PAPER – 15 : STRATEGIC COST MANAGEMENT – DECISION MAKING

SUGGESTED ANSWERS
SECTION – A

1.
(i) (A)
(ii) (C)
(iii) (D)
(iv) (D)
(v) (C)
(vi) (B)
(vii) (D)
(viii) (A)
(ix) (B)
(x) (A)

SECTION – B
2. (a)
(i) The Budgeted life Cycle Operating Income = D 44,00,000
Operating Loss for increase sales by 15% through 10% reduction in selling price = D 50,65,000

(ii) Advice:
Since Reducing the price by 10% will incurred loss of D 50.65 lakh, i.e Profit will decrease by
D 94.65 Lakh, the Company should not go for reduction in selling price by 10%.

2 (b)
Minimum price to be charged = D 110

3.
(i)
3,00,000 tubes Additional 50,000 tubes Additional 1,50,000 tubes
Make Buy Make Buy Make Buy
Cost (D) 3,82,500 4,05,000 93,750 67,500 2,21,250 2,02,500
If the company increases production to 350000 tubes of UVO, 300000 tubes should be made in
the factory and additional 50000 tubes should be purchased at D 67500.
The company increases production to 450000 tubes of UV0, 300000 empty tubes should be made
in the factory and additional 150000 tubes should be purchased at a cost of D 202500.
(ii) Minimum additional quantity of empty tubes to be made to recover the additional fixed costs
= 4,00,000 tubes.
Thus the company should sell 300000 + 400000 = 700000 tubes of UVO per month to warrant
justification for the installation of the new machine for the manufacture of empty tubes.
(iii) Evaluation of the profitability on sale of UVO at the three levels
300000 tubes 350000 tubes 450000 tubes
D D D
Sales 3000000 3500000 4500000
Total costs 2925000 3341250 4173750
Profit 75000 158750 326250
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4 (a)
(i) Material Price Variance = D 1137 (A)
(ii) Material Usage Variance = D 440 (A)
(iii) Material Yield Variance = D 682 (A)
(iv) Material mix variance = D 242 (F)
(v) Material cost variance = D 1,577 (A)

4 (b)
The benefits derived from Inter-firm Comparison are appended below:
Inter-firm Comparison makes the management of the organization aware of strengths and weakness in
relation to other orgnaisaions in same industry.
(i) As only the significant items are reported to the Management time and efforts are not unnecessary
wasted.
(ii) The management is able to keep up to data information of the trends and ratios and it becomes
easier for them to take the necessary steps for improvement.
(iii) It develops cost consciousness among the members of the industry.
(iv) Information about the organisation is made available freely without the fear of disclosure of
confidential data to outside market or public.
(v) Specialized knowledge and experience of professionally run and successful organisations are
made available to smaller units who can take the advantages it may be possible for them to have
such an infrastructure.
(vi) The industry as a whole benefits from the process due to increased productivity, standardization of
products elimination of unfair comparison and the trade practices.
(vii) Reliable and collective data enhance the organising power in deal in with various authorities and
Government bodies.
(viii) Inter firm comparison assists in a big way in identifying industry sickness and gives a timely
warning so that effective remedial steps can be taken to save the organisation.

5 (a)
(i) The Manager of Division A should not accept any price below 19.08 per unit. Hence he should not
transfer at D 18 per unit.
(ii) The lowest price is D 19.08 per unit.

Decision:
Manager of Division A should not transfer at D 18 per unit to Division B since it lowers his rate of return.
The lowest transfer price acceptable to A is the one that maintains its rate of return of 23.85% without
selling to Division B.

5 (b) :
Net Benefit due to JIT policy D 377200

Conclusion:
The JIT policy for New BOS20 may be implemented, as there is a net benefit of D 377200 per annum.

