ACCA F5 Class Notes

Example 1 : (previous year paper)
Particulars
Contribution to sales ratio
Sp in $
Max Demand
Fixed cost are 9000$

A company makes the above two products
What is the minimum revenue required for production to break even
Sol :
C/S Ratio
Sales
less : VC
Contribution per unit
Sold units
Contribution
Less : FC
Profit
Minimum units sold to achieve the BE is

Revenue
Total Revenue
In a case where there are 8 departments, for one department the Rent is 2000$ ( it is a
Allocation : the 2000$ rent for the one department is to be apportioned to 4 projects of the depart
Apportionment :
Q1 $10 p.u.
SP $100000
FC $4 p.u.
VC
10
SP 4
Less : VC 6
Contribution
0.6
C/S
1. BES in $ 166667
B.E Sales in $
2. BEP in units 16667

Break even in units
3. Profit if 40000 units are sold 240000
Contribution 100000
FC 140000
Profit
4. Req Profit Is 40000 233333

Sales 93333
less : VC 140000
Contribution 100000
Fixed cost 40000
Profit
TOU 3
The Fastest time in which a bactch of 20 spicy meat special sandwitches were made was 32 minutes with no hold up's
However work studies have shown that on an average about 8% of the sandwich makers time is non productive and that,
If the sandwich makers are paid 4.5$ per hour what is the attainable standard labour cost of one sandwich ?
1.839
Total Time to prepare 1 sandwich 0.075
Cost per minute 0.138
TOU 2
Cost Card Workings

Particulars 212
Direct Material
Direct Labor 120
Bonding 72
Finishing
Prime Cost
Variable Overheads : 36
Bonding 15
Finishing
Variable Production cost

Add : Prouction Overheads 40
Fixed Production overheads
Total production Cost 30
Add: Fixed Non-production overheads
Total Cost
Profit
Selling Price
TOU 4
Original or Fixed budget (10000 units)
Particulars 10000
100000
Sales 30000
Less : VC 10000
Less : FC 60000
Profit
Example
A co.makes and sells products X and Y
Twice as many units of Product Y are made and sold as that of Product X
Each unit of product X makes a contribution of 10$ and each unit of producy y makes a contribution of 4$
FC are 90000$
What is the total no of units which must be made and sold to make a profit of 45000$
Total
Sales 135000
Total Contribution 90000
FC 45000
Profit 6
Total contribution per unit
22500
No. of units
Example
B ltd is considering changing the way it is structured by asking it's employee staff to become freelance
Employee's are currently paid a fixed salary of 240,000$ but would instant be paid 200$ per working day.
On a typical working day staff can produce 40 units.
Other FC are 400,000$ p.a.
The SP is 60$ p.u.
The Material cost are 20$ p.u.
What will be the affect on the change of the BEP of the Business and the Level of the Operating risk.
Working
Particulars
SP
Less : VC 20
Material 5
Labor
Fixed cost
BEP
Operating risk reduces with the less fixed cost in the business.
15.06.2019
The totalbudgeted fixed overheads for the firm are 7,12,000$

These are traditionally been observed on a machine hour basis
The firm makes two products A & BA
Particulars $20
Direct material cost $50
Direct Labor cost 3hrs
Machine time 6000 units
Annual output
The firm is considering to go for AB Amount

Activity/Cost pool 178000
Machine related 230000
Setup related 304000
Purchasing related 712000
Machine hours per unit 3

Product A 4
Product B
Total
A. Calculate the Total cost for each product on the assumption that the firm continueous to absorb overheads on a machin
B. Calculate the cost per unit using the ABC system.
C. Compare the cost per unit of each product using ABC with Cost per unit using absorption costing and identify the main r
A. 712000
Total Overheads
Machine Hours 18000

A 160000
B 178000
$ 4.00
OAR
A
Particulars 20
DM 50
DL $ 12.00
OH 82
B Machine Related
Activity $ 178,000.00
Overhead 178000
Cost driver $ 1.00
Cost per unit of driver per hour
Cost related to the Products $ 18,000.00

Product A $ 160,000.00
Product B
Fixed Overhead cost per unit
$ 202,000.00
Product A $ 510,000.00
Product B
Overhead cost per unit
$ 33.67
Product A $ 12.75
Product B
Total cost per unit under ABC A

Particulars 20
DM 50
DL $ 33.67
OH 103.67
Total cost per unit under ABC
C
The Calculation of the cost of product A is significantly understated when Absorption costing is used. A significant factor in
The total set up cost apportioned to product A were 80000$ equivalent to 13.33$(80000/6000).
Product B by contrast has a total set up cost of 1,50,000$ equivalent to 3.75(150000/40000)
Product A used 16 setups to produce 6000 units which is equal to 375 units per set up (6000/16)
Product b used 30 setups to produce 40000 units which is equal to 1333.33 units per set up (40000/30)
Product A had 52 PO for 6000 units which is equal to 115 (6000/52) and the cost of processing one unit is (104000/6000) =
Product A had 100 PO for 40000 units which is equal to 400 (40000/100) and the cost of processing one unit is (200000/40
A company bugeted to produce 3000

17$
u per unit
Direct cost 9 $ per unit
Fixed OH 26 $ per unit
Total
In the period covered by the budget the actual production was 3200 units and actual fiXed OH expenditure was 5% above
All other cost were as budgeted
What is the under or over aborptio of the the OH
Budgeted Fixed OH cost
27000 Fixed OH absorbed - Estiamted for 3200
28800 Fixed OH incurred (5% over budgeted which is 3000)
28350 Over Absored as the estimate was more - 28800
450
Multi product Breakeven Graph
Page 151
Product Contribution
X 550000
Y 50000
Z 300000
Total 900000
a)Weighted Average C/S= 0.45
b)Breakeven Sales Revenue =

Fixed Cost 450000
Breakeven Sales revenue ₹ 1,000,000
c) Margin of Safety = Budgeted Sales - Breakeven sales /Budgeted Sales

50%
D)Required Revenue = (Fixed cost + profit required)/weighted C/s Ratio
Required Profit 900000

Required Sales $ 3,000,000
Q.
Particulars Laptop
Bidgeted Sales 1200
$
Units selling price 1000
Unit variable cost 700
Budgeted fixed cost are $245000 for the period
i) Breakvevn revenue using weighted average c/s ratio

ii) Sales Revenue required to make a target profit of $245000
Solution
i)
Particulars Laptop
Bidgeted Sales 1200
Contribution per unit 300
Total contribution 360000
Total revenue 1200000
Weighted Average C/S ratio
Breakveven Revenue $ 875,000
ii) Revenue Required= $ 1,750,000

X Y
0.3 0.5
3 4.8
8000 3000
30% 50%
x %
3 100
2.1 70
0.9 30
2000
1800
1800
0
2000
6000
20400
tments, for one department the Rent is 2000$ ( it is allocation)

ment is to be apportioned to 4 projects of the department ( it is apportionment)
Calculate the following

1. BES in $, 2. BEP in units, 3. Profit if units sold are 40000, 4. Sales if the profit is 40000$
100%
40%
60%
100%
40%
60%
es were made was 32 minutes with no hold up's

e sandwich makers time is non productive and that, in addition to this, the set up time (getting the ingredients together) is 2 minutes
standard labour cost of one sandwich ?
Minutes Total time taken
Fastest time taken
Additional Time
In $
212
120
72
404
36
15
455
40
495
30
525
175
700 WN1
Actual Budget for 12000
Flexed Budged for 12000 units units
12000 12000
120000 125000
36000 40000
10000 9000
74000 76000
roducy y makes a contribution of 4$
profit of 45000$

Contribution For 3 units
ployee staff to become freelance

stant be paid 200$ per working day.
the Level of the Operating risk.

Proposed Existing
60 60
25 20
35 40
400000 640000
11429 16000
B
$60
$40
4hrs
40000 units
Cost Driver
Machine hours
No. of set up's
Purchase orders
Annual output Total machine hours

6000 18000
40000 160000
46000 178000
he firm continueous to absorb overheads on a machine hour basis.
unit using absorption costing and identify the main reason for the difference.
per hour
B
60
40
$ 16.00
116
Setup related Purchasing related
$ 230,000.00 $ 304,000.00
46 152
$ 5,000.00 $ 2,000.00
per set up per PO
$ 80,000.00 $ 104,000.00
$ 150,000.00 $ 200,000.00
No of units
6000
40000
B
60
40
$ 12.75
112.75
hen Absorption costing is used. A significant factor in this would appear to be set up cost
nt to 13.33$(80000/6000).
o 3.75(150000/40000)
units per set up (6000/16)
33.33 units per set up (40000/30)
and the cost of processing one unit is (104000/6000) = 17.33 per unit
100) and the cost of processing one unit is (200000/40000) = 5 per unit
units and actual fiXed OH expenditure was 5% above of that of the budgeted.
eted which is 3000)
more - 28800
Sales Revenue C/s Ratio

800000
200000
1000000
2000000
0.45
Smartphone
600
$
500
400
Smartphone Total
600
100
60000 420000
300000 1500000
28%
y %
4.8 100
2.4 50
2.4 50
3000
7200
7200
0
3000
14400
the ingredients together) is 2 minutes
32 92%
34.78 100%
2
WN1
SP = CP + P
SP 100
P 25
75 100
525 ?
700 Selling Price

Variance
5000 F
4000 A
1000 F
2000 F
X Y
x 2x
10 4
10 8 18
No. of set up's No.of Purchse orders
16 52
30 100
46 152
0.45
a)
Absorption costing Method:
Particulars X
Budgeted Annual Production (units) 20000
Cost per labor hour $ 2.50
Total Labor hours $ 50,000.00
OAR (per hour)
OAR $9.7 per hour
Cost Card
DM 25
DL 30
OH 24.25
Total 79.25
b)
ABC analysis
Particulars X
Budgeted Annual Production (units) 20000
Batch size (units) 500
No. of Batches 40
No. of PO per batch 4
Total no. of Orders 160
Machine Hours per unit 1.5
Total Machine hours 30000
Cost Driver Rates

Cost per Machine Set up 2434.78
Cost per order 658.33
Cost per Machine hour 9.67
Allocation of OH to each Product

Particulars X
Machine Set up cost 97391.30
Material ordering cost 105333.33
Machine Running and Facility Cost 290123.76
Total 492848.40
No of units produced 20000
OH per unit 24.64
Total Cost per Unit under ABC

DM 25
DL 30
OH 24.64
Total Cost per Unit $ 79.64
Total Cost under Absorption costing (Refer the workings above)
DM 25
DL 30
OH 24.25
Total Cost per Unit 79.25
C.)
For product X, the cost as per the ABC and the absorption are nearly the same which does not have any huge impact on th
For product Y , The SP will fall down and the Demand for the product will raise as Y is relatively elastic
For product Z, The SP will raise however there won't be any change in the demand as its relatively inelastic.
Exam kit 2 marks
Procuction Cost Centres

