Advanced MGT. Accounting (May 13 - June 09)

PAPER 5
ADVANCED MANAGEMENT ACCOUNTING

MAY 2013
Q.1
(a) A process industry unit manufactures three joint products: A, B and C. C has no realisable value unless
it undergoes further processing after the point of separation. The cost details of C are as follows:
Per Unit
`
Upto point of separation
Marginal cost 30
Fixed Cost 20
After point of separation
Marginal cost 15
Fixed cost 5
70
C can be sold at ` 37 per unit and no more.
(i) Would you recommend production of C?
(ii) Would your recommendation be different if A, B and C are not joint products?
(5 Marks)
(b) HTM Ltd., by using 12,00,000 units of a material M produces jointly 2,00,000 units of H and 4,00,000
units of T. The costs and sales details are as under:
`
Direct Material M @ ` 5 per unit 60,00,000
Other variable costs 42,00,000
Total fixed costs 18,00,000
Selling price of H per unit 25
Selling price of T per unit 20
The company receives an additional order for 40,000 units of T at the rate of ` 15 per unit. If this order
has been accepted, the existing price of T will not be affected.
However, the present price of H should be reduced evenly on the entire sale of H to market the
additional units to be produced.
Find the minimum average unit price to be charged on H to sustain the increased sales.
(5 Marks)
(c) Prescribe the steps to be followed to solve an assignment problem.
(5 Marks)
(d) X Ltd. wants to replace one of its old machines. Three alternative machines namely M1, M2 and M3 are
under its consideration. The costs associated with these machines are as under:
M1 M2 M3
` ` `
Direct material cost p.u. 50 100 150
Direct labour cost p.u. 40 70 200
Variable overhead p.u. 10 30 50
Fixed cost p.a. 2,50,000 1,50,000 70,000
You are required to compute the cost indifference points for these alternatives. Based on these points
suggest a most economical alternative machine to replace the old one when the expected level of
Model Test Paper - CA Final (Group I & II) Paper 5 383

annual production is 1,200 units.
(5 Marks)
Q.2
(a) DEF Bank operated for years under the assumption that profitability can be increased by increasing
Rupee volumes. But that has not been the case. Cost analysis has revealed the following:
Activity Activity Cost Activity Driver Activity Capacity
(`)
Providing ATM service 1,00,000 No. of transactions 2,00,000
Computer processing 10,00,000 No. of transactions 25,00,000
Issuing Statements 8,00,000 No. of statements 5,00,000
Customer inquiries 3,60,000 Telephone minutes 6,00,000
The following annual information on three products was also made available:
Checking Personal Loans Gold Visa
Accounts
Units of product 30,000 5,000 10,000
ATM transactions 1,80,000 0 20,000
Computer transactions 20,00,000 2,00,000 3,00,000
Number of statements 3,00,000 50,000 1,50,000
Telephone minutes 3,50,000 90,000 1,60,000
Required:
(i) Calculate rates for each activity.
(ii) Using the rates computed in requirement (i), calculate the cost of each product.
(8 Marks)
(b) KG Ltd. is engaged in the production of two products K and G. One unit of product K requires two units
of material A and four units of material B. Each unit of product G needs four units of material A, two units
of material B and four units of material C. Material C is locally produced in the factory of the company
by using two units of material B for each unit of C.
Material A and B are purchased in the open market. Production of products K, G and C is carried out
evenly throughout the year. At present the company has purchased its 3 months requirements of A and
B in one purchase. That is four purchases per annum. The other particulars provided by the company
are:
Products
K Units G Units
Budgeted sales for the next year 40,000 75,000
Desired stock at the end of the year 5,000 10,000
Expected stock at the beginning of the year 15,000 25,000
Products
A B
Purchase price p.u. (`) 15 25
Ordering cost per order (`) 1,000 1,000
Carrying cost p.a. 10% 10%
You are required to:
(i) Prepare a production budget and a material requirement budget for the next year.
(ii) Calculate the number of material purchases to be made, if the company wants to purchase materials in
optimal quantity.
(8 Marks)
Q.3
384 ADVANCED MANAGEMENT ACCOUNTING

(a) A company manufactures two products A and B, involving three departments - Machining, Fabrication
and Assembly. The process time, profit/unit and total capacity of each department is given in the
following table :
Machining Fabrication Assembly Profit (`)
(hours) (hours) (hours)
A 1 5 3 80
B 2 4 1 100
Capacity 720 1,800 900
Set up Linear Programming problem to maximize profits. What will be the product-mix at maximum
profit level? What will be the profit?
(8 Marks)
(b) The following are the information regarding overheads of a company:
(a) Overheads cost variance = ` 2,800 (A)
(b) Overheads volume variance = ` 2,000 (A)
(c) Budgeted overheads = ` 12,000
(d) Actual overhead recovery rate = ` 8 per hour
(e) Budgeted hours for the period = 2,400 hours
You are required to compute the following:
(i) Overheads expenditure variance.
(ii) Actual incurred overheads.
(iii) Actual hours for actual production.
(iv) Overheads capacity variance.
(v) Overheads efficiency variance.
(vi) Standard hours for actual production.
(8 Marks)
Q.4
(a) XYZ Company has three plants and four warehouses. The supply and demand in units and the
corresponding transportation costs are given. The table below shows the details taken from the
solution procedure of the transportation problem :
Answer the following questions. Give brief reasons:

(i) Is this solution feasible?
(ii) Is this solution degenerate?
(iii) Is this solution optimum?
(8 Marks)
(b) Gupta Ltd. produces 4 products P, Q, R and S by using three different machines X, Y and Z.
Each machine capacity is limited to 6,000 hours per month. The details given below are for July,
2013:
P Q R S
Selling price p.u. (`) 10,000 8,000 6,000 4,000
Variable cost p.u. (`) 7,000 5,600 4,000 2,800
Machine hours required p.u.
Machine X 20 12 4 2
Machine Y 20 18 6 3
Machine Z 20 6 2 1
Expected Demand (units) 200 200 200 200
Required:
(i) Find out the bottleneck activity.
(ii) Allocate the machine hours on the basis of the bottleneck.
(iii) Ascertain the profit expected in the month if the monthly fixed cost amounts to ` 9,50,000.
(iv) Calculate the unused spare hours of each machine.
(8 Marks)
Q.5
(a) Better and Best Ltd. manufacture only one product. Production is regular throughout the year and
the capacity of the factory is 1,50,000 units per annum. The summarized Profit and Loss
Account for the year ended 31st December is being reviewed by the Board of Directors.
`
Sales @ ` 10 per unit 10,00,000
Cost of sales:
Direct materials 2,50,000
Direct labour 1,50,000
Production overheads: `
Variable 30,000
Fixed 2,30,000
Administrative overheads:
Fixed 1,00,000
Selling and distribution overhead:
Variable 50,000
Fixed 1,50,000
(i) The Production Director proposed to reduce selling price to ` 9 in order to utilize full capacity.
(ii) The Sales Director proposed to increase selling price by 20 percent. By spending ` 2,25,000 on
advertisement, sales will be increased to 1,20,000 units per annum.
(iii) The Personnel Director pleaded for a change in the method of wage payment. For the present piece rate
of `·1.50 per unit, a bonus scheme (for each 2% increase in production over the target, there would be
an increase of 1% in the basic wage of each employee) will be implemented. A target of 2,000 units per
week for the company will be set for 50 week year. Selling price increase by 10%. With an additional
advertisement cost of ` 1,60,000, 20% increase in present sales will be achieved.
(iv) The Chairman felt that the packaging of the product required improvement. He wanted to know the

sales required to earn a target profit of 10% on turnover with the introduction of an improved packing at
an additional cost of 20 paise per unit (no change in selling price).
You are required to evaluate individually the proposals of each of the board member and give your
recommendation.
(12 Marks)
(b) What do you mean by DPP? What are its benefits?
(4 Marks)
Q.6
(a) The Noida Nirman Authority intends to install a road traffic regulating signal in a heavy traffic prone
area. The total installation work has been broken down into six activities. The normal duration,
crash duration and crashing cost of the activities are expected as given in the following table : .
Activity Normal Duration Crash Duration Crashing Cost
(Days) (Days) per day (`)
1-2 9 6 30,000
1-3 8 5 40,000
1-4 15 10 45,000
2-4 5 3 15,000
3-4 10 6 20,000
4-5 2 1 60,000
You are required to :
(i) draw the network and find the normal and minimum duration of the work.
(ii) compute the additional cost involved if the authority wants to complete the work in the shortest
duration.
(7 Marks)
(b) Bring out the main applications of Learning Curve.
(4 Marks)
(c) State the advantages available in inter-firm comparison.
(5 Marks)
Q.7 Answer any four of the following questions :
(a) What are the focuses of Theory of Constraints ? How it differs with regard to cost behaviour
?
(4 Marks)
(b) Brief the reasons for using simulation technique to solve problems.
(4 Marks)
(c) List out the qualities required for a good pricing policy.
(4 Marks)
(d) Under what circumstance PERT is more relevant? How?
(4 Marks)
(e) Enumerate the expected disadvantages in taking divisions as profit centres.
(4 Marks)


Paper 5
Advanced Management Accounting
May 2013 - Answer
A.1(a)
(i) Cost incurred on Product ‘C’ upto point of separation is irrelevant for decision making as Product
‘C’ is a Joint Product. Joint Products are the result of same raw material & same process Operations.
Cost incurred after point of separation will be considered for decision making as specifically incurred for
Product ‘C’.
After further processing Product ‘C’ will contribute `17 per unit toward ‘Joint Production Cost’.
Calculation is as follows:
Particulars Amount (`) Amount (`)
Selling Price per unit 37.00
Less: Cost after separation:

Marginal Cost per unit 15.00 20.00
Fixed Cost per unit 5.00
Contribution toward ‘Joint Production Cost’ 17.00

Hence, further processing of Product ‘C’ is recommended.
(ii) If Product ‘C’ is not a joint product with same cost structure. In this case there will be negative contribution
on production of Product ‘C’. The calculation is as follows:
Particulars Amount (`)
Selling Price per unit 37.00
Less: Marginal Cost (` 30 + ` 15) 45.00
Contribution (8.00)
Hence, production of Product ‘C’ will not be recommended.
(b) Product H & T are joint products and produced in the ratio of 1:2 from the same direct material- M.
Production of 40,000 additional units of T results in production of 20,000 units of H.
Calculation of contribution under existing situation
Sales Value:
H – 2,00,000 units @ ` 25 per unit 50,00,000
T – 4,00,000 units @ ` 20 per unit 80,00,000 1,30,00,000
Less: Material- M (12,00,000 units @ ` 5 per unit) 60,00,000
Less: Other Variable Costs 42,00,000
Contribution 28,00,000
Let Minimum Average Selling Price per unit of H is ` X
Calculation of contribution after acceptance of additional order of ‘T’
Sales Value:
H – 2,20,000 units @ ` X per unit 2,20,000 X
T – 4,00,000 units @ ` 20 per unit 80,00,000
40,000 units @ ` 15 per unit 6,00,000 2,20,000 X +
86,00,000

Less: Material- M (12,00,000 units x 110%) @ ` 5 66,00,000
per unit
Less: Other Variable Costs (` 42,00,000 x 110%) 46,20,000
2,20,000 X –
Minimum Average Selling Price per unit of H
Contribution after additional order of T = Contribution under existing production
 2,20,000 X – 26,20,000 = 28,00,000
 2,20,000 X = 54,20,000
54, 20, 000

 X = = ` 24.64
2, 20, 000
Minimum Average Selling Price per unit of H is ` 24.64
(c) The assignment problem can be solved by applying the following steps:
Step1: Subtract the minimum element after row operation of each row from all the elements in
that row. From each column of the matrix so obtained, subtract its minimum element. The resulting
matrix is the starting matrix for the following procedure.
Step2: Draw the minimum number of horizontal and vertical lines that cover all the zeros. If this number
of lines is n, order of the matrix, optimal assignment can be made by skipping steps 3 and 4 and
proceeding with step 5. If, however, this number is less than n, go to the next step
Step3: Here, we try to increase the number of zeros in the matrix. We select the smallest element out
of these which do not lie on any line. Subtract this element from all such (uncovered) elements and add
it to the elements which are placed at the intersections of the horizontal and vertical lines. Do not alter
the elements through which only one line passes.
Step4: Repeat steps 1, 2 and 3 until we get the minimum number of lines equal to n.
Step5 (A): Starting with first row, examine all rows of matrix in step 2 or 4 in turn until a row containing
exactly one zero is found. Surround this zero by , indication of an assignment there. Draw a
vertical line through the column containing this zero. This eliminates any confusion of making any
further assignments in that column. Process all the rows in this way.
Step5 (B): Apply the same treatment to columns also. Starting with the first column, examine all
columns until a column containing exactly one zero is found. Mark around this zero and draw a
horizontal line through the row containing this marked zero. Repeat steps 5A and B, until one of the
following situations arises:
(i) No unmarked ( ) or uncovered (by a line) zero is left,
(ii) There may be more than one unmarked zero in one column or row. In this case, put around one of
the unmarked zero arbitrarily and pass 2 lines in the cells of the remaining zeros in its row and
column. Repeat the process until no unmarked zero is left in the matrix.
(d) Computation of Cost Indifference Points for three alternatives
Cost Indifference Point of two machines =

From the above computations, it is clear that at activity level below the indifference point the alternative
(machine) with lower fixed cost and higher variable costs should be used. In case the activity level
exceeds the indifference point, a machine with lower variable cost per unit (or higher contribution per
unit) and higher fixed cost, is more profitable to operate.
At the activity level equal to the indifference point both machines are on equal footing. Hence from the
above we conclude as follows:
Activity Level Machine Preference
Less than 400 units M3
Exactly 400 units Either M2 or M3
Above 400 units but less than 1,000 units M2
Exactly 1,000 units Either M1 or M2
Above 1,000 units M1
When expected level of activity is 1,200 units i.e. more than 1,000 units, Machine M1 should be used.
A.2(a) Calculation showing Rates for each Activity
Activity Activity Cost Activity Driver No. of Units of Activity
[a] Activity Driver Rate
(`) [b] [a] / [b]
(`)
Providing ATM Service 1,00,000 No. of ATM Transactions 2,00,000 0.50
Computer Processing 10,00,000 No. of Computer Transactions 25,00,000 0.40
Issuing Statements 8,00,000 No. of Statements 5,00,000 1.60
Customer Inquiries 3,60,000 Telephone Minutes 6,00,000 0.60
Calculation showing Cost of each Product
Activity Checking Accounts (`) Personal Loans (`) Gold Visa (`)
Providing ATM Service 90,000 - 10,000
(1,80,000 tr. x ` 0.50) (20,000 tr. x ` 0.50)
Computer Processing 8,00,000 80,000 1,20,000
(20,00,000 tr. x ` 0.40) (2,00,000 tr. x ` 0.40) (3,00,000 tr. x ` 0.40)
Issuing Statements 4,80,000 80,000 2,40,000
(3,00,000 tr. x ` 1.60) (50,000 tr. x ` 1.60) (1,50,000 tr. x ` 1.60)
Customer Inquiries 2,10,000 54,000 96,000
(3,50,000 tr. x ` 0.60) (90,000 tr. x ` 0.60) (1,60,000 tr. x ` 0.60)

Total Cost [a] ` 15,80,000 ` 2,14,000 ` 4,66,000
Units of Product [b] 30,000 5,000 10,000
Cost of each Product 52.67 42.80 46.60
[a]/[b]
A.2(b)
Production Budget for Product K and G
Particulars ‘K’ Units ‘G’ Units
Desired Inventory at the end of the year 5,000 10,000
Sales Forecast 40,000 75,000
Total Requirements 45,000 85,000
Less: Expected Inventory at beginning of the year 15,000 25,000
Budgeted Production 30,000 60,000
Budgeted Requirements of Material ‘A’, ‘B’ and ‘C’
Particulars ‘A’ Units ‘B’ Units ‘C’ Units
For Product ‘K’: Production 30,000 units
‘A’: 30,000 × 2 per unit 60,000 - -
‘B’: 30,000 × 4 per unit - 1,20,000 -
For Product ‘G’: Production 60,000 units
‘A’: 60,000 × 4 per unit 2,40,000 - -
‘B’: 60,000 × 2 per unit - 1,20,000 -
‘C’: 60,000 × 4 per unit - - 2,40,000
For Material ‘C’: Production 2,40,000 units
‘B’: 2,40,000 × 2 per unit - 4,80,000 -
Total Requirements 3,00,000 7,20,000 2,40,000
Optimum Order Quantity:
= 20,000 units = 24,000 units

No. of Purchases:

A.3(a)
Let x and y denote the number of units produced for the product A & B respectively.
Maximize (Profit) Z = 80x + 100y
Subject to x + 2y = 720 (Machining Time)
5x + 4y = 1,800 (Fabrication Time)
3x + y = 900 (Assembly Time)
x = 0, y = 0
SIMPLEX METHOD
By introducing slack variables s1 = 0, s2 = 0 and s3 = 0 the linear programming problem in standard form
becomes –
Maximize Z = 80x + 100y + 0s1 + 0s2 + 0s3
Subject to x + 2y + s1 = 720 (Machining Time)
5x + 4y + s2 = 1,800 (Fabrication Time)
3x + y + s3 = 900 (Assembly Time)
x, y, s1, s2, s3 = 0
We shall prepare the initial simplex tableau as follows:

Since all numbers in the Cj – Zj row are either negative or zero, the optimum solution to the given problem has
been obtained and is given by x = 120 units and 300 units
Maximum Profit = 80 x 120 + 100 x 300
Hence, the optimum solution is to produce 120 units of product A and 300 units of product B to get
maximum profit of ` 39,600
Solution by GRAPHICAL METHOD

Let x and y denote the number of units produced for the product A & B respectively.
Maximize (Profit) Z = 80x + 100y
Subject to x + 2y = 720 (Machining Time)
5x + 4y = 1,800 (Fabrication Time)
3x + y = 900 (Assembly Time)
x = 0, y = 0
Points to draw x + 2y = 720
If x = 0
2y = 720
y = 720/2
= 360
If y = 0
x = 720
(x, y) - (0, 360); (720, 0)
Points to draw 5x + 4y = 1,800
If x = 0
4y = 1,800
y = 450
If y = 0
5x = 1,800
x = 360
(x, y) - (0, 450); (360, 0)
Points to draw 3x + y = 900
If x = 0
y = 900
If y = 0
3x = 900
x = 300
(x, y) - (0, 900); (300, 0)
Intersection Point (R)
5x + 4y = 1,800 (Equation1)
x + 2y = 720 (Equation2)
Or
- 6y = -1,800
y = 300
On putting value of y in any one of the above equation, the value of x = 120
Point R– (120, 300)
Intersection Point (Q)
5x + 4y = 1,800 (Equation1)
3x + y = 900 (Equation2)
Or

-7x = -1,800
x = 257
On putting value of x in any one of the above equation, the value of y = 129
Point Q – (257, 129)

The shaded portion in the diagram represents the feasible region.
Point Co-Ordinates of the corner Value of the objective
points of the feasible region function
(value of x and y) Z = 80x + 100y
P (300,0) ` 24,000
Q (257,129) ` 33,460
R (120,300) ` 39,600
S (0,360) ` 36,000
T (0,0) ` 0
Since at Point R company makes maximum profit hence product mix at Point R i.e. 120 units of Product
A and 300 units of product B should be produced.
(b) Overheads Cost Variance = ` 2,800 (A)
Overheads Volume Variance = ` 2,000 (A)
Budgeted Overheads = ` 12,000
Actual Overhead Recovery Rate = ` 8 per hour
Budgeted Hours for the period = 2,400 hours
(i) Overheads Expenditure Variance = Overheads Cost Variance (-) Overheads
Volume Variance
= ` 2,800 (A) - ` 2,000 (A)
= ` 800 (A)
(ii) Overheads Expenditure Variance = Budgeted Overheads (-) Actual Overheads
` 800(A) = ` 12,000 (-) Actual Overheads
Therefore, Actual Overheads = ` 12,800
(iii) Actual hours for actual production
= 1,600 hours
For (iv), (v) & (vi) refer Working Note
(iv) Overheads Capacity Variance = Budgeted Overheads for Actual Hours (-)
Budgeted Overheads
= ` 5 x 1,600 hrs. - ` 12,000
= ` 8,000 - ` 12,000
= ` 4,000 (A)
(v) Overheads Efficiency Variance = Absorbed Overheads (-) Budgeted
Overheads for Actual Hour
= ` 10,000 - ` 5 x 1,600 hours = ` 2,000 (F)

(vi) Standard hours for actual production
Working Notes:
Overhead Cost Variance = Absorbed Overheads (-) Actual Overheads
 ` 2,800 (A) = Absorbed Overheads (-) `12,800
Therefore, Absorbed Overheads = `10,000
Standard Rate per hour
A.4(a)
(i) Is this solution feasible?
A necessary and sufficient condition for the existence of a feasible solution to the transportation problem
is that
Where
ai = quantity of product available at origin i.
bj = quantity of product available at origin j.
In other words, the total capacity (or supply) must equal total requirement (or demand)
As the supply 55 units (10+25+20) equals demand 55 units (25+10+15+5), a feasible solution to
the problem exists.
(ii) Is this solution degenerate?
When the number of positive allocations at any stage of the feasible solution is less than the required
number (rows + columns -1), the solution is said to be degenerate solution.
In given solution total allocated cells are 6 which are equal to 4+3-1 (rows + columns -1).
Therefore, the initial basic solution is not a degenerate solution.
(iii)Is this solution optimum?
Test of Optimality:

Since, all cells values in matrix are non- negative, hence the solution
provided by XYZ Company is optimum.
It may be noted that zero opportunity cost in cell (B, III) indicates a case of alternative optimum
solution.
A.4(b)
(i)
Since Machine Y has the highest machine utilization it represents the bottleneck activity.
Hence Product Ranking & Resource Allocation should be based on Contribution/Machine
Hour of Machine Y.
(ii)
(iii) Calculation of Expected Profit

Particulars Amount
(`)
P (200 units x ` 3,000) 6,00,000
Q (11.11 units x ` 2,400) 26,664
R (200 units x ` 2,000) 4,00,000
S (200 units x ` 1,200) 2,40,000
Total Contribution 12,66,664
Less: Fixed Cost 9,50,000
Expected Profit 3,16,664

(iv) Unused Spare Hours
Machine ‘X’
Particulars Amount
(`)
Machine Hours Available 6,000.00 hrs.
Less: Machine Hours Utilized 5,333.32 hrs.
Spare Hours 666.68 hrs.
Machine ’Z’
Particulars Amount
(`)
Machine Hours Available 6,000.00 hrs.
Less: Machine Hours Utilized 4,666.66 hrs.
Spare Hours 1,333.34 hrs.
A.5(a) Workings:
Full Capacity: ` 1,50,000 units p.a.
Current Capacity: ` 1,00,000 units p.a. which is equals to 66.67% of full capacity.
Existing Situation
Particulars Amount Per Unit
(`) (`)
Sales (1,00,000 units x ` 10) 10,00,000 10.00
Less: Variable Cost
Direct Material 2,50,000 2.50
Direct Labour 1,50,000 1.50
Production Overheads 30,000 0.30
Selling and Distribution Overhead 50,000 0.50
Contribution 5,20,000 5.20
Less: Fixed Cost
Production Overheads 2,30,000 2.30
Administrative Overheads 1,00,000 1.00
Selling and Distribution Overhead 1,50,000 1.50
Profit 40,000 0.40
Proposal (i) - Reduce Selling Price to ` 9, Capacity Utilization 100%
Particulars Amount
(`)
Sales (1,50,000 units x ` 9) 13,50,000
Less: Variable Cost (1,50,000 units x ` 4.80) 7,20,000
Profit 1,50,000
Proposal (ii) - Increase in Selling Price by 20%, Additional Advertising Cost ` 2,25,000, Sales Volume
1,20,000 units per annum.
Particulars Amount

(`)
Sales (1,20,000 units x ` 12) 14,40,000
Less: Variable Cost (1,20,000 units x ` 4.80) 5,76,000
Less: Advertising Cost 2,25,000
Profit 1,59,000
Proposal (iii) - Increase in Selling Price by 10%, Additional Advertising Cost ` 1,60,000, 20% Increase in
Present Sales and Bonus Scheme (for each 2% increase in production over the target, there would be an
increase of 1% in the basic wages of each employee)
Particulars Amount
(`)
Sales (1,20,000 units x ` 11) 13,20,000
Less: Variable Cost 5,94,000
[1,20,000 units x `(2.50 + 1.65* + 0.30 +
0.50)]
Less: Advertising Cost 1,60,000
Profit 86,000
Workings(*):
Present Labour Rate = ` 1.50 per unit
Target Production Volume = 2,000 units x 50 weeks = 1,00,000 units
Production above the target volume = 1,20,000 units – 1,00,000 units = 20,000 units
or 20% of Target Production Volume
Bonus (for each 2% increase in production over the target, there would be an increase of
1% in the basic wages of each employee) = = 10% increase in basic wages.
It means wages would be ` 1.65 (` 1.50 x 1.10) per unit.

Proposal (iv) -Target Profit 10% on Turnover, Additional Packing Cost 0.20 paise per unit, No Change in
Selling Price, Sales Volume =?
Let Sales Volumes is K units.
Particulars Amount
(`)
Sales (K units x ` 10) 10K
Less: Variable Cost 5K
[K units x `(4.80 + 0.20)
Contribution 5K
Profit 5K-4,80,000
Profit equals to 10% of Turnover. It means-
 5K – 4,80,000 = 10% of 10K
 4K = 4,80,000
 K = 1,20,000 units
Turnover = 1,20,000 units x ` 10

= ` 12,00,000
Profit = 10% of ` 12,00,000
= ` 1,20,000
Particulars Capacity Utilization Profit (`)
Existing Situation 66.67% 40,000
Proposal (i) 100.00% 1,50,000
Proposal (ii) 80.00% 1,59,000
Proposal (iii) 80.00% 86,000
Proposal (iv) 80.00% 1,20,000
Company should accept Proposal (ii).
A.5(b) Direct Product Profitability (DPP) is ‘Used primarily within the retail sector, and involves the attribution of both
the purchase price and other indirect costs such as distribution, warehousing, retailing to each product line.
Thus a net profit, as opposed to a gross profit, can be identified for each product. The cost attribution process
utilises a variety of measures such as warehousing space, transport time to reflect the resource consumption
of individual products.’
Benefits of Direct Product Profitability:
(i) Better Cost Analysis - Cost per product is analysed to know the profitability of a particular product.
(ii) Better Pricing Decision- It helps in price determination as desired margin can be added with the actual
cost.
(iii) Better Management of Store and Warehouse Space- Space Cost and Benefit from a product can be
analysed and it helps in management of store and warehouse in profitable way.
(iv) The Rationalisation of Product Ranges etc.
A.6(a)
(i)
The critical path is 1 – 3 – 4 – 5. The normal length of the project is 20 days and minimum project length
is 12 days.
(ii) Statement showing Additional Crashing Cost:
Normal Job Crashed Crashing Cost
Project
Length
Days
20 - -
19 3-4 ` 20,000 x1 Day = ` 20,000
18 3-4 ` 20,000 x 2 Days = ` 40,000
17 3-4 ` 20,000 x 3 Days = ` 60,000
16 4-5 ` 20,000 x 3 Days +1 Day x ` 60,000 =` 1,20,000
15 3-4,1-4 ` 20,000 x 4 Days + ` 60,000 x1 Day + ` 45,000 x 1
Day = `1,85,000
14 1-3, 1-4, 2-4 ` 1,85,000 +1 Day x ` 40,000 +1 Day x ` 45,000+ 1 Day
x ` 15,000 = ` 2,85,000
13 1-3, 1-4, 2-4 ` 2,85,000 +1 Day x ` 40,000 +1 Day x ` 45,000+ 1 Day
x ` 15,000 = ` 3,85,000
12 1-3, 1-4, 1-2 ` 3,85,000+1 Day x ` 40,000 +1 Day x ` 45,000 +1 Day
x ` 30,000 = ` 5,00,000
Total Additional Cost` 5,00,000/-
(At shortest duration)
(b) Knowledge of learning curve can be useful both in planning and control. Standard cost for new operations
should be revised frequently to reflect the anticipated learning pattern.
The main applications are summarised below:
 Helps to analyse CVP relationship during familiarisation phase: Learning curve is useful to
analyse cost-volume-profit relationship during familiarisation phase of product or process and thus
it is very useful for cost estimates. Learning curve can be used as a tool for forecasting.
 Helps in budgeting and profit planning: Budget manager should select those costs which
reflect learning effect and then he should be able to incorporate this effect in process of develop-
ing budgets or in the exercises relating to project planning.
 Helps in pricing: The use of cost data adjusted for learning effect helps in development of
advantageous pricing policy.
 Design makers: It helps design engineers in making decisions based upon expected
(predictable from past experience) rates of improvement.
 Helps in negotiations: It is very useful to Government in negotiations about the contracts.
 Helps in setting standards: The learning curve is quite helpful in setting standards in learning
phase.
(c) Advantages of Inter-firm comparison: The main advantages of inter-firm comparison are:
 Such a comparison gives an overall view of the industry as a whole to its members– the present
position of the industry, progress made during the past and the future of the industry.
 It helps a concern in knowing its strengths or weaknesses in relation to others so that remedial
measures may be taken.
 It ensures an unbiased specialized reporting on particular problems of the concern.
 It develops cost consciousness among members of the industry.
 It helps Government in effecting price regulation.
 It helps to improve the quality of products manufactured and to reduce the cost of production. It is
thus advantageous to the industry as well as to the society.
A.7 (a) The theory of constraint focuses its attention on constraints and bottlenecks within the organisation which
hinder speedy production. The main concept is to maximize the rate of manufacturing output i.e. the throughput
of the organisation. This requires examining the bottlenecks and constraints which are defined as:
 A bottleneck is an activity within the organisation where the demand for that resource is more than
its capacity to supply.

 A constraint is a situational factor which makes the achievement of objectives/throughput more
difficult than it would otherwise be. Constraints may take several forms such as lack of skilled employees,
lack of customer orders or the need to achieve a high level of quality product output.
Using above definition, therefore, a bottleneck is always a constraint but a constraints need not be a bottleneck.
The theory of constraints assumes few costs are variable –generally materials, purchased parts,
piecework labour, and energy to run machines. It assumes that most direct labour and overheads are fixed.
This is consistent with the idea that the shorter the time period, the more costs are fixed, and the idea that the
theory of constraints focuses on the short run.
(b) Reasons for using simulation technique to solve problems:
 It is not possible to develop a mathematical model and solutions without some basic assumptions.
 It may be too costly to actually observe a system.
 Sufficient time may not be available to allow the system to operate for a very long time.
 Actual operation and observation of a real system may be too disruptive.
(c) Quality required for a good pricing policy:
The pricing policy plays an important role in a business because the long run survival of a business
depends upon the firm’s ability to increase its sales and device the maximum profit from the existing and
new capital investment. Although cost is an important aspect of pricing, consumer demand and
competitive environment are frequently far more significant in pricing decisions.
The pricing policy structure should:
 provide an incentive to producer for adopting improved technology and maximising production;
 encourage optimum utilisation of resources;
 work towards better balance between demand and supply;
 promote exports; and
 avoid adverse effects on the rest of the economy.
(d) PERT (Program Evaluation and Review Technique) is more relevant for handling such projects which
have a great deal of uncertainty associated with the activity durations.
To take these uncertainty into account, three kinds of times estimates are generally obtained.
These are:
 The Optimistic Times Estimate: This is the estimate of the shortest possible time in which an
activity can be completed under ideal conditions. For this estimate, no provision for delays
or setbacks are made. We shall denote this estimate by to.
 The Pessimistic Time Estimate: This is the maximum possible time which an activity could take to
accomplish the job. If everything went wrong and abnormal situations prevailed, this would be the
time estimate. It is denoted by tp.
 The Most Likely Time Estimate: This is a time estimate of an activity which lies between
the optimistic and the pessimistic time estimates. It assumes that things go in a normal way with
few setbacks. It is represents by tm.
(e) The expected disadvantages of taking divisions as profit centres are as follows:
 Divisions may compete with each other and may take decisions to increase profits at the expense
of other divisions thereby overemphasizing short term results.
 It may adversely affect co-operation between the divisions and lead to lack of harmony in
achieving organizational goals of the company. Thus it is hard to achieve the objective of goal
congruence.
 It may lead to reduction in the company’s overall total profits.
 The cost of activities, which are common to all divisions, may be greater for decentralized
structure than centralized structure. It may thus result in duplication of staff activities.
 Top management loses control by delegating decision making to divisional managers. There
are risks of mistakes committed by the divisional managers, which the top management, may
avoid.

 Series of control reports prepared for several departments may not be effective from the point of
view of top management.
 It may under utilize corporate competence.
 It leads to complications associated with transfer pricing problems.
 It becomes difficult to identity and defines precisely suitable profit centres.
 It confuses division’s results with manager’s performance.

