Attempt all the problems.
problem1) What is Responsibility accounting? How is it associated with the goal of controllability? Describe clearly main objectives & features of responsibility accounting.
problem2) Principal budget factor (or limiting factor) is of vital importance to management. Comment on this statement, giving a list of such principal budget factors.
problem3) What are the steps involved in managerial decision making?
problem4) Describe the concept of relevant cost in managerial decision making. Also describe the effects of changing inventory levels on cost.
M/s Precision Company Ltd. (PCL) is in a business of making Fingertrips’ calculators. Fingertrips brand of calculators has the good reputation among students, office staff & college faculty for its quality & price. Its present market price is Rs.310 per calculator. Its unit cost structure is given as follows:
Direct material cost 150
Direct Labour cost 40
Variable overheads (including printing cost Rs.2 & packaging cost Rs.5) 40
Allocated fixed overheads 50
PCL was started three years ago. A market research had estimated the demand for 180000 calculators annually. The PCL was set up with the installed capacity of 200000 calculators. But even after three years annual demand for Fingertrip calculators stood at 150000 units. CEO of PCL, Bharm Dharan, was concerned about its future prospects. In the meantime, he got the export order from Dutch Exim Ltd. (DEL), Netherlands, for 100000 calculators at Rs.260 per calculator.
DEL is in business of marketing stationery to schools & offices & has planned to start selling calculators as well. It will import Fingertrip calculators but put its own brand name & will also take care of packaging to suit local market requirements. Initially, it is one-year contract renewable depending on market conditions.
The CEO of PCL is interested in the order as it will help in utilizing spare capacity of 50000 units. The marketing manager of PCL, Sonal agarwal, supports proposal as the calculator will be sold in Netherlands under a different brand name, & the sale of Fingertrip calculator in the local market will not be adversely affected.
According to John Mathew, production manager, to increase production capacity of 50000 units, a new machine, similar to the one being presently used, will have to be acquired. Two alternative machines are available in the market. First machine could be leased at the annual cost of Rs.25 Lakh. Maintenance cost per year is estimated to be Rs.2 lakh. Second machine uses latest technology. It can be leased at the yearly rental of Rs.30 lakhs. Though, maintenance cost will be 1.5 lakh per year. The new technology based machine will also reduce the labour cost & variable overhead cost by Rs.5 & Rs.2 per calculator respectively.
CEO asks the finance manager to perform a financial analysis of the alternatives.