Particulars Machinery
No Of Direct employees 7
No of Indirect employees 3
OH allocated and apportioned 28500
The OH cost of the canteen is to be reapportioned to the production cost centers on the basis of the No. of Employees in e
After the reapportionment, What is the total OH cost of the packing department to the nearest $
Total OH Cost to be apportioned 8400

Total Employees 10
Apportionment 4000
Exam kit 2 marks
Departments Production OH
1 27000
2 18000
Individual DL employees within each Dept. earn differing rates of pay according to their skills, grade and experience.
What is the most appropriate production OH absorption rate for the department 1.
Department 1
Machine hours is taken as the base as the no. of machine hours is higher than the labout hours
OAR $ 0.60
Department 2
Labour hours as the base as it is more than the machine hour
OAR $ 0.72
Question
1. Calculate the targer cost
2. Calculate the estimate current cost based on the product specification
3. Set the required profit
4. Set the selling price
5. Calculate the targer cost gap
throughput problem
Q1 Sales
Material cost
Throughput
Working notes
computation of sales
sales
less vc
contribution
less fc
profit
Test your undestanding 3
Throughput ( return per factory hour)= throughput per unit/product's time on the bottleneck resource
Sales 85
Material cost -42.5
Throughput 42.5
Product time on bottleneck resource 1.5 hours

Return per factory hour $ 28.33
Cost per factory hour $ 20.00

Total hours available 400
Total factory cost 8000
Throughput accounting ratio (tpar) = Return per factory hour/cost per factory hour
1.42
the product can be accepted
Additional example
Throughput ( return per factory hour)= throughput per unit/product's time on the bottleneck resource
Throughput per factory hour 3.5

Cost per factory hour 2.5
TPAR 1.4
Revision kit Q56.
Revision kit Q57.
IMPROVE TPAR
Situation 1 yes
Situation 2
Situation 3
Situation 4
Product X
Existing reurn per factory hour 2
Situation 1
Situation 2
Situation 3
Situation 4
Situation A as it improves eisting throughput per unit
Q.
SP 10
VC 7.5
contribution 2.5
Fixed cost 50000
Profit if 20000 units are sold
TYU 4 page 95
Step 1 -Find out bottlenceck constrain Machine time= 400 hours
Step2 - Find out throughpur per unti

A
Sales 1.4
Material cost 0.6
Throughput per unit 0.8
Step 3 - Throughput per bottle neck time taken
Time taken 5
Throughput per machine minute 0.16
Step 4 Ranking
4
step 5 allocation of resources
Product Units
D 1500
B 2000
C 2500
A 700
Total throughput
less: operating cost
(b)
TPAT
Return per factory hour

A Cost per factory hours
TPAR
Q. paper
Productuin - 5 days a week

Timing -13 hours
Weeks 50/year
Panel cut
Mould Machine M
Assembled Machine A
LP/ SP 3 years no increase in price
min 1000 sp each year
Present condition
poor production level
late orders
less profit
Introduct throghput lp
sp per unit 12600
Matetial cost per uint 4300
Total fac cost= cost of labour+ FOH
$12 m each year
13 hours 12 hours
1 hour
Unproductive time- routine time staff absent
skilled worker trained on one machine only

Maintainance worker 24x7 available
Bottleneck Machine M LP hours taken per unit 1.4
Solution
lp
12600
Matetial cost per uint 4300
Throughput per unit 8300
Throughput per bottle neck time taken
Time taken 1.4

Throughput per machine hour
(b)
Particulars no.of units

Small panel 1000
Large panel 1500
Total throughput
Total factory cost
Total profit
© u
reduce the time required to make each product

Reduce the opeating cost
Train the employees to work on all machine
Reduce the staff absenteesism
maintainance can be done on a non production hours or days
increase the working days to 6 days a week
Increase the prodcution capacity
Q.241
(1) D
(2) A $2.5
target sales 45
profit 15.75
Target cost 29.25
Actual cost 31.3
Production cost per unit 15.3
total production cost 5600
total production units 350000
non production cost per unit 16
(3)
A No
B Yes
C No
D Yes
(4) C
90% learning rate means 90 percent yet to learn

Actual learning rate is 95% which means labour cost will increase leading to increased cost gap
(5) B
Q. paper
(a) Sunrise
Selling price per unit 4,000

Raw material cost per unit 400
Revenue 8,000,000
Total raw material cost 800,000
Total units 2,000
Direct labour hours 220,000
Total labour cost 1,100,000
Total Overhead cost 5,077
Total profit on each product 6,094,923
(b)
ABC costing
Revenue 8000000
Total raw material cost 800,000
Total labour cost 1100000
Delivery cost 960
Set up cost 2100
Purchase order cost 1800
Profit 6,095,140
Sunrise
Y Z
16000 22000
$ 3.00 $ 2.00
$ 48,000.00 $ 44,000.00
28 22
36 24
29.1 19.4
93.1 65.4
Y Z
16000 22000
800 400
20 55
5 4
100 220
1.25 1.4
20000 30800
Y Z
48695.65 133913.04
65833.33 144833.33
193415.84 297860.40
307944.83 576606.77
16000 22000
19.25 26.21
28 22
36 24
19.25 26.21
$ 83.25 $ 72.21
28 22
36 24
29.10 19.40
93.10 65.40
which does not have any huge impact on the SP or the Demand of the product.
as Y is relatively elastic
and as its relatively inelastic.
Procuction Cost Centres

Finishing Packing
6 2
2 1
18300 8960
ers on the basis of the No. of Employees in each production cost centres.
nt to the nearest $
8 3
3200 1200
10160
DM cost DL cost
67500 13500
36000 100000
g to their skills, grade and experience.
he labout hours
per machine hours
per machine hours

560000
-56000
504000
560000
420000 0.75
-300000
120000
the bottleneck resource
the bottleneck resource

NOT IMPROVE TPAR
yes
yes
yes
Product Y Product Z
1.5 1.6
2.4
1.7
1.92
1.55
oughput per unit
50000
-50000
0
24000
B C
0.8 1.2
0.3 0.6
0.5 0.6
2 3
0.25 0.2
2 3
Machine minutes Cumilitave machine minutes

9000 9000
4000 13000
7500 20500
3500 24000
$ 0.24 14.4
0 13.6
1.06
sp
3800
1160
work
break
SP hours taken per min 0.6
sp
3800 (a)
1160
2640
0.6
hours per unit total hours
0.6 600
1.4 2100
General point
Cost gap 2.05

reased cost gap
Roadster Fireball
6,000 8,000
600 900
9,600,000 3,200,000
960,000 360,000
1,600 400
220,000 80,000
1,100,000 400,000
5,077 1,846
7,534,923 2,438,154
9600000 3200000
960,000 360,000
1100000 400000
768 672.00
2400 1500
1350 450
7,535,482 2,437,378
Total
58000
7.5
142000
$ 9.70
Total
58000
1700
115
13
480
4.15
80800
Total
280000.00
316000.00
781400.00
1377400.00
58000
Demand of the product.
Service Cost Centres

Canteen
0
4
8400
ction cost centres.
21
Dlabor hours Machine hours

2700 45000
25000 300
Answer
1. Set the selling price
2. Set the required profit
3. Calculate the targer cost (1-2)
4. Calculate the estimate current cost based on the product specification (consider the actual cost )
5. Calculate the targer cost gap
Throughput
Product X 20
Product Y 30
Product Z 4
Workings
Product Z
Product Y
Product Z
Product Y
qty 20000
minutes
D
2.8
1
1.8
6
0.3
throughput per unit Total throughput

1.8 $ 2,700
0.5 $ 1,000
0.6 $ 1,500
0.8 $ 560
$ 5,760
₹ -5,440
$ 320
TPAR= throughput per factory hour/cost per factory hour
Cost per factory hours
Total facory cost

Total available time
Cost per factory hours=
Throughput return per factory hour
particulars LP
Sales 12600
less material cost 4300
Throughput per unit 8300
Hours per unit 1.4

Throughput return per hour $ 5,928.57
TPAR 1.33
General rule - if TPAR is greater than 1 accept the project
For large panel since TPAR is more than 1, it covers the opeating cost but the operating cost are not covered by the small
Necessary steps should be taken to improve the TPAR of small panels
throughput return per hour total thorghput

$ 4,400.00 $ 2,640,000
$ 5,928.57 12450000
$ 15,090,000
$ (12,000,000.00)
$ 3,090,000
Total overheads
Deliveries to retailers 2400
setup cost 6000
purchase orders 3600
Total overheads 12000
OAR= 0.023076923076923
Total overheads
Deliveries to retailers 2400
setup cost 6000
purchase orders 3600
Total overheads 12000
Conclusion
n (consider the actual cost )
Machine hours per unit Return per factory hour
10 2 product x has the highest TPAR
20 1.5 so in order to improve the TPAR , it should be more than 2
2.5 1.6
Selling price Material cost Throughput Machine hours per unit

22 16 6 2.5
44 10 34 20
20 15.2 4.8 2.5
40 9.5 30.5 20
=total factory cost/total time available
12000000
2700
$ 4,444.44
SP
3800
1160
2640
0.6
$ 4,400.00
0.99
ut the operating cost are not covered by the small panel
OAR
No. of deliveries 250 Cost per delivery
No of set ups 100 Cost per setup
no of purchase order 800 Cost per order
R , it should be more than 2
Return per factory hour

2.4
1.7
1.92
1.525
9.6
60
4.5
Page 145
break even revenue= fc/weighted average c/s ratio
Weighted average c/s ratio= total contribution /total revenue
total revenue 1600000

Total contribution 550000
weighted average c/s ratio 34%
Fixed cost 200000 200000
Break even revenue $ 581,818.18
Step 1 - calculation of contrubutio per unit
Balls Racquets
Sellling price 8 4
Variable cost -5 -2.6
Contribution 3 1.4
Step 2- contribution per mix 7.4
step 3- break even point( mixes) = fixed cost/ contribution per mix
Fixed cost 407000
Contribution per mix 7.4
break even point 55000 mixes
Step 4- breakeven point (units)
balls 110000
racquets 55000
Stpp 5- break even point (in $) 1100000
Step 6 - MOS
Budgeted sales 1250000

MOS In $ 150000
MOS in % 12%
Page 151
(a)
Product Contribution Sales revenur

X 550000 800000
Y 50000 200000
Z 300000 1000000
Total 900000 2000000 C/s ratio= 45%
(b)
Break even sales required= $ 1,000,000
©
Margin of Safety (in$) $ 1,000,000
MOS %= 50%
(d)
Required profit 90000

= (FC+required profit )/c/s ratio
1200000
TYU 5
Annual sale 420000
Product J Product K
Contribution 40% 50%
C/s ratio 47.50%
Fixed cost 120000
Breakeven sales $ 252,631.58
TYU 6
Product
P 27%
E 56%
R 38%
C/s ratio 38.30%
Fixed cost ₹ 648,000

Break even Sales revenue $ 1,691,906
Chapter 6 Planning with limiting factors
Planning with one limiting factor

