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Management Accounting
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Written by-
Mohammad Salim Hossain
B.Com (Hons), M.Com (Accounting), MBA major in Finance (BOU)
Assistant Professor & Head, Department of Business Administration
Model Institute of Science & Technology (MIST), Gazipur.
Examiner of National University (BBA & MBA Program)
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Management accounting
4. Focus Financial accounting focuses on focuses on future.
history.
Financial accounting reports are Management accounting reports
5. Users primarily used by external users, are exclusively used by internal
such as shareholders, bank and users viz. managers and
creditors. employees.
Managerial accounting is not
Cost Behavior
Highlight of the Chapter :
2.1 Distinguish between product cost2.10 Distinguish between committed cost
and period cost. Why are product and discretionary cost. (2007)
costs sometimes called inventor2.11 The relevant range pertains to fixed
able costs? (2006, 2009) cost, not variable cost Do you
2.2 State the main features of fixed agree?-Explain. (2009)
Inventoriable costs are all costs that can be assigned to an inventory asset, rather than being
charged to expense as incurred. Once an inventory item is consumed through sale to a
customer or disposal in some other way, the inventory asset is charged to expense.
Thus, inventoriable costs are initially recorded as assets and appear on the balance sheet as
such, and are eventually charged to expense, moving from the balance sheet to the cost of
goods sold expense line item in the income statement. This means it is possible that
inventoriable costs may not be charged to expense in the period in which they were
originally incurred.
Inventoriable costs include the following items:
Direct materials
Direct labor
Freight in
Manufacturing overhead (both fixed and variable)
Conceptually, inventoriable costs are the costs incurred to obtain inventory items, as well
as to bring them to the location and condition required for their eventual sale.
Question.2.02.State the main features of fixed cost. 2006
Answer:
Fixed Cost:
A fixed cost is a cost that does not vary in the short term, irrespective of changes in
production or sales levels, or other measures of activity. For example, the rent on a building
will not change until the lease runs out or is re-negotiated, irrespective of the level of
business activity within that building. Examples of other fixed costs are insurance,
depreciation, and property taxes.
When a company has a large fixed cost component, it must generate a significant amount
of sales volume in order to have sufficient contribution margin to offset the fixed cost.
Once that sales level has been reached, however, this type of business generally has a
relatively low variable cost per unit, and so can generate outsized profits above the
breakeven level.
Fixed costs are allocated under the absorption basis of cost accounting. Under this
arrangement, fixed manufacturing overhead costs are proportionally assigned to the units
produced in a reporting period, and so are recorded as assets. Once the units are sold, the
costs are charged to the cost of goods sold. Thus, there can be a delay in the recognition of
those fixed costs that are allocated to inventory.
(1) All the costs like production , administration, selling and distribution costs are
classified into fixed and variable cost.
(2) Variable costs are charged to production cost. Fixed costs are not charged to
production costs .Rather, it is charged to contribution margin.
(3) All the fixed costs are taken as periodical cost and it is charged to the profit and loss
account of that year when it occurred.
(4) Finished goods and work in progress are valued by taking variable manufacturing cost
only.
(5) It has its own method of calculation of profit . The profit is determined by deducting
total fixed cost from contribution margin . The contribution margin is ascertained by
deducting total variable cost from sales .
Fixed Costs:
Fixed costs are those which do not change with the level of activity within the relevant
range. These costs will incur even if no units are produced. For example rent expense,
straight-line depreciation expense, etc.
Fixed cost per unit decreases with increase in production. Following example explains
this fact:
Total Fixed Cost $30,000 $30,000 $30,000
Units Produced 5,000 10,000 15,000
Fixed Cost per Unit $6.00 $3.00 $2.00
Variable Costs:
Variable costs change in direct proportion to the level of production. This means that
total variable cost increase when more units are produced and decreases when less units
are produced. Although variable in total, these costs are constant per unit. For example
Total Variable Cost $10,000 $20,000 $30,000
Units Produced 5,000 10,000 15,000
Variable Cost per Unit $2.00 $2.00 $2.00
Mixed Costs:
Mixed costs or semi-variable costs have properties of both fixed and variable costs due to
presence of both variable and fixed components in them. An example of mixed cost is
telephone expense because it usually consists of a fixed component such as line rent and
fixed subscription charges as well as variable cost charged per minute cost. Another
example of mixed cost is delivery cost which has a fixed component of depreciation cost
of trucks and a variable component of fuel expense.
Since mixed cost figures are not useful in their raw form, therefore they are split into their
fixed and variable components by using cost behavior analysis techniques such as High-
Low Method, Scatter Diagram Method and Regression Analysis.
A going business should have physical facilities and an organization for use. These things
provide the capacity to manufacture and sell. The continuing costs of having capacity
incurred in anticipation of future activity are termed as "capacity costs". In case capacity
is utilized, additional costs are incurred. Such additional costs of manufacturing and selling
are controllable with current activity, while capacity costs tend to continue regardless of
the current rate of activity as long as the same capacity is maintained.
Fixed costs are those which are not expected to change in total within the current budget
year, irrespective of variations in the volume of activity. Such costs are fixed for a given
period over a relevant range of output, on the assumption that technology and methods of
manufacturing remain unchanged.
For the purpose of cost analysis, fixed costs may be classified as follows:
1. Committed Costs: These costs cannot be eliminated instantly. These costs are
incurred to maintain basic facilities. Example: Rent, rates, taxes, insurance.
2. Policy and managed costs: Policy costs are incurred in enforcing management
policies. Example: Housing scheme for employees. Managed costs are incurred to
ensure the operating existence of the company. Example: Staff services.
3. Discretionary costs: These are not related to operations. These can be controlled
by the management. These occur at the discretion of the management.
Question.2.08.What do you mean by step variable cost? 2007
Answer:
Step Cost
Step costs remain unchanged (constant) for a given level of output and then increase by a
fixed amount at higher level of output, i.e., from one level of output to another higher
level. Example: Salary of supervisors in a factory.
Depending upon the period up to which an expense can be kept up to a certain level in spite
of increase in activity, the height and width of steps vary. In case, if the steps are small and
narrow, the behaviour of cost is like that of "pure variable cost". This is called "step variable
cost". In case, if the steps are wider, cost is like that of "fixed cost". This is called "step
fixed cost". Figure A and B show the behaviour of step fixed costs and step variable costs.
Figure 1.5A Step fixed costs
Answer:
a. Unit fixed costs decrease as volume increases.
b. Unit variable costs remain constant as volume increases.
c. Total fixed costs remain constant as volume increases.
d. Total variable costs increase as volume increases.
Question.2.10.Distinguish between committed cost and discretionary
cost.2007
Answer:
Fixed costs are expenses associated with businesses that remain constant regardless of
activities within the organization. Fixed costs are generally divided into two categories --
committed and discretionary costs -- with several significant differences between them.
Description
Both discretionary and committed costs are considered fixed costs. Fixed costs that are
considered committed costs are generally big decisions that companies are locked into for
a long time. Discretionary costs are also fixed costs; however, companies have more
flexibility with these. Most companies monitor all fixed costs closely to constantly look
for ways to improve the budget and profitability.
Time Length
The two categories of fixed costs are distinguished by several factors including time length.
Committed costs are generally long-term costs, while discretionary costs are short-term. In
business, long-term refers to more than one year; while short-term refers to one year or
less. Discretionary costs are generally determined each year and are subject to change
whenever the company decides to do so. Committed costs on the other hand cannot be
changed as easily and should be carefully thought out.
Examples
There are several common committed fixed costs businesses incur. These include real-
estate taxes, insurance, professional salaries and depreciation. Common types of
discretionary costs are advertising, research, public relations and repairs and maintenance.
Each type of cost is generally worked into the budget each year; however, there are many
times when a company does not spend the budgeted amount for discretionary costs.
Considerations
One key aspect of committed costs is that they cannot be reduced significantly. If they are,
the profitability of the business is often compromised as well as the long-term goals of the
business. When the management of an organization makes decisions regarding committed
costs, they must take many issues into consideration. They must analyze the situation and
determine if the decisions are good for the business. On the other hand, companies can
reduce discretionary costs for a period of time without extreme damage done to the
company.
Question.2.12.How will you classify cost according to managerial decision
making? 2010
Answer:
Imputed costs: Imputed costs do not involve actual cash outlay (cash payment). They are
not recorded in the books of accounts. They are not measurable accurately. However,
imputed costs are useful while taking decisions. Imputed costs can be estimated from
similar situations. Imputed costs can be estimated from similar situations outside the
organization. Although these are hypothetical costs, in making comparison, in performance
evaluation, in making decision, the inclusion of imputed costs is inevitable. Examples:
Interest on invested capital, rental value of company-owned building, salaries of owner-
directors of sole proprietorship firms.
Sunk costs: Sunk cost is invested cost or recorded cost. A sunk cost is one which has been
incurred already and cannot be avoided by decision taken in future. Sunk cost may be
defined as "an expenditure for equipment or productive resources which has no economic
relevance to the present decision-making process". Sunk cost is a past cost which cannot
be taken into account in decision making. Sunk cost may also be defined as the difference
between the purchase price of an asset and its salvage value. Non- incremental costs (i.e.,
cost which do not increase) are also, at times, termed as sunk costs (one specific group of
non-incremental costs).
Differential costs: Differential costs arise on account of the change in total costs associated
with each alternative. In the language of the AAA committee, "it is the increase or decrease
in total costs, or the changes in the specific elements of cost that results from any variation
in operation." Differential cost consists of both variable and fixed costs. The differential
cost between any two levels of production is (i) the difference between two marginal costs
(variable cost) at these two levels and (ii) the increase or decrease in fixed costs. A
distinction has to be understood between differential cost and incremental cost. Incremental
cost applies to increase in production and restricted to cost only, whereas differential cost
confines to both increase or decrease in output.
Differential cost is of much use in decision-making process, especially in choosing the best
alternative and in ascertaining profit where additional investments are introduced in the
business.
Opportunity costs: Opportunity costs are the economic resources which have been
foregone as the result of choosing one alternative instead of another. The unique feature of
an opportunity cost is that no cash has changed hands. There is no exchange of economic
resources. It results from sacrificing some action. They are never shown in regular cost
accounting records.
Committed costs
Managed costs
Discretionary costs
Step costs
Variable Costs:
Variable costs are those costs that changes directly with the production level changes and
therefore they are expressed in terms of units of production. Generally variable costs
increase at a constant rate relative to labour and capital. For example if direct material cost
is $ 2 per unit and if company produces 10000 units then total cost will be $ 20000 and if
company produces 20000 units then cost will be $80000. Examples of variable cost are
direct labour, depreciation on plan and machinery, power and electricity.
A mixed cost is one that contains both variable and fixed cost elements. Mixed cost is also
known as semi variable cost. Examples of mixed costs include electricity and telephone
bills. A portion of these expenses are usually consists line rent. Line rent normally is fixed
for each month. Variable portion consists units consumed or calls made. The relationship
between mixed cost and level of activity can be expressed by the following equation or
formula:
Y = a + bX
In this equation,
The equation makes it very easy to calculate what the total mixed cost would be for any
level of activity within the relevant range For example, Suppose that the company expects
to produce 800 units and company has to pay a fixed cost of $25,000 and a
variable manufacturing cost is $3.00 per unit. The total mixed cost would be calculated as
follows:
Y = a + bX
= $27,400
= 13,500 - 7500
12,000 - 4,000
= .75 Supplies.
Step -2. Estimate The fixed Cost Level:
Fixed Cost (a) = Total Cost Variable Cost.
= 13500-.75x12,000
= 4500
Req. (b) Express The Variable and Fixed Cost in The From, Y = a+b
= 4500+.75
Req. (c) Total Amount /Total Cost = Fixed Cost +Variable Cost
= 4,500 + 11000x.75 = 12,750
Problem.2. BBA-2006
The maintenance cost and patient days for the first seven months of X hospital are as
follows:-
Month Activity Level Maintenance
Patient days Cost Incurred
January 5,600 7,900
February 7,100 8,500
March 5,000 7,400
April 6,500 8,200
May 7,300 9,100
June 8,000 9,800
July 6,200 7,800
Required :
(a) Using the lest squares regression method, estimate the variable cost per patient.
(b) From the data in (a) above, express the cost formula in linear equation
form Y = a + bX.
(c) Using the derived cost formula, determine the expense expected to be incurred for
9,00 Patients.
Solution
The Least- Squares Regression Method:-
Month Activity X Cost Y XY X2 Y2
January 5600 7,900 44240,000 31,360,000 62,410,000
February 7100 8,500 60350,000 50,410,000 72,250,000
March 5000 7,400 37000,000 25,000,000 54,760,000
April 6500 8,200 533,00,000 42,250,000 67,240,000
May 7300 9,100 664,30,000 53,290,000 82,810,000
June 8000 9,800 75,200,000 64,000,000 96,040,000
July 6,200 7,800 48,360,000 38,440,000 60,840,000
N=7 X=45700 Y=587000 XY=384880,000 X2=304750,000 Y2=496350,000
Problem.3. BBA-2007
The following information relating to production and mixed cost are extracted from the
books of a manufacturing firm :
Production Mixed cost
(Units) (Taka)
January 6,800 31,580
February 6,400 30,420
March 7,200 32,740
April 8,000 35,060
May 6,600 31,000
June 7,000 32,160
Required :
(i) Calculate variable cost per unit and total fixed cost by using Least Square
Method.
(ii) What will be the mixed cost of producing 7,500 units of the month of July?
