MBA – 2 Year, Academic Year 2019-20, Term II

Cost Management Final Exam

Total Marks: 100 Duration: 2 ½ Hours

Section: ___ Reg No: ___________ Name: ______________________________________________

Question Problem Problem Problem Problem Problem Problem Problem Problem Total
1-15 1 2 3 4 5 6 7 8 Marks
Full
20 10 10 10 10 10 10 10 10 100
Marks
Marks
Awarded

This exam has 19 pages.

No clarification will be provided during this Closed Book Exam.

Electronic calculator is allowed.

Page 1 of 19
Questions 1‐10 carry 1 mark each. CIRCLE the best option. Total 10 marks.

1) An employee accidentally overstated the year's advertising expense by $50,000. Which of the
following correctly depicts the effect of this error?

a) Cost of goods manufactured will be overstated by $50,000.

b) Cost of goods sold will be overstated by $50,000.
c) Both cost of goods manufactured and cost of goods sold will be overstated by $50,000.
d) None of the other answers are correct

2) Which of the following would likely be a suitable cost driver for the amount of direct materials
used?

a) The number of units sold.

b) The number of units produced.
c) The number of direct labor hours worked.
d) The number of machine hours worked.

3) The assignment of direct labor cost to individual jobs is based on:

a) An estimate of the total time spent on the job.

b) Actual total payroll cost divided equally among all jobs in process.
c) Estimated total payroll cost divided equally among all jobs in process.
d) The actual time spent on each job multiplied by the wage rate.

4) Which of the following methods should be selected if a company terminates all processing at the
split-off point and desires to use a cost-allocation approach that considers the "revenue-
producing ability" of each product?

a) Relative-sales-value method.
b) Net-realizable-value method.
c) Physical-units method.
d) Gross margin at split-off method.

5) Herbster manufactures A, B, and C, all of which are joint products, and D, which is classified as a
by-product. If joint manufacturing costs amount to $450,000 and the company is using a popular
accounting method, the firm will:

a) Allocate $450,000 among A, B, and C.

b) Allocate $450,000 among A, B, C, and D.
c) Increase $450,000 by the net realizable value of D and then allocate the total among A, B,
and C.
d) Decrease $450,000 by the net realizable value of D and then allocate the total among A, B,
and C.

Page 2 of 19
6) Which of the following data are needed to calculate total equivalent units under the weighted-
average method?

a) Work-to-date on ending work in process, units started during the period.

b) Units completed during the period, work-to-date on ending work in process.
c) Work to complete beginning work in process, work-to-date on ending work in process.
d) Work to complete beginning work in process, units completed, and work done on ending
work in process.

7) Feinstein, Inc., an appliance manufacturer, is developing a new line of ovens that uses
controlled-laser technology. The research and testing costs associated with the new ovens is said
to arise from a:

a) Unit-level activity.
b) Batch-level activity.
c) Product-sustaining activity.
d) Facility-level activity.

8) Miller Company has an operating leverage factor of 5. Which of the following statements is true?

a) An 8% change in income should result in a 40% change in sales revenue.

b) An 8% change in sales revenue should result in a 40% change in income.
c) An 8% change in variable costs should result in a 40% change in contribution margin.
d) An 8% change in fixed costs should result in a 40% change in income.

9) The City of Miami is about to replace an old fire truck with a new vehicle in an effort to save
maintenance and other operating costs. Which of the following items, all related to the
transaction, would not be considered in the decision?

a) Purchase price of the new vehicle.

b) Savings in operating costs as a result of the new vehicle.
c) Purchase price of the old vehicle.
d) Proceeds from disposal of the old vehicle.

10) A company's sales forecast would likely consider all of the following factors except:
a) Past sales levels and trends.
b) The company's intended pricing policy.
c) The company's product costing policy.
d) Market research studies.

Page 3 of 19
Questions 11‐15 carry 2 marks each. Fill in the BLANKS. Total 10 marks.

