FINAL EXAMINATION

GROUP IV
(SYLLABUS 2008)

SUGGESTED ANSWERS TO QUESTIONS

DECEMBER 2012

Paper- 15 : MANAGEMENT ACCOUNTING-ENTERPRISE

PERFORMANCE MANAGEMENT
Time Allowed : 3 Hours Full Marks : 100
The figures in the margin on the right side indicate full marks.
Answer Question No. 1 (carrying 25 marks), which is compulsory and
any five more questions (each carrying 15 marks) from the rest.
Please : (1) Answer all part of a question at one place only.
(2) Open a new page for answer to a new question.

Q. 1. (a) State whether the following statements given below are ‘True’ or ‘False’. If True, simply rewrite the
given statement (=1 marks). If False, state it as False (= ½ marks) and rewrite the correct statement
(= ½ mark).
(i) Value Chain Concept and Value Added Concepts are fundamentally same.
(ii) Decisions under uncertainty are not always obvious.
(iii) Life Costing is a technique to establish the total cost of ownership.
(iv) Drum is the constraint and therefore sets the pace for the entire system.
(v) Theory Y style of Management is a highly autocratic style. [1×5]
(b) In each of the cases given below, only one is the most appropriate option. Indicate the correct
answer (=1 mark) and show workings/reasons briefly in support of your answer (=1 mark):
(i) SUVAM LTD., has the capacity of production of 80,000 units and presently sells 20,000 units
at ` 100 each. The demand is sensitive to selling price and it has been observed that with
every reduction of ` 10 in selling price, the demand is doubled. What should be the target
cost at full capacity if profit margin on sale is taken as 25%?
A. ` 67.50
B. ` 60.00
C. ` 45.00
D. None of the above
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(ii) ASHLIN LTD., has developed a new product and just completed the manufacture of first four
units of the product. The first unit took 2 hours to manufacture and the first four units
together took 5.12 hours to produce. The Learning Curve rate is
A. 83.50%
B. 80.00%
C. 75.50%
D. None of (A), (B) or (C)
(iii) ANKIT LTD., operates Throughput Accounting System. The details of Product A per unit are as
under:
Selling Price ` 75
Material Cost ` 30
Conversion Cost ` 20
Time to bottleneck resources 10 minutes
The return per hour for Product A is
A. ` 270
B. ` 150
C. ` 120
D. ` 90
(iv) A company makes and sells a single product. The selling price and marginal revenue equations
are :
Selling Price = ` 50 – ` 0.001X
Marginal Revenue = ` 50 – ` 0.002X
Where X is the product the company makes. The variable costs amount to ‘ 20 per unit and the
fixed costs are ` 1,00,000.
In order to maximize the profit, the selling price should be
A. ` 25
B. ` 30
C. ` 35
D ` 40
(v) A company has budgeted break-even sales revenue of ` 8,00,000 and fixed costs of ` 3,20,000
for the next period. The sales revenue needed to achieve a profit of ` 50,000 in the period will
be
A. ` 8,50,000
B. ` 9,25,000
C. ` 11,20,000
D. ` 12,00,000 [1×5]
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(c) Fill in the blanks with the appropriate word out of the options indicated in the bracket against
each statement :
(ii) Instead of (accepting / not accepting) the current practice, Zero Base Budgeting
creates a challenging and questioning attitude.
(ii) Finite Capacity Scheduling (FCS) is an extension of [Capacity Requirement Planning
(CRP)/ Manufacturing Resource Planning (MRP)].
(iii) Marginal Cost is a (constant/ variable) ratio which may be expressed in terms of
an amount per unit of output.
(iv) In a Transportation Problem, when the quantities are allocated to cost cells within the matrix
and if such allocations are less than the number of rows plus number of columns plus one,
such situation is known as (unbalanced/ degeneracy).
(v) A relative measure of (standard deviation/dispersion) is the coefficient of
variation. [1×5]

(d) Define the following terms in just one/two sentences :

(i) Effectors;
(ii) Quality Function Deployment;
(iii) Intranet;
(iv) Cost Breakdown Structure;
(v) Quality Circle. [1×5]

Answer 1. (a)
(i) False.
The value-chain concept is fundamentally different from the value-added concept.
(ii) True.
Decisions under uncertainty are not always obvious.
(iii) True.
Life Costing is a technique to establish the total cost of ownership.
(iv) True.
Drum is the constraint and therefore sets the pace for the entire system.
(v) False.
Theory X is a highly autocratic style of management.
4  Suggested Answers to Question — EPM

Answer 1. (b)
(i) B: ` 60.
Demand Price (`)
20,000 100
40,000 90
80,000 80
Target Cost = ` 80 – (80 × 0.25) = ` 60