Solution
Req(1)Calculate. The Least Square Method:-
Month Unit X Cost Y Xy X2 Y2
January 6,800 31,580 2,14,744,000 46,240,000 9,97,296,400
February 6,400 30,420 1,94,688,000 40,960,000 9,25,376,400
March 7,200 32,740 2,35,728,000 51,840,000 10,71,907,600
April 8,000 35,060 2,80,480,000 64,000,000 12,29,203,600
May 6,600 31,000 2,04,600,000 43,560,000 9,61,000,000
June 7,000 32,160 2,25,120,000 49,000,000 10,34,265,600
N=6 X=42000 Y=192960 XY=13,55,360,000 X2=2956,00,000 Y2=6219049600
Variable Cost (b)= N(XY)-(X) (Y)
N(X2-(X)2
= 6()(1355360,000042,000) (192960)
6(295600,000)-(42000)2
= 8132160,000-8104320,000
1773600,000-1,764,000,000
= 27840,000
96,00,000
= 2.9
Solution
Req.(i)
Difference in cost
When Occupancy level is 80% (450 80%) 32 30 3, 45,600
When Occupancy level is 60% 3, 26,700
18,900
Difference is activity level-
When Occupancy level is 80% (450 80%) 80% 10,800
When Occupancy level is 60% (450 60%) 30 8,100
2700
Variable cost (b) =
=
= 7 per Occupied bed
(b) Fixed cost = Total cost Variable cost
= 3,45,600 (10,800 7)
= 2,70,000
Req.(ii) In case of occupancy rate 70% the total amount of operating cost will be
Fixed cost 2,70,000
Variable cost (315 beds 30 days TK.7) 66,150
Total cost TK. 3, 36,150
Problem.5. BBA-2009
The following data relating to units shipped and total shipping expense have been
assembled by Arche Company, a wholesaler of large, custom-built air-conditioning units
tor commercial buildings :
Month Units Total Shipping
Shipped Expense (Taka)
January 3 1,800
February 6 2,300
March 4 1,700
April 5 2,000
May 7 2,300
June 8 2,700
July 2 1,200
Required :
( i ) Using the least-squares regression method, estimate the variable and fixed
elements of shipping expense.
( ii ) Express the cost data in (i) above in the form Y = a + bX
Solution
Req.(i) Least squares regression table -
Solution
Req.(i)
Step 1. Identify the lowest and highest costs and activity level
Problem.7. BBA-2011
ABC Co. Ltd. operates a fleet of delivery trucks in Malaysia. The Co. has determined that
if a truck is driven 105,000 kilometers during a year, the average operating costs is Tk.
11.40 per kilometer. If a truck is driven only 70,000 kilometers during a year, the average
operating costs increases to Tk. 13.4 per kilometer.
Required :
(i) Using the high-low method, estimate the variable and fixed costs element of the
Annual cost of truck operations.
(ii) Express the variable and fixed costs in the form Y= a + bx.
(iii) If a truck were driven 80,000 kilometers during a year, what total costs would you
expect to be incurred?
Solution
In cost of truck driven 1,05,000 Km
The operation cost is (1,05,000 11.40) 11,97,000
In cost of truck driven 70,000 Km
The operating cost is (70,000 13.4) 9,38,000
Req.(i) Step(i)Identify the cost and activity level
Truck driven Km Operating cost
High 1,05,000 11,97,000
Low 70,000 9,38,000
Step 2. Estimation of variable cost per Unit
Variable cost (b) =
=
=
= 7.4 Per Kn driven
Solution
1.
Kilometers Total Annual
Driven Cost*
High level of activity.................................................... 1,05,000 $11,970
Low level of activity............................ 70,000 9,380
Change............................................. 35,000 2,590
* 105,000 kilometers x Tk.0.114 per kilometer = Tk.11,970
70,000 kilometers x Tk.0.134 per kilometer = Tk.9,380
2. Y = Tk.4,200 + Tk.0.074X
Chapter 03
Costing Methods/ Direct Costing & Absorption Costing
Highlight of the Chapter :
3.01 Why variable costing and absorption 3.06 What are the arguments in favor
net income figures may or may not of not charging fixed cost in the
be equal?2006 valuation of inventory under
3.02 Distinguish between variable costing direct costing? 2008
and absorption costing. 3.07 Define variable costing and
2007,2008,2009 absorption costing. 2011
3.03 Discuss the uses of direct costing in 3.08 Explain how manufacturing
decision making. 2007 overhead costs are shifted from
3.04 Absorption costing considers more one period to another under
categories of costs as product cost- absorption costing.2011
Explain.2009 3.09 Math Problem Solutions
3.05 When and why profit will be higher
in case of absorption costing and
variable costing?2010
In brief, direct costing is the analysis of incremental costs. Direct costs are most easily
illustrated through examples, such as:
Direct costing is of great use as an analysis tool. The following decisions all involve the
use of direct costs as inputs to decision models. They contain no allocations of overhead,
which are not only irrelevant for many short-term decisions, but which can be difficult to
explain to someone not trained in accounting.
CIMA also defines Marginal Cost as 'the cost for producing one additional unit of the
product.' Generally, the cost of a product includes the Fixed and Variable Costs. If one unit
of output of the product is increased, only the Variable Cost increases, as the Fixed Cost
remains constant even in the change of output level. Therefore, the additional cost incurred
for producing one additional unit represents the Variable Cost only. This increase in cost
(i.e., the Variable Cost) due to increase in one additional unit of output is called Marginal
Cost. Hence, Marginal Cost is nothing but Variable Cost. That is why Variable Costing is
also called Marginal Costing.
Absorption Costing
Absorption Costing may be defined as the technique which takes into account both Fixed
and Variable Costs for determining unit cost of the goods produced or the operation
carried on.
The Chartered Institute of Management Accountants (CIMA), United Kingdom, defines
Absorption Costing as 'the practice of charging all costs, both variable and fixed, to
operations, processes or products'.
Under this technique, the cost per unit of the goods produced represents the Variable Cost
per unit plus the allocated share of Fixed Cost per unit. Here, 'Absorbed Cost' is the total
of direct cost and overheads cost. Accordingly, Absorption Costing is also called Full or
Total Costing. Wherever this technique of costing is applied, the cost per unit remains the
same only when the level of output remains constant. When the level of output changes,
the cost per unit also changes because of the existence of Fixed Cost in the unit cost. The
Fixed Cost remains constant even when there is a change in the output level. Under this
technique, closing inventory is also valued at total cost, which includes Variable Cost as
well as Fixed Cost.
Problem.1. BBA-2006
The following particulars are obtained from the records of a manufacturing company :
Absorption Variable
costing costing
Direct material 1.50 1.50
Direct labour 1.80 1.80
Variable factory O.H .40 .40
Fixed factory O.H .40 ---
4.10 3.70
-------Manufacturing company
Income Statement
Solution (Absorption Costing)
Req.(a)
86,400 90,000
Less, Selling& administration:
22,000
Fixed 22,000 50,000
Variable 10% 48,000
70,000 72,000
Net operating income 16,400 18,000
-------Manufacturing company
Req.(b) Income Statement
(Direct Costing/Variable)
Explanation Year-1 Year-2
Sales 4,80,000 5,00,000
Less, variable Cost of goods sold:
Beginning inventory ----- 51,800
Direct materials 1,65,000 1,42,500
Direct labour 1,98,000 1,71,000
Variable Factory overhead 44,000 38,000
4,07,000 4,03,300
Less, Ending inventory 51,800 33,300
3,55,200 3,70,000
1,24,800 1,30,000
Less, Factory overhead 44,000 38,000
80,800 92,000
Less, Selling& administration:
Fixed 22,000 22,000
Variable 10% 48,000 50,000
70,000 72,000
Net operating income 10,800 20,000
Problem.2. BBA-2007
The following particulars are available from the books of ABC Ltd. For the year 2006 :-
Sales 75,000 units.
Finished Goods Inventory (January 1,2006) 12,000 units.
Finished Goods Inventory (December 31,2006) 17,000 units.
Sales price Tk. 10 per unit.
Manufacturing cost :
Variable cost per unit of production Tk. 4
Fixed Factory overhead (Normal capacity 80,000 units) Tk. 1,60,000
Marketing and Administrative Expenses :
Variable cost per unit of sales Tk. 1
Fixed marketing and Administrative Expenses Tk. 1,50,000
Required :
(i) Income statement for 2006 under the absorption costing method and direct costing
method.
(ii) An account showing the difference in net operating income under the above two
methods.
Solution
Req.(i)
Income Statement
Absorption Costing
For the year ended 31st December,2006
Explanation Tk. Tk.
Sales (75000x10) 7,50,000
Less: Cost of good Sold:-
Beginning inventory (12,000 x Tk.6 ) 72,000
Variable Manufacturing(80,000 x Tk.6) 4,80,000
5,52,000
Less: Ending Inventory 1,02,000
4,50,000
Gross Profit 3,00,000
Less: Marketing and administrative exp:-
Variable(75,000 x 1) 75,000
Fixed 1,50,000 2,25,000
75,000
Net operating income
Income Statement
Direct Costing
For the year ended 31st December,2006
Explanation Tk. Tk.
Sales (75000x10) 7,50,000
Less: Cost of good Sold:-
Beginning inventory (12,000 x Tk.4 ) 48,000
Variable Manufacturing(80,000 x Tk.4) 3,20,000
3,68,000
Less: Ending Inventory 68,000
3,00,000
Gross contribution 4,50,000
Req.(ii)
Reconciliation Statement
Explanation Tk. Tk.
Net income Under absorption costing 75,000
Net loss under variable costing 65,000
Difference 10,000
Changes in inventory(Ending- Beginning)
In Absorption costing(1,02,000-72,000) 30,000
In Direct costing(68,000-48,000) 20,000
10,000
Problem.3. BBA-2008
Essex private limited company has developed the following statement for the first two years
of their operation. They sold the same number of unit each year but the profit is more than
double in the second year of their operation. The CEO was quite confused about their
operating results.
Year 1 Year 2
Taka Taka
Sales (20000 units each year) 7,00,000 7,00,000
Less : Cost of goods sold 4,60,000 4,00,000
Gross margin 240,000 300,000
Less: Selling and administrative expenses 200,000 200,000
Net operating income 40,000 1,00,000
The information related to the production of the company for these years was as
follows:
Year 2 Year 2
Actual production in units 20,000 25,000
Standard production, per year 20,000 20,000
Variable manufacturing cost per. unit of production Tk.8 Tk.8
Variable selling and administration cost per unit Tk. 1 Tk. 1
Fixed manufacturing overhead costs -(total) 3,00,000 3,00,000
Required :
(a) Compute the standard unit product cost for each year under absorption costing
and variable costing.
(b) Prepare a variable costing income statement for each year.
(c) Reconcile the - variable. Costing and absorption net operating income figures
for year 2
(d) Explain to the CEO why, under absorption costing, the net operating income for
year 2 was higher than the net operating, income of. Year 1, though the same
number of units was sold in each year.
Solution
Req.(a)
Absorption Costing Variable Costing
Year-1 Year-2 Year-1 Year-2
Variable production cost 8 8 8 8
Fixed manufacturing overhead 15 12
(3,00,00020,000 unites)(3,00,00025,000 unites) 23 20 8 8
Req.(b)
Income Statement
(Direct Costing/Variable)
Explanation Year-1 Year-2
Sales 7,00,000 7,00,000
Less, variable Cost of goods sold:
Beginning inventory ----- -----
Add, variable manufacturing cost 1,60,000 2,00,000
1,60,000 2,00,000
Less, Ending inventory ----- 40,000
variable cost of goods sold 1,60,000 1,60,000
variable Selling& administration 20,000 20,000
(20,000 unites x Tk.1 per unit) 1,80,000 1,80,000
Contribution margin 5,20,000 5,20,000
Year-1 Year-2
Req.(c) Variable costing net operating income Tk. 40,000 Tk. 40,000
Add. Manufacturing overhead cost deferred in inventory
Under absorption costing(5,000 x 12) --- 60,000
Absorption costing net operating income 40,000 1,00,000
Req.(d) The increase in production in Year 2, in the face of level sales, caused a buildup of
inventory and a deferral of a portion of Year 2's fixed manufacturing overhead costs to the next
year. This deferral of cost relieved Year 2 of Tk. 60,000 (5,000 units x Tk.12 per unit) of fixed
manufacturing overhead cost that it otherwise would have borne. Thus, net operating
income was Tk.60,000 higher in Year 2 than in Year 1, even though the same number of units
was sold each year. In sum, by increasing production and building-up inventory, profits
increased without any increase in sales or reduction in costs. This is a major criticism of the
absorption costing approach.
Problem.4. BBA-2009
Far North Telecom Ltd. of Ontario has organized a new division to manufacture
and sell specialty cellular telephones. The division's monthly costs are shown
below:
Manufacturing costs:
Direct materials Tk. 48
Variable manufacturing overhead Tk. 2
Fixed manufacturing overhead costs (total) Tk. 3, 60,000
Selling and administrative costs :
Variable 12% of sales
Fixed (total) Tk. 4, 70,000
Far North Telecom regards till of its workers as full time employees and the company has
a long standing no layoff policy. Furthermore, production is highly automated.
Accordingly the company includes its labor costs in its fixed manufacturing overhead. The
cellular phones sell for Tk. 150 each. During September, the first month of operation, the
following activity was recorded:
Units sold 10,000
Units produced 12,000
Required .
(i) Compute the unit product cost under
(a) Absorption costing;
(b) Variable costing.
(ii) Prepare income statement for September using standard Absorption costing.
(iii) Prepare income statement for September using Variable costing.
(iv) Reconcile the operating income under adsorption costing with operating income
under variable costing.
Solution
Req.(i). a.b. unit product cost
Explanation Absorption Variable
costing costing
Direct materials $48 $48
Variable manufacturing overhead 2 2
Fixed manufacturing O.H(3,60,00012,000 unites ) 30 ----
$80 $50
Problem.5. BBA-2010
Computer Desk incorporation makes an oak desk specially designed for personal
computers. The desk sells for Tk. 200 each. Data for last years operation follow:-
Units in beginning inventory 00
Units produce 10,000
Units sold 8,000
Unit in ending inventory 2,000
Variable costs per unit : Taka
Direct labour 60
Direct labour 30
Variable manufacturing overhead 10
Variable selling and administrative overhead 20
Total variable cost per unit 120
Fixed costs :
Fixed manufacturing overhead 3,00,000
Fixed selling and administrative overhead 4,50,000
Total variable 7,50,000
Required :
(i) Prepare an income statement using variable costing.
(ii) Prepare an income statement using absorption costing.
(iii)Prepare a reconciliation statement.
Reconciliation Statement
Explanation Tk. Tk.
Net income Under absorption costing (50,000)
Net loss under variable costing (1,10,000)
Difference 60,000
Changes in inventory(Ending- Beginning)
In Absorption costing(2,60,000-0) 2,60,000
In Direct costing(2,00,000-0) 2,00,000
60,000
Problem.6.
