7955final_costmgt_nov05.pdf - PAPER \u2013 5 COST MANAGEMENT Question No 1 is compulsory Answer any four questions from the rest Working notes should form

7955final_costmgt_nov05.pdf - PAPER – 5 COST MANAGEMENT...

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PAPER – 5 : COST MANAGEMENT Question No. 1 is compulsory. Answer any four questions from the rest.. Working notes should form part of the answer. Wherever appropriate, suitable assumptions should be made. Question 1 (a) Briefly describe the different methods of Transfer Pricing. (b) How Pareto analysis is helpful in pricing of product in the case of firm dealing with multi- products? (c) Kitchen King company makes a high-end kitchen range hood ‘Maharaja’. The company presents the data for the year 2003 and 2004: 2003 2004 1. Units or maharaja produced and sold 40,000 42,000 2. Selling Price per unit in Rs. 1,000 1,100 3. Total Direct Material (Square feet) 1,20,000 1,23,000 4. Direct material cost per square feet in Rs. 100 110 5. Manufacturing Capacity (in units) 50,000 50,000 6. Total Conversion cost in Rs. 1,00,00,000 1,10,00,000 7. Conversion cost per unit of capacity (6)/(5) 200 220 8. Selling and customer service capacity 300 customer 290 customer 9. Total selling and customer service cost in Rs. 72,00,000 72,50,000 10. Cost per customer of selling and customer service capacity (9)/(8) 24,000 25,000 Kitchen King produces no defective units, but it reduces direct material used per unit in 2004. Conversion cost in each year depends on production capacity defined in terms of Maharaja units that can be produced. Selling and Customer service cost depends on the number of customers that the selling and service functions are designed to support. Kitchen King has 230 customers in 2003 and 250 customers in 2004. You are required 1. Describe briefly key elements that would include in Kitchen King’s Balance Score Card. 2. Calculate the Growth, Price-recovery and productivity component that explain the change in operating income from 2003 to 2004. (3+3+18 = 24 Marks)
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PAPER – 5 : COST MANAGEMENT 4 Answer (a) The methods of pricing usually employed in industry when goods or services are transferred from one unit to the other can be broadly classified under the following three categories: (i) Pricing at cost or variants of cost e.g. manufacturing cost; standard cost; full cost and full cost plus mark up. (ii) Pricing at market price. (iii) Pricing at bargained or negotiated price. (b) In the case of firm dealing with multi products, it would not be possible for it to analyse price-volume relationship for all of them. Pareto Analysis is used for analysing the firm’s estimated sales revenue from various products and it might indicate that approximately 80% of its total sales revenue is earned from about 20% of its products. Such analysis helps the top management to delegate the pricing decision for approximately 80% of its product to the lower level of management, thus freeing them to concentrate on the pricing decisions for products approximately 20% of which is essential for the company’s survival. Thus, a firm can adopt more sophisticated pricing methods for small proportion of products that jointly account for 80% of total sales revenue. For the remaining 80% products, which account for 20% of the total sales value the firm may use cost based pricing method.
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  • Spring '18
  • Rajit

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