Cost and management accounting June 2024

Description

 

Cost & Management Accounting

June 2024 Examination

 

 

 

Q1. How does an in-depth understanding of cost behavior (fixed, variable, and semi-variable costs) influence strategic decision-making within a company? Provide a scenario where misinterpreting cost behavior could lead to a flawed business strategy. (10 Marks)

Ans 1.

Introduction

Understanding cost behavior—how costs change with fluctuations in activity levels—is fundamental for effective strategic decision-making in any organization. Fixed costs remain constant regardless of output, variable costs change directly with production volume, and semi-variable costs contain elements of both fixed and variable costs. This knowledge allows managers to forecast financial outcomes, set budgets, and align business strategies with cost efficiency principles. Misinterpreting these costs can lead to decisions that might seem beneficial under false pretenses but could ultimately jeopardize the financial health of the company. For instance, underestimating variable costs could lead to pricing strategies that do not cover all incremental costs, thus eroding profitability. Conversely, overestimating fixed costs might discourage investment in productive capacity. It is only half solved

 

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Q2. A toy company gives you the following data for a month.  You are required to calculate the variance based on profit.    (10 Marks)

Toy	Budgeted			Actual
	Quantity	Rate	Cost per unit	Quantity	Rate
A	900	50	45	1000	55
B	650	100	85	700	95
C	1200	75	65	110	78

 

Ans 2.

Introduction

In the dynamic environment of business, particularly within the manufacturing sector, variance analysis serves as a crucial tool for management. It enables decision-makers to identify discrepancies between actual financial outcomes and budgeted expectations, particularly focusing on profit variances. By examining such variances, companies can pinpoint operational areas requiring improvement, evaluate performance, and refine budgetary allocations for future periods. The task at hand involves calculating the profit variances for a toy company which presents an opportunity to explore the implications of changes in production and pricing on the overall profitability. This analysis

 

Q3a. Z Ltd initially planned to sell 5,000 units per month at an average price of Rs. 10 per unit, with a budgeted variable production cost of Rs. 4 per unit and fixed costs budgeted at Rs. 20,000, aiming for a monthly income of Rs. 10,000. However, due to raw material shortages, only 4,000 units were produced, increasing production costs by 50 paisa per unit. To offset this, the selling price was raised by Rs. 1.00 per unit. Additionally, Rs. 1,000 was spent on research and development to enhance the production process. A Performance Budget needs to be prepared, along with an analysis of the variances.    (5 Marks)

Ans 3a.

Introduction

In the realm of cost and management accounting, preparing a performance budget and analyzing variances provides vital insights into a company’s operational effectiveness. Z Ltd’s situation illustrates the impact of unforeseen challenges, such as raw material shortages, on production and pricing strategies. This analysis will detail how these factors altered the expected financial outcomes through a comprehensive review of the revised performance against the initial budge

1. b) The variable costs to sales ratio stands at 70 percent, while the break-even point happens at 60 percent of capacity. With fixed costs amounting to Rs. 90,000, we need to determine the break- even point sales. Additionally, compute the profit at 75% of the capacity sales. (5 Marks)

Ans 3b.

Introduction

Analyzing financial metrics such as the break-even point and profit margins are essential for businesses to ensure sustainability and profitability. In this case, we need to determine the break-even sales for a company with fixed costs of Rs. 90,000 and a variable costs to sales ratio of 70%. Additionally, we’ll calculate the profit when operating at 75% of capacity, providing a clear picture of financial health at different operational levels.

Concept and Application

Understanding