BBA-2011
CompuDesk,. Inc., makes an oak desk specially designed for personal computers. The
desk sells for Tk. 200. Data for last year's operations follow :
Units in beginning inventory 0
Units produced 10,000
Units sold 9,000
Units in ending inventory 1,000
Variable costs pr unit:
Taka
Direct materials 60
Direct Labour 30
Variable manufacturing overhead 10
Variable selling overhead 20
Total variable cost per unit 120
Fixed costs : Taka
Fixed manufacturing overhead 300,000
Fixed selling and administrative overhead 450,000
Total fixed costs 750,000
Required :
(i) Compute the unit product costs under variable costing and absorption costing.
(ii) Assume that the Co. uses variable costing. Prepare an income statement using
contribution format.
(iii) What is the Co's break-even point in terms of units sold and amount in Taka?
Solution
Req.(i) Unit product cost under absorption costing and variable costing
Particulars Absorption Variable
Costing Costing
Direct materials 60 60
Direct labor 30 30
Req.(iii)The Co's break-even point in terms of units sold and amount in Taka:
Selling price per unit Tk. 200
Variable cost per unit Tk. 120
Contribution margin per unit Tk. 80
Problem.7. BBA-2012
XYZ Company manufactures and sells a single product. Cost data for the product are
given below :
Solution
Req.(i) Unit product cost under absorption costing and variable costing
Particulars Absorption Variable
Costing Costing
Direct materials 7 7
Direct labor 10 10
As shown in the reconciliation in part (3) above, $45,000 of fixed manufacturing overhead cost
was deferred in inventory under absorption costing at the end of July, since $18 of fixed
manufacturing overhead cost "attached" to each of the 2,500 unsold units that went into
inventory at the end of that month. This $45,000 was*part of the $560,000 total fixed cost that
has to be covered each month in order for the company to break even. Since the $45,000 was
added to the inventory' ac- count, and thus did not appear on the income statement for July as
an expense, the company was able to report a small profit for the month even though it sold
less than the breakeven volume of sales. In short, only $515,000 of fixed cost ($560,000 -
$45,000) was expensed for July, rather than the full $560,005') as contemplated in the break-
even analysis. As stated in the text, this is a major problem with the use of absorption costing
internally for management purposes. The method does not harmonize well with the principles
of cost-volume-profit analysis, and can result in data that are unclear or confusing to
management.
Problem.8. BBA-2012
Telecom Ltd. has organized a new division to manufacture and sell cellular phone. The
division's monthly cost are shown below :
Manufacturing costs:
Variable costs per unit:
Direct material $48
Variable manufacturing overhead $2
Fixed manufacturing overhead costs (total) $360,000
Selling and administrative costs : .
Variable 12% of sales
Fixed (total) $470,000
The cellular phones sell for $150 each, During September, the first month of operations
the following activity was recorded:-
Units produced 12,000
Units sold 10,000
Required :
(i) Compute the unit product cost under :
(a) Absorption costing.
(b) Variable costing.
(ii) Prepare an absorption costing income statement for September.
Solution
-------------------------
Chapter 04
C-V-P and Break-even Analysis
Highlight of the Chapter :
4.01 What is break-even chart? 2006 4.7 Briefly explain the different
techniques applied for CVP
4.02 Describe the uses of cost volume analysis. 2010
profit analysis.2007 4.8 Contribution margin is the excess of
4.03 Explain the significance of margin sales over fixed cost. Do you
of safety. 2007 agree? Explain. 2010
4.04 What is break-even analysis? State 4.0 Why do you analyze break-even
its importance.2007 9 point? 2010
4.05 Write the assumptions of CVP How does an increase in income tax
analysis.2007,2008,2009,2011 4.1 rate affect the break-even point?
4.06 What is meant by a products 0 2011
contribution margin (CM) ratio? Define Margin of Safety.2011
How is this ratio useful in Math Problem solutions
planning business operations? 4.1
Question. 4.01.What is break-even chart? 2006
Answer:
Question.4.02.Describe the uses of cost volume profit analysis.2007
Answer:
1. Forecast: CVP analysis assists in forecasting costs and profits on account of
change in volumein both production and sales.
2. Determination of relative profit: This analysis extends a helping hand in the
determination of profitability of each product.
3. Inter-firm comparison: By applying the CVP-analysis technique, interfirm
comparison of profitability among firms can be easily made to assess the prevailing
conditions in the market.
4. Studying the effect of change in volume: Any change in the volume of sales will
have a deterrent impact on other important associated factorscost and profit. CVP
analysis assists in learning such impacts.
5. Segregation of costs: As costs can be segregated into fixed and variable, CVP
analysis helps to a great extent in this task. As variable costs can affect to a great
Margin of Safety can be expressed both in terms of sales units and currency units.
The margin of safety is a measure of risk. It represents the amount of drop in sales which
a company can tolerate. Higher the margin of safety, the more the company can withstand
fluctuations in sales. A drop in sales greater than margin of safety will cause net loss for
the period.
Companies use the margin of safety in management accounting to establish the strength
and potency of the business. The higher the margin of safety, the sturdier it deems
business. Companies attempt to place their selling price at such a point in order to cover
fixed and variable costs.
Total variable and fixed costs are compared with sales revenue in order to determine the
level of sales volume, sales value or production at which the business makes neither a
profit nor a loss (the "break-even point").
In its simplest form, the break-even chart is a graphical representation of costs at various
levels of activity shown on the same chart as the variation of income (or sales, revenue)
with the same variation in activity. The point at which neither profit nor loss is made is
known as the "break-even point" and is represented on the chart below by the intersection
of the two lines:
In the diagram above, the line OA represents the variation of income at varying levels of
production activity ("output"). OB represents the total fixed costs in the business. As
output increases, variable costs are incurred, meaning that total costs (fixed + variable) also
increase. At low levels of output, Costs are greater than Income. At the point of
intersection, P, costs are exactly equal to income, and hence neither profit nor loss is made.
In economics and business, the break-even point (BEP) represents the point where
there is no net loss or gain because costs and revenue are equal.
Break-even analysis represents the minimum quantity a company needs to sell to
cover costs like rent, building expenses, utilities, or other aspects of running day-
to-day operations.
As long as a business can cover the minimum costs, they are "breaking even" and
can remain in business even though they are not turning a profit.
Break-even point is very important for decision making point of view because it
helps the management in determining that how much number of units must be
produced and sales to at least earn so much to cover the cost of production and
company at no profit no loss point.
The contribution margin is also useful for determining the impact on profits of changes in
sales. In particular, it can be used to estimate the decline in profits if sales drop, and so is
a standard tool in the formulation of budgets.
Formula: To calculate the contribution margin ratio, divide the contribution margin by
sales. The contribution margin is calculated by subtracting all variable costs from sales.
The formula is:
Sales-Variable expenses
Sales
Question.4.07. Briefly explain the different techniques applied for CVP
analysis. 2010
Answer:
Techniques of CVP Analysis
The CVP analysis deals with the price costs structure and the sales volume and identifies
the profit figure with one or other combination of these variables . the key elements in the
CVP analysis are selling price sales volume variable cost per unit total fixed costs and the
sales mix (if the firm is dealing with more than one product at a time ).there are two basic
techniques of CVP analysis these are :
Formula: To calculate the contribution margin ratio, divide the contribution margin by
sales. The contribution margin is calculated by subtracting all variable costs from sales.
The formula is:
Sales-Variable expenses
Sales
One important characteristic of P/V ratio is that at all levels of output it will remain
constant because at various levels, variable cost as a proportion of sales remains constant..
When P/V ratio is considered in conjunction with margin of safety, it becomes particularly
useful. P/V ratio can be referred by other terms like: (a) marginal income ratio, (b)
contribution to sales ratio, & (c) variable profit ratio.
P/V ratio may be expressed as:
= 1- Variable cost
Sales
It is also possible to express the ratio in terms of percentage by multiplying by 100. Thus
a relationship between the contribution & sales is established by the profit/volume ratio.
Hence it might be better to call it as a Contribution/Sales ratio (or C/S ratio), though the
term Profit/Volume ratio (P/V ratio) is now widely called.
Total variable and fixed costs are compared with sales revenue in order to determine the
level of sales volume, sales value or production at which the business makes neither a
profit nor a loss (the "break-even point").
In its simplest form, the break-even chart is a graphical representation of costs at various
levels of activity shown on the same chart as the variation of income (or sales, revenue)
with the same variation in activity. The point at which neither profit nor loss is made is
known as the "break-even point" and is represented on the chart below by the intersection
of the two lines:
In the diagram above, the line OA represents the variation of income at varying levels of
production activity ("output"). OB represents the total fixed costs in the business. As output
increases, variable costs are incurred, meaning that total costs (fixed + variable) also
increase. At low levels of output, Costs are greater than Income. At the point of
intersection, P, costs are exactly equal to income, and hence neither profit nor loss is made.
As long as a business can cover the minimum costs, they are "breaking even" and
can remain in business even though they are not turning a profit.
Break even point is very important for decision making point of view because ithelps
the management in determining that how much number of units must be produced
and sales to at least earn so much to cover the cost of production and company at
no profit no loss point.
Question.4.10. How does an increase in income tax rate affect the break-
even point? 2011
Answer:
Although investors and business executives are concerned about the activity levels required
to break even and to achieve certain target operating incomes, net income is another key
financial measure, so it is important to understand how income taxes affect
the CVP analysis. The breakeven point is not affected by income taxes because at
breakeven point total revenues equals total costs so there is no operating income to be
taxed. However, income taxes do affect how much of the target operating income flows to
the bottom line, so CVP analysis commonly uses target net income (TNI) instead of
target operating income as part of the analysis. The relationship between the two is
illustrated as follows:
The margin of safety can also be expressed in percentage form. This percentage is
obtained by dividing the margin of safety in dollar terms by total sales. Following
equation is used for this purpose.
Problem.1. BBA-2006
Operations of X Company for the year disclosed M/S ration of 30% and C/M ration of
50%. Fixed cost amounted to Tk. 20,000. Compute (i) Break-even sales ; (ii) the amount
of profit; and (iii) the contribution margin.
Solution
Problem.2. BBA-2006
The information relating to two levels of output of a product is given below : -
Problem.3. BBA-2007
In September 2007, X Ltd. Sells 4,000 units of product and earns 20% on sales. Cost of
direct materials is Tk. 2,60,000.Other manufacturing and non-manufacturing costs during
the month are Tk. 1,20,000 and Tk. 1,00,000 respectively. 50% of manufacturing and 40%
of non-manufacturing costs are variable.
Required :
(i) Calculate the break-even sales in units and volume.
(ii) Ascertain the amount of profit earned.
(iii) What would be the profit if sales are 3,600 units?
(iv) What would be the break even sales of the price is increased by 20%?
(v) What would be the selling price if break-even is to be achieved at 1,600 units?
Solution
(i) BEP (Unit) =
= 120,000
150-90
= 2000
BEP(TK:) = BEP (unit)x selling Per Price Unit
= 2000x150
= 3,00,000
(ii) Profit = Sales - Fixed Cost - Variable Cost
= 6,00,000-1,20,000-3,60,000
= 60,000
(iv) BEP (Unit) =1,20,000
150-90
= 1333.33
BEP (TK.) = 1333.33x180
= 2,40,000
(v) Variable Cost (1600x90) =1,44,000
Fixed Cost = 1,20,000
Total Cost = 2,64,000
Selling Price = 2,64,000
1600 = 165
Working:-
Variable Cost:-
Direct Materials =2,60,000
Manufacturing (50%) = 60,000
Non- Manufacturing (40%) = 40,000
3,60,000
Fixed Cost:-
Manufacturing (50%) - 60,000
Non-manufacturing (60%) - 60,000
1,20,000
Cost Per Unit = 3,60,000
4000 = 90
Let,
Selling Price -
20% or 4000-4000 (4000x90)-1,20,000
800 = 4000-360,0001,20,000
800 = 4000- (360,000+1,20,000)
32000 = 4,80,000
= 4,80,000
3200
=150
Aales=4000x150=6,00,000
Problem.4. BBA-2008
Rock Inc. distributed a high quality wooden bird house that sells for Tk. 20 per unit
Variable costs are Tk. 8 per unit and the fixed cost for the year is Tk.1,80,000.
Required:
(a) What is the product's CM ratio?
(b) Break-even point in sales in taka and in unit.
(c) Due to an Increase in demand, the. Company estimates that sales will increase by
Tk. 75,000, during the next year. How much will the operating income increase
(or net loss decrease) assuming that no change in fixed cost occurred.
(d) What is the amount of sales required to earn a profit of Tk. 24,000.
(e) Calculate the margin of safety at a profit of Tk. 30,000.
Solution
1,80,000 24,000
.60 = 3,40,000
(e)
Problem.5. BBA-2009
Required :
(i) Calculate the annual break-even sales in taka and in units
(ii) How many units must be sold to earn a Tk. 9,000 target profit for the year?
(iii)XYZ Co. now has one full-time and one part-time salesperson working in the store.
It will cost an additional Tk. 8,000 per year to convert the part-time position to a
full-time position. This change would bring in an additional Tk. 20,000 in sales
each year. Should the company convert the position? Use the incremental approach.
(iv) Refer to the original data, actual operating results for the first year are as follows :
Taka
Sales 1,25,000
Less : Variable expenses 50,000
Contribution Margin 75,000
Less : Fixed expenses 60,000
Net operating income 15,000
= 1,00,000
CM =
=
= 60%
Req.(iv)
(a) Degree of operating leverage -
=
=
(b) Expected increase in sales 20%
Degree it operating leverage 5
Expected increase in NOI 100%
Problem.6.
BBA-2010
The following data are obtained from the records of a factory :
Taka Taka
Sales, 8000 units @ Tk 25 each 2.00,000
Direct material consumed 80,000
Variable overhead Labour 25,000
Labour 35,000
Fixed overhead 36,000 1,76,000
Net profits 24,000
Required :
(i) Calculate break-even-point in units and Taka.
(ii) The sales needed to earn a profit of Tk. 54,000
(iii) If selling price is reduced by 20%, calculate break-even point in Taka and units
(iv)To find out selling price if the break-even-point is 2000 units.
Solution
BEP in units =
=
= 4800 Units.
