watch will be locked in at the R&D and design stage. what are the
implications for managing MX3’s costs?
3. Destin’s market research department estimates that reducing MX3’s price by $3
will increase life-cycle unit sales by 10%. If unit sales increase by 10% destin
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 destin reduce MX3’s price by $3? Show your
calculations.
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Q52:- Life cycle product costing. Product mix.
Decision support systems (DSS) is examining the productivity and pricing policies of
three of its recent engineering software packages:
• EE –46: Package for electrical engineers
• ME- 83: package for mechanical engineers
• IE – 17 package for industrial engineers
Summary details on each package over their two-year “cradle-to-grave” product lives
are as follows:
Number of units sold
Selling
Package Price Year 1 Year 2
EE –46 S250 2,000 8,000
ME- 83 300 2,000 3,000
IE –17 200 5,000 3,000
Assume that no inventory remains on hand at the end of year 2.
DSS is deciding which product lines to emphasize. In the past two years, profitability
has been mediocre. DSS is particularly concerned with the increase in R & D costs.
An analyst pointed out that for one of its most recent package (IE-17), major efforts
had been made to reduce R&D costs.
Nancy Sullivan the engineering software manager, decides to collect the following
life-cycle revenue and cost information for the EE – 46, ME- 83, and IE-17 package:
EE-46 ME-83 IE-17
Year 1 Year 2 Year 1 Year 2 Year1
Year 2
Revenues S500,000 S2,000,000 S600,000 S900,000 S1,000,000
$600,000
Costs
R&D 700,000 0 450,000 0 240,000
0
Design of product 185,000 15,000 110,000 10,000 80,000
16,000
Manufacturing 75,000 225,000 105,000 105,000 143,000
65,000
Marketing 140,000 360,000 120,000 150,000 240,000
208,000
Distribution 15,000 60,000 24,000 36,000 60,000
36,000
Customer service 50,000 325,000 45,000 105,000 220,000
388,000
1:- How does a product life- cycle income statement differ from a conventional income
statement? What are the benefits of using a product life – cycle reporting format?
2:- Present a product life- cycle income statement for each software package. Which
package is the most profitable, and which is the least profitable? Ignore the time value of
money.
3:- How do the three software packages differ in their cost structure (the percentage of
total costs in each cost category)?
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Q30:- Activates have been identified and the budget quantifies for the three months
ended 31 March 2001 as follows:-
Activities Cost Driver Units of Cost
Unit basis Cost Driver ($000)
Product Design Design hours 8,000 2000 (See note1)
Purchasing Purchase order 4,000 200
Production Machine hours 12,000 1500 (See note 2)
Packing Volume(Cu.M) 20,000 400
Distribution Weight (Kg) 1,20,000 600
Note1:- this includes all design costs for new products released this period.
Note2:- this includes a depreciation provision of $300,000 of which $8000 applies to 3
months depreciation on a straight line basis for a new product (NPD). The remainder
applies to other products.
New product NPD is included in the above budget. The following additional
information applies to NPD.
(i) Estimated total output over the product life cycle: 5,000 units ( 4 years life
cycle)
(ii) Product design requirement : 400 design hours.
(iii) Output in quarter ended 31 ch 2001:250 units
(iv) Equivalent batch size per purchase order: 50 units.
(v) Other product unit data: production time 0.75 machine hours: volume 0.4 cu.
Meters: weight 3 kg.
Required:-
(vi) Prepare a unit overhead cost for product NPD using an activity based
approach which includes an appropriate share of life cycle costs using the
information provided in (b) above.
 VALUE ENGINEERING
Q31:- The Operating result of a department provide the following information for a
particular week:
Average output per week 48,000 units
Salable value of output Rs. 60,000
Contribution on above Rs. 24,000
The management is contenting to bring about more mechanization in the
department at a capital cost of Rs. 16,000 which will result in reduction in number of
workmen from the present strength of 160 nos. to 120 nos. However due to mechanical
help, the output of individual workmen will increase by 60%. The existing piece rate is
Rs. 0.10 per article and as an incentive, the management propose to increase the existing
piece rate by 5% for every 10% increase in the individual output achieved.
There will be a reduction in sale price by 4% to sell the increased production.
You are required to calculate extra weekly contribution resulting due to proposed
changes.
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Q32:- BC electronics makes audio player model “AB 100”. It has 80 components.
ABC sells 10,000 units each month at Rs/- 3,000 per unit. The cost of manufacturing is
Rs. 2,000 per unit or Rs. 200 lakhs per month for the production of 10,000 units. Monthly
manufacturing costs incurred are as follows:- (Rs. Lakhs)
Direct material costs 100.00
Direct manufacturing labour costs 20.00
Machining costs 20.00
Testing costs 25.00
Rework costs 15.00
Ordering costs 0.20
Engineering costs 19.80
200.00
Labour is paid on piece rate basis, therefore, ABC considers direct manufacturing labour
cost as variable cost.
The following additional information is available for “AB 100”:
1:- Testing and inspection time per unit is 2 hours.
2:- 10 per cent of “AB 100’ manufactured are reworked.
3:- It currently takes 1 hour to manufacture each unit of “AB 100”.
4:- ABC places two orders per month for each component. Each component is supplied
by a different supplier.
ABC has identifies activity cost pools and cost drivers for each activity. The cost per unit
of the cost driver for each activity cost pool is as follows:
Manufacturing Description of activity Cost Driver Cost
per
Activity unit
of
Cost
driver
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---------
1:Machining Costs Machining components Mach. Hours of Rs.200
2: Testing costs Testing components and Capacity Testing Rs. 125
finished products(each hours
unit of AB 100’ is tested
individually)
3:- Rework costs Correcting and fixing Units of AB 100’ Rs. 1,500
errors and defects reworked per unit

4:- Ordering Costs Ordering of components No. of orders Rs. 125

per order
5:- Eng. costs Designing & managing Engineering Rs.1980 per
of products and hours engineering
Processes hour.

Overs long-run horizon, each of the overhead costs described above vary with chosen
cost drivers.
In response to competitive pressure ABC must reduce the price of its product to
Rs. 2,600 and to reduce the cost by at least Rs. 400 per unit. ABC does not anticipate
increase in sales due to price reduction. However if it does not be able to minimum the
current sales level.
Cost reduction on the existing model is almost impossible. Therefore ABC has
decided to replace AB 100 by a new model ‘AB 200’ which is a modified version of AB
100’. The expected effect of design modifications is as follows:
1:- The number of component will be reduced to 50.
2:- Direct material costs to be lower by Rs. 200 per unit.
3:- Direct manufacturing labour cots to be lower by Rs. 20 per unit.
4:- Machining time required to be lower by 20 per cent.
5:- Testing time required to be lower by 20 per cent.
6:- Rework to decline to 5 per cent.
7:- Machining capacity and engineering hours capacity to remain the same.
ABC currently outsourcers the rework on defective units.
Required:-
1: - Compare the manufacturing cost per unit of ‘AB 100; and ‘AB 200’.
2: - Determine the immediate effect of design change and pricing decision on the
operating income of ABC.
Ignore income tax. Assume that the cost per unit of each cost driver for ‘AB 100’
continues to apply to ‘AB 200’.
Answer: - Total manufacturing cost per unit:- 2,000.00, 1,614.00
Net effect on operating income:- (10.50)
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TARGET COSTING
Q33- Samsung is developing a high speed modem:-
A:- Given the following information .Compute Samsungs cost reduction target.
Expected market price Rs. 500
Required return on sales 20%
Product life 3 years
Current feasible cost Rs. 7,50,00,000
Expected average annual sales 50,000 units
B:- If Samsung believes it-can reduce the cost of the modem by no more than 18% is this
a feasible product for Samsung? Why or Why no?
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Q34:- MR Limited undertake market research for clients. A typical study takes three
months and uses two types of staff as follows:
Type of staff used Proportion of variable costs incurred in
Month Month Month Total
1 2 3
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Research 40% ---- 60% 100%
Tabulating --- ---- 100% 100%
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Research staff and tabulating staff account for 80 per cent and 20 per cent
respectively of the variable costs of a study.
When quoting a price for a study MR Ltd adds the following contribution on the
estimated variable cost: Research Staff 112.50 per cent of Variable Cost. Tabulating Staff
50 per cent of VC. In April MR started work on orders of Rs. 30,000 & In May Rs.
40,000 & In June Rs. 23,000. For calculation of monthly income the value of an order is
divided on the basis of first month 34 per cent, second month 6 per cent and third month
60 per cent. MR’s target contribution is 10 per cent above fixed cost which is Rs.16,000
per month. Calculate the value of additional orders which should be received, by MR for
work to start in June to achieve the target contribution in June.
Answer:- Contribution:- Rs.18, Rs.6, Rs.26, Rs.50, Additional order:- 18111.111
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Q35:- Toshiba manufacture on brand of personal computers calles Toshiba. Following
is the profitability statement for Toshiba personal computer:
Particulars Amount(Rs.) For Amount (Rs.) per
75,000 units unit
Revenues (A) 30,00,00,000 4,000
Cost of Goods sold
Direct Materials Cost 13,80,00,000 1,840
Direct manufacturing labour costs 1,92,00,000 256
Direct machining costs (Fixed) 2,28,00,000 304
Manufacturing Overheads cost 2,40,00,000 320
Cost of Goods Sold(b) 20,40,00,000 2,720
R & D Costs 1,08,00,000 144
Design Cost of product and 1,20,00,000 160
processor 3,00,00,000 400
Marketing costs 72,00,000 96
Distribution Costs 60,00,000 80
Customer Service Costs 6,60,00,000 880
Operating Costs ( C) 27,00,00,000 3,600
Full product Costs ( D = B + C) 3,00,00,000 400
Operating income ( A –D)
Following further information has been provided:-
(ii) No opening closing inventory.
(iii) Manufacturing Overhead Cost = Ordering and Receiving cost + Testing and
inspection Cost = Rework Cost.
(iv) Toshiba expects its competitors to lower the prices of PCs that compete
against Toshiba by 15%. Toshiba’s management Delivers that it must
responded aggressively by reducing Toshiba’s price by 20%.
Required:-
(1) Compute the target cost?
(2) Compute difference between target and allocable cost.?
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Q36- Toshiba’s value engineering team focus their cost-reduction efforts on analyzing
the Toshiba design. Their goal? To design a high-quality, highly reliable machine with
fewer features that meets customers price expectations and achievers target cost.