PAPER 5
NOVEMBER 2012
Q-1 (a) If Moonlite Limited operates its plant at normal capacity it produces 2,00,000 units from the plant 'Meghdoot'.
The unit cost of manufacturing at normal capacity is as under:
`
Direct material 65
Direct labour 30
Variable overhead 33
Fixed overhead 7
135
Direct labour cost represents the compensation to highly-skilled workers, who are permanent employees of the
company. The company cannot afford to lose them. One labour hour is required to complete one unit of the
product.
The company sells its product for ` 200 per unit with variable selling expenses of ` 16 per unit. The company
estimates that due to economic down turn, it will not be able to operate the plant at the normal capacity, at
least during the next year. It is evaluating the feasibility of shutting down the plant temporarily for one year.
If it shuts down the plant, the fixed manufacturing overhead will be reduced to ` 1,25,000. The overhead costs
are incurred at a uniform rate throughout the year. It is also estimated that the additional cost of shutting down
will be ` 50,000 and the cost of re-opening will be ` 1,00,000.
Required:
Calculate the minimum level of production at which it will be economically beneficial to continue to operate the
plant next year if 50% of the labour hours can be utilized in another activity, which is expected to contribute at
the rate of ` 40 per labour hour. The additional activity will relate to a job which will be off-loaded by a sister
company only if the company decides to shut down the plant.
(Assume that the cost structure will remain unchanged next year. Ignore income tax and time value of money)
(5 Marks)
(b) An investor is interested in investing ` 15,00,000 in a portfolio of investments. The investment choices and
expected rates of return on each one of them are :
Investment Projected Rate of Return
Mutual Fund ‘XY’ 15%
Mutual Fund ‘HN’ 9%
Money Market Fund 8%
Government Bonds 8.75%
Shares ‘P’ 17%
Share ‘Q’ 18%
The investor wants at least 40% of his investment in Government Bonds. Because of the higher perceived risk
of the two shares, he has specified that the combined investment in these two shares not to exceed `
2,60,000. The investor has also specified that at least 25% of the investment should be in the money market
fund and that the amount of money invested in shares should not exceed the amount invested in Mutual Funds.
His final investment condition is that the amount invested in mutual fund 'XY' should be no more than the
amount invested in mutual fund 'HN'. The problem is to decide the amount of money to invest in each
alternative so as to obtain the highest annual total return.
Required:
Formulate the above as a linear programming problem.
(5 Marks)

(c) PQR Limited sells two versions: Deluxe and Premium of its only product GoGo Juicer. The GoGo Juicer uses
patented technology to extract the last drop of juice from most fruits. The 'Premium' version can handle larger
fruit and has more options relative to the 'Deluxe' version. The following table provides the financial results of
the most recent year of operations:
Particulars Deluxe Premium Total
90,000 units 10,000 units 1,00,000 units
Revenue (`) 63,00,000 9,00,000 72,00,000
Material cost (`) 10,80,000 2,50,000 13,30,000
Direct labour cost (`) 14,40,000 1,60,000 16,00,000
Contribution margin (`) 37,80,000 4,90,000 42,70,000
Allocated fixed manufacturing
overhead (`) 34,20,000 3,80,000 38,00,000
Allocated fixed selling and administrative 2,51,563 35,937 2,87,500
overheads (`)
Profit margin (`) 1,08,437 74,063 1,82,500
Profit margin per unit (`) 1.2048 7.4063
Labour cost is ` 16 per hour and each product requires one hour of labour. The company currently allocates all
fixed manufacturing overheads, using labour hours as the allocation basis. It allocates fixed selling and
administrative overheads, using revenue as the allocation base.
Although the profit margin per unit of 'Deluxe' juicer is rather low, PQR Limited believes that it is important to
keep this model in the product mix. However, PQR can tailor its promotion and sales strategies to improve the
sales mix to 16:4 ratio from the current 9:1 ratio of 'Deluxe' to 'Premium' juicers, with total volume staying at
1,00,000 units.
PQR Limited finds that ` 1.1 million of the ` 3.8 million of fixed manufacturing overheads pertains to batch
related activities such as scheduling production runs. Similarly, ` 1,15,000 is the amount of administrative
overheads out of the ` 2,87,500 of selling and administrative overheads.
It is found that the 'premium' juicer is produced in smaller batches (250 units per batch) than that of 'Deluxe'
juicer (500 units per batch). Similarly, it takes 10 sales visits to sell 1,000 units of the 'Deluxe' juicer, while it
takes 25 visits to sell 1,000 units of 'Premium' juicer.
Required:
(i) Prepare a profitability statement based on the proposed sales mix, using the most appropriate basis of
allocating fixed overheads.
(In absence of an appropriate basis, do not allocate overheads to products)
(ii) Advise the company on whether it should go ahead with the propose change in sales mix.
(10 Marks)
Q-2
(a) PEX is a manufacturing company of which division PQR manufactures a single standardized product. Some
of the output is sold externally whilst the remainder is transferred to division RPQ where it is a subassembly
in the manufacture of that division's product. PQR has the capacity (annual) to produce 30,000 units of the
product. The unit costs of division PQR's product are as under:
`
Direct material 40
Direct labour 20
Direct expenses 20
Variable manufacturing overheads 20
Fixed manufacturing overheads 40
Sells and packaging expenses-variable 10
150

Annually 20,000 units of the product are sold externally at the standard price of ` 300 per unit.
In addition to the external sales, 10,000 units are transferred annually to division RPQ at an internal transfer
price of ` 290 per unit. This transfer price is obtained by deducting variable selling and packing expenses from
the external price since those expenses are not incurred for internal transfers.
Division RPQ incorporates the transferred-in goods into a more advanced product. The unit costs of this
product are as follows:.
`
Transferred-in-item (from division PQR) 290
Direct material and components 230
Direct labour 30
Variable overheads 120
Fixed overheads 120
Selling and packing expenses-variable 10
800
Division RPQ's manager disagrees with the basis used to set the transfer price. He argues that the transfers
should be made at variable cost plus an agreed (minimal) mark up because his division is taking output that
division PQR would be unable to sell at the price of ` 300.
Partly because of this disagreement, a study of the relationship between selling price and demand has recently
been carried out for each division by the company's sales director. The study has brought out the following
demand schedule:
Division PQR
Selling price (`) 200 300 400
Demand (units) 30,000 20,000 10,000
Division RPQ
Selling price (`) 800 900 1,000
Demand (units) 14,400 10,000 5,600
The manager of the division RPQ claims that this study supports his case. He suggests that a transfer price of
` 120 would give division PQR a reasonable contribution to its fixed overheads while allowing division RPQ to
earn a reasonable profit. He also believes that it would lead to an increase of output and an improvement in the
overall level of company profits.
Required:
(i) Calculate the effect of the transfer price of ` 290 per unit on company's operating profit. Calculate the
optimal product mix.
(ii) Advise the company on whether the transfer price should be revised to ` 120 per unit.
(11 Marks)
(b) Explain the term 'Degeneracy' in the context of a transportation problem. How can this be solved?
(5 Marks)
Q-3
(a) Sunglow Limited manufactures and sells a single product. From the records of the company the following
information is available for November 2012:
The standard cost comprises the following:
Direct material Unit `
X 8 320
Y 24 1,680
Z 16 400
2,400

Direct wages (` 40 per hour) 1,600
Variable overhead (25% of direct wages) 400
Fixed overhead (based on budgeted production of
10,000 units of the final product per month) 600
5,000
The budgeted selling price is ` 700 each and the budgeted sales for the month were 14,000 units.
The following were the transactions for the month:
Direct material: Units Purchased Issued unit
Price per unit
X 44,000 42 82,400
Y 1,40,000 71 2,46,400
Z 60,000 24 1,64,000
Direct Wages: ` 90,00,000 (3,98,000 hours)
Overheads:
Variable ` 2,00,000
Fixed ` 3,00,000
Production: 11,000 units
Sales: 9,000 units at ` 700 each
and 3,500 units at ` 750 each
Required:
Calculate (i) Material price variance; (ii) Material mix variance; (iii) Labour rate variance (iv) Labour efficiency
variance (v) Variable overhead efficiency variance; and (vi) Fixed overhead efficiency variance.
(9 Marks)
(b) An international tourist company deals with numerous personal callers each day and prides itself on its level
of service. The time to deal with each caller depends on the client's requirements which range from, say, a
request for a brochure to booking a round-the-world cruise. If a client has to wait for more than 10 minutes for
attention, it is company's policy for the manager to see him personally and to give him a holiday voucher worth
`15.
The company's observations have shown that the time taken to deal with clients and the arrival pattern of their
calls follow the following distribution pattern:
Time to deal Minutes 2 4 6 10 14 20 30
with clients
Probability 0.05 0.10 0.15 0.30 0.25 0.10 0.05
Time between
call arrivals Minutes 1 8 15 25
Probability 0.2 0.4 0.3 0.1
Required :
(i) Describe how you would simulate the operation of the travel agency based on the use of random number
tables;
(ii) Simulate the arrival and serving of 12 clients and show the number of clients who receive a voucher (use
line 1 of the random numbers below to derive the arrival pattern and line 2 for serving times); and
(iii) Calculate the weekly cost of vouchers; assuming the proportion of clients receiving vouchers derived
from (ii) applies throughout a week of 75 operating hours.
Random Numbers
Line 1 03 47 43 73 86 36 96 47 36 61 46 98
Line 2 63 71 62 33 26 16 80 45 60 11 14 10
(7 Marks)

Q-4
(a) A production supervisor is considering how he should assign five jobs that are to be performed to five operators.
He wants to assign the jobs to the operators in such a manner that the aggregate costs to perform the job is
the least. He has the following information about the wages paid to the operators for performing these jobs.
Operators Jobs
1 2 3 4 5
A 10 3 3 2 8
B 9 7 8 2 7
C 7 5 6 2 4
D 3 5 8 2 4
E 9 10 9 6 10
Required :
Assign the jobs to the operators so that the aggregate cost is the least.
(8 Marks)
(b) Discuss the characteristics of zero base budgeting.
(4 Marks)
(c) Discuss the essential requisites for installation of uniform costing system.
(4 Marks)
Q-5
(a) The Board of Directors XY Company Limited are considering a new type of handy sewing machine which their
R & D Department has developed. The expenditure so far on research has been ` 95,000 and a consultant's
report has been prepared at a cost of ` 22,500. The report provides the following information:
Cost of production per unit: `
Material 45.00
Labour 75.00
Fixed overheads (Based on Company fs normal allocation rates) 20.00
140.00
Anticipated additional fixed costs:
Rent for additional space ` 1,25,000 per annum
Other additional fixed costs ` 70,000 per annum
A new machine will be built with the available facilities with a cost of ` 1,10,000 (material ` 90,000 and labour
` 20,000). The materials are readily available in stores which are regularly used. However, these are to be
replenished immediately. The price of these materials have since been increased by 50%. Scrap value of the
machine at the end of the 10th year is estimated at ` 20,000. The product scraps generated can be disposed
off at the end of year 10 for a price of ` 1,43,000.
Years 1-5 Years 6-10
Demand (Unit) Probability Demand Probability
40,000 0.15 24,000 0.30
20,000 0.60 16,000 0.50
12,000 0.25 4,000 0.20
It is estimated that the commercial life of the machine will be no longer than 10 years and the after tax cost of
capital is 10%. The full cost of the machine will be depreciated on straight line basis, which is allowed for
computing the taxable income, over a period of 10 years. Tax rate is 30%.
DCF factors at 10%:
1 - 5 years (cumulative) 3.79
6 - 10 years (cumulative) 2.355
10th year 0.386
Required:
Compute minimum selling price for the handy sewing machine.
(12 Marks)
(b) What are the distinctive features of learning curve theory in manufacturing environment? Explain the learning
curve ratio.
(4 Marks)
Q-6
(a) XY Hotel has 40 bed rooms with a maximum occupancy of 490 sleeper nights per week. Average occupancy
is 60% throughout the year. Meals provided to guests have been costed and the average food cost per person
per day is as follows:
`
Breakfast 72.00
Lunch 220.00
Dinner 268.00
560.00
Direct wages and staff meals per week are as under:
`
Housekeeping 39,040.00
Restaurant and kitchen 68,600.00
General 35,200.00
Direct expenses per annum are ` 9,15,200 for house keeping and ` 10,40,000 for restaurant. Indirect
expenses amount to ` 68,22,400, which should be apportioned on the basis of floor area. The floor areas are
as follows:
Sq. Mt.
Bed rooms 3,600
Restaurant 1,200
Service Area 600
A net profit of 10% must be made on the restaurant taking and also on accommodation takings.
Required:
Calculate what inclusive term per person should be charged per day and also show the split between meals
and accommodation charges.
(7 Marks)
(b) In the context of Activity Based Costing System, explain the following statement:
"Strategic cost analysis should exploit internal linkages" (4 Marks)
(c) Write a short note on the distinction between PERT and CPM. (5 Marks)
Q-7 Answer any four of the following questions:
(a) What is target costing? It is said that target costing fosters team work within the organisation. Explain
how target costing creates an environment in which team work fosters. (4 Marks)
(b) What qualitative factors should be considered in an decision to outsource manufacturing of a product?
(4 Marks)
(c) "Sunk cost is irrelevant in decision making, but all irrelevant costs are not sunk costs." Explain with
examples.
(4 Marks)
(d) Write a short note on the characteristics of the dual problem. (4 Marks)
(e) Brief the principles associate with synchronous manufacturing. (4 Marks)


Paper 5
November 2012 - Answer
Ans.1
(a) Contribution per unit
Particulars (`)
Selling Price 200
Variable Cost (` 65 + ` 33 + ` 16) 114
Contribution per unit
(Excluding direct labour, considered irrelevant and fixed) 86
Savings and earnings if the plant is shut down
Particulars `
Savings in Fixed Cost (` 14,00,000* - ` 1,25,000) 12,75,000
Contribution from Alternate Activity (` 40 x 50% of 2,00,000 hrs) 40,00,000
Shutting Down and Reopening Cost (` 50,000 + ` 100,000) (1,50,000)
Total 51,25,000
* [2,00,000 units x ` 7]
Indifference Point: ` 51,25,000 / ` 86 = 59,593 units
Minimum level of production to justify continuation = 59,594 units
(b) Let
u = Investment in “Mutual Fund ‘XY”
v = Investment in “Mutual Fund “HN”
w =Investment in “Money Market Fund”
x = Investment in “Government Bonds”
y = Investment in “Share ‘P”
z = Investment in “Share ‘Q”
Maximize
Z= 0.15u + 0.09v + 0.08w + 0.0875x + 0.17y + 0.18z
` 15,00,000 to be invested -
u + v + w + x + y + z < 15,00,000
At least 40% of investment in Government Bonds-
x > (u + v + w + x + y + z) X 0.40
Or
2u +2 v + 2w - 3x + 2y + 2z < 0
Combined Investment in two shares not to exceed ` 2,60,000-
y + z < 2,60,000
At least 25% of the investment in the money market fund-
w > (u + v + w + x + y + z) X 0.25
Or
u + v - 3w + x + y + z < 0
Amount of money invested in shares should not exceed the amount invested in mutual funds-
y+z<u+v
Or
-u - v + y + z < 0

Amount invested in mutual fund ‘XY’ should be not be more than the amount invested in mutual fund ‘HN’-
u<v
Or
u-v<0
Maximize
Z= 0.15u + 0.09v + 0.08w + 0.0875x + 0.17y + 0.18z
Subject to:
u + v + w + x + y + z < 15,00,000
2u +2 v + 2w - 3x + 2y + 2z < 0
y + z < 2,60,000
u + v - 3w + x + y + z < 0
-u - v + y + z < 0
u-v<0
u, v, w, x, y, z > 0
This problem can be solved with the assumption of ‘Investment Exactly ` 15,00,000’
(c) (i) Profitability Statement New Mix -Most Appropriate Basis
Particulars Deluxe Premium Total
80,000 Units 20,000 Units
Per Unit Amount Per Unit Amount
(`) (`) (`) (`)
Revenue 70.00 56,00,000.00 90.00 18,00,000.00 74,00,000.00
Material Cost 12.00 9,60,000.00 25.00 5,00,000.00 14,60,000.00
Direct Labour Cost
(One hour per unit)
80,000 Hrs., 20,000 hrs. 16.00 12,80,000.00 16.00 3,20,000.00 16,00,000.00
Contribution Margin 42.00 33,60,000.00 49.00 9,80,000.00 43,40,000.00
Unit related Fixed Mfg.
Overheads
(Allocation on the basis of
direct labour hours)
80,000:20,000 [W.N. 1] 21,60,000.00 5,40,000.00 27,00,000.00
Batch- related Fixed Mfg.
Overheads (Allocation on
the basis no. of batches)
160:80 [W.N. 1 & 4] 7,33,333.33 3,66,666.67 11,00,000.00
Fixed Selling Overheads
(Allocated on the basis of sales
visits) 800:500 [W.N. 2 & 3] 1,06,153.85 66,346.15 1,72,500.00
Profit Margin Ex Admin Overheads 3,60,512.82 6,987.18 3,67,500.00
Admin Overheads [W.N. 2 ] 1,15,000.00
Profit Margin 2,52,500.00
Working Note
W.N.1
`
Fixed Mfg. Overheads 38,00,000.00

Less: Related to batch related activities 11,00,000.00
Fixed Mfg. Overheads. unit related 27,00,000.00
W.N.2
`
Selling & Admn. Overheads 2,87,500.00
Less: Admn. Overhaeds 1,15,000.00
Selling Overheads 1,72,500.00
W.N.3
No. of Visits 10 Sales Visit 25 Sales Visit Total
for 1,000 Units for 1,000 Units
(Deluxe) (Premium)
For Proposed Mix-Sales Visit 800 500 1,300
W.N.4
No. of Batches 1 Batch 1 Batch Total
for for
500 Units 250 Units
(Deluxe) (Premium)
For Proposed Mix-Batches 160 80 240
(ii) Change in product mix, yields profit of ` 70,000/- (` 2,52,500 - ` 1,82,500). Accordingly company
should go with proposed change mix.
This problem can be solved by assuming that some portion of the fixed cost as fixed with respect to units of
production, but variable with respect to certain activities. When the production size is altered, these activities
are increased and therefore, the activity cost varies for the proposed production level. More batches of production
and more sales visits will set off the incremental contribution.
Ans. 2
(a) Contribution Analysis of Divisions:
(i) Contribution - Division PQR
Selling Price (`) 200 300 400
Variable Cost (`) 110 110 110
Contribution per Unit (`) 90 190 290
Demand (units) 30,000 20,000 10,000
Total Contribution (`) 27,00,000 38,00,000* 29,00,000
The above table shows ` 300 price to be the most profitable and that cutting prices would not result in
increased profits.
(ii) Contribution - Division RPQ (transfer price at ` 290)
Selling Price (`) 800 900 1,000
Demand (units) 14,400 10,000 5,600
Total Contribution (`) 17,28,000 22,00,000* 17,92,000
*Optimal
(iii) Contribution - Division RPQ (at alternative transfer price ` 120)
Selling Price (`) 800 900 1,000
Demand (units) 14,400 10,000 5,600
Total Contribution (`) 41,76,000* 39,00,000 27,44,000
*Optimal
The maximum capacity of the PQR division is given as 30,000 units. Hence there is no question of internal transfer
if the entire 30,000 units are sold by PQR in the external market. However, from the above computations it is clear
that Division PQR would sell 20,000 units in external market to optimize its profit and therefore the maximum
transfer to division RPQ is 10,000 units only. The question of transferring 14,400 units would arise as an alternative
to analyze the overall profitability only when PQR sells 10,000 units in the external market. Based on the demand
projection of RPQ, the demand level of 5,600 units is not relevant. It can be further noted from the question that
Division RPQ will purchase the entire quantity only from Division PQR and not externally. Hence the various
options would be as follows.
Option-1 Option-2 Option-3
PQR External Sales (units) 20,000 10,000 10,000
Transfer to RPQ (units) 10,000 14,400 10,000
Overall Profitability of the Company:
(iv)Transfer Price at ` 290
` ` `
Contribution PQR (External) 38,00,000 29,00,000 29,00,000
[Refer computation (i) above]
Contribution PQR (Transfer) @ ` 190 19,00,000 27,36,000 19,00,000
[` 290 less ` 100 Variable cost#]
Contribution RPQ 22,00,000 17,28,000 22,00,000
[Refer computation (ii) above]
Total Contribution for the Company 79,00,000* 73,64,000 70,00,000
Fixed Costs 24,00,000 24,00,000 24,00,000
[PQR 30,000 units x ` 40 + RPQ 10,000 units x ` 120]

Total Company Profit (Contribution-Fixed costs) 55,00,000 49,64,000 46,00,000
*Optimal
(v) Transfer Price at ` 120
` ` `
Contribution PQR (External) 8,00,000 29,00,000 29,00,000
[Refer computation (i) above]
Contribution PQR (Transfer) @ ` 20
[` 120 less ` 100 Variable cost#] 2,00,000 2,88,000 2,00,000
Contribution RPQ 39,00,000 41,76,000 39,00,000
[Refer computation (iii) above]
Total Contribution for the Company 79,00,000* 73,64,000 70,00,000
Fixed Costs 24,00,000 24,00,000 24,00,000
[PQR 30,000 units x ` 40 + RPQ 10,000 units x ` 120]
Total Company Profit 55,00,000 49,64,000 46,00,000
(Contribution-Fixed costs)
*Optimal
The revision of transfer price has no impact on the overall profitability of the company. However, it will alter the
profitability of the Divisions.

*The optimal level is 30,000 of PQR of which 20,000 units are for external sale and 10,000 units are transferred
to RPQ under both the transfer prices.
#On internal transfers, PQR fs variable cost per unit is ` 100, since the ` 10 on selling is not incurred.
(b) A transportation problem fs solution has m+n-1 basic variables, (where m,n are the number of rows and
columns) which means that the number of occupied cells in such a solution is one less than the number of
rows and number of columns.
When the number of occupied cells in a solution is less than m+n-1, the solution is called a degenerate
solution.
Such a situation is handled by introducing an infinitesimally small allocation ee f in the least cost and
independent cell.
If the number of occupied cells < m+n-1 by one, then only one ‘e’ needs to be introduced. If the number of
occupied cells is less by more than one, to the extent of shortage, ‘e’s will have to be introduced till the
condition that no. of occupied cells = m+n-1. For e.g. if no. of occupied cells in a solution is 7 and we have
m+n-1 = 9, then, we have to introduce two quantities of ‘e’, say e1 and e2 in 2 of the least cost independent
cells.
Degeneracy occurs because in any particular allocation (earlier than the last allocation), the row and column
totals get simultaneously fulfilled. (In the last allocation, it is always that row and column get fulfilled). Then,
we have a degeneracy by one number, i.e. no. of occupied cells +1= m+n-1. We need to put one ‘e’s. In the
subsequent allocation, if again row and column totals get fulfilled simultaneously, again there will be a shortage
of occupied cells and another ‘e’ will be required.
Due to this concept, an assignment problem, solved by transportation technique taking demand quantity =
supply quantity = 1 in every row and column will require an ‘e’ for each allocation other than the last one. For
e.g. in a 5 x 5 assignment problem, there are 4 allocations other than the last one.therefore, 4 ‘e’s will be
required.i.e. m + n -1 will be 5+5-1, =9, whereas, the no. of occupied cells will be 5.To resolve the degeneracy,
we will need 4 ‘e’s.
The ‘e’ has to be placed in the least cost independent cell, for arriving at the optimal solution as early as
possible. If, by mistake, we place ‘e’ in the second least cost but independent cell, after the ui, vj step, the ‘e’
will be shifted to the least cost independent cell, thereby necessitating one more iteration. This is similar to
the simplex table. If we bring in a wrong variable by mistake, it will go out in the next iteration. The only thing
is that the solution will be reached later.
Ans.3
(a) Statement showing ‘Standard Cost of Material’ and ‘Actual Cost of Material’- Production 11,000 units
Direct Material Standard Cost Actual Cost Revised Actual
Type Quantity Rate Amount Quantity Rate Amount Quantity*
Consumed
X 88,000 Units ` 40 ` 35,20,000 44,000 Units ` 42 ` 33,84,000 82,133
(11,000 x 8) (320/8) 38,400 Units ` 40 [4,92,800 / 5,28,000
x 88,000]
Y 2,64,000 Units ` 70 1,40,000 Units ` 71
(11,000 x 24) (1,680/24) ` 1,84,80,000 1,06,400 Units ` 70 ` 1,73,88,000 2,46,400
Units
[4,92,800 / 5,28,000
x 2,64,000]
Z 1,76,000 Units ` 25 ` 44,00,000 60,000 Units ` 24
(11,000 x 16) (400/16) 1,04,000 Units ` 25 ` 40,40,000 1,64,267
Units
[4,92,800 / 5,28,000
x 1,76,000]
Total 5,28,000 Units ` 2,64,00,000 4,92,800 ` 2,48,12,000 4,92,800
Units Units
* Actual Quantity in Standard Proportion.
Statement showing ‘Standard Cost of Wages’ and ‘Actual Cost of Wages’- Production 11,000 units
Standard Cost Actual Cost
Hours Rate Amount Hours Rate Amount
4,40,000 hrs ` 40 ` 1,76,00,000 3,98,000 hrs ` 22.613 `90,00,000
[11,000 x (1,600/40)]
(i) Material Price Variance = Actual Quantity x Std. Price - Actual Cost
Material ‘X’ = 82,400 Units x ` 40 - ` 33,84,000
= ` 88,000 (A)
Material ‘Y’ = 2,46,400 Units x ` 70 - ` 1,73,88,000
= ` 1,40,000 (A)
Material ‘Z’ = 1,64,000 Units x ` 25 - ` 40,40,000
= ` 60,000 (F)
Total = ` 88,000 (A) + ` 1,40,000 (A) + ` 60,000 (F)
= ` 1,68,000 (A)
(ii) Material Mix Variance = Std. Price x (Revised Actual Quantity . Actual Quantity)
Material ‘X’ = ` 40 x (82,133 units - 82,400 units)
= ` 10,680 (A)
Material ‘Y’ = ` 70 x (2,46,400 units - 2,46,400 units)
=`0
Material ‘Z’ = ` 25 x (1,64,267 units - 1,64,000 units)
= 6,675 (F)
Total = ` 10,680 (A) + ` 0 + ` 6,675 (F)
= ` 4,005 (A)
(iii) Labour Rate Variance = Actual hours x (Std. Rate - Actual Rate)
= 3,98,000 hrs x ( ` 40 - ` 22.613)
= ` 69,20,000 (F)
(iv) Labour Efficiency = Std. Rate x (Standard hours - Actual hours)
Variance = ` 40 x (4,40,000 hrs. - 3,98,000 hrs.)
= ` 16,80,000 (F)
(v) Variable Overhead Efficiency Variance
= Std. Rate per Hour x (Standard Hours for Actual Production - Actual Hours)
= (` 400/40 hrs.) x [ (11,000 units x 40 hrs.) - 3,98,000 hrs.)]
= ` 4,20,000 (F)
(vi) Fixed Overhead Efficiency Variance
= Std. Rate per Hour x (Standard Hours for Actual Production. Actual Hours)
= (` 600/40 hrs.) x [ (11,000 units x 40 hrs.) - 3,98,000 hrs.)]
= ` 6,30,000 (F)
It is assumed that Opening Inventory is valued at Standard Cost.
(b) Time to deal with clients
Time(Minutes) Probability Cumulative Probability Assigned Numbers
2 0.05 0.05 00-04
4 0.10 0.15 05-14
6 0.15 0.30 15-29
10 0.30 0.60 30-59
14 0.25 0.85 60-84

20 0.10 0.95 85-94
30 0.05 1.00 95-99
Time between arrivals
Time(Minutes) Probability Cumulative Probability Assigned Numbers
1 0.2 0.2 00-19
8 0.4 0.6 20-59
15 0.3 0.9 60-89
25 0.1 1.0 90-99
Simulation table for time between arrivals and service time
Client Time Arrival Time In Serving Time Waiting Voucher
Between Time Time Out Time
Arrivals
1 1 1 1 14 15 -
2 8 9 15 14 29 6
3 8 17 29 14 43 12 Yes
4 15 32 43 10 53 11 Yes
5 15 47 53 6 59 6
6 8 55 59 6 65 4
7 25 80 80 14 94 -
8 8 88 94 10 104 6
9 8 96 104 14 118 8
10 15 111 118 4 122 7
11 8 119 122 4 126 3
12 25 144 144 4 148 -
Total Clients in a Week of 75Hours =75 Hours x 60 minutes /10.4# minutes =433
#Average time between arrivals = 0.2x1 + 0.4x8 + 0.3x15 + 0.1x25 = 10.4minutes
2 out of the 12 clients receive ` 15 voucher. So the cost will be ` 1,082.50 or ` 1,083 [(2/12 x 433) x `15].
Taking cycle time as 148 minutes, voucher cost can be computed as follows:
` 15 per Client x [(75 Hours x 60 minutes /148 minutes) no. of cycles x 2 Clients per Cycle Time]
So, Voucher Cost will be ` 912.16
Ans. 4
(a) The given problem is a minimization problem
Subtracting minimum element of each row from all the elements of that row, the given problem reduces to the
following:
Job1 Job2 Job3 Job4 Job5
A 8 1 1 0 6
B 7 5 6 0 5
C 5 3 4 0 2
D 1 3 6 0 2
E 3 4 3 0 4
Subtracting the minimum element of each column from all the elements of that column
Job1 Job2 Job3 Job4 Job5
A 7 0 0 0 4
B 6 4 5 0 3
C 4 2 3 0 0
D 0 2 5 0 0
E 2 3 2 0 2

Since the minimum number of lines covering all zeros is equal to 4, which is less than the number of columns/
rows(=5), the above table does not provide the optimal solution.
Subtracting the minimum uncovered element (=2) from all uncovered elements and adding the same to the
elements lying at the intersection of two lines, we get the following matrix:
Since the minimum number of horizontal and vertical lines to cover all zeros is equal to five, which is equal to
the order of the matrix, the above table gives the optimal solution.
The optimal assignment is given below:
Operator Job Wages (`)
A 2 3
B 4 2
C 5 4
D 1 3
E 3 9
Total 21
(b) Zero base budgeting (ZBB) is defined as method of budgeting which requires each cost element to be specifically
justified, as though the activities to which the budget relates were being undertaken for the first time. ZBB is
prepared and justified from scratch (zero). Without approval, the budget allowance is zero.
Characteristics of ZBB:
(i) Manager of a decision unit has to completely justify why there should be any budget allotment for his
decision unit.
(ii) Activities are identified in decision packages.
(iii) Decision packages are ranked in order of priority
(iv) Packages are evaluated by systematic analysis.
(v) Decision packages are linked with corporate objectives, which are clearly laid down.
(vi) Available resources are directed towards alternatives in order to prioritize to ensure optimal results.
(c) The following are the essential requisites for the installation of uniform costing system
(i) Firms in the industry should be willing to share/furnish relevant data/information.
(ii) A spirit of collaboration and mutual trust should prevail among the participating firms.
(iii) Mutual exchange of ideas, methods, special achievements, research and knowhow should be frequent.
(iv) Larger firms should take the lead towards sharing their experience and knowhow with smaller firms to
enable the latter to improve their performance.
(v) Uniformity must be established with regard to the following before introducing uniform costing:
. Size of various units covered by uniform costing
. Production method
. Accounting principles, methods and procedures

Ans. 5
(a) (i) Expected Sales Volume:
Years 1-5: (40,000 x 0.15 + 20,000 x 0.60 + 12,000 x 0.25) = 21,000 units
Years 6-10: (24,000 x 0.30 + 16,000 x 0.50 + 4,000 x 0.20) = 16,000 units
(ii) Capital Cost : `
Materials (` 90,000 x 1.50) 1,35,000
(Replacement cost) Labour 20,000
Overheads (Not Relevant) -
1,55,000
(iii) Production Variable Cost: `
Materials 45
Labour 75
Overheads (Not relevant) -
Total 120
(iv) Profitability:
Details Years Years
1-5 6-10
Sales Units 21,000 16,000
Selling Price (`) X X
Sales Value (`) [A] 21,000X 16,000X
Material and Labour Cost @ ` 120 25,20,000 19,20,000
Incremental Fixed Cost (`) 1,95,000 1,95,000
Depreciation (1,55,000/10) 15,500 15,500
Total Cost (`) [B] 27,30,500 21,30,500
Profit (`) [A-B] 21,000X - 27,30,500 16,000X - 21,30,500
Less: Tax @ 30% 6,300X - 8,19,150 4,800X - 6,39,150
Profit After Tax 14,700X - 19,11,350 11,200X - 14,91,350
Add: Depreciation 15,500 15,500
Cash Inflow 14,700X - 18,95,850 11,200X - 14,75,850
(v) Cash Inflow in the Terminal Year (year 10)
`
Sale Value of the Machine 20,000
Scrap Realization 143,000
Total 163,000
Tax @ 30% (48,900)
After Tax Cash Inflow 114,100
(vi) Present Value of Cash Flows:
Details Year 0 Year 1-5 Year 6-10 Year 10
Capital Cost 1,55,000 - - -
Cash Flow from Operation - 14,700X - 11,200X - -
18,95,850 14,75,850
Cash Flow Terminal Year - - - 1,14,100
Discount Factor 1 3.79 2.355 0.386
Present Value of Cash Flows -1,55,000 55,713X - 26,376X - 44,042.6
71,85,271.50 34,75,626.70

(vii) Net Cash Inflows:
= (-1,55,000) + (55,713X . 71,85,271.50) + (26,376X - 34,75,626.70) + (44,042.60)
= 82,089X - 1,07,71,855.60
(viii) Computation of Minimum Selling Price:
For determining Minimum Selling Price, Net Cash Inflows should be equal to zero:
82,089X - 1,07,71,855.60 = 0
Or X = 131.22
Minimum selling price is ` 131.22
Note:
(a) R&D expenses of ` 95,000 is not relevant.
(b) Fee for consultant fs report of ` 22,500 is not relevant.
(c) Tax element on irrelevant costs not considered, since the benefit will arise even without this product.
(b) Learning curve ratio:
= Average Labour cost of first 2N units
Average Labour cost of first N units
As the production quantity of a given item is doubled, the cost of the item decreases at a fixed rate. It occurs
because of the following distinctive features of manufacturing environment.
(i) Better tooling methods are developed and used
(ii) Design bugs are detected and corrected
(iii) More productive equipment is designed and used.
(iv) Engineering changes decrease over time.
(v) Earlier teething problems are overcome.
(vi) Rejections and rework tend to diminish overtime.
Ans. 6
(a) Statement showing the charges per person per day
Particulars Total House Restaurant General
(`) keeping (`) & Services
(`) (`)
Direct Wages and Staff Meal
per week 1,42,840 39,040 68,600 35,200
Other Direct Expenses per week
[` 9,15,200/52; ` 10,40,000/52] 37,600 17,600 20,000 -
Sub Total - Direct Expenses 1,80,440 56,640 88,600 35,200
Direct Expenses per week
(General)* [39,040:68,600] - 12,767 22,433 (35,200)
Indirect Expenses per week
(Based on floor area)
[3,600:1,200] 1,31,200 98,400 32,800 .
Total 3,11,640 1,67,807 1,43,833 .
Average Occupancy (490 x 60% = 294 Sleeper nights per week)
Particulars Total House Restaurant
(`) keeping (`) (`)
Cost per person per day
[`1,67,807/294; `1,43,833/294] 1,060.00 570.77 489.23
Food Cost per person per day 560.00 - 560.00