(ii) B = 80%
Let the learning rate be X.
Since the first unit took 2 hours, average time for the first two units = 2X and
The average time for the first 4 units = 2X × X = 2X2
 2x2 = 5.12 ÷ 4 = 1.28
Or, x = 1.28  2  0.64
= 0.80 i.e. 80%

(iii) A: ` 270
(Selling Price – Material Cost) / Time on bottleneck resources.
= [(` 75 – ` 30)/ 10 minutes] × 60 = ` 270
(iv) C = ` 35
Selling price = ` 50 – ` 0.001X
Marginal Revenue = ` 50 – ` 0.002X
Variable Cost per unit = Marginal Cost per unit = ` 20
Optimal output for maximum profit: 20 = 50 – 0.002X,
Hence, X = 30/0.002 = 15,000 units
SP = 50 – 0.001X = 50 – 0.001(15000) = 50 – 15 = ` 35.

(v) B = ` 9,25,000.
P/V Ratio = Fixed cost/ BE Sales = 3,20,000/ 80,000 × 100 = 40%
Contribution required = FC + Profit = ` (3,20,000 + 50,000) = ` 3,70,000.
Sales = 3,70,000/ 40% = ` 9,25,000

Answer 1. (c)
(i) accepting
(ii) Capacity Requirement Planning
(iii) constant
(iv) degeneracy
(v) dispersion
 Suggested Answers to Question — EPM  5

Answer 1. (d)
(i) Effectors : Is a true decision maker. It evaluates alternative course of corrective action in the light
of the significance of the deviations transmitted by the Comparator.
(ii) Quality Function Deployment (QFD) : is a structured approach to defining customer needs or
requirements and translating them into specific plans to produce products to meet those needs.
(iii) Intranet : is a private computer network that uses internet protocols and network connectivity to
securely share part of an organization’s information or operations with its employees.
(iv) Cost Breakdown Structure (CBS) : is central to life cycle costing. Its aim is to identify all the
relevant cost elements and it must have well defined boundaries to avoid omission or duplication.
(v) Quality Circle : is a small group of 6 to 12 employees doing similar work and who voluntarily meet
together on a regular basis to identify improvements in their respective work areas.

Q. 2. Modern Electronics Ltd., manufactures Electronic Regulators. It is proposing to introduce a new

advanced version of the Electronic Regulator with digital display. Development of the new Regulator
will begin shortly and it is expected that the new product will have a life cycle of 3 years because of
continuous development in the field of Electronics.
The company has prepared the following estimates for 3 years :
Year I Year II Year III
Advanced Regulator – units to be 50,000 2,00,000 1,50,000
manufactured & sold (nos.)
Advanced Regulator per batch (nos.) 400 500 500
Price per Regulator (`) 45 40 32
Development Cost (`) 8,50,000 1,50,000 —
Production Costs
Variable Cost/unit (`) 16 15 15
Variable Cost/batch (`) 700 600 600
Fixed Costs (`) 5,50,000 5,50,000 5,50,000
Marketing Costs
Variable Cost/unit (`) 3.60 3.20 2.80
Fixed Costs (`) 4,00,000 3,00,000 3,00,000
Distribution Costs
Regulators/batch (nos.) 200 160 120
Variable Cost/unit (`) 1 1 1
Other variable Cost/batch (`) 120 120 100
Fixed Costs (`) 2,30,000 2,30,000 2,30,000
Sales Promotion expenses/unit (`) 2 1.50 1.50
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You are requested to calculate :

(i) Life Cycle Operating Profit and
(ii) Comment/evaluate on a proposal to decrease selling price by ` 3, which will increase sales
volume by 10%. In such a case, production and distribution batch size will increase by 10%.
[5+10]
Answer 2.
(i) Life Cycle Operating Profit: (` in ’000)
Year I Year II Year III Life Cycle
Sales 2,250 8,000 5,250 15,500
Development Cost 850 150 — 1,000
Production Costs :
Variable Cost/unit (Total) 800 3,000 2250 6,050
Variable Cost/batch (Total) 87.5 240 180 5,07.5
(50000/400 × 700)
Fixed Costs 550 550 550 1,650
Marketing Costs :
Variable Cost (per unit) – Total 180 640 420 1,240
Fixed Costs 400 300 300 1,000
Distribution Costs :
Variable Cost (per unit) –Total 50 200 150 400
 50000 
Variable Cost/ batch – (Total)  120  30 150 125 305
 200 
Fixed Costs 230 230 230 690
Sales Promotion expenses (/unit)
(Total) 100 300 225 625
Total Costs 3,277.50 5,760 4,430 13,467.50
Operative Profit/ Loss (1,027.50) 2,240 820 2,032.50