Toshiba is discontinued in its place. Toshiba introduced Toshiba II. Toshiba II has
fewer component s than Toshiba and is easier to manufacture and test. The following
tables compare the direct costs and the manufacturing overhead costs and cost drivers of
Toshiba and Toshiba II. In place of the 75,000 Toshiba units manufactured and sold in
2002. Toshiba expects to make and sell 1,00,000 Toshiba II units in 2003 on account of
the reduction in prices.

Direct Cost Category Costs per unit in Rs.

Toshiba Toshiba II Explanation of Costs for Toshiba II
1 Direct materials 1840 1540 The Toshiba II design will use a simplified
main printed circuit board, fewer
components and no audio features.
Toshiba II will require less labour and
2. Direct manufacturing 256 212 assembly time.

Toshiba can use the machine capacity to

3. Direct machining Costs 304 228 produce 100,000 units of Toshiba II. The
new design will enable Toshiba to
manufacture each unit of Toshiba II in less
time than a unit of Toshiba.

Cost Driver Quantity Explanation for quantity Quantity of Explanation for

of Cost of Cost Driver Toshiba Cost Driver for Quantity Driver
 Toshiba II Used by Toshiba
II
1. Number of 22,500 Toshiba places 50 21,250 Toshiba will
orders orders for each of the place 50 orders
450 components in for each of the
Toshiba Cost per order 425 components
Rs. 160 in Toshiba II
2. Testing- hours 22,50,000 Toshiba required 30 15,00,000 Toshiba II is
testing hours p.u. Cost easier to lest and
per testing hour is Rs. 8. will require 15
testing hours per
unit.
3. Units reworked 6,000 The rework rate is 8% 6,500 Toshiba II will
of the units have a lower re-
manufactures. The work rate of
rework cost is Rs. 400 6.5% because it
per unit reworked. is easier
manufacture.
Further there is a change in the non- manufacturing cost as follows:
R&D 80,00,000
Design of Product & Process cost 1,20,00,000
Marketing Costs 3,60,00,000
Distribution costs 1,00,00,000
Customer- Service Costs 60,00,000
Required:-
Determine whether Toshiba achieves the Target Cost?
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THROUGHPUT CONTRIBUTION
Q37-: Theory of constraints throughput contribution relevant costs. The Mayfield
corporation manufactures filing cabinets in two operations: machining and finishing. It
provides the following information.
Machining Finishing
Annual capacity 100,000 units 80,000 units
Annual production 80,000 units $400,000
Fixed operating costs $640,000 $400,000
(Excluding direct materials)
Fixed operating costs per unit produced
($640,000 – 80,000; $400,000-80,000) $8 per unit $5 per unit
Each cabinet sells for $72 and has direct materials costs of $32 incurred at the start of the
machining operation. Mayfield has no other variable costs. Mayfield can sell whatever
output it produces. The following requirements refer only to the preceding data. there is
no connection between the requirements.
3. Mayfield is considering using some modern jigs and tools in the finishing
operation that would increase annual finishing output by 1,000 units. The annual
 cost of these jigs and tools is $30,000. Should Mayfield acquire these tools? Show
your calculations.
4. the production manager of the machining department has submitted a proposal to
do faster setups that would increase the annual capacity of the machining
department by 10,000 units and cost $5,000 per year. Should Mayfield implement
the change? Show your calculations.
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THROUGH PUT CONTRIBUTION
Q38-:- The Waterloo, Ontario, plant of Maple Leaf Motors assembles the carus motor
vehicle. The standard unit manufacturing cost per vehicle in 2003 is
Direct materials $6,000
Direct manufacturing labor 1,800
Variable manufacturing overhead 2,000
Fixed manufacturing overhead?
The Waterloo plant is highly automated. Maximum productive capacity per month is
4,000 vehicles. Variable manufacturing overhead is allocated to vehicle on the basis of
assembly time. The standard assembly time per vehicle is 20 hours. Fixed manufacturing
overhead in 2003 is allocated on the basis of the standard assembly time for the budgeted
normal capacity utilization of the plant. In 2003, the budgeted normal capacity utilization
is 3,000 vehicles per month. The budgeted monthly fixed manufacturing overhead is
$7,500,000.
On January 1, 2003 there is Zero beginning inventory of Lcarus vehicles. The actual unit
production and sales figures for the first months of 2003 are
January February March
Production 3,200 2,400 3,800
Sales 2,000 2,900 3,200
Assume no direct materials variances , no direct manufacturing labor variances, and no
manufacturing overhead spending or efficiency variances in the first three months of
2003.
Bret Hart, a vice president of Mapale Leaf Motors, is the manager of the
Waterloo plant. His compensation includes a bonus that is 0.5% of quarterly operating
income. Operating income is calculated using absorption costing. Maple Leaf Motors
prepares absorption-costing income statements monthly, which includes an adjustment to
cost of goods sold for the total manufacturing variances occurring in that month .
The Wasterloo plant ”Sells” each Lcarus to maple Leaf’s marketing subsidiary at
$16,000 per vehicle. No marketing costs are incurred by the Waterloo plant.
Required:- 1:- Compute (a) the fixed manufacturing overhead cost per unit and (b) the
total manufacturing cost per unit.
2:- Compute the monthly operating income for January, February and March under
absorption costing What bonus is paid each ,month to Bret Hart?
3:- How much would use of variable costing change Hart’s bonus each month if the
same 0.5% figure were applied to variable costing operating income?
4:- Explain the differences in Hart’s bonuses in requirements 2 and 3.
5:- How much would use of throughout costing change Hart’s bonus if the same 0.5%
figure were applied to throughout costing operating income?
6:- Outline different approaches Maple Leaf Motors could use to reduce possible
undesirable behaviour associated with the use of absorption costing at its Waterloo plant.
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Q39-:- Corrie produces three products X,Y and Z. The capacity of Corrie plant is
restricted by process alpha. Process alpha is expected to be operational for eight hours per
day and can produce 1,200 units of X per hour, 1,500 units of Y per hour and 600 units of
Z per hour.
Selling prices and material costs for each product are as follows:
Product Selling Price Material Cost Throughput
contribution
$ per unit $ per unit $ per unit
X 150 70 80
Y 120 40 80
X 300 100 200
Conversion costs are $720,000 per day.
Requirements:-
(a) Calculate the profit per day if daily output achieved is 6,000 units of X,
4,500 units of Y and 1,200 units of Z.
(b) Determine the efficiency of the bottleneck process given the output in (a)
(c) Calculate the TA ratio for each product.
(d) In the absence of demand restrictions for the three products advise Corrie
management on the optimal production plan.
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Q40-:- WAQ produces a single product X, which passes through three different
processes, A,B and C. The throughput per hour of the three processes is 12,10 and 15
units of X respectively. The company works an 8 hour day. 6 day week, 48 week a year.
The SP of “X”is $ 150 p.u.& material cost$ 30 p.u. Conversion costs are planned to be
$24,000 per week.
Requirements:-
(a) Determine the throughout accounting (TA) ratio per day.
(b) Calculate how much the company could spend on equipment to improve the
throughout of process B if this wished to recover its costs in the following time
periods.
2 years
12weeks
(c ) Calculate the revised TA ratio if this money is spent.
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Q41-:- Products can also be ranked according to the throughput accounting ratio(TA
Ratio)
Throughput contribution on value added per time period
TA Ratio ---------------------------------------------------------------------
Conversion cost per time period
(sales - Material costs ) per time period
---------------------------------------------------------------------
 (labour + Overhead) per time period
This measure has the advantage of including the costs involved in running the
factory>The higher the ratio, the more profitable the company.
PRODUCT A PRODUCT B
$ Per hour $ Per hour
Sale Price 100 150
Material Cost (40) (50)
Conversion Cost (50) (50)
Profit 10 50
TA RATIO 60/50 = 1.2 100/50=2.0
Profit will be maximized by manufacturing as much of product B as possible.
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Q42-:- (Theory of constraints, throughput contribution, relevant cost). Colorado
industries manufactures electronic testing equipment Colorado also installs the equipment
at customers’ sites and ensures that it functions smoothly. Additional information on the
manufacturing and installation departments is as follows (capacities are expressed in
terms of the number of units of electronic testing equipment):
Equipment Equipment
Manufactured Installed
Annual capacity 400 units per year 300 units per year
Equipment manufactured and installed 300 units per year 300 units per year
Colorado manufactures only 300 units per year because the installation Department has
only enough capacity to install 300 units. The equipment sells for $40,000 per unit
(installed) and has direct materials costs of $ 15,000. All costs other than direct materials
costs are fixed. The following requirements refer only to the preceding data. There is no
connection between the requirements.
Required:-
1. Colorado’s engineers have found a way to reduce equipment manufacturing
time. The new method would cost an additional $50 per unit and would allow
Colorado to manufacture 20 additional units a year. Should Colorado implement
the new method? Show your calculations.
2. Colorado’s designers have proposed a change in direct materials that would
increase direct materials costs by $2,000 per unit. This change would enable
Colorado to install 320 units of equipment each year. If Colorado makes the
change, it will implement the new design on all equipment sold. Should
Colorado use the new design? Show your calculation.

