COST & MANAGEMENT ACCOUNTING
1. Three partners choose to go the start-up way. They run a chain of Pet Spa across Mumbai and Pune. For the accounting year 2022, their business observes increasing prices for materials. Hence, while preparing their financial statements, the three partners had varying objectives behind the method they should adopt for pricing the materials.
Objective I: The partners wished to hypothecate inventory and take a loan. Hence, a higher pricing of ending inventory in the business’ balance sheet would be desirable.
Objective II: The partners would wish to attract lower taxes on the business’ profit and hence a lower profit before tax would be desirable.
Discuss in brief any five material pricing methods that businesses may adopt. Identify the pricing methods that would achieve objectives I and II.
2. Mr. Sharma, founder of Pioma Plastics desires to increase the profit of the business in the coming year. He calls for a meeting with the managerial-level personnel and explains them that the selling price of their product is based on the prevailing market prices of their competitors. He seeks their advice on whether they should work backward on optimizing their costs by determining a standard cost for each of the components. Explain the process of standard costing to the founder as one of the managerial-level personnel. Would following standard costing help the founder in increasing the profit of the business?
3. Futuristic was a newly setup firm in 2019. It is in the business of providing artwork. However, being in the business of standard art objects (non-essential items), it did not do well once it was hit by COVID-19. It has a selling price of ₹2,500 per piece and a variable cost of ₹1,000 per piece. It incurs an annual fixed cost of ₹30,00,000.
The manager of the business wishes to know-
- The number of art pieces they must sell to be at the break-even point
- The contribution margin
- Whether the firm is earning a profit or incurring a loss by selling 2,100 art pieces
b. To combat the current difficult situation, the manager plans to curb the variable expenses and bring them to ₹500 per piece. Compute the new break-even point and contribution margin. Analyze and explain the movement in contribution margin to the manager.
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