Working :
Variable cost per unit =
=
= 17.5
BEP in sales =
=
= 1,20,000
= 100
= 30%
Req. (ii) Sales needed to earn a profit of Tk. 54,000
Sales = Variable cost + Fixed cost + Profit
250 = 17.50 + 36,000 + 54,000
7.5Q = 90,000
Q = 12,000 Units
Req. (iii) If the selling price reduced by 20%, the selling price will be
2,00,000 (2,00,000 20%)
= 2,00,000 40,000
= 1,60,000
BEP Only in Units = = 6400 Units
Sales (6400 25) 1,60,000 25
(-) Variable expanses (6400 17.5) 1,12,000 17.5
Contribution Margin 48,000 7.5
(-) Fixed cost 36,000
NOI = 12,000
BEP in Units =
= = 4800 Units
Req.(iv) If the break even pint is 20,000 Units
The selling price = selling price per Unit cost
= 25 20,000 Units
= 50,000
Problem.7. BBA-2011
Minto Company manufactures and sells a single product. The company's sales and
expenses for last quarter follow :
Total Per unit
(Taka)
Sales 450,000 30
Less : Variable expense 180,000 12
Contribution margin 270,000 18
Less : Fixed expenses Net income 216,000
Net income 54,000
Required :
(a) What is the quarterly break-even point in units sold and in sales dollars?
(b) What is the total contribution margin at the break-even point?
(c) How many units would have to be sold each quarter to earn a target profit of Tk.
100,000? Use the unit contribution method. Verify your answer by preparing a
contribution income statement at the target level of sales.
(d) Compute the company's margin of safety in both dollar and percentage terms.
(e) What is the company's CM ratio? If sales increase by Tk. 40,000 per quarter and
there is no change in fixed expenses, by how much would you expect quarterly net
income to increase?
Problem.8.
BBA-2012
PQR Company distributes a high quality wooden birdhouse that sells for Tk. 20 per unit.
Variable costs are Tk. 8 per unit and fixed costs total Tk. 180,000 per year.
Required :
(i) What is the product's CM ratio?
(ii) Use the CM ratio to determine the break-even point in
sales dollars.
(iii) Prepare a CVP graph for the company from a zero level of
activity up to 25,000 units sold each year. Indicate the break-even point on your graph.
(iv) Due to an increase in demand, the company estimates that
sales will increase by Tk. 75,000 during the next year. By how much should net operating
income increase (or net loss decrease) assuming that fixed costs do not change?
(v) Assume that the operating results for last year were :
Total Per unit
Sales Tk. 400,000 Tk. 20
Less variable expenses 160,000 8
Contribution margin 240,000 Tk. 12
Less fixed expenses 180,000
Net operating income Tk. 60,000
(a) Compute the company's margin of safety in both dollar and percentage terms.
(b) Compute the degree of operating leverage at the current level of sales.
(c) The president expects sales to increase by 20% next year. By what percentage should
net operating income increase?
(vi) Assume that the company sold 18,000 units last year. The sales manager is
convinced that a 10% reduction in the selling price, combined with a Tk. 30,000 increase
in advertising, would cause annual sales in units to increase by one-third. Prepare two
contribution income statements, one showing the results of last year's operations and one
showing the results of operations if these changes are made. Would you recommend, that
the company do as the sales manager suggests?
Solution
1.
Sales price....................................................... 20.00 100%
Less variable expenses 8.00 40
Contribution margin.............................................. 12.00 60%
-------------------
Chapter 06
Budget
Highlight of the Chapter :
6.01 What do you understand by master 6.07 Differentiate between a sales
budget? 2006 Briefly describe its forecast and sales budget. 2010
components.2011 6.08 What is a flexible budget? How does
6.02 State the difference between cash flexible budget differ from fixed
budget and cash flow statement. budget? 2008
2007 6.09 How does Zero based budgeting
6.03 What are the essentials of a sound differ from traditional budgeting?
budgeting system? Explain. 2007 2011
6.04 Mention some of the major 6.10 Explain the functions of a budget
benefits of budgeting.2007 committee.2007
6.05 State the main features of flexible
budget. 2009
6.06 Why is budgeted performance
better than past performance as a
basis for judging actual results?
2010
Sales Budget
Ending
Inventory Production Budget
Budget
Direct Materials
Direct Labor Budget Overhead Budget
Budget
Cash Budget
Budgeted
Budgeted Balance Selling an d
Income
Sheet Admn. Budget
Statement
Question. 6.02.State the difference between cash budget and cash flow
statement. 2007
Answer:
The following are the important points of distinction between a cash budget & a cash
flow statement:
1. A cash budget is futuristic in approach. It is prepared on the basis of future plan of
action & in advance. On the other hand, a cash flow statement is prepared on the
basis of past data.
2. A cash budget relates with the objectives that are to be achieved & is a plan for
inflows of cash & outflows of cash. Whereas, cash flow statement does a post
mortem analysis of actual inflows of cash & outflows of cash.
3. The cash budget is usually prepared for a short period (may be a week, fortnight,
month or quarter). For a long period also (say, a year), a cash budget may be
prepared but division into short sub-budget periods is made (say, a month or
quarter). Depending upon the nature of the business of the firm & how accurately
the estimates can be made; the time span which will be covered by the cash budget
will vary from one firm to another firm. On the other hand, a relatively longer
period, usually an accounting year, is covered by a cash flow statement & it is not
divided into sub-periods.
4. A cash budget is a tool used for budgeting & controlling of cash. While, cash flow
statement, for the past accounting year, analyses the working of the concern.
5. A cash budget, for the purpose of judicious forecasting, requires only the previous
data. While, preparation of cash flow statement is made from the accounting data
at the beginning of an accounting year & at the end of an accounting year.
6. Usually, the purpose of the management only is served by a cash budget whereas
the purposes of the management along with the external parties are served by the
cash flow statement.
Stakeholders
Applied budget work, therefore has a vital role in the budget process helping in
demystifying the complex budget statements in comprehensive, user-friendly analysis
document to be used by a larger and wider group beyond the strategists, for appreciating
and involving in better budget process. The stake holders of the applied budget work are:
1. The government - the President/Prime Minister and his Cabinet who formulate the
budget and other economic policies and the executive branch of the government;
2. Parliament/Assembly which gives approval to the budget proposals submitted by
the government and the legislative committees that subject the proposals detailed
scrutiny before they are voted by the legislature;
3. Civil society, especially organized groups, by creating awareness as well as
interests in budgets so as to encourage them to engage decision-makers on
budgeting;
4. The multi-lateral International Financial Institutions and other donors and creditors
who, as part of their development assistance, tend to play a very important role in
determining the type of economic policies we put in place, and
(1)The objectives of the organization as a whole & the results which should be achieved
by each department within this overall framework are defined by the budgetary control.
(2) When there is a difference between actual results & budget, then the extent by which
actual results have exceeded or fallen short of the budget is revealed by the budgetary
control.
(3) The variances or other measures of performance along with the reasons of difference
between the actual results with those from budgeted is indicated by the budgetary control.
Also, the magnitude of differences is established by it.
(4) As the budgetary control reports on actual performance along with variances & other
measures of performance; for correcting adverse trends, a basis for guiding executive
action is provided by it.
(5) A basis by which future budget can be prepared or the current budget can be revised
is provided by the budgetary control.
(6) A system whereby in the most efficient way possible the resources of the organization
are being used is provided by the budgetary control.
(7) The budgetary control indicates how efficiently the various departments of the
organization are being coordinated.
(8) Situations where activities & responsibilities are decentralized, some centralizing
control is provided by the budgetary control.
(9) The budgetary control provides means by which the activities of the organization can
be stabilized, where the organizations activities are subject to seasonal variations.
(10) By regularly examining the departmental results, a basis for internal audit is
established by the budgetary control.
(11) The standard costs which are to be used are provided by it.
(12) For the purpose of paying a bonus to employees, a basis by which the productive
efficiency can be measured is provided by the budgetary control.
With the preparation of a flexible budget the problem can be solved. Thus, a flexible
budget can be defined as a range of budgets which covers a number of different expected
levels of activity. It becomes possible to draw up an appropriate flexible budget from the
range once actual production is known, also the expenses can be set out which would be
appropriate to the achieved level of activity.
The main requirement of a flexible budget is that the analysis of expenses should be
done into three distinct categories:
a. Fixed expenses, i.e. irrespective of the levels of activity, these expenses would be
remaining the same.
b. Variable expenses, i.e. with the change in levels of activity, these expenses
would change in proportion to that level.
c. Semi-variable expenses, i.e. analysis of these expenses into fixed & variable
elements are needed to be done.
As already stated, the advantage of flexing a budget is that, for the purposes of control
& appraisal of performance, the comparison can be done of the actual performance with
the flexed budget.
Question.6.07. Differentiate between a sales forecast and sales budget. 2010
Answer:
SalesBudget
The sales forecast provides the framework for the detailed planning presented in the master
budget of an organization. Based on planned strategies and its best business judgment,
management converts a sales forecast into a sales plan through the commitment of
resources and the establishment of control mechanisms. The sales budget provides an
evaluative tool by presenting monthly indexes of volume of units and returns as hard targets
for the sales team. Deviations from these indexes indicate to small business owners and
managers where they need to adjust their efforts to take advantage of hot products or to
remedy difficult situations. Management determines its sales policies and strategies within
its ability to respond to customer needs, technological changes, and the financial
prerequisites of marketing. The sales budget projects that portion of potential sales the sales
team believes it can achieve. The forecast, then, sets the parameters on the top side while
the production capacity and sales acumen of the team sets the
floor. Although sales forecasts may accurately project
significant changes in market conditions, a company needs to thoroughly examine its own
resources to determine its ability to respond to these changes. A huge drop in demand may
decrease the strain on the production process to where a company regains cost efficiencies,
or a large increase in demand might be required by a company that needs cash for other
projects. The sales budget, therefore, is predicated on a company's ability to meet expected
demand at or near its maximum profit potential.
SalesForecasting
Sales forecasting on the other hand is the prediction of the future sales of a particular
product over a specific period of time based on past performance of the product, inflation
rates, unemployment, consumer spending patterns, market trends, and interest rates. In the
preparation of a comprehensive marketing plan, sales forecasts help the marketer or
manager
Question.6.08. What is a flexible budget? How does flexible budget
differ from fixed budget? 2008
Answer:
A flexible budget is a budget that adjusts or flexes for changes in the volume of activity.
The flexible budget is more sophisticated and useful than a static budget, which remains at
one amount regardless of the volume of activity A flexible budget is a budget which is
designed to change in accordance with the LEVEL OF ACTIVITY attained.
It is also known as Variable budget as the budget recognizes the difference in cost behavior
namely fixed and variable costs in relations to fluctuations in output or turnover. The
budget is designed to change appropriately with such fluctuation.
Fixed budget has a limited application Flexible budget has more application and can
and is inefficient as a tool for cost control. be used as a tool for cost control.
If the budgeted and actual activity levels Flexible budget helps in fixation of prices and
vary, the correct ascertainment os coasts submission of tenders due to correct
Fixed Budget Flexible Budget
and fixation of prices becomes difficult. ascertainment of coasts.
Question.6.09. How does Zero based budgeting differ from traditional
budgeting? 2011
Answer:
According to the Official Terminology of CIMA, London, Zero-based Budgeting is
defined as 'a method of Budgeting whereby all activities are re-evaluated each time a
Budget is formulated. Each functional Budget starts with the assumption that the function
does not exist and is at zero cost. Increments of cost are compared with increments of
benefits culminating in the planned maximum benefit given the Budgeted cost.'
Zero-based Budgeting (ZBB) is an alternative budgeting system that starts with zero base.
It is a newly invented Budget technique where executives are required to start at Zero
Budget level every year and justify all the costs of the existing function in comparison with
all present and future functions. It attempts to review and defend all functions and costs
every year.
Problem.1. BBA-2007
X Ltd. Has the following forecast date available :
September October
Taka Taka
Cash Sales 80,000 1,20,000
Credit Sales 1,45,000 1,90,000
Cash Purchases 40,000 40,000
Credit Purchase 2,00,000 1,60,000
Purchase discount 10,000 5,000
Accounts payable beginning 20,000 25,000
Accounts payable ending 25,000 20,000
Cash operating expenses 55,000 20,000
Net sales on credit are collected 50% in the month of sale, 40% in the following month
and 10% in the second following month. Such sales in July and August were Tk.
2,00,000 and Tk. 2,40,000 respectively. The estimated cash balance in September is Tk.
25,000.
Prepare a Cash budget for September and October.
Solution
Working.1.Calculation of collection from credit sales:
Months Total sales %of collection September October
July 2,00,000 50%,40%,10 20,000 ----
%
August 2,40,000 50%,40%,10 96,000 24,000
%
September 1,45,000 50%,40%,10 72,500 58,000
%
October 1,90,000 50%,40%,10 ---- 95,000
%
1,88,500 1,77,000
Cash Budget
Explanation September October
Balance b/d 25,000 1,98,500
Add, Collection:
Cash sales 80,000 1,20,000
Collection from credit sales 1,88,500 1,77,000
Total Collection (a) 2,93,500 4,95,500
Payments:
Cash purchase 40,000 40,000
Cash operating expense 55,000 20,000
Paid to accounts payable (25,000-20,000) ---- 5,000
Total payment(b) 95,000 65,000
Balance c/d(a-b) 1,98,500 4,30,500
Problem.2. BBA-2007
Star Ltd. Manufactures two products A and B. An estimate of the number of units to
be sold in the 1st seven months of 2007 is given below :
Product January February March April May June July
A 1,600 2,000 2,400 3,200 3,600 3,600 3,200
B 4,400 3,000 3,600 2,800 2,400 2,400 2,800
It is anticipated that :
(i) There will be no work-in-process at the end of any month.
(ii) Finished Units equal to 30% of anticipated sales for the next month will be in
stock at the end of each month including December, 2006.
You are required to prepare a Production Budget for the six month period from January
to July 2007.
Solution
Problem.3. BBA-2008
Tanis kids fashion is ready to begin its third quarter, in which Peak sales occur. The
company has their. highest cash requirement in this quarter and they has got an option of
borrowing from bank in the multiple of Tk. 10,000 with and interest of 10%. They generally
borrow at the beginning of the month and repay at the end. The following data have been
assembled to find their cash need for the upcoming months:
* On July 1 the company have a cash balance of Tk. 44,500.
