SUGGESTED ANSWERS TO QUESTIONS

SECTION – A

1. 2X10 = 20 Marks
(i) (B)
(ii) (C)
(iii) (A)
(iv) (B)
(v) (B)
(vi) (C)
(vii) (C)
(viii) (B)
(ix) (D)
(x) (D)

SECTION –B
(Answer any five questions)
2 (a) : 10 Marks
Time required to achieve the target profit = 21,600 hours

2 (b) : 4+2 = 6 Marks

Relevant cost of Material and the Job = Rs. 16,000
Decision: Contract should be accepted since offered is Rs 22000 in relation to relevant cost of Rs 16000.
Reasons for Relevancy of Cost Elements :
(i) Material A is not yet owned. It would have to be purchased in full at the replacement cost of
Rs.6.00 per unit.
(ii) Material B is used by the company regularly. There is already existing a stock of 600 units. If
these are used in the contract, a further 600 units would have to be purchased.
Relevant cost is therefore 1000 units at the replacement.
(iii) Material C : 1000 units of material C are, required and 700 units are already in stock. If it is used
for the contract, a further 300 units will have to be purchased at a replacement cost of Rs.4.00
each. The existing stock of 700 units will not replaced. If they are used for the contract, they
cannot be used @ Rs.2.50 each unit. The realisable value these 700 @ RS. 2.50 per units represent
an opportunity cost of sales revenue forgone.
(iv) Material D is already in stock and will not be replaced. There is an opportunity cost of using D in
the contract, because there are alternative opportunities either to sell the existing stock for Rs. 6
per unit (Rs.1200 in total) or avoid other purchases (of material E) which cost
300x5=Rs.1500,since substitution for E is more beneficial. Rs 1500 is the opportunity cost.

3: 3+3+3+7 = 16 Marks
(i)
Increase in Net Profit = Rs. 375000
Decision : It is advisable for the company to accept the order of 60000 moulded toys as it will increase
its profit by Rs. 375000.

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(ii)
Rs. (Lacs)
Profit from 540000 cans 12.40
Alternatively, the production would be 420000 cans and 60000
moulded toys
Profit from 420000 cans 5.20
Profit from 60000 moulded toys 3.75
Total profit 8.95
Decision:
The production of 120000 additional cans instead of 60000 moulded toys will result an additional profit
of Rs. 3.45 lacs (Rs. 12.40 lacs - Rs. 8.95 lacs). Therefore, the company is advised not to accept the order
of manufacturing moulded toys.

(iii)
Let the minimum excess capacity needed to justify the manufacturing of any portion of the moulded
toys order be A.
If toys are manufactured, the profit is = (Rs. 60 – Rs.50) A
– Rs. 225000
and, if toys are subcontracted, the profit is =(Rs.60– Rs.57.50) A indifference point would be 10A -
Rs. 225000 = 2.5 A
or A = 30000 moulded toys
Toys produced per hour = 15 toys
Therefore, 2000 (30000 toys / 15 toys) excess machine hours are required to justify manufacturing of
toys by the company, instead of sub-contracting.

(iv)
Profit under existing production plan :
Rs. (Lacs)
Contribution from 450000 Cans 27.00
Contribution from 45000 Toys 4.50
Total contribution 31.50
Less: Fixed cost 22.25
Profit 9.25
Profit from 15000 sub-contracted toys 0.375
Total profit 9.625
If demand was accurately forecasted and 480000 cans were manufactured, excess machine hour
capacity available was 2000 hrs such excess being the point of indifference i.e. profit from toys
order would be the same by either manufacturing 30000 toys or sub-contracting them along with the
rest of 30000 toys.
Profit under properly negotiated production plan :
(Rs. Lacs)
Contribution from 480000 Cans 28.80
Less : Fixed cost 20.00
Profit 8.80
Profit from toys 1.50
Total profit 10.30
Therefore, the loss for improper prediction and negotiation is Rs. 1030000 – Rs. 962500
= Rs. 67500

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4 (a) : 5+4+3 = 12 Marks

(i) Standard Material Cost per Unit : =Rs 6

Standard Wage rate per Unit : = Rs 9
Standard Variable overhead per unit: = Rs 15
Standard Fixed overhead rate per Unit: = Rs 7.50

(ii) Fixed overhead Volume Variance: Rs 1500 (Adv.)

