Test Series: April, 2023

MOCK TEST PAPER – 2

FINAL COURSE: GROUP – II
PAPER – 5: STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION
Question No. 1 is compulsory
Answer any four questions from the remaining five questions
Time Allowed – 3 Hours Maximum Marks – 100

1. The Crafted Mobile Applications Ltd. (‘the company’), is an Indian company, crafting the various mobile
applications. Recently the company is going to introduce three new applications, all belonging to
different areas and having various features. Details for the same is given below –
The first application is ‘Pic X Chat’, a social media application. In this application, users can upload
images, videos, write something, chat with friends, follow friends, make a group, audio/ video call, post
updates etc. Business users can upload their advertisements too. These are similar features as available
in other social media applications.
Additionally, in this application users can video call with up to 15 members at a time. User can hide
some of the conversation of particular friend, it can be seen by him/her by unhiding it whenever he/she
wants. This application features ‘Child Safe Mode’ to save children from showing any inappropriate
content for them, it will be beneficial for users having children or younger siblings.
Further, it restricts adult content in the post as well as chat. Not to compromise privacy of the user, chats
are end-to-end encrypted, but the application has feature that highlights the listed words, which are
inappropriate or vulgar, to the company, if used in the post or chat and if it is found, the company can
restrict that content. This feature included after the news of inappropriate chats in one of the groups in
the popular social media application. That news made some parents think about the use of mobile
phones by their children and that is why the company hopes that its application would be successful as
it has numerous different and crucial features than any other application. The market survey also
suggested that people would divert towards this application and consequently its demand will be higher.
Hence, the company wants to charge ` 75-150 per click on the advertisement while in the market, rate
is ` 50-100 per click from business users. However, for other users it would be free of cost like other
applications.
The second application is the ‘Remote Meet’, which is a remote video calling application. It provides
similar features like other current video calling applications available in the market. This application is
‘Made in India’ and has more safeguards compared to its competitor. Generally, basic version of these
types of applications is free of charge and for every additional feature, company charges price starting
from ` 100. But the charges of the company are 20% more than its competitors.
The third application is the ‘Mobile Dr.’ which is a unique featured application. User of the application
can measure his/her temperature through their device and on that basis; it suggests whether the user
has any symptoms of any disease. Further, it can identify coughing and sneezing by the person who
holds the mobile phone. It can also measure heart beats and pulse beats. It also helps in identifying
normal fever.
From the above tests, it can suggest next moves to be taken i.e. symptoms of any disease and need of
further health check-up, suggestions of nearby doctors, medical stores, medicines etc. It can also remind
the user’s regular check-up of sugar, blood pressure, full body check-up, eye testing etc.
It guides in exercise, food habits, water drinking habits etc. It reminds to drink the water as well. It
suggests needed calories, proteins, vitamins etc. All these suggestions would be based on height,
weight, and other personal details.
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 To use this application, the mobile phone needs some extra features which will be added in the
subsequent production of most of all mobile phones. This application is approved by the Doctors’
Association and the Government and suggested by them to use. After the outbreak of the corona virus,
the application has potential to be adapted by many users.
In the era of free applications, the company would charge ` 500 per year from the user as subscription
fees. For advertisements on this application, the company would charge 25% -30% higher than the
general market rate of advertisements in other applications.
Required
EXPLAIN and EVALUATE the pricing strategy of each new product introduced by the company.
(3 + 17 = 20 Marks)
2. Art Décor is a marble sculpture making company based out of Jaipur, Rajasthan. It has been making
miniature figurines (small statues) for the past many years. It now plans to foray into making larger sizes
statues that can be displayed in gardens, resorts or large corporate offices. As a trial it has asked its
main designer Raj to come up with an appropriate design model that would appeal to such customers.
There is already a competitive market for such larger size statues. However, the management of Art
Décor has a skilled artist like Raj who can come up with attractive designs for customers. Within the
month, Raj has come up with the appropriate design. Jay is the product manager who likes the design
but wants to price it competitively in the market. The costing for 200 statues is as below:
Cost Amount (`)
Design cost 5,00,000
Direct materials 20,00,000
Direct manufacturing labour 25,00,000