* Actual sales for the last two months and budgeted sales (all sales are on account) are as
follows :
Taka.
May (actual), 2,50,000
June (actual), 3,00,000
July (budgeted), 4,00,000
August (budgeted), 6,00,000
September (budgeted), 3,20,000
Past experience- shows that the sales are collected in the following pattern:
25% of sales are collected in the month of sales
75% of sales are collected in the month following sales
* B ud geted mer ch and ise pu rchase and o th er exp en ditu re are g iv en b elow
:
July August September
Taka Taka Taka
Merchandise purchases 2,40,00 3,50,000 1,75,000
0
Salaries and Wages 45,000 50,000 40,000
Problem.4. BBA-2009
Prepare a flexible budget from the following data made available in respect of a half-
yearly period and forecast the working result at 70%, 85% and 100% of capacity when
sales are Tk. 50 lacs, Tk. 60 lacs and Tk. 85 lacs respectively, while fixed expenses remain
constant, semi-variable expenses are constant between 55% and 75% of capacity increasing
by 10% between 75% and 90% of capacity and by 20% between 90% and 100%; of
capacity. The expenses at 60% capacity are as follows :
(Taka in lacs)
Semi-variable :
Maintenance and repair 1.25
Indirect labour 5.00
Sales expenses 1.50
Sundry overheads 1.52
Variable :
Materials 12.00
Labour 13.00
Other expenses 2.00
Fixed expenses :
Wages and salaries 4.20
Rent and taxes 2.80
Depreciation 3.50
Sundry overheads 4.50
51.00
Solution
Flexible Budget
Explanation Level of Activity
60% 70% 85% 100%
Semi variable :
Maintenance and repair 1.25 1.25 1.375 1.50
Indirect Labour 5.00 5.00 5.50 6.00
Sales expenses 1.50 1.50 1.65 1.80
Sundry Overheads 1.52 1.52 1.672 1.824
Total (A) 9.27 9.27 10.197 11 . 124
Variable :
Materials 12.00 14 17 20
Labour 13.00 15.17 18.42 21.67
Other expenses 2.00 2.33 2.83 3.33
Total (B) 27.00 31.50 38.25 45
Fixed expenses :
Wages & salaries 4.20 4.20 4.20 4.20
Rent and taxes 2.80 2.80 2.80 2.80
Depreciation 3.50 3.50 3.50 3.50
Sundry Overhead 4.50 4.50 4.50 4.50
Total (c) 15.00 15.00 15.00 15.00
GrantTotal (A + B + C) 51.27 55.77 63.447 71.124
Problem.5. BBA-2010
Assets
Taka
Cash 9,000
Accounts receivable 54,000
Inventory 30,000
Buildings and equipment, net of depreciation 207,000
Total assets 300,000
Liabilities and Stockholders' Equity
Accounts payable 63,000
Notes payable 14,500
Capital stock, no par 180,000
Retained earnings 42,500
Total liabilities and stockholders' equity 3,00,000
The company is in the process of preparing budget data for May. A number of
budget items have already been prepared, as stated below :
(a) Sales are budgeted at Tk. 200,000 for May. Of these sales, Tk. 60,000 will be for cash;
the remainder will be- credit sales. One-half of a month's credit sales are collected in
the month the sales are made, and the remainder is collected in the following month.
All of the April 30 accounts receivable will be collected in May.
(b) Purchases of inventory are expected to total Tk. 120,000 during may. These purchases
will all be on account. Forty percent of all purchases are paid for in the month of
purchase; the remainder are paid in the following month. All of the April 30 accounts
payable to suppliers will be paid during May.
c) The May 31 inventory balance is budgeted at Tk. 40.000.
d) Operating expenses for May are budgeted at Tk. 72.000, exclusive of depreciation.
These expenses will be paid in cash. Depreciation is budgeted at Tk. 2,000 for the
month.
(e) The note payable on the April 30 balance .sheet will be paid during May. with Tk. 100
in interest. (All of the interest relates to May)
(f) New refrigerating equipment costing Tk. 6.500 will be purchased for cash during May.
(g) During May. the company will borrow Tk. 20.000 from its bank by giving a new note
payable to the bank for that amount. The new note will be due in one year.
Required :
(i) Prepare a cash budget for May. Support your budget with a schedule of expected cash
collections from sales and a schedule of expected cash disbursements for merchandise
purchases.
(ii) Prepare a budgeted income statement for May. Use the absorption costing income
statement.
(iii) Prepare a budgeted balance sheet as of May 31
Solution
Cash Budget
For the month of May
Explanations/Details Tk. Tk.
Balance b/d 9,000
Collection from A/C Receive 1,84,000
(a) Total cash collection- 1,93,000
Disbursement/Payment :
Payment from A/C Payable 1,11,000
Purchase of Equipment 6,500
Operating expenses 72,000 1,89,500
(b) Total disbursement 3,500
Excess or Deficiency (a-b) 3,500
Borrowing 20,000
Interest 100 14,600 5,400
Payment 14,500 8,900
Solution
(i)Schedule of expected cash collection
Cash Budget
For the Month of December
Budgetary Control
Highlight of the Chapter :
7.01 State the main objectives of 7.04 Define budgetary control.
budgetary control system. Distinguish between budget and
2007,2008,2009 budgetary control. 2011
7.02 What do you mean by budget and 7.05 State some pre-requisites for
budgetary control.2007,2009 establishing a budgetary control
7.03 Distinguish between forecasting and system. 2011
budgeting. 2008 7.06 Math Problem Solutions
Answer:
(3) Coordinating the activities: The budgetary control coordinates the activities of
different departments or sub-units of the organization. The coordination concept
implies, for example, on production requirements, the purchasing department
should base its budget & similarly, on sales expectations, the production budget
should in turn be4 based.
2nd Difference
Budget is made for one financial period
3rd Difference
The table below summarizes the main differences between a budget and a forecast.
Budget The financial expression of your target.
This is the course you have actively decided upon and
set for yourself; it is your intention.
It is where you want to go.
Budgetary control is the process of ascertaining several budgeted figures for the
future of a business enterprise and then making comparison of these budgeted figures with
the actual results for finding out discrepancies, if any. The comparison of budgeted and
actual figures will allow the management to take curative actions at a proper time.
Budgetary control can be defined as, A means of achieving the financial control
of an entity whereby the actual results for a defined period of time are compared with the
budgeted results, any differences (or variances) being noted, and some corrective action
taken to bring the actual activities back into line with the budgeted ones if such variances
need to be dealt with.
A Budget
Budgetary Control
(c) For the purpose of relying the measurement of performance, there should be
adequate accounting records & procedures.
(d) Budgetary control needs to be flexible, so that the plans & objectives may be
revised.
(e) An awareness of the uses of the budgetary control system should be spread by
the management.
(f) An awareness regarding the problems of budgetary control & especially the
individuals reactions to budgets should be spread by the top management.
------------------------
Chapter 08
Segment Reporting, Profitability Analysis and Decentralization
Highlight of the Chapter :
8.01 What are the benefits that result 8.06 Explain how the segment margin
from decentralization? 2009 differs from the contribution
8.02 Distinguish between a cost center, margin.2011
profit center, and an investment 8.07 How can we measure the
center. 2009 performance of manager of a cost
8.03 What is responsibility accounting? center, a profit center, and an
Why is it necessary to prepare investment center? Briefly explain
income statement in a segmented with examples.2011
form? 2010 8.08 Define return on investment(ROI)
8.04 What are the six steps in designing 2011
accounting based performance 8.09 Define Incremental cost. 2011
measures? 2008 8.10 Math Problem solutions
8.05 What is meant by the term
decentralization?2011
Decentralization permits prompt and more accurate decisions because decisions are made
by those who are fully aware of the realities of the situation. Decisions can be made near
the point of action without consulting higher levels and without waiting for approval of top
executives.
3. Growth and diversification:
Decentralisation facilitates growth and diversification of products and markets. Under
decentralisation, each product line is treated as a separate division so that it can respond
quickly to the changing demands of its special market. The self-contained product divisions
enjoy considerable independence and proper emphasis can be put on each product line
under the overall coordination and control of top management.
4. Better communication:
Decentralisation improves organizational communication and efficiency because there are
fewer levels of authority. The problems of red-tape and bureaucratic delays are reduced.
5. Development of executives:
Decentralisation provides an opportunity to subordinate managers to take initiative and
acquire leadership qualities. Lower level executives learn to manage by exercising
delegated authority. A reservoir of promotable managers becomes available which
simplifies management successions and helps to ensure continuity of management.
Decentralisation promotes autonomy, initiative and creativity on the part of subordinates.
As the success and survival of the organisation does not depend upon a few individuals at
the top, decentralisation makes for stability and continuity of the enterprise.
5. Improvement in motivation and morale:
Decentralisation improves the job satisfaction, motivation and morale of subordinates.
Opportunity to make decisions provides sense of belonging and satisfies the needs for
power, prestige, status and independence. A climate of competition is generated. High
motivation and morale help in improving productivity and working relationships. Better
utilization of talents at lower levels can be made.
7. Effective supervision and control:
Decentralisation results in effective supervision because managers at the lower levels have
complete authority to make changes in work assignment, to take disciplinary action, to
recommend promotions and to change production schedule. Decentralisation also promotes
effective control through comparative evaluation of performance and clear-cut
accountability for results.
8. Democratic management:
Decentralisation makes for democratic management and flexibility of operations. People
at lower levels do not feel alienated from the top and there is little danger of administration
becoming top heavy or monolithic. Necessary changes can be made without dislocating
the entire structure.
Question.8.02. Distinguish between a cost center, profit center, and an
investment center. 2009
Answer:
Cost classification in accounting also involves the allocation of costs, revenues and
responsibilities to various centres or departments. These centres include:
== Cost centres
== Profit centres
== Investment centres
Cost Centres
A cost centre (CC) is a unit, location or department where cost data is collected. The
purpose of the cost centre is to collect, analyze and ascertain costs in its immediate context.
Cost centres usually have cost unitsunits or equipment for which costs are determinable
or attributable. Overheads and direct costs constitute the cost structure of a CC. Since many
activities in an organisation involve costs, a cost centre is a fundamental aspect, especially
as profit and investment centres can be cost centres.
According to the ACCA Study Text (Management accounting, c 1999), cost centres can
manifest themselves as a project, a machine, department or overhead costs. One should
note that a specific cost centre might not necessarily have other functions. CCs are not
limited to production and manufacturing, since they can also be attributed to service
centres, like commercial bank branches for example.
Profit centre
The profit centre addresses both costs and revenue. Therefore, the manager responsible
for a profit centre is accountable for the purchases and sales for that unit, department or
branch. Since both revenue and costs fall under the purview of the profit centre, it is both
a cost and revenue centre, although a revenue centre is not a profit centre and a cost
centre might not necessarily be a profit centre.
Investment centres
Investment centres are profit centres that are accountable for cost, revenues and net assets
for capital investment. This unit is assessed by return on investment and is a cost centre.
Managers in an investment centre are responsible for purchasing capital or non- current
assets and making investment decisions with capital.
Question.8.03. What is responsibility accounting? Why is it necessary to
prepare income statement in a segmented form? 2010
Answer:
MEANING AND CONCEPT OF RESPONSIBILITY ACCOUNTING
An organization uses various techniques of costing such as Standard Costing, Budgetary
Control for Control of Costs and so on. Under these costing techniques, focus is given on
the cost and not on the person who has the authority to control the costs. In every well-
structured organization, the responsibilities of every person's actions are clearly defined
and a manager is engaged in every section of actions of the organization. Every such person
is accountable to his/her superior authority for the responsibility assigned to him/her.
Responsibility Accounting may be defined as a system of control where a responsibility is
assigned to different executives of a concern for control of cost or increase of revenue. It
is one of the basic components of a good control system. In this system, an executive is
held responsible only for those activities for which he/she has been delegated a
responsibility.
Question.8.04. What are the six steps in designing accounting based performance
measures? 2008
Answer:
According to Fayol "Everything that goes to increase the importance of the subordinate's
role is called decentralisation."
Decentralisation in relation to office denotes disperse of office services and activities. The
necessity of decentralisation of office services occurs when official activities are performed
at functional departmental level. Thus, decentralisation in relation to office may include
departmentation of activities. When authority is dispersed, decentralisation is present.
The need for decentralisation is felt when the business grows in its size which necessiates
diversification of office activities. Decentralisation occurs at the time of decisions of
routine nature but if decisions are vital, the authority is not decentralised. The technological
development, political factors, availability of managers also affects the degree of
decentralisation. Decentralisation does not exist in its pure sense.
Due to the declining popularity of digital watches, Sweiz Company's digital watch line has
not reported a profit for several years. An income statement for last year follows :
Problem.2. BBA-2008
Y Company process an ore in department 1, from which come, three products L, W and
X. Product L is processed further in department 2. Product W is sold without further
processing. Product X is consider a by-product and is process further in department 3.
Costs in department 1 are Tk.8,00,000, department 2 costs are Tk. 1,00,000 and
department 3 costs are Tk. 50,000. Processing 6,00,000 pounds in department 1 is results
in 50,000 product L, 3,00,000.pounds of product W and 1,00,000 product of X. Product
L sells for Tk.,10 per pound. Product W sells for Tk. 2 per pound and product X sells for
Tk. 3 per pound.
Requirement:
(i) Compute unit coats per pound for products L, W and X treating X as a by-product.
Deduct the NRV (Net Realizable Value) of the by-product from the foint costa of
products L and W.
(ii) Compute unit costs per pound per products L, W and X treating all three as joint
products and by allocating costs by the NRV method.
Problem.3. BBA-2008
The Base Ball Division of Home Run Sports manufactures and sells baseballs. Budgeted
data for February, 2009 are
Problem.4. BBA-2009
Bovine Company, a wholesale distributor of DVDs, has been experiencing losses for
sometime, as shown by i t s most recent monthly income statement below:
Taka
Sales 15,00,000
Less : variable expenses 5,88,000
Contribution margin 9,12,000
Less : Fixed expenses Net operation loss 9,45,000
Net operation loss (33,000)
In an effort to isolate the problem, the president has asked for an income statement
segmented by geographic market. Accordingly, the Accounting Department has
developed the following data .