Step 1 Identify the scarce resource
Step2 Calculate the contribution per unit for each product
Step 3 Calculate the contribution per unit for the scarce resource
Step 4 Rank the product in order of the contribution per unit of the scarce resource
Step 5 Allocate the resource using ranking
TYU 1
Step 1 Identify the scarce resource
Products Product A Product B Product C Total
Sales (units) 4000 6000 6000
Total Machine hours 40000 72000 84000 196000
Total labour hours 4800 4800 2400 12000 Constrain
Step2 Calculate the contribution per unit for each product

Contribution per unit 6 5 4
Step 3 Calculate the contribution per unit for the scarce resource

Contribution per unit 6 5 4
Direct labour time per unit 1.2 0.8 0.4
Contribution per unit per labour 5 6.25 10
Step 4 Rank the product in order of the contribution per unit of the scarce resource
Products Product A Product B Product C

Rank 3 2 1
Step 5 Allocate the resource using ranking
Products Product A Product B Product C

Units 1000 1750 6000
Labour hours 1200 1400 2400
Total contribution 6000 8750 24000 38750
Page 170
Step 1 Define the variables
Let 'x' be the number of units of product X to be manufactured

Let 'y' be the number of units of product Y to be manufactured
Step 2 Define and formulate the objectives - objectives could be maximisation or minimisation
Maximise contribution C=4x + 8y
Step 3 Formulate the constrains
Department A 8x+10y less than or equal to 11000

Department B 4x+10y less than or equal to 9000
Department C 12x+6y less than or equal to 12000
Non negativuty constrains x,y greater than or = 0
y less than or = 600
Department A Let x be 0 (0,1100) D

Let y be 0 (1375,0) E
Department B Let x be 0 (0,900) F
Let y be 0 (2250,0) G
Department C Let x be 0 (0,2000) H
Let y be 0 (1000,0) I
Feasable points
J (0,600) 4800
K (600,600) 7200
L (750,500) 7000
I (600,0) 2400
Maximise contribution C=4x + 8y

Page 179
TYU 6
Step 1 Identify the variables
Let 'x' be the number of units of product flak trap to be manufactured

Let 'y' be the number of units of product sap trap to be manufactured
Step 2 Define and formulate the objectives - objectives could be maximisation or minimisation
Maximise contribution C= 50x+40y
Contribution of X 50
Contribution of Y 40
Step 3 Formulate the constrains
Skilled Labour 10x+10y less than or equal to 2000

Unskilled Labour 5x+25y less than or equal to 2500
non negativity constrain
Maximum demand of X x less than or equal to 150
Maximum demand of Y y less than or equla to 80
Solving cosntrains
A(0,200)
B(200,0)
C(0,100)
D(500,0)
E(0,80)
F(150,0)
Contribution =
10x+10y = 2000
5x+25y= 2500 *2
10x+10y = 2000 40y= 3000

10x+50y= 5000 y= 75
Shadow Prices or Dual pricing method x= 125
Page 183
TYU 8
Cutting = 6x +8y=36
Assembly = 4x+8y=48
Revised Equation
6x+8y=
4x+8y
Solving using simultaneous equation
12x+16y 74 37 *2
12x+24y 144 48 *3
18y= 70
y 3.89
6x= 25.33
x 4.22
Contribution equation= =50x+40y

$ 366.64
Extra contribution generated from using 1 hour extra for cutting process= $6.67
Current cost per cutter = $10
Maximum price payable for extra hour of cutting time= $16.67
TYU 2
Step 1- Define the variables
x' be the summerhouses and 'y' be the gardenshades produced per week
Step 2- Formulate objective function

=50x+40y
Maximise C
Step 3 - Formulate the constrains
less than or = 36
6x+3y less than or = 48
4x+8y less than or = 0
x,y
Step 4 - Solving simultaneous equation

74
12x+16y 144 *2
12x+24y *3
72
18y= 4.00
y 24
6x= 4.00
x
Contribution equation= =50x+40y

360
$ 6.64
Extra premium payable
tion or minimisation
tion or minimisation
Graph OEPHGF
O 0
H (0,80) 3200
P(100,80) 8200
H( 9250
G(150,50) 9500
F 6000
Substitute G in the line 5x+25y=2500 2000

Slack = 2500-2000=500
Chapter # 8 Relevant Costing
TYU 1 page 235
(a) This is a new post to be created

Though it is a fixed cost , it is relevant cost because the salary is to be only paid when he is employed.
(b) A new machine to be purchased.
$ 2500 is a relevant Cost as it is to be paid only when machinery to be purchased

$100 the savings in the overhead is not relevant, the reason being nothing has been mentioned
in the question that the total fixed overhead will come down
c) $125 is a relevant cost from month 2 onwards
(d)$75 is not a relevant cost as it is related to the past
Opportunity cost
Son takes a loan in SBI @ 11%

Father deposits @ 7%
so loss for the family
TYU 2 page 237
Given,
Total cost $ 330,000
Fixed cost $ 75,000
Balance VC for 102000 units $ 255,000
Variable cost per unit $ 2.5
Contribution per unit from the existing product $ 0.75
Full capacity 120000

Used capacity 102000
Remaining capacity 18000
Contribution per unit from the new product $ 0.30

Increase in total contribution from new order $ 3,600
Fall in the existing contribution in units 1600

Fall in the existing contribution in $ $ (1,200.00)
Increase in total contribution from new order $ 3,600
Net gain in contribution $ 2,400
TYU 3 page 240
Case 1 - If the work is done internally
Particulars P.a $
Purchase of hardware/software 320
Hardware /software maintainance 750
Accouniting stationery 500
Part-time account clerk 6000
7570
Case -2 If work is outsourced
Processing of invoices 2500

Processing of cheque payments 2000
Reconcilling supplier account 3600
Total cost 8100
Produce the product internally as it is cheaper
Qualitative factors
1.Confidentiality
2.Quality of supply
3.Volume of business
TYU 4 page 241
Step 1 - Assuming allt the products are produced as per demand
Particular L M N P
Units 1500 1500 1500 1500
Hours per unit 3 5 4 6
Total time taken 4500 7500 6000 9000
Step 2- Savings calculation
Particular L M N P
Purchase price (out) 57 55 54 50
Variable cost of manufacturing 45 40 30 20
Savings if manufactured 12 15 24 30
Step 3- Savings using the key factor
Particular L M N P
Savings if manufactured 12 15 24 30
Hours per unit 3 5 4 6
Savings per machine hour 4 3 6 5
Ranking 3 4 1 2
Step 4-
Rank Product Units Machine hours constrain

1N 1500 6000
2P 1500 9000
3L 1500 4500
4M 900 4500
The rest 600 units of product M has to be outsourced
TYU 5 Page 244
Particulars 1 2 3 Total
Sales (in units) 5000 6000 2000 13000
Sales (in $) 150000 240000 24000 414000

Less: cost of sales
Direct Material -75000 -150000 -10000 -235000
Direct Labour Variable WN1 -4846.00 -5815 -1938
Production Overheads WN2 -3000 -3000 -1500
Gross Profit 67154 81185 10562 158901
General Expenses -16000

Fixed cost labour -50400
Fixed Production overhead -7500
Expenses to be allocated -9000 -9000 -6000 -24000
Net Profit 58154 72185 4562 61001
Workings
1. Direct Labour
100% 63000
80% 50400
20% 12600 1 4846.15
2 5815.38
3 1938.46
12600
2. Production Overhead
Fixed component 7500
Variable component 7500
TYU 6 Page 246

Example of crayon
Paticulars Amount $ he bought crayon which is now useless
Material A either he can throw away
In stock already (1000 kg) 1700 or he can sell at less price less transport
To be bought 10000 he won't cosider market price
and the variable cost
Material B
Material cost 15000 Example of pencil
he has 6 pencils for a month
he lends one pencil to a person on a con
but he has used only 1 out of 6 pencils
so he would spare the other person at le
Material C(opportunity cost ) 8000 Example of samosa
the shop has a policy not to recycle the s
the shop has 60 samosas left at the end
a person comes and asks to purchase all
actual price @10
so the shopkeeper will sell at $6 for that
Material D -2500 Savings here consider only the quantity required

here by using 50 kg out of available 100k
Total Material cost 32200
Skiiled Labour 25000

Semi-skilled labour (2000 hours ) 11250
Unskilled Labour (500 hours) 6000 Here , the contribution of 2 wil be a loss
also the salary of the employee is 10 so t
Total Labour cost 42250
Fixed overheads 0 Ignored because it is a committed cost a

Cost of preparing the tender 0 Sunk cost
Total cost 74450

Profit (5% of total cost) 0
Minimum tender price 74450 The minimum price is effectively a break

no gain or loss
Question 72
Contract hours 100 @$15 1500

Loss of contribution per hour 10 1000
Penalty 1000
3500
4050
Requirement of the order 1250 kg
Available material 265
Current market price $3.24
Paper Question
Tco. Is the telephone service provider
Push Co. is the customer
Job is not large
Future business can be got
Quoted = competitive price
(a)Cost statement using Relevant Costing
Adjustments Cost Sheet Reason

1 0 It is a sunk cost hence not relevant
2 500 Only the penalty is relevant because by

employeeing the two engeeniers in this
contract , it will lead to delay in other
contract and hence a penalty. Fixed Salary
is not relvant as it is commited cost in the contract
3 480 In this case the technical advicer is

working at full capacity . So the relevant
cost will be the overtime cost of the
technical engeenier.
4 0 It is not relevant as this cost is charged

to Push Co. the prospective customer.
5 125 The fixed salary is commited cost hence not

relevant. $125 is relevant as this cost in incurred
only if the contract is completed
6 2184 The current cost of $18.2 is relevant cost because the

telephone hand set is a frequently used and the stock
of 80 shoulf be replaced and the balance of 40 should be
bought at the current price.
7 7600 $5400 is not relevant as it is sunk cost
$3000 is the opportunity cost and hence a relevant cost
$5450 Not relevant No intention of replacement as it is bought in error .
Use the existing wrong one to modif
$4600+3000 =$7600
New one $10,800
The existing one is cheaper
8 1300 Current Market price is relevant cost because the material

is frequntly used and the replacement cost should be considered.
Total cost 12189
Homework Example 2
The Relevant cost for the above 3 items are :
Adjustment Cost Reason

1. 10m x $2.75 = $ 27.5 Here, since the material is frequnetly use
replacement cost of $2.75
2. 2tins x $20 = $ 40 Bob would have to buy varnish specifical

the current cost is the replacement cost
3. 4hingesx$0= $ - Here, 4 hinges which was there in the sto

Also the scrap value of the hinges is $0 a
second hand hinge. Hence, the relevant
Total relevnat cost $ 67.5
The relevant cost for the above 4 items are-
Adjustment Cost Reson

1.$1500 x 0 = $0 Here, the relevant cost is $ 0 because even if the project ha
the fixed cost would be incurred. Also the salary is a comm
2 $5,000 The opportunity cost if Colin works for this project is the pe
of $5000 for delay of other projcect. However, the delay wi
not lead to the loss of contribution of $10000. Hence the re
cost is $5000. The fixed cost of Colin is not relevant as it is a
committed cost.
3 $750 Cost if freenlance is used = $75 x 10 hours = $750