Variable manufacturing overhead 20,00,000
Fixed manufacturing overhead 5,00,000
Marketing 10,00,000
Required
Reply on following points in brief–
(i) The target profit required is 25% of revenue. If the sale price per statue is ` 45,000 what is the
target cost per statue? (2 Marks)
(ii) What is the cost estimate per unit as per the cost information given above? (2 Marks)
(iii) Given your calculations in (i) and (ii) has the target cost per statue been met? (1 Mark)
(iv) During the course of discussions, Jay the product manager found that the designer Raj plans to
use high quality marble for these statues. Jay suggests that he use a much lower quality marble
material for the statues. This would reduce the material cost by 60%. Skilled labour hours required
will also be reduced resulting in direct manufacturing labour to reduce by 50%. Accordingly, what
would the revised estimate cost per unit be if value engineering is applied? (2 Marks)
(v) Given your calculations in (i) and (iv) has the target cost per statue been met? (1 Mark)
(vi) Raj the designer does not agree with Jay’s proposition given in (iv) above. He feels that inferior
quality material would affect the durability of the statue and hence would affect the dema nd for it
in the long run. Instead of value engineering, he feels that 10% increased spending in marketing
can increase the selling price per statue to `50,000 per statue. The target profit required is 25% of
revenue. Given this scenario, what is the target cost per statue? (2 Marks)
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 (vii) Given the situation in (vi) what would be revised estimated cost per statue after increasing the
spend on marketing? (2 Marks)
(viii) Given your calculations in (vi) and (vii) has the target cost per statue been met? (1 Mark)
(ix) What is the estimate profit earned per statue as per (iv) (adopting value engineering) and (vi)
(increasing marketing spend)? (2 Marks)
(x) Briefly Advice on this scenario. (5 Marks)
Note: Targeted Verbs- Compute and Advise.
3. Gold Coast community operates Homelessness Services (HS) on a not-for-profit basis as a local
solution to local housing needs. The primary objective is to meet the accommodation needs of persons
within its locality targeting those living in the low/middle income groups and senior citizens.
Accommodation is basically furnished; it consists of a small house, with kitchen, bathroom, bedroom/(s),
and a sitting room. HS manages 450 such houses across various localities. Exclusive Services (ES) is
a profit-seeking organisation which provides rented accommodation to the public. ES manages 200 such
houses across localities similar to HS’ operations.
Income and Expenditure accounts for the year ended 31 st March 2023 were as follows:
HS (`) ES (`)
Rent Received 1,02,98,600 1,09,98,000
Less:
Employee Costs 24,00,000 38,00,000
Planned Maintenance and Substantial Repairs 34,19,500 10,41,000
Running Repairs 23,91,600 6,38,000
Miscellaneous Operating Costs 15,27,500 11,75,000
Insurance, Property Taxes, and Interest etc. 13,15,500 18,75,000
Operating (Deficit)/ Surplus (7,55,500) 24,69,000
Operating Information in respect of the year ended 31 st March 2023 was as follows:
House and rental information:
Size of House Number of Houses Rent per Week (`)
HS ES HS ES
1 Bedroom + 40 20 400 750
2 Bedrooms + 80 40 450 800
3 Bedrooms + 250 140 500 1,175
4 Bedrooms + 80 Nil 700 N.A.
HS had certain houses that were unoccupied during part of the year. The rents lost as a consequence
of unoccupied properties amounted to `18,17,400. ES did not have any unoccupied houses at any time
during the year.
Employees were paid as follows:
Number of Staff Salary per Staff Member (`) per annum
HS ES HS ES
1 2 3,00,000 5,00,000
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 2 2 2,50,000 3,00,000
4 11 2,00,000 2,00,000
8 - 1,00,000 -
Planned maintenance and substantial repairs undertaken:
Nature of Work Number of Houses Cost per House (`)
HS ES HS ES
Miscellaneous Building Work 10 - 12,500 -
Sanitary Fittings (Kitchen + Bathroom) 45 5 26,100 52,200
[all are the same size]
AC Upgrades/ Replacements 8 - 15,000 -
Replacement of Wooden Structure for 50 13 40,000 60,000
3-Bedroomed Houses
Running Repairs Information:
Classification of Repair Number of Repair Undertaken Total Cost (`)
HS ES HS
Emergency 480 160 6,72,000
Urgent 990 376 11,28,000
Non-urgent 560 102 5,91,600
Each repair undertaken by ES costs the same irrespective of the classification of repair.
Required
(i) Critically EVALUATE how the management of Homelessness Services could measure the ‘Value
for Money’ of its service provision during the year ended 31 March 2021. (14 Marks)
(ii) IDENTIFY, 1 performance measures in relation to Flexibility and Service Quality (dimensions of
performance measurement). (2 Marks)
(iii) ANALYSE, 2 performance measures relating to ‘Cost and Efficiency’ that could be utilised by the
management of Homelessness Services when comparing its operating performance against that
achieved by Exclusive Services. (4 Marks)
4. (a) Z Limited manufactures three products by using a single machine which has 2,40,000 bottleneck
hours per month. The details with regard to the three products are as under:
Products
P1 P2 P3
Selling price per unit (`) 170 140 180
Direct Material cost (`) 80 90 120
Direct Labour cost (`) 30 25 35
Other Expenses (`) 10 10 5
Maximum Demand (units) 20000 15000 25000
Time required per unit (hours) 6 4 3