Geographic Market South Central North
Required :
(i) Prepare a contribution format income statement segmented by geographic market,
as desired by the president. Show both Amount and Percent columns lot the company as
a whole and for each geographic market.
(ii) The Company's sales manager believes that sales in t h e Central geographic market
could be increased by 15% if advertising were increased by Tk.25,000 each month.
Would you recommend the increased advertising? Show computations to support your
answer.
Solution
9.
Req (i) Contribution Formal
Income Slatement
Total South Central North
Particulors Amount Percnt Amount Percent Amount Percent Amount Percent
Sales 12,00,000 4,00,000 100 6,00,000 100 5,00,000 100
Less : Variable
expense
5,80,000 58 2,08,000 52 1,80,000 30 2,00,00 40
Contribution Margin
Less : Traseable fixed 9,20,000 62 1,92,000 48 4,20,000 70 3,00,000 60
cost
Problem.5.
BBA-2010
Royal Lawncare Company produces and sells two packaged products, Weedban and
Greengrow. Revenue and cost information relating to the products foilou :
Product
Weedban(TK.) Greengrow(Tk.)
Selling price per unit 6 7.50
Variable expenses per unit 2.40 5.25
Common fixed expenses in the company total Tk. 33,000 annually. Last year the
company produced and sold 15,000 units of Weedban and 28,000 units of
Greengrow
Required: Prepare a contribution format income statement segmented by product lines.
Show both Amount and Percent columns for the company as a whole and for each of
the products.
9. (a) Contribution format Income statement.
Particulars Total Weedban Greengrow
Amount Percent Amount Percent Amount Percent
Sales 3,00,000 100 90,000 100 2,10,000 100
Less: Variable 1,83,000 61 36,000 40 1,47,000 70
cost
Contribution 1,17,000 39 54,000 60 63,000 30
Margin
Less : Traceable 66,000 22 45,000 50 21,000 10
fixed cost
Segment Margin 51,000 17 9000 10 42,000 20
Less : 33,000 11
Commorfiyed cost
Not 18,000 6
King :
Weedbon bales = 15000 Unit 6 per Unit cost
= 90,000
Greengrow Sales = 28,000 7.50
= 2,10,000
Problem.6. BBA-2010
(b) Alaska Services Company of Bangladesh has two regional divisions with
headquarters in Dhaka and Chittagong. Selected data on the two divisions divisions
follows:
Divisions
Dhaka Chittagong
(TK.) (Tk.)
Sales 3,000,000 9,000,000
Required:
(i) For each division, compute the return on investment (ROI) in terms of margin and
turnover.
(ii) Assume that the company evaluates performance using residual income and that
the minimum required rate of return for any division is 15%. Compute the residual
income for each division.
(iii)Is Chittagong's greater -amount of residual income an indication that it is better
managed? Explain.
Solution
Division
Dhaka Chittagong
Taka Taka
Sales 4,000,000 7,000,000
Average operating assets 2,000,000 2,000,000
Net operating income 360,000 420,000
Property, Plant and Equipment (Net) 950,000 800,000
Required :
(i) Compute the rate of return for each division using the return on investment (ROI)
formula stated in terms of margin and turnover.
(ii) Which divisional manager seems to be doing the better job? Why?
Chapter 09
Answer:
Making correct decisions is one of the most important tasks of a successful manager. Every
decision involves a choice between at least two alternatives. The decision process may be
complicated by volumes of data, irrelevant data, incomplete information, an unlimited
array of alternatives, etc. The role of the managerial accountant in this process is often that
of a gatherer and summarizer of relevant information rather than the ultimate decision
maker.
The costs and benefits of the alternatives need to be compared and contrasted before
making a decision.
To identify which costs are relevant in a particular situation, take this three step
approach:
3. Compare the remaining costs and benefits that do differ between alternatives to
make the
proper decision
Question.9.02. How does opportunity cost enter into the make or buy
decision?(2009)
Answer:
Opportunity cost is the contribution to income that is forgone by not using a limited
resource in its next-best alternative use. Opportunity cost is included in decision making
because it represents the best alternative way in which an organization may have used its
resources had it not made the decision it did.
If the company makes the part internally, rather than buying it, then they have to use their
production facilities. The benefit that could be derived from the best use of that facility is
quality, thus the opportunity cost for buying would be losing quality.
Joint costs
Joint costs are those costs, which are common to the processing of joint-
products or by products up to the point of separation.
In other words, joint costs represent pre-separation cost of joint products or
by-products.
These are the costs of a single process that yields multiple products
simultaneously.
After the point of separation, the products can be separately identified and
post-separation costs can be readily attributed to individual products.
Split off point
This is the point at which the joint products become separately identifiable.
The costs incurred until this point cannot be identified to any particular product as
they are incurred for producing all the products.
The products arising at that split off point can either be sold at that point ( if there is
adequate market ) or they can either be further processed ( if no market is available
at split off point ).
The costs incurred beyond point are called separable costs.
After this point, the joint products or by-products gain individual identity.
This point has a special relevance in the discussion about joint products and by-
products, because the joint cost incurred before this points is to be apportioned
appropriately in the jointly produced multiple product-group i.e. to the joint
products or by products.
Answer:
Not necessarily. An apparent loss may be the result of allocated common costs or of sunk
costs that cannot be avoided if the product line is dropped. A product line should be
discontinued only if the contribution margin that will be lost as a result of dropping the line
is less than the fixed costs that would be avoided. Even in that situation the product line
may be retained if its presence promotes the sale of other products.
2. Costs Methods
The existence of a cost method provides opportunities to ascertain the cost of by-
products. It takes a closer look on the cost front and seeks to allocate joint cost to the by-
product realized incidentally in the process of producing the main product. The types of
the techniques available under cost method are following:
* Opportunity or replacement cost method
* Standard cost method
* Apportionment on suitable basis.
Question.9.09. Define opportunity cost and sunk costs with example?
(2011)
Answer:
Opportunity cost
Opportunity cost is the cost of a foregone alternative. If you chose one alternative over
another, then the cost of choosing that alternative is an opportunity cost. Opportunity cost
is the benefits you lose by choosing one alternative over another one. The opportunity cost
of choosing one investment over another one.
Sunk costs
Sunk costs are expenses which cannot be recovered once they have been incurred. An
example of sunk cost would be advertising expenses -- once a company pays for such an
expense, there is no way undo it.
Companies spend money each year for research and development as they work to come up
with new products and services to offer their customers, or as they try to refine existing
products and services. While the nature of research varies from business to business, it's
recognized as a sunk cost.
Problem.1. BBA-2008
Imperial jewelries is considering a special order for 20 handcrafted gold bracelets to be
given as gift of a wedding party. The normal selling price for the product is Tk.
189.95 and its unit product cost is Tk. 149.00 as shown below :
Taka
Direct materials 84.00
Direct labour 45.00
Manufacturing overheads 20.00
Unit product cost 149.00
Most of the manufacturing overhead is fixed and unaffected by variation in how much
jewelry is produced in any given period. However Tk.4.00 of the overhead is variable with
respect to the number of bracelet produced. The customer, who is interested in the special
order would like special filigree applied to the bracelets. This filigree would require
additional materials Costing 2.00 per bracelets and would also require acquisition of a
special tool costing Tk. 250.00 that would have no, other use once the special order is
completed. This order would have no effect on the company's regular sales and the
order could be fulfilled using the company's existing capacity without affecting any other
order.
Required :
(i)What effect would accepting this order have in the company's net operating income if a
special price of tk. 169.95 per bracelet is offered for this order?
(ii)Should this order be accepted at this price?
Solution
Only the incremental costs and benefits are relevant. In particular, only the variable
manufacturing overhead and the cost of the special tool are relevant overhead costs in this
situation. The other manufacturing overhead costs are fixed and are not affected by the
decision.
Problem.2. BBA-2009
Blueline Company manufacturers 30,000 units of part S-3 each year for use on its
production line. The cost per unit for part S-3 follows :
Taka
Direct materials 3.60
Direct labor 10.00
Variable manufacturing overhead 2.40
Fixed manufacturing overhead 9.00
Total cost per part 25.00
An outside supplier has offered to sell 30,000 units of part S-3 each year to Blucline
Company for Tk. 21 per part. If Blueline Company accepts this offer, the facilities now
being used to manufacture part S-3 could be rented to another company at an annual
rental of Tk. 80,000. However. Blueline Company has determined that Tk. 6 of the fixed
manufacturing overhead being applied to part S- 3 would continue even if part S-3
were purchased from the outside supplier.
Required:
Prepare computations to show the net amount of taka advantage or disadvantage of
accepting the outside supplier's offer.
Solution
30,000 Units
Particulars Make Buy
Per Amount Per 1amount
unit Unit
Cost of purchasing 21 6,30,000
Cost of making :
Direct Materials 3.60 1,08,000
Direct labor 10.00 3,00,000
Variable Manu. O.H 2.4 72,000
Fixed manufacturing. O.H 3.00 90,000
Total cost 19.00 5,70,000 21 6,30,000
The 80,000 rental value of the space being used to product part 5-6 represents an
opportunity cost of continuing to produce the part 5-6 represents an opportunity cost of
continuing to produce the part internally. The completed analysis
Make Buy
Total cost 5,70,000 6,30,000
Dentel value of the space (opportunity cost) 8,000
Total cost 65,000 63,000
Net Advantage in favour of buying 20,000
Problem.3. BBA-2009
Dorsey Company manufactures three products from a common input in a joint- processing
operation. Joint processing costs up to the split-off point total Tk. 3,50,000 per quarter.
The company allocates these costs to the joint products on the basis of their relative
sales value at the split-off point. Unit selling prices and total output at the split-off
point are as follows :
Solution
Incremental revenue per pound or gallon:
A B C
Selling price after further Processing 20 13 32
Less, Selling price at the split of point 16 8 25
4 5 7
A B C
Selling price of further prices 3,00,000 2,60,000 1,28,000
Selling price of spilt at pint 2,40,000 1,60,000 1,00,000
60,000 1,00,000 28,000
Less : Additional cost of further 63,000 80,000 36,000
Process
(3000) 20,000 (40,000)
Product B should be further process. Product A & C should be sold at the spilt off
point
Problem.4. BBA-2010
Delta Company manufactures 30,000 units of part S-5 each year for use on its
production line. At this level of activity, the cost per unit for part S-5 is as follow
:
Taka
Direct materials 3.60
An outside supplier has offered to sell 30,000 units of part S-6 each year Delta
Company for Fk. 21 per part. If Delta Company accepts this offer, the facilities now
being used to manufacture part S-6 could be rented to another company at an annual
rental of Tk. 80,000. However, Delta Company has determined hat Uvo-thirds of the
fixed manufacturing overhead being applied to part S-5 would continue e\en if part S-
5 were purchased from the outside supplier.
Required: Prepare computations showing how much profits will increase or decrease
if the outside supplier's offer is accepted.
Problem.5. BBA-2010
(b) Benoit Inc., produces several products from processing 1 ton of clypton, a rare mineral.
Material and processing costs total Tk. 60,000 per ton, one-fourth of which is
allocated to product X. Seven Thousand units of product X are produced from each
ton of clypton. The units can either be sold at the split-off point for Tk. 9 each, or
processed further at a total cost of Tk. 9,500 and then sold for Tk. 12 each.
Required: Should product X be processed further or sold at the split-off point?
Solution
Problem.5. BBA-2011
A company is contemplating the purchase of a new labor-saving machine that will cost Tk.
30,000 and have a 10-year useful life. Data concerning the company's annual sales and
costs with and without the new machine are shown below :
Current New
Machine Machine
Units produced and sold 5,000 5,000
Selling price per unit Tk. 40 Tk. 40
Direct materials cost per unit 14 14
Direct labour cost per unit 8 5
Variable overhead cost per unit 2 2
Fixed costs, other 62,000 62,000
Fixed costs, new machine ---- 3,000
Required :
(i) Use differential costs and benefits analysis to help the company determine
should the company buy the new machine.
(ii) In the above problem indicate which costs and benefits are irrelevant in your
decision making. 2
Problem.6. BBA-2012
Blueline Company manufactures 30,000 units of part S-3 each year for use on its
production line. The cost per unit for part S-3 follows :
Direct materials Tk.3.60
Direct labor 10.00
Variable manufacturing overhead 2.40
Fixed manufacturing overhead 9.00
Total cost per part Tk. 25.00
An outside supplier has offered to sell 30,000 units of part S-3 each year to Blueline
Company for Tk. 21 per part. If Blueline Company accepts this offer, the facilities now
being used to manufacture part S-3 could be rented to another company at an annual rental
of Tk. 80,000. However, Buleline Company has determined that Tk. 6 of the fixed
manufacturing overhead being applied to part S-3 would continue even if part S-3 were
purchased from the outside supplier.
Required:
Prepare computations to show the net amount of Taka advantage or disadvantage of
accepting the outside supplier's offer.
The costs that are relevant in a make or buy decision are those costs that can be avoided
as a result of purchasing from the outside. The analysis for this exercise is:
Group B
7. (a) What is break even chart? 2
(b) The information relating to two levels of output of a product is given below : -
8. The maintenance cost and patient days for the first seven months of X hospital are as
follows:-
September October
Taka Taka
Cash Sales 80,000 1,20,000
Credit Sales 1,45,000 1,90,000
Cash Purchases 40,000 40,000
Credit Purchase 2,00,000 1,60,000
Purchase discount 10,000 5,000
Accounts payable beginning 20,000 25,000
Accounts payable ending 25,000 20,000
Cash operating expenses 55,000 20,000
Net sales on credit are collected 50% in the month of sale, 40% in the following month and
10% in the second following month. Such sales in July and August were Tk.
2,00,000 and Tk. 2,40,000 respectively. The estimated cash balance in September
is Tk. 25,000.
Prepare a Cash budget for September and October.
12. (a) What are the essentials of a sound budgeting system? 3
(b) Star Ltd. Manufactures two products A and B. An estimate of the number of
units to be sold in the 1st seven months of 2007 is given below :
Product January February March April May June July
A 1,600 2,000 2,400 3,200 3,600 3,600 3,200
B 4,400 3,000 3,600 2,800 2,400 2,400 2,800
It is anticipated that :
(i) There will be no work-in-process at the end of any month.