Cost if David is hired = $100 x 10 hours = $1000
Hence hiring freelance is cheaper. So relevant cost
is $750.
4 $ 1,500 The opportunity cost if this contract is the loss of contributi

of $1000 and the consultant is paid $50 per hour. Hence th
cost is loss of contribution plus the fees of the consultant.
Total relevant cost $7,250
Further processing decisions
*Sales vaule or market value method

*Production units
*NRV
Illustration 1
Formula for Productions units =Joint cost/total units produced

2.5
Particulars A B Total
Sales 400 300 700
Cost of sales 200 375 575
Gross profit 125
Value of closing stock 50 125
Sales value method
Particulars Sales value the proportion joint cost apportionment

A 500 0.56 416.67
B 400 0.44 333.33
900 750
Sales 400 300 700
Cost of sales 333.33 250.00 583.33
Gross profit 66.67 50.00 116.67
Value of closing stock 83.33 83.33
GP ratio 17% 17%
Net realisable Value method

NRV= final sales value of of
Particulars A B Total product
Selling price after the processing 840 900 1740
Further processing cost 480 440 920
NRV 360 460 820
Joint cost approtionment 329.27 420.73 750

Joint cost per kg 3.29 2.10
Particulars
Sales 700
:joint cost 750
Less:closing inventory 171 579
Gross profit 121
TYU 8
Sales value method
Particulars Sales value the proportion joint cost apportionment

A 10000 0.33 6000
B 20000 0.67 12000
30000 18000
Formula for Productions units =Joint cost/total units produced

1.8
Sales 10000 20000 30000
Cost of sales 3600 14400 18000
Gross profit 6400 5600 12000
TYU 9
Hw
(a) If there is no external market
Products Quantities Selling price Sales revenue

L1 1000 6 6000
L2 1000 5 5000
L3 1000 8 8000
Total 19000
Joint cost $20000
So there is a loss of $ 1000
So, common processes is financially not viable.

(b) If there is external market for the products.
Products Quantities Selling price Sales revenue

L1 1000 9 9000
L2 1000 7 7000
L3 1000 10 10000
Total 26000
Less: common cost -20000
Less: further cost -5400
Profit 600
Thus, further processing and selling is financially viable.
TYU 10
If firm processes further

X Z
Additional sales after processing 780 440
Additional cost for reprocessing 800 400
Profit after reprocessing -20 40
Only product Z should be further processed

Total
6000
27000
Total
Total
Cumilative machine hours

6000
15000
19500
24000
be outsourced
ght crayon which is now useless
he can throw away
an sell at less price less transport
't cosider market price
e variable cost
6 pencils for a month

s one pencil to a person on a condition to replace it before month end
has used only 1 out of 6 pencils
would spare the other person at less cost
e of samosa
p has a policy not to recycle the samosas
p has 60 samosas left at the end of the day
n comes and asks to purchase all but at $6
shopkeeper will sell at $6 for that day only but not always
onsider only the quantity required in the question

y using 50 kg out of available 100kg we are saving $50 per kg of the disposal
he contribution of 2 wil be a loss for the company if the worker works on the project
e salary of the employee is 10 so total is $12 which is cheaper than $20 of hiring
d because it is a committed cost and not increamental cost
nimum price is effectively a break-even price, so will give the firm
1000
40
985
Working Notes
2. Total working hours in a month 160
There are 3 engeeniers
Their monthly salary 3000
one engeenier has spare capacity
Total relevant cost 500
7. Swipe 2
Current price of Swipe 2=10800
Modify old version = 4600
Scrap value of old version= 3000
Current price of old version=5450 x
Orginal value of old version=5400 x
Here think from both the point of view of
the company and the department
t because the
and the stock
e of 40 should be
e a relevant cost
lacement as it is bought in error .
cause the material

ost should be considered.
ince the material is frequnetly used , the relevant cost is the

ment cost of $2.75
ould have to buy varnish specifically for this contract. So

rent cost is the replacement cost of $20
hinges which was there in the store room was never used.
e scrap value of the hinges is $0 as no one would buy a
hand hinge. Hence, the relevant cost is the scrap value.
$ 0 because even if the project happens or not

curred. Also the salary is a commited cost.
lin works for this project is the penalty

r projcect. However, the delay will
tribution of $10000. Hence the releveant
ost of Colin is not relevant as it is a
= $75 x 10 hours = $750

00 x 10 hours = $1000
cheaper. So relevant cost
s contract is the loss of contribution

nt is paid $50 per hour. Hence the relevant
plus the fees of the consultant.
per kg
4.16666666666667
1.66666666666667
nal sales value of of

Profit
4000
8000
12000
88.33333333
1320
Illustration 2
Formula P= a-BQ
where P is the price
a is the intercept
b is the gradrient
Q is the quantity demanded
MR+ a-2bQ
b= always negative
Test Your Undestanding 1
Step 1 - Finding the gradient
b=delta P/delta Q
Selling price Units

200 1000
220 950
Change 20 50
b=20/50 -0.4
Step 2- Calculate the intercept a
a=
P= a-BQ
200= a-(0.4)x1000
200=a-400
a=600
Step 3- Straight line demand equation
P=a-bQ
P=600-0.4Q
(a)
P=a-bQ
P=600-0.4Q Formula
1.b=deltaP/deltaQ
300=600-(0.4xQ) 2.P=a-bQ
3.MR=a-2bQ
0.4Q= 300 4.b= is always negatine
Q= 750 5.where P is the price
a is the intercept
(b) b is the gradrient
Q is the quantity demanded
MR= a-2bQ
At optimum price MR=MC

Given MC=100
100=600-(2x0.4xQ)
500=0.8Q
Q= 625
P=a-bQ
P=600-(0.4x625)
350
Maximum contribution per unit $ 250

Maximum contribution $ 156,250
Test Your Undestanding 2
P=a-bQ
b=5/50 0.1
P=a-bQ
160=a-0.1X2000
160=a-200
a=$360
P=360-0.1Q
MR= a-2bQ
MR=360-0.2Q
MR=MC
MC=64
so,
64=360-0.2Q
Q=(360-64)/0.2
1480
P=360-0.1Q
P=360-0.1x1480
212
Max contribution per unit $ 148

Max contribution per unit $ 219,040
Max profit $ 119,040
Illustration 3
Price per unit Demand (units) Revenue MR Total cost MC Profit

50 1 50 50 44 44 6
47 2 94 44 56 12 38
44 3 132 38 71 15 61
41 4 164 32 85 14 79
38 5 190 26 95 10 95
35 6 210 20 110 15 100
32 7 224 14 122 12 102
29 8 232 8 135 13 97
26 9 234 2 145 10 89
The profit is maximised at 7 units @$32 per units
Formula
y=a-bx
a stands for total fixed (intercept) y is the dependent variable

b stands for VC per unit (gradient)
x stands for no. of units
TYU 3
*y= 100000+b*5
*y=100000+0.95b*5 or y=100000+4.75 b
where X less than or equal to 1000

TYU 4
Page 212
(a) Proposal 1
Per unit $
Sales 7 1050000
Less: Variable cost
Material 3 -450000
Labour 2 -300000
Contribution 300000
Less:Fixed cost -164000
Net Profit 136000
This proposal in not acceptable as the profit is reducing and it will be difficult to increase the price again
(b) Proposal 2
Material cost per unit $3

Reduction in material cost by 20% 0.6
Savings 60000
Increase in the fixed cost -72000
Net effect is negative -12000
This proposal should not be accepted as this will increase the total cost be $12000
Types of pricing Strategy
Market Skimming
Increase the price to grab the initial orders before other competitors start producing
Penetration Pricing
Reducing the market price to kill the competitors
Product line pricing strategy
Example- car washing in the only example

If the customer is rich go for a car polish
c
Volume discounting pricing
Chapter 10
Example - Material usage variance and Material price variance
They are inversely propotional . If you buy low quality material, then the material price
variance is favourable but material usage variance is adverse.
Example- Smooth channel of communication between juniors and seniors are required
Steps to prepare a budget
1.Sales Budget (qty)

2.Production Budget
3.Mateial Budget
No. of units to be produced= Expected sales +Closing Stock - Opening Stock Available
Fixed Budget - 500 units

But actual produced is 300
So prepare flexible budget - a budget prepated for different units which is prepared in advance of the start of the production
Flexed Budget- prepared after the production based on the actual units produced by taking the prices before the start of prod
Also called a postmoterm budget
Make it as if it was perpared earlier
Top - down budget Imposed budget

Boss prepates the budget and give it to employees
Whether employee likes it or not
Advantage
Better expertise of top level management
Lower skill/motivation of lower level management
Top level have better vision and direction of the company than the department manager
Low cost involved and time involved
They are aware of long term strategies
Disadvantages
The low level have a better overview of functioning of the company

Pricticle problems may not be known to top level management
Lower motivation to lower level management
Bottom- top budget Participative budget
Manager prepares the budget and it is not internvened be the senior managenent
Advantages
Employees are motivated if their feedback is taken
Lower level managemet have detailed knowledge about the aspects of business than the top level managers
the budget may be more effective
Zero based budgeting
Budget prepared from the scrach is called zero based budgeting

It is a budget where all the elements are prepared like it as if it is prepared for the first time
Not necessary to make budget for the entire organisation, it can be made for separate department
Activity based budgeting
budget is prepared for different activities and compared to actual
Rolling Budget
Revise the budget every quarter based on the current market condition
Used when there is a lot of fluctions in the market
Q. When is a rolling budget ideally to be used ?
a) Food retailer It is a stable business, few unexpected changes are likely to be occur
Little use is going to be gained from rolling budget
Rolling budget is unlikely to be used
b) Developer of hand computer devices and mobile phones

Technology could be change
More number of competitors
Likely obsolencence of product
Demand of the customers
Rolling budget is used
c) Airlines Fluction in oil prices
so, rolling budget can be used
d) Advertising Agency
Standard advertising costs
Difficult to implement rolling budgets
Revenue vaires from month to month based on advertising campaings.
Thus rolling budget can be used.
e) Retail Bamking It is a stable business and as such little benefits could be obtained by using rolling budget
TYU 7
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 1 Total

Sales ( budget ) 125750 132038 138640 145572 542000
Revised Budget 123450 127154 130968 134897 138944 531963
Steps in Activity Based Budgeting
Step1 : Identify cost pools and cost drivers

Step 2: Calculate the budgeted cost driver rate taking into account the budgeted cost & budgeted activity
Step 3: Prepare a budget for each product/department
expected usage x cost driver rate
Problems with Rolling Budget
1.Time consuming
2.Budget may be changed to hide operational inefficiency
3.Not necessarty in a stable budgeting
4.It is more appropriate in industries which is dynamic , where external changes can lead to orginal budget
quickly becoming outdated.
In a stable industries,little benefit may be obtained by continuously updating the budget, so rolling budget is less usefull
TYU 8
Steps in Activity Based Budgeting
Step1 : Identify cost pools and cost drivers

