For example in a machinery replacement decision the original cost and the

# For example in a machinery replacement decision the

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the decision and are directly related to the decision to be made. For example, in a machinery replacement decision, the original cost and the present depreciated book value of the old plants are not relevant. The expected sales value of the old plant is relevant because it will reduce the amount of investment in the new plant. Some important points are – (i) Historical costs being sunk cost are not relevant to the decision. (ii) Even among future costs, those variable costs which do not differ under various alternatives are not relevant. (iii) If fixed expenses remain unchanged under different alternatives such expenses are not relevant to the decision. (iv) Book value of the equipment is not relevant because it is past cost. Thus only such costs which are capable of making a difference in use decisions and enter into a choice between alternative courses of action are relevant.
FINAL EXAMINATION : NOVEMBER, 2004 18 (b) Standard hours produced Product X Product Y Total Out put (units) 1,200 800 Hours per unit 8 12 Standard hours 9,600 9,600 19,200 Actual hours worked 100 workers × 8 hours × 22 days = 17,600 Budgeted hours per month 1,86,000/12 = 15,500 Capacity Ratio = 100 hours Budgeted hours Actual × = 100 15,500 17,600 × = 113.55% Efficiency Ratio = 100 hours Actual produced Hours Std. × = 100 600 , 17 200 , 19 × = 109.09% Activity Ratio = 100 hours . Budget produced hour Std. × = 100 500 , 15 200 , 19 × = 123.87% Relationship : Activity ratio = Efficiency ratio × Capacity ratio or 123.87 = 100 113.55 109.09 × . (c) Calculation of variable cost Distance X Distance Y One side distance 24 km 16 km Round trip 48 km 32 km Variable cost @ .80 per km Rs.38.40 Rs.25.60 Calculation of fixed cost Distance X Distance Y Actual running time for round trip distance at the speed of 24 km per hour 120 Min 80 Min Filling time 40 Min 30 Min
PAPER – 5 : COST MANAGEMENT 19 Empty time 40 Min 40 Min Total time 200 Min 150 Min Fixed cost @ Rs 7.50 per hour Rs.25 18.75 Calculation of ton km Capacity 8 tons 8 tons Full load 24 km 16 km Tons km 192 128 Cost per ton km 192 25 38.40 + =Rs.0.33 128 18.75 25.60 + = Rs 0.347 Question 5 (a) Tycon Ltd. has two manufacturing departments organised into separate profit centres known as Textile unit and Process House. The Textile unit has a production capacity of 5 lacs metres cloth per month, but at present its sales is limited to 50% to outside market and 30% to process house. The transfer price for the year 2004 was agreed at Rs.6 per metre. This price has been fixed in line with the external wholesale trade price on 1 st January, 2004. However, the price of yarn declined, which was the raw material of textile unit, with effect, that wholesale trade price reduced to Rs. 5.60 per metre with effect from 1 st June, 2004. This price was however not made applicable to the sales made to the processing house of the company. The textile unit turned down the processing house request for revision of price. The Process house refines the cloth and packs the output known as brand Rayon in bundles of 100 metres each. The selling price of the Rayon is Rs. 825 per bundle. The process house has a potential of selling a further quantity of 1,000 bundles of Rayon provided the overall prices is reduced to Rs. 725 per bundle. In that event it can buy the additional 1,00,000 metres of cloth from textile unit, whose capacity can be fully utilised.

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