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MANAGEMENT ACCOUNTING

Assignment

Q.1. A manufacturer has planned his level of operation at 50 % of his total plant capacity of

30,000 units. His expenses are estimated as follows, if 50 % of the plant capacity is utilized.

Rs.Direct Materials 8,280

Direct Wages 11,160

Variable and other manufacturing expenses 3,960Total fixed expenses irrespective of capacity utilisation 6,000

The expected selling price in the domestic market is Rs. 2 per unit. Recently the manufacturer hasreceived a trade enquiry from an overseas organization interested in purchasing 6000 units at a

price of Rs.1.45 per unit.

As a professional Management Accountant, what would be your suggestion regarding acceptance

or rejection of the order? Would the situation be any different if we are able to convince them to

increase their offer price by 20 %. Why? What would be the total profit or loss in both the cases?Support your suggestion with suitable quantitative information.

Q.2 Explain in detail Classification of Costs. Give examples.

Q.3. Product Rimjhim is obtained after it passes through three distinct processes. The followinginformation is obtained from the accounts for the week ended 31st October 2010.

Items Total ProcessI II III

Rs. Rs. Rs. Rs.

Direct Materials 7,542 2,600 1,980 2,962Direct wages 9,000 2,000 3,000 4,000

Production Overhead 9,000

1,000 units at Rs. 3 each were introduced in Process I. There was no stock of material or work-in-

progress at the beginning or at the end of the period. The output of each process passes direct to

the next process and finally to finished stock. Production overhead is recovered on 100 % of directwages. The following additional data are obtained:

Process Output during % of Normal Loss Value of scrap

the week to input per unit

I 950 5 % 2

II 840 10 % 4III 750 15 % 5

Prepare Process Cost Accounts. All calculations should form part of your answer.

Q.4. Prepare and present a flexible budget on the basis of the following information for the year

2012-2013 in the format of a Cost Sheet:

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Rs.

Direct Materials 6,00,000Direct Labour 4,00,000

Direct Expenses 2,00,000

Machine Expenses 1,00,000Motive Power 1,00,000

Other Factory Overheads ( 80 % Fixed ) 80,000

Office Overheads ( 60 % Fixed ) 1,20,000Selling Overheads ( 50 % Fixed ) 40,000

Sales ( Selling Price Rs. 2000 per unit ) 20,00,000

During the year, all the units produced were sold and the factory was working at the capacity of60 %. The flexible budget is to be prepared with the following assumptions:

(a) That the capacity will be 75 %

(b) That the price of Direct Materials will increase by 25 % and the wages will increase

by 20 %

Q.5. Explain.

(a) Cost Centre

(b) Opportunity Cost(c) Cash Budget

(d) Special Plant and Common Plant

(e) Variable Costs

(f) Cost Sheet

Variable costs are expenses that change in proportion to the activity of a business

Cost centres are the smallest segments of activity or area of responsibility for which costs areaccumulated or ascertained.

It may be defined as "a location, person or item of equipment for which costs may beascertained and used for the purpose of cost control".

opportunity cost

The loss of potential gain from other alternatives when one alternative ischosen

Cash budget:

: A budget used to quantify an immediate, short-term cash flow.

Cash Budget : An estimation of the cash inputs and outputs of a person or a business over aspecific period of time.

cost sheet: Paperwork that details all fabric, trim, labor and packaging costs

Classification of costs

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Classification of costs is done for the development of the cost data that are useful to

management. The cost classification is a process of grouping costs according to their common

characteristics. It is important as it identifies the cost with cost centers or cost units.Classification of costs is done on the basis of a number of ways.

The classification of the costs of the basis of elements includes material cost, material labor andexpenses. These are further sub divided for each element. For example materials are divided into

raw material components, and spare parts, consumable stores, packing material etc. This helps infinding total cost, how such total cost is constituted and valuation of work-in-progress.

On the basis of functions it is classified as Production, Administration, and Selling &Distribution. Production and manufacturing cost are incurred in the course of manufacture. Itincludes power, lighting, heating, rent, depreciation etc. office and administration cost is incurred

in the general administration of the enterprise. It includes salary of office staff, rent of office

building, electricity charges, audit fee, printing and stationeries etc. Selling and distribution Cost

includes both selling cost as well as distribution cost. Selling costs are those costs which are

incurred in connection with the selling of goods and services.

According to variability there are direct and indirect costs. Direct costs are easily traced to a unit

of product or other cost objective. Indirect costs are those which are not easily traced to a unit of a

product or a cost object. According to the behaviorit is fixed, variable and semi-fixed variable.On the basis of association with products it is product costs and period costs. On the basis ofcontrollability there are controllable and uncontrollable costs. On the basis normality there are

normal costs and abnormal costs. The classification is also based on relevance which includes

sunk and opportunity costs