(ii) Finished Units equal to 30% of anticipated sales for the next month will be in
stock at the end of each month including December, 2006.
You are required to prepare a Production Budget for the six month period from
January to July 2007.
13. (a) What do you mean by budget and budgetary control? 4
(b) Mention some of the major benefits of budgeting. 3
(c) Write the assumptions of CPV analysis. 3
8. Essex private limited company has developed the following statement for the first two
years of their operation. They sold the same number of unit each year but the profit is
more than double in the second year of their operation. The CEO was quite confused about
their operating results.
Year 1 Year 2
Taka Taka
Sales (20000 units each year) 7,00,000 7,00,000
Less : Cost of goods sold 4,60,000 4,00,000
Gross margin 240,000 300,000
Less: Selling and administrative expenses 200,000 200,000
Net operating income 40,000 1,00,000
The information related to the production of the company for these years was as
follows :
Year 2 Year 2
Actual production in units 20,000 25,000
Standard production, per year 20,000 20,000
Variable manufacturing cost per. unit of production Tk.8 Tk.8
Variable selling and administration cost per unit Tk. 1 Tk. 1
Fixed manufacturing overhead costs -(total) 3,00,000 3,00,000
Required : 3+4+1.5+1.5-10
(a) Compute the standard unit product cost for each year under absorption costing
and variable costing.
(b) Prepare a variable costing income statement for each year.
(c) Reconcile the - variable. costing and absorption net operating income
figures for year 2
(d) Explain to the CEO why, under absorption costing, the net operating income for
year 2 was higher than the net operating, income of. year 1, though the same
number of units was sold in each year.
9. Rock Inc. distributed a high quality wooden bird house that sells for Tk. 20 per unit
Variable costs are Tk. 8 per unit and the fixed cost for the year is Tk. 1,80,000.
Required:
(a) What is the product's CM ratio?
(b) Break-even point in sales in taka and in unit.
(c) Due to an Increase in demand, the company estimates that sales will increase by
Tk. 75,000,during the next year. How much will the operating income increase (or
net loss decrease) assuming that no change in fixed cost occurred.
(d) What is the amount of sales required to earn a profit of Tk. 24,000.
(c) Calculate the margin of safety at a profit of Tk. 30,000.
10. Tanis kids fashion is ready to begin its third quarter, in which Peak sales occur. The
company has their. highest cash requirement in this quarter and they has got an
option of borrowing from bank in the multiple of Tk. 10,000 with and interest of
10%. They generally borrow at the beginning of the month and repay at the end.
The following data have been assembled to find their cash need for the upcoming
months :
* On July 1 the company have a cash balance of Tk. 44,500.
* Actual sales for the last two months and budgeted sales (all sales are on account) are as
follows :
Taka.
May (actual), 2,50,000
June (actual), 3,00,000
July (budgeted), 4,00,000
August (budgeted), 6,00,000
September (budgeted), 3,20,000
Past experience- shows that the sales are collected in the following pattern:
25%.of sales are collected in the month of sales
75%'of sales are collected in the month following sales
* B ud geted mer ch and ise pu rchase and o th er exp en ditu re are g iv en b elow
:
July August September
Taka Taka Taka
Merchandise purchases 2,40,00 3,50,000 1,75,000
0
Salaries and Wages 45,000 50,000 40,000
Most of the manufacturing overhead is fixed and unaffected by variation in how much
jewelry is produced in any given period. However Tk.4.00 of the overhead is variable with
respect to the number of bracelet produced. The customer, who is interested in the special
order would like special filigree applied to the bracelets. This filigree would require
additional materials Costing. 2.00 per bracelets and would also require acquisition of a
special tool costing Tk. 250.00 that would have no, other use once the special order is
completed. This order would have no effect on the company's regular sales and the order
could be fulfilled using the company's existing capacity without affecting any other order.
Required :
(i) What effect would accepting this order have in the company's net operating
income if a special price of tk. 169.95 per bracelet is offered for this order?
(ii) Should this order be accepted at this price?
(b)Due to the declining popularity of digital watches, Sweiz Company's digital watch line
has not reported a profit for several years. An income statement for last year follows :
Segment Income StatementDigital Watches
Taka. Taka.
Sales 500,000
Less : Variable expenses :
Variable manufacturing costs 120,000
Variable shipping costs 5,000
Commissions 75,000 200,000
Contribution margin 300,000
Less : Fixed expenses :
General factory overhead* 60,000
Salary of produce line manager. 90,000
Depreciation of equipment** 50,000
Product line advertising 100,000
Rentfactory space*** 70,000
General administrative expense* 30,000 400,000
Net operating loss (100,000)
* Allocated common cost that would be redistributed to other product lines if digital
watches were dropped.
* This equipment has. no resale value and does not wear out through use.
*** The digital watches are manufactured in their own facility.
Required : 5
What do you think; the company should retain or drop the digital watch line? (support
your answer with necessary calculation
12. (a) Distinguish between join product and by-product.
(b) Describe two methods to account for by-product.
(c) Company process an ore in department 1, from which come, three products L, W
and X. Product L is processed further in department 2. Product W is sold without
further processing. Product X is consider a by-product and is process further in
department 3. Costs in department 1 are Tk. 8,00,000, department 2 costs are Tk.
1,00,000 and department 3 costs are Tk. 50,000. Processing 6,00,000 pounds in
department 1 is results in 50,000 product L, 3,00,000.pounds of product W and
1,00,000 product of X. Product L sells for Tk.,10 per pound. Product W sells for Tk.
2 per pound and product X sells for Tk. 3 per pound.
Requirement:
(i) Compute unit coats per pound for products L, W and X treating X as a by-product.
Deduct the NRV (Net Realizable Value) of the by-product from the foint costa of
products L and W.
(ii) Compute unit costs per pound per products L, W and X treating all three as joint
products and by allocating costs by the NRV method.
13. (a) What are the six steps in designing accounting-based performance measures?
(b) The Base Ball Division of Home Run Sports manufactures and sells baseballs.
Budgeted data for February, 2009 are
Required :
(i) Calculate the annual break-even sales in taka and in units 2
(ii) How many units must be sold to earn a Tk. 9,000 target profit for the year? 2
(iii)XYZ Co. now has one full-time and one part-time salesperson working in the store.
It will cost an additional Tk. 8,000 per year to convert the part-time position to a
full-time position. This change would bring in an additional Tk. 20,000 in sales
each year. Should the company convert the position? Use the incremental approach.
(iv) Refer to the original data, actual operating results for the first year are as follow :
Taka
Sales 1,25,000
Less : Variable expenses 50,000
Contribution Margin 75,000
Less : Fixed expenses 60,000
Net operating income 15,000
In an effort to isolate the problem, the president has asked toi an income statement
segmented by geographic market. Accordingly, the Accounting Department has
developed the following data .
Geographic Market South Central North
Required :
(i) Prepare a contribution format income statement segmented by geographic
market, as desired by the president. Show both Amount and Percent columns for
the company as a whole and for- each geographic market.
(ii) The Company's sales manager believes that sales in t h e Central geographic market
could be increased by 15% if advertising were increased by Tk.25,000 each
month. Would you recommend the increased advertising? Show computations to
support your answer.
10. (a) Blueline Company manufacturers 30,000 units of part S-3 each year for use on its
production line. The cost per unit for part S-3 follows :
Taka
Direct materials 3.60
Direct labor 10.00
Variable manufacturing overhead 2.40
Fixed manufacturing overhead 9.00
Total cost per part 25.00
An outside supplier has offered to sell 30,000 units of part S-3 each year to Blucline
Company for Tk. 21 per part. If Blueline Company accepts this offer, the
facilities now being used to manufacture part S-3 could be rented to another
company at an annual rental of Tk. 80,000. However. Blueline Company has
determined that Tk. 6 of the fixed manufacturing overhead being applied to part S-
3 would continue even if part S-3 were purchased from the outside supplier.
Required :
Prepare computations to show the net amount of taka advantage or disadvantage of
accepting the outside supplier's offer. 5
(b) Dorsey Company manufactures three products from a common input in a joint-
processing operation. Joint processing costs up to the split-off point total Tk. 3,50,000
per quarter. The company allocates these costs to the joint products on the basis of
their relative sales value at the split-off point. Unit selling prices and total output at
the split-off point are as follows :
Far North Telecom regards till of its workers as full time employees and the
company has a long standing no layoff policy. Furthermore, production is
highly automated. Accordingly the company includes its labor costs in its fixed
manufacturing overhead. The cellular phones sell for Tk. 150 each. During
September, the first month of operation, the following activity was recorded :
Units sold 10,000
Units produced 12,000
Required .
(i) Compute the unit product cost under 2
(a) Absorption costing;
(b) Variable costing.
(ii) Prepare income statement for September using standard Absorption costing. 3
(iii)Prepare income statement for September using Variable costing. 3
(iv)Reconcile the operating income under adsorption costing with operating income
under variable costing.
12. (a)State the main features of flexible budget. 2
(b) Prepare a flexible budget from the following data made available in respect of
a half-yearly period and forecast the working result at 70%, 85% and 100% of
capacity when sales are Tk. 50 lacs, Tk. 60 lacs and Tk. 85 lacs respectively, while
fixed expenses remain constant, semi-variable expenses are constant between 55%
and 75% of capacity increasing by 10% between 75% and 90% of capacity and by 20%
between 90% and 100%; of capacity. The expenses at 60% capacity are as
follows : 8
(Taka in lacs)
Semi-variable :
Maintenance and repair 1.25
Indirect labour 5.00
Sales expenses 1.50
Sundry overheads 1.52
Variable :
Materials 12.00
Labour 13.00
Other expenses 2.00
Fixed expenses :
Wages and salaries 4.20
Rent and taxes 2.80
Depreciation 3.50
Sundry overheads 4.50
51.00
13. (a) St. Paul's Hospital contains 450 beds. The average occupancy rate is 80% per
month. In other words, on average. 80r:V of the hospital's beds are occupied by
patients. At this level of occupancy, the hospital's operating costs are Tk. 32 per
occupied bed per day. assuming a 30-day month. This Tk. 32 figure contains both
variable and fixed cost elements.
During June, the hospital's occupancy rate was only 60%. A total of Tk.
3,26,700 in operating cost was incurred during the month.
Required :
(i) Using the high-low method, estimate :
(a) The variable cost per occupied bed on a daily basis. 2
(b) The total fixed operating costs per month. 2
(ii) Assume an occupancy rate of 70fr per month. What amount of total operating
cost would you expect the hospital to incur? 2
(b) The following data relating to units shipped and total shipping expense have been
assembled by Arche Company, a wholesaler of large, custom-built air-conditioning units
tor commercial buildings :
Month Units Shipped Total Shipping Expense
(Taka)
January 3 1,800
February 6 2,300
March 4 1,700
April 5 2,000
May 7 2,300
June 8 2,700
July 2 1,200
Required :
( i ) Using the least-squares regression method, estimate the variable and fixed
elements of shipping expense. 3
( ii ) Express the cost data in ru above in the form Y = a bX. 1
(b) "Contribution margin is the excess of sales over fixed costs." Do you agree?
Explain. 3
3. (a) "If a product line is generating a loss, then it should be discontinued." Do you
agree? Explain. 3
(b) Are variable costs always relevant costs? Explain. 3
3
4. (a) Why is budgeted performance better than past performance as a basis for judging
actual results?
(b) Differentiate between a sales forecast and a sales budget. 3
5. Ho\v will you classify costs according to managerial decision making?
(b) State the methods of segregating mixed costs.
3
6. When and why profits will be higher in case of absorption costing and variable
costing? 6
7. (a) What is responsibility accounting? 3
(b) Why is it necessary to prepare income statement in a segmented form? 3
9. (a) Royal Lawncare Company produces and sells two packaged products, Weedban
and Greengrow. Revenue and cost information relating to the products following :
Product
Weedban(TK.) Greengrow(Tk.)
Selling price per unit 6 7.50
Variable expenses per unit 2.40 5.25
Common fixed expenses in the company total Tk. 33,000 annually. Last year the
company produced and sold 15,000 units of Weedban and 28,000 units of
Greengrow
Required: Prepare a contribution format income statement segmented by product lines.
Show both Amount and Percent columns for the company as a whole and for each of
the products.
(b) Services Company of Bangladesh has two regional divisions with headquarters in
Dhaka and Chittagong. Selected data on the two divisions divisions follows:
Divisions
Dhaka Chittagong
(TK.) (Tk.)
Sales 3,000,000 9,000,000
Required:
(i) For each division, compute the return on investment (ROI) in terms of margin and
turnover. 2
(ii) Assume that the company evaluates performance using residual income and that
the minimum required rate of return for any division is 15%. Compute the residual
income for each division. 2
(iii)Is Chittagong's greater -amount of residual income an indication that it is better
managed? Explain. 2
10. (a) Delta Company manufactures 30,000 units of part S-5 each year for use on
its production line. At this level of activity, the cost per unit for part S-5 is
as follow :
Taka
Direct materials 3.60
An outside supplier has offered to sell 30,000 units of part S-6 each year Delta
Company for Tk. 21 per part. If Delta Company accepts this offer, the facilities now
being used to manufacture part S-6 could be rented to another company at an annual
rental of Tk. 80,000. However, Delta Company has determined hat Uvo-thirds of the
fixed manufacturing overhead being applied to part S-5 would continue e\en if part S-
5 were purchased from the outside supplier.
Required: Prepare computations showing how much profits will increase or decrease
if the outside supplier's offer is accepted.
(b) Benoit Inc., produces several products from processing 1 ton of clypton, a rare
mineral. Material and processing costs total Tk. 60,000 per ton, one-fourth of which
is allocated to product X. Seven Thousand units of product X are produced from
each ton of clypton. The units can either be sold at the split-off point for Tk. 9 each,
or processed further at a total cost of Tk. 9,500 and then sold for Tk. 12 each.
Required: Should product X be processed further or sold at the split-off point?