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 Required
Based on the concept of throughput accounting, CALCULATE the optimum number of units to be
produced for each product. (5 Marks)
(b) The MD of PQR Limited, a 150 persons engineering company, decided it was time to fire the
company's biggest client. Although the client provided close to 60% of the company's annual
revenue, PQR Limited decided that dropping this client was necessary. The client was profitable.
The MD of PQR Limited stated "We cannot be a great place to work without employees, and this
client was bullying my employees. Its demands for turnaround were impossible to meet even with
people working seven days a week. No client is worth losing my valued employees" .
The initial impact on revenues was significant. However, PQR Limited was able to cut costs and
obtain new customers to fill the void. Moreover, the dropped client later gave PQR Limited two
projects on more equitable terms.
Required
(i) DISCUSS the reasons behind dropping of a profitable client by PQR Limited. (5 Marks)
OR
(ii) STATE five qualitative factors that management should consider in outsourcing and make or
buy decisions. (5 Marks)
(c) A manufacturing company manufactures a product and sells its through four dealers X1, X2, X3 and
X4. The transaction details with the dealers during a period is given below:
X1 X2 X3 X4
Selling price p.u. (`) 200 200 200 200
No. of units sold 2000 3000 5000 4000
Size of order (units) 500 300 250 400
Units delivered per delivery 250 300 250 200
No. of sales visits 8 3 10 2
No. of speed deliveries in total deliveries 1 - 2 -
Distance per delivery (km.) 15 20 10 30
No. of warranty complaints - 8 - 9
Additional information:
Order processing cost ` 50 per order
Cost per sales visit ` 2,000
Product handling expenses ` 0.20 p.u.
Ordinary delivery cost per km `3
Speed delivery cost per km `5
Cost of production 60% of sales
Average expenses per warranty complaint ` 6,000
Required
COMMENT on the profitability for each dealer. FIND which dealer is the most profitable.
(6+3+1 = 10 Marks)
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5. (a) Golden paints is a manufacturer of industrial dyes. It has received an order for 200 kgs of powder
dye that needs to be customized to certain specifications. The job would require the following
materials:
Material Total units Units Book value of Realizable Replacement
required already in the units in value cost
inventory inventory (`per (`per unit) (`per unit)
unit)
M 2,000 0 NA NA 8
N 3,000 1,200 7 8 10
O 2,000 1,400 12 9 14
P 500 500 9 12 15
I) Material N is used regularly in production of all types of dyes that Golden plaints produces.
Therefore, any stock used towards this job order would need to be replaced to meet other
production demands.
II) Inventory of material O and P are from stock that was purchased in excess previously. Material
O has no other use other than for this special order. Material P can be used as a substitute
for 700 units of material Z which currently costs `11 per unit. The company does not have any
inventory of material Z currently.
Required
ANALYSE the relevant costs of material while deciding whether to accept the order or not?
(10 Marks)
(b) Star Ltd. is engaged in marketing of wide range of consumer goods. A, B, C and D are the zonal
sales officers and the company fixes annual sale target for them individually.
You are furnished with the following :
(1) The standard costs of sales target in respect of A, B, C and D are ` 5,82,250,
` 4,50,500, ` 4,93,000 and ` 5,35,500 respectively.
(2) A, B, C and D respectively earned ` 40,800, ` 32,400, ` 35,520 and ` 38,700 as commission
at 6% on actual sales effected by them during the previous year.
(3) The relevant variances as computed by a qualified cost accountant are as follows:
A B C D
Particulars
(`) (`) (`) (`)
Sales Price Variance 6,000(F) 8,000(A) 7,000(A) 5,000(A)
Sales Volume Variance 11,000(A) 18,000(F) 19,000(F) 20,000(F)
Sales Margin Mix Variance 10,750(A) 5,500(F) 12,000(F) 9,500(A)
Assume sales margin quantity variance is zero.
Required
(i) COMPUTE the amount of sales target fixed and the actual amount of margin earned in case
of each of the zonal sales officer. (5 Marks)
(ii) FIND whose performance is the best by taking three relevant base factors. (4+1 = 5 Marks)

