45_7994final_costmanagement_gr2.pdf - PAPER \u2013 5 COST MANAGEMENT Question No 1 is compulsory Answer any four questions from the rest Question 1(a What

45_7994final_costmanagement_gr2.pdf - PAPER – 5 COST...

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PAPER – 5 : COST MANAGEMENT Question No. 1 is compulsory. Answer any four questions from the rest. Question 1 (a) What do you mean by ‘Back flushing’ in JIT system ? Explain briefly the problems with back flushing that must be corrected before it will work properly. (4 marks) (b) Explain Skimming pricing strategy. (4 marks) (c) Panchwati Cement Ltd. produces ‘43 grade’ cement for which the company has an assured market. The output for 2004 has been budgeted at 1,80,000 units at 90% capacity utilisation. The cost sheet based on output (per unit) is as follows: Rs. Selling price 130 Direct material 30 Component ‘EH’ 9.40 Direct wages @ Rs. 7 per hour 28 Factory overhead (50% fixed)` 24 Selling and distribution overheads (75% variable) 16 Administrative overhead (fixed) 5 The factory overheads are applied on the basis of direct labour hours. To utilise the idle capacity and to improve the profitability of the company, the following proposals were put up before the Board of Directors for consideration: (i) An order has been received from abroad for 500 units of product ’53 grade’ cement per month at Rs. 175 per unit. The cost data are: Direct material Rs. 56 per unit, direct labour 10 hours per unit, selling and distribution overhead applicable to this product order is Rs. 14 per unit and variable factory overhead are chargeable on the basis of direct labour hours. (ii) The company at present manufactures component ‘EH’, one unit of which is required for each unit of product ‘43 grade’. The cost details for 15,000 units of component ‘EH’ are as follows: Rs. Direct materials 30,000 Direct labour 52,500 Variable overheads 25,500 Fixed overheads 33,000 Total 1,41,000
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FINAL EXAMINATION : NOVEMBER, 2004 4 The component ‘EH’ however is available for purchase at the market at Rs. 7.90 per unit. (iii) In the event of company deciding to purchase the component ‘EH’ from market, the company has two alternatives for the use of the capacity so released, which are as under: (a) Rent out the released capacity at Re. 1 per hour. (b) Manufacture component ‘GYP’ which can be sold at Rs. 8 per unit. The cost data of this component for 15,000 units are: Rs. Direct materials 42,000 Direct labour 31,500 Factory variable overheads 13,500 Other variable overheads 25,500 Total 1,12,500 Required: (i) Prepare a statement showing profitability of the company envisaged in the budget. (ii) Evaluate the export order and state whether it is acceptable or not. (iii) Make an appraisal of proposal to manufacture component ‘EH’ and state whether the component ‘EH’ should be manufactured in the factory or purchased from the market. Assume that no alternative use of spare capacity is available. (iv) Evaluate the alternative use of the spare capacity and state whether to manufacture or buy the component ‘EH’ and if your decision is to buy the component ‘EH’, which of the two alternatives for the use of spare capacity will you prefer ? (16 marks) Answer (a) Back flushing in a JIT system Traditional accounting systems record the flow of inventory through elaborate accounting procedures . Such systems are required in those manufacturing environment where inventory/WIP values are large. However, since JIT systems operate in modern manufacturing environment characterized by low inventory and WIP values, usually also
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