3. A new installation technique has been developed that will enable Colorado’s
engineers to install 10 additional units of equipment a year. The new method will
increase installation costs by $50,000 each year. Should Colorado implement the
new techniques? Show your calculations.
4. Colorado is considering how to motivate workers to improve their productivity
(output per hour). One proposal is to evaluate and compensate workers in the
manufacturing and installation departments on the basis of their productivities.
Do you think the new proposal is a good idea? Explain briefly.
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Q43:- Theory of Constraints, throughout contribution, quality, relevant costs.
Aardee industries manufactures pharmaceutical products in two departments: Mixing and
Tablet –Making. Additional information on the two departments follows. Each tablet
contains 0.5 gram of direct materials.
Mixing Tablet
Making
Capacity per hour 150 grams 200
tablets
Monthly capacity (2,000 hours available
In each of mixing and tablet making) 300,000 grams 400,000
tablets
Monthly production 200,000 grams 390,000
tablets
Fixed operating costs(excluding direct materials) $16,000 $ 39,000
Fixed operating costs per tablet
($16,000 / 200,000; $39,000 / 390,000) $0.08 per gram $0.10 per
tablet
The Mixing Departments makes 200,000 grams of direct materials mixture(enough to
make 400,000 tablets) because the Tablet-Making Departments has only enough
capacity to process 400,000 tablets. All direct materials costs are incurred in the
Mixing Department. Aardee incurs $156,000 in direct materials costs. The tablet –
Making Department manufactures only 390.000 tablet from the 200,000 grams of
mixture processed; 2.5% of the direct materials mixture is lost in the tablet-making
process. Each tablet sells for $1.All costs other than direct materials costs are fixed
costs. The following requirements refer only to the preceding data.
There is no connection between the requirements.
1:- An outside contractor makes the following offer. If Aardee will supply the
contractor with 10,000 grams of mixture, the contractor will manufacture 19,500
tablets for Aardee following for the normal 2.5% loss during the tablet-making
process at $0.12 per tablet. Should Aardee accept the company’s offer? Show your
calculations.

2:- Another company offers to prepare 20,000 grams of mixture a month from direct
materials Aardee supplies. The company will charge $0.07 per gram of mixture.
Should Aardee accept the company’s offer? Show your calculations.

3:- Aardee’s engineers have devised a method that would improve quality in the
tablet-making operation. The estimate that the 10,000 tablets currently being lost
would be saved. The modification would cost $7,000 a month. Should Aardee
implement the new method? Show your calculation.

4:- Suppose that Aardee also loses 10,000 grams of mixture in its mixing opertion.
These losses can be reduced to zero if the company is willing to spend $9,000 per
month in quality-improvement methods. Should Aardee adopt the quality
improvement method? Show your calculations.

5:- What are the benefits of improving quality at the mixing operation compared
with improving quality at the tablet-making operation?
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Q44-:- Billington Corporation makes bicycle frames in two processes, tube cutting
and welding. The tube-cutting and welding process have a practical capacity of
150,000 and 100,000 units per year, respectively. Committed costs of quality
activities follows:-
Design of product and process costs…………………………………….$ 220,000.
Inspection and testing costs…………………………………………………..85,000
The demand is very strong. Billington can sell all output it can produce at $180 per
frame. It begins producing only 100,00 units in the tube-cutting department because
of the capacity constraint on the welding process; any defective units it produces are
scrapped. Of the 100,000 units started at the tube-cutting department,1,000 units( 1
percent) normally are scrapped(Scrap is detected at the end of the tube- cutting
operation) Full costs, based on total manufacturing costs incurred through the tube –
cutting operation. Equal $105 per unit.
Direct materials (variables per unit)…………………………… $88
Direct manufacturing setup, and materials handling labor……… 7
Equipment rent, and other overhead(fixed for the year)…….. 10
Full cost per unit …………………………….. $ 105
The tube-cutting department sends its good units to the Welding department. Unit
level manufacturing costs at the welding department are $43.50 per unit. Welders
are very highly trained, and the welding departments has no scrap. Therefore,
Billington’s total sales quantity equals the tube-cutting department’s output.
Billington designers are considering several alternative improvements to reduce
scrap in the tube- cutting department.
Alternative1: Leaving the process unchanged but starting enough units in the
tube- cutting department so that the Welding departments can operate at procaticla
capacity.
Alternative2:- Using a different type of tubing that is more resistant to damage
and would reduce scrap by 80 percent. It would increase the unit-level costs per unit
in the tube- cutting department by $ 10 but would reduce costs in the welding
department by $5.
Alternative 3:- Spending an additional amount on training to reduce scrap in the
tube- cutting process.
Required:-
Form small groups to respond to each of the following items:-
A:- Which alternative 1 or 2 is more attractive financially?
B:- How much would the company be willing to spend on training and how much
would scrap have to be reduced to make alternative 3 as attractive4 as either
alternative 1 or 2?
 C:- What other qualitative factors should Bilingtomn consider in making the
decision?
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Q45- Z Ltd. produced a single product X, which passes through three different
process. A,B and C. The through out per hour of the three processes is 12,10 and 15 units
of X respectively The company works an 8- hour day. 6 days a week, 48 weeks a year.
The selling price of X is Rs.b150 per unit and its material cost is Rs. 30 per unit.
Conversion costs are planned to be Rs. 24,000per week.
Required:-
(i) Determine the throughout accounting (TA) ratio per day.
(ii) Calculate how much the company could spend on equipment to
improve the throughout of process B if it wished to recover its costs in
the following time periods.
(a) 2 years (b) 12 weeks.
(iii) Calculate the revised TA ratio if this money is spent.
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BACKFLUSH COSTING
Q46- - Back flush costing and JIT production. The Acton Corporation manufactures
electrical meters. For august, there were no beginning inventories of direct materials and
no beginning or ending work process. Acton uses a JIT production system and back flush
costing with three trigger poins for making entries in the accounting system:
• Purchase of direct materials- debited to inventory: direct and In- process control
• Completion of good finished units of product- debited to finished goods control
• Sale of finished goods
Acton’s August standard cost per meter is direct materials $25, and conversion costs
$20. The following data apply to August manufacturing:
Direct materials purchased $550,000 Number of finished units
Conversion costs incurred $440,000 manufactured 21,000
Number of finished units sold 20,000
Continuations of Previous Question:- Assume the same facts as in Previous
question except that Road Warrior now uses a backflush costing system with the
following two trigger points:
Purchase of direct (raw) materials Sale of finished goods
The inventory Control account will include direct materials purchased but not yet in
production, materials in work in process, and materials in finished goods but not sold. No
conversion costs are inventioned. Any under- or over allocated conversion costs are
written off monthly to Cost of goods Sold.
Continuations of Previous Question:- Assume the same facts as in last question ,
except now Road Warrior uses only two trigger points, the completion of good finished
units of product and the sale of finished goods. Any under-or over allocated conversion
costs are written off monthly to Cost of goods Sold.
Required:-
1:- Prepare summary journal entries for August including the disposition of under – or
over allocated conversion costs.
2:-Post the entries in requirement 1 to T-accounts for Finished goods control, Conversion
Cost Control, Conversion Costs Allocated and Cost of goods Sold.
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Q47- - Example: accounting entries at different trigger points
The transactions for period 8 20 X 1 for Clive are as follows.
Purchase of raw materials {24,990
Conversion costs incurred {20,220
Finished goods produced (used in methods 2&3 only) 4,900 units
Sales 4,850 units
There are no opening inventories of raw materials,WIP or finished goods. The standard
costs unit is made up of {5.10 for materials and {4.20 for conversion costs.
Solution for 1 trigger point – When goods are sold (method)
This is the simplest method of back flush costing. There is only one trigger point and that
is when the entry to the cost of goods sold account is required when the goods are sold.
(this method assumes that units are sold as soon as they are produced.)
$ $
(a) DEBIT Conversion costs control 20,220
CREDIT Expense creditors 20,220
Being the actual conversion costs incurred
(b) DEBIT Costs of goods sold (4,850X {9.30) 45,105
CREDIT Creditors (4,850x { 5.10) 24,735
CREDIT Conversion costs allocated (4,850x {4.20) 20,370
Being the standard cost of goods sold
(c) DEBIT Conversion costs allocated 20,370
CREDIT Cost of goods sold 150
CREDIT Conversion costs control 20,220
Being the under or over allocation of conversion costs
:- Back flush accounting
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Q48-:- RM uses back flush accounting in conjunction with JIT. The system does not
include a raw material inventory control account. During control period 7,300 units were
produced and sold and conversation costs of {7,000-incurred. The standard unit cost is
{55, which includes material of {25.
What is the debit balance on the cost of goods sold account at the end of control period .
A {16,500
B {14,500
C {23,500
D {18,500
Solution:-
$
Conversion cost allocated to cost of goods sold a/c = 300x ({55 - 25) 9,000
Conversion cost incurred 7,000
Difference set against cost of goods sold a/c 2,000
Standard charge to cost of goods sold a/c (300x{55) 16,500
Charge to cost of goods sold a/c 14,500
Option A is the standard charge. Option C is the sum of conversion cost incurred and the
standard charge.
Option D results from adding the difference instead of deducting it.
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Q49-:- TXl manufactures a single product. Standard costs for materials and conversion
costs are $40 and $30 per unit respectively. The company uses a backflushing accounting
system with two trigger points: raw materials purchased and goods transferred to finishes
goods store. At the beginning of March there was no opening inventory of raw materials
or WIP and at the end of the month there was no WIP.
Other data for the month
Number of completed production units 15,000
Number of products sold 14,000
Raw Materials purchased $630,000
Conversion costs incurred $470,000
Requirements:-
Prepare summary journal entries for March assuming that there was no material cost
variances and without writing off under or over absorbed conversion costs.

