UNIT II CMA.pptx creative presentations for Doctoral Programme Students learning basics of Research Methodology

basics of Research Methodology

1. COST & MANAGEMENT ACCOUNTING CLASS : MBA SEMESTER : IInd ACADEMIC CONSULTANT : NEELESH KUMAR

2. UNIT II (10 Sessions) TOPICS Marginal Costing : Marginal costing versus Absorption costing Cost-volume –profit Analysis & P/V ratio analysis : Their implications Concept & uses of Contribution & Break Even point : Their analysis for various types of decision –making Single product & multi-product pricing, replacement, sales,etc. Differential costing & incremental costing: Concept, uses & applications Methods of calculation of these costs and their role in management decision making Role in management decision –making like sales, replacement, buying,etc.

3. LECTURE PLAN Unit- IInd Sub: Cost & Management Accounting Academic Consultant : Neelesh Kumar S.No. Unit Lecture no Contents (sub topics) Slide no (1) IInd 9 Marginal Costing : Marginal costing versus Absorption costing 4-14 (2) IInd 10 Cost-volume –profit Analysis & P/V ratio analysis : Their implications 15-26 (3) IInd 11 Cost-volume –profit Analysis & P/V ratio analysis : Their implications 27-36 (4) IInd 12 Concept & uses of Contribution & Break Even point : Their analysis for various types of decision –making 37-48 (5) IInd 13 Single product & multi-product pricing, replacement, sales,etc. 49-56 (6) IInd 14 Differential costing & incremental costing: Concept, uses & applications 57-74 (7) IInd 15 Methods of calculation of these costs and their role in management decision making 75-82 (8) IInd 16 Role in management decision –making like sales, replacement, buying,etc. 83-89 (9) IInd 17 Role in management decision –making like sales, replacement, buying,etc. 90-98 (10) Iind 18 Numerical –CVP Relationship & Income statement 99-103 Numerical, FAQs , Descriptive questions

4. LECTURE 9 4

5. Marginal Costing The cost of producing one extra unit of output (the variable costs) Selling price – MC = Contribution Contribution is the amount which can contribute to the overheads (fixed costs)

6. The principles of marginal costing For any given period of time, fixed costs will be the same, for any volume of sales and production (provided that the level of activity is within the ‘relevant range’). Therefore, selling an extra item of product or service: Revenue will increase by the sales value of the item sold Costs will increase by the variable cost per unit Profit will increase by the amount of contribution earned from the extra item 2. The volume of sales falls by one item  the profit will fall by the amount of contribution earned from the item. 3. Profit measurement should be based on an analysis of total contribution. Since fixed costs relate to a period of time, and do not change with increases or decreases in sales volume, it is misleading to charge units of sale with a share of fixed costs 4. When a unit of product is made, the extra costs incurred in its manufacture are the variable production costs. Fixed costs are unaffected, and no extra fixed costs are incurred when output is increased

7. Features of Marginal costing 1.Cost Classification T he marginal costing technique makes a sharp distinction between variable costs and fixed costs. It is the variable cost on the basis of which production and sales policies are designed by a firm following the marginal costing technique 2. Stock/Inventory Valuation Under marginal costing, inventory/stock for profit measurement is valued at marginal cost. It is in sharp contrast to the total unit cost under absorption costing method 3. Marginal Contribution Marginal costing technique makes use of marginal contribution for marking various decisions. Marginal contribution is the difference between sales and marginal cost. It forms the basis for judging the profitability of different products or departments

8. Absorption Costing All costs incurred are allocated to particular cost centres – direct costs, indirect costs, semi variable costs and selling costs Allocates indirect costs more accurately to the point where the cost occurred

9. Direct vs. Absorption (full) costing Direct costing are regarded as period costs(written as a lump sum to the profit and loss account) are assigned to the products are period costs are added to the variable manufacturing cost of sales to determine total manufacturing costs Absorption costing are allocated to the products (included in inventory valuation) are assigned to the products are period costs are assigned to the products Fixed manufactured overheads Variable manufacturing costs Non-manufacturing overheads Fixed manufacturing costs

10. Direct vs. Absorption (full) costing Direct costing Profit is a function of sales Are recommended where indirect costs are a low proportion of an organization’s total costs is used for managerial decision-making and control used mainly for internal purposes Absorption costing Profit is a function of both sales and production Assigns indirect costs to cost objects is widely used for cost control purpose esp. in the long run consistent for external reporting