Step 2: Calculate the budgeted cost driver rate taking into account the budgeted cost & budgeted activity
Step 3: Prepare a budget for each product/department
expected usage x cost driver rate
Incremental Budget
Here, if a single mistake is made in the budget, there is no need to change the entire budget
just change the partucular item
Usefullness of Incremental Budgeting
1.Budget is stable and the change is gradual
2.Managers can operate their department on a consistant basis
3.System is relatively simple to operate and easy to undestand
4. Coordination between the budget is easier to achieve
5. The effect of the change can be seen quickly
Problems with incrimental budgeting
1.Can be applied to limited no. of industries

2.No incentive to reduce cost
3.No incentive to develop new ideas
4.There may be budgetary slack built into the budget which is never reviewed
Feedback control
Feedback control can be of two types-

*Positive feedback
*Negative feedback
Positive feedback Is taken to reinforce a deviation from the standard

The inputs or the processes would not be altered
Whether this can be repeated
If there is any positive variance check if it is at the cost of other
Negative feedback means that the output is below the plan

ex- actual profit are below the budget
the cause of the negative feedback should be investigated
corrective actions can e taken to reduce the likelyhool of repitation in the future
TYU 11
Rolling Budget
Points
1.Competition
2.Technology development
3.Change in the taste
Quiz part of the
88
Material a material b
500 requried 1875 800 kg required

200 already -400
1475 3000 200 4675
current price 6.25
2
of the start of the production
prices before the start of production

the top level managers
rolling budget
eted activity
ng budget is less usefull
eted activity
Incremental
Cumilative Incrememtal
Units Average time/ unit Totaltime Units Total TimeAverage time/unit
1 100 100 1 100 100
2 80 160 1 60 60
4 64 256 2 96 48
8 51.2 409.6 4 153.6 38.4
16 40.96 655.36 8 245.76 30.72
32 32.768 1048.576 16 393.216 24.576
Algrebriac approach
y=a x( x ^b)
a= the time taken to product the first unit of output

x= cumilitave number of units
b=index of learning
=log(r)/log2
r= rate of learining in %
y=cumilitave average time per unit to produce x no. of units
TYU 3
y=a x( x ^b)
a 100
r 80%
x 16
b 0.322
y 40.95183 hours
b)
a 100
r 100%
x 25
b 0.322
y 35.47017
c)
for 20 units
x 20
y 38.11
Total time 762.25
for 19 units
x 19
y 38.75
Total time 736.20
Total time 26.05
Q. It is estimated that it will 500 hours to product the first unit of a new product.Workers have 95% learning
effect. Calculate how long it will take to product the 7th unit.
a 500
r 95%
x 7 403.14
b #NAME? -0.074
Time taken 432.945

Time taken 437.912
Time taken-4.966944
Tyu 5
y for1 20
y for 2 17.2
b -0.32
a 20
r 0.86
TYU 6
units Total time cumilative average time per unit

1 40 40
8 233 29.125
1
= 2 r1
r^3 0.728125 4 r2
r 90% 8 r3
TYU 7
a 100 min
Average ti 85
r 0.85
Revision kit
115
Weeks No.of clienTotal cost Cost per client

1 400 36880 92.2
2 440 39840 90.54545455
3 420 36800 87.61904762
4 460 40000 86.95652174
cost per un 80
Fixed cost 10000
variable cost
vc per unit 8
a x (800xb *3
a1.4 x (120*2
3a x 2400b=49200
2.8a x 2400b=47200
0.2a=2000
10000
Total cost units

30000 1000 FC 26000
31600 1400
1600 400
4
8400
34400 total cost for 2100
1
2
4
8 test sat
16 0.716 pricing
92% relevant costing
qty analysis
Example
1 pen sp=$5
100 units $4.5
500 units $4.5 Learning curve starts
2000 units $3,25 from second batch
TC $3.6
If the customer asks for one pen now give it at $5
TYU 9
(a) Initial order

1 batch = 10 watches
Particulars $ per batch
Material 300
Labour cost 300
Set up cost 1000
Total cost 1600
Minimum price will be $ 1600 for initial batch

Minimum price will be $ 160 for each batch
(b)
Second order
Material 300
Labour cost 180 average time =80 for 2 batch
Set up cost 0 first batch =100 hours
Total cost 480 Total time taken =800*2
=160
Time taken for 2nd batch will be 60 hours
Working Notes-
a 100
x 2
b -0.321
r 0.85
y 80.05148
'©

Material 600
Labour cost 480
Set up cost 1000
Total cost 2080
(a) (b) c)
Particulars
Material 300 300 600
Labour cost 300 180 480
Set up cost 1000 0 1000
Total cost 1600 480 2080
Bal fig.
(d)
3rd batch to 16th batch

First 16 batches
a 100
x 16
b -0.32193
r 0.85
y 40.96
First 2 batches
a 100
x 2
b -0.32193
r 0.85
y 80.00
Total time taken for 16 batches 655.36

Total time taken for 2 batches 160.00
Total time taken for 3rd to 16th batch 495.36
Particulars
Material 4200
Labour cost 1486.07
Set up cost 0
Marketing cost 250
Total cost 5936.07
Profit 363.93
revenue 6300
TYU 10
(1)
Material 1000
Assembly labour 300
Fixed overheads 600
Profit 380 40.00078
Selling Price 2280 A
80
(2) 128
48
Material 2000 32.0412

Assembly labour 480 32.00125
Fixed overheads 960
Profit 688
Selling Price 4128 A 2064
(3)
5th bike to 13th bike
Material 8000 Average learning 29.783213857 148.9161

Assembly labour 1357.495 21.897353992 284.6656
Fixed overheads 5429.981 135.7495
Profit 2957.495
Selling Price 17744.97 2218.121495
(4)
Average time for 8 bikes 18.984375

Time for 1st bike 45
r^3 0.421875
r 75%
(5)
Revision kit
166
a 400
r 90%
b -0.152
First 12 batches 1st order

next 16 batches 2nd order
Total time
y for 12 batches 274.1728 3290.074165
y for 30 batches 241.0416 6749.16432
Total time for next 16 batches 3459.090155
Labour cost for second order $ 41,509
167,
1 100
4 55 74.20%
r^2 0.55
r 74.20%
168,
r 80%
a 22 38.124
Total time for 4 units 56.32 38.7587
Total time for 3 units 46.34027467
Time taken for 4th unit 9.98
test 111
112,
D
113,
Q.163
Q.165
Learing rate= Cumulative average time for 2 units

Cumulative average time per unit for 1 unit
= squrare root of Cumulative average time per unit for 4 units

Cumulative average time per unit for 1 unit
= cube root of Cumulative average time per unit for 8 units

Cumulative average time per unit for 1 units
3.820666667
Q 163.
Cumilative Incrememtal
Units Average time/ unit Totaltime Units Total TimeAverage time/unit
1 500 500 1
2 0 1
4 0 2
8 0 4
16 358.1875 5731 8
r^2 0.526315789
0.72547625
4.350384 95
Y=a*x^b
92%
e 95% learning
curve starts
762.48 609.984
736.4153
26.06465
Chapter # 9
Risk and Uncertainity

Risk
The existence of several possible outcomes, which are known in advance along with the realtive
probobility.
Uncertainity
The potential outcomes of a decision that are not known in advance. Clearly the associated
probability cannot be known.
There are several methods of dealing with risk in decision making

1. Expected value
2.Value of perfect information
3. Decision Trees
4.Maximax
5.Manimax regret
1. Expected value
The expected value represents the average outcome that would be achieved if a decision where to be
repeated many times.
Formula
EV= Weighted Arithmetic mean of the possible outcomes
Q. A decision maker must select one of the 3 mutually exclusive projects(you can choose only 1).
The outcome from each project depends on the state of the market , which can be diminishing,
static or expanding.
The profit for each project under each of the three outcomes is shown in the following pay-off
profit table
State of Probability Probability Project 1 Project 2 Project 3

Diminishing 0.4 100 0 180
Static 0.3 200 500 190
Expanding 0.3 1000 600 200
Determine the EV for each project and select which project to persue
EV 400 330 189
Based on the expected values project 1 should be undertaken.
Advantages
1.Reduces the information to one number for each choice
2.The idea of an average is easily undestood
Disadvantages
1.Assigning the probalilities may be diffficult to estimate
2.The average may not correspond to any of the possible outcomes
3.The average gives no indication of the spread of possible results(ie,it ignores risk)
4.Unless the same decision has to be make many times, the average may not be achieved
therefore it is not suitable for decision making in one-off situation
2.Profit table
The profit table is also referred to as pay-off matrix

It shows all the possible pay-offs which may result from a decision makers chosen strategy
e.g. NPV, contribution,profits
Q. A baker pays 10 cents per cake and sells each cake for 30 cents. At the end of the day any cakes not
sold must be thrown away. On any particular day, the level of demand follows the following
probability distribution
No. of cakes 20 40 60
Probability 0.3 0.5 0.2
(a) Contruct a profit table to show the possible outcomes.

(b) Calculate the daily order the baker should place in order to maximise the expected value of
daily profits.
Solution
Maximax approach
Illustration 5
Supply
Probalility 40 50 60 70
25 days 0.1 40 80 0 -80 -160
50 days 0.2 Demand 50 80 100 20 -60
100 days 0.4 60 80 100 120 40
75 days 0.3 70 80 100 120 140
Ans-Buy 70 salads a day Maximum of the maximum demand.
Maximise Approach
Select the alternative with the maximum possible pay-off ie, highest return under the best case
senario. This will be the risk seeker's (optimistic rule)
TYU 1
Product C would be chosen because it has a maximum possible gain of 150.
Maximin Approach
Select the alternative with the highest return under the worst case senario.
Illustration 5
Supply
Probalility 40 50 60 70
25 days 0.1 40 80 0 -80 -160 These are the
50 days 0.2 Demand 50 80 100 20 -60 leaset among
100 days 0.4 60 80 100 120 40 the alternatives
75 days 0.3 70 80 100 120 140
Worst case senario 80 0 -80 -160
40 salads should be supplied as it has the highest return under the worst case senario.
TYU 2
A B C
select the minimum 20 -70 10
Product A is chosen.
Minimax regret
Select the alternative with the lowest maximum regret

Regret is defined as an opportunity loss from having made the wrong decision
Minimax regret is suitable for a risk adverse investors.
Illustration 5
Supply
Probalility 40 50 60 70 SP 10
25 days 0.1 40 0 80 160 240 Cost 8
50 days 0.2 Demand 50 20 0 80 160 Profit 2
100 days 0.4 60 40 20 0 80 Calculate
75 days 0.3 70 60 40 20 0 the
Maximum Regret 60 80 160 240 opportunity
Cost
Minimum value of the maximum regrets 60
Supply is 40 salads
46.5
Decision Tree
Page 287
0
EV at point A 132500 Don’t consider

EV at point B 6250 A and B
EV at point C 75000
EV at point D 82000
Value of imperfect information