(ii) Effect of reduction in price on Life Cycle operating profit:

Year I Year II Year III

New Selling Price/ unit (`) 42 37 32
Sales volume 55000 220000 165000
Production Batch size 440 550 550
Distribution Batch size 220 176 132
 Suggested Answers to Question — EPM  7

Operating Profit : (` in ’000)

Year I Year II Year III Life Cycle
Sales 2310 8140 5280 15730
Development Cost 850 150 — 1000
Production Costs :
Variable Cost/unit – (Total)(55000×16) 880 3300 2475 6655
 55000 
Variable Cost/batch – (Total)  700  87.5 240 180 507.5
 4400 
Fixed Cost 550 550 550 1650
Marketing Costs :
Variable Cost (per unit)- Total (55000 × 3.6) 198 704 462 1364
Fixed costs 400 300 300 1000
Distribution Costs :
Variable Cost (per unit) –Total (55000 × 1) 55 220 165 440
 50000 
Variable Cost/ batch – (Total)  120  30 150 125 305
 200 
Fixed Costs 230 230 230 690
Sales Promotion expenses (/unit)
- (Total) 110 330 247.5 687.5
Total Costs 3390.50 6174 4734.5 14299
Operative Profit/ Loss (1080.50) 1966 545.5 1431

Comment: When the price is reduced, there is a reduction in profit by over ` 6 lakhs.

Q. 3. (a) What is a control system? What are the types of control systems? [1+4]
(b) ALEENA LTD., manufactures two sub-assemblies M and P. One unit of each is assembled to produce
the final product BS.
The following information is available :
Sub- Sub- Final Product - BS
assembly - M assembly - P
Material Used – Special Steel Plates 20 kg 20 kg —
Other direct manufacturing cost (`) 500 500 —
Final assembly Cost (`) — — 1,000
ALEENA LTD., has procured an order for supply of 40,000 units of the final product BS on an urgent
basis at a price of ` 3,000 per unit. However ALEENA LTD., can arrange for only 800 MT of Special
Steel Plate required for production. On enquiry in the market, a supplier has been located, who
has got ready stock of 40,000 units of Sub-assembly P and is willing to sell the entire quantity to
ALEENA LTD.
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The company has decided to procure sub-assembly P from the said supplier and the company
has to incur an additional cost of `100 per unit for the same.
Required :
What is the maximum price that ALEENA LTD. can pay to the supplier for procuring sub-assembly
P? What are your conclusions and decisions? [8+2]

Answer 3. (a)
A Control System consists of a set of formal and informal systems that are designed to assist management
in steering the organization towards achievement of its goals. These two systems are distinct but closely
inter-related, sometimes undistinguishable sub-divisions of control systems.
Types of control systems:
The control systems are of two types:
(i) Formal Control Systems and
(ii) Informal Control Systems.

The Formal and Informal Control Systems, along with five components of each are enumerated as below:
Formal Control Systems: Informal Control Systems:
i. Infrastructure: i. Infrastructure:
-Organization Structure -Personal Contracts
-Patterns of Autonomy - Networks
-Measurement Methods - Expertise Oriented
ii. Management Style and culture: ii. Management Style and culture:
-Prevailing Style -Prevailing Style
-Principle Values -External/ Internal/ Mixed
iii. Formal Control Process: iii. Informal Control Process:
-Strategic Planning -Search/ alternative generations
-Operational Planning -Rationalisation / dialogue
-Report Systems
iv. Rewards: iv. Rewards:
-Individual and Group -Recognition
-Short term and Long term -Status Oriented
v. Coordination: v. Coordination & Integration:
-Standing Committees -Based upon trust
-Formal Conferences -Simple/ direct/ personal
-Involvement Techniques. -Telephone conversation.
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Answer 3. (b)
ALEENA LTD.
The limiting factor is the availability of Special Steel. Only 800 MT of Special Steel is available.
To produce 40000 units, the requirement of Special Steel will be:
Sub-assembly M: 20kg x 40000 units = 800 MT
P: 20 kg x 40000 units = 800 MT
Therefore the available alternatives are:
(i) To restrict production of BS to 20000 units, fully utilizing the available 800 MT of Special Steel
Plates.
(ii) To produce 40000 units of BS using 800 MT of Special Steel Plates for the required sub-assembly-
M and procuring 40000 units of Sub-assembly P from the outside supplier.