11. Criticisms of Absorption Costing Absorption costing is a powerful and widely used tool because it tries to approximate “full” or “normal “ cost. However, absorption costing has a number of weaknesses. Recall that units costs can be highly misleading because unit costs include both fixed and variable costs and fixed costs per unit depend on Number of units used to compute the overhead rate Number of units produced vs. number sold 403MSADay16.ppt 11

12. Criticisms of Absorption Costing Formula FC absorbed to COGS = FC/Units Produced * Units Sold Absorption costing can distort production incentives when the overhead rate is based on units actually produced and units produced > units sold. Why Part of this period’s overheads is “inventoried” 12

13. Criticisms of Absorption Costing In effect, because the fixed costs are being spread over more units, the per-unit cost falls. However the working capital tied up in inventory due to the overproduction is costly and overproduction increases the risk of obsolescence. Generally, these costs are not visible to manufacturing managers, so they overproduce even when the firm would not want them to do so. 13

14. Criticisms of Absorption Costing To stop this one may: Implement JIT policies … costly to the firm Have corporate policies on how much inventory can be carried … hard to monitor Impose a cost of capital charge on inventories so manufacturing managers “see” the overproduction cost … “right” cost of capital is hard to ascertain. Give managers stock options … used to appear more intelligent a solution that it does now with the market down and out … even in good times, incentive effect is small. 14

15. LECTURE 10

16. Cost-Volume-Profit Analysis Viewing CVP relationships in a graph gives managers a perspective that can be obtained in no other way. Consider the following information for McDonald’s:

17. Cost-Volume-Profit Graph

18. Cost-Volume-Profit Graph Fixed expenses

19. Cost-Volume-Profit Graph Fixed expenses

20. Cost-Volume-Profit Graph Fixed expenses Total expenses

21. Cost-Volume-Profit Graph Fixed expenses Total expenses

22. Cost-Volume-Profit Graph Fixed expenses Total expenses Total sales

23. Cost-Volume-Profit Graph Fixed expenses Total expenses Total sales Break-even point Profit area Loss area

24. Profit-Volume Graph Some managers like the profit-volume graph because it focuses on profits and volume . Loss area Profit area Break-even point

25. Target Net Profit We can determine the number of surfboards that Curl must sell to earn a profit of $100,000 using the contribution margin approach . Fixed expenses + Target profit Unit contribution margin = Units sold to earn the target profit $ 80,000 + $100,000 $200 = 900 surf boards

26. Equation Approach Sales revenue – Variable expenses – Fixed expenses = Profit ($500 × X) ($300 × X) – – $80,000 = $100,000 ($200 X) = $180,000 X = 900 surf boards

27. LECTURE 11

28. Cost –volume –profit Analysis & its implications Safety Margin The difference between budgeted sales revenue and break-even sales revenue. The amount by which sales can drop before losses begin to be incurred.

29. Safety Margin Curl, Inc. has a break-even point of $200,000. If actual sales are $250,000, the safety margin is $50,000 or 100 surf boards.

30. Changes in Fixed Costs Curl is currently selling 500 surfboards per year. The owner believes that an increase of $10,000 in the annual advertising budget, would increase sales to 540 units. Should the company increase the advertising budget?

31. Changes in Fixed Costs $80,000 + $10,000 advertising = $90,000 540 units × $500 per unit = $270,000

32. Changes in Fixed Costs Sales will increase by $20,000, but net income decreased by $2,000 .

33. Changes in Unit Contribution Margin Because of increases in cost of raw materials, Curl’s variable cost per unit has increased from $300 to $310 per surfboard. With no change in selling price per unit, what will be the new break-even point? ($500 × X) ($310 × X) – – $ 80,000 = $0 X = 422 units (rounded)

34. Changes in Unit Contribution Margin Suppose Curl, Inc. increases the price of each surfboard to $550. With no change in variable cost per unit, what will be the new break-even point? ($550 × X) ($300 × X) – – $ 80,000 = $0 X = 320 units

35. Predicting Profit Given Expected Volume Fixed expenses Unit contribution margin Target net profit Find: {required sales volume} Given: Fixed expenses Unit contribution margin Expected sales volume Find: {expected profit } Given:

36. Predicting Profit Given Expected Volume In the coming year, Curl’s owner expects to sell 525 surfboards. The unit contribution margin is expected to be $190, and fixed costs are expected to increase to $90,000. ($190 × 525) – $90,000 = X X = $9,750 profit X = $99,750 – $90,000 Total contribution - Fixed cost = Profit

37. LECTURE 12

38. Concept & uses of contribution margin ,the Break-Even Point & its analysis for decision-making The break-even point is the point in the volume of activity where the organization’s revenues and expenses are equal.