Explain how you would modify the accounting system if the company switched to a total
JIT system. Prepare specimen journal entries using the data above and the new trigger
points(s) Write off the under-or over absorbed conversion costs.
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Q50-:- Games R Us manufactures various games. For March there were no beginning
inventories of direct materials and no beginning or ending work in process. Conversion
costs is the only indirect manufacturing cost category currently used. Journal entries are
recorded when materials are purchased and when conversion costs re allocated under
backflush costing.
Conversion costs- March $ 800,000
Direct materials purchased-March $ 2,140,000
Units produced- March 117,600
Units Sold- March 83,600
(a) Which of the following entries in above question Properly records the cost of goods
sold for the month?
A:- Finished goods $2,090,000
Work-in-Process $2,090,000
B:- Cost of goods Sold $2,090,000
Finished Goods $ 2,090,000
C:- Finished Goods $2,090,000
Cost of goods Sold $2,090,000
D:- Cost of Goods Sold $2,090,000
 Work in Process $2,090,000
Answer:- B.
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Q51-:- Complete Microfilm Products manufactures microfilm cameras. Fro October
there was no beginning inventories of direct materials and no beginning or ending work
in process. Conversion costs is the only indirect manufacturing cost category currently
used. Journal entries are recorded when materials are purchased and when units are sold.