Total Cost per person per day 1,620.00 570.77 1,049.23
Add: 1/9th of Cost 180.00 63.42 116.58
Charges per person per day 1,800.00 634.19 1,165.81
* may be apportioned to house-keeping and restaurant on any other alternative logical basis.
(b) Activity based costing is an accounting methodology that assigns cost to activities rather than to products or
services. Activity based Costing tracks the flow of activities by creating internal link between activity/resource
consumption and cost object. Exploiting internal linkages means taking advantage of the relationships among
the activities that exist within a firm fs segment of value chain. Activity cost and analysis are essential parts
of this strategic analysis. Activities not based on production units/sales units, based on the variable activity
drivers are analyzed. The traditional costing system is not rich enough to supply the information needed for
thorough analysis of linkages.
(c) The PERT and CPM models are similar in terms of their basic structure, rationale and mode of analysis.
However, there are certain distinctions between PERT and CPM networks which are enumerated below:
(i) CPM is activity oriented, while PERT is event oriented
(ii) CPM is a deterministic model. It completely ignores the probabilistic element of the problem. PERT is
a probabilistic model. It uses three estimates of activity time. Optimistic, pessimistic and most likely,
with a view to take into account time uncertainty.
(iii) PERT is primarily concerned with time. It helps the manager to schedule and coordinate various activities
so that the project can be completed on scheduled time. CPM places dual emphasis on time and cost
and evaluates the trade-off between project cost and project time. By deploying additional resources, it
allows the project manager to manipulate project duration within certain limits so that the project duration
can be shortened at an optimal cost.
(iv) CPM is commonly used for those projects which are repetitive in nature and where one has prior experience
of handling similar projects. PERT is generally used for those projects where time required to complete
various activities are not known as prior.
Ans.7
(a) Target cost is the difference between the estimated selling price of a proposed product with specified functionality
and quality and target margin. This is a cost management technique that aims to produce and sell products
that will ensure the target margin. It is an integral part of the product design. While designing the product the
company allocates value and cost to different attributes and quality. Therefore, they use the technique of value
engineering and value analysis. The target cost is achieved by assigning cost reduction targets to different
operations that are involved in the production process. Eventually, all operations do not achieve the cost
reduction targets, but the overall cost reduction target is achieved through team work. Therefore, it is said that
target costing fosters team work.
(b) The following qualitative factors should be considered in an outsourcing decision:
(i) Whether the vendor will acquire the technology and will emerge as a competitor?
(ii) Whether the vendor will be able to maintain the quality? If the vendor fails to maintain the quality, will the
company lose customers?
(iii) Whether the company will lose its skills in manufacturing the product and it will find difficult to resume
production internally?
(iv) Whether laying off employees will demoralize the work force?
(v) Whether the price quoted by the vendor is a penetrating price? If so, it is likely to increase i.e. Whether
price will increase.
(c) Sunk costs are costs that have been created by a decision made in the past and that cannot be changed by
any decision that will be made in the future.
Example, the written down value of assets previously purchased are sunk cost. Sunk costs are not relevant
for decision making because they are past cost.
But not all irrelevant costs are sunk cost. For example, a comparison of two alternative production methods
may result in identical material costs for both the alternatives. In this case, the direct material cost will remain
the same whichever alternative in chosen. In this situation, through direct material cost is the future cost to be

incurred in accordance with the production, it is irrelevant, but it is not a sunk cost.
Irrelevant is only with respect to alternatives being considered and not for fund flows whereas for sunk cost
there is no further cash flow. Cash flows have already been incurred.
(d) Characteristic of the dual problem:
(i) For any linear programming model called primal model, there exists a companion model called the
dual model.
(ii) The number of constraints in the primal model equals the number of variables in the dual model.
(iii) The number of variables in the primal model equals the number of constraints in the dual model
(iv) If the primal model has a maximization objective then the dual model will have a minimization objective
and vice-versa. Inequalities get reversed.
(v) The solution of the primal model yields the solution of the dual model. Also, an optimal simplex table
for the dual model yields the optimal solution to the primal model. Further, the objective functions of
the two optimal tables will have identical values.
(vi) Dual of the dual problem is the original primal itself.
(vii) Feasible solutions to a primal and dual problem are both optimal if the complementary slackness
conditions hold. If this relationship does not hold either the primal solution or the dual solution or both
are not optimal.
(viii) If the primal problem has no optimal solution due to infeasibility, then the dual problem will have no
optimal solution due to unboundedness.
(ix) If primal has no optimal solution due to unboundedness, than the dual will have no optimal solution
due to infeasibility.
(e) Synchronous Manufacturing: In an all-encompassing management philosophy which includes a set of
principles, procedures and techniques where every action is evaluated in terms of common goals of the
organization.
The seven principles are:
(i) Focus on synchronizing the production flow than on idle capacities.
(ii) Value of time at a bottleneck resource is equal to the throughput rate of products processed by the
bottleneck.
(iii) Value of time at a non-bottleneck resource is negligible.
(iv) Level of utilization of a non-bottleneck resource is controlled by other constraints within the system.
(v) Resources must be utilized, not simply activated.
(vi) Transfer batch should not be equal to process batch.
(vii) A process batch should be variable both along its route and overtime.


PAPER 5
MAY 2012
Q-1
(a) A company has decided to launch a new product X which is, expected to have demand of 10,000 units during
the year at ` 160 per unit. The following information is furnished by the company:
(i) Material - The manufacture of one unit of X requires one unit of each of materials A, B and C.
Raw Material Current stock Cost per unit (`)
(units)
Original cost Current Resale Value
Purchase
Price
A- Regularly being used 10,000 16 20 14
B- Old stock (Not in use) 6,000 28 24 8
C- New stock --- --- 48 ---
(ii) Direct labour
Skilled labour is paid at ` 80 per hour. It takes 0.25 hours/unit. Skilled labour has to be drawn from another
production line which has a contribution of ` 240 per unit, with each unit requiring 2 hours of skilled labour.
Unskilled labour - 2 hours/unit @ ` 56 per hour. There is abundant Unskilled labour in the factory, but according
to an agreement with the labour union, no unskilled worker can be retrenched.
(iii) Variable overhead - ` 10 per unit.
(iv) Fixed Costs - no increase.
Using relevant cost approach, you are required to find out the average variable cost per unit of X.
(5 Marks)
(b) The following table gives the unit transportation costs and the quantities demanded/supplied at different
locations for a minimization problem:
You are required to find out which cell gets the 3rd allocation in the initial basic feasible solution under each of
the following methods and to give the cell reference, cost per unit of that cell and the quantity allocated to that
cell :
(i) North West Corner Rule
(ii) Vogel's Approximation Method
(iii) Least Cost Method
(Candidates may use the standard notation of Ci R j for cell reference.( e.g. C2 R3 means the cell at the

intersection of Column 2 and Row 3 )
(Note: The full solution is not required to be worked out). (5 Marks)
(c) XY Ltd. makes two products X and Y, whose respective fixed costs are F1 and F2 .You are given that the unit
contribution of Y is one. fifth less than the unit contribution of X, that the total of F 1 and F2 is ` 1,50,000, that
the BEP of X is 1,800 units (for BEP of X F2 is not considered) and that 3,000 units is the indifference point
between X and Y.(i.e. X and Y make equal profits at 3,000 unit volume, considering their respective fixed
costs). There is no inventory build up as whatever is produced is sold.
You are required to find out the values F1 and F2 and units contributions of X and Y.
(5 Marks)
(d) State whether each of the following independent activities is value-added or non-value-added:
(i) Polishing of furniture used by a systems engineer in a software firm.
(ii) Maintenance by a software company of receivables management software for a banking company.
(iii) Painting of pencils manufactured by a pencil factory.
(iv) Cleaning of customers' computer key boards by a computer repair centre.
(v) Providing, brake adjustments in cars received for service by a car service station.
(5 Marks)
Q-2
(a) AB Ltd. makes component 'C' and billing machines. Division A makes component 'C' that is used in the final
assembly of the machine in Division B.
(One unit of Component 'C' is used per machine). Component C has an outside market also. A and B operate
as profit centres and each can take its own decisions. The following data is given in the existing scenario for
Divisions A and B, under which Division A has enough special and external demand to use its capacity and
hence is offering B rates of 800 `/ Unit for quantity up to 750 units and 900 Rs/unit for more than 750 units, so
that its outside contribution is not affected by transfers to B. A and B can sell any quantity up to the maximum
indicated under 'units sold', without affecting their future demands.
Division A Division B
External Special External
Market sales Market
(normal (normal
sales) sales)
Selling Price (`/u) 1,000 800 4,000
Variable manufacturing cost (`/u) 600 600 1,500* (* excluding
component C)
Variable selling cost (`//u) 100** -- 200** (** Not
incurred on
inter division
transfers)
Total variable cost (`//unit) 700 600 1,700* (* excluding
component C)
Contribution (`//unit) 300 200
Units Sold 1,250 750 900
Production capacity 2,000 units 900 units
For the next period, A requires for its own use in its selling outlets, 50 units of billing machines.produced by B.
B's manager proposes as follows:
Option I - B will supply 50 machines to A on its variablemanufacturing cost basis provided A supplies to B, 500
units of Component C at A's variable manufacturing cost basis.
Option II - Both A and B resort to total variable cost per unit basis applicable to normal external sale, though
neither A nor B incurs any selling cost on inter division transfers. A will be given 50 machines for its use. A will

have to supply B all the 900 units that B requires.
Option III - Both A and B use the external market selling price (i.e. 1,000 and 4,000 `/Unit for 900 units of
Component 'C' and 50 machines respectively).
From a financial perspective, advise Division A's manager what he should choose. Support your advice with
relevant figures.
What is the change in the rate of discount per unit given by B to A (based on unit transfer price to market price
ratio) from option I to option II ?
(Note: Students need not work out the total cost statements. Steps showing relevant figures for evaluation are
sufficient). (10 Marks)
(b) The standard set for a chemical mixture of a company is as under:
Material Standard Mix(%) Standard Price `/Kg
A 80 50
B 20 100
Standard yield in production is 75 %.
The actual quantity produced was 1800 kg of output from the following:
Material Quantity (kg) Actual Price
A 1400 60
B 600 90
Calculate the total material price, mix and yield variances, indicating whether they are favorable (F) or adverse
(A or U ).
(6 Marks)
Q-3
(a) A company is operating at 60 % of its capacity with a turnover of ` 43.20 lacs. If the company works at 100
% capacity, the sales-cost relation is:
Factory cost is two thirds of sales value. Prime cost is 75% of factory cost. Administration and selling
expenses (75% variable) are 20% of the sales value. Factory overhead will vary according to operating capacity
as given below:
Operating capacity (%) 60 80 100 120
Factory overheads (` in lacs) 9.90 10.80 12 15
The company has planned to operate at 80 % of its capacity. Moreover, it has received an export order and its
execution will involve 40 % of the capacity.
The prime cost of the order is estimated at ` 6.0 lacs and the shipping involved will be around ` 1.0 lac.
Administration and selling expenses will be avoided on the export order. Taking the same percentage of profits
as on the domestic sales, determine the minimum price to be quoted for the export order.
(8 Marks)
(b) In a transportation problem for cost minimization, there are 4 rows indicating quantities demanded and this
totals up to 1,200 units. There are 4 columns giving quantities supplied. This totals up to 1,400 units. What is
the condition for a solution to be degenerate? (3 Marks)
(c) State with a brief reason whether you would recommend an activity based system of costing in each of the
following independent situations:
(i) Company K produces one product. The overhead costs mainly consist of depreciation.
(ii) Company L produces 5 different products using different production facilities.
(iii) A consultancy firm consisting of lawyers, accountants and computer engineers provides management
consultancy services to clients.
(iv) Company S produces two different labour intensive products. The contribution per unit in both products
is very high. The BEP is very low. All the work is carried on efficiently to meet the target costs.
(5 Marks)
Q-4
(a) Ezee Ltd makes two products, E and Z. All units produced are sold. There is no inventory build up. Production
facilities may be used interchangeably for both the products. Sales units are the limiting factor. The following
information is given:
Price Level Proposed increase
E Z Total Total
Contribution `/units 25 20
Fixed Cost` 46,000 47,500
Sales units (nos) 3,000 2,000 5,000 4,000
For increase in quantities above 4,000 units for each product, there will be an increase in variable selling costs,
(for the increased portion only), thereby reducing the contribution per unit to the following figures:
Units Contribution per unit (`)
E Z
4001-5000 20 15
5001-6000 15 10
Above 6000 No Sales possible
(i) For the present level, find the break-even point with the present product
(ii) What is the minimum number of incremental units to be sold to recover the additional fixed cost off ` 47,500
to be incurred? (Present product mix need not be maintained) :
(iii) If you are allowed to choose the best product mix for the incremental level, (while taking the present mix given
in the first table above for the present level), what would be the individual product quantities and the corresponding
total contributions, the total average contribution per unit and the total profits for the complete production?
(8 Marks)
(b) The following linear program is presented to you:
Objective: Maximize Z = 30x + 45 Y
Subject to: (i) 2x+3y < 1,440
(ii) 9x + 12y > 2,160
(iii) 3x + 4y > 1,080
(iv) x, y . 0
You are required to draw the graph taking quantities of x and y in the respective axes in steps of 60 units
(scale 1 cm. = 60 units), determine the optimality and offer your comments on the solution and the constraints.
(8 Marks)
Q-5
(a) A machine manufacturing company needs four components A, B, C and D.
The components may be procured from outside. The cost, market price for the components and other information
are given below.
Number of units required 3,000 3,500 2,000 3,000
Figs. ` per unit
A B C D
Direct Material 120 140 150 120
Direct Wages 60 80 120 80
Direct expenses at ` 40
per machine hour 80 60 80 80
Fixed Cost 40 40 30 50
Total Cost 300 320 380 330
Market Price 300 320 400 270

There are constraints on the machine time in manufacturing all the components. Total machine hours available
is only 12,000 hours.
It is possible to use the machine time in a second shift which will attract 20 % extra wages and other fixed
overheads at ` 6,000 for every 1,000 hours or part thereof.
With relevant supporting figures, advise the best course of action to maximize the profits.
(Note: Students need not work out the complete profitability statement).
(8 Marks)
(b) The following network and table are presented to you :
Activity Normal Normal Crash Crash
Duration Cost (`) Duration Cost (`)
(Days) (Days)
T 8 2,250 6 2,750
U 16 1,875 11 2,750
V 14 2,250 9 3,000
W 12 3,000 9 3,750
X 15 1,000 14 2,500
Y 10 2,500 8 2,860
Perform step by step crashing and reduce the project duration by 11days while minimizing the crashing cost.
What would be the cost of the crashing exercise?
(8 Marks)
Q-6
(a) PQR Ltd is considering introducing a new product at a price of ` 105 per unit. 'PQR Ltd's controller has
complied the following incremental cost information based on an estimate of 1,20,000 units of sales annually
for the new product:
Direct material cost ` 36,00,000
Direct Labour cost ` 24,00,000
Flexible manufacturing support ` 12,00,000
Sales commission 10% of sales
Capacity- related cost ` 20,00,000
The average inventory levels for the new product are estimated as follows:
Raw materials: 2 months' production
Work-in-progress (100% complete for
Materials and 50% complete for labour and
Flexible manufacturing support) 1 month production
Finished goods 2 months' production
Annual inventory carrying costs not included in the flexible manufacturing support listed earlier are estimated to
be 12% of inventory value. In addition, the sales manager expects the introduction of new product to result in a
reduction in sales of existing product from 3,00,000 to 2,40,000 units. The contribution margin for the existing
product is ` 20 per unit.
Prepare a statement showing the budgeted impact on PQR's profits on the introduction of the new product.
Should the new product be introduced?
(8 Marks)
(b) Explain the features of a balanced scored card.
(4 Marks)
(c) Classify the following items under the more appropriate category:
Category (CC) - Cost Control Or Category (CR) - Cost Reduction:
(i) Costs exceeding budgets or standards are investigated.

(ii) Preventive function
(iii) Corrective function
(iv) Measures to standardize for increasing productivity
(v) Provision of proper storage facilities formaterials.
(vi) Continuous comparison of actual with the standards set.
(vii) Challenges the standards set
(viii) Value analysis
(4 Marks)
Q-7
(a) The following is a part of a network.
What are activities P and Q called? How would you rectify the situation?
(4 Marks)
(b) The following matrix was obtained after performing row minimum operations on rows R1 and R2 in an assignment
problem for minimization. Entries "xx" represent some positive numbers. (It is not meant that all "xx" numbers
are equal). State two circumstances under which an optimal solution is obtained just after the row minimum
and column minimum operations.
(Candidates may use cell references as Ci Rj for uniformity. e.g. C1 R1 represents the cell at the intersection
of Column1 (C1 ) and Row 1 (R1) etc.
C1 C2 C3
R1 0 xx xx
R2 xx 0 xx
R3 xx xx xx
(4 Marks)
(c) A refreshment centre in a railway station has two counters - (i) self-service (opted by 60 % of the customers)
and (ii) attended service (opted by 40 % of the customers). Both counters can serve one person at a time. The
arrival rate of customers is given by the following probability distribution:
No.of arrivals 1 3 4 0 2
Probability 0.10 0.30 0.05 0.20 0.35
Formulate the associated interval of 2 digit random numbers for generating
(i) the type of service and
(ii) the arrival rate
(4 Marks)
(d) Define the following:
(i) maximum capacity (theoretical capacity)

(ii) practical capacity
(iii) normal capacity
(iv) principal budget factor
(The first three relate to a manufacturing plant)
(4 Marks)
(e) Suggest suitable cost units for the following services:
(i) Hospital
(ii) Hotel
(iii) Transport
(iv) Staff canteen
(4 Marks)


Paper 5
May 2012 - Answer
Ans.1
(a) Average variable cost per unit of X
Cost Element Relevancy Total Cost Average
(10,000 units) ` Cost per
unit `
Raw material A Replacement Current Purchase 2,00,000 20.00
Cost price
Raw material B Opportunity Opportunity Cost 48,000
Cost (6,000 units * ` 8 per unit)
Raw material B Incremental Current Purchase 96,000

Cost Price (4000 units *
` 24 per unit)
Sub total- Raw 1,44,000 14.40
material B
Raw material C Incremental Current Purchase
Cost Price (10,000 units 4,80,000 48.00
* ` 48 per unit)
Skilled Labour Opportunity Contribution Lost 3,00,000 30.00
Cost 10,000*0.25*240/2
Unskilled Labour Sunk Cost NIL NIL
Variable Overhead Incremental 10,000* ` 10 per unit 1,00,000 10.00
Cost
TOTAL 12,24,000 122.40
(b)
Sl. No Method Cell Reference Cost/unit Quantity
I II III
i) North West Corner Rule C2 R2 80 8,000
ii) Vogel’s method C3 R2 140 6,000
or
C1 R1 100 10,000
iii) Least Cost Method C1 R1 100 10,000
(c) Let Cx be the Contribution per unit of Product X.

Therefore Contribution per unit of Product Y = Cy =4/5Cx = 0.8Cx
Given F1 + F2 = 1,50,000,
F1 = 1,800Cx (Break even volume * contribution per unit)
Therefore F = 1,50,000 . 1,800Cx.
2
3,000Cx - F1 =3,000 * 0.8Cx - F2 or 3,000Cx - F1 =2,400 Cx-F2 (Indifference point)
i.e., 3,000Cx - 1,800Cx = 2,400Cx - 1,50,000 + 1,800Cx

i.e., 3,000Cx = 1,50,000, Therefore Cx = ` 50/- (1,50,000 / 3,000)
Therefore Contribution per unit of X = ` 50
Fixed Cost of X = F1 = ` 90,000 (1,800 * 50)
Therefore Contribution per unit of Y is ` 50 * 0.8 = ` 40 and
Fixed cost of Y = F = ` 60,000 (1,50,000 - 90,000)
2
The value of F1 = ` 90,000, F2 =` 60,000 and X = ` 50 and `40
(d)
Sl. No Item
(i) Polishing furniture used by a Systems Engineer Non-value added
in a software firm
(ii) Maintenance by a software company of receivables Value-added
management software for a banking company
(iii) Painting of pencils manufactured by a pencil factory Value-added
(iv) Customers’ computer key board cleaning by a computer Value-added
repair centre
(v) Providing brake adjustments in cars for repairs by a care Value-added
service station.
Ans.2
(a) Note : The basic strategy for division A is to first divert the Special Sales and then the Normal Sales in the
external market to minimize the opportunity loss. The analysis is done on this basis.
Option 1 Option 2 Option 3
Opportunity Lost (Units)
Special Sales 500 750 750
External Market - 150 150
Agreed Selling Price by Division A 600 700 1,000
Agreed Selling Price by Division B 2,100 2,400 4,000
(Including the Transfer price of Division A)
Contribution (Lost) / Gain ` per unit
Special Sales (200) (100) 200
External Market - (200) 100
Total Contribution (Lost) / Gain (`)
Special Sales (1,00,000) (75,000) 1,50,000
External Market - (30,000) 15,000
Total (1,00,000) (1,05,000) 1,65,000
Contribution Gain per unit by
buying from B (`/u) 1,900 1,600 -
Total Contribution Gained (50 Machines) ` 95,000 80,000 -
Net Contribution Gained (50 Machines) ` (5,000) (25,000) 165,000
Decision : Option 3 is preferred.
Rate of change in discount (1900 - 1600)/4000 = 7.5%
(b)
(I) SP x SQ (II) SP x RSQ (III) SP x AQ (IV) AQ x AP
A 50*1920 = 96,000 50*1600 = 80,000 50*1400 = 70,000 1400*60= 84,000
B 100*480 = 48,000 100*400 = 40,000 100*600 = 60,000 600*90 = 54,000
TOTAL 1,44,000 1,20,000 1,30,000 1,38,000

SP- Standard Price per Kg, SQ- Standard Quantity for actual production
RSQ- Revised Standard Quantity, AQ- Actual Quantity used, AP- Actual Price per kg.
Variances : (Figures `)
Variances Material Yield Material Mix Material Price
Variance Variance Variance
(I-II) (II-III) (III-IV)
A 16,000 F 10,000 F 14,000 A
B 8,000 F 20,000 A 6,000 F
TOTAL 24,000 F 10,000 A 8,000 A
Note : Standard Input = 1800 / 0.75 = 2,400 kgs. Hence Standard quantity of A is 2,400 * 0.8 = 1920 kgs and B
= 2400 * 0.2 = 480 kgs.
Ans.3
(a)
Capacity 40%
80% (Export
(Domestic sale) order)
` in lakhs
Sales Value 57.60
Prime cost (50% of Sales Value ie., 2/3 * 75%) 28.80 6.00
Fixed Cost (Factory Overheads, as given) 10.80 4.20
Administration and selling 8.64
- variable (20%*75% = 15% of Sales Value)
- fixed 3.60
Shipping 1.00
Total Cost 51.84 11.20
Profit 5.76
Add : Profit (Domestic Profit @80% Capacity = 10% of Sales.
Hence 11.11% on Cost) 1.24
Minimum Export price 12.44
(b) The condition for degeneracy is that the number of allocations in a solution is less than m+n-1.
The given problem is an unbalanced situation and hence a dummy row is to be added, since the Column
quantity is greater than that of the Row quantity. The total number of Rows and Columns then = 9 i.e. (5+4).
Therefore, m+n-1 = 8, i.e. if the number of allocations is less than 8, then degeneracy would occur.
(c)
Sl. Description Recommend Reason
No ABC Yes/No
(i) K produces one No * One product situation. For allocation of
product. Overhead is overhead, ABC is not required.
mainly depreciation
* ABC for cost reduction not beneficial
since most of the overhead is depreciation.
(ii) L produces 5 different Yes * Multi product situation. ABC is required
products with different for allocation of overhead.
facilities.
* ABC is necessary for pricing.

* Cost drivers are likely to be different.
* Cost reduction may be possible.
* Production facilities are different.
(iii) Professional services Yes * Variety of services. Hence ABC is
- lawyers/ required for cost allocation.
accountants/ * Services are very different.
computer engineers * ABC is necessary for pricing.
* Cost reduction possible.
(iv) S produces 2 different labour No * Different products, but labour intensive.
intensive products. High unit Hence, overhead allocation based on
contribution and efficient readily traceable direct labour cost will
operations. be accurate. Hence, ABC not required for
cost allocation.
* Low BEP level implies low level of fixed
cost as a % of sale price or as a % of
total cost.
* Many fixed cost activity drivers are likely
to align with the direct labour costs.
Hence not required for cost allocation.
* Efficient operation. Hence ABC not
required even for cost reduction or ABC
management.
Ans. 4
(a) (i) Present Level:
Weighted average contribution per unit
(3,000 x 25 + 2,000 x 20)/(3,000+2,000) Or, (3 x 25 + 2x 20)/(2+3) = 23 `/unit.
BEP = Present level Fixed cost/ weighted average Contribution per unit
= 46,000/23 = 2000 units.
or (E 1200 units & Z 800 units)
(ii) Minimum units for incremental level:
next 1,000 units of E get contribution of 25 x 1000 = 25,000
next 1,000 units of E or Z get 20/unit as Contribution = 20,000
next 125 units of E or Z get 20/unit as Contribution = 2,500
Total 2,125 units are the minimum requirement for 47,500
incremental fixed cost
Minimum units required:
E Z Total
2,000 125 2,125
or
1,000 1,125 2,125
(iii) Optimal profit - best mix :
Product E Product Z Total
Units Contribution/u Units Contribution/u quantity
Present 3,000 25 2,000 20 5,000
Next 1,000 25 1,000
Next 1,000 20 1,000 20 2,000
Next - - 1,000 20 1,000

Total for best mix 5,000 4,000
Contribution
value (`) 4,000 x 25 + 1,000 x20 4,000 x 20 = 80,000 2,00,000
= 1,20,000
Average Contribution per unit (`) = 2,00,000 / 9,000 = 22.22
Maximum profits (`) = 2,00,000 - 93,500 = 1,06,500
(b)
Boundary points
x y Max Profit
A 0 480 21,600 *
B 720 0 21,600 *
C 360 0 10,800
D 0 270 12,150
* Optimum profit.
Comment: 1 . Solution . Multiple Optimal solution exists because the objective function line 30x + 45y falls on
the constraint line 2x+3y i.e., any point on the line will yield the same profit of ` 21,600/-.
Comment 2 : - Constraint .Between Constraints (ii) 9x+12y > 2,160 and (iii) 3x+4y > 1,080 in the problem,
constraint (iii) dominates constraint (ii).

Ans. 5
(a)
A B C D
Quantity 3,000 3,500 2,000 3,000
Market price (`) 300 320 400 270
Total Variable cost/unit (`) 260 280 350 280
Contribution per unit (`) 40 40 50 (10)*
*Decision: do not make D
Machine Hours per unit 2 1.5 2
Contribution per Machine Hour 20 26.67 25
Ranking III I II
Hours required 6,000 5,250 4,000 15250 total hours
Allocation of Available hours 2,750** 5,250 4,000 12,000 hours
**(Balancing figure)
Hours required in 2nd Shift 3250 hours 1625 units of A
Contribution per unit for Product A in second shift
` 40 - `12 = ` 28 (Direct wages will go up by ` 12)
For every 1000 hours in second shift the Contribution from A would be
` 14,000 ie., 1,000/2 * 28
The increase in Fixed Cost is ` 6,000. After 3,000 hours the Contribution will be only ` 250/2 * 28 i.e. ` 3,500,
whereas the increase in fixed cost will be ` 6,000. Hence it is not advantageous to go beyond 3,000 hours in
the second shift.
Best Course of action:
(i) Purchase D from outside: 3,000 units.
(ii) Make B and C fully in-house in the normal shift, B:3,500 units, C:2,000 units.
(iii) Make and buy A as follows:
Normal shift: 1,375 units
2nd shift: 1,500 units
Purchase: 125 units
(b)
Paths: TUVY 8+16+14+10 = 48 days (critical path)

WXY 12+15+10 = 37 days
T U V Y
Crash days possible 2 5 5 2
Crash cost-normal cost 500 875 750 360
Crashing cost/day 250 175 150 180
Step I crash V - 5 days 750
Step II crash U - 5 days 875
Step III crash Y- 1 day 180
Minimum cost of crashing exercise (`) 750+875+180 = 1805 (for 11 days)
Ans. 6
(a)
Budgeted production = 120,000 per annum (10,000 units per month)
` per unit Total `
Sales Value 105.00 1,26,00,000
Less: Variable Cost
Direct material 30.00 36,00,000
Direct Labour 20.00 24,00,000
Flexible mfg. support 10.00 12,00,000
Commission 10% of sales 10.50 12,60,000
Total Variable Cost 70.50 84,60,000
Contribution 34.50 41,40,000
Fixed mfg. cost (Capacity related cost) 20,00,000
Inventory carrying cost (Refer working) 2,70,000

Profit from new product 18,70,000
Less: Loss of contribution due to lower sale of existing
product 60,000 units * ` 20 12,00,000
Net incremental profit 6,70,000
( Decision: Recommend new product)
Value of Inventory
Raw materials (36,00,000 /6) 6,00,000
Work in progress
Materials (36,00,000/ 12) 3,00,000
Labour (24,00,000/ 24) 1,00,000
Flexible Manufacturing support (12,00,000 / 24) 50,000 4,50,000
Finished Goods
(Raw materials + Labour + Flexible manufacturing support) / 6 12,00,000
TOTAL INVENTORY VALUE 22,50,000
Inventory Carrying cost - 12% 2,70,000

(b)
A Balanced score card includes information, both financial and non-financial elements under 4 perspectives
with a long term goal of improved financial performance.
Perspective Parameters
Customer Sales %
Delivery time
New product information
Internal business perspective Business process to be adopted
Technological capability Internal efficiency parameters
Innovation/ learning perspective How a company should sustain its ability to
change and innovate
Technology leadership
Product focus
Kaizen approach
Financial perspective Sales growth
How the company should appear to its
shareholders
Operating income by segments

(c) Classification of items under cost reduction/ cost control
Sl. No. Item Category
Cost Control (CC)
Cost Reduction (CR)
(i) Costs exceeding budgets or standards are investigated CC
(ii) Preventive function CC
(iii) Corrective function CR
(iv) Measures to standardize for increasing productivity CR
(v) Provision of proper storage facilities for materials CC
(vi) Continuous comparison of actual with the standards set CC
(vii) Challenges the standards set CR
(viii) Value analysis CR
Ans. 7
(a)
Activities P and Q are called duplicate activities (or parallel activities) since they have the same head and tail
events. The situation may be rectified by introducing a dummy either between P and S or between Q and S or
before P or before Q (i.e. introduce the dummy before the tail event and after the duplicate activity or Introduce
the dummy activity between the head event and the duplicate activity).
(b) Situation 1 :On performing minimum operation in Row 3, if C R is zero, the optimal solution is obtained.
3 3
0 xx xx Optimal solution = C1R1, C2R2 & C3R3
xx 0 xx
xx xx 0
Situation 2 :On performing minimum operation in Row 3, if C2R3 is zero, then it necessitates the performance
of minimum operation in C3. On account of this, if either C3R2 or C3R2 is zero then the optimal solution is
obtained
(i.e., C2R3 and C3R3 are zero after Row minimum and column minimum operation respectively)
(or C R and C R are zero after Row minimum and column minimum operation respectively).
2 3 3 2
Situation 3 : On performing minimum operation in Row 3, if C R is zero, then it necessitates the
1 3
performance of minimum operation in C . On account of this, if either C R or C R is zero then the optimal
3 3 3 3 1
solution is obtained. (i.e., C R and C R are zero after Row minimum and column minimum operation
1 3 3 3
respectively).
(ie., C1R3 and C3R3 are zero after Row minimum and column minimum operation respectively)
or C R and C R are zero after Row minimum and column minimum operation respectively).
1 3 3 1
(c)
Type of Service Probability Cumulative Random No.
Probability Interval
Self- Service 0.60 0.60 00 - 59
Attended Service 0.40 1.00 60 - 99
Arrival Rate:
No. of arrivals Probability Cumulative Random Number
Probability Interval
0 0.20 0.20 00 - 19
1 0.10 0.30 20 - 29
2 0.35 0.65 30 - 64
3 0.30 0.95 65 - 94
4 0.05 1.00 95 - 99
(d) (i) Maximum Capacity = Maximum no. of days in a period x no. of workers or
Maximum no. of hours x no. of workers
or
The maximum no. of units that can be produced by a manufacturing facility in a certain period.
(ii) Practical Capacity = Maximum capacity (minus) Sundays, holidays, normal maintenance & idle time
(iii) Normal Capacity = Average of past 3 years f normal performance excluding abnormal data.
(iv) Principal budget factor = The factor that limits the activities of the functional budgets of the organization.
(e) (i) Hospital Patient days, or room days or patient nights
(ii) Hotel Room nights/ Room days
(iii) Transport Passenger - km or Tonne- km or quintal . km
(iv) Staff canteen No. of meals or no. of staff