Sales Volume Variance: = Rs 9000 (Adv.)
Sales Price Variance: = Rs 7500 (Fav)
Standard Profit: = Rs 36000

(iii) Statement Showing Reconciliation of the Standard Profit and the Actual Profit :
Rs
Standard Profit 36000
Add : Sales Price Variance (Favourable) 7500
43500
Add :Favourable Cost Variances :
Wages Rate Variance 450
Variable overhead expenses 3000 3450
Less : Adverse Cost Variances 46950
Material price 70
Material usage 130
Labour efficiency 2250
Variable overhead efficiency 3500
Fixed overhead Expense 2500 8450
38500
Less :Fixed overhead volume variance (Adverse) 1500
Actual Profit 37000

4. (b) : 4 Marks
The requisites for installation of a Uniform Costing are enumerated below:
(i) There should be α spirit of mutual trust, co-operation and a policy of give and fake amongst the
participating members.
(ii) There should be a free exchange of ideas and methods.
(iii) The bigger units should be prepared to share with the smaller ones, improvements, achievements of
efficiency, benefits of research and know-how.
(iv) There should not be any hiding or withholding of information.
There should be no rivalry or sense of jealousy amongst the members

5. (a) : 10 Marks

(i) Profitability Under Conventional Accounting System.

Products
Total F G H
Sales – Units / Production (Goods 108000 25000 56000 27000
Units)
Gross Margin (Rs) 533080 147600 278200 107280
Production Overheads (Rs) 225250 52141 116796 56313

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 Selling Over heads (Rs) 162000 37500 84000 40500
Sub-Total Overhead (Rs) 387250 89641 200796 96813
Net Profit (Rs) 145830 57959 77404 10467
Ranking II I III

(ii) Profitability Under Activity Based Costing (ABC)

Products
F G H
Sales – Units / Production (Goods Units) 25000 56000 27000
Gross Margin (Rs) 147600 278200 107280
Production Over head (Rs) 57000 94000 74250
Selling Overheads 5787 122963 33250
Sub-Total Overheads 62787 216963 107500
Net Profit 84813 61237 (220)
Ranking I II III

5. (b) : 6 Marks
Ranking of products when availability of time is the key factor:

Products P Q R S
Market Price (Rs) 150 146 140 130
Less : Variable Cost (Rs) 130 100 90 85
Contribution per unit (Rs) 20 46 50 45
Labour hours per unit 3 4 2 3
Contribution / Labour hour (Rs) 6.66 11.5 25 15
Ranking IV III I II
Maximum demand (units) 3360 3000 2760 1920
Total no. of hours 10080 12000 5520 5760
Allocation of 24000 hours on the basis of ranking 720* 12000 5520 5760
* Balancing figure

Transfer price = Rs 118.34

6. (a) : 8 Marks

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 In row Z, column3, should be 3 instead of 9.

It should be step 3 instead of 2.

6. (b) : (2+4)+(1+1)= 8 Marks

The probabilities of occurrence of Major, Minor and Medium defects are 0.15, 020 and 0.10 respectively.
So, tile numbers 00 – 99 are allocated in proportion to the probabilities associated with each of the three
defects.
Defect Major Defect Minor Defect Medium
Exists RN Assigned Exists ? RN Assigned Exists ? RN Assigned
Yes 00 – 14 Yes 00 – 19 Yes 00 – 09
No 15 – 99 No 20 – 99 No 10 – 99
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(i) Simulation of output of the assembly line for 10 items :
Item No. RN : RN : RN : Defect Rework time Scrap
Defect Defect Defect Exist or (in min.)
Major Minor Medium Not
1. 48 47 82 None Nil --
2. 55 36 95 None Nil --
3. 91 57 18 None Nil --
4. 40 04 96 Minor 15 --
5. 93 79 20 None Nil --
6. 01 55 84 Major Nil Scrap
7. 83 10 56 Minor 15 --
8. 63 13 11 Minor 15 --
9. 47 57 52 None Nil --
10. 52 09 03 Minor & 15 + 30 = 45 --
Medium