11) BFF Corporation uses an imputed interest rate of 14% in the calculation of residual income.
Division X, which is part of BFF, had invested capital of $1,210,000 and an ROI of 17%. On the basis
of this information, X's residual income was: $__________________

12) A photographic company is estimating the benefits of investing in a new printer to improve its
output. Its current variable costs are £3.50 per photo and current fixed costs are £10,000. If the
new printer increases fixed costs by 35% but reduces variable costs by 10%. The level of
production where they should change to the new machine is ____________ photos.

13) Ortega Interiors provides design services to residential and commercial clients. The residential
services produce a contribution margin of $530,000 and have traceable fixed operating costs of
$560,000. Management is studying whether to drop the residential operation. If closed, the fixed
operating costs will fall by $480,000 and Ortega's income will
_________________(increase/decrease) by $______________________

14) Yorkley Corporation plans to sell 45,000 units of its single product in March. The company has
3,200 units in its March 1 finished-goods inventory and anticipates having 2,800 completed units
in inventory on March 31. On the basis of this information, number of units Yorkley plans to
produce during March is _______________ units

15) The accounting records of Georgia Company revealed the following costs: direct materials used,
$380,000; direct labor, $450,000; manufacturing overhead, $379,000; and selling and
administrative expenses, $240,000. Georgia's product costs total $______________

Page 4 of 19
Problem – 1 [10 marks]

Tingling Ltd, a manufacturer of custom-made furniture, uses job order costing system at its factory.
The factory has two production departments: Machining and Finishing. The company uses normal
costing for its departmental overheads. The allocation base used to allocate departmental overhead
are direct material cost in Machining department and direct labor cost in Finishing department. Its
fiscal year ends in November. The company transfers over-absorbed/under-absorbed overheads to
cost of goods sold. For the year, annual budgeted costs for Machining and Finishing departments are:
Annual Budget Machining (Rs lakh) Finishing (Rs lakh)
Direct Material Cost 300 400
Direct Labor Cost 200 600
Department’s Indirect Expenses 500 800
Service Department Cost allocated 400 100
At the end of October, Tingling had job DESK1 (100 desks) under production for which Rs. 150,000
was incurred. During November, the company worked only two jobs; while DESK1 job was
completed in November, CHAIR2 job is expected to be completed in December. The expenditure
incurred in November for the two jobs are given in the following table:
Expenditure in November DESK1 (Rs) CHAIR2 (Rs)
Direct Material Cost in Machining Department 90,000 200,000
Direct Material Cost in Finishing Department 10,000 100,000
Direct Labor Cost in Machining Department 80,000 300,000
Direct Labor Cost in Finishing Department 70,000 250,000

At the end of the fiscal year, the company’s raw material, work in progress, and finished goods
inventory were Rs. 20 lakh, 80 lakh, and 100 lakh, respectively. For the fiscal year, actual
manufacturing overheads, applied manufacturing overheads, and cost of goods sold (unadjusted)
were Rs. 2000 lakh, 2300 lakh, and 3820 lakh, respectively.

Based on information given above, determine:

Predetermined Overhead Rate for Machining Department [1.5]

Please mention the unit of measurement.

Predetermined Overhead Rate for Finishing Department [1.5]

Please mention the unit of measurement.

Ending Work in Process Inventory (end of November) [2] Rs

Cost of Goods Manufactured for Job Desk1 [3] Rs

Cost of Goods Sold (adjusted) for the fiscal year [2] Rs lakh

Page 5 of 19
Problem – 2 [10 marks]

An architectural firm designs and constructs commercial buildings. It treats each building as a job and
prices each job on a cost plus 25% basis. Costs include direct material, direct labor, and overhead costs.
It allocates overheads equally to all jobs that were under construction during the year. There was no
opening and closing work-in-progress inventory.

Overheads incurred in the fiscal year ending on September 30, 2019 are Rs. 100 crore. During the year,
the firm started and completed three jobs. The client for Job #2 complained that the price charged
was excessively high, which lead to the financial controller ordering a detailed analysis of the resources
used and activities performed for design and construction. The following tables give the resources
used and activities performed during the year.