COMPARATIVE ECONOMIES STATEMENT OF THE TWO ALTERNATIVES

Alternative- I Alternative- II Incremental
M and P (each 20000 Only M is made
units made per 40000 units with
availability the availability
constraints) constraints and
40000 units of
P purchased
Production of final Product BS (units) 20000 40000 20000
Revenue @ ` 3000 per unit ` 600 Lakhs ` 1200 Lakhs ` 600 Lakhs
Less: Direct Material Cost
(Other than Spl. St. plates)
For M @ ` 500/unit ` (100) Lakhs ` (200) Lakhs –
For P @ ` 500/unit ` (100) Lakhs –
Less : Handling Cost
@ ` 100 per unit – ` (40) Lakhs ` (40) Lakhs
Less: Final Assembling cost
@ ` 1000/unit ` (200) Lakhs ` (400) Lakhs ` (200) Lakhs
Margin ` 200 Lakhs ` 560 Lakhs ` 360 Lakhs

Decision:
Buying Price for Sub-assembly – P could br ` 900 ( ` 360 Lakh ÷ 40000) as maximum. But, then the
company (Aleena Ltd.,) will not make any financial gain at this price, though it may benefit the company
indirectly.
Therefore, any price below ` 900 for P will add to the profit and help in maintaining a good customer-
relationship with the company.
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Q. 4. (a) What is ‘Decision Tree Analysis’? Write a brief note on this. [5]
(b) RAHUL TEXTILES LTD., is considering whether to enter a new market. In case the company decides
to enter this market, it must increase its production. To achieve higher production, it must either
install a new plant with a cash outlay of ` 3,00,000 or pay overtime wages to its workers, which
are expected to amount to ` 1,00,000. If the company decides to enter the market, there is a 60%
chance of its shareholders, approving the installation of the new plant. A random sample of
current market structure reveals that there are 40% chances for achieving a high level of sales by
the company, 30% chances of achieving a medium level sales, 20% chances of low sales and 10%
chances of achieving no sales. Further, high level of sales will yield a profit of ` 10,00,000, a
medium level of sales will yield a profit of ` 6,00,000 and a low level of sales a profit of
` 2,00,000. If there are no sales, the company will lose ` 5,00,000, apart from the cost of the
equipment.
Required :
Represent the above problem in the form of a DECISION TREE and suggest the option that should
be selected by the company (RAHUL TEXTILES LTD.). [4+6]

Answer 4. (a)
Decision Tree Analysis:
Decision Tree is a tool which helps to choose between several courses of action. It provides a highly
effective structure within which options can be laid out and the possible outcomes of choosing those
options can be investigated. It also helps to form a balanced picture of the risks and rewards associated
with each possible course of action.
Decision Tree is a graphic representation of the sequence of action-event combinations available to the
decision-maker. It depicts in a systematic manner all possible sequences of decisions and consequences.
Each alternative course of action is represented by a branch, which leads to subsidiary branches for
further courses of action or possible events. Decision Trees are designed to illustrate the full range of
alternatives and events that can occur under all envisaged conditions. Decision Tree brings out logical
analysis of a problem and enables a complete strategy to be drawn up to cover all eventualities before a
firm becomes committed to a scheme.
 Suggested Answers to Question — EPM  11

Answer 4. (b)

Evaluation of Decision Points :

Expected Monetary Value (EMU) of chance node at C
= 0.4x10,00,000 + 0.3 X 6,00,000 + 0.2 X 2,00,000 +0.1 X(-) 5,00,000 = ` 5,70,000.
EMV of Node at B = 0.4 x 10,00,000 + 0.3 x 6,00,000 + 0.2 x 2,00,000 + 0.1 x (-) 5,00,000
= ` 5,70,000.
EMV of Node at A = 0.6 x (5,70,000-3,00,000) + 0.4 x 0
= ` 1,62,000
EMV of decision node at 2 : New Plant : ` 1,62,000
Overtime : ` (5,70,000-1,00,000)
= ` 4,70,000
EMV of decision node at 1 : Enter Market = ` 4,70,000 (Max.)
& Pay overtime
Do not enter market = ` 00
 The company should enter market by paying overtime wages to the workers.
12  Suggested Answers to Question — EPM

