Question 1

Westwood Solar Solutions (WSS) has mastered the art of developing Solar Domestic
Water Heater that fulfil customer’s needs. WSS’s designers and product developers
focus on solutions to get rid of everyday hassles and transform these into a pleasant
experience. WSS also has a wide service network that spans the length and breadth of
India to ensure good care of customers and products, by providing a prompt and pleasant
service experience. In the past, WSS had a dominant position in the Indian market.
However, over the past four years, it has been found that its profits and its share in
the market have come down.

WSS has business Model comprising of following steps:

⚫ Firstly, WSS’s highly qualified and skilled experts visit customer’s locations to
identify and design the appropriate heater as per customer’s requirements. WSS’s
experts are recognized as the best in the industry, and customers agree that they
produce the most effective solutions to their complaints.

⚫ At WSS, in the laboratories, the heater design goes through intricate, complex, and
dynamic process. Prototypes are developed on the basis of discussions in previous
step. Thereafter, these prototypes are tested. Once a final design is decided, such
design is passed to the manufacturing division for production.

⚫ Then, WSS manufactures appropriate Solar Water Heater to the desired

specification and installs at the customer’s location.

⚫ After the heater’s installation, WSS renders annual maintenance services for which
it is well- known in the industry.

WSS’s customers pay a total price for design, manufacture and initial installation of the
Solar Water Heater and an annual maintenance charge after that. Total prices are
quoted before design work begins.

Although customers appreciate the high quality of the solutions provided by WSS’s
team, however, they are complaining that the overall prices are too high. Customers
have said that although other suppliers do not solve their problems as WSS does, they
 do charge less. Consequently, WSS has lower down its prices to compete in the market.
There is a doubt that the manufacturing and installation stages of the business model
are not contributing sufficiently to the firm since costs at both stages are going high.

Partners of WSS have considered that this situation should no longer continue and have
recommended that a value chain analysis to be conducted as to identify the way forward
for WSS. Although majority of partners are in the agreement with the proposed value
chain analysis, however senior partner ‘W’ has stated that value chain analysis is
inappropriate idea. She says that she has heard a number of criticisms of the value
chain model.

Assuming yourself as management accountant of WSS, answer the following questions:

Required:

1) DISCUSS the benefits that may accrue to WSS from conducting a value chain
analysis. 9 Marks

2) DISCUSS the criticisms of Porter’s value chain model in the context of WSS

6 Marks

3) EXPLAIN other form of Value Chain Analysis that may be more suitable for WS

5 Marks

(20 Marks)

Question 2

Alpha and Beta are two divisions of the Hind Multinational Ltd. (AML). The Division
Alpha manufactures auto components which it sells to other divisions and external
customers.
The Division Beta has designed a new product, Product BZ, and has asked Division Alpha
to supply the auto component, Component AX, that is needed in the new product. Each
unit of Product BZ will require one Component AX. This Component will not be sold by
Division Alpha to external customers. Division Alpha has quoted a transfer price to
Division Beta of `40 for each unit of Component AX.
It is the policy of the company to reward managers based on their individual division's
return on capital employed.
Division Alpha produces the Component AX in batches of 1,000 units. The maximum
capacity is 8,000 Components per month. Variable costs amount to `12 per
component. Fixed costs per month are `60,000.00 which is specifically incurred to
produce Component AX.
Product BZ will be produced in batches of 1,000 units in Division Beta. The maximum
customer demand is 8,000 units of Product BZ. Variable costs will be `8 per unit plus
the cost of component AX. Fixed costs of `90,000.00 are to be incurred specifically to
produce Product BZ.

The head of Division Beta has given the following forecast:

Demand Selling price per unit (`)

2,000 units 120
4,000 units 100
5,000 units 90
6,000 units 82
7,000 units 70
8,000 units 65

Required
(a) CALCULATE, based on a transfer price of `40 per Component AX, the monthly profit
that would be earned as a result of selling Product BZ by (Here the situation is governed
by the actions of the manager of Division Beta) :
(i)Division Beta
(ii)Division Alpha
(iii)Company as a whole 5 Marks

(b) FIND out the profit maximizing output from the sale of Product BZ for the Hind
Multinational Ltd. 5 Marks
 (c)CALCULATE, using the marginal cost of Component AX as the transfer price, the
monthly profit that would be earned as a result of selling Product BZ by
(i)Division Alpha
(ii)Division Beta
(iii)Company as a whole 3 Marks

(d)The Operation Head of the company requires internal transfer between the divisions
at marginal cost from the overall company's perspectives. If marginal cost is used as
the transfer price the manager of the Division Alpha will not be motivated as there will
be no incentive to the division to transfer components internally.
What transfer pricing policy would you SUGGEST to help the company to overcome the
conflict between optimum decision making and performance evaluation? 7 Marks

(20 Marks)