Conversion costs- October $90,400

Direct materials purchased-October $250,400
Units produced-October 80,000untis
Units Sold- October 75,000untis
Selling price $ 10 each
(a) Which of the following journal entries in above question properly reflects the
purchase of materials in a JIT environment?
A:-Inventory: Raw and In –Process $250,400
Accounts Payable Control $250,400
B:- Accounts Payable Control $250,400
Allocated Costs: Direct Materials $250,400
C:- Accounts Payable Control $250,400
Materials Inventory $250,400
D:- Allocated Costs: Direct Materials $250,400
Inventory: Raw and Materials $250,400
Answer:- (a).
(b) Which of the following journal entries in above question would be recorded when
units are sold for the month?
A:- Cost of Goods Sold $319,500
Inventory: Raw and In-Process $319,500
B:- Cost of goods Sold $3,19,500
Inventory: Raw and In-Process $234,750
Conversion Costs Allocated $84,750
C:- Inventory: Raw and In-Progress $ 234,750
Conversion Costs Allocated $84,750
Cost of Goods Sold $319,500
D:- Cost of Goods Sold $319,500
Inventory : Raw and in- Process $229,500
Conversion Costs Allocated $90,000
Answer:- B.
Direct materials ($250,400/80,000) $3.13
Conversion costs($90,400/80,000) 1.13
Total $4.26
75,000 X $4.26 = $319,500
75,000 X$3.13 = $234.750
75,000 X $ 1.13= $ 84,750
(c ) Which of the following entries would occur if the only trigger points the production
of finished units?
A:- Cost of goods Sold $319,500
Inventory: Raw and In-Process Control $229,500
Conversion Costs Allocated $ 90,000
B:- Inventory: Raw and In-Progress Control $234,750
Conversion Costs Allocated $84,750
Cost of Goods Sold $319,500
C:- Finished Goods $340,800
Accounts Payable Control $250,400
Conversion Costs Allocated $90,400
D:- Accounts Payable Control $250,400
Conversion Costs Allocated $90,400
Finished Goods $340,800
Answer:-
80,000 X$4.26 =$340,800
80,000 X$3.13 = $250,400
80,000 X$1.13 = $90,400.
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Q52-:- Tornado Electronics manufactures stereos. All processing is initiated when an
order is received. For April there were no beginning inventories. Conversion Costs and
Direct Materials are the only manufacturing cost accounts. Direct Materials are purchased
under a just-in-time system. Backflush costing is used with a finished goods trigger point.
Additional information is a follows:
Actual conversion costs $232,000
Standard materials costs per unit 60
Standard conversion cost per unit 140
Units produced 3,200
Units sold 2,800
Required:-
Record all journal entries for the monthly activities related to the above transactions if
backflush costing is used.
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Q53-:- Corry Corporation manufactures filters for cars, Vans and trucks. A backflush
costing system is used and standard costs for a filter are as follows:
Direct materials $2.60
Conversion costs 4.20
Total $6.80
Filters are scheduled for production only after orders are received, and are shipped
immediately upon completion. This results in Product costs being charged directly to cost
of goods sold. In December 3,000 filters were produced and shipped. Materials were
purchased at a cost of $8,450 and actual conversion costs of $13,650were recorded.
Required:-
Prepare journal entries to record December’s costs for the production of the filters.
Answer:
Materials Inventory $ 8,450
Accounts payable $8,450
Conversion costs $13,650
Various credits $13,650
Cost of goods sold $22,100
Materials inventory $8,450
Conversion costs $13,650
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Q54-:- X Ltd. Manufactures a single product .Standard costs for materials and
conversion costs are Rs. 40 and Rs. 30 per unit respectively. The company uses a
backflash accounting system with two trigger points ; raw materials purchased and goods
transferred to finished goods store. At the beginning of March there was no opening stock
of raw materials or WIP and at the end of the month there was no WIP.
Other data for the month
Number of completed production units 15,000
Number of products sold 14,000
Raw Material purchased Rs. 6,30,000
Conversion costs incurred Rs. 4,70,000
Prepare summary journal entries for March assuming that there were no material cost
variances and without writing off under or over absorbed conversion costs.
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Q55:- The Littlefield Company uses a backflush costing system with three trigger
points:
Purchase of direct materials sale of finished goods
Completion of good finished units of product
There are no beginning inventories. Data for April 2003 are
Direct materials purchased $880,000 Conversion costs allocated
$400,000
Direct materials used 850,000 Costs transferred to finished goods
1,250,000
Conversion costs incurred 422,000 Costs of goods sold
1,190,000
Required
1:- Prepare summary journal entries fro April (Without disposing of under allocated or
over allocated conversion costs).Assume no direct materials variances.
2:- Under an ideal JIT production system, how would the amount in your journal entries
differ from the journal entries in requirements 1 ?
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Q56:- Road Warrior Corporation assembles handheld computers that have scaled –
down capabilities of laptop computers. Each handheld computer takes 6 hours to
assemble. Road Warrior uses a Jit production system a backflush costing system with
three trigger points:
Purchase of direct (raw)Materials Sale of finished goods
Completion of good finished units of product
There are no beginning inventories of materials or finished goods. The following data are
for August 2003:
Direct (Raw ) Materials purchased $2,754,000 Conversion costs incurred
$723,600
Direct (raw) materials used 2,733,600 Conversion costs allocated
750,400
Road Warrior records direct materials purchased and conversion costs incurred at actual
costs. When finished goods are sold, the backflush costing system “pulls through”
standard direct materials costs ($102 per unit) and standard conversion costs ($28 per
unit). Road Warrior produced 26,800 finished units in August 2003 and sold 26,400
units. The actual direct materials cost per unit in August 2003 was $102, and the actual
conversion cost per unit was $27.
Required:-
1:- Prepare summary journal entries for August 2003 ( without disposing of under or
over allocated conversion Cost).
2:- Post the entries in requirements 1 to T-accounts for applicable inventory. Direct and
in-Process Conversion Costs Control, Conversion Costs Allocated and cost of goods
Sold.
3:- Under an ideal JIT production system, how would the amounts in your journal entries
differ from those in requirements 1 ?
(a) The Backflush costing, two trigger points, materials purchase and sale ( continuation
of previous question).
Assume the same facts as in Previous question except that Road Warrior now uses a
backflush costing system with the following two trigger points:
Purchase of direct (raw) materials Sale of finished goods
The inventory Control account will include direct materials purchased but not yet in
production, materials in work in process, and materials in finished goods but not sold. No
conversion costs are inventioned. Any under- or over allocated conversion costs are
written off monthly to Cost of goods Sold.
( B) The backflush costing, two trigger points, completion of production and sale
( continuations of last question) Assume the same facts as in last question , except now
Road Warrior uses only two trigger points, the completion of good finished units of
product and the sale of finished goods. Any under-or over allocated conversion costs are
written off monthly to Cost of goods Sold.
Required:-
1:- Prepare summary journal entries for August including the disposition of under – or
over allocated conversion costs.
2:-Post the entries in requirement 1 to T-accounts for Finished goods control, Conversion
Cost Control, Conversion Costs Allocated and Cost of goods Sold.
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BALANCE SCORE CARD
Q57:- Caltex, Inc, refines gasoline and sells it through its own Gas stations. On the
basis of market research. Clatex determines that 60% of the overall gasoline market
consist of “ service –oriented customers,” medium to high income individuals who are
willing to pay a higher price for gas if the gas stations can provide excellent customer
service, such as a clean facility a convince store, friendly employees, a quick turnaround,
the ability to pay by credit card, and high substance premium fuel. The remaining 40% of
the overall market are “Price shoppers” who look to buy the cheapest gasoline available.
Caltex’s strategy is to focus on the 60% of service oriented customers. Caltex’s balance
scorecard for 2004 follows. For brevity the initiatives taken under each objective are
omitted.
Target Actual
Objectives Measures Performance Performance
Financial Perspective
Increse shareholder value Operating income changes $90,000,000 $95,000,000
From price recovery
Operating income changes $65,000,000 $67,000,000
From Growth
Customer Perspective
Increase market share Market share of overall 10% 9.8%
Gasoline market
Internal Business Process Perspective
Improve gasoline quality Quality index 94 points 95 points
Improve refinery Refinery reliability index (%) 91% 91%
Performance
Ensure gasoline Product availability index (%) 99% 100%
Availability
LearningandGrowth Perspective
Increase refinery Process Percentage of refinery 88% 90%
Processes with advanced
Controls
1. Was caltex successful in implementing its strategy in 2004? Explain your answer.
2. Would you have included some measure of employee statislactionand employee
training in the learningandgrowthperspective? Are these objectives critical
tocaltex for implementing its stategy? Why or why not? Explain briefly.
3. Explain how caltex did not achieve its target market share in the total gasoline
market but still exceeded its financial targets. Is “ market share of overall gasoline
market” the correct measure of market share? Explain briefly.
4. Is there a cause- and – effect linkage between improvements in the measures in
the internal business process perspective and the measures in the customers
perspective? That is would you add other measures to the internal business
process perspective of the customer perspective? Why or why not? Explain
briefly.
5. Do you agree with Caltex’s decision not to include measures of changes in
operating income from productivity improvements under the financial perspective
of the balanced scorecard? Explain briefly.
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BALANCE SCORE CARD
Q58:- Alan enterprises spent $ 28,600 in employee training in 2002. from a total of 160
employees, eight employees resigned during the year and were replaced with new ones.
Employees succeeded in introducing five innovative ideas for which management gave
them recognition and prizes amounting to $7,500. Defective products amounted to 192
units from a total of 2,400 units produced. Productive time amounted to 22,500 from a
total of 25,000 recorded as processing time. The company’s sales amounted to $630,000
from a market which is around 9 times this size.3 out of 50 major customers have gone
bankrupt leaving an uncollectible bad debts of around $ 19,700. Variable cost of
production amounted to 56% of sales. Sales commission is at 6%. Fixed costs amount to
$129,500 and general and administration costs amount to $87,450. This is in addition to
the employee related costs stated above. The company has a total asset of $243,000. The
company expects to increase the employee related costs by 25% in 2003 but hope that
defects will be reduced by 30%, production efficiency will increase by 7%,sales will
increase by 18% - although market will not change in total, and variable costs will
decrease by 8% fixed costs will increase by 3% G & A will increase by 4% . Bad debts
will be the same amount.
Total assets will remain at the same level.
Required: Prepare a balanced scorecard for 2002 and its forecast for 2003.
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Q59:- (Growth, price-recovery, and productivity components). Oceano T-shirt
company sells a variety of T-shirts. Oceano presents the following data for its first two
years of operations,2003 and 2004. for simplicity, assume that all purchasing and selling
costs are included in the average cost per T-shirt and that each customer buys one T-shirt.
2002 2004
Number of T-shirts purchased 20,000 30,000
Number of T-shirts lost 400 300
Number of T-shirts sold 19,600 29,700
Average selling price $15 $14
Average cost per T-shirt $10 $9
Administrative capacity in terms of
Number of customers that can be
Served 40,000 36,000
Administrative costs $80,000 $68,400
Administrative cost per customer $2 $1,90
Administrative costs depend on the number of customers that Oceano has created
capacity to support, not the actual number of customers served.
1. Calculate the growth price-recovery, and productivity components of changes in
operating income between 2003 and 2004.
2. Comment on your results in requirement 1.
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Q60:- Strategy balanced scorecard. Meredith corporation makes a special-purpose
machine D4H used in the textile industry. Meredith has designed the D4H machine for
2003 to be distinct from its competitors. It has been generally regarded as a superior
machine. Meredith presents the following data for 2002 and 2003.
2002 2003
1. Units of D4H produced and sold 200 210
2. Selling price $40,000 $42,000
3. Direct materials(Kilograms) 300,000 310,000
4. Direct materials cost per kilogram $8 $8.50
5. Manufacturing capacity in units of D4H 250 250
6.Total conversion costs $2,000,000 $20,025,000
7. Conversion cost per unit of capacity $8,000 $8,100
8.Selling and customer-service capacity 100 customers 95 customers
9. Total selling and customer-service costs $1,000,000 $940,500
10. Selling and customer-service capacity cost
per customer $10,000 $9,900
11.Design staff 12 12
12. Total design costs $1,200,000 $1,212,000
13. Design cost per employee $100,000 $101,000
Meredith produces no defective machines, but it wants to reduce direct materials usage
per D4H machine in 2003. conversion costs in each year depend on production capacity
defined in terms of D4H units that can be produced not the actual units produced. Selling
and customer-service costs depand on the number of customer that Meredith can support
not the actual number of customers it serves Meredith has 75 customers in 2002 and 80
customers in 2003. at the of each year management uses its discretion to determine the
number of design staff for the year. The design staff and its costs have no direct
relationship with the quantity of D4H produced or the number of customers to whom
D4H is sold.
1. Is Meredith’s strategy one of product differentiation or cost leadership? Explain
briefly.
Describe briefly key elements that you would include in merediths’s balanced scorecard
and the reasons for doing so.
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Q61:- (Strategy, balanced scorecard service company). Snyder corporation is a small
information systems consulting firm that specializes in helping companies implement
sales management software. The market for snyder’s products is very competitive .To
compete, snyder must deliver quality service at a low cost snyder bills clients in terms of
units of work preformed. which depends on the size and complexity of the sales
management system. Snyder presents the following data for 2002 and 2003.
2002
2003
1. Units of work performed 60
70
2. Selling price $50,000
$48,000
3. Software implementation labor-hours 30,000
32,000
4. Cost per software implementation labour-hour $60
$63
5. Software implementation support capacity(in units work)90
90
6. Total cost of software implementation support $360,000
$369,000
7.Software implementation support capacity cost
per unit of work $4,000
$4,100
8. Number of employees doing software development 3
3
9. Total software development costs $375,000
$390,000
10. Software development cost per employee $125,000
$130,000
Software implementation labour-hour costs are variable costs. Software implementation
support costs for each year depend on the software implementation support
capacity(defined in terms of units of work) that snyder chooses to maintain each year. It
does not vary with actual units of work performed that year. At the start of each year
management uses its discretion to determine the number of software development
employees. The software development staff and costs have no direct relationship with the
number of units of work performed.
1. Is snyder corporation’s strategy one of product differentiation or cost leadership?
Explain briefly.
2.Describe key elements you would include in snyder’s balanced scorecard and your
reasons for doing so.
LAST QUESTION:-
1. Calculate the operating income of snyder corporation in 2002 and 2003.
2. Calculate the growth price-recovery and productivity components that explain the
change in operating income from 2002 to 2003.
1. Comment on your answer in requirement 2. what do these components indicate?
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Q62:- Analysis of growth price-recovery, and productivity
components(continuation of Last Quesation). Suppose that during 2003 the market for
implementing sales management software increases by 5% and that snyder experiences a
1 % decline in selling prices. Assume that any further decrease in selling price and
increases in market share are strategic choices by snyder’s management to implement
their cost leadership strategy.
Required: Calculate how much of the change in operating income from 2002 to 2003 is
due to the industry market size factor cost leadership and product differentiation. How
successful has snyder been in implementing its strategy? Explain .
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Q63- Identifying and managing unused capacity(continuation of Last question).
Refer to the snyder corporation information in Exercise 13-24.
1.There possible, calculate the amount and cost of unused capacity for (a) software
implementation support and (b) software development at the beginning of 2003, based on
units of work performed in 2003. If you could not calculate the amount and cost of
unused capacity indicate why not.
2. Suppose snyder can add or reduce its software implementation support capacity in
increments of 15 units. What is the maximum amount of costs that snyder could save in
2003 by downsizing software implementation support capacity?
2. Snyder in fact does not eliminate any of its unused software implementation
support capacity. Why might snyder not downsize?
Problems
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Q64:- Balanced scorecard. (R.Kaplan adapted). Caltex Inc refines gasoline and sells it
through its own caltex gas stations on the basis of market research, Caltex determines that
60% of the overall gasoline market consists of “service-oriented customers” medium-to
high-income individuals who are willing to pay a higher price for gas if the gas stations
can provide excellent customer service such as a clean facility a convenience store
friendly employees,a quick turnaround the ability to pay by credit card and high octane
premium fuel. The remaining 40% of the overall market are “priceshoppers” who look to
buy the cheapest gasoline available. Caltex’s strategy is to focus on the 60% of service-
oriented customers. Caltex’s balanced scorecard for 2004 follows. For brevity the
initiatives taken under each objective are omitted.
Target
Actual
Objectives Measures Performance
Performance
Financial Perspective
Increase shareholder value Operating income changes $90,000,000
$95,000,000
From price recovery
Operating income changes $65,000,000
$67,000,000
from growth
Customer Prespective
Increase market share Market share of overall 10%
9.8%
Gasoline market
Internal Business Process Perspective
Improve gasoline quality Quality index 94 points 95
points
Improve refinery Refinery reliability index(%) 91% 91%
Performance
Ensure gasoline Product availability index (%) 99% 100%
Learning and growth perspective
Increase refinery process Precentage of refinery 88% 90%
Capability processes with advanced
Controls
1. Was caltex successful in implementing its strategy in 2004? Explain your answer.
 2. Would you have included some measure of employee satisfaction and employee
training in the learning and growth perspective? Are these objectives critical to
caltex for implementing its strategy? Why or why not? Explain briefly.
3. Explain how caltex did not achieve its target market share in the total gasoline
market but still exceeded its financial targets. Is “market share of overall gasoline
market” the correct measure of market share? Explain briefly.
4. Is there a cause-and-effect linkage between improvements in the measures in the
internal business process perspective and the measures in the customer
perspective? That is would you add other measures to the internal business
process perspective or the customer perspective? Why or why not? Explain
briefly.
5. Do you agree with caltex’s decision not to include measures of changes in
operating income from productivity improvements under the financial perspective
of the balanced scorecard? Explain briefly.
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Q65:- Strategic analysis of operating income. Halsey company sells women’s clothing.
Halsey’s strategy is to offer a wide selection of clothes and excellent customer service
and to charge a premium price. Halsey presents the following data for 2004 and 2005. for
simplicity,assume that each customer purchases one piece of clothing.
2003 2005
1. Pieces of clothing purchased and sold 40,000 40,000
2. Average selling price $60 $59
3. Average cost per piece of clothing $40 $41
4. Selling and customer-service capacity 51,000 customers 43,000
customers
5. Selling and customer-service capacity $357,000
$296,700
6.Selling and customer-service capacity $7per customer $6.90 per
customer
cost per customer (line 5÷ line 4)
7. Purchasing and administrative capacity 980 850
8. Purchasing and administrative costs $245,000 $204,000
9. Purchasing and administrative capacity $250 per design $240 per
design
cost per distinct design
Total selling and customer-service costs depend on the number of customers that halsey
has created capacity to support, not the actual number of customers that halsey serves.
Total purchasing and administrative costs depend on purchasing and administrative
capacity that halsey has created (defined in terms of the number of distinct clothing
designs that halsey can purchase and administer). Purchasing and administrative costs do
not depend on the actual number of distinct clothing designs purchased. Halsey
purchased 930 distinct designs in 2004 and 820 distinct designs in 2005.
At the start of 2005, Halsey planned to increase operating income by 10% over operating
income in 2004.
1. Is halsey’s strategy one product differentiation or cost leadership? Explain
 2. Calculate Halsely’s operating income in 2004 and 2005.
3. Calculate the growth price-recovery, and productivity components of changes in
operating income between 2004 and 2005.
4. Does the strategic analysis of operating income indicate Halsey was successful in
implementing its strategy in 2005? Explain
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Q66:- Winchester Corporation manufactures special ball bearning. In 2005, it plans to
grow and increase operating income by capitalizing on its reputation for manufacturing a
product that is superior to its competitors. An analysis of Winchester’s operating income
changes between 2004 and 2005 shows the following:
Operating income for 2004 $3,450,000
Add growth components 300,000
Add price-recovery components 400,000
Add productivity components 350,000
Operating income for 2005 $4,500,000
Further analysis of these components indicates that had the growth in
Winchester’s sales kept up with market growth, the growth component in 2005would
have been $750,000.All decreses in market share (that is, sales increases less than the
market growth) are attributable to Winchester’s lack of product differentiation.
1:- Is Winchester’s 2005 strategy one of product differentiation or cost
leadership? Explain briefly.
2:- Provide a brief explanation of why the growth, price recovery, and
productivity components are favorable.
3:- Was Winchester’s gain in operating income in 2005consistent with the
strategy you identified in requirement 1? Explain briefly.
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Q67:- Engineered and discretionary overhead costs, unused capacity, customers help-
desk:- Cable Galore, a large cable television operator, had 750,000 subscribers in
2002.Cable Galore employees five customers help desk representatives to respond to
customers questions and problems. During 2002, each customers help-desk
representatives worked 8 hours per day for 250 day at a fixed annual salary of $36,000.
Cable Galore received 45,000 telephone calls from its customers in 2002. Each call took
an average of 10 minutes.
Required:- 1:- Do you think customer help desk costs at cable Galore are
engineered costs or discretionary costs? Explain your answer.
2:- Where possible, calculate the costs of unused customer help-desk capacity in
2002 under each of the following assumptions (a) customers help-desk costs are
engineered costs, and (b) customer help-desk costs are discretionary costs. If you could
not calculate the amount and cost of unused capacity, indicate why not.
3:- Assume that Cable Galore had 900,000 subscribes in 2003 and that the 2002
percentage of telephone calla received to total subscribes continues in
2003.Cusotmershelp-desk capacity in 2003 was the same as it was in 2002.Where
possible calculate the cost of unused customer help-desk capacity in 2003. Under each of
the following assumptions (a) customer-service costs are engineered costs, and (b)
customer service costs are discretionary costs. If you could not calculate the amount and
cost of unused capacity, indicate why not.
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Q68-:- Following a strategy of product differentiation, Westwood corporation makes a
high-end kitchen range hood, KE8. Here’s Westwood’s data for 2002 and 2003.
2004 2003
1. units of KE8 produced and sold 40,000 42,000
2. Selling price $100 $110
3. Direct materials (square feet) 120,000 123,000
4. Direct material costs per square foot $10 $11
5. Manufacturing capacity for KE8 50,000 units 50,000 units
6. Conversion costs $1,000,000 $1,100,000
7. Conversion costs per unit of capacity
(Row 6 – Row 5) $20 $22
8. Selling and customer-service capacity 30 customers 29 customers
9. Selling and customer- service costs $720,000 $725,000
10. Cost per customer of selling and customer
service capacity (Row 9-Row 8) $24,000 $25,000
Westwood produced no defective units and reduce direct material usage per unit of KE8
in 2003. Conversion costs in each year are tied to manufacturing capacity. Selling and
customer- service costs are related to the number of customers that the selling and service
functions are designed to support. Westwood has 23 customers in 2002 and 25 customers
in 2003.
Required:-
2. Describe briefly the elements you would include in Westwood’s balanced
scorecard.
3. Calculate the growth price-recovery and productivity components that explain the
change in operating income from 2002 to 2003.
4. Suppose during 2003 the market for high-end kitchen range hoods grew at 3% in
terms of number of units and all increases in market share (that is increases in the
number of units sold greater than 3%) are due to Westwood’s product
differentiation strategy. Calculate how much of the change in operating income
from 2002 to 2003 is due to the industry-market size factor cost leadership and
product differentiation.
5. How successful has Westwood been in implementing its strategy? Explain.
Solution:-
1. The balanced scorecard should describe Westwood product differentiation
strategy. The elements that should be included in its balanced scorecard are.
*Financial perspective increase in operating income from higher margins on KE8 and
growth
• Customer perspective market shares in high-end market and customer satisfaction.
• Internal business perspective manufacturing quality order delivery time on time
delivery and new product features added.
• Learning and growth perspective Development time for new products and
improvements in manufacturing processes.
 2. Operating income for each year is
2002
2003
Revenues
($100 per unit X 40,000 units; $110 per
unit X 42,000 units) $4,000,000
$4,620,000
Costs
Direct material costs
($10 per sq. ft. X 12,000 sq.ft; $11 per sq. ft. X 123,000
Sq. ft ) 1,200,000
1,353,000
Conversion costs
($20 per unit X 50,000 units; $22 per unit X 50,000 units) 1,000,000 1,100,000
Selling and customer- service costs
($24,000 per customer X 30 customers; $25,000 per
customer X 29 customers) 720,000 725,000
Total costs 2,920,000 3,178,000
Operating income $1,080,000
$1.442,000
Change in operating income $362,000 F