PAPER 5
NOVEMBER 2011
Q-1
(a) New Ltd. Plans to completely manufacture a single product Z., whose selling price and variable
manufacturing costs will be ` 100 per unit and ` 80 per unit respectively. If the complete production is
done at its own factory, fixed machining costs will be ‘ 3,62,000 and fixed administration and selling
overheads will be ` 30,000 for the production period.
Alternatively, the product can be finished outside by sub contracting the machining operations at ` 10
per unit, but this will entail an increase in the fixed administration overheads by ` 1,20,000 while fully
avoiding the machining cost of ` 3,62,000
Based on the above figures and assuming a production capacity of 30,000 units for the production
period, advise with relevant supporting figures, from a financial perspective, for what volumes of market
demand will:
(i) a manufacture be recommended at all ?
(ii) a fully in-house production be recommended?
(iii) the sub contracting option be recommended ? (5 Marks)
(b) Pigments Ltd. is a chemical factory producing joint product s J, K and L at a joint cost of production of
` 9, 60,000. The sales are:
J 60,000 units ` at 5 per unit,
K 20,000 units at ` 20 per unit and
L 40,000 units at ` 10 per unit
The company seeks you advice regarding the following options available:
Option I: After the joint process, all of L can be further processed to make 36,000 units of M, at an
additional processing cost of ‘ 1,80,000 and M can be sold at ‘ 18 per unit.
Option II: the facilities used to convert L to M may be used to make 7000 units of an additional product
A, with a different raw material input. A can be made at an additional variable manufacturing cost of ‘ 12
per unit and will fetch ‘ 30 as the selling price, but the company will have to offer one unit of J as a free
gift for each unit of A sold.
Evaluate the proposals using the incremental cost approach.
(5 Marks)
(c) State any 5 limitations of the assumptions of PERT and CPM
(5 Marks)
(d) Classify the following ite3ms under appropriate categories of equality costs viz. Prevention Costs, appraisal
Cost, Internal Failure Costs and External Failure costs:
(i) Rework
(ii) Disposal of scrap
(iii) Warranty Repairs
(iv) Revenue loss
(v) Repair to manufacturing equipments
(vi) Discount on defective sale
(vii) Raw material inspection
(viii) Finished product inspection
(ix) Establishment of quality circles
(x) Packaging inspection (5 Marks)

Q-2
(a) The budget and actual operating data for 2010-11 pertaining to 4 products in a store are given below:
(10 Marks)
Budgeted data for 2010-11 Actual operating results in 2010-11
Product Gallons Selling price Variable costs Gallons Selling price Variable costs
(` per gallon) (` per gallon) (` per gallon) (` per gallon)
V 2,50,000 1.2 0.5 1,80,000 1.00 0.45
C 3,00,000 1.5 0.6 2,70,000 1.35 0.50
S 2,00,000 1.8 0.7 3,30,000 2.00 0.75
A 50,000 2.5 1.00 1,80,000 3.00 1.20
You are required to compute for the individual products and in total:
(i) the sales margin price variance
(ii) the sales margin mix variance and
(iii) the sales margin volume variance
Indicate whether the variances are favorable (F) or unfavorable (A or U )
(10 Marks)
(b) A city corporation has decided to carry out road repairs on 4 main roads in the city.
The Government has agreed to make a special grant of ` 50 lacs towards the cost with the condition that
the repairs should be carried out at lowest cost. Five contractors have sent their bids. Only road will be
awarded to one contractor. The bids are given below:
Cost of Repairs (` in lacs)
Road R1 R2 R3 R3
C1 9 14 19 15
Contractors
C2 7 17 20 19
C3 9 18 21 18
C3 10 12 18 19
C4 10 15 21 16
You are informed that C2 should get R1 and C4 should get R2 to minimize costs.
(i) What is the minimum cost allocation?
(ii) How much is the minimum discount that the eliminated contractor should offer for meriting a
contract?
(iii) Independent of (ii) above, if the corporation can negotiate to get a uniform discount rate from each
contractor, what is the minimum rate of discount so that the cost is within the grant amount?
(6 Marks)
Q-3
(a) PQ Ltd, makes two products P and Q, which are similar products with slight difference in dimensions,
but use the same manufacturing processes and facilities. P{production may be made interchangeably
after altering machine set-up. Production time is the same for both products. The cost structure is as
follows:
(Figures ` per unit) P Q
Selling Price 100 120
Variable manufacturing cost
(directly linked to units produced) 45 50
Contribution 55 70
Fixed manufacturing cost 10 10
Profit 45 60

Fixed cost per unit has been calculated based on the total practical capacity of 20,000 units per annum(which
is either P or Q both put together). Market demand is expected to be the deciding factor regarding the product
mix for the next 2 years. The compny does not stock inventory of finished goods. The company wished to
know whether ABC system is to be set up at a cost of ` 10,000 per month for the purpose of tracking and
recording the fixed overhead costs for allocation to products.
Support your advice with appropriate reasons.
(6 Marks)
Independent of the above, if you are told to assume that fixed costs stated above, consist of a non-cash
component of depreciation to plant at 90,000 for the year, will you advice change ? Explain.
(2 Marks)
(b) In a company, division A makes product A and Division B makes product B.
One unit of a needs one unit of B as input. State the unit transfer price to be adapted by the transferring
Division A to B in each of the following independent situations:
(i) There is a ready market for A. There are no constraints for production or demand for A and A does
not incur any external selling cost.
(ii) Supply is more than demand for A. External market resorts to distress price for A and this is
expected to last for a temporary period. The product cannot be stocked until better times.
(iii) Product A is highly specialized. Internal specifications are too many that B has to opnly buy from
A.
(iv) A has excess capacity. It can transfer any quantity to B. Goal congruence is to be achieved.
(v) A has no spare capacity, has adequate demand in a competitive market.
(vi) A has no spare capacity and has adequate demand in a competitive market. But on units trans-
ferred to B, it incurs ` 10 per unit as additional transport cost and ` 10,000 as fixed expenses
irrespective of the number of units transferred.
(8 Marks)
Q-4
(a) Alfa Mills prepared the following budget for its production department for 2010-11 10 for 12,000 units of
production.
`
Raw Material @ ` 3 per unit 36,000
Labour 2 hours/unit @ ` 2.5 per hour 60,000
Production overheads:
Power (variable) 3000
Repairs (variable) 1500
Indirect labour (80% variable) 2400
Factory Rent (Fixed) 3600
Factory Insurance (Fixed) 1800
Other Manufacturing Expenses (50% variable) 600
Total Production Cost 1,08,900
You are required to present the flexible budget classified under fixed and variable costs for
(i) Production of 10,000 units
(ii) Production of 15,000 units, for which raw material price increases by 10% for the entire quantity
and labour rate increases by ` 0.5 per hour for the full direct labour hours.
(8 Marks)
(b) Happy Holidays company contracts to take children on excursion trips Relevant information for a proposed
excursion trip is given below:
Revenue per trip per child 4000
Expenses that have to be incurred:
Train fare per child per trip 1700
Meals per child per trip 300
Craft Materials per child per trip 600
Room rent per trip (4 children can be accommodated in a room) 760
Local Transport at picnic spots (per vehicle) 1200
(each vehicle can seat 6 children excluding the driver)
Fixed costs that are required to be covered in a trip ` 5,18,130 .
Find the minimum number of children to cross the break-even point and start earning a profit.
(6 Marks)
Q-5
(a) Quickcomp is a successful version of a software package that is widely used. Fastercomp is the next
version, for which the development is complete and it is ready to the sold immediately in the market as
budgeted. However, for Fastercomp, user manuals, training modules and diskettes have not yet been
made, whereas, for the Quickcomp version, these are overstocked by 5,000 units. Release of Fastercomp
will render the Quickcomp version not saleable.
The following information is provided:
Quickcomp Fastercomp
Selling price per unit ` 14,000 14,000
Variable cost per unit `
(consisting of user manuals, training modules
and diskettes) 1000 4000
Development Cost per unit `
(total cost of development spread over the
expected sales quantity during the product’s
life-cycle) 7,000 10,000
Marketing/Administration Cost per unit `
(Fixed budgeted annual outflow divided by
the expected sales quantity for each product
for the year) 3500 4000
Total Costs per unit ` 11,500 18,000
Operating Income per unit 2,500 1,000
From a purely financial perspective, the company wants your advice whether to delay the release of the
new version by 2 months by when the inventory of the existing version would have sold out or to release
the new version immediately. Support your advice with relevant figures.
(6 Marks)
(b) Given below is the relevant portion of the first iteration of a linear program under the simplex method,
using the usual notations.
X1 X2 X1 X2 X3
Quantity Basic Contribution 50 40 0 0 0
Variable Per unit
150 S1 0 3 5 1 0 0
20 S2 0 0 1 0 1 0
296 S3 0 8 5 0 0 1
(i) Write the initial liner program with the objective function and the in equations.
The following questions are to be answered independent of each other and based on the iteration given
above:
(ii) What is the opportunity cost of bringing one unit of x1 into the solution?
(iii) If we bring 4 units of x1 into the solution, by how much will the basic variables changes?

(iv) What will be the change in the value of the objective function if 4 units of x2 are brought into the solution?
(v) What will be the quantity of the incoming variable?
(10 Marks)
Q-6
(a) The number of days of total float (TF), earliest start times (EST) and duration in days are given for some
of the following activities.
Activity TF EST Duration
1–2 0 0
1–3 0
1–4 5
2–4 0 4
2–5 1 5
3–6 2 12
4–6 0 12
5–7 3
6–7 23
6–8 2
7–8 0 23
8–9 30 6
(i) Draw the network.
(ii) List the paths with their corresponding durations and state when the project can be completed.
(10 Marks)
(b) State the pricing policy most suitable in each of the following independent situations:
(i) The company makes original equipments and does defence contract work. There are other compa-
nies which also undertake such projects.
(ii) The product made by a company is new to the market. It is expected to enjoy a long-term demand.
Competition is expected very soon, since the product will be desirable to most customers.
(iii) Stock of processed ready-to-eat product, whose shelf-life will soon be over in the next 2 months.
The product is going to be discontinued.
(iv) A company sells a homogeneous product in a highly competitive market.
(Candidates need to only write the pricing policy with the corresponding sub-division numbers of
the questions. The situations need not be copied into the answer books)
(4 Marks)
(c) Two companies, H and L, have the same values for turnover and net profit and make a similar product. H
has a higher P/V ration than L. Which company will perform better when: (i) the market demand is high
? (ii) the market demand is low?
(2 Marks)
Q-7 Answer any 4 out of the following 5 questions:
(a) what are the steps involved in the simulation process? (4 Marks)
(b) What are the limitations of the learning curve theory ? (4 Marks)
(c) Briefly explain the phases in the life cycle of a product. (4 Marks)
(d) Explain briefly Pareto analysis and mention some of its uses. (4 Marks)
(e) Explain the concept of Just In time approach in a production process. (4 Marks)


Paper 5
Ans.1
(a)
Options
Details Manufacturing Sub Contract
Amount (` ) Amount (` )
Selling price 100 100
Variable Cost 80 90
Contribution 20 10
Fixed Cost 3,92,000 1,50,000
BEP (units) 19,600 15,000
Point of Indifference = level of production where both options will have same outcome.
It can be calculated as :
Difference in Fixed cost = ` (3,92,000 – 1,50,000) = ` 2,42,000
Difference in contribution per unit = ` 10
Point of indifference = 2,42,000 /10 = 24,200 units.
It may be calculated in alternative way.
Indifference Point (x): (20x – 392000) = (10x – 150000)
10x = 242000
X = 24200
(i) If Market demand is above 15000 : manufacture is recommended
(ii) For Demand 24201 to 30000 units : Manufacture fully in-house.
(iii) For Demand 15000 to 24200 units : Sub-contract
(b) Working Notes :
Particulars Option – I Option – II
Process L to M Sell new product A
Amount (` ) Amount (` )
Sale of Product M 648,000
Sale of Product A 210000
(Less: Revenue lost on Product L ) 400,000
(Less: Revenue lost on Product J) 35000
Less: Additional Cost 180,000 84000
Incremental Profit 68000 91000
Decision : Option II is better by ` 23000
(c) Limitations of the assumption of PERT and CPM
(i) Beta distribution may not always be applicable
(ii) The formulae for expected duration and standard deviation are simplification. In certain cases,
errors due to these have been found up to 33 %
(iii) The above errors may get compounded or may cancel each other
(iv) Activities are assumed to be independent. But the limitations on the resources may not justify the
assumption.
(v) It may not always be possible to sort out completely identifiable activities and to state where they
begin and where they end
(vi) If there exist alternatives in outcome, they need to be incorporated by way of a decision tree

analysis.
(vii) Time estimates have a subjective element and to this extent, techniques could be weak. Contrac-
tors can manipulate and underestimate time in cost plus contract bids. In incentive contracts,
overestimation is likely.
(viii) Cost-time tradeoffs / cost curve slopes are subjective and even experts may be widely off the mark
even after honest deliberations
(d)
i Rework Internal Failure
ii Disposal of Scrap Internal Failure
iii Warranty Repairs External Failure
iv Revenue Loss External Failure
v Repairs to Manufacturing Equipment Internal Failure
vi Discount on Defective Sales External Failure
vii Raw Material Inspection Prevention Cost
viii Finished Product Inspection Appraisal Cost
ix Establishment of Quality Circles Prevention Cost
X Packaging Inspection Appraisal Cost
Ans.2
(a) Working Notes:
Product Budget Margin (BM) Actual Margin (AM)
Budgeted Price – Budgeted Variable Actual Price – Budgeted Variable
Cost Cost
V 1.2 – 0.5 = 0.7 1 - 0.5 = 0.5
C 1.5 – 0.6 = 0.9 1.35 – 0.6 = 0.75
S 1.8 – 0.7 = 1.1 2.0 – 0.7 = 1.3
A 2.5 – 1.0 = 1.5 3.0 – 1.0 = 2.0
Actual Quantity x Actual Actual Quantity x Budgeted
Margin (1) Margin (2)
V 1,80,000 x 0.5 = 90,000 1,80,000 x 0.7 = 1,26,000
C 2,70,000 x 0.75 = 2,02,500 2,70,000 x 0.9 = 2,43,000
S 3,30,000 x 1.3 = 4,29,000 3,30,000 x 1.1 = 3,63,000
A 1,80,000 x 2.0 = 3,60,000 1,80,000 x 1.5 = 2,70,000
9,60,000 = 10,81,500 9,60,000 = 10,02,000
Actual Qty in Budgeted mix x Budgeted Quantity x Budgeted
Budgeted Margin (3) Margin (4)
V 3,00,000 x 0.7 = 2,10,000 2,50,000 x 0.7 = 1,75,000
C 3,60,000 x 0.9 = 3,24,000 3,00,000 x 0.9 = 2,70,000
S 2,40,000 x 1.1 = 2,64,000 2,00,000 x 1.1 = 2,20,000
A 60,000 x 1.5 = 90,000 50,000 x 1.5 = 75,000
9,60,000 8,88,000 8,00,000 = 7,40,000
Sales Margin – Price Sales Margin Mix Sales Margin Volume
Variance (5) = (1) – (2) Variance (6) = (2) - (3) Variance (7) = (2) – (4)
V 36,000 (A) 84,000 (A) 49,000 (A)
C 40,500 (A) 81,000 (A) 27,000 (A)
S 66,000 (F) 99,000 (F) 1,43,000 (F)
A 90,000 (F) 1,80,000 (F) 1,95,000 (F)
79,500 (F) 1,14,000 (F) 2,62,000 (F)
(b) (i) There are 5 rows and 4 columns hence insert a dummy column R5.
1. C2 has been allocated to R1
2. C4 has been allocated to R2. Hence the assignment is restricted to
R3 R4 R5
C1 19 15 0
C3 21 18 0
C5 21 16 0
Column Minimum
R3 R4 R5
C1 0 0 0
C3 2 3 0
C5 2 1 0
R3 R4 R5
C1 0 0 1
C3 1 2 0
C5 1 0 0
Hence C1 has been allotted to R3, C3 to R5 and C5 to R4.
Hence the Minimum cost is = 7+12+19+16+0 = 54Lacs
(ii) C3 should reduce2 lacs for R1, 6lacs for R2, 2lacs for R3 and 2 lacs for R4
Minimum Discount = 2 Lacs for any of R1, R3, R4
(iii) Minimum rate of Discount (54-50) = 4/54 = 7.41%
Ans.3
(a) Working Notes
# Data Reasoning Decision
i. Similar Products OH Cost based on ABC will ABC system not
production units is required for OH
Similar Production also yield identical results allocation
Resources
ii Present OH Cost = Current OH cost of 10/u For allocation purpose,
10/u. Proposed will increase by 6 per
Increase due to ABC unit due to installing
system : ABC system
120000/20000 = 6/u (60% increase) ABC not justified
iii. Both have +ive OH allocation has no No need for ABC System
contribution / u. role in decision making
Market demand
determines the mix
iv. For the purpose of OH allocation, ABC need not be installed. However, if the
fixed overheads of ` 2,00,000 are analysed by activity and thereby a saving of at
least ` 1,20,000 be expected (which is the cost of installing ABC system), then,
ABC system may be installed
v. For the non cash component of depn = 90,000 , FC that can be saved is a maximum
of 1,10,000 (2,00,000 – 90,000).
Hence, this is clearly less than ABC cost installation. Hence do not install ABC
System

(b) Transfer Price
i) Market Price = Transfer price
ii) For any quantity that the market can absorb, Price offered by B or Market price whichever is higher
For quantity that the market can no longer absorb, any price that B may offer
iii) Maximum Transfer price =Total Cost + Profit subject to maxim price B can pay to keep its ultimate
product profitable.
Minimum transfer price -= variable cost
iv) Transfer Price = Variable Cost to A
v) Transfer price = Either Market Price or Variable Cost + Opportunity Cost of diverting market sale
vi) Transfer price = Variable Cost + Opportunity Cost + specific cost + (fixed cost/units transferred)
Transfer Price/unit = (Market Price + 10) + (10,000/units transferred)
The question has an error. It says “one unit of A needs one unit of B”. Hence students can assume
B transfers to A. Then, considering each sub division independently,
i) B will offer A at market price of B less any avoidable selling expenses on units transferred to A.
ii) A will stop buying from B since stock already exists.
iii) Maximum Transfer price =Total Cost + Profit subject to maxim price B can pay to keep its ultimate
product profitable.
Minimum transfer price = variable cost
iv) Transfer Price = Variable Cost to A
v) A will pay up to market price of B, less any avoidable selling expenses for transfers to A
vi) Transfer price = Variable Cost + Opportunity Cost + specific cost + (fixed cost/units transferred)
Transfer Price/unit = (Market Price + 10) + (10,000/units transferred)
Ans.4 (a)
Flexible Budget
Item of Cost 10000 units 15000 units
Working ` Working `
Variable Costs
Raw Material 3*10000 30,000 3*15000*1.1 49,500
Labour 2*2.5*10000 50,000 2*3*15000 90,000
Power 3000/12000*10000 2,500 3000/12000*15000 3,750
Repair 1500/12000*10000 1,250 1500/12000*15000 1,875
Indirect Labour – 2400*80%/12000*10000 1,600 2400*80%/12000*15000 2,400
Variable
Other Mfg Cost – 600*50%/12000*10000 250 600*50%/12000*15000 375
Variable
Sub-total variable 85600 147900
costs
Fixed Costs
Indirect Labour – 2400*20% 480 2400*20% 480
Fixed Fixed
Other Mfg Cost – 600*50% 300 600*50% 300
Fixed
Factory Rent 3,600 3,600
Factory Insurance 1,800 1,800

Sub-total fixed costs 6180 6180
Total Production Cost 91,780 154,080

(b)
Item Description `
Revenue per trip 4,000
Less: Variable Cost
Train Fare 1,700
Meals per Child 300
Craft Materials 600
Total Variable Cost 2,600
Contribution per child 1,400
5,18,130
Relevant Range = = 513
1010
Step Fixed Cost
Items `
Room Rent (760/4) 190
Transport Cost (1200/6) 200
Total Step Fixed Cost 390
Net Contribution = 1400 – 390 = ` 1010.
Details Amount
Sales 4000
Variable Cost -2600
Contribution 1400
At 513 Students
General Fixed Cost 518,130
Room Rent 129*760 98,040
Transportation 86*1200 103,200
Total Fixed Cost 719,370
Gross Contribution 513*1400 718,200
Loss (1,170)
BEP = 513+1170/1400 = 513.83. Hence the Minimum Students will be 514
Relevant Range for Earning Profit will be 514 to 516
Particulars 514 516
General Fixed Cost 518,130 518,130
Room Rent 98,040 98,040
Transportation 103,200 103,200
Total Fixed Cost 719,370 719,370
Gross Contribution 719,600 722,400
Profit 230 3,030
Ans.5
(a)
Particulars Quickcomp Fastercomp Remarks
Sale Price 14,000 19,000 Given
Less:
Variable Cost - 4,000 Quickcomp Variable Cost is Sunk cost
Development Cost - - Sunk Cost
Marketing Cost - - Sunk Cost
Profit 14,000 15,000
Incremental Profit is ` 1000/- Unit.
Better to Release Fastercomp now in order to get higher profit by ` 5000 x 1000 = 50 lacs.

(b)
(i) Maximize Z =50 x1 + 40 x2
Subject to
3 x1 + 5 x2 150
x2 20
8 x1 + 5 x2 296
x1, x2 0
(ii) Opportunity Cost of bringing one unit of x1 into the solution is ` 40, (i.e. the contribution lost on not
bringing one unit of the next best choice, which is x2.
(iii)
Change in basic Change in basic Implication
variable per unit variables for 4 units
of x 1 of x 1
3 12 S1 will be reduced by 12
0 0 S2 will not be impacted
8 32 S3 will be reduced by 32 units if
we bring 4 units of x1 into the
solution
(iv) Objective function value will increase by 4 x 40 = ` 160 if we bring in 4 units of x2 into the solution.
(v) x1 having highest contribution will be the incoming variable. Maximum no of units of x1 that can come in
= Maximum ratio, which is minimum of (150/3, 20/0, 296/8) = Minimum of (50, 8 , 37). Hence quantity of
incoming variable x1 is 37 units.
Ans.6
(a)
Network Diagram: 6-7 dummy

6-8-9 and 7-8-9
1-2-5-7 and 1-2-4-6
1-4-6 and 1-3-6
Activity Duration Early Start Late Start Late Finish Total Float
1-2 4 0 0 4 0
1-3 12 0 2 14 0
1-4 7 0 5 12 5
2-4 8 4 4 12 0
2-5 5 4 8 13 1
3-6 9 12 14 23 2
4-6 11 12 12 23 0
5-7 11 9 12 23 3
6-7 0 23 23 23 0

6-8 5 23 25 30 2
7-8 7 23 23 30 0
8-9 6 30 30 36 0
PATH DURATION
1-2-5-7-8-9 32
1-2-4-6-7-8-9 36
1-2-4-6-8-9 34
1-4-6-7-8-9 31
1-4-6-8-9 29
1-3-6-7-8-9 34
1-3-6-8-9 32
(b)
(i) Sealed Bid Pricing
(ii) Penetration Pricing
(iii) Any price that the market will pay (even below variable cost any cash received)
(iv) Going rate pricing or market price
(c)
(i) In case Market Demand is High – Product H (Lower Variable Cost and Higher Fixed Cost)
(ii) In case Market Demand is Low – Product L
Ans.7
(a) Steps in Simulation Process
1. Define the problem or system you intend to simulate.
2. Formulate the model you intend to use.
3. Test the model; compare its behavior with the behavior of the actual problem environment.
4. Identify and collect the date needed to test the model.
5. Run the simulation.
6. Analyse the results of the simulation and, if desired, change the solution you are evaluating.
7. Rerun the simulation to test the new solution.
8. Validate the simulation, that is, increase the chances that any inferences you draw about the real
situation from running the simulation will be valid.
(b) Limitations of Learning Curve Theory
1. All activities of a firm are not subject to learning effect. (Activities that have not been performed in
the present operational mode, those performed by new or unfamiliar employees are subjected to
learning effect, while those performed by familiar or experienced workmen will not be subjected to
learning effect)
2. It is correct that learning effect does take place and average time taken is likely to reduce. But in
practice it is highly unlikely that there will be a regular consistent rate of decrease. Therefore any
cost prediction based on conventional learning curves should be viewed with caution.
3. Considerable difficulty arises in obtaining valid data that will form basis for computation of learning
effect.
4. Even slight change in circumstances quickly renders the learning curve obsolete. While the regu-
larity of conventional learning curves can be questioned, it would be wrong to ignore learning effect
altogether in predicting costs for decision purposes.

(c) Phases in Life Cycle of a Product
Phase Characteristics
Introduction Product is launched. Profits are almost non existent.
Competition is almost negligible.
Growth Sales/ Profits rise rapidly. Competiton enters. At
phase end, profits begin to decline.
Maturity Sales increases but at a declining rate. Some firms
extend their product lines with new models.
Saturation and decline Drop in sales volume, need for product demand
disappears. Better and cheaper substitutes are
available in the market.
(d) Pareto Analysis
Pareto Analysis is based on 80:20 rule that was a phenomenon first observed by Vilfredo Pareto, a
nineteenth century Italian economist. He noticed that 80% of the wealth of Milan was owned by 20% of
its citizens. This phenomenon or some kind of approximation of it says, (70:30) can be observed in
many different business situations. The Management can use it in a number of different circumstances
to direct management attention to the key control mechanism or planning aspects.
That is, about 70 to 80% of the value corresponds to 30 to 20 % of the volume.
Use of Pareto Analysis
1. Prioritize problems, goals and objectives
2. Identify root causes
3. Select and define key quality improvement programs
4. Select key employee relations improvement programs
5. Select key customers relations and service programs
6. Maximise research and product development times
7. Verify operating procedures and manufacturing processes
8. Product or services sales and distribution
9. Allocate physical, financial and human resources
(e) Just in Time in Production Process
1. Products, Spare parts/materials are received directly at production floor. Inspection is completed
before delivery of materials.
2. Setup time is minimized while also reducing long production runs, thereby eliminating defectives,
scrap and product obsolescence.
3. Work-in-progress is reduced by use of kanban card or working cells or both.
4. Workers are trained on a variety of machines, allowed to stop machines when they identify a
problem, fix it or call the repair team and adequately compensated.
5. Supporting systems such as administration, accounting and cost reporting are suitably modified
to shift from the conventional mode to the improved JIT requirements.


PAPER 5
MAY 2011
Q-1
(a) A company actually sold 8000 units of A and 10,000 units of B at ` 12 and ` 16 per unit respectively
against a budgeted sale of 6000 units of A at ` 14 per unit and 9000 units of B at ‘ 13 per unit. The
standard costs of A and B are ` 8 and ` 10 per unit respectively and the corresponding actual costs are
` 5.5 and ` 14.5 per unit.
Compute the product wise sales margin mix and sales margin price variances, indicating clearly, whether
the variances are favorable or adverse.
(5 Marks)
(b) A company makes a single product which sells at ` 800 per unit and whose variable cost of production
is ` 500 per unit. Production and sales are 1000 units per months. Production is running to full capacity
and there is market enough to absorb an additional 20% of output each month.
(5 Marks)
The company has two options:
Option-I
Inspect finished goods at ` 10,000 per month. 4% of production is detected as defectives and scrapped
at no value. There will be no warranty replacement, since every defect is detected. A small spare part
which wears out due to defective material is required to be replaced at ` 2,000 per spare for every 20
units of scrap generated. This repair cost is not included in the manufacturing cost mentioned above.
Option-II
Shift the finished goods inspection at no extra cost, to raw material inspection, (since defective raw
materials are entitled to free replacement by the supplier), take up machine set-up tuning and machine
inspection at an additional cost of ‘ 8,000 per month, sop that scrap of finished goods is completely
eliminated. However, delivery of uninspected finished products may result in 1 % of the quantity sold to
be replaced under free warranty due to minor variation in dimensions, which does not result in the
wearing out of the spare as stated in Option-I
(i) Using monthly figures relevant for decision making, advise which option is more beneficial to the
company from a financial perspective.
(ii) Identify the quality costs that can be classified as
(a) appraisal costs and
(b) external failure costs.
(c) Pick out from each of the following items, costs that can be classified under ‘committed fixed costs’ or
‘discretionary fixed costs”.
(i) Annual i ncrease of sal ary and wages of admini strat iv e staf f by 5% as per
agreement
(ii) New advertisement for existing products is recommended by the Marketing Department for achiev-
ing sales quantities that were budgeted for at the beginning of the year.
(iii) Rents paid for the factory premises for the past 6 months and the rents payable for the next six
months. Production is going on in the factory.
(iv) Research costs on a product that has reached ‘maturity’ phase in its life cycle and the research
costs which may be needed on introducing a cheaper substitute into the market for facing compe-
tition.
(v) Legal consultancy fees payable for patent rights on anew product Patenting rights have been
applied for.

(5 Marks)
(d) The following matrix is a minimization problem for transportation cost. The unit transportation costs are
given at the right hand corners of the cells and the ij values are encircled.
Find the optimum solution (s) and the minimum cost.

Q-2
(a) During the last 20 years, KL Ltd’s manufacturing operation has become increasingly automated with
computer-controlled robots replacing operators. KL currently manufacturers over 100 products of varying
levels of design complexity. A single plant wise overhead absorption rate, based on direct labor hours is
absorb overhead costs.
In the quarter ended March, KL’s manufacturing overhead costs were:
(` 000)
Equipment operation expenses 125
Equipment maintenance expenses 25
Wages paid to technicians 85
Wages paid to component stores staff 35
Wages paid to dispatch staff 40
Total 310
During the quarter, the company reviewed the Cost Accounting System and concluded that absorbing overhead
costs to individual products on a labour hour absorption basis was meaningless and that overhead costs
should be attributed to products using an Activity Based Costing (ABC) system, The following are identified as
the most significant activities.
(i) Receiving component consignments from suppliers.
(ii) Setting up equipment for production runs
(iii) Quality inspections
(iv) Dispatching goods as per customer’s orders.
Equipment operation and maintenance expense are apportioned as :
• Component stores 15% production runs 70% and dispatch 15%
Technician’s wages are apportioned as:
• Equipment maintenance 30% set up equipment for production runs 40% and quality inspections 30%
During the quarter:
(i) 980 component consignments were received from suppliers.