Q. 5. (a) What are the reasons for implementation of an ERP (Enterprise Resource Planning) package by
the companies? [5]
(b) The top management of ZASLEEN LTD., is considering the problem of marketing a new product. The
fixed cost required in the project is ` 1,50,000. The three factors that are uncertain are Selling
Price, Variable Cost and the annual Sales Volume.
The product has a Life of only one year.
The management has collected the following data regarding the possible levels of these three
factors:
Selling Probability Variable Probability Sales Probability
Price/unit Cost/unit volume
(`) (`) (units)
(Series 1) (Series 2) (Series 3)
14 0.35 2 0.30 30,000 0.25
15 0.50 3 0.50 40,000 0.40
16 0.15 4 0.50 50,000 0.35
Consider the following three series of random numbers:
Series 1 : 82 84 28 82 36 92 73 91 63 29 (to be used for Selling Price)
Series 2 : 27 26 92 63 83 03 10 39 10 10 (to be used for Variable Cost)
Series 3 : 23 57 99 84 51 29 41 11 66 30 (to be used for Sales Volume)
Required:
Using Monte Carlo Simulation Technique, determine the expected profit for the above project on
the basis of 10 trials. [10]
Answer 5. (a)
The reasons tor implementation of ERP by the companies are enumerated below:
(i) Complete Automation and Faster Service:
ERP automates the tasks involved in performing a business process faster and with fewer errors
than before. Major business processes like handling customer orders, Employee Payroll or Financial
Reporting can be speeded up.
(ii) Standardised Process:
Manufacturing companies find that muitipie business units across the company adopt different
methods and computer systems, for the same product. Standardising these, using a single integrated
computer system can save time and increase productivity.
(iii) Integrated Financial Data:
ERP creates a single version ofthe financial position and performance, which is very useful in
analyzing the performance of different business units.
(iv) Standardised HR Information:
HR may not have a unified, simple method for tracking employee time and communicating with
them about benefits and services.
(v) Tailor-made:
ERP Systems are designed as per the requirements of individual companies, based on the methods
of their operations.
 Suggested Answers to Question — EPM  13

(vi) lnformation Management:

ERP helps at getting proper information, since all data are made available at one place and are
accessible to different users based on their requirements.

Answer 5. (a)
Selling Price Probability Cumulative Random Numbers
(`) Probability assigned
14 0.35 0.35 00 - 34
15 0.50 0.85 35 - 84
16 0.15 1.00 85 - 99
Variable Cost
(`)
2 0.30 0.30 00 - 29
3 0.50 0.80 30 - 79
4 0.20 1.00 80 - 99
Sales Volume
(units)
30000 0.25 0.25 00 - 34
40000 0.40 0.65 35 - 84
50000 0.35 1.00 85 - 99

SIMULATION USING 3 SERlES OF 10 RANDOM NUMBERS EACH

Run Random Price Random Variable Random Sales Fixed Profit
Number (`) Number Cost Number Unit Cost (`)
Series 1 Series 2 (`) Series 3 (`)
1 2 3 4 5 6 7 (2-4)×6-7
1 82 15 27 2 23 30000 150000 240000
2 84 15 26 2 57 40000 150000 370000
3 28 14 92 4 99 50000 150000 350000
4 82 15 63 3 84 40000 150000 330000
5 36 15 83 4 51 40000 150000 290000
6 92 16 03 2 29 40000 150000 410000
7 73 15 10 2 41 40000 150000 370000
8 91 16 39 3 11 30000 150000 240000
9 63 15 10 2 66 40000 150000 370000
10 29 14 10 2 30 40000 150000 330000
Total 3300000

Therefore, the expected Profit (Average): 3300000/10 = ` 3,30,000.

14  Suggested Answers to Question — EPM

Working Notes:
Profit = (Selling Price-Variable Cost) × Sales Volume - Fixed Cost.
`
Trial-1 = (15-2) x 30000 - 150000 = 240000
2 = (15-2) × 40000 - 150000 = 370000
3 = ( 14-4) × 50000 - 150000 = 350000
4 = (15-3) × 40000 - 150000 = 330000
5 = (15-4) × 40000 - 150000 = 290000
6 = (16-2) × 40000 - 150000 = 410000
7 = (15-2) × 40000 - 150000 = 370000
8 = (16-3) × 30000 - 150000 = 240000
9 = (15 -2) × 40000 - 150000 = 370000
10 = (14 -2) × 40000 - 150000 = 330000

Q. 6. (a) Explain briefly the major components of a Balanced Score Card. [5]
(b) NAVAYOGANA LTD., has adopted a Standard Costing System. The Standard output for a period is
20,000 units. The Standard Cost and Profit per unit is given below :

`
Direct Materials (6 units @ ` 1.50) 9.00
Direct Labour (6 units @ Re. 1.00) 6.00
Direct Expenses 1.00
Factory Overheads :
Variable 0.50
Fixed 0.60
Administrative Overheads 0.60
17.70
Profit per unit 2.30
Selling Price (Fixed by Government) 20.00
 Suggested Answers to Question — EPM  15

Actual production and sales for a period was 14,400 units.