Question 3

A fertilizer company produces Grade A and Grade B fertilizers. One kilogram of Grade
A fertilizer sells for ` 280 per kilogram and one kilogram of Grade B fertilizer sells for
` 400 per kilogram.
The products pass through three cost centers CC1, CC2 and CC3 during the
manufacturing process. Total direct material cost per kilogram of fertilizer produced
is ` 300 and direct labor cost per kilogram of fertilizer produced is ` 200. Allocation
between the cost centres is given below:

Particulars CC1 CC2 CC3 Total

Cost of Direct Material (per kg of fertilizer ` 90 `120 `90 `300
produced)
Cost of Direct Labour (per kg of fertilizer ` 60 `80 `60 `200
produced)
Cost Allocation to Grade A 30% 50% 30%
Cost Allocation to Grade B 70% 50% 70%

All of expenses (considered to be overheads) per kilogram of fertilizer produced is `

150. This is allocated equally between Grade A and Grade B fertilizer. Pricing decisions
for the fertilizers is made based on the above cost allocation.
The management accountant of the company has recently come across the concept of
environmental management accounting. Pricing of products should also factor in the
environmental cost generated by each product. An analysis of the overhead expenses
revealed that the total cost of ` 150 per kilogram of fertilizer produced, includes
incinerator costs of ` 90 per kilogram of fertilizer produced. The incinerator is used to
dispose the solid waste produced during the manufacturing process. Below is the cost
center and product wise information of solid waste produced:

Waste produced (in tonnes per annum) CC1 CC2 CC3 Total
Grade A 2 3 1 6
Grade B 2 2 5 9

Based in the impact that each product has on the environment, the management would
like to revise the cost allocation to products based taking into account the incinerator
cost that each product generates. The remaining overhead expenses of ` 60 per
kilogram of fertilizer produced can be allocated equally.

Required
(i)CALCULATE product wise profitability based on the original cost allocation.
RECALCULATE the product wise profitability based on activity based costing
methodology (environmental management accounting). 12
Marks
(ii)ANALYZE difference in product profitability as per both the methods. 4 Marks
(iii)RECOMMEND key takeaways for the company to undertake the above analysis of
overhead costs and pricing as per environmental management accounting. 4 Marks

(20 Marks)
Question 4 (a)

Bosch Ltd. has developed a special product. Details are as follows: The product will have
a life cycle of 5,000 units. It is estimated that market can absorb first 4,500 units at
` 64 per unit and then the product will enter the "decline" stage of its life cycle. The
company estimates the following cost structure:

Direct Labour ` 6 per hour

Other variable costs ` 19 per unit

Fixed costs will be ` 40,000 over the life cycle of the product. The ‘labour rate’ and
both of these costs will not change throughout the product's life cycle.

The first batch of 100 units will take 1,000 labour hours to produce. There will be an
80% learning curve that will continue until 2,500 units have been produced. Batches
after this level will each take the same amount of time as the 25th batch. The batch
size will always be 100 units..

Required

CALCULATE average selling price of the final 500 units that will allow the company to
earn a total profit of ` 80,000 from the product if average time for 24 batches is
359.40 hours.

(Note: Learning coefficient is –0.322 for learning rate of 80%). The values of Logs have
been given for calculation purpose:

log 2 = 0.30103; log 3 = 0.47712; log 5 = 0.69897; antilog of 2.534678 = 342.51;

antilog of 2.549863 = 354.70; antilog of 2.555572 = 359.40; antilog of 2.567698 =

369.57

(10 Marks)
Question 4 (b)

“It's frustrating working with Denial. He’s very dominant and expects everything to be
done his way. We have done more and better work to get up to budget, and the minute
we make it he tightens the budget on us. We can’t work any faster and still maintain
quality. We always seem to be interrupting the big jobs for all those small rush orders.
The accountants seem to know everything that’s happening in my department, sometimes
even before I do. I thought all that budget and accounting stuff was supposed to help,
but it just gets me into trouble. I’m trying to put out quality work; they’re trying to save
money. This is a dead-end job. I don't see much of a future here.”
– said Mr. Singh, manager of the machine shop of Global Mfg. Ltd. a UK based Company.
Mr. Singh had just attended the monthly performance evaluation meeting
for plant department heads. These meetings had been held on the third Friday of each
month since Mr. Denial, MBA from Manchester University, had joined the Indian
operations a year earlier. Mr. Singh had just been given the worst evaluation he had
ever received in his long career with Global Mfg. Ltd. He was the most respected of the
experienced machinists in the company. Old Plant Manager had often stated that the
company’s success was due to the high quality of the work of machinists like Mr. Singh.
He had been with Global Mfg. Ltd. For many years and was promoted to supervisor of
the machine shop when the company expanded and moved to its present location. As
supervisor, Mr. Singh stressed the importance of craftsmanship and told his workers
that he wanted no careless work coming from his department.
When Mr. Denial became the plant manager, he directed that monthly
performance comparisons be made between actual and budgeted costs for each
department. The departmental budgets were intended to encourage the supervisors to
reduce inefficiencies and to seek cost reduction opportunities. The company controller
was instructed to have his staff ‘tighten’ the budget slightly whenever a department
attained its budget in a given month; this was done to reinforce the plant supervisor’s
desire to reduce costs. Mr. Denial often stressed the importance of continued progress
toward attaining the budget; he also made it known that he kept a file of these
performance reports for future reference.
 Required
IDENTIFY the problems which appear to exist in budgetary control system and explain
how budgetary control system could be revised to improve the effectiveness.