(ii) 1020 production runs were set up
(iii) 640 quality inspections were carried out.
(iv) 420 orders were dispatched to customers.
KL’s production during the quarter included component R. The following information is available:
Component
R
Component Consignments received 45
Production runs 16
Quality Inspections 10
Orders (goods ) dispatched 22
Quantity produced 560
Calculate the unit manufacturing overhead cost of component R using ABC system.
(8 Marks)
(b) State any three differences between PERT and CPM
(3 Marks)
(c) What are the disadvantages of Cost Plus Pricing ?
(5 Marks)
Q-3
(a) A manager was asker to assign tasks to operators (one task per operator only) so as to minimize the
time taken. He was given the matrix showing the hours taken by the operators for the tasks.
First, he preformed the row minimum operation. Secondly, he did the column minimum operation. Then,
he realized that there were 4 tasks and 5 operators. At the third step he introduced the dummy row and
continued with his fourth step of drawing lines to cover zeros. He drew 2 vertical lines (under operator III
and operator IV) and two horizontal lines (aside task T4 and dummy task T5 ) At step 5, he performed the
necessary operation with the uncovered element, since the number of lines was less than the order of
the matrix . After this, his matrix appeared as follows:
Operators
Tasks I II III IV V
T1 4 2 5 0 0
T2 6 3 3 0 3
T3 4 0 0 0 1
T4 0 0 5 3 0
T5 (dummy) 0 0 3 3 0
(i) What was the matrix after step II ? Based on such matrix, ascertain (ii) and (iii) given below.
(ii) What was the most difficult task for operators I, II and V ?
(iii) Who was the most efficient operators?
(iv) If you are not told anything about the manager’s errors, which operator would be denied any task? Why?
(v) Can the manager go ahead with his assignment to correctly arrive at the optional assignment, or should
he start afresh after introducing the dummy task at the beginning?
(10 Marks)
(b) Classify the following measures under appropriate categories in a balanced score card for a banking
company which excels in it s home loan products:
(i) A new product related to life insurance is being considered for a tie up with the successful housing
loan disbursements.
e.g. every housing loan applicant to be advised to take a life policy or compelled to take a fire
insurance policy.
(ii) How different sectors of housing loans with different interest rates have been sanctioned, their
volumes of growth in the past 4 quarters.
(iii) How many days are taken to service a loan, how many loans have taken longer, what additional
loans are to be released soon, e.t.c
(Students are not required to copy these statements into their answer books)
(3 Marks)
(c) A company can make any one of the 3 products X,Y or Z in a year. It can exercise its option only at the
beginning of each year.
Relevant information about the products for the next year is given below.
X Y Z
Selling Price (`/u) 10 12 12
Variable Costs(`/u) 6 9 7
Market Demand (units) 3000 2000 1000
Production capacity (units) 2000 3000 900
Fixed Costs (`) 30,000
You are required to compute the opportunity costs for each of the products.
Q-4 Answer any four out of the following five subdivisions:

(a) 6000 pen drives of 2 GB to be sold in a perfectly competitive market to earn `1,06,000 profit, whereas in
a monopoly market only 1200 units are required to be sold to earn the same profit. The fixed costs for
the period are ` 74,000 . the contribution per unit in the monopoly market is as high as three fourths its
variable cost. Determine the targets selling price per unit under each market condition.
(b) In a company, factory, overheads are applied on the basis of direct labour hours.
The following information is given:
Department
A B
Fixed factory overheads(`) 3,36,000 1,26,000
Variable labour hours (` per hour) required as
per direct
labour hour budget 0.50 1.50
For product X 1,40,000 70,000
For product Y 28,000 56,000
(c) Classify the following items under the three measures used in the theory of constraints:
(i) Research and Development Cost
(ii) Rent/Utilities
(iii) Raw materials used for production
(iv) Depreciation
(v) Labour Cost
(vi) Stock of raw materials
(vii) Sales
(viii) Cost of equipments and buildings.
(d) Will the initial solution for a minimization problem obtained by Vogel’s Approximation Method and the
Least Cost Method be the same ? Why?
(e) Name any four stage in the process of bench marking.
(4 × 4 = 16 Marks)

Q-5
(a) A Company has two manufacturing divisions X and Y, X has a capacity of 96000 hours per annum. It
manufactures two products. ‘Gear ’and ‘Engines’ as [per the following details.
Gears Engines
Direct Materials 240 64
Variable costs at ‘64/hour 256 64
Selling price in the outside market 640 128
Division ‘Y’ produces product ‘Wheels’ as per the following details:
` /unit
Imported components 640
Direct Materials 96
Variable cost at ‘ 40 per hour 320
Selling price in the outside market 1,160
The fixed overheads for X and Y are ` 24 lakhs and ` lakhs respectively. With a view to minimizing
dependence on the imported component, the company has explored a possibility of Division Y using
product ‘Gears’ instead of the imported component. This is possible provided Division Y spends 2
machine hours entailing an additional expenditure of ` 64 per component on modification of product
‘Gears’ to fit into ‘wheels’. Production and sales of ‘Wheels’ in Division Y is limited to 5000 units per
annum.
(i) What will be maximum transfer price per unit that Y will offer ?
(ii) In each of the following independent situations, state with supporting calculations, the minimum
transfer price per unit that X will demand from Y, if 5000 units are required by Y.
(iii) In which of the above situations in (ii) will the Management step in and compel X to sell to Y in the
interest of overall company’s profits ?
(11 Marks)
(b) A company manufactures two products X and Y involving three departments, Machining, Fabrication and
Assembly which have limitations on the hours as 720 hours, 1800 hours and 900 hours respectively. X
and Y require 1 and 2 hour of machining time per unit and 3 hours and 1 hours of assembly time per unit
respectively. X and Y fetch ` 80 and ` 100 as respective unit contributions.
(i) Write the linear program to maximize contribution
(ii) Introducing appropriate variables, restate the problem as linear equations fit to be incorporated in
the simplex tableau.
Q-6
(a) Explain the pre-requisites for successful operation of material requirement planning.
(5 Marks)
(b) Point out the errors in the network given below, going by the usual conventions while drawing a network
to use CPM
(6 Marks)
(c) Maruthi Agencies has received an order from a valuable client for supplying 3,00,000 pieces of a component
at ` 550 per unit at a uniform rate of 25000 units a month.
Variable manufacturing costs amount to ` 404,70 per unit, of which direct materials is ` 355 per unit.
Fixed production overheads amount to ` 30 lacs per annun, ecluding depreciation. There is a penalty/
reward clause of ` 30 per uni t f or supplying
less/more than 25000 units per month. to adhere to the schedule of supply, the company procured a
machine worth ` 14.20 lacs which will wear out by the end of the year and will fetch ` 3,55 lakh sat the
year end. After this supply of machine, the supplier offers another advanced machine which will cost `
10.65 lakhs , will wear out by the year end and not have any resale value. If the advanced machine is
purchased immediately, the purchaser will exchange the earlier machine supplied at the price of the new
machine. Fixed costs of maintaining the advanced machine will increase by ` 14,200/- per month for the

whole year. While the old machine had the capacity to complete the production in 1 year, the new
machine can complete the entire job in 10 months. The new machine will have material wastage of 0.5%
. assume uniform production throughout the year for both the machines.
Using incremental cost/revenue approach, decide whether the company should opt for the advanced
version.
Q-7
(a) A car rental agency has collected the following data on the demand for five-seater vehicles over the past
50 days.
Daily Demand 4 5 6 7 8
No. of Days 4 10 16 14 6
The agency has only 6 cars currently.
(i) Use the following 5 random numbers to generate 5 days of demand fo the rental agency
Random Nos 15,48,71,56,90
(ii) What is the average number of cars rented per day for the 5 days ?
(iii) How many rentals will be lost over the 5 days?
(5 Marks)
(b) Entertain U Ltd. hires an air-conditioned theatre to stage plays on weekend evenings. One play is
staged pea evening. The following are the seating arrangements:
VIP rows-the first 3 rows of 30 seas per row, priced at ` 320 per seat.
Middle level-the next 18 rows of 20 seats per row priced at ` 250 per sea.
Last level -6 rows of 30 seats per room priced at ` 120 per seat.
For each evening a drama troup has to be hired at ` 71,000, rent has to be paid for the theatre at `
14,000 per evening and air conditioning and other state arrangements charges work out to ` 7,400 per
evening. Every time a play is staged, the drama troup’s friends and guests occupy the first row of the
VIP class, free or charged. by virtue of passes granted to these guest. the troupe ensures that 50% of
the remaining seats of the VIP class and 50% of the seats of the other two classes are sold to
outsiders in advance and the money is passed on to Entertain U. The troupe also finds for every
evening, a sponsor who pouts up his advertisements banner near the stage and pays Entertain U a
sum of ` 9,000 per evening. Entertain U supplies snacks during though interval free of charge to all the
guests in the hall, including the VIP free guests. The snacks cost Entertain U ‘ 20 per person.
Entertain U sells the remaining tickets and observes that for every one seat demanded from the last
level, there are 3 seats demanded from the middle level and 1 seat demanded from the VIP level. You
may assume that in case any level is filled, the visitor busy the next higher or lower level, subject to
availability.
(i) You are required to calculate the number of seats that Entertain U has to sell in order to break-even
and give the categorywise total seat occupancy at BEP.
(ii) Instead of the given pattern of demand, if Entertain U finds that the demand for VIP, Middle and
Last level is in the ratio 2:2:5, how many seats each category will Entertain U have to sell in order
to break-even ?


Paper 5
May 2011 - Answer
Ans.1
(a)
BQ RBQ AQ AP BP BC BM AM
A 6000 7200 8000 12 14 8 6 4
B 9000 10800 10000 16 13 10 3 6
15000 18000
Sales Margin Mix Variance :
(Actual Qty in Budgeted Mix – Actual Qty in Actual Mix) × Budgeted Margin
A : (7,200 – 8,000) × 6 = - 4,800 (Fav)
B : (10,800 – 10,000) × 3 = 2,400 (Adv)
Total Mix Variance = - 2,400 (Fav)
Sales Margin Price Variance = Actual Qty (Budgeted Margin – Actual Margin)
A 8,000 (6 – 4) = 16,000 (A)
B 10,000 (3 – 6) = 30,000 (F)
Total Price Variance 14,000 (F)
(b)
Option I Option II
Production 1000 1000 Units
Units
Finished Goods Inspection 10,000 Appraisal -
Raw Material Inspection
scrap 4% = 40 units ×
variable cost per unit 500 20,000 Appraisal 10,000
Contribution lost 300 × 40 12,000 Appraisal
Machine repair 4,000 Appraisal -
Machine set up 8,000
Warranty replacement -
1% × 1000 = 10 unit
Contribution lost 10 × 300 3,000 External failure
Variable Cost lost 10 × 500 5,000 External failure
Quality Cost 46,000 26,000
Better Option II
(c)
Committed Fixed Cost Discretionary Fixed Cost
(i) Salary and wage increase (ii) New Advertisement Cost
(iii)Rents payable for the next 6 months (iv) Research cost for substitutes
(v) Legal fees for filing for patent rights.
(d) ij values are given for unallocated cells. Hece, no. of allocated cells = 5, which = 3 + 3 – 1 = no. of
columns + no of rows – 1.
Allocating in other than ij cells.

This solution is optional since ij are non-ve. For the other optional solution, which exists since ij= 0
at R3 C1, this cell should be brought in with a loop :
R3, C1 – R1 C1 – R1C3 – R3C3.
Working Notes:
Step I : R1C1 (Minimum of 300, 500)
Step II : R2C2 (Minimum of 300, 400)
Step III : R1C2 balance of C2 total : 100, R1 Total = 100
Step IV : R1C3 100 (balance of C3 total = 200)
Step V : R3C3 200
Solution I
Solution II

Solution I Solution II
Cost: 3 × 300 = 900 3 × 200 = 600
4 × 100 = 400 4 × 100 = 400
4 × 100 = 400 4 × 200 = 800
6 × 300 = 1800 6 × 300 = 1800
5 × 200 = 1000 5 × 100 = 500
4 × 100 = 400
Minimum Cost 4500 4500
Ans.2
(a)
Receiving Set ups Quality Despatch Total
Supplies (Rs. 000) Inspection (Rs.000) (Rs.000)
(Rs. 000) (Rs.000)
Equipment Operation 18.75 87.50 18.75 125.00
Expenses
Maintenance technicians 3.75 17.50 3.75 25.00
wages initially allocated to
maintenance (30% of Rs.
85,000 = Rs. 25,500
and then reallocated on 3.83 17.85 3.82 25.50
the same basis on
maintenance
Balance of technician
wages, allocated to set ups
and quality inspections 34.00 25.50 59.50
Stores wages – Receiving 35.00 35.00
Despatch wages –
Despatch 40.00 40.00
61.33 156.85 25.50 66.32 310.00
Note: Equipment operations expenses and Maintenance allocated on the basis 15%, 70%, and 15% as
specified in the question.
The next stage is to identify cost drivers for each activity and established cost driver rates by dividing the
activity costs by a measure of cost drive usage for the period. The Calculations are as follows:
Receiving supplies (Rs. 61,330/980) = Rs. 62.58 per component
Performing set ups (Rs. 1,56,850/1020) = Rs. 153.77 per set up
Despatching goods (Rs. 66,320/420) = Rs. 157.93 per goods order despatched
Quality Inspection (Rs. 25,500/640) = Rs. 39.84
Finally the costs are assigned to components based on their cost driver usage. The assignments are as
follows:
(Rs.)
Direct Labour 300.00
Direct Materials 1200.00
Receiving supplies 2816.10
Performing Set Up 2460.32
Quality Inspection 398.40
Despatching goods 3474.46
Total Overhead Costs 10461.54
(Rs.)
No. of units produced 560
Cost per unit 16.34
For components the overhead costs have been assigned as follows (for components R)
Receiving supplies (45 receipts at Rs. 62.58)
Performing setups (16 production runs at Rs. 153.77)
Quality Inspections (10 at Rs. 39.84)
Despatching goods (22 at Rs. 157.93)
(b)
PERT CPM
(i) Non repetitive jobs Repetitive Jobs
(ii) Probabilistic Model Deterministic Model
(iii) Event oriented Activity oriented
(iv) Incorporates statistical analysis Does not incorporate statistical analysis
(v) Useful as control device Difficulty to use as control device
(c) Disadvantages of cost plus pricing:
(i) If ignores demand, facts to take into account buyers’ needs and willingness to pay.
(ii) Fails to reflect competition adequately.
(iii) Assumes correct cost estimation, whereas in multiproduct firm, costs may be arbitrarily allocated.
(iv) In many decision, incremental costs are more relevant than full cost. This is ignored.
(v) Fixed overheads depends on volume if volume is more cost is less, and vice-versa. Increase
decrease in sales volume depends on price. Thus it is a vicious circle – cost plus markup is a price
based on sales volume & sales volume is based on price.
Ans.3
(a)
Junction values at dummy = 3. 3 was the minimum uncovered element.

Previous step was
7 5 5 0 3
9 6 3 0 6
7 3 0 0 4
0 0 2 0 0
0 0 0 0 0
(i) At step II the matrix was:
7 5 5 0 3
9 6 3 0 6
7 3 0 0 4
0 0 2 0 0

(ii) For Operator I, Most difficult task will be indicated by hours = T2
Operator II T2
Operator V T2
(iii) Most efficient operator = Operator 4
(iv) If the Manager’s mistake was not known,
4 2 5 0 0
6 3 3 0 3
4 0 0 0 1
0 0 5 3 0
0 0 3 3 0
We continue the assignment; T1 – 05,
T2 – 04, T3 – 03 are fixed.
Between T4 and T5, 01 or 02 Can be allotted.
So, other 01 or 02 Can be denied the job.
(v) Yes, the Manager can go ahead with the optimal assignment
Row minimum is not affected by when the dummy was introduced.
Column minimum was affected. But in the process, more zeros were generated to provide better
solution.
(b)
(i) New product tie up - Innovation/learning perspective
(ii) Growth of Volume - Financial perspective
(iii) Time for loan/Fresh products - Customer perspective
(c)
X Y Z
Contribution per unit 4 3 5
Units (lower of production/
market demand) 2000 2000 900
Possible Contribution (Rs.) 8000 6000 4500
Opportunity Cost 6000 8000 8000
(Note: Opportunity cost is maximum benefit for gone.
Ans.4
(a)
Perfect Competition Monopoly
Units 6,000 1,200
Contribution (1,06,000 + 74,000) 1,80,000 1,80,000
Contribution per unit 30 150
3
Variable Cost per unit 150 200
4
Variable Cost per unit 200
Selling Price per unit 230 350
(b)
Products
X Y
Variable Overheads 175000 98000
Fixed Overheads 350000 112000
Total 525000 210000
Working Note :
Department A Department B
Variable Overheads
Product X 70,000 1,05,000
Product Y 14,000 84,000
Fixed Overheads
Product X 2,80,000 70,000
Product Y 56,000 56,000
(c) The 3 key measures are :
Contribution (iii) Raw Material for production
(vii) Sales
Operating Costs (ii) Rent/utilities (iv) Depreciation
(v) Labour
Investments: (i) R& D (vi) Raw Material Stock
(viii) Building and Equipment Cost
(d) The initial solution need not be the same under both methods.
Vogel’s Approximation Method uses the differences between the minimum and the next minimum costs
for each row and column.
This is the penalty or opportunity cost of not utilising the next best alterative. The highest penalty is
given the 1st preference. This need not be the lowest cost.
For example if a row has minimum cost as 3, and the next minimum as 2, penalty is 1; whereas if
another row has minimum 4 and next minimum 6, penalty is 2, and this row is given preference. But
least cost given preference to the lowest cost cell, irrespective of the next cost.
Vogel’s Approximation Method will to result in a more optimal solution than least cost.
They will be the same only when the maximum penalty and the minimum cost coincide.
(e) Various stages in the process of benchmarking.
I Planning - Determination of benchmarking goal statement
- Identification of best performance
- Establishment of the benchmarking or process improvement
team
- Defining the relevant benchmarking measures
II Collection of data and information
III Analysis of finding based on data collected
IV Formulation and implementation of recommendation
V Constant Monitoring and reviewing.
Ans.5
(a) Y will pay only a maximum of Rs. (640-64) = Rs. 576 so that its outside purchase cost is matched. i.e
Maximum Transfer price by Y = 576 Rs. per unit.
Gears Engines
(no. of units)
Market demand is limited to 20,0000 20,000
Gears Engines Total
Hours per unit 4 1
Hours available 96,000
Units possible 24,000
or 96,000
(ii) (a) Outside Demand 20,000 20,000
Hours required 80,000 20,000
Units required by Y 5,000
Hours required 20,000
Contribution per hour 36 30
Maximise Sales so that hours = 80,000 16,000
Hours used for Y 4,000 16,000
Contribution per units of Y required 1,000 4,000
On units transferred to Y 30 x 16,000 + 36 x 4000
= 480,000 + 1,44,000
= 6,24,000
Contribution per units = 6,24,000/5,000 = 124.80
Minimum Transfer price per unit = Contribution + variable cost
= 124.8 + 240 + 256
= Rs. 620.80
(b) Gears Eng.
Market Demand 15,000 10,000
Hours required per unit 4 1
Spare capacity available = 26,000
Units of Gears possible = 26,000 per unit = 6,500
Required For transfer = 5,000
Since spare capacity is used, minimum transfer
Price = variable cost of manufacturing = 240 + 256
= 496
X will agree to anything above Rs. 496 per unit
(c) Market Demand
Units 18,000 24,000
Hours per units 4 1
Hours required for Y’s demand 20,000
This will be need by sacrificing production of ‘Engines’. Hence contribution per hours for transferred
Units must be atleast.
Contribution Required on 5000 units = 20,000 x 30 = 6,00,000
6, 00, 000
Contribution Required per unit = = 120 Rs.
5, 000
Minimum Transfer Price = Contribution per unit + Variable Cost
= 120 + 240 + 256
= Rs. 616 per unit
Gears and Engines earn a contribution.
Variable Cost of in house manufacturing of imported Components = 240 + 256 + 64
= 560
Production Outside = Rs. 640
Rs. 80/- per unit is being paid for outside purchase

80
Contribution Lost per unit of facility X = = 20hrs.
4
Since X is earning higher contribution per hours 36 & 30 for each product, the management will not have
to interfere in situation (a) & (c) where full production capacity is used for outside sales.
In (i) (b) Management need not interfere since it is a win-win situation. Departments can negotiate in the
relevant range between 496 and 576.
(b) Maximize Z = 80Xx + 100 Y subject to x+2Y 720
5x+4y 1800
3x+y 900
x 0; y 0
Where x is the number of units of A and y is the number of units of B
By the addition of slack variables, S1 S2 S3 the inequality can be converted to the equations. The
problem thus becomes
Z = 80X+100Y subject to x+2y+S1 = 720
5x+4y+S2 = 1800
3x+y+S3 = 900
x 0; y 0 S1 0; S2 0; S3 0.
Ans.6
(a) Pre-requisites for successful operation of MRP system are:
(i) The latest production and purchasing schedules prepared should be strictly adhered to Day to Day
change from predetermined schedules will cause chaos.
(ii) Raw Materials, sub-assemblies and components required for production should be pre-determined
in quantifiable terms. Standard should be set for the consumption quantity, quality, mix and yield of
raw materials for every unit of finished product.
(iii) Work-force must be appraised of the system and the need for absolute adherence to the sched-
ules prepared.
(iv) Necessary internal control system should be developed to ensure total adherence to the schedule.
(v) Accuracy of the data supplied is vital to the MRP system.
(b) Flows
2–3: There are 2 activities which are duplicate. In case they are two
different activities, one may pass through a dummy
2–5 is a dangling activity; No complete path exists.
Can be joined to (9) with a dummy
4–6&6–4: looping exists; This is not proper sequencing
(c) Old (Rs.) New (Rs.) Incremental
Depreciation
Rs.14.2 lakhs – Rs. 3.55 lakhs 10,65,000 10,65,000
Fixed Cost increase 1,70,400 (-) 1,70,400
Resale value +3,55,000 - (-) 3,55,000
Material Rs./u 355 x .5%
1.775 x 3,00,000 5,32,500 (-) 5,32,500
Increase in Costs in new Machine purchased (-) 10,57,900
Penalty @ Rs. 30 per unit - -
Reward @ Rs. 30 per unit
5000 per months x 10 months
= 50,000 x 30 = + 15,00,000
Gain 4,42,100
Decision: Buy the advanced version.

Working Note :
1st machine 25,000 per month, no penalty, no reward
3, 00, 000
new machine: = = 30,000 per months
10
advance supply per month = 5,000
= 5,000 x 10 months = 50,000 units reward
Ans.7
(a)
Daily Days Probability Cumulative Random Day demand Rented Rental
demand probability No. lost
4 4 0.08 0.08 00.07 1 5 5
5 10 0.20 0.28 08-27 2 6 6
6 16 0.32 0.60 28-59 3 7 6 1
7 14 0.28 0.88 60-87 4 6 6
8 6 0.12 1.00 88-99 5 8 6 2
50 1.00 29 3
29
Average no. of cars rented = = 5.8
5
Rental lost = 3
(b) Fixed Costs
Rs. Rs.
Troupe hire 71,000
Rent 14,000
A/C 7,400
VIP Snacks 600 93,000
Fixed Revenues:
Seats Sold by the troupe 54,000
Sponsor’s advertisement 9,000 63,000
Net fixed costs recovered by Entertain U to Break even 30,000
Seats Sold by the troupe 54,000
Sponsor’s advertisement 9,000
63,000
VIP Med Lost
Total seats available 90 360 180
Less: Free 30
Less: Sold by troupe 30 180 90
Can be sold by Entertain U 30 180 90
Row Price 320 220 120
Variable cost 20 20 20 (Snacks)
Contribution per seat 300 200 100
Demand 1: 3: 1
300×1+ 200× 3 +100×1

=
1+ 3 +1

300 + 600 +100 1000
= = = 200 (1 Mark)
5 5
30, 000
Break Even Point for EntertianU = Rs. = 150 No. of seats
200
VIP Rows Middle Level Last Level
BF Seats Total 150 30 90 30
Contribution (Rs.) 9,000 18,000 3,000 30,000 Rs.
Category wise occupancy at Break Even Point

VIP 30+30+30 = 90
Middle = 90+180 = 270
Last = 120
(ii) If demand is in the ratio 2 : 2: 5
2× 300 + 2× 200 + 5× 100

Weighted contribution per seats =
9
600 + 400 + 500
=
9
30, 000
= × 9 = 180 seats
1500
Ratio 40 40 100
Quantity available 30 180 90
Break Even quantity 30 10 90
10 10
30 60 90
No. of seats 30 60 90
Contribution Rs. 9,000 12,000 9,000
Total = 30,000
(b) Alternative approach of solution:
Rs
Net fixed cost to be recovered by EU 30,000
( As worked earlier pages)
(i) When demand in ration 1:3:1

VIP Seats Mid Level Last Level Total
Seats Available to EU (Max) (no) 30 180 90 300
Net contribution per seat (Rs) 300 200 100
Contribution based on demand pattern (Rs) 300 600 100 1000
BEP Seats in std. demand ratio (no) 30 90 30 150
Contb. on BEP seats (verification ) (Rs.) 9000 18000 3000 30,000

Weighted avg. contribution per seat as per std.
1000
demand pattern = Rs. 200
5
Net Fixed Cost Rs.30000
No of seats for BEP = =
Av.Contribution Rs.200 = 150 seats
(ii) When demand in ratio 2:2:5
VIP Seats Mid Level Last Level Total
Seats Available to Eu 30 180 90 300
(Max) (no)
Net Contribution per 300 200 100
seat (Rs)
Contribution based on 600 400 500 1500
demand pattern (Rs.)
BEP Seats in std. 40 40 100 180
demand ratio (nos)
Seats adjusted to (—)10 20 (—)10
level (nos)
BEP seats adjusted) 30 60 90 180
(nos)
Contb. amount (Rs) 9000 12000 9000 30,000
Weighted average contribution per seat as per
1500
demand pattern = = Rs. 166.66
9
Rs.30, 000
No. of Seats for BEP =
Rs.166.67 = 150 seats

PAPER 5
NOVEMBER 2010
Q-1
(a) A potato chips manufacturing company decided that the mean net weight per pack of its product must
be 90 grams. A random sample of 16 packets yields a mean weight of 80 grams with standard deviation
of 17.10 grams. Test the hypothesis that the mean of the whole universe is less than 90, use level of
significance of (a) 0.05 (b) 0.01.
(5 Marks)
(b) What are the steps involved in Zero-base budgeting?
(5 Marks)
(c) G Ltd. produces and sells 95,000 units of ‘X’ in a year at its 80% production capacity. The selling price
of product is ` 8 per unit. The variable cost is 75% of sales price per unit. The fixed cost is ` 3,50,000. The
company is continuously incurring losses and management plans to shut-down the plant. The fixed cost
is expected to be reduced to `1,30,000. Additional costs of plant shut-down are expected at `15,000.
Should the plant be shut-down? What is the capacity level of production of shut-down point?
(5 Marks)
(d) H. Ltd. manufactures three products. The material cost, selling price and bottleneck resource details
per unit are as follows:
Product X Product Y Product Z

Selling price (`) 66 75 90
Material and other variable cost (`) 24 30 40
Bottleneck resource time (minutes) 15 15 20
Budgeted factory costs for the period are ` 2,21,600. The bottlneck resources time available is 75120
minutes per period.
Required:
(i) Company adopted throughput accounting and products are ranked according to ‘product return per
minute’. Select the highest rank product.
(ii) Calculate throughput accounting ratio and comment on it.
(5 Marks)
Q-2
(a) E Ltd. manufactures and sells four types of products under the brand names A, B, C and D. On a
turnover of ` 30 crores in 2009, company earned a profit of 10% before interest and depreciation which
are fixed. The details of product mix and other information are as follows:
Products Mix% to total PV Ratio (5) Raw material as %
sales on sales value
A 30 20 35
B 10 30 40
C 20 40 50
D 40 10 60
Interest and depreciation amounted to ` 225 lakhs and ` 115.50 lakhs respectively. Due to increase in
prices in the international market, the company anticipates that the cost of raw materials which are
imported will increase by 10% during 2010. The company has been able to secure a license for the
import of raw materials of a value of ` 1,535 lakhs at 2010 prices. In order to counteract the increase in
costs of raw materials, the company is contemplating to revise its product mix. The market survey
report indicates that the sales potential of each of the products: ‘A’, ‘B’ and ‘C’ can be increased upto
30% of total sales value of 2009. There was no inventory of finished goods or work in progress in both
the year.
Set an optimal product mix for 2010 and find the profitability.
(12 Marks)
(b) List out the remedies available for difficulties experienced during implementation of PRAISE.
(4 Marks)
Q-3
(a) A company is engaged in manufacturing of several products. The following data have been obtained from
the record of a machine shop for an average month: Budgeted
No. of working days 24
Working hours per day 8
No. of direct workers 150
Efficiency One standard hour per clock hour
Down time 10%
Overheads
Fixed ` 75,400
Variable ` 90,720
The actual data for the month of August 2010 are as follows:
Overheads
Fixed ` 78,800
Variable ` 70,870
Net operator hours worked 20,500
Standard hours produced 22,550
There was a special holiday in August 2010.
Required :
(i) Calculate efficiency, activity, calendar and standard capacity usages ratio.
(ii) Calculate all the relevant fixed overhead variances.
(iii) Calculate variable overheads expenditure and efficiency variance.
(10 Marks)
(b) A firm makes two products X and Y, and has a total production capacity of 16 tonnes per day. X and Y
are requiring the same production capacity. The firm has a permanent contract to supply at least 3
tonnes of X and 6 tonnes of Y per day to another company. Each tonne of X require 14 machine hours of
production time and each tonne of Y requires 20 machine hours of production time. the daily maximum
possible number of machine hours is 280. All the firm’s output can be sold, and the profit made is ` 20
per tonne of X and ` 25 per tonne of Y. Required: Formulate a linear programme to determine the
production schedule for maximum profit by using graphical approach and calculate the optimal product
mix and profit.
(6 Marks)
Q-4 Attempt any four
(a) The following information is given by Z Ltd.: Margin of safety ‘ 1,87,500 Total cost ‘ 1,93,750 Margin of
safety 7500 units Break-even sales 2500 units Required: Calculate Profit, P/V Ratio, BEP Sales (in ‘
)and Fixed Cost.
(4 Marks)
(b) Explain the major components of balanced score card.
(4 Marks)
(c) List the 5 steps involved in the methodology of critical path analysis.
(4 Marks)
(d) Calculate the selling price per unit to earn a return of 12% net on capital employed (net of tax @40%).
The cost of production and sales of 80,000 units are: Variable cost including material cost ` 9,60,000
Fixed overheads ` 5,00,000 The fixed portion of capital employed is ` 12 lakhs and the varying portion
is 50% of sales turnover.
(4 Marks)
(e) What are the steps involved in carrying out Monte Carlo simulation model?
(4 Marks)
Q-5
(a) Fruitolay had decided to increase the size of the store. It wants the information about the probability of
the individual product lines : Lemon, grapes and papaya. It provides the following data for the 2009 for
each product line:
Lemon Grapes Papaya
Revenues ` 79,350.00 ` 2,10,060.00 ` 1,20,990.00
Cost of goods sold ` 60,000.00 ` 1,50,000.00 ` 90,000.00
Cost of bottles returned ` 1,200.00 `0 `0
Number of purchase orders placed 36 84 36
Number of deliveries received 30 219 66
Hours of shelf stocking time 54 540 270
Items sold 12,600 1,10,400 30,600
Fruitolay also provides the following information for the year 2009:
Sr.No. Activity Description of Activity Total costs Cost

(`) allocation basis
1. Bottle returns Returning of empty 1,200.00 Direct tracing
bottles to the store to product line
2. Ordering Placing of orders of 15,600.00 156 purchase
purchases orders
3. Delivery Physical delivery and the 25,200.00 315 deliveries
receipts of merchandise
4. Self stocking Stocking of merchandise 17,280.00 864 hours of
on store shelves and time
ongoing restocking
5. Customer Assistance provided to 30,720.00 153600 items
support customers including sold
bagging and checkout
Required:
(i) Fruitolay currently allocates store support costs (all costs other than the cost of goods sold) to the
product line on the basis of the cost of goods sold of each product line. Calculate the operating
income and operating income as the percentage of revenue of each product line.
(ii) If Fruitolay allocates store support costs (all costs other than the cost of goods sold) to the product
lines on the basis of ABC system, calculate the operating income and operating income as the
percentage of revenue of each product line.
(iii) compare both the systems.
(11 Marks)
(b) Discuss various forecasting methods using time series.
(5 Marks)

Q-6
(a) A company has three plants located at A, B and C. The production of these plants is absorbed by four
distribution centres located at X, Y, W and Z. the transportation cost per unit has been shown in small
cells in the following table:
Distribution Centres X Y W Z Supply
Factories (Units)
A 6 9 13 7 6000
B 6 10 11 5 6000
C 4 7 14 8 6000
Demand (Units) 4000 4000 4500 5000 18000
17500
Find the optimum solution of the transportation problem by applying Vogel’s Approximation Method.
(8 Marks)
(b) Mention the data required to operate the material requirement planning system.
(4 Marks)
(c) “Customer profile is important in charging cost.” Explain this statement in the light of customer costing
in service sector.
(4 Marks)
Q-7
(a) A company has two divisions : Division a and Division B. Both divisions of the company manufacture the
same product but located at two different places. The annual output of division A is 6000 tons (at 80% capacity) and
that of division B is 7500 tons (at 60% capacity). The basic raw material required for production is available locally at
both the places, but at division A, it is limited to 4000 tons per annum at the rate of ‘100 per ton, at division B, it is
limited to 8000 tons per annum at the rate of ‘110 per ton. Any additional requirement of material will have to be
purchased at a rate of ‘125 per ton from other markets at either of division. Variable costs per ton at each division
remain constant. For every 1000 tons of output, 800 tons raw material is required. The details of other costs of the
divisions are as follows:
Division A Division B
Other variable costs of output (`) 122 per ton 120 per ton
Fixed cost per annum(`) 3,80,000 6,00,000
Required:
(i) Calculate variable cost per ton for each division’s product and decide ranking in order to prefer-
ence.
(ii) The company desires to fully utilize the available local supplies of raw material to save the overall
variable cost of production; keeping the total production of both the divisions putting together is the
same as at present level. Calculate the quantity of production (output) that could be transferred
between the two divisions and overall saving in variable cost.
(iii) After considering the option (ii), how the balance capacity should be utilized if company is working
at 100% capacity, and also calculate selling price per ton if company mark up 10% on full cost of
each division’s product.
(12 Marks)
(b) Explain distinctive features of learning curve theory in manufacturing environment.
(4 Marks)


Paper 5
Ans.1
(a) Test of Hypothesis
H0 : µ0 = 90
H1 : µ0 < 90 (Left tail test)
As n is small, < 30, we use the t Statistic
t = ( X - µ0) /
s=S/ n = 17.10/ 16 = 4.275
t = (80 – 90) / 4.275 = -2.339 ~ 2.4
Calculated t = -2.339, < table value of t.05 (15 degrees of freedom) which is -1.753 Hence, reject the null
hypothesis at 5% level of significance
Calculated t = -2.339, > table value of t.01 (15 dof) which is -2.602. Hence, accept the null hypothesis at 1%
level of significance.
(b) Steps involved in the process of Zero Based Budgeting :
1. Determination of a set of objects is the pre-requisite and essential step in the direction of ZBB
technique.
2. Deciding about the extent to which the technique of ZBB is to be applied whether in all areas of
organization activities or only in few selected areas on trial basis.
3. Identify the areas where decisions are required to be taken.
4. Developing decision packages and ranking them in order of performance.
5. Preparation of budget that is translating decision packages into practicable units/items and allo-
cating financial resources. ZBB is simply an extension of the cost, benefit analysis method to the
area of corporate planning and budgeting.
(c)
If plant is continued If plant is shutdown
Sales 7,60,000 -
Less:Variable Cost 5,70,000 -
Less:Fixed Cost 3,50,000 1,30,000
Additional Cost 15,000
Operating Loss 1,60,000 1,45,000
A comparison of loss figures indicated as above points out that loss is reduced by (16,000-14,500) Rs.
15,000 if plant is shut down.
3,50,000 - 14,5000 20,500

Shut down point = = = 1,02,500 units
8-6 2
Capacity level of shut down point:
95,000
At 100% level production is = 1,18,750
0.80
1,02,500
Capacity level at shut down = = 86.31%
1,18,750

Alternative Solution Rs.
If the plant is shut down, the sunk cost or fixed expenses 1,45,000
If it is working at 80% capacity, the fixed cost 3,50,000
Additional fixed expenses 2,05,000
Contribution (95000*2) 1,90,000
Incremental Loss on Continuing 15,000
Decision - better to shut down
Production at shut-down point
2 x – 350000 = 1,45,000
2x = 2,05,000
x = 1,02,500 Units
Capacity % = 1,02,500/(95,000/0.8) = 86.31%
(d)
(i) Calculation of Rank according to product return per minute Particulars
X Y Z
Selling Price 66 75 90
Variable Cost 24 30 40
Throughput Contribution 42 45 50
Minutes per unit 15 15 20
Contribution per minute 2.8 3 2.5
Ranking II I III
(ii)
Factory Cost per minute( 221600/75120) 2.95 2.95 2.95
TA Ratio = Contrb per min / cost per minute 0.95 1.02 0.85
Ranking based on TA Ratio II I III
Comment : Product Y yields more contribution compared to average factory contribution per minute,
whereas X and Z yield less.
Ans.2
(a) Revised P/V ratio and ranking of products:
Product Existing Increase in Revised Revised
P/V Raw material P/V raw Contribution Rank
ratio % cost as % of Ratio material as per Rs. 100 of
sales value % of sale raw
value material %
A 20 3.5 16.5 38.50 42.86% III
B 30 4 26 44.00 59.09% II
C 40 5 35 55.00 63.64% I
D 10 6 4 66.00 6.06% IV
Maximum Sales potential
A 30 % Rs. 3000 900
B 30 % Rs. 3000 900
C 30 % Rs. 3000 900
D 40 % of 3000 1200
Allocation of raw material whose supply is restricted to Rs. 1535 lacs in order of raw material profitability.