The following are the variance worked out at the end of the period :
Favourable Adverse
(`) (`)
Direct Materials:
Price Variance – 8,500
Usage Variance 2,100 –
Direct labour:
Rate Variance – 8,000
Efficiency Variance 6,400 –
Factory Overheads:
Variable Expenditure Variance 800 –
Fixed Expenditure Variance 800 –
Fixed Volume Variance – 3,360
Administrative Overheads:
Expenditure Variance – 800
Volume Variance – 3,360

You are required to :

(i) Ascertain the details of cost and prepare the Profit and Loss Account in the statement for
the period, showing actual profit. [5+3]
(ii) Reconcile the actual profit with the standard profit. [2]

Answer 6. (a)
The component of Balanced Score Card (BSC) varies from business to business. A well designed BSC
combines financial measures of past performance with measures of firm’s drivers of future performance.
The specific objectives and measures of an organization’s BSC are derived from the firm’s vision and
strategy. Generally the BSC has the following perspective form which a company’s activity can be evaluated:
(i) Customer Perspective: i.e., How customer see us? The Customer Perspective considers the business
through the eyes of the customers, measuring and reflecting upon customer satisfaction.
(ii) Internal Business Perspective: i.e., In what processes must the firm excel? The Internal Business
Perspective focuses attention on the performance of the key internal processes of the business.
(iii) Learning and Growth Perspective: i.e., Can we continue to improve and create value? This perspective
is a measure of potential future performance. It drives attention to the basis of all future success-
the organization’s people and its infrastructure.
(iv) Financial Perspective: i.e., How we look to our shareholders? The Financial Perspective measures
the results that the organization delivers to its stockholders.
16  Suggested Answers to Question — EPM

Answer 6. (b)
NAVAYOGANA LTD.
ASCERTAINMENT OF DETAILS OF COSTS :
(14400 units) Variance Standard Cost Actual Cost
(`) (`) (`)
Directs Materials (14400×9) 1,29,600
Price Variance (Adverse) 8,500
Usage Variance (Favourable) (2,100) 6,400 1,36,000
Direct Labour (14400x6) 86,400
Rate Variance (Adverse) 8,000
Efficiency Variance (Fav) (6,400) 1,600 88,000
Direct Expenses: (14400 × 1) 14,400 14,400
Factory Overheads:
Variable (14400 x 0.50) 7,200
Fixed (14400 x 0.60) 8,640
Variable Expenditure (Fav) (800)
Fixed Expenditure (Fav) (800)
Fixed Volume (Adv) 3,360 1,760 17,600
Administrative Overheads:
(14400 x 0.60) 8,640
Expenditure (Adv) 800
Volume Variance (Adv) 3,360 4,160 12,800
Total Cost (14400 x 17.70) 2,54,880 2,68,800

PROFIT AND LOSS ACCOUNT OF NAVAYOGANA LTD.

for the year ending.......
`
Sales Rev-enue (14400 × 20) 2,88,000
Less: Costs: `
Direct Materials 1,36,000
Direct Labour 88,000
Direct Expenses 14,400
Factory Overhead
Variable 6,400
Fixed 11,200
Administrative Overhead 12,800 2,68,800
Profit (Actual) 19,200
Standard Profit (14400 × 2.30) 33,120
 Suggested Answers to Question — EPM  17

STATEMENT OF RECONCIALATION OF ACTUAL PROFIT

WITH STANDARD PROFIT

`
Standard Profit 33,120
Add: Favourable Variance : `
Direct Materials Usage 2,100
Direct Labour Efficiency 6,400
Variable OH Expenditure 800
Fixed OH Expenditure 800
10,100
Less : Adverse Variance :
Direct Material Price (8,500)
Direct Labour Rate (8,000)
Fixed OH Volume (3,360)
Admn. OH Expenditure (800)
Admn. OH Volume (3,360)
(24,020) (13,920)
Profit (Actual) 19,200 (Reconciled)

Q. 7. (a) What is ‘Supply Chain Management’?

(b) What do you mean by ‘Linear Programming’?
(c) What is ‘Quality’? What is its relevance to Cot Management?
(d) What is ‘Total Quality Management’?
(e) Write a brief note on ‘Kaizen Costing Approach’. [3+3+3+3+3]

Answer 7. (a)
Supply Chain Management :
Supply Chain Management encompasses the planning and management of all the activities involved in
sourcing, procurement, conversion and logistics management activities. Importantly, it also includes
coordination and collaboration with channel partners, which can be suppliers, intermediaries, third
party service providers and customers. In essence, Supply Chain Management integrates supply and
demand management within and across the companies.
The concept of Supply Chain Management emphasizes on linkages among all of the value- adding activities
in the chain. This concept has virtually displaced the term “business logistics”. In fact Supply Chain
Management’s emergence is perhaps the most significant developme in business management since the
early 1980s. Savvy business executives firmly believe that effective management of the Supply Chain can
help boost a firm’s performance. They recognize that Supply Chain Management can provide a distinctive
and sustainable competitive advantage and improved profitability.
18  Suggested Answers to Question — EPM