Growth component
Revenue effect {Actual units of Actual units of} Output
Of growth = {Output sold - Output sold in} X Price
Component {in 2003 2002} in 2002
= (42,000 units - 40,000 units) x $100 per unit
= $200,000 F
{ Actual units of input or}
Cost effect { Capacity that would Actual units of}
Of growth = {have been used to produce inputs or capacity} Input
Component {2003 output assuming to produce} X price
{The same input- output 2002 output} in 2002
{Relationship that existed in 2002 }
Direct material costs that would be required in 2003 to produce 42,000 units instead of
the 40,000 units produced in 2002, assuming the 2002 input-output relationship
continued into 2003 can be calculated as follows:
“My own expenence indicates that we are doing well on both these dimensions. Until we
do a formal survey of employees and customers sometime next year. I think we are
doing a disservice to this company and ourselves by reporting such low scores for
employee and customer satisfaction. These scores will be an embarrassment for us at the
division managers meeting next month. We need to get these numbers up”
Ptricia knows that the employee and customer satisfaction scores are subjective but
the procedure she used is identical to the procedures she has used in the past. She knows
from the comments she had asked for that the scores represent the unhappiness of
employees with the latest work rules and the unhappiness of customers with late
deliveries. She also Knows that these problems will be corrected in time.
4. Do you think that the household products division should include subjective
measures of employee satisfaction and customer satisfaction in its balanced
scorecard? Explain.
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DOWN SIZING
Q69:- Collaborative learning problem Downsizing.(CMA adapted) Mayfair
corporation currently subsidizes cafeteria services for its 200 employees. Mayfair is in
the process of reviewing the cafeteria services because cost cutting measures are needed
throughout the organization to keep the prices of its products competitive. Two
alternatives are being evaluated: downsize the cafeteria staff and offer a reduced menu or
contract with an outside vendor.
The current cafeteria operation has four employees with a combined base annual salary of
$110,000 plus additional employee benefits at 25% of salary. The cafeteria operates 250
days each year and the costs for utilities and equipment maintenance average $30,000
annually .The daily sales include 100 entrees at $4.00 each, 80 sandwiches of salads at an
average price of $3.00 each, plus an additional $200 for beverages and deserts. The cost
of all cafeteria supplies is 60% of revenues.
The plan for downsizing the current operation envisions retaining two of the current
employees whose combined base annual salaries total $65,000.An entrée would no longer
be offered, and prices of the remaining items would be increased slightly. Under this
arrangement, Mayfair expects daily sales of 150 sandwiches or salads at a higher average
price of $ 3.60.The additional revenue for beverages and desserts is expected to increase
to$230each day. Because of the elimination of the entrée, the cost of all cafeteria supplies
is expected to decline to 50% of revenues. All other conditions of operation would
remain the same. Mayfair is willing to continue to subsidize this reduced operation but
will not spend more than 20%of the current subsidy.
A Proposal has been received from Wilco Foods an outside vendor who is willing to
supply cafeteria services. Wilco has proposed to pay Mayfair $1,000 per month for use of
the cafeteria and utilities. Mayfair would be expected to cover equipment-repair costs in a
addition.Wilco would pay Mayfair 4% of all revenues received above the breakeven
point. This payment would be made at the end of the year. All, other costs incurred by
Wilco to supply the cafeteria services are variable and equal 75% of revenues. Wilco
plans to charge $5.00 for an entrée, and the average price for the sandwich or salad would
be $4.00.All other daily sales are expected to average $300.Wilco expects daily sales of
66 entrees and 94 sandwiches or salads.
1:-Determine whether the plan for downsizing the current cafeteria operation would be
acceptable to Mayfair Corporation. Show your calculations.
2:- Is the Wilco Foods proposal more advantages to Mayfair Corporation than the
downsizing plan? Show your calculations.
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Q70:- Activity-based costing. Flexible-budget variances for finance function activities.
Josh sanchez is the chief financial officer of bouquets.com an internet company that
enables customers to order deliveries of flowers by accessing its Web site. Sanchez is
concerned with the efficiency and effectiveness of the finance function. He collects the
following information for three finance activities in 2004:
Rate per unit of
Cost driver
Activity Cost
Activity Level Driver Static budget
Actual
Receivables Output unit Remittances $0.639 $0.75
Payables Batch Invoices 2.900 2.80
Travel expenses Batch Travel claims 7.600 7.40
The output measure is the number of delivers, which is the same as the number of
remittances. The following is additional information.
Static- Budget
Amounts Actual amounts
Number of deliveries 1,000,000 948,000
Batch size in terms of deliveries
Payables 5 4.468
Travel expenses 500 01.587
Required: - 1. Calculate the flexible-budget variance for each activity in 2004.
5. Calculate the price and efficiency variances for each activity in 2004.
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Q71-:- Finance function activities, benchmarking (continuation of Last question). Josh