The value of imperfect information is simply the difference between the expected value if the market
research is commissioned and the expected value if it is not.
Expected value with market research $4.26
Expected value without market research $4.20
Value of imperfect information $0.06
MS Word problem
Daily forecast Cakes ordered Daily contribuion Probability Expected value
20 20 400 0.3 120
40 40 800 0.5 400
60 60 1200 0.2 240
Expected Value of perfect information 760
Expected Value of imperfect information 620
Value for perfect information 140
It is the profit if the market research is undertaken
Revision Kit
A pessimistic buyer will try to aim for best results if worst happen
A B C
Worst senario 1400 1800 3600
Optimistic will be maximax

So A
Regret table
A B C
Growth rate
15% 1200 1800 0
30% 3100 2600 0
40% 0 2100 1000
Max regret 3100 2600 1000
Illustration - 5
Supply
40 50 60 70
Probability 0.1 40 80 0 -80 -160
0.2 50 80 100 20 -60
0.4 Demand 60 80 100 120 40
0.3 70 80 100 120 140
EV 80 90
Illustration - 8
Supply
40 50 60 70
40 0 80 160 240
50 20 0 80 160
Demand 60 40 20 0 80
70 60 40 20 0
Max 60 80 160 240
Min 60
Chapter # 12
Advanced Variance
Explain the reason of variance
Standards are set

Sales price Vairance
Sales Variance
Total Sales Variance

Sales Volume Variance
Sales price variance = AQ*(AR-SR) difference in price * actua
AQ Actual quantity Tomato example - the qua

AR Actual Rate
SR Standard Rate
Reasons for favourable sales price variance
-Demand for the product was better than exptected

-Major competitor could have left the market
-Change in the product design
-Improvement in the quality
Reasons for adverse sales price variance
-Demand was worse off

-Major competitor entered the market
-Change in product design
-Worsening of quality
-Substitute product is available in the market at cheaper price
Sales Volume Variance= SM * (AQ-BQ)

Reasons for favourable sales volume variance
- Market is in good condition

-Competitor leaves the market
-Improvement in quality
-Lower sales price
Reason for adverse sales volume variance
-Higher price
-Market is in recession
-Lower quality
-Increase in competitiors who offer better price
-Failure of marketing campaing
TYU 1
Sales Variance
Standard Quantity 6500
Standard Rate 60
Actual Quantity 6000
Actual Rate 61
Sales Price variance = 6000 Favourable
(a) Absorbtion Costing
Sales Volume Variance = SP * (AQ-SQ)
SP Standard Profit 5
Sales Volume Variance = -2500 Adverse
(b) Marginal costing
Sales Volume Variance = SM * (AQ-SQ)
SM Standard Margin 23
Sales Volume Variance = -11500 Adverse

Material Price Variance
Material Variance
Material Usage Variance
Material Price Variance =AQ*(SR-AR) AQ

Material Volume Variance =SR * (SQ-AQ) SQ
AR
SR
TUY 2
Stadard Quantity 2000 kg

Actual Quantity 2200 kg
Standard Rate 10 $
Actual Rate 9.5 $
Material Price Variance = 1100 FAV
Material Usage Variance= -2000 Adverse
Total material variance -900 Adverse
Reasons for Favourable Material Price Variance
-Poor quality
-Availing discounts because of bulk purchase
-Cheaper quality
-More supply of material
-Substitute material at a cheapter rate
-Budgeting can be wrong
-Cheaper Supplier
Reasons for adverse Material Price Varinace
-Incorrect Budgeting
-High quality material
-Decrease in supply of material in market
-Inflation in market
-Expensive supplier
Reasons for Favourable Material Usage Variance
-Higher qualtiy material

-More efficient use of material
-Change in the product specification
-Difference in Batch sizes
-Change in the mix
Reason for Adverse Material Usage Variance
-Poor quality market

-Less efficient use of materials
-Change in product specification
-Difference in Batch sizes
-Change in the mix
Labour Rate Variance
Labour Variance
Labour Efficiency Variance
Labour rate variance = AH *(SR-AR)

Labour Efficeincy Variance = SR* (SH-AH)
AH Actual hours
AR Actual Rate
SR Standard Rate
SH Standard hours
Reasons for favourable Labour rate variance
-Lower skilled staff

-Cut the bonus/overtime
-More supply of labour
Reasons for adverse Labour rate Variance
-Higher skilled staff

-Increase in bonus
-Shortage of labour
-Government regulations
-Inflation factors
Reasons for favourable Labour Efficient Variance
-Incentives
-Efficient / highly skilled workers
-Improved staff motivation
-Training of employees
- Use of advanced technology
Reasons for adverse Labour Efficiency Variance
-Low skilled labour

-No Incentives
-Lack of motivation
-No training of employees
TYU 3
Labour rate variance = $ 4,650 Favourable

Labour efficiency variance = $ (2,400) Adverse
Actual hours 15500 hours

Standard hours 15000 hours
Actual Rate $ 4.5
Standard Rate $ 4.8
Budgeted = 15000*4.8 72000

Actual = 15500*4.5 69750
$ 2,250
Variable OH Expenditure V
Variable OH Variance
Variable efficiency Varianc
TYU 4
Given
Actual hours 15500

Standard hours 15000
Actual rate 0.961290322580645
Standard rate 1
VOH Expenditure variance = $ 600 Favourable

VOH effecience variance = $ (500) Adverse
Total variable OH variance = $ 100
Reasons for favourable VOH expenditure variance

*More economic use of the services
*Unexpected savings in the cost of services
*Incorrect budgeting
*Incorrect split of semi variable and fixed cost
Reasons for adverse VOH expenditure variance

*Excessive service usage
*Less economic use of services
*Unexpected increase in the cost of services
Reasons for favourable VOH efficience variance

*Motivation
*Better equipments
*Learning efficiennt
*Better material / higher grade of material
*Higher pay
Reasons for adverse VOH efficience variance

*Less motivation
*Lower pay
*Poor equipments
*Poor materials
*Poor learining effect
Under Absorbtion Costing Fixed overhead Expenditure Varianc
Fixed OH variance
Fixed overhead volume variance
FOH capacity variance
Fixed overhead Expenditure Variance =Actual -(BH*SR)
Fixed overhead volume variance
Fixed overhead capacity variance =(BH-AH)*SR
Fixed overhead efficiency variance =(AH-SH)*SR
FOAR =Budgeted fixed production OH

Budgeted units * standard time per unit
TYU 5
Given;
Budgeted FOH 22960

Budgeted units 6560
Standard Time 2 hrs/unit
Actual FOH 24200

Actual units 6460
Actual time 1.92063492063492
(a) FOH expenditure variance $ (1,240)
(b)FOH capacity variance $ (910) Fav
Actual hours 12600

Budgeted hours 13120
Difference -520
FOAR =Budgeted fixed production OH

Budgeted units * standard time per unit
1.75
c)
FOH efficiency variance $ 560 FAV
Standard hours 12920

Actual hours 12600
Difference 320
(d) FOH volume variance $ (350) Adv
TYU 6
(a) Selling Price Variance $ 14,000 FAV

(b) Sales volume variance $ (2,500) ADV
c) Material price variance $ (4,300) ADV
A -1499.99999999999
B -2800
(d) Material usage variance $ (2,500) ADV
A -6000
B 3500
e) Labour rate variance $ (680) ADV
(f) Labour efficiency variance $ 800 FAV
(g)FOH expenditure variance $ 8,000 FAV
(h)FOH volume variance $ (3,000) ADV =difference in units * time
(i)FOH capacity variance $ (8,000) ADV
(j) FOH eficiency variance $ 5,000 FAV
Cost net $ (1,680)
Reconcillation for profit
Budgeted profit 37500

Sales fav $ 14,000
Sales adv $ (2,500)
Cost net $ (1,680)
Profit for the year 47320
When calculating usage and efficiency variance always compare the autual usage to the standard for the
actual output , not to the orginal budgeted usage.
Material Mix and Yield variance
Material Mix variance

Material usage vairance
Material Yield variance
TYU 8
A Kgs B Kgs C=B-A Kgs
Materials Actual Qunatity Actual mix (AQAM) Actual quantity standardDifference
A 14000 12500 -1500
B 5500 5000 -500
C 5500 7500 2000
25000 25000 0
Material mix variance
Note
Intrepretation of material mix variance
*A favourable overall material mix variance means an actual mix is cheaper than the standard
*Cheaper materials have been substituted for costly ones
*While a cheapter mix saves money, it may imply poorer quality of the final product.
*This means a loss of customers in the longer run.
Reasons for varying the mix-

*The price of materials may change away from the standard, so one becomes relatively
more or less expensive
*Inaccurate measurement of inputs, due to carelessness or mistakes.
*Intentionally using a cheaper mix to get a favourable mix variance
SR= Budgeted Fixed /(SR*

TYU 6
FOH expenditure variance= 8000 FOH Expenditure Variance
FOH Volume variance = -3000
FOH Capacity Variance = -1200 FOH Volume variance = SR
FOH Efficiency vairance= 4200
FOH Capacity Variance = S
SH 3750
BH 3500 FOH Efficience Variance =
SR 12
AH 3400 FOAR =Budgeted fixed pro
Budgeted units x
12
TYU 8
A B C=B-A
Material AQAM AQSM Difference
Actual Quantity Actual Quantity
Actual Mix Standard Mix
A 14000 12500 -1500
B 5500 5000 -500
C 5500 7500 2000
25000 25000 0
Material Yield Variance

TUY 9
A B C=B-A
Material AQSM SQSM Difference
Actual Quantity Standard Quantity
Standard Mix Standard Mix
A 12500 12600 100
B 5000 5040 40
C 7500 7560 60
25000 25200 200
Material yield variance
Cross check
Input Output
600
240
360
1200 1000
Input / output ratio 1.2
Actual input 25000

Actual output 21000
Standard output =25000/1.2 20833.3333333333
Difference 166.67
Standard price 1.776
Material Yield Variance 295.999999999996
Standard price
660
576
540
1776
TYU 10
Material Mix Variance

A B C=B-A
A 1000 820 -180
B 1460 1640 180
2460 2460 0
Material Yield Variance

A B C=B-A
A 820 1600 780
B 1640 3200 1560
2460 4800 2340
TYU 11
Material Mix Variance

A B C=B-A
S1 8284 9576.5 1292.5
S2 7535 5985.3125 -1549.6875
S3 3334 3591.1875 257.1875
19153 19153 0
A B C=B-A
S1 9576.5 8560 -1016.5
S2 5985.3125 5350 -635.3125
S3 3591.1875 3210 -381.1875
19153 17120 -2033
TYU 12
In a performance measurement system managers are often rewarded for

improving the performance of cost and/or revenues under their control.
The production manager may be responsible for the material mix decision
and, if the reward system is based on achieving cost savings, then the
cheapest mix may be used. This may have a detrimental effect on
company profit if quality is reduced and this leads to a lower price or
quality failure costs.
It may therefore be preferable to reward managers on the basis of total
company profit so that the full impact of the mix decision is taken into
account.
TYU 13
Sales mix profit variance
Product Standard Mix Actual Quantity Actual Qunatity Difference

Units Actual Mix Standard Mix
S 8000 9500 8200 1300

D 12000 11000 12300 -1300
20000 20500 20500 0
Since it is a sales , put actual first
Sales quantity profit Varaiance
Product Standard Mix Actual Qunatity Difference SC per unit