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6. (a)
(i) Average number of scooters waiting in the factory = 1.4 per day
(ii) Average number of empty space on the lorry = 0.6 per day

6. (b)
(i) & (ii) The optimal assignment is as shown below:

Operator Product Profit (D)

1 D 300
2 B 450
3 C 150
4 A 240
TOTAL 1140

7 (a)
(i)

Expected
Task
task duration
A 5
B 12
C 6
D 3
E 2
F 5
G 14
H 22

(ii)

Critical Path = B  G  H
Expected Duration = 48 Days.
Standard deviation of overall duration = 3.27 days
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 (iii) Probability of finishing the Project in 54 days = 96.67 %

(iv) Probability of finishing the Project in 54 days = 92.222 %

This has fallen due to increase variability of the activities on the Critical path.

7 (b)
Let 1 ,  2 ,  3 , and  4 denote the amount of funds to be invested in government bonds, blue Cip Stocks,
speculative stocks and short terms deposits respectively. Let Z denote the total expected return.
The linear programming model for the Mutual Fund Company is formulated as below:
Objective Function:
Maximize Z  0.14 1  0.19 2  0.23 3  0.12 4
Subject to the Constraints
Maximize 1  2  3  4  2000000
 4  200000
 30 1  18 2  6 3  36 4  0
 0.2 1  0.2 2  0.8 3  0.2 4  0

Where 1  0, 2  0, 3  0 and 4  0

8. (a)
Where Product can be sold below the Marginal Cost:
The Situations where the product can be sold below Marginal Cost are enumerated below :

(i) When one has already produced and paid for the units and:
• There is no more market for the product at any price other than the one is below the marginal cost.
• Any organisation cannot keep the business open to clear the rest of the inventory because any profit
you may see is not enough to cover the cost to stay open.
• As a loss leader to attract customers that can be up sold. Works only if the customer margin- sum of
contribution margins from the basket of products and services customers buy is more than other
available options.

(ii) When one has produced each unit on demand (truly marginal)
• Only case is as a loss leader.
• Any other reason not only generates a loss in the short term but also sets really bad reference price in
the minds of customers. It is not going to be easy to improve prices when the seller gives it away at
very low price.
• The seller has to make sure that the cost is truly marginal cost and does not include overheads and
COGS (Cost of Goods Sold) is not MC (Marginal Cost).

8. (b)
Applications of Learning Curve are as follows:
Learning curve helps to analyze CVP relationship during familiarization phase of product or process and
thus is useful for cost estimates. It also assists in forecasting.
Learning curve provides the base to set standards for the learning phase.
It helps the Government to negotiate contracts. The Government receives full advantage of the decreasing
unit cost in establishing the contract price.
Cost data adjusted for learning effect helps in proper pricing decisions.

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8. (c.)
Kaizen Costing:
“Kaizen” is a Japanese term for making improvements to a process through small incremental amounts
rather than through large innovation. Kaizen Costing focuses on the production process and Cost reductions
are derived primarily though the efficiency of the production process. As the products are already in the
manufacturing stage of their life Cycles, the Potential Cost Reductions are smaller – the aim of Kaizen
costing being to reduced the Cost of Components and products by a pre–specified amount. Kaizen costing
relies heavily on employee improvement.

8. (d)
Difficulties in implementation of Bench Marking:
The difficulties in implementation of Bench Marking are stated below:
(i) Time consuming: Benchmarking is time consuming and at times difficult. It has significant
requirement of staff time and Company resources. Companies may waste time in benchmarking
non-critical functions.
(ii) Lack of management Support: Benchmarking implementation requires the direct involvement of
all managers. The drive to be best in the industry or world cannot be delegated.
(iii) Resistance from employees: It is likely that their maybe resistance from employees.
(iv) Paper Goals: Companies can become pre-occupied with the measures. The goal becomes not to
improve process, but to match the best practices at any cost.
(v) Copy-paste attitude: The key element in benchmarking is the adaptation of a best practice to
tailor it to a company's needs and culture. Without that step, a company merely adopts another
company's process. This approach condemns benchmarking to fail leading to a failure of bench
marking goals.

8. (e)
Advantages of cost control system:
The advantages of cost control are mainly as follows:
(a) Achieving the expected return on capital employed by maximising or optimizing profit.
(b) Increase in productivity of the available resources.
(c) Reasonable price of the customers.
(d) Continued employment and job opportunity for the workers.
(e) Economic use of limited resources of production.
(f) Increased credit worthiness.
(g) Prosperity and economic stability of the industry.

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