39. Equation Approach Sales revenue – Variable expenses – Fixed expenses = Profit Unit sales price Sales volume in units × Unit variable expense Sales volume in units × ($500 × X) ($300 × X) – – $80,000 = $0 ($200 X) – $80,000 = $0 X = 400 surf boards

40. Example -Break-Even Volume Analysis In typical manufacturing environment, when demand is high, managers are interested in whether to use a one-shift plus overtime operations or to add a second shift. When demand is low, it is possible to explore whether to operate temporarily at a very low volume or to shut down until operations at normal volume become economical. In a chemical plant, several routes exist for scheduling products through the plant. The problem is in which route provides the lowest cost. Option 1: Adding overtime or Saturday operations: 36Q Option 2: Second-shift operation: $13,000 + 31.50Q Break-even volume: 36Q = $13,000 + 31.50Q Q = 3,000 units 40

41. Contribution-Margin Approach Consider the following information developed by the accountant at Curl, Inc.:

42. Contribution-Margin Approach For each additional surf board sold, Curl generates $200 in contribution margin.

43. Contribution-Margin Approach Fixed expenses Unit contribution margin = Break-even point (in units) $ 80,000 $ 200 = 400 surf boards

44. Contribution-Margin Approach Solution 400 × $500 = $200,000 400 × $300 = $120,000

45. Contribution Margin Ratio Calculate the break-even point in sales dollars rather than units by using the contribution margin ratio. Contribution margin Sales = CM ratio Fixed expense CM Ratio Break-even point (in sales dollars) =

46. Contribution Margin Ratio $80,000 40% $200,000 sales =

47. Product Pricing Under Production Constraints The contribution margin per unit provides some guidance as to which products should be produced Emphasis should be placed on the item with the largest contribution margin If there are production constraints (limited amount of resources), we must consider the demands each product places on the resources

48. Product Pricing Under Production Constraints Produce those products that generate the greatest contribution per unit of the constraining resource

49. LECTURE 13

50. Single product & multi-product pricing , replacement ,sales,etc. For a company with more than one product, sales mix is the relative combination in which a company’s products are sold. Different products have different selling prices, cost structures, and contribution margins. Let’s assume Curl sells surfboards and sail boards and see how we deal with break-even analysis.

51. CVP Analysis with Multiple Products A company named Curl International selling surfboards, provides us with the following information:

52. CVP Analysis with Multiple Products Weighted-average unit contribution margin $200 × 62.5% $550 × 37.5%

53. CVP Analysis with Multiple Products Break-even point Break-even point = Fixed expenses Weighted-average unit contribution margin Break-even point = $170,000 $331.25 Break-even point = 514 combined unit sales

54. CVP Analysis with Multiple Products Break-even point Break-even point = 514 combined unit sales

55. Assumptions Underlying CVP Analysis Selling price is constant throughout the entire relevant range. Costs are linear over the relevant range. In multi-product companies, the sales mix is constant. In manufacturing firms, inventories do not change (units produced = units sold).

56. Assumptions underlying CVP analysis In manufacturing firms, the inventory levels at the beginning and end of the period are the same. This implies that the number of units produced during the period equals the number of units sold. The behavior of total revenue is linear (straight line). This implies that the price of the product or service will not change as sales volume varies within the relevant range . The behavior of costs is linear (straight line) over the relevant range. This implies the following more specific assumptions. a. Costs can be categorized as fixed, variable, or semi-variable. Total fixed costs remain constant as activity changes, and the unit variable cost remains unchanged as activity varies.The efficiency and productivity of the production process and workers remain constant . In multi-product organizations, the sales mix remains constant over the relevant range. In multi-product organizations, when we do a single CVP analysis, we assume the products all are sold in the same market. Substitutes. This means that the product mix does not change in response to changes in production/sales volume .