Units Standard Mix
S 8000 8200 200 5

D 12000 12300 300 6
20000 20500 500 Sales quantity profit var
Variance
Short cut method
Budgeted Production 20000

Actual production 20500
Difference 500
Standard Average 5.6
Sales Quantity profit variance 2800
TYU 14
Sales Price Variance
Product Standard Mix Actual Quantity Actual Qunatity Vairance

B 3 137750 133000 4750

R 1.25 209250 202500 6750
K 1.94 161500 153000 8500
Sales price variance 20000
Sales volume profit variance
Product Standard profit Actual Quantity Std qty
B 4.12 9500 10000

R 2.41 13500 13000
K 5.72 8500 9000
Sales volume profit variance
B R K
Selling Price per unit 14 15 18
Less: Direct material -5.4 -4.1 -4.85
Less:Direct labour -3.25 -5.2 -4.55
Less:FOH -1.2 -3.3 -2.9
Standard Profit 4.1 2.4 5.7
OAR= 4.11
Sales mix profit variance
Product Standard Mix Actual Quantity Actual Qunatity Difference

B 10000 9500 10000 -500

R 13000 13500 13000 500
K 9000 9000 9000 0
32000 32000
Sales profit volume variance

Product Standard Mix Actual Qunatity Difference SC per unit
Units Standard Mix
B 10000
R 13000
K 9000
32000
Planning and operational variance
There are 2 variances-

Planning variance Orginal and Revised (flexed) budgeted
Operational Variance
Planning variance
*It' uncontrollable by the management
*They are not held accountable
*It's also known as budgeted revision variance
Operational Variance
*It's the difference b/w the actual and revised budget
*Management is responsible for this as they are fully under their control
*Planning and operational variance are prepared for sales, material and labour .
*These varainces are used when the market is volatile
*Revision of the orginal helps us to undestand the efficiency better
*Acts as a motivator by revising the standards
*Helps in future planning
Limitations of these variances
*There might be bais in deciding the standard price

*Time consuming in deciding the standards
*Transfer responsibility for inefficiencies to planning variance
TYU 15
(a) Traditional sales volume variace
Sales volume variance 150000 FAV
(b) Planning and operational variance
Budgeted sales volume 400000 Total sales in market 2,000,000

Revised sales volume 440000
Actula sales volume 450000
Planning variance= (difference in the budgeted and revised sales volume)*standard margin
$ 120,000 Fav
Operational variance = (difference in the revised and actual sales volume)*standard margin
or market share variance $ 30,000 Fav
Sales volume varaince $ 150,000 Fav
*Any bonus for the sales manager should be linked to the market share variance
not the sales volume variance
*Sales manager can control the market share variance and sales volume variance is not controlled
TYU 16
(a)
Sales Price and Volume variance
Expected sales units 250000
Standard selling price $ 14
Standard profit $ 4
Actual selling price $ 12.5

Actual sales units 220000
Actual profit $ 2.5
Sales price variance $ (330,000) Adv

Sales volume variance $ (120,000) Adv
(b)
Sales market share and size variance
Planning variance= (difference in the budgeted and revised sales volume)*standard margin
Market size
Operational variance = (difference in the revised and actual sales volume)*standard margin
market share
Planning variance
Revised sales 275000

Planning variance= $ 100,000 Fav
Operational variance = $ (220,000) Adv
TYU 17 Hw
(1) Sales quantity variance = $1080 Fav
Product AQSM BQSM Difference SP Variance

A 440 400 40 8 320
B 660 600 60 6 360
C 1100 1000 100 4 400
2200 2000 200 1080
(2) A
(3) Sales mix variance Ans. B
Product Standard mix AQAM AQSM DifferenceSP

A 400 300 400 -100 8
B 600 700 600 100 6
C 1000 1000 1000 0 4
2000 2000 2000
(4) Market size variance Ans . C
Market size variance = (difference in the budgeted and revised sales volume)*standard margin
Product B
Orginal 600
Revised 540
Std. margin 6
Market size variance -360 Adv
(5) Market share variance
Product B
Revised 540
Actual 700
Std. margin 6
Market size variance 960 Fav
TYU 18 2000
-1800
Orginal price 5.2
Actual price 5.18 -200.000000000005
Revised 5
Fav
Planning variance= Adv
Operational Variance=
Traditional price variance=
*Identify the cayse if variance
Revision Kit
fference in price * actual quantity
omato example - the quantity matters

ce Variance
age Variance
Actual quntity
Standard Quantity
Actual Rate
Standard Rate
iency Variance
Labour variance $ 2,250
ariable OH Expenditure Variance

ariable efficiency Variance
ead Expenditure Variance
ead volume variance

Jeddah
KSA
FOH Efficiency
difference in units * time per unit*foar
Only input More than one input
Input and output relation
D $ C*D
RD price Variance
1.1 $ (1,650)
2.4 $ (1,200)
1.5 $ 3,000
FAV $ 150
R= Budgeted Fixed /(SR*SH)
OH Expenditure Variance = (BH*SR)- Actual cost
OH Volume variance = SR* (SH-BH)
OH Capacity Variance = SR*(AH-BH)
OH Efficience Variance = SR *(SH-AH)
OAR =Budgeted fixed production OH

Budgeted units x standard time per unit
D C*D
SD price Varince
1.1 $ (1,650)
2.4 $ (1,200)
1.5 $ 3,000
FAV $ 150
D C*D
SD price Varince
1.1 $ 110
2.4 $ 96
1.5 $ 90
FAV $ 296
D C*D
SD price Varince
4 $ (720)
6 $ 1,080
FAV $ 360
D C*D
SD price Varince
4 $ 3,120
6 $ 9,360
FAV $ 12,480
D C*D
SD price Varince
0.3 $ 388
0.5 $ (775)
0.4 $ 103
Adv $ (284)
D C*D
SD price Varince
0.3 $ (305)
0.5 $ (318)
0.4 $ (152)
FAV $ (775)
SC per unit variance
5 6500
6 -7800
Sales mix profit vari -1300 ADV
variance
1000
1800
2800 FAV
FAV
FAV
FAV
FAV
Variance Std QTY Variance
-2058 Adv 39106.73

1205 Fav 32543.91
-2861 Adv 48635.53
-3714 Adv 120286.2
SC per unitVariance
14 -7000
15 7500
18 0
500
variance
standard margin
ndard margin
standard margin
ndard margin
Fav
Fav
Fav
Fav
Variance
-800 Fav
600 Fav
0 Fav
-200 Fav
standard margin
Variance
Sales price variance = AQ*(AR-SR) difference in price * actual quantity
AQ Actual quantity
AR Actual Rate
SR Standard Rate
Sales Volume Variance= SM * (AQ-SQ)
AQ Actual Quantity
SQ Standard Quantity
SM Standard Margin/Profit
Material Price Variance
Material Variance
Material Usage Variance
Material Price Variance =AQ*(SR-AR) AQ Actual quntity

Material Volume Variance =SR *(SQ-AQ) SQ Standard Quantity
AR Actual Rate
SR Standard Rate
Chapter # 13
Performance Measurement and Control
Q 321.
Financial Performance
20X6 20X5
Gross Profit Ratio = 0.423928 0.371866
Net Profit Ratio = 0.251521 0.189529
Percentage Increase In rev
Gross Profit
20X6 20X5
Household goods 40% 30%
Electronic Goods 36% 35%
Cloud computing 66% 79%
Gold membership fees 93% 95%
5%
-28%
-16% -121%
-32% =
ROI
= Controllable profit / capital employeed x 100
For assessing the manager
ROI = Tracable profit / capital employeed x 100
For assessing the division
Controllable and Tracable profit
External sales
Internal Sales
Less: Variable cost
Controllable by manager
Less: Fixed cost
Controllable Profit
Less: Divisonal cost outside manager's control
Tracable Profit
Less: Allocated head office cost
Divisional net profit
Advantages of ROI -
*It is a relative measure- easy to compare divisions

*Similar to ROCE and used by external analysist
*Focuses attention on scarce capital resource
*Encourages reduction in non-essential investment by
a) by selling of unused fixed asset
b) minimising the investment in working capital
c) easily undestood percentages (espicially by non- finance managers)
Disadvantages
* Defination of capital employeed can be subjective

*leased assets or patents could be used
RI - Residual Income = Pre Tax Profit - Imputed interest charge for capital invested
Imputed interest = capital employed * interest rate
The company’s cost of capital is always used as a basis for the interest rate.
Q. Two divisional managers are considering investment projects
Particulars Division X Division Y

Controllable investment in the possible project 100,000 100,000
Controllable profit from possible project 16,000 11,000
Current division ROI 18% 9%
Company cost of capital is 13%

a) What decision will manager of each division manager make?
b) Is the decision making goal congruent ?
Particulars Division X Division Y

Controllable Profit 16,000 11,000
Imputed interest 13000 13000
RI 3,000 -2,000
The manager of Division X will accept the project

The manager of Division Y will reject the project
b) Here, the managers decision making goal congruent
Balance scorecard
1. Customer Perspective
2. Financial Perspective
3. Business Process Perspective
4. Learning and Growth
Q 325
a)
*Profit is generally the accepted method for evaluation internally and externally
*Incentives are based on profits
*In case of decentralised organisation, some division may be able to achieve and some may not
*External users generally feel that profit indicates the success or failure of the policy of the directors
*Success would be reflected in the stock price in the market due to increase in EPS
*Profit is also required for the ROCE, RI calculation
*Divident payouts may include the profit calculation
Building Block model
Building block model is for the service industry

This model is used to design a system of performance evaluation linked to rewards
schemes for managers.
Characteristics of service industry

1.Simultaainety - Inseparability
2.Perishibility -inability to store the facility
3. Hetrogenity -
4.Intangibility - No good with physical quantity
5
Need for Fitzgerald & Moon's Building Block Model
This model talks about the future
It is a forward looking performance measurement system
Link them to their critical success factors so that they achieve long term success.
There are 3 blocks

*Dimensions- They are the aspects of performance which must be measured.
1. Financial performance Past
2. Competitiveness Past
3. Quality Future Post transaction customer feedback
4. Resource utilisation Future
5.Innovation Future
6. Flexibility Future
2.Standards
They are targets set for managers based on measures
Three principles should be applied here-
1.Ownership
2.Acheivability
3. Equaty The organisation should maintain the realistic level of difficulty
*Rewards
Three principles
1. Clarity
2.Motivation -
3.Controllability
ng term success.
Chapter # 14
Transfer Pricing
Transfer between to department

1. Think that other department is rival
2.It should not effect the company's goals
TYU 6
(a) Full cost plus 10%
Particulars Division A Division B

Sales
External sales 0 350000
Internal sales 176000 0
Less: Variavle cost
Purchase cost from division A -176000
Material cost -80000 -20000
Other variable cost -20000 -30000
Less: Fixed cost -60000 -30000
Profit 16000 94000
Workings:
WN1: cost computation
Material cost per unit 8

Other VC per unit 2
Fixed cost 6
Total cost 16
Profit 1.6
Selling Profit 17.6
(b)Marginal cost plus 10%

Particulars Division A Division B
Sales
External sales 0 350000
Internal sales 110000 0
Less: Variavle cost
Purchase cost from division A -110000
Material cost -80000 -20000
Other variable cost -20000 -30000
Less: Fixed cost -60000 -30000
Profit -50000 160000
Workings:
WN1: cost computation
Material cost per unit 8

Other VC per unit 2
Total cost 10
Profit 1
Selling Profit 11
c)
TYU 7
Division Able Baker

Products X&Y
(i) When Divisional Able has spare capacity
The transfer price should be set at a price between $35 and $38 for product Y.
(ii) When division Albe is operating at full capacity
Hence the transfer pricing should be negotiated between $38 and $45
$45 is the variable cost of Product y and the loss in the contribution of product X
Hence, Division will buy product Y from market
Revision Kit
Q 316.
(a)
(i)
ROI
Particulars Division C Division E

Average divisional net asset 11000000 27000000
Divisional Profit 1455000 3950000
Add: Divisonal cost outside manager's control 49500 138000
Add: Allocated head office cost 620000 700000
Divisional net profit 2124500 4788000
ROI 19% 18%
(ii)
* Division C has achieved the target ROI and not Division E.