Taka
Cash 9,000
Accounts receivable 54,000
Inventory 30,000
Buildings and equipment, net of depreciation 207,000
Total assets 300,000
Liabilities and Stockholders' Equity
Accounts payable 63,000
Notes payable 14,500
Capital stock, no par 180,000
Retained earnings 42,500
Total liabilities and stockholders' equity 3,00,000
The company is in the process of preparing budget data for May. A number of
budget items have already been prepared, as stated below :
(c) Sales are budgeted at Tk. 200,000 for May. Of these sales, Tk. 60,000 will be for cash;
the remainder will be- credit sales. One-half of a month's credit sales are collected in
the month the sales are made, and the remainder is collected in the following month.
All of the April 30 accounts receivable will be collected in May.
(d) Purchases of inventory are expected to total Tk. 120,000 during May. These purchases
will all be on account. Forty percent of all purchases are paid for in the month of
purchase; the remainder are paid in the following month. All of the April 30 accounts
payable to suppliers will be paid during May.
e) The May 31 inventory balance is budgeted at Tk. 40.000.
f) Operating expenses for May are budgeted at Tk. 72.000, exclusive of depreciation.
These expenses will be paid in cash. Depreciation is budgeted at Tk. 2,000 for the
month.
(e) The note payable on the April 30 balance .sheet will be paid during May. with Tk. 100
in interest. (All of the interest relates to May)
(f) New refrigerating equipment costing Tk. 6.500 will be purchased for cash during May.
(g) During May. the company will borrow Tk. 20.000 from its bank by giving a new note
payable to the bank for that amount. The new note payable be due in one year.
Required :
(i) Prepare a cash budget for May. Support your budget with a schedule of expected cash
collections from sales and a schedule of expected cash disbursements for merchandise
purchases.
(ii) Prepare a budgeted income statement for May. Use the absorption costing income
statement.
(iii) Prepare a budgeted balance sheet as of May 31
12. (a) Why do you analyze break-even-point?
(b) The following data are obtained from the records of a factory :
Taka Taka
Sales, 8000 units @ Tk 25 each 2,00,000
Direct material consumed 80,000
Variable overhead Labour 25,000
Labour 35,000
Fixed overhead 36,000 1,76,000
Net profits 24,000
Required :
(i) Calculate break-even-point in units and Taka.
(ii) The sales needed to earn a profit of Tk. 54,000
(iii) If selling price is reduced by 20%, calculate break-even point in Taka and units
(iv)To find out selling price if the break-even-point is 2000 units.
13. Computer Desh incorporation makes an oak desk specially designed for personal
computers. The desk sells for Tk. 200 each. Data for last years operation follow
:-
Units in beginning inventory 00
Units produced 10.00
Units sold 8.000
Unit in ending inventory 2.000
Variable costs per unit : Taka
Direct labour 60
Direct labour 30
Variable manufacturing overhead 10
Variable selling and administrative overhead 20
Total variable cost pre unit 120
Fixed costs :
Fixed manufacturing overhead 3,00,000
Fixed selling and administrative overhead 4,50,000
Total variable 7,50,000
Required :
(ii) Prepare an income statement using variable costing.
(ii) Prepare an income statement using absorption costing. 4
(iii) Prepare a reconciliation statement.
Division
Dhaka Chittagong
Taka Taka
Sales 4,000,000 7,000,000
Average operating assets 2,000,000 2,000,000
Net operating income 360,000 420,000
Property, Plant and Equipment (Net) 950,000 800,000
Required :
(i) Compute the rate of return for each division using the return on investment (ROI)
formula stated in terms of margin and turnover.
(ii) Which divisional manager seems to be doing the better job? Why?
10. CompuDesk,. Inc., makes an oak desk specially designed for personal computers. The
desk sells for Tk. 200. Data for last year's operations follow :
Units in beginning inventory 0
Units produced 10,000
Units sold 9,000
Units in ending inventory 1,000
Variable costs pr unit:
Taka
Direct materials 60
Direct Labour 30
Variable manufacturing overhead 10
Variable selling overhead 20
Total variable cost per unit 120
Fixed costs : Taka
Fixed manufacturing overhead 300,000
Fixed selling and administrative overhead 450,000
Total fixed costs 750,000
Required :
(i) Compute the unit product costs under variable costing and absorption costing. 3
(ii) Assume that the Co. uses variable costing. Prepare an income statement using
contribution format. 5
(iii) hat is the Go's break-even point in terms of units sold and mount in Taka?
2
11. Mr. X, President of XYZ Co. Ltd. has just approached the Co's bank with a request for
a Tk. 30,000, 90 day loan. The loan officer has asked for a cash budget to help determine
whether the loan should be made. The following data are available for the month
AprilJune, during which the loan will be used :
(a) On April 01, the start of the loan period, the cash balance will be Tk. 26,000. Accounts
Receivable on April 01 will total Tk. 151,500, of which Tk. 141,000 will, be
collected during April and Tk. 7,200 will be collected during May. The remainder
will be uncollectible.
(b) Past experiences shows that 20% of a month's sales are collected in the month of
sale, 75% in the following sale, and 4% in the second month following sale. The other
1% represts bad.
Budgeted sales and expenses for the period follow :
April May June
Taka Taka Taka
Sales 200,000 300,000 250,000
Merchandise purchase 120,000 180,000 150,000
Payroll 9,000 9,000 8,000
Lease payments 15,000 15,000 15,000
Advertising 70,000 80,000 60,000
Equipment purchase 8,000 - -
Depreciation 10,000 10,000 10,000
(c) Merchandise purchases are paid in full during the month following purchase.
Accounts payable for merchandise purchase on March 31, which will be paid during
April, total Tk. 108,000.
(d) In preparing the cash budget, assume that the Tk. 30,000 loan will be made in April
and repaid in June. Interest on the loan will total Tk. 1,200.
Required :
(i) Prepare a schedule of expected cash collections for April, May and June and the
three months in total.
(ii) Prepare a cash budget, by month and in total for the three-month period.
12. Minto Company manufactures and sells a single product. The company's sales and
expenses for last quarter follow :
Total Per unit
(Taka)
Sales 450,000 30
Less : Variable expense 180,000 12
Contribution margin 270,000 18
Less : Fixed expenses Net income 216,000
Net income 54,000
Required :
(a) What is the quarterly break-even point in units sold and in sales dollars?
(b) What is the total contribution margin at the break-even point?
(c) How many units would have to be sold each quarter to earn a target profit of Tk.
100,000? Use the unit contribution method. Verify your answer by preparing a
contribution income statement at the target level of sales.
(d) Compute the company's margin of safety in both dollar and percentage terms.
(e) What is the company's CM ratio? If sales increase by Tk. 40,000 per quarter and
there is no change in fixed expenses, by how much would you expect quarterly net
income to increase?
13. (a) Define the following terms :
(i) Incremental cost;
(ii) Margin of safety;
(iii) Return on Investment (ROI).
(b) A company is contemplating the purchase of a new labor-saving machine that will cost
Tk. 30,000 and have a 10-year useful life. Data concerning the company's annual sales
and costs with and without the new machine are shown below :
Current New
Machine Machine
Units produced and sold 5,000 5,000
Selling price per unit Tk. 40 Tk. 40
Direct materials cost per unit 14 14
Direct labour cost per unit 8 5
Variable overhead cost per unit^ 2 2
Fixed costs, other 62,000 62,000
Fixed costs, new machine ---- 3,000
Required :
(i) Use differential costs and benefits analysis to help the company determine
should the company buy the new machine.
(ii) In the above problem indicate which costs and benefits are irrelevant in your
decision making. 2
Marks
1.What are the major differences between financial accounting and 6
managerial accounting?
2.(a) "A variable cost is a cost that varies per unit of product, 3
whereas a fixed cost is constant per unit of product." Do you agree? Explain.
(b) Why regression analysis is usually preferred to the high-low 3
method of allocation of mixed costs?
3.(a) How we can measure the performance 'of a cost center, a profit 3
center and an investment center?
(b) Why aren't common costs allocated to segments under the 3
contribution approach? .
4.(a) Briefly describe the concept of zero based budgeting. 3
(b)Distinguish between forecasting and budgets. 3
5.(a) When and why profits will be higher in case of absorption 3
costing and variable costing?
(b) Explain the significance of margin of safety. 3
6.(a) Juaria corporation has a single product whose selling price is $120 and whose
variable expenses is $80 per unit. The company's monthly fixed expenses is $ 50000.
Using the equation method solve for the unit sales that are required to earn a target
profit of $ 10000.
(b) What is responsibility accounting? 2
7.(a) "If a product line is generating a loss, then it should be discontinued." Do you
agree? Explain.
(b) What do you mean by CVP? Describe the uses of CVP analysis. 3
Part BBroad Questions
(Answer any four questions)
Marks10x4=40
XYZ Company manufactures and sells a single product. Cost data for the product are
given below :
,
Variable cost per unit: Taka
Direct materials 7
Direct labor 10
Variable manufacturing overhead 5
Variable selling and administrative 3
Fixed costs per month :
Fixed manufacturing overhead 315,000
Fixed selling and administrative 245,000
Total fixed cost per month 560,000
The product sells for Tk. 60 per unit. Production and sales data for July and August, the
first two months of operations, follows :
Units produced Units sold
July 17,500 15,000
August 17,500 20,000
The company's accounting department has prepared absorption costing income
statements for July and August as presented below :
July August
Sales 900,000 1,200,000
Less : Cost of goods sold :
Beginning Inventory 0 100,000
Add : Cost of goods manufactured 700,000 700,000
Cost of goods available for sales 700,000 800,000
Less : Ending inventory 100,000 0
Cost of goods sold 600,000 800,000
Gross Margin 300,000 400,000
Less : Selling and Administrative 290,000 305,000
expenses
Net operating income 10,000 95,000
Marks
Required :
(i) Determine the unit product cost under absorption costing and
2
variable costing.
(ii) Prepare variable costing income statement for July and 4
August using the contribution approach.
(iii) Reconcile the variable costing and absorption costing net 2
operating income figures.
(iv) The BEP according to the company's present information is 16,000 units per month,
computed as follows :
Fixed cos t per month,Tk.5,60,000 16,000units
Marks
(a) Compute the company's margin of safety in both dollar and 1
percentage terms.
(b) Compute the degree of operating leverage at the current level 1
of sales.
(c) The president expects sales to increase by 20% next year. By 1
what percentage should net operating income increase?
(vi) Assume that the company sold 18,000 units last year. The sales manager is 3
convinced that a 10% reduction in the selling price, combined with a Tk. 30,000 increase
in advertising, would cause annual sales in units to increase by one-third. Prepare two
contribution income statements, one showing the results of last year's operations and one
showing the results of operations if these changes are made. Would you recommend, that
the company do as the sales manager suggests?
10. (a) Hoi Chong Transport Ltd. operates a fleet of delivery trucks in Singapore. The
company has determined that if a truck is driven 105,000 kilometers during a year, the
average operating cost is Tk. 11.40 per kilometer. If a truck is driven only 70,000
kilometers during a year, the average operating cost increases to Tk. 13.4 per kilometer.
Required :
(i) Using the high low method, estimate the variable and 2
fixed cost elements of the annual cost of truck operation.
(ii) Express the variable and fixed costs in the form 1
Y = a + bX.
(iii) If a truck were driven 80,000 kilometers during a year, 2
what total cost would you expect to be incurred?
(b) The following data relating to units shipped and total shipping expenses have been
assembled by Molina Company, a wholesaler of large, custom-built air-conditioning units
for commercial buildings :
Month Units Shipped Total Shipping Expenses
January 3 Tk. 1,800
February 6 2,300
March 4 1,700
April 5 2,000
May 7 2,300
June 8 2,700
July 2 1,200
Required :
Using the least-squares regression method, estimate a cost formula for shipping
expense. 5
Marks
11.(a) How does opportunity cost enter into the make or buy decision? 2
(b) Blueline Company manufactures 30,000 units of part S-3 each year for use on its
production line. The cost per unit for part S-3 follows :
Direct materials Tk.3.60
Direct labor 10.00
Variable manufacturing overhead 2.40
Fixed manufacturing overhead 9.00
Total cost per part Tk. 25.00
An outside supplier has offered to sell 30,000 units of part S-3 each year to Blueline
Company for Tk. 21 per part. If Bluelme Company accepts this offer, the facilities now
being used to manufacture part S-3 could be rented to another company at an annual
rental of Tk. 80,000. However, Buleline Company has determined that Tk. 6 of the fixed
manufacturing overhead being applied to part S-3 would continue even if part S-3 were
purchased from the outside supplier.
Required:
Prepare computations to show the net amount of Taka advantage 8
or disadvantage of accepting the outside supplier's offer.
12.Telecom Ltd. has organized a new division to manufacture and sell cellular phone.
The division's monthly cost are shown below :
Manufacturing costs :
Variable costs per unit:
Direct material $48
Variable manufacturing overhead $2
Fixed manufacturing overhead costs (total) $360,000
Selling and administrative costs : .
Variable 12% of sales
Fixed (total) $470,000
The cellular phones sell for $150 each, During September, the first month of operations
the following activity was recorded:-
Units produced 12,000
Units sold 10,000
Required :
(i) Compute the unit product cost under : 3
(a) Absorption costing.
(b) Variable costing.
(ii) Prepare an absorption costing income statement for September. 7
13.You have been asked to prepare a December cash budget for Hassan Company, a
distributor of exercise equipment. The following information is available about the
company's operations:
(a)The cash balance on December 1 is $40,000.
(b)Actual sales for October and November and expected sales for December are as
follows :
October November December
Cash sales $65,000 $70,000 $83,000
Sales on discount $400,000 $525,000 $600,000
Sales on account are collected over a three month period as follows :
20% collected in the month of sale, 60% collected in the month following sale and 18%
collected in the second month following sale. The remaining 2% is uncollectible.
(c)Purchases of inventory will total $280,000 for December. 30% of a month's inventory
purchases are paid during the month of purchase. The accounts payable remaining from
November's inventory purchases total $161,000, all of which will be paid in December.
(d)Selling and administrative expenses are budgeted at $430,000 for December. Of this
amount $ 50,000 is for depreciation.
(e)Marketing costing $76,000 will be purchased for cash during December and dividends
totaling $9,000 will be paid during the month.
The company maintains a minimum cash balance of $20,000.
Required:
(i)Prepare a schedule of expected cash collection for December. 2
(ii) Prepare a schedule of expected cash disbursement for purchase for December. 2
(iii) Prepare a cash budget for December. 6
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