(10 Marks)

Question 5 (a)

Aayla runs the Planetarium Station in New Delhi, India. The strength of the station lies
in its live interactions and programs for visitors, students and amateur astronomers.
The station is always active with programs for school and college students and for
amateur astronomers.

One of the station's key attractions is a big screen IMAX theatre. IMAX is a 70 mm
motion picture film format which shows images of far greater size and resolution than
traditional film systems. The IMAX cinema projection standards were developed in
Canada in the late 1960s. Unlike traditional projectors, the film is run horizontally so
that the image width is greater than the width of the film.

The average IMAX show at the station attracts 120 visitors (50 children and 70 adults)
at a ticket price of `160 for children and `200 for adults. Aayla estimates that the
running costs per IMAX show are `10,000. In addition, fixed costs of `7,500 are
allocated to each show based on annual estimate of the number of IMAX shows.

The Hobart School has approached Aayla about scheduling an extra show for its class
VIII students. One hundred students and five teachers are expected to join the special
show on the ‘Planets & Solar System’, a feature that is currently showing. The school
has asked Aayla for a price quote. The special show will take place at 08:30 AM when
the IMAX is not usually open. Required

RECOMMEND the minimum amount that Aayla should charge.

(10 Marks)
Question 5 (b)

H. Ltd. manufactures three products. The material cost, selling price and bottleneck
resource details per unit are as follows:
Particulars Product X Product Y Product Z
Selling Price (`) 66 75 90
Material and Other Variable Cost (`) 24 30 40
Bottleneck Resource Time (Minutes) 15 15 20

Budgeted factory costs for the period are `2,21,600. The bottleneck resources time
available is 75,120 minutes per period.
Required
(i) Company adopted throughput accounting and products are ranked according to
‘product return per minute’. Select the highest rank product.
(ii) CALCULATE throughput accounting ratio and COMMENT on it.

(10 Marks)

Question 6 (a)

JFE, is following Life Cycle Costing. Its four products P4, P3, P2 and P1 are in the market
respectively in Introduction, Growth, Maturity, and Decline stages (phases).
The Management wants to analyse the marketing challenges faced by the products to
take strategical measures to stabilise the products in the market. For this purpose, the
Board directed the Secretary to get a product-wise report from the marketing chief
of each product. The chiefs were asked to give one characteristic possessed by the
product because of which the product is being classified in the respective stage and
two strategical measures to be taken to overcome the market challenges faced at that
stage (phase). The Secretary received the report from all the chiefs and handed them
over to the computer operator to get it printed in a tabulated form. But the operator,
without understanding the significance of the products, phases, characteristics, and
strategies, mixed all the twelve items [(1 + 2) × 4] and got it printed as a list as given
below:
(1)Over capacity in the industry.
(2)The company can continue to offer the product to our loyal customers at a reduced
price.
(3)Few competitors produce basic version of our product.
(4)Product features may be improved or enhanced to differentiate our product from
that of the competitors.
(5)Attracting customers by raising awareness about our product through promotion
activities.
(6)High volume of business and increase in competition.
(7)Use the present product as replacement product for launching another new product
successfully in the market.
(8)Value-based pricing strategies may be considered.
(9)Profits start declining and at times become negative.
(10)Maintain control over product quality to assure customer satisfaction.
(11)Strengthening or expanding channel and supply chain relationships.
Prices may have to be reduced to attract the price-sensitive customers. The items are
required to be tabulated as in the format given below:
Required
(i) Complete the table given below by entering the twelve items under appropriate
category columns. You need not rewrite the items. Write the serial numbers of the
items only in columns (3) and (4).
Products (1) Phases (Stages) (2) Characteristics (3) Strategies (4)

P4 Introduction
P3 Growth
P2 Maturity
P1 Decline

(ii) List down the importance (any four) of Product Life Cycle Costing.
(iii) State the benefits (any four) of Product Life-Cycle Costing.
(12 Marks)
Question 6 (b)

Hindustan Ltd. supplies the following information relating to a vital equipment used in
its production activity for April, 2019:

Total time worked during the month 210 hrs.

Total production during the month 2,800 units
No. of units accepted out of total production 2,520 units
Standard time for actual production of the month 180 hrs.
Time lost during the month 28 hrs.

Required
(i) STATE an appropriate approach to measure the total productive maintenance
performance of an equipment.
(ii) Quantify the total productive maintenance performance of the above-mentioned
equipment by using the approach stated in (i) above.
(iii) COMMENT on the effectiveness of maintenance of the equipment.

(8 Marks)