Sanchez, CFO of bouquets COM, engages the Hackett group a consulting firm
specializing in benchmarking. He asks Hackett to provide benchmark data of the
finance function at “world-class” retail companies (both traditional retail and internet-
based retail). Hackett’s cost benchmarks for bouquet. Com’s three finance activities are

Finance Activity “World-class” Cost performance

Payables S0.71 per invoice
Receivables S0.10 per remittance
Travel expenses S1.58 per travel claim
Required: - 1. What new insights might arise with the Hackett benchmark data using the
amounts in Exercise 7-30?
2. Assume you are in charge of travel-claim processing. What concerns might
you have with sanchez using the Hackett benchmark of $1.58 per travel claim as the
keyto evaluate your performance next period?
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BENCH MARKING
Q72-
Relevant information with regard to the operation of the sales order department of MM is
as follows.
 • A team of staff deals with existing customers in respect of problems with orders
of with prospective customers enquiring about potential orders.
• The processing of orders requires communication with the production and
dispatch functions of the company.
• The nature of the business in such that there is some dispatching of part orders to
customers Sales literature is sent out to existing and prospective customers by
means of a monthly mail shot.
The activity matrix below shows the budget for the sales order department.
Activity cost matrix- sales order department
Total Customer Processi Orders Implementing Sales General
Cost Cost negotiations ng of Export dispatches Literature admin
element Home

$’000 $’000 $’000 $’000 $’000 $’000 $’000

Salaries 500 80 160 100 90 20 50
Stores/ 90 16 6 8 60
supplies
IT 70 10 30 20 10
Sundry 80 8 10 6 20 10 26
Costs
Total 740 98 216 132 128 90 76
Volume 2,000 3,000 5,000 1,200 11,500
of
Activity Custo Negotiations Order Orders Dispatches
mers
MM has decided to acquire additional computer software with internet links in order
to improve the effectiveness of the sales order department. The cost to the company
of this initiative is estimated at $230,000 pa.
If the proposed changes are implemented. There will be cost and volume changes to
activities in the sales order department and it is estimated that the following activity
cost matrix will result.
Activity cost matrix-sales order department after the proposed changes
Total Customer Processi Orders Implementing Sales General
Cost Cost negotiations ng of Export dispatches Literature admin
element Home

$’000 $’000 $’000 $’000 $’000 $’000 $’000

Salaries 450 72 144 90 81 18 45
Stores/ 54 - 16 6 8 24 --
supplies
IT 300 40 120 80 40 20 --
Sundry 106 16 11 10 33 10 26
Costs
Total 910 128 291 186 162 72 71
Volume 2,600 6,000 5,500 2,000 18,750
 of
Activity Custo Negotiations Order Orders Dispatches
mers
Recent industry average statistics for sales order department activities in business of
similar size, customer mix and product mix are as follows.
Cost per customer per year $300
Cost per home order processed $50
Cost per export order processed $60
Cost per dispatch $8
Sales literature cost per customer $35
Average number of orders per customer per year4.1
Average number of dispatches per order 3.3
Requirement:-
Prepare an analysis (both discursive and quantitative/ monetary as appropriate) which
examines the implications of the IT initiative. The analysis should include a
benchmarking exercise on the effectiveness of the sales order department against both
its current position and the industry standards provided. You should incorporate
comment on additional information likely to improve the relevance of the exercise.
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Q73-:- EVALUATION MANAGERS, ROI VALUE-CHAIN ANALYSIS OF COST
STRUCTURE: User Friendly Computer is one of the largest personal computer
companies in the world .The board of directors was recently informed that User Friendly
president is resigning. An executive search firm recommends the board consider
appointing Peter Diamond ( Current president of Computer Power) or Norma Provan
(current president of Peach Computer).You Collect the following financial information
(in millions) on computer Power and Peach Computer for 2002 and 2003:
Computer Power Peach Computer
2002 2003 2002 2003