57. LECTURE 14

58. Incremental or differential revenue – additional revenue received as a result of selecting one decision alternative over another. Incremental or differential cost – additional cost incurred as a result of selecting one decision alternative over another. To answer the question of how much something costs, a manager must know why the person wants to know. No single cost number is relevant for all decisions . Three Decisions Managers Frequently Face- Additional Processing Decision Make or Buy Decision Dropping a Product Line Decision Summary of Concepts Differential & Incremental costing: Concept, Uses & applications

59. A. Additional Processing Decision HCL Computer has partially processed computers for Model 250 that they are discontinuing. This has caused a decline of the selling price. If the units are completed, they can be sold for $1,000 per unit. That is less than the total cost of producing the computers -- $1,200 per unit ($800 cost to date plus $400 of additional cost to complete the units). Material $300 $200 Labor 200 100 Variable O/H 100 100 Fixed O/H 200 Totals $800 $400 Costs per Unit Incurred to Date Costs per Unit to Complete

60. The Alternatives: 1. Sell the units as is for $500 each and avoid incurring any additional processing costs. 2. Complete the units and sell them for $1,000 each . The Solution: The prior production costs are a sunk cost since they have already been incurred. Therefore, the only relevant cost is the $400 in additional processing costs to complete each unit. Since this is less than the incremental revenue of $500 ($1,000 - $500), the units should be processed further.

61. B. Make or Buy Decision Should the organization buy the compressors from an outside source at a cost of $310 per unit?

62. Additional Cost Analysis The market value of the machinery used to produce the compressors is approximately zero. Five of the six production supervisors will be fired if production of compressors is discontinued. However, one of the supervisors, who has more than 10 years of service, is protected by a clause in a labor contract, and will be assigned to other duties, although his services are not really needed. His salary is $110,000.

63. The Solution

64. C. Dropping a Product Line Decision Should the company’s product line be dropped since it is showing a net loss of $500?

65. Additional Cost Analysis Sales revenue will decline by $80,000 if garden supplies are dropped. Cost of goods sold will decrease by $60,000, and other variable costs will decrease by $1,000. Direct costs are directly traceable to a product line. Whether they decrease depends on the nature of these costs. Since the $3,500 represents a part-time employee who will be dropped if garden supplies is dropped, this cost is avoidable. Allocated fixed costs are not directly traceable to an individual product line. Therefore, these costs are generally not avoidable.

66. The Solution

67. Cost Allocation Death Spiral In many cases, products or services may not appear profitable because they receive allocations of common fixed costs. However, if the product or service is dropped common fixed costs are reallocated to the remaining product or services. This may result in another product or service appearing unprofitable.

68. D. Summary of Concepts Costs that can be avoided by taking a particular course of action are always incremental costs and, therefore, relevant to the analysis of a decision. Costs that are sunk are never incremental costs and therefore are not relevant in making a decision. Opportunity costs represent the benefit forgone by selection a particular decision alternative over another. There are always incremental costs and therefore relevant. Fixed costs may be: Sunk and therefore irrevelant Not sunk but still irrelevant Not sunk but relevant

69. Applications of Incremental Analysis Sell or lease Relevant items Sell alternative Potential sales price, if any Cost to dispose of the item Lease alternative Lease revenue Maintenance costs, insurance, property taxes, etc. if they will continue to be paid by us

70. Applications of Incremental Analysis Discontinue a product or segment Relevant items Amount of revenue that will be lost if the product or segment is discontinued Amount of cost that can be avoided if the product or segment is discontinued If the amount of cost that can be avoided exceeds the lost revenue, it is financially wise to discontinue the product or segment

71. Applications of Incremental Analysis Make or buy a component Relevant items Make alternative Incremental costs (direct materials, direct labor, variable overhead) Fixed overhead is irrelevant if it does not increase as a result of the additional production Buy alternative Purchase price from supplier Alternative uses for the manufacturing capacity that becomes available

72. Applications of Incremental Analysis Keep existing equipment or replace it Relevant items Difference in operating costs between the existing and proposed equipment Any change in revenue that may result from increased (or decreased) capacity Purchase price of the new equipment (included in the operating costs as depreciation) Sales value, if any, of the current equipment The original cost of the current equipment is irrelevant as it has already been incurred

73. Applications of Incremental Analysis Sell a product now or process further Relevant items Incremental cost to process the item further Incremental revenue if the item is processed further If the incremental revenue exceeds the incremental cost, it is financially wise to process the product further