Resources Overhead Cost Design Engineering Construction

(Overheads) (Rs. Crore) Activity Activity Activity
Indirect Labor 20 40% 10% 50%
Depreciation 10 30% 20% 50%
Computer Systems 30 60% 30% 10%
Equipment 40 20% 20% 60%
Total = 100

Activity Activity Cost Driver Job #1 Job #2 Job #3 Total

Design Design Hours (DH) 1,000 DH 5,000 DH 4,000 DH 10,000 DH
Engineering Engineering Hours (EH) 2,000 EH 2,000 EH 3,000 EH 7,000 EH
Construction Construction Hours (CH) 20,000 CH 28,000 CH 22,000 CH 70,000 CH

Based on the information given above compute the following:

a. Cost of Design Activity [1] Rs. crore

b. Cost of Engineering Activity [1] Rs. crore

c. Cost of Construction Activity [1] Rs. crore

d. Design Activity: Cost per Design Hour [1] Rs.

e. Engineering Activity: Cost per Engineering Hour [1] Rs.

Page 6 of 19
f. Construction Activity: Cost per Construction Hour [1] Rs.

g. Under ABC, Overheads Allocated to Job #1 [1] Rs. crore

h. Under ABC, Overheads Allocated to Job #2 [1] Rs. crore

i. Under ABC, Overheads Allocated to Job #3 [1] Rs. crore

j. Which Job was over-costed under the present costing system? [0.5] Job#

k. Was the complaint made by Job #2 client valid? [0.5]

Yes No

(choose any one)

Page 7 of 19
Problem – 3 [10 marks]

Electro Mart Corporation sells electronic items in its own retail stores across the country. It has two
divisions: Smartphone and Computer. Each division is an investment center headed by a Vice
President. The CEO’s office has identified two targets (Phone Mart and Comp Mart) for acquisition. If
these targets are acquired, Smartphone Division will become responsible for Phone Mart and
Computer Division for Comp Mart. The data for the corporation, two divisions, and two targets are
given below:

Amounts are in $ Million Electro Mart Smartphone Computer Phone Comp

Corporation Division Division Mart Mart
Sales for 2018 800 300 500 200 400
Variable Expenses for 2018 200 75 125 40 140
Fixed Expenses for 2018 350 150 200 170 220
Total Investments on 31-12-2018 800 350 450 120 320
Additional/(Surplus) Investments
required/(to be disposed) if (10) 50
acquisition happens

Investments represent total assets minus operating liabilities. The corporation expects a minimum
required rate of return of 12% on its investments. Of the fixed expenses of the targets, 10% is
avoidable if acquisition is made. Assume that investments at the end of next year as well as sales
and expenses during next year will remain unchanged if acquisition is not made.

a. Return on Investment of the Smartphone Division in 2018 (before %

acquisition) [1] (Round off your answer to ONE decimal place)

b. Return on Investment of the Computer Division in 2018 (before %

acquisition) [1] (Round off your answer to ONE decimal place)

c. Return on Investment of the Smartphone Division if acquisition is made %

[1] (Round off your answer to ONE decimal place)

d. Return on Investment of the Computer Division if acquisition is made [1] %

(Round off your answer to ONE decimal place)

Page 8 of 19
e. Residual Income of the Corporation in 2018 (before acquisition) [1] $ million

f. Change in Residual Income of the Smartphone Division if acquisition is $ million

made [1.5]
Increase/Decrease
(Choose any one)

g. Change in Residual Income of the Computer Division if acquisition is $ million

made [1.5]
Increase/Decrease
(Choose any one)

h. If Divisional heads are awarded bonus based on Return on Investment,

the head of which division(s) will support the acquisition? [1]

i. If Divisional heads are awarded bonus based on Residual Income, the

head of which division(s) will support the acquisition? [1]

Page 9 of 19
Problem – 4 [10 marks]

XYZ Printers Inc. produces luxury check books with three checks and stubs per page. Each check book
is designed for an individual customer and is ordered through the customer’s bank. The company’s
operating budget for September 2018 included these data:

Number of checkbooks 20,000

Selling price per book $ 22
Variable cost per book $9
Fixed costs for the month $150,000

The actual results for September 2018 were as follows:

Number of checkbooks produced and sold 15,000
Average Selling price per book $ 23
Variable cost per book $8
Fixed costs for the month $155,000

The executive vice president of the company observed that the operating income for September was
much lower than anticipated, despite a higher-than-budgeted selling price and a lower-than-budgeted
variable cost per unit. As the company’s management accountant, you have been asked to provide
explanations for the disappointing September results.