Answer 7. (b)
Linear Programming :
Linear Programming is an optimization technique. lt is a technique for specifying how to use limited
resources or capacities of a business to obtain a particular objective, such as least cost, highest margin
or least time, when those resources have alternate uses.
A Linear Programming Problem has two basic parts. The first part is the ‘Objective function’, which
describes the primary purpose of the formulation to maximize profit/minimize losses.
The second part is the constraint set. lt is the system of equalities and /or inequalities, which describes
the restrictions (conditions or constraints) under which optimization is to be accomplished.
Answer 7. (c)
The concept of ‘Quality ‘ and its relevance to Cost Management:
The concept of ‘Quality’ means conformance to requirements. ‘Quality’ is unobtrusively meeting the needs
of the customers. A Product or process that is reliable and that performs its intended function is said to
be a quality product. Quality is the extent to which products are free from defects, constraints and items
which do not add any value for the customers. Quality is a fulfillment of expectation. Quality is the ability
of a product or service to meet a customer’s expectations from that product/service. It is consistent
conformance to customer expectations. Quality is doing right things right. It is related to customer
orientation, innovation, teamwork and everyone’s responsibility.
Relevance of Quality in Cost Management :
Cost Management is the management of cost related activities(including Quality conformance) achieved
by collecting, analysis, evaluating and reporting cost informations. Cost Management is the process by
which the companies control and plan the costs of doing business. Cost Management is the process of
planning and controlling the budgets of a business. It is a form of Management Accounting that allows a
business to predict impending expenditures to help reduce the chance of going over budget. Quality has
become such an important strategic variable that Cost Management can no longer ignore it. Building up
quality means adding up cost. Quality thus is cost and Quality Control and Cost Control are in fact the
obverse and reverse of the same coin. The emphasis should be on prevention of errors and failures
through Quality Planning. Investment in Quality Control will yield rich returns to the manufacturer
through savings in material and man-hours lost, improving productivity and above all profitability
through customer satisfaction.
Answer 7. (d)
Total Quality Management : Quality is considered a by-product ofthe manufacturing system i.e., each
individual process has some variation that will lead to the production of some defective units. If the
resulting defective rate is too high, compared to the established quality standards, quality inspectors
will identify and send them for rework. The approach is expensive and does not guarantee the desired
quality because quality maintaining and ensuring itself cannot be inspected into a product. This approach
assigns the responsibility for quality to Quality Control Managers.
A more enlightened approach to quality emphasizes building quality into the product by studying and
improving activities that affect quality, from marketing through design to manufacturing. This new approach
is refened to as Total Quality Management (TQM). TQM is an active approach encompassing a company-
wide operating philosophy and system for continuous improvement of quality. TQM demands cooperation
from everyone in the company, from the top management down to workers.
 Suggested Answers to Question — EPM  19

The principles of TQM are:

• Customer Focus and customer-orientation approach
• Managerial Leadership and
• Belief in continuous improvement
Answer 7. (e)
Kaizen Costing Approach :
Kaizen Costittg Approach is a Japanese strategy for continuous improvement. This approach focuses its
attention on the reduction of waste in the production process. Kaizen Costing Approach stands for a
number of cost reduction steps that can be used subsequent to issuing a new product design to the factory
floor. This approach assumes continuous improvement.
The activities in Kaizen Costing Approach include elimination of waste in production, assembly and
distribution processes, as well as the elimination of unnecessary work steps in any of these areas. Cost
Reductions resulting from Kaizen Costing Approach are much smaller than those achieved with value
engineering. But these are still significant since competitive pressures are likely to force down the price
of a product over time and any possible cost savings allow a company to still attain its targeted profit
margins.
Toyota aggressively and successfully pursued Kaizen Costing to reduce costs in the manufacturing phase.