74. Applications of Incremental Analysis Accept business at a special price Relevant items Sales price to be received for the items Incremental costs to be incurred producing the items (direct materials, direct labor, variable overhead) Fixed overhead is irrelevant if it does not increase as a result of the greater production

75. LECTURE 15

76. Methods of calculation of these costs & their role in decision making. Costs are an important feature of many business decisions. In order to make such decisions following cost needed to be well understood… Differential costs Opportunity costs Sunk costs Marginal costs 76

77. Differential (Incremental) Costs Revenues Decision involve selection among alternatives. Each alternative have certain costs / benefits that are needed to be compared to the costs / benefits of the other alternatives Definition: Difference in costs between any two alternatives known as Differential cost . Difference in revenues between any two alternatives is known as differential revenue 77 (c) 2002

78. Differential (Incremental) Costs Revenues Cost-volume relationship based on differential costs find many engineering applications such as short term decision making. Example: The base case is the status quo (current operation). We propose an alt. to the base case. If alt. has lower cost we accept the alt. assuming non-quantitative factors do not offset the cost advantage. 78

79. Differential (Incremental) Costs Revenues Differential cost = difference in total cost that results from selecting one alt. instead of the other. Problem of this type are generally called trade off problems because one type of cost is traded by another type of cost KEY FEATURES: New investment in physical assets not required, planning horizon short, relatively few cost items are subject to change by the decision 79

80. 80 Example : Differential Cost Associated with Adopting a New Production Method

81. 81 Example -Make or Buy Many firms perform certain activities using their own resources, and pay outside firms to perform certain other activities. It is a good policy to constantly seek to improve the balance between these two types of activities.

82. INCREMENTAL ANALYSIS 1. Describe the concept of incremental analysis. 2. Identify the relevant costs in accepting an order at a special price. 3. Identify the relevant costs in a make-or-buy decision. 4. Identify the relevant costs in determining whether to sell or process materials further 5. Identify the relevant costs to be considered in retaining or replacing equipment 6. Identify the relevant costs in deciding whether to eliminate an unprofitable segment. 7. Determine sales mix when a company has limited resources.

83. LECTURE 16

84. ROLE IN MANAGEMENT’S DECISION MAKING PROCESS Considers both financial and nonfinancial information Financial information Revenues and costs Overall profitability Nonfinancial information Effect of decision on employee turnover Environment Overall image of company

85. MANAGEMENT’S DECISION-MAKING Incremental Analysis Approach- Contd….. Decisions involve a choice among alternative actions/plans Financial data “RELEVANT” to a decision are the data that vary/change in the future among alternatives/plans Examples : Variable and fixed costs may change Revenues may change or Only variable costs may change or Only fixed costs may change

86. Incremental Analysis Approach Incremental Analysis: Process to identify financial data that change under alternative actions/plans Identifies probable effects of decisions on future earnings Time period – “Short-run” Where capacity will be unchanged, usually one year.

87. MANAGEMENT’S DECISION MAKING How Incremental Analysis Works Example Alternative Alternative A B_______ Revenues $125,000 $110,000 Costs 100,000 80,000 Net income $ 25,000 $ 30,000 Alternative Alternative Net Income A B Increase (Decrease) Revenues $125,000 $110,000 $(15,000) Costs 100,000 80,000 20,000 Net income $ 25,000 $ 30,000 $ 5,000

88. MANAGEMENT’S DECISION MAKING How Incremental Analysis Works Example Alternative B is being compared to Alternative A Incremental revenue is $15,000 less under Alternative B Incremental cost savings of $20,000 is realized Alternative B produces $5,000 more net income Alternative Alternative Net Income A B Increase (Decrease) Revenues $125,000 $110,000 $(15,000) Costs 100,000 80,000 20,000 Net income $ 25,000 $ 30,000 $ 5,000

89. IRRELEVANT COSTS Those costs that remain the same when choosing between alternatives [unavoidable costs] Sunk cost Allocated cost – a common cost that has been assigned to a product or activity [unavoidable costs]

90. LECTURE 17

91. ROLE IN MANAGEMENT DECISION-MAKING LIKE SALES, REPLACEMENT, BUYING ,ETC. CONTD…….. TYPES OF DECISIONS : Accept an order at a special price Make or buy component parts or finished products Sell products or process further Retain or replace equipment Eliminate an unprofitable business segment Obtain additional business by making price concessions Assumes sales of the products in other markets would not be affected by special order Assumes company is not operating at full capacity