Required:
Prepare a static-budget-based variance analysis of the September performance. For a variance,
mention both the amount and whether it is favorable (F) or unfavorable (U). Each entry carries 0.5
marks [3 marks]

Static Budget Variances

Units sold
Revenue ($)
Variable costs ($)
Contribution margin ($)
Fixed costs ($)
Operating Income ($)

Prepare a flexible-budget-based variance analysis of the September performance. For a variance,

mention both the amount and whether it is favorable (F) or unfavorable (U). Each entry carries 0.5
marks [6 marks]
Flexible Budget Variances
Units sold
Revenue ($)
Variable costs ($)
Contribution margin ($)
Fixed costs ($)
Operating Income ($)

What is the reason for Revenue variance in flexible budget analysis? [1 mark]

Page 10 of 19
Problem – 5 [10 marks]

Ontario Aluminum Company manufactures a variety of aluminum parts for the automotive industry.
The company uses a weighted-average process-costing system. A unit of product passes through three
departments—molding, assembly, and finishing—before it is completed. The following activity took
place in the Finishing Department during May.

Units
Work-in-process inventory, May 1 1,400
Units transferred in from the Assembly Department 14,000
Units completed and transferred out to finished-goods inventory 11,900

Raw material is added at the beginning of processing in the Finishing Department. The work-in-process
inventory was 70 percent complete as to conversion on May 1 and 40 percent complete as to
conversion on May 31. For the month of May, The the equivalent units and current period costs per
equivalent unit of production for each cost factor are as follows for the Finishing Department.

Equivalent Current Period Costs

Units per Equivalent Unit

Transferred-in costs 15,400 $ 5.00

Raw material 15,400 1.00
Conversion cost 13,300 3.00
Total $ 9.00

Required:

Compute / answer the following:

i. Cost of units completed and transferred out to finished goods

inventory during May [3 marks]

ii. Cost of the Finishing Department’s work-in-process inventory on

May 31 [4 marks]

iii. Total cost transferred in from the assembly department during

May, if the total costs of prior departments included in the work-in-
process inventory of the Finishing Department on May 1 amounted
to $6,750. [3 marks]

Page 11 of 19
Problem – 6 [10 marks]

Problem 6 (A) 5 Marks

Madhurima Company has two service departments, Plant Maintenance and Information Systems
and two production departments, Machining and Assembly. Plant Maintenance Department costs
are allocated on the basis of Budgeted labour-hours. Information Systems costs are allocated based
on Budgeted computer time.

Service Departments Production Departments

Plant Information
Maintenance Systems Machining Assembly
Budgeted manufacturing overhead
costs prior to any interdepartmental
cost allocations (Rupees) 3,50,000 75,000 2,25,000 1,25,000
Support work furnished
By Plant Maintenance
Budgeted labour-hours 3,400 5,100 8,500
By Information Systems
Budgeted computer time (hours) 500 4,000 500

1) Madhurima company uses Reciprocal-services method for service department cost allocation.
Specify a set of linear equations that captures the mutual provision of services among the service
departments 1 Mark

2) Solve the set of simultaneous equations to obtain the complete reciprocated costs of each support
department. Round off the amount to whole number. 2 Marks

Page 12 of 19
3) Allocate the complete reciprocated costs of each service department to all other departments.
Round off the amount to whole number. Also, determine total cost of the both the production
departments after allocations of service department costs using Reciprocal method. 2 Marks