Revenues $400.0 $320.0 $200.0 $350.0

Costs
R&D 36.0 16.8 18.0 43.5
Design 15.0 8.4 3.6 11.6
Production 102.0 112.0 82.8 98.6
Marketing 75.0 92.4 36.0 66.7
Distribution 27.0 22.4 18.0 23.2
Customer service 45.0 28.0 21.6 46.4
Total costs 300.0 280.0 180.0 290.0
Operating income $100.0 $40.0 $20.0 $60.0
Total assets $360.0 $340.0 $160.0 $240.0
In early 2004.0a leading computer magazine gave Peach Computer’s main
product five stars, its highest rating. Computer Power’s main product was given three
stars, down from five stars a years ago, because of customer-service problems. The
computer magazine also ran an article on new product introductions. Peach Computer
received high marks for new products in 2003.Computer Power’s performance was called
“mediocre.”
 Required:-
1:- Use the Dupont method of probability analysis to compute the ROI of
computer Power and Peach Computer in 2002 and 2003.Comment on the results.
2:- Compute the percentage of costs in each of the six business-function cost
categories for computer Power and Peach Computer in 2002 and 2003. Comment on the
results.
3:- Rank Diamond and Provan as potential candidates for president of User
Friendly Computer. Explain your ranking.
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-
INCENTIVE SCHEME
Q74-:- Enton company compensates its junior employees based on 10% of actual
income distributed equally among the 1000 employees payable within 30 days after the
and of the year plus 5% of stock appreciation for the year , 20% of planned income plus
10% of stock- appreciation for the 100 mid- level employees payable within seven
months of the current year based on stock values on june 30th of the current year, and
pays its 10 top- level executives, 30% of the revised income for the current year and 30%
of stock appreciation as of the end September during October of each year.
Planned sales for 2003 amounted to 1.3 bilion dollars. Planned costs included fixed costs
.35 billion dollars and variable costs amounting to 40% of sales. Taxes amount to 24% of
income. Revised sales on 9/30th for the year is expected to be 1.1 billion dollars with a
10% increase in variable costs and a 5% reduction in fixed costs. Actual sales, however,
amounted to 8 billion dollars with both fixed and variable costs being 12% higher the
anticipated level.
Stock prices were at $22 at the beginning of the year , $26 as of june 30 th , and $27 as of
September 30th At the end of the year, in spite of multi- million-dollar audits. Several
frauds and manipulation of records were discovered and the stock price plunged to $1.25.
There were a total of 67 million share outstanding during the year.
Required: Determine planned and actual income and compute compensation per
employee for each group .
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PARTIAL PRODUCTIVITY
Q75-:- Berkshire corporation makes small steel parts. Berkshire management has some
ability to substitute direct materials for direct manufacturing labor. If workers cut the
steel carefully, Berkshire can manufacture more parts out of a metal sheet, but this
approach will require more direct manufacturing labor- hours. Alternatively, Berkshire
can use fewer direct manufacturing labor – hours if it is willing to tolerate a larger
quantity of direct materials waste. Berkshire operates in a very competitive market. Its
strategy is to produce a quality product at a low cost. Berkshire produces no defective
products. Berkshire reports the following data for the past two years of operations:
2004 2005
Output units 375,000 525,000
Direct materials used, in kilograms 450,000 610,000
Direct material cost per kilogram $1.20 $1.25
Direct manufacturing labour-hours used 7,500 9.500
Wages per hour $20 $25
Manufacturing capacity in output units 600,000
582,000
Manufacturing capacity –related fixed costs $1,038,000
41,018,500
Fixed manufacturing cost per unit of capacity $1.73 $1.75
Required 1. Compute the partial productivity ratios for 2005. Compare the partial
productivity rations in 2005 with par-tial productivity ratios for 2004 calculated based on
2005 output produced.
1. On the basis of the partial productivity ratios alone, can you conclude whether and
by how much productivity improved overall in 2005 relative to 2004? Explain.
2. How might the management of Berkshire corporation use the partial productivity
analysis?
Required 1. Compute Berkshire corporation’s total factor productivity (TFP) in 2005.
2. Compare Berkshire corporation’s TFP performance in 2005 relative to 2004.
3. What does TFP tell you that partial productivity measures do not?
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RESPONSIBILITY ACCOUNTING
Q76:- A Boatyard is divided into three profit centers whose managers are
rewarded according to results. Transactions between these profit centers are
frequent. Sales centre(S) buys and sells new boats.
If it needs to take part-exchange from a customer in order to sell a new
boat, it transfers the part-exchanged boat to B at an agreed price.
Brokerage(B) buys and sells second-hand boats:
(i) in part-exchange from S (B names the price at which is can buy a
comparable boat that is in a suitable conditions for resale to an end-
user customer, but deducts the likely cost of repairs) and
(ii) from other sources, on a normal trading basis.
Repairs(R) does repairs for
(i) B(to put boats into saleable condition) and
(ii) other customers.
The following situation arises:
S can sell to a customer for Rs. 35,000 a new boat which would cost Rs. 29,000.
To do so, it needs to offer Rs. 16,000 in part-exchange for the customer’s
old boat. However, the customer’s boat is estimated by R to need repairs that
will cost: Materials Rs.3
Labour 60 hours at Rs.15 per hour
B can buy for Rs. 15,000 a boat comparable to the one being offered by
the customer in part-exchange but which needs no repair. B could then sell that
boat for Rs. 19,000.
Other data:
- R’s labour rate per hour is made up as follows:
Variable cost Rs. 6.00
Fixed cost 4.50 (based on 20,000 budgeted hours p.a.)
Profit 4.50
15.00
- 45% of R’s time is reserved for work from B
- Annual fixed cost is budgeted at:
S- Rs. 70,000 B- Rs. 80,000
You are required, in relation to the above situation, to set out the
contribution to profit for each profit center that would result,
(i) Assuming that all estimates and budgets materialised as expected,
(ii) Assuming that all estimates and budgets materialised as in (i), except that the
repairs undertaken by R took an extra 10 hours and Rs. 100 of materials
due to a problem not noticed by B or R.
[Answer: 1:-Rs. 3,800/- Rs. 4,000, Rs. 540] 2:- 3,550, 4000,
380.
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Q77:- A company has a Six-year contract to supply 100,000 machined components
DE a year at Rs. 5.80 each. It will have completed three years of the contract at 31 st
December 1979.
It has been offered an additional contract to supply 10,000 machined components
FG during the year 1980 at Rs. 7.20 each. There is a good possibility of an annual
renewal there after for the same quantity at the same price.
This Second contract appears attractive to the sales manger because:
(1) The work would require only 10 per cent additional machine hours and these
could be undertaken by working overtime on the existing machines.
(2) Overtime premium is 50 per cent of normal wage rate.
(3) Sufficient material is in stock to make a year’s supply to the new components
and is surplus to any other requirement.
(4) Spare space amounting to 20 percent of the works area is available for the
handling and storage of the new components.
The sales manager has recommended acceptance of the new contract on the basis
of the following calculation for 1980. Profit Forecast Year
1980
Existing contract Future
Contacts
DE DE
FG
Rs.000 Rs. 000
Rs.000
Costs: - Direct wages—normal 200 200
20
Overtime --- 9
1
Direct material--- DE 60 60
---
FG --- ---
---
 Rent 15 12
3
Depreciation 25 25
1
Other overhead costs
(100% of direct wages) 200 209
21
500 515
45
Sales income 580 580
72
Profit 80 65
27
As the management accountant you are asked to review the proposal Year
Investigation that:
1: The existing machines have a limited life based on producing a total of
600,000 components DE: it is unlikely that this total output can be
exceeded.
2: The machines cost Rs. 150,000 when purchased at the start of the contract but
new one are priced at Rs. 180,000.
3: The prod. of each component FG is twice as intensive in machine wear as
component DE.
4: Although only 10 per cent more actual machine hours would be required for
components FG, because of change over of tools 2 per cent extra labour hours
will be needed.
5: The labour hours will be worked in both daily overtime and weekends in the
ratio of 2:1, the premium rate for weekends is 100 per cent of normal wage rate.
6: The additional overhead costs in relation to the FG order expected to be
incurred amount to Rs.10,000 per year.
7: The material is stock that it is proposed to use for the first 10,000 components
FG cost Rs. 13,000 when purchased three year ago, its value was reduced to
NIL for inventory purposes at 31st December, 1977 as being surplus and un sale
able at that time. Due to changed circumstances it could be reconditioned at a
cost of Rs. 5,000 and resold to the original supplier at his current list price of
Rs. 15,000 less 20 per cent handling charge;
8: The spare productions space is at present rented to an adjoining company for
Rs. 5,000 per year and that company would be willing to take a long- term lease
at this figure. The sales manager was not aware of this fact. Prepare a revised
profit estimate, separately for components DE and FG, for each of the years
1980-81. Advise about FG order.
Answer:- 85,000, 4,000, 85,000, Loss:- 4,000.
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Q78:- Reel and Roll ltd. manufactures a range of films extensively used in the cinema
industry. The films, once manufactured packed in circular containers and stored in
specially constructed crates lined with “Pretecto”. These crates are manufactured and
 maintained by a special department within the company and the department costs last
year are as under:
Rs.
Direct materials (including” Pretecto”) 1,40,000
Direct labour 1,00,000
2,40,000
Overheads:
Department manager 16,000
Depreciation of machine 30,000
Maintenance of machine 7,200
Rent ( Portion of Warehouse) 9,000
Other miscellaneous costs 31,500 93,700
3,33,700
Adm. Overheads( Absorbed 20% of direct 48,000
costs)
Total 3,81,700
Pack Knack Associates have approached the Reel and Roll Ltd. offering to make
all the crates required on a four-year contract for Rs. 2,50,000 per annum and / or to
maintain them for future Rs. 50,000 per annum.
The following data are relevant:
1: - The machine used in the department cost Rs. 2,40,000 four years ago and will last
for four more years .It could be currently sold for Rs. 50,000.
2: - A stock of “ protecto” was acquired last year for Rs. 2,00,000 and one-fifth was used
last year and included in the material cost. Its original cost was Rs. 1,000 per ton, but
the replacement cost is Rs. 1,200 per ton, and it could be currently sold for Rs. 800
per ton.
3:- The Department has acquired Separate warehouse space for Rs. 18,000 per annum. It
uses only one-half of the space the rest is idle.
4:- If the department were closed, the Manager will be transferred to another department
; but all the labour force will be made redundant ,and the terminal benefits to be met
will amount to Rs. 15,000 per annum. In that event, Pack Knack Associates will
undertake to manufacture and maintain the crates.
If reel and Roll Ltd. continued to maintain the crates, but left their manufactures
to Pack Knack Associates:
1: The machine will not be required.
2: The manager will remain in the department.
3: The warehouse space requirements will not be reduced.
4: Only 10% of all materials will be used.
5: Only One worker will be dispensed with and taking the terminal benefit to be met
into account the saving will be Rs. 5,000 per annum.
6: The miscellaneous costs will be reduced by 80%.
If Reel and Roll Ltd. continued to manufacture the crates but left their
maintenance to pack Knack Associates:
1: The machine will be required.
2: The manager will remain in the department.
3: The warehouse space will be required.
4: 90% of all the materials will be required.
5: The labour force will continue.
6: The miscellaneous cost will be reduced by 20%.
Assuming that for the four year period there is no significant change envisaged in the
pattern of other costs. You are required to evaluate the alternative courses of action with
supporting figures of cash flows over the four year period and advise accordingly by
Preparing statement of cash receipt and cash disbursement for each of the four year.
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ABC COSTING
Q79:- The Excel Ltd make and sell two products, VG4U and VG2. Both products are
manufactured through two consecutive process-making and packing Raw material is
input at the commencement of the making process. The following estimated information
is available for the period ending 31st March. Making
Packing
($000) ($000)
Conversion Cost
Variable 350 280
Fixed 210 140
40% of Fixed costs are product specific, the remainder are company fixed costs. Fixed
costs will remain unchanged throughout a wide activity range.
Product information VG4 UVG2
Production time per unit:
Making (minutes) 5.25 5.25
Packing ( minutes) 6 4
Production Sales(units) 5000 3000
Selling price per unit($) 150 180
Direct material per unit($) 30 30
(iii) Conversion costs are absorbed by products using estimated time based rates.
Required:
(a) Using the above information,
(b) Calculate unit costs for each product, analysed as relevant.
(c) Comment on a management suggestion that the production and
sale of one of the products should not proceed in the period
ending 31st March.
(c) Additional information is gathered for the period ending 31st March as follows:
(i) The making process consists of two consecutive activities, mounding and
trimming. The moulding variable conversion costs are incurred in proportion
to the temperature required in the moulds. The variable trimming conversion
costs are incurred in proportion to the time required for each product. Packing
materials (which are part of the variable packing cost) requirement depends on
the complexity of packing specified for each product.
(ii) The proportions of product specific conversion costs (variable and fixed) are
analysed as follows:
Making Process: moulding (60%); trimming (40%)
Packing process; conversion (70%); packing material (30%)
 (iii) An investigation into the effect of the cost drivers on costs has indicated that
the proportions in which the total product specific conversion costs are
attributable to VG4U and VG2 are as follows:
VG4U VG
Temperature (moulding) 2 1
Material consistency (trimming) 2 5
Time (packing) 3 2
Packing (complexity) 1 3
(iv) Company fixed costs is apportioned to products at an overall average rate per
product unit based on the estimated figures.
Required:
Calculate amended unit costs for each product where activity based costing is used and
company fixed costs are apportioned as detailed above.
Comment on the relevance of the amended unit costs in evaluating the
management suggestion that one of the products be discontinued in the period ending
31March.
Management wish to achieve an overall net profit margin of 15% on sales in the
period ending 31 March in order to meet return on capital targets.
Required:-
Explain how target costing may be used in achieving the required return and suggest
specific areas of investigation.
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By:-
Sanjay
Aggarwal
F.C.A.,
I.C.W.A.