92. INCREMENTAL ANALYSIS Accept an Order at a Special Price Example Customer offers to buy a special order of 2,000 units at $11 per unit. Other information : No effect on normal sales; sufficient plant capacity Operating at 80 percent capacity = 100,000 units Current fixed manufacturing costs = $400,000 or $4 per unit Variable manufacturing cost = $8 per unit Normal selling price = $20 per unit

93. INCREMENTAL ANALYSIS Accept an Order at a Special Price Example Common Analysis : Total cost = $12 per unit ($8 + $4), Selling price = $11 per unit Decision : reject offer as cost $12 > selling price of $11 WRONG!!!

94. INCREMENTAL ANALYSIS Accept an Order at a Special Price Example (continued) Correct Analysis : No change in fixed costs since within existing capacity - thus fixed costs are not relevant i.e. there is idle capacity Only total variable costs change – thus they are relevant

95. INCREMENTAL ANALYSIS Make or Buy Outsourcing: The decision to buy parts or services rather than making them Example: X Co. incurs the following costs to make 25,000 switches: Switches can be purchased for $8 per switch ($200,000) Eliminates all variable costs and $10,000 of fixed costs; however, $50,000 of fixed costs remain

96. INCREMENTAL ANALYSIS Make or Buy Example (Continued) Based on analysis of costs under both alternatives: Purchasing adds $25,000 to cost of switches Net Income Make Buy Increase (Decrease) Direct materials $ 50,000 $ - 0 - $ 50,000 Direct labor 75,000 - 0 - 75,000 Variable manufacturing costs 40,000 - 0 - 40,000 Fixed manufacturing costs 60,000 50,000 10,000 Purchase price -0- 200,000 ( 200,000) Total annual cost $225,000 $250,000 $ (25,000)

97. INCREMENTAL ANALYSIS Make or Buy Example (Continued) Based on analysis of costs under both alternatives: Purchasing adds $25,000 to cost of switches Net Income Make Buy Increase (Decrease) Direct materials $ 50,000 $ - 0 - $ 50,000 Direct labor 75,000 - 0 - 75,000 Variable manufacturing costs 40,000 - 0 - 40,000 Fixed manufacturing costs 60,000 50,000 10,000 Purchase price -0- 200,000 ( 200,000) Total annual cost $225,000 $250,000 $ (25,000) Decision: Continue to make switches.

98. Identification of Relevant Costs and Revenues for Decision Making A relevant cost (revenue) is a cost (revenue) that can have an impact on a decision Characteristics of relevant costs (revenues) Cost (revenue) that varies between alternatives Incremental or differential cost (revenue) Occur in the future Opportunity costs Benefit given up when one alternative is chosen over another

99. LECTURE 18

100. NUMERICAL -CVP Relationships and the Income Statement

101. CVP Relationships and the Income Statement

102. Sample Questions Raised and Answered by CVP Analysis 1. How many units must be sold (or how much sales revenue must be generated) in order to break even? 2. How many units must be sold to earn a before-tax profit equal to $60,000? A before-tax profit equal to 15 percent of revenues? An after-tax profit of $48,750? 3. Will total profits increase if the unit price is increased by $2 and units sold decrease 15 percent? 4. What is the effect on total profit if advertising expenditures increase by $8,000 and sales increase from 1,600 to 1,750 units?

103. Sample Questions Raised and Answered by CVP Analysis (cont’d) 5. What is the effect on total profit if the selling price is decreased from $400 to $375 per unit and sales increase from 1,600 units to 1,900 units? 6. What is the effect on total profit if the selling price is decreased from $400 to $375 per unit, advertising expenditures are increased by $8,000, and sales increased from 1,600 units to 2,300 units? 7. What is the effect on total profit if the sales mix is changed?

104. ASSIGNMENT A manufacturer has planned his level of operation at 50% of his plant capacity of 30,000 units(at 100% capacity)His expenses are estimated as follows, if 50% of the plant capacity is utilized, Direct materials Rs. 8,280 Direct wages Rs.11,120 Variable & other manufacturing expenses Rs.3,960 Total fixed expenses irrespective of capacity utilization Rs.6,000 The expected selling price in the domestic market is Rs.2 per unit. Recently, the manufacturer has received a trade enquiry from an overseas organization interested in purchasing 6,000 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 offer? Suppose your suggestion with suitable quantitative information.