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6. (a) The CEO of P Limited is concerned with the amounts of resources currently spent on customers
warranty claims. Each box of its product is printed with the logo: “satisfaction guaranteed or your
money back”. P is having difficulty competing with X Limited because it does not have the reputation
for high quality that X Limited enjoys. Since the warranty claims are so high, the CEO of P Limited
would like to assess what costs are being incurred to ensure the quality of the product. Following
information is collected from various departments within the company relating to 2022-23:
`
Warranty claims 1,27,500
Employee training costs 36,000
Rework 90,000
Lost profits from lost customers due to impaired reputation 2,43,000
Cost of rejected units 15,000
Sales return processing 52,500
Testing 51,000
For the year 2023-24, the CEO is considering spending the following amounts on a new quality
programme:
`
Inspect raw material 36,000
Reengineer the production process to improve product quality 2,25,000
Supplier screening and certification 9,000
Preventive maintenance on plant equipment 21,000
P expects the new quality programme to save costs by the following amounts:
`
Reduction in lost profits from lost sales due to impaired reputation 2,40,000
Reduction in rework costs 75,000
Reduction in warranty costs 97,500
Reduction in sales return processing 45,000
Required
(i) PREPARE a Cost of Quality Statement for the year 2022-23 showing the percentage of the
total costs of quality incurred in each cost category. (3 Marks)
(ii) PREPARE a cost benefit analysis of the new quality programme showing how the quality
initiative will affect each cost category. (3 Marks)
(iii) STATE how the manager trade-offs among the four categories of quality costs. (4 Marks)
(b) Established in the year 1991, Mario Woods Private Limited (MWPL) is one of the distinguished
manufacturers and suppliers of an unlimited array of Wooden Furniture Items. Product compilation
comprises of Modular Furniture, Workstations, and Cafeteria Furniture. Moreover, it is also
engaged in presenting Furniture Services that include Interior Fit Out, Office Interiors and
Corporate Interior Designing. Since inception, it has strived to proffer an excellent blend of
optimum quality and price, and successfully established the company as the preferre d choice of
customers in the past years. This is the reason that its products and services are applauded in the

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 industry for its flawlessness.
At MWPL, a world-class infrastructure is set up with different types of latest technology based
machines and equipment, which provide great support in hassle-free production and storage of
the proffered assortment. Besides the spacious workspace, it has recruited a team of skilled and
experienced professionals, who are magnificently trained to understand and meet th e diverse
client requirements within the committed time period. It aims to attain complete client satisfaction
and put in its best efforts to achieve the same by offering outstanding product range & feasible
services.
MWPL’s Budgeting Process for Sales
1) Each salesgirl makes a customer-wise listing of sales for the last few years. Based on this
information and her knowledge about customer’s requirements, she determines an overall
sales goal.
2) The sale manager, W Robert, gathers all this information and modifies it a bit. Particularly,
W looks at variance in sales growth and modifies low projections to be in line with the
average. He, of course, discusses this correction with the concerned salesgirl. The usual
approach is to hold up the other forecasts and attribute lack of sales growth to lower talent.
3) W then meets with J Donald, Managing Director. By this time, J already back out of his sales
expectations for next year based on his desired profit. J discusses the overall target with the
W. The usual result is a 7% to 10% increase in projected sales, which the W allocates among
the salesgirls based on their past performance.
4) Of course, J desires that the W discuss and negotiate any alteration with the sales force. He
believes that with appropriate logics, not high but attainable targets for his sales team can
be met.
Required
(i) DISCUSS the participative nature of the sales budgeting process at MWPL. (4 Marks)
(ii) ADVISE on best approach from MWPL’s perspective that may be adopted. (6 Marks)

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