(ii) During the simulated period, 5 items had defect and other 5 items had not defects.
One item was scrapped.
Total reworked time is required for four items = 90 minutes

7. (a) : 4+6 = 10 Marks

Critical Path with duration = A -> D -> F, 34 days

Acti
Normal time Crash Time Crash Cost Normal cost Cost Slope
vity
Days Days Rs. Rs. Rs.
A 12 8 14,000 10,000 1,000
B 10 10 5,000 5,000 -
C - - - - -
D 6 4 5,000 4,000 500
E 16 14 12,000 9,000 1,500
F 16 8 8,000 3,200 600

Step Critical No of Activity No of Cost slope Crash cost Cumulative

Path Days reduced days Crash cost
1 ADF 34 D 2 500 1000 1000
2 ADF 32 F 4 600 2400 3400
3 ADF/ 28 A 2 1000 2000 5400
ACE
4 All Paths 26 F,E 2 2100 4200 9600

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Revised time 24 days; Total Cost Rs.40,800.

7. (b) : 6 Marks
Let x1 and x2 be the no.of bottles of medicine A and B to be manufactured.
i)Objective function is Maximize Z= 8x1 + 7x2
S.T constraints:
Bottle capacity constraint= x1 + x2 ≤ 45,000
Hour constraint= (3x1/1000) + (x2/1000) ≤ 66
Or 3x1 + x2 ≤ 66,000
Ingredient constraint for Medicine A= x1 ≤ 20,000
Ingredient constraint for Medicine B= x2 ≤ 40,000

Answer any four from the following

4X4 = 16 Marks
8. (a) :
Lean Accounting :
Lean Accounting is a system of providing information in plain and simple terms for management decision-
making and elimination of wasteful processes.
It supports lean manufacturing system whereby decisions are taken based on relevant parameters.
It supports value stream measurements and value based pricing.

8. (b) :
Pareto analysis in Quality Management:
Pareto analysis is based on the principle that 80% of the volume relates to 20 % value and vice - versa. In
the context of problem solving, it says that 80% of the problems can be solved by taking 20% effort. The
80 - 20 rule can be modified to 70 - 30 or 75 - 25, etc., but the essence is that larger volumes are
concentrated on a smaller area of attention. When resources are limited and the problems seem very large,
this approach gives a good analysis for an action plan that could be effective.

The problems or say defects are arranged according to types. They are arranged in decreasing order of
percentages and the cumulative is found out. When the cumulative reaches 80%, (or 70 to 80%) it is often
observed that a few actions of quality control will address these issues. Then, the available resource for
quality control can be applied to effectively solve most of the problems.

8. (c) :
Areas where back flush Accounting is useful:
Back flush costing is generally used by companies that keep low levels of inventory and experience high
turnover in inventory. It is because costs are still recorded relatively close to the day they are incurred.
Companies with slow inventory turnover tend to record costs as they are incurred, as the product may
remain unsold for a longer duration of time.
The back flush costing method works particularly well, where many different costs go into the production
of a good. In such an instance, it can simplify the accounting process significantly. As a result, many
manufacturing companies with complex production processes use back flush costing. However, companies
that sell more customized products are less suited to a back flush costing method, as the unit cost will vary.

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8. (d) :
Enumerate the situations where fixed costs become relevant for decision marking:
In the following circumstances, fixed costs become relevant for decision making:
(i) When Fixed Costs are specifically incurred for any contract
(ii) When fixed costs are incremental in nature
(iii) When the fixed portion of semi variable cost whereas due to change in level of activity
consequent to acceptance of a contract.
(iv) When fixed costs are avoidable or discretionary.
(v) When fixed costs are such that one cost is incurred in lieu of another (the difference in costs
will be relevant for decision-making)
8. (e) :
Sealed Bid Pricing:
The competitive pricing method is adopted in situations where firms compete for jobs on the basis of bids.
The bid is the firms offer price and it is a prime example of pricing based on the expectations of how
competitors will price rather than on a rigid relation based on the concerns own costs or demand. The
objective of the firm in bidding situation is to get the contract and therefore it tries to set its prices lower
than the other bidding firms.