Q. 8. Write Short Notes on :

(a) Matrix Organization;
(b) Aggregate Planning;
(c) Enterprises Risk Management. [5×3]

Answer 8. (a)
Matrix Organization :
Matrix Organization was used in USA to solve management problems in the Aerospace Industry.
Matrix Organization is a combination of two/more Organization Structures. For exampie- Functional
Organization and Project Organization. The Organization is divided into different functions. Example -
Purchase, Production, R&D etc., Each function has a Functional (departmental) Manager- Example.
Purchase Manager, Production Manager, etc.,
The Organization is also divided on the basis of Projects. Example-Project- A, Project-B, etc., Each Project
has a Project Manager. Example-Project Manager-A, Project Manager-B, etc., The employee has to work
under two authorities (bosses).
The authority of the functional manager flows downwards while the authority of the project manager
flows across (sideways). Thus the authority flows both downwards as well as across. That is why such an
Organization is called ‘Matrix Organization’.
20  Suggested Answers to Question — EPM

An example of Matrix Organization:

Function Purchase Production R&D Marketing Finance
Manager Manager Manager Manager Manager
Projects

Project —A
Manager
Project —B
Manager

Project —C
Manager

The peculiarities or characteristics or features of a Matrix organization are :

(i) Hybrid Structure : Matrix Organization is a hybrid structure. This is so, because, it is a combination
of two or more Organizational & Structures. It combines Functional Organization with a Project
Organization. Therefore it has the merits and demerits of both these Organization Structures.
(ii) Functional Manager : The functional manager has authority over the technical (functional) aspects
of the project. The responsibilities of functional managers are:
• He decides how to do the work
• He distributes the project work among his sub-ordinates
• He looks after the operational aspects.
(iii) Project Manager : The Project Manager has authority over administration aspects of the project.
He has full authority over the financial and physical resources, which he can use for completing
the project.
(iv) Problem of unity of command : In a Matrix Organization, there is a problem of unity of command.
This is so, because, the sub-ordinates receive orders from 2 bosses, viz., the Project Manager and
the Functional Manager. This will result in confusion, disorder, indiscipline, inefficiency, etc., All
these will reduce the productivity and profitability of the project.
(v) Specialization : In a Matrix Organization, there is a specialization. The Project Manager concentrates
on the administrative aspects of the project while the Functional Manager concentrates on the
technical aspects of the project.
(vi) Suitability: Matrix Organization is suitable for Multi-projects Orgarnizations. It is mainly used by
large construction companies that construct huge residential and commercial projects in different
places at the same time.

Answer 8. (b)
Aggregate Planning :
Aggregate Planning is a process of developing, analyzing and maintaining a preliminary approximate
schedule of the overall operations of an organisation. It generally contains targeted sales forecsts,
 Suggested Answers to Question — EPM  21

production levels and customer backlogs. It is an attempt to balance capacity and demand in such a way
that cots are minimized. Ther term “Aggregate” is used because planning at this lvel includes all resources
‘in the aggregate’.
Aggregate Planning starts with the determination of demand and current capacity and proceeds to decide
whether to increase or decrease capacity to meet the demand. Aggregate planning is considered to be
intermediate-term (as opposed to long or short term) in nature. Most Aggregate plans cover a period of
three to 18 months. It serve as a foundation for future short — range type planning, like production
scheduling, sequencing, loading etc.
There are two pure planning strategies available to the aggregate planner. They are —
(i) Level Strategy and
(ii) Chase Strategy
Firms may choose to utilize one of the pure strategies in isolation or they opt for a strategy that combines
the two.
Techniques for Aggregate Planning range from informal trial and error approaches to more formalized
and advanced mathematical techniques.

Answer 8. (c)
Enterprises Risk Management (ERM) :
Enterprise Risk Management (ERM) deals with risks and opportunities affecting value creation or
preservation. ERM is a process, affected by an entity’s Board of Directors, Management and other personnel,
applied in strategy setting and across the enterprise, designed to identify potential events that may affect
the entity and manage risk to be within its risk appetite and to provide reasonable assurance regarding
the achievement of entity objectives.
The underlying premise of ERM is that every entity exists to provide value for its stakeholders. All entities
face uncertainty and the challenge for the management is to determine how much, uncertainty to accept
as it strives to grow stakeholder value. Uncertainty presents both risk and opportunity, with the potential
to erode or enhance value. ERM enables management to effectively deal with uncertainty and the associated
risk and opportunity, enhancing the capacity to build value.
ERM encompasses :
• Aligning risk appetite and strategy
• Enhancing risk response decisions
• Reducing operational surprises and losses
• Identifying and managing multiple and cross-enterprise risks
• Seizing opportunities and
• Improving deployment of capital.
ERM approach seeks to implement risk awareness and prevention programs throughout a company, thus
creating a corporate culture able to handle the risks associated with a rapidly changing business
environment. Practitioners of ERM incorporate risk management into the basic goals and values of the
company and support those values with action. They conduct risk analysis, devise specific strategies to
reduce risk, develop monitoring systems to warn about potential risks and perform regular reviews of the
program.
Summing up, ERM helps an entity get to where it wants to go and avoid pit falls and surprises along the
way.