Page 13 of 19
Problem 6 (B) 5 Marks

Mountainside Company manufactures M and N in a joint process. The joint costs amount to $80,000
per batch of finished goods. Each batch yields 20,000 liters, of which 40% are M and 60% are N. At
the split-off point, Tthe selling price of M is $8.75 per liter, and the selling price of N is $15.00 per
liter. Mountainside has also discovered new processes by which M and N can be refined further after
split-off and sold at a higher price. Information related to further refinement follows:
M N
Selling Price per liter after additional processing (Rupees) 12 18
Additional Processing Costs (Rupees) 16,800 42,000

1) If the joint costs are allocated on the basis of the products' sales value at the split-off point,
what amount of joint cost will be charged to M? Show Calculations. 2 Marks

2) What will be the change in Operating income of the company if it decides to process M
beyond the split off point? Show Calculations. 2 Marks

3) Should the company process N beyond the split off point? Show Calculations. 1 Mark

Page 14 of 19
Problem – 7 [10 marks]

Problem 7 (A) 8 Marks

Jiniya owns and operates a successful florist shop in Mumbai. It has fixed costs of $60,000 per
month and variable costs are 25% of the selling price.

A) In a typical month it realizes profits of $7,500 from sales of 50,000 units. What is its selling price
per unit? 2 Marks

B) What is the Jiniya’s margin of safety at its current sales level (in $)? 1 Mark

C) Calculate the operating leverage of the company. 1 Mark

D) By what percentage profitwould profit of Jiniya increase if Sales increases by 12%? 1 Mark

E) Suppose Jiniya estimates that she will be able to generate revenue of $150,000 in a month.
Assume also that she wishes to earn $10,000 in profit each month. What is the maximum amount
that she can spend on fixed costs? 1 Mark

Page 15 of 19
 F) Suppose Jiniya’s variable costs were to increase by 50%. What is Jiniya’s breakeven revenue per
month? 2 Marks

Problem 7 (B) 2 Marks

Anjana Inc. sells only two products, Product X and Product Y
Product X Product Y Total
Selling price $25 $45
Variable cost per unit $20 $35
Total fixed costs $350,000
Anjana Inc. sells three units of Product X for each two units it sells of Product Y.

How many units of each product would be sold if Anjana Inc. desired a net income of $210,000?
2 Marks

Page 16 of 19
Problem – 8 [10 marks]

Problem 8 (A) 7 Marks

The Batista is a take-out food store at a popular beach resort. Sourav, owner of the Batista, is
deciding how much refrigerator space to devote to four different drinks. Following data is available
on these four drinks:

Cola Lemonade Punch Natural Orange Juice

Selling price per case (Rupees) 180 192 264 384

Variable cost per case (Rupees) 135 152 201 302

Cases sold per foot of shelf space per day 25 24 4 5

Sourav has a maximum front shelf space of 12 feet to devote to the four drinks. She wants a
minimum of 1 foot and a maximum of 6 feet of front shelf space for each drink.

A) Calculate the contribution margin per case of each type of drink. 2 Marks

B) Calculate Daily contribution per foot of front shelf space for each type of drink. 2 Marks

Page 17 of 19
C) What shelf-space allocation for the four drinks would you recommend for the Batista?
Show your calculations. 2 Marks

D) Compute total contribution margin Batista would earn per day based on your recommended
allocations. Show your calculations. 1 Mark

Page 18 of 19
Problem 8 (B) 3 Marks

Sarasota Bicycles has been manufacturing its own wheels for its bikes. The company is currently
operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate
of 30% of direct labor cost. The direct materials and direct labor cost per unit to make the wheels are
$3.00 and $3.60 respectively. Normal production is 200,000 wheels per year. A supplier offers to make
the wheels at a price of $8 each. If the bicycle company accepts this offer, all variable manufacturing
costs will be eliminated, but the $84,000 of fixed manufacturing overhead currently being charged to
the wheels will have to be absorbed by other products.
Should Sarasota Bicycles buy the wheels from the outside supplier? Justify your answer.

Page 19 of 19