Product Rank Sales Raw Material Raw Material Balance Raw
Rs . In lacs per Rs. 100 Equired Material
Lacs Sales
C I 900 55 495 1040
B II 900 44 396 644
A III 900 38.5 346.5 297.5
D IV 451** 66 297.5* 0
* Balancing figure, hence sales will be restricted to 451** lakhs ( 297.5/66%)
Profitability Statement Rs. In Lakhs
Existing (2009) Proposed(2010)
Product Sales P/V Ratio Contribution Sales P/V Ratio Contribution
A 900 20 180 900 16.5 148.5

B 300 30 90 900 26 234
C 600 40 240 900 35 315
D 1200 10 120 451 4 18.04
Total 3000 1630 3151 3715.54
2
Less : Fixed Costs* 330 330
Profit before Dep and Int. 300 385.54
Less :Depreciation 225 225.00
Less :Interest 115.5 115.50
Profit before tax (40.5) 45.04
* Balancing figure(Contribution - Profit before Depreciation & Interest)

The increase of contribution of Rs 85.54 in 2010 will set off loss of Rs 40.50 lakhs and result in profit of
Rs 45.04 lakhs.
(b) Remedies available for difficulties experienced in each step available during implementation
of praise:
Sl. Activities Remedies
No.
1. Problem Identification Participate in programs like brain storming,
multi voting, GD etc Precise definition of a
problem and quantification.
2. Ranking • Participative approach
• Sub ordination of individual to group
approach.
3. Analysis • Lateral thinking/Brain storming.
4. Innovation • Systematic evaluation of all aspects of each
strategy.
5. Solution • Effective internal communication.
• Training of personnel/managers
6. Evaluation • Participative approach
• Effective control system to track actual
feedback system

Ans.3
(a)
Ratio Working Result
Efficiency Ratio Output expressed in Standard Hours
(22550/20500)*100 = 110%
Actual Hours Worked
Activity Ratio Output expressed in Standard Hours
(22550/25920)*100 = 87%
Budgeted output in standard hours or 86.99 %
Calender Ratio Actual Working days ina period
(23/24)*100 = 96%
No. of working days in related budget period
Standard Capacity Budget Hours
(25920/28800)*100 = 90%
usage ratio Maximum No. of hours in related period
Workings
Maximum Hours = 24 × 8 × 150 28,800
Budgeted Hours = 28800 less 10% 25,920
Actual Hours (given) 20,500
Standard Hours (produced) 22,550
Budgeted Working days 24
Actual Working days 23
Standard Rate X Standard Standard Rate X Standard Actual Hours X Actual
Hours Hours Rate
(1) (2) (3)
(90720/25920)*22550 (90720/25920)*20500 Given
Rs. 78925 Rs. 71750 Rs. 70870
Variable Overhead Efficiency Variance (1) - (2) Rs. 7175 (F)
Variable Overhead Expenditure Variance (2) - (3) Rs. 880 (F)
Variable Overhead Variance (1) - (3) Rs. 8055 (F)
Budgeted Fixed Overheads
Standard Rate Standard Rate X Standard Rate Standard Rate X Actual
X Standard Actual Hours X Revised Budgeted Hours Overheads
Hours Budgeted Hours
(1) (2) (3) (4) (5)
2.91 X 22550 2.91 X 20500 2.91 X 24840 Given Given
= 65621 = 59655 = 72284 = 75400 = 78800
Fixed Overhead Efficiency Variance (1) - (2) Rs. 5,966(F)

Fixed Overhead Capacity Variance (2) - (3) Rs.12,629(A)
Fixed Overhead Calender Variance (3) - (4) Rs. 3,116(A)
Fixed Overhead Volume Variance (1) - (4) Rs. 9,779(A)
Fixed Overhead Expenditure Variance (4) - (5) Rs. 3,400(A)
Fixed Overhead Variance (1) - (5) Rs.13,179(A)
(b) Maximise Z 20 x + 25 y
Subject to x + y 16
x 3
y 6
14 x +20 y 280
x,y > 0

Z= 20 x + 25y Total Contribution
Point X Y
A 3 6 210
B 10 6 350
C 6.67 9.33 367- Optimal
D 3 12 360
The maximum value of objective function Z= 370 occurs at extreme point C (6.67,9.33). Hence company
should produce x1 = 6.67 tonnes of product X and x2 = 9.33 tones of prod Y in order to yield a maximum profit
of Rs. 367.
Ans.4
(a) Margin of Safety(%) = MoS Units/Actual Sales Units
= 7500/(7500+2500) = 75%
Total Sales = 187500/0.75 = Rs.2,50,000/-
Profit = Total sales – Total Cost
= 250000 – 193750 = Rs.56250
P/V Ratio = Profit/MoS (Rs.) × 100
= 56250/187500 × 100 = 30%
BEP Sales = Total Sales / (100 – MS)
= 2,50,000 × 0.25 = Rs.62,500
Fixed Cost = Sales x P/V Ratio
= 250000 × 0.30-56250 = 18750
Alternate Answer 1
Margin of Safety = Selling Price per unit × ( 7500 units)
Rs. 187500 = Selling Price per unit × ( 7500 units)
Therefore ,
Selling Price per unit = 187500/7500 =Rs. 25
Profit Rs.
Sales 10000 × 25 2,50,000
Less: Total Cost 1,93,750
Profit 56,250
P/V Ratio Profit/Margin of Safety
56250/187500 = 30%
BEP Sales 2500 × 25 Rs. 62,500
Fixed Cost 62500 × 30% = Rs. 18,750
Alternative Answer 2
Selling price = Rs 187500/ 7500 = Rs.25
Total Cost at Break Even point=Rs.25 ´ 2500 = 62500 = Break Even Sales
(Total Cost – Total Cost of BE)/(Total Units – Break Even Units) = Variable Cost per Unit
(93,750 – 62,500)/(10,000 – 2,500) = 1,31,250/7,500 = Rs.17.50 per unit
Selling Price = 25.00
Variable Cost = 17.50
Contribution = 7.50
P/V Ratio = 7.50/25 = 30%
Fixed Cost = 7.50 × 2500 units = Rs.18750.
Profit = 7.50 × 7500 = Rs. 56,250
(b) Well disgned balanced score card combines financial measures of past performance with measures of
the firm’s drivers of future performance. Generally the Balanced Score Card has the following perspectives
from which a company’s activity can be evaluate
1. Customer perspective i.e how customers see us?
2. Internal perspective ie. In what processes must the firm excel?
3. Innovation & learning perspective i.e,can we continue to improve and create value?
4. Financial perspective i.e., how we look to our share holders?
(c) Working Methodology of PERT :
The working methodology of PERT which includes both CPM and PERT, consists of following five steps:
1. Analyze and break down the project in terms of specific activities and/or events.
2. Determine the interdependence and sequence of specific activities and prepare a net-work.
3. Assign estimates of time, cost or both to all the activities of the network.
4. Identify the longest or critical path through the network.
5. Monitor, evaluate and control the progress of the project by re-planning, rescheduling and reas-
signment of resources.
(d) Let ‘x’ be the selling price per unit, Therefore, Turnover = 80000 x
Capital Employed = 1200000+40000 x
Return on capital employed after tax = 12%
Therefore,
Return on capital employed before tax = 12/0.6 =20%
Therefore,
Return on capital employed before tax = 20% of (1200000+40000x) = 240000+8000x Sales 80000 x
Variable Cost 960000

Fixed Cost 500000
Profit 80000x – 1460000
Therefore
80000x – 1460000 = 240000 + 8000x
72000x = 1700000
X= Rs. 23.61
Alternative Answer
Selling price per unit should cover Variable cost unit, Fixed Cost per unit and ROCE per unit
Fixed Capital Employed = Rs.12 lacs
Required Return (net of tax) = 12% = Rs.1,44,000
Pre tax return = 1,44,000 / 0.6 = Rs.2,40,000
Let Selling Price per unit = X
X = (14,60,000+2,40,000)/20,000 + (12% of 50% of X)/0.6
= 17,00,000/20,000 + 6/100 × 1/0.6 X
X(1- 0.1) = 21.25
X = 21.25/0.9 = Rs.23.61 per unit
Required Selling price = Rs.23.61 If a student has arrived at Rs.23.61, full 4 marks may be given even if
the intermediary steps are not adequately shown.
(e) Steps involved in Monte Carlo simulation are:
(i) To select the measure of effectiveness of the problem, that is, what element is used to measure
success in improving the system modeled. This is the element one wants to maximize or mini-
mize.
(ii) Identifying the variables which influence the measure of effectiveness significantly.
(iii) Determining the proper cumulative probability distribution.
(iv) To get a set of random numbers.
(v) Consideration of each random number as a decimal value of the cumulative probability distribution.
With the decimal, enter the cumulative distribution plot from the vertical axis, Project this point
horizontally, until it intersects cumulative probability distribution curve.
(vi) Recording the value generated in step
(v) into the formula derived from the chose measures of effectiveness. Solve and record the value.
(vii) Repeating steps (V) and (VI) until sample is large enough for the satisfaction of the decision
maker.
Ans.5
(a)
(i) Particulars Lemon Grapes Papaya Total
Revenue 79,350 2,10,060 1,20,990 4,10,400
Less: Cost of goods sold
(COGS) 60,000 1,50,000 90,000 3,00,000
Less: Store Support Cost 18,000 45,000 27,000 90,000
Operating income 1,350 15,060 3,990 20,400
Operating Income % 1.70% 7.17% 3.30% 4.97%
(ii) ABC System
Activity Cost Total Costs Quantity Of Cost Overhead
Heirarchy ( Rs) Allocation Base Allocation
Level Rate
Ordering Batch 15600.00 156 Purchase orders Rs. 100
Delivery Batch 25200.00 315 delivering orders Rs. 80
Shelf stocking Output unit 17280.00 864 self stocking hours Rs. 20
Customer Output unit 30,720.00 153600 items sold Rs. 0.20
support

PAPER 5
MAY 2010
Q-1
(a) E Ltd. is engaged in the manufacturing of three products in its factory. The following budget estimates
are prepared for 2009-10 :
(10 Marks)
Products
A B C
Sales (Units) 10,000 25,000 20,000
Selling price per unit. (Rs.) 40 75 85
Direct Materials per unit. (Rs.) 10 14 18
Direct wages per unit @ Rs. 2 p.hr. 8 12 10
Variable overhead per unit (Rs.) 8 9 10
Fixed overhead per unit (Rs.) 16 18 20
Profit/Loss -2 22 27
After the finalisation of the above manufacturing schedule, it is observed that presently only 80% capacity
being utilised by these three products. The production activities are made at the same platform and it
may be interchangeable among products according to requirement. In order to improve the profitability of
the company the following three proposals are put for consideration:
(a) Discontinue product A and capacity released may be used for either product B or C or equally
shared. The fixed cost of product A is avoidable. Expected changes in material cost and selling
price subject to the utilisation of product A’s capacity are as under:
Product B : Material cost increased by 10% and selling price reduced by 2%
Product C : Material cost increased by 5% and selling price reduced by 5%.
(b) Discontinue product A and divert the capacity so released and the idle capacity to produce a new
product D for meeting export demand whose per unit cost data are as follows:
Rs.
Selling Price 60
Direct material 28
Direct wages @ Rs. 3 p. hr. 12
Variable overheads 6
Fixed cost (Total) 1,05,500
(c) Product A, B and C are continuously run and hire out the idle capacity fixing a price in such a way that
the same rate of profit per direct labour hour is obtained in the original budget estimates.
Required:
(i) Prepare a statement of profitability of products A, B and C in existing situation.
(ii) Evaluate the above proposals independently and calculate the overall profitability of the company
under each proposal.
(iii) What proposal should be accepted, if the company wants to maximise its Profit?
(b) A Company is engaged in manufacturing two products A and B. Product A uses one unit of component
X and two units of component Y. Product B uses two units of component X and one unit of component Y
and two units of component Z. Component Z which is assembled in the factory uses one unit of component
Y. (7 Marks)
Components X and Y are purchased from the market. The company has prepared the following forecast
of sales and inventory for the next year:
Product A Product B
(Units) (Units)
Sales 80,000 1,50,000
Stock at the end of the year 10,000 20,000
Stock at the beginning of the year 30,000 50,000
The production of both the products and the assembling of the component Z will be spread out uniformly
throughout the year. The company at present orders its inventory of X and Y in quantities equivalent to 3
months production. The company has compiled the following data related to the two components:
X Y
Price per unit (Rs.) 20 8
Order placing cost per order (Rs.) 1,500 1,500
Carrying cost per annum 20% 20%
Required:
(i) Prepare a budget for production and requirements of components for the next year.
(ii) Suggest the optimal order quantity of components X and Y.
(c) Identify the characteristics movement such as regular, irregular, cyclical, seasonal, long-term trend,
short-term etc. of time series in the following situations:
(i) A factory delaying its production due to demolition of factory shed in earthquake.
(ii) An era of depression in business.
(iii) The country needs more and more food grains due to constant growth of population.
(iv) Decline in death rate due to availability of proper health care facilities.
(v) A continuous increase in demand of small cars.
(vi) A demand of gold products is increasing during the festival time.
(3 Marks)
Q-2
(a) AML Ltd. is engaged in production of three types of ice-cream products: Coco, Strawberry and Vanilla.
The company presently sells 50,000 units of Coco @ Rs. 25 per unit, Strawberry 20,000 @ Rs. 20 per
unit and Vanilla 60,000 units @ Rs. 15 per unit. The demand is sensitive to selling price and it has been
observed that every reduction of Re. 1 per unit in selling price, increases the demand for each product by
10% to the previous level. The company has the production capacity of 60,500 units of Coco, 24,200
units of Strawberry and 72,600 units of Vanilla. The company marks up 25% on cost of the product.
The Company management decides to apply ABC analysis. For this purpose it identifies four activities
and the rates as follows:
Activity Cost Rate
Ordering Rs. 800 per purchase order
Delivery Rs. 700 per delivery
Shelf stocking Rs. 199 per hour
Customer support and assistance Rs. 1.10 p.u. sold.
The other relevant information for the products are as follows:
Coco Strawberry Vanilla
Direct Material p.u. (Rs.) 8 6 5
Direct Labour p.u. (Rs.) 5 4 3
No. of purchase orders 35 30 15
No. of deliveries 112 66 48
Shelf stocking hours 130 150 160

cost. In ABC these costs are coming under customer support and assistance.
Required:
(i) Calculate target cost for each product after a reduction of selling price required to achieve the
sales equal to the production capacity.
(ii) Calculate the total cost and unit cost of each product at the maximum level using traditional
costing.
(iii) Calculate the total cost and unit cost of each product at the maximum level using activity based
costing.
(iv) Compare he cost of each product calculated in (i) and (ii) with (iii) and comment on it.
(12 marks)
(b) What are the essential requisites for the installation of Uniform costing system?
(4 Marks)
Q-3
(a) X Ltd. produces and sells a single product. Standard cost card per unit of the product is as follows
(12 Marks)
Rs.
Direct materials :A 10 kg @ Rs. 5 per kg 50.00
B 5 kg @ Rs. 6 per kg 30.00
Direct wages 5 hours @ Rs. 5 per hour 25.00
Variable production overheads 5 hours @ 12 per hour 60.00
Fixed production overheads 25.00
Total Standard cost 190.00
Standard gross profit 35.00
Standard selling price 225.00
A fixed production overhead has been absorbed on the expected annual output of 25,200 units produced
evenly throughout the year. During the month of December, 2009, the following were the actual results
for an actual production of 2,000 units:
Rs.
Sales 2,000 units @ Rs. 225 4,50,000
Direct materials :A 18,900 kg 99,225
B 10,750 kg 61,275
Direct Wages 10,500 hours (actually worked 10,300 hours) 50,400
Variable production overheads 1,15,000
Fixed production overheads 56,600
Total 3,82,500
Gross profit 67,500
The material price variance is extracted at the time of receipt of materials. Material purchase were a
20,000 kg. @ Rs. 5.25 per kg; B 11,500 kg @ Rs. 5.70 per kg.
Required:
(i) Calculate all variances.
(ii) Prepare an operating statement showing Standard gross profit, Variances and Actual gross profit.
(iii) Explain the reason for the difference in actual gross profit given in the question and calculated in (ii)
above.
(12 Marks)
(b) What is Backflushing in JIT? State the problems that must be addressed for the effective functioning of
the system.
(4 Marks)

Q-4
(a) An electronics firm which has developed a new type of fire-alarm system has been asked to quote for a
prospective contract. The customer requires separate price quotations for each of the following possible
orders:
(11 Marks)
Order Number of fire-alarm systems
First 100
Second 60
Third 40
The firm estimates the following cost per unit for the first order:
Direct Materials Rs. 500
Direct Labour
Deptt. A (Highly automatic) 20 hours at Rs. 10 per hour.
Deptt. B (Skilled labour) 40 hours at Rs. 15 per hour.
Variable overheads absorbed 20% of direct labour
Fixed overheads absorbed
Deptt. A Rs. 8 per hour
Deptt. B Rs. 5 per hour
Determine a price per unit for each of the three orders, assuming the firm uses a mark up of 25% on total
costs and allows for an 80% learning curve. Extract from 80% learning curve table:
X 1.0 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0
Y(%) 100.0 91.7 89.5 87.6 86.1 84.4 83.0 81.5 80.0
X represents the cumulative total volume produced to date expressed as a multiple of the initial order.
Y is the learning curve factor, for a given X value, expressed as a percentage of the cost of the initial
order.
(b) What are the applications of incremental/differential costs?
(5 Marks)
Q-5
(a) ABC Cooperative Bank receives and disburses different amount of cash in each month. The bank has an
opening cash Balance of Rs. 15 crores in the first month. Pattern of receipts and disbursements from
past data is as follows:
(7 Marks)
Monthly Cash receipts Monthly Cash disbursements
( Rs crores)
Rs. in Crores Probability Rs. in Crores P Probability
30 0.20 33 0.15
42 0.40 60 0.20
36 0.25 39 0.40
99 0.15 57 0.25
Simulate the cash position over a period of 12 months.
Required:
(i) Cal culat e probabil ity t hat t he ABC Cooperativ e Bank will f all short in
payments.
(ii) Calculate average monthly shortfall.
(iii) If ABC bank can get an overdraft facility of Rs. 45 crores from other Nationalized banks.
What is the probability that they will fall short in monthly payments?
Use the following sequence (rowwise) of paired random numbers.
1778 4316 7435 3123 7244 4692 5158 6808 9358 5478 9654 0977
(b) A small project is composed of seven activities, whose time estimates are listed below. Activities are
identifies by their beginning (i) and ending (j) note numbers:
Activity Estimated durations (in days)
(i-j) Optimistic Most likely Pessimistic
1-2 2 2 14
1-3 2 8 14
1-4 4 4 16
2-5 2 2 2
3-5 4 10 28
4-6 4 10 16
5-6 6 12 30
(a) Draw the project network.
(b) Find the expected duration and variance for each activity. What is the expected project length?
Given : Z 0.50 0.67 1.00 1.33 2.00
P 0.3085 0.2514 0.1587 0.0918 0.0228
(4 Marks)
(c) Brief the principles associated with synchronous manufacturing.
(5 Marks)
Q-6
(a) X Ltd. supplies spare parts to an air craft company Y Ltd. The production capacity of X Ltd. facilitates
production of any one spare part for a particular period of time. The following are the cost and other
information for the production of the two different spare parts A and B :
Per unit Part A Part B
Alloy usage 1.6 kgs. 1.6 kgs.
Machine Time : Machine A 0.6 hrs. 0.25 hrs.
Machine Time :Machine B 0.5 hrs. 0.55 hrs.
Target Price (Rs.) 145 115
Total hours available : Machine A 4,000 hours
Machine B 4,500 hours
Alloy available is 13,000 kgs. @ Rs. 12.50 per kg.
Variable overheads per machine hours:
Machine A : Rs. 80
Machine B : Rs. 100
You are required to identify the spare part which will optimize contribution at the offered price.
If Y Ltd. reduces target price by 10% and offers Rs. 60 per hour of unutilized machine hour, what will be
the total contribution from the spare part identified above?
(8 Marks)
(b) What do you mean by Degeneracy in transportation problem? How this can be solved?
(4 Marks)
(c) What is Price Discrimination? Under what circumstances it is possible?
(4 Marks)


Paper 5
May 2010 - Answer
Ans.1
(a)
(i) Budgeted profitability statement under existing situation
A (Rs) B(Rs) C ( Rs) Total
Selling price 40 75 85
Total Variable costs (Direct
Material + Direct Labour +
Variable overhead) 26 35 38
Contribution 14 40 47
Sales units 10000 25000 20000
Contribution in (Rs.) 140000 1000000 940000 2080000
Fixed cost (Rs) 160000 450000 400000 1010000
Profit/loss (Rs) -20000 550000 540000 1070000
(ii) Proposal (a) Alternative use of A’s Capacity for Product B or C or B & C Equally
Hours released for discontinuance of A = 10,000 x 4 = 40,000 hours
Product B Product C B&C
No of Units Possible 40000/ 6 = 6666 40000/ 5 = 80000 B=3333 C= 4000
Revised Contribution of Product B and Product C
Particulars B ( Rs) C ( Rs)

Selling price 73.50 80.75
Variable cost: Direct Material 15.40 18.90
Direct wages 12.00 10.00
Variable overheads 9.00 10.00
Total Variable cost 36.40 38.90
Contribution 37.10 41.85
Number of Hours 6 5
Contribution per hour 6.18 8.37
Decision : It is better to produce C
Taking both changes in the selling price and material cost are for the entire production or the
incremental production. Profitability is calculated below:
Proposal (a) : Profitability statement if A’s capacity utilized by C
Particulars Option 1 Option 2
Changes for entire Changes for incremental
production ( Rs) production ( Rs)
Sales Volume 28000 8000
Contribution per unit 41.85 41.85
Total Contribution 1,17,1800 3,34,800
Less Fixed Cost 400000 0
Profit 771800 334800
Existing Profit of B 550000 550000
Existing Profit of C 540000
Total Profit 1321800 1424800
Proposal (b)
Existing capacity = ( 4 x 10,000 + 6 x 25,000 + 5x 20,000) = 290000 hrs
Then, Idle capacity of 20% = .290000 /4 = 72500 hours
Capacity for product ‘D’ = ( idle + A’s spare ) capacity = 72500 + 40000 = 112500 hours,
No. of units ‘D’ produced = 112500/4 = 28125 units.
Profitability Statement – proposal (b)
Units D ( Rs)
Selling price 60
Less : Variable cost : Direct Material 28
Direct wages 12
Variable Overheads 6
Contribution 14
Contribution amount (Rs.) 393750
Less fixed cost 105500
Profit 288250
Add : Existing Profit B & C 1090000
Total Profit 1378250
Proposal (c) Hiring Out idle capacity
Particulars ( Rs)
Idle Hours 72,500
Existing Profit per hour ( 1070000/290000) 3.69
Revenue from Hire out 267500
Existing Profit 1070000
Total Profit 1337500
Profit Summary of alternatives ( Rs in 000’s)
Existing Proposal (a) Proposal (a) Proposal (b) Proposal (c)
Option 1 Option 2
1070.00 1321.80 1424.80 1378.25 1337.50
Decision on option on the basis of profitability :
i) If price and cost under proposal (a) is for entire production of C: Proposal (b) of Export
ii) If price and cost under proposal (a) is f or incremental prod C : Proposal (a) –
Option 2
(b)
(i) Production Budget:
Product “A” Product “B”
Units Units
Sales 80000 150000
Closing stock 10000 20000
Opening stock 30000 50000
Production Budget 60000 120000
Budget of Component Requirements
Components X Y Z
Product A: Production 60000 units 60000 120000
Product B: Production 120000 units 240000 120000 240000
Component Z : 240000 units 240000
Total 300000 480000 240000

(ii) Optimal order quantity of components X and Y
Components X Y
Order placing costs Rs. 1500 1500
Price of the component Rs. 20 8
Carrying cost @ 20% Rs. 4 1.60
 (2 * 300000 * 1500) 
EOQ =  4 
 
= 15000 components = 30000 components
(c) (i) Irregular

(ii) Cyclical
(iii) Long Term Trend
(iv) Long term Trend
(v) Long Term Trend
(vi) Seasonal
Ans.2
(a)
(i) Cost of products under target costing
Demanded unit and selling price

Selling Price Demand Selling Price Demand Selling Price Demand
25 50000 20 20000 15 60000
24 55000 19 22000 14 66000
23 60500 18 24200 13 72600
Target cost of each product after reduction in selling price

Selling price after reduction 23.00 18.00 13.00
Profit marks up 25% on cost i.e 20 %
on selling price 4.60 3.60 2.60
Target cost of production (per unit) 18.40 14.40 10.40
Units 60500 24200 72600
Material cost (8,6,5 per unit) 8 6 5
Labour cost (5,4,3 per unit) 5 4 3
Prime cost 13 10 8
Store support costs (30% of prime) 3.90 3 2.40
Cost per unit 16.90 13.00 10.40

(iii) Cost of product under activity based costing
(Rs.) (Rs.) (Rs.)
Units 60500 24200 72600
Material cost (8,6,5 per unit) 484000 145200 363000
Labour cost (5,4,3 per unit) 302500 96800 217800
Prime cost 786500 242000 580800
Ordering cost @ Rs. 800 (35, 30, 15) 28000 24000 12000
Delivery cost @ Rs. 700 (112, 66, 48) 78400 46200 33600
Shelf stocking @Rs 199, (130,150,160) 25870 29850 31840
Customer Support Rs 1.10 66550 26620 79860
Total Cost 985320 368670 738100
Cost Per unit 16.29 15.23 10.17
(iv) Comparative Analysis of cost of production ( Rs)
(Rs.) (Rs.) (Rs.)
(a) As per Target Costing 18.40 14.40 10.40
(b) As per traditional Costing 16.90 13.00 10.40
(c ) As per Activity Based Costing 16.29 15.23 10.17
(a) -(c) 2.11 -0.83 0.23
(b) – ( c) 0.61 -2.23 0.23
Note : The cost of product of strawberry is higher in ABC method in comparison to target costing and
traditional methods. It indicated that actual profit under target costing is less than targeted. For remaining
two products, ABC is most suitable.
(b) Essential Requisites for Installation of Uniform Costing System:
A. Firms should be willing to share or furnish relevant data /information.
B. Spirit of mutual trust and co-operation should prevail among participating firms.
C. Mutual exchange of ideas, methods used, special achievements made, research and know – how
should be frequent.
D. Bigger firms should lead in sharing their experience to enable smaller firms to improve their perfor-
mance.
E. Uniformity should be established with regard to the size of units, production methods, accounting
methods, procedures and principles used.
Ans.3
(a)
(i) Material Price variance = (SP-AP) AQ
A = (5-5.25) x 20000 = 5000(A)
B (At the time of receipt of Materials) = (6.5.70) x 11500 = 3450(F)
= 1550 (A)
Material usage variance = (SQ – AQ ) * SP
A = (20000 – 18900 )x 5 = 5500 (F)
B = (10000 – 10750 ) x 6 = 4500 (A)
= 1000 (F)
Standard quantity for actual output for
A = 2000 x 10 = 20000 kg
B = 2000 x 5 = 10000 kg
Material Mix variance = SP (RSQ –AQ)

A = (19766.67 – 18900 ) x5 = 4333.33 (F)
B = ( 9883.33 – 10750 ) x6 = 5200.00 (A)
= 866.67 (A)
Revised standard quantity
A = 20000/30000 x 29650 = 19766.67
B = 10000/30000 x 29650 = 9883.33
Material yield variance = SR (AY- SY) (2000- 1976.67 ) x 80
= 1866.67 (F)
SY = (2100/31500) x 29650 = 1976.67
Labour rate variance = (SR- AR) AH = (5-4.8) x 10500
= 2100 (F)
Labour efficiency variance = SR(SH – AH ) = (10000- 10300) x 5
= 1500(A)
Labour idle time variance = Idle hours x SR = 200 x 5 = 1000 (A)
Variable overhead cost variance = Recovered overhead – Actual
overhead
= ( 2000 x 60 – 115000) = 5000(F)
Variable overhead exp. Variance = Standard variable overhead – Actual
variable overhead
= 10300 x 12 – 115000 = 8600 (F)
Variable overhead efficiency variance = Recovered – Standard variable
overhead
= 120000 – 123600 = 3600(A)
Fixed overhead cost variance = Recovered overhead – actual
overhead
= (2000 x25 – 56600) = 6600 (A)
Fixed overhead exp. Variance = Budgeted overhead – Actual
overhead
= (2500 /12 x 25 ) – 56600) = 4100(A)
Fixed overhead volume variance = Recovered – Budgeted overhead
= (50000 – 52500) = 2500 (A)
(ii) Reconciliation Statement
(Rs.) (Rs.) (Rs.)
Standard Profit (35 * 2000) 70000
Variances Favourable Adverse
Material : Price ( at the time 1550
of receipt )
Mix 866.67
Yield 1866.67
Labour : Rate
Efficiency
Idle time 2100 1500
1000
Variable overheads Expenditure 8600
Efficiency 3600
Fixed overheads Expenditure 4100
Volume 2500
12566.67 15116.67 2550 (A)
Actual Profit 67450

(iii) Actual gross profit given in the question is Rs. 67500 while calculated operating profit in statement is
Rs. 67450. The difference amount is due to material price variance that is calculated at the time of
receipt of material instead of consumption of material.
MPV A = 18900 x ( 5-5.25) = 4725 (A)
B = 10750 x (6-5.70) = 3225 (F)
1500(A)
Over recovery in the operating statement is (1550 – 1500) = 50 , should be added in actual profit 67450
+ 50 = Rs. 67500.
(b) Back flushing requires no data entry of any kind until a finished product is completed. At the time the
total amount finished is entered into the computer system, which multiplies it by all the components
listed in the bill of materials for each item produced.
To work system properly some serious problems must corrected.
(i) Production reporting: The total production figure entered into the system must be absolutely cor-
rect.
(ii) Scrap reporting: All abnormal scrap must be diligently tracked and recorded; otherwise these
materials will fall outside the back flushing system and will not be charged to inventory.
(iii) Lot tracing: Lot tracing is impossible under the back flushing system. It is required when a manu-
facturer need to keep records of which production lots were used to create a product in case all the
items in a lot must be recalled.
(iv) Inventory accuracy: Maintain accurate set of inventory records.
Ans.4
(a)
(i) Price /Unit for First 100 Units
Rs.
Direct materials 500
Direct labour : Deptt. A 20 hrs. @10 200
Deptt. B 40 hrs. @ 15 600 800
Variable O/H 20% of Rs. 800/- 160
Fixed O/H Deptt. A 20 hrs. @ 8 160
Deptt. B 40 hrs @ 5 200 360
Total cost 1,820
Profit 455
Selling price per unit 2,275
(ii) Price/Unit for Second Order of 60 Units :
Learning will be applicable only in Dept. B
Cumulative output becomes 100 units + 60 units = 160 units
i.e. i.6 times for which learning is 86.1% from the table.
total hours for 160 units = 160x40x0.861 = 5510.4 units.
hours for 60 units = Hrs for 160 units – Hrs for 100 units.
= 5510.40 – 4000 hrs = 1510.40 hrs.
Hours per unit = 1510.40 / 60 = 25.17
Calculation of selling Price unit :
Rs.
Direct materials 500.00
Direct labour: Deptt. A 20 hrs@ 10 200.00
Deptt. B 25.17 hrs@ 15 377.55 577.55
Variable O/H 20% of Rs. 577.55 115.51
Fixed O/H : Deptt. A 20 hrs@ 8 160.00
Deptt. B 25.17@ 5 125.85 285.85
Total Cost 1478.91
Profit 369.73
Selling price per unit 1848.64
(iii) Price/Unit for Third Order of 40 Units:
Cumulative Output becomes 100+60+40 = 200 units
i.e. 2 times for which Learning is 80% from the table
Total hours for 200 units = 200 x 40 x .80 = 6400 hrs ˆ
Hours for 40 units = Hrs for 200 units – Hrs for 160 units. = 6400 – 5510.4 = 889.6 hrs.
Hours per unit = 889.6/40 = 22.24 hrs
Calculation of selling price/ unit : Rs.
Direct material 500 00
Direct labour: Deptt. A 20 hrs @ 10 200.00
Deptt. B 22.24 hrs @ 15 333.60
Variable O/H 20% of Rs. 533.60 106.72
Fixed O/H : Deptt. A 20 hrs @ 8 160.00
Deptt. B 22.24 @ 5 111.20
Total Cost 1411.52
Profit 352.88
Selling Price/Unit 1764.40
(a) Alternative solution
Particulars Amt. in First Second Third
order Order at Order
*86.1% at **80%
(Rs.) (Rs.) (Rs.)