*Since Division E uses the WDV method, the capital employeed will be more than division E which
would reduce the ROI
*Since Division E appears to be more capital intensive than division C which will pull down the ROI
as they have greater depreciation expense as compared to division C.
*Division E has made capital investment in this year which would increase the capital employment
base of department compared to division C.
*The division C manager will only get the bonus because of achieving target ROI while division E
manager wouldn't get the bonus.
(b) RI calculation
RI - Residual Income = Pre Tax Profit - Imputed interest charge for capital invested
Particulars Division C Division E

Average divisional net asset 11000000 27000000
Imputed interest charge for capital invested 1320000 3240000
Divisional net profit 2124500 4788000
RI 804500 1548000
(ii)
Both the divisions have achieved positive residual income

Thus, they have performed well by exceeding the overall cost of comparison
Advantages of RI-
The use of RI should encourage managers to make new investments, if the Investment adds to the
RI figure. A new investment can add to RI but reduce ROI and in such a situation, measuring performance
with RI will not result in dysfunctional behaviour . Instead, RI will lead to decision which is best in the
interest of the compayny as a whole.
* It discourages dysfunctional behaviour

*It is an absolute measure giving more reliability in decision making.
*Risk adjusted cost of capital can be used to reflect different risk position of different positions
Disadvantages of RI
*Definations of capital employeed varies

*Window dressing
*
©
Balance Scorecard
1.Goal
2.Performance measure
3.Explaination
Customer Perspective
Goal- To ensure that fights are on time

Measurement- on time arrival ranking from avaiation authority
Explaination - If they improve their existing ranking from seven, it will lead to
better customer satisfaction leading to further rise in revenues
Goal - To reduce/avoid the flight cancellation

Measurement- No. of flights cancelled compared to total flights
Explaination - If cancellation are more, customers may shift to other airlines and reliability may
be lost
Internal perspective
Goal - To improve the turnaround time on ground

Measurememt- On the ground time
Explaination - If turnaround time reduced , then lesser number of flights can be used
But quality of cleaning should not be reduced.
Learning Perspective
Goal - To reduce employee absentee rate

Measure- employee absenteeism rate
Explaination - The increase in absenteeism rate is critical to the success of the firm as it leads to
cancellation of of flights
Goal - To provide training to ground staff

Measure - Number of training program conducted for the grounded and also increase customer s
satisfaction by lowering costs
Financial Perspective
Goal - To increase revenue per pasanger and seat revenue per plane
Measure- Revenue per available passenger mile
Explaination- Operating efficiency will be improved by having fewer empty seats on the flight
Goal - To improve the profitability

Measure -ROCE
Goal - Financial stabitity

Measure - Gearing
Goal - Utilisation
Measure - Load factor
Goal - Low cost

Measure - average cost per seat
Q 324.
(a)
It leads to a wider view on performance of organisation rather than concentrating on financial

aspects of performance.
In a competitive environment, organisations must be aware of the need of their customers.
It is linking performance measurement to the objectives of the organisation and therefore it is

strategy. This ensures that what is being meausured is relevenat to the strategy and objective
of the entire organisation.
People's bank has identified specific categories of customers which has particular needs and aims
at satisfying them. Eg. For visually impaired and disabled
People's Bank has a vision and strategy which goes far beyond just making money.
From a purely businesss perspective, if employees and customers are valued and internal
processes are efficient, an organisation should have more chance of achieving long term success
any way.
Even putting aside the social objectives, the people's bank has a balance score card can be usefull
to meausre other perspective of future success.
Disadvantages of Balance Score card

*Difficulty in setting appropriate measures
*Time consuming and costly process
*May face resistence from employees to implement it
*May not focus
(b)
Financial perspective
The people's bank has recently invested heavily in the TI security and thus the ROCE
has decreased
The main aim of the bank is to provide for the customers requirement
Customer
Internal
Learning
Financial
Internal perspective
Learining perspective
Q 317.
(a)
Particulars
Sales : Div A Div B Total
External Sales 3000 27000 30000
Internal Sales 1950 1950
0
Less: Variable cost 0
Purcahses 0 -1950 -1950
Material cost -1050 -6750 -7800
Labour cost -1400 -5250 -6650
VC for external -200 -200
Contribution 2300 13050 15350
0
Less: Fixed cost -2200 -5460 -7660
0
Profit 100 7590 7690
(b) Division B has customers outside to buy at $15 and if Div A can sell entire quantity it produces it could
and it is left out with.
Division A countinues to sell Division B at 150,000 adaptors but division B will buy the
remaining 30,000 adaptors from an external suppliers
This is because the contribution per unit for division A's external sales is $7
Selling price 15
Material cost -3
-4
-1
This means that for every external sales it looses, it forfeits $7 for the group
However, the incremental cost of the group for division B buying the adaptors from outside the group is
$(13-7) = $6
So, it makes sense for Department A to fully satisfy its external sales before selling internally
c) Additional sales to B that could be made is 30,000

If division A 30,000 further units to div B, then it must forego the contribution earned if sold outside
Acual cost
Material 3
Labour 4
Add: Opporunity cost 7
Maximum transfer price 14
(b)
Selling to B Outside
Selling price 13 15
VC:
Material 3 3
Labour 4 4
VC 0 1
Contribution 6 0 7
Selling outside gives extra contribution of $1 so let them sell max. to outside.
Total
350000
176000
0
-176000
-100000
-50000
-90000
110000
Total
350000
110000
0
-110000
-100000
-50000
-90000
110000
performance
duces it could
the group is
Not for profit organisation
Do not have external sharehold providing risk capital for the business
Asra
They do not distribute dividends so any profit generated is retained by the Asra
business as a further source of capital Asra
Asra
Value for money Asra
Asra
Effectiveness - the extent to which the organisation acheives its objectives Asra
Asra
Economy- the ability of the organisation to optimise the use of its productive Asra
resource Asra
Asra
Efficiency - the output of the organisation per unit of resource used Asra
Asra
Economy relates to an input measure
Effeciency relates to the max output from the input
Effectiveness is an output measure.

Asra Asra Asra Asra Asra Asra Asra Asra
8/21/2019
PM revision class
Reporting on non financial performance
Building block model
Determinants
Dimensions Goals
Results
Building block is mostly used in the service industry
KPIs is nothing but the financial performance indicator
Answer questions in the ratio interpretations?
1. What has happened ?

2. Why it has happened ? Try to link up the points and don't repeat points What are the factors has l
3. What is the impact /so ? Try to provide a solution.
Cost centres - high low techniques, learning curve, and relevant cost
Profit centre - ratio analysis
Learning curve-
Sensitivity analysis -
Take a cost sheet
Relevant cost are the extension of the controllability factor
Opportunity cost is the sacrifice made in order to choosing one alternative.

Performance measurement
15-20 marks
Use headding concept
Decide what areas you are going to discuss as per the requirement of the question
It depends on the weightage of marks
Don’t give too much weightage for calculations
Some times heading are given in the question so use it .
Use the clues in the question
Write the numericals first it helps to undestand to the problem in the company
Give answers relevant the the question
It could be financial , non financial or both.
In 20 marks question - 8 min to read 3-4 minutes for desingining the answer
Numbers will tell the story of the company
Link the calculatios of the senario
Provide a link to the measures
Give reasons for your calculation
Write with the logic and link the calculations
Learn the verbs
Give conclusion as it has 1 mark
Write the formula and calculation for the calculation part
Write the answer in a way that makes it easy for the marker to evaluate
Areas that are likely to come in exam
ABC costing
Variance analysis
Pricing
Throughput
Linear programming
Performance measurement
Transfer pricing
For section B problem is that people are not reading the requirement and answer.
What are the factors has lead to the result.

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Example 1 : (previous year paper)

Fixed cost are 9000$

Minimum units sold to achieve the BE is

2. BEP in units 16667

4. Req Profit Is 40000 233333

Cost Card Workings

Variable Production cost

Original or Fixed budget (10000 units)

The totalbudgeted fixed overheads for the firm are 7,12,000$

The firm is considering to go for AB Amount

Machine hours per unit 3

Machine Hours 18000

Cost related to the Products $ 18,000.00

Total cost per unit under ABC A

A company bugeted to produce 3000

Multi product Breakeven Graph

a)Weighted Average C/S= 0.45

b)Breakeven Sales Revenue =

c) Margin of Safety = Budgeted Sales - Breakeven sales /Budgeted Sales

D)Required Revenue = (Fixed cost + profit required)/weighted C/s Ratio

Required Profit 900000

i) Breakvevn revenue using weighted average c/s ratio

Breakveven Revenue $ 875,000

ii) Revenue Required= $ 1,750,000

tments, for one department the Rent is 2000$ ( it is allocation)

Calculate the following

es were made was 32 minutes with no hold up's

roducy y makes a contribution of 4$

Contribution per unit

ployee staff to become freelance

the Level of the Operating risk.

Annual output Total machine hours

he firm continueous to absorb overheads on a machine hour basis.

Sales Revenue C/s Ratio

700 Selling Price

Cost Driver Rates

Allocation of OH to each Product

Total Cost per Unit under ABC

Total Cost per Unit 79.25

Exam kit 2 marks

Procuction Cost Centres

Total OH Cost to be apportioned 8400

Exam kit 2 marks

Test your undestanding 3

Product time on bottleneck resource 1.5 hours

Cost per factory hour $ 20.00

Throughput per factory hour 3.5

Revision kit Q56.

Revision kit Q57.

Situation A as it improves eisting throughput per unit

Step 1 -Find out bottlenceck constrain Machine time= 400 hours

Step2 - Find out throughpur per unti

Step 3 - Throughput per bottle neck time taken

step 5 allocation of resources

Return per factory hour

Productuin - 5 days a week

Total fac cost= cost of labour+ FOH

$12 m each year

skilled worker trained on one machine only