105. Descriptive Questions Q1. Define break-even point? How would you compute the B-E point? Q2. What is P/V ratio? How does it relate to the break-even point? Q3.Define margin of safety? Is there any relationship between P/V ratio, profit margin & M/S ratio? Q4. How will be the P/V ratio, break-even point and profit affected by changes in variable costs & volume? Q5.Define marginal costing and explain its main features and useful contributions to the management in decision-making? Q6.Compare & contrast differential cost analysis and marginal costing?

106. Objective Questions Q1. Which of the following best describes a fixed cost? A cost which: (a)    represents a fixed proportion of total costs (b)   remains at the same level up to a particular level of output (c)   has a direct relationship with output (d)    remains at the same level when output increases Q2.A business's telephone bill should be classified into which one of these categories?   ?    Fixed cost   ?    Stepped fixed cost   ?    Semi-variable cost   ?    Variable cost Q3.The total production cost for making 20,000 units was £21,000 & total production cost for making 50,000 was £34,000. When production goes over 25,000 units, more fixed costs of £4,000 occur. So full production cost per unit for making 30,000 units is:   ?    £0.30   ?    £0.68   ?    £0.84   ?    £0.93

107. Q4.In marginal costing , managerial decisions are guided by (a) Profit (b) Contribution margin ( c) Sales (d) All of the above Q5. Marginal costing is (a) A system of costing (b) A method of costing ( c) A distinct technique of costing (d) None of these Q6.Differential costing means (a) Increase in cost (b) Decrease in cost ( c) Change in cost (d) No change in cost Q7. A large margin of safety indicates (a) Overcapitalization (b) The soundness of business ( c) Overproduction (d) All of these Q8.The selling price per unit is Rs.20, variable cost is Rs.12 per unit & fixed cost Rs.16,000 ; the break even production in units will be (a0 800 (b) 2000 (c ) 3,000 (d) All of these Q9. Sales is Rs.20,000 , variable cost is Rs. 12,000 and fixed cost Rs. 4,000 , the break-even sales will be (a) Rs.12,000 (b) Rs. 10,000 ( c)Rs.1,500 (d) All of these

108. Q10.Actual sales Rs.20,000, break-even sales Rs.12,000, margin of safety sales will be (a) Rs.8,000 (b) Rs. 12,000 © Rs. 10,000 (d) All of these. Q11.P/V ratio is 0.6, marginal cost of production Rs.20. the selling price is (a) Rs.40 (b) Rs. 60 (c ) Rs.50 (d) All of the above Q12.Contribution margin is also known as (a) marginal income (b) Gross profit (c ) Net income Q13. When margin of safety is 20% & P/V ratio 60% , the profit will be (a) 30% (b) 33.1/3% (c ) 12% (d) none of these Q14.Which of the following is an irrelevant cost ? (a) Sunk cost (b) Opportunity cost (c )Replacement cost (d) All of these

109. Q15.When sales are Rs.2 lakh, fixed costs Rs.30,000 ; P/V ratio 40% the amount of profit will be (a) Rs. 50,000 (b) Rs. 80,000 ( c) Rs.12,000 (d) None of these Q16.When fixed cost is Rs.10,000 and P/V ratio is 50% , the break-even point will be (a) R s.20,000 (b)Rs. 40,000 Q17. Period cost means (a) Variable cost (b) Fixed cost (c ) Prime cost (d) None of these Q18.Cost variance is the difference between The standard cost and marginal cost The standard cost and budgeted cost The standard cost and the actual cost All of these Q19.The main difference between absorption costing and marginal costing relates to the treatment of (a) Prime cost (b) Variable overhead (c ) Direct material & direct wages (d) Fixed overhead Q20.Marginal costing is based on distinction between (a) Sales & cost (b) Fixed & variable cost (c ) Revenue & sales (d) None of the above

110. References: ( 1)Book on ‘Cost & management accounting ‘ by Jain, Narang, Agarwal & Sehgal . ( 2) Book on Managerial Accounting (Tata McGraw hill), 2008 Edition by Ronald W. Hilton . (3) Book on Management Accounting by I.M. Pandey ,2007edition (4)Book on “Cost & management accounting “ by Ravi M. Kishor (4 th edition) (5) Book on Management Accounting by ICFAI University Press.