Direct Material 500.00 500.00 500.00
Direct Labour
Dept A (20 hours @ Rs.10 per hour) 200.00 200.00 200.00
Dept B (40 hours @ Rs. 15 per hour) 600.00 516.60 480.00
Variable overheads (20% of direct labour) 160.00 143.32 136.00
Fixed Overheads
Dept A (20 hours @ Rs. 8 per hour) 160.00 160.00 160.00
Dept B (40 @ Rs. 5 per hour) 200.00 172.20 160.00
Total Cost 1820.00 1692.12 1636.00
Profit (25% of Cost) 455.00 423.03 409.00
Selling Price per Alarm 2275.00 2115.15 2045.00
Note : Learning Curve is not applicable for Department A as it is highly automated.
*Second Order – 60 fire-alarms, Cumulative Total = 160 fire-alarms
The cumulative total is now 160 Alarm, which is denoted by the multiple of 160/100 i.e. 1.6. From the
80% learning curve table the relevant percentage factor is 86.1% of the labour cost.
Cumulative order 160 @ Rs. 2115.15 3,38,424
Previous order 100 @ Rs.2275 2,27,500
Increment order 60 1,10,924
Therefore, charge price per Alarm 1848.73

**Third Order-40 Alarm, Cumulative Total = 200 Alarm
The cumulative total is now 200 fire alarms, which is denoted by the multiple of 200/100 i.e. 2. From
the 80% learning curve table the relevant percentage factor is 80% of the labour cost.
Cumulative orders 200 @ Rs.2045 409000
Previous order 160 @ 2115.15 338424
Incremental order 40 70576
Therefore, charge price per Alarm (Rs.) 1764.40
(b) Applications of Incremental/Differential Cost:
1. Whether to process a product further or not.
2. Dropping or adding a product line.
3. Optimizing investment plan.
4. accepting an additional order from a special customer at lower than existing price.
5. Make or buy decision.
6. Opening a new sales territory or branch.
7. Optimizing investment plan out of multiple alternatives.
8. Submitting tenders.
9. Lease or buy decisions.
10. Equipment replacement decisions.
Ans.5
(a)
Monthly Cash receipts ( Rs crores) Monthly Cash disbursements ( Rs crores)

Cash Probability Cumulative R.N. Cash Probability Cumulative R.N.
30 0.20 0.20 00-19 33 0.15 0.15 00-14
42 0.40 0.60 20-59 60 0.20 0.35 15-34
36 0.25 0.85 60-84 39 0.40 0.75 35-74
99 0.15 1.00 85-99 57 0.25 1.00 75-99
Opening Receipt Payment Closing

Months (Rs in Random (Rs in Total Random (Rs in (Rs in
Crores) Number. Crores) Crores) Crores)
1 15 17 30 45 78 57 -12
2 -12 43 42 30 16 60 -30
3 -30 74 36 06 25 39 -33
4 -33 31 42 09 23 60 -51
5 -51 72 36 -15 44 39 -54
6 -54 46 42 -12 92 57 -69
7 -69 51 42 -27 58 39 -66
8 -66 68 36 -30 08 33 -63
9 -63 93 99 36 58 39 -3
10 -3 54 42 39 78 57 -18
11 -18 96 99 81 54 39 42
12 42 09 30 72 77 57 15
(i) In 12 months, the bank falls short of cash in 10 months to meet payment.
Thus, probability of shortfall = 10/12 = 0.83

(ii) Total short fall of Rs. 399 crores over 10 months
Average monthly shortfall during 10 months = Rs 39.9 crores
(iii) With an overdraft facility of Rs. 45 crores is available, there will be a shortfall in 5 months (4,5,6,7,8)..
Therefore, probability is = 5/12 = 0.42
(b) Activity Estimated Durations :
(a + 4m + b)
Activity estimated durations (days) te = = Duration
6
Activity a m b te = [(b–a)/6]2
1-2 2 2 14 4 4
1-3 2 8 14 8 4
1-4 4 4 16 6 4
2-5 2 2 2 2 0
3-5 4 10 28 12 16
4-6 4 10 16 10 4
5-6 6 12 30 14 16
Critical path is 1-3-5-6.
The expected project duration = 8+12+14 = 34 days
(c) Synchronous Manufacturing
It is an all encompassing manufacturing management philosophy which includes a set of principles,
procedures, and techniques where every action is evaluated in terms of common goals of the
organization.
The 7 principles are :
i. Focus on synchronizing the production flow than on idle capacities.
ii. Value of time at a bottleneck resource is equal to the throughput rate of products processed by the
bottle neck.
iii. Value of time at a non bottleneck resource is negligible.
iv. Level of utilization of a non bottleneck resource is controlled by other constraints within the sys-
tem.
v. Resources must be utilized, not simply activated.
vi. Transfer batch should not be equal to the process batch.
vii. A process batch should be variable both along its route and overtime.
Ans.6
(a)
(i) Number of parts to be manufactured:
Part A Part B
Machine “A” (4,000 hours) 6666 16000
Machine “B” (4,500 hours) 9000 8181
Alloy available (13,000 hours) 8125 8125
Maximum number of parts to be manufactured 6666 8125
Cost per unit Rs. Rs.
Material (12.5 x 1.6) 20.00 20.00
Variable Overhead : Machine “A” 48.00 20.00
Variable Overhead: Machine “B” 50.00 55.00
Total variable cost per unit 118.00 95.00
Price offered 145.00 115.00
Contribution per unit 27.00 20.00
Total contribution for units produced (I) 179982 162500

Spare part A will optimize the contribution
(ii) Part A
Parts to be manufactured numbers 6666
Machine A : to be used 4000
Machine B : to be used 3333
Underutilized machine hours (4500 – 3333) 1167
Compensation for unutilized machine hours (II) (Rs. 1167 x 60)70020
Reduction in price by 10% causing fall in contribution of Rs 14.50
per unit i.e (Rs.6666 x 14.5) ( III) 96657
Total contribution (I + II -III) 153345
(b) In a transportation problem, if the no of occupied cells is less thatn m+n+1, such a solution, in
transportation problem, is called as degeneracy. Degeneracy can occur twi ways :
i) The initial basic solution can turn out to be a degenerate solution. Or
ii) an improved solution can turn out to be a degenerate solution
This can be solved by introducing an infinitesimally small allocation e ( epsilon) to least cost
empty cell .so that the total number of allocated cells is equal to m+n+1 independent cells.
(c) Price discrimination is charging different prices with respect to customers, products, places and time
It is possible when
• the market being capable of being segmented
• the customers is not able to resell the product at a higher price
• The competitors’ underselling is not possible


PAPER 5
NOVEMBER 2009
Q-1
(a) Lee Electronic manufactures four types of electronic products, A,B,C and D. All these products have a
good demand in the market. The following figures are given to you:
A B C D
Material cost (Rs./u) 64 72 45 56
Machining Cost (Rs/u @ Rs. 8 per hour) 48 32 64 24
Other variable costs (Rs/u) 32 36 44 20
Selling Price (Rs/u) 162 156 173 118
Market Demand (Units) 52,000 48,500 26,500 30,000
Fixed overhead at different levels of operation are :
Level of operation (in production hours) Total fixed cost (Rs.)
Upto 1,50,000 10,00,000
1,50,000 - 30,00,000 10,50,000
3,00,000 - 4,50,000 11,00,000
4,50,000 - 6,00,000 11,50,000
At present, the available production capacity in the company is 4,98,000 machine hours. This capacity
is not enough to meet the entire market demand and hence the production manager wants to increase
the capacity. The company wants to retain the customers by meeting their demands through
alternative ways. One alternative is to sub-contract a part of its production. The sub-contract offer
received as under :
A B C D
Sub-contract Price (Rs./u) 146 126 155 108
The company seeks your advice in terms of products and quantities to be produced
and/or sub-contracted, so as to achieve the maximum possible profit. You are required
to also compute the profit expected from your suggestion.
(18 Marks)
(b) Explain briefly the concept of skimming pricing policy.
(2 Marks)
Q-2
(a) A bank offers three products, viz., deposits, Loans and Credit Cards. The bank has selected 4 activities
for a detailed budgeting exercise, following activity based costing methods.
The bank wants to know the product wise total cost per unit for the selected activities, so that prices
may be fixed accordingly.
The following information is made available to formulate the budget:
Activity Present Cost Estimation for the budget period
(Rs.)
(i) ATM Services:

(a) Machine maintenance 4,00,000 (all fixed, no change)
(b) Rents 2,00,000 (fully fixed; no change)

(c) Currency Replenishment 1,00,000 (expected to double during budget
Cost period)
7,00,000 (This activity is driven by no. of
ATM transactions)
(ii) Computer Processing 5,00,000 (Half this amount is fixed and no
change is expected)
(The variable portion is expected
to increase to three times the
current level).
This activity is driven by the
number of computer transactions.
(iii) Issuing Statements 18,00,000 Presently, 3 lac statements are
made. In the budget period, 5 lac
statements are expected;
For every increase of one lac
statement, one lac rupees is the
budgeted increase (this activity is
driven by the number of
statements)
(iv) Computer Inquiries 2,00,000 Estimated to increase by 80%
during the budget period. (This
activity is driven by telephone
minutes).
The activity drivers and their budgeted quantifies are given below:
Deposits Loans Credit
Cards
No. of ATM Transactions 1,50,000 - 50,000
No. of Computer Processing Transactions 15,00,000 2,00,000 3,00,000
No. of Statements to be issued 3,50,000 50,000 1,00,000
Telephone Minutes 3,60,000 1,80,000 1,80,000
The bank budgets a volume of 58,600 deposit accounts, 13,000 loan accounts, and 14,000 Credit Card
Accounts.
(i) Calculate the budgeted rate for each activity.
(ii) Prepare the budgeted cost statement activity wise.
(iii) Find the budgeted product cost per account for each product using (i) and (ii) above.
(12 Marks)
(b) How do you know whether an alternative solution exists for a transportation problem ?
(4 Marks)
Q-3
(a) Hind Metals Manufactures an alloy product eIncop f by using iron and Copper. The metals pass
through two plants, X and Y. The company gives you the following details for the manufacture of one unit
of Incop :
Materials Iron: 10 kgs @ Rs.5 per kg.
Cooper: 5 kg @ Rs.8 per kg.
Wages 3 hours @ Rs.15 per hour in Plant X
5 hours @ Rs.12 per hour in Plant Y

Overhead recovery On the basis of direct labour hours
Fixed overhead Rs.8 per hour in Plant X
Rs.5 per hour in Plant Y
Variable overhead Rs.8 per hour in Plant X
Rs.5 per hour in Plant Y
Selling overhead : (fully variable) – Rs.20 per unit
(i) Find out the minimum price to be fixed for the alloy, when the alloy is new to the market. Briefly
explain this pricing strategy.
(ii) After the alloy is well established in the market. What should be the minimum selling price? Why?
(6 Marks)
(b) What are the critical success factors for the implementation of a “Total Quality Management” programme?
(5 Marks)
(c) How can value analysis achieve cost reduction?
(5 Marks)
Q-4
(a) Optically Ltd. makes two kinds of products, P (lenses) and Q (swimming goggles) in divisions P and Q
respectively. P is an input for Q and two units of P are needed to make one unit of Q.
The following data is given to you for a period :
P Q
Rs./u of P Rs./u of Q
Direct Materials 20 25 (excluding P)
Direct Labour 30 35
Variable Overhead 10 20
External Demand (units) 3,000 3,000
Capacity (units) 7,000 2,500
Selling Price Rs./u (outside market) 100 410
If Q buys P from outside, it has the following costs:
For order quantity 2,499 or lessRs.90 per unit for the entire quantity ordered.
For order quantity 2,500 . 5,000Rs.80 per unit for the entire quantity ordered.
For order quantity more than 5,000Rs.70 per unit for the entire quantity ordered.
(i) Evaluate the best strategies for Division P and Q.
(ii) Briefly explain the concept of goal congruence.
(12 Marks)
(b) In an assignment problem to assign jobs to men to minimize the time taken, suppose that one man
does not know how to do a particular job, how will you eliminate this allocation from the solution?
(4 Marks)
Q-5
(a) The following information relates to labour of x Ltd.
Type of Labour Skilled Semi Skilled Unskilled Total
No. of workers in standard gang 4 3 2 9
Standard rate per hour (Rs) 6 3 1 -
Number of workers in actual gang
Actual rate per hour (Rs.) 7 2 2 -
In a 40 hours week, the gang produced 270 standard hours.
The actual number of semi-skilled workers is two times the actual number of unskilled
workers. The rate variance of semi-skilled workers is Rs.160 (F).
Find the following:
(i) The number of workers in each category
(ii) Total gang variance
(iii) Total Sub-efficiency variance
(iv) Total labour rate variance
(v) Total labour cost variance (10 Marks)
(b) The following is a linear programming problem. You are required to set up the initial
simplex tableau. (Please do not attempt further iterations or solution):
Maximise
100x1 = 80x2
Subject to
3x1 + 5x2 150
x2 20
8x1 + 5x2 300
x1 + x2 25
x1, x2 0 (6 Marks)
Q-6
(a) The following network gives the duration in days for each activity :
(i) You are required to list the critical paths.

(ii) Given that each activity can be crashed by a maximum of one day, choose to crash any four
activities so that the project duration is reduced by 2 days. (6 Marks)
(b) In the past, a machine has produced pipes of diameter 50 mm. To determine whether the machine is in
proper working order, a sample of 10 pipes is chosen, for which mean diameter is 53 mm and the
standard deviation is 3 mm. Test the hypothesis that the machine is in proper working order, given that
the critical value of the test statistic from the table is 2.26. (4 Marks)
(c) The Gifts Company makes mementos for offering chief guests and other dignitaries at functions. A
customer wants 4 identical pieces of hand-crafted gifts for 4 dignitaries invited to its function.
(6 Marks)
For this product, the Gifts Company estimates the following costs for the 1st unit of the product
Rs./unit
Direct variable costs (excluding labour) 2,000
Direct labour (20 hours @ Rs. 50 hour) 1,000
90 % learning curve ratio is applicable and one labourer works for one customer fs order.
(i) What is the price per piece to be quoted for this customer if the targeted contribution is Rs.1,500
per unit ?
(ii) If 4 different labourers made the 4 products simultaneously to ensure faster delivery to the cus-
tomer, can the price at (i) above be quoted ? Why ?


Paper 5
Ans.1
(a)
Demand 52,000 48,500 26,500 30,000
A B C D
Direct Material 64 72 45 56
M/c 48 32 64 24
Other Variable Cost 32 36 44 20
Total Variable Cost 144 140 153 100
Selling Price 162 156 173 118
Contribution (Rs./u) 18 16 20 18
M/s Hours per unit 6 4 8 3
Contribution (Rs./ M/c hr.) 3 4 2.5 6
Ranking III II IV I
Sub-Contract Cost Rs./u) 146 126 155 108
Contribution (Rs./u) on (Sub-
Contract) 16 30 18 8
I Division : It is more profitable to sub-contract B, since contribution is higher subcontract.
1st Level of Operations: 1,50,000 hours, Produce D as much as possible.
Hours required = 30,000 units × 3 = 90,000 hours
Balance hours available: 60,000 hours.
Produce the next best (i.e. A, Since B is better outsourced)
60, 000
6 hrs/u = 10,000 units of A.
1st Level of Operation:
Contribution (units) Contribution (Rs.)
A Produce 10,000 units 18 1,80,000
A Outsource 42,000 units 16 6,72,000
B 48,500 units
Outsource fully 30 14,55,000
C 26,500 units
Outsource fully 18
D 30,000 units
Fully produce 18 5,40,000
Total Contribution: 33,24,000
Less: Fixed cost 10,00,000
Net Gain 23,24,000
2nd Level of Operation :
Both A and C increase contribution by own manufacture only by Rs.2/- per unit. 1,50,000 hrs can
produce 25,000 units of A.
Contribution increases by 25,000 × 2 = 50,000

(Difference in Contribution sub-contract and own manufacturing) = 2
But increase in fixed Cost = 50,000
At the 2nd level of operation, the increase in contribution by own manufacturing is exactly
set up by increase in fixed costs by Rs.50,000/-. It is a point of financial indifference, but other
conditions like reliability or possibility of the sub-contractor increasing his price may be consid-
ered and decision may them but towards own manufacture.
3rd Level Additional: 1,50,000 hrs available
Unit of A that are needed = [52,000 – 25,000 (2nd Level) – 10,000 (1st Level)]
= 17,000 units × 6 hrs/u = 1,02,000 hrs.
Balance 48,000 hrs are available for C to produce 6,000 units.
Increase in Contribution over Level 1st or 2nd :
A: 17,000 × 2 = Rs.34,000
C: 6,000 × 2 = Rs.12,000
= Rs.46,000
Increase in fixed costs = Rs.50,000
Additional Loss = Rs. 4,000
1, 50, 000
4th Level Additional: 1,50,000 hrs can give = 18,750 unit of C.
8
Increase in Contribution 18,750 × 2 = Rs. 37,500
Increase in Cost = (Rs. 50,000)
Level 3rd loss c/fd = (Rs. 4,000)
Level 1st profit will order by = (Rs. 16,500)
Advice: Do not expand capacities; sell maximum
No. of units by operating at 1,50,000 hrs. capacity (level 1st ) and gain Rs.23,24,000.
Summary:
Product Produce Sub-Contract Contribution Contribution Total

(Units) (Units) (Production) (Sub-Contract) Contribution
A 10,000 42,000 1,80,000 6,72,000 8,52,000
B - 48,500 - 14,55,000 14,55,000
C - 26,500 - 4,77,000 4,77,000
D 30,000 - 5,40,000 - 5,40,000
33,24,000
Fixed Cost 10,00,000
Profit 23,24,000
(b) Skimming Pricing Policy:

When the product enters the market, a high price is charged so that price covers the initial cost of
production and the demand is unknown e.g. Mobile Phones, Flat LCD TVs, etc. Price are gradually
reduced.

Ans.2
(a)
Budget Cost Statement
Activity Activity Cost Activity No. of Units of Activity Deposits Loans Credit
(Rs.) Driver Activity Driver Rate Cards
(Budgeted) (Budget) (Rs.)
1. ATM Services 8,00,000 ATM 2,00,000 4 6,00,000 - 2,00,000
Transaction
2. Computer 10,00,000 Computer 20,00,000 0.50 7,50,000 1,00,000 1,50,000
Processing Transaction
3. Issuing 20,00,000 No. of 5,00,000 4.00 14,00,000 2,00,000 4,00,000
Statements Statements
4. Customer 3,60,000 Telephone 7,20,000 0.50 1,80,000 90,000 90,000
Inquiries Minutes
Budgeted Cost 41,60,000 29,30,000 3,90,000 8,40,000
Units of product as estimated in the budget period 58,600 13,000 14,000
Budgeted Cost per unit of the product 50 30 60
Working Notes:
(i) ATM 4,00,000 + 2,00,000 + 2 × 1,00,000 = 8,00,000
(ii) Computer 5,00,000 (Fixed = 2,50,000) Variable = 10,00,000
2,50,000 increase to 3 times = 7,50,000
(iii) Issuing Statements 2,00,000 + 80% × 2,00,000 = 2 + 1.6 = 3,60,000.
(b) The ij matrix = ij = Cij – (ui + v j)
Where ci is the cost matrix and (ui + v j) is the cell evaluation matrix for allocated cell.
The ij matrix has one or more ‘Zero’ elements, indicating that, if that cell is brought into the solution,
the optional cost will not change though the allocation changes.
Thus, a ‘Zero’ element in the ij matrix reveals the possibility of an alternative solution.
Ans.3
(a)
Rs./u of alloy
Materials:
Iron 10kg @ Rs.5/- 50
Copper 5 kg @ Rs.8/- 40 90
Wages
X : 3 hrs @ 15 Rs./Hr. 45
Y : 5 hrs @ 12 Rs./Hr 60 105
Variable OH (Production)
X : 8 hrs × 3 hrs 24
Y : 5 hrs × 5 hrs 25 49
Variable OH – Selling 20
Total Variable Cost 264
Fixed Off:
X : 8/hrs × 3 hrs. 24
Y : 5/hrs × 5 hrs 25 49
Total Cost 313
(i) If pricing strategy is to penetrate the market, the minimum price for a new product should be the
variable cost i.e. Rs.264/-. In some circumstances, it can also be sold below the variable cost, if it

is expected to quickly penetrate the market and later absorb a price increase. Total Variable Cost
is the penetration price.
(ii) When the alloy is well established, the minimum selling price will be the total cost . including the
fixed cost i.e. Rs.313 per unit. Long run costs should cover at least the total cost.
(b) Critical success factors of TQM:
• Focus on customer needs.
• Everyone in the organisation should be involved.
• Focus on continuous improvement.
• Design quality in product and production process.
• Effective performance measurement system.
• Rewards and performance measurements should be renewed.
• Appropriate training and education to everyone to understand the aim of TQM.
(c) Value analysis can do cost reduction in the following manner:
• By identifying and removing unnecessary components in a product which had utility earlier.
• By introducing component substitution at a lesser cost without affecting the quality of the product.
• By simplifying the product design.
• By introducing alternative methods with less cost but improved efficiency.
Ans.4
(a)
Opticals Ltd manufactures P( lenses) and Q ( swimming goggles ).
Division P has option to supply to Division Q or sell to outside market.
Division Q has option to buy from Division P or purchase from outside market.
However, both divisions have to work within their individual capacity.
Variable Cost for product P in Division P = Rs 60.
Variable cost for product Q in Division Q ( excluding 2 Nos P’s) = Rs 80.
Division P has better market price of its product P than the market price offered to Q division.
For maximizing profit of the organization : Rs
P division should optimise its profit by selling maximum units to
outside market.
Contribution per unit for sale to outside for division P 40
Contribution per unit for Div Q as follows :
Sale price - Variable cost ( excluding lenses) 330
Max Contribution per unit ( if procured from P div at its variable
cost i.e Rs 60) 210
Min Contribution per unit ( if procured at Rs 90 per unit from outside) 150
Contribution per unit at transfer price of Rs 70 i.e minimum market price 190
Option 1 : Division Q buys 5001 units from market @ Rs 70 and meets its capacity. Division P
sells 3000 units to outside market @ Rs 100
Sale / Transfer Contrib. Contribution in
/unit thousand rupees
Rs P Div Q Div Total
DivP :Sale of 3000 units to outside market @ Rs 100 40 120 120
DivQ: Sale of 2500 units with P from market @ Rs 70 190 475 475
Less : cost of rejection of one unit of product P -0.07 -0.07
Total 120 474.93 594.93
Option 2 : Division P sells 3000 units to outside market, transfer 4000 units to div Q and Division Q
buys 1000 units from outside market to work within the capacity
P Division agrees to a transfer price so that profitability of Q is not affected. To maintain the same profitability
of Q, contribution required from 2000 units for Div Q is Rs 400,000 i.e contribution per unit Rs 200 i.e transfer
price per unit of P is Rs 65 per unit to make cost of lences Rs 130
Sale / Transfer Contrib. Contribution in
/unit thousand rupees
Rs P Div Q Div Total
Div P : Sale of 3000 units to outside market 40 120 120
Div P : Transfer of 4000 units to div Q at Rs 65 5 20 20
Div Q :Sale of 2000 units with P from P div @ Rs 65 200 400 400
Div Q : Sale of 500 units with P from market @ Rs 90 150 75 75
Total 140 475 615
Under Option 1, both divisions worked dis-jointly without caring for capacity utilization resulting lower
profitability of the organization.
Under Option 2, both divisions worked with mutual advantages for optimizing their individual
profits and overall profit for the organization has gone up by effective utilization of capacity.
Product P from Division P fetches higher price from open market indicating good quality of product.
Moreover, supply from P division is well assured in the long run which is the justification of
establishment of two parallel divisions.
Hence, Option 2 is suggested.
(ii) Division functioning as profit centers strive to achieve maximum divisional profits, either by internal
transfers or from outside purchase. This may not match with the organisation fs objective of maximum
overall profits. Divisions may be commercial to advice overall objects objectives, where divisional decisions
are in line with the overall best for the company, and this is goal congruence. Divisions at a disadvantage
may be given due weightage while appraising their performance. Goal incongruence defeats the purpose
of divisional profit centre system.
(b) In an assignment minimization problem, if one task cannot be assigned to one person, introduce a
prohibitively large cost for that allocation, say M, where M has a high the value. Then, while doing the
row minimum and column minimum operations, automatically this allocation will get eliminated.
Ans.5
(a)
SR SH SR RSH SR AH AR AH
Skill 6× 120 720 6× 960 160 6× 120 120 7× 120 840
Semi-Skill 3× 90 270 3× 360 120 3× 160 480 2× 160 320
Unskilled 1× 60 60 1× 80 80 1× 80 80 2× 80 160
1050 1400 1280 1320
Sub-efficiency Variance Gang Variance Rate Variance

350 (A) 120 (F) 40 (A)
Cost Variance = 270 (A)
Workings Note:
Standard hours produced = 270
Standard Mix : 270 9 = 30
Skill Semi-Skill Unskilled
Ratio 4: 3: 2:
Hrs. 120 90 60
Actual hrs = 40 × 9 = 360 hrs.
Actual hrs in Standard Ratio = 360
4: 3: 2:
360 360 360

× 4 = 160 × 3 = 120 × 2 = 80
9 9 9
[(Standard Rate = Actual Rate) Actual hrs.]= Rate Variance
Semi-skilled = 160
(3 – 2) Actual hrs = 160
Actual hrs = 160 (for semi-skilled)
Actual Semi-skilled = 2 (Unskilled actual)
160 = 2 (Unskilled)
160
Unskilled hrs (actual) = = 180
2
Total Actual = 360
Actual hrs – skilled = 360 – (160 + 80)
= 360 – 240 = 120
Actual Hrs. Skilled Semi-skilled Unskilled
120 160 80
40 hr week
120 160 80
=3 =3 =3
40 40 40
No. of Workers
(i) 3 4 2
(ii) Gang Variance :
= (Actual Hrs in Standard Ratio . Actual Hrs in Actual Ratio) ~ Standard Rate
= 1400 – 1280 = 120 (F)
(iii) Sub-efficiency Variance :
= Standard Rate (Standard Hrs . Actual Hrs in Standard Ratio)
= 1050 – 1400 = 350 (A)
(iv) Total Labour Rate Variance :
= Actual Hrs (Standard Rate . Actual Rate)
= 1280 – 1320 = 40 (A)
(v) Labour Cost Variance:
= (Standard Rate × Standard Hrs – Actual Rate × Actual Hrs.)
= 1050 – 1320 = 270 (A)
(b) Under the usual notations where
S1, S2, S3 are stock Variables,
A4 = the artificial variable
S4 = Surplus Variable
We have,
Max. Z = 100x + 80x + 0S + 0S + 0S + 0S – M A .
1 2 1 2 3 4 4
S.t.
3x + 5x + S = 150
1 2 1
x +S = 20
2 2
8x + 5x + S = 300
1 2 3
x +x +-S +A = 25
1 2 4 4
x x S S S S A
1 2 1 2 3 4 4
Basis C 100 80 0 0 0 0 -M
j
C
B
S 0 3 5 1 0 0 0 0 150 
1
S 0 0 1 0 1 0 0 0 20 
2
S 0 8 5 0 0 1 0 0 300 
3
A -M 1 1 0 0 0 -1 1 25 
4
Z -M -M 0 0 0 M -M -25M 
j
Cj-Zj 100+M 80+M 0 0 0 -M 0 
Ans.6
(a) Critical Paths:
All are critical paths:
(i) 1.2.5.6 2+8+5 = 15
(ii) 1 . 3 . 5 . 6 3+7+5 = 15
(iii) 1 . 4 . 5 . 6 4+6+5 = 15
(iv) 1 . 3 . 4 . 5 . 6 3+1+6+5 = 15
(i) Choose 5 . 6, common path;
Crash by 1 day
(ii) Choose: 1 . 2, 1 . 3, 1 . 4
Or
(iii) Choose: 1 . 2, 3 . 5, 4 . 5
Or
(iv) Choose: 2 - 5 , 3 . 5, 4 . 5 Or
(v) Choose: 1 . 3, 1 . 4, 2 - 5
(b) Null Hypothesis H : = 50 mm i.e. the M/c works properly.

0
H1 : 50 mm. i.e. the M/c does not work properly
Sample Size = 10, small.
use ‘t’ statistic
x
t= x = 53
S/ n - 1
= 50
n = 10; n-1 = 9=3

S = std dev = 3
53 - 50 3
T= = =3
3/3 1
Table Value = 2.26
Calculated t > table value
Reject H
o
i.e. The M/c is not working properly.

(c)
(i) Rs/u
1st unit Avg/u after 4th at
Variable Cost 2000 2000
Labour 1000 810
Target Contribution 1500
Price to be quoted 4310 (Rs./u)
(ii) No, the company cannot quote this price for varying products because the learning curve Ratio does not
apply to non-repeated jobs. Each product will carry a different price according to its direct labour hours.


PAPER 5
JUNE 2009
Q-1
(a) TQM Limited makes engines for motor cars for its parent company and for two other motor car
manufacturers.
(11 Marks)
On 31st December, the company has sufficient work order for January and one further order for 21,000
engines. Due to recession in the economy, no further order are expected until May when it is hoped
economic prospect for the motor car industry will have improved. Recently factory has been working at
only 75% of full capacity and the order for 21,000 engines represents about one month production at this
level of activity.
The board of directors are currently considering following two options:
(i) Complete the order in February and close the factory in March and April.
OR
(ii) Operate at 25 per cent of full capacity for each of three months of February, March and April.
The costs per month at different levels of activities are as. follows :
At 75% (Rs.) At 25% (Rs.) Idle (Rs.)
Direct Material 5,25,000 1,75,000 —
Direct Labour 5,23,600 1,73,250 —
Factory overhead:
Indirect material 8,400 4,900 4,900
Indirect labour 1,01,500 59,500 —
Indirect expenses:
Repairs and maintenance 28,000 28,000 —
Others expenses 52,500 34,300 26,600
Office overheads:
Staff salaries 1,48,400 98,000 67,550
Other overheads 28,000 19,950 11,200
Other information is as follows:
- Material cost and labour cost will not be incurred where there is no production.
- On the reopening of the factory, one time cost of training and engagement of new personnel would be
Rs.65,800 and overhauling cost of plant would be Rs.14,000.
- Parent company can purchase engines from open market at reasonable price.
Required:
(i) To express your opinion, along with calculations, as to whether the plant should be shut down during the
month of March and April or operate 25% of full capacity for three months.
(ii) To list and comment on cost and non-costs factors which might to relevant to the discussion.
(b) The following are Product Nova Shaft’s data for next year budget:
(9 Marks)
Activity Cost Driver Cost Driver Cost Pool
volume/year
Purchasing Purchase orders 1,500 Rs.75,000
Setting Batches produced 2,800 Rs.1,12,000

Materials handling Materials movements 8,000 Rs.96,000
Inspection Batches produced 2,800 Rs.70,000
Machining costs Machine hours “50,000' Rs.1,50,0000
Purchase orders 25
Output 15,000 units
Production batch size 100 units
Materials movements per batch 6
Machine hours per unit 0.1
Required:
(i) Calculate the budgeted overhead costs using activity based costing principles.
(ii) Calculate the budgeted overhead costs using absorption costing (absorb overhead using machine
hours).
(iii) How can the company reduce the ABC for Product Nova Shaft?
(c) Explain goals and performance measure for each perspective of Balance Score Card.
(4 Marks)
Q-2
(a) A company is organized on decentralized lines, .with each manufacturing division operating as a separate
profit centre. Each division manager has full authority to decide on sale of division’s output to outsiders
or to other divisions. Division AB manufactures a single standardized product. Some output is sold
externally and remaining is transferred to division XY where it is a subassembly in the manufacture of
the division product. The unit cost of division AB product and division XY is as follows:
(12 Marks)
Division AB (Rs.) Division XY (Rs.)
Transfer from division AB to XY — 42.00
Direct Material 6.00 35.00
Direct Labour 3.00 4.50
Direct expenses 3.00 —
Variable manufacturing overheads 3.00 18.00
Fixed manufacturing overheads 6.00 18.00
Variable selling and packing expenses 3.00 2.50
24.00 120.00
Division AB sold 40,000 units annually at the standard price of Rs.45 in external market. In additions to
the external sales, 10,000 units are transferred annually to division XY at internal price of Rupees 42
per unit. Variable selling and packing expenses are not incurred by supplying division- for the internal
transfer of the product. Division XY incorporates the transferred goods into more advance product. The
manager of division XY disagrees with the basis used to set the transfer price. He argues that transfer
price should be made at variable cost since he claims that his division is taking output that division AB
should be unable to sell at price Rs.45.
He also submitted a report of the relationship between selling price and demand to support of his
disagreement. The report of customer demand at various selling prices for division AB and for division
XY is as follows:
Division AB
Selling price per unit (Rs.) 30 45 60
Demand (Units) 60,000 40,000 20,000
Division XY
Selling price per unit (Rs.) 120 135 150
Demand (Units) 15,000 10,000 5,000
The company has sufficient capacity to meet demand at various selling prices. Internal transfer

demanded units will be decided by XY division.
Required:
(i) To calculate divisional profitability and overall profitability of company if division AB transfers de-
manded units to XY at price of Rs. 42.
(ii) To calculate divisional profitability and overall profitability of company if division AB transfers de-
manded units to XY at variable cost.
(iii) In place of internal transfers, AB division can sell 10,000 units of their product in new external
market without effecting existing market, at price Rs. 32 per unit arid XY division can ‘purchase
these units at the rate of Rs. 31 in open market.
Calculate company’s profit by following above strategies.
(b) Define the term ‘value-chain’. Mention three ‘useful strategic frameworks of the valuechain analysis.
(4 Marks)
(c) Meena is a news reporter and feature writer for an economic daily. Her assignment is to develop a
feature article on ‘Product Life-cycle Costing’, including interviews with the’ Chief Financial Officers
(CFO) and operating, managers. Meena has been given a liberal budget for travel so as to research into
company’s history, operations, and market analysis for the firm she selects for the article.
(3 Marks)
Required:
(i) Meena has asked you to recommend industries and firms that would be good candidates for the article.
What would you advice? Explain your recommendations.
Q-3
(a) JBC Limited, a manufacturing company having a capacity of 60,000 units has prepared a following cost
sheet:
(9 Marks)
Direct material (per unit) Rs.12.50
Direct wages (per unit) Rs.5.00
Semi-variable cost Rs.30,000 fixed plus 0.50 per unit
Factory overhead (per unit) Rs.10.00 (50% fixed)
Selling and administration overhead (per unit) Rs.8.00 (25% variable)
Selling price (per unit) Rs.40
During the year 2008, the sales volume achieved by the company was 50,000 units.
The company has launched an expansion program as under
(a) The capacity will be increased to 1,00,000 units.
(b) The cost of investment on expansion is Rs.5 lakhs which is proposed to be financed through
financial institution at 12 per cent per annum.
(c) The depreciation rate on new investment is 10 per cent based on straight line.
(d) The additional fixed overheads will amount to Rs.2.00 lakhs up to 80,000 units and will increase by
Rs.80,000 more beyond 80,000 units.
After the expansion, the company has two alternatives for operating the expanded plant as under:
(i) Sales can be increased up to 80,000 units by spending Rs. 50,000 on special advertisement
campaign to explore new market.
(ii) Sales can be increased up to 1,00,000 units subject to the following:
(a) Reduction of selling price by Rs.4 per unit on all the units sold.
(b) The direct material cost would go down by 4 per cent due to discount on bulk buying.
(c) By increasing the v ari able sell ing and admini strat ion expenses by 4
per cent.
Required.
(i) Construct a flexible budget at the level 50,000 units, 80,000 units and 1,00,000 units of production

and select best profitable level of operation.
(ii) Calculate break even point both before and after expansion.
(b) State major reasons for using simulation technique to solve a problem and also describe basic steps in
a general simulation process.
(5 Marks)
(c) What is penetrating pricing? What are the circumstances in which this policy can be adopted?
(5 Marks)
Q-4
(a) A project with normal duration and cost along with crash duration and cost for each activity is given
below:
(12 Marks)
Activity Normal Time Normal Cost Crash Time Crash Cost
(Hrs.) (Rs.) (Hrs.) (Rs.)
1-2 5 200 4 300
2-3 5 30 5 30
2-4 9 320 7 480
2-5 12 620 10 710
3-5 6 150 5 200
4-5 0 0 0 0
5-6 8 220 6 310
6-7 6 300 5 370
Required:
(i) Draw network diagram and identify the critical path.
(ii) Find out the total float associated with each activity.
(iii) Crash the relevant activities systematically and determine the optimum project completion time
and corresponding cost.
(b) A factory is going to modify of a plant layout to install four new machines Ml, M2, M3 and M4. There are
5 vacant places J, K, L, M and N available. Because of limited space machine M2 cannot be placed at
L and M3 cannot be placed at J. The cost of locating machine to place in Rupees is shown below:
(7 Marks)
(Rs.)
J K L M N
M1 18 22 30 20 22
M2 24 18 — 20 18
M3 — 22 28 22 14
M4 28 16 24 14 16
Required:
Determine the optimal assignment schedule in such a manner that the total costs are
kept at a minimum.
Q-5
(a) Global Limited uses standard and marginal costing system. It provides the following details for the year
2007-08 relating to its production, cost and sales:
(9 Marks)
Particulars Budget Actual
Sales units 24,000 25,600
Sales value 6,000 6,784
Materials 960 1,080

Labour 1,440 1,664
Variable overheads 2,400 2,592
Total variable cost 4,800 5,336
The sales budget is based on the expectation of the company’s estimate of market share of 12%. The
entire industry’s sales of the same product for the year 2007-08 is 2,40,000 units. Further details are
as follows:
(In Rs. )
Particulars Standard Actual
Material price per kg. 8.00 7.50
Labour rate per hour 6.00 6.40
(a) Prepare a statement reconciling the budgeted contribution with actual contribution on the basis of
important material variances, labour variances, variable overhead variances and sales variances.
(b) Compute market size variance and market share variance.
(c) Fairbilt Furniture Ltd. manufactures three products: Tables, Chairs and Cabinets. The company is in the
process of finalizing the plans for the coming year; hence the executives thought it would be prudent to
have a look at the product-wise performance during the current year. The following information is furnished:
(10 Marks)
Tables Chairs Cabinets
Unit selling price 80 60 36
Direct material 28 24 16
Direct labour 20 12 12
Factory overheads:
Variable 8 6 4
Fixed 8 6 1.28
Cost of production 64 48 33.28
Selling, distribution and general
administration expenses :
Variable 4 2 2
Fixed 4 6 1.52
Unit cost (I) 72 56 36.80
Unit profit (loss) (II) 8 4 (0.80)
Sales volume (units) 10,000 15,000 15,000
Profit (loss) 80,000 60,000 (12,000)
For the coming period, the selling prices and the cost of three products are expected to remain unchanged.
There will be an increase in the sales of tables by 1,000 units and the increase in sales of cabinets is
expected to be 8,000 units. The sales of chairs will remain to be unchanged. Sufficient additional
capacity exists to enable the increased demands to be met without incurring additional fixed costs.
Some among the executives contend that it will be unwise to go for additional production and sale of
cabinets, since it is already making losses at Rs.0.80 per unit. The suggestion is that cabinets should
be eliminated altogether.
Do you agree? Substantiate with necessary analysis and determine the product wise and overall profits
for the coming year.
Q-6
(a) What do you mean by back-flushing in JIT system? What are the problems that must be corrected
before it will work properly?
(5 Marks)

(b) Explain the main characteristics of Service sector costing.
(5 Marks)
(c) X is a multiple product manufacturer. One product line consists of motors and the company produces
three different models. X is currently considering a proposal from a supplier who wants to sell the
company blades for the motors line.
(9 Marks)
The company currently produces all the blades it requires. In order to meet customer’s needs, X currently
produces three different blades for each motor model (nine different blades).
The supplier would charge Rs.25 per blade, regardless of blade type. For the next year X has projected
the costs of its own blade production as follows (based on projected volume of 10,000 units):
Direct materials Rs.75,000
Direct labour Rs.65,000
Variable overhead Rs.55,000
Fixed overhead:
Factory supervision Rs.35,000
Other fixed cost Rs.65,000
Total production costs Rs.2,95,000
Assume (1) the equipment utilized to produce the blades has no alternative use and no market value,
(2) the space occupied by blade production will remain idle if the company purchases rather than
makes the blades, and (3) factory supervision costs reflect the salary of a production supervisor who
would be dismissed from the firm if blade production ceased.
(i) Determine the net profit or loss of purchasing (rather than manufacturing), the blades required for
motor production in the next year.
(ii) Determine the level of motor production where X would be indifferent between buying and producing
the blades. If the future volume level were predicted to decrease, would that influence the decision?
(iii) For this part only, assume that the space presently occupied by blade production could be leased
to another firm for Rs.45,000 per year. How would this affect the make or buy decision?


Paper 5
June 2009 - Answer
Ans.1
(a) (i)
Option I Option II
At 75% in Feb and close in At 25% each from Feb
March and April (Rs.) – April (Rs.)
Direct Material 5,25,000 5,25,000
Direct Labour 5,23,600 5,19,750
10,48,600 10,44,750
Factory Overhead :
Indirect Material 8,400 14,700
Two months idle 9,800
Indirect Labour 1,01,500 1,78,500
Training cost 65,800
Indirect Exp. :
Repairs & Maintenance 28,000 84,000
Over hauling cost 14,000
Others Expenses 52,500 1,02,900
Idle × 2 53,200
Office overhead:
Staff Salaries 1,48,400 2,94,000
Idle 67,550 × 2 1,35,100
Other overheads 28,000 59,850
Idle 22,400
Total overhead cost 6,67,100 7,33,950
Total cost 17,15,700 17,78,700
The more economic course of action is to operate at 75% capacity for a month only,
and close the plant for March and April. This option will save (Rs.17,78,700 –
Rs.17,15,700) = Rs.63,000. 1
(ii) Cost Factors and Non Cost Factors
In regard to the decision on close down of operations or continuing with operations,
the factors to be considered are:
(a) Cost factors:
(1) The proposal which involves the lower total costs will be selected.
(2) If the company has contracted the purchases from high qulaity and high price suppliers, a change
in the procurement policy to ‘shop around’ may be considered to obtain economics in purchases.
(3) The services of unskilled labour, if any, who do not require re-training may be dispensed with. They
may be recruited and put on work without incurring training cost on re-opening of the factory. This
will save training and idle time cost.
(4) The possibility of wage freeze may reluctantly be considered as an extreme measure.
(b) Non-cost factors:
(1) If the skilled workers are discharged, it may be difficult to get them back on rolls when the factory
is re-opened. Skilled workers may be scarce and training and orientation costs may be heavy on
re-opening of the factory. Thus it is advisable to continue operations in the interests of these types
of workers.
(2) Even though the closure is temporary in nature, the competitors may usurp the market and the
company may lose a sizable market share on re-opening. To avoid this situation, continuance of
production is better.
(3) It is advisable to continue operations to avoid heavy depreciation of plant and machinery and
obsolescence risk.
(4) Regular customers may switch over to competitor’s products and may not return after re-opening
of the factory. This may result in reduction in sales.
(b) (i) Computation of the activity based overheads
Step 1: Compute cost per unit of cost driver = Cost pool / cost driver volume
Activity Cost Driver Cost Pool Cost driver Cost/Unit of cost
(a) volume/yr (b) driver (a)/(b)
Purchasing Purchase orders Rs.75,000 1,500 Rs.50/pruchse
order
Setting Batches produced Rs.112,000 2,800 Rs.40/batch
Materials Material movements
handling Rs. 96,000 8,000 Rs.12 movement
Inspection Batches produced Rs.70,000 2,800 Rs.25/batch
Machining Machine hours Rs.150,000 50,000 Rs.3/machine
hour
Step 2: Compute the volume of cost drivers consumed by Product Nova Shaft
Purchase orders (given) = 25
Batches = 15,000/100 = 150
Materials movement = 150 batches × 6 = 900
Machine hours = 15,000 units × 0.1 = 1,500
Step 3: Compute the Activity Based Overheads Cost for Product Nova Shaft
Activity Cost Driver Costing
Rate /
Cost
Driver
Unit Rs.
Purchasing Purchase orders 50 25 order × Rs.50 Rs.1,250
Setting Batches produced 40 150 batches × Rs.40 Rs.6,000
Material handling Material movements 12 900 movement × Rs.12 Rs.10,800
Inspection Batches produced 25 150 batches × Rs.25 Rs.3,750
Machining Machine hours 3 1,500 hours × Rs.3 Rs.4,500
Rs.26,300
(ii) Computation of budgeted overheads costs for Product Nova Shaft using absorption costing
Budgeted overheads = (Rs.75,000 + Rs.96,000 + Rs.112,000 +
Rs.70,000 + Rs.150,000) = Rs.503,000
Budgeted absorption cost/machine hour = Rs.503,000 / 50,000 = Rs.10.06
Budgeted machining hours for Product Nova Shaft = 1,500
Budgeted absorbed overhead = 1,500 × Rs.10.06 = Rs.15,090
(iii) Ways in which the company can reduce the ABC for product Nova Shaft:
• Reduce the number of batches by increasing the batch size which will then reduce the setting up
overhead, materials handling and inspection costs.
• Reduce the number of purchase orders

• Innovate ways of speeding up production so that the machining hours are reduced.
(c) Goals and performance measures for each perspective of balance scorecard.
Customer Perspective
Goals Performance Measures
Price Competitive price
Delivery Number of on time delivery, lead time from receipt of order to
delivery to customer.
Quality Own quality relative to industry standards, number of defects or
defect level.
Support Response time, customer satisfaction survey.
Internal Business Perspective
Efficiency of manufacturing Manufacturing cycle time
process
Sales penetration Sales plan, Increase in number of customer in a
unit of time.
New Product introduction Rate of new product introduction.
Innovation and Learning Perspective
Technology leadership Performance of product, use of technology
Cost leadership Manufacture overhead per quarter
Market leadership Market share in all major markets
Research and development Number of new products, Patents
Financial Perspective
Sales Revenue and profit growth
Cost of Sales Extent in remain fixed or decreased each year
Profitability Return on capital employed
Prosperity Cash flows
Ans.2
(a)
(i) AB sells product at external market
Selling price (Rs.) 30 45 60
Less Variable cost 18 18 18
Contribution (per unit) 12 27 42
Demands (units) 60,000 40,000 20,000
Total contribution 7,20,000 10,80,000 8,40,000
Optimal output is 40,000 units at a selling price of Rs.45
AB transfer at Rs.42 to XY division then contribution of XY
Less Variable cost V+TP 102 102 102
(42+60)
Demands (units) 15,000 10,000 5,000
Manager will choose out put level 10,000 units at a selling price of Rs.135.

Overall profit when transfer made at Rs.42
Division AB contribution on 10,000 units [42 – (18 -3)] = 2,70,000
Division XY contribution 10,000 (135 – 102) = 3,30,000
Total contribution = 6,00,000
Division AB contribution from external market sale 10,80,000
Total profit 16,80,000
(ii) AB transfer at variable cost
Less Variable cost (15+60) 75 75 75
Demands (units) 15,000 10,000 5,000
Optimal is 15,000 units at the rate of 120 per unit.
If AB transfer at Variable cost (Rs.15) then no contribution will be generated by AB
division
XY division choose 15,000 units level gives contribution 15,000 × 45 = 6,75,000
Division AB contribution from external market sale = 10,80,000
(iii) Contribution AB division by selling 10,000 units to new external market at Rs.32 and XY division
purchasing at Rs.31.
Contribution (32 – 18) × 10,000 = 1,40,000
XY contribution [135 – (31 + 60)] = 4,40,000
Division AB contribution from external market sale = 10,80,000
(b) Value chain is the linked set of value-creating activities all the way from basic raw material sources for
component suppliers through to the ultimate end-use product or service delivered to the customer. Proter’s
described the value chain as the internal processes or activities a company performs “to design, produce,
market, deliver and support its product”. He further stated that “a firm’s value chain and the way it performs
individual activities are a reflection of its history, its strategy, its approach of implementing its strategy, and
the underlying economics of the activities themselves”. The business activities are classified in to primary
activities and support activities.
Primary activities are those activities which are involved in transforming the inputs in to outputs, delivery
and after sales service. Support activities are intended to support the primary activities like for example
procurement, human resources management, etc.
Three useful strategic frameworks for value chain analysis are:
• Industry structure analysis;
• Core competencies; and
• Segmentation analysis.
(c) The product life cycle span the time from the initial R & D on a product to when customer service and
support is no longer offered for that product.
Life Cycle Costing technique is particularly important when:
(a) High percentage of total life-cycle costs are incurred before production begins and revenue are
earned over several years and
(b) High fraction of the life cycle costs are locked in at the R & D and design stages. Meena should
identify those industries and then companies belonging to those industries where above men-
tioned feature are prevalent. For example, Automobile and Pharmaceutical Industries companies
like Tata Automobile, M&M, Ranbexy and Dabur will be good candidates for study on product life
cycle costing.

Ans.3
(a) Flexible Budget
Output level (units) 50,000 80,000 1,00,000
(Rs. in lakhs) (Rs. in lakhs) (Rs. in lakhs)
Sales 20.00 32.00 36.00
Direct Material 12.5 per unit 6.25 10.00 12.00
(reduction for 1,00,000 units by
Rs.0.50)
Direct wages (5.00 per unit) 2.50 4.00 5.00
Semi variable cost (variable) 0.25 0.40 0.50
Factory overhead (V) Rs.5 per unit) 2.50 4.00 5.00
Selling and Adm. (25% variable) 1.00 1.60 2.08
Total variable cost 12.50 20.00 24.58
Contribution 7.50 12.00 11.42
Fixed factory overheads (5×60,000) 3.00 3.00 3.00
Selling and adm. (6 × 60,000) 3.60 3.60 3.60
Semi variable fixed part .30 .30 .30
Increase due to expansion 2.00 2.80
Interest .60 .60
Depreciation .50 .50
Special Advertisement exp. 50
Total fixed costs 6 .90 10.50 10.80
0.60 1.50 0.62
Therefore activity level 80,000 units is most profitable level.
Calculation of Break even point
P/V ratio
7.5/20.00 × 100 = 37.5%, 12.00/32.00 × 100 = 37.5%, 11.42/36.00 × 100 = 31.72%BEP
(value)
= 6.90/37.5% = Rs.18,40,000, 10.50/37.5% = Rs.28,00,000, 10.80/31.72% = 34,04,792
BEP (Units )
6.90 lakhs 10.50 lakhs 10.80 lakhs

Rs. 15 Rs. 15 Rs. 15
= 46,000 units = 70,000 units = 94,571 units
Alternative Solution (BEP in Sales)
Break Even Point in value of sales: (F x S) / (S – V)
At 50000 units’ level : (6,90,000 x 20,00,000)/7,50,000 = Rs. 18,40,000
(b) Reasons :
(i) It is not possible to develop a mathematical model and solutions with out some basic assump-
tions.
(ii) It may be too costly to actually observe a system.
(iii) Sufficient time may not be available to allow the system to operate for a very long time.
(iv) Actual operation and observation of a real system may be too disruptive.

Steps:
(i) Define the problem or system which we want to simulate.
(ii) Formulate an appropriate model of the given problem.
(iii) Ensure that model represents the real situation/ test the model, compare its behaviour with the
behaviour of actual problem environment.
(iv) Identify and collect the data needed to list the model.
(v) Run the simulation
(vi) Analysis the results of the simulation and if desired, change the solution.
(vii) Return and validate the simulation.
(c) The penetration pricing policy implies charging a low price to deter entry of competitors and to expand
market share. Circumstances of penetration policy:
• The short run price elasticity of demand is high. By charging a low price, the first entrant is able to
establish a market.
• Economies of scale are significant. By entering at a large scale the first firm can both enjoy low
average cost and impose a cost penalty on any small scale subsequent entrant.
• Exploitation of established reputation / sales, marketing, distribution strengths. Create platform
form for continued sale of related products.
• When there is a threat of competition. It depicted at maturity stage of a product in its life-cycle.
Ans.4
(a) (i) Net work diagram
Path are 1-2-5-6-7 = 31 hours, this is critical path

1-2-3-5-6-7 = 30 hours
1-2-4-5-6-7 = 28 hours
(ii) Total floats
Activity Duration Early start Latest Early Latest Total
hours start finish finish float
1-2 5 0 0 5 5 0
2-3 5 5 6 10 11 1
2-4 9 5 8 14 17 3
2-5 12 5 5 17 17 0
3-5 6 10 11 16 17 1
4-5 0 14 17 14 17 3
5-6 8 17 17 25 25 0
6-7 6 25 25 31 31 0
(iii) Calculation of crashing
Activity Nt Nc Ct Cc Slop =
(Cc-Nc) / (Nt-Ct)
1-2 5 200 4 300 100
2-3 5 30 5 30 0
2-4 9 320 7 480 80
2-5 12 620 10 71 45
3-5 6 150 5 200 50
4-5 0 0 0 0 0
5-6 8 220 6 310 45
6-7 6 300 5 370 70
The critical path activities are 1-2 2-5 5-6 6-7
Slope 100 45 45 70
Two activities cost slope cost is minimum (2-5 and 5-6) but activity 5-6 is common and critical, it also
continuing so reduce by 2 hours, then reduce activity 2-5 by one hour.
Activity From-to Project durations Cost
I 5-6 8-6 hours 31-2 = 29 1840 + (2×45) + (29×50) = 3380
II 2-5 12-11 29-1 = 28 1840+90+(1×45)+28×50) = 3375
After this reduction now two paths are critical 1-2-3-5-6-7 = 28 and 1-2-5-6-7 = 28
So 1-2 3-5 6-7
2-5
Slope cost 100 50+45=95 70
As cost per hour for every alternative is greater than Rs.50 (overhead cost per hour). Therefore, any
reduction in the duration of project will increase the cost of project completion. Therefore, time for
projects is 28 weeks, minimum cost is Rs.3375.
(b) Dummy machine (M5) is inserted to make it a balanced cost matrix and assume its installation cost to
be zero. Cost of install at cell M3 (J) and M2 (L) is very high marked as é.
J K L M N
M1 18 22 30 20 22
M2 24 18 é 20 18
M3 é 22 28 22 14
M4 28 16 24 14 16
M5 (Dummy) 0 0 0 0 0
Step 1
Subtract the minimum element of each row from each element of that row
J K L M N
M1 0 4 12 2 4
M2 6 0 é 2 0
M3 é 8 14 8 0
M4 14 2 10 0 2
M5 (Dummy) 0 0 0 0 0
Step 2
Subtract the minimum element of each column from each element of that column
J K L M N
M1 0 4 12 2 4
M2 6 0 é 2 0
M3 é 8 14 8 0
M4 14 2 10 0 2
M5 (Dummy) 0 0 0 0 0
Step 3
Draw lines to connect the zeros as under:
J K L M N
M1 0 4 12 2 4
M2 6 0 é 2 0
M3 é 8 14 8 0
M4 14 2 10 0 2
M5 (Dummy) 0 0 0 0 0
There are five lines which are equal to the order of the matrix. Hence the solution is optimal. We may
proceed to make the assignment as under :
J K L M N
M1 0 4 12 2 4
M1 4 1 2 2 4
M2 6 0 e 2 0
M3 e 8 1 4 8
M4 1 4 2 10 2
M5 (Dummy) 0 0 0 0 0
J K L M N
M1 0 4 12 2 4
M2 6 0 e 2 0
M3 e 8 14 8 0
M4 14 2 10 0 2
M5 (Dummy) 0 0 0 0 0
The following is the assignment which keeps the total cost at minimum:
Machines Location Costs Rs.
M1 J 18
M2 K 18
M3 N 14
M4 M 14
M5 (Dummy) L 0
Total 64
Ans.5
(a) Sales variances
Budgeted Sales Rs.6000
Budgeted sales quantity 24000
Budgeted selling price 6000/24000 = Rs.0.25
Actual industry sales in units 240000
Budgeted market share 12%
Hence market share required: 240000 × 12% = 28800 units
SQ RSQ AQ SP SQ × SP RSQ × SP AQ × SP AQ×AP
24000 28800 25600 0.25 6000 7200 6400 6784
Sales Market Size variance 6000-7200 = Rs.1200 F
Sales Market Share Variance: 7200-6400 = Rs. 800 A
Sales Volume Variance: 6000-6400 = Rs. 400 F

Sales Price variance 6400-6784 = Rs. 384 F
Budgeted contribution:
Sales Rs.6000
Variable costs Rs.4800
Contribution Rs.1200
Units 24000
Contribution/unit : Rs.0.05
(1200/24000)
SQ RSQ AQ SP SQ × SP RSQ × SP AQ × SP
24000 28800 25600 0.05 1200 1440 1280
Sales Market Size variance: 1200 – 1440 = Rs.240 F
Sales Market Share Variance: 1440 – 1280 = Rs.160 A
Sales Volume Variance 1200 – 1280 = Rs 80 F
As per the requirement of the question (b)
Sales Market Size variance is Rs.1200 F
Sales Market Share variance is Rs.800 A
Sales Variances:
Sales Gross Margin Market Size variance Rs.240 F
Sales Gross Margin Market Share variance Rs.160 A
Sales Gross Margin Volume Variance: Rs. 80 F
Sales Price Variance Rs.384 F
Direct materials :
Budgeted Material costs Rs.960
Budgeted units 24000
Budgeted material cost per 100 units: = Rs.4.00
(960/24000) × 100
Standard price of Material/ kg = Rs.8
Standard requirement of materials per 100 units of output : 4/8 = 0.50 kg
Actual output: = 25600
Standard requirement for actual output =128kg
(25600 × 0.50)/100
Actual material cost: = Rs.1080
Actual price/kg = Rs.7.50
Actual quantity of materials consumed: = 144 kg
(1080/7.50)
SQ AQ SP SQ × SP AQ × SP AP AQ x AP
128 144 8 1024 1152 7.50 1080
Usage Variance 1024-1152 = Rs.128 A
Price Variance 1152-1080 = Rs. 72 F
Direct Labour:
Budgeted Labour costs Rs.1440
Budgeted units 24000
Budgeted Labour cost per 100 units : = Rs.6.00
(1440/24000) ×100
Standard Labour hour rate/hour = Rs.6
Standard requirement of labour hours per 100 units of output:6/6 = 1.00 hour

Actual output = 25600
Standard hours required for actual output: (25600 × 1)/100 = 256 hours
Actual labour cost: = Rs.1664
Actual direct labour hour rate = Rs.6.40
Actual hours worked (1664/6.40) = 260 hours
Budgeted direct labour (1440/6) = 240 hours
SH AH SR SH×SR AH×SR AR AH×AR
256 260 6 1536 1560 6.40 1664
Efficiency Variance 1536 – 1560 = Rs. 24 A
Labour Rate Variance 1560 – 1664 = Rs.104 A
Variable Overheads:
Budgeted variable overheads Rs. 2400
Budgeted direct labour hours 240
Budgeted variable overhead rate per direct labour hour: 2400/240 = Rs.10
A. Charged to production : 256 hours ×10 Rs.2560
B. Standard cost of actual hours : 260 × 10 Rs.2600
C. Actual overheads Rs.2592
Efficiency Variance 2560 – 2600 Rs. 40 A
Expense variance 2600 – 2592 Rs. 8F
Contribution analysis:
Budget Actual
Rs. Rs.
Sales 6000 6784
Variable costs 4800 5336
Contribution 1200 1448
Statement of Reconciliation between Budgeted and Actual Contribution
Rs
Budgeted Contribution 1200
Gross Margin Sales Volume Variance 80 F
Standard Contribution 1280
Sales Price Variance 384 F
Total contribution 1664
Cost Variances:
F A
Material Usage Variance 128
Material Price Variance 72
Labour Efficiency Variance 24
Labour Rate Variance 104
Variable OH Efficiency Variance 40
Variable OH Expense Variance 8 _____ 216 A
Actual Contribution 1448

(b) Note : Reconciliation of the figures given for ‘cabinets’ reveals the fact that the selling price is 36(36.80
– .80)
Fairbilt Furniture Ltd.
Statement showing Product-wise Contribution and Total Profit
Tables Chairs Cabinets Total
Per Unit Total Per unit Total Per unit Total
Sales volume 10,000 15,000 15,000
(units
Selling price (Rs.) 80 800,000 60 900,000 36 540,000 22,40,000
Direct Material 28 280,000 24 360,000 16 240,000 880,000
Direct Labour 20 200,000 12 180,000 12 180,000 560,000
Variable factory 8 80,000 6 90,000 4 60,000 230,000
overheads
Variable selling, 4 40,000 2 30,000 2 30,000 100,000
distribution and
administration
overhead
Total variable cost 60 600,000 44 660,000 34 510,000 1,770,000
Contribution 20 200,000 16 240,000 2 30,000 470,000
Fixed factory 80,000 90,000 19,200 189,200
overheads
Fixed selling, 40,000 90,000 22,800 152,800
distribution and
administration
overheads
Total fixed
overheads 342,000
Total Profit 128,000
The above analysis shows the cabinets make a contribution of Rs.2 per unit. The loss sustained in the
previous year is because of the falling sales volume below breakeven level.
Fairbilt Furniture Ltd.
Budgeted Performance for the Coming Year
Tables Chairs Cabinets
Unit Contribution (Rs.) 20 16 2
Sales Volume (Units) 11,000 15,000 23,000
Total Contribution (Rs.) 220,000 240,000 40,000
Less: Fixed Cost (Rs.) 120,000 180,000 42,000
Profit (Rs.) 100,000 60,000 4,000
The company makes a total profit of Rs.164,000 if all the products are continued. However, if the production of
cabinets is discontinued, there will be an adverse effect on the overall profit of the company. This is because
cabinets also contribute toward meeting the fixed costs of the company.
Ans.6
(a) Backflushing requires no data entry of any kind until a finished product is completed. At that time the
total amount finished is entered into the computer system, which multiples it by all the components
listed in the bill of materials for each item produced. This yields a lengthy list of components that should
have been used in the production process and which is subtracted from the beginning inventory balance
to arrive at the amount of inventory that should now be left of hand. Back the entire production process.
Given the large transaction volumes associated with JIT, this is an ideal solution to the problem.
The following problems must be corrected before it will work properly:
(i) Production reporting
(ii) Scrap reporting
(iii) Lot tracing
(iv) Inventory accuracy.
(b) Main characteristics of service sector are as below:
(a) Activities are labour intensive: The activities of service sector generally are labour intensive.
The direct material cost is either small or non-existent.
(b) Cost-unit is usually difficult to define: The selection of cost units usually, for service sector is
difficult to ascertain as compared to the selection of cost unit for manufacturing sector. The follow-
ing table provides some examples of the cost units for service sector.
• Hospital – Patient per day, Room per day
• Accounting firm – Charged out client hours
• Transport – passenger km., quintal km.
• Machine maintenance – Maintenance hours provided to user department
• Computer department – Computer time provided to user department.
(c) Product costs in service sector : Costs are classified as product or period costs in manufactur-
ing sector for various reasons.
(c) (a) This is a make or buy decision so compare the incremental cost to make with the incremental cost
buy.
Incremental Costs Per Unit Make the Blades
Direct materials Rs.7.50
(Rs.75,000 ÷ 10,000 units)
Direct labour Rs.6.50
(Rs.65,000 ÷ 10,000 units)
Variable overhead Rs.5.50
(Rs.55,000 ÷ 10,000)
Supervision
(Rs.35,000 ÷ 10,000) Rs.3.50
Total cost Rs.23.00
Compare the cost to make the blades for 10,000 motors. Rs.23.00, with the cost to buy, Rs.25.00
There is a net loss of Rs.2.00 if ‘X’ chooses to buy the blades.
(b) ‘X’ will be indifferent between buying and making the blades when the total costs for making and buying
will be equal at the volume level where the variable costs per unit times the volume plus the fixed
avoidable costs are equal to the supplier’s offered cost of Rs.25.00 per unit times the volume.
(Direct materials + Direct labour + Variable overhead) × Volume + Supervision =, Cost to buy × Volume.
Let volume in units = x
(7.50 + 6.50 + 5.50) × x + 35,000 = 25.00x
19.50 x + 35,000 = 25.00 x
35,000 = 25.00 × x – 19.50 × x
35,000 = 5.50 × x
x = 6,364 units of blades
As volume of production decreases, the average per unit cost of in house production increases. If the
volume falls below 6,364 motors, then ‘X’ would prefer to buy the blades from the supplier.
(c) If the space presently occupied by blade production could be leased to another firm for Rs.45,000 per
year, ‘X’ would face an opportunity cost associated with in house blade production for the 10,000 units
of Rs.4.50 per unit.
New cost to make = 23.00 + 4.50 = 27.50
Now ‘X’ should buy because the cost to make, 27.50, is higher than the cost to buy, 25.00.


Advanced MGT. Accounting (May 13 - June 09)

Uploaded by

Copyright:

Available Formats

Advanced MGT. Accounting (May 13 - June 09)

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Advanced MGT. Accounting (May 13 - June 09)

Uploaded by

Copyright:

Available Formats

PAPER 5

ADVANCED MANAGEMENT ACCOUNTING

Model Test Paper - CA Final (Group I & II) Paper 5 383

384 ADVANCED MANAGEMENT ACCOUNTING

Answer the following questions. Give brief reasons:

386 ADVANCED MANAGEMENT ACCOUNTING

Model Test Paper - CA Final (Group I & II) Paper 5 387

Less: Cost after separation:

Contribution toward ‘Joint Production Cost’ 17.00

388 ADVANCED MANAGEMENT ACCOUNTING

54, 20, 000

Cost Indifference Point of two machines =

Model Test Paper - CA Final (Group I & II) Paper 5 389

390 ADVANCED MANAGEMENT ACCOUNTING

= 20,000 units = 24,000 units

Model Test Paper - CA Final (Group I & II) Paper 5 391

392 ADVANCED MANAGEMENT ACCOUNTING

Solution by GRAPHICAL METHOD

394 ADVANCED MANAGEMENT ACCOUNTING

Model Test Paper - CA Final (Group I & II) Paper 5 395

396 ADVANCED MANAGEMENT ACCOUNTING

Standard Rate per hour

Model Test Paper - CA Final (Group I & II) Paper 5 397

(iii) Calculation of Expected Profit

Model Test Paper - CA Final (Group I & II) Paper 5 399

400 ADVANCED MANAGEMENT ACCOUNTING

1% in the basic wages of each employee) = = 10% increase in basic wages.

It means wages would be ` 1.65 (` 1.50 x 1.10) per unit.

Model Test Paper - CA Final (Group I & II) Paper 5 401

Model Test Paper - CA Final (Group I & II) Paper 5 403

404 ADVANCED MANAGEMENT ACCOUNTING

Model Test Paper - CA Final (Group I & II) Paper 5 405

406 ADVANCED MANAGEMENT ACCOUNTING

Model Test Paper - CA Final (Group I & II) Paper 5 407

408 ADVANCED MANAGEMENT ACCOUNTING

Model Test Paper - CA Final (Group I & II) Paper 5 409

Model Test Paper - CA Final (Group I & II) Paper 5 411

412 ADVANCED MANAGEMENT ACCOUNTING

Model Test Paper - CA Final (Group I & II) Paper 5 413

[PQR 30,000 units x ` 40 + RPQ 10,000 units x ` 120]

Model Test Paper - CA Final (Group I & II) Paper 5 415

Model Test Paper - CA Final (Group I & II) Paper 5 417

418 ADVANCED MANAGEMENT ACCOUNTING

Model Test Paper - CA Final (Group I & II) Paper 5 419

420 ADVANCED MANAGEMENT ACCOUNTING

Model Test Paper - CA Final (Group I & II) Paper 5 421

422 ADVANCED MANAGEMENT ACCOUNTING

Model Test Paper - CA Final (Group I & II) Paper 5 423

424 ADVANCED MANAGEMENT ACCOUNTING

Model Test Paper - CA Final (Group I & II) Paper 5 425

Model Test Paper - CA Final (Group I & II) Paper 5 427

428 ADVANCED MANAGEMENT ACCOUNTING

Model Test Paper - CA Final (Group I & II) Paper 5 429

430 ADVANCED MANAGEMENT ACCOUNTING

Raw material B Incremental Current Purchase 96,000

(c) Let Cx be the Contribution per unit of Product X.

Model Test Paper - CA Final (Group I & II) Paper 5 431

432 ADVANCED MANAGEMENT ACCOUNTING

Model Test Paper - CA Final (Group I & II) Paper 5 433